{"filename":"42246_1993.txt","cik":"42246","year":"1993","section_1":"ITEM 1. BUSINESS\nGENERAL\nMirage Resorts, Incorporated (the \"Registrant\" or the \"Company\") is a Nevada corporation incorporated in 1949. The Registrant, through wholly owned subsidiaries, owns and operates (i) The Mirage, a hotel-casino and destination resort on the Las Vegas Strip, (ii) Treasure Island at The Mirage (\"Treasure Island\"), a hotel-casino resort adjacent to The Mirage, (iii) the Golden Nugget, a hotel-casino in downtown Las Vegas and (iv) the Golden Nugget-Laughlin, a hotel-casino in Laughlin, Nevada. In January 1993, the Registrant, through a wholly owned subsidiary, purchased the assets of the former Dunes Hotel, Casino and Country Club (the \"Dunes\") on the Las Vegas Strip and is developing long-term plans for the site, which include construction of extensive new hotel, casino and resort facilities.\nTHE MIRAGE\nThe Registrant's wholly owned subsidiary, THE MIRAGE CASINO-HOTEL (\"MCH\"), owns and operates The Mirage, which opened on November 22, 1989.\nThe Mirage is a luxurious, tropically themed destination resort containing approximately 2.7 million square feet in a 29-story Y-shaped hotel tower and an expansive low-rise complex. The Mirage features a 95,500-square foot casino, 3,030 hotel rooms (including 265 suites), 14 villa suites, approximately 82,000 square feet of meeting, convention and banquet space, a parking garage with space for approximately 2,200 vehicles, a valet parking garage with space for approximately 1,830 vehicles shared with Treasure Island, surface parking for approximately 1,650 vehicles, a 1,500-seat showroom featuring top-name entertainment (showcasing the world-famous illusionists Siegfried & Roy), five international restaurants, a California-style pizza restaurant, a coffee shop, a buffet, four bars (two of which feature live entertainment), two snack\/ liquor bars, an ice cream parlor, a health spa and beauty salon, a swimming pool and cabana area, a white tiger display and extensive retail facilities. The exterior of the resort is landscaped with palm trees, abundant foliage and more than four acres of lagoons and other water features, centered around a 40-foot simulated volcano and waterfall. Each evening, the volcano erupts at 15-minute intervals, spectacularly illuminating the front of the resort. Inside the front entrance is an atrium with a tropical garden and additional water features capped by a 150-foot (in diameter) glass dome. The atrium has an advanced environmental control system and creative lighting and other special effects designed to replicate the sights, sounds and fragrances of the South Seas. Located at the rear of the hotel, adjacent to the swimming pool area, is a dolphin habitat with adjoining food, beverage and retail facilities.\nAs of March 1, 1994, The Mirage's casino offered 119 table games (including blackjack, craps, roulette, baccarat, pai gow, pai gow poker, Caribbean stud poker, red dog and big six), keno, poker, a race and sports book and approximately 2,250 slot machines and other coin-operated devices.\nDuring the years ended December 31, 1993 and 1992, The Mirage's average occupancy rates for standard rooms were approximately 98% and 96%, respectively. These percentages include occupancy on a complimentary basis.\nTREASURE ISLAND\nThe Registrant, through Treasure Island Corp. (\"TI Corp.\"), a wholly owned subsidiary of MCH, owns and operates Treasure Island, a pirate-themed hotel-casino resort located on the same 116-acre site as The Mirage with approximately 550 feet of frontage on the Las Vegas Strip. Construction of Treasure Island commenced in March 1992, and the facility opened on October 26, 1993.\nTreasure Island features a 75,000-square foot casino, 2,900 hotel rooms (including 212 suites), a steak and seafood restaurant, a contemporary Continental restaurant, an Italian specialties grill, a coffee shop, a buffet, three snack bars, an ice cream parlor, four bars (three of which feature live entertainment), a 1,500-seat showroom featuring an all-new production, \"Mystere,\" developed by the creators of the world-renowned Cirque du Soleil, and an 18,000-square foot amusement arcade. Treasure Island also offers extensive retail facilities, approximately 18,000 square feet of meeting and banquet space, two wedding\nchapels, a swimming pool with a 230-foot mountain water slide, a parking garage with space for approximately 2,400 vehicles and the valet parking garage shared with The Mirage. The facade of Treasure Island, fronting on the Las Vegas Strip, is an elaborate pirate village in which full-scale replicas of a pirate ship and a British frigate periodically engage in a pyrotechnic and special effects sea battle, culminating with the sinking of the frigate. Management believes that the pirate-themed features of Treasure Island and its proximity to The Mirage make it a \"must see\" attraction for Las Vegas visitors and local residents.\nAs of March 1, 1994, Treasure Island's casino offered 79 table games (including blackjack, craps, roulette, baccarat, pai gow, pai gow poker, Caribbean stud poker and big six), keno, poker, a race and sports book and approximately 2,260 slot machines and other coin-operated devices.\nFrom its opening through December 31, 1993, Treasure Island's average occupancy rate for standard rooms was approximately 97%. This percentage includes occupancy on a complimentary basis.\nGOLDEN NUGGET\nThe Registrant's wholly owned subsidiary, GNLV, CORP. (\"GNLV\"), owns and operates the Golden Nugget, a hotel-casino which, together with parking facilities, occupies approximately 2 1\/2 square blocks in downtown Las Vegas. The Golden Nugget features a 38,000-square foot casino, 1,907 hotel rooms (including 102 suites), two international restaurants, a California-style pizza restaurant, a coffee shop, a buffet, a snack bar, three bars, an entertainment lounge, a ballroom\/showroom, approximately 23,000 square feet of meeting and banquet space, two gift and retail shops, two hotel lobbies with guest registration facilities, a swimming pool and lounge area, a health spa, a beauty salon and two parking garages with space for approximately 1,050 vehicles.\nAs of March 1, 1994, the Golden Nugget's casino offered 69 table games (including blackjack, craps, roulette, baccarat, pai gow, pai gow poker, Caribbean stud poker, red dog and big six), keno, a race and sports book and approximately 1,300 slot machines and other coin-operated devices.\nDuring the years ended December 31, 1993 and 1992, the Golden Nugget's average occupancy rates for standard rooms were approximately 97% and 94%, respectively. These percentages include occupancy on a complimentary basis.\nGOLDEN NUGGET-LAUGHLIN\nThe Registrant's wholly owned subsidiary, GNL, CORP. (\"GNL\"), owns and operates the Golden Nugget-Laughlin, a hotel-casino in Laughlin, Nevada. The hotel-casino is located on approximately 13 acres with approximately 600 feet of Colorado River frontage near the center of Laughlin's existing hotel-casino facilities. The Golden Nugget-Laughlin includes a two-story low-rise featuring a 32,000-square foot casino, three restaurants, three bars, an entertainment lounge, a snack bar and a gift and retail shop. The hotel is a four-story structure located adjacent to the low-rise containing 296 standard rooms and four suites. Other facilities at the Golden Nugget-Laughlin include a swimming pool, a parking garage with space for approximately 1,585 vehicles adjacent to the low-rise and approximately four and one-half acres of surface parking for recreational vehicles. The hotel and a 50% expansion of the casino were completed in December 1992. GNL also owns and operates a 78-room motel in Bullhead City, Arizona, across the Colorado River from Laughlin.\nAs of March 1, 1994, the Golden Nugget-Laughlin's casino offered 20 table games (including blackjack, craps, roulette, pai gow poker and Caribbean stud poker), approximately 1,300 slot machines and other coin-operated devices, keno and a race and sports book.\nIGUAZU FALLS, ARGENTINA CASINO VENTURE\nThe Registrant, through a wholly owned subsidiary, owns a 50% equity interest in Mirage Universal de Misiones S.A., an Argentine corporation (\"MUMSA\"). In February 1994, MUMSA was awarded a 15-year concession by the Province of Misiones, Argentina to develop, own and operate a casino near Iguazu Falls, Argentina. The Registrant's total investment in the venture of $4 million was contributed in January 1994. The casino is initially expected to offer approximately 15 table games, 120 slot machines and food and beverage service. It is anticipated that the casino will be opened to the public in mid-1994 and will be managed principally by one of the other stockholders of MUMSA.\nFUTURE EXPANSION\nIn January 1993, the Registrant, through a wholly owned subsidiary, completed the purchase for $70 million of the land, buildings and certain other assets comprising the Dunes. The Dunes site consists of approximately 164 acres situated on the Las Vegas Strip between Flamingo Road and Tropicana Avenue. Pursuant to the terms of the purchase agreement, the seller terminated all operations of the Dunes prior to the closing of the purchase. The Registrant reopened the Dunes golf course to the public in February 1993 as \"The Mirage Golf Club\" and intends to operate it at least until the commencement of major construction at the site.\nThe Registrant is developing long-term plans for the Dunes property, which include construction of extensive new hotel, casino and resort facilities. The scope and timing of such a project are still uncertain, but management does not currently anticipate breaking ground on any major construction prior to late 1994 or completing such construction prior to late 1996. In October 1993, the Registrant imploded the north hotel tower of the Dunes as part of the opening ceremonies for Treasure Island. The implosion received worldwide news coverage and was featured in a one-hour fictional television special produced by the Registrant which aired on network television in January 1994. Assuming development of the Dunes property as presently contemplated, the cost of such development is expected to be in excess of, and may significantly exceed, $500 million. There can be no assurance that the Registrant will determine to proceed with such a project, that financing will be available on terms satisfactory to the Registrant or that the project, if constructed, will be profitable. In addition, there can be no assurance that the Registrant will obtain the requisite approvals, permits, allocations and licenses, including gaming licenses, or that such approvals, permits, allocations or licenses can be obtained on a timely basis.\nThe Registrant regularly evaluates and pursues potential expansion and acquisition opportunities in both the domestic and international markets. Such opportunities may include the ownership, management and operation of gaming and other entertainment facilities in states other than Nevada or outside of the United States, either alone or with joint venture partners. The Registrant has presented a large number of formal and informal proposals to develop, own and operate gaming facilities in new and potential gaming jurisdictions, several of which proposals are currently outstanding. Development and operation of any gaming facility in a new jurisdiction is subject to numerous contingencies, several of which are outside of the Registrant's control and may include the enactment of appropriate gaming legislation, the issuance of requisite permits, licenses and approvals and the satisfaction of other conditions. In addition, some of the expansions being proposed require a substantial capital investment by the Registrant and may require significant financing. There can be no assurance that such financing can be obtained on terms acceptable to the Registrant, that the Registrant will elect or be able to consummate any such acquisition or expansion opportunity outside of Nevada or that the operations of any such venture will be profitable.\nMARKETING\nOperations at the Registrant's hotel-casinos are conducted 24 hours a day, every day of the year. The Registrant does not consider its Las Vegas business to be highly seasonal. The Registrant considers its Laughlin business to be seasonal, with the greatest level of activity occurring during the spring and fall months and the lowest during December, January and the summer months.\nThe Registrant's revenues and operating income depend primarily upon the level of gaming activity at its casinos, although the Registrant also seeks to maximize revenues from food and beverage, lodging, entertainment and retail operations. Therefore, the primary goal of the Registrant's marketing efforts is to attract gaming customers to its casinos.\nThe principal segments of the Nevada gaming market are tour and travel, leisure travel, high-level wagerers and conventions (including small meetings and corporate incentive programs). The Registrant believes that The Mirage's hotel occupancy and gaming revenues can be maximized through a balanced marketing approach addressing each market segment. The Registrant's marketing strategy for Treasure Island and the Golden Nugget is aimed at attracting middle-to upper-middle-income wagerers primarily from the tour and travel and leisure travel segments. The Registrant believes that the success of its hotel- casinos is also affected by the level of walk-in customers and, accordingly, has designed these facilities to maximize their attraction to these patrons.\nThe tour and travel segment consists of gaming customers who take advantage of travel \"packages\" produced by wholesale operators. The Registrant has relationships with wholesalers selected on the basis of market penetration, reputation and commitment. Tour and travel trade emphasizes mid-week occupancy, as compared with the regionally based leisure travel segment, which is primarily weekend-oriented. The Registrant has developed specialized marketing programs for the tour and travel market. The Registrant has also developed important relationships with, and programs for, certain of the major air carriers which have their own wholesale tour and travel operations.\nThe leisure travel segment is largely composed of individuals traveling to Las Vegas from the regional market, primarily Southern California and the Southwest, by automobile and, to a lesser extent, by airplane. This segment represents a significant portion of the customers for the Registrant's facilities. As with the tour and travel business, The Mirage aims to attract the upper-middle and higher-income strata of this segment, while the focus of Treasure Island and the Golden Nugget is on the middle-to upper-middle-income strata of the leisure travel segment. To this end, the Registrant has utilized substantial media advertising (particularly radio and television commercials and billboards) emphasizing the amenities, the atmosphere of excitement and the relative value offered by the facilities. The Registrant also participates in joint advertising and marketing programs with selected air carriers and benefits from personal referrals and its high public profile.\nThe Registrant markets to the high-level-wagerer segment primarily through direct sales, using its 19 marketing offices located in a number of major domestic and foreign cities. Special entertainment and other events and programs, including golf privileges at Shadow Creek as discussed below and the presentation of major professional boxing matches, together with the provision of complimentary rooms, food and beverage and air transportation and the extension of gaming credit, are offered to attract high-level wagerers. The Registrant employs several marketing executives who have extensive customer relationships in certain areas of Asia, Latin America and Canada, as well as casino hosts from many of the countries to which international marketing efforts are directed.\nConvention business, like the tour and travel segment, is mid-week oriented, and is a major target for The Mirage, with its 82,000 square feet of meeting, convention and banquet space. The Mirage seeks those conventions whose participants have the best gaming profile. Treasure Island's and a portion of The Mirage's convention business is derived from small corporate meetings (those requiring less than 500 rooms per night) and corporate incentive programs (travel packages produced by independent \"incentive houses\" for corporations desiring to motivate their employees and reward them for superior performance). Since the Golden Nugget's facilities are inadequate to accommodate conventions requiring more than 200 rooms per night, its focus on this segment has been limited to smaller groups and \"spill-over\" business from larger conventions headquartered at other facilities, including The Mirage.\nAs discussed under \"Future Expansion,\" the Registrant recently opened The Mirage Golf Club at the Dunes site. The Registrant makes reduced green fees and preferential tee times at The Mirage Golf Club available to guests of its hotels. Management believes that The Mirage Golf Club has been beneficial to the Registrant's marketing efforts.\nWalk-in customers are those who patronize a facility's casino but are not guests of its hotel. The Mirage and Treasure Island, which are strategically located on the Las Vegas Strip, have been designed to attract walk-in casino business.\nThe Golden Nugget-Laughlin appeals primarily to patrons from the middle-income strata of the gaming populace. Many of the Golden Nugget-Laughlin's customers, particularly those who arrive on bus tours, are older and retired individuals who are attracted by lodging, food and beverage and entertainment prices that are generally lower than those offered by the major Las Vegas hotel-casinos. Many are also attracted by lower minimum wagering limits and higher slot machine paybacks than those prevalent in Las Vegas, and by their perception that Laughlin offers a more \"relaxed\" gaming and recreational atmosphere. The predominant portion of the Golden Nugget-Laughlin's casino revenues is derived from slot machine play. During 1993, slot revenues accounted for approximately 87% of its total casino revenues. Convention and high-level-wagerer patrons do not comprise a significant segment of the Laughlin gaming market.\nThe Registrant, through a wholly owned subsidiary of MCH, owns approximately 315 acres of real property located approximately 10 miles north of The Mirage and Treasure Island and five miles north of the Golden Nugget. The Registrant has developed a world-class 18-hole golf course and related facilities known as \"Shadow Creek\" on approximately 80% of such property. In connection with its marketing activities, the Registrant makes the course and related facilities available for use, by invitation only, by high-level-wagerer patrons.\nCREDIT\nCredit play represents a significant portion of the table games volume at The Mirage. The Registrant's other facilities do not emphasize credit play to the same extent as The Mirage, although credit is made available.\nThe Registrant maintains strict controls over the issuance of credit and aggressively pursues collection of its customer receivables. Such collection efforts parallel those procedures commonly followed by most large corporations, including the mailing of statements and delinquency notices, personal and other contacts, the use of an outside collection agency, civil litigation and criminal prosecution, if warranted. Nevada gaming debts evidenced by credit instruments are enforceable under the laws of Nevada. All other states are required to enforce a judgment on a gaming debt entered in Nevada pursuant to the Full Faith and Credit Clause of the Unites States Constitution and, although foreign countries are not so bound, the United States assets of foreign debtors may be reached to satisfy a judgment entered in the United States.\nSUPERVISION OF GAMING ACTIVITIES\nIn connection with the supervision of gaming activities at its casinos, the Registrant maintains stringent controls on the recording of all receipts and disbursements. These audit and cash controls include the following: locked cash boxes; personnel independent of casino operations to perform the daily cash and coin counts; floor observation of the gaming area; observation of gaming and certain other areas through the use of closed-circuit television; computer tabulation of receipts and disbursements for each of the slot machines and table games; and timely analysis of discrepancies or deviations from normal performance.\nINSURANCE AND FIRE SAFETY MEASURES\nThe Registrant maintains extensive property damage, business interruption and general liability insurance. Safety and protection have been, and continue to be, of maximum concern in the construction and expansion of the Registrant's facilities. The Mirage, Treasure Island, the high-rise towers of the Golden Nugget and the Golden Nugget-Laughlin were constructed pursuant to modern stringent fire codes, and generally exceed such codes. The Mirage, Treasure Island and the Golden Nugget is each rated by insurance companies as a \"highly protected risk.\"\nCOMPETITION\nThe Mirage, Treasure Island and the Golden Nugget each compete with a number of other hotel-casinos in Las Vegas. Currently, there are approximately 27 major hotel-casinos located on or near the Las Vegas Strip, nine major hotel-casinos located in the downtown area and several major facilities located elsewhere in the Las Vegas area. During 1993 (principally during the fourth quarter), Las Vegas hotel and motel room capacity increased by approximately 10,300 rooms, to a total of approximately 83,700 rooms. This increase includes the effect of the opening of Treasure Island and two other major Strip hotel-casinos in the fourth quarter.\nManagement believes that the primary competition for The Mirage comes from other large hotel-casinos located on or near the Strip that offer amenities and marketing programs that appeal to the upper-middle and higher-income strata of the gaming populace. The Mirage competes on the basis of the elegance and excitement offered by the facility, the desirability of its location, the quality and relative value of its hotel rooms and restaurants, its top-name entertainment, customer service, its balanced marketing strategy and special marketing and promotional programs.\nManagement believes that Treasure Island primarily competes with the other large hotel-casinos located on or near the Strip that offer amenities and marketing programs that appeal to the middle-to-\nupper-middle-income strata of the gaming populace. Treasure Island competes on the basis of the entertainment and excitement offered by the facility, the desirability of its location (including its proximity to The Mirage), the affordability of its hotel rooms, the variety, quality and attractive pricing of its food and beverage outlets, its unique showroom and innovative amusement area, customer service and its marketing and promotional programs.\nIn management's opinion, the Golden Nugget primarily competes with the large hotel-casinos located on or near the Strip, particularly those offering amenities and marketing programs that appeal primarily to the middle-and upper-middle-income strata of the gaming populace. The Golden Nugget competes for gaming customers primarily on the basis of the elegance, intimacy and excitement offered by the facility, the quality and relative value of its hotel rooms and restaurants, customer service and its marketing and promotional programs. In order to compete more effectively with the Strip hotel-casinos, a coalition of several major downtown Las Vegas hotel-casino owners (including GNLV), in conjunction with the City of Las Vegas, is developing The Fremont Street Experience, a major tourist attraction in the downtown area. See \"Management's Discussion and Analysis of Financial Condition and Results of Operations\" included in Item 7 of Part II of this Form 10-K.\nThe Golden Nugget-Laughlin competes with eight nearby hotel-casinos. During 1993, the number of available hotel rooms in Laughlin increased by approximately 1,100 rooms, to a total of approximately 10,300 rooms.\nThe Registrant's facilities also compete for gaming customers to a lesser extent with hotel-casino operations located in other areas of Nevada, Atlantic City, New Jersey and other parts of the world. They also compete with state-sponsored lotteries, off-track wagering, card parlors, riverboat and Indian gaming ventures and other forms of legalized gaming in the United States, as well as with gaming on cruise ships. Certain states have recently legalized, and several other states are currently considering legalizing, casino gaming. Management does not believe that such legalization of casino gaming in those jurisdictions will have a material adverse impact on the Registrant's operations. However, management believes that the legalization of large-scale land-based casino gaming in or near certain major metropolitan areas, particularly in California, could have a material adverse effect on the Las Vegas market. The competitive impact of Treasure Island on the Registrant's other hotel-casinos cannot yet be fully determined, but Treasure Island may attract customers who would otherwise patronize these facilities.\nEMPLOYEES AND LABOR RELATIONS\nAs of March 1, 1994, the Registrant and its subsidiaries had approximately 14,600 full-time and 2,400 part-time employees. At that date, the Registrant had collective bargaining contracts with unions covering approximately 7,700 of its Las Vegas employees, which expire in May 1994. The Registrant is in the process of negotiating with respect to the renewal of such contracts. Although unions have been active in Las Vegas, management considers its employee relations to be excellent.\nREGULATION AND LICENSING\nThe ownership and operation of casino gaming facilities in Nevada are subject to (i) the Nevada Gaming Control Act and the regulations promulgated thereunder (collectively, the \"Nevada Act\") and (ii) various local ordinances and regulations. The Registrant's gaming operations are subject to the licensing and regulatory control of the Nevada Gaming Commission (the \"Nevada Commission\"), the Nevada State Gaming Control Board (the \"Nevada Board\"), the City of Las Vegas and the Clark County Liquor and Gaming Licensing Board (the \"Clark County Board\"). The Nevada Commission, the Nevada Board, the City of Las Vegas and the Clark County Board are collectively referred to as the \"Nevada Gaming Authorities.\" To the best knowledge of management, the Registrant and its subsidiaries are presently in material compliance with all applicable laws, regulations and supervisory procedures described herein.\nThe laws, regulations and supervisory procedures of the Nevada Gaming Authorities are based upon declarations of public policy which are concerned with, among other things: (i) the prevention of unsavory or unsuitable persons from having a direct or indirect involvement with gaming at any time or in any capacity; (ii) the establishment and maintenance of responsible accounting practices and procedures; (iii) the maintenance of effective controls over the financial practices of licensees, including the establishment of minimum\nprocedures for internal fiscal affairs and the safeguarding of assets and revenues, providing reliable record keeping and requiring the filing of periodic reports with the Nevada Gaming Authorities; (iv) the prevention of cheating and fraudulent practices; and (v) providing a source of state and local revenues through taxation and licensing fees. Change in such laws, regulations and procedures could have an adverse effect on the Registrant's gaming operations.\nThe Registrant's direct and indirect subsidiaries that conduct gaming operations are required to be licensed by the Nevada Gaming Authorities. The gaming licenses require the periodic payment of fees and taxes and are not transferable. MCH is registered as an intermediary company and has been found suitable to own the stock of TI Corp. MCH has also been licensed to conduct nonrestricted gaming operations at The Mirage. TI Corp. has been licensed to conduct nonrestricted gaming operations at Treasure Island. GNLV has been registered as an intermediary company and has been found suitable to own the stock of Golden Nugget Manufacturing Corp. (\"GNMC\"), its inactive subsidiary which is licensed as a manufacturer and distributor of gaming devices. GNLV has also been licensed to conduct nonrestricted gaming operations at the Golden Nugget. GNL has been licensed to conduct nonrestricted gaming operations at the Golden Nugget-Laughlin. MR Realty, MRI's subsidiary which owns the Dunes site, has been licensed to conduct restricted gaming operations at The Mirage Golf Club. The Registrant is registered by the Nevada Commission as a publicly traded corporation (a \"Registered Corporation\") and has been found suitable to own the stock of MCH, GNLV and GNL, each of which, together with TI Corp., MR Realty and GNMC, is a corporate licensee (individually, a \"Gaming Subsidiary\" and collectively, the \"Gaming Subsidiaries\") under the Nevada Act.\nAs a Registered Corporation, the Registrant is required periodically to submit detailed financial and operating reports to the Nevada Commission and furnish any other information which the Nevada Commission may require. No person may become a stockholder of, or receive any percentage of profits from, the Gaming Subsidiaries without first obtaining licenses and approvals from the Nevada Gaming Authorities. The Registrant and the Gaming Subsidiaries have obtained from the Nevada Gaming Authorities the various registrations, approvals, permits and licenses required in order to engage in gaming activities in Nevada. The Nevada Gaming Authorities may investigate any individual who has a material relationship to, or material involvement with, the Registrant or the Gaming Subsidiaries in order to determine whether such individual is suitable or should be licensed as a business associate of a gaming licensee. Officers, directors and certain key employees of the Gaming Subsidiaries must file applications with the Nevada Gaming Authorities and may be required to be licensed or found suitable by the Nevada Gaming Authorities. Officers, directors and key employees of the Registrant who are actively and directly involved in gaming activities of the Gaming Subsidiaries may be required to be licensed or found suitable by the Nevada Gaming Authorities. The Nevada Gaming Authorities may deny an application for licensing for any cause which they deem reasonable. A finding of suitability is comparable to licensing, and both require submission of detailed personal and financial information followed by a thorough investigation. The applicant for licensing or a finding of suitability must pay all the costs of the investigation. Changes in licensed positions must be reported to the Nevada Gaming Authorities, and in addition to their authority to deny an application for a finding of suitability or licensure, the Nevada Gaming Authorities have jurisdiction to disapprove a change in a corporate position.\nIf the Nevada Gaming Authorities were to find an officer, director or key employee unsuitable for licensing or unsuitable to continue having a relationship with the Registrant or the Gaming Subsidiaries, the companies involved would have to sever all relationships with such person. In addition, the Nevada Commission may require the Registrant or the Gaming Subsidiaries to terminate the employment of any person who refuses to file appropriate applications. Determinations of suitability or of questions pertaining to licensing are not subject to judicial review in Nevada.\nThe Registrant, MCH, GNLV, GNL and TI Corp. are required to submit detailed financial and operating reports to the Nevada Commission. Substantially all material loans, leases, sales of securities and similar financing transactions entered into by MCH, GNLV, GNL or TI Corp. must be reported to or approved by the Nevada Commission.\nIf it were determined that the Nevada Act was violated by a Gaming Subsidiary, the licenses it holds could be limited, conditioned, suspended or revoked, subject to compliance with certain statutory and regulatory procedures. In addition, the Registrant, the Gaming Subsidiaries and the persons involved could be subject to substantial fines for each separate violation of the Nevada Act at the discretion of the Nevada Commission. Further, a supervisor could be appointed by the Nevada Commission to operate The Mirage, Treasure Island, the Golden Nugget and the Golden Nugget-Laughlin and, under certain circumstances, earnings generated during the supervisor's appointment (except for the reasonable rental value of the casino) could be forfeited to the State of Nevada. Limitation, conditioning or suspension of the gaming license of a Gaming Subsidiary or the appointment of a supervisor could (and revocation of any gaming license would) materially adversely affect the Registrant's gaming operations.\nAny beneficial holder of the Registrant's voting securities, regardless of the number of shares owned, may be required to file an application, be investigated and have his suitability as a beneficial holder of the Registrant's voting securities determined if the Nevada Commission has reason to believe that such ownership would be inconsistent with the declared policies of the State of Nevada. The applicant must pay all costs of investigation incurred by the Nevada Gaming Authorities in conducting any such investigation.\nThe Nevada Act requires any person who acquires more than 5% of a Registered Corporation's voting securities to report the acquisition to the Nevada Commission. The Nevada Act requires that beneficial owners of more than 10% of a Registered Corporation's voting securities apply to the Nevada Commission for a finding of suitability within 30 days after the Chairman of the Nevada Board mails a written notice requiring such filing. Under certain circumstances, an \"institutional investor,\" as defined in the Nevada Act, which acquires more than 10%, but not more than 15%, of a Registered Corporation's voting securities may apply to the Nevada Commission for a waiver of such finding of suitability requirement if such institutional investor holds the voting securities for investment purposes only. An institutional investor shall not be deemed to hold voting securities for investment purposes unless the voting securities were acquired and are held in the ordinary course of business as an institutional investor and not for the purpose of causing, directly or indirectly, the election of a majority of the members of the board of directors of the Registered Corporation, any change in the corporate charter, bylaws, management, policies or operations of the Registered Corporation or any of its gaming affiliates or any other action which the Nevada Commission finds to be inconsistent with holding the Registered Corporation's voting securities for investment purposes only. Activities which are not deemed to be inconsistent with holding voting securities for investment purposes only include: (i) voting on all matters voted on by stockholders; (ii) making financial and other inquiries of management of the type normally made by securities analysts for informational purposes and not to cause a change in its management, policies or operations; and (iii) such other activities as the Nevada Commission may determine to be consistent with such investment intent. The City of Las Vegas requires 10% stockholders to be licensed. If the beneficial holder of voting securities who must be found suitable is a corporation, partnership or trust, it must submit detailed business and financial information, including a list of beneficial owners. The applicant is required to pay all costs of investigation.\nAny person who fails or refuses to apply for a finding of suitability or a license within 30 days after being ordered to do so by the Nevada Commission or the Chairman of the Nevada Board may be found unsuitable. The same restrictions apply to a record owner if the record owner, after request, fails to identify the beneficial owner. Any stockholder found unsuitable who holds, directly or indirectly, any beneficial ownership of the common stock beyond such period of time as may be prescribed by the Nevada Commission may be guilty of a criminal offense. The Registrant is subject to disciplinary action if, after it receives notice that a person is unsuitable to be a stockholder or to have any other relationship with the Registrant or the Gaming Subsidiaries, the Registrant (i) pays such person any dividend or interest upon voting securities of the Registrant, (ii) allows such person to exercise, directly or indirectly, any voting right conferred through securities held by that person, (iii) pays remuneration in any form to such person for services rendered or otherwise or (iv) fails to pursue all lawful efforts to require such person to relinquish his voting securities including, if necessary, the immediate purchase of the voting securities for cash at fair market value. Additionally, the Clark County Board has taken the position that it has the authority to approve all persons owning or controlling the stock of any corporation controlling a gaming licensee.\nThe Nevada Commission may, in its discretion, require the holder of any debt security of a Registered Corporation to file applications, be investigated and be found suitable to own the debt security. If the Nevada Commission determines that a person is unsuitable to own such security, then pursuant to the Nevada Act, the Registered Corporation can be sanctioned, including the loss of its approvals, if without the prior approval of the Nevada Commission, it: (i) pays to the unsuitable person any dividend, interest or any distribution whatsoever; (ii) recognizes any voting right by such unsuitable person in connection with such securities; (iii) pays the unsuitable person remuneration in any form; or (iv) makes any payment to the unsuitable person by way of principal, redemption, conversion, exchange, liquidation or similar transaction.\nThe Registrant is required to maintain a current stock ledger in Nevada which may be examined by the Nevada Gaming Authorities at any time. If any securities are held in trust by an agent or nominee, the record holder may be required to disclose the identity of the beneficial owner to the Nevada Gaming Authorities. A failure to make such disclosure may be grounds for finding the record holder unsuitable. The Registrant is also required to render maximum assistance in determining the identity of the beneficial owner. The Nevada Commission has the power to require the Registrant's stock certificates to bear a legend indicating that the securities are subject to the Nevada Act. To date, the Nevada Commission has not imposed such a requirement on the Registrant.\nThe Registrant may not make a public offering of its securities without the prior approval of the Nevada Commission if the securities or proceeds therefrom are intended to be used to construct, acquire or finance gaming facilities in Nevada or to retire or extend obligations incurred for such purposes. On May 27, 1993, the Nevada Commission granted the Registrant prior approval to make public offerings for a period of one year, subject to certain conditions (the \"Shelf Approval\"). However, the Shelf Approval may be rescinded for good cause without prior notice upon the issuance of an interlocutory stop order by the Chairman of the Nevada Board. The Shelf Approval also applies to any affiliated company wholly owned by the Registrant (an \"Affiliate\") which is a publicly traded corporation or would thereby become a publicly traded corporation pursuant to a public offering. The Shelf Approval also includes approval for the Gaming Subsidiaries to guarantee any security issued by, or to hypothecate their assets to secure the payment or performance of any obligations issued by, the Registrant or an Affiliate in a public offering under the Shelf Approval. The Shelf Approval does not constitute a finding, recommendation or approval by the Nevada Commission or the Nevada Board as to the accuracy or adequacy of the prospectus or the investment merits of the securities offered. Any representation to the contrary is unlawful. The Registrant has filed an application for a renewal of the Shelf Approval, which it anticipates will be considered by the Nevada Board and the Nevada Commission in May 1994.\nChanges in control of the Registrant through merger, consolidation, stock or asset acquisitions, management or consulting agreements or any act or conduct by a person whereby he obtains control may not occur without the prior approval of the Nevada Commission. Entities seeking to acquire control of a Registered Corporation must satisfy the Nevada Board and Nevada Commission with respect to a variety of stringent standards prior to assuming control of such Registered Corporation. The Nevada Commission may also require controlling stockholders, officers, directors and other persons having a material relationship or involvement with the entity proposing to acquire control to be investigated and licensed as part of the approval process relating to the transaction.\nThe Nevada Legislature has declared that some corporate acquisitions opposed by management, repurchases of voting securities and corporate defensive tactics affecting Nevada corporate gaming licensees, and Registered Corporations that are affiliated with those operations, may be injurious to stable and productive corporate gaming. The Nevada Commission has established a regulatory scheme to ameliorate the potentially adverse effects of these business practices upon Nevada's gaming industry and to further Nevada's policy to: (i) assure the financial stability of corporate gaming licensees and their affiliates; (ii) preserve the beneficial aspects of conducting business in the corporate form; and (iii) promote a neutral environment for the orderly governance of corporate affairs. Approvals are, in certain circumstances, required from the Nevada Commission before the Registered Corporation can make exceptional repurchases of voting securities above the current market price thereof and before a corporate acquisition opposed by management can be consummated. The Nevada Act also requires prior approval of a plan of\nrecapitalization proposed by the Registered Corporation's board of directors in response to a tender offer made directly to the Registered Corporation's stockholders for the purpose of acquiring control of the Registered Corporation.\nLicense fees and taxes, computed in various ways depending on the type of gaming or activity involved, are payable to the State of Nevada and to Clark County and the City of Las Vegas, in which the Gaming Subsidiaries' respective operations are conducted. Depending upon the particular fee or tax involved, these fees and taxes are payable either monthly, quarterly or annually and are based upon either: (i) a percentage of the gross revenues received; (ii) the number of gaming devices operated; or (iii) the number of table games operated. A casino entertainment tax is also paid by casino operations where entertainment is furnished in connection with the selling of food or refreshments. Nevada licensees that hold a manufacturer's or distributor's license, such as GNMC, also pay certain fees to the State of Nevada.\nAny person who is licensed, required to be licensed, registered, required to be registered or is under common control with such persons (collectively, \"Licensees\"), and who proposes to become involved in a gaming venture outside of Nevada, is required to deposit with the Nevada Board, and thereafter maintain, a revolving fund in the amount of $10,000 to pay the expenses of investigation by the Nevada Board of its participation in such foreign gaming. The revolving fund is subject to increase or decrease at the discretion of the Nevada Commission. Thereafter, Licensees are required to comply with certain reporting requirements imposed by the Nevada Act. Licensees are also subject to disciplinary action by the Nevada Commission if they knowingly violate any laws of the foreign jurisdiction pertaining to the foreign gaming operation, fail to conduct the foreign gaming operation in accordance with the standards of honesty and integrity required of Nevada gaming operations, engage in activities that are harmful to the State of Nevada or its ability to collect gaming taxes and fees or employ a person in the foreign operation who has been denied a license or finding of suitability in Nevada on the ground of personal unsuitability.\nThe sale of alcoholic beverages at The Mirage, Treasure Island, the Golden Nugget-Laughlin and The Mirage Golf Club, and the sale of alcoholic beverages at the Golden Nugget, are subject to licensing, control and regulation by the Clark County Board and the City of Las Vegas, respectively. All licenses are revocable and are not transferable. The agencies involved have full power to limit, condition, suspend or revoke any such license, and any such disciplinary action could (and revocation would) have a material adverse effect on the operations of the Gaming Subsidiaries.\nITEM 2.","section_1A":"","section_1B":"","section_2":"ITEM 2. PROPERTIES\nThe Mirage and Treasure Island share an approximately 116-acre site owned by the Registrant on the Las Vegas Strip. At March 15, 1994, both The Mirage and Treasure Island were subject to aggregate encumbrances approximating $396.0 million, including amounts based upon the accreted value of zero coupon first mortgage notes.\nThe Golden Nugget, including parking facilities, occupies approximately seven and one-half acres in downtown Las Vegas. The improvements and approximately 90% of the underlying land are owned by the Registrant, with the remaining land being held under three separate ground leases that expire (after giving effect to renewal options) on dates ranging from 2025 to 2046.\nThe Golden Nugget-Laughlin, including adjacent parking facilities, and GNL's motel in Bullhead City, Arizona, occupy an aggregate of approximately 15 1\/2 acres. All of the property is owned by the Registrant. The Golden Nugget-Laughlin is subject to a blanket encumbrance collateralizing the Registrant's bank credit facility, $20.0 million of which was drawn at March 15, 1994.\nThe Dunes site comprises approximately 164 acres of improved property owned by the Registrant on the Las Vegas Strip. The Mirage Golf Club occupies approximately 125 acres of such property.\nThe Registrant owns approximately 315 acres of land in North Las Vegas. Shadow Creek occupies approximately 80% of such property. Shadow Creek is subject to the blanket encumbrance collateralizing the Registrant's bank credit facility.\nThe Registrant also owns or leases various improved and unimproved property, and options to purchase or lease property, in Las Vegas, Atlantic City, New Jersey and other locations in the United States and certain foreign countries.\nITEM 3.","section_3":"ITEM 3. LEGAL PROCEEDINGS\nThe Registrant (including its subsidiaries) is a defendant in various lawsuits, most of which relate to routine matters incidental to its business. Management does not believe that the outcome of such pending litigation, in the aggregate, will have a material adverse effect on the Registrant.\nITEM 4.","section_4":"ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS\nThere were no matters submitted to a vote of security holders during the fourth quarter of 1993.\nPART II\nITEM 5.","section_5":"ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS\nThe Registrant's common stock is traded on the New York and Pacific Stock Exchanges under the symbol MIR. The following table sets forth, for the calendar quarters indicated, the high and low sale prices of the common stock on the New York Stock Exchange, as adjusted to reflect a five-for-two split of the Registrant's common stock effective October 15, 1993.\nThe Registrant paid no dividends in 1993 or 1992. There were approximately 12,300 record holders of the Registrant's common stock as of March 15, 1994.\nThe Registrant's bank credit agreement contains a covenant restricting the ability of the Registrant to pay cash dividends on its common stock or make certain other restricted payments. At December 31, 1993, pursuant to such covenant, the Registrant was permitted to pay dividends and make restricted payments totaling approximately $280 million. In addition, certain subsidiaries of the Registrant are parties to the credit agreement and to indentures which contain covenants restricting the subsidiaries' ability to pay cash dividends on their capital stock to the Registrant. Refer to Exhibits 4(a), 4(e), 4(g) and 10(dd) to this Form 10-K, and Note 5 of Notes to Consolidated Financial Statements referred to in Item 14(a)(1) of this Form 10-K.\nITEM 9.","section_6":"","section_7":"","section_7A":"","section_8":"","section_9":"ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE\nNone.\nPART III\nITEM 10.","section_9A":"","section_9B":"","section_10":"ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT\nThere is incorporated by reference the information appearing under the caption \"Directors and Executive Officers\" in the Registrant's definitive Proxy Statement to be filed with the Securities and Exchange Commission.\nITEM 11.","section_11":"ITEM 11. EXECUTIVE COMPENSATION\nThere is incorporated by reference the information appearing under the caption \"Executive Compensation\" in the Registrant's definitive Proxy Statement to be filed with the Securities and Exchange Commission.\nITEM 12.","section_12":"ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT\nThere is incorporated by reference the information appearing under the caption \"Stock Ownership of Major Stockholders and Management\" in the Registrant's definitive Proxy Statement to be filed with the Securities and Exchange Commission.\nITEM 13.","section_13":"ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS\nThere is incorporated by reference the information appearing under the captions \"Compensation Committee Interlocks and Insider Participation\" and \"Certain Transactions\" in the Registrant's definitive Proxy Statement to be filed with the Securities and Exchange Commission.\nPART IV\nITEM 14.","section_14":"ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K\n(a)(3). EXHIBITS.\n(b). REPORTS ON FORM 8-K.\nThe Registrant filed no reports on Form 8-K during the three-month period ended December 31, 1993.\nSIGNATURES\nPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MIRAGE RESORTS, INCORPORATED\nBy: STEPHEN A. WYNN\n-------------------------------------- Stephen A. Wynn, PRESIDENT\nDated: March 30, 1994\nPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.","section_15":""}
{"filename":"18675_1993.txt","cik":"18675","year":"1993","section_1":"Item 1. BUSINESS.\nIntroduction\nGeneral. Central Maine Power Company (the \"Company\") is an investor-owned Maine public utility incorporated in 1905. The Company is engaged in the business of generating, purchasing, transmitting, distributing and selling electric energy for the benefit of retail customers in southern and central Maine and wholesale customers, principally other utilities. Its principal executive offices are located at 83 Edison Drive, Augusta, Maine 04336, where its general telephone number is (207) 623-3521.\nThe Company has more customers and greater revenues than any other electric utility in Maine, serving approximately 500,000 customers in its 11,000 square-mile service area in southern and central Maine and having $894 million in consolidated electric operating revenues in 1993 (reflecting consolidation of financial statements with a majority-owned subsidiary, Maine Electric Power Company, Inc. (\"MEPCO\")). The Company's service area contains the bulk of Maine's industrial and commercial centers, including Portland (the state's largest city), South Portland, Westbrook, Lewiston, Auburn, Rumford, Bath, Biddeford, Saco, Sanford, Kittery, Augusta (the state's capital), Waterville, Fairfield, Skowhegan and Rockland, and approximately 936,000 people, representing about 77 percent of the total population of the state. The Company's industrial and commercial customers include major producers of pulp and paper products, producers of chemicals, plastics, electronic components, processed food, and footwear, and shipbuilders. Large pulp-and-paper industry customers account for approximately 66 percent of the Company's industrial sales and approximately 27 percent of total service- area sales.\nCost Reduction and Restructuring. Overall demand for energy from the Company's system increased at a rate of 0.4 percent in 1993, after an increase of 0.8 percent in 1992. The low rate of increase can be attributed to continued weakness in the Maine economy, significant competition from alternative fuel sources, the effects of the Company's demand-side management programs and other factors.\nThe Company's earnings per share declined from $1.85 in 1992 to $1.65 in 1993. The rate of return on common equity for 1993 was 9.77 percent compared with 11.25 percent earned in 1992. The reduced earnings level for 1993 is attributable to higher costs, weak sales and cost disallowances associated with two proceedings before the Maine Public Utilities Commission (\"Maine PUC\", \"MPUC\" or \"PUC\") during 1993. For a discussion of those proceedings, see \"Base Rates\" and \"MPUC NUG Contracts Investigation\" under \"Regulation and Rates\", below.\nThe combination of weak sales due to economic and competitive pressures and the disappointing and inadequate base- rate-case decision in December 1993 offers the Company no reasonable opportunity to achieve a level of 1994 earnings near the 1993 level or the current allowed rate of return of 10.05\npercent on common equity. Moreover, the unfavorable outlook for the Company's near-term earnings capacity takes into account the significant reductions in previously planned 1994 operations, maintenance, and capital expenditures being implemented by the Company as part of its broad cost-reduction program.\nAs a result of such factors, the Company's credit ratings came under significant pressure during 1993 and early 1994 when its senior secured debt was downgraded by all three agencies that rate the Company's securities, one of which lowered the rating to below investment grade. The Company's junior securities came under even more pressure late in the year, being assigned, in most cases, non-investment-grade ratings. The decline in the Company's credit ratings will impair its access to the capital markets, make the terms and conditions of borrowing more stringent, and increase its cost of capital, and has already substantially reduced, if not eliminated, the Company's access to the commercial-paper markets. The credit-rating agencies cited the stagnant economy, inadequate rate relief and pricing flexibility, increased competition, and uncertainty of recovery of non-utility purchased-power costs as reasons for the credit downgrades. For a more detailed discussion of the downgrades, see \"Financing and Related Considerations\" - \"Rating Agency Actions\", below.\nAfter review of the Company's overall financial position and outlook, including the impacts associated with the MPUC's rate- case order and the expected near-term revenue impacts of weak sales, the Company's Board of Directors voted on December 15, 1993, to reduce the quarterly common-stock dividend from 39 cents to 22.5 cents per share. The dividend reduction is part of a broad-based cost-reduction and restructuring program designed to stabilize the Company's rates and enhance its financial condition. The program is composed of three major initiatives: (1) reduce the Company's operating costs while maintaining appropriate levels of service; (2) reduce the Company's largest external expense, non-utility power costs; and (3) work with regulators on innovative, competitive new pricing and service options.\nThe first step in implementing the cost-reduction strategy was to restructure the Company's organization along functional lines and eliminate 225 full-time-equivalent jobs, or approximately 10 percent of the Company's work-force, which was accomplished in March 1994. In addition, the Company's operating budget for 1994 was cut $22 million, or 12 percent, from previously planned levels, and the 1994 capital budget for plant, equipment, and conservation programs by $14 million, or 19 percent, from previously planned levels.\nThe second component of the plan, reducing the cost of non- utility power, stresses continued efforts to renegotiate, buy out or terminate high-cost purchased power contracts. It also includes support for Maine legislative action on bills that could have the effect of reducing such costs.\nThe final segment includes continuing efforts to achieve changes in regulation that would redefine the basis for overall price changes and provide flexibility in setting specific prices and in the acquisition and use of resources. As detailed below\nunder \"Regulation and Rates\" - \"Rate Stability Plan\", the Company has indicated interest in pursuing a modified price-cap approach to the regulation of its electric rates and, consistent with the terms of the PUC's December 1993 order in the base-rate case, has been engaged in discussions with rate-case intervenors as to the structure of such a plan. The Company expects to file a rate- stability plan with the PUC sometime in the first half of 1994.\nThe Company is committed to its cost-reduction and restructuring program. It believes that its ability to restore earnings to competitive levels and improve its overall financial health is closely tied to the success of the program.\nThe following topics are discussed under the general heading of Business. Where applicable, the discussions make reference to the various other Items of this Report. In addition, for further discussion of information required to be furnished in response to this Item, see pages 1 through 49 of Exhibit 13-1 hereto (the Company's Annual Report to Shareholders for the year ended December 31, 1993), which pages are hereby incorporated herein by reference.\nNon-utility Generation\nThe Company has been an industry leader in developing supplies of energy from non-utility generators, including cogeneration plants and small power producers. These sources supplied 4.0 billion kilowatt-hours of electricity to the Company in 1993, representing 40.2 percent of total generation, an increase from 38.2 percent in 1992. The Company expects to obtain approximately 44 percent of its energy from this source in 1994. The Company's contracts with non-utility generators, however, which were entered into pursuant to 1978 federal legislation and vigorous state implementation thereof, have contributed the largest part of the Company's increased costs in recent years. This has caused the Company to pursue re- negotiations or buyouts of such contracts wherever practicable. For further discussion of independent power production, see Item 2, Properties, \"Non-utility Generation\". For a discussion of a regulatory proceeding involving the Company's management of its contracts with non-utility generators, see \"Regulation and Rates\" - \"MPUC NUG Contracts Investigation\", below.\nMaine Yankee Atomic Power Company\nThe Company owns a 38 percent stock interest in Maine Yankee Atomic Power Company (\"Maine Yankee\"), which owns and operates a nuclear generating plant in Wiscasset, Maine (the \"Maine Yankee Plant\"). The Maine Yankee Plant has been in commercial operation since 1972 and has consistently produced power at a cost among the lowest in the country for nuclear plants. In 1993 the Maine Yankee Plant produced 5.7 billion kilowatt-hours of electric power, the highest total ever for a year that included a scheduled refueling and maintenance shutdown, at an average cost of 3.4 cents per kilowatt-hour. The average capacity factor for the Maine Yankee plant in 1993 was 76 percent. For further discussion of Maine Yankee, see \"Regulation and Rates\", below, and Item 2, Properties, \"Existing Facilities\".\nCompetition\nIn October 1992 the United States Congress enacted the Energy Policy Act of 1992 (the \"Policy Act\"). The Policy Act was designed to encourage competition among electric utility companies, improve energy resource planning by utility companies, and encourage the development of alternative fuels and sources of energy. The Policy Act provides for, among other things, (1) enhanced access to electric transmission to promote competition for wholesale purchasers and sellers, (2) statutory reforms to encourage utility participation in the formation of exempt wholesale generators, (3) tax credits for electricity generation from renewable energy sources, (4) tax incentives for the use of alternative fuels, and (5) required fleet vehicle conversion to alternative fuels. The Policy Act has been a significant factor in creating new areas of competition for the Company.\nThe Company is facing competition in several areas of its traditional business and anticipates that the new competition will continue to place pressure on both sales and the price the Company can charge for its product. Alternative fuels and pre- Policy Act regulation that had restricted competition from outside of the Company's service territory have expanded customers' energy options. As a result, the Company has been involved in a number of negotiations with certain of its customers and will continue to pursue retention of its customer base. This increasingly competitive environment has resulted in the Company's entering into contracts with two of its wholesale customers, as well as with certain of its industrial and commercial customers, to provide their energy needs at prices and margins lower than the current averages. For a discussion of the potential loss of the largest wholesale customer of the Company to an out-of-state supplier, see \"Regulation and Rates\" - \"Potential Loss of Wholesale Customer\", below.\nIn addition to negotiating a number of special agreements with large customers, the Company is also pursuing with the MPUC alternative pricing mechanisms that would allow the Company the flexibility to modify the price of its product in certain instances, when the competitive alternatives could result in the loss of a significant end use of electricity. In its preliminary discussions, the MPUC has indicated there may be instances in which the ability of the Company to adjust its price in response\nto competitive pressures is advisable. In February 1994, the MPUC approved a specific competitive-pricing plan under which the Company will operate with respect to residential water-heating customers. The Company believes it may be granted the authority to develop additional market-responsive rates in certain circumstances in the future. For a discussion of relevant PUC orders, see \"Regulation and Rates\" - \"Rate Design\", below.\nRegulation and Rates\nThe Company is subject to the regulatory authority of the PUC as to retail rates, accounting, service standards, territory served, the issuance of securities maturing more than one year after the date of issuance, certification of generation and transmission projects and various other matters. The Company is also subject as to some phases of its business, including licensing of its hydroelectric stations, accounting, rates relating to wholesale sales (which constitute less than one percent of operating revenues) and to interstate transmission and sales of energy and certain other matters, to the jurisdiction of the Federal Energy Regulatory Commission (\"FERC\") under Parts I, II and III of the Federal Power Act. Other activities of the Company from time to time are subject to the jurisdiction of various other state and federal regulatory agencies.\nThe Maine Yankee Plant and the other nuclear facilities in which the Company has an interest are subject to extensive regulation by the federal Nuclear Regulatory Commission (\"NRC\"). The NRC is empowered to authorize the siting, construction and operation of nuclear reactors after consideration of public health, safety, environmental and antitrust matters. Under its continuing jurisdiction, the NRC may, after appropriate proceedings, require modification of units for which construction permits or operating licenses have already been issued, or impose new conditions on such permits or licenses, and may require that the operation of a unit cease or that the level of operation of a unit be temporarily or permanently reduced.\nThe United States Environmental Protection Agency (\"EPA\") administers programs which affect all of the Company's thermal generating facilities as well as the nuclear facilities in which it has an interest. The EPA has broad authority in administering these programs, including the ability to require installation of pollution-control and mitigation devices. The Company is also subject to regulation by various state and local authorities with regard to environmental matters and land use. For further discussion of environmental considerations as they affect the Company, see \"Environmental Matters\", below.\nUnder the Federal Power Act, the Company's hydroelectric projects (including storage reservoirs) on navigable waters of the United States are required to be licensed by the FERC. The Company is a licensee, either by itself or in some cases with other parties, for 27 FERC-licensed projects, some of which include more than one generating unit. Thirteen licenses were scheduled to expire in 1993, one in 1997, and thirteen after 2000. The Company filed all applications for relicensing the projects whose licenses were scheduled to expire in 1993 and has been authorized to continue to operate those projects pending\naction on relicensing by the FERC. New licenses may contain conditions that reduce operating flexibility and require substantial additional investment by the Company.\nThe United States has the right upon or after expiration of a license to take over and thereafter maintain and operate a project upon payment to the licensee of the lesser of its \"net investment\" or the fair value of the property taken, and any severance damages, less certain amounts earned by the licensee in excess of specified rates of return. If the United States does not exercise its statutory right, the FERC is authorized to issue a new license to the original licensee, or to a new licensee upon payment to the original licensee of the amount the United States would have been obligated to pay had it taken over the project. The United States has not asserted such a right with respect to any of the Company's licensed projects.\nBase Rates. On March 1, 1993, the Company filed a request with the MPUC for a $95-million increase in base rates. The major components of the request were (1) compensating for lower-than-forecasted sales, (2) increased operation and maintenance expenses, (3) increased operating costs of the four operating nuclear plants in which the Company owns interests, (4) property additions and transmission, distribution and other improvements, (5) energy-management program costs and, (6) the expiration of the flow-through of certain tax benefits. Ultimately, the Company reduced the amount of its base-rate request from $95 million to $83 million. The decrease was the result of lower estimates of 1994 operation and maintenance expenses, further reductions in the Company's cost of capital, a decrease in the level of anticipated expenditures for energy management programs and the change in the federal income-tax rate from 34 percent to 35 percent.\nOn December 14, 1993, the MPUC issued its order in the proceeding. The MPUC's analysis indicated a need for additional revenues of $51.5 million, yet found the Company to be entitled to a net revenue increase of only $26.2 million. The Commission found a total cost of capital of 8.52 percent and a cost of equity of 10.05 percent, after deducting a one-half percent (.5%) return-on-equity penalty established by the MPUC in a 1993 investigation of the Company's management of certain independent power-producer contracts. See \"MPUC NUG Contracts Investigation\" below, for further discussion of this investigation. To arrive at its revenue-requirement conclusion, the MPUC deducted $25.3 million \"to adjust for management inefficiency\" after finding the Company's performance in the areas of management efficiency and cost-cutting to have been \"inadequate\", based largely on the recommendations contained in a management audit of the Company conducted by a consultant retained by the MPUC.\nThe Company strongly disagrees with the MPUC's management-inefficiency finding and with the resulting deduction of nearly one-half the revenue increase to which the Commission itself found the Company to be otherwise entitled using traditional ratemaking principles. The Company filed an appeal of the base-rate order with the Maine Supreme Judicial Court. The Company cannot, however, predict the result of that appeal.\nRate-Stability Plan. In connection with the base-rate proceeding, on July 21, 1993, the Company filed an alternative rate proposal designed to promote stability in the Company's rates. The proposal consisted of a combination of pricing and regulatory changes that would, among other things, limit future rate increases to annual changes based on the rate of inflation and mandated costs, and revise existing regulatory rules and policies to allow the Company to adjust prices more rapidly in response to customer needs and competitive factors.\nIn its December 14, 1993, base-rate order, the MPUC ordered that a follow-up proceeding be held to implement by mid-1994 a rate-stability plan along the lines discussed in the order. The MPUC encouraged the Company and the parties wishing to participate in the proceeding to work together to develop a plan containing price-cap, profit-sharing, and pricing-flexibility components. The MPUC also directed that the initial plan have a duration of five years, subject to a brief annual proceeding to implement any applicable rate changes, and a detailed review at the end of the fourth year to evaluate the performance of the plan and initiate necessary changes. Participants in the rate-stability plan proceeding have prepared price-cap proposals in response to the MPUC's order and regular discussions are being held. The Company cannot predict the outcome of this process or the MPUC's ultimate decision on a rate-stability plan.\nFuel Clause Adjustment. The Company's electric sales are subject to a fuel adjustment clause that enables the Company to recover from its customers both fuel costs and the increasing amounts of the fuel component of purchased-power costs, including non-utility generation. The Company also collects carrying costs on unbilled fuel and pays interest on fuel-related over- collections.\nIn accordance with a January 1993 ratemaking stipulation, the MPUC approved, as part of the $40 million July 1993 revenue increase, $17 million to reduce deferred fuel-clause balances. Earlier, in July 1992, the MPUC issued an order authorizing an increase, effective September 1, 1992, in the Company's fuel cost adjustment of $13.2 million of the $38.7 million requested by the Company, along with the Electric Revenue Adjustment Mechanism (\"ERAM\") and demand-side-management incentives discussed below under \"Incentive Regulation\". The orders extended the smoothing approach that had begun in 1988, resulting in unrecovered fuel and purchased-power costs being deferred for future recovery.\nRate Design. Effective in December 1991, the Company implemented a rate-design order from the PUC that was intended to realign customer class revenues and specific rate components more closely with marginal costs. These rate design changes, which raised or lowered some customers' rates by as much as eight percent, were intended to reallocate revenues from customer classes, but not to produce any change in aggregate revenues for the Company. In February 1992, the Company filed a request with the PUC to re-examine several rate-design changes in response to concerns regarding the impact of such changes on some classes of residential customers. After considering a number of proposals by the Company and other parties, the PUC reduced the highest winter time-of-use rates by a small percentage from the prior\nwinter's rates, effective in December 1992. The increases in on- peak rates in December 1991 resulting in part from the rate- design changes have caused a significant number of the Company's residential electric heating customers and water heating customers to convert to other fuel sources.\nOn February 18, 1994, the PUC issued its order in an investigation of the Company's resource planning, rate structure, and avoided cost that was initiated in December 1992. The primary purpose of the investigation was to examine the Company's \"long-term costs and their relationships to usage and prices, and to specify any implications for CMP's resource planning activities and general rate structure policies.\" In its order the PUC found, among other things, (1) \"no reason to encourage electric utilities to pursue broad promotion of load growth . . . absent a clear and convincing demonstration that ratepayers as a group would benefit from such efforts\"; (2) \"that CMP's proposed strategy of encouraging marginal usage through broad adoption of declining block rates is not cost-justified . . .\" but the PUC said it would \"continue to encourage proposals for targeted, short-term rates that are carefully designed to retain movable load\"; and (3) the PUC reaffirmed its \"existing policy of encouraging narrowly-focused economic incentive rates for particular kinds of customers, when it can be shown that other ratepayers will not be harmed\". The PUC also indicated that it would initiate a rulemaking proceeding to determine how \"special rates for customers with competitive alternatives should best reflect the utility's obligation to serve, particularly with respect to backup and maintenance rates . . ..\" The Company cannot predict what changes it will ultimately be permitted to implement in the areas of resource planning, rate structure, and avoided cost.\nMPUC NUG Contracts Investigation. On October 28, 1993, in connection with an investigation of the Company's management of independent power-producer contracts, the MPUC issued an order finding that the Company had been unreasonable and imprudent in its management of two independent power-producer contracts and indicated that it would reduce the Company's allowed rate of return on equity by 0.5 percent in the then-pending base-rate case (approximately $4 million, before income taxes, over a 12-month period) and also directed the Company to charge against deferred fuel-cost balances approximately $4.1 million of payments from power providers that had previously been credited against purchased-power capacity costs, unless the Company could demonstrate that the crediting was proper. The Company recorded a reserve totalling $4.1 million during the third quarter of 1993, reflecting the impact of the order. Finally, the MPUC announced that it would review in the future the Company's administration and management of certain power-purchase contracts for purchases of ten megawatts or more.\nOn December 20, 1993, the Chief Justice of the Maine Supreme Judicial Court (the \"Court\"), acting on the Company's request, issued an order staying the effectiveness of the 0.5-percent return-on-equity penalty pending final resolution of the Company's appeal of the October 28, 1993, MPUC order to the Court. In addition, the Court ordered that if the Company should not prevail on its appeal, it would be required to refund any\nrevenues collected as a result of the stay order, with interest. Finally, the Court ordered an expedited hearing on the appeal, scheduling oral argument before the Court for March 1994.\nOn February 3, 1994, the MPUC filed a motion to dismiss with the Court, stating that by order dated February 3, 1994, the Commission had reopened and reconsidered its October 28, 1993 decision. As a result of its reconsideration, the MPUC decided to vacate the return-on-equity penalty conditioned on either the Company's acquiescence in the MPUC's jurisdiction or a finding by the Court that the MPUC had retained jurisdiction, and to consider alternative remedies. The MPUC argued that because of its February 3 order the Company's appeal of the return-on-equity penalty should be dismissed as moot. The Chief Justice declined to dismiss the appeal and added the jurisdictional question to the issues to be determined by the Court.\nThe MPUC, in its February 3, 1994 order, indicated that an alternative under consideration by the MPUC \"appears to present an opportunity to insulate ratepayers sufficiently from CMP's imprudence...,\" yet also noted, \"We do not decide at this time that such a remedy . . . will be adopted.\" The order indicated an intent to seek additional information on the issue of annual differences between the contract rates and avoided costs.\nThe case was argued on March 17 and a decision is expected by early summer 1994. The Company cannot predict the outcome of the appeal on either the issue of jurisdiction or the merits of the return-on-equity penalty, or the outcome if remanded to the PUC, including any subsequent appeal of any alternative remedy.\nIncentive Regulation. In May 1991 the MPUC ordered a three-year trial of the ERAM, which was a fundamental change in the way the Company's revenues were treated and set new incentives for effective utility-sponsored energy management. In July 1992 the MPUC issued an order authorizing the Company to begin collecting $7.8 million, which was only a portion of the $26.2 million of ERAM revenues accrued in its first year, and an energy-management incentive of $1.5 million, beginning in September 1992. Approximately $18.4 million of ERAM revenues accrued in the 12 months beginning in March 1991 were therefore carried over to the 1993 ERAM filing.\nIn January 1993, the MPUC approved a stipulation that resolved several outstanding issues, including those in the Company's ERAM proceeding. The stipulation permitted recovery of accrued ERAM balances in accordance with the terms of a Financial Accounting Standards Board Emerging Issues Task Force consensus. The stipulation also authorized recovery of the costs associated with buy-outs by the Company of certain purchased-power contracts and requested the MPUC to grant an increase in the Company's fuel-cost adjustment. The stipulation also approved an accounting order permitting the Company to accelerate the flow-back of $5.9 million of certain deferred taxes associated with prior losses on reacquired debt. For 1992, the stipulation placed a limit of 11.25 percent on the Company's allowed rate of return on equity. Earnings in excess of the limit, up to approximately $10 million (the revenue requirement of the tax benefits), were applied on a monthly basis to reduce 1993 ERAM\naccruals. In addition, approximately $317,000 of income, net of income taxes, in excess of the $10 million, was used to fund a portion of 1993 operation-and-maintenance expenses.\nThe January 1993 stipulation also reduced the amount of ERAM accruals from January 1993 through November 1993 by $591,000 per month. The ERAM program continued until December 1, 1993, which was the effective date of the new base rates resulting from the Company's 1993 base-rate proceeding. As contemplated by the terms of the stipulation, the MPUC subsequently approved a revenue increase of $40 million, effective July 1, 1993, which included, among other things, $21.2 million toward recovery of deferred ERAM revenues.\nAs of December 31, 1993, the Company had collected approximately $19.2 million of the ERAM revenues; the unbilled ERAM balance at that time was approximately $50.5 million.\nPotential Loss of Wholesale Customer. On July 28, 1993, the Town of Madison Electric Works (Madison), a wholesale customer of the Company, announced that it had selected a competitive bid from Northeast Utilities (NU) and was entering negotiations for NU to become its wholesale electric supplier for a period of up to ten years. The Company's bid was rejected by Madison for being submitted after the ten-day bidding period. NU, a Connecticut-based holding company with substantial excess generating capacity, had submitted a bid to provide up to 45 megawatts of capacity at a rate that would initially be well below the Company's existing rates. Substantially all of the 45 megawatts would supply a large paper-making facility in Madison's service territory that has been served directly by the Company under a special service agreement with Madison during the last 12 years. The Company understands that Madison intends to start taking power from NU in late 1994 for that portion required to serve the paper-making facility and in late 1996 for its remaining requirements. Losing Madison as a wholesale customer would reduce the Company's non-fuel revenues by approximately $11 million annually when fully in effect, based on current rates and 1993 sales, minus any amounts paid to the Company for transmission of the NU power from the New Hampshire border.\nThe Company intervened in opposition to Madison's petition to the MPUC for approval of its contract with NU, but cannot predict what action the MPUC will take on the petition.\nThe Company has also filed with the FERC for approval of a contract to provide transmission service for Madison over the Company's system. The filing seeks recovery of the full cost of providing transmission service as well as compensation for any \"stranded investment\" of the Company in facilities that would no longer be needed to serve the Madison area.\nFERC Power Contracts Settlement Agreement. In August 1991, the FERC issued an order requiring the Company to revise its rates to a level reflecting the filed cost of service associated with each of 14 contracts for non-territorial sales, rather than the negotiated market-based levels. In 1991 the Company established a $4.5 million reserve to reflect refunds associated with some of the contracts. In 1992 the Company reversed\napproximately $1.9 million of that reserve as a result of a settlement agreement that required the Company to refund approximately $2.6 million related to that issue.\nAfter rejection by the FERC of the Company's continuing claims of disparate treatment based on its having been ordered to make refunds while several similarly situated utilities were not, on September 29, 1993, the FERC rescinded the Company's obligation to make refunds. In making its decision, the FERC invoked its \"equitable discretion\" and agreed that, based on its having granted a general amnesty from refunds to other utilities, circumstances had changed so dramatically since its approval of the Company's 1992 refund settlement that it would be \"unfair to continue to single out Central Maine for refunds.\" The FERC order allowed the utilities that had shared the $2.6 million in refunds to repay the Company, with interest, over a 24-month period. The utility that received the major share of the amount refunded by the Company requested reconsideration of the FERC rescission order. The Company recorded approximately $3.0 million of income during the third quarter of 1993, reflecting the refund including interest. On March 22, 1994, the parties submitted to the FERC a settlement agreement which, if approved, would require the Company to deliver a combination of cash and power sales having an aggregate value of up to $1.2 million.\nFinancing and Related Considerations\nDuring 1993, the Company met its capital requirements (including the refunding of several outstanding securities issues) from a variety of sources, including the issuance of additional General and Refunding Mortgage Bonds, utilization of its unsecured Medium-Term Note Program and its Dividend Reinvestment and Common Stock Purchase Plan, short-term unsecured debt borrowings, including commercial paper, and internally generated funds.\nFinancings. During 1993, the Company continued its program of refinancing its outstanding debt to take advantage of lower interest rates. The Company issued $75 million of Series Q 7.05% Due 2008 General and Refunding Mortgage Bonds in March, $50 million of Series R Bonds, 7 7\/8% Due 2023 in May, $60 million of Series S Bonds, 6.03% Due 1998 in August, and $75 million of Series T Bonds, 6.25% Due 1998 in November.\nNone of those series has a sinking fund, and the Series S and Series T Bonds are not callable at the option of the Company. The Series Q and Series R Bonds are not callable at the option of the Company prior to March 1, 1998, and June 1, 2003, respectively, except under limited circumstances.\nThe Company redeemed its $100-million Series I Bonds, 9 1\/4% Due 2016 in the second quarter of 1993, $50 million of its Series M Bonds, 9.18% Due 1995 in the third quarter of 1993, and $27.5 million of its Series N Bonds, 8.50% Due 2001 in the fourth quarter of 1993. Premiums paid on redemptions totalled $9.6 million.\nThese financing and refinancing transactions reduced the annual cost of the Company's mortgage debt to 7.1 percent at\nDecember 31, 1993, from 8.5 percent at December 31, 1992.\nDuring the year, the Company also raised approximately $25.5 million of additional capital through its Dividend Reinvestment and Common Stock Purchase Plan, resulting in the issuance of 1.2 million new shares of common stock. Effective in January 1994, however, the Company elected to authorize an agent to purchase outstanding shares for this plan on the open market, rather than issue new shares. As a result, the Company's current plans call for no additional shares of common stock to be issued for the next several years.\nIn 1993, the Company issued $48 million of notes under its $150-million medium-term note program at an average interest rate of 4.8 percent and an average life of 2.9 years. Notes in the amount of $26.5 million matured during the year, increasing the total outstanding medium-term notes at year-end 1993 to $146.0 million from $124.5 million at year-end 1992.\nThe proceeds from the debt and equity issuances were used for general corporate purposes, which included financing construction and energy-management projects, retiring or refunding outstanding securities, repaying short-term debt, and buying out purchased-power contracts.\nRating Agency Actions. Beginning in late August 1993, three major securities-rating agencies lowered their ratings on the Company's outstanding debt and preferred stock on a number of occasions.\nIn October 1993, Duff & Phelps Credit Rating Co. lowered the Company's fixed income ratings as follows: General and Refunding Mortgage Bonds from \"BBB+\" to \"BBB-\"; unsecured notes from \"BBB\" to \"BB+\"; and preferred stock from \"BBB\" to \"BB-.\"\nStandard & Poor's Corp. (\"S&P\") announced in late October 1993, the application of more stringent financial-risk standards to the investor-owned utility industry to reflect S&P's view of mounting business risk. S&P stated that it believed the industry's \"credit profile\" was being \"threatened chiefly by intensifying competitive pressures but also by sluggish demand expectations, slow earnings growth prospects, high common dividend payout, environmental cost pressures, and nuclear operating cost and decommissioning challenges.\" As a result, S&P revised rating outlooks for about one-third of the industry and placed the Company and several other utilities on \"CreditWatch with negative implications.\"\nOn January 5, 1994, S&P removed the Company's ratings from \"CreditWatch\" and lowered them again as follows: senior secured debt to \"BB+\" from \"BBB-\"; senior unsecured debt to \"BB-\" from \"BB+\"; preferred stock to \"B+\" from \"BB\"; and commercial paper to \"B\" from \"A-3.\" In addition, S&P assigned its preliminary \"BB+\" senior-secured-debt rating to the Company's $150-million General and Refunding Mortgage Bonds previously registered with the Securities and Exchange Commission as a \"shelf\" registration.\nOn January 13, 1994, Moody's Investors Service (\"Moody's\") lowered its rating on the Company's preferred stock to \"ba2\" from \"baa3\" and its short-term debt rating for the Company's commercial paper to \"Prime-3\" from \"Prime-2.\" At the same time,\nMoody's confirmed its ratings on the Company's General and Refunding Mortgage Bonds at \"Baa2\", unsecured medium-term notes and pollution control revenue bonds at \"Baa3\", and the Company's Securities and Exchange Commission \"shelf\" registration for $150,000,000 of General and Refunding Mortgage Bonds to \"(P)Baa2.\"\nThe rating agencies explained that the downgrades primarily reflected the MPUC's \"unsupportive\" base-rate decision, which in their opinion will not allow the Company's financial parameters, adjusted for off-balance-sheet obligations, to remain at acceptable levels for a utility with a \"below-average\" business position. In addition, the rating agencies expressed the belief that the Company's business position also reflected a depressed Maine economy, a large industrial-customer base, difficulty in materially reducing its significant purchased-power obligations, relatively high production costs, increasing rate pressures, and a high dividend payout.\nDeferred Costs. Over the past few years, the amount of the Company's deferred charges and regulatory assets has increased under the regulatory policies of the MPUC. The Securities and Exchange Commission has periodically considered issues regarding the proper accounting treatment of charges deferred by regulatory policy. As a result, the Company has regularly requested the MPUC to issue accounting and ratemaking orders to provide appropriate authority to comply with changing accounting requirements and to allow the Company to appropriately reflect the amounts as deferred charges and regulatory assets. In recent years, the Company received such orders with respect to issues in the 1991 Early Retirement Incentive Program, ERAM, purchased-power contract buy-outs, environmental-site cleanup costs, taxes on losses on reacquired debt, and accounting for postretirement benefits and income taxes pursuant to the newly issued accounting standards. The Company will monitor situations that result in deferred charges and regulatory assets and will seek appropriate regulatory approvals.\nFor further discussion of financing considerations affecting the Company, see the information incorporated by reference in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, and Item 8, Financial Statements and Supplementary Data (Notes 4 and 7 of Notes to Financial Statements), below.\nEnvironmental Matters\nIn connection with the operation and construction of its facilities, various federal, state and local authorities regulate the Company regarding air and water quality, hazardous wastes, land use, and other environmental considerations.\nSuch regulation sometimes requires review, certification or issuance of permits by various regulatory authorities. In addition, implementation of measures to achieve environmental standards may hinder the ability of the Company to conduct day-to-day operations, or prevent or substantially increase the cost of construction of generating plants, and may require substantial investment in new equipment at existing generating plants. Although no substantial investment is presently necessary, the Company is unable to predict whether such\ninvestment may be required in the future.\nWater Quality Control. The federal Clean Water Act provides that every \"point source\" discharger of pollutants into navigable waters must obtain a National Pollutant Discharge Elimination System (\"NPDES\") permit specifying the allowable quantity and characteristics of its effluent. Maine law contains similar permit requirements and authorizes the state to impose more stringent requirements. The Company holds all permits required for its plants by the Clean Water Act, but such permits may be reopened at any time to reflect more stringent requirements promulgated by the EPA or the Maine Department of Environmental Protection (\"DEP\"). Compliance with NPDES and state requirements has necessitated substantial expenditures and may require further substantial expenditures in the future.\nAir Quality Control. Under the federal Clean Air Act, as amended, the EPA has promulgated national ambient air quality standards for certain air pollutants, including sulfur oxides, particulate matter and nitrogen oxides. The EPA has approved a Maine implementation plan prepared by the DEP for the achievement and maintenance of these standards. The Company believes that it is in compliance with the requirements of the Maine plan. The Clean Air Act also imposes stringent emission standards on new and modified sources of air pollutants. Maintaining compliance with more stringent standards, if they should be adopted, could require substantial expenditures by the Company. Although 1990 amendments to the Clean Air Act require, among other things, an aggregate reduction of sulfur dioxide emissions by United States electric utilities by the year 2000, the Company believes that the amendments will not have a material adverse effect on the Company's operations.\nIn addition, a state regulation restricts the sulfur content of the fuel oil burned in Maine to 2.0 percent. However, all oil burned at William F. Wyman Unit No. 4 in Yarmouth, Maine, is required by license to have a sulfur content not exceeding 0.7 percent, and the other three units at Wyman Station are required to have a sulfur content not exceeding 1.5 percent when Wyman Unit No. 4 is in operation. The Company believes that it will continue to be able to obtain a sufficient supply of oil with the required sulfur contents, subject to unforeseen events and the factors influencing the availability of oil discussed under Item 2, Properties, \"Fuel Supply\", below. The operation of the Company's present fuel adjustment clause permits it to recover any additional cost of such fuel from its customers upon review by the MPUC.\nHazardous Waste Regulations. Under the federal Resource Conservation and Recovery Act of 1976, as amended (\"RCRA\"), the generation, transportation, treatment, storage and disposal of hazardous wastes are subject to EPA regulations. Maine has adopted state regulations that parallel RCRA regulations, but in some cases are more stringent. The notifications and applications required by the present regulations have been made. The procedures by which the Company handles, stores, treats, and disposes of hazardous waste products have been revised, where necessary, to comply with these regulations and with more stringent requirements on hazardous waste handling imposed by amendments to RCRA enacted in 1984.\nFor a discussion of a matter in which the Company has been named a potentially responsible party by the EPA with respect to the disposal of certain toxic substances, see Item 3, Legal Proceedings, under the caption \"PCB Disposal\", below.\nElectromagnetic Fields. Public concern has arisen in recent years as to whether electromagnetic fields associated with electric transmission and distribution facilities and appliances and wiring in buildings (\"EMF\") contribute to certain public health problems. This concern has resulted in some areas in opposition to existing or proposed utility facilities, requests for new legislative and regulatory standards, and litigation. On the basis of the scientific studies to date, the Company believes that no persuasive evidence exists that would prove a causal relationship or justify substantial capital outlays to mitigate the perceived risks. Although the Company has suffered no material effect as a result of this concern, the Company supports further research on this subject and since 1988 has been compiling and disseminating through a regular periodic publication information on all related studies and published materials as a central clearing house for such information, as well as providing such information to its customers. The Company intends to continue to monitor all significant developments in this field.\nCapital Expenditures. The Company estimates that its capital expenditures for environmental purposes for the five years from 1989 through 1993 totaled approximately $22.9 million. The Company cannot presently predict the amount of such expenditures in the future, as such estimates are subject to change in accordance with changes in applicable environmental regulations.\nEmployee Information\nA local union affiliated with the International Brotherhood of Electrical Workers (AFL-CIO) represents operating and maintenance employees in each of the Company's operating divisions, and certain office and clerical employees. At December 31, 1993, the Company had 2,103 full-time employees, of whom approximately 46 percent are represented by the union. At the end of 1990 the Company had 2,322 full-time employees. The reduction in the number of full-time employees from 1991 through 1993 was due largely to the implementation of an early retirement program and other efficiency measures in 1991 and 1992. In the first quarter of 1994 the Company further reduced its staffing in connection with its restructuring and cost-reduction program described above under \"Introduction\" - \"Cost Reduction and Restructuring\".\nIn 1989 the Company and its employees represented by the union agreed to a three-year contract, which was to expire on May 1, 1992. In November 1991, however, the Company and the union agreed to a three-year extension of the contract providing for annual wage increases of 3 percent, 3 percent, and 3.5 percent, respectively, for each of the three years ending on May 1, 1995, respectively.\nItem 2.","section_1A":"","section_1B":"","section_2":"Item 2. PROPERTIES.\nExisting Facilities\nThe electric properties of the Company form a single integrated system which is connected at 345 kilovolts and 115 kilovolts with the lines of Public Service Company of New Hampshire at the southerly end and at 115 kilovolts with Bangor Hydro-Electric Company at the northerly end of the Company's system. The Company's system is also connected with the system of The New Brunswick Power Corporation and with Bangor Hydro-Electric Company, in each case through the 345-kilovolt interconnection constructed by MEPCO, a 78 percent-owned subsidiary of the Company. At December 31, 1993, the Company had approximately 2,273 circuit-miles of overhead transmission lines, 18,605 pole-miles of overhead distribution lines and 1,182 miles of underground and submarine cable. The maximum one-hour firm system net peak load experienced by the Company during the winter of 1993-1994 was approximately 1,337 megawatts on January 27, 1994. At the time of the peak, the Company's net capability was 1,977 megawatts. The maximum such peak load experienced by the Company during the preceding three winters was approximately 1,456 megawatts on January 8, 1991, at which time the Company's net capability was 2,069 megawatts. The New England Power Pool (\"NEPOOL\"), of which the Company is a member, had sufficient installed capacity and firm purchases to meet the NEPOOL four- year peak load of 19,742 megawatts experienced on July 19, 1991, and its 1993-1994 winter peak load of 19,534 megawatts on January 19, 1994. See \"NEPOOL\", below.\nThe Company operates 28 hydroelectric generating stations with an estimated net capability of 368 megawatts and purchases an additional 91 megawatts of hydroelectric generation in Maine. It is currently re-evaluating some of its older hydroelectric plants in conjunction with efforts to obtain new federal operating licenses, with the objective of increasing their output and extending their usefulness. The Company also operates one oil-fired steam-electric generating station, William F. Wyman Station in Yarmouth, Maine, after de-activating its Mason Station in Wiscasset, Maine, in 1991. The Company's share of William F. Wyman Station has an estimated net capability of 592 megawatts. The oil-fired station is located on tidewater, permitting waterborne delivery of fuel. The Company also has three internal combustion generating facilities with an estimated aggregate net capability of 41 megawatts.\nThe Company has ownership interests in five nuclear generating plants in New England. The largest is a 38-percent interest in Maine Yankee, which generates power at its plant in Wiscasset, Maine. In addition, the Company owns a 9.5 percent interest in Yankee Atomic Electric Company (\"Yankee Atomic\"), which has permanently shut down its plant located in Rowe, Massachusetts, a 6 percent interest in Connecticut Yankee Atomic Power Company (\"Connecticut Yankee\"), with a plant in Haddam, Connecticut, and a 4 percent interest in Vermont Yankee Nuclear Power Corporation (\"Vermont Yankee\"), which owns a plant located in Vernon, Vermont (collectively, with Maine Yankee, the \"Yankee Companies\"). In addition, pursuant to a joint ownership agreement, the Company has a 2.5 percent direct ownership interest in the Millstone 3 nuclear unit (\"Millstone 3\") in Waterford, Connecticut.\nIn February 1992, the Board of Directors of Yankee Atomic, after concluding that it would be uneconomic to continue to operate, decided to permanently discontinue power operation at\nthe Yankee Atomic plant and to decommission that facility. The Company had relied on Yankee Atomic for less than one percent of the Company's system capacity. Its 9.5-percent equity investment in Yankee Atomic is approximately $2.3 million. Currently, purchased-power costs billed to the Company, which include the estimated cost of the ultimate decommissioning of the unit, are collected by the Company from its customers through the Company's base-rate structure.\nOn March 18, 1993, the FERC approved a settlement agreement regarding the decommissioning plan, recovery of plant investment, and all issues with respect to prudence of the decision to discontinue operation. The Company has estimated its remaining share of the cost of Yankee Atomic's continued compliance with regulatory requirements, recovery of its plant investments, decommissioning and closing the plant, to be approximately $32.8 million. This estimate, which is subject to ongoing review and revision, has been recorded by the Company as a regulatory asset and a liability on the Company's balance sheet. As part of the MPUC's decision in the Company's recent base-rate case, the Company's share of costs related to the deactivation of Yankee Atomic is being recovered through rates based on the most recent projections of costs.\nThe Company's share of the capacity of the four operating nuclear generating plants amounted to the following:\nThe Company is obligated to pay its proportionate share of the operating expenses, including depreciation and a return on invested capital, of each of the Yankee Companies referred to above for periods expiring at various dates to 2012. Pursuant to the joint ownership agreement for Millstone 3, the Company is similarly obligated to pay its proportionate share of the operating costs of Millstone 3. The Company is also required to pay its share of the estimated decommissioning costs of each of the Yankee Companies and Millstone 3. The estimated decommissioning costs are paid as a cost of energy in the amounts allowed in rates by the FERC.\nMEPCO owns and operates a 345-kilovolt transmission interconnection, completed in 1971, extending from the Company's substation at Wiscasset to the Canadian border where it connects with a line of The New Brunswick Power Corporation (\"NB Power\") under a 25-year interconnection agreement. MEPCO transmits power between NB Power and various New England utilities under separate agreements. In 1990 MEPCO transferred to a newly formed partnership, of which a subsidiary of the Company is a 50-percent general partner, approximately $29 million of construction work in progress and an equal amount of deferred credits related to the construction of certain static var compensator facilities used for stabilization purposes in connection with the NEPOOL Hydro-Quebec purchase discussed in the succeeding paragraph.\nNEPOOL, of which the Company is a member, contracted in connection with its Hydro-Quebec projects to purchase power from Hydro-Quebec. The contracts entitle the Company to 85.9 megawatts of capacity credit in the winter and 127.25 megawatts of capacity credit during the summer. The Company also entered\ninto facilities-support agreements for its share of the related transmission facilities, with its share of the support responsibility and of associated benefits being approximately 7 percent of the totals. The Company is making facilities-support payments on approximately $33.2 million, its share of the construction cost for the transmission facilities incurred through December 31, 1993.\nMaine Yankee Decommissioning. Effective in 1988 Maine Yankee began collecting $9.1 million annually for decommissioning based on a FERC-approved funding level of $167 million. In January 1994, Maine Yankee filed a notice of tariff change with the FERC to increase its annual collection to $14.9 million and to reduce its return on common equity to 10.65 percent, for a total net increase in rates of approximately $3.4 million. The increase in decommissioning collection is based on the estimated cost of decommissioning the Maine Yankee Plant, assuming dismantlement and removal, of $317 million (in 1993 dollars) based on a 1993 external engineering study. The estimated cost of decommissioning nuclear plants is subject to change due to the evolving technology of decommissioning and the possibility of new legal requirements. Maine Yankee's accumulated decommissioning funds were $93.8 million as of December 31, 1993.\nMaine Yankee Low-Level Waste Disposal. The federal Low- Level Radioactive Waste Policy Amendments Act (the \"Waste Act\"), enacted in 1986, required operating disposal facilities to accept low-level nuclear waste from other states until December 31, 1992. The Waste Act also set limits on the volume of waste each disposal facility must accept from each state, established milestones for the nonsited states to establish facilities within their states or regions (pursuant to regional compacts) and authorized increasing surcharges on waste disposal until 1992. After 1992 the states in which there are operating disposal sites are permitted to refuse to accept waste generated outside their states or compact regions. In 1987 the Maine Legislature created the Maine Low-Level Radioactive Waste Authority (the \"Maine Authority\") to provide for such a facility if Maine is unable to secure continued access to out-of-state facilities after 1992, and the Maine Authority engaged in a search for a qualified disposal site in Maine. Maine Yankee volunteered its site at the Plant for that purpose, but progress toward establishing a definitive site in Maine, as in other states, was difficult because of the complex technical nature of the search process and the political sensitivities associated with it. As a result, Maine did not satisfy its milestone obligation under the Waste Act requiring submission of a site license application by the end of 1991, and is therefore subject to surcharges on its waste and has not had access to regulated disposal facilities since the end of 1992. Thus, Maine Yankee now stores all waste generated at an on-site storage facility.\nAt the same time, the State of Maine was pursuing discussions with the State of Texas concerning participation in a compact with that state and Vermont. In May 1993, the Texas Legislature approved a compact with the states of Maine and Vermont. The Maine Legislature in June 1993 ratified the compact and submitted it to ratification by Maine voters in a referendum held on November 2, 1993, in which the compact was ratified by a margin of approximately 73% to 27%. It must now be presented to the United States Congress for final ratification.\nThe compact provides for Texas to take Maine's low-level waste over a 30-year period for disposal at a planned facility in west Texas. In return Maine would be required to pay $25 million, assessed to Maine Yankee by the State of Maine, payable in two equal installments, the first after ratification by Congress and the second upon commencement of operation of the Texas facility. In addition, Maine Yankee would be assessed a total of $2.5 million for the benefit of the Texas county in which the facility would be located and would also be responsible for its pro-rata share of the Texas governing commission's operating expenses. Pending the ratification votes, the Maine Authority suspended its search for a suitable disposal site in Maine.\nIn the event the required ratification by Congress is not obtained, subject to continued NRC approval, Maine Yankee can continue to utilize its capacity to store approximately ten to twelve years' production of low-level waste in its facility at the Maine Yankee Plant site, which it started in January 1993. Subject to obtaining necessary regulatory approval, Maine Yankee could also build a second facility on the Plant site. Maine Yankee believes it is probable that it will have adequate storage capacity for such low-level waste available on-site, if needed, through the licensed operating life of the Maine Yankee Plant. On January 26, 1993, the NRC published for public comment a proposed rulemaking that, if adopted, would require a licensee such as Maine Yankee, as a condition of its license, to document that it had exhausted other reasonable waste management options in order to be permitted to store low-level waste on-site beyond January 1, 1996. Such options include taking all reasonable steps to contract, either directly or through the state, for disposal of the low-level waste. On February 9, 1994, the NRC, after affirming its preference for disposal of waste over storage, announced its decision to withdraw the proposed rulemaking. Maine Yankee has informed the Company that it expects the NRC to issue its formal notice of withdrawal in the spring of 1994.\nThe Company cannot predict whether the final required ratification of the Texas compact or other regulatory approvals required for on-site storage will be obtained, but Maine Yankee has stated that it intends to utilize its on-site storage facility in the interim and continue to cooperate with the State of Maine in pursuing all appropriate options.\nNuclear Insurance. The Price-Anderson Act is a federal statute providing, among other things, a limit on the maximum liability for damages resulting from a nuclear incident. Coverage for the liability is provided for by existing private insurance and retrospective assessments for costs in excess of those covered by insurance, up to $75.5 million for each reactor owned, with a maximum assessment of $10 million per reactor in any year. Based on the Company's stock ownership in four nuclear generating facilities and its 2.5 percent direct ownership interest in the Millstone 3 nuclear plant, the Company's retrospective premium could be as high as $6 million in any year, for a cumulative total of $45.3 million, exclusive of the effect of inflation indexing and a 5-percent surcharge in the event that total public liability claims from a nuclear incident should exceed the funds available to pay such claims.\nIn addition to the insurance required by the Price-Anderson Act, the nuclear generating facilities mentioned above carry additional nuclear property-damage insurance. This additional insurance is provided from commercial sources and from the nuclear electric utility industry's mutual insurance company through a combination of current premiums and retrospective premium adjustments. Based on current premiums and the Company's indirect and direct ownership in nuclear generating facilities, this adjustment could range up to approximately $6.3 million annually.\nFor a discussion of issues relating to Maine Yankee's spent nuclear fuel disposal, see \"Fuel Supply\" - \"Nuclear\", below.\nNon-utility Generation\nIn the Public Utility Regulatory Policies Act of 1978 (\"PURPA\") the United States Congress provided substantial economic incentives to non-utility power producers by allowing cogenerators and small power producers to sell their entire electrical output to an electric utility at the utility's avoided-cost rate and purchase their entire electric energy requirement at the utility's established rate for that customer class. The Maine Legislature enacted a companion measure in 1979.\nThe Company has entered into a number of long-term, noncancellable contracts for the purchase of capacity and energy from non-utility generators. The agreements generally have terms of five to 30 years and require the Company to purchase the energy at specified prices per kilowatt-hour. As of December 31, 1993, facilities having 596 megawatts of capacity covered by these contracts were in service, and another 15 megawatts is expected to be added by the end of 1994. The costs of purchases under all of these contracts amounted to $360.7 million in 1993, $341.5 million in 1992 and $332.4 million in 1991. Such costs are recoverable through the Company's fuel clause, after review and approval by the PUC.\nIn connection with the Company's 1992 fuel cost adjustment proceeding, the MPUC announced it would review the prudence of administration and management of these contracts, as well as the terms and conditions of recent contracts. For a discussion of an imprudence finding by the MPUC in connection with its review, see Item 1, \"Business\", \"Regulation and Rates\" - \"MPUC NUG Contracts Investigation\", above.\nIn an effort to control the price pressure related to purchases from non-utility generators, the Company negotiated long term contract buy-outs or restructuring with three non-utility generators in 1992, four in 1993, eleven in early 1994, and continues to renegotiate other contracts. The Company incurred buy-out costs of approximately $11.4 million in 1993 and $19 million in 1992. The 1994 renegotiation of prices and contract terms did not require cash payments. Total buy-outs, restructuring, and terminations made to date are expected to save the Company's customers more than $170 million in fuel costs during the next five years.\nConstruction Program\nThe Company's plans for improvements and expansion of generating, transmission and distribution facilities and power- supply sources are under continuing review. Actual construction expenditures depend on the availability of capital and other resources, load forecasts, customer growth, and general business conditions. Recent economic and regulatory considerations have led the Company to hold its planned 1994 capital investment outlays, including deferred demand-side management expenditures, to a level below that of 1993. During the five-year period ended December 31, 1993, the Company's construction and acquisition expenditures amounted to $425.1 million (including investment in jointly-owned projects and excluding MEPCO), including an Allowance for Funds Used During Construction (\"AFC\") of $13.6 million. The program is currently estimated at approximately $60 million for 1994 and $256 million for 1995 through 1998, including AFC estimated for the period 1994 through 1998 at $3 million, and including an estimated $35 million for conservation and energy management programs for the 1994 through 1998 period.\nThe following table sets forth the Company's estimated capital expenditures as discussed above:\nDemand-side Management\nThe Company's demand-side-management efforts have included programs aimed at residential, commercial and industrial customers. Among the residential efforts have been programs that offer energy audits, low-cost insulation and weatherization packages, water heater wraps, energy-efficient light bulbs, and water heater cycling credits. Among the commercial and industrial efforts have been programs that offer rebates for efficient lighting systems and motors, energy management loans, grants to customers who make efficiency improvements, and shared savings arrangements with customers who undertake qualifying conservation and load management programs.\nUnder the Company's \"Power Partners\" program, customers or energy service companies may submit energy management project bids in response to requests for proposals issued by the Company for specific blocks of power. Power Partners was the first program in the United States to allow energy management proposals to compete on an equal basis with cogeneration and small power production facilities in a bidding process for capacity and energy.\nThe Company anticipates incurring expenses of approximately $17.5 million in 1994 in connection with conservation and\nload-management programs and expects the costs of all of these programs to be recoverable through rates. Actual expenditures depend on such factors as availability of capital and other resources, load forecasts, customer growth, and general business conditions. Because of budget constraints, the Company is seeking to concentrate its efforts where the need and cost- effectiveness are the greatest, while continuing to honor contractual commitments.\nNEPOOL\nThe Company is a member of NEPOOL, which is open to all investor-owned, municipal and cooperative electric utilities in New England under an agreement in effect since 1971 that provides for coordinated planning and operation of approximately 99 percent of the electric power production, purchases and transmission in New England. The NEPOOL Agreement imposes obligations concerning generating capacity reserve and the use of major transmission lines, and provides for central dispatch of the region's facilities.\nFuel Supply\nThe Company's total kilowatt-hour production by energy source for each of the last two years and as estimated for 1994 is shown below:\nThe 1994 estimated kilowatt-hour output from oil and purchased power may vary depending upon the relative costs of Company-generated power and power purchased through NEPOOL and independent producers.\nOil. The Company's William F. Wyman Station in Yarmouth, Maine, and its internal combustion electric generating units are oil-fired. A one-year contract for the supply of the Company's fuel oil requirements at market prices expired on June 30, 1993. Since then the Company has been purchasing its fuel oil requirements on the open market.\nThe average cost per barrel of fuel oil purchased by the Company during the five calendar years commencing with 1989 was $17.07, $17.33, $12.87, $14.02 and $13.12, respectively. A substantial portion of the fuel oil burned by the Company and the other member utilities of NEPOOL is imported. The availability and cost of oil to the Company, both under contract and in the open market, could be adversely affected by policies and events in oil-producing nations and other factors affecting world supplies and domestic governmental action.\nNuclear. As described above, the Company has interests in a number of nuclear generating units. The cycle of production and\nutilization of nuclear fuel for such units consists of (1) the mining and milling of uranium ore, (2) the conversion of the resulting concentrate to uranium hexafluoride, (3) the enrichment of the uranium hexafluoride, (4) the fabrication of fuel assemblies, (5) the utilization of the nuclear fuel, and (6) the disposal of spent fuel.\nMaine Yankee has entered into a contract with the United States Department of Energy (\"DOE\") for disposal of its spent nuclear fuel, as required by the Nuclear Waste Policy Act of 1982, pursuant to which a fee of one dollar per megawatt-hour is currently assessed against net generation of electricity and paid to the DOE quarterly. Under this Act, the DOE has assumed the responsibility for disposal of spent nuclear fuel produced in private nuclear reactors. In addition, Maine Yankee is obligated to make a payment with respect to generation prior to April 7, 1983 (the date current DOE assessments began). Maine Yankee has elected under terms of this contract to make a single payment of this obligation prior to the first delivery of spent fuel to DOE, scheduled to begin no earlier than 1998. The payment will consist of $50.4 million (all of which Maine Yankee has previously collected from its customers, but for which a reserve was not funded), which is the approximate one-time fee charge, plus interest accrued at the 13-week Treasury Bill rate compounded on a quarterly basis from April 7, 1983, through the date of the actual payment. Current costs incurred by Maine Yankee under this contract are recoverable under the terms of its Power Contracts with its sponsoring utilities, including the Company. Maine Yankee has accrued and billed $53.1 million of interest cost for the period April 7, 1983, through December 31, 1993.\nMaine Yankee has formed a trust to provide for payment of its long-term spent fuel obligation, and is funding the trust with deposits at least semiannually which began in 1985, with currently projected semiannual deposits of approximately $0.6 million through December 1997. Deposits are expected to total approximately $62.8 million, with the total liability, including interest due at the time of disposal, estimated to be approximately $115.9 million at January 31, 1998. Maine Yankee estimates that trust fund deposits plus estimated earnings will meet this total liability if funding continues without material changes.\nUnder the terms of a license amendment approved by the NRC in 1984, the present storage capacity of the spent fuel pool at the Maine Yankee Plant will be reached in 1999 and after 1996 the available capacity of the pool will not accommodate a full-core removal. After consideration of available technologies, Maine Yankee elected to provide additional capacity by replacing the fuel racks in the spent fuel pool at the Maine Yankee Plant for more compact storage and, on January 25, 1993, filed with the NRC seeking authorization to implement the plan. On March 15, 1994, the NRC granted the authorization. Maine Yankee believes that the replacement of the fuel racks will provide adequate storage capacity through the Maine Yankee Plant's licensed operating life. Maine Yankee has stated that it cannot predict with certainty whether or to what extent the storage capacity limitation at the plant will affect the operation of the plant or the future cost of disposal.\nFederal legislation enacted in December 1987 directed the DOE to proceed with the studies necessary to develop and operate a permanent high-level waste (spent fuel) disposal site at Yucca Mountain, Nevada. The legislation also provides for the possible development of a Monitored Retrievable Storage (\"MRS\") facility and abandons plans to identify and select a second permanent disposal site. An MRS facility would provide temporary storage for high-level waste prior to eventual permanent disposal. In late 1989 the DOE announced that the permanent disposal site is not expected to open before 2010, although originally scheduled to open in 1998. Additional delays due to political and technical problems are probable.\nThe Company has been advised by the companies operating nuclear generating stations in which the Company has an interest that each of those companies has contracted for certain segments of the nuclear fuel production and utilization cycle through various dates. Contracts for other segments of the fuel cycle will be required in the future, but their availability, prices and terms cannot now be predicted. Those companies have also advised the Company that they are assessing options generally similar to those described above with respect to Maine Yankee in connection with disposal of spent nuclear fuel.\nItem 3.","section_3":"Item 3. LEGAL PROCEEDINGS.\nMaterial proceedings before the Maine PUC involving the Company are discussed above in Item 1, Business.\nPCB Disposal\nThe Company is a party in legal and administrative proceedings that arise in the normal course of business. In connection with one such proceeding, the Company has been named as a potentially responsible party and has been incurring costs to determine the best method of cleaning up an Augusta, Maine, site formerly owned by a salvage company and identified by the EPA as containing soil contaminated by polychlorinated biphenyls (PCBs) from equipment originally owned by the Company.\nIn 1990, the Company and the EPA signed a negotiated consent agreement, which was entered as an order by the United States District Court for the District of Maine in 1991. The agreement provides for studies, development of work plans, additional EPA review, and eventual cleanup of the site by the Company over a period of years, using the method and level of cleanup selected by the EPA.\nThe Company has been investigating other courses of action that might result in lower costs and, in March 1992, acquired title to the site to pursue the possibility of developing it in a manner that would not require the same method and level of cleanup currently provided in the agreement. The Company also initiated a lawsuit against the original owners of the site and Westinghouse Electric Corp. (Westinghouse), which arranged for the equipment disposal, seeking contributions toward past and future cleanup costs. On November 8, 1993, the United States District Court for the District of Maine rendered its decision in the suit, holding that Westinghouse was responsible for 41 percent of the necessary past and future cleanup costs and the former owners 12.5 percent, other than a small amount (less than\n5 percent) of such costs not attributable to PCBs, for which Westinghouse was held not responsible and the former owners were held responsible for 33 percent. The Court further concluded that the Company had incurred approximately $3.3 million to that point in costs subject to sharing among the parties.\nAt the same time, the Company has been actively pursuing recovery of its costs through its insurance carriers and has reached agreement with one for recovering a portion of those costs. It has also filed lawsuits seeking such recovery from other carriers.\nIn August 1991, the Company requested permission from the MPUC to defer its cleanup-related costs, with accrued carrying costs, on the basis that such costs are allowable costs of service and should be recoverable in rates. In August 1992, the MPUC issued an order authorizing the Company to defer direct costs associated with the site incurred after August 9, 1991, with accrued carrying costs. Such costs incurred prior to the request were charged to a $3-million reserve established in 1985.\nInitial tests on the site have been completed and more complex technological studies are still in progress. Based on results to date and on the most likely cleanup method, the Company believes that its remaining costs of the cleanup will total between $7 million and $11 million, depending on the level of cleanup ultimately required and other variable factors. Such estimate is net of the agreed insurance recovery and considers any contributions from Westinghouse and the former owners, but excludes contributions from the insurance carriers the Company has sued, or any other third parties. As a result, in the fourth quarter of 1993, the Company decreased the liability recorded on its books from $14 million, the estimated liability prior to the November 1993 court ruling, to $7 million and recorded an equal reduction in a regulatory asset established to reflect the anticipated ratemaking recovery of such costs when ultimately paid. Approximately $1 million of costs incurred to date has been charged against the liability.\nThe Company cannot predict the level and timing of the cleanup costs, the extent to which they will be covered by insurance, or the ratemaking treatment of such costs, but believes it should recover substantially all of such costs through insurance and rates. The Company also believes that the ultimate resolution of the legal and environmental proceedings in which it is currently involved will not have a material adverse effect on its financial condition.\nPower Purchase Contract Suit. As previously reported, the Company and Caithness King of Maine Limited Partnership (\"Caithness\") engaged in a lawsuit in the United States District Court for the District of Maine over the Company's termination of a contract for the purchase of approximately 80 megawatts of electric power from a cogeneration project proposed for construction by Caithness at the Topsham, Maine. In the suit Caithness denied the validity of the termination and sought damages estimated by Caithness to be in excess of $100 million for breach of contract or, in the alternative, reformation of the contract, and other legal relief.\nAlso as previously reported, on January 14, 1994, the\nCompany and Caithness entered into a Termination and Settlement Agreement under which the Company paid Caithness a total of $5 million, and the parties agreed to the termination of the power- purchase contract and to dismiss the suit and counterclaims. The contract would have required payments by the Company over the life of the contract that were projected to be significantly higher than the Company's estimated avoided costs and was therefore inconsistent with the Company's program of pursuing terminations or other restructurings of high-cost power-purchase contracts.\nItem 4.","section_4":"Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.\nNot applicable.\nItem 4.1. EXECUTIVE OFFICERS OF THE REGISTRANT.\nThe following are the present executive officers of the Company with all positions and offices held. There are no family relationships between any of them, nor are there any arrangements or understandings pursuant to which any were selected as officers.\nEach of the executive officers, except Mr. Mildner, has for the past five years been an officer or employee of the Company.\nCurtis A. Mildner joined the Company as Vice President, Marketing, on February 7, 1994. Prior to his employment by the Company, he had been employed since 1987 by Hussey Seating Company of Berwick, Maine, as Vice President, Marketing, and in related capacities.\nMr. Hunter has announced that he plans to retire effective May 1, 1994.\nPART II\nItem 5.","section_5":"Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.\nThe Company's common stock is traded on the New York Stock Exchange. As of March 21, 1994, there were 35,146 holders of record of the Company's common stock.\nUnder the most restrictive terms of the indenture securing the Company's General and Refunding Mortgage Bonds and of the Company's Articles of Incorporation, no dividend may be paid on the common stock of the Company if such dividend would reduce retained earnings below $29.6 million. At December 31, 1993, $87.5 million of retained earnings was not so restricted. Future dividend decisions will be subject to future earnings levels and the financial condition of the Company and will reflect the evaluation by the Company's Board of Directors of then existing circumstances.\nItem 6.","section_6":"Item 6. SELECTED FINANCIAL DATA.\nThe following table sets forth selected consolidated financial data of the Company for the five years ended December 31, 1989 through 1993. This information should be read in conjunction with \"Management's Discussion and Analysis of Financial Condition and Results of Operations\" and the financial statements and related notes thereto included elsewhere herein. The selected consolidated financial data for the years ended December 31, 1989 through 1993 are derived from the audited financial statements of the Company.\nItem 7.","section_7":"Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.\nThe information required to be furnished in response to this Item is submitted as pages 1 to 15 of Exhibit 13-1 hereto (the Company's Annual Report to Shareholders for the year ended December 31, 1993), which pages are hereby incorporated herein by reference.\nItem 8.","section_7A":"","section_8":"Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.\nThe information required to be furnished in response to this Item is submitted as pages 15 through 48 of Exhibit 13-1 hereto (the Company's Annual Report to Shareholders for the year ended December 31, 1993), which pages are hereby incorporated herein by reference. For ease of reference, the following is a listing of financial information incorporated by reference to Exhibit 13-1 hereto, which shows the page number or numbers of said Exhibit on which such information is presented.\nItem 9.","section_9":"Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.\nThe information required to be furnished in response to this Item is submitted on page 49 of Exhibit 13-1 hereto (the Company's Annual Report to Shareholders for the year ended December 31, 1993), which page is hereby incorporated by\nreference.\nPART III\nItem 10.","section_9A":"","section_9B":"","section_10":"Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.\nSee the information under the heading \"Election of Directors\" in the registrant's definitive proxy material for its annual meeting of shareholders to be held on May 25, 1994, and Item 4.1, Executive Officers of the Registrant, above, both of which are hereby incorporated herein by reference.\nItem 11.","section_11":"Item 11. EXECUTIVE COMPENSATION.\nSee the information under the heading \"Board Committees, Meetings and Compensation\" and the heading \"Executive Compensation\" in the registrant's definitive proxy material for its annual meeting of shareholders to be held on May 25, 1994, which is hereby incorporated herein by reference.\nItem 12.","section_12":"Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.\nSee the information under the heading \"Security Ownership\" in the registrant's definitive proxy material for its annual meeting of shareholders to be held on May 25, 1994, which is hereby incorporated herein by reference.\nItem 13.","section_13":"Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.\nSee the information under the heading, \"Board Committees, Meetings and Compensation\" in the registrant's definitive proxy material for its annual meeting of shareholders to be held on May 28, 1994, which is hereby incorporated herein by reference.\nPART IV\nItem 14.","section_14":"Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.\n(a) Listing of Exhibits. The exhibits which are filed with this Form 10-K or are incorporated herein by reference are set forth in the Exhibit Index, which immediately precedes the exhibits to this report.\n(b) Reports on Form 8-K. The Company filed the following reports on Form 8-K during the last quarter of 1993 and thereafter to date:\nDate of Report Items Reported\nOctober 27, 1993 Item 5\nLowering of debt and preferred stock ratings. On October 27, 1993, Duff & Phelps Credit Rating Co. announced that it was lowering the ratings of the Company's debt and preferred stock.\nDate of Report Items Reported\nOctober 28, 1993 Item 5\n(a) Debt and preferred stock ratings. On October 29, 1993, Moody's Investors Service (\"Moody's\") lowered the ratings on the Company's long-term debt and preferred stock, citing concerns about the Company's \"ability to safeguard its competitive position and to gain the regulatory support needed to avoid further pressure on cash flow and debt-protection measurements\".\n(b) Base-rate case. The Company reported on positions taken by certain parties in the Company's base-rate case before the PUC.\n(c) PUC order on independent power producer contracts. On October 28, 1993, the PUC issued its written order incorporating the conclusions of its October 5, 1993, deliberations.\nDate of Report Items Reported\nNovember 30, 1993 Item 5\nPublic Utilities Commission order in base-rate case and securities downgrading. On November 30, 1993, the MPUC issued its basic revenue requirements order finding the Company entitled to an annual revenue increase of $26.2 million in the Company's $83 million base-rate case. On December 1, 1993, Standard & Poor's Corp. (\"S&P\") further lowered its ratings of the Company's securities.\nDate of Report Items Reported\nDecember 15, 1993 Item 5\nCommon stock dividend reduction. On December 15, 1993, the Company's Board of Directors reduced the quarterly dividend on the Company's common stock from 39 cents to 22.5 cents per share.\nDate of Report Items Reported\nDecember 16, 1993 Item 5\n(a) On December 16, 1993, the Company announced that David T. Flanagan had been elected President, Chief Executive Officer and a director, effective January 1, 1994, succeeding Matthew Hunter, who planned to retire May 1, 1994.\n(b) The Company reported that effective December 27, 1993, the Company's 450,000 shares of outstanding Flexible Money Market Preferred Stock, Series A, would no longer be subject to the restriction that it be conveyed only in Units of 1,000 shares.\n(c) On December 20, 1993, the Chief Justice of the Maine Supreme Judicial Court issued an order temporarily staying the .5% return-on-equity penalty that had been imposed on the Company by\nthe MPUC on October 28, 1993, in its independent power producer contracts investigation.\nDate of Report Items Reported\nJanuary 5, 1994 Item 5\nOn January 5, 1994, S&P further lowered its ratings on the Company's securities, including the senior secured debt rating to \"BB+\" from BBB-\".\nDate of Report Items Reported\nJanuary 13, 1994 Items 4 and 5\nItem 4. On January 19, 1994, the Company's Board of Directors voted to engage Coopers & Lybrand as the Company's principal accountants in 1994. The Item also contained information on a disagreement in 1991 with the Company's predecessor accountants. (This item amended by Form 8-K\/A, Amendment No. 1, also dated January 13, 1994.\nItem 5. (a) On January 13, 1994, Moody's lowered its ratings on the Company's preferred stock and commercial paper, while confirming its rating on the Company's General and Refunding Mortgage Bonds at \"Baa2\".\n(b) On January 14, 1994, the Company and Caithness King of Maine Limited Partnership entered into a Termination and Settlement Agreement terminating power-contract litigation.\nDate of Report (Form 8-K\/A) Items Reported\nJanuary 13, 1994 Item 4\nThe Company amended its January 13, 1994, Form 8-K to provide further information on its change of principal accountants and a 1991 disagreement with the Company's predecessor accountants.\nDate of Report Items Reported\nFebruary 3, 1994 Item 5\nOn February 4, 1993, the Chief Justice of the Maine Supreme Judicial Court denied the MPUC's motion to dismiss the Company's approval of the MPUC's October 28, 1993, return-on-equity penalty. The MPUC had contended that it had reconsidered its order imposing the penalty and was considering alternative remedies.\nSIGNATURES\nPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Augusta, and State of Maine on the 30th day of March, 1994.\nCENTRAL MAINE POWER COMPANY\nBy David E. Marsh Vice President, Corporate Services and Chief Financial Officer\nPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities and on the dates indicated.\nThe following report and consent and financial schedules of Central Maine Power Company are filed herewith and included in response to Item 14(d).\nAny and all other schedules are omitted because the required information is inapplicable or the information is presented in the financial statements or related notes.\nREPORT OF INDEPENDENT PUBLIC ACCOUNTANTS\nTo the Board of Directors of Central Maine Power Company:\nWe have audited, in accordance with generally accepted auditing standards, the consolidated financial statements included in Central Maine Power Company's annual report to shareholders incorporated by reference in this Form 10-K, and have issued our report thereon dated February 4, 1994. Our audits were made for the purpose of forming an opinion on those statements taken as a whole. The schedules listed on the accompanying index of schedules included in reports to Item 14(a) in Form 10-K are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic financial statements. These schedules have been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly state, in all material respects, the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.\nARTHUR ANDERSEN & CO.\nBoston, Massachusetts February 4, 1994\nCONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS\nAs independent public accountants, we hereby consent to the incorporation of our reports included and incorporated by references in this Form 10-K, into the Company's previously filed Registration Statements File No. 33-44944, File No. 33-44754, File No. 33-51611, File No. 33-39826 and File No. 33-36679.\nARTHUR ANDERSEN & CO.\nBoston, Massachusetts, March 28, 1994\nSECURITIES AND EXCHANGE COMMISSION\nWASHINGTON, D.C. 20549\nFORM 10-K\nANNUAL REPORT PURSUANT TO\nSECTION 13 OR 15(d) OF\nTHE SECURITIES EXCHANGE ACT OF 1934\nFOR THE FISCAL YEAR\nENDED DECEMBER 31, 1993\nCENTRAL MAINE POWER COMPANY\nFile No. 1-5139\n(Exact name of Registrant as specified in charter)\nEXHIBITS","section_15":""}
{"filename":"106926_1993.txt","cik":"106926","year":"1993","section_1":"ITEM 1: BUSINESS\nWhitney Holding Corporation (the \"Company\") is a Louisiana bank holding company registered pursuant to the Bank Holding Company Act of 1956. The Company became an operating entity in 1962 with Whitney National Bank (the \"Bank\") as its only significant subsidiary. The Bank, which has its headquarters in Orleans parish, has been engaged in general banking business in the City of New Orleans since 1883.\nThe Bank engages in commercial and retail banking and in trust business, including the taking of deposits, the making of secured and unsecured loans, the financing of commercial transactions, the issuance of credit cards, the performance of corporate, pension and personal trust services, and safe deposit rentals. The Bank is also active as a correspondent for other banks. The Bank renders specialized services of different kinds in connection with all of the foregoing, and has thirty-eight domestic offices and one foreign office.\nThere is significant competition within the financial services industry in general as well as with respect to the particular financial services provided by the Bank. Within its market area, the Bank competes directly with several major banking institutions of comparable or larger size and resources as well as with various other smaller banking organizations and local and national \"non-bank\" competitors, including savings and loans, credit unions, mortgage companies, personal and commercial finance companies, investment brokerage firms, and registered investment companies (mutual funds).\nAll material funds of the Company are invested in the Bank. The Bank has a large number of customer relationships which have been acquired over a period of many years and is not dependent upon any single customer or upon a few customers, so the loss of any single customer or a few customers would not have a material adverse effect on the Bank or the Company. The Bank has customers in a number of foreign countries but the portion of revenue derived from these foreign customers is not a material portion of its overall revenues.\nThe Company and the Bank and their related operations are subject to federal, state and local laws applicable to banks and bank holding companies and to the regulations of the Board of Governors of the Federal Reserve System, the Comptroller of Currency and the Federal Deposit Insurance Corporation.\nThe Company does not believe that compliance with existing federal, state or local environmental laws and regulations will impose any material financial obligation on the Company or materially affect the realizable value of its assets.\nITEM 2:","section_1A":"","section_1B":"","section_2":"ITEM 2: PROPERTIES\nThe Company owns no real estate in its own name. The Bank owns the fourteen-story Whitney National Bank Building at 228 St. Charles Avenue in New Orleans. The Bank occupies approximately one half of the 306,000 square feet in this building, and the balance is either leased to third parties or available to be leased. The Bank also owns the premises for twelve branches in Orleans parish, six branches in Jefferson parish, four branches in Lafayette parish, one branch in East Baton Rouge parish and three branches in St. Tammany parish, one of which is located on leased ground. None of these properties is subject to any significant encumbrances.\nThe Bank holds a variety of property interests acquired throughout the years in settlement of loans. Reference is made to Note 7 to the financial statements included in Item 8 for further information.\nITEM 3:","section_3":"ITEM 3: LEGAL PROCEEDINGS\nThere are no material pending legal proceedings, other than routine litigation incidental to the business, to which the Company or its subsidiaries is a party or to which any of their property is a subject.\nPage 3 of 50\nPART II\nITEM 5:","section_4":"","section_5":"ITEM 5: MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS\na) The Company's stock price is reported on the National Association of Securities Dealers Automated Quotation (NASDAQ) system under the symbol WTNY. The following table shows the range of closing prices of the Company's stock for each calendar quarter of 1993 and 1992 as reported on the NASDAQ National Market System.\nb) The approximate number of shareholders of record of the Company, as of March 1, 1994, is as follows:\nc) During 1993 and 1992, the Company declared dividends as follows:\nPer-share stock price and dividend information shown above has been adjusted where appropriate to give retroactive effect to the three-for-two stock splits that were effective February 22, 1993 and November 29, 1993.\nPage 4 of 50\nITEM 6:","section_6":"ITEM 6: SELECTED FINANCIAL DATA\nNote: All share and per-share figures give effect to the three-for-two stock splits effective February 22, 1993 and November 29, 1993.\nPage 5 of 50\nITEM 7:","section_7":"ITEM 7: MANAGEMENTS'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS\nSUMMARY\nFor 1993, the Company earned $76.4 million or $5.30 per share. These results include the effect of a $60.0 million reduction in the level of the reserve for possible loan losses, which on an after-tax basis contributed $39.5 million or $2.74 per share to net income for the year. Excluding the impact of the reserve reduction, the Company had after-tax earnings in 1993 of $36.9 million or $2.56 per share. This represents an increase of $16.7 million from the $20.2 million, or $1.41 per share, earned in 1992.\nThe increase in earnings in 1993 before the effect of the reduction in the reserve for possible loan losses was attributable both to higher net interest income and other non-interest income as well as to an overall reduction in non- interest expense. The impact of these factors was partly offset, however, by the absence in 1993 of any gains on sales of investment securities.\nNon-performing assets decreased throughout 1993 to $49.9 million at December 31, 1993, down 55% from $111.2 million at December 31, 1992. The reserve for possible loan losses, after the $60 million reduction, was $44.5 million on December 31, 1993, an amount which represented 132% of non-performing loans and 4.6% of total loans. At year end 1992, the loan loss reserve was $98.6 million, or 140% of non-performing loans and 9.4% of total loans on that date.\nIn 1993, the Company continued to experience soft loan demand in the market area serviced by the Bank. Average gross loans outstanding totalled $952 million during 1993 compared with $1.125 billion in the previous year, a decrease of $173 million or 15%. Average total deposits, however, showed modest growth between 1993 and 1992, increasing $16 million to $2.415 billion. Deposit funds not needed for loans were redirected to the investment portfolio, which rose on average by $265 million or 21% from $1.282 billion in 1992 to $1.547 billion in 1993. Adding the significant reduction in non-performing assets, these year-to-year changes translated into a $103 million or 4.2% increase in average earning assets, excluding nonaccruing loans, to $2.556 billion in 1993 from $2.453 billion in 1992.\nAfter reinstating its dividend in the fourth quarter of 1992, the Company declared dividends in each quarter of 1993, totalling $0.43 per share for the year. During 1993, the Company's Board of Directors twice approved three-for- two stock splits which were effective in February and November. All share and per-share data in this report on Form 10-K reflect the effect of these stock splits.\nPage 6 of 50\nAVERAGE BALANCE SHEETS - ---------------------- (in thousands)\nFINANCIAL CONDITION\nLOANS\nEconomic conditions in the Company's market area, which is primarily southern Louisiana and Mississippi, have in recent years slowed the overall demand for loans and have prompted efforts by many commercial loan customers to reduce their existing debt levels. Over this period, the Bank also consciously reduced its exposure to credits whose performance had been adversely affected by these economic conditions. The $173 million decrease in average loans outstanding during 1993 as compared to 1992 is largely a reflection of the prevailing economic conditions. The smaller $71 million decrease in gross loans outstanding at December 31, 1993 as compared to the prior year end is influenced by seasonal fluctuations in the short-term credit needs of certain industries serviced by the Bank.\nDuring 1993, the Bank has been expanding its lending resources and products and plans to continue to intensify its efforts to compete for and place high quality credits in the communities served by the Bank. Unfunded loan commitments outstanding at December 31, 1993, have increased to nearly $400 million, some $43 million above the level at December 31, 1992.\nPage 7 of 50\nLOAN PORTFOLIO BALANCES AT DECEMBER 31 - -------------------------------------- (in thousands)\nDEPOSITS AND SHORT-TERM BORROWINGS\nThe Company's average deposit base was essentially stable during 1993, increasing $16 million or 0.7% to $2.415 billion in 1993 from $2.399 billion in 1992. Underlying this modest overall increase is a shift in the deposit mix away from time deposits, both core and those in amounts of $100,000 and over, in favor of demand and savings deposits.\nAs is shown in the table of average balance sheets, non-interest-bearing demand deposits increased on average by $37 million in 1993 as compared to 1992. The increase in average deposits in interest-bearing demand and other transaction accounts and non-time savings products was approximately $56 million over this same period. Average total time deposits in 1993 declined $77 million from the 1992 level, including a decrease of $46 million of deposits of $100,000 and over. The Company has emphasized and will continue to emphasize offering core deposit products that respond to current market conditions while still yielding customers a meaningful rate of return.\nThe Company's short-term borrowings arise from the purchase of federal funds and the sale of securities under repurchase agreements, mainly as part the Bank's services to correspondent banks and certain other customers. The Company's average short-term borrowing position, net of federal funds sold, was approximately $122 million in 1993 and $113 million in 1992.\nINVESTMENT IN SECURITIES\nAt December 31, 1993, the Company's total investment in securities was $1.634 billion or 54% of total assets and 60% of earning assets on that date. The balance at year-end 1993 represents an increase of approximately $159 million or 10.8% over the December 31, 1992 investment total of $1.475 billion. The average total investment portfolio outstanding increased $265 million or 21% between 1992 and 1993 as funds not needed for loans were invested in securities.\nThe major portion of the increased investment activity was directed to U.S. Treasury securities and securities of U. S. government agencies, excluding mortgage-backed issues. The mix of period-end and average investments, however, remained relatively stable, with U. S. Treasury and government agency securities representing approximately 77% to 80% of the total investment in securities. The weighted average maturity of the overall portfolio of securities was 34 months at year end 1993, virtually unchanged from year end 1992. The weighted average taxable-equivalent portfolio yield decreased 57 basis points to 5.71% at December 31, 1993 from 6.28% at December 31, 1992.\nPage 8 of 50\nINVESTMENT IN SECURITIES - ------------------------ (dollars in thousands)\n(1) Tax exempt yields are expressed on a fully taxable equivalent basis. (2) Distributed by contractual maturity without regard to repayment schedules or projected prepayments. (3) These securities have no stated maturities or guaranteed dividends. (4) These securities are classified as available for sale before maturity. The actual timing of any such sales, however, is not determinable at year end.\nEffective December 31, 1993, the Company adopted SFAS No. 115, \"Accounting for Certain Investments in Debt and Equity Securities.\" The statement specifies criteria for classifying investments as either trading securities, securities held to maturity, or securities available for sale, and establishes reporting standards for each classification.\nManagement considered the Company's existing investment portfolio and underlying asset\/liability management policies and strategies in light of the new standard and determined that its investments in mortgage-backed securities met the criteria for classification as securities available for sale. These securities were reported at their estimated fair values at December 31, 1993, and a tax-effected net unrealized gain of approximately $3.1 million was recognized as a component of shareholders' equity. The remaining portfolio of securities was classified as held to maturity and continues to be reported at amortized cost. The Company currently maintains no trading portfolio.\nIn accordance with SFAS No. 115, prior period investment information has not been restated to reflect the new standard. On an ongoing basis, investment securities will be classified as they are acquired and the continued propriety of classifications will be periodically evaluated by management.\nPage 9 of 50\nASSET QUALITY\nOverall asset quality has exhibited a trend of steady improvement over the past three years. During 1993, the Company continued to be successful in its efforts to reduce all categories of its non-performing assets through the full rehabilitation of nonaccruing loans, the workout of troubled credits, or the sale of repossessed loan collateral. Non-performing assets totalled $49.9 million at December 31, 1993, a decrease of $61.3 million or 55% from $111.2 million at year end 1992.\nOf the $33.6 million in nonaccruing loans at December 31, 1993, $15.6 million or 46% represented loans that are performing as contractually agreed but are being carried in nonaccrual status because there is some doubt as to the ultimate collectibility of all principal and interest. Nonaccruing loans totalling approximately $18.6 million at year end 1993 were secured by real property collateral. Another $14.2 million consisted of various commercial credits.\nNON-PERFORMING ASSETS AT DECEMBER 31 - --------------------------------------- (in thousands)\nIn 1993, the Company identified $6.4 million of loans to be charged off as uncollectible against the reserve for possible loan losses, a decrease of 70% from the $21.4 million of charge-offs in 1992. At the same time, the Company was successful in increasing its loan recoveries to $12.4 million in 1993 from $9.4 million in 1992.\nThe reserve for possible loan losses is maintained at a level believed by management to be adequate to absorb potential losses in the portfolio. The $60 million reduction in the reserve during 1993 reflects management's determination that the steps taken in recent years to deal with the Bank's asset quality issues have yielded lasting positive results, evidenced in part by the positive trends noted above. In management's judgment, some of the reserve levels that had been established in the past in recognition of these asset quality issues were no longer needed. After the reduction, the reserve for possible loan losses was $44.5 million at December 31, 1993, or a 132% coverage of total non- performing loans and 4.6% of total loans.\nPage 10 of 50\nSUMMARY OF LOAN LOSS EXPERIENCE - --------------------------------------------------------------------------------\nALLOCATION OF THE RESERVE FOR POSSIBLE LOAN LOSSES - ---------------------------------------------------- (dollars in thousands)\nPage 11 of 50\nDuring 1993, the Company disposed of other real estate owned (\"OREO\") properties with a carrying value at the time of sale totalling approximately $24 million. The value of OREO properties acquired in settlement of loans during the year was $3.7 million. The balance of other real estate owned at December 31, 1993, which includes $8.2 million of loans deemed to have been foreclosed in substance, consisted mainly of commercial land and buildings.\nThe Company has several property interests which were acquired through routine banking transactions generally prior to 1933 and which are recorded in its financial records at a nominal value. Management continually investigates ways to maximize the return on these assets. There were no significant dispositions of these property interests in 1993. Future dispositions may result in the recognition of substantial gains.\nThe Company has not extended any credit in connection with what would be defined under regulatory guidelines as highly leveraged transactions, nor has it acquired any investment securities arising from such transactions. The Company's foreign lending and investing activities are currently insignificant. Note 3 to the consolidated financial statements discusses credit concentrations in the loan portfolio.\nCAPITAL ADEQUACY\nThe strong earnings reported for 1993, including the effect of the reduction in the reserve for loan losses, are reflected in the increase in the Company's and the Bank's regulatory capital ratios between December 31, 1993 and 1992. Also contributing to this increase was the shift in the asset mix toward investments in securities which are assigned a risk-weighting lower than for loans in the capital ratio calculations. For the purposes of these calculations, capital does not currently include the net unrealized gain or loss on securities held for sale which is reported as a separate component of shareholders' equity under SFAS No. 115.\nThe Company's regulatory capital ratios, which are essentially the same as those calculated for the Bank, are shown here compared to the minimums currently required for regulatory classification as a \"well capitalized\" institution:\nThe Company is committed to maintaining a strong capital base to support its philosophy of soundness, profitability and growth.\nThe Bank's regulators have proposed rules which will incorporate a measure of the Bank's interest rate risk into the level of regulatory capital it is required to maintain. These rules are expected to be finalized and become effective in 1994. Considering the Bank's current level of regulatory capital and its interest rate risk position, management believes that adoption of the proposed rule will not have a significant impact on the Bank's ability to satisfy its regulatory capital requirements.\nPage 12 of 50\nRESULTS OF OPERATIONS\nThe following table of comparative analytical income statements offers an overview of the Company's results of operations.\nNET INTEREST INCOME\nTaxable-equivalent net interest income increased $8.5 million or 7.4% in 1993 as compared to 1992, as the net interest margin rose to 4.75% from 4.52%. A combination of factors contributed to this increase, the components of which are detailed in the following tables analyzing changes in interest income and expense.\nInterest expense decreased $16.3 million in 1993, despite a modest rise in average deposits, because of both the lower rate environment that prevailed in 1993 as compared to 1992 as well as the shift in the mix of deposits to non- interest-bearing and lower-cost deposits between these periods. Average total time deposits in 1993 were down $77 million from 1992's level, including a decrease in deposits of $100,000 or more of $46 million.\nInterest income also decreased in 1993 as compared to 1992, by $7.8 million, but not to the same degree as interest expense. Overall asset yields declined in 1993 as a result of the lower rate environment and as the mix of earning assets shifted from loans to lower-yielding investment securities. Asset yields were favorably impacted, however, by an overall increase in average earning assets, excluding nonaccruing loans, of $103 million from 1992 to 1993, reflecting in part the continued positive trend in asset quality.\nPage 13 of 50\nANALYSIS OF CHANGES IN INTEREST INCOME AND INTEREST EXPENSE YIELDS ON AVERAGE EARNINGS ASSETS AND RATES ON AVERAGE INTEREST-BEARING LIABILITIES - ----------------------------------------------------------- (dollars in thousands)\nNote: Tax equivalent amounts are calculated using a marginal federal income tax rate of 35% for 1993 and 34% for 1992 and 1991.\nPage 14 of 50\nVOLUME AND YIELD\/RATE VARIANCE ANALYSIS OF CHANGES IN INTEREST INCOME AND INTEREST EXPENSE - ----------------------------------------------------------- (in thousands)\nNote: Tax equivalent amounts are calculated using a marginal federal income tax rate of 35% for 1993 and 34% for 1992 and 1991.\nPage 15 of 50\nOTHER INCOME AND EXPENSE\nNon-interest operating income, excluding securities gains and net gains from OREO sales, increased $1.5 million, or 5.8%, to $27.4 million in 1993 from $25.9 million in 1992. The overall increase was primarily attributable to an $800 thousand, or 5.4% increase in income from service charges on deposit accounts and an additional $700 thousand in income related to international banking services.\nThere were no securities sales during 1993. In 1992, the Company recognized a $5.4 million gain on the sale of a block of mortgage-backed securities that was experiencing excessive prepayments as market interest rates declined. This block of securities was replaced with another offering a more stable return. Gains of $18.4 million were recognized on securities sales in 1991 in connection with an overall repositioning of the portfolio begun in 1990 to implement a revised asset\/liability management strategy.\nNon-interest operating expenses, excluding provisions for possible losses on loans, OREO and other problem assets, were $98.2 million in 1993, an increase of $1.4 million, or 1.4%, over 1992's total of $96.8 million. Personnel expense increased $2.0 million in 1993 as compared to 1992. Both compensation expense and the expense of providing insurance benefits contributed to this 4.3% increase.\nOther non-interest operating expenses showed a net decrease of approximately $500 thousand from 1992 to 1993. The positive effects of improving asset quality were evident in the 1993 reductions of $1.2 million in legal expense and $287 thousand in the expense of maintaining and operating OREO net of revenues generated by the properties prior to sale.\nIn addition to the $60 million reduction in the reserve for possible loan losses discussed earlier, there was a decrease of $14 million from 1992 to 1993 in provisions for losses on OREO and other problem assets. This decrease is directly related to the Company's success in reducing its exposure to non- performing assets.\nINCOME TAXES\nThe Company provided for income taxes at an overall effective rate of 32.0% in 1993, up from the 30.6% rate in 1992. The effective rates in each period differ from the statutory rates of 35% in 1993 and 34% in 1992 primarily because of the tax exempt income earned on investments in state and municipal obligations. The higher effective rate in 1993 is largely the result of a lower proportion of tax-exempt to pre-tax income for 1993 compared to 1992.\nASSET\/LIABILITY MANAGEMENT\nThe asset\/liability management process has as its focus the development and implementation of strategies in the funding and deployment of the Company's financial resources which is expected to maximize soundness and profitability over time. Such strategies reflect the goals set by the Company for capital adequacy, liquidity, and growth and the tolerance for risk established in Company policies.\nINTEREST RATE RISK\/INTEREST RATE SENSITIVITY\nThe Company's financial assets and liabilities are subject to scheduled and unscheduled repricing opportunities over time. The Company's potential for generating net interest income, as well as the current market values of financial assets and liabilities, are sensitive to the levels of market interest rates available as these repricing opportunities arise. Interest rate risk is a measure of this potential volatility in net interest income and market values.\nAs part of the asset\/liability management process, the Company uses a variety of tools, including an earnings simulation model, to measure interest rate risk and to evaluate the impact of proposed changes in its internal strategies and potential changes in its economic environment. The interest rate sensitivity gap analysis, which compares the volume of repricing assets against repricing liabilities over time, is a relatively simple tool which is useful in highlighting significant short-term repricing volume mismatches but is limited in measuring the potential impact on earnings and net asset values.\nThe following table presents the rate sensitivity gap analysis at December 31, 1993. The interest rates on most of the Bank's commercial loans vary with changes in its prime rate or the prime rates of certain money-center banks. These loans are assigned to the earliest repricing period in the rate sensitivity analysis. A substantial portion of loans shown in the analysis as repricing after one year is made up of fixed-rate real estate loans, both retail and commercial. These loans generally mature within five years. In preparing this analysis, deposit funding sources with no scheduled maturity or contractual repricing date are assigned to a particular repricing period after consideration of past and expected customer behavior in response to general market rate changes. Surveying\nPage 16 of 50\nthe twelve-month period from December 31, 1993, the analysis indicates that the Company is in a balanced rate sensitivity position on a cumulative basis.\nINTEREST RATE SENSITIVITY - ------------------------- December 31, 1993 (dollars in millions)\nLIQUIDITY\nThe Company and the Bank manage liquidity to ensure their ability to satisfy customer demand for credit, to fund deposit withdrawals, to meet operating and other corporate obligations, and to take advantage of investment opportunities, all in a timely and cost-effective manner. Traditionally, these liquidity needs have been met by maintaining a strong base of core deposits within the Bank and by carefully managing the maturity structure of the Bank's investment portfolio. The funds provided by current operations and forecasts of loan repayments are also considered in the liquidity management process.\nThe Bank enters into short-term borrowing arrangements by purchasing federal funds and selling securities under repurchase agreements, mainly as part of its services to correspondent banks and certain other customers. Neither the Company nor the Bank has had to access short or long term debt markets as part of liquidity management.\nPage 17 of 50\nThe following tables present information concerning deposits and short-term borrowings for the years 1993, 1992 and 1991.\nDEPOSITS - -------- (in thousands)\nFEDERAL FUNDS PURCHASED AND BORROWINGS UNDER REPURCHASE AGREEMENTS - ------------------------------------------------------------------ (in thousands)\nAverage core deposits, defined as all deposits other than time deposits of $100,000 or more, increased approximately $63 million in 1993 over the prior year. During 1993, core deposits comprised 90.2% of total average deposits, compared to 88.2% during 1992.\nAs of December 31, 1993, $329 million or 22.7% of the portfolio of securities held to maturity was scheduled to mature within one year. An additional $182 million of investment securities are classified as available for sale at year end 1993, although management's determination of this classification does not derive primarily from liquidity considerations.\nThe Bank had $399 million in unfunded loan commitments outstanding at December 31, 1993, an increase of $43 million from the level at December 31, 1992. Contingent obligations under letters of credit and financial guarantees of $58 million and available credit card lines of $26 million at year end 1993 were both down slightly from year end 1992. Draws under these financial commitments should not place any unusual strain on the Bank's or the Company's liquidity positions.\nPage 18 of 50\nITEM 8.","section_7A":"","section_8":"ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA\nWHITNEY HOLDING CORPORATION AND SUBSIDIARIES\nCONSOLIDATED BALANCE SHEETS\nNote: All share and per-share figures in the consolidated financial statements give effect to the three-for-two stock splits effective February 22, 1993 and November 29, 1993.\nThe accompanying notes are an intergral part of these financial statements.\nPage 19 of 50\nWHITNEY HOLDING CORPORATION AND SUBSIDIARIES\nCONSOLIDATED STATEMENTS OF OPERATIONS\nThe accompanying notes are an integral part of these financial statements.\nPage 20 of 50\nWHITNEY HOLDING CORPORATION AND SUBSIDIARIES\nCONSOLIDATED STATEMENTS OF CHANGES IN\nSHAREHOLDERS' EQUITY\nThe accompanying notes are an integral part of these financial statements.\nPage 21 of 50\nWHITNEY HOLDING CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS\nThe accompanying notes are an integral part of these financial statements. Page 22 of 50\nNOTES TO FINANCIAL STATEMENTS\n(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES\nThe accounting and reporting policies of Whitney Holding Corporation and its subsidiaries (the \"Company\") follow generally accepted accounting principles and policies within the banking industry. The following is a summary of the more significant policies.\nCONSOLIDATION\nThe consolidated financial statements of the Company include the accounts of Whitney Holding Corporation and its wholly-owned subsidiary, Whitney National Bank (the \"Bank\"). Intercompany accounts and transactions have been eliminated in consolidation.\nCertain balances in prior years have been reclassified to conform with this year's presentation.\nCASH AND DUE FROM FINANCIAL INSTITUTIONS\nThe Company considers cash and cash due from financial institutions as cash and cash equivalents for purposes of the consolidated statement of cash flows.\nINVESTMENT IN SECURITIES\nIn May, 1993, the Financial Accounting Standards Board (\"FASB\") issued Statement of Financial Accounting Standards (\"SFAS\") No. 115, \"Accounting for Certain Investments in Debt and Equity Securities.\" Under SFAS No. 115, debt securities which the Company both positively intends and has the ability to hold to maturity are carried at amortized cost. These criteria are not considered satisfied when a security is available to be sold in response to changes in interest rates, prepayment rates, liquidity needs or other reasons as part of an overall asset\/liability management strategy.\nDebt securities and equity securities with readily determinable fair values that are acquired with the intention of being resold in the near term are classified under SFAS No. 115 as trading securities and are carried at fair value, with unrealized holding gains and losses recognized in current earnings. The Company does not currently hold any securities for trading purposes.\nSecurities not meeting the criteria of either trading securities or securities held to maturity are classified as available for sale and are carried at fair value. Unrealized holding gains and losses for these securities are recognized, net of related tax effects, as a separate component of shareholders' equity.\nThe Company adopted this new standard effective December 31, 1993. As a result, investments in mortgage-backed securities were reclassified as of that date as securities available for sale and are being reported at fair value. Shareholders' equity was increased at year-end 1993 to reflect the tax-effected net unrealized holding gain on these securities which previously had been carried at the lower of either aggregate amortized cost or market. In accordance with SFAS No. 115, prior period financial statements have not been restated to reflect this change in accounting principle.\nInterest and dividend income earned on securities either held to maturity or available for sale is included in current earnings, including the amortization of premiums and the accretion of discounts using the interest method. The gain or loss realized on the sale of a security held to maturity or available for sale is computed with reference to its amortized cost and is also included in current earnings.\nLOANS\nLoans are generally carried at the principal amounts outstanding, less unearned income and the reserve for possible loan losses.\nInterest on loans is accrued and credited to income based on the outstanding loan principal amounts. The accrual of interest on loans is discontinued when, in management's judgement, there is an indication that a borrower will be unable to meet contractual payments as they become due. For commercial and real estate loans, this generally occurs when a loan falls 90- days past due as to principal or interest, and the loan is not otherwise both well secured and in the process of collection. Upon discontinuance, accrued but uncollected interest is reversed against current income. Interest payments received on nonaccrual loans are used to reduce the\nPage 23 of 50\nreported loan principal until the collectibility of the remaining principal is reasonably assured.\nA nonaccrual loan may be reinstated to accrual status when full payment of contractual principal and interest is expected and this expectation is supported by current performance.\nRESERVE FOR POSSIBLE LOAN LOSSES\nThe reserve for possible loan losses is maintained at a level which, in management's judgment, is considered adequate to absorb potential losses inherent in the loan portfolio. The adequacy of the reserve is evaluated by management on an ongoing basis. As adjustments to the level of reserves become necessary, they are reported in current earnings. The factors considered in this evaluation include estimated potential losses from specific lending relationships, including unused loan commitments and credit guarantees; general economic conditions; economic conditions affecting specific classes of borrowers or types of loan collateral; historical loss experience; and various trends in loan portfolio characteristics, such as volume, maturity, customer mix, delinquencies and nonaccruals.\nAs actual loan losses are incurred, they are charged against the reserve. Recoveries on loans previously charged off are added back to the reserve.\nFORECLOSED ASSETS\nCollateral acquired through foreclosure or in settlement of loans is classified as either other real estate owned (\"OREO\") or other assets and is carried at its fair value, net of estimated costs to sell, or the remaining investment in the loan, whichever is lower. At acquisition, any excess of the recorded loan value over the estimated fair value of the collateral is charged against the allowance for possible loan losses. After acquisition, valuation allowances are established with a charge to current earnings to adjust the reported value of foreclosed assets to reflect changes in the estimate of a property's fair value or selling costs. Revenues and expenses associated with the management of foreclosed assets prior to sale are included in current earnings.\nBANK PREMISES AND EQUIPMENT\nBank premises and equipment are carried at cost, net of accumulated depreciation, as follows (in thousands):\nAccumulated depreciation was $57,408,000 in 1993 and $51,437,000 in 1992. Provisions for depreciation included in non-interest expenses were computed primarily on the straight-line method over the estimated useful lives of the assets. Estimated useful lives range mainly from 15 to 45 years for buildings and improvements and from 5 to 7 years for furnishings and equipment.\nINCOME TAXES\nEffective January 1, 1993, the Company adopted SFAS No. 109, \"Accounting for Income Taxes.\" In general, under this new accounting standard, the tax consequences of all temporary differences that arise between the tax bases of assets or liabilities and their reported amounts in the financial statements represent either tax liabilities to be settled in the future or tax assets that will be realized as a reduction of future taxes. The change in net deferred assets or liabilities between periods is recognized as a deferred tax expense or benefit in the consolidated statement of operations.\nIn prior years, a deferred tax expense or benefit was provided on those items of income and expense which were recognized in different time periods for financial statement and income tax purposes. See Note 4 for a more detailed discussion of the accounting for income taxes and of the impact of the adoption of SFAS No. 109 in 1993.\nEARNINGS (LOSS) PER SHARE\nEarnings (loss) per share is calculated using the weighted average number of shares outstanding during each period presented. Potentially dilutive common stock equivalents consist of stock options which have been granted to certain officers. Incorporating these common stock equivalents into the calculation of earnings (loss) per share using the treasury method does not materially affect the\nPage 24 of 50\nreported results whether on a primary or fully-diluted basis.\nAll share and per-share data in this report on Form 10-K reflect the three- for-two stock splits that were effective February 22, 1993 and November 29, 1993.\n(2) INVESTMENT IN SECURITIES\nSummary information regarding securities available for sale and securities held to maturity follows.\nAs discussed in Note 1, the Company adopted SFAS No. 115 effective December 31, 1993. As a result, investments in mortgage-backed securities were reclassified as of that date as securities available for sale and are being reported at fair value. The tax-effected net unrealized holding gain on these securities at date of adoption of $3,083,000 is reported as a separate component of shareholders' equity.\nAt December 31, 1993 and 1992, U.S. Treasury and agency securities with a carrying value of $477,904,000 and $432,751,000, respectively, were pledged to secure public and trust deposits or sold under repurchase agreements.\nThere were no sales from the securities portfolios during 1993. Proceeds from sales of investment securities during 1992 were $150,120,000. In 1992, the Company sold a block of mortgage-backed securities that was experiencing excessive early payoffs because of declining mortgage rates and replaced it with a block of mortgage-backed securities that offered a more stable return. The Company realized a $5.4 million gain as a result of this transaction. In 1990, the Company developed and began to implement a strategy to balance maturities and liquidity needs and to diversify and increase yields in the investment securities portfolio.\nPage 25 of 50\nRepositioning the portfolio in line with this strategy resulted in the realization of $18,376,000 in gains in 1991 on sales of $582,377,000.\nThe amortized cost and estimated fair value of investment securities held to maturity at December 31, 1993, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because certain issuers have the right to call or prepay obligations with or without call or prepayment penalties.\n(3) LOANS AND RESERVE FOR POSSIBLE LOAN LOSSES\nThe composition of the Company's loan portfolio at December 31, was as follows (in thousands):\nThe Company's lending activity, both commercial and retail, is conducted primarily among customers in Louisiana and Mississippi. In its market area, the Company serves a broad base of commercial customers in diverse industries.\nWithin the portfolio, the Company maintains a relatively significant concentration of outstanding credits and loan commitments to customers involved in the oil and gas industry. At December 31, 1993, outstanding loans to this industry totalled $78,488,000, and unused loan commitments and letters of credit and guarantees were $99,727,000 and $15,959,000, respectively. The operations of this industry have been stabilizing in recent years, following a period of severe decline and major restructuring which had adversely impacted the overall economy of the Company's market area. Management continues to closely monitor its lending relationships in this industry.\nThe total of commercial and other real estate loans shown above includes both those for which the primary source of repayment is the operation or sale of the underlying project, as well as those secured by real estate employed in other operations of the customer. Unfunded commitments for loans secured by commercial or other real estate were $9,140,000 at December 31, 1993. Real estate values had declined steeply during the period of economic contraction in the Company's market area, but have in recent periods been stabilizing. The Company's portfolio of commercial and other real estate loans is diversified as to both the types of collateral property and the industries in which the properties are employed.\nLoans on which the accrual of interest had been discontinued totalled $33,631,000 and $70,640,000 at December 31, 1993 and 1992, respectively. If interest on nonaccrual loans had been recognized in accordance with contractual terms, reported interest income would have been increased by approximately $1,458,000 in 1993, $6,256,000 in 1992, and $13,328,000 in 1991.\nThe Bank has made loans, in the normal course of business, to certain directors and executive officers of the Company and to their associates (related parties). The aggregate amount of these loans was $31,341,000 and $27,907,000 at December 31, 1993 and 1992, respectively. During 1993, $78,061,000 of new loan advances were made, and repayments totalled $74,627,000. Outstanding commitments and letters of credit to related parties totalled $39,517,000 and $9,092,000 at December 31, 1993 and 1992, respectively. Related party loans are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated persons, and do not involve more than the normal risk of collectibility.\nThe FASB has issued SFAS No. 114, \"Accounting by Creditors for Impairment of a Loan,\" which is effective January 1,\nPage 26 of 50\n1995. This statement establishes standards, including the use of discounted cash flow techniques, for measuring the impairment of a loan when it is probable that the contractual terms will not be met. Adoption of this new accounting standard is not expected to have a significant impact on the Company's financial condition and results of operations based on the current loan portfolio.\nChanges in the reserve for possible loan losses for the three years ended December 31, 1993 were as follows (in thousands):\n(4) INCOME TAXES\nIncome tax expense (benefit) consists of the following components for the three years ended December 31, 1993 (in thousands):\nEffective January 1, 1993, the Company adopted SFAS No. 109, \"Accounting for Income Taxes.\" Under this new accounting standard, the tax consequences of all temporary differences between the tax bases of assets or liabilities and their reported amounts in the financial statements represent either tax liabilities to be settled in the future or tax assets that will be realized as a reduction of future taxes. Among other provisions, SFAS No. 109 requires the use of currently enacted tax rates to measure these deferred tax assets and liabilities. The impact of any change in the enacted tax rates is included in the deferred tax expense or benefit recognized in the period in which the change occurs. The change in the net deferred tax asset or liability between periods represents the deferred tax expense or benefit recognized in the financial statements. With the adoption of SFAS No. 109, the Company recognized an additional net deferred tax asset of $4,574,000, which is reported in the consolidated statements of operations as a cumulative effect of an accounting change (Note 6).\nPage 27 of 50\nNet deferred income tax assets, which are included in other assets on the consolidated balance sheets, were approximately $19,046,000 and $34,113,000 at December 31, 1993 and 1992, respectively. The components of the net deferred tax asset as of December 31, 1993 were as follows (in thousands):\nFor years ending before January 1, 1993, deferred tax expense (benefit) resulted from timing differences in the recognition of revenue and expense for income tax and financial statement purposes. For the year ended December 31, 1992, the most significant timing difference was the excess of interest income recognized for tax purposes over the amount recognized for financial statement purposes. The most significant timing difference in the year ended December 31, 1991 was in the excess of the provision for possible loan losses over losses recognized for income tax purposes. The sources of timing differences and the tax effects for the years ended December 31, 1992 and 1991 are summarized as follows (in thousands):\nPage 28 of 50\nThe effective tax rate is less than the statutory federal income tax rate in each of the three years in the period ended December 31, 1993 because of the following:\nUnder SFAS No. 109, the Company is required to establish a valuation allowance against the deferred tax assets if, based on all available evidence, it is more likely than not that some or all of the asset will not be realized. Management has weighed the evidence, including current earnings performance, taxable income generated during available carryback periods, and the nature of significant deductible temporary differences, and believes that no valuation reserve is required as of December 31, 1993. Rules issued by regulatory agencies impose additional limitations on the amount of deferred tax assets that may be recognized when calculating regulatory capital ratios. The Company's ratio calculations were not affected by these rules at December 31, 1993.\n(5) EMPLOYEE BENEFIT PLANS\nThe Company has a noncontributory qualified defined benefit pension plan covering substantially all of its employees. The benefits are based on an employee's total years of service and his or her highest five-year level of compensation during the final ten years of employment. Contributions are made in amounts sufficient to meet funding requirements set forth in federal employee benefit and tax laws plus such additional amounts as the Company may determine to be appropriate from time to time.\nIn October, 1992, the Company authorized certain amendments to the defined benefit plan which were effective on January 1, 1993. The amendments included provisions to accelerate early retirement availability and to discontinue life insurance and disability benefits now provided by other Company-sponsored benefit programs. The amounts disclosed below as of December 31, 1993 and 1992, include consideration of these amendments.\nAs of December 31, 1993, the actuarial present values of vested and total accumulated benefit obligations (excluding projected future increases in compensation levels) were $34,012,000 and $37,375,000, respectively, and as of December 31, 1992, $31,799,000 and $34,458,000, respectively.\nThe following table sets forth the plan's funded status and amounts recognized in the Company's consolidated financial statements (in thousands):\nPage 29 of 50\nThe net pension expense (benefit) recognized for 1993, 1992, and 1991 is comprised of the following components (in thousands):\nThe weighted-average discount rate used in determining the actuarial present value of the projected benefit obligation was 7.5% in 1993 and 8.0% in prior periods. For all periods presented, the Company assumed an 8.0% expected long-term rate of return on plan assets and an annual rate of increase in future compensation levels of 5.0%.\nFor participants in the qualified defined benefit plan whose calculated benefits are reduced as a result of limitations under federal tax laws, the Company sponsors an unfunded non-qualified plan that provides benefits equal to those reductions. At December 31, 1993, the accrued pension cost and accumulated benefit obligation, substantially all of which is vested, related to this plan were $1,358,000 and $962,000, respectively. The net pension expense under the plan was $11,000, $55,000 and $163,000 in 1993, 1992, and 1991, respectively.\nEffective October 1, 1993, the Company converted its noncontributory employee thrift plan into an employee savings plan under Section 401(k) of the Internal Revenue Code. Under the new plan, which covers substantially all full- time employees, the Company will match the savings of each participant up to 3% of his or her compensation. Annual participant savings are limited by tax law. Participants are fully vested in their savings and in the matching Company contributions at all times. For 1993, the expense of the Company's matching contributions was approximately $245,000. There had been no Company contributions to the noncontributory thrift plan in 1993, 1992 or 1991. At current participation levels, the Company's annual matching contributions under the savings plan are expected to total approximately $1 million.\nThe Company also maintains certain health care and life insurance benefit plans for retirees and their eligible dependents. Participant contributions are required under the health plan, and the Company has established annual and lifetime maximum health care benefit limits. Effective January 1, 1993, the Company adopted SFAS No. 106, \"Employers' Accounting for Postretirement Benefits Other than Pensions.\" This statement requires that the expected cost of providing these postretirement benefits be recognized during the period employees are actively working. Prior to 1993, the Company recognized the cost only as benefit payments were made to or on behalf of retirees. The Company continues to fund its obligations under the postretirement benefit plans as the benefit payments are made.\nUpon adoption of SFAS No. 106, the Company elected to immediately recognize the accumulated postretirement benefit obligation of $5,963,000. The expense related to the recognition of this transition obligation is reported, net of income tax effects of $2,023,000, as a cumulative effect of a accounting change in the consolidated statements of operations (Note 6).\nAt December 31, 1993, the net postretirement benefit liability reported with other liabilities in the consolidated balance sheets was approximately $6,306,000. The net periodic postretirement benefit expense recognized under SFAS No. 106 for 1993 was $450,000, including components for both the portion of the expected benefit obligation attributed to current service as well as interest on the accumulated benefit obligation. The expense recognized is not materially different from that which would have been reported under the previous accounting method.\nFor the actuarial calculation of its postretirement benefit obligations at December 31, 1993, the Company assumed annual health care cost increases beginning at 12% and decreasing 0.6% per year to a 5.5% rate, and used a discount rate of 7.5% in determining the present value of projected benefits. A 1% rise in the assumed health care cost trend rates would not materially impact the accumulated benefit obligation or the periodic net benefit expense.\nThe FASB has issued SFAS No. 112, \"Employers' Accounting for Postemployment Benefits,\" which is effective January 1, 1994. Postemployment benefits are those provided to former or inactive employees after active employment but before retirement. Given the current structure of such benefit programs offered by the Company, this accounting standard will not have a significant impact on the Company's financial position or results of operations when adopted.\nThe Company has a long-term incentive program for which all employees are eligible. As of December 31, 1993, 494,625\nPage 30 of 50\nshares of treasury stock are reserved for the purposes of this program, which include the granting of stock options and restricted, performance and phantom stock. The Company granted 36,000 shares of restricted stock to certain employees during 1993 for no cash consideration. During 1992, restricted stock grants totalled 37,125 shares. Employees receiving the grants are restricted from transferring or otherwise disposing of the stock until June, 1998, for the grants in 1993, and until May, 1997, for the 1992 grants. The market values of the restricted shares, determined as of the grant dates, were $699,000 and $491,000, respectively, for 1993 and 1992. These amounts are being amortized as compensation expense over the five year restriction periods. Compensation expense recognized during 1993 and 1992 related to these stock grants was $168,000 and $49,000, respectively.\nThe following table summarizes stock option activity under the long-term incentive program for 1993 and 1992:\nThe incentive and non-qualified options are exercisable at the market price on the grant dates. All outstanding options were exercisable at December 31, 1993.\nOn February 28, 1990, an executive officer was granted options to purchase 33,750 shares of common stock of the Company at the then market price of $18.11 per share through February 28, 2000. At December 31, 1993, none of those options had been exercised. If this officer terminates his employment with the Company, the options will be exercisable for six months after his date of termination. The options will also be exercisable up to one year past the date of his death, but in no event beyond February 28, 2000.\n(6) NET CUMULATIVE EFFECT OF ACCOUNTING CHANGES\nThe net cumulative effect of accounting changes reported in the consolidated statement of operation for 1993 consists of the following (in thousands):\n(7) OTHER REAL ESTATE OWNED\nOther real estate owned (\"OREO\") is comprised of real property collateral acquired through foreclosure or in settlement of loans and surplus banking property. With the exception of the pre-1933 properties discussed below, these properties are reported at their fair value, less expected disposition costs, or the recorded investment in the related loan, whichever is lower. Activity in the OREO valuation reserve for the three years ended December 31, 1993 was as follows (in thousands):\nPage 31 of 50\nOREO includes a variety of property interests which were acquired though routine banking transactions generally prior to 1933 and for which there existed no ready market. These were subsequently written down to a nominal holding value in accordance with general banking practice at that time. These property interests include a few commercial and residential site locations principally in the New Orleans area, ownership interests in scattered undeveloped acreage, and various mineral interests.\nNot included in OREO are real estate interests evidenced by stock ownership. Such stock is carried as an investment in securities and dividends are recognized as investment income.\nIn 1991, the Company recorded a gain of approximately $4 million on the sale of one of the pre-1933 property interests. Other revenues derived from these direct and indirect property interests and related expenses have not been significant over the three-year period ended December 31, 1993.\n(8) NON-INTEREST INCOME\nThe components of non-interest income were as follows for the three years ended December 31, 1993 (in thousands):\n(9) NON-INTEREST EXPENSE\nThe components of non-interest expense were as follows for the three years ended December 31, 1993 (in thousands):\nPage 32 of 50\n(10) OTHER ASSETS AND LIABILITIES\nThe significant components of other assets and other liabilities at December 31, 1993 and 1992, were as follows (in thousands):\nCosts in excess of the net tangible assets acquired in prior years' business combinations are being amortized over remaining lives ranging from one to twelve years as of December 31, 1993.\n(11) ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS\nThe following disclosure is made in accordance with the requirements of Statement of Financial Accounting Standards No. 107, \"Disclosures about Fair Value of Financial Instruments.\" In cases where quoted market prices are not available, fair values have been estimated using present value or other valuation techniques. The results of these techniques are highly sensitive to the assumptions used, such as those concerning appropriate discount rates and estimates of future cash flows, which require considerable judgment. Accordingly, estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current settlement of the underlying financial instruments. SFAS No. 107 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. These disclosures should not be interpreted as representing an aggregate measure of the underlying value of the Company.\nPage 33 of 50\nThe following significant methods and assumptions were used by the Company in estimating the fair value of financial instruments.\nCASH AND SHORT-TERM INVESTMENTS\nThe carrying value of highly liquid instruments, such as cash on hand, interest-and non-interest bearing deposits in financial institutions, and federal funds sold, provides a reasonable estimate of their fair value.\nINVESTMENT SECURITIES\nSubstantially all of the Company's investment securities are traded in active markets. Fair value estimates for these securities are based on quoted market prices obtained from independent pricing services. The carrying amount of accrued interest on securities approximates its fair value.\nLOANS, NET\nFor loans with rates that are repriced in coordination with movements in market rates and with no significant change in credit risk, fair value estimates are based on carrying values. The fair values for other loans are estimated through discounted cash flow analysis, using current rates at which loans with similar terms would be made to borrowers of similar credit quality. Appropriate adjustments are made to reflect probable credit losses. The carrying amount of accrued interest on loans approximates its fair value.\nDEPOSITS\nSFAS No. 107 specifies that the fair value of deposit liabilities with no defined maturity is to be disclosed as the amount payable on demand at the reporting date, i.e., at their carrying or book value. These deposits, which include interest and non-interest checking, passbook savings, and money market accounts, represented approximately 80% of total deposits at December 31, 1993 and 1992. The fair value of fixed maturity deposits is estimated using a discounted cash flow calculation that applies rates currently offered for time deposits of similar remaining maturities. The carrying amount of accrued interest payable on deposits approximates its fair value.\nThe economic value attributable to the relationship with depositors who provide low-cost funds to the Company is viewed as a separate intangible asset and is excluded in SFAS No. 107 from the definition of a financial instrument.\nSHORT-TERM BORROWINGS\nThe carrying amounts of federal funds purchased, borrowings under repurchase agreements, and other short-term borrowings, approximate their fair values.\nOFF-BALANCE-SHEET INSTRUMENTS\nOff-balance-sheet financial instruments include commitments to extend credit, letters of credit, and other financial guarantees. The fair value of such instruments is estimated using fees currently charged for similar arrangements in the marketplace, adjusted for changes in terms and credit risk as appropriate. The estimated fair value for these instruments was insignificant at December 31, 1993 and 1992.\n(12) FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK\nIn order to meet the financing needs of its customers, the Company deals in financial instruments that expose it to off-balance-sheet risk. These financial instruments include commitments to extend credit, letters of credit, and other financial guarantees. Such instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the statements of financial position.\nThe Company's exposure to credit loss in the event of nonperformance by other parties for commitments to extend credit and letters of credit and other financial guarantees written is represented by the contractual amount of those instruments. The Company follows the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.\nPage 34 of 50\nCommitments to extend credit and credit card lines are agreements to make a loan to a customer as long as there is no violation of any condition established in the commitment or credit card contract. Commitments generally have fixed expiration dates or other termination clauses and may require payments of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amount outstanding does not necessarily represent total future cash outlay requirements.\nThe amount of collateral, if any, required by the Company upon issuance of a commitment is based on management's credit evaluation of the borrower. Collateral varies, but may include accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties.\nLetters of credit and financial guarantees written are conditional agreements issued by the Company to guarantee the performance of a customer to a third party. These agreements are primarily issued to support commercial trade. Agreements totalling $10.5 million at December 31, 1993 have original maturities greater than one year. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Company holds marketable securities as collateral to support those letters of credit and guarantees for which collateral is deemed necessary. Letters of credit and financial guarantees outstanding at December 31, 1993, ranged from unsecured to fully secured.\n(13) REGULATORY MATTERS\nThe Bank is required to maintain non-interest-bearing reserve balances with the Federal Reserve Bank to fulfill its reserve requirements. The average balance maintained was approximately $63,243,000 in 1993 and $61,182,000 in 1992.\nIn 1990, the Company and the Bank entered into an agreement with federal bank regulators designed to ensure the continued strength of the institution and to improve its internal policies in certain respects. The terms of the agreement have been satisfied and the agreement was dissolved during 1993.\n(14) COMMITMENTS AND CONTINGENCIES\nOn December 21, 1993, the Company and the Bank entered into an agreement for the Bank to purchase substantially all of the assets and assume the deposit and certain other liabilities of Baton Rouge Bank and Trust. This transaction, which is expected to be completed in the first half of 1994, is subject to regulatory approvals and certain other conditions. The assets to be acquired total approximately $120,000,000. The final purchase price has not yet been determined.\nThe Company and its subsidiaries are parties to various legal proceedings arising in the ordinary course of business. After reviewing with outside legal counsel pending and threatened actions, management is of the opinion that the ultimate resolution of these actions will not have a material effect on the Company's financial condition and results of operations.\nManagement also does not believe that compliance with existing federal, state or local environmental laws and regulations will impose any material financial obligation on the Company or materially affect the realizable value of its assets.\nThe Company owns its own main office building as well as most of its branch banking facilities and has not entered into material commitments under non- cancellable leases for facilities or equipment. The defined benefit retirement plan is sufficiently funded on an actuarial basis so as not to have required an additional contribution by the Company during 1993. Current projections do not indicate that a contribution will be required for 1994.\nPage 35 of 50\n(15) PARENT COMPANY FINANCIAL STATEMENTS\nSummarized parent-company-only financial statements of Whitney Holding Corporation follow (in thousands):\nPage 36 of 50\nMANAGEMENT REPORT ON RESPONSIBILITY FOR FINANCIAL REPORTING\nThe management of Whitney Holding Corporation is responsible for the preparation of the financial statements, related financial data and other information in this report on Form 10-K. The financial statements are prepared in accordance with generally accepted accounting principles and include amounts based on management's estimates and judgement where appropriate. Financial information appearing throughout this report on Form 10-K is consistent with the financial statements.\nThe Company's financial statements have been audited by Arthur Andersen & Co., independent public accountants. Management has made available to Arthur Andersen & Co. all of the Company's financial records and related data, as well as the minutes of shareholders' and directors' meetings. Furthermore, management believes that all representations made to Arthur Andersen & Co. during its audit were valid and appropriate.\nManagement of the Company has established and maintains a system of internal control that provides reasonable assurance as to the integrity and reliability of the financial statements, the protection of assets from unauthorized use or disposition, and the prevention and detection of fraudulent financial reporting. The system of internal control provides for appropriate division of responsibility and is documented by written policies and procedures that are communicated to employees with significant roles in the financial reporting process and updated as necessary. Management continually monitors the system of internal control for compliance. The Company maintains a strong internal control auditing program that independently assesses the effectiveness of the internal controls and recommends possible improvements thereto. As part of their audit of the Company's 1993 financial statements, Arthur Andersen & Co. considered the Company's system of internal control to the extent they deemed necessary to determine the nature, timing and extent of their audit tests. Management has considered the internal auditor's and Arthur Andersen & Co.'s recommendations concerning the Company's system of internal control and has taken actions that it believes are cost-effective in the circumstances to respond appropriately to these recommendations. Management believes that, as of December 31, 1993, the Company's system of internal control is adequate to accomplish the objectives discussed herein.\nREPORT OF INDEPENDENT PUBLIC ACCOUNTANTS\nTO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF WHITNEY HOLDING CORPORATION:\nWe have audited the accompanying consolidated balance sheets of Whitney Holding Corporation (a Louisiana corporation) and subsidiaries as of December 31, 1993 and 1992, and the related consolidated statements of operations, shareholders' equity and cash flows 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.\nWe conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.\nIn our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Whitney Holding Corporation and subsidiaries as of December 31, 1993 and 1992, and results of its operations and cash flows for each of the three years in the period ended December 31, 1993, in conformity with generally accepted accounting principles.\nAs discussed in Notes 4 and 5 to the consolidated financial statements, effective January 1, 1993, the Company changed its methods of accounting for income taxes and for postretirement benefits other than pensions. As discussed in Notes 1 and 2 to the consolidated financial statements, effective December 31, 1993, the Company changed its method of accounting for certain investments in debt and equity securities.\n(SIGNATURE OF ARTHUR ANDERSEN & CO. APPEARS HERE)\nArthur Andersen & Co.\nNew Orleans, Louisiana January 13, 1994\nPage 37 of 50\nSUMMARY OF QUARTERLY FINANCIAL INFORMATION - ------------------------------------------\nThe following quarterly financial information is unaudited. In the opinion of management all normal recurring adjustments necessary to present fairly the results of operations for such periods are reflected.\nPage 38 of 50\nITEM 9:","section_9":"ITEM 9: DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE\nNot Applicable\nPART III\nITEM 10:","section_9A":"","section_9B":"","section_10":"ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT\nIn response to this item, registrant incorporates by reference the section entitled \"Election of Directors\" of the Proxy Statement dated March 24, 1994.\nEXECUTIVE OFFICERS OF THE REGISTRANT\nWILLIAM L. MARKS, 50, Chairman of the Board and Chief Executive Officer of WNB and the Company since February 28, 1990. Former Senior Executive Vice President and Regional Executive of AmSouth Bank NA, headquartered in Birmingham, Alabama, responsible for a division with $1 billion in assets and 702 employees.\nR. KING MILLING, 53, since 1978, Director, since December, 1984, Director and President, of the Bank and the Company.\nG. BLAIR FERGUSON, 50, since July, 1993, Executive Vice President, of the Bank. Former Executive Vice President and Regional Director of First City, Texas - Dallas.\nEDWARD B. GRIMBALL, 49, from September, 1990 to October, 1991, Vice President and Chief Financial Officer, since October, 1991, Executive Vice President and Chief Financial Officer, of the Bank and the Company. Former Senior Vice President, Comptroller and Secretary of Bank South Corp., a $5- billion multi-bank holding company headquartered in Atlanta, Georgia.\nKENNETH A. LAWDER, JR., 52, since December, 1991, Executive Vice President, of the Bank and the Company. Former Senior Vice President, Wachovia Bank NA., a $17-billion bank headquartered in Winston-Salem, North Carolina.\nJOSEPH W. MAY, 48, since December, 1993, Executive Vice President, of the Bank and the Company. Former Executive Vice President and Chief Credit Policy Officer, Comerica, Inc., a $27-billion bank headquartered in Detroit, Michigan.\nITEM 11:","section_11":"ITEM 11: EXECUTIVE COMPENSATION\nIn response to this item, registrant incorporates by reference the section entitled \"Executive Compensation\" of the Proxy Statement dated March 24, 1994.\nITEM 12:","section_12":"ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT\nIn response to this item, registrant incorporates by reference the sections entitled \"Voting Securities and Principal Holders Thereof\" and \"Election of Directors\" of the Proxy Statement dated March 24, 1994.\nITEM 13:","section_13":"ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS\nIn response to this item, registrant incorporates by reference the section entitled \"Certain Transactions\" of the Proxy Statement dated March 24, 1994.\nPage 39 of 50\nPART IV\nITEM 14:","section_14":"ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K\n(a) (1) and (2) Financial Statements and Schedules\nThe following consolidated financial statements of the Company and its subsidiaries are included in Part II Item 8:\nAll schedules have been omitted because they are either not applicable or the required information has been included in the financial statements or notes to the financial statements.\n(a) (3) Exhibits:\nExhibit 3.1 - Copy of Composite Charter, incorporated by reference to the Company's March 31, 1993 Form 10-Q\nExhibit 3.2 - Copy of Bylaws, as amended, incorporated by reference to the Company's March 31, 1993 Form 10-Q\nExhibit 10.1 - Stock Option Agreement between Whitney Holding Corporation and William L. Marks, incorporated by reference to the Company's 1990 Form 10-K\nExhibit 10.2 - Executive agreement between Whitney Holding Corporation, Whitney National Bank and William L. Marks, incorporated by reference to the Company's June 30, 1993 Form 10-Q\nExhibit 10.3 - Executive agreement between Whitney Holding Corporation, Whitney National Bank and R. King Milling, incorporated by reference to the Company's June 30, 1993 Form 10-Q\nExhibit 10.4 - Executive agreement between Whitney Holding Corporation, Whitney National Bank and Edward B. Grimball, incorporated by reference to the Company's June 30, 1993 Form 10-Q\nExhibit 10.5 - Executive agreement between Whitney Holding Corporation, Whitney National Bank and Kenneth A. Lawder, Jr., incorporated by reference to the Company's June 30, 1993 Form 10-Q\nExhibit 10.6 - Executive agreement between Whitney Holding Corporation, Whitney National Bank and G. Blair Ferguson, incorporated by reference to the Company's September 30, 1993 From 10-Q\nPage 40 of 50\nExhibit 10.7 - Executive agreement between Whitney Holding Corporation, Whitney National Bank and Joseph W. May, effective December 13, 1993\nExhibit 10.8 - Long-term incentive program, incorporated by reference to the Company's 1991 Form 10-K\nExhibit 10.9 - Executive compensation plan, incorporated by reference to the Company's 1991 Form 10-K\nExhibit 10.10 - Form of restricted stock agreement between Whitney Holding Corporation and certain of its officers, incorporated by reference to the Company's June 30, 1992 Form 10-Q\nExhibit 10.11 - Form of stock option agreement between Whitney Holding Corporation and certain of its officers, incorporated by reference to the Company's June 30, 1992 Form 10-Q\nExhibit 10.12 - Directors' Compensation Plan, incorporated by reference to the Company's Proxy Statement dated March 24, 1994\nExhibit 21 - Subsidiaries\nWhitney Holding Corporation owns 100% of the capital stock of Whitney National Bank. All other subsidiaries considered in the aggregate would not constitute a significant subsidiary.\n(b) No report on Form 8-K was required to be filed by the Registrant during the last quarter of 1993.\nPursuant to the requirements of the Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.\nWHITNEY HOLDING CORPORATION (Registrant)\nBy: \/s\/ William L. Marks ----------------------------- William L. Marks Chairman of the Board and Chief Executive Officer March 23, 1994\nPage 41 of 50\nPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.\nPage 42 of 50","section_15":""}
{"filename":"20171_1993.txt","cik":"20171","year":"1993","section_1":"ITEM 1. BUSINESS\nGENERAL\nThe Chubb Corporation (the Corporation) was incorporated as a business corporation under the laws of the State of New Jersey in June 1967. The Corporation is a holding company and is principally engaged, through subsidiaries, in three industries: property and casualty insurance, life and health insurance and real estate development. The Corporation and its subsidiaries employed approximately 10,500 persons on December 31, 1993. Revenues, income from operations before income tax and identifiable assets for each industry segment for the three years ended December 31, 1993 are included in Note (16) of the notes to consolidated financial statements incorporated by reference from the Corporation's 1993 Annual Report to Shareholders.\nThe property and casualty insurance subsidiaries provide insurance coverages on a direct and assumed basis, principally in the United States, Canada, Europe, Australia and the Far East. The life and health insurance and real estate development subsidiaries have no international operations. Revenues, income from operations before income tax and identifiable assets of the property and casualty insurance subsidiaries by geographic area for the three years ended December 31, 1993 are included in Note (17) of the notes to consolidated financial statements incorporated by reference from the Corporation's 1993 Annual Report to Shareholders.\nPROPERTY AND CASUALTY INSURANCE GROUP\nThe Property and Casualty Insurance Group (the Group) is composed of Federal Insurance Company (Federal), Pacific Indemnity Company (Pacific Indemnity), Vigilant Insurance Company (Vigilant), Great Northern Insurance Company (Great Northern), Chubb Insurance Company of New Jersey (Chubb New Jersey), Chubb Custom Insurance Company (Chubb Custom), Chubb National Insurance Company (Chubb National), Texas Pacific Indemnity Company, Northwestern Pacific Indemnity Company, Chubb Insurance Company of Canada, Chubb Insurance Company of Europe, S.A., Chubb Insurance Company of Australia, Limited and Chubb Atlantic Indemnity Ltd.\nThe Group presently underwrites most forms of property and casualty insurance. All members of the Group write non-participating policies. Several members of the Group also write participating policies, particularly in the workers' compensation class of business, under which dividends are paid to the policyholders.\nPremiums Written\nAn analysis of the Group's premiums written during the past three years is shown in the following table.\n- ---------------\n(a) Intercompany items eliminated.\nThe net premiums written during the last five years for major insurance classes of the Group are incorporated by reference from page 12 of the Corporation's 1993 Annual Report to Shareholders.\nOne or more members of the Group are licensed and transact business in each of the 50 states of the United States, the District of Columbia, Puerto Rico, the Virgin Islands, Canada and parts of Europe, Australia and the Far East. In 1993, approximately 88% of the Group's direct business was produced in the United States, where the Group's businesses enjoy broad geographic distribution with a particularly strong market presence in the Northeast. The four states accounting for the largest amounts of direct premiums written were New York with 15%, California with 14%, New Jersey with 6% and Pennsylvania with 5%. No other state accounted for 5% or more of such premiums. Approximately 4% of the Group's direct premiums written were produced in Canada.\nUnderwriting Results\nA frequently used industry measurement of property and casualty insurance underwriting results is the combined loss and expense ratio. This ratio is the sum of the ratio of incurred losses and related loss adjustment expenses to premiums earned (loss ratio) plus the ratio of underwriting expenses to premiums written (expense ratio) after reducing both premium amounts by dividends to policyholders. When the combined ratio is under 100%, underwriting results are generally considered profitable; when the combined ratio is over 100%, underwriting results are generally considered unprofitable. Investment income, deferred policy acquisition costs, other non-underwriting income or expense and income taxes are not reflected in the combined ratio. The profitability of property and casualty insurance companies depends on income from both underwriting operations and investments.\nThe net premiums and the loss, expense and combined ratios of the Group for the last five years are shown in the following table.\nThe 1993 ratios include the effects of a $675 million increase in unpaid claims related to an agreement for the settlement of asbestos-related litigation and a $125 million return premium to the Group related to the commutation of a medical malpractice reinsurance agreement. Excluding the effects of these items, the loss ratio, the expense ratio and the combined loss and expense ratio were 65.5%, 33.5% and 99.0%, respectively, for the year 1993 and 65.7%, 34.4% and 100.1%, respectively, for the five years ended December 31, 1993.\nThe combined loss and expense ratios during the last five years for major classes of the Group's business are incorporated by reference from page 12 of the Corporation's 1993 Annual Report to Shareholders.\nProducing and Servicing of Business\nIn the United States and Canada, the Group is represented by approximately 3,000 independent agents and accepts business on a regular basis from an estimated 500 insurance brokers. In most instances, these agents and brokers also represent other companies which compete with the Group. The offices maintained by the Group assist these agents and brokers in producing and servicing the Group's business. In addition to the administrative offices of Chubb & Son Inc. in Warren, New Jersey, the Group operates six zonal management offices and 63 branch and service offices in the United States and Canada.\nThe Group's overseas business is developed by its foreign agents and brokers through local branch offices of the Group and by its United States and Canadian agents and brokers. Overseas business is also obtained from foreign treaty reinsurance assumed principally, but not exclusively, from the Sun Alliance Group plc (Sun Group). In conducting its overseas business, the Group attempts to minimize the risks relating to currency fluctuations.\nBusiness for the Group is also produced through participation in a number of underwriting pools and syndicates including, among others, Associated Aviation Underwriters, Industrial Risk Insurers, American Accident Reinsurance Group, American Excess Insurance Association, Cargo Reinsurance Association and American Cargo War Risk Reinsurance Exchange. Such pools and syndicates provide underwriting capacity for risks which an individual insurer cannot prudently underwrite because of the magnitude of the risk assumed or which can be more effectively handled by one organization due to the need for specialized loss control service.\nReinsurance\nIn accordance with the normal practice of the insurance industry, the Group assumes and cedes reinsurance with other insurers or reinsurers. These reinsurance arrangements provide greater diversification of business and minimize the Group's maximum net loss arising from large risks or from hazards of catastrophic potentialities.\nA large portion of the Group's reinsurance is effected under contracts known as treaties under which all risks meeting prescribed criteria are automatically covered. A substantial portion of the Group's ceded reinsurance is on a quota share basis with a subsidiary of the Sun Group. Most of the remaining reinsurance arrangements consist of excess of loss and catastrophe contracts with other insurers or reinsurers which protect against a specified part or all of certain types of losses over stipulated amounts arising from any one occurrence or event. In some instances, reinsurance is effected by negotiation on individual risks. The amount of each risk retained by the Group is subject to maximum limits which vary by line of business and type of coverage. Retention limits are continually reviewed and are revised periodically as the Group's capacity to underwrite risks changes. Reinsurance contracts do not relieve the Group of its obligation to the policyholders.\nThe collectibility of reinsurance is subject to the solvency of the reinsurers. The Group is selective in regard to its reinsurers, placing reinsurance with only those reinsurers with strong balance sheets and superior underwriting ability. The Group monitors the financial strength of its reinsurers on an ongoing basis. As a result, uncollectible amounts have not been significant.\nThe severity of recent catastrophes, particularly Hurricane Andrew in 1992, has demonstrated to insurers, including the Group, that assumptions on the damage potential of catastrophes have been too optimistic. The Group maintains records showing concentrations of risks in catastrophe prone areas such as California (earthquakes and brush fires) and the Southeast coast of the United States (hurricanes). The Group continually assesses its concentration of underwriting exposures in catastrophe prone areas. The Group is continuing to develop strategies which will further limit the aggregation of exposure in any one catastrophic event.\nThe catastrophe reinsurance market has suffered large losses in recent years. As a result, the reinsurance market's capacity was substantially reduced in 1993 and the cost of available coverages rose significantly. In response, the Group has increased its retention levels for individual catastrophe losses. The effect on the Group's exposure to future catastrophe losses will depend on the severity of such losses.\nUnpaid Claims and Claim Adjustment Expenses and Related Amounts Recoverable from Reinsurers\nInsurance companies are required to make provision in their accounts for the ultimate costs (including claim adjustment expenses) of claims which have been reported but not settled and of claims which have been incurred but not reported as well as for the portion of such provision that will be recovered from reinsurers.\nThe process of establishing the liability for unpaid claims and claim adjustment expenses is an imprecise science subject to variables that are influenced by both internal and external factors. This is true because claim settlements to be made in the future will be impacted by changing rates of inflation (particularly medical cost inflation) and other economic conditions, changing legislative, judicial and social environments and changes in the Group's claim handling procedures. In many liability cases, significant periods of time, ranging up to several years or more, may elapse between the occurrence of an insured loss, the reporting of the loss to the Group and the settlement of the loss. Approximately 50% of the Group's unpaid claims and claim adjustment expenses are provided for IBNR--claims which have not yet been reported to the Group, some of which were not yet known to the insured, and future development on reported claims. In spite of this imprecision, financial reporting requirements dictate that insurance companies report a single amount as the estimate of unpaid claims and claim adjustment expenses as of each evaluation date. These estimates are continually reviewed and updated. Any resulting adjustments are reflected in current operating results.\nThe Group's estimates of losses for reported claims are established judgmentally on an individual case basis. Such estimates are based on the Group's particular experience with the type of risk involved and its knowledge of the circumstances surrounding each individual claim. These estimates are reviewed on a regular basis or as additional facts become known. The reliability of the estimating process is monitored through comparison with ultimate settlements.\nThe Group's estimates of losses for unreported claims are principally derived from analyses of historical patterns of the development of paid and reported losses by accident year for each class of business. This process relies on the basic assumption that past experience, adjusted for the effects of current developments and likely trends, is an appropriate basis for predicting future events. For certain classes of business where anticipated loss experience is less predictable because of the small number of claims and\/or erratic claim severity patterns, the Group's estimates are based on both expected and actual reported losses. Salvage and subrogation estimates are developed from patterns of actual recoveries.\nThe Group's estimates of unpaid claim adjustment expenses are based on analyses of the relationship of projected ultimate claim adjustment expenses to projected ultimate losses for each class of business. Claims staff has discretion to override these expense formulas either upward or downward where judgment indicates such action is appropriate.\nIn 1993, the Corporation adopted Statement of Financial Accounting Standards (SFAS) No. 113, Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts. SFAS No. 113 establishes the conditions required for a contract with a reinsurer to be accounted for as reinsurance and prescribes accounting and reporting standards for those contracts. SFAS No. 113 requires that reinsurance recoverable on unpaid claims be reported separately as an asset on the balance sheet rather than the previous practice of reducing the liability for unpaid claims and claim adjustment expenses by such amount.\nThe Group's estimates of reinsurance recoverable related to reported and unreported claims and claim adjustment expenses, which represent the portion of such liabilities that will be recovered from reinsurers, are determined in a manner consistent with the liabilities associated with the reinsured policies.\nThe anticipated effect of inflation is implicitly considered when estimating liabilities for unpaid claims and claim adjustment expenses. Estimates of the ultimate value of all unpaid claims are based in part on paid losses, which reflect actual inflation. Inflation is also reflected in estimates established on reported open claims which, when combined with paid losses, form another basis to derive estimates of reserves for all open claims. There is no precise method for subsequently evaluating the adequacy of the consideration given to inflation, since claim settlements are affected by many factors.\nThe following table provides a reconciliation of the beginning and ending liability for unpaid claims and claim adjustment expenses, net of reinsurance recoverable, and a reconciliation of the ending net liability to the corresponding liability on a gross basis for the years ended December 31, 1993, 1992 and 1991.\nIn 1993, Pacific Indemnity entered into a global settlement agreement with Continental Casualty Company (a subsidiary of CNA Financial Corporation), Fibreboard Corporation, and attorneys representing claimants against Fibreboard for all future asbestos-related bodily injury claims against Fibreboard. This settlement relates to an insurance policy issued to Fibreboard by Pacific Indemnity in 1956. Pacific Indemnity and Continental Casualty reached a separate agreement for the handling of all pending asbestos-related bodily injury claims against Fibreboard. Prior to the settlement, the Group had paid $40 million and had existing loss reserves of $545 million to cover a portion of its obligation under these agreements. This amount included $300 million of IBNR reserves which were not previously classified as specific reserves for asbestos claims since it was management's belief that doing so would increase the demands of plaintiffs' attorneys. At the time the settlement was negotiated, the Group increased its loss reserves by $675 million. The Fibreboard settlement is further discussed in Item 7 of this report on pages 23 and 24.\nAs a result of the $675 million increase, in 1993, the estimated liability for unpaid claims and claim adjustment expenses, net of reinsurance recoverable, as established at the previous year-end was deficient by $664.8 million. This compares with favorable development of $27.6 million and $28.8 million during 1992 and 1991, respectively. Such deficiency and redundancies were reflected in the Group's operating results in these respective years. Excluding the $675 million, the Group experienced favorable development of $10.2 million in 1993. Each of the past three years benefited from favorable claim frequency and severity trends for certain liability classes; this was offset each year in varying degrees by increases in unpaid claims and claim adjustment expenses relating to asbestos and toxic waste claims.\nUnpaid claims and claim adjustment expenses, net of reinsurance recoverable, increased 22% in 1993, after increases of 11% and 10% in 1992 and 1991, respectively. The significant increase in 1993 was primarily due to the $675 million increase related to the Fibreboard settlement. Excluding this $675 million, reserves increased by 10% in 1993. Substantial reserve growth has occurred each year in those liability coverages, primarily excess liability and executive protection, that have delayed loss reporting and extended periods of settlement. These coverages have become a more significant portion of the Group's business in recent years. The Group continues to emphasize early and accurate reserving, inventory management of claims and suits, and control of the dollar value of settlements. The number of outstanding claims at year-end 1993 was approximately 7% lower than the number at year-end 1992. This decrease was due primarily to the settlement during 1993 of the large number of open claims at December 31, 1992 relating to Hurricane Andrew and the December 1992 storm in the Northeast.\nThe uncertainties relating to unpaid claims, particularly for asbestos and toxic waste claims on insurance policies written many years ago, are discussed in Item 7 of this report on pages 23 through 25.\nThere were approximately 4,000 asbestos and toxic waste claims outstanding at December 31, 1993 and 1992 compared with approximately 5,000 claims outstanding at December 31, 1991. The decrease in 1992 was primarily the result of fewer asbestos-related new arisings as well as increases in bulk settlements and closed claims relating to asbestos claims. The following table provides a reconciliation of the beginning and ending liability for unpaid claims and claim adjustment expenses, net of reinsurance recoverable, related to asbestos and toxic waste claims for the years ended December 31, 1993, 1992 and 1991. Reinsurance recoveries related to asbestos and toxic waste claims are not significant.\nDuring 1984, the Group discontinued writing medical malpractice business. The Group entered into a stop loss reinsurance agreement, effective year-end 1985, which provides that the reinsurer will pay up to $285 million of losses and allocated loss adjustment expenses for this discontinued class of business in excess of the initial $225 million to be paid by the Group subsequent to December 31, 1985. The agreement also provides that the Group may elect to commute the remaining liability from the reinsurer as of December 31, 1995 and receive payment, at that time, of an amount determined by the agreement. The cost of this reinsurance was $173.5 million.\nSince the effective date of this agreement, the Group has paid an aggregate of $249.9 million of medical malpractice losses and loss adjustment expenses and has recovered the amount in excess of $225 million from the reinsurer. The amount of paid losses is approximately 55% of what was anticipated at the time the business was reinsured eight years ago. As a result of the favorable loss experience over this extended period, the Group reduced both its gross medical malpractice liability for unpaid claims and claim adjustment expenses and the related reinsurance recoverable by approximately $125 million in 1993. At that time, the Group announced its intention to exercise the election to commute the stop loss reinsurance agreement. The commutation will result in a return premium to the Group of approximately $125 million, which was recognized in 1993.\nThe table on page 9 presents the subsequent development of the estimated year-end liability for unpaid claims and claim adjustment expenses, net of reinsurance recoverable, for the ten years prior to 1993. The top line of the table shows the estimated liability for unpaid claims and claim adjustment expenses recorded at the balance sheet date for each of the indicated years. This liability represents the estimated amount of losses and loss adjustment expenses for claims arising in all prior years that are unpaid at the balance sheet date, including losses that had been incurred but not yet reported to the Group. The upper section of the table shows the reestimated amount of the previously recorded liability based on experience as of the end of each succeeding year. The estimate is increased or decreased as more information becomes known about the frequency and severity of claims for each individual year. The increase or decrease is reflected in the current year's operating results.\nThe \"cumulative deficiency\" as shown in the table represents the aggregate change in the reserve estimates from the original balance sheet dates through December 31, 1993. The amounts noted are cumulative in nature; that is, an increase in a loss estimate that related to a prior period occurrence generates a deficiency in each intermediate year. For example, a deficiency recognized in 1993 relating to losses incurred prior to December 31, 1983, such as that related to the Fibreboard settlement, would be included in the cumulative deficiency amount for each year in the period 1983 through 1992. Yet, the deficiency would be reflected in operating results only in 1993. The effect of changes in estimates of the liabilities for claims occurring in prior years on income before income taxes in each of the past three years is shown in the reconciliation table on page 6.\nA substantial portion of the cumulative deficiencies in liability estimates from 1983 through 1992 relates to additional provisions for asbestos and toxic waste claims, particularly the Fibreboard settlement. The cumulative deficiencies in the 1983 through 1985 columns were also due to additional provisions for medical malpractice claims as well as the substantially increased severity and complexity of liability claims. The cumulative deficiencies experienced relating to asbestos and toxic waste claims were, to varying degrees, the result of: (1) an increase in the actual number of claims filed; (2) an increase in the number of unasserted claims estimated; (3) an increase in the severity of actual and unasserted claims; and (4) an increase in litigation costs associated with such claims.\nConditions and trends that have affected development of the liability for unpaid claims and claim adjustment expenses in the past will not necessarily recur in the future. Accordingly, it is not appropriate to extrapolate future redundancies or deficiencies based on the data in this table.\nThe lower section of the table on page 9 shows the cumulative amount paid with respect to the reestimated liability as of the end of each succeeding year. For example, in the 1983 column, as of December 31, 1993 the Group had paid $1,707.6 million of the currently estimated $3,142.9 million of claims and claim adjustment expenses that were unpaid at the end of 1983; thus, an estimated $1,435.3 million of losses incurred through 1983 remain unpaid as of December 31, 1993, most of which relates to the Fibreboard settlement.\nMembers of the Group are required to file annual statements with state insurance regulatory authorities prepared on an accounting basis prescribed or permitted by such authorities (statutory basis). In 1993, the Group amended its statutory basis of accounting to reflect salvage and subrogation recoveries on an accrual basis as a reduction of the liability for unpaid claims and claim adjustment\nANALYSIS OF CLAIM AND CLAIM ADJUSTMENT EXPENSE DEVELOPMENT (NET OF REINSURANCE RECOVERABLE)\n- --------------- * The cumulative deficiencies for the years 1983 through 1992 include the effect of the increase in the liability for unpaid claims and claim adjustment expenses related to the Fibreboard settlement.\n** The medical malpractice gross liability for unpaid claims and claim adjustment expenses and the related reinsurance recoverable were both reduced by approximately $125 million in 1993. Excluding the effect of this item, the deficiency resulting from the reestimation of the December 31, 1992 liability for unpaid claims and claim adjustment expenses as of December 31, 1993 on a gross basis was not significantly different from that on a net basis.\nexpenses. Prior to 1993, salvage and subrogation recoveries were recorded on a cash basis in the statutory basis financial statements. The differences between the liability for unpaid claims and claim adjustment expenses, net of reinsurance recoverable, reported in the accompanying consolidated financial statements in accordance with generally accepted accounting principles (GAAP) and that reported in the annual statutory statements are as follows:\nInvestments\nFor each member of the Group, current investment policy is implemented by management which reports to its Board of Directors.\nThe main objective of the investment portfolio of the Group is to provide maximum support to the insurance underwriting operations. To accomplish this, the investment function must be highly integrated with the operating functions and capable of responding to the changing conditions in the marketplace. Investment strategies are developed based on a variety of factors including underwriting results and the Group's resulting tax position, fluctuations in interest rates and regulatory requirements.\nThe investment portfolio of the Group is primarily composed of high quality bonds, principally tax-exempt, U.S. Treasury, government agency and corporate issues. In addition, the portfolio includes common stocks held primarily with the objective of capital appreciation.\nIn 1993 and 1992, the Group invested new cash primarily in tax-exempt bonds. In each year the Group tried to achieve the appropriate mix in its portfolio to balance both investment and tax strategies. In 1993, the Group reduced its taxable bond portfolio by $225 million and increased its short term investments so that funds are readily available to pay amounts related to the Fibreboard settlement. At December 31, 1993, 75% of the Group's fixed maturity portfolio was invested in tax-exempt bonds compared with 71% at the previous year-end.\nThe investment results of the Group for each of the past three years are shown in the following table.\n- --------------- (a) Average of amounts at beginning and end of calendar year.\n(b) Investment income after deduction of investment expenses, but before applicable income tax, excluding income from rental of real estate and fixed assets.\n(c) Before applicable income tax.\n(d) Relates to equity securities.\nCHUBB & SON INC.\nChubb & Son Inc., a wholly-owned subsidiary of the Corporation, was incorporated in 1959 under the laws of New York as a successor to the partnership of Chubb & Son which was organized in 1882 by Thomas Caldecot Chubb to act as underwriter and manager of insurance companies. Chubb & Son Inc. is the manager of Federal, Vigilant, Great Northern, Chubb New Jersey, Chubb Custom and Chubb National. Chubb & Son Inc. also provides certain services to Pacific Indemnity and other members of the Property and Casualty Insurance Group for which it is reimbursed.\nActing subject to the supervision and control of the Boards of Directors of the members of the Group, Chubb & Son Inc. provides day to day executive management and operating personnel and makes available the economy and flexibility inherent in the common operation of a group of insurance companies. In addition, Chubb & Son Inc. arranges for the exchange of reinsurance between members of the Group.\nChubb & Son Inc. is the United States manager for Samsung Fire & Marine Insurance Company, Ltd. (formerly known as Ankuk Fire & Marine Insurance Company, Ltd.). Through December 31, 1993, Chubb & Son Inc. managed the aviation departments of certain other insurance companies. Effective January 1, 1994, Associated Aviation Underwriters, Inc., a company 50% owned by Chubb and Son Inc., assumed management of this aviation business.\nLIFE AND HEALTH INSURANCE GROUP\nThe Life and Health Insurance Group (Life Group) includes Chubb Life Insurance Company of America (Chubb Life) and its wholly-owned subsidiaries, The Colonial Life Insurance Company of America (Colonial) and Chubb Sovereign Life Insurance Company (Sovereign).\nThe Life Group, which markets a wide variety of insurance and investment products, is principally engaged in the sale of personal and group life and health insurance as well as annuity contracts. These products, some of which combine life insurance and investment attributes, include traditional insurance products such as term, whole life, and accident and health insurance, as well as fixed premium interest-sensitive life, universal life and variable universal life insurance and mutual funds. The target market of the Life Group is small-to medium-sized business establishments and those people, often the proprietors of such businesses, whose needs for financial planning are more complex and diverse than average.\nOne or more of the companies in the Life Group are licensed and transact business in each of the 50 states, the District of Columbia, Puerto Rico, Guam and the Virgin Islands. Personal life and health insurance is marketed primarily through approximately 1,400 personal producing general agents and 20,600 brokers. Group life and health insurance is marketed through approximately 9,100 brokers.\nThe executive, accounting, actuarial and administrative activities of the Life Group other than Sovereign are located at the Chubb Life headquarters in Concord, New Hampshire. Sovereign's activities are administered both in Concord and Santa Barbara, California. The group insurance operations are mainly located in Parsippany, New Jersey. Personal insurance operations are in Concord, Santa Barbara and Chattanooga, Tennessee.\nThe following tables present highlights of the Life Group.\nLIFE INSURANCE IN-FORCE*\n- --------------- * Before deduction for reinsurance ceded.\nPREMIUM AND POLICY CHARGE REVENUES BY CLASS\nREVENUES, ASSETS AND CAPITAL AND SURPLUS\nThe main objective of the investment portfolio of the Life Group is to earn a rate of return in excess of that required to satisfy the obligations to policyholders and to cover expenses. The portfolio of the Life Group is comprised primarily of mortgage-backed securities and corporate bonds. The Life Group invests predominantly in investment grade, current coupon fixed-income securities with stable cash flow characteristics and maturities which are consistent with life insurance reserve requirements. The investment strategy emphasizes maintaining portfolio quality while achieving competitive investment yields. The investment results of the Life Group for each of the past three years are shown in the following table.\n- ---------------\n(a) Average of amounts at beginning and end of calendar year.\n(b) Investment income after deduction of investment expenses, but before applicable income tax, excluding income from real estate.\n(c) Before applicable income tax.\n(d) Relates to equity securities.\nReinsurance\nThe companies in the Life Group, in accordance with common industry practice, reinsure portions of the life insurance risks they underwrite with other companies. At the present time, the maximum amount of life insurance retained on any one life by the Life Group is $1,250,000, excluding accidental death benefits. Including accidental death benefits, the Life Group accepts a maximum net retention of $1,400,000.\nPolicy Liabilities\nPremium receipts from universal life and other interest-sensitive contracts are established as policyholder account balances. Charges for the cost of insurance and policy administration are assessed against the policyholder account balance. The amount remaining after such charges represents the policy liability before applicable surrender charges. Benefit reserves on individual life insurance contracts with fixed and guaranteed premiums and benefits are computed so that amounts, with additions from actuarial net premiums to be received and with interest on such reserves compounded annually at certain assumed rates, will be sufficient to meet expected policy obligations.\nIn accordance with generally accepted accounting principles, certain additional factors are considered in the reserve computation as more fully set forth in Note (1)(e) of the notes to consolidated financial statements incorporated by reference from the Corporation's 1993 Annual Report to Shareholders.\nGroup life reserves represent the unearned premium. Group medical reserves are computed utilizing \"lag and adjusted lag\" methods. These methods take into account historical claim experience and adjust for current medical inflation and changes in claim backlog.\nREAL ESTATE DEVELOPMENT GROUP\nThe Real Estate Development Group (Real Estate Group) is composed of Bellemead Development Corporation and its subsidiaries. The Real Estate Group is involved with commercial and residential real estate development.\nThe Real Estate Group develops real estate properties itself rather than through third party developers. It is distinguished from most other real estate developers in that it coordinates all phases of the development process from concept to completion. The services offered to its customers include land acquisition, site planning, architecture, engineering, construction, financing, marketing and property management. Upon completion of development, the properties may be either owned and operated for the Real Estate Group's own account or sold to third parties. The Real Estate Group directly manages virtually all of the properties which it either owns or has sold and retained interests in through secured loans. The Real Estate Group's continuing investment interests in joint ventures generally consist of the ownership and lease of the underlying land and the management and operation of the buildings.\nThe Real Estate Group's commercial development activities center around acquiring suburban, multi-site land parcels in locations considered prime for office development, and then developing the land in progressive stages. The Real Estate Group's activities include a few metropolitan office building projects. Commercial development activities are primarily in northern and central New Jersey with additional operations in Connecticut, Florida, Illinois, Maryland, Michigan, Pennsylvania and Texas.\nThe Real Estate Group owns 4,455,000 square feet of office and industrial space, of which 87% is leased. The Real Estate Group has varying interests in an additional 6,080,000 square feet of office and industrial space which is 92% leased.\nResidential development activities of the Real Estate Group are primarily in central Florida.\nThe Real Estate Group currently has undeveloped land holdings of approximately 4,600 acres, with primary holdings in New Jersey and Florida and lesser holdings in six additional states.\nREGULATION, PREMIUM RATES AND COMPETITION\nThe Corporation is a holding company primarily engaged in the insurance business and is therefore subject to regulation by certain states as an insurance holding company. California, Indiana, Minnesota, New Hampshire, New Jersey, New York and all other states have enacted legislation which regulates insurance holding company systems such as the Corporation and its subsidiaries. This legislation generally provides that each insurance company in the system is required to register with the department of insurance of its state of domicile and furnish information concerning the operations of companies within the holding company system which may materially affect the operations, management or financial condition of the insurers within the system. All transactions within a holding company system affecting insurers must be fair and equitable. Notice to the insurance commissioners is required prior to the consummation of transactions affecting the ownership or control of an insurer and of certain material transactions between an insurer and any person in its holding company system and, in addition, certain of such transactions cannot be consummated without the commissioners' prior approval.\nProperty and Casualty Insurance\nThe Property and Casualty Insurance Group is subject to regulation and supervision in the states in which it does business. In general, such regulation is for the protection of policyholders rather than shareholders. The extent of such regulation varies but generally has its source in statutes which delegate regulatory, supervisory and administrative powers to a department of insurance. The regulation, supervision and administration relate to, among other things, the standards of solvency which must be met and maintained; the licensing of insurers and their agents; restrictions on insurance policy terminations; unfair trade practices; the nature of and limitations on investments; premium rates; restrictions on the size of risks which may be insured under a single policy; deposits of securities for the benefit of policyholders; approval of policy forms; periodic examinations of the affairs of insurance companies; annual and other reports required to be filed on the financial condition of companies or for other purposes; limitations on dividends to policyholders and shareholders; and the adequacy of provisions for unearned premiums, unpaid claims and claim adjustment expenses, both reported and unreported, and other liabilities.\nIn December 1993, the National Association of Insurance Commissioners adopted a risk-based capital formula for property and casualty insurance companies. This formula will be used by state regulatory authorities to identify insurance companies which may be undercapitalized and which merit further regulatory attention. The formula prescribes a series of risk measurements to determine a minimum capital amount for an insurance company, based on the profile of the individual company. The ratio of a company's actual policyholders' surplus to its minimum capital requirement will determine whether any state regulatory action is required. The risk-based capital requirement will be applicable to property and casualty insurance companies for the first time as of year-end 1994. Based on preliminary calculations using 1993 data, each member of the Group has more than sufficient capital to meet the risk-based capital requirement.\nRegulatory requirements applying to premium rates vary from state to state, but generally provide that rates not be \"excessive, inadequate or unfairly discriminatory.\" Rates for many lines of business, including automobile and homeowners insurance, are subject to prior regulatory approval in many states. However, in certain states, prior regulatory approval of rates is not required for most lines of insurance which the Group underwrites. Ocean marine insurance rates are exempt from regulation.\nSubject to regulatory requirements, the Group's management determines the prices charged for its policies based on a variety of factors including claim and claim adjustment expense experience, inflation, tax law and rate changes, and anticipated changes in the legal environment, both judicial and legislative. Methods for arriving at rates vary by type of business, exposure assumed and size of risk. Underwriting profitability is affected by the accuracy of these assumptions, by the willingness of insurance regulators to grant increases in those rates which they control and by such other matters as underwriting selectivity and expense control.\nIn all states, insurers authorized to transact certain classes of property and casualty insurance are required to become members of an insolvency fund. In the event of the insolvency of an insurer writing a class of insurance covered by the fund in the state, all members are assessed to pay certain claims against the insolvent insurer. Fund assessments are proportionately based on the members' written premiums for the classes of insurance written by the insolvent insurer. A portion of these assessments is recovered in certain states through premium tax offsets and policyholder surcharges. In 1993, such assessments to the members of the Group amounted to approximately $8 million. The amount of future assessments cannot be reasonably estimated.\nState insurance regulation requires insurers to participate in assigned risk plans, reinsurance facilities and joint underwriting associations, which are mechanisms to provide risks with various basic insurance coverages when they are not available in voluntary markets. Such mechanisms are most prevalent for automobile and workers' compensation insurance, but a majority of states also mandate participation in Fair Plans or Windstorm Plans, which provide basic property coverages. Some states also require insurers to participate in facilities that provide homeowners, crime and medical malpractice insurance. Participation is based upon the amount of a company's voluntary written premiums in a particular state for the classes of insurance involved. These involuntary market plans generally are underpriced and produce unprofitable underwriting results.\nIn several states, insurers, including members of the Group, participate in market assistance plans. Typically, a market assistance plan is voluntary, of limited duration and operates under the supervision of the insurance commissioner to provide assistance to applicants unable to obtain commercial and personal liability and property insurance. The assistance may range from identifying sources where coverage may be obtained to pooling of risks among the participating insurers.\nThe extent of insurance regulation on business outside the United States varies significantly among the countries in which the Group operates. Some countries have minimal regulatory requirements, while others regulate insurers extensively. Foreign insurers in many countries are faced with greater restrictions than domestic competitors. Such restrictions include the need to secure new licenses and compulsory cessions of reinsurance. In certain countries the Group has incorporated insurance subsidiaries locally to improve its position.\nThe property and casualty insurance industry is highly competitive both as to price and service. Members of the Group compete not only with other stock companies but also with mutual companies, other underwriting organizations and alternative risk sharing mechanisms. Some competitors obtain their business at a lower cost through the use of salaried personnel rather than independent agents and brokers. Rates are not uniform for all insurers and vary according to the types of insurers and methods of operation. The Group competes for business not only on the basis of price, but also on the basis of availability of coverage desired by customers and quality of service, including claim adjustment service. The Group's products and services are generally designed to serve specific customer groups or needs and to offer a degree of customization that is of value to the insured.\nThere are approximately 3,900 property and casualty insurance companies in the United States operating independently or in groups and no single company or group is dominant. According to A.M. Best, the Group is the 14th largest United States property and casualty insurance group based on 1992 net premiums written. The relatively large size and underwriting capacity of the Group make available opportunities not available to smaller companies.\nThe property and casualty insurance industry has a history of cyclical performance with successive periods of deterioration and improvement over time. The industry and the Group experienced substantial underwriting losses from 1980 through 1984. Beginning in 1984, the industry and the Group were able to increase prices and tighten underwriting terms. Substantial price increases were achieved in most commercial lines from 1984 through 1986. Price competition increased in the property and casualty marketplace during 1987 and has continued through 1993, particularly in the commercial classes. In 1993, property related business experienced some rate firming in the wake of the unprecedented catastrophes of 1992; however, price increases in casualty lines continued to be difficult to achieve. The Group continues to be selective in the writing of new business and to reinforce the sound relationships with its customers who appreciate the stability, expertise and added value the Group provides. In the personal lines, the regulatory climate for obtaining rate increases continues to be difficult, particularly in the automobile class.\nLife and Health Insurance\nThe members of the Life Group are subject to regulation and supervision in each state in which they do business. Such regulation and supervision is generally of the character indicated in the first two paragraphs under the preceding caption, \"Property and Casualty Insurance.\" The risk-based capital formula for life and health insurers was first effective as of year-end 1993. Each member of the Life Group had more than sufficient capital at December 31, 1993 to meet the risk-based capital requirement.\nThe Life Group operates in a highly competitive industry in which it does not hold a significant market share. The Life Group competes in the personal insurance market not only with other life insurance companies but also with other financial institutions. By offering a full line of products, including interest-sensitive and variable products, both with and without life contingencies, the Life Group meets this competition for its selected customer group. The Life Group also competes in the small group health insurance market by offering competitively priced indemnity products with comprehensive benefits, and a full line of ancillary products including group dental, life and long term disability. In 1993, the Life Group accelerated its involvement in managed care through the\ndevelopment of ChubbHealth Inc., a health maintenance organization that will serve the New York City metropolitan area. ChubbHealth is a joint venture with Healthsource, Inc. ChubbHealth is in the final stages of licensing and will be operational during the first half of 1994.\nMembers of the Life Group also participate in insolvency funds. In 1993, insolvency fund assessments to the members of the Life Group amounted to approximately $2 million.\nThere are approximately 2,000 legal reserve life insurance companies in the United States. According to the National Underwriter, a trade publication, as of January 1, 1993, Chubb Life, Colonial and Sovereign ranked 71st, 151st and 167th, respectively, among such companies based on total insurance in-force.\nLegislative and Judicial Developments\nAlthough the federal government and its regulatory agencies generally do not directly regulate the business of insurance, federal initiatives often have an impact on the business in a variety of ways. Current and proposed federal measures which may significantly affect the insurance business include health care reform initiatives, containment of medical care costs, limitations on health insurance premiums, toxic waste removal and liability measures, financial services deregulation, solvency regulation, employee benefits regulation, automobile safety regulation, the taxation of insurance companies, the tax treatment of insurance products and modification of the limited exemption for the business of insurance from the federal antitrust laws.\nEnacted and contemplated health care reform on both a national and state level are reshaping the health insurance industry. Federal legislation on health insurance is being considered which, if enacted, could create less favorable conditions for the health insurance industry. Significant changes are not expected to become operational for some time. It is currently not possible to predict the long term impact of health care reforms on the Life Group's business.\nInsurance companies are also affected by a variety of state and federal legislative and regulatory measures as well as by decisions of their courts that define and extend the risks and benefits for which insurance is provided. These include redefinitions of risk exposure in areas such as product liability and commercial general liability as well as extension and protection of employee benefits, including pension, workers' compensation and disability benefits.\nRegulatory concerns with insurance risk classification have increased significantly in recent years. There is continuous legislative, regulatory and judicial activity regarding the use of gender in determining premium rates and benefit payments. Also, some states have restricted the use of underwriting criteria related to Human Immunodeficiency Virus related illnesses. The Corporation's insurance subsidiaries have taken steps to limit their underwriting exposures in those jurisdictions that severely restrict underwriting freedom.\nIn July 1992, New York adopted legislation implementing changes in the small employer group health insurance market. The major provisions became effective April 1, 1993. New Jersey adopted similar legislation in November 1992, which generally became effective January 1, 1994. Both laws significantly affect the manner in which the Life Group and other small group health indemnity insurers conduct business. In general, the laws create community based rating, mandate prior approval of rates by the insurance department, require open enrollment periods, limit pre-existing condition exclusions and eliminate health underwriting for insured groups with fewer than 50 covered lives. Several lawsuits have been filed by a number of insurers, including a member of the Life Group, to overturn the New York law and regulations. Certain provisions of the law have been successfully challenged; however, the New York Superintendent of Insurance has appealed such decisions. Approximately 80% of the Life Group's group health insurance premiums are written in New York and New Jersey. The Life Group has taken actions, including redesigning products and restructuring rates and sales commissions, which will allow the Life Group to remain competitive with other small employer group health indemnity insurers in New York and New Jersey.\nIn 1988, voters in California approved Ballot Proposition 103, an insurance reform initiative, which is discussed in Item 7 of this report on page 22.\nIn 1990, New Jersey adopted legislation imposing controls over automobile insurance risk selection, pricing, coverage and termination. The New Jersey statute also applied the state's antitrust laws to automobile insurers, abolished the deficit-ridden Automobile Joint Underwriting Association (JUA), established a Market Transition Facility (MTF) to issue automobile policies until the implementation of an assigned risk mechanism on October 1, 1992 and levied an assessment and surtax on certain insurance coverages to help defray the estimated $3 billion obligation of the JUA. Under the law, insurers must make special rate filings to recoup these added charges from their insurance customers. The MTF has also generated a deficit during its two year existence. Pursuant to statute, the deficit is required to be allocated to automobile insurers, including members of the Group, based on market share. Regulations permit insurers to apply for a surcharge to recover these allocations when paid. In December 1993, the Group entered into an agreement with the Insurance Commissioner to pay approximately $10 million as its share of the then projected deficit of $900 million. The Group's share is subject to adjustment based on any changes in the estimated deficit. The agreement also entitles the Group to a refund or credit of any payments made in the event that litigation commenced by representatives of the insurance industry challenging the Insurance Commissioner's authority to allocate the deficit to insurers is successful. Such litigation is currently pending. In March 1994, the acting Insurance Commissioner announced that the deficit had been reestimated to be approximately $1.3 billion. The Group's share of the reestimated deficit is approximately $15 million.\nITEM 2.","section_1A":"","section_1B":"","section_2":"ITEM 2. PROPERTIES\nThe executive offices of the Corporation and the administrative offices of the Property and Casualty Group are in Warren, New Jersey. The Life Group has its administrative offices in Concord, New Hampshire; Parsippany, New Jersey; Chattanooga, Tennessee and Santa Barbara, California. The Real Estate Group's corporate headquarters is located in Roseland, New Jersey. The insurance subsidiaries maintain zonal and branch offices in major cities throughout the United States, and members of the Property and Casualty Insurance Group also have offices in Canada, Europe, Australia and the Far East. Office facilities are leased with the exception of buildings in Branchburg, New Jersey, Chattanooga and Santa Barbara, and a portion of the Life Group's home office complex in Concord. Management considers its office facilities suitable and adequate for the current level of operations. See Note (11) of the notes to consolidated financial statements incorporated by reference from the Corporation's 1993 Annual Report to Shareholders.\nITEM 3.","section_3":"ITEM 3. LEGAL PROCEEDINGS\nThe Corporation and its subsidiaries are defendants in various lawsuits arising out of their businesses. It is the opinion of management that the final outcome of these matters will not materially affect the consolidated financial position of the registrant.\nInformation regarding certain litigation to which property and casualty insurance subsidiaries of the Corporation are a party is included in Item 7 of this report on pages 23 and 24.\nITEM 4.","section_4":"ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS\nNo matters were submitted to a vote of the shareholders during the last quarter of the year ended December 31, 1993.\nEXECUTIVE OFFICERS OF THE REGISTRANT\n- ---------------\n(a) Ages listed above are as of April 26, 1994.\n(b) Date indicates year first elected or designated as an executive officer.\nAll of the foregoing officers serve at the pleasure of the Board of Directors of the Corporation or listed subsidiary and have been employees of the Corporation or a subsidiary of the Corporation for more than five years except for Randell G. Craig, John J. Degnan and Theresa M. Stone. Mr. Craig joined Chubb Life in 1990 and was previously a vice president with Crown Life Insurance Company. Prior to joining Chubb & Son Inc. in 1990, Mr. Degnan was a senior partner in the New Jersey law firm of Shanley & Fisher. Ms. Stone, who joined the Corporation in 1990, was previously a principal with Morgan Stanley & Co. Incorporated.\nPART II.\nITEM 5.","section_5":"ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS\nIncorporated by reference from the Corporation's 1993 Annual Report to Shareholders, page 67.\nITEM 6.","section_6":"ITEM 6. SELECTED FINANCIAL DATA\nSelected financial data for the five years ended December 31, 1993 are incorporated by reference from the Corporation's 1993 Annual Report to Shareholders, pages 38 and 39.\nITEM 7.","section_7":"ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS\nThe following discussion presents our past results and our expectations for the near term future. The supplementary financial information and consolidated financial statements and related notes, all of which are integral parts of the following analysis of our results and our financial position, are incorporated by reference from the Corporation's 1993 Annual Report to Shareholders, pages 11, 12 and 40 through 61.\nNet income amounted to $324 million in 1993 compared with $617 million in 1992 and $552 million in 1991. Net income in 1993 reflects a net charge of $357 million after taxes related to an agreement for the settlement of asbestos-related litigation and the Corporation's intention to exercise its option to commute an unrelated existing medical malpractice reinsurance agreement. Net income in 1993 also reflects a one-time charge of $20 million for the cumulative effect of adopting new accounting requirements for postretirement benefits other than pensions and for income taxes.\nNet income included realized investment gains after taxes of $152 million, $124 million and $43 million in 1993, 1992 and 1991, respectively. Decisions to sell securities are governed principally by considerations of investment opportunities and tax consequences. Thus, realized investment gains and losses may vary significantly from year to year. As a result, net income may not be indicative of our operating performance for the period.\nPROPERTY AND CASUALTY INSURANCE\nProperty and casualty income was significantly lower in 1993 compared with 1992 and 1991 due to a $675 million increase in loss reserves related to an agreement for the settlement of asbestos-related litigation (the \"$675 million charge\"), which is further described under Loss Reserves. This was partially offset by a $125 million return premium to the property and casualty insurance subsidiaries related to the Corporation's intention to exercise its option to commute an existing medical malpractice reinsurance agreement (the \"$125 million return premium\").\nProperty and casualty income after taxes was $118 million in 1993 compared with $407 million in 1992 and $416 million in 1991. Excluding the effects of the $675 million charge and the $125 million return premium, property and casualty income after taxes was $475 million in 1993. Results for 1993 benefited from lower catastrophe losses and an increase in investment income compared with the prior year. The earnings decrease in 1992 was due to a decline in underwriting results caused by substantial catastrophe losses, including those from Hurricane Andrew, partially offset by an increase in investment income. Catastrophe losses were $89 million in 1993 compared with $175 million in 1992 and $72 million in 1991.\nNet premiums written, excluding the $125 million return premium, amounted to $3.5 billion in 1993, an increase of 9% compared with 1992, which was in turn 4% higher than 1991. Personal coverages accounted for $814 million or 23% of 1993 premiums written, standard commercial coverages for $1,202 million or 34%, specialty commercial coverages for $1,270 million or 36% and reinsurance assumed for $235 million or 7%. The marketplace continued to be competitive, particularly in the commercial classes. Property related business experienced some rate firming in 1993 in the wake of the unprecedented catastrophes of 1992, but price increases in casualty lines continued to be difficult to\nachieve. We have continued to be selective in the writing of new business and to reinforce the sound relationships with our customers who appreciate the stability, expertise and added value we provide.\nDue to the adverse effect of the $675 million charge, underwriting results were extremely unprofitable in 1993. The combined loss and expense ratio, the common measure of underwriting profitability, was 114.8% in 1993 compared with 101.1% in 1992 and 99.5% in 1991. Excluding the effects of the $675 million charge and the $125 million return premium, the combined loss and expense ratio was 99.0% in 1993.\nThe loss ratio was 82.5% in 1993 compared with 66.7% in 1992 and 64.4% in 1991. Excluding the effects of the $675 million charge and the $125 million return premium, the loss ratio was 65.5% in 1993, continuing to reflect the favorable experience resulting from the consistent application of our underwriting standards. Losses from catastrophes represented 2.5, 5.6 and 2.4 percentage points of the loss ratio in 1993, 1992 and 1991, respectively.\nOur expense ratio was 32.3% in 1993 compared with 34.4% in 1992 and 35.1% in 1991. Excluding the effect of the $125 million return premium, the expense ratio was 33.5% in 1993. The improvement from the comparable 1992 ratio was due to lower commissions and to growth in written premiums at a somewhat greater rate than the increase in overhead expenses. The decrease in the expense ratio in 1992 was due to lower commissions. Expenses were reduced by contingent profit sharing accruals of $9 million in each of the three years relating to the medical malpractice reinsurance agreement. We anticipate a similar accrual during 1994. There will be no further profit sharing allowance under this agreement after 1994.\nThe effect of Hurricane Andrew on our underwriting results in 1992 was mitigated to a great extent by our catastrophe reinsurance program. The catastrophe reinsurance market has suffered large losses in recent years. As a result, the reinsurance market's capacity was substantially reduced in 1993 and the cost of available coverages rose significantly. We responded by increasing our retention levels for individual catastrophe losses. The effect of this change on our 1993 underwriting results was not significant due to the absence of severe catastrophe losses.\nPERSONAL INSURANCE\nPremiums from personal insurance increased 2% in 1993 compared with a 2% decrease in 1992. It continues to be difficult to write new homeowners and other non-automobile business due to our disciplined pricing as well as the weakness in residential real estate markets. Personal automobile premiums have remained level over the past three years as modest rate increases have offset a reduction in the number of in force policies, which is consistent with our plan to control our exposure in this class.\nOur personal insurance business produced an underwriting profit in 1993 compared with underwriting losses in 1992 and 1991. All classes contributed to the 1993 improvement. The combined loss and expense ratio was 95.8% in 1993 compared with 104.6% in 1992 and 103.1% in 1991. Underwriting results in each of these years were adversely affected by significant catastrophe losses in the homeowners class, particularly Hurricane Andrew in 1992.\nHomeowners results, excluding the impact of catastrophes, benefited in 1992 and 1993 from disciplined pricing and stable loss frequency and severity. Catastrophe losses for this class represented 13.4 percentage points of the loss ratio for 1993 compared with 25.0 percentage points in 1992 and 13.1 percentage points in 1991. Our automobile business was modestly profitable in 1993 compared with breakeven results in 1992 and unprofitable results in 1991. The improvement in 1993 was due to stable loss frequency and severity while in 1992 it was primarily due to a reduced frequency of losses. Automobile results were adversely affected each year by significant losses from the mandated business which we are required by law to accept for those individuals who cannot obtain coverage in the voluntary market. Other personal coverages, which include insurance for personal valuables and excess liability, were increasingly profitable in 1992 and 1993.\nSTANDARD COMMERCIAL INSURANCE\nExcluding the $125 million return premium discussed below, premiums from standard commercial insurance, which include coverages for multiple peril, casualty and workers' compensation, increased 6% in 1993 compared with 2% in 1992. The competitive market has continued to place significant pressure on rates. Premium growth in 1993 was most significant in the multiple peril class; such growth was due primarily to improved renewal retention as well as exposure growth on such renewals.\nMedical malpractice business, which we stopped writing in 1984, was reinsured effective year-end 1985. Under the provisions of the reinsurance agreement, we may elect to commute the remaining liability from the reinsurer as of December 31, 1995 and receive payment, at that time, of an amount determined by the agreement. In August 1993, the Corporation announced its intention to exercise this election. As the result of the favorable loss payment pattern in the eight years since this business was reinsured, the commutation will result in a return premium to the property and casualty insurance subsidiaries of approximately $125 million, which was recognized in the third quarter of 1993.\nOur standard commercial underwriting results were unprofitable in each of the past three years. Such results were extremely unprofitable in 1993 due to the adverse effect of the $675 million charge. The combined loss and expense ratio was 149.7% in 1993 compared with 105.7% in 1992 and 102.6% in 1991. Excluding the effects of the $675 million charge and the $125 million return premium, the combined loss and expense ratio was 107.6% in 1993.\nCasualty results include the effects of the $675 million charge and the $125 million return premium. Excluding the effects of these items, casualty results were near breakeven in 1993 compared with profitable results in 1992 and 1991. The excess liability component deteriorated somewhat in 1993 but remained profitable due to the relative price adequacy and favorable loss experience in this class. These favorable results were offset in varying degrees in each of the past three years by increases in loss reserves on general liability business written in earlier years, particularly for asbestos-related and toxic waste claims. Results in the automobile component were modestly profitable in each of the last three years.\nMultiple peril results were similarly unprofitable in each of the last three years due to the less than adequate prices. Results in the property component of this business improved in 1993 due to a reduction in the impact of catastrophe losses. This was offset by a deterioration in the liability component that was due to an increase in the frequency and severity of losses. Results in 1992 were adversely affected by higher catastrophe losses, primarily from Hurricane Andrew and the civil disorder in Los Angeles. Catastrophe losses for this class represented 3.6 percentage points of the loss ratio for 1993 compared with 10.1 percentage points in 1992 and 1.3 percentage points in 1991.\nWorkers' compensation results were extremely unprofitable in each of the past three years. Results in our voluntary business have benefited somewhat from rate increases and a reduced frequency of losses. Results in this class have been aggravated each year, but particularly in 1991, by our share of the significant losses incurred by the involuntary pools and mandatory business in which we must participate by law.\nSPECIALTY COMMERCIAL INSURANCE\nPremiums from specialty commercial insurance increased 10% in 1993 compared with 11% in 1992. The growth was due primarily to rate and exposure increases in several of our smaller specialty classes. Price increases for most of our executive protection and financial fidelity coverages were difficult to achieve. Our strategy of working closely with our customers and our ability to differentiate our products has enabled us to retain a large percentage of our business.\nThe specialty commercial business produced substantial underwriting profits in each of the past three years with combined loss and expense ratios of 91.0% in 1993, 90.5% in 1992 and 90.3% in 1991. Our executive protection, financial fidelity and surety results were highly profitable in each year due to favorable loss experience.\nMarine results were profitable in 1993 and 1992 compared with near breakeven results in 1991. Results in several of our smaller specialty classes deteriorated in 1993 compared with the prior two years, due primarily to an increased frequency of large losses.\nREINSURANCE ASSUMED\nPremiums from reinsurance assumed, which is primarily treaty reinsurance assumed from the Sun Alliance Group plc, increased 46% in 1993 compared with 9% in 1992. The growth in 1993 was due to an increase in our participation in the business of Sun Alliance and a firming of rates in Sun Alliance's markets, primarily in the United Kingdom.\nUnderwriting results for this segment, while substantially improved in 1993 due to the firming of rates, have been unprofitable in each of the last three years. The combined loss and expense ratio was 111.8% in 1993 compared with 126.9% in 1992 and 119.3% in 1991. Results in 1992 were adversely affected by our share of the substantial mortgage indemnity insurance losses experienced by Sun Alliance in the United Kingdom. Results in 1991 reflect the adverse effect on Sun Alliance of excessive price competition and a damaging recession in the United Kingdom.\nREGULATORY INITIATIVES\nIn 1988, voters in California approved Ballot Proposition 103, an insurance reform initiative which affects most property and casualty insurers writing business in the state. Approximately 14% of the direct business of the Corporation's property and casualty subsidiaries is written in California. Provisions of Proposition 103 would have required insurers to roll back property and casualty insurance rates for certain lines of business to 20 percent below November 1987 levels and would have required an additional 20 percent reduction in automobile rates by November 1989. In 1989, the California Supreme Court, ruling on the constitutional challenge to Proposition 103, ruled that an insurer is entitled to a fair rate of return.\nThe regulations implementing the rate determination and premium rollback provisions of Proposition 103 continue to evolve. A California Superior Court decision declared invalid and void the rollback and rate review regulations proposed by the elected Insurance Commissioner. The Court decision prohibits the Commissioner from enforcing the regulations as well. The Commissioner has appealed the Superior Court decision to the California Supreme Court and the outcome of that appeal is uncertain. In a separate action, a California Court of Appeal has ruled that Proposition 103 regulations need not be submitted for approval to the California Office of Administrative Law. A petition for review has been filed with the California Supreme Court. There are at present no regulations in force or proposed which establish a final rollback formula.\nNone of our property and casualty subsidiaries have been among the companies thus far ordered to refund premiums for the rollback period. Based on our analysis of the operating results of our property and casualty subsidiaries in the State of California during the rollback period, it is management's belief that it is probable that any final court decision will not result in premium refunds of a material amount by the Corporation's property and casualty subsidiaries.\nLOSS RESERVES\nLoss reserves are our property and casualty subsidiaries' largest liability. At the end of 1993, gross loss reserves totaled $8.2 billion compared with $7.2 billion and $6.6 billion at year-end 1992 and 1991, respectively. Reinsurance recoverable on such loss reserves was $1.8 billion at the end of 1993 compared with $2.0 billion and $1.8 billion at year-end 1992 and 1991, respectively. Loss reserves, net of reinsurance recoverable, increased 22% in 1993, after increases of 11% and 10% in 1992 and 1991, respectively. The significant increase in 1993 was primarily due to the $675 million increase related to the settlement of asbestos-related litigation. Excluding this $675 million, loss reserves increased by 10% in 1993. Substantial reserve growth has occurred each year in those liability coverages, primarily excess\nliability and executive protection, that have delayed loss reporting and extended periods of settlement. These coverages have become a more significant portion of our business in recent years.\nThe process of establishing loss reserves is an imprecise science and reflects significant judgmental factors. In many liability cases, significant periods of time, ranging up to several years or more, may elapse between the occurrence of an insured loss, the reporting of the loss and the settlement of the loss. In fact, approximately 50% of our loss reserves at December 31, 1993 were for claims that had not yet been reported to us, some of which were not yet known to the insured, and for future development on reported claims.\nJudicial decisions and legislative actions continue to broaden liability and policy definitions and to increase the severity of claim payments. As a result of this and other societal and economic developments, the uncertainties inherent in estimating ultimate claim costs on the basis of past experience have increased significantly, further complicating the already difficult loss reserving process.\nThe uncertainties relating to asbestos and toxic waste claims on insurance policies written many years ago are exacerbated by judicial and legislative interpretations of coverage that in some cases have tended to erode the clear and express intent of such policies and in others have expanded theories of liability. The industry is engaged in extensive litigation over these coverage and liability issues and is thus confronted with a continuing uncertainty in its effort to quantify these exposures.\nOur most costly asbestos exposure relates to an insurance policy issued to Fibreboard Corporation by Pacific Indemnity Company in 1956. In 1993, Pacific Indemnity Company, a subsidiary of the Corporation, entered into a global settlement agreement with Continental Casualty Company (a subsidiary of CNA Financial Corporation), Fibreboard Corporation, and attorneys representing claimants against Fibreboard for all future asbestos-related bodily injury claims against Fibreboard. This agreement is subject to court approval. Pursuant to the global settlement agreement, a $1.525 billion trust fund will be established to pay future claims, which are claims that were not filed in court before August 27, 1993. Pacific Indemnity will contribute approximately $538 million to the trust fund and Continental Casualty will contribute the remaining amount. In December 1993, upon execution of the global settlement agreement, Pacific Indemnity and Continental Casualty paid their respective shares into an escrow account. Upon final court approval of the settlement, which could take up to two years or more, the amount in the escrow account, including interest earned thereon, will be transferred to the trust fund.\nAll of the parties have agreed to use their best efforts to seek court approval of the global settlement agreement. Although it is likely that this agreement will be challenged, management is optimistic that the courts will approve the settlement.\nPacific Indemnity and Continental Casualty have reached a separate agreement for the handling of all pending asbestos-related bodily injury claims against Fibreboard. Pacific Indemnity's obligation under this agreement is not expected to exceed $635 million, most of which is expected to be paid over the next two years. The agreement further provides that the total responsibility of both insurers with respect to pending and future asbestos-related bodily injury claims against Fibreboard will be shared between Pacific Indemnity and Continental Casualty on an approximate 35% and 65% basis, respectively.\nPacific Indemnity, Continental Casualty and Fibreboard have entered into a trilateral agreement, subject to court approval, to settle all present and future asbestos-related bodily injury claims resulting from insurance policies that were, or may have been, issued to Fibreboard by the two insurers. The trilateral agreement will be triggered if the global settlement agreement is disapproved. Pacific Indemnity's obligation under the trilateral agreement is therefore similar to, and not duplicative of, that under those agreements described above.\nThe trilateral agreement reaffirms portions of an agreement reached in March 1992 between Pacific Indemnity and Fibreboard. Among other matters, that 1992 agreement eliminates any Pacific Indemnity liability to Fibreboard for asbestos-related property damage claims.\nPacific Indemnity, Continental Casualty and Fibreboard have requested a California Court of Appeal to delay its decisions regarding asbestos-related insurance coverage issues, which are currently before it and involve the three parties exclusively, while the approval of the global settlement is pending in court. Continental Casualty and Pacific Indemnity have dismissed disputes against each other which involved Fibreboard and were in litigation.\nPrior to the settlement, the Corporation's property and casualty subsidiaries had paid $40 million and had existing loss reserves of $545 million to cover a portion of their obligation under these agreements. This amount included $300 million of general liability incurred but not reported (IBNR) reserves which were not previously classified as specific reserves for asbestos claims since it was management's belief that doing so would increase the demands of plaintiffs' attorneys. Additional loss reserves of $675 million were provided in the third quarter of 1993 at the time the settlement was negotiated.\nManagement believes that, as a result of the global settlement agreement and the trilateral agreement, the uncertainty of our exposure with respect to asbestos-related bodily injury claims against Fibreboard has been greatly reduced. However, if both the global settlement agreement and the trilateral agreement are disapproved, there can be no assurance that the loss reserves established for future claims would be sufficient to pay all amounts which ultimately could become payable in respect of future asbestos-related bodily injury claims against Fibreboard.\nOther than Fibreboard, our remaining asbestos exposures are mostly limited to peripheral regional defendants, principally distributors. We continue to receive new asbestos claims and new exposures on existing claims as more peripheral parties are drawn into litigation to replace the now defunct mines and bankrupt manufacturers. The recent claims are complex in that they include significant and yet unresolved liability issues. Further, we still do not know the universe of potential claims.\nHazardous waste sites are another significant potential exposure. Under the existing \"Superfund\" law and similar state statutes, when potentially responsible parties (PRPs) fail to handle the clean-up, regulators will have the work done and then attempt to establish legal liability against the PRPs. The PRPs, with proper government authorization in many instances, disposed of toxic materials at a waste dump site or transported the materials to the site. Most sites have multiple PRPs. As the cost of environmental clean-up continues to grow, PRPs and others continue to file claims with their insurance carriers. Insurance policies issued to PRPs were not intended to cover the clean-up costs of pollution and, in many cases, did not intend to cover the pollution itself. Pollution was not a recognized hazard at the time many of these policies were written. In some cases, however, more recent policies specifically excluded such exposures. Ensuing litigation extends to issues of liability, coverage and other policy provisions.\nThere is great uncertainty involved in estimating our liabilities related to these claims. First, the underlying liabilities of the claimants are extremely difficult to estimate. At any given clean-up site, the allocation of financial responsibility among the governmental authorities and PRPs varies greatly. Second, various courts have addressed liability and coverage issues regarding pollution claims and have reached inconsistent conclusions in their interpretation of several issues. These significant uncertainties are not likely to be resolved in the near future.\nUncertainties also remain as to the Superfund law itself. The law, which is subject to reauthorization in 1994, has generated far more litigation than it has provided clean up. The Clinton Administration has recently unveiled its plan for rewriting the Superfund law. The proposal creates a new Superfund insurance trust and includes a new non-judicial arbitration process aimed at removing Superfund disputes from the courts. It also creates a new tax on commercial insurance companies to be used to fund the trust and to settle Superfund related lawsuits between PRPs and their insurers. It also\nprovides for some relaxation of clean-up standards under certain conditions. We view this proposal as a positive first step. However, it does not yet come close to achieving its essential objectives -- resolving 90% of Superfund claims in litigation at a cost which is fair and affordable to the insurance industry. It is important to note that the proposal does not address non-Superfund site cases. For that reason, it does not cover all existing toxic waste litigation, for example, sites that are subject to state law only.\nLitigation costs continue to escalate, particularly for toxic waste claims. A substantial portion of the funds expended to date has been for legal fees incurred in the prolonged litigation of coverage issues. Many policies provide an indemnity policy limit but an unlimited contract for defense costs. This language in the policy sometimes leads to the payment of defense costs in sizable multiples of the policy limits.\nReserves for asbestos and toxic waste claims cannot be estimated with traditional loss reserving techniques. Case reserves and costs of related litigation have been established where sufficient information has been developed to indicate the involvement of a specific insurance policy. In addition, IBNR reserves have been established to cover additional exposures on both known and unasserted claims. These reserves are continually reviewed and updated. Other than the $675 million increase in loss reserves related to the Fibreboard settlement and the reclassification of $300 million of general liability IBNR reserves as specific reserves for this settlement, the increase in loss reserves relating to asbestos and toxic waste claims was $101 million in 1993 compared with $120 million in 1992 and $88 million in 1991. Further increases in such reserves in 1994 and future years are possible as legal and factual issues concerning these claims are clarified, although the amounts cannot be reasonably estimated.\nDuring 1993, due to the $675 million increase in loss reserves related to the Fibreboard settlement, we experienced overall unfavorable development of $665 million on loss reserves established as of the previous year-end. This compares with favorable development of $28 million and $29 million in 1992 and 1991, respectively. Such deficiency and redundancies were reflected in operating results in these respective years. Excluding the effect of the $675 million increase in loss reserves related to the Fibreboard settlement, we experienced favorable development of $10 million during 1993. Each of the past three years benefited from favorable claim frequency and severity trends for certain liability classes; this was offset each year in varying degrees by increases in loss reserves relating to asbestos and toxic waste claims.\nManagement believes that the aggregate loss reserves of the property and casualty subsidiaries at December 31, 1993 were adequate to cover claims for losses which had occurred, including both those known to us and those yet to be reported. In establishing such reserves, management considers facts currently known and the present state of the law and coverage litigation. However, given the expansion of coverage and liability by the courts and the legislatures in the past and the possibilities of similar interpretations in the future, particularly as they relate to asbestos and toxic waste claims, as well as the uncertainty in determining what scientific standards will be acceptable for measuring hazardous waste site clean-up, additional increases in loss reserves may emerge which may adversely affect results in future periods. This emergence cannot reasonably be estimated.\nINVESTMENTS AND LIQUIDITY\nInvestment income after taxes increased 8% in 1993 compared with 6% in 1992. Growth was primarily due to significant increases in invested assets, which reflected strong cash flow from operations over the period, offset in part by lower yields on new investments. The effective tax rate on our investment income was 14.7% in 1993 compared with 14.3% in 1992 and 15.3% in 1991. The increase in the effective tax rate in 1993 was due to the increase in the federal corporate tax rate from 34% to 35%, offset in part by holding a larger proportion of tax-exempt securities in our investment portfolio. In 1992, the effective tax rate decreased due to our holding a larger proportion of tax-exempt securities in our investment portfolio.\nGenerally, premiums are received by our property and casualty subsidiaries months or even years before we pay the losses under the policies purchased by such premiums. These funds are used first to make current claim and expense payments. The balance is invested to augment the investment income generated by the existing portfolio. Historically, more than sufficient funds have been provided from insurance revenues to pay losses, operating expenses and dividends to the Corporation.\nCash available for investment was approximately $480 million in 1993 compared with $655 million in 1992 and $730 million in 1991. The decrease in 1993 was due to the $538 million paid in December into an escrow account related to the Fibreboard settlement.\nThe main objective of the investment portfolio of the property and casualty companies is to provide maximum support to the insurance underwriting operations. Investment strategies are developed based on many factors including underwriting results and our resulting tax position, fluctuations in interest rates and regulatory requirements.\nIn 1993 and 1992, we invested new cash primarily in tax-exempt bonds. In each year we tried to achieve the appropriate mix in our portfolio to balance both investment and tax strategies. In 1993, we reduced our taxable bond portfolio by approximately $225 million and increased our short-term investments.\nThe property and casualty subsidiaries have consistently invested in high quality marketable securities. Taxable bonds in our domestic portfolio comprise U.S. Treasury, government agency and corporate issues. Approximately 90% of our taxable bonds are either backed by the U.S. government or rated AA or better by Moody's or Standard & Poor's. Of the tax-exempt bonds, practically all are rated A or better, with approximately half rated AAA. Both taxable and tax-exempt bonds have an average maturity of 9 years. Actual maturities could differ from contractual maturities because borrowers may have the right to call or prepay obligations. Common stocks are high quality and readily marketable. Foreign investments are managed to provide liquidity to support insurance operations outside of the United States, while minimizing our exposure to currency fluctuations.\nThe property and casualty subsidiaries maintain sufficient investments in highly liquid, short-term securities at all times to provide for immediate cash needs. At year-end 1993, such investments were at a higher than normal level so that funds are readily available to pay amounts related to the Fibreboard settlement. The Corporation maintains bank credit facilities that are available to respond to unexpected cash demands.\nLIFE AND HEALTH INSURANCE\nLife and health insurance earnings after taxes were $63 million in 1993 compared with $56 million in 1992 and $51 million in 1991. Premiums and policy charges were $801 million in 1993 compared with $689 million in 1992 and $634 million in 1991.\nPERSONAL INSURANCE\nEarnings from personal insurance were $37 million in 1993 compared with $34 million in 1992 and $33 million in 1991. Earnings increased in 1993 primarily due to an increase in the spread between interest earned on our invested assets and interest credited to policyholders on interest-sensitive products. Earnings in 1992 were adversely affected by higher mortality experience, primarily in our universal life and term life products. As the result of various adjustments, the tax rate on personal insurance earnings was 26%, 18% and 28% in 1993, 1992 and 1991, respectively.\nPremiums and policy charges amounted to $240 million in 1993 compared with $214 million in 1992 and $192 million in 1991. New sales of personal insurance as measured by annualized premiums were $88 million in 1993 compared with $71 million in 1992 and $54 million in 1991. Marketing initiatives conducted with our property and casualty insurance distribution system together with the increasing popularity of variable universal life products have contributed to our growth.\nGROUP INSURANCE\nEarnings from group insurance were $26 million in 1993 compared with $22 million in 1992 and $18 million in 1991. Group health rate levels have kept pace with medical costs over this three year period. Group life insurance, which is primarily marketed as an ancillary product to group health insurance, contributed modestly to earnings in each of the last three years.\nPremiums were $561 million in 1993 compared with $475 million in 1992 and $442 million in 1991. New group sales as measured by annualized premiums were $323 million in 1993 compared with $118 million in 1992 and $161 million in 1991.\nApproximately 80% of our group health premiums are written in New York and New Jersey. Both states have adopted legislation which eliminates health insurance underwriting, creates community based rating and limits pre-existing condition exclusions for insured groups with fewer than 50 covered lives. As the result of this legislation, we had anticipated a reduction in premium and sales levels in 1993. However, we were able to offer a competitive product in New York, which is our major market, at a time when several insurers reduced their market share, resulting in substantial increases in premiums and sales. Sales decreased in 1992 due to our adherence to disciplined pricing as well as state legislative actions which disrupted our markets in several jurisdictions.\nWe expect higher levels of competition in the small group market in 1994 and, as a result, anticipate that we will experience a reduction in premium and sales levels.\nEnacted and contemplated health care reform on both a national and state level are reshaping the health insurance industry. Federal legislation on health insurance is being considered which, if enacted, could create less favorable conditions for the health insurance industry. Significant changes are not expected to become operational for some time. It is currently not possible to predict the long term impact of health care reforms on our business.\nWe believe that traditional indemnity plans will be a less viable product option in the long term for both the consumer and the companies selling such plans. Recognizing this, we have accelerated our involvement in managed care and also worked to lessen our dependence on medical premium. The most visible action we have taken in 1993 is the development of ChubbHealth Inc., a health maintenance organization that will serve the New York City metropolitan area. ChubbHealth is in the final stages of licensing and will be operational during the first half of 1994.\nWe have also increased our emphasis on managed care outside New York by offering preferred provider organizations, which are networks of hospitals, clinics and doctors that offer cost savings compared with traditional indemnity plans. Ancillary coverages, like dental, long-term disability and group life, complete the product offering to this market segment.\nINVESTMENTS AND LIQUIDITY\nGross investment income increased 7% in 1993 compared with 8% in 1992. Premium receipts in excess of payments for benefits and expenses, together with investment income, continue to provide cash for new investments. New cash available amounted to $225 million in 1993 compared with $120 million in 1992 and $115 million in 1991. The increase in new cash in 1993 was due to the significant increase in group health premiums and to new single premium sales.\nIn 1993 and 1992, new cash was invested primarily in mortgage-backed securities and corporate bonds. We invest predominantly in investment grade current coupon fixed-income securities with stable cash flow characteristics and maturities which are consistent with life insurance reserve requirements. Approximately 95% are investment grade and nearly half are rated AAA. We maintain sufficient funds in short-term securities to meet unusual needs for cash.\nREAL ESTATE DEVELOPMENT\nReal estate operations resulted in a loss after taxes of $2 million in 1993 compared with income of $10 million in 1992 and $25 million in 1991. Earnings were adversely affected by progressively higher portions of interest costs being charged directly to expense rather than being capitalized and by provisions each year for possible uncollectible receivables related to mortgages. Results were also adversely affected in 1993 by a $3 million tax charge related to the federal corporate tax rate increase. Revenues were $161 million in 1993 compared with $150 million in 1992 and $141 million in 1991.\nOur commercial real estate activities centered around acquiring suburban, multi-site land parcels in locations considered prime for office development, and then developing the land in progressive stages. We expanded our activities to include a few metropolitan office building projects. We develop real estate properties ourselves rather than through third party developers. We are distinguished from most other real estate developers in that we coordinate all phases of the development process from concept to completion. Upon completion of development, the properties may be either owned and operated for our own account or sold to third parties. We directly manage virtually all of the properties which we either own or have sold and retained interests in through secured loans.\nOur continuing investment interests in joint ventures generally consist of the ownership and lease of the underlying land and the management and operation of the buildings. Our agreements with joint ventures to manage all aspects of the ventured properties, including debt structures, tenant leasing, and building improvements and maintenance, have put us in a strong position to protect our ongoing financial interests in the current difficult real estate environment.\nThe real estate industry continues to suffer from a significantly reduced demand for real estate investment. For the past several years, the supply of available office space has exceeded the demand. The slowdown in the economy exacerbated the problem as businesses consolidated their facilities, increasing the supply of available space. While selected real estate markets have experienced increases in leasing activity and some stability in rental rates, the oversupply of available office space for lease in most markets and the resultant depressed rental rates will continue to cause downward pressure on the earnings of the real estate industry.\nIn light of the current real estate market conditions, we have curtailed our construction of new office buildings in recent years. In 1991 and 1992, we completed high-rise office buildings in Washington, D.C. and New Jersey, which are currently approximately 95% leased. Also, in 1991, we acquired a 1.2 million square foot office building, which is 87% leased, and adjacent land in Dallas for approximately $200 million, which includes a $114 million assumed mortgage.\nIn 1993, we focused on completing and leasing newly-constructed facilities and maintaining established properties at high occupancy levels. We also commenced construction on three new suburban office buildings in locations where there are indications of tenant interest. Other than this new construction, development activities consist almost exclusively of preconstruction type efforts such as site planning, zoning and similar activities. As a consequence, we expect revenues for the next several years to come from ongoing income from owned properties and from management and financing activities related to previously sold properties or properties held in joint ventures. This does not preclude us from entertaining proposals to purchase our properties when such offers provide a reasonable return.\nOur vacancy rates are better than the average in substantially all markets in which we operate. We have been successful in both retaining existing tenants and securing new ones and have not had significant credit problems with tenants. During 1993, a total of 1,710,000 square feet was leased compared with 1,790,000 square feet in 1992 and 1,402,000 square feet in 1991. At December 31, 1993, we owned or had interests in 10,915,000 square feet of office and industrial space. Our vacancy rate was 10% at year-end 1993 compared with 14% at year-end 1992 and 17% at year-end 1991. The high vacancy rate in 1991 was the result of several multi-year projects being completed in a difficult leasing market.\nThe decreases in the vacancy rate in 1992 and 1993 were due to our ability to market a significant amount of the new space which became available in 1991.\nIn certain markets, renewing leases in established buildings has been difficult as newly-constructed space is available nearby at similar rates. While we have experienced significant leasing activity over the past two years, we have had to enter into multiple year leases at depressed market rental rates. This, together with the lack of construction and transaction based activity, will place continued pressure on our real estate earnings for the next several years. We expect that in 1994 a larger portion of interest costs will be charged directly to expense as a result of several recently completed projects becoming fully operational during 1993 and development activities being curtailed at some of our office parks.\nUltimate net realizable value for real estate assets is determined based on our ability to fully recover costs through a future revenue stream supported principally by rental revenues. In many instances, there currently is not an active market for commercial real estate. Therefore, the prices which might be realized if we were forced to liquidate such properties on an immediate sale basis would probably be less than the carrying values. In light of current market conditions and our intent and ability to hold properties for the long term, our primary focus is to ensure that we can recover our costs through ownership and operation rather than sale.\nIndividual buildings and development sites are analyzed on a continuing basis with estimates made of both additional costs to be incurred to complete development where necessary and the estimated revenues and operating costs of the property in the future. The time value of money is not considered in assessing revenues versus costs. Revenue assumptions take into account local market conditions with respect to the lease-up periods, occupancy rates, and current and future construction activity. There are uncertainties as to the actual realization of the assumptions relative to future revenues and future costs. However, management does not believe there is any permanent impairment in real estate carrying values.\nThe loans receivable issued in connection with our joint venture activities include primarily purchase money mortgages. Such loans, which represent only 2% of consolidated assets, are generally collateralized by buildings and land. The ultimate collectibility of such loans, of which no significant amounts are due in the near term, is evaluated continuously and appropriate reserves established. Our agreements to manage all aspects of the ventured properties have played a significant role in enabling us to control potential collectibility issues related to these receivables. We have had no significant foreclosures or in-substance foreclosures. The reserve for potential uncollectible amounts was increased by $22 million in both 1993 and 1992 and $9 million in 1991, principally related to loans on selected properties currently experiencing high vacancy rates. Management believes the reserve at December 31, 1993 adequately reflects the current condition of the portfolio; however, if conditions in the real estate market do not improve, additional reserves may be required.\nThe fair value of these loans receivable is estimated through the use of valuation techniques which consider the net cash flows of the properties serving as the underlying collateral for the loans. The fair value of the loans represents a point-in-time estimate that is not relevant in predicting future earnings or cash flows related to such loans. The difference between the aggregate fair value of $394 million and the carrying value of $425 million at December 31, 1993 is not expected to be realized as we intend to hold the loan portfolio to maturity.\nOur Florida residential development activities continued during 1993. All but nine units at a 181 unit mid-rise condominium project completed in 1991 have been sold. We completed construction of a 120 unit oceanfront high-rise condominium during 1992. At year-end 1993, 103 units were sold. Construction of a 104 unit mid-rise condominium project commenced in 1993 with 41 units already under contract.\nReal estate activities are funded with short-term credit instruments, primarily commercial paper, as well as term loans and debt issued by the Corporation and Chubb Capital Corporation, a subsidiary\nof the Corporation. The weighted average interest cost on short-term credit instruments approximated 3.3% in 1993 compared with 4.6% in 1992 and 7.2% in 1991. The interest rates on term loans ranged from 4.3% to 9.9% in 1993.\nCash from operations combined with the ability to utilize the Corporation's commercial paper facility will provide sufficient funds for 1994. Term loans and mortgages which become due in 1994 are expected in most cases to be refinanced under similar terms.\nCORPORATE\nThe Corporation called for redemption on April 15, 1991 the $200 million of 5 1\/2% convertible notes that were due in 1993. Prior to the redemption date, all but $85,000 of the notes were converted, resulting in the issuance of 4,687,123 shares of the Corporation's common stock.\nThe Corporation has outstanding $150 million of unsecured 8 3\/4% notes due in 1999. In each of the years 1995 through 1998, the Corporation will pay as a mandatory sinking fund an amount sufficient to redeem $30 million of principal.\nChubb Capital has outstanding $100 million of unsecured 8 5\/8% notes due in 1995, which are guaranteed by the Corporation. The proceeds have been used to support our real estate operations.\nIn May 1991, Chubb Capital sold in the Eurodollar market $250 million of 6% subordinated notes due in 1998. The notes are guaranteed by the Corporation and exchangeable into its common stock. Of the proceeds, $150 million has been used to support our real estate operations.\nIn February 1993, Chubb Capital sold $150 million of 6% notes due in 1998 and $100 million of 6 7\/8% notes due in 2003. The notes are guaranteed by the Corporation. A substantial portion of the proceeds has been used to repay certain short-term debt and term loans incurred to support the real estate operations.\nIn November 1991, the Corporation entered into a revolving credit agreement with a group of banks that provides for unsecured borrowings of up to $300 million. There have been no borrowings under this agreement. The agreement terminates on November 30, 1994 at which time any loans then outstanding become payable. Management anticipates that a similar credit agreement will replace this agreement.\nIn November 1992, the Corporation and Sun Alliance partially reduced their investment in the shares of each other. The proceeds from our sale of Sun Alliance shares were approximately $230 million. The sales have not affected the ongoing business relationship between the Corporation's property and casualty subsidiaries and Sun Alliance.\nInvestment income earned on corporate invested assets and interest expense not allocable to the operating subsidiaries are reflected in the corporate segment. Corporate income after taxes was $14 million in 1993 compared with $20 million in 1992 and $16 million in 1991.\nINVESTMENT GAINS AND LOSSES\nInvestment gains were realized by the Corporation and its insurance subsidiaries in 1993, 1992 and 1991. Such gains before taxes consisted of the following:\nA restructuring of the equity security portfolio begun in 1992 resulted in significant realized investment gains in 1992 and 1993. In addition, approximately $75 million of investment gains were realized in 1992 from the Corporation's partial sale of its investment in Sun Alliance.\nEquity securities are reported in our financial statements at market value. The unrealized appreciation on such securities is reflected as a separate component of shareholders' equity, net of applicable deferred income tax.\nThe Corporation and its insurance subsidiaries purchase long-term fixed maturity securities which have income, duration and credit quality characteristics which fit the long-range strategic plans of our businesses. We monitor the mix of taxable and tax-exempt fixed maturity securities in order to maximize after-tax returns.\nThose fixed maturity investments which may be sold prior to maturity to support our investment strategies, such as in response to changes in interest rates and the yield curve or to maximize after-tax returns, are considered available for sale and carried at the lower of the aggregate amortized cost or market value. At each of the last three year-ends, the aggregate market value of these securities has exceeded their amortized cost. Those fixed maturities which the Corporation and its insurance subsidiaries have the ability and intent to hold to maturity are considered held for investment and carried at amortized cost.\nA primary reason for the sale of fixed maturities in each of the last three years has been to improve our after-tax portfolio yield without sacrificing quality, where market opportunities have existed to do so. Declining interest rates and the resulting appreciation of our fixed maturity securities made it difficult to adjust our portfolio during those years without realizing significant investment gains. The significantly higher gains in 1993 were due to the sale of fixed maturities in the first half of the year as part of the realignment of our portfolio and in the latter part of the year to realize gains to partially offset the reduction of statutory surplus of the property and casualty subsidiaries resulting from the decrease in earnings related to the Fibreboard settlement.\nAt December 31, 1993, 1992 and 1991, the unrealized market appreciation of our fixed maturity portfolio was $736 million, $523 million and $490 million, respectively. Such unrealized appreciation was not reflected in the consolidated financial statements. The 1993 amount comprises fixed maturities with gross unrealized appreciation aggregating $771 million and those with gross unrealized depreciation aggregating $35 million.\nFEDERAL INCOME TAXES\nThe Omnibus Budget Reconciliation Act of 1993 was enacted in August 1993. One provision of the Act increased the federal corporate tax rate from 34% to 35%, retroactive to January 1, 1993. In addition to applying the higher tax rate to pre-tax income for 1993, the federal income tax provision for 1993 reflects the effect of the rate increase on deferred income tax assets and liabilities. This effect was a tax benefit of approximately $5 million. The effect on the various business segments was as follows:\nIn 1992, property and casualty underwriting income after taxes included a benefit of $12 million resulting from a reversal of income tax reserves based on a settlement of prior years' taxes. Life and\nhealth insurance income after taxes included similar benefits of $5 million and $3 million in 1993 and 1992, respectively.\nThe Tax Reform Act of 1986 requires the property and casualty subsidiaries to discount loss reserves for tax purposes as of January 1, 1987 and provides that the initial discount on such loss reserves be excluded from taxable income. The benefit of this exclusion amounted to $7 million in 1991 and $6 million in 1992. There was no similar benefit in 1993 since, for accounting purposes, the remaining \"fresh start\" benefit was recognized effective January 1, 1993 as part of the cumulative effect of the change in accounting principle upon the Corporation's adoption of the new accounting requirements for income taxes.\nThe Corporation's federal income tax payments for 1991 and 1992 were $160 million and $175 million, respectively. Tax payments for 1993 are expected to approximate only $80 million due to the substantial underwriting loss resulting from the increase in loss reserves related to the settlement of asbestos-related litigation.\nNEW ACCOUNTING PRONOUNCEMENTS\nIn 1993, the Corporation adopted Statement of Financial Accounting Standards (SFAS) No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions, SFAS No. 109, Accounting for Income Taxes, and SFAS No. 113, Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts. These pronouncements and their effect on the consolidated financial statements are discussed in Note (2) of the Notes to Consolidated Financial Statements incorporated by reference from the Corporation's 1993 Annual Report to Shareholders.\nThe Financial Accounting Standards Board has also issued SFAS No. 114, Accounting by Creditors for Impairment of a Loan, which is effective in 1995, and SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, which is effective in 1994. These pronouncements, which will affect the Corporation's consolidated financial statements when adopted, are discussed in Note (1)(o) of the Notes to Consolidated Financial Statements incorporated by reference from the Corporation's 1993 Annual Report to Shareholders.\nSUBSEQUENT EVENTS\nIn January 1994, the Los Angeles area experienced a major earthquake. Also, in January 1994, the Eastern and Midwestern parts of the United States experienced severe winter storms. Losses from these catastrophes are estimated to amount to $125 million net of reinsurance, including $90 million from the earthquake and $35 million from the storm activity. The effect of these catastrophe losses on after-tax earnings is expected to approximate $81 million, which will be reflected in the first quarter of 1994. Additional claims may be reported which could increase the estimate.\nITEM 8.","section_7A":"","section_8":"ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA\nConsolidated financial statements of the Corporation at December 31, 1993 and 1992 and for each of the three years in the period ended December 31, 1993 and the Report of Independent Auditors thereon and the Corporation's unaudited quarterly financial data for the two-year period ended December 31, 1993 are incorporated by reference from the Corporation's 1993 Annual Report to Shareholders, pages 40 through 63.\nITEM 9.","section_9":"ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE\nNone.\nPART III.\nITEM 10.","section_9A":"","section_9B":"","section_10":"ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT\nInformation regarding the Corporation's Directors is incorporated by reference from the Corporation's definitive Proxy Statement for the Annual Meeting of Shareholders on April 26, 1994, pages 2 through 5. Information regarding the executive officers is included in Part I of this report.\nITEM 11.","section_11":"ITEM 11. EXECUTIVE COMPENSATION\nIncorporated by reference from the Corporation's definitive Proxy Statement for the Annual Meeting of Shareholders on April 26, 1994, pages 14 through 30 other than the Performance Graph and the Organization and Compensation Committee Report appearing on pages 19 through 26.\nITEM 12.","section_12":"ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT\nIncorporated by reference from the Corporation's definitive Proxy Statement for the Annual Meeting of Shareholders on April 26, 1994, pages 6 through 9.\nITEM 13.","section_13":"ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS\nIncorporated by reference from the Corporation's definitive Proxy Statement for the Annual Meeting of Shareholders on April 26, 1994, pages 30 through 32.\nPART IV.\nITEM 14.","section_14":"ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K\n(a) 1. FINANCIAL STATEMENTS AND 2. SCHEDULES\nThe financial statements and schedules listed in the accompanying index to financial statements and financial statement schedules are filed as part of this report.\n3. EXHIBITS\nThe exhibits listed in the accompanying index to exhibits are filed as part of this report.\n(b) REPORTS ON FORM 8-K\nThere were no reports on Form 8-K filed during the last quarter of the period covered by this report.\nFor the purposes of complying with the amendments to the rules governing Form S-8 (effective July 13, 1990) under the Securities Act of 1933, the undersigned registrant hereby undertakes as follows, which undertaking shall be incorporated by reference into registrant's Registration Statements on Form S-8 Nos. 33-12208 (filed June 12, 1987), 33-29185 (filed June 7, 1989), and 33-30020 (filed July 18, 1989): Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.\nSIGNATURES\nPURSUANT 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.\nTHE CHUBB CORPORATION (REGISTRANT) March 4, 1994\nBy \/s\/ DEAN R. O'HARE ---------------------------- (DEAN R. O'HARE, CHAIRMAN)\nPURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED:\nTHE CHUBB CORPORATION\nINDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES COVERED BY REPORT OF INDEPENDENT AUDITORS\n(ITEM 14(A))\nAll other schedules are omitted since the required information is not present or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the financial statements and notes thereto.\nThe consolidated financial statements and supplementary information listed in the above index, which are included in the Annual Report to Shareholders of The Chubb Corporation for the year ended December 31, 1993, are hereby incorporated by reference.\nCONSENT OF INDEPENDENT AUDITORS\nWe consent to the incorporation by reference in this Annual Report (Form 10-K) of The Chubb Corporation of our report dated February 25, 1994, included in the 1993 Annual Report to Shareholders of The Chubb Corporation.\nOur audits also included the financial statement schedules of The Chubb Corporation listed in Item 14(a). These schedules are the responsibility of the Corporation'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.\nWe also consent to the incorporation by reference in the Registration Statements (Form S-8: No. 33-12208, No. 33-29185, No. 33-30020, No. 33-49230 and No. 33-49232) of our report dated February 25, 1994, with respect to the consolidated financial statements incorporated herein by reference, and our report included in the preceding paragraph with respect to the financial statement schedules included in this Annual Report (Form 10-K) of The Chubb Corporation.\n\/s\/ ERNST & YOUNG New York, New York\nMarch 28, 1994\nTHE CHUBB CORPORATION\nSCHEDULE I\nCONSOLIDATED SUMMARY OF INVESTMENTS -- OTHER THAN INVESTMENTS IN RELATED PARTIES\n(IN THOUSANDS)\nDECEMBER 31, 1993\nTHE CHUBB CORPORATION\nSCHEDULE III\nCONDENSED FINANCIAL INFORMATION OF REGISTRANT\nBALANCE SHEETS -- PARENT COMPANY ONLY\n(IN THOUSANDS)\nDECEMBER 31, 1993 AND 1992\nThe condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto in the Corporation's 1993 Annual Report to Shareholders.\nTHE CHUBB CORPORATION\nSCHEDULE III\n(CONTINUED)\nCONDENSED FINANCIAL INFORMATION OF REGISTRANT\nSTATEMENTS OF INCOME -- PARENT COMPANY ONLY\n(IN THOUSANDS)\nYEARS ENDED DECEMBER 31, 1993, 1992 AND 1991\nThe Corporation and its domestic subsidiaries file a consolidated federal income tax return. The Corporation's federal income tax represents its share of the consolidated federal income tax under the Corporation's tax allocation agreements with its subsidiaries.\nThe condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto in the Corporation's 1993 Annual Report to Shareholders.\nTHE CHUBB CORPORATION\nSCHEDULE III\n(CONTINUED)\nCONDENSED FINANCIAL INFORMATION OF REGISTRANT\nSTATEMENTS OF CASH FLOWS -- PARENT COMPANY ONLY\n(IN THOUSANDS)\nYEARS ENDED DECEMBER 31, 1993, 1992 AND 1991\nIn 1992, $401,634,000 of fixed maturities and equity securities was contributed at cost to a consolidated investment company subsidiary of the Corporation. In 1991, $199,915,000 of long term debt was converted into 4,687,123 shares of common stock of the Corporation. These noncash transactions have been excluded from the statements of cash flows.\nThe condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto in the Corporation's 1993 Annual Report to Shareholders.\nTHE CHUBB CORPORATION\nSCHEDULE V\nCONSOLIDATED SUPPLEMENTARY INSURANCE INFORMATION\n(IN THOUSANDS)\n* Property and casualty assets are available for payment of claims and expenses for all classes of business; therefore, such assets and the related investment income have not been identified with specific groupings of classes of business.\nInformation as of December 31, 1993, 1992 and 1991 and for the years then ended is presented net of related reinsurance amounts.\nTHE CHUBB CORPORATION\nSCHEDULE VI\nCONSOLIDATED REINSURANCE\n(IN THOUSANDS)\nTHE CHUBB CORPORATION\nSCHEDULE IX\nCONSOLIDATED SHORT TERM BORROWINGS\n(IN THOUSANDS)\n- ------------------\n(a) The maximum and average amounts outstanding during the period were based on month end balances.\n(b) The weighted average interest rate during the period was computed by dividing the actual interest cost by the average amount outstanding during the period.\nNotes payable to banks are obligations under revolving credit arrangements. Commercial paper and notes payable generally have terms ranging from thirty days to one year and are at interest rates generally extended to prime borrowers.\nTHE CHUBB CORPORATION\nSCHEDULE X\nCONSOLIDATED SUPPLEMENTARY PROPERTY AND CASUALTY INSURANCE INFORMATION\n(IN THOUSANDS)\nYEARS ENDED DECEMBER 31, 1993, 1992 AND 1991\nInformation for the years ended December 31, 1993, 1992 and 1991 is presented net of related reinsurance amounts.\nTHE CHUBB CORPORATION\nEXHIBITS\n(ITEM 14(A))","section_15":""}
{"filename":"73960_1993.txt","cik":"73960","year":"1993","section_1":"ITEM 1. BUSINESS\nThe Company\nOhio Edison Company (Company) was organized under the laws of the State of Ohio in 1930 and owns property and does business as an electric public utility in that state. The Company also has ownership interests in certain generating facilities located in the Commonwealth of Pennsylvania.\nThe Company furnishes electric service to communities in a 7,500 square mile area of central and northeastern Ohio. It also provides transmission services and electric energy for resale to certain municipalities in the Company's service area and transmission services to certain rural cooperatives. The Company also engages in the sale, purchase and interchange of electric energy with other electric companies. The area it serves has a population of approximately 2,400,000.\nThe Company owns all of the outstanding common stock of Pennsylvania Power Company (Penn Power), a Pennsylvania corporation, which furnishes electric service to communities in a 1,500 square mile area of western Pennsylvania. Penn Power also provides transmission services and electric energy for resale to certain municipalities in Pennsylvania. The area served by Penn Power has a population of approximately 360,000.\nCentral Area Power Coordination Group (CAPCO)\nIn September 1967, the CAPCO companies, consisting of the Company, Penn Power, The Cleveland Electric Illuminating Company (CEI), Duquesne Light Company (Duquesne) and The Toledo Edison Company (Toledo), announced a program for joint development of power generation and transmission facilities. Included in the program are Unit 7 at the W. H. Sammis Plant, Units 1, 2 and 3 at the Bruce Mansfield Plant, Units 1 and 2 at the Beaver Valley Power Station and Unit 1 at the Perry Nuclear Power Plant, each now in service. Perry Unit 2, a CAPCO nuclear generating unit whose construction had been previously suspended, has been abandoned by the CAPCO companies (see \"Perry Unit 2\").\nArrangements Among the CAPCO Companies\nThe present CAPCO Basic Operating Agreement provides, among other things, for coordinated maintenance responsibilities among the CAPCO companies, a limited and qualified mutual backup arrangement in the event of outage of CAPCO units and certain capacity and energy transactions among the CAPCO companies.\nThe agreements among the CAPCO companies generally treat the Company and Penn Power (Companies) as a single system as between them and the other three CAPCO companies, but, in agreements between the CAPCO companies and others, all five companies are treated as separate entities. Subject to any rights that might arise among the CAPCO companies as such, each member company, severally and not jointly, is obligated to pay only its proportionate share of the costs associated with the facilities and the cost of required fuel. The CAPCO companies have agreed that any modification of their arrangements or of their agreed-upon programs requires their unanimous consent. Should any member become unable to continue to pay its share of the costs associated with a CAPCO facility,\neach of the other CAPCO companies could be adversely affected in varying degrees because it may become necessary for the remaining members to assume such costs for the account of the defaulting member.\nReliance on the CAPCO Companies\nUnder the agreements governing the construction and operation of CAPCO generating units, the responsibility is assigned to a specific CAPCO company. CEI has such responsibilities for Perry Unit 1 and Duquesne is responsible for Beaver Valley Units 1 and 2. The Company monitors activities in connection with these units but must rely to a significant degree on the operating company for necessary information. The Company in its oversight role as a practical matter cannot be privy to every detail; it is the operating company that must directly supervise activities and then exercise its reporting responsibilities to the co-owners. The Company critically reviews the information given to it by the operating company, but it cannot be absolutely certain that things that it would have considered significant have been reported or that it would always have reached exactly the same conclusion about matters that are reported. In addition, the time that is necessarily part of the compiling and analyzing process creates a lag between the occurrence of events and the time the Company becomes aware of their significance. The Companies have similar responsibilities to the other CAPCO companies with respect to W.H. Sammis Unit 7 and Bruce Mansfield Units 1, 2 and 3.\nPerry Unit 2\nIn December 1993, the Companies announced that they will not participate in further construction of Perry Unit 2 and have abandoned Perry Unit 2 as a possible electric generating plant. The Company determined that recovery from customers of its Perry Unit 2 investment is not probable, resulting in a $366,377,000 write-off of its investment in 1993. Penn Power expects its Perry Unit 2 investment to be recoverable from its customers. However, due to the anticipated delay in commencement of recovery and taking into account the expected rate treatment, Penn Power recognized an impairment to its Perry Unit 2 investment of $24,458,000 in 1993. As a result, net income for the year ended December 31, 1993, was reduced by $248,743,000 ($1.63 per share of common stock).\nFinancing and Construction\nThe Companies access the capital markets from time to time to provide funds for their construction programs and to refinance existing securities.\nFuture Financing\nThe Companies' total construction costs, excluding nuclear fuel, amounted to approximately $239,000,000 in 1993. Such costs included expenditures for the betterment of existing facilities and for the construction of transmission lines, distribution lines, substations and other additions. For the years 1994-1998, such construction costs are estimated to be approximately $1,000,000,000, of which approximately $235,000,000 is applicable to 1994. See \"Environmental Matters\" below with regard to possible environment-related expenditures not included in this estimate.\nDuring the 1994-1998 period, maturities of, and sinking fund requirements for, long-term debt and preferred stock will require expenditures by the Companies of approximately $1,389,000,000, of which approximately $444,000,000 is applicable to 1994 (including $50,000,000\nof preferred stock optionally redeemed in the first quarter of 1994). All or a major portion of maturing debt is expected to be refunded at or prior to maturity.\nNuclear fuel purchases are financed through OES Fuel, Incorporated (a wholly owned subsidiary of the Company) commercial paper and loans, both of which are supported by a $325,000,000 long-term bank credit agreement. Investments for additional nuclear fuel during the 1994-1998 period are estimated to be approximately $204,000,000, of which approximately $45,000,000 applies to 1994. During the same periods, the Companies' nuclear fuel investments are expected to be reduced by approximately $261,000,000 and $64,000,000, respectively, as the nuclear fuel is consumed. Also, the Companies have operating lease commitments of approximately $547,000,000 for the 1994-1998 period, of which approximately $102,000,000 relates to 1994. The Companies recover the cost of nuclear fuel consumed and operating leases through their electric rates.\nShort-term borrowings of $104,126,000 at December 31, 1993 represented OES Capital, Incorporated (a wholly owned subsidiary of the Company) debt, which is secured by customer accounts receivable. OES Capital can borrow up to $120,000,000 under a receivables financing agreement at rates based on certain bank commercial paper. The Companies also had $85,000,000 of unused short-term bank lines of credit as of December 31, 1993. In addition, $132,000,000 of bank facilities that provide for borrowings on a short-term basis at the banks' discretion were available. OES Fuel had approximately $193,000,000 of unused borrowing capability at the end of 1993 which was available for reloan to the Company.\nBased on their present plans, the Companies may provide for their cash requirements in 1994 from: funds to be received from operations; available cash and temporary cash investments (approximately $160,000,000 as of December 31, 1993); the issuance of long-term debt and funds available under short-term bank credit arrangements.\nThe Companies currently expect that, for the period 1994-1998, external financings may be necessary to provide a portion of their cash requirements. The extent and type of future financings will depend on the need for external funds as well as market conditions, the maintenance of an appropriate capital structure and the ability of the Companies to comply with coverage requirements in order to issue first mortgage bonds and preferred stock. The Companies will continue to monitor financial market conditions and, where appropriate, may take advantage of opportunities to refund outstanding high cost debt and preferred stock to the extent that their financial resources permit.\nExcept as otherwise indicated, the foregoing statements with respect to construction expenditures are based on estimates made in February 1994 and are subject to change based upon the progress of and changes required in the construction program, including periodic reviews of costs, changing customer requirements for electric energy, the level of earnings and resulting changes in applicable coverage requirements, conditions in capital markets, changes in regulatory requirements and other relevant factors.\nCoverage Requirements\nThe coverage requirements contained in the first mortgage indentures under which the Companies issue first mortgage bonds provide that, except for certain refunding purposes, the Companies may not issue first mortgage bonds unless applicable net earnings (before income taxes), calculated as provided in the indentures, for any period of twelve consecutive months within the fifteen calendar months preceding the month in which such additional bonds are issued, are at least twice annual\ninterest requirements on outstanding first mortgage bonds, including those being issued. The Companies' respective articles of incorporation prohibit the sale of preferred stock unless applicable gross income, calculated as provided in the articles of incorporation, is equal to at least 1-1\/2 times the aggregate of the annual interest requirements on indebtedness outstanding immediately thereafter plus the annual dividend requirements on all preferred stock which will be outstanding at that time.\nWith respect to the issuance of first mortgage bonds under the Company's first mortgage indenture, the availability of property additions is more restrictive than the earnings test at the present time and would limit the amount of first mortgage bonds issuable against property additions to $404,000,000. The Company is currently able to issue $868,000,000 principal amount of first mortgage bonds against previously retired bonds without the need to meet the above restrictions. The Company could issue in excess of $1,000,000,000 of additional preferred stock before the end of the first quarter of 1994. For the remainder of 1994, however, the earnings coverage test contained in the Company's charter would preclude the issuance of additional preferred stock due to inclusion of the Perry Unit 2 write-off in the earnings test. Additional preferred stock capability is expected to be restored in January 1995. If the Company were to issue additional debt at or prior to the time it issued preferred stock, the amount of preferred stock which would be issuable would be reduced.\nTo the extent that coverage requirements or market conditions restrict the Companies' abilities to issue desired amounts of first mortgage bonds or preferred stock, the Companies may seek other methods of financing. Such financings could include the sale of common stock and preference stock in amounts greater than otherwise planned, or of such other types of securities as might be authorized by applicable regulatory authorities which would not otherwise be sold and could result in annual interest charges and\/or dividend requirements in excess of those that would otherwise be incurred. In addition, the Companies might, to the extent possible, reduce their expenditures for construction and other purposes.\nUtility Regulation\nThe Companies are subject to broad regulation as to rates and other matters by the Public Utilities Commission of Ohio (PUCO) and the Pennsylvania Public Utility Commission (PPUC). With respect to their wholesale and interstate electric operations and rates, the Companies are subject to regulation, including regulation of their accounting policies and practices, by the Federal Energy Regulatory Commission (FERC). Under Ohio law, municipalities may regulate rates, subject to appeal to the PUCO if not acceptable to the utility.\nIn 1986, a law was passed which extended the jurisdiction of the PUCO to nonutility affiliates of holding companies exempt under Section 3(a)(1) and 3(a)(2) of the Public Utility Holding Company Act of 1935 (1935 Act) to the extent that the activities of such affiliates affect or relate to the cost of providing electric utility service in Ohio. The law, among other things, requires PUCO approval of investments in, or the transfer of assets to, nonutility affiliates. Investments in such affiliates are limited to 15% of the aggregate capitalization of the holding company on a consolidated basis. The Company is an exempt holding company under Section 3(a)(2) of the 1935 Act, but the law has not had any effect on its operations as they are currently conducted.\nThe Energy Policy Act of 1992 (1992 Act) amends portions of the 1935 Act, providing independent power producers and other nonregulated generating facilities easier entry into the electric generation markets. The 1992 Act also amends portions of the Federal Power Act, authorizing\nthe FERC, under certain circumstances, to mandate access to utility-owned transmission facilities. The Companies are currently unable to predict the ultimate effects on their operations resulting from this legislation.\nIn February 1994, a bill was introduced in the Ohio legislature which would amend Ohio law to require utilities to provide transmission access to enable others to serve retail customers located in the service territory of the transmitting utility. Access would not be required however, if the transmission access requested would impair the ability of the transmitting utility to provide physically adequate service to its existing customers unless the requesting party is willing to pay the cost of eliminating the problem in instances where such elimination is possible. The sponsor of the bill has indicated that he expects its introduction will encourage comments and debate in the months ahead on the policy considerations involved. The Company is unable to predict whether this legislation will be adopted and, if adopted, what form it will actually take.\nPUCO Rate Matters\nThe Company's Rate Stabilization and Service Area Development Program provides for base electric rates to remain at 1990 levels until at least 1997, absent any significant changes in regulatory, environmental or tax requirements. Among other things, the program also provides for the adoption of demand side management programs and a tariff option for customer retention and service area stabilization.\nFERC Rate Matters\nRates for the Companies' respective wholesale customers are regulated by the FERC. The Company's tariff for its customers was approved by the FERC in 1989. Penn Power sells power to its wholesale customers under agreements which were accepted by the FERC in 1984. These agreements provide that Penn Power's wholesale customers will be charged the applicable prevailing retail electric rates through August 1994, and that they will remain full requirements customers of Penn Power at least through that date. Negotiations are currently underway to extend these agreements.\nFuel Adjustment Clauses\nUnder the laws of the State of Ohio, an electric utility is required to have semiannual hearings before the PUCO with respect to its fuel and net purchased power policies and practices. At these hearings a utility is required to show that its electric fuel component (EFC) charges are \"fair, just and reasonable\". The law also requires additional auditing of, and additional reporting by, the utility with respect to its fuel costs and fuel procurement policies and practices. The law provides for the recovery of fuel costs, including any over or under collection of fuel costs applicable to a prior six month period, by adjusting an electric utility's EFC rate every six months.\nPenn Power uses a \"levelized\" energy cost rate (ECR) for the recovery of fuel and net purchased power costs from its customers. The ECR, which includes adjustment for any over or under collection from customers, is recalculated each year.\nNuclear Regulation\nThe construction and operation of nuclear generating units are subject to the regulatory jurisdiction of the Nuclear Regulatory Commission (NRC) including the issuance by it of construction permits and\noperating licenses. The NRC's procedures with respect to application for construction permits and operating licenses afford opportunities for interested parties to request public hearings on health, safety, environmental and antitrust issues. In this connection, the NRC may require substantial changes in operation or the installation of additional equipment to meet safety or environmental standards with resulting delay and added costs. The possibility also exists for modification, denial or revocation of licenses or permits. Full power operating licenses were issued for Beaver Valley Unit 1, Perry Unit 1 and Beaver Valley Unit 2 on July 1, 1976, November 13, 1986 and August 14, 1987, respectively.\nThe construction permit and operating license issued by the NRC applicable to Perry Unit 1 is conditioned to require, among other things: (i) maintenance, emergency, economy and wholesale power and reserve sharing to be made available to, (ii) interconnections to be made with, and (iii) wheeling to be provided for, electric generating and\/or distribution systems (or municipalities or cooperatives with the right to engage in such functions) if such entities so request and to permit such entities to become members of CAPCO (subject to certain prerequisites with respect to size), or to acquire a share of the capacity of Perry Unit 1 or any other future nuclear units, if they so desire. In September 1987, the Company asked the NRC to suspend these license conditions. In April 1991, the NRC Staff denied the Company's application; accordingly, the Company petitioned the NRC for a hearing. Pursuant to this request the matter was referred to the Atomic Safety and Licensing Board (ASLB). The ASLB ruled against the Company in November 1992. The Company petitioned the NRC to review the ASLB decision in December 1992. On August 3, 1993, the NRC ruled that the license conditions will not be suspended. On October 1, 1993, the Company appealed the NRC decision in the United States Court of Appeals for the District of Columbia Circuit. If these license conditions are not suspended, they could have a materially adverse but presently undeterminable effect on the Companies' future business operations.\nThe NRC has promulgated and continues to promulgate additional regulations related to the safe operation of nuclear power plants. The Companies cannot predict what additional regulations will be promulgated or design changes required or the effect that any such regulations or design changes, or the consideration thereof, may have upon the Beaver Valley and Perry plants. Although the Companies have no reason to anticipate an accident at any nuclear plant in which they have an interest, if such an accident did happen, it could have a material but presently undeterminable adverse effect on the Company's consolidated financial position. In addition, such an accident at any operating nuclear plant, whether or not owned by the Companies, could result in regulations or requirements that could affect the operation or licensing of plants that the Companies do own with a consequent but presently undeterminable adverse impact, and could affect the Companies' abilities to raise funds in the capital markets.\nNuclear Insurance\nThe Price-Anderson Act limits the public liability which can be assessed with respect to a nuclear power plant to $9,396,000,000 (assuming 116 units licensed to operate) for a single nuclear incident, which amount is covered by: (i) private insurance amounting to $200,000,000; and (ii) $9,196,000,000 provided by an industry retrospective rating plan required by the NRC pursuant thereto. Under such retrospective rating plan, in the event of a nuclear incident at any unit in the United States resulting in losses in excess of private insurance, up to $75,500,000 (but not more than $10,000,000 per unit per year in the event of more than one incident) must be contributed for each nuclear unit licensed to operate in the country by the licensees thereof to cover liabilities arising out of the incident. Based on their present ownership and leasehold interests in Beaver Valley Units 1 and 2 and Perry Unit 1, the Companies' maximum potential assessment under these provisions (assuming the other CAPCO\ncompanies were to contribute their proportionate share of any assessments under the retrospective rating plan) would be $102,800,000 per incident but not more than $13,000,000 in any one year for each incident.\nIn addition to the public liability insurance provided pursuant to the Price-Anderson Act, the Companies have also obtained insurance coverage in limited amounts for economic loss and property damage arising out of nuclear incidents. The Companies are members of Nuclear Electric Insurance Limited (NEIL) which provides coverage (NEIL I) for the extra expense of replacement power incurred due to prolonged accidental outages of nuclear units. Under NEIL I, the Companies have policies, renewable yearly, corresponding to their respective interests in Beaver Valley Units 1 and 2 and Perry Unit 1, which provide an aggregate indemnity of up to approximately $313,000,000 for replacement power costs incurred during an outage after an initial 21-week waiting period. Members of NEIL I pay annual premiums and are subject to assessments if losses exceed the accumulated funds available to the insurer. The Companies' present maximum aggregate assessment for incidents at any covered nuclear facility occurring during a policy year would be approximately $3,300,000.\nThe Companies are insured as to their respective interests in the Beaver Valley Station and Perry Plant under property damage insurance provided by American Nuclear Insurers (ANI) and Mutual Atomic Energy Liability Underwriters (MAELU) to the operating company for each plant. Under the ANI\/MAELU arrangements, $500,000,000 of primary coverage and $850,000,000 of excess coverage for decontamination costs, debris removal and repair and\/or replacement of property is provided for the Beaver Valley Station and the Perry Plant. The Companies pay annual premiums for this coverage and are not liable for retrospective assessments.\nA secondary level of coverage for the Beaver Valley Station and Perry Plant over and above the ANI\/MAELU policy is provided by a decontamination liability, excess property and decommissioning liability insurance policy issued to each operating company by NEIL (NEIL II). Under NEIL II a minimum of $1,400,000,000 of coverage is available to pay costs required for decontamination operations in excess of the $1,350,000,000 provided by the primary ANI\/MAELU policy. Additionally, a maximum of $250,000,000, as provided by NEIL II, would cover decommissioning costs in excess of funds already collected for decommissioning. Any remaining portion of the NEIL II proceeds after payment of decontamination costs will be available to pay excess property damage losses. Members of NEIL II pay annual premiums and are subject to assessments if losses exceed the accumulated funds available to the insurer. The Companies' present maximum assessment for NEIL II coverage for accidents at any covered nuclear facility occurring during a policy year would be approximately $12,100,000. The NEIL II policy is renewable yearly.\nThe Companies intend to maintain insurance against nuclear risks as described above as long as it is available. To the extent that replacement power, property damage, decontamination, decommissioning, repair and replacement costs and other such costs arising from a nuclear incident at any of the Companies' plants exceed the policy limits of the insurance from time to time in effect with respect to that plant, to the extent a nuclear incident is determined not to be covered by the Companies' insurance policies, or to the extent such insurance becomes unavailable in the future, the Companies would remain at risk for such costs.\nThe NRC requires nuclear power plant licensees to obtain minimum property insurance coverage of $1,060,000,000 or the amount generally available from private sources, whichever is less. The proceeds of this insurance are required to be used first to ensure that the licensed reactor is in a safe and stable condition and can be maintained in that condition so as to prevent any significant risk to the public health and\nsafety. Within 30 days of stabilization, the licensee is required to prepare and submit to the NRC a cleanup plan for approval. The plan is required to identify all cleanup operations necessary to decontaminate the reactor sufficiently to permit the resumption of operations or to commence decommissioning. Any property insurance proceeds not already expended to place the reactor in a safe and stable condition must be used first to complete those decontamination operations that are ordered by the NRC. The Companies are unable to predict what effect these requirements may have on the availability of insurance proceeds to the Companies for the Companies' bondholders.\nEnvironmental Matters\nVarious federal, state and local authorities regulate the Companies with regard to air and water quality and other environmental matters. The Companies have estimated capital expenditures for environmental compliance of approximately $175,000,000, which is included in the construction estimate given under \"Financing and Construction - Future Financing\" for 1994 through 1998.\nAir Regulation\nUnder the provisions of the Clean Air Act of 1970, both the State of Ohio and the Commonwealth of Pennsylvania adopted ambient air quality standards, and related emission limits, including limits for sulfur dioxide (SO2) and particulates. In addition, the U.S. Environmental Protection Agency (EPA) promulgated an SO2 regulatory plan for Ohio which became effective for the Company's plants in 1977. Generating plants to be constructed in the future and some future modifications of existing facilities will be covered not only by the applicable state standards but also by EPA emission performance standards for new sources. In both Ohio and Pennsylvania the construction or modification of emission sources requires approval from appropriate environmental authorities, and the facilities involved may not be operated unless a permit or variance to do so has been issued by those same authorities.\nThe Clean Air Act Amendments of 1990 require significant reductions of SO2 and oxides of nitrogen from the Companies' coal-fired generating units by 1995 and additional emission reductions by 2000. Compliance options include, but are not limited to, installing additional pollution control equipment, burning less polluting fuel, purchasing emission allowances from others, operating existing facilities in a manner which minimizes pollution and retiring facilities. In compliance plans submitted to the PUCO and to the EPA, the Company stated that reductions for the years 1995 through 1999 are likely to be achieved by burning lower sulfur fuel, generating more electricity at its lower emitting plants and\/or purchasing emission allowances. The Company continues to evaluate its compliance plans and other compliance options as they arise. Plans for complying with the year 2000 reductions are less certain at this time.\nThe Companies are required to meet federally approved SO2 regulations, and the violations of such regulations can result in injunctive relief, including shutdown of the generating unit involved, and\/or civil or criminal penalties of up to $25,000 per day of violation. The EPA has an interim enforcement policy for the SO2 regulations in Ohio which allows for compliance with the regulations based on a 30-day averaging period. The EPA has proposed regulations which could cause changes in the interim enforcement policy including a revision of methods of determining compliance with emission limits. The Companies cannot predict what action the EPA may take in the future with respect to the proposed regulations or the interim enforcement policy.\nWater Regulation\nVarious water quality regulations, the majority of which are the result of the federal Clean Water Act and its amendments, apply to the Companies' plants. In addition, Ohio and Pennsylvania have water quality standards applicable to the Companies' operations. As provided in the Clean Water Act, authority to grant federal National Pollutant Discharge Elimination System (NPDES) water discharge permits can be assumed by a state. Ohio and Pennsylvania have assumed such authority.\nThe Ohio Environmental Protection Agency (Ohio EPA) has issued NPDES Permits for the R.E. Burger, Edgewater, Niles, W.H. Sammis and West Lorain plants and has proposed a water discharge permit for the Mad River Plant. The West Lorain Plant is in compliance with all permit conditions. The other plants are in compliance with chemical limitations of the permits. The permit conditions would have required the addition of cooling towers at all of the above plants except West Lorain. However, the EPA and Ohio EPA have approved variance requests for the W.H. Sammis, R.E. Burger, Edgewater and Niles plants, eliminating the current need for cooling towers at those plants.\nWaste Disposal\nAs a result of the Resource Conservation and Recovery Act of 1976, as amended, and the Toxic Substances Control Act of 1976, federal and state hazardous waste regulations have been promulgated. These regulations may result in significantly increased costs to dispose of waste materials. The ultimate effect of these requirements cannot presently be determined.\nThe Pennsylvania Department of Environmental Resources has issued regulations dealing with the storage, treatment, transportation and disposal of residual waste such as coal ash and scrubber sludge. These regulations impose additional requirements relating to permitting, ground water monitoring, leachate collection systems, closure, liability insurance and operating matters. The Companies are developing and analyzing various compliance options and are currently unable to determine the ultimate increase in capital and operating costs at existing sites.\nSummary\nEnvironmental controls are still in the process of development and require, in many instances, balancing the needs for additional quantities of energy in future years and the need to protect the environment. As a result, the Companies cannot now estimate the precise effect of existing and potential regulations and legislation upon any of their existing and proposed facilities and operations or upon their ability to issue additional first mortgage bonds under their respective mortgages. These mortgages contain covenants by the Companies to observe and conform to all valid governmental requirements at the time applicable unless in course of contest, and provisions which, in effect, prevent the issuance of additional bonds if there is a completed default under the mortgage. The provisions of each of the mortgages, in effect, also require, in the opinion of counsel for the respective Companies, that certification of property additions as the basis for the issuance of bonds or other action under the mortgages be accompanied by an opinion of counsel that the company certifying such property additions has all governmental permissions at the time necessary for its then current ownership and operation of such property additions. The Companies intend to contest any requirements they deem unreasonable or impossible for compliance or otherwise contrary to the public interest. Developments in these and other areas of regulation may require the Companies to modify, supplement or replace equipment and facilities, and may delay or impede the\nconstruction and operation of new facilities, at costs which could be substantial. The Companies expect that the impact of any such costs would eventually be reflected in their rate schedules.\nFuel Supply\nThe Companies' sources of generation during 1993 were 81.9% coal and 18.1% nuclear. Over two-thirds of the Company's annual coal purchase requirements are supplied under long-term contracts. These contracts have minimum annual tonnage levels of approximately 5,900,000 tons (including the Company's portion of the coal purchase contract relating to the Bruce Mansfield Plant discussed below). This contract coal is produced primarily from mines located in Ohio, Pennsylvania, Kentucky and West Virginia; the contracts expire at various times through February 28, 2003.\nWith the 1993 expiration of the long-term coal contract for the New Castle Plant, Penn Power's coal, other than that related to its interest in the Bruce Mansfield Plant and W. H. Sammis Unit 7, is currently supplied entirely through spot purchases of coal produced from nearby reserves.\nThe Company and Penn Power estimate their 1994 coal requirements to be approximately 8,600,000 and 1,200,000 tons, respectively (including their respective shares of the coal requirements of CAPCO's W. H. Sammis Unit 7 and the Bruce Mansfield Plant). See \"Environmental Matters\" for factors pertaining to meeting environmental regulations affecting coal- fired generating units.\nThe Companies, together with the other CAPCO companies, have each severally guaranteed (the Company's and Penn Power's composite percentages being approximately 46.7% and 6.7%, respectively) certain debt and lease obligations in connection with a coal supply contract for the Bruce Mansfield Plant (see Note 7 of Notes to Consolidated Financial Statements). As of December 31, 1993, the Companies' shares of the guarantees were $101,217,000. The price under the coal supply contract, which includes certain minimum payments, has been determined to be sufficient to satisfy the debt and lease obligations. This contract extends to December 31, 1999.\nThe Companies' fuel costs (excluding disposal costs) for each of the five years ended December 31, 1993, were as follows:\n1993 1992 1991 1990 1989 ---- ---- ---- ---- ---- Cost of fuel consumed per million BTU's:\nCoal . . . . . . . . . . . . . . . . . . $1.37 $1.40 $1.40 $1.39 $1.34 Nuclear . . . . . . . . . . . . . . . . $ .76 $ .83 $ .87 $ .84 $ .90 Average fuel cost per kilowatt-hour generated (cents). . . . . . . . . . . . 1.31 1.31 1.34 1.34 1.34\nNuclear Fuel\nOES Fuel is the sole lessor for the Companies' nuclear fuel requirements (see \"Financing and Construction - Future Financing\" and Note 5E of Notes to Consolidated Financial Statements).\nThe Companies and OES Fuel have contracts for the supply of uranium sufficient to meet projected needs through 2000 and conversion services sufficient to meet projected needs through 2001. Fabrication services for fuel assemblies have been contracted by the CAPCO companies for the next two reloads for Beaver Valley Unit 1, one reload for Beaver Valley Unit 2 (through approximately 1996 and 1995, respectively), and the next seven\nreloads for Perry Unit 1 (through approximately 2003). The CAPCO companies have a contract with the U.S. Enrichment Corporation for enrichment services for all CAPCO nuclear units through 2014.\nPrior to the expiration of existing commitments, the Companies intend to make additional arrangements for the supply of uranium and for the subsequent conversion, enrichment, fabrication, reprocessing and\/or waste disposal services, the specific prices and availability of which are not known at this time. Due to the present lack of availability of domestic reprocessing services, to the continuing absence of any program to begin development of such reprocessing capability and questions as to the economics of reprocessing, the Companies are calculating nuclear fuel costs based on the assumption that spent fuel will not be reprocessed. On- site spent fuel storage facilities for the Perry Plant are expected to be adequate through 2010; facilities at Beaver Valley Units 1 and 2 are expected to be adequate through 2011 and 2005, respectively. After on-site storage capacity is exhausted, additional storage capacity will have to be obtained which could result in significant additional costs unless reprocessing services or permanent waste disposal facilities become available. The Federal Nuclear Waste Policy Act of 1982 provides for the construction of facilities for the disposal of high-level nuclear wastes, including spent fuel from nuclear power plants operated by electric utilities; however, the selection of a suitable site has become embroiled in the political process. Duquesne and CEI have each previously entered into contracts with the U.S. Department of Energy for the disposal of spent fuel from the Beaver Valley Power Station and the Perry Plant, respectively.\nSystem Capacity and Reserves\nThe 1993 net maximum hourly demand on the Companies of 5,729,000 kW (including 450,000 kW of firm power sales which extend through 2005 as discussed under \"Competition\") occurred on July 28, 1993. The seasonal capability of the Companies on that day was 6,141,000 kW. Of that system capability, 6.6% was available to serve additional load, after giving effect to net firm purchases at that hour of 521,000 kW and term power sales to other utilities. Based on existing capacity, the load forecast made in November 1993 and anticipated term power sales to other utilities, the capacity margins during the 1994-1998 period are expected to range from about 5% to 9%.\nRegional Reliability\nThe Company participates with 26 other electric companies operating in nine states in the East Central Area Reliability Coordination Agreement (ECAR), which was organized for the purpose of furthering the reliability of bulk power supply in the area through coordination of the planning and operation by the ECAR members of their bulk power supply facilities. The ECAR members have established principles and procedures regarding matters affecting the reliability of the bulk power supply within the ECAR region. Procedures have been adopted regarding: i) the evaluation and simulated testing of systems' performance; ii) the establishment of minimum levels of daily operating reserves; iii) the development of a program regarding emergency procedures during conditions of declining system frequency; and iv) the basis for uniform rating of generating equipment.\nCompetition\nThe Companies compete with other utilities for intersystem bulk power sales and for sales to municipalities and cooperatives. The Companies compete with suppliers of natural gas and other forms of energy in connection with their industrial and commercial sales and in the home\nclimate control market, both with respect to new customers and conversions, and with all other suppliers of electricity. To date, there has been no substantial cogeneration by the Companies' customers.\nIn an effort to more fully utilize their facilities and hold down rates to their other customers, the Companies have entered into a long- term power sales agreement with another utility. Currently, the Companies are selling 450,000 kW annually under this contract through December 31, 2005. The Companies have the option to reduce this commitment by 150,000 kW beginning June 1, 1996.\nResearch and Development\nThe Company participates in funding the Electric Power Research Institute (EPRI), which was formed for the purpose of expanding electric research and development under the voluntary sponsorship of the nation's utility industry - public, private and cooperative. Its goal is to mutually benefit utilities and their customers by promoting the development of new and improved technologies to help the utility industry meet present and future electric energy needs in environmentally and economically acceptable ways. EPRI conducts research on all aspects of electric power production and use, including fuels, generating, delivery, energy management and conservation, environmental effects and energy analysis. The major portion of EPRI research and development projects is directed toward practical solutions and their applications to problems currently facing the electric utility industry. In 1993, approximately 93% of the Company's research and development expenditures were related to EPRI.\nThe Company also participates in various research and development efforts by sponsoring clean coal technology demonstration projects at Company-owned coal-fired units. These projects are designed to derive alternate ways of using coal that would otherwise be environmentally unacceptable. In addition to researching environmentally acceptable ways of burning coal, the Company is also researching technology which will produce ash waste with properties and characteristics different from present fly ash and bottom ash, with the initial goal of producing marketable products for use in agronomy applications.\nExecutive Officers\nThe executive officers are elected at the annual organization meeting of the Board of Directors, held immediately after the annual meeting of stockholders, and hold office until the next such organization meeting, unless the Board of Directors shall otherwise determine, or unless a resignation is submitted.\nPosition Held During Name Age Past Five Years Dates ---- --- -------------------- -----\nW. R. Holland 57 President and Chief Executive Officer 1993-present President and Chief Operating Officer 1991-1993 Senior Vice President of Detroit Edison Company *-1991\nA. J. Alexander 42 Senior Vice President and General Counsel 1991-present Vice President and General Counsel 1989-1991 Associate General Counsel *-1989\nPosition Held During Name Age Past Five Years Dates ---- --- -------------------- ----- H. P. Burg 47 Senior Vice President and Chief Financial Officer 1989-present Vice President-Treasury and Budget *-1989\nR. J. McWhorter 61 Senior Vice President- Generating Plant and Transmission Operations *-present\nA. R. Garfield 55 Vice President-System Operations 1991-present Manager, System Operations *-1991\nJ. A. Gill 56 Vice President- Administration *-present\nA. N. Gorant 63 Vice President-Division Operations and Customer Service *-present\nB. M. Miller 61 Vice President-Engineering and Construction *-present\nD. L. Yeager 59 Vice President-Special Projects *-present\nD. P. Zeno 63 Vice President-Governmental Affairs 1991-present Manager, Governmental Affairs *-1991\nG. F. LaFlame 45 Secretary *-present\nR. H. Marsh 43 Treasurer 1991-present Manager, Assets Administration 1989-1991 Director, Benefits Investment Administration *-1989\nH. L. Wagner 41 Comptroller 1990-present Assistant Comptroller *-1990\n*Indicates position held at least since January 1, 1989.\nAt December 31, 1993, the Company had 4,623 employees and Penn Power had 1,355 employees for a total of 5,978 employees for the Companies.\nITEM 2.","section_1A":"","section_1B":"","section_2":"ITEM 2. PROPERTIES\nThe Companies' respective first mortgage indentures constitute, in the opinion of the Companies' counsel, direct first liens on substantially all of the respective Companies' physical property, subject only to excepted encumbrances, as defined in the Indentures. See Notes 4 and 5 to the Consolidated Financial Statements for information concerning leases and financing encumbrances affecting certain of the Companies' properties.\nThe Companies own, individually or, together with one or more of the other CAPCO companies as tenants in common, and\/or lease, the generating units in service shown on the table below.\nNet Demonstrated Interest Capacity (kW) ----------------------- --------------------------- Penn Companies' Ohio Edison Power -------------- Plant-Location Unit Total Entitlement Owned Leased Owned - ---------------- ---- -------- ----------- ------ ------ -----\nCoal-Fired Units\nR.E. Burger- 1-5 518,000 518,000 100.00% - - Shadyside, OH B. Mansfield- 1 780,000 501,000 60.00% - 4.20% Shippingport, PA 2 780,000 360,000 39.30% - 6.80% 3 800,000 335,000 35.60% - 6.28% New Castle- 3-5 333,000 333,000 - - 100.00% W. Pittsburg, PA Niles-Niles, OH 1-2 216,000 216,000 100.00% - - W.H. Sammis- 1-6 1,620,000 1,620,000 100.00% - - Stratton, OH 7 600,000 413,000 48.00% - 20.80%\nNuclear Units\nBeaver Valley- 1 810,000 425,000 35.00% - 17.50% Shippingport, PA 2 820,000 343,000 20.22% 21.66% - Perry- 1 1,194,000 421,000 17.42% 12.58% 5.24% North Perry Village, OH\nOil-Fired Units Various 164,000 164,000 84.82% - 15.18% --------- Total 5,649,000 =========\nProlonged outages of existing generating units might make it necessary for the Companies, depending upon the state of demand from time to time for electric service upon their system, to use to a greater extent than otherwise, less efficient and less economic generating units, or purchased power, and in some cases may require the reduction of load during peak periods under the Companies' interruptible programs, all to an extent not presently determinable.\nThe Companies' generating plants and load centers are connected by a transmission system consisting of elements having various voltage ratings ranging from 23 kilovolts (kV) to 345 kV. The Companies' transmission lines aggregate 4,547 miles.\nThe Companies' electric distribution systems include 25,173 miles of pole line carrying primary, secondary and street lighting circuits. They own, individually or, together with one or more of the other CAPCO companies as tenants in common, 436 substations with a total installed transformer capacity of 23,394,654 kilovolt-amperes, of which 64 are transmission substations, including 8 located at generating plants.\nThe Company's transmission lines also interconnect with those of CEI, Columbus Southern Power Company, The Dayton Power and Light Company, Duquesne, Monongahela Power Company, Ohio Power Company and Toledo; Penn Power's interconnect with those of Duquesne and West Penn Power Company. These interconnections make possible utilization by the Company and Penn Power of generating capacity constructed as a part of the CAPCO program, as well as providing opportunities for the sale of power to other utilities.\nITEM 3.","section_3":"ITEM 3. LEGAL PROCEEDINGS\nSee \"Item 1 - Business - Nuclear Regulation\" for information with respect to legal proceedings.\nITEM 4.","section_4":"ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS\nNone.\nPART II\nITEM 5.","section_5":"ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS\nITEM 6.","section_6":"ITEM 6. SELECTED FINANCIAL DATA\nITEM 7.","section_7":"ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS\nITEM 8.","section_7A":"","section_8":"ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA\nThe information called for by Items 5 through 8 is incorporated herein by reference to the Common Stock Data, Classification of Holders of Common Stock as of December 31, 1993, Selected Financial Data, Management's Discussion and Analysis of Results of Operations and Financial Condition, and Consolidated Financial Statements included on pages 16 through 33 in the Company's 1993 Annual Report to Stockholders.\nITEM 9.","section_9":"ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE\nNone.\nPART III\nITEM 10.","section_9A":"","section_9B":"","section_10":"ITEM 10.DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT\nThe information required by Item 10, with respect to Identification of Directors and with respect to reports required to be filed under Section 16 of the Securities Exchange Act of 1934, is incorporated herein by reference to the Company's 1994 Proxy Statement filed with the Securities and Exchange Commission (SEC) pursuant to Regulation 14A and, with respect to Identification of Executive Officers, to \"Part I, Item 1. Business- Executive Officers\" herein.\nITEM 11.","section_11":"ITEM 11.EXECUTIVE COMPENSATION\nITEM 12.","section_12":"ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT\nITEM 13.","section_13":"ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS\nThe information required by Items 11, 12 and 13 is incorporated herein by reference to the Company's 1994 Proxy Statement filed with the SEC pursuant to Regulation 14A.\nPART IV\nITEM 14.","section_14":"ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K\n(a) 1. Financial Statements\nIncluded in Part II of this report and incorporated herein by reference to the Company's 1993 Annual Report to Stockholders (Exhibit 13 below) at the pages indicated.\nPage No. -------- Consolidated Statements of Income-Three Years Ended December 31, 1993 . . . . . . . . . . . . . . . . . . . . 20 Consolidated Balance Sheets-December 31, 1993 and 1992. . . . . 21 Consolidated Statements of Capitalization- December 31, 1993 and 1992. . . . . . . . . . . . . . . . . 22-23 Consolidated Statements of Retained Earnings-Three Years Ended December 31, 1993 . . . . . . . . . . . . . . . . . . 24 Consolidated Statements of Capital Stock and Other Paid-In Capital-Three Years Ended December 31, 1993 . . . . 24 Consolidated Statements of Cash Flows-Three Years Ended December 31, 1993 . . . . . . . . . . . . . . . . . . 25 Consolidated Statements of Taxes-Three Years Ended December 31, 1993 . . . . . . . . . . . . . . . . . . 26 Notes to Consolidated Financial Statements. . . . . . . . . . . 27-33 Report of Independent Public Accountants. . . . . . . . . . . . 33\n2. Financial Statement Schedules\nIncluded in Part IV of this report: Page No. -------- Report of Independent Public Accountants on Schedules . . . . 35 Schedules - Three Years Ended December 31, 1993: V - Consolidated Property, Plant and Equipment. . . . 36-38 VI - Consolidated Accumulated Depreciation, Depletion and Amortization of Property, Plant and Equipment . . . . . . . . . . . . . . 39-41 VIII - Consolidated Valuation and Qualifying Accounts and Reserves . . . . . . . . . . . . . 42 IX - Consolidated Short-Term Borrowings. . . . . . . . 43 X - Supplementary Consolidated Income Statement Information . . . . . . . . . . . . . . . . . . . 44\nSchedules other than those listed above are omitted for the reason that they are not required or are not applicable, or the required information is shown in the financial statements or notes thereto.\n3. Exhibits\nExhibit Number - -------\n3-1- Amended Articles of Incorporation, Effective August 5, 1993, constituting the Company's Articles of Incorporation. (Registration No. 33-51139, Exhibit (3)(b).)\n3-2- Code of Regulations of the Company as amended April 24, 1986. (Registration No. 33-5081, Exhibit (4)(d).)\n(B)4-1- Indenture dated as of August 1, 1930 between the Company and Bankers Trust Company, as Trustee, as amended and supplemented by Supplemental Indentures:\nDated as of File Reference Exhibit No. ----------- -------------- -----------\nMarch 3, 1931 2-1725 B-1,B-1(a),B-1(b) November 1, 1935 2-2721 B-4 January 1, 1937 2-3402 B-5 September 1, 1937 Form 8-A B-6 June 13, 1939 2-5462 7(a)-7 August 1, 1974 Form 8-A, August 28, 1974 2(b) July 1, 1976 Form 8-A, July 28, 1976 2(b) December 1, 1976 Form 8-A, December 15, 1976 2(b) June 15, 1977 Form 8-A, June 27, 1977 2(b)\nSupplemental Indentures:\nDated as of File Reference Exhibit No. ----------- -------------- -----------\nSeptember 1, 1944 2-61146 2(b)(2) April 1, 1945 2-61146 2(b)(2) September 1, 1948 2-61146 2(b)(2) May 1, 1950 2-61146 2(b)(2) January 1, 1954 2-61146 2(b)(2) May 1, 1955 2-61146 2(b)(2) August 1, 1956 2-61146 2(b)(2) March 1, 1958 2-61146 2(b)(2) April 1, 1959 2-61146 2(b)(2) June 1, 1961 2-61146 2(b)(2) September 1, 1969 2-34351 2(b)(2) May 1, 1970 2-37146 2(b)(2) September 1, 1970 2-38172 2(b)(2) June 1, 1971 2-40379 2(b)(2) August 1, 1972 2-44803 2(b)(2) September 1, 1973 2-48867 2(b)(2) May 15, 1978 2-66957 2(b)(4) February 1, 1980 2-66957 2(b)(5) April 15, 1980 2-66957 2(b)(6) June 15, 1980 2-68023 (b)(4)(b)(5) October 1, 1981 2-74059 (4)(d) October 15, 1981 2-75917 (4)(e) February 15, 1982 2-75917 (4)(e) July 1, 1982 2-89360 (4)(d) March 1, 1983 2-89360 (4)(e) March 1, 1984 2-89360 (4)(f) September 15, 1984 2-92918 (4)(d) September 27, 1984 33-2576 (4)(d) November 8, 1984 33-2576 (4)(d) December 1, 1984 33-2576 (4)(d) December 5, 1984 33-2576 (4)(e) January 30, 1985 33-2576 (4)(e) February 25, 1985 33-2576 (4)(e) July 1, 1985 33-2576 (4)(e) October 1, 1985 33-2576 (4)(e) January 15, 1986 33-8791 (4)(d) May 20, 1986 33-8791 (4)(d) June 3, 1986 33-8791 (4)(e) October 1, 1986 33-29827 (4)(d) July 15, 1989 33-34663 (4)(d) August 25, 1989 33-34663 (4)(d) February 15, 1991 33-39713 (4)(d) May 1, 1991 33-45751 (4)(d) May 15, 1991 33-45751 (4)(d)\nExhibit Number Supplemental Indentures: (Cont'd) - ------- Dated as of File Reference Exhibit No. ----------- -------------- ----------- September 15, 1991 33-45751 (4)(d) April 1, 1992 33-48931 (4)(d) June 15, 1992 33-48931 (4)(d) September 15, 1992 33-48931 (4)(e) April 1, 1993 33-51139 (4)(d) June 15, 1993 33-51139 (4)(d) September 15, 1993 33-51139 (4)(d) November 15, 1993 (A) 4-2\n10-1- Administration Agreement between the CAPCO Group dated as of September 14, 1967. (Registration No. 2-43102, Exhibit 5(c)(2).)\n10-2- Amendment No. 1 dated January 4, 1974 to Administration Agreement between the CAPCO Group dated as of September 14, 1967. (Registration No. 2-68906, Exhibit 5(c)(3).)\n10-3- Transmission Facilities Agreement between the CAPCO Group dated as of September 14, 1967. (Registration No. 2-43102, Exhibit 5(c)(3).)\n(A)10-4- Amendment No. 1 dated as of January 1, 1993 to Transmission Facilities Agreement between the CAPCO Group dated as of September 14, 1967.\n10-5- Agreement for the Termination or Construction of Certain Agreements effective September 1, 1980 among the CAPCO Group. (Registration No. 2-68906, Exhibit 10-4.)\n(A)10-6- Amendment dated as of December 23, 1993 to Agreement for the Termination or Construction of Certain Agreements effective September 1, 1980 among the CAPCO Group.\n10-7- CAPCO Basic Operating Agreement, as amended September 1, 1980. (Registration No. 2-68906, Exhibit 10-5.)\n10-8- Amendment No. 1 dated August 1, 1981, and Amendment No. 2 dated September 1, 1982 to CAPCO Basic Operating Agreement, as amended September 1, 1980. (September 30, 1981 Form 10-Q, Exhibit 20-1 and 1982 Form 10-K, Exhibit 19-3, respectively.)\n10-9- Amendment No. 3 dated July 1, 1984 to CAPCO Basic Operating Agreement, as amended September 1, 1980. (1985 Form 10-K, Exhibit 10-7.)\n10-10- Basic Operating Agreement between the CAPCO Companies as amended October 1, 1991. (1991 Form 10-K, Exhibit 10-8.)\nExhibit Number - ------- (A)10-11- Basic Operating Agreement between the CAPCO Companies as amended January 1, 1993.\n10-12- Memorandum of Agreement effective as of September 1, 1980 among the CAPCO Group. (1982 Form 10-K, Exhibit 19-2.)\n10-13- Operating Agreement for Beaver Valley Power Station Units Nos. 1 and 2 as Amended and Restated September 15, 1987, by and between the CAPCO Companies. (1987 Form 10-K, Exhibit 10-15.)\n10-14- Construction Agreement with respect to Perry Plant between the CAPCO Group dated as of July 22, 1974. (Registration No. 2- 52251 of Toledo Edison Company, Exhibit 5(yy).)\n10-15- Participation Agreement No. 1 relating to the financing of the development of certain coal mines, dated as of October 1, 1973, among Quarto Mining Company, the CAPCO Group, Energy Properties, Inc., General Electric Credit Corporation, the Loan Participants listed in Schedules A and B thereto, Central National Bank of Cleveland, as Owner Trustee, National City Bank, as Loan Trustee, and Owner Trustee, National City Bank, as Loan Trustee, and National City Bank, as Bond Trustee. (Registration No. 2-61146, Exhibit 5(e)(1).)\n10-16- Amendment No. 1 dated as of September 15, 1978 to Participation Agreement No. 1 dated as of October 1, 1973 among Quarto Mining Company, the CAPCO Group, Energy Properties, Inc., General Electric Credit Corporation, the Loan Participants listed in Schedules A and B thereto, Central National Bank of Cleveland as Owner Trustee, National City Bank as Loan Trustee and National City Bank as Bond Trustee. (Registration No. 2-68906 of Pennsylvania Power Company, Exhibit 5(e)(2).)\n10-17- Participation Agreement No. 2 relating to the financing of the development of certain coal mines, dated as of August 1, 1974, among Quarto Mining Company, the CAPCO Group, Energy Properties, Inc., General Electric Credit Corporation, the Loan Participants listed in Schedules A and B thereto, Central National Bank of Cleveland, as Owner Trustee, National City Bank, as Loan Trustee, and National City Bank, as Bond Trustee. (Registration No. 2-53059, Exhibit 5(h)(2).)\n10-18- Amendment No. 1 dated as of September 15, 1978 to Participation Agreement No. 2 dated as of August 1, 1974 among Quarto Mining Company, the CAPCO Group, Energy Properties, Inc., General Electric Credit Corporation, the Loan Participants listed in Schedules A and B thereto, Central National Bank of Cleveland as Owner Trustee, National City Bank as Loan Trustee and National City Bank as Bond Trustee. (Registration No. 2-68906 of Pennsylvania Power Company, Exhibit 5(e)(4).)\n10-19- Participation Agreement No. 3 dated as of September 15, 1978 among Quarto Mining Company, the CAPCO Companies, Energy Properties, Inc., General Electric Credit Corporation, the Loan Participants listed in Schedules A and B thereto, Central National Bank of Cleveland as Owner Trustee, and National City Bank as Loan Trustee and Bond Trustee. (Registration No. 2-68906 of Pennsylvania Power Company, Exhibit 5(e)(5).)\nExhibit Number - ------- 10-20- Participation Agreement No. 4 dated as of October 31, 1980 among Quarto Mining Company, the CAPCO Group, the Loan Participants listed in Schedule A thereto and National City Bank as Bond Trustee. (Registration No. 2- 68906 of Pennsylvania Power Company, Exhibit 10-16.)\n10-21- Participation Agreement dated as of May 1, 1986, among Quarto Mining Company, the CAPCO Companies, the Loan Participants thereto, and National City Bank as Bond Trustee. (1986 Form 10-K, Exhibit 10-22.)\n10-22- Participation Agreement No. 6 dated as of December 1, 1991 among Quarto Mining Company, The Cleveland Electric Illuminating Company, Duquesne Light Company, Ohio Edison Company, Pennsylvania Power Company, the Toledo Edison Company, the Loan Participants listed in Schedule A thereto, National City Bank, as Mortgage Bond Trustee and National City Bank, as Refunding Bond Trustee. (1991 Form 10-K, Exhibit 10- 19.)\n10-23- Agreement entered into as of October 20, 1981 among the CAPCO Companies regarding the use of Quarto coal at Mansfield Units 1, 2 and 3. (1981 Form 10-K, Exhibit 20-1.)\n10-24- Restated Option Agreement dated as of May 1, 1983 by and between the North American Coal Corporation and the CAPCO Companies. (1983 Form 10-K, Exhibit 19-1.)\n10-25- Trust Indenture and Mortgage dated as of October 1, 1973 between Quarto Mining Company and National City Bank, as Bond Trustee, together with Guaranty dated as of October 1, 1973 with respect thereto by the CAPCO Group. (Registration No. 2- 61146, Exhibit 5(e)(5).)\n10-26- Amendment No. 1 dated August 1, 1974 to Trust Indenture and Mortgage dated as of October 1, 1973 between Quarto Mining Company and National City Bank, as Bond Trustee, together with Amendment No. 1 dated August 1, 1974 to Guaranty dated as of October 1, 1973 with respect thereto by the CAPCO Group. (Registration No. 2-53059, Exhibit 5(h)(2).)\n10-27- Amendment No. 2 dated as of September 15, 1978 to the Trust Indenture and Mortgage dated as of October 1, 1973, as amended, between Quarto Mining Company and National City Bank, as Bond Trustee, together with Amendment No. 2 dated as of September 15, 1978 to Guaranty dated as of October 1, 1973 with respect to the CAPCO Group. (Registration No. 2-68906 of Pennsylvania Power Company, Exhibits 5(e)(11) and 5(e)(12).)\n10-28- Amendment No. 3 dated as of October 31, 1980, to Trust Indenture and Mortgage dated as of October 1, 1973, as amended between Quarto Mining Company and National City Bank as Bond Trustee. (Registration No. 2-68906 of Pennsylvania Power Company, Exhibit 10-16.)\nExhibit Number - ------- 10-29- Amendment No. 4 dated as of July 1, 1985 to the Trust Indenture and Mortgage dated as of October 1, 1973, as amended between Quarto Mining Company and National City Bank as Bond Trustee. (1985 Form 10-K, Exhibit 10-28.)\n10-30- Amendment No. 5 dated as of May 1, 1986, to the Trust Indenture and Mortgage between Quarto and National City Bank as Bond Trustee. (1986 Form 10-K, Exhibit 10-30.)\n10-31- Amendment No. 6 dated as of December 1, 1991, to the Trust Indenture and Mortgage dated as of October 1, 1973, between Quarto Mining Company and National City Bank, as Bond Trustee. (1991 Form 10-K, Exhibit 10-28.)\n10-32- Trust Indenture dated as of December 1, 1991, between Quarto Mining Company and National City Bank, as Bond Trustee. (1991 Form 10-K, Exhibit 10-29.)\n10-33- Amendment No. 3 dated as of October 31, 1980 to the Bond Guaranty dated as of October 1, 1973, as amended, with respect to the CAPCO Group. (Registration No. 2- 68906 of Pennsylvania Power Company, Exhibit 10-16.)\n10-34- Amendment No. 4 dated as of July 1, 1985 to the Bond Guaranty dated as of October 1, 1973, as amended, by the CAPCO Companies to National City Bank as Bond Trustee. (1985 Form 10-K, Exhibit 10-30.)\n10-35- Amendment No. 5 dated as of May 1, 1986, to the Bond Guaranty by the CAPCO Companies to National City Bank as Bond Trustee. (1986 Form 10-K, Exhibit 10-33.)\n10-36- Amendment No. 6A dated as of December 1, 1991, to the Bond Guaranty dated as of October 1, 1973, by The Cleveland Electric Illuminating Company, Duquesne Light Company, Ohio Edison Company, Pennsylvania Power Company, the Toledo Edison Company to National City Bank, as Bond Trustee. (1991 Form 10- K, Exhibit 10-33.)\n10-37- Amendment No. 6B dated as of December 30, 1991, to the Bond Guaranty dated as of October 1, 1973 by The Cleveland Electric Illuminating Company, Duquesne Light Company, Ohio Edison Company, Pennsylvania Power Company, the Toledo Edison Company to National City Bank, as Bond Trustee. (1991 Form 10-K, Exhibit 10-34.)\n10-38- Bond Guaranty dated as of December 1, 1991, by The Cleveland Electric Illuminating Company, Duquesne Light Company, Ohio Edison Company, Pennsylvania Power Company, the Toledo Edison Company to National City Bank, as Bond Trustee. (1991 Form 10- K, Exhibit 10-35.)\nExhibit Number - ------- 10-39- Open end Mortgage dated as of October 1, 1973 between Quarto Mining Company and the CAPCO Companies and Amendment No. 1 thereto, dated as of September 15, 1978. (Registration No. 2- 68906 of Pennsylvania Power Company, Exhibit 10-23.)\n10-40- Repayment and Security Agreement and Assignment of Lease dated as of October 1, 1973 between Quarto Mining Company and Ohio Edison Company as Agent for the CAPCO Companies and Amendment No. 1 thereto, dated as of September 15, 1978. (1980 Form 10- K, Exhibit 20-2.)\n10-41- Restructuring Agreement dated as of April 1, 1985 among Quarto Mining Company, the Company and the other CAPCO Companies, Energy Properties, Inc., General Electric Credit Corporation, the Loan Participants signatories thereto, Central National Bank of Cleveland, as Owner Trustee and National City Bank as Loan Trustee and Bond Trustee. (1985 Form 10-K, Exhibit 10- 33.)\n10-42- Unsecured Note Guaranty dated as of July 1, 1985 by the CAPCO Companies to General Electric Credit Corporation. (1985 Form 10-K, Exhibit 10-34.)\n10-43- Memorandum of Understanding dated March 31, 1985 among the CAPCO Companies. (1985 Form 10-K, Exhibit 10-35.)\n(C)10-44- Ohio Edison Company Executive Incentive Compensation Plan. (1984 Form 10-K, Exhibit 19-2.)\n(C)10-45- Ohio Edison Company Executive Incentive Compensation Plan as amended February 16, 1987. (1986 Form 10-K, Exhibit 10-40.)\n(C)10-46- Restated and Amended Executive Deferred Compensation Plan. (1989 Form 10-K, Exhibit 10-36.)\n(C)10-47- Restated and Amended Supplemental Executive Retirement Plan. (1989 Form 10-K, Exhibit 10-37).\n(D)10-48- Participation Agreement dated as of March 16, 1987 among Perry One Alpha Limited Partnership, as Owner Participant, the Original Loan Participants listed in Schedule 1 Hereto, as Original Loan Participants, PNPP Funding Corporation, as Funding Corporation, The First National Bank of Boston, as Owner Trustee, Irving Trust Company, as Indenture Trustee and Ohio Edison Company, as Lessee. (1986 Form 10-K, Exhibit 28- 1.)\n(D)10-49- Amendment No. 1 dated as of September 1, 1987 to Participation Agreement dated as of March 16, 1987 among Perry One Alpha Limited Partnership, as Owner Participant, the Original Loan Participants listed in Schedule 1 thereto, as Original Loan Participants, PNPP Funding Corporation, as Funding Corporation, The First National Bank of Boston, as Owner Trustee, Irving Trust Company (now The Bank of New York), as Indenture Trustee, and Ohio Edison Company, as Lessee. (1991 Form 10-K, Exhibit 10-46.)\nExhibit Number - ------- (D)10-50- Amendment No. 3 dated as of May 16, 1988 to Participation Agreement dated as of March 16, 1987, as amended among Perry One Alpha Limited Partnership, as Owner Participant, PNPP Funding Corporation, The First National Bank of Boston, as Owner Trustee, Irving Trust Company, as Indenture Trustee, and Ohio Edison Company, as Lessee. (1992 Form 10-K, Exhibit 10- 47.)\n(D)10-51- Amendment No. 4 dated as of November 1, 1991 to Participation Agreement dated as of March 16, 1987 among Perry One Alpha Limited Partnership, as Owner Participant, PNPP Funding Corporation, as Funding Corporation, PNPP II Funding Corporation, as New Funding Corporation, The First National Bank of Boston, as Owner Trustee, The Bank of New York, as Indenture Trustee and Ohio Edison Company, as Lessee. (1991 Form 10-K, Exhibit 10-47.)\n(D)10-52- Amendment No. 5 dated as of November 24, 1992 to Participation Agreement dated as of March 16, 1987, as amended, among Perry One Alpha Limited Partnership, as Owner Participant, PNPP Funding Corporation, as Funding Corporation, PNPPII Funding Corporation, as New Funding Corporation, The First National Bank of Boston, as Owner Trustee, The Bank of New York, as Indenture Trustee and Ohio Edison Company as Lessee. (1992 Form 10-K, Exhibit 10-49.)\n(D)10-53- Amendment No. 6 dated as of January 12, 1993 to Participation Agreement dated as of March 16, 1987 among Perry One Alpha Limited Partnership, as Owner Participant, PNPP Funding Corporation, as Funding Corporation, PNPP II Funding Corporation, as New Funding Corporation, The First National Bank of Boston, as Owner Trustee, The Bank of New York, as Indenture Trustee and Ohio Edison Company, as Lessee. (1992 Form 10-K, Exhibit 10-50.)\n(D)10-54- Facility Lease dated as of March 16, 1987 between The First National Bank of Boston, as Owner Trustee, with Perry One Alpha Limited Partnership, Lessor, and Ohio Edison Company, Lessee. (1986 Form 10-K, Exhibit 28-2.)\n(D)10-55- Amendment No. 1 dated as of September 1, 1987 to Facility Lease dated as of March 16, 1987 between The First National Bank of Boston, as Owner Trustee, Lessor and Ohio Edison Company, Lessee. (1991 Form 10-K, Exhibit 10-49.)\n(D)10-56- Amendment No. 2 dated as of November 1, 1991, to Facility Lease dated as of March 16, 1987, between The First National Bank of Boston, as Owner Trustee, Lessor and Ohio Edison Company, Lessee. (1991 Form 10-K, Exhibit 10-50.)\n(D)10-57- Amendment No. 3 dated as of November 24, 1992 to Facility Lease dated as of March 16, 1987, as amended, between The First National Bank of Boston, as Owner Trustee, with Perry One Alpha Limited Partnership, as Owner Participant and Ohio Edison Company, as Lessee. (1992 Form 10-K, Exhibit 10-54.)\nExhibit Number - ------- (D)10-58- Letter Agreement dated as of March 19, 1987 between Ohio Edison Company, Lessee, and The First National Bank of Boston, as Owner Trustee under a Trust dated March 16, 1987 with Chase Manhattan Realty Leasing Corporation, required by Section 3(d) of the Facility Lease. (1986 Form 10-K, Exhibit 28-3.)\n(D)10-59- Ground Lease dated as of March 16, 1987 between Ohio Edison Company, Ground Lessor, and The First National Bank of Boston, as Owner Trustee under a Trust Agreement, dated as of March 16, 1987, with the Owner Participant, Tenant. (1986 Form 10-K, Exhibit 28-4.)\n(D)10-60- Trust Agreement dated as of March 16, 1987 between Perry One Alpha Limited Partnership, as Owner Participant, and The First National Bank of Boston. (1986 Form 10-K, Exhibit 28-5.)\n(D)10-61- Trust Indenture, Mortgage, Security Agreement and Assignment of Facility Lease dated as of March 16, 1987 between The First National Bank of Boston, as Owner Trustee under a Trust Agreement dated as of March 16, 1987 with Perry One Alpha Limited Partnership, and Irving Trust Company, as Indenture Trustee. (1986 Form 10-K, Exhibit 28-6.)\n(D)10-62- Supplemental Indenture No. 1 dated as of September 1, 1987 to Trust Indenture, Mortgage, Security Agreement and Assignment of Facility Lease dated as of March 16, 1987 between The First National Bank of Boston as Owner Trustee and Irving Trust Company (now The Bank of New York), as Indenture Trustee. (1991 Form 10-K, Exhibit 10-55.)\n(D)10-63- Supplemental Indenture No. 2 dated as of November 1, 1991 to Trust Indenture, Mortgage, Security Agreement and Assignment of Facility Lease dated as of March 16, 1987 between The First National Bank of Boston, as Owner Trustee and The Bank of New York, as Indenture Trustee. (1991 Form 10-K, Exhibit 10-56.)\n(D)10-64- Tax Indemnification Agreement dated as of March 16, 1987 between Perry One, Inc. and PARock Limited Partnership as General Partners and Ohio Edison Company, as Lessee. (1986 Form 10-K, Exhibit 28-7.)\n(D)10-65- Amendment No. 1 dated as of November 1, 1991 to Tax Indemnification Agreement dated as of March 16, 1987 between Perry One, Inc. and Parock Limited Partnership and Ohio Edison Company. (1991 Form 10-K, Exhibit 10-58.)\n(D)10-66- Partial Mortgage Release dated as of March 19, 1987 under the Indenture between Ohio Edison Company and Bankers Trust Company, as Trustee, dated as of the 1st day of August, 1930. (1986 Form 10-K, Exhibit 28-8.)\n(D)10-67- Assignment, Assumption and Further Agreement dated as of March 16, 1987 among The First National Bank of Boston, as Owner Trustee under a Trust Agreement, dated as of March 16, 1987, with Perry One Alpha Limited Partnership, The Cleveland Electric Illuminating Company, Duquesne Light Company, Ohio Edison Company, Pennsylvania Power Company and Toledo Edison Company. (1986 Form 10-K, Exhibit 28-9.)\nExhibit Number - ------- (D)10-68- Additional Support Agreement dated as of March 16, 1987 between The First National Bank of Boston, as Owner Trustee under a Trust Agreement, dated as of March 16, 1987, with Perry One Alpha Limited Partnership, and Ohio Edison Company. (1986 Form 10-K, Exhibit 28-10.)\n(D)10-69- Bill of Sale, Instrument of Transfer and Severance Agreement dated as of March 19, 1987 between Ohio Edison Company, Seller, and The First National Bank of Boston, as Owner Trustee under a Trust Agreement, dated as of March 16, 1987, with Perry One Alpha Limited Partnership. (1986 Form 10-K, Exhibit 28- 11.)\n(D)10-70- Easement dated as of March 16, 1987 from Ohio Edison Company, Grantor, to The First National Bank of Boston, as Owner Trustee under a Trust Agreement, dated as of March 16, 1987, with Perry One Alpha Limited Partnership, Grantee. (1986 Form 10-K, File Exhibit 28-12.)\n10-71- Participation Agreement dated as of March 16, 1987 among Security Pacific Capital Leasing Corporation, as Owner Participant, the Original Loan Participants listed in Schedule 1 Hereto, as Original Loan Participants, PNPP Funding Corporation, as Funding Corporation, The First National Bank of Boston, as Owner Trustee, Irving Trust Company, as Indenture Trustee and Ohio Edison Company, as Lessee. (1986 Form 10-K, as Exhibit 28-13.)\n10-72- Amendment No. 1 dated as of September 1, 1987 to Participation Agreement dated as of March 16, 1987 among Security Pacific Capital Leasing Corporation, as Owner Participant, The Original Loan Participants Listed in Schedule 1 thereto, as Original Loan Participants, PNPP Funding Corporation, as Funding Corporation, The First National Bank of Boston, as Owner Trustee, Irving Trust Company, as Indenture Trustee and Ohio Edison Company, as Lessee. (1991 Form 10-K, Exhibit 10- 65.)\n10-73- Amendment No. 4 dated as of November 1, 1991, to Participation Agreement dated as of March 16, 1987 among Security Pacific Capital Leasing Corporation, as Owner Participant, PNPP Funding Corporation, as Funding Corporation, PNPP II Funding Corporation, as New Funding Corporation, The First National Bank of Boston, as Owner Trustee, The Bank of New York, as Indenture Trustee and Ohio Edison Company, as Lessee. (1991 Form 10-K, Exhibit 10-66.)\n10-74- Amendment No. 5 dated as of November 24, 1992 to Participation Agreement dated as of March 16, 1987 as amended among Security Pacific Capital Leasing Corporation, as Owner Participant, PNPP Funding Corporation, as Funding Corporation, PNPP II Funding Corporation, as New Funding Corporation, The First National Bank of Boston, as Owner Trustee, The Bank of New York, as Indenture Trustee and Ohio Edison Company, as Lessee. (1992 Form 10-K, Exhibit 10-71.)\nExhibit Number - ------- 10-75- Facility Lease dated as of March 16, 1987 between The First National Bank of Boston, as Owner Trustee, with Security Pacific Capital Leasing Corporation, Lessor, and Ohio Edison Company, as Lessee. (1986 Form 10-K, Exhibit 28-14.)\n10-76- Amendment No. 1 dated as of September 1, 1987 to Facility Lease dated as of March 16, 1987 between The First National Bank of Boston as Owner Trustee, Lessor and Ohio Edison Company, Lessee. (1991 Form 10-K, Exhibit 10-68.)\n10-77- Amendment No. 2 dated as of November 1, 1991 to Facility Lease dated as of March 16, 1987 between The First National Bank of Boston as Owner Trustee, Lessor and Ohio Edison Company, Lessee. (1991 Form 10-K, Exhibit 10-69.)\n10-78- Amendment No. 3 dated as of November 24, 1992 to Facility Lease dated as of March 16, 1987, as amended, between, The First National Bank of Boston, as Owner Trustee, with Security Pacific Capital Leasing Corporation, as Owner Participant and Ohio Edison Company, as Lessee. (1992 Form 10-K, Exhibit 10- 75.)\n10-79- Amendment No. 4 dated as of January 12, 1993 to Facility Lease dated as of March 16, 1987 as amended between, The First National Bank of Boston, as Owner Trustee, with Security Pacific Capital Leasing Corporation, as Owner Participant, and Ohio Edison Company, as Lessee. (1992 Form 10-K, Exhibit 10- 76.)\n10-80- Letter Agreement dated as of March 19, 1987 between Ohio Edison Company, as Lessee, and The First National Bank of Boston, as Owner Trustee under a Trust, dated as of March 16, 1987, with Security Pacific Capital Leasing Corporation, required by Section 3(d) of the Facility Lease. (1986 Form 10- K, Exhibit 28-15.)\n10-81- Ground Lease dated as of March 16, 1987 between Ohio Edison Company, Ground Lessor, and The First National Bank of Boston, as Owner Trustee under a Trust Agreement, dated as of March 16, 1987, with Perry One Alpha Limited Partnership, Tenant. (1986 Form 10-K, Exhibit 28-16.)\n10-82- Trust Agreement dated as of March 16, 1987 between Security Pacific Capital Leasing Corporation, as Owner Participant, and The First National Bank of Boston. (1986 Form 10-K, Exhibit 28-17.)\n10-83- Trust Indenture, Mortgage, Security Agreement and Assignment of Facility Lease dated as of March 16, 1987 between The First National Bank of Boston, as Owner Trustee under a Trust Agreement, dated as of March 16, 1987, with Security Pacific Capital Leasing Corporation, and Irving Trust Company, as Indenture Trustee. (1986 Form 10-K, Exhibit 28-18.)\n10-84- Supplemental Indenture No. 1 dated as of September 1, 1987 to Trust Indenture, Mortgage, Security Agreement and Assignment of Facility Lease dated as of March 16, 1987 between The First National Bank of Boston, as Owner Trustee and Irving Trust Company (now The Bank of New York), as Indenture Trustee. (1991 Form 10-K, Exhibit 10-74.)\nExhibit Number - ------- 10-85- Supplemental Indenture No. 2 dated as of November 1, 1991 to Trust Indenture, Mortgage, Security Agreement and Assignment of Facility Lease dated as of March 16, 1987 between The First National Bank of Boston, as Owner Trustee and The Bank of New York, as Indenture Trustee. (1991 Form 10-K, Exhibit 10-75.)\n10-86- Tax Indemnification Agreement dated as of March 16, 1987 between Security Pacific Capital Leasing Corporation, as Owner Participant, and Ohio Edison Company, as Lessee. (1986 Form 10-K, Exhibit 28-19.)\n10-87- Amendment No. 1 dated as of November 1, 1991 to Tax Indemnification Agreement dated as of March 16, 1987 between Security Pacific Capital Leasing Corporation and Ohio Edison Company. (1991 Form 10-K, Exhibit 10-77.)\n10-88- Assignment, Assumption and Further Agreement dated as of March 16, 1987 among The First National Bank of Boston, as Owner Trustee under a Trust Agreement, dated as of March 16, 1987, with Security Pacific Capital Leasing Corporation, The Cleveland Electric Illuminating Company, Duquesne Light Company, Ohio Edison Company, Pennsylvania Power Company and Toledo Edison Company. (1986 Form 10-K, Exhibit 28-20.)\n10-89- Additional Support Agreement dated as of March 16, 1987 between The First National Bank of Boston, as Owner Trustee under a Trust Agreement, dated as of March 16, 1987, with Security Pacific Capital Leasing Corporation, and Ohio Edison Company. (1986 Form 10-K, Exhibit 28-21.)\n10-90- Bill of Sale, Instrument of Transfer and Severance Agreement dated as of March 19, 1987 between Ohio Edison Company, Seller, and The First National Bank of Boston, as Owner Trustee under a Trust Agreement, dated as of March 16, 1987, with Security Pacific Capital Leasing Corporation, Buyer. (1986 Form 10-K, Exhibit 28-22.)\n10-91- Easement dated as of March 16, 1987 from Ohio Edison Company, Grantor, to The First National Bank of Boston, as Owner Trustee under a Trust Agreement, dated as of March 16, 1987, with Security Pacific Capital Leasing Corporation, Grantee. (1986 Form 10-K, Exhibit 28-23.)\n10-92- Refinancing Agreement dated as of November 1, 1991 among Perry One Alpha Limited Partnership, as Owner Participant, PNPP Funding Corporation, as Funding Corporation, PNPP II Funding Corporation, as New Funding Corporation, The First National Bank of Boston, as Owner Trustee, The Bank of New York, as Indenture Trustee, The Bank of New York, as Collateral Trust Trustee, The Bank of New York, as New Collateral Trust Trustee and Ohio Edison Company, as Lessee. (1991 Form 10-K, Exhibit 10-82.)\nExhibit Number - ------- 10-93- Refinancing Agreement dated as of November 1, 1991 among Security Pacific Leasing Corporation, as Owner Participant, PNPP Funding Corporation, as Funding Corporation, PNPP II Funding Corporation, as New Funding Corporation, The First National Bank of Boston, as Owner Trustee, The Bank of New York, as Indenture Trustee, The Bank of New York, as Collateral Trust Trustee, The Bank of New York, as New Collateral Trust Trustee and Ohio Edison Company, as Lessee. (1991 Form 10-K, Exhibit 10-83.)\n(A)10-94- Ohio Edison Company Master Decommissioning Trust Agreement for Perry Nuclear Power Plant Unit One, Perry Nuclear Power Plant Unit Two, Beaver Valley Power Station Unit One and Beaver Valley Power Station Unit Two dated July 1, 1993.\n10-95- Nuclear Fuel Lease dated as of March 31, 1989, between OES Fuel, Incorporated, as Lessor, and Ohio Edison Company, as Lessee. (1989 Form 10-K, Exhibit 10-62.)\n10-96- Receivables Purchase Agreement dated as of November 28, 1989 between Ohio Edison Company and OES Capital, Incorporated. (1989 Form 10-K, Exhibit 10-63.)\n10-97- Guarantee Agreement entered into by Ohio Edison Company dated as of January 17, 1991. (1990 Form 10-K, Exhibit 10-64).\n10-98- Transfer and Assignment Agreement among Ohio Edison Company and Chemical Bank, as trustee under the OE Power Contract Trust. (1990 Form 10-K, Exhibit 10-65).\n10-99- Renunciation of Payments and Assignment among Ohio Edison Company, Monongahela Power Company, West Penn Power Company, and the Potomac Edison Company dated as of January 4, 1991. (1990 Form 10-K, Exhibit 10-66).\n(E)10-100- Participation Agreement dated as of September 15, 1987, among Beaver Valley Two Pi Limited Partnership, as Owner Participant, the Original Loan Participants listed in Schedule 1 Thereto, as Original Loan Participants, BVPS Funding Corporation, as Funding Corporation, The First National Bank of Boston, as Owner Trustee, Irving Trust Company, as Indenture Trustee and Ohio Edison Company, as Lessee. (1987 Form 10-K, Exhibit 28-1.)\n(E)10-101- Amendment No. 1 dated as of February 1, 1988, to Participation Agreement dated as of September 15, 1987, among Beaver Valley Two Pi Limited Partnership, as Owner Participant, the Original Loan Participants listed in Schedule 1 Thereto, as Original Loan Participants, BVPS Funding Corporation, as Funding Corporation, The First National Bank of Boston, as Owner Trustee, Irving Trust Company, as Indenture Trustee and Ohio Edison Company, as Lessee. (1987 Form 10-K, Exhibit 28-2.)\n(E)10-102- Amendment No. 3 dated as of March 16, 1988 to Participation Agreement dated as ofSeptember 15, 1987, as amended, among Beaver Valley Two Pi Limited Partnership, as Owner Participant, BVPS Funding Corporation, The First National Bank of Boston, as Owner Trustee, Irving Trust Company, as Indenture Trustee and Ohio Edison Company, as Lessee. (1992 Form 10-K, Exhibit 10-99.)\nExhibit Number - ------- (E)10-103- Amendment No. 4 dated as of November 5, 1992 to Participation Agreement dated as of September 15, 1987, as amended, among Beaver Valley Two Pi Limited Partnership, as Owner Participant, BVPS Funding Corporation, BVPS II Funding Corporation, The First National Bank of Boston, as Owner Trustee, The Bank of New York, as Indenture Trustee and Ohio Edison Company, as Lessee. (1992 Form 10-K, Exhibit 10-100.)\n(E)10-104- Facility Lease dated as of September 15, 1987, between The First National Bank of Boston, as Owner Trustee, with Beaver Valley Two Pi Limited Partnership, Lessor, and Ohio Edison Company, Lessee. (1987 Form 10-K, Exhibit 28-3.)\n(E)10-105- Amendment No. 1 dated as of February 1, 1988, to Facility Lease dated as of September 15, 1987, between The First National Bank of Boston, as Owner Trustee, with Beaver Valley Two Pi Limited Partnership, Lessor, and Ohio Edison Company, Lessee. (1987 Form 10-K, Exhibit 28-4.)\n(E)10-106- Amendment No. 2 dated as of November 5, 1992 to Facility Lease dated as of September 15, 1987, as amended, between The First National Bank of Boston, as Owner Trustee, with Beaver Valley Two Pi Limited Partnership, as Owner Participant, and Ohio Edison Company, as Lessee. (1992 Form 10-K, Exhibit 10-103.)\n(E)10-107- Ground Lease and Easement Agreement dated as of September 15, 1987, between Ohio Edison Company, Ground Lessor, and The First National Bank of Boston, as Owner Trustee under a Trust Agreement, dated as of September 15, 1987, with Beaver Valley Two Pi Limited Partnership, Tenant. (1987 Form 10-K, Exhibit 28- 5.)\n(E)10-108- Trust Agreement dated as of September 15, 1987, between Beaver Valley Two Pi Limited Partnership, as Owner Participant, and The First National Bank of Boston. (1987 Form 10-K, Exhibit 28-6.)\n(E)10-109- Trust Indenture, Mortgage, Security Agreement and Assignment of Facility Lease dated as of September 15, 1987, between The First National Bank of Boston, as Owner Trustee under a Trust Agreement dated as of September 15, 1987, with Beaver Valley Two Pi Limited Partnership, and Irving Trust Company, as Indenture Trustee. (1987 Form 10-K, Exhibit 28-7.)\n(E)10-110- Supplemental Indenture No. 1 dated as of February 1, 1988 to Trust Indenture, Mortgage, Security Agreement and Assignment of Facility Lease dated as of September 15, 1987 between The First National Bank of Boston, as Owner Trustee under a Trust Agreement dated as of September 15, 1987 with Beaver Valley Two Pi Limited Partnership and Irving Trust Company, as Indenture Trustee. (1987 Form 10-K, Exhibit 28-8.)\n(E)10-111- Tax Indemnification Agreement dated as of September 15, 1987, between Beaver Valley Two Pi Inc. and PARock Limited Partnership as General Partners and Ohio Edison Company, as Lessee. (1987 Form 10-K, Exhibit 28-9.)\nExhibit Number - ------- (E)10-112- Tax Indemnification Agreement dated as of September 15, 1987, between HG Power Plant, Inc., as Limited Partner and Ohio Edison Company, as Lessee. (1987 Form 10-K, Exhibit 28-10.)\n(E)10-113- Assignment, Assumption and Further Agreement dated as of September 15, 1987, among The First National Bank of Boston, as Owner Trustee under a Trust Agreement, dated as of September 15, 1987, with Beaver Valley Two Pi Limited Partnership, The Cleveland Electric Illuminating Company, Duquesne Light Company, Ohio Edison Company, Pennsylvania Power Company and Toledo Edison Company. (1987 Form 10-K, Exhibit 28-11.)\n(E)10-114- Additional Support Agreement dated as of September 15, 1987, between The First National Bank of Boston, as Owner Trustee under a Trust Agreement, dated as of September 15, 1987, with Beaver Valley Two Pi Limited Partnership, and Ohio Edison Company. (1987 Form 10-K, Exhibit 28-12.)\n(F)10-115- Participation Agreement dated as of September 15, 1987, among Chrysler Consortium Corporation, as Owner Participant, the Original Loan Participants listed in Schedule 1 Thereto, as Original Loan Participants, BVPS Funding Corporation, as Funding Corporation, The First National Bank of Boston, as Owner Trustee, Irving Trust Company, as Indenture Trustee and Ohio Edison Company, as Lessee. (1987 Form 10-K, Exhibit 28- 13.)\n(F)10-116- Amendment No. 1 dated as of February 1, 1988, to Participation Agreement dated as of September 15, 1987, among Chrysler Consortium Corporation, as Owner Participant, the Original Loan Participants listed in Schedule I Thereto, as Original Loan Participants, BVPS Funding Corporation, as Funding Corporation, The First National Bank of Boston, as Owner Trustee, Irving Trust Company, as Indenture Trustee, and Ohio Edison Company, as Lessee. (1987 Form 10-K, Exhibit 28-14.)\n(F)10-117- Amendment No. 3 dated as of March 16, 1988 to Participation Agreement dated as of September 15, 1987, as amended, among Chrysler Consortium Corporation, as Owner Participant, BVPS Funding Corporation, The First National Bank of Boston, as Owner Trustee, Irving Trust Company, as Indenture Trustee, and Ohio Edison Company, as Lessee. (1992 Form 10-K, Exhibit 10- 114.)\n(F)10-118- Amendment No. 4 dated as of November 5, 1992 to Participation Agreement dated as of September 15, 1987, as amended, among Chrysler Consortium Corporation, as Owner Participant, BVPS Funding Corporation, BVPS II Funding Corporation, The First National Bank of Boston, as Owner Trustee, The Bank of New York, as Indenture Trustee and Ohio Edison Company, as Lessee. (1992 Form 10-K, Exhibit 10-115.)\n(F)10-119- Facility Lease dated as of September 15, 1987, between The First National Bank of Boston, as Owner Trustee, with Chrysler Consortium Corporation, Lessor, and Ohio Edison Company, as Lessee. (1987 Form 10-K, Exhibit 28-15.)\nExhibit Number - ------- (F)10-120- Amendment No. 1 dated as of February 1, 1988, to Facility Lease dated as of September 15, 1987, between The First National Bank of Boston, as Owner Trustee, with Chrysler Consortium Corporation, Lessor, and Ohio Edison Company, Lessee. (1987 Form 10-K, Exhibit 28-16.)\n(F)10-121- Amendment No. 2 dated as of November 5, 1992 to Facility Lease dated as of September 15, 1987, as amended, between The First National Bank of Boston, as Owner Trustee, with Chrysler Consortium Corporation, as Owner Participant and Ohio Edison Company, as Lessee. (1992 Form 10-K, Exhibit 118.)\n(F)10-122- Amendment No. 3 dated as of January 12, 1993 to Facility Lease dated as of September 15, 1987, as amended, between The First National Bank of Boston, as Owner Trustee, with Chrysler Consortium Corporation, as Owner Participant, and Ohio Edison Company, as Lessee. (1992 Form 10-K, Exhibit 10-119.)\n(F)10-123- Ground Lease and Easement Agreement dated as of September 15, 1987, between Ohio Edison Company, Ground Lessor, and The First National Bank of Boston, as Owner Trustee under a Trust Agreement, dated as of September 15, 1987, with Chrysler Consortium Corporation, Tenant. (1987 Form 10-K, Exhibit 28- 17.)\n(F)10-124- Trust Agreement dated as of September 15, 1987, between Chrysler Consortium Corporation, as Owner Participant, and The First National Bank of Boston. (1987 Form 10-K, Exhibit 28-18.)\n(F)10-125- Trust Indenture, Mortgage, Security Agreement and Assignment of Facility Lease dated as of September 15, 1987, between the First National Bank of Boston, as Owner Trustee under a Trust Agreement, dated as of September 15, 1987, with Chrysler Consortium Corporation and Irving Trust Company, as Indenture Trustee. (1987 Form 10-K, Exhibit 28-19.)\n(F)10-126- Supplemental Indenture No. 1 dated as of February 1, 1988 to Trust Indenture, Mortgage, Security Agreement and Assignment of Facility Lease dated as of September 15, 1987 between The First National Bank of Boston, as Owner Trustee under a Trust Agreement dated as of September 15, 1987 with Chrysler Consortium Corporation and Irving Trust Company, as Indenture Trustee. (1987 Form 10-K, Exhibit 28-20.)\n(F)10-127- Tax Indemnification Agreement dated as of September 15, 1987, between Chrysler Consortium Corporation, as Owner Participant, and Ohio Edison Company, as Lessee. (1987 Form 10-K, Exhibit 28-21.)\n(F)10-128- Assignment, Assumption and Further Agreement dated as of September 15, 1987, among The First National Bank of Boston, as Owner Trustee under a Trust Agreement, dated as of September 15, 1987, with Chrysler Consortium Corporation, The Cleveland Electric Illuminating Company, Duquesne Light Company, Ohio Edison Company, Pennsylvania Power Company, and Toledo Edison Company. (1987 Form 10-K, Exhibit 28-22.)\nExhibit Number - ------- (F)10-129- Additional Support Agreement dated as of September 15, 1987, between The First National Bank of Boston, as Owner Trustee under a Trust Agreement, dated as of September 15, 1987, with Chrysler Consortium Corporation, and Ohio Edison Company. (1987 Form 10-K, Exhibit 28-23.)\n10-130- Operating Agreement dated March 10, 1987 with respect to Perry Unit No. 1 between the CAPCO Companies. (1987 Form 10-K, Exhibit 28-24.)\n10-131- Operating Agreement for Bruce Mansfield Units Nos. 1, 2 and 3 dated as of June 1, 1976, and executed on September 15, 1987, by and between the CAPCO Companies. (1987 Form 10-K, Exhibit 28-25.)\n10-132- Operating Agreement for W. H. Sammis Unit No. 7 dated as of September 1, 1971 by and between the CAPCO Companies. (1987 Form 10-K, Exhibit 28-26.)\n10-133- OE-APS Power Interchange Agreement dated March 18, 1987, by and among Ohio Edison Company and Pennsylvania Power Company, and Monongahela Power Company and West Penn Power Company and The Potomac Edison Company. (1987 Form 10-K, Exhibit 28-27.)\n10-134- OE-PEPCO Power Supply Agreement dated March 18, 1987, by and among Ohio Edison Company and Pennsylvania Power Company and Potomac Electric Power Company. (1987 Form 10-K, Exhibit 28- 28.)\n10-135- Supplement No. 1 dated as of April 28, 1987, to the OE-PEPCO Power Supply Agreement dated March 18, 1987, by and among Ohio Edison Company, Pennsylvania Power Company, and Potomac Electric Power Company. (1987 Form 10-K, Exhibit 28-29.)\n10-136- APS-PEPCO Power Resale Agreement dated March 18, 1987, by and among Monongahela Power Company, West Penn Power Company, and The Potomac Edison Company and Potomac Electric Power Company. (1987 Form 10-K, Exhibit 28-30.)\n11- Calculation of fully diluted earnings per common share.\n12- Consolidated fixed charge ratios.\n(A) 13- 1993 Annual Report to Stockholders. (Only those portions expressly incorporated by reference in this Form 10-K are to be deemed \"filed\" with the SEC.)\n18- Letter from Independent Public Accountants regarding a change in accounting.\n21- List of Subsidiaries of the Registrant at December 31, 1993.\n23- Consent of Independent Public Accountants.\nExhibit Number - ------- (A) Provided herein in electronic format as an exhibit.\n(B) Pursuant to paragraph (b)(4)(iii)(A) of Item 601 of Regulation S- K, the Company has not filed as an exhibit to this Form 10-K any instrument with respect to long-term debt if the total amount of securities authorized thereunder does not exceed 10% of the total assets of the Company and its subsidiaries on a consolidated basis, but hereby agrees to furnish to the SEC on request any such instruments.\n(C) Management contract or compensatory plan contract or arrangement filed pursuant to Item 601 of Regulation S-K.\n(D) Substantially similar documents have been entered into relating to three additional Owner Participants.\n(E) Substantially similar documents have been entered into relating to five additional Owner Participants.\n(F) Substantially similar documents have been entered into relating to two additional Owner Participants.\nNote: Reports of the Company on Forms 10-Q and 10-K are on file with the SEC under number 1-2578.\nPursuant to Rule 14a - 3 (10) of the Securities Exchange Act of 1934, the Company will furnish any exhibit in this Report upon the payment of the Company's expenses in furnishing such exhibit.\n(b) Reports on Form 8-K\nThe Company filed one report on Form 8-K since September 30, 1993. A report dated December 13, 1993, reported the abandonment of Perry Unit 2 as a possible electric generating plant.\nREPORT OF INDEPENDENT PUBLIC ACCOUNTANTS\nTo the Stockholders and Board of Directors of Ohio Edison Company:\nWe have audited, in accordance with generally accepted auditing standards, the consolidated financial statements included in Ohio Edison Company's annual report to stockholders incorporated by reference in this Form 10-K and have issued our report thereon dated February 1, 1994. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. The schedules listed in Item 14 are the responsibility of the Company's management and are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic consolidated financial statements. These schedules have been subjected to the auditing procedures applied in the audit of the basic consolidated financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole.\nARTHUR ANDERSEN & CO.\nNew York, N.Y. February 1, 1994\nSIGNATURES\nPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.\nOHIO EDISON COMPANY\nBY \/s\/W. R. Holland ------------------------------------------- W. R. Holland President and Chief Executive Officer Date: March 23, 1994\nPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated:\n\/s\/W. R. Holland \/s\/H. P. Burg - --------------------------------- --------------------------------------------- W. R. Holland H. P. Burg President and Chief Senior Vice President and Director Executive Officer and Director (Principal Financial Officer and Principal (Principal Executive Officer) Accounting Officer)\n\/s\/Donald C. Blasius \/s\/Paul J. Powers - --------------------------------- -------------------------------------------- Donald C. Blasius Paul J. Powers Director Director\n\/s\/Robert H. Carlson \/s\/Charles W. Rainger - --------------------------------- -------------------------------------------- Robert H. Carlson Charles W. Rainger Director Director\n\/s\/Robert M. Carter - --------------------------------- -------------------------------------------- Robert M. Carter George M. Smart Director Director\n\/s Carol A. Cartwright \/s\/Frank C. Watson - --------------------------------- -------------------------------------------- Carol A. Cartwright Frank C. Watson Director Director\n\/s\/R. L. Loughhead \/s\/Jesse T. Williams, Sr. - --------------------------------- -------------------------------------------- R. L. Loughhead Jesse T. Williams, Sr. Director Director\n\/s\/Glenn H. Meadows - --------------------------------- Glenn H. Meadows Director\nDate: March 23, 1994","section_15":""}
{"filename":"33015_1993.txt","cik":"33015","year":"1993","section_1":"ITEM 1. Business\nENSERCH Corporation (\"ENSERCH\" or the \"Corporation\") is an integrated company focused on natural gas. It is the successor to a company originally organized in 1909 for the purpose of providing natural-gas service to North Texas. The Corporation's operations include the following:\n- Natural Gas Transmission and Distribution - Owning and operating interconnected natural-gas transmission pipelines, gathering lines, underground gas storage reservoirs, compressor stations, distribution systems and related properties; transporting, distributing and selling natural gas to residential, commercial, industrial, electric-generation, pipeline and other customers; and compressing natural gas for motor vehicle usage. (Lone Star Gas Company, a division of the Corporation, Enserch Gas Company, and related operations.)\n- Natural Gas and Oil Exploration and Production - Exploring for, developing, producing and marketing natural gas and oil. (Enserch Exploration, Inc., Enserch Exploration Partners, Ltd. [more than 99% owned], Enserch International Exploration, Inc., and related operations.)\n- Natural Gas Liquids Processing - Gathering natural gas, processing natural gas to produce liquids and marketing the products. (Enserch Processing Partners, Ltd.)\n- Power and Other - Developing, operating and maintaining independent electric-generation power plants and cogeneration facilities; and furnishing energy services under long-term contracts to large building complexes, such as universities and medical centers (Enserch Development Corporation and Lone Star Energy Company). Providing environmental engineering and contracting services from initial site assessment and feasibility studies to designs, actions and remediation (Enserch Environmental Corporation).\nOn December 22, 1993, the Corporation completed the sale of the principal operating assets of its former engineering and construction subsidiary, Ebasco Services Incorporated, to a subsidiary of Raytheon Company. Also in December 1993, in a separate transaction, the Corporation completed the sale of its 49% interest in Dorsch Consult. See \"Financial Review\" and Note 11 of the Notes to Consolidated Financial Statements included in Appendix A to this report.\nBusiness Segments\nFinancial information required hereunder is set forth under \"Summary of Business Segments\" included in Appendix A to this report.\nNatural Gas Transmission and Distribution\nThe Corporation's transmission and distribution business (\"T&D\") is composed of the regulated business of Lone Star Gas Company (\"Lone Star\"), and the nonregulated gas marketing operations of Enserch Gas Company (\"EGC\").\nLone Star owns and operates interconnected natural-gas transmission lines, gathering lines, underground gas storage reservoirs, compressor stations, distribution systems and related properties. Through and by such facilities, it purchases, distributes and sells natural gas to about 1.25 million residential, commercial, industrial and electric-generation customers in approximately 550 cities and towns, including the 11-county Dallas\/Fort Worth Metroplex. Lone Star also transports natural gas for unaffiliated pipeline and industrial customers as market opportunities are available. About seven million people\nin Texas, representing more than 40% of the total state population, reside in Lone Star's service area.\nEGC purchases and sells natural gas to industrial and electric-generation customers, local distribution companies and other pipeline and gas marketing companies.\nThe Corporation holds a 50% interest in a partnership named Gulf Coast Natural Gas Company that operates a transmission system in the Texas Gulf Coast area, which transports and sells natural gas to industrial and unaffiliated pipeline customers.\nFor the year ended December 31, 1993, residential and commercial customers accounted for 56% of T&D's total gas sales revenues and 34% of natural gas volumes sold; industrial customers accounted for 12% and 17%, respectively, and electric-generation customers accounted for 12% and 17%, respectively. Sales to other customers accounted for 20% of T&D's natural gas revenues and 32% of volumes sold. In 1993, 10% of T&D's gas sales volumes was sold to Texas Utilities Fuel Company, compared with 12% in 1992. See \"Financial Review - Natural Gas Transmission and Distribution\" included in Appendix A to this report for a discussion of Lone Star's gas sales margin.\nOperating data for the T&D segment are set forth under \"Financial Review - Natural Gas Transmission and Distribution Operating Data\" included in Appendix A to this report.\nRevenues from Lone Star's gas sales are affected by seasonal variations. The majority of Lone Star's residential and commercial gas customers uses gas for heating. Revenues from these customers are affected by the mildness or severity of the heating season. Gas sales to electric-generation customers are affected by the mildness or severity of the cooling and heating seasons.\nReengineering activities taking place within Lone Star's distribution operations have resulted in a number of process and system changes being made to improve customer service and provide operating efficiencies. As a part of these changes, the workforce will be reduced and many local offices will be closed. A related $12 million pretax charge was taken in 1993 primarily to reflect severance expenses.\nCompetition. Natural gas continues to face varying degrees of competition from electricity, coal, natural gas liquids, oil and other refined products throughout Lone Star's service territory. Pipeline systems of other companies, both intrastate and interstate, extend into or through the areas in which Lone Star's markets are located, setting up competitive situations with other sellers of natural gas for existing and potential customers. Customer sensitivity to energy prices and the availability of competitively priced gas in the nonregulated markets continue to provide intense competition in the electric- generation and industrial user markets. Competitive pressure from other pipelines and alternative fuels has caused a continuing decline in sales by Lone Star to industrial and electric-generation customers each year since 1981, most of which has been replaced by sales of the Corporation's nonregulated companies.\nLone Star initiated a program in 1992 that provides its industrial cus- tomers an opportunity to have transportation service for up to 50% of their natural-gas requirements transported by Lone Star. The gas to be trans- ported may be purchased by the industrial customers from third-party suppliers. This has resulted in lower overall gas costs to the industrial customers able to take advantage of this program, helping Lone Star maintain long-term gas load, with no detrimental effect on other customers.\nIn Lone Star's service area, the intensity of competition among natural gas, fuel oil, and coal is dependent upon relative prices of the products.\nDuring most of 1993, natural gas was generally successful competing with fuel oil but was generally unable to compete effectively with coal in existing coal-fired units.\nIn response to highly competitive industrial and electric-generation markets, T&D continues to expand its businesses of arranging transportation and the purchase and sale of gas in the nonregulated markets. This is accomplished through the gas marketing activities of EGC. EGC sales in 1993 were 244 billion cubic feet (\"Bcf\"), which was 57 Bcf (including 42 Bcf purchased for resale from affiliates) greater than in 1992. EGC continues to actively pursue sales to customers not located on Lone Star's pipeline system. These \"off-system\" sales efforts have been enhanced by the ability to transport interstate gas under the Federal Energy Regulatory Commission (\"FERC\") open-access transportation plan. EGC continues to purchase and resell gas subject to the Natural Gas Policy Act of 1978 (\"NGPA\") without utility regulatory constraints, providing EGC more opportunities to obtain supplies and market gas throughout the United States.\nWith more normal weather conditions in 1993, overall volumes of natural gas sold or transported to industrial, electric-generation and pipeline markets by T&D increased slightly compared with 1992 despite intense competition for gas load and the commencement of commercial operation of a second nuclear power plant in Lone Star's service area. In addition, the former Gulf Coast operations of Enserch Gas Transmission Company (\"EGT\"), in which Lone Star now has only a 50% interest, are not included in statistics after 1991. Transportation volumes for the entire segment were 371 Bcf in 1993, up 64 Bcf compared with 1992.\nIn the current energy market, Lone Star's contracts for new gas reserves have been at prices below its current systemwide weighted average cost of gas and are expected to continue to be so in the foreseeable future.\nSource and Availability of Raw Materials. Lone Star's gas supply is based on contracts for the purchase of dedicated specific reserves and contracts with other pipeline companies in the form of service agreements that are not related to specific reserves or fields. Management has calculated that the total contracted gas supply as of January 1, 1994, was 972 Bcf, or approximately six times Lone Star's purchases during 1993. Of this total, 342 Bcf are dedicated reserves, 52 BCF are gas in storage, and 578 Bcf, (including 372 Bcf under one agreement) are committed to Lone Star under service agreements. The January 1, 1994, total gas supply estimate is 198 Bcf lower than the January 1, 1993, estimate. The difference resulted from purchases of 175 Bcf from existing gas supply, new supply additions of 5 Bcf and a net downward revision of 28 Bcf with respect to estimates for existing sources and service agreements. New reserve additions consisted of 5 Bcf of new dedicated reserves under old contracts. The Corporation also has estimated the oil and natural gas liquids reserves of Lone Star, as of January 1, 1994, to be 64,664 barrels.\nIn 1993, about 97% of Lone Star's gas requirement was purchased from some 370 independent producers and nonaffiliated pipeline companies, one of which supplied approximately 12.8% of total requirements. The remainder of Lone Star's requirement (3.2%) was supplied by affiliates.\nLone Star estimates its peak-day availability from presently contracted sources to be 1.8 Bcf. Short-term peaking contracts and withdrawals from underground storage raise this level to meet anticipated sales needs.\nDuring 1993, the average daily demand of Lone Star's residential and commercial customers was .4 Bcf. The estimated peak-day demand of such customers (based upon an arithmetic-mean outside temperature of 15 degrees F.) was 1.9 Bcf. Lone Star's greatest daily demand in 1993 was on January 10, when estimated actual deliveries to all customers reached 1.7 Bcf and there was an arithmetic-mean temperature of 33 degrees F. The estimated deliveries to\nresidential and commercial customers on that day were 1.2 Bcf and another .9 Bcf were transported by Lone Star.\nTo meet peak-day gas demands during winter months, Lone Star utilizes its eight active underground storage fields, all of which are located in Texas. These fields have an extraneous gas capacity of 74 Bcf. At December 31, 1993, total extraneous gas in storage was approximately 52 Bcf. Gas withdrawn from storage on January 10, 1993, the date of Lone Star's greatest daily demand in 1993, was .4 Bcf, or approximately 24% of the total 1.7 Bcf of Lone Star's sales.\nLone Star historically has maintained a curtailment program designed to achieve the highest load factor possible in the use of its pipeline system while assuring continuous and uninterrupted service to its residential and commercial customers. Under the program, industrial customers select their own rates and relative priorities of service. Interruptible service contracts give Lone Star the right to curtail gas deliveries up to 100% according to a strict priority plan.\nEstimates of gas supplies and reserves are not necessarily indicative of Lone Star's ability to meet current or anticipated market demands or immediate delivery requirements, because of factors such as the physical limitations of gathering and transmission systems, the duration and severity of cold weather, the availability of gas reserves from its suppliers, the ability to purchase additional supplies on a short-term basis, and actions by federal and state regulatory authorities. Lone Star's curtailment rights provide flexibility to meet the human-needs requirements of its customers on a firm basis. Priority allocations and price limitations imposed by federal and state regulatory agencies, as well as other factors beyond the control of Lone Star, may affect its ability to meet the demands of its customers.\nLone Star follows a program to place new supplies of gas under contract to its pipeline system. In addition to being heavily concentrated in the established gas-producing areas of central, north and east Texas, Lone Star's intrastate pipeline system also extends into or near the major gas-producing areas of the Texas Gulf Coast, and the Delaware and Val Verde Basins of West Texas. Nine basins located in Texas are estimated to contain a substantial portion of the nation's remaining onshore natural-gas reserves. Lone Star's pipeline system provides access to all of these basins.\nLone Star's attractive service territory has been a primary factor in the continued addition of new customers. The number of Lone Star customers in Texas has steadily grown from 1986 to 1993. See \"Financial Review - Natural Gas Transmission and Distribution Operating Data\" included in Appendix A to this report.\nLone Star buys gas under long-term, intrastate contracts in order to assure reliable supply to its customers. To obtain this reliability, Lone Star, in the past, entered into many gas-purchase contracts that provided for minimum- purchase (\"take-or-pay\") obligations to gas sellers. In the past, Lone Star was unable to take delivery of all minimum gas volumes tendered by suppliers under these contracts. Assuming normal weather conditions, it is expected that normal gas purchases will substantially satisfy purchase obligations for the year 1994 and thereafter. For a discussion of these take-or-pay obligations and the Corporation's accounting policy with respect to gas-purchase contracts, see \"Financial Review - Gas-Purchase Contracts\" and Note 1 to the Consolidated Financial Statements included in Appendix A to this report.\nGenerally, EGC's gas supply is contracted for on a month-to-month basis at prevailing market prices. The availability of gas is dependent on many factors, including the overall demand for natural gas and market price.\nRegulation. Lone Star is wholly intrastate in character. Its utility operations in the state of Texas are subject to regulation by the Railroad Commission of Texas (\"RRC\") and municipalities. Lone Star owns no certificated interstate transmission facilities subject to the jurisdiction of FERC under the Natural Gas Act, has no sales for resale under the rate jurisdiction of FERC, and does not perform any transportation service that is subject to FERC juris- diction under the Natural Gas Act.\nIn 1985, FERC issued Order 436, and later Order 500, which allow self- implementing, voluntary transportation of natural gas, as opposed to mandatory transportation for pipelines willing to assume FERC-imposed \"open-access\" conditions and certain other price\/rate controls. The Order imposed \"open- access\" conditions that affect intrastate pipelines, such as Lone Star's intrastate facilities, if the intrastate pipeline \"voluntarily\" elects to transport gas for an interstate pipeline or local distribution company under Section 311 of the NGPA. Lone Star became an open-access transporter effective July 15, 1988, on its intrastate transmission facilities only. Transportation by each company is performed pursuant to Section 311(a)(2) of the NGPA and is subject to an exemption from the jurisdiction of the FERC under the Natural Gas Act, pursuant to Section 601 of the NGPA.\nThe RRC regulates the intracompany charge for gas delivered to Texas distribution systems for sale to residential and commercial consumers. The RRC has original jurisdiction over rates charged to residential and commercial customers for gas delivered outside incorporated cities and towns (environs rates). Rates within incorporated cities and towns in Texas are subject to the original jurisdiction of the municipal government, with appellate review by the RRC. Proposed rate changes within the jurisdiction of the incorporated cities and towns in Texas may be suspended for a period not to exceed 90 days beyond the proposed effective date. The RRC may extend the time during which it deliberates and decides a matter within its appellate jurisdiction to a maximum of 185 days, but it may suspend rates within its original jurisdiction for 150 days beyond the proposed effective date.\nLone Star continuely reviews rates for all classes of customers in its regulatory jurisdictions. Rate relief amounting to $1.9 million in annualized revenue increases over and above changes in gas cost was achieved in Texas in 1993 through rate case filings, the operation of cost of service adjustment clauses, and the operation of plant investment cost adjustments. About 110 of the 550 cities and towns served by Lone Star had approved weather normalization adjustment clauses as part of their rate structure by yearend 1993, representing about 20% of Lone Star's residential and commercial sales volumes. These clauses allow rates to be adjusted monthly to reflect the impact of warmer- or colder-than-normal weather during the winter, minimizing the impact of variations in weather on Lone Star's earnings.\nSales and transportation services to industrial and electric-generation customers are provided under contract through contractual relations. Regulatory authorities in Texas have jurisdiction to revise, review and regulate rates to industrial and electric-generation customers but, historically, have not exercised this jurisdiction. Contracts with these customers permit automatic adjustment on a monthly basis for the full amount of increases or decreases in the cost of gas.\nNatural Gas and Oil Exploration and Production\nThe Corporation's natural gas and oil exploration and production operations are collectively referred to herein as \"Enserch Exploration.\" These operations and this business are conducted primarily through Enserch Exploration Partners Ltd. (\"EP\"), a limited partnership in which a minority interest (less than 1%) is held by the public and a group of subsidiary companies. Activities include geological and geophysical studies; acquisition of gas and oil leases; drilling\nof exploratory wells; development and operation of producing properties; acquisition of interests in developed or partially developed properties; and the marketing of natural gas, crude oil and condensate.\nIn 1985, the Corporation formed EP to succeed to substantially all of the domestic gas and oil exploration and production business of the Corporation. The Corporation and an affiliate own more than 99% of the outstanding limited partnership units. The remaining units--slightly more than 800,000--are publicly held and traded on the New York Stock Exchange.\nEP operates through EP Operating Limited Partnership (\"EPO\"), a Texas limited partnership, in which EP holds a 99% limited partner's interest and the general partners own a 1% interest. Enserch Exploration, Inc. is the managing general partner and the Corporation is the special general partner of EP and EPO.\nEnserch Exploration is engaged in the exploration for and the development, production and marketing of natural gas and crude oil throughout Texas, offshore in the Gulf of Mexico, onshore in the Gulf Coast and Rocky Mountain areas and in various other areas in the United States. Subsidiaries currently have interests in three foreign countries.\nProduction offices are maintained in Dallas, Houston, Athens, Bridgeport, Longview and Midland, Texas. At December 31, 1993, Enserch Exploration employed 382 persons, including 36 geologists, 21 geophysicists and 19 land representatives who investigate prospective areas, generate drilling prospects, review submitted prospects and acquire leasehold acreage in prospective areas. In addition, Enserch Exploration maintains a staff of 56 engineers and 46 technologists who plan and supervise the drilling and completion of wells, evaluate prospective gas and oil reservoirs, plan the development and management of fields, and manage the daily production of gas and oil.\nEnserch Exploration's natural-gas sales volumes for the year ended December 31, 1993, represented 16% of the Corporation's consolidated natural-gas sales volumes. Approximately 70% of Enserch Exploration's natural-gas sales volumes (75% of gas revenues) for the year ended December 31, 1993, was sold to affiliated customers. In 1993, affiliated revenues include gas sales under new contracts effective March 1, 1993 with Enserch Gas Company covering essentially all gas production not committed under existing contracts. Affiliated pur- chasers do not have a preferential right to purchase natural gas produced by Enserch Exploration other than under existing contracts.\nThe statistics for this business segment, which are set forth in the table entitled \"Financial Review - Natural Gas and Oil Exploration and Production Operating Data\" in Appendix A to this report, reflect the fluctuations in product prices and volumes and certain unusual items which affected operating income.\nFollowing is a summary of Enserch Exploration's domestic exploration and development activity during 1993:\nGulf of Mexico. Offshore exploration provides the Corporation the opportunity to improve its ratio of production to reserve base by the addition of gas wells with relatively higher production rates. This is coupled with ongoing deep-water development projects, which are expected to provide long-term reserves. State-of-the-art technology, including 3-D seismic, specialized seismic processing, and innovative well completion and production techniques, are being used to help accomplish these objectives.\nMississippi Canyon Block 441, the first development project in the Gulf of Mexico that Enserch Exploration has operated, is indicative of this approach. A 3-D seismic program, prior to field development, confirmed that the majority of the reservoir lies beneath a shipping fairway. A production program was developed that involved drilling highly deviated wells under the shipping\nfairway, subsea completing the deep-water wells, and tying the wells back to a conventional shallow-water production platform using bundled flowlines. The high-angle wells required special gravel-pack completion techniques. After a year of production, the field has been essentially maintenance free, producing some 70 million cubic feet (\"MMcf\") of natural gas and more than 500 barrels (\"Bbls\") of condensate per day from six wells.\nThe 3-D seismic on Mississippi Canyon Block 441 is being reprocessed, using depth migration and other state-of-the-art techniques to aid in the identification of deeper exploratory targets, which, if successfully drilled, could add to the field reserves. Enserch Exploration has a 37.5% working interest in this project.\nThe Garden Banks Block 388 oil development project remains on schedule, with initial production anticipated by mid-1995. Installation of the offshore facilities, which consist of a subsea template, gathering and sales pipelines, and shallow-water production facilities, will begin by mid-1994. After the rig and all facilities are in place, the three existing wells will be connected, with initial production from the first well expected to be approximately 5 thousand barrels (\"MBbls\") of oil and 5 MMcf of gas per day. Peak daily pro- duction from the project is anticipated to be 40 MBbls of oil and 60 MMcf of gas. Enserch Exploration is 100% owner and operator of the Garden Banks 388 project.\nAnother prospect delineated by seismic amplitude anomalies lies approximately four miles to the west of Garden Banks Block 388 on Garden Banks Blocks 386\/387. If successfully drilled, this prospect could add production to the Block 388 development by incorporating some of the production technology that was utilized on Mississippi Canyon Block 441.\nIn 1994, an offset well to Enserch Exploration's discovery on Green Canyon Block 254 is scheduled to be drilled. The exploratory well, which was drilled in 1991, encountered 11 sands with a combined thickness of more than 360 feet of oil pay. Enserch Exploration has a 25% working interest in this block and a similar working interest in three adjacent blocks believed to be part of the same project.\nOnshore. Enserch Exploration participated in 78 development wells (62 net) in 1993, with the majority completed as gas producers in East Texas. Thirty- nine wells were in progress at yearend. In East Texas, Enserch Exploration is positioned in a prolific gas-prone area which, despite its maturity, provides growth opportunities. Enserch Exploration is one of the oldest and most active operators in this basin in East Texas, which includes the Opelika, Tri-Cities, Whelan, Willow Springs, North Lansing and Freestone fields.\nIn early 1993, Enserch Exploration initiated a 26-well program in East Texas to accelerate the development of natural-gas reserves from the Travis Peak formation in the Opelika field. The program was targeted to test new techniques for shortening the average life of its reserve base. The project was completed in seven months, yielding initial daily per well production rates of up to 1.8 MMcf of gas and 48 Bbls of oil. Enserch Exploration has a 100% working interest in these wells.\nEnserch Exploration performed additional development drilling in the Freestone field, where seven well completions flowed at daily rates ranging from 1.0 MMcf to 2.3 MMcf of gas per well. Enserch Exploration has 50% to 100% working interests in these wells.\nIn the Bralley field in West Texas, the combined daily oil production rate from six wells increased to 800 Bbls from 500 Bbls following production optimization work. Enserch Exploration owns a 50% working interest in each of these wells.\nIn South Texas, seven wells drilled and completed in the Fashing field flowed at daily rates of 1.2 MMcf to 2.6 MMcf of gas and 14 Bbls to 30 Bbls of oil per well. Twelve wells drilled and completed in the Boonsville field in north central Texas resulted in daily production of .4 MMcf to 1.5 MMcf of gas per well.\nOnshore development activity planned for 1994 includes drilling approximately 35 wells outside East Texas. Some of the larger projects include wells in the Fashing, Rancho Viejo and Boonsville fields.\nIn the Fashing field, results of three wells and a field study indicate development potential for new wells, as well as recompletions that could result in reserve additions.\nCompetition. Competition in the natural gas and oil exploration and production business is intense. Domestically, competition is present from a large number of firms of varying sizes and financial resources, some of which are much larger than Enserch Exploration. Internationally, competition is from a number of both U.S. and non-U.S. firms, generally major national and international oil companies. Competition involves all aspects of marketing products (including terms, prices, volumes and length of contracts), terms relating to lease bonus and royalty arrangements, and the schedule of future development activity.\nRegulation. Environmental Protection Agency (\"EPA\") rules, regulations and orders affect the operations of Enserch Exploration. EPA regulations promul- gated under the Superfund Amendments and Reauthorization Act of 1986 require Enserch Exploration to report on locations and estimates of quantities of hazardous chemicals used in Enserch Exploration's operations. The EPA has determined that most gas and oil exploration and production wastes are exempt from the hazardous waste management requirements of the Resource Conservation Recovery Act. However, the EPA determined that certain exploration and production wastes resulting from the maintenance of production equipment and transportation are not exempt, and these wastes must be managed and disposed of as hazardous waste. Also, regulations issued by the EPA under the Clean Water Act require a permit for \"contaminated\" stormwater discharges from exploration and production facilities.\nMany states have issued new regulations under authority of the Clean Air Act Amendments of 1990, and such regulations are in the process of being imple- mented. These regulations may require certain gas and oil related installations to obtain federally enforceable operating permits and may require the monitoring of emissions; however, the impact of these regulations on Enserch Exploration is expected to be minor.\nSeveral states have adopted regulations on handling, transportation, storage and disposal of naturally occurring radioactive materials that are found in gas and oil operations. Although applicable to certain Enserch Exploration facilities, it is not believed that such regulations will materially impact current or future operations.\nIn the aggregate, compliance with federal and state environmental rules and regulations is not expected to have a material effect on Enserch Exploration's operations.\nThe RRC regulates the production of natural gas and oil by Enserch Exploration in Texas. Similar regulations are in effect in all states in which Enserch Exploration explores for and produces natural gas and oil. These regulations generally require permits for the drilling of gas and oil wells and regulate the spacing of the wells, the prevention of waste, the rate of production, and the prevention and cleanup of pollution and other materials.\nNatural Gas Liquids Processing\nThe Corporation's operations for the processing of natural gas for the recovery of natural gas liquids (\"NGL\") is conducted by Enserch Processing Partners, Ltd. (\"Processing Partners\"). Processing Partners is a limited partnership that is wholly owned by the Corporation.\nProcessing Partners, which is among the top 25 NGL producers in the U.S., uses cryogenic and mechanical refrigeration processes at its NGL extraction facilities. During these processes, NGL are condensed at extremely low temperatures and are separated from natural gas. The mixed NGL stream containing the heavier hydrocarbons ethane, propane, butane and natural gaso- line, is pumped via pipeline to Mt. Belvieu, Texas. The remaining natural gas, primarily methane, leaves the NGL plants in gas transmission lines for transport to end-use customers. (See \"Properties\".)\nAbout 70% of NGL product sales are under term contracts of one-to-three years, with prices established monthly. NGL prices are influenced by a number of factors, including supply, demand, inventory levels, the product composition of each barrel, and the price of crude oil. Profitability is highly dependent on the relationship of NGL product prices to the cost of natural gas lost in the extraction process--\"shrinkage.\"\nThe natural gas liquids processing area is highly competitive, including competition regarding cost-sharing and interest-sharing arrangements among producers, third-party owners and processors.\nPower and Other\nEnergy Project Development. Enserch Development Corporation (\"EDC\") was organized in 1986 to develop business opportunities primarily in the areas of independent power, including cogeneration. EDC evaluates the risk and rewards of these potential ventures; selects for development those ventures with the highest potential of success; implements and controls development of each venture; and brings together all the resources required to develop, finance, construct, operate and manage the selected ventures. EDC focuses on employing a strategy of maximizing the use of ENSERCH resources and minimizing the Corporation's risk and investment. EDC, as of December 1993, had several business opportunities in various phases of development throughout the United States and internationally.\nThe first project completed by EDC, operating since 1989, was a gas-fired, 255-megawatt (\"MW\") cogeneration plant located near Sweetwater, Texas. The electricity produced by the plant is purchased by Texas Utilities Electric Company and thermal energy is sold to United Gypsum Company under a long-term agreement. EDC developed and arranged financing for the project and one of its subsidiaries is the managing general partner. Enserch Exploration and EGC provide gas to the plant; Lone Star transports the gas and Lone Star Energy Company (\"LSEC\") operates the plant.\nIn 1992, the second plant developed by EDC was completed. The 62-MW natural gas-fired cogeneration facility in Buffalo, New York, supplies elec- tricity to Niagara Mohawk Company and thermal energy to Outokumpu American Brass, Inc. LSEC operates the plant.\nEDC's third project, a 160-MW plant located in Bellingham, Washington, began commercial operation July 1993. The electricity produced by the plant is sold under a long-term power sales agreement with Puget Sound Power & Light. Thermal energy in the form of steam and hot water is sold to Georgia-Pacific Corporation.\nIn addition to operating the above mentioned cogeneration plants, LSEC owns and\/or operates four central thermal energy plants providing heating and cooling to various institutional customers in Texas. The aggregate existing plant capacity is nearly 50,000 tons of chilled water and 750 MMBtu's of steam or hot water per hour. From the three plants owned by LSEC, institutional customers receive thermal energy under long-term agreements that contain established rates for units of steam or chilled water and certain escalation provisions for increases in ad valorem taxes, utility and labor costs. When the agreements expire, the plants become the property of the customers. Expiration dates are in 1996 and 1997. LSEC is actively pursuing new contracts to operate the plants after the existing agreements expire. The expiration of the existing thermal- energy plant agreements is not expected to have a significant impact on the Corporation. LSEC also provides predictive maintenance services to outside plant owners through its Plant Analytical Services affiliate, which was formed in 1991.\nAs previously noted, LSEC operates the 255-MW Sweetwater cogeneration plant in West Texas. Labor for operating and maintaining this facility is provided under a fixed-cost contract with annual escalation provisions for increases in labor costs. All other costs are borne by the facility owners. LSEC also operates the 62-MW cogeneration plant in Buffalo, NY, and the 160-MW cogen- eration facility in Bellingham, Washington. At both the Buffalo and Bellingham plants, LSEC has fixed-cost operating and maintenance agreements with escalation provisions. The contracts also include bonus or penalty provisions based upon plant availability.\nLSEC operates in the compressed natural gas (\"CNG\") market through its CNG Division along with two natural gas vehicle affiliates, Fleet Star of Texas, L.C. (\"Fleet Star\") and TRANSTAR Technologies, L.C., (\"TRANSTAR\"), each 50% owned by LSEC. Fleet Star and FinaStar, a partnership between Fleet Star and Fina Oil and Chemical, had six public stations in commercial operation at December 31, 1993, and four additional stations were under construction. The CNG Division and affiliates sold more than 1 million gallons of CNG into the emerging transportation fuels market during 1993. TRANSTAR Technologies, L.C., provides turnkey natural gas vehicle conversion and other related services. TRANSTAR was involved in the conversion of more than 300 vehicles to natural gas during its first full year of operation in 1993 and enters 1994 with a backlog of 120 units under contract to be converted.\nThe operations of the CNG Division and affiliates and the Plant Analytical Services have been aligned under the Corporation's natural gas transmission and distribution system for financial reporting purposes.\nEnserch Environmental Corporation. The Corporation retained and will continue to operate the former environmental division of Ebasco Services Incorporated (\"Ebasco\"). This business is now operated through Enserch Environmental Corporation (\"Enserch Environmental\"), a lower-tier subsidiary of the Corporation. Enserch Environmental employs about 1,200 people and is headquartered in New Jersey. Enserch Environmental had 1993 revenues of $169 million, operating income of $5.7 million and its backlog at the end of 1993 was $600 million.\nThe Corporation's environmental business began in the 1960's as an out- growth of Ebasco's licensing of plant sites in connection with the company's power plant design and construction work. Enserch Environmental has extensive experience in all aspects of the environmental market, from initial site assess- ment and feasibility studies to remedial design, action and clean up. Over the last five years, Enserch Environmental has completed projects valued in excess of $1 billion in all areas of environmental and hazardous waste management ser- vices for more than 300 clients. Enserch Environmental has completed hundreds of environmental impact statements, licensing studies and baseline environmental investigations.\nWith business, government and the public showing an increasing concern about the environment, management believes that the environmental market will grow and that Enserch Environmental will be a strong participant in it.\nClean Air Act\nThe impact of the 1990 amendments to the Clean Air Act (\"CAA\") on the Corporation, its division, subsidiaries and affiliates, cannot be fully ascertained until all the regulations that implement the provisions of the Act have been promulgated. It is expected that a number of facilities or emission sources will require a federally enforceable operating permit, and certain emission sources may also be required to reduce emissions or to install enhanced monitoring equipment under proposed rules and regulations. Management currently believes, however, that if the rules and regulations implementing the CAA are adopted as proposed, the cost of obtaining permits, operating costs that will be incurred under the operating permit, new permit fee structures, capital expenditures associated with equipment modifications to reduce emissions, or any expenditures on enhanced monitoring equipment, in the aggregate, will not have a material adverse effect on the Corporation's results of operations.\nThe CAA has created new marketing opportunities for the sale of natural gas that may have a positive effect on the Corporation's results of operations. Natural gas has long been recognized as a clean and efficient fuel. Title II (Mobile Sources) requires lower emissions from light-duty vehicles and urban buses that should make alternative fuels such as natural gas more attractive and competitive. In addition, Clean Fuel Fleet programs under the CAA will require a certain percentage of fleet vehicles to utilize clean-burning alternative fuels such as natural gas in the near future. Further, because chlorofluoro- carbon compounds (\"CFCs\"), commonly used as refrigerants in large air- conditioning systems must be phased out of production by the year 2000, interest has increased in the use of natural gas-powered absorption cooling systems that do not use CFCs. In those areas that do not meet the CAA's National Ambient Air Quality Standards for ozone, natural gas may play an important role in reduc- ing ozone formation, and may be substituted for other fuels. Since Title IV (Acid Rain) requires major reductions in sulphur dioxide emissions, princi- pally from coal-fired electric power plants, natural gas is expected to be considered as a cost-effective alternative for achieving reduced sulphur dioxide emissions.\nThe CAA also is expected to create new marketing opportunities for Enserch Environmental, which has considerable experience and expertise in the engineer- ing and construction implications of environmental matters. Enserch Environ- mental's comprehensive services extend into the areas regulated by the CAA, including: Title III (Air Toxins) where regulated air toxins will ultimately grow from 8 to more than 200 contaminants, and private industrial clients, par- ticularly in the petroleum, petrochemical, chemical and pharmaceutical sectors, will require air-quality assessment, monitoring, engineering and facility upgrades; Title IV (Acid Rain) where electric-utility clients will require conceptual engineering studies, air-quality studies and monitoring; Title II (Mobile Sources) where increased emphasis is expected on environmental con- sulting related to transportation systems--both the construction of new types of infrastructure projects and the development of more sophisticated transporta- tion systems; and Title V (Permits) where industrial facilities will be required to obtain operating permits involving emission inventories, performing com- pliance analysis and operational studies, and designing and installation of emission monitors and\/or enhanced monitoring systems.\nThe ultimate effect of these opportunities on the Corporation's business cannot be quantified at this time as it will depend on the extent to which natural gas is selected as an alternative fuel source and the services of Enserch Environmental Corporation are utilized in these newly regulated areas.\nPatent and Licenses\nThe Corporation, Lone Star and subsidiary companies have no material patents, licenses, franchises (excluding gas-distribution franchises) or concession.\nEmployees\nAt December 31, 1993, the Corporation, its division and subsidiaries, employed approximately 5,600 persons.\nExecutive Officers of Registrant\nThere are no family relationships between any of the above officers. All officers of the Corporation, its division and subsidiaries are elected annually by their respective Boards of Directors. Officers may be removed by their respective Boards of Directors whenever, in their judgment, the best interest of\nthe Corporation, its division or subsidiaries, as the case may be, will be served thereby.\nITEM 2.","section_1A":"","section_1B":"","section_2":"ITEM 2. Properties\nAt December 31, 1993, Lone Star and certain subsidiaries of the Corporation operated approximately 32,000 miles of transmission and gathering lines and distribution mains, and operated 37 compressor stations having a total rated horsepower of approximately 81,000. Lone Star owns eight active gas-storage fields, all located on Lone Star's system in Texas. Lone Star also owns three major gas-treatment plants to remove undesirable components from the gas stream. See \"Business - Natural Gas Transmission and Distribution - Source and Availability of Raw Materials\" for information concerning gas supply of Lone Star.\nAs estimated by DeGolyer and MacNaughton, Enserch Exploration has net proved reserves, as of January 1, 1994, of 1.09 trillion cubic feet (\"Tcf\") of natural gas and 39.3 million barrels (\"MMBbls\") of oil and condensate, including NGL attributable to leasehold interests. (See Note 13 of the Notes to Consolidated Financial Statements included in Appendix A to this report for additional information on gas and oil reserves.) All of these reserves are in the United States.\nEnserch Exploration's 1994 capital spending budget has been set at $116 million, a 3% decrease from 1993 actual capital expenditures. More than half of the 1994 capital expenditures is earmarked for domestic onshore drilling. The exploration program includes a balance mix of projects with regard to reserve potential and risk, focusing on as many core area oppor- tunities as possible. See \"Financial Review - Natural Gas and Oil Exploration and Production\" included in Appendix A to this report.\nDuring 1993, Enserch Exploration filed Form EIA-23 with the Department of Energy reflecting reserve estimates for the year 1992. Such reserve estimates were not materially different from the 1992 reserve estimates reported in Note 13 of the Notes to Consolidated Financial Statements included in Appendix A to this report.\nOperating data relating to Enserch Exploration are set forth under \"Financial Review - Natural Gas and Oil Exploration and Production Operating Data\" included in Appendix A to this report.\nEnserch Exploration and subsidiary companies owned leasehold interests or licenses in 17 states, offshore Texas and Louisiana, and three other countries as of December 31, 1993, as follows:\nEnserch Exploration purchased about 220,000 net acres of leasehold interests in 1993, 26,000 of which were in the Gulf of Mexico. Enserch Explora- tion's Gulf of Mexico holdings totaled some 123,000 net acres, with an average working interest of 36% in 64 leases covering 65 blocks with an overriding royalty interest in six other leases. The company operates 23 leases cover- ing 24 offshore blocks. Enserch Exploration also canceled, or allowed to expire, eight Gulf of Mexico leases during the year. These leases had been con- demned following drilling on or near them or after geophysical and geological findings.\nEnserch Exploration plans further drilling on undeveloped acreage but at this time cannot specify the extent of the drilling or predict how successful it will be in establishing the commercial reserves sufficient to justify retention of the acreage. The primary terms under which the undeveloped acreage in the United States can be retained by the payment of delay rentals without the establishment of gas and oil reserves expire 30% in 1994, 17% in 1995, 25% in 1996, 13% in 1997, 4% in 1998, 1% in 1999 and 10% thereafter. A portion of the undeveloped acreage may be allowed to expire prior to the expiration of primary terms specified in this schedule by nonpayment of delay rentals. Aside from\nTexas, the Gulf of Mexico, Malaysia and Indonesia, Enserch Exploration has no material concentration of undeveloped acreage in single areas at this time.\nUndeveloped acreage in other countries, which can be retained without the establishment of gas or oil reserves, expires as follows: Indonesia - 25% in 1994, 30% in 1996, 20% in 1998 and 25% in 2000; United Kingdom - 100% in 2016; Malaysia - 100% in 1996.\nEnserch Exploration participated in 111 wells (79 net) during the year. Of these wells, 83 (64 net) were completed successfully, resulting in a net success rate of 81%. Of the successful wells, 7 wells (4 net) were exploratory and 76 wells (60 net) were development. At December 31, 1993, Enserch Exploration was participating in 39 wells (21 net), which were either being drilled or in some state of completion.\nIn the 1993 domestic drilling program, 16 wells (4.9 net) were offshore. Of these wells, 9 (2.6 net) gas wells and 1 (.1 net) oil well were successfully completed. During 1992, 4 (1.6 net) offshore wells were drilled, of which 2 (.8 net) gas wells were successfully completed.\nAt December 31, 1993, Enserch Exploration owned working interests in 1,303 (980 net) gas wells and 1,121 (277 net) oil wells in the United States. Of these, 173 (141 net) gas wells and 37 (32 net) oil wells were dual completions in single boreholes.\nDrilling activity by Enserch Exploration during the three years ended December 31, 1993, is set forth below:\nThe number of wells drilled is not a significant measure or indicator of the relative success or value of a drilling program because the significance of the reserves and economic potential may vary widely for each project. It is also important to recognize that reported completions may not necessarily track capital expenditures, since Securities and Exchange Commission guidelines do not allow a well to be reported as complete until it is ready for production. In the case of offshore wells, this may be several years following initial drilling because of construction of platforms, pipelines and other necessary facilities.\nAdditional information relating to the gas and oil activities of Enserch Exploration is set forth in Note 13 of the Notes to Consolidated Financial Statements included in Appendix A to this report.\nProcessing Partners has interest in 18 processing plants, 13 of which are wholly owned. The products, which in 1993 were produced at an average of about 16,500 barrels per day, are sold to customers primarily at the Mt. Belvieu fractionation and storage facility near Houston for use as chemical feedstock and other purposes. The processing plants are capable of producing an aggre- gate of about 27,000 barrels of NGL per day; daily production was up slightly from the previous year. Lone Star estimates that as of January 1, 1994, 27.2 MMBbls of NGLs are attributable to contractual processing rights of Pro- cessing Partners with respect to gas reserves owned by EP or third parties and dedicated to Lone Star under various gas-purchase contracts or are being trans- ported by Lone Star under various gas transportation agreements. See \"Business - - Natural Gas Transmission and Distribution - Source and Availability of Raw Materials\" for additional reserves held by Lone Star.\nLSEC owns and operates three central plants providing heating and cooling to institutional customers in Dallas, El Paso and Galveston, Texas. LSEC also operates a similar plant in San Antonio, Texas.\nThe Corporation owns a five-building office complex in Dallas, containing approximately 453,000 square feet of space that the Corporation, Lone Star and certain subsidiaries fully occupy. In addition, the Corporation leases a 21- story, 400,000-square-foot building in Houston under a two-year lease that is automatically extended each year unless terminated.\nITEM 3.","section_3":"ITEM 3. Legal Proceedings\nThe utility division of the Corporation was named as a codefendant in a lawsuit filed on November 10, 1988, in the 200th Judicial District Court of Travis County, Texas. Plaintiffs were parties to gas-sale contracts that provided for direct and indirect sale of gas to the utility division. Plain- tiffs allege that defendants implemented a series of unilateral price decreases, thereby improperly fixing prices paid for gas in three Texas counties in violation of state antitrust laws and the Texas State Natural Resources Code. Plaintiffs also allege breach of contract and fiduciary duties, fraud, interference of contracts, conspiracy, economic duress, failure to reasonably market the plaintiffs' gas, and perform the contracts in good faith and discrimination by a common purchaser. Plaintiffs seek actual damages of approximately $35 million and $20 million in punitive damages. Management believes the allegations are without merit and that liability, if any, will not have any material effect on the financial position of the Corporation.\nAdditional information required hereunder is set forth in Note 6 and Note 10 to Consolidated Financial Statements included in Appendix A hereto.\nITEM 4.","section_4":"ITEM 4. Submission of Matters to a Vote of Security Holders\nNot applicable.\nPART II\nITEM 5.","section_5":"ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters\nThe information required hereunder is set forth under \"Common Stock Market Prices and Dividend Information\" included in Appendix A to this report.\nITEM 6.","section_6":"ITEM 6. Selected Financial Data\nThe information required hereunder is set forth under \"Selected Financial Data\" included in Appendix A to this report.\nITEM 7.","section_7":"ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations\nThe information required hereunder is set forth under \"Financial Review\" included in Appendix A to this report.\nITEM 8.","section_7A":"","section_8":"ITEM 8. Financial Statements and Supplementary Data\nThe information required hereunder is set forth under \"Independent Auditors' Report,\" \"Management Report on Responsibility for Financial Reporting,\" \"Statements of Consolidated Income,\" \"Statements of Consolidated Cash Flows,\" \"Consolidated Balance Sheets,\" \"Statements of Consolidated Common Shareholders' Equity,\" \"Notes to Consolidated Financial Statements\" and \"Summary of Business Segments\" included in Appendix A to this report.\nITEM 9.","section_9":"ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure\nNone.\nPART III\nITEMS 10-13.\nPursuant to Instruction G(3) to Form 10-K, the information required in Items 10-13 (except for information set forth at the end of Part I under \"Business - Executive Officers of Registrant\") is incorporated by reference from the Corporation's definitive proxy statement which is being filed pursuant to Regulation 14A on or about March 30, 1994.\nPART IV\nITEM 14.","section_9A":"","section_9B":"","section_10":"","section_11":"","section_12":"","section_13":"","section_14":"ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K\n(a)-1 Financial Statements\nThe following items appear in Appendix A to this report:\n(a)-2 Financial Statement Schedules\nThe following items are included in Appendix B to this report:\nConsolidated financial statement schedules, other than those listed above, are omitted because of the absence of the conditions under which they are required or because the required information is included in the consolidated financial statements or notes thereto.\n(a)-3 Exhibits. The following exhibits are filed herewith unless otherwise indicated:\nLong-term debt is described in Notes 3 and 4 of the Notes to Consolidated Financial Statements included in Appendix A to this report. The Corporation agrees to provide the Commission, upon request, copies of instruments defining the rights of holders of such long-term debt, which instruments are not filed herewith pursuant to Paragraph (b)(4)(iii)(A) of Item 601 of Regulation S-K. ___________________\n*Incorporated herein by reference and made a part hereof.\n(b) Reports on Form 8-K\nCurrent Report on Form 8-K dated October 18, 1993, was filed on October 22, 1993 (judgment entered in Exchange Offer suit).\nCurrent Report on Form 8-K dated November 17, 1993, was filed on November 29, 1993 (ENSERCH signs agreement to sell principal operating assets of Ebasco Services Incorporated to Raytheon Engineers & Constructors).\nCurrent Report on Form 8-K dated December 22, 1993, was filed on January 6, 1994 (ENSERCH closes Ebasco sale; sells 49% interest in Dorsch Consult).\nSIGNATURES\nPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.\nENSERCH Corporation\nMarch 30, 1994 By: \/s\/ D. W. Biegler D. W. Biegler, Chairman and President, Chief Executive Officer\nPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant in the capacities and on the date indicated.\nSignature and Title Date\nD. W. Biegler, Chairman and President, Chief Executive Officer, and Director; William B. Boyd, Director; B. A. Bridgewater, Jr., Director; Lawrence E. Fouraker, Director; Preston M. Geren, Jr., Director; Marvin J. Girouard, Director; March 30, 1994 Joseph M. Haggar, Jr., Director; W. C. McCord, Director; Diana S. Natalicio, Director; W. Ray Wallace, Director; S. R. Singer, Senior Vice President, Finance and Corporate Development, Chief Financial Officer; Jerry W. Pinkerton, Vice President and Controller, Chief Accounting Officer\nBy: \/s\/ D. W. Biegler D. W. Biegler As Attorney-in-Fact\nAPPENDIX A\nENSERCH CORPORATION AND SUBSIDIARY COMPANIES\nINDEX TO FINANCIAL INFORMATION\nDECEMBER 31, 1993\nPage ----\nSelected Financial Data............................... A-2\nFinancial Review...................................... A-4\nIndependent Auditors' Report.......................... A-18\nManagement Report on Responsibility for Financial Reporting................................. A-19\nFinancial Statements: Statements of Consolidated Income................... A-21\nStatements of Consolidated Cash Flows............... A-22\nConsolidated Balance Sheets......................... A-23\nStatements of Consolidated Common Shareholders' Equity.............................. A-24\nNotes to Consolidated Financial Statements............ A-25\nSummary of Business Segments.......................... A-54\nCommon Stock Market Prices and Dividend Information... A-55\nA-3\nENSERCH CORPORATION FINANCIAL REVIEW\nRESULTS OF OPERATIONS\nEarnings applicable to common stock for the year 1993 were $47 million ($.70 per share), compared with a loss applicable to common stock for 1992 of $41 million ($.62 per share) and 1991 earnings of $5 million ($.07 per share).\nResults from continuing operations, after provision for preferred dividends, were a loss of $27 million ($.41 per share) in 1993, a loss of $9 million ($.14 per share) in 1992 and income of $23 million ($.36 per share) in 1991. Results from continuing operations for 1993 were impacted by the following items:\n- An $8 million after-tax ($12 million pretax) charge for efficiency enhancements and severance expenses accrued for staff reductions in Natural Gas Transmission and Distribution operations;\n- An $11 million charge to deferred federal income taxes resulting from the 1% increase in the statutory federal income-tax rate on corpora- tions;\n- A $9 million after-tax ($13 million pretax) write-off of non-U.S. gas and oil assets; and\n- A $27 million after-tax ($41 million pretax) charge as a result of an adverse judgment in litigation that required additional payment in a limited partnership exchange offer made in 1989 beyond the amount that the Corporation believes represented fair value. In addition, there was a $4 million after-tax ($6 million pretax) charge for additional interest awarded.\nThe 1992 results from continuing operations included an $11 million after-tax ($17 million pretax) write-off of abandoned offshore facilities and a $10 million after-tax ($15 million pretax) provision for litigation. Results from continuing operations in 1991 included after-tax gains totaling $10 mil- lion from the sale of properties.\nRevenues for 1993 were $1.9 billion, compared with $1.7 billion in both 1992 and 1991. Operating income for 1993 was $73 million, compared with $112 million in 1992 and $137 million in 1991. Excluding the effects on operating income of the unusual charges mentioned above, 1993 operating income was $140 million versus $129 million for 1992 and $137 million for 1991. Variations in operating income by business segment are discussed below.\nThe 1993 results include income from discontinued operations of $74 million ($1.11 per share), representing after-tax gains totaling $68 mil- lion ($1.03 per share) from the sale of the principal operating assets of Ebasco Services Incorporated and the Corporation's 49% interest in Dorsch Consult, and income from operations before the sale of $6 million. There was a $16 million ($.25 per share) loss from discontinued operations in 1992, primarily related to the sale of Humphreys and Glasgow International and provisions for real estate formerly utilized by discontinued operations. In 1991, there was a loss of $19 million ($.29 per share). With these sales, the Corporation has concluded its involvement in the engineering and construction business and now reflects these results as discontinued operations.\nA-4\nResults for the year 1992 also included a $15 million ($.23 per share) after-tax extraordinary loss from the extinguishment of high interest-rate debt and the termination of an interest-rate hedge.\nNATURAL GAS TRANSMISSION AND DISTRIBUTION\nThe six-year statistics for Transmission and Distribution operations (See table of Operating Data) reflect the effects of variable weather patterns and increasing significance of nonregulated markets.\nOperating income for Transmission and Distribution operations for 1993 was $113 million before the $12 million charge relating to the ongoing reengineering of this business ($101 million after the charge), compared with $102 million for 1992 and $111 million for 1991. Normal winter weather, combined with aggressive marketing of services and increased capacity, contributed to higher sales and transportation volumes in 1993.\nVolumes handled during the year were 645 billion cubic feet (Bcf), a 22% increase from both 1992 and 1991. Gas throughput on Lone Star's pipeline system reached 554 Bcf in 1993, its highest level since 1981. The volume of gas sold by Lone Star Gas Company and Enserch Gas Company (EGC) in 1993 totaled 414 Bcf, 18% above the 1992 level and 14% greater than 1991. Sales by EGC accounted for 59% of total gas sales volumes in 1993 versus 53% in 1992 and 51% in 1991.\nResidential and commercial (R&C) sales volumes were 139 Bcf in 1993, up 16% from the 1992 volumes of 121 Bcf and 8% higher than in 1991, primarily due to colder winter weather. Heating degree days for 1993 rose 27% over the prior year and were slightly above normal for the first year since 1989. Industrial and electric-generation sales volumes of 138 Bcf were 6% greater than in 1992 but 15% less than 1991. Volumes sold to pipelines and others in 1993 totaled 136 Bcf, a 37% improvement from the 1992 level of 99 Bcf, which was improved 40% from the 1991 level of 71 Bcf.\nThe overall gas sales margin (revenue less cost of gas purchased and off-system transportation expense) for 1993 improved 7% from the prior year. The overall gross margin per thousand cubic feet (Mcf) on Lone Star's sales was $2.09 in 1993, $2.06 in 1992 and $1.96 in 1991. Lone Star has an ongoing rate program to monitor returns from cities and towns served by its distribution system, as well as the transmission system that supplies them. In the aggregate, rate increases provided $1.9 million in annual base-rate relief in 1993. The gross margin per Mcf on gas sold by EGC was $.11 in 1993, down from $.13 in both 1992 and 1991.\nThe total gas transportation volume in 1993 was 371 Bcf, a 21% improvement from 1992 volumes of 307 Bcf, which were slightly above the 1991 level. The gas transportation rate per Mcf averaged $.14 in 1993, compared with $.15 in 1992 and $.16 in 1991. The margins on incremental volumes generally are at lower rates and thereby reduce the average margin.\nLone Star's gas purchase contracts are discussed below.\nA-5\nNATURAL GAS AND OIL EXPLORATION AND PRODUCTION\nOperating income for Exploration and Production operations closely follows fluctuations in product prices and volumes that are shown in the table of Operating Data.\nBefore the previously noted litigation charge and write-offs of non-U.S. gas and oil properties, operating income for Exploration and Production operations was $17 million for 1993, compared with $10 million for 1992 and $11 million for 1991. This improvement resulted from significantly increased natural-gas prices and higher sales volumes.\nRevenues for Exploration and Production operations for 1993 of $190 mil- lion were 11% higher than 1992 and 3% above 1991. In 1993, natural-gas revenues increased 23% to $146 million, with the average natural-gas price per Mcf of $2.09 up 15% from the price in 1992 of $1.82. Natural-gas sales volumes totaled 70 Bcf, a 7% increase from the year-ago period and virtually the same as 1991. The increase in volumes for 1993 was principally due to accelerated natural-gas development drilling in East Texas and offshore production from Mississippi Canyon Block 441 in the Gulf of Mexico, which went on stream in the second quarter of 1993. Oil revenues declined $8 million to $37 million in 1993 due to a 9% production decline and a 10% decrease in the average sales price to $17.24 per barrel. The lower volumes in 1993 were primarily the result of declining production from several North Texas reservoirs.\nSpot-market sales, which include monthly and short-term industrial sales, covered about 70% of 1993 gas sales, compared with 80% in 1992 and 75% in 1991. During 1994, the percentage of gas sold in the spot market is expected to be in the range of 75% to 85%.\nDrilling activity during the first half of 1993 increased to levels last experienced by the Corporation in 1987, primarily because of development work in East Texas. ENSERCH participated in more than 100 wells (79 net) in 1993, with the majority completed as gas producers in East Texas. Thirty-nine wells were in progress at yearend. Recompletions and production optimization measures played a major role in the 1993 production enhancement program.\nResults for 1994 will include a full year of production from the Mississippi Canyon Block 441 deep-water project in the Gulf of Mexico, which began production in early 1993. The field is producing some 70 million cubic feet (MMcf) of natural gas and more than 500 barrels of condensate per day from six wells. ENSERCH is the operator, with a 37.5% working interest in the project.\nThe Garden Banks Block 388 oil development project, also in the Gulf, remains on schedule and on budget, with initial production anticipated by mid- 1995. The final major contract for the conversion of a semi-submersible drilling rig to a floating production facility was finalized in early 1994. Installation of the offshore facilities, consisting of the subsea template, gathering and sales pipelines and shallow-water operations, will begin by mid- year. Three previously drilled oil wells will be connected to the subsea template. Initial daily production from three predrilled wells is expected to total 15 thousand barrels (MBbls) of oil and 12 to 15 MMcf of gas by late 1995, with peak daily production from the Garden Banks project anticipated in late 1996 at 40 MBbls of oil and 60 MMcf of gas. Gross proven reserves are presently estimated to be equivalent to 28 million barrels (MMBbls) of oil by DeGolyer and MacNaughton, an independent consulting firm. ENSERCH is 100% interest owner and operator of the Garden Banks project.\nA-6\nENSERCH has budgeted $116 million for exploration and production activities in 1994, compared with expenditures of $120 million in 1993. In 1992, ENSERCH sharply curtailed its capital spending to $66 million in response to poor prices for both natural gas and oil. If the early 1994 weakness in oil prices persists throughout 1994, appropriate cutbacks in spending may be undertaken. More than half of ENSERCH's 1994 capital expenditures is earmarked for domestic onshore drilling.\nThe Corporation follows the full-cost method of accounting for the acquisition, exploration and development costs of gas and oil properties. The overall rate of amortization for U.S. properties was $.98 per million British thermal units produced for both 1993 and 1992, compared with $.90 in 1991. Costs of additional offshore projects and increased development costs associated with older East Texas fields largely account for the increase from 1991.\nDuring 1993, the Corporation wrote off some $13 million representing all remaining capitalized costs associated with its non-U.S. gas and oil proper- ties.\nENSERCH's natural-gas reserves at January 1, 1994, were 1.09 trillion cubic feet (Tcf), compared with 1.10 Tcf the year earlier, as estimated by DeGolyer and MacNaughton. Oil and condensate reserves, including natural gas liquids attributable to leasehold interests, were 39 MMBbls, virtually the same as the year-ago level.\nAt January 1, 1994, estimated future pretax net cash flows from ENSERCH's owned proved gas and oil reserves, based on average prices and contracts in effect in December 1993, were $2.0 billion, about the same as the year earlier. The net present value of such cash flows, discounted at the Securities and Exchange Commission (SEC)-prescribed 10%, was $1.1 billion, virtually the same as the prior year. These discounted cash flow amounts are the basis for the SEC-prescribed cost-center ceiling for the full-cost accounting method. The margin between the cost-center ceiling and the unamortized capitalized costs of U.S. gas and oil properties was approximately $75 million at December 31, 1993. Product prices are subject to seasonal and other fluctuations. A significant decline in prices from yearend 1993 or other factors, without mitigating circumstances, could cause a future write-down of capitalized costs and a noncash charge against earnings.\nIn November 1993, an adverse judgment in litigation required additional payment for a limited partnership exchange offer made in 1989. The award included $41 million for the units and $21 million of prejudgment and post-judgment interest ($15 million was charged against an existing reserve for litigation). The $41 million additional payment was charged against income in the fourth quarter. The Corporation had believed that any additional consideration for the units should be capitalized; however, after further review at the time of the judgment, the expensing of the final court-ordered payment was prudent and necessary because it did not bring additional value.\nNATURAL GAS LIQUIDS PROCESSING\nOperating income for Natural Gas Liquids (NGL) Processing operations for 1993 was $5 million, compared with $13 million for 1992 and $21 million for 1991. Higher prices for natural gas, the feedstock used in NGL production, and continued lower NGL sales prices caused margins to decline. The average NGL\nA-7\nsales price per barrel in 1993 of $12.34 was down 8% from 1992 and was 11% below 1991, while NGL sales volumes of 6.0 MMBbls were virtually the same as 1992 and 1991.\nPOWER AND OTHER\nENSERCH's power and other activities, comprised of Enserch Development Corporation, Lone Star Energy Company and Enserch Environmental Corporation, had 1993 operating income of $15 million, compared with $20 million for 1992 and $9 million for 1991. Enserch Development Corporation's 1993 operating income was $5.9 million, compared with $9.8 million for 1992 and $2.1 million for 1991. Current year results included a $15 million pretax gain from the sale of a position in a power project that had been scheduled for development, while 1992 and 1991 results included development fees from cogeneration projects of $15 million and $5 million, respectively. Lone Star Energy Company's 1993 operating income was $3.9 million, some 8% higher than 1992 but slightly below 1991.\nEnserch Environmental Corporation, which was retained when Ebasco's principal operating assets were sold in December 1993, had operating income for 1993 of $5.7 million, compared with $6.8 million for 1992 and $2.9 million for 1991. Backlog was $600 million at December 31, 1993.\nOTHER INCOME AND EXPENSE ITEMS\nOther income\/(expense) for 1993 includes pretax gains totaling $7 million from the sale of a gas storage facility and the Corporation's minority investment in an insurance entity. Partially offsetting was a $5.6 million provision for the interest awarded in the judgment described earlier, while the 1992 amount principally reflected a $15 million provision for litigation. The sale of Oklahoma utility properties and non-U.S. gas and oil properties in 1991 resulted in pretax gains of $15 million. Details of other income\/(expense) are included in Note 12.\nInterest expense for 1993 was $80 million, including $8 million not related to borrowings, compared with $97 million for 1992 and $96 million for 1991. The reduction is the result of ongoing restructuring of long-term debt at lower rates and lower short-term interest rates. Interest capitalized in 1993 was $4.5 million, compared with $5.4 million in 1992 and $7.5 million in 1991.\nIncome-tax expense for 1993 includes an $11 million charge to deferred federal income taxes resulting from the 1% increase in the statutory federal income-tax rate on corporations. Excluding this charge, the income-tax benefit on the loss from continuing operations equaled 46% of the pretax loss. At December 31, 1993, the Corporation had domestic net operating-loss carryfor- wards and suspended losses of $161 million and tax-credit carryforwards of $37 million. The tax benefits of these carryforwards and suspended losses, which total some $93 million, are available to reduce future income-tax payments. Note 9 provides additional information on income taxes.\nA-8\nLIQUIDITY AND FINANCIAL RESOURCES\nNet cash flows from operating activities of continuing operations for 1993 were $192 million, compared with $211 million in 1992 and $184 million in 1991. Net cash flows from continuing operations, before cash flow effects of gas- purchase contract settlements and changes in current operating assets and liabilities, were $155 million versus $150 million in 1992 and $184 million in 1991. Cash flows associated with gas-purchase contract settlements improved substantially over the three-year period. Recoveries, net of payments, provided $51 million in 1993 and $26 million in 1992, while there were net payments of $7 million in 1991. (These payments are discussed in detail under \"Gas-Purchase Contracts.\") In 1993, there was a cash requirement of $14 mil- lion for the increase in current operating assets and liabilities, compared with decreases that provided $36 million in 1992 and $7 million in 1991.\nCash of $118 million was provided by investing activities in 1993, compared with cash requirements of $105 million and $127 million in 1992 and 1991, respectively. These amounts include cash provided by discontinued operations of $320 million in 1993, $14 million in 1992 and $37 million in 1991. Cash provided by discontinued operations in 1993 includes net proceeds of $198 mil- lion from the sale of the principal operating assets of Ebasco and the 49% interest in Dorsch and proceeds of $100 million from the limited recourse sale of retained Ebasco receivables, while 1992 includes net proceeds of $41 million from the sale of Humphreys and Glasgow International.\nThere was a net cash requirement for capital spending and other investing activities of $203 million in 1993, compared with $119 million in 1992 and $164 million in 1991. The increase in 1993 is primarily due to a higher level of capital spending for natural-gas and oil exploration and development programs.\nProperty, plant and equipment additions by business segments for the past three years and planned for 1994 are as follows:\nThe planned expenditures for 1994 are expected to be funded from internal cash flow and external financings as required.\nIn 1993, net cash flows from operating and investing activities totaled $309 million. In addition, $11 million was provided by the sale of common stock to employee stock plans and there was a $29 million net decrease in cash and cash equivalents. After the payment of cash dividends of $26 million, net cash of $324 million was available to reduce outstanding borrowings, with long- term debt reduced $200 million and commercial paper and other short-term borrowings decreased $121 million. In 1992, there was $51 million available to reduce borrowings or for temporary investment.\nA-9\nIn June 1993, the Corporation borrowed $200 million under its interim-term (13-month) bank lines, with the interest rate based on the London Interbank Offering Rate plus a fixed percentage. The proceeds were used in refinancing maturing debt consisting of $76 million net due on a Swiss Franc Note that had an effective interest rate of 8.9% and $100 million of 11 5\/8% Notes that matured in May 1993, with the remainder used to reduce commercial paper borrowings. The $200 million interim-term borrowing was repaid in December 1993 in connection with the sale of Ebasco assets and Dorsch.\nIn February 1993, the Corporation announced a reduction in the quarterly cash dividend on common stock to $.05 per share from $.20 per share, resulting in a change in annual cash requirements of about $40 million.\nIn 1992, Enserch Exploration Partners Ltd. (EP) entered into operating lease arrangements to provide financing for its portion of the offshore platforms and related facilities for the Mississippi Canyon Block 441 (37.5% owned) and Garden Banks Block 388 (100% owned) projects. A total of $34 mil- lion was required for the Mississippi Canyon Block 441 project, which was com- pleted in early 1993. The lease arrangement to fund the construction costs for the Garden Banks facility is estimated to total $235 million when completed in 1995. (See Note 6.)\nTotal capitalization was $1.6 billion at December 31, 1993, a decrease of $184 million from yearend 1992. The decrease reflects a $226 million reduction in senior long-term debt and a $42 million increase in common shareholders' equity. Common shareholders' equity, as a percentage of total capitalization, increased to 41.7% at December 31, 1993 from 34.8% at the end of 1992. At December 31, 1993, $350 million of shareholders' equity was free of any restrictions for payment of dividends or acquisition of capital stock.\nThe current ratio at December 31, 1993 was .72, compared with 1.0 at yearend 1992 and .95 at yearend 1991. The decline in 1993 was partially attributable to the sale of $34 million of Ebasco's working capital and the classification of a $62 million payment relating to the judgment described above as a current liability. This payment was made in January 1994.\nENSERCH uses the commercial paper market and commercial banking facilities for short-term needs. Commercial paper and other short-term borrowings, net of temporary cash investments, totaled $32 million at December 31, 1993, compared with $121 million at yearend 1992 and $156 million at the end of 1991. Bank lines for either short- or interim-term borrowings totaled $650 million at yearend 1993. Presently, all of these lines are unused.\nIn February 1994, the Corporation issued $150 million of 10-year term notes at a coupon rate of 6.375%. The proceeds were used in March to fully redeem the $75 million of Series D Adjustable Rate Preferred Stock at par value and to retire all outstanding sinking fund debentures, which had a combined principal balance of $74 million. The premium for early retirement was $1.4 million. The preferred stock had a minimum dividend rate of 7.5%, equivalent to 11.54% on a tax-adjusted basis. The sinking fund debentures had a weighted average interest rate of 8.5%.\nIn March 1994 the Corporation filed a shelf registration statement with the Securities and Exchange Commission for the sale from time to time of up to $450 million in the aggregate of securities, which can be its senior or subordinated debt securities, or its equity securities or the securities of a special purpose subsidiary. Proceeds received from any sale will be used to repay obligations of the Corporation, unless otherwise set\nA-10\nforth in a prospectus supplement. The type and terms of any security to be offered will be determined at the time of each offering.\nEven though inflation has abated considerably from the levels of the early 1980s, and was only about 2.5% in 1993, it continues to have some influence on the Corporation's operations. Most notable is that allowances for depreciation and amortization based on the historical cost of fixed assets may be insuffi- cient to cover the replacement of some long-lived fixed assets.\nGAS-PURCHASE CONTRACTS\nLone Star is a fully integrated intrastate natural-gas utility from well- head to end use and owns its own gathering, transmission and distribution facilities. Lone Star buys gas under long-term, intrastate contracts in order to assure reliable supply to its customers. To obtain this relia- bility, Lone Star entered into many gas-purchase contracts that provide for minimum-purchase (\"take-or-pay\") obligations to gas sellers. In the past, Lone Star was unable to take delivery of all minimum gas volumes tendered by suppliers under these contracts. This situation principally resulted from general economic conditions, the restructuring of regulations in the natural- gas industry, customers having the availability of lower-priced natural gas from competitive sources, certain capacity limitations, Railroad Commission of Texas (RRC) rules regulating takes of gas, and warmer-than-normal winter temperatures that reduced sales demand. During past years, numerous claims have been made by gas suppliers asserting Lone Star's failure to meet its minimum purchase obligations, and other claims such as disputing prices paid for gas purchased under contracts. Lone Star has substantially reduced the potential assertions resulting from such claims through negotiations and contractual and statutory provisions. Producer settlement obligations in Lone Star's contracts have been reduced substantially in recent years. Claims asserted for events during 1992 and anticipated claims for 1993 are negligible.\nTake-or-pay contract provisions generally allow for payments to be recouped by taking gas in future periods without payment in accordance with the terms of the contract. When the gas is taken, the previous advance payment becomes a part of gas cost that is charged to customers. Alternatively, Lone Star, in many cases, has negotiated \"nonrecoupable\" payments that generally are much less in amount than comparable recoupable payments but provide no rights to recoup gas in future periods. Nonrecoupable settlement payments are included in gas costs recovered through customer billings as described below.\nObligations to purchase gas in the future are estimated to be as follows (in millions): 1994, $150; 1995, $120; 1996, $95; 1997, $90; 1998, $80; and thereafter, not more than $70, with the final contracts expiring in 2003. Based on Lone Star's estimated gas demand of about 170 Bcf annually, which assumes normal weather conditions, it is expected that normal gas purchases will substantially satisfy purchase obligations for the year 1994 and thereafter; however, any payments that may be required to be made for obligations not met are recoupable under contract provisions or are recoverable from customers as gas purchase costs. Therefore, a provision for loss is not required.\nLone Star's regulated rates for residential and commercial customers and its contractual rates for industrial and electric-generation customers include gas costs recorded each month (including out-of-period costs), an allowance for other costs and expenses, and a return on investment. Its residential and commercial distribution rates are set at the cost of service within each city\nA-11\nby the local municipal governments. The RRC has appellate jurisdiction over the city distribution rates and original jurisdiction over the rates outside city limits. The RRC regulates the intracompany city gate rate or charge for the transmission service outside city limits that is included as a cost for distribution service to residential and commercial customers within city limits. The RRC provides a gas cost recovery mechanism in the city gate rate that is designed to match gas costs with revenues on a timely basis to prevent margin erosion or excesses by allowing both positive and negative gas cost changes to flow through to the customers. The Texas city gate gas cost recovery mechanism limits the amount of out-of-period gas costs, of which producer settlements are a part, that can be charged to customers in a particular month. The existing recovery mechanism does, however, allow for ultimate recovery of gas costs, including such out-of-period payments. Similarly, contractual provisions provide for recovery of the allocated share of these costs from industrial and electric-generation customers. Therefore, a provision for loss is not required.\nAt December 31, 1993, the approximate amount of unsettled gas-purchase contract claims asserted by suppliers, as well as estimated claims that are probable of assertion, was $80 million. Of this total, approximately $70 million relates to a claim filed in 1993 primarily related to asserted obligations for purchases for early through mid-1980s. (See Note 6.) In some cases, the claimed amount includes other asserted damages in addition to the take-or-pay claim. The possibility exists that additional gas-purchase contract claims might be asserted by other claimants. Lone Star expects to resolve the foregoing claims at substantially less than the claimed amounts. Due to the different forms of settlement, as discussed above, the ultimate liability to a supplier, if any, generally cannot be reasonably estimated prior to settlement; however, a liability is recorded in the financial statements for those claims when a settlement is probable and an amount can be reasonably estimated. A provision for loss is not required since settlement payments are recoupable under contracts or recoverable through billings to customers, as previously discussed.\nAt December 31, 1993, there was an unrecovered balance of gas-purchase contract settlements of $111 million, down from $173 million at December 31, 1992. The balances include take-or-pay settlements, amounts relating to pricing and amounts related to the settlement of other contractual matters. Of the $111 million, $63 million represented prepayments for gas expected to be recouped under contracts covering future gas purchases. The remaining $48 million represented amounts expected to be recovered from customers under the existing gas cost recovery provisions. Lone Star expects to recoup or recover the remaining balances of gas settlement payments made to date, as well as future payments to be made in settlement of remaining claims. The period of recovery is dependent on the overall demand for gas by Lone Star's customers, which is influenced by weather conditions.\nA summary of transactions related to unrecovered gas settlement payments during the two years ended December 31, 1993, is as follows:\nA-12\nFOURTH-QUARTER RESULTS\nEarnings applicable to common stock for the fourth quarter of 1993 were $36 million ($.53 per share), compared with a loss of $33 million ($.49 per share) for the fourth quarter of 1992. Fourth quarter income from discontinued operations was $70 million ($1.04 per share), compared with a loss of $16 million ($.25 per share) for the same period a year earlier. Results for the fourth quarter of 1992 also included a $10 million after-tax extraordinary loss from debt extinguishment. There was a loss from continuing operations after provision for preferred dividends for the fourth quarter of 1993 of $34 million ($.51 per share) versus a loss of $6 million ($.08 per share) for the year-ago period. Results for the 1993 and 1992 fourth quarters included all of the unusual items noted for the full year, except for after-tax charges of $10.8 million for the increase in the statutory federal income tax rate, $3.6 million for litigation and $2.0 million for write-offs of non-U.S. gas and oil properties that occurred earlier in 1993. Before unusual items, operating income for the 1993 fourth quarter was $28 million, compared with $52 million for the year-earlier quarter. In addition to the unusual items noted, fourth quarter 1993 operating income was reduced by some $10 million of other year-end provisions. Results for the fourth quarter of 1992 were enhanced by develop- ment fees of $15 million from a cogeneration project. Fundamental results were about the same in both quarters.\nNEW ACCOUNTING STANDARDS\nSFAS No. 106, \"Employer's Accounting for Postretirement Benefits Other Than Pensions,\" which mandates the accounting for medical and life insurance and other nonpension benefits provided to retired employees, was adopted by the Corporation effective January 1, 1993. (See Note 8.)\nSFAS No. 112, \"Employer's Accounting for Postemployment Benefits,\" will become effective for the Corporation in 1994. This standard covers the accounting for estimated costs of benefits provided to former or inactive employees before their retirement. The Corporation currently accrues costs of benefits to former or inactive employees by varying methods. The new standard is not expected to have a significant effect on results of operations or financial condition.\nA-13\nA-16\nA-17\nINDEPENDENT AUDITORS' REPORT\nTo the Shareholders and Board of Directors of ENSERCH Corporation:\nWe have audited the accompanying consolidated balance sheets of ENSERCH Corporation and subsidiary companies as of December 31, 1993 and 1992, and the related statements of consolidated income, cash flows and common shareholders' equity for each of the three years in the period ended December 31, 1993. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits. We have previously audited the consolidated balance sheets of ENSERCH Corporation and subsidiary companies as of December 31, 1991, 1990, 1989 and 1988 and the related statements of consolidated income, cash flows and common shareholders' equity for the years ended December 31, 1990, 1989, and 1988 (not presented herewith), and have expressed unqualified opinions thereon.\nWe conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.\nIn our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of ENSERCH Corporation and subsidiary companies at December 31, 1993 and 1992, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1993, in conformity with generally accepted accounting principles. Also, in our opinion, the information set forth in the accompanying table of selected financial data for the years 1988 through 1993 is fairly stated in all material respects in relation to the consolidated financial statements from which such information has been derived.\nDELOITTE & TOUCHE\nDallas, Texas February 7, 1994\nA-18\nMANAGEMENT REPORT ON RESPONSIBILITY FOR FINANCIAL REPORTING\nThe management of ENSERCH Corporation is responsible for the preparation, presentation and integrity of the financial statements contained in this report. These statements have been prepared in conformity with accounting principles generally accepted in the United States and include amounts that represent management's best estimates and judgments. Management has estab- lished practices and procedures designed to support the reliability of the estimates and minimize the possibility of a material misstatement. Management also is responsible for the accuracy of the other information presented in the annual report and for its consistency with the financial statements.\nManagement has established and maintains internal accounting controls that provide reasonable assurance as to the integrity and reliability of the financial statements, the protection of assets from unauthorized use or disposition, and the prevention and detection of fraudulent financial reporting. The system of internal control provides for appropriate division of responsibility and is documented by written policies and procedures that are communicated to employees with significant roles in the financial reporting process and updated as necessary. Management continually monitors compliance with the system of internal accounting controls. The Corporation maintains a strong internal audit function that evaluates the adequacy of the system of internal accounting controls. As part of the annual audit of the financial statements, Deloitte & Touche also performs a study and evaluation of the system of internal accounting controls as necessary to determine the nature, timing, and extent of their auditing procedures. The Board of Directors maintains an Audit Committee composed of Directors who are not employees. The Audit Committee meets periodically with management, the independent auditors and the internal auditors to discuss significant accounting, auditing, internal accounting control and financial reporting matters. A procedure exists whereby either the independent or the internal auditors through the independent auditors may request, directly to the Audit Committee, a meeting with the Committee.\nManagement has given proper consideration to the independent and internal auditors' recommendations concerning the system of internal accounting controls and has taken corrective action believed appropriate in the circumstances. Management further believes that, as of December 31, 1993, the overall system of internal accounting controls is sufficient to accomplish the objectives discussed herein.\nA-19\nManagement recognizes its responsibility for establishing and maintaining a strong ethical climate so that the Corporation's affairs are conducted according to the highest standards as defined in the Corporation's Statement of Policies. The Statement of Policies is publicized throughout the Corpora- tion and addresses, among other issues, open communication within the Corporation; the disclosure of potential conflicts of interest; compliance with the laws, including those relating to financial disclosure; and the confidenti- ality of proprietary information.\ns\/D. W. Biegler - ------------------------------ D. W. Biegler Chairman and President, Chief Executive Officer\ns\/S. R. Singer - ------------------------------ S. R. Singer Senior Vice President, Finance and Corporate Development, Chief Financial Officer\ns\/J. W. Pinkerton - ------------------------------ J. W. Pinkerton Vice President and Controller, Chief Accounting Officer\nFebruary 7, 1994\nA-20\nA-21\nA-22\nA-23\nA-24\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS ENSERCH Corporation and Subsidiary Companies\n1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES\nAll dollar amounts, except per share amounts, in the notes to the consoli- dated financial statements are stated in thousands unless otherwise indicated.\nBasis of Financial Statements - The consolidated financial statements include all subsidiaries during the period of ownership and control. The equity method of accounting is used for investments in affiliates in which ENSERCH Corporation (ENSERCH or the Corporation) does not have voting control.\nLone Star Gas Company (Lone Star), the gas utility division of ENSERCH Corporation and principal company in the natural gas transmission and distribu- tion business operations, is subject to the accounting requirements prescribed by the National Association of Regulatory Utility Commissioners. Lone Star's rates are established by the Railroad Commission of Texas and by municipal governments.\nThe statements of consolidated income and cash flows previously reported for 1992 and 1991 have been restated to reflect the engineering and construction segment as a discontinued operation. Current year reported results reflect the realignment of the segments of business for financial reporting purposes. All prior year amounts have been reclassified to reflect the new alignments.\nRevenue Recognition - Lone Star records revenues on the basis of cycle meter readings throughout the month and accrues revenues for gas delivered but not billed to customers from the meter reading dates to the end of the month.\nThe environmental business of the Corporation follows the generally accepted accounting practice of reporting revenues and income from long-term contracts on the percentage of completion basis using estimates of total contract revenue and costs at completion. These estimates are updated throughout the terms of the contracts and adjustments are made as appro- priate. All known or anticipated losses on these contracts are charged to earnings when identified.\nGas and Oil Properties - The full-cost method, as prescribed by the Securi- ties and Exchange Commission (SEC), is used whereby the costs of proved and unproved gas and oil properties, together with successful and unsuccessful exploration and development costs, are capitalized by cost centers on a country-by-country basis. The carrying value for each cost center is limited to the present value of estimated future net revenues of proved reserves, the cost of excluded properties and the lower of cost or market value of unproved properties being amortized. Dry-hole costs resulting from exploration activities are classified as evaluated costs and are included in the amortiza- tion base. Costs directly associated with the acquisition and evaluation of unproved properties are excluded from the amortization base until the related properties are evaluated. Such unproved properties are assessed periodically and a provision for impairment is made to the full-cost amortization base when appropriate. Sales of gas and oil properties are credited to capitalized costs unless the sale would have a significant impact on the amortization rate.\nGas Purchase Contracts - The Corporation has made accruals for payments to producers that may be required for settlement of gas purchase contract claims asserted or that are probable of assertion. Lone Star's rates billed to customers provide for the recovery of the actual cost of gas (including out-of- period costs such as gas purchase contract settlement costs). The Corporation\nA-25\ncontinually evaluates its position relative to asserted and unasserted take-or- pay claims, above-market prices or future commitments. Based on this evaluation and its experience to date, management believes that the Corporation has not incurred losses for which reserves should be provided at December 31, 1993.\nDepreciation and Amortization - Depreciation is provided principally by the straight-line method over the estimated service lives of the related assets. Amortization of evaluated gas and oil properties is computed on the unit-of- production method by cost center using estimated proved gas and oil reserves quantified on the basis of their equivalent energy content.\nLone Star's plants are depreciated over approximately 40 years; amortiza- tion of gas and oil properties was approximately 6.0% in 1993 and 5.7% in both 1992 and 1991.\nEarnings Per Share of Common Stock - Earnings per share applicable to com- mon stock are based on the weighted average number of common shares, including common equivalent shares when dilutive, outstanding during the year. Common equivalent shares consist of those shares issuable upon the assumed conversion of the 10% Convertible Subordinated Debentures during the periods in which they were outstanding (which were not dilutive in 1992 and 1991) and exercise of stock options under the treasury stock method. The 6 3\/8% Convertible Subordinated Debentures were not common stock equivalents. Fully diluted earnings per share are not presented since the assumed exercise of stock options and conversion of debentures would not be dilutive.\nGas Stored Underground - Gas stored underground is valued at average cost. The volume of gas that is available for sale within 24 months is classified as a current asset. The remainder is included in property, plant and equipment.\nFair Value of Financial Instruments - The Corporation has estimated the fair values of its financial instruments using available market information and other valuation methodologies in accordance with SFAS No. 107, \"Disclosures About Fair Value of Financial Instruments\". Accordingly, the estimates presented are not necessarily indicative of the amounts that the Corporation could realize in a current market exchange. Determinations of fair value are based on subjective data and significant judgment relating to timing of payments and collections and the amounts to be realized. Different market assumptions and\/or estimation methodologies might have a material effect on the estimated fair value amounts.\nThe estimated fair value amounts for specific groups of financial instruments are presented within the footnotes applicable to such items. When available, values were based on market quotes from a securities exchange or a broker-dealer. When such quotes were not available, fair value estimates were made using a discounted cash flow approach based on the interest rates currently available for debt with similar terms and maturities.\nThe fair value of financial instruments for which estimated fair value amounts have not been specifically presented is estimated to approximate the related book value.\nA-26\n2. LINES OF CREDIT AND BORROWINGS\nThe Corporation maintains domestic and foreign lines of credit that provide for short- and interim-term (13-month) borrowings and also support commercial paper borrowings in the U.S. and Europe. Foreign lines provide for borrowings in either U.S. dollars or in local foreign currencies, with maturities of not more than 13 months. At December 31, 1993, the aggregate lines of credit were:\nThe domestic lines are subject to renegotiation annually by May 1 and the foreign lines by November 1. All lines are on a fee basis and do not require compensating balances or restrictions on the use of cash. All lines provide for borrowing at the prime rate or at rates related to the London Interbank Offering Rate (LIBOR), the banks' certificate of deposit rate, or a money market based rate.\nAs of December 31, 1993, $15 million was used to support a letter of credit issued in connection with the appeal of a lawsuit. This letter of credit was canceled in January 1994, following satisfaction of amounts awarded under the lawsuit.\nThe Corporation has an interest-rate swap agreement, expiring in 1995, whereby the Corporation pays interest at the rate of 12.26% per annum on a notional amount of $100 million and receives interest at a floating rate based on LIBOR. Through November 1992, the notional amount of the swap was matched to variable interest-rate debt, including commercial paper, and was accounted for as an interest-rate hedge. In December 1992, the Corporation repaid all variable rate debt, and the swap arrangement could no longer be accounted for as an interest-rate hedge. A charge of $10.4 million (net of income-tax benefit of $5.4 million) was recorded for the estimated cost to terminate the hedge. (See Notes 3 and 4 for other debt extinguishments.)\nA-27\n3. SENIOR LONG-TERM DEBT\nSenior long-term debt as of December 31 is summarized below:\nIn February 1994, the Corporation issued $150 million of 6 3\/8% Notes due 2004 in a public offering. Part of the net proceeds of this issue will be used in March 1994 for early redemption, including call premiums of $1.4 million, of all the $73.7 million principal amount of the sinking fund debentures outstanding at December 31, 1993. The remainder of the net proceeds will be used to redeem in March 1994, all of the $75 million Adjustable Rate Preferred Stock, Series D. (See Note 5).\nIn June 1993, the Corporation borrowed $200 million under its interim-term (13-month) bank lines, with the interest rate based on LIBOR plus a fixed percentage. The proceeds were used in refinancing maturing debt consisting of $76 million net due on a Swiss Franc Note that had an effective interest rate of 8.9% and $100 million of 11 5\/8% Notes that matured in May 1993, with the remainder used to reduce commercial paper borrowings. The $200 million interim-term borrowing was repaid in December 1993 in connection with the sale of Ebasco assets and Dorsch.\nIn March 1992, the Corporation issued $100 million of 8% Notes due 1997 and $100 million of 8 7\/8% Notes due 2001 and in August 1992, issued $150 million of 7% Notes due 1999, all in public offerings. The net proceeds were used for early redemption of higher interest-rate debt and convertible subordinated debentures (see Note 4). The Corporation recognized an extraordinary loss of\nA-28\n$2.4 million (net of income taxes of $1.2 million) representing the call premiums, unamortized costs and other expenses associated with the early extinguishment.\nThe Corporation has a borrowing of $100 million from a foreign bank under a variable interest-rate note agreement due November 11, 1994, which provides for interest at a rate based on LIBOR plus a fixed percentage. The Corporation entered into a separate $100 million interest-rate swap that fixes interest payments at an average rate of 9.11% per annum.\nThe 9.06% Note provides for varying increasing levels of semi-annual principal payments, including an aggregate of $10.6 million for 1994, with the last payment due December 28, 1999.\nExcluding the sinking fund debentures that have been called for redemption in March 1994, maturities of senior long-term debt for the following five years are: 1994, $139.9 million; 1995, $10.6 million; 1996, $13.4 million; 1997, $117.4 million; and 1998, $17.4 million. The 1994 amount includes $100 million for the 9.11% Note and $29.3 million for the 8.7% Note which will be refinanced on a long-term basis. The Corporation is not required to maintain compensating balances for any of its senior long-term debt.\nThe estimated fair value of the Corporation's senior long-term debt, including related interest-rate swaps, was $669 million at December 31, 1993, and $888 million at December 31, 1992. Such amounts do not include prepayment penalties which would be incurred upon the early extinguishment of certain debt issues.\n4. CONVERTIBLE SUBORDINATED DEBENTURES\nAs of December 31, 1993 and 1992, $90,750 of 6 3\/8% Convertible Subordinated Debentures Due 2002 were outstanding and convertible into shares of the Corporation's common stock at $26.88 per share (equal to 37.20 shares per $1 thousand principal amount). The Corporation, at its option, may redeem the 6 3\/8% Debentures at 103.82% of the principal amount, plus accrued interest, through March 31, 1994, and at declining premiums there- after. The estimated fair value of the Corporation's convertible subordinated debentures was $92 million and $83 million at December 31, 1993 and 1992, respectively.\nAn extraordinary loss of $2.5 million (net of income-tax benefit of $1.3 million) was recorded for the call premiums and other expenses associated with the early extinguishment of the 10% Debentures in 1992.\n5. SHAREHOLDERS' EQUITY\nAs of December 31, 1993, 8,368,968 shares of unissued common stock were reserved for issuance for stock plans and conversion of convertible subordinat- ed debentures. The Corporation is authorized to issue up to 2,000,000 shares of preferred stock and 2,000,000 shares of voting preference stock.\nA-29\nAdjustable Rate Preferred Stock - Information concerning issued and out- standing shares of adjustable rate preferred stock at December 31, 1993 and 1992, is summarized below:\nThe Corporation has called for redemption at par in March 1994, all outstanding shares of the Series D preferred stock at $50 per share, plus accrued dividends. The Series E stock is deposited with a bank under a depositary agreement and is represented by 1,000,000 Depositary Shares. The Series E preferred stock is redeemable at the option of the Corporation at $103.00 per depositary share through April 30, 1994, thereafter at $100 per depositary share. Holders of the preferred stock are entitled to its stated value upon involuntary liquidation.\nDividend rates are determined quarterly, in advance, based on the \"Applicable Rate\" (such rate being the highest of the three-month U.S. Treasury bill rate, the U.S. Treasury ten-year constant maturity rate and the U.S. Treasury twenty-year constant maturity rate, as defined), as set forth below:\nShareholder Rights Plan - The outstanding shares of common stock include one voting preference stock contingent purchase right. The rights are exercisable only if a person or group acquires beneficial ownership of 20% or more, or commences a tender or exchange offer upon consummation of which such person or group would beneficially own 30% or more of the Corporation's com- mon stock. Under those conditions, each right could be exercised to purchase one two-hundredth share of a new series of voting preference stock at an exercise price of $60.\nIf any person becomes the beneficial owner of 30% or more of the Corpora- tion's common stock, or if a 20%-or-more shareholder engages in certain self- dealing transactions, or if in a merger transaction with the Corporation in which the Corporation is the surviving corporation and its common stock is not changed or converted, then each right not owned by such person or related parties will entitle its holder to purchase, at the right's then-current exercise price, shares of the Corporation's common stock (or, in certain circumstances as determined by the Board of Directors, other consideration) having a value of twice the right's exercise price. In addition, if the\nA-30\nCorporation is involved in a merger or other business combination transaction with another person in which its common stock is changed or converted, or sells 50% or more of its assets or earning power to another person, each right will entitle its holder to purchase, at the right's then-current exercise price, common stock of such other person having a value of twice the right's exercise price.\nThe rights, which have no voting privileges, expire on May 5, 1996. The Corporation will generally be entitled to redeem the rights at $.05 per right at any time until the 15th day following public announcement that a 20% position has been acquired.\nManagement Incentive Program - As of December 31, 1993, the Corporation's Management Incentive Program consisted of two separate plans, the Unit Plan and the Non-Qualified Performance - Stock Option Plan. Key employees participating in the Unit Plan and Stock Option Plan totaled 62 and 8, respectively.\nUnder the Unit Plan, a maximum of 900,000 units outstanding at one time could be awarded from time to time to key employees by the Board of Directors. Benefits are payable in cash. At December 31, 1993 and 1992, 316,500 and 347,750 units, respectively, were outstanding. The Unit Plan was terminated by the Board of Directors in February 1994.\nUnder the Non-Qualified Performance - Stock Option Plan, options were granted to key employees to purchase shares of common stock at an exercise option price equal to par value ($4.45). Outstanding options at December 31, 1993, covered 13,277 shares.\n1981 Stock Option Plan - Incentive Stock Options and Non-Qualified Stock Options were granted to key employees to purchase shares of the Corporation's common stock at an option price of not less than the fair market value of the common stock on the date of grant. This plan terminated on September 17, 1991, and no additional grants of stock options will be made. Options exercised in 1993 were at prices ranging from $16.375 to $21.00 per share. No options were exercised in 1992 and options exercised in 1991 were at a price of $17.00 per share. Option prices of grants outstanding at December 31, 1993, ranged from $16.375 to $25.625 per share. As of December 31, 1993, options to purchase 1,307,568 shares were outstanding under such plan. The number of key employees participating in the plan was 108 as of December 31, 1993.\n1991 Stock Option Plan - Non-Qualified Stock Options may be granted to key employees for the purchase of not more than 2,000,000 shares of the Corpora- tion's common stock at an option price of not less than the fair market value of the common stock on the date of grant. In February 1994, the Board of Directors amended the 1991 Stock Option Plan, subject to shareholder approval, to include provisions for Restricted Stock. A total of 88,500 shares of performance-based Restricted Stock have been authorized for issuance to certain executive officers, subject to shareholder approval of the plan amendments. Performance criteria for lifting the restrictions is related to three-year total shareholder return compared to the weighted average of a peer group of companies. Options exercised in 1993 were at prices ranging from $12.50 to $19.00 per share. No options were exercised in 1992 or 1991. Option prices of grants outstanding at December 31, 1993, ranged from $12.50 to $19.00 per share. As of December 31, 1993, options to purchase 1,068,125 shares had been\nA-31\ngranted and were outstanding under such plan. The number of key employees participating in the plan was 122 as of December 31, 1993.\nA summary of all stock option transactions follows:\nDividends - Restrictions on the payment of dividends on common stock (other than stock dividends) or acquisitions of the Corporation's capital stock are contained in the Corporation's several trust indentures and other agreements relating to senior long-term debt and in the Restated Articles of Incorporation of the Corporation. At December 31, 1993, the amount of dividends on common stock that could be paid under the most restrictive of these agreements exceeded the combined total of the retained earnings and paid in capital of the Corporation which was $350,099 and represented the effective limitation on common stock dividends. Following the redemption of all of the outstanding sinking fund debentures and the Adjustable Rate Preferred Stock, Series D, all of which have been called for redemption in March 1994, $342,139 of the Corporation's common shareholders' equity as of December 31, 1993, would have been free of such restrictions.\nDividends declared are summarized below:\nA-32\n6. COMMITMENTS AND CONTINGENT LIABILITIES\nLegal Proceedings - On June 25, 1993, a lawsuit was filed against the utility division of the Corporation in the 4th Judicial District Court of Rusk County, Texas. The plaintiff claims that the utility division failed to make certain production and minimum purchase payments under a gas- purchase contract. The plaintiff contends that it was fraudulently induced to enter into a gas-purchase contract which the utility division never intended to perform; that the plaintiff was fraudulently induced and coerced into releasing the utility division from its obligation to make minimum purchase payments; and that the contract was breached. The plaintiff seeks actual damages in excess of $100 million in addition to punitive damages equal to the savings produced from a gas price reduction program implemented by the utility in 1982 or equal to the value of gas supply in excess of its needs which were added pursuant to a program established in 1978 to increase gas supply.\nA lawsuit was filed on February 24, 1987, in the 112th Judicial District of Sutton County, Texas, against subsidiaries and affiliates of the Corporation as well as its utility division. The plaintiffs have claimed that defendants failed to make certain production and minimum purchase payments under a gas- purchase contract. In this connection, the plaintiffs have alleged a conspiracy to violate purchase obligations, improper accounting of amounts due, fraud, misrepresentation, duress, failure to properly market gas and failure to act in good faith. In this case, plaintiffs seek actual damages in excess of $5 million and punitive damages in an amount equal to 0.5% of the consoli- dated gross revenues of the Corporation for the years 1982-1986 (approximately $85 million), interest, costs and attorneys' fees.\nManagement of the Corporation believes that the named defendants have meritorious defenses to the claims made in these and other actions. In the opinion of management, the Corporation will incur no liability from these and all other pending claims and suits that would be considered material for financial reporting purposes.\nLong-term Contracts - The Corporation's environmental business enters into contracts which have provisions for significant financial penalties should certain terms of performance not be achieved. Such contract provisions have not and are not expected to have a material effect on the Corporation's operations.\nGas-Purchase Contracts - See \"Financial Review - Gas-Purchase Contracts\" for a discussion of commitments and contingencies relating to gas-purchase contracts.\nEnvironmental Matters - The Corporation is subject to federal, state, and local environmental laws and regulations. These laws and regulations, which are constantly changing, regulate the discharge of materials into the environment. Environmental expenditures are expensed or capitalized depending on their future economic benefit. The level of future expenditures for environmental matters, including costs of obtaining operating permits, enhanced equipment monitoring and modifications under the Clean Air Act and cleanup obligations, cannot be fully ascertained at this time. However, it is management's opinion that such costs, when finally determined, will not have\nA-33\na material adverse effect on the consolidated financial position of the Corporation.\nLease Commitments - In May 1992, EP entered into an operating lease arrangement to provide financing for its portion of the offshore platform and related facilities for the 37 1\/2% owned Mississippi Canyon Block 441 project. A total of $34 million was required for the Mississippi Canyon project, which was completed in early 1993. EP leased the facilities for an initial period through May 20, 1994, with an option to renew the lease, with the consent of the lessor, for up to 10 successive six-month periods. The lease has been renewed through November 20, 1994 and the Corporation expects to renew the lease for all renewal periods. EP has the option to purchase the facilities throughout the lease periods and as of December 31, 1993, has guaranteed an estimated residual value for the facilities of approximately $27 million should the lease not be renewed. Expenses incurred under the lease in 1993 were $2.1 million. The estimated future minimum net rentals for the Mississippi Canyon operating lease is $6.3 million for 1994.\nIn September 1992, EP entered into an operating lease arrangement to pro- vide financing for the offshore platform and related facilities of its 100% owned Garden Banks Block 388 project. The lessor will fund the construction cost of the facilities quarterly, up to a maximum of $235 million. As of December 31, 1993, a total of $60 million had been advanced to EP under the lease as agent for the lessor, $31 million of which was unexpended and reflected as a current liability. EP will lease the facilities for an initial period through March 31, 1997, with the option to renew the lease, with the consent of the lessor, for up to three successive two-year periods. EP, as agent for the lessors, will acquire, construct and operate the units of leased property and has guaranteed completion of construction of the facilities. EP has the option to purchase the facilities throughout the lease periods and has guaranteed an estimated residual value for the facil- ities of approximately $188 million, assuming the full lease amounts are advanced and expended, should the lease not be renewed. The estimated future minimum net rentals for the Garden Banks operating lease are as follows: $4.8 million for 1994; $9.1 million for 1995; $9.1 million for 1996; and $2.3 million for 1997. Lease payments are being deferred during the con- struction period and will be amortized when production begins.\nIn addition, the Corporation had a number of other noncancelable long-term operating leases at December 31, 1993, principally for office space and machinery and equipment. Future minimum net rentals under these noncancelable long-term operating leases aggregate $9.7 million for 1994; $8.9 million for 1995; $6.6 million for 1996; $6.5 million for 1997; $4.7 million for 1998; and $51.9 million thereafter. Future minimum rental income to be received for subleased office space is $9.3 million over the next five years. Rental expenses incurred under operating leases aggregated $14.3 million in 1993; $19.4 million in 1992; and $20.3 million in 1991. Rental income received for subleased office space was $3.4 million in 1993; $4.7 million in 1992; and $4.7 million in 1991.\nSales of Receivables - The Corporation has an agreement, which has been extended to 1996, with a commercial bank for the limited recourse sale of up to $100 million of Lone Star's receivables. Additional receivables are continually sold to replace those collected. The agreement the Corporation had\nA-34\nfor the limited recourse sale of up to $75 million of Ebasco accounts receivable was assumed by the purchaser as part of the sale of Ebasco. In December 1993, the Corporation entered into an agreement with a bank for the limited recourse sale of $100 million of receivables retained from the sale of Ebasco. This program is self-liquidating as new receivables will not be sold to replace those collected. As of December 31, 1993 and 1992, the uncollected balances of receivables sold under all existing agreements were $200 million and $175 million, respectively.\nContingent Support Agreement - In connection with the sale of its oil field services segment to Pool Energy Services Co. (PESC) in 1990, ENSERCH entered into a Contingent Support Agreement (Agreement) by which ENSERCH is providing PESC with limited financial support. PESC is obligated to repay ENSERCH for any amounts paid out under guarantees and contingent obligations, together with interest accrued thereon.\nSupport provided under the Agreement at January 1, 1994, consists of (i) the guarantee supporting the financing of PESC's Saudi Arabian affiliate, Pool Arabia, Ltd., totaling $3.1 million until July 31, 1996, and (ii) the $31 million guarantee outstanding in connection with a facility lease that is reduced periodically until fully released in March 2003. The stock of Pool International, Inc. has been pledged to ENSERCH as collateral for the Agreement. ENSERCH's lien on this collateral will remain so long as the guarantee of the Pool Arabia loan is outstanding.\nGuarantees - In addition to guarantees mentioned above, the Corporation and\/or its subsidiaries are the guarantor on various commitments and obliga- tions of others aggregating some $60 million at December 31, 1993. The Corporation is exposed to loss in the event of nonperformance by other parties. However, the Corporation does not anticipate nonperformance by the counterpart- ies.\nFinancial Instruments With Concentrations of Credit Risk - The transmission and distribution operations have trade receivables from a few large industrial customers in the north central area of Texas arising from the sale of natural gas. The environmental operations have several large receivables from projects that are subject to governmental funding approvals.\nA change in economic conditions in a particular region or industry or change in local taxing authority may affect the ability of customers to meet their contractual obligations. The Corporation believes that its provision for possible losses on uncollectible accounts receivable of continuing operations is adequate for its credit loss exposure. At December 31, 1993 and 1992, the allowance for possible losses deducted from accounts receivable on the balance sheet was $4,105 and $6,590, respectively.\n7. RETIREMENT PLANS\nThe Corporation has retirement plans covering substantially all its employees and employees of its subsidiaries. Upon the sale of the principal operating assets of Ebasco in 1993, the Corporation retained the obligations related to the Ebasco pension plan, including the obligation for benefits due Ebasco employees hired by the purchaser to date of sale and Ebasco employees\nA-35\nterminated as a result of the sale. The employees hired by the purchaser are considered fully vested with full rights in the plan but frozen benefits. The terminated employees are due the benefits for which they were eligible at the date of their termination. Since no further benefits will accrue to these two groups of former Ebasco employees, the Corporation recognized a plan curtail- ment gain in 1993 of $6.9 million, which was included as a part of the gain on the sale. The following table sets forth the funded status of all plans as of September 30, 1993 (adjusted to reflect the effects of the sale of Ebasco) and 1992, and the amounts recognized in the consolidated balance sheet at December 31:\nThe accumulated benefit obligations represent the actuarial present value of benefits based on employees' history of service and compensation up to the measurement dates (September 30, 1993 and 1992). The projected benefit obliga- tions include additional assumptions about future compensation levels. The accumulated benefit obligations and the projected benefit obligations for 1993 and 1992 were determined using an assumed discount rate of 7.25% and 8.5%, respectively, and an assumed rate of compensation increase of 4% for both 1993 and 1992. The assumed long-term rate of return on plan assets was 9.5% for 1993 and 10% for 1992. The benefit obligations fluctuate with the assumed discount rate. When the rate declines, as it did in 1993 from the broad reduction in interest rates, the actuarial present value of benefit obligations increases. Some $68 million of the increase in the benefit obligations was primarily due to the reduction in the assumed discount rate in 1993 and is reflected in the unrecognized net actuarial gain (loss).\nA-36\nThe Corporation and its subsidiaries make annual contributions to the plans in such amounts as are necessary, on an actuarial basis, to satisfy minimum funding requirements of ERISA. Accrued pension cost represents the amount of pension cost recognized in excess of contributions paid.\nBenefits vary by plan and generally are determined by the participant's years of credited service and average compensation during the highest five years prior to retirement or during each participant's career. Plan assets consist primarily of preferred and common stocks, corporate bonds and U.S. government securities.\nThe components of pension cost were as follows:\n8. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS\nSFAS No. 106, \"Employer's Accounting for Postretirement Benefits Other Than Pensions,\" became effective in January 1993 and mandates the accounting for medical and life insurance and other nonpension benefits provided to retired employees. The new standard requires accrual of these benefits over the working life of the employee, similar in manner to the requirement for pension benefits, rather than charging to expense on a cash basis.\nThe Corporation and its subsidiaries provide varying postretirement medical benefits to its retirees and employees based on their hiring date, years of service and retirement date. Except for Ebasco employees, retirees and their dependents who retired on or before December 31, 1990, and employees age 62 or older on that date who subsequently retire, are entitled to full medical coverage. Employees hired before July 1, 1989 who retire with a minimum of five years of service are provided with an annual subsidy, based on years of service, with which to purchase medical coverage. Employees hired after July 1, 1989, are not eligible for medical benefits when they retire.\nEbasco provided limited postretirement medical benefits to certain of its employees who retired prior to January 1, 1993. Upon the sale of the principal operating assets of Ebasco in 1993, the Corporation retained the obligations to retirees of Ebasco under this plan.\nA-37\nThe Corporation does not prefund its obligations under the plan. The following table sets forth the funded status of all plans as of September 30, 1993, and the amounts recognized in the consolidated balance sheet at December 31, 1993 (in millions):\nThe accumulated postretirement benefit obligation represents the actuarial present value of employee medical and life insurance benefits based on employees' history of service up to the measurement date (September 30, 1993.) It was determined using an assumed discount rate of 7.25% and an assumed medical cost trend rate of 12% for 1994 declining to a rate of 6% after the year 2002. If the medical cost trend rate was increased by 1%, the December 31, 1993 accumulated postretirement benefit obligation would have increased by $7.0 million and the 1993 net periodic benefit cost would have increased by $.9 million.\nThe accumulated postretirement benefit obligation as of January 1, 1993, was $70 million assuming an 8 1\/2% discount rate. This transition obligation is being amortized over allowable periods up to 20 years. In 1993, the reduction in the discount rate to 7.25% was the primary cause of the increase in the benefit obligation, which is reflected in the net actuarial loss.\nThe components of postretirement benefit cost for 1993 were as follows (in millions):\nAccrued postretirement benefit cost represents the amount of benefit cost recognized in excess of benefits paid. Cash payments totaled $8.1 million in 1993, $7.5 million in 1992 and $6.9 million in 1991.\nA-38\nOf the amounts noted above, about $34 million of the unrecognized transi- tion obligation and $4.7 million of the 1993 expense are attributable to Lone Star's rate-regulated activities. Lone Star's related cash payments in 1993 were $2.7 million. Cash basis is the method of recovery currently followed in the rate-making process. Lone Star has deferred approximately $.5 million of the $2.0 million difference in the 1993 net periodic expense and cash pay- ments, although the full amount is subject to future recovery through rates.\n9. INCOME TAXES\nThe provision (benefit) for income taxes on continuing operations is summarized below:\nA-39\nA reconciliation between income taxes (benefit) computed at the federal statutory rate and income-tax expense (benefit) of continuing operations is shown below:\nDeferred income taxes are provided for all significant temporary differences by the liability method, whereby deferred tax assets and liabil- ities are determined by the tax laws and statutory rates in effect at the balance sheet date. Temporary differences which give rise to significant deferred tax assets and liabilities at December 31, 1993 are as follows:\nA-40\nAt December 31, 1993, the Corporation had domestic net operating-loss carryforwards and suspended losses from partnerships of $161 million which begin to expire in 2003, and tax-credit carryforwards of $37 million, which begin to expire in 1999. The tax benefits of these carryforwards and suspended losses, which total some $93 million as shown above, are available to reduce future income-tax payments.\nThe Corporation made payments (received refunds) for income taxes as follows:\nThe tax effect of the gain on sale differs from tax at the statutory rate because of permanent differences in book and tax basis of the assets sold. The determination of the gain on sale involved significant estimates including the final purchase price, realization of the estimated value of retained assets, and related income-tax matters. In management's opinion, adequate provision has been made for these matters.\n12. SUPPLEMENTAL FINANCIAL INFORMATION\nQuarterly Results (Unaudited) - The results of operations by quarters are summarized below and have been restated for the discontinuance of the engineering and construction business segment and the realignment of operations for segment of business reporting that became effective in the first quarter of 1993. Consolidated operating income and net income were not affected by the realignment. In the opinion of the Corporation, after the restatement, all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation have been made.\nA-43\nA-44\nA-45\nReconciliation of Previously Reported Quarterly Information\nQuarterly amounts previously reported for the year 1992 and the first three quarters of 1993 have been restated in the above tables to give effect to the discontinued engineering and construction operations referred to in Note 11. The restatement affected the various components of the quarterly results as follows:\nDisposal of Significant Assets\nIn 1993, the Corporation sold a gas storage facility and a minority- investment in an insurance entity and realized a pretax gain of $7.0 million.\nEffective January 1, 1992, the Corporation transferred the assets and business of Enserch Gas Transmission Company to a new partnership, Gulf Coast Natural Gas Company, for $19 million and a 50% ownership of the new partner- ship. No gain or loss resulted from the transfer. The Corporation uses the equity method to account for its interest in the new partnership.\nIn December 1991, the Corporation completed the sale of Enserch Nether- lands, Inc., for $32.1 million and recorded a pretax gain on the sale of $6.0 million. In June 1991, the Corporation completed the sale of its Oklahoma utility properties, for approximately $31 million, and recorded a pretax gain on the sale of $9.1 million.\nA-46\nCash Flows - The Corporation considers all highly liquid investments in the United States with a maturity of three months or less to be cash equivalents. The decrease (increase) in current operating assets and liabilities for con- tinuing operations is summarized below.\nSupplemental disclosure of noncash financing and investing activities\nThe $15.8 million pretax charge in 1992 for termination of an interest-rate hedge described in Note 2 was a noncash transaction.\nA-47\nEnvironmental business long-term contracts\nThe following tabulation indicates accounts receivable and the components of unbilled costs, estimated earnings and retainages relating to uncompleted contracts as of December 31, 1993:\nIn accordance with industry practice, unbilled costs and fees relating to contracts having a duration of longer than one year are classified as current assets. Costs and fees on long-term contracts that have been billed to clients, but that have not yet been paid, are included in accounts receivable. Unbilled costs and fees on uncompleted contracts are generally includable in the following month's billings, or become billable on a progress basis, pursuant to the terms of the contract billing schedule. The balances billable pursuant to retainage provisions in contracts will be due upon substantial completion of the contract and acceptance by the client.\nAssignment of Future Gas Purchase Credits - At December 31, 1993 and 1992, assignments of future gas purchase credits from advances and prepayments for gas were $38,191 and $54,114, respectively (of which $26,028 and $18,214, respectively, were current). The credits are reduced by an amount equal to the reduction in the related asset, advances and prepayments for gas, which are based upon amounts of gas purchased by the Corporation under related gas purchase contracts. The assignment of future gas purchase credits provided for an average annual finance charge of 3.6% during December 1993.\nRestructuring Charges - In December 1993, the Corporation recognized a $12 million charge for efficiency enhancements and severance expenses accrued for staff reductions in Natural Gas Transmission and Distribution operations.\nBusiness Segments - Information by business segments presented elsewhere herein is an integral part of these financial statements.\nA-48\n13. SUPPLEMENTARY GAS AND OIL INFORMATION\nGas and Oil Producing Activities - The following tables set forth informa- tion relating to gas and oil producing activities. Reserve data for natural gas liquids attributable to leasehold interests owned by the Corporation are included in oil and condensate.\nA-49\nExcluded Costs - The following table sets forth the composition of capitalized costs excluded from the amortizable base as of December 31, 1993:\nApproximately 43% of the excluded costs relates to offshore activities in the Gulf of Mexico and the remainder is domestic onshore exploration activi- ties. The anticipated timing of the inclusion of these costs in the amortiza- tion computation will be determined by the rate at which exploratory and development activities continue, which are expected to be accomplished within ten years.\nGas and Oil Reserves (Unaudited) - The following table of estimated proved and proved developed reserves of gas and oil has been prepared by the Corporation utilizing estimates of yearend reserve quantities provided by DeGolyer and MacNaughton, independent petroleum consultants. Reserve estimates are inherently imprecise and estimates of new discoveries are more imprecise than those of producing gas and oil properties. Accordingly, the reserve estimates are expected to change as additional performance data becomes available. Oil reserves (which include condensate and natural gas liquids attributable to leasehold interests) are stated in thousands of barrels (MBbl). Gas reserves are stated in million cubic feet (MMcf).\nA-50\nIncluded in the U.S.-Oil reserve estimates are natural gas liquids for leasehold interest of 1,019 MBbl for 1991; and 985 MBbl for 1992; and 1,117 MBbl for 1993.\nA-51\nStandardized Measure of Discounted Future Net Cash Flows Relating to Proved Gas and Oil Reserve Quantities (Unaudited) - has been prepared by the Corporation using estimated future production rates and associated production and development costs. Continuation of economic con- ditions existing at the balance sheet date was assumed. Accordingly, estimated future net cash flows were computed by: applying contracts and prices in effect in December to estimated future production of proved gas and oil reserves; estimating future expenditures to develop proved reserves; and estimating costs to produce the proved reserves based on average costs for the year. Average prices used in the computations were:\nBecause of the imprecise nature of reserve estimates and the unpredictable nature of the other variables used, the standardized measure should be interpreted as indicative of the order of magnitude only and not as precise amounts.\nA-52\nThe following table sets forth an analysis of changes in the standardized measure of discounted future net cash flows from proved gas and oil reserves:\nA-53\nA-54\nCOMMON STOCK MARKET PRICES AND DIVIDEND INFORMATION\nMARKET PRICES - ENSERCH COMMON STOCK\nThe Corporation's common stock is principally traded on the New York Stock Exchange. The following table shows the high and low sales prices per share of the common stock of the Corporation reported in the New York Stock Exchange - - Composite Transactions report for the periods shown as quoted in The Wall Street Journal (WSJ).\nDIVIDENDS PER SHARE OF COMMON STOCK\nAs of December 31, 1993, the Corporation had paid 198 consecutive quarterly cash dividends on its common stock. At December 31, 1993, $350 million of the consolidated common shareholders' equity of the Corporation was free of restrictions as to the payment of dividends and redemption of capital stock. The declaration of future dividends will be dependent upon business conditions, earnings, the cash requirements of the Corporation and other relevant factors. In February 1994, the Corporation declared a quarterly cash dividend of 5 cents per share payable March 7, 1994, to share- holders of record on February 18, 1994.\nA-55\nTwo million shares of PESC common stock, obtained in connection with the sale of Pool Company and set aside as a special dividend to ENSERCH sharehold- ers, were distributed in November 1990. The common stock was distributed at the rate of one share of PESC for every 32.368 shares of ENSERCH common stock, equivalent to $.33 per share.\nA-56\nAPPENDIX B\nENSERCH CORPORATION AND SUBSIDIARY COMPANIES\nINDEX TO CONSOLIDATED FINANCIAL STATEMENT SCHEDULES\nDECEMBER 31, 1993\nPage ----\nIndependent Auditors' Report................................. B-2\nConsolidated Financial Statement Schedules for the Three Years Ended December 31, 1993:\nV - Property, Plant and Equipment..................... B-3\nVI - Accumulated Depreciation and Amortization of Property, Plant and Equipment................ B-6\nIX - Short-Term Borrowings............................. B-9\nX - Supplementary Income Statement Information........ B-10\nB-1\nINDEPENDENT AUDITORS' REPORT\nENSERCH CORPORATION:\nWe have audited the consolidated financial statements of ENSERCH Corporation and subsidiary companies as of December 31, 1993 and 1992, and for each of the three years in the period ended December 31, 1993, and have issued our report thereon dated February 7, 1994; (included elsewhere in this Form 10-K). Our audits also included the consolidated financial statement schedules of ENSERCH Corporation listed in Item 14. These consolidated financial statement schedules are the responsibility of the Corporation's management. Our responsibility is to express an opinion based on our audits. In our opinion, such consolidated financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein.\nDELOITTE & TOUCHE\nDallas, Texas February 7, 1994\nB-2\nB-3\nB-4\nB-5","section_15":""}
{"filename":"785959_1993.txt","cik":"785959","year":"1993","section_1":"Item 1. Business\nFormation\nML Media Partners, L.P. (\"Registrant\"), a Delaware limited partnership, was organized February 1, 1985. Media Management Partners, a New York general partnership (the \"General Partner\"), is Registrant's sole general partner. The General Partner is a joint venture, between RP Media Management (a joint venture organized as a New York general partnership under New York law consisting of The Elton H. Rule Company and IMP Media Management, Inc.), and ML Media Management Inc. (\"MLMM\"), a Delaware corporation and an indirect wholly-owned subsidiary of Merrill Lynch & Co., Inc. and an affiliate of Merrill Lynch, Pierce, Fenner & Smith Incorporated (\"Merrill Lynch\"). The General Partner was formed for the purpose of acting as general partner of Registrant. The Elton H. Rule Company was controlled by Elton H. Rule until his death in May of 1990. As a result of Mr. Rule's death, the general partner interest of the Elton H. Rule Company in RP Media Management may be redeemed or acquired by a company controlled by I. Martin Pompadur.\nRegistrant is engaged in the business of acquiring, financing, holding, developing, improving, maintaining, operating, leasing, selling, exchanging, disposing of and otherwise investing in and dealing with media businesses and direct and indirect interests therein. (Reference is made to Note 9 of \"Financial Statements and Supplementary Data\" included in Item 8 hereof for segment information).\nRegistrant offered through Merrill Lynch up to 250,000 units of limited partnership interest (\"Units\") at $1,000 per Unit. The Registration Statement relating to the offering was filed on December 19, 1985 pursuant to the Securities Act of 1933 under Registration Statement No. 33-2290 and was declared effective on February 3, 1986 and amendments thereto became effective on September 18, 1986, November 4, 1986 and on December 12, 1986 (such Registration Statement, as amended from and after each such date, the \"Registration Statement\"). Reference is made to the prospectus dated February 4, 1986 filed with the Securities and Exchange Commission pursuant to Rule 424 (b) under the Securities Act of 1933, as supplemented by supplements dated June 4, 1986, November 4, 1986 and December 18, 1986 which have been filed pursuant to Rule 424 (c) under the Securities Act of 1933 (such Prospectus, as supplemented from and after each such date, the \"Prospectus\"). Pursuant to Rule 12b-23 of the Securities and Exchange Commission's General Rules and Regulations promulgated under the Securities Exchange Act of 1934, as amended, the description of Registrant's business set forth under the heading \"Risk and Other Important Factors\" at pages 12 through 19 and under the heading \"Investment Objectives and Policies\" at pages 38 through 46 of the above-referenced Prospectus is hereby incorporated herein by reference.\nThe offering of Units commenced on February 4, 1986. Registrant held four Closings of Units; the first for subscriptions accepted prior to May 14, 1986 representing 144,990 Units aggregating $144,990,000; the second for subscriptions accepted thereafter and prior to October 9, 1986 representing 21,540 additional Units aggregating $21,540,000; the third for subscriptions accepted thereafter and prior to November 18, 1986 representing 6,334 additional Units aggregating $6,334,000; and the fourth and final Closing of Units for subscriptions accepted thereafter and prior to March 2, 1987 representing 15,130 additional Units aggregating $15,130,000. At these Closings, including the initial limited partner capital contribution of $100, subscriptions for an aggregate of 187,994.1 Units representing the aggregate purchase price of $187,994,100 were accepted. During 1989, the initial limited partner's capital contribution of $100 was returned.\nMedia Properties\nAs of December 31, 1993, Registrant's investments in media properties consist of a 50% interest in a joint venture which owns two cable television systems in Puerto Rico; four cable television systems in California; two VHF television stations in Lafayette, Louisiana and Rockford, Illinois; an FM and AM radio station combination in Bridgeport, Connecticut; a corporation which owns an FM radio station in Cleveland, Ohio; a 49.999% interest in a joint venture which owns an FM and AM radio station combination and a background music service in Puerto Rico; and an FM and AM radio station combination in Anaheim, California. The Universal Cable systems were sold on July 8, 1992. In addition, an FM and AM radio station combination in Indianapolis, Indiana was sold on October 1, 1993.\nPuerto Rico Investments\nCable Television Investments\nPursuant to the management agreement and joint venture agreement dated December 16, 1986 (the \"Joint Venture Agreement\"), as amended and restated, between Registrant and Century Communications Corp., a Texas corporation (\"Century\"), the parties formed a joint venture under New York law, Century-ML Cable Venture (the \"Venture\"), in which each has a 50% ownership interest. Registrant and Century each initially contributed cash of $25 million to the Venture. Century is a wholly-owned subsidiary of Century Communications Corp., a publicly held New Jersey corporation unaffiliated with the General Partner or any of its affiliates. On December 16, 1986 the Venture, through its wholly-owned subsidiary corporation, Century-ML Cable Corporation (\"C-ML Cable Corp.\"), purchased all of the stock of Cable Television Company of Greater San Juan, Inc. (\"San Juan Cable\"), utilizing the combined investment of the venturers together with debt financing, and liquidated San Juan Cable into C-ML Cable Corp. The final purchase price for San Juan Cable common stock was approximately $141.7 million. San Juan Cable is the operator of the largest cable television system in Puerto Rico.\nOn September 24, 1987, the Venture acquired all of the assets of Community Cable-Vision of Puerto Rico, Inc., Community Cablevision of Puerto Rico Associates, and Community Cablevision Incorporated (\"Community Companies\"), which consisted of a cable television system serving the communities of Catano, Toa Baja and Toa Alta, Puerto Rico, which are contiguous to San Juan Cable. C- ML Cable Corp. and the Community Companies are herein referred to as C-ML Cable (\"C-ML Cable\"). Registrant's two cable properties in Puerto Rico are herein defined as the \"Puerto Rico Systems.\" The Puerto Rico Systems currently serve approximately 104,677 basic subscribers, pass approximately 259,790 homes and consist of approximately 1,775 linear miles of plant.\nThe Community Companies were acquired pursuant to an Asset Acquisition Agreement entered into on April 22, 1987, between Century Community Holding Corp., a wholly-owned subsidiary of Century, and the Community Companies, and thereafter assigned to the Venture. The Venture purchased all of the assets of the Community Companies for $12.0 million, which was paid entirely from a portion of the proceeds of the debt financing described below.\nDuring 1993, Registrant's share of the net revenues of the Puerto Rico Systems totalled $20,060,514 (20.1% of operating revenues of Registrant).\nDuring 1992, Registrant's share of the net revenues of the Puerto Rico Systems totalled $18,265,681 (18.2% of operating revenues of Registrant).\nDuring 1991, Registrant's share of the net revenues of the Puerto Rico Systems totalled $17,340,529 (17.5% of operating revenues of Registrant).\nPursuant to a credit agreement (the \"C-ML Credit Agreement\") entered into at the time of closing of the San Juan Cable acquisition, C-ML Cable Corp. was allowed to borrow up to $100 million to finance the San Juan Cable acquisition, as well as certain capital improvements and working capital requirements associated therewith. C-ML Cable Corp. borrowed approximately $91 million under the credit facility at closing. Of this amount, approximately $19 million was used to repay existing bank debt of San Juan Cable.\nThe Venture financed the acquisition of the Community Companies with additional proceeds from the C-ML Credit Agreement. Pursuant to the C-ML Credit Agreement, as amended, C-ML Cable Corp.'s line of credit had been increased from $100 million to $108 million. The purchase price of the Community Companies of approximately $12 million was paid entirely with additional borrowings by C-ML Cable Corp. of $12 million, which C-ML Cable Corp. in turn loaned to the Venture.\nRadio Investments\nOn February 15, 1989, Registrant and Century entered into a Management Agreement and Joint Venture Agreement whereby a new joint venture, Century-ML Radio Venture (\"C-ML Radio\"), was formed under New York law, and responsibility for the management of radio stations to be acquired by C-ML Radio was assumed by Registrant. As of December 31, 1993, Registrant has a 49.99% interest, and Century has a 50.01% interest, in C-ML Radio (see below).\nOn March 10, 1989, C-ML Radio acquired all of the issued and outstanding stock of Acosta Broadcasting Corporation (\"Acosta\"), Fidelity Broadcasting Corporation (\"Fidelity\"), and Broadcasting and Background Systems Consultants Corporation (\"BBSC\"); all located in San Juan, Puerto Rico. The purchase price for the stock was approximately $7.8 million.\nThe acquisition was financed with $900,000 of Registrant equity, $900,000 of equity from Century, and the balance of approximately $6 million from proceeds of the C-ML Credit Agreement. Refer to Note 6 of \"Item 8. Financial Statements and Supplementary Data\" for further information regarding the C-ML Credit Agreement. At the time of acquisition, Acosta owned radio stations WUNO-AM and Noti Uno News, Fidelity owned radio station WFID-FM, and BBSC owned Beautiful Music Services, all serving various communities within Puerto Rico.\nIn connection with the purchase of Acosta, Fidelity and BBSC, the Venture amended the C-ML Credit Agreement on March 8, 1989 which increased the line of credit available under the C-ML Credit Agreement from $108 million to $114 million(refer to Note 6 of \"Item 8. Financial Statements and Supplementary Data\"). The Venture borrowed the increased available amount of $6 million and advanced it to C-ML Radio in exchange for a demand note from C-ML Radio. C-ML Radio used these proceeds to finance, in part, the acquisition of Acosta, Fidelity and BBSC. The remainder of the total $7.8 million acquisition price was financed with equal equity contributions from Registrant and Century.\nIn February, 1990, C-ML Radio acquired the assets of Radio Ambiente Musical Puerto Rico, Inc. (\"RAM\"), a background music service. The purchase price was approximately $200,000 and was funded with cash generated by C-ML Radio. The operations of RAM were consolidated into those of BBSC.\nAs of December 31, 1993, the results of operations of C-ML Radio are not consolidated into the operations of Registrant as the equity method of accounting is used.\nEffective March 8, 1989, C-ML Cable Corp. amended the C-ML Credit Agreement, primarily to restructure certain restrictive covenants, provide for additional equity contributions to C-ML Cable Corp. of $2.5 million each from Registrant and Century and to extend the maturity date. Refer to Note 6 of \"Item 8. Financial Statements and Supplementary Data\" for further information regarding the C-ML Credit Agreement.\nEffective January 1, 1994, all the assets of C-ML Radio were transferred to C-ML Cable, in exchange for the assumption by C-ML Cable of all the obligations of C-ML Radio and the issuance to Century and Registrant by C-ML Cable of new certificates evidencing partnership interests of 50% and 50%, respectively. The transfer was made pursuant to a Transfer of Assets and Assumption of Liabilities Agreement. At the time of this transfer, Registrant and Century entered into an amended and restated management agreement and joint venture agreement (the \"Revised Joint Venture Agreement\") governing the affairs of the revised Venture (herein referred to as the \"Revised Venture\").\nUnder the terms of the Revised Joint Venture Agreement, Century is responsible for the day-to-day operations of the Puerto Rico Systems and Registrant is responsible for the day-to-day operations of the C-ML Radio properties. For providing services of this kind, Century is entitled to receive annual compensation of 5% of the Puerto Rico Systems' net gross revenues (defined as gross revenues from all sources less monies paid to suppliers of pay TV product, e.g., HBO, Cinemax, Disney and Showtime) and Registrant is entitled to receive annual compensation of 5% of the C-ML Radio properties' gross revenues (after agency commissions, rebates or discounts and excluding revenues from barter transactions). All significant policy decisions relating to the Revised Venture, the operation of the Puerto Rico Systems and the operation of the C-ML Radio properties, however, will only be made upon the concurrence of both Registrant and Century. Registrant may require a sale of the assets and business of the Puerto Rico Systems or the C-ML Radio properties at any time. If Registrant proposes such a sale, Registrant must first offer Century the right to purchase Registrant's 50% interest in the Revised Venture at 50% of the total fair market value of the Venture at such time as determined by independent appraisal. If Century elects to sell the assets, Registrant may elect to purchase Century's interest in the Revised Venture on similar terms.\nCalifornia Cable Systems\nIn December, 1986, ML California Cable Corporation (\"ML California\"), a wholly-owned subsidiary of Registrant, entered into an agreement (the \"Stock Sale and Purchase Agreement\") with SCIPSCO, Inc. (\"SCIPSCO\"), a wholly-owned subsidiary of Storer Communications, Inc. for the acquisition by ML California of four cable television systems servicing the California communities of Anaheim, Manhattan\/Hermosa Beach, Rohnert Park, and Fairfield and surrounding areas. The acquisition was completed on December 23, 1986 with the purchase by ML California of all of the stock of four subsidiaries of SCIPSCO which at closing owned all the assets of the California cable television systems. The term \"California Cable Systems\" or \"California Cable\" as used herein means either the cable systems or the owning entities, as the context requires. The California Cable Systems currently serve approximately 131,830 basic subscribers, pass 216,328 homes and consist of approximately 2,250 linear miles of plant.\nThe purchase price for the California Cable Systems was approximately $170 million, which included certain tax liabilities of approximately $20 million in connection with the liquidation of ML California. The purchase price was funded with approximately $60 million of equity from Registrant with the balance advanced from the proceeds of debt financing.\nRegistrant and California Cable arranged the acquisition financing pursuant to a credit agreement (the \"ML California Credit Agreement\") entered into at the time of closing. Refer to Notes 2 and 6 of \"Item 8. Financial Statements and Supplementary Data\" for further information regarding the ML California Credit Agreement.\nOn December 30, 1986, ML California was liquidated into Registrant and transferred all of its assets, except its FCC licenses, subject to its liabilities, to Registrant. The licenses were transferred to ML California Associates, a partnership formed between Registrant and the General Partner for the purpose of holding the licenses in which Registrant is Managing General Partner and 99.99% equity holder.\nThe daily operations of the California Cable Systems are managed by MultiVision Cable TV Corp. (\"MultiVision\"), a cable television multiple system operator (\"MSO\") controlled by I. Martin Pompadur. Mr. Pompadur, President, Secretary and Director of RP Media Management and Chairman and Chief Executive Officer of MultiVision, organized MultiVision in January 1988 to provide MSO services to cable television systems acquired by entities under his control, with those entities paying cost for those services pursuant to an agreement to allocate certain management costs, (the \"Cost Allocation Agreement\") with MultiVision. Mr. Pompadur is, indirectly, the general partner of ML Media Opportunity Partners, L.P., a publicly held limited partnership, and Registrant. ML Media Opportunity Partners, L.P. and its subsidiaries have invested in cable television systems now managed by MultiVision pursuant to the same Cost Allocation Agreement. The total customer base managed by Multivision declined significantly during 1992 as a result of divestitures by companies other than Registrant which had utilized the management services of Multivision, leading to slightly higher programming prices for all its managed systems including California Cable.\nRegistrant engaged Merrill Lynch & Co. and Daniels & Associates in January, 1994 to act as its financial advisors in connection with a possible sale of all or a portion of Registrant's California Cable Systems.\nThere can be no assurances that Registrant will be able to enter into an agreement to sell the systems on terms acceptable to Registrant or that any such sale will be consummated. If a sale is consummated, it is expected that it would be consummated no earlier than the second half of 1994.\nAs an alternative to a sale, Registrant and its financial advisors may consider other strategic transactions to maximize the value of the California Cable Systems, such as a joint venture or an affiliation agreement with a larger multiple system operator. Merrill Lynch & Co. will not receive a fee or other form of compensation for acting as financial advisor in connection with a sale or other strategic transaction.\nRegistrant is currently unable to determine the impact of the February 22, 1994 FCC action and previous FCC actions (see below) on its ability to sell the California Cable systems or the potential timing and value of such a sale. However, as discussed below, the FCC actions have had, and will have, a detrimental impact on the revenues and profits of the California Cable systems.\nDuring 1993, California Cable generated operating revenues of $54,988,374 (55.0% of operating revenues of Registrant).\nDuring 1992, California Cable generated operating revenues of $52,838,582 (52.6% of operating revenues of Registrant).\nDuring 1991, California Cable generated operating revenues of $48,583,606 (49.0%) of operating revenues of Registrant).\nKATC Television Station\nOn September 17, 1986 Registrant entered into an acquisition agreement (the \"Assets Purchase Agreement\") with Loyola University, a Louisiana non-profit corporation (\"Loyola\"), for the acquisition by Registrant of substantially all the assets of television station KATC-TV, Lafayette Louisiana (\"KATC-TV\" or the \"Station\"). The acquisition was completed on February 2, 1987 for a purchase price of approximately $26,750,000. KATC-TV is a VHF affiliate of the American Broadcasting Company television network from which it obtains entertainment, news and sports programming. It is one of three commercial stations licensed to service Lafayette, Louisiana, an area of approximately 194,500 television households.\nAs part of the purchase, Registrant succeeded to all business contracts, agreements, leases, commitments and orders in connection with the operation of the Station. Registrant did not assume any existing debt of the Station or Loyola, nor did it assume any liabilities of the Station other than certain contractual commitments in the ordinary course of Station operations. All FCC licenses were transferred to KATC Associates, a partnership formed for the purpose of holding the licenses in which Registrant is the Managing General Partner and 99.999% equity holder. Registrant received the required FCC and local approvals for the acquisition of the Station and the transfer of all licenses. As consideration for part of the purchase price, Loyola had agreed not to compete with the Station in the Station's designated market area for two years.\nDuring 1993, the Station generated operating revenues of $5,264,556 (5.3% of operating revenues of Registrant).\nDuring 1992, the Station generated operating revenues of $5,120,331 (5.1% of operating revenues of Registrant).\nDuring 1991, the Station generated operating revenues of $5,511,818 (5.6% of operating revenues of Registrant).\nRegistrant purchased the Station for cash; however, subsequent to the purchase, in order to refinance a portion of the equity investment, Registrant entered into a Revolving Credit Loan Agreement (the \"KATC Loan\") in the initial amount of $17.0 million.\nOn June 21, 1989, Registrant entered into an Agreement of Consolidation, Extension, Amendment and Restatement (the \"WREX- KATC Loan\") which replaced the KATC Loan and the WREX Loan (see below) with a total borrowing facility of up to $27.1 million. Refer to Note 6 of \"Item 8. Financial Statements and Supplementary Data\" for further information regarding the WREX- KATC Loan.\nWREX Television Station\nOn April 29, 1987, Registrant entered into an acquisition agreement (the \"Asset Purchase Agreement\") with Gilmore Broadcasting Corporation, a Delaware corporation (\"Gilmore\"), for the acquisition by Registrant of substantially all the assets of television station WREX-TV, Rockford, Illinois (\"WREX-TV\"). The acquisition was accomplished on August 31, 1987, by payment of the purchase price of approximately $18 million. Registrant funded the acquisition with $7 million of equity and $11 million of debt. WREX-TV is a VHF affiliate of the American Broadcasting Company television network from which it obtains entertainment, news and sports programming. It is one of four commercial stations licensed to serve Rockford, Illinois, an area of approximately 159,750 television households.\nAs part of the purchase, Registrant succeeded to all business contracts, agreements, leases, commitments and orders in connection with the operation of WREX-TV, including contracts with certain key employees. Registrant did not assume any existing debt of WREX-TV or Gilmore, nor did it assume any liabilities of WREX-TV other than certain contractual commitments in the ordinary course of operations. FCC licenses and all other permits and authorizations necessary for the operations of WREX- TV have been transferred to WREX Associates, a partnership between the General Partner and Registrant formed specifically for this purpose in which Registrant is the Managing General Partner and has a 99.999% equity interest. As consideration for part of the purchase price, Gilmore agreed not to compete with WREX-TV in its designated market area for three years.\nDuring 1993, WREX-TV generated operating revenues of $4,920,860 (4.9% of operating revenues of Registrant).\nDuring 1992, WREX-TV generated operating revenues of $4,794,592 (4.8% of operating revenues of Registrant).\nDuring 1991, WREX-TV generated operating revenues of $4,368,677 (4.4% of operating revenues of Registrant).\nTo finance the purchase of WREX-TV, Registrant entered into a Revolving Credit Loan Agreement (the \"WREX Loan\"), which provided for borrowings of up to $11 million. The WREX Loan was subsequently replaced by the WREX-KATC Loan. Refer to Note 6 of \"Item 8. Financial Statements and Supplementary Data\" for further information regarding the WREX-KATC Loan. WEBE-FM Radio\nOn August 20, 1987, Registrant entered into an Asset Purchase Agreement with 108 Radio Company, L.P., for the acquisition of the business and assets of radio station WEBE-FM, Westport, Connecticut (\"WEBE-FM\") which serves Fairfield and New Haven counties (WEBE-FM was subsequently moved to Bridgeport, Connecticut). Currently, WEBE-FM serves approximately 117,200 listeners each week in the Fairfield County market. The total acquisition cost of $12 million was funded by an equity contribution of $4.5 million and long-term debt of $7.5 million.\nAt the time of closing, the FCC licenses and all other permits and authorizations necessary for the operation of WEBE-FM were transferred to WEBE Associates, a partnership between the General Partner and Registrant formed especially for this purpose, and of which Registrant is the 99.999% owner.\nIn connection with the financing of WEBE-FM, Registrant entered into a credit agreement on December 16, 1987 (the \"WEBE Loan\") with the Connecticut National Bank. The WEBE Loan provided for borrowings up to $7.5 million.\nOn July 19, 1989, Registrant entered into an Amended and Restated Credit Security and Pledge Agreement (the \"Wincom-WEBE-WICC Loan\") which provided for borrowings up to $35 million and which was used, in part, to repay the WEBE Loan. On July 30, 1993, Registrant and Chemical Bank executed an amendment to the Wincom- WEBE-WICC Loan (the \"Restructuring Agreement\"), effective January 1, 1993, which cured all previously outstanding defaults pursuant to the Wincom-WEBE-WICC Loan. Refer to Note 6 of \"Item 8. Financial Statements and Supplementary Data\" for further information regarding the Wincom-WEBE-WICC Loan and the Restructuring Agreement.\nDuring 1993, WEBE-FM generated operating revenues of $4,403,464 (4.4% of operating revenues of Registrant).\nDuring 1992, WEBE-FM generated operating revenues of $3,967,239 (4.0% of operating revenues of Registrant).\nDuring 1991, WEBE-FM generated operating revenues of $3,892,235 (3.9% of operating revenues of Registrant).\nWincom\nOn August 26, 1988, Registrant acquired 100% of the stock of Wincom Broadcasting Corporation (\"Wincom\"), an Ohio corporation headquartered in Cleveland. At acquisition, Wincom and its subsidiaries owned and operated five radio stations - WQAL-FM, Cleveland, Ohio; WCKN-AM\/WRZX-FM, Indianapolis, Indiana (the \"Indianapolis Stations\", including the Indiana University Sports Radio Network, which was discontinued after the first half of 1992); KBEZ-FM, Tulsa, Oklahoma; and WEJZ-FM, Jacksonville, Florida.\nThe purchase price for the stock of Wincom was approximately $46 million, of which approximately $26 million was funded with Registrant's equity funds. The balance of $20 million was financed with Registrant borrowings.\nTo finance the acquisition of Wincom, Registrant entered into a Credit Security and Pledge Agreement with Chemical Bank (the \"Wincom Loan\") for a term loan in the amount of $20 million. The Wincom Loan was subsequently replaced by the Wincom-WEBE-WICC Loan. On July 30, 1993, Registrant and Chemical Bank executed the Restructuring Agreement, effective January 1, 1993, which cured all previously outstanding defaults pursuant to the Wincom- WEBE-WICC Loan. Refer to Note 6 of \"Item 8. Financial Statements and Supplementary Data\" for further information regarding the Wincom-WEBE-WICC Loan and the Restructuring Agreement.\nOn November 27, 1989, Registrant entered into an asset purchase agreement with Renda Broadcasting Corp. (\"Renda\"), whereby Registrant sold, on July 31, 1990, the business and assets of radio stations KBEZ-FM, Tulsa, Oklahoma and WEJZ-FM, Jacksonville, Florida to Renda. The net proceeds from the sale of the stations, which totalled approximately $10.3 million, were used to repay outstanding principal under the Wincom-WEBE-WICC Loan, as required by that agreement.\nOn April 30, 1993, WIN Communications of Indiana, Inc., a 100%- owned subsidiary of Wincom, entered into an Asset Purchase Agreement to sell substantially all of the assets of the Indianapolis Stations to Broadcast Alchemy, L.P.(\"Alchemy\") for gross proceeds of $7 million. Alchemy is not affiliated with Registrant. The proposed sale was subject to approval by the FCC, which granted its approval on September 22, 1993. On October 1, 1993, the date of the sale of the Indianapolis Stations, the net proceeds from such sale, which totalled approximately $6.1 million, were remitted to Chemical Bank, as required by the terms of the Restructuring Agreement, to reduce the outstanding principal amount of the Series B Term Loan due Chemical Bank pursuant to the Restructuring Agreement. In addition, certain additional amounts from the net proceeds from the sale of the Indianapolis Stations, including an escrow deposit of $250,000, may ultimately be paid to Chemical Bank. Refer to Note 6 of \"Item 8. Financial Statements and Supplementary Data\" for further information regarding the Restructuring Agreement.\nDuring 1993, Wincom generated operating revenues of $5,229,301 (5.2% of operating revenues of Registrant).\nDuring 1992, Wincom generated operating revenues of $5,388,050 (5.4% of operating revenues of Registrant).\nDuring 1991, Wincom generated operating revenues of $5,509,113 (5.6% of operating revenues of Registrant).\nUniversal\nOn September 19, 1988 Registrant acquired 100% of the stock of Universal Cable Holdings, Inc. (\"Universal Cable\"), a Delaware Corporation, pursuant to a stock purchase agreement (the \"Stock Purchase Agreement\") executed on June 17, 1988. Universal Cable, through three wholly-owned subsidiaries, owned and operated cable television systems located in Kansas, Nebraska, Colorado, Oklahoma and Texas.\nThe aggregate purchase price was approximately $43 million, of which approximately $12 million was funded with Registrant's equity. The balance of $31 million was financed by Registrant borrowings. Registrant borrowed an additional $4.6 million after closing for working capital purposes. Both borrowings were pursuant to a Revolving Credit Agreement (the \"Universal Credit Agreement\") dated as of September 19, 1988.\nOn July 8, 1992, Registrant sold Universal; all proceeds of sale were paid to the lender to Universal and Registrant was released from all obligations under the Universal Credit Agreement. Refer to Note 3 of \"Item 8. Financial Statements and Supplementary Data\" for further information on the sale of Universal.\nDuring the 193-day period in which Registrant owned Universal in 1992, Universal generated operating revenues of $4,681,966 (4.7% of operating revenues of Registrant).\nDuring 1991, Universal generated operating revenues of $8,525,093 (8.6% of operating revenues of Registrant).\nWICC-AM\nOn July 19, 1989, Registrant purchased all of the assets of radio station WICC-AM located in Bridgeport, Connecticut from Connecticut Broadcasting Company, Inc. The purchase price of $6.25 million was financed solely from proceeds of the Wincom- WEBE-WICC Loan. On July 30, 1993, Registrant and Chemical Bank executed the Restructuring Agreement, effective January 1, 1993, which cured all previously outstanding defaults pursuant to the Wincom-WEBE-WICC Loan. Refer to Note 6 of \"Item 8. Financial Statements and Supplementary Data\" for further information regarding the Wincom-WEBE-WICC Loan and the Restructuring Agreement.\nAt the time of closing, the FCC licenses and all other permits and authorizations necessary for the operation of WICC-AM were transferred to WICC Associates, a partnership between the General Partner and Registrant formed especially for this purpose, and of which Registrant is the 99.999% owner.\nDuring 1993, WICC-AM generated operating revenues of $1,875,348 (1.9% of operating revenues of Registrant).\nDuring 1992, WICC-AM generated operating revenues of $1,814,294 (1.8% of operating revenues of Registrant).\nDuring 1991, WICC-AM generated operating revenues of $1,844,952 (1.9% of operating revenues of Registrant).\nAnaheim Radio Stations\nOn November 16, 1989, Registrant acquired KORG-AM and KEZY-FM (the \"Anaheim Radio Stations\") located in Anaheim, California from Anaheim Broadcasting Corporation. The total acquisition cost was $15,125,000. At the time of closing, the FCC licenses and all other permits and authorizations necessary for the operation of the Anaheim Radio Stations were transferred to Anaheim Radio Associates, a partnership between the General Partner and Registrant formed especially for this purpose, and of which Registrant owns 99.999%.\nTo finance the acquisition of the Anaheim Radio Stations, on November 16, 1989, Registrant entered into a $16.5 million revolving credit bridge loan (\"the Anaheim Radio Loan\") with Bank of America.\nOn May 15, 1990, Registrant entered into the revised ML California Credit Agreement, which was used in part to repay and refinance the Anaheim Radio Loan. Refer to Note 6 of \"Item 8. Financial Statements and Supplementary Data\" for further information regarding the ML California Credit Agreement.\nDuring 1993, the Anaheim Radio Stations generated operating revenues of $3,049,363 (3.1% of operating revenues of Registrant).\nDuring 1992, the Anaheim Radio Stations generated operating revenues of $3,103,438 (3.1% of operating revenues of Registrant).\nDuring 1991, the Anaheim Radio Stations generated operating revenues of $3,184,990 (3.2% of operating revenues of Registrant).\nEmployees\nAs of December 31, 1993 Registrant employed approximately 510 persons at its wholly-owned properties. The business of Registrant is managed by the General Partner. RP Media Management, ML Media Management Inc. and ML Leasing Management Inc., all affiliates of the General Partner, perform certain management and administrative services for Registrant.\nCOMPETITION\nCable Television\nCable television systems compete with other communications and entertainment media, including off-air television broadcast signals that a viewer is able to receive directly using the viewer's own television set and antenna. The extent of such competition is dependent in part upon the quality and quantity of such off-air signals. In the areas served by Registrant's systems, a substantial variety of broadcast television programming can be received off-air. In those areas, the extent to which cable television service is competitive depends largely upon the system's ability to provide a greater variety of programming than that available off-air and the rates charged by Registrant's cable systems for programming. Cable television systems also are susceptible to competition from other multiple- channel video programming delivery systems, from other forms of home entertainment such as video cassette recorders, and in varying degrees from other sources of entertainment in the area, including motion picture theaters, live theater and sporting events. On December 17, 1993, the first high-powered direct broadcast satellite (\"DBS\") designed to provide nationwide multiple-channel video programming delivery services was successfully launched. Service to home subscribers from this satellite is expected to be available beginning sometime during the first half of 1994.\nIn recent years, the FCC has adopted polices providing for authorization of new technologies and a more favorable operating environment for certain existing technologies which provide, or have the potential to provide, substantial additional competition for cable television systems. For example, the FCC has revised its rules on MMDS (or \"wireless cable\") to foster MMDS services competitive with cable television systems, has authorized telephone companies to deliver video services through a common- carrier-based service called \"video dialtone,\" and, most recently, has proposed a new service, the Local Multipoint Distribution Service (\"LMDS\"), which would employ technology similar to cellular telephone systems for the distribution of television programming directly to subscribers. Moreover, it is currently studying the issue of whether telephone companies should be permitted any direct involvement in video programming. At the same time, a major legislative initiative is underway in Congress and within the Clinton-Gore Administration to re-write the Communications Act of 1934, in order to facilitate development of the so-called \"information superhighway\" by, among other things, encouraging more competition in the provision of both local telephone and local cable service. One proposal being considered in this process is whether the current statutory ban on telephone companies providing cable service within their own local exchange areas should be eliminated. The term \"information superhighway\" generally refers to a combination of technological improvements or advances that would give the American public widespread access to a new broadband, interactive communications system, capable of supplying vast new quantities of both data and video. Certain other legislative or regulatory initiatives that may result in additional competition for cable television systems are described in the following sections.\nThe competitive environment surrounding cable television was further altered during the past year by a series of marketplace announcements documenting the heightened involvement of telephone companies in the cable television business. Some of these involve the purchase of existing cable systems by telephone companies outside their own exchange areas, while others contemplate expanded joint ventures between certain major cable companies and regional telephone companies. Although the most prominent recent development in this regard, the planned merger of Tele-Communications, Inc., the largest cable operator in the country, with Bell Atlantic Corporation, one of the Bell Operating Companies, was terminated in February, 1994, similar combinations are possible in the future.\nBroadcast Television\nOperating results for broadcast television stations are affected by the availability, popularity and cost of programming; competition for local, regional and national advertising revenues; the availability to local stations of compensation payments from national networks with which the local stations are affiliated; competition within the local markets from programming on other stations or from other media; competition from other technologies, including cable television; and government regulation and licensing. Due primarily to increased competition from cable television, with that medium's plethora of viewing alternatives and from the Fox Network, the share of viewers watching the major U.S. networks, ABC, CBS, and NBC, has declined significantly over the last ten years. This reduction in viewer share has made it increasingly difficult for local stations to increase their revenues from advertising. The combination of these reduced shares and the impact of the recent economic recession on the advertising market, resulted in generally deteriorating performance at many local stations affiliated with ABC, CBS, and NBC. Although the share of viewers watching the major networks has recently leveled off or increased slightly, additional audience and advertiser fragmentation may occur if, as planned, one or more additional over-the-air broadcast networks is successfully launched.\nRadio Industry\nThe radio industry is highly competitive and dynamic, and reaches a larger portion of the population than any other medium. There are generally several stations competing in an area and most larger markets have twenty or more viable stations; however, stations tend to focus on a specific target market by programming music or other formats that appeal to certain demographically specific audiences. As a result of these factors, radio is an effective medium for advertisers as it can have mass appeal or be focused on a specific market. While radio has not been subject to an erosion in market share such as that experienced by broadcast television, it was also subject to the depressed nationwide advertising market. Recent changes in FCC multiple ownership rules have led to more concentration in some local radio markets as a single party is permitted to own additional stations or provide programming and sell advertising on stations it does not own.\nRegistrant is subject to significant competition, in many cases from competitors whose media properties are larger than Registrant's media properties.\nLEGISLATION AND REGULATION\nCable Television Industry\nThe cable television industry is extensively regulated by the federal government, some state governments and most local franchising authorities. In addition, the Copyright Act of 1976 (the \"Copyright Act\") imposes copyright liability on all cable television systems for their primary and secondary transmissions of copyrighted programming. The regulation of cable television systems at the federal, state and local levels is subject to the political process and has been in constant flux over the past decade. This process continues to generate proposals for new laws and for the adoption or deletion of administrative regulations and policies. Further material changes in the law and regulatory requirements, especially as a result of the 1992 Cable Act (the \"1992 Cable Act\"), must be expected. There can be no assurance that the Registrant's Cable Systems will not be adversely affected by future legislation, new regulations or judicial or administrative decisions.\nThe following is a summary of federal laws and regulations materially affecting the cable television industry and a description of certain state and local laws with which the cable industry must comply.\nFederal Statutes\nThe Cable Act imposes certain uniform national standards and guidelines for the regulation of cable television systems. Among other things, the legislation regulates the provision of cable television service pursuant to a franchise, specifies a procedure and certain criteria under which a cable television operator may request modification of its franchise, establishes criteria for franchise renewal, sets maximum fees payable by cable television operators to franchising authorities, authorizes a system for regulating certain subscriber rates and services, outlines signal carriage requirements, imposes certain ownership restrictions, and sets forth customer service, consumer protection, and technical standards. Violations of the Cable Act or any FCC regulations implementing the statutory law can subject a cable operator to substantial monetary penalties and other sanctions.\nFederal Regulations\nFederal regulation of cable television systems under the Cable Act and the Communications Act of 1934 is conducted primarily through the FCC, although, as discussed below, the Copyright Office also regulates certain aspects of cable television system operation. Among other things, FCC regulations currently contain detailed provisions concerning non-duplication of network programming, sports program blackouts, program origination, ownership of cable television systems and equal employment opportunities. There are also comprehensive registration and reporting requirements and various technical standards. Moreover, pursuant to the 1992 Cable Act, the FCC has, among other things, established new regulations concerning mandatory signal carriage and retransmission consent, consumer service standards, the rates that may be charged to subscribers, and the rates and conditions for commercial channel leasing. The FCC also issues permits, licenses or registrations for microwave facilities, mobile radios and receive-only satellite earth stations, all of which are commonly used in the operation of cable systems.\nThe FCC is authorized to impose monetary fines upon cable television systems for violations of existing regulations and may also suspend licenses and other authorizations and issue cease and desist orders. It is likewise authorized to promulgate various new or modified rules and regulations affecting cable television, many of which are discussed in the following paragraphs.\nThe 1992 Cable Act\nIn 1992, over the veto of President Bush, the Cable Television Consumer Protection and Competition Act of 1992 (the \"1992 Cable Act\") was enacted by vote of Congress. The 1992 Cable Act clarifies and modifies certain provisions of the 1984 Cable Act as well as codifying certain FCC regulations and adding a number of new requirements. Implementation of the new legislation was generally left to the FCC. Throughout 1993 the FCC undertook or completed a substantial number of complicated rulemaking proceedings resulting in a host of new regulatory requirements or guidelines. Several of the provisions of the 1992 Cable Act and certain FCC regulations implemented pursuant thereto are being tested in court. Registrant cannot predict the result of any pending or future court challenges or the shape any still-pending or proposed FCC regulations may ultimately take, nor can Registrant predict the effect of either on its operations.\nAs discussed in greater detail elsewhere in this filing, some of the principal provisions of the 1992 Cable Act include: (1) a mandatory carriage requirement coupled with alternative provisions for retransmission consent as to over-the-air television signals; (2) rate regulations that completely replace the rate provisions of the 1984 Cable Act; (3) consumer protection provisions; (4) a three-year ownership holding requirement; (5) some clarification of franchise renewal procedures; and (6) FCC authority to examine and set limitations on the horizontal and vertical integration of the cable industry. Other provisions of the wide-ranging 1992 Cable Act include: a prohibition on \"buy-throughs,\" an arrangement whereby subscribers are required to subscribe to a program tier other than basic in order to receive certain per-channel or per-program services; requiring the FCC to develop minimum signal standards, rules for the disposition of home wiring upon termination of cable service, and regulations regarding compatibility of cable service with consumer television receivers and video cassette recorders; a requirement that the FCC promulgate rules limiting children's access to indecent programming on access channels; notification requirements regarding sexually explicit programs; and more stringent equal employment opportunity rules for cable operators. The 1992 Cable Act also contains a provision barring both cable operators and certain vertically integrated program suppliers from engaging in practices which unfairly impede the availability of programming to other multichannel video programming distributors. In sum, the 1992 Cable Act codifies, initiates, or mandates an entirely new set of regulatory requirements and standards. It is an unusually complicated and sometimes confusing legislative enactment whose ultimate impact depends on a multitude of FCC enforcement decisions as well as certain yet- to-be concluded FCC proceedings. It is also subject to pending and future judicial challenges. Because of these factors, and the on-going nature of so many highly complicated and uncertain administrative proceedings, it is only possible, at this juncture, to simply note the key features of the new law. How and to what extent most of these individual provisions will impact Registrant's operations must necessarily await future developments at the FCC, before the courts, and in the marketplace.\nAlthough still subject to various reconsideration petitions, further rulemaking notices, or pending court appeals, the FCC has adopted new regulations in most areas mandated by the 1992 Cable Act. These include rules and regulations governing the following areas: indecency on leased access channels, obscenity on public, educational and governmental (\"PEG\") channels, mandatory carriage and retransmission consent of over-the-air signals, home wiring, equal employment opportunity, tier \"buy-throughs,\" customer service standards, cable television ownership standards, program access, carriage of home shopping stations, and rate regulation. Most of these new regulations went into effect within the past year, even though the FCC standards on indecency on certain access channels were overturned as unconstitutional by the U.S. Court of Appeals for the District of Columbia Circuit on November 23, 1993, and the constitutionality of the mandatory carriage provision of the 1992 Cable Act is now pending before the U.S. Supreme Court (after having been found constitutional by a 2-1 decision of a special three-judge panel of the U.S. District Court for the D.C. Circuit on April 8, 1993). The Registrant is unable to predict the ultimate outcome of these proceedings or the impact upon its operations of various FCC regulations still being formulated and\/or interpreted.\nAs previously noted, under the broad statutory scheme, cable operators are subject to a two- level system of regulation with some matters under federal jurisdiction, others subject strictly to local regulation, and still others subject to both federal and local regulation. Following are descriptions of some of the more significant regulatory areas of concern to cable operators.\nFranchises\nThe Cable Act affirms the right of franchising authorities to award one or more franchises within their jurisdictions and prohibits future cable television systems from operating without a franchise. The 1992 Cable Act provides that franchising authorities may not grant an exclusive franchise or unreasonably deny award of a competing franchise. The Cable Act also provides that in granting or renewing franchises, franchising authorities may establish requirements for cable-related facilities and equipment but may not specify requirements for video programming or information services other than in broad categories.\nUnder the 1992 Cable Act, franchising authorities are now exempted from money damages in cases involving their exercise of regulatory authority, including the award, renewal, or transfer of a franchise, except for cases involving discrimination on race, sex, or similar impermissible grounds. Remedies are limited exclusively to injunctive or declaratory relief. Franchising authorities may also build and operate their own cable systems without a franchise.\nThe Cable Act permits local franchising authorities to require cable operators to set aside certain channels for PEG access programming and to impose a franchise fee of up to five percent of gross annual system revenues. The Cable Act further requires cable television systems with 36 or more channels to designate a portion of their channel capacity for commercially leased access by third parties, which generally is available to commercial and non-commercial parties to provide programming (including programming supported by advertising). The FCC was required by the 1992 Cable Act to adopt new rules setting maximum reasonable rates and other terms for the use of such leased channels. This was done as part of the FCC's comprehensive cable rate regulation order released on May 3, 1993. The FCC also has jurisdiction to resolve disputes over the provision of leased access.\nIn 1993, the U.S. Supreme Court ended a period of prolonged confusion over the reach of the 1984 Cable Act's franchising requirements by rejecting a constitutional challenge to the Act's definition of \"cable system.\" In FCC v. Beach Communications, Inc., 113 S. Ct. 2096 (1993), the Court held that the Act's exemption of certain satellite master antenna television (\"SMATV\") systems from general franchising requirements is rationally related to legitimate policy goals. Under the terms of the Act, SMATV systems serving more than one building need not obtain a franchise if the buildings are commonly owned and are not interconnected by wire using a public right-of-way. Reversing a 1992 decision of the U.S. Court of Appeals for the D.C. Circuit, the Supreme Court held that the distinction drawn between commonly-owned buildings and separately-owned buildings is constitutionally valid. The result of this decision is that SMATV systems interconnecting separately-owned buildings and systems that wire buildings together using a public right-of-way must obtain a franchise and comply with the franchising requirements of the Cable Act.\nIn 1992, the FCC permitted telephone companies to engage in so- called \"video dialtone\" operations in their local exchange areas pursuant to which neither they nor the programming entities they serve are required to obtain a local cable franchise (see \"Video Dialtone\" below).\nRate Regulation\nThe 1992 Cable Act completely supplants the rate regulation provisions of the 1984 Cable Act. The 1992 Act establishes that rate regulation applies to rates charged for the basic tier of service by any cable system not subject to \"effective competition,\" which is, in turn, deemed to exist if (1) fewer than 30 percent of the households in the service area subscribe to the system, (2) at least 50 percent of the households in the franchise area are served by two multichannel video programming distributors and at least 15 percent of the households in the franchise area subscribe to the additional operator, or (3) a franchising authority for that franchise area itself serves as a multichannel video programming distributor offering service to at least 50 percent of the households in the franchise area. Under this new statutory definition, the Registrant's systems, like most cable systems in most areas, are not presently subject to effective competition. The basic tier must include all signals required to be carried under the 1992 Cable Act's mandatory carriage provisions, all PEG channels required by the franchise, and all broadcast signals other than \"superstations.\"\nActing pursuant to the foregoing statutory mandate, the FCC, on May 3, 1993, released a Report and Order (\"Rate Order\") establishing a new regulatory scheme governing the rates for certain cable television services and equipment. The new rules, among other things, set certain benchmarks which will enable local franchise authorities to require rates for \"basic service\" (as noted, essentially, local broadcast and access channels) and the FCC (upon receipt of individual complaints) to require rates for certain satellite program services (excluding premium channels) to fall approximately 10% from September 30, 1992 levels, unless the cable operator is already charging rates that are at a so-called \"competitive\" benchmark level or it can justify a higher rate based on a cost-of-service showing. Rates of all regulated cable systems will then be subject to a price cap that will govern the extent to which rates can be raised in the future without a cost-of-service showing. The rules announced in May 1993, became effective on September 1, 1993, but remained subject to considerable debate and uncertainty as several major issues and FCC proceedings awaited resolution.\nOn February 22, 1994, the FCC adopted a series of additional measures that expand and substantially alter its cable rate regulations. Based on FCC news releases dated February 22, the FCC's major actions include the following: (1) a modification of its benchmark methodology in a way which will effectively require cable rates to be reduced, on average, an additional 7% (i.e., beyond the 10% reduction previously ordered in 1993) from their September 30, 1992 level, or to the new benchmark, whichever is less; (2) the issuance of new standards and requirements to be used in making cost-of-service showings by cable operators who seek to justify rates above the levels determined by the benchmark approach; and (3) the clarification and\/or reaffirmation of a number of \"going forward\" issues that had been the subject of various petitions for reconsideration of its May 3, 1993 Rate Order. Several weeks earlier, and partly in anticipation of these actions, the FCC extended its industry-wide freeze on rates for regulated cable services until May 15, 1994. It is expected that the new benchmark standards and cost-of- service rules will become effective prior to the current termination date of the rate freeze.\nIn deciding to substantially revise its benchmark methodology for regulated cable rates, the FCC has actually created two benchmark systems. Thus, whereas the modified rate regulations adopted on February 22, 1994 will become effective as of May 15, 1994, regulated rates in effect before that date will continue to be governed by the old benchmark system.\nUnder the FCC's revised benchmark regulations, systems not facing \"effective competition\" that have become subject to regulation will be required to set their rates at a level equal to their September 30, 1992 rates minus a revised \"competitive differential\" of 17 percent (a \"differential\" which, as noted, was set at 10 percent in the FCC's May, 1993 Rate Order). Cable operators who seek to charge rates higher than those produced by applying the competitive differential may elect to invoke new cost-of-service procedures (discussed below).\nIn addition to revising the benchmark formula and the competitive differential used in setting initial regulated cable rates, the FCC adopted rules to simplify the calculations used to adjust those rates for inflation and external costs in the future. The FCC also concluded that it will treat increases in compulsory copyright fees incurred by carrying distant broadcast signals as external costs in a fashion parallel to increases in the contractual costs for nonbroadcast programming. It will not, however, accord external cost treatment to pole attachment fees.\nIn its May 1993 Rate Order the FCC exempted from rate regulation the price of packages of \"a la carte\" channels if certain conditions were met. Upon reconsideration, however, the FCC on February 22, 1994 effectively tightened its regulatory treatment of \"a la carte\" packages by establishing more elaborate criteria designed to ensure that such practices are not employed so as to unduly evade rate regulation. Now, when assessing the appropriate regulatory treatment of \"a la carte\" packages, the FCC will consider, inter alia, the following factors as possibly suggesting that such packages do not qualify for non-regulated treatment: whether the introduction of the package avoids a rate reduction that otherwise would have been required under the FCC's rules; whether an entire regulated tier has been eliminated and turned into an \"a la carte\" package; whether a significant number or percentage of the \"a la carte\" channels were removed from a regulated service tier; whether the package price is deeply discounted when compared to the price of an individual channel; and whether the subscriber must pay significant equipment or other charges to purchase an individual channel in the package. In addition, the FCC will consider factors that will reflect in favor of non-regulated treatment such as whether the channels in the package have traditionally been offered on an \"a la carte\" basis or whether the subscriber is able to select the channels that comprise the \"a la carte\" package. \"A la carte\" packages which are found to evade rate regulation rather than enhance subscriber choice will be treated as regulated tiers, and operators engaging in such practices may be subject to forfeitures or other sanctions by the FCC.\nIn another action, the FCC adopted a methodology for determining rates when channels are added to or deleted from regulated tiers and announced that it will treat programming costs as external costs and that operators may recover the full amount of programming expenses associated with added channels. Operators may also recover a mark-up on their programming expenses. These adjustments and calculations are to be made on a new FCC form yet to be released.\nSeveral groups representing the cable industry have announced that they will challenge these and other rate regulation decisions of the FCC in a federal court of appeals. Registrant is unable to predict the timing or outcome of any such appeals.\nIn a separate action on February 22, 1994, the FCC adopted interim rules to govern cost of service proceedings initiated by cable operators. Operators who elect to pursue cost of service proceedings will have their rates based on their allowable costs, in a proceeding based on principles similar to those that govern cost-based rate regulation of telephone companies. Under this methodology, cable operators may recover, through the rates they charge for regulated cable service, their normal operating expenses and a reasonable return on investment. The FCC has, for these purposes, established an interim industry-wide rate of return of 11.25%. It has also determined that acquisition costs above book value are presumptively excluded from the rate base. At the same time, certain intangible, above-book costs, such as start-up losses (limited to losses actually incurred during a two- year start-up period) and the costs of obtaining franchise rights and some start-up organizational costs such as customer lists, may be allowed. There are no threshold requirements limiting the cable systems eligible for a cost of service showing, except that, once rates have been set pursuant to a cost of service approach, cable operators may not file a new cost of service showing to justify new rates for a period of two years. Finally, the FCC notes that it will, in certain individual cases, consider a special hardship showing (or the need for special rate relief) where an operator demonstrates that the rates set by a cost of service proceeding would constitute confiscation of investment and that some higher rate would not represent exploitation of customers. In considering whether to grant such a request, the FCC emphasizes that, among other things, it would examine the overall financial condition of the operator and whether there is a realistic threat of termination of service.\nThe 1992 Cable Act also prohibits cable operators from requiring customers to subscribe to any tier of service other than the basic service tier in order to gain access to programming offered on a per-channel or per-program basis. This so-called \"anti-buy- through\" provision does not apply, however, to systems that do not have the capacity to offer basic tier customers programming on a per-channel or per-program basis due to a lack of addressable converters or other technological limitations. This exemption may be claimed until a system has been modified to eliminate the technical impediments, or for a period of ten years after the enactment of the 1992 law. The FCC also may grant a cable operator a waiver of the \"anti-buy-through\" provision if it determines that compliance with the rule will require an operator to raise its rates.\nRenewal and Transfer\nThe 1984 Cable Act established procedures for the renewal of cable television franchises. The procedures were designed to provide incumbent franchisees with a fair hearing on past performances, an opportunity to present a renewal proposal and to have it fairly and carefully considered, and a right of appeal if the franchising authority either fails to follow the procedures or denies renewal unfairly. These procedures were intended to provide an incumbent franchisee with substantially greater protection than previously available against the denial of its franchise renewal application. The 1992 Cable Act seeks to address some of the issues left unresolved by the earlier Act. It provides a more definite timetable in which the franchising authority is to act on a renewal request. It also narrows the range of circumstances in which a franchised operator might contend that the franchising authority had constructively waived non-compliance with its franchise.\nCable system operators are sometimes confronted by challenges in the form of proposals for competing cable franchises in the same geographic area, challenges which may arise in the context of renewal proceedings. In Rolla Cable Systems v. City of Rolla, a federal district court in Missouri in 1991 upheld a city's denial of franchise renewal to an operator whose level of technical services was found deficient under the renewal standards of the 1984 Cable Act. Local franchising authorities also have, in some circumstances, proposed to construct their own cable systems or decided to invite other private interests to compete with the incumbent cable operator. Judicial challenges to such actions by incumbent system operators have, to date, generally been unsuccessful. Registrant cannot predict the outcome or ultimate impact of these or similar franchising and judicial actions.\nThe 1992 Cable Act directs that no cable operator may transfer ownership of a cable system within 36 months (or three-years) of its acquisition or initial construction. On July 23, 1993, the FCC released the text of new rules designed to implement this provision. Under these rules, local franchising authorities are given primary responsibility to oversee compliance with the three- year holding requirement by requiring cable systems to certify (and submit) certain information to the franchiser in order to demonstrate that the holding requirement does not apply to a particular transfer. Disputes concerning compliance, however, will be resolved by the FCC. The 1992 Cable Act also provides that in cases where the three-year holding period does not apply, and where local consent to a transfer is required, the franchise authority must act within 120 days of submission of a transfer request or the transfer is deemed approved. The 120-day period commences upon the submission to local franchising authorities of information now required on a new standardized FCC transfer form. The franchise authority may request additional information beyond that required under FCC rules. Further, the 1992 Cable Act gives local franchising officials the authority to prohibit the sale of a cable system if the proposed buyer operates another cable system in the jurisdiction or if such sale would reduce competition in cable service.\nCable System Ownership Restrictions\nCross-Ownership: The Cable Act prohibits local exchange telephone companies from owning cable television systems within their exchange service areas, except in rural areas or by specific waiver. The Act also prohibits telephone companies from providing video programming directly to subscribers. The regulations are of particularly competitive importance because these telephone companies already own much of the plant necessary for cable television operation, such as poles, ducts and rights- of-way. In late 1992, subsidiaries of Bell Atlantic Corporation filed suit in federal district court in Virginia against the FCC and United States government, alleging that the prohibition against video programming is an unconstitutional restraint of free speech and denial of equal protection. On August 24, 1993, Judge Ellis of the U.S. District Court for the Eastern District of Virginia ruled that the cable-telco cross-ownership prohibition in the Cable Act violated Bell Atlantic's First Amendment rights. Chesapeake and Potomac Telephone Co. of Virginia v. United States, No. 92-1751-A (E.D. Va. Aug. 1993). On September 30, 1993, Judge Ellis clarified the scope of his decision by ruling that it applies only to Bell Atlantic Corporation and its telephone company subsidiaries in the mid- Atlantic states. As a result, other telephone companies are not free to enter the cable television business, unless they obtain similar relief from other courts or unless the Supreme Court upholds the decision on appeal. Indeed, subsequent to this decision, other Bell Operating Companies have filed their own constitutional challenges to the same statutory restriction in other U.S. district courts. In the meantime, Judge Ellis' decision has been appealed to the U.S. Court of Appeals for the Fourth Circuit.\nThe FCC recently relaxed its telephone-cable restrictions to permit local telephone companies (local exchange carriers) to offer broadband video services under the so-called video dialtone approach. In the same proceeding, the FCC ruled that neither a local exchange carrier nor a separate programming entity providing service under a video dialtone arrangement would be required to obtain a local cable franchise. In addition, the FCC allowed telephone companies to hold financial interests of up to five percent in co-located cable companies, and it also recommended that Congress repeal its cross-ownership ban. The FCC also ruled that interexchange carriers, such as AT&T, MCI and US Sprint, are not subject to the current statutory restrictions on telephone company\/cable television cross-ownership. Various aspects of the FCC's video dialtone and telephone\/cable cross- ownership decisions have been appealed to the U.S. Court of Appeals for the D.C. Circuit by both the cable industry and certain telephone companies. Registrant cannot predict the outcome of these appeals.\nIn 1989, the FCC authorized a limited five-year waiver of its cable-telephone cross-ownership ban to permit General Telephone Company of California (\"General\") to construct coaxial and fiber optic cable facilities in Cerritos, California, on an experimental basis. The experiment called for General to lease the facilities to two customers, Apollo Cablevision (\"Apollo\"), the system franchisee, and GTE Service Corporation (\"GTE\"), an affiliate of General. GTE proposed to use its leased facilities, inter alia, to test certain types of cable in comparison with fiber optic facilities for carriage of voice, data and video signals (including a \"video on demand\" service). The waiver was granted subject to several reporting conditions, accounting safeguards against unauthorized telephone rate payer subsidization of the cable experiment, and a requirement that General contract with another entity to provide the video programming.\nIn response to a petition for review filed by the National Cable Television Association, the U.S Court of Appeals for the D.C. Circuit, on September 18, 1990, remanded the proceeding to the FCC because the Commission had failed to explain why Apollo's corporate parent needed to be involved in construction of the system and thereby give rise to a prohibited affiliation. After an extended period of unsuccessful settlement negotiations with the parties, the FCC, in July 1992, invited public comment on what action it should take. On November 9, 1993, the FCC rescinded both its original waiver in its entirety and GTE's authority to operate and maintain the coaxial and fiber optic cable facilities in Cerritos. While this FCC order was to become effective within 120 days of its release, GTE was directed to provide the FCC with its specific plan for compliance within 30 days. In January, 1994, after the FCC denied GTE's request for stay of this order (or extension of its deadlines), the U.S. Court of Appeals for the Ninth Circuit granted a stay pending its resolution of GTE's petition for review of the FCC rescission order. Registrant cannot predict the outcome of the pending judicial review proceeding, or the likelihood of similar waivers being granted to other telephone companies in the future.\nSeveral bills have been introduced in Congress that would eliminate the cable\/telco cross-ownership ban, subject to certain conditions. The two most prominent are S.1086, introduced by Senator Danforth (R-Mo.) and H.R.3636, introduced by Reps. Markey (D-Ma.) and Fields (R-Tx). These bills generally provide that a telephone company may provide video programming service within its franchise area in accordance with various regulatory safeguards, but may not acquire an existing cable system. The safeguards in H.R.3636 include a requirement that video programming service be provided through an affiliate separate from the telephone operating company, restrictions on telemarketing, affiliate transactions rules, a requirement that the telco's video affiliate establish a video platform with up to 75 percent of its capacity available to unaffiliated program suppliers, and a prohibition against cross-subsidization. The safeguards in S.1086 include a separate subsidiary requirement and a general proscription against cross-subsidization.\nUnder the 1992 Cable Act, common ownership of a co-located cable system and MMDS system is prohibited. Further, common ownership of cable systems and some types of private cable (e.g., \"SMATV\") systems is prohibited.\nConcentration of Ownership: The 1992 Cable Act directed the FCC to establish reasonable limits on the number of cable subscribers a single company may reach through cable systems it owns (\"horizontal concentration\") and the number of system channels that a cable operator could use to carry programming services in which it holds an ownership interest (\"vertical concentration\"). The horizontal ownership restrictions of the Act were struck down by a federal district court as an unconstitutional restriction on speech. Pending final judicial resolution of this issue, the FCC stayed the effective date of its horizontal ownership limitations, which would place a 30 percent nationwide limit on subscribers by any one entity. Registrant cannot predict the final version of any such limitations or their effect on Registrant's operations. The FCC's vertical restriction consists of a \"channel occupancy\" standard which places a 40% limit on the number of channels that may be occupied by services from programmers in which the cable operator has an attributable ownership interest. Further, the Act and FCC rules restrict the ability of programmers to enter into exclusive contracts with cable operators. Registrant cannot predict the effect on its operations of these legislative enactments or the implementing regulations.\nForeign Ownership: A measure was approved by the House in the 1992 Congress to restrict foreign ownership of cable systems, but was deleted by a House-Senate Conference Committee from the legislation that subsequently was enacted as the 1992 Cable Act.\nVideo Marketplace: The FCC has sought public comment in a general inquiry concerning changes in the nature of the video marketplace. This proceeding was prompted by a 1991 study by the FCC's Office of Plans and Policy that called into question the competitive balance in the video marketplace due in part to the proliferation of cable services. The inquiry will examine all federal regulations affecting broadcast television, including multiple ownership restrictions. The inquiry will focus on increased competition in the market; technological advances in delivery of video programming; the ability of competitors, including cable operators, to rely on revenue from direct viewer payment in addition to advertising; and the increase in the availability of national sources of programming. Registrant cannot predict the outcome of this proceeding. To date, however, the only new regulatory proposals resulting from the inquiry have been in the area of television ownership deregulation. See \"Television Industry,\" below.\nFCC Limits on Broadcast Network\/Cable Cross-ownership: In 1992, the FCC modified its ban on broadcast television network ownership of cable systems. Such ownership now is permitted provided that network-controlled systems do not constitute more than (1) 10% of the homes passed nationwide by cable systems, and (2) 50% of the homes passed by cable within a particular television Area of Dominant Influence (\"ADI\"). These limitations will not apply where the network-owned system receives competition from another multichannel video service provider. Registrant is unable to predict the effect upon its operations of the repeal of the former prohibition.\nAlternative Video Programming Services\nWireless Cable: The FCC has expanded the authorization of MMDS services to provide \"wireless cable\" via multiple microwave transmissions to home subscribers. In 1990, the FCC increased the availability of channels for use in wireless cable systems by eliminating MMDS ownership restrictions and simplifying various processing and administrative rules. The FCC also modified equipment and technical standards to increase service capabilities and improve service quality. In 1991, the FCC resolved certain additional wireless cable issues, including channel allocations for MMDS, Operational Fixed Service (\"OFS\") and Instructional Television Fixed Service (\"ITFS\") facilities, direct application by wireless operators for use of certain ITFS channels, and restrictions on ownership or operation of wireless facilities by cable entities. In 1992, the FCC proposed a new service, LMDS, which also could be used to supply multichannel video and other communications services directly to subscribers. This service would operate in the 28 GHz frequency range and, consistent with the nature of operations in that range, the FCC envisions that LMDS transmitters could serve areas of only six to twelve miles in diameter. Accordingly, it is proposed that LMDS systems utilize a grid of transmitter \"cells,\" similar to the structure of cellular telephone operations. In January 1994, the Commission announced that it would issue a Second Notice of Proposed Rule Making in this proceeding designed to determine whether it should implement a Negotiated Rule Making Proceeding to allow participants to reach a consensus on sharing the 28 GHz band between terrestrial (LMDS) and satellite users. Registrant cannot predict the outcome of the FCC's proceeding.\nVideo Dialtone: Telephone company ownership of cable television systems in the same areas was prohibited by the 1984 Cable Act. In 1991, however, the FCC modified its rules to allow telephone companies to play a greater role in delivery of video services through an arrangement termed \"video dialtone.\" (A U.S. district court in Virginia subsequently held the cross-ownership restriction unconstitutional, but the court's ruling is currently limited only to the particular telephone company plaintiffs in that case.) Although still largely conceptual, the video dialtone model would be a common carrier based service, analogous to the ordinary telephone dialtone, whereby local telephone companies could provide customers access to video programming, videotext, videophone and other future advanced services. In such an arrangement, the telephone company may provide the facilities to deliver programming to subscribers, but may not itself provide the programming or dictate how that programming should be offered. To date, thirteen video dialtone applications have been filed with the FCC, with most of the proposals contemplating service areas in California, the Washington, D.C., metropolitan area, and the northeast. Some of the first proposals are in the beginning stages of technical trials.\nPersonal Communications Service (\"PCS\"): In August, 1993, the FCC established rules for a new portable telephone service, the Personal Communications Service (\"PCS\"). PCS has potential to compete with landline local telephone exchange services. Among several parties expressing interest in PCS were cable television operators, whose plant structures present possible synergies for PCS operation. In September 1993, the FCC adopted rules for \"broadband PCS\" services. It allocated 120 MHz in the 2 GHz band for licensed broadband services, and an additional 40 MHz for unlicensed services. PCS licenses will be granted for Basic Trading Areas (BTAs) and Major Trading Areas, with up to seven licenses available in each geographic area. The FCC will use competitive bidding to assign PCS licenses to licensees. The auction rules have not yet been finalized, and almost every aspect of the PCS rules is subject to petitions for reconsideration. Registrant cannot predict the outcome of these proceedings. The first PCS licenses are to be issued May 7, 1994.\nInformation and Interexchange Services (Modified Final Judgment): The Consent Decree that terminated the United States v. AT&T antitrust litigation in 1982 (known as the Modified Final Judgment or \"MFJ\") prohibited the Bell Operating Companies and their affiliates (collectively, the \"Regional Bells\") from, inter alia, providing \"information\" and \"interexchange telecommunications\" services. The information services restriction was understood to prohibit the Regional Bells from owning cable television systems. In 1991, the United States District Court removed that restriction but stayed the effect of its decision. The United States Court of Appeals for the District of Columbia Circuit lifted the stay later that year and affirmed the removal of the restriction in 1993. The Supreme Court has denied a petition for writ of certiorari of that decision. Consequently, the MFJ no longer restricts the Regional Bells from providing information services.\nThe interexchange telecommunications restriction in the MFJ prohibits the Regional Bells from providing telecommunications services across Local Access and Transport Areas (\"LATAs\") as defined in the Consent Decree. The interexchange restriction has been interpreted as prohibiting the Regional Bells from operating receive-only earth stations at a cable system headend, as well as from operating a cable system that crosses a LATA boundary. In 1993, the U.S. District Court for the District of Columbia granted Southwestern Bell Corporation a waiver of the interexchange line of business restriction for the purposes of acquiring and operating cable systems in Montgomery County, Maryland, and Arlington County, Virginia. U S West has requested a waiver of this restriction in connection with its investment in the cable properties of Time Warner Entertainment Company.\nIn addition, all seven Regional Bells have moved for a waiver of the interexchange line of business restriction to allow them to provide information services on an interexchange basis. That motion is currently being reviewed by the U.S. Department of Justice.\nCongress may consider legislation in 1994 that would remove the interexchange services restriction in whole or in part. Legislation affecting the MFJ may also specify the terms and conditions, including regulatory safeguards, pursuant to which the Regional Bells may provide information and interexchange services.\nThere can be no assurance that cable television systems of Registrant will not be adversely affected by future judicial decisions or legislation in this area.\nOther New Technologies: Several technologies exist or have been proposed that have the potential to increase competition in the provision of video programming. Currently, cable subscribers can receive programming received by home satellite dishes or via satellite master antenna television facilities (\"SMATV\"). In addition, the FCC has authorized nine entities to provide programming directly to home subscribers through direct broadcast satellites (\"DBS\"). On December 17, 1993, two such parties, Hughes Communications Galaxy (\"Hughes\"), an affiliate of the General Motors Company, and Unites States Satellite Broadcasting Company jointly launched a new high-powered satellite with 16 transponders, from which they can provide DBS service to the entire country. Service is expected to begin sometime during the first half of 1994. Hughes also expects to launch a second 16- transponder satellite in late Spring 1994. Another technological development in the making with significant implications for video programming is \"high definition television\" (\"HDTV\"). A private sector Advisory Panel was organized by the FCC in 1987 to study various issues relating to advanced television systems (\"ATV\"), including HDTV. It is anticipated that with the assistance and recommendations of this Advisory Panel the FCC should be in a position to establish a technical standard for HDTV broadcasting by mid-1995.\nProgramming Issues\nRetransmission Consent and Mandatory Carriage: The 1992 Cable Act gives television stations the right to withhold permission for cable systems to carry their signals, to require compensation in exchange for such permission (\"retransmission consent\"), or, alternatively, in the case of local stations, to demand carriage without compensation (\"must carry\").\nThe FCC's implementing regulations required broadcasters to elect between must-carry and retransmission consent by June 17, 1993, with the choice binding for three years. A broadcast station has the right to choose must-carry, assuming it can deliver a signal of specified strength, with regard to cable systems in its Area of Dominant Influence as defined by the audience measurement service, Arbitron. Stations electing to grant retransmission authority were expected to conclude their consent agreements with cable systems by October 6, 1993, the date on which systems' authority to carry broadcast signals without consent expired. While monetary compensation is possible in return for such consent, many broadcast station operators accepted arrangements that do not require payment but involve other types of consideration, such as use of a second cable channel, advertising time, and joint programming efforts. The must carry provisions of the FCC's rules have been challenged as unconstitutional. A special three-judge district court rejected the challenge. That decision has been appealed, and the Supreme Court of the United States heard oral argument in the case on January 12, 1994. Its decision is expected later this year. Registrant cannot predict the outcome of the case. Meanwhile, a separate challenge to the retransmission consent aspect of the 1992 Act was rejected by a Federal district court.\nThe 1992 Cable Act also requires cable systems to carry a broadcast television station, at the election of the station, on the same channel as its broadcast channel, the channel on which it was carried by the cable system on July 19, 1985, or the channel on which it was carried on January 1, 1992.\nFCC rules formerly required cable television operators to make available and install A\/B switches to those subscribers who request them. (An A\/B switch is an input selector which permits conversion from reception via the cable television systems to use of an off-air antenna). This requirement was abolished by the 1992 Cable Act.\nCopyright: Cable television systems are subject to the Copyright Act of 1976 which, among other things, covers the carriage of television broadcast signals. Pursuant to the Copyright Act, cable operators obtain a compulsory license to retransmit copyrighted programming broadcast by local and distant stations in exchange for contributing a percentage of their revenues as statutory royalties to the U.S. Copyright Office. The amount of this royalty payment varies depending on the amount of system revenues from certain sources, the number of distant signals carried, and the locations of the cable television system with respect to off-air television stations and markets. The Copyright Royalty Tribunal (\"CRT\"), which the Copyright Office established to distribute royalty payments generally and to review and adjust royalty rates in limited situations, recently was replaced by copyright arbitration royalty panels, to be convened by the Librarian of Congress as necessary.\nIn July, 1991, the U.S. Copyright Office affirmed an earlier decision that satellite carriers and MMDS systems are not \"cable systems\" within the meaning of the Copyright Act, and, therefore, are not entitled to the compulsory licensing scheme that would allow them to retransmit broadcast signals in exchange for payment of a fee. Unlike cable entities, these systems will have to negotiate with the individual copyright holders for the right to retransmit copyrighted broadcast signals. Satellite carriers, however, can continue to retransmit broadcast signals under an alternative compulsory copyright system until the end of 1994. In response to Congressional concerns about the ability of these new technologies to compete with cable, the Copyright Office has delayed the effective date of its decision in this area until January 1, 1995. The Copyright Office has also tentatively ruled that some SMATV systems meet the Copyright Act's definition of cable system and thus are eligible for a compulsory license.\nCongress established the compulsory license in 1976 to serve as a means of compensating program suppliers for cable retransmission of broadcast programming. The FCC has recommended that Congress eliminate the compulsory copyright license for cable retransmission of both local and distant broadcast programming. In addition, legislative proposals have been and may continue to be made to simplify or eliminate the compulsory license. As noted, the 1992 Cable Act will require cable systems to obtain permission of certain broadcast licensees in order to carry their signals (\"retransmission consent\") should such stations so elect. (See \"Retransmission Consent and Mandatory Carriage\" above) This permission will be needed in addition to the copyright permission inherent in the compulsory license. Without the compulsory license, cable operators would need to negotiate rights for the copyright ownership of each program carried on each broadcast station transmitted by the system. Registrant cannot predict whether Congress will act on the FCC recommendations or similar proposals.\nExclusivity: Except for retransmission consent, the FCC imposes no restriction on the number or type of distant (or \"non-local\") television signals a system may carry. FCC regulations, however, require cable television systems serving more than 1,000 subscribers, at the request of a local network affiliate, to protect the local affiliate's broadcast of network programs by blacking out duplicated programs of any distant network- affiliated stations carried by the system. Similar rules require cable television systems to black out the broadcast on distant stations of certain local sporting events not broadcast locally.\nThe FCC rules also provide exclusivity protection for syndicated programs. Under these rules, television stations may compel cable operators to black out syndicated programming broadcast from distant signals where the local broadcaster has negotiated exclusive local rights to such programming. Syndicated program suppliers are afforded similar rights for a period of one year from the first sale of that program to any television broadcast station in the United States. The FCC rules allow any broadcaster to bargain for and enforce exclusivity rights. However, exclusivity protection may not be granted against a station that is generally available over-the-air in the cable system's market. Cable systems with fewer than 1,000 subscribers are exempt from compliance with the rules. Although broadcasters generally may acquire exclusivity only within 35 miles of their community of license, they may acquire national exclusive rights to syndicated programming. The ability to secure national rights is intended to assist \"superstations\" whose local broadcast signals are then distributed nationally via satellite. The 35- mile limitation is currently under re-examination by the FCC, which could extend the blackout zone to a larger area.\nCable Origination Programming: The FCC also requires that cable origination programming meet certain standards similar to those imposed on broadcasters. These standards include regulations governing political advertising and programming, advertising during children's programming, rules on lottery information, and sponsorship identification requirements.\nCustomer Service: On July 1, 1993, following a public rulemaking proceeding mandated by the 1992 Cable Act, new FCC rules on customer service standards became effective. The standards govern cable system office hours, telephone availability, installations, outages, service calls, and communications between the cable operator and subscriber, including billing and refund policies. Although the FCC has stated that its standards are \"self effectuating,\" it has also provided that a franchising authority wishing to enforce particular customer service standards must give the system at least 90 days advance written notice. Franchise authorities may also agree with cable operators to adopt stricter standards and may enact any state or municipal law or regulation which imposes a stricter or different customer service standard than that set by the FCC. Enforcement of customer service standards, including those set by the FCC, is entrusted to local franchising authorities.\nPole Attachment Rates and Technical Standards\nThe FCC currently regulates the rates and conditions imposed by public utilities for use of their poles, unless, under the Federal Pole Attachments Act, a state public service commission demonstrates that it is entitled to regulate the pole attachment rates. The FCC has adopted a specific formula to administer pole attachment rates under this scheme. The validity of this FCC function was upheld by the U.S. Supreme Court.\nIn 1990, new FCC standards on signal leakage became effective. Like all systems, Registrant's cable television systems are subject to yearly reporting requirements regarding compliance with these standards. Further, the FCC has instituted on-site inspections of cable systems to monitor compliance. Any failure by Registrant's cable television systems to maintain compliance with these new standards could adversely affect the ability of Registrant's cable television systems to provide certain services.\nThe Cable Act empowers the FCC to set certain technical standards governing the quality of cable signals and to preempt local authorities from imposing more stringent technical standards. The FCC's preemptive authority over technical standards for channels carrying broadcast signals has been affirmed by the U.S. Supreme Court. On March 4, 1992, the FCC adopted new mandatory technical standards for cable carriage of all video programming, including retransmitted broadcast material, cable originated programs and pay channels. The 1992 Cable Act includes a provision requiring the FCC to prescribe regulations establishing minimum technical standards. The 1992 Cable Act also codified the right of franchising authorities to seek waivers to impose technical standards more stringent than those prescribed by the FCC. The FCC has determined that its 1992 rule making proceeding satisfied the mandate of the 1992 Cable Act. The new standards, which became effective December 30, 1992, focus primarily on the quality of the signal delivered to the cable subscriber's television. Registrant cannot predict the impact of these new rules upon Registrant's operations.\nOn December 1, 1993, the FCC released a Notice of Proposed Rule Making intended to implement the 1992 Cable Act requirements for compatibility between cable and consumer electronics equipment. The proposals include the following: (1) requiring cable operators to provide equipment to enable the operation of TV\/VCR features that make simultaneous use of multiple signals; (2) giving subscribers the option of having all signals not requiring a converter passed directly to the TV receiver or VCR; (3) prohibiting cable systems from scrambling signals on the basic tier; (4) requiring operators to permit use of commercially available remote controls; and (5) requiring cable operators to provide more information to consumers. Registrant cannot predict the outcome of this proceeding or the specific impact of such requirements on its operations.\nTax Considerations\nLegislation which for the first time would allow amortization of goodwill and certain intangibles that arise in a business acquisition for federal income tax purposes was enacted as part of the Omnibus Budget Reconciliation Act of 1993. The measure permits intangible \"assets\" to be amortized over a 15-year period. The legislation includes certain governmental rights and licenses -- e.g., cable franchises -- among the intangibles eligible for such amortization. There is currently pending in Congress a proposal by Sen. Simon (D-Ill.) to amend the new law to permit only 75% of the value of such intangibles to be amortized over a 15-year period. Registrant cannot predict whether or in what form the Simon proposal will be adopted and what, if any, impact such changes would have on its operations. (Additional tax considerations are discussed below in the State and Local Regulation section.)\nAt least one cable operator has successfully argued in court that cable franchises may be depreciated under pre-existing law. In Tele-Communications, Inc. v. Comm'r of IRS, the U.S. Court of Appeals upheld the decision of the Tax Court, which had rejected the argument of the Internal Revenue Service that such amortization was available only to commercial franchises. Registrant cannot predict whether the IRS will appeal the decision to the Supreme Court of the United States or the outcome of such an appeal.\nState and Local Regulation\nLocal Authority: Cable television systems are generally operated pursuant to non-exclusive franchises, permits or licenses issued by a municipality or other local governmental entity. The franchises are generally in the nature of a contract between the cable television system owner and the issuing authority and typically cover a broad range of provisions and obligations directly affecting the business of the systems in question. Except as otherwise specified in the Cable Act or limited by specific FCC rules and regulations, the Cable Act permits state and local officials to retain their primary responsibility for selecting franchisees to serve their communities and to continue regulating other essentially local aspects of cable television. The constitutionality of franchising cable television systems by local governments has been challenged as a burden on First Amendment rights but the U.S. Supreme Court has declared that while cable activities \"plainly implicate First Amendment interest\" they must be balanced against competing societal interests. The applicability of this broad judicial standard to specific local franchising activities is subject to continuing interpretation by the federal courts.\nCable television franchises generally contain provisions governing the fees to be paid to the franchising authority, the length of the franchise term, renewal and sale or transfer of the franchise, design and technical performance of the system, use and occupancy of public streets, and the number and types of cable services provided. The specific terms and conditions of the franchise directly affect the profitability of the cable television system. Franchises are generally issued for fixed terms and must be renewed periodically. There can be no assurance that such renewals will be granted or that renewals will be made on similar terms and conditions.\nVarious proposals have been introduced at state and local levels with regard to the regulation of cable television systems and a number of states have adopted legislation subjecting cable television systems to the jurisdiction of centralized state governmental agencies, some of which impose regulation of a public utility character. Increased state and local regulations may increase cable television system expenses.\nBoth Congress and the Treasury Department have shown interest in proposals by the Clinton administration to abolish or reduce tax exemptions, enjoyed by certain companies with investments in Puerto Rico, arising under Section 936 of the Internal Revenue Code. The ultimate outcome of such proposals, which are highly tentative, cannot currently be predicted. However, the elimination of 936 Funds -- reduced rate funds available to certain borrowers from commercial banks in Puerto Rico -- could potentially increase the cost of borrowing funds under the C-ML Revolving Credit Agreement. However, C-ML Cable currently has no borrowings outstanding under the C-ML Revolving Credit Agreement. In addition, the elimination or reduction of tax exemptions pursuant to Section 936 could negatively affect the Puerto Rican economy, and therefore Registrant's investments in Puerto Rico. Due to the uncertainty surrounding possible legislation affecting Puerto Rico, it is not currently possible to predict the outcome or impact of any potential future government actions on Registrant's Puerto Rican operations.\nRadio Industry\nIn 1992, the FCC adopted substantial changes to its restrictions on the ownership of radio stations. The new rules allow a single entity to control as many as eighteen AM and eighteen FM stations nationwide. As of September 16, 1994, those maximums will be increased to twenty AMs and twenty FMs. As to ownership within a given market, the maximum varies depending on the number of radio stations within the market. In markets with fewer than fifteen stations, a single entity may control three stations (no more than two of which could be FM), provided that the combination represents less than fifty percent of the stations in the market. In contrast, in markets with fifteen or more radio stations, a single entity may control as many as two AM and two FM stations, provided that the combined audience share of the stations does not exceed twenty-five percent.\nIn addition, the FCC placed limitations on local marketing agreements through which the licensee of one radio station provides the programming for another licensee's station in the same market. Stations operating in the same service (e.g., both stations AM) and the same market are prohibited from simulcasting more than twenty-five percent of their programming. Moreover, in determining the number of stations that a single entity may control, an entity programming a station pursuant to a local marketing agreement is required to count that station toward its maximum even though it does not own the station.\nIn addition to these new radio ownership limitations, the pending television proceeding described below includes proposals for further relaxation of the FCC's restrictions on ownership of television and radio stations within the same area.\nAlso currently pending are proceedings in which the FCC is examining alternatives for the possible implementation of digital audio radio services (\"DARS\"). DARS systems potentially could allow delivery of audio signals with fidelity comparable to compact discs. In a rulemaking proceeding, the Commission is considering a proposed spectrum allocation for satellite DARS. There also are four applications on file at the FCC for satellite DARS licenses. In addition, the FCC has undertaken an inquiry into the terrestrial broadcast of DARS signals, addressing, inter alia, the need for spectrum outside the existing FM band and the role of existing broadcasters. Registrant cannot predict the outcome of these proceedings.\nTelevision Industry\nIn June, 1992, the FCC initiated a rule making proceeding inviting public comment on whether existing television ownership rules should be revised to allow broadcast television licensees greater flexibility to respond to growing competition in the distribution of video programming. Among the proposed changes are: (1) raising the national television ownership limit from 12 to as many as 24 stations, perhaps restricted by a national audience reach maximum higher than the current 25%; (2) easing restrictions on the ownership by a single entity of two television stations having overlapping signal contours; and (3) easing the so-called \"one-to-a-market\" rule that currently (with some exceptions) prevents the common ownership of a television station and one or more radio stations in the same area. The timetable for completion of the proceeding is not certain, and Registrant cannot predict whether the changes proposed will in fact be adopted or the impact of such changes on Registrant's business. Also pending at the FCC is an inquiry proceeding examining the possible re-imposition of broadcast commercial time limitations that were repealed by the FCC in 1984. Registrant cannot predict whether the proceeding will result in such a proposal or the extent of any such regulation.\nIn 1987, the FCC initiated a rule making proceeding on advanced television, which includes high definition television (\"HDTV\"). With the help of a private sector advisory committee, the Commission is attempting to establish a technical standard for HDTV broadcasting by mid-1995. After the standard is set, existing broadcasters will have three years in which to apply for a second channel assignment to be used for HDTV broadcasts. Such broadcasts must begin within six years of the standard-setting. If these deadlines are not met, existing broadcasters will be subject to competition for the HDTV channel.\nFor some period, currently thought to be fifteen years, broadcasters will broadcast on both their current \"NTSC\" channel and their HDTV channel, in a so-called \"simulcast\" mode. At the end of the period, all broadcasts on the NTSC channel must cease, whether or not every broadcaster is broadcasting HDTV. The use of the HDTV channel sufficient to meet the FCC's minimum requirements will require construction of new facilities, including a transmitter, exciter, antenna, and transmission line. Additional equipment for making the full conversion to HDTV will include cameras, switchers, tape machines, and the like.\nItem 2.","section_1A":"","section_1B":"","section_2":"Item 2. Properties\nA description of the media properties of Registrant is contained in Item 1 above. Registrant owns or leases real estate for certain headend and transmitting equipment along with space for studios and offices. Refer to Item 8. \"Financial Statements and Supplementary Data\" for further information regarding Registrant's properties.\nFor additional description of Registrant's business refer to Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.\nItem 3.","section_3":"Item 3. Legal Proceedings\nThere are no material legal proceedings against Registrant or to which Registrant is a party.\nItem 4.","section_4":"Item 4. Submission of Matters to a Vote of Security Holders\nNo matters were submitted to a vote of the limited partners of Registrant during the fourth quarter of the fiscal year covered by this report. Part II\nItem 5.","section_5":"Item 5. Market for Registrant's Common Stock and Related Stockholder Matters\nA public market for Registrant's Units does not now exist, and it is not anticipated that such a market will develop in the future. Accordingly, accurate information as to the market value of a Unit at any given date is not available.\nEffective November 9, 1992, Registrant was advised that Merrill Lynch, Pierce, Fenner & Smith Incorporated (\"Merrill Lynch\" or \"MLPF&S\") introduced a new limited partnership secondary service through Merrill Lynch's Limited Partnership Secondary Transaction Department (\"LPSTD\"). This service will assist Merrill Lynch clients wishing to buy or sell Registrant Units.\nThe number of owners of Units as of January 28, 1994 was 16,446. Registrant does not distribute dividends. Registrant distributes Distributable Cash From Operations and Distributable Sale and Refinancing Proceeds, to the extent available. There were no distributions in 1992 or 1993.\nItem 6.","section_6":"Item 6. Selected Financial Data\nYear Ended Year Ended Year Ended December 31, December 25, December 27, 1993 1992 1991\nOperating Revenues $ 99,990,757 $100,443,967 $ 99,185,423\nNet Income (Loss) $ 1,377,340 $( 9,280,770) $(51,049,551)\nIncome (Loss) per Unit of Limited Partnership Interest $ 7.25 $ (48.87) $ (268.83)\nNumber of Units 187,994 187,994 187,994\nAs of DecemberAs of December As of 31, 1993 25, 1992 December 27,\nTotal Assets $249,851,937 $261,554,442 $310,248,561\nBorrowings $232,568,349 $245,994,745 $279,440,750\nYear Ended Year Ended December 28, December 29, 1990 1989\nOperating Revenues $ 93,559,410 $ 88,353,300\nNet Income (Loss) $(41,491,591) $(35,319,437)\nIncome (Loss) per Unit of Limited Partnership Interest $ (218.50) $ (186.00)\nNumber of Units 187,994 187,994\nAs of As of December 28, December 29, 1990 1989\nTotal Assets $358,192,902 $395,011,414\nBorrowings $280,048,250 $281,270,533\nItem 7.","section_7":"Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations\nLiquidity and Capital Resources\nAs of December 31, 1993, Registrant had $26,916,477 in cash and cash equivalents, of which $22,479,254 was limited for use at the operating level and the remaining $4,437,223 was Registrant's working capital.\nAs of December 25, 1992, Registrant had $19,930,098 in cash and cash equivalents, of which $15,677,696 was limited for use at the operating level and the remaining $4,252,402 was Registrant's working capital.\nDuring 1993, Registrant continued its operations phase and continued to focus on resolving difficulties in complying with certain of its debt agreements. On July 30, 1993, Registrant executed a Second Amendment to the Wincom-WEBE-WICC Loan which cured the previously outstanding principal and interest payment and covenant defaults pursuant to the Wincom-WEBE-WICC Loan (Refer to Note 6 of \"Item 8.","section_7A":"","section_8":"Item 8. Financial Statements and Supplementary Data\nPage ML Media Partners, L.P.\nIndependent Auditors' Report 68-69\nConsolidated Balance Sheets as of December 31, 1993 and December 25, 1992 70-71\nConsolidated Statements of Operations for the years ended December 31, 1993, December 25, 1992 and December 27, 1991 72-73\nConsolidated Statements of Cash Flows for the years ended December 31, 1993, December 25, 1992 and December 27, 1991 74-76\nConsolidated Statements of Changes in Partners' Capital (Deficit) for the years ended December 31, 1993, December 25, 1992 and December 27, 1991 77\nNotes to the Consolidated Financial Statements for the years ended December 31, 1993, December 25, 1992 and December 27, 1991 78-115\nSchedule III - Condensed Financial Information of Registrant as of December 31, 1993, December 25, 1992 and December 27, 1991 116-122\nSchedule V - Property, Plant and Equipment as of December 31, 1993, December 25, 1992 and December 27, 1991 123\nSchedule VI - Accumulated Depreciation of Property, Plant and Equipment as of December 31, 1993, December 25, 1992 and December 27, 1991 124\nSchedule VIII - Accumulated Amortization of Intangible Assets and Accumulated Amortization of Prepaid Expenses and Deferred Charges as of December 31, 1993, December 25, 1992 and December 27, 1991 125\nSchedule X - Supplementary Income Statement Information for the years ended December 31, 1993, December 25, 1992 and December 27, 1991 126\nSchedules not listed are omitted because of the absence of the conditions under which they are required or because the information is included in the financial statements or the notes thereto. INDEPENDENT AUDITORS' REPORT\nML Media Partners, L.P.:\nWe have audited the accompanying consolidated financial statements and the related financial statement schedules of ML Media Partners, L.P. (the \"Partnership\") and its affiliated entities, listed in the accompanying table of contents. These financial statements and financial statement schedules are the responsibility of the Partnership's general partner. Our responsibility is to express an opinion on the financial statements and financial statement schedules based on our audits.\nWe conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the general partner, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.\nIn our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Partnership and its affiliated entities at December 31, 1993 and December 25, 1992 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1993 in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein.\nAs emphasized in Note 2 to the consolidated financial statements, the Partnership was in default under one of its loan agreements as of December 31, 1993. If the Partnership is unable to restructure or amend this loan agreement, the Partnership will be unable to satisfy its ongoing debt obligations under the agreement. As a result, the lenders could accelerate payment of the debt under the loan agreement and foreclose on the assets that collateralize that debt. The ultimate outcome of the Partnership's attempt to restructure this debt obligation cannot presently be determined. Accordingly, no adjustment that may result from the outcome of this matter has been made in the accompanying consolidated financial statements.\nAs emphasized in Note 2 to the consolidated financial statements, the recent Federal legislation concerning the regulation of the cable television industry may have a detrimental impact on the financial condition, liquidity and value of the Partnership's cable systems and it is likely that the Partnership will experience covenant defaults under a cable system debt agreement. The cable operations have total assets and operating revenues comprising 76 percent and 75 percent, respectively, of the Partnership's consolidated assets and operating revenues in the accompanying 1993 consolidated financial statements. The ultimate impact of such regulation cannot presently be determined. Accordingly, no adjustment that may result from the outcome of this matter has been made in the accompanying consolidated financial statements.\nDELOITTE & TOUCHE New York, New York March 22, 1994\nML MEDIA PARTNERS, L.P. CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1993 AND DECEMBER 25, 1992\nNotes 1993 1992 ASSETS: Cash and cash equivalents 1,2 $26,916,477 $19,930,098 Accounts receivable (net of allowance for doubtful accounts of $677,188 at December 31, 1993 and $538,888 at December 25, 1992) 14 9,286,116 6,879,831 Prepaid expenses and deferred charges (net of accumulated amortization of $7,241,088 at December 31, 1993, and $6,601,766 at December 25, 1992) 1 4,399,276 3,610,935 Property, plant and equipment(net of accumulated depreciation of $104,955,637 at December 31, 1993 and $91,378,707 at December 25, 1992) 1,2,4 92,400,494 103,758,253 Intangible assets (net of accumulated amortization of $111,069,407 at December 31, 1993 and $112,996,421 at December 25, 1992) 1,2,5 111,146,204 121,986,627 Other assets 6,10 5,703,370 5,388,698 TOTAL ASSETS 6 $249,851,937 $261,554,442\nLIABILITIES AND PARTNERS' DEFICIT: Liabilities: Borrowings 2,6,11 $232,568,349 $245,994,745 Accounts payable and accrued liabilities 7 29,989,412 29,815,516 Subscriber advance payments 2,102,082 1,929,427 Total Liabilities 264,659,843 277,739,688\nCommitments and Contingencies 8,14\n(Continued on the following page)\nML MEDIA PARTNERS, L.P. CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1993 AND DECEMBER 25, 1992 (continued)\nNotes 1993 1992\nPartners' Deficit: General Partner: Capital contributions, net of offering expenses 1 1,708,299 1,708,299 Cumulative loss (1,793,460) (1,807,233) (85,161) (98,934)\nLimited Partners: Capital contributions, net of offering expenses (187,994 Units of Limited Partnership Interest) 1 169,121,150 169,121,150 Tax allowance cash distribution (6,291,459) (6,291,459) Cumulative loss (177,552,436) (178,916,003) (14,722,745) (16,086,312) Total Partners' Deficit (14,807,906) (16,185,246) TOTAL LIABILITIES AND PARTNERS' DEFICIT $ 249,851,937 $ 261,554,442\nSee Notes to Consolidated Financial Statements.\nML MEDIA PARTNERS, L.P. CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1993, DECEMBER 25, 1992 AND DECEMBER 27, 1991 Notes 1993 1992 1991 REVENUES: Operating revenue 1 $ 99,990,757 $100,443,967 $ 99,185,423\nInterest 558,380 158,738 273,704 Gain on sale of assets 3 4,988,390 - - Total revenues 105,537,527 100,602,705 99,459,127\nCOSTS AND EXPENSES: Property operating 14 33,764,437 36,301,114 37,652,907 General and administrative 7,8,1 20,003,401 22,703,107 21,708,878 Depreciation and amortization 1,4,5 31,419,885 31,516,609 36,975,908\nInterest expense 6 17,500,965 23,437,581 30,701,430 Management fees 7 1,591,831 1,629,882 1,667,934 Other 179,455 190,182 195,203 Loss on sale of Universal 3 - 6,399,000 - Loss on write-down of Wincom 5 - - 21,606,418 Total costs and expenses 104,459,974 122,177,475 150,508,678\nIncome (loss) before provision for income taxes and extraordinary item 1,077,553 (21,574,770) (51,049,551)\nProvision for income taxes- Wincom 1,12 190,000 - -\nIncome (loss) before extraordinary item 887,553 (21,574,770) (51,049,551) Extraordinary item- gain on extin- guishment of debt 3 489,787 12,294,000 -\nNET INCOME (LOSS) $ 1,377,340 $ (9,280,770) $(51,049,551)\n(Continued on the following page)\nML MEDIA PARTNERS, L.P. CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1993, DECEMBER 25, 1992 AND DECEMBER 27, 1991 (continued)\nNotes 1993 1992 1991 Per Unit of Limited Partnership Interest:\nIncome (loss) before extraordinary item $ 4.67 $ (113.61) $ (268.83) Extraordinary item 2.58 64.74 -\nNET INCOME (LOSS) $ 7.25 $ (48.87) (268.83)\nNumber of Units 187,994 187,994 187,994\nSee Notes to Consolidated Financial Statements.\nML MEDIA PARTNERS, L.P. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1993, DECEMBER 25, 1992 AND DECEMBER 27, 1991\n1993 1992 1991 Cash flows from operating activities: Net income (loss) $ 1,377,340 $ (9,280,770 $(51,049,551 ) ) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 31,419,885 31,516,609 36,975,908 Bad debt expense 327,194 292,141 372,304 Equity in earnings of joint venture (143,582) (26,028) (3,724) Loss on sale of Universal - 6,399,000 - Gain on extinguishment of debt (489,787) (12,294,000 - ) Loss on write-down of Wincom - - 21,606,418 Gain on sale of assets (4,988,390) - -\nChange in operating assets and liabilities: Decrease\/(increase) in accounts receivable (2,733,479) 446,295 1,851,467 Decrease\/(increase)in prepaid expenses and deferred charges (1,471,007) 4,588 (799,284) Decrease\/(increase) in other assets (171,090) 219,336 209,082 Increase in accounts payable and accrued liabilities 193,632 611,859 5,135,167 Increase in subscriber advance payments 172,655 91,062 56,189\nNet cash provided by operating activities 23,493,371 17,980,092 14,353,976\n(Continued on the following page)\nML MEDIA PARTNERS, L.P. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1993, DECEMBER 25, 1992 AND DECEMBER 27, 1991 (continued)\n1993 1992 1991 Cash flows from investing activities:\nProceeds from sale of assets 7,447,854 - -\nPurchase of property, plant and equipment (10,205,727 (10,044,019) (12,856,086) )\nIntangible assets (322,723 (335,581) (115,202) )\nNet cash used in investing activities ( 3,080,596 (10,379,600) (12,971,288) )\nCash flows from financing activities: Principal payments on bank loans (14,874,901) (9,125,974) (15,321,250) Proceeds from borrowings 1,448,505 11,279,969 14,713,750 Net cash (used in) provided (13,426,396) 2,153,995 (607,500) by financing activities\nNet increase in cash and cash equivalents 6,986,379 9,754,487 775,188 Cash and cash equivalents at the beginning of year 19,930,098 10,175,611 9,400,423 Cash and cash equivalents at end of year $26,916,477 $19,930,098 $ 10,175,611\nCash paid for interest $17,246,267 $21,070,472 $ 26,803,211\nSupplemental Disclosure of Non-Cash Investing and Financing Activities:\nBorrowings and related liabilities of approximately $43,400,000 were fully discharged related to the disposition of the Universal Cable Systems as of December 25, 1992. See Note 3 for additional information.\nProperty, plant and equipment of approximately $1,067,000, $1,094,000 and $1,619,000 was acquired but not paid for as of December 31, 1993, December 25, 1992 and December 27, 1991, respectively.\nSee Notes to Consolidated Financial Statements.\nML MEDIA PARTNERS, L.P. CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT) FOR THE YEARS ENDED DECEMBER 31, 1993, DECEMBER 25, 1992 AND DECEMBER 27, 1991\nGeneral Limited Partner Partners Total\nBalance, December 28, 1990 $ 504,370 $ 43,640,705 $ 44,145,075\n1991:\nNet Loss (510,496) (50,539,055) (51,049,551)\nPartners' Deficit at December 27, 1991 (6,126) (6,898,350) (6,904,476)\n1992:\nNet Loss (92,808) (9,187,962) (9,280,770)\nPartners' Deficit at December 25, 1992 (98,934) (16,086,312) (16,185,246)\n1993:\nNet Income 13,773 1,363,567 1,377,340\nPartners' Deficit at December 31, 1993 $ (85,161) $(14,722,745 $(14,807,906 ) )\nSee Notes to Consolidated Financial Statements. ML MEDIA PARTNERS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1993, DECEMBER 25, 1992 AND DECEMBER 27, 1991\n1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES\nML Media Partners, L.P. (the \"Partnership\") was formed and the Certificate of Limited Partnership was filed under the Delaware Revised Uniform Limited Partnership Act on February 1, 1985. Operations commenced on May 14, 1986 with the first closing of the sale of units of limited partnership interest (\"Units\"). Subscriptions for an aggregate of 187,994 Units were accepted and are now outstanding.\nMedia Management Partners (the \"General Partner\") is a joint venture, organized as a general partnership under the laws of the State of New York, between RP Media Management (a joint venture organized as a general partnership under the laws of the State of New York, consisting of The Elton H. Rule Company and IMP Media Management, Inc.), and ML Media Management Inc., a Delaware corporation and an indirect wholly-owned subsidiary of Merrill Lynch & Co., Inc. The General Partner was formed for the purpose of acting as general partner of the Partnership. The General Partner's total capital contribution was $1,898,934 which represents 1% of the total Partnership capital contributions.\nPursuant to the terms of the Amended and Restated Agreement of Limited Partnership (the \"Partnership Agreement\"), the General Partner is liable for all general obligations of the Partnership to the extent not paid by the Partnership. The limited partners are not liable for the obligations of the Partnership in excess of the amount of their contributed capital.\nThe purpose of the Partnership is to acquire, finance, hold, develop, improve, maintain, operate, lease, sell, exchange, dispose of and otherwise invest in and deal with media businesses and direct and indirect interests therein. As of December 31, 1993, the Partnership's investments consisted of a 50% interest in Century - ML Cable Venture (the \"Venture\"), which through its wholly-owned subsidiary corporation, Century- ML Cable Corporation(\"C-ML Cable\") operates two cable television systems in Puerto Rico (the \"Puerto Rico Systems\"); four cable television systems in California (\"California Cable\" or the \"California Systems\"); two VHF television stations (KATC located in Lafayette, Louisiana and WREX located in Rockford, Illinois); an FM (WEBE-FM) and AM (WICC-AM) radio station combination in Bridgeport, Connecticut; an FM and AM radio station combination in Anaheim, California (KEZY-FM and KORG-AM, respectively); Wincom Broadcasting Corporation (\"Wincom\"), a corporation that owns an FM radio station in Cleveland, Ohio (WQAL-FM); and a 49.999% interest in Century-ML Radio Venture (\"C-ML Radio\"), which owns an FM and AM radio station combination (WFID-FM and WUNO-AM, respectively) and background music service in San Juan, Puerto Rico.\nBasis of Accounting and Fiscal Year\nThe Partnership's records are maintained on the accrual basis of accounting for financial reporting and tax purposes. Pursuant to generally accepted accounting principles, the Partnership recognizes revenue as various services are provided. The Partnership consolidates its 100% interest in Wincom; its 99.999% interests in ML California Associates, KATC Associates, WREX Associates, WEBE Associates, WICC Associates and Anaheim Radio Associates; and its pro rata 50% interest in the C-ML Cable Venture. The Partnership accounts for its 49.999% interest in C- ML Radio under the equity method (see Note 10). The Partnership also consolidated its 100% interest in Universal Cable Holdings, Inc. (\"Universal\") prior to its sale in July, 1992. See Note 3 for information regarding the sale of Universal. All intercompany accounts have been eliminated.\nThe fiscal year of the Partnership ends on the last Friday of each calendar year.\nProperty and Depreciation\nProperty, plant and equipment is stated at cost, less accumulated depreciation. Property, plant and equipment is depreciated using the straight-line method over the following estimated useful lives:\nMachinery, Equipment and Distribution Systems 5-12 years Buildings 15-30.5 years Other 3-10 years\nInitial subscriber connection costs, as it relates to the cable television systems, are capitalized and included as part of the distribution systems. Costs related to disconnects and reconnects are expensed as incurred. Expenditures for maintenance and repairs are also expensed as incurred. Betterments, replacement equipment and additions are capitalized and depreciated over the remaining life of the assets. Intangible Assets and Deferred Charges\nIntangible assets and deferred charges are being amortized on a straight-line basis over various periods as follows:\nGoodwill 40 years Franchise life of the franchise Other Intangibles various Deferred Costs 4-10 years\nThe Partnership periodically evaluates the recoverability of goodwill using consistent, objective methodologies. Such methodologies may include recoverability from cash flows, recoverability from operating income, recoverability from net income or fair value determination.\nBarter Transactions\nAs is customary in the broadcasting industry, the Partnership engages in the bartering of commercial air time for various goods and services. Barter transactions are recorded based on the fair market value of the products and\/or services received. The goods and services are capitalized or expensed as appropriate when received or utilized. Revenues are recognized when the commercial spots are aired.\nBroadcast Program Rights\nThe Partnership's television stations' broadcast program rights, included in other assets, represent license agreements for the right to broadcast programs which are available at the balance sheet date. Amortization is recorded on a straight-line basis over the period of the license agreements or upon run usage.\nRevenue Recognition\nOperating revenue, as it relates to the cable television systems, includes earned subscriber service revenues and charges for installation and connections. Subscriber services paid for in advance are recorded as income when earned.\nIncome Taxes\nNo provision for income taxes has been made for the Partnership because all income and losses are allocated to the partners for inclusion in their respective tax returns. However, the Partnership owns certain entities which are consolidated in the accompanying financial statements and which are taxable.\nEffective December 26, 1992 the Partnership adopted Statement of Financial Accounting Standards No. 109, \"Accounting for Income Taxes\" (\"SFAS No. 109\"). For certain entities owned by the Partnership which are taxpayers, SFAS No. 109 requires the recognition of deferred income taxes for the tax consequences of differences between the bases of assets and liabilities for income tax and financial statement reporting purposes, based on enacted tax laws. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. For the Partnership, SFAS No. 109 requires the disclosure of the difference between the tax bases and the reported amounts of the Partnership's assets and liabilities.\nStatement of Financial Accounting Standards No. 112\nIn November 1992, Financial Accounting Standards Board issued Statement on Financial Accounting Standards No. 112, \"Employers' Accounting for Postemployment Benefits\" (\"SFAS No. 112\"). This pronouncement, effective in 1994, establishes accounting standards for employers who provide benefits to former or inactive employees after employment, but before retirement. These benefits include, but are not limited to, salary- continuation, disability related benefits including workers' compensation, and continuation of health care and life insurance benefits. The statement requires employers to accrue the obligations associated with service rendered to date for employee benefits accumulated or vested where payment is probable and can be reasonably estimated. The effect of adopting SFAS No. 112 will not be material on the Partnership's financial position and results of operations.\nInterest Rate Exchange Agreements\nThe differential to be paid or received on the interest rate exchange agreements is accrued and recognized over the life of the agreement.\nThe Partnership was exposed to credit loss in the event of non- performance by the other parties to interest rate exchange agreements in connection with the Revised ML California Credit Agreement and the WREX-KATC Loan during 1992; however, these interest rate exchange agreements expired during 1993.\nStatements of Cash Flows\nShort-term investments which have an original maturity of ninety days or less are considered cash equivalents.\n2. LIQUIDITY\nThe Partnership's ongoing cash needs will be to fund debt service, capital expenditures and working capital needs.\nAs of December 31, 1993, the Partnership had $26,916,477 in cash and cash equivalents, of which $22,479,254 was limited for use at the operating level and the remaining $4,437,223 was the Partnership's working capital.\nAs of December 25, 1992, the Partnership had $19,930,098 in cash and cash equivalents, of which $15,677,696 was limited for use at the operating level and the remaining $4,252,402 was the Partnership's working capital.\nThe Partnership engaged Merrill Lynch & Co. and Daniels & Associates in January, 1994 to act as its financial advisors in connection with a possible sale of all or a portion of Registrant's California Cable Systems.\nThere can be no assurances that the Partnership will be able to enter into an agreement to sell the California Cable Systems on terms acceptable to the Partnership or that any such sale will be consummated. If a sale is consummated, it is expected that it would be consummated no earlier than the second half of 1994.\nImpact of Cable Legislation\nThe future liquidity of the Partnership's cable operations, California Cable and C-ML Cable, is likely to be negatively affected by recent and ongoing changes in legislation governing the cable industry. The potential impact of such legislation on the Partnership is described below.\nOn October 5, 1992, Congress overrode the President's veto of the Cable Consumer Protection and Competition Act of 1992 (the \"1992 Cable Act\") which imposes significant new regulations on the cable television industry. The 1992 Cable Act required the development of detailed regulations and other guidelines by the Federal Communications Commission (\"FCC\"), most of which have now been adopted but remain subject to petitions for reconsideration before the FCC and\/or court appeals.\nOn May 3, 1993, the FCC released a Report and Order relating to the regulation of rates for certain cable television programming services and equipment. These rules establish certain benchmarks which will enable local franchise authorities to require rates for \"basic service\" (minimally, local broadcast and access channels) and the FCC (upon receipt of individual complaints) to require rates for certain satellite program services (excluding premium channels) to fall approximately 10% from September 30, 1992 levels, unless the cable operator is already charging rates that are at a so-called \"competitive\" benchmark level or it can justify a higher rate based on a cost-of-service showing. Rates of all regulated cable systems will then be subject to a price cap that will govern the extent to which rates can be raised in the future without a cost-of-service showing. Several other key matters are still pending before the FCC that will ultimately shape and complete this new regulatory framework for cable industry rates. For example, in a complicated multi-faceted document released on August 27, 1993, the FCC simultaneously: (1) issued a First Order on Reconsideration of the foregoing May 3 rate order (confirming or clarifying certain benchmark rate methodology issues); (2) adopted a Second Report and Order (deciding to continue to include systems with less than 30% penetration in the universe of systems whose rates were used to establish benchmarks, a decision that, if unchanged, avoids a potentially downward adjustment of the previously announced benchmark rates); and (3) issued a Third Notice of Proposed Rulemaking (addressing such \"going forward\" issues as how cable rates should be modified when channels are added or deleted, how costs incurred for rebuilds should be treated, and whether cable operators should be required to use the same methodology to determine rates for both basic and expanded basic tiers). In addition, a separate yet related rulemaking proceeding was initiated by the FCC on July 16, 1993 to establish the proposed standards and certain other ground rules for cost-of-service showings by cable operators seeking to justify cable rates in excess of the FCC prescribed benchmark\/price cap levels. While continuing to express a strong preference for its benchmark approach, the FCC's \"Notice of Proposed Rulemaking\" in this proceeding outlines an alternative regulatory scheme that would combine certain elements of traditional ratebase\/rate of return regulation with a more streamlined approach uniquely tailored to the cable industry. Comments in response to both the Third Notice of Proposed Rulemaking and the separate cost-of-service rulemaking were received by the FCC on or before October 7, 1993. In the meantime, the FCC's overall cable service rate regulation rules took effect on September 1, 1993, and the industry-wide freeze on rates for regulated cable service remains in effect until May 15, 1994. Furthermore, by Order released September 17, 1993, the FCC initiated an industry-wide survey of cable rate changes and service restructuring as of the starting date of its rate freeze (April 5, 1993) and the effective date of rate regulation (September 1, 1993) in order to gauge the early effectiveness of its cable rate regulations. The results of this survey, which could further impact rate regulation actions by the FCC, were announced on February 22, 1994.\nOn February 22, 1994, the FCC adopted a series of additional measures that expand and substantially alter its cable rate regulations. Based on FCC news releases dated February 22, the FCC's major actions include the following: (1) a modification of its benchmark methodology in a way which will effectively require cable rates to be reduced, on average, an additional 7% (i.e., beyond the 10% reduction previously ordered in 1993) from their September 30, 1992 level, or to the new benchmark, whichever is less; (2) the issuance of new standards and requirements to be used in making cost-of-service showings by cable operators who seek to justify rates above the levels determined by the benchmark approach; and (3) the clarification and\/or reaffirmation of a number of \"going forward\" issues that had been the subject of various petitions for reconsideration of its May 3, 1993 Rate Order. Several weeks earlier, and partly in anticipation of these actions, the FCC extended its industry-wide freeze on rates for regulated cable services until May 15, 1994. It is expected that the new benchmark standards and cost-of- service rules will become effective prior to the current termination date of the rate freeze.\nIn addition to the rate reregulation described above, among other things, the 1992 Cable Act provides that certain qualified local television stations may require carriage by cable operators, or elect to negotiate for payment of fees or other forms of compensation by the cable operator to the stations in exchange for allowing retransmission of their signals. The deadline for making such elections was June 17, 1993. Negotiations between cable operators and those television stations which elected to pursue retransmission agreements were carried out between the foregoing election date and October 6, 1993, the deadline under the 1992 Cable Act for obtaining retransmission consent. If some type of agreement (either final or interim pending further negotiations) was not reached by October 6, 1993, cable operators could have been forced to discontinue carriage of those television stations which elected to pursue retransmission consent (see below).\nIn its May 1993 Rate Order the FCC exempted from rate regulation the price of packages of \"a la carte\" channels if certain conditions were met. Upon reconsideration, however, the FCC on February 22, 1994 effectively tightened its regulatory treatment of \"a la carte\" packages by establishing more elaborate criteria designed to ensure that such practices are not employed so as to unduly evade rate regulation. Now, when assessing the appropriate regulatory treatment of \"a la carte\" packages, the FCC will consider, inter alia, the following factors as possibly suggesting that such packages do not qualify for non-regulated treatment: whether the introduction of the package avoids a rate reduction that otherwise would have been required under the FCC's rules; whether an entire regulated tier has been eliminated and turned into an \"a la carte\" package; whether a significant number or percentage of the \"a la carte\" channels were removed from a regulated service tier; whether the package price is deeply discounted when compared to the price of an individual channel; and whether the subscriber must pay significant equipment or other charges to purchase an individual channel in the package. In addition, the FCC will consider factors that will reflect in favor of non-regulated treatment such as whether the channels in the package have traditionally been offered on an \"a la carte\" basis or whether the subscriber is able to select the channels that comprise the \"a la carte\" package. \"A la carte\" packages which are found to evade rate regulation rather than enhance subscriber choice will be treated as regulated tiers, and operators engaging in such practices may be subject to forfeitures or other sanctions by the FCC.\nIn a separate action on February 22, 1994, the FCC adopted interim rules to govern cost of service proceedings initiated by cable operators. Operators who elect to pursue cost of service proceedings will have their rates based on their allowable costs, in a proceeding based on principles similar to those that govern cost-based rate regulation of telephone companies. Under this methodology, cable operators may recover, through the rates they charge for regulated cable service, their normal operating expenses and a reasonable return on investment. The FCC has, for these purposes, established an interim industry-wide rate of return of 11.25%. It has also determined that acquisition costs above book value are presumptively excluded from the rate base. At the same time, certain intangible, above-book costs, such as start-up losses (limited to losses actually incurred during a two- year start-up period) and the costs of obtaining franchise rights and some start-up organizational costs such as customer lists, may be allowed. There are no threshold requirements limiting the cable systems eligible for a cost of service showing, except that, once rates have been set pursuant to a cost of service approach, cable operators may not file a new cost of service showing to justify new rates for a period of two years. Finally, the FCC notes that it will, in certain individual cases, consider a special hardship showing (or the need for special rate relief) where an operator demonstrates that the rates set by a cost of service proceeding would constitute confiscation of investment and that some higher rate would not represent exploitation of customers. In considering whether to grant such a request, the FCC emphasizes that, among other things, it would examine the overall financial condition of the operator and whether there is a realistic threat of termination of service.\nThe Partnership is currently unable to assess the full impact of the February 22, 1994 FCC action and the 1992 Cable Act upon its business prospects or future financial results. However, the rate reductions mandated by the FCC in May of 1993 have had, and will most likely continue to have, a detrimental impact on the revenues and profits of the Partnership's cable television operations. In addition, the rate reductions and limits on the pricing of a-la-carte cable services proposed on February 22, 1994 are likely to have a further detrimental impact on those revenues and profits. Although the impact of the 1992 Cable Act and the recent FCC actions cannot yet be ascertained precisely, once fully implemented, certain aspects of the new law may have a material negative impact on the financial condition, liquidity, and value of the Partnership.\nIn addition, the Partnership is currently unable to determine the impact of the February 22, 1994 FCC action and previous FCC actions on its ability to sell the California Cable Systems or the potential timing and value of such a sale. However, as discussed below, the FCC actions have had, and will have, a detrimental impact on the revenues and profits of the California Cable Systems.\nRefer to Note 15 of \"Item 8. Financial Statements and Supplementary Data\" for more information regarding the possible sale of California Cable.\nCalifornia Cable\nAs an example of the effects of the 1992 Cable Act, in complying with the benchmark regulatory scheme without considering the effect of any future potential cost-of-service showing, the Partnership's California Cable Systems, on a franchise by franchise basis, were required to reduce present combined basic service rates (broadcast tier and satellite service tier) effective September 1, 1993. In addition, pursuant to the 1992 Cable Act, revenue from secondary outlets and from remote control units was eliminated or reduced significantly. The Partnership took certain actions to seek to defray some of the resulting revenue declines, which among others included instituting charges for converters, as permitted by the 1992 Cable Act, offering programming services on an a-la-carte basis, which services are not subject to rate regulation, and aggressively marketing unregulated premium services to those subscribers benefiting from decreased basic rates. Despite the institution of these actions by the California Cable Systems, the May, 1993 rate regulations enacted pursuant to the 1992 Cable Act had a detrimental impact on the revenues and profits of the California Cable Systems. In addition, the Partnership is currently unable to determine whether its a-la-carte restructuring is in accordance with the terms of the February 22, 1994 FCC action. The further rate reduction mandated by the February 22, 1994 FCC action and any limits imposed by such action on a-la-carte pricing will have a further detrimental impact on those revenues and profits.\nBy the October 6 deadline (noted above), the Partnership's California Cable systems had reached agreement with all broadcast stations within their service areas electing retransmission consent. In some cases, these agreements obligate the Systems to carry additional programming services affiliated with the broadcast stations. The costs of these additional program services will not be material to the operations of California Cable.\nAs of December 31, 1993, the Partnership was in compliance with all covenants under the revised ML California Credit Agreement (the \"Revised ML California Credit Agreement\") (see Note 6). However, particularly in light of the February 22, 1994 FCC action, it is likely that the Partnership will experience covenant defaults under the Revised ML California Credit Agreement during 1994. C-ML Cable\nOn September 30, 1993, C-ML Cable entered into an amendment to the C-ML Revolving Credit Agreement (see Note 6) whereby the Termination Date (the date upon which all revolving credit borrowings outstanding under the C-ML Revolving Credit Agreement are converted into a term loan) was extended from September 30, 1993 to December 15, 1993. Effective December 15, 1993, C-ML Cable entered into a second amendment to the C-ML Revolving Credit Agreement whereby the debt facility was converted into a reducing revolving credit facility with a final maturity of December 31, 1998. Beginning December 31, 1993, the amount of borrowing availability under the C-ML Revolving Credit Agreement is reduced quarterly each year. Outstanding amounts under the debt facility may be prepaid at any time subject to certain conditions. As of December 31, 1993, there were no borrowings outstanding under the C-ML Revolving Credit Agreement.\nThe Partnership is currently unable to ascertain the full impact of the February 22, 1994 FCC action and previous FCC actions on the Puerto Rico Systems. While the impact of a September 1, 1993 rate and tier restructuring to comply with the 1992 Cable Act did not have a significant negative impact on the revenues and profits of C-ML Cable, it is likely that the February 22, 1994 FCC action will have a detrimental impact on the revenues and profits of the Puerto Rico Systems. The Partnership does not expect that this likely detrimental impact will result in any defaults under the C-ML Notes or the C-ML Revolving Credit Agreement during 1994.\nWREX-KATC\nDuring 1993 and 1992, the Partnership defaulted on the quarterly principal payments due with respect to its WREX-KATC Loan. As of December 31, 1993, WREX-KATC was in default of $2,967,873 in principal, after giving effect to $782,127 in principal payments made during 1993 from cash generated by the operations of WREX and KATC. The Partnership is not in default of any interest payments under the WREX-KATC Loan. In addition, as of December 28, 1990 and continuing through December 31, 1993, the Partnership was in default of financial covenants under its WREX- KATC Loan. The lender granted waivers for the defaults as of December 28, 1990. However, the lender has not granted waivers for the 1991, 1992 or 1993 defaults. As required by the terms of the WREX-KATC Loan, the Partnership advanced an additional $10,000 of its working capital to WREX and KATC in April, 1993; bringing the total of such required advances to $1.0 million. The Partnership expects to experience future principal payment and covenant defaults under the WREX-KATC Loan, and is seeking to restructure the WREX-KATC Loan. The Partnership has engaged The Blackstone Group as its restructuring advisor, to be utilized when deemed necessary, in the Partnership's efforts to restructure the WREX-KATC Loan with the lender. The outcome of these restructuring efforts cannot be predicted at this time, but the Partnership does not intend to, nor is it obligated to, advance any further working capital to WREX and KATC, although it may possibly choose to in the context of a successful restructuring of the WREX-KATC Loan. The lender has informed the Partnership that it reserves all of its rights and remedies under the WREX-KATC Loan agreement, including the right to accelerate the maturity of the indebtedness under the WREX-KATC Loan and to foreclose on, or otherwise force a sale of, the assets of WREX and KATC (but not the other assets of the Partnership.) Borrowings under the WREX-KATC Loan are nonrecourse to the Partnership.\nWincom-WEBE-WICC\nOn July 30, 1993, the Partnership and Chemical Bank executed an amendment to the Wincom-WEBE-WICC Loan (the \"Restructuring Agreement\") effective January 1, 1993, which cured all previously outstanding defaults pursuant to the Wincom-WEBE-WICC Loan (see Note 6). In addition, as discussed in Note 3, the Partnership sold certain assets and remitted a portion of the proceeds to the lender as required under the terms of the Restructuring Agreement.\nSummary\nBased upon a review of the current financial performance of the Partnership's investments, the Partnership continues to monitor its unrestricted working capital level. To the extent that the Partnership determines that it must maintain or increase its unrestricted working capital level it may take certain actions, which actions may include the continuing deferral of certain general partner management fees, the continuing deferral of certain general partner reimbursements of out-of-pocket expenses and the sale of certain assets. The Partnership does not have sufficient cash to meet all of the contractual debt obligations of all of its investments nor is it obligated to do so. As discussed above, the Partnership does not currently expect to advance working capital to WREX and KATC, although it may possibly choose to in the context of a successful restructuring.\nAs of December 31, 1993, KATC and WREX represented approximately 9% of the consolidated assets of the Partnership and approximately 10% of the consolidated operating revenue.\n3. DISPOSITION OF ASSETS\nWincom\nOn April 30, 1993, WIN Communications of Indiana, Inc., a 100%- owned subsidiary of Wincom, entered into an Asset Purchase Agreement to sell substantially all of the assets of WCKN-AM\/WRZX- FM, Indianapolis, Indiana (the \"Indianapolis Stations\") to Broadcast Alchemy, L.P.(\"Alchemy\") for gross proceeds of $7 million. Alchemy is not affiliated with the Partnership. The proposed sale was subject to approval by the FCC, which granted its approval on September 22, 1993. On October 1, 1993, the date of the sale of the Indianapolis Stations, the net proceeds from such sale, which totalled approximately $6.1 million, were remitted to Chemical Bank, as required by the terms of the Restructuring Agreement, to reduce the outstanding principal amount of the Series B Term Loan due Chemical Bank. In addition, certain additional amounts from the gross proceeds from the sale of the Indianapolis Stations, including an escrow deposit of $250,000, may ultimately be paid to Chemical Bank. The Partnership recognized a gain of approximately $4.7 million on the sale of the Indianapolis Stations. In addition, the Partnership recognized an extraordinary gain of approximately $0.5 million as a result of the remittance to Chemical Bank of the approximately $6.1 million net proceeds to reduce the outstanding principal amount of the Series B Term Loan and the simultaneous forgiveness of the entire Series C Term Loan due Chemical Bank pursuant to the Restructuring Agreement (see Note 6). The remaining portion of the forgiveness of the Series C Note will be amortized against interest expense over the remaining life of the loan. As of October 1, 1993 (the date of the sale), the Indianapolis Stations represented approximately 1% of the consolidated assets of the Partnership. In addition, for the year ended December 31, 1993, the Indianapolis Stations represented approximately 1% of the consolidated operating revenues of the Partnership.\nUniversal\nOn July 8, 1992, the Partnership consummated the sale of all of the issued and outstanding capital stock of Universal to Ponca\/Universal Holdings, Inc., a Delaware corporation (\"Ponca\"), for aggregate consideration of approximately $31.6 million. Ponca is not affiliated with the Partnership.\nConsideration was paid at closing as follows: [i] approximately $30.2 million was paid to the lenders in full discharge of the obligations of Universal under a credit agreement dated September 19, 1988, as amended, and under an interest rate exchange agreement dated December 12, 1988, which obligations were approximately $43.4 million at Closing; [ii] $1.0 million was deposited into an escrow account with the lenders, which was subsequently paid to the lenders, to provide Ponca with its sole recourse for recovering any indemnification payments or purchase price adjustments that may be due it under the stock purchase agreement; and [iii] approximately $0.4 million was used to pay closing costs associated with the sale. No proceeds were retained by the Partnership and the Partnership recognized a loss of approximately $6.4 million on the sale and an extraordinary gain of approximately $12.3 million on the extinguishment of debt. The lenders have unconditionally released the Partnership and Universal from all other obligations relating to the credit and interest rate exchange agreements. These obligations of Universal (noted above) were nonrecourse to the Partnership.\nSee Note 13 for information regarding pro forma data for the effects of the disposition of Universal.\n4. PROPERTY, PLANT AND EQUIPMENT\nProperty, plant and equipment consisted of the following:\nDecember 31, December 25, 1993 1992\nLand and Improvements $ 5,087,438 $ 5,587,676\nBuildings 10,827,637 11,613,180\nCable Distribution Systems and Equipment 178,332,482 173,696,231\nOther 3,108,574 4,239,873 197,356,131 195,136,960\nLess accumulated (104,955,637) (91,378,707) depreciation\nProperty, plant and equipment, net $ 92,400,494 $103,758,253\n5. INTANGIBLE ASSETS\nIntangible assets consisted of the following:\nDecember 31, December 25, 1993 1992\nGoodwill $ 81,091,611 $ 88,756,605\nFranchises 115,268,361 114,945,638 FCC Broadcast Licenses 4,746,304 4,746,304 Network Affiliation 10,892,168 10,892,168 Contracts Other 10,217,167 15,642,333 222,215,611 234,983,048\nLess accumulated (111,069,407) (112,996,421) amortization\nIntangible assets, net $ 111,146,204 $ 121,986,627\nIn 1991, as a result of the Partnership's view of the future prospects of the business of the Wincom-WEBE-WICC group, the Partnership concluded that there had been an impairment, which approximated $21.6 million, of the value of Wincom and, as a result, wrote off the intangible assets (principally, goodwill) related to Wincom during the fourth quarter of 1991.\n6. BORROWINGS\nAt December 31, 1993 and December 25, 1992, the aggregate amount of borrowings as reflected on the balance sheet of the Partnership is as follows:\nDecember 31, December 25, 1993 1992\nA)C-ML Notes\/C-ML Credit Agreement $ 50,000,000 $ 48,551,495 B)Revised ML California Credit Agreement 141,375,000 148,500,000 C)WREX-KATC Loan 23,467,873 24,250,000 D)Restructuring Agreement\/Wincom-WEBE-WICC Loan 17,725,476 24,693,250\nTOTAL $232,568,349 $245,994,745 A) On December 31, 1992, obligations under the C-ML Credit Agreement were fully repaid with the proceeds of a $100 million offering of Senior Secured Notes (the \"C-ML Notes\"), which were purchased by institutional lenders. The terms of the C-ML Notes provide for lower debt service payments in the short-term than the C-ML Credit Agreement, due to the lack of mandatory principal payments. Borrowings under the C-ML Notes bear semi-annual interest at a fixed annual rate of 9.47% with annual principal payments of $20 million payable beginning November 30, 1998 and the final principal payment due November 30, 2002. The C-ML Notes require that C-ML Cable maintain certain ratios such as debt to operating cash flow, interest expense coverage and debt service coverage and restricts such items as cash distributions and certain additional indebtedness. In addition, on December 1, 1992, C-ML Cable entered into a $20.0 million revolving credit agreement (the \"C-ML Revolving Credit Agreement\") with Citibank, N.A. to provide C-ML Cable future flexibility for cable system expansion, capital expenditures, working capital needs of C-ML Cable and payment of certain liabilities, including management fee obligations accrued in prior years payable to Century Communications Corp. (see Note 10). Borrowings under the C-ML Notes and the C-ML Revolving Credit Agreement are nonrecourse to the Partnership and are collateralized with substantially all of the Venture's interest in the Puerto Rico Systems, as well as by all of the assets of the Venture, the Venture's interest in C-ML Cable, and all of the assets of C-ML Radio.\nOn September 30, 1993, C-ML Cable entered into an amendment to the C-ML Revolving Credit Agreement whereby the Termination Date (the date upon which all revolving credit borrowings outstanding under the C-ML Revolving Credit Agreement are converted into a term loan) was extended from September 30, 1993 to December 15, 1993. Effective December 15, 1993, C-ML Cable entered into a second amendment to the C-ML Revolving Credit Agreement whereby the debt facility was converted into a reducing revolving credit with a final maturity of December 31, 1998. Beginning December 31, 1993, the amount of borrowing availability under the C-ML Revolving Credit Agreement is reduced quarterly each year. Outstanding amounts under the debt facility may be prepaid at any time subject to certain conditions. As of December 31, 1993, there were no borrowings outstanding under the C- ML Revolving Credit Agreement. As of December 31, 1993, outstanding borrowings under the C-ML Notes totaled $100 million, of which $50 million is reflected on the Partnership's balance sheet (see Note 10). In 1992, the effective interest rate on the old C-ML Credit Agreement was approximately 6.3%.\nB) On May 15, 1990, the Partnership entered into a $160 million Amended and Restated Credit Agreement (the \"Revised ML California Credit Agreement\") with a group of banks led by Bank of America National Trust and Savings Association (\"B of A\"). The original ML California Credit Agreement was amended to allow the Partnership to borrow up to $160 million, if certain operating levels outlined in the Revised ML California Credit Agreement were met by the California Systems, with the proceeds used to: refinance all outstanding borrowings under the $115 million original ML California Credit Agreement; repay all outstanding borrowings under the $16.5 million Anaheim Radio Loan; repay working capital advances to the Partnership; and pay various refinancing expenses. Upon repayment from the proceeds of the Revised ML California Credit Agreement, the Anaheim Radio Loan was canceled. An additional $13.0 million was borrowed during 1991 and 1992. The Revised ML California Credit Agreement was structured as a revolving credit facility through September 30, 1992, at which time all outstanding borrowings under the facility, totalling $150 million, were converted to a term loan that is scheduled to fully amortize by September 30, 1999. As a result, since October 1, 1992, the operations of the California Systems and the Anaheim Radio Stations (collectively, the \"California Media Operations\") have been prohibited from borrowing additional amounts under the Revised ML California Credit Agreement.\nThe Revised ML California Credit Agreement contains numerous covenants and restrictions regarding the California Media Operations, including limitations on indebtedness, acquisitions and divestitures of media properties, and distributions to the Partnership, all as outlined in the Revised ML California Credit Agreement. The California Media Operations must also meet certain tests such as the ratio of Funded Debt to Operating Cash Flow, the Fixed Charge Ratio and the ratio of Operating Cash Flow to Debt Service, all as defined in the Revised ML California Credit Agreement. As of December 31, 1993, the Partnership was in full compliance with all covenants under the revised ML California Credit Agreement. Proceeds from the Revised ML California Credit Agreement are restricted to the use of the California Media Operations and are generally not available for the working capital needs of the Partnership.\nBorrowings under the Revised ML California Credit Agreement bear interest at an annual rate equal to, at the Partnership's option, either B of A's Reference Rate or an Offshore Rate plus the Applicable Margin, as defined, which ranges from .75% to 1.50% in the case of Reference Rate Loans and from 1.25% to 2.50% in the case of Offshore Rate Loans, depending on the Funded Debt Ratio of the California Media Operations. On May 15, 1990, in an effort to reduce its exposure to upward fluctuations in interest rates, and as required by the terms of the Revised ML California Credit Agreement, the Partnership entered into two three-year interest rate exchange agreements totalling $100 million, which expired during 1993. Of this amount, $80 million was swapped at a fixed rate of 8.82% per annum and $20 million was swapped at a fixed rate of 9.04% per annum. During the terms of those swaps, all borrowings in excess of the $100 million that were subject to the revised ML California Credit Agreement bore interest at floating market interest rates as outlined above. All borrowings under the Revised ML California Credit Agreement currently bear interest at floating rates. The overall effective interest rate for the borrowings under the Revised ML California Credit Agreement was approximately 6.48%, 8.35% and 10.6% during 1993, 1992 and 1991, respectively.\nBorrowings under the Revised ML California Credit Agreement are nonrecourse to the Partnership and are collateralized with substantially all of the assets of the California Media Operations as well as a pledge of the Partnership's interest in Anaheim Radio Associates.\nSee Note 2 regarding potential future defaults under the Revised ML California Credit Agreement.\nC) On June 21, 1989, the Partnership entered into an Agreement of Consolidation, Extension, Amendment and Restatement (the \"WREX-KATC Loan\") which provided a reducing revolving credit line with a bank providing for borrowings of up to $27.1 million through June 30, 1989. The WREX-KATC Loan is collateralized by all of the assets of KATC-TV and WREX-TV. The Partnership, if no event of default had occurred (as discussed in Note 2), had options to elect to pay interest on the WREX-KATC Loan based upon the bank's reference rate or London Interbank Offered Rates, plus applicable margins. As a result of defaults under the WREX-KATC Loan, the bank has restricted interest rate options to the reference rate only. The WREX-KATC Loan requires mandatory quarterly principal repayments, which commenced on June 30, 1989, and continue through December 31, 1998. However, see below for a discussion of the possible acceleration of the principal repayments due to the defaults.\nDuring the first part of 1992, the Partnership had two interest rate exchange agreements for the WREX-KATC Loan, both of which expired during 1992. The Partnership entered into an interest rate swap on June 24, 1987 under which the Partnership received market-rate LIBOR and paid a fixed rate of 9.7% on the notional amount of $7 million through June 24, 1992. The Partnership entered into an interest rate swap on September 22, 1987 under which the Partnership received market-rate LIBOR and paid a fixed rate of 9.78% on the notional amount of $6.5 million through September 22, 1992. The Partnership also entered into an interest rate exchange agreement on September 26, 1990, that fixed the underlying unadjusted LIBOR rate on $11 million of the WREX- KATC Loan at 8.2% through September 26, 1991. The Partnership was not party to any interest rate hedge agreements during 1993 with respect to the WREX-KATC Loan. All borrowings under the WREX-KATC Loan currently bear interest at floating rates. The effective interest rate on the WREX-KATC Loan was approximately 7.5% during 1993. In part due to the expired interest rate exchange agreements, the effective interest rate on the WREX-KATC Loan was approximately 7.7% and 11.7% during 1992 and 1991, respectively.\nThe WREX-KATC Loan requires that KATC-TV and WREX-TV maintain minimum levels of operating cash flow and certain ratios such as debt to operating income and interest and\/or debt service coverage and restricts such items as cash distributions, additional indebtedness or asset sales. The WREX-KATC Loan also includes other standard and usual loan covenants. Borrowings under the WREX-KATC Loan are nonrecourse to the Partnership and are collateralized with substantially all the assets of KATC-TV and WREX-TV. At December 31, 1993, there was no further availability under the WREX-KATC Loan.\nSee Note 2 regarding defaults under this loan.\nD) On July 19, 1989, the Partnership entered into an amended and restated credit, security and pledge agreement (\"the Wincom-WEBE-WICC Loan\") which was used to replace the original Wincom credit, security and pledge agreement with Chemical Bank, repay the original WEBE-FM revolving credit\/term loan agreement and finance the acquisition of WICC-AM. The Wincom-WEBE-WICC Loan was structured as a revolving credit line that provided for borrowings of up to $35 million through December 31, 1990. On December 31, 1990, outstanding borrowings of approximately $24.7 million on the Wincom-WEBE Loan were converted to a term loan. Principal payments were scheduled to commence on March 31, 1991 and to continue quarterly through June 30, 1997. No such principal payments were made (see below).\nThe Partnership, if no event of default had occurred, had options to elect to pay interest on the Wincom-WEBE-WICC Loan based upon the bank's reference rate or London Interbank Offered Rates, plus applicable margins. As a result of defaults under the Wincom-WEBE-WICC Loan, the lender restricted interest rate options to reference rate only; although these defaults were cured pursuant to the Restructuring Agreement, the Partnership may borrow only at the reference rate. The Partnership entered into an interest rate swap on July 20, 1989 under which the Partnership received market-rate LIBOR and paid a fixed base rate of 8.47% on the notional amount of $10 million through July 20, 1991. The Partnership entered into an interest rate swap on August 15, 1989 under which the Partnership received market-rate LIBOR and paid a fixed base rate of 8.34% on the notional amount of $10 million through August 15, 1991. The Partnership was not party to any interest rate hedge agreements during 1993 with respect to the Wincom- WEBE-WICC Loan. The effective interest rate on the Wincom- WEBE-WICC Loan was approximately 7.8%, 8.1% and 10.4% during 1993, 1992 and 1991, respectively.\nThe Wincom-WEBE-WICC Loan requires that the Wincom-WEBE-WICC group maintain minimum covenant levels of certain ratios such as debt to operating profit and debt service coverage, and restricts such items as: cash; the payment of management fees, distributions or dividends; additional indebtedness; or asset sales by or at Wincom, WEBE-FM or WICC-AM. The Wincom-WEBE-WICC Loan also included other standard and usual loan covenants. Borrowings under the Wincom-WEBE-WICC Loan are nonrecourse to the Partnership and are collateralized with substantially all of the assets of the Wincom-WEBE-WICC group.\nOn July 30, 1993, the Partnership and Chemical Bank executed an amendment to the Wincom-WEBE-WICC Loan (the \"Restructuring Agreement\"), effective January 1, 1993, which cured all previously outstanding principal and interest payment and covenant defaults pursuant to the Wincom-WEBE- WICC Loan. In addition, as part of the restructuring process, the Partnership agreed to sell substantially all of the assets of the Indianapolis Stations (see Note 3).\nThe Restructuring Agreement provided for the outstanding principal and interest due Chemical Bank as of December 31, 1992 (approximately $24.7 million and $2.0 million, respectively) to be divided into three notes as follows: a Series A Term Loan in the amount of $13 million; a Series B Term Loan in the amount of approximately $11.7 million; and a Series C Term Loan in the amount of approximately $2.0 million (which represented all the accrued interest outstanding under the Wincom-WEBE-WICC Loan as of December 31, 1992).\nThe Series A Term Loan bears interest, payable monthly, at Chemical Bank's Alternate Base Rate plus 1-3\/4% effective January 1, 1993, with principal payments due quarterly in increasing amounts beginning March 31, 1994 and continuing through the final maturity at December 31, 1997. Additional principal payments are also required annually from Excess Cash Flow, as defined in the Restructuring Agreement. On July 30, 1993, as required by the Restructuring Agreement, the Partnership paid all the interest due on the Series A Term Loan from January 1, 1993 to July 31, 1993, totalling $593,306, from cash generated by the stations. The principal amount of the Series A Term Loan increased by $2 million to $15 million upon the consummation of the sale of the Indianapolis Stations on October 1, 1993 (see below) and such increase was offset by a simultaneous reduction in the Series B Term Loan. On January 28, 1994, the Partnership made a required principal payment under the Series A Term Loan in the amount of $656,406 from cash generated by the stations. There was $15 million outstanding under the Series A Term Loan as of December 31, 1993.\nThe Series B Term Loan bears interest at a rate equal to Chemical Bank's Alternate Base Rate plus 1-3\/4% beginning on April 30, 1994, with interest payments accruing, and payable annually only from Excess Cash Flow. In addition, a minimum of $4 million of Series B Term Loan principal was due to Chemical Bank on or prior to June 30, 1994. On October 1, 1993, the date of the sale of the Indianapolis Stations, the net proceeds from such sale, which totalled approximately $6.1 million, were remitted to Chemical Bank, as required by the terms of the Restructuring Agreement, to reduce the outstanding principal amount of the Series B Term Loan. Certain additional amounts from the net proceeds from the sale of the Indianapolis Stations, including an escrow deposit of $250,000, may ultimately be paid to Chemical Bank. On October 1, 1993, the Series B Term Loan principal amount was permanently reduced by $2 million, offset by a simultaneous increase in the Series A Term Loan. On July 30, 1993, as required by the Restructuring Agreement, the Partnership made a principal payment of $220,899 under the Series B Term Loan from cash generated by the stations and made additional required principal payments of $100,000 on October 1, 1993, $33,797 on November 1, 1993 and $545,304 on December 29, 1993. After giving effect to the principal payment made as a result of the sale of the Indianapolis Stations, and the other principal payments and adjustments discussed above, there was approximately $2.7 million outstanding under the Series B Term Loan on December 31, 1993. On January 28, 1994, the Partnership made a required principal payment under the Series B Loan in the amount of $68,594 from cash generated by the Stations. The remaining principal amount of the Series B Term Loan is due on December 31, 1997.\nThe Series C Term Loan was to bear interest at a fixed rate equal to 6% per annum beginning April 30, 1994, with interest payments accruing, and payable annually only from Excess Cash Flow. The principal amount of the Series C Term Loan was due on December 31, 1997. As a result of the principal payment made on the Series B Term Loan from the net proceeds from the sale of the Indianapolis Stations exceeding $6 million (described above), the full principal amount of the Series C Term Loan was forgiven by Chemical Bank on October 1, 1993 pursuant to the terms of the Restructuring Agreement (see Note 3).\nAfter the Series A Term Loan and the Series B Term Loan, which together totalled approximately $17.7 million on December 31, 1993, have been satisfied in full, any remaining cash proceeds generated from the operations of, or the sale proceeds from the sale of, the stations in the Wincom-WEBE-WICC Group will be divided between the Partnership and Chemical Bank, with the Partnership receiving 85% and Chemical Bank receiving 15%, respectively. As of December 31, 1993, the Partnership was in full compliance with all covenants under the Restructuring Agreement.\nAt December 31, 1993, the annual aggregate amounts of principal payments (without considering potential accelerations made possible by defaults) required for the borrowings as reflected in the consolidated balance sheet of the Partnership are as follows:\nYear Ending Principal Amount 1994 $ 18,305,373 1995 21,525,000 1996 25,225,000 1997 49,200,476 1998 50,187,500 Thereafter 68,125,000 TOTAL $232,568,349\nBased upon the restrictions of the borrowings as described above, approximately $245 million of assets are restricted from distribution by the entities in which the Partnership has an interest.\nDuring 1993 and at certain dates in 1992 and 1991, the Partnership was in violation of payments and debt covenants under the WREX-KATC Loan. The principal amount payable in 1994 would increase by an additional $17,750,000 if the lender to WREX and KATC required immediate payment.\n7. TRANSACTIONS WITH THE GENERAL PARTNER AND ITS AFFILIATES\nDuring the years ended December 31, 1993, December 25, 1992 and December 27, 1991 the Partnership incurred the following expenses in connection with services provided by the General Partner and its affiliates:\n1993 1992 1991 Media Management Partners (General Partner)\nPartnership Mgmt. fee $ 557,979 $ 557,979 $ 557,979 Property Mgmt. fee 1,033,852 1,071,903 1,109,955 Reimbursement of Operating Expenses 1,074,071 744,797 884,900 $2,665,902 $2,374,679 $2,552,834\nIn addition, the Partnership, through the California Systems, is party to an agreement with Multivision Cable TV Corp. (\"Multivision\"), an affiliate of the General Partner, whereby Multivision provides the California Systems (and provided Universal before its sale) with certain administrative services. The reimbursed cost charged to the California Systems and Universal (for 1992 and 1991) for these services amounted to an aggregate of $1,481,562 for 1993, $1,653,648 for 1992, and $1,758,576 for 1991. These costs do not include programming costs that are charged, without markup, to the California Systems (and had been charged to Universal) under an agreement to allocate certain management costs.\nAlso, the Partnership has a payable to RP Media Management of $231,664 as of December 31, 1993 related to the payment by RP Media Management of operating expenses on behalf of the television and radio stations owned by the Partnership.\nSee Note 2 for a discussion of deferral of General Partner fees and reimbursement of operating expenses. As of December 31, 1993 and December 25, 1992, the amounts payable to the General Partner were approximately $11.3 million and $8.4 million, respectively. 8. COMMITMENTS AND CONTINGENCIES\nLease Commitments\nC-ML Cable rents office and warehouse facilities under various operating lease agreements. In addition, Wincom, the Anaheim Radio Stations, KATC-TV, WEBE-FM and WICC-AM lease office space, broadcast facilities and certain other equipment under various operating lease agreements. The California Systems rent office space, equipment, and space on utility poles under operating leases with terms of less than one year, or under agreements which are generally terminable on short notice. Rental expense was incurred as follows:\n1993 1992 1991\nCalifornia Systems $ 355,311 $ 373,999 $ 351,411 Universal - 72,495 144,094 KATC-TV 19,011 - - WICC-AM 105,182 105,182 66,336 Anaheim Radio Stations 120,672 118,743 107,400 WEBE-FM 164,715 162,968 114,973 Wincom 196,337 228,209 220,303 $ 961,228 $1,061,596 $1,004,517\nFuture minimum commitments under all of the above agreements in excess of one year are as follows:\nYear Ending Amount 1994 $ 625,357 1995 497,228 1996 439,008 1997 364,860 1998 234,033 Thereafter 968,783 $3,129,269\n9. SEGMENT INFORMATION\nThe following analysis provides segment information for the two main industries in which the Partnership operates. The Cable Television Systems segment consists of the Partnership's 50% share of the Venture, the California Systems and Universal (for 1991 and the 193-day period in 1992 that the Partnership owned Universal). The Television & Radio Stations segment consists of KATC-TV, WREX-TV, WEBE-FM, Wincom, WICC-AM, and the Anaheim Radio Stations.\nCable Television Television and Radio 1993 Systems Stations Total\nOperating Revenue $ 75,048,888 $ 24,941,869 $ 99,990,757 Operating expenses before gain on sale of assets (60,907,083) (24,933,540) (85,840,623) Gain on sale of assets 272,872 4,715,518 4,988,390 Operating Income 14,414,677 4,723,847 19,138,524\nPlus: depreciation and amortization 26,064,361 5,352,429 31,416,790 Operating income before depreciation and amortization 40,479,038 10,076,276 50,555,314 Less: depreciation and amortization (26,064,361) (5,352,429) (31,416,790) Operating Income $ 14,414,677 $ 4,723,847 19,138,524\nInterest Income 558,380 Interest Expense (17,500,965) Partnership General Expenses, net (1,451,968) Equity in income of subsidiary 143,582 Extraordinary item- gain on extinguishment of debt 489,787 Net Income $ 1,377,340\nCable Television Television and Radio 1993 Systems Stations Total\nIdentifiable Assets $190,242,858 $ 53,882,827 244,125,685 Partnership Assets 5,726,252 Total $249,851,937\nCapital Expenditures $ 9,652,316 $ 530,093 $ 10,182,409\nDepreciation and Amortization $ 26,064,361 $ 5,352,429 31,416,790 Partnership Depreciation and Amortization 3,095 Total $ 31,419,885\nCable Television Television and Radio 1992 Systems Stations Total\nOperating Revenue $ 75,786,229 $ 24,657,738 $100,443,967 Operating expenses before loss on sale of Universal (64,170,063) (26,803,134) (90,973,197) Loss on sale of Universal (6,399,000) - (6,399,000) Operating Income (Loss) 5,217,166 (2,145,396) 3,071,770\nPlus: depreciation and amortization 25,781,077 5,626,804 31,407,881 Operating income before depreciation and amortization 30,998,243 3,481,408 34,479,651 Less: depreciation and amortization (25,781,077) (5,626,804) (31,407,881) Operating Income (Loss) $ 5,217,166 $ (2,145,396) 3,071,770\nInterest Income 158,738 Interest Expense (23,437,581) Partnership General Expenses, net (1,393,725) Equity in income of subsidiary 26,028 Extraordinary item-gain on extinguishment of debt 12,294,000 Net Loss $ (9,280,770)\nIdentifiable Assets $197,267,828 $ 58,893,399 256,161,227 Partnership Assets 5,393,215 Total $261,554,442\nCapital Expenditures $ 9,588,063 $ 674,093 $ 10,262,156\nDepreciation and Amortization $ 25,781,077 $ 5,626,804 31,407,881 Partnership Depreciation and Amortization 108,728 Total $ 31,516,609\nCable Television and Television Radio 1991 Systems Stations Total\nOperating Revenue $ 74,449,228 $ 24,736,195 $ 99,185,423 Operating expenses before loss on write- down of Wincom (67,327,159) (30,043,483) (97,370,642) Loss on write-down of Wincom - (21,606,418) (21,606,418) Operating Income (Loss) 7,122,069 (26,913,706) (19,791,637)\nPlus: depreciation and amortization 27,556,745 7,907,727 35,464,472 Operating income before depreciation and amortization 34,678,814 (19,005,979) 15,672,835 Less: depreciation and amortization (27,556,745) (7,907,727) (35,464,472) Operating Income (Loss) $ 7,122,069 $(26,913,706) (19,791,637)\nInterest Income 273,704 Interest Expense (30,701,430) Partnership General Expenses, net (830,188)\nNet Loss $(51,049,551)\nIdentifiable Assets $240,975,149 $ 63,971,068 304,946,217 Partnership Assets 5,302,344 Total $310,248,561\nCapital Expenditures $ 12,309,796 $ 343,156 $ 12,652,952\nDepreciation and Amortization $ 27,556,745 $ 7,907,727 35,464,472 Partnership Depreciation and Amortization 1,511,436 Total $ 36,975,908\n10. JOINT VENTURES\nPursuant to a management agreement and joint venture agreement dated December 16, 1986 (the \"Joint Venture Agreement\"), as amended and restated, between the Partnership and Century Communications Corp., (\"Century\"), the parties formed a joint venture in which each has a 50% ownership interest. The Venture subsequently acquired and operated Cable Television Company of Greater San Juan, Inc. (\"San Juan Cable\"). The Venture also acquired all of the assets of Community Cable-Vision of Puerto Rico, Inc., Community Cablevision of Puerto Rico Associates, and Community Cablevision Incorporated (\"Community Companies\"), which consisted of a cable television system serving the communities of Catano, Toa Baja and Toa Alta, Puerto Rico, which are contiguous to San Juan Cable. The Community Companies and San Juan Cable are collectively referred to as C-ML Cable.\nOn February 15, 1989, the Partnership and Century entered into a Management Agreement and joint venture agreement whereby C-ML Radio was formed as a joint venture and responsibility for the management of radio stations acquired by C-ML Radio was assumed by the Partnership.\nEffective January 1, 1994, all the assets of C-ML Radio were transferred to the Venture, in exchange for the assumption by the Venture of all the obligations of C-ML Radio and the issuance to Century and the Partnership of new certificates evidencing a partnership interest of 50% and 50%, respectively, in the Venture. Simultaneously, Century and the Partnership entered into an amended and restated management agreement and joint venture agreement (the \"Revised Joint Venture Agreement\") governing the affairs of the revised Venture. The transfer was made pursuant to a Transfer of Assets and Assumption of Liabilities Agreement, which was required under the terms of the C-ML Notes.\nUnder the terms of the Revised Joint Venture Agreement, Century is responsible for the day-to-day operations of the Puerto Rico Systems and the Partnership is responsible for the day-to-day operations of the C-ML Radio properties. For providing services of this kind, Century is entitled to receive annual compensation of 5% of the Puerto Rico Systems' net gross revenues (defined as gross revenues from all sources less monies paid to suppliers of pay TV product, e.g., HBO, Cinemax, Disney and Showtime) and the Partnership is entitled to receive annual compensation of 5% of the C-ML Radio properties' gross revenues (after agency commissions, rebates or discounts and excluding revenues from barter transactions). All significant policy decisions relating to the Venture, the operation of the Puerto Rico Systems and the operation of the C-ML Radio properties, however, will only be made upon the concurrence of both the Partnership and Century. The Partnership may require a sale of the assets and business of the Puerto Rico Systems or the C-ML Radio properties at any time. If the Partnership proposes such a sale, the Partnership must first offer Century the right to purchase the Partnership's 50% interest in the assets being sold at 50% of the total fair market value at such time as determined by independent appraisal. If Century elects to sell either the Puerto Rico Systems or the C-ML Radio properties, the Partnership may elect to purchase Century's interest in the assets being sold on similar terms.\nThe total assets, total liabilities, net capital, total revenues and net loss of the Venture (which excludes C-ML Radio) are as follows:\nDecember 31, December 25, 1993 1992\nTotal Assets $114,300,000 $115,800,000\nTotal Liabilities $114,400,000 $115,600,000\nNet Capital (Deficit) $ (100,000) $ 200,000\n1993 1992 1991\nTotal Revenues $ 40,400,000 $ 36,500,000 $ 34,700,000\nNet Loss $ (300,000 $ (700,000) $ (7,200,000) )\n11. FAIR VALUE OF FINANCIAL INSTRUMENTS\nStatement on Financial Accounting Standards No. 107, \"Disclosures about Fair Value of Financial Instruments\", requires companies to report the fair value of certain on- and off-balance sheet assets and liabilities which are defined as financial instruments.\nConsiderable judgment is necessarily required in interpreting data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that the Partnership could realize in a current market exchange. The use of different market assumptions and\/or estimation methodologies may have a material effect on the estimated fair value amounts.\nAssets, including cash and cash equivalents and accounts receivable, and liabilities, such as trade payables, are carried at amounts which approximate fair value.\nThe General Partner has been able to estimate the fair value of the C-ML Notes based on a discounted cash flow analysis. As of December 31, 1993, the fair value of the C-ML Notes is estimated to be approximately $109 million, of which approximately $54.5 million pertains to the amount reflected on the Partnership's Consolidated Balance Sheet. The General Partner estimated that the fair value of the C-ML Credit Agreement, which was subsequently refinanced, as of December 25, 1992 had approximated the carrying value.\nThe General Partner has been able to estimate the fair value of the Revised ML California Credit Agreement by using a value based on a discounted cash flow analysis. As of December 31, 1993 and December 25, 1992, the estimated fair value approximates the carrying values of the Revised ML California Agreement.\nThe General Partner has been able to estimate the fair value of the Wincom-WEBE-WICC Restructuring Agreement by using a value based on a discounted cash flow analysis. As of December 31, 1993, the fair value of the Wincom-WEBE-WICC Restructuring Agreement approximates the carrying value.\nAs of December 25, 1992 (prior to the Restructuring Agreement), considering the uncertainty of the Partnership's ability to meet its obligations under the Wincom-WEBE-WICC Loan and related accrued interest, the General Partner believed that using the Partnership's future cash flows relating to debt service to estimate the fair value of the Loan was not appropriate. In addition, because of the uncertainty related to the ultimate outcome of the Partnership's restructuring efforts, which could not be predicted at the time, the General Partner considered the estimation of the fair value of this loan to be impracticable.\nConsidering the uncertainty of the Partnership's ability to meet its obligations under the WREX-KATC Loan and the related accrued interest, the General Partner believes that using the Partnership's future cash flows relating to debt-service to estimate the fair value of the loans is not appropriate. In addition, because of the uncertainty related to the ultimate outcome of the Partnership's restructuring efforts, which could not be predicted as of December 31, 1993 or December 25, 1992, the General Partner considers estimation of the fair value of the WREX-KATC Loan to be impracticable.\nOther Financial Instruments\nAs discussed in Note 6, the Partnership entered into two swap agreements in connection with the Revised ML California Credit Agreement. The fair value of these agreements were estimated based on the expected future cash flows. The fair value of these agreements resulted in a net swap obligation of approximately $2.0 million as of December 25, 1992. These two swap agreements expired in May 1993.\n12. INCOME TAXES\nAs discussed in Note 1, the Partnership adopted SFAS No. 109 as of December 26, 1992. The cumulative effect of this change in accounting principle is immaterial and there is no effect on the provision for income taxes for the current year.\nCertain entities owned by the Partnership are taxable entities and thus are required under SFAS No. 109 to recognize deferred income taxes. The components of the net deferred tax asset at December 31, 1993 are as follows:\nDeferred tax assets: Basis of intangible assets $ 1,485,774 Net operating loss carryforward 30,078,208 Alternative minimum tax credit 100,000 Other 279,228 31,943,210 Deferred tax liability: Basis of property, plant and equipment (971,125)\nTotal 30,972,085 Less: valuation allowance (30,972,085) Net deferred tax asset $ 0\nThe components of the provision for income taxes for the year ended December 31, 1993 relate to Wincom and are as follows:\nFederal:\nCurrent $ 100,000 Deferred 0 $ 100,000\nState and Local:\nCurrent $ 90,000 Deferred 0 $ 90,000\nTotal Provision $ 190,000\nThe change in the net deferred tax asset for the year ended December 31, 1993 amounted to a reduction of $1,438,655 which was fully offset by a corresponding change in the valuation allowance.\nNo provision for income taxes was required for the years ended December 25, 1992 and December 27, 1991.\nAt December 31, 1993, the taxable entities have available net operating loss carryforwards which may be applied against future taxable income. Such net operating loss carryforwards expire at various dates from 1994 through 2007.\nFor the Partnership, the differences between the tax bases of assets and liabilities and the reported amounts at December 31, 1993 are as follows:\nPartners' Deficit - financial statements $(14,807,906) Differences: Offering expenses 19,063,585 Basis of property, plant and equipment and intangible assets (55,087,465) Cumulative losses of stock investments (corporations) 78,857,467 Nondeductible management fees 7,999,324 Other 2,455,435 Partners' Capital - income tax basis $ 38,480,440\n13. PRO FORMA DATA (Unaudited)\nThe following pro forma data was prepared to illustrate the estimated effects on the operations of the Partnership of the disposition of Universal which was sold on July 8, 1992:\n1992 1991\nTotal Revenues $100,602,705 $ 99,459,127 Less: Universal (4,681,966) (8,525,093) 95,920,739 90,934,034\nNet Loss $ (9,280,770) $(51,049,551) Less: Universal net loss 2,481,462 4,388,370 Less: Loss on sale of Universal 6,399,000 - Less: Extraordinary gain on extinguishment of debt of Universal (12,294,000) - $(12,694,308) $(46,661,181) Per Unit of Limited Partnership Interest:\nNet Loss $ (66.85) $ (245.72)\n14. OTHER EVENTS\nThe California Systems have filed property tax assessment appeals with various counties in California related to changes in the methods used by assessors to value tangible property and possessory interests. The revised methods significantly increased property taxes since they included values attributed to what the California Systems believe to be nontaxable, intangible assets. These appeals cover the tax years from 1987 to present.\nIn December 1993, the California Systems obtained a favorable decision by one county's assessment appeals board. This decision will result in a significant reduction in assessed values and accordingly, a significant refund of property taxes to the California Systems. The county has the right for six months from the decision date to elect to appeal the decision of the assessment appeals board and seek a stay of their obligation to refund the taxes. To date, the county has not elected to appeal and the California Systems believe that the election to appeal is unlikely. However, if appealed, the California Systems believe that it is probable that the decision of the board will be ultimately upheld by a reviewing court.\nIn December 1993, the California Systems reached favorable agreement in principle with another county in California where an appeal relating to property taxes was filed. Presently, the California Systems are working on the settlement agreement and finalization of the assessed values. Once finalized, this settlement agreement would result in a significant refund of property taxes to the California Systems.\nBased upon these recent developments, the California Systems have estimated the probable property tax refund amount and accordingly have recognized a receivable and related reduction to general and administrative expense amounting to $2,182,000 at December 31, 1993.\nIn addition, C-ML Cable reduced its estimate of its Puerto Rican property tax liability by $2,000,000 during 1993. This change in estimate was due mainly to the positive results of a property tax examination completed in November 1993 by the Collection Center of Municipal Taxes, an agency of the Puerto Rican government with authority over all real and personal property tax matters. Based on these developments, the Partnership has reduced accrued liabilities and has credited property operating expenses for $1 million, based on its 50% ownership of C-ML Cable. 15. SUBSEQUENT EVENT\nThe Partnership engaged Merrill Lynch & Co. and Daniels & Associates in January, 1994 to act as its financial advisors in connection with a possible sale of all or a portion of the Partnership's California Cable Systems.\nThere can be no assurances that the Partnership will be able to enter into an agreement to sell the California Cable Systems on terms acceptable to the Partnership or that any such sale will be consummated. If a sale is consummated, it is expected that it would be consummated no earlier than the second half of 1994.\nAs an alternative to a sale, the Partnership and its financial advisors may consider other strategic transactions to maximize the value of the California Cable Systems, such as a joint venture or an affiliation agreement with a larger multiple system operator. Merrill Lynch & Co. will not receive a fee or other form of compensation for acting as financial advisor in connection with a sale or other strategic transaction.\nThe Partnership is currently unable to determine the impact of the February 22, 1994 FCC action and previous FCC actions, as discussed in Note 2, or its ability to sell the California Cable Systems or the potential timing and value of such sale.\nAs of December 31, 1993, California Cable represented approximately 53% of the consolidated assets of the Partnership and approximately 55% of the consolidated operating revenues.\nML MEDIA PARTNERS, L.P. CONSOLIDATED BALANCE SHEETS AS DECEMBER 31, 1993 AND DECEMBER 25, 1992\nSCHEDULE III CONDENSED FINANCIAL INFORMATION OF REGISTRANT\nML Media Partners, L.P. Condensed Balance Sheets as of December 31, 1993 and December 25, 1992 Notes 1993 1992 ASSETS: Cash and cash equivalents 3 $ 4,437,223 $ 4,252,402 Accrued interest 11,905 4,176 Prepaid expenses and deferred charges (net of accumulated amortization of $4,755,452 at December 31, 1993, and $4,752,356 at December 25, 1992) 12,381 15,476 Investment in Subsidiaries 1,2 (8,395,362) (12,278,320) TOTAL ASSETS $ (3,933,853) $ (8,006,266)\nLIABILITIES AND PARTNERS' DEFICIT: Liabilities: Accounts payable and accrued liabilities $ 10,874,053 $ 8,178,980\nPartners' Deficit: General Partner: Capital contributions, net of offering expenses 1,708,299 1,708,299 Cumulative loss (1,793,460) (1,807,233) (85,161) (98,934) Limited Partners: Capital contributions, net of offering expenses (187,994 Units of Limited Partnership Interest) 169,121,150 169,121,150 Tax allowance cash distribution (6,291,459) (6,291,459) Cumulative loss (177,552,436) (178,916,003) (14,722,745) (16,086,312) Total Partners' Deficit (14,807,906) (16,185,246) TOTAL LIABILITIES AND PARTNERS' DEFICIT $ (3,933,853) $ (8,006,266)\nSee Notes to Condensed Financial Statements.\nML MEDIA PARTNERS, L.P. AS OF DECEMBER 31, 1993, DECEMBER 25, 1992, DECEMBER 27, 1991\nSCHEDULE III CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Cont'd)\nML Media Partners, L.P. Condensed Statements of Operations For the Years Ended December 31, 1993, December 25, 1992 and December 27, 1991\nYear Ended Year Ended Year Ended December 31, December 25, December 27, NOTE 1993 1992 1991 S REVENUES: Service fee income from C-ML Radio $ 198,977 $ 469,794 $ -\nInterest 147,466 158,738 273,704 Total revenues 346,443 628,532 273,704\nCOSTS AND EXPENSES: General and administrative 1,409,387 1,431,637 591,103 Amortization 3,095 108,728 1,511,436 Management fees to general partner 1,591,831 1,629,882 1,667,934\nTotal costs and expenses 3,004,313 3,170,247 3,770,473\nShare of subsidiaries' income (loss) before provision for income taxes and extraordinary item 2 3,735,423 (19,033,055 (47,552,782 ) )\nIncome (loss) before provision for income taxes and extraordinary item 1,077,553 (21,574,770 (51,049,551) )\nProvision for income taxes of (190,000) - - subsidiaries\nExtraordinary item- gain on extinguishment of debt of subsidiaries 489,787 12,294,000 -\nNET INCOME (LOSS) $ 1,377,340 $(9,280,770 $(51,049,55 ) 1) See Notes to Condensed Financial Statements.\nML MEDIA PARTNERS, L.P. AS DECEMBER 31, 1993 AND DECEMBER 25, 1992 AND DECEMBER 27, 1991\nSCHEDULE III CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Cont'd)\nML Media Partners, L.P. Condensed Statements of Cash Flows For the Years Ended December 31, 1993 and December 25, 1992, and December 27, 1991\n1993 1992 1991\nCash flows from operating activities:\nNet income (loss) $ 1,377,340 $(9,280,770) $(51,049,551) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Reimbursement of management fees received from subsidiaries - - 686,000 Amortization 3,095 108,728 1,511,436 Share of subsidiaries' net income\/(loss) before provision for income taxes and extraordinary item (3,735,423) 19,033,055 47,552,782 Share of subsidiaries' provision for income taxes 190,000 - - Share of subsidiaries' extraordinary item (489,787) (12,294,000) - Change in assets and liabilities: Decrease\/(Increase) in accrued interest (7,729) 27,118 15,738 Decrease\/(Increase) in prepaid expenses, deferred charges and other (143,582) 188,164 293,260\nML MEDIA PARTNERS, L.P. AS DECEMBER 31, 1993 AND DECEMBER 25, 1992 AND DECEMBER 27, 1991\nSCHEDULE III CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Cont'd)\nML Media Partners, L.P. Condensed Statements of Cash Flows For the Years Ended December 31, 1993 and December 25, 1992, and December 27, 1991\n1993 1992 1991 Increase in accounts payable and accrued liabilities 2,695,073 2,527,452 1,251,918\nNet Cash provided by (used in) operating activities (111,013) 309,747 261,583\nCash flows from investing activities:\nNet increase in investment in subsidiaries 295,834 (26,624) (1,852,614)\nNet Increase\/(Decrease) in cash and cash equivalents 184,821 283,123 (1,591,031)\nCash and cash equivalents at beginning of year 4,252,402 3,969,279 5,560,310\nCash and cash equivalents at end of year $ 4,437,223 $ 4,252,402 $ 3,969,279\nSee Notes to Condensed Financial Statements.\nML MEDIA PARTNERS, L.P. AS OF DECEMBER 31, 1993, DECEMBER 25, 1992 AND DECEMBER 27, 1991\nSchedule III CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Cont'd)\nML Media Partners, L.P. Notes To Condensed Financial Statements For the Years Ended December 31, 1993 December 25, 1992 and December 27, 1991\n1. Organization\nAs of December 31, 1993, ML Media Partners, L.P. (the \"Partnership\") wholly-owned Wincom, KATC-TV, WREX-TV, WEBE-FM, WICC-AM, the California Systems and the Anaheim Radio Stations. In addition, the Partnership wholly-owned Universal for all of 1991 and for the 193-day period in 1992. The Partnership also had a 99.999% interest in KATC Associates, WREX Associates, WEBE Associates, WICC Associates, Anaheim Radio Associates, ML California Associates; a 50% interest in Century - ML Cable Venture; and a 49.999% interest in Century - ML Radio Venture (see Note 10). All of the preceding investments shall herein be referred to as the \"Subsidiaries\".\n2. Investment in Subsidiaries\nThe Partnership's investment in the Subsidiaries is accounted for under the equity method in the accompanying condensed financial statements.\nThe following is a summary of the financial position and results of operations of the Subsidiaries:\nDecember 31, December 25, 1993 1992\nAssets $ 245,390,428 $ 257,282,388 Liabilities (253,785,790) (269,560,708) Investment in Subsidiaries $ (8,395,362) $ (12,278,320)\nYear Ended Year Ended Year Ended December 31, December 25, December 27, 1993 1992 1991\nRevenues $100,202,694 $ 99,974,173 $ 98,761,013\nShare of subsidiaries' income (loss) before provision for income taxes and extraordinary item 3,735,423 (19,033,055) (47,552,782)\nProvision for income taxes of subsidiaries (190,000) - -\nExtraordinary item- gain on extinguishment of debt of subsidiaries 489,787 12,294,000 -\nShare of subsidiaries' Net Income (Loss) $ 4,035,210 $ (6,739,055) $(47,552,782)\nML MEDIA PARTNERS, L.P. AS OF DECEMBER 31, 1993, DECEMBER 25, 1992 AND DECEMBER 27, 1991\nSchedule III CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Cont'd)\nML MEDIA PARTNERS, L.P. NOTES TO CONDENSED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1993 DECEMBER 25, 1992 AND DECEMBER 27, 1991\n3. Cash and Cash Equivalents\nAt December 31, 1993, the Partnership had $4,437,223 in cash and cash equivalents, of which $207,843 was invested in a bankers acceptance and $4,222,403 was invested in commercial paper. In addition, the Partnership had $6,977 invested in cash and demand deposits. These funds are held in reserve for the operating requirements of the Partnership.\nPer the terms of the WREX-KATC Loan (see Notes 2 and 6), the bank had the right, if certain events of default occurred under the WREX-KATC Loan, to request working capital advances from the Partnership to WREX-TV and KATC-TV in an amount not to exceed $1.0 million. The Partnership contributed $600,000 to WREX-TV and KATC-TV in the first quarter of 1991, $100,000 during the fourth quarter of 1991, $290,000 in early 1992 and $10,000 in April, 1993. The Partnership does not intend to, nor is it obligated to, advance any further working capital to WREX and KATC.\nAt December 25, 1992, the Partnership had $4,252,402 in cash and cash equivalents, of which $112,109 was invested in a bankers acceptance and $4,085,981 was invested in commercial paper. In addition, the Partnership had $54,312 invested in cash and demand deposits.\nML MEDIA PARTNERS, L.P. AS OF DECEMBER 31, 1993, DECEMBER 25, 1992 AND DECEMBER 27, 1991\nSchedule V Property, Plant and Equipment\nBalance at Retirements Beginning of and Other Balance at Perio Period Additions Changes End of Period d\n1993 $195,136,960 $10,182,409 $ (7,963,238) $197,356,131 (2)\n1992 $198,619,291 $10,262,156 $(13,744,487) $195,136,960 (1)\n1991 $186,182,059 $12,652,952 $ (215,720) $198,619,291\n(1) Retirements and Other Changes includes the sale of property, plant and equipment of Universal in the amount of $13,510,601 (see Note 3).\n(2) Retirements and Other Changes includes the sale of property, plant and equipment of the Indianapolis Stations in the amount of $2,938,203 (see Note 3).\nML MEDIA PARTNERS, L.P. AS OF DECEMBER 31, 1993, DECEMBER 25, 1992 AND DECEMBER 27, 1991\nSchedule VI Accumulated Depreciation of Property, Plant & Equipment\nAdditions Balance at Charged to Retirements Beginning of Costs and and Other Balance at Perio Period Expenses Changes End of Period d\n1993 $91,378,707 $19,574,073 $(5,997,143) (2) $104,955,637\n1992 $77,184,913 $19,024,546 $(4,830,752) (1) $ 91,378,707\n1991 $58,881,222 $18,499,808 $ (196,117) $ 77,184,913\n(1) Retirements and Other Changes includes the accumulated depreciation of property, plant and equipment related to the sale of Universal in the amount of $4,615,513 (see Note 3).\n(2) Retirements and Other Changes includes the accumulated depreciation of property, plant and equipment related to the sale of the Indianapolis Stations in the amount of $1,161,921 (see Note 3).\nML MEDIA PARTNERS, L.P. AS OF DECEMBER 31, 1993, DECEMBER 25, 1992 AND DECEMBER 27, 1991\nSchedule VIII Accumulated Amortization of Intangible Assets and Accumulated Amortization of Prepaid Expenses and Deferred Charges\nAdditions Charged to Balance at Costs and Beginning of Expenses or Deductions and Balance at Perio Period Other Other End of Period d Accounts\nIntangible Assets\n1993 $112,996,421 $11,163,146 $(13,090,160) (4) $111,069,407\n1992 $107,868,052 $11,885,557 $ (6,757,188) (2) $112,996,421\n1991 $ 68,590,822 $16,458,117 $ 22,819,113 (1) $107,868,052\nPrepaid Expenses and Deferred Charges\n1993 $6,601,766 $ 682,666 (43,344) $7,241,088\n1992 $6,385,771 $ 606,506 $ (390,511)(3) $6,601,766\n1991 $4,433,494 $2,017,983 $ (65,706) $6,385,771\n(1) Deductions and Other for Intangible Assets includes the write-off of intangible assets (principally, goodwill) related to Wincom for approximately $21.6 million.\n(2) Deductions and Other for Intangible Assets consists of the accumulated amortization of intangible assets related to the sale of Universal in the amount of $6,757,188 (see Note 3).\n(3) Deductions and Other for Prepaid Expenses and Deferred Charges includes the accumulated amortization of prepaid expenses and deferred charges related to the sale of Universal in the amount of $312,492 (see Note 3).\n(4) Deductions and Other for Intangible Assets consists of the accumulated amortization of intangible assets related to the sale of the Indianapolis Stations in the amount of $13,090,160 (see Note 3). ML MEDIA PARTNERS, L.P. FOR THE YEARS ENDED DECEMBER 31, 1993, DECEMBER 25, 1992 AND DECEMBER 27, 1991\nSchedule X Supplementary Income Statement Information\nItem Charged to costs and expenses\n1993 1992 1991\nMaintenance and Repairs $ 957,153 $1,107,115 $1,015,088\nTaxes, other than payroll and income $3,645,936 $3,423,621 $3,137,266 taxes\nRoyalties $1,056,484 $1,207,258 $1,219,837\nAdvertising costs $1,410,848 $1,560,991 $1,753,911\nItem 9.","section_9":"Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure\nNone. Part III\nItem 10.","section_9A":"","section_9B":"","section_10":"Item 10. Directors and Executive Officers of Registrant\nRegistrant has no executive officers or directors. The General Partner manages Registrant's affairs and has general responsibility and authority in all matters affecting its business. The responsibilities of the General Partner are carried out either by its executive officers (all of whom are executive officers of either RP Media Management or ML Media Management Inc.) or executive officers of RP Media Management or ML Media Management Inc. acting on behalf of the General Partner. The executive officers and directors of the General Partner, RP Media Management and ML Media Management Inc. are:\nRP Media Management (the \"Management Company\")\nServed in Present Capacity Name Since (1) Position Held\nI. Martin Pompadur 1\/01\/86 President, Chief Executive Officer, Chief Operating Officer, Secretary, Director\nElizabeth McNey Yates 4\/01\/88 Executive Vice President\n(1) Directors hold office until their successors are elected and qualified. All officers serve at the pleasure of the Board of Directors of the respective entity.\nML Media Management Inc. (\"MLMM\")\nServed in Present Capacity Name Since (1) Position Held\nKevin K. Albert 02\/19\/91 President 12\/16\/85 Director\nRobert F. Aufenanger 02\/02\/93 Executive Vice President 03\/28\/88 Director\nRobert W. Seitz 02\/02\/93 Vice President 02\/01\/93 Director\nJames K. Mason 02\/01\/93 Director\nSteven N. Baumgarten 02\/02\/93 Vice President\nDavid G. Cohen 03\/07\/94 Treasurer\n(1) Directors hold office until their successors are elected and qualified. All executive officers serve at the pleasure of the Board of Directors of the respective entity.\nMedia Management Partners (the \"General Partner\")\nServed in Present Capacity Name Since (1) Position Held\nI. Martin Pompadur 3\/22\/91 Chairman 1\/30\/87 President\nElizabeth McNey Yates 3\/01\/90 Senior Vice President\nKevin K. Albert 3\/22\/91 Senior Vice President\nRobert F. Aufenanger 8\/12\/88 Vice President\nSteven N. Baumgarten 2\/02\/93 Vice President\nDavid G. Cohen 3\/07\/94 Treasurer\n(1) All executive officers serve at the pleasure of the Partners of the General Partner.\nI. Martin Pompadur, 58, is the Chairman and Chief Executive Officer of GP Station Partners which is the General Partner of Television Station Partners, L.P., a private limited partnership that owns and operates four network affiliated television stations. He is the Chairman and Chief Executive Officer of PBTV, Inc., the Managing General Partner of Northeastern Television Investors Limited Partnership, a private limited partnership which owns and operates WBRE-TV, a network affiliated station in Wilkes-Barre Scranton, Pennsylvania. Mr. Pompadur is also Chairman and Chief Executive Officer of U.S. Cable Partners, a general partner of U.S. Cable Television Group, L.P. (\"U.S. Cable\"), which owns and operates cable systems in ten states. He is also the Chief Executive Officer and Chief Operating Officer of RP Opportunity Management, L.P. (\"RPOM\"), a limited partnership organized under the laws of Delaware, which is indirectly owned and controlled by Mr. Pompadur. RPOM is a partner in Media Opportunity Management Partners, an affiliate of the General Partner, and the general partner of ML Media Opportunity Partners, L.P. which was formed to invest in under performing and turnaround media business and which presently owns two cable television systems, an FM radio station, a 51% interest in an entity which owns three network affiliated television stations, an equity position in a cellular telecommunications company, and which participates in a joint venture to produce programming for broadcast and cable television, and in London- based joint ventures in various media operations in Europe. Mr. Pompadur is the Principal Executive Officer of ML Media Opportunity Partners, L.P. Mr. Pompadur is also Chief Executive Officer of MultiVision Cable TV Corp. (\"MultiVision\"), a cable television multiple system operator (\"MSO\") organized in January 1988 and owned principally by Mr. Pompadur to provide MSO services to cable television systems acquired by entities under his control. Mr. Pompadur is a principal owner, member of the Board of Directors and Secretary of Caribbean International News Corporation (\"Caribbean\"). Caribbean owns and publishes EL Vocero, the largest Spanish language daily newspaper in the U.S. He is a principal shareholder in Hunter Publishing Company, Inc., publisher of monthly trade magazines. Mr. Pompadur served as president of Ziff Corporation from 1977 through 1982. Ziff Corporation was the holding company for Ziff-Davis Publishing Company, one of the world's largest publishers of special interest and business publications, as well as Ziff-Davis Broadcasting Company, operator of six network affiliated television stations. Before joining Ziff Corporation, Mr. Pompadur was with ABC, Inc. for 17 years. At ABC, Inc., he was a member of the Board of Directors and also served in the following capacities: General Manager of the Television Network; Vice President of the Broadcast Division; and President of the Leisure Activities Group, which included ABC Publishing, Records, Music Publishing and Motion Picture theatres.\nElizabeth McNey Yates, 31, Executive Vice President of RP Media Management and Senior Vice President of Media Management Partners, joined RP Companies Inc., an entity controlled by Mr. Pompadur, in April 1988 and has senior executive responsibilities in the areas of finance, operations, administration and acquisitions. Prior to joining Mr. Pompadur, Ms. Yates was employed in Merrill Lynch Investment Banking's Partnership Finance Department, where she was actively involved in structuring and implementing public partnership offerings and in monitoring investments made by Merrill Lynch managed partnerships. Ms. Yates is an Executive Vice President of RP Opportunity Management.\nKevin K. Albert, 41, a Managing Director of Merrill Lynch Investment Banking Group (\"ML Investment Banking\"), joined Merrill Lynch in 1981. Mr. Albert works in the Equity Private Placement Group and is involved in structuring and placing a diversified array of private equity financings including common stock, preferred stock, limited partnership interests and other equity-related securities. Mr. Albert has a B.A. and an M.B.A. from the University of California, Los Angeles. Mr. Albert is also a director of Maiden Lane Partners, Inc. (\"Maiden Lane\"), an affiliate of the general partner of Liberty Equipment Investors - 1983; a director of Whitehall Partners Inc. (\"Whitehall\"), an affiliate of MLMM and the general partner of Liberty Equipment Investors L.P. - 1984; a director of ML Film Entertainment Inc. (\"ML Film\"), an affiliate of MLMM and the managing general partner of the general partners of Delphi Film Associates, Delphi Film Associates II, III, IV, V and ML Delphi Premier Partners; a director of ML Opportunity Management Inc. (\"ML Opportunity\"), an affiliate of the General Partner and a joint venturer in Media Opportunity Management Partners, the general partner of ML Media Opportunity Partners, L.P.; a director of MLL Antiquities Inc. (\"MLL Antiquities\"), an affiliate of MLMM and the administrative general partner of The Athena Fund II, L.P.; a director of ML Mezzanine II Inc. (\"ML Mezzanine II\"), an affiliate of MLMM and sole general partner of the managing general partner of ML-Lee Acquisition Fund II, L.P. and ML-Lee Acquisition Fund (Retirement Accounts) II, L.P.; a director of ML Mezzanine Inc. (\"ML Mezzanine\"), an affiliate of MLMM and the sole general partner of the managing general partner of ML-Lee Acquisition Fund, L.P.; a director of Merrill Lynch Venture Capital Inc. (\"ML Venture\"), an affiliate of MLMM and the general partner of the Managing General Partner of ML Venture Partners I, L.P. (\"Venture I\"), ML Venture Partners II, L.P. (\"Venture II\"), and ML Oklahoma Venture Partners Limited Partnership (\"Oklahoma\"); a director of Merrill Lynch R&D Management Inc. (\"ML R&D\"), an affiliate of MLMM and the general partner of the General Partner of ML Technology Ventures, L.P.; and a director of MLL Collectibles Inc. (\"MLL Collectibles\"), an affiliate of MLMM and the administrative general partner of The NFA World Coin Fund, L.P. Mr. Albert also serves as an independent general partner of Venture I and Venture II.\nRobert F. Aufenanger, 40, a Vice President of Merrill Lynch & Co. Corporate Strategy, Credit and Research and a Director of the Partnership Management Department, joined Merrill Lynch in 1980. Mr. Aufenanger is responsible for the ongoing management of the operations of the equipment and project related limited partnerships for which subsidiaries of ML Leasing Equipment Corp., an affiliate of Merrill Lynch, are general partners. Mr. Aufenanger was previously Controller of Merrill Lynch Leasing Inc. from 1982 through 1984 and had worked for the international public accounting firm of Ernst & Whinney from 1975 to 1980. Mr. Aufenanger has a B.S. from St. John's University, is a New York State licensed C.P.A. and is a member of the American Institute of Certified Public Accountants and the N.Y.S. Society of Certified Public Accountants. Mr. Aufenanger is also a director of Maiden Lane, Whitehall, ML Opportunity, ML Film, MLL Antiquities, ML Venture, ML R&D, MLL Collectibles, ML Mezzanine and ML Mezzanine II.\nRobert W. Seitz, 47, is a First Vice President of Merrill Lynch & Co. Corporate Strategy, Credit and Research and a Managing Director within the Corporate Credit Division of Merrill Lynch. Mr. Seitz is the Private Client Senior Officer and is also responsible for the firm's Partnership Management and Asset Recovery Management Departments. Prior to his present assignment, Mr. Seitz was a Managing Director and the Senior Credit Officer of the Merrill Lynch Public Finance Group, and before that, manager of Western Hemisphere Business Development for the Merrill Lynch International Banks. Prior to joining Merrill Lynch, Mr. Seitz served as a Vice President and Unit Head in Corporate Banking at Citibank, N.A. for ten years. Mr. Seitz holds an MBA in Finance and Marketing from the University of Rochester and a Bachelor of Arts in Psychology from Gettysburg College. Mr. Seitz is also a director of Maiden Lane, Whitehall, ML Opportunity, ML Venture, ML R&D, ML Film, MLL Antiquities, and MLL Collectibles.\nJames K. Mason, 41, a Managing Director of ML Investment Banking, is a senior member of the Telecom, Media and Technology group. He joined Merrill Lynch Investment Banking in 1978. Mr. Mason is responsible for advising Merrill Lynch's entertainment and media industry clients on such matters as financings, divestitures, restructurings, mergers and acquisitions. Mr. Mason is also a director of ML Opportunity Management Inc. Prior to joining Merrill Lynch, Mr. Mason was involved in news and production at Metromedia Inc.'s WNEW-TV and at Capital Cities' WTVD-TV. He also was station manager for the NBC-TV affiliate in Raleigh-Durham, North Carolina. Mr. Mason has two B.A. degrees from Duke University, and an M.B.A. from Columbia University Graduate School of Business.\nSteven N. Baumgarten, 38, a Vice President of Merrill Lynch & Co. Corporate Strategy, Credit and Research, joined Merrill Lynch in 1986. Mr. Baumgarten shares responsibility for the ongoing management of the operations of the equipment and project related limited partnerships for which subsidiaries of ML Leasing Equipment Corp., an affiliate of Merrill Lynch, are general partners. Mr. Baumgarten was previously Manager of Financial Analysis for the same group from 1986 through 1988. Mr. Baumgarten has an MBA from New York University, a J.D. from the Boston University School of Law and a B.A. from the State University of New York at Stony Brook. Mr. Baumgarten is a member of the Bar in the state of Massachusetts and is a member of the American Bar Association.\nDavid G. Cohen, 31, an Assistant Vice President of Merrill Lynch & Co. Corporate Strategy, Credit and Research, joined Merrill Lynch in 1987. Mr. Cohen's responsibilities include controllership and financial management functions for certain partnerships for which subsidiaries of ML Leasing Equipment Corp., an affiliate of Merrill Lynch, are general partners. Prior to joining Merrill Lynch, Mr. Cohen worked for the international public accounting firm of Arthur Andersen & Co. from 1984 through 1987. Mr. Cohen has a B.S. from the University of Maryland and is a New York State Certified Public Accountant. Item 11.","section_11":"Item 11.Executive Compensation\nRegistrant does not pay the executive officers or directors of the General Partner any remuneration. See Note 7 to the Financial Statements included in Item 8. hereof, however, for sums paid by Registrant to the General Partner and its affiliates for the years ended December 31, 1993, December 25, 1992, and December 27, 1991.\nItem 12.","section_12":"Item 12.Security Ownership of Certain Beneficial Owners and Management\nAs of February 1, 1994, no person was known by Registrant to be the beneficial owner of more than 5 percent of the Units.\nTo the knowledge of the General Partner, as of February 1, 1994, no officer or director of the General Partner, nor the officers or directors as a group, is the beneficial owner of 5% or more of the outstanding common stock of Merrill Lynch & Co., Inc.\nRP Media Management is owned 50% by IMP Media Management, Inc. and 50% by The Elton H. Rule Company. IMP Media Management is 100% owned by Mr. I. Martin Pompadur and The Elton H. Rule Company is 100% owned by the estate of Mr. Elton H. Rule.\nItem 13.","section_13":"Item 13.Certain Relationships and Related Transactions\nRefer to Note 7 to the Financial Statements included in Item 8 hereof, and in Item 1 for a description of the relationship of the General Partner and its affiliates to Registrant and its subsidiaries. Part IV\nItem 14.","section_14":"Item 14.Exhibits, Financial Statement Schedules and Reports on Form 8-K\n(a) Financial Statements, Financial Statement Schedules and Exhibits\nFinancial Statements and Financial Statement Schedules\nSee Item 8. \"Financial Statements and Supplementary Data-Table of Contents\".\nExhibits Incorporated by Reference\n3.1 Amended and Restated Exhibit 3.1 to Form S-1 Certificate of Limited Registration Statement (File No. Partnership. 33-2290)\n3.2.1 Second Amended and Exhibit 3.2.1 to Form 10-K Report Restated Agreement of Limited for the fiscal year ended December Partnership dated May 14, 1986. 26, 1986 (File No. 0-14871)\n3.2.2 Amendment No. 1 dated Exhibit 3.2.2 to Form 10-K Report February 27, 1987 to Second for the fiscal year ended December Amended and Restated Agreement 26, 1986 (File No. 0-14871) of Limited Partnership.\n10.1.1 Joint Venture Exhibit 10.1.1 to Form 10-K Report Agreement dated July 2, 1986 for the fiscal year ended December between Registrant and Century 26, 1986 (File No. 0-14871) Communications Corp.(\"CCC\")\n10.1.2 Management Agreement Exhibit 10.1.2 to Form 10-K Report and Joint Venture Agreement for the fiscal year ended December dated December 16, 1986 between 26, 1986 (File No. 0-14871) Registrant and CCC (attached as Exhibit 1 to Exhibit 10.3).\n10.1.3 Management Agreement Exhibit 10.1.3 to Form 10-K Report and Joint Venture Agreement for the fiscal year ended December dated as of February 15, 1989 30, 1988 (File No. 0-14871) between Registrant and CCC.\n10.1.4 Amended and Restated Management Agreement and Joint Venture Agreement of Century\/ML Cable Venture dated January 1, 1994 between Century Communications Corp. and Registrant.\n10.2.1 Stock Purchase Exhibit 28.1 to Form 8-K Report Agreement dated July 2, 1986 dated December 16, 1986 (File No. between Registrant and the 33-2290) sellers of shares of Cable Television Company of Greater San Juan, Inc.\n10.2.2 Assignment dated July Exhibit 10.2.2 to Form 10-K Report 2, 1986 between Registrant and for the fiscal year ended December Century-ML Cable Corporation (\"C-26, 1986 (File No. 0-14871) ML\").\n10.2.3 Transfer of Assets and Assumption of Liabilities Agreement dated January 1, 1994 between Century-ML Radio Venture, Century\/ML Cable Venture, Century Communications Corp. and Registrant.\n10.3 Amended and Restated Exhibit 10.3.5 to Form 10-K Report Credit Agreement dated as of for the fiscal year ended December March 8, 1989 between Citibank, 30, 1988 (File No. 0-14871) N.A., Agent, and C-ML.\n10.3.1 Note Agreement dated Exhibit 10.3.1 to Form 10-K Report as of December 1, 1992 between for the fiscal year ended December Century-ML Cable Corporation, 25, 1992 (File No. 0-14871) Century\/ML Cable Venture, Jackson National Life Insurance Company, The Lincoln National Life Insurance Company and Massachusetts Mutual Life Insurance Company.\n10.3.2 Second Restated Credit Exhibit 10.3.2 to Form 10-K Report Agreement dated December 1, 1992 for the fiscal year ended December among Century-ML Cable 25, 1992 (File No. 0-14871) Corporation, Century\/ML Cable Venture and Citibank.\n10.3.3 Amendment dated as of Exhibit 10.3.3 to Form 10-Q for September 30, 1993 among Century-the quarter ended September 24, ML Cable Corporation, the banks 1993 (File No. 0-14871) parties to the Credit Agreement, and Citibank, N.A. and Century\/ML Cable Venture.\n10.3.4 Amendment dated as of December 15, 1993 among Century- ML Cable Corporation, the banks parties to the Credit Agreement, and Citibank, N.A. and Century\/ML Cable Venture.\n10.4 Pledge Agreement dated Exhibit 10.4 to Form 10-K Report December 16, 1986 among for the fiscal year ended December Registrant, CCC, and Citibank, 26, 1986 (File No. 0-14871) N.A., Agent.\n10.5 Guarantee dated as of Exhibit 10.5 to Form 10-K Report December 16, 1986 among for the fiscal year ended December Registrant, CCC and Citibank, 25, 1987 (File No. 0-14871) N.A., Agent.\n10.6 Assignment of Accounts Exhibit 10.6 to Form 10-K Report Receivable dated as of December for the fiscal year ended December 16, 1986 among Registrant, CCC 25, 1987 (File No. 0-14871) and Citibank, N.A., Agent.\n10.7 Real Property Mortgage Exhibit 10.7 to Form 10-K for the dated as of December 16, 1986 fiscal year ended December 30, among Registrant, CCC and 1988 (File No. 0-14871) Citibank, N.A., Agent.\n10.8 Stock Sale and Purchase Exhibit 28.1 to Form 8-K Report Agreement dated as of December dated December 23, 1986 (File No. 5, 1986 between SCIPSCO, Inc. 33-2290) and ML California Cable Corp. (\"ML California\").\n10.9 Security Agreement dated as Exhibit 10.10 to Form 10-K Report of December 22, 1986 among for the fiscal year ended December Registrant, ML California and 26, 1987 (File No. 0-14871) BA.\n10.10 Assets Purchased Exhibit 28.1 to Form 8-K Report Agreement dated as of September dated February 2, 1987 17, 1986 between Registrant and Loyola University.\n10.11 Asset Acquisition Exhibit 28.1 to Form 8-K Report Agreement dated April 22, 1987 dated October 14, 1987 (File No. between Community Cable-Vision 33-2290) of Puerto Rico Associates, Community Cable-Vision of Puerto Rico, Inc., Community Cable- Vision Incorporated and Century Communications Corp., as assigned.\n10.12 Asset Purchase Exhibit 2.1 to Form 8-K Report Agreement dated April 29, 1987 dated September 16, 1987 (File No. between Registrant and Gilmore 33-2290) Broadcasting Corporation.\n10.13 License Holder Pledge Exhibit 2.5 to Form 8-K Report Agreement dated August 27, 1987 dated September 15, 1987 (File No. by Registrant and Media 33-2290) Management Partners in favor of Manufacturers Hanover.\n10.14 Asset Purchase Exhibit 28.1 to Form 8-K Report Agreement dated August 20, 1987 dated January 15, 1988 (File No. between 108 Radio Company 33-2290) Limited Partnership and Registrant.\n10.15 Security Agreement Exhibit 28.3 to Form 8-K Report dated as of December 16, 1987 dated January 15, 1988 (File No. between Registrant and CNB. 33-2290)\n10.16 Asset Purchase Exhibit 10.25 to Form 10-K Report Agreement dated as of January 9, for the fiscal year ended December 1989 between Registrant and 30, 1988 (File No. 0-14871) Connecticut Broadcasting Company, Inc. (\"WICC\").\n10.17.1 Stock Purchase Exhibit 28.2 to Form 10-Q for the Agreement dated June 17, 1988 quarter ended June 24, 1988 (File between Registrant and the No. 0-14871) certain sellers referred to therein relating to shares of capital stock of Universal Cable Holdings, Inc. (\"Universal\").\n10.17.2 Amendment and Consent Exhibit 2.2 to Form 8-K Report dated July 29, 1988 between dated September 19, 1988 (File No. Russell V. Keltner, Larry G. 0-14871) Wiersig and Donald L. Benson, Universal Cable Midwest, Inc. and Registrant.\n10.17.3 Amendment and Consent Exhibit 2.3 to Form 8-K Report dated July 29, 1988 between dated September 19, 1988 (File No. Ellsworth Cable, Inc., Universal 0-14871) Cable Midwest, Inc. and Registrant.\n10.17.4 Amendment and Consent Exhibit 2.4 to Form 8-K Report dated August 29, 1988 between ST dated September 19, 1988 (File No. Enterprises, Ltd., Universal 0-14871) Cable Communications, Inc. and Registrant.\n10.17.5 Amendment and Consent Exhibit 2.5 to Form 8-K Report dated September 19, 1988 between dated September 19, 1988 (File No. Dennis Wudtke, Universal Cable 0-14871) Midwest, Inc., Universal Cable Communications, Inc. and Registrant.\n10.17.6 Amendment and Consent Exhibit 10.26.6 to Form 10-K dated October 14, 1988 between Report for the fiscal year ended Down's Cable, Inc., Universal December 30, 1988 (File No. 0- Cable Midwest, Inc. and 14871) Registrant.\n10.17.7 Amendment and Consent Exhibit 10.26.7 to Form 10-K dated October 14, 1988 between Report for the fiscal year ended SJM Cablevision, Inc., Universal December 30, 1988 (File No. 0- Cable Midwest, Inc. and 14871) Registrant.\n10.17.8 Bill of Sale and Exhibit 2.6 to Form 8-K Report Transfer of Assets dated as of dated September 19, 1988 (File No. September 19, 1988 between 0-14871) Registrant and Universal Cable Communications Inc.\n10.18 Credit Agreement dated Exhibit 10.27 to Form 10-K Report as of September 19, 1988 among for the fiscal year ended December Registrant, Universal, certain 30, 1988 (File No. 0-14871) subsidiaries of Universal, and Manufacturers Hanover Trust Company, as Agent.\n10.19 Stock Purchase Exhibit 10.28 to Form 10-K Report Agreement dated October 6, 1988 for the fiscal year ended December between Registrant and the 30, 1988 (File No. 0-14871) certain sellers referred to therein relating to shares of capital stock of Acosta Broadcasting Corp.\n10.20 Stock Purchase Exhibit 28.1 to Form 10-Q for the Agreement dated April 19, 1988 quarter ended June 24, 1988 (File between Registrant and the No. 0-14871) certain sellers referred to therein relating to shares of capital stock of Wincom Broadcasting Corporation.\n10.21 Subordination Exhibit 2.3 to Form 8-K Report Agreement dated as of August 15, dated August 26, 1988 (File No. 0- 1988 among Wincom, the 14871) Subsidiaries, Registrant and Chemical Bank.\n10.22 Management Agreement Exhibit A to Exhibit 10.30.2 above dated August 26, 1988 between Registrant and Wincom.\n10.22.1 Management Agreement Exhibit 10.22.1 to Form 10-Q for by and between Fairfield the quarter ended June 25, 1993 Communications, Inc. and (File No. 0-14871) Registrant and ML Media Opportunity Partners, L.P. dated May 12, 1993.\n10.22.2 Sharing Agreement by Exhibit 10.22.2 to Form 10-Q for and among Registrant, ML Mediathe quarter ended June 25, 1993 Opportunity Partners, L.P., RP(File No. 0-14871) Companies, Inc., Radio Equity Partners, Limited Partnership and Fairfield Communications, Inc.\n10.23 Amended and Restated Exhibit 10.33 to Form 10-Q for the Credit, Security and Pledge quarter ended June 30, 1989 (File Agreement dated as of August 15, No. 0-14871) 1988, as amended and restated as of July 19, 1989 among Registrant, Wincom Broadcasting Corporation, Win Communications Inc., Win Communications of Florida, Inc., Win Communications Inc. of Indiana, WEBE Associates, WICC Associates, Media Management Partners, and Chemical Bank and Chemical Bank, as Agent.\n10.23.1 Second Amendment dated Exhibit 10.23.1 to Form 10-Q for as of July 30, 1993 to the the quarter ended June 25, 1993 Amended and Restated Credit, (File No. 0-14871) Security and Pledge Agreement dated as of August 15, 1988, as amended and restated as of July 19, 1989 and as amended by the First Amendment thereto dated as of August 14, 1989 among Registrant, Wincom Broadcasting Corporation, Win Communications Inc., Win Communications Inc. of Indiana, WEBE Associates, WICC Associates, Media Management Partners, and Chemical Bank and Chemical Bank, as Agent.\n10.24 Agreement of Exhibit 10.34 to Form 10-Q for the Consolidation, Extension, quarter ended June 30, 1989 (File Amendment and Restatement of the No. 0-14871) WREX Credit Agreement and KATC Credit Agreement between Registrant and Manufacturers Hanover Trust Company dated as of June 21, 1989.\n10.25 Asset Purchase Exhibit 10.35 to Form 10-Q for the Agreement between ML Media quarter ended September 29, 1989 Partners, L.P. and Anaheim (File No. 0-14871) Broadcasting Corporation dated July 11, 1989.\n10.26 Asset Purchase Exhibit 10.36 to Form 10-K Report Agreement between WIN for the fiscal year ended December Communications Inc. of Indiana, 28, 1990 (File No. 0-14871) and WIN Communications of Florida, Inc. and Renda Broadcasting Corp. dated November 27, 1989.\n10.26.1 Asset Purchase Exhibit 10.26.1 to Form 10-Q for Agreement between WIN the quarter ended June 25, 1993 Communications of Indiana, Inc. (File No. 0-14871) and Broadcast Alchemy, L.P. dated April 30, 1993.\n10.26.2 Joint Sales Agreement Exhibit 10.26.2 to Form 10-Q for between WIN Communications of the quarter ended June 25, 1993 Indiana, Inc. and Broadcast (File No. 0-14871) Alchemy, L.P. dated May 1, 1993.\n10.27 Credit Agreement dated Exhibit 10.39 to Form 10-Q for the as of November 15, 1989 between quarter ended June 29, 1990 (File ML Media Partners, L.P. and Bank No. 0-14871) of America National Trust and Savings Association.\n10.28 Asset Purchase Exhibit 10.38 to Form 10-Q for the Agreement dated November 27, quarter ended June 29, 1990 (File 1989 between Win Communications No. 0-14871) and Renda Broadcasting Corp.\n10.29 Amended and Restated Exhibit 10.39 to Form 10-Q for the Credit Agreement dated as of May quarter ended June 29, 1990 (File 15, 1990 among ML Media No. 0-14871) Partners, L.P. and Bank of America National Trust and Saving Association, individually and as Agent.\n10.30 Stock Purchase Exhibit 10.40.1 to Form 10-Q for Agreement between Registrant and the quarter ended March 27, 1992 Ponca\/Universal Holdings, Inc. (File No. 0-14871) dated as of April 3, 1992.\n10.30.1 Earnest Money Escrow Exhibit 10.40.1 to Form 10-Q for Agreement between Registrant and the quarter ended March 27, 1992 Ponca\/Universal Holdings, Inc. (File No. 0-14871) dated as of April 3, 1992.\n10.30.2 Indemnity Escrow Exhibit 10.40.2 to Form 8-K Report Agreement between Registrant and dated July 8, 1992 (File No. 0- Ponca\/Universal Holdings, Inc. 14871) dated as of July 8, 1992.\n10.30.3 Assignment by Exhibit 10.40.3 to Form 8-K Report Registrant in favor of Chemical dated July 8, 1992 (File No. 0- Bank, in its capacity as agent 14871) for itself and the other banks party to the credit agreement dated as of September 19, 1988, among Registrant, Universal, certain subsidiaries of Universal, and Manufacturers Hanover Trust Company, as agent.\n10.30.4 Confirmation of final Exhibit 10.40.4 to Form 10-Q for Universal agreements between the quarter ended September 25, Registrant and Manufacturers 1992 (File No. 0-14871) Hanover Trust Company, dated April 3, 1992.\n10.30.5 Letter regarding Exhibit 10.40.5 to Form 10-Q for discharge and release of the the quarter ended September 25, Universal Companies and 1992 (File No. 0-14871) Registrant dated July 8, 1992 between Registrant and Chemical Bank (as successor, by merger, to Manufacturers Hanover Trust Company).\n18.1 Letter from Deloitte, Exhibit 18.1 to Form 10-K Report Haskins & Sells regarding the for the fiscal year ended December change in accounting method, 30, 1988 (File No. 0-14871) dated March 30, 1989.\n99 Pages 12 through 19 and 38 Prospectus dated February 4, 1986, through 46 of Prospectus dated filed pursuant to Rule 424(b) February 4, 1986, filed pursuant under the Securities Act of 1933, to Rule 424(b) under the as amended (File No. 33-2290) Securities Act of 1933, as amended.\n(b) Reports on Form 8-K\nNone.\nSIGNATURES\nPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.\nML MEDIA PARTNERS, L.P. By: Media Management Partners General Partner\nBy: ML Media Management Inc.\nDated: March 31, 1994 \/s\/ Kevin K. Albert Kevin K. Albert Director and President\nPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of Registrant in the capacities and on the dates indicated.\nRP MEDIA MANAGEMENT\nSignature Title Date\n\/s\/ I. Martin Pompadur President, Secretary March 31, 1994 (I. Martin Pompadur) and Director (principal executive officer)\nML MEDIA MANAGEMENT INC.\nSignature Title Date\n\/s\/ Kevin K. Albert Director and March 31, 1994 (Kevin K. Albert) President of the General Partner\n\/s\/ Robert F. Aufenanger Director and March 31, 1994 (Robert F. Aufenanger) Executive Vice President of the General Partner\n\/s\/ James K. Mason Director of the March 31, 1994 (James K. Mason) General Partner\n\/s\/ Robert W. Seitz Director and Vice March 31, 1994 (Robert W. Seitz) President of the General Partner\n\/s\/ David G. Cohen Treasurer of the March 31, 1994 (David G. Cohen) General Partner (principal financial officer and principal accounting officer) SIGNATURES\nPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.\nML MEDIA PARTNERS, L.P. By: Media Management Partners General Partner\nBy: ML Media Management Inc.\nDated: March , 1994 Kevin K. Albert Director and President\nPursuant to the requirements of the Securities Exchange Act of l934, this report has been signed below by the following persons on behalf of Registrant in the capacities and on the dates indicated.\nRP MEDIA MANAGEMENT\nSignature Title Date\n_______________________ President, Secretary March , 1994 (I. Martin Pompadur) and Director (principal executive officer)\nML MEDIA MANAGEMENT INC. (\"MLMM\")\nSignature Title Date\n_______________________ Director and March , 1994 (Kevin K. Albert) President\n_______________________ Director and March , 1994 (Robert F. Aufenanger) Executive Vice President\n_______________________ Director March , 1994 (James K. Mason)\n_______________________ Director and Vice March , 1994 (Robert W. Seitz) President\n_______________________ Treasurer March , 1994 (David G. Cohen) (principal financial officer and principal accounting officer)","section_15":""}
{"filename":"771298_1993.txt","cik":"771298","year":"1993","section_1":"ITEM 1. BUSINESS\nFruit of the Loom, Inc. (\"Fruit of the Loom\" or the \"Company\") is a leading international basic apparel company, emphasizing branded products for consumers ranging from infants to senior citizens. It is the largest domestic producer of underwear and of activewear for the imprinted market, selling products principally under the FRUIT OF THE LOOM , BVD , SCREEN STARS , BEST , MUNSINGWEAR and WILSON brand names. The Company sells licensed sports apparel for major American sports leagues, professional players and many American colleges and universities under the SALEM , SALEM SPORTSWEAR AND OFFICIAL FAN brand names. The Company manufactures and markets men's and boys' basic and fashion underwear, activewear, casualwear, licensed sports apparel, women's and girls' underwear, infants' and toddlers' apparel and family socks. Activewear consists primarily of screen print T-shirts and fleecewear and also includes casualwear (principally a broad range of lightweight knit tops and fleece styles sold directly to retailers) and licensed sports apparel. The Company is a fully integrated manufacturer, performing its own spinning, knitting, cloth finishing, cutting, sewing and packaging. Management believes that the Company is the low cost producer in the markets it serves. Management considers the Company's primary strengths to be its excellent brand recognition, low cost production, strong relationships with mass merchandisers and discount chains and its ability to effectively service its customer base.\nThe Company manufactures and markets underwear and activewear (which both include T-shirts) as part of the basic retail product. Management believes that consumer awareness of the value and excellent quality at competitive prices of FRUIT OF THE LOOM brand products will benefit the Company in the current retail marketplace where consumers are more value conscious.\nDuring the last five calendar years, the Company has been the market leader in men's and boys' underwear, with an annual market share ranging from approximately 39% to 41%. In 1993, the Company's share in the men's and boys' underwear market was approximately 40% compared to an approximate 31% share for its closest competitor.\nThe Company offers a broad array of men's and boys' underwear, including: briefs, boxer shorts, T-shirts and A-shirts, colored and \"high fashion\" (as well as RIBBED WHITES ) underwear. It sells all-cotton and cotton-blend underwear under the FRUIT OF THE LOOM and BVD brand names. Products sold under the BVD brand name are priced higher than those sold under the FRUIT OF THE LOOM brand name and are generally designed to appeal to a more premium market. The Company also manufactures and markets boys' decorated underwear (generally with pictures of\nlicensed movie or cartoon characters) under the FUNPALS brand name. The Company manufactures and markets men's and boys' underwear bearing the MUNSINGWEAR and KANGAROO trademarks as well as certain activewear bearing the MUNSINGWEAR trademark in the United States and certain foreign markets.\nITEM 1. BUSINESS - (Continued)\nManagement believes the Company is the largest of the approximately 70 domestic activewear manufacturers that supply screen printers and that it has a market share of approximately 34% of the screen print T-shirt market. The Company produces and sells blank shirts and fleecewear under the SCREEN STARS brand name and premium fleecewear and T-shirts under the FRUIT OF THE LOOM and BEST labels. These products are manufactured in a variety of styles and colors and are sold to distributors, screen printers and specialty retailers, who generally apply a screen print prior to sale at retail. Product quality, delivery responsiveness and price are important factors in the sale of activewear. Management believes that the Company's recent capacity additions and its low cost position afford it a competitive advantage in this market.\nThe Company markets casualwear under the FRUIT OF THE LOOM, BVD and MUNSINGWEAR brands. There are separate Spring and Fall lines with updated color selections for each of the men's, women's, boys' and girls' categories. A national marketing program includes national advertising and local cooperative advertising, promotions and in-store merchandising. The casualwear market is fragmented and has no dominant brands.\nThe continued expansion of the FRUIT OF THE LOOM casualwear line including the introduction in 1993 of twenty new styles with more fashion treatments, color selections and heavier fabric combined with sixty-three new styles for 1994 which emphasize casualwear tailored specifically for ladies and girls will, management believes, contribute significantly to casualwear sales growth.\nIn February 1993, the Company and Wilson Sporting Goods Company announced an exclusive licensing agreement for the Company to manufacture and market a complete line of sweatshirts and sweatpants, T-shirts, shorts and other athletic activewear featuring the WILSON brand in the United States and Mexico. The Company began shipping WILSON brand activewear products in January of 1994.\nIn November 1993, the Company acquired Salem Sportswear Corporation (the \"Salem Acquisition\"), a Delaware corporation (\"Salem\") for approximately $157,600,000, including approximately $23,000,000 of Salem debt which was repaid by the Company. Salem is a leading domestic designer, manufacturer and marketer of sports apparel under licenses granted by the National Basketball Association, Major League Baseball, the National Football League, the National Hockey League, professional players, many American colleges and universities and the World Cup '94. Salem sells a wide variety of quality sportswear, including T-shirts, sweatshirts, shorts and light outerwear. For the fiscal year ended August 31, 1992 Salem Sportswear had sales of approximately $119,800,000.\nIn January 1994, the Company acquired Artex Manufacturing Co., Inc. (\"Artex\") for approximately $44,500,000, or approximately book value, (the \"Artex Acquisition\"). Artex operates as Jostens Sportswear and manufactures and sells a wide variety of decorated sportswear primarily to retail stores and college bookstores under the JOSTENS label and to mass merchants under the ARTEX label. Jostens Sportswear pioneered the dual license concept of combining cartoon characters with major professional sports leagues and is currently one of only three companies to have dual license agreements. Jostens Sportswear has licenses from all the major professional sports leagues as well as from The Walt Disney Company, United Feature Syndicate for PEANUTS and Warner Bros. for Looney Tunes . For the fiscal year ended June 30, 1993 Jostens Sportswear had sales of approximately $76,000,000.\nITEM 1. BUSINESS - (Continued)\nIn March 1994, the Company entered into a contract to purchase certain assets of the Gitano Group, Inc. (\"Gitano\") for approximately $100,000,000. Gitano designs, manufactures, arranges for the manufacture of, distributes and sells women's, men's and children's jeanswear, sportswear and other apparel. Gitano also provides marketing services and licenses the production and sale of a variety of accessories and other products bearing the Gitano name.\nThe Company produces women's briefs, high thigh briefs and bikinis and girls' briefs, in white and colors, under the FRUIT OF THE LOOM brand name. The Company introduced its women's and girls' lines in 1984 using the branded, packaged product strategy that it had successfully employed in the men's and boys' market. The Company's products are packaged, typically three to a pack, making them convenient for the merchant to handle and display. During the last five calendar years, in the highly fragmented women's and girls' underwear market, the Company was one of the branded market leaders with a market share ranging from approximately 11% to 17%. In 1993, the Company's share in the women's and girls' underwear market was approximately 14%, compared to a market share of 24% for the largest competing brand.\nThe Company has a licensing agreement with Warnaco Inc. whereby Warnaco Inc. manufactures and sells bras, slips, camisoles, tap pants and other products under the FRUIT OF THE LOOM brand name in North America.\nThe Company entered the family sock market in mid-1986 through acquisitions and management believes the Company is now one of the two largest domestic manufacturers and that no manufacturer has more than a 12% market share. Sales of FRUIT OF THE LOOM branded socks in 1993 were 40.8% higher than in 1992.\nMarketing and Distribution\nThe Company sells its products to over 21,000 customers, including all major discount and mass merchandisers, wholesale clubs and screen printers. The Company also sells to many department, specialty, drug and variety stores, national chains, supermarkets and sports specialty stores. The Company's products are sold by a nationally organized direct sales force of full-time employees. Underwear, activewear and hosiery are shipped from the Company's fourteen primary distribution centers to over 82,000 customer locations.\nManagement believes that one of the Company's primary strengths is its excellent relationships with mass merchandisers and discount chains. These retailers accounted for approximately 62% of the men's and boys' underwear and approximately 59% of the women's and girls' underwear sold in the United States in 1993, up from approximately 56% and 52%, respectively, in 1989. The\nCompany supplied approximately 53% of the men's and boys' underwear and approximately 20% of the women's and girls' underwear sold by discount and mass merchandisers in the United States in 1993.\nSales to one customer amounted to approximately 13.4%, 11.8% and 9.6% of consolidated net sales in 1993, 1992 and 1991, respectively. Additionally, sales to a second customer amounted to approximately 12.3%, 10.2% and 8.8% of consolidated net sales in 1993, 1992 and 1991, respectively. Management does not feel the loss of any one customer would adversely affect its business as a large percentage of these sales would shift to other outlets due to the high degree of brand awareness and consumer loyalty to the Company's products. The Company's business is seasonal to the extent that approximately 55% of annual sales occur in the second and third quarters. Sales are generally the lowest in the first quarter.\nITEM 1. BUSINESS - (Continued)\nInternational Operations\nThe Company sells activewear through its foreign operations, principally in the United Kingdom, continental Europe and Canada. The Company's approach has been to establish production in foreign markets by both acquiring existing manufacturing facilities and building new plants in order to decrease the impact of foreign currency fluctuations on international sales and to better serve these markets. The Company has established manufacturing plants in Canada, the Republic of Ireland, Northern Ireland (United Kingdom), Mexico and Honduras as a means of accomplishing these objectives. Since 1989, the Company's international sales of activewear have almost tripled. Sales from international operations during 1993 were $249,800,000, substantially all of which were generated from products manufactured at the Company's foreign facilities. These international sales accounted for approximately 13.3% of the Company's net sales in 1993. Management believes international sales will continue to be a source of growth for the Company, particularly on the European continent. This growth will depend on continued demand for the Company's products in diverse international marketplaces. See \"Business Segment and Major Customer Information\" in the Notes to Consolidated Financial Statements.\nManufacturing\nPrincipal manufacturing operations consist of spinning, knitting, cloth finishing, cutting, sewing and packaging. The Company's licensed sportswear is generally produced by applying decorative images, most often by screen printing or embroidery, to blank garments. The Company knits yarn into fabric using a multiple-knitting technique that produces long tubes of fabric corresponding in weight and diameter to various sizes and styles required to make underwear and activewear. All of the Company's products are either bleached to remove the ecru color of natural cotton or dyed for colored products. To achieve certain colors, the fabric must be bleached and dyed.\nComputer controlled die cutting is used in all areas where management believes it is more efficient. Fabric is distributed to employees operating individual sewing machines. To increase efficiency, each employee specializes in a particular function, such as sewing waistbands on briefs. Quality checkpoints occur at many intervals in the manufacturing process, and each garment is inspected prior to packaging.\nCompetition\nAll of the Company's markets are highly competitive. Competition in the underwear and activewear markets is generally based upon quality, price and delivery. Certain of the Company's domestic competitors utilize foreign manufacturing facilities to\nsupply product to the domestic markets. The Company's vertically integrated manufacturing structure allows it to produce high quality products at costs which management believes are generally lower than those of its competitors. Management also believes the Company's ability to deliver its products rapidly gives it a significant competitive advantage. In response to market conditions, the Company, from time to time, reviews and adjusts its product offerings and pricing structure. Where appropriate, the Company uses contract manufacturing to further minimize its costs. Such contract manufacturing accounted for less than 5% of the Company's total production in 1993.\nITEM 1. BUSINESS - (Continued)\nLicensing and Trademarks\nThe Company owns the FRUIT OF THE LOOM, BVD, SCREEN STARS, BEST and certain other trademarks, which are registered in the United States and in many foreign countries. These trademarks are used on men's, women's and children's underwear and activewear marketed by the Company.\nThe Company licenses properties from different companies for its decorated underwear products. Among the characters licensed are: THE LITTLE MERMAID , BEAUTY AND THE BEAST , 101 DALMATIANS , DINOSAURS , BARNEY THE DINOSAUR and BATMAN RETURNS . The Company also licenses the MUNSINGWEAR and KANGAROO trademarks for use on its men's and boys' underwear and certain activewear. The Company has a license to use the WILSON brand on its sweatshirts and sweatpants, T-shirts, shorts and other athletic activewear.\nIn addition, the Company owns the SALEM, SALEM SPORTSWEAR, OFFICIAL FAN, BABY SALEM and ARTEX trademarks. The Company licenses properties, including team insignia, images of professional athletes and college logos, from the National Basketball Association, Major League Baseball, the National Football League, the National Hockey League, professional players' associations and certain individual players, many American colleges and universities and the World Cup '94. These owned and licensed trademarks are used on sports apparel, principally T-shirts, shorts, sweatshirts and jerseys, marketed by the Company.\nImports\nIn 1993, imports accounted for approximately 19.6% (39.3% including Section 9802) of the men's and boys' underwear market and approximately 33.8% (74.1% including Section 9802) of the women's and girls' underwear market. For activewear, imports accounted for approximately 35% of the market in 1992, which is the latest period for which information is available.\nManagement does not believe that direct imports presently pose a significant threat to any of its businesses. United States tariffs along with quotas, implemented under an international agreement known as the Multifiber Arrangements (MFA), limit the growth of imports and increase the cost of imported apparel. The MFA quota system will be phased out over ten years, beginning in 1995, if the Uruguay Round\/GATT agreement is adopted by the United States Congress. Management is studying the impact of the MFA phase out on each aspect of the Company's United States manufacturing process.\nManagement does not believe that the elimination of quotas and tariffs with Mexico under the North American Free Trade Agreement (NAFTA) will adversely effect the Company. To the\ncontrary, the elimination of Mexican tariffs on the Company's United States manufactured products will enhance its sales in that market. Imports from Mexico are expected to rise more rapidly under NAFTA. However, the strict rule of origin, which generally requires apparel to be made from North American spun yarn, and North American Knit or woven fabric, should prevent Mexico from becoming an export platform for low-wage manufacturers from outside the region.\nITEM 1. BUSINESS - (Concluded)\nImports - (Concluded)\nLikewise, imports from the Caribbean and Central American nations likely will continue to rise more rapidly than imports from other parts of the world. This is because Section 9802 (previously Section 807) of the United States tariff schedule grants preferential quotas when made and cut fabrics are used, and duty is paid only on the value added outside the United States. United States apparel and textile manufacturers will continue to use Section 9802 to compete with direct imports.\nEmployees\nThe Company employs approximately 35,000 persons. Approximately 2,700 employees are covered by collective bargaining agreements.\nMiscellaneous\nMaterials and Supplies. Materials and supplies used by the Company are available in adequate quantities. The primary raw materials used in the manufacturing processes are cotton and polyester. The Company periodically enters into futures contracts as hedges for its purchases of cotton for inventory.\nOther. The Company was incorporated under the laws of the state of Delaware in 1985. The principal executive offices of the Company are located at 233 South Wacker Drive, 5000 Sears Tower, Chicago, Illinois 60606, telephone (312)876-1724. As used in this Annual Report on Form 10-K, the term \"the Company\" refers to Fruit of the Loom, Inc. and its subsidiaries, together with its predecessor, Northwest Industries, Inc. (\"Northwest\"), unless otherwise stated or indicated by the context. Market share data contained herein are for domestic markets and are based upon information supplied to the company by the National Purchase Diary, which management believes to be reliable.\nITEM 2.","section_1A":"","section_1B":"","section_2":"ITEM 2. PROPERTIES\nThe Company has properties and facilities aggregating approximately 17,000,000 square feet of usable space, of which approximately 7,000,000 square feet of facilities are under leases expiring through 2013. Management believes that the Company's facilities and equipment are in good condition and that the Company's properties, facilities and equipment are adequate for its current operations. The Company has invested approximately $1.1 billion in capacity expansion and plant modernization programs during the past eight calendar years. Capital spending, primarily to enhance distribution capabilities, is expected to approximate $150,000,000 to $175,000,000 in 1994. Management believes that these prior investments, together with planned capital expenditures, will allow the Company to\naccommodate current and anticipated sales growth and remain a low cost producer in the next several years.\nSet forth below is a summary of the principal facilities owned or leased by the Company:\nITEM 3.","section_3":"ITEM 3. LEGAL PROCEEDINGS\nThe Company and its subsidiaries are involved in certain legal proceedings and have retained liabilities, including certain environmental liabilities, such as those under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, its regulations and similar state statutes (\"Superfund Legislation\") in connection with the sale of certain discontinued operations, some of which were significant generators of hazardous waste. The Company's retained liability reserves at December 31, 1993 related to discontinued operations, consisting primarily of certain environmental reserves of approximately $46,200,000 reflect management's belief that the Company will recover at least $28,600,000 from insurance and other sources. Management and outside environmental consultants evaluate, on a site-by-site basis, the extent of environmental damage, the type of remediation that will be required and the Company's proportionate share of those costs. The Company's retained liability reserves related to discontinued operations principally pertain to ten specifically identified environmental sites. Four sites individually represent more than 10% of the net reserve and in the aggregate represent approximately 67% of the net reserve. Management believes they have adequately estimated the impact of remediating identified sites, the expected contribution from other potentially responsible parties and recurring costs for managing sites. Management currently estimates actual payments before recoveries to range from approximately $8,500,000 to $17,700,000 annually between 1994 and 1997 and $22,000,000 in total subsequent to 1997. Only the long- term monitoring costs of approximately $7,500,000, primarily scheduled to be paid in 1998 and beyond, have been discounted. The discount rate used was 10%. The undiscounted aggregate long- term monitoring costs, to be paid over approximately the next 20 years, is approximately $19,500,000. Management believes that adequate reserves have been established to cover potential claims based on facts currently available and current Superfund Legislation. The Company has provided the foregoing information in accordance with the recently issued Staff Accounting Bulletin 92.\nGenerators of hazardous wastes which were disposed of at offsite locations which are now superfund sites are subject to claims brought by state and Federal regulatory agencies under Superfund Legislation and by private citizens under Superfund Legislation and common law theories. Since 1982, the United States Environmental Protection Agency (the \"EPA\") has actively sought compensation for response costs and remedial action at offsite disposal locations from waste generators under the Superfund Legislation, which authorizes such action by the EPA regardless of fault, legality of original disposal or ownership of a disposal site. The EPA's activities under the Superfund Legislation can be expected to continue during 1994 and future years.\nIn February 1986, the Company completed the sale of stock of its then wholly owned subsidiary, Universal Manufacturing Corporation (\"Universal\"), to MagneTek, Inc., (\"MagneTek\"). At the time of the sale there was a suit pending against Universal and Northwest by L.M.P. Corporation (\"LMP\"). The suit (the \"LMP Litigation\") alleged that Universal and Northwest fraudulently induced LMP to sell its business to Universal and then suppressed the development of certain electronic lighting ballasts in breach of the agreement of sale, which required Universal to pay to LMP a percentage of the net profits from such business from 1982 through 1986. Two additional plaintiffs, Stevens Luminoptics Partnership and Calmont Technologies Inc., joined the litigation in 1986. In December 1989 and January 1990, a jury returned certain verdicts against Universal and also returned verdicts in favor of Northwest and on certain issues in favor of Universal. A judgment totalling $25,800,000, of which $7,500,000 represented punitive damages, reflecting these verdicts was entered by the Alameda County, California Superior Court in January 1990 against Universal.\nITEM 3. LEGAL PROCEEDINGS - (Continued)\nIn April 1992, the California Court of Appeals reversed the $25,800,000 judgment against Universal and affirmed those verdicts favorable to Universal and Northwest. In July 1992, the California Supreme Court denied the plaintiffs' petition for review. The case has been remanded to the trial court where it is schedule to be retried beginning in March 1994.\nIn March 1988, a class action suit entitled Endo et al. v. Albertine, et al. was filed in the United States District Court for the Northern District of Illinois (the \"District Court\") against the Company, its then directors, certain of its then executive officers, its then underwriters and the Company's current and former independent auditors in connection with the Company's initial public offering of Class A Common Stock and certain debt securities in March 1987. The suit alleges, among other things, violations of Federal and state securities laws against all of the defendants, as well as breaches of fiduciary duties by the director and officer defendants, and seeks unspecified damages.\nMotions to dismiss the complaint were filed by all defendants. In December 1990, a magistrate judge recommended that the District Court dismiss all of the plaintiffs' claims with prejudice. On January 29, 1993, the District Court adopted in part and rejected in part the magistrate judge's recommendation for dismissal of the complaint. As a result, the litigation will continue as to various remaining counts of the complaint. Both the defendants and the plaintiffs recently filed motions for summary judgment. It is uncertain as to when rulings on these motions will be issued. Management and the Board of Directors believe that this suit is without merit and intend to continue to defend themselves vigorously in this litigation.\nOn December 23, 1993, James J. Locke, as Trustee of Locke Family Trust, and I. Jack Saline filed a lawsuit against the Company and certain of its then officers and directors, including William Farley and John B. Holland in the District Court. The lawsuit was then amended to add additional plaintiffs. The lawsuit was filed as a class action, but the issue of class certification has not yet been addressed by the parties or the court. The plaintiffs claim that all of the defendants engaged in conduct violating Section 10b of the Securities Exchange Act of 1934, as amended (the \"Act\"), and that Mr. Farley and Mr. Holland also violated Section 20a of the Act. According to the plaintiffs, beginning before June 1992 and continuing through early June 1993, the Company, with the knowledge and assistance of the individual defendants, issued positive public statements about its expected sales increases and growth through 1993 and afterwards. They also allege that beginning in approximately mid-1992 and continuing afterwards, the Company's business was not as strong and its growth prospects were not as certain as represented. The plaintiffs further allege that during the end of 1992 and beginning of 1993, certain of the individual\ndefendants traded the stock of the Company while in the possession of material, non-public information. The plaintiffs ask for unspecified amounts as compensatory damages, pre-judgment and post-judgment interest, attorneys' fees, expert witness fees and costs and ask the District Court to impose a constructive trust on the proceeds of the individual defendants' trades to satisfy any potential judgment. Although the lawsuit is at a preliminary stage, the Company believes that this suit is without merit and intends to defend itself vigorously in this litigation.\nITEM 3. LEGAL PROCEEDINGS - (Concluded)\nManagement believes, based on information currently available, that the ultimate resolution of the aforementioned litigation will not have a material adverse effect on the financial condition or operations of the Company.\nIn March 1992, the Company received a refund of approximately $60,000,000 relating to Federal income taxes plus interest paid by Northwest. However, in September 1992, the Internal Revenue Service (the \"IRS\") issued a statutory notice of deficiency in the amount of approximately $7,300,000 for the taxable years from which the March 1992 refund arose, exclusive of interest which would have accrued from the date the IRS asserted the tax was due until payment, presently a period of about 24 years. Based on discussions with tax counsel, the Company believes that the asserted legal basis for the IRS's position in this matter is without merit.\nITEM 4.","section_4":"ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS\nNone PART II\nITEM 5.","section_5":"ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS\nWilliam Farley, an executive officer and director of the Company, holds 100% of the common stock of Farley Inc. (\"FI\"). William Farley and FI together own all of the Class B Common Stock of the Company outstanding. See \"Consolidated Statement of Common Stockholders' Equity\" in the Notes to Consolidated Financial Statements. William Farley also owns 318,000 shares of the Class A Common Stock of the Company. As of March 10, 1994, there were 2,798 holders of record of the Class A Common Stock of the Company.\nCommon Stock Prices and Dividends Paid\nThe Company's Class A Common Stock is listed on the New York Stock Exchange. Prior to December 3, 1993, the Company's Class A Common Stock was listed on the American Stock Exchange. The following table sets forth the high and low market prices of the Class A Common Stock for 1993 and 1992:\nNo dividends were declared on the Company's common stock issues during 1993 or 1992. The Company does not currently anticipate paying any dividends in 1994. For restrictions on the present or future ability to pay dividends, see \"Long-Term Debt\" in the Notes to Consolidated Financial Statements.\nITEM 6.","section_6":"ITEM 6. SELECTED FINANCIAL DATA (In Millions, Except Per Share Data)\nITEM 7.","section_7":"ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS\nThe table below sets forth selected operating data (in millions of dollars and as percentages of net sales) of the Company:\nOperations\n1993 Compared to 1992\nNet sales increased 1.6% in 1993 from 1992. The increased net sales for 1993 as compared to 1992 are due to volume increases in casualwear, international activewear and underwear combined with price increases (principally for domestic activewear and casualwear). These increases more than offset the adverse effects of volume declines in domestic activewear, unfavorable foreign currency exchange rate comparisons on international sales between the two periods and increased sales of promotional and closeout merchandise in 1993. In the international operations, the Company's approach has been to establish production in foreign markets by both acquiring existing manufacturing facilities and building new plants in order to better serve these markets. Management believes international unit sales will continue to be a source of growth for the Company, particularly on the European continent. However, any such growth is subject to the risk that the Company's products in diverse international marketplaces will not be widely accepted.\nGross earnings decreased 2.0% in 1993 as compared to 1992. The gross margin was 34.4% in 1993 as compared to 35.6% in 1992. The decrease in gross earnings in 1993 is due primarily to the unfavorable effects of operating certain plants on reduced production schedules in response to lower than expected consumer demand, inventory valuation adjustments and unfavorable changes in product mix due to promotions and closeouts. These decreases more than offset the favorable effects of the sales price and volume increases discussed above and lower raw material costs.\nOperating earnings decreased 6.9% compared to 1992 and the operating margin decreased 1.9 percentage points to 20.2% in\n1993. The decreases are due to lower gross earnings and gross margin as well as higher selling, general and administrative expenses. Selling, general and administrative expenses increased to 12.7% of net sales in 1993 compared to 12.1% in the prior year. The spending increase is primarily attributable to increased selling expenses resulting from increased royalty payments and increased shipping expenses. The shipping expense increase results from a shift in product mix to more casualwear and an increased number of shipments as customer order patterns have changed to include an increased number of smaller quantity shipments.\nITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)\nOperations - (Continued)\n1993 Compared to 1992 - (Continued)\nInterest expense for 1993 decreased 11.4% from 1992. Lower interest expense is principally attributable to the effect of lower interest rates on the Company's debt instruments which more than offset the effects of higher average debt levels during 1993. The lower interest rates are principally due to the Company's refinancing of its 10-3\/4% Notes (as hereinafter defined) with a 7-7\/8% senior note issue in the fourth quarter of 1992. In addition, lower average prime and LIBOR interest rates on the Company's variable rate debt instruments in 1993 as compared to 1992 contributed to the lower average interest rates.\nIn 1993 the Company received approximately $72,900,000 from Acme Boot representing the entire unpaid principal and liquidation preference (including accrued interest and dividends) on its investment in the securities of the affiliate. The Company recorded a pretax gain of $67,300,000 related to the investment in Acme Boot upon the receipt of the above mentioned proceeds. See \"Related Party Transactions\" in the Notes to Consolidated Financial Statements.\nThe effective income tax rate before extraordinary items and cumulative effect of change in accounting for 1993 and 1992 differed from the Federal statutory rate of 35% and 34%, respectively, primarily due to the impact of goodwill amortization, which is not deductible for Federal income tax purposes, state income taxes and the provision for interest related to prior years' taxes.\nIn 1993 the Company recorded an extraordinary charge of $8,700,000 ($.11 per share) in connection with the refinancing of its bank credit agreements and the redemption of its 12-3\/8% Senior Subordinated Debentures due 2003 (the \"12-3\/8% Notes\"). The extraordinary charge consists principally of the non-cash write-off of the related unamortized debt expense on the bank credit agreements, the 12-3\/8% Notes and other debt issues and the premiums paid in connection with the early redemption of the 12-3\/8% Notes, both net of income tax benefits.\nIn 1992, the Company redeemed all of its $280,000,000 principal amount of 10-3\/4% Senior Subordinated Notes due July 15, 1995 (the \"10-3\/4% Notes\"). The Company recorded an extraordinary charge of approximately $9,900,000 ($.13 per share) in connection with the redemption of the 10-3\/4% Notes, which consisted principally of the premiums paid in connection with the early redemption of the 10-3\/4% Notes and the non-cash write-off of the related unamortized debt expense, both net of income tax benefits.\nIn the first quarter of 1993, the Company recorded the cumulative effect of an accounting change related to the adoption of Statement of Financial Accounting Standards No. 109, \"Accounting for Income Taxes\", (\"Statement No. 109\") resulting in a $3,400,000 ($.04 per share) benefit.\nITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)\nOperations - (Continued)\n1993 Compared to 1992 - (Concluded)\nEarnings per share before extraordinary items and cumulative effect of change in accounting principle were $2.80 for 1993 compared to $2.48 for 1992, a 12.9% increase. Net earnings per share in 1993 were $2.73 and include an $.11 extraordinary charge related to the early retirement of debt and a $.04 benefit related to the cumulative effect of a change in accounting for income taxes. Included in earnings per share before extraordinary items and cumulative effect of change in accounting principle and net earnings per share in 1993 is the effect of a gain related to the Company's investment in Acme Boot of $.55 per share.\nManagement believes that the relatively moderate rate of inflation over the past few years has not had a significant impact on the Company's sales or profitability.\n1992 Compared to 1991\nNet sales increased 13.9% in 1992 from 1991 primarily due to higher unit shipments and price increases in both activewear and underwear. The sales growth was driven by aggressive marketing campaigns for underwear products, expanded distribution for activewear (particularly in casualwear and in Europe) and continued new product introductions in activewear.\nGross earnings increased 25.6% in 1992 compared to 1991. The gross margin was 35.6% in 1992 compared to 32.3% in 1991. Price increases (principally effected in the first quarter of 1992), manufacturing efficiencies (due to higher plant utilization), lower raw material costs and the continuing shift within the activewear line to higher margin products favorably impacted the gross earnings and gross margin in 1992.\nOperating earnings increased 28.4% compared to 1991 and the operating margin increased 2.5 percentage points to 22.1% in 1992. The increase is due to the higher gross earnings and gross margin and was slightly offset by higher selling, general and administrative expenses. Selling, general and administrative expenses increased to 12.1% of net sales in 1992 compared to 11.1% the prior year. The increase is primarily attributable to higher advertising costs and increased selling and shipping costs attributable to higher unit volume.\nInterest expense for 1992 decreased 28.5% from 1991. Lower interest expense is principally attributable to the effect of lower interest rates on the Company's variable rate debt instruments due to lower average prime and LIBOR interest rates in 1992 compared to 1991. Interest expense has also been reduced\nby lower debt levels in 1992 compared to 1991. Debt levels have been reduced from their 1991 levels as a result of the strong operating cash flows of the Company, the use of proceeds from the Stock Offering to repay a portion of the Company's bank debt and the Conversion.\nITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)\nOperations - (Concluded)\n1992 Compared to 1991 - (Concluded)\nThe effective income tax rate on earnings before extraordinary items and cumulative effect of change in accounting principle for 1992 and 1991 differed from the Federal statutory rate of 34% primarily due to the impact of goodwill amortization, which is not deductible for Federal income tax purposes, state income taxes and the provision for interest related to prior years' taxes. The tax rate in 1991 was also reduced by the effect of the Federal tax refund from prior years and was increased for the nondeductible portions of the special charges and writedowns discussed below.\nEarnings before extraordinary items and cumulative effect of change in accounting principle per share on both a primary and fully diluted basis were $2.48 for 1992 compared to $1.60 and $1.55, respectively, for 1991. The increased net earnings in 1992 were partially offset by the dilutive effect on earnings per share in 1992 of the greater average number of shares outstanding after the Stock Offering and, for primary earnings per share, the dilutive effect of the Conversion. See \"Statement of Common Stockholders' Equity\" in the Notes to Consolidated Financial Statements. Included in net earnings per share in 1991 are the effect of a court ordered refund of Federal income taxes (plus interest) of $.57 per share, special charges related to former subsidiaries of $.12 per share and a write down of the Company's investment in Acme Boot to its then market value, resulting in a charge to earnings of $.45 per share.\nLiquidity and Capital Resources\nFunds generated from the Company's operations are the major internal source of liquidity and are supplemented by funds derived from capital markets including its bank facilities. The Company has available for the funding of its operations an $800,000,000 revolving demand line of credit. As of March 10, 1994 approximately $299,700,000 was available and unused under this facility.\nDuring 1993, approximately $262,500,000 was spent on capital additions. Capital spending, primarily to enhance distribution capabilities, is anticipated to approximate $150,000,000 to $175,000,000 in 1994.\nIn December 1993, the Company completed the issuance of $150,000,000 of notes due 2003 and $150,000,000 of debentures due 2023 (collectively, the \"Offering\"). The net proceeds of the Offering of approximately $294,000,000 were used to repay amounts outstanding under the New Credit Agreement (hereinafter defined)\nand will be available for general corporate purposes, which may include acquisitions.\nIn November 1993 the Company completed the Salem Acquisition. The total funds required to acquire Salem, including the repayment of certain debt of Salem and the fees and expenses of the Salem Acquisition, totalled approximately $157,600,000. Such funds were provided from borrowings under the New Credit Agreement. The Company does not have any present agreements or understandings with regard to future acquisitions other than the Artex Acquisition completed in January 1994 and the contract to acquire certain assets of Gitano entered into in March 1994 which are described below.\nITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Concluded)\nLiquidity and Capital Resources - (Concluded)\nIn January 1994 the Company completed the Artex Acquisition. The total funds required to acquire Artex totalled approximately $44,500,000. Such funds were provided from borrowings under the New Credit Agreement.\nIn March 1994 the Company entered into a contract to purchase certain assets of Gitano for approximately $100,000,000. The total funds required to acquire Gitano will be provided from borrowings under the New Credit Agreement.\nManagement believes the funding available to it is sufficient to meet anticipated requirements for capital expenditures, working capital and other needs.\nThe Company's debt instruments, principally its bank agreements, contain covenants restricting its ability to sell assets, incur debt, pay dividends and make investments and requiring the Company to maintain certain financial ratios. See \"Long-Term Debt\" in the Notes to Consolidated Financial Statements.\nITEM 8.","section_7A":"","section_8":"ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA FRUIT OF THE LOOM, INC. AND SUBSIDIARIES\nReport of Ernst & Young, Independent Auditors . . . . . . 34\nConsolidated Balance Sheet - December 31, 1993 and 1992 . 35\nConsolidated Statement of Earnings for Each of the Years Ended December 31, 1993, 1992 and 1991 . . . . . . . . 37\nConsolidated Statement of Cash Flows for Each of the Years Ended December 31, 1993, 1992 and 1991 . . . . . 38\nNotes to Consolidated Financial Statements . . . . . . . . 40\nSupplementary Data (Unaudited) . . . . . . . . . . . . . . 80\nFinancial Statement Schedules:\nSchedule V - Property, Plant and Equipment . . . . . . 91\nSchedule VI - Accumulated Depreciation and Amortization of Property, Plant and Equipment . . . . 92\nSchedule VIII - Valuation and Qualifying Accounts . . . 93\nSchedule IX - Short-Term Borrowings . . . . . . . . . . 94\nSchedule X - Supplementary Income Statement Information . . . . . . . . . . . . . . . . . . . . . 95\nNote: All other schedules are omitted because they are not applicable or not required.\nREPORT OF ERNST & YOUNG, INDEPENDENT AUDITORS\nTo the Board of Directors of Fruit of the Loom, Inc.\nWe have audited the accompanying consolidated balance sheet of Fruit of the Loom, Inc. and Subsidiaries as of December 31, 1993 and 1992, and the related consolidated statements of earnings and cash flows for each of the three years in the period ended December 1993. Our audits also included the financial statement schedules listed in the Index at Item 14(a). These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.\nWe conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.\nIn our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Fruit of the Loom, Inc. and Subsidiaries 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. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as whole, present fairly in all material respects the information set forth therein.\nAs discussed in the Notes to Consolidated Financial Statements, the Company changed its method of accounting for income taxes in 1993. ERNST & YOUNG\nChicago, Illinois February 12, 1994\nFRUIT OF THE LOOM, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET\nSee accompanying notes.\nFRUIT OF THE LOOM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF EARNINGS\nSee accompanying notes.\nFRUIT OF THE LOOM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS\nSee accompanying notes.\nFRUIT OF THE LOOM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS\nSummary of Significant Accounting Policies\nPrinciples of Consolidation. The consolidated financial statements of the Company include the accounts of the Company and all of its subsidiaries. All material intercompany accounts and transactions have been eliminated.\nInventories. Inventory costs include material, labor and factory overhead. Inventories are stated at the lower of cost or market (net realizable value). Approximately 78.9% and 78.6% of year-end inventory amounts at December 31, 1993 and 1992, respectively, are determined using the last-in, first-out cost method. If the first-in, first-out method had been used, such inventories would have been $29,400,000 and $3,500,000 higher than reported at December 31, 1993 and 1992, respectively. The remainder of the inventories are determined using the first-in, first-out method.\nProperty, Plant and Equipment. Property, plant and equipment is stated at cost. Depreciation, which includes amortization of assets under capital leases, is based on the straight-line method over the estimated useful lives of depreciable assets. Interest costs incurred in the construction or acquisition of property, plant and equipment are capitalized.\nGoodwill. Goodwill is amortized using the straight-line method over periods ranging from 20 to 40 years.\nPre-operating Costs. Pre-operating costs associated with the start-up of significant new production facilities are deferred and amortized over three years.\nFutures Contracts. The Company periodically enters into futures contracts as hedges for its purchases of cotton for inventory. Gains and losses on these hedges are matched to inventory purchases and charged or credited to cost of sales as such inventory is sold.\nForward Contracts. The Company has entered into forward contracts to cover its principal and interest obligations on foreign currency denominated bank loans of certain of its foreign subsidiaries. The original discount on these contracts is amortized over the life of the contract and serves to reduce the effective interest cost of these loans. At December 31, 1993 and 1992, the Company had contracts maturing in 1994 and 1993, totaling $22,800,000 and $55,200,000, respectively. In addition, the Company had entered into forward contracts to cover the future obligations of certain foreign subsidiaries for certain inventory and fixed asset purchases. At December 31, 1992, the Company had contracts which matured in 1993 totaling approximately $10,000,000.\nThe fair value of the Company's foreign currency exchange forward contracts was estimated based on quoted market prices of comparable contracts. At December 31, 1993 and 1992, the fair value of the Company's forward contracts approximated their face value.\nFRUIT OF THE LOOM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)\nSummary of Significant Accounting Policies - (Concluded)\nDeferred Grants. Commencing in 1987 and during 1993 and 1992, the Company negotiated grants from the governments of the Republic of Ireland and of Northern Ireland. The grants are being used for employee training, the acquisition of property and equipment and other governmental business incentives such as general employment. Employee training grants are recognized in income in the year in which the costs to which they relate are incurred by the Company. Grants for the acquisition of property and equipment are netted against the related capital expenditure. Grants for property and equipment under operating leases are amortized to income as a reduction of rents paid. Unamortized amounts netted against fixed assets under these grants at December 31, 1993 and 1992, were $28,500,000 and $27,700,000, respectively. At December 31, 1993 and 1992, the Company has a contingent liability to repay, in whole or in part, grants received of approximately $43,500,000 and $42,100,000, respectively, in the event that the Company does not meet defined average employment levels or terminates operations in the Republic of Ireland or Northern Ireland.\nIncome Taxes. Effective January 1, 1993, the Company adopted Statement No. 109. Under Statement No. 109, the liability method is used in accounting for income taxes. Prior to the adoption of Statement No. 109 income tax expense was determined using the deferred method.\nPension Plans. The Company maintains pension plans which cover substantially all employees. The plans provide for benefits based on an employee's years of service and compensation. The Company funds the minimum contributions required by the Employee Retirement Income Security Act of 1974.\nAcquisition of Salem\nIn November 1993 the Company acquired Salem for approximately $157,600,000, including approximately $23,900,000 of Salem debt which was repaid by the Company. The Salem Acquisition has been accounted for using the purchase method of accounting. Accordingly, the purchase price was allocated preliminarily to assets and liabilities based on their estimated fair values as of the date of the Salem Acquisition. A final allocation of the purchase price will be made during 1994. The cost in excess of the net assets acquired was approximately $112,000,000 and is being amortized over 20 years. Salem's results of operations have been included in the Company's consolidated financial statements since November 1993. Salem's operations are not material in relation to the Company's consolidated financial statements and pro forma financial information has therefore not been presented.\nCash, Cash Equivalents and Restricted Cash\nThe Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Short-term investments (consisting primarily of certificates of deposit, overnight deposits or Eurodollar deposits) totaling $16,100,000 and $31,100,000 were included in cash and cash equivalents at December 31, 1993 and 1992, respectively. These investments were carried at cost, which approximated quoted market value.\nIncluded in short-term investments at December 31, 1993 and 1992 was $6,400,000 and $13,800,000, respectively, of restricted cash collateralizing domestic and certain foreign subsidiaries' letters of credit and bank loans of certain of the Company's foreign subsidiaries.\nFRUIT OF THE LOOM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)\nShort-Term Notes Payable\nIn August 1993, the Company entered into a new unsecured bank agreement (the \"New Credit Agreement\"). See \"Long-Term Debt.\" Certain indebtedness of the Company under preexisting secured domestic bank agreements was refinanced with the proceeds of loans under the New Credit Agreement and the preexisting bank agreements were terminated at that time. Prior to August 1993, the Company's domestic bank agreements consisted of revolving lines of credit, bank term loans (the\"Term Loan Facilities\"), a special purpose loan, a capital expenditure facility (the \"Capital Expenditure Facility\") and a letter of credit facility (collectively, the \"Credit Agreements\"). All borrowings under the Credit Agreements represented loans to the Company's principal operating subsidiary.\nUnder the Credit Agreements, the Company had $350,000,000 available for the funding of its operations under revolving lines of credit (the \"Revolving Credit Facilities\"). The Revolving Credit Facilities were scheduled to expire on June 30, 1995. At December 31, 1992, the Company had borrowed, under its Revolving Credit Facilities, approximately $163,600,000 of which $100,000,000 was classified as long-term debt as a result of the Company's refinancing of this debt on a long-term basis in February 1993. The carrying amounts of the Company's borrowings under the Revolving Credit Facilities approximated their fair value at December 31, 1992. Borrowings under the Revolving Credit Facilities bore interest at a rate approximating the prime rate (6% at December 31, 1992) or, at the election of the Company, at a rate approximating one percentage point over LIBOR (approximately 3.5% at December 31, 1992). The weighted average interest rate for borrowings outstanding at December 31, 1992 was approximately 5%. Borrowings under the Revolving Credit Facilities were due on demand and were collateralized under the terms of the Credit Agreements. The Credit Agreements were refinanced during 1993.\nFRUIT OF THE LOOM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)\nLong-Term Debt (In thousands of dollars)\nFRUIT OF THE LOOM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)\nLong-Term Debt - (Continued)\nThe New Credit Agreement provides the Company with an $800,000,000 revolving line of credit which expires in August 1996 and includes a letter of credit facility. At December 31, 1993 approximately $59,800,000 of letters of credit were issued under the New Credit Agreement to secure certain insurance and debt obligations reflected in the accompanying Consolidated Balance Sheet. Borrowings under the New Credit Agreement bear interest at a rate approximating the prime rate (6% at December 31, 1993) or, at the election of the Company, at rates approximating LIBOR (3.25% at December 31, 1993) plus 30 basis points. The Company also pays a facility fee (the \"Facility Fee\") under the New Credit Agreement equal to 20 basis points on the aggregate commitments thereunder. Interest rates and the Facility Fee are subject to increase or decrease based upon the Company's unsecured debt rating. The weighted average interest rate for borrowings outstanding under the New Credit Agreement at December 31, 1993 was approximately 4.3%. Borrowings under the New Credit Agreement are guaranteed by certain of the Company's subsidiaries.\nIn August 1993, the Company's wholly-owned subsidiary, Fruit of the Loom Canada, Inc. issued an unsecured senior note due 2008 (the \"Canadian Note\") in a private placement transaction with certain insurance companies. The Canadian Note is fully guaranteed by the Company and its principal operating subsidiaries and ranks pari passu in right of payment with the New Credit Agreement.\nIn 1993, the Company redeemed its 12-3\/8% Notes. The Company recorded an extraordinary charge in 1993 of approximately $8,700,000 ($.11 per share) relating to the early extinguishment of debt, primarily in connection with the refinancing of the Credit Agreements and the redemption of the 12-3\/8% Notes. The extraordinary charge consists principally of the non-cash write- off of the related unamortized debt expense on the Credit Agreements, the 12-3\/8% Notes and other debt issues and the premiums paid in connection with the early redemption of the 12- 3\/8% Notes, both net of income tax benefits.\nIn 1993, the Company issued $150,000,000 principal amount of its 6-1\/2% Notes due 2003 (the \"6-1\/2% Notes\") and $150,000,000 principal amount of its 7-3\/8% Debentures due 2023 (the \"7-3\/8% Debentures\"). The 6-1\/2% Notes and the 7-3\/8% Debentures will mature November 15, 2003 and November 15, 2023, respectively, and may not be redeemed by the Company prior to maturity. The 6-1\/2% Notes and the 7-3\/8% Debentures are general, unsecured obligations of the Company. However, the obligations of the Company under the New Credit Agreement and the Canadian Note are guaranteed by certain of the Company's subsidiaries and such debt\neffectively ranks ahead of the 6-1\/2% Notes and the 7-3\/8% Debentures with respect to such guarantees.\nIn addition to refinancing its Revolving Credit Facilities under the New Credit Agreement, the Company also refinanced its Term Loan Facilities and its Capital Expenditure Facility. Under the terms of the Credit Agreements, the Company had a term loan which required quarterly principal payments with final maturity at June 30, 1995. The Company also had an additional $100,000,000 term loan which had a final maturity of June 30, 1995. Borrowings under the Term Loan Facilities were collateralized under the terms of the Credit Agreements on a pari passu basis with borrowings under the Revolving Credit Facilities. All borrowings under the Term Loan Facilities were repaid through borrowings under the New Credit Agreement in 1993.\nFRUIT OF THE LOOM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)\nLong-Term Debt - (Continued)\nUnder the Credit Agreements, the Company originally had a Capital Expenditure Facility of up to $75,000,000 to be drawn down at various times prior to March 31, 1991, if necessary, to finance capital expenditures. At December 31, 1992, $44,100,000 was outstanding under the Capital Expenditure Facility and no additional borrowings were available under this facility. The Capital Expenditure Facility required quarterly principal payments which commenced in June 1991 with final maturity scheduled on June 30, 1995. All borrowings under the Capital Expenditure Facility were repaid through borrowings under the New Credit Agreement in 1993.\nUnder the Credit Agreements, the Company had a letter of credit facility of $75,000,000. At December 31, 1992 approximately $71,300,000 of letters of credit were issued under this facility to secure certain insurance and debt obligations reflected in the accompanying Consolidated Balance Sheet. These letters of credit were refinanced through the New Credit Agreement in 1993.\nDuring 1993, the Company entered into a new facility loan (the \"New Term Loan\") which replaced a previous loan (the \"Old Domestic Facility Loan\"), the borrowings under which were secured by one of the Company's domestic facilities. At December 31, 1993 $40,000,000 was outstanding under the New Term Loan and no additional borrowings were available under this facility. The New Term Loan matures in December 1998 and is unsecured. The New Term Loan bears interest at a rate approximating one-eighth of a percentage point over the prime rate or, at the election of the Company, at a rate approximating seven-eighths of a percentage point over LIBOR. Interest rates are subject to increase or decrease based upon the Company's unsecured debt rating. The weighted average interest rate for borrowings outstanding under the New Term Loan at December 31, 1993 was approximately 4.1%.\nAt December 31, 1992, $41,900,000 was outstanding under the Old Domestic Facility Loan and no additional borrowings were available under this facility. The Old Domestic Facility Loan required semi-annual principal payments with final maturity at July 15, 1998. The Old Domestic Facility Loan bore interest at a rate approximating two and one-half percentage points over the rate on certain United States Treasury securities or 1.3 percentage points over LIBOR at the election of the Company.\nThe Company has an agreement with an institutional lender to provide funding to certain of the Company's foreign subsidiaries (the \"Foreign Facility Loans\"). At December 31, 1993 and 1992, $22,100,000 and $53,600,000, respectively, was outstanding under this agreement. The Foreign Facility Loans require semi-annual principal payments which commenced in 1992. In 1993, the Foreign\nFacility Loans bore interest at effective rates ranging from approximately .5% to 9.2%. The Foreign Facility Loans are secured by letters of credit issued under the New Credit Agreement, restricted cash balances and inventory, receivables and fixed assets of certain foreign subsidiaries.\nFRUIT OF THE LOOM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)\nLong-Term Debt - (Concluded)\nIn 1992, the Company issued $250,000,000 principal amount of its 7-7\/8% Senior Notes Due 1999 (the \"7-7\/8% Notes\"). The 7- 7\/8% Notes will mature on October 15, 1999 and may not be redeemed by the Company prior to maturity. The 7-7\/8% Notes are general, unsecured obligations of the Company and rank pari passu in right of payment with all existing and future senior obligations of the Company. However, the obligations of the Company under the New Credit Agreement and the Canadian Note are guaranteed by certain of the Company's subsidiaries and such debt effectively ranks ahead of the 7-7\/8% Notes with respect to such guarantees.\nIn 1992, the Company redeemed all of its 10-3\/4% Notes. The redemption was funded through borrowings under the Credit Agreements and the proceeds from the issuance of the 7-7\/8% Notes. The Company recorded an extraordinary charge of approximately $9,900,000 ($.13 per share) in connection with the redemption of the 10-3\/4% Notes, which consisted principally of the premiums paid in connection with the early redemption of the 10-3\/4% Notes and the non-cash write-off of the related unamortized debt expense, both net of income tax benefits.\nThe New Credit Agreement imposes certain limitations on, and requires compliance with covenants from, the Company and its subsidiaries including, among other things: (i) maintenance of certain financial ratios and compliance with certain financial tests and limitations; (ii) limitations on incurrence of additional indebtedness and granting of certain liens and guarantees; and (iii) restrictions on mergers, sale and leaseback transactions, asset sales and investments. The New Credit Agreement also allows the Company to pay dividends on its common stock so long as, among other things, the aggregate amount of such dividends paid since August 16, 1993 does not exceed the sum of $75,000,000 and fifty percent of the Company's consolidated net earnings since June 30, 1993.\nThe New Credit Agreement provides for the acceleration of amounts outstanding thereunder should any person or entity other than William Farley, or any person or entity controlled by William Farley, control more than 50% of the voting stock or voting rights associated with such stock of the Company.\nThe aggregate amount of scheduled annual maturities of long-term debt for each of the next five years is: $34,000,000 in 1994; $22,600,000 in 1995; $343,900,000 in 1996; $22,500,000 in 1997; and $50,300,000 in 1998.\nCash payments of interest on debt were $67,100,000, $89,700,000 and $124,100,000 in 1993, 1992 and 1991, respectively. These amounts exclude amounts capitalized.\nThe fair values of the Company's non-publicly traded long- term debt were estimated using discounted cash flow analyses, based on the Company's current incremental borrowing rates for similar types of borrowing arrangements. Fair values for publicly traded long-term debt were based on quoted market prices. At December 31, 1993 and 1992, the fair value of the Company's long-term debt was approximately $1,305,800,000 and $928,700,000, respectively.\nFRUIT OF THE LOOM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)\nContingent Liabilities\nThe Company and its subsidiaries are involved in certain legal proceedings and have retained liabilities, including certain environmental liabilities, such as those under Superfund Legislation, in connection with the sale of certain discontinued operations, some of which were significant generators of hazardous waste. The Company's retained liability reserves at December 31, 1993 related to discontinued operations, consisting primarily of certain environmental reserves of approximately $46,200,000, reflect management's belief that the Company will recover at least $28,600,000 from insurance and other sources. Management and outside environmental consultants evaluate, on a site-by-site basis, the extent of environmental damage, the type of remediation that will be required and the Company's proportionate share of those costs. The Company's retained liability reserves related to discontinued operations principally pertain to ten specifically identified environmental sites. Four sites individually represent more than 10% of the net reserve and in the aggregate represent approximately 67% of the net reserve. Management believes they have adequately estimated the impact of remediating identified sites, the expected contribution from other potentially responsible parties and recurring costs for managing sites. Management currently estimates actual payments before recoveries to range from approximately $8,500,000 to $17,700,000 annually between 1994 and 1997 and $22,000,000 in total subsequent to 1997. Only the long-term monitoring costs of approximately $7,500,000, primarily scheduled to be paid in 1998 and beyond, have been discounted. The discount rate used was 10%. The undiscounted aggregate long-term monitoring costs, to be paid over approximately the next 20 years, is approximately $19,500,000. Management believes that adequate reserves have been established to cover potential claims based on facts currently available and current Superfund Legislation. The Company has provided the foregoing information in accordance with the recently issued Staff Accounting Bulletin 92.\nGenerators of hazardous wastes which were disposed of at offsite locations which are now superfund sites are subject to claims brought by state and Federal regulatory agencies under Superfund Legislation and by private citizens under Superfund Legislation and common law theories. Since 1982, the EPA has actively sought compensation for response costs and remedial action at offsite disposal locations from waste generators under the Superfund Legislation, which authorizes such action by the EPA regardless of fault, legality of original disposal or ownership of a disposal site. The EPA's activities under the Superfund Legislation can be expected to continue during 1994 and future years.\nIn August 1991, two creditors of a former subsidiary, Lone Star (a wholly owned subsidiary of Lone Star Technologies, Inc.,\na publicly owned company) brought suit against the Company in the Superior Court of the State of Delaware. In this suit, the creditors sought damages of approximately $13,100,000, plus interest, against the Company for what they alleged was the remaining liability under certain leases. In January 1993, the superior Court of Delaware issued an Opinion and Order finding that the leases were in default, but made no findings as to the amount of damages. The Company appealed the ruling and on June 4, 1993 the Supreme Court of Delaware entered an order affirming the Opinion and Order of the Superior Court of Delaware issued in January 1993. In December 1993, the Company paid the lessors approximately $9,500,000 in settlement of this suit.\nFRUIT OF THE LOOM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)\nContingent Liabilities - (Continued)\nIn February 1986, the Company completed the sale of stock of its then wholly owned subsidiary, Universal, to MagneTek. At the time of the sale there was a suit pending against Universal and Northwest by LMP. The suit alleged that Universal and Northwest fraudulently induced LMP to sell its business to Universal and then suppressed the development of certain electronic lighting ballasts in breach of the agreement of sale, which required Universal to pay to LMP a percentage of the net profits from such business from 1982 through 1986. Two additional plaintiffs, Stevens Luminoptics Partnership and Calmont Technologies Inc., joined the litigation in 1986. In December 1989 and January 1990, a jury returned certain verdicts against Universal and also returned verdicts in favor of Northwest and on certain issues in favor of Universal. A judgment totalling $25,800,000, of which $7,500,000 represented punitive damages, reflecting these verdicts was entered by the Alameda County, California Superior Court in January 1990 against Universal.\nIn April 1992, the California Court of Appeals reversed the $25,800,000 judgment against Universal and affirmed those verdicts favorable to Universal and Northwest. In July 1992, the California Supreme Court denied the plaintiffs' petition for review. The case has been remanded to the trial court where it is scheduled to be retried beginning in March 1994.\nPursuant to the stock purchase agreement (the \"Stock Purchase Agreement\") under which Universal was sold, the Company agreed to indemnify MagneTek for a two-year period following the sale of Universal for certain contingent liabilities. MagneTek brought suit against the Company for declaratory and other relief in connection with the indemnification under the Stock Purchase Agreement. In April 1992, the Los Angeles County, California Superior Court found that the Company was obligated by the Stock Purchase Agreement to indemnify MagneTek for any liability that may be assessed against MagneTek or Universal in the LMP Litigation and to reimburse MagneTek for, among other things, its costs and expenses in defending that case. The court entered a judgment requiring the Company to reimburse and indemnify MagneTek in two stages: currently, to reimburse MagneTek for costs of defense and related expenses in the LMP Litigation, plus costs of litigating the indemnity case with the Company; and at a later date, if and when any liability in the LMP Litigation is finally determined or a settlement is reached in that case, to reimburse and\/or indemnify MagneTek for that amount as well. In 1993 the Company paid approximately $9,600,000 in settlement of its obligations to MagneTek related to the litigation expenses incurred by MagneTek.\nIn March 1988, a class action suit entitled Endo et al. v. Albertine, et al. was filed in the District Court against the\nCompany, its then directors, certain of its then executive officers, its then underwriters and the Company's current and former independent auditors in connection with the Company's initial public offering of Class A Common Stock and certain debt securities in March 1987. The suit alleges, among other things, violations of Federal and state securities laws against all of the defendants, as well as breaches of fiduciary duties by the director and officer defendants, and seeks unspecified damages.\nFRUIT OF THE LOOM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)\nContingent Liabilities - (Concluded)\nMotions to dismiss the complaint were filed by all defendants. In December 1990, a magistrate judge recommended that the District Court dismiss all of the plaintiffs' claims with prejudice. In January 1993, the District Court adopted in part and rejected in part the magistrate judge's recommendation for dismissal of the complaint. As a result, the litigation will continue as to various remaining counts of the complaint. Both the defendants and the plaintiffs recently filed motions for summary judgment. It is uncertain as to when rulings on these motions will be issued. Management and the Board of Directors believe that this suit is without merit and intend to continue to defend themselves vigorously in this litigation.\nOn December 23, 1993, James J. Locke, as Trustee of Locke Family Trust, and I. Jack Saline filed a lawsuit against the Company and certain of its then officers and directors, including William Farley and John B. Holland in the District Court. The lawsuit was then amended to add additional plaintiffs. The lawsuit was filed as a class action, but the issue of class certification has not yet been addressed by the parties or the court. The plaintiffs claim that all of the defendants engaged in conduct violating Section 10b of the Securities Exchange Act of 1934 and that Mr. Farley and Mr. Holland also violated Section 20a of the Act. According to the plaintiffs, beginning before June 1992 and continuing through early June 1993, the Company, with the knowledge and assistance of the individual defendants, issued positive public statements about its expected sales increases and growth through 1993 and afterwards. They also allege that beginning in approximately mid-1992 and continuing afterwards, the Company's business was not as strong and its growth prospects were not as certain as represented. The plaintiffs further allege that during the end of 1992 and beginning of 1993, certain of the individual defendants traded the stock of the Company while in the possession of material, non-public information. The plaintiffs ask for unspecified amounts as compensatory damages, pre-judgment and post-judgment interest, attorneys' fees, expert witness fees and costs and ask the District Court to impose a constructive trust on the proceeds of the individual defendants' trades to satisfy any potential judgment. Although the lawsuit is at a preliminary stage, the Company believes that this suit is without merit and intends to defend itself vigorously in this litigation.\nManagement believes, based on information currently available, that the ultimate resolution of the aforementioned litigation will not have a material adverse effect on the financial condition or operations of the Company.\nIn 1992, the Company was named in a suit seeking to enforce the terms of a former subsidiary's lease on which the Company was\ncontingently obligated. The Company paid approximately $17,500,000 in 1992 in settlement of the suit and its contingent obligations under the lease.\nIn connection with the Company's transaction with Acme Boot during 1993, the Company guaranteed, on an unsecured basis, the repayment of debt incurred or created by Acme Boot under Acme Boot's bank credit facility. See \"Related Party Transactions.\" At December 31, 1993 Acme Boot's bank credit facility provides for up to $30,000,000 of loans and letters of credit subject to a borrowing base. Acme Boot's bank credit facility is secured by first liens on substantially all of the assets of Acme Boot and its subsidiaries (which are approximately $80,000,000 at December 31, 1993). At December 31, 1993 approximately $9,000,000 in loans and letters of credit were outstanding under Acme Boot's bank credit facility.\nFRUIT OF THE LOOM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)\nLease Commitments\nThe Company and its subsidiaries lease certain manufacturing, warehousing and other facilities and equipment. The leases generally provide for the lessee to pay taxes, maintenance, insurance and certain other operating costs of the leased property. The leases on most of the properties contain renewal provisions.\nFollowing is a summary of future minimum payments under capitalized leases and under operating leases that have initial or remaining noncancelable lease terms in excess of one year at December 31, 1993 (in thousands of dollars):\nAssets recorded under capital leases are included in Property, Plant and Equipment as follows (in thousands of dollars):\nRental expense for operating leases amounted to $11,600,000, $9,100,000 and $8,200,000 in 1993, 1992 and 1991, respectively.\nFRUIT OF THE LOOM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)\nStock Plans\nAt December 31, 1993 and 1992, approximately 1,546,600 and 1,653,000 shares, respectively, of Class A Common Stock were reserved for issuance under the Company's 1987 Stock Option Plan (the \"Plan\"). Under the terms of the Plan, options may be granted to eligible employees of the Company, its parent and its subsidiaries at a price not less than the market price on the date of grant. Option shares must be exercised within the period prescribed by the Compensation Committee of the Board of Directors at the time of grant but not later than ten years and one day from the date of grant. The Plan provides for the granting of qualified and nonqualified stock options.\nThe following summarizes the activity of the Plan for 1993:\nIn 1993, the Company's stockholders approved the Company's Directors' Stock Option Plan (the \"Directors' Plan\"). The Directors' Plan provides for the issuance of options to purchase up to 175,000 shares of Class A Common Stock, which shares are reserved and available for purchase upon the exercise of options granted under the Directors' Plan. Only directors who are not employees of the Company, any parent or subsidiary of the Company or Farley Industries, Inc. (\"FII\") are eligible to participate in the Directors' Plan. The Directors' Plan is administered by the Company's Board of Directors. Under the Directors' Plan each non-employee director is initially granted an option to purchase 7,500 shares of Class A Common Stock (the \"Initial Options\"). On the date of each annual meeting at which such person is elected or after which the person continues as a non-employee director, such non-employee director shall be granted an option to purchase 2,500 shares of Class A Common Stock (the \"Annual Options\"). The options are exercisable at a price per share equal to the fair market value per share of the Class A Common Stock on the date of grant. Option shares must be exercised not later than ten years from the date of grant and do not become exercisable until the first anniversary of the date of grant.\nThe following summarizes the activity of the Directors' Plan for 1993:\nFRUIT OF THE LOOM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)\nStock Plans - (Concluded)\nIn 1992, the Company established the 1992 Executive Stock Option Plan (the \"1992 Plan\"). The 1992 Plan provides for the issuance of options to purchase up to 975,000 shares of Class A Common Stock, which shares are reserved and available for purchase upon the exercise of stock options granted under the 1992 Plan. The 1992 Plan is administered by the Compensation Committee of the Board of Directors. In 1992, options to purchase 975,000 shares of Class A Common Stock were granted under the 1992 Plan to two directors of the Company who are also employees of the Company. The options are exercisable at a price of $28.88 per share (which was the closing price of the Class A Common Stock on the date of grant). Pursuant to the terms of the grants, options for the shares vest (subject to acceleration under certain circumstances) as follows: (i) one-third of the options granted vest immediately upon grant; (ii) one-third of the options granted vest if the closing price of the Class A Common Stock reaches or exceeds $45 per share for 90 consecutive days within six years from the date of grant; and (iii) the remaining one-third of the options granted vest if the closing price of the Class A Common Stock reaches or exceeds $60 per share for 90 consecutive days within six years from the date of grant. All vested options expire 10 years and one day after the date of grant. Options which do not vest because the Company's stock price has not reached the targeted price levels for vesting expire six years after the date of grant. As of December 31, 1993, 325,000 of these options are exercisable and none of these options have been exercised or canceled.\nIn July 1991, the Company granted an option to purchase 50,000 shares of the Class A Common Stock to a director of the Company who is also an employee of FII at a purchase price of $10.25 per share. The exercise period of the option terminates ten years and one day from the date of grant. At the date of grant the market price of the Class A Common Stock was $15 and, accordingly, the Company recorded a charge to earnings of approximately $200,000 in 1991. As of December 31, 1993, none of these options have been exercised or canceled.\nAt December 31, 1993 and 1992, approximately 268,000 and 280,000 shares, respectively, of Class A Common Stock were reserved for issuance under the Company's 1989 Stock Grant Plan. Under the terms of this plan, eligible employees of the Company, its parent and its subsidiaries are awarded shares, subject to forfeitures or certain restrictions which generally expire three years from the date of the grant. Shares are awarded in the name of the employee, who has all the rights of a shareholder, subject to the above mentioned restrictions. The Company canceled 3,900 previously issued shares during 1993. The Company granted approximately 15,900 shares to eligible employees during 1993.\nAt December 31, 1993 and 1992, approximately 344,900 and 396,700 shares, respectively, of Class A Common Stock were reserved for issuance under the Company's 1987 Long-Term Bonus Plan. Under the terms of this plan, eligible employees of the Company's operating subsidiary participate in cash and stock bonus pools for four year plan periods. Awards under this plan are payable in a combination of cash and stock. No new four year plan period began subsequent to December 31, 1990. The Company issued approximately 51,800 shares to eligible employees during 1993.\nFRUIT OF THE LOOM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)\nConsolidated Statement of Common Stockholders' Equity\nHolders of Class A Common Stock are entitled to receive, on a cumulative basis, the first dollar per share of dividends declared. Thereafter, holders of Class A Common Stock and Class B Common Stock will share ratably in any dividends declared. Each share of Class A Common Stock is entitled to one vote and each share of Class B Common Stock is entitled to five votes. The Class B Common Stock is convertible into the Class A Common Stock on a share for share basis.\nIn May 1991, the Company completed the Stock Offering. The proceeds were used by the Company to prepay its $38,000,000 special purpose term loan, which was obtained in March 1991, and to prepay $63,500,000 of its Term Loan Facilities. FI and William Farley combined also sold 5,250,000 shares in the Stock Offering.\nIn July 1991, the Company called for redemption all of its Debentures due March 1, 2002 totaling $59,900,000. All of the Debentures were converted into Class A Common Stock of the Company at a conversion price of $11.25 per share. Approximately 5,325,000 shares were issued in the Conversion.\nFRUIT OF THE LOOM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)\nConsolidated Statement of Common Stockholders' Equity - (Concluded)\nAs a result of the Stock Offering, other issuances of Class A Common Stock (primarily through the Conversion) during 1991 and the disposition of certain shares by FI during 1991, 1992 and 1993, approximately 9.3% of the Company's common stock at December 31, 1993 is held by FI and William Farley. Because these affiliates hold all of the Class B Common Stock of the Company outstanding, which has five votes per share, they control approximately 33% of all voting rights of the Company. All actions submitted to a vote of stockholders are voted on by holders of Class A Common Stock and Class B Common Stock voting together as a single class, except for the election of directors. With respect to the election of directors, holders of the Class A Common Stock vote as a separate class and are entitled to elect 25% of the total number of directors constituting the entire Board of Directors and, if not a whole number, then the holders of the Class A Common Stock are entitled to elect the nearest higher whole number of directors that is at least 25% of the total number of directors. If, at the record date for any stockholder meeting at which directors are elected, the number of shares of Class B Common Stock outstanding is less than 12.5% of the total number of shares of both classes of common stock outstanding, then the holders of Class A Common Stock would vote together with the holders of Class B Common Stock to elect the remaining directors to be elected at such meeting, with the holders of Class A Common Stock having one vote per share and the holders of Class B Common Stock having five votes per share. At December 31, 1993, FI and William Farley's combined ownership of Class B Common Stock is approximately 8.8% of the total common stock of the Company outstanding. As a result, Mr. Farley does not have the sole ability to elect those members of the Company's Board of Directors who are not separately elected by the holders of the Company's Class A Common Stock.\nBusiness Segment and Major Customer Information\nThe Company operates in only one business segment consisting of the manufacturing and marketing of basic apparel. Sales to one customer amounted to approximately 13.4%, 11.8% and 9.6% of consolidated net sales in 1993, 1992 and 1991, respectively. Additionally, sales to a second customer amounted to approximately 12.3%, 10.2% and 8.8% of consolidated net sales in 1993, 1992 and 1991, respectively.\nSales, operating earnings and identifiable assets are as follows (in thousands of dollars):\nFRUIT OF THE LOOM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)\nBusiness Segment and Major Customer Information - (Concluded)\nCorporate assets presented above consist primarily of cash and other short-term investments, deferred financing costs, the investment in Acme Boot in 1992 and 1991 and, in 1991, income taxes and interest receivable.\nPension Plans\nPension expense was $5,500,000, $4,900,000 and $3,000,000 in 1993, 1992 and 1991, respectively. The net pension expense is comprised of the following (in thousands of dollars):\nThe following table sets forth the funded status of the plans and amounts recognized in the Company's Consolidated Balance Sheet (in thousands of dollars):\nFRUIT OF THE LOOM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)\nPension Plans - (Concluded)\nThe discount rate for purposes of determining the funded status of the plans at December 31, 1993 and 1992 was 7.75% and 9%, respectively.\nPlan assets, which are primarily invested in United States Government and corporate debt securities, equity securities, real estate and fixed income insurance contracts, are commingled in a master trust which includes the assets of the pension plans of substantially all affiliated companies controlled directly and indirectly by William Farley (the \"Master Trust\"). Plan assets, except those that are specifically identified to a particular plan, are shared by all of the plans in the Master Trust (\"Allocated Assets\"). Any gains and losses associated with the Allocated Assets are spread among each of the plans based on each plan's respective share of the total Allocated Assets' market value. The Company's plan assets represent approximately 51.8% and 32.7% of the Master Trust Allocated Assets at December 31, 1993 and 1992, respectively.\nIncluded in the Master Trust Allocated Assets at December 31, 1993 and 1992 were 647,852 and 1,007,860 shares,respectively, (with a cost of $5,100,000 and $7,900,000, respectively, and a market value of $15,600,000 and $49,000,000, respectively) of the Company's Class A Common Stock. Also included in the Master Trust Allocated Assets at December 31, 1991 was $7,000,000 principal amount (with a market value of $400,000) of West Point Acquisition Corp. 18.75% Subordinated Increasing Rate Notes due April 6, 1996. West Point Acquisition Corp. was formerly a majority owned subsidiary of FI. Such debentures were sold by the Master Trust in 1992 for approximately $1,600,000.\nAs of December 31, 1993 and 1992, the Master Trust holds 348,000 shares (with a cost of $7,700,000 and a market value of $8,400,000 and $16,900,000, respectively) of the Company's Class A Common Stock that is specifically identified to the retirement plans of FI. Any change in market value associated with these shares is allocated entirely to the FI plans and does not effect the Master Trust Allocated Assets.\nDepreciation Expense\nDepreciation expense, including amortization of capital leases, approximated $84,300,000, $67,800,000 and $58,900,000 in 1993, 1992 and 1991, respectively.\nFRUIT OF THE LOOM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)\nIncome Taxes\nIncome taxes are included in the Consolidated Statement of Earnings as follows (in thousands of dollars):\nIncluded in earnings before extraordinary items and cumulative effect of change in accounting principle are foreign earnings of $17,000,000, $34,600,000 and $16,600,000, in 1993, 1992 and 1991, respectively.\nThe components of income tax expense (benefit) related to earnings before extraordinary items and cumulative effect of change in accounting principle were as follows (in thousands of dollars):\nFRUIT OF THE LOOM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)\nIncome Taxes - (Continued)\nDeferred income taxes related to earnings before extraordinary items and cumulative effect of change in accounting principle were as follows (in thousands of dollars):\nThe income tax rate on earnings before extraordinary items and cumulative effect of change in accounting principle differed from the Federal statutory rate as follows:\nDeferred income taxes are provided for temporary differences between income tax and financial statement recognition of revenues and expenses. Deferred tax liabilities (assets) are comprised of the following (in thousands of dollars):\nFRUIT OF THE LOOM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)\nIncome Taxes - (Concluded)\nEffective January 1, 1993, the Company recorded the cumulative effect of a change in accounting principle related to the initial adoption of Statement No. 109 resulting in a $3,400,000 ($.04 per share) benefit.\nThe Company paid the IRS approximately $28,300,000 in 1993 in settlement of Federal income tax assessments for the tax periods ended December 31, 1984 and July 31, 1985 (the final predecessor tax periods). This amount included approximately $14,800,000 of accrued interest. The Company had previously established reserves for these matters and these payments did not have an impact on the current year's tax provision.\nThe IRS previously asserted income tax deficiencies, excluding statutory interest which accrues from the date the tax was due until payment, for the Company of approximately $93,000,000 for the years 1978-1980 and $15,400,000 for the years 1981-1983. The Company had protested the IRS's asserted tax deficiencies for these six years with respect to a number of issues and also had raised certain affirmative tax issues that bear on these years. Settlement agreements with respect to all the 1978-1980 and 1981-1983 protested and affirmative issues resulted in the Company receiving a refund of approximately $5,900,000, including interest, in January 1993.\nIn an unrelated matter, the IRS declined to seek United States Supreme Court review of a decision by the United States Court of Appeals for the Third Circuit which reversed a lower court ruling and directed the lower court to order a refund to the Company of approximately $10,500,000 in Federal income taxes collected from a predecessor of the Company, plus approximately $49,400,000 in interest. The Company received the full refund of approximately $60,000,000 in March 1992. However, in September 1992 the IRS issued a statutory notice of deficiency in the amount of approximately $7,300,000 for the taxable years from which the March 1992 refund arose, exclusive of interest which would accrue from the date the IRS asserted the tax was due until payment, presently a period of about 24 years. Based on discussions with tax counsel, the Company believes that the asserted legal basis for the IRS's position in this matter is without merit and that the ultimate resolution will not have a material effect on the financial condition or the operations of the Company.\nCash payments for income taxes were $137,500,000, $131,600,000 and $80,200,000 in 1993, 1992 and 1991, respectively.\nOther Expense-Net\nIncluded in other expense-net in 1993, 1992 and 1991 is deferred debt fee amortization and bank fees of approximately $7,900,000, $10,100,000 and $9,000,000, respectively. Other expense-net in 1991 includes interest income of $49,400,000 on a court-ordered refund of Federal income taxes. See \"Income Taxes.\" Other expense-net in 1991 also includes charges of $10,200,000 to provide for certain obligations and other matters related to former subsidiaries and $39,200,000 to write down the Company's investment in Acme Boot to its then market value. See \"Related Party Transactions.\"\nFRUIT OF THE LOOM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)\nEarnings Per Share\nPrimary earnings per share are based on the weighted average number of common shares and equivalents outstanding during the year. Fully diluted earnings per share, for those periods prior to the Conversion, further assumed the conversion of the Debentures into Class A Common Stock and an increase in earnings to eliminate the after tax equivalent of interest expense on the Debentures.\nRelated Party Transactions\nUnder the terms of a management agreement between FII and the Company, FII provides the Company, to the extent that the Company may request, (i) general management services which include, but are not limited to, financial management, legal, tax, accounting, corporate development, human resource and personnel advice; (ii) investment banking services in connection with the acquisition or disposition of the assets or operations of a business or entity; (iii) financing services in connection with the arrangement by FII of public or private debt (including letter of credit facilities); and (iv) other financial, accounting, legal and advisory services rendered outside the ordinary course of the Company's business. FII is owned and controlled by Mr. Farley; its approximately 60 employees provide services to companies owned or controlled by Mr. Farley, including the Company. Certain of the executive officers of the Company, including Mr. Farley for periods prior to December 31, 1991, are employed by, and receive their compensation from, FII. These officers devote their time as needed to those companies owned and controlled by Mr. Farley and, accordingly, do not devote full time to any single company, including the Company.\nIn consideration for investment banking and financing services, the Company pays FII fees established by FII and determined to be reasonable by FII in relation to (i) the size and complexity of the transaction; and (ii) the fees customarily charged by other advisors for similar investment banking and financing services; provided, such fees shall not exceed two percent of the total consideration paid or received by the Company or two percent of the aggregate amount available for borrowing or use under the subject agreement or facility. Fees for investment banking and financing services are generally payable to FII upon the closing of the subject transaction or agreement.\nEffective January 1993, the Company entered into a new management agreement (the \"Management Agreement\") with FII pursuant to which FII agreed to render substantially similar services to the Company as under the prior management agreements. Under the terms of a management agreement, the Company pays a fee\nto FII based on FII's cost of providing management services. The Company also paid a financing fee to FII during 1992 under the terms of a management agreement. The Company paid FII $9,900,000 in 1993 and $9,300,000 in 1992, of which approximately none and $2,300,000 was capitalized as deferred financing costs in 1993 and 1992, respectively. It is anticipated that the Company will enter into a management agreement for 1994 under substantially the same terms and conditions as the Management Agreement.\nFRUIT OF THE LOOM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Concluded)\nRelated Party Transactions - (Concluded)\nConcurrently with entering into the management agreement with FII in 1992, the Company's Board of Directors determined to employ Mr. Farley directly as Chairman and Chief Executive Officer of the Company. Mr. Farley did not receive compensation in 1993 or 1992 from FII for his services as Chairman and Chief Executive Officer of the Company.\nIn consideration for general management services rendered prior to 1992, the Company paid FII an annual fee, subject to certain limitations imposed by the Company's Board of Directors, based on a percentage of net sales, which fees were limited to $10,000,000 in 1991. For the year ended December 31, 1991 the Company paid management service fees to FII of approximately $10,000,000. No financing fees were charged to the Company by FII in 1991.\nThe Company completed the sale of the stock of Acme Boot at book value, which approximated fair market value, to an affiliate in June 1987 for an aggregate of $38,400,000 of cash and preferred stock and subordinated debentures of the affiliate. The Company recognized no earnings in 1992 or 1991 related to its investment in the securities of the affiliate because of the inability of the affiliate to make payments under the terms of the securities. In the fourth quarter of 1991, the Company recognized a pretax charge of $39,200,000 in other expense-net to write down its investment in Acme Boot to its then market value. In the fourth quarter of 1993, the Company received approximately $72,900,000 from Acme Boot representing the entire unpaid principal and liquidation preference (including accrued interest and dividends) on its investment in the securities of the affiliate. The Company recorded a pretax gain of approximately $67,300,000 in connection with the investment in Acme Boot upon the receipt of the above mentioned proceeds. See \"Contingent Liabilities.\"\nFRUIT OF THE LOOM, INC. AND SUBSIDIARIES SUPPLEMENTARY DATA\nQuarterly Financial Summary (Unaudited) (In millions of dollars, except per share amounts)\nITEM 9.","section_9":"ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE\nNone.\nPART III\nITEM 10.","section_9A":"","section_9B":"","section_10":"ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT\nThe executive officers of the Company as of December 31, 1993 were as follows:\nName Age Position\nWilliam Farley 51 Chairman of the Board and Chief Executive Officer John B. Holland 61 President and Chief Operating Officer Richard C. Lappin 49 Vice-Chairman of the Board Richard M. Cion 50 Senior Executive Vice President- Corporate Development Michael F. Bogacki 39 Vice President and Controller Kenneth Greenbaum 49 Vice President and General Counsel Burgess D. Ridge 49 Vice President-Administration Earl C. Shanks 37 Vice President and Treasurer\nOfficers serve at the discretion of the Board of Directors. Messrs. Farley (for periods prior to January 1, 1992), Lappin, Cion, O'Hara, Bogacki, Greenbaum, Ridge and Shanks are employed by FII which provides management services to companies owned or controlled by Mr. Farley. They devote their time to those companies as needed and, accordingly, do not devote full time to any single company, including the Company. Certain of the executive officers, as noted below, are also executive officers of FI and VBQ, Inc. (\"VBQ\"), formerly a defense contractor and an affiliate of FI. Certain of the executive officers, as noted below, were also executive officers of Valley Fashions Corp. (formerly West Point Acquisition Corp.). During 1992, FI and Valley Fashions Corp. emerged from bankruptcy proceedings and VBQ became the subject of a Chapter 7 liquidation.\nWilliam Farley. Mr. Farley has been Chairman of the Board and Chief Executive Officer of the Company since May 1985. During the past five years, Mr. Farley has also been Chairman and Chief Executive Officer of FII. He has held substantially similar positions with FI since 1982, VBQ since 1984, West Point- Pepperell, Inc. (\"West Point\") from April 1989 until October 1992 and Valley Fashions Corp. from March 1989 until October 1992.\nITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - (Continued)\nJohn B. Holland. Mr. Holland has been a director of the Company since November 1992 and President of the Company since May 1992. Mr. Holland has served as Chief Operating Officer of the Company for more than the past five years. Mr. Holland served as Vice Chairman of West Point from April 1989 until September 1992 and as a director of West Point from April 1989 until September 1992. Mr. Holland served as Vice Chairman of Valley Fashions Corp. from March 1989 until June 1990. Mr. Holland is also a director of Dollar General Corp. and First Kentucky National Corp.\nRichard C. Lappin. Mr. Lappin has been a director of the Company since December 1990 and Vice Chairman of the Company since October 1991. Mr. Lappin has been President and Chief Operating Officer of FII since February 1991. From October 1989 to February 1991, Mr. Lappin served in various capacities with FI, including President and Chief Executive Officer of the Doehler Jarvis and Southern Fastening Systems divisions of FI. From 1988 to October 1989, Mr. Lappin served as President of the North American Operations of the Champion Spark Plug Company, a manufacturer of automotive products.\nRichard M. Cion. Mr. Cion has been Senior Executive Vice President of the Company since June 1990, of FII since February 1990 and of West Point from February 1990 until October 1992. Mr. Cion was also a director of West Point from April 1989 until October 1992. Mr. Cion served as a director of Valley Fashions Corp. from April 1989 until June 1992. Mr. Cion was also Senior Executive Vice President of Valley Fashions Corp. from March 1992 until October 1992. From April 1988 to February 1990, Mr. Cion was a Managing Director with Drexel Burnham Lambert Incorporated, an investment banking firm.\nPaul M. O'Hara. Mr. O'Hara has been Executive Vice President and Chief Financial Officer of the Company, FII and FI since April 1988, West Point from April 1989 until November 1992 and Valley Fashions Corp from March 1989 until November 1992. Mr. O'Hara resigned from the Company effective March 1, 1994.\nMichael F. Bogacki. Mr. Bogacki has been Corporate Controller of the Company, FII and FI since October 1988. Mr. Bogacki was appointed Vice President of FII in November 1989, of the Company in May 1990 and of FI in June 1990. In June 1991, Mr. Bogacki was appointed Assistant Secretary of the Company. Mr. Bogacki was Corporate Controller of Valley Fashions Corp. from March 1989 until November 1992. Mr. Bogacki was also Vice President of Valley Fashions Corp. from June 1991 until November 1992.\nKenneth Greenbaum. Mr. Greenbaum has served as Vice President, General Counsel and Secretary of the Company, FII and FI for more than the past five years. Mr. Greenbaum was Vice\nPresident of West Point from April 1989 until November 1992. Mr. Greenbaum served as Vice President of Valley Fashions Corp. from March 1989 until November 1992. During the past five years, Mr. Greenbaum has been General Counsel of VBQ.\nBurgess D. Ridge. Mr. Ridge was Assistant Treasurer of the Company, FII and FI from before 1989 until October 1991. Mr. Ridge was appointed Vice President Administration of FII and FI in August 1991 and of the Company in October 1991.\nITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - (Concluded)\nEarl C. Shanks. Mr. Shanks served as Vice President-Taxes and Assistant Secretary of the Company, FII and FI from May 1986 until June 1991. In June 1991, Mr. Shanks became Treasurer of the Company, FII, FI and VBQ. Mr. Shanks was Vice President and Assistant Secretary of West Point from April 1989 until November 1992. Mr. Shanks served as Vice President-Taxes and Assistant Secretary of Valley Fashions Corp. from March 1989 until June 1991. Mr. Shanks was Vice President and Treasurer of Valley Fashions Corp. from June 1991 until November 1992. During the past five years Mr. Shanks has been Vice President-Taxes of VBQ.\nInformation relating to the directors of the Company is set forth in the Registrant's proxy statement for its Annual Meeting of Stockholders to be held on May 17, 1994 (the \"Proxy Statement\") to be filed with the Securities and Exchange Commission pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended, and is hereby incorporated by reference.\nITEM 11.","section_11":"ITEM 11. EXECUTIVE COMPENSATION\nInformation relating to executive compensation is set forth in the Proxy Statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended, and is hereby incorporated by reference.\nITEM 12.","section_12":"ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT\nInformation relating to the security ownership of certain beneficial owners and management is set forth in the Proxy Statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended, and is hereby incorporated by reference.\nITEM 13.","section_13":"ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS\nUnder the terms of a management agreement between FII and the Company, FII provides the Company, to the extent that the Company may request, (i) general management services which include, but are not limited to, financial management, legal, tax, accounting, corporate development, human resource and personnel advice; (ii) investment banking services in connection with the acquisition or disposition of the assets or operations of any business or entity; (iii) financing services in connection with the arrangement by FII of public or private debt (including letter of credit facilities); and (iv) other financial, accounting, legal and advisory services rendered outside the ordinary course of the Company's business. FII is owned and controlled by Mr. Farley; its approximately 60 employees provide services to companies owned or controlled by Mr. Farley,\nincluding the Company. Certain of the executive officers of the Company, including Mr. Farley for periods prior to December 31, 1991, are employed by, and receive their compensation from, FII. These officers devote their time as needed to those companies owned and controlled by Mr. Farley and, accordingly, do not devote full time to any single company, including the Company.\nITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - (Concluded)\nIn consideration for investment banking and financing services, the Company pays FII fees established by FII and determined to be reasonable by FII in relation to (i) the size and complexity of the transaction; and (ii) the fees customarily charged by other advisors for similar investment banking and financing services; provided, such fees shall not exceed two percent of the total consideration paid or received by the Company or two percent of the aggregate amount available for borrowing or use under the subject agreement or facility. Fees for investment banking and financing services are generally payable to FII upon the closing of the subject transaction or agreement.\nEffective January 1993, the Company entered into a new management agreement (the \"Management Agreement\") with FII pursuant to which FII agreed to render substantially similar services to the Company as under the prior management agreement. Under the terms of a management agreement, the Company pays a fee to FII based on FII's cost of providing management services. The Company also paid a financing fee to FII during 1992 under the terms of a management agreement. The Company paid FII $9,900,000 in 1993 and $9,300,000 in 1992, of which approximately none and $2,300,000 was capitalized as deferred financing costs in 1993 and 1992, respectively. It is anticipated that the Company will enter into a management agreement for 1994 under substantially the same terms and conditions as the Management Agreement.\nConcurrently with entering into the new management agreement with FII in 1992, the Company's Board of Directors determined to employ Mr. Farley directly as Chairman and Chief Executive Officer of the Company. Mr. Farley did not receive compensation in 1993 or 1992 from FII for his services as Chairman and Chief Executive Officer of the Company.\nIn consideration for general management services rendered prior to 1992, the Company paid FII an annual fee, subject to certain limitations imposed by the Company's Board of Directors, based on a percentage of net sales, which fees were limited to $10,000,000 in 1991. For the year ended December 31, 1991 the Company paid management service fees to FII of approximately $10,000,000. No financing fees were charged to the Company by FII in 1991.\nThe Company completed the sale of the stock of Acme Boot at book value, which approximated fair market value, to an affiliate in June 1987 for an aggregate of $38,400,000 of cash and preferred stock and subordinated debentures of the affiliate. The Company recognized no income in 1992 or 1991 related to its investment in the securities of the affiliate because of the inability of the affiliate to make payments under the terms of the securities. In the fourth quarter of 1991, the Company\nrecognized a pretax charge of $39,200,000 in other expense-net to write down its investment in Acme Boot to its then market value. In the fourth quarter of 1993, the Company received approximately $72,900,000 from Acme Boot representing the entire unpaid principal and liquidation preference (including accrued interest and dividends) on its investment in the securities of the affiliate. The Company recorded a pretax gain of approximately $67,300,000 in connection with the investment in Acme Boot.\nInformation relating to certain relationships and related transactions is set forth in the Proxy Statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended, and is hereby incorporated by reference.\nPART IV\nITEM 14.","section_14":"ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K\n(a) Financial statements, financial statement schedules and exhibits\n1. Financial Statements\nThe financial statements listed in the index to Financial Statements and Supplementary Data on page 33 are filed as part of this Annual Report.\n2. Financial Statement Schedules\nThe schedules listed in the index to Financial Statements and Supplementary Data on page 33 are filed as part of this Annual Report.\n3. Exhibits\nThe exhibits listed in the Index to Exhibits on page 96 are filed as part of this Annual Report.\n(b) Reports on Form 8-K\nNo report on Form 8-K was filed during the fourth quarter of 1993.\nSIGNATURES\nPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Chicago, State of Illinois, on March 21, 1994.\nFRUIT OF THE LOOM, INC.\nBY: MICHAEL F. BOGACKI (Michael F. Bogacki Vice President and Controller)\nPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons in the capacities indicated on March 21, 1994.\nName Capacity\nWILLIAM FARLEY Chairman of the Board and (William Farley) Chief Executive Officer (Principal Executive Officer) and Director\nMICHAEL F. BOGACKI Vice President and (Michael F. Bogacki) Controller (Principal Accounting and Financial Officer)\nOMAR Z. AL ASKARI Director (Omar Z. Al Askari)\nDENNIS S. BOOKSHESTER Director (Dennis S. Bookshester)\nJOHN B. HOLLAND Director (John B. Holland)\nLEE W. JENNINGS Director (Lee W. Jennings)\nHENRY A. JOHNSON Director (Henry A. Johnson)\nRICHARD C. LAPPIN Director (Richard C. Lappin)\nA. LORNE WEIL Director (A. Lorne Weil)\nSIR BRIAN G. WOLFSON Director (Sir Brian G. Wolfson)\nFRUIT OF THE LOOM, INC. AND SUBSIDIARIES SCHEDULE V - PROPERTY, PLANT AND EQUIPMENT YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991 (In thousands of dollars)\nFRUIT OF THE LOOM, INC. AND SUBSIDIARIES SCHEDULE VI - ACCUMULATED DEPRECIATION AND AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991 (In thousands of dollars)\nFRUIT OF THE LOOM, INC. AND SUBSIDIARIES SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991 (In thousands of dollars)\nFRUIT OF THE LOOM, INC. AND SUBSIDIARIES SCHEDULE IX - SHORT-TERM BORROWINGS YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991 (In thousands of dollars)\nFRUIT OF THE LOOM, INC. AND SUBSIDIARIES SCHEDULE X - SUPPLEMENTARY INCOME STATEMENT INFORMATION YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991 (In thousands of dollars)\nFRUIT OF THE LOOM, INC. AND SUBSIDIARIES INDEX TO EXHIBITS (Item 14(a)(3) and 14(c)) Sequential Description page number 3(a)* - Restated Certificate of Incorporation of the Company and Certificate of Amendment of the Restated Certificate of Incorporation of the Company (incorporated herein by reference to Exhibit 3 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993). 3(b)* - By-Laws of the Company (incorporated herein by reference to Exhibit 4(b) to the Company's Registration Statement on Form S-2, Reg. No. 33-8303 (the \"S-2\")). 4(a)* - $800,000,000 Credit Agreement dated as of August 16, 1993, among the several banks and other financial institutions from time to time parties thereto (the \"Lenders\"), Bankers Trust Company, a New York banking corporation, as administrative agent for the Lenders thereunder, Chemical Bank, National Bank of North Carolina N.A., The Bank of New York and the Bank of Nova Scotia, as co-agents. (incorporated herein by reference to Exhibit 4.3 to the Company's Registration Statement on Form S-3, Reg. No. 33-50567 (the \"1993 S-3\")). 4(b)* - Subsidiary Guarantee Agreements dated as of August 16, 1993 by each of the guarantors signatory thereto in favor of the beneficiaries referred to therein (incorporated herein by reference to Exhibit 4.4 to the 1993 S-3). 10(a)* - Fruit of the Loom 1989 Stock Grant Plan dated January 1, 1989 (incorporated herein by reference to Exhibit 10(b) to the Company's Annual Report on Form 10-K for the year ended December 31, 1988). 10(b)* - Fruit of the Loom 1987 Stock Option Plan (incorporated herein by reference to Exhibit 10(b) to the S-2). 10(c)* - Fruit of the Loom, Inc. Stock Option Agreement for Richard C. Lappin (incorporated herein by reference to Exhibit 10(d) to the Company's Annual Report on Form 10-K for the year ended December 31, 1991). 10(d)* - Fruit of the Loom 1992 Executive Stock Option Plan (incorporated herein by reference to the Company's Registration Statement on Form S-8, Reg. No. 33- 57472). 10(e)* - Fruit of the Loom, Inc. Directors' Stock Option Plan (incorporated herein by reference to the Company's Registration Statement on Form S-8, Reg. No. 33-50499).\n10(f)* - Agreement and Plan of Merger, dated as of October 11, 1993, by and among Salem Sportswear Corporation, Fruit of the Loom, Inc.and FTL Acquisition Corp. (incorporated herein by reference to Exhibit 2.1 to the 1993 S-3). 10(g) - Purchase Agreement dated as of February 28, 1994 98 among The Gitano Group, Inc., each of the direct and indirect subsidiaries of Gitano and Fruit of the Loom, Inc. 11 - Computation of Earnings Per Common Share. 133 22 - Subsidiaries of the Company. 135 24 - Consent of Ernst & Young. 138\n* Document is available at the Public Reference Section of the Securities and Exchange Commission, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 (Commission file #1-8941).\nThe Registrant has not listed or filed as Exhibits to this Annual Report certain instruments with respect to long-term debt representing indebtedness of the Company and its subsidiaries which do not individually exceed 10% of the total assets of the Registrant and its subsidiaries on a consolidated basis. Pursuant to Item 601(b)(4)(iii) of Regulation S-K, the Registrant agrees to furnish such instruments to the Securities and Exchange Commission upon request.\nEXHIBIT 10(g) PURCHASE AGREEMENT\nAGREEMENT dated as of February 28, 1994 among THE GITANO GROUP, INC., a Delaware corporation having an office at 1411 Broadway, New York, New York 10018 (\"Gitano\"); each of the direct and indirect subsidiaries of Gitano signatory hereto (such subsidiaries being referred to herein as the \"Subsidiaries\" and, together with Gitano, as \"SELLER\"); and FRUIT OF THE LOOM, INC., a Delaware corporation having an office at 233 South Wacker Drive, 5000 Sears Tower, Chicago, Illinois 60606 (\"BUYER\"). R E C I T A L S : This Agreement sets forth the terms and conditions upon which BUYER agrees to purchase from SELLER, and SELLER agrees to sell to BUYER, the business of SELLER as presently conducted (the \"Business\"), including substantially all of its assets, free and clear of all Liens (as defined below) and debt, and certain executory contracts. NOW, THEREFORE, in consideration of the foregoing and the mutual covenants set forth herein, the parties agree as follows: 1. Definitions The following terms, as used herein, have the following meanings: \"Accounts Receivable\" means all accounts receivable of SELLER arising in the ordinary course of the Business from SELLER's marketing services program (known as the \"advanced integration program\"), the sale of goods at wholesale and SELLER's licensing activities, excluding all such accounts receivable that are more than 90 days past due. \"Additional Designated Contract\" has the meaning assigned to that term in Section 2(c). \"Agreement\" means this Purchase Agreement, including all exhibits and schedules hereto. \"Approval Order\" means an order of the Bankruptcy Court, in form and substance reasonably satisfactory to BUYER, approving and authorizing SELLER to enter into this Agreement and to consummate the transactions contemplated hereby, ordering that (i) the Assets sold to BUYER pursuant to this Agreement shall be free and clear of all Liens, such Liens to attach to the Purchase Price payable pursuant to Section 3; provided, however, that such Liens shall not attach to any portion of the Purchase Price to be returned to BUYER as a result of the adjustments set forth in Sections 3(b), 3(c) or 3(d); (ii) BUYER has acted in good faith within the context of Section 363(m) of the Bankruptcy Code; (iii) BUYER is not acquiring any of SELLER's liabilities except as expressly provided in this Agreement; (iv) except with respect to claims expressly assumed by BUYER pursuant to this Agreement, all Persons are enjoined from in any way pursuing BUYER by suit or otherwise, to recover on any claim which it had, has or may have against SELLER; (v) all Designated Contracts (other than Additional\nDesignated Contracts referred to in clause (B) of the second paragraph of Section 2(c)) shall be rejected by SELLER and all Assigned Contracts shall be assumed by SELLER and assigned to BUYER pursuant to Section 365 of the Bankruptcy Code (in each case in accordance with Section 2(c)); and (vi) the caption of the Chapter 11 petitions filed by The Gitano Group, Inc., Gitano Licensing, Inc., the Gitano Manufacturing Group, Inc. and Gitano Sportswear LTD. shall be amended so as to eliminate from the names of such entities the name \"Gitano\" or any name similar to such name or any variants or abbreviations of such name (e.g., such caption may read: The XYZ Group, Inc., f\/k\/a The Gitano Group, Inc.; XYZ Licensing, Inc., f\/k\/a Gitano Licensing, Inc.; The XYZ Manufacturing Group, Inc., f\/k\/a The Gitano Manufacturing Group, Inc.; and XYZ Sportswear LTD., f\/k\/a Gitano Sportswear LTD., respectively). \"Assets\" has the meaning assigned to that term in Section 2. \"Assigned Contracts\" has the meaning assigned to that term in Section 2(c). \"Assumed A\/R Amount\" has the meaning assigned to that term in Section 3(b)(ii). \"Assumed Inventory Amount\" has the meaning assigned to that term in Section 3(b)(i). \"Assumed Obligations\" has the meaning assigned to that term in Section 4(b). \"Bankruptcy Code\" means Title 11 of the United States Code, commonly known as the Bankruptcy Code, as it may be amended. \"Bankruptcy Court\" means the United States Bankruptcy Court for the District in which SELLER files the Bankruptcy Petition. \"Bankruptcy Petition\" has the meaning assigned to that term in Section 5. \"Business\" has the meaning assigned to that term in the first paragraph of the Recitals hereof. \"Closing\" means the closing of the purchase and sale of the Assets pursuant to this Agreement. \"Closing Date\" means the time and date of the Closing determined pursuant to Section 5. \"Designated Contracts\" has the meaning assigned to that term in Section 2(c). \"Employment Agreements\" has the meaning assigned to that term in Section 7(e). \"Equipment\" has the meaning assigned to that term in Section 2(a)(i). \"Equipment Leases\" has the meaning assigned to that term in Section 7(e). \"Escrow Agent\" means Kronish, Lieb, Weiner & Hellman, counsel to SELLER. \"Escrow Agreement\" means the escrow agreement dated as of the date hereof among BUYER, SELLER and the Escrow Agent in the form of Exhibit A hereto.\nK:\\CORP\\MSF\\GITANO\\BNKR-SAL.8\n\"Foreign Subsidiaries\" means the direct or indirect wholly owned subsidiaries of Gitano listed on Schedule 1 hereto. \"G.G. Licensing\" means G.G. Licensing, Inc., a Delaware corporation. \"Gitano's Best Knowledge\" means the conscious awareness of facts or other information by Robert E. Gregory, Jr., Robert J. Pines, C. William Crain, Eddie Albert, Steven M. Gerber, Wendy Nacht, George Soffron or Camillo Faraone. \"HSR Act\" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the related regulations and published interpretations. \"Initial Designated Contracts\" has the meaning assigned to that term in Section 2(c). \"Inventory\" has the meaning assigned to that term in Section 2(a)(ii). \"Inventory Cost\" means SELLER's aggregate standard cost for each item of its Inventory (including work-in- progress) on the Closing Date, \"WIP Closing Value\" means SELLER's aggregate standard cost for each unit of its work-in-progress included within the Inventory on the Closing Date, \"WIP Unit Number\" means the number of units of SELLER's work-in-progress included within the Inventory on the Closing Date, and \"WIP Average Cost\" means an amount equal to the WIP Closing Value divided by the WIP Unit Number, in each case determined in accordance with SELLER's letter to BUYER dated the date hereof. \"Licenses\" has the meaning assigned to that term in Section 7(e). \"Lien\" means any lien, security interest, pledge, hypothecation, encumbrance or other interest or claim (including but not limited to any and all \"claims\" as defined in Section 101(5) of the Bankruptcy Code and any and all rights and claims under any bulk transfer statutes and similar laws) in or with respect to any of the Assets (including but not limited to any options or rights to purchase such Assets and any mechanic's or tax liens), whether arising by agreement, by statute or otherwise and whether arising prior to, on or after the date of the filing by SELLER pursuant to Section 5 of the Bankruptcy Petition. \"Net Accounts Receivable\" means the amount of the Accounts Receivable, net of reserves for returns, allowances, chargebacks and doubtful accounts, as of the Closing Date, determined in accordance with SELLER's past practice consistently applied. \"Other Excluded Contracts\" has the meaning assigned to that term in Section 2(c). \"PBGC\" means Pension Benefit Guaranty Corporation. \"Person\" means any individual, corporation, partner- ship, joint venture, trust, association, unincorporated organization, other entity, or governmental body or subdivision, agency, commission or authority thereof.\nK:\\CORP\\MSF\\GITANO\\BNKR-SAL.8\n\"Real Property Leases\" has the meaning assigned to that term in Section 7(e). \"Scheduling Order\" means an order of the Bankruptcy Court, in form and substance reasonably satisfactory to BUYER, (i) approving the Topping Fee and Sections 7(m), 12(d) and 17(l), (ii) approving such bidding procedures as may be reasonably acceptable to BUYER, including, without limitation, (x) that \"higher and better\" offers for the Assets be filed with the Bankruptcy Court no later than three days prior to the hearing to consider the Approval Order and (y) that \"higher and better\" offers must be fully financed and contain a cash purchase price that exceeds the Purchase Price by $3,000,000, (iii) scheduling a hearing to approve the Approval Order, (iv) providing that notice of the hearing and the relief requested in the Approval Order be given to all creditors of SELLER, including, without limitation, all Persons holding a Lien on any of the Assets, all licensees, the PBGC, International Union, United Automobile, Aerospace and Agricultural Implement Workers of America and its Local 260, and all relevant taxing authorities, (v) providing for publication of the hearing notice in the Wall Street Journal, National Edition, (vi) requiring SELLER to serve a notice upon each non-SELLER party to each License that does not constitute an Initial Designated Contract or an Additional Designated Contract referred to in clause (A) of the second paragraph of Section 2(c) in advance of the hearing to consider the Approval Order, advising of the existence of any default of SELLER under such License (whether monetary or otherwise) and the dollar amount believed to be necessary to cure such default, and (vii) providing that any non- SELLER party to such a License who fails to timely file a response alleging the existence of other defaults and\/or contesting the dollar amount believed to be necessary to cure any default shall be forever barred from subsequently asserting any claim or default that existed under such License as of the date of the notice sent by SELLER to the non-SELLER party. \"SELLER LCs\" means all letters of credit for the purchase of Inventory which have been issued on behalf of SELLER and remain outstanding as of the Closing Date. \"Topping Fee\" means a fee payable by SELLER to BUYER equal to $1.5 million. \"Topping Fee Event\" means a sale or other disposition of Assets, Licenses, Real Property Leases or Equipment Leases (whether in one or more transactions) to another buyer pursuant to an order of the Bankruptcy Court in which the amount of the consideration payable in respect of the Assets, Licenses, Real Property Leases or Equipment Leases in the aggregate is greater than the Purchase Price payable by BUYER pursuant to Section 3. 2. Purchase and Sale (a) Subject to the terms and conditions of this Agree- ment, on the Closing Date SELLER shall sell, transfer, assign and\nK:\\CORP\\MSF\\GITANO\\BNKR-SAL.8\ndeliver to BUYER, free and clear of any and all Liens, and BUYER shall purchase and acquire from SELLER, all right, title and interest of SELLER in and to the following assets (collectively, the \"Assets\"), in each case as of the Closing Date: (i) All furniture, machinery, equipment, furnishings, operating equipment, supplies and tools, and all parts thereof and accessions thereto, owned by SELLER (collectively, the \"Equipment\"); (ii) All current first-quality jeans replenishment inventory (including raw materials and other supplies, work-in-progress, in-transit inventory and finished goods), owned by SELLER, which is held for sale to customers in the ordinary course of the Business (collec- tively, the \"Inventory\"), including all returns after the Closing Date; (iii) all other inventory (in addition to the Inventory) used or held for use by SELLER in the Business; (iv) Subject to Section 2(a)(iv), all of the names, trademarks, trade names, service marks and copyrights, logos, slogans and patents, if any, (including any and all applications, registrations, extensions and renewals thereof) owned by SELLER (excluding G.G. Licensing), as set forth on Schedule 2(a)(iv) hereto, together with all associated goodwill; (v) All of the assets of G.G. Licensing (which consist of the trademarks set forth on Schedule 2(a)(v) hereto), subject to certain perpetual licenses referred to in such Schedule; (vi) All of the stock in each of the Foreign Subsidiaries, provided that such Foreign Subsidiary is either (A) designated by BUYER on Schedule 1 hereto or (B) designated by BUYER by notice to SELLER at least one business day prior to the hearing in the Bankruptcy Court to consider the Approval Order (it being understood that the stock and assets of any Foreign Subsidiary not so designated will be excluded from the Assets); (vii) All customer and mailing lists of SELLER, and existing telephone numbers, telecopier numbers and telex numbers used by SELLER at any of its places of business; (viii) All outstanding Accounts Receivable of SELLER; (ix) All outstanding orders for the purchase of goods from SELLER (including orders under the advanced integration program referred to in the definition of \"Accounts Receivable\" in Section 1); (x) All invoices, bills of sale and other instruments and documents evidencing SELLER's title to Assets (including those relating to SELLER LCs) that are in the possession of SELLER; (xi) All data processing systems, records, files, data bases, and other papers and information of SELLER used in connection with the Business or in any way relating to the Assets;\nK:\\CORP\\MSF\\GITANO\\BNKR-SAL.8\n(xii) All stationery and other imprinted material and office supplies, and packaging and shipping materials, of SELLER; (xiii) The name \"Gitano\" and all corporate and other names (excluding \"Regatta\" and related names) used by SELLER in the Business or which are the subject of any filing by SELLER including in any jurisdictions in which SELLER is registered as a domestic or foreign corporation and all variations of the foregoing; and (xiv) All rights of SELLER or any Foreign Subsidiary designated on Schedule 1 hereto with respect to any insurance policy to the extent covering liabilities of any such Foreign Subsidiary or liabilities assumed by BUYER and to the extent assignable to BUYER. (b) Notwithstanding anything to the contrary contained in this Agreement, the Assets do not include the following: (i) The corporate seals, minute books, stock record books and other corporate records having exclusively to do with the corporate organization and capitalization of SELLER; (ii) Any tax or customs refunds to which SELLER is or may be entitled (other than with respect to any tax or customs paid by BUYER); (iii) Shares of the capital stock of Gitano and each direct or indirect subsidiary of Gitano, including the Subsidiaries and the Foreign Subsidiaries (other than those designated by BUYER to SELLER pursuant to Section 2(a)(vi)(A) or (B)). (iv) The \"Regatta\" and related trademarks, together with all license agreements relating to such trademarks; (v) Any payments to which SELLER is or may be entitled from any sale of assets, property or stock by SELLER prior to the date hereof, including without limitation the return of escrowed funds (excluding Accounts Receivable outstanding as of the Closing Date); (vi) SELLER's right, title and interest in, to and under (including all amounts received or to be received by SELLER pursuant to) (A) the Promissory Note Due December 31, 1994 made by The Childrens' Place Retail Stores Inc. in favor of Gitano in the principal amount of $1.35 million, and (B) (x) the Settlement Agreement dated as of November 1, 1993, among Gitano, certain of its subsidiaries, Gypsy Imports, Inc. and Nessim Dabah, and (y) the Stock Purchase Agreement and the license and commission agreements, promissory notes, guaranties and affidavits of confession referred to in such Settlement Agreement. (vii) All cash on hand and in bank accounts, prepaid insurance, prepaid interest and other prepaid items and deposits, of SELLER as of the Closing Date, including without limitation any refund of insurance premiums paid by SELLER, or dividends with respect to any insurance policy the premiums for which were paid by SELLER (except that BUYER shall be entitled to all right, title and interest of SELLER in and to any leasehold improvements,\nK:\\CORP\\MSF\\GITANO\\BNKR-SAL.8\nprepaid rent and security deposits in respect of any Lease assigned to it pursuant to Section 2(c)); and provided that, if and to the extent that for payroll or other corporate purposes the parties agree to include cash on hand or in bank accounts within the Assets, the Purchase Price shall be increased, dollar for dollar, by the amount of cash so included; (viii) All choses in action and causes of action, claims and rights of recovery or setoff of every kind or character of or for the benefit of SELLER arising out of or in connection with the actions listed on Schedule 2(b)(viii) hereto or that otherwise do not relate to the Assets, irrespective of the date on which any such cause of action, claim or right may arise or accrue; (ix) Accounting records (including workpapers, general ledgers and financial statements) and tax returns, and other business records and reports that do not relate to the Assets; (x) All right, title and interest of SELLER in, to and under insurance policies (except to the extent provided in Section 2(a)(xiv)), including without limitation directors and officers insurance policies, and indemnification agreements with directors and officers; and\n(xi) Any other assets (including rights) not specifically enumerated in Sections 2(a) and 2(c). (c) Concurrently with its execution of this Agreement, BUYER has designated in the appropriate place on Schedule 7(e) certain Real Property Leases, Equipment Leases, Licenses and other agreements that BUYER desires SELLER to reject pursuant to Section 365 of the Bankruptcy Code (each Real Property Lease, Equipment Lease, License and other agreement so designated being referred to as an \"Initial Designated Contract\") and certain Real Property Leases and Equipment Leases (in addition to the Initial Designated Contracts) that BUYER does not desire to assume (\"Other Excluded Contracts\"). At the Closing, BUYER shall acquire all right, title and interest of SELLER in all Real Property Leases, Equipment Leases and Licenses and other agreements listed on Schedule 7(e) which are not Initial Designated Contracts or Other Excluded Contracts (the \"Assigned Contracts\"); provided that not less than five days prior to the hearing on the Approval Order, BUYER, in its sole discretion, may (i) designate as \"Additional Designated Contracts\" any contracts listed on Schedule 7(e) (other than those to which G.G. Licensing or any Foreign Subsidiary is a party) which do not constitute Initial Designated Contracts and which BUYER wishes SELLER to reject (such Additional Designated Contracts, together with the Initial Designated Contracts, the \"Designated Contracts\"); and (ii) designate as \"Other Excluded Contracts\" any contracts listed on Schedule 7(e) (other than those to which G.G. Licensing or any Foreign Subsidiary is a party) which do not already constitute \"Other Excluded Contracts\" and which BUYER does not wish to assume; and further provided that the Employment Agreements will not be assumed by BUYER.\nK:\\CORP\\MSF\\GITANO\\BNKR-SAL.8\nSELLER shall cause (A) all Initial Designated Contracts and all Additional Designated Contracts that are so designated by BUYER in accordance with this Section 2(c) at least 12 hours prior to the filing of the Bankruptcy Petition to be rejected pursuant to the Approval Order, and (B) all other Additional Designated Contracts to be rejected within 25 days after the Closing; provided, that the foregoing shall not apply to any License that constitutes a Designated Contract if the Bankruptcy Court fails to agree to SELLER's request to reject such License, in which event such License shall constitute an Assigned Contract. In addition, if and to the extent the documents described on Schedule 7(e)(iii)(A) are contracts of SELLER or to the extent SELLER has any binding oral commitments to the parties referenced on such schedule, they shall be rejected by SELLER as of the Closing Date. 3. Purchase Price (a) In consideration of the sale and transfer of the Assets and the Assigned Contracts (in addition to the assumption by BUYER of the Assumed Obligations pursuant to Section 4), subject to the terms and conditions of this Agreement, BUYER shall pay to SELLER an amount (the \"Purchase Price\") equal to $100,000,000, subject to adjustment pursuant to Sections 3(b), 3(c) and 3(d). The Purchase Price shall be payable as follows: (i) Concurrently with the execution of this Agreement, BUYER shall pay to the Escrow Agent by federal funds wire transfer the sum of $5,000,000, such sum (together with any interest thereon, the \"Deposit\") to be held in escrow subject to the terms of the Escrow Agreement; (ii) On the Closing Date, BUYER shall pay to SELLER by federal funds wire transfer the sum of $80,000,000; (iii) On the Closing Date, the excess of (A) the Purchase Price (before adjustment pursuant to Sections 3(b), 3(c) and 3(d)) over (B) the sum of the Deposit plus the amount paid pursuant to Section 3(a)(ii) shall be paid by federal funds wire transfer or a certified or bank check payable to the order of SELLER to be deposited in a debtor-in-possession account (the \"Account\") and to be held in trust for BUYER, to the extent of the net adjustments, if any, payable to BUYER pursuant to Sections 3(b), 3(c) and 3(d); (iv) Within 10 days after determination of the amount, if any, of the net adjustments payable pursuant to Sections 3(b) and 3(c), BUYER shall pay to SELLER as additional Purchase Price the net amount, if any, by which the Purchase Price is increased pursuant to Section 3(b), or SELLER shall pay to BUYER from the Account as a reduction of the Purchase Price the net amount by which the Purchase Price is reduced pursuant to Sections 3(b) and 3(c). Such payment shall be made by federal funds wire transfer or certified or bank check. Upon the payment of the net adjustments pursuant to Sections 3(b) and 3(c) in accordance with this Section 3(a)(iv) all amounts held in the Account (other than any amount specified in Section 3(d)) shall be released to SELLER.\nK:\\CORP\\MSF\\GITANO\\BNKR-SAL.8\n(b) (i) The parties acknowledge that the Purchase Price is based upon the Inventory Cost being $13,900,000 (the \"Assumed Inventory Amount\"). An agent designated by BUYER and an agent designated by SELLER shall take a physical count of the Inventory as of the Closing Date and, within 30 days thereafter, shall produce a statement listing (A) the Inventory as of the Closing Date, and (B) the WIP Closing Value, the WIP Unit Number, the WIP Average Cost, and the Inventory Cost (which shall be final and binding on the parties). If the Inventory Cost as so determined exceeds the Assumed Inventory Amount, the Purchase Price shall be increased by the dollar amount of such excess. If the Assumed Inventory Amount exceeds the Inventory Cost as so determined, the Purchase Price shall be reduced by the dollar amount of such excess. Any such increase or reduction shall be paid in accordance with Section 3(a)(iv). (ii) The parties further acknowledge that the Purchase Price is based upon the Net Accounts Receivable being $10,400,000 (the \"Assumed A\/R Amount\"). Within 30 days after the Closing Date, BUYER and SELLER shall jointly (A) determine the Net Accounts Receivable and (B) produce a statement listing the Net Accounts Receivable as so determined. If the Net Accounts Receivable as so determined exceeds the Assumed A\/R Amount, the Purchase Price shall be increased by the dollar amount of such excess. If the Assumed A\/R Amount exceeds the Net Accounts Receivable as of the Closing Date as so determined, the Purchase Price shall be reduced by the dollar amount of such excess. Any such increase or reduction shall be paid in accordance with Section 3(a)(iv). (iii) If, within the 30-day period following the Closing Date, SELLER and BUYER (or their agents) are unable to jointly determine the Inventory Cost or the Net Accounts Receivable in accordance with Section 3(b)(i) or (ii), as the case may be, either party may submit such determination to the Bankruptcy Court. (c) In the event of a material breach of any representation or warranty made by SELLER in this Agreement or any breach of the representation and warranty made by SELLER in Section 7(g), BUYER shall have a period of 45 days following the Closing Date to make a claim against SELLER with respect to such breach, by sending to SELLER a written notice specifying the nature of the breach and the dollar amount of loss, damage, injury, diminution in value, cost or expense (collectively, \"Losses\") incurred by BUYER as a result of such breach. If SELLER does not object (in accordance with the following sentence) to BUYER's claim, the Purchase Price shall be reduced by the amount of such Losses and such reduction shall be paid in accordance with Section 3(a)(iv). If SELLER notifies BUYER in writing, within 10 days of receipt of BUYER's notice, that it objects to the amount of such Losses or the nature of BUYER's claim, the Bankruptcy Court shall determine the appropriate adjustment, if any, to be made to the Purchase Price in respect of such claim. (d) The parties understand that, because the present value of the benefit liabilities (within the meaning of Section 4001(a)(16) of the Employee Retirement Income Security Act of\nK:\\CORP\\MSF\\GITANO\\BNKR-SAL.8\n1974, as amended (\"ERISA\")) of SELLER's defined benefit plan (the \"Plan\") may exceed the value of the assets of the Plan, SELLER may have liability to the PBGC (\"Termination Liability\") in the event of a termination of the Plan (as determined in accordance with Title IV of ERISA and the regulations thereunder). Accordingly, a portion of the Account mutually agreed to by the parties (in an amount equal to the parties' estimate of possible Termination Liability) shall be held in trust for BUYER until the earliest to occur of the following: (i) BUYER or any of its subsidiaries (including any subsidiary that acquires Assets or the stock of which is acquired by BUYER pursuant to this Agreement) shall be held to have liability to the PBGC for any portion of the Termination Liability as a result of BUYER'S acquisition of any of the Assets, in which case the amount of such liability shall be released to BUYER and the remainder of the amount held in the Account pursuant to this Section 3(d) shall be released to SELLER; or (ii) SELLER shall have satisfied BUYER that no grounds for such liability shall exist, or shall have provided BUYER with indemnification reasonably satisfactory to BUYER against any such liability, in which case the entire amount held in the Account pursuant to this Section 3(d) shall be released to SELLER; or (iii) following termination of the Plan it is established pursuant to Section 4048(a) of ERISA that the date of termination of the Plan is after the Closing Date, in which case the entire amount held in the Account pursuant to this Section 3(d) shall be released to SELLER. 3A. Interim Services and Removal of Assets from Gitano Premises (a) The parties acknowledge that, although BUYER is not assuming the lease of the premises occupied by SELLER in Dayton, New Jersey (the \"Dayton Facility\"), BUYER will need a limited period of time following the Closing to integrate the distribution services provided by SELLER out of its Dayton Facility into BUYER's own distribution facilities. Accordingly, the parties agree that during the 90-day period following the Closing (the \"Interim Period\") SELLER, to the extent reasonably requested by BUYER, will use its reasonable efforts to receive at, and distribute from, the Dayton Facility BUYER's goods in a manner consistent with past practices. SELLER shall be paid within 10 days of BUYER's receipt of SELLER's invoice for such services in an amount equal to SELLER's cost of providing such services plus 10%. SELLER shall perform such services as an independent contractor and not as an agent for BUYER and shall retain exclusive control over its work force. Until the expiration of the Interim Period, SELLER shall provide BUYER and its agents or representatives reasonable access to the Dayton Facility for the purpose of removing Assets (including, without limitation, racks, computer and other equipment and supplies and inventory) remaining on the premises. (b) If BUYER fails to designate Noel of Jamaica Ltd. (the \"Jamaican Subsidiary\") pursuant to Section 2(a)(vi) and thereby elects not to acquire the stock of the Jamaican Subsidiary pursuant to this Agreement, then, during the Interim Period, SELLER will use its reasonable efforts to cause the Jamaican Subsidiary to complete the manufacture of all work-in- progress included within the Inventory as of the Closing Date\nK:\\CORP\\MSF\\GITANO\\BNKR-SAL.8\n(there being no obligation to cut uncut raw materials) and to deliver to BUYER, from time to time in accordance with SELLER's past practice, finished goods from such work-in-progress (in such sizes, styles and quantities as previously determined in accordance with the Jamaica Subsidiary's production schedule), and BUYER shall pay SELLER for such goods the amounts determined in accordance with the letter from SELLER to BUYER referred to in the definition of \"Inventory Cost\" in Section 1, subject to adjustment at the end of the Interim Period as provided in such letter; provided, that SELLER shall provide BUYER with the appropriate documentation (including quota, if applicable) to import such goods into the United States. SELLER shall safeguard all uncut raw materials included within the Inventory on the Closing Date in accordance with its past practice and deliver such raw materials at BUYER's expense to such location in the United States as BUYER may request before such final shipment is made by SELLER. (c) SELLER shall provide BUYER and its agents or representatives access to the premises occupied by SELLER in Edison, New Jersey during the 90-day period following the Closing Date (excluding that portion of the premises not currently used by SELLER), and to the premises occupied by SELLER at 1411 Broadway, New York, New York (on the 7th and 8th floors) during the 45-day period following the Closing Date, for the purpose of removing Assets therefrom, except that if SELLER ceases to have the right to use any such premises at any time during such period (provided that SELLER shall take all actions reasonably requested by BUYER so as to continue to have such right during such post- Closing period so long as SELLER is not required to pay for any space not currently used by SELLER), SELLER shall give notice to BUYER and SELLER shall arrange for the delivery of the Assets located at such premises at BUYER's expense to such location in the United States as BUYER may request. (d) If and to the extent that following the Closing Date, SELLER wishes to use (i) a portion of the premises currently occupied by SELLER at 1411 Broadway, New York, New York (or any other premises in such building) and BUYER (or any of its subsidiaries) occupies any such premises or (ii) the services of certain of BUYER's employees at any such premises, BUYER shall reasonably cooperate with SELLER to accommodate such wishes for a period of up to 180 days following the Closing Date so long as doing so does not unreasonably interfere with BUYER's business and SELLER reimburses BUYER for its costs to the extent allocable to SELLER's usage of such employees. 4. Assumption of Liabilities; Letters of Credit (a) Except as expressly set forth in this Section 4, BUYER is not assuming, and shall have no responsibility or obligation whatsoever for, any liability or other obligation of SELLER, including, without limitation, any liability arising under applicable federal or state environmental protection laws and any liability arising under or in connection with any collective bargaining agreement or pension plan maintained by SELLER. (b) At the Closing, BUYER shall assume all of SELLER's obligations arising from and after the Closing Date under all of\nK:\\CORP\\MSF\\GITANO\\BNKR-SAL.8\nthe Assigned Contracts. Prior to the assignment by SELLER to BUYER of each of the Assigned Contracts, and as a condition to SELLER's obligation to effect each such assignment, BUYER shall pay all amounts required to cure all defaults under the Real Property Leases, Equipment Leases and Licenses that constitute Assigned Contracts so as to permit the assumption and assignment of such Assigned Contracts pursuant to Section 365 of the Bankruptcy Code (the amounts so paid to cure such defaults, together with the other obligations to be assumed by BUYER pursuant to this Section 4(b) and Section 4(d), being referred to herein as \"Assumed Obligations\"), and BUYER shall not be entitled to any reduction in the Purchase Price for any amounts required to be so paid. SELLER does not assume any obligation whatsoever to cure any existing default, or to make any payment due after the date hereof, under the Real Property Leases, Equipment Leases or Licenses which constitute Assigned Contracts. (c) Schedule 4(c) lists all letters of credit for Inventory issued on behalf of SELLER outstanding as of February 28, 1994. SELLER shall provide BUYER a list of all SELLER LCs that will be outstanding on the Closing Date at least five business days prior to the Closing Date. On the Closing Date, BUYER shall (at BUYER's sole expense) comply with either of the following clauses (i) or (ii): (i) BUYER shall cause the SELLER LCs to be returned to SELLER and canceled (and any collateral securing SELLER's reimbursement obligations in respect of such SELLER LCs to be refunded or returned to SELLER), by causing new letters of credit to be issued to the beneficiaries of the SELLER LCs and to be substituted therefor. Such new letters of credit shall be issued by a United States bank acceptable to BUYER (such as NationsBanc or Bankers Trust Company, acting through its principal offices in the United States) (a \"BUYER Bank\"). Prior to issuance of the SELLER LCs, SELLER shall use reasonable efforts to obtain the agreement of the beneficiaries of the SELLER LCs to accept such new letters of credit and BUYER shall provide such cooperation in connection with such endeavor as SELLER may reasonably request. (ii) BUYER shall (A) cause a Buyer Bank to issue letters of credit in favor of the banks that have issued the SELLER LCs (the \"SELLER Banks\") in amounts equal to the obligations payable under the SELLER LCs, (B) cause such BUYER Bank to enter into an agreement with the SELLER Banks providing for the indemnification by letter of credit of the SELLER Banks with respect to the SELLER LCs, pursuant to which the SELLER Banks will agree not to seek reimbursement from SELLER with respect to the SELLER LCs, and (C) enter into an agreement with SELLER providing for the indemnification of SELLER by BUYER with respect to the liabilities of SELLER under the agreement described in clause (B) above, such letters of credit and agreements to be in form and substance reasonably satisfactory to SELLER and satisfactory to the SELLER Banks. (d) On the Closing Date, BUYER shall register as \"importer of record\" for all Inventory in transit upon receipt of all necessary documentation (including, without limitation, quota, if applicable), and BUYER shall assume all of SELLER's\nK:\\CORP\\MSF\\GITANO\\BNKR-SAL.8\nobligations for all costs, including customs and import duties and taxes, to be incurred in connection with the import and shipment of such Inventory into the United States. 5. Bankruptcy Filing; Obtaining of Approval Order; Closing (a) Within five business days following the date hereof and after giving reasonable advance notice to BUYER, SELLER (excluding G.G. Licensing) shall file in the Bankruptcy Court a voluntary petition for relief under the Bankruptcy Code (the \"Bankruptcy Petition\"), together with an application to the Bankruptcy Court for the Scheduling Order and the Approval Order in forms reasonably satisfactory to the parties, which SELLER shall diligently attempt to obtain (subject to its obligations under the Bankruptcy Code). (b) If the Approval Order is entered, then, subject to the satisfaction or waiver by the parties of the conditions to their respective obligations to effect the Closing, the Closing shall take place at the offices of Kronish, Lieb, Wiener & Hellman, 1114 Avenue of the Americas, New York, New York at 10:00 a.m. (New York City time) on the third business day after the Bankruptcy Court has issued the Approval Order (the effectiveness of which shall not have been stayed or, if stayed, such stay shall no longer be in effect), or, if later, on the third business day after the waiting period under the HSR Act shall have expired or been terminated, or at such other place, date and time as the parties may agree in writing. 6. Deliveries at Closing (a) At the Closing, SELLER shall deliver, or cause to be delivered (in addition to any other instruments required by this Agreement to be delivered by SELLER at the Closing), to BUYER the following (in form and substance reasonably satisfactory to BUYER): (i) a duly executed bill of sale transferring title to all of the Assets to BUYER; (ii) instruments of assignment sufficient to assign to BUYER all of SELLER's right, title and interest in and to the intangible property referred to on Schedules 2(a)(iv) and 2(a)(v); (iii) instruments of assignment sufficient to assign to BUYER all of SELLER's right, title and interest in, to and under the stock of each Foreign Subsidiary designated by BUYER to SELLER pursuant to Section 2(a)(vi)(A) or (B)); (iv) instruments of assignment sufficient to assign to BUYER all of SELLER's right, title and interest in, to and under the Assigned Contracts; (v) a certified copy of the Approval Order; (vi) possession of all of the Assets and all Equipment and leasehold interests subject to Assigned Contracts; (vii) such other instruments or documents as BUYER may reasonably request to fully effect the transfer of the Assets and to confer upon BUYER the benefits contemplated by this Agreement; (viii) notices executed by SELLER, addressed to (A) each obligor with respect to the Accounts Receivable as of the Closing Date and (B) each licensee with respect to\nK:\\CORP\\MSF\\GITANO\\BNKR-SAL.8\nLicenses that are Assigned Contracts, notifying such obligor or licensee of the assignment to BUYER of such Accounts Receivable or License, as the case may be, and directing such obligor or licensee to make payment to BUYER of such Accounts Receivable for which it is the obligor or such fees payable under the License, as the case may be; (ix) such documents as BUYER may reasonably request in connection with the consent or approval or filing requirements to effect the change of the name of Gitano and each subsidiary in their respective states of incorporation and in the states and jurisdictions in which they do business, including \"doing business as\" designations, to eliminate the name \"Gitano\" or any name similar to such name or any variants or abbreviations of such name; and (x) evidence reasonably satisfactory to BUYER of compliance with the notice provisions set forth in the Scheduling Order. (b) At the Closing, BUYER shall deliver, or cause to be delivered (in addition to any other instruments required by this Agreement to be delivered by BUYER at the Closing), to SELLER the following: (i) the excess of the Purchase Price (before adjustment pursuant to Section 3(b), 3(c) or 3(d)) over the Deposit, payable in the manner described in Section 3(a); and (ii) a duly executed assumption of liabilities in form and substance reasonably satisfactory to SELLER, whereby BUYER will assume and agree to pay, perform and discharge the Assumed Obligations. 7. Representations, Warranties and Covenants of SELLER Gitano represents and warrants (both as of the date of this Agreement and as of the Closing Date) to, and agrees with, BUYER as follows (such representations and warranties, except for the representation and warranty set forth in Section 7(g), being made to Gitano's Best Knowledge): (a) Gitano and each of the Subsidiaries is a corporation duly organized, validly existing and in good standing under the laws of the state of its incorporation. Each of the Foreign Subsidiaries the stock of which is included within the Assets is a corporation duly organized under the laws of the place of its incorporation (it being acknowledged that such Foreign Subsidiaries may not be in good standing). Gitano has no direct or indirect active subsidiaries other than the Subsidiaries and the Foreign Subsidiaries (and subsidiaries of the Foreign Subsidiaries). No representation or warranty is made as to any of the Foreign Subsidiaries (or its assets) except as to its due organization and title to its stock as set forth in this Section 7(a) and Section 7(c). Between the date hereof and the Closing Date, SELLER will use reasonable efforts to cause each of the Foreign Subsidiaries designated by BUYER to SELLER pursuant to Section 2(a)(vi)(A) or (B) to be in good standing provided that SELLER shall not be required to incur substantial expenditures in connection with such endeavor.\nK:\\CORP\\MSF\\GITANO\\BNKR-SAL.8\n(b) SELLER has the full right, power and authority to enter into this Agreement and to sell, transfer, assign and deliver the Assets to BUYER pursuant to this Agreement, subject to obtaining the Approval Order. This Agreement has been duly and validly executed and delivered by SELLER and, subject to obtaining the Approval Order, constitutes a legal, valid and binding obligation of SELLER, enforceable in accordance with its terms. (c) SELLER has good and marketable title to all of the Assets and SELLER has possession of all of the tangible Assets. Subject to obtaining the Approval Order, SELLER shall, at the Closing, transfer and assign to BUYER good and marketable title to each of the Assets, free and clear of all Liens. (d) All of the Equipment is in all material respects in good repair, ordinary wear and tear excepted. (e) Schedule 7(e) lists (except as otherwise provided in such Schedule) all material agreements to which SELLER or a Foreign Subsidiary is a party and which are currently used by SELLER in connection with the Business, consisting of the following: (i) leases pursuant to which SELLER or a Foreign Subsidiary leases real property used by it in connection with the Business, as set forth on Schedule 7(e)(i) (\"Real Property Leases\"), (ii) leases pursuant to which SELLER leases equipment or other personal property or computer software used by it in connection with the Business, as set forth on Schedule 7(e)(ii) (\"Equipment Leases\"), (iii) license agreements pursuant to which SELLER licenses intangible property to third parties, as set forth on Schedule 7(e)(iii) (\"Licenses\") and, to the extent they constitute agreements, the agreements set forth on Schedule 7(e)(iii)(A), and (iv) employment or union agreements to which SELLER is a party, as set forth on Schedule 7(e)(iv) (\"Employment Agreements\"). Schedule 7(e)(i) and 7(e)(ii) also respectively list for each of the Real Property Leases and Equipment Leases the annual or monthly rental (as the case may be), the date through which such rental has been paid, and the amount in default through February 14, 1994. Copies of all written agreements and written descriptions of all oral agreements listed on Schedule 7(e) have been delivered to BUYER on or prior to the date of this Agreement. (f) Except as expressly set forth in this Section 7, SELLER makes no representations or warranties of any kind or nature as to the condition of the Assets (or any equipment or leasehold improvements subject to Assigned Contracts). THE ASSETS (AND ANY EQUIPMENT OR LEASEHOLD IMPROVEMENTS SUBJECT TO ASSIGNED CONTRACTS) SHALL BE TRANSFERRED \"AS IS\" AND \"WHERE IS\" AND SELLER MAKES NO REPRESENTATIONS OR WARRANTIES OF ANY KIND OR NATURE (EXCEPT AS SET FORTH HEREIN). NO STATUTORY OR OTHER WARRANTIES AS TO THE CONDITION OF THE ASSETS OR THE MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OF THE ASSETS (OR SUCH EQUIPMENT OR LEASEHOLD IMPROVEMENTS) SHALL BE IMPLIED, AND SELLER HEREBY EXPRESSLY DISCLAIMS ANY REPRESENTATION OR WARRANTY AS TO THE CONDITION OF THE ASSETS (OR SUCH EQUIPMENT OR LEASEHOLD IMPROVEMENTS) OR THEIR MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE.\nK:\\CORP\\MSF\\GITANO\\BNKR-SAL.8\n(g) All Accounts Receivable as of the Closing Date will be valid and existing and result from transactions in the ordinary course of the Business. SELLER has not agreed (except as set forth on Schedule 7(e)(iii)), and prior to the Closing Date will not agree, to any reduction of any of such Accounts Receivable. In the case of goods sold giving rise to such Accounts Receivable, no defect in the quality of such goods will cause either returns or chargebacks in excess of the portion of the reserves, if any, that is allocated to returns and chargebacks and included within the Net Accounts Receivable. (h) All finished goods Inventory is current and of \"first quality\" in accordance with SELLER's past practice. All Inventory is owned by SELLER. (i) SELLER (excluding G.G. Licensing) owns the registered trademarks (including applications therefor) listed on Schedule 2(a)(iv), subject to the Licenses and the other restrictions described on such Schedule. G.G. Licensing owns the registered trademarks (including applications therefor) listed on Schedule 2(a)(v), subject to certain perpetual licenses referred to on such Schedule. Schedules 2(a)(iv) and 2(a)(v) contain accurate and complete lists of all of the registered trademarks (including applications therefor) other than \"Regatta\" and related trademarks owned by SELLER (excluding G.G. Licensing) and G.G. Licensing, respectively. Except for the licensees and the Licenses referred to on Schedules 2(a)(iv) and 2(a)(v) and except as otherwise described on such Schedule, SELLER is not aware of any other Person with rights to use the trademarks set forth on Schedules 2(a)(iv) and 2(a)(v). (j) Except for the rights, properties and other assets of SELLER specifically excluded pursuant to Section 2(b) from the Assets and SELLER's rights in, to and under the Real Property Leases, Equipment Leases, Licenses and Employment Agreements that will not constitute Assigned Contracts, the Assets, together with SELLER's rights in, to and under the Assigned Contracts, include all rights, properties and other assets necessary (assuming the hiring of all or substantially all of SELLER's employees) to permit the conduct of the Business in all material respects in the same manner as the Business is conducted on the date of this Agreement. (k) As of the date of this Agreement, all of the contracts listed in Schedules 7(e)(i), 7(e)(ii), 7(e)(iii) and 7(e)(iii)(A) (other than the Initial Designated Contracts) and, as of the Closing Date, all of the Assigned Contracts are valid, binding and enforceable in accordance with their terms, and are in full force and effect. Except as set forth in Schedule 7(e) and except for defaults of the type referred to in Section 365(b)(2) of the Bankruptcy Code, there are no defaults as of the date of this Agreement (or events that, with notice or lapse of time or both, would constitute a default) by SELLER or any other party under any of the contracts listed on Schedules 7(e)(i), 7(e)(ii), 7(e)(iii) and 7(e)(iii)(A) (other than the Initial Designated Contracts). No representation or warranty is made as to whether any consent is required pursuant to any Real Property Lease of any of the Foreign Subsidiaries by reason of the transfer to BUYER of the stock of any such Foreign Subsidiaries.\nK:\\CORP\\MSF\\GITANO\\BNKR-SAL.8\n(l) Prior to the Closing Date, SELLER shall (x) maintain all of the Equipment in good repair, ordinary wear and tear excepted; and (y) conduct its business only in the ordinary course and consistent with past practice (subject to the effect of the Bankruptcy Petition to be filed by SELLER pursuant to Section 5). In furtherance of and without limiting the foregoing, SELLER shall not, without the prior written consent of BUYER (i) sell or dispose of Inventory except through arm's- length sales in the ordinary course of business. (ii) except in accordance with their terms, terminate, allow to expire, renew or renegotiate, or (subject to the last sentence of Section 4(b)) default in any of its obligations under any contract listed on Schedules 7(e)(i), 7(e)(ii) and 7(e)(iii), other than the Initial Designated Contracts and Real Property Leases not being assumed by BUYER pursuant to this Agreement; or (iii) dispose of or permit to lapse any rights to the use of any trademarks or trademark applications or registrations owned by SELLER (other than the \"Regatta\" and related trademarks) which are currently used by SELLER in the Business (it being acknowledged that certain such trademarks are no longer used by SELLER); or (iv) sell, transfer, mortgage, encumber or otherwise dispose of any Assets, except (A) inventory in the ordinary course of business or (B) in connection with obtaining debtor-in-possession financing pursuant to Section 364 of the Bankruptcy Code providing for up to $4 million of letters of credit for the purchase of goods in connection with the Business; or (v) agree to or make any commitment to take any actions prohibited by this Section 7(1). (m) From the date hereof and until the earlier of (i) the denial of the Approval Order by the Bankruptcy Court and (ii) the termination of this Agreement, SELLER shall not solicit offers to acquire, or otherwise seek to sell, the Assets to any party other than BUYER whether privately, through an auction or otherwise except as contemplated by this Section 7(m). BUYER and SELLER acknowledge and agree that obtaining the Approval Order as contemplated by this Agreement will necessitate the good faith consideration by SELLER of bona fide offers or expressions of interest received from third parties. The parties further acknowledge and agree that a principal purpose of the provisions of this Agreement relating to the Topping Fee and the reimbursement of expenses is to provide BUYER with compensation if the process of considering such offers or expressions of interest leads to a transaction with a third party. Accordingly, prior to the issuance of the Approval Order, SELLER may (i) respond to inquiries from third parties; (ii) review written expressions of interest; (iii) enter into a confidentiality agreement with such party and provide such party with access to information, confidential or otherwise, relating to SELLER and the Assets and, if such party requests, with information concerning, or a term sheet summarizing, or a copy of, this Agreement; and (iv) take any action in furtherance of the\nK:\\CORP\\MSF\\GITANO\\BNKR-SAL.8\nforegoing permitted by the Scheduling Order. SELLER shall promptly (x) notify BUYER of the execution of a confidentiality agreement with any party, (y) notify BUYER of any conversation with, or inquiry or offer received from, potential bidders and provide BUYER with a copy of any written communication sent to or received from bidders or potential bidders and provide BUYER with a copy of any information sent by SELLER to any potential bidder and (z) provide BUYER with any sale documentation that is in substantially final form and notify BUYER of the execution of definitive sale documentation. (n) Unless exempt under Section 1146(c) of the Bankruptcy Code, SELLER shall pay any and all sales, transfer or transaction taxes imposed by any taxing authority, including without limitation, any state, county, municipality or other subdivision thereof, in connection with the consummation of the transactions contemplated by this Agreement. (o) To the extent that the rights of SELLER under any insurance policy described in Section 2(a)(xiv) are not assignable to BUYER, SELLER shall take all actions reasonably requested by BUYER and otherwise endeavor to provide BUYER with the benefits of any such insurance policy; it being understood that all costs and expenses incurred by SELLER in connection with such actions and endeavors shall be borne by BUYER.\nK:\\CORP\\MSF\\GITANO\\BNKR-SAL.8\n8. Representations, Warranties and Covenants of BUYER BUYER represents and warrants (both as of the date of this Agreement and as of the Closing Date) to, and covenants with, SELLER as follows: (a) BUYER is a corporation duly organized, validly existing and in good standing under the laws of the state of its incorporation, with full corporate power and authority to enter into this Agreement and to perform its obligations hereunder. (b) BUYER has taken all requisite corporate action in order to authorize the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby. This Agreement has been duly and validly executed and delivered by BUYER and constitutes a legal, valid and binding obligation of BUYER, enforceable in accordance with its terms. (c) Neither the execution and delivery of this Agreement nor the consummation of the transactions contemplated hereby will (a) violate or result in a breach of or default under (i) any provision of the certificate of incorporation or by-laws (or other governing instrument) of BUYER, as currently in effect, or (ii) any mortgage, indenture, contract, agreement, license, franchise, permit, instrument, trust, power, judgment, decree, order, ruling or federal or state statute or regulation to which BUYER is presently a party or to which it or its properties may be subject, (b) result in the creation or imposition of any lien, claim, charge, restriction or encumbrance of any kind whatsoever upon, or give to any other Person any interest or right (including any right of termination or cancellation) in or with respect to any properties, assets, business, agreements or contracts of BUYER, or (c) require any consent, approval or waiver of, filing with, or notification to any Person (including, without limitation, any governmental or regulatory authority), other than as required by the HSR Act. (d) No investigation, action, suit or proceeding before any court or any governmental or regulatory authority has been commenced, and no investigation, action, suit or proceeding by any governmental or regulatory authority has been threatened (other than as described in Section 5), against BUYER or any of its principals, officers or directors (i) seeking to restrain, prevent, delay or change the transactions contemplated hereby or (ii) questioning the validity or legality of this Agreement or the transactions contemplated hereby or (iii) seeking damages in connection with any such transactions. (e) BUYER hereby acknowledges that, as of the date of this Agreement, SELLER sells its Inventory to only one customer. (f) BUYER hereby acknowledges that (i) BUYER has made such investigation into the Assets, Assigned Contracts, Designated Contracts and Other Excluded Contracts of SELLER, and has been offered the opportunity to ask such questions of appropriate officers of SELLER relating to the Assets, Assigned Contracts, Designated Contracts and Other Excluded Contracts, as BUYER deems appropriate to enter into this Agreement, and (ii) except for the specific representations and warranties contained in Section 7, BUYER is not relying on any representation or warranty by SELLER or any other Person in entering into this\nK:\\CORP\\MSF\\GITANO\\BNKR-SAL.8\nAgreement (and will not rely on any other representation or warranty in effecting the Closing). 8A. Covenants of BUYER and SELLER BUYER and SELLER each hereby covenant as follows: (a) SELLER shall give prompt notice to BUYER, and BUYER shall give prompt notice to SELLER, of (i) the occurrence, or failure to occur, of any event that would be likely to cause any representation or warranty contained in this Agreement to be untrue or inaccurate in any material respect at any time from the date of this Agreement to the Closing Date, and (ii) any failure of BUYER or SELLER, as the case may be, to comply with or satisfy, in any material respect, any covenant, condition or agreement to be complied with or satisfied by it under this Agreement. (b) As promptly as practicable but in any event within seven business days after the date of this Agreement, SELLER and BUYER shall make any and all filings required to be made under the HSR Act. SELLER and BUYER shall furnish each other such necessary information and reasonable assistance as the other may request in connection with the preparation of necessary filings or submissions under the provisions of the HSR Act. SELLER and BUYER shall supply each other with copies of all correspondence, filings or communications, including file memoranda evidencing telephonic conferences with representatives of either the Federal Trade Commission (\"FTC\"), the Antitrust Division of the United States Department of Justice (\"Department of Justice\"), or any other governmental entity or members of their respective staffs, with respect to the transactions contemplated by this Agreement, except for documents filed pursuant to Item 4(c) of the Notification and Report Form or communications regarding the same. (c)Following the date hereof SELLER shall give BUYER and its authorized representatives, full access to its books and records (and permit BUYER to make copies thereof) to the extent relating to taxes or tax returns of the Business, as BUYER may reasonably request, permit BUYER to make inspections thereof, and cause SELLER's officers and advisors to furnish BUYER with such financial, tax and other operating data and other information with respect to the taxes or tax returns of the Business for periods ending before or including the Closing Date as BUYER may reasonably request. BUYER shall give SELLER and its authorized representatives, access to its books and records (and permit SELLER to make copies thereof), permit SELLER to make inspections thereof, and cause BUYER's officers and advisors to furnish SELLER with such financial, tax and other operating data and other information with respect to the Business to the extent relating to periods prior to or including the Closing Date as SELLER may reasonably request. SELLER hereby agrees that it will retain, until all appropriate statutes of limitation (including any extensions) expire, copies of all tax returns, supporting work schedules and other records or information which may be relevant to such tax returns, except for such tax returns, supporting work schedules and other records which BUYER shall acquire as a consequence of this Agreement (provided, that SELLER may elect not to retain any such copies if SELLER gives such\nK:\\CORP\\MSF\\GITANO\\BNKR-SAL.8\ncopies or makes such copies available to BUYER), and that it will not destroy or otherwise dispose of such materials without first providing BUYER with a reasonable opportunity to review and copy such materials. (g) BUYER and SELLER shall cooperate with each other in good faith in the preparation of any tax return or form required to be filed with respect to the transactions contemplated hereby, and BUYER shall provide such certificates as SELLER may reasonably request, to minimize the tax liability of SELLER as described in Section 7(n) (provided BUYER shall not be required to take any action that increases BUYER's tax liability). 9. Conditions to BUYER's Obligation to Effect Closing The obligation of BUYER to effect the Closing shall be subject to the satisfaction, on or before the Closing Date, of the following conditions, any one or more of which may be waived by BUYER: (a) (i) The representations and warranties of SELLER set forth in this Agreement shall be true and correct in all material respects as of the date of this Agreement and as of the Closing Date as though made at such time, (ii) SELLER shall have performed and complied in all material respects with the agreements contained in this Agreement required to be performed and complied with by SELLER on or before the Closing, and (iii) BUYER shall have received certificates to the effect set forth in clauses (i) and (ii) above signed by the Chief Executive Officer or the President of SELLER. (b) The Bankruptcy Court shall have issued the Scheduling Order and the Approval Order, the effectiveness of which shall not have been stayed or, if stayed, such stay shall no longer be in effect. (c) The condition of the Assets shall not have deteriorated in any material respect after the date hereof. (d) No action or proceeding shall have been instituted by any court or other governmental body, and, at what would otherwise have been the Closing Date, remain pending before any court or governmental body to restrain or prohibit BUYER's acquisition of the Assets; nor shall any court or other governmental body have notified any party to this Agreement that BUYER's acquisition of the Assets would constitute a violation of the laws of any jurisdiction or that it intends to commence an action or proceeding to restrain or prohibit BUYER's acquisition of the Assets, unless such court or other governmental body shall have withdrawn such notice and abandoned such action or proceeding. (e) Any applicable waiting period under the HSR Act shall have expired or been terminated. (f) SELLER shall have complied with all requirements of the Scheduling Order, including, without limitation, the notice requirements with respect to the hearing on the Approval Order. (g) Each lender (or, if applicable, any successor to such lender) under (i) the Note Purchase Agreement, dated as of September 20, 1989, as amended and restated to date, with respect to the 9.88% Senior Secured Notes of Gitano due February 28, 1995 and (ii) the Credit Agreement, dated as of April 30, 1993, as amended and restated to date, among Gitano, the guarantors named\nK:\\CORP\\MSF\\GITANO\\BNKR-SAL.8\ntherein, the banks named therein (the \"Banks\") and The Chase Manhattan Bank, N.A., as agent for the Banks shall have consented to release the guarantee of SELLER's obligations to it by G.G. Licensing and any Lien it may have against any Asset owned by G.G. Licensing, so long as such Lien attaches to the portion of the Purchase Price attributable to such Assets (other than any amounts retained in trust for BUYER pursuant to Sections 3(b), (c) or (d)). 10. Conditions to SELLER's Obligation to Effect Closing The obligation of SELLER to effect the Closing shall be subject to the satisfaction, on or before the Closing Date, of the following conditions, any one or more of which may be waived by SELLER: (a) (i) The representations and warranties of BUYER set forth in this Agreement shall be true and correct in all material respects as of the date of this Agreement and as of the Closing Date as though made at such time, (ii) BUYER shall have performed and complied in all material respects with the agreements contained in this Agreement required to be performed and complied with by BUYER on or before the Closing, and (iii) SELLER shall have received certificates to the effect set forth in clauses (i) and (ii) above signed by the Chief Executive Officer or a Vice President of BUYER. (b) The Bankruptcy Court shall have issued the Approval Order, the effectiveness of which shall not have been stayed or, if stayed, such stay shall no longer be in effect. (c) Any applicable waiting period under the HSR Act shall have expired or been terminated. 11. Employees Schedule 11A lists, by department, the employees of SELLER (other than direct labor). BUYER currently intends to offer employment following the Closing Date on a fair trial basis to all employees of SELLER who are within the departments designated by BUYER on Schedule 11B. On or prior to the date of the hearing at which the Bankruptcy Court will consider the Approval Order, BUYER shall deliver to SELLER a final list of the employees of each department of SELLER to whom BUYER agrees to offer employment following the Closing Date on a fair trial basis (and BUYER shall not be required to offer employment to any other employees of SELLER). The provisions of this Section 11 shall not obligate BUYER to continue the employment of any employee of SELLER if after offering such person employment on a fair trial basis BUYER elects to terminate such person's employment. Nothing contained in this Agreement shall be construed to require BUYER to assume any employment agreement, employee benefit plan or other arrangement maintained by SELLER for the benefit of any such employees or to which SELLER contributed or was obligated to make payments. For the purposes hereof, if the benefits under any vacation, disability, severance, insurance, or other similar plan or program of BUYER is based on an employee's years of service with BUYER (or its subsidiaries), then, for the purposes of determining the eligibility for and vesting of (but not, in the case of any pension, 401(k) or similar plan, the amount of) benefits to which an employee of SELLER hired by BUYER following the Closing is entitled under such plan or program, such\nK:\\CORP\\MSF\\GITANO\\BNKR-SAL.8\nemployee's years of service with SELLER shall be counted toward his or her years of service with BUYER (or its subsidiaries). 12. Termination; Effect of Termination (a) This Agreement may be terminated before the Closing occurs only as follows: (i) By written agreement of SELLER and BUYER at any time. (ii) By BUYER, by notice to SELLER, if (A) the Bankruptcy Petition shall not have been filed on or before March 4, 1994, or (B) the Closing shall not have occurred for any reason on or before April 4, 1994. (iii) By SELLER, by notice to BUYER, if the Closing shall not have occurred for any reason on or prior to the tenth day following the issuance of the Approval Order or, if later, on or prior to the third business day after the waiting period under the HSR Act shall have expired or been terminated. (iv) By BUYER, by notice to SELLER, if one or more of the conditions specified in Section 9 is not satisfied on the Closing Date or if satisfaction of such a condition is or becomes impossible. (v) By SELLER, by notice to BUYER, if one or more of the conditions specified in Section 10 is not satisfied on the Closing Date or if satisfaction of such a condition is or becomes impossible. (vi) By SELLER or BUYER, by notice to the other, at any time prior to the entry of the Approval Order upon the occurrence of a Topping Fee Event. (b) If this Agreement is terminated by either or both of SELLER and BUYER pursuant to Section 12(a)(i), 12(a)(ii), 12(a)(iii) or 12(a)(vi), or by BUYER pursuant to Section 12(a)(iv), or by SELLER pursuant to Section 12(a)(v), neither party shall have any further obligation or liability under this Agreement except as provided in this Section 12 and except for those provisions expressly provided to survive the termination hereof and except that the Deposit shall be refunded to BUYER. (c) If the Closing does not occur by reason of a willful default or intentional misrepresentation or breach of warranty by BUYER (rather than the failure of one or more conditions precedent to BUYER's obligations to effect the Closing), SELLER may elect to retain the Deposit (A) on account of the Purchase Price, (B) as monies to be applied to SELLER's damages, or (C) as liquidated damages for such default. If SELLER elects so to retain the Deposit as liquidated damages, neither party shall have any further obligation or liability under this Agreement except for those provisions expressly provided to survive the termination hereof. (d) If this Agreement is terminated in accordance with Section 12(a)(vi) SELLER shall (i) make the payments provided for in Section 17(l) and (ii) pay BUYER the Topping Fee. Any payment by SELLER to BUYER of a Topping Fee shall be made promptly and in no event later than 10 days after the Topping Fee Event. If SELLER is obligated to make payment to BUYER pursuant to Section 17(l), such amounts shall be paid within 10 days following receipt by SELLER of documentation of such amounts. The parties\nK:\\CORP\\MSF\\GITANO\\BNKR-SAL.8\nacknowledge that in determining the payments upon termination provided for in this Section 12(d), BUYER and SELLER have taken into account the fact that BUYER's damages arising from a failure to consummate this transaction are not readily calculable. BUYER and SELLER agree that this Section 12(d) is a reasonable and appropriate method of determining damages and other compensation. (e) Upon the termination of this Agreement prior to Closing, BUYER shall immediately return to SELLER all financial, operational and other information (and all copies thereof) regarding SELLER provided by SELLER to BUYER. 13. Brokers The parties hereto represent and warrant to each other that they have not employed or dealt with any broker or finder in connection with any transactions contemplated by this Agreement, except for Kurt Salmon Associates, Inc., which shall be compensated by SELLER. 14. Access; Confidentiality (a) From and after the date hereof and until the Closing, representatives of BUYER shall have the right, upon reasonable notice and at reasonable times to visit and inspect SELLER's premises and any other locations at which any of the Assets are located and shall have the right to test, operate and otherwise evaluate the Assets and their condition and to inspect, examine and make copies of SELLER's books, accounts and records to the extent that they relate to any of the Assets. (b) SELLER will promptly deliver to BUYER copies of all pleadings, motions, notices, statements, schedules, applications, reports and other papers filed in SELLER's Chapter 11 case relating to this Agreement or the transactions contemplated hereby. (c) BUYER confirms its obligations under the confidentiality agreement previously signed by it with SELLER, which obligations shall be deemed to be incorporated by reference herein and made a part hereof. 15. Jurisdiction The parties agree that the Bankruptcy Court shall retain jurisdiction to resolve any controversy or claim arising out of or relating to this Agreement, or the breach hereof. 16. Collection of Accounts Receivable; Mail If, following the Closing, BUYER or SELLER shall collect any accounts receivable belonging to, or receive any mail that was intended for, the other party, the party collecting such accounts receivable, or receiving such mail, shall hold the same in trust and, in the case of accounts receivable, shall promptly pay the same over to the party entitled thereto and, in the case of mail, deliver such mail to the party for which it is intended (in the case of mail intended for SELLER, BUYER shall deliver such mail to SELLER'S counsel), and shall not be entitled to apply any of such funds against any amounts due from the party entitled to such accounts receivable.\nK:\\CORP\\MSF\\GITANO\\BNKR-SAL.8\n17. Miscellaneous (a) All notices, requests, demands, consents and other communications required or permitted under this Agreement shall be in writing and shall be considered to have been duly given when (i) delivered by hand, (ii) sent by telecopier (with receipt confirmed), provided that a copy is mailed (on the same date) by certified or registered mail, return receipt requested, postage prepaid, or (iii) received by the addressee, if sent by Express Mail, Federal Express or other express delivery service (receipt requested), or by first class certified or registered mail, return receipt requested, postage prepaid, in each case to the appropriate addresses and telecopier numbers set forth below (or to such other addresses and telecopier numbers as a party may from time to time designate as to itself by notice similarly given to the other party in accordance herewith). A notice of change of address shall not be deemed given until received by the addressee. If to BUYER, to it at: Fruit of the Loom, Inc. 10 Sasco Hill Road Fairfield, Connecticut 06430 Attention: Richard M. Cion Telecopier No.: 203-254-2627\nwith a copies to:\nFruit of the Loom, Inc. 233 South Wacker Drive 5000 Sears Tower Chicago, Illinois 60606 Attention: Kenneth Greenbaum, Esq. Telecopier No.: 312-993-1749\nand\nKaye, Scholer, Fierman, Hays & Handler 425 Park Avenue New York, New York 10022 Attention: Nancy E. Fuchs, Esq. Telecopier No.: 212-836-8689\nIf to SELLER, to it at:\n1411 Broadway New York, New York 10018 Attention: Robert E. Gregory, Jr., Chairman and Chief Executive Officer Telecopier No.: 212-768-3936\nK:\\CORP\\MSF\\GITANO\\BNKR-SAL.8\nwith a copy to:\nKronish, Lieb, Weiner & Hellman 1114 Avenue of the Americas New York, New York 10036 Attention: Peter J. Mansbach, Esq. Telecopier No.: 212-997-3525\n(b) No public release or announcement concerning the transactions contemplated hereby shall be issued by BUYER or SELLER without the prior consent (which shall not be unreasonably withheld) of the other party, except as such release or announcement may be required by law or the rules or regulations of any United States or foreign securities exchange, in which case each party shall allow the other party reasonable time to comment on such release or announcement in advance of such issuance. (c) This Agreement and the instruments, agreements, exhibits and other documents contemplated hereby supersede all prior discussions and agreements between the parties with respect to the matters contained herein, and this Agreement and the instruments, agreements and other documents contemplated hereby contain the entire agreement between the parties hereto with respect to the transactions contemplated hereby. (d) The representations and warranties of SELLER and BUYER made pursuant to this Agreement shall survive for a period of 45 days following the Closing. (e) After the Closing, each of the parties hereto shall hereafter, at the reasonable request of the other party hereto, execute and deliver such other instruments of transfer or assumption and further documents and agreements, and do such further acts and things as may be necessary or expedient to carry out the provisions of this Agreement. (f) Any term or condition of this Agreement may be waived at any time by the party thereto which is entitled to the benefit thereof, but such waiver shall only be effective if evidenced by a writing signed by such party. A waiver on one occasion shall not be deemed to be a waiver of the same of any other breach on a future occasion. (g) Except as otherwise expressly provided herein, this Agreement may be amended only by a writing signed by all the parties hereto. (h) This Agreement may be executed in any number of counterparts, each of which shall be deemed an original and all of which together shall constitute one and the same instrument. (i) This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and permitted assigns. This Agreement may not be assigned by any party hereto, without the prior written consent of the other party, except that BUYER may assign this Agreement to a direct or indirect wholly owned subsidiary of BUYER without the prior written consent of SELLER, provided that no such assignment shall relieve BUYER from its obligations and liabilities hereunder. This Agreement is not made for the\nK:\\CORP\\MSF\\GITANO\\BNKR-SAL.8\nbenefit of any third party, and no third party shall be deemed to be a beneficiary hereof. (j) This Agreement shall be governed by the internal law of the State of New York, without regard to the conflicts of law principles thereof. (k) The headings in this Agreement are for convenience of reference only and should not be deemed a part of this Agreement. (l) Each of the parties hereto shall pay its own expenses incidental to the preparation of this Agreement, the carrying out of the provisions of this Agreement and the consummation of the transactions contemplated hereby, except that if this Agreement shall terminate for any reason (other than because of BUYER'S breach of its obligations or because of a breach of BUYER's representations and warranties hereunder), SELLER shall upon such termination be obligated to reimburse BUYER for up to $500,000 of its out-of-pocket expenses, including\nK:\\CORP\\MSF\\GITANO\\BNKR-SAL.8\nlegal, accounting and other expenses (excluding any commitment fees paid to financing sources). IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed on the date first above written. SELLER:\nTHE GITANO GROUP, INC. AMERICO LIMITED A.N. SURVIVOR CORP. EVA JOIA INCORPORATED G.G. LICENSING, INC. GITANO LICENSING, LTD. THE GITANO MANUFACTURING GROUP, INC. GITANO SPORTSWEAR, LTD. GLOBAL SOURCING, INC. G.V. LICENSING, INC. G.V. PRODUCTS CORP. NOEL INDUSTRIES, INC.\nNORTH AMERICAN UNDERWEAR COMPANY, INC. THE ORIT CORPORATION ORIT IMPORTS, INC. ORIT MENSWEAR COMPANY, INC. ORIT RETAIL HOLDING COMPANY, INC.\nBy:_____________________________ Name: Title:\nBUYER:\nFRUIT OF THE LOOM, INC.\nBy:_____________________________ Name: Title:\nK:\\CORP\\MSF\\GITANO\\BNKR-SAL.8\nAMENDMENT NO. 1\nAMENDMENT NO. 1 dated as of March 14, 1994 to the Purchase Agreement, dated as of February 28, 1994 (the \"Purchase Agreement\"), among THE GITANO GROUP, INC., a Delaware corporation having an office at 1411 Broadway, New York, New York 10018 (\"Gitano\"); each of the direct and indirect subsidiaries of Gitano signatory hereto (such subsidiaries being referred to herein as the \"Subsidiaries\" and, together with Gitano, as \"SELLER\"); and FRUIT OF THE LOOM, INC., a Delaware corporation having an office at 233 South Wacker Drive, 5000 Sears Tower, Chicago, Illinois 60606 (\"BUYER\"). Capitalized terms used but not otherwise defined herein shall have the respective meanings ascribed to such terms in the Purchase Agreement R E C I T A L S : Upon the terms and conditions of the Purchase Agreement, BUYER has agreed to purchase from SELLER, and SELLER has agreed to sell to BUYER, substantially all of the assets of SELLER, including all the assets of G.G. Licensing (subject to certain perpetual licenses referred to on Schedule 2(a)(v) of the Purchase Agreement). The parties wish to clarify their intentions with respect to certain matters covered by the Purchase Agreement. NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. The definition of \"Approval Order\" in Section 1 is hereby amended to add the following phrase after the words \"Assigned Contracts\" in clause (v) on the 24th line of such definition: \"(other than the Dayton Lease, the G.G. Licensing Agreements and the G.G.\/Gitano Licensing Agreement to the extent of G.G. Licensing's interest in the G.G.\/Gitano Licensing Agreement)\". 2. Section 1 is hereby amended to delete the definition \"Assigned Contracts\" and replace it with the following: \" 'Assigned Contracts' means all Real Property Leases, Equipment Leases and Licenses and other agreements listed on Schedule 7(e) which are not Designated Contracts or Other Excluded Contracts, including without limitation the G.G. Licensing Agreements and G.G.\/Gitano Licensing Agreement.\" 3. Section 1 is hereby further amended to add the following defined terms: \" 'Dayton Lease'\" means the lease, dated March 20, 1991 between Isaac Heller and The Orit Corporation, as amended.\" \" 'G.G. Licensing Agreements' means the license agreements listed on Schedule 2(a)(v) of the Purchase Agreement between G.G. Licensing and New Accessories Holdings, Inc. and G.G. Licensing and Hocalar B.V.\" \" 'G.G.\/Gitano Licensing Agreement' means the license agreement, dated as of September 24, 1993, between G.G. Licensing and Gitano Licensing, Ltd.\"\n4. The definition of \"Scheduling Order\" in Section 1 is hereby amended to insert in subsection (vi) the parenthetical \"(other than the G.G. Licensing Agreements)\" immediately after the phrase \"requiring SELLER to serve a notice upon each non- SELLER party to each License\". 5. Section 2(c) of the Purchase Agreement is hereby amended to delete the following phrase in lines 11 through 15 of such section: \"all Real Property Leases, Equipment Leases and Licenses and other agreements listed on Schedule 7(e) which are not Initial Designated Contracts or Other Excluded Contracts (the \"Assigned Contracts\");\" and to substitute in its place the phrase \"Assigned Contracts other than the Dayton Lease;\". 6. Section 3A(a) of the Purchase Agreement is hereby amended to delete the first two sentences of such Section and to substitute in their place the following: \"The parties acknowledge that BUYER wishes to assume the lease of the premises occupied by SELLER in Dayton, New Jersey (the \"Dayton Facility\"). Subject to Section 4(b), SELLER shall use all reasonable efforts to assign to BUYER within 25 days after Closing all of SELLER's interest in and to the Dayton Lease, at which time BUYER shall assume all of SELLER's obligations arising under the Dayton Lease. The parties agree that during the period (the \"Interim Period\") commencing on the Closing Date and ending on the earlier of (i) the 90th day following the Closing Date and (ii) the date of the assignment to BUYER of the Dayton Lease, SELLER, to the extent reasonably requested by BUYER, will use its reasonable efforts to receive at, and distribute from, the Dayton Facility BUYER's goods in a manner consistent with past practices.\" 7. Section 4(b) is hereby amended to insert in the 3rd line the parenthetical \"(other than the Dayton Lease)\" immediately after the phrase \"the Assigned Contracts\". 8. Section 4(b) is hereby further amended to add the following parenthetical in the 9th line of such Section after the words \"Assigned Contracts\": \"(other than the Dayton Lease, the G.G. Licensing Agreements and the G.G.\/Gitano Licensing Agreement to the extent of G.G. Licensing's interest in such agreement)\". 9. Schedule 7(e)(i) is hereby amended to delete the \"X\" from the box marked by SELLER, therefore indicating that BUYER wishes to assume the Dayton Lease pursuant to Section 3A(a). 10. Schedule 7(e)(iii) of the Purchase Agreement is hereby amended to include the G.G. Licensing Agreements and the G.G.\/Gitano Licensing Agreement. 11. The Purchase Agreement, as amended, hereby shall continue in full force and effect.\nIN WITNESS WHEREOF, the parties have executed and delivered this Amendment No. 1 as of the date first above written.\nSELLER:\nTHE GITANO GROUP, INC. AMERICO LIMITED A.N. SURVIVOR CORP. EVA JOIA INCORPORATED GITANO LICENSING, LTD. G.G. LICENSING, INC.\nTHE GITANO MANUFACTURING GROUP, INC. GITANO SPORTSWEAR, LTD. GLOBAL SOURCING, INC. G.V. LICENSING, INC. G.V. PRODUCTS CORP. NOEL INDUSTRIES, INC.\nNORTH AMERICAN UNDERWEAR COMPANY, INC. THE ORIT CORPORATION ORIT IMPORTS, INC. ORIT MENSWEAR COMPANY, INC. ORIT RETAIL HOLDING COMPANY, INC.\nBy:_____________________________\nBUYER:\nFRUIT OF THE LOOM, INC.\nBy:_____________________________ Name: Title:\nMarch 7, 1994\nVia Facsimile and Certified Return Receipt Mail\nThe Gitano Group, Inc. 1411 Broadway New York, New York 10018\nAttention: Robert E. Gregory, Jr. Chairman and Chief Executive Officer\nDear Mr. Gregory:\nReference is made to that certain Purchase Agreement (the \"Agreement\") dated as of February 28, 1994 among The Gitano Group, Inc. (\"Gitano\"); each of the direct and indirect subsidiaries of Gitano signatories to the Agreement (such subsidiaries and Gitano being hereafter collectively referred to as \"Seller\"); and Fruit of the Loom, Inc. (\"Buyer\"). Defined terms used herein shall have the meanings assigned to such terms in the Agreement unless the context otherwise requires.\nPursuant to Section 2(c) of the Agreement, Buyer hereby notifies Seller that the following Licenses are hereby designated as Additional Designated Contracts which Buyer does not wish to assume and requests that Seller reject:\nSchedule 7(e)(iii) Description\nItem 18 License Agreement, dated as of August 25, 1987, between Gitano Licensing, Ltd. and NuShoes, Inc. as modified by letters dated July 17, 1992, February 17, 1993 and July 26, 1993 and an oral agreement entered into in late 1993 regarding mens and boys footwear.\nThe Gitano Group, Inc. March 7, 1994 Page Two\nItem 28 License Agreement, dated as of September 11, 1992, between Gitano Licensing, Ltd. and the John Forsyth Company, Inc.\nPlease acknowledge receipt of this letter and Buyers request that Seller reject the aforementioned Licenses by signing and returning the enclosed copy of the letter.\nVery truly yours,\nFRUIT OF THE LOOM, INC.\nBy:\nKenneth Greenbaum Vice President\nReceipt Acknowledged:\nTHE GITANO GROUP, Inc.\nBy: Its:\ncc: Kronish, Lieb, Weiner & Hellman (Via Facsimile and Certified Return Receipt) 1114 Avenue of the Americas New York, New York 10036 Attention: Peter J. Mansbach, Esq.\nSteven Gerber Nancy E. Fuchs\nMarch 10, 1994\nVia Facsimile and Certified RRR\nThe Gitano Group, Inc. 1411 Broadway New York, New York 10018\nAttention: Robert E. Gregory, Jr. Chairman and Chief Executive Officer\nDear Mr. Gregory:\nReference is made to that certain Purchase Agreement (the \"Agreement\") dated as of February 28, 1994 among The Gitano Group, Inc. (\"Gitano\"); each of the direct and indirect subsidiaries of Gitano signatories to the Agreement (such subsidiaries and Gitano being hereafter collectively referred to as \"Seller\"); and Fruit of the Loom, Inc. (\"Buyer\"). Defined terms used herein shall have the meanings assigned to such terms in the Agreement unless the context otherwise requires.\nPursuant to Section 2(a)(vi)(B) of the Agreement, Buyer hereby notifies Seller that it hereby designates the stock of Noel of Jamaica Ltd. as one of the Assets that Buyer will acquire at the Closing.\nThe Gitano Group, Inc. March 7, 1994 Page Two\nPlease acknowledge receipt of this letter by signing and returning the enclosed copy of the letter.\nVery truly yours,\nFRUIT OF THE LOOM, INC.\nBy:\nKenneth Greenbaum Vice President\nReceipt Acknowledged:\nTHE GITANO GROUP, Inc.\nBy: Its:\ncc: Kronish, Lieb, Weiner & Hellman (Via Facsimile and Certified RRR) 1114 Avenue of the Americas New York, New York 10036 Attention: Peter J. Mansbach, Esq.\nSteven Gerber Nancy E. Fuchs\nFRUIT OF THE LOOM, INC. AND SUBSIDIARIES EXHIBIT 11 Computation of Earnings Per Common Share (In thousands, except per share data)\nEXHIBIT 22 SUBSIDIARIES OF FRUIT OF THE LOOM, INC.\nJurisdiction of Incorporation\nUnion Underwear Company, Inc. New York NWI Land Management Corporation Delaware\nSubsidiaries of Union Underwear Company, Inc. Aliceville Cotton Mill, Inc. Alabama Apparel Outlet Stores, Inc. Delaware Brundidge Shirt Corp. Alabama The B.V.D. Licensing Corporation Delaware Camp Hosiery Company, Inc. Tennessee Fayette Cotton Mill, Inc. Alabama Fruit of the Loom, Inc. (a New York corporation) New York FTL Sales Company, Inc. New York Greenville Manufacturing, Inc. Mississippi Jet Sew Technologies, Inc. New York Leesburg Knitting Mills, Inc. Alabama Martin Mills, Inc. Louisiana Panola Mills, Inc. Mississippi Rabun Apparel, Inc. Georgia Russell Hosiery Mills, Inc. North Carolina Salem Sportswear Corporation Delaware Sherman Warehouse Corporation Mississippi Union Sales, Inc. Delaware Union Yarn Mills, Inc. Alabama Woodville Apparel Corporation Mississippi Winfield Cotton Mill, Inc. Alabama Whitmire Manufacturing, Inc. South Carolina Fruit of the Loom Caribbean, Inc. Delaware Fruit of the Loom Canada, Inc. Ontario Fruit of the Loom Arkansas, Inc. Arkansas Fruit of the Loom Texas, Inc. Texas Fruit of the Loom Italy, S.r.l. Italy AVX Management Co., Inc. Kentucky Superior Acquisition Corporation Delaware Superior Underwear Mill, Inc. New York FOL International Republic of Ireland\n[FN] Excludes some subsidiaries which, if considered in the aggregate as a single subsidiary, would not constitute a \"significant subsidiary\" at December 31, 1993.\nEXHIBIT 22 SUBSIDIARIES OF (Continued) FRUIT OF THE LOOM, INC.-(Continued)\nJurisdiction of Incorporation\nSubsidiaries of Russell Hosiery Mills, Inc. (a North Carolina corporation) Leesburg Yarn Mills, Inc. Alabama\nSubsidiaries of Camp Hosiery Company, Inc. (a Tennessee corporation) Russmont Hosiery Mill, Inc. North Carolina\nSubsidiaries of Union Sales, Inc. (a Delaware corporation) Fruit of the Loom Trading Company Delaware\nSubsidiaries of Union Yarn Mills, Inc. (an Alabama corporation) DeKalb Knitting Corporation Alabama\nSubsidiaries of Superior Acquisition Corporation (a Delaware corporation) Prendas Tejidas de Mexico, S.A. de C.V. Mexico Tejidos de Valle Hermosa, S.A. de C.V. Mexico Confecciones dos Caminos, S.A. Honduras\nSubsidiaries of FOL International (a Republic of Ireland corporation) W.P. McCarter & Co., Ltd. Republic of Ireland Fruit of the Loom France, S.a.r.l. France Fruit of the Loom GmbH Germany Fruit of the Loom International, Ltd. Republic of Ireland Fruit of the Loom International S.P. Z.0.0 Poland Fruit of the Loom Investments, Ltd. United Kingdom Fruit of the Loom Spain, S.A. Spain Fruit of the Loom Benelux, S.A. Belgium\n[FN] Excludes some subsidiaries which, if considered in the aggregate as a single subsidiary, would not constitute a \"significant subsidiary\" at December 31, 1993.\nEXHIBIT 22 SUBSIDIARIES OF (Concluded) FRUIT OF THE LOOM, INC.-(Concluded)\nSubsidiaries of Fruit of the Loom International, Ltd. (a Republic of Ireland corporation) McCarters Ireland, Ltd. Republic of Ireland\nSubsidiaries of Fruit of the Loom Investments, Ltd. (a United Kingdom corporation) Fruit of the Loom, Ltd. United Kingdom Fruit of the Loom Management Co., Ltd. United Kingdom Fruit of the Loom Manufacturing Co., Ltd. United Kingdom\nSubsidiaries of The Fruit of the Loom Trading Company (a Delaware corporation) Controladora Fruit of the Loom, S.A. de C.V. Mexico Fruit of the Loom Sales Mexico, S.A. de C.V. Mexico\nSubsidiaries of Controladora Fruit of the Loom, S.A. de C.V. (a Mexico corporation) Distribuidora Fruit of the Loom, S.A. de C.V. Mexico\n[FN] Excludes some subsidiaries which, if considered in the aggregate as a single subsidiary, would not constitute a \"significant subsidiary\" at December 31, 1993.\nEXHIBIT 24\nCONSENT OF INDEPENDENT AUDITORS\nWe consent to the incorporation by reference in the Registration Statements (Forms S-8 Nos. 33-18250, 33-56214, 33- 57472 and 33-50499 and Forms S-3 Nos. 33-56376, 33-56378 and 33- 52023) pertaining to the Fruit of the Loom, Inc. 1987 Stock Option Plan, the Richard C. Lappin Stock Option Plan, the 1992 Executive Stock Option Plan, the Fruit of the Loom, Inc. Directors' Stock Option Plan, the registration of 800,000 shares of Class A Common Stock, 1,550,391 shares of Class A Common Stock and 1,800,000 shares of Class A Common Stock and in the related Prospectuses of our report dated February 12, 1994 with respect to the consolidated financial statements of Fruit of the Loom, Inc. and subsidiaries included in the Annual Report (Form 10-K) for the year ended December 31, 1993.\nERNST & YOUNG\nChicago, Illinois March 16, 1994\nMarch 21, 1994\nOFICS Filer Support SEC Operations Center 6432 General Green Way Alexandria, VA 22312-2413\nGentlemen:\nAttached to this transmission please find Fruit of the Loom's Annual Report on Form 10-K for the year ended December 31, 1993.\nHard copies of this document follow via special courier.\nSincerely,\nJohn R. Carroll Assistant Controller, Farley Industries\nJRC\/kd Enclosures","section_15":""}
{"filename":"714560_1993.txt","cik":"714560","year":"1993","section_1":"Item 1. BUSINESS\nUSAir Group, Inc. (\"USAir Group\" or the \"Company\") is a corporation organized under the laws of the State of Delaware. The Company's executive offices are located at 2345 Crystal Drive, Arlington, Virginia 22227 (telephone number (703) 418-5306). USAir Group's primary business activity is ownership of all the common stock of USAir, Inc. (\"USAir\"), Pennsylvania Commuter Airlines, Inc. (which is operating as Allegheny Commuter Airlines) (\"Alleghe- ny\"), Piedmont Airlines, Inc. (\"Piedmont\") (formerly Henson Aviation, Inc.), Jetstream International Airlines, Inc. (\"Jet- stream\"), USAir Fuel Corporation (\"USAir Fuel\"), USAir Leasing and Services, Inc. (\"USAir Leasing and Services\") and Material Services Company, Inc. In May 1987, the Company acquired Pacific Southwest Airlines (\"PSA\"), which merged into USAir on April 9, 1988. In November 1987 the Company completed its acquisition of Piedmont Aviation, Inc. (\"Piedmont Aviation\"), which merged into USAir on August 5, 1989. On July 15, 1992, the Company sold three wholly- owned subsidiaries, Piedmont Aviation Services, Inc., Air Service, Inc. and Aviation Supply Corporation. The former subsidiaries were engaged in fixed base operations and the sale and repair of aircraft and aircraft components. During the third quarter of 1992, the Company merged one wholly-owned subsidiary, Allegheny Commuter Airlines, Inc. into another, Pennsylvania Commuter Airlines, Inc.\nSignificant Impact of Low Cost, Low Fare Competition\nAs discussed in greater detail in \"Management's Discussion and Analysis of Financial Condition and Results of Operations,\" the dramatic expansion of low fare competitive service in many of USAir's markets in the eastern U.S. during the first quarter of 1994 and USAir's competitive response in February 1994 by reducing its fares up to 70 percent in those markets and other affected markets in order to preserve its market share led the Company to announce that it expected to experience greater losses in 1994 than it experienced in 1993.\nIn September 1993, Southwest Airlines, Inc. (\"Southwest\"), a low cost, low fare, \"no frills\" air carrier which had not previous- ly provided service to or in the eastern U.S., inaugurated service to Chicago and Cleveland from Baltimore\/ Washington International Airport (\"BWI\") at fares substantially below those previously offered by USAir and other airlines in the same markets. BWI is one of USAir's hub airports. Unlike the other major U.S. air carriers, Southwest does not structure its operations around connecting hub airports, relying instead on high frequency point- to-point service. USAir responded by matching most of Southwest's fares and increasing the frequency of service in related markets.\nOn March 22, 1994, Southwest announced that on May 26, 1994, and June 6, 1994, it will expand service between BWI and Chicago. Southwest also announced that on May 26, 1994, it will initiate its low fare service between BWI and St. Louis, and on July 8, 1994, between BWI and Birmingham, Alabama and Louisville, Kentucky. At this time, USAir has not determined its response to the Southwest announcement.\nIn October 1993, Continental Airlines (\"Continental\"), which had reorganized under bankruptcy proceedings earlier in 1993, inaugurated low fare service on certain routes in the eastern U.S. USAir is a competitor in most of the markets served by these routes. While Continental initiated service to certain cities, such as Charleston, South Carolina; Greensboro, North Carolina; and Jacksonville, Florida; most of the markets included as part of its new program (for example, Baltimore) were previously served by Continental through its hubs at Newark, Cleveland, and Houston. However, under its new program, Continental linked certain of these cities independently of its hubs while continuing to provide many of the same services that are available on its hub flights, including advance seat assignment, frequent traveler mileage credits and interline connections. Under its new program, Continental served approximately 80 city pair markets, from which USAir has historically realized approximately 4% of its total passenger revenue. When Continental started the new program it was uncertain whether the program was an experiment or a beachhead from which Continental planned to expand further. USAir, therefore, made a measured response by matching most of the low fares offered by Continental.\nOn January 31, 1994, Continental increased its competitive threat. It announced that by March 9, 1994, it would expand the low fare program to approximately 356 city pair markets, most of which USAir served and from which USAir has historically realized approximately 8% of its passenger revenue. Moreover, if secondary markets within a 90-mile radius, or a reasonable driving distance, were viewed as being included in Continental's new program, markets from which USAir has historically realized approximately 36% of its passenger revenue were affected. Contemporaneously, Continental announced that it would substantially reduce service at its Denver hub and redeploy significant aircraft and personnel resources to the eastern U.S. Although Continental's balance sheet continues to have significant leverage following its bankruptcy reorganization, its liquidity position improved substantially as a result of equity and debt infusions completed as part of that reorganization. Moreover, Continental completed a common stock offering in December 1993, which may indicate the market's receptivity to its efforts to raise additional funds. Continental has operating (including labor) costs that are substantially lower than those of USAir and the other major air carriers.\nOn February 8, 1994, in response to the expansion of Continen- tal and to avoid loss of market share in the eastern U.S., USAir lowered in primary and secondary markets affected by the Continen- tal expansion, by as much as 50%, the fares most commonly used by business travelers on many east coast routes. In addition, USAir lowered leisure fares by as much as 70% in the same markets. In many of the markets, free companion fares are available with business fares. These reduced fares have no expiration date. However, USAir could adjust the fares at some time in the future. Increases in traffic which are stimulated by the lower fares offered by Southwest, Continental and USAir will not offset USAir's reduced revenue resulting from lower yields in these markets.\nUSAir believes that Southwest, Continental or other low cost carriers with a significant cost advantage over USAir likely will expand their operations to additional markets. For example, in December 1993, Southwest completed its acquisition of Morris Air, a regional air carrier with operations concentrated in the western U.S. This acquisition could enable Southwest to divert resources to expand its operations in the eastern U.S. Furthermore, media reports indicate that Southwest has entered into a long-term agreement for the use of four additional gates at BWI, where it currently operates from two gates. On March 4, 1994, Continental further escalated prospective competition by announcing that it will further reduce operations at its Denver, Colorado hub and establish a flight crew base at Greensboro, North Carolina. These measures are likely to increase losses at USAir because they could enable Continental, which has significantly lower costs than USAir, to expand further its high frequency, low fare service described above in additional short-haul markets served by USAir with substantial detriment to USAir. In addition, other low cost carriers may enter other USAir markets. For example, America West Airlines (\"America West\") announced on February 15, 1994 that it will commence service on April 18, 1994 between Columbus, Ohio where it operates a hub and Philadelphia, where USAir has a hub operation. Other carriers, including some of the larger carriers, have also indicated their intent to develop similar low-fare short- haul service.\nIn March 1994, USAir announced that it expected a pre-tax loss for the quarter ended March 31, 1994 of approximately $200 million and that it expected a pre-tax loss for the full year of 1994 in excess of the $350 million loss reported for 1993. USAir, whose operating costs are among the highest in the domestic airline industry, believes that it must reduce those costs significantly if it is to survive in this low fare competitive environment. The largest single component of USAir's operating costs, approximately 40 percent, relates to personnel costs. USAir also announced in March 1994 that it had initiated discussions with the leaders of its unionized employees regarding efforts to reduce these costs, including reductions in wages, improvements in productivity and other cost savings.\nThe outcome of those discussions is uncertain. There are recent examples of companies in the airline industry which have obtained employee concessions in agreements also resulting in the recapitalization of the companies, including employee ownership stakes and employee participation in corporate governance as well as the restructuring of debt and lease obligations. In other cases, airlines have filed for bankruptcy protection under Chapter 11 of the bankruptcy code, and some airlines have ceased operation altogether when their operating costs remained excessive in relation to their revenues, and their liquidity became insufficient to sustain their operations. In addition, other factors beyond the Company's control, such as a downturn in the economy, a dramatic increase in fuel prices or intensified industry fare wars, could have a material adverse effect on the Company's and USAir's prospects and financial condition. Because the Company and USAir are highly leveraged and currently do not have access to bank credit and receivables facilities which had supplied a substantial portion of their liquidity, they could be more vulnerable to these factors than their financially stronger competitors. See \"Managem- ent's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources.\"\nBritish Airways Announcement Regarding Additional Investment in the Company; Code Sharing\nAs described in greater detail in \"British Airways Investment Agreement\" below, on January 21, 1993, the Company and British Airways Plc (\"BA\") entered into an Investment Agreement (as subsequently amended, the \"Investment Agreement\"). Pursuant to the Investment Agreement, on the same date, BA invested $300 million in certain preferred stock of the Company. In June 1993, pursuant to BA's exercise of its preemptive and optional purchase rights under the Investment Agreement which were triggered by the issuance by the Company to the public, and under certain employee benefit plans, of certain shares of common stock, BA purchased $100.7 million of additional series of preferred stock of the Company. The Company has benefitted from the additional equity provided by BA and also from the resulting enhancement of the Company's image in the marketplace and in the investment community. However, on March 7, 1994, BA announced that because of the Company's continued substantial losses it would make no additional investments in the Company until the outcome of the Company's efforts to reduce its costs is known. See \"Significant Impact of Low Fare, Low Cost Competition\" above and \"Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources.\" At the same time, BA indicated it would continue to cooperate with USAir on the code sharing arrangements discussed below.\nIn addition, since January 1993, pursuant to the Investment Agreement, BA and USAir have entered into code sharing arrangements whereby certain USAir flights carry the airline designator code of\nboth USAir and BA. Code sharing is a common practice in the airline industry whereby one carrier sells the flights of another carrier (its code sharing partner) as if it provides those flights with its own equipment and personnel. On March 17, 1994, the U.S. Department of Transportation (the \"DOT\") issued an order renewing for one year all of the code share authority it had previously approved for USAir and BA which includes authority to code share to 64 airports in the U.S. through 12 gateways and to Mexico City through Philadelphia. The DOT did not act on other pending applications by BA and USAir for expanded code share authority.\nMajor Airline Operations\nUSAir, a certificated air carrier engaged primarily in the business of transporting passengers, property and mail, is the Company's principal operating subsidiary, accounting for more than 93% of USAir Group's operating revenues in 1993. USAir is one of nine passenger carriers classified as \"major\" airlines (those with annual revenues greater than $1 billion) by the United States Department of Transportation (the \"DOT\"). USAir enplaned more than 54.0 million passengers in 1993, and is the sixth largest United States air carrier ranked by revenue passenger miles (\"RPMs\") flown.\nAt January 31, 1994, USAir provided regularly scheduled jet service through 118 airports to more than 154 cities in the continental United States, Canada, the Bahamas, Bermuda, the Cayman Islands, Puerto Rico, Germany, France and the Virgin Islands. USAir ceased serving the United Kingdom in January 1994. See \"British Airways Investment Agreement\". USAir's executive offices are located at 2345 Crystal Drive, Arlington, Virginia 22227 (telephone number (703) 418-7000), and its primary connecting hubs are located at the Pittsburgh, Charlotte\/Douglas, Philadelphia and Baltimore\/Washington International (\"BWI\") Airports. A substantial portion of USAir's RPMs is flown within or to and from the eastern United States. USAir Group and USAir incurred substantial operating and net losses during 1991, 1992 and 1993.\nDuring the first quarter of 1992, USAir's RPMs decreased over the same period in 1991, however, yield, or passenger revenue per RPM, improved. The decline in traffic was attributable to the May 1991 Restructuring (discussed below) and the economic recession. It is not possible to estimate accurately how many business and leisure travelers decided not to travel during 1991 and 1992 as a result of the recession and perceived weak recovery. During the second quarter of 1992, American Airlines, Inc. (\"American\") introduced a four-tier fare structure which resulted in the proliferation of deeply discounted promotional fares in the second and third quarters of 1992. Although the promotional fares significantly stimulated traffic during the second and third quarters of 1992, yields suffered substantial declines versus comparable periods in 1991.\nAlthough yields at USAir recovered and improved significantly in the fourth quarter of 1992 and in the first three quarters of 1993, yields started to erode in the fourth quarter of 1993 and declined versus the comparable quarter of 1992 due to proliferation of discount and promotional fares which were designed to stimulate passenger traffic. Yields have continued to be weak in the first quarter of 1994 due primarily to USAir's action to reduce fares to remain competitive with low cost low fare carriers which had entered many of USAir's markets in the eastern U.S. During 1993, systemwide traffic remained relatively weak. In addition, the domestic airline industry was characterized in 1991 - 1993 by substantial losses, excess capacity, intense competition and certain carriers operating under the protection of Chapter 11 of the Bankruptcy Code. Any of these factors or other developments, including the emergence of America West from bankruptcy, the entry or potential entry of low cost carriers in USAir's markets and a resurgence in low fare competition from these and other carriers could have a material adverse effect on the Company's yields, liquidity and financial condition. See \"Significant Impact of Low Fare, Low Cost Competition\" above and Item 7. \"Management's Discussion and Analysis of Financial Condition and Results of Operations.\"\nFor information on possible further effects of the recent economic recession, increased competition from low cost, low fare carriers, possible restructuring of the Company and USAir, consolidation in the domestic airline industry and globalization of the airline industry, see Item 7. \"Management's Discussion and Analysis of Financial Condition and Results of Operations.\"\nUSAir implemented several operational changes during the period 1991 through 1993 in efforts to return to profitability and has announced plans for additional action in 1994.\nOn May 2, 1991, USAir ceased operating its fleet of 18 British Aerospace BAe 146-200 (\"BAe-146\") aircraft, ceased serving eight airports in California, Oregon and Washington, and eliminated some flights at Baltimore\/Washington and Cleveland Hopkins International Airports. Although other service was added to partially offset these reductions, the net effect was a decrease of approximately three percent in USAir's system available seat miles (\"ASMs\"), and a net reduction in scheduled departures of ten percent from January 1991 service levels. In connection with this restructuring, USAir closed four flight crew bases, two heavy maintenance facilities and one reservations office (these measures are collectively referred to as the \"May 1991 Restructuring\"). (In April 1993, USAir reintroduced long-haul service at John Wayne Airport in Orange County, California, one of the airports that USAir ceased serving in the May 1991 Restructuring).\nEffective January 7, 1992, USAir discontinued its hub operations at Dayton, Ohio due to operating losses there. Daily jet departures from Dayton were reduced from 72 to 23. The majority of USAir's jet flights between Dayton and smaller and medium-sized \"spoke\" cities was shifted to USAir's hub at Pitts- burgh, Pennsylvania, and there was no reduction in total systemwide capacity as a result of this action.\nIn September 1993, USAir announced steps to reduce projected operating costs in 1994 by approximately $200 million. These measures include a workforce reduction of approximately 2,500 full time positions, revision of USAir's vacation, holiday and sick leave policy and a review of planned 1994 capital expenditures. The workforce reduction, which USAir anticipates will be completed by the end of the first quarter of 1994, will be comprised primarily of the elimination of approximately 1,800 customer service, 200 flight attendant and 200 maintenance positions. USAir recorded a non-recurring charge of approximately $68.8 million primarily in the third quarter of 1993 for severance, early retirement and other personnel-related expenses in connection with the workforce reduction.\nIn March 1994, USAir initiated discussions with the leadership of its unionized employees regarding reductions in wages, improve- ments in productivity and other cost savings as a result of the entry of low cost low fare carriers in many of its markets and USAir's response to this low fare competition. See \"Significant Impact of Low Cost, Low Fare Competition\" above and Item 7. \"Management's Discussion and Analysis of Financial Condition and Results of Operations\".\nIn counterpoint to the reductions outlined above, USAir has also taken, or plans to take, the following steps to augment or enhance its service.\nIn December 1991, USAir reached agreements with General Electric Capital Corporation (\"GE Capital\") and with The Boeing Company (\"Boeing\") to acquire up to 40 757-200 aircraft during 1992-1997. USAir agreed to lease ten aircraft owned by GE Capital and formerly operated by Eastern Air Lines (\"Eastern\"). In December 1992, USAir agreed to sublease an additional 757-200 aircraft from Boeing that was formerly operated by Eastern. USAir added these 11 aircraft to its operating fleet during 1992. USAir also agreed with Boeing to purchase 15 new 757-200 aircraft in 1993 and 1994, and took options to purchase 15 more 757-200s in 1996 and 1997. In April 1993, USAir and Boeing reached an agreement to exercise the options on 757-200 aircraft previously scheduled for delivery in 1996-1997 and accelerate their delivery to 1995-1996, and to convert a firm order for a 767-200 aircraft, originally scheduled for delivery in 1994, to a firm order for a 757-200 aircraft, also scheduled for delivery in 1994. Boeing granted USAir options to purchase 15 additional 757-200 aircraft for 1995\nand beyond, three of which have expired. In addition, Boeing relieved USAir of its obligation to purchase 20 of its 60 firm orders for Boeing 737 series aircraft and agreed to reschedule delivery of the remaining 40 on order. No new firm order 737 aircraft are scheduled to be delivered to USAir between 1994-1996, while 12 new 737 aircraft will be delivered annually in the years 1997-1999 and four will be delivered in the year 2000. USAir is using the Boeing 757-200 aircraft, which seats approximately 190 passengers, on long-haul routes and in high demand markets where potential passenger traffic may not currently be accommodated on smaller aircraft at peak travel times. USAir considers the 757-200 aircraft to be more suitable for these missions than the Boeing 767-200 and Boeing 737 aircraft types. The above actions supple- ment USAir's agreements with Boeing in 1990 and 1991 to defer delivery of several 737 and 767 aircraft originally scheduled for the 1991-1994 period. Overall, the deferrals have substantially reduced USAir's capital commitments and financing needs during that time period. USAir is engaged in negotiations with Boeing regarding, among other things, the current schedule of new aircraft deliveries. See Item 7. \"Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources\" and Item 8A. Note 4 to the Company's Consolidat- ed Financial Statements.\nOn January 17, 1992, USAir purchased 62 jet take-off and landing slots and 46 commuter slots at New York City's LaGuardia Airport (\"LaGuardia\") and six jet slots at Washington National Airport from Continental Airlines (\"Continental\") for $61 million. USAir also assumed Continental's leasehold obligations associated with the East End Terminal, which commenced operations on Septem- ber 12, 1992, and a flight kitchen at LaGuardia. USAir acquired all 46 commuter slots and 24 of the jet slots at LaGuardia on February 1, 1992; the remaining 38 jet slots at LaGuardia and all six jet slots at Washington National Airport were transferred to USAir on May 1, 1992. As a result of the acquisition, USAir expanded its operations at LaGuardia including the initiation of non-stop service to eight additional cities, four of which are in Florida. The New York-Florida markets are among the largest in the nation. USAir Express carriers used the commuter slots to expand service primarily to cities in the northeastern United States. (See \"Commuter Airline Operations\"). Expansion into these jet and commuter markets enhanced USAir's presence in the New York area and in the northeast. In addition, the East End Terminal permitted USAir to consolidate its mainline, commuter and USAir Shuttle operations in adjoining facilities, which USAir believes are the most comfortable and convenient at LaGuardia. USAir sold substan- tially all the assets associated with the flight kitchen operation on October 9, 1992.\nUSAir Group reached an agreement during 1992 with the creditors of the Trump Shuttle to manage and operate the Shuttle under the name \"USAir Shuttle\" for a period of up to ten years.\nUnder the agreement, USAir Group has an option to purchase the shuttle operation on or after October 10, 1996. The USAir Shuttle commenced operations in April 1992 between New York City, Boston and Washington D.C.\nEffective August 1, 1992, USAir leased 28 take-off and landing slots at Washington National Airport from Northwest Airlines, Inc. (\"Northwest\"). USAir is using the slots to offer expanded service from Washington to five Florida cities and New Orleans. In August 1993, USAir purchased eight of these slots from Northwest. USAir continues to lease the remaining slots from Northwest.\nOn October 1, 1992, USAir moved its hub operation at Pitts- burgh, which is the largest on its system, to the new Pittsburgh International Airport terminal, where USAir leases 53 of 75 gates. USAir believes that the Pittsburgh hub, one of the largest hub airports (measured by departures) in the U.S., is one of the most efficient connecting complexes in the nation.\nEffective February 1, 1993, USAir and USAir Express service within the state of Florida commenced operating under the brand name \"USAir Florida Shuttle\". In addition, USAir started hourly service between Miami and Tampa and Miami and Orlando. On February 1, 1993 total USAir and USAir Express daily departures in the intra-Florida markets and to cities outside Florida increased approximately 27% over February 1992 levels. To enhance customer service and bolster brand loyalty within the state, USAir offered special benefits, bonus miles and upgrades to Florida residents participating in its Frequent Traveler Program. (See Item 7. \"Management's Discussion and Analysis of Financial Condition and Results of Operations - General Economic Conditions and Industry Capacity.\")\nBy June 1993 USAir increased capacity between key cities on the west coast of the U.S. and cities in the midwestern and eastern parts of the nation as it realigned west coast schedules and increased its emphasis on long-haul flights. Much of the increase in capacity was achieved by replacing smaller aircraft types with 757-200 aircraft.\nDuring 1993 and thus far in 1994 USAir and BA have gradually implemented code sharing arrangements pursuant to the Investment Agreement. As of March 1, 1994, USAir and BA had implemented code sharing to 34 of the 65 airports currently authorized by the DOT. See \"British Airways Announcement Regarding Additional Investment in the Company; Code Sharing\" above and \"British Airways Investment Agreement\" below.\nIn March 1994, USAir (i) purchased from United Air Lines, Inc. (\"United\") certain takeoff and landing slots at Washington National Airport and New York LaGuardia Airport; (ii) purchased from United\ncertain gates and related space at Orlando International Airport and (iii) granted to United options to purchase certain gates and related space, and a right of first refusal to purchase certain takeoff and landing slots, at Chicago O'Hare International Airport. In December 1993, USAir reached an agreement with United to negotiate a code sharing agreement with United regarding USAir's flights to and from Miami and United's flights between Miami and Latin America. Consummation of the code sharing agreement is subject to a number of conditions, including governmental approvals and definitive documentation. At this time, USAir cannot predict when the transactions contemplated by the code sharing agreement with United will be consummated. In September 1993, USAir received a civil investigative demand from the U.S. Department of Justice (\"DOJ\") related to an investigation of violations of Section 1 of the Sherman Act in connection with USAir's agreement with United regarding the above transactions. Although there can be no certainty, USAir does not believe the DOJ will seek to overturn the transactions described in (i), (ii) and (iii) above.\nIn 1994, USAir has implemented and plans to implement certain changes to its service on certain short-haul routes to reduce the cost and increase the efficiency of those operations. In addition, in the second half of 1993 and early 1994, USAir experienced increased competition from low cost, low fare carriers. See \"Significant Impact of Low Cost, Low Fare Competition\" and Item 7. \"Management's Discussion and Analysis of Financial Condition and Results of Operations - Low Cost, Low Fare Competition\".\nIn response to the entry of certain low cost, low fare competitors at BWI and as part of USAir's measures to reduce the cost and increase the efficiency of its shorthaul service, USAir has substantially expanded its operations at BWI. As of March 1994, USAir had 121 daily jet departures at that airport compared to 91 daily jet departures in March 1993. See Item 7. \"Manage- ment's Discussion and Analysis of Financial Condition and Results of Operations - Low Cost, Low Fare Competition.\"\nIn November 1993, USAir commenced service between BWI and St. Thomas, Virgin Islands and between Charlotte and Tampa and Grand Cayman, Cayman Islands. In addition, USAir commenced nonstop service from Philadelphia to Mexico City in March 1994 and will commence non-stop service from Tampa to Mexico City in May 1994.\nAs a result of seasonal adjustments, increased service to existing markets and service to new destinations, on May 8, 1994, USAir also plans to increase daily jet departures at its Pittsburgh hub from 327 to 355 and at its Charlotte hub from 323 to 334.\nIn summary, in 1993, USAir continued to try to capitalize on its strong franchise in the northeastern U.S. and in Florida, based on measures it had implemented in 1991 and 1992. By the end of the third quarter of 1993, however, due to continued fare discounting, a resurgence of low fare competition from low cost carriers,\npersistent consumer price consciousness and, despite significant countermeasures, increased operating expenses, it became clear that for USAir to remain competitive, it needed to reduce costs and become more efficient. This realization resulted in, among other steps, the reduction in force of 2,500 full-time positions initiated in 1993, the innovations in short-haul service and the initiation of discussions with the leadership of USAir's unionized employees regarding wage reductions, improved productivity and other costs savings described in \"Significant Impact of Low Cost, Low Fare Competition\" above and Item 7. \"Management's Discussion and Analysis of Financial Condition and Results of Operations - Low Cost, Low Fare Competition.\" USAir is engaged in formulating additional plans to reduce its operating costs in 1994.\nUSAir's operating statistics during the years 1989 through 1993 are set forth in the following table:\n* Scheduled service only. c = cents\n(1) Statistics for 1989 are set forth on a pro forma basis to include the jet operations of Piedmont Aviation as if it had merged into USAir effective January 1, 1989. (2) Passenger load factor is the percentage of aircraft seating capacity that is actually utilized (RPMs\/ASMs). (3) Breakeven load factor represents the percentage of aircraft seating capacity that must be utilized, based on fares in effect during the period, for USAir to break even at the pre- tax income level, adjusted to exclude non-recurring and\nspecial items. (4) Adjusted to exclude non-recurring and special items. (5) Financial statistics for 1993 exclude revenue and expense generated under the BA wet lease arrangement.\nCommuter Airline Operations\nMost commuter airlines in the United States are affiliated with a major or regional jet carrier. USAir provides reservations and, at certain stations, ground support services, in return for service fees, to 10 commuter carriers (including Allegheny, Piedmont and Jetstream) which operate under the name \"USAir Express.\" At certain other stations, the commuter carriers commenced performing ground support for their operations in 1993. These airlines share USAir's two-letter designator code and feed connecting traffic into USAir's route system at several points, including its major hub operations at Pittsburgh, Charlotte, Philadelphia and BWI. At January 5, 1994, USAir Express carriers served 181 airports in the United States, Canada and the Bahamas, including 88 also served by USAir. During 1993, USAir Express' combined operations enplaned approximately 8.7 million passengers.\nPiedmont's collective bargaining agreement with the Air Line Pilots Association (\"ALPA\"), which represents its pilot employees, became amendable on December 1, 1992. On February 22, 1994, the National Mediation Board (the \"NMB\"), which had assigned a mediator to the negotiations between Piedmont and ALPA on a new agreement, declared these negotiations at an impasse and commenced a thirty- day \"cooling-off\" period. Upon the expiration of this period at midnight on March 25, 1994, the Piedmont pilots would be free to strike and Piedmont could resort to self-help measures. As USAir's largest commuter affiliate, Piedmont provides significant passenger feed to USAir. In addition, if the Piedmont pilots commence a strike, other USAir Express or USAir employees could refuse to cross picket lines or engage in sympathy strikes. USAir would view such activity as violative of applicable contracts and the Railway Labor Act and would pursue all legal remedies to halt it. Suspension of the operations of Piedmont, other USAir Express carriers or USAir for a prolonged period due to strikes or self- help measures could have a material adverse effect on the Company's and USAir's financial condition and prospects.\nUSAM Corp.\nAt December 31, 1992, USAM Corp. (\"USAM\"), a subsidiary of USAir, owned 11% of the Covia Partnership (\"Covia\") which owned and operated a computerized reservation system (\"CRS\"). In September 1993, Covia purchased the assets of the corporation that owned and operated the Galileo CRS which provided CRS services to travel agent subscribers in Europe. Covia was then separated into three entities. As a result, at December 31, 1993, USAM owns 11% of the Galileo International Partnership, approximately 11% of the Galileo\nJapan Partnership and approximately 21% of the Apollo Travel Services Partnership.\nThe Galileo International Partnership owns and operates the Galileo CRS (\"Galileo\"). Galileo Japan Partnership markets CRS services in Japan. Apollo Travel Services markets CRS services in the U.S. and Mexico. Galileo is the second largest of the four such systems in the U.S. based on revenues generated by travel agency subscribers. A subsidiary of United controls 38% of the partnership, and the other partners exclusive of USAir's interest are subsidiaries of BA, Swissair, KLM Royal Dutch Airlines, Alitalia, Air Canada, Olympic Airways, Austrian Airlines, Aer Lingus and TAP Air Portugal.\nCRSs play a significant role in the marketing and distribution of airline tickets. During 1993, travel agents issued tickets which generated the majority of USAir's passenger revenues. Most travel agencies use one or more CRSs to obtain information about airline schedules and fares and to book their clients' travel.\nEmployees\nAt December 31, 1993, USAir Group's various subsidiaries employed approximately 48,500 full-time equivalent employees. USAir employed approximately 5,400 pilots, 10,100 maintenance and related personnel, 12,300 station personnel, 4,100 reservations personnel, 8,600 flight attendants and 4,900 personnel in other administrative and miscellaneous job categories, while the commuter and other subsidiaries employed approximately 1,000 pilots, 800 maintenance personnel, 400 station personnel, 400 flight attendants and 500 personnel in other administrative and miscellaneous job categories. Approximately 24,400, or 50%, of the employees of USAir Group's subsidiaries are covered by collective bargaining agreements with various labor unions.\nAs indicated in \"Significant Impact of Low Cost, Low Fare Competition\" above and Item 7. \"Management's Discussion and Analysis of Financial Condition and Results of Operations,\" because of the entry of low cost low fare carriers in certain of USAir's markets and USAir's response to this market penetration, in March 1994 USAir initiated discussions with the leadership of its unionized employees for wage reductions, improved productivity and other cost savings. USAir must reduce its operating costs significantly if it is to survive in this low fare competitive environment.\nHistorically, USAir implemented a workforce reduction program in September 1990, in response to the economic recession and financial losses that caused USAir to decrease its planned capacity growth for 1991. More than 3,600 positions were eliminated through layoffs, furloughs and voluntary separations in connection with that program. A further reduction of more than 3,500 positions\nresulted from the May 1991 Restructuring. In September 1993, USAir announced steps to reduce projected operating costs in 1994. These measures will include a workforce reduction of approximately 2,500 full time positions and certain other cost reductions discussed under \"Major Airline Operations\".\nIn addition, USAir believes that it was largely successful in implementing during 1992 and 1993 the elements of the comprehensive cost reduction program that it announced in October 1991. The cost reduction program included salary and wage reductions for a fixed time period, suspension of longevity\/step increases in wages and salary, the freeze of a defined benefit pension plan applicable to non-contract employees, productivity improvements, contributions by employees for a portion of the cost of medical and dental benefits and implementation of a new managed care program intended to reduce the cost and retard the growth of these benefits. Consistent with this program, USAir sought concessionary contracts with each of its unions and stated that salary reductions for non-contract employees would take effect only when the first major union agreed to wage reductions.\nIn the second quarter of 1992, ALPA, which represents USAir's pilot employees, reached agreement on a new contract which becomes amendable on May 1, 1996. The new contract included wage reduc- tions and suspension of longevity\/step increases which resulted in savings of approximately $58 million over the twelve-month period which began June 1992. Additional savings of approximately $15 million resulted from productivity improvements over the same period. If fully implemented, USAir expects the productivity improvements will save the airline up to approximately $83 million annually. In addition, the pilots agreed to participate in contributory managed care medical and dental programs, which USAir expects will save approximately $10 million annually.\nIn June 1993, the wages of pilot employees reverted to pre- reduction levels, and on September 1, 1993, in accordance with the terms of ALPA's agreement with USAir, pilot employees received a 2.5% increase in their wages. These employees are scheduled to receive further wage increases on (i) July 1, 1994, of approximate- ly 6.9%; (ii) July 1, 1995 of 2%; and (iii) January 1, 1996 of 1%.\nIn accordance with its previously announced policy, when ALPA agreed to the cost reduction program, USAir imposed wage reductions and suspension of longevity\/step increases on its non-contract employees for the twelve-month period commencing in June 1992. USAir estimates that it saved approximately $32 million from these measures. Earlier in 1992, USAir had implemented the contributory managed care medical and dental programs for non-contract employ- ees, which result in approximately $20 million in annual savings. Prior to January 1, 1992, USAir exclusively paid contributions to the basic defined benefit pension plan for its non-contract employees. USAir froze this pension plan at the end of 1991, which\nresulted in a one-time book gain of approximately $107 million in 1991. USAir implemented a defined contribution pension plan for these employees on January 1, 1993, which is composed of three components: contributions by USAir based on a percentage of salary, a partial match by USAir of employee contributions to a savings plan and a profit-sharing plan.\nOn October 8, 1992, following a four-day strike, USAir reached agreement with the International Association of Machinists (\"IAM\"), which represents USAir's mechanics and related employees, on a new contract which becomes amendable on October 1, 1995. The new contract included wage reductions and suspension of longevity\/step increases for the twelve-month period commencing October 1992, which USAir estimates resulted in savings of approximately $20 million. USAir also estimates that productivity improvements, which are also provided for in the new contract, resulted in savings of approximately $22 million in 1993 and will result in savings of $45 million annually if the improvements are fully implemented. In addition, IAM employees agreed to participate in contributory managed care medical and dental programs, which USAir expects will save approximately $14 million annually.\nIn November 1993, the wages of the IAM-represented employees reverted to pre-reduction levels and on November 1, 1993, in accordance with the terms of the IAM's agreement with USAir, the wages of these employees increased by 2%. These employees are scheduled to receive further wage increases on June 1, 1994 and April 1, 1995 of approximately 3.9% and 4.7%, respectively.\nIn February 1993, USAir announced that it had reached a tentative agreement with the Association of Flight Attendants (\"AFA\"), which represents its flight attendant employees, on a new contract which would become amendable on January 1, 1997. The contract, which was ratified by the AFA membership in March 1993, provides for wage reductions and suspension of longevity\/step increases for a twelve-month period commencing April 1, 1993, which USAir expects will result in savings of approximately $10 million. USAir also estimates that productivity improvements, which are also provided for in the new contract, will result in savings of approximately $18 million over the twelve-month period commencing April 1, 1993 and $43 million annually if the improvements are fully implemented. In addition, AFA employees agreed to partici- pate in contributory managed care medical and dental programs, which USAir expects will save approximately $7 million annually.\nIn March 1994, the wages of the flight attendant employees will revert to pre-reduction levels, and on April 1, 1994, in accordance with the terms of the AFA agreement with USAir, the wages of these employees will increase by 3%. These employees are scheduled to receive further wage increases on January 31, 1995 and January 31, 1996 of approximately 4% commencing on each date.\nOn March 31, 1993 the Transport Workers Union (the \"TWU\"), which represents 175 flight dispatch employees, reached agreement with USAir on a contract which becomes amendable on September 1, 1996. The agreement provides for productivity improvements. These employees also participate in wage reductions, suspension of longevity\/step increases and contributory managed care medical and dental programs because of their non-contract status when those measures were implemented for non-contract employees. The defined benefit plan for the flight dispatch employees was frozen on December 31, 1991 because of their non-contract status at that time.\nOn July 29, 1993, USAir reached agreement with the TWU, which also represents approximately 60 USAir flight simulator engineers, on a new four-year contract which becomes amendable on August 1, 1997. The contract will result in savings of approximately $140,000 over the 12-month period commencing August 1, 1993, in the form of temporary salary reductions and suspension of longevi- ty\/step increases. In addition, the flight simulator engineers agreed to participate in contributory managed care medical and dental programs which the Company expects will save approximately $50,000 annually. In addition, the defined benefit pension plan for these employees was frozen effective August 31, 1993, and will be replaced by a defined contribution pension plan beginning September 1, 1994.\nTaken together, the above measures provided for temporary wage reductions and suspension of longevity\/step increases in wages that USAir estimates saved approximately $120 million during the period June 1992 through March 1994. These concessions provide for productivity improvements which are expected to save USAir approximately $55 million during the same period. If fully implemented, these productivity enhancements may save an additional $171 million annually. All employees affected by these changes have also agreed to participate in contributory managed care medical and dental program which are expected to save approximately $51 million annually. In exchange for the concessions agreed upon by its unionized employees, USAir included \"no furlough\" provisions in each of the new labor agreements with the ALPA, IAM, AFA and TWU, which prohibit USAir from furloughing employees hired on or before the effective date of the agreements during the term of each respective contract.\nUSAir recorded a non-recurring charge of approximately $36.8 million in the fourth quarter of 1993 based on a projection of the repayment of the amount of the temporary wage and salary reductions discussed above in the event that the employees who sustained the pay cuts leave the employ of USAir. USAir will adjust this accounting charge in subsequent periods to reflect the change in the present value of the liability and changes in actuarial assumptions including, among other things, actual experience with the rate of attrition for these employees and whether such\nemployees have received payments under the profit sharing program discussed in the next paragraph.\nIn exchange for the pay reductions and pension freeze, affected employees will participate in a profit sharing program and have been, or will be, granted options to purchase USAir Group common stock. The profit sharing program is designed to recompense those employees whose pay has been reduced in an amount equal to (i) two times salary foregone plus; (ii) one times salary foregone (subject to a minimum of $1,000) for the freeze of pension plans described above. Estimated savings of approximately $23 million attributable to the suspension of longevity\/step increases will not be subject to repayment through the profit sharing program. For each year the profit sharing program is in effect, pre-tax profits, as defined in the program, of USAir Group would be distributed to participating employees as follows:\n25% of the first $100 million in pre-tax profits 35% of the next $100 million in pre-tax profits 40% of the pre-tax profits exceeding $200 million\nThis profit sharing program will be in effect until USAir employees are recompensed for salary and pension benefits forgone and is independent of the profit sharing plan which is an element of the new defined contribution pension plan for non-contract employees discussed above.\nUnder the stock option program, employees whose pay has been reduced have received or will receive options to purchase 50 shares of USAir Group common stock at $15 per share for each $1,000 of salary reduction. The options were, or become, exercisable following the twelve-month period of the salary reduction program for each group of employees. Generally, participating employees have five years from the grant date to exercise such options. As of December 31, 1993, USAir Group had granted options to purchase approximately five million shares of common stock to USAir employees under the program. At December 31, 1993, the market value of a share of USAir Group common stock was $12.875.\nCertain unions are engaged in efforts to unionize USAir's customer service and reservations employees. The Railway Labor Act (the \"RLA\") governs, and the NMB has jurisdiction over, such campaigns. Under the RLA, the NMB could order an election among a class or craft of eligible employees if a union submitted an application to the NMB supported by the authorization cards from at least 35% of the applicable class or craft of employees. If the NMB ordered an election and a majority of the eligible employees voted for representation, USAir would be required to negotiate a collective bargaining agreement with the union that wins the election. On January 28, 1994, the IAM, United Steelworkers of America (\"USWA\") and International Brotherhood of Teamsters filed applications with the NMB requesting that an election be held among\nUSAir's fleet service employees, a class or craft of approximately 8,000 workers included among USAir's customer service employees. On March 1, 1994, after determining that each of the three applicant unions had submitted the required number of authorization cards, the NMB declared an election among the fleet service agents. At this time, the NMB has not determined the dates for the mailing or tabulation of ballots, however, USAir expects this process will be completed by the end of the third quarter of 1994. USAir cannot predict the outcome of the election, nor can it predict, if a union is certified, when a collective bargaining agreement would be negotiated or what its terms would be. On March 21, 1994, the USWA filed an additional application with the NMB requesting an election among USAir's passenger service employees, a class or craft of approximately 10,000 workers included among USAir's customer service employees. The NMB is in the process of determining whether this application is supported by sufficient authorization cards to warrant an election. USAir cannot predict whether an election will be held among the passenger service class or craft and if an election were held, the outcome. Nor can it predict if a union is certified when a collective bargaining agreement would be negotiated or what its terms would be. If unions are certified to represent the fleet service employees and the passenger service employees, substantially all of USAir's non-management employees would be unionized. USAir also cannot predict whether any union might submit authorization cards to the NMB sufficient to obtain an election among any other class or craft of employees.\nExcept as noted, the following table presents the status of USAir's labor agreements as of December 31, 1993:\nAs indicated under \"Significant Impact of Low Fare, Low Cost Competition,\" in March 1994, USAir initiated discussions with the leadership of its unionized employees regarding wage reductions, improved productivity and other cost savings. If these discussions are successful, the terms of the above labor agreements will be\nrenegotiated. See also \"Management's Discussion and Analysis of Financial Condition and Results of Operations - Low Cost, Low Fare Competition.\"\nSee\"-Commuter Airline Operations\" for information regarding negotiations between Piedmont and ALPA.\nJet Fuel\nUSAir and USAir Fuel have contracts with 25 different fuel suppliers to meet a large percentage of USAir's current jet fuel requirements. The contracts for these jet fuel purchases are generally for one-year terms and expire at various dates. The pricing provisions of these agreements may be based upon many factors including crude oil, heating oil or jet fuel market conditions. In some cases, USAir has the right to terminate the agreements if contract prices become unacceptable. As market conditions permit, USAir also may purchase a portion of its fuel on the spot market at day-to-day prices depending upon availability, price and purchasing strategy.\nThe most important single factor affecting petroleum product prices, including the price of jet fuel, continues to be the actions of the OPEC countries in setting targets for the produc- tion, and pricing of crude oil. In addition, jet fuel prices are affected by the markets for heating oil, diesel fuel, automotive gasoline and natural gas. Seasonally, second and third quarter jet fuel prices are typically lower than during the first and fourth quarters as the demand for heating oil, which competes with jet fuel for refinery production, subsides and refiners switch to gasoline production which also increases the output of jet fuel.\nDue primarily to OPEC's unwillingness or inability to restrain crude oil production and recession-dampened demand for petroleum products by the industrialized nations, USAir benefitted during 1993 from a general downward trend in jet fuel prices. For 1993, USAir's jet fuel cost averaged approximately 58.4 cents per gallon (versus an average of 61 cents in 1992) with quarterly averages of 59.8, 59.5, 56.7, and 57.7 cents.\nUSAir continues to adjust its jet fuel purchasing strategy to take advantage of the best available prices while attempting to ensure that supplies are secure. While USAir believes that jet fuel prices will remain relatively stable in 1994, all petroleum product prices continue to be subject to unpredictable economic, political and market factors. Also, the balance among supply, demand and price has become more reactive to world market condi- tions. Accordingly, the price and availability of jet fuel, as well as other petroleum products, continues to be unpredictable. In addition, USAir has entered into agreements to hedge the price of a portion of its jet fuel needs, which may have the net effect of increasing or decreasing USAir's fuel expense. See Note 1 to\nConsolidated Financial Statements of USAir. In early August 1993, the Clinton Administration's budget package was enacted. The budget package included a 4.3 cent per gallon tax on transportation fuels beginning October 1, 1993. The airline industry is exempt from the tax until October 1, 1995. Imposition of the fuel tax will increase USAir's operating expenses. If the fuel tax had been in effect on January 1, 1993, USAir's fuel expense in 1993 would have increased by approximately $50 million.\nThe following table sets forth statistics about USAir's jet fuel consumption and cost for each of the last three years:\n(1) Operating expenses have been adjusted to exclude non-recurring and special items.\nInsurance\nThe Company and its subsidiaries maintain insurance of the types and in amounts deemed adequate to protect them and their property. Principal coverage includes liability for bodily injury to or death of members of the public, including passengers; damage to property of the Company, its subsidiaries and others; loss of or damage to flight equipment, whether on the ground or in flight; fire and extended coverage; and workers' compensation and em- ployer's liability. Effective February 1, 1991, the Company reduced the hull insurance coverage on its narrowbody aircraft from replacement value to the higher of book value or the loss value required by applicable leases or other contractual provisions. Coverage for environmental liabilities is expressly excluded from the Company's insurance policies.\nIndustry Conditions\nThe airline industry has historically been cyclical, in that demand for air transportation has tended to mirror general economic conditions. Although airline traffic and operating revenues generally benefitted from the economic growth that occurred through much of the 1980s, the Company and the industry have been adversely affected by the recent economic recession. Historically, the Company's airline operations have also been subject to seasonal variations in demand. First and fourth quarter results have often been adversely affected by winter weather and, with certain exceptions, reduced travel demand, while the second and third\nquarters generally have been characterized by more favorable weather conditions as well as higher levels of passenger travel. The restructuring of USAir's route system in recent years to emphasize its strengths in the northeastern U.S. and to capitalize in the first, second and fourth quarters on passenger traffic to Florida may result in changes in historic seasonality.\nMost of USAir's operations are in competitive markets. USAir and its commuter affiliates experience competition in varying degrees with other air carriers and with all forms of surface transportation. USAir competes with at least one major airline on most of its routes between major cities. Vigorous price competi- tion exists in the airline industry, and competitors have frequent- ly offered sharply reduced discount fares in many of these markets. Airlines use discount fares and other promotions to stimulate traffic during normally slack travel periods, to generate cash flow and to increase relative market share in selected markets. Discount and promotional fares are often subject to various restrictions such as minimum stay requirements, advance ticketing, limited seating and refund penalties. USAir has often elected to match those discount or promotional fares. In 1993, Southwest Airlines, Inc. and Continental, two low cost carriers, entered several of USAir's markets in the eastern U.S. and commenced low fare service. Continental substantially expanded its low fare operations in the first quarter of 1994, and, in anticipation of that expansion, USAir substantially reduced its fares in many markets. See \"Significant Impact of Low Fare, Low Cost Competi- tion\" above and Item 7. \"Management's Discussion and Analysis of Financial Condition and Results of Operations - Low Cost, Low Fare Competition.\" USAir expects that it will continue to face vigorous price competition. To the extent that low fares continue and their depressive effect on revenues is not offset by stimulation of additional traffic or by reduced costs, USAir's and the Company's earnings and liquidity will continue to be materially and adversely affected.\nOf the eleven airlines classified as \"major\" carriers by the DOT in January 1991, two have ceased operations, one is currently operating under Chapter 11 of the Bankruptcy Code and two filed for bankruptcy protection, reorganized and emerged from bankruptcy in 1993. Eastern, which declared bankruptcy in March 1989, ceased operations in January 1991. Pan American World Airways filed for Chapter 11 protection from creditors in January 1991 and ceased operations in December 1991. Continental, America West and Trans World Airlines (\"TWA\") filed for bankruptcy in December 1990, June 1991 and January 1992, respectively. Continental and TWA reorga- nized and emerged from bankruptcy in April 1993 and November 1993, respectively. America West is seeking to emerge from bankruptcy in 1994. In addition, Midway Airlines, a smaller carrier that had been a competitor of USAir at Philadelphia, declared bankruptcy in March 1991 and ceased operations in November 1991.\nAirlines operating under Chapter 11 often engage in discount pricing to generate the cash flow necessary for their survival. In addition, when these airlines emerge from bankruptcy they may have substantially reduced their debt and lease obligations and other operating costs, as was the case when Continental and TWA emerged. These reduced costs may permit the reorganized carriers to enter new markets and offer discount fares, which may be intended to generate cash flow, preserve and enhance market share and rehabili- tate the carriers' image in the marketplace. Since its reorganiza- tion, Continental has entered many of USAir's markets in the eastern U.S. and offered fares that were substantially lower than those that were previously available. See \"Significant Impact of Low Fare, Low Cost Competition\" above and Item 7. \"Management's Discussion and Analysis of Financial Condition and Results of Operations - Low Cost Low Fare Competition.\" The availability of the assets of bankrupt carriers has enabled certain financially stronger participants in the market, including, to a lesser extent, USAir, to consolidate their position by purchasing routes, aircraft, takeoff and landing slots and other assets. While substantial capacity has been removed in certain domestic markets, these bankruptcies and failures illustrate the difficulties facing the airline industry today.\nRegulation\nAll domestic airlines, including USAir and its commuter affiliates, are subject to regulation by the FAA under the Federal Aviation Act of 1958, as amended. The Federal Aviation Administra- tion (\"FAA\") has regulatory jurisdiction over flight operations generally, including equipment, ground facilities, security systems, maintenance and other safety matters. To assure compli- ance with its operational standards, the FAA requires air carriers to obtain operations, airworthiness and other certificates, which may be suspended or revoked for cause. The FAA also conducts safety audits and has the power to impose fines and other sanctions for violations of aviation safety and security regulations.\nUSAir has developed extensive maintenance programs which consist of a series of phased checks for each aircraft type. These checks are performed at specified intervals measured either by time flown or by the number of takeoffs and landings (\"cycles\") performed. They range from daily \"walkaround\" inspections, to more involved overnight maintenance checks, to exhaustive and time- consuming overhauls. The \"Q Check\", for example, requires more than 7,000 personnel-hours of work and includes stripping the airframe, extensively testing the airframe structure and a large number of parts and components, and reassembling the overhauled airframe with new or rebuilt components. Aircraft engines are subject to phased, or continuous, maintenance programs designed to detect and remedy potential problems before they occur. The service lives of certain parts and components of both airframes and engines are time or cycle controlled. Parts and other components\nare replaced or overhauled prior to the expiration of their time or cycle limits. The FAA approves all airline maintenance programs, including changes to the programs. In addition, the FAA licenses the mechanics who perform the inspections and repairs, as well as the inspectors who monitor the work.\nThe FAA frequently issues airworthiness directives, often in response to specific incidents or reports by operators or manufac- turers, requiring operators of specified equipment to perform prescribed inspections, repairs or modifications within stated time periods or number of cycles.\nIn response to several incidents involving older aircraft, the FAA, in cooperation with airframe manufacturers and operators, has developed mandatory programs requiring extensive testing, modifica- tions and repairs to certain models of older aircraft as a condition of their continuing in service beyond specified time periods or number of cycles. USAir is modifying its Boeing 727- 200, Boeing 737-200 and Douglas DC-9-30 aircraft to comply with the first phase of the \"aging aircraft\" requirements, which requires that a series of structural modifications be performed. The second phase, announced in November 1990, involves intensified corrosion control and detection procedures. Many of USAir's aircraft will be brought into compliance well in advance of the FAA's time and cycle requirements, because the work is scheduled to be accomplished in conjunction with other maintenance.\nA continuing regulatory issue currently facing the airline industry involves air traffic delays and landing rights. While the volume of aircraft operations in domestic airspace has increased during recent years, the capacity of the national air traffic control system has not kept pace. This situation causes frequent and significant air traffic delays, especially at the nation's busiest airports. These delays have led the FAA to require monthly reporting by air carriers of on-time performance and have prompted various proposals for reform of the FAA, which oversees and regulates the air traffic control system.\nThe National Commission to Ensure a Strong Competitive Airline Industry (the \"Airline Commission\") issued its report in August 1993. Among other things, the Airline Commission recommended that: (1) the air traffic control system be modernized and the FAA air traffic control functions be performed by an independent federal corporation; (2) the federal regulatory burden be reduced; (3) the airlines be granted certain tax relief; and (4) the bankruptcy process be shortened. The Airline Commission also favored raising the statutory limit on foreign ownership of voting securities in U.S. airlines to 49 percent under certain circumstances. It further urged that the current international system of bilateral agreements be replaced with multilateral arrangements. In addition, the Airline Commission recommended that the DOT review the airlines' business, capital or financial plans with the\nassistance of a presidentially appointed advisory committee and, if an airline repeatedly failed to heed warnings or concerns of the DOT Secretary, the DOT could \"exercise its existing authority,\" among other things, to revoke an airline's operating certificate.\nIn January 1994, the Clinton Administration issued a report which described its program to implement certain of the Airline Commission's recommendations. Among other things, the Administra- tion stated that it supported the recommendation described above regarding the FAA, supported increasing to 49 percent the foreign ownership restrictions provided there are reciprocal opportunities for U.S. airlines and investors abroad, and opposed the recommenda- tions regarding tax relief and the appointment of the advisory committee discussed above. At this time, it is impossible to predict whether any of the Airline Commission's recommendations will be enacted and, if enacted, their effect on USAir. It is also difficult to anticipate whether the Congress will act in the near term on any of the proposals requiring legislation.\nThe FAA, through its High Density Traffic Airport Rule, limits the number of flight operations at Washington National Airport, Chicago's O'Hare International Airport and New York City's John F. Kennedy International and LaGuardia Airports during specified time periods. Takeoff and landing rights (\"slots\") are assigned to airlines serving these high density airports. The FAA has promulgated regulations governing the allocation and use of slots that permit them to be traded, leased, purchased and sold. In addition, in 1992, the FAA amended its regulations governing the use of slots to require slotholders to increase their average monthly use of their slots. In 1993, the DOT began a comprehensive examination of the High Density Rule. As part of its study, the DOT will determine whether the operating limitations imposed by the rule can be eliminated or modified to better utilize available capacity at these airports. USAir holds a substantial number of slots at LaGuardia and National Airports, including those assigned a value when the Company acquired Piedmont Aviation. Any DOT action which would eliminate those slots or compel USAir to transfer those slots could have a material adverse effect on USAir's operations and financial position. Revision of the High Density Rule at National Airport, however, would require legisla- tion by the Congress. The DOT has indicated that it expects to complete its study by late 1994.\nThe FAA also has authority to set noise standards for civil aircraft. Three noise level categories exist under FAA regula- tions. Stage 1 aircraft, which were designed before the first FAA noise regulations were promulgated in 1969, are no longer permitted to operate in the United States unless retrofitted to meet Stage 2 requirements. Stage 2 aircraft comply with regulations limiting noise emissions to specified levels. Aircraft designed after 1977 must meet the even more stringent noise limitations of Stage 3. At December 31, 1993, 260 aircraft, or 62% of USAir's operating fleet\n(excluding 33 Fokker aircraft exempt from the Stage 3 require- ments because their gross takeoff weights do not exceed 75,000 pounds), were Stage 3 aircraft. The Airport Noise and Capacity Act of 1990, with minor qualifications, prohibits operation of Stage 2 aircraft after 1999. Regulations promulgated by the FAA in 1991 require operators to modify or reduce the number of Stage 2 aircraft they operated during 1990 by 25% by the end of 1994, by 50% by the end of 1996, and by 75% by the end of 1998. Alterna- tively, an operator may elect to operate a fleet that is at least 55% Stage 3 by the end of 1994, 65% Stage 3 by the end of 1996 and 75% Stage 3 by the end of 1998. Modification costs will depend on the technology that is developed in response to the need, but these costs could be substantial for some aircraft types. See Note 4 to the Company's Consolidated Financial Statements. USAir intends to convert up to 64 of its Boeing 737-200 and 31 of its Douglas DC-9- 30 aircraft from Stage 2 to Stage 3. In May 1993, USAir entered into agreements to purchase hushkits for a substantial portion of its Boeing 737-200 fleet. The installation of these hushkits will bring the aircraft into compliance with federally mandated Stage 3 noise level requirements. These agreements are in addition to a previously existing agreement to purchase hushkits for certain of USAir's DC-9-30 aircraft. Installation of the hushkits will be accomplished during 1994-1999.\nCertain airport operators have adopted local regulations which, among other things, impose curfews, restrict the number of aircraft operations and require aircraft to meet prescribed decibel limits. Local noise regulations affect USAir's scheduling flexibility by requiring that only certain aircraft be scheduled at certain airports and at specified times of the day.\nIn compliance with FAA regulations, USAir has implemented a drug testing program that involves not only education and training, but also periodic drug testing of personnel performing safety and security-related work, including pilots, flight attendants, mechanics, instructors, dispatchers and security screeners, and drug testing of all newly hired employees regardless of job classification. The FAA's drug testing regulations are comprehen- sive and complex. They require, among other things, six categories of drug tests: pre-employment, probable cause, periodic, random, post-accident and return to duty. In addition, all USAir Express operators have drug testing programs in place that comply with the FAA's drug testing regulations. The DOT has recently promulgated rules requiring by January 1995 the periodic testing of airline employees in safety-related jobs for alcohol use. USAir cannot predict at this time the effect of these new rules.\nSeveral aspects of airlines' operations are subject to regulation or oversight by Federal agencies other than the FAA. The DOT has jurisdiction over certain aviation matters such as international routes and fares, consumer protection and unfair competitive practices. The antitrust laws are enforced by the DOJ.\nLabor relations in the air transportation industry are generally regulated under the RLA, which vests in the NMB certain regulatory powers with respect to disputes between airlines and labor unions that arise under collective bargaining agreements. USAir and other airlines certificated prior to October 24, 1978 are also subject to regulations issued by the Department of Labor which implement the statutory preferential hiring rights granted by the Airline Deregulation Act of 1978 to certain airline employees who have been furloughed or terminated (other than for cause).\nThe Company must also comply with federal and state environ- mental laws and regulations and has developed formal policies and procedures designed to ensure its ongoing compliance. The Company expects that its operating expenses will increase in the future as a result of governmental rulemaking and more stringent enforcement of applicable existing environmental laws. The Company cannot predict the magnitude of those increased costs or when they may be incurred, but in order to conduct their operations, airlines, including USAir and the USAir Express carriers, release and discharge pollutants into the environment. For example, USAir and the other airlines operating at Pittsburgh are subject to a Pennsylvania consent decree to reduce the runoff of deicing fluid which has resulted in the construction of new deicing pads, the cost of which will be passed on to the airlines. In addition, the Clean Air Act, as amended, as it may be implemented by the various states, may require operational upgrades and tighter emissions controls not only on aircraft but also on ground equipment operated by airlines. The airlines' operations in certain states, for example, California, where air pollution is a serious problem, may be affected more significantly than in other states. Moreover, many airports were constructed before the enactment of various environmental laws. The cost of correcting environmental problems at these airports may be passed onto the airlines operating at these airports through increased rents and fees. See also the disclosure above regarding the FAA's regulations regarding noise standards for civil aircraft and noise regulation by other governmental authorities and Note 4(d) to the Company's Con- solidated Financial Statements for disclosure regarding capital commitments related to compliance with these FAA regulations.\nBritish Airways Investment Agreement\nThe following summary of certain terms of the Investment Agreement is subject to, and is qualified in its entirety by, the Investment Agreement and the exhibits thereto, which are exhibits to this report. On March 7, 1994, BA announced it would make no additional investments in the Company until the outcome of measures by the Company to reduce costs and improve its financial results is known. As of March 1, 1994, BA owned preferred stock in the Company constituting approximately 22% of the total voting interest in the Company. See Item 12. \"Security Ownership of Certain Beneficial Owners and Management.\"\nTerms of the Series F Preferred Stock On January 21, 1993, the Company sold, pursuant to the Investment Agreement, 30,000 shares of the Company's Series F Cumulative Convertible Senior Preferred Stock, without par value, (\"Series F Preferred Stock\") to BA for an aggregate purchase price of $300 million. The Series F Preferred Stock is convertible into shares of Common Stock at a conversion price of $19.41 and will have a liquidation preference of $10,000 per share plus an amount equal to accrued dividends. See \"Miscellaneous\" for a discussion of an antidilution adjustment to the conversion price of the Series F Preferred Stock. The Series F Preferred Stock may be converted at the option of USAir Group at any time after January 21, 1998 if the average composite closing market price of Common Stock during any 30-day calendar period is at least 133% of the conversion price. The Series F Preferred Stock will be entitled to cumulative quarterly dividends of 7% per annum when and if declared and to share in certain other distributions. The Series F Preferred Stock must be redeemed by USAir Group on January 15, 2008. Each share of the Series F Preferred Stock will be entitled to a number of votes equal to the number of shares of Common Stock into which it is convertible and will vote with the Common Stock and USAir Group's Series A Cumulative Convertible Preferred Stock, without par value (\"Series A Preferred Stock\"), and any other capital stock with general voting rights for the election of directors, as a single class. Subject to adjustment, 515.2886 shares of Common Stock are issuable on conversion per share of Series F Preferred Stock (determined by dividing the $10,000 liquidation preference per share of Series F Preferred Stock by the $19.41 conversion price), and 15,458,658 shares of Common Stock would be issuable on conversion of all Series F Preferred Stock. However, under the terms of any USAir Group preferred Stock that is or will be held by BA (\"BA Preferred Stock\"), conversion rights (and as a result voting rights) may not be exercised to the extent that doing so would result in a loss of USAir Group's or any of its subsidiaries' operating certificates and authorities under Foreign Ownership Restrictions, as defined under \"Board Representation\" below, and it is assumed for this purpose that Series F Preferred Stock will be fully converted before any other BA Preferred Stock. Under Foreign Ownership Restrictions, no more than 25% of the Company's voting interest may be held by persons other than U.S. citizens, including BA. With respect to dividend rights and rights on liquidation, dissolution and winding up, the Series F Preferred Stock ranks senior to USAir Group's $437.50 Series B Cumulative Convertible Preferred Stock, without par value, and Junior Participating Preferred Stock, Series D, no par value, and Common Stock, and pari passu with BA Preferred Stock and Series A Preferred Stock.\nMoreover, the Certificate of Designation for the Series F Preferred Stock provides that if on any one occasion on or prior to January 21, 1996, any court or regulatory authority issues a final order that any material part of the Investment Agreement is\nunenforceable (except pursuant to bankruptcy or like event), then the conversion price of Series F Preferred Stock shall be reduced by 10.2564%. In that event, if the then conversion price of the Series F Preferred Stock were $19.41, it would be reduced to $17.42.\nOn March 15, 1993, the DOT issued an order (the \"DOT Order\") finding, among other things, that \"BA's initial investment of $300 million does not impair USAir's citizenship\" under Foreign Ownership Restrictions as defined under \"Board Representation\" below. However, the DOT instituted a proceeding to consider whether USAir will remain a U.S. citizen if the transactions and acts contemplated by the Investment Agreement, including the transactions discussed under \"Possible Additional BA Investments\" and \"Certain Governance Matters\" below, are consummated. The DOT has suspended indefinitely the period for comments from interested parties to the proceeding pending its resolution of requests by other airlines for production of additional documents from USAir. The DOT Order states that the DOT expects and advises USAir Group and BA not to proceed with the Second Purchase and Final Purchase, as such terms are defined under \"Possible Additional BA Invest- ments,\" until the DOT has completed its review of USAir's citizen- ship. In any event, on March 7, 1994, BA announced that it would make no additional investments in the Company until the outcome of measures by the Company to reduce its costs and improve its financial results is known. See \"Significant Impact of Low Fare, Low Cost Competition\" and \"British Airways Announcement Regarding Additional Investments in the Company; Code Sharing\" above. The Company cannot predict the outcome of the proceeding or if the transactions contemplated under the Investment Agreement, particu- larly those discussed under \"Possible Additional BA Investments\" and \"Certain Governance Matters\", will be consummated. See \"Management's Discussion and Analysis of Financial Condition and Results of Operations\" for a discussion of issues and consider- ations pertaining to globalization of the airline industry and \"Miscellaneous\" for information regarding BA's purchase of two additional series of preferred stock from USAir Group pursuant to its exercise of optional and preemptive purchase rights under the Investment Agreement and its decision not to exercise its optional purchase rights with respect to three additional series of preferred stock.\nBoard Representation USAir Group increased the size of its Board of Directors by three on January 21, 1993 and the Board of Directors filled the newly created directorships with designees of BA. Under the terms of the Investment Agreement, USAir Group must use its best efforts to cause BA to be proportionally represented on the Board of Directors (on the basis of its voting interest), up to a maximum representation of 25% of the total number of autho- rized directors (\"Entire Board\"), assuming that such proportional representation is permitted by then applicable U.S. statutory and DOT regulatory or interpretative foreign ownership restrictions\n(\"Foreign Ownership Restrictions\"), until the later of the closing of the Second Purchase, as defined under \"Possible Additional BA Investments\" below, and the date on which BA may exercise under Foreign Ownership Restrictions the rights described under \"Certain Governance Matters\" below. See \"Management's Discussion and Analysis of Financial Condition and Results of Operations - Industry Globalization\" for a discussion of currently applicable Foreign Ownership Restrictions.\nU.S.-U.K. Routes Under the Investment Agreement, USAir Group agreed that as promptly as commercially practicable it would divest or, if divestiture were not possible, relinquish, all licenses, certificates and authorities for each of USAir's routes between the U.S. and the U.K. (the \"U.K. Routes\") at such time as BA and USAir implement the code-sharing arrangement contemplated by the Investment Agreement discussed below. USAir Group and BA have agreed that they should attempt to mitigate any negative impact on Company employees or communities served by the U.K. Routes and to share any losses suffered as a result of such divestiture or relinquishment with due regard to their respective interests. Accordingly, BA is operating and marketing certain routes formerly operated by USAir under a \"wet lease.\" Under a \"wet lease,\" an airline, in this case USAir, leases its aircraft and cockpit and cabin crews to another airline, in this case BA, for the purpose of operating certain routes or flights. The wet leases have an initial term of one year and may be extended by USAir Group and BA for a cumulative lease term not to exceed two years and eleven months. Rentals under the wet lease are based on USAir's costs. BA will retain the cumulative profits received by it in respect of these routes on the basis of its fully diluted stock ownership in USAir Group and pay the balance of the profits to USAir Group annually. See \"Code Sharing\" below. If the contemplated profit sharing cannot be performed, BA will reimburse USAir Group for a portion of any losses suffered by USAir Group in the divesture or relinquishment of the U.K. Routes based on a formula set forth in the Investment Agreement. The route authorities which USAir was required to sell or relinquish were the Philadelphia-London and BWI-London route authorities purchased by USAir from TWA in April 1992 for $50 million, and its route authority between Charlotte and London. Assets related to the U.K. Routes were carried on USAir's books at approximately $47 million at December 31, 1993 and USAir expects to recover such amount in full pursuant to the provisions of the Investment Agreement described above.\nDuring March and April of 1993, USAir reached agreement with two air carriers to sell the Philadelphia-London and BWI-London route authorities, provided, among other conditions, governmental authorities permitted the transfer of these route authorities to other cities. In June 1993, the DOT denied applications for such transfers on the grounds that the U.S.-U.K. bilateral air services agreement does not permit such transfers. In July 1993, the DOT awarded the Philadelphia-London route authority to American. USAir\nceased operating the BWI-London route authority on October 1, 1993 as a result of the implementation of the wet leasing and code sharing arrangements with BA. See \"Code Sharing\" below. In April 1993, USAir agreed to sell to the Metropolitan Nashville Airport Authority, Nashville, Tennessee for $5 million its operating authority between Charlotte and London Gatwick Airport. In December 1993, the DOT issued an order which disapproved USAir's proposed sale of this route to Nashville and awarded the BWI-London and Charlotte-London route authorities to American, which will transfer the U.S. gateway cities for these route authorities to Nashville and Raleigh\/Durham, North Carolina. USAir ceased serving the Charlotte-London route on January 19, 1994 and implemented the code sharing and wet leasing arrangement with BA in that market on that date.\nCode Sharing BA and USAir Group entered into a code share agreement on January 21, 1993 (the \"Code Share Agreement\") pursuant to which certain USAir flights will carry the airline designator code of both BA and USAir. Code sharing is a common practice in the airline industry whereby one carrier sells the flights of another carrier (its code sharing partner) as if it provides those flights with its own equipment and personnel. These flights are intended by USAir Group and BA eventually to include all routes provided for under the bilateral air services agreement between the U.S. and the U.K. to the extent possible, consistent with commer- cial viability and technical feasibility.\nThe DOT Order, among other things, granted USAir for one year a statement of authorization, and BA an exemption, for certain code sharing and wet leasing arrangements contemplated by the Investment Agreement (the \"Initial Code Share Authority\"). USAir believes that the one-year term of the Initial Code Share Authority was consistent with DOT policy and precedents with respect to other code sharing arrangements. As contemplated in the Initial Code Share Authority, USAir can code share with BA to approximately 38 airports in the U.S. beyond the BWI, Philadelphia and Pittsburgh gateways. Since the DOT Order was issued in March 1993, the DOT also granted USAir code sharing authorization for 26 additional U.S. airports and Mexico City through nine additional U.S. gateways, including Charlotte (the \"Supplemental Code Share Authority\"). Although the DOT granted the Supplemental Code Share Authority for periods shorter than one year in an effort to exert pressure on the U.K. to liberalize access to the U.K., particularly London's Heathrow Airport, in negotiations on a revised U.S.-U.K. bilateral air services agreement, the DOT eventually extended the Supplemental Code Share Authority to March 17, 1994, the same date the Initial Code Share Authority expired. As of March 1, 1994, USAir and BA had implemented the code sharing arrangements for 34 U.S. cities. On March 17, 1994, the DOT issued an order renewing for one year the code share authorization granted under the Initial Code Share Authority and Supplemental Code Share Authority. In January 1994, USAir and BA filed applications to code share to 65\nadditional U.S., and seven additional foreign, destinations via the same and several additional U.S. gateways. The DOT did not act on these applications in its March 17, 1994 order.\nThe Company and BA are in the process of exploring the economies and synergies that may be possible as a result of the Code Share Agreement. The Company believes that (i) the code-share cities in the U.S. will receive greater access to international markets; (ii) it will have greater access to international traffic; and (iii) BA's and its customers will benefit from better on-line connections as well as coordinated check-in and baggage checking procedures. The Company believes that the code sharing arrange- ments will generate increased revenues; however, the magnitude of any increase cannot be estimated at this time. The DOT may continue to link further renewals of the code share authorization to the U.K.'s liberalization of U.S. air carrier access to the U.K.; however, the code sharing arrangements contemplated by the Code Share Agreement are expressly permitted under the bilateral air services agreement between the U.S. and U.K. Accordingly, USAir expects that the existing code share authorization will continue to be renewed; however, there can be no assurance that this will occur. See \"Management's Discussion and Analysis of Financial Condition and Results of Operations - Industry Globaliza- tion.\" USAir does not believe that the DOT's failure to renew further the authorization would result in a material adverse change in its financial condition; however, if the authorization is not renewed, consummation of the Second Purchase and the Final Purchase, as defined under \"Possible Additional BA Investments\" below, may be less likely. In any event, on March 7, 1994 BA announced that it would not make any additional investments in the Company until the outcome of measures by the Company to reduce costs and improve its financial results is known. As discussed under \"Possible Additional BA Investments\" below, USAir cannot predict whether or when the Second Purchase or the Final Purchase will be consummated in any event.\nPossible Additional BA Investments On March 7, 1994 BA announced that it would not make any additional investments in the Company until the outcome of measures by the Company to reduce costs and improve its financial results is known. Under the terms of the Investment Agreement, assuming the Series F Preferred Stock or any shares issued upon conversion thereof are outstanding and BA has not sold any shares of preferred stock issued to it by USAir Group or any common stock or other securities received upon conversion or exchange of the preferred stock, BA is entitled at its option to elect to purchase from USAir Group, on or prior to January 21, 1996, 50,000 shares of Series C Cumulative Convertible Senior Preferred Stock, without par value (\"Series C Preferred Stock\"), at a purchase price of $10,000 per share, to be paid by BA's surrender of the Series F Preferred Stock and a payment of $200 million (the \"Second Purchase\"), and, on or prior to Janu- ary 21, 1998, assuming that BA has purchased or is purchasing\nsimultaneously Series C Preferred Stock, 25,000 (or more in certain circumstances) shares of Series E Cumulative Convertible Exchange- able Senior Preferred Stock, without par value (\"Series E Preferred Stock\"), at a purchase price of $10,000 per share (the \"Final Purchase\"). Series E Preferred Stock is exchangeable under certain circumstances at the option of USAir Group into certain USAir Group debt securities (\"BA Notes\"). If the DOT approves all the transactions and as contemplated by the Investment Agreement, at the election of either BA or USAir Group on or prior to January 21, 1998, BA's purchase of the Series C Preferred Stock (unless previously consummated) and BA's purchase of the Series E Preferred Stock would be consummated under certain circumstances. If BA has not elected to purchase the Series C Preferred Stock by January 21, 1996, then USAir Group may at its option redeem, in whole or in part, Series F Preferred Stock at the higher of market value or the price of $10,000 per share, plus accrued dividends. USAir cannot predict whether or when the Second Purchase and Final Purchase will be consummated.\nTerms of the Series C Preferred Stock and Series E Preferred Stock The Series C Preferred Stock and Series E Preferred Stock are substantially similar to Series F Preferred Stock, except as follows. Series C Preferred Stock will be convertible into shares of Class B Common Stock or Non-Voting Class C Stock (as such terms are defined under \"Terms of BA Common Stock\" below) at an initial conversion price of approximately $19.79, subject to Foreign Ownership Restrictions. Each share of Series C Preferred Stock will be entitled to a number of votes equal to the number of share of Class B Common Stock into which it is convertible, subject to Foreign Ownership Restrictions. If shares of Series C Preferred Stock are transferred to a third party, they convert automatically at the seller's option into either shares of Common Stock or a like number of shares of Series G Cumulative Convertible Senior Preferred Stock. Series E Preferred Stock will be convertible into shares of Common Stock or Non-Voting Class ET Stock (as defined under \"Terms of BA Common Stock\" below) at an initial conversion price of approximately $21.74, subject to increase if the Series E Preferred Stock is originally issued on or after January 21, 1997, subject to Foreign Ownership Restrictions. Each share of Series E Preferred Stock will be entitled to a number of votes equal to the number of shares of Common Stock into which it is convertible, subject to Foreign Ownership Restrictions.\nTerms of BA Common Stock To the extent permitted by Foreign Ownership Restrictions, an amendment to USAir Group's charter, which is to be filed with the Delaware Secretary of State immedi- ately prior to the Second Purchase, which BA has announced it will not complete under current circumstances, will create three new classes of common stock - Class B Common Stock, par value $1.00 per share (\"Class B Common Stock\"), Non-Voting Class C Common Stock, par value $1.00 per share (\"Non-Voting Class C Stock\"), and Non- Voting Class ET Common Stock, par value $1.00 per share (\"Non-\nVoting Class ET Common Stock,\" collectively with Class B Common Stock and Non-Voting Class C Common Stock, \"BA Common Stock\") all of which may be held only by BA or one of its wholly-owned subsidiaries. Except with respect to voting and conversion rights, the BA Common Stock will be substantially identical to the Common Stock. Shares of BA Common Stock will convert automatically to shares of Common Stock upon their transfer to a third party. Subject to Foreign Ownership Restrictions, Class B Common Stock will be entitled to one vote per share. After the effectiveness of the above charter amendment, to the extent permitted by Foreign Ownership Restrictions, Class B Common Stock will vote as a single class with Series C Preferred Stock on the election of one-fourth of the directors and the approval of the holders of Class B Common Stock and Series C Preferred Stock voting as a single class will be required for certain matters.\nCertain Governance Matters Following the Second Purchase, which BA has announced it will not complete under current circum- stances, and assuming these changes are permitted under Foreign Ownership Restrictions, the above charter amendment will fix the size of USAir Group's Board of Directors at 16, one-fourth of whom would be elected by BA. In addition, the vote of 80% of the USAir or USAir Group Boards of Directors will be required for approval of the following (with certain limited exceptions): (i) any agreement with the DOT regarding citizenship and fitness matters; (ii) any annual operating or capital budgets or financing plans; (iii) incurring capital expenditure not provided for in a budget approved by the vote of 80% of the board in excess of $10 million in the aggregate during any fiscal year; (iv) declaring and paying dividends on any capital stock of USAir Group or any of its subsidiaries (other than dividends paid only to USAir Group or any wholly-owned subsidiary of USAir Group and any dividends on preferred stock); (v) making investments in other entities not provided for in approved budgets in excess of $10 million in the aggregate during any fiscal year; (vi) incurring additional debt (other than certain debt specified in the Investment Agreement) not in an approved financing plan in excess of $450 million in the aggregate during any fiscal year; (vii) incurring off-balance sheet liabilities (e.g., operating leases) not in an approved financing plan in excess of $50 million in the aggregate during any fiscal year; (viii) appointment, compensation and dismissal of certain senior executives; (ix) acquisition, sale, transfer or relinquish- ment of route authorities or operating rights; (x) entering into material commercial or marketing agreements or joint ventures; (xi) issuance of capital stock (or debt or other securities convertible into or exchangeable for capital stock), other than (A) the stock options granted to employees in return for pay reductions under the USAir Group 1992 Stock Option Plan, as described under \"Employees\" above, (B) to USAir Group or any direct or indirect wholly owned subsidiary of USAir Group, (C) pursuant to the terms of USAir Group securities outstanding when a certain amendment to USAir Group's charter required in connection with consummation of the Second\nPurchase becomes effective, or (D) pursuant to the terms of securities the issuance of which was previously approved by the vote of 80% of the board; (xii) acquisition of its own equity securities other than from USAir Group or its subsidiaries, or pursuant to sinking funds or an approved financing plan; and (xiii) establishment of a board of directors' committee with power to approve any of the foregoing. This supermajority vote requirement would allow any four directors, including those elected by BA, to withhold approval of the actions described above if they believe them to be contrary to the best interests of USAir. The super- majority vote would not be required with regard to the foregoing actions to the extent they involve the enforcement by USAir Group of its rights under the Investment Agreement.\nFollowing the Second Purchase, which BA has indicated it will not complete under current circumstances, to the extent permitted under Foreign Ownership Restrictions, USAir Group and BA will integrate certain of their respective business operations pursuant to certain \"Integration Principles\" included in the Investment Agreement. In addition, to the extent permitted by Foreign Ownership Restrictions or pursuant to specific DOT approval, an \"Integration Committee,\" headed by the chief executive officers of USAir Group and BA and by an Executive Vice President-Integration of USAir Group, would oversee the integration subject to the ultimate discretion of USAir Group's board of directors. As of the Final Purchase, which BA has indicated it will not complete under current circumstances, to the extent permitted by Foreign Ownership Restrictions, the Investment Agreement provides for the establish- ment of a committee (\"Appointments Committee\") of the board of directors of USAir Group, composed of USAir Group's chief executive officer, BA's chief executive officer and another director serving on both USAir Group's and BA's board of directors, to handle all employment matters relating to managers at the level of vice president and above, except for certain senior executives.\nBA's governance rights after the Second Purchase and the Final Purchase, which BA has indicated it will not complete under current circumstances, are subject to reduction if BA reduces its holding in USAir Group under the following circumstances. If BA sells or transfers, in one or more transactions, BA Preferred Stock, Common Stock or BA Common Stock (collectively, Common Stock and BA Common Stock are hereinafter referred to as \"Non-Preferred Stock\") issued directly or indirectly upon the conversion thereof such that the aggregate purchase price of the BA Preferred Stock, BA Notes, Non- Preferred Stock or other equity securities of USAir Group held by BA and its directly or indirectly wholly owned subsidiaries following such sale or transfer (the \"BA Holding\") is less than both two-thirds of the aggregate purchase price of all BA Preferred Stock, BA Notes, Non-Preferred Stock or other equity securities of USAir Group acquired by BA and its subsidiaries following Janu- ary 21, 1993 and $750 million (or $500 million if the Final Purchase has not occurred), then (i) the number of directors\nelected by the Class B Common Stock and the Series C Preferred Stock, voting together as a single class, will be limited to two; (ii) the directors elected by the Common Stock, Series A Preferred Stock, Series E Preferred Stock, Series T Preferred Stock, as defined under \"Miscellaneous\" below, and other capital stock with voting rights will no longer be required to include two directors selected from among the outside directors on the board of directors of BA; (iii) special class voting rights applicable to the Class B Common Stock and Series C Preferred Stock will no longer apply and; (iv) BA will no longer participate in the Appointments Committee. In addition, if the BA Holding becomes less than both one-third of the aggregate purchase price of all BA Preferred Stock, BA Notes, Non-Preferred Stock or other equity securities of USAir Group acquired by BA and its subsidiaries following January 21, 1993 and $375 million (or $250 million if the Final Purchase has not occurred), then the number of directors elected by the Class B Common Stock and the Series C Preferred Stock, voting together as a single class, will be reduced to one. If the BA Holding becomes less than $100 million, then the Class B Common Stock and the Series C Preferred Stock will no longer vote together as a single class with respect to the election of any directors of USAir Group, but will vote together with the Common Stock, the Series A Preferred Stock and any other class or series of capital stock with voting rights with respect to the election of directors of USAir Group.\nMiscellaneous Under the terms of the Investment Agreement, BA has the right to maintain its proportionate ownership (based on the assumed consummation of the Second Purchase and the Final Purchase) of USAir Group's securities under certain circumstances by purchasing shares of certain series of Series T Cumulative Convertible Exchangeable Senior Preferred Stock, without par value (\"Series T Preferred Stock\"), Common Stock or BA Common Stock. Pursuant to these provisions, on June 10, 1993, BA purchased (i) 152.1 shares of Series T-1 Preferred Stock for approximately $1.5 million as a result of certain issuances during the period January 21 through March 31, 1993 of Common Stock in connection with the exercise of certain employee stock options and to certain defined contribution retirement plans; and (ii) 9,919.8 shares of Series T-2 Preferred Stock for approximately $99.2 million as a result of USAir Group's issuance on May 4, 1993 of 11,500,000 shares of Common Stock for net proceeds of approximately $231 million pursuant to a public underwritten offering. Because BA partially exercised its preemptive right in connection with the Common Stock offering and the offering price was below a certain level, the conversion price of the Series F Preferred Stock was antidilutively adjusted on June 10, 1993 from $19.50 to $19.41 per share. As a result, the Series F Preferred stock is convertible into 15,458,658 shares of Common Stock or Non-Voting Class ET Common Stock. On March 7, 1994, BA advised the Company that it would not exercise its optional purchase rights under the Invest- ment Agreement to buy three additional series of Series T Preferred\nStock triggered by issuances of common stock of the Company pursuant to certain Company benefit plans during the second, third and fourth quarters of 1993.\nThe Investment Agreement also imposes certain restrictions on BA's right to acquire additional voting securities, participate in solicitations with respect to USAir Group securities or otherwise propose or discuss extraordinary transactions concerning USAir Group. In addition, the Investment Agreement restricts BA's right to transfer certain securities and requires that prior to transfer- ring such securities, BA must, in most cases, first offer to sell the securities to USAir Group. BA has certain rights to require USAir Group to register for sale USAir Group securities sold to it pursuant to the Investment Agreement.\nUSAir Group believes that the investments made by BA, the code sharing arrangements and consummation of the other transactions contemplated by the Investment Agreement have enabled and would further enable it to compete more effectively by (i) increasing USAir Group's equity capital and strengthening its balance sheet; (ii) improving its liquidity and access to capital markets; (iii) providing financial resources to help it withstand adverse economic conditions and fare competition; (iv) providing financial resources for the purchase of strategic assets which may be on the market from time to time; and (v) giving USAir greater access to interna- tional traffic. However, BA has announced that while it will continue to code share with USAir, it will not make additional investments in the Company under current circumstances. It is unclear whether or when any additional investments by BA will occur.\nItem 2.","section_1A":"","section_1B":"","section_2":"Item 2. PROPERTIES\nFlight Equipment\nAt December 31, 1993, USAir operated the following jet aircraft:\n(1) Of the owned aircraft, 119 were collateral for various secured financing obligations aggregating $2.0 billion at December 31, 1993, 31 were collateral under USAir Group's Credit Agreement (see Item 8A, Notes to the Consolidated Financial Statements of USAir Group). (2) The terms of the leases expire between 1994 and 2015. (3) The above table excludes one owned and one leased Boeing 767- 200ER which USAir leased to BA under a wet lease arrangement at December 31, 1993. See \"British Airways Investment Agreement - U.S.-U.K. Routes.\"\nAt December 31, 1993, USAir Group's three commuter airline subsidiaries operated the following propeller-driven aircraft:\n(1) Of the owned aircraft, four were collateral for various secured financing obligations aggregating $3.6 million at December 31, 1993, 35 were collateral under USAir Group's Credit Agreement (see Item 8A, Notes to the Consolidated Financial Statements of USAir Group), 14 were owned by USAir Leasing and Services, and 17 were owned by USAir. (2) The terms of the leases expire between 1994 and 2010.\nUSAir is party to purchase agreements that provide for the future acquisition of new jet aircraft. See Note 4(d) to the Company's Consolidated Financial Statements for outstanding commitments and options for the purchase of flight equipment. The Company's subsidiary airlines maintain inventories of spare engines, spare parts, accessories and other maintenance supplies sufficient to meet their operating requirements.\nUSAir owns one and leases 17 BAe 146-200 aircraft, leases 8 Boeing 727-200 and owns 12 Fokker-1000 aircraft that were parked in storage facilities and not operating at December 31, 1993. In addition, certain of the Company's subsidiaries lease five owned-1000 aircraft to outside parties.\nUSAir is a participant in the Civil Reserve Air Fleet (\"CRAF\"), a voluntary program administered by the Air Mobility Command (\"MAC\"). USAir's commitment under CRAF is to provide two Boeing 767 aircraft in support of military operations, probably for aeromedical missions, as specified by MAC. To date, MAC has not requested USAir to activate any of its aircraft under CRAF.\nGround Facilities\nUSAir leases the majority of its ground facilities, including executive and administrative offices in Arlington, Virginia adjacent to Washington National Airport; its principal operating, overhaul and maintenance bases at the Pittsburgh and Charlotte\/Douglas International Airports; major training facilities in Pittsburgh and Charlotte; central reservations offices in several cities; and line maintenance bases and local ticket, cargo and administrative offices throughout its system. USAir owns property in Fairfax, Virginia, a training facility in Winston- Salem, North Carolina, a reservations and training facility in San Diego, California, and a reservations facility in Orlando, Florida. Allegheny owns its principal ground facilities in Middletown, Pennsylvania. Jetstream leases its principal ground facilities in Dayton, Ohio. Piedmont leases its principal ground facilities in Salisbury, Maryland, Norfolk, Virginia and Jacksonville, Florida.\nThe Company's airline subsidiaries utilize public airports for their flight operations under lease arrangements with the govern- ment entities that own or control these airports. Airport authorities frequently require airlines to execute long-term leases to assist in obtaining financing for terminal and facility construction. Future requirements for new or improved airport facilities and passenger terminals will require additional expenditures and long-term commitments. Several significant projects which affect large airports on USAir's route system are discussed below.\nThe new terminal at Pittsburgh International Airport commenced operation in October 1992. The construction cost of the new terminal was approximately $800 million, a substantial portion of which was financed through the issuance of airport revenue bonds. As the principal tenant of the new facility, USAir will pay a portion of the cost of the new terminal through rents and other charges pursuant to a use agreement which expires in 2018. While USAir's terminal rental expense at Pittsburgh increased from approximately $14 million annually prior to relocation to the new facility, to approximately $49 million annually in 1993, the new facility has provided additional gate capacity for USAir and has enhanced the efficiency and quality of its hub services at Pittsburgh. In addition to the annual terminal rental expense, USAir is recognizing approximately $18 million annual rental expense for property and equipment typically owned by USAir at other airports. The annual terminal rental expense is subject to adjustment, depending on the actual airport operating costs, among other factors. These additional rents are reflected in Note 4(b), \"Lease Commitments\", to the Company's and USAir's respective Consolidated Financial Statements.\nThe East End Terminal at New York LaGuardia Airport, which cost approximately $177 million to construct, opened in the third quarter of 1992. USAir, USAir Express and the USAir Shuttle operations at LaGuardia are conducted from this new terminal and the adjoining USAir Shuttle terminal. The East End Terminal has 12 jet gates. USAir will recognize approximately $31.6 million in annual rental expense for the new terminal and is responsible for all maintenance and operating costs.\nIn 1993, USAir and the City of Philadelphia reached an agreement to proceed with certain capital improvements at Philadel- phia International Airport, where USAir has its third largest hub. The improvements include between $60 million and $90 million in various terminal renovations and a new $214 million commuter airline runway expansion project, exclusive of financing costs. Depending on the timing of certain federal environmental reviews, USAir expects construction will begin some time in 1994 or 1995 and will be completed in 1996 or 1997.\nThe Washington National Airport Authority, which operates Washington National Airport (\"National\"), is currently undertaking a $930 million capital development project at National, which includes construction of a new terminal currently expected to commence operation in the fourth quarter of 1996. Based on current projections, the Company estimates that its annual operating expenses at Washington National Airport will increase by approxi- mately $15-$20 million.\nDuring 1990, Congress enacted legislation to permit airport authorities, with prior approval from the DOT, to impose passenger facility charges (\"PFCs\") as a means of funding local airport projects. These charges, which are collected by the airlines from their passengers, are limited to $3.00 per enplanement, and to no more than $12.00 per round trip. The legislation provides that the airlines will be reimbursed for the cost of collecting these charges and remitting the funds to the airport authorities. To date, approximately 200 airports, including airports at Boston, Baltimore, Washington, Newark, New York City, Philadelphia, Orlando and Tampa (which are major markets served by USAir), have imposed or are seeking approval to impose PFCs. These airports will receive more than $1 billion annually in PFCs. By the end of 1993, most major airports had imposed, or announced their intent to impose, PFCs. As a result of downward competitive pressure on fares, USAir and other airlines have been unable in many instances to pass on the cost of the PFCs to passengers through fare increases.\nWith respect to the magnitude of airport rent and landing and other user fees generally, federal law prohibits States and their subdivisions from collecting these fees, other than reasonable rental charges, landing fees and other service charges, from aircraft operators for the use of airport facilities. In the absence of guidance from the FAA and the DOT, which are charged with enforcing such laws, regarding the \"reasonableness\" of fees charged at certain airports, controversies have arisen in recent years concerning the allocation of airport costs among the airlines, general aviation and concessionaires operating at the airport. Until these agencies act, governmental authorities will continue to assess fees in excess of what the airlines believe is reasonable at certain airports.\nIn addition, during 1993, the controversy surrounding the diversion by airport and other governmental authorities of airport revenues continued to grow. Airport revenues typically consist primarily of rents and landing and other user fees paid by the airlines operating at the airport. Under federal law, federal transportation funds could be denied to certain airports that engage in diversion of these revenues. During 1993, a number of airlines operating at Los Angeles International Airport (\"LAX\") withheld a portion of the fees assessed by LAX on the grounds that airport revenues were being diverted to the City of Los Angeles. The LAX airport authority threatened to prohibit certain airlines, including USAir, from operating at LAX until the fees were paid. Although, following litigation, the airlines eventually paid the fees at LAX, the Company expects that the temptation to divert airport revenues will continue at certain airports because of increasing governmental budgets and a reluctance to increase taxes and other sources of revenue.\nItem 3.","section_3":"Item 3. LEGAL PROCEEDINGS\nUSAir has been named as party to, or may be affected by, legal proceedings brought by owners and residents of property located in the vicinity of certain commercial airports. The plaintiffs generally seek to enjoin certain aircraft operations at such airports or to obtain awards of damages on the defendant airport operators and air carriers as a result of alleged aircraft noise or air pollution. The relative rights and liabilities among property owners, airport operators, air carriers and Federal, state and local governments are unclear. Any liability imposed on airport operators or air carriers, or the granting of any injunctive relief against them, could result in higher costs to air carriers, including the Company's airline subsidiaries.\nThe Equal Employment Opportunity Commission and various state and local fair employment practices agencies are investigating charges by certain job applicants, employees and former employees of the Company's subsidiaries involving allegations of employment\ndiscrimination in violation of Federal and state laws. The plaintiffs in these cases generally seek declaratory and injunctive relief and monetary damages, including back pay. In some instances they also seek classification adjustment and punitive damages.\nThe above proceedings are in various stages of litigation and investigation, and the outcome of these proceedings is difficult to predict. In the Company's opinion, however, the disposition of these matters is not likely to have a material adverse effect on its financial condition.\nIn 1989 and 1990, a number of U.S. air carriers, including USAir received two Civil Investigative Demands (\"CIDs\") from the DOJ (a CID is a request for information in the course of an antitrust investigation and does not constitute the institution of a civil or criminal action) related to investigations of price fixing in the domestic airline industry. The Attorney General of the State of Florida has also issued CIDs to USAir and other airlines concerning the same subject matter.\nThe investigations by the DOJ culminated in the filing of a lawsuit against Airline Tariff Publishing Company (\"ATPCo\") and eight major air carriers, including USAir, alleging that the defendants had agreed to fix prices in violation of Section 1 of the Sherman Act through the methods used to disseminate fare data to ATPCo, an airline-owned fare publishing service. To avoid the costs associated with protracted litigation and an uncertain outcome, USAir and another carrier decided to settle the lawsuit by entering into a consent decree to modify their fare-filing practices in certain respects and to implement compliance programs that would include education of employees regarding the carrier's responsibilities under the consent decree. Accordingly, the consent decree and the U.S. Government's complaint were filed contemporaneously in the U.S. District Court for the District of Columbia in December 1992. Due to certain legal requirements associated with the settlement of government antitrust suits, the consent decree could not be entered until a notice and comment period had expired. On November 1, 1993, after it had reviewed the comments, the Court entered the consent decree. USAir does not believe that the fare-filing practices reflected in the consent decree will have a material adverse effect on its financial condition or on its ability to compete. In March 1994, the remaining six air carrier defendants agreed to the entry of a separate consent decree to settle the lawsuit. This consent decree cannot be entered by the Court until a notice and comment period has expired. When that consent decree is entered, USAir can petition the Court to have its consent decree amended to conform with the other settlement and the Court will enter an amended consent decree.\nOn March 19, 1993, the U.S. District Court in Atlanta, Georgia entered a settlement involving USAir and five other U.S. air carrier defendants in the Domestic Air Transportation Antitrust Litigation class action lawsuit. The class action suit, which was filed in July 1990, alleged that the airlines used ATPCo to signal and communicate carrier pricing intentions and otherwise limit price competition for travel to and from numerous hub airports. Under the terms of the settlement, the six air carriers will pay $45 million in cash and issue $396.5 million in certificates valid for purchase of domestic air travel on any of the six airlines. USAir's share of the cash portion of the settlement, $5 million, was recorded in results of operations for the second quarter of 1992. The certificates provide a dollar-for-dollar discount against the cost of a ticket generally of up to a maximum of 10% per ticket, depending on the cost of the ticket. It is possible that this settlement could have a dilutive effect on USAir's passenger transportation revenue and associated cash flow. However, due to the interchangeability of the certificates among the six carriers involved in the settlement, the possibility that carriers not party to the settlement will honor the certificates, and the potential stimulative effect on travel created by the certificates, USAir cannot reasonably estimate the impact of this settlement on further passenger revenue and cash flows. USAir has employed the incremental cost method to estimate a range of costs attributable to the exercise of the certificates, based on the assumption that the estimated maximum number of certificates to be redeemed for travel on USAir will be related to USAir's market share relative to the total market share of the six carriers involved in the settlement. USAir's estimated percentage of such market share is less than 9%. Incremental costs include unit costs for passenger food, beverages and supplies, fuel, liability insurance, and denied boarding compensation expenses expected to be incurred on a per passenger basis. USAir has estimated that its incremental cost will not be material based on the equivalent free trips associated with the settlement.\nThe Attorney General of the State of Florida and the Attorneys General of several other states are investigating whether several major airlines, including USAir, have engaged in price fixing and other unlawful restraints of trade. Certain of these Attorneys General have issued document requests to USAir and several other airlines requiring them to provide certain information and documents. At this time, USAir cannot predict the manner in which these investigations will be resolved and if the resolution will have an adverse effect on USAir's results of operations or financial position.\nItem 4.","section_4":"Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS\nNo matters were submitted to a vote of security holders during the fourth quarter of 1993.\nPART II\nItem 5A. MARKET FOR USAir Group's COMMON EQUITY AND RELATED STOCKHOLDER MATTERS\nStock Exchange Listings\nThe common stock of the Company is traded on the New York Stock Exchange (Symbol U). On February 28, 1994, there were approximately 59,265,000 shares (exclusive of approximately 1,815,000 shares held in treasury) of common stock of the Company outstanding. The stock was held by 35,763 stockholders of record. The holders reside throughout the United States and abroad.\nMarket Prices of Common Stock\nPresented below are the high and low sale prices of the common stock of the Company as reported on the New York Stock Exchange Composite Tape during 1993 and 1992:\nHolders of the common stock are entitled to receive such dividends as may be lawfully declared by the Board of Directors of the Company. A common stock dividend of $.03 per share was paid in every quarter from the second quarter of 1980 through the second quarter of 1990. In September 1990, however, the Board of Directors suspended the payment of dividends on common stock for an indefinite period.\nItem 5B. MARKET FOR USAir's COMMON EQUITY AND RELATED STOCKHOLDER MATTERS\nThere is no established public trading market for USAir's common stock, which is all owned by USAir Group. No dividends were paid in 1992 or 1993.\nItem 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDI- TION AND RESULTS OF OPERATIONS\nManagement's Discussion and Analysis of Financial Condition and Results of Operations presented below relates to the Consoli- dated Financial Statements of USAir Group, Inc. (\"USAir Group\" or the \"Company\") presented in Item 8A. Consolidated Financial Statements for USAir, Inc. (\"USAir\"), the Company's principal subsidiary, are presented in Item 8B. USAir's operating revenue accounted for more than 93% of the Company's operating revenue in each of the last three years. USAir Group also owns three commuter airline subsidiaries, which accounted for more than 5% of the Company's operating revenue in each of the last three years. Therefore, the following discussion and analysis of results of operations relates principally to the operations of USAir and to the airline industry.\nThe following general factors are among those that influence USAir's financial results and its future prospects:\n1. General economic conditions and industry capacity. 2. A decline in the proportion of passengers paying higher yield \"business fares\" to passengers paying lower yield fares. 3. The emergence and growth of low cost, low fare airlines and USAir's high cost structure. 4. The trend toward globalization in the airline industry and related regulatory limitations.\nThese and other factors are discussed in the following sections.\nGeneral Economic Conditions and Industry Capacity\nHistorically, demand for air transportation has tended to mirror general economic conditions. Economic conditions in the United States and fare competition in the domestic airline industry continued to be major factors affecting the financial condition of USAir and the airline industry in 1993. In recent years, the change in industry capacity has failed to mirror the reduction in demand for domestic air transportation due primarily to continued delivery of new aircraft and, secondarily, to the operation of certain major U.S. carriers under the protection of Chapter 11 of the Bankruptcy Code for extended periods. While industry capacity has leveled off and the general economy has shown signs of improvement, the Company expects that the airline industry will remain extremely competitive for the foreseeable future. See the discussion of low cost, low fare airlines below.\nDuring the recent economic recession, some observers of the travel industry speculated that the business traveler became less reliant on air transportation as teleconferencing, telecopying and other technological developments gained wider acceptance. In addition, some observers have speculated that corporate restructur- ing and furloughs in the U.S. have reduced the number of business travelers and that the leisure traveler has become conditioned to waiting for promotional fares before making travel plans. The Company is unable to determine whether these structural changes have occurred in the air transportation market or if these changes have occurred, how long-lived these trends will be. However, the Company believes that for the foreseeable future the demand for higher yield \"business fares\" will remain essentially flat and relatively inelastic while the lower yield \"leisure\" market will continue to grow with the general economy. This trend could make it more difficult for the domestic airlines, including USAir, to sustain meaningful yield increases in the future.\nFinancial circumstances have compelled certain bankrupt or financially weakened carriers to sell assets, including foreign routes, gates and take-off and landing slots at capacity con- strained airports. Proceeds from asset sales provide cash infusions to weaker carriers, but also augment the route systems and market presence of the stronger carriers. Although USAir has completed route and other asset purchases from a number of weaker carriers, the purchases illustrate a trend of consolidation of strategic assets and financial strength within the industry which appears to benefit the three largest U.S. carriers in the long- term. In the short-term, however, these carriers have suffered from the cost of integrating these assets into their systems and from the incremental capacity which has been exacerbated by declines in passenger travel and fare wars. As a result, these carriers have taken or announced actions including reduction in workforce and salary and other employee benefits, concessions from unionized employees, deferral of new aircraft deliveries, early retirement of inefficient aircraft types, and termination of unprofitable service. USAir implemented similar measures during 1990-1993, including a workforce reduction of 2,500 full-time positions between November 1993 and the first quarter of 1994, which, along with other measures, is expected to save the Company approximately $200 million in 1994. USAir will pursue additional measures in 1994 to reduce further its operating costs. See Item 1. \"Business - Significant Impact of Low Cost, Low Fare Competi- tion\" and \"-British Airways Announcement Regarding Additional Investment in the Company; Code Sharing.\"\nIn 1993, USAir reached an agreement with the Boeing Company (\"Boeing\") to, among other things, exercise options to purchase additional B757-200 aircraft on an accelerated basis and to cancel and reschedule the delivery of certain Boeing 737 aircraft on order into the future. This agreement reduced USAir's capital expendi\ntures by more than $880 million between 1993 and 1996. USAir is currently in negotiations with Boeing regarding, among other things, the current schedule of new aircraft deliveries.\nEach major airline has developed a frequent traveler program that offers its passengers incentives to maximize travel on that particular carrier. Participants in such programs typically earn \"mileage credits\" for every trip they fly that can be redeemed for airline travel or, in some cases, for other benefits. Under USAir's Frequent Traveler Program (\"FTP\"), participants receive mileage credits equal to the greater of actual miles flown or 750 miles for each paid flight on USAir or USAir Express, or actual miles flown on one of USAir's FTP airline partners. Participants flying on first or business class tickets receive additional credits. Participants may also earn mileage credits by staying at participating hotels or by renting cars from participating car rental companies within 24 hours of a flight.\nMileage credits can be redeemed for certificates for various travel awards, including fare discounts, first class upgrades and tickets on USAir or other airlines participating in USAir's FTP. Certain awards also include hotel and car rental awards. Award certificates may not be brokered, bartered or sold, and have no cash value. USAir and its airline partners limit the number of seats allocated per flight for award recipients. The number of seats varies depending upon flight, day, season and destination. Award travel is not permitted on blackout dates, which generally correspond to certain holiday periods in the United States or peak travel dates to foreign destinations. Hotel awards are valid at participating hotels and are subject to room availability, which is limited. Car rental awards are valid only at participating locations. The number of cars available for award usage is limited, and no cars are available for award usage on blackout dates. USAir reserves the right to terminate the FTP or portions of the program at any time, and the FTP's official rules, partners, special offers, blackout dates, awards and mileage levels are subject to change with or without prior notice.\nUSAir accounts for its FTP under the incremental cost method, whereby travel awards are valued at the incremental cost of carrying one additional passenger. Such costs are accrued when FTP participants accumulate sufficient miles to be entitled to claim award certificates. No value is assigned to airline, hotel or car rental award certificates that are to be honored by other parties. Incremental costs include unit costs for passenger food, beverages and supplies, fuel, liability insurance and denied boarding compensation expenses expected to be incurred on a per passenger basis. No profit or overhead margin is included in the accrual for incremental costs.\nFTP participants had accumulated mileage credits for approxi- mately 3,896,000 awards (at the 20,000 mile level required for a\nfree domestic flight on USAir) at December 31, 1993, compared with 3,199,000 awards at December 31, 1992. However, because USAir expects that some award certificates will be redeemed by other airlines participating in USAir's FTP, that some certificates will expire, and that some accumulated mileage credits will never be applied towards award certificates, the calculations of the accrued liability for incremental costs at December 31, 1993 and 1992 were based on approximately 88% and 86%, respectively, of the accumulat- ed credits. Mileage for FTP participants who have accumulated less than the minimum number of mileage credits necessary to claim an award is excluded from the calculation of the accrual. Most participants belong to more than one frequent traveler program and it is not possible to project when or if participants will accrue additional mileage credits required to earn an award. Incremental changes in the liability resulting from additional mileage credits are recorded as part of the regular review process. Effective January 1, 1995, USAir will increase the minimum mileage level required for a free domestic flight from 20,000 to 25,000.\nUSAir's customers redeemed approximately 841,000, 626,000 and 654,000 awards for free travel on USAir in 1993, 1992 and 1991, respectively, representing approximately 8.0%, 4.9% and 5.3% of USAir's revenue passenger miles (\"RPMs\") in those years, respec- tively. During 1993, two \"free ticket for segments flown\" promotions were completed which increased the number of awards used for free travel on USAir. These promotions were offered in response to similar promotions offered by USAir's competitors. USAir does not believe that usage of FTP awards results in any significant displacement of revenue passengers. USAir has the ability, through its inventory management system, to identify markets and flights expected to have high load factors and, through capacity controls, to maximize use of FTP awards on flights with lower demand and available seats. Also, blackout dates forestall the usage of awards on peak travel days. Furthermore, USAir's exposure to the displacement of revenue passengers is not signifi- cant, as the number of USAir flights that depart 100% full is minimal. In the third quarter of 1993 (the third quarter being the period of the year when USAir generally experiences its highest load factor and expects the usage of FTP awards to be highest), for example, fewer than 2.2% of USAir's flights departed 100% full. During this same quarterly period, only approximately 1.9% of USAir's flights departed 100% full and also had one or more passengers on board who were traveling on FTP award tickets.\nAirlines often use other competitive promotions, such as offering extra credits or reduced award thresholds under certain conditions, as incentives to stimulate travel. USAir reviews these promotions to determine the proper accounting treatment for each one. To the extent these promotions are determined to be an integral part of the FTP, they are accounted for in the same manner as free travel earned through mileage credits.\nLow Cost, Low Fare Competition\nIn September 1993, Southwest Airlines, Inc. (\"Southwest\"), a low cost, low fare, \"no frills\" air carrier which had not previous- ly provided service to or in the eastern U.S., inaugurated service to Chicago and Cleveland from Baltimore\/ Washington International Airport (\"BWI\") at fares substantially below those previously offered by USAir and other airlines in the same markets. BWI is one of USAir's hub airports. Unlike the other major U.S. air carriers, Southwest does not structure its operations around connecting hub airports, relying instead on high frequency point- to-point service. USAir responded by matching most of Southwest's fares and increasing the frequency of service in related markets.\nOn March 22, 1994, Southwest announced that on May 26, 1994, and June 6, 1994, it will expand service between BWI and Chicago. Southwest also announced that on May 26, 1994, it will initiate its low fare service between BWI and St. Louis, and on July 8, 1994, between BWI and Birmingham, Alabama and Louisville, Kentucky. At this time, USAir has not determined its response to the Southwest announcement.\nIn October 1993, Continental Airlines (\"Continental\"), which had reorganized under bankruptcy proceedings earlier in 1993, inaugurated low fare service on certain routes in the eastern U.S. USAir is a competitor in most of the markets served by these routes. While Continental initiated service to certain cities, such as Charleston, South Carolina; Greensboro, North Carolina; and Jacksonville, Florida; most of the markets included as part of its new program (for example, Baltimore) were previously served by Continental through its hubs at Newark, Cleveland, and Houston. However, under its new program, Continental linked certain of these cities independently of its hubs while continuing to provide many of the same services that are available on its hub flights, including advance seat assignment, frequent traveler mileage credits and interline connections. Under its new program, Continental served approximately 80 city pair markets, from which USAir has historically realized approximately 4% of its total passenger revenue. When Continental started the new program it was uncertain whether the program was an experiment or a beachhead from which Continental planned to expand further. USAir, therefore, made a measured response by matching most of the low fares offered by Continental.\nOn January 31, 1994, Continental increased its competitive threat. It announced that by March 9, 1994, it would expand the low fare program to approximately 356 city pair markets, most of which USAir served and from which USAir has historically realized approximately 8% of its passenger revenue. Moreover, if secondary markets within a 90-mile radius, or a reasonable driving distance, were viewed as being included in Continental's new program, markets from which USAir has historically realized approximately 36% of its\npassenger revenue were affected. Contemporaneously, Continental announced that it would substantially reduce service at its Denver hub and redeploy significant aircraft and personnel resources to the eastern U.S. Although Continental's balance sheet continues to have significant leverage following its bankruptcy reorganization, its liquidity position improved substantially as a result of equity and debt infusions completed as part of that reorganization. Moreover, Continental completed a common stock offering in December 1993, which may indicate the market's receptivity to its efforts to raise additional funds. Continental has operating (including labor) costs that are substantially lower than those of USAir and the other major air carriers.\nOn February 8, 1994, in response to the expansion of Continen- tal and to avoid loss of market share in the eastern U.S., USAir lowered in primary and secondary markets affected by the Continen- tal expansion, by as much as 50%, the fares most commonly used by business travelers on many east coast routes. In addition, USAir lowered leisure fares by as much as 70% in the same markets. In many of the markets, free companion fares are available with business fares. These reduced fares have no expiration date. However, USAir could adjust the fares at some time in the future. Increases in traffic which are stimulated by the lower fares offered by Southwest, Continental and USAir will not offset USAir's reduced revenue resulting from lower yields in these markets.\nUSAir believes that Southwest, Continental or other low cost carriers with a significant cost advantage over USAir likely will expand their operations to additional markets. For example, in December 1993, Southwest completed its acquisition of Morris Air, a regional air carrier with operations concentrated in the western U.S. This acquisition could enable Southwest to divert resources to expand its operations in the eastern U.S. Furthermore, media reports indicate that Southwest has entered into a long-term agreement for the use of four additional gates at BWI, where it currently operates from two gates. On March 4, 1994, Continental further escalated prospective competition by announcing that it will further reduce operations at its Denver, Colorado hub and establish a flight crew base at Greensboro, North Carolina. These measures are likely to increase losses at USAir because they could enable Continental, which has significantly lower costs than USAir, to expand further its high frequency, low fare service described above in additional short-haul markets served by USAir with substantial detriment to USAir. In addition, other low cost carriers may enter other USAir markets. For example, America West announced on February 15, 1994 that it will commence service on April 18, 1994 between Columbus, Ohio where it operates a hub and Philadelphia, where USAir has a hub operation. Other carriers, including some of the larger carriers, have also indicated their intent to develop similar low-fare short-haul service.\nUnless USAir is able to reduce its operating costs, present and increasing competition from low cost, low fare airlines in USAir's markets could have a material adverse impact on USAir's cash position and therefore, its ability to sustain operations. In March 1994, USAir announced that it had initiated discussions with the leadership of its unionized employees regarding wage reduc- tions, improved productivity and other cost savings. The outcome of these negotiations is uncertain, but if timely agreements are not reached, the Company may seek other restructuring alternatives. See Item 1. \"Business - Significant Impact of Low Fare, Low Cost Competition\".\nIn 1993, Northwest Airlines, Inc. (\"Northwest\") and Trans World Airlines, Inc. (\"TWA\") sought and obtained from unionized employees substantial concessions and productivity improvements. In exchange, these employees have received ownership interests in those companies. In December 1993, United Airlines, Inc. (\"Unit- ed\") announced that it had reached agreement with two of its unions to trade concessions for a substantial ownership stake by all employees, subject to approval by United's stockholders. The memberships of these two unions have ratified the agreement. The stated intent and purpose of these labor concessions are to enable these carriers to lower their operating costs. At this time, it is uncertain whether the United transaction will be consummated and whether these events constitute isolated incidents or a trend of employee ownership in the airline industry. As an airline with relatively high labor costs and a route system with a significant percentage of short-haul flying, USAir is considering additional ways to reduce these costs which could involve an exchange of employee concessions for an ownership interest in the Company. USAir is currently engaged in discussions with the leaders of its unionized employees regarding efforts to reduce costs, including reductions in wages, improvements in productivity and other cost savings. The outcome of these discussions is uncertain. See Item 1. \"Business - Significant Impact of Low Fare, Low Cost Competi- tion.\"\nUSAir has been examining various ways to restructure its operations to increase efficiency and lower unit costs in markets of approximately 500 miles or less in distance. Certain carriers, such as Southwest and Continental, have a substantial cost advantage over USAir in these short-haul markets. In addition, consumers appear to be increasingly price conscious, particularly for short distance flights. In February 1994, USAir implemented the first phase of the introduction of a new short-haul product in 18 city-pair markets of approximately 500 miles or less, resulting in increased utilization and productivity of aircraft, personnel, and ground facilities in these markets by decreasing the amount of time that aircraft spend on the ground between flights from an average of 45 minutes to approximately 25 minutes. Initiation of the first phase of this service did not involve any immediate pricing changes or new personnel. Ultimately, USAir anticipates\nthat enhancements to the short-haul product will be completed in summer 1994, and that long-haul and transatlantic service will be redesigned later in 1994. USAir plans to expand this higher frequency service to additional short-haul and other markets in July 1994, with a total fleet of approximately 100 aircraft. Although USAir expects this higher frequency operation will result in reduced unit costs in relevant markets, certain variable costs generally associated with providing the incremental flights, including jet fuel, landing fees and labor, will increase. There can be no assurance, therefore, that the changes will result in improved financial results for USAir. If USAir cannot find ways to compete effectively with low cost carriers by lowering its operating costs, and to generate sufficient additional passengers to offset the effect of sharply reduced fares, USAir's revenue and results of operations will continue to be materially and adversely affected.\nIndustry Globalization and Regulation\nThe trend toward globalization of the airline industry has accelerated in recent years as the three largest U.S. carriers have initiated foreign service and purchased the foreign routes of financially distressed or bankrupt U.S. carriers. In addition, certain foreign carriers have made substantial investments in U.S. carriers which have frequently been tied to marketing alliances or, less frequently, reciprocal investments by the U.S. carrier in its foreign partner. In August 1993, Continental announced that it had reached agreement with Air France on a joint marketing agreement. Earlier in the year, Air Canada made a substantial equity invest- ment in Continental in connection with Continental's bankruptcy reorganization. In October 1993, United and Lufthansa German Airlines announced that they had reached an agreement to implement code sharing to link some of their flights. Continuing privatiza- tion of sovereign carriers and foreign airline deregulation may encourage further foreign investment. Foreign investment in U.S. air carriers is restricted by statute and may be subject to review by the U.S. Department of Transportation (\"DOT\") and, on antitrust grounds, by the U.S. Department of Justice (\"DOJ\").\nOn January 21, 1993, USAir Group and British Airways Plc (\"BA\") entered into an Investment Agreement (\"Investment Agree- ment\") under which a wholly-owned subsidiary of BA has purchased certain preferred stock of the Company for $400.7 million. On March 7, 1994, BA announced that it would not make any additional investments in the Company under current circumstances. See \"Liquidity and Capital Resources\" and Item 1. \"Business - British Airways Announcement Regarding Additional Investments in the Company; Code Sharing\" and \"- British Airways Investment Agreement\" for additional information related to the investment. Under the Investment Agreement, USAir and BA have entered into a code sharing arrangement under which certain domestic USAir flights, connecting to certain BA transatlantic flights, may be listed on computerized reservation systems either under USAir's or BA's two letter\ndesignation code, subject to authorization by the DOT. As of March 1, 1994, USAir and BA offered code share service to and from 34 of the 65 airports authorized by the DOT. On March 17, 1994, the DOT issued an order renewing for one year the existing code sharing authority. In January 1994, USAir and BA filed applica- tions with the DOT to code share to 65 additional domestic and seven additional foreign destinations. The DOT did not act on these applications in its March 17, 1994 order. See Item 1. \"Business - British Airways Announcement Regarding Additional Investments in the Company; Code Sharing\" and \"-British Airways Investment Agreement\".\nUSAir and BA are in the process of expanding their code sharing arrangement. USAir believes that it will have greater access to international traffic and that its and BA's customers will benefit from better on-line connections as well as coordinated check-in and baggage checking procedures. USAir also believes that the code sharing arrangement will generate increased revenues, the magnitude of which cannot be reasonably estimated at this time. The DOT may continue to link further renewals of the code share authorization to the United Kingdom's (\"U.K.\") liberalization of U.S. air carrier access to the U.K. markets. However, the code sharing arrangement is expressly permitted under the bilateral air services agreement between the U.S. and U.K. USAir expects that the authorization will be renewed in the future; however, there can be no assurance that this will occur. USAir does not believe that the DOT's failure to renew the code share authorization or grant the pending application would result in a material adverse change in its financial condition. However, further investment in the Company by BA, as contemplated in the Investment Agreement, may be less likely. See Item 1. \"Business - British Airways Announcement Regarding Additional Investments in the Company; Code Sharing\" and \"-British Airways Investment Agreement.\"\nCurrent U.S. law provides that foreign ownership or control of the voting interest in a certificated U.S. air carrier may not exceed 25%, non-U.S. citizens may not constitute more than a third of the board of directors and managing officers of the air carrier and the president of the air carrier must be a U.S. citizen. Over the years in the context of \"fitness\" reviews to determine whether air carriers could be issued, or continue to hold, operating certificates, the DOT has also issued interpretations regarding whether investments by, or other arrangements with, foreign investors constitute de facto control over a U.S. air carrier. Although the Company believes the policy has no basis in law, recently and particularly during 1992 and 1993, the DOT has linked its review of foreign investment in, and foreign alliances with, U.S. air carriers to the status of the bilateral air transportation treaty between the U.S. and the country of origin of the foreign airline. The willingness of the DOT to allow proposed foreign investments, alliances and participation in corporate governance has been linked to its perception of the liberality of the relevant\ntreaty with respect to the right of U.S. air carriers to operate to, from and beyond the foreign country. For example, the Netherlands entered into a new bilateral treaty with the U.S. in 1992 which permitted \"open skies\", or unrestricted access to the Netherlands by U.S. air carriers. As a result, in 1992 the DOT approved Northwest's proposal to integrate its operations with those of KLM Royal Dutch Airlines, an airline based in that nation. However, the DOT has refused to allow USAir and BA to proceed with the second and third phases of their Investment Agreement, which calls for an additional investment of $450 million by BA, unless and until the U.K. government agrees to amend its bilateral air services agreement with the U.S. to permit new services by U.S. carriers to the U.K. and particularly to London's Heathrow Airport. The U.S. and U.K. governments held several negotiating sessions during the past year and have exchanged proposals to amend the bilateral agreement, but to date the two governments have failed to resolve their differences. As a result, USAir and BA were unable to proceed with the second and third phases of the Investment Agreement in 1993. In any event, on March 7, 1994, BA announced that it would not make any additional investments in the Company under current circumstances. See Item 1. \"Business - British Airways Announcement Regarding Additional Investment in the Company; Code Sharing\" and \"-British Airways Investment Agreement.\"\nThe National Commission to Ensure a Strong Competitive Airline Industry (\"Airline Commission\") issued its report in August 1993. The Airline Commission was a presidentially-appointed committee with the task of analyzing the condition of the U.S. airline industry and reporting to the Clinton Administration its findings and recommendations. Among other things, the Airline Commission recommended that: (i) the air traffic control system be modernized and the Federal Aviation Administration's (\"FAA\") air traffic control functions be performed by an independent federal corpora- tion; (ii) the federal regulatory burden be reduced; (iii) the airlines be granted certain tax relief; and (iv) the bankruptcy process be shortened. The Airline Commission also favored raising the statutory limit on foreign ownership of voting securities in the U.S. airlines to 49 percent under certain circumstances. It further urged that the current international system of bilateral agreements be replaced with multilateral arrangements. In addition, the Airline Commission recommended that the DOT review the airlines' business, capital or financial plans with the assistance of a presidentially-appointed advisory committee and, if an airline repeatedly failed to heed warnings or concerns of the DOT Secretary, the DOT could \"exercise its existing authority\", among other things, to revoke an airline's operating certificate.\nIn January 1994, the Clinton Administration issued a report which described its program to implement certain of the Airline Commission's recommendations. Among other things, the Administra- tion stated that it supported the recommendation described above regarding the FAA, supported increasing to 49 percent the foreign\nownership restrictions provided there are reciprocal opportunities for U.S. airlines and investors abroad, and opposed the recommenda- tions regarding tax relief and the appointment of the advisory committee discussed above. At this time, it is impossible to predict whether any of the Airline Commission's recommendations will be enacted and, if enacted, their effect on USAir. It is also difficult to anticipate whether the Congress will act in the near term on any of the proposals requiring legislation.\nAs part of its initiative in the transportation industry, the Clinton Administration also indicated that the DOT has begun a comprehensive examination of the \"high density rule\" which limits airline operations at Chicago O'Hare, New York's LaGuardia (\"LaGuardia\") and John F. Kennedy International, and Washington National (\"National\") Airports by restricting the number of takeoff and landing slots. As part of its study, the DOT will determine whether the operating limitations imposed by the rule can be eliminated or modified to better utilize available capacity at these airports. USAir holds a substantial number of slots at LaGuardia and National, including those assigned a value when the Company acquired Piedmont Aviation, Inc. Any DOT action which would eliminate those slots or compel USAir to transfer those slots could have a material adverse effect on USAir's operations and financial position. Revision of the high density rule at National, however, would require legislation by the Congress. The DOT has indicated that it expects to complete its study by late 1994.\nRESULTS OF OPERATIONS\n1993 Compared with 1992\nThe Company recorded a net loss of $393.1 million on revenue of $7.1 billion, in 1993 compared with the 1992 net loss of $1.2 billion on revenue of $6.7 billion. Several non-recurring items, which include the cumulative effect of accounting changes, make it difficult to compare these results. After excluding the effect of certain non-recurring items discussed below, which amount to $153.2 million and $759.3 million in 1993 and 1992, respectively, the net loss would have been $239.9 million in 1993 ($5.69 per common share after preferred dividend requirement) compared with a loss of $469.6 million in 1992 ($11.09 per common share after preferred dividend requirement).\nThe Company's 1993 financial results contain $153.2 million of non-recurring items, including (i) $68.8 million for severance, early retirement and other personnel-related expenses recorded in connection with a workforce reduction of approximately 2,500 full- time positions between November 1993 and the first half of 1994; (ii) $43.7 million for the cumulative effect of an accounting change, as required by Statement of Financial Accounting Standards No. 112, \"Employers' Accounting for Postemployment Benefits\" (\"FAS\n112\"), which was adopted during the third quarter of 1993, retroactive to January 1, 1993; (iii) $36.8 million based on a projection of the repayment of certain employee pay reductions; (iv) $13.5 million for certain airport facilities at locations where USAir has, among other things, discontinued or reduced its service; (v) $8.8 million for a loss on USAir's investment in the Galileo International Partnership, which operates a computerized reservations system; and (vi) an $18.4 million credit related to non-operating aircraft.\nThe Company's 1992 financial results contain $759.3 million of non-recurring items, including (i) $628.1 million for the cumula- tive effect of an accounting change, as required by Statement of Financial Accounting Standards No. 106, \"Employers' Accounting for Postretirement Benefits Other Than Pensions\" (\"FAS 106\"); (ii) $107.4 million related to aircraft which have been withdrawn from service; (iii) $34.1 million loss related to the sale of ten McDonnell Douglas 82 (\"MD-82\") aircraft which USAir had on order but eliminated from its fleet plan; and (iv) $10.3 million gain resulting from the sale of three of the Company's subsidiaries during 1992.\nOperating Revenue - The Company's Passenger Transportation Revenue increased by $356.5 million (5.8%) in 1993 compared with 1992, primarily due to the $296.0 million (5.1%) increase at USAir. USAir's capacity, as measured by available seat miles (\"ASM\" - one ASM is equal to one seat flown one mile), decreased by 0.3% in 1993 compared with 1992, its passenger revenue per ASM increased by 5.4% to 10.22 cents and its passenger load factor, a measure of capacity utilization, increased by 0.4 points to 59.2%. The increase in passenger revenue per ASM is largely attributed to the lower level of discounting in 1993 versus 1992. The Company expects that it will experience a 1 - 2% increase in ASMs (including the effect of weather-related cancellations) in 1994 compared with 1993. Continued fare discounting and low fares offered by USAir to compete with low cost, low fare carriers discussed above, are expected to have a negative impact on the Company's passenger revenue. It is not expected that the resulting decrease in revenue per ASM will be totally offset by additional passengers. The severe winter weather conditions in the U.S. during the early part of 1994 have caused a reduction in revenue which the Company estimates at approximately $50 million.\nIn March 1993, USAir and five other U.S. air carriers entered into a settlement in the Domestic Air Transportation Antitrust Litigation class action lawsuit, which alleged that the airlines used the Airline Tariff Publishing Company to signal and communi- cate carrier pricing intentions and otherwise limit price competi- tion for travel to and from numerous hub airports. It is possible that this settlement could have a dilutive effect on USAir's passenger transportation revenue and associated cash flow. However, due to the interchangeability of the certificates among\nthe six carriers involved in the settlement, the possibility that carriers not party to the settlement will honor the certificates, and the potential stimulative effect on travel created by the certificates, USAir cannot reasonably estimate the impact of this settlement on future passenger revenue and cash flows. USAir has estimated that any incremental cost associated with the settlement will not be material based on the nominal equivalent free trips associated with the settlement. See Note 4 to the Company's Consolidated Financial Statements for additional information.\nThe Company's Other Revenue increased by $38.8 million (12.3%) in 1993. USAir's increase of $90.5 million (32.3%) was partially offset at the Company level by a decrease in non-airline subsidiary revenue resulting from the sale of three wholly-owned subsidiaries in July 1992. USAir's 32.3% improvement resulted from increased passenger cancellation and rebooking fees, frequent traveler participation fees, and various other sources.\nExpense - The Company's total operating expenses increased $141.7 million (2.0%) in 1993 compared with 1992. The Company's Personnel Costs increased by $217.7 million (8.3%), $205.6 million of which is attributable to USAir. USAir's increase includes (i) $65.6 million of the $68.8 million non-recurring charge related to a workforce reduction of 2,500 full-time positions; and (ii) the $36.8 million charge based on an estimate of the repayment of certain employee pay reductions, both discussed above. Without the effect of these non-recurring charges, USAir experienced an increase in employee salaries of $91.4 million (4.7%) and an increase in employee benefits of $11.8 million (2.1%). The increase in employee salaries is generally due to contractual and general salary increases which occurred during 1993. The amount saved as a result of the 12-month salary reduction program was approximately the same in 1993 and 1992. USAir expects that due to scheduled contractual increases and the effect of the expiration of the 12-month salary reduction program, employee salaries will increase in 1994 to the extent that the reduction of 2,500 full- time positions and any other possible measures do not offset the increases. See Item 1. \"Business - Significant Impact of Low Fare, Low Cost Competition\" and \"- Employees\" for information related to the possible unionization of additional employee groups. The $11.8 million increase in employee benefits is the result of increased pension expense, offset partially by a decrease in other postretir- ement benefit expense. The increased pension expense in 1993 resulted from the establishment of a defined contribution pension plan for USAir's non-contract employees on January 1, 1993. The defined benefit plan for these employees was frozen at December 31, 1991. Because of the interest rates on long-term, high quality corporate bonds which prevailed at December 31, 1993, the Company has lowered its discount rate used to calculate the actuarial present value of its pension and postretirement obligations. This action will cause an increase in the Company's pension and other postretirement benefits expense in 1994 of approximately $70\nmillion over 1993. See Note 11 to the Company's Consolidated Financial Statements.\nThe Company's Aviation Fuel Expense decreased $43.2 million (5.7%) as a result of a lower cost per gallon and decreased consumption. In early August 1993, the Clinton Administration's budget package was enacted. The budget package included a 4.3 cent per gallon tax on transportation fuels beginning October 1, 1993. The airline industry is exempt from the tax until October 1, 1995. See Item 1. \"Business - Jet Fuel\" and Note 1 to the Company's Consolidated Financial Statements.\nCommissions increased by $27.2 million (4.8%) as a result of the 5.8% increase in Passenger Transportation Revenue. The Company's Other Rent and Landing Fees increased $64.3 million (15.8%) primarily due to an increase in USAir's facility rental expense following the opening of the new terminal at Pittsburgh in October 1992, and the $8.9 million of non-recurring expense recorded for certain airport facilities, discussed above. The Company's Aircraft Rent Expense included a $72.4 million non- recurring charge in 1992 (part of the $107.4 million discussed above). Without this charge, aircraft rent expense increased $15.0 million (3.3%) due to the addition of new leased aircraft in 1993. Excluding the effect of non-recurring items in 1992 and 1993, Aircraft Maintenance Expense increased by $37.6 million (10.6%) resulting from the timing of aircraft maintenance cycles. Other Operating Expense decreased by $58.0 million (4.0%), reflecting a $25.0 million (1.8%) decrease at USAir and a $58.4 million decrease which resulted from the sale of three wholly-owned subsidiaries in July 1992, offset by increases at the Company's other wholly-owned subsidiaries.\nThe Company's Interest Capitalized decreased $10.0 million (36.1%) as the level of outstanding purchase deposits decreased with the delivery of new aircraft and changes in delivery sched- ules.\nEffective January 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109, \"Accounting for Income Taxes\", (\"FAS 109\"). The adoption of FAS 109 resulted in no cumulative adjustment. Results for 1993 do not include any income tax credit due to the FAS 109 limitations in recognizing a current benefit for net operating losses. See Note 6 to the Company's Consolidated Financial Statements for additional information.\n1992 Compared With 1991\nThe Company recorded a net loss of $1.2 billion on revenue of $6.7 billion in 1992, compared with the 1991 net loss of $305.3 million on revenue of $6.5 billion. Several non-recurring items, which include the cumulative effect of an accounting change, make it difficult to compare these results. In addition, the Company recorded no tax credit in 1992. After excluding the effect of certain non-recurring items which amount to a net charge of $759.3 million and a net gain of $45.9 million in 1992 and 1991, respec- tively, the pre-tax loss would have been $469.6 million in 1992 ($11.09 per common share after preferred dividend requirement) compared with a pre-tax loss of $460.7 million in 1991 ($11.01 per common share after preferred dividend requirement). This compari- son does not consider the ongoing effect to the Company's operating expenses which result from the adoption of FAS 106, the freezing of the pension plan for non-contract employees, or other changes.\nThe Company's 1992 financial results contained $759.3 million of non-recurring items, detailed above. Operating results for 1991 included (i) $107 million pre-tax gain related to the freeze of the fully funded pension plan for USAir's non-contract employees; (ii) a $21 million pre-tax charge related to USAir's parked British Aerospace BAe-146 (\"BAe-146\") fleet; (iii) $21.6 million pre-tax expense related to early retirement incentives; and (iv) $18.5 million, net, in miscellaneous non-recurring charges.\nOn October 5, 1992, the International Association of Machin- ists (\"IAM\"), which represents USAir's mechanics and related employees, commenced a strike against USAir. At that time, USAir implemented a reduced flight schedule equal to approximately 60% of the normal flight schedule. On October 8, 1992, USAir reached agreement with the IAM on a new collective bargaining agreement which becomes amendable in October 1995. Following ratification of the agreement by the IAM-represented employees, USAir resumed full service on October 12, 1992. USAir immediately offered various incentives including bonus frequent traveler miles and relaxed advance purchase restrictions in an effort to attract passengers following the disruption of service. The Company estimates that the IAM strike had a negative effect on results of approximately $45 million for the year.\nOperating Revenue - The Company's Passenger Transportation Revenue increased $164.6 million (2.7%) in 1992, reflecting a $97.9 million increase in USAir passenger transportation revenue and a $66.7 million increase in commuter airline passenger revenue. USAir's ASMs increased by 2.4% in 1992, its passenger revenue per ASM decreased by 0.7% to 9.7 cents, and its passenger load factor increased by 0.2 points to 58.8%. USAir's average 1992 passenger revenue per ASM was adversely affected by widespread fare promo- tions. The improvement in commuter airline passenger revenue is\nattributed to increased traffic made possible by 20.1% increase in capacity during 1992 over 1991, as measured by ASMs, at the Company's commuter airline subsidiaries.\nUSAir's Other Revenue increased $81.3 million (40.9%) in 1992 as compared with 1991, due to increases in revenue generated by passenger cancellation and re-booking fees, fees received from commuter affiliates for handling certain of their flights, and other miscellaneous sources.\nOperating Expenses - The Company's Personnel Costs increased $102.5 million (4.1%) in 1992 compared with 1991, driven by USAir's increase in personnel costs of $99.7 million (4.2%). Personnel Costs are comprised of two components: (i) employee wages and salaries; and (ii) employee benefits. USAir's wage and salary expense decreased $21.9 million (1.1%) during 1992 as a result of partial-year wage concessions on the part of pilots, non-contract employees and mechanics, all of which ended in 1993. USAir's employee benefit expense increased $121.6 million (27.8%) in 1992 resulting from the adoption of FAS 106 in 1992, and the 1991 freeze of the fully-funded pension plan for non-contract employees. The 1991 pension freeze resulted in a $107 million gain. The Company estimates that USAir's pension expense was approximately $40 million lower in 1992 than would have been the case if the freeze had not occurred. Expense for postretirement medical and death benefits, calculated in accordance with FAS 106, was $114.7 million in 1992, compared with approximately $8 million cash-basis expense in 1991. USAir's medical and dental benefit expense for active employees decreased $26.7 million (14.2%) in 1992 compared with 1991 as a result of a contributory managed care program that was implemented during 1992 for most employee groups. Excluding the effects of FAS 106 and the pension freeze, USAir employee benefit expense decreased approximately $48 million, or 8.8%, in 1992 compared with 1991.\nThe Company's Aviation Fuel Expense decreased $45.8 million (5.7%) during 1992 compared with 1991 as a result of lower cost per gallon, partially offset by an increase in consumption. The price of fuel was inflated during early 1991 as a result of the Iraqi invasion of Kuwait and ensuing Desert Storm operation in August 1990 - January 1991, and did not return to pre-invasion levels until the second quarter of 1991.\nCommissions increased $29.6 million (5.5%) as a result of the 2.7% increase in passenger transportation revenue and the mix of travel agency sales versus total sales. Other Rent and Landing Fees Expense for the Company increased $56.6 million (16.2%) during 1992. This increase was largely due to increased expense at LaGuardia which resulted from USAir's assumption of Continental's leasehold obligations associated with the East End Terminal there in January, 1992 and the increased operation at LaGuardia during the year using the take-off and landing slots acquired from\nContinental. Also contributing to the increase was the October 1992 opening of the new terminal at the Pittsburgh International Airport, USAir's largest hub. The Company's Aircraft Rent Expense increased $152.3 million (40.3%) during 1992. A charge related to USAir's grounded BAe-146 fleet accounted for $81 million of the increase. The remainder of the increase was caused by additional leased aircraft both at USAir and the commuter airline subsidiar- ies. The Company's Aircraft Maintenance Expense decreased $33.9 million (8.2%) during 1992. This decrease reflects USAir's decrease in aircraft maintenance of $43.4 million, or 12.0%, and an increase of $9.5 million at the Company's commuter airline subsidiaries during the same period. The improvement in USAir's aircraft maintenance expense is largely attributable to the grounding of its BAe-146 fleet in May 1991, the shifting of certain aircraft engine repairs in-house from outside vendors and the negotiation of a new vendor repair contract in 1991 for certain aircraft engines. The increase in maintenance expense at the commuter airline subsidiaries is due primarily to an increased fleet size in 1992. Maintenance expense for 1992 and 1991 includes charges of $25.0 million and $25.5 million, respectively, related to grounded aircraft.\nThe Company's Other Operating Expense, Net increased $63.6 million (4.6%) in 1992 compared with 1991. Expense for 1992 includes $25 million related to an employee suggestion program which netted estimated savings of $22 million in 1992 and $110 million in 1993. The remainder of the increase is attributable to changes in various smaller expense categories.\nUSAir Group's Interest Income decreased $8.7 million (46.9%) during 1992 due to a lower average level of short-term investments during 1992 coupled with lower interest rates in 1992. Both USAir's interest income and expense include intercompany amounts which have been eliminated in the USAir Group consolidation process. The Company's Interest Expense decreased $10.4 million (4.0%) in 1992 due to a lower average level of debt outstanding related to USAir Group's revolving bank credit agreement, partially offset by additional interest associated with higher levels of aircraft-related debt in 1992. Interest Capitalized decreased $7.8 million (21.8%) as a result of a lower level of outstanding equipment deposits coupled with a lower capitalized interest rate. The Company's Other Non-Operating Expense, Net increased $17.0 million, or 40.2%, during 1992. In 1992, this category included a gain of $10.3 million from the sale of three wholly-owned subsid- iaries and a $34.1 million loss related to the sale of ten MD-82 aircraft discussed above. In 1991, this category included a $12.5 million loss incurred in conjunction with the sale of nine Boeing B727-200 aircraft which had been previously retired from service.\nAll of the Company's remaining available tax credit, or $117.6 million, was recognized upon the adoption of FAS 106 on January 1, 1992. The Company could not recognize any tax credit associated\nwith the 1992 results due to limitations under Accounting Princi- ples Board Opinion No. 11.\nInflation and Changing Prices\nInflation and changing prices do not have a significant effect on the Company's operating revenues, operating expenses, and operating income because such revenues and expenses, other than depreciation and amortization, generally reflect current price levels.\nDepreciation and amortization expense is based on historical cost. For assets acquired through the purchase of Pacific Southwest Airlines, USAir's historical cost is based on fair market value of the assets on May 29, 1987. In the case of Piedmont Aviation, Inc., USAir's historical cost is based on the fair market value of the assets on November 5, 1987, reduced by the tax effect of that portion of fair market value not deductible for tax purposes in the form of depreciation and amortization. Therefore, aggregate depreciation and amortization is lower than if this expense reflected today's replacement costs for existing productive assets. In evaluating how inflation would increase depreciation expense, however, consideration should also be given to the reduction in other operating expenses, such as aircraft maintenance and aviation fuel, that would be achieved from the operating efficiencies of newer, more technologically advanced productive assets.\nLIQUIDITY AND CAPITAL RESOURCES\nCash used by operations was $21.3 million during 1993, including a $220.0 million payment under USAir's revolving accounts receivable sale program (\"Receivables Agreement\"). At December 31, 1993, cash and cash equivalents totaled approximately $368.3 million, excluding $163.7 million which was deposited in trust accounts to collateralize letters of credit or workers compensation policies and classified as \"Other Assets\" on the Company's balance sheet. Although not currently available (see below), at Decem- ber 31, 1993, USAir Group had $300 million in commitments available for borrowing under its revolving credit agreement with a group of banks (\"Credit Agreement\") and no outstanding loans thereunder, and USAir had approximately $141 million of available funds under its Receivables Agreement.\nAt February 28, 1994, cash and cash equivalents totaled approximately $363.5 million. Funds under the Credit Agreement and Receivables Agreement are not available to the Company and USAir because of violations of minimum net worth covenants in those agreements. On March 14, 1994, the Company and USAir announced that they are seeking waivers of compliance with the minimum net\nworth covenant and other anticipated covenant violations. There can be no assurance that the Company or USAir will be able to obtain the waivers or arrange replacement facilities.\nThe Company and USAir are highly leveraged. In order to meet debt service, lease and other obligations and to finance daily operations, the Company and USAir require substantial liquidity and working capital. In addition, developments may occur which are beyond the control of the Company and USAir, including intensified fare wars or substantial increases in jet fuel prices, which could have a material adverse effect on the Company's prospects and financial condition. The Company and USAir have unencumbered assets, particularly if the Credit Agreement is terminated and the mortgage of aircraft equipment related thereto is released. The Company expects that it could use these unencumbered assets to raise funds to provide an infusion of liquidity. In addition, the second and third quarters of the year historically have been characterized by higher revenues and working capital than in the first and fourth quarters. Moreover, USAir is seeking in discus- sions with the leadership of its unionized employees substantial wage reductions, improved productivity and other cost savings. However, if unforeseen adverse developments occur, if the Company and USAir are unable to finance unencumbered assets, or if timely agreements with the employees are not reached, the Company and USAir may pursue other restructuring alternatives. See Item 1. \"Business - Significant Impact of Low Fare, Low Cost Competition\" and Item 7. \"Management's Discussion and Analysis of Financial Condition and Results of Operations - Low Cost, Low Fare Competi- tion.\"\nDuring 1993, the Company's investment in new aircraft acquisitions and purchase deposits totaled $545.3 million. USAir took delivery of 11 Boeing 757-200, one Boeing 767-200, and six MD- 82 aircraft during the year. The MD-82s were immediately sold to a third party. In addition, USAir sold two other MD-82 aircraft which had been delivered in the fourth quarter of 1992. Proceeds from the sale of the MD-82s approximated $168 million. The Company has completed financing arrangements for, including the $337.7 million issue of Pass Through Certificates (\"Certificates\") which USAir sold through an underwritten public offering on November 1, 1993, or internally funded, all of its 1993 aircraft expenditures. See Note 4(d) to the Company's Consolidated Financial Statements for the projected cash flows associated with aircraft orders and other contractual capital commitments. The Company has arranged committed financing for 100% of its 1994 and 1995 aircraft deliveries.\nOn January 21, 1993, a wholly-owned subsidiary of BA purchased 30,000 shares of the 7% Series F Cumulative Convertible Senior Preferred Stock (\"Series F Preferred Stock\"), for $300 million. Substantially all of the $300 million received by the Company from the sale of the Series F Preferred Stock was used to pay down debt\nunder the Company's Credit Agreement. The Series F Preferred Stock is subject to mandatory redemption on January 15, 2008.\nOn May 4, 1993, the Company sold 11.5 million shares of $1 par value Common Stock at $20.75 per share which netted proceeds of approximately $231 million. BA partially exercised its preemptive right to maintain its proportionate ownership percentage by purchasing, on June 10, 1993, 9,919.8 shares of redeemable Series T-2 Cumulative Exchangeable Senior Preferred Stock (\"Series T-2 Preferred Stock\") for approximately $99.2 million. For additional information, see Note 8 to the Company's Consolidated Financial Statements. On March 7, 1994, BA announced that it would not make any additional investments in the Company until the outcome of measures by the Company to reduce costs and improve financial results is known.\nOn July 8, 1993, USAir sold $300 million principal amount of 10% Senior Notes due 2003 (the \"10% Notes\") through an underwritten public offering. The offering netted proceeds of approximately $294 million. The 10% Notes are unconditionally guaranteed by the Company.\nOn February 2, 1994, USAir sold $175 million principal amount of 9 5\/8% Senior Notes due 2001 (the \"9 5\/8% Notes\") through an underwritten public offering. The offering netted proceeds of approximately $172 million. The 9 5\/8% Notes are unconditionally guaranteed by the Company. The 9 5\/8% Notes are not reflected in the Company's December 31, 1993 balance sheet because they were issued after that time.\nAll net proceeds received by USAir or the Company from the Common Stock offering, the sale to BA of the Series T-2 Preferred Stock, the sale of the 10% Notes and 9 5\/8% Notes were added to the working capital of the Company for general corporate purposes, including the possible early repayment of certain outstanding debt with high interest rates.\nUSAir and the Company have filed with the Securities and Exchange Commission (\"SEC\") a shelf registration for $700 million of various debt and equity securities. Approximately $187 million of securities remain available for sale on the shelf registration following the sale of the 9 5\/8% Notes and may be sold from time- to-time depending on market conditions. The Company will continue to evaluate opportunities in the financial markets.\nOn September 29, 1993, the maximum commitment available under the Credit Agreement decreased to $300 million from $600 million in accordance with the terms of the agreement. The Credit Agreement is due to expire on September 30, 1994. In September 1993, USAir Group obtained a waiver of compliance with the coverage ratio test required to be maintained as part of the Credit Agreement, for the period July 1 through September 30, 1993. Without this waiver,\nUSAir Group would have violated this test on September 30, 1993. As of September 30, 1993, USAir Group was in compliance with the other financial covenants required to be maintained as part of the Credit Agreement. Moreover, in December 1993, USAir Group obtained an additional waiver under the Credit Agreement of compliance during the period October 1 through December 31, 1993 with the coverage ratio test. Without this waiver, USAir Group would have violated this test on December 31, 1993. The Company is currently unable to borrow under the Credit Agreement because it is in violation of a minimum net worth covenant thereunder. In addition, based on current projections of its results for 1994, USAir Group expects that it will not be in compliance with the coverage ratio test and possibly other financial covenants at March 31, 1994 and during the remainder of the year. There can be no assurance that USAir Group will be able to obtain a waiver of compliance with these covenants or to arrange a replacement facility.\nIn September 1993 and December 1993, USAir obtained waivers of the coverage ratio test under the Receivables Agreement on the same terms as described above with respect to the Credit Agreement. At December 31, 1993, USAir was in compliance with the other financial covenants and had no amounts outstanding under the Receivables Agreement. The maximum amount of receivables which USAir may sell under the Receivables Agreement was $240 million at December 31, 1993 and will be adjusted downward to $190 million on June 30, 1994 if the Company's consolidated net worth does not exceed $1.5 billion. For purposes of this net worth comparison, the Company's actual net worth is adjusted to add back the initial and ongoing impact of adopting FAS 106 and certain other accounting pronounce- ments. USAir is currently unable to sell receivables under the Receivables Agreement because it is in violation of a minimum net worth covenant thereunder. In addition, based on current projec- tions of its results for 1994, USAir expects that it will not be in compliance with the coverage ratio test and possibly other financial covenants at March 31, 1994 and during the remainder of the year. There can be no assurance that USAir will be able to obtain a waiver of compliance with these covenants or to arrange a replacement facility.\nThe Company's and USAir's debt and equity securities are presently rated below investment grade by Standard and Poor's Corporation (\"S&P\") and Moody's Investors Service, Inc. (\"Moo- dy's\"). Following the January 21, 1993 transaction in which a subsidiary of BA purchased $300 million of the Company's Series F Preferred Stock, Moody's placed the ratings on watch for possible upgrade. On March 19, 1993, Moody's confirmed its ratings of USAir Group and USAir securities. Following DOT approval of the purchase of the Series F Preferred Stock and the code sharing and wet lease relationship between USAir and BA, S&P affirmed its ratings of USAir Group and USAir securities, stating its ratings outlook was positive. In December 1993, S&P affirmed its ratings of USAir Group and USAir securities. However, the agency revised the\nratings outlook to negative, citing, among other considerations, the status of the negotiations on a revised U.S.-U.K. bilateral air services agreement and the entrance and possible expansion of the operations of low fare, low cost air carriers into USAir's markets. In February 1994, as a result of USAir's low fare initiative in certain markets and its high cost structure, S&P and Moody's placed the securities of the Company and USAir on watch with negative implications. On March 24, 1994, S&P further downgraded the Company's and USAir's securities. This downgrade will make it more difficult for the Company and USAir to effect additional financing. In addition, the Company's and USAir's securities remain on watch with negative implications at S&P.\nIn 1992, the Company's investment in new aircraft acquisitions and purchase deposits, net of deposits refunded, totaled $458.7 million. The Company purchased eight Fokker and four deHavilland Dash 8 aircraft during 1992. The acquisition of these aircraft was financed through a combination of secured debt financings and interim debt financings. In addition, USAir took delivery of four MD-82s, two of which were immediately sold to a third party. The remaining two aircraft delivered in 1992 were sold to a third party in early 1993. Cash outflows for other property during the period totaled $277.2 million, which includes $61 million paid to Continental for landing and take-off slots at LaGuardia and Washington National Airports and $50 million paid to TWA for London routes from BWI and Philadelphia International Airports. See Item 1. \"Business - British Airways Investment Agreement - U.S.-U.K. Routes.\" Proceeds from disposition of assets of $429.5 million were realized during the year, primarily from sale-leaseback transactions, the sale of the two MD-82 aircraft, and the sale of three wholly-owned subsidiaries.\nDuring 1991, acquisition of new aircraft and purchase deposit payments amounted to $345 million. During 1991, USAir took delivery of two Boeing 767-200ER, nine Boeing 737-400, 12 Fokker 100, and five deHavilland Dash 8 aircraft. The acquisition of these aircraft was financed through a combination of sale-leaseback transactions, secured debt financings and interim debt financings. Expenditures for other property, consisting primarily of ground support equipment, leasehold improvements, and major aircraft components, totaled $97 million. Proceeds from disposition of property of $286 million were realized during 1991, primarily as a result of aircraft sale-leaseback transactions.\nIn May 1991, USAir Group sold 4,263,050 Depositary Shares, each representing 1\/100 of a share of $437.50 Series B Cumulative Convertible Preferred Stock, without par value, for net proceeds of $207.8 million. Such proceeds were used to repay indebtedness under USAir Group's Credit Agreement.\nAt December 31, 1993, USAir Group's ratio of current assets to current liabilities was 0.53 to 1 and the debt component of USAir Group's capitalization structure was approximately 82% (100% if the redeemable Series A Cumulative Convertible Preferred Stock, the Series F Preferred Stock and the redeemable Series T Cumulative Convertible Exchangeable Senior Preferred Stock are considered to be debt).\nItem 8A. FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION USAir Group, Inc.\nIndependent Auditors' Report\nThe Stockholders and Board of Directors USAir Group, Inc.:\nWe have audited the accompanying consolidated balance sheets of USAir Group, Inc. and subsidiaries (\"Group\") as of December 31, 1993 and 1992, and the related consolidated statements of opera- tions, cash flows, and changes in stockholders' equity (deficit) for each of the years in the three-year period ended December 31, 1993. These consolidated financial statements are the responsibil- ity of Group's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.\nWe conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.\nIn our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of USAir Group, Inc. and subsidiaries as of December 31, 1993 and 1992, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1993 in conformity with generally accepted accounting principles.\nAs discussed in Note 11 to the consolidated financial statements, effective January 1, 1993, Group changed its method of accounting for postemployment benefits and effective January 1, 1992, Group changed its method of accounting for postretirement benefits other than pensions.\nKPMG PEAT MARWICK\nWashington, D. C. February 25, 1994\nSee accompanying Notes to Consolidated Financial Statements.\nSee accompanying Notes to Consolidated Financial Statements.\nSee accompanying Notes to Consolidated Financial Statements.\nUSAir Group, Inc. Notes to Consolidated Financial Statements\n(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES\n(a) Basis of Presentation\nThe accompanying consolidated financial statements include the accounts of USAir Group, Inc. (\"USAir Group\" or the \"Company\") and its wholly-owned subsidiaries USAir, Inc. (\"USAir\"), Piedmont Airlines, Inc. (\"Piedmont\") (formerly Henson Aviation, Inc.), Jetstream International Airlines, Inc. (\"Jetstream\"), Pennsylvania Commuter Airlines, Inc. (\"PCA\"), USAir Leasing and Services, Inc. (\"Leasing\"), USAir Fuel Corporation and Material Services Company, Inc. All significant intercompany accounts and transactions have been eliminated.\nAt December 31, 1992, USAM Corp. (\"USAM\"), a subsidiary of USAir, owned 11% of the Covia Partnership (\"Covia\") which owned and operated a computerized reservation system (\"CRS\"). In September 1993, Covia purchased the assets of the corporation that owned and operated the Galileo CRS which provided CRS services to travel agent subscribers in Europe. Covia was then separated into three new entities. As a result, at December 31, 1993, USAM owns 11% of the Galileo International Partnership which owns and operates the Galileo CRS, approximately 11% of the Galileo Japan Partnership which markets the Galileo CRS in Japan, and approximately 21% of the Apollo Travel Services Partnership which markets the Galileo CRS in the U.S. and Mexico. USAM accounts for these investments using the equity method.\nOn August 1, 1992, two wholly-owned USAir Group's commuter airline subsidiaries, Allegheny Commuter Airlines, Inc. and PCA, merged. PCA, the surviving entity, operates under the name of Allegheny Commuter Airlines, with headquarters in Middletown, Pennsylvania.\nOn July 15, 1992, USAir Group completed the sale of three of its wholly-owned subsidiaries: Piedmont Aviation Services, Inc., Air Service, Inc. and Aviation Supply Corporation. The Company realized a gain of $10.3 million as a result of the sale. The three former subsidiaries engaged in fixed base operations and the sale and repair of aircraft and aircraft components. These subsidiaries were included in the accounts until their sale.\nOn October 9, 1991, USAir reached agreement for the sale of certain assets of its wholly-owned subsidiary Pacific Southwest Airmotive (\"Airmotive\"). Airmotive discontinued operations in the third quarter of 1991. USAir did not realize any material gain or loss on the sale and discontinuance of Airmotive's operations.\nUSAir Group's principal operating subsidiary, USAir, and its three commuter airline subsidiaries, Piedmont, Jetstream and PCA, operate within one industry (air transportation); therefore, no segment information is provided.\nCertain 1992 and 1991 amounts have been reclassified to conform with 1993 classifications.\n(b) Cash and Cash Equivalents\nFor financial statement purposes, the Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents.\n(c) Materials and Supplies\nInventories of materials and supplies are valued at average cost and are charged to operations as consumed. An allowance for obsolescence is provided for flight equipment expendable parts.\n(d) Property and Equipment\nProperty and equipment is stated at cost or, if acquired under capital leases, at the lower of the present value of minimum lease payments or fair market value at the inception of the lease. Maintenance and repairs, including the overhaul of aircraft components, are charged to operating expense as incurred and costs of major improvements are capitalized for both owned and leased assets. Interest related to deposits on aircraft purchase contracts and facility and equipment construction projects is capitalized as additional cost of the asset or as leasehold improvement if the asset is leased. Depreciation and amortization for principal asset classifications is provided on a straight-line basis to estimated residual values over estimated depreciable lives as follows:\nProperty acquired under capital lease is amortized on a straight-line basis over the term of the lease and charged to depreciation expense.\n(e) Goodwill, Other Intangibles and Other Assets\nGoodwill, the cost in excess of fair value of identified net assets acquired, is being amortized on a straight-line basis over 40 years as other non-operating expense. Accumulated amortization at December 31, 1993 and 1992 was $98 million and $82 million, respectively.\nIntangible assets consist of purchased operating rights at various airports, purchased route authorities, and the intangible assets associated with the underfunded amounts of certain pension plans. The operating rights, valued at purchase cost or appraised value if acquired from Piedmont Aviation, Inc. (\"Piedmont Avia- tion\") or Pacific Southwest Airlines (\"PSA\"), are being amortized over periods ranging from ten to 25 years as Other Rent and Landing Fees Expense. The purchased route authorities are amortized over periods of 25 years as other operating expense. Accumulated amortization at December 31, 1993 and 1992 was $72 million and $65 million, respectively. The decrease in Other Intangibles, net in 1993 is primarily attributable to the $47 million reclassification of two London routes to Other Assets as a result of USAir's relinquishment of these routes as contemplated by the January 21, 1993 Investment Agreement (\"Investment Agreement\") between the Company and British Airways Plc (\"BA\"). USAir relinquished its Charlotte to London route authority in January 1994. In addition, takeoff and landing slots at Washington National Airport were purchased from Northwest Airlines, Inc. (\"Northwest\") for $10 million during 1993.\n(f) Restricted Cash and Investments\nRestricted cash and investments consist primarily of deposits in trust accounts to collateralize letters of credit or workers compensation policies and short-term investments restricted for specified construction projects. These amounts are classified as Other Assets on the accompanying balance sheets.\n(g) Deferred Gains on Sale and Leaseback Transactions\nGains on aircraft sale and leaseback transactions are deferred and amortized over the term of the leases as a reduction of rental expense.\n(h) Passenger Revenue Recognition\nPassenger ticket sales are recognized as revenue when the transportation service is rendered. At the time of sale, a liability is established (Traffic Balances Payable and Unused Tickets) and subsequently eliminated either through carriage of the passenger, through billing from another carrier which renders the service or by refund to the passenger.\n(i) Frequent Traveler Awards\nUSAir accrues the estimated incremental cost of providing outstanding travel awards earned by participants in its Frequent Traveler Program.\n(j) Investment Tax Credit\nInvestment tax credit benefits are recorded using the \"flow- through\" method as a reduction of the Federal income tax provision.\n(k) Earnings Per Share\nEarnings per share is computed by dividing net loss, after deducting preferred stock dividend requirements, by the weighted average number of shares of Common Stock outstanding, net of treasury stock. USAir Group's outstanding redeemable Series A Cumulative Convertible Preferred Stock (\"Series A Preferred Stock\"), Series B Cumulative Convertible Preferred Stock (\"Series B Preferred Stock\"), redeemable Series F Cumulative Senior Preferred Stock (\"Series F Preferred Stock\"), redeemable Series T Cumulative Convertible Exchangeable Senior Preferred Stock (\"Series T Preferred Stock) and common stock equivalents are anti-dilutive.\n(l) Swap Agreements\nUSAir has entered into hedging arrangements to reduce its exposure to fluctuations in the price of jet fuel. Net settlements are recorded as adjustments to aviation fuel expense. USAir is party to such hedging arrangements with several entities. Under these arrangements, the Company's maximum commitments, which are offset by amounts received under the arrangements, totaled approximately $100.3 million and $158.7 million at December 31, 1993 and 1992, respectively. Although the agreements expose the Company to credit loss in the event of nonperformance by the other parties to the agreements, the Company does not anticipate such nonperformance.\nThe Company has entered into interest rate swap transactions to manage interest rate exposure. Net settlements are recorded as an adjustment to interest expense. The Company is party to such interest rate swap agreements with banks and other financial institutions. The notional principal amounts of these agreements were $150 million and $400 million at December 31, 1993 and 1992, respectively. Under these swap agreements, the Company pays interest at fixed rates averaging 9.8% and 9.7% at December 31, 1993 and 1992, respectively, and receives floating rate interest payments based on three-month LIBOR. Although the agreements, which expire in 1995, expose the Company to credit loss in the event of non-performance by the other parties to the agreements, the Company does not anticipate such non-performance.\n(2) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS\nUnless a quoted market price indicates otherwise, the fair values of cash and investments generally approximate carrying values because of the short maturity of these instruments. The\nCompany has estimated the fair value of long-term debt based on quoted market prices for the same or similar issues or on the current rates offered to the Company for debt of similar remaining maturities. The estimated fair values of the Series A Preferred Stock, Series F Preferred Stock and Series T Preferred Stock are obtained by consulting with an independent external valuation source. The fair values of interest rate swap agreements, energy swap agreements and foreign currency contracts are obtained from dealer quotes whereby these values represent the estimated amount the Company would receive or pay to terminate such agreements.\nThe estimated fair values of the Company's financial instru- ments are summarized as follows:\n(3) LONG-TERM DEBT\nDetails of long-term debt are as follows:\nMaturities of long-term debt and debt under capital leases for the next five years are as follows:\n(in thousands)\n1994 $ 87,833 1995 75,344 1996 73,464 1997 84,027 1998 152,180 Thereafter 2,059,002\nIn addition to the varying interest rate on Credit Agreement borrowings as described below, interest rates on $239 million principal amount of long-term debt at December 31, 1993 are subject to adjustment to reflect prime rate and other rate changes.\nThe Company and a group of banks are parties to a Credit Agreement dated as of March 30, 1987, as amended (the \"Credit Agreement\") which makes a $300 million revolving credit facility available to the Company as of December 31, 1993. The Credit Agreement expires on September 30, 1994. At December 31, 1993, loans under the Credit Agreement, at the option of the Company, would have borne interest at a reference rate, a Eurodollar rate plus 2.50% - 2.65% per annum, determined by the Company's coverage ratio discussed below, or a bid rate if offered by a lending bank. During 1993, 1992 and 1991, the maximum amount of credit agreement borrowings outstanding at any month end was $250 million, $450 million and $733 million, respectively. All outstanding Credit Agreement borrowings were paid off in May 1993 and no other funds were borrowed during the remainder of 1993. The average amount of Credit Agreement borrowings outstanding and weighted average interest rate for 1993 were $37 million and 5.8%, respectively. The average amount of Credit Agreement borrowings outstanding and the weighted average interest rate for 1992 were $174 million and 6.2%, respectively. The average amount of Credit Agreement borrowings and the weighted average interest rate for 1991 were $510 million and 8.3%, respectively.\nOn June 21, 1993, USAir Group entered into the Seventh Amendment to the Credit Agreement. The Seventh Amendment increased the limit of unsecured debt of subsidiaries to $300 million from $200 million. On December 21, 1993, the Company obtained a waiver under the Credit Agreement which further increased the limit of unsecured debt of subsidiaries to $620 million for the period commencing December 21, 1993 and ending on the final annual reduction date of September 30, 1994. This waiver also exempted the Company from compliance, for the quarter ended December 31, 1993, with the coverage ratio test which must be maintained as part of the Credit Agreement. The Company would not otherwise have complied with this test as of December 31, 1993 but was in compliance with the other financial covenants required to be\nmaintained as part of the Credit Agreement. USAir Group is currently unable to borrow under the Credit Agreement because it is in violation of a minimum net worth covenant thereunder. In addition, based on current projections of its results for 1994, USAir Group expects that it will not be in compliance with the coverage ratio test and possibly other financial covenants at March 31, 1994 and during the remainder of the year. There can be no assurance that USAir Group will be able to obtain a waiver of compliance with these covenants or arrange a replacement facility. Certain USAir, Piedmont and PCA aircraft and engines with a net book value of $247 million at December 31, 1993 secure the Credit Agreement.\nEquipment financings totaling $2.0 billion are collateralized by aircraft and engines with a net book value of $2.2 billion at December 31, 1993.\nAn aggregate of $32 million of future principal payments of the Equipment Financing Agreements are payable in Japanese Yen. This foreign currency exposure has been hedged to maturity. Although the Company is exposed to credit loss in the event of non- performance by the counterparty to the hedge agreement, the Company does not anticipate such non-performance.\nOn February 2, 1994, USAir sold $175 million principal amount of 9 5\/8% Senior Notes (\"9 5\/8% Senior Notes\") which are uncondi- tionally guaranteed by the Company. The 9 5\/8% Senior Notes are not reflected in the above table because they were sold after December 31, 1993.\n(4) COMMITMENTS AND CONTINGENCIES\n(a) Operating Environment\nThe economic conditions in the United States, fare competition and the emergence and growth of lower cost, lower fare carriers in the domestic airline industry are factors affecting the financial condition of USAir Group. Industry capacity has recently failed to mirror changes in demand due primarily to the continued delivery of new aircraft and secondarily, to the prolonged operation of certain major U.S. carriers under the protection of Chapter 11 of the Bankruptcy Code. USAir competes with at least one major airline on most of its routes between major cities. Although the economy generally has shown signs of improvement, the Company expects that the competitive environment in the airline industry, the entry of low cost, low fare carriers into USAir's markets, and the excess capacity in the domestic airline industry will continue to have an adverse effect on USAir's passenger revenue for the foreseeable future. The extent or duration of these conditions cannot be reasonably determined at this time.\n(b) Lease Commitments\nThe Company's airline subsidiaries lease certain aircraft, engines, computer and ground equipment, in addition to the majority of their ground facilities. Ground facilities include executive offices, overhaul and maintenance bases and ticket and administra- tive offices. Public airports are utilized for flight operations under lease arrangements with the municipalities or agencies owning or controlling such airports. Substantially all leases provide that the lessee shall pay taxes, maintenance, insurance and certain other operating expenses applicable to the leased property. Most leases also include renewal options and some aircraft leases include purchase options.\nThe following amounts applicable to capital leases are included in property and equipment:\nAt December 31, 1993, obligations under capital and noncancel- able operating leases for future minimum lease payments were as follows:\nRental expense under operating leases for 1993, 1992 and 1991 was $781 million, $707 million and $605 million, respectively. Rental expense for 1993 excludes a charge of $9 million related to certain airport facilities where USAir has, among other things, discontinued or reduced its service. Rental expense for 1992 excludes a charge of $72 million related to USAir's grounded BAe- 146 fleet. Rental expense for 1991 excludes a credit of $9 million for the BAe-146 fleet.\n(c) Legal Proceedings\nThe Company and various subsidiaries have been named as defendants in various suits and proceedings which involve, among other things, environmental concerns and employment matters. These suits and proceedings are in various stages of litigation, and the status of the law with respect to several of the issues involved is unsettled. For these reasons the outcome of these suits and proceedings is difficult to predict. In the Company's opinion, however, the disposition of these matters is not likely to have a material adverse effect on its financial condition or results of operations.\nIn 1989 and 1990, a number of U.S. air carriers, including USAir, received two Civil Investigative Demands (\"CIDs\") from the U.S. Department of Justice (\"DOJ\") (a CID is a request for information in the course of an antitrust investigation and does not constitute the institution of a civil or criminal action) related to investigations of price fixing in the domestic airline industry.\nThe investigations by the DOJ culminated in the filing of a lawsuit against Airline Tariff Publishing Company (\"ATPCo\") and eight major air carriers, including USAir, alleging that the defendants had agreed to fix prices in violation of Section 1 of the Sherman Act through the methods used to disseminate fare data to ATPCo, an airline-owned fare publishing service. To avoid the costs associated with protracted litigation and an uncertain outcome, USAir and another carrier decided to settle the lawsuit by entering into a consent decree to modify their fare-filing practices in certain respects and to implement compliance programs that would include education of employees regarding the carriers' responsibilities under the consent decree. Accordingly, the consent decree and the U.S. Government's complaint were filed contemporaneously in the U.S. District Court for the District of Columbia in December 1992. Due to certain legal requirements associated with the settlement of government antitrust suits, the consent decree could not be entered until a notice and comment period had expired. On November 1, 1993, after it had reviewed the comments, the Court entered the consent decree. USAir does not believe that the fare-filing practices reflected in the consent decree will have a material adverse effect on its financial condition or on its ability to compete. In March 1994, the remaining six air carrier defendants agreed to the entry of a separate consent decree to settle the lawsuit. This consent decree cannot be entered by the Court until a notice and comment period has expired. When that consent decree is entered, USAir can petition the Court to have its consent decree amended to conform with the other settlement and the Court will enter the amended consent decree.\nOn March 19, 1993, the U.S. District Court in Atlanta, Georgia entered a settlement involving USAir and five other U.S. air carrier defendants in the Domestic Air Transportation Antitrust Litigation class action lawsuit. The class action suit, which was filed in July 1990, alleged that the airlines used ATPCo to signal and communicate carrier pricing intentions and otherwise limit price competition for travel to and from numerous hub airports. Under the terms of the settlement, the six air carriers will pay $45 million in cash and issue $396.5 million in certificates valid for purchase of domestic air travel on any of the six airlines. USAir's share of the cash portion of the settlement, $5 million, was recorded in results of operations for the second quarter of 1992. The certificates provide a dollar-for-dollar discount against the cost of a ticket generally of up to a maximum of 10% per ticket, depending on the cost of the ticket. It is possible that this settlement could have a dilutive effect on USAir's passenger transportation revenue and associated cash flow. However, due to the interchangeability of the certificates among the six carriers involved in the settlement, the possibility that carriers not party to the settlement will honor the certificates, and the potential stimulative effect on travel created by the certificates, USAir cannot reasonably estimate the impact of this\nsettlement on future passenger revenue and cash flows. USAir has employed the incremental cost method to estimate a range of costs attributable to the exercise of the certificates, based on the assumption that the estimated maximum number of certificates to be redeemed for travel on USAir will be related to USAir's market share relative to the total market share of the six carriers involved in the settlement. USAir's estimated percentage of such market share is less than 9%. Incremental costs include unit costs for passenger food, beverages and supplies, fuel, liability insurance, and denied boarding compensation expenses expected to be incurred on a per passenger basis. USAir has estimated that its incremental cost will not be material based on the equivalent free trips associated with the settlement.\nThe Attorney General of the State of Florida and the Attorneys General of several other states are investigating whether several major airlines, including USAir, have engaged in price fixing and other unlawful restraints of trade. Certain of these Attorneys General have issued document requests to USAir and several other airlines requiring them to provide certain information and documents. At this time, USAir cannot predict the manner in which these investigations will be resolved and if the resolution will have an adverse effect on USAir's results of operations or financial position.\n(d) Aircraft Commitments\nAt December 31, 1993 USAir's new aircraft on firm order, options for new aircraft and scheduled payments for new aircraft orders (including progress payments, buyer furnished equipment, spares, and capitalized interest) were:\nUSAir may elect, under certain circumstances, to convert Boeing 737 Series and Boeing 767 Series firm order or option deliveries to Boeing 757-200 deliveries. If USAir were to elect such a substitution, the payments presented in the table above would change. USAir is currently in negotiations with Boeing\nregarding, among other things, the above schedule of new aircraft deliveries.\nIn addition, USAir has a commitment to purchase hushkits for certain of its McDonnell Douglas DC-9-30 aircraft and a substantial portion of its Boeing 737-200 aircraft. The installation of these hushkits will bring the aircraft into compliance with Federal Aviation Administration (\"FAA\") Stage 3 noise level requirements. The projected payments associated with the purchase of the hushkits are: $29.1 million - 1994; $12.0 million - 1995; $42.3 million - 1996; $43.4 million - 1997; $44.0 million - 1998; and $30.8 million thereafter.\n(e) Concentration of Credit Risk\nUSAir Group does not believe it is subject to any significant concentration of credit risk. At December 31, 1993, most of the Company's receivables related to tickets sold to individual passengers through the use of major credit cards (48%) or to tickets sold by other airlines (17%) and used by passengers on USAir or the commuter subsidiaries. These receivables are short- term, generally being settled shortly after sale or in the month following usage. Bad debt losses, which have been minimal in the past, have been considered in establishing allowances for doubtful accounts.\n(f) Guarantees\nAt December 31, 1993, USAir guaranteed payments of certain debt obligations of the Galileo International Partnership amounting to approximately $16 million.\n(5) SALE OF RECEIVABLES\nUSAir is party to an agreement (\"Receivables Agreement\") to sell, on a revolving basis, undivided interest of up to $240 million in a pool of designated receivables. Approximately $141 million was available for sale at December 31, 1993 based on receivable balances at that date. The maximum amount available under the Receivables Agreement to be sold gradually reduces from $240 million at December 31, 1993, to $190 million on June 30, 1994. The Receivables Agreement expires on December 21, 1994. USAir had no outstanding amounts due under the Receivable Agreement at December 31, 1993. The net amounts sold reduce receivables in the accompanying balance sheet by $220 million and $188 million at December 31, 1992 and 1991, respectively. Included in the accounts payable balances at December 31, 1992 and 1991, are $74 million and $64 million, respectively, which represent funds held by USAir related to previously sold receivables that had been collected.\nUSAir obtained a waiver from the purchaser of the receivables and its operating agent, exempting USAir from compliance with the coverage ratio financial covenant in the Receivables Agreement for the quarter ended December 31, 1993. USAir is currently unable to sell receivables under the Receivables Agreement because it is in violation of a minimum net worth covenant thereunder. In addition, based on current projections of its results for 1994, USAir expects that it will not be in compliance with the coverage ratio test and possibly other financial covenants at March 31, 1994 and during the remainder of the year. There can be no assurance that USAir will be able to obtain a waiver of compliance with these covenants or to arrange a replacement facility.\n(6) INCOME TAXES\nEffective January 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109, \"Accounting for Income Taxes\" (\"FAS 109\"). FAS 109 required a change from the deferred method under Accounting Principles Board Opinion No. 11 to the asset and liability method of accounting for income taxes. No cumulative adjustment at January 1, 1993, and no income tax credit for the year ended December 31, 1993, were recognized due to the FAS 109 limitation in recognizing benefits for net operating losses.\nThe Company files a consolidated Federal income tax return with its wholly-owned subsidiaries.\nThe components of the provision (credit) for income taxes are as follows:\nThe significant components of deferred income tax expense\/- (benefit) for the year ended December 31, 1993, are as follows:\nDeferred tax benefit (exclusive of the other components listed below) $(136,191) Adjustments to deferred tax assets and liabilities for enacted changes in tax laws and rates (8,880) Increase for the year in the valuation allowance for deferred tax assets 145,071 -------- Total $ 0 ========\nFor the years ended December 31, 1992 and 1991 deferred income taxes result from differences in the recognition of revenue and expenses and investment tax credits for tax and financial reporting purposes. The major items resulting in these differences and the related tax effects are shown in the following chart:\nA reconciliation of taxes computed at the statutory Federal tax rate on earnings before income taxes to the provision (credit) for income taxes is as follows:\nThe tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1993 are presented below:\n(in thousands) Deferred tax assets: Leasing transactions $ 132,551 Tax benefits purchased\/sold 79,434 Gain on sale and leaseback transactions 164,613 Employee benefits 430,257 Net operating loss carryforwards 557,494 Alternative minimum tax credit carryforwards 21,146 Investment tax credit carryforwards 49,802 Other deferred tax assets 62,615 --------- Total gross deferred tax assets 1,497,912 Less valuation allowance (564,838) --------- Net deferred tax assets 933,074\nDeferred tax liabilities: Equipment depreciation and amortization (874,640) Other deferred tax liabilities (58,434) --------- Net deferred tax liabilities (933,074) --------- Net deferred taxes $ 0 =========\nThe valuation allowance for deferred tax assets as of January 1, 1993, was $420 million. The increase in the valuation allowance during 1993 was $145 million.\nAt December 31, 1993, the Company had unused net operating losses of $1.5 billion for Federal tax purposes, which expire in the years 2005-2008. The Company also has available, to reduce future taxes payable, $460 million alternative minimum tax net operating losses expiring in 2007 and 2008, $50 million of investment tax credits expiring in 2002 and 2003, and $21 million of minimum tax credits which do not expire. The Federal income tax returns of the Company through 1986 have been examined and settled with the Internal Revenue Service.\n(7) BRITISH AIRWAYS PLC INVESTMENT\nOn January 21, 1993, USAir Group and BA entered into the Investment Agreement under which a wholly-owned subsidiary of BA purchased certain series of convertible preferred stock during 1993 (see Note 8 - Redeemable Preferred Stock) and BA entered into code sharing and wet lease arrangements with USAir contemplated by the Investment Agreement. On March 7, 1994, BA announced that it would not make any additional investments in the Company until the outcome of measures by the Company to reduce its costs and improve its financial results is known.\nAt December 31, 1993, the preferred stock held by BA con- stituted approximately 22% of the total voting interest in the Company. To the extent permitted by foreign ownership restrictions which are applicable by statute regulations or interpretation by regulatory authorities, including the U.S. Department of Transpor- tation (\"DOT\") (\"Foreign Ownership Restrictions\"), the preferred stock owned by BA votes on all matters presented to the Company's stockholders for a vote and has voting power equal to the underly- ing shares of Common Stock. Under the Investment Agreement, on January 21, 1993, BA designated three of its officers to serve on the Company's Board of Directors. The Company has agreed to use its best efforts to place these designees on the slate of nominees for election as Directors of the Company.\nIn addition to BA's holdings of the Company's preferred stock at December 31, 1993, BA has the option, which it has announced it will not exercise under current circumstances, to purchase, at a minimum, an additional $450 million of the Company's preferred stock. Under certain circumstances, BA is entitled, at its option, to purchase, on or prior to January 21, 1996, 50,000 shares of Series C Cumulative Convertible Senior Preferred Stock (\"Series C Preferred Stock\") resulting in an additional cash investment in the Company of $200 million, and, on or prior to January 21, 1998, 25,000 shares of Series E Cumulative Convertible Senior Preferred Stock (\"Series E Preferred Stock\") resulting in an additional cash investment in the Company of $250 million. If the DOT approves all the transactions and acts contemplated by the Investment Agreement, at the election of either BA or the Company on or prior to January 21, 1998, BA's purchase of the Series C Preferred Stock (unless previously consummated) and BA's purchase of the Series E Preferred Stock must be consummated under certain circumstances.\nOn March 15, 1993, the DOT issued an order (\"DOT Order\") stating, among other things, that BA's initial investment does not impair USAir's citizenship under current U.S. Foreign Ownership Restrictions. However, the DOT instituted a proceeding to consider whether USAir will remain a U.S. citizen if the transactions and acts contemplated by the Investment Agreement, including the possible sale of Series C Preferred Stock and Series E Preferred\nStock, to BA, are consummated. The DOT has indefinitely suspended the period for comments from interested parties pending its resolution of requests by other airlines for production of additional documents from USAir. The DOT Order states that the DOT expects and advises USAir and BA not to proceed with the closing of the purchase of the Series C Preferred Stock or the Series E Preferred Stock until the DOT has completed its review of USAir's citizenship. In any event, on March 7, 1994, BA announced it would not make any additional investments in the Company under current circumstances. USAir cannot predict the outcome of the proceedings or if further transactions contemplated under the Investment Agreement, including the sale of Series C and Series E Preferred Stock to BA, will be consummated. The sale of additional preferred stock to BA on June 10, 1993 (see Note 8(c)), did not result in BA's ownership of voting stock in the Company exceeding applicable foreign ownership restrictions and therefore does not affect the Company's U.S. citizenship under those restrictions.\n(8) REDEEMABLE PREFERRED STOCK\n(a) Series A Preferred Stock\nAt December 31, 1993, the Company had 358,000 shares of its 9 1\/4% Series A Cumulative Convertible Redeemable Preferred Stock (\"Series A Preferred Stock\"), without par value, outstanding which was convertible into 9,239,944 shares of the Company's Common Stock at a conversion price of approximately $38.74 per share. The Series A Preferred Stock ranks pari passu with the Series F Cumulative Convertible Senior Preferred Stock (\"Series F Preferred Stock\"), without par value, and Series T-_ Cumulative Convertible Exchangeable Senior Preferred Stock (\"Series T Preferred Stock\"), without par value, and senior to the Series B Cumulative Convert- ible Preferred Stock (\"Series B Preferred Stock\"), without par value, Junior Participating Preferred Stock, Series D (\"Series D Preferred Stock\"), without par value, and the Common Stock, with respect to dividend payments and the distribution of assets. At December 31, 1993, the Series A Preferred Stock is entitled to approximately 25.81 votes per share (determined by dividing the $1,000 liquidation preference per share of Series F Preferred Stock by the $38.74 conversion price), or a total of 9,239,944 votes, and votes together with the Series F Preferred Stock, the Series T Preferred Stock and the Common Stock, on all matters submitted to a vote of stockholders of the Company.\nThe Series A Preferred Stock is redeemable on August 7, 1999 at $1,000 per share. The Company has the right to redeem the stock at a 10% premium until that time. The agreement relating to the sale of the Series A Preferred Stock imposes certain restrictions on the purchaser's ability to increase its ownership of, and to transfer, its stock in USAir Group. There have been no changes in the balance sheet value of the Series A Preferred Stock since its issuance in 1989.\n(b) Series F Preferred Stock\nAt December 31, 1993, the Company had outstanding 30,000 shares of its 7% Series F Preferred Stock which was convertible into 15,458,658 shares of the Company's Common Stock at a conver- sion price of approximately $19.41 per share. The Series F Preferred Stock ranks pari passu with the Series A Preferred Stock and Series T Preferred Stock and senior to the Series B Preferred Stock, Series D Preferred Stock, and the Common Stock, with respect to dividend payments and the distribution of assets. At December 31, 1993, each share of Series F Preferred Stock was entitled to approximately 515.29 votes per share to the extent permitted by the existing Foreign Ownership Restrictions and votes with the Company's Series A Preferred Stock, the Series T Preferred Stock and the Company's Common Stock as a single class. Under Foreign Ownership Restrictions, no more than 25% of the Company's voting interest may be held by persons other than U.S. citizens. In accordance with the terms of any preferred stock held by BA, conversion rights and voting rights may not be exercised to the extent that doing so would result in a loss of the Company's or any of its subsidiaries' operating certificates and authorities under Foreign Ownership Restrictions, and it is assumed for this purpose that Series F Preferred Stock will be fully converted before any other preferred stock held by BA.\nThe Series F Preferred Stock is convertible at any time on or after January 21, 1997 to the extent that such conversion would not violate U.S. Foreign Ownership Restrictions. Series F Preferred Stock may be converted at the option of the Company at any time after January 21, 1998 if the average composite closing market price of Common Stock during any 30-day calendar period is at least 133% of the conversion price. The Series F Preferred Stock is mandatorily redeemable on January 21, 2008. If BA has not purchased the Series C Preferred Stock by January 21, 1996, then the Company may at its option redeem, in whole or in part, Series F Preferred Stock at the higher of market value or the price of $10,000 per share, plus accrued dividends. The Series F Certifi- cate provides that if on any one occasion on or prior to Janu- ary 21, 1996, any court or regulatory authority issues a final order that any material part of the Investment Agreement is unenforceable (except pursuant to bankruptcy or like event), then the conversion price of Series F Preferred Stock shall be reduced by 10.2564%. There have been no changes in the balance sheet value of the Series F Preferred Stock since its issuance in 1993.\n(c) Series T Preferred Stock\nUnder the Investment Agreement, BA has preemptive and optional purchase rights to maintain its proportionate ownership of the Company's Common Stock and convertible securities, measured in terms of the BA Percentage (\"BA Percentage\") which approximates BA's fully diluted ownership percentage based on BA's current and\npotential holdings in the Company. The BA Percentage is calculated without regard to Foreign Ownership Restrictions at the time of the calculation. BA may exercise such preemptive or optional purchase rights by purchasing, from time-to-time, a series of Series T Preferred Stock.\nAt December 31, 1993, the Company had two series of the Series T Preferred Stock outstanding. On June 10, 1993, BA exercised its preemptive purchase right by purchasing 9,919.8 shares of a series of the Series T Preferred Stock (\"Series T-2 Preferred Stock\") for approximately $99.2 million and exercised its optional purchase right by purchasing 152.1 shares of a series of Series T Preferred Stock (\"T-1 Preferred Stock\") for approximately $1.5 million. BA's preemptive right was triggered by the issuance of Common Stock, as described in Note 8 - Stockholders' Equity, and BA's optional purchase rights were triggered by the Company's issuance of additional shares of Common Stock through the exercise of options under various employee stock option plans and through the sale of shares to certain defined contribution plans during the period from January 21, 1993 to March 31, 1993. On March 7, 1994, BA advised the Company that it would not exercise its optional purchase rights to buy three additional series of Series T Preferred Stock triggered by the Company's issuance of common stock pursuant to certain employee benefit plans during the second, third and fourth quarters of 1993.\nThere have been no changes in the balance sheet value of the Series T-1 Preferred Stock and Series T-2 Preferred Stock since their issuance in 1993.\nThe terms of all series of the Series T Preferred Stock are substantially similar to those of the Series F Preferred Stock except as noted. Each share of Series T-2 Preferred Stock carries a conversion price of $26.40 and is convertible into approximately 378.79 shares of Common Stock or Non-Voting Class ET stock. Each share of Series T-1 Preferred Stock has a conversion price of $20.50 and is convertible into approximately 487.80 shares of Common Stock or Non-Voting Class ET stock. With respect to the Series T Preferred Stock, dividends are payable quarterly in arrears, at 50 basis points over the three-month LIBOR rate. Any shares of the Series T Preferred Stock held by any person other than BA or its subsidiaries may be redeemed for cash at any time at the option of the Company at $10,000 plus accrued dividends plus a redemption premium equal to $700 from the date of issue until the first anniversary thereof and reduced by $46.67 on each anniversary thereafter.\nThe Series T Preferred Stock is exchangeable, at the option of the Company, for that principal amount of floating rate convertible subordinated notes of the Company (\"T Notes\") equal to the liquidation preference of the shares to be exchanged and bearing interest at the dividend rate. Any accrued dividends on the Series\nT Preferred Stock to be exchanged will be treated as accrued interest on the T Notes. Each $10,000 aggregate principal amount of such T Notes will be entitled to a number of votes equal to the number of votes to which each share of Series T Preferred Stock was entitled at the time of its exchange for T Notes, subject to adjustment. If issued, T Notes will have terms otherwise consis- tent with the terms of the Series T Preferred Stock.\n(9) STOCKHOLDERS' EQUITY\n(a) Common Stock\nThe Company had 150,000,000 and 100,000,000 authorized shares of Common Stock, par value $1, at December 31, 1993 and 1992, respectively. If BA purchases the Series C Preferred Stock (see Note 6 - British Airways Plc Investment), the number of authorized shares of various classes of Common Stock will increase to 300,000,000. BA has indicated, however, that it will not make any additional investments in the Company under current circumstances. At December 31, 1993, approximately 52,618,000 shares were reserved for issuance upon the conversion of preferred stock and for offerings under employee stock purchase, stock option and stock incentive plans.\nOn May 4, 1993, the Company sold 11.5 million shares of previously unissued Common Stock at $20.75 per share through a public, underwritten offering. The offering netted proceeds of approximately $231 million.\n(b) Preferred Stock and Senior Preferred Stock\nAt December 31, 1993, the Company had 5,000,000 authorized shares of preferred stock, without nominal or par value, of which 358,000 shares were issued as Series A Preferred Stock, 43,000 shares were issued as Series B Preferred Stock and 1,035,000 shares were reserved as Series D Preferred Stock. Also, at December 31, 1993, the Company had 3,000,000 authorized shares of Senior Preferred Stock, without nominal or par value, of which 30,000 shares were issued as Series F Preferred Stock and approximately 10,000 were issued as Series T Preferred Stock.\n(c) Series B Preferred Stock\nAt December 31, 1993, the Company had 4,263,050 Depositary Shares, representing 42,630.5 shares of its $437.50 Series B Preferred Stock outstanding. Each Depositary Share represents 1\/100 of a share of the Series B Preferred Stock. The Series B Preferred Stock is convertible at any time, at the option of the holder, at the rate of 249.25 shares of Common Stock of the Company per preferred share, or 2.4925 shares of Common Stock per De- positary Share. The Series B Preferred Stock ranks junior to the Company's Series A Preferred Stock, the Series F Preferred Stock\nand the Series T Preferred Stock and senior to the Series D Preferred Stock and the Common Stock with respect to dividend payments and the distribution of assets, whether upon liquidation or otherwise. Except under certain circumstances, the holders of Series B Preferred Stock have no voting rights.\nThe Series B Preferred Stock is not redeemable prior to May 15, 1994. The Series B Preferred Stock is redeemable, at the option of the Company and with consent of the holders of Series F Preferred Stock, on or after May 15, 1994, (i) in whole but not in part, only in certain circumstances, for so long as any shares of Series A Preferred Stock are outstanding; and (ii) in whole or in part if no shares of Series A Preferred Stock are outstanding, in each case initially at a redemption price of approximately $53.06 per 1\/100 of a share and thereafter at prices declining to $50 per 1\/100 of a share (equivalent to $5,000 per share of Series B Preferred Stock) on or after May 15, 2001, plus dividends accrued and accumulated but unpaid to the redemption date.\n(d) Preferred Stock Purchase Rights\nEach outstanding share of Common Stock is accompanied by one Preferred Share Purchase Right (\"Right\") and each outstanding share of Series A Preferred Stock, Series F Preferred Stock and Series T Preferred Stock is accompanied by a Right for each share into which it is convertible. Each Right entitles the holder to buy 1\/100th of a share of Series D Preferred Stock at an exercise price of $175 per Right. The Rights expire on June 29, 1996. As long as the Rights remain outstanding, the Company will issue one Right with each new share of Common Stock issued upon the conversion of any preferred stock into, or the exercise of any options for, Common Stock, as long as such preferred stock or options were outstanding prior to the Rights becoming exercisable.\nGenerally, the Rights become exercisable only if a party other than, under certain circumstances, BA acquires 20% or more of the Company's Common Stock or announces a tender offer for 20% or more of the Common Stock. The Rights are redeemable at $.03 per Right at any time before 20% or more of the Company's Common Stock has been acquired. If at any time after the Rights become exercisable and before they have been redeemed the Company is involved in a merger or other business combination transaction, the Rights will automatically entitle a holder, other than a holder of 20% or more of the Company's Common Stock, to receive, upon exercise of each Right, a number of shares of Common Stock, or a number of common shares of the acquiring company, as the case may be, having a market value of two times the exercise price of each Right. In addition, at any time after the acquisition of 30% or more of the Common Stock by any person and prior to the acquisition by such person of 50% or more of the Common Stock, the Board of Directors of the Company may exchange the Rights (other than Rights owned by such person which have become void), in whole or in part, at an\nexchange ratio of one share of Common Stock, or 1\/100th of a share of Series D Preferred Stock, per Right.\nUntil the first to occur of the redemption or expiration of the Rights, the Company will issue one Right with each new share of Common Stock issued upon the conversion of any securities into, or the exercise of any options or warrants for, Common Stock if such securities, options or warrants were outstanding prior to when Rights became exercisable.\n(e) Treasury Stock\nIn 1989, the Company's Board of Directors authorized the repurchase from time-to-time of up to 9.4 million shares of its Common Stock in open market transactions. In 1989, approximately 2.1 million shares were repurchased. The Company sold approximate- ly 500,000 shares and approximately 390,000 shares of its treasury stock during 1993 and 1992, respectively. The remaining shares are carried on the accompanying balance sheet at the average acquisi- tion cost.\n(f) Employee Stock Option and Purchase Plans\nDuring 1992, the Company's stockholders approved the 1992 Stock Option Plan (\"1992 Plan\") which allows for the issuance of stock options to purchase up to 8,125,000 shares of USAir Group Common Stock to USAir employees who participate in the previously announced cost reduction program. Under the stock option program, employees whose pay was or is currently being reduced receive options to purchase 50 shares of Common Stock at a price not less than $15 per share for each $1,000 of salary reduction. The Company will grant stock options under the 1992 Plan only in connection with salary reductions. Participating employees have five years from the grant date to exercise such options. Options, with an exercise price of $15, have been granted to purchase ap- proximately five million shares of Common Stock in conjunction with salary reductions. The Company plans to seek authority from its stockholders at its 1994 Annual Meeting to reduce the number of shares reserved for this plan.\nAt December 31, 1993, 5.3 million shares of Common Stock are reserved for the granting of stock options or restricted stock under the Company's 1984 Stock Option and Stock Appreciation Rights (\"SARs\") Plan and 1988 Stock Incentive Plan. These plans provide that options may be granted as either nonqualified or incentive stock options. Options awarded prior to 1991, except for those that reverted, have vested. Options awarded during 1991, 1992 and 1993, except under the 1992 Plan, become exercisable generally within three years from date of grant. Optionees may also receive SARs which permit them to receive, in lieu of the right to exercise the stock option, an amount equivalent to the difference between the stock option price and the fair market value of the Common\nStock on the date of exercising the right. This amount may be paid in stock, in cash, or in any combination of the two. Also, restricted stock award grants for 57,000 shares and 111,600 shares were outstanding at December 31, 1993 and 1992, respectively. Deferred compensation related to the restricted stock, which vests over periods of up to five years, amounted to $.3 million and $ .6 million at December 31, 1993 and 1992, respectively.\nAs of December 31, 1993, options to acquire approximately 9 million shares under all three plans, including 85,000 SARs, were outstanding at a weighted average exercise price of $18.77. Of those outstanding, approximately six million options were exercis- able at December 31, 1993. Options were exercised to purchase approximately 33,500 and 6,000 shares of Common Stock at average exercise prices of $17.24 and $10.44 during 1993 and 1992, respectively.\n(g) Dividend Restrictions\nThe Company's Credit Agreement does not contain specific provisions which restrict the payment of dividends by USAir Group. The amount of dividends, however, is indirectly restricted through the existence of certain covenants contained in the Credit Agreement. At December 31, 1993, under the most restrictive of these provisions, the Company's ability to pay dividends is limited to approximately $77 million.\n(10) EMPLOYEE STOCK OWNERSHIP PLAN\nIn August 1989, USAir established an Employee Stock Ownership Plan (\"ESOP\"). The Company sold 2,200,000 shares of Common Stock to an Employee Stock Ownership Trust to hold on behalf of USAir's employees, exclusive of officers, in accordance with the terms of the Trust and the ESOP. Financing of approximately $111.4 million for the Trust's purchase of the shares was provided by USAir through a 9 3\/4% loan to the Trust, and an additional $2.2 million was contributed to the Trust by USAir. The loan is being repaid with contributions made by USAir. The contributions are made in amounts equal to the periodic loan payments as they come due, less dividends available for loan payment. The amount of dividends used for debt service by the ESOP was $127,000 in 1991. As the loan is repaid over time, participating employees receive allocations of the Common Stock purchased by the Trust. The initial maturity of the loan is 30 years. However, the ESOP provides that if the Company's profitability as measured by return on sales exceeds certain goals during the life of the ESOP, USAir's contributions and the repayment of the loan will be accelerated. Contributions made by USAir and therefore loan repayments made by the Trust were $11.4 million in 1993, 1992 and 1991. The interest portion of these contributions was $10.5 million in 1993, $10.6 million in 1992 and $10.7 million in 1991. Approximately 366,000 shares of Common Stock have been allocated to employees. USAir recognized\napproximately $4 million of compensation expense related to the ESOP in each of 1993, 1992 and 1991 based on shares allocated to employees (the \"shares allocated\" method). Deferred compensation related to the ESOP amounted to approximately $95 million, $98 million and $102 million at December 31, 1993, 1992 and 1991, respectively.\n(11) EMPLOYEE BENEFIT PLANS\n(a) Pension Plans\nThe Company's subsidiaries have several pension plans in effect covering substantially all employees. One qualified defined benefit plan covers USAir maintenance employees and provides benefits of stated amounts for specified periods of service. Qualified defined benefit plans for substantially all other employees provide benefits based on years of service and compensa- tion. The qualified defined benefit plans are funded, on a current basis, to meet requirements of the Employee Retirement Income Security Act of 1974.\nThe defined benefit pension plan for USAir non-contract employees was frozen at the end of 1991 for all non-contract participants, resulting in a one-time book gain of approximately $107 million in 1991. All non-contract plan participants became 100% vested at the time of the freeze. As a result of this plan curtailment, the accrual of service costs related to defined benefits for USAir non-contract employees ceased at the end of 1991. USAir implemented a defined contribution pension plan for non-contract employees in January 1993.\nThe funded status of the qualified defined benefit plans at December 31, 1993 and 1992 was as follows:\nApproximately 97% of the accumulated benefit obligation was vested at December 31, 1993 and 1992. Unrecognized transition assets are being amortized over periods up to 27 years. The weighted average discount rate used to determine the actuarial present value of the projected benefit obligation was 7.6% and 8.75% as of December 31, 1993 and 1992, respectively. The expected long-term rate of return on plan assets used in 1993 and 1992 was 9.5%. Rates of 3% to 6% were used to estimate future salary levels. At December 31, 1993, plan assets consisted of approxi- mately 8% in cash equivalents and short-term debt investments, 37% in equity investments, and 55% in fixed income and other invest- ments. At December 31, 1992, plan assets consisted of approximate- ly 4% in cash equivalents and short-term debt investments, 70% in equity investments, and 26% in fixed income and other investments.\nThe following items are the components of the net pension cost for the qualified defined benefit plans:\nNet pension cost for 1993 and 1991 presented above excludes a settlement charge of approximately $33.9 million and $21.6 million, respectively, related to \"early-out\" incentive programs offered to a limited number of USAir employees during the years. No such charges were incurred in 1992.\nNon-qualified supplemental pension plans are established for certain employee groups, which provide incremental pension payments from the Company's funds so that total pension payments equal amounts that would have been payable from the Company's principal pension plans if it were not for limitations imposed by income tax regulations.\nThe following table sets forth the non-qualified plans' status at December 31, 1993 and 1992:\nNet supplementary pension cost for the two years included the following components:\nThe discount rate used to determine the actuarial present value of the projected benefit obligation was 7.5% and 8.75% as of December 31, 1993 and 1992, respectively. Rates of 3% to 6% were used to estimate future salary levels.\nIn addition to the qualified and non-qualified defined benefit plans described above, USAir also contributes to certain defined contribution plans primarily for employees not covered under a collective bargaining agreement. Company contributions are based on a formula which considers the age and pre-tax earnings of each employee and the amount of employee contributions. The Company's contribution expense was $42 million for 1993. The Company recognized no such expense in 1992 or 1991.\n(b) Postretirement Benefits Other Than Pensions\nUSAir offers medical and life insurance benefits to employees who retire from the Company and their eligible dependents. The medical benefits provided by USAir are coordinated with Medicare benefits. Retirees generally contribute amounts towards the cost of their medical expenses based on years of service with the Company. USAir provides uninsured death benefit payments to survivors of retired employees for stated dollar amounts, or in the case of retired pilot employees, death benefit payments determined by age and level of pension benefit. The plans for postretirement medical and death benefits are funded on the pay-as-you-go basis.\nUSAir adopted Statement of Financial Accounting Standards No. 106 (\"FAS 106\") during 1992 and elected to record the January 1, 1992 Accumulated Postretirement Benefit Obligation (\"APBO\") using the immediate recognition approach. The cumulative effect of adopting FAS 106 was $745.7 million ($628.1 million net of tax benefit).\nThe following table sets forth the financial status of the plans as of December 31, 1993 and 1992:\nThe components of net periodic postretirement benefit cost are as follows:\nThe postretirement benefit expense for 1993 presented above excludes a charge of approximately $15.5 million related to \"early out\" programs offered to a limited number of employees during the year. No such charges were incurred in 1992 or 1991.\nThe discount rate used to determine the APBO was 7.75% and 8.75% at December 31, 1993 and 1992, respectively. The assumed health care cost trend rate used in measuring the APBO was 10.5% in 1993 and 1994, declining by 1% per year after 1994 to an ultimate rate of 4.5%. If the assumed health care cost trend rate were increased by one percentage point, the APBO at December 31, 1993 would be increased by 10% and 1993 periodic postretirement benefit cost would increase 13%.\nPrior to the adoption of FAS 106, USAir recognized expense for retiree health care at an estimated monthly rate (based on payments) and recognized expense for death benefits when paid. The expense using this methodology was approximately $8 million for 1991.\n(c) Postemployment Benefits\nUSAir adopted Statement of Financial Accounting Standards No. 112, \"Employer's Accounting for Postemployment Benefits\" (\"FAS 112\"), during 1993. FAS 112 requires the use of an accrual method to recognize postemployment benefits such as disability-related benefits. The cumulative effect at January 1, 1993 of adopting FAS 112 was $43.7 million.\n(12) SUPPLEMENTAL BALANCE SHEET INFORMATION\nThe components of certain accounts in the accompanying balance sheets are as follows:\n(13) NON-RECURRING AND UNUSUAL ITEMS\n(a) 1993\nThe Company's results for 1993 include non-recurring charges of (i) $43.7 million for the cumulative effect of an accounting change, as required by FAS 112 which was adopted during the third quarter of 1993, retroactive to January 1, 1993; (ii) $68.8 million for severance, early retirement and other personnel-related expenses recorded primarily during the third quarter of 1993 in connection with a workforce reduction of approximately 2,500 full- time positions between November 1993 and the first half of 1994; (iii) $36.8 million based on a projection of the repayment of certain employee pay reductions, recorded in the fourth quarter of\n1993; (iv) $13.5 million for certain airport facilities at locations where USAir has, among other things, discontinued or reduced its service, recorded in the fourth quarter of 1993; (v) $8.8 million for a loss on USAir's investment in the Galileo International Partnership which operates a computerized reserva- tions system, recorded in the fourth quarter of 1993; and (vi) $18.4 million credit related to non-operating aircraft recorded in the second quarter of 1993.\n(b) 1992\nThe Company's results for 1992 include (i) a charge of $628.1 million for the cumulative effect of an accounting change as required by FAS 106, effective January 1, 1992; (ii) a $107.4 million charge related to certain aircraft which have been withdrawn from service, recorded in the fourth quarter of 1992; (iii) a $34.1 million non-operating loss related to the sale of ten MD-82 aircraft which USAir eliminated from its fleet plan, recorded in the fourth quarter of 1992; and (iv) a $10.3 million gain on the sale of three wholly-owned subsidiaries, recorded in the third quarter of 1992 (see Note (1)).\n(c) 1991\nThe Company's results for 1991 include (i) a $107 million pre- tax gain related to freezing of the fully funded non-contract employee pension plan; (ii) a $21.6 million pre-tax expense related to early retirement incentives offered to certain employees during 1991; (iii) a $21 million pre-tax charge to establish an additional reserve for USAir's grounded BAe-146 fleet; and (iv) $18.5 million, net, in miscellaneous non-recurring charges.\n(14) SELECTED QUARTERLY FINANCIAL DATA (Unaudited)\nThe following table presents selected quarterly financial data for 1993 and 1992:\nItem 8B. FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION USAir, Inc.\nIndependent Auditors' Report\nThe Stockholder and Board of Directors USAir, Inc.:\nWe have audited the accompanying consolidated balance sheets of USAir, Inc. and subsidiaries (\"USAir\") as of December 31, 1993 and 1992, and the related consolidated statements of operations, cash flows, and changes in stockholder's equity for each of the years in the three-year period ended December 31, 1993. These consolidated financial statements are the responsibility of USAir's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.\nWe conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.\nIn our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of USAir, Inc. and subsidiaries as of December 31, 1993 and 1992, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1993 in conformity with generally accepted accounting principles.\nAs discussed in Note 9 to the consolidated financial state- ments, effective January 1, 1993, USAir changed its method of accounting for postemployment benefits and effective January 1, 1992, USAir changed its method of accounting for postretirement benefits other than pensions.\nKPMG PEAT MARWICK\nWashington, D. C. February 25, 1994\n(PAGE>\n(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES\n(a) Basis of Presentation\nThe accompanying consolidated financial statements include the accounts of USAir, Inc. (\"USAir\") and its wholly-owned subsidiary USAM Corp. (\"USAM\"). USAir is a wholly-owned subsidiary of USAir Group, Inc. (\"USAir Group\" or \"the Company\"). All significant intercompany accounts and transactions have been eliminated.\nAt December 31, 1992, USAM owned 11% of the Covia Partnership (\"Covia\") which owned and operated a computerized reservation system (\"CRS\"). In September 1993, Covia purchased the assets of the corporation that owned and operated the Galileo CRS which provided services to travel agent subscribers in Europe. Covia was then separated into three new entities. As a result, at Decem- ber 31, 1993, USAM owns 11% of the Galileo International Partner- ship which owns and operates the Galileo CRS, approximately 11% of the Galileo Japan Partnership which markets the Galileo CRS in Japan and approximately 21% of the Apollo Travel Services Partner- ship which markets the Galileo CRS in the U.S. and Mexico. USAM accounts for these investments using the equity method.\nOn October 9, 1991, USAir reached agreement for the sale of certain assets of its wholly-owned subsidiary Pacific Southwest Airmotive (\"Airmotive\"). Airmotive discontinued operations in the third quarter of 1991. USAir did not realize any material gain or loss on the sale and discontinuance of Airmotive's operations.\nCertain 1992 and 1991 amounts have been reclassified to conform with 1993 classifications.\n(b) Cash and Cash Equivalents\nFor financial statement purposes, the Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents.\n(c) Materials and Supplies\nInventories of materials and supplies are valued at average cost and are charged to operations as consumed. An allowance for obsolescence is provided for flight equipment expendable parts.\n(d) Property and Equipment\nProperty and equipment is stated at cost or, if acquired under capital leases, at the lower of the present value of minimum lease payments or fair market value at the inception of the lease. Maintenance and repairs, including the overhaul of aircraft components, are charged to operating expense as incurred and costs of major improvements are capitalized for both owned and leased assets. Interest related to deposits on aircraft purchase contracts and facility and equipment construction projects is capitalized as additional cost of the asset or as leasehold improvement if the asset is leased. Depreciation and amortization for principal asset classifications is provided on a straight-line basis to estimated residual values over estimated depreciable lives as follows:\nProperty acquired under capital lease is amortized on a straight-line basis over the term of the lease and charged to depreciation expense.\n(e) Goodwill, Other Intangibles and Other Assets\nGoodwill, the cost in excess of fair value of identified net assets acquired, is being amortized on a straight-line basis over 40 years as other non-operating expense. Accumulated amortization at December 31, 1993 and 1992 was $98 million and $82 million, respectively.\nIntangible assets consist of purchased operating rights at various airports, purchased route authorities, and the intangible assets associated with the underfunded amounts of certain pension plans. The operating rights, valued at purchase cost or appraised value if acquired from Piedmont Aviation, Inc. (\"Piedmont Avia- tion\") or Pacific Southwest Airlines (\"PSA\"), are being amortized over periods ranging from ten to 25 years as Other Rent and Landing Fees Expense. The purchased route authorities are amortized over periods of 25 years as other operating expense. Accumulated amortization at December 31, 1993 and 1992 was $72 million and $64 million, respectively. The decrease in Other Intangibles, net in 1993 is primarily attributable to the $47 million reclassification of two London routes to Other Assets as a result of USAir's relinquishment of these routes as contemplated by the January 21, 1993 Investment Agreement (\"Investment Agreement\") between the Company and British Airways Plc (\"BA\"). USAir relinquished its Charlotte to London route authority in January 1994. In addition, takeoff and landing slots at Washington National Airport were purchased from Northwest Airlines, Inc. (\"Northwest\") for $10 million during 1993.\n(f) Restricted Cash and Investments\nRestricted cash and investments consist primarily of deposits in trust accounts to collateralize letters of credit or workers compensation policies and short-term investments restricted for specified construction projects. These amounts are classified as Other Assets on the accompanying balance sheets.\n(g) Deferred Gains on Sale and Leaseback Transactions\nGains on aircraft sale and leaseback transactions are deferred and amortized over the term of the leases as a reduction of rental expense.\n(h) Passenger Revenue Recognition\nPassenger ticket sales are recognized as revenue when the transportation service is rendered. At the time of sale, a liability is established (Traffic Balances Payable and Unused Tickets) and subsequently eliminated either through carriage of the passenger, through billing from another carrier which renders the service or by refund to the passenger. Approximately $29 million and $28 million of amounts owed to wholly-owned subsidiaries of USAir Group for passenger transportation revenue are included in Traffic Balances Payable and Unused Tickets at December 31, 1993 and 1992, respectively.\n(i) Frequent Traveler Awards\nUSAir accrues the estimated incremental cost of providing outstanding travel awards earned by participants in its Frequent Traveler Program.\n(j) Investment Tax Credit\nInvestment tax credit benefits are recorded using the \"flow- through\" method as a reduction of the Federal income tax provision.\n(k) Swap Agreements\nUSAir has entered into hedging arrangements to reduce its exposure to fluctuations in the price of jet fuel. Net settlements are recorded as adjustments to aviation fuel expense. USAir is party to such hedging arrangements with several entities. Under these arrangements, the Company's maximum commitments, which are offset by amounts received under the arrangements, totaled approximately $100.3 million and $158.7 million at December 31, 1993 and 1992, respectively. Although the agreements expose the Company to credit loss in the event of nonperformance by the other parties to the agreements, the Company does not anticipate such nonperformance.\n(2) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS\nUnless a quoted market price indicates otherwise, the fair values of cash and investments generally approximate carrying values because of the short maturity of these instruments. USAir has estimated the fair value of long-term debt based on quoted market prices for the same or similar issues or on the current rates offered to the Company for debt of similar remaining maturities. The fair values of energy swap agreements and foreign currency contracts are obtained from dealer quotes whereby these values represent the estimated amount USAir would receive or pay to terminate such agreements.\nThe estimated fair values of USAir's financial instruments are summarized as follows:\n(3) LONG-TERM DEBT\nDetails of long-term debt are as follows:\nMaturities of long-term debt and debt under capital leases for the next five years are as follows:\n(in thousands)\n1994 $ 85,715 1995 75,691 1996 75,715 1997 86,496 1998 155,234 Thereafter 2,153,879\nInterest rates on $239 million principal amount of long-term debt at December 31, 1993 are subject to adjustment to reflect prime rate and other rate changes.\nEquipment financings totaling $2.1 billion are collateralized by aircraft and engines with a net book value of $2.2 billion at December 31, 1993. In addition, certain USAir aircraft and engines with a net book value of $162 million collateralize USAir Group's Credit Agreement borrowings.\nAn aggregate of $32 million of future principal payments of the Equipment Financing Agreements are payable in Japanese Yen. This foreign currency exposure has been hedged to maturity. Although the Company is exposed to credit loss in the event of non- performance by the counterparty to the hedge agreement, the Company does not anticipate such non-performance.\nOn February 2, 1994, USAir sold $175 million principal amount of 9 5\/8% Senior Notes (\"9 5\/8% Senior Notes\") which are uncondi- tionally guaranteed by the Company. The 9 5\/8% Senior Notes are not reflected in the above table because they were sold after December 31, 1993.\n(4) COMMITMENTS AND CONTINGENCIES\n(a) Operating Environment\nThe economic conditions in the United States, fare competition and the emergence and growth of low cost, low fare carriers in the domestic airline industry are factors affecting the financial condition of USAir. Industry capacity has recently failed to mirror changes in demand due primarily to the continued delivery of new aircraft and secondarily, to the prolonged operation of certain major U.S. carriers under the protection of Chapter 11 of the Bankruptcy Code. USAir competes with at least one major airline on most of its routes between major cities. Although the economy generally has shown signs of improvement, the Company expects that the competitive environment in the airline industry, the entry of low cost, low fare carriers into USAir's markets, and the excess\ncapacity in the domestic airline industry will continue to have an adverse effect on USAir's passenger revenue for the foreseeable future. The extent or duration of these conditions cannot be reasonably determined at this time.\n(b) Lease Commitments\nUSAir leases certain aircraft, engines, computer and ground equipment, in addition to the majority of its ground facilities. Ground facilities include executive offices, overhaul and mainte- nance bases and ticket and administrative offices. Public airports are utilized for flight operations under lease arrangements with the municipalities or agencies owning or controlling such airports. Substantially all leases provide that the lessee shall pay taxes, maintenance, insurance and certain other operating expenses applicable to the leased property. Most leases also include renewal options and some aircraft leases include purchase options.\nThe following amounts applicable to capital leases are included in property and equipment:\nAt December 31, 1993, obligations under capital and noncancel- able operating leases for future minimum lease payments were as follows:\nRental expense under operating leases for 1993, 1992 and 1991 was $739 million, $678 million and $576 million, respectively. Rental expense for 1993 excludes a charge of $9 million related to certain airport facilities where USAir has, among other things, discontinued or reduced its service. Rental expense for 1992 excludes a charge of $72 million related to USAir's grounded BAe- 146 fleet. Rental expense for 1991 excludes a credit of $9 million for the BAe-146 fleet.\n(c) Legal Proceedings\nUSAir and various subsidiaries have been named as defendants in various suits and proceedings which involve, among other things, environmental concerns and employment matters. These suits and proceedings are in various stages of litigation, and the status of the law with respect to several of the issues involved is unset- tled. For these reasons the outcome of these suits and proceedings is difficult to predict. In the Company's opinion, however, the disposition of these matters is not likely to have a material adverse effect on its financial condition or results of operations.\nIn 1989 and 1990, a number of U.S. air carriers, including USAir, received two Civil Investigative Demands (\"CIDs\") from the U.S. Department of Justice (\"DOJ\") (a CID is a request for information in the course of an antitrust investigation and does not constitute the institution of a civil or criminal action) related to investigations of price fixing in the domestic airline industry.\nThe investigations by the DOJ culminated in the filing of a lawsuit against Airline Tariff Publishing Company (\"ATPCo\") and eight major air carriers, including USAir, alleging that the defendants had agreed to fix prices in violation of Section 1 of the Sherman Act through the methods used to disseminate fare data to ATPCo, an airline-owned fare publishing service. To avoid the costs associated with protracted litigation and an uncertain outcome, USAir and another carrier decided to settle the lawsuit by entering into a consent decree to modify their fare-filing practices in certain respects and to implement compliance programs that would include education of employees regarding the carriers' responsibilities under the consent decree. Accordingly, the consent decree and the U.S. Government's complaint were filed contemporaneously in the U.S. District Court for the District of Columbia in December 1992. Due to certain legal requirements associated with the settlement of government antitrust suits, the consent decree could not be entered until a notice and comment period had expired. On November 1, 1993, after it had reviewed the comments, the Court entered the consent decree. USAir does not believe that the fare-filing practices reflected in the consent decree will have a material adverse effect on its financial condition or on its ability to compete. In March 1994, the remaining six air carrier defendants agreed to the entry of a separate consent decree to settle the lawsuit. This consent decree cannot be entered until a notice and comment period has expired. When that consent decree is entered, USAir can petition the Court to have its consent decree amended to conform with the other settlement and the Court will enter the amended consent decree.\nOn March 19, 1993, the U.S. District Court in Atlanta, Georgia entered a settlement involving USAir and five other U.S. air carrier defendants in the Domestic Air Transportation Antitrust Litigation class action lawsuit. The class action suit, which was filed in July 1990, alleged that the airlines used ATPCo to signal and communicate carrier pricing intentions and otherwise limit price competition for travel to and from numerous hub airports. Under the terms of the settlement, the six air carriers will pay $45 million in cash and issue $396.5 million in certificates valid for purchase of domestic air travel on any of the six airlines. USAir's share of the cash portion of the settlement, $5 million, was recorded in results of operations for the second quarter of 1992. The certificates provide a dollar-for-dollar discount against the cost of a ticket generally of up to a maximum of 10% per ticket, depending on the cost of the ticket. It is possible that this settlement could have a dilutive effect on USAir's passenger transportation revenue and associated cash flow. However, due to the interchangeability of the certificates among the six carriers involved in the settlement, the possibility that carriers not party to the settlement will honor the certificates, and the potential stimulative effect on travel created by the certificates, USAir cannot reasonably estimate the impact of this settlement on future passenger revenue and cash flows. USAir has\nemployed the incremental cost method to estimate a range of costs attributable to the exercise of the certificates, based on the assumption that the estimated maximum number of certificates to be redeemed for travel on USAir will be related to USAir's market share relative to the total market share of the six carriers involved in the settlement. USAir's estimated percentage of such market share is less than 9%. Incremental costs include unit costs for passenger food, beverages and supplies, fuel, liability insurance, and denied boarding compensation expenses expected to be incurred on a per passenger basis. USAir has estimated that its incremental cost will not be material based on the equivalent free trips associated with the settlement.\nThe Attorney General of the State of Florida and the Attorneys General of several other states are investigating whether several major airlines, including USAir, have engaged in price fixing and other unlawful restraints of trade. Certain of these Attorneys General have issued document requests to USAir and several other airlines requiring them to provide certain information and documents. At this time, USAir cannot predict the manner in which these investigations will be resolved and if the resolution will have an adverse effect on USAir's results of operations or financial position.\n(d) Aircraft Commitments\nAt December 31, 1993, USAir's new aircraft on firm order, options for new aircraft and scheduled payments for new aircraft orders (including progress payments, buyer furnished equipment, spares, and capitalized interest) were:\nUSAir may elect, under certain circumstances, to convert Boeing 737 Series and Boeing 767 Series firm order or option deliveries to Boeing 757-200 deliveries. If USAir were to elect such a substitution, the payments presented in the table above would change. USAir is currently in negotiations with Boeing\nregarding, among other things, the above schedule of new aircraft deliveries.\nIn addition, USAir has a commitment to purchase hushkits for certain of its McDonnell Douglas DC-9-30 aircraft and a substantial portion of its Boeing 737-200 aircraft. The installation of these hushkits will bring the aircraft into compliance with Federal Aviation Administration (\"FAA\") Stage 3 noise level requirements. The projected payments associated with the purchase of the hushkits are: $29.1 million - 1994; $12.0 million - 1995; $42.3 million - 1996; $43.4 million - 1997; $44.0 million - 1998; and $30.8 million thereafter.\n(e) Concentration of Credit Risk\nUSAir does not believe it is subject to any significant concentration of credit risk. At December 31, 1993, most of USAir's receivables related to tickets sold to individual passen- gers through the use of major credit cards (47%) or to tickets sold by other airlines (16%) and used by passengers on USAir or USAir Group's commuter subsidiaries. These receivables are short-term, generally being settled shortly after sale or in the month following usage. Bad debt losses, which have been minimal in the past, have been considered in establishing allowances for doubtful accounts.\n(f) Guarantees\nAt December 31, 1993, USAir guaranteed payments of certain debt obligations of the Galileo International Partnership amounting to approximately $16 million. In addition, at December 31, 1993, USAir guaranteed payments of debt and lease obligations of USAir Group's three wholly-owned subsidiaries amounting to approximately $148 million.\n(5) SALE OF RECEIVABLES\nUSAir is party to an agreement (\"Receivables Agreement\") to sell, on a revolving basis, undivided interest of up to $240 million in a pool of designated receivables. Approximately $141 million was available for sale at December 31, 1993 based on receivable balances at that date. The maximum amount available under the Receivable Agreement to be sold gradually reduces from $240 million at December 31, 1993, to $190 million on June 30, 1994. The Receivables Agreement expires on December 21, 1994. USAir had no outstanding amounts due under the Receivable Agreement at December 31, 1993. The net amounts sold reduce receivables in the accompanying balance sheet by $220 million and $188 million at December 31, 1992 and 1991, respectively. Included in the accounts payable balances at December 31, 1992 and 1991, are $74 million and $64 million, respectively, which represent funds held by USAir related to previously sold receivables that had been collected.\nUSAir obtained a waiver from the purchaser of the receivables and its operating agent, exempting USAir from compliance with the coverage ratio financial covenant in the Receivables Agreement for the quarter ended December 31, 1993. USAir is currently unable to sell receivables under the Receivables Agreement because it is in violation of a minimum net worth covenant thereunder. In addition, based on current projections of its results for 1994, USAir expects that it will not be in compliance with the coverage ratio test and possibly other financial covenants at March 31, 1994 and during the remainder of the year. There can be no assurance that USAir will be able to obtain a waiver of compliance with these covenants or arrange a replacement facility.\n(6) INCOME TAXES\nEffective January 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109, \"Accounting for Income Taxes\" (\"FAS 109\"). FAS 109 required a change from the deferred method under Accounting Principles Board Opinion No. 11 to the asset and liability method of accounting for income taxes. No cumulative adjustment at January 1, 1993, and no income tax credit for the year ended December 31, 1993, were recognized due to the FAS 109 limitation in recognizing benefits for net operating losses. USAir files a consolidated Federal income tax return with its parent USAir Group pursuant to a tax allocation agreement.\nThe components of the provision (credit) for income taxes are as follows:\nThe significant components of deferred income tax ex- pense\/(benefit) for the year ended December 31, 1993, are as follows:\n(in thousands) Deferred tax benefit (exclusive of the other components listed below) $(121,847) Adjustments to deferred tax assets and liabilities for enacted changes in tax laws and rates (9,429) Increase for the year in the valuation allowance for deferred tax assets 131,276 -------- Total $ 0 ========\nFor the years ended December 31, 1992 and 1991, deferred income taxes result from differences in the recognition of revenue and expenses and investment tax credits for tax and financial reporting purposes. The major items resulting in these differences and the related tax effects are shown in the following chart:\nA reconciliation of taxes computed at the statutory Federal tax rate on earnings before income taxes to the provision (credit) for income taxes is as follows:\nThe tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1993 are presented below:\n(in thousands) Deferred tax assets: Leasing transactions $ 129,276 Tax benefits purchased\/sold 79,434 Gain on sale and leaseback transactions 162,400 Employee benefits 429,312 Net operating loss carryforwards 508,240 Alternative minimum tax credit carryforwards 20,881 Investment tax credit carryforwards 47,880 Other deferred tax assets 61,210 --------- Total gross deferred tax assets 1,438,633 Less valuation allowance (568,816) --------- Net deferred tax assets 869,817 Deferred tax liabilities: Equipment depreciation and amortization (840,584) Other deferred tax liabilities (29,233) --------- Net deferred tax liabilities (869,817) --------- Net deferred taxes $ 0 =========\nThe valuation allowance for deferred tax assets as of January 1, 1993, was $438 million. The increase in the valuation allowance for 1993 was $131 million.\nAt December 31, 1993, the Company had unused net operating losses of $1.3 billion for Federal tax purposes, which expire in the years 2005-2008. USAir also has available, to reduce future taxes payable, $429 million alternative minimum tax net operating losses expiring in 2007 and 2008, $47 million of investment tax credits expiring in 2002 and 2003, and $20 million of minimum tax credits which do not expire. The Federal income tax returns of the Company through 1986 have been examined and settled with the Internal Revenue Service.\n(7) STOCKHOLDER'S EQUITY\nUSAir Group owns all of the outstanding common stock of USAir. USAir Group's Credit Agreement includes a provision that limits USAir's ability to declare dividends to USAir Group.\n(8) EMPLOYEE STOCK OWNERSHIP PLAN\nIn August 1989, USAir established an Employee Stock Ownership Plan (\"ESOP\"). USAir Group sold 2,200,000 shares of its Common Stock to an Employee Stock Ownership Trust to hold on behalf of USAir's employees, exclusive of officers, in accordance with the terms of the Trust and the ESOP. Financing of approximately $111.4 million for the Trust's purchase of the shares was provided by USAir through a 9 3\/4% loan to the Trust, and an additional $2.2 million was contributed to the Trust by USAir. The loan is being repaid with contributions made by USAir. The contributions are made in amounts equal to the periodic loan payments as they come due, less dividends available for loan payment. The amount of dividends used for debt service by the ESOP was $127,000 in 1991. As the loan is repaid over time, participating employees receive allocations of the Common Stock purchased by the Trust. The initial maturity of the loan is 30 years. However, the ESOP provides that if the Company's profitability as measured by return on sales exceeds certain goals during the life of the ESOP, USAir's contributions and the repayment of the loan will be accelerated. Contributions made by USAir and therefore loan repayments made by the Trust were $11.4 million in 1993, 1992 and 1991. The interest portion of these contributions was $10.5 million in 1993, $10.6 million in 1992 and $10.7 million in 1991. Approximately 366,000 shares of Common Stock have been allocated to employees. USAir recognized approximately $4 million of compensation expense related to the ESOP in each of 1993, 1992 and 1991 based on shares allocated to employees (the \"shares allocated\" method). Deferred compensation related to the ESOP amounted to approximately $95 million, $98 million and $102 million at December 31, 1993, 1992 and 1991, respectively.\n(9) EMPLOYEE BENEFIT PLANS\n(a) Pension Plans\nUSAir has several pension plans in effect covering substan- tially all employees. One qualified defined benefit plan covers USAir maintenance employees and provides benefits of stated amounts for specified periods of service. Qualified defined benefit plans for substantially all other employees provide benefits based on years of service and compensation. The qualified defined benefit plans are funded, on a current basis, to meet requirements of the Employee Retirement Income Security Act of 1974.\nThe defined benefit pension plan for USAir non-contract employees was frozen at the end of 1991 for all non-contract participants, resulting in a one-time book gain of approximately $107 million in 1991. All non-contract plan participants became 100% vested at the time of the freeze. As a result of this plan curtailment, the accrual of service costs related to defined\nbenefits for USAir non-contract employees ceased at the end of 1991. USAir implemented a defined contribution pension plan for non-contract employees in January 1993.\nThe funded status of the qualified defined benefit plans at December 31, 1993 and 1992 was as follows:\nApproximately 97% of the accumulated benefit obligation was vested at December 31, 1993 and 1992. Unrecognized transition assets are being amortized over periods up to 27 years. The weighted average discount rate used to determine the actuarial present value of the projected benefit obligation was 7.6% and 8.75% as of December 31, 1993 and 1992, respectively. The expected long-term rate of return on plan assets used in 1993 and 1992 was 9.5%. Rates of 3% to 6% were used to estimate future salary levels. At December 31, 1993, plan assets consisted of approxi- mately 8% in cash equivalents and short-term debt investments, 37% in equity investments, and 55% in fixed income and other invest- ments. At December 31, 1992, plan assets consisted of approximate- ly 4% in cash equivalents and short-term debt investments, 70% in equity investments, and 26% in fixed income and other investments.\nThe following items are the components of the net pension cost for the qualified defined benefit plans:\n1993 1992 1991 ---- ---- ----\n(in millions) Service cost (benefits earned during the year) $ 90 $ 79 $ 98 Interest cost on projected benefit obligation 188 171 168 Actual return on plan assets (224) (114) (353) Net amortization and deferral 40 (65) 201 ---- ---- ---- Net pension cost $ 94 $ 71 $ 114 ==== ==== ====\nNet pension cost for 1993 and 1991 presented above excludes a charge of approximately $33.9 million and $21.6 million, respec- tively, related to \"early-out\" incentive programs offered to a limited number of USAir employees during the years. No such charges were incurred in 1992.\nNon-qualified supplemental pension plans are established for certain employee groups, which provide incremental pension payments from the Company's funds so that total pension payments equal amounts that would have been payable from the Company's principal pension plans if it were not for limitations imposed by income tax regulations.\nThe following table sets forth the non-qualified plans' status at December 31, 1993 and 1992:\nNet supplementary pension cost for the two years included the following components:\nThe discount rate used to determine the actuarial present value of the projected benefit obligation was 7.5% and 8.75% as of December 31, 1993 and 1992, respectively. Rates of 3% and 6% were used to estimate future salary levels.\nIn addition to the qualified and non-qualified defined benefit plans described above, USAir also contributes to certain defined contribution plans primarily for employees not covered under a collective bargaining agreement. Company contributions are based on a formula which considers the age and pre-tax earnings of each employee and the amount of employee contributions. USAir's contribution expense was $42 million for 1993. USAir recognized no such expense in 1992 and 1991.\n(b) Postretirement Benefits Other Than Pensions\nUSAir offers medical and life insurance benefits to employees who retire from the Company and their eligible dependents. The medical benefits provided by USAir are coordinated with Medicare benefits. Retirees generally contribute amounts towards the cost of their medical expenses based on years of service with the Company. USAir provides uninsured death benefit payments to survivors of retired employees for stated dollar amounts, or in the case of retired pilot employees, death benefit payments determined by age and level of pension benefit. The plans for postretirement medical and death benefits are funded on the pay-as-you-go basis.\nUSAir adopted Statement of Financial Accounting Standards No. 106 (\"FAS 106\") during 1992 and elected to record the January 1, 1992 Accumulated Postretirement Benefit Obligation (\"APBO\") using the immediate recognition approach. The cumulative effect of adopting FAS 106 was $745.5 million ($638.8 million net of tax benefit).\nThe following table sets forth the financial status of the plans as of December 31, 1993 and 1992:\nThe postretirement benefit expense for 1993 presented above excludes a charge of approximately $15.5 million related to \"early- out\" programs offered to a limited number of employees during the year. No such charges were incurred in 1992 or 1991.\nThe discount rate used to determine the APBO was 7.75% and 8.75% at December 31, 1993 and 1992, respectively. The assumed health care cost trend rate used in measuring the APBO was 10.5% in 1993 and 1994, declining by 1% per year after 1994 to an ultimate rate of 4.5%. If the assumed health care cost trend rate were increased by 1 percentage point, the APBO at December 31, 1993 would be increased by 10% and 1993 periodic postretirement benefit cost would increase 13%.\nPrior to the adoption of FAS 106, USAir recognized expense for retiree health care at an estimated monthly rate (based on payments) and recognized expense for death benefits when paid. The expense using this methodology was approximately $8 million for 1991.\n(c) Postemployment Benefits\nUSAir adopted Statement of Financial Accounting Standards No. 112, \"Employers' Accounting for Postemployment Benefits\" (\"FAS 112\"), during 1993. FAS 112 requires the use of an accrual method to recognize postemployment benefits such as disability-related benefits. The cumulative effect at January 1, 1993 of adopting FAS 112 was $43.7 million.\n(10) SUPPLEMENTAL BALANCE SHEET INFORMATION\nThe components of certain accounts in the accompanying balance sheets are as follows:\n(11) NON-RECURRING AND UNUSUAL ITEMS\n(a) 1993\nUSAir's results for 1993 include non-recurring charges of (i) $43.7 million for the cumulative effect of an accounting change, as required by FAS 112 which was adopted during the third quarter of 1993, retroactive to January 1, 1993; (ii) $68.8 million for severance, early retirement and other personnel-related expenses recorded primarily during the third quarter of 1993 in connection with a workforce reduction of approximately 2,500 full-time positions between November 1993 and the first half of 1994; (iii) $36.8 million based on a projection of the repayment of certain employee pay reductions, recorded in the fourth quarter of 1993; (iv) $13.5 million for certain airport facilities at locations where USAir has, among other things, discontinued or reduced its service, recorded in the fourth quarter of 1993; (v) $8.8 million for a loss on USAir's investment in the Galileo International Partnership, which operates a computerized reservation system, recorded in the fourth quarter of 1993; and (vi) $18.4 million credit related to non-operating aircraft, recorded in the second quarter of 1993.\n(b) 1992\nUSAir's results for 1992 include (i) a charge of $628.1 million for the cumulative effect of an accounting change as required by FAS 106, effective January 1, 1992; (ii) a $107.4 million charge related to certain aircraft which have been withdrawn from service, recorded in the fourth quarter of 1992; and (iii) a $34.1 million non-operating loss related to the sale of ten MD-82 aircraft which USAir eliminated from its fleet plan, recorded in the fourth quarter of 1992.\n(c) 1991\nUSAir's results for 1991 include (i) a $107 million a pre-tax gain related to freezing of the fully funded non-contract employee pension plan; (ii) a $21.6 million pre-tax expense related to early retirement incentives offered to certain employees during 1991; (iii) a $21 million pre-tax charge to establish an additional reserve for USAir's grounded BAe-146 fleet; and (iv) a $18.5 million, net, in miscellaneous pre-tax non-recurring charges.\n(12) SELECTED QUARTERLY FINANCIAL DATA (Unaudited)\nThe following table presents selected quarterly financial data for 1993 and 1992:\nItem 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE\nNone.\nPART III\nItem 10. DIRECTORS AND EXECUTIVE OFFICERS OF USAir Group, Inc.\nEach of the persons listed below is currently a director of the Company and was elected in 1993 by the stockholders of the Company. Each director of the Company is also a director of USAir. Except as noted otherwise, the following biographies disclose the age and describe the business experience of each Director for at least the past five years. As required by the Investment Agreement, the Board of Directors amended the Company's By-Laws on January 21, 1993 to increase the authorized number of directors by three and immediately thereafter elected Messrs. Marshall, Maynard and Stevens to fill the new directorships. Under the Investment Agreement, the Company is required to use its best efforts to ensure that the slate of persons nominated by the Company for election as directors of the Company includes that number of persons designated by BA that is the percentage of the total then authorized number of directors, which is currently 16, of the Company that is nearest to but not greater than the percentage (but in no event greater than 25%) of the aggregate voting power of the securities that vote with the Common Stock as a single class for the election of directors of the Company then held by BA and its wholly-owned subsidiaries. Under this provision of the Investment Agreement, BA is entitled to designate three directors to the Board of Directors and has accordingly designated Messrs. Marshall, Maynard and Stevens.\nServed as Director since --------\nWarren E. Buffett, 63.... Mr. Buffett has been Chairman 1993 and Chief Executive Officer of Berkshire Hathaway Inc. (insurance, candy, retailing, manufacturing and publishing) since 1970. He is also a Director of Capital Cities\/ ABC, Inc., The Coca-Cola Company, The Gillette Comp- pany and Salomon Inc. Mr. Buffett is a member of the Finance and Planning Committee of the Board of Directors.\nEdwin I. Colodny, 67..... Mr. Colodny is of counsel to 1975 the law firm of Paul, Has- tings, Janofsky & Walker. He retired as Chairman of the Company and of USAir in July 1992. He served as Chief Executive Officer of USAir from 1975 until retiring as an employee of USAir in June 1991. Mr. Colodny is a Director of Martin Marietta Corporation, Comsat Corporation and Ester- line Technologies, Inc., and is a member of the Board of Trustees of the University of Rochester. He is a member of the Finance and Planning and Nominating Committees of the Board of Directors.\nMathias J. DeVito, 63.... Mr. DeVito is Chairman of the 1981 Board and Chief Executive Officer of The Rouse Com- pany (real estate develop- ment and management). He also serves as a Director of First Maryland Bancorp and subsidiaries of The Rouse Company. He is a member of the Board of the Business Committee for the Arts and former Chair of the Greater Baltimore Committee. Mr. DeVito is Chairman of the Compensation and Benefits Committee and a member of the Finance and Planning Committee of the Board of Directors.\nGeorge J. W. Goodman, 63.. Mr. Goodman is President of 1978 Continental Fidelity, Inc. which provides editorial and investment services. He is the author of a number of books and articles on finance and economics under the pen name \"Adam Smith\" and is the host of a television series of that name seen on public broadcasting stations in the U.S. and on other networks\nabroad. He is a Director of Cambrex Corporation. Mr. Goodman also serves as a mem- ber of the Advisory Committee of the Center for International Relations at Princeton Univer- sity, and is a Trustee of the Urban Institute. He is a mem- ber of the Compensation and Benefits and Finance and Planning Committees of the Board of Directors.\nJohn W. Harris, 47....... Mr. Harris is President of 1991 The Harris Group (real estate development). From 1972 through 1991, he was President of The Bissell Companies, Inc. (real estate development). He is a Director of Southern Bell Telephone and Telegraph Company. Mr. Harris is former Chairman of the Greater Charlotte Chamber of Commerce and a member of the Board of Trustees of the University of North Carolina and serves on the boards of several community service organiza- tions. He is a member of the Audit and Compensation and Benefits Committees of the Board of Directors.\nEdward A. Horrigan, Jr., 64 Mr. Horrigan is Chairman and 1987 Chief Executive Officer of Liggett Group Inc. (consumer products), a position he has held since May 1993. He is also the retired Vice Chairman of the Board of RJR Nabisco, Inc. and retired Chairman and Chief Executive Officer of R. J. Reynolds Tobacco Company, Winston -Salem, North Carolina (consumer products). He is a Director of the Haggai Foun- dation. Mr. Horrigan is a member of the Audit and Nominating Committees of the Board of Directors.\nRobert LeBuhn, 61......... Mr. LeBuhn is Chairman of 1966 Investor International (U.S.), Inc. (investments) and is a Director of Acceptance Insur- ance Companies, Amdura Corp., Lomas Financial Corp. and Cambrex Corporation. He is Trustee and President of the Geraldine R. Dodge Foun- dation, Morristown, New Jersey and is a member of the New York Society of Security Analysts. He is Chairman of the Finance and Planning Committee and a member of the Nominating Committee of the Board of Directors.\nSir Colin Marshall, 60.... Sir Colin was elected Chairman 1993 of BA in February 1993. Prev- iously, he had been Chief Executive of BA and a member of BA's Board of Directors since 1983. Sir Colin is a Director of Grand Metropolitan plc, HSBC Holdings Plc, and IBM United Kingdom Holdings Limited. He is a member of the Finance and Planning Committee of the Board of Directors.\nRoger P. Maynard, 51...... Mr. Maynard has been Director 1993 of Corporate Strategy of BA since 1991. Previously, from 1987, he had held various positions at BA, including Director of Investor Relations & Marketplace Performance and Executive Vice President North America. Mr. Maynard is a member of the Nominating and Compensation and Benefits Committees of the Board of Directors.\nJohn G. Medlin, Jr, 60.... Mr. Medlin is Chairman of the 1987 Board and, until December 31, 1993, was Chief Executive Officer of Wachovia Corpor- ation (bank holding company). Mr. Medlin also serves as a Director of BellSouth Company, Media General, Inc., National Services Industries, Inc. and RJR Nabisco, Inc. He is Chair- man of the Nominating Committee and a member of the Compen- sation and Benefits Committee of the Board of Directors.\nHanne M. Merriman, 52..... Mrs. Merriman is the Principal 1985 in Hanne Merriman Associates (retail business consultants). Previously, she served as President of Nan Duskin, Inc. (retailing), President and Chief Executive Officer of Honeybee, Inc., a division of Spiegel, Inc., and President of Garfinckel's, a division of Allied Stores Corporation. Mrs. Merriman is a Director of CIPSCO, Inc. Central Public Service Company, State Farm Mutual Automobile Insurance Company, The Rouse Company and Ann Taylor Stores Corporation. She is a member of the National Women's Forum and a Trustee of The American-Scandinavian Founda- tion. She was a member of the Board of Directors of the Federal Reserve Bank of Richmond, Virginia from 1984- 1990 and served as Chairman in 1989-1990. Mrs. Merriman is Chairman of the Audit Committee and is a member of the Nominating Committee of the Board of Directors.\nCharles T. Munger, 70..... Mr. Munger is Vice Chairman of 1993 Berkshire Hathaway Inc. (insur- ance, candy, retailing, manu- facturing and publishing) of which he has been an officer and Director since 1975. He is Chairman of Daily Journal Corporation and is a Director of Salomon Inc. and Wesco Financial Corporation. Mr. Munger is a member of the Audit Committee of the Board of Directors.\nSeth E. Schofield, 54..... Mr. Schofield was elected 1989 Chairman of the Board of Directors of the Company and USAir in June 1992. In June 1991 he was elected President and Chief Execu- tive Officer of the Company and of USAir. In June 1990 he was elected President and Chief Operating Officer of USAir. He had served as Executive Vice President- Operations of USAir since 1981. Mr. Schofield joined USAir in 1957 and has held various corporate staff positions. Mr. Schofield is a Director of the Erie Insurance Group, the PNC Bank, N.A., the Greater Washington Board of Trade, the Flight Safety Foundation, and the Greater Pittsburgh Council of the Boy Scouts of America. Mr. Schofield is Chairman of the Board of Directors of the Greater Pittsburgh Chamber of Commerce, and a Board Member of the Pennsylvania Business Roundtable, Penn's Southwest Association and the Virginia Business Council. He is also a member of the Allegheny Conference on Community\nDevelopment and the Federal City Council.\nRichard P. Simmons, 62.... Mr. Simmons is Chairman of 1987 the Board and Chairman of the Executive Committee of Allegheny Ludlum Corp. and served as its President and Chief Execu- tive Officer from 1980 to 1990. Allegheny Ludlum pro- duces stainless steel and other high alloyed steels. Mr. Simmons is also a Director and Chairman of the Executive Committee of PNC Bank Corp. and Consolidated Natural Gas. He is a member of the Ameri- can Institute of Mining, Metallurgical and Petroleum Engineers and is a fellow and Distinguished Life Member of the American Society for Metals. Mr. Simmons is a member of the M.I.T. Corpor- ation and serves on the boards of several community service organizations. He is a member of the Audit and Finance and Planning Committees of the Board of Directors.\nRaymond W. Smith, 56..... Mr. Smith is Chairman of 1990 the Board and Chief Executive Officer of Bell Atlantic Com- pany, which is engaged princi- pally in the telecommunications business and is one of the seven regional companies formed as a result of the divestiture of the Bell System. Previously, Mr. Smith had served as Vice Chairman and President of Bell Atlantic and Chairman of The Bell Telephone Com- pany of Pennsylvania. He is a member of the Board of Directors of CoreStates Financial Company, a\ntrustee of the University of Pittsburgh and is active in many civic and cultural organizations. He is a mem- ber of the Compensation and Benefits and Nominating Committees of the Board of Directors.\nDerek M. Stevens, 55...... Mr. Stevens has been Chief 1993 Financial Officer of and a Director of BA since 1989. Previously, from 1981, he was Finance Director of TSB Group plc (financial institution). Mr. Stevens is a member of the Audit Commit- tee of the Board of Directors.\nThe law firm of Paul, Hastings, Janofsky and Walker, with which Mr. Colodny is affiliated on an Of Counsel basis, provided legal services to USAir during 1993 and is expected to provide such services during 1994.\nThe following persons are executive officers of the Company.\nFor purposes of Rule 405 under the Securities Act of 1933, Messrs. Lagow, Long, Schwab, Fornaro, Frestel, Harper and Ms. Risque Rohrbach are deemed to be executive officers of the Company.\nThere are no family relationships among any of the officers listed above. No officer was selected pursuant to any arrangement between him or her and any other person. Officers are elected annually to serve for the following year or until the election and qualification of their successors. All the executive officers except Ms. Risque Rohrbach and Messrs. Lagow, Salizzoni, Aubin, Frestel, Fornaro and Harper have been actively engaged in the business and affairs of the Company and USAir during the past five years. The business experience of the officers listed above since January 1, 1989 is as follows:\nMr. Schofield was elected Executive Vice President of the Company in July 1989. At that time he was also elected Vice Chairman of the Board of the Company and of USAir. Mr. Schofield served as Executive Vice President-Operations of USAir until his election as President and Chief Operating Officer of USAir in June 1990. Effective on July 1, 1991, Mr. Schofield was elected President and Chief Executive Officer of both the Company and USAir. Effective on July 1, 1992, Mr. Schofield was elected Chairman of the Board of Directors of both the Company and USAir.\nMr. Lagow was Senior Vice President-Market Planning of Northwest Airlines until February 1988, when he became Senior Vice President-Planning of United Airlines. Mr. Lagow held that position until he was elected Executive Vice President-Marketing of USAir in February 1992.\nMr. Lloyd engaged in the private practice of law in Washing- ton, D.C. from 1967 until election as Vice President, General Counsel and Secretary of the Company and as Senior Vice President and General Counsel of USAir in 1987. He served in those capaci- ties until his election as Executive Vice President, Secretary and General Counsel of the Company and Executive Vice President and General Counsel of USAir in January 1991.\nMr. Long served as Senior Vice President-Administration of USAir until his election as Senior Vice President-Customer Operations of USAir in June 1989. He served in that capacity until his election as Senior Vice President-Customer Services in March 1991. Mr. Long served as Senior Vice President-Customer Services until his election as Executive Vice President-Customer Services in May 1992.\nMr. Salizzoni was Vice Chairman and Chief Financial Officer of Trans World Airlines and Trans World Corporation until 1987, when he became Vice Chairman and Chief Financial Officer of TW Services, Inc. He was Chairman and Chief Executive Officer of TW Services from April 1987 until August 1989, just before that company went private. Mr. Salizzoni was associated with Mancusco and Co. from August 1989 until he was elected Executive Vice President-Finance of the Company and of USAir in November 1990.\nMr. Schwab served as Vice President-Management Information Systems of USAir until his election as Senior Vice President- Management Information Systems of USAir in July 1989. Mr. Schwab served in that capacity until his election as Executive Vice President-Operations in April 1991. He also served as President of USAM Corp. from April 1988 through April 1991.\nMr. Aubin was Executive Advisor to the Vice Chairman, President and Chief Executive Office of Air Canada and, prior to that position, Senior Vice President Technical Operations and Chief Technical Officer of Air Canada during the relevant time. He was elected Senior Vice President-Maintenance Operations of USAir in January 1994.\nMr. Fornaro was Vice President-Research of Jesup & Lamont Securities until February 1988, when he became Senior Vice President-Marketing of Braniff, Inc. In August 1988, Mr. Fornaro became Senior Vice President-Market Planning of Northwest Airlines, the position he held until February 1992. He was elected Senior Vice President-Planning of USAir in March 1992.\nMr. Frestel was Vice President-Personnel and Labor Relations for The Atchinson, Topeka & Santa Fe Railway during the relevant time, and was a Director of that company from June 1988, until his election as Senior Vice President-Human Resources of USAir in January 1989.\nMr. Harper was Senior Vice President-Marketing and Information Systems at Axe-Houghton Management (investment management) until his election as Vice President and Controller of the Company and USAir in December 1991. He served in that position until his election as Senior Vice President-Information Systems of USAir in October 1992.\nMs. Rohrbach was a public policy and communications consultant during 1993. She was Assistant Secretary of Labor for Policy at the U.S. Department of Labor during 1991-1992. Ms. Rohrbach served on the White House staff as a member of the legislative liaison team (1981-1986) and subsequently as Assistant to the President and Secretary to the Cabinet (1987-1988). In 1989 and 1990, she was a resident fellow at Harvard University's Institute of Politics, a consultant to the Department of Energy and in the private sector. From 1988-1993, she also served as a member of the National Commission on Children. She was elected Vice President-Public and Community Relations of the Company and Senior Vice President-Public and Community Relations of USAir in January 1994.\nItem 11. EXECUTIVE COMPENSATION\nCompensation of Directors\nEach director, except Mr. Schofield, is paid a retainer fee of $18,000 per year for service on the Board of Directors of the Company and a fee of $600 per Board meeting or committee meeting attended. Consistent with a comprehensive cost reduction program at USAir, the retainer fee was reduced by 20% to $14,400 for an eighteen-month period commencing January 1, 1992 and ending on June 30, 1993. Mr. LeBuhn, Chairman of the Finance and Planning Committee, Mr. DeVito, Chairman of the Compensation Committee, and Mrs. Merriman, Chairman of the Audit Committee each receives an additional fee of $2,000 per year for serving in those respective capacities. Mr. Medlin, Chairman of the Nominating Committee, receives an additional fee of $1,000 per year for serving in that capacity. Mr. Schofield receives a salary in his capacity as an officer of USAir and receives no additional compensation as a director of the Company and USAir.\nIn 1987 the Company established a retirement plan for directors who are not also employees of the Company and its subsidiaries. The plan provides that such directors shall be eligible to receive retirement benefits thereunder if they have attained seventy years of age and served at least five consecutive years on the Board of Directors or, if they have not attained age\nseventy, have served for at least ten consecutive years on the Board of Directors. Eligible directors receive an annual retirement benefit equal to the highest annual retainer in effect for active directors during the five years prior to retirement. If the annual retainer for active directors is increased, the annual retirement benefit paid to retired directors is increased by an amount equal to 50% of the increase in retainer paid to active directors. If a director dies prior to retirement and had served for at least five consecutive years on the Board of Directors, the deceased director's surviving spouse is eligible under the plan to receive, for a period of five years following such death, an annual death benefit equal to 50% of the annual retainer paid to such director at the time of his or her death. If a retired eligible director dies, the director's surviving spouse is eligible under the plan to receive, for a period of five years following such death, 50% of the annual retirement benefit payable to the director at the time of his or her death. The plan is administered by the Compensation Committee.\nCOMPENSATION OF EXECUTIVE OFFICERS\nThe Summary Compensation Table below sets forth the compensation paid during the years indicated to each of the Chief Executive Officer and the four remaining most highly compensated executive officers of the Company (including its subsidiaries).\nSUMMARY COMPENSATION TABLE\n- -------- * Under the SEC's transition rules, no disclosure is required. (A) Mr. Schofield was elected Chief Executive Officer effective June 1, 1991. (B) Mr. Lagow's employment with USAir commenced on February 7, 1992. (C) Amounts disclosed reflect reductions in salary during (i) 1993 of $24,365, $14,942, $12,250, $10,904 and $10,904, and (ii) 1992 of $87,019, $49,272, $43,750, $38,942 and $38,942 for Messrs. Schofield, Lagow, Salizzoni, Lloyd and Schwab, respectively, which were implemented for all USAir officers for a fifteen-month period commencing on January 1, 1992 and ending on March 29, 1993 pursuant to a comprehensive cost reduction program at USAir. (D) Amounts disclosed include for (i) 1993, $271,288, $33,259, $73,215, and $27,621 and (ii) 1992, $171,410, $22,523, $47,974 and $16,784, received by Messrs. Schofield, Salizzoni, Lloyd and Schwab, respectively, to cover incremental tax liability resulting from income derived from the lapsing of restrictions on disposition of Restricted Stock. Any amounts disclosed in the column that are in excess of the amounts disclosed in the preceding sentence represent income derived from personal travel on USAir. (E) At December 31, 1993, Messrs. Schofield, Salizzoni, Lloyd and Schwab owned 30,000, 6,000, 4,000 and 3,200 shares of Restricted Stock, respectively. At the fair market value of the Common Stock on that date, these holdings of Restricted Stock were valued at $386,250, $77,250, $51,500, $41,200, respectively. (F) Under USAir's split dollar life insurance plan, described under \"Additional Benefits\" below, individual life insurance coverage is available to the named officers. During 1992, each officer paid the amount of the premium associated with the term life component of the coverage. In 1993, USAir commenced paying the premium associated with this coverage. In 1992 and 1993, USAir paid the remainder of the premium associated with the whole life component of the coverage. If all assumptions as to life expectancy and other factors occur in accordance with projections, USAir expects to recover the premiums it pays with respect to the whole life component of the coverage. The following amounts reflect the value of the benefits accrued during the years indicated, calculated on an actuarial basis, ascribed to the insurance policies purchased on the lives of the named officers (plus, with respect to 1993, the dollar value of premiums paid by USAir with respect to term life insurance): 1993--Mr. Schofield-- $29,328, Mr. Lagow--$9,716, Mr. Salizzoni--$26,010, Mr. Lloyd--$17,291 and Mr. Schwab--$11,170; 1992--Mr. Schofield--$38,495; Mr. Lagow--$12,902; Mr. Salizzoni--$34,382; Mr. Lloyd--$21,382 and Mr. Schwab--$15,555. During 1993, USAir made contributions of $34,974, $22,805, $26,212, $18,897 and $18,897 to the accounts of Messrs. Schofield, Lagow, Salizzoni, Lloyd and Schwab in certain defined contribution pension plans. (G) Upon the commencement of his employment, USAir agreed to pay Mr. Lagow $1 million over four years, which amount was intended to compensate him for restricted stock and stock options which he forfeited when he left his former employer. The amount disclosed includes the first installment, $250,000, of the total payment. (H) Amount disclosed also reflects $125,000 paid to Mr. Lagow in the form of a \"sign-on bonus\" and $4,715 for reimbursement of relocation expenses. (I) Amount disclosed also reflects $25,380 for reimbursement of relocation expenses.\nAggregated Option\/SAR Exercises in Last Fiscal Year and Fiscal Year-End Option\/SAR Values\nThe following table provides information on the number of options held by the named executive officers at fiscal year-end 1993. None of the officers exercised any options during 1993 and none of the unexercised options held by these officers were in-the-money based on the fair market value of the Common Stock on December 31, 1993 ($12.875).\nThe values reflected in the above chart represent the application of the Retirement Plan formula to the specified amounts of compensation and years of service. The credited years of service under the Retirement Plan for each of the individuals included in the Summary Compensation Table are as follows: Mr. Schofield-32 years, Mr. Lagow-2 years, Mr. Salizzoni-3 years, Mr. Lloyd-7 years and Mr. Schwab-6 years.\nUSAir has entered into agreements with Messrs. Lagow, Salizzoni, Lloyd and Schwab which provide for a supplement to their retirement benefits under the Retirement Plan. This supplement is designed to provide such persons with those benefits they would have received had they been employed by USAir for the minimum number of years to be entitled to full retirement benefits under the Retirement Plan.\nUSAir adopted, effective January 1, 1993, a defined contribu- tion retirement program for its eligible non-contract employees (the \"Retirement Savings Plan\") as a replacement for the Retirement Plan described above. Under the Retirement Savings Plan, eligible\nemployees may elect to contribute on a tax-deferred basis up to 13% of their pre-tax compensation, subject to a maximum annual contribution of $8,994 in 1993. USAir will also contribute to each employee's account in the Retirement Savings Plan (i) a matching contribution equal to 50% of each employee's contribution, subject to a maximum of 2% of the employee's annual pre-tax compensation, (ii) a basic contribution which ranges, depending on the employee's age, from 2% to 8% of the employee's annual pre-tax compensation and (iii) if USAir's pre-tax profit margin, as defined, exceeds certain thresholds, a profit sharing contribution up to a maximum of 7.5% of an employee's annual pre-tax compensation. USAir made no contributions under the profit sharing component of the Retirement Savings Plan in 1993. Pre-tax compensation is defined for purposes of the Retirement Savings Plan as all compensation which USAir must report as wages on an employee's Form W-2, plus an employee's tax deferred contributions under such Plan up to a maximum of $235,840 in 1993. USAir also established a non-qualified supplemental defined contribution plan (the \"Supplemental Savings Plan\") in 1993, which credits amounts to accounts of certain officers who participate in the Retirement Savings Plan but who are adversely affected by the maximum benefit limitations under qualified plans imposed by the Code. Amounts obligated to be paid by USAir under the Supplemental Savings Plan will be deposited in a trust established for the benefit of the participants. See the \"All Other Compensation\" column of the Summary Compensation Table for the amounts contributed or allocated in 1993 to Messrs. Schofield, Lagow, Salizzoni, Lloyd and Schwab under the Retirement Savings Plan and the Supplemental Savings Plan.\nUnder the Retirement Savings Plan and the Supplemental Savings Plan, participants may direct the investment of their contributions and USAir's contributions to their accounts among certain invest- ment funds. Participants' contributions are fully vested when made. USAir's contributions vest when the participant has been employed by USAir for at least two years.\nAdditional Benefits\nUSAir has in effect an Officers' Supplemental Benefit Plan, which provides certain benefits to a current or retired officer's spouse and children under age 19 following the officer's death. These benefits include: (i) dependent survivors' monthly income benefit and (ii) dependent survivors' health care insurance.\nA dependent survivors' monthly income benefit is payable to the eligible spouse or children of a deceased officer or retired officer in an amount equal to 20% of the monthly basic rate of salary payable to the officer the day prior to death or, in the case of a deceased retired officer, the day prior to retirement. Monthly income benefits will be reduced by the amount of any spouse protection benefit payable from Retirement Plan funds, and are subject to cessation upon the occurrence of certain specified\nevents. In no case are monthly income benefits payable for more than 19 years following the date of death.\nThe eligible surviving spouse or children of a deceased officer or retired officer are also entitled to receive dependent survivors' health care insurance, which provides the medical, major medical and dental insurance benefits generally available to dependents of salaried employees of USAir. Eligibility for this coverage ceases upon the occurrence of certain specified events.\nUSAir also maintains a split-dollar life insurance plan under which individual term life insurance is available to its officers in the amount of three times base salary. The plan also provides for accrual of a cash value component for each officer who holds a policy. Under the plan, during 1993, USAir paid the premiums on the term and whole life insurance components of the policy. The premium attributable to the term life insurance of the policy is treated as income to the participant. At death, prior to transfer of the policy to the participant, the beneficiary receives the amount of the coverage less any amount necessary to reimburse the employer for its investment, and the employee is entitled to any additional proceeds. Upon transfer of the policy to the partici- pant, the participant is entitled to the cash surrender value of the policy in excess of the amount payable to the employer for recovery of its investment. See the \"All Other Compensation\" column of the Summary Compensation Table for information concerning compensation with respect to Messrs. Schofield, Lagow, Salizzoni, Lloyd and Schwab that was attributable to the split dollar life insurance plan.\nArrangements Concerning Termination of Employment and Change of Control\nUSAir currently has employment contracts (the \"Employment Contracts\") with the executive officers (the \"Executives\") named in the Summary Compensation Table. The terms of the Employment Contracts extend until the earlier of the fourth anniversary thereof or the Executive's normal retirement date and are subject to automatic one-year annual extensions on each anniversary date (to the fourth anniversary of such anniversary date) unless advance written notice is given by USAir. In exchange for each Executive's commitment to devote his or her full business efforts to USAir, the agreements provide that each Executive will be re-elected to a responsible executive position with duties substantially similar to those in effect during the prior year and will receive (1) an annual base salary at a rate not less than that in effect during the previous year, (2) incentive compensation as provided in the contract and (3) insurance, disability, medical and other benefits generally granted to other officers. In the event of a change of control, as defined in each Employment Contract, the term of each Employment Contract is automatically extended until the earlier of\nthe fourth anniversary of the change of control date or the Executive's normal retirement date. As a result of amendments to the Employment Contracts entered into in June 1992, the acquisition of 20% or more of the outstanding securities of the Company under circumstances in which the acquiror would obtain the power to elect 20% or more of the members of the Board of Directors was added to the definition of a change of control under the Employment Contracts. To the extent permitted by Foreign Ownership Restric- tions and assuming the consummation of the Second Purchase (the \"Second Closing\") results in BA's electing at least 20% of the Board of Directors, the Second Closing would be treated as a change of control and would result in extension of the term of each Employment Contract until the earlier of the fourth anniversary of the Second Closing or the Executive's normal retirement date. On March 7, 1994, BA announced that it would not make any additional investments in the Company under current circumstances. See Item 1. \"Business-British Airways Announcement Regarding Additional Investments in the Company; Code Sharing.\"\nThe Employment Contracts provide that, should USAir or any successor fail to re-elect the Executive to his or her position, assign the Executive to inappropriate duties which result in a diminution in the Executive's position, authority or responsibili- ties, fail to compensate the Executive as provided in the Employ- ment Contract, transfer the Executive in violation of the Employ- ment Contract, fail to require any successor to USAir to comply with the Employment Contract or otherwise terminate the Executive's employment in violation of the Employment Contract, the Executive may elect to treat such failure as a breach of the Employment Contract if the Executive then terminates employment. As liquidat- ed damages as the result of an event not following a change of control that is deemed to be a breach of the Employment Contracts, USAir or its successor would be required to pay the Executive an amount equal to his or her annual base salary for the then remaining term of the Employment Contract, and to continue granting certain employee benefits for the then remaining term of the Executive's Employment Contract. If the breach follows a change of control, the Executive would be entitled to receive (i) an amount equal to the product of three times the sum of the Executive's annual base salary plus an annual bonus, (ii) a lump sum equal to the actuarial equivalent of the pension benefits which the Executive would have received had he or she remained employed by USAir until the end of the term of the Employment Contract, (iii) medical benefits until such time as the Executive qualifies for group medical benefits from another employer, (iv) travel benefits for the Executive's life, (v) reimbursement of reductions in salary sustained by the Executive as a result of a comprehensive cost reduction program initiated by USAir in October 1991, and (vi) continuation of certain other benefits during the remainder of the term of the Employment Contract. In addition, except under the circumstances described in the immediately following paragraph, during the 30-day period immediately following the first anniversa\nry of a change of control any Executive could elect to terminate his or her Employment Contract for any reason and receive the liquidated damages described in the immediately preceding sentence. Each Employment Contract provides that if USAir breaches the Employment Contract, as described above, each Executive shall be entitled to recover from USAir reasonable attorney's fees in connection with enforcement of such Executive's rights under the Employment Contract. Each Employment Contract also provides that any payments the Executive receives in the event of a termination shall be increased, if necessary, such that, after taking into account all taxes he or she would incur as a result of such payments, the Executive would receive the same after-tax amount he or she would have received had no excise tax been imposed under Section 4999 of the Code.\nIn order to facilitate consummation of the acts and transac- tions contemplated by the Investment Agreement, the Executives agreed in January 1993 to an amendment to their Employment Contracts that will become effective upon the Second Closing (i) to eliminate their right to elect to terminate their Employment Contracts without any reason during the 30-day period immediately following the first anniversary of the Second Closing; (ii) that USAir may transfer the Executive's employment to any location that meets certain criteria in the Employment Contracts without such relocation constituting a breach of the Employment Contracts; (iii) that consummation of the Second Closing would be treated as the only change of control with respect to BA; and (iv) that following the Second Closing, USAir may make certain changes in benefit plans affecting the Executives that are not material, as that term is defined in the Employment Contracts, provided that the changes apply to all eligible officers of USAir and are approved by a majority of the directors of the Company not elected by BA.\nCurrently, under the Company's 1984 Stock Option and Stock Appreciation Rights Plan (the \"1984 Plan\") and 1988 Stock Incentive Plan (the \"1988 Plan,\" and together with the 1984 Plan, the \"Plans\"), pursuant to which employees of the Company and its subsidiaries have been awarded stock options and stock appreciation rights with respect to Common Stock and, in the case of the 1988 Plan, shares of Restricted Stock, occurrence of a change of control, as defined, would make all granted options immediately exercisable without regard to the vesting provisions thereof. In addition, grantees would be able, during the 60-day period immediately following a change of control (the \"Cash-out Right\"), to surrender all unexercised stock options not issued in tandem with stock appreciation rights under the Plans to the Company for a cash payment equal to the excess, if any, of the fair market value of the Common Stock over the exercise prices of such stock options or the positive value of any stock appreciation rights. As described above, in June 1992, the Company amended the definition of a change of control in the Plans with the result that, to the extent permitted by Foreign Ownership Restrictions and assuming the\nSecond Closing results in BA's electing at least 20% of the Board of Directors, the Second Closing would be treated as a change of control thereunder. As of March 1, 1994, there were unexercised stock options to purchase 548,310 shares of Common Stock (of which 84,600 had tandem stock appreciation rights) under the 1984 Plan and unexercised stock options to purchase 3,625,500 shares of Common Stock (none of which had tandem stock appreciation rights) under the 1988 Plan. (As of March 1, 1994, 3,177,400 of the 3,625,500 options outstanding under the 1988 Plan and 322,910 of the 548,310 options outstanding under the 1984 Plan were exercis- able pursuant to their normal vesting schedule.) The weighted average exercise price of all the outstanding stock options was approximately $23.15. On February 28, 1994, the closing price of a share of Common Stock on the NYSE was $11.375. See the \"Aggre- gated Option\/SAR Exercises in Last Fiscal Year and Fiscal Year-End Option\/SAR Values\" table for information regarding stock options held by the Executives.\nCurrently, 50,400 shares of Restricted Stock previously granted to the Executives may (i) become free of transfer restric- tions upon their normal vesting schedule or (ii) be subject to accelerated vesting upon a termination of employment which triggers the payment of liquidated damages under the Employment Contracts, as discussed above, regardless of whether the termination occurred following a change of control as defined in the Employment Contracts. See \"Beneficial Security Ownership\" for information regarding Restricted Stock owned by the Executives.\nWith respect to Mr. Lagow, in order to induce him to accept its offer of employment in 1992, USAir agreed, among other things, to pay Mr. Lagow $1 million in four equal installments, each installment being due and payable on the first four anniversaries of the commencement of his employment by USAir, provided Mr. Lagow remains employed by USAir. This payment was intended to compensate Mr. Lagow for stock options and restricted stock which he forfeited when he left his former employer. In the event of a change of control under his Employment Contract or wrongful termination thereunder, USAir has also agreed to pay Mr. Lagow in a lump sum any unpaid balance of this obligation.\nNotwithstanding anything to the contrary set forth in any of the Company's or USAir's filings under the Securities Act of 1933, as amended (the \"Securities Act\"), or the Securities Exchange Act of 1934, as amended (the \"Exchange Act\"), that incorporates by reference this Proxy Statement, in whole or in part, the following Report and Performance Graph shall not be incorporated by reference into any such filings.\nReport of the Compensation and Benefits Committee of the Board of Directors\nThe Compensation Committee policies with respect to compensa- tion of the Company's executive officers are to:\n1. Attract and retain talented and experienced senior management by offering compensation that is competitive with respect to other major U.S. airlines and other U.S. companies of comparable size.\n2. Motivate senior management to provide a high-quality product to consumers with the ultimate goal of maximizing profit- ability and stockholder returns by offering incentive and long-term compensation that is linked to return on sales and the market value of the Common Stock.\nThe Compensation Committee has played an active role in the oversight and review of all executive compensation paid to executive officers of the Company during the last fiscal year. Ordinarily, the Compensation Committee and the full Board of Directors, in consultation with the Senior Vice President-Human Resources of USAir and, if warranted, an independent compensation consultant, annually review the total compensation package (comprised of base salary, incentive compensation, and long-term incentive compensation) of the Chairman, President and Chief Executive Officer. The Compensation Committee reviews the market rate for peer-level positions of the other major domestic passenger carriers including, but not limited to, the three other airline companies included in the S&P Airline Index, which is reflected in the \"Performance Graph.\" Based primarily on this comparison, the Compensation Committee establishes the Chief Executive Officer's base salary. Mr. Schofield does not participate in Compensation Committee or Board of Directors deliberations or decision-making regarding any aspect of his compensation.\nCorrespondingly, the Compensation Committee established the compensation reported for 1993 for the Company's other executive officers, including the four officers named in the Summary Compensation Table, based upon a comparison of peer positions at the other major U.S. airlines including, but not limited to, the three other airline companies included in the S&P Airline Index, which is reflected in the \"Performance Graph.\"\nThe principal elements of the Company's compensation paid to the executive officers in the last completed fiscal year are discussed below.\nBase Salary. As part of a comprehensive program to reduce costs at USAir, the Compensation Committee reduced the salaries of the executive officers and the other officers of USAir for a fifteen month period commencing on January 1, 1992 and ending on\nMarch 29, 1993. The Compensation Committee reduced each ex- ecutive's base salary in accordance with the following graduated schedule:\n~ First $20,000 of salary reduced by 0%\n~ Next $30,000 of salary reduced by 10% ($20,000 to $50,000)\n~ Next $50,000 of salary reduced by 15% ($50,000 to $100,000)\n~ Any amount of salary in excess of $100,000 reduced by 20%.\nEach of the executive officers agreed to the reductions in salary, which otherwise would have constituted grounds for the executives to have terminated their employment agreements with USAir. The amounts of salary not paid in 1992 and 1993 to Mr. Schofield and the other four executive officers named in the Summary Compensation Table are disclosed in footnote (C) to that table.\nAs stated above, the Compensation Committee establishes the base salaries of the Company's executive officers primarily by reference to the salaries of officers holding comparable positions at other major U.S. airlines including, but not limited to, the three other airline companies included in the S&P Airline Index, which is reflected in the \"Performance Graph.\" Historically, the Compensation Committee had awarded merit increases based on measuring individual performance against objectives. However, due to the Company's poor financial performance, the Compensation Committee last awarded merit increases in executive base salaries in 1989. Since 1989 the Compensation Committee had increased the salaries of executive officers solely as a result of a promotion or an increase in responsibilities. The Company commissioned an independent compensation consultant to conduct a comprehensive study of the salaries of comparable airline officers in 1992. The study disclosed that the salaries (prior to the fifteen-month reduction described above) of most officers were substantially below those of salaries for analogous positions at major competi- tors. Following the study, in July 1992, the Compensation Committee prospectively set the salaries of executive officers generally at the median of the comparative range adjusted by individual performance and experience, effective April 1993.\nIn connection with the same review, the Compensation Committee proposed to increase Mr. Schofield's base salary (before adjustment for the fifteen-month salary reductions) from $500,000 to $590,000, effective April 1993. Because the Company has continued to sustain losses, Mr. Schofield declined to accept the increase in base salary.\nAnnual Cash Incentive Compensation Program: The Compensation Committee adopted the Executive Incentive Compensation Plan effective on January 1, 1988. The plan is administered by the Compensation Committee. All officers, including executive officers, of the Company are eligible to participate in this plan.\nThe Compensation Committee is authorized to grant awards under this plan only if the Company achieves for a fiscal year a two percent or greater return on sales (\"ROS\"). The target level of performance is four percent ROS. If the Company achieves the target performance of four percent ROS, the full target percentage (which varies depending on position) is applied against the individual's base salary for the year to determine the target bonus award (the \"Target Award\") for the individual.\nTarget Awards for executive officers range between 30% and 50% of base salary. If the minimum level of performance of two percent ROS is achieved, 50% of the Target Award would be available for distribution. If the maximum level of performance of six percent ROS is achieved, 200% of the Target Award would be available for payment. The Compensation Committee may adjust awards made to executive officers based on individual performance; however, no award may exceed 250% of the Target Award for any individual. The Compensation Committee last approved payments to executive officers under this plan for the fiscal year ended December 31, 1988. The Company has not achieved the minimum two percent ROS in any fiscal year, and the Compensation Committee has not made any awards under the plan, since then.\nLong-Term Incentive Programs\nStock Options: The executive officers of the Company partici- pate in the Company's 1984 Stock Option and Stock Appreciation Rights Plan (the \"1984 Plan\") and 1988 Stock Incentive Plan (the \"1988 Plan\", and together with the 1984 Plan, the \"Plans\") which are both administered by the Compensation Committee.\nThe Compensation Committee is authorized to grant options under these Plans only at an exercise price equal to the fair market value of a share of Common Stock on the date of grant. During 1993, the Compensation Committee did not grant any options from either of the Plans to the executive officers.\nThe Compensation Committee determines the size of any option grant under the Plans based upon (i) the Compensation Committee's perceived value of the grant to motivate and retain the individual executive, (ii) a comparison of long-term incentive practices within the commercial airline industry, (iii) a comparison of awards provided to peer executives within the Company and (iv) the number of outstanding options held by the grantee and the exercise prices of these options. Although the Compensation Committee\nsupports and encourages stock ownership in the Company by executive officers, it has not promulgated any standards regarding levels of ownership by executive officers.\nPursuant to the reductions in the executive officers' salaries discussed above, in 1992 the Compensation Committee granted these persons non-qualified stock options to purchase 50 shares of Common Stock at $15 per share for each $1,000 of salary foregone during the wage reduction program, as is the case for each USAir employee whose pay was reduced pursuant to the program.\nRestricted Stock\nThe Compensation Committee did not award any Restricted Stock under the 1988 Plan during 1993. (Grants of Restricted Stock are not authorized under the 1984 Plan). From 1988-1990, the Compensation Committee granted Restricted Stock to a total of nine executive officers, some of whom are no longer employed by USAir.\nDuring 1993, restrictions on disposition expired on a total of 23,200 shares of Restricted Stock held by Mr. Schofield, which shares were originally granted between 1988 and 1990. Restrictions on disposition also lapsed during 1993 on a total of 10,900 shares of Restricted Stock held by Messrs. Salizzoni, Lloyd and Schwab, which shares were originally granted between 1988 and 1990.\nThe Omnibus Budget Reconciliation Act of 1993 added Section 162(m) to the Internal Revenue Code. Section 162(m) provides that companies will not be entitled to a tax deduction for certain compensation paid to any executive officer to the extent that the compensation exceeds $1 million in a taxable year. The Compensa- tion Committee is studying Section 162(m) and the proposed rules thereunder and is in the process of determining whether to recommend that the Company take the necessary measures to conform its compensation to Section 162(m).\nThe Compensation Committee will continue to review all compensation and benefit matters presented to it and will act based upon the best information available in the best interests of the Company, its stockholders and employees.\nMathias J. DeVito, Chairman George J. W. Goodman John W. Harris Roger P. Maynard John G. Medlin, Jr. Raymond W. Smith\nPERFORMANCE GRAPH\nThis graph compares the performance of the Company's Common Stock during the period January 1, 1989 to December 31, 1993 with the S&P 500 Index and the S&P Airline Index. The graph depicts the results of investing $100 in the Company's Common Stock, the S&P 500 Index and the S&P Airline Index at closing prices on Decem- ber 31, 1988. The stock price performance shown on the graph is not necessarily indicative of future performance. The S&P Airline Index consists of AMR Corporation, Delta Air Lines, Inc., UAL Corporation and the Company.\nItem 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT\nThe following information pertains to Common Stock, Series A Preferred Stock, Series F Preferred Stock, Series T Preferred Stock and Depositary Shares (\"Depositary Shares\"), each representing 1\/100 of a share of the Company's $437.50 Series B Cumulative Convertible Preferred Stock, without par value (\"Series B Preferred Stock\"), beneficially owned by all directors and executive officers of the Company as of March 1, 1994. Unless indicated otherwise, the information refers to ownership of Common Stock. Unless indicated otherwise by footnote, the owner exercises sole voting and investment power over the securities (other than unissued securities, the ownership of which has been imputed to such owner).\nSeries F Preferred Stock and Series T Preferred Stock, Common Stock receivable upon conversion. In addition, such Rights are issuable on a one-for-one basis with respect to shares of Common Stock receivable upon exercise of stock options or conversion of Depositary Shares. (2) Percentages are shown only where they exceed one percent of the number of shares outstanding and, in the case of Common Stock holdings are based on shares of Common Stock outstanding (exclusive of treasury stock) on March 1, 1994. (3) Various affiliates of Berkshire Hathaway Inc. (\"Berkshire\") are recordholders of 358,000 or 100% of the outstanding shares of Series A Preferred Stock. Messrs. Buffett and Munger are Chairman and Chief Executive Officer and Vice Chairman, respectively, of Berkshire and may be deemed to control that company. Messrs. Buffett and Munger each disclaims beneficial ownership of Series A Preferred Stock. Series A Preferred Stock is currently convertible into 9,239,944 shares of Common Stock, which represents approximately 10.5% of the total voting interest represented by Common Stock, Series F Pre- ferred Stock, Series T Preferred Stock and Series A Preferred Stock at March 1, 1994. (4) The listing of Mr. Colodny's holding includes 67,000 shares of Common Stock issuable within 60 days of March 1, 1994 upon exercise of stock options. (5) Mr. Goodman's holdings of Depositary Shares is convertible into 498 shares of Common Stock. (6) A wholly-owned subsidiary of BA is recordholder of 30,000 or 100% of the outstanding shares of Series F Preferred Stock, 152.1 or 100% of the outstanding shares of the Series T-1 Preferred Stock and 9,919.8 or 100% of the outstanding shares of the Series T-2 Preferred Stock pursuant to the Investment Agreement. Messrs. Marshall, Maynard and Stevens are Chair- man, Director of Corporate Strategy and Chief Financial Offic- er, respectively, of BA and have been designated by BA to act as directors of the Company pursuant to the Investment Agreement. Messrs. Marshall, Maynard and Stevens each dis- claims beneficial ownership of Series F Preferred Stock and Series T Preferred Stock. (7) The listing of Mr. Schofield's holding includes 335,069 shares of Common Stock issuable within 60 days of March 1, 1994 upon exercise of stock options, and 30,000 shares of Common Stock subject to certain restrictions upon disposition (\"Restricted Stock\"). (8) The listing of Mr. Lagow's holding reflects shares of Common Stock issuable within 60 days of March 1, 1994 upon exercise of stock options. (9) The listing of Mr. Salizzoni's holding includes 152,800 shares of Common Stock issuable within 60 days of March 1, 1994 upon exercise of stock options and 6,000 shares of Restricted Stock. (10) The listing of Mr. Lloyd's holding includes 169,742 shares of Common Stock issuable within 60 days of March 1, 1994 upon\nexercise of stock options and 4,000 shares of Restricted Stock. (11) The listing of Mr. Schwab's holding includes 167,992 shares of Common Stock issuable within 60 days of March 1, 1994 upon exercise of stock options and 3,200 shares of Restricted Stock. (12) The listing of all directors' and officers' holdings includes 1,193,583 shares of Common Stock issuable within 60 days of March 1, 1994 upon exercise of stock options and 50,400 shares of Restricted Stock.\nThe only persons known to the Company (from Company records and reports on Schedules 13D and 13G filed with the Securities and Exchange Commission (the \"SEC\")) which owned, as of March 1, 1994, more than 5% of its Common Stock, Series A Preferred Stock, Series F Preferred Stock and Series T Preferred Stock are listed below:\n(1) Represents percent of class of stock outstanding (exclusive of\ntreasury stock) on March 1, 1994. (2) Number of shares as to which such person has shared voting power-358,000; shared dispositive power-358,000. (3) These shares of Series A Preferred Stock are owned directly by affiliates of Berkshire, are convertible, under certain circumstances and subject to certain antidilution adjustments, into 9,239,944 shares of Common Stock and represent approxi- mately 10.5% of the combined voting power of the outstanding Common Stock, Series A Preferred Stock, Series F Preferred Stock and Series T Preferred Stock, voting as a single class, at March 1, 1994. A number of Rights, equal to the number of shares of Common Stock into which the Series A Preferred Stock is convertible, is also owned by this person. As disclosed above, two directors of the Company, Messrs. Buffett and Munger, may be deemed to control Berkshire and disclaim beneficial ownership of Series A Preferred Stock. (4) Number of shares as to which BA has sole voting power and sole dispositive power-30,000. (5) BritAir Acquisition Corp. Inc. is a wholly-owned subsidiary of BA and owns Series F Preferred Stock and Series T Preferred Stock pursuant to the Investment Agreement. Series F Preferred Stock and Series T Preferred Stock are convertible, under certain circumstances on or after January 21, 1997 and subject to certain antidilution adjustments and Foreign Ownership Restrictions, into a total of 15,458,658 and 3,831,695 shares of Common Stock, respectively. Together, the Series F Pre- ferred Stock and Series T Preferred Stock represent approxi- mately 21.9% of the combined voting power of the outstanding Common Stock, Series A Preferred Stock, Series F Preferred Stock and Series T Preferred Stock, voting as a single class, at March 1, 1994. A number of Rights, equal to the number of shares of Common Stock into which the Series F Preferred Stock and Series T Preferred Stock are convertible, is owned by this person. As disclosed above, three directors of the Company, Messrs. Marshall, Maynard and Stevens, have been designated by BA to act as directors of the Company pursuant to the Invest- ment Agreement and disclaim beneficial ownership of Series F Preferred Stock and Series T Preferred Stock. (6) Reflects 152.1 or 100% of the outstanding shares of Series T-1 Preferred Stock and 9,919.8 or 100% of the outstanding shares of Series T-2 Preferred Stock. BA has sole voting power and sole dispositive power as to all these outstanding shares of Series T Preferred Stock. (7) The Schedule 13G dated January 6, 1994 disclosing such ownership was jointly filed by such person with five French mutual insurance companies (\"Mutuelles AXA\") and AXA. The Schedule 13G indicated that each of Mutuelles AXA, as a group, and AXA expressly declares that the filing of the Schedule 13G should not be construed as an admission that it is, for purposes of Section 13(d) of the Securities Exchange Act of 1934, as amended, the beneficial owner of any securities covered by the Schedule 13G. The Company is investigating\nwhether, owing to the investment of Mutuelles AXA and AXA (collectively, \"AXA\") in the Equitable Companies Incorporated (\"Equitable\"), AXA is the beneficial owner of these shares. If it is determined that AXA is the beneficial owner, then self-effectuating provisions of the Company's restated certificate of incorporation, as amended, would provide that the subject shares would be non-voting shares. The Company does not know whether Equitable would cause such shares to be sold in the event such shares have no voting rights. See \"Management's Discussion and Analysis of Financial Condition and Results of Operations-Industry Globalization and Regula- tion\" for information regarding U.S. statutory limitations on foreign ownership of U.S. air carriers and Item 1. \"Business- British Airways Investment Agreement\" and notes (4), (5) and (6) above for information regarding BA's ownership interest in the Company. (8) Number of shares as to which person has sole voting power- 5,669,403; shared voting power-1,300; no voting power-636,800; sole dispositive power-6,305,703; shared dispositive power- none; no dispositive power-1,800. (9) The shares are owned by a direct and an indirect subsidiary of the person. Number of shares as to which such subsidiaries have sole voting power-4,832,200; sole dispositive power- 4,832,200.\nIn connection with BA's purchase of the Series T Preferred Stock in June 1993, Messrs. Marshall, Maynard and Stevens and BA were required by Section 16 of the Securities Exchange Act of 1934, as amended, and rules thereunder to file by July 10, 1993, Form 4 reports disclosing this change of ownership. Messrs. Marshall, Maynard and Stevens and BA filed these reports on September 14, 1993.\nItem 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS\nNone\nPART IV\nItem 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K\n(a) The following documents are filed as part of this report: 1. FINANCIAL STATEMENTS\n(i) The following consolidated financial statements of USAir Group are included in Part II, Item 8A of this report:\n- Consolidated Statements of Operations for each of the Three Years Ended December 31, 1993 - Consolidated Balance Sheets at December 31, 1993 and - Consolidated Statements of Cash Flows for each of the Three Years Ended December 31, 1993 - Consolidated Statements of Changes in Stockholders' Equity for each of the Three Years Ended December 31, - Notes to Consolidated Financial Statements\n(ii) The following consolidated financial statements of USAir are included in Part II, Item 8B of this report:\n- Consolidated Statements of Operations for each of the Three Years Ended December 31, 1993 - Consolidated Balance Sheets at December 31, 1993 and - Consolidated Statements of Cash Flows for each of the Three Years Ended December 31, 1993 - Consolidated Statements of Changes in Stockholder's Equity for each of the Three Years Ended December 31, - Notes to Consolidated Financial Statements\n2. FINANCIAL STATEMENT SCHEDULES\n(i) Independent Auditors' Report on Consolidated Financial Statement Schedules of USAir Group.\n- Consolidated Financial Statement Schedules - Three Years Ended December 31, 1993:\nV - Property, Equipment and Leasehold Improvements VI - Accumulated Depreciation and Amortization of Prop- erty, Equipment and Leasehold Improvements VII - Guarantees of Securities of Other Issuers VIII - Valuation and Qualifying Accounts and Reserves X - Supplementary Income Statement Information\n(ii) Independent Auditors' Report on Consolidated Financial Statement Schedules of USAir.\n- Consolidated Financial Statement Schedules - Three Years Ended December 31, 1993:\nIV - Indebtedness to Related Parties - Not Current V - Property, Equipment and Leasehold Improvements VI - Accumulated Depreciation and Amortization of Prop- erty, Equipment and Leasehold Improvements VII - Guarantees of Securities of Other Issuers VIII - Valuation and Qualifying Accounts and Reserves X - Supplementary Income Statement Information\nAll other schedules are omitted because they are not appli- cable or not required, or because the required information is either incorporated herein by reference or included in the financial statements or notes thereto included in this report.\n(b) Reports on Form 8-K\nDuring the quarter ended December 31, 1993, the Company and USAir filed Current Reports dated September 23, October 20, and November 4, 1993, on Form 8-K regarding the Second Waiver dated September 15, 1993 to the Credit Agreement, results for the quarter ended September 30, 1993 and the sale of $337.7 million of pass through certificates, respectively. The Company and USAir filed a Current Report dated January 18, 1994 on Form 8-K regarding the Third Waiver dated as of December 21, 1993 to the Credit Agreement. In addition, the Company and USAir filed a Current Report dated January 25, 1994 on Form 8-K regarding the press release dated January 25, 1994 of USAir Group, Inc. and USAir, Inc., with consolidated statements of operations for each company. On March 9, 1994, the Company and USAir filed a Current Report on Form 8-K disclosing projected losses for the first quarter and year 1994 and the initiation of negotiations with the leadership of USAir's unions regarding pay reductions and productivity improvements.\n3. EXHIBITS\nDesignation Description\n3.1 Restated Certificate of Incorporation of USAir Group (incorporated by reference to Exhibit 3.1 to USAir Group's Registration Statement on Form 8-B dated January 27, 1983), including the Certificate of Amend- ment dated May 13, 1987 (incorporated by reference to Exhibit 3.1 to USAir Group's and USAir's Quarterly Report on Form 10-Q for the quarter ended March 31, 1987), the Certificate of Increase dated June 30, 1987 (incorporated by reference to Exhibit 3 to USAir Group's and USAir's Quarterly Report on Form 10-Q for\nthe quarter ended June 30, 1987), the Certificate of Increase dated October 16, 1987 (incorporated by reference to Exhibit 3.1 to USAir Group's and USAir's Quarterly Report on Form 10-Q for the quarter ended September 30, 1987), the Certificate of Increase dated August 7, 1989 (incorporated by reference to Exhibit 3.1 to USAir Group's Annual Report on Form 10-K for the year ended December 31, 1989), the Certificate of Increase dated April 9, 1992, the Certificate of Increase dated January 21, 1993, and as amended by Amendment No. 1 dated May 26, 1993 (incorporated by reference to Appendix II to USAir Group's Proxy State- ment dated April 26, 1993).\n3.2 By-Laws of USAir Group (incorporated by reference to Exhibit 3.2 to USAir Group's and USAir's Annual Report on Form 10-K for the year ended December 31, 1992).\n3.3 Rights Agreement, dated as of July 29, 1989, as amended and restated as of January 21, 1993, between USAir Group and Chemical Bank, as Rights Agent (incorporated by reference to Exhibit 28.4 to USAir Group's Current Report on Form 8-K dated January 21, 1993).\n3.4 Restated Certificate of Incorporation of USAir (in- corporated by reference to Exhibit 3.1 to USAir's Registration Statement on Form 8-B dated January 27, 1983).\n3.5 By-Laws of USAir (incorporated by reference to Exhibit 3.5 to USAir Group's and USAir's Annual Report on Form 10-K for the year ended December 31, 1992).\n4.1 Amended Certificate of Designation, Preferences, and Rights of the Series D of Junior Preferred Stock of USAir Group (incorporated by reference to Exhibit 4(c) to USAir Group's Current Report on Form 8-K dated August 11, 1989).\n4.2 Certificate of Designation of Series A Cumulative Convertible Preferred Stock of USAir Group (incorpo- rated by reference to Exhibit 4(b) to USAir Group's Current Report on Form 8-K dated August 11, 1989).\n4.3 Certificate of Designation of Series B Cumulative Convertible Preferred Stock of USAir Group (incorpo- rated by reference to Exhibit 3.3 to Amendment No. 4 to USAir Group's Registration Statement on Form S-3 (Registration No. 33-39540) dated May 17, 1991).\n4.4 Agreement between USAir Group and Berkshire Hathaway Inc. dated August 7, 1989 (incorporated by reference to Exhibit 4(a) to USAir Group's Current Report on Form 8- K dated August 11, 1989).\n4.5 Certificate of Designation of Series F Cumulative Convertible Senior Preferred Stock of USAir Group (incorporated by reference to Exhibit 28.2 to USAir Group's Current Report on Form 8-K dated January 21, 1993).\n4.6 Form of Certificate of Designation of Series T-_ Cumulative Exchangeable Convertible Senior Preferred Stock of USAir Group (incorporated by reference to Appendix VII to USAir Group's Proxy Statement dated April 26, 1993).\nNeither USAir Group nor USAir is filing any instrument (with the exception of holders of exhibits 10.1(a-h)) defining the rights of holders of long-term debt because the total amount of securities authorized under each such instrument does not exceed ten percent of the total assets of USAir. Copies of such instruments will be furnished to the Securities and Exchange Commission upon request.\n10.1(a) Credit Agreement dated as of March 30, 1987 and Amended and Restated as of October 21, 1988 among the Banks named therein and USAir Group (incorporated by reference to Exhibit 28.2 to Amendment No. 1 dated October 28, 1988 to Piedmont's Registration Statement on Form S-3 No. 33-24870 dated October 7, 1988).\n10.1(b) First Amendment, dated as of July 28, 1989, to USAir Group's Amended and Restated Credit Agreement (incor- porated by reference to Exhibit 10.1(b) to USAir Group's Annual Report on Form 10-K for the year ended December 31, 1989).\n10.1(c) Second Amendment, dated as of February 15, 1990, to USAir Group's Amended and Restated Credit Agreement (incorporated by reference to Exhibit 10.1 to USAir Group's Current Report on Form 8-K dated October 26, 1990).\n10.1(d) Third Amendment, dated as of September 30, 1990, to USAir Group's Amended and Restated Credit Agreement (incorporated by reference to Exhibit 10.2 to USAir Group's Current Report on Form 8-K dated October 26, 1990).\n10.1(e) Fourth Amendment, dated as of March 29, 1991, to USAir Group's Amended and Restated Credit Agreement (incor- porated by reference to the Exhibit to USAir Group's Current Report on Form 8-K dated April 23, 1991).\n10.1(f) Fifth Amendment, dated as of April 26, 1991, to USAir Group's Amended and Restated Credit Agreement (incor- porated by reference to Exhibit 28.7 to USAir Group's Registration Statement on Form S-8 No. 33-39540 dated April 26, 1991).\n10.1(g) Sixth Amendment, dated as of October 14, 1992, to USAir Group's Amended and Restated Credit Agreement (incor- porated by reference to Exhibit 28.3 to USAir Group's and USAir's Quarterly Report on Form 10-Q for the quarter ended September 30, 1992).\n10.1(h) Seventh Amendment, dated as of June 21, 1993, to USAir Group's Amended and Restated Credit Agreement (incor- porated by reference to Exhibit 28 to USAir Group's Current Report on Form 8-K filed on July 1, 1993).\n10.2(a) Supplemental Agreement No. 16, dated July 19, 1990, to Purchase Agreement No. 1102 between USAir and The Boeing Company (incorporated by reference to Exhibit 10.2(a) to USAir Group's Annual Report on Form 10-K for the year ended December 31, 1990).\n10.2(b) Supplemental Agreement No. 17, dated November 28, 1990, to Purchase Agreement No. 1102 between USAir and The Boeing Company (incorporated by reference to Exhibit 10.2(b) to USAir Group's Annual Report on Form 10-K for the year ended December 31, 1990).\n10.2(c) Supplemental Agreement No. 18, dated December 23, 1991, to Purchase Agreement No. 1102 between USAir and The Boeing Company (incorporated by reference to Exhibit 10.2(c) to USAir Group's Annual Report on Form 10-K for the year ended December 31, 1991).\n10.3 Purchase Agreement No. 1725 dated December 23, 1991 between USAir and The Boeing Company (incorporated by reference to Exhibit 10.3 to USAir Group's and USAir's Annual Report on Form 10-K for the year ended Decem- ber 31, 1991).\n10.4 USAir, Inc. Executive Incentive Compensation Plan (incorporated by reference to Exhibit 10.3 to USAir Group's Annual Report on Form 10-K for the year ended December 31, 1989).\n10.5 USAir, Inc. Officers' Supplemental Benefit Plan (incorporated by reference to Exhibit 10.5 to USAir's Annual Report on Form 10-K for the year ended December 31, 1980).\n10.6 USAir, Inc. Supplementary Retirement Benefit Plan (incorporated by reference to Exhibit 10.5 to USAir Group's Annual Report on Form 10-K for the year ended December 31, 1989).\n10.7 USAir Group's 1984 Stock Option and Stock Appreciation Rights Plan (incorporated by reference to Exhibit A to USAir Group's Proxy Statement dated March 30, 1984).\n10.8 USAir Group's 1988 Stock Incentive Plan (incorporated by reference to Exhibit 10.15 to USAir Group's Annual Report on Form 10-K for the year ended December 31, 1987).\n10.9 USAir Group's 1992 Stock Option Plan (incorporated by reference to Exhibit A to USAir Group's Proxy Statement dated March 30, 1992).\n10.10 Employment Agreement between USAir and its President and Chief Executive Officer (which is similar in form to the employment agreements of USAir Group's other executive officers) (incorporated by reference to Exhibit 10.9 to USAir Group's and USAir's Annual Report on Form 10-K for the year ended December 31, 1991).\n10.11 Agreements providing supplemental retirement benefits for the following officers of USAir: Executive Vice President and General Counsel (incorporated by reference to Exhibit 10.14 to USAir Group's Annual Report on Form 10-K for the year ended December 31, 1987), Executive Vice President-Operations, Senior Vice President-Corporate Communications and Senior Vice President-Human Resources (incorporated by reference to Exhibit 10.9 to USAir Group's Annual Report on Form 10- K for the year ended December 31, 1989).\n10.12(a) Trust Agreement dated as of August 1, 1989 between USAir Group and Wachovia Bank and Trust Company, N.A., as Trustee (incorporated by reference to Exhibit 10.10(a) to USAir Group's Annual Report on Form 10-K for the year ended December 31, 1989).\n10.12(b) Trust Agreement dated as of August 1, 1989 between USAir and Wachovia Bank and Trust Company, N.A., as Trustee (incorporated by reference to Exhibit 10.10(b) to USAir Group's Annual Report on Form 10-K for the year ended December 31, 1989).\n10.13 Investment Agreement dated as of January 21, 1993 between USAir Group and British Airways Plc (incorporated by reference to Exhibit 28.1 to USAir Group's and USAir's Current Report on Form 8-K filed on January 28, 1993, as amended by Amendment No. 1 on Form 8 filed on April 13, 1993).\n10.13(a) Amendment dated as of February 21, 1994 to the Investment Agreement dated as of January 21, 1993 between USAir Group and British Airways Plc.\n11 Computation of primary and fully diluted earnings per share of USAir Group for the five years ended December 31, 1993.\n21 Subsidiaries of USAir Group and USAir.\n23.1 Consent of the Auditors of USAir Group to the incorporation of their report concerning certain financial statements contained in this report in certain registration statements.\n23.2 Consent of the Auditors of USAir to the incorporation of their report concerning certain financial statements contained in this report in certain registration statements.\n24.1 Powers of Attorney signed by the directors of USAir Group, authorizing their signatures on this report.\n24.2 Powers of Attorney signed by the directors of USAir, authorizing their signatures on this report.\nSIGNATURES\nPursuant to the requirements of Section 13 of 15(d) of the Securities Exchange Act of 1934, USAir Group, Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.\nUSAir Group, Inc.\nBy: \/s\/Seth E. Schofield --------------------------------- Seth E. Schofield Chairman, President and Chief Executive Officer (Principal Executive Officer)\nDate: March 25, 1994\nPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of USAir Group, Inc. and in the capacities and on the dates indicated.\nMarch 25, 1994 By: \/s\/Seth E. Schofield --------------------------------- Seth E. Schofield Chairman, President and Chief Executive Officer (Principal Executive Officer)\nMarch 25, 1994 By: \/s\/Frank L. Salizzoni --------------------------------- Frank L. Salizzoni Executive Vice President-Finance (Principal Financial Officer)\nMarch 25, 1994 By: \/s\/Ann Greer-Rector --------------------------------- Ann Greer-Rector Vice President & Controller (Principal Accounting Officer)\nMarch 25, 1994 By: * -------------------------------- Warren E. Buffett Director\nMarch 25, 1994 By: * --------------------------------- Edwin I. Colodny Director\nMarch 25, 1994 By: * -------------------------------- Mathias J. DeVito Director\nMarch 25, 1994 By: * -------------------------------- George J. W. Goodman Director\nMarch 25, 1994 By: * --------------------------------- John W. Harris Director\nMarch 25, 1994 By: * --------------------------------- Edward A. Horrigan, Jr. Director\nMarch 25, 1994 By: * --------------------------------- Robert LeBuhn Director\nMarch 25, 1994 By: * --------------------------------- Sir Colin Marshall Director\nMarch 25, 1994 By: * --------------------------------- Roger P. Maynard Director\nMarch 25, 1994 By: * --------------------------------- John G. Medlin, Jr. Director\nMarch 25, 1994 By: * --------------------------------- Hanne M. Merriman Director\nMarch 25, 1994 By: * -------------------------------- Charles T. Munger Director\nMarch 25, 1994 By: * --------------------------------- Richard P. Simmons Director\nMarch 25, 1994 By: * --------------------------------- Raymond W. Smith Director\nMarch 25, 1994 By: * -------------------------------- Derek M. Stevens Director\nBy: \/s\/Frank L. Salizzoni ------------------------------ Frank L. Salizzoni Attorney-In-Fact\nSIGNATURES\nPursuant to the requirements of Section 13 of 15(d) of the Securities Exchange Act of 1934, USAir, Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.\nUSAir, Inc.\nBy: \/s\/Seth E. Schofield --------------------------------- Seth E. Schofield Chairman, President and Chief Executive Officer (Principal Executive Officer)\nDate: March 25, 1994\nPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of USAir, Inc. and in the capacities and on the dates indicated.\nMarch 25, 1994 By: \/s\/Seth E. Schofield --------------------------------- Seth E. Schofield Chairman, President and Chief Executive Officer (Principal Executive Officer)\nMarch 25, 1994 By: \/s\/Frank L. Salizzoni --------------------------------- Frank L. Salizzoni Executive Vice President-Finance (Principal Financial Officer)\nMarch 25, 1994 By: \/s\/Ann Greer-Rector --------------------------------- Ann Greer-Rector Vice President & Controller (Principal Accounting Officer)\nMarch 25, 1994 By: * -------------------------------- Warren E. Buffett Director\nMarch 25, 1994 By: * --------------------------------- Edwin I. Colodny Director\nMarch 25, 1994 By: * -------------------------------- Mathias J. DeVito Director\nMarch 25, 1994 By: * -------------------------------- George J. W. Goodman Director\nMarch 25, 1994 By: * --------------------------------- John W. Harris Director\nMarch 25, 1994 By: * --------------------------------- Edward A. Horrigan, Jr. Director\nMarch 25, 1994 By: * --------------------------------- Robert LeBuhn Director\nMarch 25, 1994 By: * --------------------------------- Sir Colin Marshall Director\nMarch 25, 1994 By: * --------------------------------- Roger P. Maynard Director\nMarch 25, 1994 By: * --------------------------------- John G. Medlin, Jr. Director\nMarch 25, 1994 By: * --------------------------------- Hanne M. Merriman Director\nMarch 25, 1994 By: * -------------------------------- Charles T. Munger Director\nMarch 25, 1994 By: * --------------------------------- Richard P. Simmons Director\nMarch 25, 1994 By: * --------------------------------- Raymond W. Smith Director\nMarch 25, 1994 By: * -------------------------------- Derek M. Stevens Director\nBy: \/s\/Frank L. Salizzoni ------------------------------ Frank L. Salizzoni Attorney-In-Fact\nIndependent Auditors' Report On Consolidated Financial Statement Schedules - USAir Group, Inc.\nThe Stockholders and Board of Directors USAir Group, Inc.:\nUnder date of February 25, 1994, we reported on the consoli- dated balance sheets of USAir Group, Inc. and subsidiaries (\"Group\") as of December 31, 1993 and 1992, and the related consolidated statements of operations, cash flows, and changes in stockholders' equity (deficit) for each of the years in the three- year period ended December 31, 1993, as included in Item 8A in this annual report on Form 10-K for the year 1993. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related consolidated financial statement schedules as listed in Item 14(a)2(i). These consolidated financial statement schedules are the responsibility of Group's management. Our responsibility is to express an opinion on these consolidated financial statement schedules based on our audits.\nIn our opinion, such consolidated financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.\nKPMG PEAT MARWICK\nWashington, D. C. February 25, 1994\nIndependent Auditors' Report On Consolidated Financial Statement Schedules - USAir, Inc.\nThe Stockholder and Board of Directors USAir, Inc.:\nUnder date of February 25, 1994, we reported on the consolidated balance sheets of USAir, Inc. and subsidiaries (\"USAir\") as of December 31, 1993 and 1992, and the related consolidated statements of operations, cash flows, and changes in stockholder's equity for each of the years in the three-year period ended December 31, 1993, as included in Item 8B in this annual report on Form 10-K for the year 1993. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related consolidated financial statement schedules as listed in Item 14(a)2(ii). These consolidated financial statement schedules are the responsibility of USAir's management. Our responsibility is to express an opinion on these consolidated financial statement schedules based on our audits.\nIn our opinion, such consolidated financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.\nKPMG PEAT MARWICK\nWashington, D. C. February 25, 1994\nExhibit 21\nSUBSIDIARIES OF USAIR GROUP, INC. AND USAIR, INC.\nUSAir Group, Inc. - -----------------\nUSAir, Inc. Piedmont Airlines, Inc. (formerly Henson Airlines, Inc.) Jetstream International Airlines, Inc. Pennsylvania Commuter Airlines, Inc. (d\/b\/a\/ Allegheny Commuter Airlines) USAir Leasing and Services, Inc. USAir Fuel Corporation Material Services Corp.\nUSAir, Inc. (the following companies are also indirect subsidiaries - ------------------------------------------------------------------- of USAir Group, Inc.) - ---------------------\nUSAM Corp. Pacific Southwest Airmotive (substantially all of the assets of this company were sold on October 9, 1991)\nExhibit 23.1\nCONSENT OF INDEPENDENT AUDITORS\nThe Board of Directors USAir Group, Inc.\nWe consent to the incorporation by reference in the Registration Statements on Form S-8 Nos. 2-98828, 33-26762, 33-39896, 33-44835, 33-60618 and 33-60620 and the Registration Statement on Form S-3 No. 33-41821 of USAir Group, Inc., of our reports dated February 25, 1994 relating to the consolidated balance sheets of USAir Group, Inc. and subsidiaries as of December 31, 1993 and 1992 and the related consolidated statements of operations, cash flows and changes in stockholders' equity, and the related consolidated financial statement schedules for each of the years in the three- year period ended December 31, 1993 which reports appear in the December 31, 1993 annual report on Form 10-K of USAir Group, Inc. and USAir, Inc.\nKPMG PEAT MARWICK\nWashington, D.C. March 25, 1994\nExhibit 23.2\nCONSENT OF INDEPENDENT AUDITORS\nThe Board of Directors USAir, Inc.\nWe consent to the incorporation by reference in the Registration Statement on Form S-3 No. 33-35509 of USAir, Inc., of our reports dated February 25, 1994 relating to the consolidated balance sheets of USAir, Inc. and subsidiaries as of December 31, 1993 and 1992 and the related consolidated statements of operations, cash flows and changes in stockholders' equity, and the related consolidated financial statement schedules for each of the years in the three- year period ended December 31, 1993 which reports appear in the December 31, 1993 annual report on Form 10-K of USAir Group, Inc. and USAir, Inc.\nKPMG PEAT MARWICK\nWashington, D.C. March 25, 1994\nExhibit 24.1\nPOWER OF ATTORNEY -----------------\nKNOW ALL MEN BY THESE PRESENTS, THAT I, Warren E. Buffett, Director of USAir Group, Inc., (the \"Company\"), do hereby constitute and appoint James T. Lloyd and Frank L. Salizzoni, and each of them (with full power to each of them to act alone), attorney and agent for me and in my name and on my behalf to sign any Annual Report on Form 10-K of the Company for the year ended December 31, 1993 and any amendments or supplements thereto which shall be filed with the Securities and Exchange Commission under the Securities and Exchange Act of 1934, as amended. I hereby give and grant to said attorneys and agents, and each of them, full power and authority generally to do and perform all acts and things necessary to be done in the premises as fully and effectually in all respects as I could do if personally present; and I hereby ratify and confirm all that said attorneys and agents, and each of them, shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand and seal this 14 day of January, 1994.\n\/s\/Warren E. Buffett (L.S.) ---------------------------------\nExhibit 24.1\nPOWER OF ATTORNEY -----------------\nKNOW ALL MEN BY THESE PRESENTS, THAT I, Edwin I. Colodny, Director of USAir Group, Inc., (the \"Company\"), do hereby constitute and appoint James T. Lloyd and Frank L. Salizzoni, and each of them (with full power to each of them to act alone), attorney and agent for me and in my name and on my behalf to sign any Annual Report on Form 10-K of the Company for the year ended December 31, 1993 and any amendments or supplements thereto which shall be filed with the Securities and Exchange Commission under the Securities and Exchange Act of 1934, as amended. I hereby give and grant to said attorneys and agents, and each of them, full power and authority generally to do and perform all acts and things necessary to be done in the premises as fully and effectually in all respects as I could do if personally present; and I hereby ratify and confirm all that said attorneys and agents, and each of them, shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand and seal this 25 day of January, 1994.\n\/s\/Edwin I. Colodny (L.S.) ----------------------------------\nExhibit 24.1\nPOWER OF ATTORNEY -----------------\nKNOW ALL MEN BY THESE PRESENTS, THAT I, Mathias J. DeVito, Director of USAir Group, Inc., (the \"Company\"), do hereby constitute and appoint James T. Lloyd and Frank L. Salizzoni, and each of them (with full power to each of them to act alone), attorney and agent for me and in my name and on my behalf to sign any Annual Report on Form 10-K of the Company for the year ended December 31, 1993 and any amendments or supplements thereto which shall be filed with the Securities and Exchange Commission under the Securities and Exchange Act of 1934, as amended. I hereby give and grant to said attorneys and agents, and each of them, full power and authority generally to do and perform all acts and things necessary to be done in the premises as fully and effectually in all respects as I could do if personally present; and I hereby ratify and confirm all that said attorneys and agents, and each of them, shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand and seal this 14 day of January, 1994.\n\/s\/Mathias J. DeVito (L.S.) ---------------------------------\nExhibit 24.1\nPOWER OF ATTORNEY -----------------\nKNOW ALL MEN BY THESE PRESENTS, THAT I, George J. W. Goodman, Director of USAir Group, Inc., (the \"Company\"), do hereby constitute and appoint James T. Lloyd and Frank L. Salizzoni, and each of them (with full power to each of them to act alone), attorney and agent for me and in my name and on my behalf to sign any Annual Report on Form 10-K of the Company for the year ended December 31, 1993 and any amendments or supplements thereto which shall be filed with the Securities and Exchange Commission under the Securities and Exchange Act of 1934, as amended. I hereby give and grant to said attorneys and agents, and each of them, full power and authority generally to do and perform all acts and things necessary to be done in the premises as fully and effectually in all respects as I could do if personally present; and I hereby ratify and confirm all that said attorneys and agents, and each of them, shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand and seal this 13 day of January, 1994.\n\/s\/George J. W. Goodman (L.S.) ----------------------------------\nExhibit 24.1\nPOWER OF ATTORNEY -----------------\nKNOW ALL MEN BY THESE PRESENTS, THAT I, John W. Harris, Director of USAir Group, Inc., (the \"Company\"), do hereby constitute and appoint James T. Lloyd and Frank L. Salizzoni, and each of them (with full power to each of them to act alone), attorney and agent for me and in my name and on my behalf to sign any Annual Report on Form 10-K of the Company for the year ended December 31, 1993 and any amendments or supplements thereto which shall be filed with the Securities and Exchange Commission under the Securities and Exchange Act of 1934, as amended. I hereby give and grant to said attorneys and agents, and each of them, full power and authority generally to do and perform all acts and things necessary to be done in the premises as fully and effectually in all respects as I could do if personally present; and I hereby ratify and confirm all that said attorneys and agents, and each of them, shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand and seal this 26 day of January, 1994.\n\/s\/J. W. Harris (L.S.) ----------------------------------\nExhibit 24.1\nPOWER OF ATTORNEY -----------------\nKNOW ALL MEN BY THESE PRESENTS, THAT I, Edward A. Horrigan, Jr., Director of USAir Group, Inc., (the \"Company\"), do hereby constitute and appoint James T. Lloyd and Frank L. Salizzoni, and each of them (with full power to each of them to act alone), attorney and agent for me and in my name and on my behalf to sign any Annual Report on Form 10-K of the Company for the year ended December 31, 1993 and any amendments or supplements thereto which shall be filed with the Securities and Exchange Commission under the Securities and Exchange Act of 1934, as amended. I hereby give and grant to said attorneys and agents, and each of them, full power and authority generally to do and perform all acts and things necessary to be done in the premises as fully and effectually in all respects as I could do if personally present; and I hereby ratify and confirm all that said attorneys and agents, and each of them, shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand and seal this 14 day of January, 1994.\n\/s\/Edward A. Horrigan, Jr. (L.S.) ----------------------------------\nExhibit 24.1\nPOWER OF ATTORNEY -----------------\nKNOW ALL MEN BY THESE PRESENTS, THAT I, Robert LeBuhn, Director of USAir Group, Inc., (the \"Company\"), do hereby constitute and appoint James T. Lloyd and Frank L. Salizzoni, and each of them (with full power to each of them to act alone), attorney and agent for me and in my name and on my behalf to sign any Annual Report on Form 10-K of the Company for the year ended December 31, 1993 and any amendments or supplements thereto which shall be filed with the Securities and Exchange Commission under the Securities and Exchange Act of 1934, as amended. I hereby give and grant to said attorneys and agents, and each of them, full power and authority generally to do and perform all acts and things necessary to be done in the premises as fully and effectually in all respects as I could do if personally present; and I hereby ratify and confirm all that said attorneys and agents, and each of them, shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand and seal this 14th day of January, 1994.\n\/s\/Robert LeBuhn (L.S.) ----------------------------------\nExhibit 24.1\nPOWER OF ATTORNEY -----------------\nKNOW ALL MEN BY THESE PRESENTS, THAT I, Colin Marshall, Director of USAir Group, Inc., (the \"Company\"), do hereby constitute and appoint James T. Lloyd and Frank L. Salizzoni, and each of them (with full power to each of them to act alone), attorney and agent for me and in my name and on my behalf to sign any Annual Report on Form 10-K of the Company for the year ended December 31, 1993 and any amendments or supplements thereto which shall be filed with the Securities and Exchange Commission under the Securities and Exchange Act of 1934, as amended. I hereby give and grant to said attorneys and agents, and each of them, full power and authority generally to do and perform all acts and things necessary to be done in the premises as fully and effectually in all respects as I could do if personally present; and I hereby ratify and confirm all that said attorneys and agents, and each of them, shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand and seal this 15 day of January, 1994.\n\/s\/C. Marshall (L.S.) ----------------------------------\nExhibit 24.1\nPOWER OF ATTORNEY -----------------\nKNOW ALL MEN BY THESE PRESENTS, THAT I, Roger P. Maynard, Director of USAir Group, Inc., (the \"Company\"), do hereby constitute and appoint James T. Lloyd and Frank L. Salizzoni, and each of them (with full power to each of them to act alone), attorney and agent for me and in my name and on my behalf to sign any Annual Report on Form 10-K of the Company for the year ended December 31, 1993 and any amendments or supplements thereto which shall be filed with the Securities and Exchange Commission under the Securities and Exchange Act of 1934, as amended. I hereby give and grant to said attorneys and agents, and each of them, full power and authority generally to do and perform all acts and things necessary to be done in the premises as fully and effectually in all respects as I could do if personally present; and I hereby ratify and confirm all that said attorneys and agents, and each of them, shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand and seal this 15 day of January, 1994.\n\/s\/R. Maynard (L.S.) ---------------------------------\nExhibit 24.1\nPOWER OF ATTORNEY -----------------\nKNOW ALL MEN BY THESE PRESENTS, THAT I, John G. Medlin, Jr., Director of USAir Group, Inc., (the \"Company\"), do hereby constitute and appoint James T. Lloyd and Frank L. Salizzoni, and each of them (with full power to each of them to act alone), attorney and agent for me and in my name and on my behalf to sign any Annual Report on Form 10-K of the Company for the year ended December 31, 1993 and any amendments or supplements thereto which shall be filed with the Securities and Exchange Commission under the Securities and Exchange Act of 1934, as amended. I hereby give and grant to said attorneys and agents, and each of them, full power and authority generally to do and perform all acts and things necessary to be done in the premises as fully and effectually in all respects as I could do if personally present; and I hereby ratify and confirm all that said attorneys and agents, and each of them, shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand and seal this 19th day of January, 1994.\n\/s\/John G. Medlin, Jr. (L.S.) ----------------------------------\nExhibit 24.1\nPOWER OF ATTORNEY -----------------\nKNOW ALL MEN BY THESE PRESENTS, THAT I, Hanne M. Merriman, Director of USAir Group, Inc., (the \"Company\"), do hereby constitute and appoint James T. Lloyd and Frank L. Salizzoni, and each of them (with full power to each of them to act alone), attorney and agent for me and in my name and on my behalf to sign any Annual Report on Form 10-K of the Company for the year ended December 31, 1993 and any amendments or supplements thereto which shall be filed with the Securities and Exchange Commission under the Securities and Exchange Act of 1934, as amended. I hereby give and grant to said attorneys and agents, and each of them, full power and authority generally to do and perform all acts and things necessary to be done in the premises as fully and effectually in all respects as I could do if personally present; and I hereby ratify and confirm all that said attorneys and agents, and each of them, shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand and seal this 14 day of January, 1994.\n\/s\/Hanne M. Merriman (L.S.) ----------------------------------\nExhibit 24.1\nPOWER OF ATTORNEY -----------------\nKNOW ALL MEN BY THESE PRESENTS, THAT I, Charles T. Munger, Director of USAir Group, Inc., (the \"Company\"), do hereby constitute and appoint James T. Lloyd and Frank L. Salizzoni, and each of them (with full power to each of them to act alone), attorney and agent for me and in my name and on my behalf to sign any Annual Report on Form 10-K of the Company for the year ended December 31, 1993 and any amendments or supplements thereto which shall be filed with the Securities and Exchange Commission under the Securities and Exchange Act of 1934, as amended. I hereby give and grant to said attorneys and agents, and each of them, full power and authority generally to do and perform all acts and things necessary to be done in the premises as fully and effectually in all respects as I could do if personally present; and I hereby ratify and confirm all that said attorneys and agents, and each of them, shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand and seal this 24th day of January, 1994.\n\/s\/Charles T. Munger (L.S.) ----------------------------------\nExhibit 24.1\nPOWER OF ATTORNEY -----------------\nKNOW ALL MEN BY THESE PRESENTS, THAT I, Richard P. Simmons, Director of USAir Group, Inc., (the \"Company\"), do hereby constitute and appoint James T. Lloyd and Frank L. Salizzoni, and each of them (with full power to each of them to act alone), attorney and agent for me and in my name and on my behalf to sign any Annual Report on Form 10-K of the Company for the year ended December 31, 1993 and any amendments or supplements thereto which shall be filed with the Securities and Exchange Commission under the Securities and Exchange Act of 1934, as amended. I hereby give and grant to said attorneys and agents, and each of them, full power and authority generally to do and perform all acts and things necessary to be done in the premises as fully and effectually in all respects as I could do if personally present; and I hereby ratify and confirm all that said attorneys and agents, and each of them, shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand and seal this 13th day of January, 1994.\n\/s\/Richard P. Simmons (L.S.) ----------------------------------\nExhibit 24.1\nPOWER OF ATTORNEY -----------------\nKNOW ALL MEN BY THESE PRESENTS, THAT I, Raymond W. Smith, Director of USAir Group, Inc., (the \"Company\"), do hereby constitute and appoint James T. Lloyd and Frank L. Salizzoni, and each of them (with full power to each of them to act alone), attorney and agent for me and in my name and on my behalf to sign any Annual Report on Form 10-K of the Company for the year ended December 31, 1993 and any amendments or supplements thereto which shall be filed with the Securities and Exchange Commission under the Securities and Exchange Act of 1934, as amended. I hereby give and grant to said attorneys and agents, and each of them, full power and authority generally to do and perform all acts and things necessary to be done in the premises as fully and effectually in all respects as I could do if personally present; and I hereby ratify and confirm all that said attorneys and agents, and each of them, shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand and seal this 14 day of January, 1994.\n\/s\/R. W. Smith (L.S.) ----------------------------------\nExhibit 24.1\nPOWER OF ATTORNEY -----------------\nKNOW ALL MEN BY THESE PRESENTS, THAT I, Derek M. Stevens, Director of USAir Group, Inc., (the \"Company\"), do hereby constitute and appoint James T. Lloyd and Frank L. Salizzoni, and each of them (with full power to each of them to act alone), attorney and agent for me and in my name and on my behalf to sign any Annual Report on Form 10-K of the Company for the year ended December 31, 1993 and any amendments or supplements thereto which shall be filed with the Securities and Exchange Commission under the Securities and Exchange Act of 1934, as amended. I hereby give and grant to said attorneys and agents, and each of them, full power and authority generally to do and perform all acts and things necessary to be done in the premises as fully and effectually in all respects as I could do if personally present; and I hereby ratify and confirm all that said attorneys and agents, and each of them, shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand and seal this 26 day of January, 1994.\n\/s\/Derek M. Stevens (L.S.) ---------------------------------\nExhibit 24.2\nPOWER OF ATTORNEY -----------------\nKNOW ALL MEN BY THESE PRESENTS, THAT I, Warren E. Buffett, Director of USAir, Inc., (the \"Company\"), do hereby constitute and appoint James T. Lloyd and Frank L. Salizzoni, and each of them (with full power to each of them to act alone), attorney and agent for me and in my name and on my behalf to sign any Annual Report on Form 10-K of the Company for the year ended December 31, 1993 and any amendments or supplements thereto which shall be filed with the Securities and Exchange Commission under the Securities and Exchange Act of 1934, as amended. I hereby give and grant to said attorneys and agents, and each of them, full power and authority generally to do and perform all acts and things necessary to be done in the premises as fully and effectually in all respects as I could do if personally present; and I hereby ratify and confirm all that said attorneys and agents, and each of them, shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand and seal this 14 day of January, 1994.\n\/s\/Warren E. Buffett (L.S.) ------------------------------\nExhibit 24.2\nPOWER OF ATTORNEY -----------------\nKNOW ALL MEN BY THESE PRESENTS, THAT I, Edwin I. Colodny, Director of USAir, Inc., (the \"Company\"), do hereby constitute and appoint James T. Lloyd and Frank L. Salizzoni, and each of them (with full power to each of them to act alone), attorney and agent for me and in my name and on my behalf to sign any Annual Report on Form 10-K of the Company for the year ended December 31, 1993 and any amendments or supplements thereto which shall be filed with the Securities and Exchange Commission under the Securities and Exchange Act of 1934, as amended. I hereby give and grant to said attorneys and agents, and each of them, full power and authority generally to do and perform all acts and things necessary to be done in the premises as fully and effectually in all respects as I could do if personally present; and I hereby ratify and confirm all that said attorneys and agents, and each of them, shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand and seal this 25 day of January, 1994.\n\/s\/Edwin I. Colodny (L.S.) ------------------------------\nExhibit 24.2\nPOWER OF ATTORNEY -----------------\nKNOW ALL MEN BY THESE PRESENTS, THAT I, Mathias J. DeVito, Director of USAir, Inc., (the \"Company\"), do hereby constitute and appoint James T. Lloyd and Frank L. Salizzoni, and each of them (with full power to each of them to act alone), attorney and agent for me and in my name and on my behalf to sign any Annual Report on Form 10-K of the Company for the year ended December 31, 1993 and any amendments or supplements thereto which shall be filed with the Securities and Exchange Commission under the Securities and Exchange Act of 1934, as amended. I hereby give and grant to said attorneys and agents, and each of them, full power and authority generally to do and perform all acts and things necessary to be done in the premises as fully and effectually in all respects as I could do if personally present; and I hereby ratify and confirm all that said attorneys and agents, and each of them, shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand and seal this 14 day of January, 1994.\n\/s\/Mathias J. DeVito (L.S.) ------------------------------\nExhibit 24.2\nPOWER OF ATTORNEY -----------------\nKNOW ALL MEN BY THESE PRESENTS, THAT I, George J. W. Goodman, Director of USAir, Inc., (the \"Company\"), do hereby constitute and appoint James T. Lloyd and Frank L. Salizzoni, and each of them (with full power to each of them to act alone), attorney and agent for me and in my name and on my behalf to sign any Annual Report on Form 10-K of the Company for the year ended December 31, 1993 and any amendments or supplements thereto which shall be filed with the Securities and Exchange Commission under the Securities and Exchange Act of 1934, as amended. I hereby give and grant to said attorneys and agents, and each of them, full power and authority generally to do and perform all acts and things necessary to be done in the premises as fully and effectually in all respects as I could do if personally present; and I hereby ratify and confirm all that said attorneys and agents, and each of them, shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand and seal this 13 day of January, 1994.\n\/s\/George J. W. Goodman (L.S.) ------------------------------\nExhibit 24.2\nPOWER OF ATTORNEY -----------------\nKNOW ALL MEN BY THESE PRESENTS, THAT I, John W. Harris, Director of USAir, Inc., (the \"Company\"), do hereby constitute and appoint James T. Lloyd and Frank L. Salizzoni, and each of them (with full power to each of them to act alone), attorney and agent for me and in my name and on my behalf to sign any Annual Report on Form 10-K of the Company for the year ended December 31, 1993 and any amendments or supplements thereto which shall be filed with the Securities and Exchange Commission under the Securities and Exchange Act of 1934, as amended. I hereby give and grant to said attorneys and agents, and each of them, full power and authority generally to do and perform all acts and things necessary to be done in the premises as fully and effectually in all respects as I could do if personally present; and I hereby ratify and confirm all that said attorneys and agents, and each of them, shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand and seal this 26 day of January, 1994.\n\/s\/J. W. Harris (L.S.) ------------------------------\nExhibit 24.2\nPOWER OF ATTORNEY -----------------\nKNOW ALL MEN BY THESE PRESENTS, THAT I, Edward A. Horrigan, Jr., Director of USAir, Inc., (the \"Company\"), do hereby constitute and appoint James T. Lloyd and Frank L. Salizzoni, and each of them (with full power to each of them to act alone), attorney and agent for me and in my name and on my behalf to sign any Annual Report on Form 10-K of the Company for the year ended December 31, 1993 and any amendments or supplements thereto which shall be filed with the Securities and Exchange Commission under the Securities and Exchange Act of 1934, as amended. I hereby give and grant to said attorneys and agents, and each of them, full power and authority generally to do and perform all acts and things necessary to be done in the premises as fully and effectually in all respects as I could do if personally present; and I hereby ratify and confirm all that said attorneys and agents, and each of them, shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand and seal this 14 day of January, 1994.\n\/s\/Edward A. Horrigan, Jr. (L.S.) ---------------------------------\nExhibit 24.2\nPOWER OF ATTORNEY -----------------\nKNOW ALL MEN BY THESE PRESENTS, THAT I, Robert LeBuhn, Director of USAir, Inc., (the \"Company\"), do hereby constitute and appoint James T. Lloyd and Frank L. Salizzoni, and each of them (with full power to each of them to act alone), attorney and agent for me and in my name and on my behalf to sign any Annual Report on Form 10-K of the Company for the year ended December 31, 1993 and any amendments or supplements thereto which shall be filed with the Securities and Exchange Commission under the Securities and Exchange Act of 1934, as amended. I hereby give and grant to said attorneys and agents, and each of them, full power and authority generally to do and perform all acts and things necessary to be done in the premises as fully and effectually in all respects as I could do if personally present; and I hereby ratify and confirm all that said attorneys and agents, and each of them, shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand and seal this 14th day of January, 1994.\n\/s\/Robert LeBuhn (L.S.) ------------------------------\nExhibit 24.2\nPOWER OF ATTORNEY -----------------\nKNOW ALL MEN BY THESE PRESENTS, THAT I, Colin Marshall, Director of USAir, Inc., (the \"Company\"), do hereby constitute and appoint James T. Lloyd and Frank L. Salizzoni, and each of them (with full power to each of them to act alone), attorney and agent for me and in my name and on my behalf to sign any Annual Report on Form 10-K of the Company for the year ended December 31, 1993 and any amendments or supplements thereto which shall be filed with the Securities and Exchange Commission under the Securities and Exchange Act of 1934, as amended. I hereby give and grant to said attorneys and agents, and each of them, full power and authority generally to do and perform all acts and things necessary to be done in the premises as fully and effectually in all respects as I could do if personally present; and I hereby ratify and confirm all that said attorneys and agents, and each of them, shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand and seal this 15 day of January, 1994.\n\/s\/C. Marshall (L.S.) ------------------------------\nExhibit 24.2\nPOWER OF ATTORNEY -----------------\nKNOW ALL MEN BY THESE PRESENTS, THAT I, Roger P. Maynard, Director of USAir, Inc., (the \"Company\"), do hereby constitute and appoint James T. Lloyd and Frank L. Salizzoni, and each of them (with full power to each of them to act alone), attorney and agent for me and in my name and on my behalf to sign any Annual Report on Form 10-K of the Company for the year ended December 31, 1993 and any amendments or supplements thereto which shall be filed with the Securities and Exchange Commission under the Securities and Exchange Act of 1934, as amended. I hereby give and grant to said attorneys and agents, and each of them, full power and authority generally to do and perform all acts and things necessary to be done in the premises as fully and effectually in all respects as I could do if personally present; and I hereby ratify and confirm all that said attorneys and agents, and each of them, shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand and seal this 15 day of January, 1994.\n\/s\/R. P. Maynard (L.S.) ------------------------------\nExhibit 24.2\nPOWER OF ATTORNEY -----------------\nKNOW ALL MEN BY THESE PRESENTS, THAT I, John G. Medlin, Jr., Director of USAir, Inc., (the \"Company\"), do hereby constitute and appoint James T. Lloyd and Frank L. Salizzoni, and each of them (with full power to each of them to act alone), attorney and agent for me and in my name and on my behalf to sign any Annual Report on Form 10-K of the Company for the year ended December 31, 1993 and any amendments or supplements thereto which shall be filed with the Securities and Exchange Commission under the Securities and Exchange Act of 1934, as amended. I hereby give and grant to said attorneys and agents, and each of them, full power and authority generally to do and perform all acts and things necessary to be done in the premises as fully and effectually in all respects as I could do if personally present; and I hereby ratify and confirm all that said attorneys and agents, and each of them, shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand and seal this 19th day of January, 1994.\n\/s\/John G. Medlin, Jr. (L.S.) ------------------------------\nExhibit 24.2\nPOWER OF ATTORNEY -----------------\nKNOW ALL MEN BY THESE PRESENTS, THAT I, Hanne M. Merriman, Director of USAir, Inc., (the \"Company\"), do hereby constitute and appoint James T. Lloyd and Frank L. Salizzoni, and each of them (with full power to each of them to act alone), attorney and agent for me and in my name and on my behalf to sign any Annual Report on Form 10-K of the Company for the year ended December 31, 1993 and any amendments or supplements thereto which shall be filed with the Securities and Exchange Commission under the Securities and Exchange Act of 1934, as amended. I hereby give and grant to said attorneys and agents, and each of them, full power and authority generally to do and perform all acts and things necessary to be done in the premises as fully and effectually in all respects as I could do if personally present; and I hereby ratify and confirm all that said attorneys and agents, and each of them, shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand and seal this 14 day of January, 1994.\n\/s\/Hanne M. Merriman (L.S.) ------------------------------\nExhibit 24.2\nPOWER OF ATTORNEY -----------------\nKNOW ALL MEN BY THESE PRESENTS, THAT I, Charles T. Munger, Director of USAir, Inc., (the \"Company\"), do hereby constitute and appoint James T. Lloyd and Frank L. Salizzoni, and each of them (with full power to each of them to act alone), attorney and agent for me and in my name and on my behalf to sign any Annual Report on Form 10-K of the Company for the year ended December 31, 1993 and any amendments or supplements thereto which shall be filed with the Securities and Exchange Commission under the Securities and Exchange Act of 1934, as amended. I hereby give and grant to said attorneys and agents, and each of them, full power and authority generally to do and perform all acts and things necessary to be done in the premises as fully and effectually in all respects as I could do if personally present; and I hereby ratify and confirm all that said attorneys and agents, and each of them, shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand and seal this 24th day of January, 1994.\n\/s\/Charles T. Munger (L.S.) ------------------------------\nExhibit 24.2\nPOWER OF ATTORNEY -----------------\nKNOW ALL MEN BY THESE PRESENTS, THAT I, Richard P. Simmons, Director of USAir, Inc., (the \"Company\"), do hereby constitute and appoint James T. Lloyd and Frank L. Salizzoni, and each of them (with full power to each of them to act alone), attorney and agent for me and in my name and on my behalf to sign any Annual Report on Form 10-K of the Company for the year ended December 31, 1993 and any amendments or supplements thereto which shall be filed with the Securities and Exchange Commission under the Securities and Exchange Act of 1934, as amended. I hereby give and grant to said attorneys and agents, and each of them, full power and authority generally to do and perform all acts and things necessary to be done in the premises as fully and effectually in all respects as I could do if personally present; and I hereby ratify and confirm all that said attorneys and agents, and each of them, shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand and seal this 13th day of January, 1994.\n\/s\/Richard P. Simmons (L.S.) ------------------------------\nExhibit 24.2\nPOWER OF ATTORNEY -----------------\nKNOW ALL MEN BY THESE PRESENTS, THAT I, Raymond W. Smith, Director of USAir, Inc., (the \"Company\"), do hereby constitute and appoint James T. Lloyd and Frank L. Salizzoni, and each of them (with full power to each of them to act alone), attorney and agent for me and in my name and on my behalf to sign any Annual Report on Form 10-K of the Company for the year ended December 31, 1993 and any amendments or supplements thereto which shall be filed with the Securities and Exchange Commission under the Securities and Exchange Act of 1934, as amended. I hereby give and grant to said attorneys and agents, and each of them, full power and authority generally to do and perform all acts and things necessary to be done in the premises as fully and effectually in all respects as I could do if personally present; and I hereby ratify and confirm all that said attorneys and agents, and each of them, shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand and seal this 14 day of January, 1994.\n\/s\/R. W. Smith (L.S.) ------------------------------\nExhibit 24.2\nPOWER OF ATTORNEY -----------------\nKNOW ALL MEN BY THESE PRESENTS, THAT I, Derek M. Stevens, Director of USAir, Inc., (the \"Company\"), do hereby constitute and appoint James T. Lloyd and Frank L. Salizzoni, and each of them (with full power to each of them to act alone), attorney and agent for me and in my name and on my behalf to sign any Annual Report on Form 10-K of the Company for the year ended December 31, 1993 and any amendments or supplements thereto which shall be filed with the Securities and Exchange Commission under the Securities and Exchange Act of 1934, as amended. I hereby give and grant to said attorneys and agents, and each of them, full power and authority generally to do and perform all acts and things necessary to be done in the premises as fully and effectually in all respects as I could do if personally present; and I hereby ratify and confirm all that said attorneys and agents, and each of them, shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand and seal this 26 day of January, 1994.\n\/s\/Derek M. Stevens (L.S.) ------------------------------","section_5":"","section_6":"","section_7":"Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDI- TION AND RESULTS OF OPERATIONS\nManagement's Discussion and Analysis of Financial Condition and Results of Operations presented below relates to the Consoli- dated Financial Statements of USAir Group, Inc. (\"USAir Group\" or the \"Company\") presented in Item 8A. Consolidated Financial Statements for USAir, Inc. (\"USAir\"), the Company's principal subsidiary, are presented in Item 8B. USAir's operating revenue accounted for more than 93% of the Company's operating revenue in each of the last three years. USAir Group also owns three commuter airline subsidiaries, which accounted for more than 5% of the Company's operating revenue in each of the last three years. Therefore, the following discussion and analysis of results of operations relates principally to the operations of USAir and to the airline industry.\nThe following general factors are among those that influence USAir's financial results and its future prospects:\n1. General economic conditions and industry capacity. 2. A decline in the proportion of passengers paying higher yield \"business fares\" to passengers paying lower yield fares. 3. The emergence and growth of low cost, low fare airlines and USAir's high cost structure. 4. The trend toward globalization in the airline industry and related regulatory limitations.\nThese and other factors are discussed in the following sections.\nGeneral Economic Conditions and Industry Capacity\nHistorically, demand for air transportation has tended to mirror general economic conditions. Economic conditions in the United States and fare competition in the domestic airline industry continued to be major factors affecting the financial condition of USAir and the airline industry in 1993. In recent years, the change in industry capacity has failed to mirror the reduction in demand for domestic air transportation due primarily to continued delivery of new aircraft and, secondarily, to the operation of certain major U.S. carriers under the protection of Chapter 11 of the Bankruptcy Code for extended periods. While industry capacity has leveled off and the general economy has shown signs of improvement, the Company expects that the airline industry will remain extremely competitive for the foreseeable future. See the discussion of low cost, low fare airlines below.\nDuring the recent economic recession, some observers of the travel industry speculated that the business traveler became less reliant on air transportation as teleconferencing, telecopying and other technological developments gained wider acceptance. In addition, some observers have speculated that corporate restructur- ing and furloughs in the U.S. have reduced the number of business travelers and that the leisure traveler has become conditioned to waiting for promotional fares before making travel plans. The Company is unable to determine whether these structural changes have occurred in the air transportation market or if these changes have occurred, how long-lived these trends will be. However, the Company believes that for the foreseeable future the demand for higher yield \"business fares\" will remain essentially flat and relatively inelastic while the lower yield \"leisure\" market will continue to grow with the general economy. This trend could make it more difficult for the domestic airlines, including USAir, to sustain meaningful yield increases in the future.\nFinancial circumstances have compelled certain bankrupt or financially weakened carriers to sell assets, including foreign routes, gates and take-off and landing slots at capacity con- strained airports. Proceeds from asset sales provide cash infusions to weaker carriers, but also augment the route systems and market presence of the stronger carriers. Although USAir has completed route and other asset purchases from a number of weaker carriers, the purchases illustrate a trend of consolidation of strategic assets and financial strength within the industry which appears to benefit the three largest U.S. carriers in the long- term. In the short-term, however, these carriers have suffered from the cost of integrating these assets into their systems and from the incremental capacity which has been exacerbated by declines in passenger travel and fare wars. As a result, these carriers have taken or announced actions including reduction in workforce and salary and other employee benefits, concessions from unionized employees, deferral of new aircraft deliveries, early retirement of inefficient aircraft types, and termination of unprofitable service. USAir implemented similar measures during 1990-1993, including a workforce reduction of 2,500 full-time positions between November 1993 and the first quarter of 1994, which, along with other measures, is expected to save the Company approximately $200 million in 1994. USAir will pursue additional measures in 1994 to reduce further its operating costs. See Item 1. \"Business - Significant Impact of Low Cost, Low Fare Competi- tion\" and \"-British Airways Announcement Regarding Additional Investment in the Company; Code Sharing.\"\nIn 1993, USAir reached an agreement with the Boeing Company (\"Boeing\") to, among other things, exercise options to purchase additional B757-200 aircraft on an accelerated basis and to cancel and reschedule the delivery of certain Boeing 737 aircraft on order into the future. This agreement reduced USAir's capital expendi\ntures by more than $880 million between 1993 and 1996. USAir is currently in negotiations with Boeing regarding, among other things, the current schedule of new aircraft deliveries.\nEach major airline has developed a frequent traveler program that offers its passengers incentives to maximize travel on that particular carrier. Participants in such programs typically earn \"mileage credits\" for every trip they fly that can be redeemed for airline travel or, in some cases, for other benefits. Under USAir's Frequent Traveler Program (\"FTP\"), participants receive mileage credits equal to the greater of actual miles flown or 750 miles for each paid flight on USAir or USAir Express, or actual miles flown on one of USAir's FTP airline partners. Participants flying on first or business class tickets receive additional credits. Participants may also earn mileage credits by staying at participating hotels or by renting cars from participating car rental companies within 24 hours of a flight.\nMileage credits can be redeemed for certificates for various travel awards, including fare discounts, first class upgrades and tickets on USAir or other airlines participating in USAir's FTP. Certain awards also include hotel and car rental awards. Award certificates may not be brokered, bartered or sold, and have no cash value. USAir and its airline partners limit the number of seats allocated per flight for award recipients. The number of seats varies depending upon flight, day, season and destination. Award travel is not permitted on blackout dates, which generally correspond to certain holiday periods in the United States or peak travel dates to foreign destinations. Hotel awards are valid at participating hotels and are subject to room availability, which is limited. Car rental awards are valid only at participating locations. The number of cars available for award usage is limited, and no cars are available for award usage on blackout dates. USAir reserves the right to terminate the FTP or portions of the program at any time, and the FTP's official rules, partners, special offers, blackout dates, awards and mileage levels are subject to change with or without prior notice.\nUSAir accounts for its FTP under the incremental cost method, whereby travel awards are valued at the incremental cost of carrying one additional passenger. Such costs are accrued when FTP participants accumulate sufficient miles to be entitled to claim award certificates. No value is assigned to airline, hotel or car rental award certificates that are to be honored by other parties. Incremental costs include unit costs for passenger food, beverages and supplies, fuel, liability insurance and denied boarding compensation expenses expected to be incurred on a per passenger basis. No profit or overhead margin is included in the accrual for incremental costs.\nFTP participants had accumulated mileage credits for approxi- mately 3,896,000 awards (at the 20,000 mile level required for a\nfree domestic flight on USAir) at December 31, 1993, compared with 3,199,000 awards at December 31, 1992. However, because USAir expects that some award certificates will be redeemed by other airlines participating in USAir's FTP, that some certificates will expire, and that some accumulated mileage credits will never be applied towards award certificates, the calculations of the accrued liability for incremental costs at December 31, 1993 and 1992 were based on approximately 88% and 86%, respectively, of the accumulat- ed credits. Mileage for FTP participants who have accumulated less than the minimum number of mileage credits necessary to claim an award is excluded from the calculation of the accrual. Most participants belong to more than one frequent traveler program and it is not possible to project when or if participants will accrue additional mileage credits required to earn an award. Incremental changes in the liability resulting from additional mileage credits are recorded as part of the regular review process. Effective January 1, 1995, USAir will increase the minimum mileage level required for a free domestic flight from 20,000 to 25,000.\nUSAir's customers redeemed approximately 841,000, 626,000 and 654,000 awards for free travel on USAir in 1993, 1992 and 1991, respectively, representing approximately 8.0%, 4.9% and 5.3% of USAir's revenue passenger miles (\"RPMs\") in those years, respec- tively. During 1993, two \"free ticket for segments flown\" promotions were completed which increased the number of awards used for free travel on USAir. These promotions were offered in response to similar promotions offered by USAir's competitors. USAir does not believe that usage of FTP awards results in any significant displacement of revenue passengers. USAir has the ability, through its inventory management system, to identify markets and flights expected to have high load factors and, through capacity controls, to maximize use of FTP awards on flights with lower demand and available seats. Also, blackout dates forestall the usage of awards on peak travel days. Furthermore, USAir's exposure to the displacement of revenue passengers is not signifi- cant, as the number of USAir flights that depart 100% full is minimal. In the third quarter of 1993 (the third quarter being the period of the year when USAir generally experiences its highest load factor and expects the usage of FTP awards to be highest), for example, fewer than 2.2% of USAir's flights departed 100% full. During this same quarterly period, only approximately 1.9% of USAir's flights departed 100% full and also had one or more passengers on board who were traveling on FTP award tickets.\nAirlines often use other competitive promotions, such as offering extra credits or reduced award thresholds under certain conditions, as incentives to stimulate travel. USAir reviews these promotions to determine the proper accounting treatment for each one. To the extent these promotions are determined to be an integral part of the FTP, they are accounted for in the same manner as free travel earned through mileage credits.\nLow Cost, Low Fare Competition\nIn September 1993, Southwest Airlines, Inc. (\"Southwest\"), a low cost, low fare, \"no frills\" air carrier which had not previous- ly provided service to or in the eastern U.S., inaugurated service to Chicago and Cleveland from Baltimore\/ Washington International Airport (\"BWI\") at fares substantially below those previously offered by USAir and other airlines in the same markets. BWI is one of USAir's hub airports. Unlike the other major U.S. air carriers, Southwest does not structure its operations around connecting hub airports, relying instead on high frequency point- to-point service. USAir responded by matching most of Southwest's fares and increasing the frequency of service in related markets.\nOn March 22, 1994, Southwest announced that on May 26, 1994, and June 6, 1994, it will expand service between BWI and Chicago. Southwest also announced that on May 26, 1994, it will initiate its low fare service between BWI and St. Louis, and on July 8, 1994, between BWI and Birmingham, Alabama and Louisville, Kentucky. At this time, USAir has not determined its response to the Southwest announcement.\nIn October 1993, Continental Airlines (\"Continental\"), which had reorganized under bankruptcy proceedings earlier in 1993, inaugurated low fare service on certain routes in the eastern U.S. USAir is a competitor in most of the markets served by these routes. While Continental initiated service to certain cities, such as Charleston, South Carolina; Greensboro, North Carolina; and Jacksonville, Florida; most of the markets included as part of its new program (for example, Baltimore) were previously served by Continental through its hubs at Newark, Cleveland, and Houston. However, under its new program, Continental linked certain of these cities independently of its hubs while continuing to provide many of the same services that are available on its hub flights, including advance seat assignment, frequent traveler mileage credits and interline connections. Under its new program, Continental served approximately 80 city pair markets, from which USAir has historically realized approximately 4% of its total passenger revenue. When Continental started the new program it was uncertain whether the program was an experiment or a beachhead from which Continental planned to expand further. USAir, therefore, made a measured response by matching most of the low fares offered by Continental.\nOn January 31, 1994, Continental increased its competitive threat. It announced that by March 9, 1994, it would expand the low fare program to approximately 356 city pair markets, most of which USAir served and from which USAir has historically realized approximately 8% of its passenger revenue. Moreover, if secondary markets within a 90-mile radius, or a reasonable driving distance, were viewed as being included in Continental's new program, markets from which USAir has historically realized approximately 36% of its\npassenger revenue were affected. Contemporaneously, Continental announced that it would substantially reduce service at its Denver hub and redeploy significant aircraft and personnel resources to the eastern U.S. Although Continental's balance sheet continues to have significant leverage following its bankruptcy reorganization, its liquidity position improved substantially as a result of equity and debt infusions completed as part of that reorganization. Moreover, Continental completed a common stock offering in December 1993, which may indicate the market's receptivity to its efforts to raise additional funds. Continental has operating (including labor) costs that are substantially lower than those of USAir and the other major air carriers.\nOn February 8, 1994, in response to the expansion of Continen- tal and to avoid loss of market share in the eastern U.S., USAir lowered in primary and secondary markets affected by the Continen- tal expansion, by as much as 50%, the fares most commonly used by business travelers on many east coast routes. In addition, USAir lowered leisure fares by as much as 70% in the same markets. In many of the markets, free companion fares are available with business fares. These reduced fares have no expiration date. However, USAir could adjust the fares at some time in the future. Increases in traffic which are stimulated by the lower fares offered by Southwest, Continental and USAir will not offset USAir's reduced revenue resulting from lower yields in these markets.\nUSAir believes that Southwest, Continental or other low cost carriers with a significant cost advantage over USAir likely will expand their operations to additional markets. For example, in December 1993, Southwest completed its acquisition of Morris Air, a regional air carrier with operations concentrated in the western U.S. This acquisition could enable Southwest to divert resources to expand its operations in the eastern U.S. Furthermore, media reports indicate that Southwest has entered into a long-term agreement for the use of four additional gates at BWI, where it currently operates from two gates. On March 4, 1994, Continental further escalated prospective competition by announcing that it will further reduce operations at its Denver, Colorado hub and establish a flight crew base at Greensboro, North Carolina. These measures are likely to increase losses at USAir because they could enable Continental, which has significantly lower costs than USAir, to expand further its high frequency, low fare service described above in additional short-haul markets served by USAir with substantial detriment to USAir. In addition, other low cost carriers may enter other USAir markets. For example, America West announced on February 15, 1994 that it will commence service on April 18, 1994 between Columbus, Ohio where it operates a hub and Philadelphia, where USAir has a hub operation. Other carriers, including some of the larger carriers, have also indicated their intent to develop similar low-fare short-haul service.\nUnless USAir is able to reduce its operating costs, present and increasing competition from low cost, low fare airlines in USAir's markets could have a material adverse impact on USAir's cash position and therefore, its ability to sustain operations. In March 1994, USAir announced that it had initiated discussions with the leadership of its unionized employees regarding wage reduc- tions, improved productivity and other cost savings. The outcome of these negotiations is uncertain, but if timely agreements are not reached, the Company may seek other restructuring alternatives. See Item 1. \"Business - Significant Impact of Low Fare, Low Cost Competition\".\nIn 1993, Northwest Airlines, Inc. (\"Northwest\") and Trans World Airlines, Inc. (\"TWA\") sought and obtained from unionized employees substantial concessions and productivity improvements. In exchange, these employees have received ownership interests in those companies. In December 1993, United Airlines, Inc. (\"Unit- ed\") announced that it had reached agreement with two of its unions to trade concessions for a substantial ownership stake by all employees, subject to approval by United's stockholders. The memberships of these two unions have ratified the agreement. The stated intent and purpose of these labor concessions are to enable these carriers to lower their operating costs. At this time, it is uncertain whether the United transaction will be consummated and whether these events constitute isolated incidents or a trend of employee ownership in the airline industry. As an airline with relatively high labor costs and a route system with a significant percentage of short-haul flying, USAir is considering additional ways to reduce these costs which could involve an exchange of employee concessions for an ownership interest in the Company. USAir is currently engaged in discussions with the leaders of its unionized employees regarding efforts to reduce costs, including reductions in wages, improvements in productivity and other cost savings. The outcome of these discussions is uncertain. See Item 1. \"Business - Significant Impact of Low Fare, Low Cost Competi- tion.\"\nUSAir has been examining various ways to restructure its operations to increase efficiency and lower unit costs in markets of approximately 500 miles or less in distance. Certain carriers, such as Southwest and Continental, have a substantial cost advantage over USAir in these short-haul markets. In addition, consumers appear to be increasingly price conscious, particularly for short distance flights. In February 1994, USAir implemented the first phase of the introduction of a new short-haul product in 18 city-pair markets of approximately 500 miles or less, resulting in increased utilization and productivity of aircraft, personnel, and ground facilities in these markets by decreasing the amount of time that aircraft spend on the ground between flights from an average of 45 minutes to approximately 25 minutes. Initiation of the first phase of this service did not involve any immediate pricing changes or new personnel. Ultimately, USAir anticipates\nthat enhancements to the short-haul product will be completed in summer 1994, and that long-haul and transatlantic service will be redesigned later in 1994. USAir plans to expand this higher frequency service to additional short-haul and other markets in July 1994, with a total fleet of approximately 100 aircraft. Although USAir expects this higher frequency operation will result in reduced unit costs in relevant markets, certain variable costs generally associated with providing the incremental flights, including jet fuel, landing fees and labor, will increase. There can be no assurance, therefore, that the changes will result in improved financial results for USAir. If USAir cannot find ways to compete effectively with low cost carriers by lowering its operating costs, and to generate sufficient additional passengers to offset the effect of sharply reduced fares, USAir's revenue and results of operations will continue to be materially and adversely affected.\nIndustry Globalization and Regulation\nThe trend toward globalization of the airline industry has accelerated in recent years as the three largest U.S. carriers have initiated foreign service and purchased the foreign routes of financially distressed or bankrupt U.S. carriers. In addition, certain foreign carriers have made substantial investments in U.S. carriers which have frequently been tied to marketing alliances or, less frequently, reciprocal investments by the U.S. carrier in its foreign partner. In August 1993, Continental announced that it had reached agreement with Air France on a joint marketing agreement. Earlier in the year, Air Canada made a substantial equity invest- ment in Continental in connection with Continental's bankruptcy reorganization. In October 1993, United and Lufthansa German Airlines announced that they had reached an agreement to implement code sharing to link some of their flights. Continuing privatiza- tion of sovereign carriers and foreign airline deregulation may encourage further foreign investment. Foreign investment in U.S. air carriers is restricted by statute and may be subject to review by the U.S. Department of Transportation (\"DOT\") and, on antitrust grounds, by the U.S. Department of Justice (\"DOJ\").\nOn January 21, 1993, USAir Group and British Airways Plc (\"BA\") entered into an Investment Agreement (\"Investment Agree- ment\") under which a wholly-owned subsidiary of BA has purchased certain preferred stock of the Company for $400.7 million. On March 7, 1994, BA announced that it would not make any additional investments in the Company under current circumstances. See \"Liquidity and Capital Resources\" and Item 1. \"Business - British Airways Announcement Regarding Additional Investments in the Company; Code Sharing\" and \"- British Airways Investment Agreement\" for additional information related to the investment. Under the Investment Agreement, USAir and BA have entered into a code sharing arrangement under which certain domestic USAir flights, connecting to certain BA transatlantic flights, may be listed on computerized reservation systems either under USAir's or BA's two letter\ndesignation code, subject to authorization by the DOT. As of March 1, 1994, USAir and BA offered code share service to and from 34 of the 65 airports authorized by the DOT. On March 17, 1994, the DOT issued an order renewing for one year the existing code sharing authority. In January 1994, USAir and BA filed applica- tions with the DOT to code share to 65 additional domestic and seven additional foreign destinations. The DOT did not act on these applications in its March 17, 1994 order. See Item 1. \"Business - British Airways Announcement Regarding Additional Investments in the Company; Code Sharing\" and \"-British Airways Investment Agreement\".\nUSAir and BA are in the process of expanding their code sharing arrangement. USAir believes that it will have greater access to international traffic and that its and BA's customers will benefit from better on-line connections as well as coordinated check-in and baggage checking procedures. USAir also believes that the code sharing arrangement will generate increased revenues, the magnitude of which cannot be reasonably estimated at this time. The DOT may continue to link further renewals of the code share authorization to the United Kingdom's (\"U.K.\") liberalization of U.S. air carrier access to the U.K. markets. However, the code sharing arrangement is expressly permitted under the bilateral air services agreement between the U.S. and U.K. USAir expects that the authorization will be renewed in the future; however, there can be no assurance that this will occur. USAir does not believe that the DOT's failure to renew the code share authorization or grant the pending application would result in a material adverse change in its financial condition. However, further investment in the Company by BA, as contemplated in the Investment Agreement, may be less likely. See Item 1. \"Business - British Airways Announcement Regarding Additional Investments in the Company; Code Sharing\" and \"-British Airways Investment Agreement.\"\nCurrent U.S. law provides that foreign ownership or control of the voting interest in a certificated U.S. air carrier may not exceed 25%, non-U.S. citizens may not constitute more than a third of the board of directors and managing officers of the air carrier and the president of the air carrier must be a U.S. citizen. Over the years in the context of \"fitness\" reviews to determine whether air carriers could be issued, or continue to hold, operating certificates, the DOT has also issued interpretations regarding whether investments by, or other arrangements with, foreign investors constitute de facto control over a U.S. air carrier. Although the Company believes the policy has no basis in law, recently and particularly during 1992 and 1993, the DOT has linked its review of foreign investment in, and foreign alliances with, U.S. air carriers to the status of the bilateral air transportation treaty between the U.S. and the country of origin of the foreign airline. The willingness of the DOT to allow proposed foreign investments, alliances and participation in corporate governance has been linked to its perception of the liberality of the relevant\ntreaty with respect to the right of U.S. air carriers to operate to, from and beyond the foreign country. For example, the Netherlands entered into a new bilateral treaty with the U.S. in 1992 which permitted \"open skies\", or unrestricted access to the Netherlands by U.S. air carriers. As a result, in 1992 the DOT approved Northwest's proposal to integrate its operations with those of KLM Royal Dutch Airlines, an airline based in that nation. However, the DOT has refused to allow USAir and BA to proceed with the second and third phases of their Investment Agreement, which calls for an additional investment of $450 million by BA, unless and until the U.K. government agrees to amend its bilateral air services agreement with the U.S. to permit new services by U.S. carriers to the U.K. and particularly to London's Heathrow Airport. The U.S. and U.K. governments held several negotiating sessions during the past year and have exchanged proposals to amend the bilateral agreement, but to date the two governments have failed to resolve their differences. As a result, USAir and BA were unable to proceed with the second and third phases of the Investment Agreement in 1993. In any event, on March 7, 1994, BA announced that it would not make any additional investments in the Company under current circumstances. See Item 1. \"Business - British Airways Announcement Regarding Additional Investment in the Company; Code Sharing\" and \"-British Airways Investment Agreement.\"\nThe National Commission to Ensure a Strong Competitive Airline Industry (\"Airline Commission\") issued its report in August 1993. The Airline Commission was a presidentially-appointed committee with the task of analyzing the condition of the U.S. airline industry and reporting to the Clinton Administration its findings and recommendations. Among other things, the Airline Commission recommended that: (i) the air traffic control system be modernized and the Federal Aviation Administration's (\"FAA\") air traffic control functions be performed by an independent federal corpora- tion; (ii) the federal regulatory burden be reduced; (iii) the airlines be granted certain tax relief; and (iv) the bankruptcy process be shortened. The Airline Commission also favored raising the statutory limit on foreign ownership of voting securities in the U.S. airlines to 49 percent under certain circumstances. It further urged that the current international system of bilateral agreements be replaced with multilateral arrangements. In addition, the Airline Commission recommended that the DOT review the airlines' business, capital or financial plans with the assistance of a presidentially-appointed advisory committee and, if an airline repeatedly failed to heed warnings or concerns of the DOT Secretary, the DOT could \"exercise its existing authority\", among other things, to revoke an airline's operating certificate.\nIn January 1994, the Clinton Administration issued a report which described its program to implement certain of the Airline Commission's recommendations. Among other things, the Administra- tion stated that it supported the recommendation described above regarding the FAA, supported increasing to 49 percent the foreign\nownership restrictions provided there are reciprocal opportunities for U.S. airlines and investors abroad, and opposed the recommenda- tions regarding tax relief and the appointment of the advisory committee discussed above. At this time, it is impossible to predict whether any of the Airline Commission's recommendations will be enacted and, if enacted, their effect on USAir. It is also difficult to anticipate whether the Congress will act in the near term on any of the proposals requiring legislation.\nAs part of its initiative in the transportation industry, the Clinton Administration also indicated that the DOT has begun a comprehensive examination of the \"high density rule\" which limits airline operations at Chicago O'Hare, New York's LaGuardia (\"LaGuardia\") and John F. Kennedy International, and Washington National (\"National\") Airports by restricting the number of takeoff and landing slots. As part of its study, the DOT will determine whether the operating limitations imposed by the rule can be eliminated or modified to better utilize available capacity at these airports. USAir holds a substantial number of slots at LaGuardia and National, including those assigned a value when the Company acquired Piedmont Aviation, Inc. Any DOT action which would eliminate those slots or compel USAir to transfer those slots could have a material adverse effect on USAir's operations and financial position. Revision of the high density rule at National, however, would require legislation by the Congress. The DOT has indicated that it expects to complete its study by late 1994.\nRESULTS OF OPERATIONS\n1993 Compared with 1992\nThe Company recorded a net loss of $393.1 million on revenue of $7.1 billion, in 1993 compared with the 1992 net loss of $1.2 billion on revenue of $6.7 billion. Several non-recurring items, which include the cumulative effect of accounting changes, make it difficult to compare these results. After excluding the effect of certain non-recurring items discussed below, which amount to $153.2 million and $759.3 million in 1993 and 1992, respectively, the net loss would have been $239.9 million in 1993 ($5.69 per common share after preferred dividend requirement) compared with a loss of $469.6 million in 1992 ($11.09 per common share after preferred dividend requirement).\nThe Company's 1993 financial results contain $153.2 million of non-recurring items, including (i) $68.8 million for severance, early retirement and other personnel-related expenses recorded in connection with a workforce reduction of approximately 2,500 full- time positions between November 1993 and the first half of 1994; (ii) $43.7 million for the cumulative effect of an accounting change, as required by Statement of Financial Accounting Standards No. 112, \"Employers' Accounting for Postemployment Benefits\" (\"FAS\n112\"), which was adopted during the third quarter of 1993, retroactive to January 1, 1993; (iii) $36.8 million based on a projection of the repayment of certain employee pay reductions; (iv) $13.5 million for certain airport facilities at locations where USAir has, among other things, discontinued or reduced its service; (v) $8.8 million for a loss on USAir's investment in the Galileo International Partnership, which operates a computerized reservations system; and (vi) an $18.4 million credit related to non-operating aircraft.\nThe Company's 1992 financial results contain $759.3 million of non-recurring items, including (i) $628.1 million for the cumula- tive effect of an accounting change, as required by Statement of Financial Accounting Standards No. 106, \"Employers' Accounting for Postretirement Benefits Other Than Pensions\" (\"FAS 106\"); (ii) $107.4 million related to aircraft which have been withdrawn from service; (iii) $34.1 million loss related to the sale of ten McDonnell Douglas 82 (\"MD-82\") aircraft which USAir had on order but eliminated from its fleet plan; and (iv) $10.3 million gain resulting from the sale of three of the Company's subsidiaries during 1992.\nOperating Revenue - The Company's Passenger Transportation Revenue increased by $356.5 million (5.8%) in 1993 compared with 1992, primarily due to the $296.0 million (5.1%) increase at USAir. USAir's capacity, as measured by available seat miles (\"ASM\" - one ASM is equal to one seat flown one mile), decreased by 0.3% in 1993 compared with 1992, its passenger revenue per ASM increased by 5.4% to 10.22 cents and its passenger load factor, a measure of capacity utilization, increased by 0.4 points to 59.2%. The increase in passenger revenue per ASM is largely attributed to the lower level of discounting in 1993 versus 1992. The Company expects that it will experience a 1 - 2% increase in ASMs (including the effect of weather-related cancellations) in 1994 compared with 1993. Continued fare discounting and low fares offered by USAir to compete with low cost, low fare carriers discussed above, are expected to have a negative impact on the Company's passenger revenue. It is not expected that the resulting decrease in revenue per ASM will be totally offset by additional passengers. The severe winter weather conditions in the U.S. during the early part of 1994 have caused a reduction in revenue which the Company estimates at approximately $50 million.\nIn March 1993, USAir and five other U.S. air carriers entered into a settlement in the Domestic Air Transportation Antitrust Litigation class action lawsuit, which alleged that the airlines used the Airline Tariff Publishing Company to signal and communi- cate carrier pricing intentions and otherwise limit price competi- tion for travel to and from numerous hub airports. It is possible that this settlement could have a dilutive effect on USAir's passenger transportation revenue and associated cash flow. However, due to the interchangeability of the certificates among\nthe six carriers involved in the settlement, the possibility that carriers not party to the settlement will honor the certificates, and the potential stimulative effect on travel created by the certificates, USAir cannot reasonably estimate the impact of this settlement on future passenger revenue and cash flows. USAir has estimated that any incremental cost associated with the settlement will not be material based on the nominal equivalent free trips associated with the settlement. See Note 4 to the Company's Consolidated Financial Statements for additional information.\nThe Company's Other Revenue increased by $38.8 million (12.3%) in 1993. USAir's increase of $90.5 million (32.3%) was partially offset at the Company level by a decrease in non-airline subsidiary revenue resulting from the sale of three wholly-owned subsidiaries in July 1992. USAir's 32.3% improvement resulted from increased passenger cancellation and rebooking fees, frequent traveler participation fees, and various other sources.\nExpense - The Company's total operating expenses increased $141.7 million (2.0%) in 1993 compared with 1992. The Company's Personnel Costs increased by $217.7 million (8.3%), $205.6 million of which is attributable to USAir. USAir's increase includes (i) $65.6 million of the $68.8 million non-recurring charge related to a workforce reduction of 2,500 full-time positions; and (ii) the $36.8 million charge based on an estimate of the repayment of certain employee pay reductions, both discussed above. Without the effect of these non-recurring charges, USAir experienced an increase in employee salaries of $91.4 million (4.7%) and an increase in employee benefits of $11.8 million (2.1%). The increase in employee salaries is generally due to contractual and general salary increases which occurred during 1993. The amount saved as a result of the 12-month salary reduction program was approximately the same in 1993 and 1992. USAir expects that due to scheduled contractual increases and the effect of the expiration of the 12-month salary reduction program, employee salaries will increase in 1994 to the extent that the reduction of 2,500 full- time positions and any other possible measures do not offset the increases. See Item 1. \"Business - Significant Impact of Low Fare, Low Cost Competition\" and \"- Employees\" for information related to the possible unionization of additional employee groups. The $11.8 million increase in employee benefits is the result of increased pension expense, offset partially by a decrease in other postretir- ement benefit expense. The increased pension expense in 1993 resulted from the establishment of a defined contribution pension plan for USAir's non-contract employees on January 1, 1993. The defined benefit plan for these employees was frozen at December 31, 1991. Because of the interest rates on long-term, high quality corporate bonds which prevailed at December 31, 1993, the Company has lowered its discount rate used to calculate the actuarial present value of its pension and postretirement obligations. This action will cause an increase in the Company's pension and other postretirement benefits expense in 1994 of approximately $70\nmillion over 1993. See Note 11 to the Company's Consolidated Financial Statements.\nThe Company's Aviation Fuel Expense decreased $43.2 million (5.7%) as a result of a lower cost per gallon and decreased consumption. In early August 1993, the Clinton Administration's budget package was enacted. The budget package included a 4.3 cent per gallon tax on transportation fuels beginning October 1, 1993. The airline industry is exempt from the tax until October 1, 1995. See Item 1. \"Business - Jet Fuel\" and Note 1 to the Company's Consolidated Financial Statements.\nCommissions increased by $27.2 million (4.8%) as a result of the 5.8% increase in Passenger Transportation Revenue. The Company's Other Rent and Landing Fees increased $64.3 million (15.8%) primarily due to an increase in USAir's facility rental expense following the opening of the new terminal at Pittsburgh in October 1992, and the $8.9 million of non-recurring expense recorded for certain airport facilities, discussed above. The Company's Aircraft Rent Expense included a $72.4 million non- recurring charge in 1992 (part of the $107.4 million discussed above). Without this charge, aircraft rent expense increased $15.0 million (3.3%) due to the addition of new leased aircraft in 1993. Excluding the effect of non-recurring items in 1992 and 1993, Aircraft Maintenance Expense increased by $37.6 million (10.6%) resulting from the timing of aircraft maintenance cycles. Other Operating Expense decreased by $58.0 million (4.0%), reflecting a $25.0 million (1.8%) decrease at USAir and a $58.4 million decrease which resulted from the sale of three wholly-owned subsidiaries in July 1992, offset by increases at the Company's other wholly-owned subsidiaries.\nThe Company's Interest Capitalized decreased $10.0 million (36.1%) as the level of outstanding purchase deposits decreased with the delivery of new aircraft and changes in delivery sched- ules.\nEffective January 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109, \"Accounting for Income Taxes\", (\"FAS 109\"). The adoption of FAS 109 resulted in no cumulative adjustment. Results for 1993 do not include any income tax credit due to the FAS 109 limitations in recognizing a current benefit for net operating losses. See Note 6 to the Company's Consolidated Financial Statements for additional information.\n1992 Compared With 1991\nThe Company recorded a net loss of $1.2 billion on revenue of $6.7 billion in 1992, compared with the 1991 net loss of $305.3 million on revenue of $6.5 billion. Several non-recurring items, which include the cumulative effect of an accounting change, make it difficult to compare these results. In addition, the Company recorded no tax credit in 1992. After excluding the effect of certain non-recurring items which amount to a net charge of $759.3 million and a net gain of $45.9 million in 1992 and 1991, respec- tively, the pre-tax loss would have been $469.6 million in 1992 ($11.09 per common share after preferred dividend requirement) compared with a pre-tax loss of $460.7 million in 1991 ($11.01 per common share after preferred dividend requirement). This compari- son does not consider the ongoing effect to the Company's operating expenses which result from the adoption of FAS 106, the freezing of the pension plan for non-contract employees, or other changes.\nThe Company's 1992 financial results contained $759.3 million of non-recurring items, detailed above. Operating results for 1991 included (i) $107 million pre-tax gain related to the freeze of the fully funded pension plan for USAir's non-contract employees; (ii) a $21 million pre-tax charge related to USAir's parked British Aerospace BAe-146 (\"BAe-146\") fleet; (iii) $21.6 million pre-tax expense related to early retirement incentives; and (iv) $18.5 million, net, in miscellaneous non-recurring charges.\nOn October 5, 1992, the International Association of Machin- ists (\"IAM\"), which represents USAir's mechanics and related employees, commenced a strike against USAir. At that time, USAir implemented a reduced flight schedule equal to approximately 60% of the normal flight schedule. On October 8, 1992, USAir reached agreement with the IAM on a new collective bargaining agreement which becomes amendable in October 1995. Following ratification of the agreement by the IAM-represented employees, USAir resumed full service on October 12, 1992. USAir immediately offered various incentives including bonus frequent traveler miles and relaxed advance purchase restrictions in an effort to attract passengers following the disruption of service. The Company estimates that the IAM strike had a negative effect on results of approximately $45 million for the year.\nOperating Revenue - The Company's Passenger Transportation Revenue increased $164.6 million (2.7%) in 1992, reflecting a $97.9 million increase in USAir passenger transportation revenue and a $66.7 million increase in commuter airline passenger revenue. USAir's ASMs increased by 2.4% in 1992, its passenger revenue per ASM decreased by 0.7% to 9.7 cents, and its passenger load factor increased by 0.2 points to 58.8%. USAir's average 1992 passenger revenue per ASM was adversely affected by widespread fare promo- tions. The improvement in commuter airline passenger revenue is\nattributed to increased traffic made possible by 20.1% increase in capacity during 1992 over 1991, as measured by ASMs, at the Company's commuter airline subsidiaries.\nUSAir's Other Revenue increased $81.3 million (40.9%) in 1992 as compared with 1991, due to increases in revenue generated by passenger cancellation and re-booking fees, fees received from commuter affiliates for handling certain of their flights, and other miscellaneous sources.\nOperating Expenses - The Company's Personnel Costs increased $102.5 million (4.1%) in 1992 compared with 1991, driven by USAir's increase in personnel costs of $99.7 million (4.2%). Personnel Costs are comprised of two components: (i) employee wages and salaries; and (ii) employee benefits. USAir's wage and salary expense decreased $21.9 million (1.1%) during 1992 as a result of partial-year wage concessions on the part of pilots, non-contract employees and mechanics, all of which ended in 1993. USAir's employee benefit expense increased $121.6 million (27.8%) in 1992 resulting from the adoption of FAS 106 in 1992, and the 1991 freeze of the fully-funded pension plan for non-contract employees. The 1991 pension freeze resulted in a $107 million gain. The Company estimates that USAir's pension expense was approximately $40 million lower in 1992 than would have been the case if the freeze had not occurred. Expense for postretirement medical and death benefits, calculated in accordance with FAS 106, was $114.7 million in 1992, compared with approximately $8 million cash-basis expense in 1991. USAir's medical and dental benefit expense for active employees decreased $26.7 million (14.2%) in 1992 compared with 1991 as a result of a contributory managed care program that was implemented during 1992 for most employee groups. Excluding the effects of FAS 106 and the pension freeze, USAir employee benefit expense decreased approximately $48 million, or 8.8%, in 1992 compared with 1991.\nThe Company's Aviation Fuel Expense decreased $45.8 million (5.7%) during 1992 compared with 1991 as a result of lower cost per gallon, partially offset by an increase in consumption. The price of fuel was inflated during early 1991 as a result of the Iraqi invasion of Kuwait and ensuing Desert Storm operation in August 1990 - January 1991, and did not return to pre-invasion levels until the second quarter of 1991.\nCommissions increased $29.6 million (5.5%) as a result of the 2.7% increase in passenger transportation revenue and the mix of travel agency sales versus total sales. Other Rent and Landing Fees Expense for the Company increased $56.6 million (16.2%) during 1992. This increase was largely due to increased expense at LaGuardia which resulted from USAir's assumption of Continental's leasehold obligations associated with the East End Terminal there in January, 1992 and the increased operation at LaGuardia during the year using the take-off and landing slots acquired from\nContinental. Also contributing to the increase was the October 1992 opening of the new terminal at the Pittsburgh International Airport, USAir's largest hub. The Company's Aircraft Rent Expense increased $152.3 million (40.3%) during 1992. A charge related to USAir's grounded BAe-146 fleet accounted for $81 million of the increase. The remainder of the increase was caused by additional leased aircraft both at USAir and the commuter airline subsidiar- ies. The Company's Aircraft Maintenance Expense decreased $33.9 million (8.2%) during 1992. This decrease reflects USAir's decrease in aircraft maintenance of $43.4 million, or 12.0%, and an increase of $9.5 million at the Company's commuter airline subsidiaries during the same period. The improvement in USAir's aircraft maintenance expense is largely attributable to the grounding of its BAe-146 fleet in May 1991, the shifting of certain aircraft engine repairs in-house from outside vendors and the negotiation of a new vendor repair contract in 1991 for certain aircraft engines. The increase in maintenance expense at the commuter airline subsidiaries is due primarily to an increased fleet size in 1992. Maintenance expense for 1992 and 1991 includes charges of $25.0 million and $25.5 million, respectively, related to grounded aircraft.\nThe Company's Other Operating Expense, Net increased $63.6 million (4.6%) in 1992 compared with 1991. Expense for 1992 includes $25 million related to an employee suggestion program which netted estimated savings of $22 million in 1992 and $110 million in 1993. The remainder of the increase is attributable to changes in various smaller expense categories.\nUSAir Group's Interest Income decreased $8.7 million (46.9%) during 1992 due to a lower average level of short-term investments during 1992 coupled with lower interest rates in 1992. Both USAir's interest income and expense include intercompany amounts which have been eliminated in the USAir Group consolidation process. The Company's Interest Expense decreased $10.4 million (4.0%) in 1992 due to a lower average level of debt outstanding related to USAir Group's revolving bank credit agreement, partially offset by additional interest associated with higher levels of aircraft-related debt in 1992. Interest Capitalized decreased $7.8 million (21.8%) as a result of a lower level of outstanding equipment deposits coupled with a lower capitalized interest rate. The Company's Other Non-Operating Expense, Net increased $17.0 million, or 40.2%, during 1992. In 1992, this category included a gain of $10.3 million from the sale of three wholly-owned subsid- iaries and a $34.1 million loss related to the sale of ten MD-82 aircraft discussed above. In 1991, this category included a $12.5 million loss incurred in conjunction with the sale of nine Boeing B727-200 aircraft which had been previously retired from service.\nAll of the Company's remaining available tax credit, or $117.6 million, was recognized upon the adoption of FAS 106 on January 1, 1992. The Company could not recognize any tax credit associated\nwith the 1992 results due to limitations under Accounting Princi- ples Board Opinion No. 11.\nInflation and Changing Prices\nInflation and changing prices do not have a significant effect on the Company's operating revenues, operating expenses, and operating income because such revenues and expenses, other than depreciation and amortization, generally reflect current price levels.\nDepreciation and amortization expense is based on historical cost. For assets acquired through the purchase of Pacific Southwest Airlines, USAir's historical cost is based on fair market value of the assets on May 29, 1987. In the case of Piedmont Aviation, Inc., USAir's historical cost is based on the fair market value of the assets on November 5, 1987, reduced by the tax effect of that portion of fair market value not deductible for tax purposes in the form of depreciation and amortization. Therefore, aggregate depreciation and amortization is lower than if this expense reflected today's replacement costs for existing productive assets. In evaluating how inflation would increase depreciation expense, however, consideration should also be given to the reduction in other operating expenses, such as aircraft maintenance and aviation fuel, that would be achieved from the operating efficiencies of newer, more technologically advanced productive assets.\nLIQUIDITY AND CAPITAL RESOURCES\nCash used by operations was $21.3 million during 1993, including a $220.0 million payment under USAir's revolving accounts receivable sale program (\"Receivables Agreement\"). At December 31, 1993, cash and cash equivalents totaled approximately $368.3 million, excluding $163.7 million which was deposited in trust accounts to collateralize letters of credit or workers compensation policies and classified as \"Other Assets\" on the Company's balance sheet. Although not currently available (see below), at Decem- ber 31, 1993, USAir Group had $300 million in commitments available for borrowing under its revolving credit agreement with a group of banks (\"Credit Agreement\") and no outstanding loans thereunder, and USAir had approximately $141 million of available funds under its Receivables Agreement.\nAt February 28, 1994, cash and cash equivalents totaled approximately $363.5 million. Funds under the Credit Agreement and Receivables Agreement are not available to the Company and USAir because of violations of minimum net worth covenants in those agreements. On March 14, 1994, the Company and USAir announced that they are seeking waivers of compliance with the minimum net\nworth covenant and other anticipated covenant violations. There can be no assurance that the Company or USAir will be able to obtain the waivers or arrange replacement facilities.\nThe Company and USAir are highly leveraged. In order to meet debt service, lease and other obligations and to finance daily operations, the Company and USAir require substantial liquidity and working capital. In addition, developments may occur which are beyond the control of the Company and USAir, including intensified fare wars or substantial increases in jet fuel prices, which could have a material adverse effect on the Company's prospects and financial condition. The Company and USAir have unencumbered assets, particularly if the Credit Agreement is terminated and the mortgage of aircraft equipment related thereto is released. The Company expects that it could use these unencumbered assets to raise funds to provide an infusion of liquidity. In addition, the second and third quarters of the year historically have been characterized by higher revenues and working capital than in the first and fourth quarters. Moreover, USAir is seeking in discus- sions with the leadership of its unionized employees substantial wage reductions, improved productivity and other cost savings. However, if unforeseen adverse developments occur, if the Company and USAir are unable to finance unencumbered assets, or if timely agreements with the employees are not reached, the Company and USAir may pursue other restructuring alternatives. See Item 1. \"Business - Significant Impact of Low Fare, Low Cost Competition\" and Item 7. \"Management's Discussion and Analysis of Financial Condition and Results of Operations - Low Cost, Low Fare Competi- tion.\"\nDuring 1993, the Company's investment in new aircraft acquisitions and purchase deposits totaled $545.3 million. USAir took delivery of 11 Boeing 757-200, one Boeing 767-200, and six MD- 82 aircraft during the year. The MD-82s were immediately sold to a third party. In addition, USAir sold two other MD-82 aircraft which had been delivered in the fourth quarter of 1992. Proceeds from the sale of the MD-82s approximated $168 million. The Company has completed financing arrangements for, including the $337.7 million issue of Pass Through Certificates (\"Certificates\") which USAir sold through an underwritten public offering on November 1, 1993, or internally funded, all of its 1993 aircraft expenditures. See Note 4(d) to the Company's Consolidated Financial Statements for the projected cash flows associated with aircraft orders and other contractual capital commitments. The Company has arranged committed financing for 100% of its 1994 and 1995 aircraft deliveries.\nOn January 21, 1993, a wholly-owned subsidiary of BA purchased 30,000 shares of the 7% Series F Cumulative Convertible Senior Preferred Stock (\"Series F Preferred Stock\"), for $300 million. Substantially all of the $300 million received by the Company from the sale of the Series F Preferred Stock was used to pay down debt\nunder the Company's Credit Agreement. The Series F Preferred Stock is subject to mandatory redemption on January 15, 2008.\nOn May 4, 1993, the Company sold 11.5 million shares of $1 par value Common Stock at $20.75 per share which netted proceeds of approximately $231 million. BA partially exercised its preemptive right to maintain its proportionate ownership percentage by purchasing, on June 10, 1993, 9,919.8 shares of redeemable Series T-2 Cumulative Exchangeable Senior Preferred Stock (\"Series T-2 Preferred Stock\") for approximately $99.2 million. For additional information, see Note 8 to the Company's Consolidated Financial Statements. On March 7, 1994, BA announced that it would not make any additional investments in the Company until the outcome of measures by the Company to reduce costs and improve financial results is known.\nOn July 8, 1993, USAir sold $300 million principal amount of 10% Senior Notes due 2003 (the \"10% Notes\") through an underwritten public offering. The offering netted proceeds of approximately $294 million. The 10% Notes are unconditionally guaranteed by the Company.\nOn February 2, 1994, USAir sold $175 million principal amount of 9 5\/8% Senior Notes due 2001 (the \"9 5\/8% Notes\") through an underwritten public offering. The offering netted proceeds of approximately $172 million. The 9 5\/8% Notes are unconditionally guaranteed by the Company. The 9 5\/8% Notes are not reflected in the Company's December 31, 1993 balance sheet because they were issued after that time.\nAll net proceeds received by USAir or the Company from the Common Stock offering, the sale to BA of the Series T-2 Preferred Stock, the sale of the 10% Notes and 9 5\/8% Notes were added to the working capital of the Company for general corporate purposes, including the possible early repayment of certain outstanding debt with high interest rates.\nUSAir and the Company have filed with the Securities and Exchange Commission (\"SEC\") a shelf registration for $700 million of various debt and equity securities. Approximately $187 million of securities remain available for sale on the shelf registration following the sale of the 9 5\/8% Notes and may be sold from time- to-time depending on market conditions. The Company will continue to evaluate opportunities in the financial markets.\nOn September 29, 1993, the maximum commitment available under the Credit Agreement decreased to $300 million from $600 million in accordance with the terms of the agreement. The Credit Agreement is due to expire on September 30, 1994. In September 1993, USAir Group obtained a waiver of compliance with the coverage ratio test required to be maintained as part of the Credit Agreement, for the period July 1 through September 30, 1993. Without this waiver,\nUSAir Group would have violated this test on September 30, 1993. As of September 30, 1993, USAir Group was in compliance with the other financial covenants required to be maintained as part of the Credit Agreement. Moreover, in December 1993, USAir Group obtained an additional waiver under the Credit Agreement of compliance during the period October 1 through December 31, 1993 with the coverage ratio test. Without this waiver, USAir Group would have violated this test on December 31, 1993. The Company is currently unable to borrow under the Credit Agreement because it is in violation of a minimum net worth covenant thereunder. In addition, based on current projections of its results for 1994, USAir Group expects that it will not be in compliance with the coverage ratio test and possibly other financial covenants at March 31, 1994 and during the remainder of the year. There can be no assurance that USAir Group will be able to obtain a waiver of compliance with these covenants or to arrange a replacement facility.\nIn September 1993 and December 1993, USAir obtained waivers of the coverage ratio test under the Receivables Agreement on the same terms as described above with respect to the Credit Agreement. At December 31, 1993, USAir was in compliance with the other financial covenants and had no amounts outstanding under the Receivables Agreement. The maximum amount of receivables which USAir may sell under the Receivables Agreement was $240 million at December 31, 1993 and will be adjusted downward to $190 million on June 30, 1994 if the Company's consolidated net worth does not exceed $1.5 billion. For purposes of this net worth comparison, the Company's actual net worth is adjusted to add back the initial and ongoing impact of adopting FAS 106 and certain other accounting pronounce- ments. USAir is currently unable to sell receivables under the Receivables Agreement because it is in violation of a minimum net worth covenant thereunder. In addition, based on current projec- tions of its results for 1994, USAir expects that it will not be in compliance with the coverage ratio test and possibly other financial covenants at March 31, 1994 and during the remainder of the year. There can be no assurance that USAir will be able to obtain a waiver of compliance with these covenants or to arrange a replacement facility.\nThe Company's and USAir's debt and equity securities are presently rated below investment grade by Standard and Poor's Corporation (\"S&P\") and Moody's Investors Service, Inc. (\"Moo- dy's\"). Following the January 21, 1993 transaction in which a subsidiary of BA purchased $300 million of the Company's Series F Preferred Stock, Moody's placed the ratings on watch for possible upgrade. On March 19, 1993, Moody's confirmed its ratings of USAir Group and USAir securities. Following DOT approval of the purchase of the Series F Preferred Stock and the code sharing and wet lease relationship between USAir and BA, S&P affirmed its ratings of USAir Group and USAir securities, stating its ratings outlook was positive. In December 1993, S&P affirmed its ratings of USAir Group and USAir securities. However, the agency revised the\nratings outlook to negative, citing, among other considerations, the status of the negotiations on a revised U.S.-U.K. bilateral air services agreement and the entrance and possible expansion of the operations of low fare, low cost air carriers into USAir's markets. In February 1994, as a result of USAir's low fare initiative in certain markets and its high cost structure, S&P and Moody's placed the securities of the Company and USAir on watch with negative implications. On March 24, 1994, S&P further downgraded the Company's and USAir's securities. This downgrade will make it more difficult for the Company and USAir to effect additional financing. In addition, the Company's and USAir's securities remain on watch with negative implications at S&P.\nIn 1992, the Company's investment in new aircraft acquisitions and purchase deposits, net of deposits refunded, totaled $458.7 million. The Company purchased eight Fokker and four deHavilland Dash 8 aircraft during 1992. The acquisition of these aircraft was financed through a combination of secured debt financings and interim debt financings. In addition, USAir took delivery of four MD-82s, two of which were immediately sold to a third party. The remaining two aircraft delivered in 1992 were sold to a third party in early 1993. Cash outflows for other property during the period totaled $277.2 million, which includes $61 million paid to Continental for landing and take-off slots at LaGuardia and Washington National Airports and $50 million paid to TWA for London routes from BWI and Philadelphia International Airports. See Item 1. \"Business - British Airways Investment Agreement - U.S.-U.K. Routes.\" Proceeds from disposition of assets of $429.5 million were realized during the year, primarily from sale-leaseback transactions, the sale of the two MD-82 aircraft, and the sale of three wholly-owned subsidiaries.\nDuring 1991, acquisition of new aircraft and purchase deposit payments amounted to $345 million. During 1991, USAir took delivery of two Boeing 767-200ER, nine Boeing 737-400, 12 Fokker 100, and five deHavilland Dash 8 aircraft. The acquisition of these aircraft was financed through a combination of sale-leaseback transactions, secured debt financings and interim debt financings. Expenditures for other property, consisting primarily of ground support equipment, leasehold improvements, and major aircraft components, totaled $97 million. Proceeds from disposition of property of $286 million were realized during 1991, primarily as a result of aircraft sale-leaseback transactions.\nIn May 1991, USAir Group sold 4,263,050 Depositary Shares, each representing 1\/100 of a share of $437.50 Series B Cumulative Convertible Preferred Stock, without par value, for net proceeds of $207.8 million. Such proceeds were used to repay indebtedness under USAir Group's Credit Agreement.\nAt December 31, 1993, USAir Group's ratio of current assets to current liabilities was 0.53 to 1 and the debt component of USAir Group's capitalization structure was approximately 82% (100% if the redeemable Series A Cumulative Convertible Preferred Stock, the Series F Preferred Stock and the redeemable Series T Cumulative Convertible Exchangeable Senior Preferred Stock are considered to be debt).\nItem 8A. FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION USAir Group, Inc.\nIndependent Auditors' Report\nThe Stockholders and Board of Directors USAir Group, Inc.:\nWe have audited the accompanying consolidated balance sheets of USAir Group, Inc. and subsidiaries (\"Group\") as of December 31, 1993 and 1992, and the related consolidated statements of opera- tions, cash flows, and changes in stockholders' equity (deficit) for each of the years in the three-year period ended December 31, 1993. These consolidated financial statements are the responsibil- ity of Group's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.\nWe conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.\nIn our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of USAir Group, Inc. and subsidiaries as of December 31, 1993 and 1992, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1993 in conformity with generally accepted accounting principles.\nAs discussed in Note 11 to the consolidated financial statements, effective January 1, 1993, Group changed its method of accounting for postemployment benefits and effective January 1, 1992, Group changed its method of accounting for postretirement benefits other than pensions.\nKPMG PEAT MARWICK\nWashington, D. C. February 25, 1994\nSee accompanying Notes to Consolidated Financial Statements.\nSee accompanying Notes to Consolidated Financial Statements.\nSee accompanying Notes to Consolidated Financial Statements.\nUSAir Group, Inc. Notes to Consolidated Financial Statements\n(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES\n(a) Basis of Presentation\nThe accompanying consolidated financial statements include the accounts of USAir Group, Inc. (\"USAir Group\" or the \"Company\") and its wholly-owned subsidiaries USAir, Inc. (\"USAir\"), Piedmont Airlines, Inc. (\"Piedmont\") (formerly Henson Aviation, Inc.), Jetstream International Airlines, Inc. (\"Jetstream\"), Pennsylvania Commuter Airlines, Inc. (\"PCA\"), USAir Leasing and Services, Inc. (\"Leasing\"), USAir Fuel Corporation and Material Services Company, Inc. All significant intercompany accounts and transactions have been eliminated.\nAt December 31, 1992, USAM Corp. (\"USAM\"), a subsidiary of USAir, owned 11% of the Covia Partnership (\"Covia\") which owned and operated a computerized reservation system (\"CRS\"). In September 1993, Covia purchased the assets of the corporation that owned and operated the Galileo CRS which provided CRS services to travel agent subscribers in Europe. Covia was then separated into three new entities. As a result, at December 31, 1993, USAM owns 11% of the Galileo International Partnership which owns and operates the Galileo CRS, approximately 11% of the Galileo Japan Partnership which markets the Galileo CRS in Japan, and approximately 21% of the Apollo Travel Services Partnership which markets the Galileo CRS in the U.S. and Mexico. USAM accounts for these investments using the equity method.\nOn August 1, 1992, two wholly-owned USAir Group's commuter airline subsidiaries, Allegheny Commuter Airlines, Inc. and PCA, merged. PCA, the surviving entity, operates under the name of Allegheny Commuter Airlines, with headquarters in Middletown, Pennsylvania.\nOn July 15, 1992, USAir Group completed the sale of three of its wholly-owned subsidiaries: Piedmont Aviation Services, Inc., Air Service, Inc. and Aviation Supply Corporation. The Company realized a gain of $10.3 million as a result of the sale. The three former subsidiaries engaged in fixed base operations and the sale and repair of aircraft and aircraft components. These subsidiaries were included in the accounts until their sale.\nOn October 9, 1991, USAir reached agreement for the sale of certain assets of its wholly-owned subsidiary Pacific Southwest Airmotive (\"Airmotive\"). Airmotive discontinued operations in the third quarter of 1991. USAir did not realize any material gain or loss on the sale and discontinuance of Airmotive's operations.\nUSAir Group's principal operating subsidiary, USAir, and its three commuter airline subsidiaries, Piedmont, Jetstream and PCA, operate within one industry (air transportation); therefore, no segment information is provided.\nCertain 1992 and 1991 amounts have been reclassified to conform with 1993 classifications.\n(b) Cash and Cash Equivalents\nFor financial statement purposes, the Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents.\n(c) Materials and Supplies\nInventories of materials and supplies are valued at average cost and are charged to operations as consumed. An allowance for obsolescence is provided for flight equipment expendable parts.\n(d) Property and Equipment\nProperty and equipment is stated at cost or, if acquired under capital leases, at the lower of the present value of minimum lease payments or fair market value at the inception of the lease. Maintenance and repairs, including the overhaul of aircraft components, are charged to operating expense as incurred and costs of major improvements are capitalized for both owned and leased assets. Interest related to deposits on aircraft purchase contracts and facility and equipment construction projects is capitalized as additional cost of the asset or as leasehold improvement if the asset is leased. Depreciation and amortization for principal asset classifications is provided on a straight-line basis to estimated residual values over estimated depreciable lives as follows:\nProperty acquired under capital lease is amortized on a straight-line basis over the term of the lease and charged to depreciation expense.\n(e) Goodwill, Other Intangibles and Other Assets\nGoodwill, the cost in excess of fair value of identified net assets acquired, is being amortized on a straight-line basis over 40 years as other non-operating expense. Accumulated amortization at December 31, 1993 and 1992 was $98 million and $82 million, respectively.\nIntangible assets consist of purchased operating rights at various airports, purchased route authorities, and the intangible assets associated with the underfunded amounts of certain pension plans. The operating rights, valued at purchase cost or appraised value if acquired from Piedmont Aviation, Inc. (\"Piedmont Avia- tion\") or Pacific Southwest Airlines (\"PSA\"), are being amortized over periods ranging from ten to 25 years as Other Rent and Landing Fees Expense. The purchased route authorities are amortized over periods of 25 years as other operating expense. Accumulated amortization at December 31, 1993 and 1992 was $72 million and $65 million, respectively. The decrease in Other Intangibles, net in 1993 is primarily attributable to the $47 million reclassification of two London routes to Other Assets as a result of USAir's relinquishment of these routes as contemplated by the January 21, 1993 Investment Agreement (\"Investment Agreement\") between the Company and British Airways Plc (\"BA\"). USAir relinquished its Charlotte to London route authority in January 1994. In addition, takeoff and landing slots at Washington National Airport were purchased from Northwest Airlines, Inc. (\"Northwest\") for $10 million during 1993.\n(f) Restricted Cash and Investments\nRestricted cash and investments consist primarily of deposits in trust accounts to collateralize letters of credit or workers compensation policies and short-term investments restricted for specified construction projects. These amounts are classified as Other Assets on the accompanying balance sheets.\n(g) Deferred Gains on Sale and Leaseback Transactions\nGains on aircraft sale and leaseback transactions are deferred and amortized over the term of the leases as a reduction of rental expense.\n(h) Passenger Revenue Recognition\nPassenger ticket sales are recognized as revenue when the transportation service is rendered. At the time of sale, a liability is established (Traffic Balances Payable and Unused Tickets) and subsequently eliminated either through carriage of the passenger, through billing from another carrier which renders the service or by refund to the passenger.\n(i) Frequent Traveler Awards\nUSAir accrues the estimated incremental cost of providing outstanding travel awards earned by participants in its Frequent Traveler Program.\n(j) Investment Tax Credit\nInvestment tax credit benefits are recorded using the \"flow- through\" method as a reduction of the Federal income tax provision.\n(k) Earnings Per Share\nEarnings per share is computed by dividing net loss, after deducting preferred stock dividend requirements, by the weighted average number of shares of Common Stock outstanding, net of treasury stock. USAir Group's outstanding redeemable Series A Cumulative Convertible Preferred Stock (\"Series A Preferred Stock\"), Series B Cumulative Convertible Preferred Stock (\"Series B Preferred Stock\"), redeemable Series F Cumulative Senior Preferred Stock (\"Series F Preferred Stock\"), redeemable Series T Cumulative Convertible Exchangeable Senior Preferred Stock (\"Series T Preferred Stock) and common stock equivalents are anti-dilutive.\n(l) Swap Agreements\nUSAir has entered into hedging arrangements to reduce its exposure to fluctuations in the price of jet fuel. Net settlements are recorded as adjustments to aviation fuel expense. USAir is party to such hedging arrangements with several entities. Under these arrangements, the Company's maximum commitments, which are offset by amounts received under the arrangements, totaled approximately $100.3 million and $158.7 million at December 31, 1993 and 1992, respectively. Although the agreements expose the Company to credit loss in the event of nonperformance by the other parties to the agreements, the Company does not anticipate such nonperformance.\nThe Company has entered into interest rate swap transactions to manage interest rate exposure. Net settlements are recorded as an adjustment to interest expense. The Company is party to such interest rate swap agreements with banks and other financial institutions. The notional principal amounts of these agreements were $150 million and $400 million at December 31, 1993 and 1992, respectively. Under these swap agreements, the Company pays interest at fixed rates averaging 9.8% and 9.7% at December 31, 1993 and 1992, respectively, and receives floating rate interest payments based on three-month LIBOR. Although the agreements, which expire in 1995, expose the Company to credit loss in the event of non-performance by the other parties to the agreements, the Company does not anticipate such non-performance.\n(2) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS\nUnless a quoted market price indicates otherwise, the fair values of cash and investments generally approximate carrying values because of the short maturity of these instruments. The\nCompany has estimated the fair value of long-term debt based on quoted market prices for the same or similar issues or on the current rates offered to the Company for debt of similar remaining maturities. The estimated fair values of the Series A Preferred Stock, Series F Preferred Stock and Series T Preferred Stock are obtained by consulting with an independent external valuation source. The fair values of interest rate swap agreements, energy swap agreements and foreign currency contracts are obtained from dealer quotes whereby these values represent the estimated amount the Company would receive or pay to terminate such agreements.\nThe estimated fair values of the Company's financial instru- ments are summarized as follows:\n(3) LONG-TERM DEBT\nDetails of long-term debt are as follows:\nMaturities of long-term debt and debt under capital leases for the next five years are as follows:\n(in thousands)\n1994 $ 87,833 1995 75,344 1996 73,464 1997 84,027 1998 152,180 Thereafter 2,059,002\nIn addition to the varying interest rate on Credit Agreement borrowings as described below, interest rates on $239 million principal amount of long-term debt at December 31, 1993 are subject to adjustment to reflect prime rate and other rate changes.\nThe Company and a group of banks are parties to a Credit Agreement dated as of March 30, 1987, as amended (the \"Credit Agreement\") which makes a $300 million revolving credit facility available to the Company as of December 31, 1993. The Credit Agreement expires on September 30, 1994. At December 31, 1993, loans under the Credit Agreement, at the option of the Company, would have borne interest at a reference rate, a Eurodollar rate plus 2.50% - 2.65% per annum, determined by the Company's coverage ratio discussed below, or a bid rate if offered by a lending bank. During 1993, 1992 and 1991, the maximum amount of credit agreement borrowings outstanding at any month end was $250 million, $450 million and $733 million, respectively. All outstanding Credit Agreement borrowings were paid off in May 1993 and no other funds were borrowed during the remainder of 1993. The average amount of Credit Agreement borrowings outstanding and weighted average interest rate for 1993 were $37 million and 5.8%, respectively. The average amount of Credit Agreement borrowings outstanding and the weighted average interest rate for 1992 were $174 million and 6.2%, respectively. The average amount of Credit Agreement borrowings and the weighted average interest rate for 1991 were $510 million and 8.3%, respectively.\nOn June 21, 1993, USAir Group entered into the Seventh Amendment to the Credit Agreement. The Seventh Amendment increased the limit of unsecured debt of subsidiaries to $300 million from $200 million. On December 21, 1993, the Company obtained a waiver under the Credit Agreement which further increased the limit of unsecured debt of subsidiaries to $620 million for the period commencing December 21, 1993 and ending on the final annual reduction date of September 30, 1994. This waiver also exempted the Company from compliance, for the quarter ended December 31, 1993, with the coverage ratio test which must be maintained as part of the Credit Agreement. The Company would not otherwise have complied with this test as of December 31, 1993 but was in compliance with the other financial covenants required to be\nmaintained as part of the Credit Agreement. USAir Group is currently unable to borrow under the Credit Agreement because it is in violation of a minimum net worth covenant thereunder. In addition, based on current projections of its results for 1994, USAir Group expects that it will not be in compliance with the coverage ratio test and possibly other financial covenants at March 31, 1994 and during the remainder of the year. There can be no assurance that USAir Group will be able to obtain a waiver of compliance with these covenants or arrange a replacement facility. Certain USAir, Piedmont and PCA aircraft and engines with a net book value of $247 million at December 31, 1993 secure the Credit Agreement.\nEquipment financings totaling $2.0 billion are collateralized by aircraft and engines with a net book value of $2.2 billion at December 31, 1993.\nAn aggregate of $32 million of future principal payments of the Equipment Financing Agreements are payable in Japanese Yen. This foreign currency exposure has been hedged to maturity. Although the Company is exposed to credit loss in the event of non- performance by the counterparty to the hedge agreement, the Company does not anticipate such non-performance.\nOn February 2, 1994, USAir sold $175 million principal amount of 9 5\/8% Senior Notes (\"9 5\/8% Senior Notes\") which are uncondi- tionally guaranteed by the Company. The 9 5\/8% Senior Notes are not reflected in the above table because they were sold after December 31, 1993.\n(4) COMMITMENTS AND CONTINGENCIES\n(a) Operating Environment\nThe economic conditions in the United States, fare competition and the emergence and growth of lower cost, lower fare carriers in the domestic airline industry are factors affecting the financial condition of USAir Group. Industry capacity has recently failed to mirror changes in demand due primarily to the continued delivery of new aircraft and secondarily, to the prolonged operation of certain major U.S. carriers under the protection of Chapter 11 of the Bankruptcy Code. USAir competes with at least one major airline on most of its routes between major cities. Although the economy generally has shown signs of improvement, the Company expects that the competitive environment in the airline industry, the entry of low cost, low fare carriers into USAir's markets, and the excess capacity in the domestic airline industry will continue to have an adverse effect on USAir's passenger revenue for the foreseeable future. The extent or duration of these conditions cannot be reasonably determined at this time.\n(b) Lease Commitments\nThe Company's airline subsidiaries lease certain aircraft, engines, computer and ground equipment, in addition to the majority of their ground facilities. Ground facilities include executive offices, overhaul and maintenance bases and ticket and administra- tive offices. Public airports are utilized for flight operations under lease arrangements with the municipalities or agencies owning or controlling such airports. Substantially all leases provide that the lessee shall pay taxes, maintenance, insurance and certain other operating expenses applicable to the leased property. Most leases also include renewal options and some aircraft leases include purchase options.\nThe following amounts applicable to capital leases are included in property and equipment:\nAt December 31, 1993, obligations under capital and noncancel- able operating leases for future minimum lease payments were as follows:\nRental expense under operating leases for 1993, 1992 and 1991 was $781 million, $707 million and $605 million, respectively. Rental expense for 1993 excludes a charge of $9 million related to certain airport facilities where USAir has, among other things, discontinued or reduced its service. Rental expense for 1992 excludes a charge of $72 million related to USAir's grounded BAe- 146 fleet. Rental expense for 1991 excludes a credit of $9 million for the BAe-146 fleet.\n(c) Legal Proceedings\nThe Company and various subsidiaries have been named as defendants in various suits and proceedings which involve, among other things, environmental concerns and employment matters. These suits and proceedings are in various stages of litigation, and the status of the law with respect to several of the issues involved is unsettled. For these reasons the outcome of these suits and proceedings is difficult to predict. In the Company's opinion, however, the disposition of these matters is not likely to have a material adverse effect on its financial condition or results of operations.\nIn 1989 and 1990, a number of U.S. air carriers, including USAir, received two Civil Investigative Demands (\"CIDs\") from the U.S. Department of Justice (\"DOJ\") (a CID is a request for information in the course of an antitrust investigation and does not constitute the institution of a civil or criminal action) related to investigations of price fixing in the domestic airline industry.\nThe investigations by the DOJ culminated in the filing of a lawsuit against Airline Tariff Publishing Company (\"ATPCo\") and eight major air carriers, including USAir, alleging that the defendants had agreed to fix prices in violation of Section 1 of the Sherman Act through the methods used to disseminate fare data to ATPCo, an airline-owned fare publishing service. To avoid the costs associated with protracted litigation and an uncertain outcome, USAir and another carrier decided to settle the lawsuit by entering into a consent decree to modify their fare-filing practices in certain respects and to implement compliance programs that would include education of employees regarding the carriers' responsibilities under the consent decree. Accordingly, the consent decree and the U.S. Government's complaint were filed contemporaneously in the U.S. District Court for the District of Columbia in December 1992. Due to certain legal requirements associated with the settlement of government antitrust suits, the consent decree could not be entered until a notice and comment period had expired. On November 1, 1993, after it had reviewed the comments, the Court entered the consent decree. USAir does not believe that the fare-filing practices reflected in the consent decree will have a material adverse effect on its financial condition or on its ability to compete. In March 1994, the remaining six air carrier defendants agreed to the entry of a separate consent decree to settle the lawsuit. This consent decree cannot be entered by the Court until a notice and comment period has expired. When that consent decree is entered, USAir can petition the Court to have its consent decree amended to conform with the other settlement and the Court will enter the amended consent decree.\nOn March 19, 1993, the U.S. District Court in Atlanta, Georgia entered a settlement involving USAir and five other U.S. air carrier defendants in the Domestic Air Transportation Antitrust Litigation class action lawsuit. The class action suit, which was filed in July 1990, alleged that the airlines used ATPCo to signal and communicate carrier pricing intentions and otherwise limit price competition for travel to and from numerous hub airports. Under the terms of the settlement, the six air carriers will pay $45 million in cash and issue $396.5 million in certificates valid for purchase of domestic air travel on any of the six airlines. USAir's share of the cash portion of the settlement, $5 million, was recorded in results of operations for the second quarter of 1992. The certificates provide a dollar-for-dollar discount against the cost of a ticket generally of up to a maximum of 10% per ticket, depending on the cost of the ticket. It is possible that this settlement could have a dilutive effect on USAir's passenger transportation revenue and associated cash flow. However, due to the interchangeability of the certificates among the six carriers involved in the settlement, the possibility that carriers not party to the settlement will honor the certificates, and the potential stimulative effect on travel created by the certificates, USAir cannot reasonably estimate the impact of this\nsettlement on future passenger revenue and cash flows. USAir has employed the incremental cost method to estimate a range of costs attributable to the exercise of the certificates, based on the assumption that the estimated maximum number of certificates to be redeemed for travel on USAir will be related to USAir's market share relative to the total market share of the six carriers involved in the settlement. USAir's estimated percentage of such market share is less than 9%. Incremental costs include unit costs for passenger food, beverages and supplies, fuel, liability insurance, and denied boarding compensation expenses expected to be incurred on a per passenger basis. USAir has estimated that its incremental cost will not be material based on the equivalent free trips associated with the settlement.\nThe Attorney General of the State of Florida and the Attorneys General of several other states are investigating whether several major airlines, including USAir, have engaged in price fixing and other unlawful restraints of trade. Certain of these Attorneys General have issued document requests to USAir and several other airlines requiring them to provide certain information and documents. At this time, USAir cannot predict the manner in which these investigations will be resolved and if the resolution will have an adverse effect on USAir's results of operations or financial position.\n(d) Aircraft Commitments\nAt December 31, 1993 USAir's new aircraft on firm order, options for new aircraft and scheduled payments for new aircraft orders (including progress payments, buyer furnished equipment, spares, and capitalized interest) were:\nUSAir may elect, under certain circumstances, to convert Boeing 737 Series and Boeing 767 Series firm order or option deliveries to Boeing 757-200 deliveries. If USAir were to elect such a substitution, the payments presented in the table above would change. USAir is currently in negotiations with Boeing\nregarding, among other things, the above schedule of new aircraft deliveries.\nIn addition, USAir has a commitment to purchase hushkits for certain of its McDonnell Douglas DC-9-30 aircraft and a substantial portion of its Boeing 737-200 aircraft. The installation of these hushkits will bring the aircraft into compliance with Federal Aviation Administration (\"FAA\") Stage 3 noise level requirements. The projected payments associated with the purchase of the hushkits are: $29.1 million - 1994; $12.0 million - 1995; $42.3 million - 1996; $43.4 million - 1997; $44.0 million - 1998; and $30.8 million thereafter.\n(e) Concentration of Credit Risk\nUSAir Group does not believe it is subject to any significant concentration of credit risk. At December 31, 1993, most of the Company's receivables related to tickets sold to individual passengers through the use of major credit cards (48%) or to tickets sold by other airlines (17%) and used by passengers on USAir or the commuter subsidiaries. These receivables are short- term, generally being settled shortly after sale or in the month following usage. Bad debt losses, which have been minimal in the past, have been considered in establishing allowances for doubtful accounts.\n(f) Guarantees\nAt December 31, 1993, USAir guaranteed payments of certain debt obligations of the Galileo International Partnership amounting to approximately $16 million.\n(5) SALE OF RECEIVABLES\nUSAir is party to an agreement (\"Receivables Agreement\") to sell, on a revolving basis, undivided interest of up to $240 million in a pool of designated receivables. Approximately $141 million was available for sale at December 31, 1993 based on receivable balances at that date. The maximum amount available under the Receivables Agreement to be sold gradually reduces from $240 million at December 31, 1993, to $190 million on June 30, 1994. The Receivables Agreement expires on December 21, 1994. USAir had no outstanding amounts due under the Receivable Agreement at December 31, 1993. The net amounts sold reduce receivables in the accompanying balance sheet by $220 million and $188 million at December 31, 1992 and 1991, respectively. Included in the accounts payable balances at December 31, 1992 and 1991, are $74 million and $64 million, respectively, which represent funds held by USAir related to previously sold receivables that had been collected.\nUSAir obtained a waiver from the purchaser of the receivables and its operating agent, exempting USAir from compliance with the coverage ratio financial covenant in the Receivables Agreement for the quarter ended December 31, 1993. USAir is currently unable to sell receivables under the Receivables Agreement because it is in violation of a minimum net worth covenant thereunder. In addition, based on current projections of its results for 1994, USAir expects that it will not be in compliance with the coverage ratio test and possibly other financial covenants at March 31, 1994 and during the remainder of the year. There can be no assurance that USAir will be able to obtain a waiver of compliance with these covenants or to arrange a replacement facility.\n(6) INCOME TAXES\nEffective January 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109, \"Accounting for Income Taxes\" (\"FAS 109\"). FAS 109 required a change from the deferred method under Accounting Principles Board Opinion No. 11 to the asset and liability method of accounting for income taxes. No cumulative adjustment at January 1, 1993, and no income tax credit for the year ended December 31, 1993, were recognized due to the FAS 109 limitation in recognizing benefits for net operating losses.\nThe Company files a consolidated Federal income tax return with its wholly-owned subsidiaries.\nThe components of the provision (credit) for income taxes are as follows:\nThe significant components of deferred income tax expense\/- (benefit) for the year ended December 31, 1993, are as follows:\nDeferred tax benefit (exclusive of the other components listed below) $(136,191) Adjustments to deferred tax assets and liabilities for enacted changes in tax laws and rates (8,880) Increase for the year in the valuation allowance for deferred tax assets 145,071 -------- Total $ 0 ========\nFor the years ended December 31, 1992 and 1991 deferred income taxes result from differences in the recognition of revenue and expenses and investment tax credits for tax and financial reporting purposes. The major items resulting in these differences and the related tax effects are shown in the following chart:\nA reconciliation of taxes computed at the statutory Federal tax rate on earnings before income taxes to the provision (credit) for income taxes is as follows:\nThe tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1993 are presented below:\n(in thousands) Deferred tax assets: Leasing transactions $ 132,551 Tax benefits purchased\/sold 79,434 Gain on sale and leaseback transactions 164,613 Employee benefits 430,257 Net operating loss carryforwards 557,494 Alternative minimum tax credit carryforwards 21,146 Investment tax credit carryforwards 49,802 Other deferred tax assets 62,615 --------- Total gross deferred tax assets 1,497,912 Less valuation allowance (564,838) --------- Net deferred tax assets 933,074\nDeferred tax liabilities: Equipment depreciation and amortization (874,640) Other deferred tax liabilities (58,434) --------- Net deferred tax liabilities (933,074) --------- Net deferred taxes $ 0 =========\nThe valuation allowance for deferred tax assets as of January 1, 1993, was $420 million. The increase in the valuation allowance during 1993 was $145 million.\nAt December 31, 1993, the Company had unused net operating losses of $1.5 billion for Federal tax purposes, which expire in the years 2005-2008. The Company also has available, to reduce future taxes payable, $460 million alternative minimum tax net operating losses expiring in 2007 and 2008, $50 million of investment tax credits expiring in 2002 and 2003, and $21 million of minimum tax credits which do not expire. The Federal income tax returns of the Company through 1986 have been examined and settled with the Internal Revenue Service.\n(7) BRITISH AIRWAYS PLC INVESTMENT\nOn January 21, 1993, USAir Group and BA entered into the Investment Agreement under which a wholly-owned subsidiary of BA purchased certain series of convertible preferred stock during 1993 (see Note 8 - Redeemable Preferred Stock) and BA entered into code sharing and wet lease arrangements with USAir contemplated by the Investment Agreement. On March 7, 1994, BA announced that it would not make any additional investments in the Company until the outcome of measures by the Company to reduce its costs and improve its financial results is known.\nAt December 31, 1993, the preferred stock held by BA con- stituted approximately 22% of the total voting interest in the Company. To the extent permitted by foreign ownership restrictions which are applicable by statute regulations or interpretation by regulatory authorities, including the U.S. Department of Transpor- tation (\"DOT\") (\"Foreign Ownership Restrictions\"), the preferred stock owned by BA votes on all matters presented to the Company's stockholders for a vote and has voting power equal to the underly- ing shares of Common Stock. Under the Investment Agreement, on January 21, 1993, BA designated three of its officers to serve on the Company's Board of Directors. The Company has agreed to use its best efforts to place these designees on the slate of nominees for election as Directors of the Company.\nIn addition to BA's holdings of the Company's preferred stock at December 31, 1993, BA has the option, which it has announced it will not exercise under current circumstances, to purchase, at a minimum, an additional $450 million of the Company's preferred stock. Under certain circumstances, BA is entitled, at its option, to purchase, on or prior to January 21, 1996, 50,000 shares of Series C Cumulative Convertible Senior Preferred Stock (\"Series C Preferred Stock\") resulting in an additional cash investment in the Company of $200 million, and, on or prior to January 21, 1998, 25,000 shares of Series E Cumulative Convertible Senior Preferred Stock (\"Series E Preferred Stock\") resulting in an additional cash investment in the Company of $250 million. If the DOT approves all the transactions and acts contemplated by the Investment Agreement, at the election of either BA or the Company on or prior to January 21, 1998, BA's purchase of the Series C Preferred Stock (unless previously consummated) and BA's purchase of the Series E Preferred Stock must be consummated under certain circumstances.\nOn March 15, 1993, the DOT issued an order (\"DOT Order\") stating, among other things, that BA's initial investment does not impair USAir's citizenship under current U.S. Foreign Ownership Restrictions. However, the DOT instituted a proceeding to consider whether USAir will remain a U.S. citizen if the transactions and acts contemplated by the Investment Agreement, including the possible sale of Series C Preferred Stock and Series E Preferred\nStock, to BA, are consummated. The DOT has indefinitely suspended the period for comments from interested parties pending its resolution of requests by other airlines for production of additional documents from USAir. The DOT Order states that the DOT expects and advises USAir and BA not to proceed with the closing of the purchase of the Series C Preferred Stock or the Series E Preferred Stock until the DOT has completed its review of USAir's citizenship. In any event, on March 7, 1994, BA announced it would not make any additional investments in the Company under current circumstances. USAir cannot predict the outcome of the proceedings or if further transactions contemplated under the Investment Agreement, including the sale of Series C and Series E Preferred Stock to BA, will be consummated. The sale of additional preferred stock to BA on June 10, 1993 (see Note 8(c)), did not result in BA's ownership of voting stock in the Company exceeding applicable foreign ownership restrictions and therefore does not affect the Company's U.S. citizenship under those restrictions.\n(8) REDEEMABLE PREFERRED STOCK\n(a) Series A Preferred Stock\nAt December 31, 1993, the Company had 358,000 shares of its 9 1\/4% Series A Cumulative Convertible Redeemable Preferred Stock (\"Series A Preferred Stock\"), without par value, outstanding which was convertible into 9,239,944 shares of the Company's Common Stock at a conversion price of approximately $38.74 per share. The Series A Preferred Stock ranks pari passu with the Series F Cumulative Convertible Senior Preferred Stock (\"Series F Preferred Stock\"), without par value, and Series T-_ Cumulative Convertible Exchangeable Senior Preferred Stock (\"Series T Preferred Stock\"), without par value, and senior to the Series B Cumulative Convert- ible Preferred Stock (\"Series B Preferred Stock\"), without par value, Junior Participating Preferred Stock, Series D (\"Series D Preferred Stock\"), without par value, and the Common Stock, with respect to dividend payments and the distribution of assets. At December 31, 1993, the Series A Preferred Stock is entitled to approximately 25.81 votes per share (determined by dividing the $1,000 liquidation preference per share of Series F Preferred Stock by the $38.74 conversion price), or a total of 9,239,944 votes, and votes together with the Series F Preferred Stock, the Series T Preferred Stock and the Common Stock, on all matters submitted to a vote of stockholders of the Company.\nThe Series A Preferred Stock is redeemable on August 7, 1999 at $1,000 per share. The Company has the right to redeem the stock at a 10% premium until that time. The agreement relating to the sale of the Series A Preferred Stock imposes certain restrictions on the purchaser's ability to increase its ownership of, and to transfer, its stock in USAir Group. There have been no changes in the balance sheet value of the Series A Preferred Stock since its issuance in 1989.\n(b) Series F Preferred Stock\nAt December 31, 1993, the Company had outstanding 30,000 shares of its 7% Series F Preferred Stock which was convertible into 15,458,658 shares of the Company's Common Stock at a conver- sion price of approximately $19.41 per share. The Series F Preferred Stock ranks pari passu with the Series A Preferred Stock and Series T Preferred Stock and senior to the Series B Preferred Stock, Series D Preferred Stock, and the Common Stock, with respect to dividend payments and the distribution of assets. At December 31, 1993, each share of Series F Preferred Stock was entitled to approximately 515.29 votes per share to the extent permitted by the existing Foreign Ownership Restrictions and votes with the Company's Series A Preferred Stock, the Series T Preferred Stock and the Company's Common Stock as a single class. Under Foreign Ownership Restrictions, no more than 25% of the Company's voting interest may be held by persons other than U.S. citizens. In accordance with the terms of any preferred stock held by BA, conversion rights and voting rights may not be exercised to the extent that doing so would result in a loss of the Company's or any of its subsidiaries' operating certificates and authorities under Foreign Ownership Restrictions, and it is assumed for this purpose that Series F Preferred Stock will be fully converted before any other preferred stock held by BA.\nThe Series F Preferred Stock is convertible at any time on or after January 21, 1997 to the extent that such conversion would not violate U.S. Foreign Ownership Restrictions. Series F Preferred Stock may be converted at the option of the Company at any time after January 21, 1998 if the average composite closing market price of Common Stock during any 30-day calendar period is at least 133% of the conversion price. The Series F Preferred Stock is mandatorily redeemable on January 21, 2008. If BA has not purchased the Series C Preferred Stock by January 21, 1996, then the Company may at its option redeem, in whole or in part, Series F Preferred Stock at the higher of market value or the price of $10,000 per share, plus accrued dividends. The Series F Certifi- cate provides that if on any one occasion on or prior to Janu- ary 21, 1996, any court or regulatory authority issues a final order that any material part of the Investment Agreement is unenforceable (except pursuant to bankruptcy or like event), then the conversion price of Series F Preferred Stock shall be reduced by 10.2564%. There have been no changes in the balance sheet value of the Series F Preferred Stock since its issuance in 1993.\n(c) Series T Preferred Stock\nUnder the Investment Agreement, BA has preemptive and optional purchase rights to maintain its proportionate ownership of the Company's Common Stock and convertible securities, measured in terms of the BA Percentage (\"BA Percentage\") which approximates BA's fully diluted ownership percentage based on BA's current and\npotential holdings in the Company. The BA Percentage is calculated without regard to Foreign Ownership Restrictions at the time of the calculation. BA may exercise such preemptive or optional purchase rights by purchasing, from time-to-time, a series of Series T Preferred Stock.\nAt December 31, 1993, the Company had two series of the Series T Preferred Stock outstanding. On June 10, 1993, BA exercised its preemptive purchase right by purchasing 9,919.8 shares of a series of the Series T Preferred Stock (\"Series T-2 Preferred Stock\") for approximately $99.2 million and exercised its optional purchase right by purchasing 152.1 shares of a series of Series T Preferred Stock (\"T-1 Preferred Stock\") for approximately $1.5 million. BA's preemptive right was triggered by the issuance of Common Stock, as described in Note 8 - Stockholders' Equity, and BA's optional purchase rights were triggered by the Company's issuance of additional shares of Common Stock through the exercise of options under various employee stock option plans and through the sale of shares to certain defined contribution plans during the period from January 21, 1993 to March 31, 1993. On March 7, 1994, BA advised the Company that it would not exercise its optional purchase rights to buy three additional series of Series T Preferred Stock triggered by the Company's issuance of common stock pursuant to certain employee benefit plans during the second, third and fourth quarters of 1993.\nThere have been no changes in the balance sheet value of the Series T-1 Preferred Stock and Series T-2 Preferred Stock since their issuance in 1993.\nThe terms of all series of the Series T Preferred Stock are substantially similar to those of the Series F Preferred Stock except as noted. Each share of Series T-2 Preferred Stock carries a conversion price of $26.40 and is convertible into approximately 378.79 shares of Common Stock or Non-Voting Class ET stock. Each share of Series T-1 Preferred Stock has a conversion price of $20.50 and is convertible into approximately 487.80 shares of Common Stock or Non-Voting Class ET stock. With respect to the Series T Preferred Stock, dividends are payable quarterly in arrears, at 50 basis points over the three-month LIBOR rate. Any shares of the Series T Preferred Stock held by any person other than BA or its subsidiaries may be redeemed for cash at any time at the option of the Company at $10,000 plus accrued dividends plus a redemption premium equal to $700 from the date of issue until the first anniversary thereof and reduced by $46.67 on each anniversary thereafter.\nThe Series T Preferred Stock is exchangeable, at the option of the Company, for that principal amount of floating rate convertible subordinated notes of the Company (\"T Notes\") equal to the liquidation preference of the shares to be exchanged and bearing interest at the dividend rate. Any accrued dividends on the Series\nT Preferred Stock to be exchanged will be treated as accrued interest on the T Notes. Each $10,000 aggregate principal amount of such T Notes will be entitled to a number of votes equal to the number of votes to which each share of Series T Preferred Stock was entitled at the time of its exchange for T Notes, subject to adjustment. If issued, T Notes will have terms otherwise consis- tent with the terms of the Series T Preferred Stock.\n(9) STOCKHOLDERS' EQUITY\n(a) Common Stock\nThe Company had 150,000,000 and 100,000,000 authorized shares of Common Stock, par value $1, at December 31, 1993 and 1992, respectively. If BA purchases the Series C Preferred Stock (see Note 6 - British Airways Plc Investment), the number of authorized shares of various classes of Common Stock will increase to 300,000,000. BA has indicated, however, that it will not make any additional investments in the Company under current circumstances. At December 31, 1993, approximately 52,618,000 shares were reserved for issuance upon the conversion of preferred stock and for offerings under employee stock purchase, stock option and stock incentive plans.\nOn May 4, 1993, the Company sold 11.5 million shares of previously unissued Common Stock at $20.75 per share through a public, underwritten offering. The offering netted proceeds of approximately $231 million.\n(b) Preferred Stock and Senior Preferred Stock\nAt December 31, 1993, the Company had 5,000,000 authorized shares of preferred stock, without nominal or par value, of which 358,000 shares were issued as Series A Preferred Stock, 43,000 shares were issued as Series B Preferred Stock and 1,035,000 shares were reserved as Series D Preferred Stock. Also, at December 31, 1993, the Company had 3,000,000 authorized shares of Senior Preferred Stock, without nominal or par value, of which 30,000 shares were issued as Series F Preferred Stock and approximately 10,000 were issued as Series T Preferred Stock.\n(c) Series B Preferred Stock\nAt December 31, 1993, the Company had 4,263,050 Depositary Shares, representing 42,630.5 shares of its $437.50 Series B Preferred Stock outstanding. Each Depositary Share represents 1\/100 of a share of the Series B Preferred Stock. The Series B Preferred Stock is convertible at any time, at the option of the holder, at the rate of 249.25 shares of Common Stock of the Company per preferred share, or 2.4925 shares of Common Stock per De- positary Share. The Series B Preferred Stock ranks junior to the Company's Series A Preferred Stock, the Series F Preferred Stock\nand the Series T Preferred Stock and senior to the Series D Preferred Stock and the Common Stock with respect to dividend payments and the distribution of assets, whether upon liquidation or otherwise. Except under certain circumstances, the holders of Series B Preferred Stock have no voting rights.\nThe Series B Preferred Stock is not redeemable prior to May 15, 1994. The Series B Preferred Stock is redeemable, at the option of the Company and with consent of the holders of Series F Preferred Stock, on or after May 15, 1994, (i) in whole but not in part, only in certain circumstances, for so long as any shares of Series A Preferred Stock are outstanding; and (ii) in whole or in part if no shares of Series A Preferred Stock are outstanding, in each case initially at a redemption price of approximately $53.06 per 1\/100 of a share and thereafter at prices declining to $50 per 1\/100 of a share (equivalent to $5,000 per share of Series B Preferred Stock) on or after May 15, 2001, plus dividends accrued and accumulated but unpaid to the redemption date.\n(d) Preferred Stock Purchase Rights\nEach outstanding share of Common Stock is accompanied by one Preferred Share Purchase Right (\"Right\") and each outstanding share of Series A Preferred Stock, Series F Preferred Stock and Series T Preferred Stock is accompanied by a Right for each share into which it is convertible. Each Right entitles the holder to buy 1\/100th of a share of Series D Preferred Stock at an exercise price of $175 per Right. The Rights expire on June 29, 1996. As long as the Rights remain outstanding, the Company will issue one Right with each new share of Common Stock issued upon the conversion of any preferred stock into, or the exercise of any options for, Common Stock, as long as such preferred stock or options were outstanding prior to the Rights becoming exercisable.\nGenerally, the Rights become exercisable only if a party other than, under certain circumstances, BA acquires 20% or more of the Company's Common Stock or announces a tender offer for 20% or more of the Common Stock. The Rights are redeemable at $.03 per Right at any time before 20% or more of the Company's Common Stock has been acquired. If at any time after the Rights become exercisable and before they have been redeemed the Company is involved in a merger or other business combination transaction, the Rights will automatically entitle a holder, other than a holder of 20% or more of the Company's Common Stock, to receive, upon exercise of each Right, a number of shares of Common Stock, or a number of common shares of the acquiring company, as the case may be, having a market value of two times the exercise price of each Right. In addition, at any time after the acquisition of 30% or more of the Common Stock by any person and prior to the acquisition by such person of 50% or more of the Common Stock, the Board of Directors of the Company may exchange the Rights (other than Rights owned by such person which have become void), in whole or in part, at an\nexchange ratio of one share of Common Stock, or 1\/100th of a share of Series D Preferred Stock, per Right.\nUntil the first to occur of the redemption or expiration of the Rights, the Company will issue one Right with each new share of Common Stock issued upon the conversion of any securities into, or the exercise of any options or warrants for, Common Stock if such securities, options or warrants were outstanding prior to when Rights became exercisable.\n(e) Treasury Stock\nIn 1989, the Company's Board of Directors authorized the repurchase from time-to-time of up to 9.4 million shares of its Common Stock in open market transactions. In 1989, approximately 2.1 million shares were repurchased. The Company sold approximate- ly 500,000 shares and approximately 390,000 shares of its treasury stock during 1993 and 1992, respectively. The remaining shares are carried on the accompanying balance sheet at the average acquisi- tion cost.\n(f) Employee Stock Option and Purchase Plans\nDuring 1992, the Company's stockholders approved the 1992 Stock Option Plan (\"1992 Plan\") which allows for the issuance of stock options to purchase up to 8,125,000 shares of USAir Group Common Stock to USAir employees who participate in the previously announced cost reduction program. Under the stock option program, employees whose pay was or is currently being reduced receive options to purchase 50 shares of Common Stock at a price not less than $15 per share for each $1,000 of salary reduction. The Company will grant stock options under the 1992 Plan only in connection with salary reductions. Participating employees have five years from the grant date to exercise such options. Options, with an exercise price of $15, have been granted to purchase ap- proximately five million shares of Common Stock in conjunction with salary reductions. The Company plans to seek authority from its stockholders at its 1994 Annual Meeting to reduce the number of shares reserved for this plan.\nAt December 31, 1993, 5.3 million shares of Common Stock are reserved for the granting of stock options or restricted stock under the Company's 1984 Stock Option and Stock Appreciation Rights (\"SARs\") Plan and 1988 Stock Incentive Plan. These plans provide that options may be granted as either nonqualified or incentive stock options. Options awarded prior to 1991, except for those that reverted, have vested. Options awarded during 1991, 1992 and 1993, except under the 1992 Plan, become exercisable generally within three years from date of grant. Optionees may also receive SARs which permit them to receive, in lieu of the right to exercise the stock option, an amount equivalent to the difference between the stock option price and the fair market value of the Common\nStock on the date of exercising the right. This amount may be paid in stock, in cash, or in any combination of the two. Also, restricted stock award grants for 57,000 shares and 111,600 shares were outstanding at December 31, 1993 and 1992, respectively. Deferred compensation related to the restricted stock, which vests over periods of up to five years, amounted to $.3 million and $ .6 million at December 31, 1993 and 1992, respectively.\nAs of December 31, 1993, options to acquire approximately 9 million shares under all three plans, including 85,000 SARs, were outstanding at a weighted average exercise price of $18.77. Of those outstanding, approximately six million options were exercis- able at December 31, 1993. Options were exercised to purchase approximately 33,500 and 6,000 shares of Common Stock at average exercise prices of $17.24 and $10.44 during 1993 and 1992, respectively.\n(g) Dividend Restrictions\nThe Company's Credit Agreement does not contain specific provisions which restrict the payment of dividends by USAir Group. The amount of dividends, however, is indirectly restricted through the existence of certain covenants contained in the Credit Agreement. At December 31, 1993, under the most restrictive of these provisions, the Company's ability to pay dividends is limited to approximately $77 million.\n(10) EMPLOYEE STOCK OWNERSHIP PLAN\nIn August 1989, USAir established an Employee Stock Ownership Plan (\"ESOP\"). The Company sold 2,200,000 shares of Common Stock to an Employee Stock Ownership Trust to hold on behalf of USAir's employees, exclusive of officers, in accordance with the terms of the Trust and the ESOP. Financing of approximately $111.4 million for the Trust's purchase of the shares was provided by USAir through a 9 3\/4% loan to the Trust, and an additional $2.2 million was contributed to the Trust by USAir. The loan is being repaid with contributions made by USAir. The contributions are made in amounts equal to the periodic loan payments as they come due, less dividends available for loan payment. The amount of dividends used for debt service by the ESOP was $127,000 in 1991. As the loan is repaid over time, participating employees receive allocations of the Common Stock purchased by the Trust. The initial maturity of the loan is 30 years. However, the ESOP provides that if the Company's profitability as measured by return on sales exceeds certain goals during the life of the ESOP, USAir's contributions and the repayment of the loan will be accelerated. Contributions made by USAir and therefore loan repayments made by the Trust were $11.4 million in 1993, 1992 and 1991. The interest portion of these contributions was $10.5 million in 1993, $10.6 million in 1992 and $10.7 million in 1991. Approximately 366,000 shares of Common Stock have been allocated to employees. USAir recognized\napproximately $4 million of compensation expense related to the ESOP in each of 1993, 1992 and 1991 based on shares allocated to employees (the \"shares allocated\" method). Deferred compensation related to the ESOP amounted to approximately $95 million, $98 million and $102 million at December 31, 1993, 1992 and 1991, respectively.\n(11) EMPLOYEE BENEFIT PLANS\n(a) Pension Plans\nThe Company's subsidiaries have several pension plans in effect covering substantially all employees. One qualified defined benefit plan covers USAir maintenance employees and provides benefits of stated amounts for specified periods of service. Qualified defined benefit plans for substantially all other employees provide benefits based on years of service and compensa- tion. The qualified defined benefit plans are funded, on a current basis, to meet requirements of the Employee Retirement Income Security Act of 1974.\nThe defined benefit pension plan for USAir non-contract employees was frozen at the end of 1991 for all non-contract participants, resulting in a one-time book gain of approximately $107 million in 1991. All non-contract plan participants became 100% vested at the time of the freeze. As a result of this plan curtailment, the accrual of service costs related to defined benefits for USAir non-contract employees ceased at the end of 1991. USAir implemented a defined contribution pension plan for non-contract employees in January 1993.\nThe funded status of the qualified defined benefit plans at December 31, 1993 and 1992 was as follows:\nApproximately 97% of the accumulated benefit obligation was vested at December 31, 1993 and 1992. Unrecognized transition assets are being amortized over periods up to 27 years. The weighted average discount rate used to determine the actuarial present value of the projected benefit obligation was 7.6% and 8.75% as of December 31, 1993 and 1992, respectively. The expected long-term rate of return on plan assets used in 1993 and 1992 was 9.5%. Rates of 3% to 6% were used to estimate future salary levels. At December 31, 1993, plan assets consisted of approxi- mately 8% in cash equivalents and short-term debt investments, 37% in equity investments, and 55% in fixed income and other invest- ments. At December 31, 1992, plan assets consisted of approximate- ly 4% in cash equivalents and short-term debt investments, 70% in equity investments, and 26% in fixed income and other investments.\nThe following items are the components of the net pension cost for the qualified defined benefit plans:\nNet pension cost for 1993 and 1991 presented above excludes a settlement charge of approximately $33.9 million and $21.6 million, respectively, related to \"early-out\" incentive programs offered to a limited number of USAir employees during the years. No such charges were incurred in 1992.\nNon-qualified supplemental pension plans are established for certain employee groups, which provide incremental pension payments from the Company's funds so that total pension payments equal amounts that would have been payable from the Company's principal pension plans if it were not for limitations imposed by income tax regulations.\nThe following table sets forth the non-qualified plans' status at December 31, 1993 and 1992:\nNet supplementary pension cost for the two years included the following components:\nThe discount rate used to determine the actuarial present value of the projected benefit obligation was 7.5% and 8.75% as of December 31, 1993 and 1992, respectively. Rates of 3% to 6% were used to estimate future salary levels.\nIn addition to the qualified and non-qualified defined benefit plans described above, USAir also contributes to certain defined contribution plans primarily for employees not covered under a collective bargaining agreement. Company contributions are based on a formula which considers the age and pre-tax earnings of each employee and the amount of employee contributions. The Company's contribution expense was $42 million for 1993. The Company recognized no such expense in 1992 or 1991.\n(b) Postretirement Benefits Other Than Pensions\nUSAir offers medical and life insurance benefits to employees who retire from the Company and their eligible dependents. The medical benefits provided by USAir are coordinated with Medicare benefits. Retirees generally contribute amounts towards the cost of their medical expenses based on years of service with the Company. USAir provides uninsured death benefit payments to survivors of retired employees for stated dollar amounts, or in the case of retired pilot employees, death benefit payments determined by age and level of pension benefit. The plans for postretirement medical and death benefits are funded on the pay-as-you-go basis.\nUSAir adopted Statement of Financial Accounting Standards No. 106 (\"FAS 106\") during 1992 and elected to record the January 1, 1992 Accumulated Postretirement Benefit Obligation (\"APBO\") using the immediate recognition approach. The cumulative effect of adopting FAS 106 was $745.7 million ($628.1 million net of tax benefit).\nThe following table sets forth the financial status of the plans as of December 31, 1993 and 1992:\nThe components of net periodic postretirement benefit cost are as follows:\nThe postretirement benefit expense for 1993 presented above excludes a charge of approximately $15.5 million related to \"early out\" programs offered to a limited number of employees during the year. No such charges were incurred in 1992 or 1991.\nThe discount rate used to determine the APBO was 7.75% and 8.75% at December 31, 1993 and 1992, respectively. The assumed health care cost trend rate used in measuring the APBO was 10.5% in 1993 and 1994, declining by 1% per year after 1994 to an ultimate rate of 4.5%. If the assumed health care cost trend rate were increased by one percentage point, the APBO at December 31, 1993 would be increased by 10% and 1993 periodic postretirement benefit cost would increase 13%.\nPrior to the adoption of FAS 106, USAir recognized expense for retiree health care at an estimated monthly rate (based on payments) and recognized expense for death benefits when paid. The expense using this methodology was approximately $8 million for 1991.\n(c) Postemployment Benefits\nUSAir adopted Statement of Financial Accounting Standards No. 112, \"Employer's Accounting for Postemployment Benefits\" (\"FAS 112\"), during 1993. FAS 112 requires the use of an accrual method to recognize postemployment benefits such as disability-related benefits. The cumulative effect at January 1, 1993 of adopting FAS 112 was $43.7 million.\n(12) SUPPLEMENTAL BALANCE SHEET INFORMATION\nThe components of certain accounts in the accompanying balance sheets are as follows:\n(13) NON-RECURRING AND UNUSUAL ITEMS\n(a) 1993\nThe Company's results for 1993 include non-recurring charges of (i) $43.7 million for the cumulative effect of an accounting change, as required by FAS 112 which was adopted during the third quarter of 1993, retroactive to January 1, 1993; (ii) $68.8 million for severance, early retirement and other personnel-related expenses recorded primarily during the third quarter of 1993 in connection with a workforce reduction of approximately 2,500 full- time positions between November 1993 and the first half of 1994; (iii) $36.8 million based on a projection of the repayment of certain employee pay reductions, recorded in the fourth quarter of\n1993; (iv) $13.5 million for certain airport facilities at locations where USAir has, among other things, discontinued or reduced its service, recorded in the fourth quarter of 1993; (v) $8.8 million for a loss on USAir's investment in the Galileo International Partnership which operates a computerized reserva- tions system, recorded in the fourth quarter of 1993; and (vi) $18.4 million credit related to non-operating aircraft recorded in the second quarter of 1993.\n(b) 1992\nThe Company's results for 1992 include (i) a charge of $628.1 million for the cumulative effect of an accounting change as required by FAS 106, effective January 1, 1992; (ii) a $107.4 million charge related to certain aircraft which have been withdrawn from service, recorded in the fourth quarter of 1992; (iii) a $34.1 million non-operating loss related to the sale of ten MD-82 aircraft which USAir eliminated from its fleet plan, recorded in the fourth quarter of 1992; and (iv) a $10.3 million gain on the sale of three wholly-owned subsidiaries, recorded in the third quarter of 1992 (see Note (1)).\n(c) 1991\nThe Company's results for 1991 include (i) a $107 million pre- tax gain related to freezing of the fully funded non-contract employee pension plan; (ii) a $21.6 million pre-tax expense related to early retirement incentives offered to certain employees during 1991; (iii) a $21 million pre-tax charge to establish an additional reserve for USAir's grounded BAe-146 fleet; and (iv) $18.5 million, net, in miscellaneous non-recurring charges.\n(14) SELECTED QUARTERLY FINANCIAL DATA (Unaudited)\nThe following table presents selected quarterly financial data for 1993 and 1992:\nItem 8B. FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION USAir, Inc.\nIndependent Auditors' Report\nThe Stockholder and Board of Directors USAir, Inc.:\nWe have audited the accompanying consolidated balance sheets of USAir, Inc. and subsidiaries (\"USAir\") as of December 31, 1993 and 1992, and the related consolidated statements of operations, cash flows, and changes in stockholder's equity for each of the years in the three-year period ended December 31, 1993. These consolidated financial statements are the responsibility of USAir's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.\nWe conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.\nIn our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of USAir, Inc. and subsidiaries as of December 31, 1993 and 1992, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1993 in conformity with generally accepted accounting principles.\nAs discussed in Note 9 to the consolidated financial state- ments, effective January 1, 1993, USAir changed its method of accounting for postemployment benefits and effective January 1, 1992, USAir changed its method of accounting for postretirement benefits other than pensions.\nKPMG PEAT MARWICK\nWashington, D. C. February 25, 1994\n(PAGE>\n(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES\n(a) Basis of Presentation\nThe accompanying consolidated financial statements include the accounts of USAir, Inc. (\"USAir\") and its wholly-owned subsidiary USAM Corp. (\"USAM\"). USAir is a wholly-owned subsidiary of USAir Group, Inc. (\"USAir Group\" or \"the Company\"). All significant intercompany accounts and transactions have been eliminated.\nAt December 31, 1992, USAM owned 11% of the Covia Partnership (\"Covia\") which owned and operated a computerized reservation system (\"CRS\"). In September 1993, Covia purchased the assets of the corporation that owned and operated the Galileo CRS which provided services to travel agent subscribers in Europe. Covia was then separated into three new entities. As a result, at Decem- ber 31, 1993, USAM owns 11% of the Galileo International Partner- ship which owns and operates the Galileo CRS, approximately 11% of the Galileo Japan Partnership which markets the Galileo CRS in Japan and approximately 21% of the Apollo Travel Services Partner- ship which markets the Galileo CRS in the U.S. and Mexico. USAM accounts for these investments using the equity method.\nOn October 9, 1991, USAir reached agreement for the sale of certain assets of its wholly-owned subsidiary Pacific Southwest Airmotive (\"Airmotive\"). Airmotive discontinued operations in the third quarter of 1991. USAir did not realize any material gain or loss on the sale and discontinuance of Airmotive's operations.\nCertain 1992 and 1991 amounts have been reclassified to conform with 1993 classifications.\n(b) Cash and Cash Equivalents\nFor financial statement purposes, the Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents.\n(c) Materials and Supplies\nInventories of materials and supplies are valued at average cost and are charged to operations as consumed. An allowance for obsolescence is provided for flight equipment expendable parts.\n(d) Property and Equipment\nProperty and equipment is stated at cost or, if acquired under capital leases, at the lower of the present value of minimum lease payments or fair market value at the inception of the lease. Maintenance and repairs, including the overhaul of aircraft components, are charged to operating expense as incurred and costs of major improvements are capitalized for both owned and leased assets. Interest related to deposits on aircraft purchase contracts and facility and equipment construction projects is capitalized as additional cost of the asset or as leasehold improvement if the asset is leased. Depreciation and amortization for principal asset classifications is provided on a straight-line basis to estimated residual values over estimated depreciable lives as follows:\nProperty acquired under capital lease is amortized on a straight-line basis over the term of the lease and charged to depreciation expense.\n(e) Goodwill, Other Intangibles and Other Assets\nGoodwill, the cost in excess of fair value of identified net assets acquired, is being amortized on a straight-line basis over 40 years as other non-operating expense. Accumulated amortization at December 31, 1993 and 1992 was $98 million and $82 million, respectively.\nIntangible assets consist of purchased operating rights at various airports, purchased route authorities, and the intangible assets associated with the underfunded amounts of certain pension plans. The operating rights, valued at purchase cost or appraised value if acquired from Piedmont Aviation, Inc. (\"Piedmont Avia- tion\") or Pacific Southwest Airlines (\"PSA\"), are being amortized over periods ranging from ten to 25 years as Other Rent and Landing Fees Expense. The purchased route authorities are amortized over periods of 25 years as other operating expense. Accumulated amortization at December 31, 1993 and 1992 was $72 million and $64 million, respectively. The decrease in Other Intangibles, net in 1993 is primarily attributable to the $47 million reclassification of two London routes to Other Assets as a result of USAir's relinquishment of these routes as contemplated by the January 21, 1993 Investment Agreement (\"Investment Agreement\") between the Company and British Airways Plc (\"BA\"). USAir relinquished its Charlotte to London route authority in January 1994. In addition, takeoff and landing slots at Washington National Airport were purchased from Northwest Airlines, Inc. (\"Northwest\") for $10 million during 1993.\n(f) Restricted Cash and Investments\nRestricted cash and investments consist primarily of deposits in trust accounts to collateralize letters of credit or workers compensation policies and short-term investments restricted for specified construction projects. These amounts are classified as Other Assets on the accompanying balance sheets.\n(g) Deferred Gains on Sale and Leaseback Transactions\nGains on aircraft sale and leaseback transactions are deferred and amortized over the term of the leases as a reduction of rental expense.\n(h) Passenger Revenue Recognition\nPassenger ticket sales are recognized as revenue when the transportation service is rendered. At the time of sale, a liability is established (Traffic Balances Payable and Unused Tickets) and subsequently eliminated either through carriage of the passenger, through billing from another carrier which renders the service or by refund to the passenger. Approximately $29 million and $28 million of amounts owed to wholly-owned subsidiaries of USAir Group for passenger transportation revenue are included in Traffic Balances Payable and Unused Tickets at December 31, 1993 and 1992, respectively.\n(i) Frequent Traveler Awards\nUSAir accrues the estimated incremental cost of providing outstanding travel awards earned by participants in its Frequent Traveler Program.\n(j) Investment Tax Credit\nInvestment tax credit benefits are recorded using the \"flow- through\" method as a reduction of the Federal income tax provision.\n(k) Swap Agreements\nUSAir has entered into hedging arrangements to reduce its exposure to fluctuations in the price of jet fuel. Net settlements are recorded as adjustments to aviation fuel expense. USAir is party to such hedging arrangements with several entities. Under these arrangements, the Company's maximum commitments, which are offset by amounts received under the arrangements, totaled approximately $100.3 million and $158.7 million at December 31, 1993 and 1992, respectively. Although the agreements expose the Company to credit loss in the event of nonperformance by the other parties to the agreements, the Company does not anticipate such nonperformance.\n(2) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS\nUnless a quoted market price indicates otherwise, the fair values of cash and investments generally approximate carrying values because of the short maturity of these instruments. USAir has estimated the fair value of long-term debt based on quoted market prices for the same or similar issues or on the current rates offered to the Company for debt of similar remaining maturities. The fair values of energy swap agreements and foreign currency contracts are obtained from dealer quotes whereby these values represent the estimated amount USAir would receive or pay to terminate such agreements.\nThe estimated fair values of USAir's financial instruments are summarized as follows:\n(3) LONG-TERM DEBT\nDetails of long-term debt are as follows:\nMaturities of long-term debt and debt under capital leases for the next five years are as follows:\n(in thousands)\n1994 $ 85,715 1995 75,691 1996 75,715 1997 86,496 1998 155,234 Thereafter 2,153,879\nInterest rates on $239 million principal amount of long-term debt at December 31, 1993 are subject to adjustment to reflect prime rate and other rate changes.\nEquipment financings totaling $2.1 billion are collateralized by aircraft and engines with a net book value of $2.2 billion at December 31, 1993. In addition, certain USAir aircraft and engines with a net book value of $162 million collateralize USAir Group's Credit Agreement borrowings.\nAn aggregate of $32 million of future principal payments of the Equipment Financing Agreements are payable in Japanese Yen. This foreign currency exposure has been hedged to maturity. Although the Company is exposed to credit loss in the event of non- performance by the counterparty to the hedge agreement, the Company does not anticipate such non-performance.\nOn February 2, 1994, USAir sold $175 million principal amount of 9 5\/8% Senior Notes (\"9 5\/8% Senior Notes\") which are uncondi- tionally guaranteed by the Company. The 9 5\/8% Senior Notes are not reflected in the above table because they were sold after December 31, 1993.\n(4) COMMITMENTS AND CONTINGENCIES\n(a) Operating Environment\nThe economic conditions in the United States, fare competition and the emergence and growth of low cost, low fare carriers in the domestic airline industry are factors affecting the financial condition of USAir. Industry capacity has recently failed to mirror changes in demand due primarily to the continued delivery of new aircraft and secondarily, to the prolonged operation of certain major U.S. carriers under the protection of Chapter 11 of the Bankruptcy Code. USAir competes with at least one major airline on most of its routes between major cities. Although the economy generally has shown signs of improvement, the Company expects that the competitive environment in the airline industry, the entry of low cost, low fare carriers into USAir's markets, and the excess\ncapacity in the domestic airline industry will continue to have an adverse effect on USAir's passenger revenue for the foreseeable future. The extent or duration of these conditions cannot be reasonably determined at this time.\n(b) Lease Commitments\nUSAir leases certain aircraft, engines, computer and ground equipment, in addition to the majority of its ground facilities. Ground facilities include executive offices, overhaul and mainte- nance bases and ticket and administrative offices. Public airports are utilized for flight operations under lease arrangements with the municipalities or agencies owning or controlling such airports. Substantially all leases provide that the lessee shall pay taxes, maintenance, insurance and certain other operating expenses applicable to the leased property. Most leases also include renewal options and some aircraft leases include purchase options.\nThe following amounts applicable to capital leases are included in property and equipment:\nAt December 31, 1993, obligations under capital and noncancel- able operating leases for future minimum lease payments were as follows:\nRental expense under operating leases for 1993, 1992 and 1991 was $739 million, $678 million and $576 million, respectively. Rental expense for 1993 excludes a charge of $9 million related to certain airport facilities where USAir has, among other things, discontinued or reduced its service. Rental expense for 1992 excludes a charge of $72 million related to USAir's grounded BAe- 146 fleet. Rental expense for 1991 excludes a credit of $9 million for the BAe-146 fleet.\n(c) Legal Proceedings\nUSAir and various subsidiaries have been named as defendants in various suits and proceedings which involve, among other things, environmental concerns and employment matters. These suits and proceedings are in various stages of litigation, and the status of the law with respect to several of the issues involved is unset- tled. For these reasons the outcome of these suits and proceedings is difficult to predict. In the Company's opinion, however, the disposition of these matters is not likely to have a material adverse effect on its financial condition or results of operations.\nIn 1989 and 1990, a number of U.S. air carriers, including USAir, received two Civil Investigative Demands (\"CIDs\") from the U.S. Department of Justice (\"DOJ\") (a CID is a request for information in the course of an antitrust investigation and does not constitute the institution of a civil or criminal action) related to investigations of price fixing in the domestic airline industry.\nThe investigations by the DOJ culminated in the filing of a lawsuit against Airline Tariff Publishing Company (\"ATPCo\") and eight major air carriers, including USAir, alleging that the defendants had agreed to fix prices in violation of Section 1 of the Sherman Act through the methods used to disseminate fare data to ATPCo, an airline-owned fare publishing service. To avoid the costs associated with protracted litigation and an uncertain outcome, USAir and another carrier decided to settle the lawsuit by entering into a consent decree to modify their fare-filing practices in certain respects and to implement compliance programs that would include education of employees regarding the carriers' responsibilities under the consent decree. Accordingly, the consent decree and the U.S. Government's complaint were filed contemporaneously in the U.S. District Court for the District of Columbia in December 1992. Due to certain legal requirements associated with the settlement of government antitrust suits, the consent decree could not be entered until a notice and comment period had expired. On November 1, 1993, after it had reviewed the comments, the Court entered the consent decree. USAir does not believe that the fare-filing practices reflected in the consent decree will have a material adverse effect on its financial condition or on its ability to compete. In March 1994, the remaining six air carrier defendants agreed to the entry of a separate consent decree to settle the lawsuit. This consent decree cannot be entered until a notice and comment period has expired. When that consent decree is entered, USAir can petition the Court to have its consent decree amended to conform with the other settlement and the Court will enter the amended consent decree.\nOn March 19, 1993, the U.S. District Court in Atlanta, Georgia entered a settlement involving USAir and five other U.S. air carrier defendants in the Domestic Air Transportation Antitrust Litigation class action lawsuit. The class action suit, which was filed in July 1990, alleged that the airlines used ATPCo to signal and communicate carrier pricing intentions and otherwise limit price competition for travel to and from numerous hub airports. Under the terms of the settlement, the six air carriers will pay $45 million in cash and issue $396.5 million in certificates valid for purchase of domestic air travel on any of the six airlines. USAir's share of the cash portion of the settlement, $5 million, was recorded in results of operations for the second quarter of 1992. The certificates provide a dollar-for-dollar discount against the cost of a ticket generally of up to a maximum of 10% per ticket, depending on the cost of the ticket. It is possible that this settlement could have a dilutive effect on USAir's passenger transportation revenue and associated cash flow. However, due to the interchangeability of the certificates among the six carriers involved in the settlement, the possibility that carriers not party to the settlement will honor the certificates, and the potential stimulative effect on travel created by the certificates, USAir cannot reasonably estimate the impact of this settlement on future passenger revenue and cash flows. USAir has\nemployed the incremental cost method to estimate a range of costs attributable to the exercise of the certificates, based on the assumption that the estimated maximum number of certificates to be redeemed for travel on USAir will be related to USAir's market share relative to the total market share of the six carriers involved in the settlement. USAir's estimated percentage of such market share is less than 9%. Incremental costs include unit costs for passenger food, beverages and supplies, fuel, liability insurance, and denied boarding compensation expenses expected to be incurred on a per passenger basis. USAir has estimated that its incremental cost will not be material based on the equivalent free trips associated with the settlement.\nThe Attorney General of the State of Florida and the Attorneys General of several other states are investigating whether several major airlines, including USAir, have engaged in price fixing and other unlawful restraints of trade. Certain of these Attorneys General have issued document requests to USAir and several other airlines requiring them to provide certain information and documents. At this time, USAir cannot predict the manner in which these investigations will be resolved and if the resolution will have an adverse effect on USAir's results of operations or financial position.\n(d) Aircraft Commitments\nAt December 31, 1993, USAir's new aircraft on firm order, options for new aircraft and scheduled payments for new aircraft orders (including progress payments, buyer furnished equipment, spares, and capitalized interest) were:\nUSAir may elect, under certain circumstances, to convert Boeing 737 Series and Boeing 767 Series firm order or option deliveries to Boeing 757-200 deliveries. If USAir were to elect such a substitution, the payments presented in the table above would change. USAir is currently in negotiations with Boeing\nregarding, among other things, the above schedule of new aircraft deliveries.\nIn addition, USAir has a commitment to purchase hushkits for certain of its McDonnell Douglas DC-9-30 aircraft and a substantial portion of its Boeing 737-200 aircraft. The installation of these hushkits will bring the aircraft into compliance with Federal Aviation Administration (\"FAA\") Stage 3 noise level requirements. The projected payments associated with the purchase of the hushkits are: $29.1 million - 1994; $12.0 million - 1995; $42.3 million - 1996; $43.4 million - 1997; $44.0 million - 1998; and $30.8 million thereafter.\n(e) Concentration of Credit Risk\nUSAir does not believe it is subject to any significant concentration of credit risk. At December 31, 1993, most of USAir's receivables related to tickets sold to individual passen- gers through the use of major credit cards (47%) or to tickets sold by other airlines (16%) and used by passengers on USAir or USAir Group's commuter subsidiaries. These receivables are short-term, generally being settled shortly after sale or in the month following usage. Bad debt losses, which have been minimal in the past, have been considered in establishing allowances for doubtful accounts.\n(f) Guarantees\nAt December 31, 1993, USAir guaranteed payments of certain debt obligations of the Galileo International Partnership amounting to approximately $16 million. In addition, at December 31, 1993, USAir guaranteed payments of debt and lease obligations of USAir Group's three wholly-owned subsidiaries amounting to approximately $148 million.\n(5) SALE OF RECEIVABLES\nUSAir is party to an agreement (\"Receivables Agreement\") to sell, on a revolving basis, undivided interest of up to $240 million in a pool of designated receivables. Approximately $141 million was available for sale at December 31, 1993 based on receivable balances at that date. The maximum amount available under the Receivable Agreement to be sold gradually reduces from $240 million at December 31, 1993, to $190 million on June 30, 1994. The Receivables Agreement expires on December 21, 1994. USAir had no outstanding amounts due under the Receivable Agreement at December 31, 1993. The net amounts sold reduce receivables in the accompanying balance sheet by $220 million and $188 million at December 31, 1992 and 1991, respectively. Included in the accounts payable balances at December 31, 1992 and 1991, are $74 million and $64 million, respectively, which represent funds held by USAir related to previously sold receivables that had been collected.\nUSAir obtained a waiver from the purchaser of the receivables and its operating agent, exempting USAir from compliance with the coverage ratio financial covenant in the Receivables Agreement for the quarter ended December 31, 1993. USAir is currently unable to sell receivables under the Receivables Agreement because it is in violation of a minimum net worth covenant thereunder. In addition, based on current projections of its results for 1994, USAir expects that it will not be in compliance with the coverage ratio test and possibly other financial covenants at March 31, 1994 and during the remainder of the year. There can be no assurance that USAir will be able to obtain a waiver of compliance with these covenants or arrange a replacement facility.\n(6) INCOME TAXES\nEffective January 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109, \"Accounting for Income Taxes\" (\"FAS 109\"). FAS 109 required a change from the deferred method under Accounting Principles Board Opinion No. 11 to the asset and liability method of accounting for income taxes. No cumulative adjustment at January 1, 1993, and no income tax credit for the year ended December 31, 1993, were recognized due to the FAS 109 limitation in recognizing benefits for net operating losses. USAir files a consolidated Federal income tax return with its parent USAir Group pursuant to a tax allocation agreement.\nThe components of the provision (credit) for income taxes are as follows:\nThe significant components of deferred income tax ex- pense\/(benefit) for the year ended December 31, 1993, are as follows:\n(in thousands) Deferred tax benefit (exclusive of the other components listed below) $(121,847) Adjustments to deferred tax assets and liabilities for enacted changes in tax laws and rates (9,429) Increase for the year in the valuation allowance for deferred tax assets 131,276 -------- Total $ 0 ========\nFor the years ended December 31, 1992 and 1991, deferred income taxes result from differences in the recognition of revenue and expenses and investment tax credits for tax and financial reporting purposes. The major items resulting in these differences and the related tax effects are shown in the following chart:\nA reconciliation of taxes computed at the statutory Federal tax rate on earnings before income taxes to the provision (credit) for income taxes is as follows:\nThe tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1993 are presented below:\n(in thousands) Deferred tax assets: Leasing transactions $ 129,276 Tax benefits purchased\/sold 79,434 Gain on sale and leaseback transactions 162,400 Employee benefits 429,312 Net operating loss carryforwards 508,240 Alternative minimum tax credit carryforwards 20,881 Investment tax credit carryforwards 47,880 Other deferred tax assets 61,210 --------- Total gross deferred tax assets 1,438,633 Less valuation allowance (568,816) --------- Net deferred tax assets 869,817 Deferred tax liabilities: Equipment depreciation and amortization (840,584) Other deferred tax liabilities (29,233) --------- Net deferred tax liabilities (869,817) --------- Net deferred taxes $ 0 =========\nThe valuation allowance for deferred tax assets as of January 1, 1993, was $438 million. The increase in the valuation allowance for 1993 was $131 million.\nAt December 31, 1993, the Company had unused net operating losses of $1.3 billion for Federal tax purposes, which expire in the years 2005-2008. USAir also has available, to reduce future taxes payable, $429 million alternative minimum tax net operating losses expiring in 2007 and 2008, $47 million of investment tax credits expiring in 2002 and 2003, and $20 million of minimum tax credits which do not expire. The Federal income tax returns of the Company through 1986 have been examined and settled with the Internal Revenue Service.\n(7) STOCKHOLDER'S EQUITY\nUSAir Group owns all of the outstanding common stock of USAir. USAir Group's Credit Agreement includes a provision that limits USAir's ability to declare dividends to USAir Group.\n(8) EMPLOYEE STOCK OWNERSHIP PLAN\nIn August 1989, USAir established an Employee Stock Ownership Plan (\"ESOP\"). USAir Group sold 2,200,000 shares of its Common Stock to an Employee Stock Ownership Trust to hold on behalf of USAir's employees, exclusive of officers, in accordance with the terms of the Trust and the ESOP. Financing of approximately $111.4 million for the Trust's purchase of the shares was provided by USAir through a 9 3\/4% loan to the Trust, and an additional $2.2 million was contributed to the Trust by USAir. The loan is being repaid with contributions made by USAir. The contributions are made in amounts equal to the periodic loan payments as they come due, less dividends available for loan payment. The amount of dividends used for debt service by the ESOP was $127,000 in 1991. As the loan is repaid over time, participating employees receive allocations of the Common Stock purchased by the Trust. The initial maturity of the loan is 30 years. However, the ESOP provides that if the Company's profitability as measured by return on sales exceeds certain goals during the life of the ESOP, USAir's contributions and the repayment of the loan will be accelerated. Contributions made by USAir and therefore loan repayments made by the Trust were $11.4 million in 1993, 1992 and 1991. The interest portion of these contributions was $10.5 million in 1993, $10.6 million in 1992 and $10.7 million in 1991. Approximately 366,000 shares of Common Stock have been allocated to employees. USAir recognized approximately $4 million of compensation expense related to the ESOP in each of 1993, 1992 and 1991 based on shares allocated to employees (the \"shares allocated\" method). Deferred compensation related to the ESOP amounted to approximately $95 million, $98 million and $102 million at December 31, 1993, 1992 and 1991, respectively.\n(9) EMPLOYEE BENEFIT PLANS\n(a) Pension Plans\nUSAir has several pension plans in effect covering substan- tially all employees. One qualified defined benefit plan covers USAir maintenance employees and provides benefits of stated amounts for specified periods of service. Qualified defined benefit plans for substantially all other employees provide benefits based on years of service and compensation. The qualified defined benefit plans are funded, on a current basis, to meet requirements of the Employee Retirement Income Security Act of 1974.\nThe defined benefit pension plan for USAir non-contract employees was frozen at the end of 1991 for all non-contract participants, resulting in a one-time book gain of approximately $107 million in 1991. All non-contract plan participants became 100% vested at the time of the freeze. As a result of this plan curtailment, the accrual of service costs related to defined\nbenefits for USAir non-contract employees ceased at the end of 1991. USAir implemented a defined contribution pension plan for non-contract employees in January 1993.\nThe funded status of the qualified defined benefit plans at December 31, 1993 and 1992 was as follows:\nApproximately 97% of the accumulated benefit obligation was vested at December 31, 1993 and 1992. Unrecognized transition assets are being amortized over periods up to 27 years. The weighted average discount rate used to determine the actuarial present value of the projected benefit obligation was 7.6% and 8.75% as of December 31, 1993 and 1992, respectively. The expected long-term rate of return on plan assets used in 1993 and 1992 was 9.5%. Rates of 3% to 6% were used to estimate future salary levels. At December 31, 1993, plan assets consisted of approxi- mately 8% in cash equivalents and short-term debt investments, 37% in equity investments, and 55% in fixed income and other invest- ments. At December 31, 1992, plan assets consisted of approximate- ly 4% in cash equivalents and short-term debt investments, 70% in equity investments, and 26% in fixed income and other investments.\nThe following items are the components of the net pension cost for the qualified defined benefit plans:\n1993 1992 1991 ---- ---- ----\n(in millions) Service cost (benefits earned during the year) $ 90 $ 79 $ 98 Interest cost on projected benefit obligation 188 171 168 Actual return on plan assets (224) (114) (353) Net amortization and deferral 40 (65) 201 ---- ---- ---- Net pension cost $ 94 $ 71 $ 114 ==== ==== ====\nNet pension cost for 1993 and 1991 presented above excludes a charge of approximately $33.9 million and $21.6 million, respec- tively, related to \"early-out\" incentive programs offered to a limited number of USAir employees during the years. No such charges were incurred in 1992.\nNon-qualified supplemental pension plans are established for certain employee groups, which provide incremental pension payments from the Company's funds so that total pension payments equal amounts that would have been payable from the Company's principal pension plans if it were not for limitations imposed by income tax regulations.\nThe following table sets forth the non-qualified plans' status at December 31, 1993 and 1992:\nNet supplementary pension cost for the two years included the following components:\nThe discount rate used to determine the actuarial present value of the projected benefit obligation was 7.5% and 8.75% as of December 31, 1993 and 1992, respectively. Rates of 3% and 6% were used to estimate future salary levels.\nIn addition to the qualified and non-qualified defined benefit plans described above, USAir also contributes to certain defined contribution plans primarily for employees not covered under a collective bargaining agreement. Company contributions are based on a formula which considers the age and pre-tax earnings of each employee and the amount of employee contributions. USAir's contribution expense was $42 million for 1993. USAir recognized no such expense in 1992 and 1991.\n(b) Postretirement Benefits Other Than Pensions\nUSAir offers medical and life insurance benefits to employees who retire from the Company and their eligible dependents. The medical benefits provided by USAir are coordinated with Medicare benefits. Retirees generally contribute amounts towards the cost of their medical expenses based on years of service with the Company. USAir provides uninsured death benefit payments to survivors of retired employees for stated dollar amounts, or in the case of retired pilot employees, death benefit payments determined by age and level of pension benefit. The plans for postretirement medical and death benefits are funded on the pay-as-you-go basis.\nUSAir adopted Statement of Financial Accounting Standards No. 106 (\"FAS 106\") during 1992 and elected to record the January 1, 1992 Accumulated Postretirement Benefit Obligation (\"APBO\") using the immediate recognition approach. The cumulative effect of adopting FAS 106 was $745.5 million ($638.8 million net of tax benefit).\nThe following table sets forth the financial status of the plans as of December 31, 1993 and 1992:\nThe postretirement benefit expense for 1993 presented above excludes a charge of approximately $15.5 million related to \"early- out\" programs offered to a limited number of employees during the year. No such charges were incurred in 1992 or 1991.\nThe discount rate used to determine the APBO was 7.75% and 8.75% at December 31, 1993 and 1992, respectively. The assumed health care cost trend rate used in measuring the APBO was 10.5% in 1993 and 1994, declining by 1% per year after 1994 to an ultimate rate of 4.5%. If the assumed health care cost trend rate were increased by 1 percentage point, the APBO at December 31, 1993 would be increased by 10% and 1993 periodic postretirement benefit cost would increase 13%.\nPrior to the adoption of FAS 106, USAir recognized expense for retiree health care at an estimated monthly rate (based on payments) and recognized expense for death benefits when paid. The expense using this methodology was approximately $8 million for 1991.\n(c) Postemployment Benefits\nUSAir adopted Statement of Financial Accounting Standards No. 112, \"Employers' Accounting for Postemployment Benefits\" (\"FAS 112\"), during 1993. FAS 112 requires the use of an accrual method to recognize postemployment benefits such as disability-related benefits. The cumulative effect at January 1, 1993 of adopting FAS 112 was $43.7 million.\n(10) SUPPLEMENTAL BALANCE SHEET INFORMATION\nThe components of certain accounts in the accompanying balance sheets are as follows:\n(11) NON-RECURRING AND UNUSUAL ITEMS\n(a) 1993\nUSAir's results for 1993 include non-recurring charges of (i) $43.7 million for the cumulative effect of an accounting change, as required by FAS 112 which was adopted during the third quarter of 1993, retroactive to January 1, 1993; (ii) $68.8 million for severance, early retirement and other personnel-related expenses recorded primarily during the third quarter of 1993 in connection with a workforce reduction of approximately 2,500 full-time positions between November 1993 and the first half of 1994; (iii) $36.8 million based on a projection of the repayment of certain employee pay reductions, recorded in the fourth quarter of 1993; (iv) $13.5 million for certain airport facilities at locations where USAir has, among other things, discontinued or reduced its service, recorded in the fourth quarter of 1993; (v) $8.8 million for a loss on USAir's investment in the Galileo International Partnership, which operates a computerized reservation system, recorded in the fourth quarter of 1993; and (vi) $18.4 million credit related to non-operating aircraft, recorded in the second quarter of 1993.\n(b) 1992\nUSAir's results for 1992 include (i) a charge of $628.1 million for the cumulative effect of an accounting change as required by FAS 106, effective January 1, 1992; (ii) a $107.4 million charge related to certain aircraft which have been withdrawn from service, recorded in the fourth quarter of 1992; and (iii) a $34.1 million non-operating loss related to the sale of ten MD-82 aircraft which USAir eliminated from its fleet plan, recorded in the fourth quarter of 1992.\n(c) 1991\nUSAir's results for 1991 include (i) a $107 million a pre-tax gain related to freezing of the fully funded non-contract employee pension plan; (ii) a $21.6 million pre-tax expense related to early retirement incentives offered to certain employees during 1991; (iii) a $21 million pre-tax charge to establish an additional reserve for USAir's grounded BAe-146 fleet; and (iv) a $18.5 million, net, in miscellaneous pre-tax non-recurring charges.\n(12) SELECTED QUARTERLY FINANCIAL DATA (Unaudited)\nThe following table presents selected quarterly financial data for 1993 and 1992:\nItem 9.","section_7A":"","section_8":"","section_9":"Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE\nNone.\nPART III\nItem 10.","section_9A":"","section_9B":"","section_10":"Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF USAir Group, Inc.\nEach of the persons listed below is currently a director of the Company and was elected in 1993 by the stockholders of the Company. Each director of the Company is also a director of USAir. Except as noted otherwise, the following biographies disclose the age and describe the business experience of each Director for at least the past five years. As required by the Investment Agreement, the Board of Directors amended the Company's By-Laws on January 21, 1993 to increase the authorized number of directors by three and immediately thereafter elected Messrs. Marshall, Maynard and Stevens to fill the new directorships. Under the Investment Agreement, the Company is required to use its best efforts to ensure that the slate of persons nominated by the Company for election as directors of the Company includes that number of persons designated by BA that is the percentage of the total then authorized number of directors, which is currently 16, of the Company that is nearest to but not greater than the percentage (but in no event greater than 25%) of the aggregate voting power of the securities that vote with the Common Stock as a single class for the election of directors of the Company then held by BA and its wholly-owned subsidiaries. Under this provision of the Investment Agreement, BA is entitled to designate three directors to the Board of Directors and has accordingly designated Messrs. Marshall, Maynard and Stevens.\nServed as Director since --------\nWarren E. Buffett, 63.... Mr. Buffett has been Chairman 1993 and Chief Executive Officer of Berkshire Hathaway Inc. (insurance, candy, retailing, manufacturing and publishing) since 1970. He is also a Director of Capital Cities\/ ABC, Inc., The Coca-Cola Company, The Gillette Comp- pany and Salomon Inc. Mr. Buffett is a member of the Finance and Planning Committee of the Board of Directors.\nEdwin I. Colodny, 67..... Mr. Colodny is of counsel to 1975 the law firm of Paul, Has- tings, Janofsky & Walker. He retired as Chairman of the Company and of USAir in July 1992. He served as Chief Executive Officer of USAir from 1975 until retiring as an employee of USAir in June 1991. Mr. Colodny is a Director of Martin Marietta Corporation, Comsat Corporation and Ester- line Technologies, Inc., and is a member of the Board of Trustees of the University of Rochester. He is a member of the Finance and Planning and Nominating Committees of the Board of Directors.\nMathias J. DeVito, 63.... Mr. DeVito is Chairman of the 1981 Board and Chief Executive Officer of The Rouse Com- pany (real estate develop- ment and management). He also serves as a Director of First Maryland Bancorp and subsidiaries of The Rouse Company. He is a member of the Board of the Business Committee for the Arts and former Chair of the Greater Baltimore Committee. Mr. DeVito is Chairman of the Compensation and Benefits Committee and a member of the Finance and Planning Committee of the Board of Directors.\nGeorge J. W. Goodman, 63.. Mr. Goodman is President of 1978 Continental Fidelity, Inc. which provides editorial and investment services. He is the author of a number of books and articles on finance and economics under the pen name \"Adam Smith\" and is the host of a television series of that name seen on public broadcasting stations in the U.S. and on other networks\nabroad. He is a Director of Cambrex Corporation. Mr. Goodman also serves as a mem- ber of the Advisory Committee of the Center for International Relations at Princeton Univer- sity, and is a Trustee of the Urban Institute. He is a mem- ber of the Compensation and Benefits and Finance and Planning Committees of the Board of Directors.\nJohn W. Harris, 47....... Mr. Harris is President of 1991 The Harris Group (real estate development). From 1972 through 1991, he was President of The Bissell Companies, Inc. (real estate development). He is a Director of Southern Bell Telephone and Telegraph Company. Mr. Harris is former Chairman of the Greater Charlotte Chamber of Commerce and a member of the Board of Trustees of the University of North Carolina and serves on the boards of several community service organiza- tions. He is a member of the Audit and Compensation and Benefits Committees of the Board of Directors.\nEdward A. Horrigan, Jr., 64 Mr. Horrigan is Chairman and 1987 Chief Executive Officer of Liggett Group Inc. (consumer products), a position he has held since May 1993. He is also the retired Vice Chairman of the Board of RJR Nabisco, Inc. and retired Chairman and Chief Executive Officer of R. J. Reynolds Tobacco Company, Winston -Salem, North Carolina (consumer products). He is a Director of the Haggai Foun- dation. Mr. Horrigan is a member of the Audit and Nominating Committees of the Board of Directors.\nRobert LeBuhn, 61......... Mr. LeBuhn is Chairman of 1966 Investor International (U.S.), Inc. (investments) and is a Director of Acceptance Insur- ance Companies, Amdura Corp., Lomas Financial Corp. and Cambrex Corporation. He is Trustee and President of the Geraldine R. Dodge Foun- dation, Morristown, New Jersey and is a member of the New York Society of Security Analysts. He is Chairman of the Finance and Planning Committee and a member of the Nominating Committee of the Board of Directors.\nSir Colin Marshall, 60.... Sir Colin was elected Chairman 1993 of BA in February 1993. Prev- iously, he had been Chief Executive of BA and a member of BA's Board of Directors since 1983. Sir Colin is a Director of Grand Metropolitan plc, HSBC Holdings Plc, and IBM United Kingdom Holdings Limited. He is a member of the Finance and Planning Committee of the Board of Directors.\nRoger P. Maynard, 51...... Mr. Maynard has been Director 1993 of Corporate Strategy of BA since 1991. Previously, from 1987, he had held various positions at BA, including Director of Investor Relations & Marketplace Performance and Executive Vice President North America. Mr. Maynard is a member of the Nominating and Compensation and Benefits Committees of the Board of Directors.\nJohn G. Medlin, Jr, 60.... Mr. Medlin is Chairman of the 1987 Board and, until December 31, 1993, was Chief Executive Officer of Wachovia Corpor- ation (bank holding company). Mr. Medlin also serves as a Director of BellSouth Company, Media General, Inc., National Services Industries, Inc. and RJR Nabisco, Inc. He is Chair- man of the Nominating Committee and a member of the Compen- sation and Benefits Committee of the Board of Directors.\nHanne M. Merriman, 52..... Mrs. Merriman is the Principal 1985 in Hanne Merriman Associates (retail business consultants). Previously, she served as President of Nan Duskin, Inc. (retailing), President and Chief Executive Officer of Honeybee, Inc., a division of Spiegel, Inc., and President of Garfinckel's, a division of Allied Stores Corporation. Mrs. Merriman is a Director of CIPSCO, Inc. Central Public Service Company, State Farm Mutual Automobile Insurance Company, The Rouse Company and Ann Taylor Stores Corporation. She is a member of the National Women's Forum and a Trustee of The American-Scandinavian Founda- tion. She was a member of the Board of Directors of the Federal Reserve Bank of Richmond, Virginia from 1984- 1990 and served as Chairman in 1989-1990. Mrs. Merriman is Chairman of the Audit Committee and is a member of the Nominating Committee of the Board of Directors.\nCharles T. Munger, 70..... Mr. Munger is Vice Chairman of 1993 Berkshire Hathaway Inc. (insur- ance, candy, retailing, manu- facturing and publishing) of which he has been an officer and Director since 1975. He is Chairman of Daily Journal Corporation and is a Director of Salomon Inc. and Wesco Financial Corporation. Mr. Munger is a member of the Audit Committee of the Board of Directors.\nSeth E. Schofield, 54..... Mr. Schofield was elected 1989 Chairman of the Board of Directors of the Company and USAir in June 1992. In June 1991 he was elected President and Chief Execu- tive Officer of the Company and of USAir. In June 1990 he was elected President and Chief Operating Officer of USAir. He had served as Executive Vice President- Operations of USAir since 1981. Mr. Schofield joined USAir in 1957 and has held various corporate staff positions. Mr. Schofield is a Director of the Erie Insurance Group, the PNC Bank, N.A., the Greater Washington Board of Trade, the Flight Safety Foundation, and the Greater Pittsburgh Council of the Boy Scouts of America. Mr. Schofield is Chairman of the Board of Directors of the Greater Pittsburgh Chamber of Commerce, and a Board Member of the Pennsylvania Business Roundtable, Penn's Southwest Association and the Virginia Business Council. He is also a member of the Allegheny Conference on Community\nDevelopment and the Federal City Council.\nRichard P. Simmons, 62.... Mr. Simmons is Chairman of 1987 the Board and Chairman of the Executive Committee of Allegheny Ludlum Corp. and served as its President and Chief Execu- tive Officer from 1980 to 1990. Allegheny Ludlum pro- duces stainless steel and other high alloyed steels. Mr. Simmons is also a Director and Chairman of the Executive Committee of PNC Bank Corp. and Consolidated Natural Gas. He is a member of the Ameri- can Institute of Mining, Metallurgical and Petroleum Engineers and is a fellow and Distinguished Life Member of the American Society for Metals. Mr. Simmons is a member of the M.I.T. Corpor- ation and serves on the boards of several community service organizations. He is a member of the Audit and Finance and Planning Committees of the Board of Directors.\nRaymond W. Smith, 56..... Mr. Smith is Chairman of 1990 the Board and Chief Executive Officer of Bell Atlantic Com- pany, which is engaged princi- pally in the telecommunications business and is one of the seven regional companies formed as a result of the divestiture of the Bell System. Previously, Mr. Smith had served as Vice Chairman and President of Bell Atlantic and Chairman of The Bell Telephone Com- pany of Pennsylvania. He is a member of the Board of Directors of CoreStates Financial Company, a\ntrustee of the University of Pittsburgh and is active in many civic and cultural organizations. He is a mem- ber of the Compensation and Benefits and Nominating Committees of the Board of Directors.\nDerek M. Stevens, 55...... Mr. Stevens has been Chief 1993 Financial Officer of and a Director of BA since 1989. Previously, from 1981, he was Finance Director of TSB Group plc (financial institution). Mr. Stevens is a member of the Audit Commit- tee of the Board of Directors.\nThe law firm of Paul, Hastings, Janofsky and Walker, with which Mr. Colodny is affiliated on an Of Counsel basis, provided legal services to USAir during 1993 and is expected to provide such services during 1994.\nThe following persons are executive officers of the Company.\nFor purposes of Rule 405 under the Securities Act of 1933, Messrs. Lagow, Long, Schwab, Fornaro, Frestel, Harper and Ms. Risque Rohrbach are deemed to be executive officers of the Company.\nThere are no family relationships among any of the officers listed above. No officer was selected pursuant to any arrangement between him or her and any other person. Officers are elected annually to serve for the following year or until the election and qualification of their successors. All the executive officers except Ms. Risque Rohrbach and Messrs. Lagow, Salizzoni, Aubin, Frestel, Fornaro and Harper have been actively engaged in the business and affairs of the Company and USAir during the past five years. The business experience of the officers listed above since January 1, 1989 is as follows:\nMr. Schofield was elected Executive Vice President of the Company in July 1989. At that time he was also elected Vice Chairman of the Board of the Company and of USAir. Mr. Schofield served as Executive Vice President-Operations of USAir until his election as President and Chief Operating Officer of USAir in June 1990. Effective on July 1, 1991, Mr. Schofield was elected President and Chief Executive Officer of both the Company and USAir. Effective on July 1, 1992, Mr. Schofield was elected Chairman of the Board of Directors of both the Company and USAir.\nMr. Lagow was Senior Vice President-Market Planning of Northwest Airlines until February 1988, when he became Senior Vice President-Planning of United Airlines. Mr. Lagow held that position until he was elected Executive Vice President-Marketing of USAir in February 1992.\nMr. Lloyd engaged in the private practice of law in Washing- ton, D.C. from 1967 until election as Vice President, General Counsel and Secretary of the Company and as Senior Vice President and General Counsel of USAir in 1987. He served in those capaci- ties until his election as Executive Vice President, Secretary and General Counsel of the Company and Executive Vice President and General Counsel of USAir in January 1991.\nMr. Long served as Senior Vice President-Administration of USAir until his election as Senior Vice President-Customer Operations of USAir in June 1989. He served in that capacity until his election as Senior Vice President-Customer Services in March 1991. Mr. Long served as Senior Vice President-Customer Services until his election as Executive Vice President-Customer Services in May 1992.\nMr. Salizzoni was Vice Chairman and Chief Financial Officer of Trans World Airlines and Trans World Corporation until 1987, when he became Vice Chairman and Chief Financial Officer of TW Services, Inc. He was Chairman and Chief Executive Officer of TW Services from April 1987 until August 1989, just before that company went private. Mr. Salizzoni was associated with Mancusco and Co. from August 1989 until he was elected Executive Vice President-Finance of the Company and of USAir in November 1990.\nMr. Schwab served as Vice President-Management Information Systems of USAir until his election as Senior Vice President- Management Information Systems of USAir in July 1989. Mr. Schwab served in that capacity until his election as Executive Vice President-Operations in April 1991. He also served as President of USAM Corp. from April 1988 through April 1991.\nMr. Aubin was Executive Advisor to the Vice Chairman, President and Chief Executive Office of Air Canada and, prior to that position, Senior Vice President Technical Operations and Chief Technical Officer of Air Canada during the relevant time. He was elected Senior Vice President-Maintenance Operations of USAir in January 1994.\nMr. Fornaro was Vice President-Research of Jesup & Lamont Securities until February 1988, when he became Senior Vice President-Marketing of Braniff, Inc. In August 1988, Mr. Fornaro became Senior Vice President-Market Planning of Northwest Airlines, the position he held until February 1992. He was elected Senior Vice President-Planning of USAir in March 1992.\nMr. Frestel was Vice President-Personnel and Labor Relations for The Atchinson, Topeka & Santa Fe Railway during the relevant time, and was a Director of that company from June 1988, until his election as Senior Vice President-Human Resources of USAir in January 1989.\nMr. Harper was Senior Vice President-Marketing and Information Systems at Axe-Houghton Management (investment management) until his election as Vice President and Controller of the Company and USAir in December 1991. He served in that position until his election as Senior Vice President-Information Systems of USAir in October 1992.\nMs. Rohrbach was a public policy and communications consultant during 1993. She was Assistant Secretary of Labor for Policy at the U.S. Department of Labor during 1991-1992. Ms. Rohrbach served on the White House staff as a member of the legislative liaison team (1981-1986) and subsequently as Assistant to the President and Secretary to the Cabinet (1987-1988). In 1989 and 1990, she was a resident fellow at Harvard University's Institute of Politics, a consultant to the Department of Energy and in the private sector. From 1988-1993, she also served as a member of the National Commission on Children. She was elected Vice President-Public and Community Relations of the Company and Senior Vice President-Public and Community Relations of USAir in January 1994.\nItem 11.","section_11":"Item 11. EXECUTIVE COMPENSATION\nCompensation of Directors\nEach director, except Mr. Schofield, is paid a retainer fee of $18,000 per year for service on the Board of Directors of the Company and a fee of $600 per Board meeting or committee meeting attended. Consistent with a comprehensive cost reduction program at USAir, the retainer fee was reduced by 20% to $14,400 for an eighteen-month period commencing January 1, 1992 and ending on June 30, 1993. Mr. LeBuhn, Chairman of the Finance and Planning Committee, Mr. DeVito, Chairman of the Compensation Committee, and Mrs. Merriman, Chairman of the Audit Committee each receives an additional fee of $2,000 per year for serving in those respective capacities. Mr. Medlin, Chairman of the Nominating Committee, receives an additional fee of $1,000 per year for serving in that capacity. Mr. Schofield receives a salary in his capacity as an officer of USAir and receives no additional compensation as a director of the Company and USAir.\nIn 1987 the Company established a retirement plan for directors who are not also employees of the Company and its subsidiaries. The plan provides that such directors shall be eligible to receive retirement benefits thereunder if they have attained seventy years of age and served at least five consecutive years on the Board of Directors or, if they have not attained age\nseventy, have served for at least ten consecutive years on the Board of Directors. Eligible directors receive an annual retirement benefit equal to the highest annual retainer in effect for active directors during the five years prior to retirement. If the annual retainer for active directors is increased, the annual retirement benefit paid to retired directors is increased by an amount equal to 50% of the increase in retainer paid to active directors. If a director dies prior to retirement and had served for at least five consecutive years on the Board of Directors, the deceased director's surviving spouse is eligible under the plan to receive, for a period of five years following such death, an annual death benefit equal to 50% of the annual retainer paid to such director at the time of his or her death. If a retired eligible director dies, the director's surviving spouse is eligible under the plan to receive, for a period of five years following such death, 50% of the annual retirement benefit payable to the director at the time of his or her death. The plan is administered by the Compensation Committee.\nCOMPENSATION OF EXECUTIVE OFFICERS\nThe Summary Compensation Table below sets forth the compensation paid during the years indicated to each of the Chief Executive Officer and the four remaining most highly compensated executive officers of the Company (including its subsidiaries).\nSUMMARY COMPENSATION TABLE\n- -------- * Under the SEC's transition rules, no disclosure is required. (A) Mr. Schofield was elected Chief Executive Officer effective June 1, 1991. (B) Mr. Lagow's employment with USAir commenced on February 7, 1992. (C) Amounts disclosed reflect reductions in salary during (i) 1993 of $24,365, $14,942, $12,250, $10,904 and $10,904, and (ii) 1992 of $87,019, $49,272, $43,750, $38,942 and $38,942 for Messrs. Schofield, Lagow, Salizzoni, Lloyd and Schwab, respectively, which were implemented for all USAir officers for a fifteen-month period commencing on January 1, 1992 and ending on March 29, 1993 pursuant to a comprehensive cost reduction program at USAir. (D) Amounts disclosed include for (i) 1993, $271,288, $33,259, $73,215, and $27,621 and (ii) 1992, $171,410, $22,523, $47,974 and $16,784, received by Messrs. Schofield, Salizzoni, Lloyd and Schwab, respectively, to cover incremental tax liability resulting from income derived from the lapsing of restrictions on disposition of Restricted Stock. Any amounts disclosed in the column that are in excess of the amounts disclosed in the preceding sentence represent income derived from personal travel on USAir. (E) At December 31, 1993, Messrs. Schofield, Salizzoni, Lloyd and Schwab owned 30,000, 6,000, 4,000 and 3,200 shares of Restricted Stock, respectively. At the fair market value of the Common Stock on that date, these holdings of Restricted Stock were valued at $386,250, $77,250, $51,500, $41,200, respectively. (F) Under USAir's split dollar life insurance plan, described under \"Additional Benefits\" below, individual life insurance coverage is available to the named officers. During 1992, each officer paid the amount of the premium associated with the term life component of the coverage. In 1993, USAir commenced paying the premium associated with this coverage. In 1992 and 1993, USAir paid the remainder of the premium associated with the whole life component of the coverage. If all assumptions as to life expectancy and other factors occur in accordance with projections, USAir expects to recover the premiums it pays with respect to the whole life component of the coverage. The following amounts reflect the value of the benefits accrued during the years indicated, calculated on an actuarial basis, ascribed to the insurance policies purchased on the lives of the named officers (plus, with respect to 1993, the dollar value of premiums paid by USAir with respect to term life insurance): 1993--Mr. Schofield-- $29,328, Mr. Lagow--$9,716, Mr. Salizzoni--$26,010, Mr. Lloyd--$17,291 and Mr. Schwab--$11,170; 1992--Mr. Schofield--$38,495; Mr. Lagow--$12,902; Mr. Salizzoni--$34,382; Mr. Lloyd--$21,382 and Mr. Schwab--$15,555. During 1993, USAir made contributions of $34,974, $22,805, $26,212, $18,897 and $18,897 to the accounts of Messrs. Schofield, Lagow, Salizzoni, Lloyd and Schwab in certain defined contribution pension plans. (G) Upon the commencement of his employment, USAir agreed to pay Mr. Lagow $1 million over four years, which amount was intended to compensate him for restricted stock and stock options which he forfeited when he left his former employer. The amount disclosed includes the first installment, $250,000, of the total payment. (H) Amount disclosed also reflects $125,000 paid to Mr. Lagow in the form of a \"sign-on bonus\" and $4,715 for reimbursement of relocation expenses. (I) Amount disclosed also reflects $25,380 for reimbursement of relocation expenses.\nAggregated Option\/SAR Exercises in Last Fiscal Year and Fiscal Year-End Option\/SAR Values\nThe following table provides information on the number of options held by the named executive officers at fiscal year-end 1993. None of the officers exercised any options during 1993 and none of the unexercised options held by these officers were in-the-money based on the fair market value of the Common Stock on December 31, 1993 ($12.875).\nThe values reflected in the above chart represent the application of the Retirement Plan formula to the specified amounts of compensation and years of service. The credited years of service under the Retirement Plan for each of the individuals included in the Summary Compensation Table are as follows: Mr. Schofield-32 years, Mr. Lagow-2 years, Mr. Salizzoni-3 years, Mr. Lloyd-7 years and Mr. Schwab-6 years.\nUSAir has entered into agreements with Messrs. Lagow, Salizzoni, Lloyd and Schwab which provide for a supplement to their retirement benefits under the Retirement Plan. This supplement is designed to provide such persons with those benefits they would have received had they been employed by USAir for the minimum number of years to be entitled to full retirement benefits under the Retirement Plan.\nUSAir adopted, effective January 1, 1993, a defined contribu- tion retirement program for its eligible non-contract employees (the \"Retirement Savings Plan\") as a replacement for the Retirement Plan described above. Under the Retirement Savings Plan, eligible\nemployees may elect to contribute on a tax-deferred basis up to 13% of their pre-tax compensation, subject to a maximum annual contribution of $8,994 in 1993. USAir will also contribute to each employee's account in the Retirement Savings Plan (i) a matching contribution equal to 50% of each employee's contribution, subject to a maximum of 2% of the employee's annual pre-tax compensation, (ii) a basic contribution which ranges, depending on the employee's age, from 2% to 8% of the employee's annual pre-tax compensation and (iii) if USAir's pre-tax profit margin, as defined, exceeds certain thresholds, a profit sharing contribution up to a maximum of 7.5% of an employee's annual pre-tax compensation. USAir made no contributions under the profit sharing component of the Retirement Savings Plan in 1993. Pre-tax compensation is defined for purposes of the Retirement Savings Plan as all compensation which USAir must report as wages on an employee's Form W-2, plus an employee's tax deferred contributions under such Plan up to a maximum of $235,840 in 1993. USAir also established a non-qualified supplemental defined contribution plan (the \"Supplemental Savings Plan\") in 1993, which credits amounts to accounts of certain officers who participate in the Retirement Savings Plan but who are adversely affected by the maximum benefit limitations under qualified plans imposed by the Code. Amounts obligated to be paid by USAir under the Supplemental Savings Plan will be deposited in a trust established for the benefit of the participants. See the \"All Other Compensation\" column of the Summary Compensation Table for the amounts contributed or allocated in 1993 to Messrs. Schofield, Lagow, Salizzoni, Lloyd and Schwab under the Retirement Savings Plan and the Supplemental Savings Plan.\nUnder the Retirement Savings Plan and the Supplemental Savings Plan, participants may direct the investment of their contributions and USAir's contributions to their accounts among certain invest- ment funds. Participants' contributions are fully vested when made. USAir's contributions vest when the participant has been employed by USAir for at least two years.\nAdditional Benefits\nUSAir has in effect an Officers' Supplemental Benefit Plan, which provides certain benefits to a current or retired officer's spouse and children under age 19 following the officer's death. These benefits include: (i) dependent survivors' monthly income benefit and (ii) dependent survivors' health care insurance.\nA dependent survivors' monthly income benefit is payable to the eligible spouse or children of a deceased officer or retired officer in an amount equal to 20% of the monthly basic rate of salary payable to the officer the day prior to death or, in the case of a deceased retired officer, the day prior to retirement. Monthly income benefits will be reduced by the amount of any spouse protection benefit payable from Retirement Plan funds, and are subject to cessation upon the occurrence of certain specified\nevents. In no case are monthly income benefits payable for more than 19 years following the date of death.\nThe eligible surviving spouse or children of a deceased officer or retired officer are also entitled to receive dependent survivors' health care insurance, which provides the medical, major medical and dental insurance benefits generally available to dependents of salaried employees of USAir. Eligibility for this coverage ceases upon the occurrence of certain specified events.\nUSAir also maintains a split-dollar life insurance plan under which individual term life insurance is available to its officers in the amount of three times base salary. The plan also provides for accrual of a cash value component for each officer who holds a policy. Under the plan, during 1993, USAir paid the premiums on the term and whole life insurance components of the policy. The premium attributable to the term life insurance of the policy is treated as income to the participant. At death, prior to transfer of the policy to the participant, the beneficiary receives the amount of the coverage less any amount necessary to reimburse the employer for its investment, and the employee is entitled to any additional proceeds. Upon transfer of the policy to the partici- pant, the participant is entitled to the cash surrender value of the policy in excess of the amount payable to the employer for recovery of its investment. See the \"All Other Compensation\" column of the Summary Compensation Table for information concerning compensation with respect to Messrs. Schofield, Lagow, Salizzoni, Lloyd and Schwab that was attributable to the split dollar life insurance plan.\nArrangements Concerning Termination of Employment and Change of Control\nUSAir currently has employment contracts (the \"Employment Contracts\") with the executive officers (the \"Executives\") named in the Summary Compensation Table. The terms of the Employment Contracts extend until the earlier of the fourth anniversary thereof or the Executive's normal retirement date and are subject to automatic one-year annual extensions on each anniversary date (to the fourth anniversary of such anniversary date) unless advance written notice is given by USAir. In exchange for each Executive's commitment to devote his or her full business efforts to USAir, the agreements provide that each Executive will be re-elected to a responsible executive position with duties substantially similar to those in effect during the prior year and will receive (1) an annual base salary at a rate not less than that in effect during the previous year, (2) incentive compensation as provided in the contract and (3) insurance, disability, medical and other benefits generally granted to other officers. In the event of a change of control, as defined in each Employment Contract, the term of each Employment Contract is automatically extended until the earlier of\nthe fourth anniversary of the change of control date or the Executive's normal retirement date. As a result of amendments to the Employment Contracts entered into in June 1992, the acquisition of 20% or more of the outstanding securities of the Company under circumstances in which the acquiror would obtain the power to elect 20% or more of the members of the Board of Directors was added to the definition of a change of control under the Employment Contracts. To the extent permitted by Foreign Ownership Restric- tions and assuming the consummation of the Second Purchase (the \"Second Closing\") results in BA's electing at least 20% of the Board of Directors, the Second Closing would be treated as a change of control and would result in extension of the term of each Employment Contract until the earlier of the fourth anniversary of the Second Closing or the Executive's normal retirement date. On March 7, 1994, BA announced that it would not make any additional investments in the Company under current circumstances. See Item 1. \"Business-British Airways Announcement Regarding Additional Investments in the Company; Code Sharing.\"\nThe Employment Contracts provide that, should USAir or any successor fail to re-elect the Executive to his or her position, assign the Executive to inappropriate duties which result in a diminution in the Executive's position, authority or responsibili- ties, fail to compensate the Executive as provided in the Employ- ment Contract, transfer the Executive in violation of the Employ- ment Contract, fail to require any successor to USAir to comply with the Employment Contract or otherwise terminate the Executive's employment in violation of the Employment Contract, the Executive may elect to treat such failure as a breach of the Employment Contract if the Executive then terminates employment. As liquidat- ed damages as the result of an event not following a change of control that is deemed to be a breach of the Employment Contracts, USAir or its successor would be required to pay the Executive an amount equal to his or her annual base salary for the then remaining term of the Employment Contract, and to continue granting certain employee benefits for the then remaining term of the Executive's Employment Contract. If the breach follows a change of control, the Executive would be entitled to receive (i) an amount equal to the product of three times the sum of the Executive's annual base salary plus an annual bonus, (ii) a lump sum equal to the actuarial equivalent of the pension benefits which the Executive would have received had he or she remained employed by USAir until the end of the term of the Employment Contract, (iii) medical benefits until such time as the Executive qualifies for group medical benefits from another employer, (iv) travel benefits for the Executive's life, (v) reimbursement of reductions in salary sustained by the Executive as a result of a comprehensive cost reduction program initiated by USAir in October 1991, and (vi) continuation of certain other benefits during the remainder of the term of the Employment Contract. In addition, except under the circumstances described in the immediately following paragraph, during the 30-day period immediately following the first anniversa\nry of a change of control any Executive could elect to terminate his or her Employment Contract for any reason and receive the liquidated damages described in the immediately preceding sentence. Each Employment Contract provides that if USAir breaches the Employment Contract, as described above, each Executive shall be entitled to recover from USAir reasonable attorney's fees in connection with enforcement of such Executive's rights under the Employment Contract. Each Employment Contract also provides that any payments the Executive receives in the event of a termination shall be increased, if necessary, such that, after taking into account all taxes he or she would incur as a result of such payments, the Executive would receive the same after-tax amount he or she would have received had no excise tax been imposed under Section 4999 of the Code.\nIn order to facilitate consummation of the acts and transac- tions contemplated by the Investment Agreement, the Executives agreed in January 1993 to an amendment to their Employment Contracts that will become effective upon the Second Closing (i) to eliminate their right to elect to terminate their Employment Contracts without any reason during the 30-day period immediately following the first anniversary of the Second Closing; (ii) that USAir may transfer the Executive's employment to any location that meets certain criteria in the Employment Contracts without such relocation constituting a breach of the Employment Contracts; (iii) that consummation of the Second Closing would be treated as the only change of control with respect to BA; and (iv) that following the Second Closing, USAir may make certain changes in benefit plans affecting the Executives that are not material, as that term is defined in the Employment Contracts, provided that the changes apply to all eligible officers of USAir and are approved by a majority of the directors of the Company not elected by BA.\nCurrently, under the Company's 1984 Stock Option and Stock Appreciation Rights Plan (the \"1984 Plan\") and 1988 Stock Incentive Plan (the \"1988 Plan,\" and together with the 1984 Plan, the \"Plans\"), pursuant to which employees of the Company and its subsidiaries have been awarded stock options and stock appreciation rights with respect to Common Stock and, in the case of the 1988 Plan, shares of Restricted Stock, occurrence of a change of control, as defined, would make all granted options immediately exercisable without regard to the vesting provisions thereof. In addition, grantees would be able, during the 60-day period immediately following a change of control (the \"Cash-out Right\"), to surrender all unexercised stock options not issued in tandem with stock appreciation rights under the Plans to the Company for a cash payment equal to the excess, if any, of the fair market value of the Common Stock over the exercise prices of such stock options or the positive value of any stock appreciation rights. As described above, in June 1992, the Company amended the definition of a change of control in the Plans with the result that, to the extent permitted by Foreign Ownership Restrictions and assuming the\nSecond Closing results in BA's electing at least 20% of the Board of Directors, the Second Closing would be treated as a change of control thereunder. As of March 1, 1994, there were unexercised stock options to purchase 548,310 shares of Common Stock (of which 84,600 had tandem stock appreciation rights) under the 1984 Plan and unexercised stock options to purchase 3,625,500 shares of Common Stock (none of which had tandem stock appreciation rights) under the 1988 Plan. (As of March 1, 1994, 3,177,400 of the 3,625,500 options outstanding under the 1988 Plan and 322,910 of the 548,310 options outstanding under the 1984 Plan were exercis- able pursuant to their normal vesting schedule.) The weighted average exercise price of all the outstanding stock options was approximately $23.15. On February 28, 1994, the closing price of a share of Common Stock on the NYSE was $11.375. See the \"Aggre- gated Option\/SAR Exercises in Last Fiscal Year and Fiscal Year-End Option\/SAR Values\" table for information regarding stock options held by the Executives.\nCurrently, 50,400 shares of Restricted Stock previously granted to the Executives may (i) become free of transfer restric- tions upon their normal vesting schedule or (ii) be subject to accelerated vesting upon a termination of employment which triggers the payment of liquidated damages under the Employment Contracts, as discussed above, regardless of whether the termination occurred following a change of control as defined in the Employment Contracts. See \"Beneficial Security Ownership\" for information regarding Restricted Stock owned by the Executives.\nWith respect to Mr. Lagow, in order to induce him to accept its offer of employment in 1992, USAir agreed, among other things, to pay Mr. Lagow $1 million in four equal installments, each installment being due and payable on the first four anniversaries of the commencement of his employment by USAir, provided Mr. Lagow remains employed by USAir. This payment was intended to compensate Mr. Lagow for stock options and restricted stock which he forfeited when he left his former employer. In the event of a change of control under his Employment Contract or wrongful termination thereunder, USAir has also agreed to pay Mr. Lagow in a lump sum any unpaid balance of this obligation.\nNotwithstanding anything to the contrary set forth in any of the Company's or USAir's filings under the Securities Act of 1933, as amended (the \"Securities Act\"), or the Securities Exchange Act of 1934, as amended (the \"Exchange Act\"), that incorporates by reference this Proxy Statement, in whole or in part, the following Report and Performance Graph shall not be incorporated by reference into any such filings.\nReport of the Compensation and Benefits Committee of the Board of Directors\nThe Compensation Committee policies with respect to compensa- tion of the Company's executive officers are to:\n1. Attract and retain talented and experienced senior management by offering compensation that is competitive with respect to other major U.S. airlines and other U.S. companies of comparable size.\n2. Motivate senior management to provide a high-quality product to consumers with the ultimate goal of maximizing profit- ability and stockholder returns by offering incentive and long-term compensation that is linked to return on sales and the market value of the Common Stock.\nThe Compensation Committee has played an active role in the oversight and review of all executive compensation paid to executive officers of the Company during the last fiscal year. Ordinarily, the Compensation Committee and the full Board of Directors, in consultation with the Senior Vice President-Human Resources of USAir and, if warranted, an independent compensation consultant, annually review the total compensation package (comprised of base salary, incentive compensation, and long-term incentive compensation) of the Chairman, President and Chief Executive Officer. The Compensation Committee reviews the market rate for peer-level positions of the other major domestic passenger carriers including, but not limited to, the three other airline companies included in the S&P Airline Index, which is reflected in the \"Performance Graph.\" Based primarily on this comparison, the Compensation Committee establishes the Chief Executive Officer's base salary. Mr. Schofield does not participate in Compensation Committee or Board of Directors deliberations or decision-making regarding any aspect of his compensation.\nCorrespondingly, the Compensation Committee established the compensation reported for 1993 for the Company's other executive officers, including the four officers named in the Summary Compensation Table, based upon a comparison of peer positions at the other major U.S. airlines including, but not limited to, the three other airline companies included in the S&P Airline Index, which is reflected in the \"Performance Graph.\"\nThe principal elements of the Company's compensation paid to the executive officers in the last completed fiscal year are discussed below.\nBase Salary. As part of a comprehensive program to reduce costs at USAir, the Compensation Committee reduced the salaries of the executive officers and the other officers of USAir for a fifteen month period commencing on January 1, 1992 and ending on\nMarch 29, 1993. The Compensation Committee reduced each ex- ecutive's base salary in accordance with the following graduated schedule:\n~ First $20,000 of salary reduced by 0%\n~ Next $30,000 of salary reduced by 10% ($20,000 to $50,000)\n~ Next $50,000 of salary reduced by 15% ($50,000 to $100,000)\n~ Any amount of salary in excess of $100,000 reduced by 20%.\nEach of the executive officers agreed to the reductions in salary, which otherwise would have constituted grounds for the executives to have terminated their employment agreements with USAir. The amounts of salary not paid in 1992 and 1993 to Mr. Schofield and the other four executive officers named in the Summary Compensation Table are disclosed in footnote (C) to that table.\nAs stated above, the Compensation Committee establishes the base salaries of the Company's executive officers primarily by reference to the salaries of officers holding comparable positions at other major U.S. airlines including, but not limited to, the three other airline companies included in the S&P Airline Index, which is reflected in the \"Performance Graph.\" Historically, the Compensation Committee had awarded merit increases based on measuring individual performance against objectives. However, due to the Company's poor financial performance, the Compensation Committee last awarded merit increases in executive base salaries in 1989. Since 1989 the Compensation Committee had increased the salaries of executive officers solely as a result of a promotion or an increase in responsibilities. The Company commissioned an independent compensation consultant to conduct a comprehensive study of the salaries of comparable airline officers in 1992. The study disclosed that the salaries (prior to the fifteen-month reduction described above) of most officers were substantially below those of salaries for analogous positions at major competi- tors. Following the study, in July 1992, the Compensation Committee prospectively set the salaries of executive officers generally at the median of the comparative range adjusted by individual performance and experience, effective April 1993.\nIn connection with the same review, the Compensation Committee proposed to increase Mr. Schofield's base salary (before adjustment for the fifteen-month salary reductions) from $500,000 to $590,000, effective April 1993. Because the Company has continued to sustain losses, Mr. Schofield declined to accept the increase in base salary.\nAnnual Cash Incentive Compensation Program: The Compensation Committee adopted the Executive Incentive Compensation Plan effective on January 1, 1988. The plan is administered by the Compensation Committee. All officers, including executive officers, of the Company are eligible to participate in this plan.\nThe Compensation Committee is authorized to grant awards under this plan only if the Company achieves for a fiscal year a two percent or greater return on sales (\"ROS\"). The target level of performance is four percent ROS. If the Company achieves the target performance of four percent ROS, the full target percentage (which varies depending on position) is applied against the individual's base salary for the year to determine the target bonus award (the \"Target Award\") for the individual.\nTarget Awards for executive officers range between 30% and 50% of base salary. If the minimum level of performance of two percent ROS is achieved, 50% of the Target Award would be available for distribution. If the maximum level of performance of six percent ROS is achieved, 200% of the Target Award would be available for payment. The Compensation Committee may adjust awards made to executive officers based on individual performance; however, no award may exceed 250% of the Target Award for any individual. The Compensation Committee last approved payments to executive officers under this plan for the fiscal year ended December 31, 1988. The Company has not achieved the minimum two percent ROS in any fiscal year, and the Compensation Committee has not made any awards under the plan, since then.\nLong-Term Incentive Programs\nStock Options: The executive officers of the Company partici- pate in the Company's 1984 Stock Option and Stock Appreciation Rights Plan (the \"1984 Plan\") and 1988 Stock Incentive Plan (the \"1988 Plan\", and together with the 1984 Plan, the \"Plans\") which are both administered by the Compensation Committee.\nThe Compensation Committee is authorized to grant options under these Plans only at an exercise price equal to the fair market value of a share of Common Stock on the date of grant. During 1993, the Compensation Committee did not grant any options from either of the Plans to the executive officers.\nThe Compensation Committee determines the size of any option grant under the Plans based upon (i) the Compensation Committee's perceived value of the grant to motivate and retain the individual executive, (ii) a comparison of long-term incentive practices within the commercial airline industry, (iii) a comparison of awards provided to peer executives within the Company and (iv) the number of outstanding options held by the grantee and the exercise prices of these options. Although the Compensation Committee\nsupports and encourages stock ownership in the Company by executive officers, it has not promulgated any standards regarding levels of ownership by executive officers.\nPursuant to the reductions in the executive officers' salaries discussed above, in 1992 the Compensation Committee granted these persons non-qualified stock options to purchase 50 shares of Common Stock at $15 per share for each $1,000 of salary foregone during the wage reduction program, as is the case for each USAir employee whose pay was reduced pursuant to the program.\nRestricted Stock\nThe Compensation Committee did not award any Restricted Stock under the 1988 Plan during 1993. (Grants of Restricted Stock are not authorized under the 1984 Plan). From 1988-1990, the Compensation Committee granted Restricted Stock to a total of nine executive officers, some of whom are no longer employed by USAir.\nDuring 1993, restrictions on disposition expired on a total of 23,200 shares of Restricted Stock held by Mr. Schofield, which shares were originally granted between 1988 and 1990. Restrictions on disposition also lapsed during 1993 on a total of 10,900 shares of Restricted Stock held by Messrs. Salizzoni, Lloyd and Schwab, which shares were originally granted between 1988 and 1990.\nThe Omnibus Budget Reconciliation Act of 1993 added Section 162(m) to the Internal Revenue Code. Section 162(m) provides that companies will not be entitled to a tax deduction for certain compensation paid to any executive officer to the extent that the compensation exceeds $1 million in a taxable year. The Compensa- tion Committee is studying Section 162(m) and the proposed rules thereunder and is in the process of determining whether to recommend that the Company take the necessary measures to conform its compensation to Section 162(m).\nThe Compensation Committee will continue to review all compensation and benefit matters presented to it and will act based upon the best information available in the best interests of the Company, its stockholders and employees.\nMathias J. DeVito, Chairman George J. W. Goodman John W. Harris Roger P. Maynard John G. Medlin, Jr. Raymond W. Smith\nPERFORMANCE GRAPH\nThis graph compares the performance of the Company's Common Stock during the period January 1, 1989 to December 31, 1993 with the S&P 500 Index and the S&P Airline Index. The graph depicts the results of investing $100 in the Company's Common Stock, the S&P 500 Index and the S&P Airline Index at closing prices on Decem- ber 31, 1988. The stock price performance shown on the graph is not necessarily indicative of future performance. The S&P Airline Index consists of AMR Corporation, Delta Air Lines, Inc., UAL Corporation and the Company.\nItem 12.","section_12":"Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT\nThe following information pertains to Common Stock, Series A Preferred Stock, Series F Preferred Stock, Series T Preferred Stock and Depositary Shares (\"Depositary Shares\"), each representing 1\/100 of a share of the Company's $437.50 Series B Cumulative Convertible Preferred Stock, without par value (\"Series B Preferred Stock\"), beneficially owned by all directors and executive officers of the Company as of March 1, 1994. Unless indicated otherwise, the information refers to ownership of Common Stock. Unless indicated otherwise by footnote, the owner exercises sole voting and investment power over the securities (other than unissued securities, the ownership of which has been imputed to such owner).\nSeries F Preferred Stock and Series T Preferred Stock, Common Stock receivable upon conversion. In addition, such Rights are issuable on a one-for-one basis with respect to shares of Common Stock receivable upon exercise of stock options or conversion of Depositary Shares. (2) Percentages are shown only where they exceed one percent of the number of shares outstanding and, in the case of Common Stock holdings are based on shares of Common Stock outstanding (exclusive of treasury stock) on March 1, 1994. (3) Various affiliates of Berkshire Hathaway Inc. (\"Berkshire\") are recordholders of 358,000 or 100% of the outstanding shares of Series A Preferred Stock. Messrs. Buffett and Munger are Chairman and Chief Executive Officer and Vice Chairman, respectively, of Berkshire and may be deemed to control that company. Messrs. Buffett and Munger each disclaims beneficial ownership of Series A Preferred Stock. Series A Preferred Stock is currently convertible into 9,239,944 shares of Common Stock, which represents approximately 10.5% of the total voting interest represented by Common Stock, Series F Pre- ferred Stock, Series T Preferred Stock and Series A Preferred Stock at March 1, 1994. (4) The listing of Mr. Colodny's holding includes 67,000 shares of Common Stock issuable within 60 days of March 1, 1994 upon exercise of stock options. (5) Mr. Goodman's holdings of Depositary Shares is convertible into 498 shares of Common Stock. (6) A wholly-owned subsidiary of BA is recordholder of 30,000 or 100% of the outstanding shares of Series F Preferred Stock, 152.1 or 100% of the outstanding shares of the Series T-1 Preferred Stock and 9,919.8 or 100% of the outstanding shares of the Series T-2 Preferred Stock pursuant to the Investment Agreement. Messrs. Marshall, Maynard and Stevens are Chair- man, Director of Corporate Strategy and Chief Financial Offic- er, respectively, of BA and have been designated by BA to act as directors of the Company pursuant to the Investment Agreement. Messrs. Marshall, Maynard and Stevens each dis- claims beneficial ownership of Series F Preferred Stock and Series T Preferred Stock. (7) The listing of Mr. Schofield's holding includes 335,069 shares of Common Stock issuable within 60 days of March 1, 1994 upon exercise of stock options, and 30,000 shares of Common Stock subject to certain restrictions upon disposition (\"Restricted Stock\"). (8) The listing of Mr. Lagow's holding reflects shares of Common Stock issuable within 60 days of March 1, 1994 upon exercise of stock options. (9) The listing of Mr. Salizzoni's holding includes 152,800 shares of Common Stock issuable within 60 days of March 1, 1994 upon exercise of stock options and 6,000 shares of Restricted Stock. (10) The listing of Mr. Lloyd's holding includes 169,742 shares of Common Stock issuable within 60 days of March 1, 1994 upon\nexercise of stock options and 4,000 shares of Restricted Stock. (11) The listing of Mr. Schwab's holding includes 167,992 shares of Common Stock issuable within 60 days of March 1, 1994 upon exercise of stock options and 3,200 shares of Restricted Stock. (12) The listing of all directors' and officers' holdings includes 1,193,583 shares of Common Stock issuable within 60 days of March 1, 1994 upon exercise of stock options and 50,400 shares of Restricted Stock.\nThe only persons known to the Company (from Company records and reports on Schedules 13D and 13G filed with the Securities and Exchange Commission (the \"SEC\")) which owned, as of March 1, 1994, more than 5% of its Common Stock, Series A Preferred Stock, Series F Preferred Stock and Series T Preferred Stock are listed below:\n(1) Represents percent of class of stock outstanding (exclusive of\ntreasury stock) on March 1, 1994. (2) Number of shares as to which such person has shared voting power-358,000; shared dispositive power-358,000. (3) These shares of Series A Preferred Stock are owned directly by affiliates of Berkshire, are convertible, under certain circumstances and subject to certain antidilution adjustments, into 9,239,944 shares of Common Stock and represent approxi- mately 10.5% of the combined voting power of the outstanding Common Stock, Series A Preferred Stock, Series F Preferred Stock and Series T Preferred Stock, voting as a single class, at March 1, 1994. A number of Rights, equal to the number of shares of Common Stock into which the Series A Preferred Stock is convertible, is also owned by this person. As disclosed above, two directors of the Company, Messrs. Buffett and Munger, may be deemed to control Berkshire and disclaim beneficial ownership of Series A Preferred Stock. (4) Number of shares as to which BA has sole voting power and sole dispositive power-30,000. (5) BritAir Acquisition Corp. Inc. is a wholly-owned subsidiary of BA and owns Series F Preferred Stock and Series T Preferred Stock pursuant to the Investment Agreement. Series F Preferred Stock and Series T Preferred Stock are convertible, under certain circumstances on or after January 21, 1997 and subject to certain antidilution adjustments and Foreign Ownership Restrictions, into a total of 15,458,658 and 3,831,695 shares of Common Stock, respectively. Together, the Series F Pre- ferred Stock and Series T Preferred Stock represent approxi- mately 21.9% of the combined voting power of the outstanding Common Stock, Series A Preferred Stock, Series F Preferred Stock and Series T Preferred Stock, voting as a single class, at March 1, 1994. A number of Rights, equal to the number of shares of Common Stock into which the Series F Preferred Stock and Series T Preferred Stock are convertible, is owned by this person. As disclosed above, three directors of the Company, Messrs. Marshall, Maynard and Stevens, have been designated by BA to act as directors of the Company pursuant to the Invest- ment Agreement and disclaim beneficial ownership of Series F Preferred Stock and Series T Preferred Stock. (6) Reflects 152.1 or 100% of the outstanding shares of Series T-1 Preferred Stock and 9,919.8 or 100% of the outstanding shares of Series T-2 Preferred Stock. BA has sole voting power and sole dispositive power as to all these outstanding shares of Series T Preferred Stock. (7) The Schedule 13G dated January 6, 1994 disclosing such ownership was jointly filed by such person with five French mutual insurance companies (\"Mutuelles AXA\") and AXA. The Schedule 13G indicated that each of Mutuelles AXA, as a group, and AXA expressly declares that the filing of the Schedule 13G should not be construed as an admission that it is, for purposes of Section 13(d) of the Securities Exchange Act of 1934, as amended, the beneficial owner of any securities covered by the Schedule 13G. The Company is investigating\nwhether, owing to the investment of Mutuelles AXA and AXA (collectively, \"AXA\") in the Equitable Companies Incorporated (\"Equitable\"), AXA is the beneficial owner of these shares. If it is determined that AXA is the beneficial owner, then self-effectuating provisions of the Company's restated certificate of incorporation, as amended, would provide that the subject shares would be non-voting shares. The Company does not know whether Equitable would cause such shares to be sold in the event such shares have no voting rights. See \"Management's Discussion and Analysis of Financial Condition and Results of Operations-Industry Globalization and Regula- tion\" for information regarding U.S. statutory limitations on foreign ownership of U.S. air carriers and Item 1. \"Business- British Airways Investment Agreement\" and notes (4), (5) and (6) above for information regarding BA's ownership interest in the Company. (8) Number of shares as to which person has sole voting power- 5,669,403; shared voting power-1,300; no voting power-636,800; sole dispositive power-6,305,703; shared dispositive power- none; no dispositive power-1,800. (9) The shares are owned by a direct and an indirect subsidiary of the person. Number of shares as to which such subsidiaries have sole voting power-4,832,200; sole dispositive power- 4,832,200.\nIn connection with BA's purchase of the Series T Preferred Stock in June 1993, Messrs. Marshall, Maynard and Stevens and BA were required by Section 16 of the Securities Exchange Act of 1934, as amended, and rules thereunder to file by July 10, 1993, Form 4 reports disclosing this change of ownership. Messrs. Marshall, Maynard and Stevens and BA filed these reports on September 14, 1993.\nItem 13.","section_13":"Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS\nNone\nPART IV\nItem 14.","section_14":"Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K\n(a) The following documents are filed as part of this report: 1. FINANCIAL STATEMENTS\n(i) The following consolidated financial statements of USAir Group are included in Part II, Item 8A of this report:\n- Consolidated Statements of Operations for each of the Three Years Ended December 31, 1993 - Consolidated Balance Sheets at December 31, 1993 and - Consolidated Statements of Cash Flows for each of the Three Years Ended December 31, 1993 - Consolidated Statements of Changes in Stockholders' Equity for each of the Three Years Ended December 31, - Notes to Consolidated Financial Statements\n(ii) The following consolidated financial statements of USAir are included in Part II, Item 8B of this report:\n- Consolidated Statements of Operations for each of the Three Years Ended December 31, 1993 - Consolidated Balance Sheets at December 31, 1993 and - Consolidated Statements of Cash Flows for each of the Three Years Ended December 31, 1993 - Consolidated Statements of Changes in Stockholder's Equity for each of the Three Years Ended December 31, - Notes to Consolidated Financial Statements\n2. FINANCIAL STATEMENT SCHEDULES\n(i) Independent Auditors' Report on Consolidated Financial Statement Schedules of USAir Group.\n- Consolidated Financial Statement Schedules - Three Years Ended December 31, 1993:\nV - Property, Equipment and Leasehold Improvements VI - Accumulated Depreciation and Amortization of Prop- erty, Equipment and Leasehold Improvements VII - Guarantees of Securities of Other Issuers VIII - Valuation and Qualifying Accounts and Reserves X - Supplementary Income Statement Information\n(ii) Independent Auditors' Report on Consolidated Financial Statement Schedules of USAir.\n- Consolidated Financial Statement Schedules - Three Years Ended December 31, 1993:\nIV - Indebtedness to Related Parties - Not Current V - Property, Equipment and Leasehold Improvements VI - Accumulated Depreciation and Amortization of Prop- erty, Equipment and Leasehold Improvements VII - Guarantees of Securities of Other Issuers VIII - Valuation and Qualifying Accounts and Reserves X - Supplementary Income Statement Information\nAll other schedules are omitted because they are not appli- cable or not required, or because the required information is either incorporated herein by reference or included in the financial statements or notes thereto included in this report.\n(b) Reports on Form 8-K\nDuring the quarter ended December 31, 1993, the Company and USAir filed Current Reports dated September 23, October 20, and November 4, 1993, on Form 8-K regarding the Second Waiver dated September 15, 1993 to the Credit Agreement, results for the quarter ended September 30, 1993 and the sale of $337.7 million of pass through certificates, respectively. The Company and USAir filed a Current Report dated January 18, 1994 on Form 8-K regarding the Third Waiver dated as of December 21, 1993 to the Credit Agreement. In addition, the Company and USAir filed a Current Report dated January 25, 1994 on Form 8-K regarding the press release dated January 25, 1994 of USAir Group, Inc. and USAir, Inc., with consolidated statements of operations for each company. On March 9, 1994, the Company and USAir filed a Current Report on Form 8-K disclosing projected losses for the first quarter and year 1994 and the initiation of negotiations with the leadership of USAir's unions regarding pay reductions and productivity improvements.\n3. EXHIBITS\nDesignation Description\n3.1 Restated Certificate of Incorporation of USAir Group (incorporated by reference to Exhibit 3.1 to USAir Group's Registration Statement on Form 8-B dated January 27, 1983), including the Certificate of Amend- ment dated May 13, 1987 (incorporated by reference to Exhibit 3.1 to USAir Group's and USAir's Quarterly Report on Form 10-Q for the quarter ended March 31, 1987), the Certificate of Increase dated June 30, 1987 (incorporated by reference to Exhibit 3 to USAir Group's and USAir's Quarterly Report on Form 10-Q for\nthe quarter ended June 30, 1987), the Certificate of Increase dated October 16, 1987 (incorporated by reference to Exhibit 3.1 to USAir Group's and USAir's Quarterly Report on Form 10-Q for the quarter ended September 30, 1987), the Certificate of Increase dated August 7, 1989 (incorporated by reference to Exhibit 3.1 to USAir Group's Annual Report on Form 10-K for the year ended December 31, 1989), the Certificate of Increase dated April 9, 1992, the Certificate of Increase dated January 21, 1993, and as amended by Amendment No. 1 dated May 26, 1993 (incorporated by reference to Appendix II to USAir Group's Proxy State- ment dated April 26, 1993).\n3.2 By-Laws of USAir Group (incorporated by reference to Exhibit 3.2 to USAir Group's and USAir's Annual Report on Form 10-K for the year ended December 31, 1992).\n3.3 Rights Agreement, dated as of July 29, 1989, as amended and restated as of January 21, 1993, between USAir Group and Chemical Bank, as Rights Agent (incorporated by reference to Exhibit 28.4 to USAir Group's Current Report on Form 8-K dated January 21, 1993).\n3.4 Restated Certificate of Incorporation of USAir (in- corporated by reference to Exhibit 3.1 to USAir's Registration Statement on Form 8-B dated January 27, 1983).\n3.5 By-Laws of USAir (incorporated by reference to Exhibit 3.5 to USAir Group's and USAir's Annual Report on Form 10-K for the year ended December 31, 1992).\n4.1 Amended Certificate of Designation, Preferences, and Rights of the Series D of Junior Preferred Stock of USAir Group (incorporated by reference to Exhibit 4(c) to USAir Group's Current Report on Form 8-K dated August 11, 1989).\n4.2 Certificate of Designation of Series A Cumulative Convertible Preferred Stock of USAir Group (incorpo- rated by reference to Exhibit 4(b) to USAir Group's Current Report on Form 8-K dated August 11, 1989).\n4.3 Certificate of Designation of Series B Cumulative Convertible Preferred Stock of USAir Group (incorpo- rated by reference to Exhibit 3.3 to Amendment No. 4 to USAir Group's Registration Statement on Form S-3 (Registration No. 33-39540) dated May 17, 1991).\n4.4 Agreement between USAir Group and Berkshire Hathaway Inc. dated August 7, 1989 (incorporated by reference to Exhibit 4(a) to USAir Group's Current Report on Form 8- K dated August 11, 1989).\n4.5 Certificate of Designation of Series F Cumulative Convertible Senior Preferred Stock of USAir Group (incorporated by reference to Exhibit 28.2 to USAir Group's Current Report on Form 8-K dated January 21, 1993).\n4.6 Form of Certificate of Designation of Series T-_ Cumulative Exchangeable Convertible Senior Preferred Stock of USAir Group (incorporated by reference to Appendix VII to USAir Group's Proxy Statement dated April 26, 1993).\nNeither USAir Group nor USAir is filing any instrument (with the exception of holders of exhibits 10.1(a-h)) defining the rights of holders of long-term debt because the total amount of securities authorized under each such instrument does not exceed ten percent of the total assets of USAir. Copies of such instruments will be furnished to the Securities and Exchange Commission upon request.\n10.1(a) Credit Agreement dated as of March 30, 1987 and Amended and Restated as of October 21, 1988 among the Banks named therein and USAir Group (incorporated by reference to Exhibit 28.2 to Amendment No. 1 dated October 28, 1988 to Piedmont's Registration Statement on Form S-3 No. 33-24870 dated October 7, 1988).\n10.1(b) First Amendment, dated as of July 28, 1989, to USAir Group's Amended and Restated Credit Agreement (incor- porated by reference to Exhibit 10.1(b) to USAir Group's Annual Report on Form 10-K for the year ended December 31, 1989).\n10.1(c) Second Amendment, dated as of February 15, 1990, to USAir Group's Amended and Restated Credit Agreement (incorporated by reference to Exhibit 10.1 to USAir Group's Current Report on Form 8-K dated October 26, 1990).\n10.1(d) Third Amendment, dated as of September 30, 1990, to USAir Group's Amended and Restated Credit Agreement (incorporated by reference to Exhibit 10.2 to USAir Group's Current Report on Form 8-K dated October 26, 1990).\n10.1(e) Fourth Amendment, dated as of March 29, 1991, to USAir Group's Amended and Restated Credit Agreement (incor- porated by reference to the Exhibit to USAir Group's Current Report on Form 8-K dated April 23, 1991).\n10.1(f) Fifth Amendment, dated as of April 26, 1991, to USAir Group's Amended and Restated Credit Agreement (incor- porated by reference to Exhibit 28.7 to USAir Group's Registration Statement on Form S-8 No. 33-39540 dated April 26, 1991).\n10.1(g) Sixth Amendment, dated as of October 14, 1992, to USAir Group's Amended and Restated Credit Agreement (incor- porated by reference to Exhibit 28.3 to USAir Group's and USAir's Quarterly Report on Form 10-Q for the quarter ended September 30, 1992).\n10.1(h) Seventh Amendment, dated as of June 21, 1993, to USAir Group's Amended and Restated Credit Agreement (incor- porated by reference to Exhibit 28 to USAir Group's Current Report on Form 8-K filed on July 1, 1993).\n10.2(a) Supplemental Agreement No. 16, dated July 19, 1990, to Purchase Agreement No. 1102 between USAir and The Boeing Company (incorporated by reference to Exhibit 10.2(a) to USAir Group's Annual Report on Form 10-K for the year ended December 31, 1990).\n10.2(b) Supplemental Agreement No. 17, dated November 28, 1990, to Purchase Agreement No. 1102 between USAir and The Boeing Company (incorporated by reference to Exhibit 10.2(b) to USAir Group's Annual Report on Form 10-K for the year ended December 31, 1990).\n10.2(c) Supplemental Agreement No. 18, dated December 23, 1991, to Purchase Agreement No. 1102 between USAir and The Boeing Company (incorporated by reference to Exhibit 10.2(c) to USAir Group's Annual Report on Form 10-K for the year ended December 31, 1991).\n10.3 Purchase Agreement No. 1725 dated December 23, 1991 between USAir and The Boeing Company (incorporated by reference to Exhibit 10.3 to USAir Group's and USAir's Annual Report on Form 10-K for the year ended Decem- ber 31, 1991).\n10.4 USAir, Inc. Executive Incentive Compensation Plan (incorporated by reference to Exhibit 10.3 to USAir Group's Annual Report on Form 10-K for the year ended December 31, 1989).\n10.5 USAir, Inc. Officers' Supplemental Benefit Plan (incorporated by reference to Exhibit 10.5 to USAir's Annual Report on Form 10-K for the year ended December 31, 1980).\n10.6 USAir, Inc. Supplementary Retirement Benefit Plan (incorporated by reference to Exhibit 10.5 to USAir Group's Annual Report on Form 10-K for the year ended December 31, 1989).\n10.7 USAir Group's 1984 Stock Option and Stock Appreciation Rights Plan (incorporated by reference to Exhibit A to USAir Group's Proxy Statement dated March 30, 1984).\n10.8 USAir Group's 1988 Stock Incentive Plan (incorporated by reference to Exhibit 10.15 to USAir Group's Annual Report on Form 10-K for the year ended December 31, 1987).\n10.9 USAir Group's 1992 Stock Option Plan (incorporated by reference to Exhibit A to USAir Group's Proxy Statement dated March 30, 1992).\n10.10 Employment Agreement between USAir and its President and Chief Executive Officer (which is similar in form to the employment agreements of USAir Group's other executive officers) (incorporated by reference to Exhibit 10.9 to USAir Group's and USAir's Annual Report on Form 10-K for the year ended December 31, 1991).\n10.11 Agreements providing supplemental retirement benefits for the following officers of USAir: Executive Vice President and General Counsel (incorporated by reference to Exhibit 10.14 to USAir Group's Annual Report on Form 10-K for the year ended December 31, 1987), Executive Vice President-Operations, Senior Vice President-Corporate Communications and Senior Vice President-Human Resources (incorporated by reference to Exhibit 10.9 to USAir Group's Annual Report on Form 10- K for the year ended December 31, 1989).\n10.12(a) Trust Agreement dated as of August 1, 1989 between USAir Group and Wachovia Bank and Trust Company, N.A., as Trustee (incorporated by reference to Exhibit 10.10(a) to USAir Group's Annual Report on Form 10-K for the year ended December 31, 1989).\n10.12(b) Trust Agreement dated as of August 1, 1989 between USAir and Wachovia Bank and Trust Company, N.A., as Trustee (incorporated by reference to Exhibit 10.10(b) to USAir Group's Annual Report on Form 10-K for the year ended December 31, 1989).\n10.13 Investment Agreement dated as of January 21, 1993 between USAir Group and British Airways Plc (incorporated by reference to Exhibit 28.1 to USAir Group's and USAir's Current Report on Form 8-K filed on January 28, 1993, as amended by Amendment No. 1 on Form 8 filed on April 13, 1993).\n10.13(a) Amendment dated as of February 21, 1994 to the Investment Agreement dated as of January 21, 1993 between USAir Group and British Airways Plc.\n11 Computation of primary and fully diluted earnings per share of USAir Group for the five years ended December 31, 1993.\n21 Subsidiaries of USAir Group and USAir.\n23.1 Consent of the Auditors of USAir Group to the incorporation of their report concerning certain financial statements contained in this report in certain registration statements.\n23.2 Consent of the Auditors of USAir to the incorporation of their report concerning certain financial statements contained in this report in certain registration statements.\n24.1 Powers of Attorney signed by the directors of USAir Group, authorizing their signatures on this report.\n24.2 Powers of Attorney signed by the directors of USAir, authorizing their signatures on this report.\nSIGNATURES\nPursuant to the requirements of Section 13 of 15(d) of the Securities Exchange Act of 1934, USAir Group, Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.\nUSAir Group, Inc.\nBy: \/s\/Seth E. Schofield --------------------------------- Seth E. Schofield Chairman, President and Chief Executive Officer (Principal Executive Officer)\nDate: March 25, 1994\nPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of USAir Group, Inc. and in the capacities and on the dates indicated.\nMarch 25, 1994 By: \/s\/Seth E. Schofield --------------------------------- Seth E. Schofield Chairman, President and Chief Executive Officer (Principal Executive Officer)\nMarch 25, 1994 By: \/s\/Frank L. Salizzoni --------------------------------- Frank L. Salizzoni Executive Vice President-Finance (Principal Financial Officer)\nMarch 25, 1994 By: \/s\/Ann Greer-Rector --------------------------------- Ann Greer-Rector Vice President & Controller (Principal Accounting Officer)\nMarch 25, 1994 By: * -------------------------------- Warren E. Buffett Director\nMarch 25, 1994 By: * --------------------------------- Edwin I. Colodny Director\nMarch 25, 1994 By: * -------------------------------- Mathias J. DeVito Director\nMarch 25, 1994 By: * -------------------------------- George J. W. Goodman Director\nMarch 25, 1994 By: * --------------------------------- John W. Harris Director\nMarch 25, 1994 By: * --------------------------------- Edward A. Horrigan, Jr. Director\nMarch 25, 1994 By: * --------------------------------- Robert LeBuhn Director\nMarch 25, 1994 By: * --------------------------------- Sir Colin Marshall Director\nMarch 25, 1994 By: * --------------------------------- Roger P. Maynard Director\nMarch 25, 1994 By: * --------------------------------- John G. Medlin, Jr. Director\nMarch 25, 1994 By: * --------------------------------- Hanne M. Merriman Director\nMarch 25, 1994 By: * -------------------------------- Charles T. Munger Director\nMarch 25, 1994 By: * --------------------------------- Richard P. Simmons Director\nMarch 25, 1994 By: * --------------------------------- Raymond W. Smith Director\nMarch 25, 1994 By: * -------------------------------- Derek M. Stevens Director\nBy: \/s\/Frank L. Salizzoni ------------------------------ Frank L. Salizzoni Attorney-In-Fact\nSIGNATURES\nPursuant to the requirements of Section 13 of 15(d) of the Securities Exchange Act of 1934, USAir, Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.\nUSAir, Inc.\nBy: \/s\/Seth E. Schofield --------------------------------- Seth E. Schofield Chairman, President and Chief Executive Officer (Principal Executive Officer)\nDate: March 25, 1994\nPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of USAir, Inc. and in the capacities and on the dates indicated.\nMarch 25, 1994 By: \/s\/Seth E. Schofield --------------------------------- Seth E. Schofield Chairman, President and Chief Executive Officer (Principal Executive Officer)\nMarch 25, 1994 By: \/s\/Frank L. Salizzoni --------------------------------- Frank L. Salizzoni Executive Vice President-Finance (Principal Financial Officer)\nMarch 25, 1994 By: \/s\/Ann Greer-Rector --------------------------------- Ann Greer-Rector Vice President & Controller (Principal Accounting Officer)\nMarch 25, 1994 By: * -------------------------------- Warren E. Buffett Director\nMarch 25, 1994 By: * --------------------------------- Edwin I. Colodny Director\nMarch 25, 1994 By: * -------------------------------- Mathias J. DeVito Director\nMarch 25, 1994 By: * -------------------------------- George J. W. Goodman Director\nMarch 25, 1994 By: * --------------------------------- John W. Harris Director\nMarch 25, 1994 By: * --------------------------------- Edward A. Horrigan, Jr. Director\nMarch 25, 1994 By: * --------------------------------- Robert LeBuhn Director\nMarch 25, 1994 By: * --------------------------------- Sir Colin Marshall Director\nMarch 25, 1994 By: * --------------------------------- Roger P. Maynard Director\nMarch 25, 1994 By: * --------------------------------- John G. Medlin, Jr. Director\nMarch 25, 1994 By: * --------------------------------- Hanne M. Merriman Director\nMarch 25, 1994 By: * -------------------------------- Charles T. Munger Director\nMarch 25, 1994 By: * --------------------------------- Richard P. Simmons Director\nMarch 25, 1994 By: * --------------------------------- Raymond W. Smith Director\nMarch 25, 1994 By: * -------------------------------- Derek M. Stevens Director\nBy: \/s\/Frank L. Salizzoni ------------------------------ Frank L. Salizzoni Attorney-In-Fact\nIndependent Auditors' Report On Consolidated Financial Statement Schedules - USAir Group, Inc.\nThe Stockholders and Board of Directors USAir Group, Inc.:\nUnder date of February 25, 1994, we reported on the consoli- dated balance sheets of USAir Group, Inc. and subsidiaries (\"Group\") as of December 31, 1993 and 1992, and the related consolidated statements of operations, cash flows, and changes in stockholders' equity (deficit) for each of the years in the three- year period ended December 31, 1993, as included in Item 8A in this annual report on Form 10-K for the year 1993. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related consolidated financial statement schedules as listed in Item 14(a)2(i). These consolidated financial statement schedules are the responsibility of Group's management. Our responsibility is to express an opinion on these consolidated financial statement schedules based on our audits.\nIn our opinion, such consolidated financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.\nKPMG PEAT MARWICK\nWashington, D. C. February 25, 1994\nIndependent Auditors' Report On Consolidated Financial Statement Schedules - USAir, Inc.\nThe Stockholder and Board of Directors USAir, Inc.:\nUnder date of February 25, 1994, we reported on the consolidated balance sheets of USAir, Inc. and subsidiaries (\"USAir\") as of December 31, 1993 and 1992, and the related consolidated statements of operations, cash flows, and changes in stockholder's equity for each of the years in the three-year period ended December 31, 1993, as included in Item 8B in this annual report on Form 10-K for the year 1993. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related consolidated financial statement schedules as listed in Item 14(a)2(ii). These consolidated financial statement schedules are the responsibility of USAir's management. Our responsibility is to express an opinion on these consolidated financial statement schedules based on our audits.\nIn our opinion, such consolidated financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.\nKPMG PEAT MARWICK\nWashington, D. C. February 25, 1994\nExhibit 21\nSUBSIDIARIES OF USAIR GROUP, INC. AND USAIR, INC.\nUSAir Group, Inc. - -----------------\nUSAir, Inc. Piedmont Airlines, Inc. (formerly Henson Airlines, Inc.) Jetstream International Airlines, Inc. Pennsylvania Commuter Airlines, Inc. (d\/b\/a\/ Allegheny Commuter Airlines) USAir Leasing and Services, Inc. USAir Fuel Corporation Material Services Corp.\nUSAir, Inc. (the following companies are also indirect subsidiaries - ------------------------------------------------------------------- of USAir Group, Inc.) - ---------------------\nUSAM Corp. Pacific Southwest Airmotive (substantially all of the assets of this company were sold on October 9, 1991)\nExhibit 23.1\nCONSENT OF INDEPENDENT AUDITORS\nThe Board of Directors USAir Group, Inc.\nWe consent to the incorporation by reference in the Registration Statements on Form S-8 Nos. 2-98828, 33-26762, 33-39896, 33-44835, 33-60618 and 33-60620 and the Registration Statement on Form S-3 No. 33-41821 of USAir Group, Inc., of our reports dated February 25, 1994 relating to the consolidated balance sheets of USAir Group, Inc. and subsidiaries as of December 31, 1993 and 1992 and the related consolidated statements of operations, cash flows and changes in stockholders' equity, and the related consolidated financial statement schedules for each of the years in the three- year period ended December 31, 1993 which reports appear in the December 31, 1993 annual report on Form 10-K of USAir Group, Inc. and USAir, Inc.\nKPMG PEAT MARWICK\nWashington, D.C. March 25, 1994\nExhibit 23.2\nCONSENT OF INDEPENDENT AUDITORS\nThe Board of Directors USAir, Inc.\nWe consent to the incorporation by reference in the Registration Statement on Form S-3 No. 33-35509 of USAir, Inc., of our reports dated February 25, 1994 relating to the consolidated balance sheets of USAir, Inc. and subsidiaries as of December 31, 1993 and 1992 and the related consolidated statements of operations, cash flows and changes in stockholders' equity, and the related consolidated financial statement schedules for each of the years in the three- year period ended December 31, 1993 which reports appear in the December 31, 1993 annual report on Form 10-K of USAir Group, Inc. and USAir, Inc.\nKPMG PEAT MARWICK\nWashington, D.C. March 25, 1994\nExhibit 24.1\nPOWER OF ATTORNEY -----------------\nKNOW ALL MEN BY THESE PRESENTS, THAT I, Warren E. Buffett, Director of USAir Group, Inc., (the \"Company\"), do hereby constitute and appoint James T. Lloyd and Frank L. Salizzoni, and each of them (with full power to each of them to act alone), attorney and agent for me and in my name and on my behalf to sign any Annual Report on Form 10-K of the Company for the year ended December 31, 1993 and any amendments or supplements thereto which shall be filed with the Securities and Exchange Commission under the Securities and Exchange Act of 1934, as amended. I hereby give and grant to said attorneys and agents, and each of them, full power and authority generally to do and perform all acts and things necessary to be done in the premises as fully and effectually in all respects as I could do if personally present; and I hereby ratify and confirm all that said attorneys and agents, and each of them, shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand and seal this 14 day of January, 1994.\n\/s\/Warren E. Buffett (L.S.) ---------------------------------\nExhibit 24.1\nPOWER OF ATTORNEY -----------------\nKNOW ALL MEN BY THESE PRESENTS, THAT I, Edwin I. Colodny, Director of USAir Group, Inc., (the \"Company\"), do hereby constitute and appoint James T. Lloyd and Frank L. Salizzoni, and each of them (with full power to each of them to act alone), attorney and agent for me and in my name and on my behalf to sign any Annual Report on Form 10-K of the Company for the year ended December 31, 1993 and any amendments or supplements thereto which shall be filed with the Securities and Exchange Commission under the Securities and Exchange Act of 1934, as amended. I hereby give and grant to said attorneys and agents, and each of them, full power and authority generally to do and perform all acts and things necessary to be done in the premises as fully and effectually in all respects as I could do if personally present; and I hereby ratify and confirm all that said attorneys and agents, and each of them, shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand and seal this 25 day of January, 1994.\n\/s\/Edwin I. Colodny (L.S.) ----------------------------------\nExhibit 24.1\nPOWER OF ATTORNEY -----------------\nKNOW ALL MEN BY THESE PRESENTS, THAT I, Mathias J. DeVito, Director of USAir Group, Inc., (the \"Company\"), do hereby constitute and appoint James T. Lloyd and Frank L. Salizzoni, and each of them (with full power to each of them to act alone), attorney and agent for me and in my name and on my behalf to sign any Annual Report on Form 10-K of the Company for the year ended December 31, 1993 and any amendments or supplements thereto which shall be filed with the Securities and Exchange Commission under the Securities and Exchange Act of 1934, as amended. I hereby give and grant to said attorneys and agents, and each of them, full power and authority generally to do and perform all acts and things necessary to be done in the premises as fully and effectually in all respects as I could do if personally present; and I hereby ratify and confirm all that said attorneys and agents, and each of them, shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand and seal this 14 day of January, 1994.\n\/s\/Mathias J. DeVito (L.S.) ---------------------------------\nExhibit 24.1\nPOWER OF ATTORNEY -----------------\nKNOW ALL MEN BY THESE PRESENTS, THAT I, George J. W. Goodman, Director of USAir Group, Inc., (the \"Company\"), do hereby constitute and appoint James T. Lloyd and Frank L. Salizzoni, and each of them (with full power to each of them to act alone), attorney and agent for me and in my name and on my behalf to sign any Annual Report on Form 10-K of the Company for the year ended December 31, 1993 and any amendments or supplements thereto which shall be filed with the Securities and Exchange Commission under the Securities and Exchange Act of 1934, as amended. I hereby give and grant to said attorneys and agents, and each of them, full power and authority generally to do and perform all acts and things necessary to be done in the premises as fully and effectually in all respects as I could do if personally present; and I hereby ratify and confirm all that said attorneys and agents, and each of them, shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand and seal this 13 day of January, 1994.\n\/s\/George J. W. Goodman (L.S.) ----------------------------------\nExhibit 24.1\nPOWER OF ATTORNEY -----------------\nKNOW ALL MEN BY THESE PRESENTS, THAT I, John W. Harris, Director of USAir Group, Inc., (the \"Company\"), do hereby constitute and appoint James T. Lloyd and Frank L. Salizzoni, and each of them (with full power to each of them to act alone), attorney and agent for me and in my name and on my behalf to sign any Annual Report on Form 10-K of the Company for the year ended December 31, 1993 and any amendments or supplements thereto which shall be filed with the Securities and Exchange Commission under the Securities and Exchange Act of 1934, as amended. I hereby give and grant to said attorneys and agents, and each of them, full power and authority generally to do and perform all acts and things necessary to be done in the premises as fully and effectually in all respects as I could do if personally present; and I hereby ratify and confirm all that said attorneys and agents, and each of them, shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand and seal this 26 day of January, 1994.\n\/s\/J. W. Harris (L.S.) ----------------------------------\nExhibit 24.1\nPOWER OF ATTORNEY -----------------\nKNOW ALL MEN BY THESE PRESENTS, THAT I, Edward A. Horrigan, Jr., Director of USAir Group, Inc., (the \"Company\"), do hereby constitute and appoint James T. Lloyd and Frank L. Salizzoni, and each of them (with full power to each of them to act alone), attorney and agent for me and in my name and on my behalf to sign any Annual Report on Form 10-K of the Company for the year ended December 31, 1993 and any amendments or supplements thereto which shall be filed with the Securities and Exchange Commission under the Securities and Exchange Act of 1934, as amended. I hereby give and grant to said attorneys and agents, and each of them, full power and authority generally to do and perform all acts and things necessary to be done in the premises as fully and effectually in all respects as I could do if personally present; and I hereby ratify and confirm all that said attorneys and agents, and each of them, shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand and seal this 14 day of January, 1994.\n\/s\/Edward A. Horrigan, Jr. (L.S.) ----------------------------------\nExhibit 24.1\nPOWER OF ATTORNEY -----------------\nKNOW ALL MEN BY THESE PRESENTS, THAT I, Robert LeBuhn, Director of USAir Group, Inc., (the \"Company\"), do hereby constitute and appoint James T. Lloyd and Frank L. Salizzoni, and each of them (with full power to each of them to act alone), attorney and agent for me and in my name and on my behalf to sign any Annual Report on Form 10-K of the Company for the year ended December 31, 1993 and any amendments or supplements thereto which shall be filed with the Securities and Exchange Commission under the Securities and Exchange Act of 1934, as amended. I hereby give and grant to said attorneys and agents, and each of them, full power and authority generally to do and perform all acts and things necessary to be done in the premises as fully and effectually in all respects as I could do if personally present; and I hereby ratify and confirm all that said attorneys and agents, and each of them, shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand and seal this 14th day of January, 1994.\n\/s\/Robert LeBuhn (L.S.) ----------------------------------\nExhibit 24.1\nPOWER OF ATTORNEY -----------------\nKNOW ALL MEN BY THESE PRESENTS, THAT I, Colin Marshall, Director of USAir Group, Inc., (the \"Company\"), do hereby constitute and appoint James T. Lloyd and Frank L. Salizzoni, and each of them (with full power to each of them to act alone), attorney and agent for me and in my name and on my behalf to sign any Annual Report on Form 10-K of the Company for the year ended December 31, 1993 and any amendments or supplements thereto which shall be filed with the Securities and Exchange Commission under the Securities and Exchange Act of 1934, as amended. I hereby give and grant to said attorneys and agents, and each of them, full power and authority generally to do and perform all acts and things necessary to be done in the premises as fully and effectually in all respects as I could do if personally present; and I hereby ratify and confirm all that said attorneys and agents, and each of them, shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand and seal this 15 day of January, 1994.\n\/s\/C. Marshall (L.S.) ----------------------------------\nExhibit 24.1\nPOWER OF ATTORNEY -----------------\nKNOW ALL MEN BY THESE PRESENTS, THAT I, Roger P. Maynard, Director of USAir Group, Inc., (the \"Company\"), do hereby constitute and appoint James T. Lloyd and Frank L. Salizzoni, and each of them (with full power to each of them to act alone), attorney and agent for me and in my name and on my behalf to sign any Annual Report on Form 10-K of the Company for the year ended December 31, 1993 and any amendments or supplements thereto which shall be filed with the Securities and Exchange Commission under the Securities and Exchange Act of 1934, as amended. I hereby give and grant to said attorneys and agents, and each of them, full power and authority generally to do and perform all acts and things necessary to be done in the premises as fully and effectually in all respects as I could do if personally present; and I hereby ratify and confirm all that said attorneys and agents, and each of them, shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand and seal this 15 day of January, 1994.\n\/s\/R. Maynard (L.S.) ---------------------------------\nExhibit 24.1\nPOWER OF ATTORNEY -----------------\nKNOW ALL MEN BY THESE PRESENTS, THAT I, John G. Medlin, Jr., Director of USAir Group, Inc., (the \"Company\"), do hereby constitute and appoint James T. Lloyd and Frank L. Salizzoni, and each of them (with full power to each of them to act alone), attorney and agent for me and in my name and on my behalf to sign any Annual Report on Form 10-K of the Company for the year ended December 31, 1993 and any amendments or supplements thereto which shall be filed with the Securities and Exchange Commission under the Securities and Exchange Act of 1934, as amended. I hereby give and grant to said attorneys and agents, and each of them, full power and authority generally to do and perform all acts and things necessary to be done in the premises as fully and effectually in all respects as I could do if personally present; and I hereby ratify and confirm all that said attorneys and agents, and each of them, shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand and seal this 19th day of January, 1994.\n\/s\/John G. Medlin, Jr. (L.S.) ----------------------------------\nExhibit 24.1\nPOWER OF ATTORNEY -----------------\nKNOW ALL MEN BY THESE PRESENTS, THAT I, Hanne M. Merriman, Director of USAir Group, Inc., (the \"Company\"), do hereby constitute and appoint James T. Lloyd and Frank L. Salizzoni, and each of them (with full power to each of them to act alone), attorney and agent for me and in my name and on my behalf to sign any Annual Report on Form 10-K of the Company for the year ended December 31, 1993 and any amendments or supplements thereto which shall be filed with the Securities and Exchange Commission under the Securities and Exchange Act of 1934, as amended. I hereby give and grant to said attorneys and agents, and each of them, full power and authority generally to do and perform all acts and things necessary to be done in the premises as fully and effectually in all respects as I could do if personally present; and I hereby ratify and confirm all that said attorneys and agents, and each of them, shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand and seal this 14 day of January, 1994.\n\/s\/Hanne M. Merriman (L.S.) ----------------------------------\nExhibit 24.1\nPOWER OF ATTORNEY -----------------\nKNOW ALL MEN BY THESE PRESENTS, THAT I, Charles T. Munger, Director of USAir Group, Inc., (the \"Company\"), do hereby constitute and appoint James T. Lloyd and Frank L. Salizzoni, and each of them (with full power to each of them to act alone), attorney and agent for me and in my name and on my behalf to sign any Annual Report on Form 10-K of the Company for the year ended December 31, 1993 and any amendments or supplements thereto which shall be filed with the Securities and Exchange Commission under the Securities and Exchange Act of 1934, as amended. I hereby give and grant to said attorneys and agents, and each of them, full power and authority generally to do and perform all acts and things necessary to be done in the premises as fully and effectually in all respects as I could do if personally present; and I hereby ratify and confirm all that said attorneys and agents, and each of them, shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand and seal this 24th day of January, 1994.\n\/s\/Charles T. Munger (L.S.) ----------------------------------\nExhibit 24.1\nPOWER OF ATTORNEY -----------------\nKNOW ALL MEN BY THESE PRESENTS, THAT I, Richard P. Simmons, Director of USAir Group, Inc., (the \"Company\"), do hereby constitute and appoint James T. Lloyd and Frank L. Salizzoni, and each of them (with full power to each of them to act alone), attorney and agent for me and in my name and on my behalf to sign any Annual Report on Form 10-K of the Company for the year ended December 31, 1993 and any amendments or supplements thereto which shall be filed with the Securities and Exchange Commission under the Securities and Exchange Act of 1934, as amended. I hereby give and grant to said attorneys and agents, and each of them, full power and authority generally to do and perform all acts and things necessary to be done in the premises as fully and effectually in all respects as I could do if personally present; and I hereby ratify and confirm all that said attorneys and agents, and each of them, shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand and seal this 13th day of January, 1994.\n\/s\/Richard P. Simmons (L.S.) ----------------------------------\nExhibit 24.1\nPOWER OF ATTORNEY -----------------\nKNOW ALL MEN BY THESE PRESENTS, THAT I, Raymond W. Smith, Director of USAir Group, Inc., (the \"Company\"), do hereby constitute and appoint James T. Lloyd and Frank L. Salizzoni, and each of them (with full power to each of them to act alone), attorney and agent for me and in my name and on my behalf to sign any Annual Report on Form 10-K of the Company for the year ended December 31, 1993 and any amendments or supplements thereto which shall be filed with the Securities and Exchange Commission under the Securities and Exchange Act of 1934, as amended. I hereby give and grant to said attorneys and agents, and each of them, full power and authority generally to do and perform all acts and things necessary to be done in the premises as fully and effectually in all respects as I could do if personally present; and I hereby ratify and confirm all that said attorneys and agents, and each of them, shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand and seal this 14 day of January, 1994.\n\/s\/R. W. Smith (L.S.) ----------------------------------\nExhibit 24.1\nPOWER OF ATTORNEY -----------------\nKNOW ALL MEN BY THESE PRESENTS, THAT I, Derek M. Stevens, Director of USAir Group, Inc., (the \"Company\"), do hereby constitute and appoint James T. Lloyd and Frank L. Salizzoni, and each of them (with full power to each of them to act alone), attorney and agent for me and in my name and on my behalf to sign any Annual Report on Form 10-K of the Company for the year ended December 31, 1993 and any amendments or supplements thereto which shall be filed with the Securities and Exchange Commission under the Securities and Exchange Act of 1934, as amended. I hereby give and grant to said attorneys and agents, and each of them, full power and authority generally to do and perform all acts and things necessary to be done in the premises as fully and effectually in all respects as I could do if personally present; and I hereby ratify and confirm all that said attorneys and agents, and each of them, shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand and seal this 26 day of January, 1994.\n\/s\/Derek M. Stevens (L.S.) ---------------------------------\nExhibit 24.2\nPOWER OF ATTORNEY -----------------\nKNOW ALL MEN BY THESE PRESENTS, THAT I, Warren E. Buffett, Director of USAir, Inc., (the \"Company\"), do hereby constitute and appoint James T. Lloyd and Frank L. Salizzoni, and each of them (with full power to each of them to act alone), attorney and agent for me and in my name and on my behalf to sign any Annual Report on Form 10-K of the Company for the year ended December 31, 1993 and any amendments or supplements thereto which shall be filed with the Securities and Exchange Commission under the Securities and Exchange Act of 1934, as amended. I hereby give and grant to said attorneys and agents, and each of them, full power and authority generally to do and perform all acts and things necessary to be done in the premises as fully and effectually in all respects as I could do if personally present; and I hereby ratify and confirm all that said attorneys and agents, and each of them, shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand and seal this 14 day of January, 1994.\n\/s\/Warren E. Buffett (L.S.) ------------------------------\nExhibit 24.2\nPOWER OF ATTORNEY -----------------\nKNOW ALL MEN BY THESE PRESENTS, THAT I, Edwin I. Colodny, Director of USAir, Inc., (the \"Company\"), do hereby constitute and appoint James T. Lloyd and Frank L. Salizzoni, and each of them (with full power to each of them to act alone), attorney and agent for me and in my name and on my behalf to sign any Annual Report on Form 10-K of the Company for the year ended December 31, 1993 and any amendments or supplements thereto which shall be filed with the Securities and Exchange Commission under the Securities and Exchange Act of 1934, as amended. I hereby give and grant to said attorneys and agents, and each of them, full power and authority generally to do and perform all acts and things necessary to be done in the premises as fully and effectually in all respects as I could do if personally present; and I hereby ratify and confirm all that said attorneys and agents, and each of them, shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand and seal this 25 day of January, 1994.\n\/s\/Edwin I. Colodny (L.S.) ------------------------------\nExhibit 24.2\nPOWER OF ATTORNEY -----------------\nKNOW ALL MEN BY THESE PRESENTS, THAT I, Mathias J. DeVito, Director of USAir, Inc., (the \"Company\"), do hereby constitute and appoint James T. Lloyd and Frank L. Salizzoni, and each of them (with full power to each of them to act alone), attorney and agent for me and in my name and on my behalf to sign any Annual Report on Form 10-K of the Company for the year ended December 31, 1993 and any amendments or supplements thereto which shall be filed with the Securities and Exchange Commission under the Securities and Exchange Act of 1934, as amended. I hereby give and grant to said attorneys and agents, and each of them, full power and authority generally to do and perform all acts and things necessary to be done in the premises as fully and effectually in all respects as I could do if personally present; and I hereby ratify and confirm all that said attorneys and agents, and each of them, shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand and seal this 14 day of January, 1994.\n\/s\/Mathias J. DeVito (L.S.) ------------------------------\nExhibit 24.2\nPOWER OF ATTORNEY -----------------\nKNOW ALL MEN BY THESE PRESENTS, THAT I, George J. W. Goodman, Director of USAir, Inc., (the \"Company\"), do hereby constitute and appoint James T. Lloyd and Frank L. Salizzoni, and each of them (with full power to each of them to act alone), attorney and agent for me and in my name and on my behalf to sign any Annual Report on Form 10-K of the Company for the year ended December 31, 1993 and any amendments or supplements thereto which shall be filed with the Securities and Exchange Commission under the Securities and Exchange Act of 1934, as amended. I hereby give and grant to said attorneys and agents, and each of them, full power and authority generally to do and perform all acts and things necessary to be done in the premises as fully and effectually in all respects as I could do if personally present; and I hereby ratify and confirm all that said attorneys and agents, and each of them, shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand and seal this 13 day of January, 1994.\n\/s\/George J. W. Goodman (L.S.) ------------------------------\nExhibit 24.2\nPOWER OF ATTORNEY -----------------\nKNOW ALL MEN BY THESE PRESENTS, THAT I, John W. Harris, Director of USAir, Inc., (the \"Company\"), do hereby constitute and appoint James T. Lloyd and Frank L. Salizzoni, and each of them (with full power to each of them to act alone), attorney and agent for me and in my name and on my behalf to sign any Annual Report on Form 10-K of the Company for the year ended December 31, 1993 and any amendments or supplements thereto which shall be filed with the Securities and Exchange Commission under the Securities and Exchange Act of 1934, as amended. I hereby give and grant to said attorneys and agents, and each of them, full power and authority generally to do and perform all acts and things necessary to be done in the premises as fully and effectually in all respects as I could do if personally present; and I hereby ratify and confirm all that said attorneys and agents, and each of them, shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand and seal this 26 day of January, 1994.\n\/s\/J. W. Harris (L.S.) ------------------------------\nExhibit 24.2\nPOWER OF ATTORNEY -----------------\nKNOW ALL MEN BY THESE PRESENTS, THAT I, Edward A. Horrigan, Jr., Director of USAir, Inc., (the \"Company\"), do hereby constitute and appoint James T. Lloyd and Frank L. Salizzoni, and each of them (with full power to each of them to act alone), attorney and agent for me and in my name and on my behalf to sign any Annual Report on Form 10-K of the Company for the year ended December 31, 1993 and any amendments or supplements thereto which shall be filed with the Securities and Exchange Commission under the Securities and Exchange Act of 1934, as amended. I hereby give and grant to said attorneys and agents, and each of them, full power and authority generally to do and perform all acts and things necessary to be done in the premises as fully and effectually in all respects as I could do if personally present; and I hereby ratify and confirm all that said attorneys and agents, and each of them, shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand and seal this 14 day of January, 1994.\n\/s\/Edward A. Horrigan, Jr. (L.S.) ---------------------------------\nExhibit 24.2\nPOWER OF ATTORNEY -----------------\nKNOW ALL MEN BY THESE PRESENTS, THAT I, Robert LeBuhn, Director of USAir, Inc., (the \"Company\"), do hereby constitute and appoint James T. Lloyd and Frank L. Salizzoni, and each of them (with full power to each of them to act alone), attorney and agent for me and in my name and on my behalf to sign any Annual Report on Form 10-K of the Company for the year ended December 31, 1993 and any amendments or supplements thereto which shall be filed with the Securities and Exchange Commission under the Securities and Exchange Act of 1934, as amended. I hereby give and grant to said attorneys and agents, and each of them, full power and authority generally to do and perform all acts and things necessary to be done in the premises as fully and effectually in all respects as I could do if personally present; and I hereby ratify and confirm all that said attorneys and agents, and each of them, shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand and seal this 14th day of January, 1994.\n\/s\/Robert LeBuhn (L.S.) ------------------------------\nExhibit 24.2\nPOWER OF ATTORNEY -----------------\nKNOW ALL MEN BY THESE PRESENTS, THAT I, Colin Marshall, Director of USAir, Inc., (the \"Company\"), do hereby constitute and appoint James T. Lloyd and Frank L. Salizzoni, and each of them (with full power to each of them to act alone), attorney and agent for me and in my name and on my behalf to sign any Annual Report on Form 10-K of the Company for the year ended December 31, 1993 and any amendments or supplements thereto which shall be filed with the Securities and Exchange Commission under the Securities and Exchange Act of 1934, as amended. I hereby give and grant to said attorneys and agents, and each of them, full power and authority generally to do and perform all acts and things necessary to be done in the premises as fully and effectually in all respects as I could do if personally present; and I hereby ratify and confirm all that said attorneys and agents, and each of them, shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand and seal this 15 day of January, 1994.\n\/s\/C. Marshall (L.S.) ------------------------------\nExhibit 24.2\nPOWER OF ATTORNEY -----------------\nKNOW ALL MEN BY THESE PRESENTS, THAT I, Roger P. Maynard, Director of USAir, Inc., (the \"Company\"), do hereby constitute and appoint James T. Lloyd and Frank L. Salizzoni, and each of them (with full power to each of them to act alone), attorney and agent for me and in my name and on my behalf to sign any Annual Report on Form 10-K of the Company for the year ended December 31, 1993 and any amendments or supplements thereto which shall be filed with the Securities and Exchange Commission under the Securities and Exchange Act of 1934, as amended. I hereby give and grant to said attorneys and agents, and each of them, full power and authority generally to do and perform all acts and things necessary to be done in the premises as fully and effectually in all respects as I could do if personally present; and I hereby ratify and confirm all that said attorneys and agents, and each of them, shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand and seal this 15 day of January, 1994.\n\/s\/R. P. Maynard (L.S.) ------------------------------\nExhibit 24.2\nPOWER OF ATTORNEY -----------------\nKNOW ALL MEN BY THESE PRESENTS, THAT I, John G. Medlin, Jr., Director of USAir, Inc., (the \"Company\"), do hereby constitute and appoint James T. Lloyd and Frank L. Salizzoni, and each of them (with full power to each of them to act alone), attorney and agent for me and in my name and on my behalf to sign any Annual Report on Form 10-K of the Company for the year ended December 31, 1993 and any amendments or supplements thereto which shall be filed with the Securities and Exchange Commission under the Securities and Exchange Act of 1934, as amended. I hereby give and grant to said attorneys and agents, and each of them, full power and authority generally to do and perform all acts and things necessary to be done in the premises as fully and effectually in all respects as I could do if personally present; and I hereby ratify and confirm all that said attorneys and agents, and each of them, shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand and seal this 19th day of January, 1994.\n\/s\/John G. Medlin, Jr. (L.S.) ------------------------------\nExhibit 24.2\nPOWER OF ATTORNEY -----------------\nKNOW ALL MEN BY THESE PRESENTS, THAT I, Hanne M. Merriman, Director of USAir, Inc., (the \"Company\"), do hereby constitute and appoint James T. Lloyd and Frank L. Salizzoni, and each of them (with full power to each of them to act alone), attorney and agent for me and in my name and on my behalf to sign any Annual Report on Form 10-K of the Company for the year ended December 31, 1993 and any amendments or supplements thereto which shall be filed with the Securities and Exchange Commission under the Securities and Exchange Act of 1934, as amended. I hereby give and grant to said attorneys and agents, and each of them, full power and authority generally to do and perform all acts and things necessary to be done in the premises as fully and effectually in all respects as I could do if personally present; and I hereby ratify and confirm all that said attorneys and agents, and each of them, shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand and seal this 14 day of January, 1994.\n\/s\/Hanne M. Merriman (L.S.) ------------------------------\nExhibit 24.2\nPOWER OF ATTORNEY -----------------\nKNOW ALL MEN BY THESE PRESENTS, THAT I, Charles T. Munger, Director of USAir, Inc., (the \"Company\"), do hereby constitute and appoint James T. Lloyd and Frank L. Salizzoni, and each of them (with full power to each of them to act alone), attorney and agent for me and in my name and on my behalf to sign any Annual Report on Form 10-K of the Company for the year ended December 31, 1993 and any amendments or supplements thereto which shall be filed with the Securities and Exchange Commission under the Securities and Exchange Act of 1934, as amended. I hereby give and grant to said attorneys and agents, and each of them, full power and authority generally to do and perform all acts and things necessary to be done in the premises as fully and effectually in all respects as I could do if personally present; and I hereby ratify and confirm all that said attorneys and agents, and each of them, shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand and seal this 24th day of January, 1994.\n\/s\/Charles T. Munger (L.S.) ------------------------------\nExhibit 24.2\nPOWER OF ATTORNEY -----------------\nKNOW ALL MEN BY THESE PRESENTS, THAT I, Richard P. Simmons, Director of USAir, Inc., (the \"Company\"), do hereby constitute and appoint James T. Lloyd and Frank L. Salizzoni, and each of them (with full power to each of them to act alone), attorney and agent for me and in my name and on my behalf to sign any Annual Report on Form 10-K of the Company for the year ended December 31, 1993 and any amendments or supplements thereto which shall be filed with the Securities and Exchange Commission under the Securities and Exchange Act of 1934, as amended. I hereby give and grant to said attorneys and agents, and each of them, full power and authority generally to do and perform all acts and things necessary to be done in the premises as fully and effectually in all respects as I could do if personally present; and I hereby ratify and confirm all that said attorneys and agents, and each of them, shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand and seal this 13th day of January, 1994.\n\/s\/Richard P. Simmons (L.S.) ------------------------------\nExhibit 24.2\nPOWER OF ATTORNEY -----------------\nKNOW ALL MEN BY THESE PRESENTS, THAT I, Raymond W. Smith, Director of USAir, Inc., (the \"Company\"), do hereby constitute and appoint James T. Lloyd and Frank L. Salizzoni, and each of them (with full power to each of them to act alone), attorney and agent for me and in my name and on my behalf to sign any Annual Report on Form 10-K of the Company for the year ended December 31, 1993 and any amendments or supplements thereto which shall be filed with the Securities and Exchange Commission under the Securities and Exchange Act of 1934, as amended. I hereby give and grant to said attorneys and agents, and each of them, full power and authority generally to do and perform all acts and things necessary to be done in the premises as fully and effectually in all respects as I could do if personally present; and I hereby ratify and confirm all that said attorneys and agents, and each of them, shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand and seal this 14 day of January, 1994.\n\/s\/R. W. Smith (L.S.) ------------------------------\nExhibit 24.2\nPOWER OF ATTORNEY -----------------\nKNOW ALL MEN BY THESE PRESENTS, THAT I, Derek M. Stevens, Director of USAir, Inc., (the \"Company\"), do hereby constitute and appoint James T. Lloyd and Frank L. Salizzoni, and each of them (with full power to each of them to act alone), attorney and agent for me and in my name and on my behalf to sign any Annual Report on Form 10-K of the Company for the year ended December 31, 1993 and any amendments or supplements thereto which shall be filed with the Securities and Exchange Commission under the Securities and Exchange Act of 1934, as amended. I hereby give and grant to said attorneys and agents, and each of them, full power and authority generally to do and perform all acts and things necessary to be done in the premises as fully and effectually in all respects as I could do if personally present; and I hereby ratify and confirm all that said attorneys and agents, and each of them, shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand and seal this 26 day of January, 1994.\n\/s\/Derek M. Stevens (L.S.) ------------------------------","section_15":""}
{"filename":"836102_1993.txt","cik":"836102","year":"1993","section_1":"Item 1. Business 1 Item 2.","section_1A":"","section_1B":"","section_2":"Item 2. Properties 15 Item 3.","section_3":"ITEM 3. LEGAL PROCEEDINGS\nThe Company has been made a defendant in a lawsuit brought by Entech Sales & Service, Inc., on behalf of a purported class of contractors engaged in the service and repair of commercial air conditioning equipment. The suit, which was filed on March 5, 1993, in the United States District Court for the Northern District of Texas, alleges principally that the manner in which Air Conditioning Products distributes repair service parts for its equipment violates Federal antitrust laws and demands $680 million in damages (which are subject to trebling under the antitrust laws) and injunctive relief. The Company has filed an answer denying all claims and is preparing to defend itself vigorously. The issue of whether Entech may maintain this action as a class action is pending before the court. In management's opinion the litigation should not have any material adverse effect on the financial position, cash flows, or results of operations of the Company.\nThere are no other material legal proceedings. For a discussion of German tax issues see \"ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Liquidity and Capital Resources\". For a discussion of environmental issues see \"ITEM 1. BUSINESS -- Regulations and Environmental Matters.\"\nITEM 4.","section_4":"ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS\nBy a vote of a majority of the holders of the common stock of the Company dated as of December 2, 1993, the following individuals were elected as directors of the Company, each to serve in office until the next annual meeting of the stockholder of the Company or until such individual's respective successor shall have been elected and shall qualify, or until such individual's earlier death, resignation or removal as provided in the By-laws of the Company:\nHorst Hinrichs Frank T. Nickell Emmanuel A. Kampouris J. Danforth Quayle George H. Kerckhove John Rutledge Shigeru Mizushima Joseph S. Schuchert\nPART II\nITEM 5.","section_5":"ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.\n(a) There is no established public trading market for shares of Holding common stock, par value $.01 per share. Shares of Holding common stock were sold to Kelso ASI Partners, L.P. (\"ASI Partners\"), the American Standard Inc. Employee Stock Ownership Plan (\"ESOP\"), and executive officers and other management personnel of American Standard Inc. and its subsidiaries (the \"Management Investors\"). The Management Investors purchased their shares pursuant to a Stockholders Agreement among ASI Partners, Holding, and the Management Investors, dated as of July 7, 1988, as amended (\"Stockholders Agreement\"). The Stockholders Agreement restricts transfers by Management Investors of Holding common stock for a period up to ten years after July 7, 1988, but obligates Holding, subject to restrictions contained in the Company's various debt agreements, to repurchase shares of Holding common stock in the case of death, disability, retirement, or other termination of employment of Management Investors. The repurchase by Holding is made at fair market value based on independent valuations, generally at year-end dates, with the valuation dates dependent on the election made by the Management Investor following employment termination. The timing of payment by Holding is subject to constraints of the debt agreements, as supplemented by a Schedule of Priorities established by Holding's Board of Directors, and by the valuation election of the Management Investor. Shares have been issued by the ESOP to participants, and additional shares have been issued in connection with other Company plans.\n(b) The number of stockholders of record of Holding at March 10, 1994, was 287.\n(c) Holding has no separate operations; its ability to pay dividends or repurchase its common stock will be totally dependent upon the extent to which it receives dividends or other funds from American Standard Inc. Covenants of the agreements under which the debt of the Company was issued substantially restrict American Standard Inc. from declaring any dividends, except to the extent necessary to permit Holding to make repurchases of its common stock (i) from participants to whom shares of common stock are distributed from the ESOP to the extent required by the terms thereof, or (ii) held by Management Investors (in the circumstances contemplated by the Stockholders Agreement) or credited to the accounts of officers and employees under the Company's incentive and savings plans, provided certain conditions are met and the aggregate amount of such purchases does not exceed specified limits in any calendar year, which under the most restrictive debt agreement is currently $5 million a year. Accordingly, no dividends can be expected to be paid by Holding at least until all borrowings under such agreements with the debt holders have been repaid.\nITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS\nResults of Operations\nAs a result of the Acquisition, results of operations include purchase accounting adjustments and reflect a highly leveraged capital structure. Sales Year Ended December 31, 1993 1992 1991 (Dollars in millions) Air Conditioning Products(a) $2,100 $ 1,892 $ 1,836 Plumbing Products 1,167 1,170 1,018 Transportation Products 563 730 741 Sales $3,830 $ 3,792 $ 3,595 ====== ======= =======\nOperating Income (Loss) Before Income Taxes, Extraordinary Loss, and Cumulative Effects of Changes in Accounting Methods\nYear Ended December 31, 1993 1992 1991 (Dollars in millions) Air Conditioning Products(a) $133 $ 104 $ 55 Plumbing Products 108 108 66 Transportation Products 41 88 121 Operating income 282 300 242\nInterest expense (278) (289) (286) Corporate items(b) (85) (63) (44) Loss before income taxes, extraordinary loss, and cumulative effects of changes in accounting methods $(81) $ (52) $ (88) ==== ===== =====\n(a) For 1991 the amounts presented for Air Conditioning Products include the following amounts for Tyler Refrigeration (which was sold on September 30, 1991): sales of $99 million and operating loss of $18 million (including a $22 million loss on the sale).\n(b) Corporate items include administrative and general expenses, accretion charges on postretirement benefit liabilities, minority interest, foreign exchange transaction gains and losses, and miscellaneous income and expense.\nThe following section summarizes the Company's consolidated results of operations and then discusses the results of its three operating segments. The Company's businesses are cyclical. Air Conditioning Products and Plumbing Products are particularly affected by the level of residential and commercial building activity.\nThe following table presents a summary of statistics on U.S. non-residential construction activity and housing starts for the years 1989 through 1993.\nU.S. Non- Residential Contract Awards U.S. Housing (Millions % Change Starts % Change of square Year (Thousands of Year feet)(a) to Year units)(b) to Year 1989 1,322 - 1% 1,376 - 8% 1990 1,155 -13% 1,193 -13% 1991 953 -17% 1,015 -15% 1992 903 - 5% 1,200 +18% 1993 (c) 930 + 3% 1,290 + 7%\n(a) Source: F.W. Dodge Division, McGraw Hill, Inc.\n(b) Source: U.S. Department of Commerce, Bureau of Census.\n(c) Preliminary data.\nThe market for replacement sales and servicing of air conditioning and plumbing products, which accounts for a substantial portion of sales for Air Conditioning Products and Plumbing Products, is less cyclical and sometimes countercyclical.\nThe following table presents a summary of statistics on unit production of trucks, buses, and trailers in excess of six tons in Western Europe for the years 1989 through 1993 (units in thousands).\nWestern Europe % Change Western Europe % Change Truck and Bus Year Trailer Year Production(a) to Year Production(a) to Year\n1989 376 4% 125 9% 1990 343 -9% 128 2% 1991 353 3% 139 9% 1992 314 -11% 115 -17% 1993 223 -29% 88 -23%\n(a) Principal sources: Verband der Deutschen Automobilindustrie (Germany); Society of Motor Manufacturers and Traders (United Kingdom); and Chambre Syndicate des Constructeurs Automobiles (France).\n1993 Compared with 1992\nU.S. housing starts increased by 7% in 1993 from the 1992 level, which was up 18% over 1991 after four consecutive years of decline. U.S. non-residential contract awards increased by 3% in 1993 after five years of decline. The 1993 improvement in housing starts came in the second half of the year with third- and fourth-quarter starts up 10% and 12%, respectively, over the preceding quarter. The gain in non-residential awards occurred over the last nine months of 1993. Western European truck and bus production declined 29% in 1993 after an 11% decline in 1992. However, the rate of decline in the truck market slowed in the fourth quarter of 1993.\nConsolidated sales for 1993 were $3.83 billion, an increase of 1% (6% excluding the unfavorable effects of foreign exchange) over the $3.79 billion for 1992. A sales increase of 11% for Air Conditioning Products was partly offset by a sales decline for Transportation Products of 23% (16% excluding the unfavorable effects of foreign exchange). Sales for Plumbing Products were flat (but up by 9% excluding the effects of foreign exchange).\nOperating income for 1993 was $282 million, a decrease of $18 million, or 6% (but an increase of less than 1% excluding the effects of foreign exchange), from $300 million in 1992. The increase in operating income of 28% for Air Conditioning Products was more than offset by a 53% decrease in operating income for Transportation Products. Plumbing Products' operating income was flat (but increased 15% excluding the effects of foreign exchange). The gain for Air Conditioning Products was the result of higher volume, increased sales of higher-margin products, the benefits of manufacturing improvements, and the effects of restructuring and cost-containment efforts undertaken in 1991 and 1992, offset partly by the costs of further restructuring in 1993. For Plumbing Products the effects of increased volume for the Far East Group were offset partly by lower margins for the U.S. group and lower volumes and unfavorable foreign exchange effects for the European group. Transportation Products' operating income decreased primarily as a result of lower volumes due to reduced demand in depressed markets in Europe, offset partly by the effects of improvements in manufacturing efficiency.\nAir Conditioning Products Segment\nYear Ended December 31, 1993 1992 1991 (Dollars in millions)\nSales: Domestic portion $1,786 $1,572 $1,453 Foreign portion 314 320 284 Subtotal 2,100 1,892 1,737 Tyler Refrigeration - - 99 Total $2,100 $1,892 $1,836 ====== ====== ======\nOperating income (loss): Domestic portion $ 148 $ 112 $ 58 Foreign portion (15) (8) 15 Subtotal 133 104 73 Tyler Refrigeration - - (18)(a) Total $ 133 $ 104 $ 55 ====== ====== ======\nAssets $1,167 $1,156 $1,174 Goodwill and purchase accounting adjustments included in assets 372 398 417 Capital expenditures 38 33 46(b) Depreciation and amortization 53 55 56(c)\n(a) Includes $22 million loss on the sale of Tyler Refrigeration.\n(b) Includes capital expenditures of Tyler Refrigeration of $1 million.\n(c) Includes depreciation and amortization of Tyler Refrigeration of $3 million.\nThe domestic portion of Air Conditioning Products is composed of the Unitary Products Group, the Commercial Systems Group (excluding Canada), and exports from the United States by the International Group. The foreign portion consists of the foreign-based operations of the International Group and the Canadian operations of the Commercial Systems Group.\nSales and operating income of Air Conditioning Products both increased in 1993 despite the continuing recession in U.S. and Canadian commercial new construction and only moderate increase in residential new construction in the U.S. and despite the economic decline in Europe. Sales of Air Conditioning Products, which accounted for approximately 55% of the Company's 1993 sales, increased by 11% (with little effect from foreign exchange) to $2,100 million in 1993 from $1,892 million in 1992. There was a significant sales increase for each of the three operating groups.\nOperating income of Air Conditioning Products increased year to year by 28% (with little effect from foreign exchange) to a record high of $133 million in 1993 from $104 million in 1992. The increase was attributable to gains achieved by all three groups.\nUnitary Products Group\nIn 1993 sales of the Unitary Products Group, which accounted for approximately 42% of Air Conditioning Products sales, increased by 15% over the 1992 sales level. Residential markets were up 15%, as a result of an unusually hot summer in the northern United States and a 7% increase in housing starts. Sales of residential products increased by 18% year over year, principally because of higher volumes driven by the improved market, increased furnace sales in the replacement market, and a shift in the market to more efficient products, offset partly by the continuation from 1992 of price degradation due to competitive pressures. Commercial markets for unitary products were up 9% overall from the 1992 markets, as the commercial replacement market strengthened further. New-construction activity continued to struggle, however. Sales of commercial unitary products increased by 10% overall, primarily as a result of higher volume (driven by the strong replacement market for both light and large commercial products); a shift to higher-priced, higher-tonnage products; and a gain in market share for light commercial products due to the success of the large Voyager products (packaged rooftop air conditioners). As a result of these factors, together with product cost improvements, improved labor productivity, and the benefits of organizational restructuring which reduced the salaried workforce in 1992, the operating income for Unitary Products in 1993 increased by 43% year over year. This improvement was achieved even though 1993 included the initial start-up costs of the new national distribution center in St. Louis, Missouri, and higher advertising costs.\nUnitary Products' sales increased through the success of new and redesigned products introduced recently and improved distribution channels. Commercial products that were introduced included the 20-to-25-ton Voyager products in 1992, which more than doubled market share in that size range; commercial microprocessor-controlled products; a line of convertible air handlers; and rooftop and air cooled chiller products using more efficient scroll compressors. Residential products introduced included the American-Standard brand outdoor units and new lines of luxury and conventional retail residential products.\nCommercial Systems Group\nSales of the Commercial Systems Group, which accounted for approximately 37% of Air Conditioning Products' sales, increased 10%, primarily on volume increases for most product lines, especially air handling systems and water chillers (principally due to improved replacement markets and increased market share), and increased revenue from Company-owned sales offices (acquisitions and volume growth). These gains were partly offset by lower volume in Canada, which continues to be adversely affected by recession. The non-residential new-construction market increased 3% in the United States in 1993, following decreases of 5% in 1992 and 17% in 1991. The non-residential replacement market was up by 6% over 1992.\nOperating income for Commercial Systems increased 12% in 1993 over the recession-affected amount of 1992. The increase was primarily the result of volume gains, improvements in manufacturing efficiency, operating expense reductions, and the benefits of restructuring actions taken in 1992. The effects of these factors were partly offset by slightly lower prices, increases in material, labor, and benefit costs, the costs of additional restructuring actions in 1993, and a larger loss in the weak Canadian market.\nProduct development emphasis for Commercial Systems in 1993 and 1992 was on new compressor, heat transfer and microelectronic control technology; adaptation of products to refrigerants that comply with recent government regulations; energy-efficient products; products for the aftermarket and replacement market (which exceeded the new-construction market in both 1993 and 1992); and products redesigned to improve manufacturing productivity. This strategy benefited operations in 1993 and 1992, and the Company expects that this product development emphasis will result in greater sales over the next several years.\nInternational Group\nSales of Air Conditioning Products' International Group, which accounted for approximately 21% of Air Conditioning Products' 1993 sales, increased 7% from those of 1992 (10% excluding the unfavorable effect of foreign exchange). Most of the gain was from higher volume in the Far East (especially Hong Kong, Taiwan, and export sales from the U.S.) resulting from expanded markets and increased penetration; higher export sales from the U.S. to the Middle East (markets were significantly stronger) and Latin America (improved penetration in a market that was up 20%); and higher volumes in Mexico. These gains were partly offset by lower sales in Europe (lower prices and volumes in a declining market). Markets were down in all European countries except the U.K., but the effect was partly offset by increased revenues from service companies acquired in 1992 and prior years. Market growth in the Far East was 6% overall, led by the PRC market, which was up by 21%. The sales growth in Hong Kong was driven by the very strong market in the PRC. Markets in Thailand also grew, and the Latin American market grew by 20%.\nOperating income for the International Group increased by approximately 39% in 1993. The increase was primarily the result of higher export sales from the U.S. to the Middle East and Far East, offset partly by a larger operating loss in Europe primarily because of the weak markets and lower margins, costs related to restructuring in response to the lower markets, and the unfavorable effects of lower volume on factory performance. Overall, income from the Far East and Latin America was essentially unchanged from the prior year, as volume gains were offset by increased costs related to expansion of distribution channels and joint ventures and development of new and improved products to support present and future growth.\nEnvironmental Matters\nFor a discussion of environmental matters see \"Business -- Regulations and Environmental Matters.\"\nBacklog\nThe worldwide backlog for Air Conditioning Products at the end of 1993 was $407 million, up 13% from 1992, excluding the effects of foreign exchange. The backlog increased as a result of increased volume for the Commercial Systems Group, market penetration and improved distribution channels in the Middle East and Far East, and sales growth for commercial Unitary Products.\nPlumbing Products Segment\nYear Ended December 31, 1993 1992 1991 (Dollars in millions)\nSales: Foreign portion $ 865 $ 885 $ 783 Domestic portion 302 285 235 Total $1,167 $1,170 $1,018 ====== ====== ====== Operating income (loss): Foreign portion $ 131 $ 124 $ 93 Domestic portion (23) (16) (27) Total $ 108 $ 108 $ 66 ====== ====== ======\nAssets $ 960 $1,002 $1,069 Goodwill and purchase accounting adjustments included in assets 376 392 447 Capital expenditures 46 48 40 Depreciation and amortization 49 49 48\nThe foreign portion of Plumbing Products is composed of the European Plumbing Products Group, the Americas International Group, and the Far East Group. The domestic portion of sales and operating results is generated primarily by the U.S. Plumbing Products Group and by export sales from the U.S.\nSales of Plumbing Products in 1993, at $1,167 million, which accounted for approximately 30% of the Company's 1993 sales, were at essentially the same level as the $1,170 million of sales in 1992 (but increased by 9% excluding the unfavorable effects of foreign exchange). Sales increases of 42% for the Far East Group (46% excluding foreign exchange), 9% for the Americas International Group (14% excluding foreign exchange), and 6% for the U.S. Plumbing Products Group were offset partly by a sales decrease of 10% for the European Plumbing Products Group (which had a 4% increase excluding the effects of foreign exchange).\nIn 1993 operating income of Plumbing Products was $108 million, the same amount as in 1992, but excluding the unfavorable effects of foreign exchange operating income increased by 15%. The increase (on an exchange-adjusted basis) was attributable primarily to increased profitability for the Far East Group and for the Americas International Group, offset partly by a decline for the U.S. group.\nEuropean Plumbing Products Group\nSales of the European group, which accounted for approximately 51% of Plumbing Products' sales for 1993, decreased 10% in 1993 from 1992 but increased by 4% excluding the unfavorable effects of foreign exchange. The exchange-adjusted gain resulted from price increases, especially in Italy, Germany, the U.K., and Greece, offset partly by lower volume in most countries because of depressed markets. In Italy sales were up with price increases for most product lines, offset partly by lower volume and a less favorable product mix. The German market was stable in total, as price gains were offset by volume and mix declines. Greece, which had been in recession for three years, recovered somewhat in 1993. The European group's strength has been sales in the replacement market, which has more than made up for the effects of poor new-construction markets.\nOperating income for the European group decreased 7% but increased 10% excluding the effects of foreign exchange. This increase occurred primarily because of the price gains and cost reductions resulting from restructuring and efficiency improvements in the U.K., France, Italy, and Germany. Partly offsetting those favorable effects were the effects of lower volumes and the unfavorable effect on margins caused by the decline in value of many European currencies agains the Deutschemark. The increased cost of fittings purchased from Germany could not be completely recovered through sales price increases in most of the operations in other countries.\nU.S. Plumbing Products Group\nSales of the U.S. group, which accounted for approximately 26% of total 1993 Plumbing Products sales, increased 6% in 1993. During 1993 the U.S. building industry continued to be adversely affected by the low level of new construction, although non-residential construction increased 3% from 1992 and new residential construction continued to recover from the lowest levels since the mid-1940's (up by 7% in 1993 and 18% in 1992 but\nstill below pre-1990 levels). A basic shift from wholesale distribution channels to retail channels has been developing over the last few years, a trend the Company believes will continue and will be beneficial to the Company because of strong product and brand-name recognition. Retail markets now account for 20% of the total sales of the U.S. group. The growth of sales for the U.S. group was largely the result of increased export sales from the U.S. and to a lesser extent price increases on certain products, a more favorable sales mix, and a small increase in the growing retail channel business. The overall gain in the retail business was small because significant volume gains due to an expanding customer base were partly offset by the loss of an important customer.\nThe operating loss for the U.S. group in 1993 was greater than that of the prior year. Despite higher sales, operating results were poorer primarily because of lower margins on both domestic and export sales, increased advertising costs and other expenses associated with expansion of the retail distribution channel, costs related to start-up and expansion of the low-water-volume toilet line (now mandated for new construction), and factory performance problems caused in part by the effects of fluctuating volumes. In addition, costs were incurred in business system re-engineeering activities intended to improve customer service.\nAmericas International and Far East Groups\nCombined sales of the Americas International and Far East Groups, which accounted for approximately 23% of total Plumbing Products sales, increased 21% in 1993 (26% excluding the effects of foreign exchange). The sales gain was due primarily to the consolidation of Incesa (a previously unconsolidated group of Central American joint ventures) effective January 1, 1993, as a result of the purchase of additional shares of stock, and to higher volume and prices in Thailand, the PRC, the Philippines, and Brazil, offset partly by decreases in sales in Mexico, Canada, and Korea.\nCombined operating income of the Americas International and Far East Groups in 1993 increased 72% over the 1992 level. Gains were realized in all operations except Mexican chinaware operations, which were adversely affected by poor economic conditions and the uncertainty related to the North American Free Trade Agreement. The increase was primarily from higher prices and volumes in Brazil, Thailand, and the PRC the consolidation of Incesa, and a smaller loss for Mexican fittings operations.\nEnvironmental Matters\nFor a discussion of environmental matters see \"ITEM 1. BUSINESS -- Regulations and Environmental Matters.\"\nBacklog\nPlumbing Products' year-end 1993 backlog of $143 million was down 9% from 1992, excluding foreign exchange effects. The decrease resulted from a significant drop for European Plumbing Products (particularly Italy because of economic uncertainty, tempered somewhat by increases for England and Germany), and a drop in backlog for export sales from the U.S., partly offset by increases in the Far East (primarily Thailand).\nTransportation Products Segment\nYear Ended December 31, 1993 1992 1991 (Dollars in millions)\nSales $ 563 $730 $741 Operating income 41 88 121 Assets 652 722 828 Goodwill and purchase accounting adjustments included in assets 422 458 510 Capital expenditures 14 27 24 Depreciation and amortization 35 37 34\nSales of Transportation Products, which accounted for 15% of the Company's 1993 sales, were $563 million, down 23% from $730 million in 1992 (16% excluding the effects of foreign exchange). The sales decrease was due primarily to a volume decline in Germany as a result of a 29% decrease in Western European truck and bus production, led by a 34% decline in Germany, and a 23% decrease in Western European trailer production. Volumes were also down in all other European countries in which Transportation Products has operations, although at the end of 1993 sales and order trends were upward. Volume in Brazil was slightly higher. Original equipment sales volume in Europe was down 22%, and aftermarket business was down 10%. These declines affected both conventional and electronic products.\nOperating income for Transportation Products in 1993 decreased 53% (50% excluding foreign exchange effects) to $41 million from $88 million in 1992, principally because of the lower sales and production volume and the inability to pass on material and labor cost increases in a very competitive, declining market. In response to reduced production levels, plant employment was reduced by 15%, the costs of which further depressed 1993 operating income. Those effects were partly offset by the favorable effects of cost improvements in manufacturing from Demand Flow implementa- tion and reduced operating expenses.\nDespite the market downturn, significant progress was made during 1993 in obtaining market acceptance of electronically controlled air suspension systems for commercial vehicles and for antilock braking systems on trailers.\nBacklog\nTransportation Products' year-end 1993 order backlog of $185 million was 2% lower than the 1992 year-end backlog, excluding the effects of foreign exchange, as a result of the poor market conditions.\nFinancial Review\n1993 Compared with 1992\nThe Company's financing and corporate costs were $363 million and $352 million in 1993 and 1992, respectively. The principal causes of the increase were effects of year-to-year changes in foreign exchange transaction gains and losses, higher minority interest, lower equity income, higher accretion expense on postretirement benefits, and lower miscellaneous income. Interest expense, which accounted for most of these costs, decreased primarily because of lower overall interest rates on new debt issued as part of the Refinancing (described below), partly offset by additional interest expense as a result of the exchange of the 12-3\/4% Exchangeable Preferred Stock for the 12-3\/4% Junior Subordinated Debentures.\nThe tax provision for 1993 was $36 million despite a pre-tax loss of $81 million, whereas in 1992 the tax provision was $5 million on a pre-tax loss from continuing operations of $52 million. The 1993 provision reflected taxes payable on profitable foreign operations and was higher than in 1992 primarily because no tax benefits were available on domestic losses. The unusual relationship between the pre-tax losses and the tax provision is explained by the nondeductibility for tax purposes of the amortization of goodwill and other purchase accounting adjustments and the share allocations made by the Company's ESOP as well as by tax rate differences and withholding taxes on foreign earnings.\nAs a result of the Refinancing in 1993 there was an extraordinary charge of $92 million related to the debt retired (including call premiums, the write-off of deferred debt issuance costs, and loss on cancellation of foreign currency swap contracts) on which there was no tax benefit.\nLiquidity and Capital Resources\nAs a result of the Acquisition the Company's capital structure became highly leveraged. Net cash flow from operations, after cash interest expense of $195 million, was $201 million for the year ended December 31, 1993. Utilizing this cash flow and cash on hand at December 31, 1992, the Company devoted $98 million to capital expenditures, including $8 million of investments in affiliated companies, and repaid $50 million of term loans.\nIn July 1993 the Company completed a refinancing (the \"Refinancing\") that included (a) the issuance of $200 million principal amount of 9-7\/8% Senior Subordinated Notes Due 2001; (b) the issuance of approximately $751 million principal amount of 10-1\/2% Senior Subordinated Discount Debentures Due 2005, which yielded proceeds of approximately $450 million; (c) the amendment and restatement of the Company's 1988 Credit Agreement (the \"1988 Credit Agreement\" and as so amended and restated, the \"Credit Agreement\") to establish a $1 billion secured, multi-currency, multi-borrower credit facility; and (d) the application of the proceeds of\nsuch issuances and such borrowings as follows: (i) the redemption on July 1, 1993, of all of the outstanding 12-7\/8% Senior Subordinated Debentures Due 2000 at a redemption price of 104.83% ($571.3 million), (ii) the redemption on July 2, 1993, of a majority of the outstanding 14-1\/4% Subordinated Discount Debentures Due 2003 at a redemption price of 105% ($389.5 million), (iii) the refunding of bank borrowings ($405 million of term loans and $77 million of other bank debt including revolving credit debt), (iv) the refunding of letters of credit ($58 million), and (v) payment of related fees and expenses.\nThe Credit Agreement provided to American Standard Inc. and certain subsidiaries (the \"Borrowers\") a $1 billion facility as follows: (a) a $250 million multi-currency revolving credit facility (the \"Revolving Credit Facility\") available to all Borrowers, which expires in 2000; (b) a $225 million multi-currency periodic access facility (the \"Periodic Access Facility\") available to all Borrowers, which expires in 2000; and (c) three term loan facilities (the \"Term Loans\") consisting of a $225 million U.S. dollar facility available to American Standard Inc., which expires in 2000; a $200 million Deutschemark facility available to a German subsidiary, which expires in 1997; and a $100 million U.S. dollar facility available to all Borrowers, which expires in 1999. In August 1993 the Company repaid $50 million, and the amount available under the Credit Agreement by its terms was reduced to $950 million.\nThe Company is required to reduce to $50 million the amount of borrowings outstanding under the Revolver for at least 30 consecutive days in each 12-month period ending May 31. In December 1993 the Company met this requirement for the 12 months ending May 31, 1994. Commencing August 31, 1994, the Revolver is reduced by $8.3 million annually, with a final maturity on June 1, 2000. In addition, the Company is required to repay the full amount of each of its outstanding revolving loans at the end of each interest period (a maximum of six months). The Company may, however, immediately reborrow such amounts subject to compliance with applicable conditions of the Credit Agreement.\nThe Credit Agreement provides the Company with increased operating and financial flexibility, including the ability to shift from time to time a portion of borrowings among borrowers and currencies. As a result of the Refinancing there was a significant reduction in annual interest expense, which was partly offset by additional interest expense on the 12-3\/4% Junior Subordinated Debentures exchanged for the 12-3\/4% Exchangeable Preferred Stock. The Company believes that the amounts available from operating cash flows and under the Revolving Credit Facility will be sufficient to meet its expected cash needs, including planned capital expenditures.\nAs described in Note 8 of Notes to Consolidated Financial Statements, the Credit Agreement contains various covenants that limit, among other things, indebtedness, dividends on and redemptions of capital stock of the Company, purchases and redemptions of other indebtedness of the Company (including its outstanding debentures and notes), rental expense, liens, capital expenditures, investments or acquisitions, disposal of assets, the use of proceeds from asset sales, and certain other business activities and require the Company to meet certain financial tests. In order to\nmaintain compliance with the covenants and restrictions contained in the 1988 Credit Agreement, the Company from time to time has had to obtain waivers and amendments. In February 1994 the Company obtained an amendment to the Credit Agreement that among other things relaxed certain financial tests and convenants, and facilitated the investment in an air conditioning joint venture and the formation of a holding company to establish joint ventures in the People's Republic of China for the manufacture and sale of plumbing products. The Company currently believes it will comply with the amended financial tests and covenants but may have to obtain similar amendments or waivers in the future.\nOn June 30, 1993, in exchange for all of the Company's outstanding shares of 12-3\/4% Exchangeable Preferred Stock, the Company issued $141.8 million of 12-3\/4% Junior Subordinated Debentures Due 2003 to the holder of the Exchangeable Preferred Stock. Those debentures were sold by the holder in a registered public offering in August 1993. The Company received none of the proceeds of this offering.\nThe indentures related to the Company's debentures and notes contain various covenants which, among other things, limit debt and preferred stock of the Company and its subsidiaries, dividends on and redemption of capital stock of the Company and its subsidiaries, redemption of certain subordinated obligations of the Company, the use of proceeds from asset sales, and certain other business activities.\nIn connection with examinations of the tax returns of the Company's German subsidiaries for the years 1984 through 1990, the German tax authorities have raised questions regarding the treatment of certain significant matters. The Company has paid approximately $20 million of a disputed German income tax. A suit is pending to obtain a refund of this tax. The Company anticipates that the German tax authorities may propose other adjustments resulting in additional taxes of approximately $105 million, plus penalties and interest for the tax return years under audit. In addition, significant transactions similar to those which gave rise to such possible adjustments occurred in years subsequent to 1990. The Company, on the basis of the opinion of legal counsel, believes the tax returns are substantially correct as filed and intends to vigorously contest any adjustments which have been or may be assessed. Accordingly, the Company had not recorded any loss contingency at December 31, 1993, with respect to such matters. Under German tax law the authorities may demand immediate payment of a tax assessment prior to final resolution of the issues. The Company also believes, on the basis of opinion of legal counsel, that it is highly likely that a suspension of payment will be obtained if additional taxes are assessed. However, if payment is required the Company expects that it will be able to meet such payment from available sources of liquidity or credit support but that future cash flows and capital expenditures, and therefore subsequent results of operations for any particular quarterly or annual period, could be adversely affected.\nCapital Expenditures\nThe Company's capital expenditures for 1993 amounted to $98 million, including investments of $8 million in affiliated companies. The amount\nof capital expenditures was $10 million less than in 1992 ($6 million less excluding the effects of foreign exchange). Decreases in capital spending by Plumbing Products and Transportation Products were partly offset by an increase in spending by Air Conditioning Products. The Company believes capital spending was sufficient for maintenance purposes, for important product and process redesigns, for expansion projects, and for strategic investments.\nCapital expenditures by Air Conditioning Products were $38 million in 1993. This amount was 15% more than that of 1992. Capital expenditures in 1993 included continuing projects related to Demand Flow and spending on new products such as the Voyager III (medium-tonnage product line), the scroll compressor, and the Series R chiller line, expansion of Voyager I and Voyager II capacity and tooling and equipment for the American Standard product line.\nPlumbing Products' capital expenditures in 1993 were $46 million, including investments of $8 million in affiliated companies in France (Porcher) and the Czech Republic. Excluding the investments in affiliated companies and the effects of foreign exchange, capital spending was 34% higher than in 1992 as a result of spending increases in Europe and the Far East. Major projects included capacity expansion in Thailand and China and various projects related to Demand Flow implementation.\nCapital expenditures for Transportation Products totaled $14 million in 1993. Excluding the effects of foreign exchange, capital spending was 41% less than in 1992, a year with significant spending related to Demand Flow cost-reduction projects in production and material flow.\n1992 Compared with 1991\nU.S. housing starts increased by 18% in 1992 from the 1991 level, but non-residential contract awards decreased by 5%. Both of these economic indicators had declined in each of the previous four years.\nConsolidated sales for 1992 were $3.8 billion, an increase of 5% (4% excluding the favorable effects of foreign exchange) over the $3.6 billion for 1991. The 1991 amount included the sales of Tyler Refrigeration, which was sold September 30, 1991. Excluding Tyler Refrigeration, sales in 1992 were up 8% (7% excluding foreign exchange effects). Sales increases of 15% for Plumbing Products and 9% for Air Conditioning Products (excluding Tyler Refrigeration) were partly offset by a sales decline for Transportation Products of 1% (6% excluding the favorable effects of foreign exchange).\nOperating income for 1992 was $300 million, an increase of $58 million, or 24% (19% excluding the effects of foreign exchange), from $242 million in 1991. The 1991 amount included a loss for Tyler Refrigeration. Excluding Tyler Refrigeration, operating income in 1992 was up 15% (10% excluding foreign exchange effects.) Increases in operating income of 42% for Air Conditioning Products (excluding Tyler Refrigeration) and 64% for Plumbing Products were partly offset by a 27% decrease in operating income for Transportation Products.\nExcept as otherwise indicated, the following discussion, including the financial comparisons, does not include the results of Tyler Refrigeration or the $22 million loss on the sale of Tyler Refrigeration in 1991.\nAir Conditioning Products Segment\nSales of Air Conditioning Products, which accounted for approximately 50% of the Company's 1992 sales, increased by 9% to $1,892 million in 1992 from $1,737 million in 1991. There was a significant sales increase for each of the three operating groups -- for the Unitary Products Group in both residential and commercial products primarily because of higher volume and more favorable product mix (partly offset by lower prices), for the Commercial Systems Group primarily because of higher volume and prices, and for the International Group principally because of increased volume in Europe and the Far East.\nOperating income of Air Conditioning Products increased year to year by 42% (with little effect from foreign exchange) to $104 million in 1992 from $73 million in 1991. The increase was attributable to the sales gains, the benefits of manufacturing improvements and restructuring and cost containment in the Unitary Products and Commercial Systems Groups, and the fact that in 1991 results of the Commercial Systems Group had been adversely affected by a 54-day work stoppage at its LaCrosse, Wisconsin, facility. The impact of these factors was partly offset by a margin decline for the International Group and costs related to the start-up of new facilities, sales offices, and distribution channels.\nUnitary Products Group\nSales in 1992 of the Unitary Products Group, which accounted for approximately 41% of Air Conditioning Products sales, increased by 6% over the 1991 sales level. Commercial markets for unitary products were up 6% overall from the depressed 1991 markets, as a very strong commercial replacement market more than offset the effects of low new-construction activity. Sales of commercial unitary products increased by 7% overall, primarily as a result of higher volume (driven by the strong replacement market), a shift to higher-priced, higher-tonnage products, and a gain in market share for light commercial products. Residential markets were down 3.5%, as poor replacement activity, a result of an unseasonably cool summer, more than offset the 18% increase in new housing starts. Despite this poorer market, sales of residential products increased by 5% year over year, principally because of larger market share, improved furnace markets, and a partial shift in the market to more efficient products stimulated by Federal standards, offset partly by price degradation due to competitive pressures. As a result of these factors, together with benefits of manufacturing improvements, cost containment, and organizational restructuring which reduced the salaried workforce, the operating profit for Unitary Products in 1992 increased by 50% from the depressed level of 1991.\nCommercial Systems Group\nSales of the Commercial Systems Group, which accounted for approximately 38% of Air Conditioning Products' sales, increased 9% primarily on volume increases in aftermarket replacement and parts sales, increased revenue from Company-owned sales offices (volume growth and acquisitions), and small price increases on most product lines. Other factors contributing to the increase were higher sales of large applied systems and the fact that in 1991 there was a 54-day work stoppage at the LaCrosse, Wisconsin, plant. These gains were partly offset by lower volume in Canada, which was adversely affected by recession.\nOperating income for Commercial Systems increased 129% in 1992 over the recession-affected and work-interrupted level of 1991. The increase was primarily the result of the volume and price gains, improvements in manufacturing efficiency, cost containment and restructuring, and the fact that 1991 included the adverse impact of the LaCrosse work stoppage. The effects of these factors were partly offset by slightly lower gross margins, as the price increases did not completely recover increases in material, labor and benefits costs.\nInternational Group\nSales of Air Conditioning Products' International Group, which accounted for approximately 21% of Air Conditioning Products' 1992 sales, increased 15% from those of 1991 (10% excluding the favorable effect of foreign exchange). Most of the gain was from higher volumes in Mexico (two new sales offices resulted in expanded distribution and penetration), the Far East (especially Hong Kong and Singapore), the Middle East (markets were significantly stronger), and Europe (sales of new products and increased penetration despite declining markets). Markets were down in almost all European countries except Italy, with the largest drop in the U.K., offset partly by increased revenues from acquired service companies.\nOperating income for the International Group decreased by approximately 68% in 1992. The decline occurred in Europe, primarily because of the weak markets and lower prices, costs related to the start-up of new facilities and new distribution networks in the U.K. and France, costs related to the introduction of new products, start-up costs of a company in Spain acquired near the end of 1991, and foreign exchange transaction losses from currency fluctuations in the latter half of 1992. Income from the Far East and Latin America was essentially unchanged from the prior year, as volume gains were offset by increased costs related to expanded distribution channels, start-up of new joint ventures, and development of new and improved products to support present and future growth.\nPlumbing Products Segment\nSales of Plumbing Products, which accounted for approximately 31% of the Company's 1992 sales, increased by 15% in 1992 (14% excluding the effects of foreign exchange) to $1,170 million from $1,018 million in 1991. The improvement resulted from sales increases of 9% (7% excluding the effects of foreign exchange) for the European Plumbing Products Group, 21% for the U.S. Plumbing Products Group, 4% for the Americas International Group (7% excluding foreign exchange), and 101% for the Far East Group (98% excluding foreign exchange).\nIn 1992 operating income of Plumbing Products increased 64% (56% excluding the effects of foreign exchange) to $108 million from $66 million in 1991. The increase was attributable primarily to increased profitability for the European group on higher prices and volumes (especially in Italy and Germany) although improved results in the U.S., Americas International, and Far East groups contributed.\nEuropean Plumbing Products Group\nSales of the European group, which accounted for approximately 57% of Plumbing Products' sales for 1992, increased 9% in 1992 over 1991, 7% excluding the favorable effects of foreign exchange. The gain resulted primarily from price and volume increases, especially in Italy and Germany, offset partly by lower volume in France from declining demand and lower prices in the U.K. caused by a very poor market. In Italy sales were up 9%, with gains for most product lines in price, volume and market share. The gains in Germany were the result of higher volumes and prices for brass fittings and luxury chinaware.\nOperating income for the European group increased 28% (23% excluding the effects of foreign exchange) primarily from the price and volume gains in Italy and Germany and higher margins on German brass operations resulting from improved manufacturing processes and cost containment, offset partly by lower profitability in France because of decreased volume and in the U.K. because of the recession. A recession depressed operating results in Greece.\nU.S. Plumbing Products Group\nSales of the U.S. group, which accounted for approximately 24% of total 1992 Plumbing Products sales, increased 21% in 1992. During 1992 the U.S. building industry continued to be severely affected by the low level of new construction, with non-residential construction down 5% from 1991 and with new residential construction recovering from the lowest levels since the mid-1940's (though up by 18%, it was still low in historical terms). The U.S. market for plumbing products was up an estimated 3% to 4%, with more than half the gain occurring in the replacement and remodeling markets, which accounts for about 60% of the total U.S. market. The growth of sales for the U.S. group was largely a result of the strength of retail business (which had a significant\nincrease in volume and accounted for 20% of sales of the U.S. group in 1992) and increased export sales from the U.S., together with smaller gains resulting from price increases and higher wholesaler distribution sales. Sales of AMERICAST products more than doubled in 1992, and smaller volume gains were achieved for acrylic products, fixtures, and faucets.\nThe operating loss for the U.S. group in 1992 was less than that of the prior year. The improvement was primarily due to price increases and secondarily to volume and margin gains (as a result of sourcing product from the Company's Latin American plants), offset partly by non-recurring costs related to implementation of improved manufacturing processes and the effects of a shift in overall sales mix from commercial and luxury to lower-margin products.\nAmericas International and Far East Groups\nCombined sales of the Americas International and Far East Groups, which accounted for approximately 19% of total Plumbing Products sales, increased 26% in 1992 (28% excluding the effects of foreign exchange). The sales gain was due primarily to the consolidation in 1992 of a previously unconsolidated joint venture in Thailand and to a lesser extent to price and volume increases in Mexico and Korea and higher volumes in Brazil, offset partly by lower sales in Canada, which were adversely affected by severe recession.\nCombined operating income of the Americas International and Far East Groups in 1992 increased 134% over the 1991 level. Gains were realized in all operations except Canada and the Philippines, both of which were adversely affected by poor economies. The increase was primarily from price and volume gains in Mexico and Korea, higher volume and margins in Brazil, and higher volume in China.\nTransportation Products Segment\nSales of Transportation Products, which accounted for 19% of the Company's 1992 sales, were $730 million, down 1% from $741 million in 1991 (6% excluding the effects of foreign exchange). The sales decrease was due primarily to a volume decline in Germany as a result of a significant decrease in truck and bus production. Volumes were also down in nearly all other European countries in which Transportation Products has operations except the U.K. There was also a decline in prices of electronic control products, primarily as a result of industry cost reductions.\nOperating income for Transportation Products in 1992 decreased 27% (32% excluding foreign exchange effects) to $88 million from $121 million in 1991, principally because of the lower sales and production volume, lower prices, and increased spending for product engineering. Plant employment was kept in line with reduced production levels, but the costs associated with these reductions also depressed 1992 operating income. Those effects were partly offset by the favorable effects of cost reductions and increases in efficiency achieved in manufacturing operations.\nFinancial Review\n1992 Compared with 1991\nThe Company's financing and corporate costs were $352 million and $330 million in 1992 and 1991, respectively. The principal causes of the increase were year-to-year effects of changes in foreign exchange transaction gains and losses, higher minority interest, and lower miscellaneous income. Interest expense and accretion expense on postretirement benefits, which accounted for most of these costs, also increased.\nThe tax provision for 1992 was $5 million despite a pre-tax loss of $52 million, whereas in 1991 the tax provision was $23 million on a pre-tax loss from continuing operations of $88 million. The 1992 provision reflected taxes payable on profitable foreign operations offset partly by available domestic tax benefits. The 1992 provision was lower than in 1991 primarily because of lower pre-tax earnings in foreign operations. In 1992 the provision was also lower because of future income tax benefits resulting from carrybacks of foreign net operating losses and the existence of deferred tax credits which reverse in the carryforward period applicable to other foreign net operating losses. The unusual relationship between the pre-tax losses and the tax provision is explained by the nondeductibility for tax purposes of the amortization of goodwill and other purchase accounting adjustments and the share allocations made by the Company's ESOP as well as by tax rate differences and withholding taxes on foreign earnings.\nITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA\nRESPONSIBILITY FOR FINANCIAL STATEMENTS\nThe accompanying consolidated balance sheets at December 31, 1993 and 1992, and related consolidated statements of operations, stockholders' equity (deficit), and cash flows for the years ended December 31, 1993, 1992 and 1991, have been prepared in conformity with generally accepted accounting principles, and the Company believes the statements set forth a fair presentation of financial condition and results of operations. The Company believes that the accounting systems and related controls that it maintains are sufficient to provide reasonable assurance that the financial records are reliable for preparing financial statements and maintaining accountability for assets. The concept of reasonable assurance is based on the recognition that the cost of a system of internal control must be related to the benefits derived and that the balancing of those factors requires estimates and judgment. Reporting on the financial affairs of the Company is the responsibility of its principal officers, subject to audit by independent auditors, who are engaged to express an opinion on the Company's financial statements. The Board of Directors has an Audit Committee of non-employee Directors which meets periodically with the Company's financial officers, internal auditors, and the independent auditors and monitors the accounting affairs of the Company.\nASI Holding Corporation\nNew York, New York March 14, 1994\nREPORT OF ERNST & YOUNG, INDEPENDENT AUDITORS\nThe Board of Directors ASI Holding Corporation\nWe have audited the accompanying consolidated balance sheets of ASI Holding Corporation and subsidiaries as of December 31, 1993 and 1992, and the related consolidated statements of operations, stockholders' equity (deficit), and cash flows 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.\nWe conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.\nIn our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of ASI Holding Corporation and subsidiaries at December 31, 1993 and 1992, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1993, in conformity with generally accepted accounting principles.\n\/s\/Ernst & Young\nErnst & Young\nNew York, New York March 14, 1994\nASI HOLDING CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (Dollars in thousands except share amounts)\nASSETS At December 31, 1993 1992 Current assets Cash and certificates of deposit $ 53,237 $ 111,549 Cash in escrow 932 1,722 Accounts receivable, less allowance for doubtful accounts-- 1993, $15,666; 1992, $12,827 507,322 468,731 Inventories 325,819 384,857 Future income tax benefits 24,562 33,192 Other current assets 29,811 31,199 Total current assets 941,683 1,031,250 Facilities, at cost net of accumulated depreciation 820,523 832,811 Other assets Goodwill, net of accumulated amortization -- 1993, $169,879; 1992, $141,858 1,025,774 1,101,716 Debt issuance costs, net of accumulated amortization-- 1993 $9,670; 1992, $77,776 78,102 51,308 Other 120,997 109,333 $2,987,079 $3,126,418 ========== ========== LIABILITIES AND STOCKHOLDERS' DEFICIT\nCurrent liabilities Loans payable to banks $ 38,036 $ 99,150 Current maturities of long-term debt 105,939 13,458 Accounts payable 307,326 271,855 Accrued payrolls 99,758 105,400 Other accrued liabilities 263,322 230,335 Taxes on income 47,003 18,848 Total current liabilities 861,384 739,046 Long-term debt 2,191,737 2,032,064 Other long-term liabilities Reserve for postretirement benefits 387,038 368,868 Deferred tax liability 45,625 73,307 Other 224,108 228,521 Total liabilities 3,709,892 3,441,806 Commitments and contingencies Exchangeable preferred stock - 133,176 Stockholders' deficit Preferred stock, Series A, par value $.01, 1,000 shares issued and outstanding - - Common stock $.01 par value, 28,000,000 shares authorized; 23,858,335 shares issued and outstanding in 1993, 23,608,587 in 1992 239 236 Capital surplus 188,744 192,351 Subscriptions receivable (2,588) (3,316) ESOP shares (4,331) (9,527) Accumulated deficit (750,003) (541,436) Foreign currency translation effects (149,220) (86,872) Minimum pension liability adjustment (5,654) - Total stockholders' deficit (722,813) (448,564) $2,987,079 $3,126,418 =========== ==========\nSee notes to consolidated financial statements.\nASI HOLDING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS\nNote 1. Basis of Presentation\nASI Holding Corporation (\"Holding\") is a Delaware corporation that was formed in 1988 by an affiliate of Kelso & Company L.P. (\"Kelso\"), an investment banking firm that specializes in leveraged buyouts. On March 21, 1988, the Kelso affiliate commenced a tender offer (the \"Tender Offer\") for all of the common stock of American Standard Inc. at $78 per share in cash. On April 27, 1988, the Kelso affiliate completed the Tender Offer with the purchase of approximately 95% of the shares of American Standard Inc.\nPursuant to an Agreement and Plan of Merger, a merger was consummated (the \"Merger\") on June 29, 1988, whereby American Standard Inc. became a wholly owned subsidiary of Holding. At that time the remaining shares of American Standard Inc.'s common stock were converted into the right to receive cash of $78 per share. Hereinafter \"the Company\" will refer to Holding or to its subsidiary, American Standard Inc., as the context requires. The Tender Offer, Merger, and related transactions are hereinafter referred to as the \"Acquisition.\" For financial statement purposes the Acquisition has been accounted for under the purchase method.\nNote 2. Accounting Policies\nConsolidation\nThe financial statements include on a consolidated basis the results of all majority-owned subsidiaries. All material intercompany transactions are eliminated. Investments in affiliated companies are included at cost plus the Company's equity in their net results.\nTranslation of Foreign Financial Statements\nAssets and liabilities of most foreign operations are translated at year-end rates of exchange, and the income statements are translated at the average rates of exchange for the period. Gains or losses resulting from translating foreign currency financial statements are accumulated in a separate component of stockholder's equity until the entity is sold or substantially liquidated.\nGains or losses resulting from foreign currency transactions (transactions denominated in a currency other than the entity's local currency) are included in net income. For operations in countries that have high rates of inflation, net income includes gains and losses from translating assets and liabilities at year-end rates of exchange, except for inventories and facilities, which are translated at historical rates.\nRevenue Recognition\nSales are recorded when shipment to a customer occurs.\nASI HOLDING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS\nStatement of Cash Flows\nCash and certificates of deposit include all highly liquid investments with an original maturity of three months or less.\nInventories\nInventory costs are determined by the use of the last-in, first-out (LIFO) method on a worldwide basis, and inventories are stated at the lower of such cost or realizable value.\nFacilities\nThe Company capitalizes costs, including interest during construction, of fixed asset additions, improvements, and betterments that add to productive capacity or extend the asset life. Maintenance and repair expenditures are charged against income. Significant foreign investment grants are amortized into income over the period of benefit.\nGoodwill\nGoodwill is being amortized over 40 years.\nDebt Issuance Costs\nThe costs related to the issuance of debt are amortized using the interest method over the lives of the related debt.\nWarranties\nThe Company provides for estimated warranty costs at the time of sale. Warranty obligations beyond one year are included in other long-term liabilities.\nThe Company changed its method of accounting for revenues from extended warranty contracts at the beginning of 1991 to conform with the FASB Technical Bulletin, \"Accounting for Separately Priced Extended Warranty and Product Maintenance Contracts.\" The bulletin requires the deferral of the revenue from the sales of such contracts and amortization thereof on a straight-line basis over the terms of the contracts. The cumulative effect of this accounting change for all contracts in place as of December 31, 1990, increased the net loss in 1991 by $7 million, net of income tax benefit. The effect on the 1991 net loss, excluding the cumulative effect upon adoption, was not material.\nLeases\nThe asset values of capitalized leases are included with facilities, and the associated liabilities are included with long-term debt.\nPostretirement Benefits\nPostretirement benefits are provided for substantially all employees of the Company, both in the United States and abroad. In the United States the Company also provides various postretirement health care and\nASI HOLDING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS\nlife insurance benefits for some of its employees. Effective January 1, 1991, such costs are calculated in accordance with Statement of Financial Accounting Standards No. 106, \"Employers' Accounting for Postretirement Benefits Other Than Pensions\" (\"FAS 106\").\nDepreciation\nDepreciation and amortization are computed on the straight-line method based on the estimated useful life of the asset or asset group.\nResearch and Development Expenses\nResearch and development costs are expensed as incurred except for costs incurred (after technological feasibility is established) for computer software products expected to be sold. The Company expensed costs of approximately $41 million in 1993, $40 million in 1992, and $36 million in 1991 for research activities and product development. Computer software product development costs capitalized in 1993 amounted to $2 million.\nIncome Taxes\nIn 1991 the Company adopted Statement of Financial Accounting Standards No. 109, \"Accounting for Income Taxes\" (\"FAS 109\"), and elected to apply the provisions retroactively to January 1, 1989.\nThe Company recognizes deferred tax assets for the tax effects of items that will be deducted for tax purposes in later years together with the tax effects of income items included in current reporting for tax purposes but in later years for financial statement purposes and the effects of certain tax attributes such as net operating losses.\nThe Company provides for United States income taxes and foreign withholding taxes on foreign earnings expected to be repatriated. Deferred tax liabilities are provided on the excess of the financial statement basis over the tax basis of certain assets, primarily for inventories and fixed assets, including fair value adjustments resulting from purchase accounting in connection with the Acquisition; fixed assets due to accelerated depreciation deductions for tax purposes; and non-permanent investments in certain foreign subsidiaries.\nEarnings per share\nEarnings per share have been computed using the weighted average number of common shares outstanding.\nASI HOLDING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS\nFinancial Instruments with Off-Balance-Sheet Risk\nThe Company from time to time enters into foreign currency exchange agreements in the management of foreign currency exposure. Gains and losses from exchange rate changes are included in income unless the contract hedges a net investment in a foreign entity or a firm commitment, in which case gains and losses are deferred as a component of foreign currency translation effects in stockholder's equity or included as a component of the transaction.\nNote 3. Postretirement Benefits\nThe Company sponsors postretirement benefit plans covering substantially all employees, including an Employee Stock Ownership Plan (the \"ESOP\") for the Company's U.S. salaried employees and certain U.S. hourly employees. In 1988 in conjunction with the Acquisition the ESOP purchased 5,000,000 shares (adjusted for a 100-for-1 stock split) of common stock of Holding. The ESOP is an individual account, defined contribution plan. The valuation of the ESOP shares is determined by independent appraisals. The common stock acquired by the ESOP is being allocated to the accounts of eligible employees over a period not exceeding eight plan years, including basic allocation of 3% of covered compensation and a matching Company contribution of up to 6% of covered compensation invested in the Company's savings plan by employees.\nPension plan benefits are generally based on years of service and employees' compensation during the last years of employment. In the United States the Company also provides various postretirement health care and life insurance benefits for some of its employees. Funding decisions are based upon the tax and statutory considerations in each country. Accretion expense is the implicit interest cost associated with amounts accrued and not funded and is included in \"other expense\". At December 31, 1993, funded plan assets related to pensions were held primarily in fixed income and equity funds. Postretirement health and life insurance benefits are not prefunded.\nEffective January 1, 1991, the Company changed its method of accounting for postretirement benefits other than pensions to conform with FAS 106. The cumulative effect of this change increased the recorded obligation for such benefits by $40 million, thereby increasing the net loss in 1991 by $25 million (net of the related income tax benefit). The effect of the change on the 1991 net loss, excluding the cumulative effect upon adoption, was not material.\nThe following table sets forth the Company's postretirement plans' funded status and amounts recognized in the balance sheet at December 31, 1993 and 1992.\nASI HOLDING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS\nNote 4. Other Expense\nOther income (expense) was as follows:\nYear Ended December 31, 1993 1992 1991 (Dollars in millions)\nInterest income $ 8.5 $ 8.7 $ 8.3 Royalties 2.6 3.8 2.5 Equity in net income (loss) of affiliated companies (0.1) 4.9 10.2 Minority interest (14.0) (9.8) (3.1) Accretion expense (30.5) (29.8) (27.9) Other, net (4.8) (2.5) 1.9 $(38.3) $(24.7) $ (8.1) ====== ====== ======\nThe decrease in equity in net income of affiliated companies and the increase in minority interest in 1993 and 1992 compared with 1991 were primarily the result of consolidation of the plumbing companies in Thailand, the People's Republic of China, and Incesa, previously unconsolidated joint ventures.\nNote 5. Income Taxes\nThe Company's loss before income taxes, extraordinary loss, and cumulative effects of changes in accounting methods (\"pre-tax income (loss)\") and the applicable provision (benefit) for income taxes were:\nYear Ended December 31, 1993 1992 1991 (Dollars in millions) Pre-tax income (loss): Domestic $ (223.2) $ (170.1) $(272.6) Foreign 142.7 117.5 184.8 Pre-tax loss $ (80.5) $ (52.6) $ (87.8) Provision (benefit) for income taxes: Current: Domestic $ 12.4 $ 5.1 $ 5.1 Foreign 43.0 63.0 71.3 55.4 68.1 76.4 Deferred: Domestic 1.1 (35.8) (52.4) Foreign (20.3) (27.6) (1.0) (19.2) (63.4) (53.4) Total provision $ 36.2 $ 4.7 $ 23.0 ======== ======== =======\nASI HOLDING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS\nA reconciliation between the actual income tax expense provided and the income tax benefit computed by applying the statutory federal income tax rate of 35% in 1993 and 34% in 1992 and 1991 to the pre-tax loss is as follows:\nYear Ended December 31, 1993 1992 1991 (Dollars in millions) Tax benefit at statutory rate $(28.2) $(17.9) $(29.9) Nondeductible goodwill charged to operations 10.4 10.5 10.6 Nondeductible goodwill related to operations sold - 25.1* Nondeductible ESOP allocations 6.1 4.9 4.6 Rate differences and withholding taxes related to foreign operations 9.0 1.4 4.7 Foreign exchange gains (7.0) (6.3) (2.1) State tax benefits (5.5) (3.3) (3.4) Other, net 8.7 5.5 5.6 Increase in valuation allowance 42.7 9.9 7.8 Total provision $ 36.2 $ 4.7 $ 23.0 ====== ====== ======\n* Includes goodwill eliminated in the sale of Tyler Refrigeration.\nIn addition to the valuation allowance increase of $42.7 million shown above, a valuation allowance of $32.1 million was provided for the entire amount of the tax benefit related to the extraordinary loss on retirement of debt (see Note 8 of Notes to Consolidated Financial Statements).\nThe following table details the gross deferred liabilities and the gross deferred tax assets and the related valuation allowances.\nAt December 31, 1993 1992 (dollars in millions) Deferred tax liabilities: Facilities (accelerated depreciation, capitalized interest and purchase accounting differences) $ 141.1 $ 154.1 Inventory (LIFO and purchase accounting differences) 18.5 30.3 Employee benefits 11.0 6.6 Foreign investments 50.1 48.8 Other 26.2 26.6 246.9 266.4 Deferred tax assets: Employee benefits (pensions and other postretirement benefits) 110.7 97.7 Warranties 37.4 30.0 Alternative minimum tax 19.4 21.8 Foreign tax credits and net operating losses 57.5 42.3 Reserves 58.7 45.1 Other 46.0 18.5 Valuation allowances (103.9) (29.1) 225.8 226.3 Net deferred tax liabilities $ 21.1 $ 40.1 ========= ========\nASI HOLDING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS\nDeferred tax assets related to foreign tax credits, net operating loss carryforwards, and future tax deductions have been reduced by a valuation allowance since realization is dependent in part on the generation of future foreign source income as well as on income in the legal entity which gave rise to tax losses. Other deferred tax assets have not been reduced by valuation allowances because of carrybacks and existing deferred tax credits which reverse in the carryforward period. The foreign tax credits and net operating losses are available for utilization in future years. In some tax jurisdictions the carryforward period is limited to as little as five years; in others it is unlimited.\nAs a result of the Acquisition (see Note 1) and the allocation of purchase accounting (principally goodwill) to foreign subsidiaries, the book basis in the net assets of the foreign subsidiaries exceeds the related U.S. tax basis in the subsidiaries' stock. Such investments are considered permanent in duration, and accordingly no deferred taxes have been provided on such differences, which are significant. It is impracticable because of the complex legal structure of the Company and the numerous tax jurisdictions in which the Company operates to determine such deferred taxes.\nCash taxes paid were $41 million, $56 million, and $79 million in the years 1993, 1992, and 1991, respectively.\nIn connection with examinations of the tax returns of the Company's German subsidiaries for the years 1984 through 1990, the German tax authorities have raised questions regarding the treatment of certain significant matters. The Company has paid approximately $20 million of a disputed German income tax. A suit is pending to obtain a refund of this tax. The Company anticipates that the German tax authorities may propose other adjustments resulting in additional taxes of approximately $105 million, plus penalties and interest for the tax return years under audit. In addition, significant transactions similar to those which gave rise to such possible adjustments occurred in years subsequent to 1990. The Company, on the basis of the opinion of legal counsel, believes the tax returns are substantially correct as filed and intends to vigorously contest any adjustments which have been or may be assessed. Accordingly, the Company had not recorded any loss contingency at December 31, 1993 with respect to such matters. Under German tax law the authorities may demand immediate payment of a tax assessment prior to final resolution of the issues. The Company also believes, on the basis of opinion of legal counsel, that it is highly likely that a suspension of payment will be obtained if additional taxes are assessed. However, if payment is required, the Company expects that it will be able to make such payment from available sources of liquidity or credit support but that future cash flows and capital expenditures and therefore subsequent results of operations for any particular quarterly or annual period could be adversely affected.\nASI HOLDING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS\nNote 6. Inventories\nThe components of inventory are as follows:\nAt December 31, 1993 1992 (Dollars in millions)\nFinished products $169.0 $200.6 Products in process 78.0 95.8 Raw materials 78.8 88.5 Inventory at cost $325.8 $384.9 ====== ======\nThe carrying cost of inventories reflects purchase accounting adjustments and therefore exceeds current cost.\nNote 7. Facilities\nThe components of facilities, at cost, are as follows:\nAt December 31, 1993 1992 (Dollars in millions)\nLand $ 66.2 $ 65.0 Buildings 314.6 310.2 Machinery and equipment 739.9 719.4 Improvements in progress 54.4 45.6 Gross facilities 1,175.1 1,140.2 Less: accumulated depreciation 354.6 307.4 Net facilities $ 820.5 $ 832.8 ======== ========\nNote 8. Debt\nThe 1993 Refinancing\nIn July 1993 the Company completed a refinancing (the \"Refinancing\") that included (a) the issuance of $200 million principal amount of 9-7\/8% Senior Subordinated Notes Due 2001; (b) the issuance of approximately $751 million principal amount of 10-1\/2% Senior Subordinated Discount Debentures Due 2005, which yielded proceeds of approximately $450 million; (c) the amendment and restatement of the Company's 1988 Credit Agreement (the \"1988 Credit Agreement\" and as so amended and restated, the \"Credit Agreement\") to establish a $1 billion secured, multi-currency, multi-borrower credit facility; and (d) the application of the proceeds of such issuances and such borrowings as follows: (i) the redemption on July 1, 1993, of all of the outstanding 12-7\/8% Senior Subordinated Debentures Due 2000 (the \"12-7\/8% Senior Subordinated Debentures\") at a redemption price of 104.83% ($571.3 million), (ii) the redemption on July 2, 1993, of\nASI HOLDING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS\na majority of the outstanding 14-1\/4% Subordinated Discount Debentures Due 2003 (the \"14-1\/4% Subordinated Discount Debentures\") at a redemption price of 105% ($389.5 million), (iii) the refunding of bank borrowings ($405 million of term loans and $77 million of other bank debt including revolving credit debt), (iv) the refunding of letters of credit ($58 million), and (v) payment of related fees and expenses.\nThe Credit Agreement provided to American Standard Inc. and certain subsidiaries (the \"Borrowers\") a $1 billion facility as follows: (a) a $250 million multi-currency revolving credit facility (the \"Revolving Credit Facility\") available to all Borrowers, which expires in 2000; (b) a $225 million multi-currency periodic access facility (the \"Periodic Access Facility\") available to all Borrowers, which expires in 2000; and (c) three term loan facilities (the \"Term Loans\") consisting of a $225 million U.S. dollar facility (\"Tranche A\") available to American Standard Inc., which expires in 2000; a $200 million Deutschemark facility (\"Tranche B\") available to a German subsidiary, which expires in 1997; and a $100 million U.S. dollar facility (\"Tranche C\") available to all Borrowers, which expires in 1999. In August 1993 the Company repaid $50 million and the amount available under the Credit Agreement by its terms was reduced to $950 million.\nBorrowings under the Periodic Access Facility and the Term Loans generally bear interest at the London interbank offered rate (\"LIBOR\") plus 2-1\/2% except for the $225 million U.S. dollar facility, which bears interest at LIBOR plus 3%, and the $200 million Deutschemark facility, which bears interest at LIBOR plus 2%. The Company pays a commitment fee of 0.5% per annum on the unused portion of the Revolving Credit Facility and a fee of 2.5% plus issuance fees for letters of credit.\nAs a result of the Refinancing, results for the year ended December 31, 1993, included an extraordinary charge of $92 million related to the debt retired (including call premiums, the write-off of deferred debt issuance costs, and loss on cancellation of foreign currency swap contracts) on which there was no tax benefit (see Note 5).\nShort-term\nThe Revolving Credit Facility (the \"Revolver\") provides for aggregate borrowings of up to $250 million for working capital purposes, of which up to $200 million may be used for the issuance of letters of credit and $40 million of which is available for same-day short-term borrowings (\"Swingline Loans\"). At December 31, 1993, there were $7 million of borrowings outstanding under the Revolver and $66 million of letters of credit. Availability under the Revolver at December 31, 1993, was $177 million. Average borrowings under this facility and under the revolving credit facility available under the previous 1988 Credit Agreement for 1993, 1992, and 1991 were $39 million, $14 million, and $44 million, respectively. The Revolver and the Swingline Loans bear interest at the prime rate plus 1-1\/2% or LIBOR plus 2-1\/2%.\nThe Company is required to reduce to $50 million the amount of borrowings outstanding under the Revolver for at least 30 consecutive days in each 12-month period ending May 31. In December 1993 the Company met this requirement for the 12-month period ending May 31, 1994. Commencing August 31, 1994, the Revolver is reduced by $8.3 million annually, with a\nAMERICAN STANDARD INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS\nfinal maturity on June 1, 2000. In addition, the Company is required to repay the full amount of each of its outstanding revolving loans at the end of each interest period (a maximum of six months). The Company may, however, immediately reborrow such amounts subject to compliance with applicable conditions of the Credit Agreement.\nOther short-term borrowings are available outside the United States under informal credit facilities and are typically a result of overdrafts. At December 31, 1993, the Company had $31 million of such foreign short-term debt outstanding at an average interest rate of 11% per annum. The Company also had an additional $50 million of unused foreign facilities. These facilities may be withdrawn by the banks at any time.\nLong-term\nLong-term debt was as follows:\nAt December 31, 1993 1992 (Dollars in millions)\nCredit Agreement $ 689.9 $ - 1988 Credit Agreement - 402.3 9 1\/4% sinking fund debentures, due in installments from 1997 to 2016 150.0 150.0 10 7\/8% senior notes due 1999 150.0 150.0 11 3\/8% senior debentures due 2004 250.0 250.0 9 7\/8% senior subordinated notes due 2001 200.0 - 10 1\/2% senior subordinated discount debentures (net of unamortized discount of $272.9 million in 1993) due in installments from 2003 to 2005 477.8 - 12 7\/8% senior subordinated debentures - 545.0 14 1\/4% subordinated discount debentures (net of unamortized discount of $36.3 million in 1992) due in installments from 2002 to 2003 175.0 509.5 Other long-term debt 63.1 53.3 12 3\/4% junior subordinated debentures due in installments from 2001 to 2003 (Note 9) 141.8 - Foreign currency swap contracts - (14.6) 2,297.6 2,045.5 Less current maturities 105.9 13.4 $ 2,191.7 $ 2,032.1 ========= =========\nThe amounts of long-term debt maturing from 1995 through 1998 are: 1995-$126.3 million, 1996-$123.5 million, 1997 $121.2 million, 1998-$117.5 million.\nInterest costs capitalized as part of the cost of constructing facilities for the years ended December 31, 1993, 1992, and 1991, were $2.7 million, $3.1 million, and $3.6 million, respectively. Cash interest paid for those same years on all outstanding indebtedness amounted to $198 million, $210 million, and $224 million, respectively.\nASI HOLDING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS\nCredit Agreement loans, maturities, and effective weighted average interest rates in effect at December 31, 1993, were as follows:\nU.S. Dollar Equivalent (in millions) Periodic Access Facility, due in semi-annual installments from February 1994 to February 2000: British sterling loans at 7.85% $ 95.8 Deutschemark loans at 9.06% 49.4 Canadian dollar loans at 6.50% 20.2 French franc loans at 9.17% 18.5 Italian lira loans at 12.19% 8.7 Total Periodic Access loans 192.6\nTerm Loans: Tranche A U.S. dollar loans, due in semi-annual installments from August 1997 to February 2000 at 6.50% 225.0 Tranche B Deutschemark loans, due in semi-annual installments from February 1994 to February 1997 at 7.88% 172.3 Tranche C U.S. dollar loans, due in semi-annual installments from February 1994 to August 1999 at 6.01% 100.0 Total Term Loans 497.3\nTotal Credit Agreement long-term loans 689.9\nRevolver loans at 7.5% 7.0\nTotal Credit Agreement loans $ 696.9 ========\nUnder the 1988 Credit Agreement the various term loans and effective weighted average interest rates in effect at December 31, 1992, were as follows: U.S. Dollar Equivalent (in millions) Deutschemark loans at 11.4% $249.8 Canadian dollar loans at 13.05% 152.5 Total $402.3 ======\nThe 9-7\/8% Senior Subordinated Notes may be redeemed at the Company's option, in whole or in part, on and after June 1, 1998, at redemption prices declining from 102.82% in 1998 to 100% on June 1, 2000, and thereafter. The 10-1\/2% Senior Subordinated Discount Debentures may be redeemed at the Company's option, in whole or in part, on and after June 1, 1998, at redemption prices declining from 104.66% in 1998 to 100% on June 1, 2002, and thereafter. The payment of the principal and interest on the\nASI HOLDING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS\n9-7\/8% Senior Subordinated Notes and on the 10-1\/2% Senior Subordinated Discount Debentures (together the \"Senior Subordinated Debt\") is subordinated in right of payment to the payment when due of all Senior Debt (as defined in the related indenture) of the Company, including all indebtedness under the Credit Agreement and the 9-1\/4% Sinking Fund Debentures, the 10-7\/8% Senior Notes, and the 11-3\/8% Senior Debentures (the said notes and debentures together the \"Senior Securities\").\nThe 9-1\/4% Sinking Fund Debentures are redeemable at the Company's option, in whole or in part, at redemption prices declining from 105.55% in 1994 to 100% in 2006 and thereafter. The 10-7\/8% Senior Notes are not redeemable by the Company. The 11-3\/8% Senior Debentures are redeemable at the option of the Company, in whole or in part, on or after May 15, 1997, at redemption prices declining from 105.69% in 1997 to 100% on May 15, 2002, and thereafter.\nThe 14-1\/4% Subordinated Discount Debentures are redeemable at the Company's option, in whole or in part, at redemption prices of 105% prior to June 30, 1994, declining to 100% on and after June 30, 1995. The payment of the principal and interest on the 14-1\/4% Subordinated Discount Debentures issued by the Company in 1988 is subordinated in right of payment to the payment when due of all Senior Debt (as defined in the related indenture) of the Company, including all indebtedness under the Credit Agreement, the Senior Securities, and the Senior Subordinated Debt. The 14-1\/4% Subordinated Discount Debentures rank senior to the 12-3\/4% Junior Subordinated Debentures (described below).\nThe 12-3\/4% Junior Subordinated Debentures may be redeemed, at the Company's option, in whole or in part at a redemption price of 101.8% prior to June 30, 1994, and at 100% thereafter. The payment of principal and interest on the 12-3\/4% Junior Subordinated Debentures is subordinated in right of payment to the payment when due of all Senior Debt (as defined in the related indenture) of the Company, including all indebtedness under the Credit Agreement, the Senior Securities, the Senior Subordinated Debt, and the 14-1\/4% Subordinated Discount Debentures.\nObligations under the Credit Agreement are guaranteed by ASI Holding Corporation (the Company's parent), the Company, and significant domestic subsidiaries of the Company (with foreign borrowings also guaranteed by certain foreign subsidiaries) and are secured by U.S., Canadian, and U.K. properties, plant, and equipment; by liens on receivables, inventories, intellectual property, and other intangibles; and by a pledge of the Company's stock and nearly all shares of subsidiary stock. In addition, the obligations of the Company under the Senior Securities are secured, to the extent required by the related indentures, by mortgages on the principal U.S. properties of the Company equally and ratably with the indebtedness under the Credit Agreement and certain related indebtedness.\nThe Senior Subordinated Debt, the 14-1\/4% Subordinated Discount Debentures, and the 12-3\/4% Junior Subordinated Debentures are unsecured.\nThe Credit Agreement contains various covenants that limit, among other things, indebtedness, dividends on and redemption of capital stock of the Company, purchases and redemptions of other indebtedness of the Company (including its outstanding debentures and notes), rental expense, liens, capital expenditures, investments or acquisitions, disposal of assets, the\nASI HOLDING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS\nuse of proceeds from asset sales, and certain other business activities and require the Company to meet certain financial tests. In order to maintain compliance with the covenants and restrictions contained in the 1988 Credit Agreement, the Company from time to time has had to obtain waivers and amend- ments. In February 1994 the Company obtained an amendment to the Credit Agreement that among other things relaxed certain financial tests and covenants and facilitated the investment in an air conditioning joint venture and the formation of a holding company to establish joint ventures in the People's Republic of China for the manufacture and sale of plumbing products. The Company currently believes it will comply with the amended financial tests and covenants but may have to obtain similar waivers or amendments in the future.\nThe indentures related to the Company's debentures and notes contain various covenants which, among other things, limit debt and preferred stock of the Company and its subsidiaries, dividends on and redemption of capital stock of the Company and its subsidiaries, redemption of certain subordinated obligations of the Company, the use of proceeds from asset sales, and certain other business activities.\nNote 9. Exchange of Exchangeable Preferred Stock\nOn June 30, 1993, in exchange for all of the Company's outstanding shares of 12-3\/4% Exchangeable Preferred Stock, the Company issued $141.8 million of 12-3\/4% Junior Subordinated Debentures Due 2003 to the holder of the Exchangeable Preferred Stock. Those debentures were sold by the holder in a registered public offering in August 1993. The Company received none of the proceeds of this offering.\nNote 10. Foreign Currency Translation\nAssets and liabilities of most foreign operations are translated at year-end rates of exchange, and the resulting gains or losses, net of income tax effects, are accumulated in a separate component of stockholder's equity.\nChanges in exchange rates which gave rise to significant translation effects included in stockholder's equity for the years ended December 31, 1993, 1992, and 1991, are summarized in the accompanying table.\nChange in End of Period Exchange Rate Currency 1993 1992 1991\nBritish sterling (2)% (19)% (3)% Canadian dollar (4) ( 9) - French franc (6) (6) (2) Deutschemark (7) (6) (1) Italian lira (14) (22) (2) ===== ===== ===== Translation loss included in stockholder's equity, net of tax (dollars in millions) $ (62.3) $ (36.2) $ (2.1) ====== ====== =====\nASI HOLDING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS\nThe allocation of purchase costs increased the net asset exposure of foreign operations; however, since June 29, 1988, the date of the Merger, the effects of exchange volatility have been ameliorated by the fact that a portion of the Company's borrowings has been denominated in foreign currencies.\nThe losses from foreign currency transactions and translation from operations in countries with high inflation rates reflected in expense were $21.9 million in 1993, $19.3 million in 1992, and $14.4 million in 1991.\nNote 11. Fair Values of Financial Instruments\nStatement of Financial Accounting Standards No. 107, \"Disclosures About Fair Values of Financial Instruments\" (\"FAS 107\"), requires disclosure information about all financial instruments of a company except certain excluded instruments and instruments for which it is not practicable to estimate fair value. The fair values presented below are estimates as of December 31, 1993, and are not necessarily indicative of amounts the Company could realize or settle currently or indicative of the intent or ability of the Company to dispose of or liquidate such instruments.\nThe following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments:\nCash and certificates of deposit: The carrying amount reported in the balance sheet for cash and certificates of deposit approximates its fair value.\nLong- and short-term debt: The fair values of the Company's Credit Agreement loans are estimated using indicative market quotes obtained from a major bank. The fair values of senior notes, senior debentures, senior subordinated notes, senior subordinated discount debentures, subordinated discount debentures, the sinking fund debentures, and the junior subordinated debentures are based on indicative market quotes obtained from a major securities dealer. The fair values of other loans approximate their carrying value.\nThe carrying amounts and estimated fair values of selected financial instruments at December 31, 1993 are as follows: (dollars in millions) Carrying Fair Amount Value Credit Agreement loans $ 697 $ 679 10 7\/8% senior notes 150 163 11 3\/8% senior debentures 250 276 9 7\/8% senior subordinated notes 200 208 10 1\/2% senior subordinated discount debentures 478 505 14 1\/4% subordinated discount debentures 175 184 9 1\/4% sinking fund debentures 150 152 12-3\/4% junior subordinated debentures 142 143 Other loans 63 63\nASI HOLDING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS\nNote 12. Related Party Transactions\nThe Company has agreed to pay Kelso an annual fee of $2.75 million for providing management consulting and advisory services. In June 1993 the Company issued 1,000 shares of a new, non-voting Series A Preferred Stock, par value $.01 per share, for $10,000 to an affiliate of Kelso & Company. The Company is committed to contribute $5 million of capital to a Kelso limited partnership. In addition, Tyler Refrigeration was sold to an affiliate of Kelso in 1991.\nNote 13. Leases\nThe cumulative minimum rental commitments under the terms of all noncancellable operating leases in effect at December 31, 1993, were $108 million. Net rental expenses for operating leases were $34 million, $32 million, and $28 million for the years ended December 31, 1993, 1992, and 1991, respectively.\nNote 14. Commitments and Contingencies\nThe Company and certain of its subsidiaries are parties to a number of pending legal and tax proceedings. The Company is also subject to federal, state and local environmental laws and regulations and is involved in environmental proceedings concerning the investigation and remediation of numerous sites. In those instances where it is probable that the Company will incur costs from such proceedings and the amounts can be reasonably determined the Company has recorded a liability. The Company believes that these legal, tax, and environmental proceedings will not have a material adverse effect on its consolidated financial position, cash flows, or results of operations.\nThe tax returns of the Company's German subsidiaries are currently under examination by the German tax authorities (see Note 5).\nNote 15. Segment Data\nSales and operating income by geographic location for the years ended December 31, 1993, 1992, and 1991, are shown on the following page. Identifiable assets are also shown as at years ended 1993, 1992, and 1991. See \"Business\" for a description of each business segment and \"Management's Discussion and Analysis of Financial Condition and Results of Operations\" for capital expenditures and depreciation and amortization.\nASI HOLDING CORPORATION AND SUBSIDIARIES QUARTERLY DATA (Unaudited) (Dollars in millions)\nFirst Second Third Fourth Sales $879.4 $995.5 $976.5 $979.1 Cost of sales 650.5 754.5 727.7 769.9 Income (loss) before income taxes and extraordinary loss (9.5) (28.2) 4.1 (46.9) Tax provision 8.1 6.1 7.2 14.8 Loss before extraordinary loss (17.6) (34.3) (3.1) (61.7) Extraordinary loss (Note 8) - (91.9) - - Net loss $(17.6) $(126.2) $ (3.1) $(61.7) ====== ======= ====== ====== Per share: Loss before extraordinary loss $ (.92) $ (1.63) $ (.13) $(2.60) Extraordinary loss - (3.87) - - Net loss $ (.92) $ (5.50) $ (.13) $(2.60) ====== ======= ====== ====== Average number of common shares (thousands) 23,699 23,756 23,690 23,756\nFirst Second Third Fourth Sales $901.0 $995.9 $980.9 $914.1 Cost of sales 672.0 734.1 742.2 703.9 Income (loss) before income taxes (8.1) 11.4 (16.5) (39.3) Tax provision (benefit) 5.5 9.2 (1.5) (8.5) Net income (loss) $(13.6) $ 2.2 $(15.0) $(30.8) ====== ======= ====== ====== Per share: Net loss $ (.74) $ (.07) $ (.81) $(1.49) ====== ======= ====== ====== Average number of common shares (thousands) 23,339 23,470 23,467 23,506\nITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCING DISCLOSURE.\nNot applicable.\nMANAGEMENT\nITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY\nThe following table sets forth certain information as of March 31, 1994, with respect to each person who is an executive officer or director of the Company:\nName Age Position with Company\nEmmanuel A. Kampouris 59 Chairman, President and Chief Executive Officer, and Director\nHorst Hinrichs 61 Senior Vice President, Transportation Products, and Director\nGeorge H. Kerckhove 56 Senior Vice President, Plumbing Products, and Director\nFred A. Allardyce 52 Vice President and Chief Financial Officer\nAlexander A. Apostolopoulos 51 Vice President and Group Executive, Americas, Plumbing Products\nThomas S. Battaglia 51 Vice President and Treasurer\nRoberto Canizares M. 44 Vice President, Air Conditioning Products' Asia\/America Zone\nWilfried Delker 53 Vice President and Group Executive, Worldwide Fittings, Plumbing Products\nAdrian B. Deshotel 48 Vice President, Human Resources\nCyril Gallimore 65 Vice President, Systems and Technology\nLuigi Gandini 55 Vice President and Group Executive, European Plumbing Products\nDaniel Hilger 53 Vice President and Group Executive, Air Conditioning Products in Europe, Middle East and Africa\nJoachim D. Huwendiek 63 Vice President, Automotive Products in Germany\nName Age Position with Company\nFrederick W. Jaqua 72 Vice President and General Counsel and Secretary\nW. Craig Kissel 42 Vice President and Group Executive, Unitary Products Group\nWilliam A. Klug 62 Vice President, Trane International\nPhilippe Lamothe 57 Vice President, Automotive Products in France\nG. Eric Nutter 58 Vice President, Automotive Products in the United Kingdom\nRaymond D. Pipes 44 Vice President and Group Executive, Plumbing Products in the Far East\nBruce R. Schiller 49 Vice President and Group Executive, Compressor Business\nJames H. Schultz 45 Vice President and Group Executive, Commercial Systems Group\nG. Ronald Simon 52 Vice President and Controller\nWade W. Smith 43 Vice President, U.S. Plumbing Products\nBenson I. Stein 56 Vice President, General Auditor\nRobert M. Wellbrock 47 Vice President, Taxes\nShigeru Mizushima 50 Director\nRoger W. Parsons 52 Director\nFrank T. Nickell 46 Director\nJ. Danforth Quayle* 47 Director\nJohn Rutledge 45 Director\nJoseph S. Schuchert* 65 Director\n* The Management Development Committee functions as the compensation committee of the Company. Since December 2, 1993, its members have been Messrs. Quayle and Schuchert. Prior thereto Mr. Schuchert and two other directors who retired in December, Richard M. Cyert and Edward Donley, served as members of the committee.\nDirectors are elected to hold office until the next annual meeting of stockholders or until their successors are elected. Messrs. Kampouris, Mizushima, Nickell, and Schuchert were elected in 1988; Mr. Kerckhove in September 1990; Mr. Hinrichs in March 1991; Dr. Rutledge in March 1993; Mr. Quayle in September 1993; and Mr. Parsons in March 1994.\nHolding, Kelso ASI Partners, L.P. (the 73 percent owner of Holding) (\"ASI Partners\"), and executive officers and certain other management personnel of the Company who purchased shares of Holding common stock (\"Management Investors\") entered into a Stockholders Agreement that, among other things, provides for arrangements regarding the control of the election of directors of Holding.\nUntil the earlier of (i) the occurrence of a public offering pursuant to an effective registration statement under the Securities Act covering the offer and sale of Holding common stock to the public and underwritten by an investment banking firm of nationally recognized standing and (ii) July 7, 1998, the Management Investors as a group are entitled to nominate at least two directors to the Board of Directors of Holding, and ASI Partners is entitled to nominate the remaining directors. As a result, during such period ASI Partners will control the Board of Directors. To effectuate their rights, the Management Investors and ASI Partners have agreed in the Stockholders' Agreement to grant an irrevocable proxy to the Secretary of Holding to vote their shares of common stock in accordance with such nominations. Such grant of an irrevocable proxy terminates upon Holding's becoming subject to the proxy rules under the Securities Exchange Act of 1934. At present the Board of Directors of Holding consists of nine directors.\nThe sole holder of the outstanding common stock of American Standard Inc. is Holding, and Holding exclusively elects the directors of American Standard Inc. Currently the directors of Holding are also the directors of American Standard Inc.\nSet forth below is the principal occupation of each of the executive officers and directors named above during the past five years (except as noted, all positions are with the Company).\nMr. Kampouris was elected Chairman in December 1993 and President and Chief Executive Officer in February 1989. Prior thereto he was Senior Vice President, Building Products, from 1984 to February 1989. He is also a director of Daido Hoxan Inc. Mr. Kampouris has served as a director of the Company since July 1988.\nMr. Hinrichs was elected Senior Vice President, Transportation Products, in December 1990. Prior thereto he served as Vice President and Group Executive, Automotive Products, from 1987 to 1990. Mr. Hinrichs has served as a director of the Company since March 1991.\nMr. Kerckhove was elected Senior Vice President, Plumbing Products, in June 1990. Prior thereto he was Vice President (from 1985 until June 1990) and Group Executive (from 1988 until June 1990) of European Plumbing Products. Mr. Kerckhove has served as a director of the Company since September 1990.\nMr. Allardyce was elected Vice President and Chief Financial Officer in January 1992. Prior thereto he served as Vice President and Controller from February 1983 until December 1991.\nMr. Apostolopoulos was elected Vice President and Group Executive, Americas Plumbing Products, in December 1990. Prior thereto he served as the executive in charge of Plumbing Products' joint ventures from September 1989 to November 1990 and Managing Director of the Company's Egyptian subsidiary from July 1984 to August 1989.\nMr. Battaglia was elected Vice President and Treasurer in September 1991. Prior thereto he was Assistant Treasurer.\nMr. Canizares was elected Vice President, Air Conditioning Products' Asia\/America Zone, in December 1990. Prior thereto he served as the executive in charge of this zone and Manager of Planning and Distribution from November 1986 to November 1990.\nMr. Delker was elected Vice President and Group Executive, Worldwide Fittings, Plumbing Products, in April 1990. Prior thereto he served as executive in charge of the Company's brass fittings manufacturing operations from June 1982 until March 1990.\nMr. Deshotel was elected Vice President, Human Resources, in January 1992. Prior thereto he served as Group Vice President, Human Resources, for U.S. Plumbing Products from September 1986 until December 1991.\nMr. Gallimore was elected Vice President, Systems and Technology, in December 1990. Prior thereto he served as the executive in charge of Manufacturing and Technology from 1984 to November 1990.\nMr. Gandini was elected Vice President and Group Executive, European Plumbing Products, in July 1990. Prior thereto he served as General Manager of Ideal Standard S.p.A., the Italian subsidiary of the Company, from January 1978 until June 1990.\nMr. Hilger was elected Vice President and Group Executive, Air Conditioning Products, in Europe, Middle East and Africa, in June 1988.\nMr. Huwendiek was elected Vice President, Automotive Products in Germany, in January 1992. Prior thereto he served as Managing Director of WABCO Germany since June 1987.\nMr. Jaqua was elected Vice President and General Counsel and Secretary in April 1989. Prior thereto he was Associate General Counsel and Assistant Secretary.\nMr. Kissel was elected Vice President in charge of Air Conditioning Products' Unitary Products Group in January 1992, becoming Group Executive in March 1994. He served as Vice President, Sales and Distribution, for Air Conditioning Products, from December 1990 until January 1992 and served as divisional Senior Vice President in charge of U.S. Sales from January to November 1990. He was in charge of Western Regional Sales from January 1989 to January 1990.\nMr. Klug was elected Vice President in 1985 and has been in charge of Trane International since December 1993. He served as Group Executive, Unitary Products Group, from April 1990 until December 1993. He was Group Executive, North American Sales and Distribution, Air Conditioning Products, from October 1987 to March 1990.\nMr. Lamothe was elected Vice President, Automotive Products in France, in January 1992. He served as Group Vice President of the French transportation business during 1991 and prior thereto was General Manager of the French transportation subsidiary.\nMr. Nutter was elected Vice President, Automotive Products in the United Kingdom, in January 1992. Prior thereto he served as Vice President and General Manager of WABCO Transportation U.K. Limited, the United Kingdom transportation subsidiary of the Company from March 1991 until December 1991 and Group Managing Director of the United Kingdom transportation subsidiary from June 1987 until February 1991.\nMr. Pipes was elected Vice President and Group Executive for the Far East Region of Plumbing Products in May 1992. Prior thereto he served as Managing Director of the Company's Philippine subsidiary from May 1990 until April 1992 and was Group Vice President, Control & Finance, of U.S. Plumbing Products from March 1985 until April 1990.\nMr. Schiller was elected Vice President and Group Executive, Compressor Business (Air Conditioning Products) in March 1994. Prior thereto he served as General Manager, Compressor Business Group, from May 1993 to February 1994 and Manager and then General Manager of the Company's Tyler, Texas, facility from March 1986 to April 1993.\nMr. Schultz was elected Vice President and Group Executive, Commercial Systems, in 1987.\nMr. Simon was elected Vice President and Controller in January 1992. Prior thereto he served as Vice President and Controller of the Air Conditioning Products' Commercial Systems Group from December 1984 to December 1991.\nMr. Wade W. Smith was elected Vice President, U.S. Plumbing Products, in May 1992. Prior thereto he served as Group Vice President in charge of the Chinaware Business Unit of U.S. Plumbing Products from February 1992 until April 1992 and from April 1987 to February 1992 he was Vice President and General Manager of the Building Automation Systems Division of the Commercial Systems Group of Air Conditioning Products.\nMr. Stein was elected Vice President, General Auditor, in March 1994; from December 1986 to February 1994 he was the Company's General Auditor.\nMr. Wellbrock was elected Vice President, Taxes, effective January 1, 1994. Prior thereto he served as Director of Taxes from 1988 through 1993.\nMr. Mizushima has been President and Chief Operating Officer of Daido Hoxan Inc. since the merger in April 1993 of Hoxan Corporation with Daido Sanso Company (a subsidiary of Air Products and Chemicals Inc.). Prior thereto Mr. Mizushima was President of Hoxan Corporation, a position he held since 1984. He is also a director of Daido Hoxan. Daido Hoxan Inc is the second largest supplier of industrial gases in Japan. One of its subsidiaries is a distributor of American-Standard plumbing products in Japan. Mr. Mizushima has served as a director of the Company since July 1988.\nMr. Nickell has been President and a director of Kelso & Companies, Inc., since March 1989. Kelso & Companies, Inc. is the general partner of Kelso & Company, L.P. From 1984 to 1989 Mr. Nickell was a general partner of Kelso & Company, L.P. He is also a director of Club Car, Inc.; King Holding Corp; and Tyler Holdings Corporation. Mr. Nickell has served as a director of the Company since May 1988.\nMr. Parsons is Managing Director of Rea Brothers Group PLC (\"Rea Brothers Group\"), which he joined in 1988 after a long banking career. Rea Brothers Group is a U.K. holding company of subsidiaries engaged in the investment banking business. He also holds directorships in several subsidiaries of Rea Brothers Group. Mr. Parsons was elected as a director of the Company on March 2, 1994.\nMr. Quayle served as Vice President of the United States from January 1989 to January 1993. Since leaving that office Mr. Quayle has been associated with Circle Investors, Inc. (an investment planning and consulting firm), and FX Strategic Advisors, Inc. (an international trade consulting firm), both of which he serves as Chairman. He is a Director of Central Newspapers, Inc. Mr. Quayle has served as a director of the Company since September 1993.\nDr. Rutledge has been Chairman of Rutledge & Company, Inc., a merchant banking firm, since January 1991. He is the founder and Chairman of Claremont Economics Institute, an economic research firm established in 1975. He is also a director of Earle M. Jorgensen & Company, Lazard Freres Funds, Medical Specialties Group, and Utendahl Capital Partners and is a special advisor to Kelso & Company. Dr. Rutledge has served as a director of the Company since March 1993.\nMr. Schuchert has been Chairman, CEO, and a director of Kelso & Companies, Inc., since March 1989. Kelso & Companies, Inc. is the general partner of Kelso & Company, L.P. From 1984 to 1989 Mr. Schuchert was managing general partner of Kelso & Company, L.P. He is also a director of Earle M. Jorgensen & Company. Mr. Schuchert has served as a director of the Company since May 1988.\nOn December 23, 1992, Kelso & Company and its chief executive officer, Mr. Schuchert, without admitting or denying the findings contained therein, consented to an administrative order in respect of a Securities and Exchange Commission (\"Commission\") inquiry relating to the 1990 acquisition of a portfolio company by a Kelso affiliate. The order found that Kelso's tender offer filing in connection with the acquisition did not comply fully with the Commission's tender offer reporting requirements, and required Kelso and Mr. Schuchert to comply with these requirements in the future.\nCompensation Committee Interlocks and Insider Participation\nMr. Schuchert is a member of the Management Development Committee (the Compensation Committee) of the Company's Board of Directors. He is Chairman of Kelso & Companies, Inc. (the general partner of Kelso & Company, L.P.) and a general partner of American Standard Partners, the general partner of Kelso ASI Partners.\nThe Company pays Kelso an annual fee of $2.75 million for providing management consulting and advisory services, including those of Messrs. Schuchert and Nickell. The fee is reduced depending on the number of shares Kelso controls of Holding or the Company, with final termination when Kelso's ownership control falls below 20 percent.\nThe Company also entered into a transaction with Kelso Insurance Services, Incorporated (an affiliate of Kelso) (\"Kelso Insurance\"), and American Telephone and Telegraph Company (\"AT&T\") pursuant to which the Company as well as other Kelso affiliated companies participates in a telecommunications network under which AT&T provides communications services to the group at a special lower tariff rate. In connection with that transaction the Company has guaranteed a minimum annual usage by it of $2 million for a period of five years commencing 1993. No fee was paid by the Company to Kelso Insurance in connection with this transaction.\nIn August 1993 the Company purchased a limited partnership interest in Kelso Investment Associates V, L.P. (\"KIA V\") in exchange for its commitment to make a capital contribution of $5 million to KIA V. KIA V was formed to seek out business opportunities and invest primarily in equity securities, leveraged buy-outs, and joint ventures. Kelso Partners V, L.P. serves as the general partner of KIA V. The general partners of Kelso Partners V, L.P., include Messrs. Schuchert and Nickell. Kelso & Co., L.P., is the manager of KIA V and, as such, acts as investment adviser of KIA V. The management fee relating to the interest held by the Company has been waived.\nThe Supplemental Plan benefits are based on credited years of service and average annual compensation for the highest three calendar years of the final ten calendar years of employment (not exceeding 60 percent of average annual compensation for such years of service) and are reduced by an offset consisting of certain other retirement benefits, including amounts payable under the Terminated Plan, annual allocations to the executive officer's Employee Stock Ownership Plan (\"ESOP\") accounts, and Social Security benefits. Benefits under the Supplemental Plan are vested after five years of service or employment continuation through age 65. Compensation used in determining Supplemental Plan benefits (covered compensation) includes only salary and bonus reflected in the Summary Compensation Table above. No covered compensation of any Named Officer differs by more than 10% from the salary and bonus set forth in the Summary Compensation Table.\nThe years of credited service under the Supplemental Plan for the Named Officers are as follows: Mr. Kampouris, 28 years; Mr. Hinrichs, 35 years; Mr. Kerckhove, 32 years; Mr. Allardyce, 17 years; Mr. Gandini, 33 years; and Mr. H.T. Smith, 13 years.\nThe current annual target benefit for Mr. Kampouris is approximately 20 percent higher than that shown in the above table since a different benefit formula under the pre-1990 version of the Supplemental Plan applies to his period of service and earnings prior to April 27, 1991. The method of calculating the lump sum payable to Mr. Kampouris that is attributable to his accrued benefit through April 27, 1991, has been adjusted to reflect the recent increase in the Federal ordinary income tax rates.\nAn amendment to the Supplemental Plan in 1993 established minimum annual lump sum payments for certain Named Officers which, after giving effect to Plan offsets, are estimated as follows: Mr. Kampouris, $427,000; Mr. Hinrichs, $143,000; Mr. Kerckhove, $37,000; and Mr. Gandini, $24,000.\nShares of Holding Common Stock distributable to Plan participants are delivered to a grantor's trust for their benefit. The trust will terminate following a public offering of Holding Common Stock, at which time shares or cash credited to each participant's account is to be distributed. Payment, however, may be deferred if an event of default under the Company's loan agreements or debt indentures has occurred or will occur as a result of such payment. Until distribution, assets of the trust are subject to the claims of creditors of Holding or the Company. Shares held by the trust are voted by the trustee in accordance with the Company's directions.\nDirectors' Fees and Other Arrangements\nIn the first half of 1993 each outside director was paid a fee of $5,000 per calendar quarter and in addition received a fee of $500 for each meeting of the Board attended; in the last half each outside director was paid a fee of $6,750 per calendar quarter and in addition received a fee of $1,000 for each meeting of the Board attended. Effective with the third quarter, an outside director is also paid $1,000 for attending a Committee meeting. (Previously an outside director was paid $500 for attending a Committee meeting not held on the day of a Board meeting.) The only directors currently eligible for directors' fees are directors who are neither employees of the Company or Kelso. They are Messrs. Mizushima, Parsons, Quayle, and Rutledge. All directors are reimbursed for reasonable expenses incurred in connection with attendance at any meetings. No separate directors' fees are paid for attendance at meetings of Holding that are held on the same day the Company's Board meets.\nA Supplemental Compensation Plan for Outside Directors (\"Supplemental Compensation Plan\") was adopted in June 1989. A Plan Account was establish- ed for each participating director at that time consisting of units equivalent to $50,000 of Holding common stock with each unit having a value of $19 per share, the independently appraised value of the shares of Holding as of December 31, 1988. For the purpose of providing a measure of parity among the directors, the $50,000 amount was increased to $100,000 for participating directors who became Board Members after January 1, 1993, with such amount converted into units for the account of such directors at the rate of $42.96 per unit ($42.96 representing the independently appraised value of the shares of Holding as of December 31, 1992). When a participating director ceases to be a member of the Board, he or his beneficiary will receive a cash payment equal to the number of units in his Plan Account multiplied by the per-share value of Holding common stock based on the then last year-end appraisal. If a participating director is removed for cause, his entire interest in the Plan is forfeited. Employee-directors and Messrs. Nickell and Schuchert do not participate in this Plan.\nMr. Donley and Dr. Cyert, directors who retired in December 1993, each received a payment of $113,053 pursuant to the Supplemental Compensation Plan.\nCorporate Officers Severance Plan and Other Employment or Severance Arrangements\nThe Board of Directors approved a severance plan for executive officers (the \"Officers Severance Plan\"), effective April 27, 1991. The Officers Severance Plan provides that any participant whose employment is involuntarily terminated by the Company without \"Cause\" (as defined in the Officers Severance Plan) or who leaves the Company for \"Good Reason\" (as defined in the Officers Severance Plan) shall be paid an amount equal to the sum of two (three in the case of the Chief Executive Officer) times such participant's annual base salary at the rate in effect at the time of termination, a proration of the then Annual Incentive Plan target award (described previously), and one (two in the case of the Chief Executive Officer) times such target award. In addition, group life, accident, and disability insurance coverages, as well as group medical coverage, will be continued for up to 24 (36 in the case of the Chief Executive Officer) months following such officer's termination. The Named Officers (other than Mr. Smith, who retired in December 1993) are participants in this Plan.\nAn agreement was entered into with H. Thompson Smith in December 1993 concerning the terms of his termination of employment and retirement. Under that agreement he is entitled to receive his 1993 Annual Incentive Plan award in the amount of $154,000 and will be entitled to receive the same amount in March 1995. In addition, Mr. Smith is retained as a consultant through 1995 at the rate of $29,583 per month. In the event of Mr. Smith's death, the fees remaining through the end of 1995 are payable in a lump sum to his spouse or estate. He is also entitled to receive payments under the Company's Long-Term Incentive Compensation Plan for the 1992-1994 and 1993-1995 performance periods in accordance with its terms, such awards to be prorated to December 31, 1993. Mr. Smith continues under the Company's medical and life insurance programs through 1995.\nITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT\nAll of the common stock, $.01 par value, of American Standard Inc., the only voting stock of American Standard Inc., is owned by Holding. Set forth below is the number of shares of Common Stock, par value $.01 per share, of Holding, the only outstanding voting stock of Holding, beneficially owned as of March 10, 1994, by each Director and nominee, each Named Executive Officer, all Directors and executive officers of Holding as a group, and each 5% holder.\nShares Percent Name and Address Beneficially of Title of Class of Beneficial Owner Owned Class Holding common stock, par value - Kelso ASI Partners, L.P.(a) 18,000,000 73% $.01 per share (\"ASI Partners\") Joseph S. Schuchert(a) 18,000,000(d) 73% (d) Frank T. Nickell(a) 18,000,000(d) 73% (d) George E. Matelich(a) 18,000,000(d) 73% (d) Thomas R. Wall IV(a) 18,000,000(d) 73% (d) Emmanuel A. Kampouris(b) 225,000 * George H. Kerckhove(b) 113,000 * Horst Hinrichs(b) 90,000 * Fred A. Allardyce(b) 113,000 * American-Standard Employee Stock Ownership Plan(c) 4,267,710 17% All current directors and executive officers of Holding and the Company as a group 18,824,900(e) 77% (e)\n* Less than one percent.\n(a) The business address for such persons is c\/o Kelso & Company, 350 Park Avenue, New York, N.Y. 10022.\n(b) Mr. Kampouris is Chairman, President and Chief Executive Officer and a director of the Company and of Holding. Messrs. Hinrichs and Kerckhove are Named Officers and directors of the Company and of Holding, and Mr. Allardyce is a Named Officer of the Company and of Holding.\n(c) The business address for the ESOP is c\/o American Standard Inc., 1114 Avenue of the Americas, New York, N.Y. 10036. At December 31, 1993, 3,548,609 Plan shares were allocated to executive officers of Holding and the Company and other ESOP participants. The number of shares shown for executive officers in the table above does not reflect shares allocated to their accounts in the ESOP. Shares in the ESOP account are voted by the ESOP trustee as directed by the plan board (the board administering the trust which currently consists of executive officers of the Company). However, participants may direct the vote of their ESOP account shares in matters involving mergers, recapitalizations, or dispositions of substantial assets. Until termination of employment a participant cannot dispose of shares in his ESOP account. Shares distributed to a participant on termination are subject to the Company's right of first refusal. The shares in the Named Officers ESOP accounts are as follows: Mr. Kampouris, 3,995 shares; Mr. Kerckhove, 3,953 shares; Mr. Hinrichs, 4,266 shares; Mr. Allardyce, 4,246 shares; and Mr. Gandini, 2,225 shares. The shares in the ESOP accounts for all executive officers total 69,218 shares.\nThe number of shares shown for executive officers in the table above also does not reflect shares of Holding Common Stock issued as part of the payouts under the LTIP and held for them in trust under a trust agreement dated as of January 1, 1993. Shares in the trust are voted by the trustee as directed by the Company. Until termination of the trust, a beneficiary of the Trust cannot dispose of shares credited to his account. Shares in the Named Officers' accounts in the trust are as follows: Mr. Kampouris, 4,453 shares; Mr. Kerckhove, 2,012 shares; Mr. Hinrichs, 1,787 shares; Mr. Allardyce, 1,224 shares; and Mr. Gandini, 1,176 shares. The shares in the trust accounts for all executive officers total 28,620 shares.\nAlso not included above are 19,198 shares of ASI Holding common stock held in a similar grantor's trust for the account of certain executive officers. These were earned by them under an employee incentive plan prior to their becoming officers.\n(d) Messrs. Schuchert and Nickell, each a director of the Company and of Holding, and Messrs. Matelich and Wall may be deemed to share beneficial ownership of shares owned of record by ASI Partners by virtue of their status as general partners of American Standard Partners, the general partner of ASI Partners. Messrs. Schuchert, Nickell, Matelich and Wall share investment and voting power with respect to securities owned by ASI Partners. See \"Certain Transactions and Relationships.\" Dr. Cyert, who was a director of Holding and the Company until December 1993, is a limited partner in one of the Kelso partnerships that has invested in ASI Partners.\n(e) Out of such 18,824,900 shares, 18,000,000 shares represent shares of Common Stock owned by ASI Partners in which Messrs. Schuchert and Nickell, each a director of Holding, may be deemed to share beneficial ownership by virtue of their status as general partners of American Standard Partners, the general partner of ASI Partners.\nITEM 13. CERTAIN TRANSACTIONS AND RELATIONSHIPS\nMessrs. Schuchert and Nickell, directors of Holding and the Company, are Chairman and President, respectively, of Kelso & Companies, Inc. (the general partner of Kelso & Company, L.P.), and are general partners of American Standard Partners, the general partner of Kelso ASI Partners. Mr. Schuchert is also a member of the Management Development Committee (the compensation committee) of the Company's Board of Directors.\nThe Company pays Kelso an annual fee of $2.75 million for providing management consulting and advisory services, including those of Messrs. Schuchert and Nickell. The fee is reduced depending on the number of shares Kelso controls of Holding or the Company, with final termination when Kelso's ownership control falls below 20 percent.\nThe Company also has entered into a transaction with Kelso Insurance Services, Incorporated (an affiliate of Kelso) (\"Kelso Insurance\"), and American Telephone and Telegraph Company (\"AT&T\") pursuant to which the Company as well as other Kelso affiliated companies participates in a telecommunications network under which AT&T provides communications services to the group at a special lower tariff rate. In connection with that transaction the Company has guaranteed a minimum annual usage by it of $2 million for a period of five years commencing 1993. No fee was paid by the Company to Kelso Insurance in connection with this transaction.\nIn August 1993 the Company purchased a limited partnership interest in Kelso Investment Associates V, L.P. (\"KIA V\"), in exchange for its commitment to make a capital contribution of $5 million to KIA V. KIA V was formed to seek out business opportunities and invest primarily in equity securities, leveraged buy-outs, and joint ventures. Kelso Partners V, L.P. serves as the general partner of KIA V. The general partners of Kelso Partners V, L.P., include Messrs. Schuchert and Nickell. Kelso & Co., L.P. is the manager of KIA V and, as such, acts as investment adviser of KIA V. The management fee relating to the interest held by the Company has been waived.\nThe Company will invest in a Cayman Islands corporation, A-S China Plumbing Products Limited (\"ASPPL\"), to be used for the establishment of various joint ventures in the People's Republic of China. The Company will have a 21% voting interest in ASPPL. Shares in ASPPL will also be sold in a private placement to certain institutions and other investors, including certain executive officers and employees of the Company and its subsidiaries.\nMr. Mizushima, a director of the Company and of Holding, is President and Chief Operating Officer of Daido Hoxan Inc., a Japanese corporation which has an approximately 11 percent limited partnership interest in ASI Partners. Daido Hoxan Inc. is the largest distributor of the Company's plumbing products in Japan. Its transactions as distributor with the Company and its subsidiaries in 1992, which were on customary terms and in the ordinary course of business, were not material to either the Company or Daido Hoxan Inc. The Company also entered into leasing transactions with an affiliate of Daido Hoxan whereby it has leased certain machinery and equipment on financial terms that were comparable to those available from other leasing companies. The leasing transactions were not material to either the Company or Daido Hoxan Inc.\nFidelity Management Trust Company (\"Fidelity\") is the owner of record of the shares of Holding held by the ESOP, a 17% owner of Holding shares. Fidelity was paid by the Company approximately $180,000 in 1993 for services in connection with administering the Company's ESOP and Savings Plan.\nMr. Nickell's father is an officer and owns more than 10 percent of AC Corporation, a contracting company which purchases air conditioning products from the Company's Trane Division. Such purchases in 1993 were on customary terms and in the ordinary course of business and were not material to either the Company or AC Corporation.\nManagement Investors Stockholders Agreement\nUnder the Stockholders Agreement, pursuant to which Management Investors purchased shares of Holding common stock, Holding is obligated to repurchase, subject to the limitations contained in the Company's lending arrangements and debt instruments, such shares at certain fair market prices in case of the death, disability, retirement, or termination of employment of a Management Investor. Shares are paid for within the constraints of the Company's lending arrangement and debt instruments, as supplemented by a Schedule of Priorities established by Holding's Board of Directors. The Named Officers (other than Mr. Gandini) and most of the executive officers are Management Investors and parties to the Stockholders Agreement.\nPART IV\nITEM 14. CONSOLIDATED EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.\n(a) 1 and 2. Financial statements and financial statement schedules\nThe financial statements and schedules listed in the accompanying index to financial statements are filed as part of this annual report on Form 10-K.\n3. Exhibits\nThe exhibits listed on the accompanying index to exhibits are filed as part of this annual report on Form 10-K.\nIncluded in the exhibits are the following management contracts or compensatory plan arrangements required to be filed as exhibits pursuant to Item 14(c) of Form 10-K\nAmerican Standard Inc. Long-Term Incentive Compensation Plan, as amended Trust Agreement for American Standard Inc. Long-Term Incentive Compensation Plan American Standard Inc. Annual Incentive Plan American Standard Inc. Management Partner's Bonus Plan with amendments American Standard Inc. Executive Supplemental Retirement Benefit Program American Standard Employee Stock Ownership Plan with amendments Estate Preservation Plan with amendments Corporate Officers Severance Plan American Standard Inc. Supplemental Compensation Plan for Outside Directors ASI Holding Corporation 1989 Stock Purchase Loan Program Summary of Terms of Unfunded Deferred Compensation Plan Letter of Agreement with respect to H. Thompson Smith's retirement and consulting services\n(b) Reports on Form 8-K for the quarter ended December 31, 1993.\nNone\nSignatures\nPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.\nASI HOLDING CORPORATION\nBy \/s\/ Emmanuel A. Kampouris (Emmanuel A. Kampouris) (Chairman, President and Chief Executive Officer)\nMarch 30, 1994\nPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:\n\/s\/ Emmanuel A. Kampouris Director, Chairman and President March 30, 1994 (Emmanuel A. Kampouris) (Chief Executive Officer)\n\/s\/ Fred A. Allardyce Vice President and Chief March 30, 1994 (Fred A. Allardyce) Financial Officer\n\/s\/ G. Ronald Simon Vice President & Controller March 30, 1994 (G. Ronald Simon) (Principal Accounting Officer)\n\/s\/ Horst Hinrichs Director March 30, 1994 (Horst Hinrichs)\n\/s\/ George H. Kerckhove Director March 30, 1994 (George H. Kerckhove)\n\/s\/ Shigeru Mizushima Director March 30, 1994 (Shigeru Mizushima)\n\/s\/ Frank T. Nickell Director March 30, 1994 (Frank T. Nickell)\n\/s\/ J. Danforth Quayle Director March 30, 1994 (J. Danforth Quayle)\n\/s\/ Roger W. Parsons Director March 30, 1994 (Roger W. Parsons)\n\/s\/ Joseph S. Schuchert Director March 30, 1994 (Joseph S. Schuchert)\n\/s\/ John Rutledge Director March 30, 1994 (John Rutledge)\nASI HOLDING CORPORATION AND FINANCIAL STATEMENT SCHEDULES COVERED BY REPORT OF INDEPENDENT AUDITORS (Item 14 (a))\nForm 10-K (Pages) 1. Financial Statements\nConsolidated Balance Sheet at December 31, 1993 and 1992 42 Years ended December 31, 1993, 1992 and 1991, Consolidated Statement of Operations 41 Consolidated Statement of Stockholder's Equity (Deficit) 43 Consolidated Statement of Cash Flows 44-45 Notes to Consolidated Financial Statements 46-62 Segment Data 63 Segment data for capital expenditures, depreciation and amortization 23-29 Quarterly Data (Unaudited) 64 Report of Independent Auditors 40\n2. Financial statement schedules, years ended December 31, 1993, 1992 and 1991 Report of Independent Auditors 84\nIII Condensed Financial Information of Registrant 85-88 V Facilities 89 VI Accumulated Depreciation of Facilities 90 VIII Reserves 91 IX Short-Term Borrowings 92 X Supplementary Income Statement Information 93\nAll other schedules have been omitted because the information is not applicable or is not material or because the information required is included in the financial statements or the notes thereto.\nReport of Independent Auditors\nStockholders and Board of Directors ASI Holding Corporation\nWe have audited the consolidated financial statements of ASI Holding Corporation as of December 31, 1993 and 1992, and for each of the three years in the period ended December 31, 1993, and have issued our report thereon dated March 14, 1994 (included elsewhere in this Annual Report on Form-10K). Our audits also included the consolidated schedules listed in Item 14(a)2. These schedules are the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits.\nIn our opinion, the consolidated 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 required to be stated therein.\n\/s\/ Ernst & Young Ernst & Young\nMarch 14, 1994\nSCHEDULE III - CONDENSED FINANCIAL INFORMATION OF REGISTRANT\nSTATEMENT OF CASH FLOWS (Parent Company Separately) (Dollars in thousands)\nYear Ended Year Ended December 31, December 31, 1993 1992\nCASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (208,567) $ (57,238)\nAdjustments to reconcile net loss to net cash provided by operating activities: Equity in net loss of subsidiary 208,567 57,238\n- ---------------------------------------------------------------------\nNet cash flow from operating activities 0 0\n- ---------------------------------------------------------------------\nCASH PROVIDED (USED) BY INVESTING ACTIVITIES: Investment in subsidiary (4,585) (3,103) Purchase of common stock by subsidiary 12,194 10,950\n- ---------------------------------------------------------------------\nNet cash provided by investing activities 7,609 7,847\n- ---------------------------------------------------------------------\nCASH PROVIDED (USED) BY FINANCING ACTIVITIES: Issuance of common stock 4,585 3,103 Common stock repurchased (12,194) (10,950) Repayments on subscriptions receivable 482 653 Repayment of loan from subsidiary (482) (653) - ---------------------------------------------------------------------\nNet cash used by financing activities (7,609) (7,847)\n- ---------------------------------------------------------------------\nNet change in cash and cash equivalents $ 0 $ 0 =====================================================================\nSee notes to the financial statements.\nSCHEDULE III - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (cont'd) NOTES TO FINANCIAL STATEMENTS (Parent Company Separately)\n(A) The notes to the consolidated financial statements of ASI Holding Corporation (the \"Parent Company\" or \"Holding\") are an integral part of these condensed financial statements.\n(B) Holding was organized by Kelso & Company, L.P., a private merchant banking firm, to participate in the acquisition of American Standard Inc. American Standard Inc. is now a wholly owned subsidiary of Holding. Holding has no other investments or operations.\nASI HOLDING CORPORATION\nINDEX TO EXHIBITS\n(Item 14(a)3 - Exhibits Required by Item 601 of Regulation S-K and Additional Exhibits)\n(The File Number of ASI Holding Corporation, the Registrant, and for all Exhibits incorporated by reference is 33-23070, except those Exhibits incorporated by reference in filings made by American Standard Inc. (the \"Company\") whose File Number is 1-470)\n(3) (i) Certificate of Incorporation of ASI Holding Corporation (\"Holding\"); previously filed as Exhibit 3.1 in Registration Statement No. 33-23070 under the Securities Act of 1933, as amended, and herein incorporated by reference.\n(ii) Amendment to Certificate of Incorporation amending Article FOURTH thereof; previously filed as Exhibit (3)(ii) in Holding's Form 10-K for the fiscal year ended December 31, 1991, and herein incorporated by reference.\n(iii) By-laws of Holding; previously filed as Exhibit 3.2 in Registration Statement No. 33-23070 under the Securities Act of 1933, as amended, and herein incorporated by reference.\n(4) (i) Indenture, dated as of November 1, 1986, between the Company and Manufacturers Hanover Trust Company, Trustee, including the form of 9-1\/4% Sinking Fund Debenture Due 2016 issued pursuant thereto on December 9, 1986, in the aggregate principal amount of $150,000,000; previously filed as Exhibit 4(iii) in the Company's Form l0-K for the fiscal year ended December 31, 1986, and herein incorporated by reference.\n(ii) Instrument of Resignation, Appointment and Acceptance, dated as of April 25, 1988 among the Company, Manufacturers Hanover Trust Company (the \"Resigning Trustee\") and Wilmington Trust Company (the \"Successor Trustee\"), relating to resignation of the Resigning Trustee and appointment of the Successor Trustee, under the Indenture referred to in Exhibit (4)(i) above; previously filed as Exhibit (4)(ii) in Registration Statement No. 33-64450 of the Company under the Securities Act of 1933, as amended, and herein incorporated by reference.\nINDEX TO EXHIBITS - (Continued)\n(iii) Form of Indenture, dated as of July 1, 1988, between the Company and Shawmut Bank Connecticut, National Association (formerly known as The Connecticut National Bank), as Trustee, relating to the Company's 14-1\/4% Subordinated Discount Debentures due 2003; previously filed as Exhibit 4.3 in Amendment No. 2 to Registration Statement No. 33-22126 of the Company under the Securities Act of 1933, as amended, and herein incorporated by reference.\n(iv) Form of Debenture evidencing the 14-1\/4% Subordinated Discount Debentures due 2003 included as Exhibit A to the Form of Indenture referred to in (4)(iii) above.\n(v) Indenture, dated as of May 15, 1992, between the Company and First Trust National Association, Trustee, relating to the Company's 10-7\/8% Senior Notes due 1999, in the aggregate principal amount of $150,000,000; copy of Indenture previously filed as Exhibit (4)(i) by the Company in its Form 10-Q for the quarter ended June 30, 1992, and herein incorporated by reference.\n(vi) Form of 10-7\/8% Senior Notes due 1999 included as Exhibit A to the Indenture described in (4)(v) above.\n(vii) Indenture dated as of May 15, 1992, between the Company and First Trust National Association, Trustee, relating to the Company's 11-3\/8% Senior Debentures due 2004, in the aggregate principal amount of $250,000,000; copy of Indenture previously filed as Exhibit (4)(iii) by the Company in its Form 10-Q for the quarter ended June 30, 1992, and herein incorporated by reference.\n(viii) Form of 11-3\/8% Senior Debentures due 2004 included as Exhibit A to the Indenture described in (4)(vii) above.\n(ix) Form of Indenture, dated as of June 1, 1993, between the Company and United States Trust Company of New York, as Trustee, relating to the Company's 9-7\/8% Senior Subordinated Notes Due 2001; previously filed as Exhibit (4)(xxxi) in Amendment No. 1 to Registration Statement No. 33-61130 of the Company under the Securities Act of 1933, as amended, and herein incorporated by reference.\n(x) Form of Note evidencing the 9-7\/8% Senior Subordinated Notes Due 2001 included as Exhibit A to the Form of Indenture referred to in (4)(ix) above.\nINDEX TO EXHIBITS - (Continued)\n(xi) Form of Indenture, dated as of June 1, 1993, between the Company and United States Trust Company of New York, as Trustee, relating to the Company's 10-1\/2% Senior Subordinated Discount Debentures Due 2005; previously filed as Exhibit (4)(xxxiii) in Amendment No. 1 to Registration Statement No. 33-61130 of the Company under the Securities Act of 1933, as amended, and herein incorporated by reference.\n(xii) Form of Debenture evidencing the 10-1\/2% Senior Subordinated Discount Debentures Due 2005 included as Exhibit A to the Form of Indenture referred to in (4)(xi) above.\n(xiii) Form of Indenture, dated as of October 25, 1990, as amended and restated as of June 15, 1993, between the Company and Shawmut Bank, N.A., as Trustee, relating to Company's 12-3\/4% Junior Subordinated Debentures due 2003; previously filed as Exhibit (4)(xx) in Amendment No. 2 to Registration Statement No. 33-64450 of the Company under the Securities Act of 1933, as amended, and herein incorporated by reference.\n(xiv) Form of Debenture evidencing the 12-3\/4% Junior Subordinated Debentures Due 2003 included as Exhibit A to the Form of Indenture referred to in (4)(xiii) above.\n(xv) Assignment and Amendment Agreement, dated as of June 1, 1993, among the Company, Holding, certain subsidiaries of the Company, Bankers Trust Company, as agent under the 1988 Credit Agreement, the financial institutions named as Lenders in the 1988 Credit Agreement and certain additional Lenders and Chemical Bank, as Administrative Agent and Arranger; previously filed as Exhibit (4)(xiii) in Amendment No. 1 to Registration Statement No. 33-64450 of the Company under the Securities Act of 1933, as amended, and herein incorporated by reference.\n(xvi) Credit Agreement, dated as of June 1, 1993, among the Company, Holding, certain subsidiaries of the Company and the lending institutions listed therein, Chemical Bank, as Administrative Agent and Arranger; Bankers Trust Company, The Bank of Nova Scotia, The Chase Manhattan Bank, N.A., Deutsche Bank AG, The Long-Term Credit Bank of Japan, Ltd., New York Branch, and NationsBank of North Carolina, N.A., as Managing Agents, and Banque Paribas, Citibank, N.A., and Compagnie Financiere de CIC et de l'Union Europeenne, New York Branch, as Co-Agents; previously filed as Exhibit (4)(xiv) in Amendment No. 1 to Registration Statement No. 33-64450 of the Company under the Securities Act of 1933, as amended, and herein incorporated by reference.\nINDEX TO EXHIBITS - (Continued)\n(xvii) First Amendment, Consent and Waiver, dated as of February 10, 1994, to the Credit Agreement referred to in (4)(xvi) above; copy of Amendment is being filed as Exhibit (4)(xvii) by the Company in its Form 10-K for the year ended December 31, 1993, concurrently with the filing of Holding's Form 10-K for the same year and herein incorporated by reference.\n(xviii) Stockholders Agreement, dated as of July 7, 1988, as amended as of August 1, 1988, among Holding, Kelso ASI Partners, L.P., and the Management Stockholders named therein; previously filed as Exhibit 4.19 in Amendment No. 2 to the Registration Statement No. 33-23070 of Holding under the Securities Act of 1933, as amended, and herein incorporated by reference.\n(xix) Amendment to Section 2.1 of the Stockholders Agreement referred to in paragraph (4)(xviii) above, effective as of January 1, 1991; previously filed as Exhibit (4)(xxvii) by Holding in its Form 10-K for the fiscal year ended December 31, 1992, and herein incorporated by reference.\n(xx) Supplement and Amendment dated as of September 4, 1991 to the Stockholders Agreement dated as of July 7, 1988, as amended, referred to in paragraph (4)(xviii) above; previously filed as Exhibit (4)(ii) in Holding's Form l0-Q for the quarter ended September 30, 1991, and herein incorporated by reference.\n(xxi) Amended Paragraph 6.1 of the Stockholders Agreement referred to in paragraph (4)(xviii) above, effective as of September 2, 1993.\n(xxii) Revised Schedule of Priorities, effective as of September 5, 1991, as adopted by the Board of Directors of Holding pursuant to the Stockholders Agreement dated as of July 7, 1988, as amended, referred to in paragraph (4)(xviii) above; previously filed as Exhibit (4)(iii) in Holding's Form l0-Q for the quarter ended September 30, 1991, and herein incorporated by reference.\n(10) (i) Agreement and Plan of Merger, dated as of March 16, 1988, among the Company, ASI Acquisition Company and Holding and Offer Letter, dated March 16, 1988, between the Company and Kelso & Company, L.P.; previously filed as Exhibit 2 to the Company's Schedule 14D-9 filed March 21, 1988, in connection with the offer for all the shares of the Company's Common Stock by a corporation formed by Kelso & Company, L.P., and herein incorporated by reference.\nINDEX TO EXHIBITS - (Continued)\n(ii) Amendment, dated June 3, 1988 to Agreement and Plan of Merger referred to in l0(i) above; previously filed as Exhibit 2.50 in Amendment No. 1 to the Registration Statement No. 33-22126 of the Company under the Securities Act of 1933, as amended, and herein incorporated by reference.\n(iii) American Standard Inc. Long-Term Incentive Compensation Plan, as amended through February 6, 1992; previously filed as Exhibit (l0)(iv) by the Company in its Form l0-K for the year ended December 31, 1992, and herein incorporated by reference.\n(iv) Trust Agreement for American Standard Inc. Long-Term Incentive Compensation Plan; copy of Trust Agreement being filed as Exhibit (10)(iv) by the Company in its Form 10-K for the year ended December 31, 1993, concurrently with the filing of Holding's Form 10-K for the same year, and herein incorporated by reference.\n(v) American Standard Inc. Annual Incentive Plan; previously filed as Exhibit (l0)(vii) by the Company in its Form l0-K for the fiscal year ended December 31, 1988, and is herein incorporated by reference.\n(vi) American Standard Inc. Management Partners' Bonus Plan effective as of July 7, 1988; previously filed as Exhibit (l0)(i) in the Company's Form l0-Q for the quarter ended September 30, 1988, and herein incorporated by reference; amendments to Plan adopted on June 7, 1990, previously filed as Exhibit (4)(ii) in the Company's Form l0-Q for the quarter ended June 30, 1990, and herein incorporated by reference.\n(vii) American Standard Inc. Executive Supplemental Retirement Benefit Program, as restated to include all amendments through December 31, 1993; copy of restated program is being filed as Exhibit (10)(vii) by the Company in its Form 10-K for the year ended December 31, 1993, concurrently with the filing of Holding's Form 10-K for the same year and herein incorporated by reference.\n(viii) Stock Purchase Agreement, dated April 27, 1988, between ASI Acquisition Company and General Electric Capital Corporation (without schedules); previously filed as Exhibit 2.4 in Amended Registration Statement No. 33-22126 of the Company under the Securities Act of 1933, and is herein incorporated by reference.\nINDEX TO EXHIBITS - (Continued)\n(ix) Amendment, dated June 3, 1988, to Stock Purchase Agreement referred to in (l0)(viii) above; previously filed as Exhibit 2.6 in Amendment No. 1 in Registration Statement No. 33-22126 of the Company under the Securities Act of 1933, as amended, and herein incorporated by reference.\n(x) Form of Composite American-Standard Employee Stock Ownership Plan incorporating amendments through December 3, 1992; previously filed as Exhibit (10)(x) in Registration Statement No. 33-61130 of the Company under the Securities Act of 1933, as amended, and herein incorporated by reference.\n(xi) American-Standard Employee Stock Ownership Trust Agreement, dated as of December 1, 1991, between ASI Holding Corporation and Fidelity Management Trust Company (as successor to Citizens & Southern Trust Company (Georgia), N.A.), as trustee; previously filed as Exhibit (l0)(xiv) by the Company in its Form l0-K for the year ended December 31, 1991, and herein incorporated by reference.\n(xii) Consulting Agreement made July 1, 1988, with Kelso & Company, L.P. concerning general management and financial consulting services to the Company; previously filed as Exhibit (l0)(xviii) in the Company's Form l0-K for the fiscal year ended December 31, 1988, and herein incorporated by reference.\n(xiii) American Standard Inc. Supplemental Compensation Plan for Outside Directors as amended through September 1993; copy of Plan is being filed as Exhibit (10)(xv) by the Company in its Form l0-K for the year ended December 31, 1993 concurrently with the filing of Holding's 10-K for the same year and herein incorporated by reference.\n(xiv) ASI Holding Corporation 1989 Stock Purchase Loan Program; previously filed as Exhibit (l0)(i) in Holding's Form l0-Q for the quarter ended September 30, 1989, and herein incorporated by reference.\n(xv) Corporate Officers Severance Plan adopted by the Company in December, 1990, effective April 27, 1991; previously filed as Exhibit (l0)(xix) by the Company in its Form l0-K for the year ended December 31, 1990, and said Plan is herein incorporated by reference.\nINDEX TO EXHIBITS - (Continued)\n(xvi) Estate Preservation Plan, adopted by the Company in December, 1990; previously filed as Exhibit (l0)(xx) by the Company in its Form l0-K for the year ended December 31, 1990, and said Plan is herein incorporated by reference.\n(xvii) Amendment adopted in March 1993 to Estate Preservation Plan referred to in (10)(xvi) above; copy of Amendment is being filed as Exhibit (10)(xix) by the Company in its Form 10-K for the year ended December 31, 1993 concurrently with the filing of Holding's Form 10-K for the same year and herein incorporated by reference.\n(xviii) Summary of terms of Unfunded Deferred Compensation Plan adopted December 2, 1993; copy of Summary is being filed as Exhibit (10)(xviii) by the Company in its Form 10-K for the year ended December 31, 1993 concurrently with the filing of Holding's Form 10-K for the same year and herein incorporated by reference.\n(xix) Retirement\/Consulting Agreement, dated December 28, 1993, between H. Thompson Smith and the Company; copy of Agreement is being filed as Exhibit (10)(xix) by Company in its Form 10-K for the year ended December 31, 1993 concurrently with the filing of Holding's Form 10-K for the same year and herein incorporated by reference.\n(21) Listing of Holding's subsidiaries.","section_6":"","section_7":"ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS\nResults of Operations\nAs a result of the Acquisition, results of operations include purchase accounting adjustments and reflect a highly leveraged capital structure. Sales Year Ended December 31, 1993 1992 1991 (Dollars in millions) Air Conditioning Products(a) $2,100 $ 1,892 $ 1,836 Plumbing Products 1,167 1,170 1,018 Transportation Products 563 730 741 Sales $3,830 $ 3,792 $ 3,595 ====== ======= =======\nOperating Income (Loss) Before Income Taxes, Extraordinary Loss, and Cumulative Effects of Changes in Accounting Methods\nYear Ended December 31, 1993 1992 1991 (Dollars in millions) Air Conditioning Products(a) $133 $ 104 $ 55 Plumbing Products 108 108 66 Transportation Products 41 88 121 Operating income 282 300 242\nInterest expense (278) (289) (286) Corporate items(b) (85) (63) (44) Loss before income taxes, extraordinary loss, and cumulative effects of changes in accounting methods $(81) $ (52) $ (88) ==== ===== =====\n(a) For 1991 the amounts presented for Air Conditioning Products include the following amounts for Tyler Refrigeration (which was sold on September 30, 1991): sales of $99 million and operating loss of $18 million (including a $22 million loss on the sale).\n(b) Corporate items include administrative and general expenses, accretion charges on postretirement benefit liabilities, minority interest, foreign exchange transaction gains and losses, and miscellaneous income and expense.\nThe following section summarizes the Company's consolidated results of operations and then discusses the results of its three operating segments. The Company's businesses are cyclical. Air Conditioning Products and Plumbing Products are particularly affected by the level of residential and commercial building activity.\nThe following table presents a summary of statistics on U.S. non-residential construction activity and housing starts for the years 1989 through 1993.\nU.S. Non- Residential Contract Awards U.S. Housing (Millions % Change Starts % Change of square Year (Thousands of Year feet)(a) to Year units)(b) to Year 1989 1,322 - 1% 1,376 - 8% 1990 1,155 -13% 1,193 -13% 1991 953 -17% 1,015 -15% 1992 903 - 5% 1,200 +18% 1993 (c) 930 + 3% 1,290 + 7%\n(a) Source: F.W. Dodge Division, McGraw Hill, Inc.\n(b) Source: U.S. Department of Commerce, Bureau of Census.\n(c) Preliminary data.\nThe market for replacement sales and servicing of air conditioning and plumbing products, which accounts for a substantial portion of sales for Air Conditioning Products and Plumbing Products, is less cyclical and sometimes countercyclical.\nThe following table presents a summary of statistics on unit production of trucks, buses, and trailers in excess of six tons in Western Europe for the years 1989 through 1993 (units in thousands).\nWestern Europe % Change Western Europe % Change Truck and Bus Year Trailer Year Production(a) to Year Production(a) to Year\n1989 376 4% 125 9% 1990 343 -9% 128 2% 1991 353 3% 139 9% 1992 314 -11% 115 -17% 1993 223 -29% 88 -23%\n(a) Principal sources: Verband der Deutschen Automobilindustrie (Germany); Society of Motor Manufacturers and Traders (United Kingdom); and Chambre Syndicate des Constructeurs Automobiles (France).\n1993 Compared with 1992\nU.S. housing starts increased by 7% in 1993 from the 1992 level, which was up 18% over 1991 after four consecutive years of decline. U.S. non-residential contract awards increased by 3% in 1993 after five years of decline. The 1993 improvement in housing starts came in the second half of the year with third- and fourth-quarter starts up 10% and 12%, respectively, over the preceding quarter. The gain in non-residential awards occurred over the last nine months of 1993. Western European truck and bus production declined 29% in 1993 after an 11% decline in 1992. However, the rate of decline in the truck market slowed in the fourth quarter of 1993.\nConsolidated sales for 1993 were $3.83 billion, an increase of 1% (6% excluding the unfavorable effects of foreign exchange) over the $3.79 billion for 1992. A sales increase of 11% for Air Conditioning Products was partly offset by a sales decline for Transportation Products of 23% (16% excluding the unfavorable effects of foreign exchange). Sales for Plumbing Products were flat (but up by 9% excluding the effects of foreign exchange).\nOperating income for 1993 was $282 million, a decrease of $18 million, or 6% (but an increase of less than 1% excluding the effects of foreign exchange), from $300 million in 1992. The increase in operating income of 28% for Air Conditioning Products was more than offset by a 53% decrease in operating income for Transportation Products. Plumbing Products' operating income was flat (but increased 15% excluding the effects of foreign exchange). The gain for Air Conditioning Products was the result of higher volume, increased sales of higher-margin products, the benefits of manufacturing improvements, and the effects of restructuring and cost-containment efforts undertaken in 1991 and 1992, offset partly by the costs of further restructuring in 1993. For Plumbing Products the effects of increased volume for the Far East Group were offset partly by lower margins for the U.S. group and lower volumes and unfavorable foreign exchange effects for the European group. Transportation Products' operating income decreased primarily as a result of lower volumes due to reduced demand in depressed markets in Europe, offset partly by the effects of improvements in manufacturing efficiency.\nAir Conditioning Products Segment\nYear Ended December 31, 1993 1992 1991 (Dollars in millions)\nSales: Domestic portion $1,786 $1,572 $1,453 Foreign portion 314 320 284 Subtotal 2,100 1,892 1,737 Tyler Refrigeration - - 99 Total $2,100 $1,892 $1,836 ====== ====== ======\nOperating income (loss): Domestic portion $ 148 $ 112 $ 58 Foreign portion (15) (8) 15 Subtotal 133 104 73 Tyler Refrigeration - - (18)(a) Total $ 133 $ 104 $ 55 ====== ====== ======\nAssets $1,167 $1,156 $1,174 Goodwill and purchase accounting adjustments included in assets 372 398 417 Capital expenditures 38 33 46(b) Depreciation and amortization 53 55 56(c)\n(a) Includes $22 million loss on the sale of Tyler Refrigeration.\n(b) Includes capital expenditures of Tyler Refrigeration of $1 million.\n(c) Includes depreciation and amortization of Tyler Refrigeration of $3 million.\nThe domestic portion of Air Conditioning Products is composed of the Unitary Products Group, the Commercial Systems Group (excluding Canada), and exports from the United States by the International Group. The foreign portion consists of the foreign-based operations of the International Group and the Canadian operations of the Commercial Systems Group.\nSales and operating income of Air Conditioning Products both increased in 1993 despite the continuing recession in U.S. and Canadian commercial new construction and only moderate increase in residential new construction in the U.S. and despite the economic decline in Europe. Sales of Air Conditioning Products, which accounted for approximately 55% of the Company's 1993 sales, increased by 11% (with little effect from foreign exchange) to $2,100 million in 1993 from $1,892 million in 1992. There was a significant sales increase for each of the three operating groups.\nOperating income of Air Conditioning Products increased year to year by 28% (with little effect from foreign exchange) to a record high of $133 million in 1993 from $104 million in 1992. The increase was attributable to gains achieved by all three groups.\nUnitary Products Group\nIn 1993 sales of the Unitary Products Group, which accounted for approximately 42% of Air Conditioning Products sales, increased by 15% over the 1992 sales level. Residential markets were up 15%, as a result of an unusually hot summer in the northern United States and a 7% increase in housing starts. Sales of residential products increased by 18% year over year, principally because of higher volumes driven by the improved market, increased furnace sales in the replacement market, and a shift in the market to more efficient products, offset partly by the continuation from 1992 of price degradation due to competitive pressures. Commercial markets for unitary products were up 9% overall from the 1992 markets, as the commercial replacement market strengthened further. New-construction activity continued to struggle, however. Sales of commercial unitary products increased by 10% overall, primarily as a result of higher volume (driven by the strong replacement market for both light and large commercial products); a shift to higher-priced, higher-tonnage products; and a gain in market share for light commercial products due to the success of the large Voyager products (packaged rooftop air conditioners). As a result of these factors, together with product cost improvements, improved labor productivity, and the benefits of organizational restructuring which reduced the salaried workforce in 1992, the operating income for Unitary Products in 1993 increased by 43% year over year. This improvement was achieved even though 1993 included the initial start-up costs of the new national distribution center in St. Louis, Missouri, and higher advertising costs.\nUnitary Products' sales increased through the success of new and redesigned products introduced recently and improved distribution channels. Commercial products that were introduced included the 20-to-25-ton Voyager products in 1992, which more than doubled market share in that size range; commercial microprocessor-controlled products; a line of convertible air handlers; and rooftop and air cooled chiller products using more efficient scroll compressors. Residential products introduced included the American-Standard brand outdoor units and new lines of luxury and conventional retail residential products.\nCommercial Systems Group\nSales of the Commercial Systems Group, which accounted for approximately 37% of Air Conditioning Products' sales, increased 10%, primarily on volume increases for most product lines, especially air handling systems and water chillers (principally due to improved replacement markets and increased market share), and increased revenue from Company-owned sales offices (acquisitions and volume growth). These gains were partly offset by lower volume in Canada, which continues to be adversely affected by recession. The non-residential new-construction market increased 3% in the United States in 1993, following decreases of 5% in 1992 and 17% in 1991. The non-residential replacement market was up by 6% over 1992.\nOperating income for Commercial Systems increased 12% in 1993 over the recession-affected amount of 1992. The increase was primarily the result of volume gains, improvements in manufacturing efficiency, operating expense reductions, and the benefits of restructuring actions taken in 1992. The effects of these factors were partly offset by slightly lower prices, increases in material, labor, and benefit costs, the costs of additional restructuring actions in 1993, and a larger loss in the weak Canadian market.\nProduct development emphasis for Commercial Systems in 1993 and 1992 was on new compressor, heat transfer and microelectronic control technology; adaptation of products to refrigerants that comply with recent government regulations; energy-efficient products; products for the aftermarket and replacement market (which exceeded the new-construction market in both 1993 and 1992); and products redesigned to improve manufacturing productivity. This strategy benefited operations in 1993 and 1992, and the Company expects that this product development emphasis will result in greater sales over the next several years.\nInternational Group\nSales of Air Conditioning Products' International Group, which accounted for approximately 21% of Air Conditioning Products' 1993 sales, increased 7% from those of 1992 (10% excluding the unfavorable effect of foreign exchange). Most of the gain was from higher volume in the Far East (especially Hong Kong, Taiwan, and export sales from the U.S.) resulting from expanded markets and increased penetration; higher export sales from the U.S. to the Middle East (markets were significantly stronger) and Latin America (improved penetration in a market that was up 20%); and higher volumes in Mexico. These gains were partly offset by lower sales in Europe (lower prices and volumes in a declining market). Markets were down in all European countries except the U.K., but the effect was partly offset by increased revenues from service companies acquired in 1992 and prior years. Market growth in the Far East was 6% overall, led by the PRC market, which was up by 21%. The sales growth in Hong Kong was driven by the very strong market in the PRC. Markets in Thailand also grew, and the Latin American market grew by 20%.\nOperating income for the International Group increased by approximately 39% in 1993. The increase was primarily the result of higher export sales from the U.S. to the Middle East and Far East, offset partly by a larger operating loss in Europe primarily because of the weak markets and lower margins, costs related to restructuring in response to the lower markets, and the unfavorable effects of lower volume on factory performance. Overall, income from the Far East and Latin America was essentially unchanged from the prior year, as volume gains were offset by increased costs related to expansion of distribution channels and joint ventures and development of new and improved products to support present and future growth.\nEnvironmental Matters\nFor a discussion of environmental matters see \"Business -- Regulations and Environmental Matters.\"\nBacklog\nThe worldwide backlog for Air Conditioning Products at the end of 1993 was $407 million, up 13% from 1992, excluding the effects of foreign exchange. The backlog increased as a result of increased volume for the Commercial Systems Group, market penetration and improved distribution channels in the Middle East and Far East, and sales growth for commercial Unitary Products.\nPlumbing Products Segment\nYear Ended December 31, 1993 1992 1991 (Dollars in millions)\nSales: Foreign portion $ 865 $ 885 $ 783 Domestic portion 302 285 235 Total $1,167 $1,170 $1,018 ====== ====== ====== Operating income (loss): Foreign portion $ 131 $ 124 $ 93 Domestic portion (23) (16) (27) Total $ 108 $ 108 $ 66 ====== ====== ======\nAssets $ 960 $1,002 $1,069 Goodwill and purchase accounting adjustments included in assets 376 392 447 Capital expenditures 46 48 40 Depreciation and amortization 49 49 48\nThe foreign portion of Plumbing Products is composed of the European Plumbing Products Group, the Americas International Group, and the Far East Group. The domestic portion of sales and operating results is generated primarily by the U.S. Plumbing Products Group and by export sales from the U.S.\nSales of Plumbing Products in 1993, at $1,167 million, which accounted for approximately 30% of the Company's 1993 sales, were at essentially the same level as the $1,170 million of sales in 1992 (but increased by 9% excluding the unfavorable effects of foreign exchange). Sales increases of 42% for the Far East Group (46% excluding foreign exchange), 9% for the Americas International Group (14% excluding foreign exchange), and 6% for the U.S. Plumbing Products Group were offset partly by a sales decrease of 10% for the European Plumbing Products Group (which had a 4% increase excluding the effects of foreign exchange).\nIn 1993 operating income of Plumbing Products was $108 million, the same amount as in 1992, but excluding the unfavorable effects of foreign exchange operating income increased by 15%. The increase (on an exchange-adjusted basis) was attributable primarily to increased profitability for the Far East Group and for the Americas International Group, offset partly by a decline for the U.S. group.\nEuropean Plumbing Products Group\nSales of the European group, which accounted for approximately 51% of Plumbing Products' sales for 1993, decreased 10% in 1993 from 1992 but increased by 4% excluding the unfavorable effects of foreign exchange. The exchange-adjusted gain resulted from price increases, especially in Italy, Germany, the U.K., and Greece, offset partly by lower volume in most countries because of depressed markets. In Italy sales were up with price increases for most product lines, offset partly by lower volume and a less favorable product mix. The German market was stable in total, as price gains were offset by volume and mix declines. Greece, which had been in recession for three years, recovered somewhat in 1993. The European group's strength has been sales in the replacement market, which has more than made up for the effects of poor new-construction markets.\nOperating income for the European group decreased 7% but increased 10% excluding the effects of foreign exchange. This increase occurred primarily because of the price gains and cost reductions resulting from restructuring and efficiency improvements in the U.K., France, Italy, and Germany. Partly offsetting those favorable effects were the effects of lower volumes and the unfavorable effect on margins caused by the decline in value of many European currencies agains the Deutschemark. The increased cost of fittings purchased from Germany could not be completely recovered through sales price increases in most of the operations in other countries.\nU.S. Plumbing Products Group\nSales of the U.S. group, which accounted for approximately 26% of total 1993 Plumbing Products sales, increased 6% in 1993. During 1993 the U.S. building industry continued to be adversely affected by the low level of new construction, although non-residential construction increased 3% from 1992 and new residential construction continued to recover from the lowest levels since the mid-1940's (up by 7% in 1993 and 18% in 1992 but\nstill below pre-1990 levels). A basic shift from wholesale distribution channels to retail channels has been developing over the last few years, a trend the Company believes will continue and will be beneficial to the Company because of strong product and brand-name recognition. Retail markets now account for 20% of the total sales of the U.S. group. The growth of sales for the U.S. group was largely the result of increased export sales from the U.S. and to a lesser extent price increases on certain products, a more favorable sales mix, and a small increase in the growing retail channel business. The overall gain in the retail business was small because significant volume gains due to an expanding customer base were partly offset by the loss of an important customer.\nThe operating loss for the U.S. group in 1993 was greater than that of the prior year. Despite higher sales, operating results were poorer primarily because of lower margins on both domestic and export sales, increased advertising costs and other expenses associated with expansion of the retail distribution channel, costs related to start-up and expansion of the low-water-volume toilet line (now mandated for new construction), and factory performance problems caused in part by the effects of fluctuating volumes. In addition, costs were incurred in business system re-engineeering activities intended to improve customer service.\nAmericas International and Far East Groups\nCombined sales of the Americas International and Far East Groups, which accounted for approximately 23% of total Plumbing Products sales, increased 21% in 1993 (26% excluding the effects of foreign exchange). The sales gain was due primarily to the consolidation of Incesa (a previously unconsolidated group of Central American joint ventures) effective January 1, 1993, as a result of the purchase of additional shares of stock, and to higher volume and prices in Thailand, the PRC, the Philippines, and Brazil, offset partly by decreases in sales in Mexico, Canada, and Korea.\nCombined operating income of the Americas International and Far East Groups in 1993 increased 72% over the 1992 level. Gains were realized in all operations except Mexican chinaware operations, which were adversely affected by poor economic conditions and the uncertainty related to the North American Free Trade Agreement. The increase was primarily from higher prices and volumes in Brazil, Thailand, and the PRC the consolidation of Incesa, and a smaller loss for Mexican fittings operations.\nEnvironmental Matters\nFor a discussion of environmental matters see \"ITEM 1. BUSINESS -- Regulations and Environmental Matters.\"\nBacklog\nPlumbing Products' year-end 1993 backlog of $143 million was down 9% from 1992, excluding foreign exchange effects. The decrease resulted from a significant drop for European Plumbing Products (particularly Italy because of economic uncertainty, tempered somewhat by increases for England and Germany), and a drop in backlog for export sales from the U.S., partly offset by increases in the Far East (primarily Thailand).\nTransportation Products Segment\nYear Ended December 31, 1993 1992 1991 (Dollars in millions)\nSales $ 563 $730 $741 Operating income 41 88 121 Assets 652 722 828 Goodwill and purchase accounting adjustments included in assets 422 458 510 Capital expenditures 14 27 24 Depreciation and amortization 35 37 34\nSales of Transportation Products, which accounted for 15% of the Company's 1993 sales, were $563 million, down 23% from $730 million in 1992 (16% excluding the effects of foreign exchange). The sales decrease was due primarily to a volume decline in Germany as a result of a 29% decrease in Western European truck and bus production, led by a 34% decline in Germany, and a 23% decrease in Western European trailer production. Volumes were also down in all other European countries in which Transportation Products has operations, although at the end of 1993 sales and order trends were upward. Volume in Brazil was slightly higher. Original equipment sales volume in Europe was down 22%, and aftermarket business was down 10%. These declines affected both conventional and electronic products.\nOperating income for Transportation Products in 1993 decreased 53% (50% excluding foreign exchange effects) to $41 million from $88 million in 1992, principally because of the lower sales and production volume and the inability to pass on material and labor cost increases in a very competitive, declining market. In response to reduced production levels, plant employment was reduced by 15%, the costs of which further depressed 1993 operating income. Those effects were partly offset by the favorable effects of cost improvements in manufacturing from Demand Flow implementa- tion and reduced operating expenses.\nDespite the market downturn, significant progress was made during 1993 in obtaining market acceptance of electronically controlled air suspension systems for commercial vehicles and for antilock braking systems on trailers.\nBacklog\nTransportation Products' year-end 1993 order backlog of $185 million was 2% lower than the 1992 year-end backlog, excluding the effects of foreign exchange, as a result of the poor market conditions.\nFinancial Review\n1993 Compared with 1992\nThe Company's financing and corporate costs were $363 million and $352 million in 1993 and 1992, respectively. The principal causes of the increase were effects of year-to-year changes in foreign exchange transaction gains and losses, higher minority interest, lower equity income, higher accretion expense on postretirement benefits, and lower miscellaneous income. Interest expense, which accounted for most of these costs, decreased primarily because of lower overall interest rates on new debt issued as part of the Refinancing (described below), partly offset by additional interest expense as a result of the exchange of the 12-3\/4% Exchangeable Preferred Stock for the 12-3\/4% Junior Subordinated Debentures.\nThe tax provision for 1993 was $36 million despite a pre-tax loss of $81 million, whereas in 1992 the tax provision was $5 million on a pre-tax loss from continuing operations of $52 million. The 1993 provision reflected taxes payable on profitable foreign operations and was higher than in 1992 primarily because no tax benefits were available on domestic losses. The unusual relationship between the pre-tax losses and the tax provision is explained by the nondeductibility for tax purposes of the amortization of goodwill and other purchase accounting adjustments and the share allocations made by the Company's ESOP as well as by tax rate differences and withholding taxes on foreign earnings.\nAs a result of the Refinancing in 1993 there was an extraordinary charge of $92 million related to the debt retired (including call premiums, the write-off of deferred debt issuance costs, and loss on cancellation of foreign currency swap contracts) on which there was no tax benefit.\nLiquidity and Capital Resources\nAs a result of the Acquisition the Company's capital structure became highly leveraged. Net cash flow from operations, after cash interest expense of $195 million, was $201 million for the year ended December 31, 1993. Utilizing this cash flow and cash on hand at December 31, 1992, the Company devoted $98 million to capital expenditures, including $8 million of investments in affiliated companies, and repaid $50 million of term loans.\nIn July 1993 the Company completed a refinancing (the \"Refinancing\") that included (a) the issuance of $200 million principal amount of 9-7\/8% Senior Subordinated Notes Due 2001; (b) the issuance of approximately $751 million principal amount of 10-1\/2% Senior Subordinated Discount Debentures Due 2005, which yielded proceeds of approximately $450 million; (c) the amendment and restatement of the Company's 1988 Credit Agreement (the \"1988 Credit Agreement\" and as so amended and restated, the \"Credit Agreement\") to establish a $1 billion secured, multi-currency, multi-borrower credit facility; and (d) the application of the proceeds of\nsuch issuances and such borrowings as follows: (i) the redemption on July 1, 1993, of all of the outstanding 12-7\/8% Senior Subordinated Debentures Due 2000 at a redemption price of 104.83% ($571.3 million), (ii) the redemption on July 2, 1993, of a majority of the outstanding 14-1\/4% Subordinated Discount Debentures Due 2003 at a redemption price of 105% ($389.5 million), (iii) the refunding of bank borrowings ($405 million of term loans and $77 million of other bank debt including revolving credit debt), (iv) the refunding of letters of credit ($58 million), and (v) payment of related fees and expenses.\nThe Credit Agreement provided to American Standard Inc. and certain subsidiaries (the \"Borrowers\") a $1 billion facility as follows: (a) a $250 million multi-currency revolving credit facility (the \"Revolving Credit Facility\") available to all Borrowers, which expires in 2000; (b) a $225 million multi-currency periodic access facility (the \"Periodic Access Facility\") available to all Borrowers, which expires in 2000; and (c) three term loan facilities (the \"Term Loans\") consisting of a $225 million U.S. dollar facility available to American Standard Inc., which expires in 2000; a $200 million Deutschemark facility available to a German subsidiary, which expires in 1997; and a $100 million U.S. dollar facility available to all Borrowers, which expires in 1999. In August 1993 the Company repaid $50 million, and the amount available under the Credit Agreement by its terms was reduced to $950 million.\nThe Company is required to reduce to $50 million the amount of borrowings outstanding under the Revolver for at least 30 consecutive days in each 12-month period ending May 31. In December 1993 the Company met this requirement for the 12 months ending May 31, 1994. Commencing August 31, 1994, the Revolver is reduced by $8.3 million annually, with a final maturity on June 1, 2000. In addition, the Company is required to repay the full amount of each of its outstanding revolving loans at the end of each interest period (a maximum of six months). The Company may, however, immediately reborrow such amounts subject to compliance with applicable conditions of the Credit Agreement.\nThe Credit Agreement provides the Company with increased operating and financial flexibility, including the ability to shift from time to time a portion of borrowings among borrowers and currencies. As a result of the Refinancing there was a significant reduction in annual interest expense, which was partly offset by additional interest expense on the 12-3\/4% Junior Subordinated Debentures exchanged for the 12-3\/4% Exchangeable Preferred Stock. The Company believes that the amounts available from operating cash flows and under the Revolving Credit Facility will be sufficient to meet its expected cash needs, including planned capital expenditures.\nAs described in Note 8 of Notes to Consolidated Financial Statements, the Credit Agreement contains various covenants that limit, among other things, indebtedness, dividends on and redemptions of capital stock of the Company, purchases and redemptions of other indebtedness of the Company (including its outstanding debentures and notes), rental expense, liens, capital expenditures, investments or acquisitions, disposal of assets, the use of proceeds from asset sales, and certain other business activities and require the Company to meet certain financial tests. In order to\nmaintain compliance with the covenants and restrictions contained in the 1988 Credit Agreement, the Company from time to time has had to obtain waivers and amendments. In February 1994 the Company obtained an amendment to the Credit Agreement that among other things relaxed certain financial tests and convenants, and facilitated the investment in an air conditioning joint venture and the formation of a holding company to establish joint ventures in the People's Republic of China for the manufacture and sale of plumbing products. The Company currently believes it will comply with the amended financial tests and covenants but may have to obtain similar amendments or waivers in the future.\nOn June 30, 1993, in exchange for all of the Company's outstanding shares of 12-3\/4% Exchangeable Preferred Stock, the Company issued $141.8 million of 12-3\/4% Junior Subordinated Debentures Due 2003 to the holder of the Exchangeable Preferred Stock. Those debentures were sold by the holder in a registered public offering in August 1993. The Company received none of the proceeds of this offering.\nThe indentures related to the Company's debentures and notes contain various covenants which, among other things, limit debt and preferred stock of the Company and its subsidiaries, dividends on and redemption of capital stock of the Company and its subsidiaries, redemption of certain subordinated obligations of the Company, the use of proceeds from asset sales, and certain other business activities.\nIn connection with examinations of the tax returns of the Company's German subsidiaries for the years 1984 through 1990, the German tax authorities have raised questions regarding the treatment of certain significant matters. The Company has paid approximately $20 million of a disputed German income tax. A suit is pending to obtain a refund of this tax. The Company anticipates that the German tax authorities may propose other adjustments resulting in additional taxes of approximately $105 million, plus penalties and interest for the tax return years under audit. In addition, significant transactions similar to those which gave rise to such possible adjustments occurred in years subsequent to 1990. The Company, on the basis of the opinion of legal counsel, believes the tax returns are substantially correct as filed and intends to vigorously contest any adjustments which have been or may be assessed. Accordingly, the Company had not recorded any loss contingency at December 31, 1993, with respect to such matters. Under German tax law the authorities may demand immediate payment of a tax assessment prior to final resolution of the issues. The Company also believes, on the basis of opinion of legal counsel, that it is highly likely that a suspension of payment will be obtained if additional taxes are assessed. However, if payment is required the Company expects that it will be able to meet such payment from available sources of liquidity or credit support but that future cash flows and capital expenditures, and therefore subsequent results of operations for any particular quarterly or annual period, could be adversely affected.\nCapital Expenditures\nThe Company's capital expenditures for 1993 amounted to $98 million, including investments of $8 million in affiliated companies. The amount\nof capital expenditures was $10 million less than in 1992 ($6 million less excluding the effects of foreign exchange). Decreases in capital spending by Plumbing Products and Transportation Products were partly offset by an increase in spending by Air Conditioning Products. The Company believes capital spending was sufficient for maintenance purposes, for important product and process redesigns, for expansion projects, and for strategic investments.\nCapital expenditures by Air Conditioning Products were $38 million in 1993. This amount was 15% more than that of 1992. Capital expenditures in 1993 included continuing projects related to Demand Flow and spending on new products such as the Voyager III (medium-tonnage product line), the scroll compressor, and the Series R chiller line, expansion of Voyager I and Voyager II capacity and tooling and equipment for the American Standard product line.\nPlumbing Products' capital expenditures in 1993 were $46 million, including investments of $8 million in affiliated companies in France (Porcher) and the Czech Republic. Excluding the investments in affiliated companies and the effects of foreign exchange, capital spending was 34% higher than in 1992 as a result of spending increases in Europe and the Far East. Major projects included capacity expansion in Thailand and China and various projects related to Demand Flow implementation.\nCapital expenditures for Transportation Products totaled $14 million in 1993. Excluding the effects of foreign exchange, capital spending was 41% less than in 1992, a year with significant spending related to Demand Flow cost-reduction projects in production and material flow.\n1992 Compared with 1991\nU.S. housing starts increased by 18% in 1992 from the 1991 level, but non-residential contract awards decreased by 5%. Both of these economic indicators had declined in each of the previous four years.\nConsolidated sales for 1992 were $3.8 billion, an increase of 5% (4% excluding the favorable effects of foreign exchange) over the $3.6 billion for 1991. The 1991 amount included the sales of Tyler Refrigeration, which was sold September 30, 1991. Excluding Tyler Refrigeration, sales in 1992 were up 8% (7% excluding foreign exchange effects). Sales increases of 15% for Plumbing Products and 9% for Air Conditioning Products (excluding Tyler Refrigeration) were partly offset by a sales decline for Transportation Products of 1% (6% excluding the favorable effects of foreign exchange).\nOperating income for 1992 was $300 million, an increase of $58 million, or 24% (19% excluding the effects of foreign exchange), from $242 million in 1991. The 1991 amount included a loss for Tyler Refrigeration. Excluding Tyler Refrigeration, operating income in 1992 was up 15% (10% excluding foreign exchange effects.) Increases in operating income of 42% for Air Conditioning Products (excluding Tyler Refrigeration) and 64% for Plumbing Products were partly offset by a 27% decrease in operating income for Transportation Products.\nExcept as otherwise indicated, the following discussion, including the financial comparisons, does not include the results of Tyler Refrigeration or the $22 million loss on the sale of Tyler Refrigeration in 1991.\nAir Conditioning Products Segment\nSales of Air Conditioning Products, which accounted for approximately 50% of the Company's 1992 sales, increased by 9% to $1,892 million in 1992 from $1,737 million in 1991. There was a significant sales increase for each of the three operating groups -- for the Unitary Products Group in both residential and commercial products primarily because of higher volume and more favorable product mix (partly offset by lower prices), for the Commercial Systems Group primarily because of higher volume and prices, and for the International Group principally because of increased volume in Europe and the Far East.\nOperating income of Air Conditioning Products increased year to year by 42% (with little effect from foreign exchange) to $104 million in 1992 from $73 million in 1991. The increase was attributable to the sales gains, the benefits of manufacturing improvements and restructuring and cost containment in the Unitary Products and Commercial Systems Groups, and the fact that in 1991 results of the Commercial Systems Group had been adversely affected by a 54-day work stoppage at its LaCrosse, Wisconsin, facility. The impact of these factors was partly offset by a margin decline for the International Group and costs related to the start-up of new facilities, sales offices, and distribution channels.\nUnitary Products Group\nSales in 1992 of the Unitary Products Group, which accounted for approximately 41% of Air Conditioning Products sales, increased by 6% over the 1991 sales level. Commercial markets for unitary products were up 6% overall from the depressed 1991 markets, as a very strong commercial replacement market more than offset the effects of low new-construction activity. Sales of commercial unitary products increased by 7% overall, primarily as a result of higher volume (driven by the strong replacement market), a shift to higher-priced, higher-tonnage products, and a gain in market share for light commercial products. Residential markets were down 3.5%, as poor replacement activity, a result of an unseasonably cool summer, more than offset the 18% increase in new housing starts. Despite this poorer market, sales of residential products increased by 5% year over year, principally because of larger market share, improved furnace markets, and a partial shift in the market to more efficient products stimulated by Federal standards, offset partly by price degradation due to competitive pressures. As a result of these factors, together with benefits of manufacturing improvements, cost containment, and organizational restructuring which reduced the salaried workforce, the operating profit for Unitary Products in 1992 increased by 50% from the depressed level of 1991.\nCommercial Systems Group\nSales of the Commercial Systems Group, which accounted for approximately 38% of Air Conditioning Products' sales, increased 9% primarily on volume increases in aftermarket replacement and parts sales, increased revenue from Company-owned sales offices (volume growth and acquisitions), and small price increases on most product lines. Other factors contributing to the increase were higher sales of large applied systems and the fact that in 1991 there was a 54-day work stoppage at the LaCrosse, Wisconsin, plant. These gains were partly offset by lower volume in Canada, which was adversely affected by recession.\nOperating income for Commercial Systems increased 129% in 1992 over the recession-affected and work-interrupted level of 1991. The increase was primarily the result of the volume and price gains, improvements in manufacturing efficiency, cost containment and restructuring, and the fact that 1991 included the adverse impact of the LaCrosse work stoppage. The effects of these factors were partly offset by slightly lower gross margins, as the price increases did not completely recover increases in material, labor and benefits costs.\nInternational Group\nSales of Air Conditioning Products' International Group, which accounted for approximately 21% of Air Conditioning Products' 1992 sales, increased 15% from those of 1991 (10% excluding the favorable effect of foreign exchange). Most of the gain was from higher volumes in Mexico (two new sales offices resulted in expanded distribution and penetration), the Far East (especially Hong Kong and Singapore), the Middle East (markets were significantly stronger), and Europe (sales of new products and increased penetration despite declining markets). Markets were down in almost all European countries except Italy, with the largest drop in the U.K., offset partly by increased revenues from acquired service companies.\nOperating income for the International Group decreased by approximately 68% in 1992. The decline occurred in Europe, primarily because of the weak markets and lower prices, costs related to the start-up of new facilities and new distribution networks in the U.K. and France, costs related to the introduction of new products, start-up costs of a company in Spain acquired near the end of 1991, and foreign exchange transaction losses from currency fluctuations in the latter half of 1992. Income from the Far East and Latin America was essentially unchanged from the prior year, as volume gains were offset by increased costs related to expanded distribution channels, start-up of new joint ventures, and development of new and improved products to support present and future growth.\nPlumbing Products Segment\nSales of Plumbing Products, which accounted for approximately 31% of the Company's 1992 sales, increased by 15% in 1992 (14% excluding the effects of foreign exchange) to $1,170 million from $1,018 million in 1991. The improvement resulted from sales increases of 9% (7% excluding the effects of foreign exchange) for the European Plumbing Products Group, 21% for the U.S. Plumbing Products Group, 4% for the Americas International Group (7% excluding foreign exchange), and 101% for the Far East Group (98% excluding foreign exchange).\nIn 1992 operating income of Plumbing Products increased 64% (56% excluding the effects of foreign exchange) to $108 million from $66 million in 1991. The increase was attributable primarily to increased profitability for the European group on higher prices and volumes (especially in Italy and Germany) although improved results in the U.S., Americas International, and Far East groups contributed.\nEuropean Plumbing Products Group\nSales of the European group, which accounted for approximately 57% of Plumbing Products' sales for 1992, increased 9% in 1992 over 1991, 7% excluding the favorable effects of foreign exchange. The gain resulted primarily from price and volume increases, especially in Italy and Germany, offset partly by lower volume in France from declining demand and lower prices in the U.K. caused by a very poor market. In Italy sales were up 9%, with gains for most product lines in price, volume and market share. The gains in Germany were the result of higher volumes and prices for brass fittings and luxury chinaware.\nOperating income for the European group increased 28% (23% excluding the effects of foreign exchange) primarily from the price and volume gains in Italy and Germany and higher margins on German brass operations resulting from improved manufacturing processes and cost containment, offset partly by lower profitability in France because of decreased volume and in the U.K. because of the recession. A recession depressed operating results in Greece.\nU.S. Plumbing Products Group\nSales of the U.S. group, which accounted for approximately 24% of total 1992 Plumbing Products sales, increased 21% in 1992. During 1992 the U.S. building industry continued to be severely affected by the low level of new construction, with non-residential construction down 5% from 1991 and with new residential construction recovering from the lowest levels since the mid-1940's (though up by 18%, it was still low in historical terms). The U.S. market for plumbing products was up an estimated 3% to 4%, with more than half the gain occurring in the replacement and remodeling markets, which accounts for about 60% of the total U.S. market. The growth of sales for the U.S. group was largely a result of the strength of retail business (which had a significant\nincrease in volume and accounted for 20% of sales of the U.S. group in 1992) and increased export sales from the U.S., together with smaller gains resulting from price increases and higher wholesaler distribution sales. Sales of AMERICAST products more than doubled in 1992, and smaller volume gains were achieved for acrylic products, fixtures, and faucets.\nThe operating loss for the U.S. group in 1992 was less than that of the prior year. The improvement was primarily due to price increases and secondarily to volume and margin gains (as a result of sourcing product from the Company's Latin American plants), offset partly by non-recurring costs related to implementation of improved manufacturing processes and the effects of a shift in overall sales mix from commercial and luxury to lower-margin products.\nAmericas International and Far East Groups\nCombined sales of the Americas International and Far East Groups, which accounted for approximately 19% of total Plumbing Products sales, increased 26% in 1992 (28% excluding the effects of foreign exchange). The sales gain was due primarily to the consolidation in 1992 of a previously unconsolidated joint venture in Thailand and to a lesser extent to price and volume increases in Mexico and Korea and higher volumes in Brazil, offset partly by lower sales in Canada, which were adversely affected by severe recession.\nCombined operating income of the Americas International and Far East Groups in 1992 increased 134% over the 1991 level. Gains were realized in all operations except Canada and the Philippines, both of which were adversely affected by poor economies. The increase was primarily from price and volume gains in Mexico and Korea, higher volume and margins in Brazil, and higher volume in China.\nTransportation Products Segment\nSales of Transportation Products, which accounted for 19% of the Company's 1992 sales, were $730 million, down 1% from $741 million in 1991 (6% excluding the effects of foreign exchange). The sales decrease was due primarily to a volume decline in Germany as a result of a significant decrease in truck and bus production. Volumes were also down in nearly all other European countries in which Transportation Products has operations except the U.K. There was also a decline in prices of electronic control products, primarily as a result of industry cost reductions.\nOperating income for Transportation Products in 1992 decreased 27% (32% excluding foreign exchange effects) to $88 million from $121 million in 1991, principally because of the lower sales and production volume, lower prices, and increased spending for product engineering. Plant employment was kept in line with reduced production levels, but the costs associated with these reductions also depressed 1992 operating income. Those effects were partly offset by the favorable effects of cost reductions and increases in efficiency achieved in manufacturing operations.\nFinancial Review\n1992 Compared with 1991\nThe Company's financing and corporate costs were $352 million and $330 million in 1992 and 1991, respectively. The principal causes of the increase were year-to-year effects of changes in foreign exchange transaction gains and losses, higher minority interest, and lower miscellaneous income. Interest expense and accretion expense on postretirement benefits, which accounted for most of these costs, also increased.\nThe tax provision for 1992 was $5 million despite a pre-tax loss of $52 million, whereas in 1991 the tax provision was $23 million on a pre-tax loss from continuing operations of $88 million. The 1992 provision reflected taxes payable on profitable foreign operations offset partly by available domestic tax benefits. The 1992 provision was lower than in 1991 primarily because of lower pre-tax earnings in foreign operations. In 1992 the provision was also lower because of future income tax benefits resulting from carrybacks of foreign net operating losses and the existence of deferred tax credits which reverse in the carryforward period applicable to other foreign net operating losses. The unusual relationship between the pre-tax losses and the tax provision is explained by the nondeductibility for tax purposes of the amortization of goodwill and other purchase accounting adjustments and the share allocations made by the Company's ESOP as well as by tax rate differences and withholding taxes on foreign earnings.\nITEM 8.","section_7A":"","section_8":"ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA\nRESPONSIBILITY FOR FINANCIAL STATEMENTS\nThe accompanying consolidated balance sheets at December 31, 1993 and 1992, and related consolidated statements of operations, stockholders' equity (deficit), and cash flows for the years ended December 31, 1993, 1992 and 1991, have been prepared in conformity with generally accepted accounting principles, and the Company believes the statements set forth a fair presentation of financial condition and results of operations. The Company believes that the accounting systems and related controls that it maintains are sufficient to provide reasonable assurance that the financial records are reliable for preparing financial statements and maintaining accountability for assets. The concept of reasonable assurance is based on the recognition that the cost of a system of internal control must be related to the benefits derived and that the balancing of those factors requires estimates and judgment. Reporting on the financial affairs of the Company is the responsibility of its principal officers, subject to audit by independent auditors, who are engaged to express an opinion on the Company's financial statements. The Board of Directors has an Audit Committee of non-employee Directors which meets periodically with the Company's financial officers, internal auditors, and the independent auditors and monitors the accounting affairs of the Company.\nASI Holding Corporation\nNew York, New York March 14, 1994\nREPORT OF ERNST & YOUNG, INDEPENDENT AUDITORS\nThe Board of Directors ASI Holding Corporation\nWe have audited the accompanying consolidated balance sheets of ASI Holding Corporation and subsidiaries as of December 31, 1993 and 1992, and the related consolidated statements of operations, stockholders' equity (deficit), and cash flows 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.\nWe conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.\nIn our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of ASI Holding Corporation and subsidiaries at December 31, 1993 and 1992, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1993, in conformity with generally accepted accounting principles.\n\/s\/Ernst & Young\nErnst & Young\nNew York, New York March 14, 1994\nASI HOLDING CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (Dollars in thousands except share amounts)\nASSETS At December 31, 1993 1992 Current assets Cash and certificates of deposit $ 53,237 $ 111,549 Cash in escrow 932 1,722 Accounts receivable, less allowance for doubtful accounts-- 1993, $15,666; 1992, $12,827 507,322 468,731 Inventories 325,819 384,857 Future income tax benefits 24,562 33,192 Other current assets 29,811 31,199 Total current assets 941,683 1,031,250 Facilities, at cost net of accumulated depreciation 820,523 832,811 Other assets Goodwill, net of accumulated amortization -- 1993, $169,879; 1992, $141,858 1,025,774 1,101,716 Debt issuance costs, net of accumulated amortization-- 1993 $9,670; 1992, $77,776 78,102 51,308 Other 120,997 109,333 $2,987,079 $3,126,418 ========== ========== LIABILITIES AND STOCKHOLDERS' DEFICIT\nCurrent liabilities Loans payable to banks $ 38,036 $ 99,150 Current maturities of long-term debt 105,939 13,458 Accounts payable 307,326 271,855 Accrued payrolls 99,758 105,400 Other accrued liabilities 263,322 230,335 Taxes on income 47,003 18,848 Total current liabilities 861,384 739,046 Long-term debt 2,191,737 2,032,064 Other long-term liabilities Reserve for postretirement benefits 387,038 368,868 Deferred tax liability 45,625 73,307 Other 224,108 228,521 Total liabilities 3,709,892 3,441,806 Commitments and contingencies Exchangeable preferred stock - 133,176 Stockholders' deficit Preferred stock, Series A, par value $.01, 1,000 shares issued and outstanding - - Common stock $.01 par value, 28,000,000 shares authorized; 23,858,335 shares issued and outstanding in 1993, 23,608,587 in 1992 239 236 Capital surplus 188,744 192,351 Subscriptions receivable (2,588) (3,316) ESOP shares (4,331) (9,527) Accumulated deficit (750,003) (541,436) Foreign currency translation effects (149,220) (86,872) Minimum pension liability adjustment (5,654) - Total stockholders' deficit (722,813) (448,564) $2,987,079 $3,126,418 =========== ==========\nSee notes to consolidated financial statements.\nASI HOLDING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS\nNote 1. Basis of Presentation\nASI Holding Corporation (\"Holding\") is a Delaware corporation that was formed in 1988 by an affiliate of Kelso & Company L.P. (\"Kelso\"), an investment banking firm that specializes in leveraged buyouts. On March 21, 1988, the Kelso affiliate commenced a tender offer (the \"Tender Offer\") for all of the common stock of American Standard Inc. at $78 per share in cash. On April 27, 1988, the Kelso affiliate completed the Tender Offer with the purchase of approximately 95% of the shares of American Standard Inc.\nPursuant to an Agreement and Plan of Merger, a merger was consummated (the \"Merger\") on June 29, 1988, whereby American Standard Inc. became a wholly owned subsidiary of Holding. At that time the remaining shares of American Standard Inc.'s common stock were converted into the right to receive cash of $78 per share. Hereinafter \"the Company\" will refer to Holding or to its subsidiary, American Standard Inc., as the context requires. The Tender Offer, Merger, and related transactions are hereinafter referred to as the \"Acquisition.\" For financial statement purposes the Acquisition has been accounted for under the purchase method.\nNote 2. Accounting Policies\nConsolidation\nThe financial statements include on a consolidated basis the results of all majority-owned subsidiaries. All material intercompany transactions are eliminated. Investments in affiliated companies are included at cost plus the Company's equity in their net results.\nTranslation of Foreign Financial Statements\nAssets and liabilities of most foreign operations are translated at year-end rates of exchange, and the income statements are translated at the average rates of exchange for the period. Gains or losses resulting from translating foreign currency financial statements are accumulated in a separate component of stockholder's equity until the entity is sold or substantially liquidated.\nGains or losses resulting from foreign currency transactions (transactions denominated in a currency other than the entity's local currency) are included in net income. For operations in countries that have high rates of inflation, net income includes gains and losses from translating assets and liabilities at year-end rates of exchange, except for inventories and facilities, which are translated at historical rates.\nRevenue Recognition\nSales are recorded when shipment to a customer occurs.\nASI HOLDING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS\nStatement of Cash Flows\nCash and certificates of deposit include all highly liquid investments with an original maturity of three months or less.\nInventories\nInventory costs are determined by the use of the last-in, first-out (LIFO) method on a worldwide basis, and inventories are stated at the lower of such cost or realizable value.\nFacilities\nThe Company capitalizes costs, including interest during construction, of fixed asset additions, improvements, and betterments that add to productive capacity or extend the asset life. Maintenance and repair expenditures are charged against income. Significant foreign investment grants are amortized into income over the period of benefit.\nGoodwill\nGoodwill is being amortized over 40 years.\nDebt Issuance Costs\nThe costs related to the issuance of debt are amortized using the interest method over the lives of the related debt.\nWarranties\nThe Company provides for estimated warranty costs at the time of sale. Warranty obligations beyond one year are included in other long-term liabilities.\nThe Company changed its method of accounting for revenues from extended warranty contracts at the beginning of 1991 to conform with the FASB Technical Bulletin, \"Accounting for Separately Priced Extended Warranty and Product Maintenance Contracts.\" The bulletin requires the deferral of the revenue from the sales of such contracts and amortization thereof on a straight-line basis over the terms of the contracts. The cumulative effect of this accounting change for all contracts in place as of December 31, 1990, increased the net loss in 1991 by $7 million, net of income tax benefit. The effect on the 1991 net loss, excluding the cumulative effect upon adoption, was not material.\nLeases\nThe asset values of capitalized leases are included with facilities, and the associated liabilities are included with long-term debt.\nPostretirement Benefits\nPostretirement benefits are provided for substantially all employees of the Company, both in the United States and abroad. In the United States the Company also provides various postretirement health care and\nASI HOLDING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS\nlife insurance benefits for some of its employees. Effective January 1, 1991, such costs are calculated in accordance with Statement of Financial Accounting Standards No. 106, \"Employers' Accounting for Postretirement Benefits Other Than Pensions\" (\"FAS 106\").\nDepreciation\nDepreciation and amortization are computed on the straight-line method based on the estimated useful life of the asset or asset group.\nResearch and Development Expenses\nResearch and development costs are expensed as incurred except for costs incurred (after technological feasibility is established) for computer software products expected to be sold. The Company expensed costs of approximately $41 million in 1993, $40 million in 1992, and $36 million in 1991 for research activities and product development. Computer software product development costs capitalized in 1993 amounted to $2 million.\nIncome Taxes\nIn 1991 the Company adopted Statement of Financial Accounting Standards No. 109, \"Accounting for Income Taxes\" (\"FAS 109\"), and elected to apply the provisions retroactively to January 1, 1989.\nThe Company recognizes deferred tax assets for the tax effects of items that will be deducted for tax purposes in later years together with the tax effects of income items included in current reporting for tax purposes but in later years for financial statement purposes and the effects of certain tax attributes such as net operating losses.\nThe Company provides for United States income taxes and foreign withholding taxes on foreign earnings expected to be repatriated. Deferred tax liabilities are provided on the excess of the financial statement basis over the tax basis of certain assets, primarily for inventories and fixed assets, including fair value adjustments resulting from purchase accounting in connection with the Acquisition; fixed assets due to accelerated depreciation deductions for tax purposes; and non-permanent investments in certain foreign subsidiaries.\nEarnings per share\nEarnings per share have been computed using the weighted average number of common shares outstanding.\nASI HOLDING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS\nFinancial Instruments with Off-Balance-Sheet Risk\nThe Company from time to time enters into foreign currency exchange agreements in the management of foreign currency exposure. Gains and losses from exchange rate changes are included in income unless the contract hedges a net investment in a foreign entity or a firm commitment, in which case gains and losses are deferred as a component of foreign currency translation effects in stockholder's equity or included as a component of the transaction.\nNote 3. Postretirement Benefits\nThe Company sponsors postretirement benefit plans covering substantially all employees, including an Employee Stock Ownership Plan (the \"ESOP\") for the Company's U.S. salaried employees and certain U.S. hourly employees. In 1988 in conjunction with the Acquisition the ESOP purchased 5,000,000 shares (adjusted for a 100-for-1 stock split) of common stock of Holding. The ESOP is an individual account, defined contribution plan. The valuation of the ESOP shares is determined by independent appraisals. The common stock acquired by the ESOP is being allocated to the accounts of eligible employees over a period not exceeding eight plan years, including basic allocation of 3% of covered compensation and a matching Company contribution of up to 6% of covered compensation invested in the Company's savings plan by employees.\nPension plan benefits are generally based on years of service and employees' compensation during the last years of employment. In the United States the Company also provides various postretirement health care and life insurance benefits for some of its employees. Funding decisions are based upon the tax and statutory considerations in each country. Accretion expense is the implicit interest cost associated with amounts accrued and not funded and is included in \"other expense\". At December 31, 1993, funded plan assets related to pensions were held primarily in fixed income and equity funds. Postretirement health and life insurance benefits are not prefunded.\nEffective January 1, 1991, the Company changed its method of accounting for postretirement benefits other than pensions to conform with FAS 106. The cumulative effect of this change increased the recorded obligation for such benefits by $40 million, thereby increasing the net loss in 1991 by $25 million (net of the related income tax benefit). The effect of the change on the 1991 net loss, excluding the cumulative effect upon adoption, was not material.\nThe following table sets forth the Company's postretirement plans' funded status and amounts recognized in the balance sheet at December 31, 1993 and 1992.\nASI HOLDING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS\nNote 4. Other Expense\nOther income (expense) was as follows:\nYear Ended December 31, 1993 1992 1991 (Dollars in millions)\nInterest income $ 8.5 $ 8.7 $ 8.3 Royalties 2.6 3.8 2.5 Equity in net income (loss) of affiliated companies (0.1) 4.9 10.2 Minority interest (14.0) (9.8) (3.1) Accretion expense (30.5) (29.8) (27.9) Other, net (4.8) (2.5) 1.9 $(38.3) $(24.7) $ (8.1) ====== ====== ======\nThe decrease in equity in net income of affiliated companies and the increase in minority interest in 1993 and 1992 compared with 1991 were primarily the result of consolidation of the plumbing companies in Thailand, the People's Republic of China, and Incesa, previously unconsolidated joint ventures.\nNote 5. Income Taxes\nThe Company's loss before income taxes, extraordinary loss, and cumulative effects of changes in accounting methods (\"pre-tax income (loss)\") and the applicable provision (benefit) for income taxes were:\nYear Ended December 31, 1993 1992 1991 (Dollars in millions) Pre-tax income (loss): Domestic $ (223.2) $ (170.1) $(272.6) Foreign 142.7 117.5 184.8 Pre-tax loss $ (80.5) $ (52.6) $ (87.8) Provision (benefit) for income taxes: Current: Domestic $ 12.4 $ 5.1 $ 5.1 Foreign 43.0 63.0 71.3 55.4 68.1 76.4 Deferred: Domestic 1.1 (35.8) (52.4) Foreign (20.3) (27.6) (1.0) (19.2) (63.4) (53.4) Total provision $ 36.2 $ 4.7 $ 23.0 ======== ======== =======\nASI HOLDING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS\nA reconciliation between the actual income tax expense provided and the income tax benefit computed by applying the statutory federal income tax rate of 35% in 1993 and 34% in 1992 and 1991 to the pre-tax loss is as follows:\nYear Ended December 31, 1993 1992 1991 (Dollars in millions) Tax benefit at statutory rate $(28.2) $(17.9) $(29.9) Nondeductible goodwill charged to operations 10.4 10.5 10.6 Nondeductible goodwill related to operations sold - 25.1* Nondeductible ESOP allocations 6.1 4.9 4.6 Rate differences and withholding taxes related to foreign operations 9.0 1.4 4.7 Foreign exchange gains (7.0) (6.3) (2.1) State tax benefits (5.5) (3.3) (3.4) Other, net 8.7 5.5 5.6 Increase in valuation allowance 42.7 9.9 7.8 Total provision $ 36.2 $ 4.7 $ 23.0 ====== ====== ======\n* Includes goodwill eliminated in the sale of Tyler Refrigeration.\nIn addition to the valuation allowance increase of $42.7 million shown above, a valuation allowance of $32.1 million was provided for the entire amount of the tax benefit related to the extraordinary loss on retirement of debt (see Note 8 of Notes to Consolidated Financial Statements).\nThe following table details the gross deferred liabilities and the gross deferred tax assets and the related valuation allowances.\nAt December 31, 1993 1992 (dollars in millions) Deferred tax liabilities: Facilities (accelerated depreciation, capitalized interest and purchase accounting differences) $ 141.1 $ 154.1 Inventory (LIFO and purchase accounting differences) 18.5 30.3 Employee benefits 11.0 6.6 Foreign investments 50.1 48.8 Other 26.2 26.6 246.9 266.4 Deferred tax assets: Employee benefits (pensions and other postretirement benefits) 110.7 97.7 Warranties 37.4 30.0 Alternative minimum tax 19.4 21.8 Foreign tax credits and net operating losses 57.5 42.3 Reserves 58.7 45.1 Other 46.0 18.5 Valuation allowances (103.9) (29.1) 225.8 226.3 Net deferred tax liabilities $ 21.1 $ 40.1 ========= ========\nASI HOLDING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS\nDeferred tax assets related to foreign tax credits, net operating loss carryforwards, and future tax deductions have been reduced by a valuation allowance since realization is dependent in part on the generation of future foreign source income as well as on income in the legal entity which gave rise to tax losses. Other deferred tax assets have not been reduced by valuation allowances because of carrybacks and existing deferred tax credits which reverse in the carryforward period. The foreign tax credits and net operating losses are available for utilization in future years. In some tax jurisdictions the carryforward period is limited to as little as five years; in others it is unlimited.\nAs a result of the Acquisition (see Note 1) and the allocation of purchase accounting (principally goodwill) to foreign subsidiaries, the book basis in the net assets of the foreign subsidiaries exceeds the related U.S. tax basis in the subsidiaries' stock. Such investments are considered permanent in duration, and accordingly no deferred taxes have been provided on such differences, which are significant. It is impracticable because of the complex legal structure of the Company and the numerous tax jurisdictions in which the Company operates to determine such deferred taxes.\nCash taxes paid were $41 million, $56 million, and $79 million in the years 1993, 1992, and 1991, respectively.\nIn connection with examinations of the tax returns of the Company's German subsidiaries for the years 1984 through 1990, the German tax authorities have raised questions regarding the treatment of certain significant matters. The Company has paid approximately $20 million of a disputed German income tax. A suit is pending to obtain a refund of this tax. The Company anticipates that the German tax authorities may propose other adjustments resulting in additional taxes of approximately $105 million, plus penalties and interest for the tax return years under audit. In addition, significant transactions similar to those which gave rise to such possible adjustments occurred in years subsequent to 1990. The Company, on the basis of the opinion of legal counsel, believes the tax returns are substantially correct as filed and intends to vigorously contest any adjustments which have been or may be assessed. Accordingly, the Company had not recorded any loss contingency at December 31, 1993 with respect to such matters. Under German tax law the authorities may demand immediate payment of a tax assessment prior to final resolution of the issues. The Company also believes, on the basis of opinion of legal counsel, that it is highly likely that a suspension of payment will be obtained if additional taxes are assessed. However, if payment is required, the Company expects that it will be able to make such payment from available sources of liquidity or credit support but that future cash flows and capital expenditures and therefore subsequent results of operations for any particular quarterly or annual period could be adversely affected.\nASI HOLDING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS\nNote 6. Inventories\nThe components of inventory are as follows:\nAt December 31, 1993 1992 (Dollars in millions)\nFinished products $169.0 $200.6 Products in process 78.0 95.8 Raw materials 78.8 88.5 Inventory at cost $325.8 $384.9 ====== ======\nThe carrying cost of inventories reflects purchase accounting adjustments and therefore exceeds current cost.\nNote 7. Facilities\nThe components of facilities, at cost, are as follows:\nAt December 31, 1993 1992 (Dollars in millions)\nLand $ 66.2 $ 65.0 Buildings 314.6 310.2 Machinery and equipment 739.9 719.4 Improvements in progress 54.4 45.6 Gross facilities 1,175.1 1,140.2 Less: accumulated depreciation 354.6 307.4 Net facilities $ 820.5 $ 832.8 ======== ========\nNote 8. Debt\nThe 1993 Refinancing\nIn July 1993 the Company completed a refinancing (the \"Refinancing\") that included (a) the issuance of $200 million principal amount of 9-7\/8% Senior Subordinated Notes Due 2001; (b) the issuance of approximately $751 million principal amount of 10-1\/2% Senior Subordinated Discount Debentures Due 2005, which yielded proceeds of approximately $450 million; (c) the amendment and restatement of the Company's 1988 Credit Agreement (the \"1988 Credit Agreement\" and as so amended and restated, the \"Credit Agreement\") to establish a $1 billion secured, multi-currency, multi-borrower credit facility; and (d) the application of the proceeds of such issuances and such borrowings as follows: (i) the redemption on July 1, 1993, of all of the outstanding 12-7\/8% Senior Subordinated Debentures Due 2000 (the \"12-7\/8% Senior Subordinated Debentures\") at a redemption price of 104.83% ($571.3 million), (ii) the redemption on July 2, 1993, of\nASI HOLDING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS\na majority of the outstanding 14-1\/4% Subordinated Discount Debentures Due 2003 (the \"14-1\/4% Subordinated Discount Debentures\") at a redemption price of 105% ($389.5 million), (iii) the refunding of bank borrowings ($405 million of term loans and $77 million of other bank debt including revolving credit debt), (iv) the refunding of letters of credit ($58 million), and (v) payment of related fees and expenses.\nThe Credit Agreement provided to American Standard Inc. and certain subsidiaries (the \"Borrowers\") a $1 billion facility as follows: (a) a $250 million multi-currency revolving credit facility (the \"Revolving Credit Facility\") available to all Borrowers, which expires in 2000; (b) a $225 million multi-currency periodic access facility (the \"Periodic Access Facility\") available to all Borrowers, which expires in 2000; and (c) three term loan facilities (the \"Term Loans\") consisting of a $225 million U.S. dollar facility (\"Tranche A\") available to American Standard Inc., which expires in 2000; a $200 million Deutschemark facility (\"Tranche B\") available to a German subsidiary, which expires in 1997; and a $100 million U.S. dollar facility (\"Tranche C\") available to all Borrowers, which expires in 1999. In August 1993 the Company repaid $50 million and the amount available under the Credit Agreement by its terms was reduced to $950 million.\nBorrowings under the Periodic Access Facility and the Term Loans generally bear interest at the London interbank offered rate (\"LIBOR\") plus 2-1\/2% except for the $225 million U.S. dollar facility, which bears interest at LIBOR plus 3%, and the $200 million Deutschemark facility, which bears interest at LIBOR plus 2%. The Company pays a commitment fee of 0.5% per annum on the unused portion of the Revolving Credit Facility and a fee of 2.5% plus issuance fees for letters of credit.\nAs a result of the Refinancing, results for the year ended December 31, 1993, included an extraordinary charge of $92 million related to the debt retired (including call premiums, the write-off of deferred debt issuance costs, and loss on cancellation of foreign currency swap contracts) on which there was no tax benefit (see Note 5).\nShort-term\nThe Revolving Credit Facility (the \"Revolver\") provides for aggregate borrowings of up to $250 million for working capital purposes, of which up to $200 million may be used for the issuance of letters of credit and $40 million of which is available for same-day short-term borrowings (\"Swingline Loans\"). At December 31, 1993, there were $7 million of borrowings outstanding under the Revolver and $66 million of letters of credit. Availability under the Revolver at December 31, 1993, was $177 million. Average borrowings under this facility and under the revolving credit facility available under the previous 1988 Credit Agreement for 1993, 1992, and 1991 were $39 million, $14 million, and $44 million, respectively. The Revolver and the Swingline Loans bear interest at the prime rate plus 1-1\/2% or LIBOR plus 2-1\/2%.\nThe Company is required to reduce to $50 million the amount of borrowings outstanding under the Revolver for at least 30 consecutive days in each 12-month period ending May 31. In December 1993 the Company met this requirement for the 12-month period ending May 31, 1994. Commencing August 31, 1994, the Revolver is reduced by $8.3 million annually, with a\nAMERICAN STANDARD INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS\nfinal maturity on June 1, 2000. In addition, the Company is required to repay the full amount of each of its outstanding revolving loans at the end of each interest period (a maximum of six months). The Company may, however, immediately reborrow such amounts subject to compliance with applicable conditions of the Credit Agreement.\nOther short-term borrowings are available outside the United States under informal credit facilities and are typically a result of overdrafts. At December 31, 1993, the Company had $31 million of such foreign short-term debt outstanding at an average interest rate of 11% per annum. The Company also had an additional $50 million of unused foreign facilities. These facilities may be withdrawn by the banks at any time.\nLong-term\nLong-term debt was as follows:\nAt December 31, 1993 1992 (Dollars in millions)\nCredit Agreement $ 689.9 $ - 1988 Credit Agreement - 402.3 9 1\/4% sinking fund debentures, due in installments from 1997 to 2016 150.0 150.0 10 7\/8% senior notes due 1999 150.0 150.0 11 3\/8% senior debentures due 2004 250.0 250.0 9 7\/8% senior subordinated notes due 2001 200.0 - 10 1\/2% senior subordinated discount debentures (net of unamortized discount of $272.9 million in 1993) due in installments from 2003 to 2005 477.8 - 12 7\/8% senior subordinated debentures - 545.0 14 1\/4% subordinated discount debentures (net of unamortized discount of $36.3 million in 1992) due in installments from 2002 to 2003 175.0 509.5 Other long-term debt 63.1 53.3 12 3\/4% junior subordinated debentures due in installments from 2001 to 2003 (Note 9) 141.8 - Foreign currency swap contracts - (14.6) 2,297.6 2,045.5 Less current maturities 105.9 13.4 $ 2,191.7 $ 2,032.1 ========= =========\nThe amounts of long-term debt maturing from 1995 through 1998 are: 1995-$126.3 million, 1996-$123.5 million, 1997 $121.2 million, 1998-$117.5 million.\nInterest costs capitalized as part of the cost of constructing facilities for the years ended December 31, 1993, 1992, and 1991, were $2.7 million, $3.1 million, and $3.6 million, respectively. Cash interest paid for those same years on all outstanding indebtedness amounted to $198 million, $210 million, and $224 million, respectively.\nASI HOLDING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS\nCredit Agreement loans, maturities, and effective weighted average interest rates in effect at December 31, 1993, were as follows:\nU.S. Dollar Equivalent (in millions) Periodic Access Facility, due in semi-annual installments from February 1994 to February 2000: British sterling loans at 7.85% $ 95.8 Deutschemark loans at 9.06% 49.4 Canadian dollar loans at 6.50% 20.2 French franc loans at 9.17% 18.5 Italian lira loans at 12.19% 8.7 Total Periodic Access loans 192.6\nTerm Loans: Tranche A U.S. dollar loans, due in semi-annual installments from August 1997 to February 2000 at 6.50% 225.0 Tranche B Deutschemark loans, due in semi-annual installments from February 1994 to February 1997 at 7.88% 172.3 Tranche C U.S. dollar loans, due in semi-annual installments from February 1994 to August 1999 at 6.01% 100.0 Total Term Loans 497.3\nTotal Credit Agreement long-term loans 689.9\nRevolver loans at 7.5% 7.0\nTotal Credit Agreement loans $ 696.9 ========\nUnder the 1988 Credit Agreement the various term loans and effective weighted average interest rates in effect at December 31, 1992, were as follows: U.S. Dollar Equivalent (in millions) Deutschemark loans at 11.4% $249.8 Canadian dollar loans at 13.05% 152.5 Total $402.3 ======\nThe 9-7\/8% Senior Subordinated Notes may be redeemed at the Company's option, in whole or in part, on and after June 1, 1998, at redemption prices declining from 102.82% in 1998 to 100% on June 1, 2000, and thereafter. The 10-1\/2% Senior Subordinated Discount Debentures may be redeemed at the Company's option, in whole or in part, on and after June 1, 1998, at redemption prices declining from 104.66% in 1998 to 100% on June 1, 2002, and thereafter. The payment of the principal and interest on the\nASI HOLDING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS\n9-7\/8% Senior Subordinated Notes and on the 10-1\/2% Senior Subordinated Discount Debentures (together the \"Senior Subordinated Debt\") is subordinated in right of payment to the payment when due of all Senior Debt (as defined in the related indenture) of the Company, including all indebtedness under the Credit Agreement and the 9-1\/4% Sinking Fund Debentures, the 10-7\/8% Senior Notes, and the 11-3\/8% Senior Debentures (the said notes and debentures together the \"Senior Securities\").\nThe 9-1\/4% Sinking Fund Debentures are redeemable at the Company's option, in whole or in part, at redemption prices declining from 105.55% in 1994 to 100% in 2006 and thereafter. The 10-7\/8% Senior Notes are not redeemable by the Company. The 11-3\/8% Senior Debentures are redeemable at the option of the Company, in whole or in part, on or after May 15, 1997, at redemption prices declining from 105.69% in 1997 to 100% on May 15, 2002, and thereafter.\nThe 14-1\/4% Subordinated Discount Debentures are redeemable at the Company's option, in whole or in part, at redemption prices of 105% prior to June 30, 1994, declining to 100% on and after June 30, 1995. The payment of the principal and interest on the 14-1\/4% Subordinated Discount Debentures issued by the Company in 1988 is subordinated in right of payment to the payment when due of all Senior Debt (as defined in the related indenture) of the Company, including all indebtedness under the Credit Agreement, the Senior Securities, and the Senior Subordinated Debt. The 14-1\/4% Subordinated Discount Debentures rank senior to the 12-3\/4% Junior Subordinated Debentures (described below).\nThe 12-3\/4% Junior Subordinated Debentures may be redeemed, at the Company's option, in whole or in part at a redemption price of 101.8% prior to June 30, 1994, and at 100% thereafter. The payment of principal and interest on the 12-3\/4% Junior Subordinated Debentures is subordinated in right of payment to the payment when due of all Senior Debt (as defined in the related indenture) of the Company, including all indebtedness under the Credit Agreement, the Senior Securities, the Senior Subordinated Debt, and the 14-1\/4% Subordinated Discount Debentures.\nObligations under the Credit Agreement are guaranteed by ASI Holding Corporation (the Company's parent), the Company, and significant domestic subsidiaries of the Company (with foreign borrowings also guaranteed by certain foreign subsidiaries) and are secured by U.S., Canadian, and U.K. properties, plant, and equipment; by liens on receivables, inventories, intellectual property, and other intangibles; and by a pledge of the Company's stock and nearly all shares of subsidiary stock. In addition, the obligations of the Company under the Senior Securities are secured, to the extent required by the related indentures, by mortgages on the principal U.S. properties of the Company equally and ratably with the indebtedness under the Credit Agreement and certain related indebtedness.\nThe Senior Subordinated Debt, the 14-1\/4% Subordinated Discount Debentures, and the 12-3\/4% Junior Subordinated Debentures are unsecured.\nThe Credit Agreement contains various covenants that limit, among other things, indebtedness, dividends on and redemption of capital stock of the Company, purchases and redemptions of other indebtedness of the Company (including its outstanding debentures and notes), rental expense, liens, capital expenditures, investments or acquisitions, disposal of assets, the\nASI HOLDING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS\nuse of proceeds from asset sales, and certain other business activities and require the Company to meet certain financial tests. In order to maintain compliance with the covenants and restrictions contained in the 1988 Credit Agreement, the Company from time to time has had to obtain waivers and amend- ments. In February 1994 the Company obtained an amendment to the Credit Agreement that among other things relaxed certain financial tests and covenants and facilitated the investment in an air conditioning joint venture and the formation of a holding company to establish joint ventures in the People's Republic of China for the manufacture and sale of plumbing products. The Company currently believes it will comply with the amended financial tests and covenants but may have to obtain similar waivers or amendments in the future.\nThe indentures related to the Company's debentures and notes contain various covenants which, among other things, limit debt and preferred stock of the Company and its subsidiaries, dividends on and redemption of capital stock of the Company and its subsidiaries, redemption of certain subordinated obligations of the Company, the use of proceeds from asset sales, and certain other business activities.\nNote 9. Exchange of Exchangeable Preferred Stock\nOn June 30, 1993, in exchange for all of the Company's outstanding shares of 12-3\/4% Exchangeable Preferred Stock, the Company issued $141.8 million of 12-3\/4% Junior Subordinated Debentures Due 2003 to the holder of the Exchangeable Preferred Stock. Those debentures were sold by the holder in a registered public offering in August 1993. The Company received none of the proceeds of this offering.\nNote 10. Foreign Currency Translation\nAssets and liabilities of most foreign operations are translated at year-end rates of exchange, and the resulting gains or losses, net of income tax effects, are accumulated in a separate component of stockholder's equity.\nChanges in exchange rates which gave rise to significant translation effects included in stockholder's equity for the years ended December 31, 1993, 1992, and 1991, are summarized in the accompanying table.\nChange in End of Period Exchange Rate Currency 1993 1992 1991\nBritish sterling (2)% (19)% (3)% Canadian dollar (4) ( 9) - French franc (6) (6) (2) Deutschemark (7) (6) (1) Italian lira (14) (22) (2) ===== ===== ===== Translation loss included in stockholder's equity, net of tax (dollars in millions) $ (62.3) $ (36.2) $ (2.1) ====== ====== =====\nASI HOLDING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS\nThe allocation of purchase costs increased the net asset exposure of foreign operations; however, since June 29, 1988, the date of the Merger, the effects of exchange volatility have been ameliorated by the fact that a portion of the Company's borrowings has been denominated in foreign currencies.\nThe losses from foreign currency transactions and translation from operations in countries with high inflation rates reflected in expense were $21.9 million in 1993, $19.3 million in 1992, and $14.4 million in 1991.\nNote 11. Fair Values of Financial Instruments\nStatement of Financial Accounting Standards No. 107, \"Disclosures About Fair Values of Financial Instruments\" (\"FAS 107\"), requires disclosure information about all financial instruments of a company except certain excluded instruments and instruments for which it is not practicable to estimate fair value. The fair values presented below are estimates as of December 31, 1993, and are not necessarily indicative of amounts the Company could realize or settle currently or indicative of the intent or ability of the Company to dispose of or liquidate such instruments.\nThe following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments:\nCash and certificates of deposit: The carrying amount reported in the balance sheet for cash and certificates of deposit approximates its fair value.\nLong- and short-term debt: The fair values of the Company's Credit Agreement loans are estimated using indicative market quotes obtained from a major bank. The fair values of senior notes, senior debentures, senior subordinated notes, senior subordinated discount debentures, subordinated discount debentures, the sinking fund debentures, and the junior subordinated debentures are based on indicative market quotes obtained from a major securities dealer. The fair values of other loans approximate their carrying value.\nThe carrying amounts and estimated fair values of selected financial instruments at December 31, 1993 are as follows: (dollars in millions) Carrying Fair Amount Value Credit Agreement loans $ 697 $ 679 10 7\/8% senior notes 150 163 11 3\/8% senior debentures 250 276 9 7\/8% senior subordinated notes 200 208 10 1\/2% senior subordinated discount debentures 478 505 14 1\/4% subordinated discount debentures 175 184 9 1\/4% sinking fund debentures 150 152 12-3\/4% junior subordinated debentures 142 143 Other loans 63 63\nASI HOLDING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS\nNote 12. Related Party Transactions\nThe Company has agreed to pay Kelso an annual fee of $2.75 million for providing management consulting and advisory services. In June 1993 the Company issued 1,000 shares of a new, non-voting Series A Preferred Stock, par value $.01 per share, for $10,000 to an affiliate of Kelso & Company. The Company is committed to contribute $5 million of capital to a Kelso limited partnership. In addition, Tyler Refrigeration was sold to an affiliate of Kelso in 1991.\nNote 13. Leases\nThe cumulative minimum rental commitments under the terms of all noncancellable operating leases in effect at December 31, 1993, were $108 million. Net rental expenses for operating leases were $34 million, $32 million, and $28 million for the years ended December 31, 1993, 1992, and 1991, respectively.\nNote 14. Commitments and Contingencies\nThe Company and certain of its subsidiaries are parties to a number of pending legal and tax proceedings. The Company is also subject to federal, state and local environmental laws and regulations and is involved in environmental proceedings concerning the investigation and remediation of numerous sites. In those instances where it is probable that the Company will incur costs from such proceedings and the amounts can be reasonably determined the Company has recorded a liability. The Company believes that these legal, tax, and environmental proceedings will not have a material adverse effect on its consolidated financial position, cash flows, or results of operations.\nThe tax returns of the Company's German subsidiaries are currently under examination by the German tax authorities (see Note 5).\nNote 15. Segment Data\nSales and operating income by geographic location for the years ended December 31, 1993, 1992, and 1991, are shown on the following page. Identifiable assets are also shown as at years ended 1993, 1992, and 1991. See \"Business\" for a description of each business segment and \"Management's Discussion and Analysis of Financial Condition and Results of Operations\" for capital expenditures and depreciation and amortization.\nASI HOLDING CORPORATION AND SUBSIDIARIES QUARTERLY DATA (Unaudited) (Dollars in millions)\nFirst Second Third Fourth Sales $879.4 $995.5 $976.5 $979.1 Cost of sales 650.5 754.5 727.7 769.9 Income (loss) before income taxes and extraordinary loss (9.5) (28.2) 4.1 (46.9) Tax provision 8.1 6.1 7.2 14.8 Loss before extraordinary loss (17.6) (34.3) (3.1) (61.7) Extraordinary loss (Note 8) - (91.9) - - Net loss $(17.6) $(126.2) $ (3.1) $(61.7) ====== ======= ====== ====== Per share: Loss before extraordinary loss $ (.92) $ (1.63) $ (.13) $(2.60) Extraordinary loss - (3.87) - - Net loss $ (.92) $ (5.50) $ (.13) $(2.60) ====== ======= ====== ====== Average number of common shares (thousands) 23,699 23,756 23,690 23,756\nFirst Second Third Fourth Sales $901.0 $995.9 $980.9 $914.1 Cost of sales 672.0 734.1 742.2 703.9 Income (loss) before income taxes (8.1) 11.4 (16.5) (39.3) Tax provision (benefit) 5.5 9.2 (1.5) (8.5) Net income (loss) $(13.6) $ 2.2 $(15.0) $(30.8) ====== ======= ====== ====== Per share: Net loss $ (.74) $ (.07) $ (.81) $(1.49) ====== ======= ====== ====== Average number of common shares (thousands) 23,339 23,470 23,467 23,506\nITEM 9.","section_9":"ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCING DISCLOSURE.\nNot applicable.\nMANAGEMENT\nITEM 10.","section_9A":"","section_9B":"","section_10":"ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY\nThe following table sets forth certain information as of March 31, 1994, with respect to each person who is an executive officer or director of the Company:\nName Age Position with Company\nEmmanuel A. Kampouris 59 Chairman, President and Chief Executive Officer, and Director\nHorst Hinrichs 61 Senior Vice President, Transportation Products, and Director\nGeorge H. Kerckhove 56 Senior Vice President, Plumbing Products, and Director\nFred A. Allardyce 52 Vice President and Chief Financial Officer\nAlexander A. Apostolopoulos 51 Vice President and Group Executive, Americas, Plumbing Products\nThomas S. Battaglia 51 Vice President and Treasurer\nRoberto Canizares M. 44 Vice President, Air Conditioning Products' Asia\/America Zone\nWilfried Delker 53 Vice President and Group Executive, Worldwide Fittings, Plumbing Products\nAdrian B. Deshotel 48 Vice President, Human Resources\nCyril Gallimore 65 Vice President, Systems and Technology\nLuigi Gandini 55 Vice President and Group Executive, European Plumbing Products\nDaniel Hilger 53 Vice President and Group Executive, Air Conditioning Products in Europe, Middle East and Africa\nJoachim D. Huwendiek 63 Vice President, Automotive Products in Germany\nName Age Position with Company\nFrederick W. Jaqua 72 Vice President and General Counsel and Secretary\nW. Craig Kissel 42 Vice President and Group Executive, Unitary Products Group\nWilliam A. Klug 62 Vice President, Trane International\nPhilippe Lamothe 57 Vice President, Automotive Products in France\nG. Eric Nutter 58 Vice President, Automotive Products in the United Kingdom\nRaymond D. Pipes 44 Vice President and Group Executive, Plumbing Products in the Far East\nBruce R. Schiller 49 Vice President and Group Executive, Compressor Business\nJames H. Schultz 45 Vice President and Group Executive, Commercial Systems Group\nG. Ronald Simon 52 Vice President and Controller\nWade W. Smith 43 Vice President, U.S. Plumbing Products\nBenson I. Stein 56 Vice President, General Auditor\nRobert M. Wellbrock 47 Vice President, Taxes\nShigeru Mizushima 50 Director\nRoger W. Parsons 52 Director\nFrank T. Nickell 46 Director\nJ. Danforth Quayle* 47 Director\nJohn Rutledge 45 Director\nJoseph S. Schuchert* 65 Director\n* The Management Development Committee functions as the compensation committee of the Company. Since December 2, 1993, its members have been Messrs. Quayle and Schuchert. Prior thereto Mr. Schuchert and two other directors who retired in December, Richard M. Cyert and Edward Donley, served as members of the committee.\nDirectors are elected to hold office until the next annual meeting of stockholders or until their successors are elected. Messrs. Kampouris, Mizushima, Nickell, and Schuchert were elected in 1988; Mr. Kerckhove in September 1990; Mr. Hinrichs in March 1991; Dr. Rutledge in March 1993; Mr. Quayle in September 1993; and Mr. Parsons in March 1994.\nHolding, Kelso ASI Partners, L.P. (the 73 percent owner of Holding) (\"ASI Partners\"), and executive officers and certain other management personnel of the Company who purchased shares of Holding common stock (\"Management Investors\") entered into a Stockholders Agreement that, among other things, provides for arrangements regarding the control of the election of directors of Holding.\nUntil the earlier of (i) the occurrence of a public offering pursuant to an effective registration statement under the Securities Act covering the offer and sale of Holding common stock to the public and underwritten by an investment banking firm of nationally recognized standing and (ii) July 7, 1998, the Management Investors as a group are entitled to nominate at least two directors to the Board of Directors of Holding, and ASI Partners is entitled to nominate the remaining directors. As a result, during such period ASI Partners will control the Board of Directors. To effectuate their rights, the Management Investors and ASI Partners have agreed in the Stockholders' Agreement to grant an irrevocable proxy to the Secretary of Holding to vote their shares of common stock in accordance with such nominations. Such grant of an irrevocable proxy terminates upon Holding's becoming subject to the proxy rules under the Securities Exchange Act of 1934. At present the Board of Directors of Holding consists of nine directors.\nThe sole holder of the outstanding common stock of American Standard Inc. is Holding, and Holding exclusively elects the directors of American Standard Inc. Currently the directors of Holding are also the directors of American Standard Inc.\nSet forth below is the principal occupation of each of the executive officers and directors named above during the past five years (except as noted, all positions are with the Company).\nMr. Kampouris was elected Chairman in December 1993 and President and Chief Executive Officer in February 1989. Prior thereto he was Senior Vice President, Building Products, from 1984 to February 1989. He is also a director of Daido Hoxan Inc. Mr. Kampouris has served as a director of the Company since July 1988.\nMr. Hinrichs was elected Senior Vice President, Transportation Products, in December 1990. Prior thereto he served as Vice President and Group Executive, Automotive Products, from 1987 to 1990. Mr. Hinrichs has served as a director of the Company since March 1991.\nMr. Kerckhove was elected Senior Vice President, Plumbing Products, in June 1990. Prior thereto he was Vice President (from 1985 until June 1990) and Group Executive (from 1988 until June 1990) of European Plumbing Products. Mr. Kerckhove has served as a director of the Company since September 1990.\nMr. Allardyce was elected Vice President and Chief Financial Officer in January 1992. Prior thereto he served as Vice President and Controller from February 1983 until December 1991.\nMr. Apostolopoulos was elected Vice President and Group Executive, Americas Plumbing Products, in December 1990. Prior thereto he served as the executive in charge of Plumbing Products' joint ventures from September 1989 to November 1990 and Managing Director of the Company's Egyptian subsidiary from July 1984 to August 1989.\nMr. Battaglia was elected Vice President and Treasurer in September 1991. Prior thereto he was Assistant Treasurer.\nMr. Canizares was elected Vice President, Air Conditioning Products' Asia\/America Zone, in December 1990. Prior thereto he served as the executive in charge of this zone and Manager of Planning and Distribution from November 1986 to November 1990.\nMr. Delker was elected Vice President and Group Executive, Worldwide Fittings, Plumbing Products, in April 1990. Prior thereto he served as executive in charge of the Company's brass fittings manufacturing operations from June 1982 until March 1990.\nMr. Deshotel was elected Vice President, Human Resources, in January 1992. Prior thereto he served as Group Vice President, Human Resources, for U.S. Plumbing Products from September 1986 until December 1991.\nMr. Gallimore was elected Vice President, Systems and Technology, in December 1990. Prior thereto he served as the executive in charge of Manufacturing and Technology from 1984 to November 1990.\nMr. Gandini was elected Vice President and Group Executive, European Plumbing Products, in July 1990. Prior thereto he served as General Manager of Ideal Standard S.p.A., the Italian subsidiary of the Company, from January 1978 until June 1990.\nMr. Hilger was elected Vice President and Group Executive, Air Conditioning Products, in Europe, Middle East and Africa, in June 1988.\nMr. Huwendiek was elected Vice President, Automotive Products in Germany, in January 1992. Prior thereto he served as Managing Director of WABCO Germany since June 1987.\nMr. Jaqua was elected Vice President and General Counsel and Secretary in April 1989. Prior thereto he was Associate General Counsel and Assistant Secretary.\nMr. Kissel was elected Vice President in charge of Air Conditioning Products' Unitary Products Group in January 1992, becoming Group Executive in March 1994. He served as Vice President, Sales and Distribution, for Air Conditioning Products, from December 1990 until January 1992 and served as divisional Senior Vice President in charge of U.S. Sales from January to November 1990. He was in charge of Western Regional Sales from January 1989 to January 1990.\nMr. Klug was elected Vice President in 1985 and has been in charge of Trane International since December 1993. He served as Group Executive, Unitary Products Group, from April 1990 until December 1993. He was Group Executive, North American Sales and Distribution, Air Conditioning Products, from October 1987 to March 1990.\nMr. Lamothe was elected Vice President, Automotive Products in France, in January 1992. He served as Group Vice President of the French transportation business during 1991 and prior thereto was General Manager of the French transportation subsidiary.\nMr. Nutter was elected Vice President, Automotive Products in the United Kingdom, in January 1992. Prior thereto he served as Vice President and General Manager of WABCO Transportation U.K. Limited, the United Kingdom transportation subsidiary of the Company from March 1991 until December 1991 and Group Managing Director of the United Kingdom transportation subsidiary from June 1987 until February 1991.\nMr. Pipes was elected Vice President and Group Executive for the Far East Region of Plumbing Products in May 1992. Prior thereto he served as Managing Director of the Company's Philippine subsidiary from May 1990 until April 1992 and was Group Vice President, Control & Finance, of U.S. Plumbing Products from March 1985 until April 1990.\nMr. Schiller was elected Vice President and Group Executive, Compressor Business (Air Conditioning Products) in March 1994. Prior thereto he served as General Manager, Compressor Business Group, from May 1993 to February 1994 and Manager and then General Manager of the Company's Tyler, Texas, facility from March 1986 to April 1993.\nMr. Schultz was elected Vice President and Group Executive, Commercial Systems, in 1987.\nMr. Simon was elected Vice President and Controller in January 1992. Prior thereto he served as Vice President and Controller of the Air Conditioning Products' Commercial Systems Group from December 1984 to December 1991.\nMr. Wade W. Smith was elected Vice President, U.S. Plumbing Products, in May 1992. Prior thereto he served as Group Vice President in charge of the Chinaware Business Unit of U.S. Plumbing Products from February 1992 until April 1992 and from April 1987 to February 1992 he was Vice President and General Manager of the Building Automation Systems Division of the Commercial Systems Group of Air Conditioning Products.\nMr. Stein was elected Vice President, General Auditor, in March 1994; from December 1986 to February 1994 he was the Company's General Auditor.\nMr. Wellbrock was elected Vice President, Taxes, effective January 1, 1994. Prior thereto he served as Director of Taxes from 1988 through 1993.\nMr. Mizushima has been President and Chief Operating Officer of Daido Hoxan Inc. since the merger in April 1993 of Hoxan Corporation with Daido Sanso Company (a subsidiary of Air Products and Chemicals Inc.). Prior thereto Mr. Mizushima was President of Hoxan Corporation, a position he held since 1984. He is also a director of Daido Hoxan. Daido Hoxan Inc is the second largest supplier of industrial gases in Japan. One of its subsidiaries is a distributor of American-Standard plumbing products in Japan. Mr. Mizushima has served as a director of the Company since July 1988.\nMr. Nickell has been President and a director of Kelso & Companies, Inc., since March 1989. Kelso & Companies, Inc. is the general partner of Kelso & Company, L.P. From 1984 to 1989 Mr. Nickell was a general partner of Kelso & Company, L.P. He is also a director of Club Car, Inc.; King Holding Corp; and Tyler Holdings Corporation. Mr. Nickell has served as a director of the Company since May 1988.\nMr. Parsons is Managing Director of Rea Brothers Group PLC (\"Rea Brothers Group\"), which he joined in 1988 after a long banking career. Rea Brothers Group is a U.K. holding company of subsidiaries engaged in the investment banking business. He also holds directorships in several subsidiaries of Rea Brothers Group. Mr. Parsons was elected as a director of the Company on March 2, 1994.\nMr. Quayle served as Vice President of the United States from January 1989 to January 1993. Since leaving that office Mr. Quayle has been associated with Circle Investors, Inc. (an investment planning and consulting firm), and FX Strategic Advisors, Inc. (an international trade consulting firm), both of which he serves as Chairman. He is a Director of Central Newspapers, Inc. Mr. Quayle has served as a director of the Company since September 1993.\nDr. Rutledge has been Chairman of Rutledge & Company, Inc., a merchant banking firm, since January 1991. He is the founder and Chairman of Claremont Economics Institute, an economic research firm established in 1975. He is also a director of Earle M. Jorgensen & Company, Lazard Freres Funds, Medical Specialties Group, and Utendahl Capital Partners and is a special advisor to Kelso & Company. Dr. Rutledge has served as a director of the Company since March 1993.\nMr. Schuchert has been Chairman, CEO, and a director of Kelso & Companies, Inc., since March 1989. Kelso & Companies, Inc. is the general partner of Kelso & Company, L.P. From 1984 to 1989 Mr. Schuchert was managing general partner of Kelso & Company, L.P. He is also a director of Earle M. Jorgensen & Company. Mr. Schuchert has served as a director of the Company since May 1988.\nOn December 23, 1992, Kelso & Company and its chief executive officer, Mr. Schuchert, without admitting or denying the findings contained therein, consented to an administrative order in respect of a Securities and Exchange Commission (\"Commission\") inquiry relating to the 1990 acquisition of a portfolio company by a Kelso affiliate. The order found that Kelso's tender offer filing in connection with the acquisition did not comply fully with the Commission's tender offer reporting requirements, and required Kelso and Mr. Schuchert to comply with these requirements in the future.\nCompensation Committee Interlocks and Insider Participation\nMr. Schuchert is a member of the Management Development Committee (the Compensation Committee) of the Company's Board of Directors. He is Chairman of Kelso & Companies, Inc. (the general partner of Kelso & Company, L.P.) and a general partner of American Standard Partners, the general partner of Kelso ASI Partners.\nThe Company pays Kelso an annual fee of $2.75 million for providing management consulting and advisory services, including those of Messrs. Schuchert and Nickell. The fee is reduced depending on the number of shares Kelso controls of Holding or the Company, with final termination when Kelso's ownership control falls below 20 percent.\nThe Company also entered into a transaction with Kelso Insurance Services, Incorporated (an affiliate of Kelso) (\"Kelso Insurance\"), and American Telephone and Telegraph Company (\"AT&T\") pursuant to which the Company as well as other Kelso affiliated companies participates in a telecommunications network under which AT&T provides communications services to the group at a special lower tariff rate. In connection with that transaction the Company has guaranteed a minimum annual usage by it of $2 million for a period of five years commencing 1993. No fee was paid by the Company to Kelso Insurance in connection with this transaction.\nIn August 1993 the Company purchased a limited partnership interest in Kelso Investment Associates V, L.P. (\"KIA V\") in exchange for its commitment to make a capital contribution of $5 million to KIA V. KIA V was formed to seek out business opportunities and invest primarily in equity securities, leveraged buy-outs, and joint ventures. Kelso Partners V, L.P. serves as the general partner of KIA V. The general partners of Kelso Partners V, L.P., include Messrs. Schuchert and Nickell. Kelso & Co., L.P., is the manager of KIA V and, as such, acts as investment adviser of KIA V. The management fee relating to the interest held by the Company has been waived.\nThe Supplemental Plan benefits are based on credited years of service and average annual compensation for the highest three calendar years of the final ten calendar years of employment (not exceeding 60 percent of average annual compensation for such years of service) and are reduced by an offset consisting of certain other retirement benefits, including amounts payable under the Terminated Plan, annual allocations to the executive officer's Employee Stock Ownership Plan (\"ESOP\") accounts, and Social Security benefits. Benefits under the Supplemental Plan are vested after five years of service or employment continuation through age 65. Compensation used in determining Supplemental Plan benefits (covered compensation) includes only salary and bonus reflected in the Summary Compensation Table above. No covered compensation of any Named Officer differs by more than 10% from the salary and bonus set forth in the Summary Compensation Table.\nThe years of credited service under the Supplemental Plan for the Named Officers are as follows: Mr. Kampouris, 28 years; Mr. Hinrichs, 35 years; Mr. Kerckhove, 32 years; Mr. Allardyce, 17 years; Mr. Gandini, 33 years; and Mr. H.T. Smith, 13 years.\nThe current annual target benefit for Mr. Kampouris is approximately 20 percent higher than that shown in the above table since a different benefit formula under the pre-1990 version of the Supplemental Plan applies to his period of service and earnings prior to April 27, 1991. The method of calculating the lump sum payable to Mr. Kampouris that is attributable to his accrued benefit through April 27, 1991, has been adjusted to reflect the recent increase in the Federal ordinary income tax rates.\nAn amendment to the Supplemental Plan in 1993 established minimum annual lump sum payments for certain Named Officers which, after giving effect to Plan offsets, are estimated as follows: Mr. Kampouris, $427,000; Mr. Hinrichs, $143,000; Mr. Kerckhove, $37,000; and Mr. Gandini, $24,000.\nShares of Holding Common Stock distributable to Plan participants are delivered to a grantor's trust for their benefit. The trust will terminate following a public offering of Holding Common Stock, at which time shares or cash credited to each participant's account is to be distributed. Payment, however, may be deferred if an event of default under the Company's loan agreements or debt indentures has occurred or will occur as a result of such payment. Until distribution, assets of the trust are subject to the claims of creditors of Holding or the Company. Shares held by the trust are voted by the trustee in accordance with the Company's directions.\nDirectors' Fees and Other Arrangements\nIn the first half of 1993 each outside director was paid a fee of $5,000 per calendar quarter and in addition received a fee of $500 for each meeting of the Board attended; in the last half each outside director was paid a fee of $6,750 per calendar quarter and in addition received a fee of $1,000 for each meeting of the Board attended. Effective with the third quarter, an outside director is also paid $1,000 for attending a Committee meeting. (Previously an outside director was paid $500 for attending a Committee meeting not held on the day of a Board meeting.) The only directors currently eligible for directors' fees are directors who are neither employees of the Company or Kelso. They are Messrs. Mizushima, Parsons, Quayle, and Rutledge. All directors are reimbursed for reasonable expenses incurred in connection with attendance at any meetings. No separate directors' fees are paid for attendance at meetings of Holding that are held on the same day the Company's Board meets.\nA Supplemental Compensation Plan for Outside Directors (\"Supplemental Compensation Plan\") was adopted in June 1989. A Plan Account was establish- ed for each participating director at that time consisting of units equivalent to $50,000 of Holding common stock with each unit having a value of $19 per share, the independently appraised value of the shares of Holding as of December 31, 1988. For the purpose of providing a measure of parity among the directors, the $50,000 amount was increased to $100,000 for participating directors who became Board Members after January 1, 1993, with such amount converted into units for the account of such directors at the rate of $42.96 per unit ($42.96 representing the independently appraised value of the shares of Holding as of December 31, 1992). When a participating director ceases to be a member of the Board, he or his beneficiary will receive a cash payment equal to the number of units in his Plan Account multiplied by the per-share value of Holding common stock based on the then last year-end appraisal. If a participating director is removed for cause, his entire interest in the Plan is forfeited. Employee-directors and Messrs. Nickell and Schuchert do not participate in this Plan.\nMr. Donley and Dr. Cyert, directors who retired in December 1993, each received a payment of $113,053 pursuant to the Supplemental Compensation Plan.\nCorporate Officers Severance Plan and Other Employment or Severance Arrangements\nThe Board of Directors approved a severance plan for executive officers (the \"Officers Severance Plan\"), effective April 27, 1991. The Officers Severance Plan provides that any participant whose employment is involuntarily terminated by the Company without \"Cause\" (as defined in the Officers Severance Plan) or who leaves the Company for \"Good Reason\" (as defined in the Officers Severance Plan) shall be paid an amount equal to the sum of two (three in the case of the Chief Executive Officer) times such participant's annual base salary at the rate in effect at the time of termination, a proration of the then Annual Incentive Plan target award (described previously), and one (two in the case of the Chief Executive Officer) times such target award. In addition, group life, accident, and disability insurance coverages, as well as group medical coverage, will be continued for up to 24 (36 in the case of the Chief Executive Officer) months following such officer's termination. The Named Officers (other than Mr. Smith, who retired in December 1993) are participants in this Plan.\nAn agreement was entered into with H. Thompson Smith in December 1993 concerning the terms of his termination of employment and retirement. Under that agreement he is entitled to receive his 1993 Annual Incentive Plan award in the amount of $154,000 and will be entitled to receive the same amount in March 1995. In addition, Mr. Smith is retained as a consultant through 1995 at the rate of $29,583 per month. In the event of Mr. Smith's death, the fees remaining through the end of 1995 are payable in a lump sum to his spouse or estate. He is also entitled to receive payments under the Company's Long-Term Incentive Compensation Plan for the 1992-1994 and 1993-1995 performance periods in accordance with its terms, such awards to be prorated to December 31, 1993. Mr. Smith continues under the Company's medical and life insurance programs through 1995.\nITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT\nAll of the common stock, $.01 par value, of American Standard Inc., the only voting stock of American Standard Inc., is owned by Holding. Set forth below is the number of shares of Common Stock, par value $.01 per share, of Holding, the only outstanding voting stock of Holding, beneficially owned as of March 10, 1994, by each Director and nominee, each Named Executive Officer, all Directors and executive officers of Holding as a group, and each 5% holder.\nShares Percent Name and Address Beneficially of Title of Class of Beneficial Owner Owned Class Holding common stock, par value - Kelso ASI Partners, L.P.(a) 18,000,000 73% $.01 per share (\"ASI Partners\") Joseph S. Schuchert(a) 18,000,000(d) 73% (d) Frank T. Nickell(a) 18,000,000(d) 73% (d) George E. Matelich(a) 18,000,000(d) 73% (d) Thomas R. Wall IV(a) 18,000,000(d) 73% (d) Emmanuel A. Kampouris(b) 225,000 * George H. Kerckhove(b) 113,000 * Horst Hinrichs(b) 90,000 * Fred A. Allardyce(b) 113,000 * American-Standard Employee Stock Ownership Plan(c) 4,267,710 17% All current directors and executive officers of Holding and the Company as a group 18,824,900(e) 77% (e)\n* Less than one percent.\n(a) The business address for such persons is c\/o Kelso & Company, 350 Park Avenue, New York, N.Y. 10022.\n(b) Mr. Kampouris is Chairman, President and Chief Executive Officer and a director of the Company and of Holding. Messrs. Hinrichs and Kerckhove are Named Officers and directors of the Company and of Holding, and Mr. Allardyce is a Named Officer of the Company and of Holding.\n(c) The business address for the ESOP is c\/o American Standard Inc., 1114 Avenue of the Americas, New York, N.Y. 10036. At December 31, 1993, 3,548,609 Plan shares were allocated to executive officers of Holding and the Company and other ESOP participants. The number of shares shown for executive officers in the table above does not reflect shares allocated to their accounts in the ESOP. Shares in the ESOP account are voted by the ESOP trustee as directed by the plan board (the board administering the trust which currently consists of executive officers of the Company). However, participants may direct the vote of their ESOP account shares in matters involving mergers, recapitalizations, or dispositions of substantial assets. Until termination of employment a participant cannot dispose of shares in his ESOP account. Shares distributed to a participant on termination are subject to the Company's right of first refusal. The shares in the Named Officers ESOP accounts are as follows: Mr. Kampouris, 3,995 shares; Mr. Kerckhove, 3,953 shares; Mr. Hinrichs, 4,266 shares; Mr. Allardyce, 4,246 shares; and Mr. Gandini, 2,225 shares. The shares in the ESOP accounts for all executive officers total 69,218 shares.\nThe number of shares shown for executive officers in the table above also does not reflect shares of Holding Common Stock issued as part of the payouts under the LTIP and held for them in trust under a trust agreement dated as of January 1, 1993. Shares in the trust are voted by the trustee as directed by the Company. Until termination of the trust, a beneficiary of the Trust cannot dispose of shares credited to his account. Shares in the Named Officers' accounts in the trust are as follows: Mr. Kampouris, 4,453 shares; Mr. Kerckhove, 2,012 shares; Mr. Hinrichs, 1,787 shares; Mr. Allardyce, 1,224 shares; and Mr. Gandini, 1,176 shares. The shares in the trust accounts for all executive officers total 28,620 shares.\nAlso not included above are 19,198 shares of ASI Holding common stock held in a similar grantor's trust for the account of certain executive officers. These were earned by them under an employee incentive plan prior to their becoming officers.\n(d) Messrs. Schuchert and Nickell, each a director of the Company and of Holding, and Messrs. Matelich and Wall may be deemed to share beneficial ownership of shares owned of record by ASI Partners by virtue of their status as general partners of American Standard Partners, the general partner of ASI Partners. Messrs. Schuchert, Nickell, Matelich and Wall share investment and voting power with respect to securities owned by ASI Partners. See \"Certain Transactions and Relationships.\" Dr. Cyert, who was a director of Holding and the Company until December 1993, is a limited partner in one of the Kelso partnerships that has invested in ASI Partners.\n(e) Out of such 18,824,900 shares, 18,000,000 shares represent shares of Common Stock owned by ASI Partners in which Messrs. Schuchert and Nickell, each a director of Holding, may be deemed to share beneficial ownership by virtue of their status as general partners of American Standard Partners, the general partner of ASI Partners.\nITEM 13. CERTAIN TRANSACTIONS AND RELATIONSHIPS\nMessrs. Schuchert and Nickell, directors of Holding and the Company, are Chairman and President, respectively, of Kelso & Companies, Inc. (the general partner of Kelso & Company, L.P.), and are general partners of American Standard Partners, the general partner of Kelso ASI Partners. Mr. Schuchert is also a member of the Management Development Committee (the compensation committee) of the Company's Board of Directors.\nThe Company pays Kelso an annual fee of $2.75 million for providing management consulting and advisory services, including those of Messrs. Schuchert and Nickell. The fee is reduced depending on the number of shares Kelso controls of Holding or the Company, with final termination when Kelso's ownership control falls below 20 percent.\nThe Company also has entered into a transaction with Kelso Insurance Services, Incorporated (an affiliate of Kelso) (\"Kelso Insurance\"), and American Telephone and Telegraph Company (\"AT&T\") pursuant to which the Company as well as other Kelso affiliated companies participates in a telecommunications network under which AT&T provides communications services to the group at a special lower tariff rate. In connection with that transaction the Company has guaranteed a minimum annual usage by it of $2 million for a period of five years commencing 1993. No fee was paid by the Company to Kelso Insurance in connection with this transaction.\nIn August 1993 the Company purchased a limited partnership interest in Kelso Investment Associates V, L.P. (\"KIA V\"), in exchange for its commitment to make a capital contribution of $5 million to KIA V. KIA V was formed to seek out business opportunities and invest primarily in equity securities, leveraged buy-outs, and joint ventures. Kelso Partners V, L.P. serves as the general partner of KIA V. The general partners of Kelso Partners V, L.P., include Messrs. Schuchert and Nickell. Kelso & Co., L.P. is the manager of KIA V and, as such, acts as investment adviser of KIA V. The management fee relating to the interest held by the Company has been waived.\nThe Company will invest in a Cayman Islands corporation, A-S China Plumbing Products Limited (\"ASPPL\"), to be used for the establishment of various joint ventures in the People's Republic of China. The Company will have a 21% voting interest in ASPPL. Shares in ASPPL will also be sold in a private placement to certain institutions and other investors, including certain executive officers and employees of the Company and its subsidiaries.\nMr. Mizushima, a director of the Company and of Holding, is President and Chief Operating Officer of Daido Hoxan Inc., a Japanese corporation which has an approximately 11 percent limited partnership interest in ASI Partners. Daido Hoxan Inc. is the largest distributor of the Company's plumbing products in Japan. Its transactions as distributor with the Company and its subsidiaries in 1992, which were on customary terms and in the ordinary course of business, were not material to either the Company or Daido Hoxan Inc. The Company also entered into leasing transactions with an affiliate of Daido Hoxan whereby it has leased certain machinery and equipment on financial terms that were comparable to those available from other leasing companies. The leasing transactions were not material to either the Company or Daido Hoxan Inc.\nFidelity Management Trust Company (\"Fidelity\") is the owner of record of the shares of Holding held by the ESOP, a 17% owner of Holding shares. Fidelity was paid by the Company approximately $180,000 in 1993 for services in connection with administering the Company's ESOP and Savings Plan.\nMr. Nickell's father is an officer and owns more than 10 percent of AC Corporation, a contracting company which purchases air conditioning products from the Company's Trane Division. Such purchases in 1993 were on customary terms and in the ordinary course of business and were not material to either the Company or AC Corporation.\nManagement Investors Stockholders Agreement\nUnder the Stockholders Agreement, pursuant to which Management Investors purchased shares of Holding common stock, Holding is obligated to repurchase, subject to the limitations contained in the Company's lending arrangements and debt instruments, such shares at certain fair market prices in case of the death, disability, retirement, or termination of employment of a Management Investor. Shares are paid for within the constraints of the Company's lending arrangement and debt instruments, as supplemented by a Schedule of Priorities established by Holding's Board of Directors. The Named Officers (other than Mr. Gandini) and most of the executive officers are Management Investors and parties to the Stockholders Agreement.\nPART IV\nITEM 14. CONSOLIDATED EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.\n(a) 1 and 2. Financial statements and financial statement schedules\nThe financial statements and schedules listed in the accompanying index to financial statements are filed as part of this annual report on Form 10-K.\n3. Exhibits\nThe exhibits listed on the accompanying index to exhibits are filed as part of this annual report on Form 10-K.\nIncluded in the exhibits are the following management contracts or compensatory plan arrangements required to be filed as exhibits pursuant to Item 14(c) of Form 10-K\nAmerican Standard Inc. Long-Term Incentive Compensation Plan, as amended Trust Agreement for American Standard Inc. Long-Term Incentive Compensation Plan American Standard Inc. Annual Incentive Plan American Standard Inc. Management Partner's Bonus Plan with amendments American Standard Inc. Executive Supplemental Retirement Benefit Program American Standard Employee Stock Ownership Plan with amendments Estate Preservation Plan with amendments Corporate Officers Severance Plan American Standard Inc. Supplemental Compensation Plan for Outside Directors ASI Holding Corporation 1989 Stock Purchase Loan Program Summary of Terms of Unfunded Deferred Compensation Plan Letter of Agreement with respect to H. Thompson Smith's retirement and consulting services\n(b) Reports on Form 8-K for the quarter ended December 31, 1993.\nNone\nSignatures\nPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.\nASI HOLDING CORPORATION\nBy \/s\/ Emmanuel A. Kampouris (Emmanuel A. Kampouris) (Chairman, President and Chief Executive Officer)\nMarch 30, 1994\nPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:\n\/s\/ Emmanuel A. Kampouris Director, Chairman and President March 30, 1994 (Emmanuel A. Kampouris) (Chief Executive Officer)\n\/s\/ Fred A. Allardyce Vice President and Chief March 30, 1994 (Fred A. Allardyce) Financial Officer\n\/s\/ G. Ronald Simon Vice President & Controller March 30, 1994 (G. Ronald Simon) (Principal Accounting Officer)\n\/s\/ Horst Hinrichs Director March 30, 1994 (Horst Hinrichs)\n\/s\/ George H. Kerckhove Director March 30, 1994 (George H. Kerckhove)\n\/s\/ Shigeru Mizushima Director March 30, 1994 (Shigeru Mizushima)\n\/s\/ Frank T. Nickell Director March 30, 1994 (Frank T. Nickell)\n\/s\/ J. Danforth Quayle Director March 30, 1994 (J. Danforth Quayle)\n\/s\/ Roger W. Parsons Director March 30, 1994 (Roger W. Parsons)\n\/s\/ Joseph S. Schuchert Director March 30, 1994 (Joseph S. Schuchert)\n\/s\/ John Rutledge Director March 30, 1994 (John Rutledge)\nASI HOLDING CORPORATION AND FINANCIAL STATEMENT SCHEDULES COVERED BY REPORT OF INDEPENDENT AUDITORS (Item 14 (a))\nForm 10-K (Pages) 1. Financial Statements\nConsolidated Balance Sheet at December 31, 1993 and 1992 42 Years ended December 31, 1993, 1992 and 1991, Consolidated Statement of Operations 41 Consolidated Statement of Stockholder's Equity (Deficit) 43 Consolidated Statement of Cash Flows 44-45 Notes to Consolidated Financial Statements 46-62 Segment Data 63 Segment data for capital expenditures, depreciation and amortization 23-29 Quarterly Data (Unaudited) 64 Report of Independent Auditors 40\n2. Financial statement schedules, years ended December 31, 1993, 1992 and 1991 Report of Independent Auditors 84\nIII Condensed Financial Information of Registrant 85-88 V Facilities 89 VI Accumulated Depreciation of Facilities 90 VIII Reserves 91 IX Short-Term Borrowings 92 X Supplementary Income Statement Information 93\nAll other schedules have been omitted because the information is not applicable or is not material or because the information required is included in the financial statements or the notes thereto.\nReport of Independent Auditors\nStockholders and Board of Directors ASI Holding Corporation\nWe have audited the consolidated financial statements of ASI Holding Corporation as of December 31, 1993 and 1992, and for each of the three years in the period ended December 31, 1993, and have issued our report thereon dated March 14, 1994 (included elsewhere in this Annual Report on Form-10K). Our audits also included the consolidated schedules listed in Item 14(a)2. These schedules are the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits.\nIn our opinion, the consolidated 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 required to be stated therein.\n\/s\/ Ernst & Young Ernst & Young\nMarch 14, 1994\nSCHEDULE III - CONDENSED FINANCIAL INFORMATION OF REGISTRANT\nSTATEMENT OF CASH FLOWS (Parent Company Separately) (Dollars in thousands)\nYear Ended Year Ended December 31, December 31, 1993 1992\nCASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (208,567) $ (57,238)\nAdjustments to reconcile net loss to net cash provided by operating activities: Equity in net loss of subsidiary 208,567 57,238\n- ---------------------------------------------------------------------\nNet cash flow from operating activities 0 0\n- ---------------------------------------------------------------------\nCASH PROVIDED (USED) BY INVESTING ACTIVITIES: Investment in subsidiary (4,585) (3,103) Purchase of common stock by subsidiary 12,194 10,950\n- ---------------------------------------------------------------------\nNet cash provided by investing activities 7,609 7,847\n- ---------------------------------------------------------------------\nCASH PROVIDED (USED) BY FINANCING ACTIVITIES: Issuance of common stock 4,585 3,103 Common stock repurchased (12,194) (10,950) Repayments on subscriptions receivable 482 653 Repayment of loan from subsidiary (482) (653) - ---------------------------------------------------------------------\nNet cash used by financing activities (7,609) (7,847)\n- ---------------------------------------------------------------------\nNet change in cash and cash equivalents $ 0 $ 0 =====================================================================\nSee notes to the financial statements.\nSCHEDULE III - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (cont'd) NOTES TO FINANCIAL STATEMENTS (Parent Company Separately)\n(A) The notes to the consolidated financial statements of ASI Holding Corporation (the \"Parent Company\" or \"Holding\") are an integral part of these condensed financial statements.\n(B) Holding was organized by Kelso & Company, L.P., a private merchant banking firm, to participate in the acquisition of American Standard Inc. American Standard Inc. is now a wholly owned subsidiary of Holding. Holding has no other investments or operations.\nASI HOLDING CORPORATION\nINDEX TO EXHIBITS\n(Item 14(a)3 - Exhibits Required by Item 601 of Regulation S-K and Additional Exhibits)\n(The File Number of ASI Holding Corporation, the Registrant, and for all Exhibits incorporated by reference is 33-23070, except those Exhibits incorporated by reference in filings made by American Standard Inc. (the \"Company\") whose File Number is 1-470)\n(3) (i) Certificate of Incorporation of ASI Holding Corporation (\"Holding\"); previously filed as Exhibit 3.1 in Registration Statement No. 33-23070 under the Securities Act of 1933, as amended, and herein incorporated by reference.\n(ii) Amendment to Certificate of Incorporation amending Article FOURTH thereof; previously filed as Exhibit (3)(ii) in Holding's Form 10-K for the fiscal year ended December 31, 1991, and herein incorporated by reference.\n(iii) By-laws of Holding; previously filed as Exhibit 3.2 in Registration Statement No. 33-23070 under the Securities Act of 1933, as amended, and herein incorporated by reference.\n(4) (i) Indenture, dated as of November 1, 1986, between the Company and Manufacturers Hanover Trust Company, Trustee, including the form of 9-1\/4% Sinking Fund Debenture Due 2016 issued pursuant thereto on December 9, 1986, in the aggregate principal amount of $150,000,000; previously filed as Exhibit 4(iii) in the Company's Form l0-K for the fiscal year ended December 31, 1986, and herein incorporated by reference.\n(ii) Instrument of Resignation, Appointment and Acceptance, dated as of April 25, 1988 among the Company, Manufacturers Hanover Trust Company (the \"Resigning Trustee\") and Wilmington Trust Company (the \"Successor Trustee\"), relating to resignation of the Resigning Trustee and appointment of the Successor Trustee, under the Indenture referred to in Exhibit (4)(i) above; previously filed as Exhibit (4)(ii) in Registration Statement No. 33-64450 of the Company under the Securities Act of 1933, as amended, and herein incorporated by reference.\nINDEX TO EXHIBITS - (Continued)\n(iii) Form of Indenture, dated as of July 1, 1988, between the Company and Shawmut Bank Connecticut, National Association (formerly known as The Connecticut National Bank), as Trustee, relating to the Company's 14-1\/4% Subordinated Discount Debentures due 2003; previously filed as Exhibit 4.3 in Amendment No. 2 to Registration Statement No. 33-22126 of the Company under the Securities Act of 1933, as amended, and herein incorporated by reference.\n(iv) Form of Debenture evidencing the 14-1\/4% Subordinated Discount Debentures due 2003 included as Exhibit A to the Form of Indenture referred to in (4)(iii) above.\n(v) Indenture, dated as of May 15, 1992, between the Company and First Trust National Association, Trustee, relating to the Company's 10-7\/8% Senior Notes due 1999, in the aggregate principal amount of $150,000,000; copy of Indenture previously filed as Exhibit (4)(i) by the Company in its Form 10-Q for the quarter ended June 30, 1992, and herein incorporated by reference.\n(vi) Form of 10-7\/8% Senior Notes due 1999 included as Exhibit A to the Indenture described in (4)(v) above.\n(vii) Indenture dated as of May 15, 1992, between the Company and First Trust National Association, Trustee, relating to the Company's 11-3\/8% Senior Debentures due 2004, in the aggregate principal amount of $250,000,000; copy of Indenture previously filed as Exhibit (4)(iii) by the Company in its Form 10-Q for the quarter ended June 30, 1992, and herein incorporated by reference.\n(viii) Form of 11-3\/8% Senior Debentures due 2004 included as Exhibit A to the Indenture described in (4)(vii) above.\n(ix) Form of Indenture, dated as of June 1, 1993, between the Company and United States Trust Company of New York, as Trustee, relating to the Company's 9-7\/8% Senior Subordinated Notes Due 2001; previously filed as Exhibit (4)(xxxi) in Amendment No. 1 to Registration Statement No. 33-61130 of the Company under the Securities Act of 1933, as amended, and herein incorporated by reference.\n(x) Form of Note evidencing the 9-7\/8% Senior Subordinated Notes Due 2001 included as Exhibit A to the Form of Indenture referred to in (4)(ix) above.\nINDEX TO EXHIBITS - (Continued)\n(xi) Form of Indenture, dated as of June 1, 1993, between the Company and United States Trust Company of New York, as Trustee, relating to the Company's 10-1\/2% Senior Subordinated Discount Debentures Due 2005; previously filed as Exhibit (4)(xxxiii) in Amendment No. 1 to Registration Statement No. 33-61130 of the Company under the Securities Act of 1933, as amended, and herein incorporated by reference.\n(xii) Form of Debenture evidencing the 10-1\/2% Senior Subordinated Discount Debentures Due 2005 included as Exhibit A to the Form of Indenture referred to in (4)(xi) above.\n(xiii) Form of Indenture, dated as of October 25, 1990, as amended and restated as of June 15, 1993, between the Company and Shawmut Bank, N.A., as Trustee, relating to Company's 12-3\/4% Junior Subordinated Debentures due 2003; previously filed as Exhibit (4)(xx) in Amendment No. 2 to Registration Statement No. 33-64450 of the Company under the Securities Act of 1933, as amended, and herein incorporated by reference.\n(xiv) Form of Debenture evidencing the 12-3\/4% Junior Subordinated Debentures Due 2003 included as Exhibit A to the Form of Indenture referred to in (4)(xiii) above.\n(xv) Assignment and Amendment Agreement, dated as of June 1, 1993, among the Company, Holding, certain subsidiaries of the Company, Bankers Trust Company, as agent under the 1988 Credit Agreement, the financial institutions named as Lenders in the 1988 Credit Agreement and certain additional Lenders and Chemical Bank, as Administrative Agent and Arranger; previously filed as Exhibit (4)(xiii) in Amendment No. 1 to Registration Statement No. 33-64450 of the Company under the Securities Act of 1933, as amended, and herein incorporated by reference.\n(xvi) Credit Agreement, dated as of June 1, 1993, among the Company, Holding, certain subsidiaries of the Company and the lending institutions listed therein, Chemical Bank, as Administrative Agent and Arranger; Bankers Trust Company, The Bank of Nova Scotia, The Chase Manhattan Bank, N.A., Deutsche Bank AG, The Long-Term Credit Bank of Japan, Ltd., New York Branch, and NationsBank of North Carolina, N.A., as Managing Agents, and Banque Paribas, Citibank, N.A., and Compagnie Financiere de CIC et de l'Union Europeenne, New York Branch, as Co-Agents; previously filed as Exhibit (4)(xiv) in Amendment No. 1 to Registration Statement No. 33-64450 of the Company under the Securities Act of 1933, as amended, and herein incorporated by reference.\nINDEX TO EXHIBITS - (Continued)\n(xvii) First Amendment, Consent and Waiver, dated as of February 10, 1994, to the Credit Agreement referred to in (4)(xvi) above; copy of Amendment is being filed as Exhibit (4)(xvii) by the Company in its Form 10-K for the year ended December 31, 1993, concurrently with the filing of Holding's Form 10-K for the same year and herein incorporated by reference.\n(xviii) Stockholders Agreement, dated as of July 7, 1988, as amended as of August 1, 1988, among Holding, Kelso ASI Partners, L.P., and the Management Stockholders named therein; previously filed as Exhibit 4.19 in Amendment No. 2 to the Registration Statement No. 33-23070 of Holding under the Securities Act of 1933, as amended, and herein incorporated by reference.\n(xix) Amendment to Section 2.1 of the Stockholders Agreement referred to in paragraph (4)(xviii) above, effective as of January 1, 1991; previously filed as Exhibit (4)(xxvii) by Holding in its Form 10-K for the fiscal year ended December 31, 1992, and herein incorporated by reference.\n(xx) Supplement and Amendment dated as of September 4, 1991 to the Stockholders Agreement dated as of July 7, 1988, as amended, referred to in paragraph (4)(xviii) above; previously filed as Exhibit (4)(ii) in Holding's Form l0-Q for the quarter ended September 30, 1991, and herein incorporated by reference.\n(xxi) Amended Paragraph 6.1 of the Stockholders Agreement referred to in paragraph (4)(xviii) above, effective as of September 2, 1993.\n(xxii) Revised Schedule of Priorities, effective as of September 5, 1991, as adopted by the Board of Directors of Holding pursuant to the Stockholders Agreement dated as of July 7, 1988, as amended, referred to in paragraph (4)(xviii) above; previously filed as Exhibit (4)(iii) in Holding's Form l0-Q for the quarter ended September 30, 1991, and herein incorporated by reference.\n(10) (i) Agreement and Plan of Merger, dated as of March 16, 1988, among the Company, ASI Acquisition Company and Holding and Offer Letter, dated March 16, 1988, between the Company and Kelso & Company, L.P.; previously filed as Exhibit 2 to the Company's Schedule 14D-9 filed March 21, 1988, in connection with the offer for all the shares of the Company's Common Stock by a corporation formed by Kelso & Company, L.P., and herein incorporated by reference.\nINDEX TO EXHIBITS - (Continued)\n(ii) Amendment, dated June 3, 1988 to Agreement and Plan of Merger referred to in l0(i) above; previously filed as Exhibit 2.50 in Amendment No. 1 to the Registration Statement No. 33-22126 of the Company under the Securities Act of 1933, as amended, and herein incorporated by reference.\n(iii) American Standard Inc. Long-Term Incentive Compensation Plan, as amended through February 6, 1992; previously filed as Exhibit (l0)(iv) by the Company in its Form l0-K for the year ended December 31, 1992, and herein incorporated by reference.\n(iv) Trust Agreement for American Standard Inc. Long-Term Incentive Compensation Plan; copy of Trust Agreement being filed as Exhibit (10)(iv) by the Company in its Form 10-K for the year ended December 31, 1993, concurrently with the filing of Holding's Form 10-K for the same year, and herein incorporated by reference.\n(v) American Standard Inc. Annual Incentive Plan; previously filed as Exhibit (l0)(vii) by the Company in its Form l0-K for the fiscal year ended December 31, 1988, and is herein incorporated by reference.\n(vi) American Standard Inc. Management Partners' Bonus Plan effective as of July 7, 1988; previously filed as Exhibit (l0)(i) in the Company's Form l0-Q for the quarter ended September 30, 1988, and herein incorporated by reference; amendments to Plan adopted on June 7, 1990, previously filed as Exhibit (4)(ii) in the Company's Form l0-Q for the quarter ended June 30, 1990, and herein incorporated by reference.\n(vii) American Standard Inc. Executive Supplemental Retirement Benefit Program, as restated to include all amendments through December 31, 1993; copy of restated program is being filed as Exhibit (10)(vii) by the Company in its Form 10-K for the year ended December 31, 1993, concurrently with the filing of Holding's Form 10-K for the same year and herein incorporated by reference.\n(viii) Stock Purchase Agreement, dated April 27, 1988, between ASI Acquisition Company and General Electric Capital Corporation (without schedules); previously filed as Exhibit 2.4 in Amended Registration Statement No. 33-22126 of the Company under the Securities Act of 1933, and is herein incorporated by reference.\nINDEX TO EXHIBITS - (Continued)\n(ix) Amendment, dated June 3, 1988, to Stock Purchase Agreement referred to in (l0)(viii) above; previously filed as Exhibit 2.6 in Amendment No. 1 in Registration Statement No. 33-22126 of the Company under the Securities Act of 1933, as amended, and herein incorporated by reference.\n(x) Form of Composite American-Standard Employee Stock Ownership Plan incorporating amendments through December 3, 1992; previously filed as Exhibit (10)(x) in Registration Statement No. 33-61130 of the Company under the Securities Act of 1933, as amended, and herein incorporated by reference.\n(xi) American-Standard Employee Stock Ownership Trust Agreement, dated as of December 1, 1991, between ASI Holding Corporation and Fidelity Management Trust Company (as successor to Citizens & Southern Trust Company (Georgia), N.A.), as trustee; previously filed as Exhibit (l0)(xiv) by the Company in its Form l0-K for the year ended December 31, 1991, and herein incorporated by reference.\n(xii) Consulting Agreement made July 1, 1988, with Kelso & Company, L.P. concerning general management and financial consulting services to the Company; previously filed as Exhibit (l0)(xviii) in the Company's Form l0-K for the fiscal year ended December 31, 1988, and herein incorporated by reference.\n(xiii) American Standard Inc. Supplemental Compensation Plan for Outside Directors as amended through September 1993; copy of Plan is being filed as Exhibit (10)(xv) by the Company in its Form l0-K for the year ended December 31, 1993 concurrently with the filing of Holding's 10-K for the same year and herein incorporated by reference.\n(xiv) ASI Holding Corporation 1989 Stock Purchase Loan Program; previously filed as Exhibit (l0)(i) in Holding's Form l0-Q for the quarter ended September 30, 1989, and herein incorporated by reference.\n(xv) Corporate Officers Severance Plan adopted by the Company in December, 1990, effective April 27, 1991; previously filed as Exhibit (l0)(xix) by the Company in its Form l0-K for the year ended December 31, 1990, and said Plan is herein incorporated by reference.\nINDEX TO EXHIBITS - (Continued)\n(xvi) Estate Preservation Plan, adopted by the Company in December, 1990; previously filed as Exhibit (l0)(xx) by the Company in its Form l0-K for the year ended December 31, 1990, and said Plan is herein incorporated by reference.\n(xvii) Amendment adopted in March 1993 to Estate Preservation Plan referred to in (10)(xvi) above; copy of Amendment is being filed as Exhibit (10)(xix) by the Company in its Form 10-K for the year ended December 31, 1993 concurrently with the filing of Holding's Form 10-K for the same year and herein incorporated by reference.\n(xviii) Summary of terms of Unfunded Deferred Compensation Plan adopted December 2, 1993; copy of Summary is being filed as Exhibit (10)(xviii) by the Company in its Form 10-K for the year ended December 31, 1993 concurrently with the filing of Holding's Form 10-K for the same year and herein incorporated by reference.\n(xix) Retirement\/Consulting Agreement, dated December 28, 1993, between H. Thompson Smith and the Company; copy of Agreement is being filed as Exhibit (10)(xix) by Company in its Form 10-K for the year ended December 31, 1993 concurrently with the filing of Holding's Form 10-K for the same year and herein incorporated by reference.\n(21) Listing of Holding's subsidiaries.","section_11":"","section_12":"ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT\nAll of the common stock, $.01 par value, of American Standard Inc., the only voting stock of American Standard Inc., is owned by Holding. Set forth below is the number of shares of Common Stock, par value $.01 per share, of Holding, the only outstanding voting stock of Holding, beneficially owned as of March 10, 1994, by each Director and nominee, each Named Executive Officer, all Directors and executive officers of Holding as a group, and each 5% holder.\nShares Percent Name and Address Beneficially of Title of Class of Beneficial Owner Owned Class Holding common stock, par value - Kelso ASI Partners, L.P.(a) 18,000,000 73% $.01 per share (\"ASI Partners\") Joseph S. Schuchert(a) 18,000,000(d) 73% (d) Frank T. Nickell(a) 18,000,000(d) 73% (d) George E. Matelich(a) 18,000,000(d) 73% (d) Thomas R. Wall IV(a) 18,000,000(d) 73% (d) Emmanuel A. Kampouris(b) 225,000 * George H. Kerckhove(b) 113,000 * Horst Hinrichs(b) 90,000 * Fred A. Allardyce(b) 113,000 * American-Standard Employee Stock Ownership Plan(c) 4,267,710 17% All current directors and executive officers of Holding and the Company as a group 18,824,900(e) 77% (e)\n* Less than one percent.\n(a) The business address for such persons is c\/o Kelso & Company, 350 Park Avenue, New York, N.Y. 10022.\n(b) Mr. Kampouris is Chairman, President and Chief Executive Officer and a director of the Company and of Holding. Messrs. Hinrichs and Kerckhove are Named Officers and directors of the Company and of Holding, and Mr. Allardyce is a Named Officer of the Company and of Holding.\n(c) The business address for the ESOP is c\/o American Standard Inc., 1114 Avenue of the Americas, New York, N.Y. 10036. At December 31, 1993, 3,548,609 Plan shares were allocated to executive officers of Holding and the Company and other ESOP participants. The number of shares shown for executive officers in the table above does not reflect shares allocated to their accounts in the ESOP. Shares in the ESOP account are voted by the ESOP trustee as directed by the plan board (the board administering the trust which currently consists of executive officers of the Company). However, participants may direct the vote of their ESOP account shares in matters involving mergers, recapitalizations, or dispositions of substantial assets. Until termination of employment a participant cannot dispose of shares in his ESOP account. Shares distributed to a participant on termination are subject to the Company's right of first refusal. The shares in the Named Officers ESOP accounts are as follows: Mr. Kampouris, 3,995 shares; Mr. Kerckhove, 3,953 shares; Mr. Hinrichs, 4,266 shares; Mr. Allardyce, 4,246 shares; and Mr. Gandini, 2,225 shares. The shares in the ESOP accounts for all executive officers total 69,218 shares.\nThe number of shares shown for executive officers in the table above also does not reflect shares of Holding Common Stock issued as part of the payouts under the LTIP and held for them in trust under a trust agreement dated as of January 1, 1993. Shares in the trust are voted by the trustee as directed by the Company. Until termination of the trust, a beneficiary of the Trust cannot dispose of shares credited to his account. Shares in the Named Officers' accounts in the trust are as follows: Mr. Kampouris, 4,453 shares; Mr. Kerckhove, 2,012 shares; Mr. Hinrichs, 1,787 shares; Mr. Allardyce, 1,224 shares; and Mr. Gandini, 1,176 shares. The shares in the trust accounts for all executive officers total 28,620 shares.\nAlso not included above are 19,198 shares of ASI Holding common stock held in a similar grantor's trust for the account of certain executive officers. These were earned by them under an employee incentive plan prior to their becoming officers.\n(d) Messrs. Schuchert and Nickell, each a director of the Company and of Holding, and Messrs. Matelich and Wall may be deemed to share beneficial ownership of shares owned of record by ASI Partners by virtue of their status as general partners of American Standard Partners, the general partner of ASI Partners. Messrs. Schuchert, Nickell, Matelich and Wall share investment and voting power with respect to securities owned by ASI Partners. See \"Certain Transactions and Relationships.\" Dr. Cyert, who was a director of Holding and the Company until December 1993, is a limited partner in one of the Kelso partnerships that has invested in ASI Partners.\n(e) Out of such 18,824,900 shares, 18,000,000 shares represent shares of Common Stock owned by ASI Partners in which Messrs. Schuchert and Nickell, each a director of Holding, may be deemed to share beneficial ownership by virtue of their status as general partners of American Standard Partners, the general partner of ASI Partners.\nITEM 13.","section_13":"ITEM 13. CERTAIN TRANSACTIONS AND RELATIONSHIPS\nMessrs. Schuchert and Nickell, directors of Holding and the Company, are Chairman and President, respectively, of Kelso & Companies, Inc. (the general partner of Kelso & Company, L.P.), and are general partners of American Standard Partners, the general partner of Kelso ASI Partners. Mr. Schuchert is also a member of the Management Development Committee (the compensation committee) of the Company's Board of Directors.\nThe Company pays Kelso an annual fee of $2.75 million for providing management consulting and advisory services, including those of Messrs. Schuchert and Nickell. The fee is reduced depending on the number of shares Kelso controls of Holding or the Company, with final termination when Kelso's ownership control falls below 20 percent.\nThe Company also has entered into a transaction with Kelso Insurance Services, Incorporated (an affiliate of Kelso) (\"Kelso Insurance\"), and American Telephone and Telegraph Company (\"AT&T\") pursuant to which the Company as well as other Kelso affiliated companies participates in a telecommunications network under which AT&T provides communications services to the group at a special lower tariff rate. In connection with that transaction the Company has guaranteed a minimum annual usage by it of $2 million for a period of five years commencing 1993. No fee was paid by the Company to Kelso Insurance in connection with this transaction.\nIn August 1993 the Company purchased a limited partnership interest in Kelso Investment Associates V, L.P. (\"KIA V\"), in exchange for its commitment to make a capital contribution of $5 million to KIA V. KIA V was formed to seek out business opportunities and invest primarily in equity securities, leveraged buy-outs, and joint ventures. Kelso Partners V, L.P. serves as the general partner of KIA V. The general partners of Kelso Partners V, L.P., include Messrs. Schuchert and Nickell. Kelso & Co., L.P. is the manager of KIA V and, as such, acts as investment adviser of KIA V. The management fee relating to the interest held by the Company has been waived.\nThe Company will invest in a Cayman Islands corporation, A-S China Plumbing Products Limited (\"ASPPL\"), to be used for the establishment of various joint ventures in the People's Republic of China. The Company will have a 21% voting interest in ASPPL. Shares in ASPPL will also be sold in a private placement to certain institutions and other investors, including certain executive officers and employees of the Company and its subsidiaries.\nMr. Mizushima, a director of the Company and of Holding, is President and Chief Operating Officer of Daido Hoxan Inc., a Japanese corporation which has an approximately 11 percent limited partnership interest in ASI Partners. Daido Hoxan Inc. is the largest distributor of the Company's plumbing products in Japan. Its transactions as distributor with the Company and its subsidiaries in 1992, which were on customary terms and in the ordinary course of business, were not material to either the Company or Daido Hoxan Inc. The Company also entered into leasing transactions with an affiliate of Daido Hoxan whereby it has leased certain machinery and equipment on financial terms that were comparable to those available from other leasing companies. The leasing transactions were not material to either the Company or Daido Hoxan Inc.\nFidelity Management Trust Company (\"Fidelity\") is the owner of record of the shares of Holding held by the ESOP, a 17% owner of Holding shares. Fidelity was paid by the Company approximately $180,000 in 1993 for services in connection with administering the Company's ESOP and Savings Plan.\nMr. Nickell's father is an officer and owns more than 10 percent of AC Corporation, a contracting company which purchases air conditioning products from the Company's Trane Division. Such purchases in 1993 were on customary terms and in the ordinary course of business and were not material to either the Company or AC Corporation.\nManagement Investors Stockholders Agreement\nUnder the Stockholders Agreement, pursuant to which Management Investors purchased shares of Holding common stock, Holding is obligated to repurchase, subject to the limitations contained in the Company's lending arrangements and debt instruments, such shares at certain fair market prices in case of the death, disability, retirement, or termination of employment of a Management Investor. Shares are paid for within the constraints of the Company's lending arrangement and debt instruments, as supplemented by a Schedule of Priorities established by Holding's Board of Directors. The Named Officers (other than Mr. Gandini) and most of the executive officers are Management Investors and parties to the Stockholders Agreement.\nPART IV\nITEM 14.","section_14":"ITEM 14. CONSOLIDATED EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.\n(a) 1 and 2. Financial statements and financial statement schedules\nThe financial statements and schedules listed in the accompanying index to financial statements are filed as part of this annual report on Form 10-K.\n3. Exhibits\nThe exhibits listed on the accompanying index to exhibits are filed as part of this annual report on Form 10-K.\nIncluded in the exhibits are the following management contracts or compensatory plan arrangements required to be filed as exhibits pursuant to Item 14(c) of Form 10-K\nAmerican Standard Inc. Long-Term Incentive Compensation Plan, as amended Trust Agreement for American Standard Inc. Long-Term Incentive Compensation Plan American Standard Inc. Annual Incentive Plan American Standard Inc. Management Partner's Bonus Plan with amendments American Standard Inc. Executive Supplemental Retirement Benefit Program American Standard Employee Stock Ownership Plan with amendments Estate Preservation Plan with amendments Corporate Officers Severance Plan American Standard Inc. Supplemental Compensation Plan for Outside Directors ASI Holding Corporation 1989 Stock Purchase Loan Program Summary of Terms of Unfunded Deferred Compensation Plan Letter of Agreement with respect to H. Thompson Smith's retirement and consulting services\n(b) Reports on Form 8-K for the quarter ended December 31, 1993.\nNone\nSignatures\nPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.\nASI HOLDING CORPORATION\nBy \/s\/ Emmanuel A. Kampouris (Emmanuel A. Kampouris) (Chairman, President and Chief Executive Officer)\nMarch 30, 1994\nPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:\n\/s\/ Emmanuel A. Kampouris Director, Chairman and President March 30, 1994 (Emmanuel A. Kampouris) (Chief Executive Officer)\n\/s\/ Fred A. Allardyce Vice President and Chief March 30, 1994 (Fred A. Allardyce) Financial Officer\n\/s\/ G. Ronald Simon Vice President & Controller March 30, 1994 (G. Ronald Simon) (Principal Accounting Officer)\n\/s\/ Horst Hinrichs Director March 30, 1994 (Horst Hinrichs)\n\/s\/ George H. Kerckhove Director March 30, 1994 (George H. Kerckhove)\n\/s\/ Shigeru Mizushima Director March 30, 1994 (Shigeru Mizushima)\n\/s\/ Frank T. Nickell Director March 30, 1994 (Frank T. Nickell)\n\/s\/ J. Danforth Quayle Director March 30, 1994 (J. Danforth Quayle)\n\/s\/ Roger W. Parsons Director March 30, 1994 (Roger W. Parsons)\n\/s\/ Joseph S. Schuchert Director March 30, 1994 (Joseph S. Schuchert)\n\/s\/ John Rutledge Director March 30, 1994 (John Rutledge)\nASI HOLDING CORPORATION AND FINANCIAL STATEMENT SCHEDULES COVERED BY REPORT OF INDEPENDENT AUDITORS (Item 14 (a))\nForm 10-K (Pages) 1. Financial Statements\nConsolidated Balance Sheet at December 31, 1993 and 1992 42 Years ended December 31, 1993, 1992 and 1991, Consolidated Statement of Operations 41 Consolidated Statement of Stockholder's Equity (Deficit) 43 Consolidated Statement of Cash Flows 44-45 Notes to Consolidated Financial Statements 46-62 Segment Data 63 Segment data for capital expenditures, depreciation and amortization 23-29 Quarterly Data (Unaudited) 64 Report of Independent Auditors 40\n2. Financial statement schedules, years ended December 31, 1993, 1992 and 1991 Report of Independent Auditors 84\nIII Condensed Financial Information of Registrant 85-88 V Facilities 89 VI Accumulated Depreciation of Facilities 90 VIII Reserves 91 IX Short-Term Borrowings 92 X Supplementary Income Statement Information 93\nAll other schedules have been omitted because the information is not applicable or is not material or because the information required is included in the financial statements or the notes thereto.\nReport of Independent Auditors\nStockholders and Board of Directors ASI Holding Corporation\nWe have audited the consolidated financial statements of ASI Holding Corporation as of December 31, 1993 and 1992, and for each of the three years in the period ended December 31, 1993, and have issued our report thereon dated March 14, 1994 (included elsewhere in this Annual Report on Form-10K). Our audits also included the consolidated schedules listed in Item 14(a)2. These schedules are the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits.\nIn our opinion, the consolidated 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 required to be stated therein.\n\/s\/ Ernst & Young Ernst & Young\nMarch 14, 1994\nSCHEDULE III - CONDENSED FINANCIAL INFORMATION OF REGISTRANT\nSTATEMENT OF CASH FLOWS (Parent Company Separately) (Dollars in thousands)\nYear Ended Year Ended December 31, December 31, 1993 1992\nCASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (208,567) $ (57,238)\nAdjustments to reconcile net loss to net cash provided by operating activities: Equity in net loss of subsidiary 208,567 57,238\n- ---------------------------------------------------------------------\nNet cash flow from operating activities 0 0\n- ---------------------------------------------------------------------\nCASH PROVIDED (USED) BY INVESTING ACTIVITIES: Investment in subsidiary (4,585) (3,103) Purchase of common stock by subsidiary 12,194 10,950\n- ---------------------------------------------------------------------\nNet cash provided by investing activities 7,609 7,847\n- ---------------------------------------------------------------------\nCASH PROVIDED (USED) BY FINANCING ACTIVITIES: Issuance of common stock 4,585 3,103 Common stock repurchased (12,194) (10,950) Repayments on subscriptions receivable 482 653 Repayment of loan from subsidiary (482) (653) - ---------------------------------------------------------------------\nNet cash used by financing activities (7,609) (7,847)\n- ---------------------------------------------------------------------\nNet change in cash and cash equivalents $ 0 $ 0 =====================================================================\nSee notes to the financial statements.\nSCHEDULE III - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (cont'd) NOTES TO FINANCIAL STATEMENTS (Parent Company Separately)\n(A) The notes to the consolidated financial statements of ASI Holding Corporation (the \"Parent Company\" or \"Holding\") are an integral part of these condensed financial statements.\n(B) Holding was organized by Kelso & Company, L.P., a private merchant banking firm, to participate in the acquisition of American Standard Inc. American Standard Inc. is now a wholly owned subsidiary of Holding. Holding has no other investments or operations.\nASI HOLDING CORPORATION\nINDEX TO EXHIBITS\n(Item 14(a)3 - Exhibits Required by Item 601 of Regulation S-K and Additional Exhibits)\n(The File Number of ASI Holding Corporation, the Registrant, and for all Exhibits incorporated by reference is 33-23070, except those Exhibits incorporated by reference in filings made by American Standard Inc. (the \"Company\") whose File Number is 1-470)\n(3) (i) Certificate of Incorporation of ASI Holding Corporation (\"Holding\"); previously filed as Exhibit 3.1 in Registration Statement No. 33-23070 under the Securities Act of 1933, as amended, and herein incorporated by reference.\n(ii) Amendment to Certificate of Incorporation amending Article FOURTH thereof; previously filed as Exhibit (3)(ii) in Holding's Form 10-K for the fiscal year ended December 31, 1991, and herein incorporated by reference.\n(iii) By-laws of Holding; previously filed as Exhibit 3.2 in Registration Statement No. 33-23070 under the Securities Act of 1933, as amended, and herein incorporated by reference.\n(4) (i) Indenture, dated as of November 1, 1986, between the Company and Manufacturers Hanover Trust Company, Trustee, including the form of 9-1\/4% Sinking Fund Debenture Due 2016 issued pursuant thereto on December 9, 1986, in the aggregate principal amount of $150,000,000; previously filed as Exhibit 4(iii) in the Company's Form l0-K for the fiscal year ended December 31, 1986, and herein incorporated by reference.\n(ii) Instrument of Resignation, Appointment and Acceptance, dated as of April 25, 1988 among the Company, Manufacturers Hanover Trust Company (the \"Resigning Trustee\") and Wilmington Trust Company (the \"Successor Trustee\"), relating to resignation of the Resigning Trustee and appointment of the Successor Trustee, under the Indenture referred to in Exhibit (4)(i) above; previously filed as Exhibit (4)(ii) in Registration Statement No. 33-64450 of the Company under the Securities Act of 1933, as amended, and herein incorporated by reference.\nINDEX TO EXHIBITS - (Continued)\n(iii) Form of Indenture, dated as of July 1, 1988, between the Company and Shawmut Bank Connecticut, National Association (formerly known as The Connecticut National Bank), as Trustee, relating to the Company's 14-1\/4% Subordinated Discount Debentures due 2003; previously filed as Exhibit 4.3 in Amendment No. 2 to Registration Statement No. 33-22126 of the Company under the Securities Act of 1933, as amended, and herein incorporated by reference.\n(iv) Form of Debenture evidencing the 14-1\/4% Subordinated Discount Debentures due 2003 included as Exhibit A to the Form of Indenture referred to in (4)(iii) above.\n(v) Indenture, dated as of May 15, 1992, between the Company and First Trust National Association, Trustee, relating to the Company's 10-7\/8% Senior Notes due 1999, in the aggregate principal amount of $150,000,000; copy of Indenture previously filed as Exhibit (4)(i) by the Company in its Form 10-Q for the quarter ended June 30, 1992, and herein incorporated by reference.\n(vi) Form of 10-7\/8% Senior Notes due 1999 included as Exhibit A to the Indenture described in (4)(v) above.\n(vii) Indenture dated as of May 15, 1992, between the Company and First Trust National Association, Trustee, relating to the Company's 11-3\/8% Senior Debentures due 2004, in the aggregate principal amount of $250,000,000; copy of Indenture previously filed as Exhibit (4)(iii) by the Company in its Form 10-Q for the quarter ended June 30, 1992, and herein incorporated by reference.\n(viii) Form of 11-3\/8% Senior Debentures due 2004 included as Exhibit A to the Indenture described in (4)(vii) above.\n(ix) Form of Indenture, dated as of June 1, 1993, between the Company and United States Trust Company of New York, as Trustee, relating to the Company's 9-7\/8% Senior Subordinated Notes Due 2001; previously filed as Exhibit (4)(xxxi) in Amendment No. 1 to Registration Statement No. 33-61130 of the Company under the Securities Act of 1933, as amended, and herein incorporated by reference.\n(x) Form of Note evidencing the 9-7\/8% Senior Subordinated Notes Due 2001 included as Exhibit A to the Form of Indenture referred to in (4)(ix) above.\nINDEX TO EXHIBITS - (Continued)\n(xi) Form of Indenture, dated as of June 1, 1993, between the Company and United States Trust Company of New York, as Trustee, relating to the Company's 10-1\/2% Senior Subordinated Discount Debentures Due 2005; previously filed as Exhibit (4)(xxxiii) in Amendment No. 1 to Registration Statement No. 33-61130 of the Company under the Securities Act of 1933, as amended, and herein incorporated by reference.\n(xii) Form of Debenture evidencing the 10-1\/2% Senior Subordinated Discount Debentures Due 2005 included as Exhibit A to the Form of Indenture referred to in (4)(xi) above.\n(xiii) Form of Indenture, dated as of October 25, 1990, as amended and restated as of June 15, 1993, between the Company and Shawmut Bank, N.A., as Trustee, relating to Company's 12-3\/4% Junior Subordinated Debentures due 2003; previously filed as Exhibit (4)(xx) in Amendment No. 2 to Registration Statement No. 33-64450 of the Company under the Securities Act of 1933, as amended, and herein incorporated by reference.\n(xiv) Form of Debenture evidencing the 12-3\/4% Junior Subordinated Debentures Due 2003 included as Exhibit A to the Form of Indenture referred to in (4)(xiii) above.\n(xv) Assignment and Amendment Agreement, dated as of June 1, 1993, among the Company, Holding, certain subsidiaries of the Company, Bankers Trust Company, as agent under the 1988 Credit Agreement, the financial institutions named as Lenders in the 1988 Credit Agreement and certain additional Lenders and Chemical Bank, as Administrative Agent and Arranger; previously filed as Exhibit (4)(xiii) in Amendment No. 1 to Registration Statement No. 33-64450 of the Company under the Securities Act of 1933, as amended, and herein incorporated by reference.\n(xvi) Credit Agreement, dated as of June 1, 1993, among the Company, Holding, certain subsidiaries of the Company and the lending institutions listed therein, Chemical Bank, as Administrative Agent and Arranger; Bankers Trust Company, The Bank of Nova Scotia, The Chase Manhattan Bank, N.A., Deutsche Bank AG, The Long-Term Credit Bank of Japan, Ltd., New York Branch, and NationsBank of North Carolina, N.A., as Managing Agents, and Banque Paribas, Citibank, N.A., and Compagnie Financiere de CIC et de l'Union Europeenne, New York Branch, as Co-Agents; previously filed as Exhibit (4)(xiv) in Amendment No. 1 to Registration Statement No. 33-64450 of the Company under the Securities Act of 1933, as amended, and herein incorporated by reference.\nINDEX TO EXHIBITS - (Continued)\n(xvii) First Amendment, Consent and Waiver, dated as of February 10, 1994, to the Credit Agreement referred to in (4)(xvi) above; copy of Amendment is being filed as Exhibit (4)(xvii) by the Company in its Form 10-K for the year ended December 31, 1993, concurrently with the filing of Holding's Form 10-K for the same year and herein incorporated by reference.\n(xviii) Stockholders Agreement, dated as of July 7, 1988, as amended as of August 1, 1988, among Holding, Kelso ASI Partners, L.P., and the Management Stockholders named therein; previously filed as Exhibit 4.19 in Amendment No. 2 to the Registration Statement No. 33-23070 of Holding under the Securities Act of 1933, as amended, and herein incorporated by reference.\n(xix) Amendment to Section 2.1 of the Stockholders Agreement referred to in paragraph (4)(xviii) above, effective as of January 1, 1991; previously filed as Exhibit (4)(xxvii) by Holding in its Form 10-K for the fiscal year ended December 31, 1992, and herein incorporated by reference.\n(xx) Supplement and Amendment dated as of September 4, 1991 to the Stockholders Agreement dated as of July 7, 1988, as amended, referred to in paragraph (4)(xviii) above; previously filed as Exhibit (4)(ii) in Holding's Form l0-Q for the quarter ended September 30, 1991, and herein incorporated by reference.\n(xxi) Amended Paragraph 6.1 of the Stockholders Agreement referred to in paragraph (4)(xviii) above, effective as of September 2, 1993.\n(xxii) Revised Schedule of Priorities, effective as of September 5, 1991, as adopted by the Board of Directors of Holding pursuant to the Stockholders Agreement dated as of July 7, 1988, as amended, referred to in paragraph (4)(xviii) above; previously filed as Exhibit (4)(iii) in Holding's Form l0-Q for the quarter ended September 30, 1991, and herein incorporated by reference.\n(10) (i) Agreement and Plan of Merger, dated as of March 16, 1988, among the Company, ASI Acquisition Company and Holding and Offer Letter, dated March 16, 1988, between the Company and Kelso & Company, L.P.; previously filed as Exhibit 2 to the Company's Schedule 14D-9 filed March 21, 1988, in connection with the offer for all the shares of the Company's Common Stock by a corporation formed by Kelso & Company, L.P., and herein incorporated by reference.\nINDEX TO EXHIBITS - (Continued)\n(ii) Amendment, dated June 3, 1988 to Agreement and Plan of Merger referred to in l0(i) above; previously filed as Exhibit 2.50 in Amendment No. 1 to the Registration Statement No. 33-22126 of the Company under the Securities Act of 1933, as amended, and herein incorporated by reference.\n(iii) American Standard Inc. Long-Term Incentive Compensation Plan, as amended through February 6, 1992; previously filed as Exhibit (l0)(iv) by the Company in its Form l0-K for the year ended December 31, 1992, and herein incorporated by reference.\n(iv) Trust Agreement for American Standard Inc. Long-Term Incentive Compensation Plan; copy of Trust Agreement being filed as Exhibit (10)(iv) by the Company in its Form 10-K for the year ended December 31, 1993, concurrently with the filing of Holding's Form 10-K for the same year, and herein incorporated by reference.\n(v) American Standard Inc. Annual Incentive Plan; previously filed as Exhibit (l0)(vii) by the Company in its Form l0-K for the fiscal year ended December 31, 1988, and is herein incorporated by reference.\n(vi) American Standard Inc. Management Partners' Bonus Plan effective as of July 7, 1988; previously filed as Exhibit (l0)(i) in the Company's Form l0-Q for the quarter ended September 30, 1988, and herein incorporated by reference; amendments to Plan adopted on June 7, 1990, previously filed as Exhibit (4)(ii) in the Company's Form l0-Q for the quarter ended June 30, 1990, and herein incorporated by reference.\n(vii) American Standard Inc. Executive Supplemental Retirement Benefit Program, as restated to include all amendments through December 31, 1993; copy of restated program is being filed as Exhibit (10)(vii) by the Company in its Form 10-K for the year ended December 31, 1993, concurrently with the filing of Holding's Form 10-K for the same year and herein incorporated by reference.\n(viii) Stock Purchase Agreement, dated April 27, 1988, between ASI Acquisition Company and General Electric Capital Corporation (without schedules); previously filed as Exhibit 2.4 in Amended Registration Statement No. 33-22126 of the Company under the Securities Act of 1933, and is herein incorporated by reference.\nINDEX TO EXHIBITS - (Continued)\n(ix) Amendment, dated June 3, 1988, to Stock Purchase Agreement referred to in (l0)(viii) above; previously filed as Exhibit 2.6 in Amendment No. 1 in Registration Statement No. 33-22126 of the Company under the Securities Act of 1933, as amended, and herein incorporated by reference.\n(x) Form of Composite American-Standard Employee Stock Ownership Plan incorporating amendments through December 3, 1992; previously filed as Exhibit (10)(x) in Registration Statement No. 33-61130 of the Company under the Securities Act of 1933, as amended, and herein incorporated by reference.\n(xi) American-Standard Employee Stock Ownership Trust Agreement, dated as of December 1, 1991, between ASI Holding Corporation and Fidelity Management Trust Company (as successor to Citizens & Southern Trust Company (Georgia), N.A.), as trustee; previously filed as Exhibit (l0)(xiv) by the Company in its Form l0-K for the year ended December 31, 1991, and herein incorporated by reference.\n(xii) Consulting Agreement made July 1, 1988, with Kelso & Company, L.P. concerning general management and financial consulting services to the Company; previously filed as Exhibit (l0)(xviii) in the Company's Form l0-K for the fiscal year ended December 31, 1988, and herein incorporated by reference.\n(xiii) American Standard Inc. Supplemental Compensation Plan for Outside Directors as amended through September 1993; copy of Plan is being filed as Exhibit (10)(xv) by the Company in its Form l0-K for the year ended December 31, 1993 concurrently with the filing of Holding's 10-K for the same year and herein incorporated by reference.\n(xiv) ASI Holding Corporation 1989 Stock Purchase Loan Program; previously filed as Exhibit (l0)(i) in Holding's Form l0-Q for the quarter ended September 30, 1989, and herein incorporated by reference.\n(xv) Corporate Officers Severance Plan adopted by the Company in December, 1990, effective April 27, 1991; previously filed as Exhibit (l0)(xix) by the Company in its Form l0-K for the year ended December 31, 1990, and said Plan is herein incorporated by reference.\nINDEX TO EXHIBITS - (Continued)\n(xvi) Estate Preservation Plan, adopted by the Company in December, 1990; previously filed as Exhibit (l0)(xx) by the Company in its Form l0-K for the year ended December 31, 1990, and said Plan is herein incorporated by reference.\n(xvii) Amendment adopted in March 1993 to Estate Preservation Plan referred to in (10)(xvi) above; copy of Amendment is being filed as Exhibit (10)(xix) by the Company in its Form 10-K for the year ended December 31, 1993 concurrently with the filing of Holding's Form 10-K for the same year and herein incorporated by reference.\n(xviii) Summary of terms of Unfunded Deferred Compensation Plan adopted December 2, 1993; copy of Summary is being filed as Exhibit (10)(xviii) by the Company in its Form 10-K for the year ended December 31, 1993 concurrently with the filing of Holding's Form 10-K for the same year and herein incorporated by reference.\n(xix) Retirement\/Consulting Agreement, dated December 28, 1993, between H. Thompson Smith and the Company; copy of Agreement is being filed as Exhibit (10)(xix) by Company in its Form 10-K for the year ended December 31, 1993 concurrently with the filing of Holding's Form 10-K for the same year and herein incorporated by reference.\n(21) Listing of Holding's subsidiaries.","section_15":""}
{"filename":"71824_1993.txt","cik":"71824","year":"1993","section_1":"ITEM 1. BUSINESS\nINTRODUCTION\nNewmont Mining Corporation (\"Newmont\"), incorporated in 1921 under the laws of Delaware, is a U.S. company whose sole asset is a controlling equity interest in Newmont Gold Company (\"NGC\"). NGC is a worldwide company engaged in gold production, exploration for gold and acquisition of gold properties. Newmont owns 89.22% of the common stock, 100% of the preferred stock and options to purchase additional shares of the common stock of NGC. Due to the transaction described below, effective January 1, 1994 Newmont had no other interests or assets and will conduct no operations in the future. Newmont, together with NGC and NGC's subsidiaries, are referred to herein as the \"Corporation.\"\nSubstantially all of the Corporation's consolidated sales, operating profit and identifiable assets in 1993, 1992 and 1991 were related to NGC's gold mining activities in the United States. Gold sales accounted for substantially all of the Corporation's consolidated sales revenues from continuing operations in 1993, 1992 and 1991.\nOPERATING SUBSIDIARY\nGENERAL\nNGC is Newmont's sole subsidiary or interest. Based on 1993 production as set forth in published reports, NGC is the largest producer of gold from North American operations. In 1993, NGC produced approximately 1.7 million ounces of gold on the Carlin Trend in Nevada. NGC also produces gold through a 38% owned venture in Peru, which commenced operations in August 1993. NGC additionally has a 50% owned joint venture in Uzbekistan and an 80% owned venture in Indonesia, both of which are scheduled to commence gold production in 1995. NGC also owns 100% of Newmont Exploration Limited (\"NEL\") which, together with various other NGC affiliates, explore worldwide for gold.\nCARLIN, NEVADA\nNGC's North American operations are located on the geographical feature known as the Carlin Trend, near Carlin, Nevada. See map on page 5 herein. The Carlin Trend is the largest gold district discovered in North America this century. From the Carlin Trend, NGC produced approximately 1,666,400 ounces in 1993 compared with approximately 1,587,900 ounces in 1992 and approximately 1,576,900 ounces in 1991. Gold production at NGC's Nevada operations is expected to be approximately 1.6 million ounces in 1994.\nNGC's cash cost of production in Nevada (which is equal to operating costs, excluding general and administrative expense, plus royalties and capitalized mining costs) was $214 per ounce sold in 1993 which, according to published industry sources, was lower than the cash costs associated with approximately two-thirds of all gold produced in the western world in 1992. For 1994, per ounce cash costs at NGC's Nevada operations are expected to increase 5% to 10% over those incurred in 1993. At the end of 1993, NGC had 17.8 million ounces of gold in proven and probable ore reserves on the Carlin Trend.\nPERU\nNGC also produces gold through the Minera Yanacocha venture in Peru. Minera Yanacocha S.A. has mining rights with respect to a 63,000 acre land position, which includes the Carachugo deposit and other numerous deposits, located in northwest Peru. See map on page 6 herein. Minera Yanacocha S.A., a Peruvian corporation which controls the multi-deposit project, is 38% owned by NGC; 32.3% by Compania de Minas Buenaventura, S.A. (\"Buenaventura\"), a Peruvian mining company; 24.7% by an affiliate of Bureau de Recherches Geologiques et Minieres, the geological mining bureau of the French government; and 5% by the International Finance Corporation, which provided $26 million in financing for the project. The project's mining rights were acquired through an assignment of a government concession held by a related entity. The assignment has a term of 20 years, renewable at the option of Minera Yanacocha for another 20 years. The Corporation manages the project and production commenced in August 1993 at the Carachugo deposit. Total project costs with respect to such deposit were approximately $45 million (of which 38% was attributable to\nNGC). Total proven and probable reserves for the project as of December 31, 1993 were 3,780,000 ounces compared with 1,275,000 ounces as of December 31, 1992.\nDuring the final five months of the year, production was 81,500 ounces from the Carachugo mine and production in 1994 is expected to be approximately 220,000 ounces. The 1994 Minera Yanacocha operating plan calls for leaching 13,000 tons of ore per day. Gold recovery is expected to be at 70% to 80% which was the approximate rate of recovery in 1993. The cash cost of production for gold produced in 1993 was approximately $150 per ounce. Contract mining is employed and the power for the project is provided by generators owned by the project.\nFollowing the results of continuing exploration, an operating plan incorporating significantly higher levels of production at Minera Yanacocha has been implemented for 1995 than is expected for 1994. Minera Yanacocha is scheduled to commence gold production from the Maqui Maqui deposit at an estimated annual rate of 180,000 ounces at the end of 1994. The additional production from the Maqui Maqui deposit will increase total production in 1995 to approximately 350,000 to 400,000 ounces. The Maqui Maqui deposit is located approximately three miles north of current mining operations at Carachugo. Total capital costs of the expansion of mining operations into the Maqui Maqui deposit are estimated at approximately $40 million which is to be funded from Minera Yanacocha's operating cash flow and borrowings.\nTHE TRANSACTION\nIn a transaction (the \"Transaction\") effective as of January 1, 1994, NGC acquired all of Newmont's assets, other than 85,850,101 shares of NGC's common stock, par value $0.01 per share (the \"NGC Common Stock\"), owned by Newmont, and assumed all liabilities (contingent or otherwise) of Newmont, except for Newmont's obligations with respect to the $5.50 convertible preferred stock, par value $5.00 per share, of Newmont (the \"NMC Preferred Stock\") (other than accrued and unpaid dividends as of December 31, 1993) and employee stock options of Newmont (the \"NMC Options\") exercisable for the common stock, par value $1.60 per share, of Newmont (the \"NMC Common Stock\"). The assets of Newmont transferred to NGC consisted of (i) all of the stock of the other subsidiaries of Newmont, (ii) all of Newmont's tangible and intangible personal property, (iii) 8,649,899 shares of NGC Common Stock owned by Newmont and (iv) all other tangible or intangible assets other than the 85,850,101 shares of NGC Common Stock retained by Newmont.\nAs part of the Transaction, NGC (i) issued to Newmont 2,875,000 shares of $5.50 convertible preferred stock, par value $5.00 per share, of NGC (the \"NGC Preferred Stock\"), with terms identical to the NMC Preferred Stock, except that on conversion Newmont will be entitled to receive shares of NGC Common Stock (instead of NMC Common Stock) and (ii) issued to Newmont options to purchase shares of NGC Common Stock (the \"NGC Options\") in the same number and with the same exercise prices (after adjusting for the stock split described below) as the NMC Options. As a result of the Transaction, all operating activities of the Corporation will be conducted by NGC and its subsidiaries and Newmont will have no business other than the ownership of the NGC Common Stock, the NGC Preferred Stock and the NGC Options and its obligations with respect to the NMC Preferred Stock and the NMC Options. The Transaction is not expected to have any significant impact on the Corporation's consolidated financial results.\nIn connection with the Transaction, on March 21, 1994, the Board of Directors of Newmont declared a 1.2481 shares for 1 share stock split of the NMC Common Stock (the \"Stock Split\"), payable in the form of a stock dividend. The amount of the Stock Split was calculated so that the number of shares of NMC Common Stock outstanding following the Stock Split would equal as close as possible the 85,850,101 shares of NGC Common Stock held by Newmont subsequent to the Transaction.\nGOLD MARKET\nGold has two main categories of use -- product fabrication and bullion investment. Fabricated gold has a wide variety of end uses. Purchasers of official coins and high-carat jewelry frequently are motivated by investment considerations, so that net private bullion purchases alone do not necessarily represent the total investment activity in physical gold.\nThe profitability of the Corporation's current operations is significantly affected by the market price of gold. Market gold prices can fluctuate widely and are affected by numerous factors beyond the Corporation's\ncontrol, including industrial and jewelry demand, expectations with respect to the rate of inflation, the strength of the dollar (the currency in which the price of gold is generally quoted) and of other currencies, interest rates, central bank sales, forward sales by producers, global or regional political or economic events and production costs in major gold-producing regions such as South Africa and the former Soviet Union. The demand for and supply of gold affect gold prices, but not necessarily in the same manner as supply and demand may affect the prices of other commodities. The supply of gold consists of a combination of new mine production and existing stocks of bullion and fabricated gold held by governments, public and private financial institutions, industrial organizations and private individuals. As the amounts produced in any single year constitute a very small portion of the total potential supply of gold, normal variations in current production do not necessarily have a significant impact on the supply of gold or on its price. If the Corporation's revenue from gold sales falls for a substantial period below its cost of production at any or all of its operations, the Corporation could determine that it is not economically feasible to continue commercial production at any or all of its operations. The Corporation's costs of production (which are equal to its costs applicable to sales on its income statement) for its Nevada operations were $200 per ounce of gold sold in 1993, $198 in 1992 and $190 in 1991.\nThe volatility of gold prices is illustrated in the following table of annual high, low and average gold fixing prices per ounce on the London Bullion Market:\n- ---------------\nSource of Data: Metals Week\nOn March 4, 1994, the afternoon fixing for gold on the London Bullion Market was $376 and the spot market price of gold on the New York Commodity Exchange was $378. Gold prices on both the London Bullion Market and the New York Commodity Exchange are regularly published in most major financial publications and many nationally recognized newspapers.\nREFINING AND MARKETING\nNGC currently has refining arrangements with four domestic and foreign refiners to further refine dore bullion produced at NGC's refinery located on its Nevada properties. Under the terms of the agreements with these refiners, the gold is toll refined and returned to NGC's account for sale to third parties. Management believes that because of the availability of alternative refiners, each able to supply all services needed by NGC, no adverse effect would result if NGC lost the services of any of its current refiners.\nIn addition to enabling Newmont to reduce its cost of borrowing, a one million ounce gold loan, negotiated in February 1988, which was monetized at $449 an ounce, effectively hedged one million ounces of Newmont's equity in then future gold production against subsequent price declines from $449 per ounce. The gold loan was amortized in sixteen quarterly installments of 62,500 ounces each which commenced in March 1990 and ended in December 1993. During 1992, the gold loan was effectively settled by Newmont entering the forward markets to acquire the gold for the quarterly payments as they became due. See Note 6 to Item 8. To further protect Newmont's gold-derived income against low prices, Newmont conducted a hedging program prior to 1993. This program principally involved put option purchases and a minimal amount of forward sales as well as the sale of call options, the proceeds of which were used to offset the cost of put options. See Item 7 -- \"Management's Discussion and Analysis of Results of Operations and Financial Condition\" for the financial impacts of the gold loan and hedging program. No hedging transactions are in place or expected to be put in place at the current market prices for gold. Hedging transactions were\nundertaken by Newmont and did not affect price realizations by NGC which has not engaged in hedging activities. However, the Corporation intends for any future hedging activities to be undertaken by NGC. NGC's gold sales generally are made at the monthly average market price prevailing during the month before the gold is delivered plus a \"contango\" which is essentially an interest factor, from the end of the month until the date of delivery.\nSee Note 11 to Item 8 for information regarding major customers and export sales.\nEXPLORATION AND DEVELOPMENT\nGENERAL\nWorldwide exploration activities are conducted through NEL and certain other NGC affiliates. NEL was responsible for the discovery in 1961 of the Carlin Trend in Nevada. The Corporation also discovered the existence of gold at the Yanacocha deposit in Peru in the 1980s. Management believes that it has one of the largest exploration and development budgets in the minerals industry based on published reports. The Corporation's 1994 budget for exploration and reserve development is $70 million. The Corporation is exploring for gold in other areas which management believes are highly prospective. The Corporation's exploration team is staffed by approximately 250 persons, the majority of whom are geologists, geochemists or geophysicists.\nCARLIN, NEVADA Carlin Trend -- 100% owned by NGC\nThe Corporation conducts extensive exploration along the Carlin Trend. Prior to the consummation of the Transaction, NGC owned or otherwise controlled the mineral interests on approximately 55 square miles along the Carlin Trend (the \"NGC Property\"). These 55 square miles contained all of NGC's operating mines and proven and probable reserves as of December 31, 1993. As a result of the Transaction, NGC acquired from Newmont ownership or control of mineral interests on an additional approximately 630 square miles of property along the Carlin Trend (which, together with the NGC Property, is herein referred to as the \"Nevada Property\"). Ongoing exploration on the Carlin Trend is focused on discovery of new gold deposits and extensions to known deposits and determining through drilling the mineable ore reserves within these deposits. In 1993 exploration by underground methods was initiated to facilitate the possible location of deeper deposits of gold ore.\nExploration and development activity on the Carlin Trend in 1993 was consistent with the Corporation's objective to conduct systematic exploration throughout such area, with the purpose of locating and testing all gold prospects, whether oxide or refractory, near-surface or deep. Oxide ore is ore which is amenable to gold extraction through the use of conventional size-reduction processes, such as blasting, crushing and grinding, and the dissolution of the gold in such ore using cyanidation treatment techniques common to the industry. Refractory ore contains minerals which require an additional treatment process, which is normally not necessary with oxide ore, to optimize the recovery of gold.\nIn 1993, a total of 1,067 holes, totalling 649,100 feet, were drilled by the Corporation on the Carlin Trend in connection with reserve development and exploration activities. This compares with approximately 1,264 holes, totalling 816,000 feet, drilled in 1992.\nIn 1993, approximately $26 million was spent by the Corporation on reserve development and exploration on the Carlin Trend. For 1994, reserve development and exploration expenditures on the Carlin Trend are expected to be approximately $28 million.\nThe exploration activities on the Carlin Trend described above include activities conducted in connection with the Ivanhoe Joint Venture. The Ivanhoe Joint Venture consists of approximately 125 square miles of land, held primarily through unpatented mining claims, which lie immediately northwest of NGC's operating mines. A 75% interest in the property was acquired in March 1992 for $20.1 million. The remaining 25% is held by Touchstone Resources Company, a subsidiary of Cornucopia Resources Ltd. The Ivanhoe Joint Venture agreement provides that upon unilateral termination of the agreement by one party, the other party accedes to the interests of the terminating party in the joint venture property. Based on drilling by the Corporation and the prior owners, management believes that the property may have significant potential; however, there can be no assurance that such potential will be realized.\n{INSERT NEVADA MAP -- FULL PAGE}\nPERU Minera Yanacocha S.A. -- 38% owned by NGC Northern Peru Joint Venture -- 65% interest held by NGC\nFurther exploration continues to be conducted at the numerous deposits owned by the Minera Yanacocha venture. See \"Operating Subsidiary.\" In addition, a second Peruvian corporation joint venture in Northern Peru has been formed between NGC and Buenaventura. The joint venture, in which NGC has a 65% interest, has staked claims on 500,000 acres of prospective ground along North and South extensions of the volcanic belt hosting the Yanacocha deposits. Initial exploration work is under way in this prospective area.\n{INSERT PERU MAP}\nUZBEKISTAN Zarafshan-Newmont -- 50% owned by NGC\nIn Uzbekistan, one of the Central Asian republics of the former Soviet Union, NGC has a 50\/50 joint venture (\"Zarafshan-Newmont\") with the Uzbekistan State Committee for Geology and Mineral Resources, and Navoi Mining and Metallurgical Combine, state entities of the Republic of Uzbekistan, to produce gold from existing stockpiles of low-grade oxide ore from the Muruntau mine through leaching the ore. Uzbekistan was the second largest gold producer among the republics of the former Soviet Union, accounting for approximately 30% of the former Soviet Union's gold production. These state entities of the Uzbekistan government have guaranteed 242.5 million tons of ore with an average grade of 0.036 ounces of gold per ton, containing approximately 8.7 million ounces of gold. Net recovery is expected to be approximately 4.8 million ounces of gold over the life of the project, 50% of which will be attributable to NGC.\nThe Corporation is managing the Zarafshan-Newmont joint venture. Production is expected to commence in early 1995 at an annual rate of approximately 450,000 ounces. Power for the project is provided by a contractual arrangement with Navoi Mining and Metallurgical Combine, which has its own power-generating facilities. The capital costs are estimated at approximately $150 million, half of which is attributable to NGC.\nThe Zarafshan-Newmont joint venture completed a $105 million credit facility for the project in November 1993. See Note 6 to Item 8. The Corporation provided to its joint venture partners such partners' share of the equity capital required for the project in exchange for a portion of the existing stockpiles. See Item 7 -- \"Management's Discussion and Analysis of Results of Operations and Financial Condition.\" The project's gold will be sold in international markets for U.S. dollars.\n{INSERT UZBEKISTAN MAP}\nINDONESIA Minahasa -- 80% owned by NGC Batu Hijau -- 80% owned by NGC\nThe Corporation has two advanced gold projects in Indonesia, both of which are 80% owned by NGC with the remainder held by its partner, Mr. Jusuf Merukh, an Indonesian national. Both projects hold mineral rights pursuant to contracts of work with the Republic of Indonesia. Such contracts provide for an eight-year term for exploration and feasibility analysis and a 30-year term for mining.\nThe more advanced of these projects is Minahasa, a multi-deposit project on the island of Sulawesi. The Mesel deposit is scheduled to commence production in late 1995 at an annual rate of approximately 100,000 ounces. Initial cash operating costs have been estimated at approximately $200 an ounce. A preliminary feasibility study of the Mesel deposit was completed on this project in October 1993. The Minahasa project is undergoing further study to achieve 35% of required engineering to determine more precise capital requirements, which preliminarily have been estimated at $100 million. This process is scheduled to be completed by April 1994.\nMinahasa has six deposits. The project's main deposit, Mesel, has been fully drilled and at the end of 1993 had 1.8 million ounces in proven and probable reserves. It contains both oxidized and refractory gold mineralization, and would require the construction of a small roaster plant, which pretreats refractory ore by oxidizing it prior to milling. There are five additional small gold deposits within a three-mile radius of the Mesel pit which are still undergoing exploratory drilling for assessment purposes. The Minahasa project is in\nclose proximity to the coast of Sulawesi and does not present any significant logistical difficulties for transportation of materials and equipment.\nThe second Indonesian project is the Batu Hijau deposit, on the island of Sumbawa. Batu Hijau is a porphyry gold\/copper deposit that was discovered in 1990. While the economics of the deposit have not been determined, it is one of the largest single occurrences of gold mineralization ever discovered by the Corporation. It is located 10 miles from the island's coast, and has access to natural harbors which can be developed for transportation of materials and equipment. Seventy-nine holes have been drilled in this deposit to an average depth of 1,500 feet. A preliminary feasibility study has been completed and a full feasibility study is anticipated to commence in late 1994 to determine the economic potential of the property. Batu Hijau is considered to have significant potential, although there can be no assurance that such potential could or will be realized.\n{INSERT INDONESIAN MAP}\nNORTHWESTERN UNITED STATES Grassy Mountain -- Vale, Oregon -- 100% interest held by NGC Musgrove Creek, Idaho -- 100% interest held by NGC\nThe Corporation owns the exploration, development and mining rights on two properties acquired from Atlas Corporation (\"Atlas\") -- Grassy Mountain in Malheur County, Oregon, and Musgrove Creek in Lemhi County, Idaho. The rights were acquired in October 1992 through two 35-year leases, each with options for three 10-year extensions. The total lease payment was $22.5 million, which has been fully paid, plus a 5% royalty on production from Grassy Mountain against which an advance payment of $7.5 million was made.\nThe Grassy Mountain project was drilled extensively by Atlas. The drilling has delineated an oxide ore gold deposit containing 995,900 ounces of gold and 2,467,000 ounces of silver. These reserves are contained in approximately 16 million tons of ore at an average grade of 0.062 ounces of gold per ton. The development plan prepared by Atlas for Grassy Mountain contemplated production of approximately 100,000 ounces of gold annually, at an estimated average operating cost over the life of the mine of approximately $150 to $200 per ounce. The Corporation is undertaking an engineering and geological review of the Atlas plan, which could increase or decrease the reserves, or alter the production schedule and\/or costs. Subject to the results of these\nstudies and obtaining necessary permits, production could begin in 1997. Further, the Corporation has begun limited exploration efforts on the Grassy Mountain property in areas outside the Atlas reserve. The 43 square miles of land which make up the Grassy Mountain property are considered to have significant additional potential, although there can be no assurance that such potential will be realized until further geological work is complete.\n{INSERT GRASSY MOUNTAIN MAP}\nThe Musgrove Creek prospect in Idaho, which covers approximately 24 square miles, is in the very early stages of exploration, but management believes the exploration potential appears promising based on results from a limited drilling program by Atlas and subsequent exploration and drilling by the Corporation.\nLAOS Newmont Viengkham Limited -- 93% owned by NGC\nNGC has a 93% interest in a joint venture for exploration in Laos. This joint venture agreement covers approximately 2,500 square miles of land which management believes is highly prospective.\nOTHER\nIn addition to the exploratory projects specifically discussed above, the Corporation is in the preliminary stages of exploration and\/or joint venture discussions in other parts of the world, including Chile, Ecuador, Mexico and Canada. There can be no assurances that any of these activities by the Corporation will result in any new joint ventures or other projects or that such new joint ventures or projects would result in profitable operations.\nENVIRONMENTAL MATTERS\nGENERAL\nThe Corporation's United States gold mining and processing operations are subject to extensive federal, state and local governmental regulations for the protection of the environment, including such as relate to the protection of air and water quality and mine reclamation, and for the promotion of mine and occupational safety. Management believes that these regulations have not had, and will not in the future have, a materially more severe impact on the Corporation's United States operations than is experienced by other gold mining companies in the United States. Management does not believe that compliance with such regulations will have a material adverse effect on its competitive position. At this time the Corporation does not expect any material impact on future recurring operating costs of compliance with currently enacted environmental regulations. Ongoing costs to comply with environmental obligations have not been significant to the Corporation's total costs of operations. Since the Corporation is not able to pass on any net increases in costs to its customers, any such increases could have an effect on future profitability of the Corporation depending upon the price of gold. Amendments to current laws and regulations governing operations and activities of mining companies or the stringent implementation thereof could have a material adverse impact on the Corporation in terms of increased capital and operating expenditures.\nThe Corporation's operations outside of the United States are also subject to governmental regulations for the protection of the environment. Management believes that these regulations have not had, and will not have, a materially adverse effect on the Corporation's operations or its competitive position. The adoption of new laws or regulations, or amendments to current laws or regulations, regarding the operations and activities of mining companies could have a material adverse impact on the Corporation's capital and operating expenditures. It is estimated that compliance with regulations for the protection of the environment will require capital expenditures of approximately $3 million in 1994 in connection with the Zarafshan-Newmont joint venture and a total of approximately $5 to $10 million in 1994, 1995 and 1996 in connection with the Minahasa project in Indonesia.\nNEVADA OPERATIONS\nThe Corporation's Nevada gold mining and processing operations generate solid waste which is subject to regulation under the federal Resource Conservation and Recovery Act (\"RCRA\") and similar laws of the State of Nevada. Solid waste that is considered \"hazardous\" is subject to extensive regulation by the U.S. Environmental Protection Agency (the \"EPA\") and the State of Nevada under Subtitle C of RCRA, while non-hazardous solid waste is governed by a less stringent program under Subtitle D of RCRA and solid waste management regulations of the State of Nevada. A 1980 amendment to RCRA temporarily excluded from Subtitle C regulation all solid waste from the \"extraction, beneficiation, and processing of ores and minerals,\" until at least six months after the submission to Congress by the EPA of a study of such wastes and promulgation by the EPA of appropriate regulations.\nThe EPA's study of \"extraction\" and \"beneficiation\" wastes from mining operations was submitted to Congress at the end of 1985. Six months later the EPA issued a determination that the regulation of such wastes under Subtitle C of RCRA was not warranted, and that it intended to develop specific regulations for such wastes under Subtitle D. The process of developing such regulations under Subtitle D has been underway since mid-1986. The Corporation is participating in that process. The EPA has indicated that the regulations for these wastes will be more stringent than the current Subtitle D program but less stringent than the hazardous waste regulations under Subtitle C. At the present time, however, there is not a sufficient basis to accurately predict the potential impacts of such regulations on the Corporation.\nWith regard to wastes from the \"processing\" of ores and minerals (including refining wastes), the EPA adopted an interpretation of the exclusion of such wastes from Subtitle C regulation to limit it only to certain very high volume wastes. This interpretation became effective in the State of Nevada in August 1990. However, due to the fact that NGC recycles all potentially hazardous secondary materials generated during refining operations, this interpretation has not had, and is not expected to have, any material impact on the Corporation's operations.\nThe Corporation's Nevada operations are subject to stringent state permitting regulations for protection of surface and ground water, as well as wildlife. These regulations address the design, construction, operation\nand closure of mining facilities, and may require additional capital and operating expenditures for current operations, expansions and development of new projects. Requirements for the closure and reclamation of pits, tailings impoundments and leaching facilities may significantly increase costs when these operations are closed. New procedural requirements may result in substantial delays when bringing new projects into production and when modifying or expanding existing operations.\nThe Corporation's gold mining operations have the potential to produce fugitive dust, primarily from unpaved roads and material handling. These fugitive dust emissions are controlled by the use of water with chemical binders as a dust suppressant. Fugitive dust emissions are subject to regulation under the laws of the State of Nevada. The EPA's current regulations under the federal Clean Air Act exclude fugitive dust from surface mines in determining whether new or expanded sources need permits for construction under the regulations for prevention of significant deterioration (\"PSD\") of air quality. Extensive amendments to the federal Clean Air Act were enacted by Congress in late 1990. These amendments could ultimately increase the Corporation's compliance costs for air pollution permitting and\/or control at its gold mining operations, but the impact on such operations is so dependent on future regulations and other contingencies that it cannot reasonably be predicted at this time.\nIt is estimated that with respect to the Corporation's U.S. operations, compliance with federal, state and local regulations relating to the discharge of material into the environment, or otherwise relating to the protection of the environment, required capital expenditures of approximately $66 million in 1993, primarily as part of the construction of the Corporation's refractory ore treatment plant (see Item 2","section_1A":"","section_1B":"","section_2":"ITEM 2. PROPERTIES\nPRODUCTION\nCARLIN, NEVADA -- 100% OWNED BY NGC\nThe Corporation's operations along the Carlin Trend are divided geographically into three management areas: the North Area which includes the Post, Carlin and Genesis mines and Mills No. 1 and No. 4; the South Area which includes the Gold Quarry mine and Mills No. 2 and No. 5; and the Rain Area which includes the Rain mine and Mill No. 3. Each of these areas has a leach facility. See map on page 5 herein.\nIn 1993, ore was produced from five open-pit mines -- Genesis, Post, Carlin, Gold Quarry and Rain. It is expected that the Rain mine will be decommissioned in late 1994 when its ore reserves are fully depleted. The Post mine is being mined by Barrick Goldstrike Mines, Inc. (\"Barrick\") under a joint mining agreement executed in December 1992 by NGC and Barrick for the exploitation of the shared Post deposit and other related matters. The lower and deep zones of this ore body contain approximately 9.25 million ounces of gold, of which NGC owns 4.88 million ounces and Barrick the remaining 4.37 million ounces. The parties will share the cost of mining the ore body in proportion to their interests in the contained gold. NGC will benefit from lower costs of mining than if it had separately mined its portion of the Post ore body. See Item 7 --\n\"Management's Discussion and Analysis of Results of Operations and Financial Condition.\" See map on page 5 herein.\nMINE PRODUCTION DRY SHORT TONS (000S)\nThe Corporation has an established program for the maintenance and repair of its equipment and facilities. Management believes that the Corporation's facilities are generally in a state of good repair. The Corporation has a continuous program of capital investment that includes, as necessary or advisable, the replacement, modernization or expansion of its equipment and facilities. For a discussion of anticipated future capital expenditures at the Corporation's Nevada operations, see Item 7 -- \"Management's Discussion and Analysis of Results of Operations and Financial Condition.\" Power for the Corporation's Nevada operations is provided by public utilities.\nWith the principal exception of its Gold Quarry and Rain properties, NGC's Nevada properties are owned primarily in fee, having been acquired from the United States by mineral patents and from others. NGC owns in fee or controls through long-term mining leases and unpatented mining claims all of the minerals and surface area within the boundaries of the present and projected mining areas of the Gold Quarry property. Such long-term leases extend for at least the anticipated life of the mine. In a substantial portion of such present and projected mining areas, NGC owns a 10% undivided interest in the minerals and with respect to the remaining 90% has agreed to pay a royalty to third party lessors that is equivalent to approximately 18% of production therefrom. NGC also has less significant royalty commitments to other parties with respect to other portions of the Gold Quarry property and certain of its other properties, notably Rain. See Item 7 -- \"Management's Discussion and Analysis of Results of Operations and Financial Condition.\"\nThe U.S. Congress is considering various proposed amendments, including proposals supported by the Clinton Administration, to the General Mining Law of 1872, which governs mining claims and related activities on federal public lands. Among other things, these proposals would impose royalties on gold production from claims on federal lands. Approximately 94% of NGC's proven and probable ore reserves in Nevada are located on private land and, therefore, not potentially subject to such government proposals to impose a royalty on gold production from federal lands.\nMill Facilities at Carlin\nMill No. 1 was built in 1965 and has treated ore from mines in the North Area such as Carlin, Genesis and Post. It treated an average of 2,600 tons per day of refractory and oxide ores in 1993. The treatment processes include primary and secondary crushing, grinding and cyanide leaching with gold recovery onto activated carbon using a carbon-in-pulp (\"CIP\") circuit. Mill No. 1 also contains a chlorination pre-treatment circuit for the processing of carbonaceous refractory gold ores. After pre-treatment, the ore pulp is combined with the oxide ore pulp for cyanide leaching with gold recovery onto activated carbon. The gold is then stripped from the carbon and refined to ore at NGC's refinery.\nMill No. 2 was commissioned in 1985 and is located in the South Area adjacent to the Gold Quarry open pit mine. It treated an average of 9,200 tons per day of oxide ore in 1993. The treatment processes consist of primary crushing, semi-autogenous grinding and cyanide leaching with gold recovery by CIP and carbon-in-column (\"CIC\") technologies. Mill No. 2 will be taken out of service in 1994, once the refractory ore\ntreatment plant becomes fully operational, which is expected to occur in the third quarter of 1994. See \"Refractory Ore Treatment Plant at Carlin.\"\nMill No. 3 was commissioned in 1988 and is located in the Rain Area some thirteen miles southeast of the town of Carlin, Nevada. In 1993, it treated an average of 2,500 tons of oxide ore per day. The treatment processes consist of primary and secondary crushing, a grinding circuit and cyanide leaching with gold recovery onto activated carbon through the use of a CIP circuit. This mill is expected to be decommissioned in late 1994 when the Rain Mine ore reserves are fully depleted.\nMill No. 4 was commissioned in 1989 and is located in the North Area approximately one mile northeast of the Post deposit. In 1993, it treated an average of 7,400 tons of oxide ore per day from the Post and Genesis mines. The treatment process is similar to Mill No. 2, but instead of a leach tank and CIP circuit, carbon-in-leach (\"CIL\") and CIC circuits are in place.\nMill No. 5 was commissioned in 1988 and is located in the South Area adjacent to Mill No. 2. In 1993, it treated an average of 17,600 tons of oxide ore per day. The treatment process is similar to Mill No. 4.\nMILL PRODUCTION\nRefractory Ore Treatment Plant at Carlin\nNGC is building a low-temperature roaster plant to oxidize refractory ores in conjunction with existing milling facilities in the South Area of operations on the Carlin Trend. This modern roaster, which is scheduled to be completed in the third quarter of 1994, will be capable of treating 8,000 tons of ore per day and is expected to cost approximately $300 million which is to be funded from cash balances, operating cash flow and borrowings.\nThe plant will enable NGC to oxidize and treat higher grades of refractory ores that contain both sulfides and active carbon. While the capital costs per ton of capacity for a roaster are higher than those of an autoclave (an oxidation process in which high temperatures and pressures are applied to convert refractory sulfidic mineralization into cyanide amenable oxide ore), the nearest alternative process for mill-grade refractory ore, the roaster's operating costs per ton are expected to be lower than the costs of operating an autoclave. Autoclaves, furthermore, will not treat ores containing active carbon, as do modern roasters.\nLeaching Facilities at Carlin\nProcessing at the Carlin leaching operations consists of crushing, dump leaching and carbon adsorption facilities. The ore is hauled from the mines to crushing plants for size reduction. The ore is then agglomerated with cement at a controlled moisture content and stacked on impermeable pads. Leach ore which is mined in excess of crushing capacity is placed directly on the leach pads, without first being crushed, to avoid stockpile rehandling costs. The ore is then leached with a low concentration cyanide solution. The gold leaching solutions are collected and passed through columns of activated carbon wherein the removal of gold is accomplished by adsorption. The barren solutions are then returned for re-use in the process. Gold recovery from carbon is accomplished at a central carbon handling facility. See \"Other Facilities at Carlin.\" The South Area leach facility, commissioned in 1989, was expanded during 1991 and 1992. The North Area leach facility\nwas commissioned in 1988 and expanded in 1991, 1992 and 1993. In 1994 expansions are planned in both the North and South Areas. The Rain Area leach facility was commissioned in 1988.\nLEACH PRODUCTION\n- ---------------\n(1) Leach recovery from tons placed fluctuates from year-to-year due to ore grade, differing solution application rates, cycle times, as well as varying inventories of unleached material placed on pads.\nBioleaching at Carlin\nAs an extension of its current leaching operations, field tests have confirmed the commercial viability of a patented bioleaching process to recover gold from low-grade sulfidic materials that previously could not be treated economically. The Corporation's patented process has proved economic on low-grade sulfidic material that already has been mined as a consequence of activity to recover higher-grade sulfidic material or oxidized ores. In the bioleaching process, high-density cultures of naturally occurring bacteria are added to low-grade ore as it is placed on leach pads. The bacteria break down the sulfide crystal structure in the ore, allowing the gold subsequently to be dissolved and recovered through normal heap leaching processes.\nNGC has a second bioleaching process under longer-range commercial tests which is aimed at recovering gold from low-grade sulfidic material that contains active carbon. Such carbon currently prevents economic recovery of contained gold by absorbing gold from the solution into which it has been dissolved.\nNGC has an agreement with Barrick which could allow NGC the opportunity to treat and recover gold from Barrick's low-grade refractory material. If the patented bioleaching process has commercial applicability to Barrick's material, NGC could construct and operate a facility for such treatment in return for a 50% share of the profits, after recovery of capital.\nOther Facilities at Carlin\nAs discussed above, all of the Corporation's Carlin milling and leaching plants recover gold onto activated carbon. The gold-bearing activated carbon from all of these plants is processed at the central carbon processing plant located in the South Area of operations. The gold is stripped from the gold-bearing carbon into a solution which is then subjected to an electrowining process at the refinery, located near the carbon handling plant. After the gold is stripped from the carbon at the carbon processing plant, the carbon is then \"re-activated\" and returned to the various milling and leaching facilities for reuse. The refinery also includes a retorting process to remove mercury, which would otherwise be vaporized and released to the atmosphere, from the electrowining product. The mercury is sold as a by-product. The refinery produces dore bullion which typically has a gold and silver content of 85% to 95%. This dore bullion is then sent to custom toll refiners who further refine the dore and recover the gold and silver at, typically, a pureness of 99.99%.\nThe refinery, analytical laboratory and administration offices are located in the vicinity of Mills Nos. 2 and 5 in the South Area. The Corporation also has an advanced metallurgical research laboratory in Salt Lake City, Utah.\nMINERA YANACOCHA -- 38% OWNED BY NGC\nMinera Yanacocha commenced production in August 1993. During the final five months of the year, it produced a total of 81,500 ounces of gold from the Carachugo mine. This was equivalent to an annual rate of approximately 220,000 ounces. The Maqui Maqui deposit is expected to commence production at a rate of approximately 180,000 ounces of gold annually at the end of 1994. Minera Yanacocha's total production is expected to be approximately 350,000 to 400,000 ounces in 1995.\nPROVEN AND PROBABLE ORE RESERVES\nNewmont's equity in the proven and probable reserves of NGC and its subsidiaries, on a pro forma basis giving effect to the Transaction, was approximately 23,177,000 ounces and 21,194,000 ounces of gold at December 31, 1993 and December 31, 1992, respectively.\nCARLIN, NEVADA\nNGC's estimate of the proven and probable ore reserves at Carlin, Nevada at December 31, 1993 and 1992 is set forth in the table below. The proven and probable reserves were determined by the use of mapping, drilling, sampling, assaying and evaluation methods generally applied in the mining industry. Calculations with respect to the estimates as of December 31, 1993 and 1992, are based on a gold price of $400 per ounce. NGC's management believes that if its reserve estimates were to be based on gold prices as low as $300 per ounce with current operating costs, 1993 year-end reserves would decrease by approximately 16%. Conversely, if its reserve estimates were to be based on a gold price of $500 per ounce with current operating costs, 1993 year-end reserves would increase by approximately 19%. These reserves represent the total quantity of ore to be extracted from the deposits or stockpiles, allowing for mining efficiencies and ore dilution.\n- ---------------\n(1) The term \"reserve\" means that part of a mineral deposit which can be reasonably assumed to be economically and legally extracted or produced at the time of the reserve determination.\nThe term \"economically,\" as used in the definition of reserve, implies that profitable extraction or production under defined investment assumptions has been established or analytically demonstrated. The assumptions made must be reasonable, including assumptions concerning the prices and costs that will prevail during the life of the project.\nThe term \"legally,\" as used in the definition of reserve, does not imply that all permits needed for mining and processing have been obtained or that other legal issues have been completely resolved. However, for a reserve to exist, there should not be any significant uncertainty concerning issuance of these permits or resolution of legal issues.\nThe term \"proven reserves\" means reserves for which (a) quantity is computed from dimensions revealed in outcrops, trenches, workings or drill holes; (b) grade and\/or quality are computed from the result of detailed sampling; and (c) the sites for inspection, sampling and measurements are spaced so closely and the geologic character is sufficiently defined that size, shape, depth and mineral content of reserves are well established.\nThe term \"probable reserves\" means reserves for which quantity and grade are computed from information similar to that used for proven reserves but the sites for sampling are farther apart or are otherwise less adequately spaced. The degree of assurance, although lower than that for proven reserves, is high enough to assume continuity between points of observation.\n(2) Represents the total quantity of ore to be extracted from each deposit or stockpile, allowing for mining efficiencies and ore dilution.\n(3) Calculated using cutoff grades for 1993 and 1992 as follows: oxide leach material not less than 0.006 ounce per ton; refractory mill material not less than 0.07 ounce per ton; oxide mill material varies. Ore reserves were calculated using different recoveries depending on each deposit's metallurgical properties and process. The average oxide mill recoveries utilized were as follows (1992 values in parenthesis): Mill No. 1 -- 85% (85%); Mill No. 2 -- 85% (85%); Mill No. 3 -- 86% (86%); Mill No. 4 -- 82% (84%); Mill No. 5 -- 85% (85%). The average refractory mill recoveries utilized were: Mill No. 1 -- 85% (85%). Roaster -- (engineered estimate) 88% (88%). The following average leach recoveries utilized were used for oxide material: North Area -- 65% (66%); South Area -- 70% (70%); Rain Area -- 56% (57%).\nThe term \"cut-off grade\" means the lowest grade of mineralized rock that qualifies as ore in a given deposit. Cut-off grades vary between deposits depending upon prevailing economic conditions, mineability of the deposit, amenability of the ore to gold extraction, and milling or leaching facilities available.\n(4) The stated average grade (ounces per ton) may not correspond to that determined by direct calculation due to rounding.\n(5) Contained ounces are prior to any losses during metallurgical treatment.\n(6) North Star's 1993 year-end reserves are included with the 1993 year-end Genesis reserves. The latter's ultimate pit area now includes North Star.\n(7) Approximately 50% of these reserves are refractory in nature. Refractory ore is not amenable to the normal cyanidation recovery processes currently used by NGC. Such ore must be oxidized before it is subjected to the normal recovery processes. All refractory reserves are of mill-grade material containing at least 0.07 ounces per ton.\nNON CARLIN TREND PROVEN AND PROBABLE RESERVES\nProven and probable ore reserves as of December 31, 1993 and 1992 of the projects and prospects in which NGC as a result of the Transaction has an interest, other than those on the Carlin Trend in Nevada, are listed below, together with NGC's equity interest in such projects and prospects. These reserves represent the total quantity of ore to be extracted from the deposits or stockpiles, allowing for mining efficiencies and ore dilution. Contained ounces are prior to any losses during metallurgical treatment. The Corporation's pro forma equity in these reserves, giving effect to the Transaction, is 89.22% of NGC's equity.\n- ---------------\n(1) Material available to Zarafshan-Newmont for processing, from designated stockpiles or from other specified sources. All ore is oxidized. Tonnage and gold content of material available to NGC for processing, from the designated stockpiles or from other specified sources, are guaranteed by state entities of Uzbekistan. NGC has completed confirmatory surveying, sampling, assaying and metallurgical testing on a substantial part of this material. Material will be crushed and leached. The feasibility study prepared by the joint venture used a gold price of $350 per ounce and 50% to 65% leach recovery rate, depending on material type.\n(2) Calculated by the Corporation using a gold price of $350 per ounce, a cutoff grade of 0.058 ounces per ton and mill recovery rates of 80% to 89% depending on material type. Substantially all the ore is refractory.\n(3) Calculated by the Corporation using a gold price of $350 per ounce and a cutoff grade not less than 0.010 ounces per ton. Reserves are contained in four deposits. Material is being leached. Assumed leach recovery is 60% to 83%, depending on each deposit's metallurgical properties. All ore is oxidized.\n(4) As published by Atlas Corporation in its Annual Report for the year ended June 30, 1991. All ore is oxidized and will be leached or milled. Feasibility study used a gold price of $350 per ounce, a 52.5% leach recovery rate, a 94% mill recovery rate and variable cutoff grades of at least 0.018 ounces per ton.\n(5) The stated average grade (ounces per ton) may not correspond to that determined by direct calculation due to rounding.\nITEM 3.","section_3":"ITEM 3. LEGAL PROCEEDINGS\nLITIGATION RELATING TO THE TRANSACTION\nOn January 13 and 19, 1994, respectively, two identical actions, both of which purported to be stockholder derivative actions, were commenced in the Court of Chancery for the State of Delaware, by alleged stockholders of NGC. The original defendants in the actions were Newmont and the members of NGC's Board of Directors (collectively, the \"Original Defendants\"). The separate actions were consolidated on February 17, 1994 (the \"Action\"). The complaints sought relief for alleged breaches of fiduciary duties by the Original Defendants in connection with (i) a series of intercompany advances from NGC to Newmont which the plaintiffs claimed were made at rates that did not approximate negotiated, arm's-length rates, thereby wasting NGC's assets, and (ii) the Transaction described in Item 1, which the plaintiffs claimed would not benefit NGC and would waste its corporate assets. The plaintiffs thereafter filed an amended complaint asserting claims for injunctive relief and for damages against the Original Defendants and NGC (collectively, the \"Defendants\") on behalf of a class of NGC stockholders (other than the Original Defendants) as of January 21, 1994, the record date for voting with respect to the proposed Transaction, and their successors in interest. In addition to alleging that certain of the disclosures in the Proxy Statement relating to the Transaction were inadequate, the amended complaint claimed that consummation of the proposed Transaction would be unfair to the minority stockholders of NGC and a breach of fiduciary duties of the Defendants.\nOn March 4, 1994, following certain discovery, the parties reached an agreement in principle to settle all claims asserted in the Action (as described below, the \"Settlement\"). Under that agreement, the essential terms of which are set forth in a Memorandum of Understanding dated March 4, 1994, the parties agreed to certification of a class for settlement purposes only consisting of all holders of record of NGC Common Stock (other than Newmont, the individual Defendants, members of their immediate families and their legal representatives, heirs, successors or assigns) as of January 21, 1994 and their successors in interest (collectively, the \"Settlement Class\").\nUnder the terms of the Settlement, NGC has agreed to make to all members of the Settlement Class who were stockholders of record on January 21, 1994 a special payment of 6 1\/2 cents per share. NGC has also agreed as part of the Settlement to pay for the costs of notice and administration of the Settlement. In addition, NGC has agreed to pay the plaintiffs' reasonable attorneys' fees and expenses in an amount to be determined by the Court, which shall not exceed $300,000.\nNewmont, NGC and each of the members of the Board of Directors of NGC believe that the claims asserted in the Action are without merit, but have agreed to settle the Action solely to avoid the expense and inconvenience of further protracted and time-consuming litigation. The Settlement is conditioned upon, among other things, (i) the execution of a definitive settlement agreement; (ii) final Court approval; and (iii) no other actions being filed which, in the reasonable judgement of the Defendants, would materially undermine the Defendants' rationale for settling (i.e., to eliminate the cost of further protracted litigation relating to the Transaction). If the Court, following notice to the Settlement Class and a hearing, approves the Settlement, it will be asked to enter an order and judgement providing for (a) the dismissal of the Action on the merits, and with prejudice as against NGC and the members of the Settlement Class, and (b) the general release of all claims which have been or could have been asserted by NGC or any member of the Settlement Class against the Defendants relating to or arising out of or in connection with any of the claims, transactions, facts, disclosures, matters or occurrences referred to in, or which are the subject matter of, the amended complaint in the Action.\nOTHER LITIGATION\nIn December 1983, the State of Colorado filed a lawsuit in the United States District Court for the District of Colorado under the Comprehensive Environmental Response Compensation and Liability Act of 1980 (CERCLA), 42 U.S.C. 9601 et seq., seeking clean-up and damages for alleged injury to natural resources due to releases of hazardous substances into the environment. This case, State of Colorado v. ASARCO, Inc., et al. (Civil Action No. 83-C-2388), has since been consolidated with another action, United States of America v. Apache Energy & Minerals, et al. (Civil Action No. 86-C-1676), which was filed August 6, 1986, and involves allegations of environmental impairment in the vicinity of Leadville, Colorado, including the area of the operations and property of the Res-ASARCO Joint Venture which owns the Black\nCloud Mine, the Yak Tunnel, and adjacent property. The State and the United States seek remedial actions and damages from a number of defendants, including Newmont and NGC's wholly owned subsidiary, Resurrection Mining Company, which is a partner with ASARCO in the Res-ASARCO Joint Venture. See Note 13 to Item 8.\nITEM 4.","section_4":"ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS\nNo matters were submitted to a vote of security holders, through the solicitation of proxies or otherwise, during the quarter ended December 31, 1993.\nITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT\nNewmont's executive officers as of March 4, 1994 were:\nThere are no family relationships by blood, marriage or adoption among any of the above executive officers of Newmont. All executive officers are elected annually by the Board of Directors or until their respective successors are chosen and qualify. There is no arrangement or understanding between any of the above executive officers and any other person pursuant to which he or she was selected as an officer. Each named executive officer, except Messrs. Brunk, DeGuire, Dow, Harris and McCall, also serves as an executive officer of NGC.\nMr. Parker has been Chairman of Newmont for more than five years. He was Chief Executive Officer from October 1, 1985 to November 1, 1993. He was President of Newmont from December 6, 1984 to October 29, 1991. He is also Chairman of NGC.\nMr. Cambre was elected Vice Chairman and Chief Executive Officer of Newmont on September 23, 1993 (effective November 1, 1993). Previously, he served as Vice President and Senior Technical Advisor to the office of the Chairman of Freeport-McMoRan Inc., a natural resources company, since 1988. He is also Vice Chairman and Chief Executive Officer of NGC.\nMr. Philip was elected President and Chief Operating Officer of Newmont on October 30, 1991. Previously, he was a Senior Vice President of Newmont for more than five years. He is also President and Chief Operating Officer of NGC.\nMr. Clark was elected a Senior Vice President of Newmont on September 11, 1991. He was designated General Counsel on October 26, 1988 (effective May 1, 1989) and elected a Vice President on December 17, 1986. Prior to his designation as General Counsel, Mr. Clark was Vice President and Western Regional Counsel of Newmont. He is also Senior Vice President and General Counsel of NGC.\nMr. Lawrence was elected Senior Vice President, Operations of Newmont on October 30, 1991. In addition, he has been Senior Vice President, Operations of NGC since October 30, 1991. Previously, he was a Vice President of NGC since December 16, 1987 serving in various senior capacities in operations and project development.\nMr. Murdy was elected Senior Vice President and Chief Financial Officer of Newmont on December 16, 1992 (effective December 31, 1992). Previously, he served as Senior Vice President and Chief Financial Officer of Apache Corporation, an oil and gas exploration and production company, since May 1991. Prior to that he had been Chief Financial Officer of Apache Corporation since December 1987 and a Vice President since February 1987. He is also Senior Vice President and Chief Financial Officer of NGC.\nMr. Baker was elected Vice President, Environmental Affairs of Newmont on February 26, 1992. Previously, he held various environmental positions with Newmont and NGC. He is also Vice President, Environmental Affairs of NGC.\nMr. Brunk was elected Vice President, Project Development of Newmont on April 24, 1991 (effective March 11, 1991). Previously, he was a Vice President of NGC since December 16, 1987 serving in various senior capacities in operations and administration.\nMr. DeGuire was elected a Vice President of Newmont on April 24, 1991 (effective March 11, 1991). He was designated Vice President, Project Development and Metallurgical Research on February 26, 1992. Previously, he had served as Vice President, Environmental Affairs and Metallurgical Research since March 11, 1991. Prior to his election as a Vice President, he served as Newmont's Director of Environmental Affairs for more than five years.\nMr. Dow was elected Vice President, Exploration of Newmont on April 29, 1992. He has held various senior exploration positions with Newmont and its subsidiaries for more than five years.\nMs. Donnelly was elected Vice President, Government Relations of Newmont on June 13, 1989. Previously, she served as Director of Governmental Relations since July 1, 1987 and prior to that as Assistant Director of Government Relations of Newmont. She is also Vice President, Government Relations of NGC.\nMr. Farmar was elected a Vice President of Newmont on December 16, 1992 and Controller on October 30, 1991. Mr. Farmar had served as Assistant Controller since January 28, 1989. Previously, he served as Controller of Petro-Lewis Corporation, an independent oil and gas producer, for three years. He is also Vice President and Controller of NGC.\nMr. Hamer was elected a Vice President of Newmont on February 24, 1993. He served as Vice President, Project Development from February 24, 1993 to December 31, 1993. Effective January 1, 1994, he was designated Vice President, Indonesian Projects. In addition, he served as Vice President and General Manager of NGC from October 30, 1991 to December 31, 1992. Previously, he served as Vice President and Resident Manager of NGC since March 11, 1991 and as Vice President, Operations from October 31, 1988 to March 10, 1991. He is also a Vice President of NGC.\nMr. Harris was elected Vice President, Metallurgical Operations of Newmont on January 1, 1984.\nMr. Hill was elected Vice President, Corporate Relations of Newmont on September 28, 1983. He is also Vice President, Public Relations of NGC.\nMr. Karras was elected Vice President, Taxes on December 16, 1992 (effective November 9, 1992). Previously, he served as director of taxes of Kennecott Corporation, a natural resources company, for four years. He is also Vice President, Taxes of NGC.\nMr. McCall was elected a Vice President of Newmont on October 26, 1988. He was designated Vice President, Project Development on June 12, 1991. Previously, he had served as Vice President, Corporate Development since January 1, 1991. Prior to his election as a Vice President of Newmont, Mr. McCall served as Executive Vice President of Newmont Oil Company, a former subsidiary.\nMr. Paverd was elected Vice President, Exploration of Newmont on April 29, 1992. He has held various senior exploration positions with Newmont and NEL for more than five years.\nMr. Rendu was elected Vice President, Mine Engineering and Information Systems of Newmont on February 24, 1993. In addition, he has been Vice President, Information Systems of NGC since November 26, 1991 and Vice President, Mine Engineering of NGC since March 11, 1991 having previously served as Vice President, Technical and Scientific Systems of NGC since October 31, 1988. Prior to that he was Director of Technical and Scientific Systems of NEL.\nMr. Schmitt was elected a Vice President of Newmont on December 17, 1986 and was elected Secretary on May 25, 1988. He was designated Assistant General Counsel on October 30, 1991. He served as Controller from March 31, 1983 through October 29, 1991. He is also Vice President, Secretary and Assistant General Counsel of NGC.\nMs. Flanagan was elected Treasurer of Newmont on December 16, 1992. Previously, she was an Assistant Treasurer from November 1, 1988 through December 15, 1992. She was appointed Assistant Secretary on June 24, 1992. She is also Treasurer and Assistant Secretary of NGC.\nPART II\nITEM 5.","section_5":"ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS\nNewmont's Common Stock is traded on the New York Stock Exchange. Newmont's stock prices in 1993 and 1992, restated for the Stock Split, payable in the form of a stock dividend, declared on March 21, 1994, were:\nOn March 4 1994, the approximate number of holders of record of Newmont's Common Stock was 6,300.\nA dividend of $0.12 per share of Common Stock outstanding was declared in each quarter of 1993 and 1992, or a total of $0.48 per share in each such year (in each case restated for the Stock Split). The determination of the amount of future dividends, however, will be made by the Corporation's Board of Directors from time to time and will depend on the Corporation's future earnings, capital requirements, financial condition and other relevant factors. For a description of certain restrictions on the payment of dividends, see Note 6 to Item 8.\nITEM 6.","section_6":"ITEM 6. SELECTED FINANCIAL DATA\n- --------------- * All amounts have been restated for a 1.2481 shares to 1 share stock split declared March 21, 1994. See Note 14 in Item 8.\n- --------------- (1) Includes the effect of the issuance of 2.875 million shares of $5.50 convertible preferred stock.\nITEM 7.","section_7":"ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION\nRESULTS OF OPERATIONS\nAll per share amounts herein have been restated for the 1.2481 shares to 1 share stock split declared March 21, 1994. The stock split was declared as part of a transaction in which the Corporation transferred all of its assets and liabilities to Newmont Gold Company (\"NGC\"), owned approximately 90% by the Corporation, effective January 1, 1994. The details of this transaction are included in Note 14 to Item 8.","section_7A":"","section_8":"Item 8.\nThe Corporation's sales revenues are derived almost entirely from NGC's gold production which is concentrated on the Carlin Trend in Nevada. NGC's gold production was 1,666,400 ounces, 1,587,900 ounces and 1,576,900 ounces in 1993, 1992 and 1991, respectively. The Corporation hedged a portion of this production through a gold loan during all three years and used additional hedging instruments in 1992 and 1991. As a result, the Corporation realized above market prices on its production of $376 per ounce in 1993, $379 per ounce in 1992 and $391 per ounce in 1991. This compares to average market per ounce prices of $361, $344 and $363 for the same respective years. The Corporation made the final payment on its gold loan on December 31, 1993 and recognized the associated deferred revenue of $23.5 million during 1993. Currently, no future production is hedged.\nThe effect of the changes in the average annual gold price realized and gold production levels on the change in sales revenues between years is reflected in the following table (in thousands):\nAlthough NGC's production has slightly increased over the past two years, the Corporation expects there will be a slight decline in NGC's Nevada production over the next several years before the deeper and higher grade portions of NGC's Post deposit are mined. NGC's Nevada production in 1994 has been targeted at approximately 1.6 million ounces, with approximately 200,000 ounces expected to come from NGC's new $300 million refractory ore treatment plant (\"roaster\") which is expected to begin production in the third quarter of 1994. The roaster will allow for the effective treatment of carbonaceous and sulfidic refractory ores which are becoming more dominant in NGC's Nevada mines.\nThe Corporation expects that Nevada production will be augmented in 1995 from production from two non-U.S. projects. One of these projects, the Zarafshan-Newmont Joint Venture, is a 50-50 joint venture between the Corporation and two governmental entities of Uzbekistan. The joint venture will leach low grade oxide ore to produce gold from existing stockpiles from the Muruntau mine in Uzbekistan. This project, which is expected to cost approximately $150 million, is anticipated to commence production in the first quarter of 1995 at an annual rate of approximately 450,000 ounces, or 225,000 ounces attributable to the Corporation's interest.\nThe second project is located in Indonesia and is owned by an Indonesian company in which the Corporation has an 80% interest. The preliminary estimate for the capital costs of this project is $100 million. Production is expected to begin late in 1995 at initial total annual rates of approximately 100,000 ounces.\nIn addition to these two non-U.S. projects, the Corporation also has a 38% interest in Minera Yanacocha S.A. (\"Minera Yanacocha\"), a Peruvian company which the Corporation manages and which is accounted for as an equity investment. Minera Yanacocha commenced gold production from a leaching operation in August of 1993 and produced 81,500 ounces, or approximately 31,000 ounces attributable to the Corporation's interest in 1993. Production is expected to increase to 220,000 ounces, or approximately 84,000 ounces attributable to the Corporation's interest, in 1994 and then further increase to 350,000 to 400,000 ounces (130,000 to 150,000 ounces attributable to the Corporation's interest) in 1995 as an additional deposit is mined. Minera Yanacocha's operating cost per ounce of gold produced in 1993 was approximately $150 and it expects to maintain this per ounce rate as production increases. The Corporation's interest in Minera Yanacocha resulted in equity income of $5.2 million in 1993, and such amount is expected to significantly increase in 1994 and 1995.\nThe Corporation's consolidated production and its equity in Minera Yanacocha's production is targeted to exceed 2,000,000 ounces annually by 1997.\nAs with sales revenues, costs applicable to sales and depreciation, depletion and amortization (\"DD&A\") are almost entirely attributable to NGC's Nevada operations. Costs applicable to sales consist primarily of production costs and royalties. Production costs consist principally of charges for mining ore and waste associated with current period production and processing ore through milling and leaching facilities. Primarily because of tons mined increasing each year, total gold production costs increased from $236.7 million in 1991 to $259.5 million in 1992 to $276.0 million in 1993. Tons mined, excluding tons attributable to capitalized mining costs discussed below, increased from 124 million in 1991 to 139 million in 1992 to 188 million in 1993.\nIn addition to the production costs expensed, a substantial portion of mining costs associated with NGC's Post deposit is being capitalized. This deposit is being mined under a joint mining agreement signed in December 1992 by NGC and Barrick Goldstrike Mines, Inc. (\"Barrick\"). Under the agreement, Barrick, which has a separate and distinct interest in the same ore body, mines the deposit and charges NGC on a basis that will result in both companies ultimately bearing the same cost per contained ounce of gold mined. Since a significant portion of NGC's contained ounces in this deep deposit are not expected to be mined for at least three years, the mining costs are being capitalized and will be matched against the revenue from the ounces when they are produced. Such costs were $23.6 million and $5.2 million in 1993 and 1992, respectively. These costs are expected to increase again in 1994 by approximately 50% over the 1993 level due to expected increased mining rates.\nRoyalty costs were $51.4 million in 1991, $46.6 million in 1992 and $47.6 million in 1993. More than half of the decrease between 1991 and 1992 was due to the lower average gold price received in 1992 relative to 1991. The balance of the decrease was due to treating less royalty-burdened ore in 1992. Total royalty ounces produced declined again in 1993 but the increase in the average gold price more than offset the decline. In general, royalty ounces produced are expected to continue to decline in the future as NGC expects to treat less royalty burdened ore.\nThe federal government is studying proposals to impose royalties on revenues from production of hard-rock minerals, including gold, from federal land. Because 94% of NGC's proven and probable gold reserves are on private land, these proposals would not have a substantial impact on current operations. However, these proposals, if enacted into law, could adversely impact the Corporation's ability to find and exploit additional resources in the United States as most exploration prospects are on federal land.\nNGC's cost applicable to sales per ounce of gold production have increased from $190 in 1991, to $198 in 1992, to $200 in 1993. These per ounce costs have increased as a result of a decrease in the overall ore grade of material processed combined with NGC's higher mining rates. The overall grade of material processed by NGC has decreased from 0.047 ounces per ton in 1991 to 0.038 ounces per ton in 1992 to 0.033 ounces per ton in 1993. With the roaster beginning operations in 1994, total production costs for the Nevada operations are expected to again increase, resulting in costs applicable to sales per ounce of production increasing annually approximately 5% to 10% in 1994 and 1995. The Corporation expects that the increase in per ounce costs for its Nevada operations will partially be offset when the Uzbekistan and Indonesian projects begin production in 1995. The Corporation currently estimates that the initial per ounce operating costs for the Uzbekistan project will be approximately $150 and for the Indonesian project approximately $200. Per ounce production costs for the Nevada operations are expected to decline once greater quantities of higher grade refractory ore from the Post deposit begin to be treated, which current mine plans project to occur in 1997.\nDD&A, which is almost entirely attributable to NGC, has increased over the last three years. The increase between 1991 and 1992 was primarily due to an increase in NGC's estimate of future mine dewatering costs. The increase in 1993 from 1992 was primarily due to a higher level of property, plant and equipment in service. Although the Corporation will incur significant capital expenditures in 1994, DD&A is expected to be approximately the same as in 1993. This is primarily due to the retirement of NGC's Mill No. 2 in its South Area of operations (which will be replaced by the roaster), and Mill No. 3 in its Rain Area of operations, due to the depletion of that deposit. No material gain or loss is anticipated from the retirement of these facilities.\nExploration expense has increased over the three year period as the Corporation looks worldwide for gold reserves. Exploration efforts are concentrated along the Carlin Trend in North America, and in Indonesia and South America. The Corporation expects to continue to fund an aggressive exploration effort.\nGeneral and administrative expense (\"G&A\") has remained fairly constant over the last three years. However, because of the costs associated with the advancement of the foreign projects and the Corporation's expanding activities, G&A is expected to increase 10% to 15% in 1994.\nNet interest expense decreased in 1993 approximately $2.2 million primarily due to a $6.1 million increase in capitalized interest in 1993 associated with capital projects. No interest was capitalized in 1991. Gross interest expense has been increasing over the past three years as the low-interest gold loan has been paid off and replaced with higher cost debt. Interest expense is expected to continue to increase as the Corporation expects to finance a significant portion of its capital projects with debt as discussed in \"Liquidity and Capital Resources.\"\nDuring 1993, the Corporation sold its remaining interest in Newcrest Mining Limited for $67 million and recognized a gain of $29.6 million. In 1991, the Corporation recognized a $36.1 million gain on the exchange of its investment in common stock of E. I. duPont de Nemours and Company for its 7% exchangeable debentures, pursuant to the terms of the debentures.\nDividends, interest and other income decreased $6.2 million in 1992 from 1991 as the 1991 period benefited from the recognition of income related to certain gold option transactions that were not considered hedges on gold production. Interest income is expected to decrease in the future due to lower available cash balances resulting from the high level of capital expenditures discussed in \"Liquidity and Capital Resources.\"\nOther expense increased $10.5 million in 1993 over 1992. Approximately $6 million of this increase was for additional provisions for estimated environmental related costs primarily associated with former mining activities as discussed in Note 13 to Item 8. Although the Corporation believes that it has adequately accrued for such costs at December 31, 1993, as additional facts become known, additional provisions may be required. Another $3.5 million of the 1993 increase in other expense represents the estimated costs of the transaction with NGC discussed in Note 14 to Item 8.\nIn 1991, other expense included a $36.0 million charge for environmental related costs, a $6.0 million provision for the estimated loss on former office space leased by the Corporation and a $5.1 million provision for certain personnel layoffs and organizational changes which took place in 1991.\nThe Corporation's effective tax rates are significantly lower than the corporate statutory rates primarily because of the impact of percentage depletion. In addition, the effective tax rate in 1992 was unusually low primarily as a result of greater amounts of deferred tax benefits recognized.\nGeneral inflation over the past three years has not had a material effect on the Corporation's cost of doing business and is not expected to have a material effect in the foreseeable future. Changes in the price received for gold will impact the Corporation's revenue stream, as previously discussed.\nLIQUIDITY AND CAPITAL RESOURCES\nDuring 1993, the Corporation had extensive cash outlays, including $235.3 million for capital expenditures, of which $101.9 million was for the roaster, $88.7 million to repay gold loan debt and $58.0 million to pay dividends, $17.0 million of which pertained to the convertible preferred stock. These outlays were largely funded through a reduction of cash balances of $221.3 million. In addition, the sale of the Newcrest Mining Limited shares, which had been classified on the balance sheet as an asset held for sale, provided approximately $67 million of cash. Another $26.1 million was provided by employees exercising employee stock options and $15 million was borrowed during the year through the issuance of debt under the Corporation's medium-term note program.\nCash provided by operating activities in 1993 was $32.8 million, or approximately $100 million less than in the prior year. The primary reason for this decrease was an increase in inventory levels in 1993 of $67.8 million compared with a $14.1 million decrease in 1992. Increases in ore inventories accounted for $51.3 million. Ore inventories at NGC increased $27.3 million due to the higher mining rates mentioned in \"Results of Operations.\" Of this increase, $7.7 million is considered a long-term other asset as this ore is not expected to be processed in the next year. Ore inventories related to the Nevada operations are expected to increase again in 1994, but by a lesser amount than they did in 1993. The remaining increase in total ore inventories relates to the Uzbekistan project and is classified as a long-term asset. In 1993, $23.8 million of ore stockpiles to be processed by the joint venture was added to the Corporation's ore inventory. The Corporation\nacquired the stockpiles to provide the Uzbekistan entities with the equity capital they required for the project. These ore stockpiles will be the first to be purchased and processed by the joint venture when it commences operations in 1995. The remaining increase in inventories in 1993 is attributable to precious metals, the level of which can fluctuate significantly from year-to-year depending on gold dore shipping dates.\nApproximately $400 million of capital expenditures are expected to be required in 1994. Of this amount, approximately $300 million is expected to be required for the Nevada operations, with almost one-half of this amount required to complete the roaster. Another $100 million is expected to be spent on the Uzbekistan and Indonesian projects. The Corporation's available cash and operating cash flow in 1994 will not be sufficient to cover these expenditures. The Corporation has an unused $280 million revolving credit facility and expects to have $150 million available under a medium-term note program. Project financing of $52.5 million has been arranged for the Corporation's share of capital expenditures required for the Uzbekistan project. The Corporation believes these facilities provide adequate liquidity to finance the Corporation's capital investment programs. However, the Corporation continuously monitors capital markets and may utilize alternative sources of funds available to it. The Corporation expects to fund maturities of its debt through operating cash flow and\/or by refinancing the debt as it becomes due.\nCapital expenditures are expected to decrease after 1994. The Corporation expects it would be able to finance any amounts needed for future capital expenditures that are in excess of operating cash flow with debt and may specifically arrange project financing on major projects.\nAs discussed in \"Results of Operations,\" the Corporation has significant environmental liabilities associated with former mining activities, as discussed in Note 13 to Item 8. Approximately $63 million had been accrued at December 31, 1993 for these liabilities. Because of the uncertain nature of these liabilities, the Corporation estimates that it is reasonably possible that the ultimate liability may be as much as 60% greater or 20% lower than the amount accrued at December 31, 1993. Because actual cash payments on these liabilities will occur over a number of years, the settlement of such liabilities is not expected to have a material impact on the Corporation's liquidity. In addition, the Corporation expects to recover a significant portion of these costs from insurance carriers, but when such recovery will occur is not certain. Absent concurrent insurance recoveries, on-going cash payments will be funded out of operating cash flows or borrowings.\nOf the Corporation's $235.3 million in capital expenditures in 1993, it is estimated that approximately $66 million was required to comply with environmental regulations. The Corporation estimates that in 1994 approximately $90 million to $95 million will be spent for capital expenditures to comply with environmental regulations. A significant portion of these 1993 and 1994 expenditures are related to the roaster. Upon completion of this facility, environmental capital expenditures are not expected to be more than approximately $20 million, annually. Ongoing costs to comply with environmental regulations are not significant. The Corporation provides for future reclamation and mine closure costs on a units-of-production basis. The annual accrual of such costs has not been significant. The Corporation reviews the adequacy of its reclamation and closure reserves in light of current laws and regulations and makes provisions as necessary. In addition, periodic internal environmental audits are conducted to evaluate environmental compliance. Cash flow from the Corporation's operations and salvage values are expected to provide funding for reclamation and closure costs. The Corporation believes that its current operations are in compliance with applicable laws and regulations designed to protect the public health and environment.\nITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA\nMANAGEMENT'S REPORT NEWMONT MINING CORPORATION AND SUBSIDIARIES\nManagement is responsible for the preparation of the accompanying consolidated financial statements and for other financial and operating information presented in this annual report. It believes that its accounting systems and internal accounting controls, together with other controls, provide assurance that all accounts and records are maintained by qualified personnel in requisite detail, and accurately and fairly reflect transactions of Newmont Mining Corporation and its subsidiaries (the \"Corporation\") in accordance with established policies and procedures.\nThe Board of Directors has an Audit Committee whose members are neither officers nor employees of the Corporation. During 1993, the Audit Committee held three meetings. The Audit Committee recommends independent public accountants to act as auditors for the Corporation for consideration by the Board of Directors; reviews the Corporation's financial statements; confers with the independent public accountants with respect to the scope and results of their audit of the Corporation's financial statements and their reports thereon; reviews the Corporation's accounting policies, tax matters and internal controls; and oversees compliance by the Corporation with requirements of the Financial Accounting Standards Board and federal regulatory agencies. The Audit Committee also reviews non-audit services furnished to the Corporation by the independent public accountants. Access to the Audit Committee is given to the Corporation's financial and accounting officers.\nREPORT OF INDEPENDENT PUBLIC ACCOUNTANTS\nTo Newmont Mining Corporation:\nWe have audited the accompanying consolidated balance sheets of Newmont Mining Corporation (a Delaware corporation) and subsidiaries as of December 31, 1993 and 1992, and the related statements of consolidated income, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 1993. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits.\nWe conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.\nIn our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Newmont Mining Corporation and subsidiaries as of December 31, 1993 and 1992, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1993 in conformity with generally accepted accounting principles.\nAs discussed in Note 5 to the consolidated financial statements, effective January 1, 1993, the Corporation changed its method of accounting for income taxes. In addition, as discussed in Note 8 to the consolidated financial statements, effective January 1, 1992, the Corporation changed its method of accounting for postretirement benefits other than pensions.\n\/s\/ ARTHUR ANDERSEN & CO. Arthur Andersen & Co.\nDenver, Colorado January 25, 1994\nNEWMONT MINING CORPORATION AND SUBSIDIARIES\nSTATEMENTS OF CONSOLIDATED INCOME (IN THOUSANDS, EXCEPT PER SHARE)\nThe accompanying notes are an integral part of these statements.\nNEWMONT MINING CORPORATION AND SUBSIDIARIES\nCONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE)\nASSETS\nThe accompanying notes are an integral part of these statements.\nNEWMONT MINING CORPORATION AND SUBSIDIARIES\nSTATEMENTS OF CONSOLIDATED CHANGES IN STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT PER SHARE)\nThe accompanying notes are an integral part of these statements.\nNEWMONT MINING CORPORATION AND SUBSIDIARIES\nSTATEMENTS OF CONSOLIDATED CASH FLOWS (IN THOUSANDS)\nSee Note 12 for supplemental cash flow information.\nThe accompanying notes are an integral part of these statements.\nNEWMONT MINING CORPORATION AND SUBSIDIARIES\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (ALL COMMON SHARE AND PER SHARE AMOUNTS HAVE BEEN RESTATED FOR THE 1.2481 SHARES TO 1 SHARE STOCK SPLIT DECLARED MARCH 21, 1994. SEE NOTE 14)\n(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES\nPRINCIPLES OF CONSOLIDATION\nThe consolidated financial statements include the accounts of Newmont Mining Corporation and its more than 50% owned subsidiaries (collectively, the \"Corporation\"). All significant intercompany balances and transactions have been eliminated. The Corporation's principal subsidiary is Newmont Gold Company (\"NGC\"), which is approximately 90% owned.\nRECLASSIFICATIONS\nCertain amounts in prior years have been reclassified to conform to the 1993 presentation.\nCASH AND CASH EQUIVALENTS\nCash and cash equivalents consist of all cash balances and highly liquid investments with an original maturity of three months or less. Excess cash balances are primarily invested in U.S. Treasury bills with lesser amounts invested in high quality commercial paper and time deposits with high credit-worthy financial institutions.\nINVESTMENTS\nShort-term investments are carried at cost, which approximates market, and include Eurodollar government and corporate obligations rated AA or higher. At December 31, 1993 and December 31, 1992, approximately $10 million of such investments secured letters-of-credit.\nInvestments in companies in which the Corporation's ownership is 20% to 50% are accounted for by the equity method of accounting.\nInvestments in companies owned less than 20% are recorded at the lower of cost or net realizable value.\nINVENTORIES\nOre and in-process inventories and materials and supplies are stated at the lower of average cost or net realizable value. Precious metals are stated at market value.\nNon-current inventories are stated at the lower of average cost or net realizable value and represent ore in stockpiles from which no material is expected to be processed for more than one year after the balance sheet date.\nPROPERTY, PLANT AND MINE DEVELOPMENT\nExpenditures for new facilities or expenditures which extend the useful lives of existing facilities are capitalized and depreciated using the straight-line method at rates sufficient to depreciate such costs over the estimated productive lives of such facilities, which range from two to fifteen years.\nMineral exploration costs are expensed as incurred. When it has been determined that a mineral property has proven or probable ore reserves, the costs of subsequent reserve definition and the costs incurred to develop such property, including costs to remove overburden to initially expose the ore body, are capitalized. Such costs, and estimated future development costs are amortized using a units-of-production method over the estimated life of the ore body. On-going development expenditures to maintain production are generally charged to operations as incurred.\nSignificant payments related to the acquisition of exploration interests are capitalized. If a mineable ore body is discovered, such costs are amortized using a units-of-production method. If no mineable ore body is\nNEWMONT MINING CORPORATION AND SUBSIDIARIES\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)\ndiscovered, such costs are expensed in the period in which it is determined the property has no future economic value.\nInterest expense allocable to the cost of developing mining properties and to constructing new facilities is capitalized until operations commence.\nGains or losses from normal sales or retirements of assets are included in other income or expense.\nMINING COSTS\nIn general, mining costs are charged to operations as incurred. Due to the diverse waste-to-ore ratios encountered in mining NGC's Post deposit, mining costs for the Post deposit, to the extent they do not relate to current production, are capitalized and then charged to operations when the applicable gold is produced.\nRECLAMATION AND MINE CLOSURE COSTS\nEstimated future reclamation and mine closure costs are based principally on legal and regulatory requirements and are accrued and charged over the expected operating lives of the Corporation's mines using a units-of-production method.\nDEFERRED INCOME TAXES\nPrior to 1993, the Corporation recorded deferred income taxes under Accounting Principles Board Opinion No. 11, \"Accounting for Income Taxes\" (\"APB 11\"). Under the deferred method of APB 11, the Corporation recognized certain revenues and expenses for financial reporting purposes at different times than it recognized such amounts for income tax purposes, generating a deferred income tax charge or benefit for the year.\nEffective January 1, 1993, the Corporation adopted Statement of Financial Accounting Standards No. 109, \"Accounting for Income Taxes\" (\"SFAS 109\"). Under the liability method of SFAS 109, the Corporation recognizes certain temporary differences between the financial reporting basis of the Corporation's liabilities and assets and the related income tax basis for such liabilities and assets.\nThis generates a net deferred income tax liability or net deferred income tax asset for the past year, as measured by the statutory tax rates in effect as enacted. The Corporation then derives its deferred income tax charge or benefit by recording the change in the net deferred income tax liability or net deferred income tax asset balance for the year.\nHEDGING ACTIVITIES\nThe Corporation may enter into gold loans, options contracts and forward sales contracts to hedge the effect of price changes on the gold it produces. Gains and losses realized on such instruments, as well as any cost or revenue associated therewith, are recognized in sales when the related production is delivered.\nEARNINGS PER COMMON SHARE\nEarnings per common and common equivalent share are based upon the sum of the weighted average number of common shares outstanding during each period and the assumed exercise of stock options having exercise prices less than the average market prices of the common stock during the period using the treasury stock method. The convertible preferred shares are not common stock equivalents and were anti-dilutive for 1993 and 1992. The weighted average number of shares used in the earnings per share calculations, as adjusted for the 1.2481 shares to 1 share stock split declared March 21, 1994, were 85.5 million, 85.0 million and 84.6 million in 1993, 1992 and 1991, respectively.\nNEWMONT MINING CORPORATION AND SUBSIDIARIES\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)\n(2) INVENTORIES\n(3) PROPERTY, PLANT AND MINE DEVELOPMENT\n(4) OTHER ACCRUED LIABILITIES\n(5) INCOME TAXES\nSFAS 109 requires that, effective January 1, 1993, the Corporation account for income taxes under the liability method, rather than the deferred method required previously under APB 11. The cumulative effect of this change in accounting for income taxes is an increase to earnings of $38.5 million, or $0.45 per share, attributable to fiscal years prior to 1993.\nUnder SFAS 109, the Corporation must establish deferred income tax liabilities and deferred income tax assets when temporary differences arise between the financial reporting basis and the income tax basis of the Corporation's liabilities and assets. The actual measurement of the deferred income tax liabilities and assets is based upon the tax rates and tax law provisions as enacted.\nNEWMONT MINING CORPORATION AND SUBSIDIARIES\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)\nDeferred income tax assets include the Corporation's future tax benefits such as net operating losses or tax credit carryforwards. The Corporation must record a valuation allowance against any portion of a deferred income tax asset which it believes it will more likely than not fail to realize.\nWorldwide components of the Corporation's deferred income tax (liabilities) and assets at December 31, 1993 are as follows (in thousands):\nBased upon estimates of future operations and tax planning strategies, the Corporation believes that it more likely than not will utilize $78.0 million of the $85.8 million of gross deferred income tax assets at December 31, 1993, reflecting a valuation allowance of $7.8 million.\nThe Corporation gives no outright assurance that it will generate sufficient taxable income to fully realize the remaining $78.0 of gross deferred income tax assets. Future levels of taxable income are dependent, in part, upon gold prices, general economic conditions and other factors beyond the Corporation's control.\nPre-tax financial statement income before the cumulative effect of changes in accounting principles consists of (in thousands):\nNEWMONT MINING CORPORATION AND SUBSIDIARIES\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)\nOn August 10, 1993, President Clinton signed into law the Revenue Reconciliation Act of 1993, raising the federal corporate income tax rate from 34% to 35% (retroactive to January 1, 1993). The Corporation's provisions for income taxes before the cumulative effect of changes in accounting principles consist of (in thousands):\nIn accordance with APB 11, the Corporation's deferred income tax provisions (benefits) for 1992 and 1991, before the cumulative effect of a change in accounting principle, consists of (in thousands):\nThe provisions for income taxes before the cumulative effect of changes in accounting principles differ from the amounts computed by applying the U.S. corporate income tax statutory rate for the following reasons (in thousands):\nNEWMONT MINING CORPORATION AND SUBSIDIARIES\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)\nIncluded in other long-term liabilities at December 31, 1993 and 1992 is $36.8 million and $32.0 million, respectively, of income taxes payable.\nIn 1991, the Corporation credited retained earnings approximately $35 million for previously provided deferred income taxes. These deferred income taxes related to a former subsidiary whose stock was distributed to the Corporation's shareholders in a prior year. At that time, the distribution reduced retained earnings.\n(6) DEBT\nLONG-TERM DEBT\nLong-term debt consists of (in thousands):\n8 5\/8% Notes\nIn April 1992, the Corporation issued unsecured notes with a principal amount of $150 million due April 1, 2002 bearing an annual interest rate of 8 5\/8%. Interest is payable semi-annually in April and October and the notes are not redeemable prior to maturity. Using interest rates prevailing on similar instruments at December 31, 1993 and 1992, this debt was estimated to have a fair value of $170.7 million and $157.7 million, respectively.\nMedium-term Notes\nBeginning in May 1992, the Corporation began issuing notes under its medium-term note program. Notes totalling $42 million and $27 million with a weighted average interest rate of 7.7% and 7.9% maturing on various dates ranging from mid-1999 to late 2004 were outstanding as of December 31, 1993 and December 31, 1992, respectively. Using the interest rates prevailing on similar instruments at December 31, 1993 and 1992, this debt was estimated to have a fair value of $45.6 million and $27.2 million at those respective dates.\nGold Loan\nIn 1988, the Corporation entered into a loan agreement with a group of lenders under which one million ounces of gold were borrowed and the obligation was monetized for $448.8 million. The borrowings were repaid in 16 equal quarterly installments of gold ounces with the final quarterly installment paid in December 1993.\nIn April 1992, the Corporation entered into forward contracts to acquire the gold necessary to satisfy the final six quarterly installments due on the loan at an average price of $355 per ounce. The difference between the forward contract values and the monetized amount of the gold loan was reflected as deferred revenue on the balance sheet at December 31, 1992.\nSales revenues of $23.5 million, $26.0 million and $20.9 million were recognized in 1993, 1992, and 1991, respectively, as the monetized amount of the repaid ounces was less than that at which the ounces were originally recorded.\nNEWMONT MINING CORPORATION AND SUBSIDIARIES\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)\nThe Corporation paid interest in gold ounces at the lenders' gold base rate plus 0.5%. Interest was calculated on current market prices for gold. The gold interest rate averaged 1.9%, 1.4% and 2.0% in 1993, 1992, and 1991, respectively. The effective interest rate based upon the monetized value of the gold loan averaged 1.8%, 1.3% and 1.6% in 1993, 1992 and 1991, respectively. The Corporation paid a $1.8 million fee to the lenders upon origination of the loan which was amortized over the life of the agreement.\nProject Financing Facility\nThe Corporation, through a wholly-owned subsidiary, is a 50% participant in a joint venture in the Republic of Uzbekistan. The other 50% participants are two entities of the Uzbekistan government. The joint venture was established to construct and operate a leaching facility to produce gold from low-grade ore. The project is expected to cost approximately $150 million.\nThe joint venture has secured $105 million of project financing for the project from a consortium of banks. The loan is payable out of the proceeds of the project, beginning the earlier of six months after completion or July 20, 1996 in semi-annual installments over three years. The average interest rate on the loan is 2.25 percentage points over the London Interbank Borrowing Rate prior to completion of the project and 3.75 percentage points over the London Interbank Borrowing Rate after completion of the project. No amounts had been drawn under the loan at December 31, 1993.\nThe Corporation has guaranteed one-half of the payment of any amounts due under the loan until the requirements of a specified completion test have been satisfied, at which time the loan will become non-recourse debt. Such completion test must be satisfied no later than October 1996. The Corporation has obtained political risk insurance coverage for its investment and loan guarantee in Uzbekistan.\nRevolving Credit Facility\nThe Corporation has a revolving credit facility under which it may borrow up to $280 million. The revolving credit facility expires in April 1997. No amounts were drawn down under the facility in 1993 or 1992. Interest rates are variable at the lenders' base rate plus 0.3% until May 1995 and 0.425% thereafter. The Corporation has the option to fix the rate for up to six months. There is an annual facility fee of 0.2% on the lenders' total commitment.\nThe Corporation's revolving credit facility contains covenants limiting consolidated indebtedness, as defined, to $750 million and requiring a minimum net worth. The minimum net worth requirement was $225 million in 1993 and increases $25 million annually. Also, as of December 31, 1993, the payment of future dividends to common and preferred stockholders was limited to $173.6 million.\nDollar\/Gold Debt Swaps\nDuring 1989 and 1990, the Corporation entered into dollar\/gold debt swaps for a total notional principal amount of $150 million and 383,400 ounces of gold. Upon termination of a swap, the Corporation was required to deliver the number of gold ounces involved in return for payment by the counterparty of the notional principal amount involved. The effect of a swap was to convert dollar denominated debt into gold denominated debt which, on average, had a significantly lower interest rate than dollar denominated debt. In early 1991, the Corporation terminated a $50 million swap covering 127,700 ounces of gold and recognized $5.2 million of revenue. In 1992, the Corporation terminated its remaining $100 million of swaps covering 255,800 ounces of gold and recognized $19.7 million of revenue.\nSHORT-TERM DEBT\nAll short-term debt at December 31, 1993 and 1992 consisted of bank debt.\nThe Corporation currently has unsecured demand bank lines of credit aggregating $16 million, of which $15.7 million and $10.9 million were outstanding at December 31, 1993 and 1992, respectively. These facilities bear interest at customary short-term rates for borrowers with similar credit ratings. The interest rates on this\nNEWMONT MINING CORPORATION AND SUBSIDIARIES\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)\nshort-term bank debt averaged 6.0%, 6.1% and 8.5% in 1993, 1992 and 1991, respectively, and were 6.0% at December 31, 1993 and 1992.\nCAPITALIZED INTEREST\nCapitalized interest was $8.5 million and $2.4 million in 1993 and 1992, respectively. No interest was capitalized in 1991.\n(7) STOCKHOLDERS' EQUITY\nPREFERRED STOCK\nIn the fourth quarter of 1992, the Corporation issued 2.875 million shares of $5.00 par value Convertible Preferred Stock at a price of $100 per share, which netted approximately $280 million after offering expenses. The $5.50 annual dividend per share is cumulative from the original issue date and is payable quarterly commencing March 15, 1993. The shares are convertible at any time at the option of the holder into shares of common stock of the Corporation at a conversion price of $36.395 for each share of common stock, subject to certain adjustments. The Convertible Preferred Stock is not redeemable prior to November 15, 1995. On and after such date it is redeemable, in whole or in part, at the option of the Corporation, at a beginning redemption price of $103.85 per share. Such redemption price then declines $0.55 per share annually until it reaches $100 per share on November 15, 2002, which is also the liquidation preference per share. The Convertible Preferred Stock ranks senior to the participating preferred stock (see \"Preferred Share Purchase Rights\") and, in general, does not have voting rights.\nThe Convertible Preferred Stock was offered under Rule 144A and Regulation S under the U.S. Securities Act of 1933 and is therefore not registered under such act. The Convertible Preferred Stock is held by shareholders through depositary shares, each of which represents one-half of a share of the Convertible Preferred Stock and entitles the holder to all proportional rights and preferences of the Convertible Preferred Stock.\nCOMMON STOCK RIGHTS\nEqual Value Rights\nIn September 1987, the Board of Directors declared a dividend distribution of one Equal Value Right (\"EVR\") on each share of common stock outstanding on October 5, 1987. Each share issued subsequent to such date automatically receives an EVR. The EVRs, which are non-voting, expire in September 1997 unless redeemed earlier by the Corporation, and separate from the common shares effective with the public announcement (the \"Control Date\") that a person or group has acquired more than 50% of the common stock. Until an EVR is exercised, the holder thereof has no rights as a stockholder of the Corporation. Until the Control Date, the EVRs will be evidenced by the Corporation's common stock and will be transferred with and only with such certificates. In the event of a subsequent merger or other specified transaction by the Corporation, each EVR would entitle the holder, under certain circumstances, to receive from the Corporation an amount in cash equal to the amount by which the highest price per share paid by such acquirer within 91 days prior to and including the Control Date exceeds the fair market value of the consideration paid for each share of the Corporation's common stock in connection with the merger or other transaction. At any time prior to the Control Date, the Corporation may (but only with the concurrence of continuing directors) redeem the EVRs at a price of $0.02 per EVR.\nPreferred Share Purchase Rights\nIn August 1990, the Board of Directors declared a dividend distribution of one preferred share purchase right (\"PSPR\") on each share of common stock outstanding on September 11, 1990. Each share issued subsequent to September 11, 1990 and prior to the \"Distribution Date\" referred to below (and in certain limited circumstances thereafter) will be issued with a PSPR. Each PSPR entitles the holder to purchase from the Corporation one five-hundredth of a share of participating preferred stock of the Corporation for\nNEWMONT MINING CORPORATION AND SUBSIDIARIES\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)\n$150, subject to adjustment. Prior to the Distribution Date, the PSPRs are not exercisable, will be evidenced by the Corporation's common stock certificates and will be transferred with and only with such certificates. The PSPRs expire in September 2000 unless earlier redeemed. Until a PSPR is exercised, the holder thereof has no rights as a stockholder of the Corporation.\nThe Distribution Date, which is the date on which the PSPRs separate from the common stock and become exercisable, is the earlier of (i) ten days after the public announcement that a person or group (other than the Corporation's present shareholder groups subject to a standstill agreement dated as of December 7, 1990, as amended and certain related entities and their transferees, but only to the extent of their current share ownership) (an \"Acquiring Person\") has acquired 15% or more of the common stock (the date of such first public announcement being the \"Stock Acquisition Date\"), or (ii) ten business days after the commencement of a tender or exchange offer that would result in a person or group owning 15% or more of the common stock. If after the Distribution Date a person shall become an Acquiring Person (other than pursuant to certain offers approved by the Board of Directors) each holder of a PSPR (other than the Acquiring Person and, in certain circumstances, transferees of the Acquiring Person) will have the right to receive, upon exercise, common stock (or, in certain circumstances, cash, property or other securities of the Corporation) having a value equal to two times the purchase price of the PSPR. In addition, if after a Stock Acquisition Date the Corporation is not the surviving entity in certain business combinations, or 50% or more of the Corporation's assets or earning power is sold or transferred, each holder of a PSPR shall have the right to receive, upon exercise, common stock of the acquiring company having a value equal to two times the purchase price of the PSPR. Prior to the earlier of a Stock Acquisition Date or the expiration date of the PSPR, the Corporation, in certain circumstances with the approval of continuing directors, may redeem the PSPRs at a price of $0.01 per PSPR.\nEach one five-hundredth share of preferred stock is designed to have similar rights to one share of common stock. The preferred shares have a preferential quarterly dividend that is 500 times the dividends on the common stock, but in no event less than one dollar. The liquidation preference per preferred share is the greater of $500 (plus accrued dividends to the date of distribution) or an amount equal to 500 times the aggregate amount of dividends to be distributed per share to holders of the Corporation's common stock. In the event of a business combination in which shares of the Corporation's common stock are exchanged, each preferred share will be entitled to receive 500 times the amount and type of consideration received per share of common stock. Each preferred share will have 500 votes and vote together with the common stock. The preferred shares are not redeemable.\n(8) EMPLOYEE BENEFIT PLANS\nSTOCK OPTION PLANS\nUnder the Corporation's stock option plans, options to purchase shares of the Corporation are granted to key employees at the fair market value of such shares on the date of grant. The options under these plans are subject to certain restrictions, vest over a two year period and are exercisable over a period not exceeding ten years. At December 31, 1993, 1,398,890 shares were available for future grants under the Corporation's stock option plans.\nIn 1993 and 1992 certain key executives were granted options that, although the exercise price is generally equal to the fair market value on the date of grant, cannot be exercised when vested until the market price of the Corporation's common stock is a defined amount above the option exercise price. In addition, the same executives were granted options in 1993 and 1992 whose exercise prices are in excess of the fair market value on the date of grant. Generally, these key executive options vest over a five year period and are exercisable over a ten year period. At December 31, 1993, 956,444 of these options were outstanding.\nNEWMONT MINING CORPORATION AND SUBSIDIARIES\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)\nThe following table summarizes annual stock option activity for the three years ended December 31, 1993:\nAt December 31, 1993, 738,777 options were exercisable.\nPENSION BENEFITS\nThe Corporation has two qualified non-contributory defined benefit pension plans, one which covers salaried employees and the other which covers substantially all hourly-rated employees. The vesting period is five years of service for both plans. In addition, the Corporation has a non-qualified supplemental pension plan for salaried employees whose benefits under the qualified plan are limited by federal legislation. Pension costs are determined annually by independent actuaries and pension contributions to the qualified plans are made based on funding standards established under the Employee Retirement Income Security Act of 1974 (\"ERISA\"). The Corporation maintains a trust for the purpose of funding the supplemental pension plan as well as death benefits for officers of the Corporation. This trust is funded at the discretion of the Corporation and had a balance of $5.0 million and $4.8 million (which approximated market) at December 31, 1993 and 1992, respectively. Although the trust's assets can be used to pay benefits for the supplemental pension plan, they cannot be used in determining the net pension liability for the supplemental pension plan. The plans' benefit formulas are based on an employee's years of credited service and either such employee's last five years average pay (salaried plan) or a flat dollar amount (hourly plan). The qualifying plans' assets consist of stocks, bonds and cash.\nThe components of pension expense for these three plans, in the aggregate, consist of (in thousands):\nNEWMONT MINING CORPORATION AND SUBSIDIARIES\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)\nThe following tables set forth the funded status of the plans and the amounts recognized in the Corporation's consolidated balance sheets at December 31, 1993 and 1992, respectively (in thousands):\nIn accordance with the provisions of Statement of Financial Accounting Standards No. 87, an adjustment was required to reflect a minimum liability for the supplemental pension plan in 1992 and 1993. Such adjustment resulted in recording an intangible asset and, to the extent the minimum liability adjustment exceeded the unrecognized net transition liability, a reduction of $3.7 million and $2.7 million in stockholders' equity, which is net of related deferred income tax benefits, for 1993 and 1992, respectively.\nNEWMONT MINING CORPORATION AND SUBSIDIARIES\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)\nThe actuarial assumptions used were:\nRETIREE BENEFITS OTHER THAN PENSIONS The Corporation provides defined medical benefits to qualified retirees who were salaried employees and their eligible dependents and it provides defined life insurance benefits to qualified retirees who were salaried employees. In general, participants become eligible for these benefits upon retirement directly from the Corporation if they are at least 55 years old and the combination of their age and years of service with the Corporation equals 75 or more.\nThe defined medical benefits cover most of the reasonable and customary charges for hospital, surgical, diagnostic and physician services and prescription drugs. Life insurance benefits are based on a percentage of final base annual salary and decline over time after coverage begins.\nThe Corporation adopted Statement of Financial Accounting Standards No. 106, \"Employers' Accounting for Postretirement Benefits Other Than Pensions\" (\"SFAS 106\"), effective January 1, 1992. The statement requires that postretirement benefits other than pensions be accrued during an employee's service to the Corporation. Previously, the Corporation recorded the expense when benefit payments were made for retirees.\nThe actuarially-determined accumulated postretirement benefit obligation (\"APBO\") calculated in accordance with SFAS 106 at January 1, 1992 was $17.6 million. This amount was expensed, net of related income tax benefits of $6.0 million, as a cumulative effect of a change in accounting principle.\nThe components of expense for postretirement benefits other than pensions for 1993 and 1992, exclusive of the cumulative effect of adopting SFAS 106 as of January 1, 1992, are shown in the table below (in thousands):\nIn 1991, the annual amount expensed for these benefits under the Corporation's prior accounting policy was insignificant.\nThe following table sets forth the components of the liability for the Corporation's plans and the amounts carried on the Corporation's consolidated balance sheets (in thousands):\nNEWMONT MINING CORPORATION AND SUBSIDIARIES\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)\nAt December 31, 1993 and 1992, $3.4 million and $3.6 million of assets, respectively, with market values of approximately the same amounts, were designated in a trust to pay postretirement benefits other than pensions. Since these assets could be used to pay other employee benefits, they cannot be used for the postretirement benefit calculations. The Corporation has no formal policy for funding postretirement benefit obligations.\nWeighted average discount rates of 7.50% and 7.75% were used in calculating the APBO at December 31, 1993 and 1992, respectively. The assumed health care cost trend rates to measure the expected cost of benefits at December 31, 1993 start at an 11% annual increase for coverage before the age of 65 and a 10% annual increase for coverage after the age of 64. These rates were assumed to decrease one percentage point each year until a 6% annual rate of increase was reached, at which point a 6% annual rate of increase was assumed thereafter. The effect of a one percentage point annual increase in the assumed cost trend rates would increase the aggregate of service and interest costs for 1993 by approximately 24% and the APBO by approximately 20%.\nSAVINGS PLAN\nThe Corporation has two qualified defined contribution savings plans, one which covers salaried employees and the other which covers substantially all hourly-rated employees. In addition, the Corporation has a non-qualified supplemental savings plan for salaried employees whose benefits under the qualified plan are limited by federal regulations.\nAfter six months or one year of service for the salaried and hourly plans, respectively, the Corporation generally matches 100% of employee contributions up to 6% and 2% of base salary for the salaried and hourly plans, respectively (the hourly plan percentage increases to 4% as of January 1, 1994).\nThe Corporation's matching contributions to the savings plans were $2.4 million, $2.3 million and $2.2 million in 1993, 1992 and 1991, respectively.\nSEVERANCE BENEFITS\nThe Corporation has a Severance Pay Plan for salaried employees who are involuntarily terminated. In addition, the Corporation has employment agreements with certain key executives pursuant to which the Corporation would be liable for certain supplemental severance payments in the event such executives' employment is involuntarily terminated. The potential obligations arising from the employment agreements have been pre-funded through a trust. The trust balances of approximately $12.8 million and $12.4 million at December 31, 1993 and December 31, 1992, respectively, with similar market values, is included in other assets.\n(9) OTHER EXPENSES\nIn December 1993, the Corporation announced that effective January 1, 1994, NGC would combine its operations with the Corporation by NGC acquiring all of the Corporation's non-NGC assets and liabilities. See Note 14 for additional information about this transaction. Costs related to the transaction of $3.5 million were expensed in 1993.\nThe Corporation expensed $2.8 million, $3.8 million and $6.0 million in 1993, 1992 and 1991, respectively, when it wrote-down the carrying value of certain assets.\nThe Corporation is involved in several matters concerning environmental obligations primarily associated with former mining activities, as discussed in Note 13. Included in other expenses for the years ended December 31, 1993 and December 31, 1991 are provisions of $6 million and $36 million, respectively, related to these matters.\nIn 1991, there was a charge of $6 million primarily associated with delays in sub-leasing the Corporation's former office space in New York City. In addition, there was a charge of $5.1 million due to corporate-wide layoffs and certain organizational changes.\nNEWMONT MINING CORPORATION AND SUBSIDIARIES\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)\n(10) GAIN ON SALE OF SECURITIES\nIn May 1993, the Corporation sold its remaining 14% interest in Newcrest Mining Limited for $67 million and recognized a gain of $29.6 million. This interest was reflected as an asset held for sale at December 31, 1992.\nIn 1991, the Corporation retired all of its 7% exchangeable debentures, due 2001, pursuant to the terms thereof by exchanging its entire investment in E.I. duPont de Nemours and Company (\"duPont\") common stock. A gain of $36.1 million was recognized on the disposal of the duPont stock.\n(11) MAJOR CUSTOMERS AND EXPORT SALES\nThe Corporation is not economically dependent on a limited number of customers for the sale of its product, primarily gold, because gold commodity markets are well-established worldwide. During 1993 there were three customers which accounted for $105.0 million, $97.3 million and $78.3 million of total sales, each of which represented more than 10% of total sales and together accounted for 44% of the annual sales. In 1992, sales to two such major customers accounted for $126.8 million and $65.3 million, or 31% of total sales. In 1991, sales to two such major customers accounted for $152.6 million and $133.2 million, or 46% of total sales.\nExport sales were $269.3 million, $267.5 million and $212.4 million in 1993, 1992 and 1991, respectively.\n(12) SUPPLEMENTAL CASH FLOW INFORMATION\nNet cash provided by operating activities includes the following cash payments (in thousands):\nExcluded from the statements of consolidated cash flows are the effects of certain non-cash transactions. During 1992, NGC exchanged $10.6 million of employee housing property for $7.7 million of notes receivable and $2.9 million in cash. As discussed in Note 10, during 1991, holders of the Corporation's $77.6 million 7% exchangeable debentures exchanged such debentures for duPont shares, held by the Corporation as an investment, that had a book value of $40 million.\n(13) COMMITMENTS AND CONTINGENCIES\nENVIRONMENTAL OBLIGATIONS\nThe Corporation's mining and exploration activities are subject to various federal and state laws and regulations governing the protection of the environment. These laws and regulations are continually changing and generally becoming more restrictive. The Corporation conducts its operations so as to protect the public health and environment and believes its operations are in compliance with all applicable laws and regulations. The Corporation has made, and expects to make in the future, expenditures to comply with such laws and regulations. The Corporation cannot predict such future expenditures.\nThe Corporation is involved in several matters concerning environmental obligations primarily associated with former mining activities.\nBased upon the Corporation's best estimate of its liability for these matters, $62.7 million and $68.5 million were accrued at December 31, 1993 and 1992, respectively, excluding $16.8 million and $14.2 million at December 31, 1993 and 1992 respectively, of reclamation costs relating to currently producing mineral properties. The amounts are included in reclamation liabilities and other current liabilities on the consolidated balance sheets for the respective periods. Depending upon the ultimate resolution of these matters, the Corporation believes that it is reasonably possible that the liability for these matters could be as much as 60% greater or 20% lower than the amount accrued at December 31, 1993.\nNEWMONT MINING CORPORATION AND SUBSIDIARIES\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)\nThe Corporation has recorded long-term receivables from third parties, primarily insurance companies, of $42.2 million and $41.2 million at December 31, 1993 and 1992, respectively, for both a portion of the costs previously expended and for the future liabilities estimated in connection with these matters. These amounts are considerably less than what the Corporation has or will claim from the insurance carriers. Substantially all of this amount is contested by the insurance companies involved. The Corporation is negotiating with some of its insurance carriers for past and future costs relating to certain of these matters. The insurance carriers have reserved their rights or disclaimed liability under their respective policies, and certain carriers have commenced declaratory judgement actions seeking to avoid coverage. The Corporation has commenced litigation seeking coverage from certain carriers. Although the Corporation cannot reasonably predict the outcome of these actions, it is nevertheless management's opinion that a substantial recovery of claimed costs will be made from the insurance carriers. The total receivables recognized represent the reasonably probable amount the Corporation expects to receive based upon its discussions with counsel. See Note 9 for certain charges taken related to these matters.\nThe following is a discussion of the environmental obligations as of December 31, 1993.\nIdarado Mining Company (\"Idarado\") -- 80.1% owned\nIn July 1992, the Corporation and Idarado signed a consent decree with the State of Colorado (\"State\") which was agreed to by the U.S. District Court of Colorado to settle a lawsuit brought by the State under the Comprehensive Environmental Response, Compensation, and Liability Act (\"CERCLA\"), generally referred to as the \"Superfund Act.\" Idarado paid $5.35 million pursuant to this consent decree in August 1992 to settle natural resources damages, past and future response costs and to provide habitat enhancement work. In addition, Idarado agreed in the consent decree to undertake specified reclamation and remediation work related to its former mining activities in the Telluride\/Ouray area of Colorado. The Corporation's best estimate of the cost of this work is included in the gross liability, as previously discussed. If the reclamation and remediation work does not meet certain measurement criteria specified in the consent decree, the State and court reserve the right to require Idarado to perform other reclamation and remediation work. Idarado and the Corporation have obtained a $16.3 million letter of credit to secure their obligations under the consent decree.\nResurrection Mining Company (\"Resurrection\") -- 100% owned\nIn 1983, the State of Colorado (\"State\") filed a lawsuit under the Superfund Act which involves a joint venture mining operation near Leadville, Colorado in which Resurrection is a joint venturer. This action was subsequently consolidated with a lawsuit filed by the United States Environmental Protection Agency (\"EPA\") in 1986. The EPA is taking the lead role on cleanup issues and the matters are now proceeding principally through the administrative processes of CERCLA, rather than through the court action. The proceedings seek to compel the defendants to remediate the impacts of pre-existing mining activities which the governments claim are causing substantial environmental problems in the area. The mining operations of the joint venture are operated by ASARCO, the other joint venturer. The governments have made the Corporation, Resurrection, the joint venture and ASARCO defendants in the proceedings. They are also proceeding against other companies with interests in the area.\nThe EPA divided the remedial work into two phases. Phase I addresses a drainage and access tunnel owned by the joint venture -- the Yak Tunnel. Phase II addresses the remainder of the site.\nIn 1988 and 1989, the EPA issued administrative orders with respect to Phase I work for the Yak Tunnel. The joint venture, ASARCO, Resurrection and the Corporation have collectively implemented those orders by constructing a water treatment plant which was placed in operation in early 1992. The joint venture is in negotiations regarding remaining remedial work for Phase I, which primarily consists of monitoring and environmental maintenance activities.\nIn October 1993, Resurrection paid $4.4 million for its share of past response costs and interest through January 1991 for the United States and through January 1992 for the State.\nNEWMONT MINING CORPORATION AND SUBSIDIARIES\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)\nThe EPA has not yet completed work to define a remedy for Phase II and thus has not published a current estimate of the costs of such remedial action. Accordingly, the Corporation cannot yet determine the full extent or cost of remedial action which will be required under Phase II. Moreover, in addition to costs of remedial action, the governments will seek to recover future response costs to be incurred at the site and may seek to recover for damages to natural resources. The case currently involves other solvent defendant corporations. The allocation of costs and damages incurred or to be incurred at the site among those defendants, if any such allocation is to be made, cannot be determined at this time.\nAlthough the ultimate amount of total costs and Resurrection's and the Corporation's exposure for such costs for Phase I and Phase II cannot be presently determined, the Corporation's best estimate of its potential exposure for these costs is included in the gross liability for these matters, previously discussed.\nDawn Mining Company (\"Dawn\") -- 51% owned\nDawn leased a currently inactive open-pit uranium mine on the Spokane Indian Reservation in the State of Washington (\"State\"). The mine is subject to regulation by agencies of the United States Department of Interior, the Bureau of Indian Affairs (\"BIA\") and the Bureau of Land Management, as well as the EPA. Dawn also owns a nearby uranium millsite facility.\nIn 1991, Dawn's lease was formally terminated. As a result, Dawn was required to file a formal reclamation plan. Dawn does not have sufficient funds to pay for such a reclamation plan or to pay for the closure of its mill. Dawn proposed to the State a mill closure plan which could potentially generate the necessary funds to reclaim the mine and the mill. The State notified Dawn that the proposed plan was not the State's preferred alternative and was not consistent with certain policy considerations of the State. At December 31, 1993, Dawn was in the process of revising its proposed mill closure plan so as to meet these State concerns. The Corporation's best estimate for the future costs related to these matters is included in the gross liability for environmental matters, previously discussed.\nThe Department of Interior previously notified Dawn that when the lease was terminated, it would seek to hold Dawn and the Corporation (as Dawn's 51% owner) liable for any costs incurred as a result of Dawn's failure to comply with the lease and applicable regulations. The Corporation would vigorously contest any such claims. The Corporation cannot reasonably predict the likelihood or outcome of any future action against Dawn or the Corporation arising from this matter.\nGUARANTEE OF THIRD PARTY INDEBTEDNESS\nThe Corporation guaranteed $35.7 million of Magma Copper Company's (a former subsidiary) Pollution Control Revenue Bonds due 2009. It is expected that the Corporation will be required to remain liable on this guarantee so long as the bonds relating thereto are outstanding.\nGUARANTEE OF PROJECT FINANCING INDEBTEDNESS\nThe Corporation has a 38% interest in Minera Yanacocha S.A. (\"Yanacocha\"), a Peruvian gold operation which commenced operations in 1993. Yanacocha secured project financing of $31.2 million from a consortium of banks. The Corporation agreed to guarantee approximately $12.5 million of this amount until the earlier of the repayment of all amounts due pursuant to the project financing or the satisfaction of a project completion test. Yanacocha expects that the project completion test will be satisfied in early 1994.\nOTHER COMMITMENTS AND CONTINGENCIES\nIn December 1992, NGC finalized an agreement with Barrick Goldstrike Mines, Inc. (\"Barrick\") which provides for Barrick to mine NGC's Post deposit which extends beyond NGC's property boundaries onto Barrick's property. NGC and Barrick share the costs so that each ounce of gold mined bears the same mining cost. NGC is obligated to pay Barrick for such costs as Barrick mines the deposit. In addition, NGC is obligated to share dewatering costs which are associated with NGC's Post deposit. The total of all such mining\nNEWMONT MINING CORPORATION AND SUBSIDIARIES\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)\nand dewatering costs were $26.2 million in 1993 and estimated to be $30 million to $40 million annually for the near future.\nIn conjunction with the construction of its refractory ore treatment plant, NGC has entered into various contracts for the acquisition of equipment and related construction services. This plant is expected to cost approximately $300 million and be completed in the third quarter of 1994. At December 31, 1993, $158.2 million had been expended.\nThe Corporation has minimum royalty obligations on one of its producing mines of 80,000 ounces of gold per year in 1994 and 1995, 55,000 ounces of gold in 1996 and no more than 40,000 ounces of gold per year thereafter for the life of the mine. The amount to be paid to meet the royalty obligations is based upon a defined average market gold price. Any amounts paid due to the minimum royalty obligation not being met in any year are recoverable in future years when the minimum royalty obligation is exceeded. The Corporation expects the mines' production will meet the minimum royalty requirements.\nThe Corporation is involved from time to time in legal proceedings of a character incident to its business. It does not believe that adverse decisions in any pending or threatened proceedings or any amounts which it may be required to pay by reason thereof will have a material adverse effect on its financial condition or results of operations.\n(14) SUBSEQUENT EVENT\nEffective January 1, 1994, NGC acquired all of the Corporation's non-NGC assets and liabilities in a tax-free transaction. As a part of the transaction, the Corporation transferred 8,649,899 shares of NGC stock to NGC reducing the Corporation's interest in NGC to 89.2% from 90.1%. The transaction has no material impact on the Corporation's consolidated financial statements. As a result of the transaction, on March 21, 1994 the Corporation declared a 1.2481 shares to 1 share stock split so that the Corporation's outstanding shares would equate as close as possible to the 85,850,101 shares of NGC it holds subsequent to the transaction.\nNEWMONT MINING CORPORATION AND SUBSIDIARIES\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)\n(15) UNAUDITED SUPPLEMENTARY DATA\nQUARTERLY DATA\nThe following is a summary of selected quarterly financial information (amounts in millions except per share amounts):\nNEWMONT MINING CORPORATION AND SUBSIDIARIES\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)\n- ---------------\n(1) Sales less costs applicable to sales and depreciation, depletion and amortization.\n(2) Cumulative effect of change in accounting for income taxes (see Note 5).\n(3) Includes after tax gain related to the sale of Newcrest Mining Limited interest of $19.3 million, or $0.22 per share.\n(4) Cumulative effect of change in accounting for postretirement benefits other than pensions (see Note 8) net of income tax benefit of $6.0 million, or $0.07 per share.\nRATIO OF EARNINGS TO FIXED CHARGES\nThe ratios of earnings to fixed charges were 6.3, 6.5, 10.3, 6.6 and 2.2 for the years ended December 31, 1993, 1992, 1991, 1990 and 1989, respectively. The Corporation guarantees certain third party debt which had total interest obligations of $0.8 million, $3.3 million, $4.0 million, $4.5 million and $5.0 million for the years ended December 31, 1993, 1992, 1991, 1990 and 1989, respectively. The Corporation has not been required to pay any of these amounts, nor does it expect to have to pay any amounts; therefore, such amounts have not been included in the ratio of earnings to fixed charges.\nITEM 9.","section_9":"ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE\nThere have been no disagreements with Arthur Andersen & Co., Newmont's independent public accountants, regarding any matter of accounting principles or practices or financial statement disclosure.\nPART III\nITEM 10.","section_9A":"","section_9B":"","section_10":"ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT\nInformation concerning Newmont's directors will be contained in Newmont's definitive Proxy Statement to be filed pursuant to Regulation 14A promulgated under the Securities Exchange Act of 1934 for the 1994 annual meeting of stockholders and is incorporated herein by reference. Information concerning Newmont's executive officers is set forth under Part I of this report.\nITEM 11.","section_11":"ITEM 11. EXECUTIVE COMPENSATION\nInformation concerning this item will be contained in Newmont's definitive Proxy Statement to be filed pursuant to Regulation 14A promulgated under the Securities Exchange Act of 1934 for the 1994 annual meeting of stockholders and is incorporated herein by reference.\nITEM 12.","section_12":"ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT\nInformation concerning this item will be contained in Newmont's definitive Proxy Statement to be filed pursuant to Regulation 14A promulgated under the Securities Exchange Act of 1934 for the 1994 annual meeting of stockholders and is incorporated herein by reference.\nITEM 13.","section_13":"ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS\nInformation concerning this item will be contained in Newmont's definitive Proxy Statement to be filed pursuant to Regulation 14A promulgated under the Securities Exchange Act of 1934 for the 1994 annual meeting of stockholders and is incorporated herein by reference.\nPART IV\nITEM 14.","section_14":"ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K\n(a) The following documents are filed as a part of this report:\n1. Financial Statements\nAll other schedules have been omitted since they are either not required, are not applicable, or the required information is shown in the financial statements or related notes.\n3. Exhibits\n(b) Reports on Form 8-K\nNo reports on Form 8-K were filed by the registrant during the quarter ended December 31, 1993.\nREPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULES\nTo Newmont Mining Corporation:\nWe have audited in accordance with generally accepted auditing standards, the consolidated financial statements of Newmont Mining Corporation and subsidiaries included in this Form 10-K, and have issued our report thereon dated January 25, 1994. Our audits were made for the purpose of forming an opinion on those statements taken as a whole. The schedules listed in the accompanying index are the responsibility of the Corporation's management and are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic consolidated financial statements. These schedules have been subjected to the auditing procedures applied in the audits of the basic consolidated financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole.\n\/s\/ ARTHUR ANDERSEN & CO. Arthur Andersen & Co.\nDenver, Colorado January 25, 1994\nS-1\nSCHEDULE V\nNEWMONT MINING CORPORATION AND SUBSIDIARIES\nPROPERTY, PLANT AND MINE DEVELOPMENT FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991 (IN THOUSANDS)\nS-2\nSCHEDULE VI\nNEWMONT MINING CORPORATION AND SUBSIDIARIES\nACCUMULATED DEPRECIATION, DEPLETION AND AMORTIZATION OF PROPERTY, PLANT AND MINE DEVELOPMENT FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991 (IN THOUSANDS)\n- ---------------\n(1) Reclass between mine development costs and buildings and equipment accumulated depreciation, depletion and amortization.\n(2) Write-down of employee housing.\nS-3\nSCHEDULE IX\nNEWMONT MINING CORPORATION AND SUBSIDIARIES\nSHORT-TERM BORROWINGS FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991 (DOLLAR AMOUNTS IN THOUSANDS)\n- ---------------\n(1) The sum of the amounts outstanding at each period (day or month-end) divided by the total number of periods during the year.\n(2) The total interest expense applicable to the amounts outstanding at each period (day or month-end) divided by the average balance owing for those periods.\nS-4\nSCHEDULE X\nNEWMONT MINING CORPORATION AND SUBSIDIARIES\nSUPPLEMENTARY INCOME STATEMENT INFORMATION* FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991 (IN THOUSANDS)\n- ---------------\n* Excludes amortization of mine development costs which are included on Schedule VI.\nS-5\nSIGNATURES\nPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.\nNEWMONT MINING CORPORATION\nBy \/s\/ TIMOTHY J. SCHMITT Timothy J. Schmitt Vice President, Secretary and Assistant General Counsel March 29, 1994\nPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.\nAppendix I\nThe following is a narrative description of certain maps in image form which have been included in the paper version of the Form 10-K but which have been excluded from the EDGAR version of the Form 10-K.\n1. Map of Location of the Carlin Trend Operations in Nevada -- Page 5 of the Form 10-K.\nOn page 5 of the Form 10-K, the registrant has included a map of Nevada with an enlargement of the geographical location of its operations on the Carlin Trend discussed on page 4 of the Form 10-K. The map also includes a chart indicating the location of various deposits including those without proven and probable reserves.\n2. Map of Location of the Yanacocha Project in Peru -- Page 6 of the Form 10-K.\nOn page 6 of the Form 10-K, the registrant has included a map of the Country of Peru showing the geographical location of the Yanacocha project discussed on page 6 of the Form 10-K. The map also includes a notation that Minera Yanacocha S.A., the Peruvian corporation which owns and operates the Yanacocha project, is 38% owned by Newmont Gold.\n3. Map of Location of the Zarafshan-Newmont Project in Uzbekistan -- Page 7 of the Form 10-K.\nOn page 7 of the Form 10-K, the registrant has included a map of the Republic of Uzbekistan showing the geographical location of the Zarafshan-Newmont project discussed on pages 6-7 of the Form 10-K. The map also includes a notation that the Zarafshan-Newmont joint venture, which operates the project, is 50% owned by Newmont Gold.\n4. Map of Locations of the Minahasa Project and the Batu Hijau Project in Indonesia -- Page 8 of the Form 10-K.\nOn page 8 of the Form 10-K, the registrant has included a map of the Republic of Indonesia showing the geographical location of the Minahasa project and the Batu Hijau project, each of which is discussed on pages 7-8 of the Form 10-K. The map also includes a notation that each of the Indonesian companies that operate the Minahasa project and the Batu Hijau project is 80% owned by Newmont Gold.\n5. Map of Location of the Grassy Mountain Project in Oregon -- Page 9 of the Form 10-K.\nOn page 9 of the Form 10-K, the registrant has included a map of Oregon and bordering states showing the geographical location of the Grassy Mountain project discussed on pages 8-9 of the Form 10-K.\nEXHIBIT INDEX","section_15":""}
{"filename":"850422_1993.txt","cik":"850422","year":"1993","section_1":"ITEM 1. BUSINESS\nTHE COMPANY'S BACKGROUND\nHyster-Yale Materials Handling, Inc. (\"Hyster-Yale\" or the \"Company\") was formed as a Delaware corporation in May 1989 in connection with the acquisition of Hyster Company (\"Hyster\") by NACCO Industries, Inc. (\"NACCO\"). NACCO directly owns approximately 97% of Common Stock, par value $1.00 per share (\"Common Stock\") of the Company, which is a holding company that owned directly 100% of the common stock of Hyster Company (\"Hyster\") and 100% of the common stock of Yale Materials Handling Corporation (\"Yale\"). On January 1, 1994, Yale was merged into Hyster and Hyster changed its name to NACCO Materials Handling Group, Inc. (\"NMHG\"). This action is the final step in the Company's strategy to combine the administrative, design, engineering and manufacturing capabilities into a unified group. NMHG will continue to market the two full lines of forklifts and related service parts under the Hyster(R) and Yale(R) brand names.\nSIGNIFICANT EVENTS\nDEBT RESTRUCTURING. In August 1993, NACCO and the Company's two minority shareholders, Sumitomo Heavy Industries Ltd. of Japan (\"Sumitomo\") and Jungheinrich Aktiengesellschaft, a German manufacturer of forklift trucks, (\"Jungheinrich\"), made a proportional capital contribution of $53.8 million in the form of previously purchased 12-3\/8% subordinated debentures of the Company with a face value of $23.7 million and a purchase value by NACCO of $25.5 million and a cash contribution of $28.3 million.\nThe cash contribution enabled the Company to call approximately $26.5 million face value of subordinated debentures at a price of 107.5. This, and the capital contribution by NACCO of previously purchased subordinated debentures, allowed the Company to retire approximately $50.2 million face value of these debentures.\nAs part of this transaction, the Company amended its existing senior bank credit agreement. This amendment permits equity infusions by existing stockholders to be used for cash purchases of debentures and, after August 1994, permits use of internally generated funds to retire up to $75.0 million of additional subordinated debentures if certain debt to capitalization ratios are achieved. In addition, the amendment modifies the bank loan amortization schedule and provides for favorable performance-based interest rate incentives.\nTHE FORKLIFT TRUCK INDUSTRY\nForklift trucks are used in both manufacturing and warehousing environments. The materials handling industry, especially in industrialized nations, is generally a mature industry. In the most recent business cycle\n- 1 - the North American market for forklift trucks reached its lowest level in 1991, and it increased in both 1992 and 1993 over prior year levels. The European and Japanese markets generally have been in decline since 1990.\nThe forklift truck industry historically has been cyclical. Fluctuations in the rate of orders for forklift trucks reflect the capital investment decisions of the customers, which in turn depend upon the general level of economic activity in the various industries served by such customers.\nCOMPANY OPERATIONS\nNMHG maintains product differentiation between Hyster(R) and Yale(R) brands of forklift trucks and distributes its products through separate worldwide dealer networks. Nevertheless, opportunities have been identified and addressed to improve the Company's results by integrating overlapping operations and taking advantage of economies of scale in design, manufacturing and purchasing. NMHG completed a series of plant and parts depot consolidations with the closure of its Wednesfield, England manufacturing plant in early 1992. NMHG now provides all design, manufacturing and administrative functions. Products are marketed and sold through two separate groups which retain the Hyster and Yale identities. In Japan, NMHG has a 50% owned joint venture with Sumitomo named Sumitomo Yale Company Limited (\"S-Y\"). S-Y performs certain design activities and produces lift trucks and components which it markets in Japan and which are exported for sale by NMHG and its affiliates in the U.S. and Europe.\nPRODUCT LINES\nNMHG manufactures a wide range of forklift trucks under both the Hyster(R) and Yale(R) brand names. The principal categories of forklift trucks include electric rider, electric narrow-aisle and electric motorized hand forklift trucks primarily for indoor use, and internal combustion engine (\"ICE\") forklift trucks for indoor or outdoor use. Forklift truck sales accounted for approximately 80%, 79%, and 77% of NMHG's net sales in 1993, 1992 and 1991, respectively.\nNMHG also derives significant revenues from the sale of service parts for its products. Profit margins on service parts are greater than those on forklift trucks. The large population of Hyster(R) and Yale(R) forklift trucks now in service provides a market for service parts. In addition to parts for its own forklift trucks, NMHG has a program (termed UNISOURCE(TM) in North America and MULTIQUIP(TM) in Europe) designed to supply Hyster dealers with replacement parts for most competing brands of forklift trucks. NMHG has a similar program (termed PREMIER(TM)) for its Yale dealers in the Americas and the United Kingdom. Accordingly, NMHG dealers can offer their mixed fleet customers a \"one stop\" supply source. Certain of these parts are manufactured by and purchased from third party component makers, NMHG also manufactures some of these parts through reverse-engineering of its competitors' parts. Service parts accounted for approximately 20%, 21%, and 23% of NMHG's net sales in 1993, 1992 and 1991, respectively.\n- 2 - COMPETITION\nThe forklift truck industry is highly competitive. The worldwide competitive structure of the industry is fragmented by product line and country. The principal methods of competition among forklift truck manufacturers are product performance, price, service and distribution networks. The forklift truck industry competes with alternative methods of materials handling, including conveyor systems, automated guided vehicle systems and hand labor. Global competition is also affected by a number of other factors, including currency fluctuations, variations in labor costs and effective tax rates, and the costs related to compliance with applicable regulations, including export restraints, antidumping provisions and environmental regulations.\nAlthough there is no official source for information on the subject, the Company believes it is one of the top three manufacturers of forklift trucks in the world.\nNMHG's position is strongest in North America, where it believes it is the leader in unit sales of electric rider and ICE forklift trucks and has a significant share of unit sales of electric narrow-aisle and electric motorized hand forklift trucks. Although the European market is fragmented and competitive positions vary from country to country, NMHG believes that it has a significant share of unit sales of electric rider and ICE forklift trucks in Western Europe. In Japan, although its share is currently small, NMHG has a distribution system through S-Y.\nTRADE RESTRICTIONS\nA. UNITED STATES\nSince June 1988, Japanese-built ICE forklift trucks, imported into the U.S., with lifting capacities between 2,000 and 15,000 pounds, including finished and unfinished forklift trucks, chassis, frames, and frames assembled with one or more component parts, have been subject to an antidumping duty order. Antidumping duty rates in effect through 1993 range from 4.48% to 56.81% depending on manufacturer or importer. The antidumping duty rate applicable to imports from S-Y is 51.33%, and is likely to continue unchanged for the foreseeable future, unless S-Y and NMHG decide to participate in proceedings to have it reduced. NMHG does not currently import for sale in the United States any forklift trucks or components subject to the antidumping duty order. This antidumping duty order will remain in effect until the Japanese manufacturers and importers satisfy the U.S. Department of Commerce (\"Commerce\") that they have not individually sold merchandise subject to the order in the United States below foreign market value for at least three consecutive years, or unless Commerce or the U.S. International Trade Commission finds that changed circumstances exist sufficient to warrant the order's revocation. If the United States Congress approves legislation implementing the Uruguay Round of GATT negotiations, the antidumping order will be reviewed for possible revocation in the year 2000. All of NMHG's major Japanese competitors have either built or acquired manufacturing or assembly facilities in the United States. The Company cannot predict with any\n- 3 - certainty if there will be any negative effects to the Company resulting from the Japanese sourcing of their forklift products in the United States.\nB. EUROPE\nFrom 1986 through 1993, Japanese forklift truck manufacturers were subject to informal export restraints on Japanese-manufactured electric rider, electric narrow-aisle, and ICE forklift trucks shipped to Europe. Discussions are continuing between European community and Japanese government officials; however, these informal restraints are expected to continue in 1994. Several Japanese manufacturers have announced either that they have established, or intend to establish, manufacturing or assembly facilities within the European community. The Company also cannot predict with any certainty if there will be any negative effects to NMHG resulting from the Japanese sourcing of their forklift products in Europe.\nC. AUSTRALIA\nIn 1987 an Australian producer of forklift trucks filed an anti-dumping action against imports from Japan. Voluntary price undertakings were negotiated with all major Japanese producers including S-Y. The S-Y undertaking expired in 1991. The Australian producer filed a legal challenge to the validity of the price undertakings. Meanwhile, in 1991 this same producer filed an antidumping action against imports from the United Kingdom. In this action Hyster Europe was found to be dumping and duties were imposed on imports from the Company's Craigavon, Northern Ireland and Irvine, Scotland factories. Hyster Australia challenged this finding and in the interim sourced its product elsewhere. In the summer of 1993 both of these anti-dumping actions were terminated.\nPRODUCT DESIGN AND DEVELOPMENT\nNMHG spent $20.7 million, $21.9 million, and $19.2 million on product design and development activities in 1993, 1992 and 1991, respectively. The Hyster(R) and Yale(R) products are differentiated for the specific needs of their respective customer bases. NMHG continues to pursue opportunities to improve product cost by engineering new Hyster(R) and Yale(R) brand products with component commonality.\nCertain product design and development activities with respect to ICE forklift trucks and some components are performed in Japan by S-Y. S-Y spent approximately $4.0 million, $3.7 million and $3.8 million on product design and development in 1993, 1992 and 1991, respectively.\nBACKLOG\nAs of December 31, 1993, NMHG's backlog of unfilled orders for forklift trucks was approximately 12,100 units, or $206 million. This compares to the backlog as of December 31, 1992 of approximately 12,100 units, or $203 million. Backlog represents unit orders to NMHG's manufacturing plants from independent dealerships, retail customers and contracts with the U.S. Government. Although these orders are believed to be firm, such orders may be subject to cancellation or modification.\n- 4 - SOURCES\nNMHG has adopted a strategy of obtaining its raw materials and principal components on a global basis from competitively priced sources. NMHG is dependent on a limited number of suppliers for certain of its critical components, including diesel and gasoline engines and cast-iron counterweights used on certain forklift trucks. There would be a material adverse effect on NMHG if it were unable to obtain all or a significant part of such components, or if the cost of such components were to increase significantly under circumstances which prevented NMHG from passing on such increases to its customers.\nDISTRIBUTION\nThe Hyster(R) and Yale(R) brand products are distributed through separate highly developed worldwide dealer networks. The Company believes that both dealer networks contribute significantly to its competitive position in the industry and intends to keep the separate networks intact and to continue to market products separately under the Hyster(R) and Yale(R) brand names. Each also sells directly to certain major accounts.\nIn Japan, forklift truck products are distributed by S-Y. In 1991, Yale reached a ten-year agreement with Jungheinrich to continue distribution of Yale brand products in Germany and Austria and to provide to Jungheinrich certain ICE and electric-powered products for sale in other major European countries under the Jungheinrich brand name.\nFINANCING OF SALES\nHyster U.S. dealer and direct sales are supported by leasing and financing services provided by Hyster Credit Company, a division of AT&T Commercial Finance Corporation, pursuant to an operating agreement which expires in 2000.\nNMHG is a minority stockholder of Yale Financial Services, Inc., a subsidiary of General Electric Capital Corporation, which offers Yale U.S. dealers wholesale and retail financing and leasing services. Such retail financing and leasing services are also available to Yale national account customers.\nEMPLOYEES\nAs of February 28, 1994, NMHG had approximately 5,000 employees. Employees in the Danville, Illinois manufacturing and parts depot operations are unionized, as are tool room employees located in Portland, Oregon. A three-year contract for the Danville union employees was signed in 1991 which will expire in June 1994. A new one-year contract was signed in 1993 with the Portland tool room union which will expire in October 1994. Employees at the facilities in Berea, Kentucky; Sulligent, Alabama; and Greenville and Lenoir, North Carolina are not represented by unions.\n- 5 - In Europe, shop employees in the Craigavon, Northern Ireland facility are unionized. Employees in the Irvine, Scotland and Nijmegen, The Netherlands facilities are not represented by unions. The employees in Nijmegen have organized a works council, as required by Dutch law, which performs a consultative role on employment matters.\nNMHG's management believes its current labor relations with both union and non-union employees are good.\nGOVERNMENT REGULATION\nNMHG's manufacturing facilities, in common with others in industry, are subject to numerous laws and regulations designed to protect the environment, particularly with respect to disposal of plant waste. NMHG's products are also subject to various industry and governmental standards. NMHG's management believes that such requirements have not had a material adverse effect on its operations.\nPATENTS, TRADEMARKS AND LICENSES\nNMHG is not materially dependent upon patents or patent protection. The Hyster(R) trademark is currently registered in approximately 51 countries. The Yale(R) trademark, which is used on a perpetual royalty-free basis in connection with the manufacture and sale of forklift trucks and related components, is currently registered in approximately 100 countries. NMHG's management believes that its business is not dependent upon any individual trademark registration or license, but that the Hyster(R) and Yale(R) trademarks are material to its business.\nITEM 2.","section_1A":"","section_1B":"","section_2":"ITEM 2. PROPERTIES\nThe following table summarizes certain information with respect to the principal manufacturing, distribution and office facilities owned or leased by NMHG and its subsidiaries.\n- 6 -\nNMHG intends to sell its Flemington, New Jersey facility and intends to either lease back a portion of the office space in this facility or to rent suitable office space in the same area. NMHG also intends to sell one of its facilities located in Danville, Illinois which is currently vacant. There is no certainty that any such transactions will occur.\nEach of NMHG's principal U.S. facilities is encumbered as security for the obligations under the Company's bank financing. The facilities in Berea, Kentucky and Sulligent, Alabama are leased pursuant to industrial development bond financings which permit NMHG to acquire the properties for nominal amounts upon redemption or repayment of the bonds.\n- 7 - ITEM 3.","section_3":"ITEM 3. LEGAL PROCEEDINGS\nThe Company is not a party to any material pending legal proceeding except ordinary routine litigation incidental to its business. Certain of such routine litigation includes claims for punitive damages; however, the management of the Company believes that none of such litigation, individually or in the aggregate, will have a material adverse effect on the Company.\nITEM 4.","section_4":"ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS\nNo matter was submitted during the fourth quarter of the fiscal year covered by this report to a vote of security holders of the Company.\nPART II\nITEM 5.","section_5":"ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS\nThere is no established public trading market for the Company's Common Stock. On February 28, 1994 there were three holders of record of the Company's Common Stock.\nThe Company has not paid any dividends on shares of its Common Stock since its organization in 1989, and it is not anticipated that any dividends will be declared or paid with respect to the Common Stock in the foreseeable future. The Company's ability to pay dividends with respect to the Common Stock is restricted under the terms of its existing debt instruments and agreements. The information set forth in Note I to the Consolidated Financial Statements in Part IV, pages through, of this Form 10-K is incorporated herein by reference.\n- 8 - ITEM 6.","section_6":"ITEM 6. SELECTED FINANCIAL DATA\nThe selected financial data below for 1989 includes Yale for the period beginning January 1, 1989 to May 26, 1989 and for the Company for the period subsequent to May 26, 1989. Certain prior year amounts have been restated to reflect the new method of accounting for income taxes and goodwill amortization has been reclassified as operating expense. Information with respect to selected financial data is set forth below.\n- 9 - ITEM 7.","section_7":"ITEM 7.\nMANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION\n1993 VS. 1992 FINANCIAL REVIEW\n1993 results reflected the strengthening North American market offset by continued weakness in most of Europe and Japan. Increased demand in North America lifted prices slightly versus the prior year but competitive pressures continued to restrain significant margin growth. The improving economy in the United States also helped parts sales and, along with tight cost controls, resulted in increased operating profit. The success of new products introduced in 1993 raised sales to a higher average sales value however, margins have not increased proportionately due to mix swings to lower margin countries.\nManufacturing costs were higher in 1993 due to start-up costs associated with new product introductions and under absorbed overhead in Europe. The Pound Sterling weakened considerably against the U.S. Dollar in 1993 causing sales and operating profit to be translated at lower amounts. The strong Yen in 1993 contributed to higher costs for products and parts sourced from Japan.\nBacklog of orders at December 31, 1993 was approximately 12,100 forklift truck units which was level with December 31, 1992. While order demand has grown, continued process improvements have shortened product delivery schedules. The forklift truck industry historically has been cyclical and the level of economic activity in the various industries in which the Company's customers participate has a corresponding impact on the forklift truck market.\nOTHER\nInterest expense was $40.4 million in 1993 versus $44.2 million in 1992. The decrease was due to lower market interest rates and a debt refinancing which included an equity infusion that lowered debt and reduced the Company's effective interest rate. The Company entered into unsecured interest rate swaps for a majority of its floating rate debt to provide near-term protection against significant increases in interest rates. The Company will continue to evaluate its interest rate exposure.\nIn the second quarter of 1993, the Company sold its former manufacturing site in Wednesfield, England for $3.3 million. The net pretax gain from the sale was $2.1 million.\nOther-net in 1993 primarily included $3.9 million of loss from the Company's 50% equity interest in Sumitomo-Yale which had a larger loss in 1993 versus 1992 due to the strong Yen and weak European and Japanese markets. Other-net in 1992 also included foreign exchange gains which were not repeated in 1993 as the Company began hedging its income statement exposures.\nPROVISION FOR INCOME TAXES\nAs discussed in Note J to the consolidated financial statements, the Company adopted SFAS No. 109 as of January 1, 1993 and has restated prior periods. The effective income tax rate change from 1992 to 1993 is not meaningful due to a pretax loss in 1993 coupled with a tax provision. The Company has non-deductible goodwill amortization related to the Hyster acquisition which increased the effective tax rate above statutory rates and resulted in a tax provision in 1993 despite a loss before income taxes. In addition, the Company began providing for U.S. taxes in 1993 on certain foreign earnings taxed at overall lower rates in anticipation of future repatriations. Due to higher levels of pre-tax income in 1992, the nondeductible expenses had a smaller impact on the effective tax rate in 1992.\nEXTRAORDINARY CHARGE\nAn extraordinary charge of $3.3 million net of $2.0 million in tax benefits, was recorded in the second quarter of 1993 and represents the write-off of premiums and unamortized debt issuance costs associated with the retirement of approximately $50.2 million face value of 12-3\/8% Subordinated Debentures. The Company retired the debentures as a result of a contribution by NACCO of previously purchased subordinated debentures with a face value of $23.7 million, and a cash infusion of $28.3 million ($26.7 million from NACCO) which enabled the Company to call approximately $26.5 million face value of subordinated debentures at a price of 107.5.\n1992 VS. 1991 FINANCIAL REVIEW\n1992 results reflect economic improvement in North America partially offset by weaker markets in Europe and the Far East. Price discounting continued to be prevalent in the forklift market and mix changes to lower margin products, especially in Europe, restricted sales and operating profits. Manufacturing costs decreased due to reductions in overhead from continued savings realized from the consolidation of operations and higher overall volumes. Operating expenses increased as marketing programs for existing and new products and new product development programs were implemented in 1992.\nOTHER\nInterest income decreased substantially from 1991 as a result of lower cash balances in Europe and lower market interest rates. Interest expense was $44.2 million for 1992 compared to $49.5 million for 1991. Lower 1992 interest expense was due to reduced debt levels and lower interest rates.\nOther-net primarily includes income or loss from operations and the after-tax gain or losses of business units classified as assets held for sale, equity in the earnings of unconsolidated subsidiaries, and foreign currency gains and losses. The increase in other-net in 1992 compared to 1991 resulted from increased foreign currency exchange gains and reduced losses from retail branch operations classified as net assets held for sale, the last of which was sold in May 1992.\nPROVISION FOR INCOME TAXES\nThe effective income tax rate decreased to 70.7% in 1992 from 128.5% in 1991. Expenses not deductible for tax purposes (primarily goodwill), were approximately level with 1991. Due to higher income in 1992, these expenses accounted for a substantially lower percentage of pretax income than in 1991.\nENVIRONMENTAL MATTERS\nThe Company's manufacturing operations, like those of other companies engaged in similar businesses, involve the use, disposal and clean-up of substances regulated under environmental protection laws. Compliance with these increasingly stringent standards results in higher expenditures for both capital improvements and operating costs. Hyster-Yale's policies stress environmental responsibility and compliance with these regulations. Based on current information, management does not expect compliance with these regulations to have a material adverse effect on its financial condition or results of operations.\n1994 OUTLOOK\nThe forklift truck industry historically has been cyclical. The economic conditions in the various markets in which the industry's customers operate affect demand. Current external economic forecasts and recent factory order information indicate an improving economy in North America. However, Europe and Japan continue to be plagued by recessionary pressures. While no near-term economic recovery is forecast for these regions, improvements in the North American economy and favorable worldwide interest rates should eventually lead to a global recovery.\nThe Company will continue to introduce new products in 1994. Improved profitability is dependent on successful continuing efforts to reduce costs.\nLIQUIDITY AND CAPITAL RESOURCES\nNet cash provided by operations was $34.1 million in 1993 compared with operating cash flow used of $25.8 million in 1992. The increase in cash provided by operations resulted primarily from reduced working capital requirements. Inventories dropped significantly from 1992 to 1993, generating cash, and accounts payable was higher due to timing, and extended trade terms with Sumitomo-Yale. Reduced tax payments in 1993 also benefited cash flow.\nExpenditures for property, plant and equipment were $20.2 million in 1993 versus $24.3 million in 1992. The majority of these expenditures were for manufacturing efficiencies and tooling for new products. The principal sources of financing capital expenditures were internally generated funds. Capital expenditures in 1994 will be approximately $25 million, a portion of which will be financed from economic development capital grants from local governments.\nThe Company amended its existing senior bank credit agreement in connection with the retirement of a portion of its subordinated debentures as discussed in Note B to the consolidated financial statements of this Form 10-K. This amendment permits equity infusions to be used for cash purchases of subordinated debentures and, after August 1994, permits use of internally generated funds to retire additional subordinated debentures. In addition, the amendment modifies the bank loan repayment schedules and provides the Company with more favorable performance based interest rate incentives. The amendment to the bank loan repayment schedule reduced the required payments in 1994 and 1995 by $35.0 million and $16.0 million, respectively. In addition, the original 1996 installment has been increased by $0.7 million and the amended schedule requires a $50.5 million payment in 1997.\nAs disclosed in the Company's quarterly report on Form 10-Q for the quarter ending June 30, 1993, an extraordinary charge of $3.3 million net of $2.0 million in related tax benefits was recognized for the write-off of premiums and unamortized debt issuance costs associated with retirement of approximately $50.2 million face value of Hyster-Yale's subordinated debentures.\nBecause of the increased cash flow from operations and equity infusion from NACCO, the Company reduced debt during 1993 and has available all of its revolving credit faculty of $100.0 million at December 31, 1993. The Company believes it can adequately meet all of its current and long-term commitments and operating needs from operating cash flow and funds available under committed credit agreements.\nDuring 1993, the Company repatriated $18.3 million of earnings from certain foreign subsidiaries. The taxes were previously provided for financial reporting purposes. Future distributions of unremitted earnings may be affected by changes in currency exchange rates and foreign and U.S. tax rates.\nForeign currency exchange gains (losses) were $(0.1) million, $5.7 million and $1.5 million in 1993, 1992, and 1991, respectively. The Company began hedging foreign currency exposure in 1993 to mitigate the majority of income statement exposure. Stockholders' equity will still be affected by translation of foreign country financial statements where the functional currency is not the U.S. dollar. The translation loss recorded in stockholders' equity was $ 2.2 million and $20.2 million in 1993 and 1992 respectively.\nEFFECTS OF INFLATION\nThe Company attempts to minimize the impact of inflation on production and operating costs through productivity improvements and cost reduction programs. The LIFO method is used to value domestic inventories. Under this method, cost of goods sold reported in the financial statements approximates current cost. Therefore, net income for 1993 adjusted for inflation would not be materially different from net income reported in the consolidated financial statements.\nRECENTLY ISSUED BUT NOT YET ADOPTED ACCOUNTING STANDARDS\nIn November 1992, Statement of Financial Accounting Standards No. 112 \"Employers' Accounting for Post Employment Benefits\" (\"SFAS 112\") was issued. The Company will be required to adopt this new method of accounting for benefits paid to former or inactive employees after employment but before retirement no later than 1994. See Note L of the Company's consolidated financial statements for discussion of the effects of this new accounting standard.\nITEM 8.","section_7A":"","section_8":"ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA\nThe information required by this Item 8 is set forth at pages through of the Financial Statements and Supplementary Data contained in Part IV hereof.\nITEM 9.","section_9":"ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES\nNone.\n- 15 - PART III\nITEM 10.","section_9A":"","section_9B":"","section_10":"ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT\n- 16 -\n- 17 -\nAlfred M. Rankin, Jr. and Claiborne R. Rankin are brothers and are nephews of Frank E. Taplin, Jr. and are cousins of David F. Taplin (who is the son of Frank E. Taplin, Jr.) and Britton T. Taplin (who is a nephew of Frank E. Taplin, Jr.).\n- 18 -\n- 19 -\n- 20 -\n- 21 -\n- 22 - ITEM 11.","section_11":"ITEM 11. EXECUTIVE COMPENSATION\nThe following table sets forth the annual, long-term and all other compensation for services in all capacities to the Company of the five persons who were, as of December 31, 1993, the Chief Executive Officer and the Company's four most highly compensated executive officers other than the Chief Executive Officer (the \"Named Executive Officers\").\n- 23 - Committee, and annual interest of $12,419 paid on a $200,000 promissory note previously held by him (\"Mr. Eklund's Promissory Note\"), which note bore interest at a rate equal to a 13-week U.S. Treasury Bill plus 2%, with a cap of 12%, compounded quarterly, which was payable by Yale on February 28, 1995 and which note represented the balance due to Mr. Eklund under the Yale Materials Handling Corporation 1985 Employee Incentive Plan that was terminated effective January 1, 1990. The principal and accrued interest of Mr. Eklund's Promissory Note were pre-paid in 1992. See note (6) below. The amount listed for 1991 consists of an annual interest payment on Mr. Eklund's Promissory Note of $21,360, and the use of a car, valued at $5,845.\n(5) For Messrs. Muller, Decker and Ryan the amounts paid in 1993 of $18,226, $12,265 and $9,013, respectively, are cash payments in lieu of perquisites. For Mr. Pollock the following amounts represent the value of the use of a car: 1993 - $2,574, 1992 - $3,477 and 1991 - $4,020. For Messrs. Muller and Ryan the value of the use of a car for 1991 was $1,272 and $6,089, respectively. Mr. Pollock was reimbursed $11,354 in 1991 for tax return preparation fees covering the years 1987 through 1991.\n(6) The amount listed was paid in cash to Mr. Eklund upon the pre-payment of Mr. Eklund's Promissory Note. See Note 4 above.\n(7) For Mr. Eklund, the amounts listed include: for 1993, 1992 and 1991, $15,370, $14,963 and $909, respectively, consisting of Company contributions under the NACCO Materials Handling Group Profit Sharing Plan (formerly known as the Hyster-Yale Profit Sharing Plan); for 1992 and 1991, $9,464 and $23,402, respectively, consisting of deferred payments under the Yale Short-Term Incentive Compensation Deferral Plan earned by Mr. Eklund for 1985 and 1986; for 1993 and 1992, $9,014 and $5,690, respectively, consisting of Company allocations under the NACCO Materials Handling Group Unfunded Benefit Plan (formerly known as the Hyster-Yale Unfunded Deferred Compensation Plan), and for 1991, $185,075 for reimbursement by Hyster-Yale of relocation expenses.\n(8) For Mr. Pollock the amounts listed were contributed by the Company to match before-tax contributions made under the Hyster-Yale Profit Sharing Plan (formerly known as the Hyster Employees' Savings Plan).\n(9) For Messrs. Muller, Decker and Ryan the amounts listed consist of contributions made by the Company to the Hyster-Yale Profit Sharing Plan (formerly known as the Yale Materials Handling Corporation Employee Profit Sharing and Stock Ownership Plan).\nLONG-TERM INCENTIVE PLAN\nThe following table sets forth information about awards to the Named Executive Officers for the calendar year 1994, and estimated payouts in the future under the long-term incentive plan of the Company.\n- 25 - Messrs. Eklund, Muller and Pollock were awarded 21,690, 3,958 and 3,121 book value appreciation units, respectively, and effective April 1, 1993, Mr. Decker was awarded 31,192 of such units. Also, Messrs. Muller and Ryan were awarded 31,739 and 4,237 of such units effective on July 1, 1993 and October 1, 1993, respectively. For units granted as of January 1, 1993, at target return on equity over ten years, Messrs. Eklund, Pollock and Muller's book value appreciation units would entitle them to cash payments on December 31, 2002 of $632,480, $91,008 and $115,415, respectively, which amounts may be greater or less, depending upon whether NMHG's book value has increased or decreased in comparison to the target for book value growth over the period. The NMHG Long-Term Plan has no specified maximum payout. Similarly, for units granted as of July 1 and October 1 of 1993, at target return on equity Mr. Decker would be entitled to a cash payment of $907,063 on March 31, 2003, and Messrs. Muller and Ryan would be entitled to cash payments of $910,909 and $118,848 on June 30, 2003 and September 30, 2003, respectively. Mr. Eklund was previously awarded 65,000 book value appreciation units effective on January 1, 1990, which units will vest on December 31, 1999. Effective January 1, 1990, Messrs. Pollock, Muller and Ryan were also awarded 35,620, 15,154 and 15,154 units, respectively, which will also vest on December 31, 1999.\nCOMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION\nDennis W. LaBarre, a director and member of the Nominating, Organization and Compensation Committee of the Company, is a partner in the law firm of Jones, Day, Reavis & Pogue. Such firm provided legal services on behalf of the Company during 1993 on a variety of matters, and it is anticipated that such firm will provide such services in 1994.\nAlfred M. Rankin, Jr. and Ward Smith who are directors of NACCO and the Company and members of the Compensation Committee of the Company, were President and Chairman of the Board, respectively, of the Company for a brief period of time in 1989.\nPENSION PLAN\nHYSTER-YALE PENSION PLANS\nMr. Pollock is covered by the non-contributory defined benefit cash balance plan (qualified and non-qualified) of the Company. Messrs. Eklund, Decker, Muller and Ryan have never been covered by any defined benefit pension plans of the Company, Hyster or Yale. Each year, effective as of January 1, 1992, an amount is credited to a notional account for each covered employee equal to a percentage of the employee's compensation (including bonuses and salary deferrals) for such year, in accordance with an age-based formula that is integrated with Social Security. The notional account balances are then credited with interest each year until the employee's normal retirement date (generally, age 65) at a stated rate of interest. The notional account balances are paid in the form of a lump sum payment or converted to an annuity to provide monthly benefit payments.\nThe estimated annual pension benefit (including prior plan benefits, if any) for Mr. Pollock under the cash balance plan, which would be payable on a straight life annuity basis at normal retirement age, is $89,300.\n- 26 - COMPENSATION OF DIRECTORS\nThe Company's directors are compensated for their service to the Company in accordance with the current practices of NACCO. Directors and officers of the Company who are employees of NACCO will be compensated principally by NACCO and will participate in employee benefit plans of NACCO. Currently, two directors of the Company (Messrs. Ward Smith and Alfred M. Rankin, Jr.) are employed by NACCO and receive their compensation and employee benefits from NACCO. Officers of the Company who are also directors receive no additional compensation for their services as a director. Mr. Eklund is both an officer and a director of the Company. Mr. Eklund receives his salary and benefits from the Company. The directors of the Company who are also directors of NACCO are currently compensated by NACCO with respect to their Company Board of Directors activities, and the Company reimburses NACCO for a pro rata share (with NACCO and two other subsidiaries of NACCO) of the compensation paid by NACCO to its directors who are also directors of NACCO. Each NACCO director who is not an officer of NACCO receives a retainer of $24,000 for each calendar year of service on the NACCO and subsidiary Board of Directors. In addition, each such director receives $500 for attending each meeting of the NACCO or subsidiary Board of Directors and each meeting of a committee thereof. Such fees for attendance at Board meetings and committee meetings may not exceed $1,000 per day. In addition, the chairman of each committee of the NACCO or subsidiary Board of Directors receives $4,000 for each calendar year for service as committee chairman. Directors of the Company who are neither directors of NACCO nor officers of the Company are paid by the Company $9,000 for each calendar year, plus $500 for attending each meeting of the Company Board of Directors and each meeting of a committee thereof (such fees for attendance at Board of Directors' meetings and multiple committee meetings do not exceed $1,000 per day).\nITEM 12.","section_12":"ITEM 12.\nSECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT\nTHE COMPANY\nThe Company currently has 10,000 authorized shares of Common Stock which is the only authorized class of Company capital stock, of which 5,598.857 shares are currently issued and outstanding. NACCO Industries, Inc., a Delaware corporation, with its headquarters located at 5875 Landerbrook Drive, Mayfield Heights, Ohio 44124-4017, is the beneficial owner of 5,435.826 shares (97%) of Common Stock. No officer or director of the Company beneficially owns any shares of the Common Stock. In connection with the financing of the acquisition of Hyster, all of the Company's Common Stock owned beneficially by NACCO was pledged to lenders to secure the Company's obligations under a Credit Agreement entered into to finance the acquisition.\nBENEFICIAL OWNERSHIP OF NACCO SECURITIES\nSet forth in the following table is the indicated information with respect to beneficial ownership of Class A Common Stock, par value $1.00 per\n- 27 - share (\"Class A Common\") and Class B Common Stock, par value $1.00 per share (\"Class B Common\"), of NACCO, by the directors and Named Executive Officers of the Company and all executive officers and directors of the Company as a group as of January 15, 1994. Each share of Class A Common is entitled to one vote on all matters brought before a meeting of NACCO's stockholders, while each share of Class B Common is entitled to ten votes on each such matter. Beneficial ownership of Class A Common and Class B Common has been determined for this purpose in accordance with Rule 13d-3 of the Securities and Exchange Commission (\"SEC\") under the Securities Exchange Act of 1934, as amended (the \"Exchange Act\"), which provides, among other things, that a person is deemed to be the beneficial owner of Class A Common or Class B Common if such person, directly or indirectly, has or shares voting power or investment power in respect of such stock or has the right to acquire such ownership within sixty days. Accordingly, the amounts shown in the table do not purport to represent beneficial ownership for any purpose other than compliance with SEC reporting requirements. Further, beneficial ownership as determined in this manner does not necessarily bear on the economic incidence of ownership of Class A Common or Class B Common.\n- 28 -\n- 29 - such shares of Class A Common and 7,000 of such shares of Class B Common. The Class B Common held by the foregoing trust is subject to the Stockholders' Agreement described in note (4).\n(4) A Schedule 13D filed with the SEC with respect to Class B Common on March 24, 1990, and amended on April 11, 1990 by Amendment No. 1, on March 18, 1991 by Amendment No. 2, on March 23, 1992 by Amendment No. 3 and on March 10, 1993 by Amendment No. 4, and amended and restated on March 30, 1994 by Amendment No. 5 (the \"Schedule 13D\"), reported that the following individuals and entities, together in certain cases with related revocable trusts and custodianships: Clara Taplin Rankin, Alfred M. Rankin, Jr., Victoire G. Rankin, Helen P. Rankin, Clara T. Rankin, Thomas T. Rankin, Matthew M. Rankin, Claiborne R. Rankin, Chloe O. Rankin, Roger F. Rankin, Bruce T. Rankin, Frank E. Taplin, Jr., Margaret E. Taplin, Martha S. Kelly, Susan S. Panella, Jennifer T. Jerome, Caroline T. Ruschell, David F. Taplin, Thomas E. Taplin, Beatrice B. Taplin, Thomas E. Taplin, Jr., Theodore D. Taplin, Britton T. Taplin, Frank F. Taplin, and National City Bank, as trustee of certain irrevocable trusts for the benefit of certain individuals named above, their family members and others (collectively, together with such individuals, revocable trusts and custodianships, the \"Signatories\"), are parties with NACCO and Society National Bank (successor by merger to Ameritrust Company National Association), as depository, to a Stockholders' Agreement, dated as of March 15, 1990, as amended, covering the shares of Class B Common beneficially owned by each of the Signatories (the \"Stockholders' Agreement\"). The Stockholders' Agreement requires that each Signatory, prior to any conversion of such Signatory's shares of Class B Common into Class A Common or prior to any sale or transfer of Class B Common to any permitted transferee (under the terms of the Class B Common) who has not become a Signatory, to offer such shares to all of the other Signatories on a pro rata basis. A Signatory may sell or transfer all shares not purchased under the right of first refusal as long as they first are converted into Class A Common prior to their sale or transfer. Accordingly, the Signatories may be deemed to have acquired beneficial ownership of all of the Class B Common subject to the Stockholders' Agreement, an aggregate of 1,542,757 shares, as a \"group\" as defined under the Exchange Act. The shares subject to the Stockholders' Agreement constitute 87.38% of the Class B Common outstanding on January 15, 1994, or 62.03% of the combined voting power of all Class A Common and Class B Common outstanding on such date. Certain Signatories own Class A Common, which is not subject to the Stockholders' Agreement. Under the Stockholders' Agreement, NACCO may, but is not obligated to, buy any of the shares of Class B Common not purchased by the Signatories following the trigger of the right of first refusal. The Stockholders' Agreement does not restrict in any respect how a Signatory may vote such Signatory's shares of Class B Common. The Class B Common shown in the foregoing table as beneficially owned by named persons who are Signatories is subject to the Stockholders' Agreement.\n(5) While Mr. Jones, a director of the Company, is a Trustee of Fidelity Funds, he has not exercised and does not presently intend to exercise\n- 30 - any voting or investment power over any of the 951,829 shares of Class A Common in which a Schedule 13G filed with the SEC for NACCO on February 14, 1992 and amended on February 16, 1993 by Amendment No. 1 and amended and restated on February 14, 1994 by Amendment No. 2 reported that FMR Corp. and certain related parties, including Fidelity Funds, have a beneficial ownership interest.\n(6) Represents shares in a certain trust of which Mr. Rankin, Jr. became a trustee on February 9, 1994, and a certain trust of which he became a trustee on March 10, 1994, succeeding his father, Alfred M. Rankin, who died on January 23, 1994.\n(7) Includes the following shares which such persons have, or had, within 60 days after January 15, 1994, the right to acquire upon the exercise of stock options: Mr. Smith, 2,500 shares of Class A Common; Mr. Rankin, Jr., 25,000 shares of Class A Common, and all executive officers and directors of the company as a group, 27,500 shares of Class A Common.\n(8) Includes 16,261 shares of Class A Common and 4,688 shares of Class B Common owned by members of Mr. Rankin's immediate family for which Mr. Rankin serves as custodian, as to which Mr. Rankin disclaims beneficial ownership.\n(9) Includes 178 shares of Class A Common owned on behalf of Messrs. Eklund, Muller and Ryan by the Yale Materials Handling Corporation Employee Profit Sharing and Stock Ownership Plan, as to which the individuals exercise voting power.\n(10) Includes 20 shares of Class A Common owned by a member of the immediate family of an executive officer as to which such executive officer disclaims beneficial ownership.\nFrank E. Taplin, Jr. and Thomas E. Taplin (who was, as of December 31, 1993, the beneficial owner of an aggregate of 584,114 shares of Class A Common and, as of January 15, 1994, 317,000 shares of Class B Common) are brothers, and Clara Taplin Rankin (who was, as of December 31, 1993, the beneficial owner of an aggregate of 640,741 shares of Class A Common and, as of January 15, 1994, 335,568 shares of Class B Common) is their sister. Britton T. Taplin is the son of Thomas E. Taplin and the nephew of Frank E. Taplin, Jr. and Clara Taplin Rankin. David F. Taplin is the son of Frank E. Taplin, Jr. and the nephew of Thomas E. Taplin and Clara Taplin Rankin. Clara Taplin Rankin is the mother of Alfred M. Rankin, Jr. and Claiborne R. Rankin. The combined beneficial ownership of such persons equals 2,106,385 shares or 29.19% of Class A Common and 1,156,857 shares or 65.52% of Class B Common outstanding on January 15, 1994. The combined beneficial ownership of all directors of the Company, together with Clara Taplin Rankin, Thomas E. Taplin and all of the executive officers of the Company whose beneficial ownership of Class A Common and Class B Common (including shares which would be held by such directors if they exercised certain stock options) must be disclosed in the foregoing table in accordance with Rule 13d-3 under the Exchange Act, equals 2,136,776 shares or 29.61% of Class A Common and 1,157,357 shares or 65.55% of Class B Common outstanding on January 15, 1994 (including shares which would be outstanding if certain stock options were exercised by such\n- 31 - directors). Such shares of Class A Common and Class B Common represent 55.12% of the combined voting power of all Class A Common and Class B Common outstanding on such date (including those shares which would be outstanding if the stock options referred to above were exercised).\nITEM 13.","section_13":"ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS\nAs a result of its ownership of in excess of 97% of the Company's stock, NACCO controls the Company and has the power to elect the Company's entire Board of Directors and to make certain strategic decisions concerning the Company (including decisions relating to mergers, consolidations or the sale of all or substantially all of the assets of the Company) without the approval of other stockholders. However, the Company has operated and conducted its day-to-day business autonomously.\nTAX AGREEMENT\nSo long as the Company continues to meet the definition of an included corporation for Federal income tax purposes, as that definition may change from time to time, NACCO intends to include the Company in the consolidated Federal income tax returns of NACCO. NACCO and the Company are parties to an income tax share agreement providing for the allocation of Federal income tax liabilities. Under the agreement, the Company will be compensated by NACCO for certain of its tax attributes (e.g., any available tax credits), while all Federal income tax deficiencies and refunds relating to the Company for prior and future years are charged or credited to the Company as they are finally determined. Under this arrangement, the Company will pay to NACCO an amount equal to the taxes that would be payable by the Company if it were a corporation filing a separate return.\nA similar arrangement currently exists between NACCO and NMHG and between NACCO and each of its other subsidiaries.\nDIRECTORS' AND OFFICERS' LIABILITY INSURANCE AND OTHER NACCO SERVICES\nNACCO provides directors' and officers' liability insurance to the Company's directors and officers, with the Company reimbursing NACCO for a portion of such costs. The Company may also make use and be charged for the use of NACCO's corporate airplane. NACCO is also expected to provide certain legal, accounting and insurance services to the Company for which it will be reimbursed.\nOTHER\nMr. Yoshinori Ohno is President of S-Y. S-Y manufactures semi-complete or complete industrial lift trucks which are purchased by NMHG, Yale Europe and Jungheinrich. S-Y also markets in Japan industrial truck products it manufactures and which it imports from NMHG. For a discussion of inter-affiliate transactions involving S-Y see Note F, Investments, on pages and F- 14.\n- 32 - PART IV\nITEM 14.","section_14":"ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K\n(a)(1) and (2) The response to Item 14(a)(1) and (2) is set forth beginning at page of this Annual Report on Form 10-K.\n(a)(3) Listing of Exhibits - See the exhibit index beginning at page X-1 of this Annual Report on Form 10-K.\n(b) The Company has not filed any Current Reports on Form 8-K during the fourth quarter of 1993.\n(c) The response to Item 14(c) is set forth beginning at page X-1 of this Annual Report on Form 10-K.\n(d) Financial Statement Schedules - The response to Item 14(d) is set forth beginning at page of this annual Report on Form 10-K.\nSUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT.\nNeither an annual report nor a proxy statement covering the Company's last fiscal year has been circulated or is going to be circulated to security holders.\n- 33 - SIGNATURES\nPursuant to the requirements of Section 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.\nHyster-Yale Materials Handling, Inc.\nBy: REGINALD R. EKLUND ------------------------------------- Reginald R. Eklund President and Chief Executive Officer\nDate: March 21, 1994\n- 34 - Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.\n- 35 -\nBergen I. Bull March 29, 1994 -------------------------------- Bergen I. Bull, Attorney-in-Fact\n- 36 -\nANNUAL REPORT ON FORM 10-K\nITEM 8, ITEM 14 (A) (1) AND (2), AND ITEM 14 (D)\nFINANCIAL STATEMENTS AND SUPPLEMENTARY DATA\nLIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES\nYEAR ENDED DECEMBER 31, 1993\nHYSTER-YALE MATERIALS HANDLING, INC.\nPORTLAND, OREGON\nFORM 10-K\nITEM 14 (A) (1) AND (2)\nHYSTER-YALE MATERIALS HANDLING, INC.\nLIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES\nThe following consolidated financial statements of Hyster-Yale Materials Handling, Inc. and subsidiaries are included in Item 8:\nReport of Independent Accountants for years ended December 31, 1993, 1992 and 1991\nConsolidated balance sheets--December 31, 1993 and December 31, 1992\nConsolidated statements of income--Years ended December 31, 1993, 1992 and\nConsolidated statements of cash flows--Years ended December 31, 1993, 1992 and 1991\nConsolidated statements of stockholders' equity--Years ended December 31, 1993, 1992 and 1991\nNotes to consolidated financial statements--December 31, 1993\nThe following consolidated financial statement schedules of Hyster-Yale Materials Handling, Inc. and subsidiaries are included in Item 14 (d):\nSchedule V -- Property, plant and equipment\nSchedule VI -- Accumulated depreciation and amortization of property, plant and equipment\nSchedule VIII -- Valuation and qualifying accounts (accounts not required or not material have been omitted)\nSchedule IX -- Short-term borrowings\nSchedule X -- Supplementary income statement information\nAll other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted.\nReport of Independent Public Accountants\nTo the Board of Directors and Stockholders of Hyster-Yale Materials Handling, Inc.:\nWe have audited the accompanying consolidated balance sheets of Hyster-Yale Materials Handling, Inc. (an indirect, majority-owned subsidiary of NACCO Industries, Inc.) and subsidiaries as of December 31, 1993 and 1992, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1993. These consolidated financial statements and the schedules referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and schedules based on our audits.\nWe conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.\nIn our opinion, the financial statements referred to above present fairly, in all materials respects, the financial position of Hyster-Yale Materials Handling, Inc. and subsidiaries as of December 31, 1993 and 1992, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1993 in conformity with generally accepted accounting principles.\nAs discussed in Note A to the consolidated financial statements, the Company has given retroactive effect to the change in its method of accounting for income taxes.\nOur audits were made for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. The schedules listed in the list of financial statements and financial statement schedules are presented for purposes of complying with the Securities and Exchange commission's rules and are not a required part of the basic consolidated financial statements. These schedules have been subjected to the auditing procedures applied in our audit of the basic consolidated financial statements and, in our opinion, are fairly stated in all material respects in relation to the basic consolidated financial statements taken as a whole.\nPortland, Oregon February 4, 1994\nArthur Andersen & Co.\nSee notes to consolidated financial statements.\nSee notes to consolidated financial statements.\nSee notes to consolidated financial statements.\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS\nHYSTER-YALE MATERIALS HANDLING, INC. AND SUBSIDIARIES FOR THE THREE YEARS ENDED DECEMBER 31, 1993\nNOTE A--ACCOUNTING POLICIES\nBASIS OF PRESENTATION: The accompanying consolidated financial statements of Hyster-Yale Materials Handling, Inc. and subsidiaries (the Company) include the accounts of Hyster-Yale Materials Handling, Inc. (Hyster-Yale), a 97% owned subsidiary of NACCO Industries, Inc. (NACCO), and its wholly-owned subsidiaries Hyster Company (Hyster) and Yale Materials Handling Corporation (Yale).\nEffective January 1, 1994 Yale was merged into Hyster with the resulting company renamed NACCO Materials Handling Group, Inc. which continues to be a wholly-owned subsidiary of Hyster-Yale.\nEffective January 1, 1993, the Company adopted Statement of Financial Accounting Standards (SFAS) #109, \"Accounting for Income Taxes.\" The Company elected to retroactively apply its provisions to January 1, 1989 and has restated the accompanying comparative consolidated financial statements (see Note J).\nPRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the accounts of Hyster-Yale and its majority-owned domestic and international subsidiaries except for a Brazilian subsidiary. Income from Companhia Hyster, the Brazilian subsidiary, will be recognized when cash is received in the form of a dividend. Investments in Sumitomo-Yale Company, Ltd. (S-Y), a 50% owned joint venture and Yale Financial Services, Inc. (YFS, Inc.), a 20% owned joint venture are accounted for by the equity method. All significant intercompany accounts and transactions among the consolidated companies are eliminated in consolidation.\nCASH AND CASH EQUIVALENTS: The Company considers cash equivalents to be investments purchased with a maturity of three months or less.\nINVENTORIES: Inventories are stated at the lower of cost or market. Cost has been determined under the last-in, first-out (LIFO) method for domestic inventories and under the first-in, first-out (FIFO) method with respect to all other inventories. Costs for inventory valuation include labor, material and manufacturing overhead.\nPROPERTY, PLANT AND EQUIPMENT: Depreciation of plant and equipment is computed using the straight-line method over the estimated useful service lives for purposes of financial reporting. For tax purposes, an accelerated method is generally used. Maintenance and repairs are expensed as incurred.\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS\nHYSTER-YALE MATERIALS HANDLING, INC. AND SUBSIDIARIES FOR THE THREE YEARS ENDED DECEMBER 31, 1993\nNOTE A--ACCOUNTING POLICIES--CONTINUED\nGOODWILL Goodwill, which represents the excess purchase price paid over the fair value of the net assets acquired in the acquisition of Hyster Company, is amortized on a straight-line basis over 40 years. Amortization was $10.8 million in each of 1993, 1992, and 1991 respectively after restatement for SFAS 109 (see Note J). Accumulated amortization was $49.6 million and $38.7 million at December 31, 1993 and 1992. Management regularly evaluates its accounting for goodwill considering such factors as historical and future profitability and believes that the asset is realizable and the amortization period is still appropriate.\nDEFERRED FINANCING COSTS: Deferred financing costs from the acquisition of Hyster Company are being amortized over the term of the related indebtedness. Amortization of deferred financing costs was $1.9 million in 1993 and $2.1 million in 1992 and 1991. In addition, $1.4 million of deferred financing costs were written-off in conjunction with the extraordinary charge (see Note B).\nPRODUCT DEVELOPMENT COSTS: Expenditures associated with the development of new products and changes to existing products are expensed as incurred. These costs amounted to $20.7, $21.9 and $19.2 million in 1993, 1992 and 1991, respectively.\nFOREIGN CURRENCY: The financial statements of the Company's foreign operations are translated into United States dollars at year-end exchange rates as to assets and liabilities and at weighted average exchange rates as to revenues and expenses. Gains and losses that do not impact cash flows are excluded from net income. Effects of changes in exchange rates on foreign financial statements is designated as \"foreign currency translation adjustment\" and included as a separate component of stockholders' equity.\nThe Company enters into forward foreign exchange contracts to hedge certain foreign currency denominated receivables and payables, certain foreign currency commitments and certain net investments in foreign subsidiaries. Gains and losses on hedges of foreign currency denominated receivables and payables are reported currently in income. Gains and losses with respect to firm commitments are deferred and are recognized as part of the cost of the underlying transaction. Gains or losses on hedges of net investments in foreign subsidiaries are included in the foreign currency translation adjustment.\nINTEREST RATE SWAP AGREEMENTS: The differential between the floating interest rate and the fixed interest rate which is to be paid or received is accrued as interest rates change and is recognized over the life of the agreement.\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS\nHYSTER-YALE MATERIALS HANDLING, INC. AND SUBSIDIARIES FOR THE THREE YEARS ENDED DECEMBER 31, 1993\nNOTE A--ACCOUNTING POLICIES--CONTINUED\nFINANCIAL INSTRUMENTS: Fair value of financial instruments, except for the senior subordinated debentures and interest rate swaps, approximated their carrying values at December 31, 1993. Fair values are determined from quoted market sources and through management estimates.\nRECLASSIFICATION: Operating profit in prior periods' consolidated financial statements has been restated to reflect the reclassification of goodwill amortization as a component of operating expenses. Certain other amounts in the prior periods consolidated financial statements have been reclassified to conform to the current period's presentation.\nNOTE B--EXTRAORDINARY CHARGE\nAn extraordinary charge of $3.3 million, net of $2.0 million in related tax benefits, was recognized for the write-off of premiums and unamortized debt issuance costs associated with the retirement of approximately $50.2 million face value of the Company's 12 3\/8% subordinated debentures. The retirement of these subordinated debentures was done in connection with a capital contribution and a restructuring of other bank debt discussed below.\nIn August 1993, NACCO and the two minority shareholders made a proportional capital contribution of $53.8 million in the form of previously purchased Hyster-Yale 12 3\/8% subordinated debentures with a face value of $23.7 million and a purchase value by NACCO of $25.5 million and a cash contribution of $28.3 million.\nAs part of this transaction, the Company amended its existing senior bank credit agreement. This amendment permits equity infusions to be used for cash purchases of subordinated debentures and, after August 1994, permits use of internally generated funds to retire additional subordinated debentures. In addition, the amendment modifies the bank loan amortization schedule and provides for favorable performance based interest rate incentives. See Note I for additional discussion of the amended senior credit agreement.\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS\nHYSTER-YALE MATERIALS HANDLING, INC. AND SUBSIDIARIES FOR THE THREE YEARS ENDED DECEMBER 31, 1993\nNOTE D--ACCOUNTS RECEIVABLE\nAllowances for doubtful accounts of $4.9 and $4.3 million at December 31, 1993 and 1992, respectively, were deducted from accounts receivable.\nThe cost of inventories has been determined by the last-in first-out (LIFO) method for 61% of such inventories as of December 31, 1993 and 1992, respectively.\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS\nHYSTER-YALE MATERIALS HANDLING, INC. AND SUBSIDIARIES FOR THE THREE YEARS ENDED DECEMBER 31, 1993\nNOTE F--INVESTMENTS\nThe Company owns a 50% interest in S-Y. S-Y operates a facility in Japan from which the Company purchases certain components and internal combustion engine and electric forklift trucks. Following is a summary of unaudited condensed financial information on a separate company basis (before elimination of intercompany profits) pertaining to S-Y.\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS\nHYSTER-YALE MATERIALS HANDLING, INC. AND SUBSIDIARIES FOR THE THREE YEARS ENDED DECEMBER 31, 1993\nThe Company generated commission income on certain S-Y sales. Commission income was $1.4, $2.2 and $2.3 million in 1993, 1992 and 1991, respectively. The Company also reimbursed S-Y $0.5 million for engineering assistance during 1993.\nDepreciation charged to income was $18.8, $19.0 and $19.1 million in 1993, 1992 and 1991, respectively.\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS\nHYSTER-YALE MATERIALS HANDLING, INC. AND SUBSIDIARIES FOR THE THREE YEARS ENDED DECEMBER 31, 1993\nNOTE I--SHORT-TERM AND LONG-TERM OBLIGATIONS\nThe Company has entered into a Credit Agreement with a group of banks to provide financing for a portion of the acquisition of Hyster and working capital needs of Hyster-Yale. The Credit Agreement is secured by all domestic assets and the pledge of stock of certain subsidiaries. The Credit Agreement provides for a term note in an aggregate principal amount of $375.0 million and a long-term revolving credit facility which permits advances and secured letters of credit to the Company from time to time up to an aggregate principal amount of $100.0 million through expiration in 1997.\nThere were no borrowings outstanding under the revolving credit facility at December 31, 1993. Borrowings under the revolving credit facility, which were classified as long-term, were $25.5 million at December 31, 1992. The commitment fee on the unused portion of the revolving credit facility is currently at 0.5% per annum.\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS\nHYSTER-YALE MATERIALS HANDLING, INC. AND SUBSIDIARIES FOR THE THREE YEARS ENDED DECEMBER 31, 1993\nNOTE I--SHORT-TERM AND LONG-TERM OBLIGATIONS--CONTINUED\nUnder an amendment to the Credit Agreement negotiated in July 1993, the term note now requires quarterly payments expiring May 31, 1997. The term note and the revolving credit facility bear interest at an effective lender's prime rate plus .75% or LIBOR plus 1.875% subject to reductions as discussed below. The average effective interest rates on the term note and the revolving credit facility were 6.45% and 7.85% in 1993 and 1992, respectively.\nThe amendment provides for favorable performance based interest rate incentives based on achievement of varying debt to capitalization rates and\/or earnings measures. In addition, the amendment permits the use of internally generated funds to repurchase additional subordinated debentures up to $75.0 million based on achieving certain debt to capitalization ratios. The Company is currently eligible to repurchase up to $25.0 million on or after August 1, 1994.\nThe Company has entered into unsecured interest rate swap agreements. At December 31, 1993 and 1992, the Company had outstanding interest rate swap agreements with commercial banks, having total notional principal amounts of $125.0 and $45.0 million, respectively. The interest rate swap agreements mature at varying lengths from six-months to two years and effectively change the Company's floating interest rat e exposure on $125.0 million of the term note to an average fixed rate of 6.65%. These agreements are with major commercial banks and the exposure to credit loss in the event of nonperformance by the banks is minimal. The Company evaluates its exposure to floating rate debt on an ongoing basis.\nThe Credit Agreement contains covenants related to minimum net worth, working capital, debt to equity, and interest and fixed charge coverage ratios. In addition, the Credit Agreement limits capital spending, investments, sales of certain assets and dividends. As of December 31, 1993, the Company was in compliance with all the covenants in the Credit Agreement.\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS\nHYSTER-YALE MATERIALS HANDLING, INC. AND SUBSIDIARIES FOR THE THREE YEARS ENDED DECEMBER 31, 1993\nNOTE I--SHORT-TERM AND LONG-TERM OBLIGATIONS--CONTINUED\nThe senior subordinated debentures in the amount of $149.8 million are payable in 1999 and bear interest at 12.375%. There is a mandatory sinking fund payment on August 1, 1998 of $100.0 million. As of August 1, 1993, the debentures were redeemable at a price of 107.5. As of August 1, 1994, the debentures can be called at a price of 105. As discussed above, there are call restrictions in the Credit Agreement.\nAt December 31, 1993, the market value of the 12.375% senior subordinated debentures was $161 million. The interest rate swap agreements have a negative market value of $1.1 million at December 31, 1993.\nForeign subsidiaries had unused credit lines at December 31, 1993 of up to $15.5 million, to the extent that borrowings under these credit lines would not cause the subsidiaries to exceed any of various restrictive covenants. These credit lines are in various currencies and bear interest at rates that range from 6.5% to 8.25% at December 31, 1993.\nA portion of the 1994 payments on the term note may be made utilizing the existing, long-term revolving credit facility.\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS\nHYSTER-YALE MATERIALS HANDLING, INC. AND SUBSIDIARIES FOR THE THREE YEARS ENDED DECEMBER 31, 1993\nNOTE J--INCOME TAXES\nAs discussed in Note A, \"Accounting Policies\", the Company has adopted SFAS 109 effective January 1, 1993 and has retroactively applied its provisions to January 1, 1989. Accordingly, net goodwill has been adjusted as of January 1, 1991 to reflect the cumulative impact of applying this Standard. No adjustment was required to retained earnings as of January 1, 1991 and there was no effect on net income in 1991 or 1992. The adjustment to goodwill, an increase of $25.1 million, represents the cumulative impact of SFAS 109 on purchase accounting for the acquisition of Hyster as of January 1, 1991.\nSFAS 109 requires, among other things, the measurement of deferred tax assets and liabilities based on the difference between the financial statement and income tax bases of assets and liabilities using the enacted marginal tax rate. Deferred income tax expense or benefit is based on the changes in the assets or liabilities from period to period. The prior method of accounting for income taxes measured deferred income tax expense or benefit based on timing differences between the recording of income and expenses for financial reporting purposes and for purposes of filing federal income tax returns at income tax rates in effect when the difference arose.\nThis Note contains disclosures relative to income taxes for the periods presented in the accompanying consolidated financial statements calculated under the provisions of SFAS 109 with prior periods restated as appropriate.\nThe Company is included in the consolidated federal income tax return of NACCO. The Company and NACCO are parties to an income tax sharing agreement providing for the allocation of federal income tax liabilities. Under this arrangement, the Company will pay to NACCO an amount equal to the income taxes that would be payable by the Company if it were a corporation filing a separate return. Therefore, the currently payable federal portion of the provision for income taxes is payable to NACCO. The Company files separate state income tax returns.\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS\nHYSTER-YALE MATERIALS HANDLING, INC. AND SUBSIDIARIES FOR THE THREE YEARS ENDED DECEMBER 31, 1993\nNOTE J--INCOME TAXES--CONTINUED\nDomestic income (loss) before income taxes includes expenses related to interest on acquisition indebtedness, goodwill and deferred financing fee amortization of approximately $47.6, $51.7 and $60.1 million in 1993, 1992 and 1991, respectively.\nThe Company has provided for estimated United States and foreign income taxes, less available tax credits and deductions, which would be incurred on the remittance of undistributed earnings in its foreign subsidiaries in excess of earnings deemed to be indefinitely reinvested. It is management's intent to provide income taxes on all future accumulations of undistributed earnings for those foreign subsidiaries where it is anticipated that distribution of earnings is likely to occur.\nAccumulated earnings at December 31, 1993 of international subsidiaries which have been indefinitely reinvested totaled $45.2 million. Determination of the amount of unrecognized deferred tax liability on these unremitted earnings is not practicable. The amount of withholding taxes that would be payable upon remittance of all undistributed foreign earnings would be $3.9 million. These withholding taxes, subject to certain limitations, may be used to reduce U.S. income taxes.\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS\nHYSTER-YALE MATERIALS HANDLING, INC. AND SUBSIDIARIES FOR THE THREE YEARS ENDED DECEMBER 31, 1993\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS\nHYSTER-YALE MATERIALS HANDLING, INC. AND SUBSIDIARIES FOR THE THREE YEARS ENDED DECEMBER 31, 1993\nDuring 1993 the Company and the IRS settled all outstanding issues on the federal income tax returns for the years 1981-1986. This final settlement did not result in a material adverse effect on the Company's financial position or results of operations.\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS\nHYSTER-YALE MATERIALS HANDLING, INC. AND SUBSIDIARIES FOR THE THREE YEARS ENDED DECEMBER 31, 1993\nNOTE K--POSTRETIREMENT BENEFITS\nThe Company maintains a variety of post retirement plans covering a majority of its employees. A portion of the employees are participants in the defined benefit plans discussed below. Most of the remaining covered employees participate in the profit sharing portion of the Company's defined contribution plan also described below. In addition, all eligible employees are included in the 401(k) portion of the defined contribution plan. Total post retirement expense for the Company was $7.0, $6.8 and $5.3 million for the years 1993, 1992 and 1991, respectively. Included in these amounts is the expense associated with government sponsored plans in which the Company's international subsidiaries participate.\nEach defined benefit plan has a formula which is used to determine benefits upon retirement. Most formulas take into account age, compensation, and success of the Company in meeting certain goals although certain hourly employee's formulas are based primarily on years of service. The Company's funding policy is to contribute annually the minimum contribution calculated by the independent actuaries. Contributions are intended to provide not only for benefits attributed to service to date but also for those expected to be earned in the future.\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS\nHYSTER-YALE MATERIALS HANDLING, INC. AND SUBSIDIARIES FOR THE THREE YEARS ENDED DECEMBER 31, 1993\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS\nHYSTER-YALE MATERIALS HANDLING, INC. AND SUBSIDIARIES FOR THE THREE YEARS ENDED DECEMBER 31, 1993\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS\nHYSTER-YALE MATERIALS HANDLING, INC. AND SUBSIDIARIES FOR THE THREE YEARS ENDED DECEMBER 31, 1993\nNOTE K--POSTRETIREMENT BENEFITS--CONTINUED\nThe Company maintains a defined contribution retirement plan for U.S. employees which includes a profit sharing portion and a 401(k) portion. Contributions to the profit sharing plan are based on a formula which takes into account age, compensation, and success of the Company in meeting certain goals. Contributions vest over a five-year period. Under the 401(k) portion, eligible employees may contribute up to 17% of their compensation and the Company matches an amount equal to 66-2\/3% of the participants initial 3% before tax contribution. Participants are at all times fully vested in their contributions and those made by the Company.\nNOTE L --OTHER POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS\nThe Company and certain of its subsidiaries have health care and life insurance plans which provide benefits to eligible retired employees. Effective January 1, 1991, the Company adopted Statement of Financial Accounting Standards No. 106 (SFAS 106) \"Accounting for Postretirement Benefits Other Than Pensions\". The impact of the adoption was not material to the results of operations or financial condition of the Company. The Company continues to fund these benefits on a \"pay as you go\" basis, with the retirees paying a portion of the costs.\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS\nHYSTER-YALE MATERIALS HANDLING, INC. AND SUBSIDIARIES FOR THE THREE YEARS ENDED DECEMBER 31, 1993\nThe assumed health care cost trend rate for measuring the postretirement benefit obligation was 11% in 1993 and 12% in 1992, gradually reducing to 6% in years 2001 and after. The weighted average discount rate utilized was 7.5% in 1993 and 8.25% in the 1992 valuation. If the assumed health care trend rate were increased by 1%, the effect on the APBO and expense would be immaterial.\nIn November, 1992, Statement of Financial Accounting Standards No. 112, \"Employers' Accounting for Postemployment Benefits\" (SFAS 112), was issued. The Company will be required to adopt this new method of accounting for benefits paid to former or inactive employees after employment but before retirement (postemployment benefits) no later than 1994. SFAS 112 requires, among other things, that the expected cost of these benefits be recognized when they are earned or become payable (accrual method) when certain conditions are met rather than the current method which recognizes these costs when they are paid (pay as you go). The Company does not expect this standard to materially impact its financial condition or results of operations.\nNOTE M--LONG-TERM INCENTIVE COMPENSATION PLAN\nThe Company has a Long-Term Incentive Compensation Plan for officers and key management employees of the Company and its subsidiaries. Awards under this plan represent book value appreciation units and entitle the recipient, subject to vesting and other restrictions, to receive cash equal to the difference between the base period price for the units and the book value price as of the quarter date coincident or immediately preceding the date of disbursement. Awards vest and are payable ten years from date of grant or earlier under certain conditions. As of December 31, 1993, awards have been granted to 109 employees and officers. The amount charged (credited) to expense was $(0.2), $(1.0) and ($0.5) million in 1993, 1992 and 1991, respectively. The total amount accrued at December 31, 1993 and 1992 for these awards is $0.3 and $0.5 million, respectively, and is recorded as a long-term liability.\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS\nHYSTER-YALE MATERIALS HANDLING, INC. AND SUBSIDIARIES FOR THE THREE YEARS ENDED DECEMBER 31, 1993\nAggregate rental expense for operating leases included in the consolidated statements of income was $4.2, $3.4 and $4.1 million in 1993, 1992 and 1991, respectively.\nNOTE O--CONTINGENCIES\nThe Company is subject to recourse or repurchase obligations under various financing arrangements for certain independently-owned retail dealerships. Also, certain dealer loans are guaranteed by the Company. Total amounts subject to recourse, guarantee or repurchase obligation at December 31, 1993 were $72.4 million.\nWhen the Company is the guarantor of the principal amount financed, a security interest is usually maintained in assets of parties for whom the Company is guaranteeing debt. Losses anticipated under the terms of the recourse or repurchase obligations have been provided for and are not significant.\nThe Company had $127.5 million of forward foreign exchange contracts outstanding at December 31, 1993, with maturities of twelve months or less. These contracts are typically with major international financial institutions. The Company's risk in these transactions is the cost of replacing, at current market rates, these contracts in the event of default by the financial institution. Management believes the risk of incurring such losses is remote and any losses therefrom would be immaterial.\nThe Company is the defendant in various product liability and other legal proceedings incidental to its business. The majority of this litigation involves product liablility claims. The Company has recorded a reserve for potential product liability losses at December 31, 1993 of $41.1 million, of which $8.0 million is estimated to be payable in 1994. While the resolution of litigation cannot be predicted with certainty, management believes that the reserves are adequate and no material adverse effect upon the financial position or results of operations of the Company will result from such legal actions.\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS\nHYSTER-YALE MATERIALS HANDLING, INC. AND SUBSIDIARIES FOR THE THREE YEARS ENDED DECEMBER 31, 1993\nNOTE P--SEGMENT INFORMATION\nThe Company's business consists of the engineering, manufacturing and marketing of materials handling machinery and equipment, under the Hyster and Yale trade names. The Company's products are manufactured in plants at five locations in the United States and six international plants located in Scotland, Northern Ireland, The Netherlands, Brazil, Australia and Japan. Service parts are distributed through parts depots located in the United States, Europe, Australia and Brazil. Generally, product assembled abroad is comprised of parts and components manufactured or purchased locally and from U.S. plants at established transfer prices. The transfer price of production parts and completed units is established by a procedure designed to equate to an arm's-length price. However, for purposes of the following financial statement disclosure, transfers between geographic areas are presented at standard cost.\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS\nHYSTER-YALE MATERIALS HANDLING, INC. AND SUBSIDIARIES FOR THE THREE YEARS ENDED DECEMBER 31, 1993\nIn addition to product sourced from plants abroad, export sales from the United States plants to unaffiliated customers were $53.8, $44.9, and $38.3 million in 1993, 1992 and 1991, respectively. Total sales into markets outside the United States were $311.5, $326.1 and $321.9 million in 1993, 1992 and 1991, respectively.\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS\nHYSTER-YALE MATERIALS HANDLING, INC. AND SUBSIDIARIES FOR THE THREE YEARS ENDED DECEMBER 31, 1993\nSCHEDULE IX\nSCHEDULE X\nEXHIBIT INDEX\n(3) Articles of Incorporation and Bylaws.\n(i) Certificate of Incorporation of the Company is incorporated herein by reference to Exhibit 3.1 of the Company's Registration Statement on Form S-1 filed May 17, 1989 (Registration Statement 33-28812).\n(ii) Bylaws of the Company are incorporated herein by reference to Exhibit 3.2 of the Company's Registration Statement on Form S-1 filed May 17, 1989 (Registration Statement No. 33-28812).\n(iii) Certificate of Amendment to Certificate of Incorporation of the Company, dated May 24, 1989, is incorporated herein by reference to Exhibit 3.3 to Amendment No. 1 filed June 9, 1989 to the Company's Registration Statement on Form S-1 (Registration Statement No. 33-28812).\n(iv) Certificate of Amendment to Certificate of Incorporation of the Company, dated June 7, 1989, is incorporated herein by reference to Exhibit 3.4 to Amendment No. 1 filed June 9, 1989 to the Company's Registration Statement on Form S-1 (Registration Statement No. 33-28812).\n(4) Instruments defining the rights of security holders, including indentures.\n(i) The Company by this filing agrees, upon request, to file with the Securities and Exchange Commission the instruments defining the rights of holders of long-term debt of the Company and its subsidiaries where the total amount of securities authorized thereunder does not exceed 10% of the total assets of the Company and its subsidiaries on a consolidated basis.\n(ii) Indenture, dated as of August 3, 1989, between the Company and United Trust Company of New York, Trustee, with respect to the 12-3\/8% Senior Subordinated Debentures due August 1, 1999 is incorporated herein by reference to Exhibit 4(ii) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1989, Commission File Number 33-28812.\n(10) Material Contracts.\n(i) Intentionally omitted.\n(ii) Operating Agreement, dated as of July 31, 1979, by and between Eaton Corporation and Sumitomo Heavy Industries Ltd. is incorporated herein by reference to Exhibit 10.4 of the Company's Registration Statement on Form S-1 filed May 17, 1989 (Registration Statement No. 33-28812).\nX-1\n(iii) Memorandum Agreement, dated as of November 19, 1982, by and between Eaton Corporation, Eaton International, Inc., Sumitomo Heavy Industries, Ltd. and Sumitomo Yale Company Ltd. is incorporated herein by reference to Exhibit 10.5 of the Company's Registration Statement on Form S-1 filed May 17, 1989 (Registration Statement No. 33-28812).\n(iv) Litigation Agreement, dated as of December 31, 1983, between Eaton Corporation and Yale, as amended, is incorporated herein by reference to Exhibit 10.6 to Amendment No. 1 filed June 9, 1989 to the Company's Registration Statement on Form S-1 (Registration Statement No. 33-28812).\n(v) Third Amended and Restated Operating Agreement, dated as of November 21, 1985, as amended, between Hyster Company and Hyster Credit Corporation is incorporated herein by reference to Exhibit 10.7 to Amendment No. 1 filed June 9, 1989 to the Company's Registration Statement on Form S-1 (Registration Statement No. 33-28812).\n(vi) Master Sale Leaseback Agreement, dated as of December 19, 1985, between Hyster Credit Corporation and Hyster is incorporated herein by reference to Exhibit 10.8 to Amendment No. 1 filed June 9, 1989 to the Company's Registration Statement on Form S-1 (Registration Statement No. 33-28812).\n(vii) Existing Fleet Sale Leaseback Agreement, dated as of December 19, 1985, between Hyster Credit Corporation and Hyster is incorporated herein by reference to Exhibit 10.9 to Amendment No. 1 filed June 9, 1989 to the Company's Registration Statement on Form S-1 (Registration Statement No. 33-28812).\n(viii) Intentionally omitted.\n(ix) Credit Agreement, dated May 26, 1989, among the Company, Yale, Hyster, the Lenders party thereto and Citicorp North America, Inc. (individually and as Agent) is incorporated herein by reference to Exhibit 10.11 to Amendment No. 1 filed June 9, 1989 to the Company's Registration Statement on Form S-1 (Registration Statement No. 33-28812).\n(x) Lease Agreement between Brunswick and Glynn County Development Authority and Hyster, dated as of September 1, 1988 is incorporated herein by reference to Exhibit 10.12 to Amendment No. 1 filed June 9, 1989 to the Company's Registration Statement on Form S-1 (Registration Statement No. 33-28812).\nX-2 (xi) Lease Agreement between the Industrial Development Board of the Town of Sulligent and Hyster, dated as of June 1, 1970, is incorporated herein by reference to Exhibit 10.13 to Amendment No. 1 filed June 9, 1989 to the Company's Registration Statement on Form S-1 (Registration Statement No. 33-28812).\n(xii) Lease Agreement between the City of Berea, Kentucky and Hyster, dated as of July 15, 1974, is incorporated by reference herein to Exhibit 10.14 to Amendment No. 1 filed June 9, 1989 to the Company's Registration Statement on Form S-1 (Registration Statement No. 33-28812).\n* (xiii) Hyster-Yale Materials Handling, Inc. Long-Term Incentive Compensation Plan, dated as of January 1, 1990, is incorporated herein to Exhibit 10(lxxxix) of the NACCO Annual Report on Form 10-K for the fiscal year ended December 31, 1990, Commission File Number 1-9172.\n* (xiv) Hyster-Yale Materials Handling, Inc. Annual Incentive Compensation Plan, dated as of January 1, 1990, is incorporated herein to Exhibit 10(lxxxviii) of the NACCO Annual Report on Form 10-K for the fiscal year ended December 31, 1990, Commission File Number 1-9172.\n(xv) Termination and Release Agreement, dated as of May 26, 1989, among Eaton Corporation, Eaton Credit Corporation and Eaton Leasing Corporation and Yale is incorporated herein by reference to Exhibit 10.16 to Amendment No. 1 filed June 9, 1989 to the Company's Registration Statement on Form S-1 (Registration Statement No. 33-28812).\n(xvi) Exhibits and Schedules to Credit Agreement, dated May 26, 1989, among the Company, Yale, Hyster, the Lenders party thereto and Citicorp North America, Inc. is incorporated herein by reference to Exhibit 10.17 to Amendment No. 3 filed July 18, 1989 to the Company's Registration Statement on Form S-1 (Registration Statement No. 33-28812).\n(xvii) Security Agreement, dated as of May 26, 1989, by Hyster in favor of Citicorp North America, Inc. (as agent for the Lenders party to the Credit Agreement) is incorporated herein by reference to Exhibit 10.18 to Amendment No. 3 filed July 18, 1989 to the Company's Registration Statement on Form S-1 (Registration Statement No. 33-28812).\n(xviii) Security Agreement, dated as of May 26, 1989, by Yale in favor of Citicorp North America, Inc. (as agent for the Lenders party to the Credit Agreement) is incorporated herein by reference to Exhibit 10.19 to Amendment No. 3 filed July 18, 1989 to the Company's Registration Statement on Form S-1 (Registration Statement No. 33-28812).\nX-3 (xix) Security Agreement, dated as of May 26, 1989, by the Company in favor of Citicorp North America, Inc. (as agent for the Lenders party to the Credit Agreement) is incorporated herein by reference to Exhibit 10.20 to Amendment No. 3 filed July 18, 1989 to the Company's Registration Statement on Form S-1 (Registration Statement No. 33-28812).\n(xx) Trademark and License Security Agreement, dated as of May 26, 1989, by Hyster in favor of Citicorp North America, Inc. (as agent for the Lenders party to the Credit Agreement) is incorporated herein by reference to Exhibit 10.21 to Amendment No. 3 filed July 18, 1989 to the Company's Registration Statement on Form S-1 (Registration Statement No. 33-28812).\n(xxi) Trademark and License Security Agreement, dated as of May 26, 1989, by Yale in favor of Citicorp North America, Inc. (as agent for the Lenders party to the Credit Agreement) is incorporated herein by reference to Exhibit 10.22 to Amendment No. 3 filed July 18, 1989 to the Company's Registration Statement on Form S-1 (Registration Statement No. 33-28812).\n(xxii) Patent and License Security Agreement, dated as of May 26, 1989, by Hyster in favor of Citicorp North America, Inc. (as agent for the Lenders party to the Credit Agreement) is incorporated herein by reference to Exhibit 10.23 to Amendment No. 3 filed July 18, 1989 to the Company's Registration Statement on Form S-1 (Registration Statement No. 33-28812).\n(xxiii) Patent and License Security Agreement, dated as of May 26, 1989, by Yale in favor of Citicorp North America, Inc. (as agent for the Lenders party to the Credit Agreement) is incorporated herein by reference to Exhibit 10.24 to Amendment No. 3 filed July 18, 1989 to the Company's Registration Statement on Form S-1 (Registration Statement No. 33-28812).\n(xxiv) Aircraft Security Agreement, dated as of May 26, 1989, by Hyster in favor of Citicorp North America, Inc. (as agent for the Lenders party to the Credit Agreement) is incorporated herein by reference to Exhibit 10.25 to Amendment No. 3 filed July 18, 1989 to the Company's Registration Statement on Form S-1 (Registration Statement No. 33-28812).\n(xxv) Hyster Pledge Agreement, dated as of May 26, 1989, by Hyster in favor of Citicorp North America, Inc. (as agent for the Lenders party to the Credit Agreement) is incorporated herein by reference to Exhibit 10.26 to Amendment No. 3 filed July 18, 1989 to the Company's Registration Statement on Form S-1 (Registration Statement No. 33-28812).\nX-4 (xxvi) Instrument of Pledge, dated as of May 26, 1989, by Hyster and Hyster, B.V. in favor of Citicorp North America, Inc. (as agent for the Lenders party to the Credit Agreement) is incorporated herein by reference to Exhibit 10.27 to Amendment No. 3 filed July 18, 1989 to the Company's Registration Statement on Form S-1 (Registration Statement No. 33-28812).\n(xxvii) Deed of Charge, dated as of May 26, 1989, by Hyster Europe Limited and Hyster in favor of Citicorp North America, Inc. (as agent for the Lenders party to the Credit Agreement) is incorporated herein by reference to Exhibit 10.28 to Amendment No. 3 filed July 18, 1989 to the Company's Registration Statement on Form S-1 (Registration Statement No. 33-28812).\n(xxviii) Brazilian Pledge Agreement, dated as of May 26, 1989, by Hyster and Hyster Overseas Capital Corporation in favor of Citicorp North America, Inc. (as agent for the Lenders party to the Credit Agreement) is incorporated herein by reference to Exhibit 10.29 to Amendment No. 3 filed July 18, 1989 to the Company's Registration Statement on Form S-1 (Registration Statement No. 33-28812).\n(xxix) Australian Pledge Agreement, dated as of May 26, 1989, by Hyster in favor of Citicorp North America, Inc. (as agent for the Lenders party to the Credit Agreement) is incorporated herein by reference to Exhibit 10.30 to Amendment No. 3 filed July 18, 1989 to the Company's Registration Statement on Form S-1 (Registration Statement No. 33-28812).\n(xxx) Pledge Agreement, dated as of May 26, 1989, by Yale in favor of Citicorp North America, Inc. (as agent for the Lenders party to the Credit Agreement) is incorporated herein by reference to Exhibit 10.31 to Amendment No. 3 filed July 18, 1989 to the Company's Registration Statement on Form S-1 (Registration Statement No. 33-28812).\n(xxxi) Yale Pledge Agreement, dated as of May 26, 1989, by Yale in favor of Citicorp North America, Inc. (as agent for the Lenders party to the Credit Agreement) is incorporated herein by reference to Exhibit 10.32 to Amendment No. 3 filed July 18, 1989 to the Company's Registration Statement on Form S-1 (Registration Statement No. 33-28812).\n(xxxii) Deed of Charge, dated as of May 26, 1989, by Yale and Yale Materials Handling Limited in favor of Citicorp North America, Inc. (as agent for the Lenders party to the Credit Agreement) is incorporated herein by reference to Exhibit 10.33 to Amendment No. 3 filed July 18, 1989 to the Company's Registration Statement on Form S-1 (Registration Statement No. 33-28812).\nX-5 (xxxiii) Holding Pledge Agreement, dated as of May 26, 1989, by the Company in favor of Citicorp North America, Inc. (as agent for the Lenders party to the Credit Agreement) is incorporated herein by reference to Exhibit 10.34 to Amendment No. 3 filed July 18, 1989 to the Company's Registration Statement on Form S-1 (Registration Statement No. 33-28812).\n(xxxiv) NACCO I Pledge Agreement, dated as of May 26, 1989, by Acquisition I in favor of Citicorp North America, Inc. (as agent for the Lenders party to the Credit Agreement) is incorporated herein by reference to Exhibit 10.35 to Amendment No. 3 filed July 18, 1989 to the Company's Registration Statement on Form S-1 (Registration Statement No. 33-28812).\n(xxxv) Guaranty, dated as of May 26, 1989, by Hyster in favor of Citicorp North America, Inc. (as agent for the Lenders party to the Credit Agreement) is incorporated herein by reference to Exhibit 10.36 to Amendment No. 3 filed July 18, 1989 to the Company's Registration Statement on Form S-1 (Registration Statement No. 33-28812).\n(xxxvi) Guaranty, dated as of May 26, 1989, by Yale in favor of Citicorp North America, Inc. (as agent for the Lenders party to the Credit Agreement) is incorporated herein by reference to Exhibit 10.37 to Amendment No. 3 filed July 18, 1989 to the Company's Registration Statement on Form S-1 (Registration Statement No. 33-28812).\n(xxxvii) Guaranty, dated as of May 26, 1989, by the Company in favor of Citicorp North America, Inc. (as agent for the Lenders party to the Credit Agreement) is incorporated herein by reference to Exhibit 10.38 to Amendment No. 3 filed July 18, 1989 to the Company's Registration Statement on Form S-1 (Registration Statement No. 33-28812).\n(xxxviii) Guaranty and Security Agreement, dated as of May 26, 1989, by Acquisition I in favor of Citicorp North America, Inc. (as agent for the Lenders party to the Credit Agreement) is incorporated herein by reference to Exhibit 10.39 to Amendment No. 3 filed July 18, 1989 to the Company's Registration Statement on Form S-1 (Registration Statement No. 33-28812).\n(xxxix) Agreement and Plan of Merger, dated as of April 7, 1989, among NACCO Industries, Inc., Yale Materials Handling Corporation, Acquisition I, ESCO Corporation, Hyster Company and Newesco, is incorporated herein by reference to Exhibit 2.1 to the Company's Registration Statement on Form S-1 filed May 17, 1989 (Registration Statement Number 33-28812).\nX-6 (xl) Agreement and Plan of Merger, dated as of April 7, 1989, among NACCO Industries, Inc., Yale Materials Handling Corporation, Acquisition I, ESCO Corporation, Hyster Company and Newesco, is incorporated herein by reference to Exhibit 2.2 to the Company's Registration Statement on Form S-1 filed May 17, 1989 (Registration Statement Number 33-28812).\n(xli) Amendment No. 1 to the Credit Agreement, dated as of August 21, 1989, among Citicorp North America, Inc., the Company, Yale Materials Handling Corporation and Hyster Company is incorporated herein by reference to Exhibit 10(xli) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1989, Commission File Number 33-28812.\n(xlii) Amendment No. 2 to the Credit Agreement, dated as of November 7, 1989, among Citicorp North America, Inc., the Company, Yale Materials Handling Corporation and Hyster Company is incorporated herein by reference to Exhibit 10(xlii) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1989, Commission File Number 33-28812.\n(xliii) Amendment No. 3 to the Credit Agreement, dated as of January 31, 1990, among Citicorp North America, Inc., the Company, Yale Materials Handling Corporation and Hyster Company is incorporated herein by reference to Exhibit 10(xliii) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1989, Commission File Number 33-28812.\n(xliv) Amendment No. 4 to the Credit Agreement, dated as of June 27, 1990, among Citicorp North America, Inc., the Company, Yale Materials Handling Corporation and Hyster Company is incorporated herein by reference to Exhibit 10(xc) to NACCO's Annual Report on Form 10-K for the fiscal year ended December 31, 1990, Commission File Number 1-9172.\n(xlv) Amendment No. 5 to the Credit Agreement, dated as of March 27, 1991, among Citicorp North America, Inc., the Company, Yale Materials Handling Corporation and Hyster Company is incorporated herein by reference to Exhibit 10(xlv) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1991, Commission File Number 33-28812.\n(xlvi) Amendment No. 6 to the Credit Agreement, dated as of October 22, 1991, among Citicorp North America, Inc., the Company, Yale Materials Handling Corporation and Hyster Company is incorporated herein by reference to Exhibit 10(xlvi) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1991, Commission File Number 33-28812.\nX-7 * (xlvii) The Yale Materials Handling Corporation Unfunded Deferred Compensation Plan, dated as of December 15, 1989, is incorporated herein by reference to Exhibit 10(xliv) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1989, Commission File Number 33-28812.\n(xlviii) Amendment to the Third Amended and Restated Operating Agreement, dated as of January 31, 1990, between Hyster and PacifiCorp Credit, Inc. is incorporated herein by reference to Exhibit 10(xlvi) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1990, Commission File Number 33-28812.\n(xlix) Amendment to the Third Amended and Restated Operating Agreement, dated as of January 31, 1990, between Hyster and AT&T Commercial Finance Corporation is incorporated herein by reference to Exhibit 10(xlvii) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1990, Commission File Number 33-28812.\n(l) Amendment to the Third Amended and Restated Operating Agreement, dated as of November 7, 1991, between Hyster and AT&T Commercial Finance Corporation is incorporated herein by reference to Exhibit 10(l) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1991, Commission File Number 33-28812.\n(li) Intentionally omitted.\n(lii) Intentionally omitted.\n(liii) Intentionally omitted.\n(liv) Intentionally omitted.\n* (lv) Amendment No. 8 to The Yale Materials Handling Corporation Employee Profit Sharing and Stock Ownership Plan is incorporated herein by reference to Exhibit 10(lv) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1991, Commission File Number 33-28812.\n* (lvi) Amendment No. 9 to The Yale Materials Handling Corporation Employee Profit Sharing and Stock Ownership Plan is incorporated herein by reference to Exhibit 10(lvi) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1991, Commission File Number 33-28812.\n(lvii) Intentionally omitted.\nX-8 (lviii) Marketing Agreement, dated as of January 1, 1992, by and between Yale Materials Handling Corporation and Jungheinrich Aktiengellschaft (AG) is incorporated herein by reference to Exhibit 10(lviii) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1991, Commission File Number 33-28812.\n* (lix) Termination and Cancellation Agreement, dated as of December 16, 1992, between Yale Materials Handling Corporation and Reginald R. Eklund is incorporated herein by reference to Exhibit 10(lix) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992, Commission File Number 33-28812.\n* (lx) The Hyster-Yale Unfunded Benefit Plan dated as of February 10, 1993, is incorporated herein by reference to Exhibit 10(lx) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992, Commission File Number 33-28812.\n(lxi) Intentionally omitted.\n* (lxii) The Hyster-Yale Profit Sharing Plan, amended and restated as of November 11, 1992, is incorporated herein by reference to Exhibit 10(lxii) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992, Commission File Number 33-28812.\n* (lxiii) Instrument of Merger of Defined Contribution Plans, effective as of November 1, 1992, is incorporated herein by reference to Exhibit 10(lxiii) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992, Commission File Number 33-28812.\n* (lxiv) Instrument of Merger, Amendment and Termination of the Yale Materials Handling Corporation Profit Sharing Retirement Plan, effective as of November 1, 1992, is incorporated herein by reference to Exhibit 10(lxiv) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992, Commission File Number 33-28812.\n* (lxv) The Hyster-Yale Cash Balance Plan, as amended and restated, effective as of April 1, 1992, is incorporated herein by reference to Exhibit 10(lxv) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992, Commission File Number 33-28812.\n* (lxvi) Master Trust Agreement dated as of October 1, 1992, is incorporated herein by reference from Exhibit 10(cv) of NACCO's Annual Report on Form 10-K for the fiscal year ended December 31, 1992, Commission File Number 1-9172.\nX-9 * (lxvii) Instrument of Amendment and Merger, effective as of November 1, 1992, of the July 1, 1986 Trust Agreement between Bergen Bull and Roger Jensen and Hyster Company into the Master Trust Agreement dated October 1, 1992 by and between State Street Bank and Trust Company and NACCO, is incorporated herein by reference to Exhibit 10(lxvii) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992, Commission File Number 33-28812.\n* (lxviii) Tenth Amendment to the Yale Materials Handling Corporation Employee Profit Sharing and Stock Ownership Plan, effective April 1, 1992, is incorporated herein by reference to Exhibit 10(lxviii) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992, Commission File Number 33-28812.\n* (lxix) Eleventh Amendment to the Yale Materials Handling Corporation Profit Sharing Retirement Plan, effective as of April 1, 1992, is incorporated herein by reference to Exhibit 10(lxix) to the Company's Annual Report on Form 10-K for the fiscal ear ended December 31, 1992, Commission File Number 33-28812.\n* (lxx) Twelfth Amendment to the Yale Materials Handling Corporation Profit Sharing Retirement Plan, effective as of November 1, 1992, is incorporated herein by reference to Exhibit 10(lxx) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992, Commission File Number 33-28812.\n* (lxxi) The Yale Materials Handling Corporation Deferred Incentive Compensation Plan, dated March 1, 1984, also known as the Yale Materials Handling Corporation Short-Term Incentive Deferral 1992, is incorporated herein by reference to Exhibit 10(lxxi) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992, Commission File Number 33-28812.\n* (lxxii) Release and Settlement Agreement between the Company and J. Phillip Frazier, dated as of August 31, 1992, is incorporated herein by reference to Exhibit 10(lxxii) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992, Commission File Number 33-28812.\n* (lxxiii) Separation Terms and Conditions Agreement between the Company and Jerry R. Findley, dated July 15, 1992, is incorporated herein by reference to Exhibit (lxxiii) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992, Commission File Number 33-28812.\nX-10 (lxxiv) Amendment Number 7 to the Credit Agreement, dated as of May 19, 1992, among Citicorp North America, Inc., the Company, Yale Materials Handling Corporation and Hyster Company is incorporated herein by reference to Exhibit 10(lxxiv) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992, Commission File Number 33-28812.\n(lxxv) Amendment Number 8 to the Credit Agreement, dated as of January 14, 1993, among Citicorp North America, Inc., the Company, Yale Materials Handling Corporation and Hyster Company is incorporated herein by reference to Exhibit 10(lxxv) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992, Commission File Number 33-28812.\n(lxxvi) Amended and Restated Credit Agreement, dated July 30, 1993, among Hyster-Yale Materials Handling, Inc., Hyster Company, Yale Materials Handling Corporation, the Lender's party thereto and Citicorp North America, Inc. (individually and as Agent) is incorporated herein by reference to Exhibit 10(lxxvi) to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993, Commission File Number 33-28812.\n(lxxvii) Termination of Lease and Bill of Sale dated October 1, 1993 between Brunswick and Glynn County Development Authority and Hyster Company is attached hereto as Exhibit 10(lxxvii).\n(lxxviii) Agreement and Plan of Merger dated as of December 20, 1993 between Hyster Company, an Oregon corporation, and Hyster Company, a Delaware corporation, is attached hereto as Exhibit 10(lxxviii).\n(lxxix) Agreement and Plan of Merger dated as of December 20, 1993 between Yale Materials Handling Corporation, a Delaware corporation, Hyster Company, a Delaware corporation, and Hyster-Yale Materials Handling, Inc., a Delaware corporation, is attached hereto as Exhibit 10(lxxix).\nX-11 (lxxx) Reaffirmation Amendment and Acknowledgement Agreement dated July 30, 1993 among Hyster-Yale Materials Handling, Inc., Yale Materials Handling Corporation, Hyster Company, NACCO Industries, Inc. and Citicorp North America, Inc., individually and as Agent for the various Lenders, is attached hereto as Exhibit 10(lxxx).\n(lxxxi) Amendment No. 1 dated as of December 31, 1993 to the Amended and Restated Credit Agreement dated as of July 30, 1993 among Hyster-Yale Materials Handling, Inc., Yale Materials Handling Corporation, Hyster Company, the Lenders party thereto, and Citicorp North America, Inc.,individually and as Agent, is attached hereto as Exhibit 10(lxxxi).\n(lxxxii) Reaffirmation, Amendment and Acknowledgement Agreement dated as of December 31, 1993 among Hyster-Yale Materials Handling, Inc., Yale Materials Handling Corporation, Hyster Company and Citicorp North America, Inc., as Agent for the Lenders, is attached hereto as Exhibit 10(lxxxii).\n(lxxxiii) Reaffirmation, Amendment and Acknowledgement Agreement dated as of January 1, 1994 among Hyster-Yale Materials Handling, Inc., NACCO Materials Handling Group, Inc. and Citicorp North America, Inc., as Agent for the Lenders, is attached hereto as Exhibit 10(lxxxiii).\n* (lxxxiv) Amendment No. 1 dated as of May 13, 1993 to the Hyster-Yale Profit Sharing Plan is attached hereto as Exhibit 10(lxxxiv).\n* (lxxxv) Amendment No. 2 dated effective January 1, 1994 to the Hyster-Yale Profit Sharing Plan is attached hereto as Exhibit 10(lxxxv).\n* (lxxxvi) Amendment No. 1 dated as of May 27, 1993 to the Hyster-Yale Cash Balance Plan is attached hereto as Exhibit 10(lxxxvi).\nX-12 * (lxxxvii) Amendment No. 2 dated effective January 1, 1994 to the Hyster-Yale Cash Balance Plan is attached hereto as Exhibit 10(lxxxvii).\n* (lxxxviii) Amendment No. 1 effective as of May 12, 1993 to the Hyster-Yale Long-Term Incentive Compensation Plan is attached hereto as Exhibit 10(lxxxviii).\n* (lxxxix) Amendment No. 1 effective January 1, 1994 to the Hyster-Yale Unfunded Benefit Plan is attached hereto as Exhibit 10(lxxxix).\n* (lxxxx) Amendment No. 1 effective as of December 31, 1993 to the Hyster-Yale Annual Incentive Compensation Plan is attached hereto as Exhibit 10(lxxxx).\n* (lxxxxi) Thirteenth Amendment dated February 15, 1993 to the Yale Materials Handling Corporation Profit Sharing Retirement Plan is attached hereto as Exhibit 10(lxxxxi).\n* (lxxxxii) Master Trust Agreement for Defined Benefit Plans between NACCO Industries, Inc. and State Street Bank and Trust Company dated January 1, 1994 is incorporated herein by reference to Exhibit 10(cxxxviii) to NACCO Industries, Inc. report on Form 10-K for the year ended December 31, 1993, Commission File Number 1-9172.\n* (lxxxxiii) Amendment No. 2 effective as of December 31, 1993 to the Hyster-Yale Long-Term Incentive Compensation Plan is attached hereto as Exhibit 10(lxxxxiii).\n(21) Subsidiaries of the Registrant.\n(i) The subsidiaries of the Company are attached hereto as Exhibit 21(i).\nX-13 (24) Powers of Attorney\n(i) A manually signed copy of a power of attorney for Owsley Brown II is attached hereto as Exhibit 24(i).\n(ii) A manually signed copy of a power of attorney for John J. Dwyer is attached hereto as Exhibit 24(ii).\n(iii) A manually signed copy of a power of attorney for Robert M. Gates is attached hereto as Exhibit 24(iii).\n(iv) A manually signed copy of a power of attorney for E. Bradley Jones is attached hereto as Exhibit 24(iv).\n(v) A manually signed copy of a power of attorney for Dennis W. LaBarre is attached hereto as Exhibit 24(v).\n(vi) A manually signed copy of a power of attorney for Yoshinori Ohno is attached hereto as Exhibit 24(vi).\n(vii) A manually signed copy of a power of attorney for Alfred M. Rankin, Jr. is attached hereto as Exhibit 24(vii).\n(viii) A manually signed copy of a power of attorney for Claiborne R. Rankin is attached hereto as Exhibit 24(vii).\n(ix) A manually signed copy of a power of attorney for John C. Sawhill is attached hereto as Exhibit 24(ix).\nX-14 (x) A manually signed copy of a power of attorney for Ward Smith is attached hereto as Exhibit 24(x).\n(xi) A manually signed copy of a power of attorney for Britton T. Taplin, is attached hereto as Exhibit 24(xi).\n(xii) A manually signed copy of a power of attorney for Frank E. Taplin, Jr. is attached hereto as Exhibit 24(xii).\n(xiii) A manually signed copy of a power of attorney for Richard B. Tullis is attached hereto as Exhibit 24(xiii).\n* Management Contract or Compensation Plan or arrangement required to be filed as an exhibit pursuant to Item 14(c) of this Annual Report on Form 10-K.\nX-15","section_15":""}
{"filename":"757011_1993.txt","cik":"757011","year":"1993","section_1":"ITEM 1. BUSINESS\n(A) GENERAL DEVELOPMENT OF BUSINESS\nUnited States Gypsum Company (\"U.S. GYPSUM\") was incorporated in 1901. USG Corporation (together with its subsidiaries, called \"USG\" or the \"CORPORATION\") was incorporated in Delaware on October 22, 1984. By a vote of stockholders at a special meeting on December 19, 1984, U.S. Gypsum became a wholly owned subsidiary of the Corporation and the stockholders of U.S. Gypsum became the stockholders of the Corporation, all effective January 1, 1985.\nIn July 1988, the Corporation consummated a plan of recapitalization (the \"1988 RECAPITALIZATION\") in part in response to an unsolicited takeover attempt. Approximately $2.5 billion in new debt was incurred by the Corporation to finance the 1988 Recapitalization, pay related costs and repay certain debt existing at that time. The 1988 Recapitalization immediately changed the Corporation's capital structure to one that was highly leveraged. At the time of the 1988 Recapitalization, the Corporation projected that it would have sufficient cash flows to meet its debt service obligations in a timely manner. However, the Corporation was adversely affected by a cyclical downturn in its construction-based markets which resulted in the Corporation's inability to achieve projected operating results and service certain debt obligations in a timely manner.\nOn May 6, 1993, the Corporation completed a comprehensive restructuring of its debt (the \"RESTRUCTURING\") through implementation of a \"prepackaged\" plan of reorganization (the \"PREPACKAGED PLAN\"). The provisions of the Prepackaged Plan were agreed upon in principle with all committees and certain institutions representing debt subject to the Restructuring in January 1993. The Corporation's Registration Statement (Registration No. 33-40136), which included a Disclosure Statement and Proxy Statement - Prospectus, was declared effective by the Securities and Exchange Commission (the \"SEC\") in February 1993. The solicitation process for approvals of the Prepackaged Plan was completed on March 15, 1993. The Corporation commenced a prepackaged Chapter 11 bankruptcy case in Delaware (IN RE: USG CORPORATION, Case No. 93-300) on March 17, 1993 and received the U.S. Bankruptcy Court's confirmation of the Prepackaged Plan on April 23, 1993. None of the subsidiaries of the Corporation were part of this proceeding and there was no impact on trade creditors of the Corporation's subsidiaries. Under the Prepackaged Plan, all previously existing defaults on debt obligations were waived or cured. The Corporation accounted for the Restructuring using the principles of fresh start accounting as required by AICPA Statement of Position 90-7, \"Financial Reporting by Entities in Reorganization under the Bankruptcy Code\". Pursuant to such principles, individual assets and liabilities were adjusted to fair market value and reorganization value in excess of identifiable assets (\"EXCESS REORGANIZATION VALUE\") was established. Post-bankruptcy accounting rules require separate reporting of financial results for the restructured company and the predecessor company. As such, the Corporation's financial statements effective May 7, 1993 are presented under \"Restructured Company\" in Part II, Item 8. \"Financial Statements and Supplementary Data,\" while financial statements for periods prior to that date are presented under \"Predecessor Company.\" Due to the Restructuring and implementation of fresh start accounting, financial statements for the Restructured Company are not comparable to those for the Predecessor Company. However, in order to facilitate a meaningful comparison of the Corporation's operating performance, certain 1993 financial information is presented in the following Part I narratives on an annual basis. See Part II, Item 8. \"Financial Statements and Supplementary Data - Predecessor Company - Notes to Financial Statements - Financial Restructuring and Fresh Start Accounting\" notes for additional information on the Restructuring and implementation of fresh start accounting.\nOn January 7, 1994, the Corporation filed a Registration Statement (Registration No. 33-51845), as amended on February 16, 1994, pertaining to its planned public offering of 6,000,000 new shares of its common stock (\"COMMON STOCK\") to be sold by the Corporation (the \"OFFERING\") and 4,000,000 shares of Common Stock to be sold by Water Street Corporate Recovery Fund I, L.P. (\"WATER STREET\"). The Offering is part of a refinancing\nstrategy which also includes (i) the placement of $150 million principal amount of new senior notes due 2001 with certain institutional investors (the \"NOTE PLACEMENT\") and (ii) certain amendments (the \"CREDIT AGREEMENT AMENDMENTS\" and, together with the Offering and the Note Placement, the \"TRANSACTIONS\") to the Credit Agreement. The Credit Agreement Amendments will, among other things, increase the size of the Corporation's revolving credit facility (the \"REVOLVING CREDIT FACILITY\") by $70 million, amend existing mandatory Bank Term Loan prepayment provisions to allow the Corporation, upon the achievement of certain financial tests, to retain additional free cash flow for capital expenditures and for the purchase of its public debt. Certain Credit Agreement Amendments are contingent on the consummation of the Offering. See Part II, Item 8. \"Financial Statements and Supplementary Data - Restructured Company - Notes to Financial Statements - Subsequent Event\" note for more information on the Transactions.\n(B) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS\nThe Corporation participates in three industry segments: Gypsum Products, Interior Systems and Building Products Distribution. Selected financial information for each of the Corporation's industry segments is presented below under \"(c) Narrative Description of Business.\" See Part II, Item 8. \"Financial Statements and Supplementary Data - Notes to Financial Statements - Geographic and Industry Segments\" notes for both the Restructured Company and the Predecessor Company for additional financial information and other related disclosures about the Corporation's industry and geographic segments.\n(C) NARRATIVE DESCRIPTION OF BUSINESS\nThrough its subsidiaries, USG is a leading manufacturer of building materials in North America which produces a wide range of products for use in residential and nonresidential construction, repair and remodeling, as well as products used in certain industrial processes. U.S. Gypsum is the largest producer of gypsum wallboard in the United States and accounted for approximately one-third of total domestic gypsum wallboard sales in 1993. USG Interiors, Inc. (\"USG INTERIORS\") is a leading supplier of interior ceiling, wall and floor products used primarily in commercial applications. In 1993, USG Interiors was the largest producer of ceiling grid and the second largest producer of ceiling tile in the United States, accounting for over one-half and approximately one-third of total domestic sales of such products, respectively. L&W Supply Corporation (\"L&W SUPPLY\") is the largest distributor of wallboard and related products in the United States and in 1993 distributed approximately 22% of U.S. Gypsum's wallboard production. In addition to its United States operations, the Corporation's 76% owned subsidiary, CGC Inc. (\"CGC\"), is the largest manufacturer of gypsum products in Eastern Canada and the Corporation's USG International, Ltd. (\"USG INTERNATIONAL\") unit supplies interior systems and gypsum wallboard products in the Pacific, Europe and Latin America. In the year ended December 31, 1993, the Corporation had net sales of $1,916 million and generated EBITDA of $218 million.\nU.S. INDUSTRY OVERVIEW\nUSG's consolidated financial performance is largely influenced by changes in the three major components of the construction industry in the United States: new residential construction, new nonresidential construction, and repair and remodel activity. In recent years, structural changes in residential construction activity combined with growth in the repair and remodel component have partially mitigated the impact of the cyclical demand of the overall new construction components.\nNEW RESIDENTIAL AND NONRESIDENTIAL CONSTRUCTION\nDemand for the Corporation's products has historically been influenced primarily by new residential (single and multi-family homes) and nonresidential (offices, schools, stores, and other institutions) construction. Construction activity is directly influenced by a variety of economic variables. In the short term, the new residential segment is characterized by fluctuating activity levels as builders and buyers respond to changes in funding costs, new home prices, and the availability of new construction financing. Over the medium to long term, new residential construction activity reflects the demand generated by household formations, the home ownership rate, removals of housing stock, and the growth of personal income.\nAlthough new residential construction remains the largest single source of demand for gypsum wallboard in the United States, it has declined significantly as a percentage of gypsum wallboard demand since 1986 (a year in which total gypsum wallboard shipments were comparable to 1993 levels). Residential construction has a nominal impact on demand for Interiors Systems products. The following table sets forth demand for gypsum wallboard in the United States by end-use segment as estimated by U.S. Gypsum based on publicly available data, internal surveys and data from the Gypsum Association, an industry trade group. Management estimates that the distribution of U.S. Gypsum's sales volume to these four end-use segments is generally proportional to industry demand.\nOver recent economic cycles, demand for gypsum wallboard has been favorably impacted by a shift toward more single family housing within the new residential construction segment and an increase in the average single family home size. New single family homes, which typically require twice as much wallboard as multi-family homes, accounted for 87% of total housing starts in 1993, as compared to 65% in 1986. Additionally, the size of the average single family home in the United States increased approximately 15% to 2,095 square feet in 1992 from 1,825 square feet in 1986. Largely as a result of these factors, United States industry shipments of gypsum wallboard were a record 21.6 billion square feet in 1993, as compared to 21.3 billion in 1986, despite an approximate 28% decline in the number of housing starts from 1.8 million units in 1986 to 1.3 million units in 1993, as depicted in the following chart.\nGYPSUM WALLBOARD INDUSTRY SHIPMENTS AND TOTAL HOUSING STARTS\nSOURCES: HOUSING STARTS ARE BASED ON DATA PUBLISHED BY THE U.S. BUREAU OF THE CENSUS. GYPSUM WALLBOARD INDUSTRY SHIPMENTS ARE BASED ON DATA PUBLISHED BY THE GYPSUM ASSOCIATION.\nNonresidential construction responds less quickly to changes in interest rates than residential construction because long-term financing is normally arranged in advance of the commencement of major building projects. In the longer term, nonresidential construction activity levels are also affected by the general rate of economic growth, the rate of new job formation and population shifts. Continued weakness in the nonresidential construction segment has negatively impacted demand for the products manufactured by both U.S. Gypsum and USG Interiors. Demand for USG Interiors' products is particularly dependent on new nonresidential construction activity. Management estimates that approximately one-half of USG Interiors' 1993 sales were in the new nonresidential construction segment as compared to approximately two-thirds in 1986. In recent years, nonresidential construction demand has accounted for approximately 10% of gypsum wallboard industry demand in the United States.\nREPAIR AND REMODEL\nBased on data published by the U.S. Bureau of The Census, the size of the total residential repair and remodel market grew to $104 billion in 1992 from $91 billion in 1986 and $46 billion in 1980. Although data on nonresidential repair and remodel activity is not readily available, management believes that this segment grew significantly during the 1980s. The growth of the repair and remodel market is primarily due to the aging of housing stock, remodeling of existing buildings and tenant turnover in commercial space. The median age of housing stock was 27 years in 1990, and the National Association of Homebuilders forecasts that the median age will increase to 32 years by 2000. Management believes that the continued aging of housing stock will contribute to further growth in the repair and remodel segment. In addition, management believes that the increase in the number of commercial buildings over the last decade will provide a greater base for nonresidential repair and remodel activity in the future, as building owners or tenants replace ceiling, wall and floor systems as part of the tenant turnover process. Demand in the repair and remodel component tends to be more stable than in new construction, although it does fluctuate somewhat in response to general economic conditions.\nManagement estimates that repair and remodel demand for gypsum wallboard has increased more than 22% since 1986 and, in 1993, accounted for 36% of total demand for gypsum wallboard in the United States. Management estimates that approximately one-half of USG Interiors' 1993 sales were to the nonresidential repair and remodel segment.\nGYPSUM PRODUCTS\nBUSINESS\nThe Gypsum Products segment consists primarily of the gypsum operations of U.S. Gypsum in the United States, CGC in Canada and USG International in Mexico.\nCGC is the largest manufacturer of gypsum wallboard in Eastern Canada. Management estimates that industry sales in Eastern Canada, including the Toronto and Montreal metropolitan areas, represent approximately two-thirds of total Canadian sales volume. In 1993, CGC accounted for approximately 45% of industry sales in Eastern Canada.\nPRODUCTS\nThe Gypsum Products segment manufactures and markets building and industrial products used in a variety of applications. Gypsum panel products are used to finish the interior walls and ceilings in residential, commercial and mobile home construction. These products provide aesthetic as well as sound and fire retarding value. The majority of these products are sold under the \"SHEETROCK\" brand name. Also sold under the \"SHEETROCK\" brand name is a line of joint compounds used for finishing wallboard joints. The \"DUROCK\" line of cement board and accessories is produced to provide fire-resistant and water damage resistant assemblies for both interior and exterior construction. The Corporation also produces a variety of plaster products used to provide a custom finish for residential and commercial interiors. Like \"SHEETROCK\" brand wallboard, these products provide aesthetic and sound and fire retarding value. Plaster products are sold under the trade names of \"RED TOP,\" \"IMPERIAL\" and \"DIAMOND.\" The Corporation also produces gypsum-based products sold to agricultural and industrial customers for use in a number of applications, including soil conditioning, road repair, fireproofing and ceramics.\nFINANCIAL PERFORMANCE\nSummary financial results of the Gypsum Products segment are outlined in the table below. Such results are not adjusted for intersegment sales eliminations and corporate expenses. Operating profit in 1993 for the Gypsum Products segment is not comparable to prior years due to $51 million of non-cash amortization of Excess Reorganization Value.\nFor additional information on the Corporation's results by industry segment, including intersegment sales eliminations and corporate expenses, see Part II, Item 8. \"Financial Statements and Supplementary Data - Notes to Financial Statements - Geographic and Industry Segments\" notes for both the Restructured and Predecessor Companies.\nMANUFACTURING\nGypsum and related products are produced by the Corporation at 42 plants located throughout the United States, Eastern Canada and in central Mexico. The Corporation believes several factors contribute to its low delivered cost, including (i) the vertical integration of its key raw materials (gypsum and paper); (ii) the technical expertise provided by its extensive research and development efforts and its experienced employees and (iii) the proximity of its plants to major metropolitan areas.\nUSG's vertically integrated gypsum and paper operations provide several cost and quality advantages. Since the Corporation obtains substantially all of its gypsum requirements from its own quarries and mines, it controls the cost, quality and continuity of its supply. These factors are vital to producing wallboard of a consistently high quality at a low cost. The Corporation's geologists estimate that recoverable rock reserves are sufficient for more than 30 years of operation based on the Corporation's average annual production of crude gypsum during the past five years. Proven reserves contain approximately 243 million tons, of which approximately 69% are located in the United States and 31% in Canada. Additional reserves of approximately 153 million tons exist on three properties not in operation. The Corporation's total average annual production of crude gypsum in the United States and Canada during the past five years was 9.4 million tons.\nUSG owns and operates seven modern paper mills located across the United States for efficient distribution of paper to virtually all of its wallboard plants. These mills have sufficient capacity to satisfy virtually all of the Corporation's expected paper needs for the foreseeable future. All these mills presently are designed to produce paper utilizing 100% recycled waste paper fiber as opposed to more costly virgin pulp. Vertical integration in paper ensures a continuous supply of high quality paper that is tailored to the specific needs of USG's wallboard production processes.\nAs the leading producer of gypsum products for over 90 years, USG has developed extensive knowledge of gypsum and the processes used in making its products. Combined with USG's experienced work force, USG's technical expertise provides significant cost efficiencies in the production of existing products and development of new ones. USG maintains the largest research and development facility in the gypsum industry in Libertyville, Illinois which conducts fire and structural testing and product and process development. Research and development activities involve technology related to gypsum, cellulosic fiber and cement as the primary raw materials on which panel products and systems, such as gypsum board and cement board, are based. Related technologies are those pertaining to joint compounds and textures for wallboard finishing, specialty plaster products for both construction and industrial applications, coatings and latex polymers.\nThe number and location of the Corporation's gypsum plants enhance its cost position by minimizing the distance and the transportation costs to major metropolitan areas. Transportation costs can be a significant part of total delivered cost of gypsum products.\nMARKETING AND DISTRIBUTION\nDistribution is carried out through L&W Supply's 131 distribution centers located in 34 states, as well as mass merchandisers and other retailers, building material dealers, contractors and distributors. Sales of gypsum products are seasonal to the extent that sales are generally greater from spring through the middle of autumn than during the remaining part of the year.\nCOMPETITION\nThe Corporation competes in North America as the largest of 18 producers of gypsum wallboard products and, in 1993, accounted for approximately one-third of total gypsum wallboard sales in the United States. In 1993, U.S. Gypsum's shipments of gypsum wallboard totaled 7.3 billion square feet, the highest in the Corporation's history, compared with total domestic industry shipments of 21.6 billion square feet which is also a record level. Principal competitors in the United States are: National Gypsum Company, which emerged from Chapter 11 bankruptcy in July 1993, The Celotex Corporation, which has operated under Chapter 11 of the Bankruptcy Code since 1990, Domtar, Inc., Georgia-Pacific Corporation and several smaller, regional competitors. Major competitors of CGC in Eastern Canada include Domtar, Inc. and Westroc Industries Ltd.\nINTERIOR SYSTEMS\nBUSINESS\nThe Interior Systems segment consists of USG Interiors in the United States, USG International in Europe, the Pacific and Latin America and CGC in Canada.\nThe Corporation has increased its emphasis on the interior systems business since 1986 when Donn Inc. (\"DONN\"), a manufacturer of ceiling suspension systems (\"grid\") and other interior products, was acquired. Already second behind Armstrong World Industries, Inc. in the ceiling tile market, the acquisition of Donn positioned the Corporation as the worldwide leader in ceiling suspension systems and the only company to offer complete pre-designed, pre-engineered and fully integrated ceiling systems. With the acquisition of Donn, USG Interiors was established as a separate subsidiary to combine the operations of Donn and USG Acoustical Products Company, formerly part of U.S. Gypsum and a leading producer of mineral fiber ceiling products.\nUSG's international position was enhanced in late 1987 when it began to export ceiling tile to Europe to complement Donn's established grid business and to capitalize on the strength of its existing distribution channels. By combining ceiling tile and grid as a system for distributors and contractors, USG has used its leading position in grid to advance sales of ceiling tile. As a result, management estimates that USG's share of the European ceiling tile market has grown to approximately 8%. International sales are managed through USG International on a regional basis consisting of Europe, the Pacific and Latin America.\nCGC manufactures and markets ceiling products and wall and floor systems and accounted for over one-half of Canadian grid sales in 1993. CGC is the second largest marketer of ceiling tile in Canada, behind Armstrong World Industries, Inc., and accounted for approximately 30% of Canadian sales of such products in 1993. CGC markets ceiling tile produced by USG Interiors.\nPRODUCTS\nThe Interior Systems segment manufactures and markets ceiling grid and ceiling tile, access floor systems, wall systems and mineral wool insulation and soundproofing products. USG's integrated line of ceiling products provides qualities such as sound absorption, fire retardation, and convenient access to the space above the ceiling for electrical and mechanical systems, air distribution and maintenance. The Corporation believes its ability to provide custom-designed and specially fabricated ceiling solutions to meet specific job design installation conditions is increasingly attractive to architects, designers and building owners. USG Interiors' significant trade names include the \"ACOUSTONE\" and \"AURATONE\" brands of ceiling tile and the \"DX,\" \"FINELINE,\" \"CENTRICITEE\" and \"DONN\" brands of ceiling grid.\nUSG's wall systems provide the versatility of an open floor plan with the privacy of floor-to-ceiling partitions which are compatible with leading office equipment and furniture systems. Wall systems are designed to be installed quickly and reconfigured easily. In addition, USG manufactures a line of access floor systems that permit easy access to wires and cables for repairs, modifications, and upgrading of electrical and communication networks as well as convenient movement of furniture and equipment.\nFINANCIAL PERFORMANCE\nSummary financial results for the Interior Systems segment are outlined in the table below. Such results are not adjusted for intersegment sales eliminations and corporate expenses. Operating profit\/(loss) in 1993 for the Interior Systems segment is not comparable to prior years due to $60 million of non-cash amortization of Excess Reorganization Value.\nFor additional information on the Corporation's results by industry segment, including intersegment sales eliminations and corporate expenses, see Part II, Item 8. \"Financial Statements and Supplementary Data - Notes to Financial Statements - Geographic and Industry Segments\" notes for both the Restructured and Predecessor Companies.\nMANUFACTURING\nInterior Systems products are manufactured at 16 plants throughout North America, including 5 ceiling tile plants and 4 ceiling grid plants. The remaining plants produce other interior products and raw materials for ceiling tile and grid. Principal raw materials used in the production of Interior Systems products include mineral fiber, steel, aluminum extrusions and high-pressure laminates. Certain of these raw materials are produced internally, while others are obtained from various outside suppliers. Shortages of raw materials used in this segment are not expected.\nUSG Interiors maintains its own research and development facility in Avon, Ohio, which provides product design, engineering and testing services in addition to manufacturing development, primarily in metal forming, with tool and machine design and construction services. Additional research and development is carried out at the Corporation's research and development center in Libertyville, Illinois and at its \"Solutions Center\" -sm- in Chicago.\nMARKETING AND DISTRIBUTION\nInteriors Systems products are sold primarily in markets related to the new construction and renovation of commercial buildings as well as the retail market for small commercial contractors. Marketing and distribution to large commercial users is conducted through a network of distributors and installation contractors as well as through L&W Supply and is oriented toward providing integrated interior systems at competitive price levels. The Corporation emphasizes educational and promotional materials designed to influence decision makers who play a significant role in choosing material suppliers, such as interior designers, contractors and facility managers. To this end, USG Interiors maintains the \"Solutions Center\"-sm- located adjacent to Chicago's Merchandise Mart which is used for product displays, educational seminars on products and new product design and development. In recent\nyears, the Corporation has increased its emphasis on the retail market and as a result now sells its products to seven of the ten largest building products retailers in the United States.\nCOMPETITION\nThe Corporation estimates that it is the world's largest manufacturer of ceiling suspension systems with approximately 40% of worldwide sales of such products. USG's most significant competitor is Chicago Metallic Corporation, which participates in the U.S. and European markets. Other competitors in ceiling grid include W.A.V.E. (a joint venture of Armstrong World Industries, Inc. and National Rolling Mills). The Corporation estimates that it accounts for approximately one-third of sales of acoustical ceiling tile to the U.S. market. Principal global competitors include Armstrong World Industries, Inc. (the largest manufacturer), Odenwald of West Germany and the Celotex Corporation.\nBUILDING PRODUCTS DISTRIBUTION\nBUSINESS\nThe Building Products Distribution segment consists of the operations of the Corporation's L&W Supply subsidiary. L&W Supply is the largest distributor of gypsum wallboard and related building products for residential and nonresidential construction in the United States. L&W Supply distributes approximately 9% of all gypsum wallboard in the United States (including approximately 22% of U.S. Gypsum's wallboard production). Wallboard accounts for approximately 47% of L&W Supply's total net sales.\nAlthough L&W Supply specializes in distribution of gypsum wallboard, joint compound and other products manufactured primarily by U.S. Gypsum, it also distributes USG Interiors' products such as acoustical ceiling tile and ceiling grid and products of other manufacturers, including drywall metal, insulation, roofing products and accessories.\nL&W Supply was founded in 1971 by U.S. Gypsum to address what management perceived as a growing demand in the construction industry for a specialized delivery service for construction materials, especially gypsum wallboard. U.S. Gypsum management believed the construction industry could benefit from a service-oriented organization that would deliver less than truckload quantities of construction materials to a job site and place them in the areas where the work was being done, thereby reducing or eliminating the need for handling by contractors. To perform this service, U.S. Gypsum established a number of distribution centers that could stock construction materials and be able to deliver relatively large quantities with short lead times.\nL&W Supply has grown significantly over the past 23 years and now has 131 distribution centers located in 34 states.\nFINANCIAL PERFORMANCE\nSummary financial results for the Building Products Distribution segment are outlined in the table below. Such results are not adjusted for corporate expenses and there are no intersegment sales eliminations for this segment. Operating profit in 1993 for the Building Products Distribution segment is not comparable to prior years due to $2 million of non-cash amortization of Excess Reorganization Value.\nFor additional information on the Corporation's results by industry segment, including intersegment sales eliminations and corporate expenses, see Part II, Item 8. \"Financial Statements and Supplementary Data - Notes to Financial Statements - Geographic and Industry Segments\" notes for both the Restructured and Predecessor Companies.\nDISTRIBUTION CENTERS\nL&W Supply leases approximately 80% of its facilities from third parties, which management believes provides it with the flexibility to enter and exit fluctuating market areas. Usually, initial leases are from three to five years with a five-year renewal option. Facilities are located in virtually every major metropolitan area in the United States.\nA typical L&W Supply facility has approximately 12,000 square feet of warehouse space, 1,500 square feet of office space and is located on 1.5 paved acres of land in prime industrial areas with good interstate highway access. Each center is equipped with at least one flatbed truck, a boom truck and, in some cases, a towable forklift. Boom trucks are standard flatbed trucks with telescoping hydraulic booms installed on the front of the truckbed. By using either the telescoping boom or the towable forklift, L&W Supply employees are able to place wallboard, joint compound and other materials in various locations on a job site.\nCOMPETITION\nL&W Supply's closest competitor, Gypsum Management Supply, is an independent distributor with approximately 70 locations in the southern, central and western United States. There are several regional competitors, such as Gypsum Drywall Management Association in the southern United States and Strober Building Supply in the northeastern United States. L&W Supply's many local competitors include lumber dealers, hardware stores, mass merchandisers, home improvement centers, acoustical tile distributors and manufacturers.\nSales are seasonal to the extent that sales are generally greater from the middle of spring through the middle of autumn than during the remaining part of the year.\n(D) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES\nSee Part II, Item 8. \"Financial Statements and Supplementary Data - Notes to Financial Statements - Geographic and Industry Segments\" notes for both the Restructured and Predecessor Companies.\nITEM 2.","section_1A":"","section_1B":"","section_2":"ITEM 2. PROPERTIES\nThe Corporation's plants, mines, transport ships, quarries and other facilities are located in North America, Europe, Australia, New Zealand, and Malaysia. Many of these facilities are operating at or near full capacity. All facilities and equipment are in good operating condition and, in management's judgment, sufficient expenditures have been made annually to maintain them. The locations of the production properties of the Corporation's subsidiaries, grouped by industry segment, are as follows (plants are owned unless otherwise indicated):\nGYPSUM PRODUCTS\nGYPSUM BOARD AND OTHER GYPSUM PRODUCTS\nGypsum plants utilize locally mined or quarried gypsum rock unless noted as follows: * These plants use rock from quarry operations at Alabaster (Tawas City), Michigan; Empire, Nevada; Plaster City, California; Little Narrows and\/or Windsor, Nova Scotia; or Harbour Head, Jamaica, an outside source. ** These plants purchase synthetic gypsum from outside sources. *** This plant purchases all gypsum rock from outside sources.\nJOINT COMPOUND\nSurface preparation and joint treatment products are produced in plants located at Chamblee, Georgia; Dallas, Texas; East Chicago, Indiana; Fort Dodge, Iowa; Gypsum, Ohio; Jacksonville, Florida; Port Reading, New Jersey (leased); Sigurd, Utah; Tacoma, Washington (leased); Torrance, California; Hagersville, Ontario, Canada; Montreal, Quebec, Canada; Puebla, Mexico; and Selangor, Malaysia (leased).\nPAPER\nPaper for gypsum board is manufactured at Clark, New Jersey; Galena Park, Texas; Gypsum, Ohio; Jacksonville, Florida; North Kansas City, Missouri; Oakfield, New York; and South Gate, California.\nOCEAN VESSELS\nGypsum Transportation Limited, a wholly owned subsidiary of the Corporation, headquartered in Bermuda, owns and operates a fleet of three self-unloading ocean vessels. Under contract of affreightment, these vessels haul\ngypsum rock from Nova Scotia to the East Coast and Gulf port plants of U.S. Gypsum. Excess ship time, when available, is offered for charter on the open market.\nMISCELLANEOUS\nA mica-processing plant is located at Spruce Pine, North Carolina; perlite ore is produced at Grants, New Mexico. Metal lath, plaster and drywall accessories and light gauge steel framing products are manufactured at Puebla, Mexico. Metal safety grating products are manufactured at Burlington, Ontario, Canada (leased); and Delta, British Columbia, Canada (leased). Various other products are manufactured at La Mirada, California (adhesives); and New Orleans, Louisiana (lime products).\nINTERIOR SYSTEMS\nCEILING TILE\nAcoustical ceiling tile and panels are manufactured at Cloquet, Minnesota; Greenville, Mississippi; Gypsum, Ohio; Walworth, Wisconsin; San Juan Ixhautepec, Mexico; and Aubange, Belgium.\nCEILING GRID\nCeiling grid products are manufactured at Cartersville, Georgia; Stockton, California; Westlake, Ohio; Auckland, New Zealand (leased); Dreux, France; Oakville, Ontario, Canada; Peterlee, England (leased); Selangor, Malaysia (leased); and Viersen, Germany. A coil coater and slitter plant used in the production of ceiling grid is also located in Westlake, Ohio.\nACCESS FLOOR SYSTEMS\nAccess floor systems products are manufactured at Red Lion, Pennsylvania; Dreux, France; Peterlee, England (leased); and Selangor, Malaysia (leased).\nMINERAL WOOL\nMineral wool products are manufactured at Birmingham, Alabama; Gypsum, Ohio; Red Wing, Minnesota; Tacoma, Washington; Wabash, Indiana; Walworth, Wisconsin; and Weston, Ontario, Canada.\nWALL SYSTEMS\nWall system products are manufactured at Medina, Ohio (leased).\nITEM 3.","section_3":"ITEM 3. LEGAL PROCEEDINGS\nSee Part II, Item 8. \"Financial Statements and Supplementary Data - Notes to Financial Statements - Litigation\" for information on legal proceedings.\nITEM 4.","section_4":"ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS\nThere were no matters submitted to a vote of security holders during the fourth quarter of 1993.\nPART II\nITEM 5.","section_5":"ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS\n(a) See Item 8. \"Financial Statements and Supplementary Data - Selected Quarterly Financial Data\" for information with respect to the principal market on which the Corporation's Common Stock is traded and the range of high and low closing market prices.\n(b) As of January 31, 1994, there were 14,702 stockholders of record of the Corporation's Common Stock.\n(c) There have been no dividends declared since the third quarter of 1988. The Credit Agreement and certain other debt instruments prohibit the payment of cash dividends for the foreseeable future.\nITEM 6.","section_6":"ITEM 6. SELECTED FINANCIAL DATA\nUSG CORPORATION COMPARATIVE FIVE-YEAR SUMMARY (A) (UNAUDITED) (DOLLARS IN MILLIONS,EXCEPT PER SHARE DATA)\nITEM 7.","section_7":"ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION\nRESULTS OF OPERATIONS\nOn May 6, 1993, the Corporation completed the Restructuring. Due to the Restructuring and implementation of fresh start accounting, the Corporation's financial statements effective May 7, 1993 are not comparable to financial statements for periods prior to that date. See Item 8.","section_7A":"","section_8":"ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA\nALL OTHER SCHEDULES HAVE BEEN OMITTED BECAUSE THEY ARE NOT APPLICABLE, ARE NOT REQUIRED, OR THE INFORMATION IS INCLUDED IN THE FINANCIAL STATEMENTS OR NOTES THERETO.\nUSG CORPORATION (RESTRUCTURED COMPANY) CONSOLIDATED STATEMENT OF EARNINGS (DOLLARS IN MILLIONS EXCEPT PER SHARE DATA)\nTHE NOTES TO FINANCIAL STATEMENTS ON PAGES 29 THROUGH 52 ARE AN INTEGRAL PART OF THIS STATEMENT.\nUSG CORPORATION (RESTRUCTURED COMPANY) CONSOLIDATED BALANCE SHEET (DOLLARS IN MILLIONS)\nTHE NOTES TO FINANCIAL STATEMENTS ON PAGES 29 THROUGH 52 ARE AN INTEGRAL PART OF THIS STATEMENT.\nUSG CORPORATION (RESTRUCTURED COMPANY) CONSOLIDATED STATEMENT OF CASH FLOWS (DOLLARS IN MILLIONS)\nTHE NOTES TO FINANCIAL STATEMENTS ON PAGER 29 THROUGH 52 ARE AN INTEGRAL PART OF THIS STATEMENT.\nUSG CORPORATION (RESTRUCTURED COMPANY) NOTES TO FINANCIAL STATEMENTS (TERMS IN INITIAL CAPITAL LETTERS ARE DEFINED ELSEWHERE IN THIS FORM 10-K)\nPRINCIPLES OF CONSOLIDATION\nThe consolidated financial statements include the accounts of the Corporation and its subsidiaries after elimination of intercompany accounts and transactions. Revenue is recognized upon the shipment of products. Net currency translation gains or losses on foreign subsidiaries are included in deferred currency translation, a component of stockholders' equity.\nExcess Reorganization Value, which was recorded as a result of the implementation of fresh start accounting, is being amortized through April 1998. The Corporation continues to evaluate whether events and circumstances have occurred that indicate the remaining estimated useful life of Excess Reorganization Value may warrant revision or that the remaining balances may not be recoverable. The Corporation uses an estimate of its undiscounted cash flows over the remaining life of the Excess Reorganization Value in measuring whether the asset is recoverable. See \"Financial Restructuring\" note below for more information on the implementation of fresh start accounting.\nFor purposes of the Consolidated Balance Sheet and Consolidated Statement of Cash Flows, all highly liquid investments with a maturity of three months or less at the time of purchase are considered to be cash equivalents.\nFINANCIAL RESTRUCTURING\nOn May 6, 1993, the Corporation completed a comprehensive restructuring of its debt (the \"RESTRUCTURING\") through implementation of a \"prepackaged\" plan of reorganization under federal bankruptcy laws (the \"PREPACKAGED PLAN\") which was confirmed on April 23, 1993 by the Bankruptcy Court. In the Restructuring, the Corporation (i) converted approximately $1.4 billion of subordinated debt and accrued interest into Common Stock and warrants to purchase Common Stock, (ii) converted approximately $340 million of its bank obligations into 10 1\/4% Senior Notes due 2002 (\"SENIOR 2002 NOTES\") and (iii) extended the maturities of its remaining Bank Debt and certain public debt. Upon consummation of the Restructuring, all previously existing defaults upon senior securities were waived or cured. None of the subsidiaries of the Corporation were part of this proceeding and there was no impact on trade creditors of the Corporation's subsidiaries. The Corporation accounted for the Restructuring using the principles of fresh start accounting as required by AICPA Statement of Position 90-7, \"Financial Reporting by Entities in Reorganization under the Bankruptcy Code\" (\"SOP 90-7\"). Pursuant to such principles, individual assets and liabilities were adjusted to fair market value as of May 6, 1993. See \"Predecessor Company - Notes to Financial Statements - Financial Restructuring and Fresh Start Accounting\" notes for information on the terms and implementation of the Prepackaged Plan and fresh start accounting.\nPRO FORMA CONSOLIDATED STATEMENT OF EARNINGS\nThe following unaudited Pro Forma Condensed Consolidated Statement of Earnings for the year ended December 31, 1993 has been prepared giving effect to the consummation of the Restructuring, including the implementation of fresh start accounting, as if the consummation had occurred on January 1, 1993. Due to the Restructuring and implementation of fresh start accounting, financial statements effective May 7, 1993 for the restructured company are not comparable to financial statements prior to that date for the predecessor company. However, for presentation of this statement, total results for 1993 are shown under the caption \"Total Before Adjustments.\" The adjustments set forth under the caption \"Pro Forma Adjustments\" reflect the implementation of the Prepackaged Plan and the adoption of fresh start accounting as if they had occurred on January 1, 1993.\nUSG CORPORATION PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF EARNINGS YEAR ENDED DECEMBER 31, 1993 (UNAUDITED) (DOLLARS IN MILLIONS)\nEXTRAORDINARY LOSS\nIn December 1993, the Corporation recorded an extraordinary loss of $21 million, net of related income tax benefit of $11 million, reflecting the write- off of the reorganization discount associated with debt issues expected to be prepaid, redeemed or purchased in 1994 in connection with the Corporation's planned public offering of Common Stock and issuance of new senior notes. See \"Subsequent Event\" note for more information on the planned public offering of stock and issuance of new senior notes.\nRESEARCH AND DEVELOPMENT\nResearch and development expenditures are charged to earnings as incurred and amounted to $10 million in the period of May 7 through December 31, 1993.\nTAXES ON INCOME AND DEFERRED INCOME TAXES\nLoss before taxes on income and extraordinary loss consisted of the following (dollars in millions):\nTaxes on income consisted of the following (dollars in millions):\nThe difference between the statutory U.S. Federal income tax\/(benefit) rate and the Corporation's effective income tax rate is summarized as follows:\nTemporary differences and carryforwards which give rise to current and long-term deferred tax (assets)\/liabilities as of December 31, 1993 were as follows (dollars in millions):\nA valuation allowance has been provided for deferred tax assets relating to pension and retiree medical benefits due to the long-term nature of their realization. Because of the uncertainty regarding the application of the Internal Revenue Code (the \"CODE\") to the Corporation's NOL Carryforwards as a result of the Prepackaged Plan, no deferred tax asset is recorded. Under fresh start accounting rules, any benefit realized from utilizing predecessor company NOL Carryforwards will not impact net earnings.\nThe Corporation has NOL Carryforwards of $90 million remaining from 1992 after using approximately $23 million to offset U.S. taxable income in 1993 and a reduction due to cancellation of indebtedness from the Prepackaged Plan. These NOL Carryforwards may be used to offset U.S. taxable income through 2007. The Code will limit the Corporation's annual use of its NOL Carryforwards to the lesser of its taxable income or approximately $30 million plus any unused limit from prior years. Furthermore, due to the uncertainty regarding the application of the Code to the exchange of stock for debt, the Corporation's NOL Carryforwards could be further reduced or eliminated. The Corporation has a $4 million minimum tax credit which may be used to offset U.S. regular tax liability in future years.\nThe Corporation does not provide for U.S. Federal income taxes on the portion of undistributed earnings of foreign subsidiaries which are intended to be permanently reinvested. The cumulative amount of such undistributed earnings totaled approximately $79 million as of December 31, 1993. Any future repatriation of undistributed earnings would not, in the opinion of management, result in significant additional taxes.\nINVENTORIES\nIn accordance with the implementation of fresh start accounting, inventories were stated at fair market value as of May 6, 1993. Most of the Corporation's domestic inventories are valued under the last-in, first-out (\"LIFO\") method. As of December 31, 1993, the LIFO values of these inventories were $103 million and would have been the same if they were valued under the first-in, first-out (\"FIFO\") and average production cost methods. The remaining inventories are stated at the lower of cost or market, under the FIFO or average production cost methods.\nInventories include material, labor and applicable factory overhead costs. Inventory classifications were as follows (dollars in millions):\nThe LIFO value of U.S. domestic inventories under fresh start accounting exceeded that computed for U.S. Federal income tax purposes by $25 million as of December 31, 1993.\nPROPERTY, PLANT AND EQUIPMENT\nProperty, plant and equipment were stated at fair market value as of May 6, 1993 in accordance with fresh start accounting. Provisions for depreciation are determined principally on a straight-line basis over the expected average useful lives of composite asset groups. Depletion is computed on a basis calculated to spread the cost of gypsum and other applicable resources over the estimated quantities of material recoverable. Interest during construction is capitalized on major property additions. Property, plant and equipment classifications were as follows (dollars in millions):\nLEASES\nThe Corporation leases certain of its offices, buildings, machinery and equipment, and autos under noncancellable operating leases. These leases have various terms and renewal options. Lease expense amounted\nto $22 million in the period of May 7 through December 31, 1993. Future minimum lease payments, by year and in the aggregate, under operating leases with initial or remaining noncancellable terms in excess of one year as of December 31, 1993 were as follows (dollars in millions):\nINDEBTEDNESS\nTotal debt, including currently maturing debt, consisted of the following (dollars in millions):\nAs of December 31, 1993, the Corporation and its subsidiaries had $1,531 million total principal amount of debt (before unamortized reorganization discount) on a consolidated basis. Of such total debt, $105 million represented direct borrowings by the subsidiaries, including $38 million of industrial revenue bonds, $36 million of 7 7\/8% sinking fund debentures issued by U.S. Gypsum in 1974 and subsequently assumed by the Corporation on a joint and several basis in 1985, $27 million of debt (primarily project financing) incurred by the Corporation's foreign subsidiaries other than CGC, $2 million of working capital borrowings by CGC, and $2 million of other long-term borrowings by CGC.\nThe Credit Agreement includes a cash sweep mechanism under which excess cash as of the end of any year, calculated in accordance with the Credit Agreement, must be used to pay debt within the following year. As of December 31, 1993, such excess cash amounted to $158 million. Accordingly, $158 million of long term debt was reclassified to currently maturing long- term debt.\nOn August 10, 1993, the Corporation issued $138 million of Senior 2002 Notes in exchange for $92 million of Bank Term Loans due 1994 through 1996 and $46 million of Capitalized Interest Notes due 2000. The Corporation did not receive any cash proceeds from the issuance of these securities. In connection with this transaction, the Credit Agreement was modified, providing for the following changes: (i) scheduled Bank Term Loan amortization payments of $95 million due in 1994, 1995 and 1996 were eliminated ($3 million was added to the final maturity of the Bank Term Loan due in 2000); (ii) USG Interiors paid $9 million of Capitalized Interest Notes due in 1998; and (iii) the cash sweep mechanism was modified to permit the use of up to $165 million of cash otherwise subject to mandatory Bank Term Loan prepayments in 1994, 1995 and 1996 for payment or purchase of senior debt with maturities prior to January 1, 1999, or for the prepayment of Bank Term Loans, at the discretion of the Corporation.\nThe Bank Term Loan and most other senior debt are secured by a pledge of all of the shares of the Corporation's major domestic subsidiaries and 65% of the shares of certain of its foreign subsidiaries including CGC, pursuant to a collateral trust arrangement controlled primarily by holders of the Bank Term Loan. The rights of the Corporation and its creditors to the assets of any subsidiary upon the latter's liquidation or reorganization will be subject to the prior claims of such subsidiary's creditors, except to the extent that the Corporation may itself be a creditor with enforceable claims against such subsidiary. The average rate of interest on the Bank Term Loan was 5.3% in the period of May 7 through December 31, 1993.\nThe \"Other Secured Debt\" category shown in the table above primarily includes short-term and long-term borrowings from several foreign banks by USG International used principally to finance construction of the Aubange, Belgium ceiling tile plant. This debt is secured by a lien on the assets of the Aubange plant and has restrictive covenants that restrict, among other things, the payment of dividends. Foreign borrowings made by the Corporation's international operations are generally allowed, within certain limits, under provisions of the Credit Agreement.\nIn general, the Credit Agreement restricts, among other things, the incurrence of additional indebtedness, mergers, asset dispositions, investments, prepayment of other debt, dealings with affiliates, capital expenditures, payment of dividends and lease commitments. The Credit Agreement, as amended in accordance with the Prepackaged Plan, also requires the Corporation, beginning January 1, 1995, to satisfy certain financial covenants.\nThe fair market value of debt as of December 31, 1993 was $1,481 million, based on indicative bond prices as of that date, excluding other secured debt, primarily representing financing for construction of the Aubange plant, which was not practicable to estimate.\nAggregate, presently scheduled maturities of long-term debt, after the assumed effect of prepayments pursuant to the aforementioned cash sweep mechanism and excluding other amounts classified as current liabilities, are $9 million, $20 million, $148 million and $153 million in the years 1995 through 1998, respectively.\nPENSION PLANS\nThe Corporation and most of its subsidiaries have defined benefit retirement plans for all eligible employees. Benefits of the plans are generally based on years of service and employees' compensation during the last years of employment. The Corporation's contributions are made in accordance with independent actuarial reports which, for most plans, required minimal funding in the period of May 7 through December 31, 1993. Net pension expense included the following components (dollars in millions):\nThe pension plan assets, which consist primarily of publicly traded common stocks and debt securities, had an estimated fair market value that was lower than the projected benefit obligation as of December 31, 1993. The following table presents a reconciliation of the total assets of the pension plans to the projected benefit obligation (dollars in millions):\nThe projected benefit obligation in excess of assets consisted of an unrecognized net loss due to changes in assumptions and differences between actual and estimated experience.\nThe expected long-term rate of return on plan assets was 9% for the period of May 7 through December 31, 1993. The assumed weighted average discount rate used in determining the accumulated benefit obligation was 7% and the rate of increases in projected future compensation levels was 5%.\nPOSTRETIREMENT BENEFITS\nThe Corporation maintains plans that provide retiree health care and life insurance benefits for all eligible employees. Employees generally become eligible for the retiree benefit plans when they meet minimum retirement age and service requirements. The cost of providing most of these benefits is shared with retirees.\nThe following table summarizes the components of net periodic postretirement benefit cost for the period of May 7 through December 31, 1993 (dollars in millions):\nThe status of the Corporation's accrued postretirement benefit cost as of December 31, 1993 was as follows (dollars in millions):\nThe assumed health care cost trend rate used in measuring the accumulated postretirement benefit obligation was 11% as of December 31, 1993 with a gradually declining rate to 5% by the year 2000 and remaining at that level thereafter. A one-percentage-point increase in the assumed health care cost trend rate for each year would increase the accumulated postretirement benefit obligation as of December 31, 1993 by $22 million and increase the net periodic postretirement benefit cost for the period of May 7 through December 31, 1993 by $2 million. The assumed discount rate used in determining the accumulated postretirement benefit obligation was 7%.\nCOMMITMENTS AND CONTINGENCIES\nThe Corporation employs a variety of off-balance sheet financial instruments to reduce its exposure to fluctuations in interest rates, foreign currency exchange rates and energy costs. These instruments consists primarily of interest rate caps and swaps, foreign currency forward exchange contracts and energy price swaps and option agreements. The Corporation designates interest rate swaps as hedges of LIBOR-based bank debt, and accrues as interest expense the differential to be paid or received under the agreements as rates change over the life of the\ncontracts. Gains and losses arising from foreign currency forward contracts offset gains and losses resulting from the underlying hedged transactions. Upon settlement of energy price contracts, the resulting gain or loss is included in related manufacturing cost. The Corporation continually monitors its positions with, and the credit quality of, the financial institutions which are counterparties to its off-balance sheet financial instruments and does not anticipate non-performance by the counterparties.\nAs of December 31, 1993, the Corporation had approximately $500 million (notional amount) of interest rate contracts outstanding, extending up to three years, and approximately $50 million (combined notional amount) of foreign currency and energy price contracts outstanding, extending one year or less. The difference in the value of all of the aforementioned contracts and the December 31, 1993 market value was not material.\nMANAGEMENT PERFORMANCE PLAN\nOn May 6, 1993, all outstanding stock options were cancelled without consideration and certain shares of restricted and deferred stock were cashed-out pursuant to \"change in control\" provisions contained in the Management Performance Plan (the \"PERFORMANCE PLAN\"). As of December 31, 1993, restricted stock and awards for deferred stock yet to be issued (totaling 25,259 shares) remained outstanding as a consequence of certain waivers of the change in control event by senior members of management.\nAs permitted by the Prepackaged Plan, 2,788,350 common shares were reserved for future issuance in conjunction with stock options, all of which remained in reserve as of December 31,1993. Options for 1,673,000 common shares were granted on June 1, 1993, leaving an additional 1,115,350 common shares available for future grants. The options granted on June 1, 1993 become exercisable in the years 1994 through 1996 at an exercise price of $10.3125 per share.\nPREFERRED SHARE PURCHASE RIGHTS\nOn June 6, 1988, the Corporation adopted a Preferred Share Purchase Rights Plan and pursuant to its provisions declared, subject to the consummation of the 1988 Recapitalization, a distribution of one right (the \"RIGHTS\") upon each new share of Common Stock issued in the 1988 Recapitalization. The 1988 Recapitalization became effective July 13, 1988 and the distribution occurred immediately thereafter. The Rights contain provisions which are intended to protect stockholders in the event of an unsolicited attempt to acquire the Corporation.\nThe Preferred Share Purchase Rights Plan was terminated in connection with the implementation of the Prepackaged Plan. On May 6, 1993, a new rights plan (the \"RIGHTS AGREEMENT\") was adopted with provisions substantially similar to the old rights agreement except that: (i) the purchase price of the Rights was reset; (ii) the expiration of the Rights was extended; (iii) a so-called \"flip-in\" feature and exchange feature were added; (iv) certain exemptions were added permitting certain acquisition and the continued holding of common shares by Water Street and its affiliates in excess of the otherwise specified thresholds; (v) the redemption price was reduced; and (vi) the amendment provision was liberalized.\nUnder the terms of the Rights Agreement, and subject to certain exceptions for Water Street and its affiliates,\ngenerally the Rights become exercisable (i) 10 days following the date of a public announcement that a person or group of affiliated or associated persons (an \"ACQUIRING PERSON\"), other than the Corporation, any employee benefit plan of the Corporation, any entity holding Common Stock for or pursuant to the terms of any such plan, has beneficial ownership (as defined in the Rights Agreement) of 20% or more of the then outstanding Common Stock, (ii) 10 days following the date of a public announcement that a person or group of affiliated or associated persons (an \"ADVERSE PERSON\") has beneficial ownership of 10% or more of the then outstanding Common Stock, the acquisition of which has been determined by the Board to present an actual threat of an acquisition of the Corporation that would not be in the best interest of the Corporation's stockholders or (iii) 10 days following the date of commencement of, or public announcement of, a tender offer or exchange offer for 30% or more of the Common Stock. When exercisable, each of the Rights entitles the registered holder to purchase one-hundredth of a share of a junior participating preferred stock, series C, $1.00 par value per share, at a price of $35.00 per one-hundredth of a preferred share, subject to adjustments.\nIn the event that the Corporation is the surviving corporation in a merger or other business combination involving an Acquiring Person or an Adverse Person and the Common Stock remains outstanding and unchanged or in the event that an Acquiring Person or an Adverse Person engages in one of a number of self-dealing transactions specified in the Rights Agreement, proper provision will be made so that each holder of a Right, other than Rights that are or were beneficially owned (as defined in the Rights Agreement) by the Acquiring Person or the Adverse Person, as the case may be, on the earliest of the Distribution Date, the date the Acquiring Person acquires 20% or more of the outstanding Common Stock or the date the Adverse Person becomes such (which will thereafter be void), will thereafter have the right to receive upon exercise thereof that number of shares of Common Stock having a market value at the time of such transaction of two times the exercise price of the Right. In addition, under certain circumstances the Board has the option of exchanging all or part of the Rights (excluding void Rights) for Common Stock in the manner described in the Rights Agreement. The Rights Agreement also contains a so-called \"flip-in\" feature which provides that if any person or group of affiliated or associated persons becomes an Adverse Person, then the provisions of the preceding two sentences shall apply.\nWARRANTS\nOn May 6, 1993, a total of 2,602,566 warrants, each to purchase a share of Common Stock at an exercise price of $16.14 per share (the \"WARRANTS\"), were issued to holders of the Old Junior Subordinated Debentures in addition to the shares of Common Stock issued to such holders, all as provided by the Prepackaged Plan. Upon issuance, each of the Warrants entitled the holder to purchase one share of Common Stock at a purchase price of $16.14 per share, subject to adjustment under certain events.\nThe Warrants are exercisable, subject to applicable securities laws, at any time prior to May 6, 1998. Each share of Common Stock issued upon exercise of a Warrant prior to the Distribution Date (as defined in the Rights Agreement) and prior to the redemption or expiration of the Rights will be accompanied by an attached Right issued under the terms and subject to the conditions of the Rights Agreement as it may then be in effect. As of December 31, 1993, 2,601,619 Warrants were outstanding.\nSTOCKHOLDERS' EQUITY\nChanges in stockholders' equity are summarized as follows (dollars in millions):\nAs of December 31, 1993, there were 27,876 shares of $0.10 par value Common Stock held in treasury, which were acquired through the forfeiture of restricted stock.\nLITIGATION\nOne of the Corporation's subsidiaries, U.S. Gypsum, is among numerous defendants in lawsuits arising out of the manufacture and sale of asbestos- containing building materials. U.S. Gypsum sold certain asbestos-containing products beginning in the 1930's; in most cases the products were discontinued or asbestos was removed from the product formula by 1972, and no asbestos- containing products were sold after 1977. Some of these lawsuits seek to recover compensatory and in many cases punitive damages for costs associated with maintenance or removal and replacement of products containing asbestos (the \"PROPERTY DAMAGE CASES\"). Others of these suits (the \"PERSONAL INJURY CASES\") seek to recover compensatory and in many cases punitive damages for personal injury allegedly resulting from exposure to asbestos and asbestos-containing products. It is anticipated that additional personal injury and property damage cases containing similar allegations will be filed.\nAs discussed below, U.S. Gypsum has substantial personal injury and property damage insurance for the years involved in the asbestos litigation. Prior to 1985, when an asbestos exclusion was added to U.S. Gypsum's policies, U.S. Gypsum purchased comprehensive general liability insurance policies covering personal injury and property damage in an aggregate face amount of approximately $850 million. Insurers that issued approximately $106 million of these policies are presently insolvent. After deducting insolvencies and exhaustion of policies, approximately\n$625 million of insurance remains potentially available. Because U.S. Gypsum's insurance carriers initially responded to its claims for defense and indemnification with various theories denying or limiting coverage and the applicability of their policies, U.S. Gypsum filed a declaratory judgment action against them in the Circuit Court of Cook County, Illinois on December 29, 1983. (U.S. GYPSUM CO. V. ADMIRAL INSURANCE CO., ET AL.) (the \"COVERAGE ACTION\"). U.S. Gypsum alleges in the Coverage Action that the carriers are obligated to provide indemnification for settlements and judgments and, in some cases, defense costs incurred by U.S. Gypsum in property damage and personal injury claims in which it is a defendant. The current defendants are ten insurance carriers that provided comprehensive general liability insurance coverage to U.S. Gypsum between the 1940's and 1984. As discussed below, several carriers have settled all or a portion of the claims in the Coverage Action.\nU.S. Gypsum's aggregate expenditures for all asbestos-related matters, including property damage, personal injury, insurance coverage litigation and related expenses, exceeded aggregate insurance payments by $10.9 million in 1991, $25.8 million in 1992, and $8.2 million in 1993.\nPROPERTY DAMAGE CASES\nThe Property Damage Cases have been brought against U.S. Gypsum by a variety of plaintiffs, including school districts, state and local governments, colleges and universities, hospitals and private property owners. U.S. Gypsum is one of many defendants in four cases that have been certified as class actions and others that request such certification. One class action suit is brought on behalf of owners and operators of all elementary and secondary schools in the United States that contain or contained friable asbestos- containing material. (IN RE ASBESTOS SCHOOL LITIGATION, U.S.D.C., E.D. Pa.) Approximately 1,350 school districts opted out of the class, some of which have filed or may file separate lawsuits or are participants in a state court class action involving approximately 333 school districts in Michigan. (BOARD OF EDUCATION OF THE CITY OF DETROIT, ET AL. V. THE CELOTEX CORP., ET AL., Circuit Court for Wayne County, Mich.) On April 10, 1992, a state court in Philadelphia certified a class consisting of all owners of buildings leased to the federal government. (PRINCE GEORGE CENTER, INC. V. U.S. GYPSUM CO., ET AL., Court of Common Pleas, Philadelphia, Pa.) On September 4, 1992, a Federal district court in South Carolina conditionally certified a class comprised of all colleges and universities in the United States, which certification is presently limited to the resolution of certain allegedly \"common\" liability issues. (CENTRAL WESLEYAN COLLEGE V. W.R. GRACE & CO., ET AL., U.S.D.C. S.C.). On December 23, 1992, a case was filed in state court in South Carolina purporting to be a \"voluntary\" class action on behalf of owners of all buildings containing certain types of asbestos-containing products manufactured by the nine named defendants, including U.S. Gypsum, other than buildings owned by the federal or state governments, single family residences, or buildings at issue in the four above-described class actions (ANDERSON COUNTY HOSPITAL V. W.R. GRACE & CO., ET AL., Court of Common Pleas, Hampton Co., S.C. (the \"ANDERSON CASE\"). On January 14, 1993, the plaintiff filed an amended complaint that added a number of claims and defendants, including USG Corporation. The amended complaint alleges, among other things, that the guarantees executed by U.S. Gypsum in connection with the 1988 Recapitalization, as well as subsequent distributions of cash from U.S. Gypsum to the Corporation, rendered U.S. Gypsum insolvent and constitute a fraudulent conveyance. The suit seeks to set aside the guarantees and recover the value of the cash flow \"diverted\" from U.S. Gypsum to the Corporation in an amount to be determined. This case has not been certified as a class action and no other threshold issues, including whether the South Carolina Courts have personal jurisdiction over the Corporation, have been decided. The damages claimed against U.S. Gypsum in the class action cases are unspecified. U.S. Gypsum has denied the substantive allegations of each of the Property Damage Cases and intends\nto defend them vigorously except when advantageous settlements are possible.\nAs of December 31, 1993, 61 Property Damage Cases were pending against U.S. Gypsum; however, the number of buildings involved is greater than the number of cases because many of these cases, including the class actions referred to above, involve multiple buildings. In addition, approximately 42 property damage claims have been threatened against U.S. Gypsum.\nIn total, U.S. Gypsum has settled property damage claims of approximately 191 plaintiffs involved in approximately 75 cases. Twenty-five cases have been tried to verdict, 16 of which were won by U.S. Gypsum and 6 lost; two other cases, one won at the trial level and one lost, were settled during appeals. Another case that was lost at the trial court level has been reversed on appeal and a new trial ordered. Appeals are pending in 5 of the tried cases. In the cases lost, compensatory damage awards against U.S. Gypsum have totaled $11.5 million. Punitive damages totalling $5.5 million were entered against U.S. Gypsum in four trials. Two of the punitive damage awards, totalling $1.45 million, were paid after appeals were exhausted; a third was settled after the verdict was reversed on appeal. The remaining punitive damage award is on appeal.\nIn 1991, 13 new Property Damage Cases were filed against U.S. Gypsum, 11 were dismissed before trial, 8 were settled, 2 were closed following trial or appeal, and 100 were pending at year-end. U.S. Gypsum expended $22.2 million for the defense and resolution of Property Damage Cases and received insurance payments of $13.8 million in 1991. During 1992, 7 new Property Damage Cases were filed against U.S. Gypsum, 10 were dismissed before trial, 18 were settled, 3 were closed following trial or appeal, and 76 were pending at year-end. U.S. Gypsum expended $34.9 million for the defense and resolution of Property Damage Cases and received insurance payments of $10.2 million in 1992. In 1993, 5 new Property Damage Cases were filed against U.S. Gypsum, 7 were dismissed before trial, 11 were settled, 1 was closed following trial or appeal, 2 were consolidated into 1, and 61 were pending at year-end. U.S. Gypsum expended $13.9 million for the defense and resolution of Property Damage Cases and received insurance payments of $7.6 million in 1993.\nIn the Property Damage Cases litigated to date, a defendant's liability for compensatory damages, if any, has been limited to damages associated with the presence and quantity of asbestos-containing products manufactured by that defendant which are identified in the buildings at issue, although plaintiffs in some cases have argued that principles of joint and several liability should apply. Because of the unique factors inherent in each of the Property Damage Cases, including the lack of reliable information as to product identification and the amount of damages claimed against U.S. Gypsum in many cases, including the class actions described above, management is unable to make a reasonable estimate of the cost of disposing of pending Property Damage Cases.\nPERSONAL INJURY CASES\nU.S. Gypsum was among numerous defendants in asbestos personal injury suits and administrative claims involving approximately 59,000 claimants pending as of December 31, 1993. All asbestos bodily injury claims pending in the federal courts, including approximately one-third of the Personal Injury Cases pending against U.S. Gypsum, have been consolidated in the United States District Court for the Eastern District of Pennsylvania.\nU.S. Gypsum is a member, together with 19 other former producers of asbestos-containing products, of the\nCenter for Claims Resolution (the \"CENTER\"). The Center has assumed the handling, including the defense and settlement, of all Personal Injury Cases pending against U.S. Gypsum and the other members of the Center. Each member of the Center is assessed a portion of the liability and defense costs of the Center for the Personal Injury Cases handled by the Center, according to predetermined allocation formulas. Five of U.S. Gypsum's insurance carriers that in 1985 signed an Agreement Concerning Asbestos-Related Claims (the \"WELLINGTON AGREEMENT\") are supporting insurers (the \"SUPPORTING INSURERS\") of the Center. The Supporting Insurers are obligated to provide coverage for the defense and indemnity costs of the Center's members pursuant to the coverage provisions in the Wellington Agreement. Claims for punitive damages are defended but not paid by the Center; if punitive damages are recovered, insurance coverage may be available under the Wellington Agreement depending on the terms of particular policies and applicable state law. Punitive damages have not been awarded against U.S. Gypsum in any of the Personal Injury Cases. Virtually all of U.S. Gypsum's personal injury liability and defense costs are paid by those of its insurance carriers that are Supporting Insurers. The Supporting Insurers provided approximately $350 million of the total coverage referred to above, of which approximately $262 million remains unexhausted.\nOn January 15, 1993, U.S. Gypsum and the other members of the Center were named as defendants in a class action filed in the U.S. District Court for the Eastern District of Pennsylvania (GEORGINE ET AL. V. AMCHEM PRODUCTS INC., ET AL., Case No. 93-CV-0215) (hereinafter \"GEORGINE,\" formerly known as \"CARLOUGH\"). The complaint generally defines the class of plaintiffs as all persons who have been occupationally exposed to asbestos-containing products manufactured by the defendants and who had not filed an asbestos personal injury suit as of the date of the filing of the class action. Simultaneously with the filing of the class action, the parties filed a settlement agreement in which the named plaintiffs, proposed class counsel, and the defendants agreed to settle and compromise the claims of the proposed class. The settlement, if approved by the court, will implement for all future Personal Injury Cases, except as noted below, an administrative compensation system to replace judicial claims against the defendants, and will provide fair and adequate compensation to future claimants who can demonstrate exposure to asbestos-containing products manufactured by the defendants and the presence of an asbestos-related disease. Class members will be given the opportunity to \"opt out,\" or elect to be excluded from the settlement, although the defendants reserve the right to withdraw from the settlement if the number of opt outs is, in their sole judgment, excessive. In addition, in each year a limited number of claimants will have certain rights to prosecute their claims for compensatory (but not punitive) damages in court in the event they reject the compensation offered by the administrative processing of their claim.\nThe Center members, including U.S. Gypsum, have instituted proceedings against those of their insurance carriers that had not consented to support the settlement, seeking a declaratory judgment that the settlement is reasonable and, therefore, that the carriers are obligated to fund their portion of it. Consummation of the settlement is contingent upon, among other things, court approval of the settlement and a favorable ruling in the declaratory judgment proceedings against the non-consenting insurers. It is anticipated that appeals will follow the district court's ruling on the fairness and reasonableness of the settlement.\nEach of the defendants has committed to fund a defined portion of the settlement, up to a stated maximum amount, over the initial ten year period of the agreement (which is automatically extended unless terminated by the defendants). Taking into account the provisions of the settlement agreement concerning the maximum number of claims that must be processed in each year and the total amount to be made available to the claimants, the Center estimates that U.S. Gypsum will be obligated to fund a maximum of approximately $125 million of the class action settlement, exclusive of expenses, with a maximum payment of less than $18 million in any single year; of the total\namount of U.S. Gypsum's obligation, all but approximately $7 million is expected to be paid by U.S. Gypsum's insurance carriers.\nDuring 1991, approximately 13,100 Personal Injury Cases were filed against U.S. Gypsum and approximately 6,300 were settled or dismissed. U.S. Gypsum incurred expenses of $15.1 million in 1991 with respect to Personal Injury Cases of which $15.0 million was paid by insurance. During 1992, approximately 20,100 Personal Injury Cases were filed against U.S. Gypsum and approximately 10,600 were settled or dismissed. U.S. Gypsum incurred expenses of $21.6 million in 1992 with respect to Personal Injury Cases of which $21.5 million was paid by insurance. During 1993, approximately 26,900 Personal Injury Cases were filed against U.S. Gypsum and approximately 22,900 were settled or dismissed. U.S. Gypsum incurred expenses of $34.9 million in 1993 with respect to Personal Injury Cases of which $34.0 million was paid by insurance. As of December 31, 1993, 1992, and 1991, approximately 59,000, 54,000, and 43,000 Personal Injury Cases were outstanding against U.S. Gypsum, respectively.\nU.S. Gypsum's average settlement cost for Personal Injury Cases over the past three years has been approximately $1,600 per claim, exclusive of defense costs. Management anticipates that its average settlement cost is likely to increase due to such factors as the possible insolvency of co- defendants, although this increase may be offset to some extent by other factors, including the possibility for block settlements of large numbers of cases and the apparent increase in the percentage of asbestos personal injury cases that appear to have been brought by individuals with little or no physical impairment. Through the Center, U.S. Gypsum has reached settlements on approximately 26,700 pending Personal Injury Cases for an amount estimated at approximately $32 million. These settlements will be consummated and the cases closed over a three year period. In management's opinion, based primarily upon U.S. Gypsum's experience in the Personal Injury Cases disposed of to date and taking into consideration a number of uncertainties, it is probable that all asbestos-related Personal Injury Cases pending against U.S. Gypsum as of December 31, 1993, can be disposed of for a total amount, including both indemnity costs and legal fees and expenses, estimated to be between $100 million and $120 million (of which all but $2 million or $5 million, respectively, is expected to be paid by insurance). The estimated cost of resolving pending claims takes into account, among other factors, (i) an increase in the number of pending claims; (ii) the settlements of certain large blocks of claims for higher per-case averages than have historically been paid; (iii) the committed but unconsummated settlements described above; and (iv) a small increase in U.S. Gypsum's historical settlement average.\nAssuming that the Georgine class action settlement referred to above is approved substantially in its current form, management estimates, based on assumptions supplied by the Center, U.S. Gypsum's maximum total exposure in Personal Injury Cases during the next ten years (the initial term of the agreement), including liability for pending claims and claims resolved as part of the class action settlement, as well as defense costs and other expenses, at approximately $262 million, of which approximately $250 million is expected to be paid by insurance. U.S. Gypsum's additional exposure for claims filed by persons who have opted out of Georgine would depend on the number of such claims that are filed, which cannot presently be determined.\nCOVERAGE ACTION\nAs indicated above, all of U.S. Gypsum's carriers initially denied coverage for the Property Damage Cases and the Personal Injury Cases, and U.S. Gypsum initiated the Coverage Action to establish its right to such coverage.\nU.S. Gypsum has voluntarily dismissed the Supporting Insurers referred to above from the personal injury portion of the Coverage Action because they are committed to providing personal injury coverage in accordance with the Wellington Agreement. U.S. Gypsum's claims against the remaining carriers for coverage for the Personal Injury Cases have been stayed since 1984.\nOn January 7, 1991, the trial court in the Coverage Action ruled on the applicability of U.S. Gypsum's insurance policies to settlements and one adverse judgment in eight Property Damage Cases. The court ruled that the eight cases were generally covered, and imposed coverage obligations on particular policy years based upon the dates when the presence of asbestos-containing material was \"first discovered\" by the plaintiff in each case. The court awarded reimbursement of approximately $6.2 million spent by U.S. Gypsum to resolve the eight cases. U.S. Gypsum has appealed the court's ruling with respect to the policy years available to cover particular claims, and the carriers have appealed most other aspects of the court's ruling. The appeal process is likely to take up to a year or more from the date of this report.\nU.S. Gypsum's experience in the Property Damage Cases suggests that \"first discovery\" dates in the eight cases referred to above (1978 through 1985) are likely to be typical of most pending cases. U.S. Gypsum's total insurance coverage for the years 1978 through 1984 is approximately $350 million (after subtracting insolvencies and discounts given to settling carriers). However, some pending cases, as well as some cases filed in the future, may be found to have first discovery dates later than August 1, 1984, after which U.S. Gypsum's insurance policies did not provide coverage for asbestos-related claims. In addition, as described below, the first layer excess carrier for the years 1980 through 1984 is insolvent and U.S. Gypsum may be required to pay amounts otherwise covered by those and other insolvent policies. Accordingly, if the court's ruling is affirmed, U.S. Gypsum will likely be required to bear a portion of the cost of the property damage litigation.\nEight carriers, including two of the Supporting Insurers, have settled U.S. Gypsum's claims for both property damage and personal injury coverage and have been dismissed from the Coverage Action entirely. Four of these carriers have agreed to pay all or a substantial portion of their policy limits to U.S. Gypsum beginning in 1991 and continuing over the next four years. Three other excess carriers, including the two settling Supporting Insurers, have agreed to provide coverage for the Property Damage Cases and the Personal Injury Cases subject to certain limitations and conditions, when and if underlying primary and excess coverage is exhausted. It cannot presently be determined when such coverage might be reached. Taking into account the above settlements, including participation of certain of the settling carriers in the Wellington Agreement, and consumption through December 31, 1993, carriers providing a total of approximately $90 million of unexhausted insurance have agreed, subject to the terms of the various settlement agreements, to cover both Personal Injury Cases and Property Damage Cases. Carriers providing an additional $250 million of coverage that was unexhausted as of December 31, 1993 have agreed to cover Personal Injury Cases under the Wellington Agreement, but continue to contest coverage for Property Damage Cases and remain defendants in the Coverage Action. U.S. Gypsum will continue to seek negotiated resolutions with its carriers in order to minimize the expense and delays of litigation.\nInsolvency proceedings have been instituted against four of U.S. Gypsum's insurance carriers. Midland Insurance Company, declared insolvent in 1986, provided excess insurance ($4 million excess of $1 million excess of $500,000 primary in each policy year) from February 15, 1975 to February 15, 1978; Transit Casualty Company, declared insolvent in 1985, provided excess insurance ($15 million excess of $1 million primary in each policy year) from August 1, 1980 to December 31, 1985; Integrity Insurance Company, declared insolvent in 1986, provided excess insurance ($10 million quota share of $25 million excess of $90 million) from August 1, 1983 to July 31,\n1984; and American Mutual Insurance Company, declared insolvent in 1989, provided the primary layer of insurance ($500,000 per year) from February 1, 1963 to April 15, 1971. It is possible that U.S. Gypsum will be required to pay a presently indeterminable portion of the costs that would otherwise have been covered by these policies. In addition, portions of various policies issued by Lloyd's and other London market companies between 1966 and 1979 have also become insolvent; under the Wellington Agreement, U.S. Gypsum must pay these amounts, which total approximately $12 million.\nIt is not possible to predict the number of additional lawsuits alleging asbestos-related claims that may be filed against U.S. Gypsum. The number of Personal Injury Cases pending against U.S. Gypsum has increased in each of the last several years. In addition, many Property Damage Cases are still at an early stage and the potential liability therefrom is consequently uncertain. In view of the limited insurance funding currently available for the Property Damage Cases resulting from the continued resistance by a number of U.S. Gypsum's insurers to providing coverage, the effect of the asbestos litigation on the Corporation will depend upon a variety of factors, including the damages sought in the Property Damage Cases that reach trial prior to the completion of the Coverage Action, U.S. Gypsum's ability to successfully defend or settle such cases, and the resolution of the Coverage Action. As a result, management is unable to determine whether an adverse outcome in the asbestos litigation will have a material adverse effect on the results of operations or the consolidated financial position of the Corporation.\nACCOUNTING CHANGE\nEffective January 1, 1994, the Corporation will adopt the requirements of Financial Accounting Standards Board Interpretation No. 39. In accordance with Interpretation No. 39, U.S. Gypsum will record an accrual for its liabilities for asbestos-related matters which are deemed probable and can be reasonably estimated, and will separately record an asset equal to the amount of such liabilities that is expected to be paid by uncontested insurance. Due to management's inability to reasonably estimate U.S. Gypsum's liability for Property Damage Cases and (until the implementation of Georgine is deemed probable) future Personal Injury Cases, it is presently anticipated that the liabilities and assets to be recorded in 1994 will relate only to pending Personal Injury Cases. This implementation of Interpretation No. 39 is not expected to have a material impact on reported earnings or net assets.\nENVIRONMENTAL LITIGATION\nThe Corporation and certain of its subsidiaries have been notified by state and federal environmental protection agencies of possible involvement as one of numerous \"potentially responsible parties\" in a number of so-called \"Superfund\" sites in the United States. In substantially all of these sites, the involvement of the Corporation or its Subsidiaries is expected to be minimal. The Corporation believes that appropriate reserves have been established for its potential liability in connection with all Superfund sites but is continuing to review its accruals as additional information becomes available. Such reserves take into account all known or estimable costs associated with these sites including site investigations and feasibility costs, site cleanup and remediation, legal costs, and fines and penalties, if any. In addition, environmental costs connected with site cleanups on USG-owned property are also covered by reserves established in accordance with the foregoing. The Corporation believes that neither these matters nor any other known governmental proceeding regarding environmental matters will have a material adverse effect upon its earnings or consolidated financial position.\nSUBSEQUENT EVENT\nOn January 7, 1994, the Corporation filed a Registration Statement (Registration No. 33-51845), as amended on February 16, 1994, pertaining to its planned public offering (the \"OFFERING\") of 6,000,000 new shares of Common Stock to be sold by the Corporation and 4,000,000 shares of Common Stock to be sold by Water Street Corporate Recovery Fund I, L.P. The Offering is part of a refinancing strategy which also includes (i) the placement (the \"NOTE PLACEMENT\") of $150 million principal amount of Senior 2001 Notes with certain institutional investors and (ii) certain amendments to the Corporation's Credit Agreement (the \"CREDIT AGREEMENT AMENDMENTS\" and, together with the Offering and Note Placement, the \"TRANSACTIONS\"). The Credit Agreement Amendments will, among other things, increase the size of the Corporation's revolving credit facility by $70 million and amend existing mandatory Bank Term Loan prepayment provisions to allow the Corporation, upon the achievement of certain financial tests, to retain additional free cash flow for capital expenditures and the purchase of its public debt. Certain Credit Agreement Amendments are contingent on the consummation of the Offering.\nThe Corporation expects to use a portion of the net proceeds from the Offering and the Note Placement, together with approximately $158 million of existing cash generated from operations to pay $140 million of Bank Term Loans and to redeem or purchase approximately $260 million aggregate principal amount of certain other senior debt issues. The remainder of the net proceeds, approximately $92 million, will be available for general corporate purposes, including capital expenditures for cost reduction, capacity improvement and future growth opportunities. The following is an unaudited Pro Forma Condensed Consolidated Balance Sheet as of December 31, 1993 illustrating the effect of the Transactions as if they had occurred on that date:\nGEOGRAPHIC AND INDUSTRY SEGMENTS\nTransactions between geographic areas are accounted for on an \"arm's-length\" basis. No single customer accounted for 4% or more of consolidated net sales. Export sales to foreign unaffiliated customers represent less than 10% of consolidated net sales.\nIntrasegment and intersegment eliminations largely reflect intercompany sales from U.S. Gypsum to L&W Supply. Segment operating profit\/(loss) includes all costs and expenses directly related to the segment involved and an allocation of expenses which benefit more than one segment. Operating profit\/(loss) in the period of May 7 through December 31, 1993 reflects the non-cash amortization of Excess Reorganization Value which had the impact of reducing the operating profit of domestic Gypsum Products by $51 million, domestic Interior Systems by $60 million and Building Products Distribution by $2 million.\nTo assist the reader in evaluating the profitability of each geographic and industry segment, EBITDA is shown separately in the following tables. EBITDA represents earnings before interest, taxes, depreciation, depletion and amortization. For the period of May 7 through December 31, 1993, the Corporation also added back non-cash postretirement charges and an extraordinary loss. The Corporation believes EBITDA is helpful in understanding cash flow generated from operations that is available for taxes, debt service and capital expenditures. In addition, EBITDA facilitates the monitoring of covenants related to certain long-term debt and other agreements entered into in conjunction with the Restructuring. EBITDA should not be considered by investors as an alternative to net earnings as an indicator of the Corporation's operating performance or to cash flows as a measure of its overall liquidity.\nSUBSIDIARY DEBT GUARANTEES\nThe Corporation issued $340 million aggregate principal amount of Senior 2002 Notes in May 1993 and an additional $138 million aggregate principal amount of similar notes in August 1993. Each of U.S. Gypsum, USG Industries, Inc., USG Interiors, USG Foreign Investments, Ltd., L&W Supply, Westbank Planting Company, USG Interiors International, Inc., American Metals Corporation and La Mirada Products Co., Inc. (together, the \"COMBINED GUARANTORS\") guaranteed, in the manner described below, both the obligations of the Corporation under the Credit Agreement and the Senior 2002 Notes. The Combined Guarantors are jointly and severally liable under the Subsidiary Guarantees. Holders of the Bank Debt have the right to (i) determine whether, when and to what extent the guarantees will be enforced (provided that each guarantee payment will be applied to the Bank Term Loan, Revolving Credit Facility, Capitalized Interest Notes and Senior 2002 Notes pro rata based on the respective amounts owed thereon) and (ii) amend or eliminate the guarantees. The guarantees will terminate when the Bank Term Loan, the Revolving Credit Facility and the Capitalized Interest Notes are retired regardless of whether any Senior 2002 Notes remain unpaid. The liability of each of the Combined Guarantors on its guarantee is limited to the greater of (i) 95% of the lowest amount, calculated as of July 13, 1988, sufficient to render the guarantor insolvent, leave the guarantor with unreasonably small capital or leave the guarantor unable to pay its debts as they become due (each as defined under applicable law) and (ii) the same amount, calculated as of the date any demand for payment under such guarantee is made, in each case plus collection costs. The guarantees are senior obligations of the applicable guarantor and rank PARI PASSU with all unsubordinated obligations of the guarantor.\nThere are 43 Non-Guarantors (the \"COMBINED NON-GUARANTORS\"), substantially all of which are subsidiaries of Guarantors. The Combined Non-Guarantors primarily include CGC, Gypsum Transportation Limited, USG Canadian Mining Ltd. and the Corporation's Mexican, European and Pacific subsidiaries. The long-term debt of the Combined Non-Guarantors of $24 million as of December 31, 1993 has restrictive covenants that restrict, among other things, the payment of dividends.\nThe following condensed consolidating information presents:\n(i) Condensed financial statements as of December 31, 1993 and for the period of May 7 through December 31, 1993 of: (a) the Corporation on a parent company only basis (the \"PARENT COMPANY,\" which was the only entity of the Corporation included in the bankruptcy proceeding); (b) the Combined Guarantors; (c) the Combined Non-Guarantors; and (d) the Corporation on a consolidated basis. Due to the Restructuring and implementation of fresh start accounting, the financial statements for the restructured company (periods after May 6, 1993) are not comparable to those of the predecessor\ncompany. Except for the following condensed financial statements, separate financial information with respect to the Combined Guarantors is omitted as such separate financial information is not deemed material to investors.\n(ii) The Parent Company and Combined Guarantors shown with their investments in their subsidiaries accounted for on the equity method.\n(iii) Elimination entries necessary to consolidate the Parent Company and its subsidiaries.\nUSG CORPORATION (RESTRUCTURED COMPANY) CONDENSED CONSOLIDATING STATEMENT OF EARNINGS MAY 7 THROUGH DECEMBER 31, 1993 (DOLLARS IN MILLIONS)\nUSG CORPORATION (RESTRUCTURED COMPANY) CONDENSED CONSOLIDATING BALANCE SHEET AS OF DECEMBER 31, 1993 (DOLLARS IN MILLIONS)\nUSG CORPORATION (RESTRUCTURED COMPANY) CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS MAY 7 THROUGH DECEMBER 31, 1993 (DOLLARS IN MILLIONS)\nUSG CORPORATION MANAGEMENT REPORT\nManagement is responsible for the preparation and integrity of the financial statements and related notes included herein. These statements have been prepared in accordance with generally accepted accounting principles and, of necessity, include some amounts that are based on management's best estimates and judgments.\nThe Corporation's accounting systems include internal controls designed to provide reasonable assurance of the reliability of its financial records and the proper safeguarding and use of its assets. Such controls are based on established policies and procedures, are implemented by trained personnel, and are monitored through an internal audit program. The Corporation's policies and procedures prescribe that the Corporation and its subsidiaries are to maintain ethical standards and that its business practices are to be consistent with those standards.\nThe Audit Committee of the Board, consisting solely of outside Directors of the Corporation, maintains an ongoing appraisal, on behalf of the stockholders, of the effectiveness of the independent auditors and management with respect to the preparation of financial statements, the adequacy of internal controls and the Corporation's accounting policies.\nREPORT OF INDEPENDENT PUBLIC ACCOUNTANTS\nTo the Stockholders and Board of Directors of USG Corporation:\nWe have audited the accompanying consolidated balance sheet of USG Corporation (Restructured Company), a Delaware corporation, and subsidiaries as of December 31, 1993 and the related consolidated statements of earnings and cash flows for the period of May 7 through December 31, 1993. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audit.\nWe conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.\nAs discussed in Notes to Financial Statements - \"Financial Restructuring\" note, on May 6, 1993, the Corporation completed a comprehensive financial restructuring through the implementation of a prepackaged plan of reorganization under Chapter 11 of the United States Bankruptcy Code and applied fresh start accounting. As such, results of operations through May 6, 1993 (Predecessor Company) are not comparable with results of operations subsequent to that date.\nIn our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of USG Corporation and subsidiaries as of December 31, 1993, and the results of their operations and their cash flows for the period of May 7 through December 31, 1993, in conformity with generally accepted accounting principles.\nAs discussed in Notes to Financial Statements - \"Litigation\" note, in view of the limited insurance funding currently available for property damage cases resulting from the continued resistance by a number of U.S. Gypsum's insurers to providing coverage, the effect of the asbestos litigation on the Corporation will depend upon a variety of factors, including the damages sought in property damage cases that reach trial prior to the completion of the coverage action, U.S. Gypsum's ability to successfully defend or settle such cases, and the resolution of the coverage action. As a result, management is unable to determine whether an adverse outcome in the asbestos litigation will have a material adverse effect on the consolidated results of operations or the consolidated financial position of the Corporation.\nARTHUR ANDERSEN & CO. Chicago, Illinois January 31, 1994\nUSG CORPORATION (RESTRUCTURED COMPANY) SCHEDULE V PROPERTY, PLANT AND EQUIPMENT (DOLLARS IN MILLIONS)\nIn accordance with fresh start accounting, the Corporation adjusted its property, plant and equipment accounts as of May 6, 1993 to fair market value.\nDetailed information regarding additions and deductions is omitted as neither total additions nor total deductions during the period shown above exceeded 10% of the balance at the end of the period. Total additions were $29 million, total deductions were $8 million and other adjustments increased property, plant and equipment by $2 million in the period of May 7 through December 31, 1993.\nTotal deductions include the effect of foreign currency translation which increased total deductions by $5 million in the period of May 7 through December 31, 1993.\nUpon retirement or other disposition of property, the applicable cost and accumulated depreciation and depletion are removed from the accounts. Any gains and losses are included in earnings.\nUSG CORPORATION (RESTRUCTURED COMPANY) SCHEDULE VI ACCUMULATED DEPRECIATION AND DEPLETION OF PROPERTY, PLANT AND EQUIPMENT (DOLLARS IN MILLIONS)\nIn accordance with fresh start accounting, the Corporation adjusted its property, plant and equipment accounts as of May 6, 1993 to fair market value. Consequently, there were no reserves for depreciation and depletion as of May 7, 1993.\nDetailed information regarding additions and deductions is omitted as neither total additions nor total deductions of property, plant and equipment (see Schedule V) during the period shown above exceeded 10% of the balance of property, plant and equipment at the end of the period. Total provisions for depreciation and depletion were $34 million, total deductions were $1 million and other adjustments increased reserves by $3 million in the period of May 7 through December 31, 1993.\nUpon retirement or other disposition of property, the applicable cost and accumulated depreciation and depletion are removed from the accounts. Any gains and losses are included in earnings.\nUSG CORPORATION (Restructured Company) SCHEDULE VIII VALUATION AND QUALIFYING ACCOUNTS (Dollars in millions)\nUSG CORPORATION (Restructured Company) SCHEDULE IX SHORT-TERM BORROWINGS (Dollars in millions)\nUSG CORPORATION (Restructured Company) SCHEDULE X SUPPLEMENTAL STATEMENT OF EARNINGS INFORMATION (Dollars in millions)\nThe following amounts were charged to costs and expenses:\nMaintenance and repairs are recorded as costs or expenses when incurred.\nTaxes (excluding payroll and income taxes), rents, royalties and advertising costs are not shown above, as individually they do not exceed one percent of net sales in the period shown.\nUSG CORPORATION (Restructured Company) SUPPLEMENTAL NOTE ON FINANCIAL INFORMATION FOR UNITED STATES GYPSUM COMPANY (A SUBSIDIARY OF USG CORPORATION)\nUSG Corporation, a holding company, owns several operating subsidiaries, including U.S. Gypsum. On January 1, 1985, all of the issued and outstanding shares of stock of U.S. Gypsum were converted into shares of USG Corporation and the holding company became a joint and several obligor for certain debentures originally issued by U.S. Gypsum. As of December 31, 1993, debentures totaling $36 million were recorded on the holding company's books of account. Financial results for U.S. Gypsum are presented below in accordance with disclosure requirements of the SEC (dollars in millions):\nSUMMARY STATEMENT OF EARNINGS\nSUMMARY BALANCE SHEET\nREPORT OF INDEPENDENT PUBLIC ACCOUNTANTS WITH RESPECT TO SUPPLEMENTAL NOTE AND FINANCIAL STATEMENT SCHEDULES\nWe have audited in accordance with generally accepted auditing standards, the consolidated financial statements of USG Corporation (Restructured Company) included in this Form 10-K, and have issued our report thereon dated January 31, 1994. Our report on the consolidated financial statements includes an explanatory paragraph with respect to the asbestos litigation as discussed in Notes to Financial Statements - \"Litigation\" note. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplemental note and financial statement schedules on pages 54 through 59 are the responsibility of the Corporation's management and are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic financial statements. The supplemental note and financial statement schedules have been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.\nARTHUR ANDERSEN & CO. Chicago, Illinois January 31, 1994\nUSG CORPORATION (PREDECESSOR COMPANY) CONSOLIDATED STATEMENT OF EARNINGS (DOLLARS IN MILLIONS)\nUSG CORPORATION (PREDECESSOR COMPANY) CONSOLIDATED BALANCE SHEET (DOLLARS IN MILLIONS)\nUSG CORPORATION (PREDECESSOR COMPANY) CONSOLIDATED STATEMENT OF CASH FLOWS (DOLLARS IN MILLIONS)\nUSG CORPORATION (PREDECESSOR COMPANY) NOTES TO FINANCIAL STATEMENTS (TERMS IN INITIAL CAPITAL LETTERS ARE DEFINED ELSEWHERE IN THIS FORM 10-K)\nPRINCIPLES OF CONSOLIDATION\nThe consolidated financial statements include the accounts of the Corporation and its subsidiaries after elimination of intercompany accounts and transactions. Revenue is recognized upon the shipment of products. Net currency translation gains or losses on foreign subsidiaries are included in deferred currency translation, a component of stockholders' equity, except for the years ended December 31, 1992 and 1991, for which Mexican currency translation losses were charged to earnings. Purchased goodwill, which was written off in accordance with the implementation of fresh start accounting, was previously being amortized over a period of 40 years. See \"Fresh Start Accounting\" note below for more information on the implementation of fresh start accounting.\nFor purposes of the Consolidated Balance Sheet and Consolidated Statement of Cash Flows, all highly liquid investments with a maturity of three months or less at the time of purchase are considered to be cash equivalents.\nFINANCIAL RESTRUCTURING\nOn May 6, 1993, the Corporation completed a comprehensive restructuring of its debt (the \"RESTRUCTURING\") through implementation of a \"prepackaged\" plan of reorganization (the \"PREPACKAGED PLAN\"). The provisions of the Prepackaged Plan were agreed upon in principle with all committees and certain institutions representing debt subject to the Restructuring in January 1993. The Corporation's Registration Statement (Registration No. 33-40136), which included a Disclosure Statement and Proxy Statement - Prospectus, was declared effective by the SEC in February 1993. The solicitation process for approvals of the Prepackaged Plan was completed on March 15, 1993. The Corporation commenced a prepackaged Chapter 11 bankruptcy case in Delaware (IN RE: USG CORPORATION, Case No. 93-300) on March 17, 1993 and received the U.S. Bankruptcy Court's confirmation of the Prepackaged Plan on April 23, 1993. None of the subsidiaries of the Corporation were part of this proceeding and there was no impact on trade creditors of the Corporation's subsidiaries. Under the Prepackaged Plan, all previously existing defaults were waived or cured.\nThe following summary of the major provisions of the Prepackaged Plan is qualified in its entirety by reference to the more detailed information appearing in the Disclosure Statement.\n(a) The Prepackaged Plan provided for a one-for-50 reverse stock split (the \"REVERSE STOCK SPLIT\") which was effected immediately prior to the distribution of new common stock (the \"NEW COMMON STOCK\") pursuant to the Prepackaged Plan. On May 6, 1993, after giving effect to the Reverse Stock Split, the following distributions were made to holders of the following securities of the Corporation:\n(i) For each $1,000 principal amount of 13 1\/4% senior subordinated debentures due 2000 (the \"OLD SENIOR SUBORDINATED DEBENTURES\") (excluding accrued interest thereon, which was cancelled), the holder received 50.81 shares of New Common Stock. As of May 6, 1993, the total principal amount of the Old Senior Subordinated Debentures was $600 million.\n(ii) For each $1,000 principal amount of 16% junior subordinated debentures due 2008 (the \"OLD JUNIOR SUBORDINATED DEBENTURES\") (excluding accrued interest thereon, which was cancelled), the holder received 11.61 shares of New Common Stock and 5.42 Warrants. As of May 6, 1993, the total principal amount of Old Junior Subordinated Debentures was $533 million, of which $480 million was\nsubject to the distribution.\nStockholders existing prior to the distribution of New Common Stock retained their shares of Common Stock, subject to the Reverse Stock Split. After giving effect to the Reverse Stock Split and distribution of New Common Stock, there were 37,157,458 shares of Common Stock outstanding on May 6, 1993, of which the shares held by stockholders existing prior to such distribution represented 3% of the total number of outstanding shares. If all Warrants were exercised, the aggregate holdings of Old Senior Subordinated Debenture holders, Old Junior Subordinated Debenture holders and previously existing stockholders would represent 76.7%, 20.6% and 2.7%, respectively, of the total number of outstanding shares.\n(b) For each $1,000 principal amount of 7 3\/8% senior notes due 1991 (the \"OLD SENIOR 1991 NOTES\"), the holder received $750 principal amount of 8% senior notes due 1995 (the \"SENIOR 1995 NOTES\") and $250 principal amount of 9% senior notes due 1998 (the \"SENIOR 1998 NOTES\"). As of May 6, 1993, the total principal amount of the Old Senior 1991 Notes was $100 million. In addition, the Corporation issued $10 million principal amount of Senior 1998 Notes to two institutional holders of existing 8% senior notes due 1996 (the \"SENIOR 1996 NOTES\") in exchange for an equal principal amount thereof. The Senior 1995 and 1998 Notes are secured, with certain other indebtedness of the Corporation and subject to a collateral trust arrangement controlled primarily by holders of the Banks' claims, by first priority security interests in the capital stock of certain subsidiaries of the Corporation.\n(c) Pursuant to the Prepackaged Plan, modifications were made to a credit agreement dated as of July 1, 1988 (the \"OLD CREDIT AGREEMENT\") with the Bank Group. The modifications, reflected in the Credit Agreement, are summarized as follows: (i) issuance of $340 million of Senior 2002 Notes in exchange for $300 million principal amount of Bank Term Loans, $24 million of accrued but unpaid interest on the Bank Term Loan and $16 million owed in connection with certain interest rate swap contracts; (ii) extension of the final maturity of the remaining principal outstanding on the Bank Term Loan ($540 million) from 1996 to 2000 and deferral of any scheduled principal payments until December 1994; (iii) issuance of $56 million of Capitalized Interest Notes bearing annual interest at LIBOR plus 2 1\/4% (or Citibank's base rate plus 1 1\/4%) in exchange for $51 million of accrued but unpaid interest on the Bank Debt and $5 million in additional amounts owed in connection with interest rate swap contracts; (iv) making available (at the Corporation's option but subject to certain limitations on the availability of LIBOR) an annual interest rate applicable to the Bank Term Loan and an extended revolving credit facility of LIBOR plus 1 7\/8% (or Citibank's base rate plus 7\/8%), with the option to issue additional Capitalized Interest Notes for the amount of such interest in excess of LIBOR plus 1% per annum; (v) provision for an excess cash flow sweep that will take into account certain liquidity thresholds; (vi) suspension of all financial covenants through January 1, 1995 and providing for new covenants thereafter; and (vii) extension to 1998 of the maturity date of and establishment of a maximum borrowing capacity of $175 million under the Revolving Credit Facility, including a $110 million letter of credit subfacility. Capitalized Interest Notes of $47 million were allocated as term capitalized interest notes maturing in 2000, being direct obligations of the Corporation, and $9 million of the Capitalized Interest Notes were allocated as revolver capitalized interest notes maturing in 1998, being direct obligations of USG Interiors.\nThe Corporation deferred certain principal and interest payments in order to maintain adequate liquidity during the Restructuring process. These payment deferrals constituted defaults under the applicable loan agreements and indentures, which were waived or cured on May 6, 1993.\nFRESH START ACCOUNTING\nThe Corporation accounted for the Restructuring using the principles of fresh start accounting as required by SOP 90-7. Pursuant to such principles, in general, the Corporation's assets and liabilities were revalued. Total assets were stated at the reorganization value of the Corporation following the Restructuring. The Corporation primarily used \"net present value\" and \"comparable companies\" approaches to determine reorganization value (the \"REORGANIZATION VALUE\"). In the net present value approach, projected, unleveraged after-tax cash flows of the Subsidiaries and corporate operations through 1995 were discounted at rates approximating the Corporation's adjusted weighted average cost of capital. Terminal value was determined by capitalizing the 1995 projected results. Liabilities were stated at fair market value. The difference between the Reorganization Value of the assets and the fair market value of the liabilities was recorded as stockholders' equity with retained earnings restated to zero.\nIn accordance with SOP 90-7, individual assets and liabilities were adjusted to fair market value as of May 6, 1993. The portion of the Reorganization Value not attributable to specific assets (\"EXCESS REORGANIZATION VALUE\") will be amortized over a five year period. Adjustments were made to the historical balances of inventory, property, plant and equipment, purchased goodwill, long- term debt, various accrued liabilities and other long-term liabilities.\nThe following balance sheet details the adjustments that were made as of May 6, 1993 to record the Restructuring and implement fresh start accounting:\nUSG CORPORATION (PREDECESSOR COMPANY) CONSOLIDATED BALANCE SHEET AS OF MAY 6, 1993 (DOLLARS IN MILLIONS)\nREORGANIZATION ITEMS\nIn connection with the Restructuring, the Corporation recorded a one-time reorganization items gain of $709 million in the period of January 1 through May 6, 1993. The (income)\/expense components of this gain are as follows (dollars in millions):\nEXTRAORDINARY GAIN\nAlso in connection with the Restructuring, the Corporation recorded a one- time after-tax extraordinary gain of $944 million in the period of January 1 through May 6, 1993. The income\/(expense) components of this gain are as follows (dollars in millions):\nCUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES\nA one-time after-tax charge of $150 million was recorded in the first quarter of 1993 representing the adoption of Statement of Financial Accounting Standard (\"SFAS\") No. 106, \"Employers' Accounting for Postretirement Benefits Other Than Pensions,\" - $180 million, partially offset by the adoption of SFAS No. 109, \"Accounting for Income Taxes,\" - $30 million. See \"Postretirement Benefits\" and \"Taxes on Income and Deferred Taxes\" notes for information on the adoption of these standards. Neither of these standards impact cash flow.\nDISCONTINUED OPERATIONS\nResults for DAP are set forth separately as discontinued operations in the accompanying consolidated financial statements and supplementary data schedules up to September 20, 1991, the completion date of the sale of the business and substantially all of the assets. Operating results for DAP in 1991 included net sales of $128 million, taxes on income of $1 million and breakeven net earnings.\nIn the second quarter of 1991, the Corporation absorbed an expense provision of $20 million related to the disposition of DAP, net of related income tax expense of $8 million. An expense provision of $41 million, net of a related income tax benefit of $2 million, was previously recorded in the fourth quarter of 1990. Net proceeds from the transaction amounted to approximately $84 million. In connection with the execution of the DAP sale agreement, the Banks consented to the sale as required under the Old Credit Agreement subject to an agreement by the Corporation and DAP to deposit the proceeds in a bank account to be held exclusively for use in the Restructuring. As a result, these funds, and interest earned on these funds, were maintained on an interim basis in a restricted bank account and were classified as restricted cash in the Consolidated Balance Sheet until their release in connection with the Restructuring.\nRESEARCH AND DEVELOPMENT\nResearch and development expenditures are charged to earnings as incurred and amounted to $4 million, $14 million and $12 million in the period of January 1 through May 6, 1993 and in the years ended December 31, 1992 and 1991, respectively.\nTAXES ON INCOME AND DEFERRED INCOME TAXES\nEffective January 1, 1993, the Corporation adopted SFAS No. 109, \"Accounting for Income Taxes.\" The cumulative effect as of January 1, 1993 of adopting SFAS No. 109 was a one-time benefit to first quarter 1993 net earnings of $30 million, primarily due to adjusting deferred taxes from historical to current tax rates. Financial statements for periods prior to January 1, 1993 have not been restated to reflect the adoption of this standard.\nEarnings\/(loss) from continuing operations before taxes on income, extraordinary gain and changes in accounting principles consisted of the following (dollars in millions):\nTaxes on income\/(income tax benefit) consisted of the following (dollars in millions):\nThe difference between the statutory U.S. Federal income tax\/(benefit) rate and the Corporation's effective income tax\/(benefit) rate is summarized as follows:\nTemporary differences and carryforwards which give rise to current and long- term deferred tax (assets)\/liabilities as of May 6, 1993 were as follows (dollars in millions):\nA valuation allowance has been provided for deferred tax assets relating to pension and retiree medical benefits due to the long-term nature of their realization. Because of the uncertainty regarding the application of the Code to the Corporation's NOL Carryforwards as a result of the Prepackaged Plan, no deferred tax asset is recorded.\nThe Corporation has NOL Carryforwards of $113 million remaining from 1992 after a reduction due to cancellation of indebtedness from the Prepackaged Plan. These NOL Carryforwards may be used to offset U.S. taxable income through 2007. The Code will limit the Corporation's annual use of its NOL Carryforwards to the lesser of its taxable income or approximately $30 million plus any unused limit from prior years. Furthermore, due to the uncertainty regarding the application of the Code to the exchange of stock for debt, the Corporation's NOL Carryforwards could be further reduced or eliminated. The Corporation has a $3 million minimum tax credit which may be used to offset U.S. regular tax liability in future years.\nDuring 1991 and 1992, deferred income taxes resulted from certain items being treated differently for financial reporting purposes than for income tax purposes. The tax effect of such differences is summarized as follows (dollars in millions):\nThe Corporation does not provide for U.S. Federal income taxes on the portion of undistributed earnings of foreign subsidiaries which are intended to be permanently reinvested. The cumulative amount of such undistributed earnings totaled approximately $75 million as of May 6, 1993. Any future repatriation of undistributed earnings would not, in the opinion of management, result in significant additional taxes.\nINVENTORIES\nIn accordance with the implementation of fresh start accounting, inventories were stated at fair market value as of May 6, 1993. Most of the Corporation's domestic and Mexican inventories are valued under the LIFO method. As of May 6, 1993, the LIFO values of these inventories were $103 million and would have been the same if they were valued under the FIFO and average production cost methods. Inventories valued under the LIFO method totaled $72 million as of December 31, 1992 and would have been $25 million higher if they were valued under the FIFO and average production cost methods. The remaining inventories as of December 31, 1992 were stated at the lower of cost or market, under the FIFO or average production cost methods. Inventories include\nmaterial, labor and applicable factory overhead costs. Inventory classifications were as follows (dollars in millions):\nThe LIFO value of U.S. domestic inventories under fresh start accounting exceeded that computed for U.S. Federal income tax purposes by $26 million as of May 6, 1993. As of December 31, 1992, the LIFO value of USG Interiors' inventories acquired under the purchase method exceeded that computed for U.S. Federal income tax purposes by $6 million.\nPROPERTY, PLANT AND EQUIPMENT\nProperty, plant and equipment were stated at fair market value as of May 6, 1993 in accordance with fresh start accounting and at cost as of December 31, 1992. Provisions for depreciation are determined principally on a straight-line basis over the expected average useful lives of composite asset groups. Depletion is computed on a basis calculated to spread the cost of gypsum and other applicable resources over the estimated quantities of material recoverable. Interest during construction is capitalized on major property additions. Property, plant and equipment classifications were as follows (dollars in millions):\nLEASES\nThe Corporation leases certain of its offices, buildings, machinery and equipment, and autos under noncancellable operating leases. These leases have various terms and renewal options. Lease expense amounted to $11 million, $31 million and $26 million in the period of January 1 through May 6, 1993 and in the years ended December 31, 1992 and 1991, respectively.\nINDEBTEDNESS\nTotal debt, including currently maturing debt, consisted of the following (dollars in millions):\nAs of May 6, 1993, the Corporation and its subsidiaries had $1,556 million total principal amount of debt (before unamortized reorganization discount) on a consolidated basis. Of such total debt, $118 million represented direct borrowings by the subsidiaries, including $38 million of industrial revenue bonds, $41 million of 7 7\/8% sinking fund debentures issued by U.S. Gypsum in 1974 and subsequently assumed by the Corporation on a joint and several basis in 1985, $33 million of debt (primarily project financing) incurred by the Corporation's foreign subsidiaries other than CGC, $4 million of working capital borrowings by CGC, and $3 million of other long-term borrowings by CGC.\nThroughout the Restructuring process (from December 31, 1990 through May 6, 1993), most long-term debt issues were included in current liabilities due to various defaults upon certain of the debt issues which allowed for the possible triggering of acceleration and cross-acceleration provisions. Upon consummation of the Prepackaged Plan, all previously existing defaults were waived or cured and long-term debt included in current liabilities was treated in accordance with the Prepackaged Plan as described in \"Financial Restructuring\" note above.\nThe Bank Debt and most other senior debt are secured by a pledge of all of the shares of the Corporation's\nmajor domestic subsidiaries and 65% of the shares of certain of its foreign subsidiaries, including CGC, pursuant to a collateral trust arrangement controlled primarily by holders of the Bank Debt. The rights of the Corporation and its creditors to the assets of any subsidiary upon the latter's liquidation or reorganization will be subject to the prior claims of such subsidiary's creditors, except to the extent that the Corporation may itself be a creditor with enforceable claims against such subsidiary. The average rate of interest on the Bank Term Loan, excluding default interest which was cured or waived in accordance with the Prepackaged Plan, was 6.5% in the period of January 1 through May 6, 1993. The rate of interest on the Capitalized Interest Notes issued on May 6, 1993 in connection with the provisions of the Prepackaged Plan was 5.4% based on LIBOR plus 2 1\/4%.\nThe \"Other Secured Debt\" category shown in the table above primarily includes short-term and long-term borrowings from several foreign banks by USG International used principally to finance construction of the Aubange, Belgium ceiling tile plant. This debt is secured by a lien on the assets of the Aubange plant and has restrictive covenants that restrict, among other things, the payment of dividends. Foreign borrowings made by the Corporation's international operations are generally allowed, within certain limits, under provisions of the Credit Agreement.\nIn general, the Credit Agreement restricts, among other things, the incurrence of additional indebtedness, mergers, asset dispositions, investments, prepayment of other debt, dealings with affiliates, capital expenditures, payment of dividends and lease commitments.\nThe fair market value of debt as of May 6, 1993 was $1,421 million, based on estimates of fair market value calculated in connection with implementation of fresh start accounting, excluding other secured debt, primarily representing financing for construction of the Aubange plant that is secured by a direct lien on its assets, which was not practicable to estimate. As of December 31, 1992, the fair market value of debt amounted to $679 million, based on indicative bond prices as of that date excluding the following items which were not practicable to estimate: (i) the bank debt for which there was no active market; (ii) the 7 7\/8% senior debentures due 2004 virtually all of which were owned by a single investment group; and (iii) the other secured debt which primarily represented financing for construction of the Aubange plant as described above.\nPENSION PLANS\nThe Corporation and most of its subsidiaries have defined benefit retirement plans for all eligible employees. Benefits of the plans are generally based on years of service and employees' compensation during the last years of employment. The Corporation's contributions are made in accordance with independent actuarial reports which,\nfor most plans, required minimal funding in the period of January 1 through May 6, 1993 and the years ended December 31, 1992 and 1991. Net pension expense\/(benefit) included the following components (dollars in millions):\nThe pension plan assets, which consist primarily of publicly traded common stocks and debt securities, had an estimated fair market value that equaled the projected benefit obligation as of May 6, 1993 and exceeded the projected benefit obligation as of December 31, 1992. The following table presents a reconciliation of the total assets of the pension plans to the projected benefit obligation (dollars in millions):\nAssets in excess of projected benefit obligation consisted of the following (dollars in millions):\nThe expected long-term rate of return on plan assets was 9% for both the period of January 1 through May 6, 1993 and the year ended December 31, 1992. The assumed weighted average discount rate used in determining\nthe accumulated benefit obligation was 8% and 9% as of May 6, 1993 and December 31, 1992, respectively. The rate of increases in projected future compensation levels was 5.5% for the period of January 1 through May 6, 1993 and the year ended December 31, 1992. The unrecognized cost of retroactive benefits granted by plan amendments was being amortized over 13 years as of December 31, 1992.\nPOSTRETIREMENT BENEFITS\nThe Corporation maintains plans that provide retiree health care and life insurance benefits for all eligible employees. Employees generally become eligible for the retiree benefit plans when they meet minimum retirement age and service requirements. The cost of providing most of these benefits is shared with retirees.\nEffective January 1, 1993, the Corporation adopted SFAS No. 106, \"Employers' Accounting for Postretirement Benefits Other Than Pensions,\" for its retiree benefit plans. Under this accounting standard, the Corporation is required to accrue the estimated cost of retiree benefit payments during employees' active service period. The Corporation elected to recognize this change in accounting principles on the immediate recognition basis. The cumulative effect as of January 1, 1993 of adopting SFAS No. 106 was a one-time after-tax charge to first quarter 1993 net earnings of $180 million. The Corporation previously expensed the cost of these benefits, which principally relate to health care, as claims were incurred. These costs were $8 million and $7 million in the years ended December 31, 1992 and 1991, respectively.\nThe following table summarizes the components of net periodic postretirement benefit cost for the period of January 1 through May 6, 1993 (dollars in millions):\nThe status of the Corporation's accrued postretirement benefit cost as of May 6, 1993 was as follows (dollars in millions):\nThe assumed health care cost trend rate used in measuring the accumulated postretirement benefit obligation was 13% as of May 6, 1993 with a gradually declining rate to 6% by the year 2000 and remaining at that level\nthereafter. A one-percentage-point increase in the assumed health care cost trend rate for each year would increase the accumulated postretirement benefit obligation as of May 6, 1993 by $18 million and increase the net periodic postretirement benefit cost for the period of January 1 through May 6, 1993 by $1 million. The assumed discount rate used in determining the accumulated postretirement benefit obligation was 8%.\nMANAGEMENT PERFORMANCE PLAN\nThe Performance Plan reserved 8,600,000 shares of Common Stock for issuance in connection with grants of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, deferred stock, performance shares and performance units.\nIn accordance with the Prepackaged Plan, all outstanding stock options (for 3,786,575 shares) were cancelled without consideration, 1,016,090 shares of restricted and deferred stock were cashed-out pursuant to \"change in control\" provisions contained in the Performance Plan, and 25,580 shares (after giving effect to the Reverse Stock Split) of restricted stock and awards for deferred stock yet to be issued remained outstanding as a consequence of certain waivers of the change in control event by senior members of management.\nLimitations on the Performance Plan in accordance with the Prepackaged Plan provide that: (i) options to purchase a number of shares not to exceed 7.5% of the number of shares of New Common Stock outstanding immediately after giving effect to the Reverse Stock Split and all distributions of New Common Stock under the Prepackaged Plan will be reserved for management incentives (2,788,350 shares); (ii) a portion of such options (not to exceed 4.5% of such number of outstanding shares) may be granted immediately upon consummation of the Prepackaged Plan; (iii) prior to June 22, 1997, the Corporation will not issue, award or grant, for compensatory purposes, any stock (including restricted and deferred stock grants and awards), stock options, stock appreciation rights or other stock-based awards, except for the options described above or as may otherwise be approved by the Corporation's stockholders; and (iv) reference to the year \"1988\" is deleted from the name of the Performance Plan.\nPREFERRED SHARE PURCHASE RIGHTS\nOn June 6, 1988, the Corporation adopted a Preferred Share Purchase Rights Plan and pursuant to its provisions declared, subject to the consummation of the 1988 Recapitalization, the distribution of one Right upon each new share of Common Stock issued in the 1988 Recapitalization. The 1988 Recapitalization became effective July 13, 1988 and the distribution occurred immediately thereafter. The Rights contain provisions which are intended to protect stockholders in the event of an unsolicited attempt to acquire the Corporation.\nThe Preferred Share Purchase Rights Plan was terminated in connection with implementation of the Prepackaged Plan. On May 6, 1993, the Rights Agreement was adopted with provisions substantially similar to the old rights except that: (i) the purchase price of the Rights was reset; (ii) the expiration of the Rights was extended; (iii) a so-called \"flip-in\" feature and exchange feature was added; (iv) certain exemptions were added permitting certain acquisitions and the continued holding of common shares by Water Street and its affiliates in excess of the otherwise specified thresholds; (v) the redemption price was reduced; and (vi) the amendment provision was liberalized.\nUnder the terms of the Rights Agreement and subject to certain exceptions for Water Street and its affiliates,\ngenerally the Rights become exercisable (i) 10 days following the date of a public announcement that a person or group of affiliated or associated persons (an \"ACQUIRING PERSON\"), other than the Corporation, any employee benefit plan of the Corporation, any entity holding Common Stock for or pursuant to the terms of any such plan has beneficial ownership (as defined in the Rights Agreement) of 20% or more of the then outstanding Common Stock, (ii) 10 days following the date of a public announcement that a person or group of affiliated or associated persons (an \"ADVERSE PERSON\") has beneficial ownership of 10% or more of the then outstanding Common Stock, the acquisition of which has been determined by the Board to present an actual threat of an acquisition of the Corporation that would not be in the best interest of the Corporation's stockholders or (iii) 10 days following the date of commencement of, or public announcement of, a tender offer or exchange offer for 30% or more of the Common Stock. When exercisable, each of the Rights entitles the registered holder to purchase one-hundredth of a share of a junior participating preferred stock, series C, $1.00 par value per share, at a price of $35.00 per one-hundredth of a preferred share, subject to adjustment.\nIn the event that the Corporation is the surviving corporation in a merger or other business combination involving an Acquiring Person or an Adverse Person and the Common Stock remains outstanding and unchanged or in the event that an Acquiring Person or an Adverse Person engages in one of a number of self-dealing transactions specified in the Rights Agreement, proper provision will be made so that each holder of a Right, other than Rights that are or were beneficially owned (as defined in the Rights Agreement) by the Acquiring Person or the Adverse Person, as the case may be, on the earliest of the Distribution Date, the date the Acquiring Person acquires 20% or more of the outstanding Common Stock or the date the Adverse Person becomes such (which will thereafter be void), will thereafter have the right to receive upon exercise thereof that number of shares of Common Stock having a market value at the time of such transaction of two times the exercise price of the Right. In addition, under certain circumstances the Board has the option of exchanging all or part of the Rights (excluding void Rights) for Common Stock in the manner described in the Rights Agreement. The Rights Agreement also contains a so-called \"flip-in\" feature which provides that if any person or group of affiliated or associated persons becomes an Adverse Person, then the provisions of the preceding two sentences shall apply.\nWARRANTS\nOn May 6, 1993, a total of 2,602,566 Warrants were issued to holders of the Old Junior Subordinated Debentures in addition to the shares of Common Stock issued to such holders, all as provided by the Prepackaged Plan. Upon issuance, each of the Warrants entitled the holder to purchase one share of Common Stock at a purchase price of $16.14 per share, subject to adjustment under certain events.\nThe Warrants are exercisable, subject to applicable securities laws, at any time prior to May 6, 1998. Each share of Common Stock issued upon exercise of a Warrant prior to the Distribution Date (as defined in the Rights Agreement) and prior to the redemption or expiration of the Rights will be accompanied by an attached Right issued under the terms and subject to the conditions of the Rights Agreement as it may then be in effect.\nSTOCKHOLDERS' EQUITY\nChanges in stockholders' equity are summarized as follows (dollars in millions):\nThe Corporation is authorized to issue 36,000,000 shares of $1 par value preferred stock, however, none were outstanding as of May 6, 1993 or December 31, 1992.\nAs of May 6, 1993, the number of authorized shares of Common Stock, $0.10 par value, was 200,000,000 shares, reduced from 300,000,000 shares in accordance with the Prepackaged Plan. After giving effect to the Reverse Stock Split and distribution of New Common Stock pursuant to the Prepackaged Plan, there were 37,157,458 shares of Common Stock outstanding, excluding 27,556 shares held in treasury, as of May 6, 1993. As of December 31, 1992, there were 55,757,394 shares of Common Stock outstanding, after deducting 368,409 shares held in treasury. The treasury shares were acquired through the forfeiture of restricted stock.\nLITIGATION\nOne of the Corporation's subsidiaries, U.S. Gypsum, is among numerous defendants in lawsuits arising out of the manufacture and sale of asbestos- containing building materials. U.S. Gypsum sold certain asbestos-containing products beginning in the 1930's; in most cases the products were discontinued or asbestos was removed from the product formula by 1972, and no asbestos- containing products were sold after 1977. Some of these lawsuits seek to recover compensatory and in many cases punitive damages for costs associated with maintenance or removal and replacement of products containing asbestos (the \"PROPERTY DAMAGE CASES\"). Others of these suits (the \"PERSONAL INJURY CASES\") seek to recover compensatory and in many cases punitive damages for personal injury allegedly resulting from exposure to asbestos and asbestos-containing products. It is anticipated that additional personal injury and property damage cases containing similar allegations will be filed.\nAs discussed below, U.S. Gypsum has substantial personal injury and property damage insurance for the years involved in the asbestos litigation. Prior to 1985, when an asbestos exclusion was added to U.S. Gypsum's policies, U.S. Gypsum purchased comprehensive general liability insurance policies covering personal injury and property damage in an aggregate face amount of approximately $850 million. Insurers that issued approximately $100 million of these policies are presently insolvent. Because U.S. Gypsum's insurance carriers initially responded to its claims for defense and indemnification with various theories denying or limiting coverage and the applicability of their policies, U.S. Gypsum filed a declaratory judgment action against them in the Circuit Court of Cook County, Illinois on December 29, 1983. (U.S. GYPSUM CO. V. ADMIRAL INSURANCE CO., ET AL.) (the \"COVERAGE ACTION\"). U.S. Gypsum alleges in the Coverage Action that the carriers are obligated to provide indemnification for settlements and judgments and, in some cases, defense costs incurred by U.S. Gypsum in personal injury and property damage cases in which it is a defendant. The current defendants are ten insurance carriers that provided comprehensive general liability insurance coverage to U.S. Gypsum between the 1940's and 1984. As discussed below, several carriers have settled all or a portion of the claims in the Coverage Action.\nU.S. Gypsum's aggregate expenditures for all asbestos-related matters, including property damage, personal injury, insurance coverage litigation and related expenses, exceeded aggregate insurance payments by $10.9 million and $25.8 million in the years ended December 31, 1991 and 1992, respectively, and by $3.8 million in the period of January 1 through May 6, 1993.\nPROPERTY DAMAGE CASES\nThe Property Damage Cases have been brought against U.S. Gypsum by a variety of plaintiffs, including school districts, state and local governments, colleges and universities, hospitals, and private property owners. U.S. Gypsum is one of many defendants in four cases that have been certified as class actions and others that request such certification. One class action suit is brought on behalf of owners and operators of all elementary and secondary schools in the United States that contain or contained friable asbestos-containing material. (IN RE ASBESTOS SCHOOL LITIGATION, U.S.D.C., E.D. Pa.) Approximately 1,350 school districts opted out of the class, some of which have filed or may file separate lawsuits or are participants in a state court class action involving approximately 333 school districts in Michigan. (BOARD OF EDUCATION OF THE CITY OF DETROIT, ET AL. V. THE CELOTEX CORP., ET AL., Cir. Ct. for Wayne County, Mich.) On April 10, 1992, a state court in Philadelphia certified a class consisting of all owners of buildings leased to the federal government. (PRINCE GEORGE CENTER, INC. V. U.S. GYPSUM CO., ET AL.,\nCt. of Common Pleas, Philadelphia, Pa.) On September 4, 1992, a Federal district court in South Carolina conditionally certified a class comprised of all colleges and universities in the United States, which certification is presently limited to the resolution of certain allegedly \"common\" liability issues. (CENTRAL WESLEYAN COLLEGE, V. W.R. GRACE & CO., ET AL., U.S.D.C., S.C.). On December 23, 1992, a case was filed in state court in South Carolina purporting to be a \"voluntary\" class action on behalf of owners of all buildings containing certain types of asbestos-containing products manufactured by the nine named defendants, including U.S. Gypsum, other than buildings owned by the federal or state governments, single family residences, or buildings at issue in the four above described class actions (ANDERSON COUNTY HOSPITAL V. W.R. GRACE & CO., ET AL., Court of Common Pleas, Hampton Co., S.C. (the \"ANDERSON CASE\"). On January 14, 1993, the plaintiff filed an amended complaint that added a number of defendants, including the Corporation. The amended complaint alleges, among other things, that the guarantees executed by U.S. Gypsum in connection with the 1988 Recapitalization, as well as subsequent distributions of cash from U.S. Gypsum to the Corporation, rendered U.S. Gypsum insolvent and constitute a fraudulent conveyance. The suit seeks to set aside the guarantees and recover the value of the cash flow \"diverted\" from U.S. Gypsum to the Corporation in an amount to be determined. This case has not been certified as a class action and no other threshold issues, including whether the South Carolina Courts have personal jurisdiction over the Corporation, have been decided. The damages claimed against U.S. Gypsum in the class action cases are unspecified. U.S. Gypsum has denied the substantive allegations of each of the Property Damage Cases and intends to defend them vigorously except when advantageous settlements are possible.\nAs of May 6, 1993, 67 Property Damage Cases were pending against U.S. Gypsum; however, the number of buildings involved is greater than the number of cases because many of these cases, including the class actions referred to above, involve multiple buildings. Approximately 40 property damage claims have been threatened against U.S. Gypsum.\nIn total, U.S. Gypsum has settled property damage claims of approximately 187 plaintiffs involved in approximately 71 cases. Twenty-two cases have been tried to verdict, 13 of which were won by U.S. Gypsum and 7 lost; two other cases, one won at the trial level and one lost, were settled after appeals. Appeals are pending in 4 of the tried cases. In the cases lost, compensatory damage awards against U.S. Gypsum have totaled $12.5 million. Punitive damages totaling $5.5 million were entered against U.S. Gypsum in four trials. Two of the punitive damage awards, totaling $1.45 million, were paid after appeals were exhausted; a third was settled after the verdict was reversed on appeal. The remaining punitive award is on appeal.\nIn 1991, 13 new Property Damage Cases were filed against U.S. Gypsum, 11 were dismissed before trial, 8 were settled, 2 were closed following trial or appeal, and 100 were pending at year end; U.S. Gypsum expended $22.2 million for the defense and resolution of Property Damage Cases and received insurance payments of $13.8 million in 1991. In 1992, 7 new Property Damage Cases were filed against U.S. Gypsum, 10 were dismissed before trial, 18 were settled, 3 were closed following trial or appeal, and 76 were pending at year end. U.S. Gypsum expended $34.9 million for the defense and resolution of Property Damage Cases and received insurance payments of $10.2 million in 1992. In the period of January 1 through May 6, 1993, no new Property Damage Cases were filed against U.S. Gypsum, 2 were dismissed before trial, 7 were settled, and 67 were pending at the end of the period. U.S. Gypsum expended $7.0 million for the defense and resolution of Property Damage Cases and received insurance payments of $3.7 million in the period.\nIn the Property Damage Cases litigated to date, a defendant's liability for compensatory damages, if any, has\nbeen limited to damages associated with the presence and quantity of asbestos- containing products manufactured by that defendant which are identified in the buildings at issue, although plaintiffs in some cases have argued that principles of joint and several liability should apply. Because of the unique factors inherent in each of the Property Damage Cases, including the lack of reliable information as to product identification and the amount of damages claimed against U.S. Gypsum in many cases, including the class actions described above, management is unable to make a reasonable estimate of the cost of disposing of pending Property Damage Cases.\nPERSONAL INJURY CASES\nU.S. Gypsum was among numerous defendants in asbestos personal injury suits and administrative claims involving 57,645 claimants pending as of May 6, 1993. All asbestos bodily injury claims pending in the federal courts, including approximately one-third of the Personal Injury Cases pending against U.S.Gypsum, have been consolidated in the United States District Court for the Eastern District of Pennsylvania.\nU.S. Gypsum is a member, together with 19 other former producers of asbestos- containing products, of the Center for Claims Resolution (the \"CENTER\"). The Center has assumed the handling, including the defense and settlement, of all Personal Injury Cases pending against U.S. Gypsum and the other members of the Center. Each member of the Center is assessed a portion of the liability and defense costs of the Center for the Personal Injury Cases handled by the Center, according to predetermined allocation formulas. Five of U.S. Gypsum's insurance carriers that in 1985 signed an Agreement Concerning Asbestos-Related Claims (the \"WELLINGTON AGREEMENT\") are supporting insurers (the \"SUPPORTING INSURERS\") of the Center. The Supporting Insurers are obligated to provide coverage for the defense and indemnity costs of the Center's members pursuant to the coverage provisions in the Wellington Agreement. Claims for punitive damages are defended but not paid by the Center; if punitive damages are recovered, insurance coverage may be available under the Wellington Agreement depending on the terms of particular policies and applicable state law. Punitive damages have not been awarded against U.S. Gypsum in any of the Personal Injury Cases. Virtually all of U.S. Gypsum's personal injury liability and defense costs are paid by those of its insurance carriers that are Supporting Insurers. The Supporting Insurers provided approximately $350 million of the total coverage referred to above.\nOn January 15, 1993, U.S. Gypsum and the other members of the Center were named as defendants in a class action filed in the U.S. District Court for the Eastern District Pennsylvania (GEORGINE ET AL. V. AMCHEM PRODUCTS INC., ET AL., Case No. 93-CV-0215) (hereinafter \"GEORGINE,\" formerly known as \"CARLOUGH\"). The complaint generally defines the class of plaintiffs as all persons who have been occupationally exposed to asbestos-containing products manufactured by the defendants and who had not filed an asbestos personal injury suit as of the date of the filing of the class action. Simultaneously with the filing of the class action, the parties filed a settlement agreement in which the named plaintiffs, proposed class counsel, and the defendants agreed to settle and compromise the claims of the proposed class. The settlement, if approved by the court, will implement for all future Personal Injury Cases, except as noted below, an administrative compensation system to replace judicial claims against the defendants, and will provide fair and adequate compensation to future claimants who can demonstrate exposure to asbestos-containing products manufactured by the defendants and the presence of an asbestos-related disease. Class members will be given the opportunity to \"opt out,\" or elect to be excluded from the settlement, although the defendants reserve the right to withdraw from the settlement if the number of opt outs is, in their sole judgment, excessive. In addition, in each year a limited number of claimants will have certain rights to prosecute their claims\nfor compensatory (but not punitive) damages in court in the event they reject compensation offered by the administrative processing of their claim.\nThe Center members, including U.S. Gypsum, have instituted proceedings against those of their insurance carriers that had not consented to support the settlement, seeking a declaratory judgment that the settlement is reasonable and, therefore, that the carriers are obligated to fund their portion of it. Consummation of the settlement is contingent upon, among other things, court approval of the settlement and a favorable ruling in the declaratory judgment proceedings against the non-consenting insurers. It is anticipated that appeals will follow the district court's ruling on the fairness and reasonableness of the settlement.\nEach of the defendants has committed to fund a defined portion of the settlement, up to a stated maximum amount, over the initial ten-year period of the agreement (which is automatically extended unless terminated by the defendants). Taking into account the provisions of the settlement agreement concerning the maximum number of claims that must be processed in each year and the total amount to be made available to the claimants, the Center estimates that U.S. Gypsum will be obligated to fund a maximum of approximately $125 million of the class action settlement, exclusive of expenses, with a maximum payment of less than $18 million in any single year; of the total amount of U.S. Gypsum's obligation, all but approximately $13 million or less is expected to be paid by U.S. Gypsum's insurance carriers.\nDuring 1991, approximately 13,100 Personal Injury Cases were filed against U.S. Gypsum and approximately 6,300 were settled or dismissed. U.S. Gypsum incurred expenses of $15.1 million in 1991 with respect to Personal Injury Cases, of which $15.0 million was paid by insurance. During 1992, approximately 20,100 Personal Injury Cases were filed against U.S. Gypsum and approximately 10,600 were settled or dismissed. U.S. Gypsum incurred expenses of $21.6 million in 1992 with respect to Personal Injury Cases of which $21.5 million was paid by insurance. In the period of January 1 through May 6, 1993, approximately 8,700 Personal Injury Cases were filed against U.S. Gypsum and approximately 5,300 were settled or dismissed. U.S. Gypsum incurred expenses of $10.9 million in the period with respect to Personal Injury Cases of which $10.8 million was paid by insurance. As of May 6, 1993, December 31, 1992 and December 31, 1991, approximately 58,000, 54,000 and 43,000 Personal Injury Cases were outstanding against U.S. Gypsum, respectively.\nU.S. Gypsum's average settlement cost for Personal Injury Cases over the past three years has been approximately $1,350 per claim, exclusive of defense costs. Management anticipates that its average settlement cost is likely to increase due to such factors as the possible insolvency of co-defendants, although this increase may be offset to some extent by other factors, including the possibility for block settlements of large numbers of cases and the apparent increase in the percentage of asbestos personal injury cases that appear to have been brought by individuals with little or no physical impairment. In management's opinion, based primarily upon U.S. Gypsum's experience in the Personal Injury Cases disposed of to date and taking into consideration a number of uncertainties, it is probable that asbestos-related Personal Injury Cases pending against U.S. Gypsum as of December 31, 1992, can be disposed of for an amount estimated to be between $80 million and $100 million, including both indemnity costs and legal fees and expenses. The estimated cost of resolving pending claims takes into account, among other factors, (i) an increase in the number of pending claims; (ii) the settlements of certain large blocks of claims for higher per-case averages than have historically been paid; and (iii) a slight increase in U.S. Gypsum's historical settlement average. No accrual has been recorded for this amount because, pursuant to the Wellington Agreement, U.S. Gypsum's Supporting Insurers are obligated to pay these costs.\nAssuming that the Georgine class action settlement referred to above is approved substantially in its current form, management estimates, based on assumptions supplied by the Center, U.S. Gypsum's maximum total exposure in Personal Injury Cases during the next ten years (the initial term of the agreement), including liability for pending claims, claims resolved as part of the class action settlement, and opt out claims, as well as defense costs and other expenses, at approximately $271 million, of which at least $254 million is expected to be paid by insurance. U.S. Gypsum's additional exposure for claims filed by persons who have opted out of Georgine would depend on the number of such claims that are filed, which cannot presently be determined.\nCOVERAGE ACTION\nAs indicated above, all of U.S. Gypsum's carriers initially denied coverage for the Property Damage Cases and the Personal Injury Cases, and U.S. Gypsum initiated the Coverage Action to establish its right to such coverage. U.S. Gypsum has voluntarily dismissed the Supporting Insurers referred to above from the personal injury portion of the Coverage Action because they are committed to providing personal injury coverage in accordance with the Wellington Agreement. U.S. Gypsum's claims against the remaining carriers for coverage for the Personal Injury Cases have been stayed since 1984.\nOn January 7, 1991, the trial court in the Coverage Action ruled on the applicability of U.S. Gypsum's insurance policies to settlements and one adverse judgment in eight Property Damage Cases. The court ruled that the eight cases were generally covered, and imposed coverage obligations on particular policy years based upon the dates when the presence of asbestos-containing material was \"first discovered\" by the plaintiff in each case. The court awarded reimbursement of approximately $6.2 million spent by U.S. Gypsum to resolve the eight cases. U.S. Gypsum has appealed the court's ruling with respect to the policy years available to cover particular claims, and the carriers have appealed most other aspects of the court's ruling. These appeals are likely to take a year or more.\nU.S. Gypsum's experience in the Property Damage Cases suggests that \"first discovery\" dates in the eight cases referred to above (1978 through 1985) are likely to be typical of most pending cases. U.S. Gypsum's total insurance coverage for the years 1978 through 1984 totals approximately $350 million (after subtracting insolvencies and discounts given to settling carriers). However, some pending cases, as well as some cases filed in the future, may be found to have first discovery dates later than August 1, 1984, after which U.S. Gypsum's insurance policies did not provide coverage for asbestos-related claims. In addition, as described below, the first layer excess carrier for the years 1980 through 1984 is insolvent and U.S. Gypsum may be required to pay amounts otherwise covered by those and other insolvent policies. Accordingly, if the court's ruling is affirmed, U.S. Gypsum will likely be required to bear a portion of the cost of the property damage litigation.\nEight carriers, including two of the Supporting Insurers, have settled U.S. Gypsum's claims for both property damage and personal injury coverage and have been dismissed from the Coverage Action entirely. Four of these carriers have agreed to pay all or a substantial portion of their policy limits to U.S. Gypsum beginning in 1991 and continuing over the next four years. Three other excess carriers, including the two settling Supporting Insurers, have agreed to provide coverage for the Property Damage Cases and the Personal Injury Cases subject to certain limitations and conditions, when and if underlying primary and excess coverage is exhausted. It cannot presently be determined when such coverage might be reached. Taking into account the above settlements, including participation of certain of the settling carriers in the Wellington Agreement, and consumption through December 31, 1992, carriers providing a total of approximately $97 million of unexhausted insurance have agreed, subject to\nthe terms of the various settlement agreements, to cover both Personal Injury Cases and Property Damage Cases. Carriers providing an additional $276 million of coverage that was unexhausted as of December 31, 1992 have agreed to cover Personal Injury Cases under the Wellington Agreement, but continue to contest coverage for Property Damage Cases and remain defendants in the Coverage Action. U.S. Gypsum will continue to seek negotiated resolutions with its carriers in order to minimize the expense and delays of litigation.\nInsolvency proceedings have been instituted against four of U.S. Gypsum's insurance carriers. Midland Insurance Company, declared insolvent in 1986, provided excess insurance ($4 million excess of $1 million excess of $500,000 primary in each policy year) from February 15, 1975 to February 15, 1978; Transit Casualty Company, declared insolvent in 1985, provided excess insurance ($15 million excess of $1 million primary in each policy year) from August 1, 1980 to December 31, 1985; Integrity Insurance Company, declared insolvent in 1986, provided excess insurance ($10 million quota share of $25 million excess of $90 million) from August 1, 1983 to July 31, 1984; and American Mutual Insurance Company, declared insolvent in 1989, provided the primary layer of insurance ($500,000 per year) from February 1, 1963 to April 15, 1971. It is possible that U.S. Gypsum will be required to pay a presently indeterminable portion of the costs that would otherwise have been covered by these policies.\nIt is not possible to predict the number of additional lawsuits alleging asbestos-related claims that may be filed against U.S. Gypsum. The number of Personal Injury Claims pending against U.S. Gypsum has increased in each of the last several years. In addition, many Property Damage Cases are still at an early stage and the potential liability therefrom is consequently uncertain. In view of the limited insurance funding currently available for the Property Damage Cases resulting from the continued resistance by a number of U.S. Gypsum's insurers to providing coverage, the effect of the asbestos litigation on the Corporation will depend upon a variety of factors, including the damages sought in the Property Damage Cases that reach trial prior to the completion of the Coverage Action, U.S. Gypsum's ability to successfully defend or settle such cases, and the resolution of the Coverage Action. As a result, management is unable to determine whether an adverse outcome in the asbestos litigation will have a material adverse effect on the results of operations or the consolidated financial position of the Corporation.\nENVIRONMENTAL LITIGATION\nThe Corporation and certain of its subsidiaries have been notified by state and federal environmental protection agencies of possible involvement as one of numerous \"potentially responsible parties\" in a number of so-called \"Superfund\" sites in the United States. In substantially all of these sites, the involvement of the Corporation or its subsidiaries is expected to be minimal. The Corporation believes that appropriate reserves have been established for its potential liability in connection with all Superfund sites but is continuing to review its accruals as additional information becomes available. Such reserves take into account all known or estimable costs associated with these sites including site investigations and feasibility costs, site cleanup and remediation, legal costs, and fines and penalties, if any. In addition, environmental costs connected with site cleanups on USG-owned property are also covered by reserves established in accordance with the foregoing. The Corporation believes that neither these matters nor any other known governmental proceeding regarding environmental matters will have a material adverse effect upon its earnings or consolidated financial position.\nGEOGRAPHIC AND INDUSTRY SEGMENTS\nTransactions between geographic areas are accounted for on an \"arm's-length\" basis. No single customer accounted for 4% or more of consolidated net sales. Export sales to foreign unaffiliated customers represent less than 10% of consolidated net sales.\nIntrasegment and intersegment eliminations largely reflect intercompany sales from U.S. Gypsum to L&W Supply. Segment operating profit\/(loss) includes all costs and expenses directly related to the segment involved and an allocation of expenses which benefit more than one segment. Geographic and industry segment data for 1991 exclude discontinued operations.\nTo assist the reader in evaluating the profitability of each geographic and industry segment, EBITDA is shown separately in the following tables. EBITDA represents earnings before interest, taxes, depreciation, depletion and amortization. For the period of January 1 through May 6, 1993, the Corporation also added back non-cash postretirement charges, reorganization items, an extraordinary gain and the cumulative impact of changes in accounting principles. The Corporation believes EBITDA is helpful in understanding cash flow generated from operations that is available for taxes, debt service and capital expenditures. In addition, EBITDA facilitates the monitoring of covenants related to certain long-term debt and other agreements entered into in conjunction with the Restructuring. EBITDA should not be considered by investors as an alternative to net earnings as an indicator of the Corporation's operating performance or to cash flows as a measure of its overall liquidity. Certain amounts for 1992 and 1991 have been reclassified to conform to the current period presentation.\nVariations in the levels of corporate identifiable assets primarily reflect fluctuations in the levels of cash and cash equivalents. Restricted cash of $88 million and $84 million, which represents the proceeds from the sale of DAP, are included in corporate identifiable assets for 1992 and 1991, respectively.\nSUBSIDIARY DEBT GUARANTEES\nIn May 1993, the Corporation issued $340 million aggregate principal amount of Senior 2002 Notes. Each of U.S. Gypsum, USG Industries, Inc., USG Interiors, USG Foreign Investments, Ltd., L&W Supply, Westbank Planting Company, USG Interiors International, Inc., American Metals Corporation and La Mirada Products Co., Inc. (together, the \"COMBINED GUARANTORS\") guaranteed, in the manner described below, both the obligations of the Corporation under the Credit Agreement and the Senior 2002 Notes. The Combined Guarantors are jointly and severally liable under the Subsidiary Guarantees. Holders of the Bank Debt have the right to (i) determine whether, when and to what extent the guarantees will be enforced (provided that each guarantee payment will be applied to the Bank Term Loan, Revolving Credit Facility, Capitalized Interest Notes and Senior 2002 Notes pro rata based on the respective amounts owed thereon) and (ii) amend or eliminate the guarantees. The guarantees will terminate when the Bank Term Loan, the Revolving Credit Facility and the Capitalized Interest Notes are retired regardless of whether any Senior 2002 Notes remain unpaid. The liability of each of the Combined Guarantors on its guarantee is limited to the greater of (i) 95% of the lowest amount, calculated as of July 13, 1988, sufficient to render the guarantor insolvent, leave the guarantor with unreasonably small capital or leave the guarantor unable to pay its debts as they become due (each as defined under applicable law) and (ii) the same amount, calculated as of the date any demand for payment under such guarantee is made, in each case plus collection costs. The guarantees are senior obligations of the applicable guarantor and rank PARI PASSU with all unsubordinated obligations of the guarantor.\nThere are 43 Non-Guarantors (the \"COMBINED NON-GUARANTORS\"), substantially all of which are subsidiaries of Guarantors. The Combined Non-Guarantors primarily include CGC, Gypsum Transportation Limited, USG Canadian Mining Ltd. and the Corporation's Mexican, European and Pacific subsidiaries. The long-term debt of the Combined Non-Guarantors of $28 million as of May 6, 1993 has restrictive covenants that restrict, among other things, the payment of dividends.\nThe following condensed consolidating information presents:\n(i) Condensed financial statements as of May 6, 1993 and December 31, 1992 and for the period of January 1 through May 6, 1993, and the years ended December 31, 1992 and 1991 of: (a) the Corporation on a parent company only basis (the \"PARENT COMPANY,\" which was the only entity of the Corporation included in the bankruptcy proceeding); (b) the Combined Guarantors; (c) the Combined Non-Guarantors; and (d) the Corporation on a consolidated basis. Due to the Restructuring and implementation of fresh start accounting, the financial statements for the restructured company (periods after May 6, 1993) are not comparable to those of the predecessor company. Except for the following condensed financial statements, separate financial information with respect to the Combined Guarantors is omitted as such separate financial information is not deemed material to investors.\n(ii) The Parent Company and Combined Guarantors shown with their investments in their subsidiaries accounted for on the equity method.\n(iii) Elimination entries necessary to consolidate the Parent Company and its subsidiaries.\nUSG CORPORATION (PREDECESSOR COMPANY) CONDENSED CONSOLIDATING STATEMENT OF EARNINGS YEAR ENDED DECEMBER 31, 1992 (DOLLARS IN MILLIONS)\nUSG CORPORATION (PREDECESSOR COMPANY) CONDENSED CONSOLIDATING STATEMENT OF EARNINGS YEAR ENDED DECEMBER 31, 1991 (DOLLARS IN MILLIONS)\nUSG CORPORATION (PREDECESSOR COMPANY) CONDENSED CONSOLIDATING BALANCE SHEET AS OF MAY 6, 1993 (DOLLARS IN MILLIONS)\nUSG CORPORATION (PREDECESSOR COMPANY) CONDENSED CONSOLIDATING BALANCE SHEET AS OF DECEMBER 31, 1992 (DOLLARS IN MILLIONS)\nUSG CORPORATION (PREDECESSOR COMPANY) CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS JANUARY 1 THROUGH MAY 6, 1993 (DOLLARS IN MILLIONS)\nUSG CORPORATION (PREDECESSOR COMPANY) CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS YEAR ENDED DECEMBER 31, 1992 (DOLLARS IN MILLIONS)\nUSG CORPORATION (PREDECESSOR COMPANY) CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS YEAR ENDED DECEMBER 31, 1991 (DOLLARS IN MILLIONS)\nUSG CORPORATION MANAGEMENT REPORT\nManagement is responsible for the preparation and integrity of the financial statements and related notes included herein. These statements have been prepared in accordance with generally accepted accounting principles and, of necessity, include some amounts that are based on management's best estimates and judgments.\nThe Corporation's accounting systems include internal controls designed to provide reasonable assurance of the reliability of its financial records and the proper safeguarding and use of its assets. Such controls are based on established policies and procedures, are implemented by trained personnel, and are monitored through an internal audit program. The Corporation's policies and procedures prescribe that the Corporation and its subsidiaries are to maintain ethical standards and that its business practices are to be consistent with those standards.\nThe Audit Committee of the Board, consisting solely of outside Directors of the Corporation, maintains an ongoing appraisal, on behalf of the stockholders, of the effectiveness of the independent auditors and management with respect to the preparation of financial statements, the adequacy of internal controls and the Corporation's accounting policies.\nREPORT OF INDEPENDENT PUBLIC ACCOUNTANTS\nTo the Stockholders and Board of Directors of USG Corporation:\nWe have audited the accompanying consolidated balance sheet of USG Corporation (Predecessor Company), a Delaware corporation, and subsidiaries as of May 6, 1993 and December 31, 1992 and the related consolidated statements of earnings and cash flows for the period of January 1 through May 6, 1993 and for the years ended December 31, 1992 and 1991. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits.\nWe conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.\nAs discussed in Notes to Financial Statements - \"Financial Restructuring\" and \"Fresh Start Accounting\" notes, on May 6, 1993, the Corporation completed a comprehensive financial restructuring through the implementation of a prepackaged plan of reorganization under Chapter 11 of the United States Bankruptcy Code and applied fresh start accounting. The restructuring resulted in an extraordinary gain of $944 million, primarily from the exchange of debt, and fresh start accounting resulted in a $709 million gain, primarily from revaluing assets and liabilities to reflect reorganization value. These one- time credits to income were recorded as of May 6, 1993 by the Predecessor Company. As such, results of operations through May 6, 1993 (Predecessor Company) are not comparable with results of operations subsequent to that date.\nIn our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of USG Corporation and subsidiaries as of May 6, 1993 and December 31, 1992, and the results of their operations and their cash flows for the period of January 1 through May 6, 1993 and for the years ended December 31, 1992 and 1991, in conformity with generally accepted accounting principles.\nAs discussed in Notes to Financial Statements - \"Litigation\" note, in view of the limited insurance funding currently available for property damage cases resulting from the continued resistance by a number of U.S. Gypsum's insurers to providing coverage, the effect of the asbestos litigation on the Corporation will depend upon a variety of factors, including the damages sought in property damage cases that reach trial prior to the completion of the coverage action, U.S. Gypsum's ability to successfully defend or settle such cases, and the resolution of the coverage action. As a result, management is unable to determine whether an adverse outcome in the asbestos litigation will have a material adverse effect on the consolidated results of operations or the consolidated financial position of the Corporation.\nAs discussed in Notes to Financial Statements - \"Cumulative Effect of Changes in Accounting Principles\" note, on January 1, 1993 the Corporation changed its method of accounting for postretirement benefits other than pensions and accounting for income taxes.\nARTHUR ANDERSEN & CO. Chicago, Illinois January 31, 1994\nUSG CORPORATION (PREDECESSOR COMPANY) SCHEDULE V PROPERTY, PLANT AND EQUIPMENT (DOLLARS IN MILLIONS)\nIn accordance with fresh start accounting, the Corporation adjusted its property, plant and equipment accounts as of May 6, 1993 to fair market value.\nDetailed information regarding additions and deductions other than those associated with fresh start accounting is omitted as neither total additions nor total deductions during each of the periods shown above exceeded 10% of the balance at the end of the period. Excluding fresh start adjustments, total additions were $12 million in the period of January 1 through May 6, 1993 and $49 million in each of the years ended December 31, 1992 and 1991. Total deductions excluding fresh start adjustments were $12 million in the period of January 1 through May 6, 1993 and $38 million and $6 million in the years ended December 31, 1992 and 1991, respectively.\nTotal deductions include the effect of foreign currency translation which increased total deductions by $1 million in the period of January 1 through May 6, 1993 and by $18 million in the year ended December 31, 1992. In 1991, foreign currency translation adjustments decreased total deductions by $1 million.\nUpon retirement of other disposition of property, the applicable cost and accumulated depreciation and depletion are removed from the accounts. Any gains and losses are included in earnings.\nUSG CORPORATION (PREDECESSOR COMPANY) SCHEDULE VI ACCUMULATED DEPRECIATION AND DEPLETION OF PROPERTY, PLANT AND EQUIPMENT (DOLLARS IN MILLIONS)\nIn accordance with fresh start accounting, the Corporation adjusted its property, plant and equipment accounts as of May 6, 1993 to fair market value. Consequently, there were no reserves for depreciation and depletion as of that date.\nDetailed information regarding additions and deductions other than those associated with fresh start accounting is omitted as neither total additions nor total deductions of property, plant and equipment (see Schedule V) during each of the periods shown above exceeded 10% of the balance of property, plant and equipment at the end of the related period. Total provisions for depreciation and depletion were $20 million in the period of January 1 through May 6, 1993 and $58 million and $57 million in the years ended December 31, 1992 and 1991, respectively. Total deductions, excluding fresh start adjustments, were $12 million in the period of January 1 through May 6, 1993 and $28 million and $8 million in the years ended December 31, 1992 and 1991, respectively.\nTotal deductions include the effect of foreign currency translation which increased total deductions by $2 million in the period of January 1 through May 6, 1993 and by $10 million in the year ended December 31, 1992 and decreased total deductions by $1 million in the year ended December 31, 1991.\nUpon retirement or other disposition of property, the applicable cost and accumulated depreciation and depletion are removed from the accounts. Any gains and losses are included in earnings.\nUSG CORPORATION (PREDECESSOR COMPANY) SCHEDULE VIII VALUATION AND QUALIFYING ACCOUNTS (DOLLARS IN MILLIONS)\nUSG CORPORATION (PREDECESSOR COMPANY) SCHEDULE IX SHORT-TERM BORROWINGS (DOLLARS IN MILLIONS)\nUSG CORPORATION (PREDECESSOR COMPANY) SCHEDULE X SUPPLEMENTAL STATEMENT OF EARNINGS INFORMATION (DOLLARS IN MILLIONS)\nThe following amounts were charged to costs and expenses:\nMaintenance and repairs are recorded as costs or expenses when incurred.\nTaxes (excluding payroll and income taxes), rents, royalties and advertising costs are not shown above, as individually they do not exceed one percent of net sales in any of the periods shown.\nUSG CORPORATION (PREDECESSOR COMPANY) SUPPLEMENTAL NOTE ON FINANCIAL INFORMATION FOR UNITED STATES GYPSUM COMPANY (A SUBSIDIARY OF USG CORPORATION)\nUSG Corporation, a holding company, owns several operating subsidiaries, including U.S. Gypsum. On January 1, 1985, all of the issued and outstanding shares of stock of U.S. Gypsum were converted into shares of USG Corporation and the holding company became a joint and several obligor for certain debentures originally issued by U.S. Gypsum. As of May 6, 1993, debentures totaling $41 million were recorded on the holding company's books of account equal to the amount recorded as of December 31, 1992. Financial results for U.S. Gypsum are presented below in accordance with disclosure requirements of the SEC (dollars in millions):\nSUMMARY STATEMENT OF EARNINGS\nSUMMARY BALANCE SHEET\nREPORT OF INDEPENDENT PUBLIC ACCOUNTANTS WITH RESPECT TO SUPPLEMENTAL NOTE AND FINANCIAL STATEMENT SCHEDULES\nWe have audited in accordance with generally accepted auditing standards, the consolidated financial statements of USG Corporation (Predecessor Company) included in this Form 10-K, and have issued our report thereon dated January 31, 1994. Our report on the consolidated financial statements includes an explanatory paragraph with respect to the asbestos litigation as discussed in Notes to the Financial Statements - \"Litigation\" note. Our report on the consolidated financial statements also includes an explanatory paragraph with respect to the changes in the methods of accounting for postretirement benefits other than pensions and accounting for income taxes as discussed in Notes to Financial Statements - \"Cumulative Effect of Changes in Accounting Principles\" note. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplemental note and financial statement schedules on pages 97 through 102 are the responsibility of the Corporation's management and are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic financial statements. The supplemental note and financial statement schedules have been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.\nARTHUR ANDERSEN & CO. Chicago, Illinois January 31, 1994\nUSG CORPORATION SELECTED QUARTERLY FINANCIAL DATA (A) (UNAUDITED) (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)\nITEM 9.","section_9":"ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE\nA Form 8-K reporting a change of accountants has not been filed within 24 months prior to the date of the most recent financial statements.\nPART III\nITEM 10.","section_9A":"","section_9B":"","section_10":"ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT\nIn connection with the consummation of the Prepackaged Plan, the number of persons comprising the Board was increased by five effective May 6, 1993 which, after the May 1993 retirement of one director whose position was eliminated, brought the total Board membership to 15. Of the five New Directors (the \"NEW DIRECTORS\"), two, Messrs. Crutcher and Lesser, were nominated by a committee representing holders of the Corporation's senior subordinated debentures which were converted into Common Stock under the Prepackaged Plan (each a \"SENIOR SUBORDINATED DIRECTOR\"); two, Messrs. Fetzer and Zubrow, were nominated by Water Street (each a \"WATER STREET DIRECTOR\"); and one, Mr. Brown, was nominated by a committee representing holders of the Corporation's junior subordinated debentures which were converted into Common Stock and Warrants to purchase Common Stock under the Prepackaged Plan (a \"JUNIOR SUBORDINATED DIRECTOR\").\nAs the respective terms of office of the New Directors expire, the Prepackaged Plan provides that each such New Director will be renominated. If a New Director declines or is unable to accept such nomination, or in the event a New Director resigns during his term or otherwise becomes unable to continue his duties as a director, such New Director or, in the case of a Water Street Director, Water Street, shall recommend his successor to the Committee on Directors of the Board. In the event of the death or incapacity of a New Director, his successor shall be recommended, in the case of a Water Street Director, by Water Street, in the case of a Senior Subordinated Director, by the remaining Senior Subordinated Director, and in the case of a Junior Subordinated Director, by the remaining New Directors. Any such nominee shall be subject to approval by the Board's Committee on Directors and the Board, which approval shall not be unreasonably withheld.\nUntil June 22, 1997, the time at which the director nomination and selection procedures established by the Prepackaged Plan terminate, no more than two employee directors may serve simultaneously on the Board. An \"employee director\" is defined for this purpose as any officer or employee of the Corporation or any direct or indirect subsidiary, or any director of any such subsidiary who is not also a director of the Corporation.\nOn February 9, 1994, William C. Foote was elected a director of the Corporation (in the class with a term expiring in 1995) to become effective March 1, 1994 following the retirement of Mr. Falvo. See \"Executive Officers of the Registrant\" below for Mr. Foote's age, present position and employment within the past five years. He will be a member of the Executive Committee.\nEXECUTIVE OFFICERS OF THE REGISTRANT (WHO ARE NOT DIRECTORS)\nITEM 11.","section_11":"ITEM 11. EXECUTIVE COMPENSATION\nEXECUTIVE COMPENSATION AND BENEFITS\nThe discussion that follows has been prepared based on the actual compensation paid and benefits provided by the Corporation to the five most highly compensated executive officers of the Corporation (collectively, the \"NAMED EXECUTIVES\"), for services performed during 1993 and the other periods indicated. This historical data is not necessarily indicative of the compensation and benefits that may be provided to such persons in the future.\nIn general, the Prepackaged Plan provided for the continuation by the Corporation of the existing employment, compensation and benefit arrangements. The Prepackaged Plan resulted in a substantial reduction on May 6, 1993 in the amounts otherwise potentially payable to the Named Executives in 1994 under the Corporation's three-year Incentive Recovery Program (the \"IRP\") and the concurrent cash settlement of such reduced awards. Although no further awards will be made to the Named Executives under the IRP, the Named Executives were eligible for incentive awards under the Corporation's 1993 Annual Management Incentive Program.\nSUMMARY COMPENSATION TABLE\nThe following table summarizes for the years indicated the compensation awarded to, earned by or paid to the Named Executives for services rendered in all capacities to the Corporation and its subsidiaries.\nOPTION\/SAR GRANTS IN LAST FISCAL YEAR (A)\nAGGREGATED OPTION\/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION\/SAR VALUES\nEMPLOYMENT AGREEMENTS\nIn order to assure continued availability of services of the Named Executives, the Corporation (or, in the case of Mr. Roller, U.S. Gypsum) entered into employment agreements (the \"EMPLOYMENT AGREEMENTS\") with the Named Executives in 1993 which superseded substantially identical agreements entered into on various dates prior to 1993. The Employment Agreements, which do not by their terms provide for renewal or extension, terminate on December 31, 1996.\nThe Employment Agreements provide for minimum annual salaries at the then current rate to be paid at normal pay periods and at normal intervals to Messrs. Connolly ($585,000), Falvo ($455,000), O'Bryan ($280,000), Roller ($280,000), and Pendexter ($255,000), with the minimum annual salaries deemed increased concurrently with salary increases authorized by the Compensation and Organization Committee of the Board of Directors. The Employment Agreements require that each Named Executive devote his full attention and best efforts during the term of such agreement to the performance of assigned duties. If a Named Executive is discharged without cause by the Corporation during the term of his Employment Agreement, he may elect to be treated as a continuing employee under such agreement, with salary continuing at the minimum rate specified in such agreement or at the rate in effect at the time of discharge, if greater, for the balance of the term of the Employment Agreement or for a period of two years, whichever is greater. In the event of any such salary continuation, certain benefits will be continued at corresponding levels and for the same period of time. If a Named Executive becomes disabled during the term of his Employment Agreement, his compensation continues for the unexpired term of the Employment Agreement at the rate in effect at the inception of the disability. In the event of a Named Executive's death during the term of his Employment Agreement, one-half of the full rate of compensation in effect at the time of his death will be paid to his beneficiary for the remainder of the unexpired term of the Employment Agreement.\nEach of the Named Executives has undertaken, during the term of his Employment Agreement and for a period of three years thereafter, not to participate, directly or indirectly, in any enterprise which competes with the Corporation or any of its subsidiaries in any line of products in any region of the United States. Each Named Executive has also agreed not to, at any time, use for his benefit or the benefit of others or disclose to others any of the Corporation's confidential information except as required by the performance of his duties under his Employment Agreement.\nTERMINATION COMPENSATION AGREEMENTS\nThe Corporation is a party to termination compensation agreements with the Named Executives, each of such agreement which will terminate at the earlier of the close of business on December 31, 1995, or upon the Named Executive attaining age 65.\nThe agreements provide certain benefits in the event of a \"change in control\" and termination of employment within three years thereafter or prior to the Named Executive attaining age 65, whichever is earlier, but only if such termination occurs under one of several sets of identified circumstances. Such circumstances include termination by the Corporation other than for \"cause\" and termination by the Named Executive for \"good reason\". Each \"change in control\" will begin a new three-year period for the foregoing purposes. For purposes of the agreements: (i) a \"change in control\" is deemed to have occurred, in general, if any person or group of persons acquires beneficial ownership of 20% or more of the combined voting power of the Corporation's then outstanding voting securities, if there is a change in a majority of the members of the Board within a two year period and in certain other events; (ii) the term \"cause\" is defined as, in general, the willful and continued failure by the Named Executive substantially to perform his duties after a demand for substantial performance has been delivered or the willful engaging of the Named Executive in misconduct which is materially injurious to the Corporation; and (iii) \"good reason\" for termination by a Named Executive means, in general, termination subsequent to a change in control based on specified changes in the Named Executive's duties, responsibilities, titles, offices or office location,\ncompensation levels and benefit levels or participation.\nThe benefits include payment of full base salary through the date of termination at the rate in effect at the time of notice of termination, payment of any unpaid bonus for a past fiscal year and pro rata payment of bonus for the then current fiscal year, and continuation through the date of termination of all stock ownership, purchase and option plans and insurance and other benefit plans. In the event of a termination giving rise to benefits under the agreements, the applicable Named Executive will be entitled to payment of a lump sum amount equal to 2.99 times the sum of (i) his then annual base salary, computed at 12 times his then current monthly pay and (ii) his full year position par bonus for the then current fiscal year, subject to all applicable federal and state income taxes, together with payment of a gross-up amount to provide for applicable federal excise taxes in the event such lump sum and all other benefits payable to the Named Executive constitute an \"excess parachute payment\" under the Internal Revenue Code. The Corporation is required to maintain in full force and effect until the earlier of (i) two years after the date of any termination which gives rise to benefits under any of the agreements and (ii) commencement by the Named Executive of full-time employment with a new employer, all insurance plans and arrangements in which the Named Executive was entitled to participate immediately prior to his termination in a manner which would give rise to benefits under his agreement, provided that if such participation is barred, the Corporation will be obligated to provide substantially similar benefits. In the event of any termination giving rise to benefits under the agreements, the Corporation is required to credit the applicable Named Executive with three years of benefit and credited service in addition to the total number of years of benefit and credited service the Named Executive accrued under the USG Corporation Retirement Plan. See \"Retirement Plans\" below. If the Named Executive has a total of less than five years of credited service following such crediting, he nonetheless will be treated as if he were fully vested under that Plan, but with benefits calculated solely on the basis of such total benefit service.\nThe Corporation is obligated to pay to each Named Executive all legal fees and expenses incurred by him as a result of a termination which gives rise to benefits under his agreement, including all fees and expenses incurred in contesting or disputing any such termination or in seeking to obtain or enforce any right or benefit provided under such agreement. No amounts are payable under such agreements if the Named Executive's employment is terminated by the Corporation for \"cause\" or if the Named Executive terminates his employment and \"good reason\" does not exist.\nAlthough Water Street's ownership of more than 20% of the Corporation's voting securities as a result of the Restructuring constituted a \"change in control\" under the agreements, each of the Named Executives agreed to waive this occurrence. Such waivers do not constitute a waiver of any other occurrence of a change in control.\nThe Corporation has established a so-called \"rabbi trust\" to provide a source of payment for benefits payable under such agreements. Immediately upon any change in control, the Corporation may deposit with the trustee under such trust an amount reasonably estimated to be potentially payable under all such agreements, taking into account any previous deposits. The Corporation did not make any such deposit to the trust as a result of Water Street's ownership. In the event that the assets of such trust in fact prove insufficient to provide for benefits payable under all such agreements, the shortfall would be paid directly by the Corporation from its general assets.\nRETIREMENT PLANS\nThe following table shows the annual pension benefits on a straight-life annuity basis for retirement at normal retirement age under the terms of the Corporation's contributory retirement plan (the \"RETIREMENT PLAN\"), before the applicable offset of one-half of the primary social security benefits at time of retirement. The table has been prepared for various compensation classifications and representative years of credited service under the Plan. Each participating employee contributes towards the cost of his or her retirement benefit. Retirement benefits are based on the average rate of annual covered compensation during the three consecutive years of highest annual compensation in the ten years of employment immediately preceding retirement. Participants become fully vested\nafter five years of continuous credited service.\nThe Named Executives participate in the Retirement Plan. The Named Executives' full years of continuous credited service at December 31, 1993 were as follows: Mr. Connolly, 35; Mr. Falvo, 38; Mr. O'Bryan, 35; Mr. Roller, 33; and Mr. Pendexter, 36. Compensation under the Retirement Plan includes salary and incentive compensation (bonus and IRP payments) for the year in which payments are made.\nPursuant to a supplemental retirement plan, the Corporation has undertaken to pay any retirement benefits otherwise payable to certain individuals, including the Named Executives, under the terms of the Corporation's contributory Retirement Plan but for provisions of the Internal Revenue Code limiting amounts payable under tax-qualified retirement plans in certain circumstances. The Corporation has established a so-called \"rabbi trust\" to provide a source of payment for benefits under this supplemental plan. Amounts are deposited in this trust from time to time to provide a source of payments to participants as they retire as well as for periodic payments to certain other retirees. In addition, the Corporation has authorized establishment by certain individuals, including the Named Executives, of special retirement accounts with independent financial institutions as an additional means of funding the Corporation's obligations to make such supplemental payments.\nDIRECTOR COMPENSATION\nDirectors who are not employees of the Corporation are currently entitled to receive a retainer of $6,000 per quarter plus a fee of $900 for each Board or Board committee meeting attended, together with reimbursement for out-of-pocket expenses incurred in connection with attendance at meetings. A non-employee director serving as chairman of a committee is entitled to receive an additional retainer of $1,000 per quarter for each such chairmanship. Additional fees for pre-meeting consultations may be paid as applicable to non-employee directors, the amount of such fees to bear a reasonable relationship to the regular meeting fee of $900 and the customary length of a meeting of the Board committee involved. No director of the Corporation has received any compensation of any kind for serving as a director while also serving as an officer or other employee of the Corporation or any of its subsidiaries.\nIn the past, the Corporation has entered into consulting agreements with retiring non-employee directors who had specified minimum periods of service on the Board. Those agreements continued the annualized retainer which was in effect in each instance at the time of retirement from the Board in return for an undertaking to serve in an advisory capacity and to refrain from any activity in conflict or in competition with the Corporation. The Board has determined to continue to offer such agreements on a case-by-case basis but also has determined to limit any such agreement to a term not to exceed five years.\n1994 Stock Option Grants\nOptions for 933,000 shares of Common Stock were granted on February 9, 1994 to 76 officers and key managers, none of whom is a Named Executive, at the exercise price of $32.5625 per share, which was the average of the high and low sales prices for a share of Common Stock as reported on the NYSE Composite Tape for such date. These options become exercisable at the rate of one-third of the aggregate grant on each of the first three anniversaries of the date of grant and expire on the tenth anniversary of the date of grant, except in the case of retirement, death or disability, in which case they expire on the earlier of the fifth anniversary of such event or the expiration of the original option term.\nITEM 12.","section_12":"ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT\n5% HOLDERS OF COMMON STOCK\nThe following persons are known by the Corporation to be a beneficial owner of more than five percent of the outstanding Common Stock:\nDIRECTORS AND EXECUTIVE OFFICERS\nThe following table sets forth information as of January 1, 1994 regarding the beneficial ownership of Common Stock by each current director and Named Executive and by all current directors and executive officers of the Corporation as a group (31 persons). Such information is derived from the filings made with the SEC by such persons under Section 16(a) of the Exchange Act. The totals include any shares allocated to the accounts of those individuals through December 31, 1993 under the USG Corporation Investment Plan.\nITEM 13.","section_13":"ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS\nAGREEMENT WITH WATER STREET ENTITIES\nOn February 25, 1993, the Corporation entered into an agreement with Water Street (the \"WATER STREET AGREEMENT\"). The Water Street Agreement, among other things, (i) restricts Water Steet and its affiliates Goldman, Sachs & Co. and The Goldman Sachs Group, L.P. (collectively the \"WATER STREET ENTITIES\") from purchasing, or offering or agreeing to purchase, any shares of Common Stock or other voting securities of the Corporation, except for Permitted Acquisitions (as defined in the Water Street Agreement) and acquisitions by any Water Street Entity other than Water Street of up to an aggregate of 10% of the then outstanding shares of Common Stock in the ordinary course of its business; (ii) requires (a) Water Street to vote all shares of Common Stock and other voting securities of the Corporation beneficially owned by it and (b) the other Water Street Entities to vote all shares of Common Stock beneficially owned by them in excess of 10% of the then outstanding shares of Common Stock, in each case, in the same proportion as the votes cast by all other holders of Common Stock and other voting securities of the Corporation, subject to certain exceptions described below; (iii) places restrictions on the ability of the Water Street Entities to transfer shares of Common Stock to any person, except for (a) sales consistent with Rule 144 of the Securities Act of 1993, (b) underwritten public offerings, (c) persons not known to be 5% holders, (d) pledgees who agree to be bound by certain provisions of the Water Street Agreement, (e) in the case of Water Street, distributions to Water Street's partners in accordance with the governing partnership agreement, (f) pursuant to certain tender or exchange offers for shares of Common Stock and (g) pursuant to transactions approved by the Board; (iv) provides Water Street with certain rights to nominate directors to the Board and Finance Committee (as described below); (v) requires the maintenance of directors' and officers' liability insurance and indemnification rights; (vi) requires that the Corporation's shareholder rights plan provide temporary exemptions for ownership of Common Stock by the Water Street Entities; (vii) provides Water Street with four demand registrations and unlimited piggyback registrations, subject to certain limitations described below; and (viii) provides for indemnification by the Corporation of Water Street, its underwriters and related parties for securities law claims related to any demand or piggyback registration contemplated in clause (vii) above.\nIn connection with the Restructuring, Water Street nominated two New Directors to the Board, Wade Fetzer III and Barry L. Zubrow. See Item 10, \"Directors and Executive Officers of the Registrant\". In the event that the Water Street Directors are removed from office without the consent of Water Street, then the restrictions on the Water Street Entities relating to (i) the purchases of voting securities of the Corporation other than Permitted Acquisitions, (ii) the voting of securities of the Corporation and (iii) the transfer of shares of Common Stock, as described above, shall terminate. These restrictions shall also terminate upon the earliest to occur of: (i) the consummation of a merger, consolidation or other business combination to which the Corporation is a constituent corporation, if the stockholders of the Corporation immediately before such merger, consolidation or combination do not own more than 50% of the combined voting power of the then outstanding voting securities of the surviving corporation, (ii) the Board consisting of a majority of directors not approved by a vote of the directors serving at the time the Water Street Agreement was executed, and (iii) the tenth anniversary of the Water Street Agreement. In addition, the restrictions on purchases of voting securities and transfers of Common Stock shall also terminate upon the Water Street Entities owning less than 5% of the then outstanding shares of Common Stock.\nFurthermore, the Water Street Entities will not be subject to the voting restrictions contained in the Water Street Agreement if, among other things: (i) the Corporation defaults on the payment of principal or interest required to be paid pursuant to any indebtedness if the aggregate amount of such indebtedness is $25 million or more; (ii) the principal of any of the Corporation's indebtedness is declared due and payable prior to the date on which it would otherwise become due and payable if the aggregate amount of such indebtedness is $25 million or more; (iii) any person other than Water Street becomes the beneficial owner of more than 10% of the then outstanding shares of Common Stock; or (iv) the Corporation fails to comply with (x) the following financial covenants: a minimum senior interest coverage ratio, a minimum total interest coverage ratio, a minimum fixed charge coverage ratio, a minimum adjusted cumulative net worth, and a maximum leverage ratio or (y) a minimum total interest coverage\nratio of 0.63 for a specified coverage period in 1993 and for the first quarter of 1994, 0.84 for the second quarter of 1994, 0.97 for the third quarter of 1994 and 1.14 for the fourth quarter of 1994, provided that (a) such financial covenants shall be calculated based only on domestic revenues unless the Corporation's non-domestic consolidated revenues exceed 35% of its total consolidated revenues, and (b) the Corporation shall not be deemed out of compliance in the event of a breach, after 1994 and prior to 1998, of the senior interest coverage ratio or the total interest coverage ratio unless there shall also exist at such time a breach of the fixed charge coverage ratio or in the event of a breach, after 1994 and prior to 1998, of the fixed charge coverage ratio unless there shall also exist at such time a breach of either the senior interest coverage ratio or the total interest coverage ratio. See \"Description of Credit Agreement\". If the Corporation complies with the financial covenants within the two fiscal quarters following the first failure to comply, the voting restrictions shall apply again. However, if the Corporation thereafter fails to comply with any of the financial covenants, the voting restrictions shall terminate.\nThe provision of registration rights to Water Street is subject to certain limitations, including but not limited to the following: (i) of Water Street's four demand registrations, the Corporation shall pay the registration expenses (other than commissions and discounts of underwriters) for two registrations, and the Corporation and Water Street shall each pay one-half of the registration expenses (other than commissions and discounts of underwriters) for two registrations; and (ii) other than in connection with the Offering, Water Street (and any Water Street Entity that receives a distribution of Common Stock from Water Street and owns 5% or more of the then outstanding shares of Common Stock) shall not request a demand registration of Common Stock during any period in which the Corporation is actively engaged in a registered distribution of Common Stock until 90 days after the effective date of the registration statement relating to such distribution. With respect to the Offering, Water Street (and, if it distributes Common Stock to its partners, those partners) shall not request a demand registration of Common Stock during the 120-day period after the effective date of the Offering. In addition, during such 120-day period, Water Street and Goldman, Sachs & Co. shall not sell or otherwise dispose of any shares of Common Stock or Warrants, except that, at any time after 90 days after the effective date of the Offering, Water Street may distribute all or any portion of its shares of Common Stock or Warrants to its partners in accordance with its governing partnership agreement. In the event of any such distribution by Water Street, the partners (other than Goldman, Sachs & Co.) would not be subject to the restriction on selling shares of Common Stock or Warrants during the remainder of the 120-day period referred to above. Except in the case of the Offering, the Corporation and Water Street have mutual piggyback rights on registrations initiated by either, generally on a 50-50 basis.\nThe Water Street Agreement originally provided, subject to certain exceptions, that, in connection with the first underwritten public offering of Common Stock after the Restructuring, the Corporation would have the right to sell, without participation of Water Street, up to such number of shares of Common Stock as would yield an aggregate price to the public of $100,000,000 and that, if a greater number of shares were to be sold in that offering, Water Street and the Corporation would each have the right to sell 50% of such greater number of shares. In addition, in connection with such offering, subject to certain exceptions, the Water Street Agreement originally provided that Water Street (and, if it distributes Common Stock to its partners, those partners) would not request or demand registration of Common Stock during the 180-day period after the effective date of such offering, rather than the 120-day period that applies to the Offering. In connection with the Offering, the Corporation and Water Street have mutually determined that they would sell in the Offering 4,000,000 shares of Common Stock, without regard to such $100,000,000 limitation, and that such 120-day period would apply in lieu of such 180-day period.\nNOTE PLACEMENT Fidelity Management & Research Company and Fidelity Management Trust Company may beneficially own in excess of 5% of the outstanding shares of Common Stock. See Item 12. \"Security Ownership of Certain Beneficial Owners and Management.\" In connection with the Note Placement, certain funds and accounts managed or advised by Fidelity Management & Research Company and Fidelity Management Trust Company purchased $150 million in aggregate principal amount of Senior Notes due 2001. Such purchasers exchanged approximately $30 million aggregate principal amount of the Corporaton's outstanding Senior Notes due 1996 and approximately $35 million aggregate principal amount of the Corporation's outstanding Senior Notes due 1997 and paid the $85 million balance of the purchase price in cash.\nPART IV\nITEM 14.","section_14":"ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K\nEXHIBIT INDEX\n(A) 1. & 2. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTAL FINANCIAL STATEMENT SCHEDULES\nSee Part II, Item 8. \"Financial Statements and Supplementary Data\" for an index of the Corporation's consolidated financial statements and supplementary data schedules.\n3. EXHIBITS (REG. S-K, ITEM 601):\nExhibits followed by an (*) constitute management contracts or compensatory plans or arrangements.\nEXHIBIT NO. Page ----\n3 Articles of incorporation and by-laws: (a) Restated Certificate of Incorporation of USG Corporation (incorporated by reference to Exhibit 3.1 of USG Corporation's Form 8-K, dated May 7, 1993.) (b) Amended and Restated By-Laws of USG Corporation, dated as of May 12, 1993 (incorporated by reference to Exhibit 3(b) of Amendment No. 1 to USG Corporation's Registration Statement No. 33-61162 on Form S-1, dated June 16, 1993).\n4 Instruments defining the rights of security holders, including indentures: (a) Indenture dated as of October 1, 1986 between USG Corporation and Harris Trust and Savings Bank, Trustee (incorporated by reference to Exhibit 4(a) of USG Corporation's Registration Statement No. 33-9294 on Form S-3, dated October 7, 1986). (b) Resolutions dated December 16, 1986 of a Special Committee created by the Board of Directors of USG Corporation. (c) Resolutions dated March 5, 1987 of a Special Committee created by the Board of Directors of USG Corporation. (d) Resolutions dated March 6, 1987 of a Special Committee created by the Board of Directors of USG Corporation. (e) Resolutions dated April 26, 1993 of a Special Committee created by the Board of Directors of USG Corporation relating to USG Corporation's 8% Senior Notes due 1995 and 9% Senior Notes due 1998 (incorporated by reference to Exhibit 4.1 of USG Corporation's Form 8-K, dated May 7, 1993). (f) Consent Resolutions adopted by a Special Committee created by the Board of Directors of USG Corporation relating to USG Corporation's 9-1\/4% Senior Notes due 2001.\n(g) Indenture dated as of April 26, 1993 among USG Corporation, certain guarantors and State Street Bank and Trust Company, as Trustees, relating to USG Corporation's 10-1\/4% Senior Notes due 2002 (incorporated by reference to Exhibit 4.2 of USG Corporation's Form 8-K, dated May 7, 1993). (h) Indenture dated as of August 10, 1993 among USG Corporation, certain guarantors and State Street Bank and Trust Company, as Trustee, relating to USG Corporation's 10-1\/4% Senior Notes due 2002, Series B (incorporated by reference to Exhibit 4(f) of USG Corporation's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993 dated August 12, 1993. (i) Warrant Agreement dated May 6, 1993 between USG Corporation and Harris Trust and Savings Bank, as Warrant Agent, relating to USG Corporation's Warrants (incorporated by reference to Exhibit 4.3 of USG Corporation's Form 8-K, dated May 7, 1993). (j) Form of Warrant Certificate (incorporated by reference to Exhibit 4(g) of Amendment No. 4 to USG Corporation's Registration Statement No. 33-40136 on Form S-4, dated November 12, 1992). (k) Rights Agreement dated May 6, 1993 between USG Corporation and Harris Trust and Savings Bank, as Rights Agent (incorporated by reference to Exhibit 10.1 of USG Corporation's Form 8-K, dated May 7, 1993). (l) Form of Common Stock certificate (incorporated by reference to Exhibit 4.4 to USG Corporation's Form 8-K, dated May 7, 1993). The Corporation and certain of its consolidated subsidiaries are parties to long-term debt instruments under which the total amount of securities authorized does not exceed 10% of the total assets of the Corporation and its subsidiaries on a consolidated basis. Pursuant to paragraph (b)(4)(iii)(A) of Item 601 of Regulation S-K, the Corporation agrees to furnish a copy of such instruments to the Securities and Exchange Commission upon request.\n10 Material contracts: (a) Management Performance Plan of USG Corporation (incorporated by reference to Annex C of Amendment No. 8 to USG Corporation's Registration Statement No. 33-40136 on Form S-4, dated February 3, 1993).* (b) 1991-1993 Management Incentive Compensation Program -- USG Corporation, as amended (incorporated by reference to Exhibit 10(b) of USG Corporation's 1991 Annual Report on Form 10-K, dated March 5, 1992).* (c) Amendment and Restatement of USG Corporation Supplemental Retirement Plan, effective as of July 1, 1993 and dated November 30, 1993 (incorporated by reference to Exhibit 10(c) of USG Corporation's Registration No. 33-51845 on Form S-1).*\n(d) First Amendment of USG Corporation Supplemental Retirement Plan, effective as of November 15, 1993 and dated December 2, 1993 (incorporated by reference to Exhibit 10(d) of USG Corporation's Registration No. 33-51845 on Form S-1).* (e) Termination Compensation Agreements (incorporated by reference to Exhibit 10(h) of USG Corporation's 1991 Annual Report on Form 10-K, dated March 5, 1992).* (f) USG Corporation Severance Plan for Key Managers, dated May 15, 1991 (incorporated by reference to Exhibit 10(i) of USG Corporation's 1991 Annual Report on Form 10-K, dated March 5, 1992).* (g) Indemnification Agreements (incorporated by reference to Exhibit 10(g) of Amendment No. 1 to USG Corporation's Registration No. 33-51845 on Form S-1).* (h) Form of Change of Control Waiver (incorporated by reference to Exhibit 10(t) of USG Corporation's 1992 Annual Report on Form 10-K dated March 26, 1993).* (i) Incentive Recovery Program -- Waiver of Full Payment (incorporated by reference to Exhibit 10(u) of USG Corporation's 1992 Annual Report on Form 10-K, dated March 26, 1993).* (j) Rights Agreement dated May 6, 1993 between USG Corporation and Harris Trust and Savings Bank, as Rights Agent (incorporated by reference to Exhibit 10.1 of Form 8-K filed by USG Corporation on May 7, 1993). (k) Warrant Agreement dated May 6, 1993 between USG Corporation and Harris Trust and Savings Bank, as Warrant Agent, relating to USG Corporation's Warrants (incorporated by reference to Exhibit 4.3 of Form 8-K filed by USG Corporation on May 7, 1993). (l) Amended and Restated Credit Agreement dated as of May 6, 1993 among USG Corporation and USG Interiors, Inc., as borrowers; the Financial Institutions listed on the signature pages thereof, as Senior Lenders; Bankers Trust Company, Chemical Bank and Citibank, N.A., as Agents; and Citibank, N.A., as Administrative Agent (incorporated by reference to Exhibit 10.2 of Form 8-K filed by USG Corporation on May 7, 1993). (m) First Amendment to Amended and Restated Credit Agreement between USG Corporation and USG Interiors, Inc. as borrowers; the Financial Institutions listed on the signature pages thereof, as Senior Lenders; Bankers Trust Company, Chemical Bank and Citibank, N.A., as Agents; and Citibank, N.A., as Administrative Agent (incorporated by reference to Exhibit 4M of USG Corporation's Registration Statement No. 35-65804 on Form S- 1, dated July 9, 1993).\n(n) Second Amendment to Amended and Restated Credit Agreement between USG Corporation and USG Interiors, Inc. as borrowers; the Financial Institutions listed on the signature pages thereof, as Senior Lenders; Bankers Trust Company, Chemical Bank and Citibank, N.A., as Agents; and Citibank, N.A., as Administrative Agent (incorporated by reference to 10(n) of Amendment No. 1 to USG Corporation's Registration No. 33-51845 on Form S-1). (o) Letter of Credit Issuance and Reimbursement Agreement dated as of May 6, 1993 between USG Interiors, Inc. and Chemical Bank (incorporated by reference to Exhibit 10.12 of Form 8-K filed by USG Corporation on May 7, 1993). (p) Amended and Restated Collateral Trust Agreement dated as of May 6, 1993 among USG Corporation, USG Interiors, Inc. and USG Foreign Investments, Ltd., as grantors, and Wilmington Trust Company and William J. Wade, as Trustees (incorporated by reference to Exhibit 10.6 of Form 8-K filed by USG Corporation on May 7, 1993). (q) Amended and Restated Company Pledge Agreement dated as of May 6, 1993 among USG Corporation, Wilmington Trust Company and William J. Wade (incorporated by reference to Exhibit 10.7 of Form 8-K filed by USG Corporation on May 7, 1993). (r) Amended and Restated Subsidiary Pledge Agreement dated as of May 6, 1993 among USG Interiors, Inc., Wilmington Trust Company and William J. Wade (incorporated by reference to Exhibit 10.8 of Form 8-K filed by USG Corporation on May 7, 1993). (s) Amended and Restated Subsidiary Pledge Agreement dated as of May 6, 1993 among USG Foreign Investments, Ltd., Wilmington Trust Company and William J. Wade (incorporated by reference to Exhibit 10.9 of Form 8-K filed by USG Corporation on May 7, 1993). (t) Amended and Restated Share Pledge Agreement dated as of May 6, 1993 among USG Foreign Investments, Ltd., Wilmington Trust Company and William J. Wade (incorporated by reference to Exhibit 10.10 of Form 8-K filed by USG Corporation on May 7, 1993). (u) Amended and Restated Deed of Charge dated as of May 6, 1993 among USG Foreign Investments, Ltd., Wilmington Trust Company and William J. Wade (incorporated by reference to Exhibit 10.11 of Form 8-K filed by USG Corporation on May 7, 1993). (v) Amended and Restated Company Guaranty dated as of May 6, 1993 made by USG Corporation (incorporated by reference to Exhibit 10.3 of Form 8-K filed by USG Corporation on May 7, 1993). (w) Amended and Restated Subsidiary Guaranty dated as of May 6, 1993 made by USG Interiors, Inc. (incorporated by reference to Exhibit 10.1 of Form 8-K filed by USG Corporation on May 7, 1993).\n(x) Form of Amended and Restated Subsidiary Guaranty dated as of May 6, 1993 made by each of United States Gypsum Company, USG Foreign Investments, Ltd., L&W Supply Corporation, USG Interiors International, Inc., La Mirada Products Co., Inc., Westbank Planting Company, American Metals Corporation and USG Industries, Inc. (incorporated by reference to Exhibit 10.5 of Form 8-K filed by USG Corporation on May 7, 1993). (y) Consent and Agreement dated as of August 22, 1991 with respect to the Old Credit Agreement dated as of July 1, 1988 (incorporated by reference to Exhibit 10(ai) of USG Corporation's Form 8-K, dated August 23, 1991). (z) First Amendment dated as of March 12, 1993 with respect to the Consent and Agreement dated as of August 22, 1991 (incorporated by reference to Exhibit 10(ap) of USG Corporation's 1992 Annual Report on Form 10-K, dated March 26, 1993). (aa) Deposit Agreement dated as of September 19, 1991 (incorporated by reference to Exhibit 10(aq) of USG Corporation's 1992 Annual Report on Form 10-K, dated March 26, 1993). (ab) First Amendment dated as of March 12, 1993 to the Deposit Agreement (incorporated by reference to Exhibit 10(ar) of USG Corporation's 1992 Annual Report on Form 10-K, dated March 26, 1993). (ac) Agreement, dated August 31, 1992, among USG Corporation and the Ad Hoc Committee of Holders of 13 1\/4% Senior Subordinated Debentures of USG Corporation due 2000 (incorporated by reference to Exhibit 10(aq) of Amendment No. 4 to USG Corporation's Registration Statement No. 33-40136 on Form S-4). (ad) Letter Agreement dated February 25, 1993 among USG Corporation, Water Street Corporate Recovery Fund, L.P., the Goldman Sachs Group, L.P. and Goldman, Sachs & Co. (incorporated by reference to Exhibit 10(au) of USG Corporation's 1992 Annual Report on Form 10-K, dated March 26, 1993). (ae) Bankruptcy Court Order issued April 23, 1993 confirming USG Corporation's Prepackaged Plan of Reorganization (incorporated by reference to Exhibit 28.1 of Form 8-K filed by USG Corporation on May 7, 1993). (af) Consulting Agreement dated July 1, 1990, as amended March 23, 1992, between USG Corporation and William L. Weiss (incorporated by reference to Exhibit 10(au) of Amendment No. 4 to USG Corporation's Registration Statement No. 33-40136 on Form S-4). (ag) Consulting Agreement dated May 6, 1993 between USG Corporation and Jack D. Sparks (incorporated by reference to Exhibit 10(av) in USG Corporation's Registration Statement 33-51845 on Form S-1).\nPage ---- (ah) Consulting Agreement dated August 11, 1993 between USG Corporation and James W. Cozad (incorporated by reference to Exhibit 10(aw) in USG Corporation's Registration Statement 33-51845, on Form S-1). (ai) 1993 Annual Management Incentive Program -- USG Corporation (incorporated by reference to Exhibit 10(b) of Amendment No. 1 to USG Corporation's Registration Statement No. 33-61152 on Form S-1). (aj) Form of Employment Agreement dated May 12, 1993 (incorporated by reference to Exhibit 10(h) of Amendment No. 1 to USG Corporation's Registration Statement No. 33-61152 on Form S-1). (ak) Amendment of Termination Compensation Agreements (incorporated by reference to Exhibit 10(j) of Amendment No. 1 to USG Corporation's Registration Statement No. 33-61152 on Form S-1). (al) Form of Nonqualified Stock Option Agreement effective June 1, 1993 (incorporated by reference to Exhibit 10(l) of Amendment No. 1 on USG Corporation's Registration Statement No. 33-61152 on Form S-1). (am) Form of Nonqualified Stock Option Agreement with Anthony J. Falvo, Jr. effective June 1, 1993 (incorporated by reference to Exhibit 10(m) of Amendment No. 1 to USG Corporation's Registration Statement No. 33-61152 on Form S-1). (an) Form of First Amendment to Amended and Restated Collateral Trust Agreement (incorporated by reference to Exhibit 10(w) of Amendment No. 1 to USG Corporation's Registration Statement No. 33-61152 on Form S-1). (ao) Form of First Amendment to Amended and Restated Subsidiary Guaranty (incorporated by reference to Exhibit 10(ae) of Amendment No. 2 to USG Corporation's Registration Statement No. 33-61152 on Form S-1). (ap) Form of First Amendment to Amended and Restated Subsidiary Guaranty (incorporated by reference to Exhibit 10(ae) of Amendment No. 2 to USG Corporation's Registration Statement No. 33-61152 on Form S-1). (aq) First Amendment to Management Performance Plan, effective November 15, 1993 and dated February 1, 1994 (incorporated by reference to Exhibit 10(aq) of USG Corporation's Registration Statement No. 33-51845 on Form S-1). (ar) Modification letter dated February 1, 1994 to Nonqualified Stock Option Agreement dated June 1, 1993 between USG Corporation and Eugene B. Connolly (incorporated by reference to Exhibit 10(ar) of USG Corporation's Registration Statement No. 33-51845 on Form S-1). (as) Form of Nonqualified Stock Option Agreement effective February 9, 1994 (incorporated by reference to Exhibit 10(as) of USG Corporation's Registration Statement No. 33-51845 on Form S-1). (at) Executive Consulting Agreement effective March 1, 1994 between USG Corporation and Anthony J. Falvo, Jr. (incorporated by reference to Exhibit 10(at) of USG Corporation's Registration Statement No. 33-51845 on Form S-1).\n11 Computation of Earnings\/(Loss) Per Common Share\n21 Subsidiaries\n23 Consents of Experts and Counsel (a) Consent of Arthur Andersen & Co.\n24 Power of Attorney\n(B) REPORTS ON FORM 8-K:\nNo reports on Form 8-K were filed during the fourth quarter of 1993.\nSIGNATURES\nPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.\nUSG CORPORATION February 24, 1994\nBy: \/s\/ Richard H. Fleming ------------------------------------\nRichard H. Fleming Vice President and Chief Financial Officer\nPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.\n\/s\/ Eugene B. Connolly February 24, 1994 - --------------------------------- EUGENE B. CONNOLLY Chairman of the Board, Chief Executive Officer and Director (Principal Executive Officer)\n\/s\/ Richard H. Fleming February 24, 1994 - --------------------------------- RICHARD H. FLEMING Vice President and Chief Financial Officer (Principal Financial Officer)\n\/s\/ Raymond T. Belz February 24, 1994 - --------------------------------- RAYMOND T. BELZ Vice President and Controller (Principal Accounting Officer)\nROBERT L. BARNETT, KEITH A. BROWN, ) By: \/s\/ Richard H. Fleming W. H. CLARK, JAMES C. COTTING, ) --------------------------- LAWRENCE M. CRUTCHER, ANTHONY J. ) Richard H. Fleming FALVO, JR., WADE FETZER III, DAVID W. FOX, ) Attorney-in-fact PHILIP C. JACKSON, JR., MARVIN E. LESSER, ) Pursuant to Power of Attorney ALAN G. TURNER, BARRY L.ZUBROW ) (Exhibit 24 hereto) Directors ) February 24, 1994\nAPPENDIX TO FORM 10-K\nThe following graphic has been omitted from the EDGAR submission of USG Corporation's form 10-K:\nPage 7:\nA line graph depicting United States Gypsum wallboard industry shipments and United States total housing starts for the years 1982 through 1993 was replaced with a table providing such data.","section_15":""}
{"filename":"60653_1993.txt","cik":"60653","year":"1993","section_1":"Item 1. Business Item 2. Properties Item 3. Legal Proceedings Item 4. Submission of Matters to a Vote of Security Holders\nPART II\nItem 5. Market for Registrant's Common Stock and Related Stockholder Matters Item 6. Selected Financial Data Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 8. Financial Statements and Supplementary Data Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure\nPART III\nItem 10. Directors and Executive Officers of the Registrant Item 11. Executive Compensation Item 12. Security Ownership of Certain Beneficial Owners and Management Item 13. Certain Relationships and Related Transactions\nPART IV\nItem 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K\nPART I\nItem 1. Business\nTHE COMPANY\nColonial Gas Company (\"Colonial\" or the \"Company\"), a Massachusetts corporation formed in 1849, is primarily a regulated natural gas distribution utility. The Company serves 132,000 utility customers in 24 municipalities located northwest of Boston and on Cape Cod. Through its wholly-owned energy trucking subsidiary, Transgas Inc. (\"Transgas\"), the Company also provides over-the-road transportation of liquefied natural gas (\"LNG\"), propane and other commodities.\nThe Company's corporate office is located at 40 Market Street, Lowell, Massachusetts 01852. The telephone number is (508) 458-3171.\nThe Company's combined natural gas distribution service areas in the Merrimack Valley region northwest of Boston and on Cape Cod cover approximately 622 square miles with a year-round population of approximately 500,000, which increases by approximately 350,000 during the summer tourist season on Cape Cod. The Company is serving approximately 48% of potential customers in its service areas. Of its 132,000 customers, approximately 90% are residential accounts. The Company added 4,223 firm customers in 1993. The Company's growth during the 1980's had been based primarily on new residential and commercial construction in its service areas. More recently, as new construction in the region has slowed from previous levels, the Company has actively sought new customers to convert to gas from other energy sources for their existing homes and businesses. Of the total number of new customers in 1993, 57% converted from other fuels.\nThe Company's 1993 consolidated operating revenues from gas sales were derived 64% from residential customers, 32% from commercial and firm industrial customers, 2% from interruptible industrial customers and 1% from transportation customers. For the year 1993, the Company sold 19,965 MMcf of gas, of which 12,889 MMcf was sold in the Merrimack Valley area and 7,076 MMcf in the Cape Cod area. At December 31, 1993, 90% of the Company's residential customers used gas as their source of heating fuel. The demand for the products and services furnished by the Company is to a great extent seasonal, being heaviest in the colder months.\nAt December 31, 1993, the Company had 464 full-time and 51 part-time gas employees. Of those employees, 97 are covered by a collective bargaining agreement with the United Steelworkers of America which expires in April 1996 and 82 are covered by a separate collective bargaining agreement with the United Steelworkers of America which expires in February 1995. In addition, the Company has 11 full-time and 3 part-time appliance sales employees and Transgas employs 86 full-time employees. Of those Transgas employees, 59 are covered by a collective bargaining agreement with the International Brotherhood of Teamsters, which expires in June 1996.\nGAS SUPPLY\nAs of November 1, 1993, all interstate pipelines were required to implement restructuring programs pursuant to Order 636 of the Federal Energy Regulatory Commission (\"FERC\"). See \"Regulatory Matters - Federal Regulation\" below. Intended to create a more competitive environment in the natural gas industry, Order 636 required the pipelines to unbundle\/separate the three components of their former city gate sales services: supply, transportation and storage. Under this restructuring program local distribution companies (\"LDCs\") such as the Company have been assigned their pro-rata share of the transportation and storage entitlements which were inherent in the discontinued sales service. Further, LDCs now negotiate directly with suppliers for their supply requirements and must effectively manage their transportation and storage in conjunction with those supplies. In general, the Company pays negotiated rates for gas supplies and tariffed rates (approved by FERC) for transportation and storage services.\nThe Company has determined that its supply requirements should be met through a combination of firm purchases, spot purchases, supply from underground storage, liquefied natural gas (\"LNG\") and propane.\nThe following table shows the Company's sources of firm supply to meet its gas requirements and the actual components of gas sendout for each of the last three years:\n1993 1992 1991 MMcf(a) % MMcf(a) % MMcf(a) % Firm Gas Sources (b) Supply purchase contracts (c) 19,731 74 - - - - Pipeline contracts - - 24,933 81 24,933 81 LNG contracts 3,450 13 3,125 10 3,125 10 Storage inventory at January 1(d) 3,417 13 2,786 9 2,625 9 Total sources 26,598 100 30,844 100 30,683 100\nGas Sendout Pipeline: Firm gas supply 2,620 13 - - - - Pipeline contracts (e) 7,184 35 8,292 40 5,053 27 Spot purchases 5,178 26 8,341 40 9,604 51 Supplemental: Underground storage 3,501 17 2,666 13 3,018 16 LNG-as liquid 907 4 564 2 524 3 LNG-as vapor 915 5 1,095 5 462 3 Propane-air 8 - 9 - 13 -\nTotal sendout 20,313 100 20,967 100 18,674 100\nRatio of firm sources to sendout 1.63 (f) 1.47 1.64\n(a) The term \"MMcf\" means one million cubic feet of vapor or vapor equivalent.\n(b) 1993 reflects the Company's portfolio of firm sources subsequent to the pipeline unbundling mandated by FERC Order 636, calculated on an annualized basis.\n(c) The Company's total firm pipeline transportation capacity for 1993 following the unbundling mandated by FERC Order 636 was 26,239 MMcf. The Company's firm supply purchase contracts are structured to enable the Company to purchase volumes equivalent to its total firm pipeline capacity during the winter or peak season, but less than total firm pipeline capacity during the off-peak season when customer demand is less. Accordingly, on an annualized basis, the total supply purchase contract volume shown is less than total firm transportation capacity.\n(d) The Company's storage inventory is drawn down and refilled throughout the year depending upon the availability and price of gas sources and upon the requirements of the Company's customers. The Company's current level of underground storage inventory capacity is 4,309 MMcf.\n(e) 1993 reflects pipeline contracts prior to implementation of FERC Order 636.\n(f) The Company's ratio of firm sources to sendout for 1993 was determined by adding available transportation capacity (26,239 MMcf) to LNG contracts (3,450 MMcf) and storage inventory (3,417 MMcf), and then dividing by total sendout.\nBased upon presently available information concerning its firm contracts for transportation, storage and supply, and other supplemental sources, the Company expects to be able to meet the gas requirements of its firm customers for the foreseeable future. Additional information concerning the Company's firm sources of gas transportation, storage and supply for its two service territories is set forth below.\nMerrimack Valley Service Area Sources\nThe Merrimack Valley service area is directly served by the Tennessee Gas Pipeline Company (\"Tennessee\"). The Company has three separate firm transportation contracts with Tennessee, and two storage contracts with accompanying transportation contracts.\nOne of the firm transportation service contracts with Tennessee is for approximately 25,196 Mcf per day and will be in effect until November 1, 2000 and year to year thereafter unless terminated upon twelve months prior written notice. The three firm supply contracts which utilize this transportation service provide various levels of supply service up to a total of 25,196 Mcf per day during the peak period, and have been filed with the Massachusetts Department of Public Utilities (\"DPU\") for its approval. A ruling is expected shortly. See \"Regulatory Matters - Federal Regulation\" below.\nThe second firm transportation service contract with Tennessee is for approximately 17,300 Mcf per day and will be in effect until April 1, 2013 and year to year thereafter unless terminated upon twelve months prior written notice. To meet its own peak season supply requirements, the Company has a firm supply contract for the months of November through March which provides the entire volume associated with this transportation contract. The firm supply contract will be in effect until October 31, 2000 and year to year thereafter unless terminated with twelve months prior written notice. During the off-peak season the Company expects to utilize its capacity entitlements under this transportation contract to transport gas on behalf of an 84 MW cogeneration facility which is independently owned.\nThe third firm transportation service contract with Tennessee is utilized in conjunction with the Iroquois Pipeline System (\"Iroquois\"). The Company has contracted for approximately 2,000 Mcf per day of capacity on Iroquois and Tennessee for delivery of the Company's Canadian supplies to the Merrimack Valley service area. These transportation contracts are in effect until November 1, 2011 and continue year to year thereafter unless terminated by twelve months prior written notice.\nIn addition, contingent upon all necessary regulatory approvals, the Company has contracted for approximately 4,000 Mcf of additional Canadian supply, along with associated capacity on Iroquois and Tennessee. These volumes would be deliverable to either the Merrimack Valley or Cape Cod service areas on a firm basis.\nThe Company has underground storage capacity of approximately 2,000,000 Mcf of natural gas pursuant to a contract with Penn-York Energy Corporation. This storage contract is for service to the Merrimack Valley service area and continues until March 31, 1995 and from year to year thereafter unless terminated upon twelve months prior written notice. The gas is transported from storage to the Merrimack Valley service area by Tennessee pursuant to a firm transportation contract for up to approximately 15,691 Mcf per day which continues until March 31, 1995 and from year to year thereafter unless terminated upon twelve months prior written notice.\nThe Company has another underground gas storage service pursuant to separate storage and transportation contracts with Tennessee. The storage contract provides capacity of approximately 1,053,898 Mcf of natural gas, and the related transportation contract is for up to approximately 7,504 Mcf per day. These contracts continue until November 1, 2000 and from year to year thereafter unless terminated upon twelve months prior written notice.\nTo serve the Merrimack Valley service area, the Company owns an LNG facility, located in Tewksbury, Massachusetts, which has liquefaction capacity of approximately 5,000 Mcf of natural gas per day. LNG can also be delivered by truck for injection into this facility which has a total storage capacity of approximately 1,000,000 Mcf. In addition, the facility has the capability of vaporizing and injecting back into the distribution system approximately 60,000 Mcf per day.\nThe Company has also contracted for the purchase of LNG that can be available to both the Merrimack Valley and Cape Cod service areas. This contract provides for approximately 150,000 Mcf in the 1993-94 winter season with an expiration date of October 31, 1994. The Company has an option to increase the quantity of natural gas available under this contract by as much as one-third during the winter season. In addition, the Company has a separate contract for the liquefaction of approximately 300,000 Mcf of LNG each year through October 31, 1996.\nThe Company also owns facilities for the storage of approximately 158,000 Mcf natural gas equivalent of propane which can be vaporized, mixed with air and injected into the Merrimack Valley service area distribution system at a rate of up to approximately 26,000 Mcf per day. The Company does not normally enter into long-term contracts for the purchase of propane to supply either its Merrimack Valley or Cape Cod service areas, and there are no such contracts currently in effect.\nCape Cod Service Area Sources\nThe Cape Cod service area is directly served by the Algonquin Gas Transmission Company (\"Algonquin\") through various transportation services. The Company has ten firm transportation agreements with Algonquin which total approximately 37,207 Mcf of capacity per day. Each of these ten Algonquin transportation arrangements will be in effect until either October 31, 2012 or October 31, 2013 and will continue year to year thereafter unless terminated upon twelve months prior written notice. Because there are no production supply sources directly connected to Algonquin, these services are supported by multiple transportation and storage services on seven upstream pipelines of several different pipeline companies. The Company has contracted with four suppliers for various levels of firm supply service up to a total of 20,918 Mcf per day during the peak season, and those contracts have been filed with the DPU for its approval. A ruling is expected shortly. See \"Regulatory Matters - Federal Regulation\" below.\nThe Company has six unbundled storage contracts to service the Cape Cod area, three of which are on the Texas Eastern Transmission Company (\"Texas Eastern\") system and three on the CNG Transmission Corporation (\"CNG\") system. Colonial has contracted for underground natural gas storage capacity of approximately 461,396 Mcf with Texas Eastern (related firm transportation out of storage of up to approximately 6,451 Mcf per day) through the 2012-2013 heating season and with CNG for underground natural gas storage capacity of approximately 1,056,129 Mcf (related firm transportation out of storage of up to approximately 6,442 Mcf per day). Texas Eastern and Algonquin transport the natural gas from these storage fields to the Cape Cod service area under a variety of transportation contracts.\nAlso, the Company leases facilities in the Cape Cod service area for the storage (but not the liquefaction) of approximately 180,000 Mcf of LNG and, through May 1994, the Company has contracted with a subsidiary of Algonquin for the annual storage capacity of approximately 42,000 Mcf of LNG in a Providence, Rhode Island facility. In addition, the Company has storage for 27,000 Mcf natural gas equivalent of propane which the Company normally purchases on a short-term basis.\nLastly, the Company has one bundled supply and transportation arrangement for the purchase and firm delivery of gas. The arrangement provides for the delivery to the Company of up to approximately 10,000 Mcf per day and approximately 3,000,000 Mcf annually of LNG as either liquid or vapor for a one year period ending October 31, 1994. Under this arrangement the primary delivery point is the Cape Cod service area, but the Company can designate the Merrimack Valley service area on a day to day basis as an alternate delivery point.\nREGULATORY MATTERS Federal Regulation\nBy the fall of 1993, several interstate pipelines serving Colonial had implemented FERC Order 636. Order 636, issued in 1992, required interstate pipeline companies to \"unbundle\" gas supply, transportation and storage services previously provided under a unified tariffed service. Now, the Company is responsible for procuring gas supplies and storage services to meet its load requirements, with the pipelines providing transportation only service. In general, Colonial pays negotiated rates for gas supplies and FERC-approved tariffed rates for transportation and storage services. On November 9, 1993, the Company filed each of its gas supply purchase contracts to be reviewed by the DPU, which has not previously exercised jurisdiction with respect to the Company's base load supplies. These FERC ordered changes may increase the contracting, supply and regulatory risk for the Company. At the same time, they could also create a more competitive market for gas supply which would permit the Company to achieve savings in its cost of gas. Because the new rules have recently been implemented, the Company cannot now predict their impact, but it does not expect them to have a material direct effect on its results of operations.\nState Regulation\nThe Company is a public utility subject to the jurisdiction and regulatory authority of the Massachusetts DPU with respect to its rates as well as to the issuance of securities, franchise territory and other related matters. The DPU permits Massachusetts gas companies to utilize a cost of gas adjustment clause which enables them to pass on to their customers, via their monthly gas bill, changes in the cost of gas. Other changes in rates charged to customers are subject to approval by the DPU after formal proceedings.\nThe Company periodically receives refunds and charges from its gas transporters related to rate adjustments ordered by the FERC. All of the refunds and charges are returned to or collected from utility customers under methods approved by the DPU.\nDuring 1990, the DPU ruled that the Company and eight other Massachusetts gas distribution companies can recover environmental response costs related to former gas manufacturing operations through the CGAC as described under \"Environmental Matters\".\nIn August 1992, the DPU approved the second phase of the Company's demand side management program. When completed this program is expected to save over $15 million in gas costs that would have been incurred over the lives of the installed conservation measures. In order to achieve these savings, Colonial is investing $8 million over a two-year period in customer conservation measures such as insulation, heating systems controls and water heating conservation devices. As a result, Colonial expects to reduce customer bills by a net $7 million from the levels they would have been at if no conservation occurred. Colonial has been authorized by the DPU to fully recover all costs associated with the program through the CGAC. In addition, the Company is also authorized to recover the margins lost as a result of this program and, if certain milestones are met, to receive an additional financial incentive of up to $400,000. In January 1994, the Company filed a request with the DPU to extend the operation of this program from September 1994 until September 1995. A ruling is expected shortly.\nIn October 1992, the Company received authorization from the DPU to extend natural gas service into the Town of Eastham, Massachusetts. Eastham, located at the eastern end of Cape Cod, provides Colonial with new growth opportunities. Colonial believes that there are 5,000 homes and businesses in Eastham that currently utilize other fuels such as oil, electricity and propane which present opportunities for natural gas conversions. The Company has added 104 customers in the town since facilities were constructed in the fourth quarter of 1992.\nIn November 1992, the DPU approved Colonial's request for two new rate schedules which are designed to overcome equipment cost disadvantages that existed in the natural gas air conditioning and small scale cogeneration markets. By reducing , if not eliminating, these cost disadvantages, the Company expects to increase sales into these markets and increase the usage of its distribution system during off-peak periods. The Company has used these new rate schedules to make proposals to potentially large customers and expects to continue to pursue this new market opportunity in 1994.\nIn April 1993, the Company applied for a $10.75 million or 7.87% increase of its base rates. This was only the second base rate increase requested by Colonial since 1984. Effective November 1, 1993, the Company received DPU approval of a settlement agreement that called for a base rate increase designed to produce additional revenues of $6.7 million or 4.9% annually. In addition to this rate increase, the DPU approved a proposal to expand the eligibility criteria for Colonial's discount rate to be applied to low-income residential heating customers. The table below summarizes the Company's recent rate activity:\nResults of the Company's Requests to Increase Base Revenue\nRequested Approved Date Effective Amount Percentage Amount Percentage November 1, 1984 $ 4.30 million 3.73% $2.8 million 2.4% November 1, 1990 $ 12.80 million 9.86% $7.9 million 5.6% November 1, 1993 $ 10.75 million 7.87% $6.7 million 4.9%\nIn response to new marketing opportunities which may result from the FERC Order 636 and the unbundling of interstate pipeline services, Colonial requested in its 1993 rate filing and gained DPU approval to offer a firm transportation service on the Company's distribution system in order to provide customers with an alternative to traditional firm sales service. The DPU order also permits the Company to retain 10% of the revenues generated from releasing the Company's interstate pipeline transportation capacity to third parties above a threshold of $2,500,000 for 1994. In 1993, the Company earned $2,200,000 in capacity release revenue that was credited back to firm customers and had no impact on earnings.\nIn October 1993, the DPU approved Colonial's proposal for a rate targeted at the natural gas vehicle market. The approved rates remain in effect over the course of a \"market-development\" period that extends until January 1, 1997. To assist Colonial in selling additional quantities of natural gas to the natural gas powered vehicle market, the authorized rate is to be indexed $.50 below the retail price of gasoline, provided that it cannot fall below a floor rate equal to Colonial's marginal cost of gas plus 5%. As of December 31, 1993, these rates are approximately equal to $0.70 per gallon equivalent for retail customers.\nCOMPETITION\nMassachusetts law protects gas companies from competition with respect to pipeline distribution of natural gas within its franchise areas by providing that, where a gas company exists in active operation, no other person may lay pipe in the public ways without the approval, after notice and hearing, of the municipal authorities and the DPU. If a municipality desires to enter the gas business, it must take certain procedural steps, including a favorable vote by a majority of the voters in a city election or two-thirds vote at each of two town meetings, and must purchase the property of any gas company operating in the municipality, if the company elects to sell, to the extent, and at such prices, as may be agreed upon or, if no agreement is reached, as the DPU determines.\nAlthough, under a series of FERC orders issued in the late 1980's, certain larger industrial users may attempt to obtain gas from other sources and by-pass a utility's distribution system, the Company does not believe that these FERC orders will have a material adverse effect on its business, in part because large industrial users are not a significant part of its customer base.\nThe Company provides a transportation-only service of gas through its distribution system for commercial and industrial customers either on a firm basis or an interruptible basis. While such transportation may displace direct gas sales by the Company, this service assists qualifying customers in obtaining the lowest possible gas costs while still contributing to the profit margin of the Company. Profit margins from interruptible sales and interruptible transportation result in lower gas costs which are passed through to firm customers by the cost of gas adjustment clause and, therefore, do not directly affect operating margin or net income.\nFuel oil suppliers, electric utilities and propane suppliers provide competition generally for residential, commercial and industrial customers. Interruptible sales are generally in competition with No. 6 fuel oil which most of the interruptible customers are equipped to use. Lower worldwide oil prices may adversely affect the Company's ability to retain or attract customers. The Company's rates have remained generally competitive with the price of alternative fuels, but the long- term impact of fuel price changes on the Company and its rates cannot be predicted.\nThe Company is aware that a steam generating enterprise plans to begin operations in the City of Lowell in the fall of 1994. The enterprise would operate a \"trigeneration\" facility which would produce (i) electric power for its own operation and for sale to the New England power pool, (ii) gases such as CO2 and argon for sale in industrial applications, and (iii) steam for sale through a pipeline system to government offices, schools and businesses within the City of Lowell. The enterprise is in the process of obtaining the easements and other permits and regulatory approvals necessary for its steam pipeline system and its fuel storage and generating facilities.\nIn the event this Lowell steam generating enterprise is successfully able to produce and distribute steam to government and private businesses in Lowell, many of whom are currently customers of the Company, the Company would be faced with an additional energy source competitor for those customers. It cannot currently be determined what impact, if any, such competition would have on the Company's sales to commercial and industrial customers in Lowell.\nENVIRONMENTAL AND PIPELINE SAFETY MATTERS\nThe Company is subject to Federal and state laws and regulations dealing with environmental protection. Compliance with such environmental laws and regulations has resulted in increased costs with respect to the Company's existing operations.\nWorking with the Massachusetts Department of Environmental Protection, the Company is engaged in site assessments and evaluation of remedial options for contamination that has been attributed to the Company's former gas manufacturing site and at various related disposal sites. During 1990, the DPU ruled that Colonial and eight other Massachusetts gas distribution companies can recover environmental response costs related to former gas manufacturing operations over a seven-year period, without carrying costs, through the CGAC. Through December 31, 1993, the Company had incurred $7,750,000 of environmental response costs related to these sites, $1,521,000 for the former gas manufacturing site and $6,229,000 for the related disposal sites. The Company expects to continue incurring costs arising from these environmental matters.\nAs of December 31, 1993 the Company has recorded on the balance sheet a long-term liability of $5,300,000 representing estimated future response costs relating to these sites based on the Company's preferred methods of remediation; of this amount $2,200,000 relates to the gas manufacturing site. Based upon the DPU order approving rate recovery of environmental response costs, a regulatory asset of $5,300,000 has been recorded on the balance sheet (\"Unrecovered Environmental Costs Accrued\"). This amount has decreased from the prior year estimate based upon the completion of certain remedial actions and a lower expectation of future costs due to changes in environmental regulations and a better understanding of on-site exposures. Actual environmental response costs to be incurred depends on various factors, and therefore future costs may differ from the amount currently recorded as a liability.\nAs of December 31, 1993, the Company has settled claims relating to this matter with all liability insurers and other known potentially responsible parties (\"PRP\"), except for one. The Company expects to receive $250,000 in 1994 from that PRP. In accordance with the DPU order referred to above, half the costs incurred in pursuing insurers and other PRP are recovered from the ratepayers through the CGAC and half are initially borne by the Company. Also, per this order, any insurance and other proceeds are applied first to the Company's costs of pursuing recovery from insurers and other PRP, with the remainder divided equally between the ratepayers and shareholders.\nThe table below summarizes the environmental response costs incurred and insurance and other proceeds received relating to these environmental response costs:\n(In Thousands) Response Costs Insurance and Other Proceeds Recovered Returned Recorded as Non- from Period of to Operating Income Year Incurred Customers Rate Recovery Customers Net of Taxes\n1988 $ 853 $ 488 1990-1997 - - 1989 4,031 2,303 1990-1997 - - 1990 639 274 1991-1998 - - 1991 374 107 1992-1999 $ 851 $ 525 1992 617 88 1993-2000 1,121 673 1993 1,236 - 1994-2001 469 290 Total $7,750 $3,260 $2,441 $1,488\nTRANSGAS INC.\nTransgas primarily provides over-the-road transportation of LNG, propane and other commodities. Transgas acts as a common carrier for approximately 60 commercial and gas utility customers located in the eastern half of the United States. Canadian over- the-road transportation services are also available through CGI Transport Limited, which is a wholly-owned subsidiary of Transgas. Transgas also provides a unique LNG portable pipeline service, which permits gas utilities to provide continuous supply of natural gas to communities while the pipeline supply is temporarily interrupted during scheduled maintenance, upgrading, and recertification, or during emergency interruption.\nRates charged for Transgas' common carrier transportation service are filed as tariffs under operating authorities issued to Transgas by the Interstate Commerce Commission and regulatory agencies in various states, and to CGI Transport Limited by Canadian provincial authorities. As common carriers, they are also subject to various regulations applicable to motor common carriers, including accounting matters, safety matters, rates charged and various fiscal matters.\nTransgas had revenues of $8.1 million in 1993. Approximately 50% of Transgas' revenue in 1993 was derived from transporting Algerian LNG from the Distrigas import terminal which is located in Everett, Massachusetts.\nTransgas provides over-the-road transportation services by utilizing a permanent fleet of 37 tractors. Transgas operates 56 trailers which are specifically designed for the transportation of cryogenic liquids. Of those cryogenic transport trailers, 21 are leased on a long-term basis. In addition, Transgas has 25 trailers which are designed for the transportation of propane. Of those propane transport trailers, 4 are leased on a long-term basis. There were also 12 owner-operated tractors utilized for propane hauling during the year. In addition to the equipment described above, Transgas also has 11 trailers which are designed for carrying vaporizers and 2 flat bed trailers.\nTransgas competes with many other motor carriers engaged in the transportation of various gases and other products. Transgas believes, however, that it is the leading over-the-road transporter of LNG due to the size of its fleet of specialized cryogenic transport trailers.\nTransgas closed its unprofitable bulk cement trucking operation during the first half of 1993. The closing of this operation permitted Transgas to reduce overhead expenses. In addition, trucking equipment associated with this operation were sold at prices exceeding net book value.\nItem 1A.","section_1A":"Item 1A. Executive Officers of the Registrant.\nThe following table indicates the present executive officers of the Company, their ages, the dates when their service with the Company began and their respective positions with the Company.\nAffiliated with Name and Age Position with Company Company Since\nFrederic L. Putnam, Chairman and Chief Executive Officer 1953 Jr. (69)\nCharles O. Swanson (62) President 1971\nFrederic L. Putnam, Executive Vice President and III (48) General Manager 1975\nJohn P. Harrington (51) Vice President - Gas Supply 1966\nNickolas Stavropoulos Vice President - Finance and (36) Chief Financial Officer 1979\nVictor W. Baur (50) President - Transgas Inc. 1972\nDennis W. Carroll (47) Vice President and Treasurer 1990\nCharles A. Cook (41) Vice President and General Counsel 1978\nMr. Putnam, Jr. has been Chairman of the Board of Directors since 1981 and the Chief Executive Officer since 1977. He has also been a Director since 1973.\nMr. Swanson has been President since July 1990. He is scheduled to retire on May 1, 1994. He had been Executive Vice President since November 1986. He has also been a Director since 1986.\nMr. Putnam, III, the son of F.L. Putnam, Jr., has been Executive Vice President and General Manager since April 1993. He has been elected President effective May 1, 1994. He had been Vice President and General Manager since August 1989. He has also been a Director since November 1991.\nMr. Harrington has been Vice President - Gas Supply since August 1989. He had been Vice President - General Manager - Lowell Division since November 1986. He has also been a Director since February 1993.\nMr. Stavropoulos has been Vice President - Finance and Chief Financial Officer since August 1989. He had been Vice President - Rates and Planning since November 1985. He has also been a Director since February 1993.\nMr. Baur has been President of Transgas Inc. since July 1990. He had been Executive Vice President - General Manager of Transgas Inc. since 1984. He also became a Director in August 1993.\nMr. Carroll has been Vice President and Treasurer since August 1990. Prior to then he was a partner with Grant Thornton, the Company's independent certified public accountants.\nMr. Cook has been Vice President and General Counsel since July 1990. He had been Vice President and Counsel since August 1989.\nThese officers hold office until the next annual meeting of the Board of Directors or until their successors are duly elected and qualified.\nItem 2.","section_1B":"","section_2":"Item 2. Properties.\nThe Company has two principal operations centers and a natural gas liquefaction and storage facility with approximately 1,000,000 Mcf of LNG storage capacity located in Tewksbury, Massachusetts. The Company's gas production and storage facilities, metering and regulation stations and operations centers are generally located on land it owns.\nA 175,000 Mcf LNG storage tank located on land owned by the Company in South Yarmouth, Massachusetts is leased from an unaffiliated company through 1998. The Company also has a lease which expires in 2002 for office facilities in Lowell, Massachusetts.\nThe Company's distribution mains of approximately 2,690 miles are located within public highways under franchises or permits from state or municipal authorities, or on land owned by others under easements or licenses from the owners. The Company's first mortgage bonds are collateralized by utility property.\nManagement considers that the Company's properties are adequate for the conduct of its business for the reasonably foreseeable future.\nItem 3.","section_3":"Item 3. Legal Proceedings.\nSee Item 1, \"Business--Environmental and Pipeline Safety Matters\" above, which is incorporated herein.\nItem 4.","section_4":"Item 4. Submission of Matters to a Vote of Security Holders.\nNo matter was submitted to a vote of the Company's security holders during the quarter ended December 31, 1993.\nPART II\nItem 5.","section_5":"Item 5. Market for Registrant's Common Stock and Related Stockholder Matters.\nThe information required to be reported hereunder is incorporated by reference to the information reported in the Company's 1993 annual report to stockholders under the caption \"Shareholder Information\" and under Note D of the \"Notes to Consolidated Financial Statements\".\nItem 6.","section_6":"Item 6. Selected Financial Data.\nThe information required to be reported hereunder is incorporated by reference to the information reported in the Company's 1993 annual report to stockholders under the caption \"Selected Financial Data\".\nItem 7.","section_7":"Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.\nThe information required to be reported hereunder is incorporated by reference to the information reported in the Company's 1993 annual report to stockholders under the caption \"Management's Discussion and Analysis of Financial Condition and Results of Operations\".\nItem 8.","section_7A":"","section_8":"Item 8. Financial Statements and Supplementary Data.\nThe information required to be reported hereunder is incorporated by reference to the information reported in the Company's 1993 annual report to stockholders under the following captions: \"Consolidated Statements of Income\", \"Consolidated Balance Sheets\", \"Consolidated Statements of Cash Flows\", \"Consolidated Statements of Common Equity\", \"Notes to Consolidated Financial Statements\", \"Report of Independent Certified Public Accountants\" and \"Shareholder Information\".\nItem 9.","section_9":"Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.\nNone.\nPART III\nItem 10.","section_9A":"","section_9B":"","section_10":"Item 10. Directors and Executive Officers of the Registrant.\nThe information required to be reported hereunder for the Company's Directors is incorporated by reference to the information reported in the Company's Proxy Statement for its 1994 annual meeting of stockholders under the caption \"Election of Directors\".\nThe information required to be reported hereunder for the Executive Officers of the Registrant is incorporated by reference to the information in Item 1A of this Form 10-K under the caption \"Executive Officers of the Registrant\".\nItem 11.","section_11":"Item 11. Executive Compensation.\nThe information required to be reported hereunder is incorporated by reference to the information reported in the Company's Proxy Statement for its 1994 annual meeting of stockholders under the captions \"Executive Compensation\" and under the subheading \"Directors' Compensation\" of the caption \"Election of Directors\".\nItem 12.","section_12":"Item 12. Security Ownership of Certain Beneficial Owners and Management.\nThe information required to be reported hereunder is incorporated by reference to the information reported in the Company's Proxy Statement for its 1994 annual meeting of stockholders under the caption \"Security Ownership of Certain Beneficial Owners and Management\".\nItem 13.","section_13":"Item 13. Certain Relationships and Related Transactions.\nThe information required to be reported hereunder is incorporated by reference to the information reported in the Company's Proxy Statement for its 1994 annual meeting of stockholders under the caption \"Election of Directors\".\nPART IV\nItem 14.","section_14":"Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.\n(a) 1. Financial Statements The Consolidated Financial Statements of the Company (including the Report of Independent Certified Public Accountants) required to be reported herein are incorporated by reference to the information reported in the Company's 1993 annual report to stockholders under the following captions: \"Consolidated Statements of Income\", \"Consolidated Balance Sheets\", \"Consolidated Statements of Cash Flows\", \"Consolidated Statements of Common Equity\", \"Notes to Consolidated Financial Statements\" and \"Report of Independent Certified Public Accountants\".\n2. Financial Statement Schedules The following Financial Statement Schedules and report thereon are filed as part of this Form 10-K on the pages indicated below:\nSchedule Number Description\nReport of Independent Certified Public Accountants on Schedules\nV Property, Plant and Equipment for the three years ended December 31, 1993\nVI Accumulated Depreciation, Depletion and Amortization of Property, Plant and Equipment for the three years ended December 31, 1993\nVIII Valuation and Qualifying Accounts for the three years ended December 31, 1993\nIX Short-term Debt for the three years ended December 31, 1993\nX Supplementary Income Statement Information for the three years ended December 31, 1993\nSchedules other than those listed above are either not required or not applicable, or the required information is shown in the financial statements or notes thereto. Columns omitted from schedules filed have been omitted because the information is not applicable.\n3. List of Exhibits\nExhibit Number Exhibit Reference\n3a Restated Articles of Organization of Filed herewith as Colonial Gas Company, dated April Exhibit 3a. 19, 1989, as amended on July 16, 1992, and supplemented by a Certificate of Vote of Directors establishing a series of a class of stock filed on November 30, 1993.\n3b By-Laws of Colonial Gas Company, as Filed herewith as amended to date. Exhibit 3b.\n4a Second Amended and Restated First Incorporated herein Mortgage Indenture, dated as of June by reference. 1, 1992, filed as Exhibit 4(b) to Form 10-Q of the Registrant for the quarter ended June 30, 1992.\n4b First Supplemental Indenture, dated Incorporated herein as of June 15, 1992, filed as by reference. Exhibit 4(c) to Form 10-Q of the Registrant for the quarter ended June 30, 1992.\n4c Credit Agreement for Colonial Gas Incorporated herein Company, dated as of June 27, 1990, by reference. filed as Exhibit 10(a) to Form 8-K of the Registrant for the quarter ended June 30, 1990, as amended on December 24, 1991, filed as Exhibit 4(j) to Form 10-K of the Registrant for the year ended December 31, 1991, as amended on July 27, 1993, filed as Exhibit 4(a) to Form 10-Q of the Registrant for the quarter ended June 30, 1993.\n4d Credit Agreement for Massachusetts Incorporated herein Fuel Inventory Trust, dated as of by reference. June 27, 1990, filed as Exhibit 10(b) to Form 8-K of the Registrant for the quarter ended June 30, 1990, as amended on July 27, 1993, filed as Exhibit 4(b) to Form 10-Q of the Registrant for the quarter ended June 30, 1993.\n4e Purchase Contract, dated as of June Incorporated herein 27, 1990 between Massachusetts Fuel by reference. Inventory Trust acting by and through its Trustee, Shawmut Bank, N.A. and Colonial Gas Company, filed as Exhibit 10(e) to Form 8-K of the Registrant for quarter ended June 30, 1990.\n4f Security Agreement and Assignment of Incorporated herein Contracts, dated as of June 27, 1990 by reference. made by Massachusetts Fuel Inventory Trust in favor of The First National Bank of Boston as Agent, for the Ratable Benefit of the Secured Parties Named Herein, filed as Exhibit 10(c) to Form 8-K of the Registrant for the quarter ended June 30, 1990.\n4g Trust Agreement, dated as of June Incorporated herein 22, 1990 between Colonial Gas by reference. Company (as Trustor) and Shawmut Bank, N.A. (as Trustee), filed as Exhibit 10(d) to Form 8-K of the Registrant for quarter ended June 30, 1990.\n10a Storage Service Transportation Incorporated herein Contract with Tennessee Gas Pipeline by reference. Company, a Division of Tenneco Inc., dated January 1, 1983, filed as Exhibit 10(b) to the Registrant's Registration Statement on Form S-2. Commission File No. 2-93118.\n10b Service Agreement with Algonquin Gas Incorporated herein Transmission Company, dated December by reference. 11, 1972, filed as Exhibit 13(n) to Colonial Gas Energy System's Registration Statement on Form S-1. Commission File No. 2-54673.\n10c Storage Service Agreement with Penn- Incorporated herein York Energy Corporation, dated as of by reference. December 21, 1984, filed as Exhibit 10(r) to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1984.\n10d Agreement for Sale of Gas between Incorporated herein Bay State Gas Company and Colonial by reference. Gas Company, dated December 11, 1987, filed as Exhibit 10(m) to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1987.\n10e Agreement for Liquefaction of Gas Incorporated herein with Bay State Gas Company, dated by reference. March 14, 1988, filed as Exhibit 10(p) to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1989.\n10f Service Agreement with Distrigas of Incorporated herein Massachusetts Corporation, as by reference. related to firm vapor service, dated September 30, 1989, filed as Exhibit 10(q) to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1989.\n10g Letter Agreement with Distrigas of Incorporated herein Massachusetts Corporation, related by reference. to firm vapor service agreement, dated December 8, 1989, filed as Exhibit 10(r) to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1989.\n10h Service Agreement with Distrigas of Incorporated herein Massachusetts Corporation, related by reference. to firm vapor service, dated October 31, 1990, filed as Exhibit 10(s) to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1990.\n10i Gas Transportation Contract for Firm Incorporated herein Reserved Service with Iroquois, by reference. dated February 7, 1991, filed as Exhibit 10(v) to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1990.\n10j Gas Sales Agreement No. 1 with ANE, Incorporated herein dated February 7, 1991, filed as by reference. Exhibit 10(y) to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1990.\n10k Gas Sales Agreement between Sonat Incorporated herein Exploration Company and Sonat by reference. Marketing Company and Colonial Gas Company, dated October 1, 1990, filed as Exhibit 10(cc) to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1990.\n10l Firm Natural Gas Transportation Incorporated herein Agreement between Tennessee Gas by reference. Pipeline Company and Colonial Gas Company (under Rate Schedule NET- NE), dated February 7, 1991, filed as Exhibit 10(ff) to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1991.\n10m Amended and Restated Gas Sales Incorporated herein Agreement between Sonat Marketing by reference. Company and Colonial Gas Company, dated July 16, 1991, filed as Exhibit 10(jj) to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1991.\n10n Letter Agreement with Distrigas of Incorporated herein Massachusetts Corporation, related by reference. to firm vapor service agreement, dated November 16, 1992, filed as Exhibit 10(dd) to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1992.\n10o Gas Transportation Contract for Firm Incorporated herein Reserved Service between Iroquois by reference. Gas Transmission System, L.P. and Colonial Gas Company, dated November 25, 1991, filed as Exhibit 10(gg) to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1992.\n10p Service Agreement between Algonquin Filed herewith as Gas Transmission Company and Exhibit 10p. Colonial Gas Company (under Rate Schedule AFT-E), dated June 1, 1993.\n10q Service Agreement between Algonquin Filed herewith as Gas Transmission Company and Exhibit 10q. Colonial Gas Company (under Rate Schedule AFT-1), dated June 1, 1993.\n10r Service Agreement between Algonquin Filed herewith as Gas Transmission Company and Exhibit 10r. Colonial Gas Company (under Rate Schedule AFT-1), dated June 1, 1993.\n10s Service Agreement between Algonquin Filed herewith as Gas Transmission Company and Exhibit 10s. Colonial Gas Company (under Rate Schedule AFT-1), dated June 1, 1993.\n10t Service Agreement between Algonquin Filed herewith as Gas Transmission Company and Exhibit 10t. Colonial Gas Company (under Rate Schedule AFT-E), dated June 1, 1993.\n10u Service Agreement between Algonquin Filed herewith as Gas Transmission Company and Exhibit 10u. Colonial Gas Company (under Rate Schedule AFT-1), dated June 1, 1993.\n10v Service Agreement between Algonquin Filed herewith as Gas Transmission Company and Exhibit 10v. Colonial Gas Company (under Rate Schedule AFT-1), dated June 1, 1993.\n10w Service Agreement between Texas Filed herewith as Eastern Transmission Corporation and Exhibit 10w. Colonial Gas Company (under Rate Schedule CDS), dated June 1, 1993.\n10x Service Agreement between Texas Filed herewith as Eastern Transmission Corporation and Exhibit 10x. Colonial Gas Company (under Rate Schedule FT-1), dated June 1, 1993.\n10y Service Agreement between Texas Filed herewith as Eastern Transmission Corporation and Exhibit 10y. Colonial Gas Company (under Rate Schedule FTS-8), dated June 1, 1993.\n10z Service Agreement between Texas Filed herewith as Eastern Transmission Corporation and Exhibit 10z. Colonial Gas Company (under Rate Schedule FTS-7), dated June 1, 1993.\n10aa Service Agreement between Texas Filed herewith as Eastern Transmission Corporation and Exhibit 10aa. Colonial Gas Company (under Rate Schedule FT-1), dated June 1, 1993.\n10bb Service Agreement between Texas Filed herewith as Eastern Transmission Corporation and Exhibit 10bb. Colonial Gas Company (under Rate Schedule SS-1), dated June 1, 1993.\n10cc Service Agreement between Texas Filed herewith as Eastern Transmission Corporation and Exhibit 10cc. Colonial Gas Company (under Rate Schedule SS-1), dated June 1, 1993.\n10dd Service Agreement between Texas Filed herewith as Eastern Transmission Corporation and Exhibit 10dd. Colonial Gas Company (under Rate Schedule SS-1), dated June 1, 1993.\n10ee Service Agreement between Filed herewith as Transcontinental Gas Pipe Line Exhibit 10ee. Corporation and Colonial Gas Company (under Rate Schedule FT), dated June 1, 1993.\n10ff Service Agreement between Texas Filed herewith as Eastern Transmission Corporation and Exhibit 10ff. Colonial Gas Company (under Rate Schedule FT-1), dated June 1, 1993.\n10gg Firm Gas Transportation Agreement Filed herewith as between Koch Gateway Pipeline Company Exhibit 10gg. and Colonial Gas Company, dated December 1, 1993.\n10hh Service Agreement between Texas Filed herewith as Eastern Transmission Corporation and Exhibit 10hh. Colonial Gas Company (under Rate Schedule FT-1), dated June 1, 1993.\n10ii Service Agreement between Texas Filed herewith as Eastern Transmission Corporation and Exhibit 10ii. Colonial Gas Company (under Rate Schedule FT-1), dated June 1, 1993.\n10jj Service Agreement between Algonquin Filed herewith as Gas Transmission Company and Exhibit 10jj. Colonial Gas Company (under Rate Schedule PSS-T), dated August 1, 1993.\n10kk Service Agreement between Algonquin Filed herewith as Gas Transmission Company and Exhibit 10kk. Colonial Gas Company (under Rate Schedule AFT-2), dated August 1, 1993.\n10ll Service Agreement between Algonquin Filed herewith as Gas Transmission Company and Exhibit 10ll. Colonial Gas Company (under Rate Schedule AFT-1), dated August 1, 1993.\n10mm Gas Storage Contract between Filed herewith as Tennessee Gas Pipeline Company and Exhibit 10mm. Colonial Gas Company (under Rate Schedule FS), dated September 1, 1993.\n10nn Gas Transportation Agreement between Filed herewith as Tennessee Gas Pipeline Company and Exhibit 10nn. Colonial Gas Company (under Rate Schedule FT-A), dated September 1, 1993.\n10oo Gas Transportation Agreement between Filed herewith as Tennessee Gas Pipeline Company and Exhibit 10oo. Colonial Gas Company (under Rate Schedule FT-A), dated September 1, 1993.\n10pp Gas Transportation Agreement between Filed herewith as Tennessee Gas Pipeline Company and Exhibit 10pp. Colonial Gas Company (under Rate Schedule FT-A), dated September 1, 1993.\n10qq Service Agreement between Algonquin Filed herewith as Gas Transmission Company and Exhibit 10qq. Colonial Gas Company (under Rate Schedule FST-LG), dated October 1, 1993.\n10rr Service Agreement between CNG Filed herewith as Transmission Corporation and Exhibit 10rr. Colonial Gas Company (under Rate Schedule FTNN), dated October 1, 1993.\n10ss Service Agreement between CNG Filed herewith as Transmission Corporation and Exhibit 10ss. Colonial Gas Company (under Rate Schedule GSS), dated October 1, 1993.\n10tt Service Agreements between CNG Filed herewith as Transmission Corporation and Exhibit 10tt. Colonial Gas Company (under Rate Schedule GSS-II), dated September 30, 1993.\n10uu Service Agreement between Texas Filed herewith as Eastern Transmission Corporation and Exhibit 10uu. Colonial Gas Company (under Rate Schedule FT-1), dated October 1, 1993.\n10vv Gas Transportation Agreement between Filed herewith as Tennessee Gas Pipeline Company and Exhibit 10vv. Colonial Gas Company (under Rate Schedule FT-A), dated September 1, 1993.\n10ww Service Agreement between National Filed herewith as Fuel Gas Supply Corporation and Exhibit 10ww. Colonial Gas Company (under Rate Schedule EFT), dated October 28, 1993.\n10xx Gas Transportation Agreement between Filed herewith as Tennessee Gas Pipeline Company and Exhibit 10xx. Colonial Gas Company (under Rate Schedule FT-A), dated September 1, 1993.\n10yy Service Agreement between Algonquin Filed herewith as Gas Transmission Company and Exhibit 10yy. Colonial Gas Company (under Rate Schedule AIT-1), dated September 15, 1993.\n10zz Gas Transportation Agreement between Filed herewith as Tennessee Gas Pipeline Company and Exhibit 10zz. Colonial Gas Company (under Rate Schedule FT-A), dated October 1, 1993.\n10aaa Lease Agreement, dated as of May 1, Incorporated herein 1982, with Olde Market House by reference. Associates of Lowell, filed as Exhibit 10(y) to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1982.\n10bbb Lease of Equipment from The National Incorporated herein Shawmut Bank of Boston (now Shawmut, by reference. Bank N.A.) as Trustee, as Lessor dated as of May 1, 1973, filed as Exhibit 13(c) to Colonial Gas Energy System's Registration Statement on Form S-1. Commission File No. 2- 54673.\n10ccc Form Employment Agreement for Incorporated herein corporate officers, filed as Exhibit by reference. 10(kk) to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1992.\n10ddd Supplemental Retirement Plan Incorporated herein Agreement between Colonial Gas by reference. Company and F. L. Putnam, Jr., dated December 29, 1981, filed as Exhibit 10(ll) to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1992.\n10eee Supplemental Retirement Plan Incorporated herein Agreement between Colonial Gas by reference. Company and C. O. Swanson, dated December 29, 1981, filed as Exhibit 10(mm) to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1992.\n13a Those portions of the 1993 Annual Filed herewith as Report to Stockholders which have Exhibit 13a. been incorporated by reference in Part II Items 5 - 8 and Part IV Item 14 part a 1.\n22a Subsidiaries of the Registrant. Filed herewith as Exhibit 22a.\n24a Consent of Independent Certified Filed herewith as Public Accountants. Exhibit 24a. ____________________\nEXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS\nExhibits 10bbb, 10ccc and 10ddd above are management contracts or compensatory plans or arrangements in which the executive officers of the Company participate.\nb)Reports on Form 8-K.\nThere were no reports on Form 8-K for the quarter ended December 31, 1993.\nREPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON SCHEDULES\nTo the Shareholders of Colonial Gas Company\nIn connection with our audit of the consolidated financial statements of Colonial Gas Company and subsidiaries referred to in our report dated January 18, 1994, which is included in the 1993 Annual Report to Stockholders and incorporated by reference in Part II of this Form 10-K, we have also audited the schedules listed at Part IV, Item 14(a)2. In our opinion, these schedules present fairly, in all material respects, the information required to be set forth therein.\nGRANT THORNTON\nBoston, Massachusetts January 18, 1994\n[END OF REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON SCHEDULES] SCHEDULE V\nCOLONIAL GAS COMPANY AND SUBSIDIARIES PROPERTY, PLANT AND EQUIPMENT Year ended December 31, 1993 (In Thousands)\nCOLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F\nOTHER CHANGES- BALANCE BALANCE AT ADD AT CLASSIFI- BEGINNING ADDITIONS RETIRE- (DEDUCT)- END OF CATION OF PERIOD AT COST MENTS DESCRIBE PERIOD\nUtility Property $ 71 (b) Land, rights of way and structures $ 12,269 $ - $ 131 345 (a) $ 12,554 \t\t\t\t\t\t 1,233 (a) Gas production equipment 10,403 - 151\t 287 (b) 11,772 19,464 (a) Transmission and distribution 196,256 - 747 (358)(b) 214,615 Utilization equipment 5,674 - 284 954 (a) 6,344 General equipment 6,188 - 462 2,226 (a) 7,952 Intangible plant 372 418 - - 790 Construction work in progress 5,353 25,412 - (24,222)(a) 6,543 Total Utility Property $236,515 $25,830 $ 1,775 $ - $260,570\nNon-Utility Property Land and buildings $ 1,348 $ 12 $ 25 $ - $ 1,335 Services 640 - - - 640 General equipment 8,742 359 2,156 - 6,945 Total Non- Utility Property $ 10,730 $ 371 $ 2,181 $ - $ 8,920\nAssets Under Capital Leases $ 8,329 $ 494 $ 1,348 $ - $ 7,475\n_____________________________ See Note A of Notes to Consolidated Financial Statements. (a) Transfers to plant in service from construction work in progress. (b) Intercompany transfer or reclassification of fixed assets.\n[END OF COLONIAL GAS COMPANY AND SUBSIDIARIES PROPERTY, PLANT AND EQUIPMENT YEAR ENDED DECEMBER 31, 1993]\nSCHEDULE V\nCOLONIAL GAS COMPANY AND SUBSIDIARIES PROPERTY, PLANT AND EQUIPMENT Year ended December 31, 1992 (In Thousands)\nCOLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F\nOTHER CHANGES- BALANCE BALANCE AT ADD AT CLASSIFI- BEGINNING ADDITIONS RETIRE- (DEDUCT)- END OF CATION OF PERIOD AT COST MENTS DESCRIBE PERIOD\nUtility Property\nLand, rights of way and structures $ 11,977 $ - $ 8 $ 300 (a) $ 12,269 Gas production equipment 10,549 - 180\t 34 (a) 10,403 Transmission and distribution 177,916 - 528 18,868 (a) 196,256 Utilization equipment 4,376 - 221 1,519 (a) 5,674 General equipment 3,065 - 83 3,206 (a) 6,188 Intangible plant 433 372 - (433)(a) 372 Construction work in progress (5)(b) 2,547 26,300 - (23,489)(a) 5,353 Total Utility Property $210,863 $26,672 $ 1,020 $ - $236,515\nNon-Utility Property Land and buildings $ 1,343 $ - $ - $ 5 (b) $ 1,348 Services 640 - - - 640 General equipment 8,626 154 38 - 8,742 Total Non- Utility Property $ 10,609 $ 154 $ 38 $ 5 $ 10,730\nAssets Under Capital Leases $ 7,963 $ 628 $ 262 $ - $ 8,329\n_____________________________ See Note A of Notes to Consolidated Financial Statements. (a) Transfers to plant in service from construction work in progress. (b) Intercompany transfer or reclassification of fixed assets.\n[END OF COLONIAL GAS COMPANY AND SUBSIDIARIES PROPERTY, PLANT AND EQUIPMENT YEAR ENDED DECEMBER 31, 1992]\nSCHEDULE V\nCOLONIAL GAS COMPANY AND SUBSIDIARIES PROPERTY, PLANT AND EQUIPMENT Year ended December 31, 1991 (In Thousands)\nCOLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F\nOTHER CHANGES- BALANCE BALANCE AT ADD AT CLASSIFI- BEGINNING ADDITIONS RETIRE- (DEDUCT)- END OF CATION OF PERIOD AT COST MENTS DESCRIBE PERIOD\nUtility Property\nLand, rights of way and $ (47)(b) structures $ 11,976 $ - $ 46 94 (a) $ 11,977 Gas production equipment 10,642 - 173\t 80 (a) 10,549 Transmission and distribution 164,013 - 534 14,437 (a) 177,916 Utilization equipment 2,799 - 163 1,740 (a) 4,376 General equipment 2,765 - 24 324 (a) 3,065 Intangible plant - 433 - - 433 Construction work in progress 3,108 16,114 - (16,675)(a) 2,547 Total Utility Property $195,303 $16,547 $ 940 $ (47) $210,863\nNon-Utility Property Land and buildings $ 1,346 $ 14 $ 64 $ 47 (b) $ 1,343 Services 640 - - - 640 General equipment 8,318 563 255 - 8,626 Total Non- Utility Property $ 10,304 $ 577 $ 319 $ 47 $ 10,609\nAssets Under Capital Leases $ 8,646 $ 273 $ 956 $ - $ 7,963\n_____________________________ See Note A of Notes to Consolidated Financial Statements. (a) Transfers to plant in service from construction work in progress. (b) Intercompany transfer or reclassification of fixed assets.\n[END OF COLONIAL GAS COMPANY AND SUBSIDIARIES PROPERTY, PLANT AND EQUIPMENT YEAR ENDED DECEMBER 31, 1991]\nSCHEDULE VI\nCOLONIAL GAS COMPANY AND SUBSIDIARIES ACCUMULATED DEPRECIATION, DEPLETION AND AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT For the Three Years Ended December 31, 1993 (In Thousands)\nCOLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F\nADDITIONS OTHER BALANCE CHARGED CHANGES - AT TO COSTS ADD BALANCE \t\t BEGINNING AND\t RETIRE- (DEDUCT)- AT END DESCRIPTION OF PERIOD EXPENSES MENTS DESCRIBE OF PERIOD\nYear Ended December 31, 1993 Accumulated depreciation of utility property (separate reserves not maintained) $52,700 $6,939 $1,882 $ 100 (1) $57,857\nAccumulated depreciation of non- utility property $ 6,691 $ 670 $1,615 $ (61)(3) $ 5,685\nAmortization on $ 61 (3) capital leases $ 3,963 $ - $ - $ (463) $ 3,561\nYear Ended December 31, 1992 Accumulated depreciation of utility property (separate reserves not maintained) $48,127 $6,023 $1,464 $ 14 (1) $52,700\nAccumulated depreciation of non- utility property $ 5,842 $ 941 $ 8 $ (84)(3) $ 6,691\nAmortization on $ 84 (3) capital leases $ 3,406 $ - $ - $ 473 $ 3,963\nYear Ended December 31, 1991 Accumulated depreciation of utility property (separate reserves not maintained) $43,823 $5,488 $1,276 $ 92 (1) $48,127 \t\t\t\t\t\t Accumulated depreciation of non- $ (265)(2) utility property $ 5,228 $ 957 $ - $ (78)(3) $ 5,842\nAmortization on $ 78 (3) capital leases $ 3,684 $ - $ - $ (356) $ 3,406\n_______________________________________________ (1) Depreciation charged on clearing accounts. (2) Sold to third party. (3) Capitalized tractor lease.\n[END OF COLONIAL GAS COMPANY AND SUBSIDIARIES ACCUMULATED DEPRECIATION, DEPLETION AND AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT FOR THE THREE YEARS ENDED DECEMBER 31, 1993]\nSCHEDULE VIII\nCOLONIAL GAS COMPANY AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS For the Three Years Ended December 31, 1993 (In Thousands)\nCOLUMN A COLUMN B COLUMN C COLUMN D COLUMN E\nADDITIONS BALANCE CHARGED BALANCE AT TO COSTS AT BEGINNING AND DEDUC- END OF DESCRIPTION OF PERIOD EXPENSES TIONS PERIOD\nFor the Year Ended December 31, 1993\nReserve for uncollectible accounts \t $1,187 $2,101 $1,606 (1) $1,682\nReserve for insurance claims $ 548 $ 616 $ 566 $ 598\nFor the Year Ended December 31, 1992\nReserve for uncollectible accounts \t $ 778 $1,696 $1,287 (1) $1,187\nReserve for insurance claims $ - $ 622 $ 74 $ 548\nFor the Year Ended December 31, 1991\nReserve for uncollectible accounts \t $ 856 $1,516 $1,594 (1) $ 778\nReserve for insurance claims $ 50 $ - $ 50 $ - _____________________________ (1) Accounts charged off, net of collections.\n[END OF COLONIAL GAS COMPANY AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS FOR THE THREE YEARS ENDED DECEMBER 31, 1993]\nSCHEDULE IX\nCOLONIAL GAS COMPANY AND SUBSIDIARIES SHORT-TERM DEBT For the Three Years Ended December 31, 1993 (In Thousands Except Percentages)\nCOLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F WEIGHTED WEIGHTED AVERAGE MAXIMUM AVERAGE AVERAGE CATEGORY OF INTEREST AMOUNT AMOUNT INTEREST AGGREGATE BALANCE RATE OUTSTANDING OUTSTANDING RATE SHORT-TERM AT END AT END DURING THE DURING THE DURING THE DEBT OF PERIOD OF PERIOD PERIOD PERIOD (1) PERIOD (2)\nYear Ended December 31, 1993\nBank Loans $32,600 3.64% $32,600 $14,546 3.71% Gas Inventory Purchase $15,233 3.47% $15,233 $10,982 3.55% Obligations\nYear Ended December 31, 1992\nBank Loans $24,500 3.76% $42,600 $20,314 4.62% Gas Inventory Purchase $14,741 3.81% $11,768 $10,676 4.05% Obligations\nYear Ended December 31, 1991\nBank Loans $28,000 5.06% $28,000 $ 9,251 6.42% Gas Inventory Purchase $11,726 5.12% $11,864 $ 9,601 6.54% Obligations\n_____________________________ See Note F of Notes to Consolidated Financial Statements. (1) Amounts calculated by weighting the average of amount of short-term debt outstanding each day during the year. (2) Rates calculated by dividing actual interest expense by average outstanding balance of short-term debt.\n[END OF COLONIAL GAS COMPANY AND SUBSIDIARIES SHORT-TERM DEBT FOR THE THREE YEARS ENDED DECEMBER 31, 1993]\nSCHEDULE X\nCOLONIAL GAS COMPANY AND SUBSIDIARIES SUPPLEMENTARY INCOME STATEMENT INFORMATION\nCHARGED TO COSTS AND EXPENSES YEAR ENDED DECEMBER 31, 1993 1992 1991 Maintenance and repairs included in: Operating Expenses - Maintenance $5,631 $5,477 $5,124 Other Income 444 593 550\nTotal $6,075 $6,070 $5,674\nDepreciation, depletion and amortization of property, plant equipment included in: Operating Expenses - Depreciation $6,831 $5,895 $5,488 Operating Expenses - Operations 240 175 126 Other Income 632 906 910\nTotal $7,703 $6,976 $6,524\nTaxes, other than payroll and income Local property taxes included in: Operating Expenses - Local property taxes $2,496 $2,059 $1,683 Other Income 42 36 31 2,538 2,095 1,714 Other taxes included in: Operating Expenses - Other Taxes 130 131 103 Other Income 186 299 347 316 430 450\nTotal $2,854 $2,525 $2,164\nDepreciation and amortization of intangible assets, pre-operating costs and similar deferrals, royalties and advertising costs are not shown since the amounts are either less than 1% of operating revenues or none.\n[END OF COLONIAL GAS COMPANY AND SUBSIDIARIES SUPPLEMENTARY INCOME STATEMENT INFORMATION]\nSIGNATURES\nPursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. COLONIAL GAS COMPANY Date By March 18 , 1994 F.L. Putnam, Jr., Chairman of the Board of Directors\nPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.\nSignature Title Date\nF.L. Putnam, Jr. Chief Executive Officer, March 18 , 1994 Director\nNickolas Stavropoulos Vice President - Finance and March 18 , 1994 Chief Financial Officer, Director (Principal Financial Officer)\nD.W. Carroll Vice President and Treasurer March 18 , 1994 (Principal Accounting Officer)\nV.W. Baur Director March 18 , 1994\nA.C. Dudley Director March 18 , 1994\nJ.P. Harrington Director March 18 , 1994\nH.C. Homeyer Director March 18 , 1994\nR.L. Hull Director March 18 , 1994\nK.R. Lydecker Director March 18 , 1994\nF.L. Putnam, III Director March 18 , 1994\nJ.F. Reilly, Jr. Director March 18 , 1994\nA.B. Sides, Jr. Director March 18 , 1994\nM.M. Stapleton Director March 18 , 1994\nC.O. Swanson Director March 18 , 1994\nG.E. Wik Director March 18 , 1994","section_15":""}
{"filename":"844718_1993.txt","cik":"844718","year":"1993","section_1":"ITEM 1: BUSINESS\n(a) General Development of Business The Corporation was incorporated in Colorado on October 25, 1988 for the purpose of acquiring or completing a merger with another company. Effective July 22, 1991, the Company entered into a common stock exchange agreement with Finca Consulting Costa Brava, S.A. whereby the Company transferred essentially 100% of its net assets to Finca Consulting Costa Brava, S.A. As a result of the merger, Finca Consulting Costa Brava, S.A. remained as the sole ongoing entity for accounting purposes. Finca Consulting Costa Brava, S.A. is located in and was incorporated in Spain on June 14, 1989 and its principal business is acting as a real estate broker for sales of Spanish properties, mainly holiday homes.\nSubsequent to the aforementioned July 22, 1991 merger, the Corporation generated capital through an offering of preferred stock in Europe and in September 1991 formed an additional wholly-owned subsidiary, Finca Consulting Ltd, incorporated in the United Kingdom. Finca Consulting Ltd. was formed to assist Finca Consulting Costa Brava,S.A. in the marketing and sales of Spanish properties.\nIn January 1991, the Corporation formed another new wholly-owned subsidiary, Finca Consulting GmbH, incorporated in Germany. Finca Consulting GmbH was formed to engage in the buying, selling and administration of Spanish real estate.\nIn May, 1992, the Company commenced an offering of its Common Shares in Europe.\nIn July 1992, the corporation entered into and consummated a common stock exchange agreement with King National Corporation,a U.S. corporation,whereby the sole transferable asset was a 100% ownership interest of Opti-Wert-Interest AG (\"OWI-AG\") a Swiss corporation. OWI-AG is primarily engaged in the buying and selling of marketable securities and options on behalf of its customers in Germany via a network of independent brokers. The sale of securities, including futures options contracts are subject to regulation in Germany by the Banking Supervisory Authority.\nOn October 1, 1992, Finca Consulting Limited acquired three additional companies incorporated in the United Kingdom, each of which are engaged as real estate agencies.\nThe Corporation is currently subject to the reporting requirements under the Securities Exchange Act of 1934, as amended. The Corporation has the authority to issue an aggregate of Twenty Million (20,000,000) common shares, par value $.01 and Twenty Million (20,000,000) preferred shares, $.00001 par value.\nAs of December 31, 1993, there were outstanding 2,146,633 Common Shares and 16,305 Preferred Shares.\nThe Corporation did not acquire or dispose of any material amount of assets during the fiscal year ended December 31, 1993.\n(b) Financial Information About Industry Segments.\nThe Corporation operates in two business segments, acting as a real estate broker for sales and rentals of properties in Europe and, through its subsidiary, OWI-AG, the buying and selling of marketable securities and options on behalf of OWI-AG's customers in Germany.\nThe Corporation operates primarily in Europe. Information regarding each geographic area on an unconsolidated basis for 1993 and 1992 is as follows:\n(c) Narrative Description of Business\nThe Corporation and its subsidiaries operate in two segments, acting as a real estate broker for sales and rentals of properties in Europe and the buying and selling of marketable securities and options on behalf of its customers in Germany through its subsidiary, Opti-Wert-Interest AG, a Swiss corporation (\"OWI-AG\").\nThe Corporation's activities have been limited to raising capital and through its subsidiary, OWI-AG, the buying and selling of marketable securities and options on behalf of its customers in Germany.\nHistorically, the Company operated solely in the European real estate market. However, since its acquisition of OWI-AG, in July, 1992, the Company has focused its business operation chiefly in the buying and selling of equities and options on behalf of German customers.\nThe Corporation and its subsidiaries derived revenues from its real estate operations in the approximate amount of $36,369 in 1992 and $51,848 in 1991. No revenues were earned from this business segment in fiscal 1993. The Corporation and its subsidiaries generated revenues from its securities brokerage operations of $16,603,901 in 1993 and $2,656,076 in 1992.\nNeither industry segment in which the Corporation does business is seasonal. The Corporation is not dependent upon a single customer or a few customers. Accordingly, the loss of any one or more of such customers would not have a material adverse effect on either industry segment.\nIn its securities brokerage operations, the Corporation competes with established companies, private investors, limited partnerships and other entities (many of which may possess substantially greater resources than the Corporation) in connection with its brokerage business securities and options brokerage business. A majority of the companies with which the Corporation competes are substantially larger, have more substantial histories, backgrounds, experience and records of successful operations, greater financial, technical, marketing and other resources, more employees and more extensive facilities than the Corporation now has, or will have in the foreseeable future. It is also likely that other competitors will emerge in the near future. The Corporation competes with these entities on the basis of service and sales commissions.\nThe Corporation and its subsidiaries employ no full time persons and no part time persons in its real estate operations and 16 full time persons and no part time persons in its securities brokerage operations.\n(d) Financial information about foreign and domestic operations and export sales.\nITEM 2:","section_1A":"","section_1B":"","section_2":"ITEM 2: Properties\nReal Estate Operations.\nDuring 1993, the Corporation's executive offices were located at 665 Finchley Road, London NW2 2HN Telephone No. 011-44-71-431-4529. The offices have since been relocated to 106 Koenigsallee, 40215 Duesseldorf, Germany. The Corporation leases 1,000 square feet in office and showroom space in Play de Aro, Spain under a five year lease which commenced February 1991. The lease is cancelable with a 90 day notice and provides for annual rent increases based on a price index. the Corporation paid rents of $32,103 and $40,631 for the years 1993 and 1992, respectively.\nIn January 1993, the Company leased the Spanish property, consisting of a residential dwelling located in Gerona, Spain to Volker Montag, an officer and director of the Company. The term of the lease is for a period of five years commencing January 1, 1993 and requires payment of $1,000 rent per month for each of the ensuing sixty months.\nSecurities Operations.\nIn January 1992, the Corporation entered into a lease agreement for 9,600 square feet of office space in Dusseldorf, Germany. The lease required a deposit of $37,345 and requires monthly rental payments of $12,448 through December 1996. The monthly rent may be increased based on a price index and the lease provides for a five year renewal option. The Corporation (by virtue of its acquisition of King National Corporation) leases 13,700 square feet in office space in Zug, Switzerland, as well as automobiles and office equipment under operating leases. The Corporation paid $21,807 for the six month period from July 1, 1992 to December 31, 1992 and $84,546 for the year ended December 31, 1993.\nITEM 3:","section_3":"ITEM 3: LEGAL PROCEEDINGS\nThe Corporation is not involved in any legal proceedings as of the date of this Form 10-K nor are any material proceedings known to be contemplated.\nITEM 4:","section_4":"ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS\nNo matters were submitted to a vote of the security holders during the fourth quarter of this fiscal period.\nPART II\nITEM 5:","section_5":"ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS\n(a)(1)(i) The Corporation is not currently trading on the over-the- counter \"Pink Sheet\" market or on any exchange.\n(b) As of December 31, 1993 there were approximately 671 shareholders of record for the Common Stock.\n(c) the Corporation has not declared or paid any cash dividends.\nITEM 6:","section_6":"ITEM 6: SELECTED FINANCIAL DATA\nThe selected financial information presented below under the captions \"Statement of Operations\" and \"Balance Sheet\" for the years ended December 31, 1993, 1992, 1991, 1990 and 1989 is derived from the financial statements of the Corporation and should be read in conjunction with the financial statements and notes thereto.\nStatement of Operations\nITEM 7:","section_7":"ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS\nQuarter Ended December 31, 1993\nThe Corporation's wholly owned Swiss subsidiary, Opti-Wert-Interest AG (\"OWI-AG\") continues to be the sole source of revenues for the Corporation. OWI-AG operates a securities brokerage business in Germany, utilizing commissioned sales brokers to sell equity stocks and options to its customers in Germany.\nFor the quarter ended December 31, 1993 the Corporation had revenues of $5,627,646, resulting in a net loss of $1,820,337. This loss was substantially due to the high cost of equity securities and options of $5,394,281 and selling, general and administrative expenses of $2,050,174, incurred for the quarter.\nYear Ended December 31, 1993\nFor the year ended December 31, 1993, the Corporation had gross revenues of $16,603,901, generated exclusively by its subsidiary, OWI-AG, through its securities brokerage business in Germany. For the year ended December 31, 1993, the Corporation experienced a net loss of $2,457,631. This loss was the result of the high cost of products - equity securities and options - purchased by OWI-AG in the course of its trading business, in the amount of $13,728,846, and the substantial administrative costs incurred as well as commissions paid in the amount of $5,314,366. OWI-AG utilizes the administrative services of a German affiliate, Telecom GmbH, which provides the facilities and infrastructure for the Company's network of brokers for its equity securities and options business. During fiscal year 1993, the Corporation, through OWI-AG, paid Telecom GmbH $1,703,792, for these administrative services and $1,891,704, in brokerage fees: see, Note 2 to Consolidated Financial Statements annexed hereto as Exhibit A.\nFiscal Year 1993 Compared to Fiscal Year 1992\nOn July 15, 1992, the Corporation consummated a stock exchange agreement with King National Corporation, a Nevada corporation, the principal result of which was the acquisition of Opti-Wert-Interest AG (\"OWI-AG\"), the Corporation's currently wholly owned subsidiary and sole revenue generating business (the \"OWI-AG Acquisition\"): see, Note 5 to Consolidated Financial Statements annexed hereto as Exhibit A. During fiscal 1992 and prior to the OWI-AG Acquisition, the Corporation derived its revenues from its real estate sales and rental operations of holiday residential units in Spain: this real estate business produced no revenues during fiscal year 1993, as compared to revenues of $36,369 during fiscal year 1992.\nDuring 1993, the Corporation's revenues of $16,603,901 were all derived from OWI-AG's securities brokerage activities in Germany as compared to 1992, which showed revenues of $2,656,076 attributable to OWI-AG and revenues of $36,369 from its Spain-based real estate operations. During 1993, the Corporation sustained a loss of $2,457,631, as compared to a loss of $1,786,637 in fiscal year 1992. The OWI-AG Acquisition resulted in a material increase in selling, general and administrative expenses which totaled $5,314,366 in 1993 as compared to $2,732,421 in 1992.\nFor the year ended December 31, 1993, the Corporation experienced a nominal decrease in cash used in operations, from $(1,686,186) for the year ended December 31, 1992, to $(1,539,520)for the year ended December 31, 1993. Cash flow from operations was affected primarily by an increase in customer credit balances to $749,929 at December 31, 1993,as compared to $176,783 at December 31, 1992, due to the increased customer brokerage activities of OWI-AG. Conjunctively, cash flow from operating activities was materially reduced by a $234,402 increase in receivables. Depreciation and amortization contributed $246,181 to cash flow from operations in 1993. The Corporation materially reduced cash outlays for investing activities during fiscal 1993, from utilizing $1,099,990 during fiscal year 1992 to total expenditures of $132,651 during fiscal year 1993. $90,120 was spent on real estate and property and equipment during 1993 as compared to expenditures aggregating $775,741 during 1992, while an investment of $42,531 in vintage cars was made during 1993 as compared to a total investment of $226,226 in such assets in 1992.\nCash flow from financing activities during fiscal year 1993 amounted to $1,654,161, most of which represented proceeds derived from the private placement of the Corporation's Common Shares with European investors pursuant o Regulation S promulgated under the Securities Act of 1933, as amended. During fiscal year 1992, the Corporation derived a material amount of its cash through similar financing activities, i.e., the private placement of its preferred and common stock with European investors, producing cash of $2,362,381: see, Consolidated Statements of Changes in Stockholders' Equity annexed hereto as Exhibit A. At December 31, 1993, the Corporation experienced a decrease in its cash position of $5,204 due to the effects of currency exchange rates as compared to a $74,888 decrease at December 31, 1992 for the same reasons.\nFiscal Year 1992 Compared To Fiscal Year 1991\nPrior to the OWI-AG Acquisition (see above) the Corporation's business and source of revenue was in the sale and rental of holiday residential units in Spain. Through subsidiaries located in the United Kingdom and Germany, the Corporation sold and rented holiday homes in Spain to European residents.\nGross revenues in this real estate business amounted to $36,369 at December 31, 1992, a decrease of approximately 22% from revenues of $46,914 at December 31, 1991. As a result of the OWI-AG Acquisition in July 1992 resulting in the Corporation's refocus from its core Spain-based real estate business to OWI-AG's Germany-based securities brokerage operations, selling, general and administrative expenses increased materially, from $245,746 at December 31, 1991 to $2,732,421 at December 31, 1992.\nThe Corporation suffered a loss of $1,786,637 at December 31, 1992, as compared to a loss of $186,605 at December 31, 1991. The material increase in the Corporation's losses at December 31, 1992, was due chiefly to the cost to purchase equity securities and options, amounting to $1,749,426, as well as the material increase in selling, general and administrative expenses, mentioned above, arising from OWI-AG's securities brokerage business.\nThe OWI-AG Acquisition, with its accompanying shift in the Corporation's business, materially changed the Corporation's sources and uses of cash. Substantial amounts of cash were utilized during fiscal 1992 by the Corporation for investments: $551,263 was used to invest in real estate in Spain; $224,778 for property and equipment; $226,226 for vintage automobiles; $37,480 was invested in marketable securities; $43,018 to purchase goodwill, and $17,534 was used for certain capitalized lease expenses. Conjunctively, $2,294,866 was derived from proceeds resulting from the private placement by the Corporation of its common and preferred shares to investors in Europe.\nAt December 31, 1992, the Corporation's cash was decreased by $74,888, as compared to $13,343 at December 31, 1991 due to adjustments resulting from currency exchange rates.\nITEM 8:","section_7A":"","section_8":"ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA\nThe Corporation's Financial Statement and Notes to Financial Statements are attached hereto as Exhibit A and incorporated herein by reference.\nITEM 9:","section_9":"ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE\nChanges in Registrant's Certifying Accountant.\n(a) 304(a)(1)(i): Neil James & Associates, P.C., Registrant's former independent accountant previously engaged as the principal accountant to audit the Registrant's financial statements, was dismissed on December 18, 1995.\n(a)(1)(ii): Mr. Neil James & Associates, P.C. did not issue any reports on the Registrant's financial statements for the past two fiscal years.\n(a)(1)(iii): The Registrant's Board of Directors recommended and approved the hiring of Rosenberg Rich Baker Berman & Company Certified Public Accountants, 380 Foothill Road, Bridgewater, New Jersey as the Registrant's principal independent accountant and to dismiss Neil James & Associates, P.C.\n(a)(1)(iv)(A): Registrant is unaware of any disagreements between Registrant and Neil James & Associates, P.C. on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure.\n(a)(1)(iv)(B)(1),(2) and (3): Not applicable.\n(a)(1)(iv)(C): Not applicable.\n(a)(1)(iv)(D): Not applicable.\n(a)(1)(iv)(E): Registrant authorized its former accountant, Neil James & Associates, P.C., to respond fully to inquiries of Rosenberg Rich Baker Berman & Company, its successor accountant, concerning the subject matter of each and every disagreement or event, if any, known by Registrant's former accountant.\n(a)(2): Registrant's new independent auditors are Rosenberg Rich Baker Berman & Company who were engaged on December 15, 1995.\n(a)(2)(i): Registrant's management engaged in general business conversation with its new accountant, who did not, during such conversations, render any advice to Registrant, oral or written, which was an important factor considered by Registrant in reaching any accounting, auditing or financial reporting issue decisions.\n(a)(2)(ii): Registrant's management did not consult its new accountant regarding any matter that was the subject of a disagreement or event referred to in (a)(1)(iv) above since Registrant is unaware and has no knowledge of any such disagreement or event.\n(a)(2)(ii)(A),(B), and (C): Not applicable.\n(a)(2)(ii)(D): Registrant has requested its new accountant to review the disclosure required by this Item before it is filed with the Securities and Exchange Commission and has been provided the opportunity to furnish Registrant with a letter addressed to the Commission containing any new information, clarification of Registrant's expression of its views, or the respects in which it does not agree with the statements made in response to this Item.\nPART III\nITEM 10:","section_9A":"","section_9B":"","section_10":"ITEM 10: DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS\nThe names and ages of all directors and executive officers of the Corporation are as follows:\nThere are no family relationships among the Corporation's Officers and Directors.\nAll Directors of the Corporation hold office until the next annual meeting of the shareholders and until successors have been elected and qualified. Executive Officers of the Company are appointed by the Board of Directors at the annual meeting of the Corporation's Directors and hold office for a term of one year or until they resign or are removed from office.\nResumes:\nVolker Montag - Mr. Montag was born in Essen, Germany and makes his home in Weeze, Germany. From 1990 he has been an officer and Director of King National Corporation (acquired by the Corporation in July 1992.) From 1988 to 1990, Mr. Montag was the Managing Director of Opti-Wert Interest, AG, Switzerland, a Swiss brokerage company, which is a wholly owned subsidiary of the Corporation. He was also associated with VISA Enterprise PLC, London, United Kingdom.\nHugo Winkler - Mr. Winkler was born in Switzerland and currently makes his home in London. Mr. Winkler is an international business consultant and holds directorships in seventeen companies throughout the world. He is the founder and Managing Director of Hugo Winkler & Co., Ltd., a managing consulting company located in London since the early 1980s. Mr. Winkler also has extensive holdings in Southeast Asia, including Singapore and Malaysia. Mr. Winkler is a Qualified Business Administrator from Kaukfmaennischer Verein Zurich, Switzerland in 1974. He is a member of the United Kingdom Institute of Directors in London. Mr. Winkler resigned as Director effective November 1, 1995.\nNorani Mohammad Zin - Mr. Zin was born in Malaysia and currently makes is home in Maui, Malaysia. Since 1981, Mr. Zin has been the General Manager of Hugo Winkler & Co., Ltd. in Singapore. Mr. Zin resigned as Director effective November 1, 1995.\nRoland Schoneberg - Mr. Schoneberg was born in Germany and currently lives in Koln, Germany. He is member of the board of Telecom GmbH, an affiliate of the Company. He served as director of the Company since November 1995.\nITEM 11:","section_11":"ITEM 11: EXECUTIVE COMPENSATION\nNo compensation was paid to the officers and directors of the Corporation over the last fiscal year. The Corporation has reimbursed and will continue to reimburse its officers and directors for any and all out of pocket expenses incurred relating to the business of the Corporation. In addition, it is not expected that the officers and directors of the Corporation will begin drawing salary until such time as the business operations of the Corporation can substantiate the same. However, in the event any officer and\/or director performs extraordinary services on behalf of the Corporation, it is the position of the Board of Directors to reward such services by issuance of a bonus to such person(s).\nITEM 12:","section_12":"ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT\nAs of December 31, 1993, there were 2,146,633 Common Shares outstanding. The following tabulates holdings of shares of the Corporation by each person who, subject to the above, at the date of this Memorandum, holds of record or is known by Management to own beneficially more than 5.0% of the Common Shares and, in addition, by all directors and officers of the Corporation individually and as a group. There were 16,305 Preferred Shares outstanding issued to individuals who are neither officers or directors.\nTitle of Name and Address of Amount and Nature of Percent of Class Beneficial Owner Beneficial Ownership Class - ----- ---------------- -------------------- -----\nCommon Secure Securities, Ltd. Stock c\/o Hugo Winkler 665 Finchley Road London, UK 260,240* 12.12%\nVisa International, PLC c\/o Hugo Winkler 665 Finchley Road London, UK 266,667* 12.42%\nBernd Nagel Hessenweg 10 A D-4422 Ahaus Germany 119,667 5.57%\nVolker Montag c\/o Opti-Wert-Interest Industriel Str. 9 Postfach 6300 ZUB Switzerland 526,907* 24.55%\nHugo Winkler 665 Finchley Road London, UK 0 0%\nNorani Mohammad Zin 665 Finchley Road London, UK 0 0%\nRoland Schoneberg c\/o Opti-Wert-Interest Industriel Str. 9 Postfach 6300 ZUB Switzerland 526,907* 24.55%\nAll Directors and Officers as a Group 526,907* 24.55%\n- --------------- *Messrs. Volker Montag and Roland Schoneberg are majority shareholders of Secure Securities, Ltd. and Visa International, PLC.\nITEM 13:","section_13":"ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS\n(a) Minority Interest in Subsidiary. One of the Corporation's subsidiaries Opti-Wert-Interest, AG (\"OWI-AG\") has issued participation certificates with a minimal value of Sfr. 10(U.S. $6.60) for a subscription price of U.S. $9.07. These participation certificates carry no voting rights and do not have a fixed return. The Corporation subscribed to 5,040 certificates (49,603). Subsequently in 1992, OWI-AG's parent company (King National Corporation) was acquired by the Corporation thus causing this investment to be eliminated in the consolidation process. The remaining 5,460 certificates are held by various investors.\n(b) Commissions to Affiliate. Secure Securities, Ltd., a shareholder of the Corporation, controlled by Messrs. Volker Montag and Roland Schoneberg, owns a German company, Telecom GmbH, having its principal offices located in Dusseldorf, Germany (\"Telecom\"). Telecom provides all of the administrative services to Opti-Wert-Interest AG, the Corporation's wholly owned subsidiary (\"OWI-AG\"), for its securities brokerage business. During fiscal year 1993 OWI-AG paid Telecom $1,703,792 for their administrative services. Telecom also pays all of OWI-AG's brokerage commissions due to non-affiliated third parties arising out of OWI-AG sales to its customers, which amounted to $1,891,704 during 1993.\n(c) Loan to Officer and Director. OWI-AG made a loan in the amount of $141,750 to Mr. Volker Montag, an officer and director of the Company during 1993. The loan's outstanding principal balance accrues interest at the rate of five (5%) percent, per annum, and payments in the amount of $7,020 are due quarterly.\n(d) Payments to Officers and Directors. During 1992, the Corporation paid $4,300 for various office services to a company owned by Hugo Winkler, an officer and director.\n(e) Office space to Subsidiary. Finca Consulting Limited, a wholly-owned subsidiary of the Corporation is provided, free of charge, office spacein London, England in the business office of an officer and director.\nPART IV\nITEM 14:","section_14":"ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K\n(a)(1) Financial Statements\nThe response to this portion of Item 14 is included as a separate section, Exhibit A, attached hereto and incorporated herein by reference.\n(a)(2) Financial Statements Schedules All schedules are omitted since the required information is not applicable or of insufficient materiality.\n(a)(3) Exhibits\nThe Exhibits that are filed with this report or that are incorporated by reference are set forth in the Exhibit Index.\n(b) Reports on form 8-K\nThere were no reports filed on Form 8-K during the quarter ended December 31, 1993.\nSIGNATURES\nPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.\nFINCA CONSULTING, INC.\nDate: December 20, 1997 By: \/s\/Volker Montag ---------------- Volker Montag President and Chief Financial Officer\nPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.\nName Date ---- ----\n\/s\/Volker Montag December 20, 1997 - ---------------- Volker Montag, President and Director\n\/s\/Roland Schoneberg December 20, 1997 - -------------------- Roland Schoneberg, Secretary and Director\nEXHIBIT INDEX\n(2) Agreement and Plan of Reorganization between the Corporation and King National Corporation dated July 1992 incorporated by reference to Form 8-K.\n(3)(i) Articles of Incorporation incorporated by reference to Form S- 18 filed October 17, 1989. Articles of Amendment to Articles of Incorporation incorporated by reference to the Exhibit to the Company's Form 10-K for the fiscal year ended December 31, 1991 filed on June 4, 1992.\n(3)(ii) By Laws incorporated by reference to Form S-18 filed October 17, 1989.\n(13) Quarterly report incorporated by Reference to Quarterly Report on Form 10-Q for period ended September 30, 1993.\n(16) Letter regarding change in certifying accountant incorporated by reference to Form 8-K filed in February, 1993.\n(21) Subsidiaries of the Company:\n(i) Finca Consulting Costa Brava, S.A. - is a corporation formed under the laws of the Country of Spain and is the name under which it conducts business.\n(ii) Finca Consulting, Limited - is a corporation formed under the laws of the Country of the united Kingdom and is the name under which it conducts business.\n(iii) Finca Consulting, GmbH - is a corporation formed under the laws of the Country of Germany and is the name under which it conducts business.\n(iv) Opti-Wert-Interest, AG - is a corporation formed under the laws of the Country of Switzerland and conducts its retail securities and options business in Germany.\n(27) Financial Data Schedule - attached to Exhibit A\nEXHIBIT A\nFinca Consulting, Inc. and Subsidiaries\nConsolidated Financial Statements\nDecember 31, 1993\nFinca Consulting, Inc. and Subsidiaries Index to the Consolidated Financial Statements December 31, 1993\nIndependent Auditors' Report on the Financial Statements........................\nFinancial Statements\nConsolidated Balance Sheets................................................\nConsolidated Statements of Operations......................................\nConsolidated Statements of Changes in Stockholders' Equity.................\nConsolidated Statements of Cash Flows......................................\nNotes to the Consolidated Financial Statements.............................\nIndependent Auditors' Report\nRosenberg Rich Baker Berman & Company 380 Foothill Road Bridgewater, New Jersey 08807\nTo the Board of Directors and Stockholders of Finca Consulting, Inc. and Subsidiaries\nWe have audited the accompanying consolidated balance sheets of Finca Consulting, Inc. and Subsidiaries as of December 31, 1993 and 1992, and the related consolidated statements of operations, changes in stockholders' equity, and cash flows for the years then ended. These consolidated 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.\nWe 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 provides a reasonable basis for our opinion.\nIn our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Finca Consulting, Inc. and Subsidiaries as of December 31, 1993 and 1992, and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles.\n\/s\/Rosenberg Rich Baker Berman & Company - ---------------------------------------- Rosenberg Rich Baker Berman & Company Bridgewater, New Jersey\nDecember 15, 1995\nSee notes to the consolidated financial statements.\nSee notes to the consolidated financial statements.\nSee notes to the consolidated financial statements.\nSee notes to the consolidated financial statements.\nSee notes to the consolidated financial statements.\nFinca Consulting, Inc. and Subsidiaries Notes to the Consolidated Financial Statements\nNOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES\nFinca Consulting, Inc. (formerly Charter Ventures, Inc.) (the Company) was incorporated in the State of Colorado on October 25, 1988 for the purpose of acquiring or completing a merger with another company. Effective July 22, 1991 the Company entered into a common stock exchange agreement (NOTE 5) with Finca Consulting Costa Brava, S.A. (Finca) whereby, the Company transferred essentially 100% of its net assets to Finca. Subsequent to this stock exchange agreement, the Company and Finca remain as two separate legal entities (the Company as the parent of Finca) however, at the date of the merger Finca remained as the sole ongoing entity for accounting purposes. Finca is located in and was incorporated in Spain on June 14, 1989 and its principal business is acting as a real estate broker for sales of Spanish properties, mainly holiday homes.\nSubsequent to the aforementioned July 22, 1991 merger, the Company generated capital through an offering of preferred stock (NOTE 6) and in September 1991 formed an additional wholly-owned subsidiary, Finca Consulting Limited, incorporated in the United Kingdom. Finca Consulting Limited assists Finca in marketing and sales of Spanish properties.\nIn January 1992, the Company formed another new wholly-owned subsidiary, Finca Consulting GmbH, incorporated in Germany. Finca Consulting GmbH is engaged in the buying, selling and administration of the Spanish real estate.\nIn July 1992, the Company entered into a common stock exchange agreement (NOTE 5) with King National Corporation, a U.S. corporation, whereby the sole transferrable asset was a 100% ownership interest of Opti-Wert - Invest AG (OWI-AG) a Switzerland corporation. OWI-AG is principally engaged in the buying and selling of marketable securities and options on behalf of its customers in Germany via a network of independent brokers.\nOn October 1, 1992, Finca Consulting Limited acquired three additional companies incorporated in the United Kingdom, each of which are engaged as real estate agencies.\nA summary of the Company's significant accounting policies is as follows:\nPrinciples of Consolidation\nThe accompanying consolidated financial statements include the accounts of Finca Consulting, Inc. (for the period after the July 22, 1991 merger) and its wholly-owned subsidiaries, Finca Consulting Costa Brava, S.A., Finca Consulting Limited (and\nFinca Consulting, Inc. and Subsidiaries Notes to the Consolidated Financial Statements\nNOTE 1 - ORGANIZATION OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)\nSubsidiaries after October 1, 1992), Finca Consulting GmbH, and King National Corporation for the period July 1, 1992 through December 31, 1992 (collectively hereinafter referred to as the Company). All significant intercompany accounts and transactions have been eliminated.\nProperty and Equipment\nProperty and equipment are recorded at cost with depreciation and amortization being recorded by using the straight-line method over estimated economic useful lives as follows:\nExpenditures for maintenance and repairs are charged to expense when incurred. Property replacements and betterments, which improve or extend the useful lives of assets, are capitalized and subsequently depreciated.\nAmortization\nGoodwill and Capital Costs - Office Premium is stated at cost. Goodwill is being amortized over 40 years using a straight-line basis. Office premium is being amortized over 19 years using a straight-line basis.\nVintage Cars - Vintage cars are being amortized based on their estimated book value.\nStock Offering Costs\nCosts relating to the offering of the Company's common and preferred stock (NOTE 6 and 7) have been charged against the proceeds of the respective offerings.\nIncome Taxes\nThe provision for income taxes is based on income (loss) as reported for financial statement purposes. Such provision may differ from amounts currently payable, if any, because certain items are reported for income tax purposes in periods different from those in which they are reported in the financial statements. If applicable, the tax effects of these timing differences are reflected as deferred income taxes.\nFinca Consulting, Inc. and Subsidiaries Notes to the Consolidated Financial Statements\nNOTE 1 - ORGANIZATION OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)\nInternational subsidiaries are taxed according to applicable laws of the countries in which they do business.\nTranslation of Foreign Currencies\nFor international subsidiaries operating in their local currency environment, net assets are translated at year-end exchange rates while revenue and expenses are translated at average exchange rates in effect during the year. Adjustments resulting from these translations are accumulated in a separate component of stockholders' equity.\nNet (Loss) Per Share\nThe net income (loss) per share has been computed using the weighted average number of common stock shares outstanding during the year. During the period January 1, 1991 through July 21, 1991, 651,842 shares are reported as outstanding. Effective with the July 22, 1991 recapitalization (NOTE 5), 162,961 shares of common stock are reported as issued for a $29,402 capital contribution. During 1992 and 1993, common shares were outstanding as follows:\nA. January 1, 1992 through July 15, 1992 - 814,803 B. July 16, 1992 through September 14, 1992 - 1,733,228 (500,000 shares issued for all of King National Corporation common shares (NOTE 5) C. September 15, 1992 through December 31, 1992 - 1,939,895 (206,667 additional common shares issued) (NOTE 7) D. January 1, 1993 through May 15, 1993 - 2,012,582 E. May 16, 1993 through November 14, 1993 - 2,040,937 F. November 15, 1993 through December 31, 1993 - 2,146,633\nCommon stock purchase warrants and common stock issuable upon conversion of the Company's preferred stock have been excluded from the computation in that their effects are anti-dilutive.\nNOTE 2 - RELATED PARTY TRANSACTIONS\n(1) On December 31, 1991 the Company made a $49,603 investment in participation certificates of OWI AG (NOTE 8). The investment has been recorded at cost which approximates market value at December 31, 1991. Subsequently in 1992, OWI AG's parent company (King National Corporation) was acquired by the Company thus causing this $49,603 investment to be eliminated in the consolidation process.\n(2) During 1993 and 1992, the Company paid $0 and $19,743, respectively for legal fees to Andrew J. Telsey, P.C. and Andrew I. Telsey, a stockholder of the Company.\nFinca Consulting, Inc. and Subsidiaries Notes to the Consolidated Financial Statements\nNOTE 2 - RELATED PARTY TRANSACTIONS (continued)\n(3) Finca Consulting Limited, a wholly-owned subsidiary of the Company, is provided, free of charge, office space in London, England in the business office of a Company officer and director.\n(4) OWI AG pays fees for sales administration services to Telecom GmbH, Dusseldorf. Both companies have the same manager. Fees paid for the years ended 1993 and 1992 amounted to $1,703,792 and $994,498, respectively. Telecom also pays certain brokerage fees on behalf of the company which amounted to $1,891,704 and $1,068,907 for 1993 and 1992, respectively.\n(5) OWI AG has granted a loan of $141,750 to its company manager. The loan is payable in quarterly installments of $7,020 with interest at five percent per annum.\nNOTE 3 - INCOME TAXES\nAs of December 31, 1993, the Company has $2,918,238 of domestic and foreign net operating loss carryforwards as follows:\nNet Operating Available Through Losses - ----------------- ------\nUnited States 2004 $ 10,075 2005 677 2006 34,835 2007 74,177 2008 154,223 --------------- $ 273,987 =============== Spain 1996 $ 156,356 1997 73,757 1998 238,634 --------------- $ 468,747 =============== Germany 1997 $ 442,556 1998 488,110 --------------- $ 930,666 =============== Switzerland 1998 $ 1,059,919 =============== United Kingdom Indefinite $ 184,919 ===============\nFinca Consulting, Inc. and Subsidiaries Notes to the Consolidated Financial Statements\nNOTE 4 - OPERATING LEASES\nThe Company leases office space in Playa de Aro, Spain under a five year lease which commenced February 1991. The lease is cancelable with a 90 day notice and provides for annual rent increases based on a price index. The Company paid $32,103 and $40,631 for the years 1993 and 1992, respectively.\nIn January 1992 the Company entered into a lease agreement for office space in Dusseldorf, Germany. The lease required a deposit of $37,345 and requires monthly rental of $12,448 through December 1996. The monthly rent may be increased based on a price index and the lease provides for a five year renewal option.\nIn January 1993, the Company leased the Spanish property, consisting of a residential dwelling located in Gerona, Spain to Volker Montag, an officer and director of the Company. The term of the lease is for a period of five years commencing January 1, 1993 and requires payment of $1,000 rent per month for each of the ensuing sixty months.\nThe Company (by virtue of its acquisition of King National Corporation) leases office space in Switzerland, as well as automobiles and office equipment under operating leases. The Company paid $84,546 for the year ended December 31, 1993.\nThe following is a schedule years of future minimum rental payments required under operating leases that have initial or remaining noncancelable terms:\nYear Ending December 31, Total ------------------------ ----- 1994 $ 237,361 1995 230,262 1996 170,518 1997 13,930 1998 8,625 Thereafter 36,750 --------------- Total Minimum Payments Required $ 697,446 ===============\nTotal rental expense for all operating leases, except those with terms of a month or less that were not renewed, amounted to $284,049 and $185,796 for the year ended December 31, 1993 and 1992, respectively.\nFinca Consulting, Inc. and Subsidiaries Notes to the Consolidated Financial Statements\nNOTE 5 - BUSINESS ACQUISITION\nEffective July 22, 1991, Charter Ventures, Inc. (Charter) (Note 1) entered into a common stock exchange agreement with Finca Consulting Costa Brava, S.A. (Finca). Charter acquired 100% of Finca's issued and outstanding shares of common stock by issuing 325,921,000 shares (651,842 shares as adjusted for a 1 for 500 reverse stock split) of $.00001 ($.01 as amended) per value common stock which represents 80% of the new combined common stock outstanding. Charter was incorporated under the laws of the State of Colorado on October 25, 1988 to engage in all aspects of review and evaluation of private companies, partnerships and sole proprietorships for the purpose of completing mergers with or acquisitions by Charter. Effective with the common stock exchange agreement, Charter changed its name to Finca Consulting, Inc. (the Company) and effected a reverse split of its common stock which provided that every 500 shares of common stock would be exchanged for 1 share of common stock. In addition, the number of authorized common shares was amended to 20,000,000 shares, par value $.01. As of July 21, 1991 the Company's capital structure consisted of the following:\nPreferred Stock - $.00001 par value; 20,000,000 shares authorized, none issued (NOTE 6).\nCommon Stock - $.01 (as amended) par value; 20,000,000 (as amended) shares authorized, 162,961 (as adjusted for reverse split) shares issued and outstanding.\nEffective with the stock exchange agreement, the Company transferred $29,402 of cash to Finca which represented essentially 100% of the Company's net assets at the merger date. The common stock exchange agreement has been accounted for as \"a recapitalization and issuance of shares for net assets (reverse purchase of the Company by Finca)\". Subsequent to the July 22, 1991 recapitalization, the Company and Finca remain as two separate legal entities (the Company as the parent of Finca) however, at the date of the merger Finca remained as the sole ongoing entity for accounting purposes. The accompanying consolidated financial statements exclude the financial condition, results of operations and cash flows of Charter for the period prior to the July 22, 1991 merger. As a result of the recapitalization, the stockholders' equity section of the balance sheet has been presented to reflect the 325,921,000 shares (651,961 shares as adjusted for reverse stock split) of common stock issued to Finca in the stock exchange agreement, 81,480,250 shares (162,961 shares as adjusted for reverse stock split) of common stock issued for $29,402, and reflects the preferred stock available for issuance by the new combined equity.\nIn December 1990, the Company completed a public offering of 5,175 units with each unit consisting of 1,000 shares (2 shares as adjusted for the reverse split) of common stock. As part of the common stock exchange agreement, two former officers of the Company assigned to Secure Securities, Ltd., a stockholder of the\nFinca Consulting, Inc. and Subsidiaries Notes to the Consolidated Financial Statements\nNOTE 5 - BUSINESS ACQUISITION (Continued)\nCompany, 100,000,000 (200,000 as adjusted for the reverse split) common stock purchase warrants. Each warrant entitles the holder to purchase one share of common stock at $10.00 (as adjusted) per share at any time prior to June 29, 1992 though a one-year extension has been approved by the Board of Directors effectively extending the expiration date to June 30, 1993. The notice at $.005 (as adjusted) per warrant, providing a current registration statement covering the warrants in effect. To date none of the warrants have been exercised and the Company has not called any of the warrants for redemption.\nAs of December 31, 1990, Charter previously reported net assets of approximately $42,000, consisting primarily of cash. During the period January 1, 1991 through July 22, 1991 Charter, as a separate entity, incurred a net loss of approximately $12,600, which included income of approximately $1,000 and the following general and administrative expenses:\nAdministrative $ 2,958 Accounting 500 Legal 10,142 -------------- $ 13,600 ==============\nAs of July 22, 1991, Charter had cash of $29,402 which essentially represented 100% of its net assets. As previously discussed, this cash was transferred to Finca effective with the July 22, 1991 merger. If Charter's net loss of approximately $12,600 for the period January 1, 1991 through July 22, 1991 is combined with the Company's net loss of $186,605 included in the accompanying reported statement of operations for the year ended December 31, 1991, the earnings (loss) per share is as follows:\nFinca Consulting, Inc. and Subsidiaries Notes to the Consolidated Financial Statements\nNOTE 5 - BUSINESS ACQUISITION (Continued)\nDuring the period January 1, 1991 through July 22, 1991 Charter paid $10,142 in legal fees to Andrew I. Telsey, P.C. and Andrew I. Telsey is a company stockholder.\nIn January 1992, the Company formed as a wholly-owned subsidiary Finca Consulting GmbH, incorporated in Germany. Finca Consulting GmbH is engaged in the buying, selling and administration of the Spanish real estate. The Company capitalized the subsidiary with $284,810 of its cash.\nOn July 15, 1992, the Company entered into a common stock exchange agreement with King National Corporation, a U.S. Corporation (King) whereby 500,000 common shares of Finca Consulting, Inc. were exchanged for all 7,500,000 outstanding shares of King in a 15 for 1 exchange. Since both Finca Consulting, Inc. and King are controlled by the same interests, this transaction is accounted for as neither a purchase or pooling of interests. The assets and liabilities of the acquired company (King) are recorded at historical cost with the excess of liabilities assumed over assets acquired in the amount of $147,052 resulting in a reduction of consolidated equity. The sole transferrable asset of King is a 100% ownership interest in the common stock of Opti-Wert-Invest AG (OWI AG), a Switzerland corporation. OWI AG is principally engaged in the buying and selling of marketable securities and options on behalf of its customers in Germany via a network of independent brokers. Activity during the period July 1, 1992 through December 31, 1992 for OWI AG has been included in the consolidated statements of operations. King did not have any activity during this period.\nFor the period January 1, 1992 to June 30, 1992 King and OWI AG, as a separate consolidated entity, incurred a consolidated loss of $70,029. Consolidated assets of $442,934 are essentially comprised of cash, vintage car, and fixed assets.\nIf the net loss of $70,029 for the period January 1, 1992 to June 30, 1992 is combined with the Company's net loss of $1,786,637 included in the accompanying reported statement of operations for the year ended December 31, 1992 the (loss) per share is as follows:\nFinca Consulting, Inc. and Subsidiaries Notes to the Consolidated Financial Statements\nNOTE 5 - BUSINESS ACQUISITION (Continued)\nOn October 1, 1992 Finca Consulting Limited (a United Kingdom subsidiary) acquired the net assets of three additional companies incorporated in the United Kingdom as wholly-owned subsidiaries. This transaction was accounted for under the purchase method and, accordingly, the three month activity from October 1, 1992 through December 31, 1992 in each of these acquired companies has been included in the consolidated statement of operations. The assets and liabilities of the acquired companies are recorded at historical cost with the excess of liabilities assumed over assets acquired in the amount of $443,018 recorded as goodwill.\nNOTE 6 - PREFERRED STOCK OFFERING\nIn August 1991 the Company's Board of Directors authorized the offering of 100,000 convertible preferred shares of the Company's $.00001 par value preferred stock at a price of $20 per share. The offering was undertaken pursuant to Regulation S under the Securities Act of 1993 as amended. Each preferred share is convertible into five shares of the Company's common stock within a five year period from the date of subscription for the preferred shares. No call provision exists relevant to the preferred shares and the preferred shares do not include any voting or redemption rights and are not subject to any operation of a retirement or sinking fund. In the event of a liquidation of the Company, either voluntary or involuntary, dissolution or winding up of the Company or any distribution of the assets of the Company, the holders of the preferred shares shall be entitled to any and all amounts payable upon such shares superior to those similar rights available to holders of the Company's common shares, but subordinate to all creditors of the Company. The Company has reserved for issuance from its authorized but unissued common shares, 500,000 common stock shares relating to the conversion rights of the preferred shares.\nDuring 1991 the Company sold 69,920 shares of convertible preferred stock and recorded gross proceeds of $1,398,400. Commissions of $90,000 on the shares sold were paid to an affiliate (NOTE 2) and as of December 31, 1991, $311,200 of the gross proceeds remained payable to the Company by the same affiliated brokerage firm (NOTE 2). During 1992, the Company sold 30,070 shares of convertible preferred stock and recorded gross proceeds of $601,400. To date, preferred stockholders have exercised their right to convert 83,685 preferred shares into 418,425 common stock shares and at December 31, 1992, 16,305 preferred shares remain outstanding.\nThe Company's commission arrangement with an affiliate (OWI-AG) provided that $90,000 of commissions were payable December 31, 1991, and that an additional $100,000 could be paid during 1992 based upon the successful completion of the offering of the 100,000 convertible preferred shares. However, the affiliate received no additional payments in 1992.\nFinca Consulting, Inc. and Subsidiaries Notes to the Consolidated Financial Statements\nNOTE 7 - COMMON STOCK ISSUANCE\nFor the years ended December 31, 1993 and 1992, respectively the Company authorized the issuance of 206,738 and 206,667 additional common shares with a par value per share of $.01. The offering was undertaken pursuant to Regulation S under the Securities Act of 1993 as amended.\nNOTE 8 - MINORITY INTEREST IN SUBSIDIARY\nOne of the Company's subsidiaries (OWI-AG) has issued participation certificates with a minimal value of Sfr. 10 (US $6.60) for a subscription price of US $9.07. These participation certificates carry no voting rights and do not have a fixed return. The 5,040 certificates have been subscribed to by the Company and have been eliminated in the consolidation process. The remaining 5,460 certificates are held by various investors.\nNOTE 9 - OPERATIONS OF BUSINESS SEGMENTS AND IN GEOGRAPHIC AREAS\nBusiness Segments The Company operates in two business segments, acting as a real estate broker for sales of properties in Europe and through its subsidiary OWI-AG buying and selling of marketable securities and options on behalf of its customers in Germany.\nGeographic Areas The Company operates primarily in Europe. Information regarding each geographic area on an unconsolidated basis for 1993 and 1992 is as follows:\nFinca Consulting, Inc. and Subsidiaries Notes to the Consolidated Financial Statements\nOperating (loss) consists of sales less operating expenses. General corporate assets represent parent company cash, receivable due from affiliate for preferred stock offering proceeds and the Company's stock investment in an affiliate.\nNOTE 10 - CONCENTRATIONS OF CREDIT RISK\nThe Company maintains cash balances in several foreign financial institutions which are not insured by the respective countries. At December 31, 1993, the Company's uninsured cash balances total $345,668.","section_15":""}
{"filename":"201499_1993.txt","cik":"201499","year":"1993","section_1":"Item 1. BUSINESS. THE COMPANY\nCommercial Credit Company (the \"Company\") is a financial services holding company engaged, through its subsidiaries, principally in two business segments: (i) Consumer Finance; and (ii) Insurance Services. The Company is a wholly owned subsidiary of The Travelers Inc. (\"The Travelers\"), formerly known as Primerica Corporation. The Travelers is a financial services holding company engaged, through its subsidiaries, principally in four business segments: (i) Investment Services; (ii) Consumer Services (through the Company); (iii) Life Insurance Services; and (iv) Property & Casualty Insurance Services. The periodic reports of The Travelers provide additional business and financial information concerning that company and its consolidated subsidiaries.\nIn December 1992, The Travelers acquired approximately 27% of the common stock of The Travelers Corporation (\"old Travelers\"), a Connecticut corporation that was one of the largest multiline financial services companies in the United States. As a part of the transaction, the Company sold to old Travelers 50% of the Company's equity in Commercial Insurance Resources, Inc. (the parent of Gulf Insurance Company, the Company's property and casualty insurance subsidiary) in exchange for approximately 5.5% of old Travelers' common stock, and one of the Company's subsidiaries purchased additional shares directly from old Travelers. This acquisition was accounted for as a purchase with an effective accounting date of December 31, 1992. On December 31, 1993, old Travelers was merged into The Travelers and each outstanding share of common stock of old Travelers owned by the Company was converted into 0.80423 of a share of common stock of The Travelers. See \"Insurance Services\" and Note 4 of Notes to Consolidated Financial Statements.\nThe principal executive offices of the Company are located at 300 St. Paul Place, Baltimore, Maryland 21202; telephone number 410-332-3000.\nCONSUMER FINANCE SERVICES\nThe Company's Consumer Finance Services segment includes consumer lending services conducted primarily under the name \"Commercial Credit,\" as well as credit-related insurance and credit card services.\nConsumer Finance\nAs of December 31, 1993, the Company maintained 768 loan offices in 42 states, and it plans to open approximately 60 additional loan offices in 1994. The Company owns two state- chartered banks headquartered in Newark, Delaware, which generally limit their activities to offering credit card services nationwide. Total consumer finance receivables of this segment\nat December 31, 1993, 1992 and 1991 were approximately $6.3 billion, $5.8 billion and $5.8 billion, respectively. For an analysis of consumer finance receivables, net of unearned finance charges (\"Consumer Finance Receivables\"), see Note 5 of Notes to Consolidated Financial Statements.\nLoans to consumers by the Consumer Finance Services unit include secured and unsecured personal loans, real estate-secured loans and consumer goods financing. Credit card loans are discussed below. The Company's loan offices are located throughout the United States. They are generally located in small to medium-sized communities in suburban or rural areas, and are managed by individuals who generally have considerable consumer lending experience. The primary market for the Company's consumer loans consists of households with an annual income of $15,000 to $54,000. The number of loan customers (excluding credit card customers) was approximately 1,142,000 at December 31, 1993, as compared to approximately 1,058,000 at December 31, 1992 and approximately 1,078,000 at December 31, 1991. A loan program of the Company solicits applications for second mortgage loans through the sales force of the Primerica Financial Services group of companies, which are subsidiaries of The Travelers.\nThe average amount of cash advanced per personal loan made was approximately $3,800 in each of 1993, 1992 and 1991. The average amount of cash advanced per real estate-secured loan made was approximately $28,800 in 1993 and approximately $26,000 in each of 1992 and 1991. The average annual yield for loans in 1993 was 15.83%, as compared to 16.31% in 1992 and 16.69% in 1991. The average annual yield for personal loans in 1993 was 20.11%, as compared to 19.99% in 1992 and 19.97% in 1991, and for real estate-secured loans it was 13.14% in 1993, as compared to 14.05% in 1992 and 14.48% in 1991. The 1993 average yield for real estate-secured loans was affected by the successful introduction of a variable rate product. The Company's average net interest margin for loans was 8.44% in 1993, 8.66% in 1992 and 8.63% in 1991.\nPrior to 1992, both delinquencies and charge-offs had increased, reflecting the recessionary economic environment. The Company took steps to combat this trend, by tightening the credit criteria used for making new loans and placing a greater emphasis on collection policies and practices. As a result of these measures and recent economic trends, delinquency rates generally have continued to improve throughout 1993. See \"Delinquent Receivables and Loss Experience,\" below. In addition, aggregate quarterly loss charge-off rates have generally declined since the first quarter of 1992.\nDelinquent Receivables and Loss Experience\nThe management of the consumer finance business attempts to prevent customer delinquency through careful evaluation of each borrower's application and credit history at the time the loan is made or acquired, and attempts to control losses through\nappropriate collection activity. An account is considered delinquent for financial reporting purposes when a payment is more than 60 days past due, based on the original or extended terms of the contract. Due to the nature of the finance business, some customer delinquency and loss is unavoidable. The delinquency and loss experience on real estate-secured loans is generally more favorable than on personal loans.\nThe following table shows the ratio of receivables delinquent for 60 days or more on a contractual basis (i.e., more than 60 days past due) to gross receivables outstanding:\nRatio of Receivables Delinquent 60 Days or More to Gross Receivables Outstanding (1)\nReal Estate- Personal Secured Credit Sales Total Loans Loans Cards Finance Consumer ----- ----- ------ ------- -------- As of December 31, ------------------ 1993 2.62% 2.15% 1.03% 1.54% 2.21%(2) 1992 3.02% 2.31% 1.87% 1.48% 2.55% 1991 3.51% 2.19% 2.57% 2.00% 2.80% __________________________ (1) The receivable balance used for these ratios is before the deduction of unearned finance charges and excludes accrued interest receivable. Receivables delinquent 60 days or more include, for all periods presented, accounts in the process of foreclosure. (2) Includes the reacquisition in the fourth quarter of 1993 of the remainder of a portfolio of loans collateralized by manufactured housing units.\nThe following table shows the ratio of net charge-offs to average Consumer Finance Receivables. For all periods presented, the ratios shown below give effect to all deferred origination costs.\nRatio of Net Charge-Offs to Average Consumer Finance Receivables\nReal Estate- Personal Secured Credit Sales Total Loans Loans Cards Finance Consumer ----- ----- ------ ------- -------- Year Ending December 31, ------------ 1993 4.08% 0.84% 2.56% 1.78% 2.36%(1) 1992 5.09% 0.74% 4.01% 2.05% 2.84% 1991 5.03% 0.69% 3.05% 2.52% 2.72%\n______________________________ (1) Includes the reacquisition in the fourth quarter of 1993 of the remainder of a portfolio of loans collateralized by manufactured housing units.\nThe following table sets forth information regarding the ratio of allowance for losses to Consumer Finance Receivables.\nRatio of Allowance For Losses to Consumer Finance Receivables\nAs of December 31, ------------------ 1993 2.64% 1992 2.91% 1991 2.86%\nCredit-Related Insurance\nAmerican Health and Life Insurance Company (\"AHL\"), a subsidiary of the Company, underwrites or arranges for credit- related insurance, which is offered to customers of the consumer finance business. AHL has an A+ (superior) rating from the A.M. Best Company, whose ratings may be revised or withdrawn at any time. Credit life insurance covers the declining balance of unpaid indebtedness. Credit disability insurance provides monthly benefits during periods of covered disability. Credit property insurance covers the loss of property given as security for loans. Other insurance products offered or arranged for by AHL include accidental death and dismemberment, auto single interest, nonfiling, involuntary unemployment insurance and mortgage impairment insurance. Most of AHL's products are single premium, which premiums are earned over the related contract period.\nThe following table sets forth gross written insurance premiums, net of refunds, by AHL for consumer finance customers:\nConsumer Finance Insurance Premiums Written (in millions)\nYear Ended December 31, ------------------------ 1993 1992 1991 ---- ---- ----\nCredit life . . . . . . . . $ 33.5 $ 33.1 $ 40.7 Credit disability . . . . . 47.1 44.7 49.9 ------ ------ ------- Total . . . . . . . . . . $ 80.6 $ 77.8 $ 90.6 ====== ======= =======\nSee Note 7 of Notes to Consolidated Financial Statement for information regarding reinsurance activities.\nCredit Card Services\nPrimerica Bank, a subsidiary of the Company, is a state- chartered bank located in Newark, Delaware, which provides credit\ncard services, including upper market gold credit card services, to individuals and to affinity groups (such as nationwide professional associations and fraternal organizations). Primerica Bank USA, another state-chartered bank subsidiary of the Company, was formed in September 1989. Primerica Bank USA is not subject to certain regulatory restrictions relating to growth and cross-marketing activities to which Primerica Bank is subject. See \"Regulation\" below. These banks generally limit their activities to credit card operations.\nThe following table sets forth aggregate information regarding credit cards issued by Primerica Bank and Primerica Bank USA:\nCredit Cardholders and Total Outstandings (outstandings in millions of dollars)\nAs of and for the year ended December 31, ----------------------------------------- 1993 1992 1991 ---- ---- ---- Approximate total credit cardholders 534,000 423,000 370,000 Approximate gold credit cardholders 478,000 371,000 305,000 Total outstandings $697.1 $538.2 $472.9 Average annual yield 11.66% 12.12% 13.50%\nThe primary market for the banks' credit cards consists of households with annual incomes of $40,000 and above.\nThe Delaware credit card banks offer deposit-taking services (which as to Primerica Bank USA are limited to deposits of at least $100,000 per account). At December 31, 1993, deposits at the Delaware offices were $51.7 million, as compared to $22.4 million at December 31, 1992 and $23.8 million at December 31, 1991. At December 31, 1993, all of such deposits were federally insured. The increase in deposits resulted from a balance transfer promotion conducted by Primerica Bank during 1993.\nCompetition\nThe consumer finance business competes with banks, savings and loan associations, credit unions, credit card issuers and other consumer finance companies. Additionally, substantial national financial services networks have been formed by major brokerage firms, insurance companies, retailers and bank holding companies. Some competitors have substantial local market positions; others are part of large, diversified organizations. Deregulation of banking institutions has greatly expanded the consumer lending products permitted to be offered by these institutions, and because of their long-standing insured deposit base, many of them are able to offer financial services on very competitive terms. The Company believes that it is able to compete effectively with such institutions. In particular, the Company believes that the diversity and features of the products\nit offers, personal service and cultivation of repeat and referral business support and strengthen its competitive position in its Consumer Finance Services businesses.\nRegulation\nMost consumer finance activities are subject to extensive federal and state regulation. Personal loan, real estate-secured loan and sales finance laws generally require licensing of the lender, limitations on the amount, duration and charges for various categories of loans, adequate disclosure of certain contract terms and limitations on certain collection practices and creditor remedies. Federal consumer credit statutes primarily require disclosure of credit terms in consumer finance transactions. The Company's banking operations, which must undergo periodic examination, are subject to additional regulations relating to capitalization, leverage, reporting, dividends and permitted asset and liability products. The Company's credit card banks are also covered by the Competitive Equality Banking Act of 1987 (the \"Banking Act\"), which, among other things, prevents the Company from acquiring or forming most types of new banks or savings and loan institutions and, with respect to Primerica Bank, restricts cross-marketing of products by or of certain affiliates. The Company's banks are also subject to the Community Reinvestment Act, which requires a bank to provide equal credit opportunity to all persons in such bank's delineated community. The Company believes that it complies in all material respects with applicable regulations.\nThe Real Estate Settlement Procedures Act of 1974 (\"RESPA\") has been extended to cover real estate-secured loans that are subordinated to other mortgage loans. Generally, RESPA requires disclosure of certain information to customers and regulates the receipt or payment of fees or charges for services performed.\nINSURANCE SERVICES\nThe Company's Insurance Services business includes property and casualty insurance and specialty lines of insurance. The Company's insurance activities relating to its consumer finance business are discussed above under \"Consumer Finance Services.\"\nThe Company's property and casualty insurance operations are conducted principally through Gulf Insurance Company and its subsidiaries (\"Gulf\"). Gulf operates through regional offices for traditional lines of property and casualty insurance and specialty lines of business. Gulf has an A+ (superior) rating from the A.M. Best Company, whose ratings may be revised or withdrawn at any time.\nIn connection with The Travelers' 1992 acquisition of old Travelers' common stock, the Company sold to old Travelers 1,000 newly issued shares of Commercial Insurance Resource, Inc. (\"CIRI\"), the parent of Gulf, in exchange for approximately 5.5% of old Travelers' then outstanding common stock. As a result, during 1993 CIRI and its subsidiaries were 50%-owned by each of the Company and a subsidiary of old Travelers. In 1993, CIRI was treated as a consolidated subsidiary of the Company, and the 50% ownership interest of old Travelers was reflected as minority interest.\nRegional and Specialty Lines\nGulf obtains its regional property and casualty insurance business primarily through independent insurance agencies that represent it on a non-exclusive basis. During 1993, approximately 19% of Gulf's regional business represented personal lines of insurance, approximately 29% represented workers' compensation insurance and approximately 52% represented other commercial lines of business, including commercial automobile liability and physical damage and commercial multiple peril insurance. At the end of 1993, Gulf discontinued writing personal lines of insurance and transferred a major part of that business to a subsidiary of The Travelers, although Gulf does retain some run-off business. Approximately 73% of Gulf's regional business, as represented by direct written premiums during 1993, is in Texas, Georgia, Florida and Missouri.\nProduct offerings in Gulf's specialty lines include directors' and officers' liability and various forms of nonprofessional errors and omissions, fidelity bonds, commercial umbrella coverages and contingent liability coverages; coverages relating to the entertainment industry; and standard commercial property and casualty products for specific niche markets. These specialty lines are produced mainly through commercial insurance brokers and several wholesale brokers, and underwriting managers for specific industry programs. In the aggregate these specialty lines comprised approximately 53%, 47% and 42% of Gulf's earned premiums in 1993, 1992 and 1991, respectively.\nReserves are subject to ongoing review as additional experience and other data become available. Increases or decreases to reserves for loss and loss adjustment expenses may be made, which would be reflected in operating results for the period in which such adjustments, if any, are made.\nGulf attempts to limit its risks through careful underwriting and the reinsurance of portions of certain policies with unaffiliated reinsurers. Reinsurance is subject to collectibility in all cases and to aggregate loss limits in certain cases. In Gulf's regional business, losses on any single claim are limited by reinsurance to $500,000 per occurrence and reinsurance arrangements limit Gulf's maximum loss from any single property catastrophic occurrence to $4.0 million, and it participates for 5% of any excess, up to a maximum excess participation of $36 million. For its specialty lines coverages, Gulf's maximum risk is limited through reinsurance to approximately $2.73 million per policy or, under certain policies, per occurrence. See Note 7 of Notes to Consolidated Financial Statements.\nAlso included in this area is account insurance provided by Gulf to Smith Barney Shearson Inc., a subsidiary of The Travelers, in excess of that provided by the Securities Investor\nProtection Corporation (\"SIPC\"). This insurance provides certain excess coverage for losses due to forced liquidation of broker- dealers, which losses would be recoverable by securities customers from SIPC but for SIPC's $500,000 limitation on liability per customer.\nThe following table sets forth information concerning property and casualty operations of Gulf and its subsidiaries:\nGulf Insurance Company and Subsidiaries (in millions of dollars)\nYear Ended December 31, ----------------------------- 1993 1992 1991 ---- ---- ----\nNet premiums written . . $ 264.9 $ 250.1 $ 232.2 Premiums earned: Regional business . . . $ 121.9 $ 128.4 $ 128.7 Specialty business . . 135.4 112.1 93.0 ------- ------- ------- Total premiums earned $ 257.3 $ 240.5 $ 221.7 Total Loss and Expense Reserve $ 244.7 $ 223.1 $ 216.8 Loss ratio (1) . . . . . 72.1% 70.3% 75.1% Expense ratio (2) . . . . 23.8% 27.3% 26.8% Combined ratio (3) . . . 95.9% 97.6% 101.9%\n____________________________ (1) Ratio of losses and loss expenses incurred to premiums earned, determined in accordance with statutory insurance accounting principles. (2) Ratio of underwriting expenses incurred to net premiums written, determined in accordance with statutory insurance accounting principles. (3) Total of loss ratio and expense ratio.\nInvestments\nThe investment holdings of the insurance companies at December 31, 1993 were composed primarily of fixed income securities. At December 31, 1993, approximately 97% in total dollar amount of the fixed income securities portfolios of the Company's insurance subsidiaries had investment grade ratings. The remaining investments are principally issues of utilities and private placement securities that are not subject to investment rating. The weighted average maturity of the fixed income holdings at December 31, 1993 was approximately 9.6 years. State insurance laws prescribe the types, quality and diversity of permissible investments for insurance companies.\nCompetition\nThe property and casualty insurance industry includes many insurance companies of varying size. Companies may be small local firms, large regional firms or large national firms, as\nwell as self-insurance programs or captive insurers. Market competition, regulated by state insurance departments, works to set the price charged for insurance products and the level of service provided. Growth is driven by a company's ability to provide insurance and services at a price that is reasonable and acceptable to the customer. In addition, the marketplace is affected by available capacity of the insurance industry as measured by policyholders' surplus. Surplus expands and contracts primarily in conjunction with profit levels generated by the industry, which is generally referred to as the underwriting cycle. Growth in premium and service business is also measured by a company's ability to retain existing customers and to attract new customers.\nLocal or regional companies are effective competitors in personal lines business because of their expense structure or because they specialize in providing coverage to particular risk groups. Personal automobile and homeowners insurance is marketed mainly through one of two distribution systems: independent agents or direct writing. Direct writing companies operate either by mail or through exclusive agents or sales representatives. Due in part to the expense advantage that direct writers typically have relative to agency companies, the direct writers have been able to gradually expand their market share. Gulf's insurance sales force is primarily composed of independent commissioned agents and brokers.\nRegulation\nThe Company's insurance subsidiaries are subject to considerable regulation and supervision by insurance departments or other authorities in each state or other jurisdiction in which they transact business. The laws of the various jurisdictions establish supervisory and regulatory agencies with broad administrative powers. The purpose of such regulation and supervision is primarily to provide safeguards for policyholders, rather than to protect the interests of the insurers' stockholders. Typically, state regulation extends to such matters as licensing companies, regulating the type, amount and quality of permitted investments, licensing agents, regulating aspects of a company's relationship with its agents, requiring triennial financial examinations, market conduct surveys and the filing of reports on financial condition, recording complaints, restricting expenses, commissions and new business issued, restricting use of some underwriting criteria, regulating rates, forms and advertising, specifying what might constitute unfair practices, fixing maximum interest rates on policy loans and establishing minimum reserve requirements and minimum policy surrender values. Such powers also extend to premium rate regulation, which varies from open competition to limited review upon implementation, to requirements for prior approval for rate changes. State regulation may also cover regulating capital and surplus and actuarial reserve maintenance, setting solvency standards, mandating loss ratios for certain kinds of insurance, limiting the grounds for cancellation or nonrenewal of policies and regulating solicitation and replacement practices. State laws also regulate transactions and dividends between an insurance company and its parent or affiliates, and require prior approval or notification of any change in control of an insurance subsidiary. In addition, under insurance holding company legislation, most states regulate affiliated groups with respect to intercorporate transfers of assets, service arrangements and dividend payments from insurance subsidiaries.\nThe insurance industry generally is exempt from federal antitrust laws because of the application of the McCarran- Ferguson Act. In recent years, legislation has been introduced to modify or repeal the McCarran-Ferguson Act. The effect of any such modification or repeal cannot currently be determined.\nVirtually all states mandate participation in insurance guaranty associations and\/or insolvency funds, which assess insurance companies in order to fund claims of policyholders of insolvent insurance companies. Under these arrangements, insurers are assessed their proportionate share (based on premiums written for the relevant lines of insurance in that state each year) of the estimated loss and loss expense of insolvent insurers. Similarly, as a condition to writing a line of property and casualty business, many states mandate participation in \"fair plans\" and\/or \"assigned risk pools\" that underwrite insurance for individuals and businesses that are otherwise unable to obtain insurance. Participation is based on the amount of premiums written in past years by the participating company in an individual state for the classes of insurance involved. These plans or pools traditionally have been unprofitable, although the effect of their performance has been partially mitigated in certain lines of insurance by the states' allowance of increases in rates for business voluntarily written by plan or pool participants in such states. For workers' compensation plans or pools the effect may be further mitigated by the method of participation selected by insurance companies.\nIn addition to state insurance laws, the Company's insurance subsidiaries are also subject to general business and corporation laws, state securities laws, consumer protection laws, fair credit reporting acts and other laws.\nMany jurisdictions require prior regulatory approval of rate and rating plan changes and some impose restrictions on the cancellation or nonrenewal of risks and the termination of agency contracts, or have regulations that preclude immediate withdrawal from certain lines of business. Certain lines of business, such as commercial automobile and workers' compensation, experience rate inadequacies in many jurisdictions. Automobile insurance is also subject to varying regulatory requirements as to mandated coverages and availability, such as no-fault benefits, assigned risk pools, reinsurance facilities and joint underwriting associations. The added expense associated with involuntary pools in this and other areas has adversely affected profitability.\nIn December 1992, the Florida legislature created the Residential Property and Casualty Joint Underwriting Association (\"RPCJUA\") to provide residential property and casualty insurance to individuals who cannot obtain coverage in the voluntary market. Property-casualty insurance companies in Florida, including Gulf, will be required to share the risk in the RPCJUA.\nIn November 1993, the Florida legislature created a Florida Hurricane Catastrophe Fund to provide reimbursement to insurers for a portion of their future catastrophic hurricane losses. This Hurricane Catastrophe Fund will be funded in part by assessments on insurance companies.\nThe National Association of Insurance Commissioners (the \"NAIC\") adopted risk-based capital (\"RBC\") requirements for property-casualty companies in December 1993, effective with reporting for 1994. The RBC requirements are to be used as early warning tools by the NAIC and states to identify companies that merit further regulatory action.\nCORPORATE AND OTHER OPERATIONS\nThe Corporate and Other segment consists of corporate staff and treasury operations, a hotel mortgage investment and certain corporate income and expenses that have not been allocated to the operating subsidiaries. During 1993, this segment also included the Company's share of equity income of old Travelers. See Notes 3 and 4 of Notes to Consolidated Financial Statements.\nInvestment in The Travelers\nIn December 1988, in connection with an acquisition by The Travelers, the Company's parent company, the Company made an investment of approximately $500 million in an entire issue of preferred stock of Primerica Holdings, Inc. (\"Primerica Holdings\"), then a wholly owned subsidiary of The Travelers. Since then $400 million of such preferred stock has been repurchased from the Company. In December 1992 Primerica Holdings was merged into The Travelers and the Company's investment in the preferred stock was converted into preferred stock of The Travelers, with the same terms. The preferred stock is entitled to a cumulative quarterly dividend at an annual rate of 85% of the daily average of the 30-day commercial paper rate multiplied by the stock's $45,000 per share liquidation value. Additionally, the preferred stock has customary provisions regarding preferences upon liquidation, is redeemable without premium at the issuer's option at any time, and is subject to repurchase at the holder's request at its liquidation value plus accrued dividends if not redeemed on or prior to September 15, 1998. See Note 13 of Notes to Consolidated Financial Statements.\nGENERAL BUSINESS FACTORS\nIn the judgment of the Company, no material part of the business of the Company and its subsidiaries is dependent upon a single customer or group of customers, the loss of any one of which would have a materially adverse effect on the Company, and no one customer or group of affiliated customers accounts for as much as 10% of the Company's consolidated revenues.\nAt December 31, 1993, the Company had approximately 5,000 full-time employees. The Company also employs part-time employees.\nOTHER INFORMATION\nSource of Funds\nFor a discussion of the Company's sources of funds and maturities of the long-term debt of the Company's subsidiaries, see Item 7, \"Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources,\" and Note 6 of Notes to Consolidated Financial Statements.\nThe following table sets forth information concerning annual weighted average interest rates on the Company's borrowed funds:\nAnnual Weighted Average Interest Rates\nYears ended December 31, ------------------------ 1993 1992 1991 ---- ---- ---- Savings accounts, certificates and deposits................ 4.4% 5.4% 6.8% Short-term borrowings (1)..... 3.2% 3.8% 6.1% Long-term borrowings (2)...... 8.0% 8.4% 8.9% Total borrowings.............. 6.3% 6.6% 7.6% Bank prime rate .............. 6.0% 6.3% 8.5%\n____________________ (1) Includes all commercial paper and short-term bank loans; does not include cost of maintaining bank credit lines. (2) Includes current maturities of long-term debt and amortization of long-term debt expenses.\nTaxation\nFor a discussion of tax matters affecting the Company and its operations, see Item 7, \"Management's Discussion and Analysis of Financial Condition and Results of Operations,\" and Notes 1 and 8 of Notes to Consolidated Financial Statements.\nFinancial Information about Industry Segments\nFor financial information regarding industry segments of the Company, see Note 3 of Notes to Consolidated Financial Statements.\nItem 2.","section_1A":"","section_1B":"","section_2":"Item 2. PROPERTIES.\nThe Company is engaged in the business of providing services that are generally not dependent upon their physical plant. In 1989, a subsidiary of the Company completed the sale of the Company's headquarters office building in Baltimore, Maryland, and the lease back of a portion of the space therein, which is used by the Company as its executive offices. Offices and other properties used by the Company's subsidiaries are located throughout the United States. One subsidiary owns and uses office space in Tel Aviv, Israel. Most office locations and other properties are leased on terms and for durations that are reflective of commercial standards in the communities where such offices and other properties are located. A few offices are owned, none of which is material to the Company's financial condition or operations.\nThe Company believes its properties are adequate and suitable for its business as presently conducted and are adequately maintained. For further information concerning leases, see Note 12 of Notes to Consolidated Financial Statements.\nItem 3.","section_3":"Item 3. LEGAL PROCEEDINGS.\nFor information concerning Gallagher, et. al. v. American Health and Life Insurance Company, et. al., a purported class action relating to annuity policies that were transferred by the defendants to an insurance company that is now insolvent, see the description that appears in the second paragraph of page 2 of the Company's filing on Form 8-K dated July 28, 1992, which description is incorporated by reference herein. A copy of the pertinent paragraph of such filing is included as an exhibit to this Form 10-K.\nBecause the nature of the businesses of the Company and its subsidiaries involves the collection of numerous accounts, the validity of liens, accident and other damage or loss claims under many types of insurance, and the construction and interpretation of contracts, the Company and its subsidiaries are plaintiffs and defendants in numerous legal proceedings. Neither the Company nor any of its subsidiaries is a party to, nor is its property the subject of, any legal proceeding that departs from litigation normally incident to the kinds of business conducted by the Company or its subsidiaries which, in the opinion of the Company's management, would be expected to have a material adverse impact on the consolidated financial condition of the Company and its subsidiaries.\nItem 4.","section_4":"Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.\nPursuant to General Instruction J of Form 10-K, the information required by Item 4 is omitted.\nPART II -------\nItem 5.","section_5":"Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.\nAll of the outstanding common stock of the Company is owned by CCC Holdings, Inc., which is a wholly owned subsidiary of The Travelers.\nItem 6.","section_6":"Item 6. SELECTED FINANCIAL DATA.\nCOMMERCIAL CREDIT COMPANY and SUBSIDIARIES FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA (In millions of dollars)\n-------------------------------------------- (1) Included in 1992 results are after-tax gains of $7.1 from the sale of stock of subsidiaries and affiliates and $22.7 from the sale of the common stock investment in Musicland Stores Corporation.\n(2) See Note 1 of Notes to Consolidated Financial Statement for information regarding changes in accounting principles in 1992 and 1993.\n(3) Assets and liabilities for 1992 have been reclassified to conform with the 1993 presentation for the adoption, effective January 1, 1993, of Statement of Financial Accounting Standards No. 113, \"Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts.\"\nItem 7.","section_7":"Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS\nConsolidated Results of Operations Year Ended December 31, --------------------------- ($ in millions) 1993 1992 1991 ----------------------------------------------------------------------- Revenues $1,580.3 $1,523.5 $1,459.1 ======== ======== ======== Income before cumulative effect of changes in accounting principles $ 291.8 $ 281.2 $ 203.2 ======== ======== ======== Net income $ 286.0 $ 263.1 $ 203.2 ======== ======== ========\nResults of Operations\nCommercial Credit Company's (the Company) earnings in 1993 reflect a substantial increase in the contribution of Consumer Finance Services, which continued to post record results.\nIncome before the cumulative effect of changes in accounting principles for 1993 includes:\n- Reported investment portfolio gains of $33.3 million;\nIncome before the cumulative effect of changes in accounting principles for 1992 includes:\n- Reported investment portfolio gains of $10.3 million; - a gain of $22.7 million from the sale of the common stock investment in Musicland Stores Corporation (Musicland); - a gain of $11.1 million from the exchange of 50% of Commercial Insurance Resources, Inc. (CIRI), the parent of Gulf Insurance Company (Gulf), for The Travelers Corporation (old Travelers) common stock; - a net loss of $4.0 million from the divestment of securities of the Company's affiliate, Inter-Regional Financial Group, Inc. (IFG)\nIncluded in net income for 1993 is an after-tax charge of $3.4 million resulting from the adoption of Statement of Financial Accounting Standards No. 112 (FAS 112), \"Employers' Accounting for Postemployment Benefits,\" and an after-tax charge of $2.4 million resulting from the adoption of Statement of Financial Accounting Standards No. 106 (FAS 106), \"Employers' Accounting for Postretirement Benefits Other Than Pensions.\" Included in net income for 1992 is an after-tax charge of $18.1 million resulting from the adoption of Statement of Financial Accounting Standards No. 109 (FAS 109), \"Accounting for Income Taxes.\"\nExcluding these items, earnings for 1993 increased by $17.4 million or 7% over the 1992 period reflecting improved performance at Consumer Finance Services and the 1993 contribution to earnings of an equity investment in old Travelers, partially offset by the 1993 minority interest in Gulf and higher corporate expenses.\nThe most significant factor in 1992's and 1991's earnings growth over 1991 and 1990, respectively, were increases in the contributions of Consumer Finance Services.\nThe following discussion presents in more detail each segment's performance.\nConsumer Finance Services\nYear Ended December 31, ------------------------------------------------------- 1993 1992 1991 ------------------------------------------------------- Net Net Net ($ in millions) Revenues income Revenues income Revenues income ------------------------------------------------------------------------- Consumer Finance Services (1) $1,190.6 $230.8 $1,154.8 $196.6 $1,147.1 $173.8 =========================================================================\n(1) Net income includes $22.7 and $4.3 of reported investment portfolio gains in 1993 and 1992, respectively.\nConsumer Finance earnings before reported investment portfolio gains increased 8% in 1993 over the prior year. The increase primarily reflects a significant decline in loan losses and a 3% increase in average receivables outstanding. The increase in net income and revenues in 1992 compared to 1991 reflects an increase in average receivables outstanding (offset by slightly lower yields), improved operating efficiencies and some benefit from lower funding costs.\nYear-end receivables increased in 1993 by $554 million to end the year at $6.342 billion. The 1993 increase occurred across-the-board in real estate loans, personal loans and credit cards and also reflects the reacquisition of the remainder of a portfolio of loans collateralized by manufactured housing units amounting to $135 million at year end. While average receivables increased in 1992, year-end receivables declined reflecting an increase in early payoffs of real estate loans outstandings. This was partially offset by an increase in credit card outstandings. Seventy-three branch offices were added during 1993, bringing the total to 768 at year end.\nConsumer Finance borrows from the Company's corporate treasury operation which raises funds externally. For fixed rate loan products Consumer Finance is charged agreed-upon rates that have generally been set within a narrow range and have approximated 8% over the last three years. For variable rate loan products Consumer Finance is charged prime-based rates. The Company's actual cost of funds may be higher or lower than rates charged to Consumer Finance, with the difference reflected in Corporate and Other.\nThe average yield on receivables outstanding decreased to 15.83% in 1993 from 16.31% in the prior year and 16.69% in 1991, due to lower yields on fixed rate second mortgages and the adjustable rate real estate-secured loan product introduced at the end of 1992. Lower yields on loans outstanding, partially offset by decreased cost of funds to Consumer Finance on variable rate loans, have resulted in a decline in net interest margins to 8.44% in 1993 from 8.66% in 1992.\nThe allowance for losses as a percentage of net receivables was reduced to 2.64% at year-end 1993 from 2.91% at year-end 1992 due to the improved credit quality of the loan portfolio. The increase in the allowance in 1992 from 2.86% at year-end 1991 reflected the impact of the recessionary economic environment.\nAs of, and for, the Year Ended December 31, ----------------------- 1993 1992 1991 ----------------------- Allowance for losses as % of net consumer finance 2.64% 2.91% 2.86% receivables at year end\nCharge-off rate for the year 2.36% 2.84% 2.72%\n60 + days past due on a contractual basis as % of gross consumer finance 2.21% 2.55% 2.80% receivables at year end\nAccounts 60+ days past due include accounts in the process of foreclosure for all periods presented.\nThe Company's wholly owned subsidiary, American Health and Life Insurance Company (AHL), provides credit life and health insurance to Consumer Finance customers. Premiums earned were $84.8 million in 1993, $86.1 million in 1992 and $82.5 million in 1991.\nOutlook - Consumer Finance is affected by the interest rate environment and general economic conditions. In a rising interest rate environment, real estate loan liquidations may decline compared to the last two years, when potential customers refinanced their first mortgages instead of turning to the second mortgage-market or proceeds from the refinancing of first mortgages were used to pay off existing second mortgages. Lower loan liquidations would benefit the level of receivables outstanding. In addition, a rising interest rate environment could also reduce the downward pressure experienced during the last several years on the interest rates charged on new real estate-secured receivables, as well as credit cards, which are substantially based on the prime rate. However, significantly higher rates could result in an increase in the interest rates charged to Consumer Finance on the funds it borrows from the Company to reflect the Company's overall higher cost of funds. These impacts could be at least partially offset by the benefits of a strengthening U.S. economy, which typically would include an increase in consumer borrowing demand.\nAsset Quality - Consumer Finance assets totaled approximately $7 billion at December 31, 1993, of which $6 billion, or 86%, represented the net consumer finance receivables (after accrued interest and the allowance for credit losses). These receivables were predominantly residential real estate-secured loans and personal loans. Receivable quality depends on the likelihood of repayment. The Company seeks to reduce its risks by focusing on individual lending, making a greater number of smaller-sized loans than would be practical in commercial markets, and maintaining disciplined control over the underwriting process. The Company has a geographically diverse portfolio as described in Note 5 of Notes to Consolidated Financial Statements. The Company believes that its loss reserves on the consumer finance receivables are appropriate given current circumstances.\nOf the remaining Consumer Finance assets, approximately $631 million were investments of AHL and its affiliates, including $352 million of fixed-income securities and $204 million of short-term investments.\nInsurance Services\nYear Ended December 31, ----------------------------------------------------- 1993 1992 1991 ----------------------------------------------------- Net Net Net ($ in millions) Revenues income Revenues income Revenues income - ------------------------------------------------------------------------------ Gulf property and casualty (1) $314.5 $ 44.9 $322.2 $57.9 $257.0 $21.6\nMinority Interest - Gulf -- (22.5) -- -- -- --\nOther 5.6 (0.2) 5.0 (0.5) 9.7 1.4 - ------------------------------------------------------------------------------ Total Insurance Services $320.1 $ 22.2 $327.2 $57.4 $266.7 $23.0 ==============================================================================\n(1) Net income includes $15.2 and $6.0 of reported investment portfolio gains in 1993 and 1992, respectively and $22.7 from the sale of Musicland common stock in 1992.\nEarnings from Gulf increased slightly compared to 1992, before old Travelers' 50% minority interest, reported net investment portfolio gains of $15.2 million and $6.0 million in 1993 and 1992, respectively, and a $22.7 million gain in 1992 from the sale of Musicland. Gulf's results reflect ongoing growth in its high-margin specialty businesses offset by relatively high local storm losses in the regional business in 1993. Notwithstanding a $2 million after-tax provision for losses from Hurricane Andrew in the third quarter of 1992, Gulf's 1992 earnings improved over 1991, also as a result of the growth of the specialty business. Gulf's 1993 combined ratio improved to 95.9%, from 97.6% in 1992 and 101.9% in 1991. However, for the fourth quarter of 1993 the combined ratio increased to 97.8%, principally as a result of higher storm-related claims.\nGulf writes both traditional and specialty insurance lines. Gulf's traditional lines - largely written in Texas, Georgia, Florida and Missouri - include automobile liability and physical damage, workers' compensation, other liability, fire and related homeowners' insurance and multiple peril insurance. Gulf's specialty lines include directors' and officers', errors and omissions, fidelity bonds and contingent liability coverages, as well as coverages relating to the entertainment industry and other specialty markets.\nOutlook Changes in the general interest rate environment affect the return received by the insurance subsidiaries on newly invested and reinvested funds. While a rising interest rate environment enhances the returns available, it reduces the market value of existing fixed maturity investments and the availability of gains on disposition.\nAs required by various state laws and regulations, the Company's insurance subsidiaries are required to participate in state- administered guarantee associations established for the benefit of the policyholders of insolvent insurance companies. Management believes that payments to such associations will not have a material impact on financial condition or results of operations.\nAsset Quality - The investment portfolio of the Insurance Services segment totaled approximately $519 million, representing 57% of total Insurance Services' assets of approximately $907 million. Because the primary purpose of the portfolio is to fund future policyholder benefits and claims payments, and in order to provide for economies of scale and tight control, it is managed centrally, employing a conservative investment philosophy. Approximately $433 million of the portfolio is invested in long-term fixed-income securities, of which 97.0% had investment grade ratings. At December 31, 1993, the weighted average maturity of these fixed-income holdings was approximately 9.6 years.\nCorporate and Other Year Ended December 31, --------------------------------------------------------- 1993 1992 1991 --------------------------------------------------------- Net Net Net ($ in millions) Revenues income Revenues income Revenues income ---------------------------------------------------------------------------- Corporate and Other $ 3.9 $20.1 $6.4\nEquity in income of old Travelers in 1993 34.9 -- --\nNet gain on sales of stock of subsidiary and affiliate -- 7.1 -- ---------------------------------------------------------------------------- Total Corporate and Other $69.6 $38.8 $41.5 $27.2 $45.3 $6.4 ============================================================================\nCorporate and Other reflects lower income from miscellaneous investments, somewhat higher corporate expenses and lower net interest income reflecting an increase in the proportion of variable rate loans in the Consumer Finance receivables portfolio. These factors were partially offset by lower interest rates on debt in 1993. Lower interest rates in 1992 contributed to the improvement over 1991.\nThe equity in income of old Travelers includes $3.0 million from the Company's share of old Travelers' realized portfolio gains. The 1992 net gain on sale of stock of an affiliate represents a gain of $11.1 million from the exchange of 50% of CIRI, the parent of Gulf, for old Travelers common stock and an after-tax loss of $4.0 million relating to the sale of Inter-Regional Financial Group, Inc. common stock.\nOn December 31, 1993, The Travelers Inc. (the Parent), the parent of Commercial Credit Company, acquired the approximately 73% it did not already own of The Travelers Corporation (old Travelers), by means of a merger of old Travelers into the Parent. As a result of the merger, the Company's investment in the common stock of old Travelers, which through that date had been carried on the equity basis of accounting, was exchanged for 7.2 million shares of common stock of the Parent at a ratio of 0.80423 of a share of the Parent common stock for each share of old Travelers common stock. At December 31, 1993 the investment was reflected at a carrying amount of $211.3 million. On March 31, 1994, 6.3 million of the Company's shares of the Parent's common stock will be exchanged for a variable rate preferred stock of the Parent, which is redeemable at the option of the holder at certain times and callable by the Parent at certain times. The preferred stock will have a value equal to the market value of the common shares at the time the exchange was agreed upon. The balance of such shares, which are held by an insurance subsidiary, will be exchanged upon receipt of regulatory approval.\nLiquidity and Capital Resources\nThe Company issues commercial paper directly to investors and maintains unused credit availability under committed revolving credit agreements at least equal to the amount of commercial paper outstanding. As of December 31, 1993, the Company has unused credit availability of $2.295 billion. The Company may borrow under its revolving credit facilities at various interest rate options and compensates the banks for the facilities through commitment fees.\nDuring 1993, the Company completed the following debt offerings and, as of February 28, 1994, had $850 million available for debt offerings under its shelf registration statement:\n- 5.70% Notes due March 1, 1998 ...... $100 million\n- 6 1\/8 Notes due March 1, 2000 ...... $100 million - 6.00% Notes due April 15, 2000 ..... $150 million - 5 1\/2% Notes due May 15, 1998 ...... $100 million - 6.00% Notes due June 15, 2000 ...... $100 million - 5 3\/4% Notes due July 15, 2000 ..... $200 million - 5.9% Notes due September 1, 2003 ... $200 million\nThe Company is limited by covenants in its revolving credit agreements as to the amount of dividends and advances that may be made to the Parent or its affiliated companies. At December 31, 1993, the Company would have been able to remit $149.8 million to the Parent under its most restrictive covenants or regulatory requirements.\nRecent Accounting Standards\nFAS 114 Statement of Financial Accounting Standards No. 114, \"Accounting by Creditors for Impairment of a Loan,\" describes how impaired loans should be measured when determining the amount of a loan loss accrual. The Statement also amends existing guidance on the measurement of restructured loans in a troubled debt restructuring involving a modification of terms. The Company has not yet determined the impact, if any, this statement will have on its financial statements. The Statement has an effective date of January 1, 1995.\nFAS 115 Effective January 1, 1994, the Company will adopt Statement of Financial Accounting Standards No. 115, \"Accounting for Certain Investments in Debt and Equity Securities,\" which addresses accounting and reporting for investments in equity securities that have a readily determinable fair value and for all debt securities. Those investments are to be classified in one of three categories. Debt securities that the Company has the positive intent and ability to hold to maturity are to be classified as \"held for investment\" and are to be reported at amortized cost. Securities that are bought and held principally for the purpose of selling them in the near term are classified as \"trading securities\" and are to be reported at fair value, with unrealized gains and losses included in earnings. Securities that are neither to be held to maturity nor to be sold in the near term are classified as \"available for sale\" and are to be reported at fair value, with unrealized gains and losses excluded from earnings and reported as a net amount in a separate component of stockholders' equity. At December 31, 1993 the market value of fixed maturities exceeded the cost by $32.9 million.\nItem 8.","section_7A":"","section_8":"Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.\nSee Index to Consolidated Financial Statements and Schedules on page hereof. There is also incorporated by reference herein in response to this Item the Company's Consolidated Financial Statements and the notes thereto and the material under the caption \"Quarterly Financial Data (Unaudited)\" set forth in the Consolidated Financial Statements.\nItem 9.","section_9":"Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.\nNone.\nPART III --------\nItem 10.","section_9A":"","section_9B":"","section_10":"Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.\nPursuant to General Instruction J of Form 10-K, the information required by Item 10 is omitted.\nItem 11.","section_11":"Item 11. EXECUTIVE COMPENSATION.\nPursuant to General Instruction J of Form 10-K, the information required by Item 11 is omitted.\nItem 12.","section_12":"Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.\nPursuant to General Instruction J of Form 10-K, the information required by Item 12 is omitted.\nItem 13.","section_13":"Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.\nPursuant to General Instruction J of Form 10-K, the information required by Item 13 is omitted.\nPART IV -------\nItem 14.","section_14":"Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.\n(a) Documents filed as a part of the report:\n(1) Financial Statements. See Index to Consolidated Financial Statements and Schedules on page hereof.\n(2) Financial Statement Schedules. See Index to Consolidated Financial Statements and Schedules on page hereof.\n(3) Exhibits:\nSee Exhibit Index.\n(b) Reports on Form 8-K:\nOn October 21, 1993, the Company filed a Current Report on Form 8-K dated October 18, 1993, reporting under Item 5 thereof the results of its operations for the three months and nine months ended September 30, 1993, and certain other selected financial data.\nNo other reports on Form 8-K have been filed by the Company during the last quarter of the period covered by this report.\nEXHIBIT INDEX -------------\nExhibit Filing Number Description of Exhibit Method ------- ---------------------- ------ 3.01 Restated Certificate of Incorporation of Commercial Credit Company (the \"Company\"), included in Certificate of Merger of CCC Merger Company into the Company; Certificate of Ownership and Merger merging CCCH Acquisition Corporation into the Company; and Certificate of Ownership and Merger merging RDI Service Corporation into the Company, incorporated by reference to Exhibit 3.01 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992 (File No. 1-6594).\n3.02 By-laws of the Company, as amended May 14, 1990, incorporated by reference to Exhibit 3.02.2 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1990 (File No. 1-6594). 4.01.1 Indenture, dated as of December 1, 1986 (the \"Indenture\"), between the Company and Citibank, N.A., relating to the Company's debt securities, incorporated by reference to Exhibit 4.01 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1988 (File No. 1-6594).\n4.01.2 First Supplemental Indenture, dated as of June 13, 1990, to the Indenture, incorporated by reference to Exhibit 1 to the Company's Current Report on Form 8-K dated June 13, 1990 (File No. 1-6594).\nThe total amount of securities authorized pursuant to any other instrument defining rights of holders of long-term debt of the Company does not exceed 10% of the total assets of the Company and its consolidated subsidiaries. The Company will furnish copies of any such instrument to the Commission upon request.\nExhibit Filing Number Description of Exhibit Method ------- ---------------------- ------ 10.01 $1,500,000,000 Three Year Credit Agreement Electronic dated as of February 24, 1994 among the Company, the Banks party thereto and Morgan Guaranty Trust Company of New York, as Agent.\n12.01 Computation of Ratio of Earnings to Fixed Electronic Charges. 21.01 Pursuant to General Instruction J of Form 10-K, the list of subsidiaries of the Company is omitted.\n23.01 Consent of KPMG Peat Marwick, Independent Electronic Certified Public Accountants. 99.01 The second paragraph of page 2 of the Electronic Company's Current Report on Form 8-K dated July 28, 1992 (File No. 1-6594).\nCopies of any of the exhibits referred to above will be furnished at a cost of $.25 per page to security holders who make written request therefor to Patricia A. Rouzer, Corporate Communications and Investor Relations, Commercial Credit Company, 300 St. Paul Place, Baltimore, Maryland 21202.\nSIGNATURES\nPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 30th day of March, 1994.\nCOMMERCIAL CREDIT COMPANY (Registrant)\nBy: \/s\/ Robert S. Willumstad . . . . . . . . . . . . . . Robert B. Willumstad, Chairman of the Board\nPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities indicated on the 30th day of March, 1994.\nSignature Title --------- ----- \/s\/ Robert B. Willumstad . . . . . . . . . . . . . . Chairman of the Board, Chief Robert B. Willumstad Executive Officer (Principal Executive Officer) and Director\n\/s\/ William R. Hofmann . . . . . . . . . . . . . . Vice President and Chief William R. Hofmann Financial Officer (Principal Financial Officer)\n\/s\/ Irwin R. Ettinger . . . . . . . . . . . . . . Senior Vice President, Chief Irwin R. Ettinger Accounting Officer (Principal Accounting Officer) and Director\n\/s\/ James Dimon . . . . . . . . . . . . . . Director James Dimon\n\/s\/ Jerome T. Fadden . . . . . . . . . . . . . . Director Jerome T. Fadden\n\/s\/ Robert I. Lipp . . . . . . . . . . . . . . Director Robert I. Lipp\nCOMMERCIAL CREDIT COMPANY and SUBSIDIARIES\nINDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES*\nPage Herein ------ Independent Auditors' Report\nConsolidated Statement of Income for the year ended December 31, 1993, 1992 and 1991\nConsolidated Statement of Financial Position at December 31, 1993 and 1992\nConsolidated Statement of Changes in Stockholder's Equity for the year ended December 31, 1993, 1992 and 1991\nConsolidated Statement of Cash Flows for the year ended December 31, 1993, 1992 and 1991\nNotes to Consolidated Financial Statements -\nSchedules:\nSchedule I - Marketable Securities - Other Investments\nSchedule III - Condensed Financial Information of Registrant (Parent Company only) -\nSchedule IX - Short-Term Borrowings\nSchedule X - Supplementary Income Statement Information\n*Schedules not listed are omitted as not applicable or not required by Regulation S-X.\nINDEPENDENT AUDITORS' REPORT\nThe Board of Directors and Stockholder Commercial Credit Company:\nWe have audited the consolidated financial statements of Commercial Credit Company and subsidiaries as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedules as listed in the accompanying index. These consolidated financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on our audits.\nWe conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.\nIn our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Commercial Credit Company and subsidiaries as of December 31, 1993 and 1992, and the results of their operations and their cash flows for each of the years in the three year period ended December 31, 1993 in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.\nAs discussed in Note 1 to the consolidated financial statements, the Company changed its methods of accounting for postretirement benefits other than pensions and accounting for postemployment benefits in 1993, and its method of accounting for income taxes in 1992.\n\/s\/ KPMG Peat Marwick\nBaltimore, Maryland January 24, 1994\nCOMMERCIAL CREDIT COMPANY and SUBSIDIARIES Consolidated Statement of Income (In millions of dollars)\nYear Ended December 31, 1993 1992 1991 ------------------------------------------------------------------- Revenues Finance related interest and other charges $ 953.5 $ 952.7 $ 958.3 Insurance premiums 342.1 326.7 304.2 Interest and dividends 69.2 79.5 85.9 Equity in income of old Travelers 38.0 - - Other income 177.5 164.6 110.7 ------------------------------------------------------------------- Total revenues 1,580.3 1,523.5 1,459.1 ------------------------------------------------------------------- Expenses Interest 363.7 369.7 434.9 Policyholder benefits and claims 216.2 210.4 200.9 Insurance underwriting, acquisition and operating 87.0 85.2 77.0 Non-insurance compensation and benefits 164.1 153.5 152.5 Provision for credit losses 133.9 165.3 165.1 Other operating 147.5 122.6 125.8 ------------------------------------------------------------------- Total expenses 1,112.4 1,106.7 1,156.2 ------------------------------------------------------------------- Gain on sale of stock of subsidiary and affiliate -- 12.0 -- ------------------------------------------------------------------- Income before income taxes, minority interest and cumulative effect of changes in accounting principles 467.9 428.8 302.9 Provision for income taxes 153.6 147.6 99.7 ------------------------------------------------------------------- Income before minority interest and cumulative effect of changes in accounting principles 314.3 281.2 203.2 Minority interest, net of income taxes (22.5) -- -- Cumulative effect of changes in accounting principles, net of income taxes (5.8) (18.1) -- ------------------------------------------------------------------- Net income $ 286.0 $ 263.1 $ 203.2 ===================================================================\nSee Notes to Consolidated Financial Statements\nCOMMERCIAL CREDIT COMPANY and SUBSIDIARIES Consolidated Statement of Financial Position (In millions of dollars, except per share amounts)\nDecember 31, 1993 1992 ------------------------------------------------------------------------- Assets Cash and cash equivalents $ 25.6 $22.0 Investments: Fixed maturities: Available for sale (market $784.1 and $765.1) 752.5 727.8 Held for investment (market $35.0 and $36.7) 33.7 35.0 Equity securities (market $368.5 and $82.8) 300.0 82.8 Mortgage loans 205.1 188.9 Short-term and other 246.7 115.3 -------------------------------------------------------------------------- Total investments 1,538.0 1,149.8 -------------------------------------------------------------------------- Consumer finance receivables 6,383.1 5,823.5 Allowance for losses (167.5) (168.6) -------------------------------------------------------------------------- Net consumer finance receivables 6,215.6 5,654.9 Other receivables 560.9 363.6 Deferred policy acquisition costs 26.7 26.7 Cost of acquired businesses in excess of net assets 105.8 106.5 Investment in old Travelers - 170.0 Other assets 421.1 545.5 -------------------------------------------------------------------------- Total assets $8,893.7 $8,039.0 ========================================================================== Liabilities Certificates of deposit $ 56.7 $ 22.4 Short-term borrowings 2,206.1 2,486.6 Long-term debt 3,969.8 3,241.9 -------------------------------------------------------------------------- Total debt 6,232.6 5,750.9 Insurance policy and claims reserves 894.7 765.6 Accounts payable and other liabilities 655.7 487.2 -------------------------------------------------------------------------- Total liabilities 7,783.0 7,003.7 -------------------------------------------------------------------------- Stockholder's equity Common stock ($.01 par value; authorized shares: 1,000; share issued: 1) - - Additional paid-in-capital 94.7 105.9 Retained earnings 1,002.6 926.6 Other 13.4 2.8 -------------------------------------------------------------------------- Total stockholder's equity 1,110.7 1,035.3 -------------------------------------------------------------------------- Total liabilities and stockholder's equity $8,893.7 $8,039.0 ==========================================================================\nSee Notes to Consolidated Financial Statements\nCOMMERCIAL CREDIT COMPANY and SUBSIDIARIES Consolidated Statement of Changes in Stockholder's Equity (In millions of dollars, except per share amounts)\nYear ended December 31, 1993 1992 1991 --------------------------------------------------------------------- Common stock-$.01 par value, 1,000 shares with 1 share issued\nBalance, beginning of year - - -\nBalance, end of year - - - --------------------------------------------------------------------- Additional Paid-In Capital\nBalance, beginning of year $ 105.9 $ 105.9 $ 105.4\nCapital contribution 1.2 - 0.5\nAdjustments relating to exchange of investment in old Travelers, net (12.4) - - --------------------------------------------------------------------- Balance, end of year 94.7 105.9 105.9 --------------------------------------------------------------------- Retained Earnings\nBalance, beginning of year 926.6 943.5 845.1\nNet income 286.0 263.1 203.2\nDividends (210.0) (280.0) (104.8) --------------------------------------------------------------------- Balance, end of year 1,002.6 926.6 943.5 --------------------------------------------------------------------- Other\nBalance, beginning of year 2.8 0.7 1.3\nNet appreciation (depreciation) of equity 10.8 2.3 (0.5) securities\nTranslation adjustments (0.2) (0.2) (0.1) --------------------------------------------------------------------- Balance, end of year 13.4 2.8 0.7 --------------------------------------------------------------------- Total stockholder's equity $1,110.7 $1,035.3 $1,050.1 =====================================================================\nSee Notes to Consolidated Financial Statements\nCOMMERCIAL CREDIT COMPANY and SUBSIDIARIES Consolidated Statement of Cash Flows (In millions of dollars)\nNotes to Consolidated Financial Statements (continued)\nThe amortized cost and estimated market value at December 31, 1993 by contractual maturity are shown below. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or pre-payment penalties.\nEstimated Amortized Market Cost Value -------- --------- Due in one year or less $ 30.3 $ 32.3 Due after one year through five years 83.9 86.9 Due after five years through ten years 132.2 170.3 Due after ten years 306.9 297.4 ----- ----- 553.3 586.9 Mortgage-backed securities 232.9 232.2 ----- ----- $786.2 $819.1 ===== =====\nRealized gains and losses on fixed maturities for the year ended December 31 were as follows:\n1993 1992 1991 ---- ---- ---- Realized gains Pre-tax $67.3 $22.2 $5.2 ---- ---- --- After-tax 43.7 14.7 3.4 ---- ---- ---\nRealized losses Pre-tax $0.2 $0.2 $0.7 --- --- --- After-tax 0.1 0.1 0.5 --- --- ---\nOn December 31, 1993, the Parent acquired the approximately 73% it did not already own of old Travelers, by means of a merger of old Travelers into the Parent. As a result of the merger, the Company's investment in the common stock of old Travelers, which through that date had been carried on the equity basis of accounting, was exchanged for 7.2 million shares of common stock of the Parent at a ratio of 0.80423 of a share of the Parent common stock for each share of old Travelers common stock. At December 31, 1993 the investment was reflected at a carrying amount of $211.3. On March 31, 1994, 6.3 million of the Company's shares of the Parent's common stock will be exchanged for a variable rate preferred stock of the Parent, which is redeemable at the option of the holder at certain times and callable by the Parent at certain times. The preferred stock will have a value equal to the market value of the common shares at the time the exchange was agreed upon. The balance of such shares, which are held by an insurance subsidiary, will be exchanged upon receipt of regulatory approval.\nNotes to Consolidated Financial Statements (continued)\n5. Consumer Finance Receivables ----------------------------\nConsumer finance receivables, net of unearned finance charges of $613.0 and $535.3 at December 31, 1993 and 1992, respectively, consisted of the following:\n1993 1992 -------- -------- Real estate-secured loans $2,705.8 $2,607.7 Personal loans 2,495.2 2,378.8 Credit cards 697.1 538.2 Sales finance and other 443.7 263.0 -------- -------- Consumer finance receivables 6,341.8 5,787.7 Accrued interest receivable 41.3 35.8 Allowance for credit losses (167.5) (168.6) -------- -------- Net consumer finance receivables $6,215.6 $5,654.9 ======== ========\nAn analysis of the allowance for credit losses on consumer finance receivables at December 31, was as follows:\n1993 1992 1991 -------- -------- --------- Balance, January 1 $ 168.6 $ 166.8 $ 135.5 Provision for credit losses 133.9 165.3 165.1 Amounts written off (163.1) (184.8) (174.8) Recovery of amounts previously written off 22.7 21.3 20.6 Allowance on receivables purchased 5.4 - 20.4 ------- -------- -------- Balance, December 31 $ 167.5 $ 168.6 $ 166.8 ======= ======== ======== Net outstandings $6,341.8 $5,787.7 $5,825.1 ======= ======== ======== Ratio of allowance for credit losses to net outstandings 2.64% 2.91% 2.86% ======= ======= ========\nContractual maturities of receivables before deducting unearned finance charges and excluding accrued interest were as follows:\nReceivables Outstanding Due December 31, Due Due Due Due After 1993 1994 1995 1996 1997 1997 ----------- ------- -------- ------ ------ ------- Real estate-secured loans $2,769.9 $ 175.6 $ 180.9 $193.1 $198.0 $2,022.3 Personal loans 2,952.5 954.1 822.1 608.1 331.0 237.2 Credit cards 695.0 114.4 95.6 79.8 66.7 338.5 Sales finance and other 537.4 217.9 121.0 63.6 37.0 97.9 -------- -------- -------- ------ ------ -------- Total $6,954.8 $1,462.0 $1,219.6 $944.6 $632.7 $2,695.9 ======== ======== ======== ====== ====== ======== Percentage 100% 21% 18% 14% 9% 38% ===== ===== ===== ===== ===== =====\nContractual terms average 12 years on real estate-secured loans and 4 years on other personal loans. Experience has shown that a substantial amount of the receivables will be renewed or repaid prior to contractual maturity dates. Accordingly, the foregoing tabulation should not be regarded as a forecast of future cash collections.\nNotes to Consolidated Financial Statements (continued)\nThe Company has a geographically diverse consumer finance loan portfolio. At December 31, the distribution by state was as follows: 1993 1992 -------- ------ Ohio 13% 14% North Carolina 10% 9% South Carolina 7% 6% Maryland 6% 7% Pennsylvania 6% 6% California 5% 6% Texas 5% 5% All other states* 48% 47% ---- ---- Total 100% 100% ==== ====\n* None of the remaining states individually accounts for more than 4% of total consumer finance receivables.\nThe estimated fair value of the consumer finance receivables portfolio depends on the methodology selected to value such portfolio (i.e., entry value versus exit value). Entry value is determined by comparing the portfolio yields to the yield at which new loans are being originated. Under the entry value methodology, the estimated fair value of the receivables portfolio at December 31, 1993 is approximately $40 to $55 above the recorded carrying values. Exit value represents a valuation of the portfolio based upon sales of comparable portfolios which takes into account the value of customer relationships and the current level of funding costs. Under the exit value methodology, the estimated fair value of the receivables portfolio at December 31, 1993 is approximately $550 to $650 above the recorded carrying value.\n6. Debt ----\nShort-term borrowings consisted of the following at December 31:\n1993 1992 ---- ---- Commercial paper $2,206.1 $2,386.6 Medium-term floating rate notes -. 100.0 -------- -------- $2,206.1 $2,486.6 ======== ========\nThe Company issues commercial paper directly to investors and maintains unused credit availability under its bank lines of credit at least equal to the amount of its outstanding commercial paper. The Company may borrow under its revolving credit facilities at various interest rate options and compensates the banks for the facilities through commitment fees. The Company and its Parent have agreements with certain banks whereby the Parent, with the consent of the Company, may assign certain revolving credit amounts (swing facilities) to the Company for specific periods of time.\nAt December 31, 1993, the Company had committed and available revolving credit facilities of $2,295.0, which was increased to $2,495.0 in January 1994 through additional amounts assigned under the swing facilities. Also in February 1994, a $1,825.0 revolving credit facility, which, would have matured in August 1994, was replaced with two new facilities totaling $2,000.0. With these new facilities, the Company has revolving credit facilities totaling $2,670.0, of which $250.0 expires in 1994, $920.0 expires in 1995 and $1,500.0 expires in 1997.\nNotes to Consolidated Financial Statements (continued)\nThe carrying value of short-term borrowings approximates fair value.\nLong-term debt, including its current portion, and final maturity dates were as follows at December 31:\n1993 1992 ---- ---- 8.29% to 12.85% Medium-Term Notes due 1994-1995 $ 54.8 $ 76.9 9 1\/8% Notes due 1993 - 100.0 9.15% Notes due 1993 - 100.0 8% Notes due 1994 100.0 100.0 12.7% Notes due 1994 15.0 15.0 6.95% Notes due 1994 200.0 200.0 8.45% Notes due 1994 100.0 100.0 9 7\/8% Notes due 1995 150.0 150.0 9.2% Notes due 1995 100.0 100.0 6.25% Notes due 1995 100.0 100.0 7.7% Notes due 1995 150.0 150.0 8.1% Notes due 1995 150.0 150.0 8 3\/8% Notes due 1995 150.0 150.0 6.375% Notes due 1996 200.0 200.0 7.375% Notes due 1996 150.0 150.0 8% Notes due 1996 100.0 100.0 6.75% Notes due 1997 200.0 200.0 8 1\/8% Notes due 1997 150.0 150.0 5.70% Notes due 1998 100.0 - 5 1\/2% Notes due 1998 100.0 - 8 1\/2% Notes due 1998 100.0 100.0 6.70% Notes due 1999 150.0 150.0 10% Notes due 1999 100.0 100.0 9.6% Notes due 1999 100.0 100.0 6.00% Notes due 2000 100.0 - 5 3\/4% Notes due 2000 200.0 - 6 1\/8% Notes due 2000 100.0 - 6.00% Notes due 2000 150.0 - 5.9% Notes due 2003 200.0 - 10% Notes due 2008 150.0 150.0 10% Debentures due 2009 100.0 100.0 8.7% Debentures due 2009 150.0 150.0 8.7% Debentures due 2010 100.0 100.0 ------- ------- $3,969.8 $3,241.9 ======= =======\nNotes to Consolidated Financial Statements (continued)\nPayments due on debt, excluding amortization of the net discount to fair values, are as follows:\n1994 $459.8 1995 $810.0 1996 $450.0 1997 $350.0 1998 $300.0\nThe fair value of the Company's long-term debt is estimated based on the quoted market price for the same or similar issues or on current rates offered to the Company for debt of the same remaining maturities. At December 31, 1993 these fair values were approximately $4,234.\n7. Reinsurance -----------\nThe Company's insurance subsidiaries cede portions of certain insurance business in order to limit losses, to reduce exposure on large risks and to provide additional capacity for future growth. This is accomplished through various plans of reinsurance, primarily coinsurance, modified coinsurance and yearly renewable term. Reinsurance ceded arrangements do not discharge the insurance subsidiaries or the Company as the primary insurer. Reinsurance amounts included in the Condensed Consolidated Statement of Income were as follows:\nCeded to Gross Other Net Amount Companies Amount ------ --------- ------ Year ended December 31, 1993 ---------------------------- Premiums Credit life insurance $ 53.0 $ (12.9) $ 40.1 Credit accident and health insurance 86.9 (42.2) 44.7 Property and casualty insurance 433.8 (176.5) 257.3 ------ ------- ------ $573.7 $(231.6) $342.1 ====== ======= ====== Claims $318.0 $(101.8) $216.2 ====== ======= ====== Year ended December 31, 1992 ---------------------------- Premiums Credit life insurance $ 52.2 $ (10.8) $ 41.4 Credit accident and health insurance 75.0 (30.2) 44.8 Property and casualty insurance 390.2 (149.7) 240.5 ------ ------- ----- $517.4 $(190.7) $326.7 ====== ======== ====== Claims $284.8 $ (74.4) $210.4 ====== ======== ====== Year ended December 31, 1991 ---------------------------- Premiums Credit life insurance $ 58.5 $ (18.1) $ 40.4 Credit accident and health insurance 69.8 (27.6) 42.2 Property and casualty insurance 376.3 (154.7) 221.6 ------ -------- ----- $504.6 $(200.4) $304.2 ====== ======== ====== Claims $290.0 $ (89.1) $200.9 ====== ======== ======\nNotes to Consolidated Financial Statements (continued)\n8. Income Taxes ------------\nFor the years ended December 31, 1993 and 1992, income taxes have been provided in accordance with the provisions of FAS 109, which has been adopted effective January 1, 1992.\nThe provision for income taxes (before minority interest) for the year ended December 31 was as follows:\n1993 1992 1991 ----- ------ ------ Current: Federal $128.7 $113.6 $62.6 Foreign 2.5 2.0 1.6 State 7.1 6.0 5.1 ----- ----- ---- 138.3 121.6 69.3 ----- ----- ---- Deferred: Federal 18.0 27.2 31.8 Foreign (2.2) (1.8) (1.4) State (0.5) 0.6 -. ----- ----- ---- 15.3 26.0 30.4 ----- ----- ---- Total $153.6 $147.6 $99.7 ===== ===== ====\nDeferred income taxes at December 31 related to the following:\n1993 1992 -------- -------- Deferred tax assets: Bad debt reserves $ 62.8 $ 68.5 Policy reserves 24.0 23.9 Basis difference on old Travelers stock - 17.8 Other deferred tax assets 24.7 24.7 ----- ----- 111.5 134.9 ----- ----- Deferred tax liabilities: Deferred gains - (26.9) Israeli leasing transactions (9.3) (13.9) Fixed asset depreciation (11.7) (9.3) Deferred policy acquisition costs (7.8) (6.2) Other deferred tax liabilities (28.1) (36.4) ------ ------ (56.9) (92.7) ------ ------ Total $54.6 $42.2 ==== ====\nThe Company and its wholly owned domestic non-life insurance subsidiaries join with the Parent in filing a consolidated federal income tax return. Under a tax sharing agreement with the Parent, the Company is entitled to a current tax benefit if it incurs losses which are utilized in the Parent's consolidated return. The Parent's consolidated tax return group has reported large amounts of taxable income in recent years and can, more likely than not, expect to have significant taxable income in the future thereby enabling utilization of the Company's deferred tax asset.\nNotes to Consolidated Financial Statements (continued)\nThe provision for deferred income taxes for the year ended December 31, 1991 related to the following:\nBad debt reserves $ 4.2 Divested businesses and assets 19.9 Israeli leasing transactions (1.4) Net costs to originate loans 4.6 Other, net 3.1 ---- Total $30.4 ====\nThe reconciliation of the federal statutory income tax rate to the Company's effective income tax rate for the year ended December 31 was as follows:\n1993 1992 1991 ---- ---- ----\nFederal statutory rate 35.0% 34.0% 34.0% Dividends from affiliate - The Travelers Inc. (0.3) (0.6) (2.0) Equity in income of old Travelers (1.6) -- -- Other, net (0.3) 1.0 0.9 ----- ---- ---- Effective income tax rate 32.8% 34.4% 32.9% ==== ==== ====\n9. Stockholder's Equity --------------------\nCertain long-term loan credit agreements restrict the payment of dividends with such restrictions based on cumulative net earnings, as defined. Additionally, a minimum net worth restriction, as defined, contained in such agreements, imposes an additional constraint on dividends. At December 31, 1993 the Company would be able to remit $149.8 in dividends to its parent under the most restrictive debt covenants.\nThe Company's share of the combined insurance subsidiaries' statutory stockholder's equity at December 31, 1993 and 1992 was $231.5 and $318.3, respectively, and is subject to certain restrictions imposed by state insurance departments as to the transfer of funds and payment of dividends. The combined insurance subsidiaries' net income determined in accordance with statutory accounting practices and after minority interest in 1993, for the years ended December 31, 1993, 1992 and 1991 was $64.4, $107.4 and $52.7, respectively.\n10. Employee Benefit Plans ----------------------\nThe Company along with affiliated companies, participates in a noncontributory defined benefit pension plan sponsored by the Parent (the Plan) covering the majority of U.S. employees.\nNotes to Consolidated Financial Statements (continued)\nBenefits are based on an account balance formula. Under this formula, each employee's accrued benefit can be expressed as an account that is credited with amounts based upon the employee's pay, length of service and a specified interest rate, all subject to a minimum benefit level. The Plan is funded in accordance with the Employee Retirement Income Security Act of 1974 and the Internal Revenue Code. Pension cost allocated to the Company from the Plan was $2.1, $1.3 and $0.2 in 1993, 1992 and 1991, respectively.\nCertain non-U.S. employees of the Company are covered by noncontributory defined benefit plans. These plans are funded based upon local laws. Pension cost related to these plans was not material.\nThe Company also has an unfunded noncontributory supplemental retirement plan that covers certain executives and key employees. Pension cost related to the plan was $1.2, $0.8 and $0.6 in 1993, 1992 and 1991, respectively.\n11. Postretirement and Postemployment Benefits ------------------------------------------\nThe Company provides postretirement life insurance benefits to certain eligible retirees. As required by FAS 106, the Company changed its method of accounting for these benefits effective January 1, 1993, to accrue the Company's share of the costs of the benefits over the service period rendered by an employee. Previously these benefits were charged to expense when paid.\nThe Company elected to recognize immediately the liability for postretirement benefits as the cumulative effect of a change in accounting principle. This change resulted in a noncash after-tax charge to net income of $2.4 in 1993. The Company generally funds the postretirement benefits when due. Payments and ongoing net periodic postretirement benefit cost were not material in 1993.\nIn accordance with the Company's early adoption of FAS 112, the Company changed its method of accounting for postemployment benefits effective January 1, 1993, to accrue the cost of postemployment benefits over the service period rendered by an employee. Previously these benefits were charged to expense when paid. For the Company these benefits are principally disability-related benefits and severance.\nAdoption of FAS 112 resulted in the recognition of a noncash after-tax charge to net income of $3.4 in 1993 for the cumulative effect of a change in accounting principle. The Company continues to fund benefits on a \"pay-as-you-go\" basis. Payments and annual expense for providing postemployment benefits in 1993 were not material.\n12. Lease Commitments and Other Financial Instruments -------------------------------------------------\nRentals\nRental expense (principally for offices and computer equipment) was $33.7, $35.0 and $34.4 for the years ended December 31, 1993, 1992 and 1991, respectively.\nNotes to Consolidated Financial Statements (continued)\nAt December 31, 1993, future minimum annual rentals under noncancellable operating leases were as follows:\n1994 $18.1 1995 14.5 1996 12.2 1997 7.1 1998 4.1 Thereafter 5.7 ----- $61.7 ====\nCredit Cards\nThe Company provides credit card services through its subsidiaries, Primerica Bank and Primerica Bank USA. These services are provided to individuals and to affinity groups nationwide. At December 31, 1993 and 1992 total credit lines available to credit cardholders were $3,916.1 and $3,056.2, of which $697.1 and $538.2 were utilized, respectively.\n13. Related Party Transactions --------------------------\nIncluded in other assets is an investment in redeemable preferred stock of the Parent amounting to $100 and $200 at December 31, 1993 and 1992, respectively. The Company recorded $4.0, $8.0 and $17.8 for the years ended December 31, 1993, 1992 and 1991, respectively, of dividend income from the Parent on this investment of which $100.0 and $100.0 was repurchased in 1993 and 1992, respectively.\nTo facilitate cash management the Company has entered into an agreement with the Parent under which the Company or the Parent may borrow from the other party at any time an amount up to the greater of $50.0 or 1% of the Company's consolidated assets. The agreement may be terminated by either party at any time. The interest rate to be charged on borrowings outstanding will be equivalent to an appropriate market rate.\n14. Contingencies -------------\nIn the ordinary course of business the Company and\/or its subsidiaries are defendants or co-defendants in various litigation matters. Although there can be no assurances, the Company believes, based on information currently available, that the ultimate resolution of these legal proceedings would not be likely to have, but may have, a material adverse effect on the results of operations.\nNotes to Consolidated Financial Statements (continued)\n15. Quarterly Financial Data (unaudited)\n(1) Previously reported quarterly results for the first quarter of 1993 have been restated to reflect the Statement of Financial Accounting Standards (FAS 112) \"Accounting For Postemployment Benefits,\" with retroactive application to January 1, 1993. This had the effect of reducing first quarter 1993 net income by $3.4.\nSCHEDULE I COMMERCIAL CREDIT COMPANY and SUBSIDIARIES Marketable Securities - Other Investments December 31, 1993 (In millions of dollars)\nColumn A Column B Column C Column D -------- -------- -------- -------- Amount at Which Shown Market in the Type of Investment Cost Value Balance Sheet ------------------ ---- ----- ------------- Fixed maturities Bonds United States Government and government agencies and authorities (1) $ 507.4 $519.4 $ 507.4 States, municipalities and political sub-divisions 177.8 190.3 177.8 Foreign governments 0.3 0.3 0.3 Public utilities 13.1 14.5 13.1 All other corporate bonds 76.1 82.9 76.1 Redeemable preferred stock 11.5 11.7 11.5 ------- ----- ------- Total fixed maturities $ 786.2 $819.1 $ 786.2 ------- ----- -------\nEquity securities Common stocks $ 237.2 $324.4 $ 255.9 Non-redeemable preferred stocks 40.1 44.1 44.1 ------- ----- ------- Total equity securities 277.3 $368.5 300.0 ------- ------ ------- Mortgage loans on real estate 205.1 205.1 Short-term investments 233.0 233.0 Other investments 13.8 13.7 ------- ------- Total investments $1,515.4 $1,538.0 ======= =======\n(1) includes mortgage-backed security obligations of U.S. Government agencies.\nSCHEDULE III\nCOMMERCIAL CREDIT COMPANY (Parent Company Only) Condensed Financial Information of Registrant (In millions of dollars) Condensed Statement of Income\nYear Ended December 31, 1993 1992 1991 ----------------------------------------------------------------- Income Equity in income of old Travelers $ 38.0 $ - $ - Gain on sales of stock of subsidiary and affiliate - 12.0 - Other income 383.2 423.5 451.5 ----------------------------------------------------------------- Total 421.2 435.5 451.5 ----------------------------------------------------------------- Expenses Interest 364.2 368.9 427.8 Other 22.2 13.0 11.7 ----------------------------------------------------------------- Total 386.4 381.9 439.5 ----------------------------------------------------------------- Pre-tax income 34.8 53.6 12.0 Income tax benefit (expense) (3.3) (18.5) 0.2 ----------------------------------------------------------------- Net income before equity in net income of subsidiaries 31.5 35.1 12.2 Equity in net income of subsidiaries 260.3 246.1 191.0 Cumulative effect of changes in accounting principles (including $5.8 and $18.1, respectively, applicable to subsidiaries) (5.8) (18.1) - ----------------------------------------------------------------- Net income $286.0 $263.1 $203.2 ================================================================\nThe condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto.\nSCHEDULE III\nCOMMERCIAL CREDIT COMPANY (Parent Company Only) Condensed Financial Information of Registrant (In millions of dollars except per share amounts) Condensed Statement of Financial Position\nDecember 31, 1993 1992 -------------------------------------------------------------------------- Assets Equity securities $ 178.4 $ - Investment in old Travelers - 150.0 Investment in mortgage loans 194.4 178.8 Notes and accounts receivable from subsidiaries- eliminated in consolidation 6,035.6 5,304.7 Investment in subsidiaries at cost plus equity in net earnings-eliminated in consolidation 832.0 954.6 Investment in redeemable preferred stock of the Parent 100.0 200.0 Other 128.1 118.4 -------------------------------------------------------------------------- Total assets $7,468.5 $6,906.5 ========================================================================== Liabilities Short-term borrowings $2,206.1 $2,486.5 Long-term debt 3,969.8 3,241.9 Accrued expenses and other liabilities 181.9 142.8 -------------------------------------------------------------------------- Total liabilities 6,357.8 5,871.2 -------------------------------------------------------------------------- Stockholder's equity Common stock ($.01 par value; authorized shares: 1,000; share issued: 1) - - Additional paid-in capital 94.7 105.9 Retained earnings 1,002.6 926.6 Other 13.4 2.8 -------------------------------------------------------------------------- Total stockholder's equity 1,110.7 1,035.3 -------------------------------------------------------------------------- Total liabilities and stockholder's equity $7,468.5 $6,906.5 ==========================================================================\nThe condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto.\nSCHEDULE III COMMERCIAL CREDIT COMPANY (Parent Company Only) Condensed Financial Information of Registrant (In millions of dollars) Condensed Statement of Cash Flows\nThe condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto.\nSchedule IX\nSCHEDULE X COMMERCIAL CREDIT COMPANY and SUBSIDIARIES SUPPLEMENTARY INCOME STATEMENT INFORMATION (In millions of dollars)\nColumn A Column B ------------------------------ ---------------------- Charged to costs and expenses\nYear ended December 31, ----------------------- Item 1993 1992 1991 ---- ---- ---- ----\nTaxes, other than payroll and $22.7 $20.9 $19.1 income taxes ===== ===== =====\nAdvertising costs $26.2 $19.7 $22.0 ===== ===== =====\nEXHIBIT INDEX -------------\nExhibit Filing Number Description of Exhibit Method ------- ---------------------- ------ 3.01 Restated Certificate of Incorporation of Commercial Credit Company (the \"Company\"), included in Certificate of Merger of CCC Merger Company into the Company; Certificate of Ownership and Merger merging CCCH Acquisition Corporation into the Company; and Certificate of Ownership and Merger merging RDI Service Corporation into the Company, incorporated by reference to Exhibit 3.01 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992 (File No. 1-6594).\n3.02 By-laws of the Company, as amended May 14, 1990, incorporated by reference to Exhibit 3.02.2 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1990 (File No. 1-6594). 4.01.1 Indenture, dated as of December 1, 1986 (the \"Indenture\"), between the Company and Citibank, N.A., relating to the Company's debt securities, incorporated by reference to Exhibit 4.01 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1988 (File No. 1-6594).\n4.01.2 First Supplemental Indenture, dated as of June 13, 1990, to the Indenture, incorporated by reference to Exhibit 1 to the Company's Current Report on Form 8-K dated June 13, 1990 (File No. 1-6594).\nThe total amount of securities authorized pursuant to any other instrument defining rights of holders of long-term debt of the Company does not exceed 10% of the total assets of the Company and its consolidated subsidiaries. The Company will furnish copies of any such instrument to the Commission upon request.\nExhibit Filing Number Description of Exhibit Method ------- ---------------------- ------ 10.01 $1,500,000,000 Three Year Credit Agreement Electronic dated as of February 24, 1994 among the Company, the Banks party thereto and Morgan Guaranty Trust Company of New York, as Agent.\n12.01 Computation of Ratio of Earnings to Fixed Electronic Charges.\n21.01 Pursuant to General Instruction J of Form 10-K, the list of subsidiaries of the Company is omitted.\n23.01 Consent of KPMG Peat Marwick, Independent Electronic Certified Public Accountants.\n99.01 The second paragraph of page 2 of the Electronic Company's Current Report on Form 8-K dated July 28, 1992 (File No. 1-6594).\nCopies of any of the exhibits referred to above will be furnished at a cost of $.25 per page to security holders who make written request therefor to Patricia A. Rouzer, Corporate Communications and Investor Relations, Commercial Credit Company, 300 St. Paul Place, Baltimore, Maryland 21202.","section_15":""}
{"filename":"356080_1993.txt","cik":"356080","year":"1993","section_1":"ITEM 1. BUSINESS\nA. H. Belo Corporation (the \"Company\" or \"Belo\") owns and operates newspapers and network-affiliated television stations in five U.S. cities. The Company traces its roots to The Galveston Daily News, which began publishing in 1842. Incorporated in Texas in 1926, the Company was reorganized as a Delaware corporation in 1987. (References herein to \"Company\" or \"Belo\" mean A. H. Belo Corporation and its wholly-owned subsidiaries unless the context otherwise specifies.)\nThe Company's principal newspaper is The Dallas Morning News. In addition, the Company publishes eight community newspapers for certain suburbs in the Dallas-Fort Worth metropolitan area. The Company also owns and operates network-affiliated VHF television broadcast stations in Dallas-Fort Worth and Houston, Texas; Sacramento-Stockton-Modesto, California; Norfolk-Portsmouth-Newport News-Hampton, Virginia and Tulsa, Oklahoma.\nNote 11 to the Consolidated Financial Statements, included on page 35 of this document, contains information about the Company's industry segments for the years ended December 31, 1993, 1992 and 1991.\nNEWSPAPER PUBLISHING\nThe Company's wholly-owned subsidiary, The Dallas Morning News, Inc., publishes the Company's principal newspaper, The Dallas Morning News, each morning, including Sunday. Published continuously since 1885, The Dallas Morning News provides coverage of local, state, national and international news. The Morning News is distributed throughout the Southwest, though its circulation is concentrated primarily in the twelve counties surrounding Dallas and Fort Worth: Collin, Dallas, Denton, Ellis, Henderson, Hood, Hunt, Johnson, Kaufman, Parker, Rockwall and Tarrant counties.\nThe Dallas Morning News strives to serve the public interest by maintaining a strong and independent voice in matters of public concern. It is the policy of the Company to allocate such resources as may be necessary to maintain excellence in news reporting and editorial comment in The Dallas Morning News.\nThe Dallas Morning News serves a large readership in its primary market. Average paid circulation for the six months ended September 30, 1993, according to the unaudited Publisher's Statement of the Audit Bureau of Circulations, an independent agency, was 527,387 daily and 814,404 on Sunday, an increase of 2.5 percent and .6 percent, respectively, over the six months ended September 30, 1992, which were 514,342 daily and 809,188 on Sunday.\nIn December 1991, the Company's principal competitor, the Dallas Times Herald (owned by Times Herald Printing Company), ceased operations and sold substantially all of its assets to the Company for $55.7 million. The primary daily newspaper competing with The Dallas Morning News in its marketing area is the Fort Worth Star-Telegram, owned by Capital Cities\/ABC, Inc.. The Dallas Morning News also competes for advertising with television and radio stations (including a television station owned and operated by the Company), magazines, direct mail, cable television, billboards and other newspapers (including the other newspapers owned and operated by the Company).\nThe basic material used in publishing The Dallas Morning News is newsprint. The average unit price of newsprint consumed during 1993 was higher than that of the prior year due to a market-wide increase in newsprint prices. At present, newsprint is purchased from eight suppliers. During 1993, the Company's three largest providers of newsprint provided approximately 65 percent of the annual requirements, but the Company is not dependent on any one of these suppliers. Management believes its sources of newsprint, along with alternate sources that are available, are adequate for its current needs.\nIn January 1994, the Company restructured the operations of its wholly-owned subsidiary, Dallas-Fort Worth Suburban Newspapers, Inc.. As part of the restructuring, Dallas-Fort Worth Suburban Newspapers, Inc., was split into two wholly-owned subsidiaries, DFW Suburban Newspapers, Inc., and DFW Printing Company, Inc.. DFW Suburban Newspapers, Inc. will continue to publish its six paid circulation newspapers for suburban communities in the Dallas-Fort Worth metropolitan area. These publications are delivered one to two days a week. In addition, two free newspapers are published once a week. Each of the Company's community publications has its own sales, circulation, news and editorial personnel, and several of the publications currently maintain separate offices. All administrative functions, however, are centralized and all of the newspapers are printed at a plant in Arlington, Texas. This plant is owned and operated by DFW Printing Company, Inc., which in addition to printing the suburban newspapers, conducts the Company's commercial printing operations.\nTELEVISION BROADCASTING\nThe following table lists relevant information about the Company's television broadcasting stations:\n_____________________________\n(1) Designated Market Area (\"DMA\") is an exclusive geographic area consisting of all counties in which the local stations receive a preponderance of total viewing hours. DMA data, which is published by the A. C. Nielsen Company (\"Nielsen\"), is a significant factor in determining television advertising rates. All the information shown above is as of November 1993.\n(2) Applications for renewal of the licenses for certain stations are pending before the Federal Communications Commission, and the stations' licenses are by statute continued in effect pending action thereon.\n(3) The number of television broadcasting stations is as of November 1993 and is based on information published by Nielsen. In each of these markets, one of the VHF stations indicated is a non-commercial public broadcasting television station, except for Dallas-Fort Worth, where there are two VHF stations that are non-commercial public broadcasting stations, and Norfolk-Portsmouth-Newport News-Hampton, where there are no VHF non-commercial public broadcasting stations. In addition, there is one UHF non-commercial public broadcasting station in Norfolk- Portsmouth-Newport News-Hampton and one in Tulsa.\nAffiliation with a television network can have a significant influence on the revenues of a television station because the audience share drawn by a network's programming can affect the rates at which a station can sell advertising time. The Federal Communications Commission (\"FCC\") regulates certain provisions of television station's network affiliation contracts. The television networks compete for affiliations with licensed television stations through program commitments and local marketing support. From time to time, local television stations also solicit network affiliations on the basis of their ability to provide a network better access to a particular market.\nGenerally, rates for national and local spot advertising sold by the Company are determined by each station, which receives all of the revenues, net of agency commissions, for that advertising. Rates are influenced both by the demand for advertising time and the popularity of the station's programming. Most advertising during network programs is sold by the networks, which pay their affiliated stations negotiated fees for broadcasting such programs and advertising.\nThe Company's television broadcast properties compete for advertising revenues directly with other media such as newspapers (including those owned and operated by the Company), billboard advertising, magazines, direct mail advertising, radio, other television stations, cable television systems, and indirectly, with motion picture theaters and other news and entertainment media. The success of broadcast operations depends on a number of factors, including the general strength of the national and local economy, the ability to provide attractive programming, audience ratings, relative cost efficiency in reaching audiences as compared to other advertising media, technical capabilities and governmental regulations and policies.\nEach of the three major television networks is represented in each television market in which the Company has a television broadcast station. Each of the markets is served by at least two other commercial VHF television stations and at least two commercial UHF television stations. Competition for advertising sales and local viewers within each market is intense, particularly among the network-affiliated commercial VHF television stations. In the Dallas-Fort Worth market, the other commercial VHF stations are owned by Argyle Television Holdings, Inc., LIN Broadcasting Corporation and Gaylord Entertainment Company. In Houston, the other commercial VHF stations are owned by Capital Cities\/ABC, Inc. and H & C Communications, Inc. (sale pending to The Washington Post Company). In the Sacramento-Stockton-Modesto market, Kelly Broadcasting Company and Continental Broadcasting Ltd. also own commercial VHF stations. The Norfolk-Portsmouth-Newport News- Hampton market is served by two other commercial VHF stations, one owned by LIN Broadcasting Corporation and the other by Narragansett Capital Associates, L. P.. In the Tulsa market, the two other commercial VHF stations are owned by Scripps Howard Inc. and Perpetual Corporations Communications (Allbritton Communications Company). Fox-affiliated stations also compete in each of Belo's markets for advertising sales and local viewers. The Fox-affiliated stations in Belo's broadcast markets are all commercial UHF television stations and are owned by the following companies: Fox Television Stations, Inc., in Dallas-Fort Worth; The Fox Network in Houston; Renaissance Communications in Sacramento-Stockton-Modesto; WTVZ, Inc. in Norfolk-Portsmouth-Newport News-Hampton; and Clear Channel Television in Tulsa.\nREGULATION OF TELEVISION BROADCASTING\nThe Company's television broadcasting operations are subject to the jurisdiction of the FCC under the Communications Act of 1934, as amended (the \"Act\"). Among other things, the Act empowers the FCC to assign frequency bands; determine stations' frequencies, location and power; issue, renew, revoke and modify station licenses; regulate equipment used by stations; impose penalties for violation of the Act or of FCC regulations; impose fees for processing applications and other administrative functions; and adopt regulations to carry out the Act's provisions. The Act also prohibits the assignment of a broadcast license or the transfer of control of a broadcast licensee without prior FCC approval. Under the Act, the FCC also regulates certain aspects of the operation of cable television systems and other electronic media that compete with broadcast stations.\nThe Act would prohibit the Company's subsidiaries from continuing as broadcast licensees if record ownership or power to vote more than one-fourth of the Company's stock were to be held by aliens or foreign governments or their representatives, or if an officer or more than one-fourth of the Company's directors were aliens.\nUnder the Act, television broadcast licenses may be granted for maximum periods of five years and are renewable upon proper application for additional five-year terms. Renewal applications are granted without hearing if there are no competing applications or issues raised by petitioners to deny such applications that would cause the\nFCC to order a hearing. A full comparative hearing is required if competing applications are filed. A federal court of appeals has affirmed an FCC decision that recognizes an incumbent licensee's \"renewal expectancy\" based on substantial service to its community. The precise parameters of licensees' renewal expectancies in comparative proceedings are ambiguous at the present time. This ambiguity may lead to new FCC rules or policies as the result of pending FCC rulemaking proceedings, or Congressional legislation reforming the comparative renewal process.\nApplications for renewal of broadcast licenses for three of the Company's stations are pending before the FCC. The stations' licenses are by statute continued pending action thereon. The current license expiration dates for each of the Company's television broadcast stations are set forth in the table under \"Business-Television Broadcasting.\"\nFCC rules limit the total number of television broadcast stations that may be under common ownership, operation and control, or in which a single person or entity may hold office or have more than a specified percentage of voting power. FCC rules also place certain limits on common ownership, operation and control of, or cognizable interests or voting power in, (a) broadcast stations serving the same area, (b) broadcast stations and daily newspapers serving the same area and (c) television broadcast stations and cable systems serving the same area. The Company's ownership of The Dallas Morning News and WFAA-TV, which are both located in the Dallas-Fort Worth area and serve the same market area, predate the adoption of the FCC's rules regarding cross-ownership, and the Company's ownership of The Dallas Morning News and WFAA has been \"grandfathered\" by the FCC.\nThese FCC rules affect the number, type and location of newspaper, broadcast and cable television properties that the Company might acquire in the future. For example, under current rules, the Company could not acquire any daily newspaper, broadcast or cable television properties in a market in which it now owns or has an interest deemed attributable under Commission rules in a television station, except that the Commission's rules provide that waivers of their restrictions could be granted to permit the Company's acquisition of radio stations in the Dallas, Houston and Sacramento markets. Under current FCC regulations, and in light of the Company's current investments, the Company could acquire outright two more television stations (not including \"satellite\" television stations which rebroadcast all or most of a parent station's programming) in other markets without disposing of any stations (provided the number of television households in the sum of all Company-owned stations' Area of Dominant Influence (\"ADI\") did not exceed 25 percent of the total television households in the nation, counting only 50 percent of ADI households for UHF stations). The FCC has instituted rulemaking proceedings looking toward possible relaxation of certain of these rules regulating television station ownership. The Company recently announced that it has reached an agreement in principle to purchase WWL-TV in New Orleans, Louisiana. See Note 12 of Notes to Consolidated Financial Statements on page 36. If the purchase is consummated, the Company could acquire outright one more television station under the parameters described above.\nThe FCC has significantly reduced its past regulation of broadcast stations, including elimination of formal ascertainment requirements and guidelines concerning amounts of certain types of programming and commercial matter that may be broadcast. There are, however, FCC rules and policies, and rules and policies of other federal agencies, that regulate matters such as network-affiliate relations, cable systems' carriage of syndicated and network television programming on distant stations, political advertising practices, obscene and indecent programming, equal employment opportunity, application procedures and other areas affecting the business or operations of broadcast stations. The FCC has modified its rules which restrict network participation in program production and syndication, an action which is the subject of pending review proceedings. The Supreme Court has refused to review a lower court decision that upheld FCC action invalidating most aspects of the Fairness Doctrine, which had required broadcasters to present contrasting views on controversial issues of public importance. The FCC may, however, continue to regulate other aspects of fairness obligations in connection with certain types of broadcasts. The FCC has adopted rules to implement the Children's Television Act of 1990, which, among other provisions, limits the permissible amount of commercial matter in children's television programs and requires each television station to present educational and informational children's programming.\nThe FCC has adopted various regulations to implement certain provisions of the Cable Television Consumer Protection and Competition Act of 1992 (\"1992 Cable Act\") which, among other matters, includes provisions respecting the carriage of television stations' signals by cable television systems and requiring mid-license term review of television stations' equal employment opportunity practices. Certain provisions of the 1992 Cable Act, including the provisions respecting cable systems' carriage of local television stations, are the subject of pending judicial review proceedings. The FCC has also modified its rules to enable local telephone companies to provide a \"video dialtone\" service that would be similar to the ordinary telephone dialtone and would provide access for\nconsumers to a wide variety of services including video programming. This decision is the subject of pending judicial review proceedings.\nProposals for additional or revised regulations and requirements are pending before and are being considered by Congress and federal regulatory agencies from time to time. The FCC is at present considering modification or elimination of rules respecting territorial exclusivity in non-network program arrangements; rules relating to telephone company ownership of cable television systems; and policies with respect to high definition television. The Company cannot predict the effect of existing and proposed federal regulations and policies on its broadcast business.\nThe foregoing does not purport to be a complete summary of all the provisions of the Act or the regulations and policies of the FCC thereunder. Also, various of the foregoing matters are now, or may become, the subject of court litigation, and the Company cannot predict the outcome of any such litigation or the impact on its broadcast business.\nEMPLOYEE RELATIONS\nAs of December 31, 1993, the Company had 2,863 full-time employees. There are 37 full-time and 17 part-time composing room employees of The Dallas Morning News represented by a union. The union contract covering these employees expires on June 19, 1994.\nThere are 28 full-time and one part-time television broadcasting employees of WFAA-TV represented by a union under a contract that expires on September 11, 1994.\nITEM 2.","section_1A":"","section_1B":"","section_2":"ITEM 2. PROPERTIES\nThe Company's corporate offices and certain departments of The Dallas Morning News are located in downtown Dallas in a portion of a 17-story office building owned by the Company.\nThe Company owns and operates a newspaper printing facility in Plano, Texas (the \"North Plant\"), in which eight high-speed offset presses are housed to print The Dallas Morning News. Expansion of these facilities to accommodate increased circulation and provide greater publishing flexibility was completed during 1993.\nThe remainder of The Dallas Morning News' operations are housed in a Company-owned five-story building in downtown Dallas. This facility is equipped with computerized input and photocomposition facilities and other equipment that is used in the production of both news and advertising copy.\nDFW Suburban Newspapers, Inc. and DFW Printing Company, Inc. operations are located at a Company-owned plant in Arlington, Texas. This facility is pledged as security for certain industrial revenue bonds issued in 1985.\nThe studios and offices of WFAA-TV occupy Company-owned facilities in downtown Dallas. The Company also owns 50 percent of the outstanding capital stock of Hill Tower, Inc. (\"Hill Tower\"), owner of a 1,500-foot transmitting tower and antennas located in Cedar Hill, Texas. The remaining 50 percent of Hill Tower is owned by the CBS television affiliate in Dallas, a subsidiary of Argyle Television Holdings, Inc.. This equipment is used by both WFAA and the CBS television affiliate.\nKHOU-TV operates from Company-owned facilities located in Houston. The station's transmitter is located near DeWalt, Texas and includes a 2,000-foot tower. The facility is wholly-owned by the Company.\nKXTV operates from Company-owned facilities located in Sacramento, California. The station's 2,000-foot tower and transmitter system are located in Sacramento County, California. The tower and transmitter building are owned by a joint venture between the Company and a subsidiary of Anchor Media, Ltd., which owns and operates the ABC television affiliate in Stockton. KXTV leases the transmitter site from the joint venture.\nWVEC-TV operates from Company-owned facilities in Hampton and Norfolk, Virginia. The Company-owned transmitting facilities include a 980-foot tower and antenna in Driver, Virginia. WVEC also leases additional building space adjacent to the Company-owned facilities, which houses the marketing and business departments.\nKOTV operates from Company-owned facilities located in Tulsa, Oklahoma. The station's transmitting system is located near Tulsa. The transmitter site and 1,839-foot tower are owned by a joint venture between the Company and Scripps Howard Inc., owner and operator of the NBC television affiliate in Tulsa. The balance of KOTV's transmitting equipment is owned by the station.\nAll of the foregoing subsidiaries have additional leasehold interests that are used in their respective operations.\nThe Company also owns certain land and a building located near downtown Dallas that were acquired from the Dallas Times Herald in December 1991. Sale of this property is expected to be completed in 1994.\nThe Company believes its properties are in good condition and well maintained, and that such properties are adequate for present operations.\nITEM 3.","section_3":"ITEM 3. LEGAL PROCEEDINGS\nThere are legal proceedings pending against the Company, including a number of actions for alleged libel. In the opinion of management, liabilities, if any, arising from these actions are either covered by insurance or would not have a material adverse effect on the operations or financial position of the Company.\nITEM 4.","section_4":"ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS\nNo matter was submitted to a vote of security holders, through the solicitation of proxies or otherwise, during the fourth quarter of the fiscal year covered by this Form 10-K.\nPART II\nITEM 5.","section_5":"ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS\nThe Company's authorized common equity consists of 150 million shares of Common Stock, par value $1.67 per share. Currently, 50 million shares are designated as Series A Common Stock and 15 million shares are designated as Series B Common Stock. The Series A and Series B shares are identical in all respects except that Series B shares are entitled to ten votes per share on all matters submitted to a vote of shareholders, while the Series A shares are entitled to one vote per share; transferability of the Series B shares is limited to family members and affiliated entities of the holder; and Series B shares are convertible at any time on a one-for-one basis into Series A shares. Shares of the Company's Series A Common Stock are traded on the New York Stock Exchange (NYSE symbol: BLC).\nThe following table lists the high and low closing prices and last sale prices for Series A Common Stock as reported by the New York Stock Exchange for the last two years.\nOn February 28, 1994, the closing price for the Company's Series A Common Stock, as reported on the New York Stock Exchange, was $52 1\/4 and the approximate number of shareholders of record of the Series A Common Stock at the close of business on such date was 720. There is no established public trading market for shares of Series B Common Stock, and such shares are subject to significant restrictions on transfer. Series B shares, however, are convertible at any time into Series A shares on a one-for-one basis. On February 28, 1994, there were approximately 589 holders of record of shares of Series B Common Stock.\nITEM 6.","section_6":"ITEM 6. SELECTED FINANCIAL DATA\n(A) Net earnings for 1993 includes an increase of $6,599,000 (33 cents per share) representing the cumulative effect of adopting Statement of Financial Accounting Standards No. 109, \"Accounting for Income Taxes\", effective January 1, 1993. (B) In December 1991, the Company purchased substantially all of the operating assets of the Dallas Times Herald newspaper for $55,673,000. Also see accompanying Management's Discussion and Analysis of Financial Condition and Results of Operations and Notes to Consolidated Financial Statements.\nITEM 7.","section_7":"ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS\nLIQUIDITY AND CAPITAL RESOURCES\nDuring 1993, net cash provided by operations was $84,818,000, compared to $78,336,000 in 1992. Cash from operations continues to be Belo's primary source of liquidity. The $6,482,000 increase in net cash provided by operations from 1992 to 1993 resulted primarily from increased earnings and lower payments for taxes. In 1993, cash provided by operations was sufficient to fund capital expenditures and dividends on common stock and to make unscheduled repayments of long-term debt. An additional $17,242,000 was generated through the exercise of stock options in 1993, which was also used to pay down debt.\nAt December 31, 1993, Belo had access to a $450,000,000 variable rate revolving credit agreement on which borrowings at that time were $250,000,000. Belo also uses short-term unsecured notes from time to time as a source of financing temporary cash requirements, when rates are favorable. At December 31, 1993, Belo had $21,000,000 of such short-term notes outstanding. On January 15, 1993, Belo retired its 9.45% Notes due in 1993 in the amount of $100,000,000 by borrowing under its revolving credit agreement and in December 1993, another $100,000,000 in 8 5\/8% debt was redeemed, also with proceeds from the revolving credit agreement.\nDuring 1993, Belo entered into agreements that cap at 6 percent the interest on $75,000,000 of variable rate borrowings. These agreements expire in 1996.\nCapital expenditures in 1993 were $60,169,000 (excluding $1,961,000 of capitalized interest) compared to $26,750,000 (excluding $395,000 of capitalized interest) in 1992. Nearly 45 percent of these expenditures were for the expansion of The Dallas Morning News' North Plant production facility. The expansion project was substantially completed in the third quarter of 1993 and provides increased press capacity and greater publishing flexibility. Other significant capital additions for 1993 include the replacement of the news department computer system of The Dallas Morning News, expansion and renovation of certain Belo broadcast station facilities and completion of a new transmitter at the Virginia station. In addition, Belo purchased the building in which its corporate offices and several departments of The Dallas Morning News are located. The Company expects to finance future capital expenditures using net cash generated from operations and, when necessary, bank borrowings. Required future payments for capital expenditures in 1994 are $9,992,000 and total capital expenditures in 1994 are expected to be approximately $50,000,000.\nDividends of $11,128,000 were paid in 1993 compared to $10,381,000 in 1992. These 1993 dividends represent a total of 56 cents per share of outstanding Series A and Series B Common Stock. Dividends of 54 cents per share were paid in 1992.\nOn December 31, 1993, Belo's ratio of long-term debt to total capitalization was 44.5 percent, compared to 51.8 percent at the end of 1992. The improvement in 1993 is primarily due to earnings in excess of dividend payments, funds generated through the exercise of stock options, and a $25,000,000 reduction in long-term debt.\nIn December 1993, the Board of Directors authorized purchases of up to 1,000,000 shares of the Company's Series A Common Stock from time to time. The Company has the authority to purchase approximately 357,000 shares remaining from a previous Board authorization. In addition, the Company has in place a repurchase program authorizing the purchase of up to $2,500,000 of Company stock annually.\nBelo believes that its present financial condition and credit relationships will enable it to adequately meet its current obligations and provide for future growth.\nRESULTS OF OPERATIONS\nBelo recorded 1993 net earnings of $51,077,000 or $2.53 per share, compared to $37,170,000 ($1.90 per share) in 1992 and $12,392,000 (65 cents per share) in 1991. Earnings in 1993 were affected by certain nonrecurring items, including a $6,599,000 increase (33 cents per share) representing the cumulative effect of adopting Statement of Financial Accounting Standards (\"SFAS\") No. 109 in January 1993. This increase was partially offset in the third quarter when Belo recorded a $2,249,000 (11 cents per share) adjustment to deferred taxes following an increase in the federal income tax rate from 34 percent to 35 percent. Also included in 1993 earnings is a fourth quarter restructuring charge of $5,822,000 (19 cents per share), related primarily to the write-off of goodwill and a reduction in the carrying value of production assets associated with the newspaper operations of Dallas-Fort Worth Suburban Newspapers, Inc. (\"DFWSN\"), a wholly-owned subsidiary of Belo. The production assets adjusted include building and improvements and publishing equipment. The restructuring decision was made in an effort to streamline operations and reduce costs of DFWSN's newspaper publishing and commercial printing operations. The restructuring was substantially completed in January 1994. In the fourth quarter, Belo reversed certain music license fee accruals totaling $3,349,000 (10 cents per share). This action was in response to an agreement between the All Industry Television Music License Committee and the American Society of Composers, Authors and Publishers, defining the formula used to compute licensing fees for the use of certain music in television broadcasts from 1984 to 1994. The formula was approved by a New York Federal District Court Magistrate in the fourth quarter. Net earnings for 1993 excluding the above special items were $2.40 per share.\nIn 1992, net earnings of $37,170,000 or $1.90 cents per share, included a $4,019,000 (16 cents per share) increase in earnings before taxes from a property damage settlement with the United States Navy. Excluding this one-time gain, 1992 earnings were $1.74 per share.\nNet earnings in 1991 were hampered by an overall weak economy, especially in Texas, where Belo's three largest subsidiaries operate. Earnings for 1991 were also affected by several items, including a favorable Internal Revenue Service (\"IRS\") settlement which increased net earnings by $6,787,000. Offsetting this amount, however, were a number of unusual one-time charges, including a $4,000,000 unfavorable judgment in a lawsuit against one of Belo's broadcast subsidiaries; a $4,000,000 reserve for a note receivable related to a previous asset sale; a $1,500,000 settlement of an antitrust lawsuit; a $1,384,000 provision for post-retirement benefits; a $1,259,000 write-down of certain broadcast film contract rights; and $1,241,000 in early retirement charges. The net effect on 1991 earnings of these unusual items was a decrease of 7 cents per share. Excluding these items, earnings for 1991 were 72 cents per share.\nInterest expense in 1993 was 37.8 percent less than 1992 interest expense. The most significant contributing factor to the current year savings was lower interest rates. In January 1993, Belo replaced $100,000,000 of 9.45 percent notes with proceeds from the revolving credit agreement, which had an average interest rate of 3.7 percent during 1993. A similar financing of debt took place in December 1993, when $100,000,000 of 8 5\/8 percent notes were redeemed using proceeds from the revolving credit agreement. Also contributing to the decrease in 1993 interest expense was Belo's lower average debt outstanding and the capitalization of $1,961,000 of interest in 1993 versus 1992 capitalized interest of $395,000. Interest expense in 1992 was relatively unchanged when compared to 1991 interest expense.\nOther income and expense in 1993 includes a $986,000 gain on the sale of two parcels of non-operating real estate and several smaller, individually insignificant items. As noted earlier, 1992's other income and expense included a gain of $4,019,000 before taxes, related to a property damage settlement with the United States Navy. Other income and expense for 1991 included the $4,000,000 reserve for a note receivable and $1,500,000 for the settlement of an antitrust lawsuit.\nThe Company's effective tax rate in 1993 was 41.1 percent, which compares to 39.6 percent in 1992 and 33.4 percent in 1991. The effective rate in 1993 was affected by an increase in the federal income tax rate, which resulted in an increase in current tax expense and a $2,249,000 increase in deferred tax expense to adjust deferred taxes to the 35 percent rate. The 1993 rate was favorably impacted by the reversal of certain tax accruals as a result of new tax legislation regarding amortization of intangibles. The effective rate in 1991 was favorably impacted by reversals of tax accruals related to IRS settlements.\nNEWSPAPER PUBLISHING\nIn 1993, newspaper publishing revenues represented 61.6 percent of consolidated revenues, compared to 61 percent in 1992 and 57.9 percent in 1991. The composition of revenues in each of these three years was essentially the same, with advertising accounting for approximately 87 percent, circulation 11 percent and other publishing revenues, primarily commercial printing, 2 percent.\nNewspaper advertising volume for The Dallas Morning News, Belo's principal newspaper, is measured in column inches. Volume for the last three years was comprised as follows:\nTotal publishing revenues in 1993 were $335,642,000, up 6.7 percent from revenues of $314,701,000 earned in 1992. Classified advertising revenues were nearly 11 percent better than last year due to both linage and rate increases. The increase in linage was primarily attributable to automotive and employment advertising. Retail and general advertising revenues also improved in 1993 relative to 1992, primarily due to increased rates. Circulation revenues increased 5.9 percent in 1993 primarily from a January 1, 1993 increase in the price of a Sunday single-copy and the weekend subscription rate.\nRevenues in 1992 of $314,701,000 improved 26 percent over 1991 revenues of $249,737,000. Higher advertising volumes, combined with rate increases, generated the 1992 advertising revenue improvement. Average circulation increased by approximately 25 percent daily and 30 percent Sunday after the December 1991 closure of the Dallas Times Herald. Based primarily on this increased circulation, the Company announced a 15 percent rate increase across substantially all advertising categories, effective on January 15, 1992. Additional rate increases ranging from 6.5 percent to 11.5 percent were announced in the third quarter of 1992. The Company also experienced volume gains in all advertising categories, with the most significant increases in general and classified advertising.\nThe Company believes that its advertising rates continue to compare favorably with competing media and have not negatively affected advertising volumes. Future demand for advertising in the Dallas-Fort Worth area will continue to depend on general economic conditions of the Southwest region and the United States as a whole. Management further believes that increased circulation from the conversion of former Dallas Times Herald readers was substantially realized in 1992. Thus, the ability of the Company to generate continued growth in circulation and advertising revenues will likely depend on the ability of its newspapers to compete successfully in the highly competitive Dallas-Fort Worth media market, where numerous news and advertising alternatives are available. In addition, various market and demographic factors, such as circulation and readership trends, retail sales activity, inflation and population growth will also affect future revenues.\nEarnings from newspaper publishing operations in 1993 were $44,293,000 after a $5,822,000 restructuring charge related to DFWSN. Excluding the restructuring charge, earnings were $50,115,000, an increase of 16.6 percent from 1992. While total publishing revenues increased 6.7 percent, operating expenses (excluding the charge) increased only 5.1 percent, resulting in an operating margin of 14.9 percent versus 13.7 percent in 1992. Salaries, wages and employee benefits rose primarily as a result of merit increases and an increase in the number of full-time employees. Newsprint expense was up due to both increased consumption associated with the linage increase and a higher average cost per ton. Contributing to the increase in linage was the publishing of special sports sections in connection with the Dallas Cowboys' appearance in the Super Bowl. The volume variance accounted for approximately 60 percent of the overall increase in newsprint expense. In addition, expansion of delivery routes resulted in increased distribution expenses. Depreciation expense was higher in 1993 than in 1992 following the completion of The Dallas Morning News North Plant expansion project. Partially offsetting these increases were savings in outside services, bad debt expense and property taxes.\nEarnings from publishing operations increased to $42,974,000 in 1992 from $21,417,000 in 1991, resulting in operating margins of 13.7 percent and 8.6 percent, respectively. Revenue increases outpaced higher operating costs, resulting in operating margin improvement. The 1992 increase in salaries, wages and employee benefits was from merit increases, more employees, higher benefit costs and incentive bonuses. Newsprint consumed, and consequently newsprint costs, were higher in 1992 compared to 1991 due to the increase in circulation mentioned before. However, a significant decline in the average price of newsprint in 1992 helped to mitigate the volume variance. Amortization of intangibles was included in 1992 earnings from newspaper publishing operations for the first time following the December 1991 purchase of an intangible asset from the Dallas Times Herald.\nBROADCASTING\nBelo's five television broadcast subsidiaries contributed 38.4 percent of total 1993 revenues compared to 39 percent in 1992 and 42.1 percent in 1991. Broadcast revenues for 1993 of $209,193,000 increased 4 percent over 1992 revenues of $201,241,000. In 1992, revenues improved 10.7 percent from the $181,848,000 of the previous year. Broadcast revenues for the last three years were derived as follows:\nThe broadcast revenue mix has been relatively stable over the last three years, with a slight variation in 1992 other revenue due to higher political advertising.\nLocal and national advertising revenues in 1993 increased 6.2 percent and 6.6 percent, respectively, compared to 1992 revenues. Stations in Houston, Virginia and Tulsa combined for an overall revenue gain of $9,266,000 while Dallas station revenues were relatively flat and the California station experienced a slight revenue decline. In 1993, all of Belo's broadcast stations with the exception of the Dallas station experienced an increase in local advertising revenues. National advertising revenues increased at all but Belo's California station. Contributing factors to the 1993 improvements include strong ratings performances, healthier local economies and competitive pricing strategies. The industry categories contributing the most to advertising revenues were restaurants, automobiles, department stores and health care. Partially offsetting these revenue gains, however, were a significant decrease in political advertising compared to 1992, a weaker California economy and the effect of competitive forces.\nThe favorable revenue performance in 1992 compared to 1991 was due to improved demand for both local and national advertising, combined with a higher than expected volume of political advertising for national, state and local elections. Political revenues in 1992 were $4,780,000 higher than in 1991, accounting for 25 percent of the overall year-to-year increase. National and local advertising increased by 9.8 percent and 9 percent, respectively, in 1992 from 1991. National advertising revenues were higher in 1992, due, in part, to broadcast of the Super Bowl and Winter Olympics by Belo's three CBS-affiliated stations.\nBroadcast earnings from operations for 1993 were $63,240,000, including a $3,349,000 increase related to the reversal of certain music license fee accruals. Excluding the music license fee adjustment, earnings from broadcast operations were $59,891,000 compared to $56,461,000 in 1992, an increase of 6.1 percent. In addition to the overall 4 percent increase in revenues, operating costs increased only 3.3 percent, excluding the music license fee adjustment. Contributing to the increase in 1993 expenses were higher salaries, wages and employee benefits due to merit increases, higher benefit costs and an increase in the number of employees in the broadcast division. Communications and travel expenses were higher in 1993 than in 1992 due to coverage of significant news stories, including the Dallas Cowboys' trip to the 1993 Super Bowl, the Presidential Inauguration, and the Branch Davidian story in Waco, Texas. These increases were partially offset by savings in 1993 programming expense.\nEarnings from broadcast operations were $56,461,000 in 1992, compared with $41,553,000 in 1991. The 1991 broadcast earnings were reduced by several one-time charges, including a $4,000,000 charge for an unfavorable judgment in an employment-related lawsuit, a $1,259,000 write-down of certain broadcast film contract rights and a $788,000 charge for early retirement costs. Excluding these items, comparable earnings increased by $8,861,000 in 1992 from 1991. The increase in broadcast earnings resulted from the $19,393,000 increase in revenues, partially offset by increases in salary and benefit costs due to merit increases, health care expenses and incentive compensation.\nIn recent years, the television broadcast industry has been affected by increased competition for viewing audiences. Belo continues to compete aggressively for advertisers and viewing audiences in markets that offer many alternative media outlets. Future earnings growth will likely depend on the ability to offer competitive audience delivery to advertisers and on general economic conditions.\nOTHER MATTERS\nOn February 23, 1994, Belo announced an agreement in principle to purchase the assets of WWL-TV, the CBS affiliate in New Orleans, Louisiana for $110,000,000. Belo intends to borrow funds from its revolving credit agreement to complete the transaction. The transaction, which is subject to the signing of a definitive agreement, as well as customary closing conditions, including approval by appropriate government agencies, will be accounted for as a purchase. The Company expects that a definitive agreement will be entered into by early spring and that the transaction will be completed during the third quarter of 1994.\nAt the end of 1993, Belo adjusted the discount rate used in computing the accumulated pension benefit obligation from 9 percent to 7.5 percent and changed the expected rate of return on plan assets from 11 percent to 10.25 percent. The effect of these changes is expected to increase 1994 pension costs by approximately $2,000,000.\nIn 1993, the Financial Accounting Standards Board released SFAS No. 112, \"Employers' Accounting for Postemployment Benefits.\" The requirements of the standard, which relate primarily to workers' compensation, disability, severance pay and other benefits provided after employment but before retirement, do not differ significantly from existing accounting practices employed by the Company. Therefore, planned adoption of the standard in January 1994 is not expected to significantly affect the Company's net earnings.\nIn the Cable Television Consumer Protection and Competition Act of 1992, Congress gave commercial broadcast stations new rights with respect to cable television systems located in the television markets they serve. Under this new law, each commercial broadcast station has the right, at its election, either to demand that their signal be carried on local cable television systems or, alternatively, to require these cable systems to obtain the station's consent in order to retransmit the broadcast station's signal. The Company's broadcast stations have elected the retransmission consent right with respect to most local cable systems. The Company's broadcast stations have completed agreements granting retransmission consent in exchange for various forms of consideration with substantially all of the cable systems in the television markets in which such stations are located. While some of these agreements are short-term, expiring within the next few months, the Company anticipates that it will be able to replace these with longer-term agreements before their expiration.\nThe net effect of inflation on Belo's operations and net income has not been material in the last few years because of a relatively low rate of inflation during this period and because of efforts to lessen the effect of rising costs through a strategy of improved productivity, cost control and, when warranted, increased prices.\nITEM 8.","section_7A":"","section_8":"ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA\nThe consolidated financial statements, together with the report of independent auditors and financial statement schedules, are included on pages 21 through 42 of this document. Financial statement schedules other than those included have been omitted because the required information is contained in the consolidated financial statements or related notes, or such information is not applicable.\nITEM 9.","section_9":"ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE\nNot applicable.\nPART III\nITEM 10.","section_9A":"","section_9B":"","section_10":"ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT\nThe information set forth under the headings \"Outstanding Capital Stock and Stock Ownership of Directors and Principal Shareholders,\" \"Executive Officers of the Company\" and \"Election of Directors\" contained in the definitive Proxy Statement for the Company's Annual Meeting of Shareholders to be held on May 4, 1994, is incorporated herein by reference.\nITEM 11.","section_11":"ITEM 11. EXECUTIVE COMPENSATION\nThe information set forth under the heading \"Executive Compensation and Other Matters\" and \"Election of Directors\" contained in the definitive Proxy Statement for the Company's Annual Meeting of Shareholders to be held on May 4, 1994, is incorporated herein by reference.\nITEM 12.","section_12":"ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT\nThe information set forth under the heading \"Outstanding Capital Stock and Stock Ownership of Directors and Principal Shareholders\" in the definitive Proxy Statement for the Company's Annual Meeting of Shareholders to be held on May 4, 1994, is incorporated herein by reference.\nITEM 13.","section_13":"ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS\nThe information set forth under the headings \"Executive Compensation and Other Matters\" and \"Election of Directors\" contained in the definitive Proxy Statement for the Company's Annual Meeting of Shareholders to be held on May 4, 1994, is incorporated herein by reference.\nPART IV\nITEM 14.","section_14":"ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K\n(a) (1) The financial statements listed in the Index to Financial Statements and Schedules included in the Table of Contents are filed as part of this report.\n(2) The schedules listed in the Index to Financial Statements and Schedules included in the Table of Contents are filed as part of this report.\n(3) Exhibits\nCertain of the exhibits to this report are hereby incorporated by reference, as specified:\nEXHIBIT NUMBER DESCRIPTION - ------- ----------- 3.1 Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the Company's Annual Report on Form 10-K dated March 19, 1992 (the \"1991 Form 10-K\"))\n3.2 Certificate of Correction to Certificate of Incorporation dated May 13, 1987 (incorporated by reference to Exhibit 3.2 to the Company's Annual Report on Form 10-K dated March 18, 1993 (the \"1992 Form 10-K\"))\n3.3 Certificate of Designation of Series A Junior Participating Preferred Stock of the Company dated April 16, 1987 (incorporated by reference to Exhibit 3.3 to the 1991 Form 10-K)\n3.4 Certificate of Amendment of Certificate of Incorporation of the Company dated May 4, 1988 (incorporated by reference to Exhibit 3.4 to the 1992 Form 10-K)\n3.5 Amended Certificate of Designation of Series A Junior Participating Preferred Stock of the Company dated May 4, 1988 (incorporated by reference to Exhibit 3.5 to the 1992 Form 10-K)\n3.6 Certificate of Designation of Series B Common Stock of the Company dated May 4, 1988 (incorporated by reference to Exhibit 3.6 to the 1992 Form 10-K)\n3.7 Bylaws of the Company, effective December 16, 1992 (incorporated by reference to Exhibit 3.7 to the 1992 Form 10-K)\n4.1 Certain rights of the holders of the Company's Common Stock are set forth in Exhibits 3.1-3.6 above\n4.2 Specimen Form of Certificate representing shares of the Company's Series A Common Stock (incorporated by reference to Exhibit 4.2 to the 1992 Form 10-K)\n4.3 Specimen Form of Certificate representing shares of the Company's Series B Common Stock (incorporated by reference to Exhibit 4.3 to the Company's Annual Report on Form 10-K dated March 20, 1989)\n4.4 Form of Rights Agreement, dated March 10, 1986 between the Company and RepublicBank Dallas, National Association as Rights Agent, which includes as Exhibit B thereto the Form of Right Certificate (incorporated by reference to Exhibit 4.8 to the 1991 Form 10-K)\n4.5 Supplement No. 1 to Rights Agreement (incorporated by reference to Exhibit 4.9 to the 1991 Form 10-K)\n4.6 Supplement No. 2 to Rights Agreement (incorporated by reference to Exhibit 4.9 to the 1992 Form 10-K)\n4.7 Supplement No. 3 to Rights Agreement (incorporated by reference to Exhibit 4.10 to the 1992 Form 10-K)\n4.8 Supplement No. 4 to Rights Agreement dated December 12, 1988 substituting Manufacturers Hanover Trust Company as Rights Agent\n4.9 Supplement No. 5 to Rights Agreement (incorporated by reference to Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1993)\n10.1 Contracts relating to television broadcasting:\n(1) Contract for Affiliation between KOTV in Tulsa, Oklahoma and CBS, with Network Affiliation Consent (incorporated by reference to Exhibit 10.1(1) to the 1991 Form 10-K)\n(2) Contract for Affiliation between KHOU-TV in Houston, Texas and CBS, with Network Affiliation Consent (incorporated by reference to Exhibit 10.1(2) to the 1991 Form 10-K)\nEXHIBIT NUMBER DESCRIPTION ------- ----------- (3) Letter Amendment, dated June 11, 1993, to Contract for Affiliation between KHOU-TV in Houston, Texas and CBS\n(4) Contract for Affiliation between KXTV in Sacramento, California and CBS (incorporated by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1993 (the \"First Quarter 1993 Form 10-Q\"))\n(5) Contract for Affiliation between WFAA-TV in Dallas, Texas and ABC, with Network Affiliation Consent (incorporated by reference to Exhibit 10.1(4) to the Company's Annual Report on Form 10-K dated March 28, 1991 (the \"1990 Form 10-K\"))\n(6) Rider One to Contract for Affiliation between WFAA-TV in Dallas, Texas and ABC (incorporated by reference to Exhibit 10.1 to the First Quarter 1993 Form 10-Q)\n(7) Contract for Affiliation between WVEC-TV in Hampton-Norfolk, Virginia and ABC, with Network Affiliation Consent (incorporated by reference to Exhibit 10.1(5) to the 1991 Form 10-K)\n10.2 Contracts relating to newspaper publication:\n(1) Founding agreement dated July 28, 1987 between the Company and Newsprint South, Inc. for newsprint supply (incorporated by reference to Exhibit 10.2(2) to the 1990 Form 10-K)\n(2) Amendment to the founding agreement dated June 30, 1990 between the Company and Newsprint South, Inc. for newsprint supply (incorporated by reference to Exhibit 10.2(3) to the 1990 Form 10-K)\n10.3 (1) Management Security Plan (incorporated by reference to Exhibit 10.4(1) to the 1991 Form 10-K)\n(2) Stock Option Plan (incorporated by reference to Exhibit 10.4(2) to the 1991 Form 10-K)\n(3) Amendment to Stock Option Plan by the Compensation Committee of the Board of Directors (incorporated by reference to Exhibit 10.4(3) to the 1991 Form 10-K)\n(4) Amendments to Stock Option Plan (incorporated by reference to Exhibit 10.4(4) to the 1991 Form 10-K)\n(5) Amendment to Stock Option Plan dated December 19, 1986 (incorporated by reference to Exhibit 10.4(5) to the 1991 Form 10-K)\n(6) Amendment to Stock Option Plan dated February 22, 1989\n(7) 1986 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.4(7) to the 1991 Form 10-K)\n(8) Amendment No. 1 to 1986 Long-Term Incentive Plan dated October 22, 1986 (incorporated by reference to Exhibit 10.4(8) to the 1991 Form 10-K)\n(9) Amendment No. 2 to 1986 Long-Term Incentive Plan effective January 1, 1987 (incorporated by reference to Exhibit 10.3(9) to the 1992 Form 10-K)\n(10) Amendment No. 3 to 1986 Long-Term Incentive Plan dated May 4, 1988\nEXHIBIT NUMBER DESCRIPTION ------- ----------- (11) Amendment No. 4 to 1986 Long-Term Incentive Plan dated May 13, 1988\n(12) Amendment No. 5 to 1986 Long-Term Incentive Plan dated February 22, 1989\n(13) Amendment No. 6 to 1986 Long-Term Incentive Plan dated May 6, 1992 (incorporated by reference to Exhibit 10.3(13) to the 1992 Form 10-K)\n(14) The A. H. Belo Corporation Employee Savings and Investment Plan (incorporated by reference to Exhibit 10.4(13) to the Company's Annual Report on Form 10-K dated March 27, 1990 (the \"1989 Form 10-K\"))\n(15) First Amendment to the A. H. Belo Corporation Employee Savings and Investment Plan, dated January 29, 1992 (incorporated by reference to Exhibit 10.3(15) to the 1992 Form 10-K)\n(16) Second Amendment to the A. H. Belo Corporation Employee Savings and Investment Plan, dated October 22, 1992 (incorporated by reference to Exhibit 10.3(16) to the 1992 Form 10-K)\n(17) Third Amendment to the A. H. Belo Corporation Employee Savings and Investment Plan (incorporated by reference to Exhibit 10.2 to the First Quarter 1993 Form 10-Q)\n(18) Fourth Amendment to the A. H. Belo Corporation Employee Savings and Investment Plan (incorporated by reference to Exhibit 4.14 to Post-Effective Amendment No. 1 to Form S-8 (Registration No. 33-30994))\n(19) Fifth Amendment to the A. H. Belo Corporation Employee Savings and Investment Plan\n(20) The G. B. Dealey Retirement Pension Plan (as amended and restated effective January 1, 1988)\n(21) First Amendment to the G. B. Dealey Retirement Pension Plan\n(22) Second Amendment to the G. B. Dealey Retirement Pension Plan\n(23) Third Amendment to the G. B. Dealey Retirement Pension Plan\n(24) Fourth Amendment to the G. B. Dealey Retirement Pension Plan\n(25) Fifth Amendment to the G. B. Dealey Retirement Pension Plan\n(26) Master Trust Agreement, effective as of July 1, 1992, between A. H. Belo Corporation and Mellon Bank, N. A.\n(27) A. H. Belo Corporation Supplemental Executive Retirement Plan\n(28) Trust Agreement dated February 28, 1994, between the Company and Mellon Bank, N. A.\n(29) Summary of A. H. Belo Corporation Executive Compensation Program (incorporated by reference to Exhibit 10.3(18) to the 1992 Form 10-K)\n(30) Employment and Consultation Agreement between A. H. Belo Corporation and James P. Sheehan (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1993)\n10.4 (1) Credit Agreement dated October 27, 1988, between the Company and The First National Bank of Chicago as Managing Agent (incorporated by reference to Exhibit 10.4(1) to the 1992 Form 10-K)\nEXHIBIT NUMBER DESCRIPTION ------- ----------- (2) Amendment No. 1 to 1988 Credit Agreement between the Company and The First National Bank of Chicago as Managing Agent dated November 8, 1989 (incorporated by reference to Exhibit 10.5(4) to the 1990 Form 10-K)\n(3) Amendment No. 2 to 1988 Credit Agreement between the Company and The First National Bank of Chicago as Managing Agent dated April 24, 1991 (incorporated by reference to Exhibit 10.5(5) to the 1991 Form 10-K)\n(4) Amendment Agreement dated May 14, 1992, between the Company and The First National Bank of Chicago as Managing Agent (incorporated by reference to Exhibit 10.4(4) to the 1992 Form 10-K)\n(5) Amendment Agreement dated November 6, 1992, between the Company and The First National Bank of Chicago as Managing Agent (incorporated by reference to Exhibit 10.4(5) to the 1992 Form 10-K)\n(6) Loan Agreement dated October 1, 1985, between City of Arlington Industrial Development Corporation and Dallas-Fort Worth Suburban Newspapers, Inc. (incorporated by reference to Exhibit 10.5(2) to the 1991 Form 10-K)\n(7) Letter of Credit and Reimbursement Agreement dated as of June 2, 1987, between Dallas-Fort Worth Suburban Newspapers, Inc. and The Sanwa Bank, Limited, Dallas Agency covering $6,400,000 City of Arlington Industrial Development Corporation Industrial Development Revenue Bonds (incorporated by reference to Exhibit 10.5(3) to the 1991 Form 10-K)\n(8) Amendment and Waiver Agreement dated as of December 30, 1992, by and between the Company and The Sanwa Bank, Limited, Dallas Agency (incorporated by reference to Exhibit 10.4(8) to the 1992 Form 10-K)\n10.5 Joint Venture Agreement dated August 1, 1989, between the Company and Universal Press Syndicate (incorporated by reference to Exhibit 10.6 to the 1989 Form 10-K)\n21 Subsidiaries of the Company\n23 Consent of Ernst & Young\nExecutive Compensation Plans and Arrangements:\nManagement Security Plan--1991 Form 10-K, Exhibit 10.4(1)\nStock Option Plan--1991 Form 10-K, Exhibit 10.4(2)\nAmendment to Stock Option Plan by the Compensation Committee of the Board of Directors--1991 Form 10-K, Exhibit 10.4(3)\nAmendments to Stock Option Plan--1991 Form 10-K, Exhibit 10.4(4)\nAmendment to Stock Option Plan dated December 19, 1986--1991 Form 10-K, Exhibit 10.4(5)\nAmendment to Stock Option Plan dated February 22, 1989--filed herewith as Exhibit 10.3(6)\n1986 Long-Term Incentive Plan--1991 Form 10-K, Exhibit 10.4(7)\nAmendment No. 1 to 1986 Long-Term Incentive Plan dated October 22, 1986-- 1991 Form 10-K, Exhibit 10.4(8)\nAmendment No. 2 to 1986 Long-Term Incentive Plan effective January 1, 1987-- 1992 Form 10-K, Exhibit 10.3(9)\nAmendment No. 3 to 1986 Long-Term Incentive Plan dated May 4, 1988--filed herewith as Exhibit 10.3(10)\nAmendment No. 4 to 1986 Long-Term Incentive Plan dated May 13, 1988--filed herewith as Exhibit 10.3(11)\nAmendment No. 5 to 1986 Long-Term Incentive Plan dated February 22, 1989 --filed herewith as Exhibit 10.3(12)\nAmendment No. 6 to 1986 Long-Term Incentive Plan dated May 6, 1992--1992 Form 10-K Exhibit 10.3(13)\nThe A. H. Belo Corporation Employee Savings and Investment Plan--1989 Form 10-K, Exhibit 10.4(13)\nFirst Amendment to the A. H. Belo Corporation Employee Savings and Investment Plan, dated January 29, 1992--1992 Form 10-K, Exhibit 10.3(15)\nSecond Amendment to the A. H. Belo Corporation Employee Savings and Investment Plan, dated October 22, 1992--1992 Form 10-K, Exhibit 10.3(16)\nThird Amendment to the A. H. Belo Corporation Employee Savings and Investment Plan--First Quarter 1993 Form 10-Q, Exhibit 10.2\nFourth Amendment to the A. H. Belo Corporation Employee Savings and Investment Plan--Post-Effective Amendment No. 1 to Form S-8, Exhibit 4.14\nFifth Amendment to the A. H. Belo Corporation Employee Savings and Investment Plan--filed herewith as Exhibit 10.3(19)\nThe G. B. Dealey Retirement Pension Plan (as amended and restated effective January 1, 1988)--filed herewith as Exhibit 10.3(20)\nFirst Amendment to the G. B. Dealey Retirement Pension Plan--filed herewith as Exhibit 10.3(21)\nSecond Amendment to the G. B. Dealey Retirement Pension Plan--filed herewith as Exhibit 10.3(22)\nThird Amendment to the G. B. Dealey Retirement Pension Plan--filed herewith as Exhibit 10.3(23)\nFourth Amendment to the G. B. Dealey Retirement Pension Plan--filed herewith as Exhibit 10.3(24)\nFifth Amendment to the G. B. Dealey Retirement Pension Plan--filed herewith as Exhibit 10.3(25)\nA. H. Belo Corporation Supplemental Executive Retirement Plan--filed herewith as Exhibit 10.3(27)\nSummary of A. H. Belo Corporation Executive Compensation Program--1992 Form 10-K, Exhibit 10.3(18)\nEmployment and Consultation Agreement between A. H. Belo Corporation and James P. Sheehan--Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1993, Exhibit 10.1\n(b) Reports on Form 8-K.\nNo reports on Form 8-K were filed during the last quarter of the period covered by this report.\nSIGNATURES\nPursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.\nA. H. BELO CORPORATION\nBy: \/s\/ Robert W. Decherd Robert W. Decherd Chairman of the Board, President & Chief Executive Officer\nDated: March 18, 1994\nPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated:\nREPORT OF INDEPENDENT AUDITORS\nThe Board of Directors and Shareholders A. H. Belo Corporation\nWe have audited the accompanying consolidated balance sheets of A. H. Belo Corporation and subsidiaries as of December 31, 1993 and 1992, and the related consolidated statements of earnings, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1993. Our audit also included the financial statement schedules listed in the Index at Item 14(a). These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.\nWe conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.\nIn our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of A. H. Belo Corporation and subsidiaries at December 31, 1993 and 1992, and the consolidated results of their operations and cash flows for each of the three years in the period ended December 31, 1993, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.\nAs discussed in Note 5 to the consolidated financial statements, effective January 1, 1993, the Company changed its method of accounting for income taxes.\n\/s\/ERNST & YOUNG\nDallas, Texas January 26, 1994, except for Note 12, as to which the date is February 23, 1994.\nCONSOLIDATED STATEMENTS OF EARNINGS A. H. Belo Corporation and Subsidiaries\nSee accompanying Notes to Consolidated Financial Statements.\nCONSOLIDATED BALANCE SHEETS A. H. Belo Corporation and Subsidiaries\nCONSOLIDATED BALANCE SHEETS (CONTINUED) A. H. Belo Corporation and Subsidiaries\nSee accompanying Notes to Consolidated Financial Statements.\nCONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY A. H. Belo Corporation and Subsidiaries\nSee accompanying Notes to Consolidated Financial Statements.\nCONSOLIDATED STATEMENTS OF CASH FLOWS A. H. Belo Corporation and Subsidiaries\nSee accompanying Notes to Consolidated Financial Statements.\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS A. H. Belo Corporation and Subsidiaries\nNOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES\nA) PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of A. H. Belo Corporation (the \"Company\" or \"Belo\") and its wholly-owned subsidiaries after the elimination of all significant intercompany accounts and transactions.\nCertain amounts for the prior years have been reclassified to conform to the current year presentation.\nB) STATEMENT OF CASH FLOWS For the purpose of the Consolidated Statements of Cash Flows, the Company considers all highly liquid debt instruments purchased with a remaining maturity of three months or less to be temporary cash investments. Such temporary cash investments are carried at cost which approximates fair value.\nC) INVENTORIES Inventories, consisting primarily of newsprint, ink and other supplies used in printing newspapers, are stated at the lower of average cost or market value.\nD) PROPERTY, PLANT AND EQUIPMENT Depreciation of property, plant and equipment is provided principally on a straight-line basis over the estimated useful lives of the assets as follows:\nE) INTANGIBLE ASSETS, NET Intangible assets, net includes primarily the excess cost applicable to subsidiaries acquired since 1984 which is being amortized on a straight-line basis over 40 years. The carrying value of intangible assets is periodically reviewed to determine if impairment exists. In 1993, the Company determined that excess cost associated with its suburban newspaper operations was not recoverable (see Note 2).\nAlso included in Intangible assets, net is the intangible asset acquired in 1991 (see Note 3) which is being amortized on a straight- line basis over its currently estimated useful life of 18 years. Accumulated amortization of intangible assets was $112,775,000 and $100,392,000 at December 31, 1993 and 1992, respectively.\nF) EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE Earnings per common and common equivalent share are based on the weighted average number of shares outstanding during the period, including common equivalent shares representing dilutive stock options.\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS A. H. Belo Corporation and Subsidiaries\nNOTE 2: RESTRUCTURING CHARGE\nThe Consolidated Statement of Earnings for 1993 includes a $5,822,000 charge related to Dallas-Fort Worth Suburban Newspapers, Inc. (\"DFWSN\"), that consists primarily of the write-off of goodwill and a reduction in the carrying value of production assets to their fair value. The production assets adjusted include building and improvements and publishing equipment. The charge was recognized in conjunction with the decision to restructure DFWSN upon the determination that the carrying value of these assets was not recoverable. Fair value of production assets was determined principally by market value. The restructuring was substantially completed in January 1994.\nNOTE 3: ACQUISITION\nIn December 1991, the Company acquired substantially all of the operating assets of the Dallas Times Herald newspaper for $55,673,000, after the newspaper's owner, Times Herald Printing Company, ceased publication of the newspaper. The majority of the assets acquired consisted of newspaper presses and other operating equipment, land, buildings and intangible assets. Following the Company's purchase price allocation, $28,717,000 was included in property, plant and equipment and $23,135,000 was included in intangible assets, net.\nNOTE 4: LONG-TERM DEBT\nLong-term debt consists of the following:\nAt the end of 1993, the Company had access to $450,000,000 in revolving credit on which the borrowings were $250,000,000 and $30,000,000 at December 31, 1993 and 1992, respectively. Average interest rates were 3.7 percent and 4.2 percent in 1993 and 1992, respectively. Loans under the revolving credit agreement bear interest at a rate based, at the option of the Company, on the participating bank's prime rate, certificate of deposit rate or LIBOR. The agreement also provides for commitment fees ranging from 1\/8 to 1\/4 percent per annum depending on the amount of unused commitment. Each January 1 and July 1, until expiration of the commitment on July 1, 1998, the commitment is reduced. Available credit as of January 1, 1994 is $418,750,000. No mandatory repayment of amounts outstanding at December 31, 1993, including short-term borrowings classified as long-term, would be required to be made until January 1, 1996.\nThe revolving credit agreement contains certain covenants, including the maintenance of cash flow in relation to both the Company's leverage and its fixed charges, and a limitation on repurchases of the Company's stock. The Company is in compliance with these covenants at December 31, 1993.\nDuring 1993, the Company continued to use various short-term unsecured notes as an additional source of financing. At both December 31, 1993 and 1992, the average interest rate on this debt was 3.7 percent. Due to the Company's intent to renew the short-term notes and its continued ability to refinance this debt on a long-term basis through its revolving credit agreement, $21,000,000 and $66,000,000 of short-term notes outstanding at December 31, 1993 and 1992, respectively, have been classified as long-term.\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS A. H. Belo Corporation and Subsidiaries\nThe 9.45% Unsecured Notes matured on January 15, 1993 and were redeemed using proceeds from the revolving credit agreement. On December 16, 1993, the Company exercised an option to redeem its 8 5\/8% Unsecured Notes due in 1996 at par plus accrued interest, also using proceeds from the revolving credit agreement.\nIn 1993, 1992 and 1991, the Company incurred interest costs of $16,976,000, $24,554,000 and $24,254,000, respectively, of which $1,961,000, $395,000 and $372,000, respectively, were capitalized as components of construction cost.\nAt December 31, 1993, the Company had outstanding letters of credit of $7,509,000 issued in the ordinary course of business.\nDuring 1993, the Company entered into agreements that cap at 6 percent the interest on $75,000,000 of variable rate borrowings. These agreements expire in 1996.\nBecause substantially all of the Company's debt is due under the variable rate revolving credit agreement, no significant differences exist between the carrying value and fair value.\nNOTE 5: INCOME TAXES\nEffective January 1, 1993, the Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 109, \"Accounting for Income Taxes\" changing to the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases 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. As permitted by SFAS No. 109, prior years' financial statements have not been restated to reflect the change. The cumulative effect of adopting SFAS No. 109 as of January 1, 1993 is to increase net earnings by $6,599,000 or 33 cents per share.\nSubsequent to the adoption of SFAS No. 109, the federal income tax rate was increased from 34 percent to 35 percent, retroactive to January 1, 1993. The Company's deferred taxes were adjusted to reflect the new tax rate, resulting in an increase in deferred tax expense of $2,249,000. Deferred tax expense also reflects a decrease of $1,000,000 for the reversal of certain tax accruals as a result of new tax legislation regarding the amortization of intangibles.\nIncome tax expense (benefit) consists of the following:\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS A. H. Belo Corporation and Subsidiaries\nIncome tax provisions for the years ended December 31, 1993, 1992 and 1991 differ from amounts computed by applying the applicable U.S. federal income tax rate as follows:\nDuring 1992, the Company and one of its equity affiliates settled a claim against the United States Navy which resulted in an increase in equity in earnings of an equity affiliate of $1,901,000, on which no taxes were provided by the Company because such undistributed earnings are expected to remain invested in that affiliate.\nDuring December 1991, the Company reached a settlement with the Internal Revenue Service (\"IRS\") resolving all pending audit issues in connection with an IRS examination of the Company's tax returns for 1984 through 1988. The principal issue in the examination was the deductibility of the amortization of value of network affiliation agreements and FCC licenses of four of the Company's television stations acquired in 1984. The settlement resulted in a $6,787,000 increase in net earnings from the reversal of excess income taxes and interest accruals in connection with the IRS examination.\nSignificant components of the Company's deferred tax liabilities and assets as of December 31, 1993, are as follows:\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS A. H. Belo Corporation and Subsidiaries\nThe sources of deferred income taxes and the tax effect of each for years prior to the adoption of SFAS No. 109 are as follows:\nNOTE 6: EMPLOYEE RETIREMENT PLANS\nThe Company sponsors a noncontributory defined benefit pension plan covering substantially all employees. The benefits are based on years of service and the average of the employee's five years of highest annual compensation earned during the most recently completed ten years of employment.\nThe funding policy is to contribute annually to the plan an amount at least equal to the minimum required contribution for a qualified retirement plan, but not in excess of the maximum tax deductible contribution.\nThe following table sets forth the plan's funded status and prepaid pension costs (included in other assets on the Consolidated Balance Sheets) at December 31, 1993 and 1992:\nThe increase in unrecognized net loss is the result of the change in the discount rate from 9 percent to 7.5 percent.\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS A. H. Belo Corporation and Subsidiaries\nThe net periodic pension cost (benefit) includes the following components:\nAssumptions used in the accounting for the defined benefit plan are:\nThe Company sponsors a defined contribution plan that covers substantially all of its employees. Subject to certain dollar limits, employees may contribute a percentage of their salaries to this plan, and the Company will match a portion of the employee's contributions. The Company's contributions totaled $1,895,000, $1,135,000 and $799,000 in 1993, 1992 and 1991, respectively. Contributions were higher in 1993 following a change in the Company's matching percentage from 35 percent to 50 percent.\nThe Company also sponsors unfunded non-qualified retirement and death benefit plans for key employees. The Company had recorded a liability for these plans of $3,994,000 and $2,174,000 at December 31, 1993 and 1992, respectively, most of which is classified as long-term in other liabilities on the Consolidated Balance Sheets. Expense recognized in 1993, 1992 and 1991 was $1,412,000, $908,000 and $405,000, respectively.\nNOTE 7: LONG-TERM INCENTIVE PLAN\nThe Company's current long-term incentive plan has been in place since 1986. There are, however, stock options awarded under a prior plan, which will remain outstanding until they are exercised, canceled or expire. The following table presents the status of the stock options awarded under the prior plan. At December 31, 1993, all of these options were exercisable.\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS A. H. Belo Corporation and Subsidiaries\nAwards under the 1986 long-term incentive plan may be granted to employees in the form of incentive stock options, non-qualified stock options, restricted shares or performance units, the values of which are based on the long-term performance of the Company. In addition, options may be accompanied by stock appreciation rights and limited stock appreciation rights. Rights and limited rights may also be issued without accompanying options. The plan was amended in 1988 to provide for a one-time grant of non-qualified options to purchase 2,500 shares of Series A Common Stock to non-employee directors and to eliminate the previous limit on the number of restricted shares that may be issued. The plan was also amended in 1992 to provide for automatic annual grants through 1997 of non-qualified options to non-employee directors serving after the 1992 Annual Meeting of Shareholders and an additional one-time grant of options to purchase 10,000 shares of Series A Common Stock to those directors subsequently elected. The amendment also increased the number of shares for which awards could be made under the plan.\nThe maximum aggregate number of shares of common stock that may be granted in relation to options, restricted shares and rights, and limited rights issued without accompanying options is 3,600,000 less the number of performance units granted under the plan. The maximum number of performance units that may be granted under the plan is 3,600,000 less the number of options, restricted shares and rights, and limited rights issued without accompanying options granted.\nGrants made under the 1986 long-term incentive plan during 1993, 1992 and 1991 are summarized below:\n1986 LONG-TERM INCENTIVE PLAN\nThe non-qualified options granted under the Company's long-term incentive plan become exercisable in cumulative installments over a period of three years. On December 31, 1993, of the 1,423,192 options outstanding, 821,659 were exercisable. Performance units and shares of Series A Common Stock reserved for grants under the plan were 613,874 and 896,746 at December 31, 1993 and 1992, respectively.\nA provision for the restricted shares is made ratably over the restriction period. Expense recognized under the plan for restricted shares was $3,598,000, $2,723,000 and $1,889,000 in 1993, 1992 and 1991, respectively.\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS A. H. Belo Corporation and Subsidiaries\nNOTE 8: COMMITMENTS AND CONTINGENT LIABILITIES\nThe Company is involved in certain claims and litigation related to its operations. In the opinion of Management, liabilities, if any, arising from these claims and litigation are either covered by insurance or would not have a material adverse effect on the consolidated financial statements of the Company. In 1991, the Company recorded a $4,000,000 accrual for a judgment resulting from an unfavorable verdict in an employment-related lawsuit.\nCommitments for the purchase of first-run broadcast film contract rights totaled approximately $60,635,000 at December 31, 1993.\nAdvance payments on plant and equipment expenditures at December 31, 1993 primarily relate to renovations of existing facilities owned by certain Belo broadcasting stations. Required future payments for capital expenditures are $9,992,000 and $882,000 in 1994 and 1995, respectively.\nIn December 1993, the Company purchased the building in which it had been leasing office space. The building had been constructed by a partnership in which the Company was a limited partner prior to 1992. Lease expense for the building in 1991 was $2,807,000. Total lease expense for property and equipment, including the office space through November 1993, was $5,447,000, $6,130,000 and $5,780,000 in 1993, 1992 and 1991, respectively.\nFuture minimum rental payments for operating lease agreements are as follows:\nNOTE 9: COMMON AND PREFERRED STOCK\nThe Company has two series of common stock authorized, issued and outstanding, Series A and Series B. The shares are identical except that Series B shares are entitled to ten votes per share on all matters submitted to a vote of shareholders, while the Series A shares are entitled to one vote per share. Transferability of the Series B shares is limited to family members and affiliated entities of the holder. Series B shares are convertible at any time on a one-for-one basis into Series A shares.\nEach outstanding share of common stock is accompanied by one preferred share purchase right which entitles shareholders to purchase 1\/100th of a share of Series A Junior Participating Preferred Stock. The rights will not be exercisable until a party either acquires beneficial ownership of 30 percent of the Company's common stock or makes a tender offer for at least 30 percent of its common stock. The rights expire in 1996. If the Company is acquired in a merger or business combination, each right has an initial exercise price of $175 (subject to adjustment) and can be used to purchase the common stock of the surviving company having a market value of twice the exercise price of each right. The number of shares of Series A Junior Participating Preferred Stock reserved for possible conversion of these rights is equivalent to one one-hundredth of the number of shares of common stock issued and outstanding plus the number of shares reserved for grant under the 1986 Long-Term Incentive Plan and Stock Option Plan.\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS A. H. Belo Corporation and Subsidiaries\nNOTE 10: SUPPLEMENTAL CASH FLOW INFORMATION\nNet cash provided by operations reflects cash payments for interest and income taxes as follows:\nNOTE 11: INDUSTRY SEGMENT INFORMATION\nThe Company operates in two industries: newspaper publishing and television broadcasting. Operations in the newspaper publishing industry involve the sale of advertising space in published issues, the sale of newspapers to distributors and individual subscribers and commercial printing. Operations in the broadcast industry involve the sale of air time for advertising and the broadcast of entertainment, news and other programming for both local markets and syndication. Net operating revenues by industry segment include sales to unaffiliated customers and intersegment revenues, which before their elimination, are accounted for on the same basis as revenues from unaffiliated customers.\nSelected segment data is as follows:\n(A) Included in Newspaper publishing earnings from operations in 1993 is a $5,822,000 restructuring charge consisting primarily of the write-off of goodwill and a reduction in the carrying value of production assets related to the restructuring of DFWSN (see Note 2). (B) Included in Broadcasting earnings from operations in 1993 is a $3,349,000 reversal of certain music license fee accruals. (C) Included in Broadcasting earnings from operations in 1991 is a $788,000 provision for early retirement costs, a $1,259,000 write-down of certain broadcast film contract rights and a $4,000,000 accrual for an adverse judgement in an employment-related lawsuit. (D) Included in corporate expenses in 1991 is a $1,500,000 settlement of an antitrust lawsuit as part of the agreement to acquire the Dallas Times Herald assets (see Note 3).\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS A. H. Belo Corporation and Subsidiaries\nNOTE 12: SUBSEQUENT EVENT\nOn February 23, 1994, the Company announced an agreement in principle to purchase the assets of a television broadcast station in New Orleans, Louisiana for $110,000,000. The Company anticipates that the acquisition will be financed using borrowings from its revolving credit agreement. The transaction, which is subject to the signing of a definitive agreement, as well as customary closing conditions, including approval by appropriate government agencies, will be accounted for as a purchase. The Company expects that a definitive agreement will be entered into by early spring and that the transaction will be completed during the third quarter of 1994.\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS A. H. Belo Corporation and Subsidiaries\nNOTE 13: QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)\nFollowing is a summary of the Unaudited Quarterly Results of Operations for 1993 and 1992:\n(A) Amount represents the cumulative effect of adopting SFAS No. 109, \"Accounting for Income Taxes\" (see Note 5). (B) A settlement of a claim against the United States Navy was reached in which the Company and one of its equity affiliates were among the plaintiffs. The Company's portion of the settlement and its equity in earnings of the affiliate increased earnings before income taxes by $4,019,000 and net earnings by $3,235,000 or 16 cents per share. The $4,019,000 gain is included in Other, net on the Consolidated Statements of Earnings. The equity in earnings amounted to $1,901,000, on which no taxes are provided by the Company because such undistributed earnings are expected to remain invested in that affiliate. (C) Belo's income tax provision in the third quarter reflects a $2,249,000 charge representing an adjustment to deferred taxes following an increase in the federal income tax rate from 34 percent to 35 percent (see Note 5). (D) Included in Newspaper publishing earnings from operations for the fourth quarter of 1993 is a $5,822,000 restructuring charge consisting primarily of the write-off of goodwill and a reduction in the carrying value of production assets related to the restructuring of DFWSN (see Note 2). (E) Included in Broadcasting earnings from operations for the fourth quarter of 1993 is a $3,349,000 reversal of certain music license fee accruals. (F) Belo's income tax provision in the fourth quarter of 1992 reflects a $1,101,000 benefit resulting from the favorable resolution of a franchise tax issue.\nMANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS\nThe Management of A. H. Belo Corporation is responsible for the preparation of the Company's consolidated financial statements, as well as for their integrity and objectivity. Those statements are prepared using generally accepted accounting principles, they include amounts that are based on our best estimates and judgments, and we believe they are not misstated due to material fraud or error. Management has also prepared the other information in the Annual Report and is responsible for its accuracy and its consistency with the financial statements.\nManagement maintains a system of internal control that is designed to provide reasonable assurance of the integrity and reliability of the financial statements, the protection of assets from unauthorized use or disposition, and the prevention and detection of fraudulent financial reporting. That system of internal control provides for appropriate division of responsibility, and is documented in written policies and procedures. These policies and procedures are updated as necessary and communicated to those employees having a significant role in the financial reporting process. Management continually monitors the system of internal control for compliance.\nManagement believes that, as of December 31, 1993, the Company's system of internal control is adequate to accomplish the objectives described above. Management recognizes, however, that no system of internal control can ensure the elimination of all errors and irregularities, and it recognizes that the cost of the internal controls should not exceed the value of the benefits derived.\nFinally, Management recognizes its responsibility for fostering a strong ethical climate within the Company according to the highest standards of personal and professional conduct, and this responsibility is delineated in the Company's written statement of business conduct. That statement of business conduct addresses, among other things, the necessity for due diligence and integrity, avoidance of potential conflicts of interest, compliance with all applicable laws and regulations, and the confidentiality of proprietary information.\n\/S\/ Robert W. Decherd Robert W. Decherd Chairman of the Board, President & Chief Executive Officer\n\/S\/ Michael D. Perry Michael D. Perry Senior Vice President & Chief Financial Officer\nSCHEDULE V - PROPERTY, PLANT AND EQUIPMENT A. H. Belo Corporation and Subsidiaries\n(1) Amounts represent allocation of purchase price for assets acquired from the Dallas Times Herald in December 1991. (2) In 1993, retirements and other adjustments includes the reclassification of advance payments related to completion of the expansion of The Dallas Morning News' North Plant production facility, and the reduction of the carrying value of certain assets of DFWSN.\nSCHEDULE VI - ACCUMULATED DEPRECIATION OF PROPERTY, PLANT AND EQUIPMENT A. H. Belo Corporation and Subsidiaries\n(1) In 1993, retirements and other adjustments includes the reduction of the carrying value of certain assets of DFWSN.\nSCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS A. H. Belo Corporation and Subsidiaries\n(1) Uncollectible accounts written off, net of recoveries and other miscellaneous adjustments.\nSCHEDULE X - SUPPLEMENTARY EARNINGS STATEMENT INFORMATION A. H. Belo Corporation and Subsidiaries\nE-1\nE-2\nE-3\nE-4\nE-5\nE-6","section_15":""}
{"filename":"23738_1993.txt","cik":"23738","year":"1993","section_1":"ITEM 1. BUSINESS\nTHE COMPANY AND ITS SUBSIDIARIES\nConsolidated Natural Gas Company is a Delaware corporation organized on July 21, 1942, and a public utility holding company registered under the Public Utility Holding Company Act of 1935. It is engaged solely in the business of owning and holding all of the outstanding equity securities of sixteen directly owned subsidiary companies.\nConsolidated Natural Gas Company and its subsidiaries (\"Consolidated\" or the \"Company\") at December 31, 1993, are listed below. The subsidiary companies are engaged in, and their total operating revenues are derived from, all phases of the natural gas business -- exploration, production, purchasing, gathering, transmission, storage, distribution, and marketing, together with by-product operations (see Note 2 to the Financial Statements, page 57). At December 31, 1993, Consolidated had 7,625 regular employees.\nThe principal cities served at retail by Consolidated's gas distribution subsidiaries (East Ohio Gas, River Gas, West Ohio Gas, Peoples Natural Gas, Virginia Natural Gas and Hope Gas) are: Cleveland, Akron, Youngstown, Canton, Warren, Lima, Ashtabula and Marietta in Ohio; Pittsburgh (a portion), Altoona and Johnstown in Pennsylvania; Norfolk, Newport News, Virginia Beach, Chesapeake, Hampton and Williamsburg in Virginia; and Clarksburg and Parkersburg in West Virginia. At December 31, 1993, Consolidated served at retail approximately 1,777,000 residential, commercial and industrial gas sales customers in Ohio, Pennsylvania, Virginia and West Virginia. With 98 percent of their residential and commercial customers using gas for space heating, variations in weather conditions can materially affect the volume of gas delivered by the distribution subsidiaries of the Company.\nITEM 1. BUSINESS (Continued)\nCNG Transmission is the Company's interstate gas transmission subsidiary. CNG Transmission operates a regional interstate pipeline system serving each of the Company's distribution subsidiaries, and nonaffiliated utility and end-user customers in the Midwest, the Mid-Atlantic states and the Northeast. Regulatory efforts intended to increase competition in the natural gas industry have resulted in significant changes in the operations of CNG Transmission over the past several years. Under the most recent regulatory initiative, Federal Energy Regulatory Commission (\"FERC\") Order 636, interstate pipeline companies, including CNG Transmission, were required to revise customer contracts and service tariffs and further \"unbundle\" their services into separate sales, transportation and storage transactions, with such services offered and priced separately. CNG Transmission implemented FERC Order 636 on October 1, 1993 (see \"FERC Order 636,\" page 39) and thereby abandoned its traditional \"bundled\" sales service. CNG Transmission now offers a number of gas transportation and storage service options, along with related services, to a broad range of customers. Because a substantial part of its gas deliveries is ultimately used by space-heating customers, variations in weather conditions can materially affect the volume of gas transported and stored by CNG Transmission.\nThrough its wholly owned subsidiary, CNG Iroquois, Inc., CNG Transmission holds a 9.4 percent general partnership interest in the Iroquois Gas Transmission System, L.P., a Delaware limited partnership formed to construct, own and operate an interstate natural gas pipeline extending from the Canada-United States border near Iroquois, Ontario, to Long Island, New York. The Iroquois pipeline transports Canadian gas to utility and power generation customers in metropolitan New York and New England.\nCNG Producing is Consolidated's exploration and production subsidiary. Gas and oil exploration and production activities are conducted by this subsidiary primarily in the Gulf of Mexico, the southern and western United States, the Appalachian region, and in Canada. In addition, CNG Producing participates in coalbed methane projects throughout the United States.\nCNG Energy develops new business opportunities for the Company in energy-re- lated markets. It invests in and develops independent power producer projects and conducts a gas liquids business.\nCNG Gas Services (formerly CNG Trading Company) is Consolidated's unregulated gas marketing subsidiary. CNG Gas Services markets a portion of Company-owned production and, during 1993, began offering the equivalent of the \"bundled\" services previously provided by CNG Transmission. CNG Gas Services offers an array of gas sales, transportation, storage and other services that can be arranged separately or in various combinations to meet the individual needs of customers in the post-Order 636 environment.\nCNG Storage was formed to engage in providing natural gas storage facilities and a wide range of storage-related services to affiliates and other customers, including the sale or lease of base gas, and the sale, lease or brokerage of gas storage capacity obtained from third parties.\nConsolidated LNG was organized to import and regasify liquefied natural gas (\"LNG\") for sale to CNG Transmission. However, Consolidated LNG has ended its involvement in LNG operations and is currently recovering its undepreciated investment in LNG-related facilities, plus carrying charges and taxes, through a FERC approved amortization surcharge.\nCNG Research administers the Company's proprietary research activities. Amounts spent on research activities in the calendar years 1991 through 1993 by all of the subsidiary companies were not material.\nCNG Coal owns Consolidated's coal reserves and a related plant site. The Company's recoverable raw coal reserves are approximately 615 million tons, as estimated by John T. Boyd Company, Mining and Geological Engineers. Most of these coal reserves are located in Greene County, Pennsylvania, principally in the Sewickley and Pittsburgh coal seams. The Company has various options under review with respect to these properties.\nITEM 1. BUSINESS (Continued)\nService Company is a subsidiary service company, authorized by the Securities and Exchange Commission (\"SEC\") under the Public Utility Holding Company Act of 1935 (\"PUHCA\"). It advises and assists the other subsidiary companies on administrative and technical matters and manages centralized activities and facilities for their benefit. It also provides services to the Parent Company.\nCNG Financial was formed to engage in certain financing transactions, but has not yet engaged in any such transactions.\nGOVERNMENTAL REGULATION\nThe Company and its subsidiaries are subject to regulation by the SEC pursuant to the PUHCA.\nCNG Transmission and Consolidated LNG are \"natural-gas companies\" subject to the Natural Gas Act of 1938, as amended. Their sales in interstate commerce for resale and interstate transportation and storage activities are regulated under such Act and are made in accordance with gas tariffs and service agreements on file with the FERC. The distribution subsidiaries of the Company are subject to regulation by the respective utility commissions in the states within which they operate.\nCertain subsidiaries are subject to various provisions of the five statutes which are referred to as the National Energy Act of 1978. One of these statutes, the Natural Gas Policy Act of 1978 (\"NGPA\"), established maximum lawful wellhead prices for various categories of natural gas and provided for decontrol of certain natural gas prices at various times. However, the Decontrol Act of 1989 effected the total decontrol of natural gas wellhead prices on January 1, 1993. Another statute, the National Energy Conservation Policy Act, requires utilities to offer home energy audits and other assistance to residential customers.\nThe Natural Gas Pipeline Safety Act of 1968 (which, among other things, author- izes the establishment and enforcement of federal pipeline safety standards) subjects the interstate pipeline of CNG Transmission to the safety jurisdiction of the Department of Transportation. Intrastate facilities remain within the safety jurisdiction of the state regulatory agencies, presuming compliance by such agencies with certain prerequisites contained in such Act.\nConsolidated is subject to the provisions of various federal laws dealing with the protection of the environment. In addition, the subsidiary companies are subject to the environmental laws and regulations of state and local governmental authorities in the areas within which the subsidiaries have operations or facilities. Reference is made to \"Environmental Matters\" on page 42, and to Notes 15 and 16 to the Financial Statements, for additional information on environmental-related matters. (See \"LEGAL PROCEEDINGS,\" page 25.)\nCAPITAL EXPENDITURES\nConsolidated's current capital budget for 1994 is estimated at $439.6 million, a 28 percent increase over the $342.6 million spent in 1993. The 1994 budget reflects increased projected expenditures for all of the Company's major business components.\nExpenditures for the exploration and production operations are estimated to be $153.0 million in 1994, up from $110.7 million in 1993. The higher amount in 1994 includes funds for development of the \"Popeye\" deep-water project in the Gulf of Mexico, and provides for an increased level of exploratory drilling. Distribution operations spending in 1994 is expected to be $141.8 million, compared with $115.4 million in 1993. The increased level of spending will allow for continued growth, as well as improvements in the gas distribution system and related facilities. Although the multi-year expansion program of the transmission operations is substantially complete, the Company continues to make\nITEM 1. BUSINESS (Continued)\nenhancements to its pipeline network to better serve customers. Transmission expenditures in 1994 are budgeted at $124.4 million, up from $113.4 million spent in 1993. The 1994 capital budget also includes $17.9 million in connection with CNG Energy's investment in the Lakewood cogeneration project in New Jersey.\nCNG Transmission and certain of the Company's distribution subsidiaries are subject to the Federal Clean Air Act and the Federal Clean Air Act Amendments of 1990 (\"1990 amendments\") which added significantly to the existing requirements established by the Federal Clean Air Act. These subsidiaries operate compressor stations that are covered by the new nitrogen oxide emission standard established as a result of the 1990 amendments. The Company will have until May 31, 1995, to comply with the emission standard. The Company expects that compliance will require significant capital expenditures to modify the compressor engines along the Company's pipeline system. However, the actual cost of compliance will be dependent upon the requirements imposed by the environmental agencies of the states in which the compressor stations are located. Based on the Company's preliminary estimates and analyses, approximately $46 million of capital expenditures may be required over the next two years. The actual amounts required to comply with the 1990 amendments are expected to be recoverable through future regulatory proceedings.\nConsolidated's capital budget will be reviewed during the year in light of market conditions and is subject to revision. (See \"Capital Spending,\" page 44.)\nCOMPETITIVE CONDITIONS\nVarious regulatory and market trends have combined to increase competition for Consolidated in recent years, and for the gas industry in general. The factors affecting the Company include regulatory efforts, such as the FERC's various initiatives to increase competition in the industry; the overall availability of gas nationwide; competition from local producers and other sellers and brokers of gas for the retail and wholesale markets; competition with existing and proposed pipelines, and projects to import gas from Canada and other foreign countries; and competition with other energy forms, such as electricity, fuel oil and coal.\nRESTRUCTURING OF INTERSTATE PIPELINE INDUSTRY\nDuring 1993, the final portion of the FERC's plan to restructure the interstate natural gas pipeline industry was set in motion as pipeline companies began implementing the provisions of FERC Order 636. Similar to previous FERC actions to enable more direct access to gas supplies and open access to pipeline transportation systems, Order 636 has significantly increased competition in the natural gas industry. Order 636 required interstate pipelines, including CNG Transmission, to \"unbundle\" their services into separate sales, transportation and storage services and to offer and price such services separately. In the restructured marketplace, local gas utilities and large-volume end-users, including former pipeline sales customers, now bear all the responsibilities and risks for arranging the procurement of their gas supplies and contracting with pipelines to transport purchases. Other significant changes required by Order 636 included a basic change in the way rates are designed. Under the new rate design, return on equity and related income taxes are recovered as part of a fixed monthly charge. Previously, these costs were recovered through usage or commodity rates. As the result of Order 636, each pipeline company was required to revise its customer contracts and service tariffs. The Order allows pipelines to recover 100 percent of all prudently incurred costs resulting from the transition to the new rules. CNG Transmission implemented FERC Order 636 on October 1, 1993 (see \"FERC Order 636,\" page 39) and thereby abandoned its traditional \"bundled\" sales service. CNG Transmission now offers a number of gas transportation and storage service options, along with related services, to a broad range of customers.\nITEM 1. BUSINESS (Continued)\nThe restructuring of the interstate natural gas pipeline industry has also affected the distribution subsidiaries. Industrial and large commercial gas users now purchase a large portion of their gas supplies directly from producers, from marketers, or on the spot market. The distribution subsidiaries have, for the most part, however, been able to retain these customers by providing transportation service for such supplies. The most significant effect on local distribution companies of Order 636 has been on their gas supply procurement and storage practices. Since bundled pipeline sales service is no longer available, these companies now bear all the responsibilities and risks for arranging the acquisition, delivery and storage of their own gas supplies. As a result of previous FERC initiatives, Consolidated's distribution subsidiaries have been managing a part of their own gas supplies for the last several years. Therefore, the transition to the more competitive environment under Order 636 did not have a significant impact on their operations. Additionally, as a result of Order 636, storage facilities owned and operated by the Company's distribution and transmission operations as well as storage capacity acquired will be even more important factors in gas supply management.\nAlso, as a result of the restructuring, gas producers throughout the industry, including CNG Producing, now face a more diverse and active market with purchasers seeking to balance the advantage of lower-cost spot market supplies with the security of higher-priced, longer-term contracts.\nDISTRIBUTION\nConsolidated's distribution subsidiaries generally operate in long-established service areas and have extensive facilities already in place. Growth in the Company's traditional service areas in Ohio, Pennsylvania and West Virginia is limited in that natural gas is already the fuel of choice for heating and for most significant industrial applications. These areas have experienced minimal population growth in the past, and almost all customers have become more energy efficient, resulting in lower gas usage per customer. In addition, the economies of these areas, which were formerly based mainly on heavy industry, have diversified with increased emphasis on high technology and service oriented firms.\nHowever, opportunities for growth in the Company's distribution operations are expected to continue at Virginia Natural Gas. This subsidiary offers the potential for future growth through its expanding service territory and the prospect of conversion of space-heating customers and commercial and industrial applications to gas. The completion in 1992 of the intrastate pipeline in Virginia has provided Virginia Natural Gas and its customers with new gas supply sources through access to Consolidated's transmission system and storage facilities, and has afforded additional opportunities for growth in both gas sales and transportation, especially in the power generation markets.\nThe Clean Air Act may also provide opportunities for increased throughput in the Company's distribution markets. Consolidated is promoting the use of natural gas as a means for industrial customers and electric generators to reduce emissions. The Clean Air Act and the more recent Energy Policy Act of 1992 contain a number of provisions relating to the use of alternative fuel vehicles. Consolidated is participating in various programs to demonstrate the advantages and environmental benefits of natural gas powered vehicles.\nThe Company's distribution markets continue to be competitive. As the gas industry has restructured and government regulations have changed, a marketplace has evolved with new and traditional competitors -- the usual oil and electric companies, other gas companies, local producers seeking to gain direct access to the Company's customers, and gas brokers and dealers seeking to supplant supplies with spot market gas. Natural gas faces price competition with other energy forms, and certain of the distribution companies' industrial customers have the ability to switch to fuel oil or coal if desired. Local distribution companies operate in what are essentially dual markets -- a traditional utility market, where a utility has an obligation to provide service and offers a \"bundled\" package of services to all\nITEM 1. BUSINESS (Continued)\ncustomers; and a \"contract\" market, where obligations are defined by contract terms and large customers can elect individually or in various combinations whatever gas supplies, storage and\/or transportation services they require. Consolidated has responded to this competitive environment by offering an expanded range of services to its customers. The Company's distribution subsidiaries now routinely provide a variety of firm and interruptible services, including gas transportation, storage, supply pooling and balancing, and brokering, to industrial and commercial customers.\nTRANSMISSION\nCNG Transmission operates a regional interstate pipeline system with the principal pipeline and storage facilities located in Ohio, Pennsylvania, West Virginia and New York. Regulatory efforts intended to increase competition in the natural gas industry have resulted in significant changes in the operations of CNG Transmission over the past several years. Beginning with open access transportation and culminating with the significant service restructuring required by FERC Order 636, the role of the Company's transmission operations has changed from primarily that of a merchant, or wholesaler, of gas to one that provides a wide range of services. Although CNG Transmission no longer provides its traditional bundled sales service, it continues to offer gas transportation, storage and related services to its affiliates, as well as to utilities and end-users in the Northeast, Mid-Atlantic and Mid-West regions of the country.\nThe changing regulatory policies have provided CNG Transmission and other pipeline companies with unique opportunities for expansion. CNG Transmission has directed its expansion efforts toward potential high-volume, weather- sensitive markets and areas with growing power generation needs. This expansion has occurred in many directions, with particular emphasis on Northeast and East Coast markets. CNG Transmission's large underground storage capacity and the location of its pipeline system as a link between the country's major gas pipelines and large markets on the East Coast have been key factors in the success of these expansion efforts.\nCNG Transmission competes with domestic as well as Canadian pipeline companies and gas marketers seeking to provide or arrange transportation, storage and other services for customers. Also, certain end users have the ability to switch to fuel oil or coal if desired. Although competition is based primarily on price, the range of services that can be provided to customers is also an important factor. The combination of capacity rights held on certain longline pipelines, a large storage capability and the availability of numerous receipt and delivery points along its own pipeline system, enables CNG Transmission to tailor its services to meet the individual needs of customers.\nOn October 1, 1993, CNG Transmission implemented Order 636 in accordance with the terms of a comprehensive settlement reached with customers and others (see \"FERC Order 636,\" page 39). CNG Transmission's former wholesale sales customers now have the responsibility and risk inherent in contracting for their own gas supplies. However, since customers have greater access to the Company's pipeline and storage capacity, both increased gas transportation and storage service are expected to help offset the impact of lower gas sales. Consolidated continues to provide the equivalent of bundled services through its unregulated marketing subsidiary, CNG Gas Services. This company offers a range of gas sales, transportation, storage and other service options that can be arranged separately or in various combinations to meet the individual needs of customers.\nEXPLORATION AND PRODUCTION\nConsolidated's exploration and production operations are conducted by CNG Producing in several of the major gas and oil producing basins in the United States, both onshore and offshore. In this highly competitive business, Consolidated competes with a large number of companies ranging in size from large international oil companies with extensive financial resources to small, cash flow-driven independent producers.\nITEM 1. BUSINESS (Continued)\nCNG Producing faces significant competition in the bidding for federal offshore leases and in obtaining leases and drilling rights for onshore properties. Since CNG Producing is the operator of a number of properties, it also faces competition in securing drilling equipment and supplies for exploration and development. From the production perspective, the marketing of gas and oil is also highly competitive with price being the most significant factor. When the economics warrant, Consolidated attempts to sell its gas production under long- term contracts to customers such as electric power generators and others that require a secure source of supply. These arrangements generally command a premium over spot market prices. Further, the implementation by pipeline companies of the FERC's Order 636 could impact the deliverability of gas produced due to increased competition for limited downstream pipeline transportation capacity. In response to the unbundling of sales services previously offered by pipelines, CNG Producing and CNG Gas Services have taken actions to expand and diversify the Company's customer base. These subsidiaries continue to develop new marketing strategies and contracts to address customer needs for intermediate and long-term gas supplies as well as other services in the post-Order 636 era.\nThe exploration for and production of gas and oil is subject to various federal and state laws and regulations which may, among other things, limit well drilling activity and volumes produced. Changes in these laws and regulations can impact Consolidated's exploration and production operations.\nGAS SUPPLY\nGENERAL INFORMATION\nConsolidated's gas supply is obtained from various sources including: purchases from major and independent producers in the Southwest and Midwest regions; purchases from local producers in the Appalachian area; purchases from gas marketers; purchases on the spot market; production from Company-owned wells in the Appalachian area, the Southwest, and the Midwest; and withdrawals from the Company's underground storage fields.\nRegulatory actions, economic factors, and changes in customers and their preferences over the past several years have reshaped the Company's gas sales markets. A significant number of industrial customers and some commercial customers now purchase a large portion of their gas supplies from producers, marketers, or on the spot market, and contract with the Company's transmission and distribution subsidiaries for transportation and other services. Since these customers are less reliant on the distribution subsidiaries for sales service, the volume of gas that these subsidiaries must obtain to meet sales requirements has been reduced. In addition, the implementation of FERC Order 636 by CNG Transmission in effect removed that subsidiary from its merchant role thereby eliminating its need to purchase gas for resale. The former merchant service contracted for by wholesale customers was converted to transportation and storage services in 1993. Since CNG Transmission no longer provides traditional sales service, its former sales customers, including the Company's distribution subsidiaries, now have the responsibility and risk for obtaining their own gas supplies.\nConsolidated's available gas supply in 1993 was again in a surplus position -- where available supplies exceed sales requirements. Considering the Company's large storage capacity, the volumes obtainable under its gas purchase contracts, Company-owned gas reserves, and assuming the future availability of spot market gas, the Company believes that supplies will be available to meet requirements for several years. Gas supply statistics for the past five years are on page 13.\nITEM 1. BUSINESS (Continued)\nGAS PURCHASED\nPurchased gas volumes were 485.2 billion cubic feet in 1993, representing 75 percent of the Company's total 1993 gas supply of 648.2 billion cubic feet. Spot market gas purchases were 392.2 billion cubic feet, or about 61 percent of the total 1993 supply. Volumes purchased under contracts with producers, primarily in the Appalachian area, totaled 79.4 billion cubic feet, or 12 percent of the 1993 supply. Purchases from pipeline companies were 13.6 billion cubic feet in 1993, or 2 percent of the 1993 supply.\nIn response to the regulatory and market changes over the past several years, the Company has been converting its long-term gas purchase contracts with interstate pipelines to firm transport contracts. As a result of these contract conversions, gas volumes purchased from the pipeline companies have declined and have been replaced, in large part, with contracts directly with producers and lower-cost spot market gas. As pipelines implemented FERC Order 636 in 1993, the Company's remaining long-term purchase contracts with these companies were converted to firm transportation.\nWhile spot market gas supplies have historically been obtained at lower prices, the availability of spot market gas supplies to distribution companies can be severely impacted by sudden swings in supply and demand. The distribution subsidiaries now must weigh the benefits of generally lower-cost spot market purchases with the security of longer-term contract arrangements. To ensure a secure supply in the post-Order 636 market, the Company's distribution subsidiaries anticipate purchasing a larger portion of their gas supplies directly from producers on a firm basis. Although the volume of gas obtained on the spot market by the distribution subsidiaries is expected to decline, spot market gas will continue to be an important part of the Company's supply mix, particularly for CNG Gas Services.\nGas purchased from producers and on the spot market is delivered to the subsidiaries using their firm transport capacity on interstate pipelines. At December 31, 1993, the subsidiaries had 425 billion cubic feet of firm transport capacity on upstream pipelines, yielding deliveries of up to 1,174 million cubic feet a day. These upstream pipelines include Tennessee Gas Pipeline Company, Panhandle Eastern Pipe Line Company, Texas Eastern Transmission Corporation, ANR Pipeline Company, Texas Gas Transmission Corporation, Transcontinental Gas Pipe Line Corporation and Columbia Gas Transmission Corporation.\nGAS STORAGE\nConsolidated's vast underground storage complex plays an important part in balancing gas supply with sales demand and is essential to servicing the Company's large volume of space heating business. The Company operates 26 underground gas storage fields located in Ohio, Pennsylvania, West Virginia and New York. The Company owns 21 of these storage fields and has joint-ownership with other companies in 5 of the fields. The total designed capacity of the storage fields is approximately 885 billion cubic feet. The Company's share of the total capacity is about 669 billion cubic feet. About one-half of the total capacity is base gas which remains in the reservoirs at all times to provide the primary pressure which enables the balance of the gas to be withdrawn as needed.\nCNG Transmission operates 710 billion cubic feet of the total storage capacity and owns 503 billion cubic feet of the Company's capacity. CNG Transmission utilizes a large portion of its turnable capacity to provide approximately 252 billion cubic feet of gas storage service for others. This service is provided to pipelines and utilities whose primary service areas are along the East Coast. CNG Transmission also provides storage service to affiliates, end-users and to many of its former wholesale gas sales customers.\nITEM 1. BUSINESS (Continued)\nTwo of the Company's distribution subsidiaries, East Ohio Gas and Peoples Natural Gas, own and operate the remaining 166 billion cubic feet of storage capacity. In addition to owning their own storage, these companies, as well as most of the Company's other subsidiaries have ready access to a part of the storage capacity operated by CNG Transmission. Certain distribution subsidiaries also have capacity available in storage fields owned by others. In the post-Order 636 environment, available storage capacity will be an important element in the effective management of both gas supply and pipeline transport capacity.\nConsolidated controls other acreage in the Appalachian area suitable for the development of additional storage facilities which would enable further expansion of capacity to meet possible future storage needs.\nGAS AND OIL PRODUCING ACTIVITIES\nOver the past several years, Consolidated's exploration and production operations have been affected by the generally adverse conditions in the industry. The effects of persistent warm weather, the lingering gas oversupply situation, and low gas and oil wellhead prices have all contributed to a difficult operating environment. Also during this time, the level of capital spending for exploration and development activities was reduced as a greater proportion of capital resources was devoted to the Company's pipeline expansion projects. As a result of these conditions, Consolidated reduced its exploration and production activities. During 1992, natural gas market conditions improved as spot market prices rebounded after falling to a low of about $1.00 per thousand cubic feet in February 1992. The improving conditions continued in 1993 as gas prices firmed generally above $2.00. Conditions in oil markets, however, worsened during 1993.\nConsolidated's gas wellhead prices in 1993 averaged $2.24 a thousand cubic feet, up from $2.05 in 1992. Gas wellhead prices were strong throughout most of 1993 and were above 1992 levels for most of the year. Consolidated's average gas wellhead prices are generally higher, and less volatile than industry spot prices since its average price reflects a mix of longer-term contracts. However, due to market-sensitive contracts, Consolidated's prices generally follow industry trends. Consolidated's average oil wellhead price in 1993 was $15.66 per barrel, down from $18.15 in 1992. Oil prices were weak through most of the year and fell sharply near year-end, reflecting the trend in world prices.\nThe Company's total gas production in 1993 was 129.5 billion cubic feet, up from 128.0 billion cubic feet produced in 1992. Oil production was 3.9 million barrels, down 13 percent from 4.5 million barrels in 1992. Although gas production was up slightly in 1993, it was limited somewhat due to reduced deliverability at certain properties and the sale of selected properties in the Appalachian area. The lower oil production in 1993 was attributable primarily to normal production declines at older properties.\nIn light of the difficult industry conditions of the past few years, Consolidated has restructured its exploration and production operations and refocused its efforts into selected geographic areas. These efforts are currently directed to moderate- and low-risk prospects, principally in the Gulf of Mexico.\nThe Company has also taken steps to address the recent declines in short-term deliverability. During 1993, the Company completed a series of well workovers and a compression project that had been postponed in prior years due to the low level of gas prices. While these efforts have helped restore short-term deliverability, any significant increases will be dependent primarily on future exploratory successes.\nITEM 1. BUSINESS (Continued)\nDuring 1993, Consolidated participated in the drilling of 65 gross wells (22 net), compared with 106 gross wells (68 net) drilled in 1992. The following table sets forth 1993 drilling activity by region: _______________________________________________________________________________ Gross Wells Drilled Exploratory Development _______________________________________________________________________________\nOnshore (Southwest and West). . . . . . . 7 32 Gulf of Mexico . . . . . . . . . . . 15 7 Canada . . . . . . . . . . . . . . - 4 __ __ Total. . . . . . . . . . . . . . 22 43 == == _______________________________________________________________________________\nOf the total 65 wells in which the Company participated during 1993, 46 were successful, a 71 percent success rate. Of the 22 exploratory wells drilled, 6 were successful.\nAlthough Consolidated's drilling program was reduced in 1993, it resulted in a number of successful completions. An exploratory well drilled at South Marsh Island Block 154 in the Gulf of Mexico resulted in a natural gas and oil discovery. Consolidated is the operator of this property and owns a 50 percent working interest. The South Marsh Island 154 discovery was brought onto production in just seven months by using a refitted production platform from one of the Company's depleted fields. Another significant success in the Gulf in 1993 was at the West Cameron Block 76 field. After doubling the Company's interest in the field to 40 percent in 1992, a new development well resulted in the largest single addition to Consolidated's reserves in 1993. Other successes offshore included wells drilled at Vermilion Block 255 and at West Cameron Block 293.\nA large part of the Company's development drilling in 1993 occurred at the Sand Dunes field located in the New Mexico portion of the Permian Basin. Consolidated participated in the drilling of 26 development wells in this area and has added approximately 900 barrels of oil a day to the Company's production. Consolidated's working interest in these wells averaged about 26 percent. Development drilling is expected to continue in this field during 1994.\nAlso during 1994, development will continue at \"Popeye,\" a deep-water natural gas discovery in the Green Canyon area of the Gulf of Mexico. Consolidated entered into an agreement in 1992 with Shell Offshore, Inc., under which the Company acquired half of Shell's 75 percent interest in this property. In return, Consolidated will pay some $60 million for development of the field. Other participants in the joint venture are Mobil Oil Exploration and Producing Southeast and BP Exploration Inc. Participation in the Popeye project is providing Consolidated access to a new technology and the experience necessary to better evaluate future deep-water opportunities.\nDespite difficult industry conditions, Consolidated remains committed to its exploration and production operations. The Company plans to increase its exploration and production spending by 38 percent in 1994 to $153.0 million. The anticipated expenditures include funds for the development of Popeye and provide for an increased level of exploratory drilling.\nITEM 1. BUSINESS (Continued)\nConsolidated did not participate in drilling activity in the Appalachian Basin during 1993, and there is no drilling planned for this area in 1994. In the past, gas from this area commanded a higher price because of its location in proximity to major gas markets. However, as a result of industry changes and revised rate structures, pipeline companies can transport gas to these markets at low commodity rates that negate somewhat the location premium associated with these reserves. The Company expects to continue production from these properties and plans to maintain its strong acreage position in the Appalachian Basin. Drilling activity can be resumed with very short lead times if market and economic conditions warrant. Selected Appalachian properties were sold during 1993, but the acreage and reserves were not material.\nTotal Company-owned proved gas reserves at year-end were 960 billion cubic feet, down from 998 billion cubic feet at the end of 1992. Proved oil reserves were 27.9 million barrels, compared with 29.5 million barrels in 1992. Because of the low level of drilling activity, new reserves added during 1993 were not sufficient to replace the volumes of gas produced during the year. (See \"Company-Owned Reserves,\" page 22.)\nConsolidated was the successful bidder on nine leases offered in the federal government's Gulf of Mexico lease sales in 1993, acquiring five blocks off Louisiana and four blocks off Texas. At year-end 1993, Consolidated held 2.6 million net acres of exploration and production properties, down from 2.7 million at year-end 1992. The Company's lease holdings include about 1.8 million net acres in the Appalachian area, 386,000 in the offshore Gulf of Mexico, and 495,700 in the inland areas of the Southwest, Gulf Coast and West.\nThe Company will continue to review its property inventory during 1994, and sales of selected properties are possible depending on economic conditions. Included in the properties which may be sold is Consolidated's 21 percent interest in heavy oil properties in Alberta, Canada. Proved reserves associated with the Canadian properties approximated 1.1 billion cubic feet of gas and 5.7 million barrels of oil at December 31, 1993. On an energy- equivalent basis, these reserves represent about 3 percent of Consolidated's total proved reserves at that date.\nGAS SALES AND TRANSPORTATION\nTotal gas sales in 1993 were 604 billion cubic feet, up 35 percent from the 449 billion cubic feet sold in 1992. Transportation volumes were 587 billion cubic feet in 1993, a 4 percent decrease from the 613 billion cubic feet transported in 1992. (Five-year statistics are on page 13.)\nGAS SALES CUSTOMERS\nAt December 31, 1993, the Company's distribution subsidiaries served almost 1.7 million residential customers, over 118,000 commercial customers and more than 1,800 industrial customers in Ohio, Pennsylvania, Virginia and West Virginia. _______________________________________________________________________________ Residential Customers Total and Commercial Industrial Wholesale Nonregulated _______________________________________________________________________________ December 31, 1993 1,777,320 1,774,922 1,851 31 516 1992 1,759,428 1,757,139 1,838 32 419 1991 1,738,098 1,735,803 1,849 31 415 1990 1,718,016 1,715,824 1,787 32 373 1989 1,543,845 1,541,680 1,750 36 379 _______________________________________________________________________________\nITEM 1. BUSINESS (Continued)\nRESIDENTIAL AND COMMERCIAL SALES\nSales of gas to residential customers in 1993 were 212 billion cubic feet, up 4 billion cubic feet from 1992, while sales to commercial customers were 73 billion cubic feet, virtually unchanged compared with 1992. Residential gas sales volumes increased as slightly colder weather in 1993 resulted in higher gas usage by space-heating customers. The weather in the Company's retail service areas in 1993 was 2 percent colder than in 1992 but still warmer than normal. Also contributing to the increase was the net addition of about 17,800 residential and commercial customers, including about 7,800 at Virginia Natural Gas.\nINDUSTRIAL SALES\nIndustrial sales in 1993 were 12 billion cubic feet, about the same as in 1992. Due to both availability and price, many of the Company's industrial customers now buy gas directly from producers, from marketers, or on the spot market, and contract with the subsidiary companies for transportation service. The total gas deliveries (sales and transportation) to industrial customers was 128 billion cubic feet in 1993, compared with 127 billion cubic feet in 1992.\nWHOLESALE SALES\nTotal wholesale sales were 81 billion cubic feet in 1993, up from 21 billion cubic feet in 1992. The increase in sales volumes was due to the sale by CNG Transmission of approximately 58 billion cubic feet of gas from storage inventory in anticipation of the transition to restructured services under FERC Order 636. These sales, which were made primarily to customers outside the Company's traditional Northern Market area at reduced prices under alternative FERC-approved tariff schedules, increased available capacity to provide future storage service and reduced certain transition costs under Order 636.\nNONREGULATED SALES\nNonregulated gas sales in 1993 were 226 billion cubic feet, up from 134 billion cubic feet in 1992. Sales of Company-produced gas to nonaffiliates was 88 billion cubic feet, compared with 109 billion cubic feet in 1992. Gas sales by CNG Gas Services were 100 billion cubic feet in 1993, its first year of operations. Volumes related to gas brokering activity were 38 billion cubic feet in 1993, up from 25 billion cubic feet in 1992.\nGAS TRANSPORTATION\nTotal transportation volumes in 1993 amounted to 587 billion cubic feet, down from 613 billion cubic feet in 1992. Increased wholesale sales volumes, due largely to CNG Transmission's sales from storage inventory prior to its transition to FERC Order 636, was the principal reason for the lower transportation volumes in 1993. In the fourth quarter of 1993, following CNG Transmission's implementation of Order 636, gas transportation volumes increased due primarily to volumes transported for customers in the Northern Market area and Virginia. Total volumes transported by the distribution subsidiaries for commercial, industrial and off-system customers were up 2 billion cubic feet over 1992.\nITEM 1. BUSINESS (Continued)\nGAS SALES, SUPPLY AND TRANSPORTATION STATISTICS (Excludes affiliated transactions)\nITEM 1. BUSINESS (Continued)\nMARKET EXPANSION\nFor the past several years Consolidated has pursued a broad program designed to expand its interstate pipeline system and extend its marketing territory. Consolidated's principal objective has been to build long-term supply relationships with customers in the growing markets at the perimeter of its system, markets which offer opportunities for growth in throughput due to their increasing demand for energy. Consolidated has concentrated its transmission expansion efforts toward potentially high-volume, weather sensitive markets and areas with growing power generation needs located primarily in the Northeast and along the East Coast. These markets are particularly attractive in that gas space heating is not yet as widely used in these areas as in the Company's traditional service areas of western Pennsylvania, eastern Ohio, West Virginia and upstate New York. Because of its large gas storage capacity and the location of its gridlike pipeline system in close proximity to these markets, Consolidated has an opportunity to be an important gas supplier to utilities with growing space heating markets and for customers seeking an environmentally clean, efficient fuel for electric generation.\nConsolidated is also developing and promoting additional uses for natural gas. These technologies provide opportunities for the use of natural gas in markets that are not sensitive to the weather. The more stringent air quality standards required under the Federal Clean Air Act and the various provisions of the Energy Policy Act of 1992 should help advance the development and use of these and other technologies.\nTRANSMISSION EXPANSION\nDuring 1993, the final phase of the expansion of CNG Transmission's interstate pipeline between Lebanon, Ohio, and its storage field at Leidy, Pennsylvania, was completed. This $240 million project was the primary, and largest, component of the Company's $600 million multi-year transmission expansion program. The new pipeline and additional compressor facilities added to this main line will be used to transport up to 370 million cubic feet of gas a day on behalf of Transcontinental Gas Pipe Line Corporation and customers of ANR Pipeline Company for ultimate delivery to East Coast markets.\nAlso in 1993, CNG Transmission expanded its market area further to the south. On November 1, 1993, CNG Transmission began providing a combination of storage and transportation service to Public Service Company of North Carolina, Inc. Under this 20-year contract, CNG Transmission is providing about 30 million cubic feet of gas a day. Since the Company's pipeline system does not extend into North Carolina, CNG Transmission delivers the gas to Transcontinental Gas Pipe Line Corporation at Nokesville in northern Virginia, and Transcontinental delivers the gas by displacement in North Carolina.\nWith the transmission construction program essentially complete, the Company is now pursuing new growth opportunities available for its expanded pipeline system. In March 1994, Consolidated announced plans to create a new gas market center that will offer service at points along CNG Transmission's pipeline system to utilities, interstate pipelines, large end-users and marketers throughout the Mid-Atlantic and the East Coast. This market center is being developed by CNG Transmission and Texaco's Sabine Pipe Line Company. The hub is expected to begin operating in 1994 offering services such as intra-hub transfers, parking and wheeling, together with a new service designed to reduce the administrative burden associated with buying and selling gas. These services are designed to help minimize transaction costs and give buyers and sellers more options for trading. The CNG\/Sabine Center is expected to further increase throughput and also offer new marketing opportunities for CNG Gas Services.\nITEM 1. BUSINESS (Continued)\nTECHNOLOGY-BASED MARKETS\nDuring 1993, Consolidated continued its involvement with a number of relatively new gas burning technologies. These applications provide opportunities to improve customer efficiency while promoting the use of natural gas in market sectors that are not sensitive to the weather or economic downturn. The future advancement of such technologies also appears promising as business entities strive to comply with provisions of the Federal Clean Air Act. This legislation applies strict anti-pollution standards to factories, fleet and mass transit vehicles, and to electric power plants. The law is likely to increase demand for natural gas, but the extent thereof will depend on how the Act is implemented and enforced. Gas demand could also increase as the result of the Energy Policy Act of 1992. This Act requires and encourages large vehicle fleets to operate on alternative fuels such as natural gas. The Energy Policy Act also created a new class of independent power producers exempt from utility regulation, which could lead to the construction of additional gas- fueled generating facilities.\nWith regard to these market expansion efforts, Consolidated has participated extensively in developing and marketing a technology called \"cofiring,\" in which a small amount of gas is burned along with coal in an electric utility or industrial boiler. Cofiring has resulted in improved boiler efficiency and has reduced certain emissions which are responsible for acid rain. Consolidated is also promoting \"reburn,\" which is a more advanced version of cofiring. Under this technique, natural gas is injected into the upper part of a boiler, creating a fuel-rich zone where nitrogen oxide is transformed into harmless nitrogen.\nConsolidated is also pursuing other technological opportunities, including gas cooling equipment, fuel cell power generation, coal drying processes and the promotion of natural gas powered vehicles (\"NGVs\"). Fleet operators and mass transit authorities are turning to NGVs for both fuel cost efficiencies and as a way to reduce environmental pollution. Despite the environmental benefits of NGVs, it appears unlikely that such vehicles will replace a significant number of gasoline powered vehicles in the near future, given the lack of a nationwide network of refueling facilities and the current cost of retrofitting individual vehicles. However, beginning in 1997, the Clean Air Act could require 22 of the country's most polluted regions to convert a portion of their fleet vehicles to natural gas. Consolidated supplies natural gas to utilities that serve Baltimore, Washington, D.C., and New York, three metropolitan areas directly affected by this provision of the Act.\nITEM 1. BUSINESS (Continued)\nRATE MATTERS (See Note 3 to the Financial Statements, page 57.)\nThe Company's average unit selling price of gas to its customers was $4.33 per thousand cubic feet in 1993, compared with $4.35 in 1992 and $4.29 in 1991. Average sales prices in 1993 were higher for all retail categories and for Company-produced gas. However, CNG Transmission's sales from storage inventory had a significant influence on the overall average unit selling price since such sales were made at lower rates under alternative FERC-approved tariff schedules in anticipation of the implementation of Order 636. The higher average selling price in 1992 compared with 1991 reflects the upward industry trend in gas wellhead prices experienced in 1992.\nThe Company's utility subsidiaries continue to seek general rate increases on a timely basis to recover increased operating costs and to ensure that rates of return are compatible with the cost of raising capital. In addition to general rate increases, subsidiary companies make separate filings with their respective regulatory commissions to reflect changes in the costs of purchased gas.\nThe following is a summary of rate activity during 1993 and to date.\nCNG TRANSMISSION\nIn April 1992, the FERC issued Order 636, a comprehensive set of regulations designed to encourage competition and continue the significant restructuring of the interstate natural gas pipeline industry that the FERC first set in motion with its Order 436. As the result of Order 636, each pipeline company was required to revise its customer contracts and service tariffs. On November 2, 1992, CNG Transmission filed with the FERC a revised service tariff complying with the provisions of the Order. On March 31, 1993 (as amended June 15, 1993), CNG Transmission filed a comprehensive stipulation and agreement (\"Settlement\") which revised substantially the November 2, 1992, filing. On July 16, 1993, the FERC issued an order approving CNG Transmission's amended Settlement, subject to certain modifications, clarifications and justifications. Following a series of Commission orders relating to these matters, CNG Transmission implemented Order 636 in accordance with the terms of the Settlement (Docket No. RS92-14) on October 1, 1993. (See \"FERC Order 636,\" page 39.)\nOn December 30, 1993, CNG Transmission filed a general rate filing with the FERC requesting an annual revenue increase of $106.6 million. CNG Transmission requested an 11.78 percent overall rate of return and a 14.00 percent return on equity. The rate increase request is intended to cover higher operating costs, increased plant investment, and the recovery of $9.2 million in transition costs related to stranded facilities because of Order 636. The increase is expected to become effective, after the suspension period, on July 1, 1994, subject to refund.\nVIRGINIA NATURAL GAS\nOn June 22, 1993, the Virginia State Corporation Commission approved a $10.4 million annual revenue increase for Virginia Natural Gas. The new rates were effective retroactive to September 4, 1992, and reflect an 11.75 percent return on equity. In its April 1992 filing, Virginia Natural Gas had requested a $14.1 million annual increase in revenues and a 12.25 percent return on equity.\nITEM 1. BUSINESS (Continued)\nPEOPLES NATURAL GAS\nOn October 28, 1993, Peoples Natural Gas filed with the Pennsylvania Public Utility Commission for a $28.4 million increase in base rates. In its filing, Peoples Natural Gas requested a 10.00 percent overall rate of return and a 12.25 percent return on equity. The rate increase request is intended to cover higher operating expenses. If approved, the new rates would become effective on August 6, 1994. Peoples Natural Gas also filed to recover, over four years, $20.1 million in estimated transition costs related to FERC Order 636.\nHOPE GAS\nOn October 29, 1993, the Public Service Commission of West Virginia granted Hope Gas an indicated $1.9 million annual revenue increase effective November 1, 1993. The approved rates reflect an 8.78 percent overall rate of return and a 10.20 percent return on equity. In its March 1993 filing, Hope Gas had requested an $8.2 million increase in revenues and an estimated 12.30 percent return on equity. On November 8, 1993, Hope Gas filed a petition for rehearing in the case.\nEAST OHIO GAS\nOn January 18, 1994, East Ohio Gas filed with the Public Utilities Commission of Ohio (\"PUCO\") for a $99.1 million increase in base rates. East Ohio Gas is seeking a 10.95 percent overall rate of return and a 12.50 percent return on equity. The rate increase request is intended to cover higher operating costs and increases in plant investment. The filing also reflects the proposed merger of River Gas into East Ohio Gas and the combining of the operations and service areas of the two subsidiary companies. A decision by the PUCO is expected in October 1994. In addition, East Ohio Gas is negotiating with customers and the PUCO staff as to the future recovery of transition costs to be incurred under FERC Order 636.\nITEM 1. BUSINESS (Concluded)\nEXECUTIVE OFFICERS OF THE COMPANY (Note 1) _______________________________________________________________________________ Name, Age and Business Experience Position (Note 2) During Past Five Years _______________________________________________________________________________\nGeorge A. Davidson, Jr. (55) Mr. Davidson was elected to his present Chairman of the Board and position on May 19, 1987, and has been a Chief Executive Officer, Director since October 1985. and Director\nLester D. Johnson (62) Mr. Johnson was elected to his present Executive Vice President and position on March 1, 1992, and has been Chief Financial Officer, a Director since May 1992. He served as and Director Senior Vice President and Chief Financial Officer from January 1986 to March 1992.\nDavid E. Weatherwax (63) Mr. Weatherwax was elected to his Senior Vice President, present position on January 1, 1993. He Administration served as Senior Vice President, Administration and General Counsel from March 1992 to January 1993 and Senior Vice President and General Counsel from July 1987 to March 1992.\nStephen E. Williams (45) Mr. Williams was elected to his present Senior Vice President and position on January 1, 1993. He served General Counsel as Associate General Counsel from September 1992 to January 1993. From April 1987 to September 1992, he served as General Counsel and Secretary of CNG Transmission.\nDavid J. Dzuricky (42) Mr. Dzuricky was elected to his present Vice President and Treasurer position on August 1, 1993. He served as Vice President and Treasurer of Virginia Natural Gas from July 1992 to August 1993, and as its Vice President, Treasurer and Controller from January 1991 to July 1992, and Vice President, Treasurer, Secretary and Controller from June 1990 to January 1991. From January 1988 to June 1990, he served as Treasurer of CNG Transmission.\nStephen R. McGreevy (43) Mr. McGreevy was elected to his present Vice President, Accounting position on March 1, 1993. He served as and Financial Control Controller from January 1986 to March 1993.\nLaura J. McKeown (35) Ms. McKeown was elected to her present Secretary position on May 16, 1989. She served as Assistant Secretary from August 1987 to May 1989.\nThomas F. Garbe (41) Mr. Garbe was elected to his present Controller position on March 1, 1993. He served as Senior Assistant Controller from May 1991 to March 1993 and Assistant Controller from January 1986 to May 1991. _______________________________________________________________________________\nNotes: (1) The Company has been advised that there are no family relationships between any of the officers listed, and there is no arrangement or understanding between any of them and any other person pursuant to which the individual was elected as an officer. (2) The By-Laws of the Company provide that each officer shall hold office until a successor is chosen and qualified.\nITEM 2.","section_1A":"","section_1B":"","section_2":"ITEM 2. PROPERTIES\nGENERAL INFORMATION ON FACILITIES (Maps are on pages 20 and 21.)\nThe total gross investment of the Company and its subsidiaries in property, plant and equipment was $7.3 billion at December 31, 1993. The largest portion of this investment (62%) is in facilities located in the Appalachian area. Another significant portion (22%) is located in the Gulf of Mexico.\nOf the $7.3 billion investment, $3.3 billion is in production and gathering systems, of which 56 percent is invested in the Gulf of Mexico and the Gulf coast and 29 percent in the Appalachian area. The Company's production subsidiary, CNG Producing, accounts for $2.7 billion of the $3.3 billion investment, and CNG Transmission and the distribution subsidiaries account for the remaining $600 million. In addition to the wells and acreage listed elsewhere in ITEM 2, this investment includes 7,188 miles of gathering lines which are located almost entirely within the Appalachian area.\nThe Company's investment in its gas distribution network includes 28,165 miles of pipe, exclusive of service pipe, the cost of which represents 61% of the $1.5 billion invested in the total function.\nThe Company's storage operation, the largest in the industry, consists of 26 storage fields, 331,848 acres of operated leaseholds, 2,032 storage wells and 828 miles of pipe. The investment in storage properties is $644 million, including $124 million of cushion gas stored.\nOf the $1.5 billion invested in transmission facilities, 69% represents the cost of 7,402 miles of pipe required to move large volumes of gas throughout the Company's operating area.\nThe Company has 111 compressor stations with 452,157 installed compressor horsepower. Some of the stations are used interchangeably for several functions.\nThe Company's investment in its fully integrated natural gas system is considered suitable to do all things necessary to bring gas to the consumer. The Company's properties provided the capacity to meet a record system peak day sendout, including transportation service, of 9.1 Bcf on January 18, 1994. The system peak day sendout in 1993 was 7.9 Bcf on February 24.\nMap of Principal Facilities at December 31, 1993 (GRAPHIC MATERIAL OMITTED)\nMap of Exploration and Production Areas at December 31, 1993 (GRAPHIC MATERIAL OMITTED)\nITEM 2. PROPERTIES (Continued)\nGAS AND OIL PRODUCING ACTIVITIES (See Note 17(A) to the Financial Statements, page 72.)\nProperties and activities subject to cost-of-service rate regulation are shown together with non-cost-of-service properties (those subject to contractual arrangements, and Canadian properties) and activities in the statistical presentations which follow.\nCOMPANY-OWNED RESERVES\nEstimated net quantities of proved gas and oil reserves at December 31, 1991 through 1993, follow:\nCNG Producing, East Ohio Gas, Hope Gas, Peoples Natural Gas and CNG Transmission file Form EIA-23 with the Department of Energy. The reserves reported at December 31, 1992, as well as those which will be reported at December 31, 1993, are not reconcilable with Company-owned reserves because they are calculated on an operated basis and include working interest reserves of all parties.\nQUANTITIES OF GAS AND OIL PRODUCED\nNet quantities (net before royalty) of gas and oil produced during each of the last three years follow: _______________________________________________________________________________ Years Ended December 31, 1993 1992 1991 _______________________________________________________________________________\nGas Production (Bcf) Non-cost-of-service . . . . . . . . . 124 121 126 Cost-of-service . . . . . . . . . . 6 7 7 _____ _____ _____ Total . . . . . . . . . . . . . 130 128 133 ===== ===== =====\nOil Production (000 Bbls) Non-cost-of-service . . . . . . . . . 3,907 4,508 5,246 Cost-of-service . . . . . . . . . . 29 31 33 _____ _____ _____ Total . . . . . . . . . . . . . 3,936 4,539 5,279 ===== ===== ===== _______________________________________________________________________________\nThe average sales price (including transfers to other operations as determined under Financial Accounting Standards Board rules) per Mcf of non-cost-of- service gas produced during the calendar years 1991 through 1993 was $1.96, $2.05 and $2.24, respectively. The respective average sales prices for oil were $19.53, $18.15 and $15.66 per barrel. The average production (lifting) cost per Mcf equivalent of non-cost-of-service gas and oil produced during the years 1991 through 1993 was $.37, $.37 and $.33, respectively.\nITEM 2. PROPERTIES (Continued)\nPRODUCTIVE WELLS\nThe number of productive gas and oil wells in which the subsidiary companies have an interest at December 31, 1993, follow: _______________________________________________________________________________ Gas Wells Oil Wells Gross Net Gross Net _______________________________________________________________________________\nNon-cost-of-service* . . . . . . . . 5,601 4,715 853 407 Cost-of-service . . . . . . . . . . 2,181 1,811 3 3 _____ _____ ___ ___ Total. . . . . . . . . . . . . 7,782 6,526 856 410 ===== ===== === === _______________________________________________________________________________ * Includes 46 gross (12 net) multiple completion gas wells and 5 gross (2 net) multiple completion oil wells.\nACREAGE\nThe following table sets forth the gross and net developed and undeveloped acreage of the subsidiary companies at December 31, 1993: _______________________________________________________________________________ Developed Acreage Undeveloped Acreage Gross Net Gross Net _______________________________________________________________________________\nNon-cost-of-service. . . . 1,621,117 1,227,844 1,309,456 933,323 Cost-of-service . . . . . 440,912 439,179 42,124 37,775 _________ _________ _________ _________ Total. . . . . . . . 2,062,029 1,667,023 1,351,580 971,098 ========= ========= ========= ======== _______________________________________________________________________________\nApproximately 32% of the foregoing non-cost-of-service undeveloped net acreage and 100% of the cost-of-service undeveloped net acreage is located in the Appalachian area.\nNET WELLS DRILLED IN THE CALENDAR YEAR\nThe number of non-cost-of-service net wells completed during each of the last three years follow (there were no cost-of-service wells completed during this three-year period): _______________________________________________________________________________ Exploratory Development Total Productive Dry Productive* Dry Productive Dry _______________________________________________________________________________\nYears Ended December 31, 1993 . . . . . . . 2 6 13 1 15 7 1992 . . . . . . . 1 3 54 10 55 13 1991 . . . . . . . 3 7 39 7 42 14 _______________________________________________________________________________ * Includes Canadian completions: 1993 - 1 well, 1992 - 0 wells and 1991 - 4 wells.\nAs of December 31, 1993, 4 gross (2 net) non-cost-of-service wells were in process of drilling, including wells temporarily suspended. As of December 31, 1993, Consolidated was engaged in waterflood projects in Oklahoma and Texas and an enhanced oil recovery program in Alberta, Canada.\nITEM 2. PROPERTIES (Concluded)\nGAS PURCHASE CONTRACT RESERVES (AT DECEMBER 31, 1993) AND AVAILABILITY OF SUPPLY (CALENDAR YEAR 1994)\nGas purchase reserves under contract with independent producers in the Appalachian area total 960 billion cubic feet at December 31, 1993. In addition, at December 31, 1993, Consolidated had gas supply contracts with various other producers and marketers with contract lengths ranging from a few months to ten years. The volume of gas available to Consolidated under these supply contracts totals 458 billion cubic feet if all volumes are requested. These gas purchase contract reserve and gas supply contract volume amounts are as contained in the February 15, 1994 report of Ralph E. Davis Associates, Inc. Of the total 960 billion cubic feet under contract from Appalachian producers, the volume of gas expected to be purchased in 1994 under such contracts is not estimable as such contracts are generally life-of-the-well arrangements and contain provisions adaptable to changing market conditions. Of the total 458 billion cubic feet available under contract from other producers and marketers, approximately 229 billion cubic feet of gas will be available to Consolidated in 1994, assuming all volumes are requested. During 1993, Consolidated converted its remaining gas purchase contracts with interstate pipeline companies to firm transportation contracts, and no gas purchases from pipeline companies are expected in 1994.\nThe Company anticipates that substantial volumes of gas will be available for purchase during 1994 on the spot market. Due to the nature of spot market transactions, the volumes of such gas available to Consolidated in 1994 cannot be reasonably estimated. However, for the calendar year 1994, Consolidated expects its distribution subsidiaries to have approximately 409 billion cubic feet of firm transport capacity available on upstream pipelines and 57 billion cubic feet of storage capacity available to meet their customer requirements.\nThe volumes expected to be available from Company-owned wells in 1994 amount to 139 billion cubic feet of gas and 4,124 thousand barrels of oil. Included in these amounts are 133 billion cubic feet of gas and 4,095 thousand barrels of oil expected to be available from the Company's non-cost-of-service properties. The foregoing volumes are based on the Company's current production estimates of proved gas and oil reserves. Actual production may differ from these amounts due to a number of factors, including changing market conditions and the acquisition or sale of reserves.\nITEM 3.","section_3":"ITEM 3. LEGAL PROCEEDINGS\nAs previously reported, in June 1993, CNG Transmission received a Notice of Violation from the Pennsylvania Department of Environmental Resources (\"DER\") alleging violations of the Pennsylvania Clean Streams Law and three Earth Disturbance Permits issued thereunder. CNG Transmission was assessed a penalty of $405,450 by the DER, which was paid in December 1993. CNG Transmission is seeking recovery of a substantial portion of the penalty paid in this matter from third party contractors under contractual indemnification provisions.\nReference is made to \"Environmental Matters,\" page 42, and to Notes 15 and 16 to the Financial Statements, page 70, for additional environmental-related information.\nReference is made to \"Rate Matters,\" page 16, for descriptions of certain regulatory proceedings.\nITEM 4.","section_4":"ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS\nNot applicable\nPART II\nITEM 5.","section_5":"ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS\nThis information is included in Note 17(C) to the Financial Statements, page 77, and reference is made thereto.\nITEM 6.","section_6":"ITEM 6. SELECTED FINANCIAL DATA\nITEM 7.","section_7":"ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS\nRESULTS OF OPERATIONS\nNET INCOME\nNet income in 1993 was $206 million, a 6 percent increase over the $195 million earned in 1992. On a per share basis, 1993 net income was $2.22 compared with $2.19 in 1992. The earnings per share amounts reported for 1993 and 1992 reflect the sale of 4.6 million shares of common stock in September 1992. Net income in 1991 was $169 million, or $1.94 a share.\nColder weather, higher prices for natural gas production, increased gas deliveries resulting from pipeline expansion projects, higher by-product revenues and reduced interest expense were major factors for the earnings improvement in 1993. While weather in Consolidated's retail service areas was colder than in 1992, it was still warmer than normal for the fourth consecutive year. Normal weather represents a measure of temperature experienced over a 30- year period. Normal weather in 1993 would have added about $.06 a share to the $2.22 a share reported.\nEarnings in both 1993 and 1992 included the positive impact of deferred tax benefits. In 1993, deferred tax benefits of $17.4 million, or $.19 a share, resulting from the mandatory adoption of Statement of Financial Accounting Standards (SFAS) No. 109 are reported as a separate component of net income as the cumulative effect of the accounting change. By contrast, deferred tax benefits recognized in 1992 under the previously applicable accounting standard reduced income tax expense in that year by $13.0 million, or $.15 a share.\nThe positive factors in 1993 were offset in part, however, by higher income taxes due to the increase in the federal corporate income tax rate from 34 percent to 35 percent enacted in August 1993. The effects of this rate change included an $11.4 million, or $.12 a share, adjustment to previously recorded deferred tax balances and a $2.7 million, or $.03 a share, increase in current taxes to reflect the new tax law retroactive to January 1, 1993.\nColder weather compared with 1991, the continued expansion of the Company's transmission operations, increased gas storage service revenues, and higher wellhead prices for gas were major factors for the earnings improvement in 1992 compared with 1991. Although weather in Consolidated's retail service areas was colder than in 1991, the weather was warmer than normal. If weather in the retail service areas had been normal in 1992, earnings would have been $.16 a share higher than the $2.19 reported. Gas wellhead prices fell sharply early in 1992, but recovered and strengthened as gas demand increased due to cold spring weather and concerns over possible supply shortages following Hurricane Andrew. The increase in average gas wellhead prices for the year was offset to a large extent by lower gas and oil production and lower average oil wellhead prices. The net income comparison of the two years was also affected by the recognition in 1991 of interest revenues related to the settlement of federal income tax issues from prior years.\nIn 1991, warm weather depressed the level of earnings throughout all three of Consolidated's major business components. If weather in Consolidated's retail service areas had been normal in 1991, earnings would have been $.33 a share higher than the $1.94 reported for that year. Reduced gas demand, declining gas field prices and the curtailment of gas production resulted in sharply lower exploration and production earnings. Higher other income, including interest revenues related to the settlement of federal income tax issues from prior years, was also a significant factor contributing to earnings in 1991.\nITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)\nINCOME FROM OPERATIONS\nOperating income for Consolidated's business components for the last three years is shown in the following table. Operating income is presented on an after-tax basis consistent with the Statement of Income where income taxes are classified as an operating expense.\nEffective January 1, 1993, Consolidated's CNG Trading Company subsidiary was renamed CNG Gas Services Corporation. In addition to continuing its predecessor's role of marketing a portion of Company-owned production, CNG Gas Services arranges gas supplies, transportation, storage and related services for customers. The demand for these services was created by Federal Energy Regulatory Commission (FERC) Order 636, which has restructured the natural gas marketplace. As a result of this new role, amounts pertaining to the operations of CNG Gas Services are included in the caption \"Other\" in the following table, as well as in the other tables presented in this discussion and analysis. Amounts applicable to CNG Trading for 1992 and 1991 remain in the exploration and production component.\n______________________________________________________________________________ OPERATING INCOME 1993 1992 1991 ______________________________________________________________________________ (In Millions) Distribution . . . . . . . . . . . $122.5 $130.0 $110.7 Transmission . . . . . . . . . . . 98.0 84.0 79.9 Exploration and production . . . . . . 35.3 50.7 37.6 Other* . . . . . . . . . . . . . .3 8.7 1.1 Intercompany eliminations and adjustments . 1.3 .2 .8 ______ ______ ______ Total . . . . . . . . . . . . $257.4 $273.6 $230.1 ====== ====== ====== ______________________________________________________________________________ * Includes CNG Gas Services, CNG Energy, Consolidated System LNG, CNG Research, CNG Coal and Parent companies.\nDue to the regulated nature of the distribution and transmission components of Consolidated's business, operating results can be affected by regulatory delays when price increases are sought through general rate filings to recover certain higher costs of operation. Weather is also an important factor since a major portion of the gas sold or transported by the distribution and transmission operations is ultimately used for space heating.\nDISTRIBUTION\n\"Distribution\" represents the results of Consolidated's six retail gas distribution subsidiaries, including their minor gas and oil production activities. These subsidiaries are subject to price regulation by their respective state utility commissions.\nOperating income for the gas distribution operations in 1993 was down $7.5 million, or 6 percent, from 1992. Higher costs of operations and the increase during 1993 in the federal corporate income tax rate more than offset the impact of slightly colder weather and a minor increase in throughput in 1993. Overall, weather in Consolidated's retail service areas was 2 percent colder than in 1992, but 1 percent warmer than normal. The colder weather, the net addition of about 17,800 residential and commercial gas sales customers and the full year impact of general rate increases placed into effect by two subsidiaries in the latter part of 1992 contributed favorably to 1993 results. To help mitigate the effect of rising non-gas operating costs and to enable a return to be earned on new facilities placed in service, Consolidated's two largest distribution subsidiaries, The East Ohio Gas Company and The Peoples Natural Gas Company, have filed for general rate increases. However, resolution of these proceedings is not expected until the latter part of 1994.\nITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)\nOperating income in 1992 increased $19.3 million, or 17 percent, over 1991 due in large part to colder weather in the 1992 period. Overall, weather in Consolidated's retail service areas was 12 percent colder than in 1991, but 3 percent warmer than normal. However, due to the seasonality of their operations, the overall deviation from normal weather in 1992 was not entirely indicative of the weather's financial impact on the distribution operations. Specifically, in the five principal heating months of 1992, weather in Consolidated's retail service areas was 3 percent colder than in 1991 and 8 percent warmer than normal. The net addition of some 21,000 residential and commercial gas sales customers also contributed to the improved operating results. Further, the distribution operations benefited from a full year of general rate increases granted to two subsidiaries during 1991, and the impact of general rate increases placed into effect by two subsidiaries in the latter part of 1992.\nExceptionally warm weather in 1991 had a particularly noticeable impact on gas distribution operations, limiting the level of gas deliveries and holding operating income in that year to a relatively low level. Weather in Consolidated's retail service areas was 14 percent warmer than normal in 1991.\nTRANSMISSION\n\"Transmission\" includes the results of the gas transmission, storage, by- product and certain other activities of CNG Transmission Corporation and the activities of CNG Storage Service Company. Gas and oil production activities of CNG Transmission are included in exploration and production operations. The interstate gas transmission and related operations of CNG Transmission are regulated by the FERC.\nOperating income of the gas transmission operations in 1993 increased $14.0 million, or 17 percent, over 1992. The improvement was due partly to expanded service to customers in the Northeast as a result of the Company's pipeline construction program, increased throughput to affiliated distribution companies, and higher gas storage service and by-product revenues. Colder weather also contributed to the increased operating income in 1993. The operating results of the transmission operations in the year were also favorably affected, but to a lesser extent, by sales of gas from storage inventory and certain other steps taken to facilitate the transition to FERC Order 636.\nOperating income in 1992 was up $4.1 million, or 5 percent, over 1991. The expansion of transportation service to both new customers and existing wholesale customers and end-users on the East Coast, including power generation customers, and increased demand by traditional Northern Market customers were the most significant factors affecting the 1992 results. Colder weather and increased storage service revenues also contributed to the improvement. The increased transportation to utilities and end-users in the Northeast and along the East Coast was the result of the completion of several of the Company's pipeline expansion projects. The impact of these positive factors was partially offset by higher operating costs in 1992.\nThe operating results in 1991 were influenced to a large extent by the implementation of restructured service agreements in connection with the settlement with the FERC of CNG Transmission's 1988 general rate case. The impact of this settlement included a significant increase in storage service revenues resulting from customers' increased access to CNG Transmission's storage facilities and increased gas transportation volumes due to the conversion by some customers from sales service to firm transportation.\nITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)\nEXPLORATION AND PRODUCTION\n\"Exploration and production\" includes the results of CNG Producing Company, the gas and oil production activities of CNG Transmission, and, in 1992 and 1991, the results of CNG Trading Company.\nThe adjustment to deferred income tax balances to reflect the increase in the federal corporate income tax rate had a significant impact on the operating income of Consolidated's exploration and production operations in 1993. Operating income of the exploration and production operations was $35.3 million in 1993, down from $50.7 million in 1992. These amounts are on an after-tax basis consistent with the Statement of Income where income taxes are classified as an operating expense. However, as a result of the implementation of SFAS No. 109 and the increase in the federal tax rate, the comparison of 1993 operating results with 1992 is significantly distorted. Deferred tax benefits resulting from the adoption of SFAS No. 109 in 1993 are included separately as a component of net income below the operating income line as part of the cumulative effect of the accounting change. In addition, operating income in 1993 for the exploration and production operations was reduced by $8.8 million due to the tax rate increase, including the adjustment to existing deferred tax balances required by SFAS No. 109 and the current year effect of applying the new higher rate retroactive to January 1, 1993. By contrast, operating income in 1992 reflected an increase for certain deferred tax benefits that had been recognized under the previous accounting standard. On a pretax basis, operating income of the exploration and production operations was $47.3 million in 1993, up $8.5 million, or 22 percent, compared with $38.8 million in 1992. Positive factors affecting operating results in 1993 included higher wellhead prices for natural gas and slightly higher gas production. Consolidated's gas wellhead prices in 1993 averaged $2.24 per thousand cubic feet, a 9 percent increase from 1992. The positive factors were offset by higher income taxes, lower oil prices and production, and lower margins on the brokering of gas. The average oil wellhead price realized of $15.66 per barrel was 14 percent below 1992 levels.\nOperating income in 1992 rose $13.1 million, an increase of 35 percent over 1991. The impacts of higher gas wellhead prices and reduced operation and maintenance expense were offset somewhat by lower gas and oil production and lower wellhead oil prices. Gas wellhead prices followed industry trends, falling early in the year but recovering and strengthening as the year progressed. Consolidated's gas wellhead prices in 1992 averaged $2.05 per thousand cubic feet, up 5 percent from 1991. The decline in operation and maintenance expense resulted from cost containment programs and, to a lesser extent, the lower gas and oil production levels. Overall, gas production for 1992 was down 4 percent and oil production was down 14 percent.\nThe generally adverse conditions in natural gas markets nationwide -- including excess supply, reduced demand due to the warmer-than-normal weather and the dramatically low level of wellhead prices -- were the primary reasons for the relatively low operating income in 1991. The average gas wellhead price realized was $1.96 per thousand cubic feet in 1991, the lowest level on an annual basis in over 10 years. The shut-in of certain high-deliverability offshore gas production for a portion of the year, and lower oil production and prices also contributed to the low 1991 operating income.\nITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)\nUTILITY GAS SALES AND TRANSPORTATION VOLUMES\nDuring 1993, the final portion of the FERC's plan to restructure the interstate natural gas pipeline industry was set in motion as pipeline companies began implementating the provisions of FERC Order 636. Similar to previous FERC actions to enable more direct access to gas supplies and open access to pipeline transportation systems, Order 636 has significantly increased competition in the natural gas industry. In the restructured marketplace, local gas utilities and other large-volume end-users, including former pipeline sales customers, now bear all the responsibilities and risks for arranging the procurement and delivery of their gas supplies.\nOn October 1, 1993, CNG Transmission implemented Order 636 with the required \"unbundled\" services and new rate structure. Since Consolidated's utility subsidiaries had already been managing a part of their own gas supplies, the transition to the more competitive environment under Order 636 did not have a significant impact on their operations. In addition, Consolidated, through its CNG Gas Services subsidiary, continues to offer the equivalent of bundled services previously provided by CNG Transmission.\nThe gas sales and transportation volumes of the distribution and transmission operations for the last three years are presented in the following table. Since distribution sales largely represent retail sales for space heating, changes in sales volumes from one period to another are primarily a function of the weather. \"Normal weather,\" as the term is used in the gas industry, represents the mean of temperatures experienced, measured in terms of degree days, over a 30-year period. A degree day is a measure of the coldness of the weather based on the extent to which the daily mean temperature falls below 65 degrees Fahrenheit. The 30-year average, which is calculated by a federal agency, is updated approximately every 10 years. For Consolidated, \"normal weather\" is determined using the weighted average of the normal degree days experienced in its retail service territories.\nVariations in weather conditions can also have a significant impact on the throughput of the transmission operations, since a substantial portion of the gas deliveries of these operations is ultimately used by space-heating customers. The distribution and transmission operations provide gas transportation services to a wide range of customers, including commercial and industrial end-users, electric power generators and local utility companies. Therefore, the volume of gas transported can also be affected by changes in economic and market conditions.\n_______________________________________________________________________________ UTILITY GAS SALES AND TRANSPORTATION 1993 1992 1991 _______________________________________________________________________________ (In Billion Cubic Feet)\nDISTRIBUTION OPERATIONS Sales. . . . . . . . . . . . . 297.8 293.6 273.3 Transportation. . . . . . . . . . 145.4 143.5 134.4 _____ _____ _____ Throughput . . . . . . . . . . 443.2 437.1 407.7 ===== ===== ===== TRANSMISSION OPERATIONS Sales. . . . . . . . . . . . . 100.1 42.4 142.3 Transportation. . . . . . . . . . 610.9 596.8 403.7 _____ _____ _____ Throughput* . . . . . . . . . . 711.0 639.2 546.0 ===== ===== =====\n* Includes intercompany activity. _______________________________________________________________________________\nITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)\nDISTRIBUTION\nSales growth in Consolidated's residential service areas in Ohio, Pennsylvania and West Virginia has generally been limited since such areas have experienced minimal population growth, and the vast majority of households in these areas already use natural gas for space heating. Opportunity for growth in the retail sales market is expected to continue at Virginia Natural Gas, Inc., due to customer conversions from other energy sources and the past and potential future expansion of its service territory. Since Consolidated's acquisition of this subsidiary in 1990, it has experienced an annual customer growth rate of about 4 percent, well above the 1 percent rate for Consolidated's other distribution subsidiaries. In 1993, Virginia Natural Gas connected about 7,800 new residential and commercial customers. The completion in 1992 of the 135- mile intrastate pipeline in Virginia has provided Virginia Natural Gas and its customers with new gas supply sources through access to Consolidated's transmission system and storage facilities and has afforded additional opportunities for growth in both gas sales and transportation, especially in the power generation markets. Additional growth in distribution operations may also occur as industrial customers and electric generators turn to natural gas as a means to ensure compliance with the provisions of the Clean Air Act. In this connection, the development of new gas-burning technologies for industry and the wider acceptance of natural gas as a fuel for motor vehicles provide opportunities for increased gas usage in market sectors that are not weather- sensitive.\nGas sales of the distribution subsidiaries were somewhat higher in 1993 due to slightly colder weather while transportation volumes remained relatively unchanged from 1992. The net addition of approximately 17,800 customers in 1993 also contributed to the higher sales volumes. The weather in 1993 was 2 percent colder than in 1992, resulting in higher space-heating sales. Residential gas sales increased 4.2 Bcf to 212.3 Bcf in 1993, and commercial sales volumes were virtually unchanged at 72.7 Bcf. Industrial sales volumes were flat with 1992 at 12.5 Bcf, while transportation volumes for industrial customers were up 1.5 Bcf to 116.0 Bcf. Gas transported for commercial customers was 21.1 Bcf in 1993, up 1.4 Bcf compared with 1992, while transportation to off-system customers declined by 1.0 Bcf to 8.3 Bcf in 1993.\nSignificantly colder weather and increased economic activity were the primary reasons for the increased gas deliveries by the distribution operations in 1992 compared with 1991. The weather, which overall was 12 percent colder than in 1991, resulted in increased gas usage by space-heating customers. Residential gas sales volumes increased 15.8 Bcf in 1992 to 208.1 Bcf, while sales to commercial customers were up 3.2 Bcf to 72.6 Bcf. Sales to industrial customers were 12.5 Bcf, up 1.3 Bcf over 1991, and transportation volumes for these customers increased 4.8 Bcf to 114.5 Bcf. Transportation for commercial customers was also higher in 1992, increasing by 2.5 Bcf.\nTRANSMISSION\nChanging regulatory policies intended to increase competition in the natural gas industry have been the principal factor affecting the transmission operations over the past several years. Beginning with open access transportation and culminating with the significant service restructuring required by FERC Order 636, the role of the Company's transmission operations has changed from that of primarily a merchant, or wholesaler, of gas to one that provides a range of gas transportation, storage, and other related services. The changing regulatory environment has also created a number of opportunities for pipeline companies to expand and serve new markets. The Company has taken advantage of selected market expansion opportunities, concentrating the efforts toward potentially high-volume, weather-sensitive markets and areas with growing power generation needs located primarily in the Northeast and along the East Coast. This expansion takes advantage of Consolidated's network of underground storage facilities and the location and nature of its gridlike pipeline system as a link between the country's major longline gas pipelines and the increasing energy demands of East Coast markets.\nITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)\nCNG Transmission implemented Order 636 effective October 1, 1993 and, as required by the Order, \"unbundled\" its services and revised its customer contracts and service tariffs. Customers now have even greater access to the Company's pipeline and storage capacity, together with a range of options available with respect to gas transportation and storage services. With the implementation of Order 636, CNG Transmission abandoned its traditional sales service which consisted of various elements of gas sales, transportation and storage that were offered and priced as a single bundled service. However, Consolidated continues to provide the equivalent of \"bundled\" services through its unregulated CNG Gas Services subsidiary.\nConsolidated's transmission operations achieved a record level of throughput in 1993. Total transmission throughput volumes were 711.0 billion cubic feet (Bcf), an increase of 71.8 Bcf compared with 639.2 Bcf in 1992. Wholesale gas sales volumes increased 57.7 Bcf in 1993 to 100.1 Bcf. The increase in sales volumes was due to the sale by CNG Transmission of approximately 58 Bcf of gas from storage inventory in anticipation of the transition to restructured services. These sales, which were made primarily to customers outside the traditional Northern Market area at reduced prices under alternative FERC- approved tariff schedules, increased available capacity to provide future storage service and reduced certain transition costs under Order 636. Total gas transportation volumes in 1993 increased 14.1 Bcf to 610.9 Bcf. The increase in transportation volumes occurred in the fourth quarter of 1993 following CNG Transmission's implementation of Order 636 and was due primarily to volumes transported for customers in the Northern Market area and Virginia.\nTotal transmission throughput volumes in 1992 were 639.2 Bcf, an increase of 93.2 Bcf compared with 1991. Market expansion, increased demand in the Northern Market area, and higher deliveries to power generation customers, were the major factors affecting gas sales and transportation volumes in 1992. Wholesale gas sales volumes declined 99.9 Bcf to 42.4 Bcf as utility customers switched from sales to transportation service under the restructured service agreements which resulted from the settlement of CNG Transmission's previous rate filings. The decline in sales volumes also reflects the sale-in-place during 1991 of 13.7 Bcf of gas inventories. Total gas transportation volumes were up 193.1 Bcf over 1991 to 596.8 Bcf. The expansion of service to new and existing customers, colder weather, and renewed demand in the Northern Market were the major factors for the increase.\nGAS AND OIL PRODUCTION AND PRICES\nThe following table sets forth Consolidated's gas and oil production and average wellhead prices for the exploration and production operations for the last three years: _______________________________________________________________________________ PRODUCTION 1993 1992 1991 _______________________________________________________________________________ GAS (BCF) Nonregulated. . . . . . . . . . 123.5 121.3 125.7 Regulated (Cost-of-service). . . . . 6.0 6.7 7.1 _______ _______ _______ Total. . . . . . . . . . . 129.5 128.0 132.8 ======= ======= =======\nOIL (000 BBLS) Nonregulated. . . . . . . . . . 3,906.8 4,507.7 5,245.6 Regulated (Cost-of-service). . . . . 29.1 31.3 33.3 _______ _______ _______ Total. . . . . . . . . . . 3,935.9 4,539.0 5,278.9 ======= ======= =======\nAVERAGE WELLHEAD PRICES (NONREGULATED ONLY) Gas (per Mcf) . . . . . . . . . $ 2.24 $ 2.05 $ 1.96 Oil (per Bbl) . . . . . . . . . $ 15.66 $ 18.15 $ 19.53 _______________________________________________________________________________\nITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)\nAlthough gas production increased slightly in 1993 compared with 1992, reduced deliverability at certain properties and the sale of selected properties in the Appalachian area held production below the level achieved in 1991. The reduced deliverability was due in part to the postponement in past years of workover activity due to the weak prices in gas markets. Gas wellhead prices remained strong in 1993 and were above 1992 levels for most of the year. For the year, Consolidated's average gas wellhead price was up $.19 a thousand cubic feet over 1992. The lower oil production in 1993 was attributable primarily to normal production declines at older properties. Following world oil price trends, Consolidated's average oil price declined in 1993 as prices remained weak through most of the year and fell sharply near year-end.\nGas production in 1992 was down 4 percent and oil production declined 14 percent from 1991. The lower production was due to a combination of factors, including the selective shut-in of wells, particularly early in 1992 when prices were low, the interruption of operations caused by Hurricane Andrew, and reduced deliverability at certain properties. Gas spot market prices for the industry dropped to a low of about $1.00 a thousand cubic feet in February 1992, but strengthened considerably in the second and third quarters of the year due to cold spring weather and concerns over supply shortages following the hurricane. Consolidated's gas wellhead prices in 1992 were up $.09 a thousand cubic feet, while average oil prices declined in 1992, as prices remained lower throughout most of the year reflecting the trend in world oil prices.\nOPERATING REVENUES\nOperating revenues, which include revenues from gas and oil sales, transportation of gas, storage service, brokering activities and by-product operations, are shown below by business component:\n______________________________________________________________________________ OPERATING REVENUES 1993 1992 1991 ______________________________________________________________________________ (In Millions) Distribution. . . . . . . . . $1,773.9 $1,603.1 $1,531.0 Transmission. . . . . . . . . 983.8 642.7 878.9 Exploration and production . . . . 536.4 519.4 502.6 Other . . . . . . . . . . . 357.8* 85.7 77.8 Intercompany eliminations and adjustments . . . . . . . (467.8) (330.0) (383.3) ________ ________ ________ Total. . . . . . . . . . $3,184.1 $2,520.9 $2,607.0 ======== ======== ========\n* Includes $325.7 million of revenues of CNG Gas Services. ______________________________________________________________________________\nTotal operating revenues were up $663.2 million in 1993 with the increase due to higher gas sales revenues. Total gas sales revenues increased $663.5 million due to higher retail sales volumes and rates, the sale of gas from storage inventory, higher gas wellhead prices and production, and the initial year of marketing activities by CNG Gas Services. Other operating revenues declined slightly from 1992. Increased gas transportation and storage service revenues and higher revenues from by-product sales were offset by the impact of lower oil and condensate revenues.\nLower gas sales revenues were the primary reason for the decline in total operating revenues in 1992 compared with 1991. Total gas sales revenues in 1992 were down $131.4 million due primarily to the shift by wholesale customers from sales to transportation service. Revenues from oil production and brokering and from by-product sales were also lower in 1992. Increases in retail sales volumes, gas transportation revenues, gas wellhead prices, gas brokering activity, and storage service revenues only partially offset the impact of these revenue declines.\nITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)\nThe total average unit selling price of gas in 1993 was $4.33 per thousand cubic feet, down slightly from $4.35 in 1992. In 1991, the average unit selling price was $4.29 per thousand cubic feet. Average sales prices in 1993 were higher for all retail categories and for sales of the Company's gas production. However, CNG Transmission's sales from storage inventory had a significant influence on the overall average unit selling price since such sales were made at lower rates under alternative FERC-approved tariff schedules. The higher selling price in 1992 compared with 1991 reflects the upward industry trend in gas wellhead prices experienced in 1992.\nOperating revenues of the gas distribution operations in 1993 increased $170.8 million. Gas sales revenues rose $171.6 million due to both higher sales volumes and rates. Colder weather and an increase in the number of customers served were the principal reasons for the sales volume increase. The full year impact of general rate increases placed into effect in late 1992 by Peoples Natural Gas and Virginia Natural Gas, and an increase which became effective in 1993 for Hope Gas, Inc., contributed approximately $21.8 million to sales revenues in 1993. The recovery in current rates of previously incurred gas cost increases also contributed to the higher revenues in 1993. Other operating revenues declined $.8 million due primarily to lower storage service revenues.\nRevenues of the gas distribution operations rose $72.1 million in 1992 compared with 1991. Gas sales revenues increased $59.0 million as colder weather resulted in higher residential and commercial sales volumes. The general rate increase granted to Hope Gas in 1991 and rate increases placed into effect by Peoples Natural Gas and Virginia Natural Gas in the latter part of 1992 contributed about $8.2 million to sales revenues in 1992. Other operating revenues were up $13.1 million in 1992, primarily as the result of increased transportation revenues due to higher deliveries to industrial and commercial customers and facilities use charges associated with the Virginia intrastate pipeline.\nOperating revenues of the gas transmission operations over the past three years have fluctuated as CNG Transmission moved toward the implementation of FERC Order 636. In 1993, operating revenues were up $341.1 million, a significant portion of which is attributable to higher gas sales revenues. Wholesale gas sales revenues rose $290.0 million due chiefly to billings by CNG Transmission of its October 1, 1993, balance of certain Order 636 transition costs and the sales of approximately 58 Bcf of gas from storage inventory in anticipation of the implementation of Order 636. Gas transportation revenues were up $35.7 million and storage service revenues increased $12.6 million, both reflecting the increased level of services provided customers under Order 636. Revenues from the sale of by-products were also higher in 1993, increasing $4.5 million primarily as the result of higher propane and ethane sales volumes.\nOperating revenues of the gas transmission operations in 1992 and 1991 reflect the impact of the restructured service agreements which resulted from CNG Transmission's 1988 rate case settlement. Wholesale sales revenues were reduced in both years and transportation revenues were higher in 1992 as customers switched from sales to transportation service. The effect on sales revenues, however, does not parallel the change in transportation revenues due to the commodity cost associated with the gas sales volumes. In 1992, operating revenues of the transmission operations were down $236.2 million compared with 1991. Sales revenues declined $304.0 million and transportation revenues rose $54.4 million primarily as a result of the volumetric changes. The comparison of transportation revenues is also affected by a $10.3 million refund reclassification charge related to prior years, which was recorded in 1991 as part of a rate settlement. Storage service revenues in 1992 increased $11.7 million due to the increased access by customers to the Company's storage facilities.\nITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)\nOperating revenues from exploration and production operations increased $17.0 million in 1993. Gas sales revenues rose $43.5 million due to higher prices received, an increase in the volume of gas brokering activity and slightly higher gas production. However, a large portion of this gain was offset by lower oil and condensate revenues. Oil and condensate revenues declined $35.5 million as lower prices and volumes adversely affected revenues from both oil production and brokering activities. Revenues from the sale of oil and condensate production declined $20.8 million, while revenues from oil brokering were down $14.7 million. Other revenues of the exploration and production operations were up $9.0 million in 1993 as the result of increased royalties received due to the higher gas prices and business interruption insurance reimbursements related to Hurricane Andrew.\nExploration and production revenues in 1992 were up $16.8 million compared with 1991. Gas revenues increased $46.9 million due to increased gas brokering activity and higher prices received for both the sale of Company production and volumes brokered. The impact of lower gas production only partially offset these gains. Oil and condensate revenues fell $34.8 million in 1992. Revenues from the sale of oil and condensate production were down $20.0 million due to lower production and wellhead prices, while revenues from the Company's brokered oil program declined $14.8 million due to lower volumes and prices. Hurricane Andrew did not have a significant effect on 1992 operating revenues due to business interruption insurance coverage.\nOPERATING EXPENSES\nOperating expenses, including taxes, increased 30 percent in 1993 to $2.93 billion. Operating expenses in 1992 were $2.25 billion, down 5 percent from $2.38 billion in 1991.\nPurchased gas costs consistently represent the largest expense item for Consolidated. Purchased gas costs were $1,603.0 million in 1993, $990.6 million in 1992 and $1,157.1 million in 1991. These costs are influenced primarily by changes in gas sales requirements, the price and mix of gas supplies, and the timing of recoveries of deferred purchased gas costs. Increased volume requirements, CNG Transmission's billing of its October 1, 1993, balance of unrecovered gas and transportation costs under Order 636 and higher spot market gas prices were the principal reasons for the increased costs in 1993. The sales of approximately 58 Bcf of gas from storage inventory by CNG Transmission and increased recoveries of previously deferred gas costs by the distribution subsidiaries also contributed to the higher level of expense in 1993. Lower volume requirements and the resulting lower recoveries of gas costs previously deferred were the major factors for the decline in overall purchased gas costs in 1992.\n\"Other purchased products\" includes the cost of liquids and by-products purchased for resale and, beginning in 1992, the cost of pipeline capacity not associated with gas purchased. The decrease in these costs in 1993 and 1992 generally reflects the lower volumes of oil purchased and resold in connection with the Company's brokered oil program.\nConsolidated's combined operation expense and maintenance increased $23.5 million, or 4 percent, in 1993 to $685.7 million. Operation expense was up $15.4 million to $598.5 million principally due to increased payroll and benefit expenses and gas and oil production-related costs. Maintenance expense in 1993 was up $8.1 million to $87.2 million largely because of additional work performed with respect to distribution and transmission mains, compressor station maintenance and environmental-related costs. The adoption in 1993 of SFAS No. 106, which requires the accrual of postretirement health care and life insurance costs, did not have a significant impact on operation expense since the vast majority of the increased costs under SFAS No. 106 has been deferred pending recovery in future rates. Reference is made to Note 6 to the consolidated financial statements for additional information regarding this new accounting standard. In 1992, combined operation expense and maintenance\nITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)\nincreased 4 percent to $662.2 million. Operation expense increased $16.4 million to $583.1 million primarily as the result of higher payroll and overhead costs and increased environmental-related costs. These higher costs were partially offset by a decline in production-related expenses due to lower gas and oil production volumes and cost containment efforts. Maintenance increased $6.3 million to $79.1 million in 1992 due chiefly to additional work performed to ensure service reliability of distribution mains.\nThe following table presents the depreciation and amortization expense for Consolidated's business components for the last three years: _______________________________________________________________________________ DEPRECIATION AND AMORTIZATION 1993 1992 1991 _______________________________________________________________________________ (In Millions) Distribution. . . . . . . . . . . $ 65.3 $ 61.0 $ 56.9 Transmission. . . . . . . . . . . 50.4 43.8 39.2 Exploration and production . . . . . . 176.7 180.8 186.3 Other . . . . . . . . . . . . . 2.2 2.2 2.3 ______ ______ ______ Total. . . . . . . . . . . . $294.6 $287.8 $284.7 ====== ====== ====== _______________________________________________________________________________\nDepreciation expense for the distribution operations increased in both 1993 and 1992 due to the higher level of plant investment. These higher amounts reflect, for the most part, depreciation charges for the Virginia intrastate pipeline which was placed in service during 1992. The increased expense in 1993 and 1992 for transmission operations reflects the higher plant investment resulting from the completion of substantially all of its major pipeline expansion projects. Amortization charges of the exploration and production operations decreased in 1993 and 1992 due primarily to lower oil production.\nTaxes, other than income taxes, increased by $11.7 million in 1993 compared with an $8.7 million increase in 1992. These increases were due in large part to higher property taxes.\nIncome taxes for 1993 reflect the implementation of SFAS No. 109, while taxes for 1992 and 1991 were determined under the previous accounting standard. Reference is made to Note 7 to the consolidated financial statements for information regarding the adoption of SFAS No. 109, as well as for information on the effects of the increase in 1993 in the federal corporate income tax rate. \"Income taxes - estimated\" increased $31.3 million in 1993. Additional deferred income taxes recorded in 1993 as a result of the tax rate increase and higher pretax earnings were the primary reasons for the increased tax expense. Certain deferred tax benefits which reduced income tax expense in 1992 under the previous accounting standard were also a significant factor in the comparison. Income taxes in 1992 increased compared with 1991 due to higher pretax earnings and increased state income taxes.\nNEW ACCOUNTING STANDARD\nIn November 1992, the FASB issued Statement of Financial Accounting Standards No. 112, \"Employers' Accounting for Postemployment Benefits.\" This Statement establishes the accounting for certain benefits provided to inactive and former employees prior to retirement. Consolidated will adopt the provisions of this standard in the first quarter of 1994 as required. Based on management's current estimates and assumptions, the adoption of the standard is not expected to have a material effect on Consolidated's financial position, results of operations or cash flows.\nITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)\nLIMITATION ON CAPITALIZED COSTS\nAs indicated in Note 1 to the consolidated financial statements, CNG Producing and CNG Transmission follow the full cost method of accounting for their gas and oil producing activities prescribed by the Securities and Exchange Commission (SEC). Under this method, the total capitalized costs, net of related deferred taxes, are subject to a limitation based on the present value of estimated future net revenues expected to be received from the production of proved reserves. If net capitalized costs exceed this amount at the end of any quarter, a permanent impairment of the assets is required to be charged to expense in that period.\nConsolidated has never been required to recognize such an impairment under the SEC full cost rules. There are a number of factors, including prices, that determine whether or not an impairment is required. Gas wellhead prices remained strong during 1993, and have continued to be firm in the early part of 1994 due in part to higher demand caused by the colder weather. However, since gas wellhead prices are subject to sudden fluctuations, the impairment of these gas and oil properties is a possibility at any quarterly measurement date, unless other factors such as lower production costs or proved reserve additions mitigate the impact of the price decline.\nOTHER INCOME AND INTEREST CHARGES\nTotal other income was $10.5 million in 1993, $4.7 million in 1992 and $26.3 million in 1991. Interest revenues were up $1.5 million in 1993 due primarily to the recognition of interest in connection with certain regulatory programs. Interest revenues in 1992 reflect lower revenues in connection with take-or-pay recoveries by the subsidiaries and the lower interest rates which prevailed during that year. Interest revenues were unusually high in 1991 due primarily to the recognition of $13.9 million of interest income in connection with refunds resulting from the settlement of certain tax matters related to prior years. The changes in \"Other (net)\" in the Statement of Income for 1993 and 1992 reflect the differing levels of income recognized from the Company's external investments. Income realized from the disposition of certain nonregulated assets also contributed to the higher amount in 1991.\nInterest on long-term debt was lower in 1993 and 1992 due to redemptions and repayments of debenture borrowings. During 1993, the Company called $266.2 million of its higher-cost borrowings, while issuing $300 million of lower rate debentures. Other interest expense declined in both 1993 and 1992 due primarily to lower commercial paper discount rates in both years. Reduced interest charges related to refund obligations to customers also contributed to the decrease in 1992. The amount of interest expense capitalized has declined in the past two years reflecting the completion of pipeline expansion projects and reduced interest costs incurred.\nITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)\nFOURTH QUARTER RESULTS\nConsolidated's net income for the fourth quarter of 1993 was $86.1 million compared with $97.1 million earned in the 1992 fourth quarter, a decrease of $11 million. On a per share basis, the 1993 quarter was $.93 compared with $1.05 in 1992. However, the comparison is somewhat distorted due to the inclusion in the 1992 fourth quarter of the favorable impacts of certain deferred tax benefits under the then-applicable income tax accounting standard and the reversal of a reserve related to the Company's abandoned liquefied natural gas facilities. Excluding these items, fourth quarter net income would show an improvement due primarily to increased gas deliveries by the Company's transmission operations and colder weather. The weather in Consolidated's retail service areas was 3 percent colder than in the 1992 fourth quarter. These positive factors offset lower gas and oil wellhead prices experienced in the quarter by the exploration and production operations. Gas wellhead prices were down $.19 per thousand cubic feet compared with 1992 while oil wellhead prices fell $4.01 per barrel. ______________________________________________________________________________ QUARTERS ENDED DECEMBER 31, 1993 1992 ______________________________________________________________________________ (In Millions) Operating revenues . . . . . . . . . . $1,030.2 $ 790.4 Operating expenses . . . . . . . . . . (930.4) (672.8) ________ _______ Operating income . . . . . . . . . . . 99.8 117.6 Other income\/expenses (net) . . . . . . . (13.7) (20.5) ________ _______ Net income . . . . . . . . . . . . . $ 86.1 $ 97.1 ======== ======= Per common share (in dollars). . . . . . . $.93 $1.05 Average shares outstanding (thousands). . . . 92,923 92,473 ______________________________________________________________________________\nFEDERAL AND STATE REGULATORY MATTERS\nFERC ORDER 636\nIn April 1992, the FERC issued Order 636, a comprehensive set of regulations designed to encourage competition and continue the significant restructuring of the interstate natural gas pipeline industry that the FERC first set in motion during 1985 with its Order 436. Under Order 636, interstate pipelines were required to \"unbundle\" their services into separate sales, transportation and storage services and to offer and price such services separately. Order 636 also changed the way in which rates are designed by requiring return on equity and income taxes to be recovered as part of a fixed monthly charge. Under previous rate design, these costs were recovered through usage or commodity rates.\nOrder 636 allows pipelines to recover 100 percent of all prudently incurred costs resulting from the transition to the new rules (transition costs). The FERC has identified four types of transition costs: (1) purchased gas costs that would have been recovered from customers through the purchased gas adjustment provisions of previous tariffs, but which are unrecovered at the termination of \"bundled\" services; (2) gas supply realignment (GSR) costs required to reform or terminate contracts to purchase gas from producers; (3) stranded costs, which are the cost of facilities or transportation arrangements no longer necessary or uneconomic after restructuring; and (4) the costs of installing new facilities that may be required to comply with the new rules.\nCNG Transmission received FERC approval to implement Order 636 effective October 1, 1993, in accordance with the terms of a comprehensive stipulation and agreement (Settlement) reached with customers and others.\nITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)\nOn November 23, 1993, the FERC issued an Order allowing CNG Transmission to begin collecting its unrecovered purchased gas and sales-related transportation costs which were remaining at the October 1, 1993, implementation date. In December 1993, CNG Transmission billed its customers (through a direct bill mechanism) for these costs. The total principal amount to be collected based on this Order was approximately $177.9 million. In accordance with the FERC Order, CNG Transmission can seek recovery through March 1995 of additional Order 636 transition costs incurred that relate to transactions prior to October 1, 1993.\nIn accordance with the Settlement, CNG Transmission will absorb up to $3.5 million of GSR costs. GSR costs, however, were minimized since certain of the Company's distribution subsidiaries agreed to the assignment from CNG Transmission of its Appalachian gas purchase contracts in consideration for favorable cost allocation provisions contained in the Settlement. The distribution subsidiaries should generally be able to pass through to their customers the costs associated with the assigned contracts in recognition of the other benefits received in the Settlement.\nThe full extent of stranded costs for CNG Transmission are unknown at this time. However, CNG Transmission has filed for recovery of $9.2 million of stranded facilities costs in its December 30, 1993, general rate filing. CNG Transmission will incur new facilities costs, including costs for new computer hardware and software. Although a final overall estimate of new facilities costs has not yet been determined, such costs may approach $50 million. Consistent with FERC procedures, the Settlement allows CNG Transmission to file with the FERC for rate increases to recover both stranded costs and new facilities costs. The Settlement also provides CNG Transmission additional rights to defer recognition of certain stranded costs pending rate case review. Parties to the Settlement have also agreed not to challenge certain construction projects that CNG Transmission may determine will assist it in rendering unbundled services.\nAlthough Order 636 applies directly to pipeline companies, it has also affected the way in which gas distribution companies purchase gas supplies and contract for transportation and storage services. The Company's distribution subsidiaries have taken actions designed to adapt to the new environment created by Order 636 and should generally be able to recover transition costs passed through to them by the pipelines. Reference is made to Note 3 to the consolidated financial statements for additional information regarding the effects of Order 636 on the distribution subsidiaries, including the estimated amount of future transition costs.\nOther portions of the Company's operations have also been affected by Order 636. CNG Producing and CNG Gas Services have taken action to expand the Company's customer base in response to the unbundling of sales service previously offered by pipelines. New marketing strategies and contracts are being developed to address customer needs for intermediate and long-term gas supplies as well as other services which will be required in this \"post-Order 636\" era.\nAs a fully integrated gas system with production, transmission, distribution and marketing subsidiaries, the Company believes it is in a position to compete in new markets and to offer a broad range of unbundled gas services. Based on management's current estimates, the operating environment under Order 636 and any uncertainties pertaining to the recovery of transition costs should not have a material adverse effect on the Company's financial position, results of operations or cash flows.\nITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)\nCNG TRANSMISSION\nOn December 30, 1993, CNG Transmission filed a general rate filing with the FERC requesting an annual revenue increase of $106.6 million. The rate increase request is intended to cover higher operating costs, increased plant investment, and the recovery of $9.2 million in transition costs related to stranded facilities because of FERC Order 636. The increase is expected to become effective, after the suspension period, on July 1, 1994, subject to refund.\nSTATE REGULATORY ISSUES\nOn June 22, 1993, the Virginia State Corporation Commission approved a $10.4 million annual increase for Virginia Natural Gas. The new rates were effective retroactive to September 4, 1992. In its April 1992 filing, Virginia Natural Gas had requested a $14.1 million annual increase in revenues.\nOn October 28, 1993, Peoples Natural Gas filed with the Pennsylvania Public Utility Commission for a $28.4 million increase in base rates. The rate increase request is intended to cover higher operating expenses. If approved, the new rates would become effective on August 6, 1994. Peoples Natural Gas also filed to recover, over four years, $20.1 million in estimated transition costs related to FERC Order 636.\nOn October 29, 1993, the Public Service Commission of West Virginia granted Hope Gas an indicated $1.9 million annual revenue increase effective November 1, 1993. In its March 1993 filing, Hope Gas had requested an $8.2 million increase in revenues. On November 8, 1993, Hope Gas filed a petition for rehearing in the case.\nOn January 18, 1994, East Ohio Gas filed with the Public Utilities Commission of Ohio for a $99.1 million increase in base rates. The rate increase request is intended to cover higher operating costs and increases in plant investment. A decision by Ohio regulators is expected in October 1994. In addition, East Ohio is negotiating with customers and the Commission staff as to the future recovery of transition costs to be incurred under Order 636.\nITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)\nENVIRONMENTAL MATTERS\nThe Company and its subsidiaries are subject to various federal, state and local laws and regulations relating to the protection of the environment. These laws and regulations govern both current and future operations and potentially extend to plant sites formerly owned or operated by the Company and its subsidiaries, or their predecessors.\nAs part of their normal business operations, the subsidiaries periodically monitor their properties and facilities and resolve potential environmental matters so as to remain in compliance with the various environmental laws and regulations. The Company also conducts general environmental surveys on a continuing basis at its operating facilities to assure compliance with these laws and regulations. In this regard, voluntary surveys at subsidiary meter sites were conducted to determine the extent of any possible soil contamination due to mercury spillage. These studies, which are continuing, are not in response to any governmental or regulatory directive, order or settlement agreement and have not disclosed any mercury contamination for which the remediation costs would be considered material to Consolidated's financial position, results of operations or cash flows. On August 16, 1990, CNG Transmission entered into a Consent Order and Agreement with the Commonwealth of Pennsylvania Department of Environmental Resources (DER) in which CNG Transmission has agreed with the DER's determination of certain violations of the Pennsylvania Solid Waste Management Act, the Pennsylvania Clean Streams Law and the rules and regulations promulgated thereunder. It is unknown at this time whether civil penalties will be assessed. Pursuant to the Order and Agreement, CNG Transmission is performing certain sampling, testing and analysis, and conducting a program of remediation at some of its Pennsylvania facilities. Total remediation costs in connection with the Order and Agreement are not expected to be material with respect to Consolidated's financial position, results of operations or cash flows. Based on current knowledge, the Company has recognized a gross estimated liability amounting to $19,661,000 at December 31, 1993, for future costs expected to be incurred to remediate or mitigate hazardous substances at mercury sites and at facilities covered by the Order and Agreement. The estimate for this liability was based on current environmental laws and regulations and existing technology.\nInasmuch as certain environmental-related expenditures are expected to be recoverable in future regulatory proceedings, a regulatory asset amounting to $11,378,000 at December 31, 1993, is included in the Consolidated Balance Sheet under the caption \"Deferred charges and other noncurrent assets.\" Also, uncontested claims amounting to $3,566,000 at December 31, 1993, were recognized for environmental-related costs probable of recovery through joint- interest operating agreements.\nThe total charges to operating expenses for environmental-related costs were $3,205,000, $7,646,000, and $9,049,000, respectively, for the years ended December 31, 1991 through 1993. Reference is made to Note 15 to the consolidated financial statements for the components of these expenses. The Company's environmental-related capital expenditures for monitoring or complying with laws and regulations for 1991 through 1993 were not material.\nThe Company has determined that it is associated with 16 former manufactured gas plant sites, five of which are currently owned by the Company. Studies conducted by other utilities at their former manufactured gas plants have indicated that their sites contain coal tar and other potentially harmful materials. None of the 16 former sites with which the Company is associated is under investigation by any state or federal environmental agency, and no investigation or action is currently anticipated. At this time it is not known if, or to what degree, these sites may contain environmental contamination. Therefore, the Company is not able to estimate the cost, if any, that may be required for the possible remediation of these sites.\nITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)\nThe exact nature of environmental issues that the Company may encounter in the future cannot be predicted. Additional environmental liabilities may result in the future as more stringent environmental laws and regulations are implemented and as the Company obtains more specific information about its existing sites and production facilities. At present, no estimate of any such additional liability, or range of liability amounts, can be made.\nCNG Transmission and certain of the Company's distribution subsidiaries are subject to the Federal Clean Air Act and the Federal Clean Air Act Amendments of 1990 (1990 amendments) which added significantly to the existing requirements established by the Federal Clean Air Act. These subsidiaries operate compressor stations that are covered by the new nitrogen oxide emission standard established as a result of the 1990 amendments. The Company will have until May 31, 1995, to comply with the emission standard. The Company expects that compliance will require significant capital expenditures to modify the compressor engines along the Company's pipeline system. However, the actual cost of compliance will be dependent upon the requirements imposed by the environmental agencies of the states in which the compressor stations are located. Based on the Company's preliminary estimates and analyses, approximately $46 million of capital expenditures may be required. Actual capital expenditures required to comply with the 1990 amendments are expected to be recoverable through future regulatory proceedings.\nEFFECTS OF INFLATION\nAlthough inflation rates have been moderate, any change in price levels has an effect on operating results due to the capital intensive and regulated nature of Consolidated's major business components. Consolidated attempts to minimize the effects of inflation through cost control, productivity improvements and regulatory actions where appropriate.\nFor the Company's rate-regulated subsidiaries, increases in operating costs are not generally subject to immediate recovery due to the time lag inherent in the rate-making process. Also, only the historical cost of property, plant and equipment is recoverable in revenues through depreciation. While the rate- making process gives no recognition to the current cost of replacing properties, Consolidated believes, based on past regulatory practices, that it will be allowed to earn a return on the increased cost of its property investment as replacement occurs.\nFor the exploration and production operations, gas and oil prices are based on market supply and demand rather than the level of costs. Therefore, Consolidated's exploration and production operations focus on balancing production and sales levels with operating costs to minimize the effects of inflation.\nITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)\nFINANCIAL CONDITION\nDIVIDEND INCREASE AND COMMON STOCK MATTERS\nIn December 1993, the Board of Directors raised the annual dividend on the common stock to $1.94 a share from $1.92 a share. The new quarterly rate is 48.5 cents a share, compared with 48 cents a share. This marked the 29th consecutive year in which the dividend has been increased. Total dividends paid to common shareholders in 1993 were $178.1 million compared with $168.5 million in 1992 and $163.1 million in 1991.\nDuring 1993, a total of 376,811 original issue shares were acquired by stockholders and employees through various Company-sponsored plans. Stockholders participating in the Company's Dividend Reinvestment Plan purchased a total of 57,750 shares, representing the reinvestment of $2,856,000 of dividends. A total of 303,561 shares were issued to employees under stock- based incentive plans, including 237,957 shares acquired through the exercise of outstanding stock options. In addition, 15,500 new issue shares were purchased by employees through the System's Thrift Plans. During 1993, certain share requirements of the Thrift Plans, as well as the shares required for the Company's Employee Stock Ownership Plan, were satisfied through open market purchases.\nUnder the Company's stock repurchase plan, up to 4 million shares of the outstanding common stock can be repurchased through December 31, 1995. The shares may be purchased in the open market from time-to-time, depending on market conditions. The Company may also acquire shares of its common stock through certain provisions of the 1991 Stock Incentive Plan and the Long-Term Incentive Plan. The shares repurchased or acquired are held as treasury stock and are available for reissuance for general corporate purposes or in connection with various employee benefit plans. No treasury shares were held by the Company at December 31, 1992. During 1993, no open market purchases were made by the Company. The Company acquired 29,212 shares in 1993 through the provisions of its incentive plans at a cost of $1.4 million, or an average price of $48.51 a share. All of these shares were sold before year-end to the System's Thrift Plans.\nCAPITAL SPENDING\nAs shown in the table below, capital expenditures were $342.6 million in 1993, compared with $441.5 million in 1992. _______________________________________________________________________________ CAPITAL EXPENDITURES 1994* 1993 1992 _______________________________________________________________________________ (In Millions) Distribution. . . . . . . . . . . $141.8 $115.4 $114.7 Transmission. . . . . . . . . . . 124.4 113.4 225.3 Exploration and production . . . . . . 153.0 110.7 99.1 Other . . . . . . . . . . . . . 20.4 3.1 2.4 ______ ______ ______ Total. . . . . . . . . . . . $439.6 $342.6 $441.5 ====== ====== ====== * Estimated. _______________________________________________________________________________\nITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)\nThe current capital budget for 1994 is estimated at $439.6 million, a 28 percent increase compared with spending in 1993. The higher level of capital expenditures anticipated for 1994 reflects increased spending for exploration and production operations, including funds for work on the \"Popeye\" deep-water development project in the Gulf of Mexico. Expenditures for the distribution and transmission operations will primarily be for enhancements and improvements in the pipeline network and related facilities, and expected capital expenditures to comply with the 1990 Federal Clean Air Act Amendments. The increase in the \"Other\" category reflects a higher level of expenditures in connection with the Lakewood cogeneration project.\nFunds required for the capital spending program, as well as for other general corporate purposes, are expected to be obtained principally from internal cash generation. Additional funds, if necessary, could be obtained through borrowings under the Company's credit agreement or through the issuance of new debt securities.\nThe following table presents the total gross investment in property, plant and equipment of each of Consolidated's business components at December 31, 1993 and 1992: _______________________________________________________________________________ TOTAL GROSS INVESTMENT IN PROPERTY, PLANT AND EQUIPMENT 1993 1992 _______________________________________________________________________________ (In Millions) Distribution. . . . . . . . . . . . . $2,380.1 $2,281.7 Transmission. . . . . . . . . . . . . 1,916.8 1,812.1 Exploration and production . . . . . . . . 2,983.0 2,929.7 Other . . . . . . . . . . . . . . . 66.1 63.6 ________ ________ Total. . . . . . . . . . . . . . $7,346.0 $7,087.1 ======== ======== _______________________________________________________________________________\nAlthough the Company plans to increase spending in 1994 for its exploration and production operations, it will continue to monitor its investment in these operations in light of changing market conditions. The sale of the Company's remaining interests in gas and oil producing properties in Canada is possible depending on economic conditions. Proved reserves associated with Canadian properties approximated 1.1 Bcf of gas and 5.7 million barrels of oil at December 31, 1993. On an energy-equivalent basis, these reserves represent about 3 percent of Consolidated's total proved reserves at that date.\nCAPITAL RESOURCES AND LIQUIDITY\nBecause of the seasonal nature of the regulated subsidiaries' heating business, a substantial portion of the Company's cash receipts are obtained in the first half of the year. However, cash requirements for capital expenditures, dividends, long-term debt retirement and working capital do not track this pattern of cash receipts. Consequently, additional cash needs are satisfied through the sale of short-term commercial paper notes or by the issuance of long-term debt. As shown in the Statement of Cash Flows, net cash provided by operating activities was $470.9 million, $405.4 million and $497.9 million for the years 1993, 1992 and 1991, respectively. Higher gas sales and transportation revenues in 1993 and refunds made to customers in 1992 amounting to $63 million in connection with the final settlement of a CNG Transmission rate case were the primary factors for the increase in net operating cash flows in 1993 compared with 1992. Federal income tax refunds received in 1991 contributed to that year's operating cash flows.\nITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Concluded)\nDuring 1993, the Company retired $279,650,000 principal amount of its debentures, of which $266,150,000 represents debentures called at the option of the Company. The Company used short-term borrowings and internally-generated funds to redeem an aggregate of $118,150,000 of debentures in May and June of 1993. On August 16, 1993, an additional $148,000,000 of debentures were redeemed. On August 24, 1993, the Company sold $150 million of 5 3\/4% debentures, using the net proceeds from the sale, along with available funds, to repay short-term debt incurred in connection with the August 16 redemption. Also, in December 1993, the Company sold $150 million of 6 5\/8% debentures. The net proceeds from this sale were used to repay short-term borrowings in connection with the May and June redemptions and to finance capital expenditures.\nThe Company has a currently effective shelf registration with the SEC that permits the sale of up to $100 million of debentures. The Company plans to file a new shelf registration in 1994 that would permit the sale of an additional $400 million of debentures.\nAt December 31, 1993, the Company had a $300 million credit agreement with a group of banks. At various times during 1993, the Company utilized borrowings under this agreement primarily to provide temporary financing for capital expenditures. The maximum amount outstanding at any one time during 1993 was $125 million. There were no amounts outstanding under this credit agreement at December 31, 1993 and 1992.\nThe Company's embedded long-term debt cost, excluding current maturities, at year-end 1993 was 7.75 percent, compared with 8.18 percent for 1992 and 8.38 percent for 1991. The long-term debt to capitalization ratio was 34.7 percent at the end of 1993, and 34.3 percent and 38.0 percent at year-end 1992 and 1991, respectively. Under the provisions of the indenture covering the Company's outstanding senior debenture issues, the ratio cannot exceed 60 percent. The Company's senior debentures are rated A1 by Moody's Investors Service, AA- by Standard & Poor's, AA- by Duff and Phelps, and AA by Fitch Investors Service.\nThe Company utilizes short-term borrowings to finance gas inventories and other working capital requirements. Funds from the sale of commercial paper notes were used for these purposes in 1993, of which $455 million was outstanding at year-end. Bank lines of credit amounting to $475 million are available to provide backup if the sale of commercial paper notes is not feasible. In addition to these credit lines, the Company may utilize unused portions of its credit agreement to provide support for commercial paper notes.\nSUMMARY OF FINANCIAL DATA\nThe Company's Summary of Financial Data is on page 26.\nITEM 8.","section_7A":"","section_8":"ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA\nSUPPLEMENTARY DATA\nThis information is included in the Notes to Consolidated Financial Statements and reference is made thereto as follows: Gas and Oil Producing Activities -- Note 17(A), page 72; Quarterly Financial Data -- Note 17(B), page 76.\nFINANCIAL STATEMENTS\nINDEX _______________________________________________________________________________ Page _______________________________________________________________________________\nReport of Independent Accountants. . . . . . . . . . . . 48 Consolidated Statement of Income for the Years 1991 through 1993 . 49 Consolidated Balance Sheet at December 31, 1992 and 1993 . . . . 50 Consolidated Statement of Cash Flows for the Years 1991 through 1993 52 Notes to Consolidated Financial Statements. . . . . . . . . 53\nSchedule V - Property, Plant and Equipment. . . . . . . . . 78 Schedule VI - Accumulated Depreciation, Depletion and Amortization of Property, Plant and Equipment. . . . . . . 82 Schedule VIII - Valuation and Qualifying Accounts . . . . . . Note 2 Schedule IX - Short-term Borrowings . . . . . . . . . . . 86 Schedule X - Supplementary Income Statement Information . . . . 87\nNotes: (1) Schedules I, II, III, IV, VII, XI, XII, XIII, and XIV have been excluded because they are not applicable. (2) Omitted inasmuch as amounts involved are not significant. _______________________________________________________________________________\nITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)\nREPORT OF INDEPENDENT ACCOUNTANTS\nTo the Board of Directors and Stockholders of Consolidated Natural Gas Company\nIn our opinion, the consolidated financial statements listed in the accompanying index on page 47 present fairly, in all material respects, the financial position of Consolidated Natural Gas Company and subsidiaries at December 31, 1993 and 1992, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1993, in conformity with generally accepted accounting principles. 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 of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.\nAs discussed in Note 1 to these consolidated financial statements, the Company adopted Statement of Financial Accounting Standards No. 106, \"Employers' Accounting for Postretirement Benefits Other Than Pensions,\" and Statement of Financial Accounting Standards No. 109, \"Accounting for Income Taxes,\" in 1993.\nPRICE WATERHOUSE\nPrice Waterhouse\n600 Grant Street Pittsburgh, Pennsylvania 15219-9954 February 16, 1994\nITEM 8. CONSOLIDATED NATURAL GAS COMPANY AND SUBSIDIARIES (Cont.) CONSOLIDATED STATEMENT OF INCOME\nITEM 8. CONSOLIDATED NATURAL GAS COMPANY AND SUBSIDIARIES (Cont.) CONSOLIDATED BALANCE SHEET\nITEM 8. (Cont.)\nITEM 8. CONSOLIDATED NATURAL GAS COMPANY AND SUBSIDIARIES (Cont.) CONSOLIDATED STATEMENT OF CASH FLOWS\nITEM 8. CONSOLIDATED NATURAL GAS COMPANY AND SUBSIDIARIES (Cont.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS\n1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Methods of allocating costs to accounting periods by the subsidiary companies subject to federal or state accounting and rate regulation may differ from methods generally applied by nonregulated companies. However, when the accounting allocations prescribed by regulatory authorities are used for ratemaking, the economic effects thereof determine the application of generally accepted accounting principles. Significant accounting policies of Consolidated Natural Gas Company (the Company) and subsidiaries within this framework are summarized in this Note.\nPRINCIPLES OF CONSOLIDATION The Company owns all of the capital stock of its subsidiaries. The consolidated financial statements represent the accounts of the Company and its subsidiaries after the elimination of intercompany transactions.\nThe subsidiary companies follow the equity method of accounting for investments in partnerships and corporate joint ventures when the subsidiary is able to influence the financial and operating policies of the investee. For investments where the subsidiary is not able to influence the business policies of the investee, the cost method is applied.\nREVENUE RECOGNITION Revenues from gas sales and transportation services are recognized in the same period in which the related gas volumes are delivered to customers. The subsidiaries bill and recognize sales revenues from residential and certain commercial and industrial customers on the basis of scheduled meter readings. In addition, revenues are recorded for estimated deliveries of gas to these customers from the meter reading date to the end of the accounting period. For wholesale and other commercial and industrial customers, revenues are based upon actual deliveries of gas to the end of the period.\nUNRECOVERED GAS COSTS Where permitted by regulatory authorities, the subsidiaries defer the difference between certain gas costs incurred, including take-or-pay and transportation costs, and the amount of such costs included in current rates. Amounts deferred are recognized as purchased gas costs in future periods when such costs are recovered through adjusted rates.\nHEDGING AND OTHER ENERGY PRICE MANAGEMENT ACTIVITIES The nonregulated subsidiaries utilize natural gas and crude oil futures contracts to hedge a portion of their transactions against the risk of market price fluctuations. Gains and losses on these contracts are deferred and subsequently recognized in the period the related hedged transaction occurs. Cash flows from hedging transactions are included in the Consolidated Statement of Cash Flows as an operating activity -- the same category as the cash flows from the transaction being hedged.\nThe nonregulated subsidiaries, on occasion, enter into price swap agreements to modify their exposure to natural gas price risk. Under these agreements, the subsidiaries receive payments from, or make payments to, counterparties generally based on the difference between fixed and variable gas prices specified in the contracts. Settlement takes place under the agreements on a monthly basis, and amounts received or paid are recognized as an adjustment to nonregulated gas sales revenues.\nPROPERTY, PLANT AND EQUIPMENT AND DEPRECIATION The property, plant and equipment accounts are stated at the cost incurred or, where required by regulatory authorities, \"original cost.\" Additions and betterments are charged to the property accounts at cost. Upon normal retirement of a plant asset, its cost is charged to accumulated depreciation together with costs of removal less salvage. The costs of maintenance, repairs and replacing minor items are charged principally to expense as incurred.\nITEM 8. CONSOLIDATED NATURAL GAS COMPANY AND SUBSIDIARIES (Cont.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)\nGAS AND OIL PRODUCING ACTIVITIES CNG Producing and CNG Transmission follow the full cost method of accounting for gas and oil producing activities prescribed by the Securities and Exchange Commission (SEC). Under the full cost method, all costs directly associated with property acquisition, exploration, and development activities are capitalized, with the principal limitation that such amounts not exceed the present value of estimated future net revenues to be derived from the production of proved gas and oil reserves.\nThe gas and oil producing activities of the distribution subsidiaries are subject to cost-of-service rate regulation and are exempt from the accounting methods prescribed by the SEC.\nDEPRECIATION AND AMORTIZATION Depreciation and amortization are recorded over the estimated service lives of plant assets by application of the straight-line method or, in the case of gas and oil producing properties, the unit-of-production method.\nUnder the full cost method of accounting, amortization is also accrued on estimated future costs to be incurred in developing proved gas and oil reserves, including estimated dismantlement and abandonment costs net of projected salvage values. However, the costs of investments in unproved properties and major development projects are excluded from amortization until it is determined whether or not proved reserves are attributable to such properties.\nALLOWANCE FOR FUNDS USED DURING CONSTRUCTION The subsidiaries subject to cost-of-service rate regulation capitalize the estimated costs of equity funds and\/or borrowed funds used during the construction of major projects. Under regulatory practices, those companies are permitted to include the costs capitalized in rate base for rate-making purposes when the completed facilities are placed in service. The remaining subsidiaries capitalize interest costs as part of the cost of acquiring certain assets. Generally, interest is capitalized on unproved properties and major construction and development projects on which amortization is not yet being recorded.\nIn determining the allowance for funds used during construction, the following ranges of rates reflect the pretax cost of borrowed funds used to finance construction expenditures: 1991 - 5% to 9 3\/8%; 1992 - 3 7\/8% to 9 1\/4% and 1993 - 3 1\/4% to 8 7\/8%. There were no equity funds capitalized in those years.\nINCOME TAXES The current provision for income taxes represents amounts paid or currently payable. Investment tax credits which were deferred where required by regulatory authorities are being amortized as credits to income over the estimated service lives of the related properties.\nCHANGE IN ACCOUNTING Effective January 1, 1993, the Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 109, \"Accounting for Income Taxes.\" The adoption of SFAS No. 109 changed the Company's method of accounting for income taxes from the deferred method to an asset and liability approach. Under SFAS No. 109, deferred tax liabilities and assets are recognized for the expected future tax consequences attributable to temporary differences between the carrying amounts of assets and liabilities and their tax bases. In addition, such deferred tax asset and liability amounts are adjusted for the effects of enacted changes in tax laws or rates. Under the previous income tax accounting principle, deferred income taxes were generally provided for the tax effects of timing differences between the recognition of revenue and expense for income tax purposes and financial reporting purposes. Once recognized, tax balances were not adjusted for subsequent changes in tax laws or rates.\nITEM 8. CONSOLIDATED NATURAL GAS COMPANY AND SUBSIDIARIES (Cont.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)\nSFAS No. 109 also requires the recognition of additional deferred tax liabilities and assets for timing differences on which deferred tax treatment had been prohibited in the past by regulatory authorities. Regulatory assets and liabilities corresponding to such additional deferred taxes, representing future amounts collectible from or refundable to customers through the rate- making process, may also be recorded.\nThe cumulative effect on years prior to 1993 of applying SFAS No. 109 increased 1993 net income by $17,422,000, or $.19 per share. This cumulative effect adjustment resulted primarily from the reduction in deferred income tax balances associated with the Company's nonregulated activities. The application of SFAS No. 109 had no effect on reported pretax earnings.\nPENSION AND OTHER BENEFIT PROGRAMS PENSION PROGRAM The subsidiaries have qualified noncontributory defined benefit pension plans covering all employees. Benefits payable under the plans are based primarily on each employee's years of service, age and base salary during the five years prior to retirement. Net pension costs are determined by an independent actuary, and the plans are funded on an annual basis to the extent such funding is deductible under federal income tax regulations. Plan assets consist primarily of equity securities, fixed income securities and insurance contracts. The pension program also includes the payment of supplemental pension benefits to certain retirees depending on retirement dates.\nIn accordance with the requirements of Statement of Financial Accounting Standards No. 87, \"Employers' Accounting for Pensions,\" Consolidated has recognized a liability for the unfunded accumulated benefit obligation relating to its supplemental pension benefit plans. An amount equal to the liability, less a required reduction in common stockholders' equity, net of applicable deferred taxes, has also been recognized as an intangible asset. Such amounts recognized are subject to future revision based on both changes in assumptions and changes in the financial status of the supplemental pension benefit plans.\nOTHER POSTRETIREMENT BENEFITS In addition to pension plans, the subsidiaries sponsor defined benefit postretirement plans covering both salaried and hourly employees and certain dependents. The plans provide medical benefits as well as life insurance coverage. These benefits are provided through insurance companies and other providers with the annual cash outlays based on the claim experience of the related plans.\nEmployees who retire from System companies on or after attaining age 55 and having rendered at least 15 years of service, or employees retiring on or after attaining age 65, are eligible to receive benefits under the plans. The plans are both contributory and noncontributory, depending on age, retirement date, the plan elected by the employee, and whether the employee is covered under a collective bargaining agreement. Most of the medical plans contain cost- sharing features such as deductibles and coinsurance. For certain of the contributory medical plans, retiree contributions are adjusted annually.\nCHANGE IN ACCOUNTING As required, Consolidated adopted Statement of Financial Accounting Standards No. 106, \"Employers' Accounting for Postretirement Benefits Other Than Pensions,\" effective January 1, 1993. This standard required a change from the practice of recognizing such costs on a pay-as-you-go basis to an accrual method. Under the standard, the estimated future costs of providing postretirement benefits are recognized as an expense and a corresponding liability during the employees' service periods. For the current contributory postretirement medical plans, the calculations under SFAS No. 106 anticipate future changes in cost-sharing that are included in the written plan.\nITEM 8. CONSOLIDATED NATURAL GAS COMPANY AND SUBSIDIARIES (Cont.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)\nAs permitted by the standard, the Company elected to amortize the accumulated postretirement benefit obligation existing at the date of adoption (transition obligation) over a 20-year period. Prior to 1993, amounts paid for postretirement benefits were recognized as an expense in the period paid.\nFASB STATEMENT NO. 112 In November 1992, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 112, \"Employers' Accounting for Postemployment Benefits.\" This Statement covers benefits such as salary continuation, severance pay and disability-related benefits provided to inactive and former employees prior to retirement. The standard requires the accrual of a liability for the postemployment benefit obligations if certain specified conditions are met. Statement No. 112 is effective for fiscal years beginning after December 15, 1993. Based on management's current estimates and assumptions, the adoption of the standard is not expected to have a material effect on Consolidated's financial position, results of operations or cash flows.\nENVIRONMENTAL EXPENDITURES Environmental-related expenditures associated with current operations are generally expensed as incurred. Expenditures for the assessment and\/or remediation of environmental conditions related to past operations are charged to expense or are deferred pending probable recovery. In this connection, a liability is recognized when the assessment or remediation effort is probable and the future costs are estimable. Estimated future costs for the abandonment and restoration of gas and oil properties are accrued currently through charges to depreciation.\nClaims for recovery of environmental-related costs from insurance carriers and other third parties or through regulatory procedures are recognized separately as assets when future recovery is deemed probable.\nGAINS AND LOSSES ON REACQUISITION OF DEBT Gains and losses (including redemption premiums) on the purchase or redemption of the Company's debentures are generally deferred and then included in income over the original lives of the applicable debenture issues to give recognition to the economic effect of the rate-making process on certain subsidiaries. The portion not deferred is included in income when realized.\nEARNINGS PER SHARE Earnings per share of common stock is computed based on the weighted average number of common shares outstanding during the period. Under the methods prescribed by generally accepted accounting principles, the assumed exercise of outstanding stock options is not considered to have a dilutive effect on earnings per share. Also, the conversion of the Company's outstanding convertible subordinated debentures has not been assumed in determining earnings per share since such conversion would be antidilutive.\nTEMPORARY CASH INVESTMENTS Temporary cash investments consist of short-term, highly liquid investments that are readily convertible to cash and present no significant interest rate risk. Such temporary cash investments are stated at cost, which approximates fair value due to their short maturities. For purposes of the Consolidated Statement of Cash Flows, temporary cash investments are considered to be cash equivalents.\nITEM 8. CONSOLIDATED NATURAL GAS COMPANY AND SUBSIDIARIES (Cont.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)\n2. LINE OF BUSINESS Total operating revenues of the subsidiaries are derived from their operations in all phases of the natural gas business. Operations are conducted principally in the United States with CNG Producing also owning a working interest in a heavy oil program in Alberta, Canada.\nA substantial portion of total operating revenues and related accounts receivable are generated by the Company's distribution and transmission subsidiaries. The distribution subsidiaries sell gas and\/or provide transportation services to residential, commercial and industrial customers in Ohio, Pennsylvania, Virginia and West Virginia. These subsidiaries require deposits from certain customers to obtain utility services. The transmission subsidiary provides gas transportation, storage and related services to affiliates and to utilities and end-users in the Midwest, the Mid-Atlantic states and the Northeast.\n3. RATE MATTERS Certain increases in prices by subsidiaries and other rate-making issues are subject to final modification in regulatory proceedings. The related accumulated provisions pertaining to these matters were $52,115,000 and $17,777,000 at December 31, 1992 and 1993, including interest. These amounts are reported in the Consolidated Balance Sheet under \"Estimated rate contingencies and refunds\" together with $27,271,000 and $39,679,000, respectively, which are primarily refunds received from suppliers and refundable to customers under regulatory procedures.\nPursuant to a November 1993 order from the Federal Energy Regulatory Commission (FERC), in December 1993, CNG Transmission billed its customers, including certain affiliates, $177.9 million, which represented the balance of its unrecovered purchased gas costs and unrecovered sales-related transportation costs existing at October 1, 1993 -- the date CNG Transmission's restructured services under FERC Order 636 became effective. Of the $177.9 million removed from unrecovered gas costs, $75,292,000 is included in the Consolidated Balance Sheet at December 31, 1993, under \"Deferred charges and other noncurrent assets\" representing the distribution subsidiaries' portion of such billing. The subsidiaries are pursuing the recovery of these costs in state regulatory proceedings.\nIn addition, at December 31, 1993, an estimated liability and a corresponding regulatory asset amounting to $6,300,000 have been recorded by the distribution subsidiaries for their portion of FERC Order 636 transition costs expected to be billed by nonaffiliated upstream pipeline companies. This liability reflects an estimate of these pipeline companies' unrecovered gas costs approved for billing by the FERC. Additional amounts are likely to be accrued in the future by the distribution subsidiaries for gas supply realignment costs and other Order 636 transition costs once these pipeline companies receive final FERC approval to recover these costs. Based on the pipeline companies' filings with the FERC, the distribution subsidiaries currently estimate that their portion of such costs could be in the range of $75 million. However, since settlement negotiations and regulatory proceedings regarding these costs are still in progress, the ultimate amount billed may vary significantly from this estimate.\nBased on the nature of the costs and the past rate-making treatment of similar costs, management believes that the distribution subsidiaries should generally be able to pass through all Order 636 transition costs to their customers.\nITEM 8. CONSOLIDATED NATURAL GAS COMPANY AND SUBSIDIARIES (Cont.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)\n4. PROPERTY, PLANT AND EQUIPMENT AND DEPRECIATION Total provisions for depreciation of property, plant and equipment for the years ended December 31, 1991 through 1993, including amounts charged to accounts other than \"Depreciation and amortization\" in the Consolidated Statement of Income, were equivalent to approximately 4.8%, 4.3% and 4.2%, respectively, of the average capitalized investment subject to depreciation and amortization in those periods.\nAmortization of capitalized costs under the full cost method of accounting for Consolidated's exploration and production operations amounted to $1.16 per Mcf (thousand cubic feet) equivalent of gas and oil produced in 1991, $1.19 in 1992, and $1.18 in 1993.\nCosts of unproved properties capitalized under the full cost method of accounting that are excluded from amortization at December 31, 1993, and the years in which such excluded costs were incurred, follow: ______________________________________________________________________________ DECEMBER 31, Incurred in Calendar Year 1993 1993 1992 1991 Prior ______________________________________________________________________________ (In Thousands) Property acquisition costs $ 28,920 $ 5,772 $ 1,358 $ 3,902 $ 17,888 Exploration costs . . . 41,002 14,161 6,993 7,659 12,189 Capitalized interest . . 38,641 890 1,485 5,380 30,886 ________ ________ ________ ________ ________ Total . . . . . $108,563 $ 20,823 $ 9,836 $ 16,941 $ 60,963 ======== ======== ======== ======== ======== ______________________________________________________________________________\nThere are no significant properties, as defined by the SEC, excluded from amortization at December 31, 1993. As gas and oil reserves are proved through drilling or as properties are judged to be impaired, excluded costs and any related reserves are transferred on an ongoing, well-by-well basis into the amortization calculation.\n5. PENSION COSTS Pension expense (or credits), which includes the costs of defined benefit pension plans and pension supplements, was $822,000, $(1,697,000) and $(4,844,000), respectively, for the years ended December 31, 1991 through 1993. The net pension costs, which were determined by an independent actuary, included the following components: ______________________________________________________________________________ Years Ended December 31, 1993 1992 1991 ______________________________________________________________________________ (In Thousands) Service cost - benefits earned during the period $ 27,266 $ 26,435 $ 26,275 Interest cost on projected benefit obligation . 56,834 54,748 53,713 Return on plan assets . . . . . . . . . (89,441) (73,754) (183,902) Net amortization and deferral . . . . . . (303) (9,926) 103,936 Special voluntary retirement programs. . . . 800 800 800 ________ ________ ________ Net pension cost . . . . . . . . . $ (4,844) $ (1,697) $ 822 ======== ======== ======== ______________________________________________________________________________\nITEM 8. CONSOLIDATED NATURAL GAS COMPANY AND SUBSIDIARIES (Cont.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)\nIn 1989, Peoples Natural Gas offered special retirement incentives to certain salaried and hourly employees. The additional pension payments resulting from these incentives are being paid from the assets of the applicable pension plans. The estimated cost of these additional benefits, amounting to approximately $8,000,000, was deferred and is being amortized to expense over a 10-year period which began October 1, 1990, in accordance with the rate-making treatment approved by the Pennsylvania Public Utility Commission. The amount amortized to pension expense was $800,000 in each of the years ended December 31, 1991 through 1993.\nThe following table sets forth the funded status of the plans, as determined by an independent actuary, at December 31, 1992 and 1993:\nThe projected benefit obligation at December 31, 1992 and 1993, was determined using an annual discount rate of 6.5% and an average assumed annual rate of salary increase of 5.5%. The expected long-term rate of return on plan assets was 8.0% per annum.\nThe minimum liability recognized relating to the Company's supplemental pension benefit plans amounted to $13,112,000 and $10,067,000 at December 31, 1992 and 1993. The related intangible asset recognized as of those dates amounted to $10,108,000 and $7,572,000, respectively. These amounts are included in the Consolidated Balance Sheet under \"Other deferred credits and noncurrent liabilities\" and \"Deferred charges and other noncurrent assets.\" Adjustments of the minimum liability and intangible asset due to changes in assumptions or the financial status of the plans resulted in a credit to retained earnings of $216,000 and $361,000 at December 31, 1992 and 1993, respectively.\nITEM 8. CONSOLIDATED NATURAL GAS COMPANY AND SUBSIDIARIES (Cont.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)\n6. OTHER POSTRETIREMENT BENEFITS Effective January 1, 1993, the Company adopted the provisions of Statement of Financial Accounting Standards No. 106, \"Employers' Accounting for Postretirement Benefits Other Than Pensions.\" Statement No. 106 requires that the estimated future costs of providing postretirement benefits, such as health care and life insurance, be recognized as an expense and a liability during the employees' service periods. As permitted under the standard, the Company elected to amortize the accumulated postretirement benefit obligation existing at the date of adoption (transition obligation) of $288,393,000 over a 20-year period.\nNet periodic postretirement benefit cost for the year ended December 31, 1993, as determined by an independent actuary, included the following components: ______________________________________________________________________________ Year Ended December 31, 1993 ______________________________________________________________________________ (In Thousands) Service cost - benefits attributed to service during the period $10,549 Interest cost on accumulated postretirement benefit obligation 23,208 Amortization of transition obligation. . . . . . . . . 14,420 _______ Net periodic postretirement benefit cost . . . . . . . $48,177 ======= ______________________________________________________________________________\nThe following table reconciles the plans' combined funded status, as determined by an independent actuary, with amounts included in the Consolidated Balance Sheet at December 31, 1993: ______________________________________________________________________________ December 31, 1993 ______________________________________________________________________________ (In Thousands) Accumulated postretirement benefit obligation: Retirees. . . . . . . . . . . . . . . . . . $ 165,819 Fully eligible active plan participants . . . . . . . 58,465 Other active plan participants . . . . . . . . . . 102,900 _________ Total accumulated postretirement benefit obligation. . . 327,184 Plan assets at fair value. . . . . . . . . . . . . - _________ Accumulated postretirement benefit obligation in excess of plan assets . . . . . . . . . . . (327,184) Unrecognized net loss . . . . . . . . . . . . . . 22,821 Unrecognized transition obligation. . . . . . . . . . 273,973 _________ Accrued postretirement benefit cost recognized in the Consolidated Balance Sheet . . . . . . . . . . $ (30,390) ========= ______________________________________________________________________________\nThe weighted average discount rate used in determining the accumulated postretirement benefit obligation was 7.25%. The average assumed annual rate of salary increase for the applicable life insurance plans was 5.5%.\nThe assumed health care cost trend rate used in measuring the accumulated postretirement benefit obligation for the medical plans is 11% for 1994, declining gradually to 5% in 2003 and remaining at that level thereafter. The health care cost trend rate assumption has a significant effect on the amounts reported. If the health care cost trend rate were increased by 1% in each year, the accumulated postretirement benefit obligation as of December 31, 1993, would be increased by $28.8 million. A 1% change would also increase the aggregate of the service and interest cost components of net periodic postretirement benefit cost for 1993 by $4.2 million.\nITEM 8. CONSOLIDATED NATURAL GAS COMPANY AND SUBSIDIARIES (Cont.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)\nThe majority of the estimated postretirement benefit costs and of the transition obligation is attributable to Consolidated's rate-regulated subsidiaries. Accordingly, these subsidiaries are seeking, or intend to seek as soon as practicable, rate relief from their respective regulatory commissions for the increased level of expense resulting from the adoption of the standard. In this regard, regulatory authorities having jurisdiction over the Company's subsidiaries have indicated their intention to generally allow inclusion in rates of postretirement benefit costs determined on an accrual basis, subject to prudency and certain other conditions. As a result, the Company's rate-regulated subsidiaries have generally deferred the differences between SFAS No. 106 costs and amounts currently included in rates pending expected recovery of Statement No. 106 costs and related deferrals in regulatory proceedings. The amount of SFAS No. 106 costs deferred at December 31, 1993, was $27,662,000, which is included in the Consolidated Balance Sheet under \"Deferred charges and other noncurrent assets.\"\nCurrently, the subsidiary companies do not prefund postretirement benefit costs, but pay claims as presented. However, the FERC and certain state regulatory authorities have indicated that when SFAS No. 106 costs are recovered in rates, amounts collected must be deposited in irrevocable trust funds dedicated for the sole purpose of paying postretirement benefits.\nPrior to the adoption of SFAS No. 106, postretirement benefit costs were expensed as paid. The cost of such benefits amounted to $16,881,000 and $17,948,000 for the years ended December 31, 1991 and 1992, respectively.\n7. INCOME TAXES As detailed in Note 1, the Company adopted Statement of Financial Accounting Standards No. 109, \"Accounting for Income Taxes,\" effective January 1, 1993. Statement No. 109 required a change from the deferred method to an asset and liability approach for accounting for and reporting of income taxes. The cumulative effect on years prior to 1993 of applying SFAS No. 109 increased net income in 1993 by $17,422,000, or $.19 per share, due primarily to the reduction in deferred tax balances associated with the Company's nonregulated activities.\n\"Income taxes - estimated\" included the following: ______________________________________________________________________________ Years Ended December 31, 1993 1992 1991 ______________________________________________________________________________ (In Thousands) Current provision Federal . . . . . . . . . . $ 99,029 $ 18,378 $ 32,274 State. . . . . . . . . . . 23,279 5,466 3,119 Deferred income taxes (net) Federal . . . . . . . . . . (6,688) 35,941 15,715 State. . . . . . . . . . . (13,094) 11,529 6,375 Investment tax credit . . . . . . (2,620) (2,691) (2,639) ________ ________ ________ Total. . . . . . . . . . . $ 99,906 $ 68,623 $ 54,844 ======== ======== ======== Income before taxes. . . . . . . $288,400 $263,581 $223,457 ======== ======== ======== ______________________________________________________________________________\nITEM 8. CONSOLIDATED NATURAL GAS COMPANY AND SUBSIDIARIES (Cont.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)\nOn August 10, 1993, the federal corporate income tax rate was increased from 34% to 35%, retroactive to January 1, 1993. As required by SFAS No. 109, existing deferred tax assets and liabilities were adjusted to reflect this enacted tax rate change. As a result, deferred income tax expense was increased (and operating income was reduced) in the third quarter of 1993 by $11,429,000, or $.12 per share. In addition, income taxes based on pretax earnings for the year 1993 increased by $2,692,000, or $.03 per share because of the higher rate. The total adjustment to the net deferred income tax liability included in the Consolidated Balance Sheet as a result of the increase in the federal corporate income tax rate amounted to $26,707,000.\nIncome taxes charged to operating income differed from the amounts of $75,975,000, $89,618,000 and $100,940,000 shown in the next table that were computed by applying the statutory federal income tax rate of 34% (1991 and 1992) and 35% (1993) to reported income before taxes. The reasons for the differences follow: ______________________________________________________________________________ Years Ended December 31, 1993 1992 1991 ______________________________________________________________________________ (In Thousands) Computed \"expected\" tax expense. . . . $100,940 $ 89,618 $ 75,975 Increases (or reductions) in tax resulting from: Production tax credit . . . . . . (8,435) (7,506) (5,349) Investment tax credit . . . . . . (2,620) (2,691) (2,639) Deferred tax reversals . . . . . . - (15,325) (15,803) State income taxes . . . . . . . 6,620 11,217 6,266 Effect of increase in federal corporate income tax rate on deferred income taxes. . . . . 11,429 - - Miscellaneous. . . . . . . . . (8,028) (6,690) (3,606) ________ ________ ________ Income taxes charged to operating income $ 99,906 $ 68,623 $ 54,844 ======== ======== ========\nEffective tax rate . . . . . . . 34.6% 26.0% 24.5% ______________________________________________________________________________\nITEM 8. CONSOLIDATED NATURAL GAS COMPANY AND SUBSIDIARIES (Cont.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)\nThe current and noncurrent deferred income taxes reported in the Consolidated Balance Sheet at December 31, 1993, represent the net expected future tax consequences attributable to temporary differences between the carrying amounts of assets and liabilities and their tax bases. These temporary differences and the related tax effects were as follows: ______________________________________________________________________________ Deferred income Deferred income December 31, taxes taxes-current ______________________________________________________________________________ (In Thousands) Deferred tax liabilities: Excess of tax over book depreciation . . $425,488 $ - Exploration and intangible well drilling costs . . . . . . . . . 276,462 - FERC Order 636 transition costs . . . . 48,404 - Allowance for funds used during construction . . . . . . . 41,089 - Other. . . . . . . . . . . . . 72,695 - ________ _________ Total liabilities . . . . . . . . 864,138 - ________ _________\nDeferred tax assets: Deferred investment tax credits . . . . 20,291 - Tax basis step-up in connection with acquisition of subsidiary . . . . . 15,001 - Overheads capitalized for tax purposes. . 12,240 - Supplier and other refunds. . . . . . - 13,959 Unrecovered gas costs . . . . . . . - 3,979 Other. . . . . . . . . . . . . 33,095 5,747 Valuation allowance . . . . . . . . - - ________ _________ Total assets. . . . . . . . . . 80,627 23,685 ________ _________ Total deferred income taxes. . . . . $783,511 $(23,685) ======== ======== ______________________________________________________________________________\nA regulatory liability amounting to $72,208,000 has been recorded representing the reduction to previously recorded deferred income taxes associated with rate- regulated activities that are expected to be refundable to customers, net of certain taxes collectible from customers. Also, a regulatory asset corresponding to the recognition of additional deferred income taxes not previously recorded because of past rate-making practices amounting to $113,483,000 has been recorded at December 31, 1993. These regulatory amounts are included in the Consolidated Balance Sheet under \"Other deferred credits and noncurrent liabilities\" and \"Deferred charges and other noncurrent assets,\" respectively.\nITEM 8. CONSOLIDATED NATURAL GAS COMPANY AND SUBSIDIARIES (Cont.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)\n8. GAS STORED Based upon the average price of gas purchased during 1993, the current cost of replacing the inventory of \"Gas stored - current portion\" exceeded the amount stated on a LIFO basis by approximately $176,397,000 at December 31, 1993.\nA portion of gas in underground storage used as a pressure base for operations is included in \"Property, Plant and Equipment\" in the amounts of $120,270,000 and $123,564,000 at December 31, 1992 and 1993.\n9. OTHER ASSETS UNAMORTIZED ABANDONED FACILITIES In 1988, Consolidated LNG received FERC approval for the abandonment of its interest in liquefied natural gas facilities at Cove Point, Maryland. In connection with the abandonment, Consolidated LNG recorded a deferred asset in accordance with the provisions of FASB Statement No. 90, \"Accounting for Abandonments and Disallowances of Plant Costs.\" This deferred asset, which represents the present value of allowable costs expected to be recovered, is being amortized over the 10-year recovery period which began March 1, 1988, as prescribed in the FERC order.\nLAKEWOOD COGENERATION PROJECT CNG Energy holds directly a 34% limited partnership interest in Lakewood Cogeneration, L.P. (Lakewood Partnership), a partnership formed to construct, own and operate a cogeneration facility in Lakewood, New Jersey. CNG Lakewood, Inc., a wholly owned subsidiary of CNG Energy, owns a 1% general partnership interest in the Lakewood Partnership. Using natural gas, the facility will produce electricity for sale to an electric utility and steam for sale primarily to customers in an industrial park.\nIn November 1992, the Lakewood Partnership entered into a credit agreement with a group of banks and an institutional investor that will provide up to $262,000,000 in construction financing through non-recourse loans made to the partnership. A portion of the proceeds from the construction loans was used to reimburse the partners for certain expenditures previously made in connection with the project. Construction of the facility began in late 1992 and is expected to be completed by the end of 1994. At December 31, 1993, CNG Energy's total investment in the project amounted to $7,186,000.\n10. COMMON STOCKHOLDERS' EQUITY A summary of the changes in stockholders' equity follows:\nITEM 8. CONSOLIDATED NATURAL GAS COMPANY AND SUBSIDIARIES (Cont.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)\nITEM 8. CONSOLIDATED NATURAL GAS COMPANY AND SUBSIDIARIES (Cont.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)\nCOMMON STOCK OFFERING In September 1992, the Company issued, through a public offering, 4,600,000 shares of its common stock at a price to the public of $43.50 per share. The net proceeds of the offering, after deducting the underwriting discount and expenses, were $193,612,000. The proceeds from the stock sale were used to finance capital expenditures of the subsidiaries.\nUNISSUED SHARES At December 31, 1993, 107,066,172 shares of common stock were unissued. Of these, a total of 18,436,115 shares have been registered with the SEC for possible issuance under various employee benefit plans including the 1991 Stock Incentive Plan, the Long-Term Incentive Plan and the System Thrift Plans. Shares acquired by these plans can consist of original issue shares, treasury shares or shares purchased in the open market. In addition, 741,356 shares have been registered with the SEC for possible issuance to shareholders under the Dividend Reinvestment Plan and 4,629,629 shares have been registered for issuance upon conversion of the Company's convertible subordinated debentures.\nTREASURY STOCK Under a stock repurchase plan approved by the Board of Directors, the Company can purchase in the open market up to 4,000,000 shares of its common stock through December 31, 1995. The Company may also acquire shares of its common stock through certain provisions of the 1991 Stock Incentive Plan and the Long- Term Incentive Plan. Shares repurchased or acquired are held as treasury stock and are available for reissuance for general corporate purposes or in connection with various employee benefit plans. When treasury shares are reissued, the difference between the market value at reissuance and the cost of shares is reflected in \"Capital in excess of par value.\" The cost of any shares held as treasury stock is shown as a reduction in common stockholders' equity in the Consolidated Balance Sheet.\nSTOCK AWARDS AND STOCK OPTIONS 1991 STOCK INCENTIVE PLAN The 1991 Stock Incentive Plan provides for the granting of stock awards, stock options and other stock-based awards to employees of the Company and its subsidiaries. The maximum number of shares available for issuance in each calendar year is determined in accordance with a formula contained in the plan. During 1993, 3,056,107 shares were available for issuance under the plan.\nStock awards granted under the plan may be in the form of restricted stock or deferred stock. Shares issued as restricted stock awards are held by the Company until the attached restrictions lapse. Deferred stock awards generally consist of a right to receive shares at the end of specified deferral periods. The market value of the stock award on the date granted is recorded as compensation expense over the applicable restriction or deferral period.\nStock options granted under the plan allow the purchase of common shares at a price not less than fair market value at the date of grant and not less than par value.\nStock appreciation rights may also be granted, either alone or in tandem with stock options. These rights permit the recipient to receive, upon exercise, the excess of the fair market value of a share on the date of exercise over the grant price. The grant price is generally the fair market value of the stock on the date of grant. As of December 31, 1993, no stock appreciation rights have been granted under the plan.\nITEM 8. CONSOLIDATED NATURAL GAS COMPANY AND SUBSIDIARIES (Cont.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)\nThe 1991 Stock Incentive Plan also provides for the granting of performance awards, dividend equivalents, or other awards which may be based on, or related to, shares of the Company's common stock. The granting of stock awards constitutes a non-cash financing activity of the Company.\nLONG-TERM INCENTIVE PLAN The Company's Long-Term Incentive Plan, which provided for the issuance of common shares to key employees as either restricted stock awards or stock options, terminated by its terms on November 9, 1991. However, the provisions of the plan continue with respect to any restricted stock awards and stock options granted prior to the termination date.\nShares of common stock issued as restricted stock awards under the plan are held by the Company until certain restrictions lapse, which ordinarily occurs equally on the third through sixth award anniversaries. The market value of the stock when awarded is recorded as compensation expense over the six-year period.\nStock options granted under the plan allow the purchase of common shares at a price not less than fair market value at the date of grant and not less than par value. The options generally are exercisable in four equal annual installments commencing with the second anniversary of the grant and expire after 10 years from the date of grant.\nA summary of stock option activity under both plans for the years ended December 31, 1991 through 1993, follows: _______________________________________________________________________________ Number Option Price of Shares Per Share _______________________________________________________________________________ (In Thousands) Shares under option: At January 1, 1991 . . . . . . . 843 $32.50 - $50.75 Granted in 1991 . . . . . . . . 509 $41.13 - $43.88 Exercised in 1991. . . . . . . . (67) $34.38 - $40.00 Cancelled in 1991. . . . . . . . (59) $34.38 - $50.75 _____ At December 31, 1991. . . . . . . 1,226 $32.50 - $50.75\nGranted in 1992 . . . . . . . . 659 $34.75 - $47.25 Exercised in 1992. . . . . . . . (113) $34.38 - $44.00 Cancelled in 1992. . . . . . . . (59) $34.38 - $50.75 _____ At December 31, 1992. . . . . . . 1,713 $32.50 - $50.75\nGranted in 1993 . . . . . . . . 552 $44.88 - $55.00 Exercised in 1993. . . . . . . . (238) $33.25 - $50.75 Cancelled in 1993. . . . . . . . (65) $34.75 - $50.75 _____ At December 31, 1993. . . . . . . 1,962 $32.50 - $55.00 ===== _______________________________________________________________________________\nAt December 31, 1993, options were exercisable for the purchase of 295,077 shares. Stock options become exercisable for the purchase of 381,164 shares in 1994, 456,311 in 1995, 402,394 in 1996, and 426,618 shares thereafter.\nITEM 8. CONSOLIDATED NATURAL GAS COMPANY AND SUBSIDIARIES (Cont.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)\n11. PREFERRED STOCK The Company's authorized cumulative preferred stock consists of 2,500,000 shares at a par value of $100 each. There were no shares of preferred stock issued or outstanding at December 31, 1992 and 1993.\n12. DIVIDEND RESTRICTIONS The indenture relating to the Company's senior debenture issues and the preferred stock provisions of its Certificate of Incorporation contain restrictions on dividend payments by the Company and acquisitions of its capital stock. Under the indenture provisions (there being no preferred stock outstanding), $664,756,000 of consolidated retained earnings was free from such restrictions at December 31, 1993. The indenture also imposes dividend limitations on the subsidiaries, but at December 31, 1993, these limitations did not restrict their ability to pay dividends to the Company.\n13. LONG-TERM DEBT Long-term debt, excluding current maturities, follows: ______________________________________________________________________________ December 31, 1993 1992 ______________________________________________________________________________ (In Thousands) Debentures 6 5\/8%, Due December 1, 2013 . . . . . . $ 150,000 $ - 5 3\/4%, Due August 1, 2003. . . . . . . 150,000 - 5 7\/8%, Due October 1, 1998 . . . . . . 150,000 150,000 8 3\/4%, Due October 1, 2019 . . . . . . 150,000 150,000 8 3\/4%, Due June 1, 1999 . . . . . . . 100,000 100,000 9 3\/8%, Due February 1, 1997 . . . . . . 100,000 100,000 8 5\/8%, Due December 1, 2011 . . . . . . 100,000 100,000 7 5\/8%, Due April 1, 1996 . . . . . . . - 100,000 8 1\/8%, Due June 1, 1997 . . . . . . . - 18,600 8 3\/8%, Due September 1, 1996. . . . . . - 13,900 9 1\/4%, Due July 1, 1995 . . . . . . . - 12,500 8 5\/8%, Due March 1, 1999 . . . . . . . - 20,000 7 3\/4%, Due June 1, 1998 . . . . . . . - 18,000 7 5\/8%, Due May 1, 1997. . . . . . . . - 16,000 7 3\/4%, Due October 1, 1996 . . . . . . - 7,000 8 3\/8%, Due May 1, 1996. . . . . . . . - 11,200 7 7\/8%, Due December 1, 1995 . . . . . . - 10,800 9%, Due July 1, 1995. . . . . . . . . - 9,600 8 1\/4%, Due November 1, 1994 . . . . . . - 6,000 7 3\/4%, Due July 1, 1994 . . . . . . . - 6,000 Unamortized debt discount, less premium . . (9,252) (5,413) Convertible Subordinated Debentures 7 1\/4%, Due December 15, 2015. . . . . . 250,000 250,000 Unamortized debt discount . . . . . . . (2,100) (2,231) 9.94% Unsecured loan due January 1, 1999. . . 20,000 20,000 __________ __________ Total . . . . . . . . . . . . . $1,158,648 $1,111,956 ========== ========== ______________________________________________________________________________\nThe estimated fair value of the Company's debentures, including current maturities, was $1,208,719,000 and $1,235,351,000 at December 31, 1992 and 1993. Fair value was estimated based on closing transactions and\/or quotations for the Company's debentures as of those dates.\nITEM 8. CONSOLIDATED NATURAL GAS COMPANY AND SUBSIDIARIES (Cont.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)\nThere are no debentures maturing in the years 1994 and 1995. The aggregate principal amounts of the Company's debentures maturing in the years 1996 through 1998 are: $6,250,000; $106,250,000 and $156,250,000.\nDiscounts and premiums and the expenses incurred in connection with the issuance of debentures are being amortized on a basis which will equitably distribute the net amount to \"Interest on long-term debt,\" over the life of each debenture issue.\nThe Company's 7 1\/4% Convertible Subordinated Debentures, which mature on December 15, 2015, are convertible into shares of the Company's common stock at any time prior to maturity at an initial conversion price of $54 per share. Under additional terms of the issue, on December 15, 2000, the Company is obligated to purchase, at the option of the holder, any Debenture then outstanding for 100% of the principal amount plus accrued interest.\nThe 9.94% unsecured loan due January 1, 1999, is an obligation of Virginia Natural Gas. This $20,000,000 loan, which is to be repaid in five annual installments of $4,000,000 each, beginning January 1, 1995, has been guaranteed by the Company.\nIn March 1991, the Company entered into a credit agreement with a group of banks that provides for the borrowing of up to $300,000,000. The 1991 Credit Agreement initially was to expire on March 31, 1994; however, each year the term of the agreement has, with the approval of the banks, been extended for a period of one additional year. In February 1994, the term was extended to March 31, 1997. The loans under the 1991 Credit Agreement are in the form of revolving credits and may, at the option of the Company, be structured either as syndicated loans by a group of participating banks or money market loans by individual participating banks. The loans may be borrowed, paid or prepaid and reborrowed on a few days notice. Varying interest rate options are available for syndicated loans, while the interest rate on money market loans is determined from quotes rendered by the participating banks. A commitment fee of 1\/8 of 1% per annum is charged under the 1991 Credit Agreement. No revolving credit loans were outstanding at December 31, 1992 or 1993.\n14. SHORT-TERM BORROWINGS The weighted average interest rate on the Company's $455,000,000 of commercial paper notes outstanding at December 31, 1993, was 3.35%. Because of the short maturities of commercial paper notes, the carrying amount represents a reasonable estimate of fair value.\nCommercial paper notes are supported by unused lines of credit totaling $475,000,000. These lines may be used if the sale of commercial paper is not feasible. Each of the lines bears a commitment fee, but such fees, in the aggregate, are not significant. In addition to these credit lines, the Company may utilize unused portions of its 1991 Credit Agreement to provide support for commercial paper notes.\nThere are no agreements or arrangements requiring compensating balances with respect to either lines of credit or outstanding bank loans. Under the Company's policy, bank deposits are maintained for normal operating purposes.\nITEM 8. CONSOLIDATED NATURAL GAS COMPANY AND SUBSIDIARIES (Cont.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)\n15. ENVIRONMENTAL MATTERS The Company and its subsidiaries are subject to various federal, state and local laws and regulations relating to the protection of the environment. These laws and regulations govern both current and future operations and potentially extend to plant sites formerly owned or operated by the Company and its subsidiaries, or their predecessors.\nAs part of their normal business operations, the subsidiaries periodically monitor their properties and facilities and resolve potential environmental matters so as to remain in compliance with the various environmental laws and regulations. The Company also conducts general environmental surveys on a continuing basis at its operating facilities to assure compliance with these laws and regulations. In this regard, voluntary surveys at subsidiary meter sites were conducted to determine the extent of any possible soil contamination due to mercury spillage. These studies, which are continuing, are not in response to any governmental or regulatory directive, order or settlement agreement and have not disclosed any mercury contamination for which the remediation costs would be considered material to Consolidated's financial position, results of operations or cash flows. On August 16, 1990, CNG Transmission entered into a Consent Order and Agreement with the Commonwealth of Pennsylvania Department of Environmental Resources (DER) in which CNG Transmission has agreed with the DER's determination of certain violations of the Pennsylvania Solid Waste Management Act, the Pennsylvania Clean Streams Law and the rules and regulations promulgated thereunder. It is unknown at this time whether civil penalties will be assessed. Pursuant to the Order and Agreement, CNG Transmission is performing certain sampling, testing and analysis, and conducting a program of remediation at some of its Pennsylvania facilities. Total remediation costs in connection with the Order and Agreement are not expected to be material with respect to Consolidated's financial position, results of operations or cash flows. Based on current knowledge, the Company has recognized a gross estimated liability amounting to $19,661,000 at December 31, 1993, for future costs expected to be incurred to remediate or mitigate hazardous substances at mercury sites and at facilities covered by the Order and Agreement. The estimate for this liability was based on current environmental laws and regulations and existing technology.\nInasmuch as certain environmental-related expenditures are expected to be recoverable in future regulatory proceedings, a regulatory asset amounting to $11,378,000 at December 31, 1993, is included in the Consolidated Balance Sheet under the caption \"Deferred charges and other noncurrent assets.\" Also, uncontested claims amounting to $3,566,000 at December 31, 1993, were recognized for environmental-related costs probable of recovery through joint- interest operating agreements.\nThe total amounts included in operating expenses for remediation and other environmental-related costs were $3,205,000, $7,646,000, and $9,049,000, respectively, for the years ended December 31, 1991 through 1993. The components of such costs are as follows: ______________________________________________________________________________ Years Ended December 31, 1993 1992 1991 ______________________________________________________________________________ (In Thousands) Recurring costs for ongoing operations $3,381 $4,032 $1,601 Mandated remediation and other compliance costs . . . . . . . 3,963 2,816 1,493 Voluntary remediation costs . . . . 1,185 703 4 Other . . . . . . . . . . . 520 95 107 ______ ______ ______ Total. . . . . . . . . . . $9,049 $7,646 $3,205 ====== ====== ====== ______________________________________________________________________________\nThe Company's environmental-related capital expenditures for monitoring or complying with laws and regulations for 1991 through 1993 were not material.\nITEM 8. CONSOLIDATED NATURAL GAS COMPANY AND SUBSIDIARIES (Cont.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)\nThe Company has determined that it is associated with 16 former manufactured gas plant sites, five of which are currently owned by the Company. Studies conducted by other utilities at their former manufactured gas plants have indicated that their sites contain coal tar and other potentially harmful materials. None of the 16 former sites with which the Company is associated is under investigation by any state or federal environmental agency, and no investigation or action is currently anticipated. At this time it is not known if, or to what degree, these sites may contain environmental contamination. Therefore, the Company is not able to estimate the cost, if any, that may be required for the possible remediation of these sites.\nThe exact nature of environmental issues that the Company may encounter in the future cannot be predicted. Additional environmental liabilities may result in the future as more stringent environmental laws and regulations are implemented and as the Company obtains more specific information about its existing sites and production facilities. At present, no estimate of any such additional liability, or range of liability amounts, can be made.\n16. COMMITMENTS AND CONTINGENCIES Lease arrangements of the subsidiaries are principally for office space, business machines and transportation equipment. None of these arrangements, individually or in the aggregate, are material capital leases. Rental expense incurred in the years 1991 through 1993 was not material, and future rental payments required under leases in effect at December 31, 1993, are not material.\nCNG Transmission and certain of the Company's distribution subsidiaries are subject to the Federal Clean Air Act and the Federal Clean Air Act Amendments of 1990 (1990 amendments) which added significantly to the existing requirements established by the Federal Clean Air Act. These subsidiaries operate compressor stations that are covered by the new nitrogen oxide emission standard established as a result of the 1990 amendments. The Company will have until May 31, 1995, to comply with the emission standard. The Company expects that compliance will require significant capital expenditures to modify the compressor engines along the Company's pipeline system. However, the actual cost of compliance will be dependent upon the requirements imposed by the environmental agencies of the states in which the compressor stations are located. Based on the Company's preliminary estimates and analyses, approximately $46 million of capital expenditures may be required. Actual capital expenditures required to comply with the 1990 amendments are expected to be recoverable through future regulatory proceedings. Reference is made to Note 15 for additional information on environmental matters.\nIt is estimated that Consolidated's 1994 capital budget will amount to $439,600,000, and that approximately $153,000,000 of that amount will be directed to gas and oil producing activities. In connection with the capital budget, the subsidiaries have entered into certain contractual commitments.\nThe subsidiaries have claims and suits pending against them, but, in the opinion of management and counsel, the ultimate liability will not have a material effect on Consolidated's financial position, results of operations or cash flows.\nITEM 8. CONSOLIDATED NATURAL GAS COMPANY AND SUBSIDIARIES (Cont.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)\n17. SUPPLEMENTARY FINANCIAL INFORMATION -- UNAUDITED (A) GAS AND OIL PRODUCING ACTIVITIES (EXCLUDING COST-OF-SERVICE RATE- REGULATED ACTIVITIES) This information has been prepared in accordance with Statement of Financial Accounting Standards No. 69, \"Disclosures about Oil and Gas Producing Activities,\" and related SEC pronouncements. Statement No. 69 is a comprehensive, standard set of required disclosures about the gas and oil producing activities of publicly traded companies. The following disclosures exclude the gas and oil producing activities subject to cost-of-service rate regulation. Certain disclosures about these gas and oil activities, which are exempt from the accounting methods prescribed by the SEC, are included under \"Cost-of-Service Properties\" in this Note (A).\nCAPITALIZED COSTS The aggregate amounts of costs capitalized by subsidiaries for their gas and oil producing activities, and related aggregate amounts of accumulated depreciation and amortization, follow: _______________________________________________________________________________ December 31, 1993 1992 _______________________________________________________________________________ (In Thousands) Capitalized costs of Proved properties. . . . . . . . . $2,685,856 $2,673,042 Unproved properties . . . . . . . . 232,312 194,189 __________ __________ Total . . . . . . . . . . . . $2,918,168 $2,867,231 ========== ==========\nAccumulated depreciation of Proved properties. . . . . . . . . $1,723,113 $1,609,850 Unproved properties . . . . . . . . 78,352 68,444 __________ __________ Total . . . . . . . . . . . . $1,801,465 $1,678,294 ========== ========== _______________________________________________________________________________\nTOTAL COSTS INCURRED The following costs were incurred by subsidiaries in their gas and oil producing activities during the years 1991 through 1993: _______________________________________________________________________________ Years Ended December 31, 1993 1992 1991 _______________________________________________________________________________ (In Thousands) Property acquisition costs Proved properties. . . . . . . . . $ 132 $ 7,926 $ - Unproved properties . . . . . . . . 18,224 14,378 20,879 ________ ________ ________ Subtotal . . . . . . . . . . . 18,356 22,304 20,879 Exploration costs . . . . . . . . . 47,934 30,860 30,420 Development costs . . . . . . . . . 40,516 42,059 63,413 ________ ________ ________ Total . . . . . . . . . . . . $106,806 $ 95,223 $114,712 ======== ======== ======== _______________________________________________________________________________\nITEM 8. CONSOLIDATED NATURAL GAS COMPANY AND SUBSIDIARIES (Cont.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)\nRESULTS OF OPERATIONS The elements of the \"results of operations for gas and oil producing activities\" that follow are as required and defined by the FASB. Consolidated cautions that these standardized disclosures do not represent the results of operations based on its historical financial statements. In addition to requiring different determinations of revenues and costs, the disclosures exclude the impact of interest expense and corporate overheads.\n______________________________________________________________________________ Years Ended December 31, 1993 1992 1991 ______________________________________________________________________________ (In Thousands) Revenues (net of royalties) from: Sales to unaffiliated companies . . . $204,614 $155,481 $187,662 Transfers to other operations. . . . 88,241 135,280 110,351 ________ ________ ________ Total . . . . . . . . . . . 292,855 290,761 298,013 ________ ________ ________ Less: Production (lifting) costs . . . 49,177 55,281 58,253 Depreciation and amortization . . 173,171 176,463 183,027 Income tax expense. . . . . . 18,400 13,509 20,144 ________ ________ ________ Results of operations . . . . . . . $ 52,107 $ 45,508 $ 36,589 ======== ======== ======== ______________________________________________________________________________\nCOMPANY-OWNED RESERVES (NON-COST-OF-SERVICE RESERVES) Estimated net quantities of proved gas and oil (including condensate) reserves in the United States and Canada at December 31, 1991 through 1993, and changes in the reserves during those years, are shown in the two schedules which follow: ______________________________________________________________________________ Years Ended December 31, 1993 1992 1991 ______________________________________________________________________________ (In Bcf) PROVED DEVELOPED AND UNDEVELOPED RESERVES* - GAS At January 1 . . . . . . . . . . . 918 918 1,017 Changes in reserves Revisions of previous estimates . . . . 46 (23) (17) Purchases of gas in place . . . . . . - 19 - Extensions, discoveries and other additions 55 141 79 Production . . . . . . . . . . . (124) (121) (126) Sales of gas in place. . . . . . . . (10) (16) (35) _____ _____ _____ At December 31. . . . . . . . . . . 885 918 918 ===== ===== =====\nPROVED DEVELOPED RESERVES* - GAS At January 1 . . . . . . . . . . . 794 855 920 At December 31. . . . . . . . . . . 761 794 855\n* Net before royalty. ______________________________________________________________________________\nIncluded in the caption \"Extensions, discoveries and other additions\" for 1992 are 79 Bcf of proved undeveloped reserves for which development costs will be incurred in future years. The preceding proved developed and undeveloped gas reserves at December 31, 1991 through 1993, include United States reserves of 917, 917 and 884 Bcf which, together with the Canadian reserves and the gas reserves reported under \"Cost-of-Service Properties,\" are as contained in reports of Ralph E. Davis Associates, Inc., independent geologists.\nITEM 8. CONSOLIDATED NATURAL GAS COMPANY AND SUBSIDIARIES (Cont.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) ______________________________________________________________________________ Years Ended December 31, 1993 1992 1991 ______________________________________________________________________________ (In Thousand Bbls) Proved developed and undeveloped reserves* - Oil At January 1 . . . . . . . . . . . 29,238 31,014 37,881 Changes in reserves Revisions of previous estimates . . . . 290 390 (3,300) Purchases of oil in place . . . . . . - 245 - Extensions, discoveries and other additions 1,978 2,104 3,410 Production . . . . . . . . . . . (3,907) (4,508) (5,246) Sales of oil in place. . . . . . . . (3) (7) (1,731) ______ ______ ______ At December 31. . . . . . . . . . . 27,596 29,238 31,014 ====== ====== ======\nProved developed reserves* - Oil At January 1 . . . . . . . . . . . 27,449 30,070 36,541 At December 31. . . . . . . . . . . 21,936 27,449 30,070\n* Net before royalty. ______________________________________________________________________________\nThe foregoing proved developed and undeveloped oil reserves at December 31, 1991 through 1993, include United States reserves of 25,623, 23,493 and 21,917 thousand barrels, respectively. These, together with the Canadian reserves and the oil reserves reported under \"Cost-of-Service Properties,\" are as contained in reports of Ralph E. Davis Associates, Inc.\nSTANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS AND CHANGES THEREIN The following tabulation has been prepared in accordance with the FASB's rules for disclosure of a standardized measure of discounted future net cash flows relating to Company-owned proved gas and oil reserve quantities. ______________________________________________________________________________ December 31, 1993 1992 1991 ______________________________________________________________________________ (In Thousands) Future cash inflows . . . . . . . . $2,336,553 $2,421,422 $2,570,408 Less: Future development and production costs . . . . . 529,592 572,576 496,389 Future income tax expense. . . . 537,966 473,475 608,264 __________ __________ __________ Future net cash flows . . . . . . . 1,268,995 1,375,371 1,465,755 Less annual discount (10% a year) . . . 500,732 557,019 584,624 __________ __________ __________ Standardized measure of discounted future net cash flows . . . . . . . . . $ 768,263 $ 818,352 $ 881,131 ========== ========== ========== ______________________________________________________________________________\nIn the foregoing determination of future cash inflows, sales prices for gas were based on contractual arrangements or market prices at each year end. Prices for oil were based on average prices received from sales in the month of December each year. Future costs of developing and producing the proved gas and oil reserves reported at the end of each year shown were based on costs determined at each such year end, assuming the continuation of existing economic conditions. Future income taxes were computed by applying the appropriate year-end or future statutory tax rate to future pretax net cash flows, less the tax basis of the properties involved, and giving effect to tax deductions, or permanent differences and tax credits.\nITEM 8. CONSOLIDATED NATURAL GAS COMPANY AND SUBSIDIARIES (Cont.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)\nIt is not intended that the FASB's standardized measure of discounted future net cash flows represent the fair market value of Consolidated's proved reserves. The Company cautions that the disclosures shown are based on estimates of proved reserve quantities and future production schedules which are inherently imprecise and subject to revision, and the 10% discount rate is arbitrary. In addition, present costs and prices are used in the determinations and no value may be assigned to probable or possible reserves.\nThe following tabulation is a summary of changes between the total standardized measure of discounted future net cash flows at the beginning and end of each year.\nCOST-OF-SERVICE PROPERTIES As previously stated, activities subject to cost-of-service rate regulation are excluded from the foregoing information. At December 31, 1992 and 1993, net capitalized costs of cost-of-service properties amounted to $30,645,000 and $27,320,000, respectively. Related proved reserves of gas and oil are located in the United States, and at December 31, 1991 through 1993, amounted to 87, 80 and 75 Bcf of gas and 313, 283 and 287 thousand barrels of oil, respectively. Production for the years 1991 through 1993 amounted to 7, 7 and 6 Bcf of gas and 33, 31 and 29 thousand barrels of oil, respectively.\nFuture revenues associated with production of the foregoing gas and oil reserves would be based upon cost-of-service ratemaking and historical asset costs, with rate of return levels determined by various state regulatory commissions.\nITEM 8. CONSOLIDATED NATURAL GAS COMPANY AND SUBSIDIARIES (Cont.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)\n(B) QUARTERLY FINANCIAL DATA A summary of the quarterly results of operations for the years 1992 and 1993 follows. Because a major portion of the gas sold or transported by the Company's distribution and transmission operations is ultimately used for space heating, both revenues and earnings are subject to seasonal fluctuations, and third quarter results are usually the least significant of the year for Consolidated. Seasonal fluctuations are further influenced by the timing of price relief granted under regulation to compensate for certain past cost increases.\nITEM 8. CONSOLIDATED NATURAL GAS COMPANY AND SUBSIDIARIES (Cont.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Concluded)\n(C) COMMON STOCK MARKET PRICES AND RELATED MATTERS At December 31, 1993, there were 41,648 holders of the Company's common stock. The principal market for the stock is the New York Stock Exchange. Quarterly price ranges and dividends declared on the common stock for the years 1992 and 1993 follow. Restrictions on the payment of dividends are discussed in Note 12. ______________________________________________________________________________ Quarter First Second Third Fourth ______________________________________________________________________________ Market Price Range 1993 - High . . . . . . . $49 7\/8 $53 5\/8 $55 3\/8 $53 1\/4 - Low. . . . . . . . $43 1\/2 $48 5\/8 $48 3\/8 $42 5\/8\n1992 - High . . . . . . . $43 1\/2 $43 7\/8 $48 5\/8 $48 3\/8 - Low. . . . . . . . $33 5\/8 $35 $42 3\/8 $44 3\/8\nDividends Declared per Share 1993. . . . . . . . . . $.48 $.48 $.48 $.485 1992. . . . . . . . . . $.475 $.475 $.475 $.48 ______________________________________________________________________________\nITEM 8. CONSOLIDATED NATURAL GAS COMPANY AND SUBSIDIARIES (Cont.) SCHEDULE V - PROPERTY, PLANT AND EQUIPMENT (Note 1)\nITEM 8. CONSOLIDATED NATURAL GAS COMPANY AND SUBSIDIARIES (Cont.) SCHEDULE V - PROPERTY, PLANT AND EQUIPMENT (Note 1) (Continued)\nITEM 8. CONSOLIDATED NATURAL GAS COMPANY AND SUBSIDIARIES (Cont.) SCHEDULE V - PROPERTY, PLANT AND EQUIPMENT (Note 1) (Continued)\nITEM 8. CONSOLIDATED NATURAL GAS COMPANY AND SUBSIDIARIES (Cont.) SCHEDULE V - PROPERTY, PLANT AND EQUIPMENT (Note 1) (Concluded) Notes:\n(1) In view of the variety of properties and the large number of depreciation rates applied by subsidiary companies, it is considered impractical to set forth the rates used in computing provisions. However, the total provisions for depreciation of property, plant and equipment for the years ended December 31, 1991 through 1993, including amounts charged to accounts other than depreciation and amortization expense, were equivalent to approximately 4.8%, 4.3% and 4.2%, respectively, of the average capitalized investment subject to depreciation and amortization in those periods.\n(2) Includes transfers between utility and exploration and production operations and: 1993 1992 1991 (a) The change in the quantity of gas stored underground classified as gas plant in accordance with provisions of the systems of accounts prescribed by regulatory authorities . . . . . $3,294 $(35) $ -\n(b) Subsequent adjustments to a gas plant acquisition adjustment arising from Consolidated's purchase of Virginia Natural Gas, Inc. in 1990 . - - 893 ______ ____ ______\nTotal utility and exploration and production operations . . . . $3,294 $(35) $ 893 ====== ==== ======\n(3) Plant in service for the utility operations includes gas stored underground in the amounts of $108,180,000, $120,270,000 and $123,564,000 at December 31, 1991 through 1993, respectively, of which $10,355,000 at the end of 1991 and $10,342,000 at the end of 1992 and 1993 represents base gas required under joint operating agreements.\nITEM 8. CONSOLIDATED NATURAL GAS COMPANY AND SUBSIDIARIES (Cont.) SCHEDULE VI - ACCUMULATED DEPRECIATION, DEPLETION AND AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT\nITEM 8. CONSOLIDATED NATURAL GAS COMPANY AND SUBSIDIARIES (Cont.) SCHEDULE VI - ACCUMULATED DEPRECIATION, DEPLETION AND AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT (Continued)\nITEM 8. CONSOLIDATED NATURAL GAS COMPANY AND SUBSIDIARIES (Cont.) SCHEDULE VI - ACCUMULATED DEPRECIATION, DEPLETION AND AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT (Continued)\nITEM 8. CONSOLIDATED NATURAL GAS COMPANY AND SUBSIDIARIES (Cont.) SCHEDULE VI - ACCUMULATED DEPRECIATION, DEPLETION AND AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT (Concluded) Notes:\n(1) Includes depreciation and amortization charged to other income and expense accounts for the years 1991 through 1993 amounting to $107,000, $135,000 and $365,000, respectively.\n(2) Includes transfers between utility and exploration and production operations. Also includes charges to miscellaneous clearing and appointment accounts: 1993 1992 1991 Utility operations . . . . . . . . $4,970 $5,666 $6,329 Exploration and production operations. . 187 212 162 ______ ______ ______\nTotal utility and exploration and production operations . . . . . . $5,157 $5,878 $6,491 ====== ====== ======\nITEM 8. CONSOLIDATED NATURAL GAS COMPANY AND SUBSIDIARIES (Cont.) SCHEDULE IX - SHORT-TERM BORROWINGS\nITEM 8. CONSOLIDATED NATURAL GAS COMPANY AND SUBSIDIARIES (Concl.) SCHEDULE X - SUPPLEMENTARY INCOME STATEMENT INFORMATION\n_______________________________________________________________________________ Charged to Costs and Expenses _______________________________________________________________________________ Year Year Year Item 1993 1992 1991 _______________________________________________________________________________ (Thousands of Dollars) Maintenance and repairs: Charged to income account as maintenance $ 87,207 $ 79,128 $ 72,865 Charged to operation expense . . . . 656 826 962 ________ ________ ________ $ 87,863 $ 79,954 $ 73,827 ======== ======== ========\nDepreciation and amortization of intangible assets, preoperating costs and similar deferrals . . . . . . (Note) (Note) (Note)\nTaxes, other than payroll and income taxes, charged to income account as other taxes: Real and personal property taxes . . $ 55,933 $ 52,563 $ 48,066 Excise taxes on gross receipts. . . 75,803 70,743 69,459 Other . . . . . . . . . . . 26,795 24,191 21,691 ________ ________ ________ $158,531 $147,497 $139,216 ======== ======== ========\nRoyalties . . . . . . . . . . . $ 55,523 $ 54,400 $ 55,617 Advertising costs . . . . . . . . (Note) (Note) (Note) _______________________________________________________________________________ Note: Omitted inasmuch as amount is not in excess of one percent of total sales and revenues as reported in the Consolidated Statement of Income.\nITEM 9.","section_9":"ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE\nNot applicable\nPART III\nITEM 10.","section_9A":"","section_9B":"","section_10":"ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY\nInformation concerning the directors of the Company is hereby incorporated by reference to the Company's definitive proxy statement filed with the Commission pursuant to Regulation 14A within 120 days after the close of the Company's fiscal year. Information concerning the executive officers of the Company is on page 18 of this Report.\nITEM 11.","section_11":"ITEM 11. EXECUTIVE COMPENSATION\nThis information is hereby incorporated by reference to the Company's definitive proxy statement filed with the Commission pursuant to Regulation 14A within 120 days after the close of the Company's fiscal year.\nITEM 12.","section_12":"ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT\nThis information is hereby incorporated by reference to the Company's definitive proxy statement filed with the Commission pursuant to Regulation 14A within 120 days after the close of the Company's fiscal year.\nITEM 13.","section_13":"ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS\nThis information is hereby incorporated by reference to the Company's definitive proxy statement filed with the Commission pursuant to Regulation 14A within 120 days after the close of the Company's fiscal year.\nPART IV\nITEM 14.","section_14":"ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K\nREPORTS ON FORM 8-K\nNo reports on Form 8-K were filed during the last quarter of the calendar year 1993, the year for which this Form 10-K is being filed.\nDOCUMENTS FILED AS A PART OF THIS REPORT\nFinancial Statements Financial Statement Schedules\nAll of the financial statements and financial statement schedules filed as a part of this Report are included in ITEM 8 and reference is made to the index on page 47.\nITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (Continued)\nConsent of Independent Accountants\nWe hereby consent to the incorporation by reference in the Prospectuses con- stituting part of the Registration Statements on Form S-3 (Nos. 33-1040, 33- 49469 and 33-52585) and Form S-8 (Nos. 2-77204, 2-97948, 33-40478 and 33-44892) of Consolidated Natural Gas Company of our report dated February 16, 1994, appearing on page 48 of this Form 10-K. We also consent to the references to us under the heading \"Experts\" in such Prospectuses.\nPRICE WATERHOUSE\nPrice Waterhouse\n600 Grant Street Pittsburgh, Pennsylvania 15219-9954 March 28, 1994\nEXHIBITS _______________________________________________________________________________ SEC Exhibit Number Description of Exhibit _______________________________________________________________________________\n(3) Articles of Incorporation and By-Laws: (3A) Certificate of Incorporation of Consolidated Natural Gas Company, restated October 4, 1990 (incorporated by reference to Exhibit A-1 to the Application-Declaration of Consolidated Natural Gas Company on Form U-1, File No. 70-7811)\n(3B) By-Laws of Consolidated Natural Gas Company, last amended March 1, 1993 (incorporated by reference to Exhibit (3B) filed with Consolidated Natural Gas Company's Form 10-K for the year ended December 31, 1992, File No. 1-3196)\n(4) Instruments Defining the Rights of Security Holders, Including Indentures: (4A) (1) Indentures of Consolidated Natural Gas Company: Indentures of Consolidated Natural Gas Company are incorporated by reference to previously filed material as indicated on the list filed herewith\n(2) Note Purchase Agreement of Virginia Natural Gas: Note Purchase Agreement dated as of January 1, 1989, between Virginia Natural Gas, Inc. and the Aid Association for Lutherans relating to $20,000,000 principal amount of 9.94% Senior Notes, Series A, due January 1, 1999 (incorporated by reference to Exhibit B-1 to the Application-Declaration of Consolidated Natural Gas Company on Form U-1, File No. 70-7667)\n(4B) Section 203 of the Delaware General Corporation Law, \"Business Combinations With Interested Stockholders,\" effective February 2, 1988 (incorporated by reference to Exhibit (4B) filed with Consolidated Natural Gas Company's Form 10-K for the year ended December 31, 1987, File No. 1-3196)\nOther portions of the Delaware General Corporation Law affecting security holder rights are considered routine and are not filed hereunder\nITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (Continued)\nEXHIBITS (Continued) _______________________________________________________________________________ SEC Exhibit Number Description of Exhibit _______________________________________________________________________________\n(10) Material Contracts: (Exhibits (10A) through (10G) listed below are incorporated by reference to the Exhibit with the same designation filed with Consolidated Natural Gas Company's Form 10-K for the year ended December 31, 1987, File No. 1-3196; Exhibits (10H) and (10I) listed below are incorporated by reference to the Exhibit with the same designation filed with Consolidated Natural Gas Company's Form 10-K for the year ended December 31, 1989, File No. 1-3196; Exhibit (10J) listed below is incorporated by reference to the Exhibit with the same designation filed with Consolidated Natural Gas Company's Form 10-K for the year ended December 31, 1991, File No. 1-3196; Exhibit (10K) listed below is incorporated by reference to the Exhibit with the same designation filed with Consolidated Natural Gas Company's Form 10-K for the year ended December 31, 1992, File No. 1-3196)\n(10A) Form of Split Dollar Insurance Agreement between Consolidated Natural Gas Company and certain employees and Directors\n(10B) Form of Supplemental Death Benefit Payment Agreement between Consolidated Natural Gas Company and certain employees and Directors\n(10C) Consolidated Natural Gas Company Supplemental Retirement Benefit Plan\n(10D) System Supplemental Retirement Plan for Certain Management Employees of Consolidated Natural Gas Company and Its Participating Subsidiaries\n(10E) Form of agreement between Consolidated Natural Gas Company and nonemployee Directors for deferral of payment of retainer and attendance fees, effective before 1987\n(10F) Deferred Compensation Plan for Directors of Consolidated Natural Gas Company, effective for years beginning with 1987\n(10G) Consolidated Natural Gas Company Cash Incentive Bonus Deferral Plan\n(10H) Form of Change of Control Employment Agreement between Consolidated Natural Gas Company and certain employees\n(10I) Form of Change of Control Salary Continuation Agreement between Consolidated Natural Gas Company and certain employees\n(10J) Description of Consolidated Natural Gas Company Annual Executive Incentive Program\n(10K) Unfunded Supplemental Benefit Plan for Employees of Consolidated Natural Gas Company and Its Participating Subsidiaries Who Are Not Represented by a Recognized Union\nITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (Concluded)\nEXHIBITS (Concluded) _______________________________________________________________________________ SEC Exhibit Number Description of Exhibit _______________________________________________________________________________\n(11) Statement re Computation of Per Share Earnings: Computations of Earnings Per Share of Common Stock, Primary Earnings Per Share, and Fully Diluted Earnings Per Share of Consolidated Natural Gas Company and Subsidiaries for the years ended December 31, 1991 through 1993, are filed herewith\n(12) Statement re Computation of Ratios: Ratio of Earnings to Fixed Charges of Consolidated Natural Gas Company and Subsidiaries for the calendar years 1989-1993, inclusive, are filed herewith\n(21) Subsidiaries of the Registrant: Subsidiaries of Consolidated Natural Gas Company, is filed herewith\n(23) Consents of Experts and Counsel: (23A) Report of Ralph E. Davis Associates, Inc., independent geologists, dated February 15, 1994, and consent letter authorizing the filing of such report as an exhibit to Consolidated Natural Gas Company's Form 10-K for the year ended December 31, 1993, are filed herewith\n(23B) Consent letter of John T. Boyd Company, Mining and Geological Engineers, authorizing the use of coal reserve estimates in Consolidated Natural Gas Company's Form 10-K for the year ended December 31, 1993, is filed herewith\n(23C) Consent of Price Waterhouse - included as part of this ITEM 14 _______________________________________________________________________________\nSIGNATURES\nPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.\nCONSOLIDATED NATURAL GAS COMPANY ________________________________ (Registrant)\nGEORGE A. DAVIDSON, JR. By___________________________\n(George A. Davidson, Jr.) Chairman of the Board March 28, 1994 and Chief Executive Officer\nPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 28, 1994.\nGEORGE A. DAVIDSON, JR. THEODORE LEVITT ________________________________ ________________________________ (George A. Davidson, Jr.) (Theodore Levitt) Chairman of the Board Director and Chief Executive Officer, and Director STEVEN A. MINTER ________________________________ L. D. JOHNSON (Steven A. Minter) ________________________________ Director (L. D. Johnson) Executive Vice President and Chief Financial Officer, WALTER R. PEIRSON and Director ________________________________ (Walter R. Peirson) Director S. R. MCGREEVY ________________________________ (S. R. McGreevy) RICHARD P. SIMMONS Vice President, Accounting ________________________________ and Financial Control (Richard P. Simmons) Director\nJ. W. CONNOLLY ________________________________ A. A. SOMMER, JR. (J. W. Connolly) ________________________________ Director (A. A. Sommer, Jr.) Director\nPAUL E. LEGO ________________________________ LOIS WYSE (Paul E. Lego) ________________________________ Director (Lois Wyse) Director\nAPPENDIX TO FORM 10-K\nThe following graphic material which appeared in the paper format version of the document is omitted from this electronic format document:\nMap of Principal Facilities at December 31, 1993 (Page 20)\nThis map shows the primary operating areas of Consolidated Natural Gas Company in Ohio, Pennsylvania, Virginia and West Virginia. The map shows the principal cities served at retail including Cleveland, Akron, Youngstown, Canton, Warren, Lima, Ashtabula and Marietta in Ohio; Pittsburgh (a portion), Altoona and Johnstown in Pennsylvania; Norfolk, Newport News and Williamsburg in Virginia; and Clarksburg and Parkersburg in West Virginia. The map also shows the general location of Consolidated's pipelines and joint venture pipelines, including gas sale or transport connections with wholesale customers and gas purchase or transport connections with other pipelines. Also shown on the map are the general location of certain compressor facilities and the general location of underground storage fields.\nMap of Exploration and Production Areas at December 31, 1993 (Page 21)\nThis United States map shows the general areas in which Consolidated conducts its exploration and production activities. These areas include: the Gulf of Mexico, offshore Louisiana and Texas; the Gulf Coast Basin; Permian Basin; Anadarko Basin; Arkoma Basin; Black Warrior Basin; San Juan Basin; Williston Basin; Michigan Basin; Rocky Mountain Basins and the Appalachian Region. Also shown is the general location of Consolidated's Canadian exploration and production properties in Alberta, Canada.\nEXHIBIT INDEX\n_______________________________________________________________________________ SEC Exhibit Number Description of Exhibit _______________________________________________________________________________\n(3) Articles of Incorporation and By-Laws: (3A) Certificate of Incorporation of Consolidated Natural Gas Company, restated October 4, 1990 (incorporated by reference to Exhibit A-1 to the Application-Declaration of Consolidated Natural Gas Company on Form U-1, File No. 70-7811)\n(3B) By-Laws of Consolidated Natural Gas Company, last amended March 1, 1993 (incorporated by reference to Exhibit (3B) filed with Consolidated Natural Gas Company's Form 10-K for the year ended December 31, 1992, File No. 1-3196)\n(4) Instruments Defining the Rights of Security Holders, Including Indentures: (4A) (1) Indentures of Consolidated Natural Gas Company: Indentures of Consolidated Natural Gas Company are incorporated by reference to previously filed material as indicated on the list filed herewith\n(2) Note Purchase Agreement of Virginia Natural Gas: Note Purchase Agreement dated as of January 1, 1989, between Virginia Natural Gas, Inc. and the Aid Association for Lutherans relating to $20,000,000 principal amount of 9.94% Senior Notes, Series A, due January 1, 1999 (incorporated by reference to Exhibit B-1 to the Application-Declaration of Consolidated Natural Gas Company on Form U-1, File No. 70-7667)\n(4B) Section 203 of the Delaware General Corporation Law, \"Business Combinations With Interested Stockholders,\" effective February 2, 1988 (incorporated by reference to Exhibit (4B) filed with Consolidated Natural Gas Company's Form 10-K for the year ended December 31, 1987, File No. 1-3196)\nOther portions of the Delaware General Corporation Law affecting security holder rights are considered routine and are not filed hereunder\n(10) Material Contracts: (Exhibits (10A) through (10G) listed below are incorporated by reference to the Exhibit with the same designation filed with Consolidated Natural Gas Company's Form 10-K for the year ended December 31, 1987, File No. 1-3196; Exhibits (10H) and (10I) listed below are incorporated by reference to the Exhibit with the same designation filed with Consolidated Natural Gas Company's Form 10-K for the year ended December 31, 1989, File No. 1-3196; Exhibit (10J) listed below is incorporated by reference to the Exhibit with the same designation filed with Consolidated Natural Gas Company's Form 10-K for the year ended December 31, 1991, File No. 1-3196; Exhibit (10K) listed below is incorporated by reference to the Exhibit with the same designation filed with Consolidated Natural Gas Company's Form 10-K for the year ended December 31, 1992, File No. 1-3196)\n(10A) Form of Split Dollar Insurance Agreement between Consolidated Natural Gas Company and certain employees and Directors\n(10B) Form of Supplemental Death Benefit Payment Agreement between Consolidated Natural Gas Company and certain employees and Directors\n(10C) Consolidated Natural Gas Company Supplemental Retirement Benefit Plan\n_______________________________________________________________________________ SEC Exhibit Number Description of Exhibit _______________________________________________________________________________\n(10) Material Contracts (Continued): (10D) System Supplemental Retirement Plan for Certain Management Employees of Consolidated Natural Gas Company and Its Participating Subsidiaries\n(10E) Form of agreement between Consolidated Natural Gas Company and nonemployee Directors for deferral of payment of retainer and attendance fees, effective before 1987\n(10F) Deferred Compensation Plan for Directors of Consolidated Natural Gas Company, effective for years beginning with 1987\n(10G) Consolidated Natural Gas Company Cash Incentive Bonus Deferral Plan\n(10H) Form of Change of Control Employment Agreement between Consolidated Natural Gas Company and certain employees\n(10I) Form of Change of Control Salary Continuation Agreement between Consolidated Natural Gas Company and certain employees\n(10J) Description of Consolidated Natural Gas Company Annual Executive Incentive Program\n(10K) Unfunded Supplemental Benefit Plan for Employees of Consolidated Natural Gas Company and Its Participating Subsidiaries Who Are Not Represented by a Recognized Union\n(11) Statement re Computation of Per Share Earnings: Computations of Earnings Per Share of Common Stock, Primary Earnings Per Share, and Fully Diluted Earnings Per Share of Consolidated Natural Gas Company and Subsidiaries for the years ended December 31, 1991 through 1993, are filed herewith\n(12) Statement re Computation of Ratios: Ratio of Earnings to Fixed Charges of Consolidated Natural Gas Company and Subsidiaries for the calendar years 1989-1993, inclusive, are filed herewith\n(21) Subsidiaries of the Registrant: Subsidiaries of Consolidated Natural Gas Company, is filed herewith\n(23) Consents of Experts and Counsel: (23A) Report of Ralph E. Davis Associates, Inc., independent geologists, dated February 15, 1994, and consent letter authorizing the filing of such report as an exhibit to Consolidated Natural Gas Company's Form 10-K for the year ended December 31, 1993, are filed herewith\n(23B) Consent letter of John T. Boyd Company, Mining and Geological Engineers, authorizing the use of coal reserve estimates in Consolidated Natural Gas Company's Form 10-K for the year ended December 31, 1993, is filed herewith\n(23C) Consent of Price Waterhouse - included as part of ITEM 14 _______________________________________________________________________________","section_15":""}
{"filename":"85408_1993.txt","cik":"85408","year":"1993","section_1":"ITEM 1. BUSINESS\nRowan Companies, Inc.(the \"Company\"), organized in 1947 as a Delaware corporation and a successor to a contract drilling business conducted since 1923 under the name Rowan Drilling Company, Inc., is engaged principally in the contract drilling of oil and gas wells in domestic and foreign areas. As noted below, it also provides aircraft services and, since February, 1994, has operated a mini-steel mill, a heavy equipment manufacturing operation and a marine rig construction yard through the purchase of the net assets of Marathon LeTourneau Company.\nOffshore operations of the Company consist primarily of contract drilling services utilizing mobile rigs, principally a fleet of 20 self-elevating drilling platforms (\"jack-up rigs\"), including three heavy duty cantilever jack-up rigs (\"Gorilla Class rigs\") delivered in the 1984-86 period. Beginning in 1992, the Company has moved towards Total Project Management, an approach to drilling operations which emphasizes drilling and completing wells on a turnkey basis. In that same year it began providing offshore platform installation and removal services.\nThe Company provides contract and charter helicopter and fixed-wing aircraft services. In Alaska and in the Gulf of Mexico, services provided are primarily to support oil and gas related operations, with the Company's fleet consisting on March 1, 1994 of 94 helicopters and 15 fixed-wing aircraft. Since 1991, the Company has owned a 49% interest in a Dutch-based joint venture company, KLM ERA Helicopters B.V. (\"KLM ERA\"), which owns a fleet consisting of 10 helicopters in the Dutch and British sectors of the North Sea and one helicopter in Canada.\nOn February 11, 1994, the Company purchased through its wholly-owned subsidiary, LeTourneau, Inc., the net assets of Marathon LeTourneau Company for $52.1 million with $10.4 million cash paid at the time of the purchase and the balance being seller-financed by promissory notes bearing interest at 7% and payable at the end of five years. LeTourneau, Inc. operates a mini-steel mill that recycles scrap and produces alloy steel and steel plate; a manufacturing facility that produces heavy equipment for the mining, timber and material handling industries including, among other things, front-end loaders up to 50 ton-capacity and trucks under the registered trademark, Titan, up to 240 ton capacity; and a marine division that has built over one-third of all mobile offshore jack-up drilling rigs, including all 20 operated by Rowan.\nInformation regarding revenues, operating profit, identifiable assets and export sales of the Company's industry segments and foreign and domestic operations for each of the three years in the period ended December 31, 1993, is incorporated by reference herein and provided in Footnote 10 of the Notes to Consolidated Financial Statements on page 25 of the Company's Annual Report to Stockholders for the fiscal year ended December 31, 1993 (\"Annual Report\"), incorporated portions of which are filed as Exhibit 13 hereto. Information on the Company's manufacturing segment is not provided since the purchase occurred after year-end 1993.\nIn the years 1991, 1992 and 1993, the Company had revenues from individual customers representing more than 10% of consolidated revenues as follows: Conoco, Inc. - 23% and 11% for 1991 and 1992, respectively; and Shell Oil Company - 12% for 1991 and Phillips Petroleum Company - 17% for 1993. Such revenues were primarily from drilling operations.\nFor a discussion of the Company's availability of funds for future operations and estimated capital expenditures for 1994 which would be in addition to the $52.1 million purchase of the net assets of Marathon LeTourneau, see \"Liquidity and Capital Resources\" under \"Management's Discussion and Analysis of Financial Condition and Results of Operations\" on page 14 of the Annual Report, which information is incorporated herein by reference.\nCONTRACT DRILLING\nIn 1993, drilling operations generated an operating profit (income from operations before deducting general and administrative expenses) of $19.1 million.\nOffshore Operations\nAt December 31, 1993, the Company's drilling fleet consisted of 20 deep-water jack-up rigs (eight conventional and twelve cantilever, including three Gorilla Class rigs in the latter category), one semi-submersible rig and three submersible barge rigs. The Company owns all of the rigs comprising its fleet except for two cantilever jack-up rigs leased under sale\/leaseback arrangements expiring in 1999 and 2000.\nSince completing a major drilling rig expansion program conducted in the early to mid-1980s, the Company's capital expenditures have been primarily for improvements to existing drilling rigs and the purchase of aircraft. Adding to these capital expenditures was the November 1991 acquisition of the 49% interest in KLM ERA and the February 1994 purchase of the net assets of Marathon LeTourneau. See ITEM 2.","section_1A":"","section_1B":"","section_2":"ITEM 2. PROPERTIES\nThe Company leases as its corporate headquarters 57,800 square feet of space in an office tower located at 2800 Post Oak Boulevard in Houston, Texas.\nDRILLING RIGS\nThe following is a summary of the principal drilling equipment owned or operated by the Company and in service at March 31, 1994. See \"Liquidity and Capital Resources\" as appearing in \"Management's Discussion and Analysis of Financial Condition and Results of Operations\" on page 14 in the Annual Report which page is incorporated herein by reference.\nOFFSHORE\nITEM 2. PROPERTIES\nOFFSHORE(Continued)\nITEM 2. PROPERTIES\n(Continued)\n______________________\n(a) Classes 200-C (\"Gorilla\"), 116-C, 116, 84 and 52 are nomenclature assigned by LeTourneau, Inc. to jack-ups of its design and construction. (b) Indicates rated water depth in current location and rated drilling depth, respectively. (c) Unit modified to increase operating capability in hostile environments. (d) Gorilla Class unit designed for hostile environment capability. (e) Unit equipped with a \"top drive\" drilling system. (f) Unit equipped with a \"skid base\" unit. (g) Unit equipped with drilling\/heavy-lift crane option. (h) Unit equipped with leg extensions. (i) Rig sold December 1984 and leased back for 15 years. (j) Rig sold December 1985 and leased back for 15 years. (k) Onshore rigs, including the three used rigs purchased in 1991, were constructed at various dates between 1960 and 1982, utilizing, in some instances, new as well as used equipment. Most of the older rigs have been substantially rebuilt subsequent to their respective dates of construction. (l) Refer to \"Contracts\" on page 4 of this Form 10-K for definition of types of contracts. (m) Indicates estimated completion date of work to be performed. (n) Currently under tow from Alaska. (o) Rigs currently being shipped to the United States.\nThe Company's Drilling Division leases and, in some cases, owns various operating and administrative facilities generally consisting of office, maintenance and storage space in the states of Alaska, Texas and Louisiana and, on a foreign basis, in the countries of Canada, Venezuela, England, Scotland, The Netherlands, and Trinidad.\nAIRCRAFT\nAt March 1, 1994 the U.S.-based Company-owned helicopter fleet consisted of 14 twin-engine turbine IFR rated Bell 212 helicopters (14 passenger), 16 twin-engine turbine IFR rated Bell 412 helicopters (14 passenger), 31 twin-engine turbine MBB BO-105CBS helicopters (five passenger), two Aerospatiale 332L Super Puma helicopters (19 passenger) and 31 various single-engine turbine helicopters (four to six passenger). The U.S.-based fixed-wing fleet of Company-owned aircraft consisted of four Convair 580s (44 passenger), nine DeHavilland Twin Otters (9-19 passenger), one DeHavilland Dash 8 (37 passenger), one Lear Jet 35A (six passenger) and one Beechcraft King Air 200C (six passenger).\nHelicopters owned by KLM ERA on March 1, 1994 consisted of six twin-engine turbine IFR rated Sikorsky S-61N helicopters (26 passenger) and five twin-engine turbine IFR rated Sikorsky S-76B helicopters (13 passenger).\nThe Company's principal aircraft bases in Alaska, all located on leased property, are a fixed-wing air service center (57,000 square feet of hangar, repair and office facilities) at Anchorage International Airport, with an adjacent helicopter hangar facility (14,800 square feet) and hangar, office and repair facilities at Fairbanks International Airport (13,000 square feet). The Company also maintains similar, smaller helicopter facilities in Alaska at Deadhorse, Juneau, Valdez and Yakutat.\nThe Company's principal facilities to accommodate its Gulf of Mexico operations are located on leased property at Lake Charles Regional Airport.The facilities, comprising 53,000 square feet, include helicopter hangars, a repair facility and an operations and administrative building. The Company also operates a helicopter facility (20,700 square feet of hangar, repair and office facilities) located on leased property at the Terrebonne Airport in Houma, Louisiana and a helicopter facility (5,700 square feet of hangar, repair and office facilities) located on leased property in New Iberia, Louisiana.\nKLM ERA's principal facilities to accommodate its operations in the Dutch sector of the North Sea include bases in Amsterdam and Den Helder. The Amsterdam facility, comprising 149,000 square feet leased and 17,000 square feet subleased, includes helicopter hangars, a repair facility, an operations\/administrative building and a passenger waiting area. The Den Helder facility, comprising 35,000 square feet, includes a helicopter hangar, a repair facility and an operations\/administrative building. The Amsterdam operations are scheduled for shutdown and consolidation with the Den Helder operations by the fourth quarter of 1994.\nManufacturing Facilities\nLeTourneau's principal manufacturing facility and headquarters are located in Longview, Texas on approximately 2,400 acres with approximately 1.2 million square feet under roof. Included within the facility are: A mini-steel mill having approximately 330,000 square feet of covered work space and housing two 25-ton electric arc furnaces having an aggregate 120,000 tons per year capacity; a fabrication shop having approximately 300,000 square feet of covered work space and housing a 3,000 ton vertical bender for making roll-ups or flattening materials up to 2 1\/2 inches thick by 11 feet wide; a machine shop having approximately 140,000 square feel of covered work space and housing various types of machinery; and an assembly shop have approximately 124,000 square feel and housing various types of machinery.\nThe marine division's facility located in Vicksburg, Mississippi is located on 1,850 acres of land and has approximately 476,000 square feet of covered work space. This facility is currently closed and the businesses formerly carried on at this location have been relocated to the Longview, Texas facility.\nThe LeTourneau Portland Division's distributor for forest products in the Northwestern United States, is located on a six acre site in Troutdale, Oregon\nwith approximately 22,000 square feet of building space.\nThe Western Mining Division of LeTourneau located in Tucson, Arizona is housed in a 20,000 square foot leased facility. It functions as the distributor for LeTourneau's mining equipment products in the Western United States.\nITEM 3.","section_3":"ITEM 3. LEGAL PROCEEDINGS\nThe Company is involved from time to time in litigation arising out of the conduct of the Company's operations and other matters, not all the potential liabilities with respect to which are covered by the terms of the Company's insurance policies. While the Company is unable to predict the ultimate liabilities which may result from such litigation, the Company believes that no such litigation in which the Company was involved as of March 31, 1994 will have a material adverse effect on the financial position or results of operations of the Company.\nITEM 4.","section_4":"ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS\nThere were no matters submitted to a vote of the Company's common stockholders during the fourth quarter of the fiscal year ended December 31, 1993.\nADDITIONAL ITEM. EXECUTIVE OFFICERS OF THE REGISTRANT\nThe names, positions, years of accredited service and ages of the officers of the Company and certain officers of the Company's wholly-owned subsidiary, Era Aviation, Inc., as of March 24, 1994 are listed below. Officers of both entities are normally appointed annually by the entities' Board of Directors at the bylaws prescribed meetings held in the spring and serve at the discretion of the Board of Directors. There are no family relationships among these officers, nor any arrangements or understandings between any officer and any other person pursuant to which the officer was selected.\nYears of Accredited Name Position Service Age - -------------------- -------------------------------- ---------- ----- Executive Officers of the Registrant:\nC. R. Palmer Chairman of the Board, President 34 59 and Chief Executive Officer R. G. Croyle Executive Vice President 20 51 D. F. McNease Senior Vice President, Drilling 19 42 John L. Buvens Vice President, Legal 13 38 James B. Davis Vice President, Engineering 20 43 Paul L. Kelly Vice President, Special Projects 11 54 Bill S. Person Vice President, Industrial Relations 26 45 William C. Provine Vice President, Investor Relations 7 47 E. E. Thiele Vice President, Finance, Adminis- 24 54 tration and Treasurer\nOther Officers of the Registrant:\nMark H. Hay Secretary and Assistant Treasurer 15 49 P. G. Wheeler Assistant Treasurer 19 46 Lynda A. Aycock Assistant Treasurer 22 47\nCertain Officers of Era Aviation, Inc.:\nC. W. Johnson President and Chief Operating Officer 16 50 James Vande Voorde Vice President 20 54\nEach of the executive officers and other officers of the Company and the two officers of Era Aviation, Inc. listed above continuously served in the position\nshown above for more than the past five years except as noted in the following paragraphs.\nSince October 1993, Mr. Croyle's principal occupation has been in the position set forth. For more than five years prior to that time, Mr. Croyle served as Vice President, Legal of the Company.\nSince October 1993, Mr. McNease's principal occupation has been in the position set forth. From April 1991 to October 1993, Mr. McNease served as Vice President, Drilling of the Company. For more than five years prior to that time, he served as Vice President of Rowandrill, Inc., a subsidiary of the Company.\nSince October 1993, Mr. Buvens' principal occupation has been in the position set forth. For more than five years prior to that time, Mr. Buvens served as an Attorney for the Company.\nSince October 1993, Mr. Davis' principal occupation has been in the position set forth. From January 1990 to October 1993, Mr. Davis served as Manager of Engineering\/Purchasing & Chief Engineer of the Company. From June 1989 to January 1990, he served as, he served as an Engineer for the Company. For more than five years prior to that time, he served as a Tool Pusher for the Company.\nSince October 1993, Mr. Person's principal occupation has been in the position set forth. From April 1990 to October 1993, Mr. Person served as Director of British American Offshore Limited, a subsidiary of the Company. For more than five years prior to that time, he served as Manager of Industrial Relations of the Company.\nSince October 1993, Mr. Provine's principal occupation has been in the position set forth. For more than five years prior to that time, Mr. Provine served as Vice President of Rowandrill, Inc., a subsidiary of the Company.\nSince January 1994, Mr. Thiele's principal occupation has been in the position set forth. From February 1989 to January 1994, Mr. Thiele served as Vice President, Administration and Finance.\nSince October 1993, Ms. Aycock's principal position has been in the position set forth. For more than five years prior to that time, Ms. Aycock served as an Accountant for the Company.\nSince December 1993, Mr. Johnson's principal occupation has been in the position set forth. For more than five years prior to that time, Mr. Johnson served as Executive Vice President of Era Aviation, Inc., a subsidiary of the Company.\nIn addition to serving in the position shown above, Mr. Wheeler has also served as Corporate Tax Director of the Company for more than five years.\nPART II\nITEM 5.","section_5":"ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS\nThe information required hereunder regarding the Common Stock price range and cash dividend information for 1993 and 1992 and the number of holders of Common Stock is set forth on page 26 of the Company's Annual Report under the title \"Common Stock Price Range, Cash Dividends and Stock Splits\", and is incorporated herein by reference, except for the final two paragraphs under such title. Also incorporated herein by reference to the Annual Report is the first paragraph in the right hand column appearing on page 14 within \"Management's Discussion and Analysis of Financial Condition and Results of Operations\", such paragraph providing information pertinent to the Company's ability to pay cash dividends subject to certain restrictions. The Company's Common Stock is listed on the New York Stock Exchange and the Pacific Stock Exchange.\nITEM 6.","section_6":"ITEM 6. SELECTED FINANCIAL DATA\nThe information required hereunder is set forth on pages 10 and 11 of the Company's Annual Report under the title \"Twelve Year Financial Review\" and is incorporated herein by reference except for the information for the years 1988, 1987, 1986, 1985, 1984, 1983, and 1982.\nITEM 7.","section_7":"ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS\nThe information required hereunder is set forth on pages 12, 13 and 14 under the title \"Management's Discussion and Analysis of Financial Condition and Results of Operations\" in the Company's Annual Report and is incorporated herein by reference.\nITEM 8.","section_7A":"","section_8":"ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA\nRefer to ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K on page 21 of this Form 10-K for a listing of financial statements of the registrant and its subsidiaries, all of which financial statements are incorporated by reference under this item.\nITEM 9.","section_9":"ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE\nNone\nPART III\nITEM 10.","section_9A":"","section_9B":"","section_10":"ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT\nThe information provided under the columns entitled Name, Principal Occupation for the Past Five Years, Age and Year First Became Director in the table on pages 5 and 6, in footnotes (1) and (3) on page 6 and in the paragraph following footnote (5) on page 4 of the Proxy Statement for the Company's 1994 Annual Meeting of Stockholders (the \"Proxy Statement\") is incorporated herein by reference. There are no family relationships among the directors or nominees for directors and the executive officers of the Company, nor any arrangements or understandings between any director or nominee for director and any other person pursuant to which such director or nominee for director was selected. Except as otherwise indicated, each director or nominee for director of the Company has been employed or engaged for the past five years in the principal occupation set forth opposite his name in the information incorporated by reference. See ADDITIONAL ITEM. EXECUTIVE OFFICERS OF THE REGISTRANT on pages 18 and 19 of this Form 10-K for information relating to executive officers.\nITEM 11.","section_11":"ITEM 11. EXECUTIVE COMPENSATION\nThe standard arrangement for compensating directors described in footnote (2)\non page 6 of the Proxy Statement and the information appearing under the titles \"Summary Compensation Table\", \"Option Grants in Last Fiscal Year\", Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values\", \"Option Plans\", \"Convertible Debenture Incentive Plan\" and \"Pension Plans\" on pages 8 through 11 of the Proxy Statement are incorporated herein by reference. In accordance with the instructions to Item 402 of Regulation S-K, the information contained in the Proxy Statement under the titles \"Board Compensation Committee Report on Executive Compensation\" and \"Stockholder Return Performance Presentation\" shall not be deemed to be filed as part of this Form 10-K.\nITEM 12.","section_12":"ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT\nThe information regarding security ownership of certain beneficial owners and management of the Company set forth under the headings \"Voting Securities Outstanding\" appearing on page 2 and \"Security Ownership of Management and Principal Stockholders\" appearing on pages 2 through 4 of the Proxy Statement is incorporated herein by reference.\nThe business address of all directors is the principal executive offices of the Company as set forth on the facing page of this Form 10-K.\nITEM 13.","section_13":"ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS\nInformation regarding certain business relationships and transactions between the Company and certain of the directors of the Company under the heading \"Certain Transactions\" appearing on page 14 of the Proxy Statement is incorporated herein by reference.\nPART IV\nITEM 14.","section_14":"ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K\n(a)1. Financial Statements\nThe following financial statements and independent auditors' report, included in the Annual Report, are incorporated herein by reference:\nPage of 1993 Annual Report -------------\nIndependent Auditors' Report............................. 15 Consolidated Balance Sheet, December 31, 1993 and 1992.............................. 16 Consolidated Statement of Operations for the Years Ended December 31, 1993, 1992 and 1991............ 17 Consolidated Statement of Changes in Stockholders' Equity for the Years Ended December 31, 1993, 1992 and 1991................................................ 18 Consolidated Statement of Cash Flows for the Years Ended December 31, 1993, 1992 and 1991........ 19 Notes to Consolidated Financial Statements............... 20 Selected Quarterly Financial Data (Unaudited) for the Quarters Ended March 31, June 30, September 30 and December 31, 1993 and 1992.......................... 26\n2. Financial Statement Schedules Page of This Report -----------\nIndependent Auditors' Report.............................. 27 V - Property and Equipment for the Years Ended December 31, 1993, 1992 and 1991.................... 28 VI - Accumulated Depreciation and Amortization\nof Property and Equipment for the Years Ended December 31, 1993, 1992 and 1991.............. 30 IX - Short-Term Borrowings for the Years Ended December 31, 1993, 1992 and 1991.................... 31\nFinancial Statement Schedules I, II, III, IV, VII, VIII, X, XI, XII, XIII and XIV have been omitted as not required, not significant or because the required information is shown in Notes to the Consolidated Financial Statements of the Company's Annual Report.\n3. Exhibits:\nUnless otherwise indicated below as being incorporated by reference to another filing of the Company with the Securities and Exchange Commission, each of the following exhibits is filed herewith:\n3a Restated Certificate of Incorporation of the Company, dated February 17, 1984, incorporated by reference to: Exhibit 3a to the Company's Form 10-K for the fiscal year ended December 31, 1983 (File No. 1-5491); Exhibit 4.2 to the Company's Registration Statement on Form S-3 (Registration No. 33-13544); and Exhibits 4a, 4b, 4c and 4d below.\n3b Bylaws of the Company amended as of April 23, 1993, incorporated by reference to Exhibit 3 to the Company's Form 10Q for the quarter ended March 31, 1993 (File No. 1-5491).\n4a Certificate of Designation of the Company's $2.125 Convertible Exchangeable Preferred Stock incorporated by reference to Exhibit 4.2 to the Company's Registration Statement on Form S-3 (Registration No. 33-6476).\n4b Certificate of Designation of the Company's Series I Preferred Stock incorporated by reference to Exhibit 4b to the Company's Form 10-K for the fiscal year ended December 31, 1986 (File No.1-5491).\n4c Certificate of Designation of the Company's Series II Preferred Stock incorporated by reference to Exhibit 4c to the Company's Form 10-K for the fiscal year ended December 31, 1987 (File No.1-5491).\n4d Certificate of Designation of the Company's Series A Junior Preferred Stock dated March 2, 1992 incorporated by reference to Exhibit 4d to the Company's Form 10-K for the fiscal year ended December 31, 1991 (File No. 1-5491).\n4e Rights Agreement dated as of February 25, 1992 between the Company and Citibank, N.A. as Rights Agent incorporated by reference to Exhibit 1 to the Company's Current Report on Form 8-K dated March 2, 1992 (File No. 1-5491).\n4f Indenture dated December 1, 1991 between the Company and Bankers Trust Company, as Trustee, relating to the Company's 11-7\/8% Senior Notes due 2001 incorporated by reference to Exhibit 28.1 to the Company's Current Report on Form 8-K dated December 12, 1991 (File No. 1-5491).\n4g Specimen Common Stock certificate, incorporated by reference to Exhibit 4g to the Company's Form 10-K for the fiscal year ended December 31, 1992 (File No. 1-5491).\n10a 1980 Nonqualified Stock Option Plan of the Company together with form of Stock Option Agreement related thereto incorporated by reference to Exhibit 5.10 to the Company's Registration Statement on Form S-7 (Registration No. 2-68622).\n10b 1988 Nonqualified Stock Option Plan of the Company as amended together\nwith form of Stock Option Agreement related thereto incorporated by reference to Exhibit 10b of the Company's Form 10-K for the fiscal year ended December 31, 1992 (File No. 1-5491).\n10c Amendment No. 1 dated October 25, 1990, to all then outstanding Stock Option Agreements related to the 1980 Nonqualified Stock Option Plan of the Company incorporated by reference to Exhibit 10c to the Company's Form 10-K for the fiscal year ended December 31, 1990 (File No. 1-5491).\n10d Amendment No. 2 dated May 23, 1991, to all then outstanding Stock Option Agreements related to the 1980 Nonqualified Stock Option Plan of the Company incorporated by reference to Exhibit 10d to the Company's Form 10-K for the fiscal year ended December 31, 1991 (File No. 1-5491).\n10e Amendment No. 1 dated October 25, 1990, to all then outstanding Stock Option Agreements related to the 1988 Nonqualified Stock Option Plan of the Company incorporated by reference to Exhibit 10d to the Company's Form 10-K for the fiscal year ended December 31, 1990 (File No. 1-5491).\n10f Amendment No. 2 dated May 23, 1991, to all then outstanding Stock Option Agreements related to the 1988 Nonqualified Stock Option Plan of the Company incorporated by reference to Exhibit 10f to the Company's Form 10-K for the fiscal year ended December 31, 1991 (File No. 1-5491).\n10g 1986 Convertible Debenture Incentive Plan of the Company incorporated by reference to Exhibit 10b to the Company's Form 10-K for the fiscal year ended December 31, 1986 (File No.1-5491).\n10h Pension Restoration Plan of the Company incorporated by reference to Exhibit 10h to the Company's Form 10-K for the fiscal year ended December 31, 1992 (File No. 1-5491).\n10i Credit Agreement dated September 22, 1986 (including amendatory letter dated March 25, 1987) and First Preferred Ship Mortgage dated November 7, 1986 between the Company and Marathon LeTourneau Company incorporated by reference to Exhibit 10c to the Company's Form 10-K for the fiscal year ended December 31, 1986 and amendatory letter dated February 21, 1992 incorporated by reference to Exhibit 10h to the Company's Form 10-K for the fiscal year ended December 31, 1991 (File No. 1-5491).\n10j Participation Agreement dated December 1, 1984 between the Company and Textron Financial Corporation et al. and Bareboat Charter dated December 1, 1984 between the Company and Textron Financial Corporation et al. incorporated by reference to Exhibit 10c to the Company's Form 10-K for the fiscal year ended December 31, 1985 (File No. 1-5491).\n10k Participation Agreement dated December 1, 1985 between the Company and Eaton Leasing Corporation et. al. and Bareboat Charter dated December 1, 1985 between the Company and Eaton Leasing Corporation et. al. incorporated by reference to Exhibit 10d to the Company's Form 10-K for the fiscal year ended December 31, 1985 (File No.1-5491).\n10l Corporate Continuing Guaranty dated December 31, 1986 between Shearson Lehman Brothers Holdings Inc. and the Company incorporated by reference to Exhibit 10h to the Company's Form 10-K for the fiscal year ended December 31, 1986 (File No.1-5491).\n10m Corporate Continuing Guaranty dated September 10, 1987 between Shearson Lehman Brothers Holdings Inc. and the Company incorporated by reference to Exhibit 10i to the Company's Form 10-K for the fiscal year ended December 31, 1987 (File No.1-5491).\n10n Cross-Border Corporate Continuing Guaranty dated May 29, 1991 between Citicorp and the Company's wholly-owned subsidiary, Rowan International,\nInc. incorporated by reference to Exhibit 10o to the Company's Form 10-K for the fiscal year ended December 31, 1991 (File No. 1-5491).\n10o Consulting Agreement dated March 1, 1991 between the Company and C. W. Yeargain incorporated by reference to Exhibit 10K to the Company's Form 10-K for the fiscal year ended December 31, 1990 (File No. 1-5491).\n10p Acquisition Agreement dated as of November 7, 1991, among KLM Royal Dutch Airlines, Blue Yonder I B.V., KLM Helikopters B.V. and Rowan Aviation (Netherlands) B.V. incorporated by reference to Exhibit 28.1 to the Company's Current Report on Form 8-K dated November 7, 1991 (File No. 1-5491).\n10q Business Loan Agreement dated January 27, 1993 between Key Bank of Alaska and the Company's wholly-owned subsidiary, Era Aviation, Inc. incorporated by reference to Exhibit 10s to the Company's Form 10-K for the fiscal year ended December 31, 1992 (File No. 1-5491).\n10r Asset Purchase Agreement dated as of November 12, 1993, among Rowan Companies, Inc., Rowan Equipment, Inc., General Cable Corporation, Marathon LeTourneau Company, Marathon LeTourneau Sales & Service Company and Marathon LeTourneau Australia Pty. Ltd. incorporated by reference to the Company's Current Report on Form 8-K dated February 11, 1994 (File No. 1-5491).\n11 Computation of Primary and Fully Diluted Earnings (Loss) Per Share for the years ended December 31, 1993, 1992 and 1991 appearing on page 32 in this Form 10-K.\n*13 Annual Report to Stockholders for fiscal year ended December 31, 1993.\n21 Subsidiaries of the Registrant as of March 31, 1994.\n23 Independent Auditors' Consent.\n24 Powers of Attorney pursuant to which names were affixed to this Form 10-K for the fiscal year ended December 31, 1993.\nThe Company agrees to furnish to the Commission upon request a copy of all instruments defining the rights of holders of long-term debt of the Company and its subsidiaries. ________________________________\n* Only portions specifically incorporated herein are deemed to be filed.\nEXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS\nCompensatory plans in which directors and executive officers of the Company participate are listed as follows:\n. 1980 Nonqualified Stock Option Plan of the Company together with form of Stock Option Agreement related thereto incorporated by reference to Exhibit 5.10 to the Company's Registration Statement on Form S-7 (Registration No. 2-68622); Amendment No. 1 dated October 25, 1990, to all then outstanding Stock Option Agreements related to such Plan incorporated by reference to Exhibit 10c to the Company's Form 10-K for the fiscal year ended December 31, 1990 (File No. 1-5491); and Amendment No. 2 dated May 23, 1991, to all then outstanding Stock Option Agreements related to such Plan incorporated by reference to Exhibit 10d to the Company's Form 10-K for the fiscal year ended December 31, 1991 (File No. 1-5491).\n. 1988 Nonqualified Stock Option Plan of the Company as amended together with form of Stock Option Agreement related thereto incorporated by reference to Exhibit 10b to the Company's Form 10-K for the fiscal year ended December 31,\n1992 (File No. 1-5491; Amendment No. 1 dated October 25, 1990, to all then outstanding Stock Option Agreements related to such Plan incorporated by reference to Exhibit 10d to the Company's Form 10-K for the fiscal year ended December 31, 1990 (File No. 1-5491); and Amendment No. 2 dated May 23, 1991, to all then outstanding Stock Option Agreements related to such Plan incorporated by reference to Exhibit 10f to the Company's Form 10-K for the fiscal year ended December 31, 1991 (File No. 1-5491).\n. 1986 Convertible Debenture Incentive Plan of the Company incorporated by reference to Exhibit 10b to the Company's Form 10-K for the fiscal year ended December 31, 1986 (File No. 1-5491).\n. Pension Restoration Plan of the Company incorporated by reference to Exhibit 10h to the Company's Form 10-K for the fiscal year ended December 31, 1992 (File 1-5491).\n(b) Reports on Form 8-K:\n. No reports on Form 8-K were filed by the Registrant during the fourth quarter of fiscal year 1993.\n. Subsequent to December 31, 1993, the Company filed a Current Report on Form 8-K as follows:\nA report dated February 21, 1994 under ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS in which the Company reported the acquisition of substantially all of the assets, and assumption of certain related liabilities, of Marathon LeTourneau Company and two of its subsidiaries. Marathon LeTourneau is a wholly-owned subsidiary of General Cable Corporation. Filed by amendment on Form 8-K\/A dated March 31, 1994 were related financial statements of the Company on a pro forma basis and financial statements of Marathon LeTourneau Company on a historical basis.\nFor the purposes of complying with the amendments to the rules governing Form S-8 (effective July 13, 1990) under the Securities Act of 1933, the undersigned registrant hereby undertakes as follows, which undertaking shall be incorporated by reference into registrant Registration Statements on Form S-8 Nos. 2-67866 (filed May 22, 1980), 2-58700, as amended by Post-Effective Amendment No. 4 (June 11, 1980), 33-33755, as amended by Amendment No. 1 (filed March 29, 1990), 33-61444 (filed April 23, 1993), 33-51103 (filed November 18, 1993) 33-51105 (filed November 18, 1993) and 33-51109 (filed November 18, 1993):\nInsofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the act and will be governed by the final adjudication of such issue.\nSIGNATURES\nPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.\nROWAN COMPANIES, INC.\nBy: C. R. PALMER (C. R. Palmer, Chairman of the Board, President and Chief Executive Officer)\nDate: March 31, 1994\nPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.\nSignature Title Date\nC. R. PALMER Chairman of the Board, President March 31, 1994 (C. R. Palmer) and Chief Executive Officer\nE. E. THIELE Principal Financial Officer and March 31, 1994 (E. E. Thiele) Principal Accounting Officer\nDirector - ------------------------ (Ralph E. Bailey)\n* HENRY O. BOSWELL Director March 31, 1994 (Henry O. Boswell)\n* H. E. LENTZ Director March 31, 1994 (H. E. Lentz)\n* WILFRED P. SCHMOE Director March 31, 1994 (Wilfred P. Schmoe)\n* CHARLES P. SIESS, JR. Director March 31, 1994 (Charles P. Siess, Jr.)\n* PETER SIMONIS Director March 31, 1994 (Peter Simonis)\n* C. W. YEARGAIN Director March 31, 1994 (C. W. Yeargain)\n* BY C. R. PALMER March 31, 1994 (C. R. Palmer, Attorney-in-fact)\nINDEPENDENT AUDITORS' REPORT\nRowan Companies, Inc. and Subsidiaries:\nWe have audited the consolidated financial statements of Rowan Companies, Inc. and Subsidiaries as of December 31, 1993 and 1992, and for each of the three years in the period ended December 31, 1993, and have issued our report thereon dated March 7, 1994; such financial statements and report are included in your 1993 Annual Report to Stockholders and are incorporated herein by reference. Our audits also included the financial statement schedules of Rowan Companies, Inc. and Subsidiaries, listed in Item 14. These financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion,such financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.\nDELOITTE & TOUCHE DELOITTE & TOUCHE\nHouston, Texas March 7, 1994\nROWAN COMPANIES, INC. AND SUBSIDIARIES SCHEDULE V PROPERTY AND EQUIPMENT (In Thousands)\nROWAN COMPANIES, INC. AND SUBSIDIARIES SCHEDULE V PROPERTY AND EQUIPMENT (In Thousands)\nSCHEDULE VI ROWAN COMPANIES, INC. AND SUBSIDIARIES ACCUMULATED DEPRECIATION, DEPLETION AND AMORTIZATION OF PROPERTY AND EQUIPMENT (In Thousands)\nSCHEDULE IX\nROWAN COMPANIES, INC. AND SUBSIDIARIES SHORT-TERM BORROWINGS (In thousands)\n(A) The only borrowing during the period was for $10,000,000. The proceeds were received on March 31, 1993, and the loan was repaid on June 18, 1993. The borrowing carried a weighted average interest rate of 4.67%.\n(B) The only borrowing during the period was for $15,000,000. The proceeds were received on November 27, 1991, and the loan was repaid on December 17, 1991. The borrowing carried a fixed interest rate of 6.31%.\nEXHIBIT 11\nROWAN COMPANIES, INC. AND SUBSIDIARIES COMPUTATION OF PRIMARY AND FULLY DILUTED EARNINGS (LOSS) PER SHARE (in thousands except per share amounts)\nNote: Reference is made to Note 1 to Consolidated Financial Statements regarding computation of per share amounts.\n(A) Included in accordance with Regulation S-K Item 601 (b)(11) although not required to be provided for by Accounting Principles Board Opinion No. 15 because the effect is insignificant.\n(B) This calculation is submitted in accordance with regulation S-K Item 601(b)(11) although it is contrary to paragraph 40 of APB Opinion No. 15 because it produces an antidilutive result.\nEXHIBIT INDEX Page 1 of 4\nEXHIBIT INDEX Page 2 of 4\nEXHIBIT INDEX Page 3 of 4\nEXHIBIT INDEX Page 4 of 4\n________________________________________________\n(1) Incorporated herein by reference to another filing of the Company with the Securities and Exchange Commission as indicated.\n(2) Included herein.\n(3) Included in Form 10-K on page 32.\n(4) Included herein. See Item 1, Items 5-8 and Subpart (a)1. of ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K on page 20 and page 21, respectively, on Form 10-K for specific portions incorporated herein by reference.","section_15":""}
{"filename":"755926_1993.txt","cik":"755926","year":"1993","section_1":"ITEM 1. BUSINESS.\nGeneral Development of Business\nEQK Realty Investors I, a Massachusetts business trust (the 'Company'), was formed pursuant to a Declaration of Trust dated as of October 8, 1984. Equitable Realty Portfolio Management, Inc. ('ERPM,' successor in interest to EQK Partners), acts as the advisor (the 'Advisor') to the Company. ERPM is a wholly owned subsidiary of Equitable Real Estate Investment Management, Inc. ('Equitable Real Estate'), itself an indirect wholly owned subsidiary of The Equitable Life Assurance Society of the United States ('Equitable'). The principal executive offices of the Company and of the Advisor are located at 5775 Peachtree Dunwoody Road, Suite 200D, Atlanta, Georgia, 30342, and their telephone number is (404) 303-6100.\nThe Company has adopted a fiscal and taxable year ending December 31. The Company has transacted its affairs so as to qualify as, and has elected to be treated as, a real estate investment trust under applicable provisions of the Internal Revenue Code. Under the Internal Revenue Code, a real estate investment trust that meets applicable requirements is not subject to Federal income tax on that portion of its taxable income that is distributed to its shareholders.\nThe Company consummated the public offering of its Shares of Beneficial Interest (the 'Shares') on March 12, 1985. The net proceeds to the Company from such offering, net of underwriting discount, amounted to $170,856,000 before deducting offering expenses of $1,062,000. Certain of those proceeds aggregating $167,032,000 were expended to acquire the properties (the 'Properties,' described below under 'Narrative Description of Business') on March 13, 1985.\nThe Company initially intended to hold its real estate investments for a period not to exceed 12 years from the date of acquisition and, after the twelfth year, to dispose of any remaining investments in an orderly fashion within a period of two years in order to achieve a complete liquidation of the Company by March 1999. Actual disposition of the Properties may occur at any time prior to March 1999, depending on prevailing conditions in the relevant real estate markets, and the precise timing of dispositions will be in the discretion of the Trustees.\nOn December 18, 1985, the Company issued to Salomon Brothers Realty Corp. its seven-year 10.92% Zero Coupon Note (the '1985 Note') in the principal amount of $45,000,000 and the face amount of $94,719,904. The 1985 Note was secured by mortgages on the Properties. The difference between the principal amount of $45,000,000 received for the 1985 Note and the face amount of $94,719,904 that was due at maturity on December 18, 1992 represents interest compounded semi- annually at the rate of 10.92%. The Company utilized the net proceeds from the sale of the 1985 Note ($44,296,000) to repurchase an aggregate of 2,466,211 Shares in the open market\nbetween February 13, 1986 and May 6, 1986. In 1992 the Company utilized proceeds from the sale of real estate at Peachtree-Dunwoody Pavilion to prepay a portion of the Note. Also, in 1992, the Company utilized proceeds from the issuance of previously repurchased Shares to its Advisor to prepay a portion of the Note.\nOn February 4, 1988, the Company issued to Salomon Brothers Realty Corp. a second Zero Coupon Note (the '1988 Note') in the principal amount of $5,000,000 and the face amount of $7,771,718 payable at its maturity on December 18, 1992. The 1988 Note was also secured by mortgages on the Properties. The difference between the principal amount of $5,000,000 received for the 1988 Note and the face amount of $7,771,718 represents interest compounded semi-annually at the rate of 9.255%. The Company utilized the proceeds from the 1988 Note to repay borrowings under the Company's unsecured revolving credit facility. In 1991 the Company utilized proceeds from the sale of real estate at Castleton Commercial Park ('Castleton') to prepay a portion of the 1988 Note. In 1992 the Company utilized proceeds from the sale of real estate at Peachtree-Dunwoody Pavilion to prepay the remaining portion of the 1988 Note.\nThe 1985 Note and the 1988 Note, together with the mortgages securing them, were assigned on February 4, 1988 by Salomon Brothers Realty Corp. to The Prudential Insurance Company of America ('Prudential').\nIn December 1992, the Company completed the refinancing of the 1985 Note, which at that time had a balance of $75,689,000, for a term of three years. The interest rates on the refinanced Note are 9.54% in the first year, 9.79% in the second year, and 10.04% in the third year. The new loan agreement requires monthly payments of interest only at the rate of 8.54% per annum. The additional interest charges will be accrued and added to principal over the term of the loan. The amount of principal due at maturity in December 1995 will be $78,928,000. In addition, the lender received in 1992 and 1993 warrants to purchase 165,086 and 151,556 Company shares, respectively, for $.0001 per share, none of which have yet been exercised. The agreement also stipulates that the lender may purchase up to 50,000 additional Company shares in December 1994, although the actual number of such additional shares at each date will be adjusted proportionately with changes to the mortgage balance. The new financing is collateralized by first mortgage liens on Castleton and Harrisburg East Mall ('Harrisburg') real estate, assignments of leases and rents and certain cash balances.\nIn December 1992, the Company also completed the restructuring of its bank line of credit into a term loan. The balance of the restructured term loan was $2,859,000 and will also mature in three years. The interest rate on the term loan is 8.33% per annum. Monthly payments are determined based on the same 8.54% pay rate applicable to the primary lender's mortgage. The amount of each monthly payment above the required interest rate is applied to the principal balance of the loan. The amount of principal due at maturity in December 1995 will be $2,839,000. The term loan is secured by subordinate liens on each of the properties and an escrow deposit of $300,000.\nIn connection with the debt restructuring, the Company issued 1,675,000 previously repurchased Shares of its stock to its Advisor. The Company received proceeds of $6,700,000, or $4.00 per share, for the Shares. The Company may, at its discretion, reissue the remaining 791,211 Shares previously repurchased. Any issuance of Shares in excess of the Shares previously repurchased would require shareholder approval.\nApart from its initial investments in the Properties, and subject to certain restrictions, the Company may make additional real estate investments involving the expansion of existing improvements or the acquisition and development of additional properties that are in the immediate vicinity of the Properties. No additional real estate investments are currently contemplated, other than capital improvements to the existing properties.\nThe Company may make secured or unsecured borrowings to make distributions to its shareholders, to make permitted additional real estate investments described above and for normal working capital needs, including tenant alterations and\/or allowances and the repair and maintenance of properties in which it has invested. The Declaration of Trust prohibits the Company's aggregate borrowings from exceeding 75% of its total asset value, as defined.\nThe Company will not engage in any business not related to its real estate investments and, in that connection, the Declaration of Trust imposes certain prohibitions and investment restrictions on various investment practices or activities of the Company.\nNarrative Description of Business\nAt December 31, 1993, the Company's portfolio consists of two real estate investments: Castleton Commercial Park ('Castleton' or the 'Park'), an office park located in Indianapolis, Indiana, and Harrisburg East Mall ('Harrisburg' or the 'Mall'), a regional shopping center located in Harrisburg, Pennsylvania. During 1993, the Company sold its two remaining office buildings within its office complex located in Atlanta, Georgia, formerly known as Peachtree-Dunwoody Pavilion or 'Peachtree'.\nCastleton Commercial Park\nLocation and Area Overview. The Park is located in the northeast portion of Marion County, Indiana, approximately 10 miles from downtown Indianapolis, within a triangle formed by Interstate 465 (the major beltway surrounding the Indianapolis metropolitan area), Interstate 69 and East 82nd Street (a major local thoroughfare). The surrounding area is characterized by varied office, retail, residential and light industrial development. The site has convenient access from Interstate 465 via the Allisonville Road interchange and from Interstate 69 via the 82nd Street interchange.\nTenants. At December 31, 1993, there were approximately 200 tenants in the Park occupying approximately 1,034,000 square feet of net rentable area,\nrepresenting an occupancy percentage of 89.4%, and approximately 123,000 square feet of space were vacant.\nLeases covering 157,000 square feet of space are scheduled to expire during 1994. The Company anticipates leases covering approximately 141,000 square feet will be renewed during 1994.\nCompetition. The following table provides selected information with respect to Castleton's primary existing competitors. All the competitive properties listed below are comprised of one or more office buildings. Each property is located within 10 miles of the Park.\nThe Park will continue to be subject to the very competitive market conditions as a result of a high level of existing vacancy. As of December 31, 1993, the office vacancy rate in the Northeast submarket, of which the Park is a part, was 17%, down from 21% in 1992. Space absorption in the suburban market totalled 473,000 square feet in 1993 as compared to 220,000 square feet in 1992. There is virtually no new space expected to come on-line in 1994. The Company believes that, over the long term, Castleton will be able to sustain a relatively high occupancy level due to the quality of the Park, the desirability of its location, and its competitive rent structure, which is somewhat lower than comparable new space.\nThe president of Castleway Management Corp., the current manager of Castleton, also serves as marketing manager of a similar park, known as the Precedent, located approximately two and one-half miles from the Park and developed by an affiliate of the former owners of the Park. The Company believes that the Precedent will not have a material adverse impact on the Park, based upon the advantage of the Park's more developed location, as well as the Company's assessment of general supply and demand conditions in the relevant market. Moreover, pursuant to the management agreement with the Company, Castleway Management Corp. must disclose to the Company the terms of any offers to any major tenant at the Park (20,000 square feet or more) within 10 days following initial discussions with such tenant and may not conclude an agreement with such tenant for a period of 30 days thereafter.\nHarrisburg East Mall\nLocation and Area Overview. The Mall is located in Dauphin County, Pennsylvania, near the intersection of Paxton Street (U.S. Route 322) and Interstate 83. The Center is adjacent to Pennsylvania Route 441, approximately five miles from the Pennsylvania Turnpike and three miles from the central business district of Harrisburg. Access to the site from Interstate 83, the major north-south traffic corridor serving Harrisburg, is provided by the Paxton Street interchange. Access from the Pennsylvania Turnpike, the major east-west traffic corridor serving Harrisburg, is provided by the Interstate 283 interchange.\nTenants. At December 31, 1993, the Mall had 95 mall and outparcel building tenants (excluding anchor store tenants) occupying approximately 358,000 square feet of gross leasable area, representing an occupancy rate of 93.0%. Other than the anchor store tenants (J.C. Penney, Hess's and John Wanamaker), only Toys R Us, which occupies approximately 51,400 square feet of space, occupies more than five percent of the gross leasable area of the Mall.\nCompetition. The following table provides selected information with respect to the Mall's primary existing competitors. Each property is located within five miles of the Mall, except for Park City Mall which is 35 miles away. The inclusion of Park City is due to the lack of major retail space along Interstate 283 between Harrisburg and Lancaster, although its degree of competition with the Mall is limited.\nITEM 2.","section_1A":"","section_1B":"","section_2":"ITEM 2. PROPERTIES.\nCastleton Commercial Park\nGeneral. Castleton Commercial Park consists of 44 single-and multi-tenanted office buildings and mixed-use office\/warehouse buildings which have a total building area of 1,219,914 square feet and net rentable area of 1,157,000 square feet. It is located immediately northwest of the intersection of Interstate 465 and Interstate 69 in the northeast quadrant of the Indianapolis metropolitan area.\nApproximately 66% of the total building area of the Park is designed solely for use as office space and the balance is a combination of both office and warehouse space (including related uses, such as operation of light manufacturing, product assembly, showroom and distribution facilities). On the basis of net rentable area, approximately 85% of the Park comprises office space, with the balance consisting of warehouse space. The Park is located on a site of approximately 18 acres. The site has paved surface parking for approximately 5,580 cars (4.9 spaces per 1,000 net rentable square feet).\nHarrisburg East Mall\nGeneral. Harrisburg East Mall is a two-level enclosed regional shopping mall located approximately three miles from the central business district of Harrisburg, Pennsylvania, the state capitol. The Mall contains approximately 872,000 gross leasable square feet and is anchored by three major department stores: J.C. Penney, Hess's and John Wanamaker. The Mall is located on a site of approximately 62 acres with paved surface parking for approximately 4,729 automobiles (5.4 spaces per 1,000 gross leasable square feet).\nThe total building area of the Mall is allocated as shown in the table below.\nPhysical Improvements. Since acquiring the Mall in 1985, the Company has undertaken several physical improvement programs. In 1987, the Company converted approximately 51,400 square feet of space in the basement of Hess's department store into mall tenant space, currently leased to Toys R Us. During 1988, a new food court with approximately 13,000 square feet of gross leasable area was completed. In 1991, the Company completed the conversion of 47,960 square feet of space previously occupied by J.C. Penney into approximately 31,500 square feet of new leasable area leased at substantially higher rates.\nIn conjunction with the J.C. Penney conversion, the remaining area of the J.C. Penney store has been remodeled. In addition, the terms of the amended J.C. Penney lease required the Company to renovate the common areas and the exterior facade of the Mall. The renovation was completed in 1993. The project included a complete refurbishment of the property's interior common area, with new floors, finishes, and lighting throughout.\nITEM 3.","section_3":"ITEM 3. LEGAL PROCEEDINGS.\nNone.\nITEM 4.","section_4":"ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.\nNone.\nITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT.\nThe following table sets forth the names and positions of the executive officers of the Company. The term of office of each officer expires at the annual meeting of the Board of Directors or when the respective successor is elected and qualifies.\nPhillip E. Stephens, age 46, has been President of Compass Retail, Inc., a subsidiary of Equitable Real Estate, since January of 1992 and was Executive Vice President of the Compass Retail division of Equitable Real Estate from January 1990 to December 1991. He has also served as President of Equitable Realty Portfolio Management, Inc. ('ERPM'), the Company's Advisor and a wholly owned subsidiary of Equitable Real Estate, since December 1989. Prior to that date and since October 1987, he was President of EQK Partners, the predecessor in interest to ERPM. Prior to that date and since its inception in September 1983, he was Senior Vice President of EQK Partners. He is also Senior Vice President and Treasurer and a director of EQK Green Acres Corp., the former managing general partner of EQK Green Acres, L.P. (the 'Partnership'), predecessor to EQK Green Acres Trust (the 'Trust'). On February 28, 1994, the Partnership merged with and into the Trust. Mr. Stephens is a managing trustee of the Trust.\nGregory R. Greenfield, age 37, has been Executive Vice President and Chief Operating Officer of Compass Retail, Inc. since January of 1992 and was Senior Vice President of the Compass Retail division of Equitable Real Estate from January 1990 to December 1991. He has also served as Vice President and Treasurer of ERPM since December 1989. Prior to that date and since November 1988, he was Senior Vice President, General Counsel and Secretary of EQK Partners. Mr. Greenfield joined EQK Partners in June 1984. From 1981 to 1984, he was associated with the law firm of Wolf, Block, Schorr and Solis-Cohen. Mr. Greenfield is also Senior Vice President of EQK Green Acres Corp.\nWilliam G. Brown, Jr., age 38, has been Senior Vice President and Chief Financial Officer of Compass Retail, Inc. since January of 1992 and was Vice President of the Compass Retail division of Equitable Real Estate from March 1990 to December 1991. He has also served as a Vice President of ERPM since March 1990. Prior to that date and since November 1988, he was Vice President and Chief Financial Officer of Envirosafe Services, Inc., a hazardous waste management company. Mr. Brown joined Envirosafe in July 1987. From 1981 to 1987, he held financial management positions with IU International Corporation, and from 1978 to 1981, he was associated with the accounting firm of Coopers & Lybrand. Mr. Brown is also Vice President and Controller of EQK Green Acres Corp.\nScott M. Boggio, age 35, has been Vice President of Compass Retail, Inc. since February 1992 and was Director of Construction and Development of the Compass Retail division of Equitable Real Estate from January 1990 to January 1992. He has also served as Assistant Vice President of ERPM since December 1989. Prior to that date and since February 1989, he was Vice President of Construction and Planning of EQK Partners. From 1986 until 1988, he was employed by VMS Realty Management, Inc. as its Northeast Regional Manager. From 1985 to 1986, he was employed by the Linpro Company in acquisitions and site selection. Mr. Boggio is also Vice President of EQK Green Acres Corp.\nGary L. Werkheiser, age 34, has been Vice President of Compass Retail, Inc. since February 1992 and was Director of Asset Management of Equitable Real Estate\nfrom May 1990 to January 1992. Prior to that date and since August of 1986, he was the Real Estate Analyst for EQK Partners. Mr. Werkheiser is also Vice President of EQK Green Acres Corp.\nLinda K. Schear, age 41, has been Vice President and General Counsel to Compass Retail, Inc. since February 1992 and was General Counsel to the Compass Retail division of Equitable Real Estate from April 1990 to February 1992. She has also served as Counsel to ERPM and Vice President of Equitable since April 1990. Prior to that date, she was first an associate and then a partner with the Atlanta law firm of Merritt & Tenney, specializing in commercial real estate. Ms. Schear also serves as Secretary of EQK Green Acres Corp.\nPART II\nITEM 5.","section_5":"ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.\nThe Company's shares of beneficial interest are traded on the New York Stock Exchange (symbol EKR). The Company is listed in the stock tables as 'EQK Rt.' As of February 28, 1994 the record number of shareholders of the Company was 413 . Although the Company does not know the exact number of beneficial holders of its shares, it believes the number exceeds 2,100.\nThe following table presents the high and low prices of the Company's shares based on the New York Stock Exchange daily composite transactions.\nThere have been no distributions to shareholders during 1992 and 1993. It is the Company's current policy to reinvest all of its cash flow into the properties to fund capital expenditures and leasing costs. The Company does not anticipate a change in this policy.\nITEM 6.","section_6":"ITEM 6. SELECTED FINANCIAL DATA.\n(IN THOUSANDS, EXCEPT PER SHARE DATA)\n- ------------------ (a) Calculation is based on 9,264,344 weighted average shares outstanding during 1993, 7,653,415 weighted average shares outstanding during 1992, and 7,589,344 weighted average shares outstanding during all other years.\nITEM 7.","section_7":"ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.\nTHIS DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL STATEMENTS AND NOTES ON PAGES 9-18.\nFINANCIAL CONDITION\nCapital Resources\nIn December 1993, the Company completed the sale of its two remaining buildings within the Peachtree complex which generated net cash proceeds of $10,552,000 and a gain on sale of real estate of $282,000. The Company's cash management agreement, which was executed in connection with the December 1992 mortgage refinancing, provides for the application of the net proceeds from real estate sales against the balances of the mortgage note and the term loan. The Company negotiated a modification to this provision with its lenders as it related to the December 1993 Peachtree sale, and used net proceeds of $9,626,000 to prepay in full the Harrisburg mortgage notes. This modification allowed the Company to retire debt that was accruing interest for financial reporting purposes at 14% per annum, and to avoid significant prepayment penalties associated with the mortgage note payable.\nThe Company continues to pursue the orderly liquidation of its real estate portfolio. During this process, the Company will make certain capital expenditures required to enhance or maintain the value of the properties, including tenant allowances associated with leasing activity. For 1994, the Company's capital budget is $2,500,000. One of the conditions of the mortgage restructuring completed in 1992 was the establishment of a capital reserve account, which is maintained by a third-party escrow agent and from which expenditures must be approved by the lender. The balance of this account at December 31, 1993 was approximately $3,400,000.\nLiquidity\nDuring 1993, the Company generated cash flow from operating activities of $4,792,000, substantially all of which was transferred to the capital reserve account. Cash flows from operating activities in 1993 were $3,276,000 less than 1992 operating cash flows. This decrease is attributable to the payment of mortgage interest on a current basis in 1993. This decline was partially offset by increased cash flows resulting from improved operating results, net of the effects of results from the buildings at Peachtree which were sold in 1992, and the nonrecurrence of 1992 payments of approximately $1,500,000 for refinancing costs. For 1994, the Company expects to continue to satisfy its liquidity needs solely from operating cash flow. In addition to the capital expenditure requirements described above, liquidity requirements for 1994 will also include principal and interest payments of $6,700,000 pursuant to existing loan agreements.\nThe Company's cash management agreement stipulates that all rental payments from tenants are to be made directly to a third-party escrow agent who also funds monthly operating expenses in accordance with a budget approved by the lender. The Company believes that its cash flow for 1994 will be sufficient to fund its various operating requirements, although its discretion with respect to cash flow management will be limited by the terms of the cash management agreement.\nRESULTS OF OPERATIONS\nIn 1993, the Company reported a net loss of $3,780,000, or $.41 per share, compared with net losses of $8,850,000 ($1.16 per share) in 1992 and $14,976,000 ($1.97 per share) in 1991. The current year results include an extraordinary charge to earnings of $1,711,000 ($.19 per share) related to the early retirement of debt. The prior year results included a write-down of $4,001,000 ($.52 per share) of the Company's investment in real estate. Similar write-downs of $8,448,000 ($1.11 per share) were recorded in 1991.\nRevenues from rental operations decreased in 1993 to $18,458,000 from $20,900,000 in 1992. Revenue decreased at Peachtree in 1993 by approximately $3,400,000 due primarily to the sale of five buildings in the latter part of 1992. At Castleton, a revenue increase of approximately $456,000 was primarily attributable to the collection of a $225,000 lease termination fee received in connection with the loss of a tenant in September 1993. Anticipated rental revenues in 1994 from this tenant had been $176,000. Management believes that this tenant space will be re-leased during 1994. Revenue increased by $500,000 at Harrisburg due to the addition of four large tenants at the end of 1992. In 1992, revenues from rental operations decreased from $21,276,000 in 1991. Revenue declines at Peachtree and Castleton that were attributable to the sale of buildings in the latter part of 1992 and 1991, respectively, were partially offset by revenues generated from increased occupancy levels at the remaining Castleton buildings and at Harrisburg.\nNet operating expenses declined in 1993 to $6,384,000 from $9,239,000 in 1992, a decrease of 31%. Expenses decreased at Peachtree by approximately $2,500,000 or 65% due primarily to the sale of five buildings in the latter part of 1992. Expenses increased slightly at Castleton due to higher net common area expenses. Net operating expenses at Harrisburg decreased approximately $478,000 due primarily to decreases in bad debt expense and net common area expenses. Net operating expenses in 1992 decreased from $10,335,000 in 1991. Expenses decreased at Peachtree by approximately 12% due to the sale of buildings and to effective cost containment measures. Expenses decreased at Castleton by approximately 5% due primarily to the effect of a full year of operations without the two buildings sold in the latter part of 1991. Net operating expenses at Harrisburg decreased by approximately $300,000 due primarily to decreased bad debt expense and the absence of certain non-recurring expenditures incurred in 1991.\nInterest expense decreased in 1993 due to lower borrowing levels and lower interest costs associated with the refinanced mortgage note. Interest expense will continue to decline in 1994 due to the retirement of Harrisburg mortgage notes payable. Interest expense increased in 1992 due to amortization of the discount on the zero coupon mortgage for the period of time it was outstanding during the year, offset somewhat by lower borrowing levels and lower interest costs on the bank line of credit.\nOther expenses consist of portfolio management fees, other costs related to the operation of the Trust, and interest income earned on cash balances. Other expenses decreased approximately $150,000 in 1993 from 1992 due to interest earned on excess cash balances. There were no significant variations in the other expenses between 1992 and 1991.\nITEM 8.","section_7A":"","section_8":"ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.\nThe Registrant's financial statements and supplementary data listed in Item 14(a) appear immediately following the signature pages.\nITEM 9.","section_9":"ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.\nNone\nPART III\nITEM 10.","section_9A":"","section_9B":"","section_10":"ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.\nIncorporated by reference to the Company's Proxy Statement relating to its 1994 Annual Meeting of Shareholders.\nITEM 11.","section_11":"ITEM 11. EXECUTIVE COMPENSATION.\nIncorporated by reference to the Company's Proxy Statement relating to its 1994 Annual Meeting of Shareholders.\nITEM 12.","section_12":"ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.\nIncorporated by reference to the Company's Proxy Statement relating to its 1994 Annual Meeting of Shareholders.\nITEM 13.","section_13":"ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.\nIncorporated by reference to the Company's Proxy Statement relating to its 1994 Annual Meeting of Shareholders.\nPART IV\nITEM 14.","section_14":"ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.\nEQK REALTY INVESTORS I BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)\nSee accompanying Notes to Financial Statements\nEQK REALTY INVESTORS I STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)\nSee accompanying Notes to Financial Statements\nEQK REALTY INVESTORS I STATEMENTS OF SHAREHOLDERS' EQUITY (IN THOUSANDS, EXCEPT PER SHARE DATA)\nSee accompanying Notes to Financial Statements\nEQK REALTY INVESTORS I STATEMENTS OF CASH FLOWS (IN THOUSANDS)\nSee accompanying Notes to Financial Statements\nEQK REALTY INVESTORS I NOTES TO FINANCIAL STATEMENTS\nNOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES\nDescription of Business:\nEQK Realty Investors I (the 'Company'), a Massachusetts business trust, was formed pursuant to a Declaration of Trust dated as of October 8, 1984 to acquire certain income-producing real estate investments. Commencing with the period beginning April 1, 1985, the Company qualified for and elected real estate investment trust status under the provisions of the Internal Revenue Code, and adopted December 31 as its year end, as required for real estate investment trusts.\nThe Company's portfolio at December 31, 1993 consists of two real estate investments: Castleton Commercial Park ('Castleton'), an office park located in Indianapolis, Indiana, and Harrisburg East Mall ('Harrisburg' or the 'Mall'), a regional shopping center located in Harrisburg, Pennsylvania. During 1993, the Company sold its two remaining office buildings within its office complex in Atlanta, Georgia, formerly known as Peachtree-Dunwoody Pavilion or 'Peachtree' (see Note 4).\nCapitalization, Depreciation and Amortization:\nProperty additions are recorded at cost. Costs directly associated with major renovations and improvements, including interest on funds borrowed to finance construction, are capitalized to the point of substantial completion.\nDepreciation of real estate investments is provided on a straight-line basis over the estimated useful lives of the related assets, ranging generally from 5 to 40 years. Intangible assets are amortized on a straight-line basis over their estimated useful lives.\nOther Assets\nOther assets primarily consist of deferred leasing costs. Costs incurred in connection with the execution of a new lease including leasing commissions, costs associated with the acquisition or buyout of existing leases and legal fees, are deferred and amortized over the term of the new lease. At December 31, 1993 and 1992, deferred leasing costs, net of accumulated amortization, amounted to $4,898,000 and $5,513,000, respectively. Included in deferred leasing costs is a 1990 payment of $5,500,000 made to an anchor tenant at Harrisburg in exchange for which the tenant relinquished space that was subsequently converted into leasable area for mall stores.\nNet Loss per Share:\nNet loss per share is calculated on the basis of the weighted average number of shares outstanding during each year. For the years ended December 31, 1993, 1992 and 1991, the number of weighted average shares outstanding was 9,264,344, 7,653,415 and 7,589,344, respectively.\nEQK REALTY INVESTORS I NOTES TO FINANCIAL STATEMENTS--(CONTINUED)\nShare warrants issued in 1993 and 1992 in connection with the Company's debt restructuring (see Note 2) are considered common share equivalents for purposes of the calculation of net loss per share. However, the warrants have not been included in the calculation of net loss per share since the effect on such calculation would be antidilutive.\nIn December 1992, the Company prepaid $3,000,000 of debt with proceeds from the issuance of the Company's shares to its Advisor (see Notes 2 and 8). Net loss per share for the year ended December 31, 1992 would have been $1.02 had the related shares been included in average shares outstanding from the beginning of the year and had interest expense been lower due to a $3,000,000 reduction of outstanding indebtedness for the entire year.\nIncome Taxes:\nThe Company distributes 100% of its real estate investment trust taxable income to its shareholders within certain time limits prescribed by the Internal Revenue Code. Accordingly, no provision has been made for income tax liabilities.\nStatements of Cash Flows:\nCash equivalents include short-term investments with an original maturity of three months or less.\nIncluded in the statements of cash flows are cash payments for interest of $7,439,000 (net of amounts capitalized of $115,000), $1,361,000, and $1,670,000 in 1993, 1992 and 1991, respectively.\nAs a condition of the Company's debt restructuring (see Note 2), the Company issued 151,556 and 165,086 share warrants in 1993 and 1992, respectively, to its primary mortgage lender. Based upon the respective market values of the Company's shares, the value of the warrants at the time of issuance was $397,000 and $392,000, respectively. These amounts were recorded as debt discounts and increases in Shareholders' equity.\nProceeds from the sale of real estate in 1991 exclude a $168,000 note received as partial consideration on the sale of a building at Castleton (see Note 4).\nRestricted Cash:\nThe terms of the Company's restructured mortgage loan required the establishment of a Cash Management Agreement with a third-party escrow agent (see Note 2). The Company's access to cash balances maintained on deposit with the escrow agent are restricted in accordance with the terms of this agreement. In addition, the Company has established a $300,000 escrow account in connection with the restructuring of its bank line of credit.\nEQK REALTY INVESTORS I NOTES TO FINANCIAL STATEMENTS--(CONTINUED)\nNOTE 2: MORTGAGE DEBT AND RESTRUCTURING ACTIVITIES\nOn February 4, 1988, the Company issued a zero coupon mortgage note with an original maturity date of December 18, 1992. The original maturity value of the note was $7,772,500; however, in December 1991 the Company prepaid a portion of the note with proceeds from the sale of buildings at Castleton reducing the maturity value to $4,264,000. In September 1992, the Company prepaid the remainder of the note with proceeds from the sale of a building at Peachtree (see Note 4). At issuance, the Company received $5,000,000 representing an effective interest rate of 9.255% compounded semi-annually.\nOn December 18, 1985, the Company issued a zero coupon mortgage note with an original face amount of $94,720,000. At issuance, the Company received $45,000,000 representing an effective interest rate of 10.92% compounded semi-annually. As described in Note 4, the Company completed property sales in 1992, and, as described in Note 3, the Company issued additional shares to its Advisor. Proceeds received from these transactions were used to prepay a portion of the mortgage note, reducing the maturity value to $75,689,000.\nUpon maturity of this zero coupon mortgage note in December 1992, the Company completed a restructuring of its debt. The new financing, which is collateralized by first mortgage liens on Castleton and Harrisburg, matures in December 1995. Interest will accrue on the mortgage at 9.54%, 9.79% and 10.04% per year in the first, second and third loan years, respectively, although interest is payable at an annual rate of 8.54% for the duration of the loan. The interest differential between the accrual rates and the payment rate will be added to principal over the term of the loan, resulting in a final maturity balance of $78,928,000. The mortgage lender also received in December 1992 and 1993 warrants to purchase 165,086 and 151,556 Company shares, respectively, for $.0001 per share, none of which have yet been exercised. The agreement also stipulates that the mortgage lender may purchase up to 50,000 additional Company shares in December 1994 although the actual number of such additional shares will be adjusted proportionately with changes to the mortgage balance.\nAs part of the restructuring, the Company also entered into a Cash Management Agreement with the mortgage lender and assigned all lease and rent receipts to the lender as additional collateral. Pursuant to this agreement, a third-party escrow agent has been appointed to receive all rental payments from tenants and to fund monthly operating expenses in accordance with a budget approved by the lender. The agreement also provides for the establishment of a capital reserve account, which is maintained by the escrow agent. Disbursements from this account, which was initially funded with a portion of the proceeds from the sale of shares to the Company's Advisor (see Note 3) and is funded each month with any excess operating cash flow, are limited to capital expenditures approved by the lender.\nIn December 1992, the Company also completed the restructuring of its bank line of credit into a term loan. The line of credit was an unsecured facility that bore interest at the bank's prime rate through its original maturity date, March 23, 1992, and at the prime\nEQK REALTY INVESTORS I NOTES TO FINANCIAL STATEMENTS--(CONTINUED)\nrate plus 1 1\/4% until restructured. The balance of the restructured term loan was $2,859,000 and will mature in December 1995. The interest rate on the term loan is 8.33% per annum. Monthly payments are determined based on the same 8.54% pay rate applicable to the primary lender's mortgage. The amount of each monthly payment in excess of the required interest payment is applied to the principal balance of the loan. The amount of principal due at maturity will be $2,839,000. The term loan is secured by subordinate liens on each of the properties and by an escrow deposit of $300,000 (see Note 9).\nNOTE 3: ISSUANCE OF SHARES\nIn connection with its debt restructuring, the Company issued 1,675,000 previously repurchased shares to its Advisor. Upon issuance, the Company received proceeds of $6,700,000, or $4.00 per share. In total, the Advisor owns 1,685,556 shares, or 18.2% of the total shares outstanding.\nNOTE 4: VALUATION AND SALES OF REAL ESTATE\nThe Company is attempting to sell the properties in conjunction with Management's plans for an orderly liquidation of its real estate portfolio. As the likelihood of any specific future property sales cannot be predicted, the Company considers that all of its properties are held for sale. Therefore, to the extent that the net investment in any property exceeds its current market value, an allowance is recorded to adjust such net investment to net realizable value commencing with the date on which the properties were deemed held for sale. For the year ended December 31, 1993, no such write-down was deemed necessary. For the year ended December 31, 1992 the Company recorded write-downs of $4,001,000 to adjust its investment in Castleton to its net realizable value. For the year ended December 31, 1991, the Company recorded write-downs totalling $8,448,000 to adjust its investment in Peachtree and Castleton to their respective net realizable values. Although the determination of net realizable value involves subjective judgment, as market prices of real estate can only be determined by negotiation between a willing buyer and seller, the Company believes that these market values are reasonable approximations of market prices.\nIn December 1993, the Company completed the sale of its remaining two office buildings at Peachtree. In the aggregate, the Company received cash proceeds of $10,552,000 net of associated costs of $248,000, and recognized a gain on sale of $282,000.\nDuring 1992, the Company completed the sale of five office buildings at Peachtree. In the aggregate, the Company received cash proceeds of $21,748,000, net of associated costs of $888,000, and recognized a gain on sale of $1,143,000.\nIn December 1991, the Company completed the sales of two buildings at Castleton. In connection with these sales, the Company received cash proceeds of $3,295,000, net of associated costs of $494,000, and a one-year note with a face amount of $168,000 bearing interest at 9.375% per year. These transactions resulted in a gain on sale of $248,000.\nEQK REALTY INVESTORS I NOTES TO FINANCIAL STATEMENTS--(CONTINUED)\nNOTE 5: LEASING ARRANGEMENTS\nThe Company leases office, warehouse and shopping center space, generally under noncancelable operating leases, some of which contain renewal options. The office and warehouse space leases generally provide for either base rentals plus annual increases based on the increase in the Consumer Price Index, or base rentals plus reimbursement to the Company for the increase in certain defined real estate operating expenses.\nThe shopping center leases generally provide for minimum rentals, plus percentage rentals based upon the retail stores' sales volume. Percentage rentals amounted to $154,000, $268,000 and $453,000 for the years ended December 31, 1993, 1992 and 1991, respectively. In addition, the tenants pay certain utility charges to the Company and, in most leases, reimburse their proportionate share of real estate taxes and common area expenses.\nFuture minimum rentals under existing leases at December 31, 1993 are as follows:\nNOTE 6: INVESTMENT IN REAL ESTATE\nThe Company's investment in real estate at December 31, 1993 and 1992 consisted of the following:\nEQK REALTY INVESTORS I NOTES TO FINANCIAL STATEMENTS--(CONTINUED)\nNOTE 7: EXTRAORDINARY LOSS ON RETIREMENT OF DEBT\nThe Company used proceeds of $9,626,000 from the 1993 sale of its remaining two buildings at Peachtree (see Note 4) to retire the Harrisburg mortgage notes that had been assumed by the Company in connection with its purchase of the Mall. The Harrisburg mortgage notes, with stated interest rates of 8.8% and 8.562% per annum, had been discounted for financial reporting purposes using a market interest rate of 14%. At retirement, the Harrisburg mortgage notes had a carrying value of $7,975,000, net of a $1,547,000 discount. The Company also paid accommodation fees of $60,000 to the holders of its mortgage note and term loan. In connection with the retirement of the Harrisburg mortgage notes, the Company recognized an extraordinary charge to earnings of $1,711,000.\nNOTE 8: ADVISORY AND MANAGEMENT AGREEMENTS\nThe Company has entered into an agreement with Equitable Realty Portfolio Management, Inc. (successor in interest to EQK Partners), a wholly owned subsidiary of Equitable Real Estate Investment Management, Inc. ('Equitable Real Estate'), to act as its 'Advisor'. The Advisor makes recommendations to the Company concerning investments, administration and day-to-day operations.\nUnder the terms of the advisory agreement, as amended in December 1989, the Advisor receives a management fee that is based upon the average daily per share price of the Company's shares plus the average daily balance of outstanding mortgage indebtedness, net of the unamortized discount on the zero coupon mortgage note. Such fee is calculated using a factor of 42.5 basis points (0.425%) and is payable monthly without subordination. For the years ended December 31, 1993, 1992 and 1991, portfolio management fees were $484,000, $494,000 and $515,000, respectively.\nAs of December 31, 1989, portfolio management fees of $5,440,000 payable to the Advisor were deferred in accordance with subordination provisions contained in the original advisory agreement. Pursuant to the amended advisory agreement, the Advisor forgave one-half, or $2,720,000, of the deferred balance. The remaining deferred fees are to be paid upon the disposition of the Company's properties. If the properties are sold before December 1, 1994, the $2,720,000, will be discounted by 13% per year from December 1, 1994 to the date on which the last property is sold. For financial reporting purposes, the deferred balance is being discounted from December 1, 1996. As of December 31, 1993, the discounted liability for deferred management fees was $1,894,000.\nEQK REALTY INVESTORS I NOTES TO FINANCIAL STATEMENTS--(CONTINUED)\nUpon the sale of all or any portion of any real estate investment of the Company, the Advisor will receive a disposition fee equal to 2% of the gross sales price (including outstanding indebtedness taken subject to or assumed by the buyer and any purchase money indebtedness taken back by the Company). The disposition fee will be reduced by the amount of any brokerage commissions and legal expenses incurred by the Company in connection with such sales. For the years ended December 31, 1993, 1992 and 1991, disposition fees paid to the Advisor amounted to $216,000, $453,000, and $79,000, respectively.\nThe Company has also entered into agreements for the on-site management of each of its properties. Harrisburg East Mall is managed by an affiliate of Equitable Real Estate, as were the buildings at Peachtree up until the time of their respective sales. Castleton Commercial Park is managed by an unaffiliated third-party management company.\nManagement fees paid to each of the Equitable Real Estate management affiliates are generally based upon a percentage of rents and certain other charges. For Peachtree, the Company also paid leasing commissions based upon a percentage of total minimum future rents. Such fees and commissions are comparable to those charged by unaffiliated third-party management companies providing comparable services. For the years ended December 31, 1993, 1992 and 1991, management and leasing fees paid to Equitable Real Estate were $204,000, $707,000 and $473,000, respectively.\nNOTE 9: RELATED PARTY TRANSACTIONS\nIn addition to providing management and advisory services to the Company as described in Note 8, Equitable Real Estate and certain of its affiliates, including the Advisor, lease space at Peachtree-Dunwoody Pavilion. As discussed in Note 4, the Company sold its office buildings at Peachtree during 1992 and 1993. The Company received rent payments of approximately $1,167,000, $879,000 and $846,000 for the years ended December 31, 1993, 1992 and 1991, respectively, with respect to such leases.\nAs a condition of the restructured bank term loan, an escrow deposit of $300,000 was required as additional security for the loan. The Company borrowed this amount from its Advisor, for which it will pay the Advisor interest at a rate of 7.5% per annum. The balance of this loan is repayable at such time as the bank term loan is repaid.\nEQK REALTY INVESTORS I NOTES TO FINANCIAL STATEMENTS--(CONTINUED)\nNOTE 10: SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)\nThe following is a summary of selected quarterly financial data for the years ended December 31, 1993 and 1992.\nThe sum of the quarterly per share amounts in 1992 does not equal the corresponding per share amounts on a full year basis due to the effect on average shares outstanding of the additional shares issued in December 1992 (see Note 3). Income (loss) from rental operations includes write-downs of the Company's investment in Castleton of $4,001,000 in the fourth quarter of 1992 (see Note 4).\nFINANCIAL STATEMENT SCHEDULES DECEMBER 31, 1993 (IN THOUSANDS)\n- -------------------------------------------------------------------------------- SCHEDULE IX -- SHORT-TERM BORROWINGS - --------------------------------------------------------------------------------\n(1) Average of month-end balances outstanding during the period. (2) Year-to-date interest expense divided by average of month-end balances outstanding during the period. (3) Revolving credit line was converted to a term loan in 1992. - -------------------------------------------------------------------------------- SCHEDULE X -- SUPPLEMENTARY INCOME STATEMENT INFORMATION - --------------------------------------------------------------------------------\n(1) Substantially all such costs are recovered from tenants based on the provisions of the tenants' leases. - -------------------------------------------------------------------------------- SCHEDULE XI -- REAL ESTATE AND ACCUMULATED DEPRECIATION - --------------------------------------------------------------------------------\n(1) Encumbrance is a mortgage note payable constituting first liens on the Castleton and Harrisburg real estate and a term loan payable to a bank constituting subordinated liens on such properties. (2) Initial cost is net of imputed interest of $5,280 at date of acquisition. (3) The initial cost is net of unrealized loss recognized through 1993 of $19,565. (4) The aggregate tax basis of the Trust's property is $131 million as of December 31, 1993. (5) Renovation of Harrisburg was completed in 1993.\nINDEPENDENT AUDITORS' REPORT\nTo the Board of Trustees and Shareholders of EQK Realty Investors I:\nWe have audited the accompanying balance sheets of EQK Realty Investors I (a Massachusetts business trust) as of December 31, 1993 and 1992, and the related statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1993. These financial statements and financial statement schedules discussed below are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedules based on our audits.\nWe conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.\nIn our opinion, such financial statements present fairly, in all material respects, the financial position of EQK Realty Investors I as of December 31, 1993 and 1992, and the 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. Also, in our opinion, the financial statement schedules, when consolidated in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.\nOur audits also comprehended the financial statement schedules of EQK Realty Investors I as of December 31, 1993 and 1992, and for each of the three years in the period ended December 31, 1993. In our opinion, such financial statement schedules, when considered in relation to the basic financial statements, present fairly in all material respects the information shown therein.\nDeloitte & Touche Atlanta, Georgia\nMarch 15, 1994","section_15":""}
{"filename":"277948_1993.txt","cik":"277948","year":"1993","section_1":"","section_1A":"","section_1B":"","section_2":"","section_3":"","section_4":"","section_5":"","section_6":"","section_7":"","section_7A":"","section_8":"","section_9":"","section_9A":"","section_9B":"","section_10":"","section_11":"","section_12":"","section_13":"","section_14":"","section_15":""}
{"filename":"769589_1993.txt","cik":"769589","year":"1993","section_1":"","section_1A":"","section_1B":"","section_2":"","section_3":"Item 3. Legal Proceedings\nLitigation is pending in the Indiana Supreme Court and in the Marion County Superior Court in Indiana and arbitration is pending relating to a 1990 notice from PSI Energy Inc. of its intent to arbitrate certain matters arising under its long-term coal sales contract concerning the Cyprus Amax Wabash mine. PSI Energy Inc. is seeking relief regarding the contract including price relief retroactive to January 1, 1988. While the nature and extent of the claims is not clear, Cyprus Amax will continue to defend its position with respect to the contract and has offsetting claims. While Cyprus Amax is not able to predict the outcome of this matter at this time, based upon facts currently known to it, Cyprus Amax believes it has reasonable defenses in this matter and does not believe that the ultimate resolution of this matter will have a material adverse effect on its financial condition.\nOn November 8, 1993, Cyprus Amax was notified by the United States Department of Justice that it is under investigation for possible violations of the antitrust laws of the United States regarding its molybdenum business. While Cyprus Amax is unable to predict the outcome of this investigation, based upon facts currently known to it, the resolution of this matter is not expected to have a material adverse effect on Cyprus Amax's financial condition.\nAt December 31, 1993, Cyprus Amax's long-term accrual for deferred closure, reclamation, and environmental remediation liabilities totalled approximately $358 million which included $254 million for future reclamation, $90 million for environmental remediation at Superfund and other sites, and $14 million for closure of discontinued or previously sold operations. Cyprus Amax's $254 million reclamation reserve is primarily for operating facilities. Reclamation is an ongoing activity and a cost associated with the Company's mining operations and Cyprus Amax accrues for closure and final reclamation liabilities on a life-of-mine basis. The coal reclamation reserve component largely is a result of reclamation obligations incurred for replacing soils and revegetation of mined areas as required by provisions and permits pursuant to the Surface Mining Control and Reclamation Act. The copper and other reclamation reserve component includes costs for site stabilization, cleanup, long-term monitoring, and water treatment costs as expected to be required largely by state laws and regulations as well as by\nsound environmental practice. Total reclamation costs for Cyprus Amax at the end of current mine lives are estimated at about $500-550 million.\nCyprus Amax or its subsidiaries has been advised by the Environmental Protection Agency (\"EPA\") and several State environmental agencies that it may be liable under the Comprehensive Environmental Response, Compensation and Liability Act or similar State laws and regulations (\"Superfund\"), for costs of responding to environmental conditions at a number of sites which have been or are being investigated by the EPA or state agencies to establish whether releases of hazardous substances have occurred and, if so, to develop and implement remedial actions. Cyprus Amax is named as a potentially responsible party (\"PRP\") or has received EPA requests for information for about 30 sites. The reserve of approximately $90 million at December 31, 1993, for Cyprus Amax's share of the estimated aggregate liability for the cost of remedial actions is based upon an evaluation of, among other factors, currently available facts, existing technology, currently enacted laws and regulations, its experience in remediation, other companies' cleanup experience, and its status as a PRP at each of the sites, as well as the ability of other PRPs to pay their allocated portions. The cost range of reasonably possible outcomes for sites where costs are estimable is from $60 million to $200 million and work on these sites is expected to be substantially completed within the next five years, subject to the inherent delays involved in the process. Cyprus Amax believes certain insurance policies partially cover these claims; however, some of the insurance carriers have denied responsibility and Cyprus Amax is litigating coverage. Further, Cyprus Amax believes that it has other potential claims for recovery from third parties, including the U.S. Government and other PRPs, as well as liability offsets through lower cost remedial solutions. Generally, neither insurance recoveries, nor other claims or offsets, have been recognized in the liabilities reported.\nItem 4.","section_4":"Item 4. Submission of Matters to a Vote of Security Holders\nCyprus Minerals Company and AMAX Inc. held special shareholder meetings on November 12, 1993, in New York to vote on the merger of AMAX Inc. into Cyprus Minerals Company and the transactions contemplated under the Agreement and Plan of Reorganization and Merger between Cyprus Minerals Company and AMAX Inc. (\"Merger Agreement\"). Cyprus shareholder approval was requested for the approval of the Merger Agreement, the issuance of Cyprus common stock and of shares of a newly-created series of Cyprus $4.00 Series A Convertible Preferred Stock to Amax shareholders in the merger, amendment to Cyprus' Certificate of Incorporation to create a new series of Cyprus $4.00 Series A Convertible Preferred Stock and to change the name of Cyprus to Cyprus Amax Minerals Company. Shareholders of Amax were asked to approve the spin-off of its aluminum company, Alumax Inc., in a tax-free distribution of all of the outstanding shares of Alumax common stock. In addition, Amax would distribute approximately 28 percent of Amax Gold, Inc. to Amax shareholders in the form of a taxable dividend. The merger and its contemplated transactions were approved by 77 percent of the Cyprus shareholders and 75 percent of the Amax shareholders. The vote of the Cyprus shareholders was 36,503,374 for the proposal, 967,916 against, with 548,347 abstentions.\nExecutive Officers of the Registrant\nSet forth below are the names, ages and titles of the executive officers of Cyprus Amax:\nMr. Ward was elected Chairman of the Board, President and Chief Executive Officer on May 14, 1992, and was made Co-Chairman on November 15, 1993. Mr. Brown was elected to his current office on May 2, 1991, and Mr. Clevenger assumed his current position on January 27, 1993. Mr. Malys was elected Senior Vice President effective October 31, 1988, and Chief Financial Officer effective August 1, 1989. Mr. Watkins assumed his current office on February 1, 1994. Mr. Wolf was elected to his current office on November 13, 1993. Mr. Kane assumed his current office on January 11, 1994. Mr. Peppard was elected to his current office on October 4, 1987. Mr. Taraba was elected to his current office on October 31, 1988.\nMessrs. Brown, Malys, Wolf, Peppard, and Taraba have been engaged full-time in the business of Cyprus and its subsidiaries for more than the past five years. Prior to joining Cyprus in May 1992, Mr. Ward had been President and Chief Operating Officer of Freeport-McMoRan Inc. and Chairman and Chief Executive Officer of Freeport-McMoRan Copper & Gold Inc. since 1984. Mr. Brown has occupied various management positions in Cyprus' coal operations since 1980. Mr. Clevenger held various management positions at Phelps Dodge Corporation since 1979. Mr. Malys was Vice President and Corporate Controller from 1985 to 1988, and Senior Vice President Financial and Information Services from 1988 to 1989, when he assumed his current position. Prior to joining Cyprus Amax in 1994, Mr. Watkins occupied various management positions at Minnova Inc. from 1977 until 1991 when he was elected President and Director. Mr. Watkins served as Vice President and Director at Metall Mining Corporation from 1991 until 1993. Mr. Wolf has been a member of Cyprus' law department since 1993 and previously served as chief legal officer from 1984 through 1987. Mr. Wolf had operating responsibility for Cyprus' talc, lithium, gold and iron ore operations during the period from 1987 until 1993 when he assumed his current position. Prior to joining Cyprus in 1994, Mr. Kane served as Associate Director, Relationship Officer for Bear, Stearns & Co. Inc. since 1990. From 1989 to 1990, Mr. Kane served as Manager of Capital Markets and Exposure Management for United Technologies Corporation. Mr. Peppard has held various management positions in Cyprus' human resources department since 1986. Mr. Taraba held various positions in Cyprus' financial departments from 1982 until 1988, when he assumed his current position.\nEach executive officer holds office subject to removal at any time by the Board of Directors of Cyprus Amax.\nPART II\nItem 5.","section_5":"Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters.\nInformation required by this item is incorporated by reference from \"Stock Market Information\" on page 65 in the 1993 Annual Report.\nThe information required by Items 6 through 8 is incorporated by reference from the pages in the 1993 Annual Report set forth below.\nPART III\nItem 10.","section_6":"","section_7":"","section_7A":"","section_8":"","section_9":"","section_9A":"","section_9B":"","section_10":"Item 10. Directors and Executive Officers of the Registrant\nThe information required by this item appears in Part I of this Annual Report on Form 10-K and in Cyprus Amax's Proxy Statement for the 1994 Annual Meeting to be filed within 120 days after the end of the fiscal year.*\nItem 11.","section_11":"Item 11. Executive Compensation\nThe information required by this item appears in Cyprus Amax's Proxy Statement for the 1994 Annual Meeting to be filed within 120 days after the end of the fiscal year.\nItem 12.","section_12":"Item 12. Security Ownership of Certain Beneficial Owners and Management\nThe information required by this item appears in Cyprus Amax's Proxy Statement for the 1994 Annual Meeting to be filed within 120 days after the end of the fiscal year.\nItem 13.","section_13":"Item 13. Certain Relationships and Related Transactions\nThe information required by this item appears in Cyprus Amax's Proxy Statement for the 1994 Annual Meeting to be filed within 120 days after the end of the fiscal year.\n- ------------ * References in this Annual Report on Form 10-K to material contained in Cyprus Amax's Proxy Statement for the 1994 Annual Meeting to be filed within 120 days after the fiscal year incorporate such material into this Report by reference.\nPART IV\nItem 14.","section_14":"Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K\n(a) The following financial statements are filed as part of this Report:\n1. Financial Statements included in the 1993 Annual Report and incorporated by reference:\nWith the exception of the aforementioned financial statements and schedules, and the information incorporated in Items 1 and 2 and Items 5 through 8, the 1993 Annual Report is not deemed to be filed as part of this Annual Report on Form 10-K. Schedules not included in this Form 10-K have been omitted because they are not applicable or the required information is shown in the financial statements in the 1993 Annual Report or notes thereto. Separate financial statements of 50 percent or less owned companies accounted for by the equity method have been omitted since, if considered in the aggregate, they would not constitute a significant subsidiary.\n3. The following exhibits are filed with this Annual Report on Form 10-K. The exhibit numbers correspond to the numbers assigned in Item 601 of Regulation S-K. The page numbers correspond to the numbers in the sequential numbering system (used only in the manually signed copies of this Annual Report on Form 10-K).\n* To be filed by amendment within 180 days of the plan's fiscal year end, in accordance with Rule 15d-21.\n(b) The following 8-K's were filed during the last quarter of the period covered by this Report on Form 10-K:\nA current report on Form 8-K dated October 26, 1993, reporting the first amendment to the Competitive Advance and Revolving Credit Facility Agreement was filed on October 27, 1993. A current report on Form 8-K dated October 26, 1993, reporting the issuance of $250,000,000 aggregate principal amount of 6 percent Notes due October 15, 2005, was filed on October 27, 1993. A current report on Form 8-K dated November 9, 1993, reporting the termination by the Justice Department of the waiting period for the Cyprus Amax merger was filed on November 9, 1993. A current report on Form 8-K dated November 30, 1993, reporting the amendments to Cyprus' Certificate of Incorporation and By-laws was filed on November 30, 1993.\nSIGNATURES\nPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on the 23rd day of March 1994.\nCyprus Amax Minerals Company (Registrant)\nBy \/s\/ Gerald J. Malys --------------------------------- Gerald J. Malys Senior Vice President and Chief Financial Officer\nPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 23rd, 1994.\nSignatures Titles ---------- ------\n\/s\/ Milton H. Ward Co-Chairman of the Board, Director, President, and - ----------------------------- Chief Executive Officer Milton H. Ward\n\/s\/ Allen Born Co-Chairman of the Board and Director - ----------------------------- Allen Born\n\/s\/ Gerald J. Malys Senior Vice President and Chief Financial - ----------------------------- Officer (Principal Financial Officer) Gerald J. Malys\n\/s\/ John Taraba Vice President and Controller (Principal - ----------------------------- Accounting Officer) John Taraba\n\/s\/ Linda G. Alvarado Director - ----------------------------- Linda G. Alvarado\n\/s\/ George S. Ansell Director - ----------------------------- George S. Ansell\n\/s\/ William C. Bousquette Director - ----------------------------- William C. Bousquette\n\/s\/ Calvin A. Campbell, Jr. Director - ----------------------------- Calvin A. Campbell, Jr.\n\/s\/ Thomas V. Falkie Director - ----------------------------- Thomas V. Falkie\n\/s\/ Ann Maynard Gray Director - ----------------------------- Ann Maynard Gray\n\/s\/ James C. Huntington, Jr. Director - ----------------------------- James C. Huntington, Jr.\n\/s\/ Michael A. Morphy Director - ----------------------------- Michael A. Morphy\n\/s\/ Rockwell A. Schnabel Director - ----------------------------- Rockwell A. Schnabel\n\/s\/ Theodore M. Solso Director - ----------------------------- Theodore M. Solso\n\/s\/ John Hoyt Stookey Director - ----------------------------- John Hoyt Stookey\n\/s\/ James A. Todd, Jr. Director - ----------------------------- James A. Todd, Jr.\n\/s\/ Billie B. Turner Director - ----------------------------- Billie B. Turner\nREPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULES\nTo the Board of Directors and Shareholders of Cyprus Amax Minerals Company:\nOur audits of the consolidated financial statements referred to in our report dated March 1, 1994, appearing on page 38 of the 1993 Annual Report to Shareholders of Cyprus Amax Minerals Company (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the Financial Statement Schedules listed in Item 14(a) of this Form 10-K. In our opinion, these Financial Statement Schedules present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.\nPRICE WATERHOUSE\nDenver, Colorado March 1, 1994\nAPPENDIX A\nADDITIONAL INFORMATION CONCERNING CYPRUS AMAX'S OIL AND GAS OPERATIONS (Unaudited)\nIntroduction. Data presented in the tables below reflect the merger of Amax into Cyprus on November 15, 1993. Prior to November 15, 1993, Amax Energy Inc. was the holding company for Amax Oil & Gas Inc. In the first quarter 1994, Cyprus Amax reached an agreement with Union Pacific Resources Company, a subsidiary of Union Pacific Corporation, to sell all of its stock of Amax Oil & Gas, Inc. The sale, which has an effective date of September 30, 1993, is expected to close by March 31, 1994.\nReserve Data. The following table sets forth the estimated quantities of Cyprus Amax's net proved reserves of crude oil, natural gas and natural gas liquids as of December 31, 1993.\nNo major discovery or other favorable or adverse event has occurred since December 31, 1993, which would cause a significant change in estimated proved reserve data. No estimates of Cyprus Amax's total net proved oil and gas reserves have been filed with or included in reports to any federal authority or agency other than the Securities and Exchange Commission since January 1, 1993.\nProved oil and gas reserves are the estimated quantities of crude oil, natural gas, condensate, and natural gas liquids which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Proved developed oil and gas reserves are reserves that can be expected to be recovered through existing wells with existing equipment and operating methods. Proved undeveloped oil and gas reserves are reserves that are expected to be recovered from new wells on undrilled acreage, or from existing wells where a relatively major expenditure is required for recompletion. Estimated net proved reserves of crude oil and natural gas reported herein are stated in terms of Cyprus Amax's net interest, after reduction for royalties and other economic interests owned by others.\nAverage Sales Price and Average Production Costs. The following table sets forth Cyprus Amax's average sales prices per unit of crude oil, natural gas and natural gas liquids for the period November 15 through December 31, 1993.\n\/(1)\/ Includes condensate \/(2)\/ See \"Governmental Regulations\" under \"Other Minerals--Oil and Gas\" \/(3)\/ Includes hedging activity\nThe following table sets forth Cyprus Amax's average production costs per equivalent barrel of crude oil and per equivalent thousand cubic feet of natural gas for the period November 15 through December 31, 1993. Production costs include lifting costs and severance taxes but do not include foreign or domestic income taxes, depreciation, depletion and amortization of capitalized acquisitions, exploration and development, interest, general administrative, overhead allocation or other expenses.\n\/(1)\/ Natural gas amounts have been converted to equivalent barrels of crude oil based on relative energy content. \/(2)\/ Crude oil amounts, including condensate and natural gas liquids, have been converted to equivalent thousand cubic feet of natural gas based on relative energy content.\nProduction Data. The net quantities of crude oil, natural gas and natural gas liquids production attributable to Cyprus Amax's interests for the period November 15 through December 31, 1993 were as follows:\n\/(1)\/ Includes production of 211 (thousands of barrels) from Cyprus Amax's ownership interests in gas processing plants.\nGross and Net Productive Wells. The table below sets forth Cyprus Amax's gross and net productive wells as of December 31, 1993.\n\/(1)\/ A \"gross well\" is a well in which a working interest is owned. The number of gross wells is the total number of wells in which a working interest is owned. \/(2)\/ A \"net well\" is deemed to exist when the sum of fractional ownership working interest 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.\nWells in Process of Drilling. At December 31, 1993, there were 6 gross (4.4 net) wells in the process of drilling in which Cyprus Amax had an interest.\nProductive and Dry Wells Drilled. The following table sets forth the number of gross and net productive and dry exploratory and development wells drilled for the period November 15 through December 31, 1993.\nAcreage Data. Undeveloped acreage in which Cyprus Amax held interests at December 31, 1993 included fee mineral interests, acres held under oil and gas leases and overriding royalty interests. Developed acreage, on which there is oil and gas production in which Cyprus Amax had interests at December 31, 1993, included fee mineral interests, acreage held under oil and gas leases and overriding royalty interests. The developed and undeveloped acreage is summarized as follows:\n\/(1)\/ Developed acreage is that spaced or assignable to productive wells. \/(2)\/ Undeveloped acreage is acreage on which wells have not been drilled or completed to the point which would permit the production of commercial quantities of oil and gas, regardless of whether such acreage contains proved reserves.\nThe remaining terms of oil and gas leases in which Cyprus Amax has an interest range from one to five years. In general, leases have a primary term of three years and are subject to possible extension by development and production.\nSCHEDULE II CYPRUS AMAX MINERALS COMPANY AND SUBSIDIARIES AMOUNTS RECEIVABLE FROM RELATED PARTIES AND UNDERWRITERS, PROMOTERS, AND EMPLOYEES OTHER THAN RELATED PARTIES For the Year Ended December 31 (Thousands of Dollars)\n\/(1)\/ Descriptions ------------ Alumax Inc. Represents amounts due under a tax disaffiliation agreement which requires Alumax to pay or reimburse Cyprus Amax for tax obligations arising from certain transactions within Alumax prior to spin-off.\n\/(2)\/ Resulted from the merger.\nSCHEDULE IV CYPRUS AMAX MINERALS COMPANY AND SUBSIDIARIES INDEBTEDNESS OF AND TO RELATED PARTIES -- NOT CURRENT For the Year Ended December 31 (Thousands of Dollars)\n\/(1)\/ Descriptions ------------\nLoan to Savings Plan Loan outstanding under a promissory note payable. The loan to the Savings Plan bears interest at 9 3\/4 percent per annum and is serviced by Cyprus' contributions to the Savings Plan and dividends paid on the Cyprus common shares purchased with the proceeds of the loan. The minimum contribution to the Savings Plan by Cyprus must be sufficient to amortize the loan to the Plan over a 20-year term as provided in the promissory note. The loan to the Savings Plan is recorded as a reduction of Shareholders' Equity.\nAmax Gold Inc. Loans outstanding under a demand promissory note payable. Interest payable at the Federal Funds Rate plus 3\/16 percent. In February 1994 approval was granted for Cyprus Amax to purchase Amax Gold common stock at $6.888 per share to repay approximately $21 million of the above indebtedness.\nOakbridge Limited Subordinated loans outstanding due June 28, 1996. Interest payable at the average daily bank bill buying rate rounded to the nearest 1\/16 percent plus one percent payable in arrears.\n\/(2)\/ Resulted from the merger.\nSCHEDULE V CYPRUS AMAX MINERALS COMPANY AND SUBSIDIARIES PROPERTY, PLANT, AND EQUIPMENT\/(1)\/ For the Year Ended December 31 (Thousands of Dollars)\n- ------------ \/(1)\/ Property acquisition costs, intangible mine development costs and certain tangible assets which are expected to be in service for the life of the mine are amortized on the unit-of-production basis. Mobile mining equipment and most other assets are depreciated on a straight-line basis. \/(2)\/ Other changes are due mainly to the balance sheet reclassifications and intercompany transfers.\nSCHEDULE VI CYPRUS AMAX MINERALS COMPANY AND SUBSIDIARIES ACCUMULATED DEPRECIATION, DEPLETION, AMORTIZATION, AND WRITE-DOWNS OF PROPERTY, PLANT, AND EQUIPMENT For the Year Ended December 31 (Thousands of Dollars)\nReconciliation to depreciation, depletion, and amortization:\n- ------------ \/(1)\/ Other Changes include balance sheet reclassifications, intercompany transfers and write-downs of certain assets in 1992 and 1991.\nSCHEDULE VII CYPRUS AMAX MINERALS COMPANY AND SUBSIDIARIES GUARANTEES OF SECURITIES OF OTHER ISSUERS For the Year Ended December 31 (Thousands of Dollars)\n- ------------ \/(1)\/ Oakbridge Limited - Short-term loan (6 months) from ABN AMRO Australia Limited to Oakbridge. Final loan repayment occurred on February 9, 1994 and the guarantee subsequently was cancelled.\nSCHEDULE VIII CYPRUS AMAX MINERALS COMPANY AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS AND RESERVES For the Year Ended December 31 (Thousands of Dollars)\n\/(1)\/ Amount includes the elimination of reserves for operations sold or shut down, $4,417; remainder represents deductions for transfers, usage, returns, and obsolescence due to the M&S inventory reduction program. \/(2)\/ Amount primarily represents increased reserve for obsolescence, $12,100. \/(3)\/ Amount primarily represents the write-off of LTV receivables. \/(4)\/ Amount primarily represents collection of loan from a joint venture partner, $3,654.\nSCHEDULE IX CYPRUS AMAX MINERALS COMPANY AND SUBSIDIARIES SHORT-TERM BORROWINGS For the Year Ended December 31 (Thousands of Dollars)\n- -------------- \/(1)\/ The average amount outstanding during the year was computed by dividing the sum of month end outstanding principal balances by twelve.\n\/(2)\/ Weighted average interest rate during the year was computed by dividing total interest on short-term borrowings by the average outstanding short- term principal balance during the year.\nSCHEDULE X CYPRUS AMAX MINERALS COMPANY AND SUBSIDIARIES SUPPLEMENTARY INCOME STATEMENT INFORMATION For the Year Ended December 31 (Thousands of Dollars)\nINDEX TO EXHIBITS\n- ------------ * To be filed by amendment within 180 days of the plan's fiscal year end, in accordance with Rule 15d-21.\n(b) The following 8-K's were filed during the last quarter of the period covered by this Report on Form 10-K:\nA current report on Form 8-K dated October 26, 1993, reporting the first amendment to the Competitive Advance and Revolving Credit Facility Agreement was filed on October 27, 1993. A current report on Form 8-K dated October 26, 1993, reporting the issuance of $250,000,000 aggregate principal amount of 6 5\/8 percent Notes due October 15, 2005, was filed on October 27, 1993. A current report on Form 8-K dated November 9, 1993, reporting the termination by the Justice Department of the waiting period for the Cyprus Amax merger was filed on November 9, 1993. A current report on Form 8-K dated November 30, 1993, reporting the amendments to Cyprus' Certificate of Incorporation and By-laws was filed on November 30, 1993.","section_15":""}
{"filename":"908603_1993.txt","cik":"908603","year":"1993","section_1":"ITEM 1. BUSINESS\nFord Credit Auto Receivables Corporation (\"FCARC\") established the Ford Credit 1993-B Grantor Trust (the \"Trust\") as of July 1, 1993 by selling and assigning to Chemical Bank, as Trustee (the \"Trustee\"), property including a pool of retail installment sale contracts secured by new and used automobiles and light trucks (the \"Receivables\"), certain monies due thereunder, security interests in the vehicles financed thereby and certain other property in exchange for certificates representing fractional undivided interests in the Trust (the \"Certificates\") consisting of two Classes of Certificates: a) the Class A Certificates evidencing in the aggregate an undivided ownership interest of 92.50% of the Trust, which were sold to the public, and b) the Class B Certificate evidencing in the aggregate an undivided ownership interest of 7.5% of the Trust, which were retained by FCARC. The Trust does not intend to acquire additional retail installment sale contracts and therefore the Receivable portfolio will continue to liquidate.\nFord Motor Credit Company (\"Ford Credit\") services the Receivables pursuant to a Pooling and Servicing Agreement dated as of July 1, 1993 (the \"Agreement\") and is compensated for acting as the Servicer. In order to facilitate its servicing functions and minimize administrative burdens and expenses, Ford Credit, as Servicer, retains physical possession of the Receivables and documents relating thereto as custodian for the Trustee.\nThe rights of the holders of the Class B Certificates to receive distributions with respect to the Receivables are subordinated, to the extent described in the Agreement, to the rights of the holders of the Class A Certificates.\nITEM 2.","section_1A":"","section_1B":"","section_2":"ITEM 2. PROPERTIES\nThe property of the Trust includes retail installment sale contracts originated on or after July 1, 1992 between dealers (the \"Dealers\") and retail purchasers (the \"Obligors\") secured by new and used automobiles and light trucks (the \"Financed Vehicles\") and, in general, all payments due thereunder on or after July 1, 1993 (the \"Cutoff Date\").\nThe Receivables were originated by Dealers in accordance with Ford Credit's requirements under agreements with Dealers, for assignment to Ford Credit, have been so assigned and were sold to FCARC by Ford Credit pursuant to a Purchase Agreement dated July 1, 1993 (\"Purchase Agreement), are serviced by Ford Credit, and evidence the indirect financing made available by Ford Credit to the Obligors. The property of the Trust also includes (i) such amounts as from time to time may be held in separate trust accounts established and maintained pursuant to the Agreement, and the proceeds of such accounts, (ii) security interests in the Financed Vehicles and any accessions thereto, (iii) any Dealer Recourse, (iv) the right to proceeds of credit life, credit disability, and physical damage insurance policies covering the Financed Vehicles, (v) the rights of FCARC under the Purchase Agreement and (vi) certain rebates of premiums and other amounts relating to certain insurance policies and other items financed under the Receivables in effect as of the July 1, 1993 (the \"Cutoff Date\").\nAdditionally, pursuant to agreements between Ford Credit and the Dealers, the Dealers are obligated to repurchase from Ford Credit Receivables which do not meet certain representations made by the Dealers, as well as those covered by recourse plans (\"Dealer Recourse\").\nThe Receivables were purchased by Ford Credit in the ordinary course of business in accordance with Ford Credit's underwriting standards, which emphasize the Obligor's ability to pay and creditworthiness, as well as the asset value of the Financed Vehicle.\nThe Receivables were selected from Ford Credit's portfolio by several criteria, including the following: each Receivable (i) was originated in the United States, (ii) has a contractual Annual Percentage Rate (\"APR\") that equals or exceeds 6.8%, (iii) provides for level monthly payments which provide interest at the APR and fully amortize the amount financed over an original term no greater than 60 months, (iv) was not more than 30 days past due as of the Cutoff Date and has never been extended, (v) is attributable to the purchase of a new or automobile or light truck, and (vi) was originated on or after July 1, 1992.\nThe Receivables were selected at random from Ford Credit's retail installment sale contracts meeting the criteria described above, and no selection procedures believed to be adverse to the Certificateholders were utilized in selecting the Receivables from qualifying retail installment sale contracts.\nIn addition to required repurchases by the Dealers in cases of misrepresentations as stated above, on July 1, 1992, 1.8% of the Receivables provided recourse to the Dealer which originated the Receivables. Dealers are generally obligated under these recourse plans for payment of the unpaid principal balance of a defaulted contract, unless Ford Credit fails to repossess the vehicle and deliver it to the Dealer within 90 days after default. The Dealer's obligation generally terminates after the first 24 monthly payments are made under the related contract.\nAll the Receivables are prepayable at any time. If prepayments are received on the Receivables, the actual weighted average life of the Receivables will be shorter than that scheduled weighted average life, which is based on the assumptions that payments will be made as scheduled, and that no prepayments will be made. (For this purpose the term \"prepayments\" includes liquidations due to default, as well as receipt of proceeds from credit life, credit disability, and casualty insurance policies.) Weighted average life means the average amount of time during which each dollar of principal on a receivable is outstanding.\nThe rate of prepayments on the Receivables may be influenced by a variety of economic, social and other factors, including the fact that an Obligor may not sell or transfer a Financed Vehicle without the consent of Ford Credit. Ford Credit believes that the actual rate of prepayments will result in a substantially shorter weighted average life than the scheduled weighted average life of 27.25 months. Based on the historical performance of Ford Credit's portfolio of U. S. retail installment sale contracts for new and used automobiles and light trucks (including previously sold contracts which Ford Credit continues to service), the average effective term of such contracts in approximately two-thirds of their scheduled contractual term.\nAs of December 31, 1993, the pool consisted of 90,881 Receivables, of which 1,507, representing payments of $645,726.08, were delinquent 30 - 59 days; 99, representing payments of $75,028.60, were delinquent 60 - 89 days; 10, representing payments of $12,467.87, were delinquent 90 - 119 days; and 6, representing payments of $9,085.97 were delinquent over 120 days.\nAdditional information concerning the pool balance, payment of principal and interest, prepayments, the servicing fee, the weighted average maturity and seasoning, the pool factor, the remaining limited guaranty amount and other information relating to the pool of Receivables may be obtained in the monthly reports provided to Chemical Bank by Ford Credit as Servicer (Exhibits 19-B through 19-G).\nITEM 3.","section_3":"ITEM 3. LEGAL PROCEEDINGS\nNothing to report.\nITEM 4.","section_4":"ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS\nNothing to report. ITEM II.\nITEM 5.","section_5":"ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS\nThere were 57 Class A Certificateholders as of March 3, 1994. There is no established public trading market for the Certificates.\nITEM 9.","section_6":"","section_7":"","section_7A":"","section_8":"","section_9":"ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTS ON ACCOUNTING AND FINANCIAL DISCLOSURE\nNothing to report.\nPART III\nITEM 12.","section_9A":"","section_9B":"","section_10":"","section_11":"","section_12":"ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT\n(3) Amount and nature of (2) Name and Address beneficial (1) Title of of beneficial ownership (4) Percent of Class owner* (in thousands) of Class - ---------------------------------------------------------------------- 4.30% Asset Bankers Trust Company $142,050 12.9% Backed 16 Wall Street Certificates, New York, NY 10015 Class A\n4.30% Asset The Chase Manhattan $129,250 11.8% Backed Bank, N. A. Certificates, 1 Chase Manhattan Plaza Class A New York, NY 10081\n4.30% Asset Citibank N. A. $ 59,500 5.4% Backed 111 Wall Street Certificates, New York, NY 10043 Class A\n4.30% Asset Bank of New York $ 67,170 6.1% Backed 925 Patterson Plank Rd. Certificates, Secaucus, NJ 07094 Class A\n4.30% Asset Chemical Bank $269,800 24.6% Backed 270 Park Avenue Certificates, 31st Floor Class A New York, NY 10017\n4.30% Asset Shawmut Bank $ 73,016 6.6% Backed Connecticut, N. A.\/ Certificates, Investment Dealer Class A 777 Main Street, MSN 371 New York, NY 06115\n4.30% Asset U. S. Trust Co. of $ 60,500 5.5% Backed New York Certificates, 770 Broadway Class A New York, NY 10003\n*As of March 3, 1994\nITEM 13.","section_13":"ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS\nNothing to report.\nITEM 14.","section_14":"ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.\n(a)3. Exhibits\nDesignation Description Method of Filing - ----------- ----------- ----------------\nExhibit 3-A Restated Certificate of Filed as Exhibit 3.1to Incorporation of Ford Ford Credit Auto Credit Auto Receivables Receivables Corporation's Corporation. Registration Statement on Form S-1 (33-39027) and incorporated herein by reference.\nExhibit 3-B By-Laws of Ford Credit Filed as Exhibit 3.2 to Auto Receivables Corpora- Ford Credit Auto Receiv- tion. ables Corporation's Registration Statement on Form S-1 (No. 33-39027) and incorporated herein by reference.\nExhibit 4-A Form of Pooling and Filed as Exhibit 4 to Servicing Agreement dated Ford Credit 1993-B as of July 1, 1993 Grantor Trust's Current between Ford Credit Auto Report on Form 8-K dated Receivables Corporation, August 10, 1993 and as seller, Ford Credit as incorporated herein by Servicer and Chemical Bank reference. as Trustee.\nExhibit 4-B Prospectus dated July Filed as Exhibit 99 to 15, 1993, relating to sale Ford Credit 1993-B of Ford Credit 1993-B Grantor Trust's Current Grantor Trust 4.30% Asset Report on Form 8-K dated Backed Certificates. August 10, 1993 and incorporated herein by reference.\nExhibit 19-A Selected Information Filed with this report. Relating to the Receivables.\nExhibit 19-B Report for the month ended Filed as Exhibit 19 to July 31, 1993 provided Ford Credit 1993-B to Chemical Bank, as Grantor Trust's Current Trustee under Ford Credit Report on Form 8-K dated 1993-B Grantor Trust. August 16, 1993 and incorporated herein by reference.\nExhibit 19-C Report for the month ended Filed as Exhibit 19 to August 31, 1993 provided Ford Credit 1993-B to Chemical Bank, as Grantor Trust's Current Trustee under Ford Credit Report on Form 8-K dated 1993-B Grantor Trust. September 20, 1993 and incorporated herein by reference.\nExhibit 19-D Report for the month ended Filed as Exhibit 19 to September 30, 1993 provided Ford Credit 1993-B to Chemical Bank, as Grantor Trust's Current Trustee under Ford Credit Report on Form 8-K dated 1993-B Grantor Trust. October 20, 1993 and incorporated herein by reference.\nExhibit 19-E Report for the month ended Filed as Exhibit 19 to October 31, 1993 provided Ford Credit 1993-B to Chemical Bank, as Grantor Trust's Current Trustee under Ford Credit Report on Form 8-K dated 1993-B Grantor Trust. November 15, 1993 and incorporated herein by reference.\nExhibit 19-F Report for the month ended Filed as Exhibit 19 to November 30, 1993 provided Ford Credit 1993-B to Chemical Bank, as Grantor Trust's Current Trustee under Ford Credit Report on Form 8-K dated 1993-B Grantor Trust. December 15, 1993 and incorporated herein by reference.\nExhibit 19-G Report for the month ended Filed as Exhibit 19 to December 31, 1993 provided Ford Credit 1993-B to Chemical Bank, as Grantor Trust's Current Trustee under Ford Credit Report on Form 8-K dated 1993-B Grantor Trust. January 12, 1994 and incorporated herein by reference.\n(b) REPORTS ON FORM 8-K\nThe Ford Credit 1993-B Grantor Trust filed a Current Report on Form 8-K dated August 10, 1993 regarding the pool of Receivables in the Trust and the servicing thereof as described in the Pooling and Servicing Agreement dated as of July 1, 1993 among Ford Credit Auto Receivables Corporation, as Seller, Ford Motor Credit Company, as Servicer and Chemical Bank, as Trustee filed as Exhibit 4, and the Prospectus dated July 15, 1993 relating to the issuance of $1,097,416,687.49 aggregate principal amount of Ford Credit 1993-B Grantor Trust 4.30% Asset Backed Certificates, Class A filed as Exhibit 99.\nAlso, see Exhibits 19-B through 19-G.\nSIGNATURES\nPursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.\nFORD CREDIT 1993-B GRANTOR TRUST -------------------------------- (Registrant)\nMarch 18, 1994 By: \/s\/Richard P. Conrad ----------------------------- Richard P. Conrad (Assistant Secretary of Ford Credit Auto Receivables Corporation originator of Trust)\nEXHIBIT INDEX\nExhibit Number Description of Exhibit Page - ------- ---------------------- ----\nExhibit 3-A Restated Certificate of * Incorporation of Ford Credit Auto Receivables Corporation.\nExhibit 3-B By-Laws of Ford Credit * Auto Receivables Corpora- tion.\nExhibit 4-A Form of Pooling and * Servicing Agreement dated as of July 1, 1993 between Ford Credit Auto Receivables Corporation, as seller, Ford Credit as Servicer and Chemical Bank as Trustee.\nExhibit 4-B Prospectus dated July * 15, 1993, relating to sale of Ford Credit 1993-B Grantor Trust 4.30% Asset Backed Certificates.\nExhibit 19-A Selected Information Filed with this Report. Relating to the Receivables.\nExhibit 19-B Report for the month ended * July 31, 1993 provided to Chemical Bank, as Trustee under Ford Credit 1993-B Grantor Trust.\nExhibit 19-C Report for the month ended * August 31, 1993 provided to Chemical Bank, as Trustee under Ford Credit 1993-B Grantor Trust.\nExhibit 19-D Report for the month ended * September 30, 1993 provided to Chemical Bank, as Trustee under Ford Credit 1993-B Grantor Trust.\nExhibit 19-E Report for the month ended * October 31, 1993 provided to Chemical Bank, as Trustee under Ford Credit 1993-B Grantor Trust.\nExhibit 19-F Report for the month ended * November 30, 1993 provided to Chemical Bank, as Trustee under Ford Credit 1993-B Grantor Trust.\nExhibit 19-G Report for the month ended * December 31, 1993 provided to Chemical Bank, as Trustee under Ford Credit 1993-B Grantor Trust.\n- ------------------ * Previously filed","section_15":""}
{"filename":"351155_1993.txt","cik":"351155","year":"1993","section_1":"ITEM 1 - BUSINESS West One Bancorp, (the Registrant) is an Idaho corporation formed in 1981 as a bank holding company subject to regulation under the Bank Holding Company Act of 1956, as amended, and is registered with the Board of Governors of the Federal Reserve System (Federal Reserve Board).\nThe Registrant's principal subsidiary is West One Bank, Idaho in Boise, Idaho. Other subsidiaries include West One Bank, Washington in Seattle, Washington; West One Bank, Utah in Salt Lake City, Utah; West One Bank, Oregon in Portland, Oregon; West One Bank, Oregon, S.B. in Hillsboro, Oregon; Idaho First Bank in Boise, Idaho; West One Financial Services, Inc. in Boise, Idaho; West One Trust Company in Salt Lake City, Utah; West One Trust Company, Washington in Bellevue, Washington; and West One Life Insurance Company in Boise, Idaho.\nThe Registrant, through its subsidiaries, provides a wide variety of financial services to corporate and institutional customers, governments, individuals, and other financial institutions. Such services include domestic commercial banking, investment and funds management, personal banking, trust operations, corporate services, mortgage banking and credit life insurance. As of December 31, 1993, the Registrant and its subsidiaries employed approximately 4,477 full-time equivalent employees.\nWEST ONE BANK, IDAHO West One Bank, Idaho (West One, Idaho) was founded in 1867 in Boise, Idaho, and was the second national bank to be established west of the Rocky Mountains. When branch banking was authorized in 1933, West One, Idaho acquired three affiliated banks, thus beginning the development of its present statewide banking organization in Idaho.\nWest One, Idaho is an Idaho-chartered bank supervised and regulated at the state level by the Director of the Idaho Department of Finance and at the federal level by the Federal Reserve Board. West One, Idaho is insured by the Bank Insurance Fund (BIF) and is therefore also subject to regulations issued by the FDIC. (See \"Supervision and Regulation - Other Regulations.\")\nOn January 21, 1994, West One, Idaho acquired Idaho State Bank with assets of $48 million in exchange for 133,332 shares of the Registrant's common stock. The transaction is a pooling of interests in 1994. Idaho State Bank's financial position and results of operations are not material to West One's financial position and results of operations.\nIdaho is the primary market area of West One, Idaho. West One, Idaho offers a full range of commercial and personal banking and trust services. Its corporate banking department provides a broad range of customized credit products and services to middle market and large corporate borrowers. The principal industries in Idaho include agriculture, forest products, services, tourism, mining and manufacturing.\nThe banking business in Idaho is highly competitive. West One, Idaho competes for deposits, loans, and trust accounts with other banks and financial institutions. At December 31, 1993, West One had $3.9 billion in assets and 79 branches. Based on assets of $3.8 billion at September 30, 1993, West One, Idaho is the largest bank in Idaho. In 1993, approximately 20 banks with approximately 306 branches were actively engaged in banking in Idaho.\nWEST ONE BANK, WASHINGTON West One Bank, Washington, (West One, Washington), a full-service commercial bank, has 53 branches principally in the Puget Sound region, Yakima, Spokane and the Tri-Cities, with assets of $1.9 billion at December 31, 1993. West One, Washington is regulated by the State of Washington, and deposits are insured by the FDIC.\nOn December 31, 1993, West One, Washington and West One Bank, Eastern Washington (formerly Yakima Valley Bank and Ben Franklin National Bank) merged under the name West One, Washington. West One, Washington now includes the operations of the former Community Bank of Renton, First Security Bank of Tacoma, Bank of Tacoma, First Western Bank, West One Bank, Spokane, Yakima Valley Bank and Ben Franklin National Bank.\nAt September 30, 1993, West One, Washington and West One Bank, Eastern Washington had combined assets of $1.9 billion making it the sixth largest bank in Washington. In 1993, approximately 103 banks with approximately 1,052 branches were actively engaged in banking in Washington.\nIn May 1993, Ben Franklin National Bank with assets of $37 million was acquired in exchange for 206,254 shares of the Registrant's common stock. The transaction was accounted for as a pooling of interests. Ben Franklin National Bank's financial position and results of operations were not material to the Registrant's financial position and results of operations, and prior year financial statements have not been restated.\nWEST ONE BANCORP, WASHINGTON West One Bancorp, Washington, a bank holding company purchased in 1988, was merged into the Registrant on April 30, 1993.\nWEST ONE BANK, UTAH West One Bank, Utah, (West One, Utah), chartered in 1909 and acquired in November 1985, is a state-chartered, full-service commercial bank based in Salt Lake City, Utah. As of December 31, 1993, West One, Utah had 23 branches and $703 million in total assets. West One, Utah is regulated by the Federal Reserve Board, and deposits are insured by the FDIC.\nAt September 30, 1993, West One, Utah had $689 million in total assets making it the sixth largest bank in Utah. In 1993, approximately 50 banks with approximately 424 offices were actively engaged in banking in Utah.\nWEST ONE BANK, OREGON West One Bank, Oregon, (West One, Oregon), acquired in 1983, operates as a state-chartered, full-service commercial bank with operations concentrated in the western Oregon market area. As of December 31, 1993, West One, Oregon had 21 branches and $602 million in total assets. West One, Oregon is regulated by the State of Oregon, and deposits are insured by the FDIC.\nWEST ONE BANK, OREGON, S.B. West One Bank, Oregon, S.B., acquired in 1991, is a state-chartered, full-service savings bank based in Hillsboro, Oregon. As of December 31, 1993, West One Bank, Oregon, S.B. had 14 branches and $428 million in total assets. West One Bank, Oregon, S.B. is regulated by the State of Oregon, and deposits are insured by the FDIC.\nWest One, Oregon and West One Bank, Oregon, S.B. combined had total assets of $1.0 billion as of September 30, 1993, making it the fifth largest bank in Oregon.\nIDAHO FIRST BANK Idaho First Bank was formed by the Registrant in 1989. Idaho First Bank is an Idaho-chartered bank supervised and regulated at the state level by the Director of the Idaho Department of Finance and at the federal level by the Federal Reserve Board. Idaho First Bank, which is insured by the BIF, offers electronic banking services to the Registrant's cardholders through the affiliates' automated teller machine (ATM) network (AWARD); Cirrus\/Mastercard, STAR System, and Exchange NW (Oregon and Washington) ATM; and ACCEL and Explore on-line debit point-of-sale networks; VISA and Mastercard credit cards; merchant bankcard and VISA Check Card Services. As of December 31, 1993, Idaho First Bank had $216 million in total assets.\nAs of December 31, 1993, the ATM network totaled 189 branch and retail ATMs, including 74 in Idaho, 58 in Washington, 29 in Oregon, and 5 in Nevada.\nWEST ONE FINANCIAL SERVICES, INC. West One Financial Services, Inc. services residential and commercial mortgage portfolios for long-term investors. Total loans serviced, including loans serviced for the Registrant's affiliates, were $2.2 billion as of December 31, 1993.\nWEST ONE TRUST COMPANY West One Trust Company, acquired by the Registrant in 1982, operates offices in Salt Lake City, Utah and Portland, Oregon. West One Trust Company provides fiduciary, investment management and related services for corporate, institutional and individual clients.\nWEST ONE TRUST COMPANY, WASHINGTON West One Trust Company, Washington, formed by the Registrant in 1991, is a state-chartered trust company based in Bellevue, Washington. West One Trust Company, Washington provides fiduciary, investment management and related services for corporate, institutional and individual clients.\nWEST ONE LIFE INSURANCE COMPANY West One Life Insurance Company underwrites credit life and credit disability policies for borrowers of West One Bancorp affiliates.\nWEST ONE BANCORP, THE PARENT COMPANY The Parent Company provides a variety of services to affiliates. Through its Data Processing Center in Boise, the Registrant processes demand deposit accounts, savings accounts, installment credit loans, commercial loans and real estate loans for a majority of its subsidiaries. Most branches have on-line teller terminals which provide direct access to the centralized computer system and permit faster processing of customer transactions.\nSUPERVISION AND REGULATION The Registrant's banking subsidiaries are affected by the policies of regulatory authorities, including the monetary policy of the Federal Reserve Board. In order to mitigate recessionary and inflationary pressures, the Federal Reserve Board uses a variety of money supply management techniques, including engaging in open market operations in United States Government securities, changing the discount rate on member bank borrowings, and changing reserve requirements against member bank deposits. The impact of current economic conditions on the policies of the Federal Reserve Board and other\nregulatory authorities and their effect on the future business and earnins of the Registrant cannnot be predicted with assurance.\nThe Registrant is subject to regulation under the Bank Holding Company Act of 1956, as amended. Under that Act, the Registrant is required to obtain the approval of the Federal Reserve Board before it may acquire all or substantially all of the assets of any bank or ownership or control of any voting securities of any bank not already majority owned if, after giving effect to the acquisition, the Registrant would own or control more than five percent of the voting shares of such bank.\nThe Bank Holding Company Act of 1956 generally does not permit the Federal Reserve Board to approve an acquisition by a bank holding company of voting shares or assets of a bank located outside the state in which the operations of its banking subsidiaries are principally conducted unless the acquisition is specifically authorized by the statutes of the states in which the banks are located. Each of the states in the Registrant's marketing area have adopted legislation that permits bank acquisition by out-of-state bank holding companies, with certain restrictions.\nThe Bank Holding Company Act of 1956 also prohibits, with certain exceptions, the Registrant from engaging in or acquiring direct or indirect control of more than five percent of the voting shares of any company engaged in nonbanking activities. One of the principal exceptions to this prohibition applies to activities found by the Federal Reserve Board to be so closely related to banking as to be a proper incident thereto. Some of the activities which the Federal Reserve Board has determined by regulation to be closely related to banking are: mortgage banking, certain data processing operations, personal property leasing on a full payout basis and operation of a consumer finance business. The Registrant is not subject to territorial restrictions on the operations of nonbank subsidiaries.\nThe Registrant and its subsidiaries are prohibited from engaging in certain \"tie-in\" arrangements in connection with extensions of credit or provision of any property or service. Also, the Registrant's banking subsidiaries are subject to restrictions on loans to the Registrant or its subsidiaries, investments in stock or other securities of the Registrant or its subsidiaries, or advances to any borrower collateralized by such stock or other securities.\nIn December 1991, Congress enacted the Federal Deposit Insurance Corporation Improvement Act of 1991 (\"FDICIA\"), which substantially revises the bank regulatory and funding provisions of the Federal Deposit Insurance Act and makes revisions to several other federal banking statutes.\nIn addition to establishing minimum capital requirements, FDICIA directs that each federal banking agency prescribe standards for depository institutions and depository institution holding companies relating to internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, a maximum ratio of classified assets to capital and such other standards as the agency deems appropriate.\nFDICIA also contains a variety of other provisions that may affect the operations of the Registrant including new reporting requirements, revised regulatory standards for real estate lending, \"truth in savings\" provisions, and the requirement that a depository institution give 90 days' notice to customers and regulatory authorities before closing any branch.\nIII. LOAN PORTFOLIO\nLoans outstanding at December 31, 1993, (other than consumer and mortgage loans, and leases which are ordinarily on a term basis with installment repayment requirements) segregated by maturity ranges follow:\nA loan or lease is placed on nonaccrual status when timely collection of interest becomes doubtful. Interest payments received on nonaccrual loans and leases are applied to principal if collection of principal is doubtful or reflected as interest income on a cash basis. Loans and leases are removed from nonaccrual status when they are current and collectibility of principal and interest is no longer doubtful.\nIncome foregone on nonaccrual and restructured loans, net of tax, was $1,086,000, $1,650,000 and $3,662,000 for the years ended December 31, 1993, 1992 and 1991, respectively.\nUnited States dollar denominated, interest bearing short-term investments located in foreign banks including United States branches of foreign banks, exceeding .75% of total assets follows:\nIV. SUMMARY OF LOAN LOSS EXPERIENCE\nV. DEPOSITS\nTime certificates of deposits $100,000 and over as of December 31, 1993, segregated by maturity ranges follow:\nITEM 2","section_1A":"","section_1B":"","section_2":"ITEM 2 - PROPERTIES The Registrant's main office, owned by West One, Idaho, is located in a 19-story building in downtown Boise, Idaho. The building, completed in 1978, contains approximately 285,000 square feet of which approximately 172,000 square feet are utilized by the Registrant and the remainder is leased or available for lease to others. In addition, the Registrant owns 73 of 77 branch buildings in Idaho, 16 of 22 branch buildings in Utah, 16 of 33 branch buildings in Oregon, 35 of 51 branch buildings in Washington, and 8 of 28 support service buildings. Remaining facilities are leased from others for terms expiring between 1994 and 2017.\nITEM 3","section_3":"ITEM 3 - LEGAL PROCEEDINGS Various legal proceedings arising in the normal course of business are pending against subsidiaries of the Registrant. In the opinion of management, the resulting liability, if any, from these proceedings will not have a material impact on the Registrant's financial position or results of operations.\nITEM 4","section_4":"ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders of the Registrant during the quarter ended December 31, 1993.\nEXECUTIVE OFFICERS OF THE REGISTRANT The names, positions, ages and background of the executive officers of the Registrant, as of January 1, 1994, are set forth below:\nMr. Nelson joined the Registrant in 1984. He was named an Executive Vice President of the Registrant in 1984 and elected President and Chief Operating Officer of the Registrant in 1985. In August, 1986, he was elected Chairman and Chief Executive Officer of West One, Idaho. In January, 1987, Mr. Nelson was elected Chairman of the Board and Chief Executive Officer of the Registrant. Mr. Nelson serves as a Chairman of the Board of West One, Idaho and a Director of the Registrant; West One, Idaho; and West One, Washington; and also as an officer of the Registrant and West One, Idaho.\nMr. Jones joined the Registrant in 1987. He was elected President of the Registrant in 1987. Mr. Jones serves as Chairman of the Board of West One, Washington and a Director of the Registrant; West One, Utah; West One, Oregon; and West One, Washington.\nMr. Lane joined West One, Idaho in 1983 as Vice President and Senior Credit Officer. In 1985, he was elected President of West One Financial Services. Later that same year, he was elected President and Chief Operating Officer of West One, Idaho and also became a Director of West One, Idaho. In 1987, he was named President and Chief Executive Officer of West One, Idaho. Mr. Lane was elected Executive Vice President of the Registrant in January 1991.\nMr. Hayes joined West One, Idaho in 1981 as Vice President of Money Desk operations. In 1985, he was elected Vice President of the Registrant, and in 1986 he was elected a Senior Vice President of the Registrant. In 1987, he was named Executive Vice President and Chief Financial Officer of the Registrant.\nMr. Dobson joined the Registrant in 1990 as Executive Vice President of the Capital Management Group. From 1987 through 1990, Mr. Dobson was with U.S. Bancorp as Senior Vice President of Corporate Development and then Executive Vice President of the Investment Services Group.\nMr. Board joined West One, Idaho in 1971 as Legal Counsel. In 1981, he was elected Vice President, Secretary and General Counsel of the Registrant. He was elected Senior Vice President of the Registrant in 1990.\nMr. Peterson joined the Registrant in 1982. In January, 1987, he was elected Vice President of the Registrant. In 1990, he was elected Vice President and Controller. He was elected Senior Vice President and Controller in January 1993, and serves as principal accounting officer of the Registrant.\nThe executive officers of the Registrant also serve as officers and\/or Directors of several other affiliated companies.\nPART II\nITEM 5","section_5":"ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Items relating to market price for the Registrant's common equity and related stockholder matters included in the 1993 Annual Report to Shareholders at the pages indicated, are herein incorporated by reference.\nPage of 1993 Annual Report to Shareholders\nShareholders' Equity and Capital Adequacy 15\nQuarterly Common Stock Statistics 16\nShareholders' Equity, Note 9 43\nRegulatory Requirements and Restrictions, Note 14 50\nITEM 6","section_6":"ITEM 6 - SELECTED FINANCIAL DATA Selected Financial Data of the Registrant on page 12 of the 1993 Annual Report to Shareholders is incorporated herein by reference.\nITEM 7","section_7":"ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's Discussion and Analysis of Financial Condition and Results of Operations set forth on pages 13-26 of the 1993 Annual Report to Shareholders is incorporated herein by reference.\nITEM 8","section_7A":"","section_8":"ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements and Report of Independent Public Accountants listed in the Index to Financial Statements and Schedules on page 15 of this Annual Report on Form 10-K and included in the 1993 Annual Report to Shareholders are incorporated herein by reference. Quarterly Financial Data on page 27 of the 1993 Annual Report to Shareholders is incorporated herein by reference.\nITEM 9","section_9":"ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There were no changes in accountants within the last 24 months, nor were there reportable disagreements with the Registrant's independent public accountants on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure.\nPART III\nITEM 10","section_9A":"","section_9B":"","section_10":"ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information on pages 2-4 in the March 8, 1994 Proxy Statement is incorporated herein by reference. Reference is made to \"Executive Officers of the Registrant\" in Part I of this Annual Report on Form 10-K for additional information regarding the executive and management officers of the Registrant. There are no family relationships among the directors or the executive and management officers.\nITEM 11","section_11":"ITEM 11 - EXECUTIVE COMPENSATION The information on pages 6-10 in the March 8, 1994 Proxy Statement is incorporated herein by reference.\nITEM 12","section_12":"ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information regarding security ownership of certain beneficial owners and management included in the March 8, 1994 Proxy Statement on pages 4-5 is incorporated herein by reference.\nITEM 13","section_13":"ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information in the sixth paragraph on page 5 in the March 8, 1994, Proxy Statement is incorporated herein by reference.\nPART IV\nITEM 14","section_14":"ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K\n(a)(1) Financial Statements: The consolidated financial statements incorporated by reference in this Annual Report on Form 10-K are listed in the Index to Financial Statements and Schedules on page 18 herein.\n(2) Financial Statement Schedules: See the Index to Financial Statements and Schedules on page 18.\n(3) The exhibits filed herewith are listed in the Exhibit Index on pages 19 and 20 herein.\n(b) There were no current reports on Form 8-K filed by the Registrant during the last quarter of the year ended December 31, 1993.\n(c) Each management contract compensation plan and arrangement required to be filed is an exhibit to this report as listed in item 10, Executive Compensation Plans and Arrangements and Other Management Contracts, in the Exhibit Index on page 19 herein.\nSIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.\nDate: 3\/24\/94 WEST ONE BANCORP Registrant\nBy \/s\/ Scott M. Hayes Scott M. Hayes Executive Vice President and Chief Financial Officer\nBy \/s\/ Jim A. Peterson Jim A. Peterson Senior Vice President and Controller\nPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities on the dates indicated.\nManually signed Power of Attorney authorizing Dwight V. Board to sign the Annual Report on Form 10-K for the fiscal year ended December 31, 1993, as Attorney-in-fact for certain directors and officers of the Registrant is included herein as Exhibit 24.\nINDEX TO FINANCIAL STATEMENTS AND SCHEDULES\nFINANCIAL STATEMENTS The following consolidated financial statements and Report of Independent Public Accountants included in the 1993 Annual Report to Shareholders at the pages indicated, are incorporated herein by reference.\nFinancial Statement Schedules\nAll schedules have been omitted because the information is either not required, not applicable, not present in amounts sufficient to require submission of the schedule, or is included in the financial statements or notes thereto.\nEXHIBIT INDEX\nExhibit Number Description\n3-A Amended Articles of Incorporation of the Registrant\n3-B Bylaw Amendment and Amended Bylaws of the Registrant Incorporated by reference to Exhibit 3-B to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1991.\n4 Shareholder Rights Plan. Incorporated by reference to Exhibit 4-B to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1989 as amended by Form 8-A dated October 15, 1992.\nRegistrant agrees to furnish copies of instruments relating to its long-term notes payable, the total amount of which does not exceed 10% of the total Consolidated Assets of the Registrant and its subsidiaries, to the Commission upon request.\n10 Executive Compensation Plans and Arrangements and Other Management Contracts:\n10-A Executive Compensation Program\n10-B The Executive Incentive Program of the Registrant, as amended. Incorporated by reference to Exhibit 10-B to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1990.\n10-C Registrant's Executive Deferred Compensation Plan, as amended. Incorporated by reference to Exhibit 10-C to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1990.\n10-D Form of Employment Agreements between Registrant and certain key employees. Incorporated by reference to Exhibit 10-E to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1987.\n10-E Form of Indemnification Agreement dated June 16, 1988, entered into by the Registrant with each of its Directors. Incorporated by reference to Exhibit 19 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1988.\n10-F The 1991 Performance and Equity Incentive Plan of the Registrant. Incorporated by reference to Exhibit 10-F to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1990.\n10-G Deferred Compensation Plan for Outside Directors of the Registrant. Incorporated by reference to Exhibit 10-G to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1990.\nEXHIBIT INDEX (continued)\nExhibit Number Description\n11 Statement regarding computation of per share earnings.\n13 Portions of the Registrant's 1993 Annual Report to Shareholders.\n21 List of subsidiaries of the Registrant.\n23 Consent of independent public accountants.\n24 Power of Attorney of Certain Officers and Directors of Registrant.","section_15":""}
{"filename":"763657_1993.txt","cik":"763657","year":"1993","section_1":"Item 1. Regulation and Legislation. Generally, the franchising authority can decide not to renew a franchise only if it finds that the cable operator has not substantially complied with the material terms of the franchise, has not provided reasonable service in light of the community's needs, does not have the financial, legal and technical ability to provide the services being proposed for the future, or has not presented a reasonable proposal for future service. A final decision of non-renewal by the franchising authority is appealable in court. The General Partner and its affiliates recently have experienced lengthy negotiations with some franchising authorities for the granting of franchise renewals and transfers. Some of the issues involved in recent renewal negotiations include rate reregulation, customer service standards, cable plant upgrade or replacement and shorter terms of franchise agreements. The inability of a Partnership to renew a franchise, or lengthy negotiations or litigation involving the renewal process could have an adverse impact on the business of a Partnership. The inability of a Partnership to transfer a franchise could have an adverse impact on the ability of a Partnership to accomplish its investment objectives.\nCOMPETITION. The Systems face competition from a variety of alternative entertainment media, such as: Multichannel Multipoint Distribution Service (\"MMDS\"), which is often called a \"wireless cable service\" and is a microwave service authorized to transmit television signals and other communications on a complement of channels, which when combined with instructional fixed television and other channels, is able to provide a complement of television signals potentially competitive with cable television systems; Satellite Master Antenna Television System (\"SMATV\"), commonly called a \"private\" cable television system, which is a system wherein one central antenna is used to receive signals and deliver them to, for example, an apartment complex; and Television Receive-Only Earth Stations (\"TVRO\"), which are satellite receiving antenna dishes that are used by \"backyard users\" to receive satellite delivered programming directly in their homes. Programming services sell their programming directly to owners of TVROs as well as through third parties. The competition from MMDS and TVRO potentially diminishes the pool of subscribers to the Systems because persons who subscribe to MMDS services or who own backyard satellite dishes are not likely to subscribe to all of the Systems' cable television services.\nIn the near future, the Systems will also face competition from direct satellite to home transmission (\"DBS\"). DBS can provide to individuals on a wide-scale basis premium channel services and specialized programming through the use of high-powered DBS satellites that transmit such programming to a rooftop or side-mounted antenna. There are currently no DBS operators in the areas served by the Systems. DBS systems' ability to compete with the cable television industry will depend on, among other factors, the ability to obtain access to\nprogramming and the availability of reception equipment at reasonable prices. The first DBS satellite was recently launched, and it is anticipated that DBS services will become available throughout the United States during 1994.\nThe Systems also face competition from video cassette rental outlets and movie theaters in the Systems' service areas. The General Partner believes the preponderance of video cassette recorder (\"VCR\") ownership in the Systems' service areas may be a positive rather than a negative factor because households that have VCRs are attracted to non-commercial programming delivered by the Systems, such as movies and sporting events on cable television, that they can tape at their convenience.\nCable television franchises are not exclusive, so that more than one cable television system may be built in the same area (known as an \"overbuild\"), with potential loss of revenues to the operator of the original cable television system. Other than as described below, the Systems currently face no direct competition from other cable television operators.\nAlthough the Partnerships have not yet encountered competition from a telephone company entering into the cable television business, the Partnerships' Systems could potentially face competition from telephone companies doing so. Bell Atlantic, a regional Bell operating company (\"RBOC\"), has announced its intention, if permitted by the courts, to build a cable television system in Alexandria, Virginia, and has won a lawsuit to obtain such authority. The case is on appeal. The General Partner currently owns and manages the cable television system in Alexandria, Virginia. Another RBOC, Ameritech, has also indicated its intention to build and operate a cable television system in Naperville, Illinois, a location where the General Partner manages a system on behalf of one of its managed limited partnerships. Other RBOCs have indicated their intention to enter the cable television market, and have filed lawsuits similar to the one being pursued by Bell Atlantic and Ameritech. Widespread competition through overbuilds by RBOCs could have a negative impact on companies like the General Partner that are already established cable television system operators.\nCOMPETITION FOR SUBSCRIBERS IN THE PARTNERSHIPS' SYSTEMS. Following is a summary of competition from MMDS, SMATV and TVRO operators in the Partnerships' franchise areas.\nAlbuquerque System Two SMATV operators serve approximately 3,190 units in trailer parks and apartments.\nAugusta System Two SMATV operators serve two apartment complexes; one TVRO dealer principally operates in areas which are not serviced by cable.\nFt. Myers System One MMDS operator provides negligible competition; five SMATV operators provide service to motels and an occasional apartment complex; and twelve TVRO dealers serve a customer base that is confined primarily to rural areas.\nNorthern Illinois System The General Partner is not aware of any MMDS or TVRO satellite dish dealers in the system's service area. There are a limited number of SMATV operators in the system's service area, but they do not provide significant competition.\nPalmdale\/Lancaster System No MMDS operators; numerous SMATV operators provide some competition in several apartment complexes, hotels, motels, trailer parks and two hospitals. There are numerous TVRO dealers in the service area. Approximately 2% of the homes in the service area have TVRO systems.\nTampa System One MMDS operator provides minimal competition; ten SMATV operators provide moderate competition; thirty TVRO dealers provide minimal competition.\nREGULATION AND LEGISLATION. The cable television industry is regulated through a combination of the Federal Communications Commission (\"FCC\"), some state governments, and most local governments. In addition, the Copyright Act of 1976 imposes copyright liability on all cable television systems. Cable television operations are subject to local regulation insofar as systems operate under franchises granted by local authorities.\nCable Television Consumer Protection and Competition Act of 1992. On October 5, 1992, Congress enacted the Cable Television Consumer Protection and Competition Act of 1992 (the \"1992 Cable Act\"), which became effective on December 4, 1992. This legislation effected significant changes to the regulatory environment in which the cable television industry operates. The 1992 Cable Act generally allows for a greater degree of regulation of the cable television industry. Under the 1992 Cable Act's definition of effective competition, nearly all cable television systems in the United States, including those owned and managed by the General Partner, are subject to rate regulation of basic cable services. In addition, the 1992 Cable Act allows the FCC to regulate rates for non-basic service tiers other than premium services in response to complaints filed by franchising authorities and\/or cable subscribers. In April 1993, the FCC adopted regulations governing rates for basic and non-basic services and ordered an interim freeze on these rates effective on April 15, 1993. The rate freeze recently was extended by the FCC until the earlier of May 15, 1994, or the date on which a cable system's basic service rate is regulated by a franchising authority. The FCC's\nrate regulations became effective on September 1, 1993. On February 22, 1994, the FCC announced a revision of its rate regulations which it believes will generally result in a further reduction of rates for basic and non-basic services.\nThe 1992 Cable Act encourages competition with existing cable systems by allowing municipalities, which are otherwise legally qualified, to own and operate their own cable systems without having to obtain a franchise; prevents franchising authorities from granting exclusive franchises; or unreasonably refusing to award additional franchises covering an existing cable system's service area. The 1992 Cable Act also makes several procedural changes to the process under which a cable operator seeks to enforce renewal rights which could make it easier in some cases for a franchising authority to deny renewal. The 1992 Cable Act prohibits the common ownership of cable systems and co-located MMDS or SMATV systems, and absent certain exceptions, the sale or transfer of ownership of a cable system within 36 months after its acquisition or initial construction. The 1992 Cable Act also precludes video programmers affiliated with cable companies from favoring cable operators over competitors and requires such programmers to sell their programs to other multichannel video distributors. This provision may limit the ability of cable program suppliers to offer exclusive programming arrangements with cable companies and could affect the volume discounts that program suppliers currently offer to the General Partner in its capacity as a multiple system operator. The 1992 Cable Act has eliminated the latitude of operators to set rates for commercially leased access channels and requires that leased access rates be set according to a formula determined by the FCC.\nThe 1992 Cable Act contains new broadcast signal carriage requirements, and the FCC has adopted regulations implementing the statutory requirements. These new rules allow a local commercial broadcast television station to elect whether to demand that a cable television system carry its signal, or to require the cable television system to negotiate with the station for \"retransmission consent.\" A cable television system is generally required to devote up to one-third of its activated channel capacity for the mandatory carriage of local commercial broadcast television stations, and non-commercial television stations are also given mandatory carriage rights, although such stations are not given the option to negotiate retransmission consent for the carriage of their signals by cable television systems. Additionally, cable television systems also are required to obtain retransmission consent from all \"distant\" commercial television stations (except for commercial satellite-delivered independent \"superstations\"), commercial radio stations and certain low-power television stations carried by cable television systems. See Item 1. Cable Television Services.\nThere have been several lawsuits filed by cable television operators and programmers in Federal court challenging various aspects of the 1992 Cable Act, including provisions relating to mandatory broadcast signal carriage, retransmission consent, access to cable programming, rate regulation, commercial leased channels and public access channels. On April 8, 1993, a three-judge Federal district court panel issued a decision upholding the constitutional validity of the mandatory signal carriage requirements of the 1992 Cable Act. That decision has been appealed directly to the United States Supreme Court. Appeals have\nbeen filed in the Federal appellate court challenging the validity of the FCC's retransmission consent rules.\nOwnership and Market Structure. The FCC rules and federal law generally prohibit the direct or indirect common ownership, operation, control or interest in a cable television system, on the one hand, and a local television broadcast station whose television signal reaches any portion of the community served by the cable television system, on the other hand. The FCC recently lifted its ban on the cross-ownership of cable television systems by broadcast networks. The FCC revised its regulations to permit broadcast networks to acquire cable television systems serving up to 10% of the homes passed in the nation, and up to 50% of the homes passed in a local market. Neither the Partnerships nor the General Partner has any direct or indirect ownership, operation, control or interest in a television broadcast station, or a telephone company, and they are thus presently unaffected by the cross-ownership rules.\nThe Cable Communications Policy Act of 1984 (the \"1984 Cable Act\") and FCC regulations generally prohibit the common operation of a cable television system and a telephone company within the same service area. Until recently, a provision of a Federal court antitrust consent decree also prohibited the regional Bell operating companies (\"RBOCs\") from engaging in cable television operations. This prohibition was recently removed when the court retaining jurisdiction over the consent decree ruled that the RBOCs could provide information services over their facilities. This decision permits the RBOCs to acquire or construct cable television systems outside of their own service areas.\nThe 1984 Cable Act prohibited local exchange carriers, including the RBOCs, from providing video programming directly to subscribers within their local exchange telephone service areas, except in rural areas or by specific waiver of FCC rules. This statutory provision has recently been challenged on constitutional grounds by Bell Atlantic, one of the RBOCs. The court held that the 1984 Cable Act cross-ownership provision is unconstitutional, and it issued an order enjoining the United States Justice Department from enforcing the cross-ownership ban. The National Cable Television Association, an industry group of which the General Partner is a member, has appealed this landmark decision, and the case could ultimately be reviewed by the United States Supreme Court. This federal cross-ownership rule is particularly important to the cable industry since these telephone companies already own certain facilities needed for cable television operation, such as poles, ducts and associated rights-of-way.\nThe FCC has conducted a comprehensive proceeding examining whether and under what circumstances telephone companies should be allowed to provide cable television services, including video programming, to their customers. The FCC has concluded that under the 1984 Cable Act interexchange carriers (such as AT&T, which provide long distance services) are not subject to the restrictions which bar the provision of cable television service by local exchange carriers. In addition, the FCC concluded that neither a local exchange carrier providing a video dialtone service nor its programming suppliers leasing the dialtone service are required to obtain a cable television franchise. This determination has been appealed. If video dialtone services become widespread in the future, cable television systems\ncould be placed at a competitive disadvantage because cable television systems are required to obtain local franchises to provide cable television service and must comply with a variety of obligations under such franchises.\nThe FCC has tentatively concluded that construction and operation of technologically advanced, integrated broadband networks by carriers for the purpose of providing video programming and other services would constitute good cause for waiver of the cable\/telephone cross-ownership prohibitions. In July 1989, the FCC granted a California telephone company a waiver of the cross- ownership restrictions based on a showing of \"good cause,\" but the FCC's decision was reversed on appeal, and as a result of this decision, the FCC may be required to follow a stricter policy in granting such waivers in the future.\nAs part of the same proceeding, the FCC recommended that Congress amend the 1984 Cable Act to allow Local Exchange Carriers (\"LECs\") to provide their own video programming services over their facilities. The FCC recently decided to loosen ownership and affiliation restrictions currently applicable to telephone companies, and has proposed to increase the numerical limit on the population of areas qualifying as \"rural\" and in which LECs can provide cable service without a FCC waiver.\nLegislation is pending in Congress which would permit the LECs to provide cable television service within their own operating areas conditioned on establishing separate video programming affiliates. The legislation would generally prohibit, however, telephone companies from acquiring cable systems within their own operating areas. The legislation would also enable cable television companies and others, subject to regulatory safeguards, to offer telephone services by eliminating state and local barriers to entry.\nITEM 2.","section_1A":"","section_1B":"","section_2":"ITEM 2. PROPERTIES\nThe cable television systems owned at December 31, 1993 by the Partnerships are described below.\nThe following tables set forth (i) the monthly basic plus service rates charged to subscribers, (ii) the number of basic subscribers and pay units, (iii) the number of homes passed by cable plant, (iv) the miles of cable plant and (v) the range of franchise expiration dates for the cable television systems owned and operated by the Partnerships. The monthly basic plus service rates set forth herein represent, with respect to systems with multiple headends, the basic plus service rate charged to the majority of the subscribers within the system. While the charge for basic plus service may have increased in some cases as a result of the FCC's rate regulations, overall revenues to the Partnerships may have decreased due to the elimination of charges for additional outlets and certain equipment. In cable television systems, basic subscribers can subscribe to more than one pay TV service. Thus, the total number of pay services subscribed to by basic subscribers are called pay units. Figures for numbers of subscribers, miles of cable plant and homes passed are compiled from the General Partner's records and may be subject to adjustments.\nAs of December 31, 1993, the number of homes passed and the miles of cable plant were 21,869 and 300, respectively. Franchise expiration dates range from March 1996 to June 2001.\nAs of December 31, 1993, the number of homes passed and the miles of cable plant were 16,751 and 262, respectively. Franchise expiration date is August 1994. The renewal of this franchise is currently being negotiated.\nAs of December 31, 1993, the number of homes passed and the miles of cable plant were 9,182 and 81, respectively. Franchise expiration date is November 1995.\nAs of December 31, 1993, the number of homes passed and the miles of cable plant were 64,507 and 664, respectively. Franchise expiration dates range from December 1999 to January 2002.\nAs of December 31, 1993, the number of homes passed and the miles of cable plant were 100,100 and 1,602, respectively. Franchise expiration dates range from December 1998 to October 2003.\nAs of December 31, 1993, the number of homes passed and the miles of cable plant were 85,768 and 937, respectively. Franchise expiration dates range from September 1994 to October 2005. Any franchises expiring in 1994 are in the process of franchise renewal negotiations.\nAs of December 31, 1993, the number of homes passed and the miles of cable plant were 200,500 and 2,202, respectively. Franchise expiration dates range from January 1999 to August 2001.\nAs of December 31, 1993, the number of homes passed and the miles of cable plant were 127,800 and 1,093, respectively. The Tampa franchise expires in December 1997. The City of Tampa has notified the Venture of its belief that the Venture is not in compliance with certain provisions of the franchise agreement. Specifically, the City has claimed that the Venture is not in compliance with local origination programming requirements, institutional network requirements, and other facilities, equipment and service obligations under the franchise. The Venture has responded to the claim with a detailed demonstration that many of the City's claims are erroneous and that the remaining unmet obligations should be modified. The City of Tampa and the Venture have reached an agreement in principle with respect to the settlement of the franchise dispute. A definitive settlement agreement is in the process of being negotiated.\nPROGRAMMING SERVICES\nProgramming services provided by the Systems include local affiliates of the national broadcast networks, local independent broadcast channels, the traditional satellite services (e.g., American Movie Classics (AMC), Arts & Entertainment (ARTS), Black Entertainment Network (BET), C-SPAN, The Discovery Channel (DISC), Lifetime (LIFE), Entertainment Sports Network (ESPN), Home Shopping Network (HSN), Mind Extension University (MEU), Music Television (MTV), Nickelodeon (NICK), Turner Network Television (TNT), The Nashville Network (TNN), Video Hits One (VH-1), and superstations WOR, WGN and\nTBS. The Partnerships' Systems also provide a selection, which varies by system, of premium channel programming (e.g., Bravo (BRVO), Cinemax (CMAX), The Disney Channel (DISN), Encore (ENC), Home Box Office (HBO), Showtime (SHOW) and The Movie Channel (TMC)).\nITEM 3.","section_3":"ITEM 3. LEGAL PROCEEDINGS\nOn July 15, 1992, the General Partner received a Civil Investigative Demand (the \"CID\") from the Department of Justice (\"DOJ\") in connection with an investigation to determine whether there is or has been a violation of Section 2 of the Sherman Act as a consequence of the General Partner's alleged refusal to carry a television broadcast station on cable television systems. The interrogatories and document requests included in the CID request information relating to systems owned or managed by the General Partner in Los Angeles County, and elsewhere, including the Palmdale\/Lancaster System owned by the Venture. Specific reference is made in the CID to KHIZ, Channel 64. The General Partner has responded to a variety of requests for information and documents from the DOJ but has had no communication from the DOJ since March 1992.\nITEM 4.","section_4":"ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS\nNone\nPART II.\nITEM 5.","section_5":"ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS\nWhile the Partnerships are all publicly held, there is no public market for the limited partnership interests and it is not expected that a market will develop in the future. As of March 1, 1994, the approximate number of equity security holders was:\nItem 6.","section_6":"Item 6. Selected Financial Data\n** The above financial information represents the consolidated operations of Cable TV Fund 12-BCD Venture, in which Cable TV Fund 12-D has an approximate 76 percent equity interest.\nItem 7.","section_7":"Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations\nCABLE TV FUND 12-A\nResults of Operations\n1993 Compared to 1992 -\nRevenues of Fund 12-A increased $2,270,698, or approximately 9 percent, from $26,693,028 in 1992 to $28,963,726 in 1993. During 1993, Fund 12-A added approximately 1,923 basic subscribers, an increase of 3 percent. This increase in basic subscribers accounted for approximately 28 percent of the increase in revenues. An increase in advertising revenues accounted for approximately 24 percent of the increase in revenues. Basic service rate adjustments implemented in all of Fund 12-A's systems accounted for approximately 17 percent of the increase in revenues. The increase in revenues would have been greater but for the reduction in basic rates due to new basic rate regulations issued by the FCC in May 1993 with which Fund 12-A complied effective September 1, 1993. In addition, on February 22, 1994, the FCC announced a further rulemaking which, when implemented, could reduce rates further. No other individual factor was significant to the increase in revenues.\nOperating, general and administrative expense increased $991,718, or approximately 6 percent, from $15,492,913 in 1992 to $16,484,631 in 1993. Operating, general and administrative expense represented 57 percent of revenue in 1993 compared to 58 percent in 1992. Programming fees, advertising and plant related costs primarily accounted for the increase. These increases were offset, in part, by a decrease in copyright fees. There were no other individual factors that contributed significantly to the increase. Management fees and allocated overhead from the General Partner increased $285,162, or approximately 9 percent, from $3,156,916 in 1992 to $3,442,078 in 1993. This increase was due to the increase in revenues, upon which such fees and allocations are based, and an increase in expenses allocated from the General Partner. Depreciation and amortization expense increased $311,388, or approximately 4 percent, from $7,528,805 in 1992 to $7,840,193 in 1993. This increase was due to additions in Fund 12- A's asset base.\nOperating income increased $682,430 to $1,196,824 in 1993 compared to $514,394 in 1992. This was due to the fact that revenue growth exceeded the increases in operating, general and administrative expense, management fees and allocated overhead from the General Partner and depreciation and amortization expense. Operating income before depreciation and amortization increased $993,818, or approximately 12 percent, from $8,043,199 in 1992 to $9,037,017 in 1993. The increase was due to the fact that revenue growth exceeded the increases in operating, general and administrative expense, management fees and allocated overhead from the General Partner.\nInterest expense decreased $302,642, or approximately 16 percent, from $1,864,954 in 1992 to $1,562,312 in 1993. This decrease was due primarily to lower effective interest rates and lower outstanding balances on interest bearing obligations. Other expense decreased $188,649 from $232,887 in 1992 to $44,238 in 1993. Such expense was primarily due to allocated depreciation from affiliated entities. Net loss decreased $1,173,721, or approximately 74 percent, from $1,583,447 in 1992 to $409,726 in 1993. This decrease is due to the factors discussed above. Fund 12-A's losses are expected to continue in the future.\n1992 Compared to 1991 -\nRevenues of Fund 12-A increased $2,370,428, or approximately 10 percent, from $24,322,600 in 1991 to $26,693,028 in 1992. Basic service rate adjustments implemented in all of Fund 12-A's systems accounted for approximately 43 percent of the increase in revenues. During 1992, Fund 12-A added approximately 2,220 basic subscribers, an increase of 4 percent. This increase in basic subscribers accounted for approximately 39 percent of the increase. In addition, Fund 12-A added approximately 6,316 pay units which accounted for approximately 14 percent of the increase in revenues.\nOperating, general and administrative expense increased $1,650,299, or approximately 12 percent, from $13,842,614 in 1991 to $15,492,913 in 1992. Operating, general and administrative expense represented 58 percent of revenue in 1992 compared to 57 percent in 1991. Programming fees accounted for approximately 29 percent of the increase in expense and was due, in part, to the increases in the subscriber base. Personnel related expense accounted for approximately 32 percent of the increase. There were no other individual factors that contributed significantly to the\nincrease. Management fees and allocated overhead from the General Partner increased $456,198, or approximately 17 percent, from $2,700,718 in 1991 to $3,156,916 in 1992. This increase was due to the increase in revenues, upon which such fees and allocations are based, and an increase in expenses allocated from the General Partner. Depreciation and amortization expense decreased $1,513,475, or approximately 17 percent, from $9,042,280 in 1991 to $7,528,805 in 1992. This decrease is due to the maturation of Fund 12-A's asset base.\nFund 12-A recorded operating income of $514,394 in 1992 compared to an operating loss of $1,263,012 in 1991. This was due to the fact that revenue growth exceeded the increases in operating, general and administrative expense and management fees and allocated overhead from the General Partner, as well as the decrease in depreciation and amortization expense. Operating income before depreciation and amortization increased $263,931, or approximately 3 percent, from $7,779,268 in 1991 to $8,043,199 in 1992. The increase was due to the fact that revenue growth exceeded the increases in operating, general and administrative expense and management fees and allocated overhead from the General Partner.\nInterest expense decreased $785,801, or approximately 30 percent, from $2,650,755 in 1991 to $1,864,954 in 1992. This decrease is due primarily to lower effective interest rates on interest bearing obligations. Other expense increased $247,812 from income of $14,925 in 1991 to expense of $232,887 in 1992 due primarily to the allocated depreciation from related entities that provide advertising sales, warehouse and converter repair services to Fund 12-A. Net loss decreased $2,315,395, or approximately 59 percent, from $3,898,842 in 1991 to $1,583,447 in 1992. These decreases in net losses are due to the factors discussed above.\nFinancial Condition\nCapital expenditures totalled approximately $3,639,000 in 1993. Approximately 37 percent of these expenditures related to rebuild projects in all of Fund 12-A's systems. Approximately 31 percent of these expenditures related to plant extensions in all of Fund 12-A's systems. The remaining expenditures were used for various enhancements in all of Fund 12-A's systems. Funding for these expenditures was provided by cash generated from operations.\nFund 12-A anticipates capital expenditures of approximately $5,189,000 in 1994. Plant extensions in all of Fund 12-A's systems are expected to account for approximately 34 percent of these expenditures, and service drops to homes are anticipated to account for approximately 20 percent. The remainder of the anticipated expenditures is for various enhancements in all of Fund 12- A's systems. The actual level of capital expenditures will depend, in part, upon the General Partner's determination as to the proper scope and timing of such expenditures in light of the FCC's announcement of a further rulemaking regarding the 1992 Cable Act on February 22, 1994 and Fund 12-A's liquidity position. Funding for these expenditures is expected to be provided by cash on hand and cash generated from operations.\nDuring March 1990, the General Partner renegotiated Fund 12-A's $35,000,000 credit facility, extending the revolving credit period to June 30, 1992, at which time the then-outstanding balance of $34,000,000 converted to a term loan. The term loan is payable in 20 consecutive quarterly installments that commenced on September 30, 1992. Payments in 1993 totaled $3,000,000. At December 31, 1993, $29,500,000 was outstanding under this term loan. Payments due in 1994 total $4,500,000. Fund 12-A intends to fund these payments with cash on hand and cash generated from operations. The General Partner is currently negotiating to reduce amortization payments in order to provide liquidity for capital expenditures. Generally, interest payable on amounts borrowed under the term loan is at Fund 12-A's option of prime plus 1\/2 percent or a fixed rate defined as the CD rate plus 1-1\/4 percent or the Euro-Rate plus 1-1\/4 percent. On January 12, 1993, Fund 12-A entered into an interest rate cap agreement covering outstanding debt obligations of $15,000,000. The agreement protects Fund 12-A from interest rates that exceed 7 percent for three years from the date of the agreement.\nSubject to the regulatory matters discussed below and assuming successful renegotiation of Fund 12-A's credit facility, of which there can be no assurance, the General Partner believes that Fund 12-A has sufficient sources of capital from cash on hand and cash generated from operations to meet its presently anticipated needs.\nRegulation and Legislation\nOn October 5, 1992, Congress enacted the Cable Television Consumer Protection and Competition Act of 1992 (the \"1992 Cable Act\") which became effective on December 4, 1992. This legislation has effected significant changes to the regulatory environment in which the cable television industry operates. The 1992 Cable Act generally allows for a greater degree of regulation of the cable television industry. Under the 1992 Cable Act's definition of effective competition, nearly all cable television systems in the United States, including those owned and managed by the General Partner, are subject to rate regulation of basic cable services. In addition, the 1992 Cable Act allows the FCC to regulate rates for non-basic service tiers other than premium services in response to complaints filed by franchising authorities and\/or cable subscribers. In April 1993, the FCC adopted regulations governing rates for basic and non-basic services. These regulations, with which Fund 12-A complied, became effective on September 1, 1993. See Item 1 for further discussion of the provisions of the 1992 Cable Act.\nBased on the General Partner's assessment of the FCC's rulemakings concerning rate regulation under the 1992 Cable Act, Fund 12-A reduced the rates it charged for certain regulated services. On an annualized basis, such rate reductions will result in an estimated reduction in Fund 12-A's revenue of approximately $1,800,000, or approximately 6 percent, and a decrease in operating income before depreciation and amortization of approximately $1,600,000, or approximately 12 percent. In addition, on February 22, 1994, the FCC announced a further rulemaking which, when implemented, could reduce rates further. Based on the foregoing, the General Partner believes that the new rate regulations will have a negative effect on Fund 12-A's revenues and operating income before depreciation and amortization. The General Partner has undertaken actions to mitigate a portion of these reductions primarily through (a) new service offerings, (b) product re-marketing and re-packaging and (c) marketing directed at non- subscribers. To the extent such reductions are not mitigated, the values of Fund 12-A's cable television systems, which are calculated based on cash flow, could be adversely impacted. In addition, such reductions could adversely effect the General Partner's ability to renegotiate Fund 12-A's credit facility.\nThe 1992 Cable Act contains new broadcast signal carriage requirements, and the FCC has adopted regulations implementing the statutory requirements. These new rules allow a local commercial broadcast television station to elect whether to demand that a cable system carry its signal or to require the cable system to negotiate with the station for \"retransmission consent.\" Additionally, cable systems also are required to obtain retransmission consent from all \"distant\" commercial television stations (except for commercial satellite-delivered independent \"superstations\"), commercial radio stations and certain low-power television stations carried by cable systems. The retransmission consent rules went into effect on October 6, 1993. In the cable television systems owned by Fund 12-A, no broadcast stations withheld their consent to retransmission of their signal. Certain broadcast signals are being carried pursuant to extensions offered to the General Partner by broadcasters, including a one-year extension for carriage of the CBS station owned and operated by the CBS network in Chicago. The General Partner expects to conclude retransmission consent negotiations with those stations whose signals are being carried pursuant to extensions without having to terminate the distribution of any of those signals. However, there can be no assurance that such will occur. If any broadcast station currently being carried pursuant to an extension is dropped, there could be a negative effect on the system if a significant number of subscribers were to disconnect their service.\nCABLE TV FUND 12-BCD VENTURE\nResults of Operations\n1993 Compared to 1992\nRevenues of Cable TV Fund 12-BCD Venture (the \"Venture\") increased $5,564,003, or approximately 7 percent, from $83,567,527 in 1992 to $89,131,530 in 1993. Between December 31, 1992 and 1993, the Venture added 7,498 basic subscribers, an increase of approximately 4 percent. This increase in basic subscribers accounted for approximately 32 percent of the increase in revenues. Basic service rate adjustments were responsible for approximately 38 percent of the increase in revenues. Advertising sales revenue accounted for approximately 12 percent of the increase in revenues. Increases in pay per view revenue accounted for approximately 14 percent of the increase. The increase in revenues would have been greater but for the reduction in basic rates due to new basic rate regulation issued by the FCC in May 1993 with which the Venture complied effective September 1, 1993. In addition, on February 22, 1994, the FCC announced a further rulemaking which, when implemented, could reduce rates further. No other single factor significantly affected the increase in revenues.\nOperating, general and administrative expenses in the Venture's systems increased $3,941,804, or approximately 8 percent, from $48,132,180 in 1992 to $52,073,984 in 1993. Operating, general and administrative expense represented 58 percent of revenue in 1993 and in 1992. The increase in operating, general and administrative expense was due to increases in subscriber related costs, programming fees and marketing related costs. No other single factor significantly affected the increase in operating, general and administrative expenses. Management fees and allocated overhead from Jones Intercable, Inc. increased $746,870, or approximately 8 percent, from $9,758,490 in 1992 to $10,505,360 in 1993 due to the increase in revenues, upon which such fees and allocations are based, and an increase in allocated expenses. Depreciation and amortization expense decreased $1,113,583, or approximately 4 percent, from $26,764,820 in 1992 to $25,651,237 in 1993. The decrease is due to the maturation of the Venture's asset base.\nThe Venture recorded operating income of $900,949 for 1993 compared to an operating loss of $1,087,963 for 1992. This change is the result of increases in revenue and the decreases in depreciation and amortization expenses exceeding the increases in operating, general and administrative expenses and management fees and allocated overhead from Jones Intercable Inc. Operating income before depreciation and amortization increased $875,329, or approximately 3 percent, from $25,676,857 in 1992 to $26,552,186 in 1993. This increase is due to the increase in revenues exceeding the increase in operating, general, and administrative expenses and administrative fees and allocated overhead from Jones Intercable, Inc.\nInterest expense decreased $33,744, or less than 1 percent, from $12,022,874 in 1992 to $11,989,130 in 1993 due to lower interest rates on interest bearing obligations, which were offset, in part, by higher balances on such obligations. The Venture recorded other expense of $556,309 in 1993 compared to other expense of $2,708,833 in 1992. The 1992 expense primarily represented the Sunbelt litigation settlement as discussed in Note 6 of notes to financial statements of the Venture. The settlement was accrued by the Venture in 1992 and paid by the Venture in March 1993.\nNet loss decreased $3,299,949, or approximately 22 percent, from $14,884,365 in 1992 to $11,584,416 in 1993 due to the factors discussed above. These losses are expected to continue in the future.\n1992 Compared to 1991\nRevenues of the Venture increased $5,518,022, or approximately 7 percent, from $78,049,505 in 1991 to $83,567,527 in 1992. Between December 31, 1991 and 1992, the Venture added 3,670 basic subscribers, an increase of approximately 2 percent. This increase in basic subscribers accounted for approximately 17 percent of the increase in revenues. Basic service rate adjustments were responsible for approximately 46 percent of the increase in revenues. Advertising sales revenue accounted for approximately 14 percent of the increase in revenues. Increases in equipment rental revenue accounted for approximately 13 percent of the increase. No other single factor significantly affected the increase in revenues.\nOperating, general and administrative expenses in the Venture's systems increased $4,487,834, or approximately 10 percent, from $43,644,346 in 1991 to $48,132,180 in 1992. Operating, general and administrative expense represented 58 percent of revenue in 1992 compared to 56 percent in 1991. The increase in operating, general and administrative expense was due to increases in personnel related costs, programming fees and property taxes, which were partially offset by decreases in marketing related costs and copyright fees. No other single factor significantly affected the increase in operating, general and administrative expenses. Management fees and allocated overhead from Jones Intercable, Inc. increased $1,215,796, or approximately 14 percent, from $8,542,694 in 1991 to $9,758,490 in 1992 due to the increase in revenues, upon which such fees and allocations are based, and an increase in allocated expenses from Jones Intercable, Inc. Depreciation and amortization expense decreased $4,028,233, or approximately 13 percent, from $30,793,053 in 1991 to $26,764,820 in 1992. The decrease is due to the maturation of the Venture's asset base.\nOperating loss decreased $3,842,625, or approximately 78 percent, from $4,930,588 in 1991 to $1,087,963 in 1992 as a result of the increase in revenues and the decreases in depreciation and amortization exceeding the increases in operating, general and administrative expenses and management fees and allocated overhead from Jones Intercable, Inc.\nInterest expense decreased $898,899, or approximately 7 percent, from $12,921,773 in 1991 to $12,022,874 in 1992 due primarily to lower interest rates on interest bearing obligations, despite higher balances on such obligations. The Venture recorded other expense of $2,708,833 in 1992 compared to other income of $23,761 in 1991. This increase was due to the Sunbelt litigation settlement as discussed above. This settlement was paid by the Venture in March 1993.\nNet loss decreased $2,944,235, or approximately 17 percent, from $17,828,600 in 1991 to $14,884,365 in 1992 due primarily to the reductions in operating loss and interest expense which were offset, in part, by the litigation settlement discussed above. These losses are the result of the factors discussed above and are expected to continue in the future.\nFinancial Condition\nCapital expenditures for the Venture totaled approximately $18,711,600 during 1993. Service drops to homes accounted for approximately 29 percent of the capital expenditures. Approximately 18 percent of these capital expenditures related to plant extensions in all of the Venture's systems. The completion of a rebuild of the Venture's Palmdale, California system accounted for approximately 17 percent of capital expenditures. Approximately 12 percent of capital expenditures was for fiber upgrades. The remaining expenditures related to various system enhancements. These capital expenditures were funded primarily from cash generated from operations and borrowings under the Venture's credit facility. Expected capital expenditures for 1994 are approximately $25,914,000. The upgrade of the Albuquerque, New Mexico system is expected to account for approximately 31 percent. Plant extensions in all of the Venture's systems are expected to account for approximately 15 percent. Service drops to homes are anticipated to account for approximately 23 percent. The remainder of the expenditures are for various system enhancements in all of the Venture's systems. Funding for these expenditures is expected to be provided by cash on hand, cash generated from operations and borrowings from the Venture's credit facility. Subject to the regulatory matters discussed below and assuming successful renegotiation of its credit facility, the Venture has sufficient sources of capital available in its ability to generate cash from operations and to borrow under its credit facility to meet its presently anticipated needs.\nDuring the first quarter of 1992, the Venture renegotiated its debt arrangements, which increased the maximum amount of debt available to $183,000,000. Such new debt arrangements consist of $93,000,000 of Senior Notes placed with a group of institutional lenders and a renegotiated $90,000,000 revolving credit agreement with a group of commercial bank lenders. The Venture used the funds from the Senior Notes to repay approximately $88,000,000 of the $155,000,000 outstanding on its previous credit facility and to repay advances from Intercable. The Venture used borrowings under its new credit facility to repay the remaining balance on its previous credit facility.\nThe Senior Notes have a fixed interest rate of 8.64 percent and a final maturity date of March 31, 2000. The Senior Notes call for interest only payments for the first four years, with interest and accelerating amortization of principal payments for the next four years. Interest is payable semi-annually. The Senior Notes carry a \"make-whole\" premium, which is a prepayment penalty, if they are prepaid prior to maturity. The make-whole premium protects the lenders in the event that the funds are reinvested at a rate below 8.64 percent, and is calculated per the note agreement.\nThe Venture's current revolving credit facility has a maximum amount available of $90,000,000. As of December 31, 1993, $73,800,000 was outstanding under the Venture's revolving credit agreement, leaving the Venture with $16,200,000 of available borrowing capacity until March 31, 1994. The revolving credit period will expire on March 31, 1994, at which time the principal balance converts to a term loan payable in quarterly installments with a final maturity date of March 31, 2000. The General Partner is negotiating to to extend the revolving credit period for one year. Interest is at the Venture's option of LIBOR plus 1.25 percent to 1.75 percent, the CD rate plus 1.375 percent to 1.875 percent or the Base Rate plus 0 percent to .50 percent. An annual commitment fee of .5 percent is required on the unused portion of the facility until it converts to a term loan.\nBoth lending facilities are equal in standing with the other, and both are equally secured by the assets of the Venture.\nRegulation and Legislation\nOn October 5, 1992, Congress enacted the Cable Television Consumer Protection and Competition Act of 1992 (the \"1992 Cable Act\") which became effective on December 4, 1992. This legislation has effected significant changes to the regulatory environment in which the cable television industry operates. The 1992 Cable Act generally allows for a greater degree of regulation of the cable television industry. Under the 1992 Cable Act's definition of effective competition, nearly all cable television systems in the United States, including those owned and managed by the General Partner, are subject to rate regulation of basic cable services. In addition, the 1992 Cable Act allows the FCC to regulate rates for non-basic service tiers other than premium services in response to complaints filed by franchising authorities and\/or cable subscribers. In April 1993, the FCC adopted regulations governing rates for basic and non-basic services. These regulations, with which the Venture complied, became effective on September 1, 1993. See Item 1 for further discussion of the provisions of the 1992 Cable Act.\nBased on Intercable's assessment of the FCC's rulemakings concerning rate regulation under the 1992 Cable Act, the Venture reduced the rates it charged for certain regulated services. On an annualized basis, such rate reductions will result in an estimated reduction in the Venture's revenue of approximately $4,500,000, or approximately 5 percent, and a decrease in operating income before depreciation and amortization of approximately $4,300,000, or approximately 10 percent. In addition, on February 22, 1994, the FCC announced a further rulemaking which, when implemented, could reduce rates further. Based on the foregoing, the General Partner believes that the new rate regulations will have a negative effect on the Venture's revenues and operating income before depreciation and amortization. The General Partner has undertaken actions to mitigate a portion of these reductions primarily through (a) new service offerings, (b) product re-marketing and re-packaging and (c)marketing efforts directed at non- subscribers. To the extent such reductions are not mitigated, the values of the Venture's cable television systems, which are calculated based on cash flow, could be adversely impacted.\nThe 1992 Cable Act contains new broadcast signal carriage requirements, and the FCC has adopted regulations implementing the statutory requirements. These new rules allow a local commercial broadcast television station to elect whether to demand that a cable system carry its signal or to require the cable system to negotiate with the station for \"retransmission consent.\" Additionally, cable systems also are required to obtain retransmission consent from all \"distant\" commercial television stations (except for commercial satellite-delivered independent \"superstations\"), commercial radio stations and certain low-power television stations carried by cable systems. The retransmission consent rules went into effect on October 6, 1993. In the cable television system owned by the Venture, no broadcast stations withheld their consent to retransmission of their signal. Certain broadcast signals are being carried pursuant to extensions offered to the General Partner by broadcasters, including a one-year extension for carriage of the CBS station owned and operated by the CBS network in Chicago. The General Partner expects to conclude retransmission consent negotiations with those stations whose signals are being carried pursuant to extensions, without having to terminate the distribution of any of those signals. However, there can be no assurance that such will occur. If any broadcast station currently being carried pursuant to an extension is dropped, there could be a negative effect on the system if a significant number of subscribers were to disconnect their service.\nItem 8.","section_7A":"","section_8":"Item 8. Financial Statements\nCABLE TV FUND 12\nFINANCIAL STATEMENTS\nAS OF DECEMBER 31, 1993 AND 1992\nINDEX\nREPORT OF INDEPENDENT PUBLIC ACCOUNTANTS\nTo the Partners of Cable TV Fund 12-A:\nWe have audited the accompanying balance sheets of CABLE TV FUND 12-A (a Colorado limited partnership) as of December 31, 1993 and 1992, and the related statements of operations, partners' capital (deficit) and cash flows for each of the three years in the period ended December 31, 1993. These financial statements and the schedules referred to below are the responsibility of the General Partner's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.\nWe conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.\nIn our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Cable TV Fund 12-A as of December 31, 1993 and 1992, and the 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.\nOur audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedules listed in the index of financial statements are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic financial statements. These schedules have been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.\n\/s\/ ARTHUR ANDERSEN & CO. ARTHUR ANDERSEN & CO.\nDenver, Colorado, March 11, 1994.\nCABLE TV FUND 12-A (A Limited Partnership)\nBALANCE SHEETS\nThe accompanying notes to financial statements are an integral part of these balance sheets.\nCABLE TV FUND 12-A (A Limited Partnership)\nBALANCE SHEETS\nThe accompanying notes to financial statements are an integral part of these balance sheets.\nCABLE TV FUND 12-A (A Limited Partnership)\nSTATEMENTS OF OPERATIONS\nThe accompanying notes to financial statements are an integral part of these statements.\nCABLE TV FUND 12-A (A Limited Partnership)\nSTATEMENTS OF PARTNERS' CAPITAL (DEFICIT)\nThe accompanying notes to financial statements are an integral part of these statements.\nCABLE TV FUND 12-A (A Limited Partnership)\nSTATEMENTS OF CASH FLOWS\nThe accompanying notes to financial statements are an integral part of these statements.\nCABLE TV FUND 12-A (A Limited Partnership)\nNOTES TO FINANCIAL STATEMENTS\n(1) ORGANIZATION AND PARTNERS' INTERESTS\nFormation and Business\nCable TV Fund 12-A (\"Fund 12-A\"), a Colorado limited partnership, was formed on January 2, 1985, under a public program sponsored by Jones Intercable, Inc. Fund 12-A was formed to acquire, construct, develop and operate cable television systems. Jones Intercable, Inc., a publicly held Colorado corporation, is the \"General Partner\" and manages Fund 12-A. The General Partner and its subsidiaries also own and operate cable television systems. In addition, the General Partner manages cable television systems for other limited partnerships for which it is general partner and, also, for affiliated entities.\nContributed Capital\nThe capitalization of Fund 12-A is set forth in the accompanying statements of partners' capital (deficit). No limited partner is obligated to make any additional contributions to partnership capital.\nThe General Partner purchased its interest in Fund 12-A by contributing $1,000 to partnership capital.\nAll profits and losses of Fund 12-A are allocated 99 percent to the limited partners and 1 percent to the General Partner, except for income or gain from the sale or disposition of cable television properties, which will be allocated to the partners based upon the formula set forth in the Partnership Agreement, and interest income earned prior to the first acquisition by Fund 12-A of a cable television system, which was allocated 100 percent to the limited partners.\n(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES\nAccounting Records\nThe accompanying financial statements have been prepared on the accrual basis of accounting in accordance with generally accepted accounting principles. Fund 12-A's tax returns are also prepared on the accrual basis.\nProperty, Plant and Equipment\nDepreciation of property, plant and equipment is provided primarily using the straight-line method over the following estimated service lives:\nReplacements, renewals and improvements are capitalized and maintenance and repairs are charged to expense as incurred.\nIntangible Assets\nCosts assigned to franchises and subscriber lists are being amortized using the straight-line method over the following remaining estimated useful lives:\nRevenue Recognition\nSubscriber prepayments are initially deferred and recognized as revenue when earned.\nReclassification\nCertain prior year amounts have been reclassified to conform to the 1993 presentation.\n(3) TRANSACTIONS WITH THE GENERAL PARTNER AND AFFILIATES\nBrokerage Fees\nAn affiliate of the General Partner performed brokerage services for Fund 12-A. For brokering the acquisition of cable television systems for Fund 12-A, The Jones Group, Ltd. is paid a fee equal to 4.5 percent of the purchase prices. The Jones Group, Ltd. brokered the acquisition of a SMATV system for Fund 12-A in 1991 and earned a fee of $37,000, or 4 percent of the acquisition price. No brokerage fees were paid by Fund 12-A in 1992 and 1993.\nManagement Fees, Distribution Ratios and Reimbursement\nThe General Partner manages Fund 12-A and receives a fee for its services equal to 5 percent of the gross revenues of Fund 12-A, excluding revenues from the sale of cable television systems or franchises. Management fees for the years ended December 31, 1993, 1992 and 1991 were $1,448,186, $1,334,651 and $1,216,130, respectively.\nAny distributions made from cash flow (defined as cash receipts derived from routine operations, less debt principal and interest payments and cash expenses) are allocated 99 percent to the limited partners and 1 percent to the General Partner. Any distributions other than from cash flow, such as from the sale or refinancing of a system or upon dissolution of the partnership, will be made as follows: first, to the limited partners in an amount which, together with all prior distributions, will equal the amount initially contributed to the partnership capital by the limited partners; the balance, 75 percent to the limited partners and 25 percent to the General Partner.\nFund 12-A reimburses the General Partner for certain allocated overhead and administrative expenses. These expenses consist primarily of salaries and benefits paid to corporate personnel, rent, data processing services and other facilities costs. Such personnel provide engineering, marketing, administrative, accounting, legal and investor relations services to Fund 12-A. Allocations of personnel costs are based primarily on actual time spent by employees of the General Partner with respect to each partnership managed. Remaining overhead costs are allocated based on revenues and\/or the cost of assets managed for the partnership. Systems owned by the General Partner and all other systems owned by partnerships for which Jones Intercable, Inc. is the general partner are also allocated a proportionate share of these expenses. The General Partner believes that the methodology used in allocating overhead and administrative expenses is reasonable. Reimbursements by Fund 12-A to the General Partner for allocated overhead and administrative expenses were $1,993,892, $1,822,265 and $1,484,588 in 1993, 1992 and 1991, respectively.\nFund 12-A was charged interest during 1993 an average interest rate of 10.61 percent on the amounts due the General Partner, which approximated the General Partner's weighted average cost of borrowing. Total interest charged Fund 12-A by the General Partner was $1,029, $-0- and $1,071 in 1993, 1992 and 1991, respectively.\nPayments to Affiliates for Programming Services\nThe Partnership receives programming from Superaudio and The Mind Extension University, affiliates of the General Partner. Payments to Superaudio totaled $45,495, $44,605 and $39,588 in 1993, 1992 and 1991, respectively. Payments to The Mind Extension University totaled $26,411, $25,559 and $24,313 in 1993, 1992 and 1991, respectively.\n(4) DEBT\nFund 12-A's credit facility's revolving credit period expired on June 30, 1992. The credit facility has been converted to a term loan payable in 20 consecutive quarterly installments. Fund 12-A repaid $3,000,000 of the outstanding balance during 1993. Principal payments required in 1994 are $4,500,000. Generally, interest is at Fund 12-A's option of prime plus 1\/2 percent or a fixed rate defined as the CD Rate plus 1-1\/4 percent or the Euro-Rate plus 1-1\/4 percent. The effective interest rates on outstanding obligations as of December 31, 1993 and 1992 were 4.83 percent and 5.13 percent, respectively.\nOn January 12, 1993, Fund 12-A entered into an interest rate cap agreement covering outstanding debt obligations of $15,000,000. Fund 12-A paid an initial fee of $150,000. The agreement protects Fund 12-A for interest rates that exceed 7 percent for three years from the date of the agreement and will be charged to interest expense over the life of the agreement using the straight-line method.\nInstallments due on all debt principal for each of the five years in the period ending December 31, 1998, respectively, are: $4,567,359, $6,067,359, $7,567,359, $11,522,453, and $-0-. At December 31, 1993, substantially all of Fund 12- A's property, plant and equipment secured the above indebtedness.\n(5) INCOME TAXES\nIncome taxes have not been recorded in the accompanying financial statements because they accrue directly to the partners. The Federal and state income tax returns of Fund 12-A are prepared and filed by the General Partner.\nFund 12-A's tax returns, the qualification of the partnership as such for tax purposes, and the amount of distributable partnership income or loss are subject to examination by Federal and state taxing authorities. If such examinations result in changes with respect to Fund 12-A's recorded income or loss, the tax liability of the general and limited partners would likely be changed accordingly.\nTaxable loss reported to the partners is different from that reported in the statements of operations due to the difference in depreciation recognized under generally accepted accounting principles and the expense allowed for tax purposes under the Modified Accelerated Cost Recovery System (MACRS). There are no other significant differences between taxable loss and the net loss reported in the statements of operations.\n(6) COMMITMENTS AND CONTINGENCIES\nOn October 5, 1992, Congress enacted the Cable Television Consumer Protection and Competition Act of 1992 (the \"1992 Cable Act\") which became effective on December 4, 1992. The 1992 Cable Act generally allows for a greater degree of regulation in the cable television industry. In April 1993, the FCC adopted regulations governing rates for basic and non-basic services. These regulations became effective on September 1, 1993. Such regulations caused reductions in rates for certain regulated services. On February 22, 1994, the FCC announced a further rulemaking which, when implemented, could reduce rates further. The General Partner plans to mitigate a portion of these reductions primarily through (a) new service offerings, (b) product re-marketing and re-packaging and (c) marketing efforts directed at non-subscribers.\nThe 1992 Cable Act contains new broadcast signal carriage requirements, and the FCC has adopted regulations implementing the statutory requirements. These new rules allow a local commercial broadcast television station to elect whether to demand that a cable system carry its signal or to require the cable system to negotiate with the station for \"retransmission consent.\" Additionally, cable systems also are required to obtain retransmission consent from all \"distant\" commercial television stations (except for commercial satellite-delivered independent \"superstations\"), commercial radio stations and certain low-power television stations carried by cable systems. The retransmission consent rules went into effect on October 6, 1993. In the cable television systems owned by Fund 12-A, no broadcast stations withheld their consent to retransmission of their signal. Certain broadcast signals are being carried pursuant to extensions offered to the General Partner by broadcasters, including a one-year extension for carriage of the CBS station owned and operated by the CBS network in Chicago. The General Partner expects to conclude retransmission consent negotiations with those stations whose signals are being carried pursuant to extensions without having to terminate the distribution of any of those signals. However, there can be no assurance that such will occur. If any broadcast station currently being carried pursuant to an extension is dropped, there could be a negative effect on the system if a significant number of subscribers were to disconnect their service.\nFund 12-A rents office and other facilities under various long-term operating lease arrangements. Rent paid under such lease arrangements totaled $74,142, $81,669 and $35,060, respectively, for the years ended December 31, 1993, 1992 and 1991. Minimum commitments for each of the five years in the period ending December 31, 1998, and thereafter are as follows:\n(7) SUPPLEMENTARY PROFIT AND LOSS INFORMATION\nSupplementary profit and loss information for the respective years is presented below:\nCABLE TV FUND 12-A SCHEDULE V - PROPERTY, PLANT AND EQUIPMENT FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 and 1991\nCABLE TV FUND 12-A SCHEDULE VI - ACCUMULATED DEPRECIATION OF PROPERTY, PLANT AND EQUIPMENT FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 and 1991\nREPORT OF INDEPENDENT PUBLIC ACCOUNTANTS\nTo the Partners of Cable TV Fund 12-BCD Venture:\nWe have audited the accompanying balance sheets of CABLE TV FUND 12-BCD VENTURE (a Colorado general partnership) as of December 31, 1993 and 1992, and the related statements of operations, partners' capital and cash flows for each of the three years in the period ended December 31, 1993. These financial statements and the schedules referred to below are the responsibility of the General Partners' management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.\nWe conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.\nIn our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Cable TV Fund 12-BCD Venture as of December 31, 1993 and 1992, and the 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.\nOur audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedules listed in the index of financial statements are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic financial statements. These schedules have been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.\n\/s\/ ARTHUR ANDERSEN & CO. ARTHUR ANDERSEN & CO.\nDenver, Colorado, March 11, 1994.\nCABLE TV FUND 12-BCD VENTURE (A General Partnership)\nBALANCE SHEETS\nThe accompanying notes to financial statements are an integral part of these balance sheets.\nCABLE TV FUND 12-BCD VENTURE (A General Partnership)\nBALANCE SHEETS\nThe accompanying notes to financial statements are an integral part of these balance sheets.\nCABLE TV FUND 12-BCD VENTURE (A General Partnership)\nSTATEMENTS OF OPERATIONS\nThe accompanying notes to financial statements are an integral part of these statements.\nCABLE TV FUND 12-BCD VENTURE (A General Partnership)\nSTATEMENTS OF PARTNERS' CAPITAL\nThe accompanying notes to financial statements are an integral part of these statements.\nCABLE TV FUND 12-BCD VENTURE (A General Partnership)\nSTATEMENTS OF CASH FLOWS\nThe accompanying notes to financial statements are an integral part of these statements.\nCABLE TV FUND 12-BCD VENTURE (A General Partnership)\nNOTES TO FINANCIAL STATEMENTS\n(1) ORGANIZATION AND PARTNERS' INTERESTS\nFormation and Business\nOn March 17, 1986, Cable TV Funds 12-B, 12-C and 12-D (the \"Venture Partners\") formed Cable TV Fund 12-BCD Venture (the \"Venture\"). The Venture was formed for the purpose of acquiring certain cable television systems serving Tampa, Florida; Albuquerque, New Mexico; and Palmdale, California. Jones Intercable, Inc. (\"Intercable\"), the \"General Partner\" of each of the Venture Partners, manages the Venture. Intercable and its subsidiaries also own and operate cable television systems. In addition, Intercable manages cable television systems for other limited partnerships for which it is general partner and, also, for affiliated entities.\nContributed Capital\nThe capitalization of the Venture is set forth in the accompanying statements of partners' capital.\nAll Venture distributions, including those made from cash flow, from the sale or refinancing of Partnership property and on dissolution of the Venture, shall be made to the Venture Partners in proportion to their approximate respective interests in the Partnership as follows:\nCable TV Fund 12-B 9% Cable TV Fund 12-C 15% Cable TV Fund 12-D 76% --- 100% ===\nVenture Acquisitions and Sales\nThe Venture owns and operates the cable television systems serving certain areas in and around Albuquerque, New Mexico; Palmdale, California; and Tampa, Florida.\nOn September 20, 1991, the Venture entered into a purchase and sale agreement with an unaffiliated party to sell the cable television system serving the area in and around California City, California for $2,620,000. Closing on this transaction occurred on April 1, 1992. The proceeds were used to repay a portion of the amounts outstanding under the Venture's credit facility.\nThe Venture's acquisitions were accounted for as purchases with the individual purchase prices allocated to tangible and intangible assets based upon an independent appraisal. The method of allocation of purchase price was as follows: first, to the fair value of the net tangible assets acquired; second, to the value of subscriber lists; third, to franchise costs; and fourth, to cost in excess of interests in net assets purchased. Brokerage fees paid to an affiliate of Intercable and other system acquisition costs were capitalized and included in the cost of intangible assets.\n(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES\nAccounting Records\nThe accompanying financial statements have been prepared on the accrual basis of accounting in accordance with generally accepted accounting principles. The Venture's tax returns are also prepared on the accrual basis.\nProperty, Plant and Equipment\nDepreciation is provided using the straight-line method over the following estimated service lives:\nDistribution systems 5 - 15 years Buildings 20 years Equipment and tools 3 - 5 years Premium television service equipment 5 years Earth receive stations 5 - 15 years Vehicles 3 years Other property, plant and equipment 5 years\nReplacements, renewals and improvements are capitalized and maintenance and repairs are charged to expense as incurred.\nIntangible Assets\nCosts assigned to franchises and subscriber lists and cost in excess of interests in net assets purchased are amortized using the straight-line method over the following remaining estimated useful lives:\nFranchise costs 3 years Subscriber lists 1 year Cost in excess of interests in net assets purchased 32 years\nRevenue Recognition\nSubscriber prepayments are initially deferred and recognized as revenue when earned.\n(3) TRANSACTIONS WITH JONES INTERCABLE, INC. AND AFFILIATES\nBrokerage Fees\nThe Jones Group, Ltd., an affiliate of the General Partner, performs brokerage services for the Venture in connection with Venture acquisitions and sales. For brokering two acquisitions in the Tampa System for the Venture, The Jones Group, Ltd. was paid fees totaling $13,120, or 4 percent of the transaction prices, during 1992. Additionally, The Jones Group, Ltd. received $65,500, or 2.5 percent of the transaction price, during 1992 for brokering a sale in the Palmdale System. For brokering the acquisitions of two SMATV systems in the Tampa System for the Venture, The Jones Group, Ltd. was paid fees totaling $55,400, or 4 percent of the original purchase prices, during 1991. There were no brokerage fees paid during the year ended December 31, 1993.\nManagement Fees and Reimbursements\nIntercable manages the Venture and receives a fee for its services equal to 5 percent of the gross revenues of the Venture, excluding revenues from the sale of cable television systems or franchises. Management fees paid to Intercable for the years ended December 31, 1993, 1992 and 1991 were $4,456,577, $4,178,376 and $3,902,475, respectively.\nThe Venture reimburses Intercable for certain allocated overhead and administrative expenses. These expenses represent the salaries and related benefits paid to corporate personnel, rent, data processing services and other corporate facilities costs. Such personnel provide engineering, marketing, administrative, accounting, legal and investor relations services to the Venture. Allocations of personnel costs are based primarily on actual time spent by employees of the General Partner with respect to each entity managed. Remaining overhead costs are allocated based on total revenues and\/or the cost of assets managed for the entity. Systems owned by Intercable and all other systems owned by partnerships for which Intercable is the general partner are also allocated a proportionate share of these expenses. Intercable believes\nthat the methodology used in allocating overhead and administrative expenses is reasonable. Overhead and administrative expenses allocated to the Venture by Intercable during the years ended December 31, 1993, 1992 and 1991 were $6,048,783, $5,580,114 and $4,640,219, respectively.\nThe Venture was charged interest during 1993 at an average interest rate of 10.61 percent on the amounts due Intercable, which approximated Intercable's cost of borrowing. Total interest charged the Venture by Intercable was $15,477, $126,073 and $171,942 during 1993, 1992 and 1991, respectively.\nPayments to Affiliates for Programming Services\nThe Venture receives programming from Superaudio and The Mind Extension University, affiliates of Intercable. Payments to Superaudio totaled $134,179, $132,091 and $120,851 in 1993, 1992, and 1991, respectively. Payments to The Mind Extension University totaled $79,002, $76,676 and $72,218 in 1993, 1992 and 1991, respectively.\n(4) DEBT\nDuring the first quarter of 1992, the Venture renegotiated its debt arrangements, which increased the maximum amount of debt available to $183,000,000. The Venture's debt arrangements consist of $93,000,000 of Senior Notes placed with a group of institutional lenders and a $90,000,000 revolving credit agreement with a group of commercial bank lenders.\nThe Senior Notes have a fixed interest rate of 8.64 percent and a final maturity date of March 31, 2000. The Senior Notes call for only interest payments for the first four years, with interest and accelerating amortization of principal payments for the next four years. Interest is payable semi-annually. The Senior Notes carry a \"make-whole\" premium, which is a prepayment penalty, if they are prepaid prior to maturity. The make-whole premium protects the lenders in the event that the funds are reinvested at a rate below 8.64 percent, and is calculated per the note agreement.\nThe Venture's current revolving credit facility has a maximum amount available of $90,000,000. As of December 31, 1993, $73,800,000 was outstanding under the current revolving credit agreement, leaving the Venture with $16,200,000 of available borrowing capacity until March 31, 1994. The revolving credit period is scheduled to expire on March 31, 1994, at which time the principal balance will convert to a term loan payable in quarterly installments with a final maturity date of March 31, 2000. The General Partner is negotiating to extend the revolving credit period for one year. Interest is at the Venture's option of LIBOR plus 1.25 percent to 1.75 percent, the CD rate plus 1.375 percent to 1.875 percent or the Base Rate plus 0 percent to .50 percent. An annual commitment fee of .5 percent is required on the unused portion of the facility. The effective interest rates on amounts outstanding on the Venture's revolving credit facility as of December 31, 1993 and 1992 were 4.08 percent and 5.29 percent, respectively.\nBoth lending facilities are equal in standing with the other, and both are equally secured by the assets of the Venture.\nDuring 1992, the Venture incurred costs associated with renegotiating its debt arrangements. These fees were capitalized and are being amortized over the life of the debt agreements.\nDuring 1988, the Venture entered into an interest rate cap agreement covering outstanding debt obligations of an additional $25,000,000. The Venture paid a fee of $957,500. The agreement protects the Venture from interest rates that exceed 10 percent for five years from the date of the agreement. The fee was charged to interest expense over the life of this agreement using the straight-line method.\nInstallments due on debt principal for each of the five years in the period ending December 31, 1998 and thereafter, respectively, are: $2,262,209, $4,697,609, $7,945,609, $30,201,870, $36,681,000 and $85,910,400, respectively.\n(5) INCOME TAXES\nIncome taxes have not been recorded in the accompanying financial statements because they accrue directly to the partners of Cable TV Funds 12-B, 12-C and 12-D.\nThe Venture's tax returns, the qualification of the Venture as such for tax purposes, and the amount of distributable income or loss, are subject to examination by Federal and state taxing authorities. If such examinations result in changes with respect to the Venture's qualification as such, or in changes with respect to the Venture's recorded loss, the tax liability of the Venture's general partners would likely be changed accordingly.\nTaxable losses reported to the partners is different from that reported in the statements of operations due to the difference in depreciation allowed under generally accepted accounting principles and the expense allowed for tax purposes under the Modified Accelerated Cost Recovery System (MACRS). There are no other significant differences between taxable income or losses and the net losses reported in the statements of operations.\n(6) COMMITMENTS AND CONTINGENCIES\nOn October 5, 1992, Congress enacted the Cable Television Consumer Protection and Competition Act of 1992 (the \"1992 Cable Act\") which became effective on December 4, 1992. The 1992 Cable Act generally allows for a greater degree of regulation in the cable television industry. In April 1993, the FCC adopted regulations governing rates for basic and non-basic services. These regulations became effective on September 1, 1993. Such regulations caused reductions in rates for certain regulated services. On February 22, 1994, the FCC announced a further rulemaking which, when implemented, could reduce rates further. The General Partner plans to mitigate a portion of these reductions primarily through (a) new service offerings, (b) product re-marketing and re- packaging and (c) marketing efforts directed at non-subscribers.\nThe 1992 Cable Act contains new broadcast signal carriage requirements, and the FCC has adopted regulations implementing the statutory requirements. These new rules allow a local commercial broadcast television station to elect whether to demand that a cable system carry its signal or to require the cable system to negotiate with the station for \"retransmission consent.\" Additionally, cable systems also are required to obtain retransmission consent from all \"distant\" commercial television stations (except for commercial satellite-delivered independent \"superstations\"), commercial radio stations and certain low-power television stations carried by cable systems. The retransmission consent rules went into effect on October 6, 1993. In the cable television systems owned by the Venture, no broadcast stations withheld their consent to retransmission of their signal. Certain broadcast signals are being carried pursuant to extensions offered to the\nGeneral Partner by broadcasters, including a one-year extension for carriage of the CBS station owned and operated by the CBS network in Chicago. The General Partner expects to conclude retransmission consent negotiations with those stations whose signals are being carried pursuant to extensions, without having to terminate the distribution of any of those signals. However, there can be no assurance that such will occur. If any broadcast station currently being carried pursuant to an extension is dropped, there could be a negative effect on the system if a significant number of subscribers were to disconnect their service.\nIn February 1993, the General Partner entered into a settlement agreement related to litigation brought by Sunbelt Television, Inc. against the Venture in the amount of $2,850,000. As of December 31, 1992, the Venture had accrued $2,850,000, which was reflected as an increase in other expense in the 1992 statement of operations. The settlement was paid by the Venture in March 1993.\nOffices and other facilities are rented under various long-term lease arrangements. Rent paid under such lease arrangements totaled $454,229, $450,295 and $345,994, respectively, for the years ended December 31, 1993, 1992 and 1991. Minimum commitments under operating leases for the five years in the period ending December 31, 1998 and thereafter are as follows:\n(7) SUPPLEMENTARY PROFIT AND LOSS INFORMATION\nSupplementary profit and loss information for the respective years is presented below:\nCABLE TV FUND 12-BCD VENTURE SCHEDULE V - PROPERTY, PLANT AND EQUIPMENT FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 and 1991\n1 Amount primarily represents the sale of the California City, California cable television system.\nCABLE TV FUND 12-BCD VENTURE SCHEDULE VI - ACCUMULATED DEPRECIATION OF PROPERTY, PLANT AND EQUIPMENT FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 and 1991\n1 Amount primarily represents the sale of the California City, California cable television system.\nITEM 9.","section_9":"ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL STATEMENTS\nNone\nPART III.\nITEM 10.","section_9A":"","section_9B":"","section_10":"ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT\nThe Partnerships themselves have no officers or directors. Certain information concerning directors and executive officers of the General Partner is set forth below.\nMr. Glenn R. Jones has served as Chairman of the Board of Directors and Chief Executive Officer of the General Partner since its formation in 1970, and he was President from June 1984 until April 1988. Mr. Jones was elected a member of the Executive Committee of the Board of Directors in April 1985. He is also Chairman of the Board of Directors and Chief Executive Officer of Jones Spacelink, Ltd., a publicly held cable television company that is a subsidiary of Jones International, Ltd. and the parent of the General Partner. Mr. Jones is the sole shareholder, President and Chairman of the Board of Directors of Jones International, Ltd. He is also Chairman of the Board of Directors of the subsidiaries of the General Partner and of certain other affiliates of the General Partner. Mr. Jones has been involved in the cable television business in various capacities since 1961, is a past and member of the Board of Directors of the National Cable Television Association and is a former member of its Executive Committee. Mr. Jones is a past director and member of the Executive Committee of C-Span. Mr. Jones has been the recipient of several awards including the Grand Tam Award in 1989, the highest award from the Cable Television Administration and Marketing Society, the Chairman's Award from the Investment Partnership Association, which is an association of sponsors of public syndications; the cable television industry's Public Affairs Association President's Award in 1990; the Donald G. McGannon award for the advancement of minorities and women in cable; the STAR Award from American Women\nin Radio and Television, Inc., for exhibition of a commitment to the issues and concerns of women in television and radio; and the Women in Cable Accolade in 1990 in recognition of support of this organization. Mr. Jones is also a founding member of the James Madison Council of the Library of Congress, is on the Board of Governors of the American Society of Training and Development and is a director of the National Alliance of Business.\nMr. James B. O'Brien, the General Partner's President, joined the General Partner in January 1982 as System Manager, Brighton, Colorado, and was later promoted to the position of General Manager, Gaston County, North Carolina. Prior to being elected President and a Director of the General Partner in December 1989, Mr. O'Brien served as a Division Manager, Director of Operations Planning\/Assistant to the CEO, Fund Vice President and Group Vice President\/Operations. As President, he is responsible for the day-to-day operations of the cable television systems managed and owned by the General Partner. Mr. O'Brien is also President and a Director of Jones Cable Group, Ltd., Jones Global Funds, Inc., and Jones Global Management, Inc., all affiliates of the General Partner. Mr. O'Brien is a board member of Cable Labs, Inc., the research arm of the cable television industry. He also serves as a director of the Cable Television Administration and Marketing Association and as a director of the Walter Kaitz Foundation.\nMs. Ruth E. Warren joined the General Partner in August 1980 and served in various capacities, including system manager and Fund Vice President, since then. Ms. Warren was elected Group Vice President\/Operations of the General Partner in September 1990. Ms. Warren also serves as Vice President\/Operations of Jones Spacelink, Ltd.\nMr. Kevin P. Coyle joined The Jones Group, Ltd. in July 1981 as Vice President\/Financial Services. In September 1985, he was appointed Senior Vice President\/Financial Services. He was elected Treasurer of the General Partner in August 1987, Vice President\/Treasurer in April 1988 and Group Vice President\/Finance in October 1990.\nMr. Christopher J. Bowick joined the General Partner in September 1991 as Group Vice President\/Technology and Chief Technical Officer. Previous to joining the General Partner, Mr. Bowick worked for Scientific Atlanta's Transmission Systems Business Division in various technical management capacities since 1981, and as Vice President of Engineering since 1989.\nMr. Timothy J. Burke joined the General Partner in August 1982 as corporate tax manager, was elected Vice President\/Taxation in November 1986 and Group Vice President\/Taxation\/Administration in October 1990. He is also a member of the Board of Directors of Jones Spacelink, Ltd.\nMr. Raymond L. Vigil joined the General Partner in April 1993 as Group Vice President\/Human Resources and was elected a Director of the General Partner in November 1993. Previous to joining the General Partner, Mr. Vigil served as Executive Director of\nLearning with USWest from September 1989 to April 1993. Prior to that, Mr. Vigil worked in various human resources posts over a 14-year term with the IBM Corporation.\nMr. James J. Krejci joined Jones International, Ltd. in March 1985 as Group Vice President. He was elected Group Vice President and Director of the General Partner in August 1987. He is also an officer of Jones Futurex, Inc., a subsidiary of Jones Spacelink, Ltd. engaged in manufacturing and marketing data encryption devices, Jones Information Management, Inc., a subsidiary of Jones International, Ltd. providing computer data and billing processing facilities and Jones Lightwave, Ltd., a company owned by Jones International, Ltd. and Mr. Jones, and several of its subsidiaries engaged in the provision of telecommunications services. Prior to joining Jones International, Ltd., Mr. Krejci was employed by Becton Dickinson and Company, a medical products manufacturing firm.\nMs. Elizabeth M. Steele joined the General Partner in August 1987 as Vice President\/General Counsel and Secretary. Ms. Steele also is an officer of Jones Spacelink, Ltd. From August 1980 until joining the General Partner, Ms. Steele was an associate and then a partner at the Denver law firm of Davis, Graham & Stubbs, which serves as counsel to the General Partner.\nMr. Michael J. Bartolementi joined the General Partner in September 1984 as an accounting manager and was promoted to Assistant Controller in September 1985. He was named Controller in November 1990.\nMr. George J. Feltovich was elected a Director of the General Partner in March 1993. Mr. Feltovich has been a private investor since 1978. Prior to 1978, Mr. Feltovich served as an administrative and legal consultant to various private and governmental housing programs. Mr. Feltovich was admitted to practice law in California, Pennsylvania and the District of Columbia and is a member of the California Bar Association.\nMr. Patrick J. Lombardi has been a Director of the General Partner since February 1984 and has served as a member of the Audit Committee of the Board of Directors since February 1985. In September 1985, Mr. Lombardi was appointed Vice President of The Jones Group, Ltd., and in June 1989 was elected President of Jones Global Group, Inc., both affiliates of the General Partner. Mr. Lombardi is President and a director of Jones Financial Group, Ltd., an affiliate of the General Partner, and Group Vice President\/Finance and a director of Jones International, Ltd.\nMr. Howard O. Thrall was elected a Director of the General Partner in December 1988 and serves as a member of the Audit Committee and the special Stock Option Committee, which was established in August of 1992. From 1984 until August 1993, Mr. Thrall was associated with Douglas Aircraft Company, an aircraft manufacturing firm, most recently as Regional Vice President Marketing. In September 1993, Mr. Thrall joined World Airways, Inc. as Vice President of Sales, Asian Region.\nITEM 11.","section_11":"ITEM 11. EXECUTIVE COMPENSATION\nThe Partnerships have no employees; however, various personnel are required to operate the cable television systems owned by the Partnerships. Such personnel are employed by the General Partner and, pursuant to the terms of the limited partnership agreements of the Partnerships, the cost of such employment is charged by the General Partner to the Partnerships as a direct reimbursement item. See Item 13.\nITEM 12.","section_12":"ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGERS\nNo person or entity owns more than 5 percent of the limited partnership interests in any of the Partnerships.\nITEM 13.","section_13":"ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS\nThe General Partner and its affiliates engage in certain transactions with the Partnerships as contemplated by the limited partnership agreements of the Partnerships and as disclosed in the prospectus for the Partnerships. The General Partner believes that the terms of such transactions, which are set forth in the Partnerships' limited partnership agreements, are generally as favorable as could be obtained by the Partnerships from unaffiliated parties. This determination has been made by the General Partner in good faith, but none of the terms were or will be negotiated at arm's-length and there can be no assurance that the terms of such transactions have been or will be as favorable as those that could have been obtained by the Partnerships from unaffiliated parties.\nThe General Partner charges the Partnerships for management fees, and the Partnerships reimburse the General Partner for certain allocated overhead and administrative expenses in accordance with the terms of the limited partnership agreements of the Partnerships. These expenses consist primarily of salaries and benefits paid to corporate personnel, rent, data processing services and other facilities costs. Such personnel provide engineering, marketing, administrative, accounting, legal and investor relations services to the Partnerships. Allocations of personnel costs are based primarily on actual time spent by employees of the General Partner with respect to each Partnership managed. Remaining overhead costs are allocated based on revenues and\/or the cost of assets managed for the Partnerships. Systems owned by the General Partner and all other systems owned by partnerships for which Jones Intercable, Inc. is the general partner are also allocated a proportionate share of these expenses.\nThe General Partner also advances funds and charges interest on the balance payable from the Partnerships. The interest rate charged the Partnerships approximates the General Partner's weighted average cost of borrowing. Affiliates of the General Partner have received amounts from the Partnerships for performing brokerage services.\nThe Systems receive stereo audio programming from Superaudio, a joint venture owned 50% by an affiliate of the General Partner and 50% by an unaffiliated party, for a fee based upon the number of subscribers receiving the programming. These systems also receive educational video programming from Mind Extension University, Inc., an affiliate of the General Partner, for a fee based upon the number of subscribers receiving the programming.\nThe charges to the Partnerships for related transactions are as follows for the periods indicated:\nThe activities of Fund 12-C and Fund 12-D are limited to their equity ownership in the Venture. See the following related party disclosure for the Venture.\nPART IV.\nITEM 14.","section_14":"ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K\n(a)1. See index to financial statements at page 23 for list of financial statements and exhibits thereto filed as a part of this report. 2. Fund 12-A: Schedule V - Property, Plant and Equipment Schedule VI - Accumulated Depreciation of Property, Plant and Equipment\nFund 12-B: Schedule V - Property, Plant and Equipment Schedule VI - Accumulated Depreciation of Property, Plant and Equipment\nFund 12-D: Schedule V - Property, Plant and Equipment Schedule VI - Accumulated Depreciation of Property, Plant and Equipment\n12-BCD Venture Schedule V - Property, Plant and Equipment Schedule VI - Accumulated Depreciation of Property, Plant and Equipment\n3. The following exhibits are filed herewith.\n4.1 Limited Partnership Agreements for Cable TV Funds 12-A, 12-B and 12-C. (1)\n4.2 Limited Partnership Agreement of Cable TV Fund 12-D. (3)\n4.3 Joint Venture Agreement of Cable TV Fund 12-BCD Venture dated as of March 17, 1986, among Cable TV Fund 12-B, Ltd., Cable TV Fund 12-C, Ltd. and Cable TV Fund 12-D, Ltd. (3)\n10.1.1 Copy of a franchise and related documents thereto granting a community antenna television system franchise for Edwards Air Force Base, California (Fund 12-BCD). (2)\n10.1.2 Copy of a franchise and related documents thereto granting a community antenna television system franchise for the City of Lancaster, California (Fund 12-BCD). (2)\n10.1.3 Copy of a franchise and related documents thereto granting a community antenna television system franchise for Unincorporated portions of Los Angeles County, California (Fund 12-BCD). (2)\n10.1.3.1 Copy of Los Angeles County Code regarding cable tv system franchises (Fund 12- BCD). (8)\n10.1.3.2 Copy of Ordinance 90-0118F dated 10\/29\/90 granting a cable television franchise to Fund 12-BCD (Fund 12-BCD). (8)\n10.1.4 Copy of a franchise and related documents thereto granting a community antenna television system franchise for the Green Valley\/Elizabeth Lake\/Leona Valley unincorporated areas of Los Angeles County, California (Fund 12-BCD). (3)\n10.1.4.1 Ordinance 88-0166F dated 10\/4\/88 amending the franchise described in 10.1.5 (Fund 12-BCD). (8)\n10.1.5 Copy of a franchise and related documents thereto granting a community antenna television system franchise for the City of Palmdale, California (Fund 12-BCD). (8)\n10.1.6 Copy of a franchise and related documents thereto granting a community antenna television system franchise for the City of Fort Myers, Florida (Fund 12-A). (1)\n10.1.7 Copy of a franchise and related documents thereto granting a community antenna television system franchise for Lee County, Florida (Fund 12-A). (1)\n10.1.7.1 Renewal of Permit dated 3\/4\/92 (Fund 12-A). (8)\n10.1.8 Copy of a franchise and related documents thereto granting a community antenna television system franchise for the City of Tampa, Florida (Fund 12-BCD). (1)\n10.1.8.1 Resolution No. 1153 dated 10\/2\/86 authorizing consent to transfer of the franchise and amendment to the franchise agreement (Fund 12-BCD). (8)\n10.1.8.2 Amendment to franchise agreement dated 10\/6\/86 (Fund 12-BCD). (8)\n10.1.8.3 Franchise transfer, acceptance and consent to transfer dated 10\/6\/86 (Fund 12- BCD). (8)\n10.1.9 Copy of a franchise and related documents thereto granting a community antenna television system franchise for the City of Augusta, Georgia (Fund 12-B). (1)\n10.1.10 Copy of a franchise and related documents thereto granting a community antenna television system franchise for the City of Blythe, Georgia (Fund 12-B). (3)\n10.1.11 Copy of a franchise and related documents thereto granting a community antenna television system franchise for the County of Burke, Georgia (Fund 12-B). (5)\n10.1.12 Copy of a franchise and related documents thereto granting a community antenna television system franchise for the Unincorporated Area of Columbia County, Georgia (Fund 12-B). (8)\n10.1.13 Copy of a franchise and related documents thereto granting a community antenna television system franchise for the City of Hephzibah, Georgia (Fund 12-B). (1)\n10.1.14 Copy of a franchise and related documents thereto granting a community antenna television system franchise for the Unincorporated Area of Richmond County, Georgia (Fund 12-B). (1)\n10.1.15 Copy of a franchise and related documents thereto granting a community antenna television system franchise for the Unincorporated portions of Cook County, Illinois (Fund 12-A). (3)\n10.1.16 Copy of a franchise and related documents thereto granting a community antenna television system franchise for the Village of Grayslake, Illinois (Fund 12-A). (1)\n10.1.17 Copy of a franchise and related documents thereto granting a community antenna television system franchise for the Unincorporated Area of Lake County, Illinois (Fund 12-A). (1)\n10.1.18 Copy of a franchise and related documents thereto granting a community antenna television system franchise for the Village of Libertyville, Illinois (Fund 12- A). (1)\n10.1.19 Copy of a franchise and related documents thereto granting a community antenna television system franchise for the Village of Mundelein, Illinois (Fund 12-A). (1)\n10.1.20 Copy of a franchise and related documents thereto granting a community antenna television system franchise for the Village of Orland Park, Illinois (Fund 12-A). (1)\n10.1.21 Copy of a franchise and related documents thereto granting a community antenna television system franchise for the Village of Park Forest, Illinois (Fund 12-A). (1)\n10.1.22 Copy of a franchise and related documents thereto granting a community antenna television system franchise for the Village of Wauconda, Illinois (Fund 12-A). (1)\n10.1.23 Copy of a franchise and related documents thereto granting a community antenna television system franchise for the City of Albuquerque, New Mexico (Fund 12- BCD). (2)\n10.1.24 Copy of a franchise and related documents thereto granting a community antenna television system franchise for the County of Bernalillo, New Mexico (Fund 12- BCD). (2)\n10.1.25 Copy of a franchise and related documents thereto granting a community antenna television system franchise for the Town of Bernalillo, New Mexico (Fund 12-BCD). (2)\n10.1.25.1 Resolution No. 12-14-87 dated 12\/14\/87 authorizing the assignment of the franchise to Fund 12-BCD. (8)\n10.1.26 Copy of a franchise and related documents thereto granting a community antenna television system franchise for the Village of Bosque Farms, New Mexico (Fund 12- BCD). (2)\n10.1.27 Copy of a franchise and related documents thereto granting a community antenna television system franchise for the Village of Corrales, New Mexico (Fund 12- BCD). (2)\n10.1.28 Copy of a franchise and related documents thereto granting a community antenna television system franchise for the Kirtland Air Force Base, New Mexico (Fund 12- BCD). (8)\n10.1.29 Copy of a franchise and related documents thereto granting a community antenna television system franchise for the Village of Los Ranchos, New Mexico (Fund 12-BCD). (2)\n10.1.30 Copy of a franchise and related documents thereto granting a community antenna television system franchise for the County of Sandoval, New Mexico (Fund 12-BCD). (2)\n10.1.31 Copy of a franchise and related documents thereto granting a community antenna television system franchise for the County of Valencia, New Mexico (Fund 12-BCD). (2)\n10.1.31.1 Resolution No. 88-23 dated 2\/14\/88 authorizing assignment of the franchise to Fund 12-BCD. (8)\n10.2.1 Credit Agreement, dated as of July 15, 1992, between Cable TV Fund 12-A, Ltd. and Mellon Bank, N.A, for itself and as agent for various lenders. (8)\n10.2.2 Loan and Security Agreement, dated August 29, 1985, between Cable TV Fund 12-B, Ltd. and The Philadelphia National Bank, individually and as agent for various lenders. (1)\n10.2.2.1 Amendment No. 1 dated as of August 14, 1986, to Loan and Security Agreement, dated August 29, 1985, between Cable TV Fund 12-B, Ltd. and The Philadelphia National Bank, individually and as agent for various lenders. (8)\n10.2.2.2 Amendment No. 2 dated March 31, 1988 to Loan and Security Agreement, dated August 29, 1985, between Cable TV Fund 12-B, Ltd. and The Philadelphia National Bank, individually and as agent for various lenders. (8)\n10.2.2.3 Amendment No. 3 dated March 29, 1989 to Loan and Security Agreement, dated August 29, 1985, between Cable TV Fund 12-B, Ltd. and The Philadelphia National Bank, individually and as agent for various lenders. (8)\n10.2.2.4 Amendment No. 4 dated November 29, 1991 to Loan and Security Agreement dated November 1991 between Cable TV Fund 12-B, Ltd. and Corestates Bank, N.A. (formerly The Philadelphia National Bank), individually and as agent for various lenders. (6)\n10.2.3 Note Purchase Agreement dated as of March 31, 1992 among Fund 12-BCD Venture and various note purchasers. (8)\n10.3.1 Purchase and Sale Agreement dated as of March 29, 1988 by and between Cable TV Fund 12-BCD Venture as Buyer and Video Company as Seller. (4)\n10.3.2 Purchase and Sale Agreement dated 9\/20\/91 and amendments thereto between Cable TV Fund 12-BCD Venture as Seller and Falcon Classic Cable Income Properties, L.P. (Fund 12-BCD). (7)\n__________\n(1) Incorporated by reference from Registrant's Report on Form 10-K for the fiscal year ended December 31, 1985 (Commission File Nos. 0-13192, 0-13807, 0-13964 and 0-14206).\n(2) Incorporated by reference from Registrant's Report on Form 10-K for the fiscal year ended December 31, 1986 (Commission File Nos. 0-13192, 0-13807, 0-13964 and 0-14206).\n(3) Incorporated by reference from Registrant's Report on Form 10-K for the fiscal year ended December 31, 1987 (Commission File Nos. 0-13192, 0-13807, 0-13964 and 0-14206).\n(4) Incorporated by reference from Registrant's Report on Form 10-K for the fiscal year ended December 31, 1988 (Commission File Nos. 0-13192, 0-13807, 0-13964 and 0-14206).\n(5) Incorporated by reference from Registrant's Report on Form 10-K for the fiscal year ended December 31, 1990 (Commission File Nos. 0-13192, 0-13807, 0-13964 and 0-14206).\n(6) Incorporated by reference from Registrant's Report on Form 10-K for the fiscal year ended December 31, 1991 (Commission File Nos. 0-13192, 0-13807, 0-13964 and 0-14206).\n(7) Incorporated by reference from the Forms 8-K of Fund 12-B, Fund 12-C and Fund 12- D dated 4\/6\/92 (Commission File Nos. 0-13193, 0-13964 and 0-14206, respectively).\n(8) Incorporated by reference from Registrant's Report on Form 10-K for the fiscal year ended December 31, 1992 (Commission File Nos. 0-13192, 0-13807, 0-13964 and 0-14206).\n(b) Reports on Form 8-K.\nNone.\nSIGNATURES\nPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.\nCABLE TV FUND 12-A, LTD. CABLE TV FUND 12-B, LTD. CABLE TV FUND 12-C, LTD. CABLE TV FUND 12-D, LTD. Colorado limited partnerships By: Jones Intercable, Inc., their general partner\nBy: \/s\/ GLENN R. JONES Glenn R. Jones Chairman of the Board and Chief Dated: March 25, 1994 Executive Officer\nPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.","section_15":""}
{"filename":"215619_1993.txt","cik":"215619","year":"1993","section_1":"ITEM 1. BUSINESS\nDauphin Deposit Corporation (the \"Corporation\") is a bank holding company incorporated under the laws of the Commonwealth of Pennsylvania in 1974. The Corporation's principal banking subsidiaries are Dauphin Deposit Bank and Trust Company (\"Dauphin Bank\") and Farmers Bank and Trust Company of Hanover (\"Farmers Bank\") (hereinafter sometimes collectively referred to as the \"Banks\"), through which the Corporation provides banking services. The Banks are engaged in the commercial and retail banking and trust business including the taking of time and regular savings and demand deposits, the making of commercial and consumer loans and mortgage loans, the providing of credit cards, safe deposit services and the performance of personal, corporate and pension trust services. Auxiliary services such as cash management are provided to commercial customers. The Banks are Pennsylvania chartered bank and trust companies and are not members of the Federal Reserve System. The Banks' deposits are insured by the Federal Deposit Insurance Corporation (\"FDIC\") to the extent provided by law.\nEffective February 1, 1994, the Corporation sold 100% of the issued and outstanding stock of Farmers Bank, a Federal Savings Bank (\"Farmers Savings\") for a cash purchase price of $796,872. Farmers Savings operates one office in Baltimore City and one office in Baltimore County, Maryland. Both Farmers Bank and Farmers Savings became wholly-owned subsidiaries of the Corporation on July 1, 1992 as a result of the merger of FB&T Corporation with and into the Corporation. Farmers Savings had total assets of $12.7 million at December 31, 1993. The sale of Farmers Savings will not have a material impact on the financial condition or results of operations for the Corporation in 1994.\nThe Corporation is registered with and is subject to regulatory supervision by the Board of Governors of the Federal Reserve System (the \"Federal Reserve Board\") under the Bank Holding Company Act of 1956, as amended. Following the sale of Farmers Savings, the Corporation is no longer subject to regulatory supervision by the Office of Thrift Supervision (the \"OTS\"). The Corporation is restricted to activities which are found by the Federal Reserve Board to be bank-related and which are expected to produce benefits for the public that will outweigh any potentially adverse effects. The operations of the Banks, as well as those of other banks, are significantly affected by the monetary and credit policies and regulations of the federal regulatory agencies.\nDAUPHIN BANK - ------------\nDauphin Bank, which includes the Bank of Pennsylvania Division, operates primarily in central and eastern Pennsylvania. Dauphin Bank presently operates 83 banking offices with 60 automated teller machines serving Dauphin, Berks, Chester, Cumberland, Lancaster, Lebanon, Lehigh, Montgomery, Northampton and York Counties. In addition to its main office in Harrisburg, Dauphin County, Dauphin Bank owns an office building in Harrisburg which is used as an administrative center and includes one of the banking offices.\nAt December 31, 1993, Dauphin Bank had total deposits of $2,792,775,000 and total loans of $1,986,790,000.\nFARMERS BANK - ------------\nFarmers Bank operates primarily in the south central Pennsylvania counties of York, Adams, Franklin and Cumberland. Farmers Bank presently operates 15 banking offices with eight automated teller machines and one loan production office.\nAt December 31, 1993, Farmers Bank had total deposits of $498,578,000 and total loans of $376,464,000.\nDAUPHIN DEPOSIT CORPORATION\nNON-BANKING SUBSIDIARIES - ------------------------\nDauphin Life Insurance Company (the \"Insurance Company\") is an Arizona corporation which was formed in 1979 as a wholly-owned subsidiary of the Corporation. The Insurance Company reinsures credit life, health and accident insurance directly related to extensions of credit by Dauphin Bank and Farmers Bank and is presently limited to those activities by regulations of the Federal Reserve Board. Directors of the Insurance Company are officers or directors of the Corporation. Effective January 1, 1993, Center Square Life Insurance Company, a credit life insurance company acquired through the merger of FB&T Corporation on July 1, 1992, was merged into the Insurance Company.\nDauphin Investment Company (the \"Investment Company\") is a Delaware corporation which was formed in 1982 as a wholly-owned subsidiary of the Corporation. The Investment Company manages equity investments for the Corporation. Directors of the Investment Company are officers or directors of the Corporation.\nFinancial Realty, Inc. is a wholly-owned subsidiary of the Corporation. It is incorporated under the laws of the State of Delaware, and commenced operations in 1982. Financial Realty, Inc. holds title to certain bank buildings which are leased to Dauphin Bank.\nHopper Soliday & Co., Inc. (\"HSC\") is a wholly-owned subsidiary of the Corporation acquired effective July 1, 1991. HSC is a Delaware corporation which engages in municipal finance, institutional sales, financial advisory and other general securities businesses permitted for bank holding companies and their non-bank subsidiaries.\nFarmers Mortgage Company (\"Farmers Mortgage\") is a wholly-owned subsidiary of the Corporation acquired through the merger of FB&T Corporation on July 1, 1992. Farmers Mortgage was organized in 1983 as a Pennsylvania corporation. Farmers Mortgage makes and acquires loans and other extensions of credit secured by real estate mortgages and deeds of trust.\nFARMCO Realty, Inc. (\"FARMCO\") is a Pennsylvania corporation organized in 1967 as a subsidiary of Farmers Bank. Effective September 30, 1985, FARMCO became a wholly-owned subsidiary of FB&T Corporation and, as a consequence of the merger of FB&T Corporation with and into the Corporation on July 1, 1992, is now a wholly-owned subsidiary of the Corporation. FARMCO is a real estate holding company which holds property leased to Farmers Bank for its branch office locations.\nFinancial Land Corporation is a Pennsylvania corporation wholly-owned by Dauphin bank which was formed to hold assets acquired in loan liquidations.\nFinancial Mineral Corporation is a Pennsylvania corporation wholly-owned by Dauphin Bank which was formed to hold assets acquired in loan liquidations.\nReliance Consumer Discount Company (the \"Discount Company\") is a wholly-owned subsidiary of the Corporation acquired through the merger of FB&T Corporation on July 1, 1992. The Discount Company was organized in 1982 as a Pennsylvania corporation. The assets of the Discount Company were sold by the Corporation in October, 1992 and the Discount Company is no longer an operating subsidiary.\nCOMPETITION - -----------\nThe banking industry in the Banks' service areas continues to be extremely competitive, both among commercial banks and with other financial service providers such as consumer finance companies, thrifts, investment firms, mutual funds and credit unions. The increased competition has resulted from a changing legal and regulatory climate, as well as from the economic climate.\nDAUPHIN DEPOSIT CORPORATION\nSUPERVISION AND REGULATION - --------------------------\nThe Corporation is subject to regulation by the Pennsylvania Department of Banking, the Federal Reserve Board and the Securities and Exchange Commission. Prior to the sale of Farmers Savings on February 1, 1994, the Corporation also was subject to regulation by the OTS. The deposits of the Banks are insured by the FDIC and the Banks are members of the Bank Insurance Fund which is administered by the FDIC. The Banks are subject to regulation and supervision by the Pennsylvania Department of Banking and the FDIC.\nThe Corporation is required to file with the Federal Reserve Board an annual report and such additional information as the Federal Reserve Board may require pursuant to the Bank Holding Company Act of 1956, as amended (the \"BHC Act\"). The Federal Reserve Board may also make examinations of the Corporation and each of its non-bank subsidiaries. The BHC Act requires each bank holding company to obtain the approval of the Federal Reserve Board before it may acquire substantially all the assets of any bank, or before it may acquire ownership or control of any voting shares of any bank if, after such acquisition, it would own or control, directly or indirectly, more than five percent of the voting shares of such bank.\nPursuant to provisions of the BHC Act and regulations promulgated by the Federal Reserve Board thereunder, the Corporation may only engage in or own companies that engage in activities deemed by the Federal Reserve Board to be so closely related to the business of banking or managing or controlling banks as to be a proper incident thereto, and the Corporation must gain permission from the Federal Reserve Board prior to engaging in most new business activities.\nSubsidiary banks of a bank holding company are subject to certain restrictions imposed by the BHC Act on any extensions of credit to the bank holding company or any of its subsidiaries, investments in the stock or securities thereof, and on the taking of such stock or securities as collateral for loans to any borrower. A bank holding company and its subsidiaries are also prevented from engaging in certain tie-in arrangements in connection with any extension of credit, lease or sale of property or furnishing of services.\nSince March 4, 1990, the Pennsylvania Banking Code of 1965, as amended (the \"Banking Code\"), has authorized reciprocal interstate banking without any geographic limitation. Reciprocity between states exists when a foreign state's law authorizes Pennsylvania bank holding companies to acquire banks or bank holding companies located in that state on terms and conditions substantially no more restrictive than those applicable to such an acquisition by a bank holding company located in that state. Currently, the state banking statutes in Alaska, Delaware, Idaho, Indiana, Kentucky, Louisiana, Maine, Maryland, Michigan, Nevada, New Hampshire, New Jersey, New Mexico, New York, Ohio, Oklahoma, Oregon, Rhode Island, South Dakota, Texas, Utah, Vermont, Washington, West Virginia and Wyoming authorize interstate ownership of banks and bank holding companies in each of those states and Pennsylvania. Other states also are considering legislation to authorize reciprocal interstate banking. Congress may pass interstate banking legislation that would accelerate the authorization for interstate banking. The Pennsylvania Banking Department is responsible for determining whether the laws of other states satisfy the reciprocity requirements on a case-by-case basis and also shall determine whether the interstate banking statutes in the above states continue to be reciprocal following any amendments to such statutes.\nIn addition, pursuant to provisions of the Banking Code, since March 4, 1990, the number of Pennsylvania banks owned or controlled by a bank holding company is not limited.\nDuring 1989, Congress passed new legislation (the Financial Institutions Reform, Recovery and Enforcement Act of 1989) to provide a workable solution to the financial problems of the financial services industry. The direct effect of this legislation on the banking industry was to substantially increase the assessments banks pay to the FDIC for the insurance of bank deposits. The effect of this legislation on the Corporation was to increase the FDIC insurance assessment by approximately 84% or $3.1 million for 1991 over 1990. In 1992, the FDIC insurance assessment increase over 1991 was approximately $.8 million. During 1993, a risk-based assessment was\nDAUPHIN DEPOSIT CORPORATION\nestablished which requires banks to pay an assessment rate based on the combination of its capital and supervisory condition.\nOn December 19, 1991, the President signed into law the Federal Deposit Insurance Corporation Improvement Act of 1991 (\"FDICIA\"). The primary purpose of FDICIA was to authorize approximately $70 billion in Federal Government loans to the FDIC's Bank Insurance Fund, which is used to satisfy the deposit insurance claims of customers of failed banks and thrifts. FDICIA also created a strict uniform system of capital-based regulation, which became effective on December 19, 1992. FDICIA established five different levels of capitalization of financial institutions, with \"prompt corrective actions\" and significant operational restrictions imposed on institutions that are capital deficient under the categories. The five categories are: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized.\nTo be considered well capitalized, an institution must have a total risk- based capital ratio of at least 10%, a Tier 1 risk-based capital ratio of at least 6%, a leverage capital ratio of 5%, and must not be subject to any order or directive requiring the institution to improve its capital level. An institution falls within the adequately capitalized category if it has a total risk-based capital ratio of at least 8%, a Tier 1 risk-based capital ratio of at least 4% and a leverage capital ratio of at least 4%. Institutions with lower capital levels are deemed to be undercapitalized, significantly undercapitalized or critically undercapitalized, depending on their actual capital levels. In addition, the appropriate federal regulatory agency may downgrade an institution to the next lower capital category upon a determination that the institution is in an unsafe or unsound condition or is engaged in an unsafe or unsound practice. Institutions are required under FDICIA to monitor closely their capital levels and to notify their appropriate regulatory agency of any basis for a change in capital category. On December 31, 1993, the Corporation and its banking subsidiaries all exceeded the minimum capital levels of the well capitalized category.\nRegulatory oversight of an institution becomes more stringent with each lower capital category, with certain \"prompt corrective actions\" imposed depending on the level of capital deficiency.\nFDICIA also includes a provision (Section 303) that generally restricts federally insured state banks, such as the Banks, to activities permitted to national banks. On December 8, 1993, the FDIC published its final rule implementing Section 303. Under the rule, state chartered banks must obtain the FDIC's prior consent before engaging as a principal in any activity not permissible for a national bank, unless one of the exceptions contained in the rule applies. Among the exceptions are activities that the Federal Reserve Board, by regulation (Regulation Y) or order, has found to be closely related to banking for purposes of the BHC Act. Compliance with the rule is not expected to have a material adverse effect on the Banks' operations.\nOn December 21, 1993, the Federal Reserve Board, FDIC, OTS and Office of the Comptroller of the Currency published a Joint Notice of Proposed Rule Making relating to proposed Community Reinvestment Act regulations. The proposed regulations would substitute a performance based evaluation system in lieu of the 12 Assessment Factors set forth in the current regulations. If adopted, compliance with the proposed regulations may require changes in certain operating procedures and additional costs, both of which cannot currently be determined.\nEMPLOYEES - ---------\nAt December 31, 1993, the Corporation and its subsidiaries employed approximately 1,950 persons.\nMERGERS AND ACQUISITIONS - ------------------------\nOn January 1, 1994 (the \"Effective Date\"), Valley Bancorp., Inc., a Pennsylvania corporation and bank holding company (\"Valley\"), was merged with and into the Corporation (the \"Merger\"). The Merger was approved by the shareholders of Valley at a special shareholders meeting held on October 21, 1993.\nDAUPHIN DEPOSIT CORPORATION\nPursuant to the Agreement and Plan of Merger dated June 16, 1993 (the \"Plan of Merger\"), by and between Valley and the Corporation, each issued and outstanding share of Valley Common Stock was converted into 2.1401 shares of Dauphin common stock, par value $5.00 per share (\"Dauphin Common Stock\"), and cash in lieu of fractional shares of Dauphin Common stock.\nAs of the Effective Date, there were 1,236,480 shares of Valley Common Stock issued and outstanding, including 21,000 shares owned by the Corporation. As a result of the Merger, outstanding Valley shares (other than those owned by the Corporation, which were canceled) were converted into approximately 2,600,643 shares of Dauphin Common Stock, plus cash in the approximate aggregate amount of $15,767 in lieu of fractional share interests. On December 31, 1993, the last trading day before the Merger, the closing sale price of Dauphin Common Stock in the NASDAQ National Market System was $25.25. Thus, the total consideration paid by the Corporation to the holders of Valley Common Stock in dollar equivalent terms was approximately $65.7 million as of the Effective Date.\nSimultaneously with the Merger of Valley into the Corporation, Valley Bank and Trust Company (\"Valleybank\"), a subsidiary of Valley and a Pennsylvania chartered bank, was merged (the \"Bank Merger\") with and into Dauphin Bank, with Dauphin Bank being the surviving corporation. Valleybank, which operates 13 branch banking offices in south central Pennsylvania (primarily Franklin County, Pennsylvania), will be operated after the Effective Date as the Valleybank Division of Dauphin Deposit Bank.\nValley had total assets of $324 million at December 31, 1993. The Merger was accounted for as a pooling-of-interests.\nITEM 2.","section_1A":"","section_1B":"","section_2":"ITEM 2. PROPERTIES\nThe Corporation's principal office is located in Dauphin Bank's main banking offices at 213 Market Street, Harrisburg, Pennsylvania. The Corporation owns no real estate.\nThe Banks, Financial Realty, Inc. and FARMCO Realty, Inc. own 67 of the branch offices and lease 35 other offices including two leases which are treated as capitalized leases for financial reporting purposes. Hopper Soliday & Co., Inc. leases three of its sales offices. Leases expire intermittently through 2010 and most contain options to renew.\nAggregate annual rentals for real estate and equipment paid during the Corporation's last fiscal year did not exceed five percent of its operating expenses.\nITEM 3.","section_3":"ITEM 3. LEGAL PROCEEDINGS\nVarious legal actions or proceedings are pending involving Dauphin or its subsidiaries. Management believes that the aggregate liability or loss, if any, will not be material.\nITEM 4.","section_4":"ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS\nNot applicable.\nITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT\nThe names, ages and positions of all of the executive officers of the Corporation as of February 3, 1994 are listed below along with their business experience during the past five years. Executive officers are appointed by the Board of Directors. There are no family relationships among these executive officers, nor any arrangement or understanding between any executive officer and any other person pursuant to which the executive officer was selected.\nDAUPHIN DEPOSIT CORPORATION\nDAUPHIN DEPOSIT CORPORATION PART II\nITEM 5.","section_5":"ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS\nPRICE RANGE OF DAUPHIN COMMON STOCK AND DIVIDENDS PAID\nThe price information provided below reflects actual high, low and closing sales prices as quoted on the NASDAQ National Market System.\nDAUPHIN DEPOSIT CORPORATION\nITEM 6.","section_6":"ITEM 6. SELECTED FINANCIAL DATA\nDAUPHIN DEPOSIT CORPORATION ITEM 7.","section_7":"ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS\nThis section presents management's discussion and analysis of the financial condition and results of operations of Dauphin Deposit Corporation and subsidiaries (Dauphin), including Dauphin Deposit Bank and Trust Company, which includes the Bank of Pennsylvania Division, and Farmers Bank and Trust Company of Hanover (the Banks). This discussion and analysis should be read in conjunction with the financial statements which appear elsewhere in this report.\nIn 1993 the provisions of Statement of Financial Accounting Standards No. 112 (SFAS 112), \"Employers' Accounting for Postemployment Benefits\" were adopted. Effective January 1, 1992, Dauphin adopted the provisions of Statement of Financial Accounting Standards No. 106 (SFAS 106), \"Employers' Accounting for Postretirement Benefits Other Than Pensions\". Also during 1992, Dauphin adopted the provisions of Statement of Financial Accounting Standards No. 109 (SFAS 109), \"Accounting for Income Taxes\".\nEffective July 1, 1991, Hopper Soliday & Co., Inc. (Hopper Soliday), a securities broker\/dealer, was acquired for $3.3 million in cash pursuant to a stock purchase agreement signed in November 1990. The acquisition was accounted for using the purchase method of accounting. Therefore, the results of operations of Hopper Soliday since the date of acquisition are included with the results of Dauphin.\nRESULTS OF OPERATIONS\nSUMMARY\nDauphin Deposit Corporation recorded net income of $64.5 million for 1993, compared with $57.2 million recorded in 1992. On a per common share basis, net income rose to $2.15 from $1.93 in 1992 and $1.84 in 1991. The 1993 results of operations represent the 22nd consecutive year that Dauphin has reported increased earnings per share.\nReturn on average total assets was 1.43% for 1993, compared with 1.31% for 1992 and 1.29% for 1991. Return on average equity for 1993 was 14.33%, compared with 14.07% for 1992 and 14.75% for 1991.\nDuring 1993 average earning assets increased 3.9% to $4.2 billion and the net interest margin increased from 4.11% to 4.16%. This growth in earning assets and the improved net interest margin produced an increase of $8.9 million or 5.3% in fully taxable equivalent net interest income.\nDauphin continues to maintain a high quality loan portfolio. The percentage of non-performing assets, comprised of non-accrual loans, restructured loans and other real estate owned represented 1.10% of year-end loans and other real estate owned, down from 1.26% at December 31, 1992. The allowance for loan losses was maintained at 1.53% of year-end loans. The allowance exceeds non- performing loans by 56% and includes $17.7 million which is not allocated to any specific loan category. Because of this strong asset quality, the provision for loan losses was decreased by $1.6 million in 1993.\nNon-interest income, other than securities gains, increased $5.0 million, or 10.0%. Included in other non-interest income is a $3.6 million non-recurring tax refund from a settlement with the Commonwealth of Pennsylvania. Increased income was also the result of growth in fiduciary activities, service charges on deposit accounts, credit card related activities, mortgage sales and servicing and letter of credit fees. Offsetting these increases somewhat was a decline in commission and fee income generated by Hopper Soliday.\nNon-interest expense items increased $3.9 million, or 3.2%. Effective January 1, 1993, Dauphin adopted SFAS 112. The incremental effect of SFAS 112 was to increase non-interest expense by $.5 million. Also contributing to this increase were normal salary adjustments and controlled additions to staffing levels, a $1.0 million increase in professional fees and increases in other miscellaneous expenses. 1992 included $2.4 million in merger related expenses in connection with the acquisition of Farmers Bank and Trust Company of Hanover.\nDAUPHIN DEPOSIT CORPORATION\nTABLE 1--AVERAGE BALANCES, RATES AND INTEREST INCOME AND EXPENSE SUMMARY (TAXABLE EQUIVALENT BASIS)\n- -------- (1) Includes fees on loans. Average loan balances include non-accruing loans. (2) Includes home equity loans. (3) Loans outstanding net of unearned income.\nDAUPHIN DEPOSIT CORPORATION\nNET INTEREST INCOME\nNet interest income is the product of the volume of average earning assets and the average rates earned on them, less the volume of average interest bearing liabilities and the average rates paid thereon. The amount of net interest income is affected by changes in interest rates, account balances, or volume, and the mix of earning assets and interest bearing liabilities.\nFor analytical purposes, net interest income is adjusted to a taxable equivalent basis. This adjustment facilitates performance comparisons among taxable and tax exempt assets by increasing tax exempt income by an amount equivalent to the federal income taxes which would have been paid if this income were taxable at the federal statutory rate of 35% for 1993 and 34% for prior years.\nTable 2 presents the net interest income on a fully taxable equivalent basis for each of the years in the three year period ended December 31, 1993.\nTABLE 2--NET INTEREST INCOME\nTABLE 3--RATE-VOLUME ANALYSIS OF CHANGES IN NET INTEREST INCOME\nNote: The changes not due solely to change in volume or solely to change in rate are allocated proportionally to both change in volume and rate.\nNet interest income on a fully taxable equivalent basis totaled $176.5 million in 1993, an increase of $8.9 million or 5.3% from $167.6 million in 1992. Net interest income in 1992 was up 7.8% from $155.5 million in 1991.\nDAUPHIN DEPOSIT CORPORATION\nTable 1 presents average balances, taxable equivalent interest income and expense and average rates earned and paid for Dauphin's assets and liabilities. Table 3 analyzes the changes attributable to the volume and rate components of net interest income.\nDuring 1993 there was an increase in net interest income of $12.9 million due to changes in volume and a decrease of $4.0 million due to changes in rate. In 1992 there was an increase of $13.1 million due to changes in volume and a decrease of $1.0 million due to changes in rate.\nThe change in the net interest margin attributable to interest rates can be understood by analyzing the interest rate spread and the net interest margin on earning assets. While the interest rate spread considers only the difference between the average rate earned on earning assets and the average rate paid on interest bearing liabilities, the net interest margin takes into account the contribution of assets funded by interest free sources.\nAs reflected in Table 4, average earning assets increased to $4.2 billion in 1993 from $4.1 billion in 1992 and $3.8 billion in 1991. The interest rate spread for 1993 was 3.63% compared with 3.50% for 1992 and 3.30% for 1991. The net interest margin for 1993 was 4.16% compared with 4.11% for 1992 and 4.05% for 1991.\nTABLE 4--INTEREST RATE SPREAD AND NET INTEREST MARGIN ON EARNING ASSETS\nInterest rates continued to fall during 1993. The average prime rate in 1993 was 6.00% compared with 6.25% in 1992. The average federal funds rate decreased to 3.02% for 1993 compared with 3.53% for 1992. During 1993, compared with 1992, the average yield on earning assets decreased 77 basis points while the average cost of funds decreased 90 basis points resulting in an increase in the interest rate spread of 13 basis points. The yield on the investment portfolio decreased 73 basis points due to the reinvestment of maturities at significantly lower rates. Average loans, which represent the highest yielding earning assets, increased $56.5 million or 2.6% and produced a yield of 7.86% in 1993 compared with 8.63% in 1992. This 77 basis point decrease in yield was caused by the decrease in the prime interest rate affecting variable rate loans, the amount of refinancings of fixed rate loans and the interest rates on consumer loans compared with 1992. Average loans represented 52.9% of the average earning assets for 1993. The cost of interest bearing deposits decreased to 3.89% in 1993 compared with 4.84% in 1992. The overall interest rates offered on these deposits continued to decline during 1993. Additionally, the mix of these deposits continued to change significantly as depositors allowed longer term certificates of deposit to mature and decided to reinvest these proceeds into shorter term instruments. The decrease in the cost of short-term borrowings (52 basis points) was caused primarily by the decline in the federal funds rate. As in recent prior years, the increase in the net interest margin, compared with the increase in the interest rate spread, was negatively affected by the decreased value of non-interest bearing funds in a lower interest rate environment.\nDAUPHIN DEPOSIT CORPORATION\nDuring 1992, compared with 1991, the average yield on earning assets decreased 130 basis points while the average cost of interest bearing liabilities decreased 150 basis points resulting in an increase in the interest rate spread of 20 basis points. The increase in the interest rate spread was the result of several factors. The yield on the investment portfolio decreased only moderately (100 basis points) due to the longer maturity structure of the portfolio, the amount of state and municipal securities in the portfolio at higher rates and the increased yield generated from mortgage-backed securities. Average loans increased $49.6 million or 2.3% and represented 53.6% of the average earning assets for 1992 compared with 55.7% for 1991. The average prime interest rate for 1992 was 6.25% compared with 8.48% for 1991, a decrease of 223 basis points. This decrease in the average prime interest rate was the primary reason for the 151 basis point decrease in the overall average loan yield for 1992 compared with 1991. The cost of interest bearing deposits decreased to 4.84% in 1992 compared with 6.26% in 1991. This decline was caused by lower rates offered and the change in the mix of deposits from longer term instruments to shorter term instruments. Finally, the average cost of short- term borrowings decreased 209 basis points during 1992 as a result of the lower federal funds rate during 1992 compared with 1991. While the interest rate spread increased 20 basis points, the net interest margin increased six basis points. As previously mentioned, the net interest margin was negatively affected by the decreased value of non-interest bearing funds in a lower interest rate environment.\nPROVISION FOR LOAN LOSSES\nThe provision for loan losses charged against earnings was $9.4 million in 1993 compared with $10.9 million in 1992, a decrease of 14.4%. This decrease was mainly due to the good asset quality of the loan portfolio. The provision is based on management's estimate of the amount needed to maintain an adequate allowance for loan losses. This estimate is based on the review of the loan portfolio, the level of net credit losses, past loan loss experience, the general economic outlook and other factors that management feels are appropriate.\nManagement takes an aggressive approach to charging off loans partly due to its analysis of the general economic outlook. This does not necessarily indicate a material decline in the asset quality of the loan portfolio.\nSeveral improvements were seen in certain measures of loan portfolio performance. The ratio of net charge-offs to average loans decreased to .31% in 1993 from .33% in 1992 and the level of non-accruing loans and restructured loans decreased to $23.1 million (.98% of year-end loans) from $24.2 million (1.10% of year-end loans) at December 31, 1992.\nNON-INTEREST INCOME\nTotal non-interest income increased $4.3 million or 7.9% in 1993 compared with an increase of $10.0 million or 22.7% in 1992. Excluding gains on investment securities, the 1993 increase was $ 5.0 million or 10.0% compared with $8.8 million or 21.4% for 1992.\nIncome from fiduciary activities increased $.2 million or 1.1% in 1993. Revenue in 1993 was negatively impacted by a decline in trust income fees as interest rates fell during 1993. Also, estate fees declined in 1993 when compared to 1992. The increase of $.5 million or 3.9% in 1992 was primarily the result of revenue improvements in the areas of corporate services and employee benefits.\nService charges on deposit accounts increased $1.1 million or 9.6% during 1993. In 1992, this increase was $.8 million or 8.1%. Management continuously monitors the fee structure and makes changes where appropriate. These increases reflect both the growth in fee-based accounts and changes in the fee structure. Included in 1993 is $.5 million from new fees on certain individual retirement accounts.\nOther service charges and fees increased $1.0 million or 10.8% in 1993 compared with a decrease of $.6 million or 6.6% in 1992. The increase in 1993 was due to increases in credit card related activities, mortgage sales and servicing and letter of credit fees. The decrease for 1992 was primarily the result of the negative impact on the valuation of the excess servicing rights due to the large amount of home mortgage refinancings in 1992.\nDAUPHIN DEPOSIT CORPORATION\nBroker\/dealer commissions and fees represent the income generated by Hopper Soliday. This income is generated from underwriting securities which are predominantly general obligations of Central Pennsylvania municipalities, providing financial advisory services, selling securities to individual and institutional investors and other related activities.\nSecurities gains totaled $3.2 million in 1993 as compared with $4.0 million in 1992 and $2.8 million in 1991. The sale of debt securities generated $1.5 million in net gains for 1993. The sale of equity securities generated $1.7 million in net gains. During 1992 the sale of debt securities generated $2.9 million in net gains compared with $1.1 million in net gains from equity securities transactions.\nOther non-interest income increased $3.5 million for 1993 compared with 1992. In 1992, compared with 1991, other non-interest income increased $.4 million. In December 1993 a settlement with the Commonwealth of Pennsylvania was entered into which resulted in a refund of $3.6 million in previously paid Bank Shares Tax plus interest. This non-recurring refund is the result of litigation contesting the Commonwealth's ability to tax United States Obligations. Gains from loan sales, primarily fixed rate residential mortgages, included in other non-interest income amounted to $1.6 million for 1993 and 1992 compared with $1.3 million for 1991.\nTABLE 5--NON-INTEREST INCOME\nNON-INTEREST EXPENSE\nNon-interest expense increased $3.9 million or 3.2% in 1993 compared with an increase of $14.4 million or 13.4% in 1992. Without including the expenses of Hopper Soliday, the increase for 1993 would have been $4.2 million or 3.8% and $7.8 million or 7.5% for 1992.\nSalaries and employee benefits increased .9% in 1993 and 17.7% in 1992. The increase for 1993 was, for the most part, due to normal salary adjustments and increased benefits costs, which were partially offset by a $.3 million decrease in Hopper Soliday's salaries and employee benefits due to the decreased commission and fee income produced. Without Hopper Soliday, salaries and employee benefits increased $1.1 million or 2.0% for 1993 compared with 1992. For 1992, compared with 1991, this increase was $4.5 million or 8.8%. 1993 includes the impact of adopting SFAS 112 which amounted to an incremental cost of $.5 million. As explained in more detail in Note 13 of the Notes to Consolidated Financial Statements, SFAS 112 changed the practice of accounting for postemployment benefits from a pay-as-you-go basis to an accrual basis. Full-time equivalent employees increased 1.7% to 1,950 at December 31, 1993 compared with 1,917 at year-end 1992. The ratio of average assets (millions) per full-time equivalent employee was 2.31 at December 31, 1993 compared with 2.27 at December 31, 1992.\nDAUPHIN DEPOSIT CORPORATION\nAll other non-interest expense items increased $3.3 million or 5.6% in 1993 and $5.0 million or 9.1% in 1992. Without the effect of Hopper Soliday, the increase would have been $3.1 million or 5.4% for 1993 and $3.3 million or 6.2% for 1992. The increase for 1993 was primarily the result of increases in insurance, occupancy expenses, professional fees, computer processing, purchased software costs, merchant processing interchange expense, advertising costs and $.5 million in merger expenses in connection with the acquisition of Valley Bancorp., Inc. (see Note 2 of the Notes to Consolidated Financial Statements). The increase in 1992 included $2.4 million in merger expenses in connection with the acquisition of Farmers Bank and Trust Company of Hanover along with increases in occupancy expenses, professional fees, deposit insurance, computer processing and purchased software costs. Increases in computer processing and purchased software costs are, in most cases, brought about by increases in volume of transactions and the acquisition of new software and hardware for future growth and expansion.\nDuring 1989 Congress passed legislation (The Financial Institutions Reform, Recovery and Enforcement Act of 1989) to provide a workable solution to the financial problems of the financial services industry. The direct effect of this legislation on the banking industry was to substantially increase both the expense and burden of regulation and the assessment banks pay to the FDIC, the entity which insures a bank's depositors of their funds deposited with a bank. The effect of this increase on Dauphin was to increase this expense by 11.3% or $.8 million for 1992. During 1993 a risk-based assessment was established which required banks to pay an assessment rate based on the combination of its capital and supervisory condition.\nTABLE 6--NON-INTEREST EXPENSE\nPROVISION FOR INCOME TAXES\nIncome tax expense amounted to $20.5 million in 1993 as compared with $17.2 million in 1992 and $13.3 million in 1991. Dauphin's effective tax rate for 1993 was 24.1% compared with 23.1% in 1992 and 20.1% in 1991. In 1992 Dauphin adopted the provisions of SFAS 109 (see Note 1 of the Notes to Consolidated Financial Statements) and elected to restate prior years financial statements. In connection with this adoption, net income for the years 1992 and 1991 was increased by $.5 million and $1.2 million, respectively. Additionally, during 1993 new tax legislation was enacted retroactive to January 1, 1993. The immediate impact, among other things, was to increase the corporate tax rate from 34% to 35%. This increased rate resulted in additional income tax expense of $.3 million for 1993. For a more comprehensive analysis of income tax expense, refer to Note 12 of the Notes to Consolidated Financial Statements.\nDAUPHIN DEPOSIT CORPORATION\nFINANCIAL CONDITION\nSOURCES AND USES OF FUNDS\nDauphin's financial condition can be evaluated in terms of trends in its sources and uses of funds. The comparison of average balances in Table 7 indicates how Dauphin has managed these elements. Average funding uses increased $157.7 million or 3.9% in 1993 as compared with an increase of $247.8 million or 6.5% in 1992.\nTABLE 7--SOURCES AND USES OF FUNDS\n- -------- (1) Non-interest bearing liabilities and stockholders' equity less non-interest bearing assets.\nINVESTMENT SECURITIES AND OTHER SHORT-TERM INVESTMENTS\nAverage short-term investments and investment securities, in the aggregate, increased $77.3 million or 4.1% during 1993 compared with an increase of $192.1 million or 11.4% during 1992. During both 1993 and 1992 funds provided from increases in deposits and short-term borrowings exceeded the increase in the loan portfolio.\nThe balances maintained for short-term investments and investment securities are, for the most part, supported by short-term deposits such as money market and NOW accounts, short-term borrowings and time deposits. As reflected in Table 8, the average maturity of the investment portfolio was 6.8 years at year-end 1993. Included in the portfolio are state and municipal securities and mortgage-backed securities that have a longer term maturity but are sometimes either called before maturity or have repricing characteristics that occur before final maturity. The average life to call or repricing of the portfolio was 1.8 years at December 31, 1993.\nDAUPHIN DEPOSIT CORPORATION\nDauphin had no investments in any foreign country that aggregated more than 1% of assets at December 31, 1993, 1992 or 1991.\nAt December 31, 1993, net unrealized appreciation in the portfolio was $63.2 million consisting of gross unrealized gains of $64.9 million and gross unrealized losses of $1.7 million. Dauphin will adopt Statement of Financial Accounting Standards No. 115 (SFAS 115), \"Accounting for Certain Investments in Debt and Equity Securities\" as of January 1, 1994. SFAS 115 addresses the accounting and reporting for investments in equity securities that have readily determinable fair values and for all investments in debt securities. These investments are to be classified in one of three categories and accounted for as follows: 1) debt securities that a company has the positive intent and ability to hold to maturity are classified as held-to-maturity securities and reported at amortized cost; 2) debt and equity securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and reported at fair value, with unrealized gains and losses included in earnings; and 3) debt and equity securities not classified as either held-to-maturity or trading securities are classified as available-for-sale securities and reported at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of stockholders' equity.\nManagement has determined that the entire investment securities portfolio will be classified as available-for-sale. The impact of this change will result in an increase in investment securities of $63.2 million and an increase in stockholders' equity of $41.1 million, representing the after tax impact.\nTABLE 8--ANALYSIS OF INVESTMENT SECURITIES\nLOANS\nAverage loans increased $56.5 million or 2.6% during 1993 compared with an increase of $49.6 million or 2.3% in 1992. Loan demand improved slightly as 1993 progressed.\nThe economy in our market area is diversified and has been relatively stable. This affords Dauphin the opportunity to select quality commercial credits and stabilizes our consumer business.\nDAUPHIN DEPOSIT CORPORATION\nLoan balances during 1993 were influenced by the improving economy and, as a result, balances in both the commercial and consumer areas increased. Additionally, as interest rates continued to fall, many residential mortgages were refinanced into lower fixed rate mortgages. These fixed rate mortgages were sold in the secondary mortgage market. It has been Dauphin's policy to sell and continue to service these mortgages in order to avoid taking interest rate risk.\nDauphin's policy is to make the vast majority of its loans and commitments in the market area it serves. This tends to reduce risk and gives Dauphin the opportunity to deliver its many products to the same customer base. Dauphin had no foreign loans in its portfolio at December 31, 1993.\nTABLE 9--LOANS OUTSTANDING, NET OF UNEARNED INCOME\n- -------- (1) Includes home equity loans\nTABLE 10--LOAN MATURITIES AND INTEREST SENSITIVITY (1)\n- -------- (1) Excludes residential mortgages, consumer loans and lease financing\nDEPOSITS\nAverage deposits, including non-interest bearing demand deposits, decreased $57.7 million or 1.7% during 1993 compared with an increase of $59.0 million or 1.8% in 1992. Dauphin's subsidiary banks, like many other commercial banks, have experienced slow deposit growth as the competition for depositors' funds has become more intense. Competition for deposits has come from other commercial banks, thrift institutions, credit unions, brokerage houses and mutual funds. Deposit growth is also affected by the movement of interest rates. During\nDAUPHIN DEPOSIT CORPORATION 1993 and 1992 interest rates offered on time deposits have fallen substantially, whereby rates offered on longer term instruments are not materially higher than short-term instruments. This resulted in a greater increase in interest bearing demand deposits and savings deposits compared with certificates of deposit. Included in interest bearing deposits are certain individual retirement accounts (IRA) totaling $157.8 million which are invested in 18 month variable interest rate products with a minimum interest rate of 10%. During 1993, Dauphin charged a service fee on these products, and initiated the process to discontinue them in accordance with the terms of the IRA contract. Litigation was filed against Dauphin challenging the right to charge fees on these particular products. The right to terminate this product is also in dispute. Management intends, however, to vigorously defend its entitlement to charge fees and its right to terminate these products in accordance with their terms. Also during 1993 and 1992 average time deposits of $100,000 or more decreased $37.4 million and $19.7 million, respectively. This funding source was replaced by lower costing overnight federal funds. Additionally, the growth of non-interest bearing deposits has been relatively slow in recent years. The percentage of average non-interest bearing demand deposits to average total deposits amounted to 11.1% in 1993, 10.1% for 1992 and 9.9% for 1991. Dauphin's banking subsidiaries have remained interest rate competitive and have introduced new deposit products to maintain and attract deposits.\nSHORT-TERM BORROWINGS\nAverage short-term borrowings increased $163.0 million or 33.9% during 1993 compared with an increase of $108.3 million or 29.0% in 1992. Short-term borrowings are primarily represented by federal funds purchased and securities sold under agreements to repurchase. The level of short-term borrowings is dependent upon many items such as loan growth, deposit growth and the interest rates paid for these funds. As previously mentioned, a portion of the growth in 1993 and 1992 was the result of a need to replace the decrease in time deposits of $100,000 or more. The average cost of short-term borrowings decreased from 5.62% in 1991 to 3.53% in 1992 and to 3.01% in 1993.\nNON-PERFORMING ASSETS\nTable 11 reflects Dauphin's non-performing assets for the five years ended December 31, 1993. Dauphin's policy is to discontinue the accrual of interest on commercial loans on which principal or interest is past due 90 days or more and on commercial mortgages on which principal or interest is past due 120 days or more. Consumer loans, excluding residential mortgages, which are 150 days past due are charged off. Residential mortgages are placed on non-accrual status after becoming 180 days past due. When a loan is placed on non-accrual status, any unpaid interest is generally charged against income. Management believes that strict adherence to this policy with regard to non-accruals and charge-offs will insure that the historically high quality of the loan portfolio will be maintained. Other real estate owned represents property acquired through foreclosure or considered to be in an in-substance foreclosure status.\nLoan quality is maintained through diversification of risk, strict enforcement of credit control practices and continued monitoring of the loan portfolio.\nAt December 31, 1993, Dauphin had no loan concentrations exceeding 10% of total loans. Loan concentrations are considered to exist when there are amounts loaned to a multiple number of borrowers engaged in similar activities which would cause them to be similarly affected by economic or other industry specific conditions.\nLoans which are not included in non-performing and are current as to payments of principal and interest but have a somewhat higher than normal risk of becoming non-accrual or reduced rate in the future are estimated to total approximately $7.0 million at December 31, 1993 compared with $7.4 million at December 31, 1992.\nDAUPHIN DEPOSIT CORPORATION\nFederal regulatory authorities have defined \"highly leveraged transactions\" (HLT's) as a credit of $20 million or more which is extended in connection with an acquisition by, or a restructuring of, an organization, and the extension of credit results in \"high leverage\" or is made to an already highly leveraged organization. It is the policy of Dauphin to consider financing HLT's for its customers or for potential customers in its market area which usually involves the change of ownership from one generation of a family to the next, or from present owners to the existing management team. The amount of HLT's, as defined by the Federal regulatory authorities, was $10.2 million at December 31, 1993 and $7.2 million at December 31, 1992 and represents Dauphin's portion of a shared national credit within its market area.\nTABLE 11--NON-PERFORMING ASSETS\nALLOWANCE FOR LOAN LOSSES\nThe allowance for loan losses is based on management's continuing evaluation of the loan portfolio, assessment of economic conditions, the diversification and size of the portfolio, adequacy of collateral, past and anticipated loss experience and the amount and quality of non-performing loans. Table 12 presents the allocation of the allowance for loan losses by major loan category for the past five years. The specific allocations in any particular category may prove excessive or inadequate and consequently may be re-allocated in the future to reflect then current conditions. Accordingly, the entire allowance is considered available to absorb losses in any category.\nTABLE 12--ALLOCATION OF ALLOWANCE FOR LOAN LOSSES\nDAUPHIN DEPOSIT CORPORATION\nManagement believes that the allowance for loan losses is adequate. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Banks' allowance for loan losses. Such agencies may require the Banks to recognize additions to the allowance based on their judgments of information available to them at the time of their examination.\nTable 13 reflects an analysis of the allowance for loan losses for the past five years.\nThe provision for loan losses of $9.4 million exceeded the net charge-offs of $6.9 million, thereby increasing the allowance for loan losses from $33.6 million in 1992 to $36.1 million in 1993. The allowance for loan losses as a percentage of year-end loans was 1.53% at December 31, 1993 and 1992.\nTABLE 13--ANALYSIS OF ALLOWANCE FOR LOAN LOSSES\nIn May 1993, Statement of Financial Accounting Standards No. 114 (SFAS 114), \"Accounting by Creditors for Impairment of a Loan\" was issued. SFAS 114 addresses the accounting by creditors for impairment of certain\nDAUPHIN DEPOSIT CORPORATION loans. SFAS 114 requires that impaired loans that are within the scope of the Statement be measured based on the present value of expected future cash flows discounted at the loan's effective interest rate or, at the loan's market price of the fair value of the collateral if the loan is collateral dependent. Management presently does not know and cannot reasonably estimate the impact of SFAS 114 on its financial statements. SFAS 114 is effective for fiscal years beginning after December 15, 1994 and earlier adoption is permitted. Dauphin expects to adopt SFAS 114 in January 1995.\nLIQUIDITY\nLiquidity management involves meeting the funds flow requirements of customers who may be either depositors wanting to withdraw funds, or borrowers needing assurance that sufficient funds will be available to meet their credit needs.\nLiquidity from asset categories is provided primarily through investment securities with maturities of less than one year and short-term investments, such as deposits with other banks, federal funds sold and other short-term investments. Dauphin's asset liquidity position is strong because of the investment portfolio's maturity structure (Table 8), the amount of short-term investments, the funds provided by loan maturities (Table 10) and the funds available to Dauphin by established federal funds lines of credit. Additionally, in 1991 Dauphin Deposit Bank and Trust Company became a member of the Federal Home Loan Bank of Pittsburgh. These established credit arrangements provide the Banks with increased liquidity.\nThe generation of deposit balances is the primary source of liquidity from liability categories. Total deposits decreased by $100.3 million or 2.9% from year-end 1992 to year-end 1993. As previously mentioned, this funding source was replaced by lower costing overnight federal funds. Table 14 reflects the growth in the major classifications of deposits by comparing the year-end balances for the past three years and Table 15 reflects the maturity of large dollar deposits for the same periods. Federal funds purchased and other forms of short-term borrowings are also significant sources of liquidity. Dauphin continues to maintain diverse liability funding sources.\nTABLE 14--DEPOSITS BY MAJOR CLASSIFICATION\nTABLE 15--MATURITY OF TIME DEPOSITS OF $100,000 OR MORE\nDAUPHIN DEPOSIT CORPORATION\nCAPITAL RESOURCES\nTotal stockholders' equity increased $42.1 million or 9.8% in 1993 compared with an increase of $50.0 million or 13.1% in 1992. The increase for 1993 was, for the most part, retained earnings or internal capital generation. The increase for 1992 was primarily the result of retained earnings and the $12.6 million net proceeds received from the reissuance of 700,000 shares of previously acquired treasury stock in a public offering. The purpose of the offering was to enable the acquisition of Farmers Bank and Trust Company of Hanover to be accounted for as a pooling-of-interests. The proceeds have been used for general corporate purposes. The ratio of average equity to average assets amounted to 9.98% for 1993, compared with 9.34% for 1992 and 8.77% for 1991. Internal capital generation is measured as the percent of return on average equity multiplied by the percent of earnings retained. The resulting internal capital generation percentage amounted to 8.8% for 1993 compared with 8.4% for 1992 and 9.1% for 1991.\nCommon measures of adequate capitalization for banking institutions are ratios of capital to assets. These ratios indicate the proportion of permanently committed funds to the total asset base. Guidelines issued by federal regulatory authorities require both banks and bank holding companies to meet minimum risk-based capital ratios in an effort to make regulatory capital more responsive to the risk exposure related to a bank's on- and off-balance sheet items. Risk-based capital guidelines redefine the components of capital, categorize assets into different risk classes and include certain off-balance sheet items in the calculation of capital requirements. The components of risk- based capital are segregated as Tier 1 and Tier 2 capital. Tier 1 capital is composed of total stockholders' equity reduced by goodwill and other intangible assets. Tier 2 capital is the allowance for loan losses (with certain limitations) and qualifying debt obligations. Regulators have also adopted minimum Tier 1 leverage ratio standards. Tier 1 capital for the leverage ratio is the same as the Tier 1 capital definition in the risk-based capital guidelines. Table 16 presents the capital ratios for Dauphin for the past three years calculated at year-end in accordance with these guidelines. At December 31, 1993, Dauphin and its banking subsidiaries exceeded all capital requirements.\nTABLE 16--CAPITAL RATIOS\nIn January 1994, Dauphin announced that the Board of Directors authorized the repurchase of up to 1,000,000 shares of its outstanding common stock. Dauphin expects to use available cash to fund the share repurchases which will be made from time to time on the open market or in privately negotiated transactions. Dauphin will use the shares for general corporate purposes, including the Employee Stock Purchase Plan,Stock Option Plan and other appropriate uses.\nINTEREST RATE SENSITIVITY\nInterest rate sensitivity management seeks to avoid fluctuating net interest margins and to enhance consistent growth of net interest income through periods of changing interest rates.\nRates on different assets and liabilities within a single maturity category adjust to changes in interest rates to varying degrees and over varying periods of time. The relationships between prime rates and rates paid on purchased funds are not constant over time. The rate of growth in interest free sources of funds will influence\nDAUPHIN DEPOSIT CORPORATION the level of interest sensitive funding sources. In addition, the absolute level of interest rates will affect the volume of earning assets and funding sources. As a result of these limitations, the interest sensitivity gap is only one factor to be considered in estimating the net interest margin.\nTable 17 presents an interest sensitivity analysis of Dauphin's assets and liabilities at December 31,1993 for several time intervals. This table reflects the interest sensitivity gap in two formats. The detailed presentation represents management's position on certain interest bearing deposits, such as passbook savings and NOW accounts, as not being subject to immediate repricing. Management is of the opinion that historical interest rate movements indicate that these products do not reprice in direct relation to the change in the interest rate environment. Additionally, these products have provided Dauphin with a stable core deposit base. Therefore, the detailed presentation within Table 17 attempts to reflect these products in the appropriate interest sensitivity time interval based on their interest sensitivity to the movement of other interest rates. Also included in Table 17 is a summary of the gap, as viewed by certain regulatory authorities, which presents these interest bearing deposits as being subject to immediate repricing.\nTABLE 17--INTEREST SENSITIVITY ANALYSIS\nAn interest sensitivity analysis is measured as of a specified date and, therefore, is subject to almost immediate change as the maturities of assets are reinvested and liabilities, such as deposits and short-term borrowings, are received or mature. The mismatch of assets and liabilities in a specific time frame is referred to as a sensitivity gap. An asset sensitive gap will benefit Dauphin during periods of rising interest rates, while a liability sensitive gap will benefit Dauphin during declining rates. The gap reflects Dauphin's sensitivity to rate changes over a period of time. Dauphin continuously monitors and adjusts the gap position, taking into consideration current interest rate projections, and maintaining flexibility if rates move contrary to expectations.\nDAUPHIN DEPOSIT CORPORATION\nACQUISITION AND DIVESTITURE\nOn January 1, 1994, Dauphin acquired all the outstanding stock of Valley Bancorp., Inc. (Valley) in exchange for 2,600,643 shares of Dauphin's common stock, along with cash of $16,000 in lieu of fractional shares, consummating the merger announced in June 1993. Valley's principal subsidiary was Valley Bank and Trust Company. Valley has total assets of $324 million at December 31, 1993. The acquisition was accounted for as a pooling-of-interests.\nIn addition, on August 23, 1993 Dauphin entered into an agreement to sell 100% of the stock of Farmers Savings Bank, a Federal Savings Bank (FSB), for $.8 million. The sale was consummated on February 1, 1994. FSB had total assets of $12.7 million at December 31, 1993. The sale of FSB will not have a material impact on the financial condition or results of operations for Dauphin in 1994.\nEFFECTS OF INFLATION\nThe impact of inflation upon banks differs from the impact upon non-financial institutions. Banks, as financial intermediaries, have assets which are primarily monetary in nature and change corresponding to movements in the inflation rate. The precise impact of inflation upon Dauphin is difficult to measure. Inflation may cause non-interest expense items to increase at a more rapid rate than earning sources. Inflation may also affect the borrowing needs of consumers, thereby affecting the growth rate of Dauphin's assets. Inflation may also affect the general level of interest rates, which can have an effect on the profitability of Dauphin.\nDAUPHIN DEPOSIT CORPORATION ITEM 8.","section_7A":"","section_8":"ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA\nThe following audited consolidated financial statements and documents are set forth in this Annual Report on Form 10-K on the following pages:\nDauphin Deposit Corporation and Subsidiaries CONSOLIDATED BALANCE SHEETS December 31, 1993 and 1992\nSee accompanying notes to consolidated financial statements.\nDauphin Deposit Corporation and Subsidiaries CONSOLIDATED STATEMENTS OF INCOME Years Ended December 31, 1993, 1992 and 1991\nSee accompanying notes to consolidated financial statements.\nDauphin Deposit Corporation and Subsidiaries CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Years Ended December 31, 1993, 1992 and 1991\nSee accompanying notes to consolidated financial statements.\nDauphin Deposit Corporation and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, 1993, 1992 and 1991\nTotal interest paid amounted to $97,691, $129,598 and $164,214, respectively. Total income taxes paid amounted to $22,458, $19,693 and $12,256, respectively. Total loan sales amounted to $104,541, $89,318 and $67,114, respectively.\nSee accompanying notes to consolidated financial statements.\nDAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS\nDECEMBER 31, 1993, 1992 AND 1991\n1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES\nThe following is a description of the more significant accounting policies of Dauphin Deposit Corporation and subsidiaries.\nBASIS OF FINANCIAL STATEMENT PRESENTATION\nThe financial statements have been prepared in conformity with generally accepted accounting principles. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ significantly from those estimates. The material estimate that is particularly susceptible to significant change in the near-term relates to the determination of the allowance for loan losses.\nPRINCIPLES OF CONSOLIDATION\nThe consolidated financial statements include the accounts of Dauphin Deposit Corporation and subsidiaries (Dauphin), including its principal subsidiaries, Dauphin Deposit Bank and Trust Company, which includes the Bank of Pennsylvania Division, and Farmers Bank and Trust Company of Hanover (the Banks). All material intercompany balances and transactions have been eliminated in consolidation.\nINVESTMENT SECURITIES\nInvestment debt securities are carried at cost adjusted for amortization of premium and accretion of discount. Debt securities are carried at cost since Dauphin currently has the ability and intent to hold to maturity. Marketable equity securities are carried at the lower of cost or market value. Unrealized losses on equity securities are reported as a reduction of investment securities and net of taxes as a reduction of stockholders' equity. Realized gains or losses on the sale of investment securities (determined by the specific identification method) are shown separately in the statements of income.\nDauphin will adopt Statement of Financial Accounting Standards No. 115 (SFAS 115), \"Accounting for Certain Investments in Debt and Equity Securities\" as of January 1, 1994. SFAS 115 addresses the accounting and reporting for investments in equity securities that have readily determinable fair values and for all investments in debt securities. These investments are to be classified in one of three categories and accounted for as follows: 1) debt securities that a company has the positive intent and ability to hold to maturity are classified as held-to-maturity securities and reported at amortized cost; 2) debt and equity securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and reported at fair value, with unrealized gains and losses included in earnings; and 3) debt and equity securities not classified as either held-to-maturity or trading securities are classified as available-for-sale securities and reported at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of stockholders' equity.\nManagement has determined that the entire investment securities portfolio will be classified as available-for-sale. This change will result in an increase in investment securities of $63,243,000 and an increase in stockholders' equity of $41,108,000, representing the after tax impact.\nLOANS\nLoans are carried at the principal amount outstanding, net of unearned income. Interest income is accounted for on an accrual basis. Interest income is not accrued when, in the opinion of management, its collectibility is doubtful. When a loan is designated as non-accrual, any accrued interest receivable is generally\nDAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)\nDECEMBER 31, 1993, 1992 AND 1991 charged against current earnings. Lease income is recorded using the finance method which provides for a level rate of return on the investment outstanding.\nMortgages held for sale are carried at the lower of aggregate cost or market value with resulting gains and losses included in other income. Excess servicing fees are computed as the present value of the difference between the estimated future net servicing revenues and normal servicing revenues as established by the federally sponsored secondary market makers. Upon the sale of mortgage loans, excess servicing fees are deferred and amortized over the estimated life of the related mortgages.\nLoan fees and costs of loan origination are deferred and recognized over the life of the loan as a component of interest income.\nASSETS HELD FOR SALE\nAssets held for sale are comprised of mortgages held for sale and the securities inventory of Hopper Soliday & Co., Inc., Dauphin's broker\/dealer subsidiary.\nMortgage loans held for sale are recorded at the lesser of current secondary market value or the actual book value of loans. The securities inventory is recorded at current quoted market value.\nALLOWANCE FOR LOAN LOSSES\nThe allowance for loan losses is a valuation reserve to absorb losses on loans which may become uncollectible. The provision for loan losses is management's estimate of the amount required to establish a reserve adequate to reflect risks in the loan portfolio of the Banks. Loan losses are charged directly against the allowance for loan losses, and recoveries on previously charged off loans are added to the allowance.\nManagement believes that the allowance for loan losses is adequate. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Banks' allowance for loan losses. Such agencies may require the Banks to recognize additions to the allowance based on their judgments of information available to them at the time of their examination.\nIn May 1993, Statement of Financial Accounting Standards No. 114 (SFAS 114), \"Accounting by Creditors for Impairment of a Loan\" was issued. SFAS 114 addresses the accounting by creditors for impairment of certain loans. SFAS 114 requires that impaired loans that are within the scope of the Statement be measured based on the present value of expected future cash flows discounted at the loan's effective interest rate or, at the loan's market price or the fair value of the collateral if the loan is collateral dependent. Management presently does not know and cannot reasonably estimate the impact of SFAS 114 on its financial statements. SFAS 114 is effective for fiscal years beginning after December 15, 1994 and earlier adoption is permitted. Dauphin expects to adopt SFAS 114 in January 1995.\nBANK PREMISES AND EQUIPMENT\nBank premises and equipment are stated at cost, including capitalized interest during construction, less accumulated depreciation and amortization. Bank premises and equipment under capitalized leases are recorded at the lower of the present value of minimum lease payments or the fair value of the leased assets determined at the inception of the lease term. Depreciation charged to operating expense, including amounts\nDAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)\nDECEMBER 31, 1993, 1992 AND 1991 applicable to capitalized leases, is computed on the straight-line method for financial reporting and the straight-line and accelerated methods for income tax purposes. Leasehold improvements are capitalized and amortized over the lives of the respective leases or the estimated useful life of the leasehold improvement, whichever is shorter. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in income for the period. Maintenance, repairs and minor improvements are charged to expense as incurred; significant renewals and betterments are capitalized.\nTRUST ASSETS\nAssets held by the Banks in a fiduciary or agency capacity are not included in the consolidated financial statements since such assets are not assets of the Banks. Income from fiduciary activities is recorded on an accrual basis.\nBENEFIT PLANS\nPension plan costs for Dauphin's defined benefit plans are accounted for in accordance with the requirements of Statement of Financial Accounting Standards No. 87 \"Employers' Accounting for Pensions\". The projected unit credit method is utilized for measuring net periodic pension cost over the employees' service lives.\nDauphin adopted Statement of Financial Acccounting Standards No. 106, \"Employers' Accounting for Postretirement Benefits Other Than Pensions\", as of January 1, 1992, which established a new accounting principle for the cost of retiree health care and other postretirement benefits. Prior to 1992, Dauphin recognized these benefits on a cash basis.\nDauphin adopted Statement of Financial Acccounting Standards No. 112, \"Employers' Accounting for Postemployment Benefits\" effective January 1, 1993. This standard established accounting requirements for employers who provide benefits to former or inactive employees after employment but before retirement. Prior to 1993, these costs were recognized on a cash basis.\nINCOME TAXES\nIn 1992, Dauphin adopted Statement of Financial Accounting Standards No. 109 (SFAS 109), \"Accounting for Income Taxes\". SFAS 109 requires the asset and liability method in computing income tax expense for financial reporting purposes. Under the asset and liability method of SFAS 109, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. Under SFAS 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.\nNET INCOME PER SHARE\nNet income per share is computed based upon the weighted average number of common shares outstanding and dilutive common equivalent shares from stock options using the treasury stock method. The difference between primary and fully diluted earnings per share is not significant in any year.\nSTATEMENT OF CASH FLOWS\nFor purposes of the statement of cash flows, Dauphin considers cash and due from banks and overnight federal funds sold to be cash and cash equivalents.\nDAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)\nDECEMBER 31, 1993, 1992 AND 1991\n2--ACQUISITION AND DIVESTITURE\nOn January 1, 1994, Dauphin acquired all the outstanding stock of Valley Bancorp., Inc. (Valley) in exchange for 2,600,643 shares of Dauphin's common stock, along with cash of $16,000 in lieu of fractional shares, consummating the merger announced in June 1993. At December 31, 1993 Valley had total assets, deposits and equity of $324,164,000, $285,310,000 and $33,948,000, respectively. Valley's principal subsidiary was Valley Bank and Trust Company. The acquisition was accounted for as a pooling-of-interests.\nThe effect of the merger on Dauphin's reported net interest income, net income and net income per share for the periods presented is as follows:\nOn August 23, 1993 Dauphin entered into an agreement to sell 100% of the stock of Farmers Savings Bank, a Federal Savings Bank (FSB) for $797,000. The sale is subject to regulatory approval and is expected to be consummated during the first quarter of 1994. FSB had total assets of $12,678,000 at December 31, 1993. The sale of FSB will not have a material impact on the financial condition or results of operations for Dauphin in 1994.\n3--RESTRICTIONS ON CASH AND DUE FROM BANK ACCOUNTS AND INVESTMENT SECURITIES\nThe Banks are required to maintain average reserve balances with the Federal Reserve Bank. The average amount of those required reserve balances at December 31, 1993 and 1992 was approximately $38,336,000 and $31,678,000, respectively.\nDauphin Deposit Bank and Trust Company is required to maintain an investment in Federal Home Loan Bank of Pittsburgh stock of $10,651,000 which is included in equity securities.\nDAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)\nDECEMBER 31, 1993, 1992 AND 1991\n4--INVESTMENT SECURITIES\nThe amortized cost and estimated market value of investment securities are as follows:\nThe amortized cost and estimated market value of debt securities at December 31, 1993, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.\nDAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)\nDECEMBER 31, 1993, 1992 AND 1991\nGains and losses from sales of investment securities are as follows:\nSecurities with a carrying value of $827,404,000 at December 31, 1993 and $790,706,000 at December 31, 1992 are pledged to secure public deposits and for other purposes as provided by law.\n5--LOANS\nThe loan portfolio, net of unearned income, at December 31, 1993 and 1992 is as follows:\nThe Banks have granted loans to officers, directors and their associates. Related party loans are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated persons and do not involve more than normal risk of collectibility. The aggregate dollar amount of these loans, which excludes aggregate loans totaling less than $60,000 to any one related party, is as follows:\nDAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)\nDECEMBER 31, 1993, 1992 AND 1991 Included within the loan portfolio are loans on which the Banks have ceased the accrual of interest and restructured loans. Such loans amounted to $23,129,000 and $24,154,000 at December 31, 1993 and 1992, respectively. If interest income had been recorded on all such loans outstanding during the years 1993, 1992 and 1991, interest income would have been increased as shown in the following table:\n6--ALLOWANCE FOR LOAN LOSSES\nAn analysis of the changes in the allowance for loan losses is as follows:\n7--BANK PREMISES AND EQUIPMENT\nA summary of bank premises and equipment at December 31, 1993 and 1992 is as follows:\nDepreciation and amortization amounted to $5,957,000 for 1993, $5,673,000 for 1992 and $5,435,000 for 1991.\n8--TIME CERTIFICATES OF DEPOSIT\nTime certificates of deposit of $100,000 or more at December 31, 1993 and 1992 amounted to $287,673,000 and $304,528,000, respectively.\nDAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)\nDECEMBER 31, 1993, 1992 AND 1991\n9--SHORT-TERM BORROWINGS\nFederal funds purchased, securities sold under agreements to repurchase and other short-term borrowings generally mature within one to ninety days from the transaction date.\nA summary of aggregate short-term borrowings is as follows for the years ended December 31, 1993, 1992 and 1991:\nThe Banks have approved federal funds lines of credit that amounted to approximately $1,600,000,000 at December 31, 1993.\n10--LONG-TERM DEBT\nThe following is a summary of long-term debt at December 31, 1993 and 1992:\nIn November 1986, Dauphin issued $35,000,000, 8.70% Senior Notes due 1996 at par. These Senior Notes are not subordinated in right of payment to any other unsecured indebtedness of Dauphin.\nAdvances from The Federal Home Loan Bank of Pittsburgh consists of two advances with interest rates ranging from 5.89% to 6.17% and mature in 1995. These advances are subject to restrictions and penalties if repaid prior to maturity and are collateralized by qualifying investments.\nAggregate long-term debt maturities, for each of the next five years are as follows:\n1994--$78,000; 1995--$51,087,000; 1996--$35,097,000; 1997--$108,000; 1998-- $86,000\nAt December 31, 1993, Dauphin and its subsidiaries had unused lines of credit totaling approximately $3,000,000 with a non-affiliated bank.\nDAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)\nDECEMBER 31, 1993, 1992 AND 1991\n11--RESTRICTION ON PAYMENT OF DIVIDENDS\nCertain restrictions exist regarding the ability of the subsidiaries to transfer funds to Dauphin in the form of cash dividends. Additionally, regulatory agencies restrict the availability of surplus for the payment of dividends. As of December 31, 1993, $307,691,000 of undistributed earnings of the Banks were available for distribution to Dauphin as dividends without restriction.\n12--INCOME TAXES\nThe provision for income taxes, consisting primarily of Federal income taxes, for the years 1993, 1992 and 1991, consists of the following:\nDeferred income taxes result from temporary differences in the recognition of income and expense for tax and financial reporting purposes. The sources of those temporary differences and the related tax effect are as follows:\nA reconciliation between the effective income tax rate and the statutory rate follows:\nDAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)\nDECEMBER 31, 1993, 1992 AND 1991\nThe tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1993, 1992 and 1991 are as follows:\nManagement is of the opinion that the deferred tax asset is realizable since Dauphin has had a long history of strong earnings and has carryback potential greater than the deferred tax asset. Management is not aware of any evidence that would preclude Dauphin from ultimately realizing this asset.\nDAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)\nDECEMBER 31, 1993, 1992 AND 1991\n13--BENEFIT PLANS\nThe Banks have noncontributory defined benefit pension plans covering substantially all employees. The Plans' benefit formulas generally base payments to retired employees upon their length of service and a percentage of qualifying compensation during the final years of employment. Dauphin's funding policy is to contribute annually the maximum amount that can be deducted for federal income tax purposes. Contributions are intended to provide not only for benefits attributed to service to date but also for those expected to be earned in the future. Pension expense (credit) associated with these plans amounted to $(269,000), $(262,000) and $(178,000) for 1993, 1992 and 1991, respectively.\nThe following table sets forth the pension plans' funded status and amounts recognized in Dauphin's consolidated financial statements at December 31, 1993 and 1992:\nThe assumptions used in determining the actuarial present value of the projected benefit obligation and the expected rate of return on plan assets are as follows:\nNet pension expense (credit) for 1993, 1992 and 1991 was comprised of the following:\nPlan assets are primarily invested in listed stocks (including 86,000 shares of Dauphin at December 31, 1993 and 1992) and U.S. Treasury and federal agency securities.\nDAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)\nDECEMBER 31, 1993, 1992 AND 1991\nEffective January 1, 1992, Dauphin adopted Statement of Financial Accounting Standards No. 106 (SFAS 106), \"Employers' Accounting for Postretirement Benefits Other than Pensions\". This pronouncement focuses principally on postretirement health care and life insurance benefits and significantly changed Dauphin's prior practice of accounting for these benefits on a pay-as- you-go basis to an accrual basis during the years that the employee renders the necessary service to eventually receive these benefits.\nDauphin's postretirement benefits other than pensions are currently not funded. The status of the plan at December 31, 1993 and 1992 is as follows:\nThe assumptions used in determining the actuarial present value of the accumulated postretirement benefit obligation are as follows:\nThe cost for postretirement benefits other than pensions for 1993 and 1992 consisted of the following components:\nPrior to January 1, 1992, Dauphin recognized the cost of retiree health care and life insurance benefits as an expense as premiums were incurred. These costs approximated $444,000 for 1991.\nThe assumed postretirement health care cost trend rate used in measuring the accumulated postretirement benefit obligation was 16 1\/2% in 1992, the year of adoption, decreasing by 1% per year to an ultimate rate of 6% in 2012 and thereafter over the projected payout period of benefits.\nThe health care cost trend rate assumption has a significant effect on the amounts reported. For example, one-percentage-point increase in the assumed health care cost trend would increase the accumulated postretirement benefit obligation by $2,000,000 and $1,500,000 at December 31, 1993 and 1992, respectively and\nDAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)\nDECEMBER 31, 1993, 1992 AND 1991 increase the aggregate of the service and interest cost components by $200,000 and $150,000 for the years ended December 31, 1993 and 1992, respectively.\nDauphin offers a savings plan for all eligible employees. Under the plan, Dauphin contributes 25% of the participants' contribution which cannot exceed 10% of their salaries. Participants' contributions are at all times fully vested, and Dauphin's contributions become fully vested with two years of service. Contributions to the plan amounted to $468,000, $405,000 and $312,000 during 1993, 1992 and 1991, respectively.\nFarmers Bank and Trust Company of Hanover (FB&T) maintained two defined contribution plans. A savings plan permitted eligible employees to make Section 401(k) salary withholding contributions. This savings plan also permitted FB&T to make contributions to the plan on behalf of eligible employees by way of matching Employer Contributions and Regular Employer Contributions. An Employee Stock Ownership Plan (ESOP), designed to invest primarily in common stock of FB&T, was initially funded in 1988 by reversionary assets from FB&T's terminated employee pension plan. FB&T stock held by the ESOP was periodically released from the ESOP's suspense account as yearly allocations were made to eligible employees. Both plans were discontinued during 1992. The expense for these two plans amounted to $505,000 and $398,000 during 1992 and 1991, respectively.\nIn 1993, Dauphin adopted Statement of Financial Accounting Standards No. 112, \"Employers' Accounting for Postemployment Benefits\". The adoption resulted in an incremental cost of $500,000 to salaries and benefits expense. This accrual was established to record the liability for benefits to former or inactive employees after employment but before retirement.\n14--EMPLOYEE STOCK PURCHASE PLAN, STOCK OPTION PLAN AND STOCKHOLDERS' EQUITY\nUnder the employee stock purchase plan, all eligible employees may purchase shares of Dauphin's common stock through payroll deductions (limited to an amount aggregating 10% of annual base pay). The purchase price, established 30 days prior to the offering date, is not less than 85% or more than 100% of the average market price on the offering date or exercise date, whichever is lower. 840,000 shares of common stock have been authorized to be offered under the plan, of which 588,205 shares have been issued. Because of a difference between the plan offering date, and Dauphin's year-end, no shares were under option at December 31, 1993.\nDuring 1987, the shareholders approved the adoption of the Stock Option Plan of 1986 (the Plan). Under the Plan, Dauphin may grant either qualified or non- qualified stock options to key employees for the purchase of up to 1,193,000 shares of common stock. The exercise price of options granted may not be less than 85% of the fair market value of Dauphin's common stock at the date of grant. Options become exercisable over periods of one to five years and expire ten years from the date of grant.\nDAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)\nDECEMBER 31, 1993, 1992 AND 1991\nStock option transactions during 1993, 1992 and 1991 are summarized below:\nIn connection with the adoption of a shareholder rights plan on January 22, 1990, Dauphin declared a dividend distribution of one Common Stock Purchase Right (a \"Right\") for each outstanding share of common stock of Dauphin. The Rights are exercisable only if a person or group of affiliated persons acquires or announces an intention to acquire 18% of the common stock of Dauphin and Dauphin's Board of Directors does not redeem the Rights during the specified redemption period. Initially, each Right, upon becoming exercisable, would entitle the holder to purchase from Dauphin one share of common stock at the specified exercise price which is subject to adjustment (currently $50 per share). Once the Rights become exercisable, if any person or group acquires 18% of the common stock of Dauphin, the holder of a Right, other than the acquiring person or group, will be entitled, among other things, to purchase shares of common stock having a value equal to two times the exercise price of the Right. The Board of Directors is entitled to redeem the Rights for $.001 per Right at any time before expiration of the redemption period. The Board of Directors may, at any time after the Rights become exercisable and prior to the time any person becomes a 50% beneficial owner of Dauphin's shares of common stock, exchange each of the outstanding Rights (except Rights of the acquiring person or group which are voided) for one share of common stock, subject to adjustment. The Rights will expire on January 22, 2000, unless earlier redeemed by Dauphin.\nIn January 1994, Dauphin announced that the Board of Directors authorized the repurchase of up to 1,000,000 shares of the outstanding common stock. Dauphin expects to use available cash to fund the share repurchases which will be made from time to time on the open market or in privately negotiated transactions. Dauphin will use the shares for general corporate purposes, including the Employee Stock Purchase Plan, Stock Option Plan and other appropriate uses.\n15--FINANCIAL INSTRUMENTS OFF-BALANCE SHEET RISK AND CONCENTRATIONS OF CREDIT RISK\nDauphin is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers and to reduce its own exposure to fluctuation in interest rates. These financial instruments include commitments to extend credit, financial guarantees and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet.\nDAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)\nDECEMBER 31, 1993, 1992 AND 1991\nDauphin's exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual notional amount of those instruments. Dauphin uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.\nAt December 31, 1993 and 1992, Dauphin had the following off-balance sheet financial instruments whose contract amounts represent credit risk:\nCommitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Dauphin evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by Dauphin upon extension of credit is based on management's credit evaluation of the customer. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, and income- producing commercial properties.\nStandby letters of credit are conditional commitments issued by Dauphin to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. The term of the letters of credit varies from one month to 24 months and may have renewal features. The credit risk involved in using letters of credit is essentially the same as that involved in extending loans to customers. Dauphin holds collateral supporting those commitments for which collateral is deemed necessary.\nMost of Dauphin's business activity is with customers located within Dauphin's defined market area, principally Central Pennsylvania. Dauphin grants commercial, residential and consumer loans throughout the state. The loan portfolio is well diversified and Dauphin does not have any significant concentrations of credit risk.\nFAIR VALUE OF FINANCIAL INSTRUMENTS\nStatement of Financial Accounting Standards No. 107, \"Disclosure about Fair Value of Financial Instruments\" (SFAS 107) requires disclosure of the fair value of financial instruments. The majority of Dauphin's assets and liabilities are considered financial instruments. Significant assumptions and estimates were used in calculation of fair market values.\nThe following methods and assumptions were used to estimate the fair value of each class of Dauphin's financial instruments for which it is practicable to estimate that value:\nCASH AND SHORT-TERM INVESTMENTS\nThe fair value for cash and short-term instruments is estimated to be book value, due to the short maturity of, and negligible credit concerns within, those instruments.\nDAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)\nDECEMBER 31, 1993, 1992 AND 1991\nINVESTMENT SECURITIES\nThe fair value for debt and marketable equity securities is based on quoted market prices, if available. If quoted market price is not available, fair value is estimated using quoted market prices for similar securities.\nASSETS HELD FOR SALE\nThe fair value for mortgage loans held for sale is estimated using the current secondary market rates. For the securities held for sale, the securities are recorded at the current quoted market value.\nLOANS\nThe fair value of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings. The residential mortgages and certain consumer loans include prepayment assumptions.\nOTHER FINANCIAL ASSETS\nThe fair value for accrued interest receivable is estimated to be the current book value. The fair value for excess servicing fees is calculated based on the present value of the difference between the estimated future net revenues and normal servicing.\nDEPOSITS\nThe fair value of deposits with no stated maturity, such as demand deposits, savings accounts, NOW and money market deposits is the amount payable on demand at the reporting date. The fair value of fixed maturity certificates of deposit is based on the discounted value of contractual cash flows, using the rates currently offered for deposits of similar remaining maturities.\nSHORT-TERM BORROWINGS\nThe fair value of short-term borrowings is estimated using the current rates for similar terms and maturities.\nLONG-TERM DEBT\nThe fair value of long-term debt is estimated using debt with similar terms and remaining maturities.\nACCRUED INTEREST PAYABLE\nThe fair value of accrued interest payable is estimated to be the current book value.\nCOMMITMENTS\nThe fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms and present creditworthiness of the counterparties. For fixed rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of guarantees and letters of credit is based on fees currently charged for similar agreements.\nLIMITATIONS\nThe fair values estimated are dependent upon subjective assumptions and involve significant uncertainties resulting in estimates that vary with changes in assumptions. Any sales of financial instruments may incur potential tax and other expenses that would not be reflected in the fair values. Any changes in assumptions or estimation methodologies may have a material effect on the estimated fair values disclosed. The reasonable comparability between financial institutions may not be likely due to the wide range of permitted valuation techniques.\nDAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)\nDECEMBER 31, 1993, 1992 AND 1991\nAt December 31, 1993 and 1992, Dauphin's estimated fair values of financial instruments based on disclosed assumptions are as follows:\nDAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)\nDECEMBER 31, 1993, 1992 AND 1991 16--CONDENSED FINANCIAL INFORMATION--PARENT COMPANY ONLY\nDauphin Deposit Corporation (Parent Company Only) Condensed Balance Sheets\nDAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)\nDECEMBER 31, 1993, 1992 AND 1991 Dauphin Deposit Corporation (Parent Company Only) Condensed Statements of Income\nDAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)\nDECEMBER 31, 1993, 1992 AND 1991 Dauphin Deposit Corporation (Parent Company Only) Condensed Statements of Cash Flows\nDAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)\nDECEMBER 31, 1993, 1992 AND 1991 17--CONSOLIDATED QUARTERLY FINANCIAL DATA (UNAUDITED)\n18--CONTINGENT LIABILITIES\nVarious legal actions or proceedings are pending involving Dauphin or its subsidiaries. Management believes that the aggregate liability or loss, if any, will not be material.\n[LOGO OF KPMG PEAT MARWICK APPEARS HERE]\nCERTIFIED PUBLIC ACCOUNTANTS\n225 Market Street Suite 300 P.O. Box 1190 Harrisburg, PA 17108-1190\nINDEPENDENT AUDITORS' REPORT\nThe Board of Directors and Stockholders Dauphin Deposit Corporation\nWe have audited the accompanying consolidated balance sheets of Dauphin Deposit Corporation and subsidiaries as of December 31, 1993 and 1992, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1993. These consolidated financial statements are the responsibility of Dauphin's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.\nWe conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.\nIn our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Dauphin Deposit Corporation and subsidiaries as of December 31, 1993 and 1992, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1993 in conformity with generally accepted accounting principles.\n\/s\/ KPMG Peat Marwick\nJanuary 28, 1994\n[LOGO OF MEMBER FIRM OF KLYNVEID PEAT MARWICK GOERDELER APPEARS HERE]\nDAUPHIN DEPOSIT CORPORATION ITEM 9.","section_9":"ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE\nNot applicable.\nDAUPHIN DEPOSIT CORPORATION\nPART III --------\nITEM 10.","section_9A":"","section_9B":"","section_10":"ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT\nInformation relative to directors of the Registrant is incorporated herein by reference to Election of Directors and Section 16(a) of the Exchange Act in the Corporation's 1994 Proxy Statement. Information relative to executive officers of the Registrant is set forth herein in Part I under the caption \"EXECUTIVE OFFICERS OF THE REGISTRANT.\"\nITEM 11.","section_11":"ITEM 11. EXECUTIVE COMPENSATION\nThis item is incorporated by reference to Executive Compensation in the 1994 Proxy Statement.\nITEM 12.","section_12":"ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT\nThis item is incorporated by reference to Outstanding Stock and Principal Holders Thereof in the 1994 Proxy Statement.\nITEM 13.","section_13":"ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS\nThis item is incorporated by reference to Transactions with Management in the 1994 Proxy Statement.\nDAUPHIN DEPOSIT CORPORATION PART IV\nITEM 14.","section_14":"ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K\nDAUPHIN DEPOSIT CORPORATION\nDAUPHIN DEPOSIT CORPORATION\nSIGNATURES\nPURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED THEREUNTO DULY AUTHORIZED.\nDauphin Deposit Corporation\nFebruary 22, 1994 \/s\/ William J. King By: --------------------------------- WILLIAM J. KING CHAIRMAN OF THE BOARD, CHIEF EXECUTIVE OFFICER AND DIRECTOR\nPURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT IS SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.\nSIGNATURES TITLE DATE ---------- ----- ----\n\/s\/ William J. King Chairman of the February 22, 1994 - ------------------------------------- Board, Chief WILLIAM J. KING Executive Officer and Director\n\/s\/ Christopher R. Jennings President, Chief February 10, 1994 - ------------------------------------- Operating Officer CHRISTOPHER R. JENNINGS and Director\n\/s\/ Lawrence J. LaMaina, Jr. Vice Chairman and February 14, 1994 - ------------------------------------- Director LAWRENCE J. LAMAINA, JR.\n\/s\/ Dennis L. Dinger Executive Vice February 10, 1994 - ------------------------------------- President and Chief DENNIS L. DINGER Financial Officer\n\/s\/ William H. Alexander Director February 14, 1994 - ------------------------------------- WILLIAM H. ALEXANDER\n\/s\/ John A. Arnold Director February 10, 1994 - ------------------------------------- JOHN A. ARNOLD\n\/s\/ Jeffrey J. Burdge Director February 10, 1994 - ------------------------------------- JEFFREY J. BURDGE\nDAUPHIN DEPOSIT CORPORATION SIGNATURES TITLE DATE\n\/s\/ James O. Green Director February 22, 1994 - ------------------------------------- JAMES O. GREEN\n\/s\/ Alfred G. Hemmerich Director February 22, 1994 - ------------------------------------- ALFRED G. HEMMERICH\nDirector - ------------------------------------- LEE H. JAVITCH\n\/s\/ William T. Kirchhoff Director February 10, 1994 - ------------------------------------- WILLIAM T. KIRCHHOFF\n\/s\/ James E. Marley Director February 14, 1994 - ------------------------------------- JAMES E. MARLEY\n\/s\/ Robert F. Nation Director February 10, 1994 - ------------------------------------- ROBERT F. NATION\n\/s\/ Elmer E. Naugle Director February 22, 1994 - ------------------------------------- ELMER E. NAUGLE\nDirector - ------------------------------------- WALTER F. RAAB\n\/s\/ Paul C. Raub Director February 10, 1994 - ------------------------------------- PAUL C. RAUB\n\/s\/ Henry W. Rhoads Director February 10, 1994 - ------------------------------------- HENRY W. RHOADS\nDirector - ------------------------------------- R. CHAMPLIN SHERIDAN, JR.\nDAUPHIN DEPOSIT CORPORATION EXHIBIT INDEX\nDAUPHIN DEPOSIT CORPORATION","section_15":""}
{"filename":"34088_1993.txt","cik":"34088","year":"1993","section_1":"ITEM 1. BUSINESS.\nExxon Corporation was incorporated in the State of New Jersey in 1882. Divisions and affiliated companies of Exxon operate in the United States and more than 80 other countries. Their principal business is energy, involving exploration for, and production of, crude oil and natural gas, manufacturing of petroleum products and transportation and sale of crude oil, natural gas and petroleum products. Exxon Chemical Company, a division of Exxon, is a major manufacturer and marketer of petrochemicals. Exxon is engaged in exploration for, and mining and sale of, coal and other minerals. Exxon also has an interest in electric power generation in Hong Kong. Affiliates of Exxon conduct extensive research programs in support of these businesses.\nThe terms corporation, company, Exxon, our, we and its, as used in this report, sometimes refer not only to Exxon Corporation or to one of its divisions but collectively to all of the companies affiliated with Exxon Corporation or to any one or more of them. The shorter terms are used merely for convenience and simplicity.\nThe oil industry is highly competitive. There is competition within the industry and also with other industries in supplying the energy and fuel needs of commerce, industry and individuals. The corporation competes with other firms in the sale or purchase of various goods or services in many national and international markets and employs all methods of competition which are lawful and appropriate for such purposes.\nExxon Chemical is organized into three business groups, each managed as a worldwide business with its own manufacturing, marketing and technology activities. It is a major producer of basic petrochemicals, including olefins and aromatics, and a leading supplier of specialty rubbers and of additives for fuels and lubricants. The products manufactured include polyethylene and polypropylene plastics, plasticizers, specialty resins, specialty and commodity solvents, fertilizers and performance chemicals for oil field operations.\nThe operations and earnings of the corporation and its affiliates throughout the world have been, and may in the future be, affected from time to time in varying degree by political developments and laws and regulations, such as forced divestiture of assets; restrictions on production, imports and exports; price controls; tax increases and retroactive tax claims; expropriations of property; cancellation of contract rights and environmental regulations. Both the likelihood of such occurrences and their overall effect upon the corporation vary greatly from country to country and are not predictable.\nIn 1993, the corporation spent $1,873 million (of which $641 million were capital expenditures) on environmental conservation projects and expenses worldwide, mostly dealing with air and water conservation. Total expenditures for such activities are expected to be about $2.0 billion in 1994 and 1995 (with capital expenditures in each year representing about 35 percent of the total).\nOperating data and industry segment information for the corporation are contained on pages, and of the accompanying financial section of the 1993 Annual Report to shareholders. Information on oil and gas reserves is contained on pages and of the accompanying financial section of the 1993 Annual Report to shareholders.*\nITEM 2.","section_1A":"","section_1B":"","section_2":"ITEM 2. PROPERTIES.\nPart of the information in response to this item and to the Securities Exchange Act Industry Guide 2 is contained in the accompanying financial section of the 1993 Annual Report to shareholders in Note 8, which note appears on page, and on pages, and through.* - -------- *Only the data appearing on pages and through of the accompanying financial section of the 1993 Annual Report to shareholders, incorporated in this report as Exhibit 13, are deemed to be filed as part of this Annual Report on Form 10-K as indicated under Items 1, 2, 3, 5, 6, 7 and 8 and on page 14.\nInformation with regard to oil and gas producing activities follows:\n1. NET RESERVES OF CRUDE OIL AND NATURAL GAS LIQUIDS (MILLIONS OF BARRELS) AND NATURAL GAS (BILLIONS OF CUBIC FEET) AT YEAR-END 1993\nEstimated proved reserves are shown on pages and of the accompanying financial section of the 1993 Annual Report to shareholders. No major discovery or other favorable or adverse event has occurred since December 31, 1993 that would cause a significant change in the estimated proved reserves as of that date. The oil sands reserves shown separately for Canada represent synthetic crude oil expected to be recovered from Imperial Oil Limited's 25 percent interest in the net reserves set aside for the Syncrude project, as presently defined by government permit. For information on the standardized measure of discounted future net cash flows relating to proved oil and gas reserves, see page of the accompanying financial section of the 1993 Annual Report to shareholders.\n2. ESTIMATES OF TOTAL NET PROVED OIL AND GAS RESERVES FILED WITH OTHER FEDERAL AGENCIES\nDuring 1993, the company filed proved reserve estimates with the U.S. Department of Energy on Forms EIA-23 and EIA-28. The information is consistent with the 1992 Annual Report to shareholders with the exception of EIA-23 which covered total oil and gas reserves from Exxon-operated properties in the U.S. and does not include gas plant liquids.\n3. AVERAGE SALES PRICES AND PRODUCTION COSTS PER UNIT OF PRODUCTION\nIncorporated by reference to page of the accompanying financial section of the 1993 Annual Report to shareholders. Average sales prices have been calculated by using sales quantities from our own production as the divisor. Average production costs have been computed by using net production quantities for the divisor. The volumes of crude oil and natural gas liquids (NGL) production used for this computation are shown in the reserves table on page of the accompanying financial section of the 1993 Annual Report to shareholders. The net production volumes of natural gas available for sale by the producing function used in this calculation are shown on page of the accompanying financial section of the 1993 Annual Report to shareholders. The volumes of natural gas were converted to oil equivalent barrels based on a conversion factor of six thousand cubic feet per barrel.\n4. GROSS AND NET PRODUCTIVE WELLS\n5. GROSS AND NET DEVELOPED ACREAGE\nNote: Separate acreage data for oil and gas are not maintained because, in many instances, both are produced from the same acreage.\n6. GROSS AND NET UNDEVELOPED ACREAGE\n7. SUMMARY OF ACREAGE TERMS IN KEY AREAS\nUnited States\nOil and gas exploration leases are acquired for varying periods of time, ranging from one to ten years. Production leases normally remain in effect until production ceases.\nCanada\nExploration permits are granted for varying periods of time with renewals possible. Production leases are held as long as there is production on the lease.\nCold Lake oil sands leases were taken for an initial 21-year term in 1968-69 and renewed for a second 21-year term in 1989-1990. Athabasca oil sands leases were taken for an initial 21-year term in 1958-1961 and renewed for a second 21-year term in 1979-1982.\nUnited Kingdom\nLicenses issued prior to 1977 were for an initial period of six years with an option to extend the license for a further 40 years on no more than half of the license area. Licenses issued between 1977 and 1979 were for an initial period of four years, after which one-third of the acreage was required to be relinquished, followed by a second period of three years, after which an additional one-third of the acreage was required to be relinquished, with an option to extend the license for a further 30 years on the remaining one-third of the acreage. Subsequent licenses are for an initial period of six or seven years with an option to extend for a total license period of 24 to 36 years on no more than half the license area.\nNetherlands\nOnshore: Exploration drilling permits are issued for a period of two to five years. Production concessions are granted after discoveries have been made, under conditions which are negotiated with the government. Normally, they are field-life concessions covering an area defined by hydrocarbon occurrences.\nOffshore: Prospecting licenses issued prior to March 1976 were for a 15-year period, with relinquishment of about 50 percent of the original area required at the end of ten years. Subsequent licenses are for ten years with relinquishment of about 50 percent of the original area required after six years. For commercial discoveries within a prospecting license, a production license is issued for a 40-year period.\nNorway\nLicenses issued prior to 1972 were for a total period of 46 years, with relinquishment of at least one-fourth of the original area required at the end of the sixth year and another one-fourth at the end of the ninth year. Subsequent licenses are for a total period of 36 years, with relinquishment of at least one-half of the original area required at the end of the sixth year.\nFrance\nExploration permits are granted for periods of three to five years, renewable up to two times accompanied by substantial acreage relinquishments: 50 percent of the acreage at first renewal; 25 percent of the remaining acreage at second renewal. Upon discovery of commercial hydrocarbons, a production concession is granted for up to 50 years, renewable in periods of 25 years each.\nAustralia\nOnshore: Acreage terms are fixed by the individual state and territory governments. These terms and conditions vary significantly between the states and territories. Production licenses are generally granted for an initial term of 21 years, with subsequent renewals, each for 21 years, for the full area.\nOffshore: Exploration permits are granted for six years with possible renewals of five-year periods to a total of 26 years. A 50 percent relinquishment of remaining area is mandatory at the end of each renewal period. Production licenses are for 21 years, with renewals of 21 years for the life of the field.\nMalaysia\nExploration and production activities are governed by production sharing contracts negotiated with the national oil company. These contracts have an overall term of 20 years with possible extensions to the exploration or development periods. The exploration period is three years with the possibility of a two-year extension, after which time areas with no commercial discoveries must be relinquished. The development period is two years from commercial discovery, with an option to extend the period for an additional two years and possibly longer under special circumstances. Areas from which commercial production has not started by the end of the development period must be relinquished. The total production period is 15 years from first commercial lifting, not to exceed the overall term of the contract.\nIndonesia\nExxon's operations previously conducted under a contract of work agreement converted to a production sharing contract in late 1993, with a term of 20 years. Other production sharing contracts in Indonesia have an overall term of up to 30 years.\nRepublic of Yemen\nProduction sharing agreements negotiated with the government entitle Exxon to participate in exploration operations within a designated area during the exploration period. In the event of a commercial discovery, the company is entitled to proceed with development and production operations during the development period. The length of these periods and other specific terms are negotiated prior to executing the production sharing agreement. Existing production operations have a development period extending 20 years from first commercial declaration made in November 1985.\nEgypt\nExploration and production activities are governed by concession agreements negotiated with the government. These agreements generally permit three exploration periods, with the first period being three years, and the remaining two optional periods being two years each. Production operations have an overall term of 30 years, with an option for a ten-year extension.\nColombia\nPrior to 1974, exploration, development and production rights were granted for up to 30 years through concessions. Since 1974, the association contract has been the basic form of participation in new acreage. With this form of contract, exploration rights are granted for up to a maximum of six years. After a discovery is made, the development period extends for 22 years with relinquishment of 50 percent at the end of six years, 50 percent of the retained area after eight years and all remaining area except commercial fields after ten years.\n8. NUMBER OF NET PRODUCTIVE AND DRY WELLS DRILLED\n9. PRESENT ACTIVITIES\nA. Wells Drilling -- Year-End 1993\nB. Review of Principal Ongoing Activities in Key Areas\nUNITED STATES\nDuring 1993, exploration activities were coordinated by Exxon Exploration Company and producing activities by Exxon Company, U.S.A., both divisions of Exxon Corporation. Some of the more important ongoing activities are:\n. Exploration and delineation of additional hydrocarbon resources continued. At year-end 1993, Exxon's inventory of undeveloped acreage totaled 3.7 million net acres. Exxon is active in areas onshore, offshore and in Alaska. A total of 14 net exploration and delineation wells were completed during 1993.\n. During 1993, 171 net development wells were completed within and around mature fields in the inland lower 48 states.\n. Exxon has an interest in over 25 enhanced oil recovery projects in the lower 48 states which contributed nearly 60 thousand barrels per day of incremental production in 1993.\n. Exxon's net acreage in the Gulf of Mexico at year-end 1993 was 1.4 million acres. A total of 36 net exploratory and development wells were completed during the year. Production was initiated from the Zinc field in mid-1993 via a satellite subsea production template to the Alabaster platform, which started up in 1992. Combined gas production from these two new fields exceeded 130 million cubic feet per day at year-end. The Mobile Bay project off Alabama also began production in 1993 and is currently producing more than 300 million cubic feet of gas per day. Off California, production from the Santa Ynez Unit expansion began in late 1993. Drilling operations are under way on both new platforms, Harmony and Heritage.\n. Participation in Alaska production and development continued. The first phase of a second major Prudhoe Bay Unit gas handling expansion project was started up in late 1993. This additional gas handling capacity will help slow the natural decline from this giant oil field. Point McIntyre field also began production in October 1993 with rates exceeding 100 thousand barrels per day by year-end.\nCANADA\nDuring 1993, exploration and production activities in Canada were conducted by the Resources Division of Imperial Oil Limited, which is 69.6 percent owned by Exxon Corporation. Some of the more important ongoing activities are:\n. Commercial bitumen production from Cold Lake averaged 82 thousand barrels per day during 1993. Initial production began in 1993 from phases 7 and 8. Phases 9 and 10 will be deferred until there is further improvement in market conditions.\n. The Syncrude plant, 25 percent owned by Imperial and located in northern Alberta, has completed its 15th year of operations. Gross synthetic crude production averaged 178 thousand barrels per day in 1993.\nOUTSIDE NORTH AMERICA\nDuring 1993, exploration activities were conducted by Exxon Exploration Company and producing activities by Exxon Company, International, both divisions of Exxon Corporation. Some of the more important ongoing activities include:\nUnited Kingdom\nExxon's share of licenses held in United Kingdom waters totaled 1.8 million net acres at year-end 1993, with 13.6 net exploration and development wells completed during the year. First production at the Hudson and Strathspey fields and additional compression at Sole Pit began in 1993. Development of the Nelson and Galleon fields is proceeding, with start-up currently scheduled in 1994. Redevelopment of the Brent field is proceeding on schedule. Government approval has been obtained for the development of Brent South and the Barque Extension, with first production currently scheduled for 1995.\nNetherlands\nExxon's interest in licenses totaled 2.8 million net acres at year-end 1993. During the year, 10.7 net exploration and development wells were completed. Onshore operations continued at Groningen, one of the world's largest gas fields. Offshore, the-FB, L12 and L15 fields started up in 1993, and development is proceeding on three new fields currently expected to start-up in 1994.\nNorway\nA total of 0.6 million net acres offshore were under license to Exxon at year-end 1993, and 3.8 net exploration and development wells were completed during the year. Production was initiated at the Brage, Sleipner East and Loke Heimdal fields, while the N.E. Frigg field ceased production during 1993. Projects for development of the Sleipner West, Tordis and the Statfjord satellite fields are continuing as planned, with first production currently scheduled for 1994-1997.\nFrance\nExxon holds 1.7 million net acres onshore under license in France. During 1993, 2.0 net exploration and development wells were drilled and completed.\nGermany\nA total of 4.4 million net acres were held by Exxon in Germany at year-end 1993, with 2.3 net exploration and development wells drilled and completed during the year.\nAustralia\nExxon's year-end 1993 acreage holdings totaled 7.6 million net acres onshore and 2.5 million net acres offshore, with exploration and production activities underway in both areas. During 1993, 15.5 net exploration and development wells were completed. Projects are progressing for the offshore development of the West Tuna and Bream B fields with first production anticipated in 1996. Onshore, production from new fields in S.W. Queensland began in late 1993. Exxon's interests in the Jabiru, Challis and Cassini fields in the Timor Sea were divested in 1993.\nMalaysia\nExxon has interests in production sharing contracts covering 4.2 million net acres offshore peninsular Malaysia. During 1993, a total of 55.3 net exploration and development wells were completed. Development activity continued in the Seligi field with the installation of a fourth compression train and continuation of development drilling. Also in 1993, one additional platform was installed on the Dulang field.\nIndonesia\nExxon acreage holdings totaled 2.5 million net acres onshore and 1.6 million net acres offshore Indonesia, with exploration and production activities being undertaken in both areas. A total of 5.5 net exploration and development wells were completed during 1993.\nThailand\nExxon's net interest acreage in the Khorat concession onshore Thailand totaled 0.6 million acres at year-end 1993.\nRepublic of Yemen\nExxon's net interest acreage in the Republic of Yemen production sharing agreement areas totaled 1.4 million acres onshore at year-end 1993. Facilities were installed to recover natural gas liquids in the Alif, Asa'ad Al-Kamil and Al-Raja fields. During 1993, 11.4 net exploration and development wells were drilled and completed.\nEgypt\nExxon is engaged in exploration and production activities in two contract areas, with net acreage holdings totaling 0.1 million acres.\nColombia\nA total of 0.2 million net acres onshore were held by Exxon at year-end 1993, with 1.3 net exploration and development wells being completed during the year. One concession in the Provincia field reverted to the Government during 1993.\nWORLDWIDE EXPLORATION\nExploration activities were underway during 1993 in several areas in which Exxon has no established production operations. A total of 25.5 million net acres were held at year-end 1993, and 3.2 net exploration wells were completed during the year.\nITEM 3.","section_3":"ITEM 3. LEGAL PROCEEDINGS.\nOn October 1, 1992, the U.S. Environmental Protection Agency (\"EPA\") issued a Complaint, Compliance Order, and Opportunity for Hearing to the registrant. The Complaint alleged that the registrant was late in filing certain financial assurance letters under the Resource Conservation and Recovery Act and proposed a civil penalty of $461,050. The registrant has executed a settlement agreement with the EPA which was approved by the Administrative Law Judge on October 28, 1993. Under the settlement, the registrant paid a civil penalty of $150,000.\nRefer to the relevant portions of Note 14 on pages and of the accompanying financial section of the 1993 Annual Report to shareholders for further information on legal proceedings.\nITEM 4.","section_4":"ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.\nNone.\n----------------\nEXECUTIVE OFFICERS OF THE REGISTRANT [pursuant to Instruction 3 to Regulation S-K, Item 401(b)].\nFor at least the past five years, Messrs. Raymond, Sitter, Cattarulla, McDonagh, O'Brien, Robinson, Smiley and Townsend have been employed as executives of the registrant.\nThe following executive officers of the registrant have also served as executives of the subsidiaries, affiliates or divisions of the registrant shown opposite their names during the five years preceding December 31, 1993.\nOfficers are generally elected by the Board of Directors at its meeting on the day of each annual election of directors, each such officer to serve until his or her successor has been elected and qualified.\nPART II\nITEM 5.","section_5":"ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS.\nIncorporated by reference to the quarterly information which appears on page of the accompanying financial section of the 1993 Annual Report to shareholders.\nITEM 6.","section_6":"ITEM 6. SELECTED FINANCIAL DATA.\nIncorporated by reference to page of the accompanying financial section of the 1993 Annual Report to shareholders.\nITEM 7.","section_7":"ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.\nIncorporated by reference to pages through of the accompanying financial section of the 1993 Annual Report to shareholders.\nITEM 8.","section_7A":"","section_8":"ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.\nReference is made to the Index to Financial Statements on page 14 of this Annual Report on Form 10-K.\nITEM 9.","section_9":"ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.\nNone.\nPART III\nITEM 10.","section_9A":"","section_9B":"","section_10":"ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.\nIncorporated by reference to the relevant portions of pages 4 through 7 (excluding the portion of page 7 entitled \"Transactions with Management\") of the registrant's definitive proxy statement dated March 4, 1994.\nITEM 11.","section_11":"ITEM 11. EXECUTIVE COMPENSATION.\nIncorporated by reference to the fifth through eighth paragraphs of page 2, and pages 8 through 11 (excluding the portion of page 11 entitled \"Board Compensation Committee Report on Executive Compensation\") of the registrant's definitive proxy statement dated March 4, 1994.\nITEM 12.","section_12":"ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.\nIncorporated by reference to the relevant portions of pages 4 through 7 (excluding the portion of page 7 entitled \"Transactions with Management\") of the registrant's definitive proxy statement dated March 4, 1994.\nITEM 13.","section_13":"ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.\nIncorporated by reference to the portion of page 7 entitled \"Transactions with Management\" of the registrant's definitive proxy statement dated March 4, 1994.\nPART IV\nITEM 14.","section_14":"ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.\n(a)(1) and (a) (2) Financial Statements: See Index to Financial Statements and Financial Statement Schedules on page 14 of this Annual Report on Form 10-K.\n(a)(3) Exhibits: See Index to Exhibits on page 19 of this Annual Report on Form 10-K.\n(b)Reports on Form 8-K. The registrant did not file any reports on Form 8-K during the last quarter of 1993.\nSIGNATURES\nPURSUANT TO THE REQUIREMENTS OF SECTION 13 OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.\nEXXON CORPORATION\n\/s\/ LEE R. RAYMOND By: _________________________________ (Lee R. Raymond, Chairman of the Board)\nDated March 11, 1994\n----------------\nPOWER OF ATTORNEY\nEACH PERSON WHOSE SIGNATURE APPEARS BELOW CONSTITUTES AND APPOINTS RICHARD E. GUTMAN, FRANK A. RISCH AND RICHARD A. ROSENBERG, AND EACH OF THEM, HIS OR HER TRUE AND LAWFUL ATTORNEYS-IN-FACT AND AGENTS, WITH FULL POWER OF SUBSTITUTION AND RESUBSTITUTION, FOR HIM OR HER AND IN HIS OR HER NAME, PLACE AND STEAD, IN ANY AND ALL CAPACITIES, TO SIGN ANY AND ALL AMENDMENTS TO THIS ANNUAL REPORT ON FORM 10-K, AND TO FILE THE SAME, WITH ALL EXHIBITS THERETO, AND OTHER DOCUMENTS IN CONECTION THEREWITH, WITH THE SECURITIES AND EXCHANGE COMMISSION, GRANTING UNTO SAID ATTORNEYS-IN-FACT AND AGENTS, AND EACH OF THEM, FULL POWER AND AUTHORITY TO DO AND PERFORM EACH AND EVERY ACT AND THING REQUISITE AND NECESSARY TO BE DONE, AS FULLY TO ALL INTENTS AND PURPOSES AS HE OR SHE MIGHT OR COULD DO IN PERSON, HEREBY RATIFYING AND CONFIRMING ALL THAT SAID ATTORNEYS- IN-FACT AND AGENTS OR ANY OF THEM, OR THEIR OR HIS OR HER SUBSTITUTE OR SUBSTITUTES, MAY LAWFULLY DO OR CAUSE TO BE DONE BY VIRTUE HEREOF.\n----------------\nPURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.\nThe consolidated financial statements, together with the report thereon of Price Waterhouse dated February 23, 1994, appearing on pages to; the Quarterly Information appearing on page; and the Supplemental Information on Oil and Gas Exploration and Production Activities appearing on pages to of the accompanying financial section of the 1993 Annual Report to shareholders are incorporated in this Annual Report on Form 10-K as Exhibit 13. With the exception of the aforementioned information, no other data appearing in the accompanying financial section of the 1993 Annual Report to shareholders is deemed to be filed as part of this Annual Report on Form 10-K under Item 8. The following Consolidated Financial Statement Schedules should be read in conjunction with the accompanying financial section of the 1993 Annual Report to shareholders. Consolidated Financial Statement Schedules not included with this Annual Report on Form 10-K have been omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto.\nSUPPLEMENTAL FINANCIAL INFORMATION\nREPORT OF INDEPENDENT ACCOUNTANTS ON THE SUPPLEMENTAL FINANCIAL INFORMATION\nTo the Board of Directors of Exxon Corporation\nOur audits of the consolidated financial statements referred to in our report dated February 23, 1994 appearing on page of the accompanying financial section of the 1993 Annual Report to shareholders of Exxon Corporation (which report and consolidated financial statements are incorporated as Exhibit 13) also included an audit of the Supplemental Financial Information listed above. In our opinion, this Supplemental Financial Information presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.\nAs discussed in note 2 to the consolidated financial statements, the corporation changed its method of accounting for postretirement benefits other than pensions and for income taxes in 1992.\nPrice Waterhouse\nDallas, Texas February 23, 1994\nCONSENT OF INDEPENDENT ACCOUNTANTS\nWe hereby consent to the incorporation by reference in the following Prospectuses constituting part of the Registration Statements on:\nof our report dated February 23, 1994 appearing on page of the accompanying financial section of the 1993 Annual Report to shareholders of Exxon Corporation which is incorporated as Exhibit 13 in this Annual Report on Form 10-K. We also consent to the incorporation by reference of our report on the Supplemental Financial Information, which appears on page 14 of this Annual Report on Form 10-K.\nPrice Waterhouse\nDallas, Texas March 11, 1994\nEXXON CORPORATION\nPROPERTY, PLANT AND EQUIPMENT (SCHEDULE V)\n1993, 1992 AND 1991(1) (EXPRESSED IN MILLIONS OF DOLLARS)\n- -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------\n- --------------------- Notes: (1) Reference is made to page of the accompanying financial section of the 1993 Annual Report to shareholders for a description of the accounting for property, plant and equipment. (2) The total for 1992 reflects the property, plant and equipment gross-up, effective January 1, 1992, associated with implementation of Statement of Financial Accounting Standards No. 109, \"Accounting for Income Taxes.\"\nEXXON CORPORATION\nACCUMULATED DEPRECIATION, DEPLETION AND AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT (SCHEDULE VI)\n1993, 1992 AND 1991(1) (EXPRESSED IN MILLIONS OF DOLLARS)\n- -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------\n- --------------------- Notes: (1) Reference is made to page of the accompanying financial section of the 1993 Annual Report to shareholders for a description of the accounting for depreciation, depletion and amortization. (2) Depreciation and depletion (page of the accompanying financial section of the 1993 Annual Report to shareholders) was comprised of:\n(3) Reflects transfers among functions and net charges and reclassifications to other balance sheet accounts.\nEXXON CORPORATION\nSHORT-TERM BORROWINGS (SCHEDULE IX)\n1993, 1992 AND 1991 (EXPRESSED IN MILLIONS OF DOLLARS)\n- -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------\n- --------------------- Notes: (1) Determined from monthly balances. (2) Represents the ratio of actual interest to average borrowings outstanding.\nEXXON CORPORATION\nSUPPLEMENTARY INCOME STATEMENT INFORMATION (SCHEDULE X)\nFOR YEARS 1993, 1992 AND 1991 (EXPRESSED IN MILLIONS OF DOLLARS)\n- -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------\nINDEX TO EXHIBITS\n- -------- * Compensatory plan or arrangement required to be identified pursuant to Item 14(a)(3) of this Annual Report on Form 10-K.\nThe registrant has not filed with this report copies of the instruments defining the rights of holders of long-term debt of the registrant and its subsidiaries for which consolidated or unconsolidated financial statements are required to be filed. The registrant agrees to furnish a copy of any such instrument to the Securities and Exchange Commission upon request.","section_15":""}
{"filename":"42791_1993.txt","cik":"42791","year":"1993","section_1":"ITEM 1. BUSINESS\n(A) General Development of Business\nThe Company started business in 1848 and was incorporated 20 years later in 1864 under the laws of New York State as Downs & Co. Manufacturing Company. In 1869, the Company's name was changed to The Goulds Manufacturing Company and in 1926 the name was changed to Goulds Pumps, Incorporated. Effective December 31, 1984, the Company was reincorporated under the laws of the State of Delaware by virtue of a merger transaction.\nGoulds Pumps, Incorporated designs, manufactures and services pumps, motors and accessories for industrial, agricultural, commercial and consumer markets. Industrial markets account for approximately 57 percent of the Company's sales. These include: chemical, petrochemical, refining, pulp and paper, utilities, mining and municipal, including waste water treatment systems. The remaining sales, representing approximately 43 percent of the Company's business, include pumps, motors and accessories for home water and sewage systems, agricultural irrigation and commercial uses.\n1993 was a year in which the pump industry as a whole continued to be impacted by weak economic conditions and increased competitive pricing pressures. Goulds Pumps' 1993 sales were slightly below 1992 levels, and earnings for the year of $1.12 from continuing operations were 8.2% lower than last year's $1.22 from continuing operations, exclusive of 1992 restructuring charges ($.19 per share) and 7.7% above last year's $1.04 in earnings before the cumulative effect of the accounting changes. The decrease from 1992's $1.22 earnings level is attributable to a consolidated gross margin decline of nearly three percentage points caused by stiff price competition in key markets and lower fourth quarter sales at EPD due to the implementation of CATS II, a new systems- driven manufacturing process. These declines were partially offset by a decrease in selling, general and administrative costs resulting from cost control measures and favorability in the translation of WTG-Europe's (Lowara) expenses, an outstanding performance by our joint venture, Oil Dynamics, Inc., and the tax benefits of the European corporate restructuring and other tax strategies. Reported 1993 earnings per share of $1.07 reflect the recording as of January 1, 1993 of the cumulative effect of the adoption of Financial Accounting Standard No. 112 (SFAS No. 112), \"Employers' Accounting for Postemployment Benefits,\" which decreased earnings by $.05.\n1993 highlights included:\n* The acquisition of Environamics Corporation. Goulds' investment in Environamics reflects the Company's continuing commitment to be the leader in advancing state-of-the-art pump design. The Company believes the Environamics pumps will qualify as the best available technology to control chemical emissions and expects demand for the pumps to increase as manufacturing plants respond to requirements of OSHA and the Clean Air Act. Sales of the Environamics product line could reach $40 million by the late 1990s.\n* During 1993, the Company's two largest divisions, the Engineered Products Division (EPD) and WTG-America implemented phase II of CATS - Competitive Advantage Through Simplification. This is a systems-driven overhaul of how the Company operates, from customer inquiries to order entry to shipment. While it will take several months for all aspects of\nPage 3 of 54\nthese newest introductions of CATS to fully benefit operations, significant improvements are expected in the Company's ability to deliver products efficiently to customers in 1994 and beyond.\n* The outstanding performance of the 50%-owned joint venture, Oil Dynamics, Inc. (ODI), had a major impact on 1993's results. ODI benefitted from the strength of significant Russian business during 1993.\n(B) Financial Information About Industry\/Market Segments\nFinancial information about market segments contained in Note 12 (Major Market Segment Information) on page 39 of this Annual Report on Form 10-K.\n(C) Narrative Description of Business\nOverview\nThe Company designs, manufactures and services pumps for the industrial, agricultural, commercial and consumer markets. The Company's pumps are manufactured for a broad range of uses in the chemical, petrochemical, refining, pulp and paper, utilities and mining industries, home water and sewage systems, agricultural irrigation and office building and other commercial applications.\nThe Company is organized into two groups: the Industrial Products Group (\"IPG\") and the Water Technologies Group (\"WTG\"). Prior to 1993, the Ag Turbine portion of the Vertical Products Division in Texas was part of the Industrial Products Group. In 1993, under the Company's restructuring plan, it became part of the Water Technologies Group.\nIndustrial Products Group\nThe Industrial Products Group represented approximately 57% of the Company's sales and 47% of operating earnings for 1993. The types of pumps manufactured for customers served by the Industrial Products Group include end-suction, double-suction, multistage, axial flow, vertical turbine, sump and slurry pumps to meet a wide variety of needs in the industrial and municipal markets including pumps designed for API and ANSI standards. The Company manufactures pumps from nonmetallic materials for applications where metal alloys are unsatisfactory or prohibitively expensive. The Company's vertical industrial turbine pumps are used throughout industries where space limitations or unsatisfactory suction conditions make the use of horizontal pumps impractical. The Company's slurry pumps serve the alumina and phosphate mining and minerals markets. Abrasion resistant pumps are manufactured for mining, utility and steel mill applications. The Company's Pump Repair and Overhaul (PRO) Service Centers play a role in customer service by rebuilding and repairing pumps and other rotating equipment produced by any manufacturer. The Company currently operates nine PRO Service Centers domestically and three in Canada.\nThe Company has a repair parts service organization to assist customers in its key industrial areas of the United States. Service representatives provide emergency service and technical advice on a 24-hour basis.\nIn 1993, IPG posted sales of $316.1 million, a decrease of $6.0 million or 1.9% compared to 1992 results restated for the Texas Ag Turbine restructuring noted above. Without restatement of 1992 results, IPG sales decreased $21.2 million or 6.3% below 1992\nPage 4 of 54\nresults. IPG sales were impacted by shipment delays early in the fourth quarter of 1993, caused by the implementation of CATS II at the Engineered Products Division. IPG experienced a softening of pump order activity in 1993 as customers in key core markets continued to defer spending for major projects. IPG repair parts activity increased slightly over 1992 levels due largely to energy-industry repair business offsetting the negative impact of selective union strikes against coal producers of 1993 which affected the demand for slurry product repair parts during most of 1993.\nIn 1994, IPG expects sales growth internationally and through its increased presence in the $3 billion worldwide energy market due to the 1992 acquisition of energy pump lines from the IDP joint venture which are now produced by EPD. The introduction of the Environamics product lines in late 1994 will further strengthen the Company's position in the chemical market.\nThe Company's industrial sales organization markets pumps for U.S. industrial users through 26 branch sales offices and approximately 100 independent sales representatives and distributors. The services of the independent representatives and distributors are used in geographic areas where it is not economical to maintain a direct branch office and in some of the large metropolitan areas where they supplement branch personnel in servicing specialized markets. The Company employs approximately 60 sales engineers nationwide in its branch sales offices.\nWater Technologies Group\nThe Water Technologies Group represented approximately 43% of the Company's sales and 53% of operating earnings for 1993. The Group manufactures and sells water pump systems, which include pumps, motors, pressure tanks and related accessories, used to supply water for farms, single and multiple family residences, office buildings, restaurants and other commercial uses, and municipal water supply and sewage treatment facilities. Larger submersible pumps are used to supply water for commercial and municipal customers. A commercial line of pumps is manufactured and sold for light industrial application. Submersible and deep-well turbine pumps are used for irrigation and other agricultural services. The Company believes it is the largest manufacturer of home water pump systems in the world.\nThe home water systems market presently accounts for 60% of Water Technologies Group sales. This market is cyclical, however, because it is tied to general economic conditions and the weather.\nIn 1993, WTG posted sales of $239.6 million, an increase of $2.8 million or 1.2% above 1992 results restated for the Texas Ag Turbine restructuring noted above. Without restatement, the WTG sales increase was $18.0 million or 8.1% above 1992 results. WTG-America sales increased 10.0% for 1993 compared to 1992 as new products and dry U.S. weather conditions in the Northeast and South boosted sales. WTG-Europe (Lowara) sales for 1993 were 10.3% below 1992 on a translated basis. On a local currency basis, sales for the year increased 14.4% over 1992 due to the shipment of new products and marketing initiatives, as well as the weakening of the lira, which makes Italian products more price competitive. Although affecting Lowara's translated results, the weakening of the lira does not negatively impact overall WTG profitability due to a natural hedge that exists since U.S. division imports of Lowara product equal or exceed Lowara's profitability.\nPage 5 of 54\nIn 1994, WTG will continue to focus on the development and introduction of new products and expanding and improving existing product lines. Additionally, WTG-Europe is continuing to expand its European presence by establishing a subsidiary in France and other European locations. These expansions are expected to result in sales growth in the future and increased market penetration in key regions. WTG-America (WTG-A) expects to introduce new products during the second and third quarters of 1994 in an effort to gain additional market share. Sales growth is therefore expected for 1994.\nThe Company's agricultural pumps and domestic water systems pumps manufactured by WTG are marketed in the United States through the WTG-America sales force. The Company employs approximately 50 WTG-A field sales force persons to call on approximately 500 distributors throughout the country. These distributors, primarily plumbing, heating and pump specialty wholesalers, sell to and service nearly 7,300 Goulds Pumps Dealers Association members.\nJoint Ventures\nOil Dynamics, Inc., of Tulsa, Oklahoma, is a 50% owned joint venture with Franklin Electric Co. which manufactures and distributes a line of high performance submersible pumps used in secondary oil recovery and provides the necessary sales and service network. This joint venture posted a $3.8 million earnings increase when compared to 1992 results, reflecting the strength of significant Russian business that will continue into the first quarter of 1994. Currently, due to the suspension of Russian financing availability, further ODI shipments to Russia have been halted. Though prior suspensions have been relatively short in duration, the end date cannot be predicted.\nInternational joint ventures are discussed on page 7 of this report under \"International Operations\".\n(D) General\nCompetition\nThe Company is one of the largest manufacturers of pumps in the United States. There are few competitors in the industrial sector in the United States who carry a diversified product line with a broad service network comparable to that of the Company.\nThe Company competes principally on the basis of product performance, quality, service and price. The Company enjoys the reputation as a \"quality\" pump manufacturer with a complete repair parts service. It believes it can maintain and strengthen its present competitive position by continuing to improve its customer service levels and manufacturing equipment and processes, by designing and developing new and improved products, by maintaining strategically located parts distribution centers and PRO Service Centers and by promoting the efforts of its sales force in the world market.\nThe pump industry is highly competitive with numerous competitors in the field. Some competitors are divisions of large corporations while others are companies with a limited product line.\nPage 6 of 54\nProduct Development\nThe Company is committed to the ongoing development of new products and improvement of existing products. Product development and research activities are carried out at the Company's various manufacturing facilities. Research and development expenditures amounted to $7.2 million, $7.9 million, and $6.1 million for the years ended December 31, 1993, 1992, and 1991, respectively. The higher level of R&D expenses in 1992 relates to the introduction of the SSV vertical multi-stage product line during the second quarter of 1992 by WTG-Europe. In 1994, the Company expects to increase its investment in new product development as well as in enhancements to existing products in order to improve its competitive position in the industry. The acquisition of Environamics Corporation and the expansion into the energy market provide the Company with new products to offer customers in the chemical and energy marketplaces.\nInternational Operations\nThe Company has wholly-owned subsidiaries in Italy, Canada, Mexico, Singapore, South Korea, Venezuela, the Netherlands and the Philippines. Sales by foreign affiliates were approximately $152 million, $161 million, and $159 million for 1993, 1992 and 1991, respectively. The decrease noted in 1993 is a result of the currency exchange impact of the weaker lire on translated results. Our largest international subsidiary, Lowara S.p.A. (WTG-Europe) located in Italy, also has wholly-owned subsidiaries in Italy, France, Belgium and the Netherlands, and 90% owned subsidiaries in the United Kingdom and Germany. Lowara fabricates stainless-steel pumps which are sold worldwide and has recently introduced several key new products with significant growth potential. The Canadian operation includes a new manufacturing facility in Cambridge, Ontario, for water systems products and for industrial products, as well as sales offices in Montreal and Calgary. The Philippines subsidiary manufactures residential and agricultural water systems pumps. The Mexican operation manufactures various pumps for industrial and agricultural applications. The Venezuelan subsidiary produces and markets certain industrial and water systems pumps primarily in Venezuelan markets. The Korean operation is an assembly and testing facility opened in May 1992 to provide support to customers in the Asia-Pacific region. The Netherlands operation is an assembly, testing and distribution site for industrial products. The Singapore operation is an assembly and distribution site for both IPG and WTG products serving the Asia-Pacific region.\nThe international sales efforts of the Company's employees are supplemented by local sales representatives. Offices to support foreign sales have been established in Fort Lauderdale, Florida; Singapore, Republic of Singapore; Cairo, Egypt; Athens, Greece; IJmuiden, Netherlands; Dammam, Saudi Arabia; Southhampton, England; Beijing, China; Taipei, Taiwan; Lima, Peru and Seoul, South Korea. In addition, the foreign operations maintain sales personnel to market their respective products.\nExport sales from the United States were $62 million in 1993, $58 million in 1992, and $53 million in 1991. The Company's export sales are distributed throughout the world without concentration in any one geographic region.\nThe Company also has a joint venture agreement with Nanjing Deep Well Pump Works of Nanjing, China to produce agricultural vertical turbine pumps for sale worldwide. Lowara participates in a joint\nPage 7 of 54\nventure marketing agreement with Tsurumi Company of Japan to market the highly sophisticated Lowara fabricated stainless steel pump line.\nRaw Materials\nThe principal raw materials essential to manufacturing pumps are nickel, iron, bronze and stainless steel. These are used more specifically in the manufacture of castings produced in the Company's three foundries. These internal foundries supply most stainless steel and hard iron castings to the Company's machining locations, thus reducing the need to purchase these products from external suppliers.\nIn addition, sheets of stainless steel are used in various stamping processes. Other components such as drivers, ball bearings and mechanical seals, along with bar stock for shafts, are purchased from several suppliers.\nRaw materials for the Company's products are in adequate supply from a number of alternative suppliers and, at present, the Company has the ability to select and apportion among vendors based on price, quality and delivery capability. The Company has entered into several quality alliances with selected vendors in order to focus on improving the quality, delivery and costs related to purchased material. This Total Quality emphasis on vendor performance will continue on an ongoing basis.\nThe Company purchases motors for its domestic water systems pumps primarily from Franklin Electric Company. The Company expects that it will continue to purchase motors from Franklin, but if the Company were required to establish a relationship with another supplier, its manufacturing business could be temporarily disrupted.\nEmployee Relations\nThe Company presently employs approximately 4,100 persons. Approximately 1,200 employees are covered under union contracts stipulating rates of pay, hours of employment and other conditions of employment. During 1993, the Company successfully extended its contract for one year with approximately 80 union employees at the Vertical Products Division, located in City of Industry, California. Including California, contracts with four unions covering approximately 430 employees expire in 1994. An early settlement was reached recently with the International Association of Machinists at the Municipal Business Unit in Baldwinsville, New York, the smallest of the four unions; another proposed early settlement was turned down by the 285-member United Steelworkers Union located at the Slurry Pump Division (SPD) in Ashland, Pennsylvania. The Company believes, however, that settlements will be reached in all cases before the contract expiration dates.\nThe Company considers that its overall labor relations are good with active labor-management committees operating at all locations. Approximately 2,800 persons are employed domestically while approximately 1,300 persons work at foreign affiliate locations.\nSeasonal Business\nThe Company operates at its lowest level during the first and last quarter of each calendar year due primarily to the Water\nPage 8 of 54\nTechnologies Group market decline in winter months. The Industrial Products Group of the Company is not a seasonal business.\nEnvironmental Considerations\nOn February 22, 1994, the Company was served with a copy of a sixty day notice given by the Environmental Defense Fund and the National Resources Defense Fund to the Attorney General and other California officials alleging that the Company and other submersible pump manufacturers were in violation of the Proposition 65.\nThe law prohibits the discharge, into sources of drinking water, of chemicals (including lead) known to the State of California to cause cancer or reproduction toxicity and requires a warning if individuals there are being exposed to such chemicals through the normal and intended use of the product. The notifying parties are permitted to commence litigation within sixty days in the event the officials do not so proceed. Violations of the law may result in a maximum civil penalty of $2,500 per day for each violation.\nThe Company has retained counsel in California and will vigorously defend any law suit that may be instituted. It is not possible to determine the extent of liability at this time, if any, or to quantify the cost of settlement or civil penalty that may be imposed.\nIn 1991, the Company recorded a $2.0 million provision for estimated environmental costs. This charge reflects anticipated costs to monitor and remediate a previously disclosed inactive Company landfill site in Seneca Falls, New York. At December 31, 1993, the remaining reserve was $1.7 million. The remediation is expected to occur through late 1995 or early 1996 and the Company does not currently expect any additional material expenses in future years associated with this site.\nAlthough the Company is unable to predict what legislation or regulations may be adopted or enacted in the future with respect to environmental protection and waste disposal, existing legislation and regulations have had no material adverse effect on its capital expenditures, earnings or competitive position. Capital expenditures for property, plant and equipment for environmental control were not material during 1993 and are not anticipated to be material in 1994 or 1995.\nPatents and Trademarks\nAlthough the Company owns several beneficial patents, none are considered to be material to its operations. The Company believes its trademark \"Goulds\" is of importance worldwide, since its products have been sold and used for almost 150 years.\nBacklog\nBacklog is primarily in the Industrial Products Group as the Water Technologies Group maintains minimal backlog levels since their products are normally shipped within two weeks from receipt of a customer order. The backlog of orders was $98.6 million at February 28, 1994, a decrease of $1.4 million from December 31, 1993 levels.\nPage 9 of 54\nEXECUTIVE OFFICERS\nName Age Present Office and Experience\nS. V. Ardia 52 President and Chief Executive Officer since 1985; President and Chief Operating Officer 1984-1985; Vice President-Corporate Sales 1982-1984; Vice President-International Operations 1979-1982; General Manager of Standard Pump Division of Worthington Pump Co. 1976-1979; Director of Goulds Pumps International Sales 1974-1976; Director since 1984.\nE. B. Bradshaw 55 Vice President since 1979; Secretary since 1974; General Counsel since 1969.\nM. A. Lambertsen 54 Vice President - Human Resources since December, 1991; Previously Vice President of Human Resources of Fisher-Price, Inc., 1978-1991.\nJ. M. Morphy 46 Group Vice President - Industrial Products Group since October 1992; Vice President and Chief Financial Officer 1986-1993; Controller 1985-1986; Previously Vice-President and Controller, Computer Consoles, Inc., Rochester, NY.\nJ. P. Murphy 47 Vice President and Chief Financial Officer since August 1993; Previously Executive Vice President and Chief Financial Officer of Westcan Chromalox, Inc., in Toronto, Canada, 1991-1993; Vice President-Finance and Administration and Chief Financial Officer of Hamilton Beach, Inc., of Waterbury, CT, 1986-1991.\nF. J. Zonarich 48 Group Vice President - Water Technologies Group since December, 1989; Vice President Sales and Marketing-Industrial Products Group 1986-1989; Commercial Manager, Engineered Products Division 1985-1986; Director of Marketing 1982-1985.\nNo family relationship exists between any of the above executive officers. The term of office for all executive officers listed above runs from one annual meeting to the next, or approximately one year.\nThere were no arrangements or understandings between any of the above executive officers and any other person pursuant to which they were selected as an executive officer.\nPage 10 of 54\nITEM 2.","section_1A":"","section_1B":"","section_2":"ITEM 2. PROPERTIES\nThe Company's Corporate headquarters and primary manufacturing facilities are located in Seneca Falls, New York. Other domestic manufacturing facilities are also located in Baldwinsville, New York; Ashland, Pennsylvania; Lubbock, Texas; Hudson, New Hampshire; and City of Industry, California. An assembly, shipping, and receiving facility for water systems is maintained in Auburn, New York. International manufacturing facilities are currently located in Italy, Canada, Mexico, Venezuela, South Korea and the Philippines. Lowara maintains subsidiaries outside of Italy which are located in Germany, Belgium, France, the Netherlands, and the United Kingdom.\nSubstantially all manufacturing sites are owned, and most sales offices, warehouses and service facilities are leased. The Company maintains warehouses or distribution centers in Chicago, Illinois; Houston, Texas; Portland, Oregon; Savannah, Georgia; Baton Rouge, Louisiana; and IJmuiden, the Netherlands, which carry inventories of pumps and parts sold to industrial users. The Company maintains regional warehouses to keep inventories of water pump systems and\/or deep-well turbine components readily available in the vicinities of Chicago, Illinois; Orlando, Florida; Fresno, California; Memphis, Tennessee; Melbourne, Australia, and Singapore.\nDuring the five years ended December 31, 1993, the Company invested approximately $153 million in capital improvements, primarily relating to upgrades in machinery and equipment. Management believes that the Company's facilities are well maintained and adequate for its operations.\nITEM 3.","section_3":"ITEM 3. LEGAL PROCEEDINGS\nOn February 22, 1994, the Company was served with a copy of a sixty day notice given by the Environmental Defense Fund and the National Resources Defense Fund to the Attorney General and other California officials alleging that the Company and other submersible pump manufacturers were in violation of the Proposition 65.\nThe law prohibits the discharge, into sources of drinking water, of chemicals (including lead) known to the State of California to cause cancer or reproduction toxicity and requires a warning if individuals there are being exposed to such chemicals through the normal and intended use of the product. The notifying parties are permitted to commence litigation within sixty days in the event the officials do not so proceed. Violations of the law may result in a maximum civil penalty of $2,500 per day for each violation.\nThe Company has retained counsel in California and will vigorously defend any law suit that may be instituted. It is not possible to determine the extent of liability at this time, if any, or to quantify the cost of settlement or civil penalty that may be imposed.\nITEM 4.","section_4":"ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS\nNo matters were submitted to a vote of shareholders during the fourth quarter of 1993.\nPage 11 of 54\nPart II\nITEM 5.","section_5":"ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY SECURITIES AND RELATED STOCKHOLDER MATTERS\nThe Company's common stock is traded in the NASDAQ National Market System under the symbol GULD. Quarterly high and low sales prices reported by NASDAQ National Markets and related dividend information for the past two years is set forth below:\nMarket value per share 1993 1992 Quarter High Low Quarter High Low\n1st $25.75 $21.25 1st $28.63 $22.75\n2nd $25.63 $22.38 2nd $29.38 $22.13\n3rd $26.50 $23.38 3rd $24.38 $21.63\n4th $26.75 $23.13 4th $25.00 $20.00\nYear $26.75 $21.25 Year $29.38 $20.00\nDividend paid per common share Quarter 1993 1992\n1st $.20 $.20\n2nd $.20 $.20\n3rd $.20 $.20\n4th $.20 $.20\nYear $.80 $.80\nThe approximate number of record holders of the Company's common stock as of February 28, 1994 was 5,484.\nThe Company's policy is to pay cash dividends quarterly. A quarterly cash dividend has been paid without interruption since 1948. The amount of dividends is within the discretion of the Board of Directors and depends, among other factors, on earnings, capital requirements and the operating and financial condition of the Company.\nThere are no dividend restrictions which materially limit the Company's current ability to pay dividends.\nPage 12 of 27\nITEM 6.","section_6":"ITEM 6. SELECTED FINANCIAL DATA\nPage 13 of 54\nPage 14 of 54\nITEM 7.","section_7":"ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS\nManagement's discussion and analysis reviews the Company's operating results for each of the three years in the period ended December 31, 1993, and its financial condition at December 31, 1993. The focus of this review is on the underlying business reasons for significant changes and trends affecting our sales, net earnings, and financial condition. This review should be read in conjunction with the accompanying consolidated financial statements, the related Notes to Consolidated Financial Statements and the Five-Year Summary of Financial Data.\nOVERVIEW\n1993 was a year in which the pump industry as a whole continued to be impacted by weak economic conditions and increased competitive pricing pressures. Goulds Pumps' 1993 sales were slightly below 1992 levels, and earnings for the year of $1.12 from continuing operations were 8.2% lower than last year's $1.22 from continuing operations, exclusive of 1992 restructuring charges ($.19 per share) and 7.7% above last year's $1.04 in earnings before the cumulative effect of the accounting changes. The decrease from 1992's $1.22 earnings level is attributable to a consolidated gross margin decline of nearly three percentage points caused by stiff price competition in key markets and lower fourth quarter sales at EPD due to the implementation of CATS II, a new systems-driven manufacturing process. These declines were partially offset by a decrease in selling, general and administrative costs resulting from cost control measures and favorability in the translation of WTG-Europe's (Lowara) expenses, an outstanding performance by our joint venture, Oil Dynamics, Inc., and the tax benefits of the European corporate restructuring and other tax strategies. Reported 1993 earnings per share of $1.07 reflect the recording as of January 1, 1993 of the cumulative effect of the adoption of Financial Accounting Standard No. 112 (SFAS No. 112), \"Employers' Accounting for Postemployment Benefits,\" which had a $.05 impact.\n1993 orders of $558.4 million were down slightly from 1992's record orders level of $560.1 million. Industrial Products Group (IPG) orders decreased 2.4% while Water Technologies Group (WTG) orders increased 2.6%. Fourth quarter 1993 order activity was 8.6% above 1992's fourth quarter, as both IPG and WTG experienced order level upturns. The Company is hopeful that the fourth quarter results are an indication of the beginning of a stronger orders trend into 1994.\nIPG experienced a softening of pump order activity in 1993 as customers in key core markets continued to defer spending for major projects. IPG repair parts activity increased slightly over 1992 levels due largely to energy-industry repair business offsetting the negative impact of selective union strikes against coal producers which affected the demand for slurry product repair parts during most of 1993. These strikes were settled during the fourth quarter of 1993.\nWithin WTG, WTG-America's (WTG-A) 1993 orders levels increased 12.2% compared to 1992, while orders at WTG-Europe declined 10.3% on a translated basis. On a local currency basis, WTG-Europe's 1993 orders increased 14.4% over 1992, primarily due to new product introductions, marketing initiatives, and the impact of the weaker lira, which makes Lowara's products more price competitive. WTG-A orders increased due the impact of new product promotions and to dry U.S. weather conditions in the Northeast and South.\n1993 was a year of many challenges as well as many accomplishments. Highlights of the year include:\n* The acquisition of Environamics Corporation. Goulds' investment in Environamics reflects the Company's continuing commitment to be the leader in advancing state-of-the-art pump design. The Company believes the Environamics pumps will qualify as the best available technology to control chemical emissions and expects demand for the pumps to increase as manufacturing plants respond to requirements of OSHA and the Clean Air Act. Sales of the Environamics product line could reach $40 million by the late 1990s.\n* During 1993, the Company's two largest divisions, the Engineered Products Division (EPD) and WTG-America implemented phase II of CATS - Competitive Advantage Through Simplification. This is a systems-driven\nPage 15 of 54\noverhaul of how the Company operates, from customer inquiries to order entry to shipment. While it will take several months for all aspects of these newest introductions of CATS to fully significant improvements are expected in the Company's ability to deliver products efficiently to customers in 1994 and beyond.\n* During the fourth quarter of 1993, the Company substantially completed personnel reductions in IPG and on the Corporate staff that will result in future cost savings in excess of $4.0 million annually. The Company recognized approximately $1.3 million in severance costs associated with this downsizing in 1993.\n* The Company continued to expand its international focus and presence as WTG-Europe (Lowara) has established a new subsidiary in France, and will look to add locations during 1994. In 1994, the Company expects to continue the trend toward international growth through increased sales presence in the Asia-Pacific region, South America, and Europe.\n* The Company implemented several tax planning strategies which resulted in a decreased effective tax rate in 1993. A significant one-time adjustment due to tax code changes and the application of SFAS No. 109 as well as the implementation of the European corporate tax restructuring, were primarily responsible for the rate decrease in 1993. Several of the strategies put in place in 1993 are expected to yield future tax benefits.\n* The energy-industry product line, which the Company acquired in 1992, exceeded 1993 expectations in terms of profitability, primarily due to strong repair parts shipment activity and cost containment measures. The Company anticipates the commencement of energy pump shipments during 1994.\n* The outstanding performance of the 50%-owned joint venture, Oil Dynamics, Inc. (ODI), had a major impact on 1993's results. ODI benefitted from the strength of significant Russian business during 1993.\n* Safety performance in 1993 again showed continuous improvement as the Company's employees incurred the lowest number of accidents on record within Goulds in a one-year period. Safety improvements over the past two years have resulted in lower Worker's Compensation insurance premiums for 1994.\nPage 16 of 54\nAnalysis of Operations\nThe following table indicates the percentage relationships of earnings and expense items included in the Consolidated Statements of Earnings for each of the three years ended December 31, 1993 and the percentage change in those items or such years.\nAs a Percentage of Total Percentage Change Net Sales 1993 vs 1992 vs 1993 1992 1991 1992 1991 100.0% 100.0% 100.0% Net Sales (0.6)% (1.4)% 71.9 69.0 69.0 Cost of sales 3.6 (1.3) 20.7 21.4 20.4 SG&A expenses (3.8) 3.5 1.3 1.4 1.0 R&D expenses (9.6) 29.5 -- 1.1 -- Restructuring charge (100.0) -- -- -- 0.4 Environmental provision -- (100.0) Earnings from investments (0.8) (0.1) (0.4) and affiliates 542.6 (71.3) 1.0 0.9 1.1 Interest expense 8.1 (21.3) (0.4) (0.2) (0.4) Interest income 35.7 (36.8) 0.1 0.1 (0.1) Other (income) expense-net 1.9 (175.8) Earnings before income taxes, extraordinary charge and cumulative effect of 6.2 6.4 9.0 accounting changes (3.9) (30.1) 1.9 2.5 3.5 Income taxes (22.4) (30.1) Earnings before extraordinary charge and cumulative effect 4.3 3.9 5.5 of accounting changes 7.9 (30.2) -- -- (0.1) Extraordinary charge -- (100.0) Cumulative effect of (0.2) (5.3) -- accounting changes (96.6) -- 4.1% (1.4)% 5.4% Net earnings (loss) N.M. N.M. N.M. - Not meaningful\nNet Sales\nThe decrease in total sales of $3.2 million in 1993 compared to 1992 is primarily composed of a $6.0 million or 1.9% decrease in Industrial Products Group sales while Water Technologies Group sales increased $2.8 million or 1.2%. IPG sales were impacted by shipment delays early in the fourth quarter of 1993, caused by the implementation of CATS II at the Engineered Products Division (EPD). We expect that it will take a number of months before we are able to reduce this current shipment backlog. For WTG, WTG-America sales increased 10.0% for 1993 compared to 1992 as new products and dry U.S. weather conditions in the Northeast and South boosted sales. WTG-Europe (Lowara) sales for 1993 were 10.3% below 1992 on a translated basis. On a local currency basis, sales for the year increased 14.4% over 1992 due to the shipment of new products and marketing initiatives, as well as the weakening of the lira, which makes Italian products more price competitive. Although affecting Lowara's translated results, the weakening of the lira does not negatively impact overall WTG profitability due to a natural hedge that exists since U.S. division imports of Lowara product equal or exceed Lowara's profitability.\nIn 1994, IPG expects sales growth internationally and through our increased presence in the $3 billion worldwide energy market due to the 1992 acquisition of energy pump lines from the IDP joint venture, which are now produced by EPD. The introduction of the Environamics product lines in late 1994 will further strengthen the Company's competitive position in the chemical market.\nWTG will continue to focus on the development and introduction of new products and expanding and improving existing product lines. Additionally, WTG-Europe is continuing to expand its European presence by establishing a subsidiary in France and other European locations. These expansions are expected to result in sales growth in the future and increased market penetration in key regions. WTG-America expects to introduce new products during the second and third quarters of 1994 in an effort to gain additional market share. Sales growth is therefore expected for 1994.\nPage 17 of 54\nDuring 1992, net sales of $558.9 million represented a decrease of $7.7 million or 1.4% compared to 1991. In 1992, IPG sales decreased due to lower repair parts order activity while WTG sales increased $1.0 million primarily due to translation favorability at WTG-Europe.\nCosts and Expenses\nGross profit as a percentage of net sales was 28.1% for 1993, compared to 31.0% for 1992. The Industrial Products Group gross profit percentage for 1993 decreased to 27.5% from 31.0% a year ago. This decrease is largely attributable to the continued competitive pricing environment in the U.S. and certain international markets and a shipments delay of approximately $9 million early in the fourth quarter at EPD due to the implementation of CATS II. We expect that it will take a number of months before we are able to reduce this current shipment backlog. The Water Technologies Group gross profit percentage decreased to 29.6% in 1993, compared to 32.0% for 1992. This decrease is due in large part to pricing pressure and unfavorable product shipment mix.\nSelling, general and administrative (SG&A) expenses were 20.7%, 21.4%, and 20.4% of net sales in 1993, 1992, and 1991, respectively. The decrease in 1993 was a result of cost containment measures implemented by the Company, which included restructuring and workforce reductions. Also reducing reported SG&A in 1993 is the favorability associated with the translation of WTG-Europe expenses.\nDuring 1993, the Company's investment in research and development (R&D) was $7.2 million, compared to $7.9 million in 1992, and $6.1 million in 1991. The higher level of R&D expenses in 1992 relates to the introduction of the SSV vertical multi-stage product line during the second quarter of 1992 by WTG- Europe. In 1994, the Company expects to increase its investment in new product development as well as in enhancements to existing products in order to improve its competitive position in the industry. The acquisition of Environamics Corporation and the expansion into the energy market provide the Company with new products to offer customers in the chemical and energy marketplaces.\nOther Income and Expenses\nInterest expense increased $.4 million due to the higher levels of short-term and long-term debt being maintained in 1993 in comparison to 1992. Interest expense in 1994 is anticipated to be higher as the Company has drawn down on a previously arranged long-term financing agreement at a higher interest rate (see Liquidity and Capital Resources).\nEarnings from investments and affiliates increased $3.9 million in 1993 compared to the same period in 1992. This increase is due to Goulds' share of the 1993 earnings of Oil Dynamics, Inc. (ODI), a 50%-owned joint venture, which posted a $3.8 million increase when compared to 1992 results, reflecting the strength of significant Russian business that will continue into the first quarter of 1994. Currently, due to the suspension of Russian financing availability, further ODI shipments to Russia have been halted. Though prior suspensions have been relatively short in duration, the end date of this suspension cannot be predicted.\nThe variations in other (income) expense-net in 1992 as compared to 1991 were primarily the result of non-recurring income in 1991 from the receipt of government subsidies related to prior year capital expenditures by WTG-Europe.\nThe provision for income taxes represents 31.5%, 39.0%, and 39.0% of earnings from continuing operations before income taxes in 1993, 1992, and 1991, respectively. In 1993, our effective tax rate decreased due to a third quarter cumulative adjustment associated with recent tax code changes and new accounting rules for income taxes (SFAS No. 109) and the implementation of the corporate European tax restructuring in the fourth quarter. The effective tax rate in 1994 is expected to be 38.5%, reflecting the higher marginal tax rates enacted, less other tax reduction strategies put into place.\nPage 18 of 54\nReturn on Equity\nThe percentage return on average shareholders' equity in 1993 increased to 12.4% from 9.6% in 1992. The percentage in 1992 reflects the impact of restructuring charges. Excluding the after-tax effects of the restructuring charge, the 1992 return on average shareholders' equity would have been 11.1%. The increase in 1993 reflects the reductions in shareholders' equity caused by the $12.3 million decrease in cumulative translation adjustments on the consolidated balance sheet and an increase in the level of after-tax earnings from continuing operations, primarily due to the tax restructuring strategy.\nNon-recurring Charges\n* Restructuring Charge. During 1992, the Company recorded the impact of a restructuring program designed to reduce costs, improve operating efficiencies, and increase shareholder value. The program included $2.9 million related to the early retirement of employees. In addition, $3.4 million resulted from the relocation of certain product lines and the centralization of contract engineering for high- specification products to better meet customer requirements. The aggregate restructuring program costs are shown as a separate line item in the accompanying consolidated statement of earnings and resulted in an after-tax charge of $3.9 million ($.19 per share) in 1992. The actions considered in the restructuring charge were essentially completed during 1993. The Company began in 1993 to realize the benefits associated with this restructuring through reduced payroll- related costs and improved operating efficiencies. A successful transfer of the industrial sump pump line (Model 3171) from the Lubbock, Texas, facility to the Slurry Pump Division in Ashland, Pennsylvania, was also accomplished.\n* Environmental Provision. In 1991, the Company recorded a $2.0 million provision for estimated environmental costs. This charge reflects anticipated costs to monitor and remediate an inactive Company landfill site in Seneca Falls, New York. At December 31, 1993, the remaining reserve was $1.7 million. The remediation is expected to occur through late 1995 or early 1996, and the Company does not currently expect any additional material expenses in future years associated with this site.\n* Extraordinary Charge. In 1991, an extraordinary charge net of tax benefits of $.6 million was recognized for the early retirement of the Company's Convertible Subordinated Debentures. The $25.0 million of Debentures carried an interest rate of 9- 7\/8% and were due in the year 2006. This one-time charge was fully recovered during 1992 as we refinanced the debt at substantially lower interest rates.\nOrders and Backlog\nIn 1993, orders received were $558.4 million, less than 1% below the record 1992 orders level of $560.1 million. Backlog levels at December 31, 1993, increased from 1992 by $3.2 million or 3.3% to $100.0 million, primarily due to the high level of fourth quarter orders activity and the delays in EPD shipments caused by the CATS II implementation. Backlog exists primarily in the Industrial Products Group as the Water Technologies Group maintains minimal backlog levels since its products are normally shipped within two weeks from receipt of a customer order.\nLiquidity and Capital Resources\nAs reflected in the Consolidated Statements of Cash Flows, the $20.9 million of cash generated by operating activities and $10.9 million of cash provided by net financing activities in 1993, combined with a negative $2.0 million translation effect, was utilized to fund $36.3 million of net investing activities, while decreasing cash and cash equivalents by $6.5 million.\nPage 19 of 54\nSignificant items impacting cash flows from operating activities in 1993 include an $18.3 million increase in trade receivables due largely to increased December shipments volume over 1992 at both IPG and WTG and a $12.5 million increase in inventories primarily at WTG-America and WTG-Europe to support higher shipment levels and the promotion of new products.\nCapital additions in 1993 were $24.7 million, which approximated depreciation of $24.8 million. Significant projects included investments in the CATS II business systems hardware and software upgrades at EPD and equipment additions at domestic locations. In 1994, the Company expects to spend approximately $25-30 million in capital additions. The 1994 spending level includes continued major investments in upgrades of machinery and equipment and product development related expenditures that include the new Environamics technology.\nIn the third quarter of 1993, WTG-Europe entered into an agreement whereby 10 billion lire ($6.1 million) of proceeds from short-term loans were invested in insurance certificates. The net effect of this transaction is to increase WTG-Europe's interest expense and interest income, resulting in increased profit after taxes due to tax rate differentials on these items.\nCash flows from investing activities in 1992 reflected the availability of sinking funds, previously restricted and classified as other long-term assets related to Industrial Revenue Bond proceeds.\nDebt levels at the end of 1993 increased significantly compared to those at December 31, 1992 primarily due to higher levels of inventory and other working capital items. Based on a financing agreement entered into in December 1992, the Company borrowed $20.0 million on August 3, 1993 at a fixed interest rate of 7.18% payable semi-annually. Principal payments are required in equal annual installments at the end of the third through seventh years. Proceeds from this loan were used to refinance a $10.0 million Term Loan due in August 1993 and other short-term debt. Additionally, the Company currently intends to replace its $30 million Revolving Credit Agreement, which will expire on October 31, 1994. The Company believes cash from operations and the $56.1 million of available credit facilities at December 31, 1993, will be sufficient to meet its liquidity needs during 1994.\nCumulative translation adjustments on the consolidated balance sheet at December 31, 1993 decreased shareholders' equity by $12.3 million from December 31, 1992 reflecting the weakening of the devalued Italian lira and the Canadian dollar against the U.S. dollar since the fourth quarter of 1992.\nIn 1993, the Company redeemed the rights issued under the Stockholder Rights Plan instituted in 1988. The Company paid shareholders a redemption price of $.01 per share outstanding or approximately $200,000.\nInflation\nThe market price of a number of the Company's product lines decreased in 1993 due to worldwide competitive pressures in the pump industry. At the same time, material cost increases from our vendors have been minimal. The Company continues to monitor the impact of inflation in order to minimize its effects in future years through pricing strategies, productivity improvements, and cost reductions.\nEvents Impacting Future Operating Results\nDuring 1993, the Company successfully extended its contract for one year with approximately 80 union employees at the Vertical Products Division, located in City of Industry, California. Including California, contracts with four unions covering approximately 430 employees expire in 1994, the largest being the 285-member United Steelworkers located at the Slurry Pump Division (SPD) in Ashland, Pennsylvania. The Company considers that its overall labor relations are good with active labor-management committees operating at all locations.\nDuring the fourth quarter of 1993, the Company announced it acquired Environamics Corporation, a privately held company whose patented hermetically sealed pump technology will greatly expand Goulds' ability to help the\nPage 20 of 54\nchemical processing industry lower production costs and also meet increasingly stringent environmental regulations. Environamics is operating as an autonomous subsidiary, augmenting Goulds' current industry distribution channels used by IPG. Shipments of Environamics products are expected to begin near the end of the third quarter of 1994.\nSean P. Murphy joined the Company in August 1993 as Vice President and Chief Financial Officer (CFO). Mr. Murphy assumed the CFO duties from John M. Morphy, who continues as Group Vice President of the Industrial Products Group.\nEarnings of our WTG-Europe (Lowara) subsidiary continue to be impacted by unfavorable currency exchange. Offsetting this negative impact is the natural hedge which exists through the transfer of Lowara products to WTG-America. We will continue to monitor exchange rate fluctuations and where appropriate, consider forward contracts for lira purchases to control the impact of these fluctuations.\nAccounting Standards\nEffective in the first quarter of 1993, the Company adopted SFAS No. 112, \"Employers' Accounting for Postemployment Benefits.\" See Note 11 for a detailed discussion of the impact of this change on the Company's consolidated financial statements.\nEffective in the first quarter of 1992, the Company adopted SFAS No. 106, \"Employers' Accounting for Postretirement Benefits Other Than Pensions\"; SFAS No. 107, \"Disclosures About Fair Value of Financial Instruments\"; and SFAS No. 109, \"Accounting for Income Taxes.\" See Notes 11, 8, and 10, respectively, for a detailed discussion of the impact of these standards on the Company's consolidated financial statements.\nIn Conclusion\nThe Company is encouraged that it has taken important steps in 1993 that will yield improved results in 1994 and beyond. One milestone achieved this year was the implementation of CATS II and related manufacturing process improvements, which will translate into increased productivity and better customer service. Other important steps have been the acquisition of Environamics Corporation, the Company's expansion in the energy-industry business, and cost containment measures that included reducing the workforce. These actions, when combined with signs of a stronger orders trend, give the Company solid reasons for expecting improvement next year in both sales and profitability.\nPage 21 of 54\nITEM 8.","section_7A":"","section_8":"ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA\nFinancial Statements\nPage\nIndependent Auditors' Report 23 Consolidated Statements of Earnings 24 Consolidated Balance Sheets 25 Consolidated Statements of Shareholders' Equity 26 Consolidated Statements of Cash Flows 27 Notes to Consolidated Financial Statements 28-39\nSupplementary Data\nQuarterly Financial Data 40\nPage 22 of 54\nIndependent Auditors' Report\nTo the Board of Directors and Shareholders of Goulds Pumps, Incorporated:\nWe have audited the accompanying consolidated balance sheets of Goulds Pumps, Incorporated, and its subsidiaries as of December 31, 1993 and 1992, and the related consolidated statements of earnings, shareholders' equity, and cash flows 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.\nWe conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.\nIn our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Goulds Pumps, Incorporated, and its subsidiaries at December 31, 1993 and 1992, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1993, in conformity with generally accepted accounting principles.\nAs discussed in Note 11 to the consolidated financial statements, the Company changed its methods of accounting for postretirement benefits other than pensions (effective January 1, 1992) and postemployment benefits (effective January 1, 1993).\nDELOITTE & TOUCHE Rochester, New York January 26, 1994\nPage 23 of 54\nPage 24 of 54\nPage 25 of 54\nPage 26 of 54\nPage 27 of 54\nNotes To Consolidated Financial Statements (Dollars in thousands except per share data)\n1. Summary of Significant Accounting Policies\nConsolidation\nThe consolidated financial statements include the accounts of all wholly owned and majority-owned subsidiaries after elimination of all significant intercompany transactions. Investments in affiliates and corporate joint ventures, representing 20% to 50% of the ownership of such companies, are accounted for under the equity method.\nThe majority of the foreign subsidiaries have fiscal year-ends of October 31 or November 30 to facilitate consolidation of the subsidiaries' financial statements.\nForeign Currency\nThe Company accounts for its foreign operations in accordance with Statement of Financial Accounting Standards (SFAS) No. 52, \"Foreign Currency Translation.\" For subsidiaries where the local currency is the functional currency, assets and liabilities are translated at current exchange rates. Earnings and expense items are translated using average exchange rates during the year. Translation adjustments are not included in determining net earnings but are accumulated and reported as a separate component of shareholders' equity.\nFor subsidiaries located in highly inflationary economies, balance sheet items are translated using current exchange rates, and average exchange rates are used for statement of earnings items except for inventory, property, and their related statement of earnings accounts, which are translated using historical exchange rates. Resultant translation gains and losses are included in earnings.\nCash and Cash Equivalents\nCash and cash equivalents include all cash balances and highly liquid investments with original maturities of three months or less. The carrying values of cash and cash equivalents approximate fair values due to the short maturities of these financial instruments.\nInventories\nDomestic inventories are stated at the lower of cost or market, with cost generally determined by the last-in, first-out (LIFO) method. Inventories of foreign subsidiaries are stated at the lower of cost or market, with cost being determined by the first-in, first-out (FIFO) method, or average cost method.\nProperty, Plant and Equipment\nProperty, plant and equipment is stated at cost, less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets ranging from 15 to 50 years for buildings and 3 to 12 years for machinery and equipment.\nIncome Taxes\nIn February 1992, the Financial Accounting Standards Board issued SFAS No. 109, \"Accounting for Income Taxes,\" which requires recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the\nPage 28 of 54\ndifference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Effective January 1, 1992, the Company adopted SFAS No. 109. The cumulative effect of this accounting change for income taxes was not significant.\nPrior to 1992, the provision for income taxes, computed under APB Opinion 11, was based on earnings and expenses included in the accompanying consolidated statements of earnings. Deferred taxes were provided to reflect the tax effects of reporting earnings, expenses, and tax credits in different periods for financial accounting purposes than for income tax purposes.\nThe aggregate undistributed earnings of certain foreign subsidiaries which, under existing law, will not be subject to U.S. tax until distributed as dividends was $55,001 on December 31, 1993. Since the earnings have been or are intended to be indefinitely reinvested in foreign operations, no provision has been made for any U.S. taxes that may be applicable thereto. Any taxes paid to foreign governments on those earnings may be used, in whole or in part, as credits against U.S. tax on any dividends distributed from such earnings.\nNet Earnings (Loss) Per Share\nNet earnings (loss) per share of common stock is based upon the weighted average number of shares of common stock outstanding during the year (21,126 in 1993, 21,027 in 1992 and 20,781 in 1991). No effect has been given to options outstanding under the Company's Stock Option Plans since no material dilutive effect would result from the exercise of these items.\nFinancial Presentation Changes\nCertain prior year amounts have been reclassified to conform to the current- year presentation.\n2. Inventories\nInventories are summarized as follows:\nDecember 31, 1993 1992\nRaw materials $ 31,927 $36,764 Work-in-process 49,062 46,434 Finished goods 55,863 48,800\nInventories valued at FIFO 136,852 131,998 LIFO allowance (30,667) (29,967)\n$106,185 $102,031\nInventories of foreign subsidiaries, valued at FIFO or average cost, are $49,252 and $48,774 at December 31, 1993 and 1992, respectively.\n3. Investments, Including Investments in Affiliates\nInvestments, including investments in affiliates, are summarized below:\nDecember 31, 1993 1992\nInvestment in Oil Dynamics, Inc. $11,706 $11,696 Investments in insurance certificates 6,074 -- Other investments 1,068 1,039\n$18,848 $12,735 Page 29 of 54\nThe Company has a 50%-owned joint venture, Oil Dynamics, Inc. (ODI), which manufactures submersible pumps utilized principally in secondary oil recovery. For 1993, 1992, and 1991, the Company recognized earnings of $4,385, $558, and $1,957, respectively. The Company's investment in ODI approximates the Company's share of the underlying equity in the net assets of that Company. Dividends received were $4,375, $1,050, and $1,983, in 1993, 1992, and 1991, respectively.\nSummarized financial information for Oil Dynamics, Inc., is as follows:\nOctober 30, October 31, (In thousands) 1993 1992\nCurrent assets $26,579 $19,387 Non-current assets 12,808 11,777\nTOTAL ASSETS $39,387 $31,164\nCurrent liabilities $14,444 $ 6,127 Non-current liabilities 1,497 1,704 Total shareholders' equity 23,446 23,333\nTOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $39,387 $31,164\nFor the years ended, October 30, October 31, November 2, (In thousands) 1993 1992 1991\nNet sales $71,672 $30,424 $39,796 Gross profit 25,408 10,176 13,783 Net earnings 8,770 1,115 3,914\nThe Company's Italian subsidiary, Lowara S.p.A., entered into a financial contract with a major Italian insurance company. The proceeds from short-term loans were invested in long-term insurance certificates to take advantage of tax rate differentials. At December 31, 1993, carrying value approximates fair value.\n4. Property, Plant and Equipment\nMajor classes of property, plant and equipment consist of the following:\nDecember 31, 1993 1992\nLand and buildings $ 51,605 $ 52,049 Machinery and equipment 310,460 301,715\n362,065 353,764 Less accumulated depreciation 213,092 199,178 $148,973 $154,586\n5. Stock Option Plans\nThe Company has two stock option plans from which key employees may be granted options to purchase shares of the Company's common stock at 100% of the market price on the date of grant.\nA maximum of 1,500,000 shares was authorized to be granted under the 1988 Stock Incentive Plan during the period ending May 1998. Grants for 678,947 shares were outstanding at December 31, 1993, of which 172,226 shares were exercisable at that date. An additional 153,481 shares were granted in January 1994.\nA maximum of 1,000,000 shares was authorized to be granted under the 1981 Incentive Stock Option Plan during the period ended April 1992. Grants for 251,022 shares were outstanding at December 31, 1993, of which 214,320 were exercisable at that date.\nPage 30 of 54\nThe following table summarizes stock option activity for the three years ended December 31, 1993:\nPrice Range Shares Per Share\nOutstanding, January 1, 1991 940,529 $15.00 - 24.63\nGranted 210,433 $15.50 - 23.88 Exercised (205,864) $15.00 - 19.88 Cancelled (45,854) $15.50 - 24.13\nOutstanding, December 31, 1991 899,244 $15.00 - 24.63\nGranted 236,330 $23.25 - 24.63 Exercised (225,607) $15.00 - 24.63 Cancelled (34,972) $15.50 - 24.13\nOutstanding, December 31, 1992 874,995 $15.00 - 24.63\nGranted 233,579 $23.63 - 25.00 Exercised (78,740) $15.00 - 24.13 Cancelled (99,865) $18.13 - 24.88\nOutstanding, December 31, 1993 929,969 $15.00 - 25.00\nPage 31 of 54\n6. Debt and Credit Agreements\nDebt consists of the following:\nDecember 31, 1993 1992\nForeign overdrafts and short-term loans 4.19%-13.50%, due currently $26,911 $9,795\nForeign notes payable 4.0%-9.0%, due 1994-2006 8,671 7,822\nUnsecured committed line of credit Variable, due 1994 (3.75% at December 31, 1993) 9,520 7,647\nIndustrial revenue bonds 5.0%, due 1994-2006 1,632 1,769 Variable, due 2009 (3.1% at December 31, 1993) 1,850 2,587\nRevolving credit agreement Variable, expires 1994 (3.39% at December 31, 1993) 5,000 20,000\nUnsecured committed credit facility 3.39%, due 1995 7,869 --\nTerm loans 7.18%, due 1996-2000 20,000 -- 4.125%, due 1993 -- 10,000\nOther borrowings 4.18% (weighted average), due 1994-2007 5,447 4,480\nCapital leases 10.51% (weighted average), due 1994-1996 452 1,166\nTotal 87,352 65,266\nLess payments due within one year 48,493 24,379\n$38,859 $40,887\nThe Company has $25,480 of unused short-term committed credit lines available with U.S. banks at money market rates of interest. Foreign subsidiaries have unused short-term credit lines available at prevailing interest rates in the amount of $30,591.\nThe Company obtained Industrial Development Revenue Bond Financing to purchase, renovate, and expand certain facilities. Additionally, the bonds are collateralized by certain property.\nThe Revolving Credit Agreement permits borrowing up to $30,000, at the Company's election, under several interest rate options, which are reflective of current rates. The highest level of revolving credit borrowings during 1993 was $30,000; 1992 - $27,500; 1991 - $12,000. Borrowings under this agreement averaged $22,927 for 1993, with a weighted average interest rate of 3.45%; 1992 - $16,400, at 4.1%; 1991 - $3,000, at 6.41%.\nThe Company borrowed funds through a $10,000 unsecured committed credit facility in 1993 to finance the import of product from its Italian subsidiary. At December 31, 1993, the Company had borrowed $7,869, which is to be repaid in 1995.\nThe $10,000 Term Loan came due and was repaid in 1993. On August 3, 1993 the Company borrowed $20,000 on a long-term note. The balance of the note has\nPage 32 of 54\nbeen classified as long-term debt in the accompanying consolidated balance sheets since principal repayment commences in 1996.\nThe Company's borrowing agreements impose certain financial restrictions. The Company was in compliance with these restrictions at December 31, 1993.\nDebt maturities during the next five years are $48,493 in 1994, $9,405 in 1995, $5,533 in 1996, $4,384 in 1997, and $4,933 in 1998.\n7. Commitments\nThe Company has various noncancellable lease agreements for sales offices, warehouses, computers, and other equipment. Total rental expense for the years ended December 31, 1993, 1992, and 1991 was $5,010, $4,913, and $5,188, respectively. Future minimum rental payments at December 31, 1993, are as follows:\n1994 $3,046 1997 $ 997 1995 1,992 1998 814 1996 1,217 1999 and after 1,755\n8. Financial Instruments\nOff-Balance-Sheet Risk. As part of its currency hedging, the Company utilizes forward exchange and option contracts to minimize the impact of currency fluctuations on transactions. The Company and its subsidiaries held contracts for $10,042 and $7,966 at December 31, 1993 and 1992, respectively, for the purchase or sale of Canadian and other currencies. The fair value of these financial instruments is estimated based on quoted market prices for similar contracts at December 31, 1993 and 1992, respectively. The unrealized gain on these contracts at December 31, 1993 and 1992, is $96 and $214, respectively.\nAt December 31, 1993 and 1992, the Company has letters of credit outstanding totalling $5,356 and $4,899, respectively, which guarantee various trade activities. The contract amount of the letters of credit is a reasonable estimate of the fair value since the value for each is fixed over the life of the commitment.\nNo material loss is anticipated due to nonperformance by counterparties to these agreements.\nConcentrations of Credit Risk. Financial instruments that potentially subject the Company to concentrations of credit risk, as defined by SFAS No. 105, consist principally of temporary cash investments and trade receivables. The Company places its temporary cash investments with credit-worthy financial institutions and limits the amount of credit exposure to any one financial institution. The Company actively evaluates the credit worthiness of the financial institutions with which it invests. Concentrations of credit risk with respect to trade receivables are limited due to the large number of customers constituting the Company's customer base and their dispersion across different businesses and geographic areas. Letters of credit are the principal security obtained to support lines of credit or negotiated contracts when the financial strength of a customer is not considered sufficient. At December 31, 1993 and 1992, the Company had no significant concentrations of credit risks.\nFair Value. At December 31, 1993 and 1992, the Company's long-term debt carrying value is a reasonable estimate of its fair value since interest rates are based on prevailing market rates.\nAt December 31, 1993 and 1992, the Company held a note receivable from Wheatley TXT Corporation for $4,000, and $5,000, respectively. The non- current portion of the note receivable is included in other assets. The carrying amount at December 31, 1993 and 1992, respectively, which represents the face value of the note receivable, is a reasonable estimate of its fair value. The interest rate is variable and during 1993 and 1992, the Company recognized $248 and $310, respectively, of interest income on this note.\nPage 33 of 54\n9. Non-recurring Charges\nRestructuring Charge. During 1992, the Company recorded the impact of a restructuring program designed to reduce costs, improve operating efficiencies, and increase shareholder value. The program included $2,940 related to the early retirement of employees. In addition, $3,360 resulted from the relocation of certain product lines and the centralization of contract engineering for high-specification products to better meet customer requirements. The aggregate restructuring program costs are shown as a separate line item in the accompanying consolidated statement of earnings and resulted in an after-tax charge of $3,900 ($.19 per share) in 1992. During 1993, the restructuring program was substantially completed.\nEnvironmental Provision. In 1991, the Company recorded a $2,000 provision for estimated environmental costs. This charge reflects anticipated costs to monitor and remediate an inactive Company landfill site in Seneca Falls, New York. At December 31, 1993, the balance of this reserve was $1,735. The remediation is expected to occur through late 1995 or early 1996, and the Company does not currently expect any additional material expenses in future years associated with this site.\nExtraordinary Charge. During December 1991, the Company called for the early redemption of the $25,000 - 9.875% Convertible Subordinated Debentures, which had been due in 2006. Of this amount, $24,895 was redeemed at the call price of 103.292%, and the remaining amount of $105 was converted into 3,923 shares of common stock at the conversion price of $26.75 per share. The redemption premium (net of applicable income tax benefit of $313) has been classified as an extraordinary charge of $557, in the accompanying consolidated statements of earnings.\n10. Income Taxes\nThe components of the provision for income taxes are as follows:\n1993 1992 1991\nCurrent: Federal (U.S.) $ 6,049 $11,363 $13,760 State 1,565 2,544 2,843 Foreign 4,825 6,375 5,992\nDeferred: Federal (U.S.) (2,548) (6,119) (3,243) State (5) (905) (644) Foreign 955 718 1,296\nProvision for income taxes $10,841 $13,976 $20,004\nReconciliations of the U.S. statutory tax rate with the effective tax rates reported for continuing operations are as follows:\n1993 1992 1991\nU.S. statutory rate 35.0% 34.0% 34.0%\nForeign taxes in excess of U.S. statutory rate 6.1 7.6 3.9 State taxes-net 2.9 3.0 3.3 U.S. benefits of foreign sales corporation (2.0) (1.5) (.5) Deferred income tax rate changes (2.2) -- -- International tax restructuring and recapitalization (4.1) -- -- Other-net (4.2) (4.1) (1.7)\nEffective tax rate 31.5% 39.0% 39.0%\nPage 34 of 54\nThe components of the total net deferred tax asset at December 31, 1993 and 1992 under SFAS No. 109 are as follows:\n1993 1992\nDeferred tax assets: Postretirement benefits other than pensions $19,517 $17,986 Other nondeductible liabilities and reserves 4,054 3,195 Tax credit carryforwards 2,589 905 Workers' compensation and other claims 2,488 1,439 Accrued vacation pay 2,191 2,162 Deferrals under state jurisdictions-net 1,839 1,880 Deferrals under foreign jurisdictions 1,448 1,925 Pension benefits 1,240 1,326 Miscellaneous 384 662 Inventories 775 1,444 Gross deferred tax assets 36,525 32,924\nValuation allowance for deferred tax assets (1,782) (905)\nDeferred tax liabilities: Property, plant and equipment (10,895) (10,334) Deferrals under foreign jurisdictions (5,701) (6,951) Other assets and miscellaneous (4,111) (3,307) Deferred gain on Wheatley Gaso transactions (748) (909) Gross deferred tax liabilities (21,455) (21,501)\nNet deferred tax asset $13,288 $10,518\nThe components of the deferred tax provision (benefit) under APB11 from continuing operations for 1991 are as follows:\nDepreciation and amortization $(1,616) Reserves and accruals (1,061) Deferred gain on Wheatley Gaso transactions (1,090) Deferrals under foreign jurisdictions 1,296 Other-net (120)\nDeferred income tax provision (benefit) $(2,591)\nEarnings before income taxes resulting from non-U.S. operations for 1993, 1992, and 1991 are $10,359, $13,412, and $15,745, respectively.\nAs discussed in Note 1, the Company adopted SFAS No. 109 as of January 1, 1992. The cumulative effect of this accounting change for income taxes is not significant and hence, prior years' financial statements have not been restated to apply the provisions of SFAS No. 109.\nThe Company and its domestic subsidiaries file a consolidated U.S. federal income tax return. Such returns have been audited and settled through the year 1989.\nThe valuation allowance for deferred tax assets increased by $877 in 1993.\nAt December 31, 1993, the Company has foreign tax credit carryforwards of $2,589 that will expire at the end of the following years if not otherwise utilized: $174 -1995, $216 - 1996, $354 - 1997, and $1,845 - 1998.\n11. Employee Benefit Plans\nPension Plans\nThe Company has several defined benefit pension plans covering substantially all domestic employees. Plans covering salaried exempt employees provide pension benefits based upon final average salary and years of service.\nPage 35 of 54\nBenefits to other employees are based on a fixed amount for each year of service. During the fourth quarter of 1992, the Company offered an early retirement program to employees meeting certain age and service requirements. The additional expense has been recorded as part of the 1992 net pension cost shown below. The cost of this program is included in the restructuring costs recorded by the Company (see Note 9). The Company's funding policy is to contribute annually an amount that falls within the range determined to be deductible for federal income tax purposes. Plan assets consist primarily of listed stocks and bonds.\nNet pension cost for 1993, 1992, and 1991 includes the following components:\n1993 1992 1991\nService cost $ 3,668 $2,815 $2,189 Interest cost 6,968 5,965 5,294 Actual return on plan assets (11,447) (6,442) (11,822) Net amortization and deferral 4,562 (128) 6,210 Early retirement plan -- 2,940 --\nNet pension cost $ 3,751 $5,150 $1,871\nThe following table sets forth the plans' funded status and the amounts recognized in the Company's consolidated financial statements:\nIn determining the actuarial present value of the projected benefit obligation, the weighted average discount rate was 7.5% and 8.5% as of December 31, 1993, and 1992, respectively; the rate of increase in future compensation levels was 5% as of December 31, 1993, and 6% as of December 31, 1992; and the expected long-term rate of return on assets was 9% as of December 31, 1993 and 1992.\nAs is required by SFAS No. 87, \"Employers' Accounting for Pensions,\" for plans where the accumulated benefit obligation exceeds the fair value of plan assets, the Company has recognized in the accompanying consolidated balance sheets the minimum liability of the unfunded accumulated benefit obligation as a long-term liability with an offsetting intangible asset and equity adjustment, net of tax impact. As of December 31, 1993 and 1992, this minimum\nPage 36 of 54\nliability amounted to $6,410 and $1,405, respectively. The adoption of these provisions had no impact on net earnings or cash flow.\nThe Company's wholly owned subsidiary, Lowara S.p.A., is required by Italian law to provide a lump sum severance payment to personnel upon termination of employment. The amounts are subject to annual revaluation on the basis of indices. The provision for employee severance amounted to $1,873 in 1993, $2,059 in 1992, and $1,905 in 1991, resulting in total reserve balances of $7,772 at December 31, 1993, $8,334 at December 31, 1992, and $7,666 at December 31, 1991. This reserve reflects the amounts accrued at year-end for each employee in accordance with the law and labor contracts.\nPostretirement Benefits Other Than Pensions\nIn addition to providing pension benefits, the Company and its subsidiaries provide certain health care and life insurance benefits for retired employees. Certain domestic employees may become eligible for these benefits if they retire from the Company with 10 years of service and have reached age 55. The benefit amount is determined based on the age and length of service of the employee at retirement. The plan is currently unfunded, and the Company has the right to modify or terminate the plan in the future.\nIn the fourth quarter of 1992, the Company adopted SFAS No. 106, \"Employers' Accounting for Postretirement Benefits Other than Pensions,\" requiring the accrual method of accounting for these benefits effective January 1, 1992. As permitted by SFAS No. 106, the Company elected to recognize the transition obligation as of the adoption date. The Company restated 1992 first quarter operations to record a pre-tax charge of $47,978 ($29,746 after-tax or $1.42 per share) as a cumulative effect of an accounting change at that date.\nNet postretirement benefit cost for 1993 and 1992 includes the following components:\n1993 1992 Service cost on benefits earned during the period $1,440 $2,073 Interest cost on accumulated benefit obligation 4,026 4,251 Amortization of plan amendments (598) --\nNet postretirement benefit cost $4,868 $6,324\nRetirement medical costs decreased primarily due to cost reductions resulting from amendments to Company-sponsored medical plans. The unamortized amounts for plan amendments, set forth in the table below, represent the accumulated cost reductions resulting from these amendments. The amortization of these amounts will reduce retirement medical costs over the next 14 years. Under the prior accounting method, 1991 retirement medical costs were $1,047.\nThe accumulated postretirement benefit obligation, included in the accompanying consolidated balance sheets, is comprised of the following:\n1993 1992\nRetirees $25,869 $17,579 Active, eligible employees 5,434 9,606 Active, non-eligible employees 19,132 25,639 Unrecognized gain (loss) (3,007) 76 Unrecognized prior service cost 8,362 -- Accrued postretirement benefit obligation $55,790 $52,900\nThe December 31, 1992, accrued postretirement benefit obligation was remeasured effective January 1, 1993, to reflect actual experience for 1992 and a plan amendment that was not known at the beginning of 1992. The accrued postretirement benefit obligation was determined using a weighted average discount rate of 8.75% and a medical care cost trend rate of 13%. In determining the accrued postretirement benefit obligation as of December 31, 1993, a weighted average discount rate of 7.75% and a medical care cost trend rate of 12% were used. The medical care cost trend rates used in the\nPage 37 of 54\nactuarial computations were reduced by 1% per year to 5% and 5.5% by 2001 as of December 31, 1993, and 1992, respectively. The effect of a one percentage point increase in the assumed medical care cost trend rate would have increased the 1993 and 1992 net postretirement benefit cost by $925 and $1,162, respectively, and the accrued postretirement benefit obligation at December 31, 1993 and 1992, by $6,400 and $7,261, respectively.\nPostemployment Benefits\nIn the fourth quarter of 1993, the Company adopted SFAS No. 112, \"Employers' Accounting for Postemployment Benefits,\" requiring the accrual method of accounting for certain of these benefits effective January 1, 1993. The Company restated 1993 first quarter operations to record a pre-tax charge of $1,579 ($1,026 after-tax or $.05 per share) as a cumulative effect of accounting change at that date. Previously, the Company recognized postemployment benefit costs when paid. The annual incremental cost of adopting SFAS No.112 is immaterial on an on-going basis.\nPage 38 of 54\n12. Major Market Segment Information\nThe Company operates in two major market segments, Industrial Products and Water Technologies. The Industrial Products segment produces and sells pumps used in various industries including pulp and paper, chemical processing, petrochemical, food and beverage, oil, mining, municipal, and electric utility and provides parts and repair services for various types of pumps and other rotating equipment. The Water Technologies segment produces and sells pumps for residential, farm, irrigation, and commercial\/light industrial use. Intersegment sales and sales between geographic areas are not material.\nPage 39 of 54\n13. Quarterly Financial Data (Unaudited)\nPage 40 of 54\nITEM 9.","section_9":"ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING FINANCIAL DISCLOSURE\nNone.\nPart III\nITEM 10.","section_9A":"","section_9B":"","section_10":"ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT\nPages 1 through 3 of the Proxy Statement contain information concerning directors which is incorporated herein by reference. Information concerning executive officers is included in Part I of this Form 10-K Annual Report, following Item 1.\nITEM 11.","section_11":"ITEM 11. EXECUTIVE COMPENSATION\nPages 3, 4, and 8 through 14 of the Proxy Statement contain information concerning executive compensation which is incorporated herein by reference.\nITEM 12.","section_12":"ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT\nPages 2, 3, and 8 of the Proxy Statement contain information concerning ownership of the Company's common stock which is incorporated herein by reference.\nITEM 13.","section_13":"ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS\nPage 9 of the Proxy Statement contains information concerning transactions with directors and others which is incorporated herein by reference.\nPart IV\nITEM 14.","section_14":"ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K\n(a) (1) Financial Statements:\nThe financial statements of the Company are included in Part II, Item 8.\nPage in Form 10-K\n(2) Independent Auditors' Report on Financial Statement Schedules 44\nThe following schedules are included in this Form 10-K Annual Report:\nV - Property, Plant and Equipment 45\nVI - Accumulated Depreciation of Property, Plant and Equipment 46\nVIII - Valuation and Qualifying Accounts 47\nIX - Short-term Borrowings 48\nX - Supplementary Income Statement Information 49\nPage 41 of 54\nAll other Financial Statement Schedules are omitted because they are not applicable or the required information is shown in the Consolidated Financial Statements.\n(b) Reports on Form 8-K:\nNo reports on Form 8-K were filed during the fourth quarter of the year ended December 31, 1993.\n(c) Exhibits:\nExhibit Number Description of Exhibits\n(3) Articles of Incorporation and By-Laws:\n* Restated Certificate of Incorporation filed May 6, 1985. Incorporated by reference to Exhibit 19 to Form 10-Q for the period ending June 30, 1985.\n* By-Laws. Incorporated by reference to Appendix C of the 1984 Proxy Statement.\n* Amendment to the Certificates of Incorporation, incorporated by reference from the Company's definitive Proxy Statement for its Annual Meeting of Stockholders held on May 4, 1988, copies of which were filed with the Commission on April 11, 1988, wherein said amendment is identified as exhibit (B).\n* Amendment to the Certificate of Incorporation as filed by the Delaware Secretary of State on May 31, 1989 (Exhibit (a), Form 10-Q for the quarter ended June 30, 1989).\n* Amendment to the Company's By-Laws, incorporated by reference from the Company's definitive Proxy Statement for its Annual Meeting of Stockholders held on May 4, 1988, copies of which were filed with the Commission on April 11, 1988, wherein said amendment is identified as exhibit (C).\n(10) Material Contracts: (iii) Compensatory Plans for Officers:\n* Goulds Pumps, Incorporated 1994 Incentive Plan to Increase Stockholder Value, effective on date approved by Stockholders of the Company (filed as Exhibit A on page 19 of Proxy Statement dated March 31, 1994).\n* Goulds Pumps, Incorporated 1994 Stock Option Plan for Non-Employee Directors, effective on date approved by Stockholders of the Company (filed as Exhibit B on page 35 of Proxy Statement dated March 31, 1994).\n* Goulds Pumps, Incorporated Supplemental Executive Pension Plan, effective January 1, 1992 (filed as Exhibit 10 on page 29 of Form 10-K for year ended December 31, 1991).\n* Goulds Pumps, Incorporated Senior Executive Severance Agreement, effective May 12, 1983 (Exhibit 19, Form 10-Q for quarter ended June 30, 1983).\n* Goulds Pumps, Incorporated Investment and Stock Ownership Plan (filed on May 8, 1984, Form S-8, Registration Statement No. 2-90969).\n* Goulds Pumps, Incorporated Revised Incentive Stock Option Plan, effective March 19, 1987 (Form S-8 Registration Statement No. 2-78145, filed on June 25, 1982. Appendices No. 1 and No. 2 to the prospectus filed with SEC on June 8, 1983 and May 8, 1987 respectively).\nPage 42 of 54\n* Goulds Pumps, Incorporated Stock Purchase Plan for Employees (Form S-8 Registration Statement No. 2-64530, filed on May 21, 1979).\n* Goulds Pumps, Incorporated 1988 Stock Incentive Plan (Form S-8 Registration Statement No. 33-22902 filed on July 5, 1988).\n(11) Computation of Earnings Per Share: See page 50 of this Annual Report on Form 10-K.\n(22) Subsidiaries of the Registrant: See page 51 of this Annual Report on Form 10-K.\n(23) Consents of Experts and Counsel: For Consent of Independent Auditors see page 52 of this Annual Report on Form 10-K.\nAll other exhibits are omitted because they are not applicable or the required information is shown elsewhere in this Annual Report on Form 10-K.\n* Incorporated herein by reference as indicated.\nUNDERTAKINGS\nThe Company, being the registrant under Registration Statement Nos. 2-64847, 2-64530, 2-78145, 2-90969, and 33-22902 on Form S-8, currently on file with the Securities and Exchange Commission, hereby undertakes as follows, which undertaking shall be incorporated by reference into such Registration Statements:\nInsofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant, the registrant has been advised that, in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.\nPage 43 of 54\nINDEPENDENT AUDITORS' REPORT\nGoulds Pumps, Incorporated:\nWe have audited the consolidated balance sheets of Goulds Pumps, Incorporated and its subsidiaries as of December 31, 1993 and 1992 and the related consolidated statements of earnings, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1993, and have issued our report thereon dated January 26, 1994; such report is included elsewhere in this Form 10-K. Our audits also included the financial statement schedules of Goulds Pumps, Incorporated and its subsidiaries, listed in Item 14(a)2. These financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.\ns\/Deloitte & Touche Deloitte & Touche\nRochester, New York January 26, 1994\nPage 44 of 54\nPage 45 of 54\nPage 46 of 54\nSchedule VIII\nGOULDS PUMPS, INCORPORATED AND CONSOLIDATED SUBSIDIARIES SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991 (IN THOUSANDS)\nBALANCE ADDITIONS BALANCE AT BEGINNING CHARGED TO DEDUCTIONS AT END OF YEAR INCOME (2) (1) OF YEAR\nAllowance for Doubtful Accounts, Deducted from Trade Receivables:\n1993........... $2,408 $ 814 $1,045 $2,177\n1992........... $3,009 $ 472 $1,073 $2,408\n1991........... $2,815 $1,110 $ 916 $3,009\n(1) Accounts written off, less recoveries.\n(2) Includes impact of foreign currency translations.\nPage 47 of 54\nPage 48 of 54\nSchedule X\nGOULDS PUMPS, INCORPORATED AND CONSOLIDATED SUBSIDIARIES SCHEDULE X - SUPPLEMENTARY INCOME STATEMENT INFORMATION FOR THE THREE YEARS ENDED DECEMBER 31, 1993, 1992, and 1991 (IN THOUSANDS)\nCharged to Costs and Expenses\nItem 1993 1992 1991\nMaintenance and Repairs $15,128 $12,517 $14,302\nDepreciation and Amortization of intangible assets, pre-operating costs and similar deferrals * * *\nTaxes, other than payroll and income taxes * * *\nRoyalties * * *\nAdvertising costs * * *\n* Less than 1% of total sales.\nPage 49 of 54\nPage 50 of 54\nEXHIBIT 22\nAll subsidiaries of Goulds Pumps, Incorporated listed below are included in the consolidated financial statements.\nState or Country Ownership Incorporated Subsidiary Percentage or Organized\nBombas Goulds de Mexico, S.A. de C.V........ 100 Mexico Bombas Goulds de Venezuela, C.A............. 100 Venezuela Environamics Corp........................... 100 Delaware Goulds Pumps Ag............................. 96 Switzerland Goulds Pumps (Asia), Ltd.................... 100 Hong Kong Goulds Pumps Australia...................... 100 Australia Goulds Pumps B.V............................ 100 Netherlands Goulds Pumps Canada, Inc.................... 100 Canada Goulds Pumps DISC, Inc...................... 100 New York Goulds Pumps Delaware, Inc.................. 100 Delaware Goulds Pumps Europe B.V..................... 100 Netherlands Goulds Pumps Financial Services............. 100 Ireland Goulds Pumps International, Inc. (a DISC)... 100 Delaware Goulds Pumps Korea Co. Ltd.................. 100 South Korea Goulds Pumps (N.Y.), Inc.................... 100 New York Goulds Pumps (Phil.), Inc................... 100 Philippines Goulds Pumps (Singapore) PTE, Ltd........... 100 Singapore Goulds Pumps (Taiwan) Co. Ltd............... 100 Taiwan Goulds Pumps Trading Corp................... 100 Delaware Goulds Pumps World Sales, Ltd. (a FSC)...... 100 Guam Goulds Pumps World Sales (V.I.) Ltd......... 100 U.S. Virgin Islands Goulds Pumps Worldwide, Inc................. 100 Delaware Lowara B.V.................................. 100 Netherlands Lowara Belgium, S.A......................... 100 Belgium Lowara France S.A........................... 100 France Lowara, Gmbh................................ 90 Germany Lowara S.p.A................................ 100 Italy Lowara UK Ltd............................... 90 United Kingdom Marka S.p.A................................. 100 Italy Morris Pumps International, Inc. (a DISC)... 100 New York West Virginia Pump and Supply............... 100 West Virginia World Pump, Srl............................. 100 Italy World Pump Slovenia DoO..................... 100 Slovenia\nThe Company also has equity investments in Oil Dynamics, Inc., a 50 percent owned corporation incorporated in Oklahoma and Nanjing Goulds Pumps Limited Co., of China, a 45 percent owned joint venture. Lowara Co., Ltd. of Osaka, Japan is a 54.8% owned joint venture which Lowara S.p.A. maintains with Tsurumi Company of Japan.\nPage 51 of 54\nEXHIBIT 23\nIndependent Auditors' Consent\nGoulds Pumps, Incorporated:\nWe consent to the incorporation by reference in Registration Statement No.s' 2-64847, 2-64530, 2-78145, 2-90969 and 33-22902 of Goulds Pumps, Incorporated and its subsidiaries on Forms S-8 of our reports dated January 26, 1994, appearing in this Annual Report on Form 10-K of Goulds Pumps, Incorporated and its subsidiaries for the year ended December 31, 1993.\ns\/Deloitte & Touche Deloitte & Touche\nRochester, New York March 30, 1994\nPage 52 of 54\nSIGNATURES\nPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Goulds Pumps, Inc., has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.\nGOULDS PUMPS, INCORPORATED\nBy: s\/Stephen V. Ardia Stephen V. Ardia (President, Chief Executive Officer and Director)\nDate: March 18, 1994\nPage 53 of 54\nPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated.\ns\/Robert L. Tarnow March 18, 1994 Robert L. Tarnow Date (Chairman of the Board and Director)\ns\/Stephen V. Ardia March 18, 1994 Stephen V. Ardia Date (President, Chief Executive Officer and Director)\ns\/John P. Murphy March 18, 1994 John P. Murphy Date (Vice President and Chief Financial Officer)\ns\/Peter Oddleifson March 18, 1994 Peter Oddleifson Date (Director)\ns\/Melvin Howard March 18, 1994 Melvin Howard Date (Director)\ns\/Arthur M. Richardson March 18, 1994 Arthur M. Richardson Date (Director)\ns\/William R. Fenoglio March 18, 1994 William R. Fenoglio Date (Director)\nListed below are those directors not mentioned above:\nWilliam W. Goessel Barbara B. Lucas Thomas C. McDermott James C. Miller\nPage 54 of 54","section_15":""}
{"filename":"36032_1993.txt","cik":"36032","year":"1993","section_1":"ITEM 1. Business\n(a) The Registrant, First Alabama Bancshares, Inc. (hereinafter called Registrant or First Alabama), is a bank holding company, incorporated under the laws of the state of Delaware and with its principal office located in Birmingham, Alabama. The Registrant became operational as a bank holding company when the exchange offer for the stock of its original banks in Montgomery, Birmingham and Huntsville became effective on July 13, 1971. Subsequently, the Registrant acquired 29 additional banks located in Alabama. From 1985 through 1988, Registrant merged these affiliate banks into First Alabama Bank, the Registrant's lead bank. In 1990, Registrant purchased certain assets and assumed the deposit liabilities of Baldwin County Federal Savings Bank and City Federal Savings and Loan Association in transactions with the Resolution Trust Corporation. These acquisitions added approximately $599 million in deposits at the acquisition dates. In 1992, Registrant acquired certain assets and assumed the deposit liabilities of seven offices formerly of Jefferson Federal Savings and Loan Association in a transaction with the Resolution Trust Corporation. This acquisition added approximately $49 million in deposits to First Alabama Bank. First Alabama Bank operates from 166 full- service offices located throughout Alabama. In 1987 Registrant made its first interstate bank acquisition by acquiring Santa Rosa State Bank in Milton and Pensacola, Florida.\nRegistrant expanded its northwest Florida operation in early 1988 through the acquisition of Sunshine Bank of Fort Walton Beach. In November 1988, Registrant's two Florida banks were merged into one bank and renamed Sunshine Bank. In 1991, Registrant purchased five offices with deposits of $146 million in Pensacola, Florida from Great Western Bank and merged these offices into Sunshine Bank. In the fourth quarter of 1993, Registrant acquired First Federal Savings Bank of DeFuniak Springs, Florida and First Federal Savings Bank of Marianna, Florida. These thrifts, with eight offices and $190 million in assets were merged into First Alabama's Florida bank, newly renamed Regions Bank of Florida. Regions Bank of Florida operates from 23 full-service offices in northwest Florida. Registrant's Georgia bank, First Alabama Bank of Columbus, began operations in July 1991, with the purchase from the Resolution Trust Corporation of three banking offices, formerly of Fulton Federal Savings and Loan Association, with deposits of $107 million. On March 14, 1994, this bank was renamed Regions Bank of Georgia. In December 1992, Registrant entered the Tennessee banking market for the first time through the acquisition of Security Federal Savings and Loan Association (Security Federal), a mutual association headquartered in Nashville, Tennessee. Security Federal, with assets of $383 million, subsequently converted to a Tennessee chartered state bank, First Security Bank of Tennessee. In June 1993, Registrant acquired Franklin County Bank, of Winchester, Tennessee adding four offices and $68 million in assets.\nThese banks serve the middle Tennessee market from 24 full-service offices. In December 1993, First Alabama purchased Secor Bank, Federal Savings Bank, headquartered in Birmingham, Alabama, adding $1.8 billion in assets. With the exception of one office in Centre, Alabama, which is expected to be sold, Secor's 23 Alabama offices were merged into First Alabama Bank in January 1994 resulting in the addition of four Alabama offices after the consolidation of 18. Secor's three Florida offices, with deposits of approximately $183 million, are expected to be sold in 1994. Secor's 15 Louisiana offices, which have $789 million in deposits, provide First Alabama with a retail banking franchise in New Orleans and northern Louisiana. In 1993, Registrant announced plans to change its name to Regions Financial Corporation in 1994, subject to approval from stockholders. Some subsidiaries of the Registrant have already been renamed to reflect the Registrant's proposed name change. All of Registrant's banking offices are engaged in the commercial banking business with certain offices providing trust services. Information on Registrant's bank and thrift subsidiaries as of December 31, 1993, is provided as follows:\nRegistrant, as of December 31, 1993, had three (3) operating bank-related subsidiaries. FAB Agency, Inc. acts as an insurance agent or broker with respect to credit life and accident and health insurance and other types of insurance which are related to extensions of credit by affiliate banks or bank-related subsidiaries. First Alabama Life Insurance Company, renamed Regions Life Insurance Company in January 1994, acts as a reinsurer of credit life and accident and health insurance connected with the activities of certain affiliates of Registrant. Regions Financial Building Corporation holds and operates properties for use by the Registrant and its affiliates. Regions Corporation, organized in 1993 as a subsidiary of the registrant, acts as a second tier holding company for Secor Bank, FSB, and its five subsidiaries - First Insurance Corporation, Secor Realty and Investment Corporation, Secor Insurance Agency, Inc. Alabama, Secor\nInsurance Agency, Inc. Louisiana and Secor Credit Corporation. All of Secor's subsidiaries are scheduled to be dissolved or disposed of within the next two years. Registrant's lead bank, First Alabama Bank, had three (3) operating wholly-owned subsidiaries as of December 31, 1993. Real Estate Financing, Inc., headquartered in Montgomery, Alabama, is engaged in mortgage banking with its primary business and source of income being the origination and servicing of mortgage loans for long-term investors. Real Estate Financing, Inc., at December 31, 1993, serviced approximately $8.5 billion in real estate mortgages and operates loan production offices in Alabama, Florida, Georgia, Mississippi, Tennessee and South Carolina. Regions Title Company, a subsidiary of Real Estate Financing, Inc., was acquired in connection with the acquisition of Security Federal and acts as an agent with respect to issuance of title insurance policies related to the extension of credit by an affiliate bank or bank-related subsidiary. First Alabama Investments, Inc., which began operation in 1986, engages in securities underwriting and brokerage activities. Regions Agency, Inc., which was organized in 1985 and which is currently inactive, is authorized to act as an insurance agent for sales of various types of insurance policies. Regions Financial Leasing, Inc., which began operations in January 1992, holds and services certain lease contracts. Reference is made to pages 24 through 47 and 70 through 73 of the annual report to stockholders for the year ended December 31, 1993,\nsubmitted as Exhibit 13 hereto, for certain statistical (Guide 3) and other information. (b) The primary business conducted by Registrant's banking affiliates is banking, which includes provision of commercial and retail banking services and, in some cases, trust services. Registrant's bank-related subsidiaries perform services incidental to the field of banking. Consequently, Registrant's only industry segment is the business of banking and the information required for industry segments is not applicable. Reference is made to pages 24 through 47 of the annual report to stockholders for the year ended December 31, 1993, included as Exhibit 13 hereto, for information required by this item. (c)(1) General. The Registrant is a bank holding company, registered with the Board of Governors of the Federal Reserve System (\"Federal Reserve\") under the Bank Holding Company Act of 1956, as amended (\"BHC Act\"). As such, the Registrant and its subsidiaries are subject to the supervision, examination, and reporting requirements of the BHC Act and the regulations of the Federal Reserve. The BHC Act requires every bank holding company to obtain the prior approval of the Federal Reserve before (i) it may acquire direct or indirect ownership or control of any voting shares of any bank if, after such acquisition, the bank holding company will directly or indirectly own or control more than 5% of the voting shares of the bank, (ii) it or any of its subsidiaries, other than a bank, may acquire all or substantially all\nof the assets of the bank, or (iii) it may merge or consolidate with any other bank holding company. The BHC Act further provides that the Federal Reserve may not approve any transaction that would result in a monopoly or would be in furtherance of any combination or conspiracy to monopolize or attempt to monopolize the business of banking in any section of the United States, or the effect of which may be substantially to lessen competition or to tend to create a monopoly in any section of the country, or that in any other manner would be in restraint of trade, unless the anticompetitive effects of the proposed transaction are clearly outweighed by the public interest in meeting the convenience and needs of the community to be served. The Federal Reserve is also required to consider the financial and managerial resources and future prospects of the bank holding companies and banks concerned and the convenience and needs of the community to be served. Consideration of financial resources generally focuses on capital adequacy and consideration of convenience and needs issues includes the parties' performance under the Community Reinvestment Act of 1977 (the \"CRA\"), both of which are discussed below. The BHC Act prohibits the Federal Reserve from approving a bank holding company's application to acquire a bank or bank holding company located outside the state in which the deposits of its banking subsidiaries were greatest on the date the company became a bank holding company (Alabama in the case of the Registrant), unless such acquisition is specifically\nauthorized by statute of the state in which the bank or bank holding company to be acquired is located. Alabama has adopted reciprocal interstate banking legislation permitting Alabama-based bank holding companies to acquire banks and bank holding companies in other states and allowing bank holding companies located in Arkansas, the District of Columbia, Florida, Georgia, Kentucky, Louisiana, Maryland, Mississippi, North Carolina, South Carolina, Tennessee, Texas, Virginia, and West Virginia to acquire Alabama banks and bank holding companies. The BHC Act generally prohibits the Registrant from engaging in activities other than banking or managing or controlling banks or other permissible subsidiaries and from acquiring or retaining direct or indirect control of any company engaged in any activities other than those activities determined by the Federal Reserve to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. In determining whether a particular activity is permissible, the Federal Reserve must consider whether the performance of such an activity reasonably can be expected to produce benefits to the public, such as greater convenience, increased competition, or gains in efficiency, that outweigh possible adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interest, or unsound banking practices. For example, factoring accounts receivable, acquiring or servicing loans, leasing personal property, conducting discount securities brokerage activities, performing certain data\nprocessing services, acting as agent or broker in selling credit life insurance and certain other types of insurance in connection with credit transactions, and performing certain insurance underwriting activities all have been determined by the Federal Reserve to be permissible activities of bank holding companies. The BHC Act does not place territorial limitations on permissible bank-related activities of bank holding companies. Despite prior approval, the Federal Reserve has the power to order a holding company or its subsidiaries to terminate any activity or to terminate its ownership or control of any subsidiary when it has reasonable cause to believe that continuation of such activity or such ownership or control constitutes a serious risk to the financial safety, soundness, or stability of any bank subsidiary of that bank holding company. Each of the subsidiary banks and the one subsidiary savings bank (collectively the \"subsidiary institutions\") of the Registrant is a member of the Federal Deposit Insurance Corporation (\"FDIC\"), and as such, their deposits are insured by the FDIC to the extent provided by law. Each subsidiary institution is also subject to numerous state and federal statutes and regulations that affect its business, activities, and operations, and each is supervised and examined by one or more state or federal bank regulatory agencies. Because each of the Registrant's subsidiary banks is a state-chartered bank that is not a member of the Federal Reserve System, such banks are subject to supervision and examination by the FDIC. The Registrant's\nsubsidiary savings bank is a federally-chartered savings bank that is a member of the Federal Home Loan Bank System and is subject to supervision and examination by the Office of Thrift Supervision (\"OTS\") and to the back-up supervisory authority of the FDIC. Such agencies regularly examine the operations of the subsidiary institutions and are given authority to approve or disapprove mergers, consolidations, the establishment of branches, and similar corporate actions. Such agencies also have the power to prevent the continuance or development of unsafe or unsound banking practices or other violations of law. The subsidiary institutions are subject to the provisions of the CRA. Under the terms of the CRA, the appropriate federal bank regulatory agency is required, in connection with its examination of a subsidiary institution, to assess such institution's record in meeting the credit needs of the community served by that institution, including low and moderate-income neighborhoods. The regulatory agency's assessment of the institution's record is made available to the public. Further, such assessment is required of any institution which has applied to (i) charter a national bank, (ii) obtain deposit insurance coverage for a newly chartered institution, (iii) establish a new branch office that will accept deposits, (iv) relocate an office, or (v) merge or consolidate with, or acquire the assets or assume the liabilities of, a federally regulated financial institution. In the case of a bank holding company applying for approval to acquire a bank or other bank holding company, the Federal\nReserve will assess the records of each subsidiary institution of the applicant bank holding company, and such records may be the basis for denying the application. In December 1993, the federal banking agencies proposed to revise their CRA regulations in order to provide clearer guidance to depository institutions on the nature and extent of their CRA obligations and the methods by which those obligations will be assessed and enforced. The proposed regulations substitute for the current process-based CRA assessment factors a new evaluation system that would rate institutions based on their actual performance in meeting community credit needs. Under the proposal, all depository institutions would be subject to three CRA-related tests: a lending test; an investment test; and a service test. The lending test, which would be the primary test for all institutions other than wholesale and limited-purpose banks, would evaluate an institution's lending activities by comparing the institution's share of housing, small business, and consumer loans in low- and moderate-income areas in its service area with its share of such loans in the other parts of its service area. The agencies would also evaluate the institution's performance independent of other lenders by examining the ratio of such loans made by the institution to low- and moderate-income areas to all such loans made by the institution. At the election of an institution, the agencies would also consider \"indirect\" loans made by affiliates and subsidiaries of the institution as well as lending consortia and other\nlenders in which the institution had made lawful investments. The focus of the investment test, under which wholesale and limited-purpose institutions would normally be evaluated, would be the amount of assets (compared to its risk-based capital) that an institution has devoted to \"qualified investments\" that benefit low- and moderate-income individuals and areas in the institution's service area. The service test would evaluate an institution based on the percentage of its branch offices that are located in or are readily accessible to low- and moderate-income areas. Smaller institutions, those having total assets of less than $250 million, would be evaluated under more streamlined criteria. The joint agency CRA proposal provides that an institution evaluated under a given test would receive one of five ratings for that test: outstanding; high satisfactory; low satisfactory; needs to improve; or substantial non-compliance. The ratings for each test would then be combined to produce an overall composite rating of either outstanding, satisfactory (including both high and low satisfactory), needs to improve, or substantial non-compliance. In the case of a retail-oriented institution, its lending test rating would form the basis for its composite rating. That rating would then be increased by up to two levels in the case of outstanding or high satisfactory investment performance, increased by one level in the case of outstanding service, and decreased by one level in the case of substantial non-compliance in service. An institution found to have engaged in illegal lending discrimination would be rebuttably\npresumed to have a less-than-satisfactory composite CRA rating. Under the proposal, an institution's CRA rating will continue to be taken into account by a regulator in considering various types of applications. In addition, an institution receiving a rating of \"substantial non-compliance\" would be subject to civil money penalties or a cease and desist order under Section 8 of the Federal Deposit Insurance Act (the \"FDIA\"). It is uncertain at this time whether or when the CRA proposal will ultimately be adopted by the federal banking agencies in its current form. Payment of Dividends. The Registrant is a legal entity separate and distinct from its banking and other subsidiaries. The principal source of cash flow of the Registrant, including cash flow to pay dividends to its shareholders, is dividends from the subsidiary institutions. There are statutory and regulatory limitations on the payment of dividends by the subsidiary institution to the Registrant as well as the Registrant to its shareholders. As state nonmember banks, the subsidiary banks are subject to the respective laws and regulations of the States of Alabama, Florida, Georgia, and Tennessee and to the regulations of the FDIC as to the payment of dividends. The subsidiary savings bank is subject to the regulations of the OTS and the FDIC as to payment of dividends. If, in the opinion of a federal regulatory agency, an institution under its jurisdiction is engaged in or is about to engage in an unsafe or\nunsound practice (which, depending on the financial condition of the institution, could include the payment of dividends), such authority may require, after notice and hearing, that such institution cease and desist from such practice. The Federal Reserve, the FDIC, and the OTS have indicated that paying dividends that deplete an institution's capital base to an inadequate level would be an unsafe and unsound banking practice. Under the Federal Deposit Insurance Corporation Improvement Act of 1991 (\"FDICIA\"), an insured institution may not pay any dividend if payment would cause it to become undercapitalized or once it is undercapitalized. See \"Prompt Corrective Action.\" Moreover, the Federal Reserve and the FDIC have issued policy statements which provide that bank holding companies and insured banks should generally only pay dividends out of current operating earnings. At December 31, 1993, under dividend restrictions imposed under federal and state laws, the subsidiary institutions, without obtaining governmental approvals, could declare aggregate dividends to the Registrant of approximately $172 million. The payment of dividends by the Registrant and the subsidiary institutions may also be affected or limited by other factors, such as the requirement to maintain adequate capital above regulatory guidelines. Transactions With Affiliates. There are various restrictions on the extent to which the Registrant and its nonbank subsidiaries can borrow or otherwise obtain credit from the subsidiary institutions. Each subsidiary\ninstitution (and its subsidiaries) is limited in engaging in borrowing and other \"covered transactions\" with nonbank or non-savings bank affiliates to the following amounts: (i) in the case of any such affiliate, the aggregate amount of covered transactions of the subsidiary institution and its subsidiaries may not exceed 10% of the capital stock and surplus of such subsidiary institution; and (ii) in the case of all affiliates, the aggregate amount of covered transactions of the subsidiary institution and its subsidiaries may not exceed 20% of the capital stock and surplus of such subsidiary institution. \"Covered transactions\" are defined by statute to include a loan or extension of credit, as well as a purchase of securities issued by an affiliate, a purchase of assets (unless otherwise exempted by the Federal Reserve), the acceptance of securities issued by the affiliate as collateral for a loan and the issuance of a guarantee, and the issuance of a guarantee, acceptance, or letter of credit on behalf of an affiliate. Covered transactions are also subject to certain collateralization requirements. Further, a bank holding company and its subsidiaries are prohibited from engaging in certain tie-in arrangements in connection with any extension of credit, lease, or sale of property or furnishing of services. Capital Adequacy. The Registrant and the subsidiary institutions are required to comply with the capital adequacy standards established by the Federal Reserve in the case of the Registrant, the FDIC in the case of the subsidiary banks, and the OTS in the case of the subsidiary savings bank.\nThere are two basic measures of capital adequacy for bank holding companies that have been promulgated by the Federal Reserve: a risk-based measure and a leverage measure. All applicable capital standards must be satisfied for a bank holding company to be considered in compliance. The risk-based capital standards are designed to make regulatory capital requirements more sensitive to differences in risk profile among banks and bank holding companies, to account for off-balance sheet exposure, and to minimize disincentives for holding liquid assets. Assets and off-balance sheet items are assigned to broad risk categories, each with appropriate weights. The resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-balance sheet items. The minimum guideline for the ratio of total capital (\"Total Capital\") to risk-weighted assets (including certain off-balance-sheet items, such as standby letters of credit) is 8.0%. At least half of the Total Capital must be composed of common equity, undivided profits, minority interests in the equity accounts of consolidated subsidiaries, noncumulative perpetual preferred stock, and a limited amount of cumulative perpetual preferred stock, less goodwill and certain other intangible assets (\"Tier 1 Capital\"). The remainder may consist of qualifying subordinated debt, other preferred stock, and a limited amount of the allowance for loan losses. At December 31, 1993, the Registrant's consolidated Tier 1 Capital and Total Capital ratios were 11.13% and 13.48%, respectively. In addition, the Federal Reserve has established minimum leverage ratio\nguidelines for bank holding companies. These guidelines provide for a minimum ratio of Tier 1 Capital to average assets, less goodwill and certain other intangible assets (the \"Leverage ratio\"), of 3.0% for bank holding companies that meet certain specified criteria, including having the highest regulatory rating. All other bank holding companies generally are required to maintain a Leverage ratio of at least 3.0% plus an additional cushion of 100 to 200 basis points. The Registrant's Leverage ratio at December 31, 1993 was 10.11%. The guidelines also provide that bank holding companies experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels without significant reliance on intangible assets. Furthermore, the Federal Reserve has indicated that it will consider a \"tangible Tier 1 Capital leverage ratio\" (deducting all intangibles) and other indicia of capital strength in evaluating proposals for expansion or new activities. Each of the Registrant's subsidiary banks is subject to risk-based and leverage capital requirements adopted by the FDIC and the Registrant's subsidiary savings bank is subject to tangible, risk-based, and core capital requirements adopted by the OTS. Each of the Registrant's subsidiary institutions was in compliance with applicable minimum capital requirements as of December 31, 1993. Neither the Registrant nor any of the subsidiary institutions has been advised by any federal banking agency of any specific minimum capital ratio requirement applicable to it.\nFailure to meet capital guidelines could subject a bank to a variety of enforcement remedies, including the termination of deposit insurance by the FDIC, and to certain restrictions on its business. See \"Prompt Corrective Action.\" The federal bank regulators continue to indicate their desire to raise capital requirements applicable to banking organizations beyond their current levels. In this regard, the Federal Reserve, the FDIC, and the OTS have, pursuant to FDICIA, proposed an amendment to the risk-based capital standards which would calculate the change in an institution's net economic value attributable to increases and decreases in market interest rates and would require banks with excessive interest rate risk exposure to hold additional amounts of capital against such exposures. Support of Subsidiary Institutions. Under Federal Reserve policy, the Registrant is expected to act as a source of financial strength to, and to commit resources to support, each of the subsidiary institutions. This support may be required at times when, absent such Federal Reserve policy, the Registrant may not be inclined to provide it. In addition, any capital loans by a bank holding company to any of the subsidiary institutions are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary institution. In the event of a bank holding company's bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary institution will be assumed by the bankruptcy trustee and entitled to a\npriority of payment. Under the FDIA, a depository institution insured by the FDIC can be held liable for any loss incurred by, or reasonably expected to be incurred by, the FDIC after August 9, 1989 in connection with (i) the default of a commonly controlled FDIC-insured depository institution or (ii) any assistance provided by the FDIC to any commonly controlled FDIC-insured depository institution \"in danger of default.\" \"Default\" is defined generally as the appointment of a conservator or receiver and \"in danger of default\" is defined generally as the existence of certain conditions indicating that a default is likely to occur in the absence of regulatory assistance. Prompt Corrective Action. FDICIA establishes a system of prompt corrective action to resolve the problems of undercapitalized institutions. Under this system, which became effective on December 19, 1992, the federal banking regulators are required to establish five capital categories (\"well-capitalized,\" \"adequately capitalized,\" \"undercapitalized,\" \"significantly undercapitalized,\" and \"critically undercapitalized\") and to take certain mandatory supervisory actions, and are authorized to take other discretionary actions, with respect to institutions in the three undercapitalized categories, the severity of which will depend upon the capital category in which the institution is placed. Generally, subject to a narrow exception, the FDICIA requires the banking regulator to appoint a receiver or conservator for an institution that is critically\nundercapitalized. The federal banking agencies have specified by regulation the relevant capital level for each category. Under the final agency rule implementing the prompt corrective action provisions, an institution that (i) has a Total Capital ratio of 10.0% or greater, a Tier I Capital ratio of 6.0% or greater, and a Leverage ratio of 5.0% or greater, and (ii) is not subject to any written agreement, order, capital directive, or prompt corrective action directive issued by the appropriate federal banking agency, is deemed to be \"well-capitalized.\" An institution with a Total Capital ratio of 8.0% or greater, a Tier I Capital ratio of 4.0% or greater, and a Leverage ratio of 4.0% or greater is considered to be \"adequately capitalized.\" A depository institution that has a Total Capital ratio of less than 8.0% or a Tier I Capital ratio of less than 4.0% or a Leverage ratio that is less than 4.0% is considered to be \"undercapitalized.\" A depository institution that has a Total Capital ratio of less than 6.0%, a Tier I Capital ratio of less than 3%, or a Leverage ratio that is less than 3.0% is considered to be \"significantly undercapitalized\" and an institution that has a tangible equity capital to assets ratio equal to or less than 2.0% is deemed to be \"critically undercapitalized.\" For purposes of the regulation, the term \"tangible equity\" includes core capital elements counted as Tier I capital for purposes of the risk-based capital standards plus the amount of outstanding cumulative perpetual preferred stock (including related surplus), minus all intangible assets with certain exceptions. A depository institution may be\ndeemed to be in a capitalization category that is lower than is indicated by its actual capital position if it receives an unsatisfactory examination rating. In the case of an institution that is categorized as undercapitalized, significantly undercapitalized, or critically undercapitalized, the institution is required to submit an acceptable capital restoration plan to its appropriate federal banking agency. Under FDICIA, a bank holding company must guarantee that a subsidiary depository institution meet its capital restoration plan, subject to certain limitations. The obligation of a controlling bank holding company under FDICIA to fund a capital restoration plan is limited to the lesser of 5.0% of an undercapitalized subsidiary's assets or the amount required to meet regulatory capital requirements. An undercapitalized institution is also generally prohibited from increasing its average total assets, making acquisitions, establishing any branches, or engaging in any new line of business except in accordance with an accepted capital restoration plan or with the approval of the FDIC. In addition, the appropriate federal banking agency is given authority with respect to any undercapitalized depository institution to take any of the designated actions it is required to or may take with respect to a significantly undercapitalized institution if it determines \"that those actions are necessary to carry out the purpose\" of FDICIA. At December 31,1993, all of the Registrant's subsidiary institutions had the requisite capital levels to qualify as well capitalized.\nBrokered Deposits. The FDIC has adopted regulations governing the receipt of brokered deposits. Under the regulations, a depository institution cannot accept, rollover, or renew brokered deposits unless (i) it is well capitalized or (ii) it is adequately capitalized and receives a waiver from the FDIC. A depository institution that cannot receive brokered deposits also cannot offer \"pass-through\" insurance on certain employee benefit accounts. Whether or not it has obtained such a waiver, an adequately capitalized depository institution may not pay an interest rate on any deposits in excess of 75 basis points over certain prevailing market rates specified by regulation. There are no such restrictions on a depository institution that is well capitalized. Because all of the subsidiary institutions of the Registrant had at December 31,1993, the requisite capital levels to qualify as well capitalized, the Registrant believes the brokered deposits regulation will have no material effect on the funding or liquidity of any of the subsidiary institutions. FDIC Insurance Assessments. In July 1993, the FDIC adopted a new risk-based assessment system for insured depository institutions that takes into account the risks attributable to different categories and concentrations of assets and liabilities. The new system, which went into effect on January 1, 1994 and replaces a transitional system that the FDIC had utilized for the 1993 calendar year, assigns an institution to one of three capital categories: (i) well capitalized; (ii) adequately capitalized; and (iii) undercapitalized. These three categories are substantially similar\nto the prompt corrective action categories described above, with the \"undercapitalized\" category including institutions that are undercapitalized, significantly undercapitalized, and critically undercapitalized for prompt corrective action purposes. An institution is also assigned by the FDIC to one of three supervisory subgroups within each capital group. The supervisory subgroup to which an institution is assigned is based on a supervisory evaluation provided to the FDIC by the institution's primary federal regulator and information which the FDIC determines to be relevant to the institution's financial condition and the risk posed to the deposit insurance funds (which may include, if applicable, information provided by the institution's state supervisor). An institution's insurance assessment rate is then determined based on the capital category and supervisory category to which it is assigned. Under the final risk-based assessment system, as well as the prior transitional system, there are nine assessment risk classifications (i.e., combinations of capital groups and supervisory subgroups) to which different assessment rates are applied. Assessment rates for 1994, as they had during 1993, will range from .23% of deposits for an institution in the highest category (i.e., \"well-capitalized\" and \"healthy\" to .31% of deposits for an institution in the lowest category (i.e., \"undercapitalized\" and \"substantial supervisory concern\"). The FDIC is authorized to raise insurance premiums in certain circumstances. Any increase in premiums would have an adverse effect on\nthe Registrant. Under the FDIA, insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. New Safety and Soundness Standards. In November 1993, federal banking agencies issued for comment proposed safety and soundness standards relating to internal controls, information systems and internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees, and benefits. With respect to internal controls, information systems, and internal audit systems, the standards describe the functions that adequate internal controls and information systems must be able to perform, including (i) monitoring adherence to prescribed policies, (ii) effective risk management, (iii) timely and accurate financial, operational, and regulatory reporting, (iv) safeguarding and managing assets, and (v) compliance with applicable laws and regulations. The standards also include requirements that (i) those performing internal audits be qualified and independent, (ii) internal controls and information systems be tested and reviewed, (iii) corrective actions be adequately documented, and (iv) that results of an audit be made available for review of management actions. As in the case of internal controls and information systems, the\nproposal establishes general principles and standards, rather than specific requirements, that must be followed in other areas. For example, loan documentation and credit underwriting practices must be such that they enable the institution to make an informed lending decision and assess credit risk on an ongoing basis. Similarly, an institution must manage interest rate risk \"in a manner that is appropriate to the size of (the institution) and the complexity of its assets and liabilities\" and must conduct any asset growth in accordance with a plan that has taken a variety of factors such as deposit volatility, capital, and interest rate risk into account. The proposal also prohibits \"excessive compensation,\" which is defined as amounts paid that are unreasonable or disproportionate to the services performed by an officer, employee, director, or principal shareholder in light of all circumstances. In order to help alert institutions and their regulators to deteriorating financial conditions, the proposed rule also would impose a maximum ratio of classified assets to total capital of 1.0 and, in the case of an institution that had incurred a net loss over the last four quarters, would require that institution to have sufficient capital to absorb a similar loss over the next four quarters and still remain in compliance with its minimum capital requirements. Depositor Preference. Legislation recently enacted by Congress establishes a nationwide depositor preference rule in the event of a bank failure. Under this arrangement, all deposits and certain other claims\nagainst a bank, including the claim of the FDIC as subrogee of insured depositors, would receive payment in full before any general creditor of the bank would be entitled to any payment in the event of an insolvency or liquidation of the bank. Other. Because of concerns relating to the competitiveness and the safety and soundness of the industry, the Congress is considering, even after the enactment of FIRREA and FDICIA, a number of wide-ranging proposals for altering the structure, regulation, and competitive relationships of the nation's financial institutions. Among such bills are proposals to prohibit depository institutions and bank holding companies from conducting certain types of activities, to subject depository institutions to increased disclosure and reporting requirements, to eliminate the present restriction on interstate branching by banks, to eliminate the present restriction on the purchase of banks and bank holding companies by banks and bank holding companies located in other states, to alter the statutory separation of commercial and investment banking and to further expand the powers of depository institutions, bank holding companies, and competitors of depository institutions. It cannot be predicted whether or in what form any of these proposals will be adopted or the extent to which the business of First Alabama may be affected thereby. Registrant's broker\/dealer subsidiary is subject to regulation by the Securities and Exchange Commission, the National Association of Securities Dealers, and certain state securities commissions.\n(i) The following chart shows for the last three years the percentage of total operating income contributed by each of the major categories of income.\n(ii) There has been no public announcement, and no information otherwise has become public, about a material new product or line of business. (iii) The monetary policies of the Board of Governors of the Federal Reserve affect the operations of Registrant's subsidiary institutions. Through changes in the reserve requirements against bank and thrift deposits, open market operations in U.S. Government securities and changes in the discount rate on borrowings, the Federal Reserve influences the cost and availability of funds obtained for lending and investing. The monetary policies of the Federal Reserve have had a significant effect on the operating results of financial institutions in the past and are expected to do so in the future. The impact of such policies on the\nfuture business and earnings of the Registrant cannot be predicted. (iv) The Registrant does not have any material patents, trademarks, licenses, franchises, or concessions. (v) No material portion of the Registrant's business is of a seasonal nature. (vi) The primary sources of funds for the subsidiary institutions are deposits and borrowed funds. The Registrant's primary sources of operating funds are service fees, dividends, and interest which it receives from bank and bank-related subsidiaries. (vii) No material part of the business of the Registrant is dependent upon a single customer or a few customers. No single customer or affiliated group of customers accounts for 10% or more of Registrant's consolidated revenues. (viii) Information concerning backlog orders is not relevant to an understanding of the business of the Registrant. (ix) No material portion of the business of the Registrant is subject to renegotiation of profits or termination of contracts or subcontracts by the Government. (x) All aspects of the Registrant's business are highly competitive. The Registrant's subsidiaries compete with other financial institutions located in Alabama; Columbus, Georgia; northwest Florida, Louisiana, Tennessee, and other adjoining states, as well as large banks in major financial centers and other financial intermediaries, such as savings\nand loan associations, credit unions, consumer finance companies, brokerage firms, insurance companies, investment companies, mutual funds, other mortgage companies and financial service operations of major commercial and retail corporations. As of December 31, 1993, the Registrant was the third largest bank holding company headquartered in Alabama based on both deposits and assets. The Registrant has offices with deposits in excess of $800 million in each of the three largest metropolitan areas in Alabama. The Registrant's banking offices are located in markets primarily within the state of Alabama. In addition, the Registrant operates 23 banking offices in northwest Florida with approximately $445 million in deposits, three banking offices in Columbus, Georgia, with approximately $98 million in deposits, 15 banking offices in Louisiana with $789 million in deposits, and 24 banking offices in middle Tennessee, with approximately $398 million in deposits. Customers for banking services are generally influenced by convenience, quality of service, personal contacts, price of services, and availability of products. Although the ranking of Registrant's position varies in different markets, Registrant believes that its affiliates effectively compete with other banks and thrifts in their relevant market areas.\nOn July 1, 1987, Alabama's regional reciprocal interstate banking statute became effective. The statute provides for an interstate banking region that includes Alabama, Arkansas, the District of Columbia, Florida, Georgia, Kentucky, Louisiana, Maryland, Mississippi, North Carolina, South Carolina, Tennessee, Texas, Virginia, and West Virginia. All of these states have passed some form of interstate banking legislation which is reciprocal with Alabama. Institutions from outside this region could also enter Alabama through the purchase of failed institutions from the Resolution Trust Corporation or the FDIC. If other bank holding companies enter Alabama through acquisition or otherwise, competition for banking services in Alabama could increase. To date, there have been several relatively small acquisitions by out-of-state firms, however the effect on Registrant has been insignificant. Congress is considering legislation to eliminate the present restrictions on interstate branching by banks and the present restrictions on the purchase of banks and bank holding companies by banks and bank holding companies located in other states. In addition, several states included in Alabama's regional reciprocal interstate banking statue have passed or are considering some form of legislation that would enable banks or bank holding companies located in any other state in the nation to purchase banks or bank holding companies in that state. Alternatively, the legislation would enable banks or bank holding companies located in that state to purchase banks or bank holding companies located in any other\nstate in the nation. Although Alabama is not currently considering interstate banking legislation, the enactment of some form of interstate banking by the Congress or by other states in the Registrant's market areas, could further intensify competition in the Registrant's business. (xi) There were no material expenditures during the last three fiscal years on research and development activities by the Registrant. (xii) Regulations of any governmental authority concerning the discharge of materials into the environment are expected to have no material effect on the Registrant or any of its subsidiaries. (xiii) As of December 31, 1993, Registrant, its affiliate banks and other subsidiaries had a total of 5,439 full-time-equivalent employees. (d) Registrant neither engages in foreign operations nor derives a significant portion of its business from customers in foreign countries.\nITEM 2.","section_1A":"","section_1B":"","section_2":"ITEM 2. Properties\nThe corporate headquarters of the Registrant occupy several floors of the downtown Birmingham main banking office facility. Certain administrative offices of the Registrant are located in downtown Montgomery, in the First Alabama Bancshares Building, a modern, eight-story building owned by Regions Financial Building Corporation, a wholly-owned subsidiary of Registrant, and a six story building owned by First Alabama Bank, also a wholly-owned subsidiary of Registrant. Registrant's largest banking offices, all of which are owned by wholly-owned subsidiaries of the Registrant, are located in Birmingham, Mobile, Montgomery and Huntsville, Alabama. The Birmingham offices are in a modern, 18 story office building in downtown Birmingham and an operations center outside the downtown area. The Mobile offices operate from an 18 story office building with an eight-story annex. The Montgomery offices are in a modernized and enlarged, 12 story building, also owned by Regions Financial Building Corporation. The Huntsville offices are in a historic main office building in downtown Huntsville. Portions of the Birmingham, Mobile and Montgomery main office buildings are leased to other tenants. In addition to the four main offices, a total of 77 full-service branches were maintained at December 31, 1993, within the respective cities or counties in the four markets. Registrant's other 85 Alabama banking offices at December 31, 1993, operated in these Alabama counties: Autauga, Baldwin, Blount, Calhoun,\nCherokee, Chilton, Choctaw, Clarke, Coffee, Conecuh, Covington, Cullman, Dallas, Etowah, Houston, Lauderdale, Lee, Limestone, Macon, Marengo, Marshall, Monroe, Morgan, Pike, Russell, Shelby, Sumter, Talladega, Tallapoosa, Tuscaloosa and Walker. Registrant's 23 Florida banking offices operate in the Florida counties of Calhoun, Escambia, Holmes, Jackson, Okaloosa, Santa Rosa, Walton and Washington. Registrant operates three Georgia banking offices in Muskogee County, Georgia, and 24 Tennessee banking offices in the counties of Coffee, Cheatham, Davidson, Franklin, Macon, Montgomery, Overton, Putnam, Robertson, Rutherford, Sumner and Williamson. Registrant's Louisiana affiliate operates 15 offices located in the parishes of Clairborne, Jefferson, Lafourche, Orleans, Ouachita, St. Bernard, St. Tammany and Webster. Registrant's subsidiary, Real Estate Financing, Inc. has its main offices located in Montgomery. As of December 31, 1993, it maintained 23 loan production offices, located in Birmingham, Huntsville, Daphne, Dothan, Decatur, Enterprise, Foley, Guntersville, Mobile, Montgomery, Prattville, Thomasville and Tuscaloosa, Alabama; Destin, Pensacola and Tallahassee, Florida; Columbus, Georgia; Jackson, Mississippi; Columbia and Greenville, South Carolina; and Knoxville and Memphis, Tennessee. Regions Life Insurance Company and FAB Agency, Inc. conduct business from offices located in Montgomery. FAB Agency, Inc. is also authorized to do business at the offices of Real Estate Financing, Inc. and at the offices of bank affiliates.\nFirst Alabama Investments, Inc. has its main office located in Birmingham. As of December 31, 1993, it maintained four other offices located in Huntsville, Mobile and Montgomery, Alabama, and Pensacola, Florida. The subsidiary depository institutions operated a total of 231 full-service offices at December 31, 1993. Of the 231 total full-service offices, 67 are subject to a building or ground lease and 164 are wholly owned by subsidiaries of the Registrant. For offices in leased premises, annual rentals totaled approximately $3,686,000 as of December 31, 1993. During 1993, banking affiliates received approximately $3,589,000 in rentals for space leased to others. At December 31, 1993, encumbrances on the offices, equipment and other operational facilities owned by the affiliates totaled approximately $5,543,000 with a weighted average interest rate of 8.8%.\nITEM 3.","section_3":"ITEM 3. Legal Proceedings\n\"Note L. Commitments and Contingencies\" on page 62 of the annual report to stockholders for the year ended December 31, 1993, is incorporated herein by reference.\nITEM 4.","section_4":"ITEM 4. Submission of Matters to a Vote of Security Holders\nRegistrant did not submit any matters to a vote of security holders during the fourth quarter of 1993.\nPART II ITEM 5.","section_5":"ITEM 5. Market for the Registrant's Common Stock and Related Security Holder Matters\n\"Common Stock Market Prices and Dividends\" on page 47 of the annual report to stockholders for the year ended December 31, 1993, is incorporated herein by reference.\nITEM 6.","section_6":"ITEM 6. Selected Financial Data\n\"Historical Financial Summary\" on pages 70 through 73 of the annual report to stockholders for the year ended December 31, 1993, is incorporated herein by reference.\nITEM 7.","section_7":"ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations\n\"Management's Discussion and Analysis of Financial Condition and Results of Operations\" on pages 24 through 47 of the annual report to stockholders for the year ended December 31, 1993, is incorporated herein by reference.\nITEM 8.","section_7A":"","section_8":"ITEM 8. Financial Statements and Supplementary Data\nThe report of independent auditors and the consolidated financial statements of the Registrant and its subsidiaries, included in the annual report to stockholders for the year ended December 31, 1993, are incorporated herein by reference. \"Summary of Quarterly Results of Operations\" on page 47 and \"Effects of Inflation\" on page 46 of the annual report to stockholders for the year\nended December 31, 1993, are incorporated herein by reference.\nITEM 9.","section_9":"ITEM 9. Changes in and Disagreements with Accountants On Accounting and Financial Disclosure\nThere have been no disagreements on accounting and financial disclosure between Registrant and Ernst & Young.\nPART III\nITEM 10.","section_9A":"","section_9B":"","section_10":"ITEM 10. Directors and Executive Officers of the Registrant\n\"Information on Directors\" from pages 3 through 6 and \"Section 16 Transactions\" on page 6 of the Registrant's proxy statement dated March 16, 1994, are incorporated herein by reference. Executive officers of the Registrant as of December 31, 1993, are as follows:\n*The years indicated are those in which the individual was first deemed to be an executive officer of Registrant, although in every case the individual had been an executive officer of a subsidiary of Registrant for a number of years.\nITEM 11.","section_11":"ITEM 11. Executive Compensation\n\"Executive Compensation and Other Transactions\" on pages 7 through 9 and \"Personnel Committee Interlocks and Insider Participation\" on page 11 of the Registrant's proxy statement dated March 16, 1994, are incorporated herein by reference. All information on page 10 and all information on page 11, except for the information under the sub-heading \"Personnel Committee Interlocks and Insider Participation,\" of the Registrant's proxy statement dated March 16, 1994, are specifically not incorporated by reference herein.\nITEM 12.","section_12":"ITEM 12. Security Ownership of Certain Beneficial Owners and Management \"Voting Securities and Principal Holders Thereof\" on page 2 and \"Information on Directors\" on pages 3 through 5 of the Registrant's proxy statement dated March 16, 1994, are incorporated herein by reference. ITEM 13.","section_13":"ITEM 13. Certain Relationships and Related Transactions \"Other Transactions,\" on page 12 of the Registrant's proxy statement dated March 16, 1994, are incorporated herein by reference. PART IV ITEM 14.","section_14":"ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 14(a)(1) and (2) The lists called for by this portion of Item 14 are submitted as a separate part of this report. 14(a)(3) Listing of Exhibits:\nSignatures\nPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.\nFIRST ALABAMA BANCSHARES, INC.\n\/s\/ L. Burton Barnes, III 3\/16\/94 ---------------------------------- L. Burton Barnes, III Date General Counsel and Corporate Secretary\n\/s\/Robert P. Houston 3\/16\/94 ---------------------------------- Robert P. Houston Date Executive Vice President and Comptroller\nPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.\n\/s\/ J. Stanley Mackin 3\/16\/94 \/s\/ Albert P. Brewer 3\/16\/94 - ------------------------------------ ---------------------------------- J. Stanley Mackin Date Albert P. Brewer Date Chairman, Chief Executive Director Officer and Director\n\/s\/ Richard D. Horsley 3\/16\/94 \/s\/ James S. M. French 3\/16\/94 - ------------------------------------ ---------------------------------- Richard D. Horsley Date James S. M. French Date Vice Chairman, Executive Director Financial Officer and Director\n\/s\/ Sheila S. Blair 3\/16\/94 \/s\/ Catesby ap C. Jones 3\/16\/94 - ------------------------------------ ---------------------------------- Sheila S. Blair Date Catesby ap C. Jones Date Director Director\n\/s\/ James B. Boone, Jr. 3\/16\/94 \/s\/ Olin B. King 3\/16\/94 - ------------------------------------ ---------------------------------- James B. Boone, Jr. Date Olin B. King Date Director Director\n\/s\/ Norman F. McGowin, Jr. 3\/16\/94 \/s\/ Henry E. Simpson 3\/16\/94 - ------------------------------------ ---------------------------------- Norman F. McGowin, Jr. Date Henry E. Simpson Date Director Director\n\/s\/ H. M. McPhillips, Jr. 3\/16\/94 \/s\/ Robert E. Steiner, III 3\/16\/94 - ------------------------------------ ---------------------------------- H. Manning McPhillips, Jr. Date Robert E. Steiner, III Date Director Director\n\/s\/ W. Wyatt Shorter 3\/16\/94 \/s\/ Lee J. Styslinger, Jr. 3\/16\/94 - ------------------------------------ ---------------------------------- W. Wyatt Shorter Date Lee J. Styslinger, Jr. Date Director Director\nANNUAL REPORT ON FORM 10-K\nITEM 14(a)(1) AND (2)\nLIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES\nCERTAIN EXHIBITS\nYEAR ENDED DECEMBER 31, 1993\nFIRST ALABAMA BANCSHARES, INC.\nBIRMINGHAM, ALABAMA\nFORM 10-K - ITEM 14(a)(1) AND (2)\nFIRST ALABAMA BANCSHARES, INC. AND SUBSIDIARIES\nLIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES\nThe following consolidated financial statements and report of independent auditors of First Alabama Bancshares, Inc. and subsidiaries, included in the annual report of the registrant to its stockholders for the year ended December 31, 1993, are incorporated by reference in Item 8:\nReport of Independent Auditors\nConsolidated Statement of Condition - December 31, 1993 and\nConsolidated Statement of Income - Years ended December 31, 1993, 1992 and 1991\nConsolidated Statement of Cash Flows - Years ended December 31, 1993, 1992 and 1991\nConsolidated Statement of Changes in Stockholders' Equity - Years ended December 31, 1993, 1992 and 1991\nNotes to Consolidated Financial Statements - December 31,\nSchedules to the consolidated financial statements required by Article 9 of Regulation S-X are not required under the related instructions or are inapplicable, and therefore have been omitted.\nANNUAL REPORT ON FORM 10-K\nITEM 14(c)\nEXHIBITS\nEXHIBITS INDEX","section_15":""}
{"filename":"85153_1993.txt","cik":"85153","year":"1993","section_1":"Item 1. Business.\nRoseville Telephone Company (the \"Company\"), incorporated under the laws of the State of California in 1914, is engaged in the business of furnishing communications services, mainly local and toll telephone service and network access services, in a territory covering approximately 83 square miles in Placer and Sacramento Counties, California. Toll service to points outside the Company's own area is furnished through connection at Roseville with facilities of Pacific Bell, AT&T, and other interexchange carriers. The City of Roseville, which is centrally located in the Company's service area, is 18 miles northeast of Sacramento.\nDuring recent years, including the year ended December 31, 1993, the area served by the Company has experienced both land subdividing activity for home building purposes and significant commercial and industrial development. The Company continues to be engaged in the expansion of its facilities and operations to meet current and anticipated service demand increases and to maintain modern and efficient service.\nCurrently, no other telephone company operates in the area served by the Company. However, the Company's future operations may be impacted by several proceedings pending before the Public Utilities Commission of the State of California (the \"P.U.C.\") which are considering whether certain services presently provided solely by the Company within its \"Local Access Transport Area\" (\"LATA\") should be opened to competition. See \"Item 3 - Legal Proceedings\" and \"Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations.\"\nThe Company, with a 23.5% equity interest, is one of four limited partners of Sacramento-Valley Limited Partnership (the \"Partnership\"), a California limited partnership formed for the construction and operation of a cellular mobile radiotelephone system, which now operates in the following Standard Metropolitan Statistical Areas (\"SMSA\"):\nSacramento Reno Stockton Yuba City - Marysville Modesto Redding - Chico\nIn addition, the Partnership also operates in the Tehama, Sierra and Storey (Carson City) Rural Statistical Areas (\"RSA\").\nPacTel Cellular, a wholly owned subsidiary of the Pacific Telesis Group, is the sole general partner of the Partnership and responsible for the construction, operation, maintenance and marketing of the cellular mobile radiotelephone system.\nIn each SMSA and RSA, the Federal Communications Commission (the \"F.C.C.\") has granted or will grant one license to provide cellular services to a wireline carrier and one license to a non-wireline carrier. The Partnership is the wireline carrier licensee for each SMSA and RSA in which it operates and competes with the non-wireline licensee in each of those areas.\nThe table that follows reflects the percentage amounts of operating revenues of the Company contributed by various services, excluding income from the Partnership.\nNetwork Access and Local Telephone Long Distance Year Service Service Miscellaneous ---- ------- ------- -------------\n1993 38.1% 46.8% 15.1% 1992 35.9% 49.1% 15.0% 1991 33.0% 53.3% 13.7% 1990 34.5% 51.7% 13.8% 1989 34.5% 50.0% 15.5%\nAs indicated above, revenues from local, network access and long distance services constituted approximately 85% of the Company's total operating revenues in 1993. Miscellaneous operating revenues include primarily revenues from billing and collection services and directory advertising services, in addition to revenues from nonregulated activities. Nonregulated revenues are derived from the sale, lease and maintenance of telecommunications equipment, and the provision of alarm monitoring and paging services.\nRevenues from telephone service are affected by rates authorized by various regulatory agencies. The Company's local service rates are subject to regulation by the P.U.C. As discussed more fully in \"Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations\", the Company completed negotiations with Pacific Bell concerning new compensation agreements, the effects of which were first realized in 1992, that affected extended area service settlements and a significant portion of network access and long distance revenues. With respect to calls terminating outside the Company's LATA, access charges to interexchange carriers are assessed based on tariffs filed by Pacific Bell for intrastate services. With respect to interstate services, the Company has filed its own tariff with the F.C.C. for all elements of access except carrier common line charges, with respect to which the Company concurs with tariffs filed by the National Exchange Carrier Association. Extensive cost separation studies are utilized to determine both the final settlements and access charges.\nSubstantially all of the Company's revenues were from communications and related services. As discussed more fully in \"Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations\", approximately 36% and 34% of the Company's consolidated operating revenues in 1993 and 1992, respectively, were derived from access charges and charges for other services to, and transition contract payments from Pacific Bell pursuant to certain agreements (such amounts represented less than 10% of the Company's consolidated operating revenues in 1991). Approximately 10%, 10% and 11% of the Company's consolidated operating revenues in 1993, 1992 and 1991, respectively, were derived from the provision of services to AT&T. The revenues from services provided to AT&T were received primarily from access charges, but also included revenues from the provision of operator, billing and collection, and other interexchange services. No other customers accounted for more than 10% of consolidated operating revenues.\nIn addition to its regulatory authority with respect to rates, the P.U.C. also has the power, among other things, to establish the terms and conditions of service, to regulate securities issues, to prescribe uniform systems of accounts to be kept by public utilities and to regulate the mortgaging or disposition of public utility properties.\nThe Company uses public streets and highways in the conduct of its public utility telephone business under a non-exclusive perpetual franchise granted by Section 7901 of the California Public Utilities Code.\nAt December 31, 1993, the Company employed 463 persons, none of whom is represented by any union.\nItem 2.","section_1A":"","section_1B":"","section_2":"Item 2. Properties.\nThe Company owns central office buildings and related equipment in Roseville, Citrus Heights, Granite Bay, and other locations in Placer County, and completed construction of a new 135,000 square foot operations facility in November 1993. The Company's 68,000 square foot principal business office and administrative headquarters is located in Roseville. Other land is held for future expansion. The Company has appropriate easements, rights of way and other arrangements for the accommodation of its pole lines and underground conduits and for its aerial and underground cables and wires.\nIn addition to land and structures, the Company's property consists of equipment required in providing telephone service. This includes central office equipment, customer premises equipment and connections, radio antennas, pole lines, aerial and underground cable and wire facilities, vehicles, furniture and fixtures and other equipment. The Company also owns certain other communications equipment held as inventory for sale or lease.\nIn addition to plant and equipment that the Company wholly owns, the Company utilizes poles and conduit systems wholly owned by, or jointly owned with, other utilities and leases space on facilities wholly or jointly owned by the Company to other utilities. These arrangements are in accordance with written agreements customary in the industry.\nThe Partnership owns certain equipment used in the provision of cellular mobile radiotelephone services.\nItem 3.","section_3":"Item 3. Legal Proceedings.\nExcept for the proceedings described below the Company is not aware of any material pending legal proceedings, other than ordinary routine litigation incidental to its business, to which it is a party or to which any of its property is subject.\nAs appears in Item 1, above, the Company is subject to regulation by the F.C.C. and P.U.C. In the past there have been various proceedings before these agencies to which the Company has been a party. Reference is made to Item 1 for further information regarding the nature of the jurisdiction of the F.C.C. and P.U.C. over the business and operations of the Company. The regulatory proceedings discussed below relate to matters which may effect the Company prospectively and are not expected to effect the Company's 1993 financial statements.\nIn March 1985, the P.U.C. commenced an investigation into the \"rates, tolls, rules, charges, operations, costs, separations, intercompany settlements, contracts, service and facilities of the operations of independent telephone companies\" (I. 85-03-078), and consolidated this investigation with Application No. 85-01-034 of Pacific Bell. In connection with the application, the P.U.C. issued an interim rate design effective in 1988 for Pacific Bell which resulted in a local rate increase for the Company and a decrease in settled toll revenues. The P.U.C. has stated that it will order a final rate design during 1994, in conjunction with I. 87-11-033 discussed below, which could have a material impact on the sources and amount of the Company's revenues.\nThe P.U.C. has instituted an investigation (I. 87-11-033) into the manner in which it regulates local exchange carriers, including the Company. In the course of this investigation, it will consider whether certain services presently provided solely by the Company within its LATA should be open to competition. In the course of this current proceeding the Company has proposed adjustments to its rates that would maintain revenues at their present level, while the P.U.C. staff has proposed a revenue reduction of approximately $6 million. A July 1991 decision of the P.U.C. ordered a phase-down of settlement pool payments after January 1, 1993. The Company completed negotiations and has entered into new agreements with Pacific Bell to replace these settlement procedures effective as of January 1, 1992. In addition, the July 1991 decision expressed the Commission's expectation that the Company will file a general rate proceeding, including a request for regulation under the new incentive-based regulatory framework. As a result of delays in issuing a final order, the Company expects to submit a test year 1995 general rate case application during calendar year 1994.\nIn April 1993, the P.U.C. opened an investigation and rulemaking proceeding (R. 93-04-003) to establish rules that will provide non-discriminatory access by competing service providers to the network capabilities of local exchange carriers. The P.U.C. proposed applying these rules to the five largest local exchange carriers in California, including the Company. In connection with this proceeding, the P.U.C. issued a further order in August 1993 proposing additional rules to allow broader competition in the provision of specific special access and switched transport services. The Company has filed comments and expects a decision during 1994.\nIn November 1993, the P.U.C. issued a report to the Governor of the State of California in which it proposed opening all markets to competition by January 1, 1997. Specifically, the P.U.C. proposed streamlining regulation and eliminating all remaining legal barriers to competition for telecommunications services in order to accelerate the pace of innovation in the California telecommunications marketplace.\nThere are a number of regulatory proceedings occurring at the federal level that may have a material impact on the Company. These regulatory proceedings include, but are not limited to, implementation of revised separations procedures that shift revenue requirements and costs between interstate and intrastate jurisdictions and implementation of revised procedures to allocate costs between regulated and non-regulated operations. In addition, the F.C.C. periodically establishes the authorized rate of return for interstate access services, which in 1994 will remain at the 1993 rate of 11.25%.\nIn September 1992, the F.C.C. issued an order, which is currently under appeal, granting to competitors expanded interconnection rights to the facilities of local exchange carriers with annual revenues from regulated operations in excess of $100 million. While not yet applicable to the Company, this order will permit competitors to terminate their own facilities in telephone company central offices to which the order applies. In addition, the F.C.C. initiated a separate notice of proposed rulemaking establishing a two-phased proceeding to modify interstate access rate structures to further competition in the provision of interstate services. These two proceedings may broaden the scope of competition in the provision of interstate services, the effects of which on the Company cannot yet be determined.\nThe Company is subject to certain legal proceedings and claims arising in the ordinary course of its business. In the opinion of management, any liability which may ultimately be incurred with respect to these matters will not materially affect the consolidated financial position or results of operations of the Company.\nItem 4.","section_4":"Item 4. Submission of Matters to a Vote of Security Holders.\nNo matters were submitted to a vote of security holders during the fourth quarter of 1993.\nEXECUTIVE OFFICERS OF THE REGISTRANT\nThe names, ages and positions of the executive officers of the Company as of March 14, 1994 are as follows:\nName Age Office\nRobert L. Doyle(1) 75 Chairman of the Board; President and Chief Executive Officer from 1954 to\nBrian H. Strom 51 President and Chief Executive Officer (since December 1993); Vice President and Chief Financial Officer from 1989 to 1993\nA. A. Johnson 72 Executive Vice President and Chief Operating Officer (since December 1993); Vice President-Operations from 1989 to 1993\nThomas E. Doyle(1) 65 Vice President (since 1972) and Secretary-Treasurer (since 1965)\nMichael D. Campbell 45 Vice President and Chief Financial Officer (since March 1994); Partner, Ernst & Young, from 1983 to 1994.\n(1) Robert L. Doyle and Thomas E. Doyle are brothers.\nPART II\nItem 5.","section_5":"Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.\nThe Common Stock of the Company trades principally in local transactions without the benefit of an established public trading market. As a result of the minimal number of stock transactions, the Company's information with respect to price per share is derived from reports provided by the Company's Retirement Supplement Plan and disclosure, in limited circumstances, of third party transactions. Retirement Supplement Plan transactions in the Company's Common Stock were effected at approximately $22 per share in all quarters of 1992 through January 1993, approximately $23 per share from the balance of the first quarter through the beginning of the fourth quarter of 1993 and approximately $24 per share thereafter.\nAs of February 28, 1994, the approximate number of holders of the Company's Common Stock was 9,500.\nThe Company pays quarterly cash dividends on its Common Stock. The Company paid cash dividends of $.15 per share for each quarter during 1992 and 1993.\nItem 6.","section_6":"Item 6. Selected Financial Data.\n1993 1992 1991 1990 1989 ---- ---- ---- ---- ---- (Dollars in thousands, except per share amounts) Total operating revenues $ 96,780 $ 92,280 $ 88,461 $ 73,629 $ 61,293 Net income $ 22,518 $ 21,816 $ 19,940 $ 16,830 $ 14,740 Net income per share of common stock (1) $ 1.68 $ 1.63 $ 1.49 $ 1.26 $ 1.14 Cash dividends per share of common stock (1) $ .58 $ .55 $ .53 $ .50 $ .40 Property, plant and equipment, at cost $ 228,927 $ 203,379 $ 181,552 $ 159,880 $144,001 Total assets (2) $ 226,459 $ 190,760 $ 165,380 $ 143,264 $131,268 Long-term debt $ 40,000 $ 25,000 $ 13,270 $ 5,590 $ 6,400 Shares of common stock used to calculate per share data (1) 13,399,194 13,399,194 13,399,194 13,399,194 12,940,861\n(1)Shares used in the computation of net income and cash dividends per share of common stock are based on the weighted average number of shares outstanding in each period after giving retroactive effect to 5% stock dividends issued in 1993, 1992, 1991 and 1990.\n(2)The 1989 through 1992 total asset amounts have been conformed to the presentation of the 1993 amount.\nItem 7.","section_7":"Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.\nResults of Operations\n1993 versus 1992\nOperating Revenues:\nIn years prior to 1992, a significant portion of the Company's network access and long distance service revenues, as well as certain portions of local service revenues, resulted from the Company's participation in pooling and settlement arrangements. Such arrangements are processes whereby amounts billed by local exchange carriers are reported to the pool and ultimately divided among the pool participants on the basis of a pool-wide rate of return. Beginning in 1992, there was a significant shift in the sources of these revenues as a result of the Company's tentative agreements with Pacific Bell (the \"Pacific Bell Agreements\"), effective concurrently with the Company's exit from the intrastate settlement pools. Of the Company's total revenues in 1993 and 1992, 36% and 34%, respectively, was recorded under these tentative agreements. Definitive agreements were executed in February 1994 and had no significant effect on revenues recorded in 1993 and 1992 under the tentative agreements. In addition, certain billings to interexchange carriers previously reported to and divided by the pool are now retained by the Company.\nUnder the Pacific Bell Agreements, the Company billed Pacific Bell various charges in connection with the provision of services within the Company's Local Access Transport Area, one of ten in California. In addition, as a result of the Pacific Bell Agreements the Company recognized transition revenues of $16.5 million and $15 million in 1993 and 1992, respectively, which will be reduced over an approximate six year period, commencing in a year to be determined by future regulatory developments, and ultimately eliminated. To avoid potential adverse effects on future results of operations, the Company must either seek adjustments to tariffed rates for services, increase productivity or both.\nLocal service revenues increased approximately $3.8 million, or 11% over 1992. Of the total increase, approximately $2.3 million was related to an increase in extended area service revenues recognized under the Pacific Bell Agreements discussed above. In addition, local service revenues were positively affected by a 5% growth in access lines and increased revenues associated with custom calling and enhanced network services.\nNetwork access and long distance revenues result from charges assessed to carriers and end users for use of the local exchange network and from transition revenues described above. In 1993, network access revenues increased slightly to $37.5 million, reflecting growth in minutes of use volumes and higher interstate settlements from the National Exchange Carrier Association. Positive settlement adjustments which were recorded in 1992 and did not reoccur in 1993 reduced the effect of this increase and also caused a decrease in long distance revenues. Long distance revenues, comprised largely of transition revenues from Pacific Bell, decreased $727,000 to $7.8 million.\nOperating Expenses:\nOperating expenses in 1993 increased approximately $5.1 million or 9% compared to 1992. The increase in operating expenses was due primarily to a combination of 1) software purchases and improvements in the Company's data systems to implement movement from a mainframe platform to a client\/server platform and to implement a wide area network, 2) higher costs associated with the Company's numerous regulatory proceedings, 3) higher pension costs resulting from changes in actuarial assumptions, 4) normal inflationary factors, and 5) increased costs associated with serving a larger number of access lines. Depreciation expense increased as a result of increased plant levels.\nOther Income (Expense):\nOther income, which consists primarily of income attributable to the Company's interest in Sacramento-Valley Limited Partnership, interest income from cash equivalents and short-term investments and allowance for funds used during construction (AFUDC), increased $2.4 million over 1992, due primarily to improved results of operations of the partnership and a significant increase in AFUDC due to the construction of the Company's new Industrial Avenue facility. Other expense consists primarily of interest expense arising from the $25,000,000 long-term debt facility obtained in March 1992 and the $15,000,000 facility obtained in November 1993. Total interest expense was approximately $2.2 million compared to $2.1 million in 1992 resulting from a combination of slightly increased average borrowings offset by lower interest rates.\nIncome Taxes:\nIncome tax expense for 1993 increased approximately $932,000 due to the increase in income subject to tax and an increase in the effective tax rate resulting from the implementation of the Revenue Reconciliation Act of 1993 which retroactively increased the corporate federal income tax rate to 35% beginning January 1, 1993. The effective federal and state income tax rate was 40.6% compared to 39.9% in 1992.\n1992 versus 1991\nOperating Revenues:\nThe Pacific Bell Agreements, effective beginning in 1992, as previously discussed, significantly affected the comparability of certain revenue categories between 1992 and 1991.\nLocal service revenues increased approximately $3.9 million, or 13% over 1991. Of this total increase, $2.0 million was due to increased extended area service revenues recognized under the Pacific Bell Agreements. Additionally, local service revenues were positively affected by a 4% growth in access lines and increased custom calling and enhanced network service revenues.\nIn 1992, long distance service revenues resulted primarily from transition revenues. In the aggregate, network access and long distance service revenues decreased $1.8 million or 4%. In 1991, the Company received approximately $4 million from the California High Cost Fund (\"CHCF\"), and did not request CHCF support for 1992. This decrease was partially offset by an increase in interstate switched access revenues due to increases in minutes of use volumes and in tariffed rates, and higher settlements from the National Exchange Carrier Association. The remaining increase in network access revenues and the remaining decrease in long distance service revenues was due to the shift in the sources of these revenues as described above.\nOperating Expenses:\nTotal operating expenses in 1992 remained at essentially the same level as in 1991. The cost of services and products decreased by $1.6 million primarily due to decreases in network software expense and the cost of sales associated with lower nonregulated equipment sales volumes. Depreciation expense increased by $1.5 million due to an increase in average plant in service. General and administrative expenses decreased due to the incurrence of nonrecurring information management expenses in 1991.\nOther Income (Expense):\nOther income (expense), net increased approximately $973,000 over 1991, due primarily to an increase in interest expense of $1.1 million as a result of the Company's incurrence of $25 million in long-term indebtedness in March 1992 for major construction projects and general corporate purposes.\nIncome Taxes:\nIncome tax expense for 1992 increased approximately $1.2 million due principally to the increase in income subject to tax. The effective federal and state income tax rate was 39.9% in both 1992 and 1991.\nLiquidity and Capital Resources\nAs reflected in the Consolidated Statements of Cash Flows, the Company's operations continue to provide positive cash flows. Net cash provided by operating activities amounted to $36.6 million, $31.4 million and $33.2 million in 1993, 1992 and 1991, respectively. The increase in 1993 was due primarily to increases in net income, payables, accrued liabilities and other deferred credits. During 1993, the Company utilized cash flows from operations and existing cash and cash equivalents to fund capital expenditures in the amount of $35.5 million and cash dividends of $7.8 million. Capital expenditures were larger in 1993 than the $22.6 million in 1992 and the $25.9 million in 1991 due to the completion in 1993 of the new Industrial Avenue facility.\nIn February 1992, the Company received authority from the P.U.C. to issue and sell up to an aggregate $40 million of its long-term notes. The Company issued the initial $25 million in March 1992, and the remaining $15 million in November 1993.\nThe Company's most significant use of funds in 1994 is expected to be for budgeted capital expenditures of approximately $21.5 million for central office equipment and cable and wire facilities. It is anticipated that the Company's capital requirements in 1994 will be met from cash flows from operations and existing cash, cash equivalents and short-term investments. The Company does not presently anticipate that it will commence any securities offerings in 1994.\nInflation\nWhile the Company is not immune from increased costs brought on by inflation and regulatory requirements, the impact of such items on the Company's operations and financial condition depends partly on results of future rate cases and the extent to which increased rates can be translated into improved earnings.\nRegulatory Matters\nThe Company's financial condition is and continues to be affected by recent and future proceedings by the P.U.C. Pending before the P.U.C. are proceedings which are considering:\nBroad competition for the first time within the Company's LATA with regard to IntraLATA toll\nRate design proposals by all California local exchange carriers to revise toll, access, private line and basic exchange rates\nRules that will provide non-discriminatory access by competing service providers to the network capabilities of local exchange carriers\nRules that will allow non-discriminatory open access to the local exchange company's central office and authorize broader competition for intrastate switched transport services\nThe P.U.C. has expressed its expectation that the Company will file an application for a general rate proceeding and its election under the new incentive-based regulatory framework for telephone utilities. The Company anticipates submitting a test year 1995 general rate case application during calendar year 1994. The potential future impact of this proceeding can not be determined.\nIn November 1993, the P.U.C. issued a report to the Governor of the State of California in which it proposes to open all markets to competition by January 1, 1997 and aggressively streamline regulation to accelerate the pace of innovation in the California telecommunications marketplace. The P.U.C. plans to consider these proposals in future proceedings.\nThe Company believes it meets the criteria of Statement of Financial Accounting Standards No. 71, \"Accounting for the Effects of Certain Types of Regulation\" (\"SFAS No. 71\"), which requires the Company to give effect in its financial statements to certain actions of regulators. Accordingly, the Company's consolidated financial statements have been prepared on that basis. As a result of increasing competition and rapid changes in the telecommunications industry, the Company periodically monitors whether it continues to meet the criteria which require the use of SFAS No. 71. In the future, should the Company determine it no longer meets the SFAS No. 71 criteria, a material, extraordinary, noncash charge would result.\nItem 8.","section_7A":"","section_8":"Item 8. Financial Statements and Supplementary Data. Page\nReport of independent auditors\nConsolidated balance sheets as of December 31, 1993 and 1992\nConsolidated statements of income for each of the three years in the period ended December 31, 1993\nConsolidated statements of shareholders' equity for each of the three years in the period ended December 31, 1993\nConsolidated statements of cash flows for each of the three years in the period ended December 31, 1993\nNotes to consolidated financial statements\nREPORT OF INDEPENDENT AUDITORS\nThe Board of Directors and Shareholders Roseville Telephone Company\nWe have audited the accompanying consolidated balance sheets of Roseville Telephone Company as of December 31, 1993 and 1992, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1993. Our audits also included the financial statement schedules listed in the Index at Item 14(a). These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.\nWe conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.\nIn our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Roseville Telephone Company 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. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.\nERNST & YOUNG\nSacramento, California February 25, 1994\nROSEVILLE TELEPHONE COMPANY CONSOLIDATED BALANCE SHEETS December 31, 1993 and 1992\nASSETS 1993 1992 ------ ------ ----- Current assets: Cash and cash equivalents $ 9,847,000 $ 11,200,000 Short-term investments 8,920,000 - Accounts receivable (less allowances of $47,000 and $94,000, respectively) 16,109,000 15,017,000 Refundable income taxes 944,000 - Inventories 1,115,000 860,000 Deferred income tax asset 1,129,000 1,029,000 Prepaid pension cost - 824,000 Prepaid expenses and other current assets 434,000 456,000 ------------ ------------ Total current assets 38,498,000 29,386,000\nProperty, plant and equipment: In service 226,170,000 189,447,000 Under construction 2,757,000 13,932,000 ------------ ------------ 228,927,000 203,379,000 Less accumulated depreciation 60,356,000 58,694,000 ------------ ------------ 168,571,000 144,685,000 Investments and other assets: Cellular partnership 17,327,000 15,771,000 Deferred charges and other assets 2,063,000 918,000 ------------ ------------ 19,390,000 16,689,000 ------------ ------------\n$226,459,000 $190,760,000 ============ ============\nSee accompanying notes.\nROSEVILLE TELEPHONE COMPANY CONSOLIDATED BALANCE SHEETS (CONTINUED) December 31, 1993 and 1992\nLIABILITIES AND SHAREHOLDERS' EQUITY 1993 1992 ------------------------------------ ---- ---- Current liabilities: Accounts payable and other accrued liabilities $ 7,908,000 $4,777,000 Net payables to telecommunications entities 6,569,000 7,531,000 Advance billings and customer deposits 1,375,000 1,394,000 Accrued income taxes - 52,000 Accrued pension cost 603,000 - Accrued compensation 2,688,000 2,398,000 ------------ ------------ Total current liabilities 19,143,000 16,152,000\nLong-term debt 40,000,000 25,000,000\nCommitments and contingencies (Notes 1 and 5)\nDeferred credits and other liabilities: Deferred income taxes 20,071,000 18,225,000 Deferred investment tax credits 885,000 1,103,000 Other 3,439,000 2,121,000 ------------ ------------ 24,395,000 21,449,000\nShareholders' equity: Common stock, without par value; 20,000,000 shares authorized, 13,399,194 shares issued and outstanding (12,765,141 shares in 1992) 130,287,000 115,704,000 Retained earnings 12,634,000 12,455,000 ------------ ------------ Total shareholders' equity 142,921,000 128,159,000 ------------ ------------ $226,459,000 $190,760,000 ============ ============\nSee accompanying notes.\nROSEVILLE TELEPHONE COMPANY CONSOLIDATED STATEMENTS OF INCOME Years ended December 31, 1993, 1992 and 1991\n1993 1992 1991 ---- ---- ---- Operating revenues: Local service $36,883,000 $33,108,000 $29,173,000 Network access service 37,466,000 36,807,000 31,587,000 Long distance service 7,781,000 8,508,000 15,539,000 Directory advertising 6,085,000 5,592,000 4,755,000 Other 8,565,000 8,265,000 7,407,000 ------------ ------------ ----------- Total operating revenues 96,780,000 92,280,000 88,461,000\nOperating expenses: Cost of services and products 23,138,000 21,454,000 23,063,000 Depreciation 12,453,000 12,249,000 10,725,000 Customer operations 10,717,000 9,533,000 9,208,000 General and administrative 11,951,000 9,947,000 10,450,000 Other 1,571,000 1,575,000 1,555,000 ------------ ------------ ------------ Total operating expenses 59,830,000 54,758,000 55,001,000 ------------ ------------ ------------ Income from operations 36,950,000 37,522,000 33,460,000\nOther income (expense): Interest income 285,000 403,000 59,000 Interest expense (2,220,000) (2,056,000) (992,000) Equity in earnings of cellular partnership 1,579,000 66,000 484,000 Allowance for funds used during construction 1,356,000 393,000 315,000 Other, net (48,000) (60,000) (147,000) ------------ ------------ ------------ Total other income (expense), net 952,000 (1,254,000) (281,000) ------------ ------------ ------------ Income before income taxes 37,902,000 36,268,000 33,179,000\nIncome taxes 15,384,000 14,452,000 13,239,000 ------------ ------------ ----------- Net income $22,518,000 $21,816,000 $19,940,000 ============ ============ =========== Per share of common stock:\nNet income $1.68 $1.63 $1.49 ===== ===== ===== Cash dividends $ .58 $ .55 $ .53 ===== ===== ===== Shares of common stock used to calculate per share data 13,399,194 13,399,194 13,399,194 ============ ============ ===========\nSee accompanying notes.\nROSEVILLE TELEPHONE COMPANY CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Years ended December 31, 1993, 1992 and 1991\nCommon Stock ------------------------- Number of Retained Shares Amount earnings Total ------------ ------------ ------------ ------------ Balance at December 31, 1990 11,586,000 $89,763,000 $11,068,000 $100,831,000 5% stock dividend, at fair value: Shares 575,251 12,655,000 (12,655,000) - Cash in lieu of fractional shares - - (89,000) (89,000) Cash dividends - - (6,952,000) (6,952,000) Net income - - 19,940,000 19,940,000 ------------ ------------ ------------ ------------ Balance at December 31, 1991 12,161,251 102,418,000 11,312,000 113,730,000 5% stock dividend, at fair value: Shares 603,890 13,286,000 (13,286,000) - Cash in lieu of fractional shares - - (91,000) (91,000) Cash dividends - - (7,296,000) (7,296,000) Net income - - 21,816,000 21,816,000 ----------- ------------ ------------ ------------ Balance at December 31, 1992 12,765,141 115,704,000 12,455,000 128,159,000 5% stock dividend, at fair value: Shares 634,053 14,583,000 (14,583,000) - Cash in lieu of fractional shares - - (97,000) (97,000) Cash dividends - - (7,659,000) (7,659,000) Net income - - 22,518,000 22,518,000 ----------- ------------ ------------ ------------ Balance at December 31, 1993 13,399,194 $130,287,000 $12,634,000 $142,921,000 =========== ============ ============ ============\nSee accompanying notes.\nROSEVILLE TELEPHONE COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31, 1993, 1992 and 1991 Increase (Decrease) in Cash and Cash Equivalents\n1993 1992 1991 ---- ---- ---- Cash flows from operating activities: Net income $22,518,000 $21,816,000 $19,940,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 12,453,000 12,249,000 10,725,000 Equity component of allowance for funds used during construction (976,000) (322,000) (277,000) Amortization of investment tax credits (218,000) (217,000) (222,000) Provision for deferred income taxes 2,743,000 2,912,000 1,625,000 Equity in earnings of cellular partnership (1,579,000) (66,000) (484,000) Other, net 121,000 105,000 219,000 Net changes in:\nAccounts receivable, net (1,092,000) (2,401,000) (1,132,000) Refundable income taxes (944,000) - - Inventories, prepaid expenses and other current assets 591,000 756,000 (1,468,000) Payables, accrued liabilities and other deferred credits 3,082,000 (2,320,000) 3,734,000 Accrued income taxes (52,000) (1,134,000) 586,000 ----------- ----------- -----------\nNet cash provided by operating activities 36,647,000 31,378,000 33,246,000\nCash flows from investing activities: Capital expenditures for property, plant and equipment (35,484,000) (22,588,000) (25,865,000) Purchases of short-term investments (8,920,000) - - Investment in cellular partnership (1,387,000) (1,721,000) (4,218,000) Return of investment in cellular partnership 1,410,000 - - Other, net (863,000) (402,000) 152,000 ----------- ------------ -----------\nNet cash used in investing activities (45,244,000) (24,711,000) (29,931,000)\nSee accompanying notes.\nROSEVILLE TELEPHONE COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) Years ended December 31, 1993, 1992 and 1991 Increase (Decrease) in Cash and Cash Equivalents\n1993 1992 1991 ---- ---- ---- Cash flows from financing activities: Proceeds of short-term borrowings - - 4,550,000 Proceeds of long-term debt 15,000,000 25,000,000 - Principal payments of long-term debt - (13,270,000) (1,180,000) Dividends paid and fractional share amounts (7,756,000) (7,387,000) (7,041,000) ----------- ----------- ----------- Net cash provided by (used in) financing activities 7,244,000 4,343,000 (3,671,000)\nIncrease (decrease) in cash and cash equivalents (1,353,000) 11,010,000 (356,000)\nCash and cash equivalents at beginning of year 11,200,000 190,000 546,000 ----------- ----------- ----------\nCash and cash equivalents at end of year $9,847,000 $11,200,000 $ 190,000 =========== =========== ==========\nSee accompanying notes.\nROSEVILLE TELEPHONE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1993, 1992 and 1991\n1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES\nBusiness and basis of accounting\nRoseville Telephone Company (the \"Company\") is engaged in the business of furnishing communications and related services principally within its service area in Northern California. The Company maintains its accounts in accordance with the Uniform System of Accounts prescribed for telephone companies by the Federal Communications Commission (the \"F.C.C\").\nThe Company believes it meets the criteria of Statement of Financial Accounting Standards No. 71, \"Accounting for the Effects of Certain Types of Regulation\" (\"SFAS No. 71\"), which requires the Company to give effect in its financial statements to certain actions of regulators. Accordingly, the Company's consolidated financial statements have been prepared on that basis. As a result of increasing competition and rapid changes in the telecommunications industry, the Company periodically monitors whether it continues to meet the criteria which require the use of SFAS No. 71. In the future, should the Company determine it no longer meets the SFAS No. 71 criteria, a material, extraordinary, noncash charge would result.\nThe Company engages in nonregulated activities through its RCC Communications division (\"RCC\"). Products and services provided by RCC include the sale, lease and maintenance of telecommunications equipment, and the provision of alarm monitoring and paging services.\nPrinciples of consolidation\nThe consolidated financial statements include the accounts of the Company and its wholly owned subsidiary. All significant intercompany transactions have been eliminated. The Company's 23.5% interest in the Sacramento- Valley Limited Partnership is accounted for using the equity method. The Company's portion of undistributed earnings of this partnership included in the Company's consolidated retained earnings at December 31, 1993 amounted to approximately $3,075,000.\nCash equivalents and short-term investments\nThe Company invests its excess cash in various investment grade, short- term, interest-bearing investments. As of December 31, 1993, cash equivalents and short-term investments consist of an interest-bearing cash account and commercial paper. The Company has not experienced any losses on such investments.\nFor purposes of reporting cash flows, the Company considers highly liquid investments with original maturities of three months or less as cash equivalents.\n1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)\nFair values of financial instruments\nAs of December 31, 1993 and 1992, the Company's financial instruments consist of cash, cash equivalents, short-term investments and long-term debt. Management of the Company believes that their carrying amounts approximate their fair values as of December 31, 1993 and 1992. Fair values for short-term investments were determined by quoted market prices and for long-term debt by a discounted cash flow analysis based on the Company's current incremental borrowing rates for similar instruments.\nInventories\nTelephone construction inventories consist of materials and supplies, which are stated at average cost. Equipment and other nonregulated inventory held for resale are stated at the lower of average cost or market.\nProperty, plant and equipment\nProperty, plant and equipment is recorded at cost. Retirements and other reductions of regulated telephone plant and equipment of approximately $9,886,000, $947,000 and $4,353,000 in 1993, 1992 and 1991, respectively, were charged against accumulated depreciation with no gain or loss recognized. When property applicable to nonregulated operations is sold or retired, the asset and related accumulated depreciation are removed from the accounts and the associated gain or loss is recognized. The cost of maintenance and repairs is charged to operating expense when incurred.\nInvestment tax credits\nInvestment tax credits on utility property acquired subsequent to 1980 were deferred and are being amortized to income over the productive lives of the related property for rate-making and financial reporting purposes. For tax return purposes, investment tax credits reduced federal income tax expense in the year they arose or became available. The Tax Reform Act of 1986 effectively eliminated investment tax credits after December 31, 1985.\nRevenues\nThe Company is subject to regulation by the F.C.C. and the Public Utilities Commission of the State of California (the \"P.U.C.\"). Pending and future regulatory actions may have a significant impact on the Company's future operations and financial condition.\n1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)\nIn years prior to 1992, a significant portion of the Company's network access and long distance service revenues, as well as certain portions of local service revenues, resulted from the Company's participation in pooling and settlement arrangements. Such arrangements are processes whereby amounts billed by local exchange carriers are reported to the pool and ultimately divided among the pool participants on the basis of a pool- wide rate of return. Beginning in 1992, there was a significant shift in the sources of these revenues as a result of the Company's tentative agreements with Pacific Bell (the \"Pacific Bell Agreements\"), effective concurrently with the Company's exit from the intrastate settlement pools. Of the Company's total revenues in 1993 and 1992, 36% and 34%, respectively, was recorded under these tentative agreements. Definitive agreements were executed in February 1994 and had no significant effect on revenues recorded in 1993 or 1992 under the tentative agreements. In addition, certain billings to interexchange carriers previously reported to and divided by the pool are now retained by the Company.\nUnder the Pacific Bell Agreements, the Company billed Pacific Bell various charges in connection with the provision of services within the Company's Local Access Transport Area, one of ten in California. In addition, as a result of the Pacific Bell Agreements the Company recognized transition revenues of $16.5 million and $15 million in 1993 and 1992, respectively, which will be reduced over an approximate six year period, commencing in a year to be determined by future regulatory developments and ultimately eliminated. To avoid potential adverse effects on future results of operations, the Company must either seek adjustments of tariffed rates for services, increase productivity or both. The implementation of the Pacific Bell Agreements significantly affected the comparability of certain revenue categories between 1992 and 1991.\nDepreciation\nDepreciation of regulated telephone plant and equipment is computed on a straight-line basis using rates approved by the P.U.C. Average annual composite depreciation rates were 6.56%, 6.75% and 6.55% in 1993, 1992 and 1991, respectively.\nThe cost of property, plant and equipment used in nonregulated activities is depreciated over their estimated useful lives, which range from 3 to 5 years, on a straight-line basis.\nAllowance for funds used during construction\nThe F.C.C. and the P.U.C. allow the Company to capitalize an allowance for funds used during construction, which includes both an interest and return on equity component. Such amounts are reflected as a cost of constructing certain plant assets and as an element of \"Other income.\"\n1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)\nIncome taxes\nEffective January 1, 1993, the Company prospectively adopted Statement of Financial Accounting Standards No. 109, \"Accounting for Income Taxes\" (\"SFAS No. 109\") and, accordingly, the Company's prior consolidated financial statements were not restated. SFAS No. 109 requires companies to record deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements and tax returns. Additionally, SFAS No. 109 requires adjustments of deferred tax assets and liabilities for changes in tax laws or rates (such as the Revenue Reconciliation Act of 1993), and requires recognition of a regulatory asset or liability when it is probable that deferred taxes would be reflected in future rates of regulated companies. The adoption of SFAS No. 109 and the implementation of the Revenue Reconciliation Act of 1993 did not have a material effect on the Company's consolidated financial position or results of operations.\nPrior to January 1, 1993, deferred income taxes were provided in accordance with Accounting Principles Board Opinion No. 11 (\"APB No. 11\")for the tax effect of all timing differences between financial statement income and taxable income, except for items that were not allowable by the P.U.C. as deferred tax expense for rate-making purposes.\nPer share amounts\nNet income and cash dividends per share of common stock are based on the weighted average number of shares outstanding each year after giving retroactive effect to stock dividends.\nStatements of cash flows information\nDuring 1993, 1992 and 1991, the Company made payments for interest and income taxes as follows (in thousands):\n1993 1992 1991 ---- ---- ----\nInterest (net of amounts capitalized) $ 1,747 $ 1,497 $ 1,049 Income taxes $13,855 $ 12,891 $11,250\nReclassifications\nCertain amounts in the 1992 and 1991 consolidated financial statements have been reclassified to conform with the presentation of the 1993 consolidated financial statements.\n2. LONG-TERM DEBT\nLong-term debt outstanding as of December 31, 1993 consisted of the following:\n$25,000,000 under an unsecured, long-term credit arrangement with a bank, with interest payable quarterly at rates increasing from 8.16% to 8.46% during the period of the loan. Principal payments are due in equal quarterly installments of $893,000, commencing in June 1995, and ending in April 2002.\nOn November 17, 1993, the Company borrowed $15,000,000 under an unsecured, long-term credit arrangement with a bank. Borrowings under the new credit arrangement bear interest, which is payable quarterly, at a fixed rate of 6.22%. Principal payments are due in equal quarterly installments of $536,000, commencing in March 31, 1997, and ending in December 2003.\nAt December 31, 1993, the aggregate maturity requirements on all long-term debt are $2,679,000, $3,572,000, $5,716,000, and $5,716,000 in 1995, 1996, 1997 and 1998, respectively.\nThe aforementioned credit arrangements contain various positive and negative covenants with respect to cash flow coverage, tangible net worth and leverage ratio. These provisions could restrict the payment of dividends in certain circumstances; however, the entire amount of retained earnings at December 31, 1993 was unrestricted.\n3. INCOME TAXES\nThe income tax provisions consist of the following components (in thousands):\n1993 1992 1991 ---- ---- ---- Current expense: Federal $9,633 $8,730 $8,810 State 3,226 3,027 3,026 ------- ------- ------- 12,859 11,757 11,836 Deferred expense: Federal 2,484 2,552 1,550 State 259 360 75 ------ ------- ------- 2,743 2,912 1,625\nAmortization of investment tax credits (218) (217) (222) -------- ------- ------- $15,384 $14,452 $13,239 ======== ======= =======\nThe income tax provisions differ from those computed by using the statutory federal rate (35% in 1993, and 34% in 1992 and 1991) for the following reasons (in thousands):\n1993 1992 1991 ---- ---- ----\nComputed at statutory rates $13,266 $12,331 $11,281\nIncrease (decrease): State taxes, net of federal benefit 2,265 2,235 2,047\nBenefit of the rate differential applied to reversing timing differences (115) (207) (325)\nOther, net (32) 93 236 ------- ------- ------- Income tax provision $15,384 $14,452 $13,239 ======= ======= ======= Effective federal and state rate 40.6% 39.9% 39.9% ======= ======= =======\n3. INCOME TAXES (CONTINUED)\nThe significant components of the Company's deferred income tax assets and liabilities were as follows at December 31, 1993 (in thousands):\nDeferred Income Taxes ---------------------- Assets Liabilities ------ -----------\nProperty, plant and equipment - primarily due to depreciation differences $ - $ 21,614\nDifferences in the timing of recognition of revenues 2,871 -\nCellular partnership - 2,708\nState franchise taxes 1,129 -\nOther, net 1,380 - ---------- ----------\nTotal 5,380 24,322\nLess current portion 1,129 - ----------- ----------\n$ 4,251 $ 24,322 =========== ========== Net long-term deferred income tax liability $ 20,071 ==========\nAs of January 1, 1993 and December 31, 1993, there was no valuation allowance for deferred tax assets.\n3. INCOME TAXES (CONTINUED)\nDuring 1992 and 1991, in accordance with APB No. 11, the deferred income tax provisions resulted from differences in the timing of recognizing certain revenues and expenses for financial reporting and income tax purposes. The components of the aggregate deferred income tax provisions were as follows (in thousands):\n1992 1991 ---- ---- Tax depreciation in excess of book depreciation $ 1,759 $ 2,268\nDifferences in the timing of recognition of revenues 504 (633)\nDifferences between book and tax income (loss) attributable to the Company's investment in a cellular partnership 736 260\nBenefit of the rate differential applied to reversing timing differences (207) (325)\nOther, net 120 55 --------- ---------- Deferred income tax provision $ 2,912 $ 1,625 ========= ==========\n4. PENSION, OTHER POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS\nThe Company sponsors a noncontributory defined benefit pension plan covering substantially all employees. Benefits are based on years of service and the employee's average compensation during the five highest consecutive years of the last ten years of credited service. The Company's funding policy is to contribute annually an actuarially determined amount consistent with applicable federal income tax regulations. Contributions are intended to provide for benefits attributed to service to date. Plan assets are primarily invested in collective trust accounts, government and government agency obligations, publicly traded stocks and bonds and mortgage-related securities.\nNet periodic pension cost for the years ended December 31, 1993, 1992 and 1991 includes the following components (in thousands):\n1993 1992 1991 ---- ---- ---- Service cost-benefits earned during the period $2,149 $1,544 $1,252 Interest cost on projected benefit obligation 3,131 2,727 2,252 Actual return on plan assets (2,313) (1,592) (3,113) Net amortization and deferral 910 (80) 1,786 ------- ------- ------- Net pension cost $3,877 $2,599 $2,177 ======= ======= =======\nThe following table sets forth the defined benefit plan's funded status and amounts recognized in the consolidated balance sheets as of December 31, 1993 and 1992 (in thousands): 1993 1992 ---- ---- Actuarial present value of benefit obligations: Vested benefit obligation $29,717 $25,054 Nonvested benefit obligation 646 483 --------- -------- Accumulated benefit obligation $30,363 $25,537 ========= ========\nPlan assets at fair value $31,369 $27,659 Less projected benefit obligation (47,383) (39,609) -------- -------- Projected benefit obligation in excess of plan assets (16,014) (11,950) Unrecognized net loss 12,614 9,260 Unrecognized transition obligation 3,247 3,514 -------- -------- Prepaid (accrued) pension cost $ (603) $ 824 ======== ========\n4. PENSION, OTHER POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS (CONTINUED)\nThe discount rates used in determining the projected benefit obligation at December 31, 1993 and 1992 were 7% and 7.5%, respectively. The assumed rate of increase in future compensation levels used to measure the projected benefit obligation was 6% at December 31, 1993 and 1992. The expected long-term rate of return on plan assets used in determining net pension cost was 8% in 1993, and 8.5% in 1992 and 1991. Changes in the discount rate and expected long-term rate of return on plan assets increased pension cost $1,054,000 in 1993.\nThe Company also maintains a retirement supplement plan providing both a retirement and savings feature for substantially all employees. The retirement feature allows for tax deferred contributions by employees under Section 401(k) of the Internal Revenue Code. Subject to certain limitations, one-half of all employee contributions made to the retirement supplement plan are matched by the Company. Such matching contributions, as defined in the plan, amounted to approximately $903,000, $731,000 and $623,000 in 1993, 1992 and 1991, respectively. At December 31, 1993, 7% of the Company's outstanding shares of common stock were held by the retirement supplement plan.\nEffective January 1, 1993, the Company adopted Statements of Financial Accounting Standards No. 106, \"Employers' Accounting for Postretirement Benefits Other Than Pensions\" (\"SFAS No. 106\") and No. 112, \"Employers' Accounting for Postemployment Benefits\" (\"SFAS No. 112\"). SFAS No. 106 requires accrual of the expected ultimate cost of providing benefits during the years that the employee renders the necessary service. Prior to the Company's adoption of SFAS No. 106, the cost of postretirement benefits was generally recognized as paid. Presently, the Company provides certain postretirement benefits other than pensions to substantially all employees, including a stated reimbursement for Medicare supplemental insurance and life insurance benefits. SFAS No. 112 establishes certain requirements for accounting for benefits provided to former or inactive employees after employment but before retirement. The adoption of SFAS No. 106 and No. 112 did not have a material effect on the Company's consolidated financial position or results of operations.\n5. COMMITMENTS AND CONTINGENCIES\nOperating leases\nThe Company leases certain facilities and equipment used in its operations and reflects lease payments as rental expense for the periods to which they relate. Total rental expense amounted to $1,137,000, $936,000 and $961,000 in 1993, 1992 and 1991, respectively.\nAt December 31, 1993, the aggregate minimum rental commitments under noncancellable operating lease obligations are not significant.\nOther commitments\nThe Company's budgeted capital expenditures for the year ending December 31, 1994 approximate $21.5 million. Binding commitments for such planned expenditures at December 31, 1993 were not significant.\nLitigation\nThe Company is subject to certain legal proceedings and claims arising in the ordinary course of its business. In the opinion of management, any liability which may ultimately be incurred with respect to these matters will not materially affect the consolidated financial condition or results of operations of the Company.\n6. CONCENTRATIONS OF CREDIT RISK AND SIGNIFICANT CUSTOMERS\nSubstantially all of the Company's revenues were from communications and related services provided in the Northern California area. The Company performs ongoing credit evaluations of its customers' financial condition and management believes that an adequate allowance for doubtful accounts has been provided.\nAs discussed more fully in Note 1 - Revenues, approximately 36% and 34% of the Company's consolidated operating revenues in 1993 and 1992, respectively, were derived from access charges and other charges to, and transition contract payments from Pacific Bell pursuant to the Pacific Bell Agreements (such amounts represented less than 10% of the Company's consolidated operating revenues in 1991). Approximately 10%, 10% and 11% of the Company's consolidated operating revenues in 1993, 1992 and 1991, respectively, were derived from the provision of services to AT&T. The revenues from services provided to AT&T were received primarily from access charges, but also included revenues from the provision of operator, billing and collection, and other interexchange services. No other customers accounted for more than 10% of consolidated operating revenues.\nItem 9.","section_9":"Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.\nNone.\nPART III\nItem 10.","section_9A":"","section_9B":"","section_10":"Item 10. Directors and Executive Officers of the Registrant.\nFor information regarding the executive officers of the Company, see \"Executive Officers of the Registrant\" at the end of Part I of this report. Other information required by this item is incorporated herein by reference from the proxy statement for the annual meeting of the Company's shareholders to be held on June 17, 1994.\nItem 11.","section_11":"Item 11. Executive Compensation.\nIncorporated herein by reference from the proxy statement for the annual meeting of the Company's shareholders to be held on June 17, 1994.\nItem 12.","section_12":"Item 12. Security Ownership of Certain Beneficial Owners and Management.\nIncorporated herein by reference from the proxy statement for the annual meeting of the Company's shareholders to be held on June 17, 1994.\nItem 13.","section_13":"Item 13. Certain Relationships and Related Transactions.\nNone.\nPART IV\nItem 14.","section_14":"Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.\n(a) 1 and 2. Financial Statements and Financial Statement Schedules\nThe financial statements and schedules listed in the accompanying Index to Financial Statements and Financial Statement Schedules are filed as part of this annual report.\n3. Exhibits\nThe exhibits listed on the accompanying Index to Exhibits are filed as part of this annual report.\n(b) Reports on Form 8-K\nNo reports on Form 8-K were filed during the fourth quarter of 1993.\nROSEVILLE TELEPHONE COMPANY AND FINANCIAL STATEMENT SCHEDULES (Item 14(a) 1 and 2)\nPAGE\nReport of independent auditors 14\nConsolidated balance sheets as of December 31, 1993 and 1992 15\nConsolidated statements of income for each of the three years in the period ended December 31, 1993 17\nConsolidated statements of shareholders' equity for each of the three years in the period ended December 31, 1993 18\nConsolidated statements of cash flows for each of the three years in the period ended December 31, 1993 19\nNotes to consolidated financial statements 21\nFinancial statement schedules for each of the three years in the period ended December 31, 1993\nV Property, plant and equipment 34\nVI Accumulated depreciation 36\nVIII Valuation and qualifying accounts 37\nIX Short-term borrowings 38\nX Supplementary income statement information 39\nAll other schedules are omitted since the required information is not present or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements and notes thereto.\nROSEVILLE TELEPHONE COMPANY SCHEDULE V - PROPERTY, PLANT AND EQUIPMENT Years ended December 31, 1993, 1992 and 1991 (In thousands)\nBalance Net Other Balance at additions changes at beginning (transfers) Retire- - add end of Classification of period at cost ments (deduct) period --------------- --------- ---------- --------- --------- --------- Year ended December 31, 1993: In service: Land $ 3,908 $ - $ - $ - $ 3,908 Buildings 28,777 24,232 4 - 53,005 Central office equipment 63,968 12,638 8,951 - 67,655 Cable and wire facilities 75,351 5,220 578 - 79,993 Furniture and office equipment 10,650 4,341 278 - 14,713 Vehicles and other work equipment 4,634 511 75 - 5,070 Nonregulated equipment 2,159 693 1,026 - 1,826 --------- --------- -------- -------- -------- 189,447 47,635 10,912 - 226,170 Under construction 13,932 (11,175) - - 2,757 --------- --------- -------- -------- -------- $203,379 $ 36,460 $ 10,912 $ - $228,927 ======== ========= ======== ======== ========\nYear ended December 31, 1992: In service: Land $ 3,909 $ - $ 1 $ - $ 3,908 Buildings 28,127 651 1 - 28,777 Central office equipment 62,229 2,126 387 - 63,968 Cable and wire facilities 69,254 6,397 300 - 75,351 Furniture and office equipment 9,499 1,296 145 - 10,650 Vehicles and other work equipment 4,247 500 113 - 4,634 Nonregulated equipment 1,855 440 136 - 2,159 ---------- --------- -------- --------- -------- 179,120 11,410 1,083 - 189,447 Under construction 2,432 11,500 - - 13,932 ---------- ---------- -------- --------- --------- $ 181,552 $ 22,910 $ 1,083 $ - $203,379 ========== ========== ========= ========= =========\nROSEVILLE TELEPHONE COMPANY SCHEDULE V - PROPERTY, PLANT AND EQUIPMENT (CONTINUED) Years ended December 31, 1993, 1992 and 1991 (In thousands)\nBalance Net Other Balance at additions changes at beginning (transfers) Retire- - add end of Classification of period at cost ments (deduct) period --------------- --------- ---------- --------- --------- --------- Year ended December 31, 1991: In service: Land $ 2,436 $ 1,473 $ - $ - $ 3,909 Buildings 26,086 2,071 30 - 28,127 Central office equipment 51,390 13,720 2,881 - 62,229 Cable and wire facilities 63,347 6,334 427 - 69,254 Furniture and office equipment 8,896 1,421 818 - 9,499 Vehicles and other work equipment 3,971 473 197 - 4,247 Nonregulated equipment 1,634 338 117 - 1,855 --------- --------- --------- --------- -------- 157,760 25,830 4,470 - 179,120 Under construction 2,120 312 - - 2,432 --------- --------- --------- --------- -------- $159,880 $ 26,142 $ 4,470 $ - $181,552 ========= ========= ========= ========= ========\nROSEVILLE TELEPHONE COMPANY SCHEDULE VI - ACCUMULATED DEPRECIATION Years ended December 31, 1993, 1992 and 1991 (In thousands)\nBalance Net Other Balance at additions changes at beginning (transfers) Retire- - add end of Classification of period at cost ments (deduct) period --------------- --------- ---------- --------- --------- --------- Year ended December 31, 1993: Buildings $ 6,944 $ 900 $ 6 $ - $ 7,838 Central office equipment 22,655 5,977 8,735 - 19,897 Cable and wire facilities 20,616 3,152 639 - 23,129 Furniture and office equipment 4,331 1,624 279 - 5,676 Vehicles and other work equipment 2,220 413 50 - 2,583 Nonregulated equipment 1,928 387 1,082 - 1,233 --------- --------- -------- --------- --------- $ 58,694 $ 12,453 $10,791 $ - $60,356 ========= ========= ======== ========= ========= Year ended December 31, 1992: Buildings $ 6,103 $ 841 $ - $ - $ 6,944 Central office equipment 16,910 6,009 264 - 22,655 Cable and wire facilities 18,068 2,930 382 - 20,616 Furniture and office equipment 3,069 1,405 143 - 4,331 Vehicles and other work equipment 1,934 384 98 - 2,220 Nonregulated equipment 1,339 680 91 - 1,928 --------- --------- -------- --------- -------- $47,423 $ 12,249 $ 978 $ - $58,694 ======== ======== ======== ========= ======== Year ended December 31, 1991: Buildings $ 5,347 $ 785 $ 29 $ - $ 6,103 Central office equipment 14,345 5,234 2,669 - 16,910 Cable and wire facilities 15,861 2,704 497 - 18,068 Furniture and office equipment 2,577 1,308 816 - 3,069 Vehicles and other work equipment 1,752 355 173 - 1,934 Nonregulated equipment 1,067 339 67 - 1,339 --------- --------- --------- --------- --------- $ 40,949 $ 10,725 $ 4,251 $ - $ 47,423 ========= ========= ========= ========= =========\n(1)Sales and retirements are net of salvage value and costs of removal.\nROSEVILLE TELEPHONE COMPANY SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS Years ended December 31, 1993, 1992 and 1991 (In thousands)\nAdditions ------------------------ Balance at Charged to Charged to Balance at beginning of costs and other end of Description period expenses accounts(1) Deductions(2) period - ----------- ------------ ----------- ----------- ------------- ------------ Allowance for doubtful accounts:\n1993 $ 94 $106 $122 $275 $ 47 ==== ==== ==== ==== ==== 1992 $162 $ 87 $116 $271 $ 94 ==== ==== ==== ==== ==== 1991 $235 $ 69 $244 $386 $162 ==== ==== ==== ==== ====\n(1) Represents collection of accounts previously written-off. (2) Represents accounts written-off.\nROSEVILLE TELEPHONE COMPANY SCHEDULE IX - SHORT-TERM BORROWINGS Years ended December 31, 1993, 1992 and 1991 (In thousands)\nWeighted Maximum Average average Balance Weighted amount amount interest at end average outstanding outstanding rate Category of aggregate of interest during the during the during the short-term borrowings period rate period period(1) period(2)\n- --------------------- ------- ----- ------- --------- ---------\nYear ended December 31, 1993 - ----------------------------\nNot applicable $ - -% $ - $ - -%\nYear ended December 31, 1992 - ----------------------------\nNot applicable(3) $ - -% $ - $ - -%\nYear ended December 31, 1991 - ----------------------------\nBank line of credit agreement $ -(3) 5.25% $ 13,500 $ 5,587 6.97%\n(1)The average amount of short-term borrowings during each period was determined by multiplying the amount of each advance during the period by the percentage of the period for which it was outstanding.\n(2)The approximate weighted average interest rate for each period was determined by dividing interest expense applicable to the borrowing by the average amount outstanding during the period.\n(3)Borrowings outstanding under this bank line of credit agreement at December 31, 1991, and subsequent thereto until its refinancing in March 1992 on a long-term basis, were classified as long-term debt in the Company's Consolidated Balance Sheet.\nROSEVILLE TELEPHONE COMPANY SCHEDULE X - SUPPLEMENTARY INCOME STATEMENT INFORMATION Years ended December 31, 1993, 1992 and 1991 (In thousands)\nCharged to costs and expenses ----------------------------- Year ended December 31, -----------------------\n1993 1992 1991 ---- ----- ---- 1. Taxes, other than payroll and income taxes $1,571 $1,575 $1,555\nMaintenance and repairs is the primary component of plant operations expense, which is included in \"Cost of services and products\" in the Company's Consolidated Statements of Income. Plant operations expense amounted to $12,911,000, $11,397,000 and $12,419,000 in 1993, 1992 and 1991, respectively. Depreciation and amortization of intangible assets, preoperating costs and similar deferrals, royalties paid and advertising costs incurred were insignificant in each year presented.\nSIGNATURES\nPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.\nROSEVILLE TELEPHONE COMPANY (Registrant)\nDate: March 25, 1994 By: \/s\/ Robert L. Doyle Robert L. Doyle, Chairman of the Board\nDate: March 25, 1994 By: \/s\/ Brian H. Strom Brian H. Strom, President and Chief Executive Officer\nPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.\nDate: March 25, 1994 By: \/s\/ Robert L. Doyle Robert L. Doyle, Chairman of the Board\nDate: March 25, 1994 By: \/s\/ Brian H. Strom Brian H. Strom, President and Chief Executive Officer (Chief Financial Officer and Principal Accounting Officer); Director\nDate: March 25, 1994 \/s\/ Thomas E. Doyle Thomas E. Doyle Director\nDate: March 25, 1994 \/s\/ Ralph E. Hoeper Ralph E. Hoeper, Director\nDate: March 25, 1994 \/s\/ John R. Roberts III John R. Roberts III Director\nROSEVILLE TELEPHONE COMPANY INDEX TO EXHIBITS (Item 14(a) 3)\nMethod Exhibit No. Description of Filing Page ----------- ----------- --------- ----\n3(a) Restated Articles of Incorporation of the Incorporated - Company (Filed as Exhibit I to Form 10-Q by reference Quarterly Report for the quarter ended June 30, 1980), together with Certificate of Amendment amending such Restated Articles of Incorporation (as filed with Exhibit 3(a) to Form 10-K Annual Report for the year ended December 31, 1982), and Certificate of Amendment further amending such Restated Articles of Incorporation, as amended (Filed as Exhibit 3A to Form 10-K Annual Report for the year ended December 31, 1983)\n3(b) Certificate of Amendment of Articles of Incorporated - Incorporation (Filed as Exhibit 3(b) to by reference Form 10-K Annual Report for the year ended December 31, 1988)\n3(c) Bylaws of the Company, as amended to date Incorporated - (Filed as Exhibit 3(c)to Form 10-K Annual by reference Report for the year ended December 31, 1988)\n10(a) Sacramento-Valley Limited Partnership Incorporated - Agreement, dated April 4, 1984 (Filed as by reference Exhibit I to Form 10-Q Quarterly Report for the quarter ended March 31, 1984)\n10(b) Credit Agreement with Bank of America Incorporated - National Trust and Savings Association, by reference dated March 27, 1992, with respect to $25,000,000 term loan. (Filed as Exhibit 10(a) to Form 10-Q Quarterly Report for the quarter ended March 31, 1992)\n10(c) Credit Agreement with Bank of America Filed - National Trust and Savings Association, herewith dated January 4, 1994, with respect to $15,000,000 term loan.\n22(a) List of subsidiaries (Filed as Exhibit Incorporated - 22(a) to Form 10-K Annual Report for the by reference year ended December 31, 1981)\nSIGNATURES\nPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.\nROSEVILLE TELEPHONE COMPANY (Registrant)\nDate: March 25, 1994 By: Robert L. Doyle, Chairman of the Board\nDate: March 25, 1994 By: Brian H. Strom, President and Chief Executive Officer\nPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.\nDate: March 25, 1994 Robert L. Doyle, Chairman of the Board\nDate: March 25, 1994 Brian H. Strom, President and Chief Executive Officer (Chief Financial Officer and Principal Accounting Officer); Director\nDate: March 25, 1994 Thomas E. Doyle, Director\nDate: March 25, 1994 Ralph E. Hoeper, Director\nDate: March 25, 1994 John R. Roberts III, Director","section_15":""}
{"filename":"736768_1993.txt","cik":"736768","year":"1993","section_1":"ITEM 1. BUSINESS\nPetroleum Heat and Power Co., Inc. (the \"Company\" or \"Petro\") is the largest retail distributor of home heating oil (#2 fuel oil) in the United States, with sales of $538.5 million for the year ended December 31, 1993. Petro served approximately 415,000 customers in 26 markets in the Northeast, as of December 31, 1993, including the metropolitan areas of Boston, New York City, Baltimore, Providence and Washington, D.C. Despite its leading market position, Petro estimates that its customer base represents approximately 5% of the residential home heating oil customers in the Northeast. For the year ended December 31, 1993, the Company sold approximately 443.5 million gallons of home heating oil and propane.\nIn addition to home heating oil and propane, the Company also installs and repairs heating equipment and markets to commercial customers, to a limited extent, other petroleum products, including #4 fuel oil, #6 fuel oil, diesel fuel, kerosene and gasoline.\nInstallation and repair of heating equipment is provided as a service by the Company to its heating oil customers, and has represented approximately 12% per year of the Company's net sales for the last three fiscal years. The Company considers the provision of service and installation services to be an integral part of its basic fuel oil business. Accordingly, the Company regularly provides various service incentives to obtain and retain fuel oil customers and such services are not designed to generate profits. Except in isolated instances, the Company does not provide service to any person who is not a heating oil customer.\nFor the years ended December 31, 1991, 1992 and 1993, sales of home heating oil and propane (not including related installation and service) constituted approximately 82%, of the Company's net sales.\nThe Company's volume, cash flow and operating profits before depreciation and amortization have increased significantly since 1980 primarily because of its acquisitions of other home heating oil businesses. Since September 1979, the Company has completed 146 acquisitions including nine in 1993 and one in 1994. Large volume\nacquisitions are operated as separate branches while smaller volume acquisitions are integrated into existing branches of the Company.\nOperating Strategy\nThe Company currently operates from 30 branch locations and a corporate office in Stamford, Connecticut. The accounting, data processing, purchasing and credit functions are centralized, while branch offices maintain autonomy over oil delivery, heating equipment service and customer relations. The Company obtains its fuel oil in either barge or truckload quantities. When purchasing in barge quantities, the Company hires independent barging companies on an as needed basis to transport the Company's oil from refineries and other bulk storage facilities to third-party storage terminals. The Company has contracted with 71 third party storage terminals for the right to temporarily store its fuel oil at their facilities. The fuel oil is then transported by the Company's fleet of approximately 725 delivery trucks to its customers.\nApproximately 85% of the Company's customers receive their home heating oil pursuant to an automatic delivery system in which individual deliveries are scheduled by computer based upon each customer's historical consumption patterns and prevailing weather conditions. The Company delivers home heating oil approximately six times during the year to the average customer. The Company's practice is to bill customers promptly after delivery. In addition, approximately 30% of the Company's customers are on the Company's budget payment plan whereby their estimated annual oil purchases and service contract is paid for in a series of equal monthly payments over an eleven or twelve month period.\nSuppliers\nThe Company obtains home heating oil from numerous sources, including integrated international oil companies, independent refiners and independent wholesalers, many of which have been suppliers to the Company for over 10 years. The Company's purchases are made pursuant to supply contracts or on the spot market. The Company has market price based contracts for substantially all its petroleum requirements with 14 different suppliers, all of which have significant domestic sources for their product. The Company's current suppliers are (in alphabetical order): Amerada Hess Corporation; Bayway Refining Co.; Citgo Petroleum Corp.; Coastal New England and New York; Crown Central Petroleum; Exxon Company USA; Global Petroleum Corp.; Kerr McGee Refining Corp.; MG Refining and Marketing Co.; Mobil Oil Corporation; Northeast Petroleum, a division of Cargill, Inc.; S & S Hartwell and Co., Inc. (a division of Sprague Energy Co.); Stuart Petroleum Company and Sun Oil Company. The Company's supply contracts each have terms of 12 months and typically expire in May or June of each year. All of the supply contracts provide for maximum quantities, but do not establish in advance the price at which fuel oil is sold, which, like the Company's price to its customers, is established from time to time. The Company believes that its policy of contracting for substantially all its supply needs with diverse and reliable sources will enable it to obtain sufficient product should unforeseen shortages develop in the worldwide supply of crude oil. The Company further believes that relations with its current suppliers are satisfactory.\nCustomers and Sales\nAs of December 31, 1993, the Company served approximately 415,000 customers in the following 26 markets through a sales force of approximately 139 individuals based primarily in the Company's branch offices:\nNew York Maryland\/Virginia\/D.C. Pennsylvania Bronx, Queens and Baltimore (Metropolitan) Allentown Kings Counties Washington, D.C. Berks County Eastern Long Island (Metropolitan) (Centered in Reading) Staten Island Lebanon County Western Long Island Massachusetts (Centered in Palmyra) Boston (Metropolitan) Connecticut Northeastern Massachusetts New Jersey Bridgeport--New Haven (Centered in Lawrence) Camden Hartford (Metropolitan) Springfield Neptune Litchfield County Worcester Newark (Metropolitan) Southern Fairfield County North Brunswick Rockaway Rhode Island Trenton Providence New Hampshire Milford Portsmouth\nApproximately 85% of the Company's sales of #2 fuel oil are made to homeowners with the balance to industrial, commercial and institutional customers. Historically, the Company has lost a portion of its customer base each year for various reasons, including customer relocation, price competition and conversions to natural gas.\nConversions to Natural Gas\nThe rate of conversion from the use of home heating oil to natural gas is primarily affected by the relative prices of the two products and the cost of replacing an oil fired heating system with one that uses natural gas. The Company believes that approximately 1% of its customer base annually converts from home heating oil to natural gas. Even when natural gas had a significant price advantage over home heating oil, such as in 1980 and 1981 when there were government controls on natural gas prices or, for a short time in 1990 and 1991, during the Persian Gulf crisis, the Company's customers converted to natural gas at only a 2% annual rate. During the latter part of 1991 and through 1993, natural gas conversions have returned to their approximate 1% historical annual rate as the prices for the two products have been at parity.\nCertain Industry Matters and Seasonality\nThe Company's business is directly related to the heating needs of its customers and the weather can have a material effect on the Company's sales in any particular year, such as in 1990 and 1991 which were the first and third warmest years in the century. However, the temperatures over the past 30 years have been relatively stable, and as a result have not had a significant impact on the Company's performance except on a short-term basis.\nThe Company's business is highly seasonal. Approximately 80% of its revenues are generated during the heating season from October 1 through March 31, the Company's fourth and first fiscal quarters.\nCompetition\nThe Company's business is highly competitive. The Company competes with fuel oil distributors offering a broad range of services and prices, from full service distributors, like the Company, to those offering delivery only. Competition with other companies in the fuel oil industry is based primarily on customer service and price. Long-standing customer relationships are typical in the retail home heating oil industry. Many companies in the industry, including Petro, deliver home heating oil to their customers based upon weather conditions and historical consumption patterns without the customer having to make an affirmative purchase decision each time oil is needed. In addition, most companies, including Petro, provide home heating equipment repair service on a 24-hour a day basis, which tends to build customer loyalty.\nEmployees\nAs of December 31, 1993, the Company had 2,385 employees, of whom 759 were office, clerical and customer service personnel, 720 were heating equipment repairmen, 572 were oil truck drivers and mechanics, 195 were management and staff and 139 were employed in sales. Approximately 355 of those employees were seasonal, and management expects to rehire the majority of them during the next heating season. Approximately 718 full time employees and 235 seasonal employees are represented by 17 different local chapters of labor unions. Management believes that its relations with both its union and non-union employees are satisfactory.\nInvestment in Star Gas Corporation\nIn December 1993, the Company acquired a 29.5% equity interest (42.8% voting interest) in Star Gas Corporation (\"Star Gas\"), the tenth largest propane distributorship in the United States, for $16.0 million in cash. Certain other investors invested a total of $49.0 million of additional equity in Star Gas, of which $11.0 million was in the form of cash and $38.0 million resulted from the conversion of long-term debt and preferred stock into equity. As a result of redemptions of a portion of the equity in Star Gas held by certain of the other investors that the Company expects will occur in connection with a Star Gas recapitalization, the Company expects that its direct and indirect equity\ninterest in Star Gas will increase to 36.7% without any additional investment by the Company.\nStar Gas is the tenth largest distributor of propane in the United States, with sales of $154.2 million, representing over 169 million gallons of propane, for its fiscal year ended September 30, 1993. Star Gas served approximately 200,000 customers in the midwestern, northeastern and southeastern regions of the United States as of September 30, 1993.\nThe Company will manage Star Gas' business under a Management Services Agreement which provides for an annual cash fee of $500,000 and an annual bonus equal to 5% of the increase in Star Gas' operating income before depreciation and amortization over its fiscal year ended September 30, 1993, payable in common stock of Star Gas pursuant to a formula set forth in the Management Services Agreement. Star Gas also will reimburse the Company for its expenses and the cost of certain Company personnel.\nAfter giving effect to the Star Gas recapitalization on a pro forma basis as of September 30, 1993, Star Gas would have had total long-term debt of $70.3 million and stockholder's equity of $51.1 million. The Company is not directly or contingently liable for any indebtedness of Star Gas.\nStar Gas distributes propane primarily for home heating as well as for commercial uses from 89 locations employing a fleet of over 300 delivery trucks. Star Gas acquires propane from approximately 30 sources, including Ashland Petroleum Company, Amoco Canada Marathon Corp., Enron Gas Liquids, Inc. and Texaco Exploration and Production, Inc. Star Gas owns a storage facility in the Midwest in which it is able to store approximately 22 million gallons of propane in an underground cavern located approximately 400 feet below the surface.\nITEM 2.","section_1A":"","section_1B":"","section_2":"ITEM 2. PROPERTIES\nThe Company currently occupies 50 different facilities and distributes fuel oil and provides service to its customers through approximately 1,900 oil delivery tank trucks, service vans and other vehicles.\nThe following table presents additional information concerning the Company's facilities:\nOwned\/Lease Approx. Expiration Square Location Type of Facility Date Footage - -------- ---------------- ----------- -------\nNew York Astoria Office\/Garage 12\/31\/95 25,600 Brooklyn Office Owned 6,500 Brooklyn Garage Owned 13,000 Brooklyn Office\/Garage 10\/31\/00 25,500 Brooklyn Garage 10\/31\/05 33,500 Hicksville Office\/Garage 7\/14\/01 16,000 Oyster Bay Office\/Garage 8\/31\/96 22,800 Patchogue Office\/Garage 10\/03\/96 26,500 Plainview Garage Owned 8,500 Plainview Office\/Garage 10\/31\/00 23,800 Southampton Office\/Storage 7\/31\/98 12,000 Staten Island Office\/Garage 6\/30\/96 9,650 Westbury Office\/Garage 10\/31\/95 17,400\nNew Jersey Camden Office\/Garage Owned 9,800 Clark Office 4\/30\/99 15,000 Hanover Office\/Garage 5\/31\/96 6,000 Lakewood Office\/Garage 9\/30\/95 4,500 Linden Office\/Warehouse 6\/30\/94 8,100 Princeton Office\/Garage\/Storage Owned 7,300\nConnecticut Ansonia Office 11\/20\/94 800 Bristol Office 5\/31\/95 5,360 Canton Office\/Garage\/Storage Owned 4,900 East Hartford Office\/Garage 2\/01\/00 18,000 East Hartford Office\/Storage 3\/31\/94 4,070 Greenwich Storage 9\/30\/96 -- New Milford Office\/Garage 8\/31\/98 5,800 North Haven Office\/Garage 9\/15\/00 12,000 Norwalk Office 12\/31\/96 5,400 Norwalk Garage 12\/31\/96 2,400 Stamford Corporate Headquarters 8\/31\/03 19,000 Stamford Office\/Garage 5\/31\/94 29,000 Waterbury Office 6\/30\/96 375\nOwned\/Lease Approx. Expiration Square Location Type of Facility Date Footage - -------- ---------------- ----------- -------\nMassachusetts\nHolden Office\/Garage\/Storage Owned 7,500 Lawrence Office\/Garage Owned 8,500 Revere Office\/Garage 8\/31\/96 12,800 Rochdale Office\/Storage Owned 1,200 Springfield Office\/Garage\/Storage Owned 12,570 Westfield Office\/Storage 12\/22\/94 500 Westwood Office 6\/15\/97 9,400\nPennsylvania Allentown Office\/Garage 5\/31\/98 4,600 East Stroudsbourg Office\/Garage\/Warehouse 8\/11\/95 1,700 Palmyra Office\/Garage\/Storage Owned 5,500 Reading Office\/Garage Owned 20,600\nNew Hampshire Amherst Storage Owned -- Milford Office\/Garage 3\/31\/96 7,240 Portsmouth Office\/Garage 9\/01\/95 6,100\nRhode Island Providence Office\/Garage 5\/31\/98 7,600\nMaryland Baltimore Office\/Garage\/Storage Owned 13,750 Forrestville Office\/Garage 3\/31\/08 18,900\nThe Company believes its existing facilities are sufficient and that there are numerous comparable facilities available at similar rentals in each of its marketing areas should they be required.\nITEM 3.","section_3":"ITEM 3. LEGAL PROCEEDINGS\nThe Company is not currently involved in any legal proceeding which could have a material adverse effect on the results of operations or the financial condition of the Company.\nITEM 4.","section_4":"ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS\nNone.\nPART II\nITEM 5.","section_5":"ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS\nClass A Common Stock\nThe Company's Class A Common Stock is traded on the National Association of Securities Dealers Inc. NASDAQ National Market System under the symbol \"HEAT\". The high and low per share price of the Class A Common Stock and dividends declared on the Class A Common Stock since the initial public offering of the Class A Common Stock on July 29, 1992 were as follows:\n1992 1993 ------------------------- -------------------------- High Low Dividend High Low Dividend ------- ------- -------- ------ ------- -------- Quarter 1st $10 3\/4 $ 8 1\/4 $.1125 2nd 11 1\/4 8 1\/4 .1375 3rd $12 3\/4 $10 1\/2 $.0703 9 7 3\/4 .1375 4th 12 5\/8 10 1\/4 .1125 10 7 .1375\nThe last sale price of the Class A Common Stock on March 1, 1994 was $9.00 per share. As of March 1, the Company had 102 shareholders of record of its Class A Common Stock. In addition, the Company declared a dividend of $.1375 per share of Class A Common Stock which was paid on January 3, 1994 to holders of records as of December 15, 1993. The Company has declared a dividend of $.1375 per share of Class A Common Stock payable on April 1, 1994 to holders of record on March 15, 1994.\nClass B Common Stock\nThe Class B Common Stock has been listed on the American Stock Exchange since December 1986 under the symbol \"PHP\". The high and low per share price of the Class B Common Stock and dividends declared on the Class B Common Stock in 1992 and 1993 were as follows:\n1992 1993 ------------------------- -------------------------- High Low Dividend High Low Dividend ------- ------- -------- ------ ------- -------- Quarter 1st $12 1\/4 $ 9 7\/8 $.2858 $19 1\/4 $15 3\/4 $.4700 2nd 16 1\/4 10 1\/4 .2858 22 1\/2 17 3\/8 .4700 3rd 17 1\/2 14 1\/2 .2858 20 3\/4 19 3\/4 .4700 4th 17 1\/4 15 1\/8 .2858 20 1\/2 19 1\/2 .4700\nThe last sale price of the Class B Common Stock on March 1, 1994 was $23.50 per share. As of March 1, 1994, the Company had 60 shareholders of record of its Class B Common Stock. In addition, the Company declared a dividend of $.47 per share of Class B Common Stock which was paid on January 3, 1994 to holders of record as of December 15, 1993. The Company has declared a dividend of $.41 per share of Class B Common Stock payable on April 1, 1994 to holders of record on March 21, 1994.\nClass C Common Stock\nThere is no established trading market for the Company's Class C Common Stock, $.10 par value. The number of record holders of the Company's Class C Common stock at March 1, 1994 was 29.\nThe Company declared cash dividends on its Class C Common Stock of $.1828 per share in 1992 and declared cash dividends of $.525 per share in 1993. In addition, the Company declared a dividend of $.1375 per share of Class C Common Stock which was paid on January 3, 1994 to holders of record as of December 15, 1993. The Company has declared a dividend of $.1375 per share of Class C Common stock payable on April 1, 1994 to holders of record on March 15, 1994.\nUnder the terms of the Company's 11.85%, 12.17%, and 12.18% Subordinated Notes due 1998 and 14.10% Subordinated Notes due 2001 the Company may not pay any dividend nor make a distribution on its capital stock if the amount expended for such purposes after December 31, 1987 exceeds the sum of (a) 50% of the aggregate Cash Flow of the Company accrued on a cumulative basis for each of the fiscal years subsequent to December 31, 1986 and (b) the aggregate net proceeds, including the fair value and property other than cash, received by the Company from the issue or sale of capital stock of the Company after July 1, 1987. The terms of the Company's Credit Agreement, as restated and amended on December 31, 1992 (Credit Agreement), along with the terms of its 10 1\/8% Subordinated Notes due 2003 and 9 3\/8% Subordinated Debentures due 2006 include restrictions which limit the aggregate amount of dividends the Company may pay. Under the most restrictive dividend limitations, at December 31, 1993, $7.1 million was available for the payment of dividends on all classes of Common Stock.\nITEM 6.","section_6":"ITEM 6. SELECTED FINANCIAL AND OTHER DATA\nThe following table sets forth selected financial and other data of the Company and should be read in conjunction with the more detailed financial statements included elsewhere in this Report. Although EBITDA and NIDA should not be considered as substitutes for net income (loss) as an indicator of the Company's operating performance and NIDA is not a measure of the Company's liquidity, they are included in the following table as they are the bases upon which the Company assesses its financial performance, compensates management and establishes dividends. See \"Management's Discussion and Analysis of Results of Operations and Financial Condition.\"\n(Footnotes on next page)\n------------------------------------ (1) On July 29, 1992, the holders of Class A Common Stock exchanged 20% of their shares (2,545,139 shares) for an equal number of the newly created Class C Common Stock. All per share amounts for Class A and Class C Common Stock have been retroactively adjusted to reflect such exchange.\n(2) EBITDA is defined as operating income before depreciation and amortization and non-cash expenses associated with key employees' deferred compensation plans.\n(3) NIDA is defined as the sum of consolidated net income (loss), plus depreciation and amortization of plant and equipment and amortization of customer lists and deferred charges, plus non-cash expenses associated with key employees' deferred compensation plans, less dividends accrued on preferred stock, excluding net income (loss) derived from investments accounted for by the equity method, except to the extent of any cash dividends received by the Company.\n(4) The Company has escrowed certain amounts to secure the repayment of certain long-term debt. The amounts on deposit at the dates indicated were as follows: $-0- at December 31, 1989, $-0- at December 31, 1990, $5,000,000 at December 31, 1991, $15,000,000 at December 31, 1992 and $20,000,000 at December 31, 1993.\nITEM 7.","section_7":"ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION\nOverview\nIn analyzing the Company's results, one should consider the Company's active acquisition program, the rapid rate of amortization of customer lists purchased in acquisitions, the seasonal nature of the heating oil business and the general ability of heating oil distributors to pass on variations in wholesale heating oil costs to their customers. Therefore, although a company's net income (loss) calculated in accordance with generally accepted accounting principles is generally considered by investors to be an indicator of a company's operating performance, management believes that in evaluating the Company's results, two additional measures should be considered to supplement the net income (loss) analysis. The first such measure is operating income before depreciation and amortization and non-cash expenses associated with key employees' Deferred Compensation Plans (referred to herein as EBITDA) and the second such measure is NIDA, defined as the sum of (i) consolidated net income (loss), plus (ii) depreciation and amortization of plant and equipment and amortization of customer lists and deferred charges, plus non-cash expenses associated with key employees' deferred compensation plans less dividends accrued on preferred stock excluding net income (loss) derived from investments accounted for by the equity method, except to the extent of any cash dividends received from the Company. Although EBITDA and NIDA should not be considered as substitutes for net income (loss) as an indicator of the Company's operating performance and NIDA should not be considered as a measure of the Company's liquidity, it is important for an investor to understand these concepts since management's strategy is to maximize EBITDA and NIDA, rather than net income. The computations of EBITDA and NIDA are derived from the Company's financial statements as a supplement to the Company's traditional financial statements. Because of management's acquisition and other strategies, it believes that EBITDA is an important indicator as a measure of earnings derived from operations before non-cash expenses and non-operating expenses, such as interest expense, other expenses and income taxes. The following expands on the above and enumerates other factors that one should consider.\nFirst, the financial results of a given year do not reflect the full impact of that year's acquisitions. Most acquisitions are made during the non-heating season because many sellers desire to retain winter profits but avoid summer losses. Therefore, the effect of acquisitions made after the heating season are not fully reflected in the Company's sales volume and operating and financial results until the following calendar year.\nSecond, as stated above, the Company's objective is to maximize NIDA and EBITDA, rather than net income. The large disparity between NIDA and net income (loss) is primarily attributable to the substantial amortization of customer lists and other intangibles in connection with acquisitions. Customer lists and other intangibles acquired in connection with acquisitions represent the allocation of acquisition costs which are amortized over the future periods benefitted by such acquisitions. In general, costs are allocated to assets based upon the\nfair market value of the assets purchased, as determined by arms' length negotiations between the Company and the seller. Substantially all purchased intangibles are comprised of customer lists and covenants not to compete. Amortization of customer lists is a non-cash expense which represents the write-off of the amount paid for customers acquired in connection with acquisitions who later terminate their relationship with the Company. Based on the Company's analysis of historical purchased customer attrition rates, these lists have been amortized 90% over a six year period (on average, 15% per annum) and the balance over a 25 year period. However, the Company's annual net loss of customers has only averaged approximately 3.5% over the past five years, as the loss of purchased accounts has been partially offset by new customers obtained through internal marketing. The covenants not to compete are amortized over the lives of the covenants, which generally range from five to seven years. The Company periodically reviews the appropriate allocation of purchase price among the intangible assets acquired and their amortization lives.\nThird, the seasonal nature of the Company's business results in the sale by the Company of approximately 50% of its volume in the first quarter and 30% in the fourth quarter of each year. The Company generally realizes positive NIDA in both of these quarters and negative NIDA during the warmer quarters ending June and September. As a result, acquisitions made during the spring and summer months generally have a negative effect on earnings and a limited impact on NIDA in the calendar year in which they are made. Most of the costs associated with an acquired distributor are incurred evenly throughout the remainder of the year, whereas a smaller percentage of the purchased company's annual volume and gross profit is realized during the same period.\nFinally, changes in total dollar sales do not necessarily affect the Company's gross profit, EBITDA, net income or NIDA. Since the Company adds a per gallon margin onto its wholesale costs, variability in wholesale oil prices will affect net sales but generally do not affect EBITDA, net income, NIDA or any other measure of earnings. As a result, the Company's margins are most meaningfully measured on a per gallon basis and not as a percentage of sales. While fluctuations in wholesale prices have not significantly affected demand to date, it is possible that significant wholesale price increases over an extended period of time could have the effect of encouraging conservation. If demand were reduced and the Company was unable to increase its gross profit margin or reduce its operating expenses, the effect of the decrease in volume would be to reduce EBITDA, net income, NIDA or any other measure of earnings.\nGiven the Company's operating strategy to maximize EBITDA and NIDA as described above, one should also be aware of certain risks that are inherent in such a strategy. Although an increased level of acquisitions (which in turn adds to the Company's plant and equipment and customer lists) is expected to have a positive impact on the long term viability of the business, the near term effect of acquisitions would be to increase EBITDA and NIDA by a significantly greater amount than would be the increase, if any, of net income because of the substantial impact of depreciation and amortization expense, items which generally do not impact EBITDA or NIDA, but which do materially impact net income. A reduced level of acquisitions, which would be expected to have an adverse impact on the long term growth of the business, could have the short term\neffect of decreasing EBITDA and NIDA, while possibly increasing net income.\nIn the year of an acquisition, depending on the month it is consummated, it is possible that EBITDA and NIDA would not be affected, while net income could be negatively impacted.\nTo the extent future acquisitions are financed with debt, the interest expense associated with such debt would not impact EBITDA, but would reduce NIDA and net income. If the Company were to finance future acquisitions by issuing new preferred stock, the preferred stock dividends associated with the new preferred stock would not affect EBITDA or net income, but would reduce NIDA and increase the Company's stockholders' deficiency.\nSince EBITDA and NIDA are not affected by depreciation and amortization, the Company's failure to replace long lived assets or its decision to delay needed capital expenditures, could have the short term effect of improving net income (by minimizing depreciation and amortization expense), but could have a negative impact on the long term viability of the business. Because management is concerned with the Company's long term viability, and measures its operating performance by EBITDA and NIDA, it intends to continue making capital improvements as required.\nFactors that impact the Company's ability to continue following its current operating strategy in the foreseeable future include its ability to continue to grow through acquisitions, while continuing to replace lost customers through internal marketing.\nResults of Operations and Other Data\n1993 Compared to 1992\nNet sales increased in 1993 to $538.5 million from $512.4 million in 1992. This $26.1 million increase was attributable to volume growth and related service revenues associated with acquisitions ($55.4 million or 10.8%), offset by attrition in the Company's customer base and slightly warmer weather (2.6% warmer than in the prior period).\nIn 1993 home heating oil volume, including propane increased to 443.5 million gallons, 4.8% greater than the 423.4 million gallons delivered in 1992 due to the impact of the nine acquisitions completed in 1992 whose annual volume was fully reflected for the first time in 1993, and to a lesser extent, the nine acquisitions completed in 1993. The positive impact of the acquisitions was offset by the slightly warmer weather and attrition in the Company's customer base.\nGross profit increased $10.2 million, (6.3%), from $161.5 million (38.1 cents per gallon) for 1992 to $171.7 million (38.7 cents per gallon) for 1993. Home heating oil margins increased 2.0 cents per gallon, which was partially offset by the higher cost of providing heating equipment repair and maintenance service to a larger customer base and the utilization of this service as part of the Company's internal marketing program.\nOperating expenses increased $13.1 million (11.9%) from $110.2 million in 1992 to $123.2 million in 1993, primarily due to the acquisitions, the severe weather conditions experienced in March 1993 that temporarily increased delivery expenses during that month and the expansion of the Company's marketing program. On a per gallon basis these expenses increased 6.9% from 26.0 cents in 1992 to 27.8 cents in 1993. However, after adjustment for the warmer weather in 1993, the increase was only 4.2% per gallon which was attributable entirely to above mentioned severe March weather and the Company's marketing program.\nThe provision for supplemental benefits, representing the present value of such benefits, returned to the more normal level of $0.3 million compared to the accelerated accrual of $2.0 million in 1992.\nAmortization of customer lists and deferred charges were $28.7 million approximately the same as in 1992. While volume increased 4.8% these non cash expenses remained equal as certain customer lists and capitalized expenses became fully amortized. Depreciation and amortization of plant and equipment increased 7.2%, or $0.4 million, to $5.9 million for 1993 due to the acquisitions.\nOperating income was $13.5 million for 1993 compared to $15.0 million in 1992, as the 4.8% increase in volume and the increase in home heating oil margins were offset by higher residential service related costs, increased delivery and marketing expenses.\nNet interest expense increased $1.9 million, 10.1%, to $20.5 million. A reduction in the average borrowing rate was offset by a $31.1 million increase in long-term borrowings from $148.5 million, at an average interest rate of 11.9%, to $179.6 million, at an average interest rate of 11.4%. This increase in long-term borrowings was due to the\nconversion in March 1993 of $12.8 million of Redeemable Preferred Stock into Subordinated Notes due in 2000 and the issuance in April 1993 of $50.0 million of 10 1\/8% Notes due in 2003. The proceeds of this public issue were used to repay $25.0 million of long-term obligations maturing in 1993 and 1995 with the balance being used to fund, in part, the Company's acquisition program. Offsetting the increase in long-term borrowings was a decline in short-term borrowings from $17.9 million, at an average interest rate of 5.9%, to $11.2 million, at an average interest rate of 5.4%. In addition, the Company reduced bank fees and generated interest income on higher cash balances in 1993 compared to 1992.\nThe loss before income taxes and extraordinary items was $7.2 million, $3.2 million (79%) greater than in 1993 due to the reduction in operating income and the increase in interest expense. Income taxes of $0.4 million were the same for both periods and represent certain state income taxes applicable to profitable subsidiaries that are not included in consolidated state returns. The Company had losses for federal income tax purposes in each of these periods.\nIn May 1993, the Company recorded an extraordinary charge against earnings of $0.9 million. This represented the cash premium paid of $0.4 million to retire $25.0 million of the Company's long-term obligations maturing in 1993 and 1995 and the write off of $0.5 million in debt discount and deferred charges associated with these obligations.\nThe net loss increased from $4.4 million in 1992 to $8.4 million in 1993 due to the decline in operating income, the increase in interest expense and the extraordinary charge. EBITDA was $48.4 million compared to $51.3 million in 1992 as the 4.8% increase in volume, the increase in home heating oil margins were offset by higher residential service related costs and increased marketing expenses.\n1992 Compared to 1991\nNet sales decreased in 1992 to $512.4 million from $523.2 million in 1991. This $10.8 million decrease was due to lower home heating oil prices ($37.9 million or 7.2%) as a result of lower per gallon wholesale costs, as well as to reductions in sales of products other than #2 fuel oil to commercial accounts ($17.0 million or 3.3%), which were partially offset by an increase in home heating oil volume ($41.0 million or 7.8%). The average price of home heating oil in 1992 was approximately 14.8% below the 1991 levels, when prices were affected by the Persian Gulf crisis.\nIn 1992, home heating oil volume increased to 423.1 million gallons, 9.7% greater than the 385.6 million gallons delivered in 1991 due to colder temperatures (45.3 million gallons) and the impact of the nine acquisitions completed in 1991 whose full annual volume was realized for the first time in 1992 and from a portion of the annual volume associated with the nine additional acquisitions completed in 1992 (19.2 million gallons). The impact of the acquisitions was offset in part by attrition in the Company's customer base, as well as the loss of certain of its high volume, low margin commercial accounts, as the Company continued to focus its marketing efforts on smaller, higher margin, more service sensitive residential customers.\nGross profit increased $17.0 million (11.8%), or 1.9% per gallon, from $144.5 million in 1991 (37.5 cents per gallon) to $161.5 million in 1992 (38.2 cents per gallon). This increase exceeded the percentage increase in home heating oil volume due to improved per gallon gross profit margins, attributable to the Company's ability to add an increasing gross margin onto its wholesale costs, designed to offset the impact of inflation, account attrition and weather.\nOperating expenses increased 5.5% compared to the 9.7% increase in volume and declined 3.9% on a per gallon basis from 27.1 cents in 1991 to 26.1 cents in 1992. The per gallon reduction in operating expenses reflects the savings from the Company's cost reduction program which was begun in April 1991 and economies of scale realized from the Company's acquisition program.\nAmortization of customer lists declined 5.4%, or $1.3 million, to $23.5 million in 1992 as certain customer lists became fully amortized and a greater portion of the purchase price in more recent acquisitions was allocated to restrictive covenants and included in deferred charges. As a result of this allocation, amortization of deferred charges increased 3.5% to $5.4 million in 1992. On a combined basis, amortization of customer lists and deferred charges declined 3.9% as the annual amortization associated with assets that became fully amortized was greater than the amount associated with the limited number of acquisitions in 1991 and the impact of the 1992 acquisitions was not fully realized in the current year.\nDepreciation and amortization of plant and equipment was $5.5 million for 1992, approximately the same as in 1991, as reductions related to assets that became fully depreciated were offset by increases associated with assets purchased in 1991 and 1992.\nProvision for supplemental benefit in 1992 represents the present value of a supplemental retirement benefit ($2.0 million) which is being paid over 10 years.\nOperating income increased to $15.0 million, from $4.5 million in 1991. This improvement was due to an increase in home heating oil volume and an improvement in per gallon operating income associated with higher gross profit margins, lower per gallon operating expenses and the decline in the non-cash expenses, partially offset by the provision for the supplemental benefit in 1992.\nNet interest expense in 1992 decreased $2.1 million, 10.2% below 1991, due to a decline in average outstanding borrowings from 1991 to 1992 of $15.6 million, which caused a reduction of $1.7 million in interest expense and to an increase in interest income ($0.4 million), generated primarily by a higher average balance in U.S. Treasury Notes held in the Cash Collateral Account. The Company's average borrowing rate increased from 11.2% in 1991 to 11.3% in 1992. Average working capital borrowings dropped from $35.0 million in 1991 at an average interest rate of 8.2% to $17.9 million in 1992, at an average interest rate of 5.9%. Average fixed rate borrowings increased from $147.0 million in 1991 to $148.5 million in 1992 with an average interest rate of 11.9% for both years.\nPretax loss decreased $12.3 million in 1992 from 1991 due to the increase in operating income and the reduction in interest expense, partially offset by the increase in other expenses. Taxes increased from $0.3 million in 1991 to $0.4 million in 1992. Despite the pretax loss, the Company was required to pay certain state income taxes in 1992 and 1991 on profitable subsidiaries that are not included in consolidated state returns. The 1992 loss, while not providing any Federal tax benefits in 1992, will increase the Company's tax loss carryforwards to approximately $43.0 million as of December 31, 1992.\nNet loss decreased to $4.4 million in 1992, a $12.2 million improvement over the $16.6 million net loss in 1991.\nEBITDA increased 28.2% to $51.3 million in 1992 from $40.0 million in 1991. This improvement was primarily the result of the 9.7% home heating oil volume increase and a 1.7 cents per gallon EBITDA margin improvement.\nLiquidity and Financial Condition\nOne of the Company's primary financial strategies has been to finance its growth through a combination of internally generated capital, the sale of Common Stock, and the issuance of Redeemable Preferred Stock and debt. As indicated in the table below, this strategy has been pursued by financing acquisitions and other asset requirements made in the last five years, 62.6% with internally generated cash and funds from the 1992 offering of 4.3 million shares of Class A Common Stock, 13.3% with Redeemable Preferred Stock and 24.1% with long-term debt and working capital. As a result of this strategy, for the year ended December 31, 1993, EBITDA was 2.4 times net interest expense.\nFunding Sources --------------------------------------------------- Acquisitions Internally and Fixed Generated Funds Long-Term Debt Asset and Additional Redeemable and Net Working Year Purchases Equity(1) Preferred Stock Capital(2) - ---- ------------ ---------------- --------------- ---------------- (dollars in thousands)\n1989 $ 42,900 $ 20,643 48.1% $ 9,140 21.3% $ 13,117 30.6% 1990 33,077 (544) (1.6) 15,000 45.3 18,621 56.3 1991 16,399 13,834 84.4 4,449 27.1 (1,884) (11.5) 1992 48,478 64,431 132.9 7,500 15.5 (23,453) (48.4) 1993 34,654 11,461 33.1 (12,764) (36.8) 35,957 103.7 -------- -------- -------- --------\nTotal $175,508 $109,825 62.6% $23,325 13.3% $ 42,358 24.1% ======== ======== ======= ========\n(1) Internally generated funds consist of net income plus depreciation and amortization less dividends. Additional equity consisted of $42.7 million from the sale of Class A Common Stock in 1992.\n(2) Net working capital was used for other than acquisition and fixed asset purchases. This column reflects only that portion of net working capital utilized for the purpose indicated.\nNet cash provided by operating activities of $36.6 million for the year ended December 31, 1993, net of repayments of working capital borrowings of $4.0 million, along with the $48.1 million of net proceeds from the April 1993 public offering of the 10 1\/8% Notes amounted to $80.7 million. These funds were utilized in investing activities for acquisitions, purchase of fixed assets and the investment in Star Gas all of which totalled $34.7 million and in financing activities to pay dividends of $14.6 million, to repurchase subordinated debt, including premium, of $25.4 million, to deposit $5.0 million into a cash collateral account to partially secure the Maxwhale Notes, and to make principal payments on other long-term obligations of $0.3 million.\nIn February 1994, the Company completed a public offering of $75.0 million of its 9 3\/8% Debentures due in 2006 (\"Debentures\"). A portion of the net proceeds from the sale of the Debentures was used to repurchase $50.0 million of the Company's 9% Notes (Maxwhale Notes) due June 1, 1994 at a purchase price equal to 101.33% of the principal amount thereof. The Company will record an extraordinary loss of approximately $0.7 million as a result of the early payment of such debt in 1994. As a result of the repayment of the Maxwhale Notes, the $20.0 million cash collateral account which had partially secured these notes was released to the Company. Pending application for general corporate purposes including the Company's ongoing acquisition program, the balance of the proceeds from the offering and the proceeds from the release of the cash collateral account were applied to reduce working capital borrowings.\nA consortium of banks has historically provided the Company with credit facilities, currently consisting of a $75 million credit line pursuant to an amended and restated credit agreement dated as of December 31, 1992 (the \"Credit Agreement\"). As of December 31, 1993, $28 million of borrowings were outstanding under the Credit Agreement, however; primarily due to the application of the proceeds from the February 1994 offering and to a lesser extent the cash provided from operations in January and February 1994, there were no borrowings outstanding at March 1, 1994.\nFor 1994, the Company's financing obligations include redeeming $4.2 million of Redeemable Preferred Stock, Redeemable Preferred Stock Dividends of approximately $3.6 million, principal payments on other long-term obligations of $0.3 million and paying Common Stock dividends, anticipated to be approximately $12.2 million. Based on the Company's current cash position, bank credit availability and expected net cash to be provided by operations during 1994, the Company expects to be able to meet all of the above mentioned obligations in 1994, as well as meet all of its other current obligations as they become due.\nNew Accounting Pronouncements\nDuring the first quarter of 1993, the Company adopted Statement of Financial Accounting Standard No. 106 (\"SFAS No. 106\"), \"Employer's Accounting for Post Retirement Benefits Other Than Pensions.\" This statement requires that the expected cost of post retirement benefits be fully accrued by the first date of full benefit eligibility, rather than expensing the benefit when payment is made. As the Company generally does not provide for post-retirement benefits, other than pensions, the adoption of the new statement did not have any material effect on the Company's financial condition or results of operations.\nDuring the first quarter of 1993, the Company also adopted Statement of Financial Accounting Standard No. 109, \"Accounting for Income Taxes\" (\"SFAS No. 109\"). This statement requires that deferred income taxes be recorded following the liability method of accounting and adjusted periodically when income tax rates change. Adoption of the new statement did not have any effect on the Company's financial condition or results of operations since the Company did not carry any deferred tax accounts on its balance sheet at December 31, 1992 and any net deferred tax asset set up as a result of applying SFAS No. 109 has been fully reserved.\nTax Matters\nFederal tax legislation, passed on August 10, 1993, will affect for Federal income tax purposes the manner in which the Company amortizes intangible assets, primarily customer lists and restrictive covenants associated with acquisitions. For financial reporting purposes, the Company historically has amortized 90% of acquired customer lists over a six year period and the balance over a 25 year period, and has followed substantially the same policy for Federal income tax reporting purposes.\nThe new legislation will require amortization of all intangible assets on a straight line basis over 15 years for Federal income tax reporting purposes, beginning with acquisitions made after the date of enactment. The legislation has no effect on the Company's historic results for financial reporting nor does it affect the Company's Federal income tax reporting up through the date of enactment. For financial reporting purposes, the Company periodically reviews the appropriate allocation of purchase price among the assets acquired. No changes are currently contemplated in the various amortization lives for the intangible assets acquired; however the Company periodically reviews such periods from time to time. The legislation will reduce the Company's annual Federal income tax deduction attributable to future acquisitions by requiring the amortization of such intangibles for Federal income tax purposes over a longer period than the Company currently utilizes. This could cause the Company to pay income taxes in advance of recording financial statement income in the future after utilization of the Company's available net operating loss carryforwards.\nITEM 8.","section_7A":"","section_8":"ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA\nand Financial Statement Schedules\nConsolidated Financial Statements of Petroleum Heat and Power Co., Inc. and Subsidiaries:\nIndependent Auditors' Report\nConsolidated Balance Sheets, December 31, 1992 and 1993\nConsolidated Statements of Operations, Years ended December 31, 1991, 1992 and 1993\nConsolidated Statements of Changes in Stockholders' Equity (Deficiency) Years ended December 31, 1991, 1992 and 1993\nConsolidated Statements of Cash Flows, Years ended December 31, 1991, 1992 and 1993\nNotes to Consolidated Financial Statements\nConsolidated Financial Statements of Star Gas Corporation and Subsidiaries:\nIndependent Auditors' Reports\nConsolidated Balance Sheets, September 30, 1992 and 1993\nConsolidated Statements of Operations, years ended September 30, 1991, 1992 and 1993\nConsolidated Statements of Shareholders' Equity (Deficiency), years ended September 30, 1991, 1992 and 1993\nConsolidated Statements of Cash Flows, years ended September 30, 1991, 1992 and 1993\nNotes to Consolidated Financial Statements\nSchedules for the years ended December 31, 1991, 1992 and 1993\nVIII - Valuation and Qualifying Accounts\nIX - Short-term Borrowings\nAll other schedules are omitted because the required information is either inapplicable or included in the consolidated financial statements or the notes thereto.\nIndependent Auditors' Report\nThe Stockholders and Board of Directors of Petroleum Heat and Power Co., Inc.:\nWe have audited the accompanying consolidated balance sheets of Petroleum Heat and Power Co., Inc. and subsidiaries as of December 31, 1992 and 1993, and the related consolidated statements of operations, changes in stockholders' equity (deficiency) and cash flows for each of the years in the three-year period ended December 31, 1993. In connection with our audit of the consolidated financial statements, we also have audited the financial statement schedules as listed in the accompanying index. These consolidated financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on our audits.\nWe conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.\nIn our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Petroleum Heat and Power Co., Inc. and subsidiaries as of December 31, 1992 and 1993, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1993 in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.\nAs discussed in the notes to the consolidated financial statements, the Company adopted the provisions of the Financial Accounting Standard Board's Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes, in 1993.\nKPMG Peat Marwick\nNew York, New York February 28, 1994\nSee accompanying notes to consolidated financial statements.\nSee accompanying notes to consolidated financial statements.\nSee accompanying notes to consolidated financial statements.\nSee accompanying notes to consolidated financial statements.\nPETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES\nNotes to Consolidated Financial Statements\n(1) Summary of Significant Accounting Policies\nPrinciples of Consolidation\nThe consolidated financial statements include the accounts of Petroleum Heat and Power Co., Inc. (Petro) and its subsidiaries (the Company), each of which is wholly owned and, like Petro, is engaged in the retail distribution of home heating oil and propane in the Northeast. The Company currently operates in 26 major markets in the Northeast, including the metropolitan areas of Boston, New York City, Baltimore, Providence and Washington, D.C., serving approximately 415,000 customers in those areas. Credit is granted to substantially all of these customers with no individual account comprising a concentrated credit risk.\nInvestment in Star Gas Corporation\nThe Company's investment in Star Gas Corporation (see note 11) is accounted for following the equity method.\nInventories\nInventories are stated at the lower of cost or market using the first-in, first-out method. The components of inventories were as follows at the dates indicated:\nDecember 31, ----------------------- 1992 1993 ---- ----\nFuel oil $ 8,151,053 $ 6,289,676 Parts 7,578,252 7,703,252 --------- ---------\n$15,729,305 $13,992,928 ========== ==========\nProperty, Plant and Equipment\nProperty, plant and equipment are carried at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets.\nCustomer Lists and Deferred Charges\nCustomer lists are recorded at cost less accumulated amortization. Amortization is computed using the straight-line method with 90% of the cost amortized over six years and 10% of the cost amortized over 25 years.\nDeferred charges include goodwill, acquisition costs and payments related to covenants not to compete. The covenants are amortized using the straight-line method over the terms of the related contracts; acquisition costs are amortized using the straight-line method over a six-year period; while goodwill is amortized using the straight-line method over a twenty-five year period. Also included as deferred charges are the costs associated with the issuance of the Company's subordinated notes. Such costs are being amortized using the interest method over the lives of the notes.\n(Continued)\nPETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES\nNotes to Consolidated Financial Statements\n(1), Continued\nThe Company assesses the recoverability of intangible assets by comparing the carrying values of such intangibles to market values, where a market exists, supplemented by cash flow analyses to determine that the carrying values are recoverable over the remaining estimated lives of the intangibles through undiscounted future operating cash flows. When an intangible asset is deemed to be impaired, the amount of intangible impairment is measured based on market values, as available, or by projected operating cash flows, using a discount rate reflecting the Company's assumed average cost of funds.\nUnearned Service Contract Revenue\nPayments received from customers for burner service contracts are deferred and amortized into income over the terms of the respective service contracts, which generally do not exceed one year.\nCustomer Credit Balances\nCustomer credit balances represent payments received from customers pursuant to a budget payment plan (whereby customers pay their estimated annual fuel charges on a fixed monthly basis) in excess of actual deliveries billed.\nIncome Taxes\nThe Company files a consolidated Federal income tax return with its subsidiaries. When appropriate, deferred income taxes were provided to reflect the tax effects of timing differences between financial and tax reporting. Effective January 1, 1993 the Company adopted Statement of Financial Accounting Standards No. 109, \"Accounting for Income Taxes\" (SFAS No. 109) (see note 9).\nPensions\nThe Company funds accrued pension costs currently on its pension plans, all of which are noncontributory.\nCommon Stock\nIn July 1992, the holders of Class A Common Stock exchanged 2,545,139 shares of Class A Common Stock for 2,545,139 shares of Class C Common Stock (see note 6). All numbers of Class A and Class C Common Stock and related amounts have been retroactively adjusted in the accompanying consolidated financial statements to reflect such exchange.\n(Continued)\nPETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES\nNotes to Consolidated Financial Statements\n(1), Continued\nEarnings per Common Share\nEarnings per common share are computed utilizing the three class method based upon the weighted average number of shares of Class A Common Stock, Class B Common Stock and Class C Common Stock outstanding, after adjusting the net loss for preferred dividends declared and the accretion of 1991 Redeemable Preferred Stock, aggregating $3,292,000, $4,452,000, and $3,367,000 for the years ended 1991, 1992 and 1993, respectively. Fully diluted earnings per common share are not presented because the effect is not material or is antidilutive.\n(2) Property, Plant and Equipment\nThe components of property, plant and equipment and their estimated useful lives were as follows at the indicated dates:\nDecember 31, ----------------- Estimated 1992 1993 useful lives ---- ---- ------------\nLand $ 1,469,065 $ 1,519,065 Buildings 7,151,142 7,420,171 20-45 years Fleet and other equipment 38,507,056 38,412,619 3-17 years Furniture and fixtures 10,784,419 11,861,514 5-7 years Leasehold improvements 3,180,615 3,430,193 Terms of leases --------- ---------- 61,092,297 62,643,562 Less accumulated depreciation and amortization 28,342,302 31,103,032 ---------- ----------\n$32,749,995 $31,540,530 ========== ==========\n(Continued)\nPETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES\nNotes to Consolidated Financial Statements\n(3) Notes Payable, Other Long-Term Debt and Working Capital Borrowings\nNotes payable and other long-term debt, including working capital borrowings and current maturities of long-term debt, consisted of the following at the indicated dates:\nDecember 31, ----------------- 1992 1993 ---- ----\nNotes payable to banks under working capital borrowing arrangements(a)(c). $32,000,000 $28,000,000 Notes payable in connection with the acquisition of Whale Oil Corp., refinanced on February 3, 1994 and paid on February 4, 1994, with interest at the rate of 9% per annum(b)(c) 50,000,000 50,000,000 Amounts payable in connection with the purchase of a fuel oil dealer, due in monthly installments with interest at 6% per annum, through June 1, 1996 (see note 10) 113,749 80,404 ---------- ---------- 82,113,749 78,080,404 Less current maturities, including working capital borrowings 32,033,345 28,033,345 ---------- ----------\n$50,080,404 $50,047,059 ========== ========== ____________ (a) Pursuant to a Credit Agreement dated December 31, 1992, as restated and amended (Credit Agreement), the Company may borrow up to $75 million under a revolving credit facility with a sublimit under a borrowing base established each month. Amounts borrowed under the revolving credit facility are subject to a 45 day clean-up requirement prior to September 30 of each year and the facility terminates on June 30, 1996. As collateral for the financing arrangement, the Company granted to the lenders a security interest in the customer lists trademarks and trade names owned by the Company, including the proceeds therefrom. Under certain circumstances, the Company would have to further secure its obligations under the credit agreement with a lien on accounts receivable and material inventories.\nInterest on borrowings is payable monthly and is based upon the floating rate selected at the option of the Company of either the Eurodollar Rate (as defined below) or the Alternate Base Rate (as defined below), plus 125 to 175 basis points on Eurodollar Loans or 0 to 50 basis points on Alternative Base Rate Loans, based upon the ratio of Consolidated Operating Profit to Interest Expense (as defined in the Credit Agreement). The Eurodollar Rate is the prevailing rate in the Interbank Eurodollar Market adjusted for reserve requirements. The Alternate Base Rate is the greater of (i) the prime rate or base rate of Chemical Bank in effect or (ii) the Federal Funds Rate in effect plus 1\/2 of 1%. At December 31, 1993, the rate on the working capital borrowings was 4.9%. The Company pays a facility fee of 0.375% on the unused portion of the revolving credit facility. Compensating balances equal to 5.0% of the average amount outstanding during the relevant period are also required under the agreement.\n(Continued)\nPETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES\nNotes to Consolidated Financial Statements\n(3), Continued\n(b) On July 22, 1987, Maxwhale Corp. (Maxwhale), a wholly owned subsidiary of Petro, acquired certain assets of Whale Oil Corp. for $50.0 million. The purchase price was paid by the issuance of $50.0 million of 9% notes due June 1, 1994. The notes were nonrecourse to Petro, but were secured by letters of credit issued by certain banks pursuant to the Credit Agreement. Maxwhale paid a fee on these letters of credit, calculated at a range of 1.75% to 2.25% on $50.0 million less the balance maintained in a Cash Collateral Account, plus 0.25% on the Cash Collateral Account balance. Petro had fully guaranteed these letters of credit. The Maxwhale customer list was pledged pursuant to a security agreement in favor of the banks.\nOn February 4, 1994, the Company repaid the $50.0 million of Maxwhale notes at a purchase price of 101.33% of the principal amount thereof, with a portion of the proceeds of its $75.0 million 9-3\/8% public subordinated debenture offering completed on February 3, 1994 (see note 5). The Company will record an extraordinary loss in 1994 of approximately $0.7 million as a result of the early payment on such debt. Since the Maxwhale notes were refinanced with the proceeds of new long term debt, such notes have been classified as long term at December 31, 1993.\nUnder the Credit Agreement, the Company was required to make annual deposits into a Cash Collateral Account to secure the outstanding letters of credit. The first such deposit of $5 million was made on June 15, 1991 with additional deposits of $10 million occurring on April 1, 1992 and $5 million on May 15, 1993. As a result of the repayment of the Maxwhale notes, the $20 million in the cash collateral account was released for general corporate purposes on February 4, 1994.\n(c) The customer lists, trademarks and trade names pledged to the banks under the Credit Agreement are carried on the December 31, 1993 balance sheet at $73,177,198. Under the terms of the Credit Agreement, the Company is required, among other things, to maintain certain minimum levels of cash flow, as well as certain ratios on consolidated debt. In the event of noncompliance with certain of the covenants, the banks have the right to declare all amounts outstanding under the loans to be due and payable immediately.\nWith the refinancing of the Maxwhale notes with a portion of the Company's 9-3\/8% subordinated debentures, there are no other annual maturities of long-term debt for each of the next five years as of December 31, 1993, except for the required repayments of the acquisition related payable of approximately $80,000 due in equal monthly installments of approximately $3,300 through June 30, 1996.\n(Continued)\nPETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES\nNotes to Consolidated Financial Statements\n(4) Leases and Capital Lease Obligations\nThe Company is obligated under various capital leases entered into during 1988 and 1989 for service vans. The leases expired in 1993 and were renewed on a month to month basis thereafter. The gross amounts of fleet and other equipment and related accumulated amortization recorded under the capital leases were as follows at the dates indicated:\nDecember 31, ------------------ 1992 1993 ---- ----\nFleet and other equipment $2,701,658 2,701,658 Less accumulated amortization 2,598,063 2,701,658 ---------- ---------\n$ 103,595 -- ========== =========\nAmortization of assets held under capital leases is included with depreciation expense.\nThe Company also leases real property and equipment under noncancelable operating leases which expire at various times through 2008. Certain of the real property leases contain renewal options and require the Company to pay property taxes.\nFuture minimum lease payments for all operating leases (with initial or remaining terms in excess of one year) are as follows:\nYear ending Operating December 31, leases ------------ ------\n1994 $ 3,260,000 1995 2,974,000 1996 2,128,000 1997 1,507,000 1998 1,392,000 Thereafter 5,046,000 ---------\nTotal minimum lease payments $16,307,000 ==========\nRental expense under operating leases for the years ended December 31, 1991, 1992 and 1993 was $4,916,000, $4,448,000, and $5,346,000, respectively.\n(Continued)\nPETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES\nNotes to Consolidated Financial Statements\n(5) Subordinated Notes Payable\nSubordinated notes payable, net of unamortized original discounts, at the dates indicated, consisted of:\nDecember 31, --------------------- 1992 1993 ---- ----\n11.40% Subordinated Notes due July 1, 1993(a)(b) $12,400,373 $ -- 14.275% Subordinated Notes due October 1, 1995(b) 12,478,349 -- 11.85%, 12.17%, and 12.18% Subordinated Notes due October 1, 1998(c) 60,000,000 60,000,000 14.10% Subordinated Notes due January 15, 2001(d) 12,500,000 12,500,000 Subordinated Notes due March 1, 2000(e) -- 12,763,663 10-1\/8% Subordinated Notes due April 1, 2003(f) -- 50,000,000 ---------- ----------- 97,378,722 135,263,663 Less current maturities 12,400,373 -- ---------- ----------\n$84,978,349 $135,263,663 ========== ===========\n(a) On July 2, 1984, the Company sold $20,000,000 of subordinated notes at an original discount of approximately $150,000. These notes (11.40% Notes) bore interest at 11.40% and were redeemable at the Company's option in whole, at any time, or in part, from time to time, at a redemption price of 101.5% of principal amount through June 30, 1993. Interest was payable quarterly.\n(b) On October 8, 1985, the Company sold $25,000,000 of subordinated fixed rate notes at an original discount of approximately $330,000. These notes (14.275% Notes) bore interest at 14.275% and were redeemable at the option of the Company, in whole or in part, from time to time, upon payment of a premium rate of approximately 3.7%, which declined on October 1, 1992 to approximately 2.0% until October 1, 1993, when the 14.275% Notes were redeemable at par.\nIn April 1991, the Company purchased $5,519,000 and $376,000 face value of its 11.40% Notes and 14.275% Notes, respectively, for an aggregate of $5,617,000. Unamortized deferred charges and bond discounts of $218,000 associated with the issuances of the 11.40% Notes and the 14.275% Notes were written off upon the repurchase of the debt. The Company included a gain of $60,000 in 1991 on these repurchases and included such gain in other income. In March 1992, the Company purchased $2,445,000 of the 14.275% notes at par. Unamortized deferred charges and bond discounts of $62,000 associated with the issuance of these notes were written off on the repurchase of the debt in March 1992. On May 15, 1992, the Company purchased $4,355,000 of the 14.275% Notes at a premium of 3.7%.\n(Continued)\nPETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES\nNotes to Consolidated Financial Statements\n(5), Continued\n(b), continued\nUnamortized deferred charges and bond discounts of $106,000 associated with the issuance of these notes were written off on the repurchase of the debt in May 1992. The Company included a loss of $333,000 in 1992 on these repurchases and included such loss in other expenses. In May 1993, the Company repurchased the remaining outstanding amounts of its 11.40% Subordinated Notes due July 1, 1993 having a face amount of $12,430,000, at a redemption price of 101.5% of face value, for an aggregate of approximately $12.6 million and its outstanding 14.275% Subordinated Notes due October 1, 1995, having a face amount of $12,524,000, at a redemption price of 102.0% of face value, for an aggregate of approximately $12.8 million. Unamortized deferred charges and bond discounts of $447,000 associated with the issuance of these Notes were written off on the repurchase of the debt in May 1993. The Company recorded an extraordinary loss of $867,000 as a result of the early retirement of these notes.\n(c) On September 1, 1988, the Company authorized the issuance of $60,000,000 of Subordinated Notes due October 1, 1998 bearing interest payable semiannually on the first day of April and October. The Company issued $40,000,000 of such notes on October 14, 1988 bearing interest at the rate of 11.85% per annum, $15,000,000 of such notes on March 31, 1989 bearing interest at the rate of 12.17% per annum and $5,000,000 of such notes on May 1, 1990 bearing interest at the rate of 12.18% per annum. All such notes are redeemable at the option of the Company, in whole or in part, from time to time, upon payment of a premium rate as defined.\n(d) On January 15, 1991, the Company authorized the issuance of $12,500,000 of 14.10% Subordinated Notes due January 15, 2001 bearing interest payable quarterly on the fifteenth day of January, April, July and October. The Company issued $5,700,000 of such notes in April 1991 and $6,800,000 in March 1992. The notes are redeemable at the option of the Company, in whole or in part, from time to time, upon payment of a premium rate as defined. On each January 15, commencing in 1996 and ending on January 15, 2000, the Company is required to repay $2,100,000 of the Notes. The remaining principal of $2,000,000 is due on January 15, 2001. No premium is payable in connection with these required payments.\n(e) In March 1993, the Company issued $12,764,000 of Subordinated Notes due March 1, 2000 in exchange for an equal amount of 1991 Redeemable Preferred Stock (see note 7). The Company issued the 1991 Redeemable Preferred Stock under an agreement which required the Company to redeem the 1991 Redeemable Preferred Stock as soon as, and to the extent that, it was permitted to incur Funded Debt. Under the applicable provisions of the Company's debt agreements, the Company was allowed to incur Funded Debt in the first quarter of 1993, and as such, was required to enter into the exchange. These notes call for interest payable monthly based on the sum of LIBOR plus 9.28%. At December 31, 1993, LIBOR was 3.25%.\n(Continued)\nPETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES\nNotes to Consolidated Financial Statements\n(5), Continued\n(f) On April 6, 1993, the Company issued $50.0 million of 10-1\/8% Subordinated Notes due April 1, 2003. These Notes are redeemable at the Company's option, in whole or in part, at any time on or after April 1, 1998 upon payment of a premium rate as defined. Interest is payable semiannually on the first day of April and October.\nExpenses connected with the above six offerings, and amendments thereto, amounted to approximately $8,057,000. At December 31, 1992 and 1993, the unamortized balances relating to notes still outstanding amounted to approximately $1,675,000 and $2,762,000, respectively, and such balances are included in deferred charges.\nAggregate annual maturities for each of the next five years, are as follows as of December 31, 1993:\nYear ended December 31, ------------\n1994 $ -- 1995 -- 1996 2,100,000 1997 2,100,000 1998 62,100,000\nOn February 3, 1994, the Company issued $75.0 million of 9-3\/8% public subordinated debentures due February 1, 2006. These debentures are redeemable at the Company's option, in whole or in part, at any time on or after February 1, 1997 upon payment of a premium rate as defined. Interest is payable semiannually on the first day of February and August.\nIn connection with the offering of its 9-3\/8% subordinated debentures, the Company solicited and received consents of the holders of at least a majority in aggregate principal amount of each class of subordinated debt and redeemable preferred stock (see note 7) to certain amendments to the respective agreements under which the subordinated debt and the redeemable preferred stock were issued. In consideration for the consents, the Company paid to the holders of the subordinated debt due in 1998, 2000 and 2003 a cash payment aggregating $0.6 million and caused approximately $42.6 million of the aggregate principal amount of such subordinated debt to be ranked as senior debt. In addition, the Company has agreed to increase dividends on the redeemable preferred stock by $2.00 per share per annum. The Company also paid approximately $1.5 million in fees and expenses to obtain such consents (see Note 7).\n(Continued)\nPETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES\nNotes to Consolidated Financial Statements\n(6) Common Stock and Common Stock Dividends\nThe Company's outstanding Common Stock consists of Class A Common Stock, Class B Common Stock and Class C Common Stock, each with various designations, rights and preferences. In 1992, the Company restated and amended its Articles of Incorporation increasing the authorized shares of Class A Common Stock to 40,000,000 and authorizing 5,000,000 shares of Class C Common Stock, $.10 par value. On July 29, 1992, the holders of Class A Common Stock exchanged, pro rata, 2,545,139 shares of Class A Common Stock for 2,545,139 shares of Class C Common Stock. The financial statements, as well as the table on the following page, give retroactive effect to this exchange.\nHolders of Class A Common Stock and Class C Common Stock have identical rights, except that holders of Class A Common Stock are entitled to one vote per share and holders of Class C Common Stock are entitled to ten votes per share. Holders of Class B Common Stock do not have voting rights, except as required by law, or in certain limited circumstances.\nHolders of Class B Common Stock are entitled to receive, as and when declared by the Board of Directors, Special Dividends equal to .000001666% per share per quarter of the Company's Cash Flow, as defined, for its prior fiscal year. For purposes of computing Special Dividends, Cash Flow represents the sum of (i) consolidated net income, plus (ii) depreciation and amortization of plant and equipment, and (iii) amortization of customer lists and restrictive covenants, (iv) excluding net income (loss) derived from investments accounted for by the equity method, except to the extent of any cash dividends received by the Company. Special Dividends are cumulative and are payable quarterly. If not paid, dividends on any other class of stock may not be paid until all Special Dividends in arrears are declared and paid.\nThe Company may, in its sole discretion, terminate the payment of the Special Dividends if all Special Dividends have then been paid or duly provided for. If the Company exercises its right to terminate the Special Dividends, it must give notice to the holders of Class B Common Stock not less than 30 days nor more than 60 days prior to the date fixed for termination. In such event, the Special Dividends will terminate on the date specified in the notice (the Parity Date). Each holder of Class B Common Stock will then have a period of 60 days from the date of the notice to elect to require the Company to purchase all or part of such holder's Class B Common Stock at a price of $17.50 per share, as adjusted for stock splits, reclassifications and the like, plus all accrued and unpaid Special Dividends to the date of purchase, or to elect to retain such holder's Class B Common Stock. After the Parity Date, no dividends will be paid to the holders of Class B Common Stock until the holders of Class A Common Stock and Class C Common Stock receive dividends equal to the Common Stock Allocation, as defined.\n(Continued)\nPETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES\nNotes to Consolidated Financial Statements\n(6), Continued\nOn July 29, 1992 and September 2, 1992, the Company sold an aggregate of 4,330,000 shares of its Class A Common Stock in a Public Offering (the \"Offering\") at an initial offering price of $11.00 per share.\nOn September 17, 1992 the Company commenced an Exchange Offer (Exchange Offer) for all of the outstanding shares of its Class B Common Stock pursuant to which each holder of Class B Common Stock who validly tendered a share of Class B Common Stock for exchange was entitled to receive 1.591 shares of Class A Common Stock. The Exchange Offer expired on October 16, 1992 and, as a result, 2,817,159 shares of Class B Common Stock (92.8% of the total then outstanding) were exchanged for 4,482,021 shares of Class A Common Stock.\nThe following table summarizes the cash dividends declared on Common Stock and the cash dividends declared per common share for the years indicated:\nYear Ended December 31, ------------------------------ 1991 1992 1993 ---- ---- ----\nCash dividends declared Class A $ -- $ 3,157,000 $ 9,971,000 Class B 952,000 2,715,000 408,000 Class C -- 465,000 1,336,000\nCash dividends declared per share Class A $ -- $ 0.18 $ 0.525 Class B 0.31 1.14 1.88 Class C -- 0.18 0.525\nUnder the Company's most restrictive dividend limitation, $7.1 million was available at December 31, 1993 for the payment of dividends on all classes of Common Stock. The amount available for dividends is increased each quarter by 50% of the cash flow, as defined, for the previous fiscal quarter.\nIn the event of liquidation of the Company, each outstanding share of Class B Common Stock would be entitled to a distribution equal to its share of all accrued and unpaid Special Dividends, without interest, plus $5.70 per share, before any distribution is made with respect to the Class A or Class C Common Stock. Thereafter, each share of Class B Common Stock and each share of Class A and Class C Common Stock would participate equally in all liquidating distributions, subject to the rights of the holders of the Cumulative Redeemable Exchangeable Preferred Stock. The aggregate liquidation preference on the Class B Common Stock at December 31, 1993 amounted to an aggregate of $1,236,336.\n(Continued)\nPETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES\nNotes to Consolidated Financial Statements\n(7) Cumulative Redeemable Exchangeable Preferred Stock\nThe Company entered into agreements dated as of August 1, 1989 with John Hancock Mutual Life Insurance Company and Northwestern Mutual Life Insurance Company to sell up to 250,000 shares of its Redeemable Preferred Stock, par value $. 10 per share, at a price of $100 per share, which shares are exchangeable into Subordinated Notes due August 1, 1999 (1999 Notes). The Company sold 50,000 shares of the Redeemable Preferred Stock in August 1989, 50,000 shares in December 1989 and 150,000 shares in May 1990. The Redeemable Preferred Stock issued in August 1989 calls for dividends of $12 per share, while the stock issued in December 1989 and May 1990 calls for dividends of $11.84 and $12.61 per share, respectively. In connection with receiving the consents in 1994 to modify certain covenants under which the Redeemable Preferred Stock was issued, the Company has agreed to increase dividends on the Redeemable Preferred Stock by $2.00 per share per annum beginning February 1994. The shares of the Redeemable Preferred Stock are exchangeable in whole, or in part, at the option of the Company, for 1999 Notes of the Company.\nOn August 1, 1994, and on August 1 of each year thereafter, so long as any of the shares of Redeemable Preferred Stock remain outstanding, one-sixth of the number of originally issued shares of each series of Redeemable Preferred Stock outstanding less the number of shares of such series previously exchanged for 1999 Notes, are to be redeemed, with the final redemption of remaining outstanding shares occurring on August 1, 1999. The redemption price is $100 per share plus all accrued and unpaid dividends to such August 1.\nThe Company entered into an agreement dated September 1, 1991 with United States Leasing International Inc. to sell up to 159,722 shares of its 1991 Redeemable Preferred Stock, par value $.10 per share, at an initial price of $78.261 per share, which shares were exchangeable into Subordinated Notes due March 1, 2000 (2000 Notes). The Company sold 63,889 shares of the Redeemable Preferred Stock in September 1991 at $78.261 per share and 94,995 shares in March 1992 at $78.951 per share, the accreted value of the initial price. The holders of the shares of 1991 Preferred Stock were entitled to receive monthly dividends based on the annual rate of the sum of LIBOR plus 4.7%.\nThe Company issued the 1991 Redeemable Preferred Stock under an agreement which required the Company to redeem the 1991 Redeemable Preferred Stock as soon as, and to the extent that it was permitted to incur Funded Debt. Under the applicable provisions of the Company's debt agreements, the Company was allowed to incur Funded Debt in the first quarter of 1993 and as such, was required to enter into the exchange. In March 1993, the Company issued $12,763,663 of 2000 Notes in exchange for all of the 1991 Redeemable Preferred Stock (see note 5).\nPreferred dividends of $3,269,000, $4,258,000 and $3,321,000 were declared on all classes of preferred stock in 1991, 1992 and 1993, respectively.\n(Continued)\nPETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES\nNotes to Consolidated Financial Statements\n(7), Continued\nAggregate annual maturities of Redeemable Preferred Stock are as follows as of December 31, 1993:\nYear ended December 31, ------------\n1994 $ 4,167,000 1995 4,166,000 1996 4,167,000 1997 4,167,000 1998 4,167,000 1999 4,166,000 ---------\n$ 25,000,000 ==========\n(8) Pension Plans\nThe Company has several noncontributory defined contribution and defined benefit pension plans covering substantially all of its nonunion employees. Benefits under the defined benefit plans are generally based on years of service and each employee's compensation, while benefits under the defined contribution plans are based solely on compensation. Pension expense under all plans for the years ended December 31, 1991, 1992 and 1993 was $2,774,000, $2,447,000 and $3,342,000, respectively, net of amortization of the pension obligation acquired.\nThe following table sets forth the defined benefit plans' funded status and amounts recognized in the Company's balance sheets at the indicated dates:\nDecember 31, -------------------------- 1992 1993 ---- ----\nActuarial present value of benefit obligations: Accumulated benefit obligations including vested benefits of $18,409,871 and $23,566,465 $ 18,790,759 $ 23,848,149 ========== ==========\nProjected benefit obligation $(21,715,790) $(26,458,728) Plan assets at fair value (primarily listed stocks and bonds) 16,581,099 17,252,490 ---------- ---------- Projected benefit obligation in excess of plan assets (5,134,691) (9,206,238) Unrecognized net loss from past experience different from the assumed and effects of changes in assumptions 3,645,967 7,538,164 Unrecognized net transitional obligation 606,394 546,784 Unrecognized prior service cost due to plan amendments 674,044 785,832 Additional liability (2,133,731) (6,260,201) ---------- ----------\nAccrued pension cost for defined benefit plans $(2,342,017) $(6,595,659) ========== ==========\n(Continued)\nPETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES\nNotes to Consolidated Financial Statements\n(8), Continued\nNet pension cost for defined benefit plans for the periods indicated included the following components:\nYear Ended December 31, -------------------------------------\n1991 1992 1993 ---- ---- ---- Service cost-benefits earned during the period $ 1,154,607 $ 1,162,736 $1,391,564 Interest cost on projected benefit obligation 1,665,229 1,781,444 1,778,401 Actual return on assets (2,515,808) (1,248,604) (994,937) Net amortization and deferral of gains and losses 1,471,819 (71,885) 207,465 --------- --------- ---------\nNet periodic pension cost for defined benefit plans $ 1,775,847 $ 1,623,691 $2,382,493 ========= ========= =========\nAssumptions used in the above accounting were:\nDiscount rate 8.5% 8.5% 7.0% Rates of increase in compensation level 6.0% 6.0% 4.0% Expected long-term rate of return on assets 10.0% 10.0% 8.5%\nIn addition to the above, the Company made contributions to union-administered pension plans during the years ended December 31, 1991, 1992 and 1993 of $2,365,000, $2,442,000 and $2,867,000, respectively.\nThe Company has recorded an additional minimum pension liability for underfunded plans of $5,866,651 at December 31, 1993, representing the excess of unfunded accumulated benefit obligations over plan assets. A corresponding amount is recognized as an intangible asset except to the extent that these additional liabilities exceed the related unrecognized prior service costs and net transition obligation, in which case the increase in liabilities is charged as a reduction of stockholders' equity. The Company has recorded intangible assets of $1,332,616 and a reduction in stockholders' equity of $4,534,035 as of December 31, 1993.\nIn connection with the purchase of shares of a predecessor company as of January 1, 1979 by a majority of the Company's present holders of Class C Common Stock, the Company assumed a pension liability in the aggregate amount of $1,512,000, as adjusted, representing the excess of the actuarially computed present value of accumulated vested plan benefits over the net assets available for such benefits. Such liability, which amounted to $1,212,843 at December 31, 1993, is being amortized over 40 years.\nUnder a 1992 supplemental benefit agreement, Malvin P. Sevin, the Company's chairman and co-chief executive officer, was entitled to receive $25,000 per month for a period of 120 months following his retirement. In the event of his death, his designated beneficiary is entitled to receive such benefit. The expense related to this benefit was being accrued over the estimated remaining period of Mr. Sevin's employment. Mr. Sevin passed away in\n(Continued)\nPETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES\nNotes to Consolidated Financial Statements\n(8), Continued\nDecember 1992, prior to his retirement. The accrual for such benefit payable was accelerated at December 31, 1992 to $1,973,000, the present value (using a discount rate of 9%) of the payments now payable to his beneficiary, which payments commenced in January 1993.\nDuring the first quarter of 1993, the Company adopted Statement of Financial Accounting Standards No. 106 (SFAS No. 106) \"Employers' Accounting for Post Retirement Benefits Other Than Pensions.\" This Statement requires that the expected cost of postretirement benefits be fully accrued by the first date of full benefit eligibility, rather than expensing the benefit when payment is made. As the Company generally does not provide for postretirement benefits, other than pensions, the adoption of the new Statement did not have any material effect on the Company's consolidated financial condition or results of operations.\n(9) Income Taxes\nIncome tax expense was comprised of the following for the indicated years: Year Ended December 31, ------------------------\n1991 1992 1993 ---- ---- ---- Current:\nFederal $ -- $ -- $ -- State 250,000 400,000 400,000 ------- ------- ------- $250,000 $400,000 $400,000 ======= ======= =======\nDeferred income tax expense results from temporary differences in the recognition of revenue and expense for tax and financial statement purposes. The sources of these differences and the tax effects of each were as follows:\nYear Ended December 31, ---------------------------- 1991 1992 1993 ---- ---- ---- Excess of tax over book (book over tax) depreciation $(114,000) $ (11,000) $ 242,000 Excess of book over tax vacation expense (223,000) (3,000) (93,000) (Excess of book over tax) tax over book bad debt expense (74,000) (165,000) 92,000 (Excess of book over tax) tax over book supplemental benefit expense -- (671,000) 12,000 Deferred service contracts 66,000 66,000 18,000 Other, net 36,000 50,000 (60,000) Recognition of tax benefit of net operating loss to the extent of current and previously recognized temporary differences -- -- (211,000) Deferred tax assets not recognized 309,000 734,000 -- ------- ------- ------- $ -- $ -- $ -- ======= ======= =======\n(Continued)\nPETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES\nNotes to Consolidated Financial Statements\n(9), Continued\nAs of December 31, 1993, the Company has for Federal tax reporting purposes, a net operating loss (NOL) carryforward of approximately $51.3 million. Total income tax expense amounted to $250,000 for 1991, $400,000 for 1992, and $400,000 for 1993. The following reconciles the effective tax rates to the \"expected\" statutory rates for the years indicated:\nYear Ended December 31, ---------------------- 1991 1992 1993 ---- ---- ----\nComputed \"expected\" tax (benefit) rate (34.0)% (34.0)% (34.0)% Reduction of income tax benefit resulting from: Net operating loss carryback limitation 34.0 34.0 34.0 State income taxes, net of Federal income tax benefit 1.5 10.0 5.6 ---- ---- ----\n1.5% 10.0% 5.6% === ==== ====\nDuring the first quarter of 1993, the Company adopted Statement of Financial Accounting Standards No. 109, \"Accounting for Income Taxes\" (\"SFAS No. 109\"). 'This Statement requires that deferred income taxes be recorded following the liability method of accounting and adjusted periodically when income tax rates change. Adoption of the new Statement did not have any effect on the Company's consolidated financial condition or results of operations since the Company did not carry any deferred tax accounts on its balance sheet at December 31, 1992 and any net deferred assets set up as a result of applying SFAS 109 have been fully reserved.\nUnder SFAS No. 109, as of January 1, 1993, the Company had net deferred tax assets of approximately $14.1 million subject to a valuation allowance of approximately $14.1 million. The components of and changes in the net deferred tax assets and the changes in the related valuation allowance for 1993 using current rates were as follows (in thousands):\n(Continued)\nPETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES\nNotes to Consolidated Financial Statements\n(9), Continued\nA valuation allowance is provided when it is more likely than not that some portion of the deferred tax asset will not be realized. The Company has determined, based on the Company's recent history of annual net losses, that a full valuation allowance is appropriate.\nAt December 31, 1993, the Company had the following income tax carryforwards for Federal income tax reporting purposes (in thousands):\nExpiration Date Amount ---- ------ 2005 $26,651 2006 15,012 2007 1,367 2008 8,286 ------- $51,316 ======\n(10) Related Party Transactions\nIn connection with the acquisition of customer lists, equipment and other assets of previously unaffiliated fuel oil businesses, the Company entered into lease agreements covering certain vehicles with individuals, including certain stockholders, directors and executive officers. These leases are currently on a month-to-month basis, on terms comparable with leases from unrelated parties. Annual rentals under these leases are approximately $150,000.\nDuring 1981, the Company acquired the customer list, equipment and accounts receivable of a fuel oil business from two individuals, one of whom is, and the other of whom was, prior to his death, stockholders, directors and executive officers of the Company. The purchase price was approximately $1,233,000, of which $733,000 was paid at the closing and the balance was financed through the issuance of a $500,000, 6%, 15-year term note secured by property of the Company. The unpaid balance of this note at December 31, 1993 was $80,404 (see note 3).\nOn November 6, 1985, the Company sold a building to certain related parties for $660,000, the same price the Company originally paid for the property in June 1984 and which was also the facility's independently appraised fair market value. The parties then leased the facility back to the Company pursuant to a ten-year agreement providing for rentals of $90,000 per annum plus escalation and taxes.\n(Continued)\nPETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES\nNotes to Consolidated Financial Statements\n(10), Continued\nUntil 1985, the Company occupied a certain building under a lease agreement with an unaffiliated lessor. The lease was accounted for as a capital lease and, as such, the capitalized leased asset and obligation were included on the Company's balance sheet. In November 1985, pursuant to a competitive bidding process, the Company purchased the building from the landlord for $1,500,000. The building was resold for $1,500,000 in December 1985 to certain related parties, some of whom are stockholders, directors and executive officers of the Company. These related parties are leasing the building to the Company under a lease agreement which calls for rentals of $315,000 per annum (which was the independently appraised lease rental) plus escalations and which expires in 1995.\nIn October 1986, Irik P. Sevin purchased 161,313 shares of Class A Common Stock and 40,328 shares of Class C Common Stock (after giving retroactive effect to the exchange of Class C Common Stock for Class A Common Stock in July 1992) of the Company for $1,280,000 (which was the fair market value as established by the Pricing Committee pursuant to the Stockholders' Agreement described below). The purchase price was financed by a note originally due December 31, 1989, but which has been extended to December 31, 1994. The note was amended in 1991 to increase the principal amount by $152,841, the amount of interest due from October 22, 1990 through December 31, 1991 and to change the interest rate on the note effective January 1, 1992 from 10% per annum to the LIBOR rate in effect for each month plus 0.75%. The note was amended again in 1992 to increase the principal amount by $66,537, the amount of interest due from January 1, 1992 through December 31, 1992. The note was amended in 1993 to increase the principal amount by $60,449, the amount of interest due from January 1, 1993 through December 31, 1993. At any time prior to the due date of the note, Mr. Sevin has the right to require the Company to repurchase all or any of these shares (as adjusted for stock splits, dividends and the like) for $6.35 per share (the Put Price), provided, however, that Mr. Sevin retain all shares of Class B Common Stock issued as stock dividends on the shares without adjustments to the Put Price. In December 1986, 50,410 shares of Class B Common Stock were issued as a stock dividend with respect to these shares, which shares were exchanged in October 1992 for 80,202 Class A Common Shares pursuant to the Exchange Offer discussed in Note 6. Upon the repurchase of the shares, the Company has agreed to issue an eight-year option to Mr. Sevin to purchase a like number of shares at the Put Price. Mr. Sevin has entered into an agreement with the Company that he will not sell or otherwise transfer to a third party any of the shares of Class A Common Stock or Class C Common Stock received pursuant to this transaction until the note has been paid in full.\nIn November 1986, the Company issued stock options to purchase 30,000 shares and 20,000 shares, of the Class A Common Stock of the Company to Irik P. Sevin and Malvin P. Sevin, respectively, subject to adjustment for stock splits, stock dividends, and the like, upon the successful completion of a public offering of at least 10% of the common stock of the Company. Such a public offering was completed in December 1986. The option price for the shares of Class A Common Stock was $20 per share. The options, which expire on November 30, 1994, are nontransferable. As a result of stock dividends in the form of Class A Common Stock and Class B Common Stock declared by the Company in\n(Continued)\nPETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES\nNotes to Consolidated Financial Statements\n(10), Continued\nDecember 1986, the exchange of Class C Common Stock for Class A Common Stock in July 1992, and special antidilution adjustments, the options held by Irik P. Sevin now apply to 89,794 shares of Class A Common Stock and 22,448 shares of Class C Common Stock and the options held by Malvin P. Sevin now apply to 59,862 shares of Class A Common Stock and 14,966 shares of Class C Common Stock. The adjusted option price for each such share is $4.10.\nOn December 28, 1987, the Company issued stock options to purchase 24,000 shares of Class A Common Stock and 6,000 shares of Class C Common Stock (after giving retroactive effect to the exchange of' Class C Common Stock for Class A Common Stock in July, 1992) to Irik P. Sevin. The option price for each such share is $7.50. These options are not transferable and expire on January 1, 1996.\nOn March 3, 1989, the Company issued stock options to purchase 72,000 shares of Class A Common Stock and 18,000 shares of Class C Common Stock (after giving retroactive effect to the exchange of Class C Common Stock for Class A Common Stock in July 1992) to Irik P. Sevin and 48,000 shares of Class A Common Stock and 12,000 shares of Class C Common Stock (after giving retroactive effect to the exchange of Class C Common Stock for Class A Common Stock in July 1992) to Malvin P. Sevin. The option price for each such share is $11.25. These options are nontransferable, Malvin P. Sevin's option expired unexercised while Irik P. Sevin's options expire on March 3, 1999.\nOn November 1, 1992, the Company issued stock options to an officer of the Company to purchase 25,000 shares of Class A Common Stock and issued another 25,000 stock options to this officer in June 1993. The option price for each such share is $11.00. Twenty percent of the options become exercisable on each of the next five anniversary dates of the grants.\nIn December 1992, Malvin P. Sevin passed away. All options previously owned by him are exercisable by his estate up until the original expiration date of such options.\nDuring the first quarter of 1991, the Company contemplated the acquisition of a business engaged in the distribution of packaged industrial gases for other than heating purposes (\"Packaged Industrial Gas Business\"). As the Company was prohibited from making this acquisition because of restrictions under the Credit Agreement from which the Company was unable to obtain a waiver, the acquisition was consummated by certain of the principal holders of the Class C Common Stock. The Company entered into an agreement with the Packaged Industrial Gas Business to provide management services on request for a fee equal to the allocable cost of Company personnel devoted to the business with a minimum fee of $50,000 per annum plus an incentive bonus equal to 10% of the cash flow above budget. The fee received under such management contract for the seven months ended December 31, 1991 was $29,000 and for the years ended December 31, 1992 and 1993 was $50,000 and $4,000, respectively. Simultaneously with this acquisition, the Company entered into an option agreement expiring May 31, 1996 pursuant to which the Company had the right, exercisable at any time, to acquire the Packaged Industrial Gas Business for its fair market value, as determined by an independent appraisal. In January 1993, the Packaged Industrial Gas Business was sold by its owners to an unrelated third party and the Company's option agreement and management services agreement were cancelled.\n(Continued)\nPETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES\nNotes to Consolidated Financial Statements\n(10), Continued\nOn August 1, 1991, the Company agreed to purchase certain assets of a fuel oil distributor for approximately $17 million, however, certain restrictions under the Company's lending arrangements made the cost of the acquisition unduly burdensome. Accordingly, in October 1991, certain shareholders of the Company, owning approximately 9% of the Class C Common Stock and certain unaffiliated investors, organized RAC Fuel Oil Corp. (RAC) to acquire such business, but gave Petro a five year option, which Petro was required to exercise when permitted by its lending arrangements, to purchase RAC for the same price, as adjusted for operations while the business was owned by RAC. Pending exercise of its option, the Company had been managing RAC's business at an annual fee of $161,000, which was designed to compensate the Company for its estimated costs and for supplying fuel oil to RAC at the Company's cost. In August 1992, the Company was able to and did exercise its option to buy RAC. The acquisition price was approximately $17 million.\nThe existing holders of Class C Common Stock of the Company have entered into a Shareholders' Agreement which provides that, in accordance with certain agreed-upon procedures, each will vote his shares to elect certain designated directors. The Shareholders' Agreement also provides for first refusal rights to the Company if a holder of Class C Common Stock receives a bona fide written offer from a third party to buy such holder's Class C Common Stock.\n(11) Investment in Star Gas\nIn December 1993, the Company acquired an approximate 29.5% equity interest (42.8% voting interest) in Star Gas for $16.0 million in cash. Of such $16.0 million investment, $14.0 million was invested directly in Star Gas through the purchase of Series A 8% pay-in-kind Cumulative Convertible Preferred Stock of Star Gas, which is convertible into common stock of Star Gas, and $2.0 million was invested through Star Gas Holdings, Inc. (\"Holdings\"), a newly formed corporation. Certain other investors (including Holdings) invested a total of $49.0 million of additional equity in Star Gas, of which $11.0 million was in the form of cash and $38.0 million resulted from the conversion of long-term debt and preferred stock into equity. As a result of redemptions of a portion of the equity in Star Gas held by certain of the other investors that the Company expects will occur in connection with a Star Gas recapitalization, the Company expects that its direct and indirect equity interest in Star Gas will increase to 36.7% without any additional investment by the Company.\nStar Gas has granted to the Company an option, exercisable through December 20, 1998, to purchase 500,000 shares of common stock of Star Gas for an aggregate purchase price of approximately $5.0 million. In addition, each of the other investors in Star Gas (including each such investor whose investment is held through Holdings) has granted to the Company an option, exercisable for the period beginning on the date that Star Gas' audited financial statements for its fiscal year ended September 30, 1994 are first delivered to such investors and ending on December 31, 1998, to purchase such investor's interest in Star Gas\n(Continued)\nPETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES\nNotes to Consolidated Financial Statements\n(11), Continued\n(or, in the case of Holdings, to purchase such investor's interest in Holdings). In addition, each such investor has an unconditional option, exercisable beginning January 1, 1999 and ending on December 31, 1999, to require the Company to purchase such investor's interest in Star Gas (or Holdings). The purchase prices upon exercise of any such options are calculated based upon specified multiples of Star Gas' earnings before interest, taxes, depreciation and amortization (EBITDA), subject to certain minimum prices, and are payable in cash or Class A common stock of the Company or, in the case of the Holdings' options, in cash, subordinated debt of the Company or, if the Company is not then permitted to issue such debt, preferred stock of the Company.\nThe investors in Star Gas have entered into a shareholders' agreement, which provides that the Company is entitled to nominate for election up to three persons to serve as directors of Star Gas, Holdings is entitled to nominate up to two persons, and the other investors (as a group) are entitled to nominate up to three persons. In addition, the shareholders' agreement provides that each investor in Star Gas, prior to selling any of its equity interests in Star Gas to any purchaser other than another investor in Star Gas, must first offer to sell such equity interests to Star Gas and then to the other investors.\nThe Company is managing Star Gas' business under a Management Services Agreement which provides for an annual cash fee of $500,000 and an annual bonus equal to 5% of the increase in Star Gas' EBITDA over the fiscal year ended September 30, 1993, payable in common stock of Star Gas pursuant to a formula set forth in the Management Services Agreement. Star Gas also reimburses the Company for its expenses and the cost of certain Company personnel.\n(12) Acquisitions\nDuring 1991, the Company acquired the customer lists and equipment of nine unaffiliated fuel oil dealers. The aggregate consideration for these acquisitions, accounted for by the purchase method, was approximately $12,500,000.\nDuring 1992, the Company acquired the customer lists and equipment of nine unaffiliated fuel oil dealers. The aggregate consideration for these acquisitions, accounted for by the purchase method, was approximately $41,500,000.\nDuring 1993, the Company acquired the customer lists and equipment of nine unaffiliated fuel oil dealers. The aggregate consideration for these acquisitions, accounted for by the purchase method, was approximately $13,600,000. In addition, during 1993, the Company acquired a 29.5% interest in Star Gas Corporation for $16,000,000.\nSales and net income of the acquired companies are included in the consolidated statements of operations from the respective dates of acquisition. Star Gas will be accounted for following the equity method of accounting beginning January 1994.\n(Continued)\nPETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES\nNotes to Consolidated Financial Statements\n(12), Continued\nUnaudited pro forma data giving effect to the purchased businesses and to the Star Gas investment as if they had been acquired on January 1 of the year preceding the year of purchase, with adjustments, primarily for amortization of intangibles, are as follows:\nYear Ended December 31, ----------------------- 1991 1992 1993 ---- ---- ---- (in thousands, except per share data)\nNet sales $ 593,876 $604,491 $557,843 ========= ======== ========\nEquity in (share of loss of) Star Gas Corporation -- 167 (11,923) ========= ======== ========\nNet loss (15,547) (3,012) (19,570) ========= ======== ========\nEarnings (loss) per common share: Class A Common Stock $ (1.62) $ (.81) $ (1.09) Class B Common Stock .57 1.77 2.47 Class C Common Stock (1.62) (.81) (1.09) ========= ======== ========\n(13) Supplemental Disclosure of Cash Flow Information\nYear Ended December 31, ---------------------- 1991 1992 1993 ---- ---- ----\nCash paid during the year for: Interest $ 21,928,724 $20,238,486 $21,705,736 Income taxes 202,650 319,487 495,739\nNoncash financing activities: Redemption of preferred stock -- -- (12,763,663) Issuance of subordinated notes payable -- -- 12,763,663 Minimum pension liability -- -- 5,866,651 Deferred pension costs -- -- (1,332,616) Minimum pension liability adjustment -- -- (4,534,035)\n(Continued)\nPETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES\nNotes to Consolidated Financial Statements\n(14) Disclosures About the Fair Value of Financial Instruments\nCash, Accounts Receivable, Notes Receivable and Other Current Assets, U.S. Treasury Notes held in a Cash Collateral Account, Working Capital Borrowings, Accounts Payable and Accrued Expenses\nThe carrying amount approximates fair value because of the short maturity of these instruments.\nLong-Term Debt, Subordinated Notes Payable and Cumulative Redeemable Exchangeable Preferred Stock\nThe fair values of each of the Company's long-term financing instruments, including current maturities, are based on the amount of future cash flows associated with each instrument, discounted using the Company's current borrowing rate for similar instruments of comparable maturity.\nThe estimated fair value of the Company's financial instruments are summarized as follows:\nAt December 31, 1993 -------------------- Carrying Estimated Amount Fair Value ------ ---------- (amounts in thousands)\nLong-term debt $ 50,080 $ 50,076 Subordinated notes payable 135,264 148,644 Cumulative Redeemable Exchangeable Preferred Stock 25,000 27,170\nLimitations\nFair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.\n(Continued)\nPETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES\nNotes to Consolidated Financial Statements\n(15) Selected Quarterly Financial Data (Unaudited) (in thousands, except per share data)\nINDEPENDENT AUDITORS REPORT\nTo the Board of Directors and Shareholders of Star Gas Corporation and Subsidiaries:\nWe have audited the accompanying consolidated balance sheet of Star Gas Corporation and subsidiaries as of September 30, 1993 and the related consolidated statements of operations, shareholders' equity (deficiency), and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.\nWe conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.\nIn our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Star Gas Corporation and subsidiaries at September 30, 1993 and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles.\nKPMG Peat Marwick\nNew York, New York December 28, 1993\nREPORT OF INDEPENDENT AUDITORS\nTo the Board of Directors and Shareholders of Star Gas Corporation and Subsidiaries\nWe have audited the accompanying consolidated balance sheet of Star Gas Corporation and subsidiaries as of September 30, 1992 and the related consolidated statements of operations, shareholders' equity (deficiency) and cash flows for each of the two years in the period ended September 30, 1992. 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.\nWe 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.\nIn our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Star Gas Corporation and subsidiaries at September 30, 1992, and the consolidated results of their operations and their cash flows for each of the two years in the period ended September 30, 1992 in conformity with generally accepted accounting principles.\nERNST & YOUNG\nNew York, New York December 3, 1992, except for Notes 5 and 9, as to which the date is April 1, 1993\nSTAR GAS CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS\nSee accompanying notes to consolidated financial statements.\nSTAR GAS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS\nSee accompanying notes to consolidated financial statements.\nSTAR GAS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY) YEARS ENDED SEPTEMBER 30, 1993, 1992 AND 1991\nSee accompanying notes to consolidated financial statements.\nSTAR GAS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS\nSee accompanying notes to consolidated financial statements.\nSTAR GAS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS\n(1) ORGANIZATION AND BUSINESS\nStar Gas Corporation (the \"Company\") primarily sells and distributes propane gas and related appliances to retail and wholesale customers through its branch offices located principally in the Northeastern, Southeastern and Midwestern United States. The Company had been owned 45% by Star Energy Inc., (\"SEI\"), a wholly owned subsidiary of The Brooklyn Union Gas Company, and 55% by a group of limited partnerships--American Gas and Oil Investors, AmGO II, AmGO III, and First Reserve Secured Energy Assets Fund, L.P. These limited partnerships are managed by the First Reserve Corporation (and are collectively referred to herein as \"FRC\").\nIn September 1989, the Company purchased 15.12 shares of common stock owned by an officer for a 10% Junior Subordinated Promissory Note in the amount of $2,187,916 (see note 5). These shares were held in treasury at September 30, 1993 and 1992.\nIn June 1991, the Company converted $1,796,500 and $2,196,000 of Junior Subordinated Debt owed to SEI and FRC into 1,796.5 shares and 2,196 shares of Series A Preferred Stock, respectively. The conversion rate was one share of Series A Preferred Stock for every $1,000 of Junior Subordinated Debt.\nIn September 1991, the Company sold 13.77 shares of common stock to SEI and 16.83 shares of common stock to FRC for $2,193,300 and $2,680,600, respectively, and sold 2,306.7 shares of Series A Preferred Stock to SEI and 2,819.4 shares of Series A Preferred Stock to FRC for $2,306,700 and $2,819,400, respectively.\nIn August 1992, the Company sold 4.81 shares of common stock to SEI and 5.88 shares of common stock to FRC for $900,000 and $1,100,000, respectively.\nIn March 1993, the Company and the shareholders signed a Cancellation of Indebtedness and Deferral Agreement (the \"Cancellation Agreement\"). Under the terms of the Cancellation Agreement, SEI and FRC agreed to cancel $639,000 and $781,000, respectively, of long-term liabilities acquired from a third party (see note 9) in consideration of 639 and 781 shares, respectively, of newly issued 8% Cumulative Convertible Preferred Stock.\nAs a result of the above mentioned transactions, SEI and FRC continued to own 45% and 55%, respectively, of the common, Series A Preferred and 8% Cumulative Convertible Preferred Stock of the Company at September 30, 1993 and 1992.\nOn December 2, 1993, the Company sold the branches of its wholly owned subsidiary, Federal Petroleum Company (\"Federal\"), for $1,650,000 in cash and a note receivable of $500,000. At September 30, 1993, the Company adjusted the carrying value of the net assets sold to equal the sales price, $2,150,000. The Company is also negotiating to sell the branches of its wholly owned subsidiary, Highway Pipeline Trucking Co. (\"Highway\"), and has adjusted the carrying value of Highway's net assets to equal the value of a recent offer received, $5,228,126. The net assets of Federal and Highway have been reflected in the 1993 Consolidated Balance Sheet as assets held for sale in the aggregate amount of $7,378,126. (See note 10)\nOn December 23, 1993, the Company was recapitalized and, as a part of the recapitalization, issued 269,750 shares of 8% Cumulative Convertible Preferred Stock (see note 2) for $26,975,000 in the indicated amounts to the following investors: Petroleum Heat and Power Co., Inc. (\"Petro\") ($14,000,000), FRC ($1,975,000) and Star Gas Holdings Inc. (\"Holdings\") ($11, 000,000). Holdings is a corporation recently formed for the purpose of investing in the Company. Holdings was formed by a group of investors, including Petro who contributed $2,000,000 of the $11,000,000 invested by\nSTAR GAS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)\n(1) ORGANIZATION AND BUSINESS--(CONTINUED)\nHoldings. The cash proceeds received by the Company from the issuance of the preferred stock were used to repay $14,325,000 of its outstanding 11.56% Senior Notes, to repay $2,800,000 of its outstanding Term Loan, and to pay interest in arrears of $7,957,000. The Company estimates that the expenses relating to the recapitalization will approximate $1 million. Also on that date, the Company issued 250,000 shares of its 8% Cumulative Convertible Preferred Stock and 75,000 shares of its 12.625% Cumulative Redeemable Preferred Stock to The Prudential Insurance Company of America (\"Prudential\") in exchange for $32,500,000 of its 12.625% Senior Subordinated Participating Notes. (See note 5)\nThe Company simultaneously entered into a management services agreement with Petro under which Petro will provide executive, financial, and managerial oversight services to the Company. In full consideration and compensation for its services, Petro will receive $500,000 per year plus expenses, plus an annual bonus fee to be paid in the Company's Class A Common Stock equal in value to 5% of the increase in operating income before depreciation and amortization, as defined, over the amount generated for the year ended September 30, 1993.\nPetro has an option to buy all of the shares of common stock and the 8% Cumulative Convertible Preferred Stock owned by FRC, Prudential, and Holdings. This option commences after the receipt of the audited financial statements for the year ended September 30, 1994 and ends on December 31, 1998. In addition, FRC, Prudential and Holdings have the option, beginning on January 1, 1999 and ending on December 31, 1999, to require Petro to purchase all of their shares of the Company's common stock and 8% Cumulative Convertible Preferred Stock. Under the terms of the put\/call agreements with FRC and Prudential, Petro has the right to purchase these shares with either cash or shares of Petro's Class A Common Stock. Under the terms of the put\/call agreement with Holdings, Petro has the right to purchase these shares for cash, notes or Petro preferred stock.\nIn addition, Petro and FRC have each been granted an option to purchase 500,000 shares of the Company's Class A Common Stock for $9.9031 and $14.8546 per share, respectively. These options expire on December 20, 1998.\n(2) RECAPITALIZATION\nOn December 21, 1993, the Company amended its Articles of Incorporation and authorized the issuance of three new classes of common stock, Class A, Class B, and Class C, each with identical rights and preferences, except that Class A has one vote per share, Class B is nonvoting and Class C has 10 votes per share, and two new classes of preferred stock, a new 8% Cumulative Convertible Preferred Stock and a 12.625% Cumulative Redeemable Preferred Stock.\nThe Company is authorized to issue the indicated number of shares in the following classes of its common stock:\nSTAR GAS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)\n(2) RECAPITALIZATION--(CONTINUED)\nThe Company is authorized to issue the indicated number of shares in the following series of its 8% Cumulative Convertible Preferred Stock:\nThe Company is authorized to issue the indicated number of shares in the following series of its 12.625% Cumulative Redeemable Preferred Stock:\nAll dividends on the Series A, B, D and E 8% Cumulative Convertible Preferred Stock and on the Series A and B 12.625% Cumulative Redeemable Preferred Stock are to be paid in additional shares of the same preferred stock series. The holders of the Series C 8% Cumulative Convertible Preferred Stock have the option, upon delivering proper notice, to be paid in cash or in additional shares of Series C 8% Cumulative Convertible Preferred Stock.\nEach share of Series A, C and E 8% Cumulative Convertible Preferred Stock is convertible into 9.2278 shares of Class A Common Stock and the shareholders are entitled to one vote for each as-if-converted common share. Each share of Series B 8% Cumulative Convertible Preferred Stock is convertible into 7.0746 shares of nonvoting Class B Common Stock and each share of Series D 8% Cumulative Convertible Preferred Stock is convertible into 9.2278 shares of nonvoting Class B Common Stock.\nThe holders of Series A, C and E 8% Cumulative Convertible Preferred Stock are entitled to vote together, with the holders of shares of common stock, as a single class, with each as-if-converted common share of such 8% Cumulative Convertible Preferred Stock entitled to one vote. The holders of shares of the Series B and D 8% Cumulative Convertible Preferred Stock and the Series A and B 12.625% Cumulative Redeemable Preferred Stock are not entitled to vote on any matters, except as required by law or as specified in the Company's Articles of Incorporation.\nUpon the occurrence of any liquidating event, each holder of shares of Series A, B, C and D 8% Cumulative Convertible Preferred Stock and Series A 12.625% Cumulative Redeemable Preferred Stock is entitled, before any distribution or payment is made upon any shares of common stock or any other junior security, to a pro rata amount of each series' liquidation value per share. In the event of liquidation, the remaining order of liquidation is as follows: Series B 12.625% Cumulative Redeemable Preferred Stock, Series E 8% Cumulative Convertible Preferred Stock and finally, the common stock of the Company, with each share of Class A, B, and C Common Stock sharing ratably.\nSTAR GAS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)\n(2) RECAPITALIZATION--(CONTINUED)\nAs part of the recapitalization, the Company issued the following shares of 8% Cumulative Convertible Preferred Stock for $100 per share, $26,975,000 in the aggregate:\n8% CUMULATIVE CONVERTIBLE PREFERRED STOCK\nIn addition, the Company exchanged $32,500,000 of its 12.625% Senior Subordinated Participating Notes held by Prudential for the following shares of preferred stock at $100 per share:\n8% CUMULATIVE CONVERTIBLE PREFERRED STOCK\nThe Company, simultaneously with the issuance of the 8% Cumulative Convertible Preferred Stock and the 12.625% Cumulative Redeemable Preferred Stock, redeemed $4,080,000 plus accrued interest in certain notes held by FRC, $1,420,000 in previously outstanding 8% Cumulative Convertible Preferred Stock, the previously outstanding Series A Preferred Stock and all previously outstanding shares of common stock in exchange for 5,000 shares of Series E 8% Cumulative Convertible Preferred Stock and 480,695 shares of Class A Common Stock. In addition, prior to the recapitalization, all shares previously held by SEI were acquired by FRC.\nUpon the sale of Highway and Federal, the Company is required to apply the net proceeds from the sales to repurchase, at $100 per share plus an additional amount sufficient to generate a yield equal to 12.625% compounded semiannually from December 21, 1993, the Series D 8% Cumulative Convertible Preferred Stock from Prudential. The Company also has an option, which expires on December 31, 1995, to repurchase the balance of the Series D shares at the same formula price. As the Company redeems shares of its Series D 8% Cumulative Convertible Preferred Stock, FRC has agreed to return, as a contribution to the capital of the Company, a number of shares of Class A Common Stock of the Company owned by FRC, determined by multiplying 48,569 by a fraction, the numerator of which is the face value of the Series D 8% Cumulative Convertible Preferred Stock redeemed and the denominator of which is $10 million. On December 2, 1993, the Company sold Federal for an aggregate price of $2.15 million, consisting of $1.65 million in cash and a $500,000 note. The cash from the sale was held in escrow until the recapitalization was completed. On December 23, 1993, such cash was used to repurchase a portion of the Series D 8% Cumulative Convertible Preferred Stock as described above. The Company is currently negotiating to sell Highway. (See note 1).\nSTAR GAS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)\n(2) RECAPITALIZATION--(CONTINUED)\nThe 12.625% Cumulative Redeemable Preferred Stock must be exchanged into subordinated notes once the Company meets certain financial ratios; to the extent not previously exchanged, the Company is required to apply up to $2 million on January 10, 2000 to redeem 12.625% Cumulative Redeemable Preferred Stock plus an amount sufficient to redeem any 12.625% Cumulative Redeemable Preferred Stock received as dividends thereon, and to the extent shares still remain outstanding, the Company is required to redeem the remaining shares on January 10, 2001.\nAs of December 23, 1993, after giving effect to the recapitalization of the Company, assuming conversion of all of the 8% Cumulative Convertible Preferred Stock into common stock and assuming no issuance of any option shares, the investors would have the following equity interests and voting percentages on most matters, except for certain voting rights for the Series B and D 8% Cumulative Convertible Preferred Stock and the Series A and B 12.625% Cumulative Redeemable Preferred Stock designated by law or as specified in the Company's Articles of Incorporation:\nCombining Petro's interest with its ownership interest in Holdings, Petro's equity interest would increase to 29.5%, but its voting interest would remain at 42.8%.\nAssuming further that the Series D 8% Cumulative Convertible Preferred Stock is repurchased from Prudential and FRC contributes the full 48,569 common shares back to the Company, the investors would then have the following interests:\nCombining Petro's interest with its ownership interest in Holdings, Petro's equity interest would increase to 36.7%, but its voting interest would remain at 43.5%.\nSTAR GAS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)\n(2) RECAPITALIZATION--(CONTINUED)\nThe following represents the capitalization of the Company as of September 30, 1993 and as adjusted to give effect to the recapitalization as discussed above, as if such recapitalization had occurred on September 30, 1993:\n(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES\nPrinciples of Consolidation\nThe accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All material intercompany accounts and transactions have been eliminated.\nInventories\nInventories are stated at the lower of cost or market following the moving weighted average method, which approximates first-in, first-out cost.\nProperty, Plant and Equipment\nProperty, plant and equipment are stated at cost. Depreciation is computed over the estimated useful lives of the depreciable assets (generally thirty years for buildings and seven to thirty years for equipment) using the straight-line method. Gain or loss on property retired, sold or otherwise disposed\nSTAR GAS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)\n(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)\nof is included in operations. Expenditures for renewals and improvements are capitalized, while maintenance and repairs are expensed.\nIntangible Assets\nBeginning on October 1, 1992, the excess of cost over the fair value of net assets acquired is being amortized using the straight-line method over 10 years. Prior to October 1, 1992, such assets were being amortized over 40 years. The effect of the change in 1993 was to increase amortization expense by $1,160,000. Other intangible assets, principally covenants not to compete, capitalized consulting costs and customer contracts and lists are being amortized over their estimated useful lives, ranging from one to ten years. Deferred charges, representing costs associated with the issuance of the Company's debt, are being amortized over the lives of the related debt.\nThe Company assesses the recoverability of intangible assets by comparing the carrying values of such intangibles to market values, where a market exists, supplemented by cash flow analyses to determine that the carrying values are recoverable over the remaining estimated lives of the intangibles through undiscounted future operating cash flows. Where an intangible asset is deemed to be impaired, the amount of intangible impairment, is measured based on market values, as available, or by projected cash flows.\nCustomer Credit Balances\nCustomer credit balances represent payments received from customers pursuant to a budget payment plan (whereby customers pay their estimated annual propane gas charges on a fixed monthly basis) in excess of actual deliveries billed.\nCash Equivalents\nFor the purpose of determining cash equivalents used in the preparation of the Statements of Cash Flows, the Company considers all highly liquid investments with a maturity of three months or less when purchased, to be cash equivalents.\nBasis of Presentation\nCertain reclassifications have been made to the 1992 and 1991 financial statements to conform to the 1993 presentation.\n(4) ACQUISITIONS\nThe Company expanded its operations in the retail and wholesale propane gas businesses by making several acquisitions during the fiscal years ended September 30, 1991, 1992 and 1993 as described below. The acquisitions were accounted for under the purchase method of accounting and, therefore, the purchase prices have been allocated to the assets and liabilities acquired based on their respective fair market values at the dates of acquisition. The purchase prices in excess of the fair values of net assets acquired were classified as excess of cost over net assets acquired in the Consolidated Balance Sheets. The results of operations of the respective acquired companies have been included in the Consolidated Statements of Operations from the dates of acquisition.\nDuring fiscal 1991, the Company acquired certain assets of six unaffiliated liquified petroleum gas businesses. The aggregate consideration for these acquisitions, accounted for by the purchase method, was approximately $1,420,000.\nSTAR GAS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)\n(4) ACQUISITIONS--(CONTINUED)\nDuring fiscal 1991, the Company also entered into an operating lease for certain assets of a water treatment company. Annual payments on the lease are $47,760 per year for three years. The Company has an irrevocable option at the end of the lease to purchase these assets for $60,000.\nDuring fiscal 1992, the Company acquired certain assets of five unaffiliated liquified petroleum gas businesses. The aggregate consideration for these acquisitions, accounted for by the purchase method, was approximately $1,047,000.\nDuring fiscal 1993, the Company acquired certain assets of one unaffiliated liquified petroleum gas business. The aggregate consideration for this acquisition, accounted for by the purchase method, was approximately $60,000.\n(5) LONG-TERM DEBT AND OBLIGATIONS UNDER CAPITAL LEASES\nLong-term debt and obligations under capital leases consist of the following:\n- ---------------\n* As adjusted gives effect to the recapitalization discussed in notes 1 and 2 and in (b) and (d) below, as if such recapitalization had occurred on September 30, 1993.\n(a) On July 2, 1993, the Company entered into a $20,000,000 Amended and Restated Revolving Credit Agreement (the \"Credit Agreement\") with The First National Bank of Boston. The Credit Agreement matured on October 15, 1993, was renewed to December 22, 1993, and bore interest at the higher of the annual rate of interest announced as the base rate of the bank making the loan plus 2% or 2.5% above the overnight federal funds rate.\n(Footnotes continued on following page)\nSTAR GAS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)\n(5) LONG-TERM DEBT AND OBLIGATIONS UNDER CAPITAL LEASES--(CONTINUED)\n(Footnotes continued from preceding page)\nAs of September 30, 1993 and 1992, outstanding revolving loans and letters of credit aggregated $9,457,520 (including $2,648,816 for letters of credit), and $9,257,522 (including $4,029,526 for letters of credit), respectively.\nThe Credit Agreement was again restated and amended as of December 21, 1993. Under the terms of the restated and amended Credit Agreement, the Company may borrow up to $25 million to finance working capital needs under a revolving credit facility which expires on June 30, 1996. Amounts borrowed under the revolving credit facility are subject to a 30 day clean up requirement each year. Interest on borrowings is payable monthly and is based upon either the Eurodollar Rate (as defined below) or the Alternate Base Rate (as defined below), plus 2 1\/4% on Eurodollar loans or 1\/4% on Alternative Base Rate Loans, at the Company's option. The Eurodollar Rate is the prevailing rate in the Interbank Eurodollar Market adjusted for reserve requirements, if any. The Alternate Base Rate is the higher of (i) the prime rate or base rate of The First National Bank of Boston in effect or (ii) the Federal Funds Rate in effect plus 1\/2%.\nThe Credit Agreement also provides for a revolving credit acquisition facility under which the Company may borrow up to $20 million to fund acquisitions of propane companies. This acquisition facility expires on June 30, 1996 and the Company has the option to convert this facility into a term loan, payable in 36 consecutive monthly installments commencing on July 1, 1996. Interest on the borrowings is payable monthly and is based upon either the Eurodollar Rate plus 2 1\/2% on loans made before the acquisition loan conversion date and 3% after the acquisition loan conversion date or the Alternate Base Rate plus 1\/2% on loans made before the acquisition loan conversion date and 1% on loans made after the acquisition loan conversion date, at the Company's option.\nThe Company pays a commitment fee equal to 1\/2% of the unused portion of the bank facilities with a reduction, through June 30, 1994, on the Acquisition Facility to 1\/4% annually if it is not used through that date.\nUnder the terms of the Credit Agreement, as amended, the Company is restricted as to the declaration and distribution of dividends and is also required to maintain certain financial and operational ratios. The amounts borrowed under the Credit Agreement are secured by substantially all of the Company's assets.\n(b) On January 10, 1989, the Company issued $85,000,000 of notes (the \"Note Agreements\") to Prudential for cash. The Note Agreements consisted of $45,000,000 of 11.56% Senior Notes due in six consecutive annual installments of $7,500,000 commencing January 10, 1994; $30,000,000 of 12.625% Senior Subordinated Participating Notes, Series A, due in six consecutive annual installments of $4,250,000 commencing January 10, 1995, with a final installment of $4,500,000 due on January 10, 2001; and $10,000,000 of 12.625% Senior Subordinated Participating Notes, Series B, due in six consecutive annual installments of $1,500,000 commencing January 10, 1995, with a final installment of $1,000,000 due on January 10, 2001.\nThe Series A and Series B Senior Subordinated Participating Notes bore additional interest aggregating to the greater of (a) $487,500 or 2.5% of the first $33,500,000 of the Company's operating profit (as defined) for each of the fiscal years ended September 30, 1991 through 1999 and (b) $622,400 or 3.19% of the first $33,500,000 of the Company's operating profit (as defined) for the fiscal year ended September 30, 2000.\n(Footnotes continued on following page)\nSTAR GAS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)\n(5) LONG-TERM DEBT AND OBLIGATIONS UNDER CAPITAL LEASES--(CONTINUED)\n(Footnotes continued from preceding page)\nAs part of the recapitalization (see notes 1 and 2), the Company exchanged in direct order of maturity, $15,000,000 of Series A 12.625% Senior Subordinated Participating Notes for 150,000 shares of Series B 8% Cumulative Convertible Preferred Stock, the entire $10,000,000 of Series B 12.625% Senior Subordinated Participating Notes for 100,000 shares of Series D 8% Cumulative Convertible Preferred Stock, and in inverse order of maturity, $1,500,000 of Series A 12.625% Senior Subordinated Participating Notes for 15,000 shares of Series A 12.625% Cumulative Redeemable Preferred Stock and $6,000,000 of Series A 12.625% Senior Subordinated Participating Notes for 60,000 shares of Series B 12.625% Cumulative Redeemable Preferred Stock. In addition, the participating interest feature on the Series A and B 12.625% Senior Subordinated Participating Notes was eliminated.\nAdditionally, the Company was also allowed to prepay $14,325,000 of the 11.56% Senior Notes in direct order of their maturity. The remaining 1995 payment of $675,000 and part of the 1996 payment of $1,325,000 were deferred such that the 1997, 1998 and 1999 payments were increased from $7,500,000 per year to $8,166,667 per year.\nUnder the terms of the Note Agreements, as amended at various dates through December 23, 1993, the Company is restricted as to the declaration and distribution of dividends and is also required to maintain certain financial and operational ratios. The amounts borrowed under the 11.56% Senior Notes and the 12.625% Senior Subordinated Participating Notes are secured by substantially all of the Company's assets.\n(c) On February 28, 1991, the Company issued $20,000,000 in Senior Reset Term Notes (the \"Notes\") to Prudential for cash. The Notes were due in consecutive semi-annual installments of $2,500,000 commencing August 28, 1994. The Notes bore interest at 10.72% until February 28, 1994. Thereafter, until maturity, the Notes would have borne interest at the 2.25 year Treasury Rate on February 28, 1994 plus 3.75%.\nThe Company amended the Notes at various dates through November 30, 1993. The required prepayments under the amended terms of the Notes are $2,500,000 on August 28, 1999, $5,000,000 on each of February 28, 2000, August 28, 2000 and February 28, 2001 and $2,500,000 on August 28, 2001. As part of the recapitalization, the Notes were amended such that the interest rate on the Notes became the 6.5 year Treasury Rate plus 3.3%.\nUnder the terms of the Notes, as amended, the Company is restricted as to the declaration and distribution of dividends and is also required to maintain certain financial and operational ratios. The amounts outstanding under the Notes are secured by substantially all of the Company's assets.\n(d) On March 7, 1991, the Company entered into a Term Loan Agreement (the \"Term Loan\") with PruSupply, Inc. which provided a $20,000,000 facility. The Company amended the Term Loan at various dates through November 30, 1993. The Term Loan was to be repaid in nineteen consecutive quarterly installments of $875,000, which commenced in May 1991, with a final payment of $3,375,000 due at maturity in February 1996. The Term Loan bears interest at the one month London Interbank Offered Rate (\"LIBOR\") plus 2.7%.\nAs part of the recapitalization, the Term Loan was amended to allow for the prepayment of $1,925,000 on December 23, 1993. In addition, the Company paid $875,000 that had been deferred. This agreement was further amended such that the required payments on these notes will be $4,325,000 in 1996 and $5,000,000 in 1997.\nUnder the terms of the Term Loan, as amended, the Company is restricted as to the declaration and distribution of dividends and is also required to maintain certain financial and operational ratios. The amounts outstanding under the Term Loan are secured by substantially all of the Company's assets.\n(Footnotes continued on following page)\nSTAR GAS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)\n(5) LONG-TERM DEBT AND OBLIGATIONS UNDER CAPITAL LEASES--(CONTINUED)\n(Footnotes continued from preceding page)\n(e) On March 30, 1993, the Company and a former shareholder reached an agreement whereby the former shareholder received payments in settlement of all amounts owed under a 10% Junior Subordinated Promissory Note and a Consulting Agreement. The Company recognized a gain of $178,415 on the settlement. (See note 9)\nAs of September 30, 1993, the Company was not in compliance with certain financial covenants contained in the Credit Agreement, the Note Agreements, the Notes and the Term Loan. All appropriate covenants have been amended or waivers have been obtained, where necessary.\nAs of September 30, 1993, annual maturities of long-term debt and obligations under capital leases, after giving effect to the recapitalization, are set forth in the following table:\n(6) INCOME TAXES\nThe income tax provision (benefit) shown in the accompanying Consolidated Statements of Operations consists of the components set forth below:\nSTAR GAS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)\n(6) INCOME TAXES--(CONTINUED)\nThe following is a reconciliation between reported income tax (benefit) expense and tax (benefit) expense computed at the statutory rate:\nThe (benefit) provision for income taxes is based upon pretax book income. Deferred income taxes result primarily from the difference in depreciation expense as a result of the use of accelerated methods in determining depreciation for income tax purposes in excess of the straight-line basis used for financial statement purposes.\nAt September 30, 1993, the Company had approximately $84,000,000 of Federal and state net operating loss (NOL) carryforwards available to offset future taxable income. Such NOLs expire in the years 2004 through 2008.\nEffective with the recapitalization on December 23, 1993 (see note 2), the Company's NOL's were substantially limited for purposes of general carryforward availability and otherwise limited for specified carryforward purposes since the recapitalization constitutes a change in control for income tax reporting purposes.\nIn February 1992, the Financial Accounting Standards Board adopted Statement of Financial Accounting Standards No. 109 \"Accounting for Income Taxes\" (\"FASB 109\"). The Company is not required to adopt the new method of accounting for income taxes until fiscal 1994. Because the Company was not carrying substantial deferred taxes on its Consolidated Balance Sheet, management believes that the adoption of FASB 109 will not have a material effect on financial position or results of operations. However, as a result of the recapitalization and change in control, the Company is in the process of determining what effect, if any, the limitation on the use of the NOLs will have on financial position and results of operations, and what tax planning strategies are available to retain the maximum benefit thereof.\n(7) EMPLOYEE BENEFIT PLANS\nThe Company has a 401(k) plan which provides benefits for all eligible employees except those covered by union plans and employees of Highway. Subject to IRS limitations, the 401(k) plan provides for employees to contribute from 1% to 15% of compensation with the Company contributing a matching amount of the employees' contribution up to a maximum of 3% of compensation. The Company may also contribute an additional amount on behalf of each employee in an amount equal to\nSTAR GAS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)\n(7) EMPLOYEE BENEFIT PLANS--(CONTINUED)\n3% of each employee's compensation. Effective, March 1, 1992, an amendment to the plan eliminated the ability to make this additional contribution.\nAggregate Company contributions made to the 401(k) plan during 1993, 1992 and 1991 were $313,652, $537,703 and $627,447, respectively.\nThe Company makes monthly contributions to a union defined benefit pension plan for all union employees. The amount charged to expense was $198,206, $202,545 and $186,871 in fiscal 1993, 1992 and 1991, respectively.\n(8) LEASE COMMITMENTS\nThe Company has entered into noncancellable capital lease agreements with former owners of acquired businesses for certain premises and related equipment. All leases contain bargain purchase options, exercisable on the lease termination dates.\nThe premises and equipment under capital leases are carried at $828,725 and $2,023,660 on the Consolidated Balance Sheets with accumulated depreciation of $79,234 and $141,426 at September 30, 1993 and 1992, respectively. Depreciation of premises and equipment under capital leases is included in depreciation expense.\nThe Company has entered into operating leases for office space, trucks and other equipment. The future minimum rental commitments at September 30, 1993 under leases having an initial or remaining noncancellable term of one year or more are as follows:\nThe Company incurred rent expense of $4,150,765, $3,586,450 and $3,437,423 in 1993, 1992 and 1991, respectively.\n(9) OTHER CURRENT AND LONG-TERM LIABILITIES\nAs a result of various acquisition agreements, the Company was required to pay an aggregate of $6,278,259 and $9,268,487 (net of discounts of $406,596 and $1,155,492), as of September 30, 1993 and 1992, respectively, pursuant to certain consulting and covenant not-to-compete agreements. These obligations are included in other current liabilities and long-term liabilities in the amounts of $712,179 and $3,812,670 and $5,566,080 and $5,455,817 as of September 30, 1993 and 1992, respectively.\nOn December 4, 1992, the Company and its shareholders entered into a Purchase Agreement with a third party for the shareholders to purchase from the third party $5,500,000 of consulting and non-competition payments (the \"Purchased Payments\") owed to the third party by the Company. This\nSTAR GAS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)\n(9) OTHER CURRENT AND LONG-TERM LIABILITIES--(CONTINUED)\namount due was $2,750,000 on November 17, 1992 and $2,750,000 on November 17, 1993. The shareholders deferred the $2,750,000 installment payment (the \"Deferred Amount\") due on November 17, 1992 under the original agreement to June 1, 1993. This Deferred Amount bore interest at 13.76% per annum.\nOn March 30, 1993, the Company and its shareholders signed a Cancellation of Indebtedness and Deferral Agreement (the \"Cancellation Agreement\"). Under the terms of the Cancellation Agreement, the shareholders agreed to cancel $1,420,000 of the Deferred Amount in consideration of 1,420 of newly issued shares of 8% Cumulative Convertible Preferred Shares of the Company. The balance of the Deferred Amount, after giving effect to such cancellation, plus interest accrued through March 30, 1993, aggregated $1,470,848 (the \"New Deferred Amount\"). The shareholders agreed to the deferral of the New Deferred Amount to December 31, 1994 and to the deferral of the remainder of the Purchased Payments from November 17, 1993 to December 31, 1994. The New Deferred Amount bore interest at the rate of 13.75% per annum from March 30, 1993. The remainder of the Purchased Payments bore interest at the rate of 13.76% per annum from November 17, 1993 (See note 1).\nOn December 23, 1993, as part of the recapitalization (see note 2), the Company exchanged the 1,420 8% Cumulative Convertible Preferred Shares plus the New Deferred Amount and the balance of the Purchased Payments plus accrued interest for 5,000 shares of Series E 8% Cumulative Convertible Preferred Stock and 230,695 shares of Class A Common Stock.\nOn March 30, 1993, the Company and a former shareholder reached an agreement whereby the former shareholder received payments in settlement of all amounts owed to him under a 10% Junior Subordinated Promissory Note and a Consulting Agreement. The Company recognized a gain of $178,415 on the settlement (See note 5).\nAt September 30, 1993, annual maturities of amounts payable in connection with certain covenants not to compete and consulting agreements, after giving effect to the recapitalization, are as follows:\n1994................................................. $ 712,179 1995................................................. 637,346 1996................................................. 412,994 1997................................................. 379,504 1998................................................. 90,299\n(10) IMPAIRMENT OF LONG-LIVED ASSETS\nDuring fiscal 1993, in connection with the recapitalization (see note 2) and the sale of certain of the Company's branches (see note 1), the Company reviewed the carrying values of its long-lived assets and identifiable intangible assets for possible impairment. The Company determined, based on expected future cash flows and the estimated fair values of certain branches, that it would not be able to recover the carrying values of some of these assets. Accordingly, as of September 30, 1993 the Company recorded a write-off of approximately $33 million representing the estimated impairment to its long lived assets.\nSCHEDULE VIII\nPETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES\nVALUATION AND QUALIFYING ACCOUNTS\nYears Ended December 31, 1991, 1992 and 1993\n_______________ (1) Recoveries (2) Bad debts written off\nSCHEDULE IX\nPETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES\nSHORT-TERM BORROWINGS\nYears Ended December 31, 1991, 1992 and 1993\nWeighted Maximum Average Average Weighted Amount Amount Interest Average Outstanding Outstanding Rate Balance at Interest During the During the During End of Year Rate Year Year the Year ----------- -------- ----------- ----------- --------\n1991 $ 39,750,000 6.2% $ 73,000,000 $34,944,000 8.2% ============ ==== ============ =========== ====\n1992 $ 32,000,000 5.4% $ 42,750,000 $17,906,000 5.9% ============ ==== ============ =========== ====\n1993 $ 28,000,000 4.9% $ 37,000,000 $11,233,000 5.4% ============ ==== ============ =========== ====\nThe short-term borrowings represent obligations payable under credit agreements to various banks.\nThe average amount outstanding during the year represents the average daily principal balances outstanding during the year.\nThe weighted average interest rates during the year were computed by dividing the actual interest incurred on short-term borrowings by the weighted average short-term borrowings.\nITEM 9.","section_9":"ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.\nNone.\nPART III --------\nITEM 10.","section_9A":"","section_9B":"","section_10":"ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. - -------- --------------------------------------------------\nThe information appearing in the Proxy Statement under the caption ELECTION OF DIRECTORS and under the caption EXECUTIVE OFFICERS, is incorporated herein by this reference.\nITEM 11.","section_11":"ITEM 11. EXECUTIVE COMPENSATION. - -------- ----------------------\nThe information appearing in the Proxy Statement under the caption EXECUTIVE COMPENSATION, is incorporated herein by this reference.\nITEM 12.","section_12":"ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. - -------- --------------------------------------------------------------\nThe information appearing in the Proxy Statement under the caption ELECTION OF DIRECTORS -- Ownership of Equity Securities in the Company, is incorporated herein by this reference.\nITEM 13.","section_13":"ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. - -------- ----------------------------------------------\nThe information appearing in the Proxy Statement under the caption ELECTION OF DIRECTORS -- Certain Transactions, is incorporated herein by this reference.\nPART IV\nITEM 14.","section_14":"ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8K\n(a) The following documents are filed as part of this report:\n1. The following consolidated financial statements are included in Part II, Item 8:\nConsolidated Financial Statements of Petroleum Heat and Power Co., Inc. and Subsidiaries:\nIndependent Auditors' Reports\nConsolidated Balance Sheets, December 31, 1992 and 1993\nConsolidated Statements of Operations, years ended December 31, 1991, 1992 and 1993\nConsolidated Statements of Changes in Stockholders' Equity (Deficiency) years ended December 31, 1991, 1992 and 1993\nConsolidated Statements of Cash Flows, years ended December 31, 1991, 1992 and 1993\nNotes to Consolidated Financial Statements\nConsolidated Financial Statements of Star Gas Corporation and Subsidiaries:\nIndependent Auditors' Reports\nConsolidated Balance Sheets, September 30, 1992 and 1993\nConsolidated Statements of Operations, years ended September 30, 1991, 1992 and 1993\nConsolidated Statements of Shareholders' Equity (Deficiency), years ended September 30, 1991, 1992 and 1993\nConsolidated Statements of Cash Flows, years ended September 30, 1991, 1992 and 1993\nNotes to Consolidated Financial Statements\n2. The following financial schedules are submitted herewith:\nSchedule VIII - Valuation and Qualifying Accounts - Years Ended December 31, 1991, 1992 and 1993\nSchedule IX - Short-term Borrowings - December 31, 1992 and 1993\nAll other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.\n3. (a) Exhibits\nThe Exhibits, which are listed on the Exhibit Index attached hereto.\n(b) Reports on Form 8-K\nRegistrant filed a report on Form 8-K on January 4, 1994 to report under item 2, \"Acquisition or Disposition of Assets\", the investment made by the Company in Star Gas Corporation.\nSIGNATURES\nPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.\nMarch 9, 1994\nPETROLEUM HEAT AND POWER CO., INC. (Registrant)\nBy: \/s\/ Irik P. Sevin -------------------------------- Irik P. Sevin President, Chairman of the Board, Chief Executive Officer and Chief Financial and Accounting Officer\nPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.\n\/s\/ Irik P. Sevin President, Chairman of the March 9, 1994 - ------------------------ Board, Chief Executive Officer, Irik P. Sevin and Chief Financial and Accounting Officer and Director\n\/s\/ Audrey L. Sevin Secretary and Director March 9, 1994 - ------------------------ Audrey L. Sevin\n\/s\/ Phillip E. Cohen Director March 9, 1994 - ------------------------ Phillip E. Cohen\n\/s\/ Thomas J. Edelman Director March 9, 1994 - ------------------------ Thomas J. Edelman\nList of Exhibits\nExhibit No. Description of Exhibit - ------- ----------------------\n3.1 -- Restated and Amended Articles of Incorporation, as amended, and Articles of Amendment thereto.(2)\n3.2 -- Restated By-Laws of the Registrant.(2)\n4.1 -- Indenture, dated as of April 1, 1993, between the Company and Chemical Bank, as trustee, including Form of Notes.(1)\n4.2 -- Form of Indenture, dated as of October 1, 1985 between the Company and Manufacturers Hanover Trust Company, as trustee, including Form of Notes.(3)\n4.3 -- Restated and Amended Articles of Incorporation and Articles of Amendment thereto.(3)\n4.4 -- Certificate of Designation creating a series of preferred stock designated as Cumulative Redeemable Exchangeable 1991 Preferred Stock and Certificate of Amendment relating thereto.(6)\n4.5 -- Certificate of Designation creating a series of preferred stock designated as Cumulative Redeemable 1991 Preferred Stock.(3)\n4.6 -- Form of Indenture between the Company and Chemical Bank, as trustee, including Form of Debentures.(8)\n4.7 -- Certificate of Designation creating a series of Preferred Stock designated as Cumulative Redeemable Exchangeable 1993 Preferred stock.(8)\n9.1 -- Shareholders' Agreement dated as of July 1992, among the Company and certain of its stockholders.(2)\n10.1 -- Amended and Restated Credit Agreement dated as of December 31, 1992 among the Company, Maxwhale Corp., certain banks party thereto and Chemical Bank. (1)\n10.2 -- Pension Plan, as amended, of Petroleum Heat and Power Co., Inc. (2)\n10.3 -- Savings Plan, as amended of Petroleum Heat and Power Co., Inc.(2)\n10.4 -- Supplemental Executive Retirement Plan of Petroleum Heat and Power Co., Inc.(2)\n10.5 -- Lease dated July 15, 1981 with respect to offices and garage located at 477 West John Street and 5 Alpha Plaza, Hicksville, New York.(4)\n10.6 -- Lease dated February 15, 1982,(5) First Amendment dated February 14, 1986, and Second Amendment dated July 1, 1989,\nwith respect to offices, garage and terminal located at 818 Michigan Avenue, N.E., Washington, D.C.(2)\n10.7 -- Lease dated June 26, 1989 with respect to offices and garage located at 40 Lee Burbank Highway, Revere, Massachusetts.(2)\n10.8 -- Lease dated December 1, 1985 with respect to office and garage located at 3600-3620 19th Avenue, Astoria, New York.(3)\n10.9 -- Lease dated November 1, 1985 with respect to office and garage located at 522 Grand Blvd., Westbury, New York.(5)\n10.10 -- Lease dated June 5, 1986 with respect to office and garage located at 2541 Richmond Terrace Co., Staten Island, New York.(5)\n10.11 -- Lease dated July 31, 1986 with respect to office and garage located at 71 Day Street, Norwalk, Connecticut.(5)\n10.12 -- Lease dated July 9, 1984 with respect to office located at 1245 Westfield Avenue, Clark, New Jersey.(5)\n10.13 -- Lease dated April 5, 1991 with respect to office and garage located at 10 Spring Street, New Milford, Connecticut.(2)\n10.14 -- Lease dated October 26, 1990 with respect to office and garage located at 1 Coffey Street, Brooklyn, New York.(2)\n10.15 -- Lease dated February 6, 1990 with respect to office and garage located at 62 Oakland Avenue and 64 Oakland Avenue, East Hartford, Connecticut.(2)\n10.16 -- Lease dated July 29, 1988 and Addendum to lease dated August 1, 1988 with respect to office, garage and terminal located at 224 North Main Street, Southampton, New York.(2)\n10.17 -- Lease dated April 1, 1988 with respect to office and garage located at 171 Ames Court, Plainview, New York.(2)\n10.18 -- Lease dated August 12, 1988 with respect to office and garage located at 326 South Second Street, Emmaus, Pennsylvania.(2)\n10.19 -- Lease dated July 15, 1990, Addendum to lease dated July 27, 1990 and Second Addendum to lease dated November 30, 1990, with respect to office and garage located at 212 Elm Street, North Haven, Connecticut.(2)\n10.20 -- Lease dated August 14, 1989 with respect to office and garage located at foot of South Street, Oyster Bay, New York.(2)\n10.21 -- Lease and Addendum to lease dated September 26, 1990 with respect to office and garage located at 930 Park Avenue, Lakewood, New Jersey.(2)\n10.22 -- Lease dated December 1, 1990 with respect to garage located at 10 Coffey Street, Brooklyn, New York.(2)\n10.23 -- Lease dated May 9, 1991 with respect to office and garage located at 260 Route 10 East, Whippany, New Jersey.(2)\n10.24 -- Lease dated June 1, 1987 with respect to garage located at 817 Pennsylvania Avenue, Linden, New Jersey.(2)\n10.25 -- Lease dated June 1, 1989 with respect to office and garage located at 2 Selleck Street, Stamford, Connecticut.(2)\n10.26 -- Lease dated April 28, 1992 with respect to office and garage located at 8087-8107 Parston Drive, Forestville, Maryland.(1)\n10.27 -- Demand Promissory Notes of Thomas J. Edelman in favor of Petro, Inc. in the amounts of $500,000 and $100,000 dated April 15, 1985 and May 17, 1985, respectively, and Pledge and Security Agreement, as amended, made by Thomas J. Edelman in favor of Petro, Inc. dated April 15, 1986.(5)\n10.28 -- Letter dated June 5, 1985 with respect to redemption of 55,250 shares of common stock of Petroleum Heat and Power Co., Inc. from Thomas J. Edelman and promissory note of Petroleum Heat and Power Co., Inc. in the amount of $884,000 in favor of Thomas J. Edelman, dated June 6, 1985.(3)\n10.29 -- Option dated October 18, 1984 granted to Irik P. Sevin to purchase 64,000 shares of common stock of Petroleum Heat and Power Co., Inc.(3)\n10.30 -- Form of Equipment Lease and related documentation dated as of October 21, 1983 relating to vehicle leasing transaction between Atlas Oil Corporation and various equipment lessors.(3)\n10.31 -- Form of Equipment Lease and related documentation dated as of March 2, 1985 relating to vehicle leasing transaction between Petro, Inc. and various equipment lessors.(3)\n10.32 -- Agreement dated October 22, 1986 relating to purchase of 64,000 shares of Class A Common Stock by Irik P. Sevin.(5)\n10.33 -- Agreement dated December 2, 1986 relating to stock options granted to Malvin P. Sevin.(5)\n10.34 -- Agreement dated December 2, 1986 relating to stock options granted to Irik P. Sevin.(5)\n10.35 -- Agreements dated December 28, 1987 and March 6, 1989 relating to stock options granted to Irik P. Sevin and Malvin P. Sevin.(2)\n10.36 -- Form of Note dated December 31, 1992, in the amount of $1,499,378, due December 31, 1993, from Irik P. Sevin to the Company.(1)\n10.37 -- Subordinated Note Agreement relating to $60 million Subordinated Notes due October 1, 1998 issued to John Hancock Mutual Life Insurance Company and other Investors.(2)\n10.38 -- Note Agreement, dated as of January 15, 1991, relating to $12.5 million Subordinated Notes due January 15, 2001, between the Company and Connecticut General Life Insurance Company.(2)\n10.39 -- Purchase Agreement, dated as of September 1, 1991, between the Company and United States Leasing International, relating to purchase of 159,722 shares of the 1991 Preferred Stock.(2)\n10.40 -- Purchase Agreement, dated as of August 1, 1989, between the Company and John Hancock Mutual Life Insurance Company and The Northwestern Mutual Life Insurance Company, relating to the purchase of the 1989 Preferred Stock.(2)\n10.41 -- Agreement dated as of November 1, 1992 relating to stock options granted to George Leibowitz.(1)\n10.42 -- Letter Agreement dated March 15, 1993 relating to the Credit Agreement.(1)\n10.43 -- Lease dated June 17, 1993 with respect to office facilities located at 2187 Atlantic Street in Stamford, Connecticut. (8)\n10.44 -- Form of Note dated December 31, 1993, in the amount of $1,559,827, due December 31, 1994, from Irik P. Sevin to the Company.(8)\n10.45 -- Agreement dated December 1993 relating to stock options granted to Malvin P. Sevin.(8)\n10.46 -- Purchase Agreement, dated as of December 21, 1993, among Star Gas Holdings, Inc., First Reserve Secured Energy Assets Fund, L.P., American Gas & Oil Investors, AmGo II, AmGo III, FRC Star Gas, Inc., Star Gas and the Company.(9)\n10.47 -- Option from Star Gas to the Company, dated as of December 21, 1993.(9)\n10.48 -- Shareholder Put\/Call Agreement, dated as of December 21, 1993, among the Company, the Other Investors and Prudential.(9)\n10.49 -- Shareholders' Agreement, dated as of December 21, 1993, among the Company, the Other Investors and Prudential.(9)\n10.50 -- Management Services Agreement, dated as of December 21, 1993, between the Company and Star Gas.(9)\n10.51 -- First Amendment to the Company's 10 1\/8% Subordinated Notes Indenture dated as of January 12, 1994.(8)\n10.52 -- Form of First Amendment to the US Leasing Purchase Agreement.(8)\n10.53 -- Form of Third Amendment to the Connecticut General Note Agreement.(8)\n10.54 -- Form of Second Amendment to the Hancock Note Agreement.(8)\n10.55 -- Form of First Amendment to the Hancock\/Northwestern Purchase Agreement.(8) 10.56 -- Form of Fourth Amendment dated January 21, 1994 to the Second Amended and Restated Credit Agreement(8)\n11.0 -- Computation of Per Share Earnings.(10)\n21.0 -- Subsidiaries of Registrant.(10)\n27.0 -- Financial Data Schedule.(10)\n(1) Filed as Exhibits to Registration Statement on Form S-2, File No. 33-58034.\n(2) Filed as Exhibits to Registration Statement on Form S-1, File No. 33-48051, and incorporated herein by reference.\n(3) Filed as Exhibits to Registration Statement on Form S-1, File No. 2-99794, and incorporated herein by reference.\n(4) Filed as Exhibits to Registration Statement on Form S-1, File No. 2-88526, and incorporated herein by reference.\n(5) Filed as Exhibits to Registration Statement on Form S-1, File No. 33-9088, and incorporated herein by reference.\n(6) Filed as Exhibits to the Company's Annual Report on Form 10-K for the year ended December 31, 1991, File No. 2-88526, and incorporated herein by reference.\n(7) Filed as Exhibits to the Company's Annual Report on Form 10-K for the year ended December 31, 1988, File No. 2-88526, and incorporated herein by reference.\n(8) Filed as Exhibits to the Registration Statement on Form S-2, File No. 33-72354, and incorporated herein by reference.\n(9) Filed as Exhibits to the Company's Periodic Report on Form 8-K filed on January 4, 1994, File No. 2-88526 and incorporated herein by reference.\n(10) Filed herein.","section_15":""}
{"filename":"76744_1993.txt","cik":"76744","year":"1993","section_1":"Item 1. BUSINESS. - ------ ---------\nGENERAL\nPayless Cashways, Inc. (\"Payless\" or the \"Company\") is the third largest retailer of building materials and home improvement products in the United States as measured by sales. The Company operates 197 full-line retail stores in 26 states located in the Midwest, Southwest, Pacific Coast, Rocky Mountain and New England areas under the names of Payless Cashways Building Materials, Furrow Building Materials, Lumberjack Building Materials, Hugh M. Woods Building Materials, Knox Lumber and Somerville Lumber. Each full-line store is designed as a one-stop source that provides customers with a complete selection of quality products and services needed to build, improve, and maintain their home, business, farm or ranch properties. The Company's merchandise assortment includes approximately 22,000 items in the following categories: lumber and building materials, millwork, tools, hardware, electrical and plumbing products, paint, lighting, home decor, kitchens, decorative plumbing, heating, ventilating and cooling (HVAC), and seasonal items. The Company believes that the combination of a full-line lumberyard, a broad product mix, a high level of in- store customer assistance concerning product usage and installation, and competitive prices distinguishes Payless from many competitors.\nThe Company's primary customers include serious do-it-yourselfers and professionals. Serious Do-It-Yourselfers (\"DIY'ers\") are those that engage in more frequent and complex repair or improvement projects and typically spend in excess of $1,000 annually on home improvement products. Professionals (\"Pros\") include remodelers, residential contractors, and specialty tradesmen along with enterprises which purchase large quantities of building materials for facility maintenance, such as property management firms, commercial and industrial accounts, and government institutions. Due to its product mix (especially the advantage provided by its full-line lumberyard) and customer service approach, the Company believes that it is well positioned to increase its penetration of these segments of the building materials and home improvement products market. Payless also serves the needs of the moderate and light DIY'er.\nINDUSTRY OVERVIEW\nBuilding materials and home improvement products are sold through two distribution channels -- retail units and wholesale supply outlets. According to a study prepared by DRI\/McGraw-Hill in October 1993, the retail channel of the industry was estimated to be $115.4 billion in 1993, and is forecast to exceed $151.9 billion by 1998. The Company estimates the wholesale supply channel for products sold by the Company represented approximately $86 billion in 1992, based on the most recently available unpublished data from the U.S. Department of Commerce for 1992.\nRetail distribution channels include neighborhood hardware stores, home centers, warehouse stores, specialty stores (such as paint and tile stores) and lumberyards. Although the industry remains highly fragmented, the retail distribution channel has consolidated somewhat in the last ten years, particularly in metropolitan areas. Warehouse, home center and building materials chains have grown while the number of local independent merchants has declined. The top 25 chains accounted for approximately 28% of industry sales in 1992.\nIn general terms, customers can be characterized as either retail-oriented (consumer) or wholesale-oriented (professional). The consumer segments, as defined by the Company, include light DIY'ers who spend less than $200 annually on building materials and home improvements products; moderate DIY'ers who make annual purchases of $200 to $1,000; and serious DIY'ers who make annual purchases in excess of $1,000. Consumer purchases tend to be self-service and paid for with cash or credit cards. Purchases by professionals tend to be larger in volume and require specialized merchandise assortments, competitive market pricing, superior lumber quality, telephone order placement, commercial credit and job-site delivery.\nBUSINESS STRATEGY\nOBJECTIVES\nThe Company's principal objectives are to (i) increase its market share in the Pro and serious DIY segments through its existing stores, (ii) continue to increase Pro sales as a percentage of total sales to approximately 50% and (iii) acquire new customers through the implementation of a store expansion program and development of new, complementary retail concepts.\nThe Company believes that demographic and lifestyle factors (such as the aging baby boomers, the increase in home-centered activities and the aging housing stock) will result in a growing demand for its products. The Company also believes that the rate of growth in the professional segment will continue to exceed the consumer or DIY segment due to the lack of discretionary time of many homeowners and the reluctance of an aging homeowner population to engage in major repair or remodeling projects. As a national chain, the Company believes it enjoys economies of scale, buying power and professional management that the traditional outlets supplying the professional commonly do not have. These advantages, along with the broad product assortment and full service package, make the Company well suited to supply the professional's needs.\nBased on the Company's most recent Spring 1993 surveys from ten stores, which the Company believes are representative of its stores, the Company's business mix as a percentage of sales was approximately 54% DIY and 46% Pro. Approximately 58% of the DIY sales were derived from the serious DIY'er and the remainder from the light and medium DIY'er. Due to the Company's focus on expanding its Pro business and the higher rate of increase anticipated for the professional segment, the Company expects the Pro business to contribute approximately 50% of its total sales by the end of 1994. The Company's goal is to maintain this balance once it is achieved.\nThe Company also believes that there are significant market opportunities for specialty store concepts which complement its full-line building material stores.\nPROFESSIONAL STRATEGY\nAfter a strategic review of the industry in 1988, the Company determined there was a significant opportunity to expand the portion of its business derived from the professional customers because the Company concluded this market was underpenetrated by full-service distributors. As a result, the Company implemented a strategy beginning in late 1988 and early 1989 to increase its sales to the professional customer. These initiatives included: (i) the addition of a dedicated sales staff, currently numbering approximately 1,400, many of whom call on professional customers at their places of business and job sites; (ii) construction of a separate commercial sales area in each store; (iii) implementation of an enhanced delivery program which guarantees next-day job-site delivery; and (iv) the offering of special services such as roof-top delivery, commercial credit and a telephone ordering service.\nThe Company also enhanced its merchandise assortment to reflect the increased emphasis on the Pro customer. This included the addition of contractor preferred brands, commercial grade items, contractor packs and more top-of-the-line products. The Company also improved the quality of the lumber offered.\nSurveys conducted by the Company in fiscal 1988 from ten stores which the Company believes were representative of its stores indicated a business mix of approximately 75% DIY and 25% Pro based on sales. Following implementation of the initiatives outlined above, the Company's business mix has shifted to approximately 54% DIY and 46% Pro in fiscal 1993.\nSeveral additional initiatives were implemented to support the continued growth and profitability of Pro sales. These include the following:\n. Account Management. Each Pro customer is assigned to a sales representative who has responsibility for servicing and ensuring the profitability of each account. The sales representatives have detailed information regarding account purchases (what was purchased and when) and the profitability of their accounts. The Company believes that this level of customer service and type of sales management system is effective in increasing purchases and improving profitability from current professional customers and building customer loyalty.\n. Customer Segmentation for Profitability. Each retail store prepares an annual business plan which targets customers by Standard Industry Code and purchase potential. This focus is intended to create more sales in the higher margin hardware and decorative products without impairing the growth in sales of lumberyard products.\n. Enhanced Service Capabilities. The Company implemented a number of enhanced service capabilities intended to increase sales to current customers and make stores more appealing to new customers. The Company, through its On- Property Total Inventory Control (\"OPTIC\") program, offers on-site product replenishment service to over 1,700 large property owners and managers. Additionally, all stores offer automated blueprint estimating services featuring 48-hour turnaround. This estimating system is unique in that it utilizes a digitizer which ensures accuracy in the measurement process and it is fully integrated into the store's point-of-sale (\"POS\") system. The Company also supports its professional customer with joint marketing programs such as its contractor referral data base.\n. National Accounts Program. The Company initiated a national accounts program in 1992 which targets businesses with major facilities or multiple locations and which utilize large amounts of building materials and improvement products for facility maintenance. The primary focus of this program is to emphasize sales of hardware and decorative items. This program is designed to provide incremental sales from national accounts at current store locations. The Company had 278 national accounts at the end of 1993.\n. Differentiation through Product Offering. Payless has actively worked to offer professional and commercial products previously available to customers only through authorized wholesale distributors. These additions are intended to generate increased sales and increase customer perception of the wider selection of quality products offered.\nDIY STRATEGY\nThe Company's strategy to increase market share with the DIY customer focuses primarily on the serious DIY'er. In fiscal 1993, sales to serious DIY'ers represented approximately 58% of the sales to DIY'ers while accounting for approximately 49% of the DIY'er transactions based on Company surveys of ten stores which the Company believes are representative of its stores.\nQuality products, a wide assortment, in-stock position, competitive pricing and service assistance on more complex projects are important to the serious DIY customer and have been the foundation upon which the Company has built its business with these customers. Since 1988, the Company has upgraded its assortment and displays in product categories which represent a significant portion of the purchases by serious DIY'ers. These upgraded product categories include paint, decorative plumbing, kitchen cabinets, power tools, builders' hardware, millwork, and home decor.\nSerious DIY'ers are similar to the professional customer with regard to the brands preferred and the importance of stocking high quality lumber. The Company believes that many of the steps it has taken to serve the professional customer have also had a positive impact on sales to the serious DIY customer.\nSeveral additional initiatives were implemented to support the continued growth and profitability of DIY sales. These include the following:\n. Improved Customer Service. In 1992, the Company increased the number of sales personnel available to assist customers. Improved productivity in support areas such as receiving rooms and offices allowed this re-allocation of personnel. The Company also has an employee recognition and reward program to promote outstanding customer service. Improved customer service is intended to increase the average sales ticket size and the number of repeat purchasers.\n. Design Services. The Company has also expanded the project design services offered to its customers. A computer design system for kitchens, baths and closet systems is located in each of the store's kitchen design centers. Design Works, a building packages design system focusing initially on decks, garages and post-frame buildings, was installed in all stores (except Somerville) in 1993. Both of these systems are integrated into the store's POS system, providing on-line pricing, confirmation of inventory availability and immediate conversion of an estimate into an order.\n. Lumberyard Improvements. Serious DIY'ers are frequent purchasers of the lumber and building material products stocked in the lumberyard. Currently, DIY customers are not provided a single location in the store at which they can complete a purchase of lumberyard products. The Company has completed changes to one pilot store and is currently in various stages of design or implementation for an additional 55 stores in 1994 as part of a plan that is designed to facilitate the purchase of lumberyard products, saving the customer time and increasing customer satisfaction. The Company believes these changes position it for increased future sales.\n. Special Events. The Company offers the serious DIY'er special buying opportunities through after-hours sales and other preferred customer programs.\nEXPANSION STRATEGY\nPayless grew substantially in the 1980's prior to a 1988 leveraged buyout by certain members of Payless' senior management and a group of investors, with a net increase of 77 full-line stores during the 1984-1988 period. The Company has added one (net) store since 1988. An important part of the Company's business strategy is an expansion program, which will include seven additional full-line stores in 1994, approximately six new stores annually thereafter and new, complementary retail concepts in new and existing markets. Implementation of this program is dependent on a number of factors, including availability of cash flow from operations and site availability. Although there is no assurance that future growth will take place as anticipated, the Company believes that its prior experience in site selection and acquisition and demographic analysis provides a solid base for its future expansion activities.\nThe Company's expansion program is designed to broaden the Company's penetration into new and existing markets. Although existing market expansion may initially adversely affect sales at existing stores, the Company believes that expansion into existing markets will increase market penetration by attracting new customers to more convenient locations and allow the Company to increase operating margins by achieving economies of scale in certain areas such as management supervision, advertising and distribution. Expansion in the Company's current market is also less uncertain because of its experience in those markets with existing store locations. Typically, the Company plans to enter new markets with multiple store locations. The Company expects that the additional stores will generally be located in trade areas which have high housing density and above-average household income.\nThe Company estimates that the time required to open a new full-line store, from site selection to opening the doors for business is approximately 12 to 15 months. The Company also estimates that capital investment for new stores will average $6.5 to $7.0 million per store, with land costs being the greatest variable, and that the initial net inventory investment will average $1.9 million per store.\nIn addition to opening traditional full-line stores, the Company expects to increase its market share with new, complementary retail concepts piloted in 1993 which require significantly less capital outlay than traditional full-line stores:\n. Remote Contractor Sales Office (CSO). CSO's, which include an order desk and selected, high-demand products, are located generally within 50 miles of a full-line store in an underserved area and are designed to significantly expand a full-line store's trade area for the professional and commercial customer. The Company currently operates 21 CSO's.\n. Home & Room Designs (HRD). HRD showrooms feature kitchens, baths, millwork, lighting, flooring, wall covering, window treatments and builders' hardware. HRD's are designed to serve the professional home builder, remodeler, architect, interior designer and their customers. The Company currently operates two HRD's.\n. Tool Site. Tool Site specialty stores feature approximately 6,500 tools and related products in a facility with an average size of 15,000 square feet. The Company opened two pilot units in 1993.\nThe mix of the number of CSO's, HRD's and Tool Sites that the Company expects to open each year will depend on a variety of factors, including financial performance as well as economic factors beyond the Company's control.\nAlso, at the end of 1993 the Company announced its first, international expansion into Mexico through the creation of a joint venture, with plans to build a chain of at least 25 stores within the next five to six years. The stores will offer customers, both DIYer's and Pros, a complete line of building materials and home improvement products and services in a customized retail setting. The first retail facility is currently scheduled to open in late 1994 or early 1995.\nMERCHANDISING AND MARKETING\nPayless' full-line stores sell a broad range of building material products totaling approximately 22,000 items, many of which are nationally advertised brand-name items. Payless categorizes its product offerings into the classes described below:\nLUMBERYARD - Dimensional lumber, plywood, sidings, roofing materials, fencing materials, windows, doors and moldings, insulation materials and drywall.\nHARDWARE - Electrical wire and wiring materials, plumbing materials, power and hand tools, paint and painting supplies, lawn and garden products, door locks, fasteners, and heating and cooling products.\nSHOWROOM - Interior and exterior lighting, bathroom fixtures and vanities, kitchen cabinets, flooring, panelling, wallcoverings and ceiling tiles.\nDuring the three fiscal years ended November 27, 1993, the three product classifications accounted for the following percentages of Payless' sales:\nDuring the past five years the Company has remerchandised its retail showroom in order to maximize space utilization. This has contributed to an increase in space productivity as sales per square foot of retail space have risen from $327 in fiscal 1988 to $435 in fiscal 1993.\nPayless addresses its primary target customers through a mix of newspaper, direct mail, radio and television advertising methods. The primary media vehicle is newspaper advertisements, both freestanding inserts and run-of-press ads. Television and radio advertising are used in support of major promotional events. Additionally, the Company participates in or hosts a variety of home shows, customer hospitality events, contractor product shows and national trade association shows and conferences. During fiscal 1993, the Company's expenditures (net of vendor allowances) on all forms of advertising totaled approximately $36 million or 1.4% of sales.\nThe Company utilizes data base marketing techniques to increase the effectiveness of its marketing programs. The data base allows the Company to track purchases of individual customers at the stock keeping unit (\"SKU\") level if desired. This purchase history data is used in targeted marketing campaigns and to develop distinct customer profiles for various product categories. In addition, the Company conducts its own market research, including customer intercepts, phone surveys and customer focus groups.\nSTORE LOCATIONS\nThe Company's 197 full-line stores are located in the following states:\nPayless owns 173 of its full-line store facilities and 161 of the 197 sites on which such stores are located. The remaining 24 stores and 36 sites are leased. Additionally, 21 CSO's, two Tool Sites, and two Home & Room Designs units are leased. Mortgages or deeds of trust on 167 store parcels secure existing indebtedness.\nPayless has generally located retail stores adjacent to residential areas of major metropolitan cities or adjacent to major arteries in smaller communities which are convenient to the DIY and Pro customer. Operation of multiple stores in a trade area permits more effective supervision of stores and provides certain economies in distribution expenses and advertising costs. Each of Payless' 197 existing stores has an average of approximately 30,000 square feet of indoor display space and 52,000 square feet of warehouse space. The prototype stores being built in 1994 will average approximately 60,000 square feet of retail selling space with an attached 17,000 square foot warehouse and a 150,000 square foot lumberyard. The average Payless Store occupies approximately eight acres of land.\nAn average Payless store currently carries approximately $1.7 million of inventory, and during fiscal 1993 sales at Payless stores averaged approximately $13.3 million per store.\nDuring fiscal 1993, one full-line store, 17 CSO's, two Tool Sites and one Home & Room Designs unit were opened. No full-line stores were opened in fiscal 1991 or 1992. However, four CSO's and one Home & Room Designs unit were opened in 1992.\nSTORE MANAGEMENT AND PERSONNEL\nPayless recently reorganized the coordination of its 197 full-line-store operations. The structure includes 101 Group Store Directors and Store Managers reporting to one of six Regional Vice Presidents. Supervision and control over the individual stores are facilitated by means of detailed operating reports. All of Payless' Group Store Directors, Store Managers, and Regional Vice Presidents have been promoted from within Payless or from within the stores Payless has acquired.\nTo obtain candidates for store supervisory and management positions, Payless recruits both recent college graduates and persons with business experience. These employees are placed in a formal training program administered by Payless. In addition, Payless maintains an ongoing training program for existing store personnel. Group Store Directors and Store Managers typically have more than ten years of experience with the Company.\nThe stores utilize a departmental management structure designed to provide a superior level of service to customers. Sales associates are trained in product knowledge, selling skills and systems and procedures. Formal classroom training sessions are supplemented with product clinics, rallies and special assignments. Department sales managers typically have more than five years of experience with the Company.\nThe Company utilizes a sales tracking system at the store level to set individual sales and gross margin goals for each of its sales associates. Information is available on a weekly basis to monitor performance against those goals.\nIncentive compensation systems reward employees for store performance above goal. In addition to management personnel, all sales and support personnel in the retail stores participate in incentive compensation programs. In fiscal 1993, the Company paid $5.6 million in incentive compensation to its nonmanagement store personnel. Group Store Directors and Store Managers can earn in excess of 40% of base salary in incentive compensation. The Company paid approximately $10.8 million in incentive compensation to its store management personnel for fiscal 1993. The Company believes that its incentive compensation systems are key to employee performance and motivation.\nINFORMATION SYSTEMS\nDuring the past five years, Payless has spent over $101 million in information systems technology (consisting of capital expenditures and operating expenses) providing timely operational and management information. All of the Company's 197 full-line stores have point-of-sale terminals equipped with scanning that transmit daily information on sales at the SKU level via a satellite network. This information is used to support merchandising, inventory replenishment and promotional decisions. The satellite network is also utilized for on-line credit card processing and check authorization.\nThe Company has developed or purchased software packages to support numerous integrated systems in such areas as finance, merchandising, marketing, distribution, store operations and human resources. The Company continues to evaluate information systems usage and architecture, including such things as data base and client\/server processing, hand-held registers, and other applications to enhance customer service.\nDISTRIBUTION AND SUPPLIERS\nThe Company operates a total of eight distribution centers and three manufacturing locations. The distribution centers maintain inventories and tag and ship product to stores on a weekly basis. Of the eight, two (Sedalia, Missouri and Bellingham, Massachusetts) handle small-sized, conveyable, high value items such as hardware, plumbing and electrical supplies, and hand tools. The other six distribution centers handle commodity products and bulky manufactured products such as tubs, paneling and ceiling tile. The manufacturing locations assemble pre-hung doors and customized windows.\nIn fiscal 1993, 54% of merchandise was channeled through the distribution centers for redistribution to individual stores. This benefits the Company in the areas of product costs, in-stock positions and inventory turnover.\nThe Sedalia Distribution Center commenced operations in April 1988 and now serves 187 stores. The 495,000 square foot facility utilizes computerized receiving, storage and selection technology. The Bellingham Distribution Center was opened in May 1989 with similar automation. The facility has 453,000 square feet and serves the Somerville Lumber stores. Excluding the Sedalia and Bellingham operations, the Company's regional distribution centers average 18 acres with 154,000 square feet of warehouse space, operating with manual storage and selection systems. In addition, the Company uses third-party operations for specialized needs.\nPayless purchases substantially all of its merchandise from approximately 3,500 suppliers, no one of which accounted for more than 5% of the Company's purchases during fiscal 1993.\nCREDIT\nThe Company offers credit to both its DIY and Pro customers. Purchases under national credit cards and the Company's private label credit card program as a percentage of sales represented 25.1% in fiscal 1993, 25.6% in fiscal 1992, and 26.4% in fiscal 1991. Purchases under the Company's private label commercial credit program as a percentage of sales represented 22.1% in fiscal 1993, 16.7% in fiscal 1992, and 14.3% in fiscal 1991. The Company's private- label credit card program and commercial credit program are administered by a large finance and asset management company. Accounts written off (net of recoveries) under the commercial credit program in fiscal 1993 were approximately $2.8 million or .5% of net commercial credit sales. The cost of the private label credit card program represents a fixed percentage fee of charge sales. The fees on the commercial credit program consist of administrative fees which are primarily tied to commercial credit sales and fees for accounts written off, which are substantially all absorbed by the Company.\nCOMPETITION\nThe business of Payless is highly competitive. Payless encounters competition from national and regional chains, including those with a warehouse format, and from local independent wholesalers, supply houses and distributors. Certain of its competitors are larger in terms of capital and sales volume and have been operating longer than Payless in particular areas. Although Payless' competition varies by geographical area, Payless believes that it generally has a favorable competitive position as a result of its full-line lumberyard, broad product mix, customer service, product availability and price. As a result of the Company's shift in marketing focus to the market for professional customers, the Company competes with local independent lumberyards, independent wholesalers, supply houses and distributors who market primarily to commercial and professional users.\nEMPLOYEES\nAt November 27, 1993, Payless employed approximately 18,100 persons, approximately 29% of whom were part-time, although the number of employees may fluctuate seasonally. Payless believes its employee relations are satisfactory. Payless' employees are primarily nonunion with less than 2% being represented by a union.\nA substantial portion of the administrative, purchasing, advertising and accounting functions are centralized at Payless' headquarters in Kansas City, Missouri.\nEXECUTIVE OFFICERS OF THE REGISTRANT - ------------------------------------\nThe following table sets forth the name and age of all executive officers of Payless and their present positions and recent business experience. There is no family relationship among Payless' current directors and executive officers.\nItem 2.","section_1A":"","section_1B":"","section_2":"Item 2. PROPERTIES. - ------ ----------\nPayless owns 173 of its full-line store facilities and 161 of the 197 sites on which such stores are located. The remaining 24 facilities and 36 sites are leased. Additionally, 21 CSO's, two Tool Sites, and two Home & Room Design units are leased. The leases provide for various terms. Mortgages or deeds of trust on 167 store parcels secure existing indebtedness.\nSix of the Company's eight distribution centers are owned and, of the remaining two, one is leased for land only and the facility and land are leased for the other. Mortgages or deeds of trust on six distribution center parcels secure existing indebtedness.\nPayless leases its corporate office in Kansas City, Missouri, under a lease expiring on November 30, 2002. The administrative offices occupy several floors (approximately 204,000 square feet) of a multi-story building.\nSee also \"Store Locations\" and \"Distribution and Suppliers\" in Item 1, above.\nItem 3.","section_3":"Item 3. LEGAL PROCEEDINGS. - ------ -----------------\nThere are presently no material legal proceedings to which Payless or its subsidiary is a party or of which any of their property is the subject.\nItem 4.","section_4":"Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. - ------ ---------------------------------------------------\nNone.\nPART II -------\nItem 5.","section_5":"Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER - ------ ----------------------------------------------------------------- MATTERS. -------\nPayless Common Stock has been traded on the New York Stock Exchange (ticker symbol PCS) since March 9, 1993. Prior to that date there was no established trading market for Payless' Common Stock. Therefore, high and low bid quotations are only available from that date.\nAt February 4, 1994, there were 835 holders of record of Payless' Voting Common Stock and one holder of Class A Non-Voting Common Stock. No cash dividends have been declared on the Common Stock since 1988. Certain of Payless' debt instruments contain restrictions on the declaration and payment of dividends on, or the making of any distribution to the holders of, or the acquisition of, any shares of Common Stock or Convertible Preferred Stock.\nItem 6.","section_6":"Item 6. SELECTED FINANCIAL DATA. - ------ -----------------------\nThe Five-Year Financial Summary, page 34 of the Annual Report to Shareholders for the fiscal year ended November 27, 1993, is incorporated herein by reference.\nItem 7.","section_7":"Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND --------------------------------------------------------------- RESULTS OF OPERATIONS. ---------------------\nManagement's Discussion and Analysis of the Financial Condition and Results of Operations on pages 8 through 12 of the Annual Report to Shareholders for the fiscal year ended November 27, 1993, is incorporated herein by reference.\nItem 8.","section_7A":"","section_8":"Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. - ------ -------------------------------------------\nThe financial statements and independent auditors' report included on pages 14 through 32 of the Annual Report to Shareholders for the fiscal year ended November 27, 1993, are incorporated herein by reference.\nThe Quarterly Consolidated Statements of Operations on pages 6 and 7 of the Annual Report to Shareholders for the fiscal year ended November 27, 1993, are incorporated herein by reference.\nItem 9.","section_9":"Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND - ------ --------------------------------------------------------------- FINANCIAL DISCLOSURE. --------------------\nNone.\nPART III\nItem 10.","section_9A":"","section_9B":"","section_10":"Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. - ------- --------------------------------------------------\nThe information required by this item with respect to directors and compliance with Section 16(a) of the Securities Exchange Act of 1934 is incorporated herein by reference to the Registrant's Proxy Statement for the 1994 Annual Meeting of Shareholders, dated February 25, 1994, to be filed pursuant to Regulation 14A. The required information as to executive officers is set forth in Part I hereof.\nItem 11.","section_11":"Item 11. EXECUTIVE COMPENSATION. - ------- ----------------------\nThe information required by this item is incorporated herein by reference to the Registrant's Proxy Statement for the 1994 Annual Meeting of Shareholders, dated February 25, 1994, to be filed pursuant to Regulation 14A.\nItem 12.","section_12":"Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. - ------- --------------------------------------------------------------\nThe information called for by this item is incorporated herein by reference to the Registrant's Proxy Statement for the 1994 Annual Meeting of Shareholders, dated February 25, 1994, to be filed pursuant to Regulation 14A.\nItem 13.","section_13":"Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. - ------- ----------------------------------------------\nThe information called for by this item is incorporated herein by reference to the Registrant's Proxy Statement for the 1994 Annual Meeting of Shareholders, dated February 25, 1994, to be filed pursuant to Regulation 14A.\nPART IV\nItem 14.","section_14":"Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. - ------- ----------------------------------------------------------------\n(a) Document list.\n1. and 2. The response to this portion of Item 14 is submitted as a separate section of this report.\n3. List of exhibits.\n3.1 Restated Articles of Incorporation of the Company (incorporated by reference to Exhibit 3.1 filed as part of Amendment No. 1 to Registration Statement No. 33-58008 on Form S-2 on March 8, 1993).\n3.2 By-laws of the Company (incorporated by reference to Exhibit 3.2 filed as part of Registration Statement No. 33-58008 on Form S-2 on February 8, 1993).\n4.0 Long-term debt instruments of the Registrant in amounts not exceeding ten percent (10%) of the total assets of the Registrant and its subsidiary on a consolidated basis will be furnished to the Commission upon request.\n4.1 Indenture dated as of April 20, 1993 by and between Payless and United States Trust Company of New York, pursuant to which the 9 1\/8% Senior Subordinated Notes of Payless due April 15, 2003 were issued (incorporated by reference to Exhibit 4.2 filed as part of Payless' Quarterly Report on Form 10-Q for the quarter ended May 29, 1993).\n4.2(a) 1993 Credit Agreement, dated as of March 8, 1993, among Payless, the Banks listed on the signature pages thereof and Canadian Imperial Bank of Commerce, New York Agency, as Administrative Agent (incorporated by reference to Exhibit 4.1(b) filed as part of Amendment No. 1 to Registration Statement No. 33-58008 on Form S-2 on March 8, 1993).\n4.2(b) First Amendment dated as of March 15, 1993, to the 1993 Credit Agreement, dated as of March 8, 1993, among Payless, the Banks listed on the signature pages thereof and Canadian Imperial Bank of Commerce, New York Agency, as Administrative Agent (incorporated by reference to Exhibit 4.2(b) filed as part of Registration Statement No. 33-59854 on Form S-2 on March 19, 1993).\n4.2(c) Second Amendment dated as of March 19, 1993, to the 1993 Credit Agreement, dated as of March 8, 1993, among Payless, the Banks listed on the signature pages thereof and Canadian Imperial Bank of Commerce, New York Agency, as Administrative Agent (incorporated by reference to Exhibit 4.2(c) filed as part of Amendment No. 1 to Registration Statement No. 33-59854 on Form S-2 on April 9, 1993).\n4.2(d) Third Amendment dated as of April 14, 1993, to the 1993 Credit Agreement, dated as of March 8, 1993, among Payless, the Banks listed on the signature pages thereof and Canadian Imperial Bank of Commerce, New York Agency, as Administrative Agent (incorporated by reference to Exhibit 4.1(b) filed as part of Payless' Quarterly Report on Form 10-Q for the quarter ended May 29, 1993).\n4.2(e) Fourth Amendment dated as of September 17, 1993, to the 1993 Credit Agreement, dated as of March 8, 1993, among Payless, the Banks listed on the signature pages thereof and Canadian Imperial Bank of Commerce, New York Agency, as Administrative Agent (incorporated by reference to Exhibit 4.1 filed as part of Payless' Quarterly Report on Form 10-Q for the quarter ended August 28, 1993).\n4.2(f) Fifth Amendment dated as of February 14, 1994, to the 1993 Credit Agreement, dated as of March 8, 1993, among Payless, the Banks listed on the signature pages thereof and Canadian Imperial Bank of Commerce, New York Agency, as Administrative Agent.\n4.3 Amended and Restated Warrant Agreement, dated as of January 1, 1993, to Warrant Agreement dated as of November 1, 1988, between Payless and Bank of New York (incorporated by reference to Exhibit 4.1(b) of Payless' Annual Report on Form 10-K for the fiscal year ended November 28, 1992, as amended by Form 8, dated February 1, 1993).\n4.4(a) Loan Agreement dated June 20, 1989, by and among Payless Cashways, Inc., Knox Home Centers, Inc., Somerville Lumber and Supply Co., Inc., and The Prudential Insurance Company of America (incorporated by reference to Exhibit 4.2 filed as part of Payless' Quarterly Report on Form 10-Q for the quarter ended May 27, 1989).\n4.4(b) Guaranty effective June 20, 1989, given by Somerville Lumber and Supply Co., Inc. to The Prudential Insurance Company of America, guaranteeing certain indebtedness of Payless Cashways, Inc. (incorporated by reference to Exhibit 4.7 filed as part of Payless' Quarterly Report on Form 10-Q for the quarter ended May 27, 1989).\n4.4(c) Promissory Note dated June 20, 1989 from Payless to The Prudential Insurance Company of America, Tranche A (AR, MA, NH, RI) (incorporated by reference to Exhibit 4.10 filed as part of Payless' Quarterly Report on Form 10-Q for the quarter ended May 27, 1989).\n4.4(d) Promissory Note dated June 20, 1989 from Payless to The Prudential Insurance Company of America, Tranche A (LA) (incorporated by reference to Exhibit 4.11 filed as part of Payless' Quarterly Report on Form 10-Q for the quarter ended May 27, 1989).\n4.4(e) Promissory Note dated June 20, 1989 from Payless to The Prudential Insurance Company of America, Tranche B (MN) (incorporated by reference to Exhibit 4.12 filed as part of Payless' Quarterly Report on Form 10-Q for the quarter ended May 27, 1989).\n4.4(f) Promissory Note dated June 20, 1989 from Payless to The Prudential Insurance Company of America, Tranche B (MT) (incorporated by reference to Exhibit 4.13 filed as part of Payless' Quarterly Report on Form 10-Q for the quarter ended May 27, 1989).\n4.4(g) Promissory Note dated June 20, 1989 from Payless to the Prudential Insurance Company of America, Tranche B (ND) (incorporated by reference to Exhibit 4.14 filed as part of Payless' Quarterly Report on Form 10-Q for the quarter ended May 27, 1989).\n4.4(h) Promissory Note dated June 20, 1989 from Payless to The Prudential Insurance Company of America, Tranche B (NV) (incorporated by reference to Exhibit 4.15 filed a part of Payless' Quarterly Report on Form 10-Q for the quarter ended May 27, 1989).\n4.4(i) Promissory Note dated June 20, 1989 from Payless to The Prudential Insurance Company of America, Tranche B (AZ, CA) (incorporated by reference to Exhibit 4.16 filed as part of Payless' Quarterly Report on Form 10-Q for the quarter ended May 27, 1989).\n4.4(j) Promissory Note dated June 20, 1989 from Payless to The Prudential Insurance Company of America, Tranche C (IN, KY, NM, OH, TN)(incorporated by reference to Exhibit 4.17 filed as part of Payless' Quarterly Report on Form 10-Q for the quarter ended May 27, 1989).\n4.4(k) Promissory Note dated June 20, 1989 from Payless to The Prudential Insurance Company of America, Tranche D (CO, IA, IL, KS, NE, MO, TX, OR, OK) (incorporated by reference to Exhibit 4.18 filed as part of Payless' Quarterly Report on Form 10-Q for the quarter ended May 27, 1989).\n4.4(l) Form of Deed of Trust, Mortgage and Security Agreement effective June 20, 1989, given to The Prudential Insurance Company of America (incorporated by reference to Exhibit 4.19 filed as part of Payless' Quarterly Report on Form 10-Q for the quarter ended May 27, 1989).\n4.4(m) Form of Deed of Trust, Security Agreement and Assignment of Leases dated June 20, 1989 given to Morgan Bank (Delaware), as Collateral Agent (incorporated by reference to Exhibit 4.20 filed as part of Payless' Quarterly Report on Form 10-Q for the quarter ended May 27, 1989).\n4.4(n) First Modification Agreement dated as of October 18, 1991, by and among Payless, Knox, Somerville and The Prudential Insurance Company of America (incorporated by reference to Exhibit 4.9(r) filed as part of Payless' Annual Report on Form 10-K for fiscal year ended November 30, 1991).\n4.4(o) Second Modification Agreement dated as of December 17, 1991, by and among Payless, Knox, Somerville and The Prudential Insurance Company of America (incorporated by reference to Exhibit 4.9(s) filed as part of Payless' Annual Report on Form 10-K for fiscal year ended November 30, 1991).\n4.4(p) Third Modification Agreement dated as of December 31, 1991, by and among Payless, Knox, Somerville and the Prudential Insurance Company of America (incorporated by reference to Exhibit 4.9(t) filed as part of Payless' Annual Report on Form 10-K for fiscal year ended November 30, 1991).\n4.4(q) Fourth Modification Agreement dated as of March 8, 1993, by and among Payless, Somerville and The Prudential Insurance Company of America (incorporated by reference to exhibit 4.6(v) filed as part of Amendment No. 1 to Registration Statement No. 33-58008 on Form S-2 on March 8, 1993).\n4.4(r) Letter dated March 12, 1993 modifying Fourth Modification Agreement dated as of March 8, 1993 by and among Payless, Somerville and The Prudential Insurance Company of America (incorporated by reference to Exhibit 4.5(w) filed as part of Registration Statement No. 33-59854 on Form S-2 on March 19, 1993).\n4.5 Security Agreement, dated October 7, 1988, executed by Payless for the benefit of Morgan Bank (Delaware) as Collateral Agent (incorporated by reference to Exhibit 4.15 filed as part of Post-Effective Amendment No. 1 on Form S-2 to Form S-1 Registration Statement No. 33-23893 filed August 8, 1989).\n4.6 Acknowledgement and Release of Current Banks, dated as of March 8, 1993, among Morgan Guaranty Trust Company of New York, Payless and the banks party to the 1988 Credit Assignment (incorporated by reference to Exhibit 4.8 filed as part of Registration Statement No. 33-59854 on Form S-2 on March 19, 1993).\n4.7 Assignment Agreement, dated as of March 8, 1993, among J.P. Morgan Delaware, Canadian Imperial Bank of Commerce, New York Agency (\"CIBC\"), Payless and Somerville (incorporated by reference to Exhibit 4.9 filed as part of Registration Statement No. 33-59854 on Form S-2 on March 19, 1993).\n4.8 Subsidiary Security Agreement, dated as of March 8, 1993, made by Somerville in favor of CIBC, as Collateral Agent, for the benefit of the banks and other financial institutions party to the 1993 Credit Agreement (incorporated by reference to Exhibit 4.10 filed as part of Registration Statement No. 33-59854 on Form S-2 on March 19, 1993).\n4.9 Amended and Restated Note Pledge Agreement, dated as of March 8, 1993, between Payless and CIBC, as Collateral Agent, for the benefit of the banks and other financial institutions party to the 1993 Credit Agreement (incorporated by reference to Exhibit 4.11 filed as part of Registration Statement No. 33-59854 on Form S-2 on March 19, 1993).\n4.10(a) Amended and Restated Inter-Facility Agreement, dated as of March 8, 1993, between Payless, Somerville and CIBC, as Administrative Agent and Collateral Agent for the benefit of the banks and other financial institutions listed on the signature pages thereto (incorporated by reference to Exhibit 4.12 filed as part of Registration Statement No. 33-59854 on Form S-2 on March 19, 1993).\n4.10(b) Joinder Agreement dated February 14, 1994 among Payless, Somerville Lumber and Supply Co., Inc. the Banks listed on the signature pages thereof and Canadian Imperial Bank of Commerce, New York Agency, as Administrative Agent.\n4.11 Amended and Restated Borrower Security Agreement, dated as of March 8, 1993, between Payless and CIBC, as Collateral Agent, for the benefit of the banks and other financial institutions party to the 1993 Credit Agreement (incorporated by reference to Exhibit 4.13 filed as part of Registration Statement No. 33- 59854 on Form S-2 on March 19, 1993).\n4.12 Amended and Restated Guarantee, dated as of March 8, 1993, between Somerville and CIBC, as Collateral Agent, for the benefit of the banks and other financial institutions party to the 1993 Credit Agreement (incorporated by reference to Exhibit 4.14 filed as part of Registration Statement No. 33-59854 on Form S-2 on March 19, 1993).\n4.13 Amended and Restated Pledge Agreement, dated as of March 8, 1993, between Payless and CIBC, as Collateral Agent, for the benefit of the banks and other financial institutions party to the 1993 Credit Agreement (incorporated by reference to Exhibit 4.15 filed as part of Registration Statement No. 33-59854 on Form S-2 on March 19, 1993).\n4.14 Form of First amendment to Mortgage and Assignment of Mortgage, dated as of March 15, 1993, among Payless, CIBC, as Collateral Agent, and J.P. Morgan Delaware (incorporated by reference to Exhibit 4.16 filed as part of Registration Statement No. 33 -59854 on Form S-2 on March 19, 1993).\n10.1 Supply Agreement dated as of August 4, 1988, between Masco Corporation and Payless (incorporated by reference to Exhibit 10.1 filed as part of Registration Statement No.33-23893 on Form S-1 filed August 19, 1988).\n10.2 Indemnification Agreement (incorporated by reference to Exhibit 10.2 filed as part of Amendment No. 2 to Registration Statement No. 33-49772 filed August 26, 1992).\n10.3 Payless Cashways, Inc. Corporate Management Incentive Compensation Program, dated as of December 1991 (incorporated by reference to Exhibit 10.2 filed as part of Payless' Quarterly Report on Form 10-Q for the quarter ended May 30, 1992).\n10.4(a) Employment Agreement dated as of December 1, 1988 between Payless and Larry P. Kunz (incorporated by reference to Exhibit 10.12 filed as part of Post Effective Amendment No. 1 on Form S-2 to Form S-1 Registration Statement No. 33-23893 filed August 8, 1989).\n10.4(b) Amendment dated March 10, 1992 to Employment Agreement between Payless and Larry Kunz (incorporated by reference to Exhibit 10.1 filed as part of the Payless' Quarterly Report on Form 10-Q for the quarter ended February 29, 1992).\n10.4(c) Amendment dated as of February 8, 1993 to Employment Agreement between Payless and Larry Kunz (incorporated by reference to Exhibit 10.4(c) filed as part of Registration Statement No. 33- 58008 on Form S-2 on March 8, 1993).\n10.4(d) Amendment dated June 23, 1993 to Employment Agreement between Payless and Larry Kunz (incorporated by reference to Exhibit 10.1 filed as part of Payless' Quarterly Report on Form 10-Q for the quarter ended May 29, 1993).\n10.4(e) Employment Agreement dated as of September 22, 1993 between Payless and Larry Kunz (incorporated by reference to Exhibit 10.1 filed as part of Payless' Quarterly Report on Form 10-Q for the quarter ended August 28, 1993).\n10.5(a) Employment Agreement dated as of December 1, 1988 between Payless and David Stanley (incorporated by reference to Exhibit 10.13 filed as part of Post Effective Amendment No. 1 on Form S-2 to Form S-1 Registration Statement No. 33-23893 filed August 8, 1989).\n10.5(b) Amendment dated March 10, 1992 to Employment Agreement between Payless and David Stanley, (incorporated by reference to Exhibit 10.2 filed as part of Payless' Quarterly Report on Form 10-Q for the quarter ended February 29, 1992).\n10.5(c) Amendment dated June 23, 1993 to Employment Agreement between Payless and David Stanley (incorporated by reference to Exhibit 10.2 filed as part of Payless' Quarterly Report on Form 10-Q for the quarter ended May 29, 1993).\n10.6(a) Employment Agreement dated as of December 1, 1988 between Payless and Harold Cohen (incorporated by reference to Exhibit 10.14 filed as part of Post Effective Amendment No. 1 on Form S-2 to Form S-1 Registration Statement No. 33-23893 filed August 8, 1989).\n10.6(b) Amendment dated March 10, 1992 to Employment Agreement between Payless and Harold Cohen (incorporated by reference to Exhibit 10.3 filed as part of Payless' Quarterly Report on Form 10-Q for the quarter ended February 29, 1992).\n10.6(c) Retirement Agreement dated as of November 14, 1993 between Payless and Harold Cohen.\n10.7 Employment Agreement dated as of February 8, 1993 between Payless and Ronald H. Butler (incorporated by reference to Exhibit 10.24 files as part of Registration Statement No. 33- 58008 on Form S-2 on February 8, 1993).\n10.8 Employment Agreement dated as of February 8, 1993 between Payless and Stephen A. Lightstone (incorporated by reference to Exhibit 10.25 filed as part of Registration Statement No. 33- 58008 on Form S-2 on February 8, 1993).\n10.9 Employment Agreement dated as of February 8, 1993 between Payless and Susan M. Stanton (incorporated by reference to Exhibit 10.26 filed as part of Registration Statement No. 33- 58008 on Form S-2 on February 8, 1993).\n10.10(a) Payless Cashways, Inc. Wealth-Op Deferred Compensation Plan (incorporated by reference to Exhibit 10.8 filed as part of Post-Effective Amendment No. 7 to Registration Statement No. 33- 23893 on Form S-2 filed May 26, 1992).\n10.10(b) Amendment to Payless' Wealth-Op Deferred Compensation Plan.\n10.11(a) Payless Cashways, Inc. 1988 Deferred Compensation Plan.\n10.11(b) Amendment to Payless' 1988 Deferred Compensation Plan.\n10.12 Payless Cashways, Inc. Supplemental Death Benefit Plan.\n10.13 Payless Cashways, Inc. Supplemental Disability Plan.\n10.14(a) Payless Cashways, Inc. Supplemental Retirement Plan.\n10.14(b) First Amendment to the Payless Cashways, Inc. Supplemental Retirement Plan effective June 22, 1989.\n10.15(a) Registration Rights Agreement dated as of August 4, 1988 among PCI Acquisition Corp. and certain of its shareholders.\n10.15(b) Agreement and Amendment dated as of November 11, 1988 to Registration Rights Agreement dated as of August 4, 1988 among Payless and certain of its shareholders.\n10.15(c) Addendum to Shareholders' Agreement and Registration Rights Agreement dated February 22, 1989 by and among Payless and certain of its shareholders.\n10.16(a) Amended and Restated Shareholders' Agreement, dated as of February 22, 1990, by and among PCI Acquisition Corp. and certain of its shareholders (incorporated by reference to Exhibit 10.47 filed as part of Post-Effective Amendment No. 3 to Registration Statement No. 33-23893 on Form S-2 filed March 23, 1990).\n10.16(b) Amendment No. 1 dated as of March 18, 1991, to the Amended and Restated Shareholders' Agreement dated as of February 22, 1990, by and among Payless and certain of its shareholders (incorporated by reference to Exhibit 10.43(b) filed as part of Post-Effective Amendment No. 5 to Registration Statement No. 33-23893 on Form S-2 filed March 21, 1991).\n10.17(a) 1988 Payless Cashways, Inc. Employee Stock Plan (incorporated by reference to Annex 1 filed as part of Registration Statement No. 33-24368 on Form S-8 filed September 9, 1988).\n10.17(b) First Amendment to the 1988 Payless Cashways, Inc. Employee Stock Plan, dated November 11, 1988 (incorporated by reference to Exhibit 10.1(b) filed as part of Payless' Quarterly Report on Form 10-Q for the quarter ended February 25, 1989).\n10.17(c) Second Amendment to the 1988 Payless Cashways, Inc. Employee Stock Plan, dated February 22, 1989 (incorporated by reference to Exhibit 10.1(c) filed as part of Payless' Quarterly Report on Form 10-Q for the quarter ended February 25, 1989).\n10.17(d) Third Amendment to the 1988 Payless Cashways, Inc. Employee Stock Plan, dated March 6, 1990 (incorporated by reference to Exhibit 10.2 of Payless' Quarterly Report on Form 10-Q for the quarter ended February 24, 1990).\n10.17(e) Form of Performance Stock Option Agreement pursuant to the 1988 Payless Cashways, Inc. Employee Stock Option Plan amended on June 20, 1991 (incorporated by reference to Exhibit 10.21(e) filed as part of Payless' Annual Report on Form 10-K for fiscal year ended November 30, 1991).\n10.17(f) Amendment to the 1988 Payless Cashways, Inc. Employee Stock Plan, dated as of May 1, 1992 (incorporated by reference to Exhibit 10.26 filed as part of Post-Effective Amendment No. 7 to Form S-2 Registration Statement No. 33-23893 filed May 26, 1992).\n10.18 Payless Cashways 1992 Incentive Stock Program (incorporated by reference to Exhibit 10.24 filed as part of Amendment No. 2 to Registration Statement No. 33-49772 on Form S-2 filed August 26, 1992).\n10.19 Payless Cashways Director Option Plan (incorporated by reference to Exhibit 10.23 filed as part of Registration Statement No. 33- 59854 on Form S-2 on March 19, 1993).\n11.1 Computation of per share earnings.\n13.1 Annual Report to Shareholders.\n21.1 Subsidiary of the Registrant (incorporated by reference to Exhibit 22.1 filed as part of Payless' Annual Report on Form 10-K for fiscal year ended November 30,1991).\n23.1 Consent of KPMG Peat Marwick.\nCopies of any or all Exhibits will be furnished upon written request and payment of Payless' reasonable expenses in furnishing the Exhibits.\n(b) Reports on Form 8-K.\nNo reports on Form 8-K have been filed by the Registrant during the quarter ended November 27, 1993.\n(c) Exhibits.\nThe response to this portion of Item 14 is submitted as a separate section of this report.\n(d) Financial Statement Schedules.\nThe response to this portion of Item 14 is submitted as a separate section of this report.\nSIGNATURES\nPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Payless has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.\nPAYLESS CASHWAYS, INC. (Registrant)\nBy s\/David Stanley ------------------------------------------ David Stanley, Principal Executive Officer Dated: February 14, 1994\nPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of Payless and in the capacities and on the dates indicated.\nANNUAL REPORT ON FORM 10-K\nITEM 14(a) (1) and (2), (c) and (d)\nLIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES\nFINANCIAL STATEMENT SCHEDULES\nEXHIBITS\nYEAR ENDED NOVEMBER 27, 1993\nPAYLESS CASHWAYS, INC., and subsidiary\nKANSAS CITY, MISSOURI\nPAYLESS CASHWAYS, INC., and subsidiary\nFORM 10-K--ITEM 14(a) (1) and (2)\nLIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES\nThe following consolidated financial statements of Payless Cashways, Inc., and subsidiary included in Payless' Annual Report to the Shareholders for the year ended November 27, 1993, are incorporated by reference in Item 8:\nConsolidated Balance Sheets--November 27, 1993 and November 28, 1992.\nConsolidated Statements of Operations--fiscal years ended November 27, 1993, November 28, 1992 and November 30, 1991.\nConsolidated Statements of Shareholders' Equity--fiscal years ended November 27, 1993, November 28, 1992 and November 30, 1991.\nConsolidated Statements of Cash Flows--fiscal years ended November 27, 1993, November 28, 1992 and November 30, 1991.\nNotes to Consolidated Financial Statements.\nThe following financial statement schedules of Payless Cashways, Inc., and subsidiary are included in Item 14(d):\nV - Property, Plant and Equipment VI - Accumulated Depreciation and Amortization of Property, Plant and Equipment VIII - Valuation and Qualifying Accounts IX - Short-Term Borrowings X - Supplementary Income Statement Information\nAll other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted.\n[Letterhead of KPMG Peat Marwick]\nINDEPENDENT AUDITORS' REPORT\nThe Board of Directors Payless Cashways, Inc.:\nUnder date of January 7, 1994, we reported on the consolidated balance sheets of Payless Cashways, Inc. and subsidiary as of November 27, 1993 and November 28, 1992, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the fiscal years in the three-year period ended November 27, 1993, as contained in the 1993 annual report to shareholders. These consolidated financial statements and our report thereon are incorporated by reference in the annual report on Form 10-K for the fiscal year 1993. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related financial statement schedules as listed in the accompanying index. These financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statement schedules based on our audits.\nIn our opinion, such schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.\ns\/KPMG Peat Marwick ------------------- KPMG Peat Marwick\nKansas City, Missouri January 7, 1994\nSCHEDULE V - PROPERTY, PLANT AND EQUIPMENT PAYLESS CASHWAYS, INC., and subsidiary (In thousands)\nSCHEDULE VI - ACCUMULATED DEPRECIATION AND AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT\nPAYLESS CASHWAYS, INC., and subsidiary (In thousands)\nSCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS\nPAYLESS CASHWAYS, INC., and subsidiary (In thousands)\nSCHEDULE IX - SHORT-TERM BORROWINGS\nPAYLESS CASHWAYS, INC., and subsidiary (In thousands, except interest rates)\nSCHEDULE X - SUPPLEMENTARY INCOME STATEMENT INFORMATION\nPAYLESS CASHWAYS, INC., and subsidiary (In thousands)","section_15":""}
{"filename":"110471_1993.txt","cik":"110471","year":"1993","section_1":"Item 1. Business\nWolverine World Wide, Inc. (the \"Company\"), designs, manufactures, distributes and markets various brands and styles of footwear. The wide variety of footwear sold by the Company includes casual shoes, slippers, moccasins, dress shoes, boots, uniform shoes and work boots and shoes. The Company is also the largest domestic tanner of pigskin. The Company, a Delaware corporation, is the successor of a 1969 reorganization of a Michigan corporation of the same name, originally organized in 1906, which in turn was the successor of a business established in Grand Rapids, Michigan, in 1883.\nThe Company is a leading provider of branded, comfort footwear for the entire family, supplying more than 17 million pairs annually to consumers in 80 countries. Footwear has accounted for 90% or more of the consolidated revenues of the Company for each of the last three years. For further financial information regarding the Company, see the consolidated financial statements of the Company, which are attached as Appendix A to this Form 10-K.\nFootwear manufactured by the Company is sold under many recognizable brand names. The Company's HUSH PUPPIES (Registered) brand is a world leader in affordable, comfortable, casual and functional footwear for men, women and children. The Company's WOLVERINE (Registered) brand of work and sport boots ranks as the number two brand of work and sport boots. The Company's BATES (Registered) brand is the number one brand of uniform footwear in the United States. The Tru-Stitch Footwear Division is the foremost supplier of constructed slippers in the United States. The Company has also introduced a line of rugged outdoor and sport footwear under the WOLVERINE WILDERNESS (Registered) brand. Through these, and several other footwear brands, the Company expects to continue to manufacture quality footwear for its customers.\nThe Company also manufactures and sources shoes for sale through world wide licensing arrangements under the COLEMAN (Registered), CATERPILLAR (Registered) and CAT (Registered) trademarks.\nThe Wolverine Leathers Division is one of the premier tanners of quality pigskin leather for the shoe, automotive and leather goods industries. The pigskin leather tanned by the Company is used in a significant portion of the footwear manufactured and sold by the Company, and is also sold to other domestic and foreign manufacturers of shoes.\nThe Company's products are sold by Company salespersons and agents and through Company-owned stores. Sales are made directly to various retail sellers, including independent shoe stores, footwear chains and department stores. Most customers also sell shoes bought from competing manufacturers.\nCompany products are sold directly to more than 10,000 accounts, operating more than 20,000 retail locations. Sales are also made to large footwear chains, including those owned or operated by other companies in the shoe industry, catalog houses, and to the retail operations referenced below.\nIn addition to its wholesale activities, the Company operated 124 domestic retail shoe stores, leased shoe departments and Company-owned HUSH PUPPIES (Registered) Specialty Stores as of March 25, 1994. A fiscal 1990 decision to downsize the factory outlet business will result in closing approximately 9 outlet retail locations during 1994. Eleven outlet retail locations were closed in fiscal 1993.\nOf the 124 retail locations, approximately 66 are factory outlet stores located in strip centers or in free-standing buildings. Approximately 36 of these stores operate under the LITTLE RED SHOE HOUSE (Service Mark) format. These stores primarily handle closeouts and factory rejects from the Company's own factories and those of other manufacturers.\nOf the approximately 66 factory outlet stores, 30 are currently operating under the HUSH PUPPIES (Registered) FACTORY DIRECT (Service Mark) name in major manufacturer outlet malls. These stores carry a large selection of first quality company branded footwear. The Company has and may continue to selectively convert LITTLE RED SHOE HOUSE (Service Mark) locations to this retail and merchandising format.\nThe 124 retail locations include 20 regional mall full service, full price HUSH PUPPIES (Registered) Specialty Stores which feature exclusively a broad selection of men's and women's HUSH PUPPIES (Registered) brand footwear. The Company also licenses independent retailers who operate HUSH PUPPIES (Registered) Specialty Stores at another 81 locations.\nIn addition to retail shoe stores and HUSH PUPPIES (Registered) Specialty Stores, the Company operates 38 full price, full service family leased shoe departments in the Pacific Northwest and Alaska, which feature the Company's wholesale brands.\nThe Company derives royalty income from licensing the HUSH PUPPIES (Registered), WOLVERINE (Registered), WILDERNESS (Registered) and other trademarks to domestic and foreign licensees for use on footwear and related products. In addition, the Company sells its own pigskin leather to certain of its licensees. In fiscal 1993, the Company's foreign licensees and distributors sold an estimated 8.3 million pairs of footwear, an increase from approximately 7.4 million pairs sold in fiscal 1992.\nThe Company continues to develop a global network of licensees to market its footwear brands. The licensees purchase goods from the Company and third-party manufacturers and these purchases are generally supported by letters of credit. Each licensee is responsible for the marketing and distribution of the Company's products, and generally purchases substantially all marketing, advertising materials and products from the Company.\nThe Company operates a pigskin tannery as a part of its Wolverine Leathers Division, from which the Company receives virtually all of its pigskin requirements. The tannery is one of the most modern pigskin tanneries in the world. The quality pigskin leather utilized in the Company's products which incorporate this material is a significant element of product cost, and is generally only available at comparable cost and delivery terms from the Company's tannery. Therefore, the continued operation of this tannery is important to the Company's competitive position in the footwear industry. In addition, the Company owns a minority interest in Wan Hau Enterprise Co., Ltd. (\"Wan Hau\"), a principal tanner of pigskin in Taiwan. The Company provides semi-finished pigskin leather to Wan Hau for finishing in Taiwan.\nThe Company's principal required raw material is quality leather, which it purchases primarily from a select group of domestic suppliers, including the Company's tannery. The Company has traditionally purchased the vast majority of the shearling used extensively in the manufacture of constructed slippers and related products by its Tru-Stitch Footwear Division from a single source, which has been a reliable and consistent supplier. The Company purchases all of its other raw materials, including man-made materials and fabrics for uppers, and leather, rubber and plastics for soles and heels, from a variety of sources, none of which is believed by the Company to be a dominant supplier.\nThe Company is the holder of many trademarks which identify its products. The trademarks which are most widely used by the Company include HUSH PUPPIES (Registered), WOLVERINE (Registered), WILDERNESS (Registered), WOLVERINE WILDERNESS (Registered), BATES (Registered), FLOATERS (Trademark), BATES FLOATAWAYS (Registered), HARBOR TOWN (Trademark), TOWN & COUNTRY (Trademark), TRU-STITCH (Registered), WIMZEES (Registered), and SIOUX MOX (Registered). The Company is also licensed to market footwear in the United States under the COLEMAN (Registered) trademark and throughout the world under the CATERPILLAR (Registered) and CAT (Registered) trademarks. Pigskin leather produced by the Company is sold under the trademarks BREATHIN' BRUSHED PIGSKIN (Registered), SILKEE (Registered) and WEATHER TIGHT (Registered).\nThe Company believes that its products are identified by its trademarks and thus its trademarks are a valuable asset. It is the policy of the Company to vigorously defend its trademarks against infringement to the greatest extent practicable under the laws of the United States and other countries. The Company is also the holder of several patents, copyrights and various other proprietary rights. The Company protects all of its proprietary rights to the greatest extent practicable under applicable law.\nThe Company does not have a significant backlog of non-cancelable orders. On March 1, 1994, the Company had a backlog of orders believed to be firm of approximately $69 million compared with a backlog of\napproximately $66 million on March 20, 1993. Historically, the Company has not experienced significant cancellation of orders. While orders in backlog are subject to cancellation by customers, the Company expects that substantially all of these orders will be shipped in fiscal 1994.\nRetail footwear sales are seasonal with significant increases in sales experienced during the Christmas, Easter and back-to-school periods. Due to this seasonal nature of footwear sales, the Company experiences some fluctuation in the levels of working capital. The Company provides working capital for such fluctuation through internal financing and a revolving credit agreement which the Company has in place. The Company expects the seasonal sales pattern to continue in future years.\nA broad distribution base insulates the Company from dependence on any one customer. No customer of the Company accounted for more than 10% of the Company's consolidated revenues in fiscal year 1993.\nThe Company's footwear lines are manufactured and marketed in a highly competitive environment. The Company competes with numerous other manufacturers (domestic and foreign) and importers, many of which are larger and have greater resources than the Company. The Company's major competitors for its brands of footwear are generally located in the United States. The Company has at least six major competitors in connection with the sale of its work shoes and boots, at least eight major competitors in connection with the sale of its sport boots, and at least fifteen major competitors in connection with the sale of its casual and dress shoes. Virtually all domestic and foreign manufacturers of footwear compete, or plan to compete, with the Company in the rugged casual and outdoor footwear market. Many of these competitors are established in the footwear industry, and have strong market identities.\nProduct performance and quality, including technological improvements, product identity, competitive pricing, and the ability to adapt to style changes are all important elements of competition in the footwear markets served by the Company. The Company attempts to meet competition and maintain its competitive position through promotion of brand awareness, manufacturing efficiencies, its tannery operations and the style, comfort and value of its products. Future sales of the Company will be affected by its continued ability to sell its products at competitive prices and to meet shifts in customer preference.\nBecause of the lack of reliable published statistics, the Company is unable to state with certainty its position in the shoe industry, however, the Company believes it is one of the ten largest domestic manufacturers of footwear.\nForeign footwear manufacturers and importers also provide a source of competition for the Company. In order to remain competitive with these foreign entities, the Company continues to improve and expand its manufacturing facilities in Michigan, the Caribbean basin and Mexico. In addition, the Company is continuing to pursue lower cost manufacturing alternatives in the Far East and Latin America.\nAlthough a significant portion of the Company's product line is purchased or sourced overseas, the majority of its products are produced in the United States. The Company's footwear is manufactured in several domestic facilities and certain related foreign facilities, including facilities located in Michigan, Arkansas, New York, Mexico, Puerto Rico, Costa Rica, the Dominican Republic and Canada. The Company includes, as an integral part of its domestic manufacturing operations, five factories located in the Caribbean basin and Mexico that produce footwear uppers for final assembly in the Company's domestic factories.\nThe Company sources certain footwear from a variety of foreign manufacturing facilities in the Far East, Latin America and the Caribbean. The Company also maintains a small office in Taiwan to facilitate the sourcing and import of footwear from the Far East.\nThe Company is subject to the normal risks of doing business abroad due to its international operations, including the risks of expropriation, acts of war, political disturbances and similar events, and loss of most favored nations trading status. With respect to its international sourcing activities, management believes that over a period of time, it could arrange adequate alternative sources of supply for the products obtained from its foreign suppliers. A sustained disruption of such sources of supply could, particularly on a short-term basis, have an adverse impact on the Company's operations.\nAt the end of the third quarter of fiscal 1992, the Company announced its intent to dispose of its Brooks athletic footwear and sports apparel business. The Brooks business consisted of sales and distribution operations in the United States, France, Germany and the United Kingdom, sourcing activities, primarily in the Far East, and worldwide licensing of the rights to the brand name. The Brooks distributors in Europe were 33%-owned equity investees from April 3, 1990 until July 1, 1991 when the remaining equity interests were acquired.\nDuring 1993, the Company sold the Brooks businesses in separate transactions in exchange for cash and notes totaling approximately $24 million. Notes receivable of $7,700,000 were outstanding as of January 1, 1994, and are collateralized by substantially all of the assets sold. Payments of $2,300,000, $4,324,000, and $361,000, representing the noncurrent portion of the notes receivable, are due in 1995, 1996 and 1997, respectively.\nIn addition to normal and recurring product development, design and styling activities, the Company engages in research and development related to new and improved materials for use in its footwear and other products and in the development and adaptation of new production techniques. The Company's continuing relationship with the Biomechanics Evaluation Laboratory at Michigan State University, which is funded in part by a grant from the Company, has led to specific biomechanical design concepts which have been incorporated in the Company's footwear. The Company also maintains a footwear design center in Italy to develop\ncontemporary styling for the Company and its international licensees. While the Company continues to be a leading developer of footwear innovations, research and development costs do not represent a material portion of operating expenses.\nCompliance with federal, state and local regulations with respect to the environment has not had, nor is it expected to have, any material effect on the capital expenditures, earnings or competitive position of the Company. The Company uses and generates, and in the past has used and generated, certain substances and wastes that are regulated or may be deemed hazardous under certain federal, state and local regulations with respect to the environment. The Company from time to time works with federal, state and local agencies to resolve cleanup issues at various waste sites. The Company recently received notice from the Michigan Department of Natural Resources (\"MDNR\") that it is one of the 14 currently named potentially responsible parties for cleanup of the Sunrise Landfill Site in Allegan County, Michigan. The Sunrise Landfill Site is related to another cleanup site in Allegan County, Michigan for which the MDNR has identified 556 potentially responsible parties, including the Company. The MDNR currently estimates that the total cost of cleanup of the Sunrise Landfill Site is approximately $17 million, but actual costs could exceed this amount. The Company is currently conducting an investigation into its responsibility with respect to the Sunrise Landfill Site. The Company currently anticipates that a substantial number of the 556 potentially responsible parties for the related cleanup site in Allegan County, Michigan, will eventually be identified as potentially responsible parties for the cleanup of the Sunrise Landfill Site.\nAs of December 31, 1993, the Company had approximately 5,088 domestic and foreign production, office and sales employees. Approximately 1,218 employees are covered by seven union contracts expiring at various dates through 1996. The Company has experienced four isolated work stoppages since 1975, none of which materially affected operations. The Company presently considers its employee relations to be good.\nItem 2.","section_1A":"","section_1B":"","section_2":"Item 2. Properties.\nThe principal executive, sales and administration offices of the Company are located in Rockford, Michigan and consist of administration and office buildings of approximately 123,300 square feet. The Company also has additional administrative and sales offices in Arkansas, New York, Italy, the United Kingdom, Canada and Taiwan totaling approximately 32,400 square feet, the majority of which is leased.\nThe Company owns and operates one pigskin tannery from which it receives virtually all of its pigskin requirements. The tannery is located in Rockford, Michigan and encompasses approximately 160,000 square feet.\nThe Company's footwear manufacturing operations are carried out at 15 separate facilities, totaling approximately 713,500 square feet of manufacturing space. These facilities are located primarily in smaller\ntowns in Arkansas, Michigan, and New York and in Mexico, Puerto Rico, the Dominican Republic and Canada. Approximately 370,400 square feet of manufacturing space is under lease at seven locations and the remaining eight facilities are Company-owned. The Company's current aggregate footwear manufacturing capacity is in excess of 12.0 million pairs of shoes per year. The Company believes its footwear manufacturing facilities are generally among the most modern in the industry.\nThe Company maintains twelve warehouses, located in four states and Canada, containing approximately 804,100 square feet. The vast majority of these warehouses are Company-owned, with approximately 63,500 square feet at three locations under lease.\nIn addition, the Company's retail operations are conducted throughout the United States and as of March 25, 1994, consisted of approximately 124 locations, including 38 leased shoe departments. All retail locations, except three factory outlet stores in Company-owned facilities, are subject to operating leases.\nThe Company believes that all properties and facilities of the Company are suitable, adequate and fit for their intended purposes.\nItem 3.","section_3":"Item 3. Legal Proceedings.\nThe Company is involved in litigation and various legal matters arising in the normal course of business. The Company is also involved in several proceedings involving cleanup issues associated with various waste disposal sites, as more fully described in Item 1 of this Annual Report on Form 10-K. Having considered facts that have been ascertained and opinions of counsel handling these matters, the Company does not believe the ultimate resolution of such litigation will have a material adverse effect on the Company's financial position.\nItem 4.","section_4":"Item 4. Submission of Matters to a Vote of Security Holders.\nNo matter was submitted during the fourth quarter of the fiscal year covered by this report to a vote of security holders, through the solicitation of proxies or otherwise.\nSupplemental Item. Executive Officers of the Registrant.\nThe following table lists the names and ages of the Executive Officers of the Company as of the date of this Annual Report on Form 10-K, and the positions presently held with the Company. The information provided below the table lists the business experience of each such Executive Officer during the past five years. All Executive Officers serve at the pleasure of the Board of Directors of the Company, or if not appointed by the Board of Directors, they serve at the pleasure of management.\nGeoffrey B. Bloom has served the Company as President and Chief Executive Officer since April 1993. From 1987 to 1993 he served the Company as President and Chief Operating Officer.\nSteven M. Duffy has served the Company as a Vice President since April 1993. From 1989 to April 1993 he served the Company in various senior manufacturing positions. Prior to 1989, he served as the Head of Manufacturing for Florsheim Shoes.\nStephen L. Gulis, Jr., has served the Company as Vice President and Chief Financial Officer since February 1994. From April 1993 to February 1994 he served the Company as Vice President of Finance and Corporate Controller, and from 1986 to 1993 he was the Vice President of Administration and Control for the Hush Puppies Company.\nBlake W. Krueger has served the Company as General Counsel and Secretary since April 1993. He has been a partner of the law firm of Warner, Norcross & Judd since 1985.\nL. James Lovejoy has served the Company as Vice President of Corporate Communications since 1991. From 1984 to 1991 he was the Director of Corporate Communications for Gerber Products Company, a manufacturer of baby food and related products.\nCharles F. Morgo has served the Company as Senior Executive Vice President since 1984.\nThomas P. Mundt has served the Company as Vice President of Strategic Planning and Treasurer since December 1993. From 1988 to 1993 he served in various financial and planning positions at Sears Roebuck & Co. including Vice President Planning, Coldwell Banker's Real Estate Group and Director of Corporate Planning for Sears Roebuck & Co.\nTimothy J. O'Donovan has served the Company as Executive Vice President since 1982.\nRobert J. Sedrowski has served the Company as Vice President of Human Resources since October 1993. From 1990 to 1993 he served as Director of Human Resources for the Company, and from 1989 to 1990 he served as Director of Human Resources of Rospatch Corporation (now Ameriwood International, Inc.), a manufacturer.\nPART II\nItem 5.","section_5":"Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters.\nWolverine World Wide, Inc. common stock is traded on the New York and Pacific Stock Exchanges. The following table shows the high and low transaction prices by calendar quarter for 1993 and 1992. The number of holders of record of common stock on March 1, 1994 was 2,144.\nDividends Per Share Declared:\nDividends of $.04 per share were declared for the first quarter of fiscal 1994. Future dividends are restricted as more fully described in Note E of the consolidated financial statements, which are attached as Appendix A to this Form 10-K.\nItem 6.","section_6":"Item 6. Selected Financial Data.\nItem 7.","section_7":"Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.\nOperations\nResults of Operations - 1993 Compared to 1992\nNet sales for fiscal 1993 were $333.1 million compared to $293.1 million for fiscal 1992. This 13.6% increase was driven by record sales in the Wolverine Work & Outdoor Footwear Group, the Bates Uniform Footwear Division and the Tru-Stitch Footwear Division. The Hush Puppies Company also recorded a healthy sales increase during the year. These increases were partially offset by a decrease in the Wolverine Leathers Division sales.\nThe Wolverine Work & Outdoor Footwear Group posted a sales increase of 33.8% which was the second year in which the sales gain exceeded 30%. The continued success of Wolverine DURASHOCK (Registered) boots and the introduction of WOLVERINE WILDERNESS (Registered) products to the market place were the primary factors contributing to the sales gain. Increased marketing efforts to promote the Wolverine Work Boot products also contributed to the sales gains.\nA 16.2% increase in sales was realized by the Bates Uniform Footwear Division. While the U.S. military continues to contract, the comfort characteristics of BATES (Registered) footwear continues to gain acceptance and the durability of the product makes Bates number one in this category.\nThe Tru-Stitch Footwear Division reached record sales with a 20.7% increase for the year. Their prominent position in the market through all distribution channels and the addition of B & B Shoe Company which produces generally lower priced products continues to allow the Tru-Stitch Division to grow its business.\nWhile the Hush Puppies Company did not reach record sales volumes, it did post an increase of 5.3%. The repositioning and revitalization of the brand which began in 1992 is beginning to have a positive impact. Retail and consumer acceptance for the product is apparent as the division's reorder business for the year was strong.\nThe Wolverine Leathers Division began resizing during the third quarter of 1993. The primary focus is to retract the business into high margin areas where the business can perform profitability. The volume was reduced and this, combined with other actions, is expected to allow the division to regain its profitability as it focuses on the higher value added product in its offerings.\nGross margins as a percentage of net sales decreased to 30.0% from 30.2% in 1992. The emphasis of value priced product in the market place continues to place pressures on wholesale and retail price points. The Company is maximizing its pricing positions when superior products are available, such as WOLVERINE (Registered) DURASHOCKS (Registered) and\nTRU-STITCH (Registered) slippers, but is very cautious in raising prices in order to increase gross margin levels. A significant benefit, which improved the Company's gross margin levels, is the manufacturing efficiencies being produced in the domestic facilities. This, combined with the Company's low cost import operations, should continue to provide the Company with product which can be priced attractively.\nSelling and administrative expenses for 1993 were 24.1% of net sales compared to 26.0% of net sales in 1992. While the expenses were reduced as a percentage of net sales, the expenses increased $4.2 million. The increase was primarily a result of increased commissions due to higher volume, the impact of intensified marketing and promotional campaigns, and employee profit sharing programs. The overhead reduction plan which was announced in the fourth quarter of 1992 was successful and the initial target of $3.0 million of savings was exceeded by over $1.0 million.\nInterest expense of $5.1 million for 1993 reflects a $1.4 million increase over 1992. However, 1992 interest expense did not include interest expense of $2.3 million associated with discontinued operations. Overall, interest expense was reduced by $0.9 million as a result of the reduction in debt levels.\nOther expenses in 1992 included a restructuring charge of $2.7 million associated with the reduction in corporate staff and the write-down of certain intangible assets.\nThe 1993 effective tax rate of 27.9% compared to 28.7% in 1992. The decrease from the statutory federal rate of 35% was principally a result of non-taxable earnings of Puerto Rican and foreign subsidiaries.\nEarnings from continuing operations of $11.5 million for fiscal 1993 reflect a 149% increase over fiscal 1992 earnings of $4.6 million.\nDuring 1992 the corporation incurred costs associated with the operating losses of the Brooks Athletic Footwear Division and the loss associated with the disposal of this operation, which totaled $14.8 million. Additionally, the corporation elected to adopt SFAS No. 109 (\"Accounting for Income Taxes\") and SFAS No. 106 (\"Employers Accounting for Post-retirement Benefits Other Than Pensions\") which resulted in a net charge to earnings of $0.8 million. There were no additional charges associated with either the discontinued operations or accounting changes for 1993.\nNet earnings of $11.5 million ($1.65 per share) for 1993 compares to a loss of $10.9 million ($1.65 per share) for fiscal year end 1992. The change reflects the significant progress made in the core business units of the Company and the improvements resulting from the divestiture of the Brooks athletic business.\nResults of Operations - 1992 Compared to 1991\nNet sales of continuing operations totaling $293.1 million for fiscal 1992 were $10.4 million, or 3.7% higher than 1991. Sales gains were realized in the Wolverine Work and Outdoor Footwear Group, the Bates Uniform Footwear Division, the Tru-Stitch Footwear Division, and the Wolverine Leather Division. Partially offsetting these gains was a sales decline in the Hush Puppies Company.\nThe Wolverine Work and Outdoor Footwear Group posted sales gains of 38.0% over 1991, resulting primarily from the success of the WOLVERINE (Registered) DURASHOCKS (Registered) boots which feature a rugged adaptation of the patented BOUNCE (Registered) comfort sole. Improved styling coupled with an aggressive advertising campaign also contributed to the product's success.\nA sales increase of 10.0% was realized by the Bates Uniform Footwear Division despite a shrinking military market place. The majority of the growth in 1992 was attributable to the penetration of the newly introduced HUSH PUPPIES (Registered) PROFESSIONALS (Trademark) line into the civilian uniform market.\nThe Tru-Stitch Footwear Division, the market leader of constructed slippers, generated a 10.0% sales increase compared to 1991 as a result of expanding its product offering to meet a broader range of retail price points.\nDuring 1992, the Hush Puppies Company experienced a sales decline of 8.0% from 1991 primarily due to the continued weakness in the retail sector caused by the worldwide recession. The narrowing of the TOWN & COUNTRY (Trademark) brand product offerings also contributed to the sales decrease.\nGross margin as a percentage of net sales for 1992 was 30.2%, a decrease from 31.7% for 1991. Margin declines were realized in the Hush Puppies Company, due primarily to manufacturing volume reductions, and the Tru-Stitch Footwear Division, resulting from an increase in sales of lower margin merchandise. Partially offsetting these declines were increases in gross margins for the Wolverine Work and Outdoor Footwear Group and Bates Uniform Division resulting from favorable manufacturing efficiencies and improved pricing margins. The liquidation of lower cost LIFO inventories contributed .4% to the gross margin in 1991 and was not repeated in 1992.\nSelling and administrative expenses for 1992 of $76.2 million increased by $1.3 million or 1.7% over 1991. Increases in variable selling costs were partially offset by expense reductions related to a corporate overhead cost reduction program initiated in the fourth quarter of 1992.\nInterest expense of $3.6 million decreased by $0.1 million from 1991 as a result of a decline in interest rates partially offset by increased borrowings. Reported interest expense for 1992 does not include $2.3 million of interest which was classified as discontinued operations.\nOther expenses include restructuring costs in 1992 amounting to $2.7 million related to corporate staff reductions and asset write-offs compared to a charge in 1991 of $7.5 million for litigation settlement and related costs as described in Notes J and K to the Consolidated Financial Statements. The effective income tax rate for 1992 of 28.7% of earnings from continuing operations is below the statutory rate of 34.0% primarily due to nontaxable earnings of foreign subsidiaries and affiliates.\nEarnings from continuing operations of $4.6 million or $0.70 per share in 1992 compared favorably to $4.4 million or $0.68 per share in 1991.\nThe loss from discontinued operations in 1992 of $14.8 million is the result of operating losses and the Company's disposition of its Brooks athletic footwear and sports apparel businesses. The disposition includes the sales and distribution operations in the United States, France, Germany and the United Kingdom and the worldwide distribution and licensing rights to the brand name as described in Note C to the Consolidated Financial Statements.\nDuring 1992, the Company adopted SFAS No. 109 \"Accounting for Income Taxes.\" The cumulative effect of adopting this change in accounting for income taxes decreased the 1992 net loss by $0.8 million.\nThe Company also adopted the provisions of SFAS No. 106 \"Employers' Accounting for Post-retirement Benefits Other than Pensions\" in 1992. The cumulative effect of adopting this accounting change increased the 1992 net loss by $1.6 million.\nThe net loss of $10.9 million or $1.65 per share compared unfavorably to fiscal 1991 net earnings of $3.3 million or $0.50 per share due to the cumulative effect of accounting changes and the loss from discontinued operations recognized in fiscal 1992.\nLiquidity and Capital Resources\nEarnings from continuing operations after adjusting for non-cash items increased cash by $18.9 million in 1993 compared to $10.9 million in 1992. Of these amounts $12.9 million and $11.8 million were used to fund increases in working capital. The most significant changes in working capital were increases in accounts receivables and inventories during 1993 which were required in order to fund the growth of the business. In fiscal 1992, a significant reduction in other current liabilities was reported as the litigation settlement was paid.\nAdditions to property, plant and equipment of $6.6 million in 1993 was higher than the $4.1 million reported in 1992, but relatively flat with the $6.3 million in 1991. The majority of this expenditure was related to purchases of manufacturing equipment in order to continue to upgrade our manufacturing facilities.\nIn 1993, cash of $12.2 million was provided from the divestiture of the Brooks athletic business.\nPayments on short-term debt of $15.2 million were made during 1993 which was principally a reduction of debt related to the discontinued operations of Brooks.\nLong-term debt of $49.6 million in 1993 remains relatively flat compared to $48.4 million in 1992. While the senior notes were reduced by $4.3 million, the Company recognized an increase in the revolving credit obligations of $7.0 million.\nThe Company paid dividends of $1.1 million, or $.16 per share, which was consistent with 1992 and 1991. Additionally, shares issued under employee stock plans provided cash of $2.2 million compared to $1.2 million during 1992. The Company expects to increase its dividend payout beginning the second quarter of 1994 by 50%.\nThe Company continues to strengthen its financial position as the current ratio improved to 3.9 : 1 in 1993 versus 2.8 : 1 in 1992. Additionally, total interest bearing debt to equity was .46 : 1 in 1993 compared to .65 : 1 at year end 1992.\nThe Company's credit facilities and banking relationships combined with cash flow from future operations are expected to be sufficient to meet the cash requirements of the Company. The revolving credit facility which expires in 1995 will be renegotiated during 1994 to assure that proper financing remains in place for the Company. The Company is also evaluating the refinancing of its senior notes to determine the benefits of lower interest rates. Additionally, the Company maintains short-term credit facilities of $41.0 million of which $13.4 million were used at year end 1993.\nInflation\nInflation has not had a significant impact on the Company over the past three years nor is it expected to have a significant impact in the foreseeable future. The Company continuously attempts to minimize the effect of inflation through cost reductions and improved productivity.\nRecent Development\nThe number of shares and the amount per share data included in this Form 10-K have not been adjusted to reflect the three-for-two stock split which was approved by the Board of Directors of the Company on March 10, 1994, and which will be payable on April 14, 1994, to stockholders of record of the Company as of March 21, 1994.\nItem 8.","section_7A":"","section_8":"Item 8. Financial Statements and Supplementary Data.\nThe response to this Item is set forth in Appendix A of this Annual Report on Form 10-K and is here incorporated by reference.\nItem 9.","section_9":"Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.\nNone.\nPART III\nItem 10.","section_9A":"","section_9B":"","section_10":"Item 10. Directors and Executive Officers of the Registrant.\nThe information regarding directors of the Company contained under the captions \"Board of Directors\" and \"Compliance with Section 16(a) of the Exchange Act\" in the definitive Proxy Statement of the Company dated March 22, 1994, is incorporated herein by reference. The information regarding Executive Officers is provided in the Supplemental Item following Item 4 of Part I above.\nItem 11.","section_11":"Item 11. Executive Compensation.\nThe information contained under the captions \"Compensation of Directors\", \"Executive Compensation,\" \"Employment Agreements, Termination of Employment and Change of Control Arrangements\" and \"Compensation Committee Interlocks and Insider Participation\" in the definitive Proxy Statement of the Company dated March 22, 1994, is incorporated herein by reference.\nItem 12.","section_12":"Item 12. Security Ownership of Certain Beneficial Owners and Management.\nThe information contained under the captions \"Ownership of Common Stock\" and \"Securities Ownership of Management\" contained in the definitive Proxy Statement of the Company dated March 22, 1994, is incorporated herein by reference.\nItem 13.","section_13":"Item 13. Certain Relationships and Related Transactions.\nThe information regarding certain employee loans following the caption \"Executive Compensation,\" under the subheading \"Stock Options,\" and the information contained under the caption \"Compensation Committee Interlocks and Insider Participation\" contained in the definitive Proxy Statement of the Company dated March 22, 1994, are incorporated herein by reference.\nPART IV\nItem 14.","section_14":"Item 14. Exhibits, Financial Statements, Schedules, and Reports on Form 8- K.\nItem 14(a)(1). List of Financial Statements. Attached as Appendix A.\nThe following consolidated financial statements of Wolverine World Wide, Inc. and subsidiaries are filed as a part of this report:\n- Consolidated Balance Sheets as of January 1, 1994, and January 2, 1993.\n- Consolidated Statements of Stockholders' Equity for the Fiscal Years Ended January 1, 1994, January 2, 1993 and December 28, 1991.\n- Consolidated Statements of Operations for the Fiscal Years Ended January 1, 1994, January 2, 1993 and December 28, 1991.\n- Consolidated Statements of Cash Flows for Fiscal Years Ended January 1, 1994, January 2, 1993 and December 28, 1991.\n- Notes to Consolidated Financial Statements for January 1, 1994.\nItem 14(a)(2). Financial Statement Schedules. Attached as Appendix B.\nThe following consolidated financial statement schedules of Wolverine World Wide, Inc. and subsidiaries are filed as a part of this report:\n- Schedule II--Amounts receivable from related parties and underwriters, promoters and employees other than related parties.\n- Schedule VIII--Valuation and qualifying accounts of continuing operations.\n- Schedule IX--Short-term borrowings of continuing operations.\n- Schedule X--Supplementary income statement information of continuing operations.\nAll other schedules (I, III, IV, V, VI, VII, XI, XII, XIII, XIV) for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and, therefore, have been omitted.\nItem 14(a)(3). List of Exhibits.\nItem 14(b). Reports on Form 8-K.\nNo reports on Form 8-K were filed in the fourth quarter of the fiscal year ended January 1, 1994.\nSIGNATURES\nPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.\nWOLVERINE WORLD WIDE,INC.\nDated: March 31, 1994 By:\/s\/Geoffrey B. Bloom Geoffrey B. Bloom President, Chief Executive Officer and Director\nPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.\nSignature Title Date\n*\/s\/Phillip D. Matthews Chairman of the Board of March 31, 1994 Phillip D. Matthews Directors\n\/s\/Geoffrey B. Bloom President, Chief Executive March 31, 1994 Geoffrey B. Bloom Officer and Director\n*\/s\/Thomas D. Gleason Vice Chairman of the Board March 31, 1994 Thomas D. Gleason of Directors\n*\/s\/Timothy J. O'Donovan Executive Vice President March 31, 1994 Timothy J. O'Donovan and Director\n*\/s\/Stephen L. Gulis, Jr. Vice President and Chief March 31, 1994 Stephen L. Gulis, Jr. Financial Officer (Principal Financial and Accounting Officer)\n*\/s\/Daniel T. Carroll Director March 31, 1994 Daniel T. Carroll\n*\/s\/David T. Kollat Director March 31, 1994 David T. Kollat\n*\/s\/David P. Mehney Director March 31, 1994 David P. Mehney\n*\/s\/Stuart J. Northrop Director March 31, 1994 Stuart J. Northrop\n*\/s\/Joseph A. Parini Director March 31, 1994 Joseph A. Parini\n*\/s\/Joan Parker Director March 31, 1994 Joan Parker\n*\/s\/Elmer L. Ward, Jr. Director March 31, 1994 Elmer L. Ward, Jr.\n*by\/s\/Geoffrey B. Bloom Geoffrey B. Bloom Attorney-in-Fact\nAPPENDIX A\nWolverine World Wide, Inc. and Subsidiaries Consolidated Balance Sheets\nWolverine World Wide, Inc. and Subsidiaries Consolidated Balance Sheets (Continued)\nSee accompanying notes to consolidated financial statements.\nWolverine World Wide, Inc. and Subsidiaries Consolidated Statements of Operations\nSee accompanying notes to consolidated financial statements.\nWolverine World Wide, Inc. and Subsidiaries Consolidated Statements of Cash Flows\nWolverine World Wide, Inc. and Subsidiaries Consolidated Statements of Cash Flows (continued)\nWolverine World Wide, Inc. and Subsidiaries Consolidated Statements of Stockholders' Equity\nWolverine World Wide, Inc. and Subsidiaries Notes to Consolidated Financial Statements\nJanuary 1, 1994\nNote A - Summary of Significant Accounting Policies\nPrinciples of Consolidation\nThe consolidated financial statements include the accounts of the Company and its majority owned subsidiaries. Upon consolidation, all intercompany accounts, transactions and profits have been eliminated. The investment in a 35%-owned foreign affiliate is carried on the equity basis.\nFiscal Year End\nThe Company's fiscal year is the 52- or 53-week period that ends on the Saturday nearest the end of December. Fiscal years presented herein include the 52-week years ended January 1, 1994 and December 28, 1991, and the 53-week year ended January 2, 1993.\nRevenue Recognition\nRevenue is recognized on the sale of Company products when the related goods have been shipped and legal title has passed to the customer.\nCash Equivalents\nAll short-term investments with a maturity of less than three months when purchased are considered cash equivalents for purposes of the consolidated statement of cash flows. The carrying amount reported in the balance sheet for cash and cash equivalents approximates its fair value.\nInventories\nInventories are valued at the lower of cost or market. Cost is determined by the last-in, first-out (LIFO) method for substantially all manufacturing inventories (see Note B). Inventories of the Company's retail operations are valued using the retail method.\nProperty, Plant and Equipment\nProperty, plant and equipment are stated on the basis of cost and include expenditures for new facilities, major renewals and betterments. Normal repairs and maintenance are expensed as incurred.\nDepreciation of plant and equipment is computed using the straight-line method over the estimated useful lives of the respective assets.\nWolverine World Wide, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued)\nNote A - Summary of Significant Accounting Policies (continued)\nIncome Taxes\nThe provision for income taxes is based on the earnings or loss reported in the financial statements. A deferred income tax asset or liability is determined by applying currently enacted tax laws and rates to the cumulative temporary differences between the carrying value of assets and liabilities for financial statement and income tax purposes. Deferred income tax expense (credit) is measured by the change in the deferred income tax asset or liability during the year.\nEarnings Per Share\nPrimary earnings per share are computed based on the weighted average shares of common stock outstanding during each year and, for fiscal 1993, the assumed exercise of dilutive stock options. Stock options are not included in the computation of earnings per share in prior years since they were not materially dilutive. Fully diluted earnings per share for fiscal 1993 also includes the effect of converting subordinated notes into common stock. Fully diluted earnings per share are not presented for prior years since the effect of exercising stock options and converting subordinated notes was not material.\nFinancial Instruments\nThe Company's financial instruments, as defined by Statement of Financial Accounting Standard No. 107, consist of cash and cash equivalents, notes receivable and long-term debt. The Company's estimate of the fair value of these financial instruments approximates the carrying amounts at January 1, 1994, except for certain long-term debt arrangements as discussed in Note E.\nReclassifications\nCertain amounts in 1992 and 1991 have been reclassified to conform with the presentation used in 1993.\nNote B - Inventories\nInventories in the amount of $47,686,000 at January 1, 1994 and $38,950,000 at January 2, 1993 have been valued using the LIFO method. If the FIFO method had been used, the amounts would have been $19,903,000 and $20,082,000 higher than reported at January 1, 1994 and January 2, 1993, respectively.\nReductions in certain inventory quantities during 1991 resulted in the liquidation of LIFO inventory layers carried at costs prevailing in prior\nWolverine World Wide, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued)\nyears that were lower than current costs. The effect of these reductions was to increase 1991 earnings from continuing operations before income taxes by $1,080,000 and net earnings by $702,000 ($.11 per share). There were no similar liquidations of LIFO inventories in 1993 or 1992.\nNote C - Discontinued Operations\nAt the end of the third quarter of fiscal 1992, the Company announced its intent to dispose of its Brooks athletic footwear and sports apparel business. The Brooks business consisted of sales and distribution operations in the United States, France, Germany and the United Kingdom, sourcing activities, primarily in the Far East, and worldwide licensing of the rights to the brand name. The Brooks distributors in Europe were 33%- owned equity investees from April 3, 1990 until July 1, 1991 when the remaining equity interests were acquired.\nDuring 1993, the Company sold the Brooks businesses in separate transactions in exchange for cash and notes totaling approximately $24 million. Notes receivable of $7,700,000 were outstanding at January 1, 1994 and are collateralized by substantially all of the assets sold. The noncurrent portion of the notes receivable representing payments of $2,300,000, $4,324,000, and $361,000, due in 1995, 1996 and 1997, respectively, are included in other assets.\nThe results of these businesses, which are classified separately as discontinued operations in the accompanying consolidated statements of operations, are summarized as follows:\nThe above results for 1992 are through the third quarter when the decision was made to dispose of the Brooks business. Operating results of discontinued operations for 1992 and 1991 include allocations of overhead and interest expense. Overhead expense of $370,000 and $556,000, respectively, was allocated based upon a determination of those costs which were not expected to be incurred by continuing operations. Interest\nWolverine World Wide, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued)\nexpense of $2,268,000 and $1,442,000, respectively, was allocated based on debt incurred to finance the discontinued operations since acquisition.\nThe Company also made charges of $16,300,000 ($9,335,000 after income taxes) during fiscal 1992 to provide for estimated losses on the disposal of the Brooks businesses including anticipated operating losses from the end of the third quarter to the expected dates of sale.\nNote D - Notes Payable to Banks\nNotes payable to banks at January 1, 1994 consist primarily of unsecured short-term borrowings of the Company's Canadian subsidiary. The notes bear interest at Canadian prime (5.5% at January 1, 1994) plus 2%. Notes payable to banks in 1992 also included unsecured short-term borrowings of the Company's Brooks Europe subsidiaries which were substantially repaid in 1993 in connection with the disposal of the Brooks business.\nThe Company also has $41,000,000 of short-term borrowing and commercial letter-of-credit facilities. There were no outstanding borrowings at the end of fiscal 1993; however, outstanding letters-of-credit amounted to approximately $13,400,000.\nNote E - Long-Term Debt\nLong-term debt consists of the following obligations at the end of fiscal 1993 and 1992:\nThe 10.4% senior notes to insurance companies were issued on September 1, 1988. The note agreement requires equal annual principal payments of $4,286,000 on August 15, 1994 through 1998.\nWolverine World Wide, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued)\nNote E - Long-Term Debt (continued)\nThe revolving credit agreement allows for borrowings of up to the lesser of $50,000,000 or amounts determined in accordance with certain asset-based debt limitation formulas. The agreement also requires the outstanding balance to be no more than $30,000,000 during the period December 1 through May 31 each year. Interest is payable at variable rates based on both LIBOR and prime (6% at January 1, 1994). The agreement expires on June 30, 1995, but can be renewed with the mutual consent of the Company and the participating lenders. As of January 1, 1994, the available unused credit under the agreement was $5,000,000. Maximum borrowings under the agreement during 1993 and 1992 were $46,000,000 and $45,000,000, respectively.\nThe subordinated convertible notes are payable in two installments of $1,250,000 each in 1995 and 1996 with interest payable semiannually at 6.5%. The notes are subordinated to all insurance company and bank debt and are convertible into common stock at a price of $12.50 per share at any time prior to maturity.\nThe revolving credit and insurance company loan agreements contain restrictive covenants which, among other things, require the Company to maintain certain financial ratios and minimum levels of working capital and tangible net worth. The agreements also impose restrictions on the occurrence of additional debt, sale and merger transactions, acquisition by the Company of its common stock and the payment of dividends. At January 1, 1994, retained earnings of $2,873,000 are available for dividends or other restricted payments under the most restrictive of these provisions.\nPrincipal maturities of long-term debt during the four years subsequent to 1994 are as follows: 1995--$30,705,000; 1996--$5,586,000; 1997--$4,336,000; 1998--$4,286,000.\nThe carrying value of the Company's long-term debt approximates fair market value except for the 10.4% senior notes and the convertible notes. The fair market value of the senior notes is estimated to be $24,300,000. This was determined using discounted cash flow analysis and the Company's incremental borrowing rate for similar financing arrangements. The fair market value of the subordinated convertible notes is $6,000,000 based on the quoted market price of the Company's common stock at January 1, 1994.\nNote F - Leases\nThe Company leases machinery, transportation equipment and certain warehouse and retail store space under agreements which expire at various dates through 2002. At January 1, 1994, minimum rental payments due under all noncancelable leases are as follows (thousands of dollars):\nWolverine World Wide, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued)\nNote F - Leases (continued)\nRental expense under all operating leases is summarized as follows:\nContingent rentals are based on retail store sales volume or usage of equipment.\nNote G - Capital Stock\nThe Company's authorized capital includes 2,000,000 shares of preferred stock with a par value of $1 per share. No preferred stock has been issued; however, the Company has designated 880,000 shares of preferred stock as Series A junior participating preferred stock for possible future issuance under the Company's stock rights plan described below. Each share of Series A junior preferred stock will have 100 votes upon issuance and a preferential quarterly dividend equal to the greater of $6.00 per share or 100 times the dividend declared on the Company's common stock.\nThe Company's stock rights plan is designed to protect stockholder interests in the event the Company is confronted with coercive or unfair takeover tactics. Under its terms, each stockholder received one right for each share of common stock owned. The rights will trade separately from common stock and will become exercisable only upon the occurrence of certain triggering events, including a person, group or company acquiring 15% or more of the Company's outstanding common stock, tendering for a 15% or greater interest in the Company, or acquiring 10% or more of the outstanding common stock and being determined by the Company's Board of Directors to be an adverse person, as defined.\nWolverine World Wide, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued)\nNote G - Capital Stock (continued)\nEach right, when exercisable, will entitle the holder to purchase one one- hundredth of a share of Series A junior participating preferred stock for $40. Alternatively, in the event the Company is a party to a merger or other business combination, regardless of whether the Company is the surviving corporation, rights holders, other than the party to the merger, will be entitled to receive common stock of the surviving corporation worth twice the exercise price of the rights. The plan also provides for protection against self-dealing transactions by a 15% stockholder or the activities of an adverse person. The Company may redeem the rights for $.01 each at any time prior to fifteen days after a triggering event. Unless redeemed earlier, all rights will expire on May 8, 1997.\nThe Company has stock incentive plans under which options to purchase shares of common stock may be granted to officers, other key employees and nonemployee directors. Under the plans, which were adopted in 1979, 1988 and 1993, options are exercisable in equal annual installments of 25% over three years beginning on the date the options are granted. All unexercised options under the 1988 and 1993 plans are available for future grants upon their cancellation. The 1979 plan expired during 1989 and no additional options are available for future grants under this plan.\nA summary of the transactions under the plans follows:\nWolverine World Wide, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued)\nNote G - Capital Stock (continued)\nA provision in the 1993 stock incentive plan allows the Company to make stock awards to officers and key employees as consideration for future services. The intent of this provision is to provide a continuation of the provisions of the executive incentive stock purchase plan adopted in 1984 and expiring on December 31, 1994, which awarded rights to purchase shares of the Company's common stock at a nominal price of $1.00 per share. Common stock acquired under the provisions of either plan is subject to certain restrictions, including prohibition against any sale, transfer or other disposition by the officer or employee, and a requirement to forfeit the award upon termination of employment. These restrictions lapse over a three- to five-year period from the date of the award. During 1993, 15,484 shares were issued under provisions of the current plan and 4,716 shares were issued under the predecessor plan. Rights to purchase 19,700 and 26,500 shares of common stock under the 1984 plan for $1.00 per share were granted in 1992 and 1991, respectively, and rights to 2,913 and 3,375 shares were canceled in 1992 and 1991. The maximum of 150,000 shares have been granted under the 1984 plan. Additional shares may be awarded under the 1993 stock incentive plan. Such awards will reduce the number of shares effected above as available for grant under the stock option provisions of the plan.\nNote H - Retirement Plans\nThe Company has noncontributory, defined benefit pension plans covering a majority of domestic employees. The Company's principal defined benefit pension plan provides benefits based on the employee's years of service and final average earnings (as defined), while the other plans provide benefits at a fixed rate per year of service. The Company intends to annually contribute amounts deemed necessary, if any, to maintain the plans on a sound actuarial basis.\nThe Company also has individual deferred compensation agreements with certain key employees which entitles them to receive payments from the Company for a period of fifteen to eighteen years following retirement. Under the terms of the individual contracts, the employees are eligible for reduced benefits upon early retirement generally at age 58. Prior to 1992, the Company's policy was to recognize the deferred compensation cost over the expected employment period of the individual employees.\nIn addition, the Company sponsors a noncontributory defined benefit plan that provides postretirement life insurance benefits to full-time employees who have worked ten or more consecutive years and attained age 60 while employed by the Company. Prior to 1992, the Company's policy was to recognize expense when claims were paid.\nThe Company does not provide postretirement medical benefits.\nWolverine World Wide, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued)\nNote H - Retirement Plans (continued)\nThe Company also has a defined contribution plan covering substantially all employees which provides for Company contributions based on the Company's earnings. Contributions to the plan were $760,000 in 1993, $69,000 in 1992 and $267,000 in 1991.\nThe Company adopted the provisions of Statement of Financial Accounting Standard (SFAS) No. 106, \"Employers' Accounting for Postretirement Benefits Other Than Pensions\" in 1992. SFAS No. 106 requires the estimated cost of life insurance benefits and deferred compensation contracts to be recognized over the period of employment to the date that employees are fully eligible to receive future benefits.\nThe cumulative prior year effect of adopting SFAS No. 106 was recorded in fiscal 1992 and amounted to $2,400,000 ($1,550,000 after related deferred income taxes). If the revised accounting principle had been applied retroactively, net earnings for fiscal 1991 would not have changed significantly.\nThe following summarizes the status of the Company's pension assets and related obligations:\nWolverine World Wide, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued)\nNote H - Retirement Plans (continued)\nThe discount rate and rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligation were 7.5% and 4% in 1993 and 8.5% and 5% in 1992. These assumption changes increased the projected benefit obligation at September 30, 1993 by approximately $3,300,000.\nAt September 30, 1993, plan assets were invested in listed equity securities (69%), fixed income funds (20%), guaranteed investment contracts (6%) and short-term investments (5%). Equity securities at September 30, 1993 include 200,200 shares of the Company's common stock with a fair value of $5,756,000.\nThe following is a summary of the pension income recognized by the Company:\nThe expected long-term return on plan assets was 9.0% in 1993 and 1992, and 9.5% in 1991.\nThe Company's accumulated postretirement life insurance benefit obligation is as follows:\nWolverine World Wide, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued)\nNote H - Retirement Plans (continued)\nThe weighted-average discount rate used in determining the accumulated postretirement benefit obligation was 7.5% in 1993 and 8.5% in 1992. The Company's expense for postretirement life insurance benefits was $70,000 in 1993 and $50,000 in 1992 and 1991.\nNote I - Income Taxes\nEffective the beginning of fiscal 1992, the Company adopted SFAS No. 109, \"Accounting for Income Taxes\". The new standard requires that an asset and liability approach be applied in accounting for income taxes and provides revised criteria for the recognition of deferred tax assets. As permitted under the new rules, prior years financial statements were not restated. The cumulative prior year effect of adopting SFAS No. 109 was recorded in fiscal 1992 and decreased the net loss by $800,000.\nThe provisions (credit) for income taxes consists of the following:\nA reconciliation of the Company's total income tax expense (benefit) and the amount computed by applying the statutory federal tax rate of 35% (34% for fiscal 1992 and 1991) to earnings from continuing operations before income taxes is as follows:\nWolverine World Wide, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued)\nNote I - Income Taxes (continued)\nDeferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities as of the end of fiscal 1993 and 1992 are as follows:\nThe valuation allowance has been provided to recognize the uncertainty of realizing a portion of the deferred tax assets which are dependent upon future taxable income.\nThe Company has provided for substantially all taxes that would be payable if accumulated earnings of its Puerto Rico subsidiary were distributed. Similar taxes on the unremitted earnings of the Company's foreign affiliates have not been provided because such earnings are considered permanently invested. The additional taxes that would be payable if unremitted earnings of its foreign affiliates were distributed are not significant.\nWolverine World Wide, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued)\nNote J - Restructuring\nA restructuring charge of $2,700,000 in fiscal 1992 is included in other expense - net. The charge consisted principally of costs associated with a reduction in the corporate staff and the write-off of certain intangible and other assets. After related income taxes, the charge reduced 1992 earnings from continuing operations and net earnings by $1,730,000 ($.26 per share).\nNote K - Litigation\nOn March 2, 1992, the Company settled lawsuits which were filed in 1989 and 1990 by Southwest Hide Company and First Security Bank of Utah under an agreement requiring the payment of cash and notes. To provide for the settlement, the Company recognized a charge of $7,500,000 in its 1991 financial statements which is included in other expenses - net. After related income taxes, the provision reduced 1991 earnings from continuing operations and net earnings by $6,100,000 ($.93 per share).\nThe Company is involved in various other legal actions arising in the normal course of business. After taking into consideration legal counsel's evaluation of such actions, management is of the opinion that their outcome will not have a significant effect on the Company's consolidated financial position or results of operations.\nNote L - Industry Information\nThe Company is principally engaged in the manufacture and sale of footwear, primarily casual shoes, slippers, moccasins, dress shoes, boots, uniform shoes and work shoes. The Company is also the largest domestic tanner of pigskin which is used in a significant portion of shoes manufactured and sold by the Company, and is also sold to other domestic and foreign manufacturers of shoes and other products and to the Company's foreign trademark licensees. Royalty income is derived from licensing its trademarks to domestic and foreign licensees for use on non-footwear and footwear products. As part of its footwear business, the Company operates a number of domestic retail shoe stores that sell Company-manufactured products as well as footwear manufactured by unaffiliated companies. Foreign operations consist of factories in the Dominican Republic and Mexico which produce shoe uppers for Company operations in the United States and a 75%-owned subsidiary which manufactures and markets branded footwear in Canada. Export sales, foreign operations and related assets, excluding the discontinued Brooks European operations (see Note C), are not significant.\nThe Company markets its products primarily to customers in the retail sector. Although the Company closely monitors the credit worthiness of its customers and adjusts its credit policies and limits as needed, a substantial portion of its debtors' ability to discharge amounts owed is\nWolverine World Wide, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued)\ndependent upon the retail economic environment. The Company does not believe that it is dependent upon any single customer, since none account for more than 10% of consolidated net sales.\nNote M - Quarterly Results of Operations (Unaudited)\nThe Company reports its quarterly results of operations on the basis of 12-week periods for each of the first three quarters and a 16-week period for the fourth quarter. The fourth quarter of fiscal 1992 included 17 weeks.\nThe following tabulation presents the Company's unaudited quarterly results of operations for fiscal 1993 and 1992. Certain reclassifications have been made to the amounts originally reported in the Company's quarterly reports on Form 10-Q to conform with the presentation used in the annual financial statements.\nWolverine World Wide, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued)\nNote M - Quarterly Results of Operations (Unaudited) (continued)\nAdjustments recorded in the fourth quarter of fiscal 1993 and 1992 relating principally to inventories increased net earnings by $1,910,000 ($0.27 per share) in 1993 and earnings from continuing operations in 1992 by $1,030,000 ($0.16 per share). In addition, an after tax provision of $6,900,000 ($1.04 per share) related to discontinued operations was recorded in the fourth quarter of 1992 (see Note C).\nReport of Independent Auditors\nThe Board of Directors Wolverine World Wide, Inc.\nWe have audited the accompanying consolidated balance sheets of Wolverine World Wide, Inc. and subsidiaries as of January 1, 1994 and January 2, 1993, and the related consolidated statements of stockholders' equity, operations and cash flows for each of the three fiscal years in the period ended January 1, 1994. Our audits also included the financial statement schedules listed in the Index at Item 14(a). These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.\nWe conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.\nIn our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Wolverine World Wide, Inc. and subsidiaries at January 1, 1994 and January 2, 1993, and the consolidated results of their operations and their cash flows for each of the three fiscal years in the period ended January 1, 1994, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.\nErnst & Young\nGrand Rapids, Michigan February 14, 1994\nAPPENDIX B\nSchedule II--Amounts Receivable from Related Parties and Underwriters, Promoters and Other Employees Other than Related Parties\nWolverine World Wide, Inc. and Subsidiaries\nFiscal year ended January 1, 1994\nSchedule VIII--Valuation and Qualifying Accounts from Continuing Operations Wolverine World Wide, Inc. and Subsidiaries\nSchedule IX--Short-Term Borrowings of Continuing Operations Wolverine World Wide, Inc. and Subsidiaries\nSchedule X--Supplementary Income Statement Information of Continuing Operations\nWolverine World Wide, Inc. and Subsidiaries\nAmounts for amortization of intangible assets, taxes other than payroll and income taxes and royalties are not presented, as such amounts are less than one percent of total net sales and other operating income in each of the three fiscal years.\nCommission File No. 1-6024\nSECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549\nEXHIBITS TO FORM 10-K\nFor the Fiscal Year January 1, 1994\nWolverine World Wide, Inc. 9341 Courtland Drive Rockford, Michigan 49351\nEXHIBIT INDEX","section_15":""}
{"filename":"720556_1993.txt","cik":"720556","year":"1993","section_1":"Item 1. Business\nGENERAL\nCalifornia Energy Company, Inc. (the \"Company\"), together with its subsidiaries, is primarily engaged in the exploration for and development of geothermal resources and the development, ownership and operation of environmentally responsible independent power production facilities worldwide utilizing geothermal resources and other energy sources such as hydroelectric, natural gas, oil and coal. The Company was an early participant in the domestic independent power market and is now one of the largest geothermal power producers in the United States. The Company is also actively pursuing opportunities in the international independent power market. The Company is a Delaware corporation which was formed in 1971. The Company's Common Stock is traded on the New York, Pacific and London Stock Exchanges under the symbol \"CE\". Approximately 37% of the Company's Common Stock is owned by a Peter Kiewit Sons', Inc. subsidiary, Kiewit Energy Company (references herein to \"Kiewit\" means Peter Kiewit Sons', Inc. and its affiliates including Kiewit Energy Company, Kiewit Diversified Group Inc. and Kiewit Construction Group Inc. or other subsidiaries thereof, as applicable). Kiewit is a large construction, mining and telecommunications company headquartered in Omaha, Nebraska. Kiewit is a joint venture participant in certain of the Company's international private power projects.\nThrough its subsidiaries, the Company currently has substantial ownership interests in, and operates, four geothermal facilities that are qualified facilities under the Public Utility Regulatory Policies Act of 1978 (\"PURPA\"), which requires electric utilities to purchase electricity from qualified independent power producers. Three of the Company's geothermal power production facilities are located at the Naval Air Weapons Station at China Lake, California (together, the \"Coso Project\") and are each owned by separate partnerships (collectively the \"Coso Joint Ventures\" and individually the \"Navy I Joint Venture\", the \"BLM Joint Venture\" and the \"Navy II Joint Venture\"). The Company owns an interest of approximately 50% in each of the Coso Joint Ventures and, through a subsidiary, acts as the managing general partner of each. The Coso Project continues to constitute the Company's primary source of electrical generation capacity constituting an aggregate generating capacity of approximately 240 net megawatts (\"NMW\"). The Coso Project power production facilities have a gross capacity of approximately 88 megawatts (\"MW\") each (referred to individually as the \"Navy I Project\", the \"BLM Project\" and the \"Navy II Project\"). The Coso Joint Ventures sell all electricity generated by the Coso Projects pursuant to three long-term \"Interim Standard Offer No. 4\" contracts (the \"SO4 Agreements\") between each of the Coso Joint Ventures and Southern California Edison Company (\"SCE\"). These SO4 Agreements provide for energy payments, capacity payments and capacity bonus payments. The fixed price periods for energy payments of the SO4 Agreements extend until August 1997, March 1999 and January 2000 for each of the Navy I Joint Venture, the BLM Joint Venture and the Navy II Joint Venture, respectively. Energy payments under the SO4 Agreements have been fixed at rates ranging from 10.1 cents per kilowatt hour (\"kWh\") in 1993 to 14.6 cents per Kwh in August 1998. After the fixed price period expires for each of the Coso Projects, the energy will be purchased at SCE's then prevailing avoided cost (as determined by the California Public Utilities Commission) which at present is substantially lower than the current energy payments under the SO4 Agreement. In addition to the energy payments, SCE makes fixed annual capacity payments to the Coso Joint Ventures, and under certain circumstances is required to make capacity bonus payments. The price for capacity and capacity bonus payments is fixed for the life of the SO4 Agreements. See \"The Coso Project -- SO4 Power Sales Agreements.\"\nThe Company also owns and operates a 10 MW geothermal power plant located at Desert Peak, Nevada which is a qualified facility that sells power to Sierra Pacific Power Company, and operates and owns a 70% interest in a geothermal steam field at Roosevelt Hot Springs, Utah, which supplies 25 MW of geothermal steam to Utah Power & Light Company under a 30-year steam sales agreement. Pursuant to a memorandum of understanding, the Company has commenced early stage site work on a proposed 30 MW geothermal project at Newberry, Oregon (the \"Newberry Project\"), which is expected to be completed in early 1997 and to be wholly owned and operated by the Company.\nIn September 1993, the Company acquired The Ben Holt Co., a 30 person engineering firm located in Pasadena, California which specializes in the design of geothermal power plants and has international experience. The Ben Holt Co. will provide support to the Company's domestic and international projects as well as continue its services to third parties.\nDomestically, the Company plans to focus on developing and operating geothermal power projects, an area in which the Company believes it has a competitive advantage due to its geotechnical and project management expertise and extensive geothermal leaseholdings. The Company intends to continue to pursue geothermal opportunities in the Pacific Northwest where it has extensive geothermal leaseholdings. In March 1993, the Company acquired 26,000 acres of geothermal leases and three successful production wells in the Glass Mountain area of Northern California. In addition, the Company has diversified into other environmentally responsible sources of power generation. The Company is currently constructing a 50 NMW natural gas fired cogeneration project in Yuma, Arizona (the \"Yuma Project\"), which is expected to be wholly owned by the Company and to sell electricity to San Diego Gas & Electric Company (\"SDG&E\") under a 30-year power sales contract. The Company anticipates that this project will be completed by mid- year 1994. See \"Other Domestic Projects and Development Opportunities - Yuma.\" The Company expects future diversification through the selective acquisition of partially developed or existing power generating projects and intends to maintain a significant equity interest in, and to operate, the projects which it develops or acquires.\nInternational Activities\nThe Company presently believes that the international independent power market holds the majority of new opportunities for financially attractive private power development in the next several years. The Company is actively pursuing selected opportunities in nations where power demand is high and the Company's geothermal resource development and operating experience, project development expertise and strategic relationships are expected to provide it with a competitive advantage. The Company believes that the opportunities to successfully develop, construct, finance, own and operate international power projects are increasing as several countries have initiated the privatization of the power generation capacity and have solicited bids from foreign developers to purchase existing generating facilities or to develop new capacity. Some of these countries, such as the Philippines and Indonesia, also have extensive geothermal resources.\nThe Company has recently entered into international joint venture agreements with Kiewit and Distral S.A. (\"Distral\"), firms with significant power plant construction experience, in an effort to augment and accelerate the Company's capabilities in foreign energy markets. Joint venture activities with Distral are expected to be conducted in South America, Central America and the Caribbean and joint venture activities with Kiewit are expected to be conducted in Asia, in particular the Philippines and Indonesia, and in other regions not covered by the Distral joint venture agreement. See \"International Geothermal and Other Development Opportunities - International Joint Venture Agreements.\"\nThe Company has obtained \"take-or-pay\" power sales contracts for two geothermal power projects in the Philippines aggregating approximately 300 MW in capacity. The Upper Mahiao project (the \"Upper Mahiao Project\"), a 120 MW geothermal facility with an estimated total project cost of approximately $226 million, is expected to be constructed on the island of Leyte and will be over 95% owned and operated by the Company. A syndicate of international banks is expected to provide approximately $170 million project finance construction loan for the project. The Company's equity commitment to such project would be approximately $56 million. The Export-Import Bank of the United States (\"ExIm Bank\") is expected to provide the term loan that would be used to refinance the construction loan for this project, as well as political risk insurance to the syndicate of commercial banks for the construction loan. The Company intends to arrange for similar insurance on its equity investment through the Overseas Private Investment Corporation (\"OPIC\") or from other governmental agencies or commercial sources. The Company expects that both the construction and the term loan agreements for the Upper Mahiao Project will be executed in April 1994 and that the notice to proceed will be issued promptly thereafter under the construction contract, which was executed in January 1994. Commercial operation of this project is presently scheduled for mid-year 1996.\nThe Mahanagdong project (the \"Mahanagdong Project\"), a 180 MW geothermal project with an anticipated total project cost of approximately $310 million, is expected to be operated by the Company and owned 45% by the Company, 45% by Kiewit and up to 10% by another industrial company. The Company's equity investment for the Mahanagdong Project would be approximately $40 million, and the Company intends to obtain political risk insurance on its investment similar to that for the Upper Mahiao Project. The Company is in the process of arranging construction financing for this project from a syndicate of international banks on terms similar to those of the Upper Mahiao Project construction loan. The construction financing is expected to close in mid-year 1994, with commercial operation presently scheduled for mid-year 1997. See \"International Geothermal and Other Development Opportunities - The Philippines.\"\nThe Company has been awarded the geothermal development rights to three geothermal fields in Indonesia at Dieng, Patuha and Lampung\/South Sumatra, the initial phases of which could aggregate an additional generating capacity of 500 NMW. The Company is currently negotiating power sales contracts for these projects in Indonesia. See \"International Geothermal and Other Development Opportunities - Indonesia.\"\nGeothermal Energy\nGeothermal energy can be economically extracted when water contained within porous and permeable rock formations comes sufficiently close to molten rock to heat the water to temperatures of 400 degrees Fahrenheit or more. The heated water then ascends towards the surface of the earth, where it can be extracted by drilling geothermal production wells. The energy necessary to operate a geothermal power plant is typically obtained from several such wells, which are drilled using established technology similar to that employed in the oil and gas industry.\nThe geothermal production wells are normally located within approximately one to two miles of a power plant, as geothermal fluids cannot typically be transported economically over longer distances. From the well heads, the heated fluid flows through pipelines to a series of separators, where it is separated into water \"brine\" and steam. The steam is passed through a turbine which drives a generator to generate electricity. Once the steam has passed through the turbine it is then cooled and condensed back into water, which along with any brine and noncondensable gases is returned to the geothermal reservoir via injection wells. The geothermal reservoir is a renewable source of energy if natural ground water sources and reinjection of extracted geothermal fluids are adequate to replenish the geothermal reservoir after the withdrawal of geothermal fluids. Geothermal plants in the United States are eligible to be \"Qualified Facilities\" under PURPA. See \"Regulatory and Environmental Matters\"\nThe Independent Power Production Market and Competition\nIn the United States, the independent power industry expanded rapidly in the 1980's, facilitated by the enactment of PURPA. PURPA was enacted to encourage the production of electricity by non-utility companies. According to the Utility Data Institute and the North American Electricity Reliability Council, independent power producers were responsible for about 50,000 MW, or 43%, of the U.S. electric generation capacity which has come on line since 1980.\nAs the size of United States independent power market has increased, available domestic power capacity and competition in the industry have also significantly increased. The Company competes with other independent power producers including affiliates of utilities, in obtaining long-term contracts to sell electric power and steam to utilities. In addition, utilities may elect to expand or create generating capacity through their own direct investments in new plants. Over the past decade, obtaining a power sales contract from a U.S. utility has generally become increasingly difficult, expensive and competitive. Many states now require power sales contracts to be awarded by competitive bidding, which both increases the cost of obtaining such contracts and decreases the chances of obtaining such contracts as bids significantly outnumber awards in most competitive solicitations. Many of the Company's competitors have more extensive and more diversified developmental or operating experience (including international experience) and greater financial resources than the Company. The federal Energy Policy Act of 1992 is expected to further increase domestic competition.\nDue to the rapidly growing demand for new power generation capacity in many foreign countries and resulting privatization of power development, significant new markets for independent power generation now exist outside the United States. The Company intends to take advantage of opportunities in these new markets and to develop, construct and acquire generation projects outside the United States. See \"International Geothermal and Other Development Opportunities.\"\nBusiness Development Strategies\nThe Company is focusing on market opportunities domestically in which it believes it has relative competitive advantages, such as geothermal (because of the Company's geotechnical and project management expertise and extensive geothermal leaseholdings). In addition, the Company expects to consider diversification into other environmentally responsible sources of energy, primarily through the selected acquisition of partially developed or existing power generating projects.\nThe Company is also actively pursuing selected opportunities abroad in developing nations where power demand is high and the Company's geothermal operating experience, project development expertise and strategic relationships with Kiewit and Distral are expected to provide it with a competitive advantage. The Company believes that the opportunities to successfully develop, construct and finance international projects are increasing as several countries, including the Philippines and Indonesia, have initiated the privatization of their power generation capacity and have solicited bids from foreign developers for the purchase of existing generating capacity or the development of new capacity. In evaluating and negotiating international projects, the Company intends to employ a strategy whereby a substantial portion of the political and financial risks are, through contract provisions or insurance coverage, borne by parties other than the Company; however, there can be no assurance that such insurance will be available on commercially reasonable terms, or that such third parties will perform such contract provisions.\nTHE COSO PROJECT\nIn 1979, the Company entered into a 30-year contract (the \"Navy Contract\") with the United States Department of the Navy (\"the Navy\") to explore for, develop and generate electricity from geothermal resources located on approximately 5,000 acres of the Naval Air Weapons Station at China Lake, California. In 1985, the Company entered into a 30-year lease (the \"BLM Lease\") with the United States Bureau of Land Management (\"BLM\") for approximately 19,000 acres of land adjacent to the land covered by the Navy Contract. The Company formed the Coso Joint Ventures with one primary joint venture partner, Caithness Corporation (\"Caithness\"), to develop and construct the three facilities which comprise the Coso Project. The Coso Joint Ventures entered into contracts to supply electricity to SCE. The contracts were entered into pursuant to the provisions of PURPA, which, subject to certain conditions, requires electric utilities to purchase electricity from qualifying independent power producers.\nThe three joint ventures which own the Coso Projects are (i) Coso Finance Partners, which owns the Navy I Project, (ii) Coso Energy Developers, which owns the BLM Project, and (iii) Coso Power Developers, which owns the Navy II Project. The Company holds ownership interests of approximately 46% in the Navy I Joint Venture; of approximately 48% in the BLM Joint Venture, after payout to the Company and its joint venture partner; and of 50% in the Navy II Joint Venture. The remaining portions are owned by partnerships formed by Caithness and certain investors (the \"Caithness Partnerships\"). In addition, the Company indirectly holds rights to certain cash flows from the Caithness Partnerships in the BLM Project, and, to a lesser extent, the Navy I Project and Navy II Project. See \"The Coso Project -- Interest in Caithness Partnerships\". Each of the Coso Joint Ventures is managed by a management committee which consists of two representatives from the Company and two representatives from the Caithness Partnerships. The Company also acts as the operator of each of the fields and plants, for which it receives fees from the Coso Joint Ventures.\nThe Coso Geothermal Resource\nThe area in which the Coso Projects are located has been designated as a \"Known Geothermal Resource Area\" (\"KGRA\") by the United States Department of the Interior, Bureau of Land Management (\"BLM\") pursuant to the Geothermal Steam Act of 1970. Areas are designated as KGRAs when the BLM determines that a commercially viable geothermal resource is likely to exist. There are over 100 other KGRAs in the United States.\nThe Coso geothermal resource is located in Inyo County, California, approximately 150 miles northeast of Los Angeles. The Coso geothermal resource is a liquid-dominated hot water resource contained within the heterogeneous fractured granitic rocks of the Coso mountains. It is believed that the heat source for the Coso geothermal resource is a molten rock or \"magma\" body located beneath the field at a depth of six to seven miles. Water in the system is believed to be supplied from groundwater flow from the Sierra Nevada mountains located approximately 10 miles west of the site.\nProduction is obtained by drilling wells into the fracture systems, which tap into these reservoirs of hot water. As is common in this type of geothermal resource, the heterogeneous, fractured structure makes it somewhat difficult to predict the performance of new wells even when the new wells are located in relatively close proximity to existing wells. Geothermal exploration, development and operations are subject to uncertainties similar to those typically associated with oil and gas exploration and development, including dry holes and uncontrolled well flows. The success of geothermal projects ultimately depends on the heat content of the extractable fluids, the geology of the reservoir, the reservoir's actual life, and operational factors relating to the extraction of the fluids, including operating expenses, electricity price levels and capital expenditure requirements. Because of the geological complexities of geothermal reservoirs, the geographic area and sustainable output of a geothermal reservoir can only be estimated and cannot be definitively established. There is, accordingly, a risk of an unexpected decline in the capacity of geothermal wells, and a risk of a geothermal reservoir not being sufficient for sustained generation of the electrical power capacity desired.\nAverage production of a typical new geothermal production well is expected by the Coso Joint Ventures to decline 35% to 45% in the first year, 15% to 25% in the second year, 5% to 15% in the third year and 5% or less each year thereafter, due to mechanical deterioration of the well bore, well bore scaling, a decline in well pressure due to the withdrawal of geothermal fluids, and other chemical and physical factors. The Coso Joint Ventures have adopted a program of geothermal well replacement which is intended to compensate for production decreases.\nProduction available at the wellhead for the Navy I Project, the BLM Project and the Navy II Project presently is in excess of the steam necessary for power production at full capacity for each plant. Under the loans financing the power plants, each Joint Venture is required to meet a steam covenant as of May 1st of each year which requires geothermal reserves of 125% of the resource required to operate each plant at full capacity.\nManagement of the Company believes, based on geological and engineering surveys and analysis of wells drilled, that the Coso Projects' geothermal resource is sufficient to supply steam to the Coso Projects of adequate temperature and in sufficient quantities for the respective terms of the SO4 Agreements. Because of the uncertainties related to developing, exploring and operating geothermal resources and the limited history of extracting the geothermal resource at the sites of the Navy I Project, the BLM Project and the Navy II Project, there is no assurance that the geothermal reservoir will continue to supply steam to the Coso Project at current levels for the remaining terms of the SO4 Agreements.\nThe Company believes that the facilities producing electricity at the Coso Project emit significantly less emissions than electricity production facilities using combustible materials as an energy source. The geothermal fluids contain certain noncondensable gases, such as hydrogen sulfide (\"H2S\"), carbon dioxide (\"C02\"), hydrogen, nitrogen, ammonia, methane, and argon, as well as traces of arsenic (a metal which remains dissolved in the brine after separation). Certain of the Coso Joint Ventures hold permits to operate the turbine-generator units which require that the release of certain noncondensable gases be below specified levels. The Coso Joint Ventures have, from time to time, exceeded such levels, particularly with respect to the BLM Project. As a result, new H2S emissions control systems were installed at the BLM Project in 1992. H2S emissions control systems are also now under contract to be installed at the Navy I Project and the Navy II Project in 1994. Operating permits and California state laws require that arsenic levels may not exceed specified levels so as not to endanger worker health and safety. Arsenic comes into contact with the interior of the pipes and turbine systems and may be released into sumps during well tests. Failure to construct and operate the Coso Projects within the applicable regulatory limits may result in the applicable regulatory agencies levying fines on the Coso Joint Ventures or curtailing operation of the Coso Projects until compliance with the regulatory limits is achieved.\nThe Coso area is subject to frequent low-level seismic disturbances, and more serious seismic disturbances are possible. The Coso Project's wells and turbine generator units have been designed and built to withstand relatively significant seismic disturbances, but there can be no assurance that they will withstand any particular disturbance. See \"Insurance\".\nThe Coso Facilities\nThe physical facilities used for geothermal energy production are substantially the same at the Navy I Project, the BLM Project and the Navy II Project.\nThe geothermal fluids produced at the wellhead consist of a mixture of hot water and steam. The mixture flows from the wellhead through a gathering system of insulated steel pipelines to high pressure separation vessels called separators. There, steam is separated from the water and is sent to a demister in the power plant, where any remaining water droplets are removed. This produces a stream of dry steam, which passes through the high pressure inlet of a turbine generator, producing electricity. The hot water previously separated from the steam at the high pressure separators is piped to low pressure separators, where low pressure steam is separated from the water and sent to the low pressure inlet of a turbine generator. The hot water remaining after low pressure steam separation is injected back into the Coso geothermal resource.\nSteam exhausted from the steam turbine is passed to a surface condenser consisting of an array of tubes through which cold water circulates. Moisture in the steam leaving the turbine generators condenses on the tubes and, after being cooled further in a cooling tower, is used to provide cold circulating water make up for the condenser.\nAt the Navy I Project and the Navy II Project, the primary atmospheric emission control system consists of the surface condenser, noncondensable gas removal equipment, a gas compressor unit and the injection wells. The noncondensable gas, which consists primarily of CO2 with a small percentage of H2S, is compressed, mixed with the hot water exiting the low pressure separator and reinjected into the geothermal reservoir. The BLM Project has the same injection facilities. The Coso Joint Ventures believe that certain residual, noncondensable gases, primarily CO2 and a small percentage of H2S which were originally being returned to the geothermal reservoir through the injection wells at the respective Coso Projects were recycling into the production wells supplying the Coso Projects, which, together with related equipment problems, increased H2S emissions and reduced the ability to use the energy content of the extracted geothermal fluids which in turn reduced the overall electrical generating capacity for the Coso Project. Therefore, in addition to the injection wells, a Dow SulFerox H2S abatement system was installed at the BLM Project and new LO-CAT II H2S abatement systems are under contract to be installed at the Navy I Project and Navy II Project in 1994, as described below.\nAll of the Coso Projects are designed to operate 24 hours a day every day of the year. Currently, each year three of the nine turbine generators are shut down for approximately two weeks for regular inspection, maintenance and repair. The Company attempts to schedule these shut-downs during off-peak periods. Weekend outages are scheduled twice a year for all nine units. The Navy I Project. The geothermal resource for the Navy I Project currently is produced from approximately 32 wells located within a radius of approximately 3,000 feet of the Navy I Project area. The Navy I Project consists of three individual turbine generators, each with approximately 32 MW of electrical generating capacity. The Navy I Project has an aggregate gross electrical generating capacity of approximately 96 MW, and operated at an average operating capacity factor of 98.5% in 1991, 99.8% in 1992 and 111.2% in 1993, based on a capacity of 80 NMW.\nThe Navy I Joint Venture recently executed agreements with ARI Technologies, Inc. for the Engineering, Procurement and Construction of a LO-CAT II H2S abatement system and the right to use that technology. The LO-CAT II H2S abatement system is expected to be completed in 1994.\nThe BLM Project. The BLM Project's geothermal resource currently is produced from approximately 20 wells located within a radius of approximately 4,000 feet from either the BLM East or BLM West site. The BLM Project consists of three turbine generators. Two of these turbine generators are located at the BLM East site in a dual flash system, each with a nameplate capacity of 29 MW; and one is located at the BLM West site in a single flash system, with a nameplate capacity of 29 MW. The BLM Project has an aggregate gross electrical generating capacity of approximately 96 MW, and operated at an average operating capacity factor of 71.4% in 1991, 87.2% in 1992, and 98.1% in 1993, based on a capacity of 80 NMW.\nThe BLM Joint Venture recently completed the construction of two Dow SulFerox H2S abatement systems for the BLM Project which have improved the BLM Project's operating efficiency. These H2S abatement systems were designed by Dow Chemical USA and constructed by Gilbert Industrial Corp.\nThe Navy II Project. The geothermal resource for the Navy II Project currently is produced from approximately 25 wells located within a radius of approximately 5,000 feet of the Navy II Project area. The Navy II Project consists of three individual turbine generators, each with approximately 32 MW of electrical generating capacity. The Navy II Project has an aggregate gross electrical capacity of approximately 96 MW, and operated at an average operating capacity factor of 99.9% in 1991, 98.1% in 1992, and 102.6% in 1993, based on a capacity of 80 NMW.\nThe Navy II Joint Venture recently executed agreements with ARI Technologies, Inc. for the Engineering, Procurement and Construction of a LO-CAT II H2S abatement system and the right to use that technology. The LO-CAT II H2S abatement system is expected to be completed in 1994.\nPower Transmission Lines. The electricity generated by the Navy I Project is transmitted over a 28.8 mile 115 kilovolt (\"kV\") transmission line to the SCE substation at Inyokern, California. This transmission line is owned and operated by the Navy I Joint Venture. The electricity produced by the BLM Project and the Navy II Project is transmitted on a 230 Kv power line connected to the SCE substation at Kramer Junction, California (the \"Transmission Line\"). Coso Transmission Line Partners, a California general partnership (\"CTLP\"), holds title to the Transmission Line and related facilities, which are used by both the BLM Joint Venture and the Navy II Joint Venture. The BLM Joint Venture and the Navy II Joint Venture are the general partners of CTLP. CTLP charges the BLM Joint Venture and the Navy II Joint Venture for its costs, allocated in accordance with the proportion of the transmission capability of the Transmission Line dedicated for each Project's use. Pursuant to a Transmission Line Operation and Maintenance Agreement dated as of July 28, 1989 between CTLP and the Company, the Transmission Line is operated by the Company on behalf of CTLP for an annual fee.\nManagement of the Coso Joint Ventures\nThe managing partner of the Navy I Joint Venture is China Lake Operating Company (\"CLOC\"), the managing partner of the BLM Joint Venture is Coso Hotsprings Intermountain Power, Inc. (\"CHIP\"), and the managing partner of the Navy II Joint Venture is Coso Technology Corporation (\"CTC\"). CLOC, CHIP and CTC are wholly- owned subsidiaries of the Company. Each managing partner is responsible for the conduct of the business of its Joint Venture, and each has subcontracted with the Company to operate and maintain its respective plant and geothermal field pursuant to operation and maintenance agreements as described below. As such, the managing partners have control over the day-to-day businesses of the Coso Joint Ventures, including budgeting and development of the Coso Projects, subject to the oversight of the Management Committee. No managing partner may be removed without the consent of the Company.\nThe business operations of each Coso Joint Venture are overseen by a management committee (each a \"Management Committee\"). In each case the Management Committee consists of two delegates appointed by the managing partner and two delegates appointed by the Caithness Partnerships. Pursuant to the partnership agreement of each of the Coso Joint Ventures, each Management Committee holds meetings on a quarterly basis and on such other dates as shall be called by any of the partners. Action of the Management Committee may be taken by majority vote of a quorum of at least three delegates present at a meeting, or by written consent or confirmed telephonic vote of at least three delegates.\nThe Management Committee of each of the Coso Joint Ventures must consent to certain investment and business decisions of the managing partners, including, without limitation, certain decisions regarding contracts, engagement of outside consultants, termination of the Coso Joint Ventures and approval of budgets. For the purposes of the Coso Project Loans, if the annual budget proposed by the managing partner is not approved by the Management Committee in a timely fashion, the managing partner is required to retain an independent engineering firm to review the proposed budget. If this proposed budget is approved by the independent engineering firm as reasonably designed to operate and maintain a facility of this type and to maximize revenues and net income, the budget as proposed by the managing partner is deemed to be approved. Otherwise, any controversies or claims arising out of the partnership agreements of the Coso Joint Ventures are to be settled by binding arbitration.\nPlant Operation and Maintenance Agreements. By a separate Plant Operations and Maintenance Agreement (\"Plant O&M Agreement\") for each Coso Joint Venture, dated July 15, 1988, in the case of the Navy I Project, August 3, 1988, in the case of the BLM Project, and December 30, 1988, in the case of the Navy II Project, the Company has agreed to perform on behalf of CLOC, CHIP and CTC the operation and maintenance services for the Coso Projects.\nIn each case, the Company's performance of these services will be in accordance with an annual operating budget for each Coso Project. Pursuant to each Plant O&M Agreement, the Company's general duties include hiring and training of personnel, testing and operation of the three turbine generators for each Coso Project, providing inventories of tools and spare parts, upkeep of the Transmission Line, furnishing reports required by SCE, the BLM, the Navy or other governmental authorities, and protecting and enforcing all warranty rights and claims related to each Coso Project. Each Coso Joint Venture is a third-party beneficiary of its respective Plant O&M Agreement.\nCLOC, CHIP and CTC compensate the Company for its services rendered under each Plant O&M Agreement, including reimbursement for all of the Company's direct costs incurred in operating each Coso Project, and the operator fees approved by the Coso Joint Ventures' respective Management Committee. CLOC, CHIP and CTC have the right to suspend all services performed by the Company under the respective Plant O&M Agreements under certain circumstances, including the inability of the Coso Projects or the Transmission Line to operate for any reason, SCE's refusal or inability to accept power generated by a Coso Project, or Navy or BLM activities or restrictions which prohibit economic operation of the Navy I Project, the BLM Project or the Navy II Project. In the event of such suspension, CLOC, CHIP and CTC are relieved of their respective obligations to compensate the Company after 30 days, after compensating the Company for costs associated with winding down or resumption of operations.\nEach Plant O&M Agreement between CLOC, CHIP or CTC and the Company may be terminated by the Company upon six months' notice. Otherwise each Plant O&M Agreement may be terminated in the event of an uncured default by either party and shall be terminated upon the termination by SCE of the applicable SO4 Agreement upon the occurrence of an uncured default thereunder. Under the current financing arrangements for the Coso Project, the Plant O&M Agreements have a term equal to the longest maturity of the notes issued by Coso Funding Corporation and may not be terminated by a Coso Joint Venture without the consent of the trustee under the indenture for such notes, and any material amendments or modifications must be approved by the trustee and an independent engineering firm.\nField Operation and Maintenance Agreements. The arrangements for the operation and maintenance of the Navy I, the BLM and the Navy II geothermal resources are substantially the same as those for the Navy I, the BLM, and the Navy II plants and facilities, as set forth above. The obligations of the Company, pursuant to the three Field Operations and Maintenance Agreements, dated July 15, 1988 for the Navy I Project, August 8, 1988 for the BLM Project, and December 30, 1988 for the Navy II Project (each a \"Field O&M Agreement\"), include performing all testing, permitting and record keeping services required by the Navy I Joint Venture, the BLM Joint Venture and the Navy II Joint Venture, the BLM, the Navy or other government authorities, proper operation and maintenance of the steam gathering, delivery and injection systems, maintenance of a qualified staff, and contracting with drilling companies for repair and replacement of wells. The compensation, suspension, emergency procedure, third-party beneficiary and termination provisions of each Field O&M Agreement are substantially the same as the corresponding provisions in the Plant O&M Agreements, as set forth above.\nCoso Royalty and Other Revenue Sharing Agreements\nThe receipt of revenues from the Navy I Project, the BLM Project and the Navy II Project are subject to the following royalty and other revenue sharing arrangements:\nThe Navy Contract. In December 1979, the Company entered into the 30-year Navy Contract with the Government of the United States, acting through the Navy, which granted to the Company exclusive rights to explore, develop and use the geothermal resource located within the Naval Air Weapons Station near China Lake, California, in the Coso KGRA (the \"Navy Contract\"). The term of the Navy Contract may be extended for an additional 10 years at the option of the Navy.\nThe Navy Contract has been modified on several occasions to provide for, among other things, assignment of all of the Company's rights with respect to the Navy I Project and the Navy II Project to the Navy I Joint Venture and the Navy II Joint Venture, respectively. In accordance with the terms of the financing arrangements for the Coso Project, the Navy I and Navy II Joint Venture's rights and interests pursuant to the Navy Contract have been assigned as security for the notes issued by Coso Funding Corporation in connection with the refinancing of existing bank debt of the Coso Project.\nNavy I Project. Under the terms of the Navy Contract, as a royalty for Unit 1 of the Navy I Project, the Navy I Joint Venture is obligated to pay for electricity supplied by SCE to the Navy. This obligation amounted to $9,620,900 in 1993 for 112 million kWh of electricity. The Navy is obligated to reimburse the Navy I Joint Venture for the electricity used, at a formula price specified in the Navy Contract. For 1993, the reimbursement to the Navy I Joint Venture equaled approximately 71% of the SCE price paid by the Coso Joint Venture. The percentage reimbursement from the Navy is escalated semi-annually, not to exceed 95% of the SCE price, in accordance with a weighted index based on the Consumer Price Index and price indices for the oil industry, the electric power plant industry and the construction industry.\nIn addition, the Navy I Joint Venture is obligated to pay the Navy the sum of $25.0 million in respect of Unit 1 of the Navy I Project on December 31, 2009, which is the expiration date of the initial term of the Navy Contract. This payment will be made from a sinking fund, to which the Navy I Joint Venture has been making payments since 1987. Payments to the sinking fund are to be made at an annual rate of $600,000. As of December 31, 1993, approximately $2.7 million was on deposit in this sinking fund, representing both sinking fund payments and accrued interest.\nFor Units 2 and 3 at the Navy I Project, the Navy I Joint Venture's royalty expenses are a fixed percentage of its electricity sales. The royalty expense per Kwh remained constant at 10.0% through 1993 and will escalate over the life of the Navy Contract in accordance with the following schedule:\n1994-1998. . . . . . . . . . . . . . . . . . . . . . 10.0% 1999-2003. . . . . . . . . . . . . . . . . . . . . . 15.0% 2004-2009. . . . . . . . . . . . . . . . . . . . . . 20.0%\nNavy II Project. The Navy II Joint Venture's royalty expenses are a fixed percentage of its electricity sales. The royalty expense per Kwh remained constant at 4.0% through 1993 and will escalate over the life of the Navy Contract in accordance with the following schedule:\n1994 . . . . . . . . . . . . . . . . . . . . . . . . .4.0% 1995-1999. . . . . . . . . . . . . . . . . . . . . . 10.0% 2000-2004. . . . . . . . . . . . . . . . . . . . . . 18.0% 2005-2010. . . . . . . . . . . . . . . . . . . . . . 20.0%\nThe Navy II Joint Venture is also obligated to pay any shortfalls in the obligation of the Navy I Joint Venture to make annual sinking fund payments of $600,000 in respect of the Navy I Joint Venture's obligation in respect of Unit I of the Navy I Project to pay the Navy the sum of $25.0 million on December 31, 2009.\nTermination. The Navy has the right to terminate the Navy Contract at any time by giving the Navy I Joint Venture or the Navy II Joint Venture, or both, as applicable, six months prior written notice for \"reasons of national security, national defense preparedness, national emergency, or for any reasons the Contracting Officer shall determine that such termination is in the best interest of the U.S. Government.\"\nIn the event of such termination, the United States Government is required to pay the Navy I Joint Venture, or the Navy II Joint Venture, or both, as applicable, for its unamortized exploratory investment and for its investment in installed power plant facilities, up to a maximum based on the nameplate capacity of the turbine generators. With respect to each of the Navy I and Navy II Joint Ventures, for the first aggregate 25 MW, the maximum is $2.7 million per MW, and for the next 25 MW (i.e. up to 50 MW), the maximum payment is $2.5 million per MW. For 50-75 MW the maximum payment is $1.4 million per MW for the Navy I Joint Venture and $2.3 million per MW for the Navy II Joint Venture. For a total nameplate capacity of 75 MW for either the Navy I Project or the Navy II Project, the total maximum payment for termination compensation would be $165.0 million for the Navy I Joint Venture, and $187.5 million for the Navy II Joint Venture. The total aggregate termination compensation for both the Navy I and Navy II Joint Venture could therefore not exceed $352.5 million. There is no provision in the contract to compensate either the Navy I or the Navy II Joint Venture for the loss of anticipated profits resulting from such termination.\nThe BLM Lease. On April 29, 1985 the Company and the BLM entered into an \"Offer to Lease and Lease for Geothermal Resources,\" #CA11402 effective as of May 1, 1985 (the \"BLM Lease\"), pursuant to which the Company acquired a leasehold interest in approximately 2,500 acres of land, including rights to explore, develop and use the geothermal resource thereon. All of the Company's rights pursuant to the BLM Lease have been assigned to the BLM Joint Venture. The BLM Lease was recorded on May 9, 1988 as Instrument No. 88-2092 of the Official Records of Inyo County.\nThe primary term of the BLM Lease is 10 years, however, the term extends automatically \"for so long thereafter as geothermal steam is produced to be utilized in commercial quantities but shall in no event continue for more than forty years after the end of the primary term.\" Such an automatic extension due to the continuation of production is termed being \"held by production.\" The BLM Joint Venture also enjoys a preferential right of renewal of the BLM Lease for a second forty-year term if the BLM Lease is held by production at the termination of the forty-year automatic extension. If the initial 10-year term expired at the present time, the BLM Lease would be deemed to be \"held by production,\" entitling the BLM Joint Venture to an automatic extension.\nRoyalties to the BLM are 10% of the amount of value of steam produced, 5.0% of any by-products and 5.0% of commercially demineralized water. These rates are fixed for the life of the BLM Lease. Since increased steam production is required to increase revenues, the royalties based on the value of the steam typically increase with the revenues. Under the method which has been agreed to for valuing the steam utilized by the BLM Project, the 10% royalty translates to an approximate royalty rate of 5.1% on revenues from electricity sales. The BLM Project does not currently produce demineralized water, but the sulphur and carbon dioxide by-products of the Dow SulFerox H2S abatement system are subject to the BLM royalty schedule. The BLM has the right to establish minimum production levels after notice and an opportunity to be heard, and the right to reduce the above royalties if necessary to encourage the greater recovery of leased resources, or as otherwise justified.\nIn addition to the royalties mentioned above, the BLM Joint Venture is also obligated to pay a royalty to Coso Land Company (\"CLC\"), an affiliate of the BLM Joint Venture (the \"CLC Royalty\"). The CLC Royalty is equal to 5.0% of the value of the steam utilized by the BLM Project, but is subordinated to all other royalties, all debt service of the BLM Joint Venture and all operating costs of the BLM Project. The royalty may not be transferred without consent and is unsecured.\nPursuant to the BLM Lease, the BLM Joint Venture must comply with certain \"Navy Constraints on Naval Weapon Center Lands.\" These constraints include, among other things, certain security measures and restrictions of access, the Navy's right to suspend operations if an imminent threat to the environment is present, permitting requirements, information and data exchange, and the Navy's right of inspection. In addition, BLM leases can be terminated by operation of law, as follows: (i) at the anniversary date, for failure to pay the full amount of the annual rental by such date, and (ii) at the end of the primary term, if there is no production in commercial quantities, there is no producing well, or actual drilling operations are not being diligently prosecuted.\nOther Revenue Sharing Arrangements. The Company has outstanding Senior Notes (the \"Senior Notes\"). The Senior Notes bear interest at the rate of 12% per annum, plus 10% of the Company's share of the net cash flow from the Coso Project through December 31, 1994.\nSO4 Power Sales Agreements\nThe Navy I Joint Venture, the BLM Joint Venture and the Navy II Joint Venture have acquired SO4 Agreements which were originally executed by SCE and the China Lake Joint Venture (\"CLJV\"), and by SCE and Coso Geothermal Company (\"CGC\"), each of which are California general partnerships between the Company, Caithness and others. Under the terms of the SO4 Agreements, the Navy I Joint Venture, the BLM Joint Venture and the Navy II Joint Venture have agreed to sell and SCE has agreed to purchase the net electrical output of the Navy I, the BLM and the Navy II Projects. The SO4 Agreements require that each Coso Project maintain its status as a qualifying facility under PURPA throughout its respective contract term.\nPursuant to the SO4 Agreements, SCE must purchase all of the net electrical output of the Navy I Project until August 2011, of the BLM Project until March 2019 and of the Navy II Project until January 2010. In each case, SCE must pay the Navy I Joint Venture, the BLM Joint Venture and the Navy II Joint Venture capacity payments, capacity bonus payments and energy payments in accordance with each Coso Project's output.\nCapacity Payments. A Coso Project qualifies for an annual capacity payment by meeting specified performance requirements on a monthly basis during an approximately four-month long peak period, which currently runs during the months of June through September of each year. The basic performance requirement is that the Coso Project deliver an average kWh output during specified on-peak hours of each month in the peak period at a rate equal to at least an 80% Contract Capacity Factor. The \"Contract Capacity Factor\" equals (1) a plant's actual electricity output, measured in kWhs, during the hours of measurement, divided by (2) the product obtained by multiplying the plant's \"Contract Capacity,\" as stated in the SO4 Agreement applicable to such plant, by the number of hours in the measurement period. If a Project maintains the required 80% Contract Capacity Factor during the applicable periods, the annual capacity payment will be equal to the product of the capacity payment per kWh stated in its SO4 Agreement and the Contract Capacity.\nThe Navy I Project has a Contract Capacity of 75 MW, and a capacity payment per kW year of $161.20, for an annual maximum capacity payment of $12,090,000. The BLM Project and the Navy II Project each have a Contract Capacity of 67.5 MW, and capacity payments per kW year of $175.00 and $176.00, respectively, yielding annual maximum capacity payments of $11,812,500 and $11,880,000, respectively. Although capacity prices per kWh remain constant throughout the life of each SO4 Agreement, capacity payments are disbursed by SCE on a monthly basis in accordance with a tariff schedule filed with the CPUC. Payments are made unevenly throughout the year, and are weighted toward the on-peak periods; currently, approximately 84% of the capacity payments received by the Coso Joint Ventures from SCE are paid in respect of peak months, and 16% in respect of non-peak months. As of the end of the 1992 peak season, each of the Coso Projects earned, for the first time, the maximum capacity and bonus payments available under its respective SO4 Agreement for the peak months. In 1993 each of the Coso Projects also earned the maximum capacity and bonus payments available under its respective SO4 Agreement for the peak and non- peak months.\nCapacity Bonus Payments. Each Coso Joint Venture is entitled to receive capacity bonus payments during both on-peak and non-peak months by operating at a Contract Capacity Factor of between 85% and 100% during on-peak hours of each month. A plant qualifies for capacity bonus payments in respect of peak months provided that the plant operates at least at an 85% Contract Capacity Factor during the on-peak hours of the month, and qualifies in respect of non- peak months if performance requirements for on-peak months have been satisfied and the plant also operates at a Contract Capacity Factor of at least 85% during mid-peak hours of the non-peak month.\nCapacity bonus payments for each month increase with the level of kWhs delivered between the 85% and 100% Contract Capacity Factor levels during the month. The annual capacity bonus payment for each month is equal to a percentage based on the plant's on-peak Contract Capacity Factor (which percentage may not exceed 18% of one-twelfth of the annual capacity payment).\nEnergy Payments. In addition to capacity and bonus payments, SCE must make monthly energy payments to each Coso Joint Venture in accordance with kWh of energy delivered by each Coso Project. The energy price component for electricity delivered to SCE is subject to different pricing mechanisms during the first 10 years of each SO4 Agreement than are applicable during the remaining term of each agreement. During the first 10 years following the commencement of firm power delivery, the energy price per kWh varies between so- called on-peak and non-peak periods, but the time weighted average of these prices equals a fixed price per kWh specified in the SO4 Agreements. The stated fixed price in the SO4 Agreements escalates at an average annual rate of approximately 7.7% per year for the remainder of the initial 10-year period under the SO4 Agreement for the Navy I Project, 6.4% per year for the BLM Project and the Navy II Project. This period ends in August 1997 for the Navy I Joint Venture, March 1999 for the BLM Joint Venture and January 2000 for the Navy II Joint Venture. The fixed average energy prices per kWh which will remain in effect through the year 1998 and which management of the Coso Joint Ventures believes will be the minimum amounts payable in 1999 and 2000 are as follows:\nAnnual % Year Price\/kWh Increase\n1993 10.1 cents 1994 10.9 cents 7.9% 1995 11.8 cents 8.3% 1996 12.6 cents 6.8% 1997 13.6 cents 7.9% 1998 14.6 cents 7.4% 1999 14.6 cents 0.0% 2000 14.6 cents 0.0%\nAfter the initial 10-year period under each SO4 Agreement expires, the energy price paid for electricity delivered under the agreement will be based upon SCE's short-run avoided cost (as determined and published from time to time by the CPUC) which at present is substantially lower than the current energy payments under the SO4 Agreement. The short-run avoided cost is the product of its Incremental Energy Rate (\"IER\") (system efficiency) and its avoided fuel rate, plus various additions that have been adopted by the CPUC. The IER and the additions are determined yearly in the purchasing utility's Energy Cost Adjustment Clause proceeding before the CPUC. The purchasing utility's avoided fuel and the corresponding fuel rate are determined monthly by the CPUC. For the majority of months, the utility's avoided fuel has historically been gas, although in some winter months the avoided fuel has been oil. When the avoided fuel is gas, the electric utility's fuel rate is based on the utility's forecast of its average cost of gas. When the avoided fuel is oil, the utility's fuel rate is based on the utility's actual average cost of the most recent period's oil purchase. Consequently, after the initial 10-year period, energy payments under the SO4 Agreements will fluctuate based on average fuel costs in the California energy market.\nThe Company cannot predict the likely level of avoided cost energy prices at the expiration of the fixed price period. Although from time to time, various third parties attempt to forecast SCE's future avoided costs, the Company believes that all forecasts of avoided costs are inherently speculative in nature because SCE's actual avoided costs will be dependent upon, among other factors, SCE's future fuel costs, system operation characteristics and regulatory action.\nNon-Recourse Coso Project Financing\nIn December 1992, the Coso Joint Ventures refinanced the existing bank debt on the Coso Projects with the proceeds of the sale of approximately $560 million in non-recourse senior secured notes (the \"Notes\") in a private placement pursuant to Rule 144A under the Securities Act of 1933. The Notes were issued by Coso Funding Corp. (\"Coso Funding\"), a corporation owned by the Coso Joint Ventures and formed exclusively for the purpose of issuing the Notes. Coso Funding has lent the Coso Joint Ventures substantially all of the net proceeds of the sale of the Notes in loans known as the \"Project Loans\".\nThe Notes were issued in the following amounts, fixed interest rates and maturities:\nAmount Rate Maturity\n$ 12,904,000 4.94% December 31, 1992 $ 17,506,000 5.35% June 30, 1993 $ 17,506,000 5.72% December 31, 1993 $ 28,823,000 6.50% June 30, 1994 $ 28,823,000 6.87% December 31, 1994 $ 33,552,000 7.22% June 30, 1995 $ 33,552,000 7.41% December 31, 1995 $167,992,000 7.99% December 31, 1997 $144,504,000 8.53% December 31, 1999 $ 75,083,000 8.87% December 31, 2001\nMandatory semi-annual principal repayments are required with respect to Notes due 1997, 1999 and 2001 beginning on June 30, 1996, 1998 and 2000, respectively. At the time of their issuance, the Notes were rated \"BBB-\" by Standard & Poor's Corporation, \"Baa3\" by Moodys Investor's Service Inc., and \"BBB\" by Duff & Phelps Credit Rating Co., all investment grade ratings.\nThe obligations of each Coso Joint Venture under the Project Loans are non-recourse obligations. Coso Funding may look solely to each Coso Joint Venture's pledged assets for satisfaction of such Coso Joint Venture's Project Loan. In addition, the Project Loans are cross-collateralized by certain support loans (\"Support Loans\") only to the extent of the other Coso Joint Ventures' available cash flow and, under certain circumstances, the debt service reserve funds, and not as to other assets. The Company is not liable for the repayment of the Notes or the Project Loans. Reference is made to the indenture relating to the Notes (the \"Notes Indenture\") for a detailed description of the refinancing terms, including the definition of certain terms used herein.\nSecurity. The Notes are secured by an assignment of Coso Funding's interest in the Project Loans of the Coso Joint Ventures and a security interest in all collateral thereunder, as well as by each Coso Joint Venture's agreement to make payments under certain circumstances in respect of the other Coso Joint Ventures' Project Loans, and each Coso Joint Venture's commitment to advance Support Loans to the other Coso Joint Ventures, as described below. Security for payment of each Coso Joint Venture's Project Loan includes: (1) an assignment of all such Coso Joint Venture's revenues which will be applied against the payment of obligations of each Coso Joint Venture, including its Project Loan, in accordance with priorities of payment described below; (2) a mortgage on the geothermal property interests of each Coso Joint Venture and the respective Coso Project; (3) a collateral assignment of certain material contracts; (4) a pledge of the partnership interests in the Coso Joint Ventures; (5) a pledge of the stock of all Corporate general partner entities for each Coso Joint Venture; (6) a debt service reserve fund; (7) a contingency fund; (8) a pledge of such Coso Joint Venture's capital stock of Coso Funding; (9) a pledge of such Coso Joint Venture's partnership interest in CTLP, if any; and (10) any other funds of such Coso Joint Venture on deposit under the Notes Indenture. The assets described in clauses (1) through (10) and any other assets securing a Coso Joint Venture's Project Loan at any time are collectively referred to herein as the \"Collateral.\" Each Coso Joint Venture's assets secures only its own Project Loan, and is not cross- collateralized with the assets pledged under the other Coso Joint Ventures' Project Loans. However, each Coso Joint Venture is obligated, to the extent of available cash flow, and under certain conditions, its debt service reserve fund balance, to make Support Loans to the other Coso Joint Ventures.\nPriority of Payments. Each Coso Joint Venture's revenues are applied in the following order of priority: (a) royalties due to the Navy or the BLM; (b) operating and maintenance expenses; (c) capital expenditures; (d) repayment of working capital lines of credit of up to $10.0 million; (e) principal and interest payments on such Coso Joint Venture's Project Loan; (f) Support Loans to the other Coso Joint Ventures or payments under Project Loan pledge agreements to maintain an operating capital balance of $1.0 million and in respect of principal and interest due under the other Coso Joint Ventures' Project Loans (to the extent described below under \"--Support Loans and Project Loan Pledge Agreements\"); (g) replenishment of any shortfall in such Coso Joint Venture's own debt service reserve fund; (h) Support Loans to replenish shortfalls in the other Coso Joint Ventures' debt service reserve funds; (i) payments in connection with permitted interest rate swap arrangements; (j) repayment of any outstanding Support Loans; (k) subordinated royalty payments due to affiliates; (l) other subordinated obligations, including existing subordinated debt due to affiliates; and (m) distributions to partners.\nConditions to Cash Distributions From the Coso Joint Ventures. The terms of the financing restrict the ability of the Coso Joint Ventures to distribute cash to their partners. In order to distribute cash, (i) no event of default may exist under the Project Loans or the Notes, and no notice of such an impending event of default may have been received from the trustee under the Notes Indenture, (ii) certain financial ratios must be met, and (iii) certain thresholds must be met regarding the availability of an adequate geothermal resource for each of the Coso Projects and for the Coso Project as a whole, as described in the Notes Indenture. In addition, the consent of the Management Committee of each of the Coso Joint Ventures is required for cash distributions. See \"The Coso Project -- Management of the Coso Joint Ventures\".\nRequired Geothermal Percentage. The terms of the financing require that an independent geothermal engineer prepare a report annually on the geothermal resource available at the Coso Project as of May 1 of each year. The resource is measured by comparing the geothermal resource available at the wellhead, or otherwise available pursuant to contract, with the resource that would be required to fuel the Coso Projects at their specified capacity levels of 80 NMW for the Navy I and Navy II Projects and 70 NMW for the BLM Project. If the geothermal resource for the Coso Project falls below a set threshold, initially 125% of the resource required to operate at full capacity, as measured on May 1 of each year, then the relevant Coso Joint Venture(s) are required to develop additional steam reserves under a plan of corrective action approved by the independent geothermal engineer. Depending upon the results of such efforts, the relevant Coso Joint Venture(s) may reduce the geothermal resource threshold for permitting cash distributions by increasing cash reserves available for debt service. Cash distributions otherwise permitted will be suspended during any period when the geothermal resources threshold is not met. On May 1, 1993, the Coso Project met the required steam reserve covenants.\nDebt Service Reserve and Contingency Funds. The debt service reserve funds for the Coso Joint Ventures are currently fully funded. With respect to the Navy I Joint Venture, the debt service reserve requirement requires that the Navy I debt service reserve fund be equal to at least the next semi-annual principal and interest payment on the Navy I Joint Venture's Project Loan. With respect to the BLM Joint Venture and the Navy II Joint Venture, the debt service reserve requirements will require that the debt service reserve funds of the BLM Joint Venture and the Navy II Joint Venture together be equal to at least the aggregate of the next semi-annual principal and interest payments on the Project Loans of such Coso Joint Ventures.\nIn connection with the financing, contingency funds were funded from the Project Loan to the Navy I Joint Venture to the extent of approximately $14.0 million, from the Project Loan to the BLM Joint Venture to the extent of approximately $20.3 million, and from the Project Loan to the Navy II Joint Venture to the extent of approximately $34.1 million. The amount of the contingency fund for each Coso Joint Venture represented the approximate maximum amount, if any, which could theoretically be payable by such Coso Joint Venture to third parties to satisfy and discharge all liens of record and other contract claims encumbering the respective Coso Projects at the time of the sale of the Notes, including liens and contract claims which were the subject of litigation between the Coso Joint Ventures, on the one hand, and Mission Power Engineering Company (\"MPE\"), on the other hand, and to establish a reserve for any other contingencies. The contingency funds were established in order to obtain ratings to facilitate the offer and sale of the Notes. The litigation with MPE was settled in June 1993. As a result of the various payments and releases involved in such settlement, the Coso Joint Ventures agreed to make a net payment of $20,000,000 to MPE from the contingency fund and MPE released its mechanics' liens on the Coso Projects. After paying the settlement amount to MPE, the remaining balance of the contingency fund (approximately $49 million) was used to fully fund the Coso Projects' debt service reserve funds to the maximum of $68 million, and the remaining $24 million was retained in the contingency fund for future capital expenditures and debt service according to the Project Loans.\nSupport Loans and Project Loan Pledge Agreements. The Support Loans and the Project Loan pledge agreements have the effect of cross-collateralizing the Project Loans, but only to a limited extent. There is no cross-collateralization of the Coso Joint Ventures' assets.\nSubject to certain limitations and conditions, each Coso Joint Venture has agreed to advance Support Loans to each other Coso Joint Venture, in the event that the borrowing Joint Venture's revenues are insufficient to meet scheduled semi-annual principal and interest payments. The Navy I Joint Venture's obligation to advance Support Loans is subordinate to the BLM and Navy II Joint Ventures' obligations to advance Support Loans. In addition, the debt service reserve fund of the Navy I Joint Venture will be utilized to fund a Support Loan only to the extent that the amount in the Navy I Joint Venture debt service reserve fund exceeds the amount required to defease in full the Navy I Joint Venture's share of the then outstanding Notes. If a Coso Joint Venture elects to terminate its Support Loan obligations as permitted under certain circumstances, it will remain obligated under a Project Loan pledge agreement to fund principal and interest on the Project Loans of the other Coso Joint Ventures to the extent of its available cash flow and, to a limited extent, its debt service reserve fund.\nInterest in Caithness Partnerships\nIn connection with the refinancing of the Coso Projects, the Company contributed approximately $9.8 million to CEGC-Mojave Partnership (\"CEGC-Mojave\"), a recently formed partnership which used the proceeds to acquire a limited partnership interest in Caithness CEA Geothermal L.P. (\"CCG\"), a partnership which is, in turn, a limited partner in Caithness Coso Holdings, L.P., the Caithness Partnership which is a partner in the BLM Project. In addition, certain cash flows of four Caithness affiliates have been pledged to CEGC-Mojave which relate in part to cash received as a result of distributions from the Navy I, BLM and Navy II Projects. Under the terms of the CEGC-Mojave partnership agreement, with certain exceptions, up to 25% of the cash flows related to the Caithness affiliates will be distributed to such affiliates, and the remainder, including all of the cash flows related to the interest in CCG, will be distributed to the Company until the Company receives a return of its initial investment plus a 17% annual rate of return, at which time all distributions revert to the Caithness affiliates.\nCoso Joint Venture Notes due to the Company\nIn connection with the refinancing of the Coso Project, the Coso Joint Ventures prepaid a portion of certain notes to the Company in respect of prior advances made by the Company to the Coso Project, and amended certain outstanding notes owing to the Company. As a result the BLM Joint Venture and Navy II Joint Venture have notes due to the Company in the aggregate amount of principal and accrued interest of $21,557,996 due March 19, 2002 which bear interest at 12 1\/2% annually. The notes are subordinated to the senior Project Loans on the Coso projects and interest is not paid currently, but accrues on a pay in kind basis until final maturity.\nOTHER DOMESTIC PROJECTS AND DEVELOPMENT OPPORTUNITIES\nDesert Peak\nThe Company is the owner and operator of a 10 MW geothermal plant at Desert Peak, Nevada that is currently selling electricity to Sierra Pacific Power Company under a power sales contract that expires December 31, 1995 and that may be extended on a year-to- year basis as agreed by the parties. The price for electricity under this contract is 6.3 cents per kWh, comprising an energy payment of 1.8 cents per kWh (which is adjustable pursuant to an inflation-based index) and a capacity payment of 4.5 cents per kWh. The Company is currently negotiating the terms of an extension to this contract.\nRoosevelt Hot Springs\nThe Company operates and owns an approximately 70% interest in a 25 MW geothermal steam field which supplies geothermal steam to a power plant owned by Utah Power & Light Company (\"UP&L\") located on the Roosevelt Hot Springs property under a 30-year steam sales contract. The Company obtained approximately $20.3 million of the cash portion of the purchase price for the properties under a pre- sale agreement with UP&L whereby UP&L paid in advance the entire purchase price for the Company's proportionate share of the steam produced by the steam field. The Company must make certain penalty payments to UP&L if the steam produced does not meet quantity and quality requirements.\nYuma\nDuring 1992 the Company acquired a development stage 50 MW natural gas fired cogeneration project in Yuma, Arizona. The Yuma Project is designed to be a qualified facility under PURPA and to provide 50 NMW of electricity to SDG&E over an existing 30 year power purchase contract. The electricity is to be sold at SDG&E's avoided cost. The power will be wheeled to SDG&E over transmission lines constructed and owned by Arizona Public Service Company (\"APS\"). An Agreement for Interconnection and a Firm Transmission Service Agreement have been executed between APS and the Yuma Project entity and have been accepted for filing by the Federal Energy Regulatory Commission (\"FERC\").\nThe Power Sales Agreement with SDG&E requires the Yuma Project to commence reliable operations by December 31, 1994. The Company currently anticipates that construction will be completed and reliable operations will commence by mid-1994. The project entity has executed steam sales contracts with an adjacent industrial entity to act as its thermal host in order to maintain its status as a qualified facility, which is a requirement of its SDG&E contract. Since the industrial entity has the right under its contract to terminate the agreement upon one year's notice if a change in its technology eliminates its need for steam, and in any case to terminate the agreement at any time upon three years notice, there can be no assurance that the Yuma Project will maintain its status as a qualified facility. However, if the industrial entity terminates the agreement, the Company anticipates that it will be able to locate an alternative thermal host in order to maintain its status as a qualified facility or build a greenhouse at the site for which the Company believes it would obtain qualified facility status. A natural gas supply and transportation agreement has been executed with Southwest Gas Corporation.\nThe Yuma Project is being constructed pursuant to a fixed price turnkey contract with Raytheon Engineers & Constructors for approximately $43 million, of which the Company has to date funded approximately $39 million from internal sources. The Company currently intends to fund the balance from internal sources as construction expenditures are incurred.\nNewberry\nUnder a Bonneville Power Administration (\"BPA\") geothermal pilot program, the Company is developing a 30 NMW geothermal project at Newberry, Oregon (the \"Newberry Project\"). Pursuant to a Memorandum of Understanding executed in January 1993, the Company has agreed to sell 20 NMW of Power to BPA and 10 NMW to Eugene Water and Electric Board (\"EWEB\") from the Newberry Project. In addition, BPA has an option to purchase up to an additional 100 MW of production from the project under certain circumstances. In a public-private development effort, the Company is responsible for development, permitting, financing, construction and operation of the project (which will be 100% owned by the Company), while EWEB will cooperate in the development efforts by providing assistance with government and community affairs and sharing in the development costs (up to 30%). The Newberry Project is currently expected to commence commercial operation in 1997. The memorandum of understanding provides that under certain circumstances the contracts may be utilized at an alternative location.\nA draft environmental impact study with respect to the Newberry Project was completed in January 1994 and is expected to be finalized in mid-year 1994, at which time the Company expects to commence drilling of the geothermal wells and to execute the power sales contracts, subject to obtaining all governmental permits and approvals.\nGlass Mountain\nIn March 1993, the Company completed the acquisition of an approximate 65% interest in 26,000 acres of geothermal leaseholds at Glass Mountain in Northern California, which include three successful production wells with an existing capacity of between 15 to 30 MW. The Company believes that this acreage represents one of the finest undeveloped geothermal reservoirs in the country. The Company has attempted to negotiate the terms of a power sales contract to exploit this geothermal resource; however, no agreement exists to date.\nINTERNATIONAL GEOTHERMAL AND OTHER DEVELOPMENT OPPORTUNITIES\nThe Company presently believes that the international independent power market holds the majority of new opportunities for financially attractive private power development in the next several years, because the demand for new generating capacity is growing more rapidly in foreign markets, especially emerging nations, than in the United States. The World Bank estimates that developing countries will need approximately 380,000 MW of new generating capacity over the next decade. The need for such rapid expansion has forced many countries to select private power development as their only practical alternative and to restructure their legislative and regulatory schemes to facilitate such development. The Company believes that this significant need for power has created strong local support for private power projects in many foreign countries and increased the availability of long- term multilateral lending agency and foreign source financing and political risk insurance for certain international private power projects, particularly those utilizing indigenous fuel sources and renewable or otherwise environmentally responsible generating facilities. The Company intends to focus its international efforts on the development, construction, ownership and operation of such projects.\nIn developing its international strategy, the Company intends to pursue development opportunities in countries which it believes have an acceptable risk profile and where the Company's geothermal resource development and operating experience, project development expertise or strategic relationship with Kiewit or local partners are expected to provide it with a competitive advantage. The Company is currently pursuing a number of electric power project opportunities in countries such as the Philippines and Indonesia, which have initiated private power programs and have extensive geothermal resources. The Company's development efforts include both so-called \"green field\" development, in which the Company attempts to negotiate unsolicited power sales contracts for new generation capacity or engages in competitive bids in response to government agency or utility requests for proposals for new capacity, as well as the acquisition of or participation in the joint development of projects which are under development or already operating. To better position itself to pursue international project development opportunities in the Asian market, the Company recently established an office in Singapore to oversee its activities in that region, including the Philippines and Indonesia. In pursuing international projects, the Company intends to maintain a significant equity interest in, and to operate, the projects that it develops or acquires.\nIn order to compete more effectively internationally, the Company's strategy is to diversify its project portfolio, reduce its future equity commitments and leverage its capabilities in international projects by developing most international projects on a joint venture basis. To that end, the Company has recently entered into international joint venture agreements with Kiewit and Distral (firms with extensive power plant construction experience) in a effort to augment and accelerate the Company's capabilities in foreign energy markets. Joint venture activities with Distral are expected to be conducted in South America, Central America and the Caribbean and joint venture activities with Kiewit are expected to be conducted in Asia (in particular the Philippines and Indonesia) and in other regions not covered by the Distral joint venture agreement. See \"- International Joint Venture Agreements.\"\nInternational Joint Venture Agreements\nAs part of the Company's international development strategy, the Company recently signed separate joint venture agreements with Kiewit and Distral. These joint ventures provide the Company with strategic alliances with firms possessing unique private power and construction expertise. The Company believes these strategic joint venture relationships will augment and accelerate its development capabilities in foreign energy markets and provide it with a relative competitive advantage. In addition, the Company believes that participation in these joint ventures will help the Company diversify its project risk profile, leverage its development capabilities and reduce future requirements to raise additional equity for projects. The Company also believes that it is important in foreign transactions to establish strong relationships with local partners (such as Distral in Central and South America and P.T. Himpurna and P.T. ESA (each as defined below) in Indonesia) who are knowledgeable of local cultural, political and commercial practices and who provide a visible local presence and local project representation.\nKiewit Joint Venture. On December 14, 1993, the Company signed a joint venture agreement with Kiewit affiliates (Kiewit Diversified Group Inc. and Kiewit Construction Group Inc.). Kiewit is one of the largest construction companies in North America and has been in the construction business since 1884. Kiewit is a diversified industrial company with approximately $2.0 billion in revenues in 1993 from operations in construction, mining and telecommunications. Kiewit has built a number of power plants in the United States and large infrastructure projects and industrial facilities worldwide, and owns approximately 37% beneficial interest in the Company.\nThe Kiewit joint venture agreement, which has an initial term of three years, provides each party a right of first refusal to pursue jointly all \"build, own and operate\" or \"build, own, operate and transfer\" power projects identified by the other party or its affiliates outside of the United States, except in locations covered by the Distral joint venture agreement described below. The Kiewit joint venture agreement provides that, if both parties agree to participate in a project, they will share all development costs equally, each of the Company and Kiewit will provide 50% of the equity required for financing a project developed by the joint venture and the Company will operate and manage any such project. The agreement contemplates a joint development structure under which, on a project by project basis, the Company will be the development manager, managing partner and\/or project operator, an equal equity participant with Kiewit and a preferred participant in the construction consortium, and Kiewit will be an equal equity participant and the preferred turnkey construction contractor, with the construction consortium providing customary security to project lenders (including the Company) for liquidated damages and completion guarantees. The joint venture agreement may be terminated by either party on 15 days written notice, provided that such termination cannot affect the pre-existing contractual obligations of either party.\nDistral Joint Venture. On December 14, 1993, the Company entered into a joint venture agreement with Distral of the Lancaster Distral Group. Distral is a South American turnkey construction contractor and manufacturer of boilers, generators and heavy equipment, and has constructed, engineered or supplied equipment to numerous coal, gas and hydroelectric power plants located in Central and South America. The Company believes that, in addition to its extensive experience in energy-related business, Distral brings substantial knowledge of the customs and commercial practices in Central and South America, as well as knowledge of the general power markets and specific power project opportunities in such regions.\nThe joint venture agreement, which has an initial term of three years, provides that the joint venture will have the right of first refusal to jointly pursue all power projects identified by the joint venture, the Company, Distral or their affiliates (other than Kiewit) in the Caribbean, South America and that part of Central America south of Mexico. The agreement provides that the Company and Distral will share all development costs equally, if both parties agree to participate in a project. The Company is required to provide at least 50% of the equity required to finance any project developed by the joint venture; provided, however, that the Company may assign up to 50% of its equity interest in any such project to Kiewit and its affiliates. The agreement contemplates a joint development structure under which the Company and Distral will jointly operate and maintain each joint venture project, with the Company responsible for overall supervision and management. The Distral agreement may be terminated at any time by the Company or Distral, provided that such termination cannot affect the pre- existing contractual obligations of either party.\nThe Philippines\nThe Company believes that increasing industrialization, a rising standard of living and an expanding power distribution network has significantly increased demand for electrical power in the Philippines. Currently, according to the 1993 Power Development Program of the National Power Corporation of the Philippines (\"NAPOCOR\"), demand for electricity exceeds supply. NAPOCOR has also reported that its ability to sustain current levels of electric production from existing facilities has been limited due to frequent breakdowns in many of its older electric generating plants and an extended drought, which has limited hydroelectric generation. As a result, the Philippines has experienced severe power outages, with Manila suffering significant daily brownouts during much of 1993. Although the occurrence of brownouts has been recently reduced, NAPOCOR has said that it still anticipates significant energy shortages in the future.\nIn 1993, the Philippine Congress, pursuant to Republic Act 7648, granted President Ramos emergency powers to remedy the Philippines' energy crisis, including authority to (i) exempt power projects from public bidding requirements, (ii) increase power rates and (iii) reorganize NAPOCOR. Until 1987, NAPOCOR had a monopoly on power generation and transmission in the Philippines. In 1987, then President Aquino issued Executive Order No. 215, which grants private companies the right to develop certain power generation projects, such as those using indigenous energy sources on a \"build-operate-transfer\" or \"build-transfer\" basis. In 1990, the Philippine Congress enacted Republic Act No. 6957, which authorizes private development of priority infra-structure projects on a \"build-operate-transfer\" and a \"build-transfer\" basis. In addition, under that Act, such power projects are eligible for certain tax benefits, including exemption from Philippine national income taxes for at least six years and exemption from, or reimbursement for, customs duties and value added taxes on capital equipment to be incorporated into such projects.\nIn a effort to remedy the shortfall of electricity, the Republic of the Philippines, NAPOCOR and the Philippine National Oil Company-Energy Development Company (\"PNOC-EDC\") are jointly soliciting bids for private power projects. The potential Philippine indigenous resources include geothermal, hydro and coal, of which geothermal power has been identified as a preferred alternative. The Philippine Government has elected to promote geothermal power development due to the domestic availability and the minimal environmental effects of geothermal power in comparison to other forms of power production. PNOC-EDC, which is responsible for developing the Philippines' domestic energy sources, has been successful in the exploration and development of geothermal resources.\nThe Company has been awarded and signed power contracts with PNOC-EDC for two geothermal projects, Upper Mahiao and Mahanagdong, aggregating 300 MW. The following is a summary description of certain information concerning these and other projects as it is currently known to the Company. Since these projects are still in development, however, there can be no assurance that this information will not change over time. In addition, there can be no assurance that development efforts on any particular project, or the Company's efforts generally, will be successful.\nUpper Mahiao. The Company is negotiating the final terms of the construction and term project financing for a 120 MW geothermal project to be located in the Greater Tongonan area of the island of Leyte, Republic of the Philippines (the \"Upper Mahiao Project\"). The Upper Mahiao Project will be built, owned and operated by CE Cebu Geothermal Power Company, Inc. (\"CE Cebu\"), a Philippine corporation that will be more than 95% indirectly owned by the Company. It will sell 100% of its capacity on a \"take-or-pay\" basis (described below) to PNOC-EDC, which will in turn sell the power to NAPOCOR for distribution to the island of Cebu, located about 40 miles west of Leyte.\nThe Company estimates that Upper Mahiao will have a total project cost of approximately $226 million, including interest during construction, project contingency costs and a debt service reserve fund. A consortium of international banks is expected to provide an approximately $170 million project-financed construction loan, supported by political risk insurance from the Export-Import Bank of the United States (\"ExIm Bank\"). The Company expects that the term loan for the project will also be provided by the ExIm Bank, and that both the construction and the term loan agreements will be executed in April 1994. Shortly thereafter, the Company expects to issue a notice to proceed to the Contractor under the Mahiao EPC Contract (as defined below), with commercial operations scheduled for mid-year 1996. The Company expects that its equity commitment to the Upper Mahiao Project will be about $56 million. The Company intends to arrange for political risk insurance on this equity investment through OPIC or from governmental agencies or commercial sources.\nThe Upper Mahiao Project will be constructed by Ormat, Inc. (\"Ormat\") and its affiliates pursuant to supply and construction contracts (collectively the \"Mahiao EPC Contract\"), which, taken together, provide for the construction of the plant on a fixed- price, date-certain, turnkey basis. Ormat is an international manufacturer and construction contractor that builds binary geothermal turbines; it has provided its equipment to several geothermal power projects throughout the United States and internationally. The Mahiao EPC Contract provides liquidated damage protection of 30% of the Mahiao EPC Contract price. Ormat's performance under the Mahiao EPC Contract will be backed by a completion guaranty of Ormat, by letters of credit, and by a guaranty of Ormat Industries, Ltd., an Israeli corporation and the parent of Ormat, in each case for the benefit of, and satisfactory to, the project lenders.\nUnder the terms of the Energy Conversion Agreement, executed on September 6, 1993 (the \"Upper Mahiao ECA\"), CE Cebu will build, own and operate the Project during the two-year construction period and the ten year cooperation period, after which ownership will be transferred to PNOC-EDC at no cost. The effectiveness of the Upper Mahiao ECA is subject to the satisfaction or waiver of certain conditions prior to April 8, 1994 (subject to extension by agreement of the parties) including finalization of the principal project documents (including a power purchase agreement between PNOC-EDC and NAPOCOR), posting by Ormat of a construction performance bond in favor of PNOC-EDC in the amount of approximately $11.8 million, obtaining permits and approvals from various Philippine governmental authorities and arranging financing commitments. In the event the parties are unable to satisfy such conditions before the agreed upon effectivity date, either party may terminate the Upper Mahiao ECA and such party shall reimburse the other party for its costs and expenses incurred in connection with such agreement.\nThe Upper Mahiao Project will be located on land to be provided by PNOC-EDC at no cost; it will take geothermal steam and fluid, also provided by PNOC-EDC at no cost, and convert its thermal energy into electrical energy to be sold to PNOC-EDC on a \"take-or-pay\" basis. Specifically, PNOC-EDC will be obligated to pay for the electric capacity that is nominated each year by CE Cebu, irrespective of whether PNOC-EDC is willing or able to accept delivery of such capacity. PNOC-EDC will pay to CE Cebu a fee (the \"Capacity Fee\") based on the plant capacity nominated to PNOC-EDC in any year (which, at the plant's design capacity is approximately 95% of total contract revenues) and a fee ( the \"Energy Fee\") based on the electricity actually delivered to PNOC-EDC (approximately 5% of total contract revenues). The Capacity Fee consists of three separate components: a fee to recover the capital costs of the project, a fee to recover fixed operating costs and a fee to cover return on investment. The Energy Fee is designed to cover all variable operating and maintenance costs of the power plant. Payments under the Upper Mahiao ECA will be denominated in U.S. dollars, or computed in dollars and paid in Philippine pesos at the then-current exchange rate, except for the Energy Fee, which will be used to pay peso-denominated expenses. The ECA provides a mechanism to convert Philippine pesos to dollars. Significant portions of the Capacity Fee and Energy Fee will be indexed to U.S. and Philippine inflation rates, respectively. PNOC-EDC's \"take-or- pay\" performance requirement, and its other obligations under the Upper Mahiao ECA, are guaranteed by the Republic of the Philippines through a performance undertaking.\nThe payment of Capacity Fees is not excused if PNOC-EDC fails to deliver or remove the steam or fluids or fails to provide the transmission facilities, even if its failure was caused by a force majeure event. In addition, PNOC-EDC must continue to make Capacity Fee Payments if there is a force majeure event (e.g. war, nationalization, etc.) that affects the operation of the Upper Mahiao Project and that is within the reasonable control of PNOC- EDC or the government of the Republic of the Philippines or any agency or authority thereof. If CE Cebu fails to meet certain construction milestones or the power plant fails to achieve 70% of its design capacity by the date that is 120 days after the scheduled completion date (as that date may be extended for force majeure and other reasons under the Upper Mahiao ECA), the Upper Mahiao Project may, under certain circumstances, be deemed \"abandoned,\" in which case the Upper Mahiao Project must be transferred to PNOC-EDC at no cost, subject to any liens existing thereon.\nPNOC-EDC is obligated to purchase CE Cebu's interest in the facility under certain circumstances, including (i) extended outages resulting from the failure of PNOC-EDC to provide the required geothermal fluid, (ii) changes in tax, environmental or other laws which would materially adversely affect CE Cebu's interest in the project, (iii) transmission failure, (iv) failure of PNOC-EDC to make timely payments of amounts due under the Upper Mahiao ECA, (v) privatization of PNOC-EDC or NAPOCOR, and (vi) certain other events. Prior to completion of the Upper Mahiao Project, the buy-out price will be equal to all costs incurred through the date of the buy-out, including all Upper Mahiao Project debt, plus an additional rate of return on equity of ten percent per annum. In a post-completion buy-out, the price will be the net present value at a ten percent discount rate of the total remaining amount of Capacity Fees over the remaining term of the Upper Mahiao ECA.\nMahanagdong. The Mahanagdong Project is expected to be a 180 MW geothermal project, which will also be located on the island of Leyte. The Mahanagdong Project will be built, owned and operated by CE Luzon Geothermal Power Company, Inc. (\"CE Luzon\"), a Philippine corporation that is currently expected to be indirectly owned as follows: 45% by the Company, 45% by Kiewit and up to 10% by another industrial company. It will sell 100% of its capacity on a take-or-pay basis (as described above for the Upper Mahiao Project) to PNOC-EDC, which will in turn sell the power to NAPOCOR for distribution to the island of Luzon.\nThe Company estimates that Mahanagdong will have a total project cost of approximately $310 million, including interest during construction, project contingency costs and a debt service reserve fund. The proposed capital structure is 75% debt, with a construction and term loan of approximately $225 million and 25% equity, or approximately $85 million in equity contributions. The Company believes that political risk insurance from ExIm Bank for financing of the procurement of U.S. goods and services is available and, if appropriate, will request similar coverage from the Export-Import Bank of Japan for Japanese goods and services. The Company is in the process of arranging construction financing for the Mahanagdong Project from a consortium of international banks. Construction of the Mahanagdong Project is expected to commence in mid-year 1994, with commercial operation presently scheduled for mid-year 1997. The Company's equity investment for the Mahanagdong Project is expected to be about $40 million, and the Company expects to arrange for political risk insurance on this equity investment through OPIC or from governmental agencies or commercial sources.\nThe Mahanagdong Project will be constructed by a consortium of Kiewit Construction Group, Inc. (\"KCG\") and The Ben Holt Co. (\"BHCO\") (the \"EPC Consortium\"), pursuant to fixed-price, date- certain, turnkey supply and construction contracts (collectively the \"Mahanagdong EPC Contract\"). The obligations of the EPC Consortium under the Mahanagdong EPC Contract will be supported by letters of credit, bonds, guarantees or other acceptable security in an aggregate amount equal to approximately 30% of the Mahanagdong EPC Contract's price, plus a joint and several guaranty of each of the EPC Consortium members. KCG, a wholly-owned subsidiary of Kiewit, will be the lead member of the EPC Consortium, with an 80% interest. KCG performs construction services for a wide range of public and private customers in the U.S. and internationally. Construction projects undertaken by KCG during 1992 included: transportation projects, including highways, bridges, airports and railroads; power facilities; buildings and sewer and waste disposal systems; with the balance consisting of water supply systems, utility facilities, dams and reservoirs. KCG accounted for 80% of Kiewit's revenues, contributing $1.7 billion in revenues in 1993. KCG has an extensive background in power plant construction.\nBHCO will provide design and engineering services for the EPC Consortium, holding a 20% interest. BHCO, wholly-owned by the Company, is a California based engineering firm with over 25 years of geothermal experience, specializing in feasibility studies, process design, detailed engineering, procurement, construction and operation of geothermal power plants, gathering systems and related facilities. The Company will provide a guaranty of BHCO's obligations under the Mahanagdong EPC Contract.\nThe terms of the Energy Conversion Agreement (the \"Mahanagdong ECA\"), executed on September 18, 1993, are substantially similar to those in the Upper Mahiao ECA. The Mahanagdong ECA provides for a three-year construction period, and its effectivity deadline date is in July 1994. All of PNOC-EDC's obligations under the Mahanagdong ECA will be guaranteed by the Republic of the Philippines through a performance undertaking. The Capacity Fees are expected to be approximately 97% of total revenues at the expected capacity levels and the Energy Fees are expected to be approximately 3% of such total revenues.\nCasecnan. The Company has been granted exclusive rights to negotiate an energy sales contract with NAPOCOR and a water sales contract with the National Philippine Irrigation Administration in connection with a proposed 60 MW hydro-electric generating facility to be located in the Casecnan area on the island of Luzon. These contracts will be structured as take-or-pay capacity and energy agreements, with capacity payments representing the bulk of the revenues. Negotiations have only recently commenced on this potential project, and there can be no assurance at this time that any agreement will be reached by the parties.\nIndonesia\nThe Republic of Indonesia is experiencing demand for electrical power that exceeds current supply, and has a number of promising geothermal reservoirs. Recent Indonesian legislation has facilitated foreign ownership and operation of private electrical power generation and transmission facilities. The Company's subsidiaries are currently negotiating several potential project agreements for geothermal power facilities in Indonesia.\nThe following is a summary description of certain information concerning these projects as it is currently known to the Company. Since those projects are still in development, however, there can be no assurance that this information will not change materially over time. In addition, there can be no assurance that development efforts on any particular project, or the Company's efforts generally, will be successful.\nDieng. Through memoranda of understanding executed by Perusahaan Pertambangan Minyak Dan Gas Bumi Negara (\"Pertamina\"), the Indonesian national oil company, and assigned to the Company, the Company has been awarded the exclusive right to develop geothermal resources in the Dieng region of central Java, Indonesia (the \"Dieng Project\"). A subsidiary of the Company has entered into a Joint Development Agreement with P.T. Himpurna Enersindo Abadi (\"P.T. HEA\"), its Indonesian partner, which is a subsidiary of Himpurna, an association of Indonesian military veterans, whereby the Company and P.T. HEA have agreed to work together on an exclusive basis to develop the Dieng Project (the \"Dieng JV\"). The Dieng JV is expected to be structured such that subsidiaries of the Company will have a 45% interest, subsidiaries of Kiewit will have the option to take a 45% interest and P.T. HEA will have a 10% interest in the Dieng Project. The Dieng JV expects to conduct geothermal exploration and development in the Dieng field, to build, own and operate power generating facilities and to sell the power generated to Perusahaan Umum Listrik Negara (\"PLN\"), the Indonesian national electric utility.\nThe Dieng JV and Pertamina are currently negotiating a proposed Joint Operation Contract (the \"Dieng JOC\") pursuant to which Pertamina would contribute the geothermal field and the wells and other facilities presently located thereon and the Dieng JV initially would build, own and operate four power production units comprising an aggregate of 220 MW. The Dieng JV will accept the field operation responsibility for developing and supplying the geothermal steam and fluids required to operate the plants. The current proposed Dieng JOC would expire (subject to extension by mutual agreement) on the date which is the later of (i) 42 years following completion of well testing and (ii) 30 years following the date of commencement of commercial operation of the final unit completed. Upon the expiration of the proposed Dieng JOC, all facilities would be transferred to Pertamina at no cost. Under the proposed Dieng JOC, the Dieng JV would be required to pay Pertamina a production allowance equal to three percent of the Dieng JV's net operating income from the Dieng Project, plus a further percentage based upon the negotiated value of existing Pertamina geothermal production facilities that the Company expects will be contributed by Pertamina.\nThe Dieng JV and Pertamina are currently negotiating a proposed \"take-or-pay\" Energy Sales Contract (the \"Dieng ESC\") with PLN whereby PLN would agree to purchase and pay for all electricity delivered or capacity made available from the Dieng Project for a term equal to that of the Dieng JOC. Under the current draft, the price paid for electricity would equal a base energy price per kWh multiplied by the number of kWh the plants deliver or are \"capable of delivering,\" whichever is greater. Electricity revenue payments would also be adjusted for inflation and fluctuations in exchange rates.\nAssuming execution of the Dieng JOC and the Dieng ESC, the Company presently intends to begin well testing by the second quarter of 1994 and to commence construction of an initial 55 MW unit in the fourth quarter of 1994, and then to proceed on a modular basis with construction of three additional units to follow shortly thereafter, resulting in an aggregate first phase at this site of 220 MW. The Company estimates that the total project cost of these units will be approximately $450 million. The Company anticipates that the Dieng Project will be designed and constructed by a consortium consisting of KCG and BHCO, and that the Company (through a subsidiary) will be responsible for operating and managing the Dieng Project.\nThe Dieng field has been explored domestically for over 20 years and BHCO has been active in the area for more than five years. The Company has a significant amount of data, which it believes to be reliable as to the production capacity of the field. However, a number of significant steps, both financial and operational, must be completed before the Dieng Project can proceed. These steps, none of which can be assured, include obtaining required regulatory permits and approvals, entering into the Dieng JOC, undertaking and completing the well testing contemplated by the Dieng JOC, entering into the Dieng ESC, the construction agreement and other project contracts, and arranging financing.\nPatuha. The Company has also negotiated a memorandum of understanding and expects to execute a definitive agreement with Pertamina for the exclusive geothermal development rights with respect to the Patuha geothermal field in Java, Indonesia (the \"Patuha Project\"). The Company has entered into an agreement to establish a joint venture for Patuha with P.T. Enerindo Supra Abadi, an Indonesian company (\"P.T. ESA\") (the \"Patuha JV\"). P.T. ESA is an affiliate of the Bukaka Group, which has extensive experience in general construction, fabrication and electrical transmission construction in Indonesia. In exchange for project development services, P.T. ESA is expected to receive a 10% equity interest in the Patuha Project with an option to acquire an additional 20% interest for cash upon the satisfaction of certain conditions. Subject to the exercise of that option, subsidiaries of the Company will have a 45% interest and subsidiaries of Kiewit will have the option to take a 45% interest in the Patuha Project.\nThe Patuha JV is currently negotiating both a Joint Operation Contract (\"JOC\") and an Energy Sales Contract (\"ESC\"), each of which currently contains terms substantially similar to those described above for the Dieng Project. The Patuha JV presently intends to proceed on a modular basis like the Dieng Project, with an initial 55 MW unit to be built followed by three additional units, in total aggregating 220 MW. The Company estimates that the total cost of these four units will be approximately $450 million. Assuming execution of both a JOC and an ESC, field development is expected to commence in the first quarter of 1995 with construction of the first unit expected to begin by mid-year 1996.\nThe Patuha Project remains subject to a number of significant uncertainties, as described above in connection with the Dieng Project, and there can be no assurance that the Patuha Project will proceed or reach commercial operation.\nLampung\/South Sumatra. The Company and P.T. ESA have also formed a joint venture (the \"Lampung JV\") to pursue development of geothermal resources in the Lampung\/South Sumatra regions (the \"Lampung Project\"). The Lampung JV is presently exploring several geothermal fields in this region and is negotiating a memorandum of understanding for a JOC and ESC for these prospects containing terms substantially similar to those described above for the Dieng Project.\nThe Company presently intends to develop the Lampung Project and other possible Indonesia projects using a structure similar to that contemplated for the Dieng Project, with the same construction consortium, similar equipment and similar financing arrangements.\nThe Lampung Project remains subject to a number of significant uncertainties, as described above for the Dieng Project, and there can be no assurance that the Company will pursue the Lampung Project or that it will proceed or reach commercial operation.\nREGULATORY AND ENVIRONMENTAL MATTERS\nEnvironmental Regulation\nThe Company's projects are subject to environmental laws and regulations at the federal, state and local levels in connection with the development, ownership and operation of the projects. These environmental laws and regulations generally require that a wide variety of permits and other approvals be obtained for the construction and operation of an energy-producing facility and that the facility then operate in compliance with such permits and approvals. Failure to operate the facility in compliance with applicable laws, permits and approvals can result in the levy of fines or curtailment of operations by regulatory agencies.\nManagement of the Coso Joint Ventures believe that the Coso Joint Ventures are in compliance in all material respects with all applicable environmental regulatory requirements and that maintaining compliance with current governmental requirements will not require a material increase in capital expenditures or materially affect its financial condition or results of operations. Likewise, management of the Company believes that the Company's other projects are in compliance with all applicable environmental regulatory requirements. It is possible, however, that future developments, such as more stringent requirements of environmental laws and enforcement policies thereunder, could affect the costs of and the manner in which the Coso Joint Ventures or the Company's other projects conduct their businesses.\nFederal Energy Regulations\nThe principal federal regulatory legislation relating to the Company's geothermal energy activities is PURPA. PURPA and associated state legislation have conferred certain benefits on the independent power production industry. In particular, PURPA exempts certain electricity producers (\"Qualifying Facilities\") from federal and state regulation as a public utility. PURPA also requires utilities, such as SCE, to purchase electricity from qualifying facilities at the particular utility's avoided cost.\nEach of the Coso Projects meets the requirements promulgated under PURPA to be Qualifying Facilities. Qualifying Facility status under PURPA provides two primary benefits. First, regulations under PURPA exempt qualifying facilities from the Public Utility Holding Company Act of 1935 (\"PUHCA\"), most provisions of the Federal Power Act (the \"FPA\") and state laws concerning rates of electric utilities, and financial and organizational regulations of electric utilities. Second, FERC's regulations promulgated under PURPA require that (1) electric utilities purchase electricity generated by Qualifying Facilities, the construction of which commenced on or after November 9, 1978, at a price based on the purchasing utility's full avoided cost; (2) the electric utility sell back-up, interruptable, maintenance and supplemental power to the Qualifying Facility on a non- discriminatory basis; and (3) the electric utility interconnect with the Qualifying Facility in its service territory.\nThe Projects remain subject, among other things, to FERC approvals and permits for power development, and to federal, state and local laws and regulations regarding environmental compliance, leasing, siting, licensing, construction, and operational and other matters relating to the exploration, development and operation of its geothermal properties.\nIn 1992, Congress enacted comprehensive new energy policy legislation in its passage of the Energy Policy Act. This new law is designed to, among other things, foster competition in energy production and provide independent power producers with competitive access to the transmission grid. To achieve these goals, the Energy Policy Act amended PUHCA to create a new class of generating facility called Exempt Wholesale Generators (\"EWGs\"). EWGs are generally exempt from public utility regulation under PUHCA. The Energy Policy Act also provides new authority to FERC to mandate that owners of transmission lines provide wheeling access at just and reasonable rates. Previously limited, wheeling rights enhance the ability of independent power producers to negotiate transmission access and encourages development of facilities whose most feasible siting lies outside the purchasing utility's service area or which, like many geothermal sites, are remotely located.\nPermits and Approvals\nThe Company has obtained certain permits, approvals and certificates necessary for the current exploration, development and operation of its Projects. Similar permits, approvals and certificates will be required for any future expansion of the Coso Project and for any development of the Company's other geothermal properties or for other power project development by the Company. Such compliance is costly and time consuming, and may in certain instances be dependent upon factors beyond the Company's control.\nThe Company believes that its operating power facilities are currently in material compliance with all applicable federal, state and local laws and regulations. No assurance can be given, however, that in the future all necessary permits, approvals, variances and certificates will be obtained and all applicable statutes and regulations will be complied with, nor can assurance be given that additional and more stringent laws, taxes or regulations will not be established in the future which may restrict the Company's current operations or delay the development of new geothermal properties, or which may otherwise have an adverse impact on the Company.\nINSURANCE\nThe Coso Projects are insured for $600.0 million per occurrence for general property damage and $600.0 million per occurrence for business interruption, subject to a $25,000 deductible for property damage ($500,000 for turbine generator and machinery) and a 15-day deductible for business interruption. Catastrophic insurance (earthquake and flood) for the Coso Project is capped at $200.0 million per occurrence for property damage and $200.0 million per occurrence for business interruption. Liability insurance coverage is $51.0 million (occurrence based) with a $10,000 deductible. Operators' extra expense (control of well) insurance for the Coso Project is $10.0 million per occurrence with a $25,000 deductible which is non-auditable. The policies are issued by international and domestic syndicates with each company rated A- or better by A.M. Best Co., Inc. There can be no assurance, however, that earthquake, property damage, business interruption or other insurance will be adequate to cover all potential losses sustained by the Company or that such insurance will continue to be available on commercially reasonable terms.\nEMPLOYEES\nAs of December 31, 1993, the Company employed approximately 249 people, of which approximately 160 people were employed at the Navy I, Navy II and BLM Projects, collectively. The Coso Joint Ventures do not hire or retain any employees. All employees necessary to the operation of the Coso Project are provided by the Company under certain plant and field operations and maintenance agreements.\nItem 2.","section_1A":"","section_1B":"","section_2":"Item 2. Properties\nAs described under \"Business\", the Company's most significant physical properties are its four operating power facilities and its related real property interests. The Company also maintains an inventory of more than 400,000 acres of geothermal property leases and owns a 70% interest in a geothermal steam field. An affiliate of the Company owns the approximately 42 acre site in Yuma, Arizona where the 50 MW gas fired cogeneration facility is being constructed.\nThe Company owns a one-story office building in Omaha, Nebraska, which houses its principal executive offices. The Company also leases office space in Ridgecrest, California, which houses the operating offices for the Coso Project and in Singapore and Manila, which house offices for the Company's international activities in the region.\nItem 3.","section_3":"Item 3. Legal Proceedings\nThe Company is not a party to any material legal proceedings.\nItem 4.","section_4":"Item 4. Submission of Matters to a Vote of Security Holders\nNot applicable.\nPART II\nItem 5.","section_5":"Item 5. Market for Registrant's Common Equity and Related Stockholder's Matters\nThe Company's Common Stock is listed on the New York Stock Exchange, the Pacific Stock Exchange and the London Stock Exchange using the symbol CE. Prior to listing on the New York Stock Exchange on August 12, 1993, the Company's Common Stock was listed on the American Stock Exchange.\nThe following table sets forth, for the calendar periods indicated, the high and low closing sales prices of the Company's Common Stock as reported by the American Stock Exchange for the periods through August 11, 1993 and the New York Stock Exchange thereafter. All prices have been adjusted to reflect the Company's stock dividends during those calendar periods.\nPeriod High Low\nFirst Quarter $16.25 $11.63 Second Quarter 13.25 11.50 Third Quarter 13.00 11.38 Fourth Quarter 17.38 11.88\nPeriod High Low\nFirst Quarter 21.50 16.50 Second Quarter 20.00 17.25 Third Quarter 18.38 16.00 Fourth Quarter 20.13 18.13\nAs of March 21, 1994, there were 1,408 stockholders of record of the Company's Common Stock.\nThe present policy of the Board is to retain earnings to provide sufficient funds for the operation and expansion of the Company's business. Accordingly, the Company has not paid, and does not have any present plan to pay, cash dividends on its Common Stock. In January of 1990 and January of 1991, the Company paid a 4% stock dividend to the holders of its Common Stock. The Company did not pay such a dividend in 1992 or 1993, and has no plans to pay any such dividend in the future.\nPrior to March 24, 1994, the agreements relating to the Senior Notes issued by the Company prohibit the payment of dividends unless the Company has a net worth of at least $50 million, after giving effect to the payment of such dividends, and dividends do not exceed 50% of the Company's net income accumulated after December 31, 1987. Pursuant to a Defeasance Agreement dated March 23, 1994 such restrictions were released by the holder of the Senior Notes. The Certificate of Designation with respect to the Company's Series C Redeemable Convertible Exchangeable Preferred Stock (the \"Series C Preferred Stock\") prohibits cash dividend payments with respect to the Common Stock unless all accumulated dividends on the Series C Preferred Stock have been paid.\nThe Indenture for the Senior Discount Notes issued by the Company on March 24, 1994 prohibit the payment of dividends unless certain financial covenants are satisfied. Reference is made to the indenture relating to the Senior Discount Notes for a detailed description of these restrictions.\nIn June of 1993, the Company issued $100,000,000 of 5% convertible subordinated debentures (\"Debentures\") due July 31, 2000. The Debentures are convertible into shares of the Company's Common Stock at any time prior to redemption or maturity at a conversion price of $22.50 per share, subject to adjustment in certain circumstances. Interest on the Debentures is payable semi- annually in arrears on July 31 and January 31 of each year, commencing on July 31, 1993. The debentures are redeemable for cash at any time on or after July 31, 1996 at the option of the Company. The redemption prices (expressed in percentages of the principal amount) based on twelve month periods beginning July 31, 1996 are 102%, 101%, 100% and 100% for 1996, 1997, 1998 and 1999, respectively. The Debentures are unsecured general obligations of the Company and subordinated to all existing and future senior indebtedness of the Company. In December of 1993, the Company registered 4,444,444 shares of the Company's Common Stock in the event a holder elected to exercise the conversion rights under the Debentures.\nItem 6.","section_6":"Item 6. Selected Financial Data\nThere is hereby incorporated by reference the information which appears under the caption \"Selected Financial Data\" in the Annual Report.\nItem 7.","section_7":"Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation\nThere is hereby incorporated by reference the information which appears under the caption \"Management's Discussion and Analysis of Financial Condition and Results of Operation\" in the Annual Report.\nItem 8.","section_7A":"","section_8":"Item 8. Financial Statements and Supplementary Data\nThere is hereby incorporated by reference the information which appears in the Consolidated Financial Statements and notes thereto in the Annual Report. Since the preparation of the Consolidated Financial Statements, the Company closed on the Senior Discount Notes described in the Consolidated Financial Statements at footnote 16, \"Subsequent Event.\" On March 24, 1994 the Company received the proceeds of about $390 million from the closing on its Senior Discount Note offering. The Senior Discount Notes bear interest at the rate of 10.25% per annum, with cash interest payment commencing in 1997 and accrete to an aggregate principal amount of $529 million at maturity. The notes are unsecured obligations of the Company. The Company intends to use the proceeds from the offering to: (i) fund equity commitments in, and the construction costs of, geothermal power project presently planned in the Philippines and Indonesia, (ii) to fund equity investments in, and loan to, other potential international and domestic private power projects and related facilities, (iii) for corporate or project acquisitions permitted under the indenture, and (iv) for general corporate purposes.\nItem 9.","section_9":"Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure\nNot Applicable\nPART III\nItem 10.","section_9A":"","section_9B":"","section_10":"Item 10. Directors and Executive Officers of the Registrant\nThere is hereby incorporated by reference the information which appears under the caption \"Information Regarding Nominees for Election as Directors and Directors Continuing in Office\" in the Proxy Statement.\nSet forth below are the current executive officers of the Company and their positions with the Company:\nExecutive Officer Position\nRichard R. Jaros Chairman of the Board of Directors David L. Sokol President and Chief Executive Officer Gregory E. Abel Assistant Vice President and Controller Edward F. Bazemore Vice President, Human Resources David W. Cox Vice President, Legislative and Regulatory Affairs Philip H. Essner Vice President, Land Management and Insurance Vincent R. Fesmire Vice President, Development and Implementation Thomas R. Mason Senior Vice President, Engineering, Construction and Operations Steven A. McArthur Senior Vice President, General Counsel and Secretary Donald M. O'Shei, Sr. Vice President, Marketing; President, CE International, Ltd. John G. Sylvia Vice President, Chief Financial Officer and Treasurer\nSet forth below is certain information with respect to each executive officer of the Company other than Messrs. Jaros and Sokol (for whom information is incorporated by reference from the Proxy Statement):\nGREGORY E. ABEL, 31, Assistant Vice President and Controller. Mr. Abel joined the Company in 1992. Mr. Abel is a Chartered Accountant and from 1984 to 1992 he was employed by Price Waterhouse. As a Manager in the San Francisco office of Price Waterhouse, he was responsible for clients in the energy industry.\nEDWARD F. BAZEMORE, 57, Vice President, Human Resources. Mr. Bazemore joined the Company in July 1991. From 1989 to 1991, he was Vice President, Human Resources, at Ogden Projects, Inc. in New Jersey. Prior to that, Mr. Bazemore was Director of Human Resources for Ricoh Corporation, also in New Jersey. Previously, he was Director of Industrial Relations for Scripto, Inc. in Atlanta, Georgia.\nDAVID W. COX, 38, Vice President, Legislative and Regulatory Affairs. Mr. Cox joined the Company in 1990. From 1987 to 1990, Mr. Cox was Vice President with Bank of America N.T. & S.A. in the Consumer Technology and Finance Group. From 1984 to 1987, Mr. Cox held a variety of management positions at First Interstate Bank.\nPHILIP H. ESSNER, 51, Vice President, Land Management and Insurance. Mr. Essner administers the Company's geothermal lease acquisition and land position programs, and obtains permits from regulatory agencies. Mr. Essner also manages the Company's insurance programs. He has been a Vice President of the Company since 1983.\nVINCENT R. FESMIRE, 53, Vice President, Development and Implementation. Mr. Fesmire joined the Company in October 1993. Prior to joining the Company, Mr. Fesmire was employed for 19 years with Stone & Webster, an engineering firm, serving in various management level capacities with an expertise in geothermal design engineering.\nTHOMAS R. MASON, 50, Senior Vice President, Engineering, Construction and Operations. Mr. Mason joined the Company in March 1991. From October 1989 to March 1991, Mr. Mason was Vice President and General Manager of Kiewit Energy Company. Mr. Mason acted as a consultant in the energy field from June 1988 to October 1989. Prior to that, Mr. Mason was Director of Marketing for Energy Factors, Inc., a non-utility developer of power facilities.\nSTEVEN A. McARTHUR, 36, Senior Vice President, General Counsel and Secretary. Mr. McArthur joined the Company in February 1991. From 1988 to 1991 he was an attorney in the Corporate Finance Group at Shearman & Sterling in San Francisco. From 1984 to 1988 he was an attorney in the Corporate Finance Group at Winthrop, Stimson, Putnam & Roberts in New York.\nDONALD M. O'SHEI, SR., 60, Vice President; President, CE International, Ltd. General O'Shei was in charge of engineering and operations for the Company from October 1988 until October 1991. He rejoined the Company as a Vice President in August, 1992. Previously he was President and Chief Executive Officer of AWD Technologies, Inc., a hazardous waste remediation firm, and President and General Manager of its predecessor company, Atkinson- Woodward Clyde. He was a brigadier general in the U.S. Army prior to joining the Guy F. Atkinson Co. in 1982 as Director of Corporate Planning and Development.\nJOHN G. SYLVIA, 35, Vice President, Chief Financial Officer and Treasurer. Mr. Sylvia joined the Company in 1988. From 1985 to 1988, Mr. Sylvia was a Vice President in the San Francisco office of the Royal Bank of Canada, with responsibility for corporate and capital markets banking. From 1986 to 1990, Mr. Sylvia served as an Adjunct Professor of Applied Economics at the University of San Francisco. From 1982 to 1985, Mr. Sylvia was a Vice President with Bank of America.\nItem 11.","section_11":"Item 11. Executive Compensation\nThere is hereby incorporated by reference the information which appears under the caption \"Executive Officer and Director Compensation\" in the Proxy Statement.\nItem 12.","section_12":"Item 12. Security Ownership of Certain Beneficial Owners and Management\nThere is hereby incorporated by reference the information which appears under the caption \"Security Ownership of Significant Stockholders and Management\" in the Proxy Statement.\nItem 13.","section_13":"Item 13. Certain Relationships and Related Transactions\nThere is hereby incorporated by reference the information which appears under the caption \"Certain Transactions and Relationships\" in the Proxy Statement.\nPART IV\nItem 14.","section_14":"Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K\n(a) Financial Statements and Schedules\n(i) Financial Statements\nFiled herewith are the consolidated balance sheet of California Energy Company, Inc. and subsidiaries as of December 31, 1993, and December 31, 1992, and the consolidated statements of operations, cash flows and stockholder's equity for the years ended December 31, 1993, 1992 and 1991, and the related reports of independent auditors.\n(ii) Financial Statement Schedules\nSchedule No. Name of Schedule II Amounts Receivable from Related Parties and Underwriters, Promoters, and Employees other than Related Parties III Financial Statements of the Company (Parent Company only) V Consolidated Property, Plant and Equipment VI Consolidated Accumulated Depreciation and Amortization of Property, Plant and Equipment IX Short-Term Borrowings X Consolidated Supplementary Income Statement Information\nThe other financial statement schedules are either not required for the Company or are included at the notes to the financial statements.\n(b) Reports on Form 8-K\nThe Company filed a Report on Form 8-K on October 1, 1993 reporting the signing of Energy Conversion Agreement with the Philippine National Oil Company - Energy Development Corporation for two separate Philippines geothermal power projects totaling 300 MW under Item 5. thereof, \"Other Events\".\nThe Company filed a Report on Form 8-K on November 2, 1993 reporting the Company agreed to acquire 100% of the stock of Westmoreland Energy, Inc. from Westmoreland Coal Company.\nThe Company filed a Report on Form 8-K on December 1, 1993 reporting that it terminated the proposed acquisition of Westmoreland Energy, Inc. stock.\n(c) Exhibits\nThe exhibits listed on the accompanying Exhibit Index (except in the case of Exhibit 13.0, in which case only the portion of the Annual Report which constitutes the Company's Consolidated Financial Statements and notes thereto) are filed as part of this Annual Report.\nFor the purposes of complying with the amendments to the rules governing Form S-8 effective July 13, 1990 under the Securities Act of 1933, the undersigned Registrant hereby undertakes as follows, which undertaking shall be incorporated by reference into the Company's currently effective Registration Statements on Form S-8:\nInsofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer of controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. SIGNATURES\nPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized, in the City of Omaha, State of Nebraska, on this 30th day of March, 1994.\nCALIFORNIA ENERGY COMPANY, INC.\nBy David L. Sokol President and Chief Executive Officer\nBy: \/s\/ Steven A. McArthur Steven A. McArthur Attorney-in-Fact\nPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.\nSignature Date\n\/s\/ David L. Sokol* March 30, 1994 David L. Sokol President and Chief Executive Officer, Director\n\/s\/ John G. Sylvia March 30, 1994\nJohn G. Sylvia Vice President, Chief Financial Officer, Chief Accounting Officer and Treasurer\n*By: \/s\/ Steven A. McArthur March 30, 1994 Steven A. McArthur Attorney-in-Fact\n\/s\/ Edgar D. Aronson * March 30, 1994 Edgar D. Aronson Director\n\/s\/ Judith E. Ayres * March 30, 1994 Judith E. Ayres Director\n\/s\/ Harvey F. Brush* March 30, 1994 Harvey F. Brush Director\n\/s\/ James Q. Crowe* March 30, 1994 James Q. Crowe Director\n\/s\/ Richard K. Davidson* March 30, 1994 Richard K. Davidson Director\n\/s\/ Richard R. Jaros* March 30, 1994 Richard R. Jaros Chairman of the Board of Directors\n\/s\/ Ben Holt* March 30, 1994 Ben Holt Director\n\/s\/ Everett B. Laybourne* March 30, 1994 Everett B. Laybourne Director\n\/s\/ Daniel J. Murphy* March 30, 1994 Daniel J. Murphy Director\n\/s\/ Herbert L. Oakes, Jr.* March 30, 1994 Herbert L. Oakes, Jr. Director\n\/s\/ Walter Scott, Jr.* March 30, 1994 Walter Scott, Jr. Director\n\/s\/ Barton W. Shackelford* March 30, 1994 Barton W. Shackelford Director\n\/s\/ David E. Wit* March 30, 1994 David E. Wit Director\n*By: \/s\/ Steven A. McArthur March 30, 1994 Steven A. McArthur Attorney-in-Fact\nCalifornia Energy Company, Inc. Schedule II Amounts Receivable from Related Parties and Underwriters, Promoters, and Employees Other Than Related Parties\nas of December 31, 1993, 1992, 1991 (dollars in thousands)\nBalance at Beginning of Period Additions Collected Current Noncurrent\nYear ended December 31, 1993 $--- $--- $--- $--- $---\nYear ended December 31, 1992 --- --- --- --- ---\nYear ended December 31, 1991 100 --- 100 --- --- Robert D. Tibbs*\n*Relocation Loan, repaid January 2, 1991\nCalifornia Energy Company, Inc. Schedule III Parent Company Only Balance Sheets\nas of December 31, 1993 and 1992 (dollars and shares in thousands, except per share amounts)\nASSETS 1993 1992\nCash and investments $126,824 $ 53,321 Restricted cash 13,535 634 Development projects in progress 44,272 21,428 Investment in and advances to subsidiaries and joint ventures 215,660 168,949 Equipment, net of accumulated depreciation 2,587 1,575 Notes receivable - joint ventures 21,558 19,098 Deferred charges and other assets 16,458 17,214\nTotal assets $440,894 $282,219\nLIABILITIES AND STOCKHOLDERS' EQUITY\nLiabilities: Accounts payable $ 86 $ 937 Other accrued liabilities 10,550 5,061 Income taxes payable 4,000 --- Senior notes 35,730 35,730 Convertible subordinated debenture 100,000 --- Deferred income taxes 18,310 15,212\nTotal liabilities 168,676 56,940 Deferred income relating to joint ventures 1,915 2,165 Redeemable preferred stock 58,800 54,350\nStockholders' equity: Preferred stock - authorized 2,000 shares no par value --- --- Common stock - authorized 60,000 shares par value $0.0675 per share; issued and outstanding 35,446 and 35,258 shares 2,404 2,380 Additional paid-in capital 100,965 97,977 Retained earnings 111,031 68,407 Treasury stock, 157 common shares at cost (2,897) --- Total stockholders' equity 211,503 168,764 Total liabilities and stockholders' equity $440,894 $282,219\nThe accompanying notes are an integral part of these financial statements.\nCalifornia Energy Company, Inc. Schedule III Parent Company Only (continued) Statement of Operations\nfor the three years ended December 31, 1993 (dollars in thousands)\nRevenues: 1993 1992 1991\nEquity in earnings of subsidiary companies and joint ventures before extraordinary items $61,412 $53,685 $38,364\nInterest and other income 8,756 4,557 4,923\nTotal revenues 70,168 58,242 43,287\nExpenses:\nGeneral and administration 6,564 6,796 5,585\nInterest, net of capitalized interest 2,346 714 2,836\nTotal expenses 8,910 7,510 8,421\nIncome before provision for income taxes 61,258 50,732 34,866\nProvision for income taxes 18,184 11,922 8,284\nIncome before change in accounting principle and extraordinary item 43,074 38,810 26,582\nCumulative effect of change in account principle 4,100 --- ---\nEquity in extraordinary item of joint ventures (Less applicable income taxes of $1,533) --- (4,991) ---\nNet income 47,174 33,819 26,582\nPreferred dividends 4,630 4,275 ---\nNet income available to common stockholders $42,544 $29,544 $26,582\nThe accompanying notes are an integral part of these financial statement.\nCalifornia Energy Company, Inc. Schedule III Parent Company Only (continued) Condensed Statement of Cash Flows\nfor the three years ended December 31, 1993 (dollars in thousands)\n1993 1992 1991\nCash flows from operating activities $45,671 $22,597 $ 631\nCash flows from investing activities: Increase in development projects in progress (22,844) (4,218) (3,458) Decrease (increase) in advances to and investments in subsidiaries and joint ventures (36,812) 12,155 (41,162) Other (9,945) (15,711) 251\nCash flows from investing activities (69,601) (7,774) (44,369)\nCash flows from financing activities: Proceeds from sale of common, treasury and preferred stocks, and exercise of warrants and stock options 2,912 8,065 111,458 Payment in senior notes --- --- (6,000) Purchase of treasury stock (2,897) (4,887) --- Net change in short-term bank loan --- --- (15,000) Proceeds from issue of convertible subordinated debentures 100,000 --- --- Purchase of warrants --- (11,716) --- Deferred charges relating to debt financing (2,582) --- ---\nCash flows from financing activities 97,433 (8,538) 90,458 Net increase in cash and investments 73,503 6,285 46,720\nCash and investments at beginning of period 53,321 47,036 316\nCash and investment at end of period $126,824 $53,321 $47,036\nInterest paid (net of amount capitalized) $ (897) $ 464 $ 3,342\nIncome taxes paid $ 6,819 $ 4,129 $ 1,682\nThe accompanying notes are an integral part of these financial statement.\nCalifornia Energy Company, Inc. Schedule III Parent Company Only (continued) Supplemental Notes to Financial Statement\n(dollars in thousands)\nRelated Party Transactions\nThe Company bills the Coso Project partnerships and joint ventures for management, professional and operational services. Billings for the years ended December 31, 1993, 1992 and 1991 were $18,285, $19,629 and $18,316, respectively. Dividends received from subsidiaries for the years ended December 31, 1993, 1992 and 1991 were $49,053, $33,524 and 18,935, respectively.\nReclassification\nCertain amounts in the fiscal 1992 and 1991 financial statements have been reclassified to conform to the fiscal 1993 presentation. Such reclassifications do not impact previously reported net income or retained earnings.\nCalifornia Energy Company, Inc. Schedule V Consolidated Property, Plant and Equipment\nas of December 31, 1993, 1992, and 1991 (dollars in thousands)\nCalifornia Energy Company, Inc. SCHEDULE VI Consolidated Accumulated Depreciation and Amortization of Property, Plant and Equipment\nas of December 31, 1993, 1992, and 1991 (dollars in thousands)\nCalifornia Energy Company, Inc. SCHEDULE IX Short-Term Borrowings\nas of December 31, 1993, 1992, and 1991 (dollars in thousands)\nThe short-term borrowing payable to a bank was under a $15,000 multi-year Credit Agreement. The average amount outstanding during the period was computed based on month-end balances. The weighted average interest rate during the period was the effective rate incurred.\nCalifornia Energy Company, Inc. Schedule X Consolidated Supplementary Income Statement Information for the three years ended December 31, 1993\n(dollars in thousands)\nExhibit Index\n3.1 The Company's Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 of the Company's Form 10-K for the year ended December 31, 1992, File No. 1- 9874 (the \"1992 Form 10-K\"))\n3.2 Certificate of Amendment of the Company's Restated Certificate of Incorporation, dated June 23, 1993 (incorporated by reference to the Company's Form 8-A, dated July 28, 1993, File No. 1-9874 (the \"Form 8-A\"))\n3.3 The Company's Certificate of Designation with respect to the Company's Series C Redeemable Convertible Exchangeable Preferred Stock, dated November 20, 1991 (incorporated by reference to Exhibit 3.1 of the Company's 1992 Form 10-K)\n3.4 The Company's By-Laws as amended through September 24, 1993.\n4.1 Specimen copy of form of Common Stock Certificate.\n4.2 Shareholders Rights Agreement between the Company and Manufacturers Hanover Trust Company of California dated December 1, 1988 (incorporated by reference to Exhibit 1 to Company's Form 8-K dated December 5, 1988, File No. 1-9874).\n4.3 Amendment Number 1 to Shareholder Rights Agreement, dated February 15, 1991 (incorporated by reference to Exhibit 4.2 to the Company's 1992 Form 10-K).\n4.4 Note Purchase Agreement between the Company and Principal Mutual Life Insurance Company dated March 15, 1988 (incorporated by reference to Exhibit 1 to Company's Form 8-K dated April 11, 1988).\n4.5 Defeasance Agreement between Principal Mutual Life Insurance Company and the Company dated March 3, 1994.\n4.6 Consent and Agreement between Principal Mutual Life Insurance Company and the Company dated March 24, 1994.\n4.7 Escrow Deposit Agreement between Bank of America National Trust and Savings Association and the Company dated March 3, 1994.\n10.1 Joint Venture Agreement for China Lake Joint Venture between the Company and Caithness Geothermal 1980 Ltd., restated as of January 1, 1984 (incorporated by reference to Exhibit 10.1 to the Company's Registration Statement on Form S-1, 33-7770).\n10.2 Amended Joint Venture Agreement for Coso Land Company between the Company and Caithness Geothermal 1980 Ltd., dated as of June 1, 1983 (incorporated by reference to Exhibit 10.3 to the Company's Registration Statement on Form S-1, 33-7770).\n10.3 Amended General Partnership Agreement for Coso Finance Partners between China Lake Operating Company and ESCA I L.P. dated July 13, 1988 (incorporated by reference to Exhibit 10.3 to the Company's 1992 Form 10-K).\n10.4 First Supplemental Amendment to the Amended and Restated General Partnership Agreement for Coso Finance Partners between China Lake Operating Company and ESCA L.P. (Undated) (incorporated by reference to Exhibit 10.4 to the Company's 1992 Form 10-K).\n10.5 Second Supplemental Amendment to the Amended and Restated General Partnership Agreement for Coso Finance Partners between China Lake Operating Company and ESCA L.P. dated as of July 13, 1988 (incorporated by reference to Exhibit 10.5 to the Company's 1992 Form 10-K).\n10.6 Third Supplemental Amendment to the Amended and Restated General Partnership Agreement for Coso Finance Partners between China Lake Operating Company and ESCA L.P. dated as of December 16, 1992 (incorporated by reference to Exhibit 10.6 to the Company's 1992 Form 10-K).\n10.7 General Partnership Agreement for Coso Finance Partners II between China Lake Geothermal Management Company and ESCA II L.P. dated July 7, 1987 (incorporated by reference to Exhibit 10.7 to the Company's 1992 Form 10-K).\n10.8 Restated General Partnership Agreement for Coso Energy Developers between Coso Hotsprings Intermountain Power Inc. and Caithness Coso Holdings L.P. dated as of March 31, 1988 (incorporated by reference to Exhibit 10.8 to the Company's 1992 Form 10-K).\n10.9 First Amendment to the Restated General Partnership Agreement for Coso Energy Developers between Coso Hotsprings Intermountain Power, Inc. and Caithness Coso Holdings L.P. dated as of March 31, 1988 (incorporated by reference to Exhibit 10.9 to the Company's 1992 Form 10-K).\n10.10 Second Amendment to the Restated General Partnership Agreement for Coso Energy Developers between Coso Hotsprings Intermountain Power, Inc. and Caithness Coso Holdings L.P. dated as of December 16, 1992 (incorporated by reference to Exhibit 10.10 to the Company's 1992 Form 10-K).\n10.11 Amended and Restated General Partnership Agreement for Coso Power Developers between Coso Technology Corporation and Caithness Navy II Group L.P. dated July 31, 1989 (incorporated by reference to Exhibit 10.11 to the Company's 1992 Form 10-K).\n10.12 First Amendment to the Amended and Restated General Partnership for Coso Power Developers between Coso Technology Corporation and Caithness Navy II Group L.P. dated as of March 19, 1991 (incorporated by reference to Exhibit 10.12 to the Company's 1992 Form 10-K).\n10.13 Second Amendment to the Amended and Restated General Partnership Agreement for Coso Power Developers between Coso Technology Corporation and Caithness Navy II Group L.P. dated as of December 16, 1992 (incorporated by reference to Exhibit 10.13 to the Company's 1992 Form 10-K).\n10.14 Form of Amended and Restated Field Operation and Maintenance Agreement between Coso Joint Ventures and the Company dated as of December 16, 1992 (incorporated by reference to Exhibit 10.14 to the Company's 1992 Form 10-K).\n10.15 Form of Amended and Restated Project Operation and Maintenance Agreement between Coso Joint Venture and the Company dated as of December 16, 1992 (incorporated by reference to Exhibit 10.15 to the Company's 1992 Form 10-K).\n10.16 Trust Indenture between Coso Funding Corp. and Bank of America National Trust and Savings Association dated as of December 16, 1992 (incorporated by reference to Exhibit 10.16 to the Company's 1992 Form 10-K).\n10.17 Form of Amended and Restated Credit Agreement between Coso Funding Corp. and Coso Joint Ventures dated as of December 16, 1992 (incorporated by reference to Exhibit 10.17 to the Company's 1992 Form 10-K).\n10.18 Form of Support Loan Agreement among Coso Joint Ventures dated December 16, 1992 (incorporated by reference to Exhibit 10.18 to the Company's 1992 Form 10-K).\n10.19 Form of Project Loan Pledge Agreement between Coso Joint Ventures and Bank of America National Trust and Savings dated as of December 16, 1992 (incorporated by reference to Exhibit 10.19 to the Company's 1992 Form 10-K).\n10.20 Power Purchase Contracts between Southern California Edison Company and: (a) China Lake Joint Venture, executed June 4, 1984 with a term of 24 years; (b) China Lake Joint Venture, executed February 1, 1985 with a term of 23 years; and (c) Coso Geothermal Company, executed February 1, 1985 with a term of 30 years (incorporated by reference to Exhibit 10.7 to the Company's Registration Statement on Form S-1, 33-7770).\n10.21 Contract No. N62474-79-C-5382 between the United States of America and China Lake Joint Venture, restated October 19, 1983 as \"Modification P00004,\" including modifications through \"Modification P00026,\" dated December 16, 1992 (incorporated by reference to Exhibit 10.21 to the Company's 1992 Form 10-K).\n10.22 Lease between the BLM and Coso Land Company, effective November 1, 1985 (with Designation of Geothermal Operator) (incorporated by reference to Exhibit 10.8 to the Company's Registration Statement on Form S-1, 33- 7770).\n10.23 Stock Purchase Agreement between the Company and Kiewit Energy Company dated as of February 18, 1991, as amended as of June 19, 1991 (incorporated by reference to Exhibit 1 to the Company's Form 8-K dated February 26, 1991).\n10.24 Amendment No. 2 to Stock Purchase Agreement between Kiewit Energy Company and the Company dated as of January 8, 1992 (incorporated by reference to Exhibit 10.24 to the Company's 1992 Form 10-K).\n10.25 Amendment No. 3 to Stock Purchase Agreement between Kiewit Energy Company and the Company dated as of April 2, 1993.\n10.26 Shareholders Agreement between the Company and Kiewit Energy Company dated as of February 18, 1991, as amended as of June 19, 1991 and as of November 20, 1991 (incorporated by reference to Exhibit 1 to the Company's Form 8-K dated February 26, 1991, Exhibit 1 to the Company's Form 8-K dated July 18, 1992, and Exhibit 3 to the Company's Form 8-K dated November 21, 1991).\n10.27 Amendment No. 3 to Shareholder's Agreement between the Company and Kiewit Energy Company dated as of April 2, 1993 (incorporated by reference to Exhibit 14 to the Company's Form 8-A).\n10.28 Amendment No. 4 to Shareholder's Agreement between the Company and Kiewit Energy Company dated as of July 20, 1993.\n10.29 Registration Rights Agreement between the Company and Kiewit Energy Company dated as of February 18 1991, as amended as of June 19, 1991 (incorporated by reference to Exhibit 1 to the Company's Form 8-K dated February 26, 1991, and Exhibit 1 to the Company's Form 8-K dated July 18, 1992).\n10.30 Registration Rights Agreement between the Company and Kiewit Energy Company dated June 19, 1991, as amended November 20, 1991 (incorporated by reference to Exhibit 1 of the Company's Form 8-K dated June 19, 1991 and Exhibit 4 to the Company's Form 8-K dated November 21, 1991).\n10.31 Stock Option Agreement between the Company and Kiewit Energy Company dated as of February 18, 1991, as amended as of June 19, 1991 (incorporated by reference to Exhibit 1 to the Company's Form 8-K dated February 26, 1991, and Exhibit 1 to the Company's Form 8-K dated July 18, 1992).\n10.32 Stock Option Agreement between the Company and Kiewit Energy Company dated as of June 19, 1991 (incorporated by reference to Exhibit 1 to the Company's Form 8-K dated July 18, 1991).\n10.33 Securities Purchase Agreement between the Company and Kiewit Energy Company dated as of November 20, 1991 (incorporated by reference to Exhibit 2 to the Company's Form 8-K dated November 21, 1991).\n10.34 Sublease between the Company and Kiewit Energy Company dated March 15, 1991 (incorporated by reference to Exhibit 10.32 to the Company's 1992 Form 10-K).\n10.35 Amended and Restated 1986 Stock Option Plan, as amended (incorporated by reference to Exhibit 10.33 to the Company's 1992 Form 10-K).\n10.36 Form of severance letter between the Company and certain executive officers of the Company (incorporated by reference to Exhibit 10.35 to the Company's 1992 Form 10- K).\n10.37 Indenture between the Company and The Chemical Trust Company of California dated as of June 24, 1993 (incorporated by reference to the Company's Form 8-K dated June 24, 1993, File No. 1-9874).\n10.38 Registration Rights Agreement among the Company, Lehman Brothers, Inc. and Alex Brown & Sons Incorporated dated June 24, 1993 (incorporated by reference to the Company's Form 8-K dated June 24, 1993, File No. 1-9874).\n10.39 Indenture dated March 24, 1994 between the Company and IBJ Schroder Bank and Trust Company (incorporated by reference to Exhibit 3 to the Company's Form 8-K dated March 28, 1994).\n10.40 Employment Agreement between the Company and David L. Sokol dated as of April 2, 1993.\n10.41 Termination Agreement between the Company and Richard R. Jaros dated as of December 9, 1993.\n10.42 Standard Offer Number 2, Standard Offer for Power Purchase with a Firm Capacity Qualifying Facility effective June 15, 1990 (\"SO2\") between San Diego Gas & Electric Company and Bonneville Pacific Corporation.\n10.43 Amendment Number One to the SO2 dated September 25, 1990.\n10.44 Joint Venture Agreement among the Company, Kiewit Diversified Group Inc. and Kiewit Construction Group Inc. dated December 14, 1993.\n10.45 Joint Venture Agreement between the Company and Distral dated December 14, 1993.\n11.0 Calculation of Earnings Per Share in accordance with Interpretive Release No. 34-9083.\n13.0 The Company's 1993 Annual Report (only the portions thereof specifically incorporated herein by reference are deemed filed herewith).\n21.0 Subsidiaries of Registrant.\n23.0 Consents of Independent Accountants.\n24.0 Power of Attorney.\n27.0 Financial Data Schedule.","section_15":""}
{"filename":"882234_1993.txt","cik":"882234","year":"1993","section_1":"ITEM 1. BUSINESS\nEach of the Grantor Trusts, (the \"Trusts\"), listed below, was formed by GMAC Auto Receivables Corporation (the \"Seller\") by selling and assigning the receivables and the security interests in the vehicles financed thereby to The First National Bank of Chicago, as Trustee, in exchange for Class A certificates representing an undivided ownership interest that ranges between approximately 91% and 94.5% in each Trust, which were remarketed to the public, and Class B certificates representing an undivided ownership interest that ranges between approximately 5.5% and 9% in each Trust, which were not offered to the public and initially were held by the Seller. The right of the Class B certificateholders to receive distribution of the receivables is subordinated to the rights of the Class A certificateholders.\nGRANTOR TRUST -------------\nGMAC 1990-A GMAC 1991-A GMAC 1991-B GMAC 1991-C GMAC 1992-A GMAC 1992-C GMAC 1992-D GMAC 1992-E GMAC 1992-F GMAC 1992-G GMAC 1993-A GMAC 1993-B\n_____________________\nPART II\nITEM 7.","section_1A":"","section_1B":"","section_2":"","section_3":"","section_4":"","section_5":"","section_6":"","section_7":"ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS\nEach of the Grantor Trusts, listed in the table as shown below, was formed by GMAC Auto Receivables Corporation (the \"Seller\") pursuant to a Pooling and Servicing Agreement between the Seller and The First National Bank of Chicago, as trustee. Each Trust acquired retail finance receivables from the Seller in the aggregate amount as shown below in exchange for certificates representing undivided ownership interests in each Trust. Each Trust's property includes a pool of retail instalment sale contracts secured by new, and in some Trust's used, automobiles and light trucks, certain monies due thereunder and security interests in the vehicles financed thereby.\nThe certificates for each of the following Trusts consist of two classes, entitled Asset Backed certificates, Class A and Asset Backed certificates, Class B. The Class A certificates represent in the aggregate an undivided ownership interest that ranges between approximately 91% and 94.5% of the Trusts and the Class B certificates represent in the aggregate an undivided ownership interest that ranges between approximately 5.5% and 9% of the Trusts. Only the Class A certificates have been remarketed to the public. The Class B certificates have not been offered to the public and initially are being held by the Seller. The rights of the Class B certificateholder to receive monthly distributions with respect to the receivables are subordinated to the rights of the Class A certificateholders.\nOriginal Aggregate Amount ----------------------------------- Date of Pooling Retail Asset Backed Certificates Grantor and Servicing Finance ------------------------- Trust Agreement Receivables Class A Class B - ------- ----------------- --------- -------- ------- (In millions of dollars)\nGMAC 1990-A December 20, 1990 $1,162.6 $1,057.9 $104.7\nGMAC 1991-A March 14, 1991 891.7 811.4 80.3\nGMAC 1991-B September 17, 1991 1,007.4 916.7 90.7\nGMAC 1991-C December 16, 1991 1,326.4 1,207.0 119.4\nGMAC 1992-A January 30, 1992 2,001.4 1,851.3 150.1\nGMAC 1992-C March 26, 1992 1,100.3 1,012.3 88.0\nGMAC 1992-D June 4, 1992 1,647.6 1,499.3 148.3\nGMAC 1992-E August 20, 1992 1,578.0 1,436.0 142.0\nGMAC 1992-F September 29, 1992 1,644.6 1,496.6 148.0\nGMAC 1992-G November 19, 1992 1,379.4 1,303.5 75.9\nGMAC 1993-A March 24, 1993 1,403.0 1,297.8 105.2\nGMAC 1993-B September 16, 1993 1,450.6 1,341.8 108.8\nII-1\nITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (concluded)\nGeneral Motors Acceptance Corporation, the originator of the retail receivables, continues to service the receivables for each of the aforementioned Grantor Trusts and receives compensation and fees for such services. Investors receive monthly payments of the pro rata portion of principal and interest for each Trust as the receivables are liquidated.\n------------------------\nII-2\nITEM 8.","section_7A":"","section_8":"ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.\nCROSS REFERENCE SHEET\nCaption Page - --------------------------------------------------- ------\nGMAC 1990-A Grantor Trust, Independent Auditors' Report, Financial Statements and Selected Quarterly II-4 Data for the Year Ended December 31, 1993.\nGMAC 1991-A Grantor Trust, Independent Auditors' Report, Financial Statements and Selected Quarterly II-9 Data for the Year Ended December 31, 1993.\nGMAC 1991-B Grantor Trust, Independent Auditors' Report, Financial Statements and Selected Quarterly II-14 Data for the Year Ended December 31, 1993.\nGMAC 1991-C Grantor Trust, Independent Auditors' Report, Financial Statements and Selected Quarterly II-19 Data for the Year Ended December 31, 1993.\nGMAC 1992-A Grantor Trust, Independent Auditors' Report, Financial Statements and Selected Quarterly II-24 Data for the Year Ended December 31, 1993.\nGMAC 1992-C Grantor Trust, Independent Auditors' Report, Financial Statements and Selected Quarterly II-29 Data for the Year Ended December 31, 1993.\nGMAC 1992-D Grantor Trust, Independent Auditors' Report, Financial Statements and Selected Quarterly II-34 Data for the Year Ended December 31, 1993.\nGMAC 1992-E Grantor Trust, Independent Auditors' Report, Financial Statements and Selected Quarterly II-39 Data for the Year Ended December 31, 1993.\nGMAC 1992-F Grantor Trust, Independent Auditors' Report, Financial Statements and Selected Quarterly II-44 Data for the Year Ended December 31, 1993.\nGMAC 1992-G Grantor Trust, Independent Auditors' Report, Financial Statements and Selected Quarterly II-49 Data for Year Ended from December 31, 1993.\nGMAC 1993-A Grantor Trust, Independent Auditors' Report, Financial Statements and Selected Quarterly II-54 Data for the period from March 24, 1993 to December 31, 1993.\nGMAC 1993-B Grantor Trust, Independent Auditors' Report, Financial Statements and Selected Quarterly II-59 Data for period from September 16, 1993 to December 31, 1993.\nII-3\nINDEPENDENT AUDITORS' REPORT\nMarch 22, 1994\nThe GMAC 1990-A Grantor Trust, its Certificateholders, GMAC Auto Receivables Corporation, and The First National Bank of Chicago, Trustee:\nWe have audited the accompanying Statement of Assets and Liabilities of the GMAC 1990-A Grantor Trust as of December 31, 1993 and 1992, and the related Statement of Distributable Income for each of the three years in the period ended December 31, 1993. These financial statements are the responsibility of the Trust's management. Our responsibility is to express an opinion on these financial statements based on our audits.\nWe conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.\nAs described in Note 1 to the financial statements, these financial statements are prepared on the basis of cash receipts and disbursements, which is a comprehensive basis of accounting other than generally accepted accounting principles.\nIn our opinion, such financial statements present fairly, in all material respects, the assets and liabilities of the GMAC 1990-A Grantor Trust at December 31, 1993 and 1992, and its distributable income and distributions for each of the three years in the period ended December 31, 1993, on the basis of accounting described in Note 1.\ns\\ DELOITTE & TOUCHE - ---------------------- DELOITTE & TOUCHE 600 Renaissance Center Detroit, Michigan 48243\nII-4\nGMAC 1990-A GRANTOR TRUST\nSTATEMENT OF ASSETS AND LIABILITIES (in millions of dollars)\nDec. 31 Dec. 31 1993 1992 ------- ------- ASSETS $ $\nReceivables (Note 2) ................... 207.1 459.8 ------- -------\nTOTAL ASSETS ........................... 207.1 459.8 ======= =======\nLIABILITIES\nAsset-backed Certificates (Notes 2 and 3) ...................... 207.1 459.8 ------- -------\nTOTAL LIABILITIES ...................... 207.1 459.8 ======= =======\nReference should be made to the Notes to Financial Statements.\nII-5\nGMAC 1990-A GRANTOR TRUST (continued)\nSTATEMENT OF DISTRIBUTABLE INCOME For the years ended December 31, 1993, 1992 and 1991 (in millions of dollars)\n1993 1992 1991 ----- ----- ----- Distributable Income $ $ $\nAllocable to Principal ............... 252.7 344.1 358.7\nAllocable to Interest ............... 27.7 52.9 82.6 ----- ----- ----- Distributable Income ................... 280.4 397.0 441.3 ===== ===== =====\nIncome Distributed ..................... 280.4 397.0 441.3 ===== ===== =====\nReference should be made to the Notes to Financial Statements.\nII-6\nGMAC 1990-A GRANTOR TRUST (continued)\nNOTES TO FINANCIAL STATEMENTS\nNOTE 1. BASIS OF ACCOUNTING\nThe financial statements of the GMAC 1990-A Grantor Trust (the \"Trust\") are prepared on the basis of cash receipts and cash disbursements. Such financial statements differ from financial statements prepared in accordance with generally accepted accounting principles in that interest income and the related assets are recognized when received rather than when earned and distributions to certificateholders are recognized when paid rather than when the obligation is incurred. All expenses of the Trust are paid by GMAC Auto Receivables Corporation (the \"Seller\").\nNOTE 2. SALE OF CERTIFICATES\nOn December 20, 1990, GMAC 1990-A Grantor Trust acquired retail finance receivables aggregating approximately $1,162.6 million from the Seller in exchange for certificates representing undivided ownership interests of 91% for the Class A certificates and 9% for the Class B certificates in the Trust. The Trust property includes a pool of retail instalment sale contracts for new automobiles and light trucks, certain monies due thereunder, and security interests in the vehicles financed thereby. The Seller has the option to repurchase the remaining receivables as of the last day of any month on or after which the principal balance declines below 10% of the aggregate amount financed.\nNOTE 3. PRINCIPAL AND INTEREST PAYMENTS\nPrincipal (including prepayments) and interest are passed through and distributed pro rata to Class A and Class B certificateholders on each distribution date commencing January 15, 1991. Principal consists of payments on the receivables that are allocable to repayment of the amount sold as determined on a constant interest rate basis (the \"actuarial method\"). Interest is passed through and distributed to Class A certificateholders at one-twelfth of the pass through rate of 8.25% per annum. Interest consists of payments on the receivables that are allocable to finance charges, using the actuarial method, net of fees and expenses. The rights of the Class B certificateholders to receive monthly distributions with respect to the receivables are subordinated to the rights of the Class A certificateholders. A distribution date is the 15th day of each month (or, if such 15th day is not a business day, the next following business day).\nNOTE 4. FEDERAL INCOME TAX\nThe Trust is classified as a grantor trust, and therefore is not taxable as a corporation for federal income tax purposes. Each certificateholder will be treated as the owner of a pro rata undivided interest in each of the receivables in the Trust.\nII-7\nGMAC 1990-A GRANTOR TRUST (concluded)\nSUPPLEMENTARY FINANCIAL DATA (unaudited)\nSUMMARY OF QUARTERLY DISTRIBUTABLE INCOME (in millions of dollars)\n1993 Quarters Principal Interest Total - ------------------------------------ --------- -------- ----- $ $ $\nFirst quarter ...................... 70.0 9.0 79.0\nSecond quarter ..................... 69.0 7.5 76.5\nThird quarter ...................... 61.8 6.2 68.0\nFourth quarter ..................... 51.9 5.0 56.9 --------- -------- ----- Total ......................... 252.7 27.7 280.4 ========= ======== =====\n1992 Quarters Principal Interest Total - ------------------------------------ --------- -------- ----- $ $ $\nFirst quarter ...................... 90.4 16.0 106.4\nSecond quarter ..................... 90.0 14.1 104.1\nThird quarter ...................... 86.1 12.3 98.4\nFourth quarter ..................... 77.6 10.5 88.1 --------- -------- ----- Total ......................... 344.1 52.9 397.0 ========= ======== =====\n1991 Quarters Principal Interest Total - ------------------------------------ --------- -------- ----- $ $ $\nFirst quarter ...................... 86.6 23.4 110.0\nSecond quarter ..................... 93.2 21.7 114.9\nThird quarter ...................... 90.8 19.7 110.5\nFourth quarter ..................... 88.1 17.8 105.9 --------- -------- ----- Total ......................... 358.7 82.6 441.3 ========= ======== =====\nII-8\nINDEPENDENT AUDITORS' REPORT\nMarch 22, 1994\nThe GMAC 1991-A Grantor Trust, its Certificateholders, GMAC Auto Receivables Corporation, and The First National Bank of Chicago, Trustee:\nWe have audited the accompanying Statement of Assets and Liabilities of the GMAC 1991-A Grantor Trust as of December 31, 1993 and 1992, and the related Statement of Distributable Income for the two years in the period ended December 31, 1993 and the period March 14, 1991 (inception) through December 31, 1991. These financial statements are the responsibility of the Trust's management. Our responsibility is to express an opinion on these financial statements based on our audits.\nWe conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.\nAs described in Note 1 to the financial statements, these financial statements are prepared on the basis of cash receipts and disbursements, which is a comprehensive basis of accounting other than generally accepted accounting principles.\nIn our opinion, such financial statements present fairly, in all material respects, the assets and liabilities of the GMAC 1991-A Grantor Trust at December 31, 1993 and 1992 and its distributable income and distributions for the two years in the period ended December 31, 1993 and the period March 14, 1991 (inception) through December 31, 1991, on the basis of accounting described in Note 1.\ns\/ DELOITTE & TOUCHE - ----------------------- DELOITTE & TOUCHE 600 Renaissance Center Detroit, Michigan 48243\nII-9\nGMAC 1991-A GRANTOR TRUST\nSTATEMENT OF ASSETS AND LIABILITIES (in millions of dollars)\nDec. 31 Dec. 31 1993 1992 ------- ------- ASSETS $ $\nReceivables (Note 2) ................... 162.0 370.4 ------- -------\nTOTAL ASSETS ........................... 162.0 370.4 ======= =======\nLIABILITIES\nAsset-backed Certificates (Notes 2 and 3) ...................... 162.0 370.4 ------- -------\nTOTAL LIABILITIES ...................... 162.0 370.4 ======= =======\nReference should be made to the Notes to Financial Statements.\nII-10\nGMAC 1991-A GRANTOR TRUST (continued)\nSTATEMENT OF DISTRIBUTABLE INCOME For the years ended December 31, 1993, 1992 and the period March 14, 1991 (inception) through December 31, 1991 (in millions of dollars)\n1993 1992 1991 ----- ----- ----- $ $ $ Distributable Income\nAllocable to Principal ................ 208.3 290.7 230.6\nAllocable to Interest ................ 21.2 41.2 46.7 ----- ----- ----- Distributable Income .................... 229.5 331.9 277.3 ===== ===== =====\nIncome Distributed ...................... 229.5 331.9 277.3 ===== ===== =====\nReference should be made to the Notes to Financial Statements.\nII-11\nGMAC 1991-A GRANTOR TRUST (continued)\nNOTES TO FINANCIAL STATEMENTS\nNOTE 1. BASIS OF ACCOUNTING\nThe financial statements of the GMAC 1991-A Grantor Trust (the \"Trust\") are prepared on the basis of cash receipts and cash disbursements. Such financial statements differ from financial statements prepared in accordance with generally accepted accounting principles in that interest income and the related assets are recognized when received rather than when earned and distributions to certificateholders are recognized when paid rather than when the obligation is incurred. All expenses of the Trust are paid by GMAC Auto Receivables Corporation (the \"Seller\").\nNOTE 2. SALE OF CERTIFICATES\nOn March 14, 1991, GMAC 1991-A Grantor Trust acquired retail finance receivables aggregating approximately $891.7 million from the Seller in exchange for certificates representing undivided ownership interests of 91% for the Class A certificates and 9% for the Class B certificates in the Trust. The Trust property includes a pool of retail instalment sale contracts for new automobiles and light trucks, certain monies due thereunder, and security interests in the vehicles financed thereby. The Seller has the option to repurchase the remaining receivables as of the last day of any month on or after which the principal balance declines below 10% of the aggregate amount financed.\nNOTE 3. PRINCIPAL AND INTEREST PAYMENTS\nPrincipal (including prepayments) and interest are passed through and distributed pro rata to Class A and Class B certificateholders on each distribution date commencing April 15, 1991. Principal consists of payments on the receivables that are allocable to repayment of the amount sold as determined on a constant interest rate basis (the \"actuarial method\"). Interest is passed through and distributed to Class A certificateholders at one-twelfth of the pass through rate of 7.90% per annum. Interest consists of payments on the receivables that are allocable to finance charges, using the actuarial method, net of fees and expenses. The rights of the Class B certificateholders to receive monthly distributions with respect to the receivables are subordinated to the rights of the Class A certificateholders. A distribution date is the 15th day of each month (or, if such 15th day is not a business day, the next following business day).\nNOTE 4. FEDERAL INCOME TAX\nThe Trust is classified as a grantor trust, and therefore is not taxable as a corporation for federal income tax purposes. Each certificateholder will be treated as the owner of a pro rata undivided interest in each of the receivables in the Trust.\nII-12\nGMAC 1991-A GRANTOR TRUST (concluded)\nSUPPLEMENTARY FINANCIAL DATA (unaudited)\nSUMMARY OF QUARTERLY DISTRIBUTABLE INCOME (in millions of dollars)\n1993 Quarters Principal Interest Total - ------------------------------------ --------- -------- ----- $ $ $\nFirst quarter ...................... 58.0 6.9 64.9\nSecond quarter ..................... 55.5 5.8 61.3\nThird quarter ...................... 50.6 4.7 55.3\nFourth quarter ..................... 44.2 3.8 48.0 --------- -------- ----- Total ......................... 208.3 21.2 229.5 ========= ======== =====\n1992 Quarters Principal Interest Total - ------------------------------------ --------- -------- ----- $ $ $\nFirst quarter ...................... 78.5 12.5 91.0\nSecond quarter ..................... 75.1 11.0 86.1\nThird quarter ...................... 71.9 9.5 81.4\nFourth quarter ..................... 65.2 8.2 73.4 --------- -------- ----- Total ......................... 290.7 41.2 331.9 ========= ======== =====\n1991 Quarters Principal Interest Total - ------------------------------------ --------- -------- ----- $ $ $\nSecond quarter ..................... 78.6 17.1 95.7\nThird quarter ...................... 76.7 15.6 92.3\nFourth quarter ..................... 75.3 14.0 89.3 --------- -------- ----- Total ......................... 230.6 46.7 277.3 ========= ======== =====\nII-13\nINDEPENDENT AUDITORS' REPORT\nMarch 22, 1994\nThe GMAC 1991-B Grantor Trust, its Certificateholders, GMAC Auto Receivables Corporation, and The First National Bank of Chicago, Trustee:\nWe have audited the accompanying Statement of Assets and Liabilities of the GMAC 1991-B Grantor Trust as of December 31, 1993 and 1992, and the related Statement of Distributable Income for the two years in the period ended December 31, 1993 and the period September 17, 1991 (inception) through December 31, 1991. These financial statements are the responsibility of the Trust's management. Our responsibility is to express an opinion on these financial statements based on our audits.\nWe conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.\nAs described in Note 1 to the financial statements, these financial statements are prepared on the basis of cash receipts and disbursements, which is a comprehensive basis of accounting other than generally accepted accounting principles.\nIn our opinion, such financial statements present fairly, in all material respects, the assets and liabilities of the GMAC 1991-B Grantor Trust at December 31, 1993 and 1992, and its distributable income and distributions for the two years in the period ended December 31, 1993 and the period September 17, 1991 (inception) through December 31, 1991, on the basis of accounting described in Note 1.\ns\\ DELOITTE & TOUCHE - ----------------------- DELOITTE & TOUCHE 600 Renaissance Center Detroit, Michigan 48243\nII-14\nGMAC 1991-B GRANTOR TRUST\nSTATEMENT OF ASSETS AND LIABILITIES (in millions of dollars)\nDec. 31 Dec. 31 1993 1992 ------- ------- ASSETS $ $\nReceivables (Note 2) ................... 306.4 582.8 ------- -------\nTOTAL ASSETS ........................... 306.4 582.8 ======= =======\nLIABILITIES\nAsset-backed Certificates (Notes 2 and 3) ...................... 306.4 582.8 ------- -------\nTOTAL LIABILITIES ...................... 306.4 582.8 ======= =======\nReference should be made to the Notes to Financial Statements.\nII-15\nGMAC 1991-B GRANTOR TRUST (continued)\nSTATEMENT OF DISTRIBUTABLE INCOME For the years ended December 31, 1993, 1992 and the period September 17, 1991 (inception) through December 31, 1991 (in millions of dollars)\n1993 1992 1991 ------ ------ ------ $ $ $ Distributable Income\nAllocable to Principal ............... 276.3 340.7 83.9\nAllocable to Interest ............... 30.4 51.5 16.5 ------ ------ ------ Distributable Income ................... 306.7 392.2 100.4 ====== ====== ======\nIncome Distributed ..................... 306.7 392.2 100.4 ====== ====== ======\nReference should be made to the Notes to Financial Statements.\nII-16\nGMAC 1991-B GRANTOR TRUST (continued)\nNOTES TO FINANCIAL STATEMENTS\nNOTE 1. BASIS OF ACCOUNTING\nThe financial statements of the GMAC 1991-B Grantor Trust (the \"Trust\") are prepared on the basis of cash receipts and cash disbursements. Such financial statements differ from financial statements prepared in accordance with generally accepted accounting principles in that interest income and the related assets are recognized when received rather than when earned and distributions to certificateholders are recognized when paid rather than when the obligation is incurred. All expenses of the Trust are paid by GMAC Auto Receivables Corporation (the \"Seller\").\nNOTE 2. SALE OF CERTIFICATES\nOn September 17, 1991, GMAC 1991-B Grantor Trust acquired retail finance receivables aggregating approximately $1,007.4 million from the Seller in exchange for certificates representing undivided ownership interests of 91% for the Class A certificates and 9% for the Class B certificates in the Trust. The Trust property includes a pool of retail instalment sale contracts for new automobiles and light trucks, certain monies due thereunder and security interests in the vehicles financed thereby. The Seller has the option to repurchase the remaining receivables as of the last day of any month on or after which the principal balance declines below 10% of the aggregate amount financed.\nNOTE 3. PRINCIPAL AND INTEREST PAYMENTS\nPrincipal (including prepayments) and interest are passed through and distributed pro rata to Class A and Class B certificateholders on each distribution date commencing October 15, 1991. Principal consists of payments on the receivables that are allocable to repayment of the amount sold as determined on a constant interest rate basis (the \"actuarial method\"). Interest is passed through and distributed to Class A certificateholders at one-twelfth of the pass through rate of 6.75% per annum. Interest consists of payments on the receivables that are allocable to finance charges, using the actuarial method, net of fees and expenses. The rights of the Class B certificateholders to receive monthly distributions with respect to the receivables are subordinated to the rights of the Class A certificateholders. A distribution date is the 15th day of each month (or, if such 15th day is not a business day, the next following business day).\nNOTE 4. FEDERAL INCOME TAX\nThe Trust is classified as a grantor trust, and therefore is not taxable as a corporation for federal income tax purposes. Each certificateholder will be treated as the owner of a pro rata undivided interest in each of the receivables in the Trust.\nII-17\nGMAC 1991-B GRANTOR TRUST (concluded)\nSUPPLEMENTARY FINANCIAL DATA (unaudited)\nSUMMARY OF QUARTERLY DISTRIBUTABLE INCOME (in millions of dollars)\n1993 Quarters Principal Interest Total - ------------------------------------ --------- -------- ----- $ $ $\nFirst quarter ...................... 72.7 9.4 82.1\nSecond quarter ..................... 74.8 8.2 83.0\nThird quarter ...................... 68.3 7.0 75.3\nFourth quarter ..................... 60.5 5.8 66.3 --------- -------- ----- Total ......................... 276.3 30.4 306.7 ========= ======== =====\n1992 Quarters Principal Interest Total - ------------------------------------ --------- -------- ----- $ $ $\nFirst quarter ...................... 87.1 15.1 102.2\nSecond quarter ..................... 89.5 13.6 103.1\nThird quarter ...................... 84.9 12.1 97.0\nFourth quarter ..................... 79.2 10.7 89.9 --------- -------- ----- Total ......................... 340.7 51.5 392.2 ========= ======== =====\n1991 Quarters Principal Interest Total - ------------------------------------ --------- -------- ----- $ $ $\nFourth quarter ..................... 83.9 16.5 100.4 ========= ======== =====\nII-18\nINDEPENDENT AUDITORS' REPORT\nMarch 22, 1994\nThe GMAC 1991-C Grantor Trust, its Certificateholders, GMAC Auto Receivables Corporation, and The First National Bank of Chicago, Trustee:\nWe have audited the accompanying Statement of Assets and Liabilities of the GMAC 1991-C Grantor Trust as of December 31, 1993 and 1992, and the related Statement of Distributable Income for the years then ended. These financial statements are the responsibility of the Trust's management. Our responsibility is to express an opinion on these financial statements based on our audits.\nWe conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.\nAs described in Note 1 to the financial statements, these financial statements are prepared on the basis of cash receipts and disbursements, which is a comprehensive basis of accounting other than generally accepted accounting principles.\nIn our opinion, such financial statements present fairly, in all material respects, the assets and liabilities of the GMAC 1991-C Grantor Trust at December 31, 1993 and 1992, and its distributable income and distributions for the years then ended, on the basis of accounting described in Note 1.\ns\\ DELOITTE & TOUCHE - ----------------------- DELOITTE & TOUCHE 600 Renaissance Center Detroit, Michigan 48243\nII-19\nGMAC 1991-C GRANTOR TRUST\nSTATEMENT OF ASSETS AND LIABILITIES (in millions of dollars)\nDec. 31 Dec. 31 1993 1992 ------- ------- ASSETS $ $\nReceivables (Note 2) ................... 496.0 874.6 ------- -------\nTOTAL ASSETS ........................... 496.0 874.6 ======= =======\nLIABILITIES\nAsset-backed Certificates (Notes 2 and 3) ...................... 496.0 874.6 ------- -------\nTOTAL LIABILITIES ...................... 496.0 874.6 ======= =======\nReference should be made to the Notes to Financial Statements.\nII-20\nGMAC 1991-C GRANTOR TRUST (continued)\nSTATEMENT OF DISTRIBUTABLE INCOME For the years ended December 31, 1993 and 1992 (in millions of dollars)\n1993 1992 -------- -------- $ $ Distributable Income\nAllocable to Principal ...................... 378.5 451.8\nAllocable to Interest ...................... 39.7 63.3 -------- -------- Distributable Income .......................... 418.2 515.1 ======== ========\nIncome Distributed ............................ 418.2 515.1 ======== ========\nReference should be made to the Notes to Financial Statements.\nII-21\nGMAC 1991-C GRANTOR TRUST (continued)\nNOTES TO FINANCIAL STATEMENTS\nNOTE 1. BASIS OF ACCOUNTING\nThe financial statements of the GMAC 1991-C Grantor Trust (the \"Trust\") are prepared on the basis of cash receipts and cash disbursements. Such financial statements differ from financial statements prepared in accordance with generally accepted accounting principles in that interest income and the related assets are recognized when received rather than when earned and distributions to certificateholders are recognized when paid rather than when the obligation is incurred. All expenses of the Trust are paid by GMAC Auto Receivables Corporation (the \"Seller\").\nNOTE 2. SALE OF CERTIFICATES\nOn December 16, 1991, GMAC 1991-C Grantor Trust acquired retail finance receivables aggregating approximately $1,326.4 million from the Seller in exchange for certificates representing undivided ownership interests of 91% for the Class A certificates and 9% for the Class B certificates in the Trust. The Trust property includes a pool of retail instalment sale contracts for new automobiles and light trucks, certain monies due thereunder, and security interests in the vehicles financed thereby. The Seller has the option to repurchase the remaining receivables as of the last day of any month on or after which the principal balance declines below 10% of the aggregate amount financed.\nNOTE 3. PRINCIPAL AND INTEREST PAYMENTS\nPrincipal (including prepayments) and interest are passed through and distributed pro rata to Class A and Class B certificateholders on each distribution date commencing January 15, 1992. Principal consists of payments on the receivables that are allocable to repayment of the amount sold as determined on a constant interest rate basis (the \"actuarial method\"). Interest is passed through and distributed to Class A certificateholders at one-twelfth of the pass through rate of 5.70% per annum. Interest consists of payments on the receivables that are allocable to finance charges, using the actuarial method, net of fees and expenses. The rights of the Class B certificateholders to receive monthly distributions with respect to the receivables are subordinated to the rights of the Class A certificateholders. A distribution date is the 15th day of each month (or, if such 15th day is not a business day, the next following business day).\nNOTE 4. FEDERAL INCOME TAX\nThe Trust is classified as a grantor trust, and therefore is not taxable as a corporation for federal income tax purposes. Each certificateholder will be treated as the owner of a pro rata undivided interest in each of the receivables in the Trust.\nII-22\nGMAC 1991-C GRANTOR TRUST (concluded)\nSUPPLEMENTARY FINANCIAL DATA (unaudited)\nSUMMARY OF QUARTERLY DISTRIBUTABLE INCOME (in millions of dollars)\n1993 Quarters Principal Interest Total - ------------------------------------ --------- -------- ----- $ $ $\nFirst quarter ...................... 96.7 12.0 108.7\nSecond quarter ..................... 101.1 10.6 111.7\nThird quarter ...................... 95.2 9.2 104.4\nFourth quarter ..................... 85.5 7.9 93.4 --------- -------- ----- Total ......................... 378.5 39.7 418.2 ========= ======== =====\n1992 Quarters Principal Interest Total - ------------------------------------ --------- -------- ----- $ $ $\nFirst quarter ...................... 120.6 18.3 138.9\nSecond quarter ..................... 115.3 16.6 131.9\nThird quarter ...................... 109.9 15.0 124.9\nFourth quarter ..................... 106.0 13.4 119.4 --------- -------- ----- Total ......................... 451.8 63.3 515.1 ========= ======== =====\nII-23\nINDEPENDENT AUDITORS' REPORT\nMarch 22, 1994\nThe GMAC 1992-A Grantor Trust, its Certificateholders, GMAC Auto Receivables Corporation, and The First National Bank of Chicago:\nWe have audited the accompanying Statement of Assets and Liabilities of the GMAC 1992-A Grantor Trust as of December 31, 1993 and 1992, and the related Statement of Distributable Income for the year ended December 31, 1993 and the period January 30, 1992 (inception) through December 31, 1992. These financial statements are the responsibility of the Trust's management. Our responsibility is to express an opinion on these financial statements based on our audit.\nWe conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.\nAs described in Note 1 to the financial statements, these financial statements are prepared on the basis of cash receipts and disbursements, which is a comprehensive basis of accounting other than generally accepted accounting principles.\nIn our opinion, such financial statements present fairly, in all material respects, the assets and liabilities of the GMAC 1992-A Grantor Trust at December 31, 1993 and 1992, and its distributable income and distributions for the year ended December 31, 1993 and the period January 30, 1992 (inception) through December 31, 1992, on the basis of accounting described in Note 1.\ns\\ DELOITTE & TOUCHE - ----------------------- DELOITTE & TOUCHE 600 Renaissance Center Detroit, Michigan 48243\nII-24\nGMAC 1992-A GRANTOR TRUST\nSTATEMENT OF ASSETS AND LIABILITIES (in millions of dollars)\nDec. 31 Dec. 31 1993 1992 ------- ------- ASSETS $ $\nReceivables (Note 2) .............................. 370.7 1,052.5 ------- -------\nTOTAL ASSETS ...................................... 370.7 1,052.5 ======= =======\nLIABILITIES\nAsset-backed Certificates (Notes 2 and 3) ................................. 370.7 1,052.5 ------- -------\nTOTAL LIABILITIES ................................. 370.7 1,052.5 ======= =======\nReference should be made to the Notes to Financial Statements.\nII-25\nGMAC 1992-A GRANTOR TRUST (continued)\nSTATEMENT OF DISTRIBUTABLE INCOME For the year ended December 31, 1993 and the period January 30, 1992 (inception) through December 31, 1992 (in millions of dollars)\n1993 1992 ------- ------- $ $ Distributable Income\nAllocable to Principal ...................... 681.7 948.9\nAllocable to Interest ...................... 35.4 72.0 ------- ------- Distributable Income .......................... 717.1 1,020.9 ======= =======\nIncome Distributed ............................ 717.1 1,020.9 ======= =======\nReference should be made to the Notes to Financial Statements.\nII-26\nGMAC 1992-A GRANTOR TRUST (continued)\nNOTES TO FINANCIAL STATEMENTS\nNOTE 1. BASIS OF ACCOUNTING\nThe financial statements of the GMAC 1992-A Grantor Trust (the \"Trust\") are prepared on the basis of cash receipts and cash disbursements. Such financial statements differ from financial statements prepared in accordance with generally accepted accounting principles in that interest income and the related assets are recognized when received rather than when earned and distributions to certificateholders are recognized when paid rather than when the obligation is incurred. All expenses of the Trust are paid by GMAC Auto Receivables Corporation (the \"Seller\").\nNOTE 2. SALE OF CERTIFICATES\nOn January 30, 1992, GMAC 1992-A Grantor Trust acquired retail finance receivables aggregating approximately $2,001.4 million from the Seller in exchange for certificates representing undivided ownership interests of 92.5% for the Class A certificates and 7.5% for the Class B certificates in the Trust. The Trust property includes a pool of retail instalment sale contracts for new automobiles and light trucks, certain monies due thereunder and security interests in the vehicles financed thereby. The Seller has the option to repurchase the remaining receivables as of the last day of any month on or after which the principal balance declines below 10% of the aggregate amount financed.\nNOTE 3. PRINCIPAL AND INTEREST PAYMENTS\nPrincipal (including prepayments) and interest are passed through and distributed pro rata to Class A and Class B certificateholders on each distribution date commencing February 18, 1992. Principal consists of payments on the receivables that are allocable to repayment of the amount sold as determined on a constant interest rate basis (the \"actuarial method\"). Interest is passed through and distributed to Class A certificateholders at one-twelfth of the pass through rate of 5.05% per annum. Interest consists of payments on the receivables that are allocable to finance charges, using the actuarial method, net of fees and expenses. The rights of the Class B certificateholders to receive monthly distributions with respect to the receivables are subordinated to the rights of the Class A certificateholders. A distribution date is the 15th day of each month (or, if such 15th day is not a business day, the next following business day).\nNOTE 4. FEDERAL INCOME TAX\nThe Trust is classified as a grantor trust, and therefore is not taxable as a corporation for federal income tax purposes. Each certificateholder will be treated as the owner of a pro rata undivided interest in each of the receivables in the Trust.\nII-27\nGMAC 1992-A GRANTOR TRUST (concluded)\nSUPPLEMENTARY FINANCIAL DATA (unaudited)\nSUMMARY OF QUARTERLY DISTRIBUTABLE INCOME (in millions of dollars)\n1993 Quarters Principal Interest Total - ------------------------------------ --------- -------- ----- $ $ $\nFirst quarter ...................... 206.9 12.4 219.3\nSecond quarter ..................... 192.5 9.8 202.3\nThird quarter ...................... 157.7 7.5 165.2\nFourth quarter ..................... 124.6 5.7 130.3 --------- -------- ----- Total ......................... 681.7 35.4 717.1 ========= ======== =====\n1992 Quarters Principal Interest Total - ------------------------------------ --------- -------- ----- $ $ $\nFirst quarter ...................... 171.8 16.5 188.3\nSecond quarter ..................... 278.3 21.9 300.2\nThird quarter ...................... 263.6 18.4 282.0\nFourth quarter ..................... 235.2 15.2 250.4 --------- -------- ------- Total ......................... 948.9 72.0 1,020.9 ========= ======== =======\nII-28\nINDEPENDENT AUDITORS' REPORT\nMarch 22, 1994\nThe GMAC 1992-C Grantor Trust, its Certificateholders, GMAC Auto Receivables Corporation, and The First National Bank of Chicago:\nWe have audited the accompanying Statement of Assets and Liabilities of the GMAC 1992-C Grantor Trust as of December 31, 1993 and 1992, and the related Statement of Distributable Income for the year ended December 31, 1993 and the period March 26, 1992 (inception) through December 31, 1992. These financial statements are the responsibility of the Trust's management. Our responsibility is to express an opinion on these financial statements based on our audit.\nWe conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.\nAs described in Note 1 to the financial statements, these financial statements are prepared on the basis of cash receipts and disbursements, which is a comprehensive basis of accounting other than generally accepted accounting principles.\nIn our opinion, such financial statements present fairly, in all material respects, the assets and liabilities of the GMAC 1992-C Grantor Trust at December 31, 1993 and 1992, and its distributable income and distributions for the year ended December 31, 1993 and the period March 26, 1992 (inception) through December 31, 1992, on the basis of accounting described in Note 1.\ns\\ DELOITTE & TOUCHE - ----------------------- DELOITTE & TOUCHE 600 Renaissance Center Detroit, Michigan 48243\nII-29\nGMAC 1992-C GRANTOR TRUST\nSTATEMENT OF ASSETS AND LIABILITIES (in millions of dollars)\nDec. 31 Dec. 31 1993 1992 ------- ------- ASSETS $ $\nReceivables (Note 2) .............................. 311.3 716.3 ------- -------\nTOTAL ASSETS ...................................... 311.3 716.3 ======= =======\nLIABILITIES\nAsset-backed Certificates (Notes 2 and 3) .................................. 311.3 716.3 ------- -------\nTOTAL LIABILITIES ................................. 311.3 716.3 ======= =======\nReference should be made to the Notes to Financial Statements.\nII-30\nGMAC 1992-C GRANTOR TRUST (continued)\nSTATEMENT OF DISTRIBUTABLE INCOME For the year ended December 31, 1993 and the period March 26, 1992 (inception) through December 31, 1992 (in millions of dollars)\n1993 1992 ------- ------- $ $ Distributable Income\nAllocable to Principal ...................... 405.0 384.0\nAllocable to Interest ...................... 31.0 41.2 ------- ------- Distributable Income .......................... 436.0 425.2 ======= =======\nIncome Distributed ............................ 436.0 425.2 ======= =======\nReference should be made to the Notes to Financial Statements.\nII-31\nGMAC 1992-C GRANTOR TRUST (continued))\nNOTES TO FINANCIAL STATEMENTS\nNOTE 1. BASIS OF ACCOUNTING\nThe financial statements of the GMAC 1992-C Grantor Trust (the \"Trust\") are prepared on the basis of cash receipts and cash disbursements. Such financial statements differ from financial statements prepared in accordance with generally accepted accounting principles in that interest income and the related assets are recognized when received rather than when earned and distributions to certificateholders are recognized when paid rather than when the obligation is incurred. All expenses of the Trust are paid by GMAC Auto Receivables Corporation (the \"Seller\").\nNOTE 2. SALE OF CERTIFICATES\nOn March 26, 1992, GMAC 1992-C Grantor Trust acquired retail finance receivables aggregating approximately $1,100.3 million from the Seller in exchange for certificates representing undivided ownership interests of 92% for the Class A certificates and 8% for the Class B certificates in the Trust. The Trust property includes a pool of retail instalment sale contracts for new automobiles and light trucks, certain monies due thereunder and security interests in the vehicles financed thereby. The Seller has the option to repurchase the remaining receivables as of the last day of any month on or after which the principal balance declines below 10% of the aggregate amount financed.\nNOTE 3. PRINCIPAL AND INTEREST PAYMENTS\nPrincipal (including prepayments) and interest are passed through and distributed pro rata to Class A and Class B certificateholders on each distribution date commencing April 15, 1992. Principal consists of payments on the receivables that are allocable to repayment of the amount sold as determined on a constant interest rate basis (the \"actuarial method\"). Interest is passed through and distributed to Class A certificateholders at one-twelfth of the pass through rate of 5.95% per annum. Interest consists of payments on the receivables that are allocable to finance charges, using the actuarial method, net of fees and expenses. The rights of the Class B certificateholders to receive monthly distributions with respect to the receivables are subordinated to the rights of the Class A certificateholders. A distribution date is the 15th day of each month (or, if such 15th day is not a business day, the next following business day).\nNOTE 4. FEDERAL INCOME TAX\nThe Trust is classified as a grantor trust, and therefore is not taxable as a corporation for federal income tax purposes. Each certificateholder will be treated as the owner of a pro rata undivided interest in each of the receivables in the Trust.\nII-32\nGMAC 1992-C GRANTOR TRUST (concluded)\nSUPPLEMENTARY FINANCIAL DATA (unaudited)\nSUMMARY OF QUARTERLY DISTRIBUTABLE INCOME (in millions of dollars)\n1993 Quarters Principal Interest Total - ------------------------------------ --------- -------- ----- $ $ $\nFirst quarter ...................... 109.2 10.1 119.3\nSecond quarter ..................... 109.3 8.5 117.8\nThird quarter ...................... 99.7 6.9 106.6\nFourth quarter ..................... 86.8 5.5 92.3 --------- -------- ----- Total ......................... 405.0 31.0 436.0 ========= ======== =====\n1992 Quarters Principal Interest Total - ------------------------------------ --------- -------- ----- $ $ $\nSecond quarter ..................... 133.1 15.7 148.8\nThird quarter ...................... 129.8 13.7 143.5\nFourth quarter ..................... 121.1 11.8 132.9 --------- -------- ----- Total ......................... 384.0 41.2 425.2 ========= ======== =====\nII-33\nINDEPENDENT AUDITORS' REPORT\nMarch 22, 1994\nThe GMAC 1992-D Grantor Trust, its Certificateholders, GMAC Auto Receivables Corporation, and The First National Bank of Chicago:\nWe have audited the accompanying Statement of Assets and Liabilities of the GMAC 1992-D Grantor Trust as of December 31, 1993 and 1992, and the related Statement of Distributable Income for the year ended December 31, 1993 and the period June 4, 1992 (inception) through December 31, 1992. These financial statements are the responsibility of the Trust's management. Our responsibility is to express an opinion on these financial statements based on our audit.\nWe conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.\nAs described in Note 1 to the financial statements, these financial statements are prepared on the basis of cash receipts and disbursements, which is a comprehensive basis of accounting other than generally accepted accounting principles.\nIn our opinion, such financial statements present fairly, in all material respects, the assets and liabilities of the GMAC 1992-D Grantor Trust at December 31, 1993 and 1992, and its distributable income and distributions for the year ended December 31, 1993 and the period June 4, 1992 (inception) through December 31, 1992, on the basis of accounting described in Note 1.\ns\/ DELOITTE & TOUCHE - ---------------------- DELOITTE & TOUCHE 600 Renaissance Center Detroit, Michigan 48243\nII-34\nGMAC 1992-D GRANTOR TRUST\nSTATEMENT OF ASSETS AND LIABILITIES (in millions of dollars)\nDec. 31 Dec. 31 1993 1992 ------- ------- ASSETS $ $\nReceivables (Note 2) .............................. 702.0 1,270.4 ------- -------\nTOTAL ASSETS ...................................... 702.0 1,270.4 ======= =======\nLIABILITIES\nAsset-backed Certificates (Notes 2 and 3) ................................. 702.0 1,270.4 ------- -------\nTOTAL LIABILITIES ................................. 702.0 1,270.4 ======= =======\nReference should be made to the Notes to Financial Statements.\nII-35\nGMAC 1992-D GRANTOR TRUST (continued)\nSTATEMENT OF DISTRIBUTABLE INCOME For the year ended December 31, 1993 and the period June 4,1992 (inception) through December 31, 1992 (in millions of dollars)\n1993 1992 ------ ------ $ $ Distributable Income\nAllocable to Principal ...................... 568.4 377.2\nAllocable to Interest ...................... 55.4 48.0 ------ ------ Distributable Income .......................... 623.8 425.2 ====== ======\nIncome Distributed ............................ 623.8 425.2 ====== ======\nReference should be made to the Notes to Financial Statements.\nII-36\nGMAC 1992-D GRANTOR TRUST (continued)\nNOTES TO FINANCIAL STATEMENTS\nNOTE 1. BASIS OF ACCOUNTING\nThe financial statements of the GMAC 1992-D Grantor Trust (the \"Trust\") are prepared on the basis of cash receipts and cash disbursements. Such financial statements differ from financial statements prepared in accordance with generally accepted accounting principles in that interest income and the related assets are recognized when received rather than when earned and distributions to certificateholders are recognized when paid rather than when the obligation is incurred. All expenses of the Trust are paid by GMAC Auto Receivables Corporation (the \"Seller\").\nNOTE 2. SALE OF CERTIFICATES\nOn June 4, 1992, GMAC 1992-D Grantor Trust acquired retail finance receivables aggregating approximately $1,647.6 million from the Seller in exchange for certificates representing undivided ownership interests of 91% for the Class A certificates and 9% for the Class B certificates in the Trust. The Trust property includes a pool of retail instalment sale contracts for new and used automobiles and light trucks, certain monies due thereunder and security interests in the vehicles financed thereby. The Seller has the option to repurchase the remaining receivables as of the last day of any month on or after which the principal balance declines below 10% of the aggregate amount financed.\nNOTE 3. PRINCIPAL AND INTEREST PAYMENTS\nPrincipal (including prepayments) and interest are passed through and distributed pro rata to Class A and Class B certificateholders on each distribution date commencing June 15, 1992. Principal consists of payments on the receivables that are allocable to repayment of the amount sold as determined on a constant interest rate basis (the \"actuarial method\"). Interest is passed through and distributed to Class A certificateholders at one-twelfth of the pass through rate of 5.55% per annum. Interest consists of payments on the receivables that are allocable to finance charges, using the actuarial method, net of fees and expenses. The rights of the Class B certificateholders to receive monthly distributions with respect to the receivables are subordinated to the rights of the Class A certificateholders. A distribution date is the 15th day of each month (or, if such 15th day is not a business day, the next following business day).\nNOTE 4. FEDERAL INCOME TAX\nThe Trust is classified as a grantor trust, and therefore is not taxable as a corporation for federal income tax purposes. Each certificateholder will be treated as the owner of a pro rata undivided interest in each of the receivables in the Trust.\nII-37\nGMAC 1992-D GRANTOR TRUST (concluded)\nSUPPLEMENTARY FINANCIAL DATA (unaudited)\nSUMMARY OF QUARTERLY DISTRIBUTABLE INCOME (in millions of dollars)\n1993 Quarters Principal Interest Total - ------------------------------------ --------- -------- ----- $ $ $\nFirst quarter ...................... 148.6 16.9 165.5\nSecond quarter ..................... 153.3 14.8 168.1\nThird quarter ...................... 140.7 12.8 153.5\nFourth quarter ..................... 125.8 10.9 136.7 --------- -------- ----- Total ......................... 568.4 55.4 623.8 ========= ======== =====\n1992 Quarters Principal Interest Total - ------------------------------------ --------- -------- ----- $ $ $\nSecond quarter ..................... 50.7 7.6 58.3\nThird quarter ...................... 166.9 21.4 188.3\nFourth quarter ..................... 159.6 19.0 178.6 --------- -------- ----- Total ......................... 377.2 48.0 425.2 ========= ======== =====\nII-38\nINDEPENDENT AUDITORS' REPORT\nMarch 22, 1994\nThe GMAC 1992-E Grantor Trust, its Certificateholders, GMAC Auto Receivables Corporation, and The First National Bank of Chicago:\nWe have audited the accompanying Statement of Assets and Liabilities of the GMAC 1992-E Grantor Trust as of December 31, 1993 and 1992, and the related Statement of Distributable Income for the year ended December 31, 1993 and the period August 20, 1992 (inception) through December 31, 1992. These financial statements are the responsibility of the Trust's management. Our responsibility is to express an opinion on these financial statements based on our audit.\nWe conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.\nAs described in Note 1 to the financial statements, these financial statements are prepared on the basis of cash receipts and disbursements, which is a comprehensive basis of accounting other than generally accepted accounting principles.\nIn our opinion, such financial statements present fairly, in all material respects, the assets and liabilities of the GMAC 1992-E Grantor Trust at December 31, 1993 and 1992, and its distributable income and distributions for the year ended December 31, 1993 and the period August 20, 1992 (inception) through December 31, 1992, on the basis of accounting described in Note 1.\ns\\ DELOITTE & TOUCHE - ----------------------- DELOITTE & TOUCHE 600 Renaissance Center Detroit, Michigan 48243\nII-39\nGMAC 1992-E GRANTOR TRUST\nSTATEMENT OF ASSETS AND LIABILITIES (in millions of dollars)\nDec. 31 Dec. 31 1993 1992 ------- ------- ASSETS $ $\nReceivables (Note 2) .............................. 885.4 1,398.0 ------- -------\nTOTAL ASSETS ...................................... 885.4 1,398.0 ======= =======\nLIABILITIES\nAsset-backed Certificates (Notes 2 and 3) ................................. 885.4 1,398.0 ------- -------\nTOTAL LIABILITIES ................................. 885.4 1,398.0 ======= =======\nReference should be made to the Notes to Financial Statements.\nII-40\nGMAC 1992-E GRANTOR TRUST (continued)\nSTATEMENT OF DISTRIBUTABLE INCOME For the year ended December 31, 1993 and the period August 20, 1992 (inception) through December 31, 1992 (in millions of dollars)\n1993 1992 ------- ------- $ $ Distributable Income\nAllocable to Principal ...................... 512.6 180.0\nAllocable to Interest ...................... 55.1 23.9 ------- ------- Distributable Income .......................... 567.7 203.9 ======= =======\nIncome Distributed ............................ 567.7 203.9 ======= =======\nReference should be made to the Notes to Financial Statements.\nII-41\nGMAC 1992-E GRANTOR TRUST (continued)\nNOTES TO FINANCIAL STATEMENTS\nNOTE 1. BASIS OF ACCOUNTING\nThe financial statements of the GMAC 1992-E Grantor Trust (the \"Trust\") are prepared on the basis of cash receipts and cash disbursements. Such financial statements differ from financial statements prepared in accordance with generally accepted accounting principles in that interest income and the related assets are recognized when received rather than when earned and distributions to certificateholders are recognized when paid rather than when the obligation is incurred. All expenses of the Trust are paid by GMAC Auto Receivables Corporation (the \"Seller\").\nNOTE 2. SALE OF CERTIFICATES\nOn August 20, 1992, GMAC 1992-E Grantor Trust acquired retail finance receivables aggregating approximately $1,578.0 million from the Seller in exchange for certificates representing undivided ownership interests of 91% for the Class A certificates and 9% for the Class B certificates in the Trust. The Trust property includes a pool of retail instalment sale contracts for new and used automobiles and light trucks, certain monies due thereunder and security interests in the vehicles financed thereby. The Seller has the option to repurchase the remaining receivables as of the last day of any month on or after which the principal balance declines below 10% of the aggregate amount financed.\nNOTE 3. PRINCIPAL AND INTEREST PAYMENTS\nPrincipal (including prepayments) and interest are passed through and distributed pro rata to Class A and Class B certificateholders on each distribution date commencing September 15, 1992. Principal consists of payments on the receivables that are allocable to repayment of the amount sold as determined on a constant interest rate basis (the \"actuarial method\"). Interest is passed through and distributed to Class A certificateholders at one-twelfth of the pass through rate of 4.75% per annum. Interest consists of payments on the receivables that are allocable to finance charges, using the actuarial method, net of fees and expenses. The rights of the Class B certificateholders to receive monthly distributions with respect to the receivables are subordinated to the rights of the Class A certificateholders. A distribution date is the 15th day of each month (or, if such 15th day is not a business day, the next following business day).\nNOTE 4. FEDERAL INCOME TAX\nThe Trust is classified as a grantor trust, and therefore is not taxable as a corporation for federal income tax purposes. Each certificateholder will be treated as the owner of a pro rata undivided interest in each of the receivables in the Trust.\nII-42\nGMAC 1992-E GRANTOR TRUST (concluded)\nSUPPLEMENTARY FINANCIAL DATA (unaudited)\nSUMMARY OF QUARTERLY DISTRIBUTABLE INCOME (in millions of dollars)\n1993 Quarters Principal Interest Total - ------------------------------------ --------- -------- ----- $ $ $\nFirst quarter ...................... 128.3 16.1 144.4\nSecond quarter ..................... 134.8 14.5 149.3\nThird quarter ...................... 129.0 13.0 142.0\nFourth quarter ..................... 120.5 11.5 132.0 --------- -------- ----- Total ......................... 512.6 55.1 567.7 ========= ======== =====\n1992 Quarters Principal Interest Total - ------------------------------------ --------- -------- ----- $ $ $\nThird quarter ...................... 46.1 6.2 52.3\nFourth quarter ..................... 133.9 17.7 151.6 --------- -------- ----- Total ......................... 180.0 23.9 203.9 ========= ======== =====\nII-43\nINDEPENDENT AUDITORS' REPORT\nMarch 22, 1994\nThe GMAC 1992-F Grantor Trust, its Certificateholders, GMAC Auto Receivables Corporation, and The First National Bank of Chicago:\nWe have audited the accompanying Statement of Assets and Liabilities of the GMAC 1992-F Grantor Trust as of December 31, 1993 and 1992, and the related Statement of Distributable Income for the year ended December 31, 1993 and the period September 29, 1992 (inception) through December 31, 1992. These financial statements are the responsibility of the Trust's management. Our responsibility is to express an opinion on these financial statements based on our audit.\nWe conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.\nAs described in Note 1 to the financial statements, these financial statements are prepared on the basis of cash receipts and disbursements, which is a comprehensive basis of accounting other than generally accepted accounting principles.\nIn our opinion, such financial statements present fairly, in all material respects, the assets and liabilities of the GMAC 1992-F Grantor Trust at December 31, 1993 and 1992, and its distributable income and distributions for the year ended December 31, 1993 and the period September 29, 1992 (inception) through December 31, 1992, on the basis of accounting described in Note 1.\ns\\ DELOITTE & TOUCHE - ----------------------- DELOITTE & TOUCHE 600 Renaissance Center Detroit, Michigan 48243\nII-44\nGMAC 1992-F GRANTOR TRUST\nSTATEMENT OF ASSETS AND LIABILITIES (in millions of dollars)\nDec. 31 Dec. 31 1993 1992 ------- ------- ASSETS $ $\nReceivables (Note 2) .............................. 908.7 1,492.8 ------- -------\nTOTAL ASSETS ...................................... 908.7 1,492.8 ======= =======\nLIABILITIES\nAsset-backed Certificates (Notes 2 and 3) ................................. 908.7 1,492.8 ------- -------\nTOTAL LIABILITIES ................................. 908.7 1,492.8 ======= =======\nReference should be made to the Notes to Financial Statements.\nII-45\nGMAC 1992-F GRANTOR TRUST (continued)\nSTATEMENT OF DISTRIBUTABLE INCOME For the year ended December 31, 1993 and the period September 29, 1992 (inception) through December 31, 1992 (in millions of dollars)\n1993 1992 ------ ------ $ $ Distributable Income\nAllocable to Principal ...................... 584.1 151.8\nAllocable to Interest ...................... 55.0 17.9 ------ ------ Distributable Income .......................... 639.1 169.7 ====== ======\nIncome Distributed ............................ 639.1 169.7 ====== ======\nReference should be made to the Notes to Financial Statements.\nII-46\nGMAC 1992-F GRANTOR TRUST (continued))\nNOTES TO FINANCIAL STATEMENTS\nNOTE 1. BASIS OF ACCOUNTING\nThe financial statements of the GMAC 1992-F Grantor Trust (the \"Trust\") are prepared on the basis of cash receipts and cash disbursements. Such financial statements differ from financial statements prepared in accordance with generally accepted accounting principles in that interest income and the related assets are recognized when received rather than when earned and distributions to certificateholders are recognized when paid rather than when the obligation is incurred. All expenses of the Trust are paid by GMAC Auto Receivables Corporation (the \"Seller\").\nNOTE 2. SALE OF CERTIFICATES\nOn September 29, 1992, GMAC 1992-F Grantor Trust acquired retail finance receivables aggregating approximately $1,644.6 million from the Seller in exchange for certificates representing undivided ownership interests of 91% for the Class A certificates and 9% for the Class B certificates in the Trust. The Trust property includes a pool of retail instalment sale contracts for new and used automobiles and light trucks, certain monies due thereunder, and security interests in the vehicles financed thereby. The Seller has the option to repurchase the remaining receivables as of the last day of any month on or after which the principal balance declines below 10% of the aggregate amount financed.\nNOTE 3. PRINCIPAL AND INTEREST PAYMENTS\nPrincipal (including prepayments) and interest are passed through and distributed pro rata to Class A and Class B certificateholders on each distribution date commencing October 15, 1992. Principal consists of payments on the receivables that are allocable to repayment of the amount sold as determined on a constant interest rate basis (the \"actuarial method\"). Interest is passed through and distributed to Class A certificateholders at one-twelfth of the pass through rate of 4.50% per annum. Interest consists of payments on the receivables that are allocable to finance charges, using the actuarial method, net of fees and expenses. The rights of the Class B certificateholders to receive monthly distributions with respect to the receivables are subordinated to the rights of the Class A certificateholders. A distribution date is the 15th day of each month (or, if such 15th day is not a business day, the next following business day).\nNOTE 4. FEDERAL INCOME TAX\nThe Trust is classified as a grantor trust, and therefore is not taxable as a corporation for federal income tax purposes. Each certificateholder will be treated as the owner of a pro rata undivided interest in each of the receivables in the Trust.\nII-47\nGMAC 1992-F GRANTOR TRUST (concluded)\nSUPPLEMENTARY FINANCIAL DATA (unaudited)\nSUMMARY OF QUARTERLY DISTRIBUTABLE INCOME (in millions of dollars)\n1993 Quarters Principal Interest Total - ------------------------------------ --------- -------- ----- $ $ $\nFirst quarter ...................... 146.9 16.2 163.1\nSecond quarter ..................... 151.2 14.6 165.8\nThird quarter ...................... 147.3 12.9 160.2\nFourth quarter ..................... 138.7 11.3 150.0 --------- -------- ----- Total ......................... 584.1 55.0 639.1 ========= ======== =====\n1992 Quarters Principal Interest Total - ------------------------------------ --------- -------- ----- $ $ $\nFourth quarter ..................... 151.8 17.9 169.7 ========= ======== =====\nII-48\nINDEPENDENT AUDITORS' REPORT\nMarch 22, 1994\nThe GMAC 1992-G Grantor Trust, its Certificateholders, GMAC Auto Receivables Corporation, and The First National Bank of Chicago:\nWe have audited the accompanying Statement of Assets and Liabilities of the GMAC 1992-G Grantor Trust as of December 31, 1993 and 1992, and the related Statement of Distributable Income for the year ended December 31, 1993 and the period November 19, 1992 (inception) through December 31, 1992. These financial statements are the responsibility of the Trust's management. Our responsibility is to express an opinion on these financial statements based on our audit.\nWe conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.\nAs described in Note 1 to the financial statements, these financial statements are prepared on the basis of cash receipts and disbursements, which is a comprehensive basis of accounting other than generally accepted accounting principles.\nIn our opinion, such financial statements present fairly, in all material respects, the assets and liabilities of the GMAC 1992-G Grantor Trust at December 31, 1993 and 1992, and its distributable income and distributions for the year ended December 31, 1993 and the period November 19, 1992 (inception) through December 31, 1992, on the basis of accounting described in Note 1.\ns\/ DELOITTE & TOUCHE - ----------------------- DELOITTE & TOUCHE 600 Renaissance Center Detroit, Michigan 48243\nII-49\nGMAC 1992-G GRANTOR TRUST\nSTATEMENT OF ASSETS AND LIABILITIES (in millions of dollars)\nDec. 31 Dec. 31 1993 1992 ------- ------- ASSETS $ $\nReceivables (Note 2) .............................. 335.3 1,288.5 ------- -------\nTOTAL ASSETS ...................................... 335.3 1,288.5 ======= =======\nLIABILITIES\nAsset-backed Certificates (Notes 2 and 3) ................................. 335.3 1,288.5 ------- -------\nTOTAL LIABILITIES ................................. 335.3 1,288.5 ======= =======\nReference should be made to the Notes to Financial Statements.\nII-50\nGMAC 1992-G GRANTOR TRUST (continued)\nSTATEMENT OF DISTRIBUTABLE INCOME For the year ended December 31, 1993 and the period November 19, 1992 (inception) through December 31, 1992 (in millions of dollars)\n1993 1992 ------ ------ $ $ Distributable Income\nAllocable to Principal ...................... 953.1 91.0\nAllocable to Interest ...................... 35.2 4.9 ------ ------ Distributable Income .......................... 988.3 95.9 ====== ======\nIncome Distributed ............................ 988.3 95.9 ====== ======\nReference should be made to the Notes to Financial Statements.\nII-51\nGMAC 1992-G GRANTOR TRUST (continued)\nNOTES TO FINANCIAL STATEMENTS\nNOTE 1. BASIS OF ACCOUNTING\nThe financial statements of the GMAC 1992-G Grantor Trust (the \"Trust\") are prepared on the basis of cash receipts and cash disbursements. Such financial statements differ from financial statements prepared in accordance with generally accepted accounting principles in that interest income and the related assets are recognized when received rather than when earned and distributions to certificateholders are recognized when paid rather than when the obligation is incurred. All expenses of the Trust are paid by GMAC Auto Receivables Corporation (the \"Seller\").\nNOTE 2. SALE OF CERTIFICATES\nOn November 19, 1992, GMAC 1992-G Grantor Trust acquired retail finance receivables aggregating approximately $1,379.4 million from the Seller in exchange for certificates representing undivided ownership interests of 94.5% for the Class A certificates and 5.5% for the Class B certificates in the Trust. The Trust property includes a pool of retail instalment sale contracts for new and used automobiles and light trucks, certain monies due thereunder, and security interests in the vehicles financed thereby. The Seller has the option to repurchase the remaining receivables as of the last day of any month on or after which the principal balance declines below 10% of the aggregate amount financed.\nNOTE 3. PRINCIPAL AND INTEREST PAYMENTS\nPrincipal (including prepayments) and interest are passed through and distributed pro rata to Class A and Class B certificateholders on each distribution date commencing December 15, 1992. Principal consists of payments on the receivables that are allocable to repayment of the amount sold as determined on a constant interest rate basis (the \"actuarial method\"). Interest is passed through and distributed to Class A certificateholders at one-twelfth of the pass through rate of 4.30% per annum. Interest consists of payments on the receivables that are allocable to finance charges, using the actuarial method, net of fees and expenses. The rights of the Class B certificateholders to receive monthly distributions with respect to the receivables are subordinated to the rights of the Class A certificateholders. A distribution date is the 15th day of each month (or, if such 15th day is not a business day, the next following business day).\nNOTE 4. FEDERAL INCOME TAX\nThe Trust is classified as a grantor trust, and therefore is not taxable as a corporation for federal income tax purposes. Each certificateholder will be treated as the owner of a pro rata undivided interest in each of the receivables in the Trust.\nII-52\nGMAC 1992-G GRANTOR TRUST (concluded)\nSUPPLEMENTARY FINANCIAL DATA (unaudited)\nSUMMARY OF QUARTERLY DISTRIBUTABLE INCOME (in millions of dollars)\n1993 Quarters Principal Interest Total - ------------------------------------ --------- -------- ----- $ $ $\nFirst quarter ...................... 268.1 12.9 281.0\nSecond quarter ..................... 258.3 10.0 268.3\nThird quarter ...................... 230.4 7.3 237.7\nFourth quarter ..................... 196.3 5.0 201.3 --------- -------- ----- Total ......................... 953.1 35.2 988.3 ========= ======== =====\n1992 Quarters Principal Interest Total - ------------------------------------ --------- -------- ----- $ $ $\nFourth quarter ..................... 91.0 4.9 95.9 ========= ======== =====\nII-53\nINDEPENDENT AUDITORS' REPORT\nMarch 22, 1994\nThe GMAC 1993-A Grantor Trust, its Certificateholders, GMAC Auto Receivables Corporation, and The First National Bank of Chicago:\nWe have audited the accompanying Statement of Assets and Liabilities of the GMAC 1993-A Grantor Trust as of December 31, 1993 and the related Statement of Distributable Income for the period March 24, 1993 (inception) through December 31, 1993. These financial statements are the responsibility of the Trust's management. Our responsibility is to express an opinion on these financial statements based on our audit.\nWe conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.\nAs described in Note 1 to the financial statements, these financial statements are prepared on the basis of cash receipts and disbursements, which is a comprehensive basis of accounting other than generally accepted accounting principles.\nIn our opinion, such financial statements present fairly, in all material respects, the assets and liabilities of the GMAC 1993-A Grantor Trust at December 31, 1993 and its distributable income and distributions for the period March 24, 1993 (inception) through December 31, 1993, on the basis of accounting described in Note 1.\ns\\ DELOITTE & TOUCHE - ----------------------- DELOITTE & TOUCHE 600 Renaissance Center Detroit, Michigan 48243\nII-54\nGMAC 1993-A GRANTOR TRUST\nSTATEMENT OF ASSETS AND LIABILITIES (in millions of dollars)\nDec. 31 ------- ASSETS $\nReceivables (Note 2) .............................. 845.9 -------\nTOTAL ASSETS ...................................... 845.9 =======\nLIABILITIES\nAsset-backed Certificates (Notes 2 and 3) ................................. 845.9 -------\nTOTAL LIABILITIES ................................. 845.9 =======\nReference should be made to the Notes to Financial Statements.\nII-55\nGMAC 1993-A GRANTOR TRUST (continued)\nSTATEMENT OF DISTRIBUTABLE INCOME For the period March 24, 1992 (inception) through December 31, 1993\n(in millions of dollars)\n----- $ Distributable Income\nAllocable to Principal .................... 557.0\nAllocable to Interest .................... 35.6 ----- Distributable Income ......................... 592.6 =====\nIncome Distributed ........................... 592.6 =====\nReference should be made to the Notes to Financial Statements.\nII-56\nGMAC 1993-A GRANTOR TRUST (continued))\nNOTES TO FINANCIAL STATEMENTS\nNOTE 1. BASIS OF ACCOUNTING\nThe financial statements of the GMAC 1993-A Grantor Trust (the \"Trust\") are prepared on the basis of cash receipts and cash disbursements. Such financial statements differ from financial statements prepared in accordance with generally accepted accounting principles in that interest income and the related assets are recognized when received rather than when earned and distributions to certificateholders are recognized when paid rather than when the obligation is incurred. All expenses of the Trust are paid by GMAC Auto Receivables Corporation (the \"Seller\").\nNOTE 2. SALE OF CERTIFICATES\nOn March 24, 1993, GMAC 1993-A Grantor Trust acquired retail finance receivables aggregating approximately $1,403.0 million from the Seller in exchange for certificates representing undivided ownership interests of 92.5% for the Class A certificates and 7.5% for the Class B certificates in the Trust. The Trust property includes a pool of retail instalment sale contracts for new and used automobiles and light trucks, certain monies due thereunder, and security interests in the vehicles financed thereby. The Seller has the option to repurchase the remaining receivables as of the last day of any month on or after which the principal balance declines below 10% of the aggregate amount financed.\nNOTE 3. PRINCIPAL AND INTEREST PAYMENTS\nPrincipal (including prepayments) and interest are passed through and distributed pro rata to Class A and Class B certificateholders on each distribution date commencing April 15, 1993. Principal consists of payments on the receivables that are allocable to repayment of the amount sold as determined on a constant interest rate basis (the \"actuarial method\"). Interest is passed through and distributed to Class A certificateholders at one-twelfth of the pass through rate of 4.15% per annum. Interest consists of payments on the receivables that are allocable to finance charges, using the actuarial method, net of fees and expenses. The rights of the Class B certificateholders to receive monthly distributions with respect to the receivables are subordinated to the rights of the Class A certificateholders. A distribution date is the 15th day of each month (or, if such 15th day is not a business day, the next following business day).\nNOTE 4. FEDERAL INCOME TAX\nThe Trust is classified as a grantor trust, and therefore is not taxable as a corporation for federal income tax purposes. Each certificateholder will be treated as the owner of a pro rata undivided interest in each of the receivables in the Trust.\nII-57\nGMAC 1993-A GRANTOR TRUST (concluded)\nSUPPLEMENTARY FINANCIAL DATA (unaudited)\nSUMMARY OF QUARTERLY DISTRIBUTABLE INCOME (in millions of dollars)\n1993 Quarters Principal Interest Total - ------------------------------------ --------- -------- ----- $ $ $\nSecond quarter ..................... 196.7 13.9 210.6\nThird quarter ...................... 194.4 11.8 206.2\nFourth quarter ..................... 165.9 9.9 175.8 --------- -------- ----- Total ......................... 557.0 35.6 592.6 ========= ======== =====\nII-58\nINDEPENDENT AUDITORS' REPORT\nMarch 22, 1994\nThe GMAC 1993-B Grantor Trust, its Certificateholders, GMAC Auto Receivables Corporation, and The First National Bank of Chicago:\nWe have audited the accompanying Statement of Assets and Liabilities of the GMAC 1993-B Grantor Trust as of December 31, 1993 and the related Statement of Distributable Income for the period September 16, 1993 (inception) through December 31, 1993. These financial statements are the responsibility of the Trust's management. Our responsibility is to express an opinion on these financial statements based on our audit.\nWe conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.\nAs described in Note 1 to the financial statements, these financial statements are prepared on the basis of cash receipts and disbursements, which is a comprehensive basis of accounting other than generally accepted accounting principles.\nIn our opinion, such financial statements present fairly, in all material respects, the assets and liabilities of the GMAC 1993-B Grantor Trust at December 31, 1993 and its distributable income and distributions for the period September 16, 1993 (inception) through December 31, 1993, on the basis of accounting described in Note 1.\ns\/ DELOITTE & TOUCHE - ----------------------- DELOITTE & TOUCHE 600 Renaissance Center Detroit, Michigan 48243\nII-59\nGMAC 1993-B GRANTOR TRUST\nSTATEMENT OF ASSETS AND LIABILITIES (in millions of dollars)\nDec. 31 ------- ASSETS $\nReceivables (Note 2) .............................. 1,269.0 -------\nTOTAL ASSETS ...................................... 1,269.0 =======\nLIABILITIES\nAsset-backed Certificates (Notes 2 and 3) ................................. 1,269.0 -------\nTOTAL LIABILITIES ................................. 1,269.0 =======\nReference should be made to the Notes to Financial Statements.\nII-60\nGMAC 1993-B GRANTOR TRUST (continued)\nSTATEMENT OF DISTRIBUTABLE INCOME For the period September 16, 1993 (inception) through December 31, 1993\n(in millions of dollars)\n----- $ Distributable Income\nAllocable to Principal .................... 181.6\nAllocable to Interest .................... 13.9 ----- Distributable Income ......................... 195.5 =====\nIncome Distributed ........................... 195.5 =====\nReference should be made to the Notes to Financial Statements.\nII-61\nGMAC 1993-B GRANTOR TRUST (continued)\nNOTES TO FINANCIAL STATEMENTS\nNOTE 1. BASIS OF ACCOUNTING\nThe financial statements of the GMAC 1993-B Grantor Trust (the \"Trust\") are prepared on the basis of cash receipts and cash disbursements. Such financial statements differ from financial statements prepared in accordance with generally accepted accounting principles in that interest income and the related assets are recognized when received rather than when earned and distributions to certificateholders are recognized when paid rather than when the obligation is incurred. All expenses of the Trust are paid by GMAC Auto Receivables Corporation (the \"Seller\").\nNOTE 2. SALE OF CERTIFICATES\nOn September 16, 1993, GMAC 1993-B Grantor Trust acquired retail finance receivables aggregating approximately $1,450.6 million from the Seller in exchange for certificates representing undivided ownership interests of 92.5% for the Class A certificates and 7.5% for the Class B certificates in the Trust. The Trust property includes a pool of retail instalment sale contracts for new and used automobiles and light trucks, certain monies due thereunder, and security interests in the vehicles financed thereby. The Seller has the option to repurchase the remaining receivables as of the last day of any month on or after which the principal balance declines below 10% of the aggregate amount financed.\nNOTE 3. PRINCIPAL AND INTEREST PAYMENTS\nPrincipal (including prepayments) and interest are passed through and distributed pro rata to Class A and Class B certificateholders on each distribution date commencing October 15, 1993. Principal consists of payments on the receivables that are allocable to repayment of the amount sold as determined on a constant interest rate basis (the \"actuarial method\"). Interest is passed through and distributed to Class A certificateholders at one-twelfth of the pass through rate of 4.00% per annum. Interest consists of payments on the receivables that are allocable to finance charges, using the actuarial method, net of fees and expenses. The rights of the Class B certificateholders to receive monthly distributions with respect to the receivables are subordinated to the rights of the Class A certificateholders. A distribution date is the 15th day of each month (or, if such 15th day is not a business day, the next following business day).\nNOTE 4. FEDERAL INCOME TAX\nThe Trust is classified as a grantor trust, and therefore is not taxable as a corporation for federal income tax purposes. Each certificateholder will be treated as the owner of a pro rata undivided interest in each of the receivables in the Trust.\nII-62\nGMAC 1993-B GRANTOR TRUST (concluded)\nSUPPLEMENTARY FINANCIAL DATA (unaudited)\nSUMMARY OF QUARTERLY DISTRIBUTABLE INCOME (in millions of dollars)\n1993 Quarters Principal Interest Total - ------------------------------------ --------- -------- ----- $ $ $\nFourth quarter ..................... 181.6 13.9 195.5 ========= ======== =====\nII-63\nPART IV\nITEM 14.","section_9":"","section_9A":"","section_9B":"","section_10":"","section_11":"","section_12":"","section_13":"","section_14":"ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.\n(a) (1) FINANCIAL STATEMENTS.\nIncluded in Part II, Item 8, of Form 10-K.\n(a) (2) FINANCIAL STATEMENT SCHEDULES.\nAll schedules have been omitted because they are inapplicable or because the information called for is shown in the financial statements or notes thereto.\n(a) (3) EXHIBITS (Included in Part II of this report).\n-- GMAC 1990-A Grantor Trust Financial Statements for the Year Ended December 31, 1993.\n-- GMAC 1991-A Grantor Trust Financial Statement for the Year Ended December 31, 1993.\n-- GMAC 1991-B Grantor Trust Financial Statements for the Year Ended December 31, 1993.\n-- GMAC 1991-C Grantor Trust Financial Statements for the Year Ended December 31, 1993.\n-- GMAC 1992-A Grantor Trust Financial Statements for the Year Ended December 31, 1993.\n-- GMAC 1992-C Grantor Trust Financial Statement for the Year Ended December 31, 1993.\n-- GMAC 1992-D Grantor Trust Financial Statements for the Year Ended December 31, 1993.\n-- GMAC 1992-E Grantor Trust Financial Statements for the Year Ended December 31, 1993.\n-- GMAC 1992-F Grantor Trust Financial Statements for the Year Ended December 31, 1993.\n-- GMAC 1992-G Grantor Trust Financial Statement for the Year Ended December 31, 1993.\n-- GMAC 1993-A Grantor Trust Financial Statements for the period March 24, 1993 through December 31, 1993.\n-- GMAC 1993-B Grantor Trust Financial Statements for the period September 16, 1993 through December 31, 1993.\n(b) REPORTS ON FORM 8-K.\nNo current reports on Form 8-K have been filed by any of the above-mentioned Grantor Trusts during the fourth quarter ended December 31, 1993\nITEMS 2, 3, 4, 5, 6, 9, 10, 11, 12 and 13 are inapplicable and have been omitted.\nIV-1\nSIGNATURE\nPursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Trustee has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.\nGMAC 1990-A GRANTOR TRUST GMAC 1991-A GRANTOR TRUST GMAC 1991-B GRANTOR TRUST GMAC 1991-C GRANTOR TRUST GMAC 1992-A GRANTOR TRUST GMAC 1992-C GRANTOR TRUST GMAC 1992-D GRANTOR TRUST GMAC 1992-E GRANTOR TRUST GMAC 1992-F GRANTOR TRUST GMAC 1992-G GRANTOR TRUST GMAC 1993-A GRANTOR TRUST GMAC 1993-B GRANTOR TRUST\nThe First National Bank of Chicago (Trustee)\ns\\ Steven M. Wagner ---------------------------------- (Steven M. Wagner, Vice President)\nDate: March 30, 1994 --------------\nIV-2","section_15":""}
{"filename":"810334_1993.txt","cik":"810334","year":"1993","section_1":"Item 1. Regulation and Legislation. Generally, the franchising authority can decide not to renew a franchise only if it finds that the cable operator has not substantially complied with the material terms of the franchise, has not provided reasonable service in light of the community's needs, does not have the financial, legal and technical ability to provide the services being proposed for the future, or has not presented a reasonable proposal for future service. A final decision of non-renewal by the franchising authority is appealable in court. The General Partner and its affiliates recently have experienced lengthy negotiations with some franchising authorities for the granting of franchise renewals and transfers. Some of the issues involved in recent renewal negotiations include rate reregulation, customer service standards, cable plant upgrade or replacement and shorter terms of franchise agreements. The inability of a Partnership to renew a franchise, or lengthy negotiations or litigation involving the renewal process could have an adverse impact on the business of a Partnership. The inability of a Partnership to transfer a franchise could have an adverse impact on the ability of a Partnership to accomplish its investment objectives.\nCOMPETITION. The Systems face competition from a variety of alternative entertainment media, such as: Multichannel Multipoint Distribution Service (\"MMDS\"), which is often called a \"wireless cable service\" and is a microwave service authorized to transmit television signals and other communications on a complement of channels, which when combined with instructional fixed television and other channels, is able to provide a complement of television signals potentially competitive with cable television systems; Satellite Master Antenna Television System (\"SMATV\"), commonly called a \"private\" cable television system, which is a system wherein one central antenna is used to receive signals and deliver them to, for example, an apartment complex; and Television Receive-Only Earth Stations (\"TVRO\"), which are satellite receiving antenna dishes that are used by \"backyard users\" to\nreceive satellite delivered programming directly in their homes. Programming services sell their programming directly to owners of TVROs as well as through third parties. The competition from MMDS and TVRO potentially diminishes the pool of subscribers to the Systems because persons who subscribe to MMDS services or who own backyard satellite dishes are not likely to subscribe to all of the Systems' cable television services.\nIn the near future, the Systems will also face competition from direct satellite to home transmission (\"DBS\"). DBS can provide to individuals on a wide-scale basis premium channel services and specialized programming through the use of high-powered DBS satellites that transmit such programming to a rooftop or side-mounted antenna. There are currently no DBS operators in the areas served by the Systems. DBS systems' ability to compete with the cable television industry will depend on, among other factors, the ability to obtain access to programming and the availability of reception equipment at reasonable prices. The first DBS satellite was recently launched, and it is anticipated that DBS services will become available throughout the United States during 1994.\nThe Systems also face competition from video cassette rental outlets and movie theaters in the Systems' service areas. The General Partner believes the preponderance of video cassette recorder (\"VCR\") ownership in the Systems' service areas may be a positive rather than a negative factor because households that have VCRs are attracted to non-commercial programming delivered by the Systems, such as movies and sporting events on cable television, that they can tape at their convenience.\nCable television franchises are not exclusive, so that more than one cable television system may be built in the same area (known as an \"overbuild\"), with potential loss of revenues to the operator of the original cable television system. The Systems currently face no direct competition from other cable television operators.\nAlthough the Partnerships have not yet encountered competition from a telephone company entering into the cable television business, the Partnerships' Systems could potentially face competition from telephone companies doing so. Bell Atlantic, a regional Bell operating company (\"RBOC\"), has announced its intention, if permitted by the courts, to build a cable television system in Alexandria, Virginia, and has won a lawsuit to obtain such authority. The case is on appeal. The General Partner currently owns and manages the cable television system in Alexandria, Virginia. Another RBOC, Ameritech, has also indicated its intention to build and operate a cable television system in Naperville, Illinois, a location where the General Partner manages a system on behalf of one of its managed limited partnerships. Other RBOCs have indicated their intention to enter the cable television market, and have filed lawsuits similar to the one being pursued by Bell Atlantic and Ameritech. Widespread competition through overbuilds by RBOCs could have a negative impact on companies like the General Partner that are already established cable television system operators.\nCOMPETITION FOR SUBSCRIBERS IN THE PARTNERSHIPS' SYSTEMS. Following is a summary of competition from MMDS, SMATV and TVRO operators in the Partnerships' franchise areas:\nREGULATION AND LEGISLATION. The cable television industry is regulated through a combination of the Federal Communications Commission (\"FCC\"), some state governments, and most local governments. In addition, the Copyright Act of 1976 imposes copyright liability on all cable television systems. Cable television operations are subject to local regulation insofar as systems operate under franchises granted by local authorities.\nCable Television Consumer Protection and Competition Act of 1992. On October 5, 1992, Congress enacted the Cable Television Consumer Protection and Competition Act of 1992 (the \"1992 Cable Act\"), which became effective on December 4, 1992. This legislation effected significant changes to the regulatory environment in which the cable television industry operates. The 1992 Cable Act generally allows for a greater degree of regulation of the cable television industry. Under the 1992 Cable Act's definition of effective competition, nearly all cable television systems in the United States, including those owned and managed by the General Partner, are subject to rate regulation of basic cable services. In addition, the 1992 Cable Act allows the FCC to regulate rates for non-basic service tiers other than premium services in response to complaints filed by franchising authorities and\/or cable subscribers. In April 1993, the FCC adopted regulations governing rates for basic and non-basic services and ordered an interim freeze on these rates effective on April 15, 1993. The rate freeze recently was extended by the FCC until the earlier of May 15, 1994, or the date on which a cable system's basic service rate is regulated by a franchising authority. The FCC's rate regulations became effective on September 1, 1993. On February 22, 1994, the FCC announced a revision of its rate regulations which it believes will generally result in a further reduction of rates for basic and non-basic services.\nThe 1992 Cable Act encourages competition with existing cable systems by allowing municipalities, which are otherwise legally qualified, to own and operate their own cable systems without having to obtain a franchise; prevents franchising authorities from granting exclusive franchises; or unreasonably refusing to award additional franchises covering an existing cable system's service area. The 1992 Cable Act also makes several procedural changes to the process under which a cable operator seeks to enforce renewal rights which could make it easier in some cases for a franchising authority to deny renewal. The 1992 Cable Act prohibits the common ownership of cable systems and co-located MMDS or SMATV systems, and absent certain exceptions, the sale or transfer of ownership of a cable system within 36 months after its acquisition or initial construction. The 1992 Cable Act also precludes video programmers affiliated with cable companies from favoring cable operators over competitors and requires such programmers to sell their programs to other multichannel video distributors. This provision may limit the ability of cable program suppliers to offer exclusive programming arrangements with cable companies and could affect the volume discounts that program suppliers currently offer to the General Partner in its capacity as a multiple system operator. The 1992 Cable Act has eliminated the latitude of operators to set rates for commercially leased access channels and requires that leased access rates be set according to a formula determined by the FCC.\nThe 1992 Cable Act contains new broadcast signal carriage requirements, and the FCC has adopted regulations implementing the statutory requirements. These new rules allow a local commercial broadcast television station to elect whether to demand that a cable television system carry its signal, or to require the cable television system to negotiate with the station for \"retransmission consent.\" A cable television system is generally required to devote up to one-third of its activated channel capacity for the mandatory carriage of local commercial broadcast television stations, and non-commercial television stations are also given mandatory carriage rights, although such stations are not given the option to negotiate retransmission consent for the carriage of their signals by cable television systems. Additionally, cable television systems also are required to obtain retransmission consent from all \"distant\" commercial television stations (except for commercial satellite-delivered independent \"superstations\"), commercial radio stations and certain low-power television stations carried by cable television systems. See Item 1. Cable Television Services.\nThere have been several lawsuits filed by cable television operators and programmers in Federal court challenging various aspects of the 1992 Cable Act, including provisions relating to mandatory broadcast signal carriage, retransmission consent, access to cable programming, rate regulation, commercial leased channels and public access channels. On April 8, 1993, a three-judge Federal district court panel issued a decision upholding the constitutional validity of the mandatory signal carriage requirements of the 1992 Cable Act. That decision has been appealed directly to the United States Supreme Court. Appeals have been filed in the Federal appellate court challenging the validity of the FCC's retransmission consent rules.\nOwnership and Market Structure. The FCC rules and federal law generally prohibit the direct or indirect common ownership, operation, control or interest in a cable television system, on the one hand, and a local television broadcast station whose television signal reaches any portion of the community served by the cable television system, on the other hand. The FCC recently lifted its ban on the cross-ownership of cable television systems by broadcast networks. The FCC revised its regulations to permit broadcast networks to acquire cable television systems serving up to 10% of the homes passed in the nation, and up to 50% of the homes passed in a local market. Neither the Partnerships nor the General Partner has any direct or indirect ownership, operation, control or interest in a television broadcast station, or a telephone company, and they are thus presently unaffected by the cross-ownership rules.\nThe Cable Communications Policy Act of 1984 (the \"1984 Cable Act\") and FCC regulations generally prohibit the common operation of a cable television system and a telephone company within the same service area. Until recently, a provision of a Federal court antitrust consent decree also prohibited the regional Bell operating companies (\"RBOCs\") from engaging in cable television operations. This prohibition was recently removed when the court retaining jurisdiction over the consent decree ruled that the RBOCs could provide information services over their facilities. This decision permits the RBOCs to acquire or construct cable television systems outside of their own service areas.\nThe 1984 Cable Act prohibited local exchange carriers, including the RBOCs, from providing video programming directly to subscribers within their local exchange telephone service areas, except in rural areas or by specific waiver of FCC rules. This statutory provision has recently been challenged on constitutional grounds by Bell Atlantic, one of the RBOCs. The court held that the 1984 Cable Act cross-ownership provision is unconstitutional, and it issued an order enjoining the United States Justice Department from enforcing the cross-ownership ban. The National Cable Television Association, an industry group of which the General Partner is a member, has appealed this landmark decision, and the case could ultimately be reviewed by the United States Supreme Court. This federal cross-ownership rule is particularly important to the cable industry since these telephone companies already own certain facilities needed for cable television operation, such as poles, ducts and associated rights-of-way.\nThe FCC has conducted a comprehensive proceeding examining whether and under what circumstances telephone companies should be allowed to provide cable television services, including video programming, to their customers. The FCC has concluded that under the 1984 Cable Act interexchange carriers (such as AT&T, which provide long distance services) are not subject to the restrictions which bar the provision of cable television service by local exchange carriers. In addition, the FCC concluded that neither a local exchange carrier providing a video dialtone service nor its programming suppliers leasing the dialtone service are required to obtain a cable television franchise. This determination has been appealed. If video dialtone services become widespread in the future, cable television systems could be placed at a competitive disadvantage because cable television systems are required to obtain local franchises to provide cable television service and must comply with a variety of obligations under such franchises.\nThe FCC has tentatively concluded that construction and operation of technologically advanced, integrated broadband networks by carriers for the purpose of providing video programming and other services would constitute good cause for waiver of the cable\/telephone cross-ownership prohibitions. In July 1989, the FCC granted a California telephone company a waiver of the cross-ownership restrictions based on a showing of \"good cause,\" but the FCC's decision was reversed on appeal, and as a result of this decision, the FCC may be required to follow a stricter policy in granting such waivers in the future.\nAs part of the same proceeding, the FCC recommended that Congress amend the 1984 Cable Act to allow Local Exchange Carriers (\"LECs\") to provide their own video programming services over their facilities. The FCC recently decided to loosen ownership and affiliation restrictions currently applicable to telephone companies, and has proposed to increase the numerical limit on the population of areas qualifying as \"rural\" and in which LECs can provide cable service without a FCC waiver.\nLegislation is pending in Congress which would permit the LECs to provide cable television service within their own operating areas conditioned on establishing separate video programming affiliates. The legislation would generally prohibit, however, telephone companies from acquiring cable systems within their own operating areas. The legislation\nwould also enable cable television companies and others, subject to regulatory safeguards, to offer telephone services by eliminating state and local barriers to entry.\nITEM 2.","section_1A":"","section_1B":"","section_2":"ITEM 2. PROPERTIES\nThe cable television systems owned at December 31, 1993 by the Partnerships are described below.\nThe following tables set forth (i) the monthly basic plus service rates charged to subscribers, (ii) the number of basic subscribers and pay units, (iii) the number of homes passed by cable plant, (iv) the miles of cable plant and (v) the range of franchise expiration dates for the cable television systems owned and operated by the Partnerships. The monthly basic plus service rates set forth herein represent, with respect to systems with multiple headends, the basic plus service rate charged to the majority of the subscribers within the system. While the charge for basic plus service may have increased in some cases as a result of the FCC's rate regulations, overall revenues to the Partnerships may have decreased due to the elimination of charges for additional outlets and certain equipment. In cable television systems, basic subscribers can subscribe to more than one pay TV service. Thus, the total number of pay services subscribed to by basic subscribers are called pay units. Figures for numbers of subscribers, miles of cable plant and homes passed are compiled from the General Partner's records and may be subject to adjustments.\nCABLE TV FUND 14-A, LTD.\nAs of December 31, 1993, the number of homes passed and the miles of cable plant were 43,400 and 726, respectively. Franchise expiration dates range from July 1995 to January 2003.\nAs of December 31, 1993, the number of homes passed and the miles of cable plant were 19,266 and 409, respectively. Franchise expiration date for all franchises is September 1999.\nAs of December 31, 1993, the number of homes passed and the miles of cable plant were 34,921 and 452, respectively. Franchise expiration dates range from December 1999 to April 2001.\nAs of December 31, 1993, the number of homes passed and the miles of cable plant were 22,400 and 679, respectively. Franchise expiration dates range from July 1999 to January 2001.\nAs of December 31, 1993, the number of homes passed and the miles of cable plant were 24,570 and 314, respectively. Franchise expiration dates range from April 1994 to September 2004. Any franchise that expires in 1994 is in the process of franchise renewal negotiations.\nCABLE TV FUND 14-B, LTD.\nAt December 31, --------------- Surfside, South Carolina 1993 1992 1991 - ------------------------ ---- ---- ---- Monthly rate basic plus service $ 23.25 $ 20.60 $ 18.95 Basic subscribers 17,770 17,275 17,665 Pay units 10,168 10,422 11,748\nAs of December 31, 1993, the number of homes passed and the miles of cable plant were 32,100 and 489, respectively. Franchise expiration dates range from June 2006 to December 2013.\nAt December 31, --------------- Little Rock, California 1993 1992 1991 - ----------------------- ---- ---- ---- Monthly rate basic plus service $ 21.77 $ 20.00 $ 17.95 Basic subscribers 4,875 4,859 4,338 Pay units 4,171 3,717 3,553\nAs of December 31, 1993, the number of homes passed and the miles of cable plant were 6,910 and 192, respectively. Franchise expiration date is October 2000.\nCABLE TV FUND 14-A\/B VENTURE\nAt December 31, --------------- BROWARD COUNTY, FLORIDA 1993 1992 1991 - ----------------------- ---- ---- ---- Monthly basic plus service rate $ 24.00 $ 23.95 $ 19.50 Basic subscribers 45,515 42,945 41,153 Pay units 37,684 33,735 33,950\nAs of December 31, 1993, the number of homes passed and the miles of cable plant were 89,000 and 938, respectively. Franchise expiration dates range from July 1994 to December 2024. Any franchise that expires in 1994 is in the process of franchise renewal negotiations.\nPROGRAMMING SERVICES\nProgramming services provided by the Systems include local affiliates of the national broadcast networks, local independent broadcast channels, the traditional satellite services (e.g., American Movie Classics (AMC), Arts & Entertainment (ARTS), Black Entertainment Network (BET), C-SPAN, The Discovery Channel (DISC), Lifetime (LIFE), Entertainment Sports Network (ESPN), Home Shopping Network (HSN), Mind Extension University (MEU), Music Television (MTV), Nickelodeon (NICK), Turner Network Television (TNT), The Nashville Network (TNN), Video Hits One (VH-1), and superstations WOR, WGN and TBS. The Partnerships' Systems also provide a selection, which varies by system, of premium channel programming (e.g., Bravo (BRVO), Cinemax (CMAX), The Disney Channel (DISN),\nEncore (ENC), Home Box Office (HBO), Showtime (SHOW) and The Movie Channel (TMC)).\nITEM 3.","section_3":"ITEM 3. LEGAL PROCEEDINGS\nIn April 1989, a few months after it had acquired the Surfside System, Fund 14-B acquired a small cable television system in the Surfside Beach area from Tritek\/Southern Communications, Ltd. At the time of the acquisition, this system served approximately 1,450 subscribers in the same area as the Surfside System. In May 1990, the Federal Trade Commission (\"FTC\") commenced an investigation into the effect of this acquisition on competition in the Surfside Beach area. Fund 14-B submitted its response to the FTC's request for information concerning the acquisition in July 1990. The FTC conducted recorded interviews with certain employees of the General Partner in September 1991. No further action has been taken by the FTC, although to the best of the General Partner's knowledge the investigation is still pending.\nITEM 4.","section_4":"ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS\nNone.\nPART II.\nITEM 5.","section_5":"ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS\nWhile the Partnerships are publicly held, there is no public market for the limited partnership interests and it is not expected that a market will develop in the future. As of March 1, 1994, the approximate number of equity security holders was:\nItem 6.","section_6":"Item 6. Selected Financial Data\nItem 7.","section_7":"Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations\nCABLE TV FUND 14-A\nResults of Operations\n1993 Compared to 1992-\nRevenues of Cable TV Fund 14-A (\"Fund 14-A\") increased $2,600,712, or approximately 7 percent, from $36,315,757 in 1992 to $38,916,469 in 1993. An increase in the subscriber base accounted for approximately 44 percent of the increase in revenues. Basic subscribers increased 4,066, or approximately 5 percent, from 87,435 at December 31, 1992 to 91,501 at December 31, 1993. Basic service rate adjustments in the Partnership's systems accounted for approximately 22 percent of the increase in revenues. An increase in advertising sales revenues accounted for approximately 16 percent of the increase in revenues. The increase in revenues would have been greater but for the reduction in basic rates due to new basic rate regulations issued by the FCC in May 1993 with which Fund 14-A complied effective September 1, 1993. In addition, on February 22, 1994, the FCC announced a further rulemaking which, when implemented, could reduce rates further. No other individual factor was significant to the increases in revenues.\nOperating, general and administrative expenses increased $2,000,422, or approximately 10 percent, from $20,597,819 in 1992 to $22,598,241 in 1993. Operating, general and administrative expense represented 58 percent of revenue in 1993 compared to 57 percent in 1992. Increases in programming fees accounted for approximately 40 percent of the increase in expenses. Increases in personnel costs accounted for approximately 20 percent of the increase in expenses. Increases in advertising sales costs accounted for approximately 14 percent of the increase in expenses. No other factor was significant to the increase in operating, general and administrative expenses. Management fees and allocated overhead from the General Partner increased $364,543, or approximately 8 percent, from $4,318,812 in 1992 to $4,683,355 in 1993. This increase was due to the increases in revenues, upon which such fees and allocations are based, and an increase in allocated expense from the General Partner.\nDepreciation and amortization expense decreased $267,307, or approximately 2 percent, from $15,464,984 in 1992 to $15,197,677 in 1993 primarily due to the maturation of a portion of the intangible asset base.\nOperating loss decreased $503,054, or approximately 12 percent, from $4,065,858 in 1992 to $3,562,804 in 1993 due to the increase in revenues exceeding the increases in operating, general and administrative expenses and management fees and allocated overhead from the General Partner as well as the decrease in depreciation and amortization expense. Operating income before depreciation and amortization increased $235,747, or approximately 2 percent, from $11,399,126 in 1992 to $11,634,873 in 1993 due to the increase in revenues exceeding the increases in operating, general and administrative expenses and management fees and allocated overhead from the General Partner.\nInterest expense decreased $836,116, or approximately 18 percent, from $4,562,353 in 1992 to $3,726,237 in 1993. This decrease was due primarily to lower effective interest rates and lower outstanding balances on interest bearing obligations. Loss before equity in net loss of cable television joint venture decreased $1,374,868, or approximately 16 percent, from $8,705,625 in 1992 to $7,330,757 in 1993 due primarily to the decrease in operating loss and the decrease in interest expense. Such losses are expected to continue.\n1992 Compared to 1991-\nRevenues of Fund 14-A increased $5,065,606, or approximately 16 percent, from $31,250,151 in 1991 to $36,315,757 in 1992. Approximately 41 percent of the increase in revenues is due to the acquisition of the Central Illinois System on May 30, 1991. Basic service rate adjustments in the first and second quarter of 1992 accounted for approximately 30 percent of the increase in revenues. Increases in the basic subscriber base primarily accounted for the remainder of the increase in revenues.\nOperating, general and administrative expenses increased $2,502,733, or approximately 14 percent, from $18,095,086 in 1991 to $20,597,819 in 1992. Operating, general and administrative expense represented 57 percent of revenue in 1992 compared to 58 percent in 1991. Approximately 45 percent of the increase in expenses is due to the acquisition of the Central Illinois System on May 30, 1991. Increases in programming fees in the remaining systems accounted for approximately 28 percent of the increase in expenses. The increase in programming fees was due in part to the increase in the subscriber base. No other factor was significant to the increase in operating, general and administrative expenses. Management fees and allocated overhead from the\nGeneral Partner increased $835,442, or approximately 24 percent, from $3,483,370 in 1991 to $4,318,812 in 1992. Approximately 36 percent of the increase is attributable to the acquisition of the Central Illinois System. The remainder of the increase is due to the increases in revenues, upon which management fees and allocated overhead are based, and an increase in allocated expense from the General Partner.\nDepreciation and amortization expense increased $1,277,739, or approximately 9 percent, from $14,187,245 in 1991 to $15,464,984 in 1992. Approximately 78 percent of the increase in expense was due to the acquisition of the Central Illinois System on May 30, 1991. The remainder of the increase was due to capital additions during 1991.\nOperating loss decreased $449,692, or approximately 10 percent, from $4,515,550 in 1991 to $4,065,858 in 1992 due to the increase in revenues exceeding the increases in operating, general and administrative expenses, management fees and allocated overhead from the General Partner and depreciation and amortization expense. Operating income before depreciation and amortization increased $1,727,431, or approximately 18 percent, from $9,671,695 in 1991 to $11,399,126 in 1992. Approximately 38 percent of the increase was due to the acquisition of the Central Illinois System on May 30, 1991. The remainder of the increase was due to the increase in revenues exceeding the increase in operating, general and administrative expenses and management fees and allocated overhead from the General Partner.\nInterest expense decreased $410,317, or approximately 8 percent, from $4,972,670 in 1991 to $4,562,353 in 1992. This decrease was due primarily to lower effective interest rates on interest bearing obligations and was offset, in part, by higher outstanding balances on interest bearing obligations due to the purchase of the Central Illinois System. Other expense increased $96,828 due to depreciation allocated from related entities that provide advertising sales, warehouse and converter repair services to Fund 14-A. Loss before equity in net loss of cable television joint venture decreased $763,181, or approximately 8 percent, from $9,468,806 in 1991 to $8,705,625 in 1992 due primarily to the decrease in operating loss and the decrease in interest expense.\nIn addition to the systems owned exclusively, Fund 14-A owns an approximate 27 percent interest in Cable TV Fund 14-A\/B Venture (the \"Venture\"). See Management's Discussion and Analysis of the Venture for details pertaining to the Venture's operations.\nFinancial Condition\nCapital expenditures totalled approximately $7,007,000 during 1993. Approximately 26 percent of these expenditures was attributable to service drops to homes, approximately 24 percent related to converter replacements, approximately 18 percent was for new plant construction and approximately 17 percent of these expenditures was for system upgrades and rebuilds in four of Fund 14- A's operating systems. The remainder of the expenditures related to various system and plant enhancements throughout Fund 14-A's operating systems. These expenditures were funded from cash on hand and cash generated from operations.\nBudgeted capital expenditures for 1994 are approximately $9,016,000. Approximately 34 percent of the total capital expenditures will be used for new plant construction in all of Fund 14-A's systems. Approximately 24 percent will relate to service drops to homes. Approximately 18 percent will be used for system upgrades and rebuilds in all of Fund 14-A's systems. The remainder of the anticipated expenditures are for various enhancements in all of Fund 14-A's systems. The actual level of capital expenditures will depend, in part, upon the General Partner's determination as to the proper scope and timing of such expenditures in light of the FCC's announcement of a further rulemaking regarding the 1992 Cable Act on February 22, 1994 and Fund 14-A's liquidity position. Funding for the improvements is expected to come from cash on hand, cash generated from operations, and, if available, borrowings under a renegotiated credit facility.\nAt December 31, 1992, the then-outstanding balance of $79,000,000 on the Partnership's revolving credit facility converted to a term loan. The term loan is payable in 26 consecutive quarterly installments which began March 31, 1993. The Partnership repaid $3,665,600 during 1993. Interest on the outstanding principal balance is at the Partnership's option of prime plus 1\/4 percent or a fixed rate defined as the CD rate plus 1-3\/8 percent or the London Interbank Offered Rate plus 1-1\/4 percent. Repayments under this term loan total $5,245,600 for 1994. The General Partner is currently negotiating to reduce or stop the principal amortization payments, establish a revolving credit period, and increase the maximum amount available under this credit facility. If the General Partner is unsuccessful in renegotiating the credit facility, Fund 14-A may have to reduce anticipated capital expenditures to fund required principal repayments. Until the credit facility is successfully renegotiated, Fund 14-A will need to rely on cash on hand, cash generated from operations and advances from the General Partner to fund principal repayments and capital expenditures. Advances from the General Partner will be made in the General Partner's discretion and the General Partner has no obligation to make advances to Fund 14-A.\nDuring 1988, Fund 14-A entered into an interest rate cap agreement covering outstanding debt obligations of $10,000,000. Fund 14-A paid a fee of $383,000. The agreement protects Fund 14-A from interest rates that exceed 10 percent for five years from the date of the agreement and expired in January, 1993. The fee was charged to interest expense over the life of the agreement using the straight-line method. On June 17, 1991, Fund 14-A entered into an interest rate cap agreement covering outstanding debt obligations of $35,000,000. Fund 14-A paid a fee of $157,500. The agreement protects Fund 14-A from LIBOR interest rates that exceed 8.5 percent for two years from the date of the agreement and expired in May, 1993. The fee was charged to interest expense over the life of the agreement using the straight-line method. On January 12, 1993, Fund 14-A entered into an interest rate cap agreement covering outstanding debt obligations of $5,000,000. Fund 14-A paid a fee of $50,000. The agreement protects Fund 14-A from interest rates that exceed 7 percent for three years from the date of the agreement. The fee is being charged to interest expense over the life of the agreement using the straight-line method.\nSubject to the regulatory matters discussed below and assuming successful renegotiation of Fund 14-A's credit facility, of which there can be no assurance, the General Partner believes Fund 14-A has sufficient sources of capital to meet its presently anticipated needs.\nIn addition to those systems owned exclusively by it, Fund 14-A owns an approximate 27 percent interest in the Venture. Fund 14-A's investment in this cable television joint venture, accounted for under the equity method, decreased by $1,277,358 compared to the December 31, 1992 balance. This decrease represents Fund 14-A's proportionate share of losses generated by the Venture during 1993. These losses are anticipated to continue.\nRegulation and Legislation\nOn October 5, 1992, Congress enacted the Cable Television Consumer Protection and Competition Act of 1992 (the \"1992 Cable Act\") which became effective on December 4, 1992. This legislation has effected significant changes to the regulatory environment in which the cable television industry operates. The 1992 Cable Act generally allows for a greater degree of regulation of the cable television industry. Under the 1992 Cable Act's definition of effective competition, nearly all cable television systems in the United States, including those owned and managed by the General Partner, are subject to rate regulation of basic cable services. In addition, the 1992 Cable Act allows the FCC to regulate rates for non-basic service tiers other than premium services in response to complaints filed by franchising authorities and\/or cable subscribers. In April 1993, the FCC adopted regulations governing rates for basic and non-basic services. These regulations, with which Fund 14-A complied, became effective on September 1, 1993. See Item 1 for further discussion of the provisions of the 1992 Cable Act.\nBased on the General Partner's assessment of the FCC's rulemakings concerning rate regulation under the 1992 Cable Act, Fund 14-A reduced the rates it charged for certain regulated services. On an annualized basis, such rate reductions will result in an estimated reduction in Fund 14-A's revenue of approximately $2,250,000, or approximately 5 percent, and a decrease in operating income before depreciation and amortization of approximately $2,100,000, or approximately 11 percent. In addition, on February 22, 1994, the FCC announced a further rulemaking which, when implemented, could reduce rates further. Based on the foregoing, the General Partner believes that the new rate regulations will have negative effect on Fund 14-A's revenues and operating income before depreciation and amortization. The General Partner has undertaken actions to mitigate a portion of these reductions primarily through (a) new service offerings, (b) product re-marketing and re-packaging and (c) marketing efforts directed at non-subscribers. To the extent such reductions are not mitigated, the values of Fund 14-A's cable television systems, which are calculated based on cash flow, could be adversely impacted. The FCC's rulemakings may have a material adverse effect on Fund 14-A's ability to renegotiate its credit facility.\nThe 1992 Cable Act contains new broadcast signal carriage requirements, and the FCC has adopted regulations implementing the statutory requirements. These new rules allow a local commercial broadcast television station to elect whether to demand that a cable system carry its signal or to require the cable system to negotiate with the station for \"retransmission consent.\" Additionally, cable systems also are required to obtain retransmission consent from all \"distant\" commercial television stations (except for commercial satellite-delivered independent \"superstations\"), commercial radio stations and certain low-power television stations carried by the cable systems. The retransmission consent rules went into effect October 6, 1993. In the cable television systems owned by Fund 14-A, no broadcast stations withheld their consent to retransmission of their signal. Certain broadcast signals are being carried pursuant to extensions offered to the General Partner by broadcasters, including a one-year extension for carriage of the CBS station owned and operated by the CBS network in Chicago. The General Partner expects to conclude retransmission consent negotiations with those stations whose signals are being carried pursuant to extensions without having to terminate the distribution of any of those signals. However, there can be no assurance that such will occur . If any broadcast station currently being carried pursuant to an extension is dropped, there could be a negative effect on the system if a significant number of subscribers were to disconnect their service.\nCABLE TV FUND 14-A\/B VENTURE\nResults of Operations\n1993 Compared to 1992-\nRevenues of the Venture's Broward County System increased $1,856,065, or approximately 9 percent, from $20,212,867 in 1992 to $22,068,952 in 1993. Increases in basic and premium subscribers accounted for approximately 48 percent of the increase in revenue. Basic and premium subscribers increased 6 percent and 14 percent, respectively, during 1993. Advertising sales accounted for approximately 19 percent of the increase in revenues. Basic service rate adjustments accounted for approximately 15 percent of the increase in revenues. The increase in revenues would have been greater but for the reduction in basic rates due to the new basic rate regulations issued by the FCC in May 1993 with which the Venture complied effective September 1, 1993. In addition, on February 22, 1994, the FCC announced a further rulemaking which, when implemented, could reduce rates further. No other individual factor significantly affected the increase in revenues.\nOperating, general and administrative expense increased $1,287,088, or approximately 12 percent, from $11,052,427 in 1992 to $12,339,515 in 1993. Operating, general and administrative expenses represented 56 percent of revenue in 1993, compared to 55 percent in 1992. The increase in operating, general and administrative expenses was due primarily to increases in programming fees and marketing expenses. No other individual factor significantly affected the increase in operating, general and administrative expense. Management fees and allocated overhead from Jones Intercable, Inc. increased $219,910, or approximately 9 percent, from $2,481,658 in 1992 to $2,701,568 in 1993 due to the increase in revenues, upon which such fees and allocations are based, and an increase in allocated expenses from Jones Intercable, Inc. Depreciation and amortization expense decreased $619,107, or approximately 6 percent, from $9,971,915 in 1992 to $9,352,808 in 1993. The decrease in depreciation and amortization expense is attributable to the maturation of the Venture's tangible asset base.\nOperating loss decreased $968,164, or approximately 29 percent, from $3,293,133 in 1992 to $2,324,939 in 1993. This decrease is due to the increase in revenues exceeding the increases in operating, general and administrative expenses and management fees and allocated overhead from Jones Intercable, Inc. as well as the decrease in depreciation and amortization expense. Operating income before depreciation and amortization expense increased $349,087, or approximately 5 percent, from $6,678,782 in 1992 to $7,027,869 in 1993 due to the increase in revenues exceeding the increases in operating, general and administrative expenses and management fees and allocated overhead from Jones Intercable, Inc.\nInterest expense decreased $114,318, or approximately 4 percent, from $2,564,990 in 1992 to $2,450, 672 in 1993 due to lower effective interest rates and lower outstanding balances on interest bearing obligations. Net loss decreased $1,472,607, or approximately 24 percent, from $6,186,107 in 1992 to $4,713,500 in 1993. The decrease was primarily attributable to the decrease in operating loss and the decrease in interest expense. These losses were primarily the result of the factors discussed above and are expected to continue in the future.\n1992 Compared to 1991-\nRevenues of the Venture's Broward County System increased $1,845,986, or approximately 10 percent, from $18,366,881 in 1991 to $20,212,867 in 1992. Basic service rate adjustments accounted for approximately 51 percent of the increase in revenues. Increases in basic commercial customers and customer late fees accounted for approximately 22 percent and 7 percent, respectively, of the increase in revenues. No other individual factor significantly affected the increase in revenues.\nOperating, general and administrative expense increased $987,683, or approximately 10 percent, from $10,064,744 in 1991 to $11,052,427 in 1992. Operating, general and administrative expenses represented 55 percent of revenue in 1992 and 1991. The increase in operating, general and administrative expense was due primarily to increases in personnel related costs and programming fees, which were partially offset by decreases in marketing expenses. No other individual factor significantly affected the increase in operating, general and administrative expense. Management fees and allocated overhead from Jones Intercable, Inc. increased $290,942, or approximately 13 percent, from $2,190,716 in 1991 to $2,481,658 in 1992 due to the increase in revenues, upon which such fees and allocations are based, and an increase in allocated expenses from Jones Intercable, Inc. Depreciation and amortization expense decreased $500,706, or approximately 5 percent, from $10,472,621 in 1991 to $9,971,915 in 1992. The decrease in depreciation and amortization expense was attributable to the maturation of the Venture's intangible asset base.\nOperating loss decreased $1,068,067, or approximately 24 percent, from $4,361,200 in 1991 to $3,293,133 in 1992. This decrease was due to the increase in revenues exceeding the increase in operating, general and administrative expenses, management fees and allocated overhead from Jones Intercable, Inc. as well as the decrease in depreciation and amortization expense. Operating income before depreciation and amortization expense increased $567,361, or approximately 9 percent, from $6,111,421 in 1991 to $6,678,782 in 1992 due to the increase in revenues exceeding the increases in operating, general and administrative expenses and management fees and allocated overhead from Jones Intercable, Inc.\nInterest expense decreased $1,078,926, or approximately 30 percent, from $3,643,916 in 1991 to $2,564,990 in 1992 due to lower effective interest rates on interest bearing obligations. Net loss decreased $1,852,613, or approximately 23 percent, from $8,038,720 in 1991 to $6,186,107 in 1992. The decrease was primarily attributable to the decrease in operating loss and the decrease in interest expense. These losses were primarily the result of the factors discussed above.\nFinancial Condition\nThe Venture expended approximately $3,040,000 on capital additions during 1993. Cable television plant extensions accounted for approximately 27 percent of these expenditures. The construction of service drops to homes and the purchase of converters accounted for approximately 25 percent and 12 percent, respectively, of the expenditures. The remainder of these expenditures related to various enhancements in the Broward County System. These capital expenditures were funded from cash on hand and cash generated from operations. The Venture plans to expend approximately $3,125,000 for capital additions in 1994. Of this total, approximately 24 percent is for cable television plant extensions. Approximately 26 percent will relate to the construction of service drops to homes. Approximately 14 percent will relate to upgrades and rebuild of the Broward County System. The remainder of the anticipated expenditures are for various enhancements in the Broward County System. These capital expenditures are expected to be funded from cash on hand and cash generated from operations and, if necessary, borrowings under a renegotiated credit facility, as discussed below.\nOn December 31, 1992, the then outstanding balance of $46,800,000 on the Venture's revolving credit facility converted to a term loan. The balance outstanding on the term loan at December 31, 1993 was $43,290,000. The term loan is payable in quarterly installments which began March 31, 1993 and is payable in full by December 31, 1999. Installments paid during 1993 totalled $3,510,000. Installments due during 1994 total $3,510,000. Funding for these installments is expected to come from cash on hand and cash generated from operations. The General Partner is currently negotiating to reduce principal payments (to provide liquidity for capital expenditures) and to adjust certain leverage covenants. Interest is at the Venture's option of prime plus 1\/2 percent, LIBOR plus 1-1\/2 percent or CD rate plus 1-5\/8 percent. The effective interest rates on amounts outstanding as of December 31, 1993 and 1992 were 5.0 percent and 5.48 percent, respectively. In January 1993, the Venture entered into an interest rate cap agreement covering outstanding debt obligations of $25,000,000. The Venture paid a fee of $246,250. The agreement protects the Venture from interest rates that exceeded 7 percent for three years from the date of the agreement.\nSubject to regulatory matters discussed below and the General Partner's ability to successfully renegotiate the Venture's credit facility, the General Partner believes that the Venture has sufficient sources of capital to service its presently anticipated needs.\nRegulation and Legislation\nOn October 5, 1992, Congress enacted the Cable Television Consumer Protection and Competition Act of 1992 (the \"1992 Cable Act\") which became effective on December 4, 1992. This legislation has effected significant changes to the regulatory environment in which the cable television industry operates. The 1992 Cable Act generally allows for a greater degree of regulation of the cable television industry. Under the 1992 Cable Act's definition of effective competition, nearly all cable television systems in the United States, including those owned and managed by the General Partner, are subject to rate regulation of basic cable services. In addition, the 1992 Cable Act allows the FCC to regulate rates for non-basic service tiers other than premium services in response to complaints filed by franchising authorities and\/or cable subscribers. In April 1993, the FCC adopted regulations governing rates for basic and non-basic services. These regulations, with which the Venture complied, became effective on September 1, 1993. See Item 1 for further discussion of the provisions of the 1992 Cable Act.\nBased on the General Partner's assessment of the FCC's rulemakings concerning rate regulation under the 1992 Cable Act, the Venture reduced the rates it charged for certain regulated services. On an annualized basis, such rate reductions will result in an estimated reduction in the Venture's revenue of approximately $1,800,000, or approximately 8 percent, and a decrease in operating income before depreciation and amortization of approximately $1,100,000, or approximately 10 percent. In addition, on February 22, 1994, the FCC announced a further rulemaking which, when implemented, could reduce rates further. Based on the\nforegoing, the General Partner believes that the new rate regulations will have a negative effect on the Venture's revenues and operating income before depreciation and amortization. The General Partner has undertaken actions to mitigate a portion of these reductions primarily through (a) new service offerings, (b) product re-marketing and re-packaging and (c) marketing efforts directed at non-subscribers. To the extent such reductions are not mitigated, the values of the Venture's cable television systems, which are calculated based on cash flow, could be adversely impacted. In addition, the FCC's rulemakings may have an adverse effect on the Venture's ability to renegotiate its credit facility.\nItem 8.","section_7A":"","section_8":"Item 8. Financial Statements\nCABLE TV FUND 14\nFINANCIAL STATEMENTS\nAS OF DECEMBER 31, 1993 and 1992\nINDEX\nREPORT OF INDEPENDENT PUBLIC ACCOUNTANTS\nTo the Partners of Cable TV Fund 14-A:\nWe have audited the accompanying balance sheets of CABLE TV FUND 14-A (a Colorado limited partnership) as of December 31, 1993 and 1992, and the related statements of operations, partners' capital (deficit) and cash flows for each of the three years in the period ended December 31, 1993. These financial statements and the schedules referred to below are the responsibility of the General Partner's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.\nWe conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.\nIn our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Cable TV Fund 14-A as of December 31, 1993 and 1992, and the 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.\nOur audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedules listed in the index of financial statements are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic financial statements. These schedules have been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.\n\/s\/ ARTHUR ANDERSEN & CO. ARTHUR ANDERSEN & CO.\nDenver, Colorado, March 11, 1994.\nCABLE TV FUND 14-A (A Limited Partnership)\nBALANCE SHEETS\nThe accompanying notes to financial statements are an integral part of these balance sheets.\nCABLE TV FUND 14-A (A Limited Partnership)\nBALANCE SHEETS\nThe accompanying notes to financial statements are an integral part of these balance sheets.\nCABLE TV FUND 14-A (A Limited Partnership)\nSTATEMENTS OF OPERATIONS\nThe accompanying notes to financial statements are an integral part of these statements.\nCABLE TV FUND 14-A (A Limited Partnership)\nSTATEMENTS OF PARTNERS' CAPITAL (DEFICIT)\nThe accompanying notes to financial statements are an integral part of these statements.\nCABLE TV FUND 14-A (A Limited Partnership)\nSTATEMENTS OF CASH FLOWS\nThe accompanying notes to financial statements are an integral part of these statements.\nCABLE TV FUND 14-A (A Limited Partnership)\nNOTES TO FINANCIAL STATEMENTS\n(1) ORGANIZATION AND PARTNERS' INTERESTS\nFormation and Business\nCable TV Fund 14-A (\"Fund 14-A\"), a Colorado limited partnership, was formed on February 6, l987, under a public program sponsored by Jones Intercable, Inc. Fund 14-A was formed to acquire, construct, develop and operate cable television systems. Jones Intercable, Inc. is the \"General Partner\" and manager of Fund 14-A. The General Partner and its subsidiaries also own and operate cable television systems. In addition, the General Partner manages cable television systems for other limited partnerships for which it is general partner and, also, for other affiliated entities.\nOn January 8, 1988, Fund 14-A and Cable TV Fund 14-B formed Cable TV Fund 14-A\/B Venture (the \"Venture\"), to acquire the cable television system serving areas in and around Broward County, Florida. Fund 14-A contributed $18,975,000 to the capital of the Venture for an approximate 27 percent ownership interest and Cable TV Fund 14-B contributed $51,025,000 of its net contributed capital for an approximate 73 percent ownership interest.\nContributed Capital, Commissions and Syndication Costs\nThe capitalization of Fund 14-A is set forth in the accompanying statements of partners' capital (deficit). No limited partner is obligated to make any additional contribution to partnership capital.\nThe General Partner purchased its interest in Fund 14-A by contributing $1,000 to partnership capital.\nAn affiliate of the General Partner, Jones International Securities, Ltd, received a commission of 10 percent of capital contributions of the limited partners, from which the affiliate paid all commissions of participating broker-dealers which sold partnership interests. The General Partner was reimbursed for all offering costs. Commission costs and reimbursements to the General Partner for costs of raising partnership capital were charged to limited partners' capital.\nAll profits and losses of Fund 14-A are allocated 99 percent to the limited partners and 1 percent to the General Partner, except for income or gain from the sale or disposition of cable television properties, which will be allocated to the partners based upon the formula set forth in the Partnership Agreement and interest income earned prior to the first acquisition by the partnership of a cable television system, which was allocated 100 percent to the limited partners.\nCable Television System Acquisitions and Formation of the Venture\nFund 14-A acquired the cable television systems serving certain areas in and around the communities of Turnersville, New Jersey, Buffalo, Minnesota, Naperville, Illinois and Calvert County, Maryland in 1987. On May 30, 1991, Fund 14-A purchased additional cable television systems serving certain communities in central Illinois.\nFund 14-A allocated the total contract purchase price of cable television systems acquired as follows: first, to the fair value of net tangible assets acquired; second, to the value of subscriber lists and a noncompete agreement with previous owners; third, to franchise costs; and fourth, to costs in excess of interests in net assets purchased. Brokerage fees paid to an affiliate of the General Partner (Note 3) and other system acquisition costs were capitalized and charged to distribution systems, except for the Central Illinois System which were charged to intangible assets.\n(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES\nAccounting Records\nThe accompanying financial statements have been prepared on the accrual basis of accounting in accordance with generally accepted accounting principles. Fund 14-A's tax returns are also prepared on the accrual basis.\nInvestment in Cable Television Joint Venture\nIn addition to its wholly owned systems, Fund 14-A owns an approximate 27 percent interest in the Venture through a capital contribution made in March 1988 of $18,975,000. The Venture acquired the Broward County System in March 1988. The Venture incurred losses of $4,713,500, $6,186,107, and $8,038,720 in 1993, 1992 and 1991, respectively of which $1,277,358, $1,676,435, and $2,178,493, respectively, was allocated to Fund 14-A. The investment is accounted for on the equity method. The operations of the Venture are significant to Fund 14-A and should be reviewed in conjunction with these financial statements. Reference is made to the accompanying financial statements of the Venture on pages 38 to 49.\nProperty, Plant and Equipment\nDepreciation of property, plant and equipment is provided primarily using the straight-line method over the following estimated service lives:\nDistribution systems 5 - 15 years Buildings 20 years Equipment and tools 3 - 5 years Premium television service equipment 5 years Earth receive stations 5 years Vehicles 3 years Other property, plant and equipment 5 years\nReplacements, renewals and improvements are capitalized and maintenance and repairs are charged to expense as incurred.\nIntangible Assets\nCosts assigned to intangible assets are being amortized using the straight-line method over the following remaining estimated useful lives:\nFranchise costs 1 - 6 years Subscriber lists 6 years Costs in excess of interests in net assets purchased 33 - 38 years\nRevenue Recognition\nSubscriber prepayments are initially deferred and recognized as revenue when earned.\nReclassification\nCertain prior year amounts have been reclassified to conform to the 1993 presentation.\n(3) TRANSACTIONS WITH THE GENERAL PARTNER AND AFFILIATES\nBrokerage Fees\nThe Jones Group, Ltd., an affiliate of the General Partner, performs brokerage services for Fund 14-A. For brokering the acquisition of cable television systems for Fund 14-A, The Jones Group, Ltd. is paid fees totalling 4 percent of the purchase prices. For brokering the acquisition of the Central Illinois System for Fund 14-A, The Jones Group, Ltd. was paid fees totalling $998,960, or 4 percent of the original purchase price, during 1991. No brokerage fees were paid by Fund 14-A during 1993 and 1992.\nManagement Fees, Distribution Ratios and Reimbursements\nThe General Partner manages Fund 14-A and receives a fee for its services equal to 5 percent of the gross revenues of the partnership, excluding revenues from the sale of cable television systems or franchises. Management fees paid to the General Partner by Fund 14-A for the years ended December 31, 1993, 1992, and 1991 were $1,945,823, $1,815,788 and $1,562,508, respectively.\nAny distributions made from cash flow (defined as cash receipts derived from routine operations, less debt principal and interest payments and cash expenses) are allocated 99 percent to the limited partners and 1 percent to the General Partner. Any distributions other than interest income on limited partner subscriptions earned prior to the acquisition of Fund 14- A's first cable television system or from cash flow, such as from the sale or refinancing of a system or upon dissolution of Fund 14-A, will be made as follows: first, to the limited partners in an amount which, together with all prior distributions, will equal 125 percent of the amount initially contributed to Fund 14-A capital by the limited partners; the balance, 75 percent to the limited partners and 25 percent to the General Partner.\nFund 14-A reimburses the General Partner for certain allocated overhead and administrative expenses. These expenses represent the salaries and benefits paid to corporate personnel, rent, data processing and other corporate facilities costs. Such personnel provide engineering, marketing, administrative, accounting, legal, and investor relations services to Fund 14-A. Allocations of personnel costs are based primarily on actual time spent by employees of the General Partner with respect to each partnership managed. Remaining overhead costs are allocated based on total revenues and\/or the cost of partnership assets managed. Systems owned by the General Partner and all other systems owned by partnerships for which Jones Intercable, Inc. is the general partner are also allocated a proportionate share of these expenses. The General Partner believes that the methodology used in allocating overhead and administrative expenses is reasonable. Reimbursements made to the General Partner by Fund 14-A for allocated overhead and administrative expenses were $2,737,532, $2,503,024 and $1,920,862 in 1993, 1992 and 1991, respectively.\nFund 14-A was charged interest during 1993 at an average interest rate of 10.61 percent on the amounts due the General Partner, which approximated the General Partner's weighted average cost of borrowing. Total interest charged by the General Partner was $1,029, $10,063 and $9,400 for the years ended December 31, 1993, 1992 and 1991, respectively.\nPayments to Affiliates for Programming Services\nFund 14-A receives programming from Superaudio and The Mind Extension University, affiliates of the General Partner. Payments to Superaudio totalled $50,655, $48,754 and $41,743 in 1993, 1992 and 1991, respectively. Payments to The Mind Extension University totalled $32,659, $31,361 and $27,542 in 1993, 1992 and 1991, respectively.\n(4) DEBT\nDuring March 1988, Fund 14-A entered into a revolving credit and term loan agreement with an institutional lender. During May 1991, the General Partner negotiated an increase in the maximum amount available under this credit facility to $80,000,000 from $45,000,000 to facilitate the purchase of the Central Illinois System and extended the revolving credit period to December 31, 1992. At December 31, 1992, the then-outstanding balance of $79,000,000 on the Partnership's credit facility converted to a term loan. The term loan is payable in 26 consecutive quarterly installments which began March 31, 1993. The Partnership repaid $3,665,600 during 1993. Interest on the outstanding principal balance is at the Partnership's option of prime plus 1\/4 percent or a fixed rate defined as the CD rate plus 1-3\/8 percent or the London Interbank Offered Rate plus 1-1\/4 percent. Scheduled repayments under this term loan are $5,245,600 for 1994. The effective interest rates on outstanding obligations as of December 31, 1993 and 1992 were 4.64 percent and 5.02 percent, respectively.\nDuring 1988, Fund 14-A entered into an interest rate cap agreement covering outstanding debt obligations of $10,000,000. Fund 14-A paid a fee of $383,000. The agreement protected Fund 14-A from interest rates that exceeded 10 percent for five years from the date of the agreement and expired in January, 1993. The fee was charged to interest expense over the life of the agreement using the straight-line method. On June 17, 1991, Fund 14-A entered into an interest rate cap agreement covering outstanding debt obligations of $35,000,000. Fund 14-A paid a fee of $157,500. The agreement protected Fund 14-A from LIBOR interest rates that exceeded 8.5 percent for two years from the date of the agreement and expired in June, 1993. The fee was charged to interest expense over the life of the agreement using the straight-line method. On January 12, 1993, Fund 14-A entered into an interest rate cap agreement covering outstanding debt obligations of $5,000,000. Fund 14-A paid a fee of $50,000. The agreement protects Fund 14-A from interest rates that exceed 7 percent for three years from the date of the agreement. The fee is being charged to interest expense over the life of this agreement using the straight-line method.\nInstallments due on debt principal for each of the five years in the period ending December 31, 1998, and thereafter, respectively, are: $5,325,829, $8,327,829, $11,614,228, $17,564,743, $21,962,000 and $10,807,200. At December 31, 1993, substantially all of Fund 14-A's property, plant and equipment secured the above indebtedness.\n(5) INCOME TAXES\nIncome taxes have not been recorded in the accompanying financial statements because they accrue directly to the partners. The Federal and state income tax returns of Fund 14-A are prepared and filed by the General Partner.\nFund 14-A's tax returns, the qualification of Fund 14-A as such for tax purposes, and the amount of distributable partnership income or loss are subject to examination by Federal and state taxing authorities. If such examinations result in changes with respect to Fund 14-A's qualification as such, or in changes with respect to Fund 14-A's recorded income or loss, the tax liability of the general and limited partners would likely be changed accordingly.\nTaxable loss reported to the partners is different from that reported in the statements of operations due to the difference in depreciation recognized under generally accepted accounting principles and the expense allowed for tax purposes under the Modified Accelerated Cost Recovery System (MACRS). There are no other significant differences between taxable loss and the net loss reported in the statements of operations.\n(6) COMMITMENTS AND CONTINGENCIES\nOn October 5, 1992, Congress enacted the Cable Television Consumer Protection and Competition Act of 1992 (the \"1992 Cable Act\") which became effective on December 4, 1992. The 1992 Cable Act generally allows for a greater degree of regulation in the cable television industry. In April 1993, the FCC adopted regulations governing rates for basic and non-basic services. These regulations became effective on September 1, 1993. Such regulations caused reductions in the rates for certain regulated services. On February 22, 1994, the FCC announced a further rulemaking which, when implemented could reduce rates further. The General Partner plans to mitigate a portion of these reductions primarily through (a) new service offerings, (b) product re-marketing and re-packaging and (c) marketing efforts directed at non-subscribers.\nThe 1992 Cable Act contains new broadcast signal carriage requirements, and the FCC has adopted regulations implementing the statutory requirements. These new rules allow a local commercial broadcast television station to elect whether to demand that a cable system carry its signal or to require the cable system to negotiate with the station for \"retransmission consent.\" Additionally, cable systems also are required to obtain retransmission consent from all \"distant\" commercial television stations (except for commercial satellite-delivered independent \"superstations\"), commercial radio stations and certain low-power television stations carried by the cable systems. The retransmission consent rules went into effect October 6, 1993. In the cable television systems owned by Fund 14-A, no broadcast stations withheld their consent to retransmission of their signal. Certain broadcast signals are being carried pursuant to extensions offered to the General Partner by broadcasters, including a one-year extension for carriage of the CBS station owned and operated by the CBS network in Chicago. The General Partner expects to conclude retransmission consent negotiations with those stations whose signals are being carried pursuant to extensions without having to terminate the distribution of any of those signals. However, there can be no assurance that such will occur. If any broadcast station currently being carried pursuant to an extension is dropped, there could be a negative effect on the system if a significant number of subscribers were to disconnect their service.\nFund 14-A rents office and other facilities under various long-term lease arrangements. Rent paid under such lease arrangements totalled $250,526, $226,896 and $225,725, respectively, for the years ended December 31, 1993, 1992 and 1991. Minimum commitments under operating leases for the five years in the period ending December 31, 1998, and thereafter are as follows:\n1994 $218,161 1995 164,870 1996 151,563 1997 145,813 1998 144,663 Thereafter 145,180 -------- $970,250 ========\n(7) SUPPLEMENTARY PROFIT AND LOSS INFORMATION\nSupplementary profit and loss information for the respective periods is presented below:\nCABLE TV FUND 14-A SCHEDULE V - PROPERTY, PLANT AND EQUIPMENT FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 and 1991\n1 Amount principally represents the purchase of the Central Illinois System in May 1991.\nCABLE TV FUND 14-A SCHEDULE VI - ACCUMULATED DEPRECIATION OF PROPERTY, PLANT AND EQUIPMENT FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 and 1991\nREPORT OF INDEPENDENT PUBLIC ACCOUNTANTS\nTo the Partners of Cable TV Fund 14-A\/B Venture:\nWe have audited the accompanying balance sheets of CABLE TV FUND 14-A\/B VENTURE (a Colorado general partnership) as of December 31, 1993 and 1992, and the related statements of operations, partners' capital and cash flows for each of the three years in the period ended December 31, 1993. These financial statements and the schedules referred to below are the responsibility of the General Partner's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.\nWe conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.\nIn our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Cable TV Fund 14-A\/B Venture as of December 31, 1993 and 1992, and the 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.\nOur audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedules listed in the index of financial statements are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic financial statements. These schedules have been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.\n\/s\/ ARTHUR ANDERSEN & CO. ARTHUR ANDERSEN & CO.\nDenver, Colorado, March 11,1994.\nCABLE TV FUND 14-A\/B VENTURE (A General Partnership)\nBALANCE SHEETS\nThe accompanying notes to financial statements are an integral part of these balance sheets.\nCABLE TV FUND 14-A\/B VENTURE (A General Partnership)\nBALANCE SHEETS\nThe accompanying notes to financial statements are an integral part of these balance sheets.\nCABLE TV FUND 14-A\/B VENTURE (A General Partnership)\nSTATEMENTS OF OPERATIONS\nThe accompanying notes to financial statements are an integral part of these statements.\nCABLE TV FUND 14-A\/B VENTURE (A General Partnership)\nSTATEMENTS OF PARTNERS' CAPITAL\nThe accompanying notes to financial statements are an integral part of these statements.\nCABLE TV FUND 14-A\/B VENTURE (A General Partnership)\nSTATEMENTS OF CASH FLOWS\nThe accompanying notes to financial statements are an integral part of these statements.\nCABLE TV FUND 14-A\/B VENTURE (A General Partnership)\nNOTES TO FINANCIAL STATEMENTS\n(1) ORGANIZATION AND PARTNERS' INTERESTS\nFormation and Business\nOn January 8, 1988, Cable TV Funds 14-A and 14-B (the \"Venture Partners\") formed a Colorado general partnership known as Cable TV Fund 14-A\/B Venture (the \"Venture\") by contributing $18,975,000 and $51,025,000, respectively, for approximate 27 percent and 73 percent ownership interests, respectively. The Venture was formed for the purpose of acquiring the cable television system serving areas in and around Broward County, Florida (the \"Broward County System\").\nJones Intercable, Inc., (\"Intercable\") general partner of each of the Venture Partners, manages the Venture. Intercable and its subsidiaries also own and operate cable television systems. In addition, Intercable manages cable television systems for other limited partnerships for which it is general partner and for other affiliated entities.\nContributed Capital\nThe capitalization of the Venture is set forth in the accompanying statements of partners' capital.\nAll Venture distributions, including those made from cash flow, from the sale or refinancing of Venture property and on dissolution of the Venture, shall be made to the Venture Partners in proportion to their approximate 27 and 73 percent interests in the Venture.\nCable Television System Acquisition\nThe Broward County System acquisition was accounted for as a purchase with the purchase price allocated to tangible and intangible assets based upon an independent appraisal. The method of allocation of purchase price was as follows: first, to the fair value of net tangible assets acquired; second, to the value of subscriber lists and noncompete agreements with previous owners; third, to franchise costs; and fourth, to costs in excess of interests in net assets purchased. Brokerage fees paid to an affiliate of the General Partner and other system acquisition costs were capitalized and included in the cost of intangible assets.\n(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES\nAccounting Records\nThe accompanying financial statements have been prepared on the accrual basis of accounting in accordance with generally accepted accounting principles. The Venture's tax returns are also prepared on the accrual basis.\nProperty, Plant and Equipment\nDepreciation is provided using the straight-line method over the following estimated service lives:\nReplacements, renewals, and improvements are capitalized and maintenance and repairs are charged to expense as incurred.\nIntangible Assets\nCosts assigned to franchises, subscriber lists, noncompete agreement and costs in excess of interests in net assets purchased are amortized using the straight-line method over the following remaining estimated useful lives:\nRevenue Recognition\nSubscriber prepayments are initially deferred and recognized as revenue when earned.\n(3) TRANSACTIONS WITH AFFILIATES\nBrokerage Fees\nThe Jones Group, Ltd., an affiliate of the General Partner, performs brokerage services in connection with the acquisition of systems for the Venture. For brokering the acquisition of a SMATV system in the Broward County System for the Venture, The Jones Group, Ltd. was paid a fee of $2,456, or 4 percent of the purchase price, during 1992. There were no brokerage fees paid in 1993 or 1991.\nManagement Fees and Reimbursements\nIntercable manages the Venture and receives a fee for its services equal to five percent of the gross revenues of the Venture, excluding revenues from the sale of cable television systems or franchises. Management fees paid to Intercable by the Venture for the years ended December 31, 1993, 1992 and 1991 were $1,103,448, $1,010,643 and $918,344, respectively.\nThe Venture reimburses Intercable for allocated overhead and administrative expenses. These expenses include salaries and related benefits paid for corporate personnel, rent, data processing services and other corporate facilities costs. Such personnel provide engineering, marketing, accounting, administrative, legal, and investor relations services to the Venture. Allocations of personnel costs are based primarily on actual time spent by employees of the General Partner with respect to each entity managed. Remaining overhead costs are allocated based on revenues and\/or the cost of assets managed for the entity. Systems owned by Intercable and all other systems owned by partnerships for which Intercable is the general partner are also allocated a proportionate share of these expenses. Intercable believes that the methodology used in allocating overhead and administrative expenses is reasonable. Reimbursements made to Intercable by the Venture for allocated overhead and administrative expenses during the years ended December 31, 1993, 1992 and 1991 were $1,598,120, $1,471,015 and $1,272,372, respectively.\nThe Venture was charged interest during 1993 at an average interest rate of 10.61 percent on the amounts due Intercable, such rate approximated Intercable's weighted average cost of borrowing. Total interest charged the Venture by Intercable was $2,361, 10,475 and $4,131 for the years ended December 31, 1993, 1992 and 1991, respectively.\nPayments to Affiliates for Programming Services\nThe Venture receives programming from Superaudio and The Mind Extension University, affiliates of Intercable. Payments to Superaudio totalled $30,018, $28,679 and $25,872 in 1993, 1992 and 1991, respectively. Payments to The Mind Extension University totalled $17,451, $16,434 and $15,882 in 1993, 1992 and 1991, respectively.\n(4) DEBT\nOn December 31, 1992, the then outstanding balance of $46,800,000 on the Venture's revolving credit facility converted to a term loan. The balance outstanding on the term loan at December 31, 1993 was $43,290,000. The term loan is payable in quarterly installments which began March 31, 1993 and is payable in full by December 31, 1999. Installments paid during 1993 totalled $3,510,000. Installments due during 1994 total $3,510,000. Funding for these installments is expected to come from cash on hand and cash generated from operations. Intercable is currently negotiating to reduce principal payments to provide liquidity for capital expenditures. Interest is at the Venture's option of prime plus 1\/2 percent, LIBOR plus 1-1\/2 percent or CD rate plus 1-5\/8 percent. The effective interest rates on amounts outstanding as of December 31, 1993 and 1992 were 5.0 percent and 5.48 percent, respectively\nIn January 1993, the Venture entered into an interest rate cap agreement covering outstanding debt obligations of $25,000,000. The Venture paid a fee of $246,250. The agreement protects the Venture from interest rates that exceed 7 percent for three years from the date of the agreement. The fee is being charged to interest expense over the life of the agreement using the straight-line method.\nOn August 22, 1988, the Venture entered into an interest rate cap agreement covering outstanding debt obligations of $20,000,000. The Venture paid a fee of $310,000. The agreement protected the Venture from interest rates that exceeded ten percent for three years from the date of the agreement. The fee was charged to interest expense over the life of this agreement using the straight-line method.\nInstallments due on debt principal for each of the five years in the period ending December 31, 1998 and thereafter, respectively, are: $3,561,519, $4,731,519 , $5,901,519, $8,207,173, $9,360,000 and $11,700,000 . At December 31, 1993, substantially all of the Venture's property, plant and equipment secured the above indebtedness.\n(5) INCOME TAXES\nIncome taxes have not been recorded in the accompanying financial statements because they accrue directly to the partners of Cable TV Funds 14-A and 14-B, which are general partners in the Venture.\nThe Venture's tax returns, the qualification of the Venture as such for tax purposes, and the amount of distributable Venture income or loss are subject to examination by Federal and state taxing authorities. If such examinations result in changes with respect to the Venture's qualification as such, or in changes with respect to the Venture's recorded income or loss, the tax liability of the Venture's general partners would likely be changed accordingly.\nTaxable loss reported to the partners is different from that reported in the statements of operations due to the difference in depreciation recognized under generally accepted accounting principles and the expense allowed for tax purposes under the Modified Accelerated Cost Recovery System (MACRS). There are no other significant differences between taxable loss and the net loss reported in the statements of operations.\n(6) COMMITMENTS AND CONTINGENCIES\nOn October 5, 1992, Congress enacted the Cable Television Consumer Protection and Competition Act of 1992 (the \"1992 Cable Act:\") which became effective on December 4, 1992. The 1992 Cable Act generally allows for a greater degree of regulation in the cable television industry. In April 1993, the FCC adopted regulations governing rates for basic and non-basic services. These regulations became effective on September 1, 1993. Such regulations caused reductions in the rates for certain regulated services. On February 22, 1994, the FCC announced a further rulemaking which, when implemented could reduce rates further. The General Partner plans to mitigate a portion of these reductions primarily through (a) new service offerings, (b) product re-marketing and re-packaging and (c) marketing efforts directed at non-subscribers.\nOffice and other facilities are rented under various long-term lease arrangements. Rent paid under such lease arrangements totalled $46,521, $45,406 and $54,702 respectively for the years ended December 31, 1993, 1992 and 1991. Minimum commitments under operating leases for each of the five years in the period ending December 31, 1998 and thereafter are as follows:\n1994 $ 46,520 1995 46,520 1996 28,507 1997 5,724 1998 1,431 Thereafter - -------- $128,702 ========\n(7) SUPPLEMENTARY PROFIT AND LOSS INFORMATION\nSupplementary profit and loss information for the respective periods is presented below:\nCABLE TV FUND 14-A\/B VENTURE SCHEDULE V - PROPERTY, PLANT AND EQUIPMENT FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 and 1991\nCABLE TV FUND 14-A\/B VENTURE SCHEDULE VI - ACCUMULATED DEPRECIATION OF PROPERTY, PLANT AND EQUIPMENT FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 and 1991\nITEM 9.","section_9":"ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE\nNone.\nPART III.\nITEM 10.","section_9A":"","section_9B":"","section_10":"ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT\nThe Partnerships themselves have no officers or directors. Certain information concerning directors and executive officers of the General Partner is set forth below.\nMr. Glenn R. Jones has served as Chairman of the Board of Directors and Chief Executive Officer of the General Partner since its formation in 1970, and he was President from June 1984 until April 1988. Mr. Jones was elected a member of the Executive Committee of the Board of Directors in April 1985. He is also Chairman of the Board of Directors and Chief Executive Officer of Jones Spacelink, Ltd., a publicly held cable television company that is a subsidiary of Jones International, Ltd. and the parent of the General Partner. Mr. Jones is the sole shareholder, President and Chairman of the Board of Directors of Jones International, Ltd. He is also Chairman of the Board of Directors of the subsidiaries of the General Partner and of certain other affiliates of the General Partner. Mr. Jones has been involved in the cable television business in various capacities since 1961, is a past member of the Board of Directors of the National Cable Television Association and is a former member of its Executive Committee. Mr. Jones is a past director and member of the Executive Committee of C-Span. Mr. Jones has been the recipient of several awards including the Grand Tam Award in 1989, the highest award from the Cable Television Administration and Marketing Society, the Chairman's Award from the Investment Partnership Association, which is an association of sponsors of public syndications; the cable television industry's Public Affairs Association President's Award in 1990; the Donald G. McGannon award for\nthe advancement of minorities and women in cable; the STAR Award from American Women in Radio and Television, Inc., for exhibition of a commitment to the issues and concerns of women in television and radio; and the Women in Cable Accolade in 1990 in recognition of support of this organization. Mr. Jones is also a founding member of the James Madison Council of the Library of Congress, is on the Board of Governors of the American Society of Training and Development and is a director of the National Alliance of Business.\nMr. James B. O'Brien, the General Partner's President, joined the General Partner in January 1982 as System Manager, Brighton, Colorado, and was later promoted to the position of General Manager, Gaston County, North Carolina. Prior to being elected President and a Director of the General Partner in December 1989, Mr. O'Brien served as a Division Manager, Director of Operations Planning\/Assistant to the CEO, Fund Vice President and Group Vice President\/Operations. As President, he is responsible for the day-to-day operations of the cable television systems managed and owned by the General Partner. Mr. O'Brien is also President and a Director of Jones Cable Group, Ltd., Jones Global Funds, Inc., and Jones Global Management, Inc., all affiliates of the General Partner. Mr. O'Brien is a board member of Cable Labs, Inc., the research arm of the cable television industry. He also serves as a director of the Cable Television Administration and Marketing Association and as a director of the Walter Kaitz Foundation.\nMs. Ruth E. Warren joined the General Partner in August 1980 and served in various capacities, including system manager and Fund Vice President, since then. Ms. Warren was elected Group Vice President\/Operations of the General Partner in September 1990. Ms. Warren also serves as Vice President\/Operations of Jones Spacelink, Ltd.\nMr. Kevin P. Coyle joined The Jones Group, Ltd. in July 1981 as Vice President\/Financial Services. In September 1985, he was appointed Senior Vice President\/Financial Services. He was elected Treasurer of the General Partner in August 1987, Vice President\/Treasurer in April 1988 and Group Vice President\/Finance in October 1990.\nMr. Christopher J. Bowick joined the General Partner in September 1991 as Group Vice President\/Technology and Chief Technical Officer. Previous to joining the General Partner, Mr. Bowick worked for Scientific Atlanta's Transmission Systems Business Division in various technical management capacities since 1981, and as Vice President of Engineering since 1989.\nMr. Timothy J. Burke joined the General Partner in August 1982 as corporate tax manager, was elected Vice President\/Taxation in November 1986 and Group Vice President\/Taxation\/Administration in October 1990. He is also a member of the Board of Directors of Jones Spacelink, Ltd.\nMr. Raymond L. Vigil joined the General Partner in April 1993 as Group Vice President\/Human Resources and was elected a Director of the General Partner in November 1993. Previous to joining the General Partner, Mr. Vigil served as Executive Director of\nLearning with USWest from September 1989 to April 1993. Prior to that, Mr. Vigil worked in various human resources posts over a 14-year term with the IBM Corporation.\nMr. James J. Krejci joined Jones International, Ltd. in March 1985 as Group Vice President. He was elected Group Vice President and Director of the General Partner in August 1987. He is also an officer of Jones Futurex, Inc., a subsidiary of Jones Spacelink, Ltd. engaged in manufacturing and marketing data encryption devices, Jones Information Management, Inc., a subsidiary of Jones International, Ltd. providing computer data and billing processing facilities and Jones Lightwave, Ltd., a company owned by Jones International, Ltd. and Mr. Jones, and several of its subsidiaries engaged in the provision of telecommunications services. Prior to joining Jones International, Ltd., Mr. Krejci was employed by Becton Dickinson and Company, a medical products manufacturing firm.\nMs. Elizabeth M. Steele joined the General Partner in August 1987 as Vice President\/General Counsel and Secretary. Ms. Steele also is an officer of Jones Spacelink, Ltd. From August 1980 until joining the General Partner, Ms. Steele was an associate and then a partner at the Denver law firm of Davis, Graham & Stubbs, which serves as counsel to the General Partner.\nMr. Michael J. Bartolementi joined the General Partner in September 1984 as an accounting manager and was promoted to Assistant Controller in September 1985. He was named Controller in November 1990.\nMr. George J. Feltovich was elected a Director of the General Partner in March 1993. Mr. Feltovich has been a private investor since 1978. Prior to 1978, Mr. Feltovich served as an administrative and legal consultant to various private and governmental housing programs. Mr. Feltovich was admitted to practice law in California, Pennsylvania and the District of Columbia and is a member of the California Bar Association.\nMr. Patrick J. Lombardi has been a Director of the General Partner since February 1984 and has served as a member of the Audit Committee of the Board of Directors since February 1985. In September 1985, Mr. Lombardi was appointed Vice President of The Jones Group, Ltd., and in June 1989 was elected President of Jones Global Group, Inc., both affiliates of the General Partner. Mr. Lombardi is President and a director of Jones Financial Group, Ltd., an affiliate of the General Partner, and Group Vice President\/Finance and a director of Jones International, Ltd.\nMr. Howard O. Thrall was elected a Director of the General Partner in December 1988 and serves as a member of the Audit Committee and the special Stock Option Committee, which was established in August of 1992. From 1984 until August 1993, Mr. Thrall was associated with Douglas Aircraft Company, an aircraft manufacturing firm, most recently as Regional Vice President Marketing. In September 1993, Mr. Thrall joined World Airways, Inc. as Vice President of Sales, Asian Region.\nITEM 11.","section_11":"ITEM 11. EXECUTIVE COMPENSATION\nThe Partnerships have no employees; however, various personnel are required to operate the cable television systems owned by the Partnerships. Such personnel are employed by the General Partner and, pursuant to the terms of the limited partnership agreements of the Partnerships, the cost of such employment is charged by the General Partner to the Partnerships as a direct reimbursement item. See Item 13.\nITEM 12.","section_12":"ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGERS\nNo person or entity owns more than 5 percent of the limited partnership interests in either of the Partnerships.\nITEM 13.","section_13":"ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS\nThe General Partner and its affiliates engage in certain transactions with the Partnerships as contemplated by the limited partnership agreements of the Partnerships and as disclosed in the Prospectus for the Partnerships. The General Partner believes that the terms of such transactions, which are set forth in the Partnerships' limited partnership agreements, are generally as favorable as could be obtained by the Partnerships from unaffiliated parties. This determination has been made by the General Partner in good faith, but none of the terms were or will be negotiated at arm's-length and there can be no assurance that the terms of such transactions have been or will be as favorable as those that could have been obtained by the Partnerships from unaffiliated parties.\nThe General Partner charges the Partnerships for management fees, and the Partnerships reimburse the General Partner for certain allocated overhead and administrative expenses in accordance with the terms of the limited partnership agreements of the Partnerships. These expenses consist primarily of salaries and benefits paid to corporate personnel, rent, data processing services and other facilities costs. Such personnel provide engineering, marketing, administrative, accounting, legal and investor relations services to the Partnerships. Allocations of personnel costs are based primarily on actual time spent by employees of the General Partner with respect to each Partnership managed. Remaining overhead costs are allocated based on revenues and\/or the costs of assets managed for the Partnerships. Systems owned by the General Partner and all other systems owned by partnerships for which Jones Intercable, Inc. is the General Partner, are also allocated a proportionate share of these expenses.\nThe General Partner also advances funds and charges interest on the balance payable from the Partnerships. The interest rate charged the Partnerships approximates the General Partner's weighted average cost of borrowing. Affiliates of the General Partner have received amounts from the Partnerships for performing brokerage services.\nThe Systems receive stereo audio programming from Superaudio, a joint venture owned 50% by an affiliate of the General Partner and 50% by an unaffiliated party, for a fee based upon the number of subscribers receiving the programming. These systems also receive educational video programming from Mind Extension University, Inc., an affiliate of the General Partner, for a fee based upon the number of subscribers receiving the programming.\nThe charges to the Partnerships for related transactions are as follows for the periods indicated:\n* Cable TV Fund 14-B's consolidation includes 100% of the Venture.\nPART IV.\nITEM 14.","section_14":"ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K\nSIGNATURES\nPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.\nCABLE TV FUND 14-A, LTD. CABLE TV FUND 14-B, LTD. Colorado limited partnerships By: Jones Intercable, Inc., their general partner\nBy: \/s\/ GLENN R. JONES Glenn R. Jones Chairman of the Board and Chief Dated: March 25, 1994 Executive Officer\nPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.","section_15":""}
{"filename":"85388_1993.txt","cik":"85388","year":"1993","section_1":"Item 1. Business.\nItem 1(a). General Development of Business.\nThe Rouse Company (the \"Company\") was incorporated as a business corporation under the laws of the State of Maryland in 1956. Its principal offices are located at The Rouse Company Building, Columbia, Maryland 21044. Its telephone number is (410) 992-6000. The Company, through its subsidiaries and affiliates, is engaged in (i) the ownership, management, acquisition and development of income-producing and other real estate in the United States, including retail centers, office buildings, mixed-use projects, community retail centers and three hotels, and the management of one retail center in Canada, and (ii) the development and sale of land to builders and other developers, primarily around Columbia, Maryland, for residential, commercial and industrial uses.\nItem 1(b). Financial Information About Industry Segments.\nInformation required by Item 1(b) is incorporated herein by reference to note 11 of the notes to consolidated financial statements included in the 1993 Annual Report to Shareholders.\nAs noted in Item 1(a), the Company is a real estate company engaged in most aspects of the real estate industry, including the management, acquisition and development of income-producing and other properties, both retail and commercial, community development and management, and land sales. These business segments are further described below.\nI-1\nItem 1. Business, continued.\nItem 1(c). Narrative Description of Business.\nOperating Properties: --------------------\nAs set forth in Item 2, at December 31, 1993, the 70 regional retail centers owned, in whole or in part, or operated by subsidiaries or affiliates of the Company, aggregated 22,213,000 square feet of leasable space, including 982,000 square feet leased to department stores and 669,000 square feet of office space. The activities involved in operating and managing retail centers include: negotiating lease terms with present and prospective tenants, identifying and attracting desirable new tenants, conducting local market and consumer research, developing and implementing short- and long- term merchandising and leasing programs, assisting tenants in the presentation of their merchandise and the layout of their stores and storefronts, and maintaining the buildings and common areas.\nIn conjunction with other partners or investors, the Company has a program of acquiring completed retail centers, with the Company having management responsibility and earning incentive fees including, in some instances, equity interests in the centers. The Company also has a program of providing management services for centers developed and owned by others under management agreements that also provide for incentive fees and, in some instances, equity interests in the centers. As of December 31, 1993, the Company managed 21 such centers, which are included in the figures in the preceding paragraph and aggregated 7,032,000 square feet of leasable space.\nIn addition to Columbia Mall, which is included in the figures in the second preceding paragraph, The Howard Research And Development Corporation (\"HRD\") and its subsidiaries own and\/or manage 17 office and industrial buildings and retail centers with 3,080,000 square feet of leasable office space, 8 village centers with 824,000 square feet of leasable retail space and other properties and additional commercial space, including the 289-room Columbia Inn in Columbia, Maryland.\nOther subsidiaries of the Company own, in whole or in part, and operate 11 office buildings with a total of 2,673,000 square feet of leasable space and the 148-room Cross Keys Inn located at The Village of Cross Keys in Baltimore, Maryland. The Company also has a 5% interest in Rouse-Teachers Properties, Inc., which owns 81 office\/industrial buildings with 5,727,000 square feet of space and 454 acres of land. A wholly owned\nI-2\nItem 1. Business, continued.\nItem 1(c). Narrative Description of Business, continued:\naffiliate of the Company is responsible for the operation, management and development of all buildings and land owned by Rouse-Teachers Properties, Inc.\nDevelopment: -----------\nThe Company renovates and expands existing retail centers and develops suburban and downtown retail centers and mixed-use projects, primarily for ownership. In addition, the Company is capable of serving as the master developer for certain mixed-use projects, with the Company generally owning at least the retail component of such projects. The activities involved in the development, renovation and expansion of retail centers and mixed-use projects include: initial market and consumer research, evaluating and acquiring land sites, obtaining necessary public approvals, engaging architectural and engineering firms to design the project, estimating development costs, developing and testing pro forma operating statements, selecting a general contractor, arranging construction and permanent financing, identifying and obtaining department stores and other tenants, negotiating lease terms, negotiating partnership and joint venture agreements and promoting new, renovated or expanded retail centers and mixed-use projects.\nThe Company also develops retail centers for others, with the Company earning incentive fees and, in some instances, equity interests in the centers.\nThe Company and certain subsidiaries or affiliates are in the construction or development stage of announced projects, primarily expansions of existing centers, that will add 283,000 square feet of leasable space.\nLand Sales: ----------\nHRD is the developing entity of Columbia, Maryland, which is located in the Baltimore-Washington corridor. HRD owns approximately 2,097 saleable acres of land in and around Columbia, and, through its subsidiaries and affiliates, develops and sells this land to builders and other developers for residential, commercial and industrial uses. The Company, through its subsidiaries and affiliates, also is presently involved in community development and related land sales elsewhere in Maryland and is developing and selling a parcel of land in California.\nI-3\nItem 1. Business, continued.\nItem 1(c). Narrative Description of Business, continued:\nIn all aspects of the Company's business pertaining to the ownership, management, acquisition or development of income-producing and other real estate, the Company operates in highly competitive markets. With respect to the leasing and operation or management of developed properties, each project faces market competition from existing and future developments in its geographical market area. The Company competes with developers and other buyers with respect to the acquisition of development sites or centers and for financing opportunities in the money markets. The Company also faces competition in and around Columbia, Maryland with respect to the development and sale of land for residential, commercial and industrial uses.\nNeither the Company's business, taken as a whole, nor any of its industry segments, is seasonal in nature.\nFederal, state and local statutes and regulations relating to the protection of the environment have previously had no material effect on the Company's business. Future development opportunities of the Company may involve additional capital and other expenditures in order to comply with such statutes and regulations. It is impossible at this time to predict with any certainty the magnitude of any such expenditures or the long-range effect, if any, on the Company's operations. Compliance with such laws has had no material adverse effect on the earnings or competitive position of the Company in the past; the Company anticipates that they will have no material adverse effect on its future earnings or its competitive position in the industry.\nNone of the Company's industry segments depends upon a single customer or a few customers, the loss of which would have a materially adverse effect on the segment. No customer accounts for 10 percent or more of the consolidated revenues of the Company.\nThe Company and its subsidiaries had 5,085 full- and part- time employees at December 31, 1993.\nI-4\nItem 2.","section_1A":"","section_1B":"","section_2":"Item 2. Properties.\nThe Company leases its headquarters building (approximately 127,000 square feet) in Columbia, Maryland for an initial term of 30 years which expires in 2003 with options for two 15-year renewal periods. The lease on the headquarters building is accounted for as a capital lease.\nInformation respecting the Company's operating properties is incorporated herein by reference to the \"Projects of The Rouse Company\" table on pages 56 through 60 of the Annual Report to Shareholders for 1993 that is an Exhibit to this Form 10-K. The ownership of virtually all properties is subject to mortgage financing. The table of projects includes retail centers managed by the Company for a fee as identified in notes (c) and (d) to the table. Excluding such managed centers, certain of the remaining properties are subject to leases which provide an option to purchase (or repurchase) the property and\/or to renew the leases for one or more renewal periods. The years of expiration indicated below assume all options to extend the terms of the leases are exercised. The properties subject to such leases in whole or in part are as follows:\nI-5\nItem 2. Properties, continued.\nI-6\nItem 3.","section_3":"Item 3. Legal Proceedings.\nOn November 6, 1990, Robert P. Guastella Equities, Inc. (\"Plaintiff\"),a former tenant at the Riverwalk Shopping Center in New Orleans, Louisiana (\"Riverwalk\"), which is owned and operated by New Orleans Riverwalk Associates, an affiliate of the Company (\"NORA\"), filed suit in the Civil District Court of Orleans Parish, Louisiana against NORA, the Company, two Company affiliates - Rouse-New Orleans, Inc. and New Orleans Riverwalk Limited Partnership - and Connecticut General Life Insurance Company, which is a general partner of NORA (collectively, \"Defendants\"). Plaintiff alleges that Defendants breached Plaintiff's lease agreement with NORA for the operation of a restaurant at Riverwalk by (i) failing to prevent the leased premises from flooding, (ii) refusing to permit entertainment on the leased premises, (iii) interfering with the operation of air conditioning equipment on the leased premises and (iv) failing to provide adequate security. Plaintiff claims that as a result of these breaches it suffered losses and could not pay the rentals due under the lease agreement, as a result of which the lease and its tenancy were terminated by NORA. Plaintiff sought damages of approximately $600,000 for these alleged breaches. In addition, on September 3, 1992, Plaintiff claimed $33,000,000 for alleged lost future profits which it claimed it would have earned had its lease not been terminated. All Defendants filed answers denying the claims of Plaintiff and asserting other defenses. NORA also asserted a counterclaim against Plaintiff and its guarantors, Robert Guastella and Charles Kovacs, for past due rentals and other charges in the approximate amount of $300,000 plus interest and attorneys' fees as provided for in the lease agreement. The case was tried before a jury and, on October 28, 1993, the jury returned a verdict against Defendants upon which judgment was entered by the trial court on January 7, 1994, in the total net amount of approximately $9,128,000 (which included a net award for lost future profits of approximately $8,640,000) plus interest and attorneys' fees. Defendants believe that the verdict and judgment as entered to date are contrary to the facts and applicable law. Following entry of judgment, Defendants filed with the trial court Motions for Judgment Notwithstanding the Verdict, Remittitur and\/or New Trial. These motions seek, in the alternative, (i) the dismissal of all claims of Plaintiff against Defendants, (ii) a significant reduction of the award to Plaintiff, including elimination of the entire award for lost future profits or (iii) a new trial. The hearing on the post-trial motions was held on February 28, 1994, and the matter is under consideration by the trial court. To the extent that these post-trial motions are not successful, Defendants intend to vigorously pursue their rights of appeal.\nI-7\nItem 4.","section_4":"Item 4. Submission of Matters to a Vote of Security Holders.\nNone.\nI-8\nDirectors and Executive Officers.\nThe executive officers of the Company as of March 31, 1994 are:\nI-9\nI-10\nThe term of office of each officer is until election of a successor or otherwise at the pleasure of the Board of Directors.\nThere is no arrangement or understanding between any of the above-listed officers and any other person pursuant to which any such officer was elected as an officer.\nNone of the above-listed officers has any family relationship with any director or other executive officer.\nI-11\nPart II -------\nItem 5.","section_5":"Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters.\nInformation required by Item 5 is incorporated herein by reference to page 51 of the 1993 Annual Report to Shareholders.\nItem 6.","section_6":"Item 6. Selected Financial Data.\nInformation required by Item 6 is incorporated herein by reference to page 51 of the 1993 Annual Report to Shareholders.\nItem 7.","section_7":"Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.\nInformation required by Item 7 is incorporated herein by reference to pages 45 through 50 of the 1993 Annual Report to Shareholders.\nItem 8.","section_7A":"","section_8":"Item 8. Financial Statements and Supplementary Data.\nFinancial Statements required by Item 8 are set forth in the Index to Financial Statements and Schedules on page IV-2.\nSupplementary data required by Item 8 are incorporated herein by reference to page 51 of the 1993 Annual Report to Shareholders.\nItem 9.","section_9":"Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.\nNone.\nII-1\nPart III --------\nThe information required by Items 10, 11, 12 and 13 (except that information regarding executive officers called for by Item 10","section_9A":"","section_9B":"","section_10":"","section_11":"","section_12":"","section_13":"","section_14":"Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.\n(a) 1 and 2. Financial Statements and Schedules:\nReference is made to the Index to Financial Statements and Schedules on page IV-2.\n3. Exhibits: Reference is made to the Exhibit Index.\n(b) Reports on Form 8-K:\nNone.\nIV-1\nTHE ROUSE COMPANY AND SUBSIDIARIES\nIndex to Financial Statements and Schedules\nPage ----\nIndependent Auditors' Report IV-3\nReport of Independent Real Estate Consultants included on page 21 of the 1993 Annual Report to Shareholders incorporated herein by reference\nFinancial Statements: The Rouse Company and Subsidiaries included on pages 22 through 44 of the 1993 Annual Report to Shareholders, incorporated herein by reference: Consolidated Cost Basis and Current Value Basis Balance Sheets at December 31, 1993 and 1992 Consolidated Cost Basis Statements of Operations for the Years Ended December 31, 1993, 1992 and 1991 Consolidated Cost Basis Statements of Shareholders' Equity for the Years Ended December 31, 1993, 1992 and 1991 Consolidated Cost Basis Statements of Cash Flows for the Years Ended December 31, 1993, 1992 and 1991 Consolidated Current Value Basis Statements of Changes in Revaluation Equity for the Years Ended December 31, 1993, 1992 and 1991 Notes to Consolidated Financial Statements\nSchedules:\nThe Rouse Company and Subsidiaries as of December 31, 1993 or for the years ended December 31, 1993, 1992 and 1991:\nSchedule II Amounts Receivable from Related Parties and Underwriters, Promoters and Employees Other Than Related Parties IV-4\nSchedule VIII Valuation and Qualifying Accounts IV-14\nSchedule IX Short-Term Borrowings IV-15\nSchedule X Supplementary Income Statement Information IV-16\nSchedule XI Real Estate and Accumulated Depreciation IV-17\nAll other schedules have been omitted as not applicable, or not required, or because the required information is included in the consolidated financial statements or notes thereto.\nIV-2\nINDEPENDENT AUDITORS' REPORT ----------------------------\nThe Board of Directors and Shareholders The Rouse Company:\nWe have audited the consolidated cost basis financial statements and the related financial statement schedules of The Rouse Company and subsidiaries as listed in the accompanying index. We have also audited the supplemental consolidated current value basis financial statements listed in the index. These consolidated financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on our audits.\nWe conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.\nIn our opinion, the consolidated cost basis financial statements referred to above present fairly, in all material respects, the financial position of The Rouse Company and subsidiaries at December 31, 1993 and 1992, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1993, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedules, when considered in relation to the basic consolidated cost basis financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.\nAs discussed in notes 2 and 12 to the consolidated financial statements, the Company changed its method of accounting for income taxes in 1991 to adopt the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 109, \"Accounting for Income Taxes.\"\nAs more fully described in note 1 to the consolidated financial statements, the supplemental consolidated current value basis financial statements referred to above have been prepared by management to present relevant financial information about The Rouse Company and its subsidiaries which is not provided by the cost basis financial statements and are not intended to be a presentation in conformity with generally accepted accounting principles. In addition, as more fully described in note 1, the supplemental consolidated current value basis financial statements do not purport to present the net realizable, liquidation or market value of the Company as a whole. Furthermore, amounts ultimately realized by the Company from the disposal of properties may vary from the current values presented.\nIn our opinion, the supplemental consolidated current value basis financial statements referred to above present fairly, in all material respects, the information set forth therein on the basis of accounting described in note 1 to the consolidated financial statements.\nKPMG PEAT MARWICK\nBaltimore, Maryland February 23, 1994\nIV-3\nSchedule II -----------\nTHE ROUSE COMPANY AND SUBSIDIARIES\nAmounts Receivable from Related Parties and Underwriters, Promoters and Employees Other than Related Parties\nYears ended December 31, 1993, 1992, and 1991 ----\n(continued)\nIV-4\nSchedule II (continued) ----------- THE ROUSE COMPANY AND SUBSIDIARIES\nAmounts Receivable from Related Parties and Underwriters, Promoters and Employees Other than Related Parties\nYears ended December 31, 1993, 1992, and 1991 ----\nNote: Reference is made to Note 15 to the Consolidated Financial Statements for additional information concerning these balances.\nIV-5\nSchedule II (continued) ----------- THE ROUSE COMPANY AND SUBSIDIARIES\nAmounts Receivable from Related Parties and Underwriters, Promoters and Employees Other than Related Parties\nYears ended December 31, 1993, 1992, and 1991 ----\n(continued)\nIV-6\nSchedule II (continued) ----------- THE ROUSE COMPANY AND SUBSIDIARIES\nAmounts Receivable from Related Parties and Underwriters, Promoters and Employees Other than Related Parties\nYears ended December 31, 1993, 1992, and 1991 ----\n(continued)\nIV-7\nSchedule II (continued) ----------- THE ROUSE COMPANY AND SUBSIDIARIES\nAmounts Receivable from Related Parties and Underwriters, Promoters and Employees Other than Related Parties\nYears ended December 31, 1993, 1992, and 1991 ----\n(continued)\nIV-8\nSchedule II (continued) ----------- THE ROUSE COMPANY AND SUBSIDIARIES\nAmounts Receivable from Related Parties and Underwriters, Promoters and Employees Other than Related Parties\nYears ended December 31, 1993, 1992, and 1991 ---\nNote:\nReference is made to Note 15 to the Consolidated Financial Statements for additional information concerning these balances.\nIV-9\nSchedule II (continued) ----------- THE ROUSE COMPANY AND SUBSIDIARIES\nAmounts Receivable from Related Parties and Underwriters, Promoters and Employees Other than Related Parties\nYears ended December 31, 1993, 1992, and 1991 ----\n(continued)\nIV-10\nSchedule II (continued) ----------- THE ROUSE COMPANY AND SUBSIDIARIES\nAmounts Receivable from Related Parties and Underwriters, Promoters and Employees Other than Related Parties\nYears ended December 31, 1993, 1992, and 1991 ----\n(continued)\nIV-11\nSchedule II (continued) ----------- THE ROUSE COMPANY AND SUBSIDIARIES\nAmounts Receivable from Related Parties and Underwriters, Promoters and Employees Other than Related Parties\nYears ended December 31, 1993, 1992, and 1991 ----\n(continued)\nIV-12\nSchedule II (continued) ----------- THE ROUSE COMPANY AND SUBSIDIARIES\nAmounts Receivable from Related Parties and Underwriters, Promoters and Employees Other than Related Parties\nYears ended December 31, 1993, 1992, and 1991 ----\nNote:\nReference is made to Note 15 to the Consolidated Financial Statements for additional information concerning these balances.\nIV-13\nSchedule VIII ------------- THE ROUSE COMPANY AND SUBSIDIARIES\nValuation and Qualifying Accounts Years ended December 31, 1993, 1992 and 1991 ----\nNotes:\n(1) Balances written off as uncollectible.\n(2) Costs of unsuccessful projects written off.\n(3) Costs of unsuccessful projects written off of $6,679 and transfers to property held for development and sale of $2,011.\n(4) Reclassification of pre-construction reserve related to a project in which the Company has an equity investment.\nIV-14\nSchedule IX -----------\nTHE ROUSE COMPANY AND SUBSIDIARIES Short-Term Borrowings\nYears ended December 31, 1993, 1992 and 1991 ---\nNotes:\n(1) The unsecured bank loans consist of two revolving lines of credit which provide for maximum borrowings of $20,000,000 and $60,000,000, respectively. Under the terms of the loan agreement relating to the $20,000,000 line of credit, advances supported by compensating balances bear interest at 2% for 1993 and 1% for 1992 and 1991 and the remaining outstanding balance bears interest at a variable rate based on specific market indices. This credit facility expired in January 1994.\nUnder the terms of the loan agreement relating to the $60,000,000 facility, advances bear interest at a variable rate based on specific market indices. This credit facility expired during 1993.\n(2) The average amount outstanding and the weighted average interest rate during the year were computed based on the average daily outstanding balances.\n(3) Reference is made to note 10 to the consolidated financial statements for information relating to lines of credit available at December 31, 1993.\nIV-15\nSchedule X ----------\nTHE ROUSE COMPANY AND SUBSIDIARIES\nSupplementary Income Statement Information Years ended December 31, 1993, 1992 and 1991 ---\nThere were no royalties paid during any of the three years presented.\nIV-16\nSchedule XI ----------- THE ROUSE COMPANY AND SUBSIDIARIES Real Estate and Accumulated Depreciation (note 1)\nDecember 31, 1993\nIV-17\nSchedule XI, continued ---------------------- THE ROUSE COMPANY AND SUBSIDIARIES Real Estate and Accumulated Depreciation (note 1)\nDecember 31, 1993\nIV-18\nSchedule XI, continued ----------------------\nTHE ROUSE COMPANY AND SUBSIDIARIES Real Estate and Accumulated Depreciation (note 1)\nDecember 31, 1993\nNotes:\n(1) Reference is made to notes 2, 3, 4, 5, 6, 10, 13 and 16 to the consolidated financial statements. Land was generally acquired one to three years before completion of construction.\n(2) The determination of these amounts is not practicable and, accordingly, they are included in improvements.\n(3) Buildings and improvements include deferred costs of $122,762,000 at December 31, 1993.\n(4) Encumbrances on office buildings are included in operating property encumbrances.\n(5) The changes in total cost of properties for the years ended December 31, 1993, 1992 and 1991 are as follows (in thousands):\n(continued)\nIV-19\nSchedule XI, continued ----------------------\nTHE ROUSE COMPANY AND SUBSIDIARIES Real Estate and Accumulated Depreciation (note 1)\nDecember 31, 1993\nNotes, continued:\n(6) The changes in accumulated depreciation and amortization for the years ended December 31, 1992, 1991 and 1990 are as follows (in thousands):\n(7) The aggregate cost of properties for Federal income tax purposes is approximately $2,764,666,000 at December 31, 1993.\n(8) Reference is made to note 2(c) to the consolidated financial statements for information related to depreciation.\nIV-20\nSIGNATURES ----------\nPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.\nPrincipal Executive Officers:\n\/s\/Mathias J. DeVito -------------------------------------- Mathias J. DeVito March 31, 1994 Chairman of the Board and Chief Executive Officer\n\/s\/Anthony W. Deering ------------------------------------- Anthony W. Deering March 31, 1994 President and Chief Operating Officer\nPrincipal Financial Officer:\n\/s\/Jeffrey H. Donahue ------------------------------------- Jeffrey H. Donahue March 31, 1994 Senior Vice President and Chief Financial Officer\nPrincipal Accounting Officer:\n\/s\/George L. Yungmann ------------------------------------- George L. Yungmann March 31, 1994 Senior Vice-President and Controller\nBoard of Directors:\nDavid H. Benson, Jeremiah E. Casey, Anthony W. Deering, Rohit M. Desai, Mathias J. DeVito, Juanita T. James, Hanne M. Merriman, Thomas J. McHugh, Roger W. Schipke and Alexander B. Trowbridge.\nBy: \/s\/Mathias J. DeVito -------------------------------- Mathias J. DeVito March 31, 1994 For Himself and as Attorney-in-fact\nIV-21\nCONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ---------------------------------------------------\nThe Board of Directors The Rouse Company:\nWe consent to the incorporation by reference in the Registration Statements of The Rouse Company on Form S-8 (Registration No. 2-83612) and Form S-3 (Registration Nos. 2-78898, 2-95596, 33-52458, 33-56646 and 33-57584) of our report dated February 23, 1994, relating to the consolidated financial statements and related schedules of The Rouse Company and subsidiaries as of December 31, 1993 and 1992 and for each of the years in the three-year period ended December 31, 1993, which report appears in the Annual Report on Form 10-K of The Rouse Company for the year ended December 31, 1993.\nKPMG PEAT MARWICK\nBaltimore, Maryland March 31, 1994\nIV-22\nCONSENT OF INDEPENDENT REAL ESTATE CONSULTANTS ----------------------------------------------\nThe Board of Directors The Rouse Company:\nWe consent to the incorporation by reference in the Registration Statements of The Rouse Company (the \"Company\") on Form S-8 (Registration No. 2-83612) and Form S-3 (Registration Nos. 2-78898, 2-95596, 33-52458, 33- 56646 and 33-57584) of our report dated February 23, 1994 on our concurrence with the Company's estimates of the total current value of its equity and other interests in certain real property owned and\/or managed by the Company and its subsidiaries as of December 31, 1993 and 1992, which report appears in the 1993 Annual Report to Shareholders which is incorporated by reference in the Annual Report on Form 10-K of the Company for the year ended December 31, 1993.\nLANDAUER ASSOCIATES, INC.\nDeborah A. Jackson Senior Vice President Director of Retail Valuation\nNew York, New York March 31, 1994\nIV-23\nExhibit Index","section_15":""}
{"filename":"728391_1993.txt","cik":"728391","year":"1993","section_1":"Item 1. BUSINESS\nORGANIZATION\nIPALCO Enterprises, Inc. (IPALCO) is a holding company and was incorporated under the laws of the State of Indiana on September 14, 1983. IPALCO has two (2) subsidiaries: Indianapolis Power & Light Company (IPL), an electric utility, and Mid-America Capital Resources, Inc. (Mid-America), a holding company for unregulated businesses.\nDESCRIPTION OF BUSINESS OF SUBSIDIARIES\nINDIANAPOLIS POWER & LIGHT COMPANY\nGENERAL\nIPL is engaged primarily in generating, transmitting, distributing and selling electric energy in the City of Indianapolis and neighboring cities, towns, communities, and adjacent rural areas, all within the State of Indiana, the most distant point being about forty miles from Indianapolis. It also produces, distributes and sells steam within a limited area in such city. There have been no changes in the services rendered, or in the markets or methods of distribution, since the beginning of the fiscal year. IPL intends to do business of the same general character as that in which it is now engaged. No private or municipally-owned electric public utility companies are competing with IPL in the territory it serves.\nIPL operates under indeterminate permits subject to the jurisdiction of the Indiana Utility Regulatory Commission (IURC). Such permits are subject to revocation by the IURC for cause. The Public Service Commission Act of Indiana (the PSC Act), which provides for the issuance of such permits, also provides that if the PSC Act is repealed, indeterminate permits will cease and a utility will again come into possession of such franchises as were surrendered at the time of the issue of the permit, but in no event shall such reinstated franchise be terminated within less than five years from the date of repeal of the PSC Act.\nThe electric utility business is affected by the various seasonal weather patterns throughout the year and, therefore, the operating revenues and associated operating expenses are not generated evenly by months during the year.\nIPL's electric system is directly interconnected with the electric systems of Indiana Michigan Power Company, PSI Energy, Inc., Southern Indiana Gas and Electric Company, Wabash Valley Power Association and Hoosier Energy Rural Electric Cooperative, Inc.\nAlso, IPL and 28 other electric utilities, known as the East Central Area Reliability Group (the Group), are cooperating under an agreement which provides for coordinated planning of generating and transmission facilities and the operation of such facilities to provide maximum reliability of bulk power supply in the nine- state region served by the Group.\nIn 1993, approximately 99.7% of the total kilowatthours sold by IPL were generated from coal, .2% from middle distillate fuel oil and .1% from secondary steam purchased from the Indianapolis Resource Recovery Project. In addition to use in oil-fired generating units, fuel oil is used for start up and flame stabilization in coal-fired generating units as well as for coal thawing and coal handling.\nIPL's long-term coal contracts provide for the supply of the major portion of its burn requirements through the year 1999, assuming environmental regulations can be met. The long-term coal agreements are with six suppliers and the coal is produced entirely in the State of Indiana (these six suppliers are located in the following counties: Clay, Daviess, Greene, Knox, Pike, Sullivan and Warrick, and are not affiliates of IPL). See Exhibits listed under Part IV Item 14(a)3(21). It is presently believed that all coal used by IPL will be mined by others. IPL normally carries a 70-day supply of coal and fuel oil to offset unforeseen occurrences such as labor disputes, equipment breakdowns, power sales to other utilities, etc. When strikes are anticipated in the coal industry, IPL increases its stockpile to an approximate 103-day supply.\nThe combined cost of coal and fuel oil used in the generation of electric energy for 1993 averaged 1.151 cents per kilowatthour or $24.49 per equivalent ton of coal, compared with the 1992 average fuel cost for electric generation of 1.146 cents per kilowatthour or $24.55 per equivalent ton of coal. Fuel costs are expected to experience only moderate changes in the near future due to increased supplier productivity, the stabilizing of coal prices and a low dependency on oil. However, an acceleration of inflation and\/or changes in laws, regulations or ordinances which impact the mining industry or place more restrictive environmental controls on utilities could have a detrimental effect on such prices.\nIPL has a long-term contract to purchase steam for use in its steam distribution system with Ogden Martin Systems of Indianapolis, Inc. (Ogden Martin). Ogden Martin owns and operates the Indianapolis Resource Recovery Project which is a waste-to- energy facility located in Marion County, Indiana. During 1993, IPL's steam system purchased 49.4% of its total therm requirement from Ogden Martin. Additionally, 33.3% of its 1993 one-hour peak load was met with steam purchased from Ogden Martin. IPL also purchased 3.2 million secondary therms which represent Ogden Martin send-out in excess of the IPL steam system requirements. Such secondary steam is used to produce electricity at the IPL Perry K and Perry W facilities.\nCONSTRUCTION\nThe cost of IPL's construction program during 1993, 1992 and 1991 was $149.3 million, $115.3 million and $96.3 million, respectively, including Allowances for Funds Used During Construction (AFUDC) of $3.6 million, $3.2 million and $1.6 million, respectively.\nIPL's construction program is reviewed periodically and is updated to reflect among other things the changes in economic conditions, revised load forecasts and cost escalations under construction contracts. The most recent projections indicate that IPL will need about 800 megawatts (MW) of additional energy resources by the year 2000. IPL plans to meet this need through the combination of the use of Demand Side Management, power purchases, peaking turbines and base-load generation.\nDuring 1992, IPL entered into a five-year firm power purchase agreement with Indiana Michigan Power Company (IMP), which will supply additional capacity for the near-term requirements. IPL receives 200 MW of capacity. IPL can also elect to extend the agreement through November 1999. See Item 7, \"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS\" under \"Capital Requirements\" for additional information regarding the IMP agreement.\nIPL's construction program for the five-year period 1994- 1998, is estimated to cost $1.0 billion including AFUDC. The estimated cost of the program by year (in millions) is $234.4 in 1994; $191.9 in 1995; $116.6 in 1996; $221.4 in 1997; and $251.8 in 1998. It includes $113.7 million for four 80 MW combustion turbines with in-service dates of 1994, 1995, 1998 and 1999, respectively, and $217.2 million for base-load capacity with in- service dates of 2000 and 2002, or beyond. The forecast also includes $284.4 million for additions, improvements and extensions to transmission and distribution lines, substations, power factor and voltage regulating equipment, distribution transformers and street lighting distribution. With respect to the expenditures for pollution control facilities to comply with the Clean Air Act and with respect to the regulatory authority of the IURC as it relates to the integrated resource plan, see \"REGULATORY MATTERS\" and Item 7, \"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS\".\nFINANCING\nIPL's 1994-1998 long-term financing program anticipates sales of debt and equity securities totaling $447.7 million. The timing and amounts of such activities are contingent upon the timing and cost of any new capacity, as well as market conditions and other factors near the dates of the required financings. In addition to the sale of new securities, IPL has authority from the IURC to redeem and replace certain of its existing securities should favorable market conditions arise. Such action, if considered, may result in additional financing in the form of long-term debt. (With respect to restrictions on the issuance of certain securities, see Item 7, \"LIQUIDITY AND CAPITAL RESOURCES\".)\nEMPLOYEE RELATIONS\nAs of December 31, 1993, IPL had 2,276 employees of whom 1,155 were represented by the International Brotherhood of Electrical Workers, AFL-CIO (IBEW) and 411 were represented by the Electric Utility Workers Union (EUWU), an unaffiliated labor organization. In December 1993, the membership of the IBEW ratified a new labor agreement which remains in effect until December 16, 1996. The agreement provides for general pay adjustments of 4% in 1993, 3.5% in both 1994 and 1995, and changes in pension and health care coverage. In March, 1992, the membership of the EUWU ratified a new labor agreement which remains in effect until February 27, 1995. The agreement provides for general pay adjustments of 4.5% in both 1992 and 1993, and 3% in 1994, as well as changes in health care coverage.\nREGULATORY MATTERS\nIPL is subject to regulation by the IURC as to its services and facilities, valuation of property, the construction, purchase or lease of electric generating facilities, classification of accounts, rates of depreciation, rates and charges, issuance of securities (other than evidences of indebtedness payable less than twelve months after the date of issue), the acquisition and sale of public utility properties or securities, and certain other matters.\nIn addition, IPL is subject to the jurisdiction of the Federal Energy Regulatory Commission, in respect of short-term borrowings not regulated by the IURC, the transmission of electric energy in interstate commerce, the classification of its accounts and the acquisition and sale of utility property in certain circumstances as provided by the Federal Power Act.\nIPL is also subject to federal, state, and local environmental laws and regulations, particularly as to generating station discharges affecting air and water quality. The impact of such regulations on the capital and operating costs of IPL has been and will continue to be substantial. IPL's 1994-1998 construction program includes $335 million in environmental costs, including AFUDC, of which approximately $207 million pertains to the Clean Air Act. Accordingly, IPL has developed a plan to reduce sulfur dioxide and nitrogen oxide emissions from several generating units. This plan has been approved by the IURC. Annual costs for all air, solid waste, and water environmental compliance measures are $106 million and $112 million in 1994 and 1995, respectively.\nMID-AMERICA CAPITAL RESOURCES, INC. (Mid-America)\nGENERAL\nMid-America, the holding company for the unregulated activities of IPALCO, has as subsidiaries Indianapolis Campus Energy, Inc. (ICE), Store Heat And Produce Energy, Inc. (SHAPE) and Mid-America Energy Resources, Inc. (Energy Resources). Mid- America also holds an investment in the Evergreen Media Corporation (Evergreen) and manages other financial investments. Energy Resources has as subsidiaries Cleveland Thermal Energy Corporation (Cleveland Thermal) and Cleveland District Cooling Corporation (Cleveland Cooling).\nEnergy Resources was formed on November 17, 1989, to construct and operate a multi-phased district cooling system in near downtown Indianapolis. The completion of phase I construction and the commencement of operations occurred in mid- 1991. Phase II construction commenced in June 1992, and was completed in November 1992. In 1991, Energy Resources acquired Cleveland Thermal, which owns and operates the district steam heating system in Cleveland, Ohio. During 1992, Energy Resources formed Cleveland Cooling for the purpose of constructing and operating a district cooling system in downtown Cleveland. Operations commenced April 15, 1993. Both Cleveland Thermal and Cleveland Cooling jointly conduct business under the name Cleveland Energy Resources.\nAt December 31, 1993, Mid-America held 70 percent of the common stock of SHAPE. SHAPE conducts research and development of energy storage technology.\nICE was formed to construct, own, and operate energy systems in campus settings such as industrial complexes or college campuses. On August 3, 1993, ICE entered into a contractual agreement with Eli Lilly and Company (Lilly) to provide cooling capacity to the Lilly Technical Center. Construction of the chilled water facility, located near Morris Street and Kentucky Avenue in Indianapolis, will begin in mid-1994 with operations scheduled to begin in March 1996.\nMid-America holds a $7.5 million investment in Evergreen, representing approximately 5 percent equity ownership at December 31, 1993. Evergreen owns and operates eleven radio stations in major markets across the United States.\nDuring the next five years, 1994-1998, IPALCO may continue to become involved in unregulated businesses through the formation of one or more additional Mid-America subsidiaries. The cash assets of Mid-America are invested in a variety of short-term financial investments and marketable securities, pending investment in any such business. The sources of capital to finance these subsidiaries will be determined at the time they are established. Opportunities for future diversification investments into other businesses are continually being reviewed.\nCONSTRUCTION AND FINANCING\nDuring 1993, 1992 and 1991, the construction expenditures of Mid-America and its subsidiaries totaled $8.8 million, $29.8 million and $14.0 million respectively. These costs were financed with internal funds and a $9.5 million debt issue in 1991.\nConstruction requirements during the next five years are estimated to be $18.8 million, $.4 million, $17.9 million, $9.3 million and $29.4 million for ICE, SHAPE, Energy Resources, Cleveland Thermal and Cleveland Cooling, respectively. Such expenditures are highly contingent upon the development of markets for the products and services offered by the Mid-America family of companies. The cash requirements of ICE, SHAPE, Energy Resources, Cleveland Thermal and Cleveland Cooling are expected to be funded by Mid-America from existing liquid assets, future cash flows from operations and $46.3 million of project specific debt financing.\nEMPLOYEES\nAs of December 31, 1993, Mid-America had 8 employees, Energy Resources had 18 employees, Cleveland Thermal had 91 employees and SHAPE had 4 employees. There were no labor organizations.\nItem 2.","section_1A":"","section_1B":"","section_2":"Item 2. PROPERTIES\nIPL\nIPL owns and operates five primarily coal-fired generating plants, three of which are used for total electric generation and two of which are used for a combination of electric and steam generation. In relation to electric generation, there exists a total gross nameplate rating of 2,885 MW, a winter capability of 2,862 MW and a summer capability of 2,829 MW. All figures are net of station use. In relation to steam generation, there exists a gross capacity of 2,290 Mlbs. per hour.\nTotal Electric Stations:\nH. T. Pritchard plant (Pritchard), 25 miles southwest of Indianapolis (six units in service - one in 1949, 1950, 1951, two in 1953 and one in 1956) with 367 MW nameplate rating and net winter and summer capabilities of 344 MW and 341 MW, respectively.\nE. W. Stout plant (Stout) located in southwest part of Marion County (five units in service - one each in 1941, 1947, 1958, 1961 and 1973) with 771 MW nameplate rating and net winter and summer capabilities of 798 MW and 767 MW, respectively.\nPetersburg plant (Petersburg), located in Pike County, Indiana (four units in service - one each in 1967, 1969, 1977 and 1986) with 1,716 MW nameplate rating and net winter and summer capabilities of 1,690 MW and 1,690 MW, respectively.\nCombination Electric and Steam Stations:\nC.C. Perry Section K plant (Perry K), in the city of Indianapolis with 20 MW nameplate rating (net winter capability 20 MW, summer 19 MW) for electric and a gross capacity of 1,990 Mlbs. per hour for steam.\nC.C. Perry Section W plant (Perry W), in the city of Indianapolis with 11 MW nameplate rating (net winter capability 10 MW, summer 12 MW) for electric and a gross capacity of 300 Mlbs. per hour for steam.\nNet electrical generation during 1993, at the Petersburg, Stout and Pritchard stations accounted for about 74.9%, 19.6% and 5.5%, respectively, of IPL's total net generation. All steam generation by IPL for the steam system was produced by the Perry K and Perry W stations.\nIncluded in the above totals are three gas turbine units at the Stout station added in 1973 with a combined nameplate rating of 64 MW, one diesel unit each at Pritchard and Stout stations, and three diesel units at Petersburg station, all added in 1967. Each diesel unit has a nameplate rating of 3 MW.\nIPL's transmission system includes 454 circuit miles of 345,000 volt lines, 353 circuit miles of 138,000 volt lines and 275 miles of 34,500 volt lines. Distribution facilities include 4,686 pole miles and 19,785 wire miles of overhead lines. Underground distribution and service facilities include 436 miles of conduit and 4,900 wire miles of conductor. Underground street lighting facilities include 110 miles of conduit and 668 wire miles of conductor. Also included in the system are 74 bulk power substations and 85 distribution substations.\nSteam distribution properties include 22 miles of mains with 286 services. Other properties include coal and other minerals, underlying 798 acres in Sullivan County and coal underlying about 6,215 acres in Pike and Gibson Counties, Indiana. Additional land, approximately 4,722 acres in Morgan County, and approximately 884 acres in Switzerland County has been purchased for future plant sites.\nOTHER SUBSIDIARIES\nEnergy Resources owns and operates a district cooling facility in near downtown Indianapolis, which is designed to distribute chilled water to subscribers located downtown for their air conditioning needs. The plant is equipped with four 5,000 ton chillers powered by steam purchased from IPL.\nCleveland Thermal owns and operates two steam plants in Cleveland, Ohio, with a total of nine boilers having a gross capacity of 1,050 Mlbs. per hour. The distribution system includes 20 miles of mains with 230 services.\nCleveland Cooling owns and operates a district cooling facility in near downtown Cleveland, which is designed to distribute chilled water to subscribers located downtown for their air conditioning needs. The plant is equipped with two 5,000 ton chillers.\nItem 3.","section_3":"Item 3. LEGAL PROCEEDINGS\nOn March 16, 1993, Smith Cogeneration of Indiana, Inc., and its affiliates (Smith) filed a petition with the Indiana Utility Regulatory Commission (IURC) requesting that IPL be ordered to enter into a power sales agreement to purchase power from Smith's proposed 240 megawatt plant. On September 24, 1993, IPL filed a motion for summary adjudication of Smith's petition. This motion is currently pending, has been fully briefed and no further proceedings have been scheduled in this matter.\nIn June 1993, IPL received a Notice of Violation from the Indianapolis Air Pollution Control Section (IAPCS) regarding fugitive dust emissions at its Perry K Generating Station. IPL met with IAPCS to discuss four alleged violations over a span of 15 months. Each violation was subject to a fine of up to $2,500. IPL agreed to a settlement in the amount of $3,500 for all violations, but settlement has not yet been finalized.\nOn August 18, 1993, the IURC entered an order in Cause No. 39437, approving IPL's Environmental Compliance Plan to comply with the Clean Air Act Amendments of 1990. The estimated cost of IPL's Environmental Compliance Plan is approximately $250 million before including allowance for funds used during construction. A primary part of IPL's Plan, scrubbing IPL's Petersburg 1 and 2 coal-fired units by 1996 to enable IPL to continue to burn high sulfur coal, was opposed by the Office of Utility Consumer Counselor (OUCC), the Citizens Action Coalition, and the Industrial Intervenors Group (IIG). OUCC and IIG are in the process of appealing the Commission's order to the Indiana Court of Appeals.\nIn October 1993, IPL received a Findings of Violation from EPA, Region V, regarding IPL's compliance with the thermal limitations of the NPDES (water discharge) permit under which IPL operates its Petersburg Generating Station. On February 20, 1992, IPL filed an application for renewal of that permit but the application has not been acted upon by the Indiana Department of Environmental Management. Although unclear to IPL, EPA's action seems to have resulted from its misinterpretation of data IPL supplied to EPA in response to the latter's Clean Water Act information request that preceded issuance of the Findings of Violation. IPL believes it continues to be in compliance with the requirements of the permit and has made continuing efforts to meet with EPA to discuss the matter. If IPL is found to be in violation of its permit, it could be subject to maximum fines of $25,000 per day per violation.\nItem 4.","section_4":"Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS\nNone.\nEXECUTIVE OFFICERS OF THE REGISTRANT AT FEBRUARY 22, 1994.\nName, age (at December 31, 1993), and positions and offices held for the past five years:\nFrom To John R. Hodowal (48) Chairman of the Board and President of IPALCO May, 1989 Vice President and Treasurer of IPALCO September, 1983 May, 1989 Chairman of the Board of IPL February, 1990 Chief Executive Officer of IPL May, 1989 Executive Vice President of IPL April, 1987 May, 1989\nRamon L. Humke (61) Vice Chairman of IPALCO May, 1991 President and Chief Operating Officer of IPL February, 1990 President and Chief Executive Officer of Ameritech Services and Senior Vice President of Ameritech Bell Group September, 1989 February, 1990 President and Chief Executive Officer of Indiana Bell Telephone Company October, 1983 September, 1989\nJohn R. Brehm (40) Vice President and Treasurer of IPALCO May, 1989 Assistant Secretary and Assistant Treasurer of IPALCO December, 1983 May, 1989 Senior Vice President - Finance and Information Services of IPL May, 1991 Senior Vice President - Financial Services of IPL May, 1989 May, 1991 Treasurer of IPL August, 1987 May, 1989\nMaurice O. Edmonds (62) Vice President - Corporate Affairs of IPALCO December, 1992 Vice President - Human Resources of IPL May, 1989 December, 1992 Vice President - General Services of IPL July, 1988 May, 1989\nFrom To\nN. Stuart Grauel (49) Vice President - Public Affairs of IPALCO May, 1991 Vice President - Public Affairs of IPL May, 1989 May, 1991 Public Affairs Manager of IPL October, 1981 May, 1989\nJoseph A. Gustin (46) Vice President of SHAPE May, 1993 President of ICE April, 1993 President of Energy Resources May, 1991 Vice President of Mid-America May, 1991 Vice President of Energy Resources January, 1990 May, 1991 Vice President - Steam Operations of IPL May, 1989 May, 1991 Manager - Power Production of IPL June, 1981 May, 1989\nRobert W. Rawlings (52) Senior Vice President - Electric Production of IPL May, 1991 Vice President - Electric Production of IPL May, 1989 May, 1991 Vice President - Engineering and Construction of IPL April, 1986 May, 1989\nGerald D. Waltz (54) Senior Vice President - Business Development of IPL May, 1991 Senior Vice President - Engineering and Operations of IPL April, 1986 May, 1991\nMax Califar (40) Vice President - Human Resources of IPL December, 1992 Assistant Treasurer of IPALCO May, 1989 December, 1992 Treasurer of IPL May, 1989 December, 1992 Assistant Controller of IPL July, 1987 May, 1989\nStephen J. Plunkett (45) Controller of IPALCO and IPL May, 1991 Assistant Controller of IPL May, 1989 May, 1991\nPART II\nItem 5.","section_5":"Item 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS\nAt December 31, 1993, Enterprises had 24,299 holders of common stock (not including approximately 1,900 shareholders who hold shares only through Enterprises' Automatic Dividend Reinvestment and Stock Purchase Plan). Enterprises' common stock is principally traded on the New York Stock Exchange and the Chicago Stock Exchange. The high and low sales prices for Enterprises' common stock during 1993 and 1992 as reported on the Composite Tape in The Wall Street Journal, were as follows:\n1993 1992 High Low High Low Sale Price Sale Price Sale Price Sale Price ----------------------- ---------------------- First Quarter $40 $34 3\/8 $33 5\/8 $31 1\/2 Second Quarter 39 1\/4 35 1\/2 36 1\/8 32 1\/4 Third Quarter 38 3\/4 35 3\/4 36 7\/8 34 1\/8 Fourth Quarter 38 33 1\/8 36 33 3\/8\nThe high and low sales prices for Enterprises' common stock as reported on the Composite Tape in The Wall Street Journal for the period January 1, 1994, through February 22, 1994, were: High - $35 3\/8, Low - $31 3\/4.\nQuarterly dividends paid on the common stock during 1993 and 1992 were as follows:\n1993 1992\nFirst Quarter $ .49 $ .47 Second Quarter .51 .49 Third Quarter .51 .49 Fourth Quarter .51 .49\nThe Enterprises' Board of Directors at its meeting on February 22, 1994, declared a regular quarterly dividend on common stock of $.53 per share, payable April 15, 1994, to shareholders of record on March 25, 1994.\nDividend Restrictions\nThe following restrictions pertain to IPL but to the extent that the earnings of Enterprises depend upon IPL dividends it may have an effect on Enterprises.\nSo long as any of the several series of bonds of IPL issued under the Mortgage and Deed of Trust, dated as of May 1, 1940, as supplemented and modified, executed by IPL to American National Bank and Trust Company of Chicago, as Trustee, remain outstanding, IPL is restricted in the declaration and payment of dividends, or other distribution on shares of its capital stock of any class, or in the purchase or redemption of such shares, to the aggregate of its net income, as defined in Section 47 of such Mortgage, after December 31, 1939, available for dividends. The amount which these Mortgage provisions would have permitted IPL to declare and pay as dividends at December 31, 1993, exceeded retained earnings at that date. Such restrictions do not apply to the declaration or payment of dividends upon any shares of capital stock of any class to an amount in the aggregate not in excess of $1,107,155, or to the application to purchase or redemption of any shares of capital stock of any class of amounts not to exceed in the aggregate the net proceeds received by IPL from the sale of any shares of its capital stock of any class subsequent to December 31, 1939.\nItem 7.","section_6":"","section_7":"Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS\nIPALCO Enterprises, Inc. (IPALCO) is a holding company incorporated under the laws of the State of Indiana. Indianapolis Power & Light Company (IPL) and Mid-America Capital Resources, Inc. (Mid-America) are subsidiaries of IPALCO. Mid-America was formed as a holding company for the unregulated activities of IPALCO.\nLIQUIDITY AND CAPITAL RESOURCES\nIPL\nOn a national basis, competition for wholesale and retail sales within the electric utility industry has been increasing. In Indiana, competition has been primarily focused on the wholesale power markets. Existing Indiana law provides for public utilities to have an exclusive permit at the retail level. The impact of continuing competitive pressures on IPL's wholesale and retail electric and steam markets cannot be determined at this time.\nRate Matters\nEnvironmental Compliance Plan\nIPL is subject to the new air quality provisions specified in the federal Clean Air Act Amendments of 1990 and related regulations (the Act). During 1993, IPL obtained an order from the Indiana Utility Regulatory Commission (IURC) approving its environmental compliance plan, together with the costs and expenses associated therewith, which provides for the installation of sulfur dioxide and nitrogen oxide emissions abatement equipment and the installation of continuous emission monitoring systems to meet the requirements of both Phase I and Phase II of the Act - See \"Capital Requirements\". Certain intervenors in the hearing before the IURC have requested a transcript preparatory to an appeal of that order which appeal has not yet been perfected As required by the Act, IPL filed its proposed compliance plan with the Environmental Protection Agency in February 1993.\nAs provided in the Act, effective January 1, 1995, IPL is scheduled to receive annual emission \"allowances\" for certain of its generating units. Each allowance would permit the emission of one ton of sulfur dioxide. IPL presently expects that annual sulfur dioxide emissions will not exceed annual allowances provided to IPL under the Act. Allowances not required in the operation of IPL facilities may be reserved for future periods or sold. The value of such unused allowances that may be available to IPL for use in future periods or for sale is subject to a developing market and is unknown at this time. The IURC Order provides for the deferral of net gains and losses resulting from any sale of emission allowances for future amortization to cost of service on a basis to be determined in the next general retail electric rate proceeding.\nDemand Side Management Program\nOn September 8, 1993, IPL obtained an order from the IURC approving a Stipulation of Settlement Agreement between IPL, the Office of Utility Consumer Counsel, Citizens Action Coalition of Indiana, Inc., an industrial group, the Trustees of Indiana University and the Indiana Alliance for Fair Competition relating to IPL's Demand Side Management Program (DSM). The order provides for the deferral and subsequent recovery in rates of certain approved DSM costs. The order also provides for the recording of a return on deferred costs until recognized in rates.\nPostretirement Benefits\nOn December 30, 1992, the IURC issued an order authorizing Indiana utilities to account for postretirement benefits on the basis required by the Statement of Financial Accounting Standard No. 106 -- Accounting for Postretirement Benefits other than Pensions (SFAS 106). Generally, SFAS 106 requires the use of an accrual basis accounting method for determining annual costs of postretirement benefits. Prior to 1993, IPL used a pay-as-you-go method to account for such costs. IPL was required to adopt SFAS 106 effective January 1, 1993. Additionally, the order authorized the deferral of SFAS 106 costs in excess of such costs determined on a pay-as-you-go and the recording of a resulting regulatory asset. The order further provides for the recovery in rates of such costs in a subsequent general rate proceeding on an individual company basis in an amount to be determined in each such proceeding. IPL is deferring as a regulatory asset the non-construction related SFAS 106 costs associated with its electric business. IPL is expensing its non- construction related SFAS 106 costs associated with its steam business.\nRegulatory Asset Deferrals\nBalance sheet deferrals of regulatory assets for DSM, postretirement benefits, income taxes and other such costs amounted to $33.1 million in 1993. Future deferrals for such items are expected to increase due to SFAS 106, and DSM costs and related carrying charges until IPL's next retail electric rate order.\nFuture Rate Relief\nIPL presently anticipates that it will petition the IURC to increase its electric rates and charges during 1994. A final IURC order on such a request may not occur until 1995. IPL's last authorized increase in electric rates and charges occurred in August, 1986.\nSteam Rate Order\nThe IURC authorized IPL to increase its steam system rates and charges over a six-year period beginning January 13, 1993. Accordingly, IPL implemented new steam tariffs effective on that date which were designed to produce estimated additional annual steam operating revenues as follows:\nCapital Requirements\nThe capital requirements of IPL are primarily driven by the need for facilities to ensure customer service reliability and environmental compliance and by the impact of maturing long-term debt.\nForecasted Demand & Energy\nFrom 1994 to 1998, annual peak demand is forecasted to experience a compound 1.5% increase, while retail kilowatthour (KWH) sales are anticipated to increase at a 2.0% compound growth rate. Both compound growth rates are computed assuming normal weather conditions and include the effects of DSM. IPL expects a reduction of about 120 megawatts (MW) of annual peak demand by the year 2000 as a result of DSM programs.\nIntegrated Resource Plan\nSales growth projections indicate a need for about 800 MW of additional capacity resources by the year 2000. These resource requirements can be met in a variety of ways including, but not limited to, a combination of the use of DSM, power purchases, peaking turbines and base-load generation. IPL continues to review its integrated resource plan to consider the appropriateness of all resource options to meet capacity requirements over the decade of the 1990's and beyond.\nIPL has a well-defined, near-term integrated resource plan and is considering all reasonable options to meet its long-term capacity requirements. The following discussion makes certain assumptions regarding IPL's plans to meet these requirements.\nIn order to maintain adequate summer capacity reserve margins in the near-term, IPL entered into a five-year firm power purchase agreement with Indiana Michigan Power Company (IMP), which expires March 31, 1997. Under this agreement, IPL is receiving 200 MW of capacity. The agreement provides for monthly capacity payments by IPL of $1.2 million through March 31, 1997. IPL can terminate the agreement, should the ability to recover future demand charges through rates be disallowed. IPL and IMP will also exchange 50 MW of seasonal power over the 1995-1998 period.\nIPL plans to add two 80 MW combustion turbines with in-service dates in 1994 and 1995. Under Indiana law, IPL must obtain from the IURC a certificate of \"public convenience and necessity\" (Certificate) prior to purchasing or commencing construction of any new electric generation facility. IPL received Certificates from the IURC for construction of these combustion turbines during 1992.\nIPL is considering a variety of options to meet its long-term capacity requirements through the year 2000 including DSM, utility and nonutility power purchases, additional peaking turbines and base- load generating units. Presently, IPL plans to add two additional 80 MW combustion turbines with in-service dates in 1998 and 1999. IPL also has options to extend the 200 MW firm power purchase agreement with IMP through December 31, 1997 and subsequently through November 30, 1999, with capacity payments of $1.2 million per month and $1.55 million per month, respectively. Under a recent agreement, IPL has an option to purchase up to 250 MW from PSI Energy over the 1996 to 2000 period. IPL is also evaluating the installation, on a joint ownership basis, of two 426 MW base-load generating units to be placed in service in 2000 and 2002, respectively, or beyond. Of the total 852 MW, IPL proposes to own 400 MW, with other partners owning the remaining 452 MW. There is no assurance that IPL will be able to ultimately reach a joint ownership agreement with any other party. IPL has not applied for Certificates for the additional combustion turbines or the base load unit.\nEnvironmental Compliance Construction Requests\nIPL estimates that the capital cost of complying with the Act through 1997 will be approximately $240 million, including Allowance for Funds Used During Construction (AFUDC), of which $33.0 million has been expended prior to 1994. IPL further estimates that, subsequent to December 31, 1997, no significant capital expenditures will be required to bring generating units into compliance with the Act until the year 2010 or beyond.\nCost of Construction Program\nThe cost of IPL's construction program during 1993, 1992 and 1991 was $149.3 million, $115.3 million and $96.3 million, including AFUDC of $3.6 million, $3.2 million and $1.6 million respectively.\nIPL estimates the cost of the construction program for the five years, 1994-1998, to be approximately $1.0 billion including AFUDC of $73.1 million. This program is subject to continuing review and is revised from time to time in light of changes in the actual customer demand for electric energy, IPL's financial condition and construction cost escalations. In addition to costs of environmental compliance, the five-year construction program includes $113.7 million for the four 80 MW combustion turbines and $217.2 million for the base-load capacity, mentioned above. Additional expenditures will be incurred beyond 1998 for the capacity with in- service dates subsequent to 1998. Transmission and substation facilities relating to the planned base-load capacity amount to $29.0 million in the five-year construction program. Expenditures for the new capacity are contingent upon the review of other long-term and near-term options previously discussed and subsequent receipt of the necessary Certificates.\nRetirement of Long-term Debt and Equity Securities\nDuring 1993, 1992 and 1991, IPL retired long-term debt, including sinking fund payments, of $96.9 million, $75.0 million and $96.4 million, respectively, which required replacement with other debt securities at a lower cost.\nIPL will retire $7.5 million, $15.0 million, $11.25 million and $18.75 million of maturing long-term debt during 1994, 1996, 1997 and 1998, respectively, which may require replacement in whole or in part with other debt or equity securities. In addition, other existing higher rate debt may be refinanced depending upon market conditions.\nFinancing\nFinancing Requirements\nDuring the three-year period ended December 31, 1993, IPL's permanent financing totaled $275.3 million in long-term debt. The net proceeds of these securities were used, along with internal funds, to retire existing long-term debt. All of IPL's construction expenditures during this three-year period were funded with internally generated cash and short-term debt.\nIPL's permanent financing requirements for the five-year period, 1994-1998, are forecasted to include additional sales of debt and equity securities totaling $447.7 million. This amount is highly contingent on the timing and cost of any new capacity. The timing, number and dollar amounts of such financings will depend on market conditions and other factors, including required regulatory approvals. In addition to the sale of new securities, IPL has authority from the IURC to redeem and replace certain of its existing securities, should favorable market conditions dictate.\nInternally generated funds supplemented by temporary short-term borrowings are forecasted to provide the remaining funds required for the five-year construction program. Uncertainties which could affect this forecast include the impact of inflation on operating expenses, the actual degree of growth in KWH sales, the level of interchange sales with other utilities and the receipt of Certificates required for new electric generation facilities.\nMortgage Restrictions\nIPL is limited in its ability to issue certain securities by restrictions under its Mortgage and Deed of Trust (Mortgage) and its Amended Articles of Incorporation (Articles). The restriction under the Articles requires that the net income of IPL, as specified therein, shall be at least one and one-half times the total interest on the funded debt and the pro forma dividend requirements on the outstanding preferred stock and on any preferred stock proposed to be issued, before any additional preferred stock can be issued. The Mortgage restriction requires that net earnings as calculated thereunder be two and one-half times the annual interest requirements before additional bonds can be authenticated on the basis of property additions. Based on IPL's net earnings for the twelve months ended December 31, 1993, the ratios under the Articles and the Mortgage are 3.28 and 7.33, respectively. IPL believes these requirements will not restrict any anticipated future financings.\nMID-AMERICA\nMid-America, the holding company for the unregulated activities of IPALCO, has as subsidiaries Indianapolis Campus Energy, Inc. (ICE), Store Heat And Produce Energy, Inc. (SHAPE) which is 70% owned and Mid-America Energy Resources, Inc. (Energy Resources). Energy Resources has as subsidiaries Cleveland Thermal Energy Corporation (Cleveland Thermal) and Cleveland District Cooling Corporation (Cleveland Cooling). Energy Resources has operated a district cooling system in downtown Indianapolis, Indiana since 1991 and Cleveland Cooling began operations of its district cooling system in downtown Cleveland, Ohio during 1993. During 1993, ICE entered into an agreement to provide chilled water to the Lilly Technical Center in near downtown Indianapolis. Operations of this campus facility are expected to begin in 1996. SHAPE became a majority owned subsidiary of Mid-America during 1993.\nConstruction Program\nDuring 1993, 1992 and 1991, the construction expenditures of Mid- America and its subsidiaries totaled $8.8 million, $29.8 million and $14.0 million, respectively. These costs were financed with internal funds and a $9.5 million debt issue in 1991.\nConstruction requirements during the next five years are estimated to be $18.8 million, $.4 million, $17.9 million, $9.3 million and $29.4 million, for ICE, SHAPE, Energy Resources, Cleveland Thermal and Cleveland Cooling, respectively. Such expenditures are highly contingent upon the development of markets for the products and services offered by the Mid-America family of companies. The cash requirements of Mid-America and its subsidiaries are expected to be funded by Mid-America from existing liquid assets, future cash flows from operations and $46.3 million of project specific debt financing.\nProjected Operations\nSHAPE is projected to provide operating profits in 1995 and ICE is projected to provide operating profits concurrent with commencement of operations in 1996. The existing projects of Energy Resources, Cleveland Thermal and Cleveland Cooling are currently projected to begin contributing to operating profits in 1996. This projection could be materially affected by the rate at which customers are added and other factors. During the next five years, 1994-1998, IPALCO may continue to become involved in unregulated businesses through the formation of one or more additional Mid- America subsidiaries. The sources of capital to finance these businesses will be determined at the time they are established. The cash assets of Mid-America are invested in a variety of short-term financial instruments and marketable securities, pending investment in any such unregulated business.\nIPALCO ENTERPRISES CONSOLIDATED\nAdditional information regarding IPALCO's historical cash flows from operations, investing and financing for the past three years including the capital expenditures of IPL are disclosed in the Statements of Consolidated Cash Flows (See page II-15) and in the Notes to Consolidated Financial Statements (pages II-18 - II-29).\nRESULTS OF OPERATIONS\n1993 vs. 1992\nEarnings per share during 1993 were $2.00 or $.35 below the $2.35 attained in 1992. The following discussion highlights the factors contributing to this result.\nOperations\nUtility operating income increased $8.1 million in 1993 compared to 1992. Contributing to this increase was an increase in electric operating revenues of $30.1 million, due to increases in retail sales of $25.9 million, wholesale sales of $2.8 million and miscellaneous electric revenue of $1.4 million. Retail electric sales were higher due to increased retail KWH sales of $31.1 million and decreased fuel cost recoveries of $5.2 million. The increase in retail KWH sales this year resulted primarily from the return to normal weather conditions in 1993 as compared to the abnormally mild summer weather conditions in 1992. During 1992, cooling degree days were 26.5 percent below normal. Wholesale sales were higher as a result of increased energy requirements of other utilities, who were also affected by the mild summer during 1992. The continuing health of the Indianapolis economy also contributed to the growth in KWH sales, particularly in the large industrial class.\nFuel costs increased $3.3 million due to increases in fuel consumption of $9.6 million, partially offset by decreased unit costs of coal and oil of $.5 million and deferred fuel costs of $5.8 million. Power purchased increased $11.6 million due to increased capacity payments of $7.2 million to IMP in accordance with a five-year power purchase agreement, and by increased purchases of energy as a result of the near normal weather conditions in 1993 as compared to 1992.\nMaintenance expenses increased $4.9 million. This increase reflects higher unit overhaul and outage expenses in 1993, partially offset by decreased distribution maintenance expenses as a result of a severe storm in 1992 that cost $3.9 million. Amortization of the deferred return--rate phase-in plan, decreased due to the completion in August 1992 of the five-year amortization period.\nTaxes other than income taxes decreased $1.7 million as a result of lower property assessments. Income taxes - net, increased $4.3 million as a result of the increase in pretax utility operating income and a one percentage point increase in the federal income tax rate.\nOther Income And Deductions\nDuring 1993, IPALCO incurred a one-time charge against earnings of $33.9 million before taxes ($21.1 million net of applicable income taxes), for legal, financial and administrative costs pertaining to IPALCO's effort to acquire PSI Resources, Inc. The charge resulted in a decrease in earnings per share of 56 cents.\nOther - net, which includes operations other than IPL, decreased $2.4 million due to lower pretax income from nonutility investments and operations of $4.0 million. The decreased investment income reflects lower interest rates and decreased cash balances available for investment as a result of the capital requirements of Mid- America's subsidiaries, primarily for construction of district cooling facilities. Operations other than IPL and excluding the one- time charge against earnings, in total, experienced a net loss of $3.1 million, or $.08 per share. This compares to a net loss of $1.5 million during 1992, or $.04 per share.\nInterest Charges\nInterest on long-term debt decreased $1.3 million as a result of refinancing six series of IPL's First Mortgage Bonds as follows: the 10 1\/4% Series, First Mortgage Bonds in October 1993 (replaced with the 5.50% Series, First Mortgage Bonds); the 5.80% Series, First Mortgage Bonds in October, 1993 (replaced with the 5.40% Series, First Mortgage Bonds); the 6.90% and the 6.60% Series, First Mortgage Bonds (replaced with the 6.10% Series, First Mortgage Bonds); and the 9.30% and 9 1\/2% Series, First Mortgage Bonds in September 1992 (replaced with the 7 3\/8% Series, First Mortgage Bonds). The allowance for borrowed funds used during construction increased due primarily to an increased construction base. Other interest charges increased $1.1 million due to higher notes payable balances carried during 1993.\n1992 vs. 1991\nEarnings per share during 1992 were $2.35 or $.37 below the $2.72 attained in 1991. The following discussion highlights the factors contributing to this result.\nOperations\nUtility operating income decreased $15.6 million in 1992 compared to 1991. Contributing to this decrease were lower electric operating revenues of $16.7 million, due to lower retail electric sales of $13.9 million, lower wholesale sales of $1.8 million and lower miscellaneous electric revenue of $1.0 million. Retail electric sales were lower due to decreased retail KWH sales of $10.6 million and decreased fuel cost recoveries of $3.3 million. The decrease in retail KWH sales in 1992 resulted primarily from unusual weather conditions in both 1992 and 1991. Abnormally mild summer weather conditions in 1992 resulted in lower KWH sales, while the unusually hot weather during the summer of 1991 significantly increased KWH sales in that year. During 1992, cooling degree days were 48 percent lower than 1991 and 26.5 percent below normal. Wholesale sales were lower as a result of decreased energy requirements of other utilities, who were also affected by the mild summer.\nFuel costs decreased $7.4 million due to decreases in fuel consumption of $4.3 million, decreased unit costs of coal and oil of $2.0 million and deferred fuel costs of $1.1 million. Other operating expenses increased $2.9 million due primarily to an increase in administrative and general expenses of $1.4 million (primarily as a result of increased salaries and group insurance costs), and a $2.0 million expense related to the FAC Agreement. Power purchased increased $3.9 million due to capacity payments of $5.4 million to IMP in accordance with a five-year power purchase agreement, partially offset by decreased purchases of energy as a result of the mild summer weather.\nMaintenance expenses increased $2.0 million, reflecting transmission and distribution system repair expenses as a result of a severe storm in June that cost a total of $3.9 million. These expenses were partially offset by decreased unit overhaul expenses in 1992, compared to 1991. Amortization of the deferred return--rate phase-in plan, decreased due to the completion in August 1992, of the five-year amortization period.\nTaxes other than income taxes increased $2.7 million as a result of increased property assessments and higher property tax rates. Income taxes-net, decreased $3.0 million primarily due to the decrease in pretax utility operating income.\nOther Income And Deductions\nAllowance for equity funds used during construction increased $1.3 million due to an increased construction base in 1992.\nOther - net, which includes operations other than IPL, decreased $6.8 million due to lower pretax income from nonutility investments and operations of $2.9 million, decreased interest and dividend income earned by IPL of $2.4 million, and as a result of a $1.5 million contribution to customer energy assistance programs expensed in 1992. The decreased investment income reflects lower interest rates and decreased cash balances available for investment as a result of the capital requirements of Mid-America's subsidiaries, primarily for construction of district cooling facilities. Operations other than IPL, in total, experienced a net loss of $1.5 million, or $.04 per share. This compares to net income of $1.3 million during 1991, or $.03 per share.\nIncome taxes - net, decreased $1.1 million as a result of decreased pretax operating income of the unregulated subsidiaries, decreased IPL interest and dividend income and the increased contribution expense previously mentioned.\nInterest Charges\nInterest and other charges - net, decreased $6.4 million primarily due to decreased interest on long-term debt of $3.8 million. This decrease is the result of refinancing four series of IPL's First Mortgage Bonds as follows: the 12% Series, First Mortgage Bonds in August 1991 (replaced with the long-term note at a floating interest rate that approximates tax-exempt Commercial Paper Rates); the 9 7\/8% Series, First Mortgage Bonds in November 1991 (replaced with the 8% Series, First Mortgage Bonds); and the 9.30% and 9 1\/2% Series, First Mortgage Bonds in September 1992 (replaced with the 7 3\/8% Series, First Mortgage Bonds). The allowance for borrowed funds used during construction increased due primarily to an increased construction base. Other interest charges decreased $1.4 million due to lower interest rates during 1992.\nFactors having a bearing on 1994 earnings compared to 1993 will include the one-time 1993 charge against earning for the costs of the withdrawn tender offer, the impact of economic conditions, weather conditions, an increased level of construction expenditures, an increase in monthly capacity payments and the implementation of new steam system tariff rates.\nAuthorized electric operating income for 1994 as determined by the IURC is approximately $144.0 million. (IPL earned $141.2 million during 1993 and $133.4 million during 1992.)\nAffecting 1994 earnings will be the cost of the IMP purchases mentioned previously. Annual capacity payments will increase by $1.8 million.\nThe overall effect these factors will have on 1994 earnings cannot be accurately determined at this time.\nItem 8.","section_7A":"","section_8":"Item 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA\nINDEPENDENT AUDITORS' REPORT\nIPALCO Enterprises, Inc. and Subsidiaries:\nWe have audited the accompanying consolidated balance sheets and statements of preferred stock and long-term debt of IPALCO Enterprises, Inc. and subsidiaries as of December 31, 1993 and 1992, and the related statements of consolidated income, common shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1993. Our audits also included the consolidated financial statement schedules listed in the Index at Item 14(a). These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedules based on our audits.\nWe conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.\nIn our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of IPALCO Enterprises, Inc. and subsidiaries as of December 31, 1993 and 1992, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1993 in conformity with generally accepted accounting principles. Also, in our opinion, such consolidated financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein.\nAs discussed in Notes 1 and 9 to the consolidated financial statements, the Company changed its method of accounting for income taxes and postretirement benefits other than pensions effective January 1, 1993.\nDeloitte & Touche\nIndianapolis, Indiana January 21, 1994\nIPALCO ENTERPRISES, INC. and SUBSIDIARIES\nNotes to Consolidated Financial Statements For the Years Ended December 31, 1993, 1992 and 1991\n1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES\nPrinciples of Consolidation--IPALCO Enterprises, Inc. (IPALCO) owns all of the outstanding common stock of its subsidiaries (collectively referred to as Enterprises). The consolidated financial statements include the accounts of IPALCO, its utility subsidiary, Indianapolis Power & Light Company (IPL) and its unregulated subsidiary, Mid-America Capital Resources, Inc. (Mid-America). Mid-America conducts its businesses through various wholly owned subsidiaries, including Mid-America Energy Resources, Inc. (Energy Resources), and one 70 percent owned subsidiary.\nThe operating components of all subsidiaries other than IPL are included under the captions OTHER INCOME AND (DEDUCTIONS), \"Other-net\" and \"Income Taxes-net\" in the Statements of Consolidated Income. Revenues from these operations were not significant. All significant intercompany items have been eliminated in consolidation.\nSystem of Accounts--The accounts of IPL are maintained in accordance with the system of accounts prescribed by the Indiana Utility Regulatory Commission (IURC), which system substantially conforms to that prescribed by the Federal Energy Regulatory Commission.\nRevenues--Utility operating revenues are recorded as billed to customers on a monthly cycle billing basis. Revenue is not accrued for energy delivered but unbilled at the end of the year. A fuel adjustment charge provision, which is established after public hearing, is applicable to substantially all the rate schedules of IPL, and permits the billing or crediting of fuel costs above or below the levels included in such rate schedules.\nUnder current IURC practice, future fuel adjustment revenues may be temporarily reduced should actual operating expenses be less than or income levels be above amounts authorized by the IURC.\nAuthorized Annual Operating Income--In an IURC order dated May 6, 1992, IPL's maximum authorized annual electric operating income, for purposes of quarterly earnings tests, was established at approximately $147 million through July 31, 1992, declining ratably to approximately $144 million at July 31, 1993. This level will be maintained until IPL's next general electric rate order. Additionally, through the date of IPL's next general electric rate order, IPL is required to file upward and downward adjustments in fuel cost credits and charges on a quarterly basis.\nAs provided in an order dated December 21, 1992, IPL's authorized annual steam net operating income is $6.2 million, plus any cumulative annual underearnings occurring during the five-year period subsequent to the implementation of the new rate tariffs.\nDeferred Fuel Expense--Fuel costs recoverable in subsequent periods under the fuel adjustment charge provision are deferred.\nAllowance For Funds Used During Construction (AFUDC)--In accordance with the prescribed uniform system of accounts, IPL capitalizes an allowance for the net cost of funds (interest on borrowed and a reasonable rate on equity funds) used for construction purposes during the period of construction with a corresponding credit to income. IPL capitalized amounts using pre-tax composite rates of 8.0%, 9.5% and 9.6% during 1993, 1992 and 1991, respectively.\nUtility Plant and Depreciation--Utility plant is stated at original cost as defined for regulatory purposes. The cost of additions to utility plant and replacements of retirement units of property, as distinct from renewals of minor items which are charged to maintenance, are charged to plant accounts. Units of property replaced or abandoned in the ordinary course of business are retired from the plant accounts at cost; such amounts plus removal costs, less salvage, are charged to accumulated depreciation. AFUDC is capitalized and depreciated over the life of the related facility. Depreciation was computed by the straight-line method based on the functional rates and averaged 3.4% during each of the years 1993, 1992 and 1991.\nStatements of Cash Flows - Cash Equivalents--Enterprises considers all highly liquid investments purchased with original maturities of 90 days or less to be cash equivalents.\nMarketable Securities--Securities with original maturities of over 90 days are classified as marketable securities and are carried at the lower of aggregate cost or market, determined at the balance sheet date.\nFinancial Investments--Financial investments represent investments in limited partnerships and managed asset funds which are actively managed stock and bond funds which value their investments at market. Enterprises accounts for these investments on the equity method.\nUnamortized Deferred Return - Rate Phase-in Plan--IPL deferred the pre- tax debt and equity costs relating to its investment in plant which did not earn a cash return during the first year of a two-year, two-step retail electric rate phase-in plan authorized August 6, 1986. This deferred return and the related income taxes were amortized to cost of service over a five-year period commencing with the August 8, 1987 implementation of the second step of the phase-in plan. The deferred return was fully amortized in August, 1992.\nUnamortized Petersburg Unit 4 Carrying Charges--IPL has deferred certain post in-service date carrying charges of its investment in Petersburg Unit 4 (Unit 4). These carrying charges include both AFUDC on and depreciation of Unit 4 costs from the April 28, 1986 in-service date through the August 6, 1986 IURC rate order date in which IPL's investment in Unit 4 was included in rate base. Subsequent to April 28, 1986, IPL has capitalized interest on these deferred carrying charges. In addition, IPL has capitalized $7.0 million of additional allowance for earnings on shareholders' investment for rate-making purposes but not for financial reporting purposes. As provided in the rate order, the total amount of deferred carrying charges will be included in IPL's next general electric rate case.\nUnamortized Redemption Premiums and Expenses on Debt and Preferred Stock--In accordance with regulatory treatment, IPL defers non-sinking fund debt redemption premiums and expenses, and amortizes such costs over the life of the original debt or, in the case of preferred stock redemption premiums, over twenty years.\nOther Regulatory Assets--At December 31, 1993 and 1992, IPL has deferred certain costs and expenses which are recoverable in future rates as follows:\nIncome Taxes--Deferred taxes are provided for all significant timing differences between book and taxable income. Such differences include the use of accelerated depreciation methods for tax purposes, the use of different book and tax depreciable lives, rates and in-service dates, and the accelerated tax amortization of pollution control facilities.\nInvestment tax credits which reduced Federal income taxes in the years they arose have been deferred and are being amortized to income over the useful lives of the properties in accordance with regulatory treatment.\nEffective January 1, 1993, Enterprises adopted Statement of Financial Accounting Standards (SFAS) No. 109, \"Accounting for Income Taxes,\" on a prospective basis. This statement requires the current recognition of income tax expense for (a) the amount of income taxes payable or refundable for the current year, and (b) for deferred tax liabilities and assets for the future tax consequences of events that have been recognized in Enterprises' financial statements or income tax returns. The effects of income taxes are measured based on enacted laws and rates. Substantially all of the adjustments required by SFAS 109 were recorded to deferred tax balance sheet accounts, with the offsetting adjustments to regulatory assets and liabilities. The adoption of this standard did not have a material impact on Enterprises' cash flows or results of operations due to the effect of rate regulation.\nEmployee Benefit Plans--Substantially all employees of IPALCO and IPL and certain management employees of Mid-America are covered by a non- contributory, defined benefit pension plan which is funded through two trusts. Additionally, a select group of management employees of IPALCO, IPL and Mid-America are covered under a funded supplemental retirement plan. Collectively, these two plans are referred to as Plans. Benefits are based on each individual employee's years of service and compensation. IPL's funding policy is to contribute annually not less than the minimum required by applicable law, nor more than the maximum amount which can be deducted for Federal income tax purposes.\nIPL also sponsors the Employees' Thrift Plan of Indianapolis Power & Light Company (Thrift Plan), a defined contribution plan covering substantially all employees of IPALCO and IPL and certain management employees of Mid-America. Employees elect to make contributions to the plan based on a percentage of their annual base compensation. IPL matches each employee's contributions in amounts up to, but not exceeding four percent of the employee's annual base compensation.\nSubstantially all non-management employees of Energy Resources and its subsidiaries are covered by a contributory 401(k) plan.\nReclassification--Certain amounts from prior years' financial statements have been reclassified to conform to the current year presentation.\n2. UTILITY PLANT IN SERVICE\nThe original cost of utility plant in service at December 31, segregated by functional classifications, follows:\nSubstantially all of IPL's property is subject to the lien of the indentures securing IPL's First Mortgage Bonds.\n3. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS\nThe following disclosure of the estimated fair value of financial instruments is made in accordance with the requirements of SFAS No. 107, \"Disclosures about Fair Value of Financial Instruments\". The estimated fair value amounts have been determined by Enterprises, using available market information and appropriate valuation methodologies. However, considerable judgment is necessarily required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that Enterprises could realize in a current market exchange. The use of different market assumptions and\/or estimation methodologies may have an effect on the estimated fair value amounts.\nCash, cash equivalents, marketable securities and notes payable--The carrying amount approximates fair value due to the short maturity of these instruments.\nOther property - other long-term investments--Mid-America has an investment in the publicly traded common stock of a company which owns and operates radio stations. The fair value of this investment as determined by the market value of its common stock at December 31, 1993, approximates its carrying value of $7.5 million.\nAt December 31, 1992, it was not practical to estimate the fair value of this investment because at that time the common stock of the company was not publicly traded.\nLong-term debt, including current maturities and sinking fund requirements--Interest rates that are currently available to IPL and Energy Resources for issuance of debt with similar terms and remaining maturities are used to estimate fair value. At December 31, 1993 and 1992 the consolidated carrying amount of Enterprises' long-term debt, including current maturities and sinking fund requirements, and the approximate fair value are as follows:\n4. CAPITAL STOCK\nCommon Stock:\nEnterprises has a Shareholder Rights Plan designed to protect Enterprises' shareholders against unsolicited attempts to acquire control of Enterprises that do not offer what the Board believes is a fair and adequate price to all shareholders. The Board declared a dividend of one Right for each share of common stock to shareholders of record on July 11, 1990. The Rights will expire July 11, 2000. At this time, no Rights have been distributed. The Rights are not taxable to shareholders or to Enterprises, and they do not affect reported earnings per share. Under the Shareholder Rights Plan, Enterprises has authorized 40,000,000 shares for issuance.\nEnterprises' Automatic Dividend Reinvestment and Stock Purchase Plan allows common shareholders to purchase shares of common stock by reinvestment of dividends and limited additional cash investments. The plan provides that such shares may be purchased on the open market or directly from Enterprises at the option of Enterprises. Enterprises is authorized to issue 643,038 additional shares as of December 31, 1993 pursuant to this plan.\nUnder the Thrift Plan, shares may be purchased either on the open market or, if available, as original issue shares directly from Enterprises.\nEnterprises is authorized to issue 93,161 additional shares of common stock pursuant to the Energy Resources 401(k) plan.\nEnterprises has a stock option plan (1990 Plan) for key employees under which options to acquire shares of common stock and stock appreciation rights covering common shares may be granted. One million shares of common stock have been authorized for issuance under the 1990 Plan. The maximum period for exercising an option may not exceed ten years and one day after grant or ten years for incentive stock options. Upon the first anniversary date after the grant, and each anniversary date thereafter, these options are exercisable in proportion to the number of years expired in a three-year period. At December 31, 1993, there were 43,500 shares available for future grants.\nDuring 1991, the 1991 Directors' Stock Option Plan (1991 Plan) was established. This plan provides to the non-employee Directors of Enterprises options to acquire shares of common stock. These options are exercisable for the period beginning on the six month anniversary of and ending on the ten year anniversary of the grant date. Under the 1991 Plan, 250,000 shares of common stock have been authorized for issuance and 192,000 are available for future grants.\nA summary of options issued under both plans is as follows:\nThe number of shares exercisable at December 31, 1993, 1992 and 1991 were 411,000, 227,000 and 148,000, respectively.\nRestrictions on the payment of cash dividends or other distributions on IPL common stock held by Enterprises and on the purchase or redemption of such shares by IPL are contained in the indentures securing IPL's First Mortgage Bonds. All of IPL's retained earnings at December 31, 1993, were free of such restrictions. There are no other restrictions on the retained earnings of Enterprises.\nCumulative Preferred Stock:\nPreferred stock shareholders are entitled to two votes per share, and if four full quarterly dividends are in default, they are entitled to elect the smallest number of Directors to constitute a majority.\n5. LONG-TERM DEBT\nThe 9 5\/8% Series due 2012, 10 5\/8% Series due 2014, 6.10% Series due 2016, 5.40% Series due 2017, and 5.50% Series due 2023 were each issued to the City of Petersburg, Indiana (City) by IPL to secure the loan of proceeds received from a like amount of tax-exempt Pollution Control Revenue Bonds issued by the City for the purpose of financing pollution control facilities at IPL's Petersburg Generating Station.\nOn August 6, 1992, IPL issued $80 million of First Mortgage Bonds, 7 3\/8% Series, due 2007. The net proceeds from this issue were used to redeem on September 1, 1992, IPL's First Mortgage Bonds, 9.3% Series, due 2006 and 9 1\/2% Series, due 2016, at the prices of $104.17 and $107.13, respectively, plus accrued interest.\nOn April 13, 1993, IPL issued a First Mortgage Bond, 6.10% Series, due 2016, in the principal amount of $41.85 million, in connection with the issuance of the same amount of Pollution Control Refunding Revenue Bonds by the City of Petersburg, Indiana. The net proceeds, along with other IPL funds were used to redeem on June 1, 1993, IPL's $19.65 million First Mortgage Bonds, 6.90% Series, due 2006, and IPL's $22.2 million First Mortgage Bonds, 6.60% Series, due 2008, at the prices of $100 and $101, respectively, plus accrued interest.\nOn October 14, 1993, IPL issued a First Mortgage Bond, 5.40% Series, due 2017, in the principal amount of $24.65 million, in connection with the issuance of the same amount of Pollution Control Refunding Revenue Bonds by the City of Petersburg, Indiana. The net proceeds, along with other IPL funds, were used to redeem on November 15, 1993, IPL's $24.65 million First Mortgage Bonds, 5.80% Series, due 2007, at the price of $100 plus accrued interest.\nAlso, on October 14, 1993, IPL issued a First Mortgage Bond, 5.50% Series, due 2023, in the principal amount of $30.0 million, in connection with the issuance of the same amount of Pollution Control Refunding Revenue Bonds by the City of Petersburg, Indiana. The net proceeds, along with other IPL funds, were used to redeem on November 15, 1993, IPL's $30.0 million First Mortgage Bonds, 10 1\/4% Series, due 2013, at the price of $103 plus accrued interest.\nIPL has a 30-year unsecured promissory note which was issued to the City of Petersburg, Indiana, in connection with the issuance of $40 million of Pollution Control Refunding Revenue Bonds, due 2021, by the City of Petersburg. This note and the related bonds provide for a floating interest rate that approximates tax-exempt Commercial Paper Rates. The average interest rate on this note was 2.40% for 1993 and 3.00% for 1992. At the option of IPL, the bonds can be converted to First Mortgage Bonds which would bear interest at a fixed rate.\nEnergy Resources has a 20-year unsecured note which was issued to the City of Indianapolis, Indiana, in connection with the issuance of $9.5 million of 7.25% Exempt Facility Revenue Bonds, due 2011, by the City of Indianapolis. The net proceeds were used to finance costs incurred during the construction of the district cooling system in near downtown Indianapolis.\nMaturities and sinking fund requirements on long-term debt for the five years subsequent to December 31, 1993, are as follows:\n6. LINES OF CREDIT\nIPL has lines of credit with banks of $100 million at December 31, 1993, to provide loans for interim financing. These lines of credit, based on separate formal and informal agreements, have expiration dates ranging from January 31, 1994 to November 30, 1994, and require the payment of commitment fees. At December 31, 1993, these credit lines were unused. Lines of credit supporting commercial paper were $90 million at December 31, 1993.\nMid-America also has a line of credit of $2 million, which was unused at December 31, 1993. The line of credit requires the payment of a commitment fee and expires January 31, 1994.\n7. INCOME TAXES\nFederal and State income taxes charged to income are as follows:\nThe provision for Federal income taxes (including net investment tax credit adjustments) is less than the amount computed by applying the statutory tax rate to pre-tax income. The reasons for the difference, stated as a percentage of pre-tax income, are as follows:\nThe significant items comprising Enterprises' net deferred tax liability recognized in the consolidated balance sheet as of December 31, 1993 are as follows:\n8. RATE MATTERS\nSteam Rate Order\nBy an order dated January 13, 1993, the IURC authorized IPL to increase its steam system rates and charges over a six-year period. Accordingly, IPL implemented new steam tariffs designed to produce estimated additional annual steam operating revenues as follows:\nEnvironmental Compliance Plan\nOn August 18, 1993, IPL obtained an Order from the IURC approving its Environmental Compliance Plan, together with the costs and expenses associated therewith, which provides for the installation of sulfur dioxide and nitrogen oxide emissions abatement equipment and the installation of continuous emission monitoring systems to meet the requirements of both Phase I and Phase II of the Federal Clean Air Act Amendments of 1990. The order provides for the deferral of net gains and losses resulting from any sale of emission allowances for future amortization to cost of service on a basis to be determined in the next general electric rate proceeding.\nDemand Side Management Program\nIPL obtained an Order from the IURC approving a Stipulation of Settlement Agreement between IPL, the Office of Utility Consumer Counsel, Citizens Action Coalition of Indiana, Inc., an industrial group, the Trustees of Indiana University and the Indiana Alliance for Fair Competition relating to the Company's Demand Side Management Program (DSM). The order provides for the deferral and subsequent recovery in rates of certain approved DSM costs. The order also provides for the recording of a return on deferred costs until recognized in rates.\n9. EMPLOYEE BENEFIT PLANS AND OTHER POSTRETIREMENT BENEFITS\nEnterprises' contributions to the Thrift Plan were $3.2 million, $3.1 million and $2.8 million in 1993, 1992 and 1991, respectively.\nNet pension cost including amounts charged to construction is comprised of the following components:\nA summary of the Plans' funding status, and the amount recognized in the consolidated balance sheets at December 31, 1993 and 1992, follows:\nAs of the October 31, 1993 valuation date, approximately 10.5% of the Plans' assets were in equity securities, with the remainder in fixed income securities.\nEnterprises also provides certain postretirement health care and life insurance benefits for employees, other than Mid-America's subsidiaries' employees, who retire from active service on or after attaining age 55 and have rendered at least 10 years of service. On January 1, 1993, Enterprises adopted the provisions of SFAS No. 106 -- Employers' Accounting for Postretirement Benefits Other than Pensions (SFAS 106). Generally, SFAS 106 requires the use of an accrual basis accounting method for determining annual costs of postretirement benefits. The January 1, 1993 transition obligation of $122.8 million is being amortized over a 20 year period. Prior to 1993, the cost of such benefits was recognized when incurred and amounted to $3.5 million and $2.8 million in 1992 and 1991, respectively.\nNet postretirement benefit cost, including amounts charged to construction for 1993 is comprised of the following components:\nA summary of the retiree health care and life insurance plan's funding status, and the amount recognized in the consolidated balance sheet at December 31, 1993 follows:\nEnterprises is expensing its non-construction related SFAS 106 costs associated with its unregulated and steam businesses. The SFAS 106 costs, net of amounts paid and capitalized for construction, associated with IPL's electric business are being deferred as a regulatory asset on the consolidated balance sheet, as authorized by an order of the IURC on December 30, 1992, which provided for deferral of SFAS 106 costs in excess of such costs determined on a cash basis. A request for recovery in rates of these costs will be included in IPL's next general electric rate petition.\nThe assumed health care cost trend rate used in measuring the accumulated postretirement benefit obligation is 12.6% for 1994, gradually declining to 5.0% in 2003. A one-percentage point increase in the assumed health care cost trend rate for each year would increase the accumulated postretirement benefit obligation as of December 31, 1993 by approximately $24.4 million and the combined service cost and interest cost for 1993 by approximately $3.4 million.\nPlan assets consist of the cash surrender value of life insurance policies on certain retired IPL employees.\nAssumptions used in determining the accumulated benefit obligation for the pension plans for 1993, 1992 and 1991 and for the accumulated postretirement benefit obligation for 1993 were:\n10. COMMITMENTS AND CONTINGENCIES\nIn 1994, Enterprises anticipates the cost of its subsidiaries' construction programs to be approximately $247 million.\nIPL will comply with the provisions of \"The Clean Air Act Amendments of 1990\" (the Act) through the installation of SO2 scrubbers and NOx facilities. The cost of complying with the Act from 1994 through 1997, including AFUDC, is estimated to be approximately $207 million, of which $80 million is anticipated in 1994. During 1993, expenditures for compliance with the Act were $13.7 million.\nIPL has a five-year firm power purchase agreement with Indiana Michigan Power Company (IMP) for 100 megawatts (MW) of capacity effective April 1992, with the purchase of an additional 100 MW (for a total of 200 MW) beginning in April 1993. The agreement provides for monthly capacity payments by IPL of $.6 million from April 1992 through March 1993, increasing to a monthly amount of $1.2 million which began in April 1993 and continues through March 31, 1997. The agreement further provides that IPL can elect to extend purchases through December 31, 1997, and subsequently through November 30, 1999, with capacity payments of $1.2 million per month and $1.55 million per month, respectively. IPL can terminate the agreement, should the ability to recover future demand charges through rates be disallowed. Capacity payments in 1993 and 1992 under this agreement totaled $12.6 million and $5.4 million, respectively.\nIn October 1993, IPL received a Findings of Violation regarding compliance with the thermal limits of the National Pollutant Discharge Elimination System permit for its Petersburg Generating Station. IPL expects to meet with the Environmental Protection Agency in early 1994 to resolve this matter. IPL believes it has met all the requirements of its permit, but if IPL's position is found erroneous, IPL could be subject to fines of up to $25,000 per day of violation.\nEnterprises is involved in litigation arising in the normal course of business. While the results of such litigation cannot be predicted with certainty, management, based upon advice of counsel, believes that the final outcome will not have a material adverse effect on the consolidated financial position and results of operations.\n11. WITHDRAWN TENDER OFFER\nDuring 1993, IPALCO incurred a one-time charge against earnings of $33.9 million before taxes ($21.1 million net of applicable income taxes), for legal, financial and administrative costs pertaining to IPALCO's effort to acquire PSI Resources, Inc. The charge resulted in a decrease in earnings per share of 56 cents.\n12. QUARTERLY RESULTS (UNAUDITED)\nOperating results for the years ended December 31, 1993 and 1992, by quarter, are as follows (in thousands except per share amounts):\nThe quarterly figures reflect seasonal and weather-related fluctuations which are normal to IPL's operations. Weather conditions in 1993 reflected near normal conditions, while weather conditions in 1992 were considerably moderate.\nThe quarter ended September 30, 1993, includes a $33.9 million expense pertaining to the withdrawn tender offer. The quarter ended June 30, 1992, includes a $3.9 million expense as a result of severe storm damage to IPL's transmission and distribution systems, and a $2.8 million expense in connection with the settlement of disputes regarding fuel adjustment issues.\nItem 9.","section_9":"Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE\nNone.\nPART III\nItems 10, 11, 12 IPALCO Enterprises, Inc. will file with the Securities and and 13 Exchange Commission a definitive proxy statement pursuant to Regulation 14A. This document will incorporate by reference the information required by these items, except for the information regarding executive officers which is set forth in Part I, following Item 4 hereof under the heading \"EXECUTIVE OFFICERS OF THE REGISTRANT.\"\nPART IV\nItem 14","section_9A":"","section_9B":"","section_10":"","section_11":"","section_12":"","section_13":"","section_14":"Item 14 (a). DOCUMENT LIST\nThe Consolidated Financial Statements and Supplemental Schedules under this Item 14(a). 1 and 2 filed in this Form 10-K are those of IPALCO Enterprises, Inc. and subsidiaries.\n1. Consolidated Financial Statements\nIncluded in Part II of this report:\nIndependent Auditors' Report\nStatements of Consolidated Cash Flows for the Years Ended December 31, 1993, 1992 and 1991\nStatements of Consolidated Income for the Years Ended December 31, 1993, 1992 and 1991\nConsolidated Balance Sheets, December 31, 1993 and 1992\nStatements of Consolidated Preferred Stock and Long-Term Debt, December 31, 1993 and 1992\nStatements of Consolidated Common Shareholders' Equity for the Years Ended December 31, 1993, 1992 and 1991\nNotes to Consolidated Financial Statements\n2. Supplementary Data and Consolidated Financial Statement Schedules\nIncluded in Part IV of this report:\nFor each of the years ended December 31, 1993, 1992 and 1991\nSchedule V - Utility Property, Plant and Equipment Schedule VI - Accumulated Depreciation of Utility Property, Plant and Equipment Schedule V - Nonutility Property, Plant and Equipment Schedule VI - Accumulated Depreciation of Nonutility Property, Plant and Equipment Schedule IX - Short-Term Borrowings Schedule X - Supplemental Consolidated Income Statement Information\nThe schedules, other than those listed above, are omitted because of the absence of the conditions under which they are required or because the information is furnished in the consolidated financial statements or notes thereto.\n3. Exhibits Required by Securities and Exchange Commission Regulation S-K\nCopies of the documents listed below which are identified with an asterisk (*) are incorporated herein by reference and made a part hereof and have heretofore been classified as basic documents under Rule 24(b) of the SEC Rules of Practice.\n(3) Articles of Incorporation and By-Laws\n* --Copy of Amended Articles of Incorporation of Enterprises dated April 16, 1986 and Articles of Amendment dated April 18, 1990. (Form 10-K for year ended 12-31-90.)\n* --Copy of By-Laws of Enterprises as amended August 23, 1993. (Form 10-Q for quarter ended September 30, 1993.)\n(10) Material Contracts\n* --Certificate of the Resolution establishing the Unfunded Deferred Compensation Plan for Enterprises' Directors dated December 27, 1983. (Form 10-K for year ended 12-31-83.)\n* --Copy of the Resolution amending the Unfunded Deferred Compensation Plan for Enterprises' Directors effective January 1, 1992. (Form 10-K for year ended 12-31-92.)\n--Copy of the Resolution amending the Unfunded Deferred Compensation Plan for Enterprises' Directors effective January 1, 1994.\n--Copy of the Resolution adopting the Unfunded Deferred Compensation Plan for Enterprises' Officers effective January 1, 1994.\n--Directors' and Officers' Liability Insurance Policy No. DO392B1A93 effective June 30, 1993, to June 1, 1994.\n* --IPALCO Enterprises, Inc. Benefit Protection Fund and Trust Agreement effective November 1, 1988. (Form 10-K for year ended 12-31-88.)\n--Exhibit A to IPALCO Enterprises, Inc. Benefit Protection Fund and Trust Agreement dated February 23, 1993.\n* --IPALCO Enterprises, Inc. Annual Incentive Plan and Administrative Guidelines effective January 1, 1990. (Form 10-K for year ended 12-31-89.)\n* --IPALCO Enterprises, Inc. 1990 Long-Term Performance Incentive Plan and Administrative Guidelines effective January 1, 1990. (Form 10-K for year ended 12-31-89.)\nExhibits Required by Securities and Exchange Commission Regulation S-K (Continued)\n* --Copy of First Amendment to the IPALCO Enterprises, Inc. 1990 Long-Term Performance Incentive Plan and Revised Administrative Guidelines, effective January 1, 1992. (Form 10-K for year ended 12-31-92.)\n(21) Other Documents or Statements to Security Holders\n--Form 10-K of Indianapolis Power & Light Company for the year ended December 31, 1993, and all documents listed at Item 14 (a) 3 thereof.\n(23) Consents of Experts and Counsel\n--Independent Auditors' Consent\n(99) Additional Exhibits\n* --Agreement dated as of October 27, 1993, by and among IPALCO Enterprises, Inc., Indianapolis Power & Light Company, PSI Resources, Inc., PSI Energy, Inc., The Cincinnati Gas & Electric Company, CINergy Corp., James E. Rogers, John R. Hodowal and Ramon L. Humke. (Form 10-Q for quarter ended September 30, 1993.)\nItem 14 (b). REPORTS ON FORM 8-K\nA report on Form 8-K, dated October 26, 1993, reporting Item 5, \"Other Events\", and Item 7, \"Exhibits\", with respect to a settlement agreement with PSI Resources, Inc. and Cincinnati Gas & Electric Company, and the release of third quarter earnings.\nSIGNATURES\nPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.\nIPALCO ENTERPRISES, INC.\nBy John R. Hodowal ----------------------------------- (John R. Hodowal, Chairman of the Board and President)\nDate February 22, 1994\nPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.\nSignature Title Date --------- ----- ----\n(i) Principal Executive Officer:\n\/s\/ John R. Hodowal Chairman of the Board February 22, 1994 ------------------------ and President (John R. Hodowal)\n(ii) Principal Financial Officer:\n\/s\/ John R. Brehm Vice President February 22, 1994 ------------------------ and Treasurer (John R. Brehm)\n(iii) Principal Accounting Officer:\n\/s\/ Stephen J. Plunkett Controller February 22, 1994 ------------------------ (Stephen J. Plunkett)\n(iv) A majority of the Board of Directors of IPALCO Enterprises, Inc.:\n\/s\/ Joseph D. Barnette, Jr. Director February 22, 1994 ---------------------------- (Joseph D. Barnette, Jr.)\n\/s\/ Robert A. Borns Director February 22, 1994 ---------------------------- (Robert A. Borns) SIGNATURES (Continued)\n\/s\/ Mitchell E. Daniels, Jr. Director February 22, 1994 ---------------------------- (Mitchell E. Daniels, Jr.)\n\/s\/ Rexford C. Early Director February 22, 1994 ---------------------------- (Rexford C. Early)\n\/s\/ Otto N. Frenzel III Director February 22, 1994 ---------------------------- (Otto N. Frenzel III)\n\/s\/ Max L. Gibson Director February 22, 1994 ---------------------------- (Max L. Gibson)\n\/s\/ Edwin J. Goss Director February 22, 1994 ---------------------------- (Edwin J. Goss)\n\/s\/ Dr. Earl B. Herr, Jr. Director February 22, 1994 ---------------------------- (Dr. Earl B. Herr, Jr.)\n\/s\/ John R. Hodowal Director February 22, 1994 ---------------------------- (John R. Hodowal)\n\/s\/ Ramon L. Humke Director February 22, 1994 ---------------------------- (Ramon L. Humke)\n\/s\/ Sam H. Jones Director February 22, 1994 ---------------------------- (Sam H. Jones)\n\/s\/ Andre B. Lacy Director February 22, 1994 ---------------------------- (Andre B. Lacy)\n\/s\/ L. Ben Lytle Director February 22, 1994 ---------------------------- (L. Ben Lytle)\n\/s\/ Michael S. Maurer Director February 22, 1994 ---------------------------- (Michael S. Maurer)\nSIGNATURES (Continued)\n\/s\/ Thomas M. Miller Director February 22, 1994 ---------------------------- (Thomas M. Miller)\n\/s\/ Sallie W. Rowland Director February 22, 1994 ---------------------------- (Sallie W. Rowland)\n\/s\/ Thomas H. Sams Director February 22, 1994 ---------------------------- (Thomas H. Sams)\n\/s\/ Zane G. Todd Director February 22, 1994 ---------------------------- (Zane G. Todd)","section_15":""}
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{"filename":"818687_1993.txt","cik":"818687","year":"1993","section_1":"Item 1. BUSINESS\nBusiness of the Company\nMcCaw Cellular Communications, Inc. (the \"Company\"), develops and provides wireless personal communications services, including cellular telephone, messaging and air-to-ground communications. The Company, both directly and through its 52% ownership of LIN Broadcasting Corporation (together with its subsidiaries, \"LIN\"), is the largest cellular telephone company in the United States based on 1992 revenues. The Company is also the fifth largest radio common carrier (\"RCC\") operator (providing primarily messaging services) in the United States based on 1992 year-end subscribers. The Company also owns Claircom Communications Group, L.P. (\"Claircom\"), which began providing common carrier voice communication services for airline passengers in February 1993 and plans to provide two-way data communication services (including facsimiles) beginning in 1994. LIN also owns seven network-affiliated television stations.\nThe Company's goal is to develop a fully integrated personal communications network connecting people, instead of places, throughout North America using the most efficient and effective technology available. To achieve that goal, the Company has developed a fourfold strategy: first, create cellular clusters in major metropolitan areas through the acquisition of adjacent cellular licenses; second, construct the systems serving such cellular clusters to a high technical standard; third, link the country's cellular systems into a \"national seamless network\"; and fourth, integrate other communications technologies into the network.\nThe Company has completed the first and second stages of this strategy and has begun the third stage. In the first stage, the Company obtained majority or controlling interests in cellular systems serving many of the largest and fastest growing Metropolitan Statistical Areas (\"MSAs\") and continuously enlarged the service area provided by obtaining majority or controlling interests in, or reciprocal service agreements with the other owners of, cellular systems serving successively adjacent markets, thereby creating networks of uninterrupted coverage encompassing large metropolitan complexes. These complexes, which were arbitrarily divided in the licensing process, are commercial corridors through which local businesses and subscribers regularly conduct their affairs. The Company has largely succeeded in this strategy as approximately 80% of the persons or \"pops\" represented by the cellular interests owned by the Company are in such markets.\nWith respect to construction, all of the Company's markets are now served by high quality operating cellular systems, which the Company continually upgrades with advances in technology. The Company is currently offering \"digital\" cellular service to its customers in Florida, California, New York, Nevada and the Pacific Northwest. The balance of the Company's markets are expected to begin offering such service in 1994. Digital service brings distinct advantages to both the Company and its subscribers, including enhanced call privacy and increased system capacity of three or more times the \"analog\" system capacity. In addition, digital transmission enhances the Company's opportunity to offer new services such as caller identification or message waiting indicator services. The Company uses a digital format referred to as Time Division Multiple Access (\"TDMA\") which has been adopted and recently re-endorsed as an industry standard by the Cellular Telecommunications Industry Association. Although digital service is offered, customers are also able to continue to use their existing analog equipment with the same reliability they have experienced in the past. The Company expects its additional capital expenditures in 1994 in connection with the planned expansion of digital service to be approximately $110 million. Over time, the Company expects its capital expenditures to be reduced significantly because the increased system capacity associated with digital service will reduce the need to add new cell sites.\nHaving acquired and built strong regional cellular systems, the Company is in the process of linking those regional cellular systems into the North American Cellular Network (\"NACN\") permitting cellular subscribers, without making special arrangements, to both place and receive calls anywhere they travel in areas served by the NACN, even if the local cellular service is not provided by the Company. All of the Company's markets within the continental United States, as well as the systems not affiliated with any landline telephone carrier (\"A Block\") in most other major metropolitan areas, and Cantel, which holds Canada's A Block cellular license, are served by the NACN. The creation of the NACN does not involve material capital expenditures, yet markedly increases the quality and convenience of the Company's service. Administration of the network will not directly provide the Company with any significant income. As of February 28, 1994, the NACN served approximately 5 million subscribers and covered a population base of over 100 million. GTE Corporation and most of the other major wireline (\"B Block\") licensees have formed a national network similar to the NACN, which competes with the NACN.\nUltimately, the Company's goal is to extend this network to permit its customers to place and receive calls effortlessly throughout North America, including integration with American Mobile Satellite Corporation's satellite-based mobile communications system (scheduled to begin operations in 1995) and Claircom's air-to-ground system. The Company expects its cellular systems to provide the wireless infrastructure for the fully integrated personal communications network it is developing. Consequently, the Company is exploring, and will continue to explore, the use of emerging technologies to expand the reach of the network, provide additional services (especially data services) and enhance the convenience provided to the Company's customers. In addition, the Company expects to actively seek additional licenses to utilize spectrum for wireless communications as those licenses may be issued by the Federal Communications Commission (the \"FCC\"). There is, however, no assurance that the Company will be successful in obtaining additional spectrum or licenses for new services.\nCellular telephone technology provides high-quality mobile and portable telephone service which permits simultaneous use by a large number of subscribers within a given market. \"Pops\" means the population of a market multiplied by a percentage ownership interest in an entity licensed or designated to receive a license (a \"licensee\") by the FCC to construct or operate a cellular telephone system in such market. Pops do not represent actual subscribers in a cellular system. All the Company's cellular interests are the \"A Block licensee\" of a given market which holds the license that originally was reserved for an entity not affiliated with a landline telephone carrier.\nMessaging systems provide messaging services (a lower-cost, complementary product line to cellular services) and conventional mobile phone and telephone answering services. As of December 31, 1993, the Company had 525,000 messaging units in service.\nThe Company, a Delaware corporation, was incorporated on July 7, 1987 and is the successor to McCaw Cellular Communications, Inc., a Washington corporation, which was incorporated in 1982. The Company's principal executive office is located at 5400 Carillon Point, Kirkland, Washington 98033. Its telephone number is (206) 827-4500. References to \"the Company\" in this Annual Report on Form 10-K include McCaw Cellular Communications, Inc., its subsidiaries and its predecessors, unless the context otherwise requires. For information about the Company's industry segments, see Note 14 to the Company's consolidated financial statements contained herein.\nRecent Developments\nAT&T Merger Agreement. On August 16, 1993, the Company entered into a merger agreement (the \"AT&T Merger Agreement\") pursuant to which the Company would merge with a subsidiary of AT&T and thereby become a wholly owned subsidiary of AT&T (the \"Merger\" or \"AT&T Transaction\"). AT&T is subject to the information and reporting requirements of the Securities Exchange Act of 1934, as amended, and in accordance therewith files reports, proxy statements and other information with the Securities and Exchange Commission. AT&T Stock is traded on the New York Stock Exchange. For pro forma financial information regarding AT&T assuming consummation of the AT&T Transaction, see the Company's Report on Form 8-K filed September 17, 1993, as amended October 12 and October 29, 1993, incorporated by reference herein.\nIn the AT&T Transaction, and subject to the terms referred to in the following sentences, each share of the Common Stock of the Company would be converted into one share of AT&T Common Stock, par value $1.00 per share (the \"AT&T Stock\"). In the event that the average closing price of the AT&T Stock is greater than $71.73 per share during the 20 most recent trading days ending on the fifth business day prior to the closing of the AT&T Transaction, the exchange rate will be adjusted downward to provide for the delivery of shares of AT&T Stock worth $71.73 for each share of Common Stock, but in no event less than 0.909 of a share of AT&T Stock for each share of Common Stock. In the event that the average closing price of the AT&T Stock is less than $53.00 per share during such period, the exchange rate will be adjusted upward to provide for the delivery of shares of AT&T Stock worth $53.00 for each share of Common Stock, but in no event more than 1.111 shares of AT&T Stock for each share of Common Stock. Either party will have a right to terminate the AT&T Merger Agreement if it has not closed by September 30, 1994.\nThe AT&T Transaction has been approved by the respective Boards of Directors of AT&T and the Company and the Company's stockholders, but is subject to the satisfaction of several conditions, including the receipt of the governmental consents discussed below. The AT&T Transaction is also subject to the conditions that the Company receive an opinion of counsel that no taxable gain or loss will be recognized upon the exchange of Common Stock for shares of AT&T Stock and that AT&T receive from its independent public accountants an opinion that the AT&T Transaction will qualify for pooling-of-interests accounting treatment.\nIn connection with the Merger, AT&T and the Company have made filings or applications with (i) the Federal Trade Commission and the Antitrust Division of the Department of Justice (the \"Antitrust Division\") pursuant to the Hart-Scott- Rodino Antitrust Improvements Act of 1976, as amended, and the rules promulgated thereunder (the \"HSR Act\"), (ii) the FCC and (iii) various state regulatory commissions. The approvals of all state regulatory commissions (with the exception of the California Public Utility Commission) have been received. Consummation of the Merger is conditioned upon, among other things, expiration of the waiting periods under the HSR Act, approval by the FCC of the transfer of control of McCaw and the receipt of the necessary state regulatory approvals.\nOn September 22, 1993, AT&T and McCaw each received an extensive request from the Antitrust Division for additional information and documents with respect to the Merger and the telecommunications industry. Accordingly, the waiting period under the HSR Act has been extended and will not expire until the twentieth calendar day after AT&T and McCaw have each substantially complied with such request for additional information and documents. Each of AT&T and McCaw is responding to the request, but cannot predict when substantial compliance will be achieved. On December 2, 1993, BellSouth Corporation (\"BellSouth\") filed a motion in the case entitled United States v. Western Electric Co. Inc. et al., Civil Action No. 82-0192, for a declaratory ruling that the Merger would violate Section I(D) of the Modification of Final Judgment (the \"Decree\"), United States v. American Tel. and Tel. Co., 552 F. Supp. 131, 226-34 (D.D.C. 1982), aff'd mem. sub. nom Maryland v. United States, 450 U.S. 1001 (1982), and cannot be consummated without a modification or waiver of the Decree. The Justice Department has also taken the position that a modification or waiver is required. AT&T and McCaw believe that BellSouth is not entitled to the relief sought. There can be no assurance that AT&T will prevail with respect to the BellSouth challenge or any other challenge to the Merger that may be made on antitrust grounds.\nThe obligations of AT&T and McCaw to consummate the Merger are also subject to the condition that there be no preliminary or permanent injunction or other order by any court or governmental or regulatory authority of competent jurisdiction, including any state governmental or regulatory authorities, prohibiting consummation of the Merger or permitting such consummation only subject to any condition or restriction unacceptable to AT&T in its reasonable judgment. In addition, the obligation of AT&T to consummate the Merger is subject to the condition that no suit, action, investigation, inquiry or other proceeding by any United States governmental body or other material governmental body shall have been instituted and be pending which imposes or which would be reasonably expected to impose any condition or restriction unacceptable to AT&T in its reasonable judgment. Each party has agreed to use all reasonable efforts to have any such injunction or order lifted and otherwise satisfy the conditions to Closing.\nSeparately, AT&T has agreed to purchase, at the Company's option, exercisable in the event the AT&T Merger Agreement is terminated, approximately 11.7 million newly issued shares of the Company's Class A Common Stock, par value $.01 per share (the \"Class A Common Stock\") at $51.25 per share, for a total purchase price of $600 million. Such purchase would be subject to the receipt of necessary governmental approvals. In the event that it is finally judicially determined that the AT&T Merger Agreement was terminated as a result of a breach of the Company's obligations thereunder, AT&T has the right to require the Company to repurchase all shares so purchased by AT&T, at the original purchase price plus interest thereon accrued at 7% per annum.\nRedemption of Publicly Held Debt. On March 4, 1993, the Company announced the redemption of all its outstanding convertible senior subordinated debentures. Between the announcement of the redemption and the termination on March 31, 1993 of the right of holders to convert, approximately $113.9 million of the debentures were converted into approximately 3.8 million shares of the Company's Class A Common Stock. On April 5, 1993, the Company redeemed the remaining convertible debentures for cash. On December 31, 1993, the Company redeemed all of its remaining senior and senior subordinated notes and debentures. The Company financed the redemption with borrowings made under its existing $3 billion Bank Credit Facility and a new $1 billion parallel facility. Interest under both such facilities is payable at the applicable margin above, at the Company's discretion, the prevailing prime, LIBOR or CD rate. See \"Management's Discussion and Analysis of Financial Condition and Results of Operations.\" The applicable margin for LIBOR loans is currently 1 1\/2%.\nCellular Interests\nBy obtaining cellular licenses in areas adjacent to or near those in which it already controls a license, the Company has assembled and continues to develop eight regional clusters of operations. Clustering offers the Company operating efficiencies, capital savings and service advantages. See \"Business--The Company's Cellular Operations.\" As of December 31, 1993, the number of subscribers in the Company's and LIN's markets, based on 100% of the subscribers in markets which were operating and in which the Company or LIN owned at least a 50% voting interest in a licensee, and also including the Company's less than 50% interests in the California, Kansas and New York markets held in joint ventures with AirTouch Communications and Associated Communications, and in the Philadelphia market, was approximately 3.1 million and penetration was 3.24%.\nThe table on the following pages sets forth the markets, by cluster, in which McCaw and LIN owned an interest as of December 31, 1993. Ownership 1993 Net 1993 Interest Population(1) Pops(2) Market Florida Cluster Miami\/Ft. Lauderdale, FL 100.00% 3,350,000 3,350,000 West Palm Beach, FL 100.00% 918,400 918,400 Fort Pierce, FL 100.00% 271,000 271,000 Tampa, FL 100.00% 2,031,500 2,031,500 Orlando, FL 100.00% 1,172,800 1,172,800 Lakeland, FL 93.02% 428,400 398,500 Melbourne, FL 92.57% 431,500 399,400 Sarasota, FL 84.64% 291,900 247,100 Bradenton, FL 91.01% 223,800 203,700 Jacksonville, FL 100.00% 987,900 987,900 Tallahassee, FL 100.00% 266,200 266,200 Ocala, FL 88.96% 213,400 189,800 Daytona Beach, FL 100.00% 398,700 398,700 Citrus, FL 85.00% 415,500 353,200 11,401,000 11,188,200 California\/Nevada Cluster Los Angeles, CA (3) 39.97% 14,588,100 5,830,900 Oxnard, CA 100.00% 693,400 693,400 Las Vegas, NV 100.00% 899,400 899,400 Santa Barbara, CA 84.13% 379,200 319,000 San Francisco, CA 50.00% 3,796,900 1,898,500 San Jose, CA 50.00% 1,535,800 767,900 Sacramento, CA 100.00% 1,474,100 1,474,100 Fresno, CA 100.00% 720,300 720,300 Stockton, CA 100.00% 513,900 513,900 Vallejo, CA 50.00% 489,400 244,700 Santa Rosa, CA 46.73% 408,700 191,000 Carmel\/Mont\/Salinas, CA 49.44% 371,300 183,600 Modesto, CA 100.00% 410,700 410,700 Visalia, CA 92.22% 339,900 313,500 Santa Cruz, CA 22.20% 230,600 51,200 Reno, NV 88.59% 276,800 245,200 Redding, CA 88.20% 165,000 145,500 Yuba City, CA 94.37% 132,800 125,300 Alpine, CA 100.00% 139,300 139,300 Madera, CA 24.98% 333,300 83,300 Tehama, CA 100.00% 96,100 96,100 27,995,000 15,346,800 Pacific Northwest Cluster Seattle, WA 100.00% 2,077,800 2,077,800 Tacoma, WA 100.00% 634,000 634,000 Spokane, WA 88.22% 393,000 346,700 Yakima, WA 93.20% 202,000 188,300 Bremerton, WA 96.70% 218,700 211,500 Olympia, WA 89.20% 182,500 162,800 Richland, WA 100.00% 163,700 163,700 Bellingham, WA 91.48% 140,900 128,900 Clallam, WA 100.00% 252,300 252,300 Pacific, WA 100.00% 174,300 174,300 Kittitas, WA 100.00% 114,000 114,000 Portland, OR 100.00% 1,541,100 1,541,100 Salem, OR 93.91% 300,300 282,000 Eugene, OR 100.00% 295,200 295,200 Medford, OR 91.75% 157,500 144,500 Boise, ID 90.10% 231,600 208,700 Elmore, ID 100.00% 127,800 127,800 Anchorage, AK 88.29% 250,100 220,800 Maui, HI 100.00% 111,700 111,700 7,568,500 7,386,100 Ownership 1993 Net 1993 Interest Population(1) Pops(2) Market Rocky Mountain Cluster Denver, CO 100.00% 1,992,900 1,992,900 Colorado Springs, CO 100.00% 431,000 431,000 Fort Collins, CO 91.14% 203,700 185,700 Greeley, CO 89.38% 137,300 122,700 Pueblo, CO 87.85% 124,600 109,500 Garfield, CO 91.50% 257,100 235,200 Salt Lake City, UT 100.00% 1,178,900 1,178,900 Provo, UT 93.05% 277,400 258,100 Box Elder, UT 100.00% 113,800 113,800 4,716,700 4,627,800 Northeast Cluster New York, NY (3) 93.08% 14,938,800 13,905,000 Buffalo, NY 25.00% 1,196,900 299,200 Philadelphia, PA (3) 49.99% 4,895,100 2,447,100 Pittsburgh, PA 64.30% 2,108,200 1,355,600 Erie, PA 93.76% 281,400 263,800 Johnstown, PA 100.00% 241,200 241,200 Wheeling, WV\/OH 84.56% 156,900 132,700 Parkersburg, WV 98.02% 154,900 151,800 Worcester, MA 9.40% 705,100 66,300 Ocean County, NJ 75.00% 445,600 334,200 25,124,100 19,196,900 Midwest Cluster St. Louis, MO 15.00% 2,453,700 368,100 Kansas City, MO 50.00% 1,487,200 743,600 St. Joseph, MO 47.50% 98,500 46,800 Lawrence, KS 50.00% 86,100 43,100 Oklahoma City, OK 100.00% 963,300 963,300 Grant, OK 100.00% 203,100 203,100 Tulsa, OK 100.00% 779,800 779,800 Little Rock, AR 89.65% 528,100 473,400 Fort Smith, AR\/OK 100.00% 227,600 227,600 Fayetteville, AR 100.00% 229,500 229,500 Pine Bluff, AR 94.73% 84,800 80,300 7,141,700 4,158,600 Upper Midwest Cluster Minneapolis, MN 100.00% 2,543,700 2,543,700 St. Cloud, MN 69.51% 202,200 140,500 Rochester, MN 84.86% 112,800 95,700 Koochiching, MN 100.00% 57,300 57,300 2,916,000 2,837,200 Texas\/Louisiana Cluster Dallas, TX (3) 83.00% 4,201,900 3,487,600 Houston, TX (3) 56.25% 3,811,900 2,144,200 San Antonio, TX 100.00% 1,359,700 1,359,700 Austin, TX 100.00% 850,200 850,200 Shreveport, LA 97.50% 371,700 362,400 Corpus Christi, TX 90.97% 366,800 333,700 Temple\/Killeen, TX 100.00% 237,400 237,400 Lafayette, LA 87.64% 220,600 193,300 Waco, TX 100.00% 194,000 194,000 Longview, TX 100.00% 167,800 167,800 Monroe, LA 80.00% 145,700 116,600 Texarkana, AR\/TX 89.29% 134,900 120,500 Bryan-College St., TX 100.00% 125,000 125,000 Sherman-Denison, TX 100.00% 97,500 97,500 Ownership 1993 Net 1993 Interest Population(1) Pops(2) Market Texas\/Louisiana Cluster (con't.) Galveston, TX (3) 42.07% 231,800 97,500 Jack, TX 100.00% 79,400 79,400 Claiborne, LA 25.00% 112,400 28,100 Wichita Falls, TX 49.00% 130,400 63,900 Newton, TX (3) 100.00% 230,200 230,200 13,069,300 10,289,000 Other interests 4,500,500 395,100\nTOTAL 104,432,800 75,425,700\n__________________________________________ (1) Source: Donnelley Marketing Service Estimate for 1993. (2) Total Ownership Interest multiplied by 1993 Population. (3) Interests in Los Angeles, New York, Philadelphia, Houston and Newton reflect LIN's direct ownership interest therein. The interest in Dallas represents LIN's direct interest of 60.44% plus the Company's direct and indirect interests of 22.56%. The interest in Galveston represents LIN's direct interest of 34.60% plus the Company's direct interest of 7.47%. The Company owns an approximate 52% interest in LIN. LIN shares voting control equally with the other major partner in Los Angeles and Houston and controls Dallas, New York and Newton.\nWithin its clusters, the Company has pursued an aggressive acquisition strategy designed first to obtain majority or controlling interests in the largest and fastest growing MSAs and second to continuously enlarge the service area provided by obtaining majority or controlling interests in successively adjacent markets, thereby creating networks of uninterrupted coverage encompassing large metropolitan complexes. These complexes, which were arbitrarily divided in the licensing process, are commercial corridors through which local businesses and subscribers regularly conduct their affairs.\nIllustrated on the next two pages are several examples of the results of this strategy, both in assembling clusters and also in the creation of large metropolitan complexes within these clusters. On the West Coast, for example, the Company is in the process of establishing uninterrupted service from the Canadian border to Los Angeles. Within this \"I-5 Corridor\" the Company has assembled four metropolitan complexes: Greater Seattle, Greater Portland, Northern California and Southern California\/Nevada, each area embracing large, growing population bases. In between, the Company has obtained controlling interests in key markets along Interstate 5, which links Washington, Oregon and California. The Company has followed the same strategy in Florida, the Rocky Mountain area and Texas as illustrated below, as well as in its other clusters.\nThis page contains two maps. The first map depicts the Company's \"Florida Cluster\". The map shows the state of Florida, its major highways, and the Company's coverage area in that state. The following table appears also:\nTotal 1993 Company's Population 1993 Pops ---------- ---------- Greater Tampa\/Orlando 5,400,000 5,200,000 Greater Miami\/West Palm 4,500,000 4,500,000 Other 1,500,000 1,500,000 ---------- ---------- Total 11,400,000 11,200,000\nThe second map depicts the Company's \"I-5 Corridor\". The map shows the states of California, Nevada, Oregon, Washington and Idaho. It shows major highways in those states, and the Company's coverage area in those states. The following table also appears:\nTotal 1993 Company\/LIN Population 1993 Pops ---------- ---------- Greater Seattle\/Portland 6,400,000 6,300,000 Northern CA\/NV 10,900,000 7,500,000 Southern CA\/NV 16,600,000 7,700,000 Other 800,000 800,000 ---------- ---------- Total 34,700,000 22,300,000\nThis page contains two maps. The first map depicts the Company's \"Rocky Mountain Cluster\". The map shows the states of Utah and Colorado, the major highways in those states, and Company's coverage area in those states. The following table also appears:\nTotal 1993 Company's Population 1993 Pops ---------- ---------- Greater Denver 3,100,000 3,100,000 Greater Salt Lake City 1,600,000 1,500,000 ---------- ---------- Total 4,700,000 4,600,000\nThe second map depicts the state of Texas. It shows the major highways in that state, and the Company's coverage area in that state. The following table also appears:\nTotal 1993 Company\/LIN Population 1993 Pops ---------- ---------- Greater Dallas 4,400,000 3,700,000 Greater Houston 4,400,000 2,600,000 Greater Austin\/San Antonio 2,600,000 2,600,000 Other 1,200,000 1,000,000 ---------- ---------- Total 12,600,000 9,900,000\nThe Cellular Telephone Industry\nCellular telephone technology provides high quality, high capacity service to and from vehicle-mounted, hand-held portable and stationary wireless telephones. Cellular telephone systems (\"cellular systems\") divide a region into many \"cells,\" each covered by its own low-power transmitter, receiver and signaling equipment (the \"cell site\"). Each cell site is connected by landline, microwave or other technology to the system's computers in a mobile telephone switching office (the \"switch\"). The switches control the operation of the cellular system for the entire service area. Each conversation in a cellular system involves a radio transmission between a cellular telephone and a cell site and the transmission of the call between the cell site and a switch. The switch and cell sites periodically monitor the signal quality of calls in progress. The signal quality of the transmission between the cellular telephone and a cell site in any cell declines as the signal strength decreases. When the signal quality of a call declines to a predetermined level, the switch determines if the signal quality is greater at the cell site of another cell or different sector within the same cell and if so, \"hands off\" the call to that other cell site or sector. This hand off takes a fraction of a second and is not generally noticeable to either party to the call. If the cellular telephone leaves the service area of the cellular system, the call is disconnected unless an appropriate technical interface is established with an adjacent cellular system.\nCurrently, the radio transmission between the cellular telephone and the cell site is primarily an \"analog\" transmission and both the cellular telephone and the transmitting equipment are designed to send and receive voice signals exclusively in this mode. The Company is introducing new cellular telephones and transmitting equipment using \"digital\" transmission technology based on the TDMA format. Digital technology offers many advantages over analog technology, including an initial three-fold increase in capacity, lower costs and the opportunity to provide enhanced services, such as improved data transmissions, short messaging, caller ID and longer phone battery life. Because existing analog cellular telephones will not be able to receive digital transmissions from the cell site, the Company expects that the conversion from analog to digital will be phased in over a number of years, during which a system will maintain both analog and digital transmitting equipment and will thus be able to serve customers with either analog, dual- mode (analog and digital) or digital only cellular telephones. All of the Company's systems are already compatible with both analog and digital transmitting equipment. Thus, implementation of digital service only involves the change-out of cell site radios and certain other equipment. The Company expects its additional capital expenditures in 1994 in connection with the planned expansion of digital service to be approximately $110 million. Over time, the Company expects its capital expenditures to be reduced significantly because the resulting increased system capacity associated with digital service will reduce the need to add new cell sites.\nCellular systems can offer a variety of features including call forwarding, call waiting, conference calling, voice message storage and retrieval and voice recognition where subscribers can make calls by speaking the number to be dialed. Because cellular systems are fully interconnected with the landline telephone network, subscribers can receive and originate both local and long distance calls from their cellular telephones. The cellular system operator pays an interconnection charge to the local landline telephone company to carry calls placed from a mobile unit to a wired telephone. The amounts paid are subject to negotiation or tariff and vary from system to system.\nAll cellular phones are designed for compatibility with cellular systems in all market areas within the United States, Canada and Mexico and with all channels allocated for cellular use, so that a mobile unit may be used wherever a subscriber is located. Changes of cellular telephone numbers or other technical adjustments to mobile units by the manufacturer or the cellular service operator may be required, however, to enable the subscriber to change from one cellular system to another. Cellular system operators may provide service to subscribers from another cellular system temporarily located in or traveling through the operator's service area. Such subscribers are called \"roamers.\"\nThe FCC granted only two licenses for cellular service in each market. During its initial licensing of cellular MSAs and rural service areas (\"RSAs\"), the FCC reserved one license for applicants (such as the Company) that were not affiliated with any landline telephone carrier (the \"A Block license\"), and the other license for wireline applicants (the (\"B Block license\") . Now, subject to FCC rules, an A Block or B Block license may be granted to either a wireline or nonwireline entity, but no entity may control more than one cellular system in any service area.\nThe Company's Cellular Operations\nAcquisitions and Dispositions. The Company has aggressively pursued the acquisition of cellular interests throughout the United States, both through the application process and through acquisitions. In evaluating acquisitions, the Company considers price, the potential demand for cellular service in the market served, the ability to \"cluster\" systems in the area and the ability to obtain control of the system acquired. Attention to these considerations has enabled the Company to assemble cellular interests which it believes provide a strong operating base. The Company now owns cellular interests, located primarily in the Western and Sunbelt regions of the United States, in and around areas which it believes (in light of demographics or anticipated rate of population growth, or both) have above average potential for the development of cellular service. The Company is regularly engaged in discussions relating to the acquisition of additional interests in its existing markets, in markets adjoining its existing markets and in other areas. The competition for the purchase of controlling interests in cellular systems is intense, and the Company must often compete for control of additional systems with entities that have substantially greater capital resources. There can be no assurance that the Company will be able to acquire any additional cellular interests. The Company has disposed of cellular interests which were not critical to the completion of the Company's network.\nClustering. By obtaining licenses in areas adjacent to or near those in which it already controls a license, the Company has assembled and continues to develop eight regional clusters of cellular operations. The Company is a pioneer of the clustering concept and has successfully created a greater number of clusters than any other cellular service provider.\nThe Company's strategy in assembling clusters has been to build upon core metropolitan areas and by acquiring control of contiguous or nearby markets, to create wide areas of coverage serving larger concentrations of population than the original FCC licensing scheme would have suggested. For example, in Florida the Company's Miami, West Palm Beach and Fort Pierce markets, which are all contiguous, cover an aggregate of 4.5 million 1993 population.\nThese clusters offer many competitive advantages. For example, clusters permit the Company to offer subscribers more areas of service as they travel throughout a region, such as the Pacific Northwest, where the Company controls the A Block cellular systems in Seattle, Tacoma and Portland. The use of equipment from a single manufacturer may enable the Company to offer services at greater convenience to its customers than B Block competitors using equipment of different manufacturers. When the markets controlled by the Company are contiguous, the Company may offer uninterrupted service as a subscriber travels within the region.\nClustering can reduce capital and operating costs through shared use of equipment among nearby markets and common management. The sharing of equipment is especially important for smaller markets. The majority of the Company's cellular systems serving markets having populations of approximately 350,000 or less share equipment and construction and maintenance facilities with neighboring cellular systems controlled by the Company. The extent to which the Company centralizes operations within a given region varies depending on the proximity, size and number of the component markets.\nClustering also allows the Company to implement regional marketing and advertising efficiently. For example, customer recognition of the regional scope of the Company's operations is enanced by the consistent use by the Company throughout a region of the \"Cellular One\" name. See \"Marketing\".\nMajority Control. The Company has sought to obtain majority ownership or operating control of its cellular systems in order to control the development and operation of the systems and capitalize on its experience and expertise. Operating control enables the Company to implement its strategies, establish regional networks and take advantage of operating efficiencies not available to smaller or more fragmented operators. As of December 31, 1993, the Company owned, or had the right or obligation to acquire, a majority ownership interest in the A Block licensees (including the markets in which the CMT Partners Joint Venture will have a majority interest) in 83 of the 305 MSAs and 15 of the 416 RSAs licensed by the FCC. As of such date, the Company owned an interest in 34 of the 90 largest markets in the United States based on 1993 population. Of these markets, the Company currently has majority ownership in 28 markets.\nIn those markets in which the Company owns or purchases less than the entire interest in the cellular licensee, the license is generally held by a partnership in which the Company or one of its subsidiaries is a partner, although in smaller markets the license may be held by a corporation. In each such partnership in which the Company owns a majority interest, the Company exercises control over operations. The partnerships in these markets are governed by partnership agreements which are substantially similar and contain customary provisions dealing with capital contributions, distributions, transfers of interests and management.\nThe partnership agreement for the Pittsburgh market contains provisions entitling any partner, on or after June 4, 1991, to offer either to buy the partnership interest of the other partner or to sell its partnership interest, in each case at the price per percentage of interest stipulated by the initiating partner, and to require the other partner to elect to accept one of such offers (the \"shotgun\"). The Company and its other partner have mutually agreed not to trigger the Pittsburgh \"shotgun\" before September 28, 1995.\nMarketing. In marketing its services, the Company stresses that cellular telephones are affordable and easy to use and produce immediate and direct benefits to subscribers, including increased productivity for the business user and convenience for all subscribers. The Company also emphasizes that it is a locally managed, customer-oriented cellular system operator which is responsive and accommodating to the needs of subscribers. Like the A Block licensees in many other markets, most cellular entities controlled by the Company conduct business under the service mark \"Cellular One.\" The Company follows a strategy of controlled decentralization which allows each regional manager to adapt the Company's general marketing and incentive plans to the particular needs of the markets within his or her cluster, to develop innovative uses for cellular telephones and products which are responsive to local needs, and to set goals for the sales force and dealers. The key elements of all such marketing plans are appealing to potential subscribers, creating public awareness and understanding of the cellular telephone services offered by the Company, developing a sales force and dealer network, reducing the initial investment required by subscribers to obtain cellular service and certifying installation centers.\nSubscribers. While subscribers represent a wide range of occupations, they have traditionally been individuals who work in the construction, contracting, real estate, wholesale and retail industries, service industries and professionals. Because these individuals often work out of their cars during the day, the Company's systems are used primarily between the hours of 7:00 a.m. and 6:00 p.m. Increasingly, the Company's subscribers represent major accounts, such as federal and local governmental agencies, national and regional shipping, delivery and transportation companies and other businesses. Although a majority of the Company's subscribers are business users, a growing share of new customers use the phone principally for safety and convenience. The Company expects this trend to continue as market penetration increases. Over half of the Company's new subscribers purchase a portable unit that is not restricted to car use. The Company believes that hand-held portable cellular telephones will become an increasingly large portion of its subscriber base as the price for such telephones continues to decline.\nSales Force, Dealers and Retailers. The Company enlists subscribers through an internal sales force and through a network of independent dealers and retailers. Dealers and retailers are independent contractors who solicit customers on a commission basis for the Company's cellular systems.\nThe Company's dealers either are in the business of selling or servicing cellular telephones exclusively or are engaged in businesses with customers that are likely to become cellular subscribers. The Company has established and is continuing to pursue multi-state dealer arrangements. The Company has several dealer compensation contracts. Most involve a commission which is paid immediately to the dealer, but with the dealer's retention of all or part of the commission contingent upon the customer keeping the service for a specified period of time (generally between three and six months). Such contracts may also involve the payment of a portion of the commission over time, as service is provided to the subscriber.\nThe Company has also been successful in attracting premier national mass market retailers to distribute its products. National Marketing. Increasingly, large customers with nationwide needs for cellular services are purchasing these services centrally. Larger corporations generally require a national sales force, special volume purchase discounts, trial programs, central billing, simple rate plans, and national 24- hour customer service. The Company's National Account Services Group coordinates these activities with local markets. To improve these programs, the Company is now operating a central clearing house for all new national account orders and shipping of the cellular telephones to national accounts. The National Account Services Group also accredits local installers, and establishes the Company's national corporate price plan.\nThe Company has been authorized to list cellular telephone equipment on the General Services Administration approved schedule, which facilitates the buying process for all federal government agencies.\nTelephones and Installation. The Company purchases telephones under national sales contracts and, as a means of stimulating demand for cellular service, generally sells phones to its dealers and the major accounts it services directly at prices reflecting its costs. The Company cooperates with several cellular equipment manufacturers in local advertising and promotion of cellular equipment.\nThere are a number of different types of cellular telephones available, all of which are compatible with cellular systems nationwide. Models vary by type: car-mounted, transportable, and fully portable; by type of transmission: analog and digital; by feature, such as: speed dialing, speakerphone, voice recognition and horn alert; and by price. Prices at which telephones are sold to subscribers vary by market, resulting in part from local competitive forces.\nTo ensure quality installation and customer satisfaction, the Company certifies installation centers which meet certain quality control standards.\nProducts and Services. The Company generally offers its customers several pricing options. Some options consist of a fixed monthly charge plus additional variable charges per minute of telephone use. A high volume caller might find an option with a high monthly access charge and low per-minute charges to be most economical. Low volume users might choose a different package featuring a low access fee and high per-minute charge. The Company also offers plans with access fees which include a specified number of minutes, with established per-minute charges for usage in excess of the included minutes.\nThe Company makes available to subscribers custom calling services such as call-forwarding, call-waiting, three-way calling, no-answer and busy transfer. The Company has also instituted a voice retrieval message system and has or will be installing voice recognition technology in all its cellular systems. The Company also provides news, weather, sports and financial news recordings.\nThe Company has also implemented automatic roaming in its cellular systems. With automatic roaming, the Company's subscribers are pre-registered in cellular systems outside the Company's regions. Such subscribers receive service automatically while they are roaming, without having to communicate with the local office in any fashion.\nData-Over-Cellular. In 1992, the Company, together with several other cellular carriers and IBM, announced a cooperative effort to develop specifications for a packet data technology to be used for transmission of data over cellular communications systems (Cellular Digital Packet Data or \"CDPD\"). This technology will allow data to be transmitted across existing cellular networks without disrupting or degrading voice traffic and without requiring additional system capacity or spectrum. The technology is designed to serve wireless personal computing devices and a variety of other wireless business applications. The Company and the other participating carriers have funded development of specifications which have resulted in an open industry standard, using existing technology as building blocks. This open industry standard will allow manufacturers to use the same technical requirements, providing widespread service capability. The Company recently commenced offering CDPD services in Las Vegas, Nevada and expects commercial service to begin in its largest markets during 1994.\nCustomer Service. The Company recognizes that being responsive to the problems and concerns of its subscribers is critical in a service business. The Company trains and certifies various agents to provide repair services for the Company's subscribers. The Company continually monitors and provides ongoing training for service centers. In addition, the Company operates its markets through an on-site staff, including a branch manager or managers, technicians and customer service representatives.\nCellular Competition. The FCC awarded only two cellular licenses in each market - an A Block and a B Block license. During its initial licensing of MSAs and RSAs the FCC reserved the A Block license for a nonwireline company (which in each of the Company's markets is the partnership or other entity in which the Company owns an interest) and the B Block license for an affiliate of a local wireline telephone company. Now, subject to FCC rules, an A Block or a B Block license may be granted to either a wireline or a nonwireline entity, but no entity may control more than one license per market. Only a small number of RSA cellular licenses have not been granted. Each licensee in a market has the exclusive grant of a defined frequency band within that market. The Company also faces competition for wireless communications services in each market from other wireless technologies which provide many of the characteristics of cellular service. See \"Competition From Other Technologies\".\nCompetition is principally on the basis of services and enhancements offered, the technical quality of the system, quality and responsiveness of customer service and price. Competition may be intense. Under applicable law, the Company is required to permit the \"reselling\" of its services. In certain larger markets and in certain market segments such as national customers, competition from resellers may be significant. There is also competition for dealers.\nThe Company believes that in most of its markets the B Block competitor must be viewed as formidable because of its greater assets and resources and more extensive experience in telecommunications. Large amounts of capital are required to build and operate a cellular system, especially for equipment and marketing. Because of their historical affiliation with the local telephone company, the financial and other resources available to the B Block licensees will generally be greater than those available to the Company. In addition, the B Block licensee generally completed construction and commenced operation of its system earlier than the Company's partnership, giving the B Block licensee a significant head start.\nFCC rules require Regional Bell Operating Companies that become cellular operators to create a separate subsidiary to own and operate cellular systems. This requirement is intended to make it more difficult for these companies to engage in anticompetitive activities, such as subsidizing their cellular operations from monopoly landline revenues in order to force cellular competitors out of the market.\nThere are currently pending several legislative initiatives which may affect the Company, including proposals regarding the obligation of common carriers such as the Company to provide interconnection or equal access to interexchange carriers and the right of the Regional Bell Operating Companies (which are the Company's primary B Block competitors) to offer or resell interexchange services. In light of the uncertainty as to whether such legislation will be enacted or the final form thereof, and as to the nature of the additional competitive services covered thereby, it is impossible to quantify the impact of these legislative initiatives or such competition on the Company at this time.\nCompetition From Other Technologies. Potential users of cellular systems may find their communication needs satisfied by other current and developing technologies. For example, specialized mobile radio (\"SMR\") systems, generally used by taxicabs and tow truck services, and other communication services which have the technical capability to handle mobile telephone calls may provide competition in certain markets. One-way messaging or beeper services that feature voice message and data display as well as tones may be adequate for potential subscribers who do not need to transmit back to the caller. Other two-way mobile services may also be competitive with the Company's services. For example, the second generation of cordless telephone technology will permit the application of this technology to a public environment. If sufficient demand develops for these types of services, however, current regulation would permit the Company to offer them under its existing licenses.\nIn addition to B Block cellular competition, the Company and its unconsolidated affiliates expect to face competition from enhanced specialized mobile radio services (\"ESMR\") operations, such as Nextel, which are providing cellular-like services in the Company's California markets. A number of other ESMR networks are scheduled to begin either operation or construction in 1994 in other cities as well.\nIn September 1993, the FCC adopted rules for the licensing of personal communications services (\"PCS\"). While the Company and other cellular carriers will be eligible to compete for these licenses, the amount of PCS spectrum that cellular carriers may acquire in their own cellular market areas is limited. Furthermore, the FCC's rules provide for as many as seven PCS licenses in any market area, so the likelihood of additional competition in wireless services has increased. The FCC has also established Rand-McNally Major Trading Areas (\"MTAs\") and Basic Trading Areas (\"BTAs\") as the licensing areas for PCS services. Both MTAs and BTAs are larger than a cellular MSA or RSA. In some instances, an MTA may exceed in size the Company's cluster of cellular licenses in a particular geographic region. It is expected that PCS licenses will begin to be awarded in 1994. Several parties to the FCC proceeding including the Company have petitioned for reconsideration of certain aspects of the PCS rules and it is possible that the FCC could amend its rules based on these petitions.\nSome of the PCS spectrum is already used by cellular carriers for microwave transmissions, and the FCC has determined that the existing microwave users must be phased out or relocated to new frequencies once PCS is deployed. However, the FCC's rules enable displaced microwave users to obtain compensation from PCS licensees for vacating PCS spectrum and provide for a transition period before incumbent microwave users are forced to relocate.\nPursuant to the Omnibus Budget Reconciliation Act of 1993, signed into law in August 1993, the FCC will auction the spectrum that it has allocated for PCS licenses. Auctions are scheduled to begin in May 1994. The FCC has recently proposed rules for conducting auctions; these include a provision for the submission of bids to acquire all licenses available within a common spectrum block, thus offering a new PCS entrant the possibility of obtaining national coverage. Because the auction rules are only in preliminary form, it is uncertain how they will affect the Company's competitive position.\nThe Company's Messaging Operations\nGeneral. The Company owns messaging businesses operating in 13 states comprising the fifth largest messaging business in the United States. The Company's messaging businesses provide three services: radio messaging (one-way), conventional mobile communications (two-way) and telephone answering. Radio messaging services are either operator-assisted or fully automated and include tone-alert, silent-alert, tone-and-voice, alpha-numeric and digital display messaging. Mobile communications services include conventional mobile telephone services (\"MTS\"), Improved Mobile Telephone Service (\"IMTS\"), air-to-ground services and marine radio.\nThe Company's messaging businesses had, as of December 31, 1993, approximately 525,000 messaging units in service in the states of Washington, Oregon, California, Colorado, Utah, Nevada, Alaska, Minnesota, Kansas, Missouri, Arkansas, Oklahoma and Texas. The majority of these subscribers are in locations where the Company owns or has the right or obligation to acquire cellular interests. The Company believes that combining cellular telephone and messaging businesses enables the Company to have a comprehensive personal communications presence in those markets and allows it to realize marketing advantages as well as economies of scale in management services.\nMessaging Services. Messaging services provide the ability to contact, by means of a radio-transmitted signal, persons who carry small radio receivers. The caller uses a cellular or landline telephone to reach an assigned telephone number at the service provider's facilities. The assigned number is automatically relayed to the messaging terminal, and the call triggers a signal which is relayed to the terminal's transmitter, and transmitted to the messaging unit. Subscribers to messaging services include medical and legal groups, messenger services, and off-duty emergency personnel. Subscribers typically rent the messaging units on a month-to-month basis and pay a flat monthly fee for messaging services.\nCompetition. Competition in the radio messaging industry is intense and includes local radio common carriers, private messaging systems and some FM broadcasters (using the subcarrier channel). In addition, the FCC has allocated 3 MHz of spectrum in the 900 MHz band for new narrowband PCS services that it will auction off in the form of 11 national licenses, 6 regional licenses, 7 MTA licenses and 2 BTA licenses.\nThe Company's Air-to-Ground Communications Operations\nThrough Claircom, the Company holds a license to provide common carrier air-to-ground telecommunications services in the U.S., and holds minority interests in two companies which are licensed to provide similar service in Canada and Mexico. Claircom has entered into agreements to provide digital voice and data services to Alaska Airlines, Inc., American Airlines, Inc., Northwest Airlines, Inc. and Southwest Airlines Co. The agreements with these carriers represent commitments to install Claircom equipment on approximately 1,100 commercial aircraft. Claircom also has entered into an agreement with Air France to install satellite-based equipment on certain international aircraft. Claircom currently offers nationwide service in the U.S. and has installed its equipment on approximately 275 aircraft.\nBusiness of LIN\nLIN is principally engaged in the cellular telephone and media (commercial television broadcasting and specialty publishing) businesses. LIN owns cellular interests representing approximately 27.2 million 1993 pops in New York, Los Angeles, Philadelphia and Dallas-Fort Worth, Houston, Galveston and Newton, Texas and owns seven network-affiliated television stations. LIN also conducts a specialty publishing business through its GuestInformant division. Set forth below is a summary description of LIN's business. For a more complete description, see LIN's current Annual Report on Form 10-K.\nCellular Operations. LIN, through subsidiaries, holds significant ownership interests in, and participates in the management and operation of, cellular systems in New York, Los Angeles, Philadelphia and Dallas-Fort Worth, Houston, Galveston and Newton, Texas. Five of LIN's cellular markets are in the ten largest MSAs in the United States. The licenses or permits for each cellular telephone market in which LIN has an interest are held by a general partnership in which one of LIN's subsidiaries is a general partner (except for the Philadelphia market, in which the license is held by a corporation). Following is information with respect to the seven cellular systems in which LIN owns an interest.\nThe agreements governing the New York, Los Angeles, Dallas- Fort Worth, Houston and Galveston partnerships are generally similar and LIN's subsidiaries have or share effective operating control of each partnership. LIN's wholly-owned subsidiaries are general partners in these partnerships, and each of the partnerships is governed by a Partners' or Executive Committee consisting of designated representatives from the partners in the particular partnership. In each case, the applicable partnership agreement generally provides that all rights and obligations (other than voting), such as obligations for capital investment, sharing of profits and losses, and distributions, are based upon percentage ownership. The cellular system serving the Philadelphia market is conducted in the form of a corporation, and Comcast has operating control of the corporation. The participants in each of these partnership or corporate entities are generally responsible for their pro rata share of all capital contributions called for by the governing bodies of such entities, and failure to make such contributions could result in the ownership interest being either forfeited or diluted. Such ownership interests are also subject to restrictions upon the owners' ability to sell, transfer, pledge or otherwise encumber or dispose of such interests under certain circumstances.\nTelevision Broadcasting. Information with respect to LIN's television stations is set forth in the following table.\nLIN also provides programming and advertising services pursuant to a local marketing agreement to WOTV-41, Battle Creek, Michigan, an ABC affiliate operating on UHF Channel 41. The Grand Rapids-Kalamazoo-Battle Creek market, with a population of approximately 1,683,000, is served by three commercial VHF stations, including station WOOD-TV, which is owned by LIN, and one other commercial UHF television station and three non- commercial UHF television stations.\nBroadcasting operations are subject to the jurisdiction of the FCC under the Communications Act. The Communications Act empowers the FCC, among other things, to issue, revoke, modify and renew broadcasting licenses, approve the transfer of such licenses, assign frequency bands and determine the location of stations, regulate the apparatus used by stations, establish areas to be served by particular stations, regulate distribution of network programming and syndicated programs, adopt such regulations as may be necessary to carry out the provisions of the Communications Act and impose certain penalties for violation of those regulations. Both UHF and VHF television licenses issued by the FCC authorize licensees to provide broadcast service on specific channels which cover specified service areas.\nBroadcasting licenses for television stations are granted for a maximum period of five years and they are renewable upon application therefor. During certain periods when a renewal application is pending, competing applicants may file for the frequency in use by the renewal applicant. Competing applicants may be entitled to a comparative hearing in competition with the renewal applicant. As of December 31, 1993, no competing applications had been filed against any of LIN's stations.\nIn addition, petitions to deny applications for renewal of licenses may be filed during certain periods following the filing of renewal applications. In recent years, representatives of various community groups and others have filed numerous petitions to deny renewal applications of broadcasting stations. None of LIN's stations are subject to renewal during 1994. Renewal applications must be filed with the FCC four months before the expiration date of the license, and competing applications and petitions to deny must be filed one month prior to the expiration date.\nThe foregoing does not purport to be a complete summary of all of the provisions of the Communications Act or the regulations and policies of the FCC thereunder which relate to television broadcasting. Reference is made to the Communications Act, such regulations and the public notices promulgated thereunder by the FCC for further information relating thereto.\nSpecialty Publishing. GuestInformant (managed by Metromedia) publishes annual, hardcover, high quality publications which are placed in the rooms of distinguished hotels in 33 metropolitan areas. For each of these locations, GuestInformant produces a distinctive magazine, which contains editorial features relating to places of interest in the area and advertisements supporting each magazine published. In select markets, GuestInformant also publishes a Quick City Guide, which is a softcover magazine distributed in hotel lobbies. Editorial and production offices are located in Woodland Hills, California, and sales offices are maintained in New York and most other major cities. Printing is done by independent contractors.\nPrivate Market Value Guarantee\nThe Company has entered into the Private Market Value Guarantee (\"PMVG\") with LIN for the benefit of LIN's stockholders (other than the Company and its affiliates). The PMVG provides among other things that, for as long as the Company and its affiliates beneficially own in the aggregate at least 25% of the outstanding shares of LIN Common Stock (\"Shares\") on a fully diluted basis or the Company's designees constitute a majority of the Board of Directors of LIN, and any Shares are held by other persons, the following provisions shall apply:\nIndependent Directors. Three members of LIN's board of directors (the \"Independent Directors\") will be independent directors as determined under the New York Stock Exchange Rules (i.e., independent of management of the Company and its affiliates and free of any relationship that, in the opinion of LIN's Board of Directors, would interfere with the exercise of independent judgment). The initial Independent Directors are persons who served on LIN's Board of Directors prior to the completion by the Company of its tender offer for LIN. At each annual meeting of LIN's stockholders, Independent Directors will be nominated by the then current Independent Directors and elected by a Majority Vote of the Public Stockholders, as defined below. Independent Directors will be subject to removal only (a) for cause, (b) if a majority of the Independent Directors approve such removal or (c) if such removal is approved by a Majority Vote of the Public Stockholders.\n\"Majority Vote of the Public Stockholders\" means (a) the affirmative vote of the holders of at least a majority of the Public Shares present and entitled to vote at any meeting at which the holders of a majority of the Public Shares are present or (b) the action by written consent (in accordance with applicable provisions of Delaware law and LIN's certificate of incorporation and by-laws) of the holders of a majority of the Public Shares. \"Public Shares\" means Shares not owned by the Company or any of its affiliates.\nSale of LIN After Five Years. On or about January 1, 1995 (the \"Initiation Date\"), the Independent Directors will designate an investment banking firm of recognized national standing and the Company will designate an investment banking firm of recognized national standing, in each case to determine the private market value per Share. Private market value per Share is the private market price per Share (\"Private Market Price\") (including control premium) that an unrelated third party would pay if it were to acquire all outstanding Shares (including the Shares held by the Company and its affiliates) in an arm's length transaction, assuming that LIN was being sold in a manner designed to attract all possible participants (including the Regional Bell Operating Companies) and to maximize stockholder value, including if necessary through the sale or other disposition (including tax-free spin-offs, if possible) of businesses prohibited by legal restrictions to be owned by any particular buyer or class of buyers (e.g., the Regional Bell Operating Companies).\nOnce the Private Market Price is determined pursuant to the procedures provided for in the PMVG, the Company will have 45 days to decide whether it desires to proceed with an acquisition of all of the public shares (an \"Acquisition\") at that price. If the Company decides to proceed with an Acquisition, it may pay the Private Market Price in cash or any combination of cash, common equity securities and\/or nonconvertible senior or subordinated \"current cash pay\" debt securities that the Independent Directors, after consultation with their investment banking firm, believe in good faith will have an aggregate market value, on a fully distributed basis, of not less than the Private Market Price. If the Company determines to proceed with an Acquisition as set forth above, it will enter into an agreement with LIN (containing customary terms and conditions) and will cause a meeting of stockholders of LIN to be held as soon as practicable to consider and vote thereon. The Acquisition may only be completed if it is approved by a Majority Vote of the Public Stockholders.\nIf the Company determines not to proceed with an Acquisition, or if despite the Company's good faith efforts an Acquisition has not been completed within 12 months following the Initiation Date (or, if an Acquisition has been approved by a Majority Vote of the Public Stockholders and is being pursued in good faith by the Company but has not been completed due to regulatory delays or litigation, 20 months following the Initiation Date), the Company will put LIN in its entirety up for sale under direction of the Independent Directors in a manner intended by the Independent Directors to maximize value for all Shares. The sale procedures will be set by the Independent Directors and may include, if necessary in order to maximize stockholder value, provision for the sale or other disposition of businesses prohibited by legal restrictions to be owned by any particular buyer or class of buyers (e.g., the Regional Bell Operating Companies). The Independent Directors will select from among the proposed transactions the one or more transactions determined by them (including tax-free spin-offs, if possible) as being most likely to maximize value for all Shares and will cause a meeting of LIN's stockholders to be held as soon as practicable to consider and vote thereon. The Company will not bid unless requested to do so by the Independent Directors. The Company will fully cooperate in this process and, if one or more of the transactions so selected by the Independent Directors are approved by a Majority Vote of the Public Stockholders, will cause all Shares owned by it or its affiliates to be voted in favor thereof. Any sale of LIN would be subject to receipt of FCC and other necessary regulatory approvals.\nIf a transaction is presented for approval at a meeting of stockholders as contemplated above and fails to receive the requisite Majority Vote of the Public Stockholders, the Company will have no further rights or obligations to purchase the remaining interest in LIN, but the remainder of the PMVG shall continue to apply to the extent described therein.\nContinuing Stockholder Protections. Except as described above, neither the Company nor any of its non-LIN affiliates may engage in any material transaction (including, without limitation, agreements, such as roaming agreements, which are standard in the industry) with LIN or any of its subsidiaries (other than proportionate as a stockholder of LIN) unless such transaction has been approved by a majority of the Independent Directors.\nExcept as described above, neither the Company nor any of its non-LIN affiliates may engage in a merger or consolidation with LIN, or purchase all or substantially all of LIN's assets, unless the transaction is approved not only by a majority of the Independent Directors but also by a Majority Vote of the Public Stockholders. In deciding whether to approve such a transaction, the Independent Directors will be instructed to consider as a fair price per Share the Private Market Price per Share (including control premium) that an unrelated third party would pay if it were to acquire all outstanding Shares (including the Shares held by the Company and its affiliates) in an arm's length transaction, assuming that LIN was being sold in the manner contemplated above. The Independent Directors will retain independent financial advisors and counsel to advise them with respect to any such transaction.\nNo transaction will be undertaken, and LIN will not take any action, whether or not approved by a majority of the board of directors of LIN, if the Independent Directors determine in their good faith judgment by unanimous vote that such transaction or action would likely depress the value of LIN on the Initiation Date. In addition, LIN will not acquire or dispose of any business (other than acquisitions of additional cellular interests in markets in which LIN has an interest), whether or not approved by a majority of the board of directors of LIN, if the Independent Directors determine in their good faith judgment by unanimous vote that such acquisition or disposition is not in the best interests of LIN. Additional Share Purchases. Except as permitted above, neither the Company nor any of its non-LIN affiliates may purchase additional Shares if, after giving effect thereto, they would beneficially own in the aggregate more than 75% of the outstanding Shares on a fully diluted basis.\nCorporate Opportunities. The Company will direct to LIN, and LIN will have a priority right to pursue, all corporate opportunities to acquire interests in U.S. cellular telephone systems other than those in markets in which the Company has an interest or contiguous to markets in which the Company has such an interest (in the latter instance, however, only if such market is not a market in which LIN has such an interest or contiguous to such a market). For purposes of the foregoing, a party will not be deemed to have an interest in a cellular telephone system solely by reason of such party's ownership of less than a majority equity interest in a public company having such an interest. The Independent Directors will be afforded an amount of time reasonably necessary to consider any such transaction, consistent with any time constraints imposed by the other party to such transaction, and if and for as long as a majority of the Independent Directors desire to pursue such transaction, the Company will not separately pursue that transaction.\nCertain Transferees Bound. Except pursuant to a sale of LIN as described above, neither the Company nor any of its non-LIN affiliates may sell more than 25% of the outstanding Shares on a fully diluted basis to a third party or group unless that third party or group agrees in writing to be bound by the provisions set forth in the PMVG to the same extent as the Company is so bound.\nAmendments. The provisions of the PMVG may be amended in any respect not materially adverse to the holders of Public Shares, but only if the amendment is approved by a majority of the Independent Directors. Any such amendment will promptly be disclosed in a filing with the Securities and Exchange Commission. The determination of the Independent Directors as to whether an amendment is materially adverse to the holders of Public Shares shall be final and shall bind all holders of Public Shares. The provisions of the PMVG may also be amended in any other respect if the amendment is approved by a Majority Vote of the Public Stockholders.\nThe foregoing description is only a summary of the PMVG, which has been filed with the Securities and Exchange Commission as an exhibit to this Annual Report on Form 10-K.\nGovernmental Regulation\nCellular. The construction, operation and transfer of cellular systems in the United States are regulated to varying degrees by the FCC pursuant to the Communications Act. The FCC has promulgated regulations governing the construction and operation of cellular systems, licensing and technical standards for the provision of cellular telephone service.\nFor licensing purposes the FCC divided the United States into separate geographic markets (MSAs and RSAs). In each market, the allocated cellular frequencies are divided into two equal blocks. During the initial application process for MSAs and RSAs, the FCC reserved the A Block frequencies for nonwireline applicants (such as the Company) and the B Block for wireline applicants. Now, subject to FCC rules, an A Block or B Block license may be granted to either a wireline or nonwireline entity, but no entity may control more than one cellular system in any MSA or RSA.\nThe completion of acquisitions involving the transfer of control of a cellular system requires prior FCC approval and, in certain cases, compliance with the HSR Act and state regulatory approval. Acquisitions of minority interests generally do not require FCC approval. Whenever FCC approval is required, any interested party may file a petition to dismiss or deny the Company's application for approval of the proposed transfer. The Company expects to receive in the ordinary course FCC approval for the completion of all of its pending acquisitions for which such approval is required and which has not already been obtained.\nWhen a cellular system has been constructed, the licensee is required to notify the FCC that construction has been completed. Immediately upon this notification, but not before, FCC rules authorize the licensee to offer commercial service to the public. The licensee is then said to have \"operating authority.\" The Company has obtained operating authority for each of its cellular systems that is currently in operation. Initial operating licenses are granted for 10 year periods. The FCC has recently established the procedures and standards for filing renewal applications, filing petitions to deny applications for renewal and conducting comparative renewal proceedings between cellular licensees and challengers filing competing applications. The FCC will award a \"renewal expectancy\" to cellular operators meeting specific criteria that establish that the licensee has adequately provided service to the public and has complied with applicable rules and regulations. The ruling establishing the process of obtaining a \"renewal expectancy\" and other procedures for renewal is subject to further FCC review. The Company filed its renewal application for its Minneapolis, Minnesota license in 1993. No competing applications were filed and the application was unopposed. Licenses may be revoked and license renewal applications denied for cause. In addition, if a renewal expectancy is not granted, a license could be awarded to a competing applicant if it prevails in a comparative hearing.\nUnder FCC rules, the authorized service area for the Company in each of its markets is referred to as the \"cellular geographic service area\" or CGSA. The CGSA is comprised of the composite service area of the system's cell sites as measured according to a formula established by the FCC in 1992 and contained in its rules. The CGSA may be coincident with or smaller than the related MSA or RSA. The right to serve areas which fall within the licensee's MSA or RSA but outside of its CGSA is exclusive to such licensee for a period of 5 years from the date the licensee receives authority to construct its system. This ruling and the manner in which the FCC defines the CGSA is currently subject to further FCC and court review. At the conclusion of such 5-year period other entities may apply to serve areas within the MSA or RSA that are unserved by the licensee. If more than one mutually exclusive application is filed for an unserved area, the FCC is considering whether to use its auction authority to choose a winner or whether to award the area by lottery. In March 1993 the FCC began accepting such unserved areas applications and the Company expects that there will be applications filed for unserved areas within MSAs where it holds the initial A Block licenses. The Company expects that any unserved areas within its MSAs will be immaterial to the Company. In addition, the Company intends to file several unserved areas applications to attempt to obtain rights to serve additional territory. Because of the possibility of other competing applications, the Company has no assurance that these applications will be granted.\nThe FCC requires landline telephone carriers in each market to offer reasonable interconnection facilities to both cellular systems in the market and to disclose how the B Block licensee will interconnect with the landline network. The A Block cellular licensee has the right to interconnect with the landline network in a manner no less favorable than that of the B Block licensee; it may, however, negotiate interconnection arrangements that are not identical to those provided to the B Block licensee in that market. In addition, the FCC is now considering the issue of whether commercial mobile radio services such as cellular should be required to provide interconnection to their networks to other carriers.\nThe FCC's rules also generally require persons or entities holding cellular construction permits or licenses to coordinate their proposed frequency usage and system design with other cellular users and licensees in order to avoid electrical interference between adjacent systems or the capture of another market's subscribers. The height and power of base stations in the cellular system are regulated by FCC rules, as are the type of signals emitted by these stations. In addition to regulation by the FCC, cellular systems are subject to certain Federal Aviation Administration regulations respecting the marking, lighting, siting and construction of cellular transmitter towers and antennas.\nThe FCC has initiated a rulemaking to update its rules which ensure that FCC-regulated transmitters do not expose the public or workers to potentially harmful levels of radio frequency radiation. The Company does not believe that the standards that have been proposed will have any significant impact on the Company or its services.\nThe Company is also subject to state and local regulation in some instances. In 1981, the FCC preempted the states from exercising jurisdiction in the areas of licensing, technical standards and market structure. However, certain states require cellular system operators to go through a state certification process to serve communities within their borders. All such certificates can be revoked for cause. In addition, certain state authorities regulate several aspects of a cellular operator's business, including the rates it charges its subscribers and cellular resellers, the resale of long-distance service to its subscribers, the technical arrangements and charges for interconnection with the landline network and the transfer of interests in cellular systems. The siting and construction of the cellular facilities, including transmitter towers, antennas and equipment shelters may also be subject to state or local zoning, land use and other local regulations.\nPublic utility or public service commissions (or certain of the commissioners) and legislators in several states have expressed an interest in examining whether the cellular industry should be more closely regulated by such states. Such regulation could include one or all of the following: regulating the manner in which cellular service is provided to \"wholesale\" or \"bulk\" purchasers who resell such service to the public; regulating the provision of cellular service across landline telephone \"exchange\" or \"LATA\" boundaries; or mandating that cellular providers allow \"equal access\" to long-distance providers, thereby allowing cellular subscribers to choose their long- distance provider. There can be no assurance that this does not evidence a future trend in state regulation of the cellular industry.\nApplicable law administered by the FCC requires that the total percentage of shares of the Company owned of record or voted by non-United States persons or entities shall not exceed 25%. Under Article IX of the Company's Restated Certificate of Incorporation, the Company has the right to redeem outstanding shares of its stock if the Board of Directors determines that such redemption is necessary to prevent the loss or secure the reinstatement of any governmental license or franchise held by the Company. Although the Company believes that its foreign ownership is currently less than the 25% limit, because BT USA Holdings, Inc. (\"BT USA\") owns a significant portion of the 25% permitted foreign ownership and the Company has additional foreign ownership, the Company may, from time to time, redeem stock from non-United States persons or entities.\nThe Omnibus Budget Reconciliation Act specifies that cellular and other commercial mobile providers should be subject to similar regulatory treatments, including possible federal pre- emption of state rate and entry regulation. These provisions may reduce some of the Company's regulatory compliance costs and may ensure that competing wireless services do not acquire competitive advantages as a result of disparate regulatory treatment. Nevertheless, in light of the uncertainty as to how the legislation will be implemented, and as to the nature of the additional competitive services covered thereby, it is impossible to quantify the impact of these legislative and regulatory initiatives on the Company at this time.\nMessaging. FCC regulations control the number of frequencies available to conduct messaging and mobile communications operations. Competition for new frequencies can be intense and any qualified applicant could be granted such a frequency.\nThe Company's radio messaging and other radio telecommunications activities are subject to FCC regulation. All channels used in these activities are licensed by the FCC, and future business may be limited by FCC regulations in a variety of areas, including, among other things, regulations restricting the number of available channels. The FCC allocates a limited number of messaging frequencies in a given geographical area and grants licenses for the exclusive use of such channels only upon a satisfactory showing of compliance with FCC regulations. The licenses are generally issued for up to 10-year periods. At the end of the 10 years, a renewal application must be made for the license which will be granted only upon showing compliance with FCC regulations, and continuing service to the public. The Company believes there will not be competition for a license upon the expiration of its initial 10-year period, but there can be no assurance that any license will be renewed. Such licenses are revocable only for specified causes.\nVarious states require radio messaging and mobile radio service providers to go through a state certification process prior to providing service in a proposed area. All such certificates can be revoked for cause. State public service commissions may also have regulatory authority over rates charged for messaging, IMTS and MTS service. The siting and construction of messaging and other radio transmitters, antennae and equipment shelters is subject to the same state or local zoning, land use and other local regulations as is the siting and construction of cellular systems.\nEmployees\nThe Company (excluding LIN) has approximately 5,800 employees. LIN has approximately 4,060 employees, including employees in the cellular ventures in which LIN has an interest. The majority of such employees are not represented by a labor organization. Management considers its employee relations to be good.\nItem 2.","section_1A":"","section_1B":"","section_2":"Item 2. PROPERTIES\nTo provide service the Company maintains sales and administrative offices, and many transmitter or antenna sites. The Company generally leases all of these facilities, although it does own such premises where it is in the best interests of the Company to do so. See Note 13 to the Company's Consolidated Financial Statements included herein.\nItem 3.","section_3":"Item 3. LEGAL PROCEEDINGS\nThe Company is a party to certain litigation in the ordinary course of business and to routine filings with the FCC and state regulatory authorities, customary regulatory proceedings in connection with acquisitions and interconnection rates and practices, proceedings concerning the telecommunications industry and other proceedings which management believes are immaterial to the Company.\nIn May 1990, a suit was filed in the United States District Court for the District of Columbia against the Company by the former owners (the \"Charisma Group\") of cellular interests which the Company acquired in 1986 and 1987 and some of which the Company sold in its transaction with Contel Cellular Inc. (the \"Charisma Litigation\"). The suit alleges that the transaction with Contel breached an agreement that would have required the Company to share with the Charisma Group up to 25 percent of the net capital gains from such sale.\nDuring the same period that the Company acquired cellular interests from the Charisma Group in 1986 and 1987, the Company also acquired similar interests from Maxcell Telecom Plus, Inc. (\"Maxcell\"). On November 1, 1993, Maxcell and its parent, Telecom Plus, Inc. (\"TPI\") filed a suit in the Circuit Court, Palm Beach County, Florida alleging that the Company made certain oral representations to the former owners of Maxcell that they would be treated identically to the Charisma Group in connection with their sale of interests to the Company, and that the alleged agreement made by the Company with the Charisma Group violated that oral agreement (the \"TPI Litigation\"). In an apparent response to defendant's motion to dismiss, plaintiff filed an amended complaint. Plaintiff's allegations in the amended complaint include claims for fraud, breach of contract, breach of implied contract, interference with contract, breach of fiduciary duty, constructive trust, promissory estoppel, breach of covenant of good faith and fair dealing, conspiracy and concealment. Various types of relief including rescission, reformation, damages and punitive damages are sought. Former owners of Charisma are co-defendants individually and as class defendants.\nThe Company believes that the Plaintiffs in both suits are not entitled to the relief sought and is defending the lawsuits vigorously. The Company initially filed a response to the complaint denying the allegations in the Charisma Litigation and asserting various affirmative defenses, and has subsequently filed counter claims and third-party claims in such litigation. The Company also filed two motions for summary judgment dismissing the Charisma Litigation. The Court denied those summary judgment motions. Discovery in the Charisma Litigation is proceeding; no trial date has been set. In the TPI Litigation, defendant's motion to dismiss is still pending. Management believes the results of the Charisma Litigation and the TPI Litigation will not have a material adverse impact on the financial position or results of operations of the Company.\nOn August 15, 1993, the Company entered into a Memorandum of Understanding which would result in the settlement of the litigation entitled In re McCaw Cellular Communications, Inc. Shareholders Litigation, Consolidated Civil Action No. 12793, described in the Company's Current Report on Form 8-K, dated November 17, 1992. The settlement is subject to approval by the court, consummation of the AT&T Transaction and other customary conditions. The defendants have denied, and continue to deny, that they have committed any violations of law and, as the Memorandum of Understanding states, are entering into the settlement solely to eliminate the burden and expense of further litigation. If approved, the settlement will release all claims of the Company's stockholders in connection with or that arise out of the subject matter of the action, the Company's proposed strategic alliance with AT&T (which was abandoned when the proposed Merger with AT&T was agreed to), the proposed Merger, the negotiation and consideration of such transactions, and the fiduciary or disclosure obligations of any of the defendants (or other persons to be released) with respect to any of the foregoing. It is expected that the Company's stockholders separately will be provided a notice containing further information regarding the proposed settlement and related proceedings, including a settlement hearing to be scheduled by the court.\nItem 4.","section_4":"Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS\nNo matters were submitted to a vote of security holders during the quarter ended December 31, 1993.\nPART II\nItem 5.","section_5":"Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS\nThe Class A Common Stock has been quoted on the Nasdaq National Market under the symbol MCAWA since the Company's initial public offering on August 21, 1987. On March 17, 1988, the Class A Common Stock began trading on the Pacific Stock Exchange under the symbol MCWA. The following table sets forth, for the calendar quarters indicated, the high and low sales prices of the Class A Common Stock on the Nasdaq National Market as reported in published financial sources. These prices reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not necessarily represent actual transactions.\nYear High Low\n1992: First Quarter . . . . . . . . . . . 36 28 3\/4 Second Quarter. . . . . . . . . . . 29 3\/4 22 3\/4 Third Quarter . . . . . . . . . . . 28 1\/4 23 1\/8 Fourth Quarter . . . . . . . . . . 34 1\/4 20 1\/4\n1993: First Quarter . . . . . . . . . . . 41 1\/4 31 1\/2 Second Quarter. . . . . . . . . . . 46 1\/4 35 Third Quarter . . . . . . . . . . . 57 3\/4 44 3\/4 Fourth Quarter. . . . . . . . . . . 57 5\/8 50\n1994: First Quarter (through March 15, 1994). . . . . 54 1\/4 48 3\/4\nThere is no public trading market for the Company's Class B Common Stock.\nAs of March 15, 1994, there were 8,001 holders of record of the Company's Class A Common Stock (which number does not include the number of stockholders whose shares are held of record by a broker or clearing agency but does include such a brokerage house or clearing agency as one recordholder). As of March 15, 1994, there were 21 holders of record of the Company's Class B Common Stock, par value $.01 per share.\nThe Company has never paid cash dividends on its Class A Common Stock or Class B Common Stock. The Board of Directors will determine future dividend policy based on the Company's results of operations, financial condition, capital requirements and other circumstances. The McCaw Bank Credit Facilities (as defined below) prohibit the Company from paying cash dividends. There are also restrictions on the ability of certain of the Company's subsidiaries to pay dividends to the Company. It is not anticipated that any cash dividends will be paid on the Class A Common Stock or Class B Common Stock in the foreseeable future.\nSelected Proportionate Cellular Operating Data The following table sets forth unaudited, supplemental financial data for the Company's cellular segment reflecting proportionate consolidation of entities in which the Company has a substantial interest. This presentation differs from the consolidation methodology used to prepare the Company's principal financial statements in accordance with generally accepted accounting principles. The proportionate cellular operating data reflects the Company's ownership percentage of systems consolidated for financial reporting purposes (including approximately 52% of LIN's proportionate results) and the Company's ownership percentage of certain of its significant unconsolidated investees (which are accounted for on the equity method for financial reporting purposes).\nYear Ended December 31, 1993 1992(4) 1991(4) ($ in thousands)\nService revenue $1,646,630 $1,284,402 $ 974,505 Equipment revenue, net 286 1,342 191 Net revenues 1,646,916 1,285,744 974,696 Direct costs and expenses excluding marketing 513,051 413,350 323,507 Marketing expenses 393,629 301,162 257,650 Depreciation 195,573 151,169 120,250 Valuation loss on equipment 93,786 -- -- Amortization of intangible assets 178,214 229,050 223,480 Total operating costs 1,374,253 1,094,731 924,887 Operating income proportionate basis $272,663 $191,013 $49,809 Proportionate subscribers(1) 1,934,000 1,366,000 985,000 Proportionate pops(2)(3) 61,600,000 60,400,000 57,400,000\n(1) As of December 31, 1993, 100% of subscribers in markets which the Company (exclusive of LIN) owned at least a 50% interest in plus 100% of the subscribers of the cellular systems serving the CMT Partnership was 1,602,000 and average penetration in such markets was 3.10%. The Company's (exclusive of LIN's) proportionate share of subscribers based on its December 31, 1993 ownership position in markets where it owned an interest was 1,481,000. As of December 31, 1993, 100% of subscribers in markets in which LIN owned an interest was 1,434,000 and average penetration in such markets was 3.34%. LIN's proportionate share of such subscribers based on its ownership position at December 31, 1993 was 865,000. (2) Calculated by multiplying (i) the Donnelley Marketing Service estimate of current population in a market by (ii) the percentage ownership interest which the Company owned, or had the right or obligation to acquire, in the A Block licensee for that market. As of December 31, 1993, the Company (exclusive of LIN) owned 47.4 million proportionate pops and LIN owned 27.2 million proportionate pops.\n(3) Excludes 0.9 million, 0.4 million and 2.3 million proportionate pops for the periods ended December 31, 1993, 1992 and 1991, respectively, which are not reflected in the supplemental financial data for the Company's cellular segment set forth above because the effect on such results would not be material. Such pops consisted primarily of pending acquisitions and minority interests accounted for by the cost method for financial reporting purposes. (4) During the first quarter of 1993, the Company retroactively adopted SFAS No. 109, effective January 1, 1991. The effect on the proportionate cellular operating data was to increase amortization expense and decrease operating income by $1.0 million in 1992 and $0.2 million in 1991. Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS\nRESULTS OF OPERATIONS\nThe Company completed a sale of properties to BellSouth Corporation in September 1991. Results of operations for the properties sold are included in the Company's results through the date of sale. Exclusive of the effect of significant acquisitions and dispositions, the Company's revenues and cash flows (as defined in the McCaw Bank Credit Facilities) have historically grown at significant rates. While the Company expects its revenues and cash flows to continue to grow in the future, there can be no assurance that this will occur or that the rates of growth will equal the rates achieved by the Company in prior periods. Indeed, as absolute levels of revenues and cash flows increase, it is expected that the percentage rate of growth will decline.\nThere are several legislative and regulatory initiatives at the federal and state levels that are expected to result in the allocation of additional spectrum for use for mobile communications services, and may result in the modification of rights held by providers of mobile communications services and the modification of relationships between facilities-based cellular carriers and resellers of cellular services. See \"The Company's Cellular Operations-Cellular Competition\" and \"Governmental Regulation.\" The Company believes these initiatives will continue and will result, in some cases, in additional competition for the Company. One entity has already been authorized to provide a cellular-like mobile service in certain markets of the Company (in addition to the B Block cellular competition) commencing in 1993 and 1994. The Company also intends to pursue rights to offer additional mobile communications services. In light of the uncertainty as to the eventual outcome of any of these specific initiatives, including as to the nature and timing of the additional competitive services covered thereby, it is impossible to quantify the impact of these legislative and regulatory initiatives or such competition on the Company at this time. For each of the reasons set forth above, results of operations for the periods discussed herein are not necessarily indicative of the Company's future results and are not necessarily comparable.\nDuring the first quarter of 1993, the Company retroactively adopted SFAS No. 109, \"Accounting for Income Taxes,\" effective January 1, 1991. The adoption of SFAS No. 109 as of January 1, 1991 required the Company to record a cumulative effect of the change in accounting for income taxes, increasing the Company's net loss in 1991 by $1,956.3 million with a corresponding increase in deferred tax liability. This change in accounting for income taxes has no effect on cash flow and will reduce (increase) the income tax expense (benefit) the Company will recognize in future periods as the difference in the book and tax basis of the intangible assets is reduced. See Note 1 to the Company's consolidated financial statements included herein.\nCertain reclassifications have been made to the 1992 segment information to conform with the 1993 presentation. See Note 14 to the Company's consolidated financial statements included herein for further information regarding the Company's business segments.\nYears Ended December 31, 1993 and 1992\nNet Revenues\nConsolidated net revenues increased 26 percent to $2,194.8 million for 1993 compared with $1,743.3 million for the year ended December 31, 1992. Net revenues of the Company's cellular operations for the year ended December 31, 1993 were $1,919.4 million and represented 87 percent of the total consolidated net revenues of the Company for the year. Net revenues for the year ended December 31, 1993 of the broadcast segment and messaging and other segments were $145.5 million and $129.9 million, respectively and accounted for 7 percent and 6 percent, respectively, of the Company's consolidated net revenues for the year.\nNet revenues for the Company's cellular operations increased 29 percent to $1,919.4 million for 1993 compared with $1,486.2 million for the year ended December 31, 1992, despite a gradual decrease in average revenue per cellular subscriber, a trend that the Company expects may continue as the subscriber base continues to grow.\nNet revenues for the Company's broadcast operations increased 2 percent to $145.5 in 1993 from $142.9 million in 1992. Excluding cyclical political and Olympic revenues from both years, the net broadcast revenues increased 6 percent in 1993 compared to 1992.\nNet revenues grew 14 percent in the messaging and other segment to $129.9 million in 1993, with the increase due primarily to the continuous growth of messaging net revenues. Total messaging net revenues continue to grow due to an increase in the messaging subscriber base, through both acquisitions and growth in existing markets. 1993 messaging net revenue per subscriber declined slightly from 1992, a trend the Company expects may continue as the messaging subscriber base continues to grow.\nOperating Expenses\nConsolidated operating expenses, exclusive of corporate expenses, for the year ended December 31, 1993 were $1,385.2 million, an increase of $306.1 million or 28 percent, from December 31, 1992. A significant portion of these expenses was associated with the Company's cellular operations which accounted for 85 percent of the Company's total operating expenses for the year ended December 31, 1993.\nOperating expenses for the cellular segment, exclusive of depreciation, amortization and valuation loss on equipment, increased to $1,174.7 million, an increase of $263.4 million or 29 percent, from the year ended December 31, 1992. A significant portion of this increase resulted from an increase in cost of equipment sales and marketing costs incurred as a result of the Company's 27 percent increase in new cellular subscribers in 1993 over 1992. Operating expenses as a percentage of net revenues for the cellular segment remained constant at 61 percent for 1993 and 1992. Operating costs associated with the broadcast operations increased $3.0 million, or 4 percent from the year ended December 31, 1992. Total operating expenses, exclusive of depreciation and amortization, for the broadcast operations for 1993 were $79.1 million. These costs as a percentage of net revenues of the broadcast operations increased slightly from 53 percent in 1992 to 54 percent in 1993. Operating expenses, exclusive of depreciation and amortization, of the messaging and other segment increased by 43 percent over 1992 to $131.4 million for 1993. The significant portion of this increase resulted from the Company's start-up air-to-ground communications operations.\nDepreciation and amortization increased from $385.2 million in the year ended December 31, 1992 to $403.6 million for the same period in 1993. Contributing to the 5 percent increase in depreciation and amortization was the Company s improvement and expansion of its existing cellular, messaging and air-to-ground systems offset in part by a decrease in amortization expense due to fully amortized assets. Depreciation and amortization is expected to increase due to continued improvement and expansion of the Company s cellular, messaging and air-to-ground systems, including the implementation of digital cellular service. During 1993, the Company recognized a valuation loss on equipment of $123.6 million associated with replacing and upgrading certain cellular equipment in its Minnesota, Rocky Mountain and Southwest markets. This valuation loss represents the excess of net book value of the cellular equipment being replaced over the estimated realizable value as of its replacement date. See Note 4 to the Company's consolidated financial statements included herein regarding the replacement and upgrade of certain of the Company's cellular equipment.\nOther Income and Expenses\nInterest expense was $394.2 million in 1993, a $95.9 million or 20 percent decrease from 1992. This decrease resulted from reductions in the applicable margin and base borrowing rates on the McCaw Bank Credit Facilities and LIN's credit facilities offset by increased borrowings under the McCaw Bank Credit Facilities. On April 5, 1993, the Company redeemed all of its outstanding convertible senior subordinated debentures. There were approximately $400 million of these debentures outstanding at redemption. The Company recognized a savings of interest expense of approximately $31 million in 1993 as a result of the redemption of these debentures. On December 31, 1993, the Company redeemed its approximate $1.2 billion of remaining publicly held fixed rate debt and replaced it with lower cost borrowings on its Bank Credit Facilities. This redemption should result in significant future interest savings.\nGain on disposition of assets, net was $141.2 million for the year ended December 31, 1993. This gain consists primarily of the gain recognized on the sale to Associated Communications Corporation of the Company's interests in the A Block cellular systems in Albany, Glens Falls and Rochester, New York and the gain recognized on the sale of the Company's Wichita and Topeka systems to PacTel.\nEquity in income of unconsolidated investees was $71.1 million in 1993 compared with $40.2 million in 1992. This increase is primarily attributable to lower amortization expense due to fully amortized assets.\nOther expense of $76.3 million for the year ended December 31, 1993 primarily represents nonrecurring charges associated with the Company's Bank Credit Facilities. See \"Liquidity and Capital Resources\" and Note 7 to the Company's consolidated financial statements included herein regarding the Company's Bank Credit Facilities.\nA tax benefit of $35.0 million was recognized for the year ended December 31, 1992 primarily due to the reversal of deferred taxes established on the difference in the book and tax basis of certain intangible assets as a result of the retroactive implementation of SFAS No. 109. The tax expense of $97.9 million for 1993 includes a one time charge of $49.6 million required under SFAS No. 109 as a result of the change in the federal corporate tax rate to 35 percent from 34 percent as well as state and federal taxes applicable to the gains on dispositions of assets. The 1993 expense was offset in part by tax benefits associated with other 1993 expenses and the reversal of deferred taxes established on the difference in the book and tax basis of certain intangible assets as a result of SFAS No. 109.\nDuring the fourth quarter of 1993, the Company recognized an extraordinary loss, net of income tax benefit, of $45.0 million on the early extinguishment of its public debt. See Note 7 to the Company's consolidated financial statements included herein regarding the redemption.\nFor the reasons discussed above the net loss of $285.6 million in 1992 decreased to a net loss of $272.3 million in 1993.\nYears Ended December 31, 1992 and 1991\nNet Revenues\nConsolidated net revenues increased 28 percent to $1,743.3 million for 1992 compared with $1,365.6 million for the year ended December 31, 1991. Net revenues of the Company's cellular operations for the year ended December 31, 1992 were $1,486.2 million and represented 85 percent of the total consolidated net revenues of the Company for the year. Net revenues for the year ended December 31, 1992 of the broadcast and messaging and other segments were $142.9 million and $114.2 million, respectively and accounted for 8 percent and 7 percent, respectively, of the Company's consolidated net revenues for the year.\nNet revenues for the Company's cellular operations increased 31 percent to $1,486.2 million for 1992 compared with $1,135.2 million for the year ended December 31, 1991, despite a gradual decrease in average revenue per cellular subscriber, a trend that the Company expects may continue as the subscriber base continues to grow. The effect on the Company's cellular operations of the continued weakness of the California economy was offset by unexpected strength from the Company s Florida properties, arising at least in part from Hurricane Andrew.\nNet revenues for the Company's broadcast operations increased 10 percent to $142.9 million in 1992 from $129.5 million in 1991. Improved economic conditions in many of the Company's broadcast market areas stimulated growth in advertising spending. The broadcast operations also benefited from the election year activity; political advertising revenues contributed 26% to the total increase in net revenues.\nNet revenues grew 13 percent in the messaging and other segment to $114.2 million in 1992, with the increase due substantially to the continuous growth of messaging net revenues. Although 1992 messaging net revenue per subscriber declined slightly from 1991, a trend the Company expects may continue as the messaging subscriber base continues to grow, total messaging net revenues continue to grow due to an increase in the messaging subscriber base, both through acquisition and growth in existing markets.\nOperating Expenses\nConsolidated operating expenses, exclusive of corporate expenses, for the year ended December 31, 1992 were $1,079.1 million, an increase of $190.7 million or 21 percent, from December 31, 1991. A significant portion of these expenses was associated with the Company's cellular operations which accounted for 84 percent of the Company's total operating expenses for the year ended December 31, 1992.\nOperating expenses for the cellular segment, exclusive of depreciation and amortization, increased to $911.3 million, an increase of $165.8 million, or 22 percent, from the year ended December 31, 1991. This increase in operating expenses resulted primarily from an increase in marketing and administrative costs incurred as a result of the increase in the segment's subscriber base. Operating expenses as a percentage of net revenues for the cellular segment decreased to 61 percent for 1992 compared to 66 percent for 1991. This trend is primarily due to the economies of scale resulting from growth in the Company's subscriber base. Operating costs associated with the broadcast operations increased $7.1 million, or 10 percent from the year ended December 31, 1991. Total operating expenses, exclusive of depreciation and amortization, for the broadcast operations for 1992 were $76.2 million. These costs as a percentage of net revenues of the broadcast operations remained constant from 1991 to 1992 at 53 percent. Operating expenses, exclusive of depreciation and amortization, of the messaging and other segment increased by 24 percent over 1991 to $91.6 million for 1992. A significant portion of this increase resulted from the Company's start-up air-to-ground communications operations.\nDepreciation and amortization increased from $344.8 million in the year ended December 31, 1991 to $385.2 million for the same period in 1992. Contributing to the 12 percent increase in depreciation and amortization was the Company s improvement and expansion of its existing cellular and messaging systems. In the future, depreciation and amortization will continue to increase due to continued improvement and expansion of the Company s cellular and messaging systems, including the implementation of digital cellular service.\nOther Income and Expenses\nInterest expense was $490.0 million in 1992, an $88.0 million or 15 percent decrease from 1991. The majority of this decrease resulted from a reduction in the applicable margin and base borrowing rates on the McCaw Bank Credit Facilities and LIN's credit facilities offset by increased borrowings under the McCaw Bank Credit Facilities. Interest expense is expected to be at or above current levels in the foreseeable future (see \"Liquidity and Capital Resources\") for the Bank Credit Facility.\nInterest income decreased 41 percent to $17.9 million for the year ended December 31, 1992 primarily as a result of lower yields on investments. Equity in income of unconsolidated investees was $40.2 million in 1992 compared with $22.9 million in 1991. This increase is primarily due to improved operating results of BACTC and the LIN unconsolidated investees.\nThe year ended December 31, 1991 includes a net pre-tax gain on assets sold of $249.5 million resulting primarily from the BellSouth Transaction. The Company also recognized a gain of $6.2 million on the exchange of $68.7 million principal amount of outstanding debentures during 1991. This gain is reflected as a nonrecurring benefit in other income and expense.\nThe tax benefit of $26.8 million in 1991 reflects taxes recognized on the BellSouth Transaction and state income taxes offset by the benefit recognized from the adoption of SFAS No. 109 due to the reversal of deferred taxes established on the difference in the book and tax basis of certain intangible assets. The tax benefit of $35.0 million for 1992 is primarily the result of state income taxes in McCaw markets and state and federal income taxes attributable to LIN markets offset by reversals of deferred taxes related to SFAS No. 109. Excluding the impact of the adoption of SFAS No. 109, income tax expense would have been $49.5 million in 1991 and $45.1 million in 1992.\nMinority interest in income of consolidated subsidiaries increased from $14.0 million in 1991 to $16.3 million for 1992. This increase is primarily due to improved operating results of less than 100 percent owned consolidated subsidiaries partially offset by the consolidation of the operations of Claircom.\nThe year ended December 31, 1991 includes a $1,956.3 million cumulative effect of the change in accounting for income taxes as a result of the retroactive adoption of SFAS No. 109. See Note 1 to the Company's consolidated financial statements included herein.\nFor the reasons discussed above the net loss of $2,231.4 million in 1991 decreased to a net loss of $285.6 million in 1992. Excluding the impact of the adoption of SFAS No. 109, net loss would have been $364.7 million in 1992 and $351.1 million in 1991.\nLIQUIDITY AND CAPITAL RESOURCES\nThe Company utilizes capital to make acquisitions of cellular and messaging interests (which may include the acquisition of stock of publicly traded corporations), to complete the construction of and to operate and expand its communications systems, to fund start-up operating losses for its transmitting systems and to cover interest payments on its indebtedness. Moreover, as subscribers are added and usage increases, it will be necessary to make additional capital expenditures for the purchase of additional sites and operating equipment. The Company is in the process of changing cellular equipment to accommodate the transition from analog to digital cellular service. The conversion from analog to digital equipment will require significant expenditures but will expand the capacity of the Company's cellular systems. The Company expects its additional capital expenditures in 1994 in connection with the planned expansion of digital service to be approximately $110 million and otherwise expects that it will continue to invest cash to grow its businesses at levels similar to or in excess of its 1993 investing activity.\nCash provided by operating activities totaled $294.5 million in 1993, an increase of $132.9 million from 1992's total of $161.6 million. A significant portion of the Company's cash provided by operations is derived from the Company's cellular operations.\nInterest expense decreased 20 percent from the year ended December 31, 1992 to $394.2 million for the year ended December 31, 1993. This decrease resulted from reductions in the applicable margin and base borrowing rates on the McCaw Bank Credit Facilities and LIN's credit facilities offset by increased borrowings under the McCaw Bank Credit Facilities. The Company redeemed all of its outstanding convertible senior subordinated debentures on April 5, 1993. There were approximately $400 million of these debentures outstanding at redemption. The Company recognized a savings of interest expense of approximately $31 million in 1993 as a result of the redemption of these debentures. On December 31, 1993, the Company redeemed its approximate $1.2 billion of remaining publicly held fixed rate debt and replaced it with lower cost borrowings on its Bank Credit Facilities. This redemption should result in significant future interest savings.\nThe Company does not expect that its operations will generate sufficient cash to meet its expenditure requirements for the next few years. Historically the Company has raised capital through the issuance of public indebtedness, bank borrowings and the sale of equity or assets. For example, in February 1994, in connection with the pending Merger of the Company with a subsidiary of AT&T, AT&T and the Company entered into a credit agreement under which an aggregate of $350 million is available for the Company's financing of certain acquisitions and other business opportunities. In addition, AT&T has agreed to purchase approximately 11.7 million newly issued shares of Class A Common Stock for a total purchase price of $600 million in the event that the AT&T Merger Agreement is terminated.\nThere can be no assurance that the Company will be able to obtain such additional financing or sell assets when needed, or if it is able to obtain such financing or sell assets, that the terms will be favorable to the Company. The Company will be required by the terms of the McCaw Bank Credit Facilities to apply the proceeds of certain asset sales to the repayment of loans thereunder.\nThe Company's indebtedness is due and payable over a several year period. The revolving period under the McCaw Bank Credit Facilities ends on March 31, 1996, at which time the obligation to repay principal commences. See Note 7 to the consolidated financial statements included herein. If the Company does not have sufficient internally generated funds to repay its indebtedness at maturity, it may issue additional indebtedness, sell equity or sell assets to refinance such maturing indebtedness. There can be no assurance that such issuances or sales will be possible or, if carried out, that the terms thereof will be favorable to the Company or its security holders.\nIn connection with its acquisition of a controlling interest in LIN in 1990, the Company entered into the PMVG for the benefit of the public stockholders of LIN. See \"Business--Private Market Value Guarantee.\" Pursuant to the PMVG, the Company is required, beginning January 1, 1995, either to offer to purchase the remaining outstanding shares of LIN at private market value (an \"Acquisition\") or put LIN in its entirety up for sale. If the Company decides to proceed with an Acquisition, it may pay the purchase price in cash or any combination of cash, common equity securities and\/or nonconvertible senior or subordinated \"current cash pay\" debt securities that the Independent Directors believe in good faith will have an aggregate market value on a fully distributed basis of not less than the private market value purchase price. If the Company determines not to proceed with an Acquisition, there can be no certainty that LIN will be sold to a third party. The Company s completion of an Acquisition may diminish the Company s liquidity, either through draws by the Company on outstanding facilities, the refinancing of such facilities or the issuance of securities which, by their nature, may limit the ability of the Company to issue further securities for other purposes. Conversely, if LIN is sold, it is likely that such transaction will enhance the Company s liquidity. There can be no assurance as to whether the Company will determine to make an Acquisition or not or, if it does determine to proceed with an Acquisition, what the price for the remaining outstanding interest in LIN will be, the manner in which it will be financed and what effect the payment of such purchase price will have on the Company s liquidity.\nIt is the Company s policy to carefully monitor the state of its business, cash requirements and capital structure. From time to time, the Company may enter into transactions pursuant to which debt is extinguished, such as the CMT Partners transaction, the redemption of public debentures, the sale of stock to AT&T and the proposed merger with AT&T. The Company will continue to explore other such opportunities, which could include sales of assets or equity, joint ventures, reorganizations or further recapitalizations. There can be no assurance that any further such transactions will be undertaken, or, if undertaken, will be favorable to stockholders.\nMcCaw Bank Credit Facilities\nUnder the McCaw Bank Credit Facilities, interest is payable at the applicable margin above, at the Company's discretion, the prevailing prime, LIBOR or CD rate. Interest is fixed for a period ranging from one month to twelve months, depending on availability of the interest basis selected, although if the Company selects a prime-based loan, the interest rate will fluctuate during the period as the prime rate fluctuates. The applicable margin for each loan will be determined on the basis of the Company's ratio of adjusted total debt (as determined under the McCaw Bank Credit Facilities) to cash flow (i.e., net income, excluding extraordinary items, plus depreciation, amortization, interest expense, reserves for deferred taxes and other noncash items deducted in determining net income). For example, if the ratio was 6.0 to 1 or greater, the applicable margin for LIBOR, CD and prime loans would be 1-5\/8%, 1-3\/4% and 5\/8%, respectively, while if the ratio was less than 4.5 to 1, such margins would be 1-1\/8%, 1-1\/4% and 1\/8%, respectively. Beginning on March 31, 1996 and at the end of each fiscal quarter thereafter until the maturity date (which will be on or about March 31, 2000), the Company will be required to make payments amortizing the amount outstanding under the McCaw Bank Credit Facilities on December 31, 1995. In addition, the Company will be required to apply cash proceeds from certain sales of assets not reinvested in similar assets, and, after January 1, 1996, all excess cash flow, to the prepayment of loans.\nThe McCaw Bank Credit Facilities contains covenants restricting certain activities by the Company and its restricted subsidiaries, including, without limitation, restrictions on (i) investments in unrestricted subsidiaries, (ii) the incurrence of debt, (iii) distributions and dividends to stockholders, (iv) mergers and sales of assets, (v) prepayments of subordinated indebtedness, (vi) creation of liens, and (vii) issuance of preferred stock.\nIn addition, the Company and its subsidiaries are required to maintain compliance with certain financial covenants set forth in the McCaw Bank Credit Facilities. The Company is required to maintain certain ratios of combined outstanding indebtedness to the number of pops owned. The Company is also required to maintain ratios of senior debt and combined debt to cash flow in compliance with amounts specified in the McCaw Bank Credit Facilities. Substantially all the Company's assets, consisting of the stock of its first-tier (i.e., direct) subsidiaries, are pledged as security for repayment of amounts due under the McCaw Bank Credit Facilities.\nAlthough the Company is currently in compliance with all covenants under the McCaw Bank Credit Facilities, because the ratios of indebtedness to cash flow required to be maintained by the McCaw Bank Credit Facilities decrease each quarter through 1996, it will be necessary over that time period for the Company either to continue to increase cash flow or to reduce debt in order to remain in compliance.\nThe McCaw Bank Credit Facilities contains customary events of default, including (i) failure to make principal or interest payments when due, (ii) failure to comply with covenants, (iii) misrepresentations, (iv) defaults on other indebtedness, (v) material adverse change in the business, condition, operations, performance or properties of the Company, (vi) unpaid judgments, and (vii) standard ERISA and bankruptcy defaults. In addition, it shall be an event of default if, except in connection with the AT&T Merger, the Designated Party under the McCaw Shareholders Agreement fails to be entitled to appoint a majority of the Board of Directors of the Company or if the McCaw Family (as defined below) fails to hold at least 20 million shares subject to the McCaw Shareholders Agreement.\nThe ability of the Company to comply with the covenants contained in the McCaw Bank Credit facilities may be affected by events beyond its control. If the Company fails to service its indebtedness or satisfy the covenants contained in the McCaw Bank Credit Facilities or the agreements relating to its other indebtedness, the Company will be in default. In such an event, holders of the Company's indebtedness will be able to exercise their rights including the right to declare all the borrowed funds and interest thereon immediately due and payable. If the Company were unable to repay such indebtedness, the holders of such indebtedness could proceed against their collateral, if any. Substantially all the Company's assets, including its stock in subsidiaries and its ownership interests in entities holding cellular licenses, are pledged or encumbered as security for indebtedness.\nLIN's Credit Facilities\nLIN has arranged financing through two bank facilities. LIN Cellular Network, Inc. (\"LCNI\"), a wholly-owned subsidiary of LIN (owning all of LIN's cellular operations other than Philadelphia), has an aggregate of $1,480 million outstanding and $240 million available as of December 31, 1993 (the \"Cellular Facility\"). LIN Television Corporation (\"LTC\"), a wholly-owned subsidiary of LIN (owning all of LIN's television operations other than WOOD-TV), has $222 million outstanding and no additional amounts available as of December 31, 1993 (the \"Broadcast Facility\"), (collectively, the \"LIN Bank Credit Facilities\").\nDuring the second quarter of 1993, LIN renegotiated its Cellular Facility. This resulted in an extension in the commencement of amortization of the $400 million revolving portion of the Cellular Facility from September 1993 to March 1996 and a change in certain financial covenants and other terms.\nLIN's credit facilities prohibit the payment of dividends and distributions to LIN by its major operating subsidiaries, thereby effectively limiting the ability of LIN to transfer funds to the Company.\nFunds available under the McCaw Bank Credit Facilities can only be utilized by the Company and certain of its subsidiaries other than LIN. Proceeds from LIN's credit facilities are only available to LIN and its subsidiaries. For additional information regarding LIN's credit facilities, see LIN's current Annual Report on Form 10-K.\nLCH's Redeemable Preferred Stock\nOn August 10, 1990, LIN completed its acquisition of Metromedia Company's interest in the New York City A Block licensee (the \"Metromedia Transaction\"). In addition to the cash portion of the purchase price for the Metromedia interests, LIN's subsidiary, LCH Communications, Inc. (\"LCH\"), issued $850 million of newly issued Class A Redeemable Preferred Stock (the \"LCH Preferred Stock\") to Metromedia. Metromedia has subsequently transferred the LCH Preferred Stock to a subsidiary of Comcast Corporation. The holder of the LCH Preferred Stock is entitled to appoint two members of the LCH Board of Directors and will be entitled to dividends if and when declared by the Board. LCH may redeem the LCH Preferred Stock at any time at a price equal, at its option, to either:\n(1) all of the issued and outstanding capital stock of LCH's subsidiary (\"LIN-Penn\"), which holds GuestInformant and LIN's ownership interest in the Philadelphia A Block cellular system, plus cash equal to 15 percent of the fair market value of all businesses (currently, only WOOD, formerly WOTV, LIN's broadcast business in Grand Rapids - Kalamazoo - Battle Creek, Michigan) then operated by LCH (the \"Operating Business Portion\"); or\n(2) a cash amount equal to the greater of (a) the fair market value of the issued and outstanding capital stock of LIN- Penn plus the Operating Business Portion and (b) $850 million, plus, in each case, dividends which would have accrued on the LCH Preferred Stock from the issuance date (to the extent not previously paid) at the rate of 15.8 percent per year.\nLCH is required to redeem the LCH Preferred Stock in the year 2000 (if not redeemed prior to such time) at a price comparable to that described above. In certain circumstances, the holder of the LCH Preferred Stock may require the corporate parent of LCH to purchase the LCH Preferred Stock.\nItem 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA\nThe Company's consolidated financial statements and supplementary data, together with the reports of Arthur Andersen & Co., independent public accountants and Ernst & Young, independent auditors, are included elsewhere herein. Reference is made to the \"Index to Financial Statements\" immediately preceding page.\nItem 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE\nNone. PART III\nItem 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT\nThere is hereby incorporated by reference the information under the captions \"Election of Directors,\" \"Executive Officers,\" and \"Section 16 Compliance\" in the Company's Proxy Statement relating to its 1994 annual meeting of stockholders (the \"Proxy Statement\").\nItem 11. EXECUTIVE COMPENSATION\nThere is hereby incorporated by reference the information under the captions \"Election of Directors\" and \"Compensation of Executive Officers\" in the Proxy Statement.\nItem 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT\nThere is hereby incorporated by reference the information under the caption \"Security Ownership of Certain Beneficial Owners and Management\" in the Proxy Statement.\nItem 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS\nThere is hereby incorporated by reference the information under the caption \"Compensation Committee Interlocks and Insider Participation\" and \"Certain Transactions\" in the Proxy Statement.\nPART IV\nItem 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K\n(a)(1) Consolidated Financial Statements of McCaw Cellular Communications, Inc. and Subsidiary Companies:\n- Report of Arthur Andersen & Co., Independent Public Accountants - Report of Ernst & Young, Independent Auditors - Balance Sheets as of December 31, 1993 and 1992 - Statements of Operations for the Years Ended December 31, 1993, 1992 and 1991 - Statements of Changes in Stockholders' Investment (Deficiency) for the Years Ended December 31, 1993, 1992 and 1991 - Statements of Cash Flows for the Years Ended December 31, 1993, 1992 and 1991 - Notes to Financial Statements for December 31, 1993\nCombined Financial Statements of LIN's Unconsolidated Affiliates\n- Report of Ernst & Young, Independent Auditors - Independent Auditors' Report - Report of Independent Public Accountants - Combined Balance Sheets at December 31, 1993 and - Combined Statements of Income for the Years Ended December 31, 1993, 1992 and 1991 - Combined Statements of Ventures' Equity for the Years Ended December 31, 1993, 1992 and 1991 - Combined Statements of Cash Flows for the Years Ended December 31, 1993, 1992 and 1991 - Notes to Combined Financial Statements for December 31, 1993\n(a)(2) Financial Statement Schedules of LIN's Unconsolidated Affiliates\nSchedule II - Amounts Receivable from Related Parties for the Years Ended December 31, 1993, 1992 and 1991 Schedule IV - Indebtedness to Related Parties for the Years Ended December 31, 1993, 1992 and 1991 Schedule V - Property and Equipment for the Years Ended December 31, 1993, 1992 and 1991 Schedule VI- Accumulated Depreciation and Amortization of Property and Equipment for the Years Ended December 31, 1993, 1992 and 1992\nSchedule VIII - Valuation and Qualifying Accounts and Reserves for the Years Ended December 31, 1993, 1992 and 1991 Schedule X - Supplementary Income Statement Information for the Years Ended December 31, 1993, 1992 and 1991\n(a)(3) Exhibit Index\n2.1 Agreement and Plan of Merger, dated August 16, 1993, among American Telephone and Telegraph Company, Ridge Merger Corporation and McCaw Cellular Communications, Inc. (incorporated by reference to Exhibit 2(a) to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993, as amended) 3.1 Restated Certificate of Incorporation of the Registrant, as amended (incorporated by reference to Exhibit 3.1 to the Company's Annual Report on Form 10-K for the year ended December 31, 1992) 3.2 By-Laws of the Registrant (incorporated by reference to Exhibit 3.2 to the Company's Annual Report on Form 10-K for the year ended December 31, 1992) 10.1 Credit Agreement, dated as of February 8, 1994, between AT&T and MCCI Acquisitions, Inc. 10.2 Credit Agreement, dated as of December 3, 1993 10.3 Credit Agreement, dated as of February 26, 1990, as amended and restated 10.4 Stock Pledge Agreement of McCaw Cellular, Inc., together with Amendment to Stock Pledge Agreement (incorporated by reference to Exhibit 10.11 to Registration Statement No. 33-15727) 10.5* Amended and Restated Equity Purchase Program (incorporated by reference to Exhibit 4.1 to Registration Statement No. 33-20985) 10.6* Amended and Restated 1983 Non-Qualified Stock Option Plan (incorporated by reference to Exhibit 4.3 to Registration Statement No. 33-27820) 10.7* Employee Stock Purchase Plan (incorporated by reference to Exhibit 4.8 to Registration Statement No. 33-20985) 10.8* Amended and Restated 1987 Stock Option Plan (incorporated by reference to Exhibit 4.6 to Registration Statement No. 33-20985) 10.9 Purchase Agreement between McCaw Cellular Communications, Inc. and British Telecom USA Holdings, Inc. (incorporated by reference to Exhibit 10.16 to Registration Statement No. 33-32874) 10.10 Guaranty Agreement between McCaw Cellular Communications, Inc. and British Telecommunications plc. (incorporated by reference to Exhibit 10.17 to Registration Statement No. 33-32874) 10.11 Shareholders Agreement, dated May 31, 1989, as amended December 31, 1989, among McCaw Cellular Communications, Inc., the Jordan and Taylor Trusts, Craig, John, Bruce and Keith McCaw and the other parties named therein (incorporated by reference to Exhibit 10.18 to Registration Statement No. 33-32874) 10.12 Shareholders Agreement, dated June 20, 1989 among McCaw Cellular Communications, Inc., British Telecom USA Holdings, Inc. and Craig, John, Bruce and Keith McCaw (incorporated by reference to Exhibit 10.19 to Registration Statement No. 33-32874) 10.13 Agreement, dated December 11, 1989, between McCaw, MMM Holdings, Inc. and LIN (incorporated by reference to Exhibit 10.20 to Registration Statement No. 33-32874) 10.14 Private Market Value Guarantee, dated December 11, 1989 (incorporated by reference to Exhibit 10.21 to Registration Statement No. 33-32874) 10.15* Employment Agreement, dated as of November 1, 1991, of James L. Barksdale (incorporated by reference to Exhibit 10.15 to the McCaw Cellular Communications Inc. Annual Report on Form 10-K for the fiscal year ended December 31, 1991) 10.16* Employment Agreement, dated as of March 23, 1989,of Peter L.S. Currie 10.17 Agreement of Purchase and Partnership Contribution and other related agreements in connection with the Bay Area Transaction (incorporated by reference to Exhibit 28 to the Company's Current Report on Form 8-K dated October 1, 1991) 10.18 Agreement of Purchase and Sale, dated as of April 10, 1991, by and between BellSouth Enterprises, Inc. and Rochester Cellular Corporation and McCaw Cellular Communications, Inc., Cellular Fund, Inc. and McCaw Cellular, Inc. (incorporated by reference to Exhibit 10.18 to the McCaw Cellular Communications, Inc. Annual Report on Form 10-K for the fiscal year ended December 31, 1991) 10.19* Employment Agreement, dated as of May 31, 1990, of Tom A. Alberg (incorporated by reference to Exhibit 10.22 to the McCaw Cellular Communications, Inc. Annual Report on Form 10-K for the fiscal year ended December 31, 1991) 10.20* McCaw Cellular Communications, Inc. 401(k) Plan, dated as of July 1, 1991 (incorporated by reference to Exhibit 10.23 to the McCaw Cellular Communications, Inc. Annual Report on Form 10-K for the fiscal year ended December 31, 1991) 10.21* 1992 Stock Option Plan for Non-Employee Directors (incorporated by reference to Exhibit 10.24 to the McCaw Cellular Communications, Inc. Annual Report on Form 10-K for the fiscal year ended December 31, 1991) 10.22* 1992 Stock Option Plan for British Telecom Directorships (incorporated by reference to Exhibit 10.25 to the McCaw Cellular Communications, Inc. Annual Report on Form 10-K for the fiscal year ended December 31, 1991) 10.23 Purchase and Sale Agreement, dated as of July 31, 1992, among McCaw Cellular Communications, Inc., Associated Communications Corporation and Celcom Communications Corporation of Pittsburgh, and other related agreements in connection with the McCaw\/Associated Joint Venture (incorporated by reference to Exhibit 10.24 to the McCaw Cellular Communications, Inc. Annual Report on Form 10-K for the fiscal year ended December 31, 1992) 10.24* McCaw Employee Plan, established in connection with AT&T Merger Agreement 10.25* McCaw Cellular Communications, Inc. Deferred Compensation Plan, dated December 15, 1993 21 Subsidiaries of the Registrant 23.1 Consent of Arthur Andersen & Co. 23.2 Consent of Ernst & Young 23.3 Consent of Deloitte & Touche 23.4 Consent of Arthur Andersen & Co. 24 Powers of attorney with respect to certain signatures\n* Management contract or compensatory plan or arrangement.\n(b) Reports on Form 8-K\nThere was one report on Form 8-K filed during the quarter ended December 31, 1993:\nDecember 3, 1993: Announcing redemption of all of the Company's publicly held debt.\nSIGNATURES\nPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.\nMcCAW CELLULAR COMMUNICATIONS, INC.\nBy: ANDREW A. QUARTNER Andrew A. Quartner Senior Vice President-Law March 31, 1994\nPursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons in the capacities and on the dates indicated.\nSignature Title Date\nChairman of the Board, Chief Executive Officer and Director (Principal Craig O. McCaw* Executive Officer) March 31, 1994 - ------------------------ Craig O. McCaw Chief Financial Officer (Principal Financial Officer and Principal Accounting Steven W. Hooper* Officer) March 31, 1994 - ------------------------ Steven W. Hooper\nVice Chairman Wayne M. Perry* of the Board March 31, 1994 - ------------------------ Wayne M. Perry\nPresident and James L. Barksdale* Director March 31, 1994 - ------------------------ James L. Barksdale\nJohn W. Stanton* Director March 31, 1994 - ------------------------ John W. Stanton\nJohn E. McCaw, Jr.* Director March 31, 1994 - ------------------------ John E. McCaw, Jr.\nSignature Title Date\nBruce R. McCaw* Director March 31, 1994 - ------------------------ Bruce R. McCaw\nHarold S. Eastman* Director March 31, 1994 - ------------------------ Harold S. Eastman\nHarold W. Andersen* Director March 31, 1994 - ------------------------ Harold W. Andersen\nDaniel J. Evans* Director March 31, 1994 - ------------------------ Daniel J. Evans\nJohn C. McDonald* Director March 31, 1994 - ------------------------ John C. McDonald\nStuart M. Sloan* Director March 31, 1994 - ------------------------ Stuart M. Sloan\nMalcolm Argent* Director March 31, 1994 - ------------------------ Malcolm Argent\nBruce R. Bond* Director March 31, 1994 - ------------------------ Bruce R. Bond\n*By: ANDREW A. QUARTNER ------------------------ Andrew A. Quartner Attorney-in-fact\nPage\nConsolidated Financial Statements of the Company\nReport of Arthur Andersen & Co., Independent Public Accountants.......................................F-1\nReport of Ernst & Young, Independent Auditors..............F-2\nConsolidated Balance Sheets as of December 31, 1993 and 1992............................................F-3\nConsolidated Statements of Operations for the Years Ended December 31, 1993, 1992 and 1991.............F-5\nConsolidated Statements of Changes in Stockholders' Investment (Deficiency) for the Years Ended December 31, 1993, 1992 and 1991.............F-7\nConsolidated Statements of Cash Flows for the Years Ended December 31, 1993, 1992 and 1991.............F-9\nNotes to Consolidated Financial Statements for December 31, 1993.......................................F-12\nCombined Financial Statements of LIN's Unconsolidated Affiliates\nReport of Ernst & Young, Independent Auditors.............F-48\nIndependent Auditors' Report..............................F-49\nReport of Independent Public Accountants..................F-50\nCombined Balance Sheets at December 31, 1993 and 1992.....F-51\nCombined Statements of Income for the Years Ended December 31, 1993, 1992 and 1991........................F-53\nCombined Statements of Ventures' Equity for the Years Ended December 31, 1993, 1992 and 1991..................F-54\nCombined Statements of Cash Flows for the Years Ended December 31, 1993, 1992 and 1991..................F-55\nNotes to Combined Financial Statements for December 31, 1993.......................................F-58\nFinancial Statement Schedules of LIN's Unconsolidated Affiliates\nSchedule II - Amounts Receivable from Related Parties for the Years Ended December 31, 1993, 1992 and 1991..........................F-66 Schedule IV - Indebtedness to Related Parties for the Years Ended December 31, 1993, 1992 and 1991....................F-67 Schedule V - Property and Equipment for the Years Ended December 31, 1993, 1992 and 1991..........................F-68 Schedule VI- Accumulated Depreciation and Amortization of Property and Equipment for the Years Ended December 31, 1993, 1992 and 1992.......F-69 Schedule VIII - Valuation and Qualifying Accounts and Reserves for the Years Ended December 31, 1993, 1992 and 1991.......F-70 Schedule X - Supplementary Income Statement Information for the Years Ended December 31, 1993, 1992 and 1991.......F-71\nReport of Independent Public Accountants\nTo McCaw Cellular Communications, Inc.:\nWe have audited the accompanying consolidated balance sheets of McCaw Cellular Communications, Inc. (a Delaware corporation) and subsidiary companies as of December 31, 193 and 1992, and the related consolidated statements of operations, stockholders' investment (deficiency) and cash flows 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 did not audit the financial statements of LIN Broadcasting Corporation and subsidiaries, which statements reflect assets of 32 percent of the 1993 and 1992 consolidated assets and net revenues of 34 percent, 35 percent, and 36 percent for 1993, 1992 and 1991 consolidated net revenues, respectively. Those statements were audited by other auditors whose report has been furnished to us and our opinion, insofar as it relates to the amounts included for those entities, is based solely on the report of other auditors.\nWe conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of other auditors provide a reasonable basis for our opinion.\nIn our opinion, based on our audits and the report of other auditors, the financial statements referred to above present fairly, in all material respects, the financial position of McCaw Cellular Communications, Inc. and subsidiary companies as of December 31, 1993 and 1992 and the results of their operations and their cash flows for each of the three years in the period ended December 31,1993 in conformity with generally accepted accounting principles.\nAs explained in Note 1 to the financial statements, the Company has adopted Statement of Financial Accounting Standards No. 109, \"Accounting for Income Taxes,\" by applying it retroactively effective January 1, 1991.\nARTHUR ANDERSEN & CO.\nSeattle, Washington March 30, 1994\nREPORT OF ERNST & YOUNG, INDEPENDENT AUDITORS\nBoard of Directors and Stockholders of LIN Broadcasting Corporation\nWe have audited the consolidated balance sheets of LIN Broadcasting Corporation and subsidiaries as of December 31, 1993 and 1992, and the related consolidated statements of operations, stockholders' deficit, and cash flows for each of the three years in the period ended December 31, 1993 (not presented separately herein). 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.\nWe conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform our 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.\nIn our opinion, the financial statements referred to above present fairly, in all material respects the consolidated financial position of LIN Broadcasting Corporation and subsidiaries at December 31, 1993 and 1992, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1993 in conformity with generally accepted accounting principles.\nSeattle, Washington February 4, 1994\nMcCAW CELLULAR COMMUNICATIONS, INC. AND SUBSIDIARY COMPANIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1993 AND 1992 (Dollars In Thousands, Except Per Share Amounts)\nASSETS 1993 1992 ---- ---- Current assets: Cash and cash equivalents $138,908 $201,606 Marketable securities 57,661 168,306 Accounts receivable, net of allowance for doubtful accounts (1993, $36,682; 1992, $31,298) 326,584 250,265 Other 106,041 51,917 --------- --------- Total current assets 629,194 672,094\nProperty and equipment, net of accumulated depreciation and amortization (1993, $784,330; 1992, $494,322) 1,616,480 1,439,058 Licensing costs, net of accumulated amortization (1993, $505,303; 1992, $407,169) 3,994,511 3,991,928 Other intangible assets, net of accumulated amortization (1993, $221,152; 1992, $365,717) 768,481 804,963 Investments 1,960,863 1,856,669 Other assets 95,400 190,733 --------- -------- $9,064,929 $8,955,445 ========== =========\n(continued)\nMcCAW CELLULAR COMMUNICATIONS, INC. AND SUBSIDIARY COMPANIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1993 AND 1992 (Dollars In Thousands, Except Per Share Amounts) (continued)\nLIABILITIES AND STOCKHOLDERS DEFICIENCY\n1993 1992 ---- ---- Current liabilities: Current portion of long-term debt $158,925 $90,906 Accounts payable 159,129 124,339 Accrued expenses 333,481 326,052 Unearned revenues and customer deposits 69,118 59,123 --------- --------- Total current liabilities 720,653 600,420\nLong-term debt, net of current portion 4,989,746 5,562,393 Net deferred tax liability 1,955,687 1,899,581 Other noncurrent liabilities 131,499 131,844 --------- --------- Total liabilities 7,797,585 8,194,238 --------- --------- Commitments and contingencies\nRedeemable preferred stock of a subsidiary 1,305,248 1,170,948 --------- --------- Stockholders deficiency: Preferred stock, $0.01 par: Authorized 10,000,000 shares; none issued Common stock, $0.01 par: Class A: Authorized 400,000,000 shares; issued and outstanding, 1993, 148,411,196; 1992, 124,769,731 1,484 1,247 Class B: Authorized 200,000,000 shares; issued and outstanding, 1993, 60,142,047; 1992, 61,356,282 602 614 Additional paid-in capital 2,888,565 2,244,637 Deficit (2,928,555) (2,656,239) --------- --------- Total stockholders deficiency (37,904) (409,741) --------- --------- $9,064,929 $8,955,445 ========== =========\nSee notes to consolidated financial statements.\nMcCAW CELLULAR COMMUNICATIONS, INC. AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1993\n1. Summary of significant accounting policies:\nPrinciples of consolidation:\nThe consolidated financial statements include the accounts of McCaw Cellular Communications, Inc., a Delaware corporation, and its majority-owned subsidiary companies (the Company), including LIN Broadcasting Corporation, together with its subsidiaries (LIN).\nThe Company s consolidated financial statements include 100% of the assets, liabilities and results of operations of subsidiaries (both corporations and partnerships) in which the Company has a voting interest of greater than 50%. The ownership interest of the other interest holders is reflected as minority interests. Losses in consolidated corporations (including LIN s) attributable to minority interest holders in excess of their respective share of the subsidiaries net equity are not eliminated in consolidation. All significant intercompany accounts and transactions have been eliminated.\nCertain reclassifications were made to prior years amounts to conform with the 1993 presentation.\nOperations:\nThe Company s activities primarily consist of the acquisition of interests in cellular licensees and the construction, operation and expansion of cellular, air-to- ground, messaging and broadcasting communications systems. The Company has experienced substantial net losses, exclusive of gains on dispositions of assets, and has had insufficient internally generated funds to cover capital, operating expenditures and debt service since its inception.\nCash and cash equivalents:\nCash equivalents consist of repurchase obligations, certificates of deposit, commercial paper and other investments with a maturity of 90 days or less when purchased. The carrying amount reported in the balance sheets for cash and cash equivalents approximates fair value.\nMcCAW CELLULAR COMMUNICATIONS, INC. AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1993\n1. Summary of significant accounting policies (continued):\nMarketable securities:\nThe Company invests excess cash in marketable securities which include equity and debt securities, certificates of deposit and other investment instruments with maturities greater than 90 days when purchased. Marketable securities are stated at the lower of aggregate cost or market value. At December 31, 1993 and 1992, aggregate cost approximated market value. The Company recognized net gains of approximately $1.1, $1.0 and $13.5 million on sales of marketable securities in 1993, 1992 and 1991, respectively. The gains are reflected in the accompanying statements of operations as gain on dispositions of assets, net.\nRevenue recognition:\nCellular and air-to-ground air time is recorded as revenue as earned. Sales of equipment and related services are recorded when goods and services are delivered. Cellular access charges and messaging services generally are billed in advance and recognized as revenue when the services are provided. Broadcast revenue is billed when contracted and recognized during the period the advertising is aired or appears in publications.\nProperty and equipment:\nProperty and equipment are stated at cost. Repair and maintenance costs are charged to expense when incurred. Renewals and betterments are capitalized. Gains or losses on disposition of property and equipment are reflected in income currently. Depreciation is computed using the straight-line method over the estimated useful lives of the assets which are generally 10 to 12 years for cellular, 2 to 12 years for messaging, 10 to 20 years for broadcast, 3 to 12 years for air-to-ground and 3 to 5 years for other equipment. Leasehold improvements are amortized using the straight-line method over the terms of the leases.\nDuring 1993 certain cellular equipment was identified for early replacement and reduced to its estimated realizable value (see Footnote 4--Property and equipment).\nMcCAW CELLULAR COMMUNICATIONS, INC. AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1993\n1. Summary of significant accounting policies (continued):\nLicensing costs:\nLicensing costs primarily represent costs incurred to develop or acquire cellular and messaging licenses. Generally, amortization begins with the commencement of service to customers and is computed using the straight-line method over a period of 40 years.\nOther intangible assets:\nOther intangible assets primarily represent costs allocated in acquisitions to customer contracts, broadcast licenses, network affiliations and goodwill. Customer contracts are amortized using the straight-line method over the expected term of the customers service, generally 3 years. Broadcast licenses, network affiliations and goodwill are amortized using the straight-line method over a period of 40 years.\nIncome taxes:\nThe Company provides for income taxes currently payable and for deferred income taxes resulting from temporary differences in the recognition of income and expense for financial reporting and tax reporting purposes.\nDuring the first quarter of 1993, the Company retroactively adopted Statement of Financial Accounting Standards (SFAS) No. 109, \"Accounting for Income Taxes,\" effective January 1, 1991. SFAS No. 109 requires an asset and liability approach for financial accounting and reporting for income tax purposes. The principal impact of SFAS No. 109 on the Company relates to the requirement that a deferred tax liability be provided to recognize the differences in book and tax basis for certain intangible assets recorded as a result of purchase business combinations, such as the Company s acquisition of LIN and LIN s acquisition of Metromedia s indirect interest in the New York City licensee. The adoption of SFAS No. 109 retroactive to January 1, 1991 resulted in an increase to the 1991 net loss for the cumulative effect of the change of $1,956 million or $10.78 per share and an increase of the deferred tax liability of $1,956 million.\nMcCAW CELLULAR COMMUNICATIONS, INC. AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1993\n1. Summary of significant accounting policies (continued):\nNet loss per share:\nNet loss per share is computed based on the weighted average number of common and common equivalent shares outstanding during the year. In the years where the Company has reported a net loss, only common shares outstanding are considered since the assumed conversion of options and convertible securities would be antidilutive. The computation of 1992 and 1991 net loss per share also reflects the accretion of the mandatory repurchase obligation of McCaw Cellular, Inc. (MCI) warrants net of the accretion of warrants held by the Company.\nRecently issued accounting standards:\nIn December 1992, the Financial Accounting Standards Board issued Statement No. 112, Employers Accounting for Postemployment Benefits. This statement is effective for fiscal years beginning after December 15, 1993 and requires accrual of the expected cost of benefits provided to former or inactive employees after employment but before retirement either over the period of employment or as an expense at the date of the event giving rise to the benefits. The Company has decided to adopt Statement No. 112, effective January 1, 1994. All such postemployment benefits provided by the Company in prior years have not been material, and accordingly, the adoption of Statement No. 112 will not have a material impact on the financial position or results of operations of the Company.\n2. Significant acquisitions and dispositions:\n1993 Transactions:\nOn January 8, 1993, the Company and Associated Communications Corporation (Associated) completed the formation of a joint venture combining Associated s 6% interest in Bay Area Cellular Telephone Company (BACTC) and the Company s 50% interest in the Buffalo, New York A Block cellular system (AM Partners). Associated and the Company each have a 50% ownership interest in AM Partners. In addition, Associated purchased the Company s 34.17% interest in the A Block cellular system in Albany, New York, its 100% interest in the A Block cellular system in Glens Falls, New York and its 28.57% interest in the A Block cellular system in Rochester, New York. The total price for the three combined interests was approximately $85.6 million on McCAW CELLULAR COMMUNICATIONS, INC. AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1993\n2. Significant acquisitions and dispositions (continued):\nwhich the Company recognized an after tax gain of approximately $35.5 million.\nOn September 1, 1993, the Company and PacTel, a subsidiary of Pacific Telesis Group, completed the formation of a 99- year joint venture combining PacTel s 61.1% interest in BACTC and its approximate 34% interest in the A Block cellular system in Dallas and the Company s 32.9% interest in BACTC, certain of its interests in the A Block cellular systems in Vallejo, Santa Rosa and Carmel\/Monterey\/Salinas, California, and certain of its interests in the A Block cellular systems in Kansas City, St. Joseph and Lawrence, Kansas\/Missouri (collectively, CMT Partners). PacTel and the Company each have a 50% ownership interest in CMT Partners. In addition, PacTel directly purchased the Company s 100% interest in the A Block cellular system in Wichita, Kansas and an approximate 78% interest in the A Block cellular system in Topeka, Kansas for $100 million. The Company recognized an after tax gain on the sale of approximately $56 million, subject to certain purchase price adjustments.\nThe primary effect on the consolidated balance sheet of the formation of CMT Partners, net of cash, was to increase investments approximately $97.7 million, decrease property and equipment approximately $55.0 million and decrease licensing costs and other intangible assets approximately $44.5 million.\nThe Company completed the acquisition of interests in several A Block cellular licensees in exchange for approximately 2.2 million shares of the Company s Class A Common Stock for an approximate $96.1 million.\n1992 Transaction:\nOn January 7, 1992, the Company completed the acquisition from Crowley Cellular Telecommunications Limited Partnership, of its 100% interests in the A Block cellular systems in Waco, Texas and Daytona Beach, Florida, as well as certain minority interests in other cellular systems for approximately $107 million in cash.\nMcCAW CELLULAR COMMUNICATIONS, INC. AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1993\n2. Significant acquisitions and dispositions (continued):\n1991 Transaction:\nOn September 20, 1991 the Company sold to BellSouth Enterprises, Inc. (BellSouth) the Company s cellular interests in Indiana, Wisconsin and Illinois (Upper Midwest Cellular Systems) for approximately $360 million in cash and BellSouth s approximate 29% interest in the A Block cellular system in Rochester, New York valued at $21.0 million. In addition, as part of the transaction, the Company released Graphic Scanning Corporation (Graphic) from a pending lawsuit and terminated the pending formation of a joint venture between the Company and Graphic to which the Company would have contributed the cellular interests sold to BellSouth and Graphic would have contributed its 50% interest in Milwaukee, Wisconsin. Under the joint venture agreement, the Company would have had to pay Graphic approximately $50 million in exchange for an additional interest in the profits of the joint venture. The termination of the joint venture agreement eliminated this contingent obligation. The Company recognized an after tax gain of approximately $153.3 million on the sale.\n3. Other current assets\nDecember 31, 1993 1992 ---- ---- (In thousands)\nInventories $40,190 $20,268 Accounts and notes receivable 36,603 16,343 Prepaids and other 29,248 15,306 ------- ------- $106,041 $51,917 ======== =======\nMcCAW CELLULAR COMMUNICATIONS, INC. AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1993\n4. Property and equipment:\nDecember 31, 1993 1992 ---- ---- (In thousands)\nCellular $1,579,839 $1,310,765 Messaging 106,148 102,401 Broadcast 99,766 95,566 Air-to-ground 68,954 -- Other 264,635 219,095 ------- ------- 2,119,342 1,727,827 Less accumulated depreciation and amortization 784,330 494,322 ------- ------- 1,335,012 1,233,505\nConstruction in progress 281,468 205,553 ------- ------- $1,616,480 $1,439,058 ========== ==========\nDuring 1993, the Company entered into agreements to replace and upgrade certain cellular equipment in its Minnesota, Rocky Mountain and Southwest markets during 1994 and 1995. The new equipment will be digital compatible. As a result, the Company adjusted the cellular equipment to reflect its estimated realizable value at the time of replacement. The excess of net book value of the cellular equipment over the estimated realizable value as of its replacement date has been reflected as a valuation loss on equipment in the accompanying financial statements.\n5. Investments:\nSubsidiary corporations and joint ventures in which the Company has investments with voting interests of at least 20% but not more than 50% are reported on the equity method. Under the equity method, investments are stated at cost and are adjusted for the Company s share of undistributed earnings and losses. Partnerships in which the Company has ownership interests not exceeding 50% are also reported on the equity method. The excess of the Company s investment over the underlying book value of the investees net assets\nMcCAW CELLULAR COMMUNICATIONS, INC. AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1993\n5. Investments (continued):\nhas been allocated to licensing costs and customer contracts and is being amortized consistent with the amortization periods for those assets. Amortization of this excess of $45.9, $74.3 and $73.9 million for the years ended December 31, 1993, 1992 and 1991, respectively, is reflected in the accompanying statements of operations in equity in income of unconsolidated investees. At December 31, 1993 and 1992, the investments accounted for under the equity method exceeded the Company s share of the underlying net assets by approximately $1,447.0 and $1,599.5 million, respectively.\nOwnership percentages of significant investees are as follows:\nDecember 31, 1993 1992 ---- ---- Equity investments held directly by the Company:\nCMT Partners(1) 50.00% --\nBay Area Cellular Telephone Company(1) -- 32.90%\nAM Partners(1) 50.00% --\nBuffalo Telephone Company(1) -- 50.00%\nAlbany Telephone Company(1) -- 34.17%\nGenesee Telephone Company (Rochester, NY)(1) -- 28.57%\nCybertel Cellular Telephone Company (St. Louis, MO) 15.00% 15.00%\nNortheast Pennsylvania Cellular Telephone Company -- 34.26%\nSmarTone Limited (Hong Kong) 27.00% 27.00%\nMovitel del Noroeste, SA de CV (States of Sinaloa and Sonora, Mexico) 22.00% 22.00% McCAW CELLULAR COMMUNICATIONS, INC. AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1993\n5. Investments (continued):\nDecember 31, 1993 1992 ---- ----\nCellular One Group 48.75% 48.75%\nEquity investments held by LIN(2):\nHouston Cellular Telephone Company 56.25% 56.25%\nLos Angeles Cellular Telephone Company 39.97% 39.97%\nMetrophone (Philadelphia) 49.99% 49.99%\nAmerican Mobile Satellite Corporation(3) 12.49% 32.35%\nGalveston Cellular Telephone Company(4) 42.07% 41.93%\n(1) See Footnote 2 for description of transactions affecting the Company s equity investment interests in 1993.\n(2) LIN s ownership percentages reflect LIN s equity interest in each investee. LIN s voting interest in both Houston Cellular Telephone Company and Los Angeles Cellular Telephone Company was 50% at December 31, 1993 and 1992.\n(3) At December 31, 1993 and 1992 the Company, excluding LIN, held a 4.91% and 12.72% direct interest in American Mobile Satellite Corporation (AMSC), respectively. LIN owned an interest of 7.58% and 19.63% at December 31, 1993 and 1992, respectively. The fair value of the Company s investment in AMSC at December 31, 1993 is approximately $62.8 million based on the closing price of AMSC s publicly traded stock.\n(4) At December 31, 1993 and 1992 the Company, excluding LIN, held a 7.47% and 9.76% direct interest in Galveston Cellular Telephone Company. LIN owned an interest of 34.60% and 32.17% at December 31, 1993 and 1992, respectively.\nMcCAW CELLULAR COMMUNICATIONS, INC. AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1993\n6. Accrued expenses:\nDecember 31, 1993 1992 ---- ---- (In thousands)\nInterest $12,611 $71,346 Income taxes 34,241 45,340 Payroll and related benefits 55,913 38,571 Business taxes 39,543 32,064 Other 191,173 138,731 ------- ------- $333,481 $326,052 ======== ========\n7. Long-term debt:\nDecember 31, 1993 1992 ---- ---- (In thousands)\nMcCaw Bank Credit Facilities (a) $3,400,000 $2,229,650\nLIN Bank Credit Facilities (b) 1,698,338 1,769,682\nSenior and senior subordinated notes and debentures (c) -- 1,195,555\nConvertible senior subordinated debentures (d) -- 399,720\nOther (e) 50,333 58,692 ------- ------- 5,148,671 5,653,299 Less current portion 158,925 90,906 ------- ------- $4,989,746 $5,562,393 ========== ==========\nMcCAW CELLULAR COMMUNICATIONS, INC. AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1993\n7. Long-term debt (continued):\n(a) McCaw Bank Credit Facilities\nThe Company has arranged $4,000 million in financing with a group of banks through two Revolving Credit and Term Loan Agreements. During the fourth quarter of 1993, the Company renegotiated its existing $3,000 million Bank Credit Facility and entered into a new $1,000 million Bank Credit Facility (together the McCaw Bank Credit Facilities). The renegotiation of the $3,000 million facility resulted in an extension of the commencement of principal repayment from June of 1994 to March of 1996 and a change in certain financial covenants and other terms. Included in other expenses is approximately $79 million in nonrecurring charges associated with the McCaw Bank Credit Facilities.\nUnder the McCaw Bank Credit Facilities, interest is payable at an applicable margin above the prevailing prime, LIBOR or CD rate. Interest is fixed for a period ranging from one month to twelve months, depending on availability of the interest basis selected, although if the Company selects a prime-based loan, the interest rate will fluctuate during the period as the prime rate fluctuates.\nThe Company does not expect its operations to generate sufficient cash to meet its expenditure requirements for the next few years. In order to meet its substantial debt service obligations and to fund its other operating and capital requirements, the Company will have to borrow significant additional amounts under the McCaw Bank Credit Facilities. There are conditions in the McCaw Bank Credit Facilities which must be satisfied before the banks will lend additional amounts. If these conditions are not satisfied, the banks may conclude it is not in their best interests to lend additional amounts to the Company. Among these conditions are ratios of senior debt and combined debt to cash flow (as defined in the McCaw Bank Credit Facilities) and cash flow to combined debt service. (See Footnote 16 -- Merger with American Telephone and Telegraph Company.)\nBeginning March 31, 1996 and at the end of each fiscal quarter thereafter until the maturity date (which will be on or about March 31, 2000), the Company will be required to make payments amortizing the amount McCAW CELLULAR COMMUNICATIONS, INC. AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1993\n7. Long-term debt (continued):\n(a) McCaw Bank Credit Facilities (continued):\noutstanding under the McCaw Bank Credit Facilities on December 31, 1995. In addition, the Company will be required to apply cash proceeds from certain sales of assets and, after January 1, 1996, its excess cash flow (as defined in the McCaw Bank Credit Facilities), to the prepayment of loans. At December 31, 1993, $2,550 million was outstanding under the $3,000 million facility and $850 million was outstanding under the $1,000 million facility. As of March 15, 1994, the Company has borrowed net additional amounts of $80 million under its Bank Credit Facilities. The weighted average interest rate was 4.85% for the $3,000 million facility and 4.74% for the $1,000 million facility at December 31, 1993. The McCaw Bank Credit Facilities provide for annual fees of .5% of the unused commitments.\nAt December 31, 1993, the Company has interest rate protection in the form of a swap arrangement and interest caps on LIBOR covering $100 million and $800 million, respectively, of the outstanding amounts on the McCaw Bank Credit Facilities. These arrangements expire between February 1994 and March 1996.\nThe book value of the amounts outstanding under the McCaw Bank Credit Facilities at December 31, 1993 accrue interest at a variable rate plus an applicable margin as described above. Since the borrowings are repriced for periods ranging from one month to twelve months based on changes in the market rates, the book value of the amounts outstanding under the Bank Credit Facilities at December 31, 1993 approximate fair value.\n(b) LIN Bank Credit Facilities\nLIN has arranged financing through two bank facilities. LIN Cellular Network, Inc. (LCNI), a wholly owned subsidiary of LIN (owning all of LIN's cellular operations other than Philadelphia), has an aggregate of $1,480 million outstanding and $240 million available as of December 31, 1993 (the Cellular Facility). LIN Television Corporation (LTC), a wholly owned subsidiary of LIN (owning all of LIN's television operations other than WOOD-TV), has $222 million outstanding and no additional amounts available as of McCAW CELLULAR COMMUNICATIONS, INC. AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1993\n7. Long-term debt (continued):\n(b) LIN Bank Credit Facilities (continued):\nDecember 31, 1993 (the Broadcast Facility), (collectively the LIN Bank Credit Facilities).\nDuring the second quarter of 1993, LIN renegotiated its Cellular Facility. This resulted in an extension in the commencement of amortization of the $400 million revolving portion of the Cellular Facility from September 1993 to March 1996 and a change in certain financial covenants and other terms.\nAt December 31, 1993, $222 million was outstanding under the Broadcast Facility and $1,476 million was outstanding under the Cellular Facility. As of March 15, 1994, LIN has not borrowed additional amounts under its Bank Credit Facilities.\nUnder the LIN Bank Credit Facilities, interest is payable at the prevailing prime, LIBOR or CD rate, plus an applicable margin. Interest is fixed for a period ranging from one month to twelve months, depending on availability of the interest basis selected, although if LIN selects a prime-based loan, the interest rate will fluctuate during the period as the prime rate fluctuates. The applicable margin for each loan will be determined each quarter on the basis of the borrowing subsidiaries' ratio of adjusted senior debt to cash flow (as defined in the LIN Bank Credit Facilities).\nThere are conditions in the LIN Bank Credit Facilities which must be satisfied before the banks will lend additional amounts. If these conditions are not satisfied, the banks may conclude it is not in their best interest to lend additional amounts to LIN. Among these conditions are ratios of senior debt and combined debt to cash flow and cash flow to debt service or fixed charges (as defined in the LIN Bank Credit Facilities).\nOn March 31, 1991 and September 30, 1993, LTC and LCNI, respectively, began making payments amortizing the amounts outstanding under the LIN Bank Credit Facilities. Quarterly payments will continue until December 31, 1998 for LTC and June 30, 2000 for LCNI. McCAW CELLULAR COMMUNICATIONS, INC. AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1993\n7. Long-term debt (continued):\n(b) LIN Bank Credit Facilities (continued):\nIn addition, both LTC and LCNI will be required to apply cash proceeds from certain sales of assets, not reinvested in similar assets, and excess cash flow (as defined in the LIN Bank Credit Facilities) to the prepayment of loans. LIN has not guaranteed the repayment of amounts under the LIN Bank Credit Facilities.\nThe weighted average interest rate was 4.46% and 4.69% for the Cellular and Broadcast Facilities, respectively, at December 31, 1993. The Cellular and Broadcast Facilities provide for annual fees of .5% of the unused commitments. In order to manage interest rate exposure, LIN has entered into interest rate swap and cap agreements covering $50 million and $840 million of its outstanding debt, respectively, as of December 31, 1993. The costs of the interest caps are deferred and charged to interest expense over their respective lives.\nThe book value of the amounts outstanding under the LIN Bank Credit Facilities at December 31, 1993 accrue interest at a variable rate plus an applicable margin as described above. Since the borrowings are repriced for periods ranging from one month to twelve months based on the changes in the market rates, the book value of the amounts outstanding at December 31, 1993 approximate fair value.\n(c) On December 31, 1993, the Company redeemed for cash all of its outstanding 12.75% senior notes of MCI, 13% senior subordinated notes of MCI, 12.95% senior subordinated debentures and 14% senior subordinated debentures. The redemption price on the 12.75% senior notes was 100% of the $125 million principal amount, plus accrued interest. The redemption price on the 13% senior subordinated notes was 103% of the $150 million principal amount, plus accrued interest. The redemption price of the 12.95% senior subordinated debentures was 104.6% of the approximate $531 million principal amount, plus accrued interest. The redemption price on the 14% senior subordinated debentures was 104.9% of the $400 million principal amount, plus accrued interest. The Company paid McCAW CELLULAR COMMUNICATIONS, INC. AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1993\n7. Long-term debt (continued):\npremiums of approximately $48 million on the redemption of the notes and charged to expense approximately $25 million in unamortized financing costs and original issue discounts. All costs associated with the early redemption, net of related income tax benefit, are reflected as an extraordinary item in the accompanying financial statements.\nDuring 1991, the Company exchanged 2.4 million shares of Class A Common Stock for $68.7 million principal amount of outstanding 12.95% Senior Subordinated debentures.\n(d) On March 4, 1993, the Company announced the redemption of all its outstanding 8% convertible senior subordinated debentures and all its outstanding 11.5% convertible senior subordinated discount debentures. Between the announcement of the redemption and the termination on March 31, 1993 of the right of holders to convert, approximately $113.9 million of the 8% debentures were converted into approximately 3.8 million shares of the Company s Class A Common Stock. On April 5, 1993, the Company redeemed the remaining $0.3 million of the 8% debentures and $285.5 million of the 11.5% debentures for cash.\n(e) Debt included in Other has interest rates that float with the prime rate and reprices as the prime rate changes; therefore, book value approximates fair value at December 31, 1993.\nFunds available under the McCaw Bank Credit Facilities can only be utilized by the Company and certain of its subsidiaries other than LIN. Proceeds from LIN s Credit Facilities are only available to LIN and its subsidiaries.\nThe McCaw Bank Credit Facilities, the LIN Bank Credit Facilities and certain of the other loan agreements described above contain restrictions relating to (i) investments in certain subsidiaries, (ii) the incurrence of debt, (iii) distributions and dividends to stockholders, (iv) mergers and sales of assets, (v) prepayments of subordinated indebtedness, (vi) the creation of liens, and (vii) the issuance of preferred stock. In addition, the Company and its subsidiaries are required to maintain compliance with certain financial covenants. McCAW CELLULAR COMMUNICATIONS, INC. AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1993\n7. Long-term debt (continued):\nFollowing is a schedule of maturities of long-term debt for each of the next five years and thereafter:\nYear Ending December 31, Maturities (In thousands)\n1994 $158,925 1995 198,749 1996 588,951 1997 970,137 1998 1,208,909 Thereafter 2,023,000 --------- $5,148,671 ==========\nThe stock of substantially all subsidiaries of the Company and of LIN and their ownership interests in entities holding cellular licenses are pledged or encumbered as security for the Company s and LIN s indebtedness.\nThe terms of various indebtedness incurred by the Company, LIN and the Company s operating systems restrict dividends or other distributions and loans by the Company, LIN and such systems.\n8. Redeemable preferred stock of a subsidiary:\nOn August 10, 1990, LIN completed its acquisition of Metromedia Company s interest in the New York City A Block licensee (the Metromedia Transaction). In addition to the cash portion of the purchase price for the Metromedia interests, LIN s subsidiary, LCH, issued $850 million of newly issued Class A Redeemable Preferred Stock (the LCH Preferred Stock) to Metromedia. Metromedia has subsequently transferred the LCH Preferred Stock to a subsidiary of Comcast Corporation.\nThe holder of the LCH Preferred Stock is entitled to appoint two members of the LCH Board of Directors and will be entitled to dividends if and when declared by the Board. Under the terms of the Preferred Stock, LCH is accruing dividends at the rate of 15.8% per year. LCH is not required to declare or pay dividends in cash, but such dividends are cumulative and must be paid in the event of certain redemptions of the Preferred Stock. McCAW CELLULAR COMMUNICATIONS, INC. AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1993\n8. Redeemable preferred stock of a subsidiary (continued):\nLCH may redeem the Preferred Stock at any time at a price equal, at its option, to either:\n(1) delivery of all of the issued and outstanding capital stock of LCH s subsidiary (LIN-Penn), which holds LIN's ownership interest in the Philadelphia A Block cellular system and its GuestInformant specialty publishing business, plus cash equal to 15% of the fair market value of all businesses (currently, only WOOD, formerly WOTV, LIN's broadcast business in Grand Rapids- Kalamazoo-Battle Creek, Michigan) then operated by LCH (the \"Operating Business Portion\"); or\n(2) a cash amount equal to the greater of (a) the fair market value of the issued and outstanding capital stock of LIN-Penn plus the Operating Business Portion and (b) $850 million, plus, in each case, dividends which would have accrued on the Preferred Stock from the issuance date (to the extent not previously paid) at the rate of 15.8% per year.\nLCH is required to redeem the Preferred Stock in the year 2000 (if not redeemed prior to such time) at a price comparable to that described above. In certain circumstances, the holder of the LCH Preferred Stock may require the corporate parent of LCH to purchase the LCH Preferred Stock. The terms of the Stock Acquisition Agreement executed pursuant to the issuance of the LCH Preferred Stock contains numerous covenants pertaining to LCH which, among other things, include restrictions on (i) the incurrence of debt, (ii) liens, (iii) forgiveness of debt, (iv) mergers, etc., (v) disposition of assets, and (vi) dispositions of certain stock.\nManagement estimates the fair value of the Preferred Stock at December 31, 1993 to be $554.8 million. This represents the estimated fair value of the capital stock of LIN-Penn plus 15% of the Operating Business Portion at December 31, 1993, based on various valuation approaches.\nMcCAW CELLULAR COMMUNICATIONS, INC. AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1993\n9. Stockholders investment:\nStock option plans:\nThe Company's various stock option plans that were adopted by the Company s Board of Directors are summarized below.\nEquity Purchase Program:\nThe Amended and Restated Equity Purchase Program (EPP) provides for the issuance of restricted stock and grants of incentive stock options, non-qualified stock options and stock appreciation rights (SARs). The maximum number of shares of Class A Common Stock authorized for issuance under the EPP is 12,000,000 shares.\n1987 Stock Option Plan:\nUnder the 1987 Stock Option Plan, 319,000 shares of Class A Common Stock are authorized for issuance on exercise of non- qualified options. All options expire ten years and one day from the date of grant. The options are considered compensatory, and the Company recognized compensation expense over the vesting period, which ended in 1989, based on the excess of the fair market value of the Class A Common Stock at the measurement date over $6.75 per share, the exercise price of the option.\n1983 Non-Qualified Stock Option Plan:\nThis plan provides for the grant of rights to purchase shares of Class A and Class B Common Stock under a non- qualified stock option plan and through SARs. Under the terms of the amended plan, 15,000,000 shares in the aggregate of Class A and Class B Common Stock are authorized for grant. These options are exercisable at any time within a period of fifteen years from the date of grant. The options are considered compensatory, and the Company recognizes compensation expense over the vesting period based on the excess of the fair market value of the Class A Common Stock at the measurement date over the exercise price of the option.\nMcCAW CELLULAR COMMUNICATIONS, INC. AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1993\n9. Stockholders' investment (continued):\nStock option plans (continued):\n1992 Stock Option Plan for Non-Employee Directors:\nThe 1992 Stock Option Plan for Non-Employee Directors (Director Plan) provides for the grant of options to acquire up to a total of 100,000 shares of the Company's Class A Common Stock, to be granted to each non-employee director who was not elected or appointed to the Board by virtue of their affiliation with BT USA. Grants of 1,000 shares per director are automatically received annually. The exercise price is equal to the fair market value of the stock on the date of grant. The options are fully vested and immediately exercisable on the date of grant. Options are exercisable for ten years.\n1992 Stock Option Plan for British Telecom Directorships:\nThis plan provides for the grant of options to acquire up to a total of 25,000 shares of the Company's Class A Common Stock. BT USA will automatically receive annual grants of 1,000 shares for each BT Director who is then serving on the Board. The exercise price is equal to the fair market value of the stock on the date of grant and the options are fully vested and immediately exercisable on the date of grant. Options are exercisable for ten years.\nMcCAW CELLULAR COMMUNICATIONS, INC. AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1993\n9. Stockholders' investment (continued):\nStock option plans (continued):\nAt December 31, 1993, 6,120,853 options to purchase the Company s Class A and Class B Common Stock were exercisable, 5,730,188 were exercisable subject to vesting and 5,637,754 shares were available for option grant.\nEmployee stock purchase plan:\nThe Employee Stock Purchase Plan (ESPP) provides for the purchase of shares of Class A Common Stock through regular payroll deductions. The total number of shares authorized to be issued under the ESPP is 500,000. The ESPP expires in August 1997, and restricts an employee to purchase no more than $25,000 of stock in any calendar year under any qualified employee stock purchase plan. Shares may be issued to eligible employees on the last day of each calendar month. The purchase price is 85% of the average of the bid and asked price of the Class A Common Stock on such a date. During 1993, 108,884 shares of Class A Common Stock were purchased at prices ranging from $27.52 to $48.20 per share.\nWarrant repurchase:\nOn June 18, 1992, MCI, a wholly owned subsidiary of the Company, called for the repurchase of all of the warrants issued to purchase an aggregate of 2,250,000 shares of MCI common stock effective July 1, 1992. These warrants contained a mandatory redemption requirement in which MCI was obligated to repurchase the warrants no later than July 1, 1997. The repurchase price at July 1, 1992 of $60.4523 per share represented the minimum value as set forth in the warrant agreement. The final redemption of approximately $89.9 million did not include the 762,495 warrants held by the Company.\nMcCAW CELLULAR COMMUNICATIONS, INC. AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1993\n10. Shareholders agreements:\nCertain controlling shareholders of the Company have entered into a shareholders agreement which, among other things, contains provisions relating to the election of directors and other voting agreements, procedures in the event of a sale of the Company and certain restrictions on the conversion, transfer or sale of common stock of the Company. Certain controlling shareholders of the Company have also entered into a shareholders agreement with British Telecom. This agreement also contains provisions relating to the election of directors, procedures in the event of a sale of the Company and restrictions on the transfer or sale of common stock of the Company.\nBoth agreements expire in 1999 and include renewal options for an additional period not to exceed ten years. All parties to the shareholders agreement and British Telecom voted all their shares in favor of the Merger with AT&T (See Footnote 16 -- Merger with American Telephone and Telegraph Company).\nMcCAW CELLULAR COMMUNICATIONS, INC. AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1993\n11. Income taxes:\nDeferred taxes are determined based on the estimated future tax effects of differences between the financial statement and the tax basis of assets and liabilities given the provisions of the enacted tax laws. The components of the net deferred tax liability are as follows:\nDecember 31, 1993 1992 ---- ---- (In thousands)\nDeferred tax liabilities: Property and equipment, licensing costs and other intangibles $2,115,261 $1,967,690 Other 26,975 48,334 ---------- ---------- Total deferred tax liability 2,142,236 2,016,024 ---------- ---------- Deferred tax assets: Net operating loss and alternative minimum tax credit carry forwards (130,485) (116,443) Finance costs (30,189) -- Other (30,300) -- ---------- ---------- (190,974) (116,443) Valuation allowance 4,425 -- ---------- ---------- Total deferred tax asset (186,549) (116,443) ---------- ---------- Net deferred tax liability $1,955,687 $1,899,581 ========== ==========\nMcCAW CELLULAR COMMUNICATIONS, INC. AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1993\n11. Income taxes (continued):\nThe components of income tax (expense) benefit exclusive of the tax effect of the extraordinary item, are as follows:\nYear Ended December 31, 1993 1992 1991 ---- ---- ---- (In thousands)\nCurrent: Federal $(72,519) $(22,265) $(1,250) State (7,869) (25,780) (18,944) ------- ------- ------- (80,388) (48,045) (20,194) ------- ------- ------- Deferred: Federal 14,182 78,793 41,993 State (31,713) 4,244 5,018 ------- ------- ------- (17,531) 83,037 47,011 ------- ------- ------- $(97,919) $34,992 $26,817 ========= ======= =======\nAt December 31, 1993, the Company, exclusive of LIN, has approximately $172 million of regular tax operating loss carry forwards which expire in the years 2007 and 2008. The Company, exclusive of LIN, has alternative minimum tax credits aggregating approximately $33 million, which carry forward indefinitely for federal income tax purposes. These credits can be used in the future to the extent that the Company s regular tax liability exceeds their liability calculated under the alternative minimum tax system.\nThe Omnibus Budget Reconciliation Act of 1993 increased the corporate tax rate to 35% from 34% effective January 1, 1993. Pursuant to Statement of Financial Accounting Standards No. 109, \"Accounting for Income Taxes,\" the Company recorded an additional tax expense of $49.6 million, with a corresponding increase in deferred tax liability.\nThe following table reconciles the amount which would be provided by applying the 35% federal income tax rate in 1993, and the 34% federal income tax rate in 1992 and 1991, to income (loss) before (expense) benefit for income taxes to the income taxes actually provided. McCAW CELLULAR COMMUNICATIONS, INC. AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1993\n11. Income taxes (continued):\nYear Ended December 31, 1993 1992 1991 ---- ---- ---- (In thousands)\n(Expense) benefit assuming federal statutory rates $(8,245) $57,783 $ 52,203\nAmortization of goodwill (4,744) (5,875) (6,012) State and local taxes, net of federal tax benefit (39,860) (14,214) (9,191) Equity investments 2,019 4,169 3,770 Tax expense not provided on minority partners share of income 4,126 4,734 3,343 Increase in federal statutory rate (49,568) -- -- Other (1,647) (11,605) (17,296) -------- -------- -------- $(97,919) $34,992 $26,817 ========= ======= =======\n12. Retirement benefits:\nLIN has a contributory retirement plan covering certain employees of LIN and its wholly owned television subsidiaries who meet certain requirements, including length of service and age. Pension benefits vest upon completion of five years of service and are computed, subject to certain adjustments, by multiplying 1.25% of the employee's last three years average annual compensation times the number of years of credited service. Funding is based upon legal requirements and tax considerations. No funding was required during the three year period ended December 31, 1993.\nMcCAW CELLULAR COMMUNICATIONS, INC. AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1993\n16. Merger with American Telephone and Telegraph Company:\nOn August 16, 1993, the Company entered into an Agreement and Plan of Merger (the Merger Agreement) with AT&T, pursuant to which the Company would become a wholly owned subsidiary of AT&T and each share of Class A Common Stock and Class B Common Stock of the Company would be converted into one AT&T common share, subject to certain adjustments. Each outstanding option to purchase the Company s stock would be assumed by AT&T and would be exercisable for a proportionate number of AT&T common shares. The merger has been approved by the respective Boards of Directors of AT&T and the Company and the Company's stockholders, but is subject to the satisfaction of several conditions, including the receipt of necessary governmental consents.\nEach party will have a right to terminate the Merger Agreement if it has not closed by September 30, 1994. Separately, AT&T has agreed to purchase at the Company s option, exercisable in the event the Merger Agreement is terminated, approximately 11.7 million newly issued shares of the Company s Class A Common Stock at $51.25 per share, for a total price of $600 million. This right will not be exercisable if the merger is completed. Such transaction would be subject to the receipt of necessary governmental approvals, which have not yet been applied for or received.\nPursuant to the Merger Agreement, on February 8, 1994, the Company, through a wholly owned subsidiary, entered into a credit agreement with AT&T under which an aggregate of $350 million is available (the AT&T Credit Agreement). Under the AT&T Credit Agreement, interest is payable quarterly at an applicable margin in excess of the prevailing LIBOR rate and is fixed for a period ranging from one month to twelve months. Amounts outstanding under the AT&T Credit Agreement are due and payable two years after the earlier of (i) the closing under the Merger Agreement or (ii) the termination of the Merger Agreement. The AT&T Credit Agreement provides for fees of .5% per annum on the unused portion of the $350 million commitment. The assets of the wholly owned subsidiary are pledged as security for this debt. As of March 15, 1994, $67.5 million was outstanding and $282.5 million was available under the AT&T Credit Agreement.\nSeparately, on February 23, 1993, AT&T purchased approximately 14.5 million newly issued shares of the Company's Class A Common Stock at $27.625 per share, for a total price of $400 million.\nREPORT OF ERNST & YOUNG, INDEPENDENT AUDITORS\nThe Board of Directors and Stockholders of LIN Broadcasting Corporation\nWe have audited the accompanying combined balance sheets of LIN Broadcasting Corporation's Unconsolidated Affiliates listed in Note 1 (the Ventures) as of December 31, 1993 and 1992, and the related combined statements of income, Ventures' equity, and cash flows for each of the three years in the period ended December 31, 1993. Our audits also included the financial statement schedules listed in the Index at Item 14(a). These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits. We did not audit the 1993 and 1992 consolidated financial statements of AWACS, Inc. and subsidiaries, which statements reflect total assets constituting 24% and 20% as of December 31, 1993 and 1992, respectively and net revenues constituting 19% and 17% for the years then ended of the related combined totals. Those statements were audited by other auditors whose report, which also places reliance on other auditors, has been furnished to us, and our opinion, insofar as it relates to data included for AWACS, Inc. and subsidiaries, is based solely on the reports of the other auditors.\nWe conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform our 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 and the reports of other auditors provide a reasonable basis for our opinion.\nIn our opinion, based on our audits and the reports of other auditors, the combined financial statements referred to above present fairly, in all material respects, the combined financial position of the Ventures at December 31, 1993 and 1992, and the combined results of their operations and their cash flows for each of the three years in the period ended December 31, 1993, in conformity with generally accepted accounting principles. Also, in our opinion, based on our audits and the reports of other auditors, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. ERNST & YOUNG Seattle, Washington February 4, 1994\nINDEPENDENT AUDITORS' REPORT\nBoard of Directors and Stockholders AWACS, Inc. Wayne, Pennsylvania\nWe have audited the consolidated balance sheet of AWACS, Inc. and subsidiaries as of December 31, 1993 and 1992, and the related consolidated statements of operations and retained earnings and of cash flows for the years then ended (not presented separately herein). 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 did not audit the financial statements of Garden State Cablevision L.P. (\"Garden State\"), the Company's investment in which is accounted for by the use of the equity method. The Company's equity of $32,302,000 and $22,369,000 in Garden State's deficit at December 31, 1993 and 1992, respectively, and of $9,933,000 and $2,985,000 in that entity's net losses for the years then ended are included in the accompanying consolidated financial statements. The financial statements of Garden State were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for Garden State, is based solely on the report of such other auditors.\nWe conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.\nIn our opinion, based on our audits and the report of other auditors, such consolidated financial statements present fairly, in all material respects, the financial position of AWACS, Inc. and subsidiaries as of December 31, 1993 and 1992 and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles.\nAs discussed in the notes to the consolidated financial statements, the Company changed its method of accounting for income taxes effective January 1,1993 to conform with Statement of Financial Accounting Standards No. 109 \"Accounting for Income Taxes.\"\nDELOITTE & TOUCHE Philadelphia, Pennsylvania\nFebruary 18, 1994\nREPORT OF INDEPENDENT PUBLIC ACCOUNTANTS\nTo Garden State Cablevision L.P.:\nWe have audited the accompanying balance sheets of Garden State Cablevision L.P. (a Delaware Limited Partnership) as of December 31,1993 and 1992, and the related statements of operations, partners' (deficit) capital and cash flows for the years then ended. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits.\nWe conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.\nIn our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Garden State Cablevision L.P. as of December 31,1993 and 1992, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles.\nThe accompanying financial statements have been prepared assuming that the Partnership will continue as a going concern. As discussed in Note 2, the Partnership has obtained financing proposals for the repayment of the Senior Debt and Subordinated Debt which become due in 1994. As of the date of this report, the Partnership has not received a written commitment for the required financing and this raises substantial doubt about its ability to continue as a going concern. Management's plans in regard to this matter are described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.\nARTHUR ANDERSEN & CO.\nPhiladelphia, Pa., February 23, 1994\nLIN BROADCASTING CORPORATION'S UNCONSOLIDATED AFFILIATES COMBINED BALANCE SHEETS DECEMBER 31, 1993 AND 1992 (Dollars in thousands)\nASSETS 1993 1992 - ---------------------------------------------------------------- Current assets: Cash and cash equivalents $54,357 $40,815 Accounts receivable, less allowance for doubtful accounts (1993-$9,829; 1992-$14,440) 111,723 84,926 Prepaid expenses and other 17,497 11,812 - ---------------------------------------------------------------- Total current assets 183,577 137,553 - ---------------------------------------------------------------- Property and equipment, at cost, less accumulated depreciation 452,447 417,297 Other assets 2,108 1,143 Cellular FCC licenses, less accumulated amortization (1993-$506) 13,564 -- Organization costs, less accumulated amortization (1993-$6,785; 1992-$5,780) 3,265 4,270 Due from majority stockholder of AWACS 16,387 -- Notes receivable, less allowance for doubtful accounts (1993-$150; 1992-$198) 281 966 - ---------------------------------------------------------------- Total assets $671,629 $561,229 ================================================================\n(continued)\nLIN BROADCASTING CORPORATION'S UNCONSOLIDATED AFFILIATES COMBINED BALANCE SHEETS (continued) DECEMBER 31, 1993 AND 1992 (Dollars in thousands)\nLIABILITIES AND EQUITY 1993 1992 - ----------------------------------------------------------------\nCurrent liabilities: Accounts payable $37,801 $22,378 Accrued expenses 39,180 27,889 Unearned revenues 27,610 16,818 Commissions payable 14,439 10,868 Notes payable 2,946 -- Other current liabilities 6,000 5,199 - ---------------------------------------------------------------- Total current liabilities 127,976 83,152 - ---------------------------------------------------------------- Notes payable to affiliates 63,126 93,827 Investment in affiliate 32,302 22,369 Deferred income taxes 4,236 13,434 Other long-term liabilities 1,286 1,302\nEquity: Contributed capital 78,690 63,817 Excess cost of limited Current assets: Cash and cash equivalents $54,357 $40,815 Accounts receivable, less allowance for doubtful accounts (1993-$9,829; 1992-$14,440) 111,723 84,926 Prepaid expenses and other 17,497 11,812 - ---------------------------------------------------------------- =============================================\nSee accompanying notes.\nLIN BROADCASTING CORPORATION'S UNCONSOLIDATED AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS (Dollars in thousands)\nNOTE 1 -- Basis of Presentation\nThese combined financial statements have been prepared to comply with the Securities and Exchange Commission's Regulation S-X requirement, in connection with LIN Broadcasting Corporation's (\"LIN\") consolidated financial statements, which requires separate or combined financial statements of significant subsidiaries 50% or less controlled.\nThese combined financial statements include 100% of the accounts of the operating ventures listed in the table below in which LIN has voting interests of 50% or less (the \"Ventures\"). These Ventures are included in LIN's consolidated financial statements on the equity accounting method. During 1992, LIN acquired an indirect interest in Galveston Cellular Telephone Company. As a result of this acquisition, the results of the Galveston venture are included in the combined financial statements from the date of acquisition.\nVoting\/ Name and Location Equity Management - ----------------------------------------------------------------- AWACS Inc., d\/b\/a Comcast Metrophone Corporation 49.99% 49.99% Philadelphia\nLos Angeles Cellular Telephone Co., Partnership 39.97% 50.00% Los Angeles\nHouston Cellular Telephone Co., Partnership 56.25% 50.00% Houston\nGalveston Cellular Telephone Co., Corporation 34.60% 50.00% Galveston\nNOTE 2 -- Significant Accounting Policies\nThe following are the Ventures' significant accounting policies:\nCASH EQUIVALENTS: Certain highly liquid, short-term investments which have a maturity of three months or less are considered cash equivalents. Excess cash is primarily invested in U.S. Government obligations.\nPROPERTY AND EQUIPMENT: Cellular system equipment is recorded at cost and is depreciated on a straight-line basis over an 8 or 10 year period. All other property and equipment, including betterments to existing facilities, are recorded at cost and\nLIN BROADCASTING CORPORATION'S UNCONSOLIDATED AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS (Dollars in thousands)\nNOTE 2 -- Significant Accounting Policies (continued)\ndepreciated on a straight-line basis over their estimated useful lives of three to twenty years. Beginning in 1993, AWACS revised the useful lives used to compute depreciation for its cell site equipment from 10 to 8 years and for its computer equipment from 5 to 3 years. The change had the effect of increasing depreciation expense by approximately $4.4 million.\nCELLULAR FCC LICENSES AND ORGANIZATION COSTS: Cellular FCC Licenses represent costs to acquire cellular licenses authorized by the Federal Communications Commission and are amortized using the straight line method over 40 years. Organization costs, consisting principally of legal fees, feasibility studies and other costs related to obtaining required licenses and regulatory approvals, are amortized using the straight-line method over a 10 year period.\nINCOME TAXES: Accelerated depreciation methods are used for tax purposes. AWACS, which is a corporation, provides deferred taxes related to this and other timing differences. Effective January 1, 1993, AWACS adopted the provisions of Statement of Financial Accounting Standards (\"SFAS\") No. 109, \"Accounting for Income Taxes\" (see Note 7). No provision is made for income taxes for either the Los Angeles or Houston ventures as the income or loss is includable in the tax returns of the respective partners of these partnerships.\nREVENUE RECOGNITION: Cellular airtime is recorded as revenue when earned. Unearned revenues consist principally of amounts billed to customers for access fees which are payable one month in advance.\nRECLASSIFICATIONS: Certain reclassifications have been made to the prior years' combined financial statements in order to conform to the 1993 presentation.\nNOTE 3 -- Property and Equipment\nThe major classifications of property and equipment were as follows: December 31, 1993 1992 ------------------ Land $1,379 $1,271 Buildings and improvements 6,583 5,084 Cellular equipment 576,655 511,993 Other 70,997 40,093 ------- ------- 655,614 558,441 Less accumulated depreciation 203,167 141,144 ------- ------- $452,447 $417,297 ======== ========\nLIN BROADCASTING CORPORATION'S UNCONSOLIDATED AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS (Dollars in thousands)\nNOTE 4 -- Notes Payable to Affiliates\nThe Houston venture has entered into agreements with the partners under which it has borrowed $2,946 and $35,946 as of December 31, 1993 and 1992, respectively. The borrowings were made to fund capital expenditures and to retire existing equipment vendor financings. The notes to partners mature in June 1994, are nonamortizing and bear interest at a rate of prime (6% as of December 31, 1993) plus 1%. The Galveston venture also entered into an agreement with an affiliate under which it has borrowed $4,717 and $5,478 as of December 31, 1993 and December 31, 1992, respectively. This note matures beginning in 1995 and bears interest at prime plus 2%.\nNOTE 5 -- Investment in Affiliate\nOn September 30, 1992, an indirect subsidiary of AWACS acquired from the majority stockholder of AWACS a 40% limited partnership interest in Garden State Cablevision L.P. (\"Garden State\"). Consideration consisted of a note with an initial principal amount of $51,000 which is included in Notes payable to affiliates. The note bears interest at a rate of 11% per annum. Interest is payable on a quarterly basis to the extent of available cash, with any unpaid interest added to principal. The note is due September 30, 1997. AWACS anticipates there will be no significant amount of cash available for payment of interest on the note, and accordingly, interest accrued on the note during 1993 and 1992 of $6,006 and $1,403, respectively, was added to principal.\nAWACS' acquisition of the 40% interest in Garden State was recorded as a negative investment in an affiliate of $19,384, which represented the carryover basis from the majority stockholder. AWACS' excess of purchase price over the carrying value was recorded as a reduction of stockholders' equity in the amount of $70,384. The investment is accounted for on the equity method and under the terms of the partnership agreement, 49.5% of the net losses of Garden State are allocated to AWACS. Such losses, which amounted to $9,933 and $2,985 during 1993 and 1992, respectively, were added to the investment in affiliate.\nSummarized financial information for Garden State for the year ended December 31, 1993 and the three months ended December 31, 1992 is as follows:\nLIN BROADCASTING CORPORATION'S UNCONSOLIDATED AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS (Dollars in thousands)\nNOTE 5 -- Investment in Affiliate (Continued)\nThree Months Year Ended Ended December 31, December 31, 1993 1992 ------------ ----------- (Unaudited)\nResults of Operations\nRevenues $90,824 $21,779\nCosts and expenses 41,647 9,915 Depreciation and amortization 47,682 12,139 ------- ------- Operating loss 1,495 (275) Interest expense, net 20,904 5,755 ------- ------- Loss before cumulative effect of accounting change $(19,409) $(6,030) Cumulative effect of accounting change (657) -- ------- ------- Net loss $(20,066) $(6,030) ======= ======== Equity in net loss $(9,933) $(2,985) ======= ========\nFinancial position at December 31, 1993 and 1992\nCurrent assets $7,328 $15,861 Noncurrent assets 246,512 285,828 Current liabilities 294,325 23,198 Noncurrent liabilities 779 299,689\nGarden State's Senior Loan Credit Agreement matures on March 30, 1994, but may be extended through December 31, 1999, upon the satisfaction of certain conditions as specified by the agreement. These conditions include, among other things, the refinancing of the subordinated debt, which matures on June 30,1994, at terms approved by the senior lenders. In connection therewith, Garden State has obtained financing proposals for the repayment of the senior debt ($196,475,000 at December 31, 1993) and subordinated debt ($75,926,919 at December 31, 1993, including deferred interest of $7,523,428). Management believes that Garden State will be successful in obtaining the required financing. As of February 18, 1994, Garden State had not received a written commitment for the required financing. Garden State's ability to continue as a going concern is dependent upon obtaining the required financing.\nLIN BROADCASTING CORPORATION'S UNCONSOLIDATED AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS (Dollars in thousands)\nNOTE 5 -- Investment in Affiliate (Continued)\nIn November 1993, Garden State signed a letter of intent to purchase the general partner's interest in Garden State. The general partner has also retained its rights under the Partnership Agreement that beginning August 15, 1994, for a period of 90 days, it shall have the right to cause Garden State to purchase all of its partnership interest. The purchase price shall be equal to the greater of 150% of the general partner's aggregate capital contributions or 120% of the general partner's percentage of the system's fair market value as determined by an independent appraisal.\nDuring 1993 and 1994, the FCC adopted and modified various regulations governing the rates charged to cable subscribers. Because of these regulations, future revenue growth from cable services will rely to a much greater extent that has been true in the past on increased revenues from unregulated services and new subscribers than from increases in previously unregulated rates.\nNOTE 6 -- Equity\nIn accordance with the various partnership agreements, income of the partnerships is allocated to each owner's respective capital account in accordance with its respective equity interest.\nAdditional capital contributions may be called based on annual construction and operating budgets submitted by the partnerships and agreed upon by the operating committees of each partnership.\nNOTE 7 -- Postretirement Benefits Other Than Pensions\nEffective January 1, 1993, AWACS adopted SFAS No. 106. This statement requires AWACS to accrue the estimated cost of retiree benefits earned during the years the employee provides services. AWACS previously expensed the cost of these benefits as claims were incurred. AWACS recorded the cumulative effect of the obligation for its allocated cost of such benefits in 1993. AWACS' retiree benefit obligation is unfunded and all benefits are paid by Comcast. The cumulative effect as of January 1, 1993 of the adoption of SFAS No. 106 was to reduce the AWACS net income by approximately $375 (net of tax). The effect of SFAS No. 106 on AWACS' income before cumulative effect of the accounting changes was not significant to AWACS' results of operations.\nNOTE 8 -- Income Taxes\nEffective January 1, 1993, AWACS adopted SFAS No. 109, \"Accounting for Income Taxes.\" As a result, AWACS recorded a cumulative effect of accounting change of $12,517. The adoption of SFAS No. 109 did not have a significant impact on the amount of income tax expense recorded by AWACS during 1993.\nLIN BROADCASTING CORPORATION'S UNCONSOLIDATED AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS (Dollars in thousands)\nNOTE 8 -- Income Taxes (continued)\nIncome tax expense consists of the following:\nYear Ended December 31, 1993 1992 1991 ---- ---- ---- Current: Federal $3,543 $3,179 $3,840 State 4,653 2,041 1,374 ------ ------ ------ 8,196 5,220 5,214 ------ ------ ------ Deferred: Federal 4,381 2,509 1,841 State (1,330) 735 922 ------ ------ ------ 3,051 3,244 2,763 ------ ------ ------ $11,247 $8,464 $7,977 ======= ======= ======\nTotal tax expense differs from the amount computed by multiplying income before tax by the statutory federal tax rate primarily due to non-deductible depreciation and amortization expense and state income taxes.\nDeferred taxes are attributable primarily to excess tax over book depreciation and certain expenses not deductible for tax purposes until paid.\nNOTE 9 -- Related-Party Transactions\nDuring the years ended December 31, 1993, 1992 and 1991, the two partnerships recorded management fees payable to affiliates of their partners of $4,200, $4,200 and $4,200, respectively, for management consultation, legal services and various other professional services.\nAWACS is required to advance to its majority stockholder certain amounts based on AWACS' cash flow (as defined) on a semiannual basis. During 1993, AWACS advanced $15,970 to the majority stockholder in the form of a note bearing interest at the prime rate plus 1%. Pursuant to the terms of the note, unpaid interest of $417 was capitalized and added to the principal outstanding. For the year ended December 31, 1993, AWACS is required to advance to the majority stockholder an additional $4,460 by April 30, 1994.\nIn addition to the transactions described above, the Ventures routinely enter into transactions with the Company or other affiliates of the Company (including McCaw), or other affiliates\nLIN BROADCASTING CORPORATION'S UNCONSOLIDATED AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS (Dollars in thousands)\nNOTE 9 -- Related-Party Transactions (continued)\nof the partners. Such transactions include roaming agreements and participation in the North American Cellular Network, among other things. Such transactions are not separately disclosed in the financial statements as they are carried out in the normal course of business.\nNOTE 10 -- Commitments\nThe Ventures lease office space, land and buildings for cell sites and vehicles under operating leases which expire through the year 2010. Total rent expense for the years ended December 31, 1993, 1992 and 1991 was $13,945, $11,909 and $8,788, respectively. Some of the leases include escalation clauses based on increases in the Consumer Price Index. Several of the leases include options to extend the lease term.\nFuture minimum payments under noncancellable operating leases with initial or remaining terms of one year or more at December 31, 1993 are:\n1994 $14,286 1995 13,037 1996 10,841 1997 8,918 1998 6,811 1999 and beyond 10,809 -------- $64,702 ========\nNOTE 11 -- Contingencies\nThe Ventures are from time to time defendants in and are threatened with various legal proceedings arising from their regular business activities. The Ventures are also party to routine filings with the FCC and state regulatory authorities and customary regulatory proceedings pending in connection with interconnection, rates, and practices and proceedings concerning the telecommunications industry in general and other proceedings which management does not expect to have a material adverse effect on the financial position or results of operations of the Ventures.\nIn August 1993 and in December 1993, two dealers for the Los Angeles cellular partnership filed lawsuits against the partnership and certain other parties in the California state court, seeking injunctive relief and monetary damages. The lawsuits allege various torts and statutory violations, including price-fixing regarding cellular equipment and service, below-cost sales of equipment, fraud, interference with economic relationship, unfair competition, discrimination among agents,\nLIN BROADCASTING CORPORATION'S UNCONSOLIDATED AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS (Dollars in thousands)\nNOTE 11 -- Contingencies (continued)\nand conspiracy. The lawsuits are in their early stages and plaintiffs have made a motion to consolidate them. The partnership intends to defend each lawsuit vigorously, believes that it has meritorious defenses to the allegations contained in the complaints, and does not expect that the ultimate results of these legal proceedings will have a material adverse effect on its financial position or results of operations.\nIn September 1993, a proposed class action lawsuit was filed by a cellular subscriber in a District Court in Texas. The lawsuit alleges that the renewal provisions and liquidated damages provisions of the annual subscriber agreements of various cellular carriers, including the Houston cellular partnership, are void and unenforceable, and are contrary to public policy. The plaintiffs also seek monetary damages. No class has yet been certified. The partnership intends to defend the lawsuit vigorously, believes that it has meritorious defenses to the allegations contained in the complaint, and does not expect that the ultimate results of this legal proceeding will have a material adverse effect on its financial position or results of operations.\nAPPENDIX\nOMITTED GRAPHICAL MATERIAL\nGraphical material omitted from this EDGAR filing includes two pages of maps. Such maps are described in the body of the Form 10-K under Item 1 - \"Business--Cellular Interests\".","section_6":"","section_7":"Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS\nRESULTS OF OPERATIONS\nThe Company completed a sale of properties to BellSouth Corporation in September 1991. Results of operations for the properties sold are included in the Company's results through the date of sale. Exclusive of the effect of significant acquisitions and dispositions, the Company's revenues and cash flows (as defined in the McCaw Bank Credit Facilities) have historically grown at significant rates. While the Company expects its revenues and cash flows to continue to grow in the future, there can be no assurance that this will occur or that the rates of growth will equal the rates achieved by the Company in prior periods. Indeed, as absolute levels of revenues and cash flows increase, it is expected that the percentage rate of growth will decline.\nThere are several legislative and regulatory initiatives at the federal and state levels that are expected to result in the allocation of additional spectrum for use for mobile communications services, and may result in the modification of rights held by providers of mobile communications services and the modification of relationships between facilities-based cellular carriers and resellers of cellular services. See \"The Company's Cellular Operations-Cellular Competition\" and \"Governmental Regulation.\" The Company believes these initiatives will continue and will result, in some cases, in additional competition for the Company. One entity has already been authorized to provide a cellular-like mobile service in certain markets of the Company (in addition to the B Block cellular competition) commencing in 1993 and 1994. The Company also intends to pursue rights to offer additional mobile communications services. In light of the uncertainty as to the eventual outcome of any of these specific initiatives, including as to the nature and timing of the additional competitive services covered thereby, it is impossible to quantify the impact of these legislative and regulatory initiatives or such competition on the Company at this time. For each of the reasons set forth above, results of operations for the periods discussed herein are not necessarily indicative of the Company's future results and are not necessarily comparable.\nDuring the first quarter of 1993, the Company retroactively adopted SFAS No. 109, \"Accounting for Income Taxes,\" effective January 1, 1991. The adoption of SFAS No. 109 as of January 1, 1991 required the Company to record a cumulative effect of the change in accounting for income taxes, increasing the Company's net loss in 1991 by $1,956.3 million with a corresponding increase in deferred tax liability. This change in accounting for income taxes has no effect on cash flow and will reduce (increase) the income tax expense (benefit) the Company will recognize in future periods as the difference in the book and tax basis of the intangible assets is reduced. See Note 1 to the Company's consolidated financial statements included herein.\nCertain reclassifications have been made to the 1992 segment information to conform with the 1993 presentation. See Note 14 to the Company's consolidated financial statements included herein for further information regarding the Company's business segments.\nYears Ended December 31, 1993 and 1992\nNet Revenues\nConsolidated net revenues increased 26 percent to $2,194.8 million for 1993 compared with $1,743.3 million for the year ended December 31, 1992. Net revenues of the Company's cellular operations for the year ended December 31, 1993 were $1,919.4 million and represented 87 percent of the total consolidated net revenues of the Company for the year. Net revenues for the year ended December 31, 1993 of the broadcast segment and messaging and other segments were $145.5 million and $129.9 million, respectively and accounted for 7 percent and 6 percent, respectively, of the Company's consolidated net revenues for the year.\nNet revenues for the Company's cellular operations increased 29 percent to $1,919.4 million for 1993 compared with $1,486.2 million for the year ended December 31, 1992, despite a gradual decrease in average revenue per cellular subscriber, a trend that the Company expects may continue as the subscriber base continues to grow.\nNet revenues for the Company's broadcast operations increased 2 percent to $145.5 in 1993 from $142.9 million in 1992. Excluding cyclical political and Olympic revenues from both years, the net broadcast revenues increased 6 percent in 1993 compared to 1992.\nNet revenues grew 14 percent in the messaging and other segment to $129.9 million in 1993, with the increase due primarily to the continuous growth of messaging net revenues. Total messaging net revenues continue to grow due to an increase in the messaging subscriber base, through both acquisitions and growth in existing markets. 1993 messaging net revenue per subscriber declined slightly from 1992, a trend the Company expects may continue as the messaging subscriber base continues to grow.\nOperating Expenses\nConsolidated operating expenses, exclusive of corporate expenses, for the year ended December 31, 1993 were $1,385.2 million, an increase of $306.1 million or 28 percent, from December 31, 1992. A significant portion of these expenses was associated with the Company's cellular operations which accounted for 85 percent of the Company's total operating expenses for the year ended December 31, 1993.\nOperating expenses for the cellular segment, exclusive of depreciation, amortization and valuation loss on equipment, increased to $1,174.7 million, an increase of $263.4 million or 29 percent, from the year ended December 31, 1992. A significant portion of this increase resulted from an increase in cost of equipment sales and marketing costs incurred as a result of the Company's 27 percent increase in new cellular subscribers in 1993 over 1992. Operating expenses as a percentage of net revenues for the cellular segment remained constant at 61 percent for 1993 and 1992. Operating costs associated with the broadcast operations increased $3.0 million, or 4 percent from the year ended December 31, 1992. Total operating expenses, exclusive of depreciation and amortization, for the broadcast operations for 1993 were $79.1 million. These costs as a percentage of net revenues of the broadcast operations increased slightly from 53 percent in 1992 to 54 percent in 1993. Operating expenses, exclusive of depreciation and amortization, of the messaging and other segment increased by 43 percent over 1992 to $131.4 million for 1993. The significant portion of this increase resulted from the Company's start-up air-to-ground communications operations.\nDepreciation and amortization increased from $385.2 million in the year ended December 31, 1992 to $403.6 million for the same period in 1993. Contributing to the 5 percent increase in depreciation and amortization was the Company s improvement and expansion of its existing cellular, messaging and air-to-ground systems offset in part by a decrease in amortization expense due to fully amortized assets. Depreciation and amortization is expected to increase due to continued improvement and expansion of the Company s cellular, messaging and air-to-ground systems, including the implementation of digital cellular service. During 1993, the Company recognized a valuation loss on equipment of $123.6 million associated with replacing and upgrading certain cellular equipment in its Minnesota, Rocky Mountain and Southwest markets. This valuation loss represents the excess of net book value of the cellular equipment being replaced over the estimated realizable value as of its replacement date. See Note 4 to the Company's consolidated financial statements included herein regarding the replacement and upgrade of certain of the Company's cellular equipment.\nOther Income and Expenses\nInterest expense was $394.2 million in 1993, a $95.9 million or 20 percent decrease from 1992. This decrease resulted from reductions in the applicable margin and base borrowing rates on the McCaw Bank Credit Facilities and LIN's credit facilities offset by increased borrowings under the McCaw Bank Credit Facilities. On April 5, 1993, the Company redeemed all of its outstanding convertible senior subordinated debentures. There were approximately $400 million of these debentures outstanding at redemption. The Company recognized a savings of interest expense of approximately $31 million in 1993 as a result of the redemption of these debentures. On December 31, 1993, the Company redeemed its approximate $1.2 billion of remaining publicly held fixed rate debt and replaced it with lower cost borrowings on its Bank Credit Facilities. This redemption should result in significant future interest savings.\nGain on disposition of assets, net was $141.2 million for the year ended December 31, 1993. This gain consists primarily of the gain recognized on the sale to Associated Communications Corporation of the Company's interests in the A Block cellular systems in Albany, Glens Falls and Rochester, New York and the gain recognized on the sale of the Company's Wichita and Topeka systems to PacTel.\nEquity in income of unconsolidated investees was $71.1 million in 1993 compared with $40.2 million in 1992. This increase is primarily attributable to lower amortization expense due to fully amortized assets.\nOther expense of $76.3 million for the year ended December 31, 1993 primarily represents nonrecurring charges associated with the Company's Bank Credit Facilities. See \"Liquidity and Capital Resources\" and Note 7 to the Company's consolidated financial statements included herein regarding the Company's Bank Credit Facilities.\nA tax benefit of $35.0 million was recognized for the year ended December 31, 1992 primarily due to the reversal of deferred taxes established on the difference in the book and tax basis of certain intangible assets as a result of the retroactive implementation of SFAS No. 109. The tax expense of $97.9 million for 1993 includes a one time charge of $49.6 million required under SFAS No. 109 as a result of the change in the federal corporate tax rate to 35 percent from 34 percent as well as state and federal taxes applicable to the gains on dispositions of assets. The 1993 expense was offset in part by tax benefits associated with other 1993 expenses and the reversal of deferred taxes established on the difference in the book and tax basis of certain intangible assets as a result of SFAS No. 109.\nDuring the fourth quarter of 1993, the Company recognized an extraordinary loss, net of income tax benefit, of $45.0 million on the early extinguishment of its public debt. See Note 7 to the Company's consolidated financial statements included herein regarding the redemption.\nFor the reasons discussed above the net loss of $285.6 million in 1992 decreased to a net loss of $272.3 million in 1993.\nYears Ended December 31, 1992 and 1991\nNet Revenues\nConsolidated net revenues increased 28 percent to $1,743.3 million for 1992 compared with $1,365.6 million for the year ended December 31, 1991. Net revenues of the Company's cellular operations for the year ended December 31, 1992 were $1,486.2 million and represented 85 percent of the total consolidated net revenues of the Company for the year. Net revenues for the year ended December 31, 1992 of the broadcast and messaging and other segments were $142.9 million and $114.2 million, respectively and accounted for 8 percent and 7 percent, respectively, of the Company's consolidated net revenues for the year.\nNet revenues for the Company's cellular operations increased 31 percent to $1,486.2 million for 1992 compared with $1,135.2 million for the year ended December 31, 1991, despite a gradual decrease in average revenue per cellular subscriber, a trend that the Company expects may continue as the subscriber base continues to grow. The effect on the Company's cellular operations of the continued weakness of the California economy was offset by unexpected strength from the Company s Florida properties, arising at least in part from Hurricane Andrew.\nNet revenues for the Company's broadcast operations increased 10 percent to $142.9 million in 1992 from $129.5 million in 1991. Improved economic conditions in many of the Company's broadcast market areas stimulated growth in advertising spending. The broadcast operations also benefited from the election year activity; political advertising revenues contributed 26% to the total increase in net revenues.\nNet revenues grew 13 percent in the messaging and other segment to $114.2 million in 1992, with the increase due substantially to the continuous growth of messaging net revenues. Although 1992 messaging net revenue per subscriber declined slightly from 1991, a trend the Company expects may continue as the messaging subscriber base continues to grow, total messaging net revenues continue to grow due to an increase in the messaging subscriber base, both through acquisition and growth in existing markets.\nOperating Expenses\nConsolidated operating expenses, exclusive of corporate expenses, for the year ended December 31, 1992 were $1,079.1 million, an increase of $190.7 million or 21 percent, from December 31, 1991. A significant portion of these expenses was associated with the Company's cellular operations which accounted for 84 percent of the Company's total operating expenses for the year ended December 31, 1992.\nOperating expenses for the cellular segment, exclusive of depreciation and amortization, increased to $911.3 million, an increase of $165.8 million, or 22 percent, from the year ended December 31, 1991. This increase in operating expenses resulted primarily from an increase in marketing and administrative costs incurred as a result of the increase in the segment's subscriber base. Operating expenses as a percentage of net revenues for the cellular segment decreased to 61 percent for 1992 compared to 66 percent for 1991. This trend is primarily due to the economies of scale resulting from growth in the Company's subscriber base. Operating costs associated with the broadcast operations increased $7.1 million, or 10 percent from the year ended December 31, 1991. Total operating expenses, exclusive of depreciation and amortization, for the broadcast operations for 1992 were $76.2 million. These costs as a percentage of net revenues of the broadcast operations remained constant from 1991 to 1992 at 53 percent. Operating expenses, exclusive of depreciation and amortization, of the messaging and other segment increased by 24 percent over 1991 to $91.6 million for 1992. A significant portion of this increase resulted from the Company's start-up air-to-ground communications operations.\nDepreciation and amortization increased from $344.8 million in the year ended December 31, 1991 to $385.2 million for the same period in 1992. Contributing to the 12 percent increase in depreciation and amortization was the Company s improvement and expansion of its existing cellular and messaging systems. In the future, depreciation and amortization will continue to increase due to continued improvement and expansion of the Company s cellular and messaging systems, including the implementation of digital cellular service.\nOther Income and Expenses\nInterest expense was $490.0 million in 1992, an $88.0 million or 15 percent decrease from 1991. The majority of this decrease resulted from a reduction in the applicable margin and base borrowing rates on the McCaw Bank Credit Facilities and LIN's credit facilities offset by increased borrowings under the McCaw Bank Credit Facilities. Interest expense is expected to be at or above current levels in the foreseeable future (see \"Liquidity and Capital Resources\") for the Bank Credit Facility.\nInterest income decreased 41 percent to $17.9 million for the year ended December 31, 1992 primarily as a result of lower yields on investments. Equity in income of unconsolidated investees was $40.2 million in 1992 compared with $22.9 million in 1991. This increase is primarily due to improved operating results of BACTC and the LIN unconsolidated investees.\nThe year ended December 31, 1991 includes a net pre-tax gain on assets sold of $249.5 million resulting primarily from the BellSouth Transaction. The Company also recognized a gain of $6.2 million on the exchange of $68.7 million principal amount of outstanding debentures during 1991. This gain is reflected as a nonrecurring benefit in other income and expense.\nThe tax benefit of $26.8 million in 1991 reflects taxes recognized on the BellSouth Transaction and state income taxes offset by the benefit recognized from the adoption of SFAS No. 109 due to the reversal of deferred taxes established on the difference in the book and tax basis of certain intangible assets. The tax benefit of $35.0 million for 1992 is primarily the result of state income taxes in McCaw markets and state and federal income taxes attributable to LIN markets offset by reversals of deferred taxes related to SFAS No. 109. Excluding the impact of the adoption of SFAS No. 109, income tax expense would have been $49.5 million in 1991 and $45.1 million in 1992.\nMinority interest in income of consolidated subsidiaries increased from $14.0 million in 1991 to $16.3 million for 1992. This increase is primarily due to improved operating results of less than 100 percent owned consolidated subsidiaries partially offset by the consolidation of the operations of Claircom.\nThe year ended December 31, 1991 includes a $1,956.3 million cumulative effect of the change in accounting for income taxes as a result of the retroactive adoption of SFAS No. 109. See Note 1 to the Company's consolidated financial statements included herein.\nFor the reasons discussed above the net loss of $2,231.4 million in 1991 decreased to a net loss of $285.6 million in 1992. Excluding the impact of the adoption of SFAS No. 109, net loss would have been $364.7 million in 1992 and $351.1 million in 1991.\nLIQUIDITY AND CAPITAL RESOURCES\nThe Company utilizes capital to make acquisitions of cellular and messaging interests (which may include the acquisition of stock of publicly traded corporations), to complete the construction of and to operate and expand its communications systems, to fund start-up operating losses for its transmitting systems and to cover interest payments on its indebtedness. Moreover, as subscribers are added and usage increases, it will be necessary to make additional capital expenditures for the purchase of additional sites and operating equipment. The Company is in the process of changing cellular equipment to accommodate the transition from analog to digital cellular service. The conversion from analog to digital equipment will require significant expenditures but will expand the capacity of the Company's cellular systems. The Company expects its additional capital expenditures in 1994 in connection with the planned expansion of digital service to be approximately $110 million and otherwise expects that it will continue to invest cash to grow its businesses at levels similar to or in excess of its 1993 investing activity.\nCash provided by operating activities totaled $294.5 million in 1993, an increase of $132.9 million from 1992's total of $161.6 million. A significant portion of the Company's cash provided by operations is derived from the Company's cellular operations.\nInterest expense decreased 20 percent from the year ended December 31, 1992 to $394.2 million for the year ended December 31, 1993. This decrease resulted from reductions in the applicable margin and base borrowing rates on the McCaw Bank Credit Facilities and LIN's credit facilities offset by increased borrowings under the McCaw Bank Credit Facilities. The Company redeemed all of its outstanding convertible senior subordinated debentures on April 5, 1993. There were approximately $400 million of these debentures outstanding at redemption. The Company recognized a savings of interest expense of approximately $31 million in 1993 as a result of the redemption of these debentures. On December 31, 1993, the Company redeemed its approximate $1.2 billion of remaining publicly held fixed rate debt and replaced it with lower cost borrowings on its Bank Credit Facilities. This redemption should result in significant future interest savings.\nThe Company does not expect that its operations will generate sufficient cash to meet its expenditure requirements for the next few years. Historically the Company has raised capital through the issuance of public indebtedness, bank borrowings and the sale of equity or assets. For example, in February 1994, in connection with the pending Merger of the Company with a subsidiary of AT&T, AT&T and the Company entered into a credit agreement under which an aggregate of $350 million is available for the Company's financing of certain acquisitions and other business opportunities. In addition, AT&T has agreed to purchase approximately 11.7 million newly issued shares of Class A Common Stock for a total purchase price of $600 million in the event that the AT&T Merger Agreement is terminated.\nThere can be no assurance that the Company will be able to obtain such additional financing or sell assets when needed, or if it is able to obtain such financing or sell assets, that the terms will be favorable to the Company. The Company will be required by the terms of the McCaw Bank Credit Facilities to apply the proceeds of certain asset sales to the repayment of loans thereunder.\nThe Company's indebtedness is due and payable over a several year period. The revolving period under the McCaw Bank Credit Facilities ends on March 31, 1996, at which time the obligation to repay principal commences. See Note 7 to the consolidated financial statements included herein. If the Company does not have sufficient internally generated funds to repay its indebtedness at maturity, it may issue additional indebtedness, sell equity or sell assets to refinance such maturing indebtedness. There can be no assurance that such issuances or sales will be possible or, if carried out, that the terms thereof will be favorable to the Company or its security holders.\nIn connection with its acquisition of a controlling interest in LIN in 1990, the Company entered into the PMVG for the benefit of the public stockholders of LIN. See \"Business--Private Market Value Guarantee.\" Pursuant to the PMVG, the Company is required, beginning January 1, 1995, either to offer to purchase the remaining outstanding shares of LIN at private market value (an \"Acquisition\") or put LIN in its entirety up for sale. If the Company decides to proceed with an Acquisition, it may pay the purchase price in cash or any combination of cash, common equity securities and\/or nonconvertible senior or subordinated \"current cash pay\" debt securities that the Independent Directors believe in good faith will have an aggregate market value on a fully distributed basis of not less than the private market value purchase price. If the Company determines not to proceed with an Acquisition, there can be no certainty that LIN will be sold to a third party. The Company s completion of an Acquisition may diminish the Company s liquidity, either through draws by the Company on outstanding facilities, the refinancing of such facilities or the issuance of securities which, by their nature, may limit the ability of the Company to issue further securities for other purposes. Conversely, if LIN is sold, it is likely that such transaction will enhance the Company s liquidity. There can be no assurance as to whether the Company will determine to make an Acquisition or not or, if it does determine to proceed with an Acquisition, what the price for the remaining outstanding interest in LIN will be, the manner in which it will be financed and what effect the payment of such purchase price will have on the Company s liquidity.\nIt is the Company s policy to carefully monitor the state of its business, cash requirements and capital structure. From time to time, the Company may enter into transactions pursuant to which debt is extinguished, such as the CMT Partners transaction, the redemption of public debentures, the sale of stock to AT&T and the proposed merger with AT&T. The Company will continue to explore other such opportunities, which could include sales of assets or equity, joint ventures, reorganizations or further recapitalizations. There can be no assurance that any further such transactions will be undertaken, or, if undertaken, will be favorable to stockholders.\nMcCaw Bank Credit Facilities\nUnder the McCaw Bank Credit Facilities, interest is payable at the applicable margin above, at the Company's discretion, the prevailing prime, LIBOR or CD rate. Interest is fixed for a period ranging from one month to twelve months, depending on availability of the interest basis selected, although if the Company selects a prime-based loan, the interest rate will fluctuate during the period as the prime rate fluctuates. The applicable margin for each loan will be determined on the basis of the Company's ratio of adjusted total debt (as determined under the McCaw Bank Credit Facilities) to cash flow (i.e., net income, excluding extraordinary items, plus depreciation, amortization, interest expense, reserves for deferred taxes and other noncash items deducted in determining net income). For example, if the ratio was 6.0 to 1 or greater, the applicable margin for LIBOR, CD and prime loans would be 1-5\/8%, 1-3\/4% and 5\/8%, respectively, while if the ratio was less than 4.5 to 1, such margins would be 1-1\/8%, 1-1\/4% and 1\/8%, respectively. Beginning on March 31, 1996 and at the end of each fiscal quarter thereafter until the maturity date (which will be on or about March 31, 2000), the Company will be required to make payments amortizing the amount outstanding under the McCaw Bank Credit Facilities on December 31, 1995. In addition, the Company will be required to apply cash proceeds from certain sales of assets not reinvested in similar assets, and, after January 1, 1996, all excess cash flow, to the prepayment of loans.\nThe McCaw Bank Credit Facilities contains covenants restricting certain activities by the Company and its restricted subsidiaries, including, without limitation, restrictions on (i) investments in unrestricted subsidiaries, (ii) the incurrence of debt, (iii) distributions and dividends to stockholders, (iv) mergers and sales of assets, (v) prepayments of subordinated indebtedness, (vi) creation of liens, and (vii) issuance of preferred stock.\nIn addition, the Company and its subsidiaries are required to maintain compliance with certain financial covenants set forth in the McCaw Bank Credit Facilities. The Company is required to maintain certain ratios of combined outstanding indebtedness to the number of pops owned. The Company is also required to maintain ratios of senior debt and combined debt to cash flow in compliance with amounts specified in the McCaw Bank Credit Facilities. Substantially all the Company's assets, consisting of the stock of its first-tier (i.e., direct) subsidiaries, are pledged as security for repayment of amounts due under the McCaw Bank Credit Facilities.\nAlthough the Company is currently in compliance with all covenants under the McCaw Bank Credit Facilities, because the ratios of indebtedness to cash flow required to be maintained by the McCaw Bank Credit Facilities decrease each quarter through 1996, it will be necessary over that time period for the Company either to continue to increase cash flow or to reduce debt in order to remain in compliance.\nThe McCaw Bank Credit Facilities contains customary events of default, including (i) failure to make principal or interest payments when due, (ii) failure to comply with covenants, (iii) misrepresentations, (iv) defaults on other indebtedness, (v) material adverse change in the business, condition, operations, performance or properties of the Company, (vi) unpaid judgments, and (vii) standard ERISA and bankruptcy defaults. In addition, it shall be an event of default if, except in connection with the AT&T Merger, the Designated Party under the McCaw Shareholders Agreement fails to be entitled to appoint a majority of the Board of Directors of the Company or if the McCaw Family (as defined below) fails to hold at least 20 million shares subject to the McCaw Shareholders Agreement.\nThe ability of the Company to comply with the covenants contained in the McCaw Bank Credit facilities may be affected by events beyond its control. If the Company fails to service its indebtedness or satisfy the covenants contained in the McCaw Bank Credit Facilities or the agreements relating to its other indebtedness, the Company will be in default. In such an event, holders of the Company's indebtedness will be able to exercise their rights including the right to declare all the borrowed funds and interest thereon immediately due and payable. If the Company were unable to repay such indebtedness, the holders of such indebtedness could proceed against their collateral, if any. Substantially all the Company's assets, including its stock in subsidiaries and its ownership interests in entities holding cellular licenses, are pledged or encumbered as security for indebtedness.\nLIN's Credit Facilities\nLIN has arranged financing through two bank facilities. LIN Cellular Network, Inc. (\"LCNI\"), a wholly-owned subsidiary of LIN (owning all of LIN's cellular operations other than Philadelphia), has an aggregate of $1,480 million outstanding and $240 million available as of December 31, 1993 (the \"Cellular Facility\"). LIN Television Corporation (\"LTC\"), a wholly-owned subsidiary of LIN (owning all of LIN's television operations other than WOOD-TV), has $222 million outstanding and no additional amounts available as of December 31, 1993 (the \"Broadcast Facility\"), (collectively, the \"LIN Bank Credit Facilities\").\nDuring the second quarter of 1993, LIN renegotiated its Cellular Facility. This resulted in an extension in the commencement of amortization of the $400 million revolving portion of the Cellular Facility from September 1993 to March 1996 and a change in certain financial covenants and other terms.\nLIN's credit facilities prohibit the payment of dividends and distributions to LIN by its major operating subsidiaries, thereby effectively limiting the ability of LIN to transfer funds to the Company.\nFunds available under the McCaw Bank Credit Facilities can only be utilized by the Company and certain of its subsidiaries other than LIN. Proceeds from LIN's credit facilities are only available to LIN and its subsidiaries. For additional information regarding LIN's credit facilities, see LIN's current Annual Report on Form 10-K.\nLCH's Redeemable Preferred Stock\nOn August 10, 1990, LIN completed its acquisition of Metromedia Company's interest in the New York City A Block licensee (the \"Metromedia Transaction\"). In addition to the cash portion of the purchase price for the Metromedia interests, LIN's subsidiary, LCH Communications, Inc. (\"LCH\"), issued $850 million of newly issued Class A Redeemable Preferred Stock (the \"LCH Preferred Stock\") to Metromedia. Metromedia has subsequently transferred the LCH Preferred Stock to a subsidiary of Comcast Corporation. The holder of the LCH Preferred Stock is entitled to appoint two members of the LCH Board of Directors and will be entitled to dividends if and when declared by the Board. LCH may redeem the LCH Preferred Stock at any time at a price equal, at its option, to either:\n(1) all of the issued and outstanding capital stock of LCH's subsidiary (\"LIN-Penn\"), which holds GuestInformant and LIN's ownership interest in the Philadelphia A Block cellular system, plus cash equal to 15 percent of the fair market value of all businesses (currently, only WOOD, formerly WOTV, LIN's broadcast business in Grand Rapids - Kalamazoo - Battle Creek, Michigan) then operated by LCH (the \"Operating Business Portion\"); or\n(2) a cash amount equal to the greater of (a) the fair market value of the issued and outstanding capital stock of LIN- Penn plus the Operating Business Portion and (b) $850 million, plus, in each case, dividends which would have accrued on the LCH Preferred Stock from the issuance date (to the extent not previously paid) at the rate of 15.8 percent per year.\nLCH is required to redeem the LCH Preferred Stock in the year 2000 (if not redeemed prior to such time) at a price comparable to that described above. In certain circumstances, the holder of the LCH Preferred Stock may require the corporate parent of LCH to purchase the LCH Preferred Stock.\nItem 8.","section_7A":"","section_8":"Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA\nThe Company's consolidated financial statements and supplementary data, together with the reports of Arthur Andersen & Co., independent public accountants and Ernst & Young, independent auditors, are included elsewhere herein. Reference is made to the \"Index to Financial Statements\" immediately preceding page.\nItem 9.","section_9":"Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE\nNone. PART III\nItem 10.","section_9A":"","section_9B":"","section_10":"Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT\nThere is hereby incorporated by reference the information under the captions \"Election of Directors,\" \"Executive Officers,\" and \"Section 16 Compliance\" in the Company's Proxy Statement relating to its 1994 annual meeting of stockholders (the \"Proxy Statement\").\nItem 11.","section_11":"Item 11. EXECUTIVE COMPENSATION\nThere is hereby incorporated by reference the information under the captions \"Election of Directors\" and \"Compensation of Executive Officers\" in the Proxy Statement.\nItem 12.","section_12":"Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT\nThere is hereby incorporated by reference the information under the caption \"Security Ownership of Certain Beneficial Owners and Management\" in the Proxy Statement.\nItem 13.","section_13":"Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS\nThere is hereby incorporated by reference the information under the caption \"Compensation Committee Interlocks and Insider Participation\" and \"Certain Transactions\" in the Proxy Statement.\nPART IV\nItem 14.","section_14":"Item 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K\n(a)(1) Consolidated Financial Statements of McCaw Cellular Communications, Inc. and Subsidiary Companies:\n- Report of Arthur Andersen & Co., Independent Public Accountants - Report of Ernst & Young, Independent Auditors - Balance Sheets as of December 31, 1993 and 1992 - Statements of Operations for the Years Ended December 31, 1993, 1992 and 1991 - Statements of Changes in Stockholders' Investment (Deficiency) for the Years Ended December 31, 1993, 1992 and 1991 - Statements of Cash Flows for the Years Ended December 31, 1993, 1992 and 1991 - Notes to Financial Statements for December 31, 1993\nCombined Financial Statements of LIN's Unconsolidated Affiliates\n- Report of Ernst & Young, Independent Auditors - Independent Auditors' Report - Report of Independent Public Accountants - Combined Balance Sheets at December 31, 1993 and - Combined Statements of Income for the Years Ended December 31, 1993, 1992 and 1991 - Combined Statements of Ventures' Equity for the Years Ended December 31, 1993, 1992 and 1991 - Combined Statements of Cash Flows for the Years Ended December 31, 1993, 1992 and 1991 - Notes to Combined Financial Statements for December 31, 1993\n(a)(2) Financial Statement Schedules of LIN's Unconsolidated Affiliates\nSchedule II - Amounts Receivable from Related Parties for the Years Ended December 31, 1993, 1992 and 1991 Schedule IV - Indebtedness to Related Parties for the Years Ended December 31, 1993, 1992 and 1991 Schedule V - Property and Equipment for the Years Ended December 31, 1993, 1992 and 1991 Schedule VI- Accumulated Depreciation and Amortization of Property and Equipment for the Years Ended December 31, 1993, 1992 and 1992\nSchedule VIII - Valuation and Qualifying Accounts and Reserves for the Years Ended December 31, 1993, 1992 and 1991 Schedule X - Supplementary Income Statement Information for the Years Ended December 31, 1993, 1992 and 1991\n(a)(3) Exhibit Index\n2.1 Agreement and Plan of Merger, dated August 16, 1993, among American Telephone and Telegraph Company, Ridge Merger Corporation and McCaw Cellular Communications, Inc. (incorporated by reference to Exhibit 2(a) to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993, as amended) 3.1 Restated Certificate of Incorporation of the Registrant, as amended (incorporated by reference to Exhibit 3.1 to the Company's Annual Report on Form 10-K for the year ended December 31, 1992) 3.2 By-Laws of the Registrant (incorporated by reference to Exhibit 3.2 to the Company's Annual Report on Form 10-K for the year ended December 31, 1992) 10.1 Credit Agreement, dated as of February 8, 1994, between AT&T and MCCI Acquisitions, Inc. 10.2 Credit Agreement, dated as of December 3, 1993 10.3 Credit Agreement, dated as of February 26, 1990, as amended and restated 10.4 Stock Pledge Agreement of McCaw Cellular, Inc., together with Amendment to Stock Pledge Agreement (incorporated by reference to Exhibit 10.11 to Registration Statement No. 33-15727) 10.5* Amended and Restated Equity Purchase Program (incorporated by reference to Exhibit 4.1 to Registration Statement No. 33-20985) 10.6* Amended and Restated 1983 Non-Qualified Stock Option Plan (incorporated by reference to Exhibit 4.3 to Registration Statement No. 33-27820) 10.7* Employee Stock Purchase Plan (incorporated by reference to Exhibit 4.8 to Registration Statement No. 33-20985) 10.8* Amended and Restated 1987 Stock Option Plan (incorporated by reference to Exhibit 4.6 to Registration Statement No. 33-20985) 10.9 Purchase Agreement between McCaw Cellular Communications, Inc. and British Telecom USA Holdings, Inc. (incorporated by reference to Exhibit 10.16 to Registration Statement No. 33-32874) 10.10 Guaranty Agreement between McCaw Cellular Communications, Inc. and British Telecommunications plc. (incorporated by reference to Exhibit 10.17 to Registration Statement No. 33-32874) 10.11 Shareholders Agreement, dated May 31, 1989, as amended December 31, 1989, among McCaw Cellular Communications, Inc., the Jordan and Taylor Trusts, Craig, John, Bruce and Keith McCaw and the other parties named therein (incorporated by reference to Exhibit 10.18 to Registration Statement No. 33-32874) 10.12 Shareholders Agreement, dated June 20, 1989 among McCaw Cellular Communications, Inc., British Telecom USA Holdings, Inc. and Craig, John, Bruce and Keith McCaw (incorporated by reference to Exhibit 10.19 to Registration Statement No. 33-32874) 10.13 Agreement, dated December 11, 1989, between McCaw, MMM Holdings, Inc. and LIN (incorporated by reference to Exhibit 10.20 to Registration Statement No. 33-32874) 10.14 Private Market Value Guarantee, dated December 11, 1989 (incorporated by reference to Exhibit 10.21 to Registration Statement No. 33-32874) 10.15* Employment Agreement, dated as of November 1, 1991, of James L. Barksdale (incorporated by reference to Exhibit 10.15 to the McCaw Cellular Communications Inc. Annual Report on Form 10-K for the fiscal year ended December 31, 1991) 10.16* Employment Agreement, dated as of March 23, 1989,of Peter L.S. Currie 10.17 Agreement of Purchase and Partnership Contribution and other related agreements in connection with the Bay Area Transaction (incorporated by reference to Exhibit 28 to the Company's Current Report on Form 8-K dated October 1, 1991) 10.18 Agreement of Purchase and Sale, dated as of April 10, 1991, by and between BellSouth Enterprises, Inc. and Rochester Cellular Corporation and McCaw Cellular Communications, Inc., Cellular Fund, Inc. and McCaw Cellular, Inc. (incorporated by reference to Exhibit 10.18 to the McCaw Cellular Communications, Inc. Annual Report on Form 10-K for the fiscal year ended December 31, 1991) 10.19* Employment Agreement, dated as of May 31, 1990, of Tom A. Alberg (incorporated by reference to Exhibit 10.22 to the McCaw Cellular Communications, Inc. Annual Report on Form 10-K for the fiscal year ended December 31, 1991) 10.20* McCaw Cellular Communications, Inc. 401(k) Plan, dated as of July 1, 1991 (incorporated by reference to Exhibit 10.23 to the McCaw Cellular Communications, Inc. Annual Report on Form 10-K for the fiscal year ended December 31, 1991) 10.21* 1992 Stock Option Plan for Non-Employee Directors (incorporated by reference to Exhibit 10.24 to the McCaw Cellular Communications, Inc. Annual Report on Form 10-K for the fiscal year ended December 31, 1991) 10.22* 1992 Stock Option Plan for British Telecom Directorships (incorporated by reference to Exhibit 10.25 to the McCaw Cellular Communications, Inc. Annual Report on Form 10-K for the fiscal year ended December 31, 1991) 10.23 Purchase and Sale Agreement, dated as of July 31, 1992, among McCaw Cellular Communications, Inc., Associated Communications Corporation and Celcom Communications Corporation of Pittsburgh, and other related agreements in connection with the McCaw\/Associated Joint Venture (incorporated by reference to Exhibit 10.24 to the McCaw Cellular Communications, Inc. Annual Report on Form 10-K for the fiscal year ended December 31, 1992) 10.24* McCaw Employee Plan, established in connection with AT&T Merger Agreement 10.25* McCaw Cellular Communications, Inc. Deferred Compensation Plan, dated December 15, 1993 21 Subsidiaries of the Registrant 23.1 Consent of Arthur Andersen & Co. 23.2 Consent of Ernst & Young 23.3 Consent of Deloitte & Touche 23.4 Consent of Arthur Andersen & Co. 24 Powers of attorney with respect to certain signatures\n* Management contract or compensatory plan or arrangement.\n(b) Reports on Form 8-K\nThere was one report on Form 8-K filed during the quarter ended December 31, 1993:\nDecember 3, 1993: Announcing redemption of all of the Company's publicly held debt.\nSIGNATURES\nPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.\nMcCAW CELLULAR COMMUNICATIONS, INC.\nBy: ANDREW A. QUARTNER Andrew A. Quartner Senior Vice President-Law March 31, 1994\nPursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons in the capacities and on the dates indicated.\nSignature Title Date\nChairman of the Board, Chief Executive Officer and Director (Principal Craig O. McCaw* Executive Officer) March 31, 1994 - ------------------------ Craig O. McCaw Chief Financial Officer (Principal Financial Officer and Principal Accounting Steven W. Hooper* Officer) March 31, 1994 - ------------------------ Steven W. Hooper\nVice Chairman Wayne M. Perry* of the Board March 31, 1994 - ------------------------ Wayne M. Perry\nPresident and James L. Barksdale* Director March 31, 1994 - ------------------------ James L. Barksdale\nJohn W. Stanton* Director March 31, 1994 - ------------------------ John W. Stanton\nJohn E. McCaw, Jr.* Director March 31, 1994 - ------------------------ John E. McCaw, Jr.\nSignature Title Date\nBruce R. McCaw* Director March 31, 1994 - ------------------------ Bruce R. McCaw\nHarold S. Eastman* Director March 31, 1994 - ------------------------ Harold S. Eastman\nHarold W. Andersen* Director March 31, 1994 - ------------------------ Harold W. Andersen\nDaniel J. Evans* Director March 31, 1994 - ------------------------ Daniel J. Evans\nJohn C. McDonald* Director March 31, 1994 - ------------------------ John C. McDonald\nStuart M. Sloan* Director March 31, 1994 - ------------------------ Stuart M. Sloan\nMalcolm Argent* Director March 31, 1994 - ------------------------ Malcolm Argent\nBruce R. Bond* Director March 31, 1994 - ------------------------ Bruce R. Bond\n*By: ANDREW A. QUARTNER ------------------------ Andrew A. Quartner Attorney-in-fact\nPage\nConsolidated Financial Statements of the Company\nReport of Arthur Andersen & Co., Independent Public Accountants.......................................F-1\nReport of Ernst & Young, Independent Auditors..............F-2\nConsolidated Balance Sheets as of December 31, 1993 and 1992............................................F-3\nConsolidated Statements of Operations for the Years Ended December 31, 1993, 1992 and 1991.............F-5\nConsolidated Statements of Changes in Stockholders' Investment (Deficiency) for the Years Ended December 31, 1993, 1992 and 1991.............F-7\nConsolidated Statements of Cash Flows for the Years Ended December 31, 1993, 1992 and 1991.............F-9\nNotes to Consolidated Financial Statements for December 31, 1993.......................................F-12\nCombined Financial Statements of LIN's Unconsolidated Affiliates\nReport of Ernst & Young, Independent Auditors.............F-48\nIndependent Auditors' Report..............................F-49\nReport of Independent Public Accountants..................F-50\nCombined Balance Sheets at December 31, 1993 and 1992.....F-51\nCombined Statements of Income for the Years Ended December 31, 1993, 1992 and 1991........................F-53\nCombined Statements of Ventures' Equity for the Years Ended December 31, 1993, 1992 and 1991..................F-54\nCombined Statements of Cash Flows for the Years Ended December 31, 1993, 1992 and 1991..................F-55\nNotes to Combined Financial Statements for December 31, 1993.......................................F-58\nFinancial Statement Schedules of LIN's Unconsolidated Affiliates\nSchedule II - Amounts Receivable from Related Parties for the Years Ended December 31, 1993, 1992 and 1991..........................F-66 Schedule IV - Indebtedness to Related Parties for the Years Ended December 31, 1993, 1992 and 1991....................F-67 Schedule V - Property and Equipment for the Years Ended December 31, 1993, 1992 and 1991..........................F-68 Schedule VI- Accumulated Depreciation and Amortization of Property and Equipment for the Years Ended December 31, 1993, 1992 and 1992.......F-69 Schedule VIII - Valuation and Qualifying Accounts and Reserves for the Years Ended December 31, 1993, 1992 and 1991.......F-70 Schedule X - Supplementary Income Statement Information for the Years Ended December 31, 1993, 1992 and 1991.......F-71\nReport of Independent Public Accountants\nTo McCaw Cellular Communications, Inc.:\nWe have audited the accompanying consolidated balance sheets of McCaw Cellular Communications, Inc. (a Delaware corporation) and subsidiary companies as of December 31, 193 and 1992, and the related consolidated statements of operations, stockholders' investment (deficiency) and cash flows 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 did not audit the financial statements of LIN Broadcasting Corporation and subsidiaries, which statements reflect assets of 32 percent of the 1993 and 1992 consolidated assets and net revenues of 34 percent, 35 percent, and 36 percent for 1993, 1992 and 1991 consolidated net revenues, respectively. Those statements were audited by other auditors whose report has been furnished to us and our opinion, insofar as it relates to the amounts included for those entities, is based solely on the report of other auditors.\nWe conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of other auditors provide a reasonable basis for our opinion.\nIn our opinion, based on our audits and the report of other auditors, the financial statements referred to above present fairly, in all material respects, the financial position of McCaw Cellular Communications, Inc. and subsidiary companies as of December 31, 1993 and 1992 and the results of their operations and their cash flows for each of the three years in the period ended December 31,1993 in conformity with generally accepted accounting principles.\nAs explained in Note 1 to the financial statements, the Company has adopted Statement of Financial Accounting Standards No. 109, \"Accounting for Income Taxes,\" by applying it retroactively effective January 1, 1991.\nARTHUR ANDERSEN & CO.\nSeattle, Washington March 30, 1994\nREPORT OF ERNST & YOUNG, INDEPENDENT AUDITORS\nBoard of Directors and Stockholders of LIN Broadcasting Corporation\nWe have audited the consolidated balance sheets of LIN Broadcasting Corporation and subsidiaries as of December 31, 1993 and 1992, and the related consolidated statements of operations, stockholders' deficit, and cash flows for each of the three years in the period ended December 31, 1993 (not presented separately herein). 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.\nWe conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform our 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.\nIn our opinion, the financial statements referred to above present fairly, in all material respects the consolidated financial position of LIN Broadcasting Corporation and subsidiaries at December 31, 1993 and 1992, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1993 in conformity with generally accepted accounting principles.\nSeattle, Washington February 4, 1994\nMcCAW CELLULAR COMMUNICATIONS, INC. AND SUBSIDIARY COMPANIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1993 AND 1992 (Dollars In Thousands, Except Per Share Amounts)\nASSETS 1993 1992 ---- ---- Current assets: Cash and cash equivalents $138,908 $201,606 Marketable securities 57,661 168,306 Accounts receivable, net of allowance for doubtful accounts (1993, $36,682; 1992, $31,298) 326,584 250,265 Other 106,041 51,917 --------- --------- Total current assets 629,194 672,094\nProperty and equipment, net of accumulated depreciation and amortization (1993, $784,330; 1992, $494,322) 1,616,480 1,439,058 Licensing costs, net of accumulated amortization (1993, $505,303; 1992, $407,169) 3,994,511 3,991,928 Other intangible assets, net of accumulated amortization (1993, $221,152; 1992, $365,717) 768,481 804,963 Investments 1,960,863 1,856,669 Other assets 95,400 190,733 --------- -------- $9,064,929 $8,955,445 ========== =========\n(continued)\nMcCAW CELLULAR COMMUNICATIONS, INC. AND SUBSIDIARY COMPANIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1993 AND 1992 (Dollars In Thousands, Except Per Share Amounts) (continued)\nLIABILITIES AND STOCKHOLDERS DEFICIENCY\n1993 1992 ---- ---- Current liabilities: Current portion of long-term debt $158,925 $90,906 Accounts payable 159,129 124,339 Accrued expenses 333,481 326,052 Unearned revenues and customer deposits 69,118 59,123 --------- --------- Total current liabilities 720,653 600,420\nLong-term debt, net of current portion 4,989,746 5,562,393 Net deferred tax liability 1,955,687 1,899,581 Other noncurrent liabilities 131,499 131,844 --------- --------- Total liabilities 7,797,585 8,194,238 --------- --------- Commitments and contingencies\nRedeemable preferred stock of a subsidiary 1,305,248 1,170,948 --------- --------- Stockholders deficiency: Preferred stock, $0.01 par: Authorized 10,000,000 shares; none issued Common stock, $0.01 par: Class A: Authorized 400,000,000 shares; issued and outstanding, 1993, 148,411,196; 1992, 124,769,731 1,484 1,247 Class B: Authorized 200,000,000 shares; issued and outstanding, 1993, 60,142,047; 1992, 61,356,282 602 614 Additional paid-in capital 2,888,565 2,244,637 Deficit (2,928,555) (2,656,239) --------- --------- Total stockholders deficiency (37,904) (409,741) --------- --------- $9,064,929 $8,955,445 ========== =========\nSee notes to consolidated financial statements.\nMcCAW CELLULAR COMMUNICATIONS, INC. AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1993\n1. Summary of significant accounting policies:\nPrinciples of consolidation:\nThe consolidated financial statements include the accounts of McCaw Cellular Communications, Inc., a Delaware corporation, and its majority-owned subsidiary companies (the Company), including LIN Broadcasting Corporation, together with its subsidiaries (LIN).\nThe Company s consolidated financial statements include 100% of the assets, liabilities and results of operations of subsidiaries (both corporations and partnerships) in which the Company has a voting interest of greater than 50%. The ownership interest of the other interest holders is reflected as minority interests. Losses in consolidated corporations (including LIN s) attributable to minority interest holders in excess of their respective share of the subsidiaries net equity are not eliminated in consolidation. All significant intercompany accounts and transactions have been eliminated.\nCertain reclassifications were made to prior years amounts to conform with the 1993 presentation.\nOperations:\nThe Company s activities primarily consist of the acquisition of interests in cellular licensees and the construction, operation and expansion of cellular, air-to- ground, messaging and broadcasting communications systems. The Company has experienced substantial net losses, exclusive of gains on dispositions of assets, and has had insufficient internally generated funds to cover capital, operating expenditures and debt service since its inception.\nCash and cash equivalents:\nCash equivalents consist of repurchase obligations, certificates of deposit, commercial paper and other investments with a maturity of 90 days or less when purchased. The carrying amount reported in the balance sheets for cash and cash equivalents approximates fair value.\nMcCAW CELLULAR COMMUNICATIONS, INC. AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1993\n1. Summary of significant accounting policies (continued):\nMarketable securities:\nThe Company invests excess cash in marketable securities which include equity and debt securities, certificates of deposit and other investment instruments with maturities greater than 90 days when purchased. Marketable securities are stated at the lower of aggregate cost or market value. At December 31, 1993 and 1992, aggregate cost approximated market value. The Company recognized net gains of approximately $1.1, $1.0 and $13.5 million on sales of marketable securities in 1993, 1992 and 1991, respectively. The gains are reflected in the accompanying statements of operations as gain on dispositions of assets, net.\nRevenue recognition:\nCellular and air-to-ground air time is recorded as revenue as earned. Sales of equipment and related services are recorded when goods and services are delivered. Cellular access charges and messaging services generally are billed in advance and recognized as revenue when the services are provided. Broadcast revenue is billed when contracted and recognized during the period the advertising is aired or appears in publications.\nProperty and equipment:\nProperty and equipment are stated at cost. Repair and maintenance costs are charged to expense when incurred. Renewals and betterments are capitalized. Gains or losses on disposition of property and equipment are reflected in income currently. Depreciation is computed using the straight-line method over the estimated useful lives of the assets which are generally 10 to 12 years for cellular, 2 to 12 years for messaging, 10 to 20 years for broadcast, 3 to 12 years for air-to-ground and 3 to 5 years for other equipment. Leasehold improvements are amortized using the straight-line method over the terms of the leases.\nDuring 1993 certain cellular equipment was identified for early replacement and reduced to its estimated realizable value (see Footnote 4--Property and equipment).\nMcCAW CELLULAR COMMUNICATIONS, INC. AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1993\n1. Summary of significant accounting policies (continued):\nLicensing costs:\nLicensing costs primarily represent costs incurred to develop or acquire cellular and messaging licenses. Generally, amortization begins with the commencement of service to customers and is computed using the straight-line method over a period of 40 years.\nOther intangible assets:\nOther intangible assets primarily represent costs allocated in acquisitions to customer contracts, broadcast licenses, network affiliations and goodwill. Customer contracts are amortized using the straight-line method over the expected term of the customers service, generally 3 years. Broadcast licenses, network affiliations and goodwill are amortized using the straight-line method over a period of 40 years.\nIncome taxes:\nThe Company provides for income taxes currently payable and for deferred income taxes resulting from temporary differences in the recognition of income and expense for financial reporting and tax reporting purposes.\nDuring the first quarter of 1993, the Company retroactively adopted Statement of Financial Accounting Standards (SFAS) No. 109, \"Accounting for Income Taxes,\" effective January 1, 1991. SFAS No. 109 requires an asset and liability approach for financial accounting and reporting for income tax purposes. The principal impact of SFAS No. 109 on the Company relates to the requirement that a deferred tax liability be provided to recognize the differences in book and tax basis for certain intangible assets recorded as a result of purchase business combinations, such as the Company s acquisition of LIN and LIN s acquisition of Metromedia s indirect interest in the New York City licensee. The adoption of SFAS No. 109 retroactive to January 1, 1991 resulted in an increase to the 1991 net loss for the cumulative effect of the change of $1,956 million or $10.78 per share and an increase of the deferred tax liability of $1,956 million.\nMcCAW CELLULAR COMMUNICATIONS, INC. AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1993\n1. Summary of significant accounting policies (continued):\nNet loss per share:\nNet loss per share is computed based on the weighted average number of common and common equivalent shares outstanding during the year. In the years where the Company has reported a net loss, only common shares outstanding are considered since the assumed conversion of options and convertible securities would be antidilutive. The computation of 1992 and 1991 net loss per share also reflects the accretion of the mandatory repurchase obligation of McCaw Cellular, Inc. (MCI) warrants net of the accretion of warrants held by the Company.\nRecently issued accounting standards:\nIn December 1992, the Financial Accounting Standards Board issued Statement No. 112, Employers Accounting for Postemployment Benefits. This statement is effective for fiscal years beginning after December 15, 1993 and requires accrual of the expected cost of benefits provided to former or inactive employees after employment but before retirement either over the period of employment or as an expense at the date of the event giving rise to the benefits. The Company has decided to adopt Statement No. 112, effective January 1, 1994. All such postemployment benefits provided by the Company in prior years have not been material, and accordingly, the adoption of Statement No. 112 will not have a material impact on the financial position or results of operations of the Company.\n2. Significant acquisitions and dispositions:\n1993 Transactions:\nOn January 8, 1993, the Company and Associated Communications Corporation (Associated) completed the formation of a joint venture combining Associated s 6% interest in Bay Area Cellular Telephone Company (BACTC) and the Company s 50% interest in the Buffalo, New York A Block cellular system (AM Partners). Associated and the Company each have a 50% ownership interest in AM Partners. In addition, Associated purchased the Company s 34.17% interest in the A Block cellular system in Albany, New York, its 100% interest in the A Block cellular system in Glens Falls, New York and its 28.57% interest in the A Block cellular system in Rochester, New York. The total price for the three combined interests was approximately $85.6 million on McCAW CELLULAR COMMUNICATIONS, INC. AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1993\n2. Significant acquisitions and dispositions (continued):\nwhich the Company recognized an after tax gain of approximately $35.5 million.\nOn September 1, 1993, the Company and PacTel, a subsidiary of Pacific Telesis Group, completed the formation of a 99- year joint venture combining PacTel s 61.1% interest in BACTC and its approximate 34% interest in the A Block cellular system in Dallas and the Company s 32.9% interest in BACTC, certain of its interests in the A Block cellular systems in Vallejo, Santa Rosa and Carmel\/Monterey\/Salinas, California, and certain of its interests in the A Block cellular systems in Kansas City, St. Joseph and Lawrence, Kansas\/Missouri (collectively, CMT Partners). PacTel and the Company each have a 50% ownership interest in CMT Partners. In addition, PacTel directly purchased the Company s 100% interest in the A Block cellular system in Wichita, Kansas and an approximate 78% interest in the A Block cellular system in Topeka, Kansas for $100 million. The Company recognized an after tax gain on the sale of approximately $56 million, subject to certain purchase price adjustments.\nThe primary effect on the consolidated balance sheet of the formation of CMT Partners, net of cash, was to increase investments approximately $97.7 million, decrease property and equipment approximately $55.0 million and decrease licensing costs and other intangible assets approximately $44.5 million.\nThe Company completed the acquisition of interests in several A Block cellular licensees in exchange for approximately 2.2 million shares of the Company s Class A Common Stock for an approximate $96.1 million.\n1992 Transaction:\nOn January 7, 1992, the Company completed the acquisition from Crowley Cellular Telecommunications Limited Partnership, of its 100% interests in the A Block cellular systems in Waco, Texas and Daytona Beach, Florida, as well as certain minority interests in other cellular systems for approximately $107 million in cash.\nMcCAW CELLULAR COMMUNICATIONS, INC. AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1993\n2. Significant acquisitions and dispositions (continued):\n1991 Transaction:\nOn September 20, 1991 the Company sold to BellSouth Enterprises, Inc. (BellSouth) the Company s cellular interests in Indiana, Wisconsin and Illinois (Upper Midwest Cellular Systems) for approximately $360 million in cash and BellSouth s approximate 29% interest in the A Block cellular system in Rochester, New York valued at $21.0 million. In addition, as part of the transaction, the Company released Graphic Scanning Corporation (Graphic) from a pending lawsuit and terminated the pending formation of a joint venture between the Company and Graphic to which the Company would have contributed the cellular interests sold to BellSouth and Graphic would have contributed its 50% interest in Milwaukee, Wisconsin. Under the joint venture agreement, the Company would have had to pay Graphic approximately $50 million in exchange for an additional interest in the profits of the joint venture. The termination of the joint venture agreement eliminated this contingent obligation. The Company recognized an after tax gain of approximately $153.3 million on the sale.\n3. Other current assets\nDecember 31, 1993 1992 ---- ---- (In thousands)\nInventories $40,190 $20,268 Accounts and notes receivable 36,603 16,343 Prepaids and other 29,248 15,306 ------- ------- $106,041 $51,917 ======== =======\nMcCAW CELLULAR COMMUNICATIONS, INC. AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1993\n4. Property and equipment:\nDecember 31, 1993 1992 ---- ---- (In thousands)\nCellular $1,579,839 $1,310,765 Messaging 106,148 102,401 Broadcast 99,766 95,566 Air-to-ground 68,954 -- Other 264,635 219,095 ------- ------- 2,119,342 1,727,827 Less accumulated depreciation and amortization 784,330 494,322 ------- ------- 1,335,012 1,233,505\nConstruction in progress 281,468 205,553 ------- ------- $1,616,480 $1,439,058 ========== ==========\nDuring 1993, the Company entered into agreements to replace and upgrade certain cellular equipment in its Minnesota, Rocky Mountain and Southwest markets during 1994 and 1995. The new equipment will be digital compatible. As a result, the Company adjusted the cellular equipment to reflect its estimated realizable value at the time of replacement. The excess of net book value of the cellular equipment over the estimated realizable value as of its replacement date has been reflected as a valuation loss on equipment in the accompanying financial statements.\n5. Investments:\nSubsidiary corporations and joint ventures in which the Company has investments with voting interests of at least 20% but not more than 50% are reported on the equity method. Under the equity method, investments are stated at cost and are adjusted for the Company s share of undistributed earnings and losses. Partnerships in which the Company has ownership interests not exceeding 50% are also reported on the equity method. The excess of the Company s investment over the underlying book value of the investees net assets\nMcCAW CELLULAR COMMUNICATIONS, INC. AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1993\n5. Investments (continued):\nhas been allocated to licensing costs and customer contracts and is being amortized consistent with the amortization periods for those assets. Amortization of this excess of $45.9, $74.3 and $73.9 million for the years ended December 31, 1993, 1992 and 1991, respectively, is reflected in the accompanying statements of operations in equity in income of unconsolidated investees. At December 31, 1993 and 1992, the investments accounted for under the equity method exceeded the Company s share of the underlying net assets by approximately $1,447.0 and $1,599.5 million, respectively.\nOwnership percentages of significant investees are as follows:\nDecember 31, 1993 1992 ---- ---- Equity investments held directly by the Company:\nCMT Partners(1) 50.00% --\nBay Area Cellular Telephone Company(1) -- 32.90%\nAM Partners(1) 50.00% --\nBuffalo Telephone Company(1) -- 50.00%\nAlbany Telephone Company(1) -- 34.17%\nGenesee Telephone Company (Rochester, NY)(1) -- 28.57%\nCybertel Cellular Telephone Company (St. Louis, MO) 15.00% 15.00%\nNortheast Pennsylvania Cellular Telephone Company -- 34.26%\nSmarTone Limited (Hong Kong) 27.00% 27.00%\nMovitel del Noroeste, SA de CV (States of Sinaloa and Sonora, Mexico) 22.00% 22.00% McCAW CELLULAR COMMUNICATIONS, INC. AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1993\n5. Investments (continued):\nDecember 31, 1993 1992 ---- ----\nCellular One Group 48.75% 48.75%\nEquity investments held by LIN(2):\nHouston Cellular Telephone Company 56.25% 56.25%\nLos Angeles Cellular Telephone Company 39.97% 39.97%\nMetrophone (Philadelphia) 49.99% 49.99%\nAmerican Mobile Satellite Corporation(3) 12.49% 32.35%\nGalveston Cellular Telephone Company(4) 42.07% 41.93%\n(1) See Footnote 2 for description of transactions affecting the Company s equity investment interests in 1993.\n(2) LIN s ownership percentages reflect LIN s equity interest in each investee. LIN s voting interest in both Houston Cellular Telephone Company and Los Angeles Cellular Telephone Company was 50% at December 31, 1993 and 1992.\n(3) At December 31, 1993 and 1992 the Company, excluding LIN, held a 4.91% and 12.72% direct interest in American Mobile Satellite Corporation (AMSC), respectively. LIN owned an interest of 7.58% and 19.63% at December 31, 1993 and 1992, respectively. The fair value of the Company s investment in AMSC at December 31, 1993 is approximately $62.8 million based on the closing price of AMSC s publicly traded stock.\n(4) At December 31, 1993 and 1992 the Company, excluding LIN, held a 7.47% and 9.76% direct interest in Galveston Cellular Telephone Company. LIN owned an interest of 34.60% and 32.17% at December 31, 1993 and 1992, respectively.\nMcCAW CELLULAR COMMUNICATIONS, INC. AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1993\n6. Accrued expenses:\nDecember 31, 1993 1992 ---- ---- (In thousands)\nInterest $12,611 $71,346 Income taxes 34,241 45,340 Payroll and related benefits 55,913 38,571 Business taxes 39,543 32,064 Other 191,173 138,731 ------- ------- $333,481 $326,052 ======== ========\n7. Long-term debt:\nDecember 31, 1993 1992 ---- ---- (In thousands)\nMcCaw Bank Credit Facilities (a) $3,400,000 $2,229,650\nLIN Bank Credit Facilities (b) 1,698,338 1,769,682\nSenior and senior subordinated notes and debentures (c) -- 1,195,555\nConvertible senior subordinated debentures (d) -- 399,720\nOther (e) 50,333 58,692 ------- ------- 5,148,671 5,653,299 Less current portion 158,925 90,906 ------- ------- $4,989,746 $5,562,393 ========== ==========\nMcCAW CELLULAR COMMUNICATIONS, INC. AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1993\n7. Long-term debt (continued):\n(a) McCaw Bank Credit Facilities\nThe Company has arranged $4,000 million in financing with a group of banks through two Revolving Credit and Term Loan Agreements. During the fourth quarter of 1993, the Company renegotiated its existing $3,000 million Bank Credit Facility and entered into a new $1,000 million Bank Credit Facility (together the McCaw Bank Credit Facilities). The renegotiation of the $3,000 million facility resulted in an extension of the commencement of principal repayment from June of 1994 to March of 1996 and a change in certain financial covenants and other terms. Included in other expenses is approximately $79 million in nonrecurring charges associated with the McCaw Bank Credit Facilities.\nUnder the McCaw Bank Credit Facilities, interest is payable at an applicable margin above the prevailing prime, LIBOR or CD rate. Interest is fixed for a period ranging from one month to twelve months, depending on availability of the interest basis selected, although if the Company selects a prime-based loan, the interest rate will fluctuate during the period as the prime rate fluctuates.\nThe Company does not expect its operations to generate sufficient cash to meet its expenditure requirements for the next few years. In order to meet its substantial debt service obligations and to fund its other operating and capital requirements, the Company will have to borrow significant additional amounts under the McCaw Bank Credit Facilities. There are conditions in the McCaw Bank Credit Facilities which must be satisfied before the banks will lend additional amounts. If these conditions are not satisfied, the banks may conclude it is not in their best interests to lend additional amounts to the Company. Among these conditions are ratios of senior debt and combined debt to cash flow (as defined in the McCaw Bank Credit Facilities) and cash flow to combined debt service. (See Footnote 16 -- Merger with American Telephone and Telegraph Company.)\nBeginning March 31, 1996 and at the end of each fiscal quarter thereafter until the maturity date (which will be on or about March 31, 2000), the Company will be required to make payments amortizing the amount McCAW CELLULAR COMMUNICATIONS, INC. AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1993\n7. Long-term debt (continued):\n(a) McCaw Bank Credit Facilities (continued):\noutstanding under the McCaw Bank Credit Facilities on December 31, 1995. In addition, the Company will be required to apply cash proceeds from certain sales of assets and, after January 1, 1996, its excess cash flow (as defined in the McCaw Bank Credit Facilities), to the prepayment of loans. At December 31, 1993, $2,550 million was outstanding under the $3,000 million facility and $850 million was outstanding under the $1,000 million facility. As of March 15, 1994, the Company has borrowed net additional amounts of $80 million under its Bank Credit Facilities. The weighted average interest rate was 4.85% for the $3,000 million facility and 4.74% for the $1,000 million facility at December 31, 1993. The McCaw Bank Credit Facilities provide for annual fees of .5% of the unused commitments.\nAt December 31, 1993, the Company has interest rate protection in the form of a swap arrangement and interest caps on LIBOR covering $100 million and $800 million, respectively, of the outstanding amounts on the McCaw Bank Credit Facilities. These arrangements expire between February 1994 and March 1996.\nThe book value of the amounts outstanding under the McCaw Bank Credit Facilities at December 31, 1993 accrue interest at a variable rate plus an applicable margin as described above. Since the borrowings are repriced for periods ranging from one month to twelve months based on changes in the market rates, the book value of the amounts outstanding under the Bank Credit Facilities at December 31, 1993 approximate fair value.\n(b) LIN Bank Credit Facilities\nLIN has arranged financing through two bank facilities. LIN Cellular Network, Inc. (LCNI), a wholly owned subsidiary of LIN (owning all of LIN's cellular operations other than Philadelphia), has an aggregate of $1,480 million outstanding and $240 million available as of December 31, 1993 (the Cellular Facility). LIN Television Corporation (LTC), a wholly owned subsidiary of LIN (owning all of LIN's television operations other than WOOD-TV), has $222 million outstanding and no additional amounts available as of McCAW CELLULAR COMMUNICATIONS, INC. AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1993\n7. Long-term debt (continued):\n(b) LIN Bank Credit Facilities (continued):\nDecember 31, 1993 (the Broadcast Facility), (collectively the LIN Bank Credit Facilities).\nDuring the second quarter of 1993, LIN renegotiated its Cellular Facility. This resulted in an extension in the commencement of amortization of the $400 million revolving portion of the Cellular Facility from September 1993 to March 1996 and a change in certain financial covenants and other terms.\nAt December 31, 1993, $222 million was outstanding under the Broadcast Facility and $1,476 million was outstanding under the Cellular Facility. As of March 15, 1994, LIN has not borrowed additional amounts under its Bank Credit Facilities.\nUnder the LIN Bank Credit Facilities, interest is payable at the prevailing prime, LIBOR or CD rate, plus an applicable margin. Interest is fixed for a period ranging from one month to twelve months, depending on availability of the interest basis selected, although if LIN selects a prime-based loan, the interest rate will fluctuate during the period as the prime rate fluctuates. The applicable margin for each loan will be determined each quarter on the basis of the borrowing subsidiaries' ratio of adjusted senior debt to cash flow (as defined in the LIN Bank Credit Facilities).\nThere are conditions in the LIN Bank Credit Facilities which must be satisfied before the banks will lend additional amounts. If these conditions are not satisfied, the banks may conclude it is not in their best interest to lend additional amounts to LIN. Among these conditions are ratios of senior debt and combined debt to cash flow and cash flow to debt service or fixed charges (as defined in the LIN Bank Credit Facilities).\nOn March 31, 1991 and September 30, 1993, LTC and LCNI, respectively, began making payments amortizing the amounts outstanding under the LIN Bank Credit Facilities. Quarterly payments will continue until December 31, 1998 for LTC and June 30, 2000 for LCNI. McCAW CELLULAR COMMUNICATIONS, INC. AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1993\n7. Long-term debt (continued):\n(b) LIN Bank Credit Facilities (continued):\nIn addition, both LTC and LCNI will be required to apply cash proceeds from certain sales of assets, not reinvested in similar assets, and excess cash flow (as defined in the LIN Bank Credit Facilities) to the prepayment of loans. LIN has not guaranteed the repayment of amounts under the LIN Bank Credit Facilities.\nThe weighted average interest rate was 4.46% and 4.69% for the Cellular and Broadcast Facilities, respectively, at December 31, 1993. The Cellular and Broadcast Facilities provide for annual fees of .5% of the unused commitments. In order to manage interest rate exposure, LIN has entered into interest rate swap and cap agreements covering $50 million and $840 million of its outstanding debt, respectively, as of December 31, 1993. The costs of the interest caps are deferred and charged to interest expense over their respective lives.\nThe book value of the amounts outstanding under the LIN Bank Credit Facilities at December 31, 1993 accrue interest at a variable rate plus an applicable margin as described above. Since the borrowings are repriced for periods ranging from one month to twelve months based on the changes in the market rates, the book value of the amounts outstanding at December 31, 1993 approximate fair value.\n(c) On December 31, 1993, the Company redeemed for cash all of its outstanding 12.75% senior notes of MCI, 13% senior subordinated notes of MCI, 12.95% senior subordinated debentures and 14% senior subordinated debentures. The redemption price on the 12.75% senior notes was 100% of the $125 million principal amount, plus accrued interest. The redemption price on the 13% senior subordinated notes was 103% of the $150 million principal amount, plus accrued interest. The redemption price of the 12.95% senior subordinated debentures was 104.6% of the approximate $531 million principal amount, plus accrued interest. The redemption price on the 14% senior subordinated debentures was 104.9% of the $400 million principal amount, plus accrued interest. The Company paid McCAW CELLULAR COMMUNICATIONS, INC. AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1993\n7. Long-term debt (continued):\npremiums of approximately $48 million on the redemption of the notes and charged to expense approximately $25 million in unamortized financing costs and original issue discounts. All costs associated with the early redemption, net of related income tax benefit, are reflected as an extraordinary item in the accompanying financial statements.\nDuring 1991, the Company exchanged 2.4 million shares of Class A Common Stock for $68.7 million principal amount of outstanding 12.95% Senior Subordinated debentures.\n(d) On March 4, 1993, the Company announced the redemption of all its outstanding 8% convertible senior subordinated debentures and all its outstanding 11.5% convertible senior subordinated discount debentures. Between the announcement of the redemption and the termination on March 31, 1993 of the right of holders to convert, approximately $113.9 million of the 8% debentures were converted into approximately 3.8 million shares of the Company s Class A Common Stock. On April 5, 1993, the Company redeemed the remaining $0.3 million of the 8% debentures and $285.5 million of the 11.5% debentures for cash.\n(e) Debt included in Other has interest rates that float with the prime rate and reprices as the prime rate changes; therefore, book value approximates fair value at December 31, 1993.\nFunds available under the McCaw Bank Credit Facilities can only be utilized by the Company and certain of its subsidiaries other than LIN. Proceeds from LIN s Credit Facilities are only available to LIN and its subsidiaries.\nThe McCaw Bank Credit Facilities, the LIN Bank Credit Facilities and certain of the other loan agreements described above contain restrictions relating to (i) investments in certain subsidiaries, (ii) the incurrence of debt, (iii) distributions and dividends to stockholders, (iv) mergers and sales of assets, (v) prepayments of subordinated indebtedness, (vi) the creation of liens, and (vii) the issuance of preferred stock. In addition, the Company and its subsidiaries are required to maintain compliance with certain financial covenants. McCAW CELLULAR COMMUNICATIONS, INC. AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1993\n7. Long-term debt (continued):\nFollowing is a schedule of maturities of long-term debt for each of the next five years and thereafter:\nYear Ending December 31, Maturities (In thousands)\n1994 $158,925 1995 198,749 1996 588,951 1997 970,137 1998 1,208,909 Thereafter 2,023,000 --------- $5,148,671 ==========\nThe stock of substantially all subsidiaries of the Company and of LIN and their ownership interests in entities holding cellular licenses are pledged or encumbered as security for the Company s and LIN s indebtedness.\nThe terms of various indebtedness incurred by the Company, LIN and the Company s operating systems restrict dividends or other distributions and loans by the Company, LIN and such systems.\n8. Redeemable preferred stock of a subsidiary:\nOn August 10, 1990, LIN completed its acquisition of Metromedia Company s interest in the New York City A Block licensee (the Metromedia Transaction). In addition to the cash portion of the purchase price for the Metromedia interests, LIN s subsidiary, LCH, issued $850 million of newly issued Class A Redeemable Preferred Stock (the LCH Preferred Stock) to Metromedia. Metromedia has subsequently transferred the LCH Preferred Stock to a subsidiary of Comcast Corporation.\nThe holder of the LCH Preferred Stock is entitled to appoint two members of the LCH Board of Directors and will be entitled to dividends if and when declared by the Board. Under the terms of the Preferred Stock, LCH is accruing dividends at the rate of 15.8% per year. LCH is not required to declare or pay dividends in cash, but such dividends are cumulative and must be paid in the event of certain redemptions of the Preferred Stock. McCAW CELLULAR COMMUNICATIONS, INC. AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1993\n8. Redeemable preferred stock of a subsidiary (continued):\nLCH may redeem the Preferred Stock at any time at a price equal, at its option, to either:\n(1) delivery of all of the issued and outstanding capital stock of LCH s subsidiary (LIN-Penn), which holds LIN's ownership interest in the Philadelphia A Block cellular system and its GuestInformant specialty publishing business, plus cash equal to 15% of the fair market value of all businesses (currently, only WOOD, formerly WOTV, LIN's broadcast business in Grand Rapids- Kalamazoo-Battle Creek, Michigan) then operated by LCH (the \"Operating Business Portion\"); or\n(2) a cash amount equal to the greater of (a) the fair market value of the issued and outstanding capital stock of LIN-Penn plus the Operating Business Portion and (b) $850 million, plus, in each case, dividends which would have accrued on the Preferred Stock from the issuance date (to the extent not previously paid) at the rate of 15.8% per year.\nLCH is required to redeem the Preferred Stock in the year 2000 (if not redeemed prior to such time) at a price comparable to that described above. In certain circumstances, the holder of the LCH Preferred Stock may require the corporate parent of LCH to purchase the LCH Preferred Stock. The terms of the Stock Acquisition Agreement executed pursuant to the issuance of the LCH Preferred Stock contains numerous covenants pertaining to LCH which, among other things, include restrictions on (i) the incurrence of debt, (ii) liens, (iii) forgiveness of debt, (iv) mergers, etc., (v) disposition of assets, and (vi) dispositions of certain stock.\nManagement estimates the fair value of the Preferred Stock at December 31, 1993 to be $554.8 million. This represents the estimated fair value of the capital stock of LIN-Penn plus 15% of the Operating Business Portion at December 31, 1993, based on various valuation approaches.\nMcCAW CELLULAR COMMUNICATIONS, INC. AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1993\n9. Stockholders investment:\nStock option plans:\nThe Company's various stock option plans that were adopted by the Company s Board of Directors are summarized below.\nEquity Purchase Program:\nThe Amended and Restated Equity Purchase Program (EPP) provides for the issuance of restricted stock and grants of incentive stock options, non-qualified stock options and stock appreciation rights (SARs). The maximum number of shares of Class A Common Stock authorized for issuance under the EPP is 12,000,000 shares.\n1987 Stock Option Plan:\nUnder the 1987 Stock Option Plan, 319,000 shares of Class A Common Stock are authorized for issuance on exercise of non- qualified options. All options expire ten years and one day from the date of grant. The options are considered compensatory, and the Company recognized compensation expense over the vesting period, which ended in 1989, based on the excess of the fair market value of the Class A Common Stock at the measurement date over $6.75 per share, the exercise price of the option.\n1983 Non-Qualified Stock Option Plan:\nThis plan provides for the grant of rights to purchase shares of Class A and Class B Common Stock under a non- qualified stock option plan and through SARs. Under the terms of the amended plan, 15,000,000 shares in the aggregate of Class A and Class B Common Stock are authorized for grant. These options are exercisable at any time within a period of fifteen years from the date of grant. The options are considered compensatory, and the Company recognizes compensation expense over the vesting period based on the excess of the fair market value of the Class A Common Stock at the measurement date over the exercise price of the option.\nMcCAW CELLULAR COMMUNICATIONS, INC. AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1993\n9. Stockholders' investment (continued):\nStock option plans (continued):\n1992 Stock Option Plan for Non-Employee Directors:\nThe 1992 Stock Option Plan for Non-Employee Directors (Director Plan) provides for the grant of options to acquire up to a total of 100,000 shares of the Company's Class A Common Stock, to be granted to each non-employee director who was not elected or appointed to the Board by virtue of their affiliation with BT USA. Grants of 1,000 shares per director are automatically received annually. The exercise price is equal to the fair market value of the stock on the date of grant. The options are fully vested and immediately exercisable on the date of grant. Options are exercisable for ten years.\n1992 Stock Option Plan for British Telecom Directorships:\nThis plan provides for the grant of options to acquire up to a total of 25,000 shares of the Company's Class A Common Stock. BT USA will automatically receive annual grants of 1,000 shares for each BT Director who is then serving on the Board. The exercise price is equal to the fair market value of the stock on the date of grant and the options are fully vested and immediately exercisable on the date of grant. Options are exercisable for ten years.\nMcCAW CELLULAR COMMUNICATIONS, INC. AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1993\n9. Stockholders' investment (continued):\nStock option plans (continued):\nAt December 31, 1993, 6,120,853 options to purchase the Company s Class A and Class B Common Stock were exercisable, 5,730,188 were exercisable subject to vesting and 5,637,754 shares were available for option grant.\nEmployee stock purchase plan:\nThe Employee Stock Purchase Plan (ESPP) provides for the purchase of shares of Class A Common Stock through regular payroll deductions. The total number of shares authorized to be issued under the ESPP is 500,000. The ESPP expires in August 1997, and restricts an employee to purchase no more than $25,000 of stock in any calendar year under any qualified employee stock purchase plan. Shares may be issued to eligible employees on the last day of each calendar month. The purchase price is 85% of the average of the bid and asked price of the Class A Common Stock on such a date. During 1993, 108,884 shares of Class A Common Stock were purchased at prices ranging from $27.52 to $48.20 per share.\nWarrant repurchase:\nOn June 18, 1992, MCI, a wholly owned subsidiary of the Company, called for the repurchase of all of the warrants issued to purchase an aggregate of 2,250,000 shares of MCI common stock effective July 1, 1992. These warrants contained a mandatory redemption requirement in which MCI was obligated to repurchase the warrants no later than July 1, 1997. The repurchase price at July 1, 1992 of $60.4523 per share represented the minimum value as set forth in the warrant agreement. The final redemption of approximately $89.9 million did not include the 762,495 warrants held by the Company.\nMcCAW CELLULAR COMMUNICATIONS, INC. AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1993\n10. Shareholders agreements:\nCertain controlling shareholders of the Company have entered into a shareholders agreement which, among other things, contains provisions relating to the election of directors and other voting agreements, procedures in the event of a sale of the Company and certain restrictions on the conversion, transfer or sale of common stock of the Company. Certain controlling shareholders of the Company have also entered into a shareholders agreement with British Telecom. This agreement also contains provisions relating to the election of directors, procedures in the event of a sale of the Company and restrictions on the transfer or sale of common stock of the Company.\nBoth agreements expire in 1999 and include renewal options for an additional period not to exceed ten years. All parties to the shareholders agreement and British Telecom voted all their shares in favor of the Merger with AT&T (See Footnote 16 -- Merger with American Telephone and Telegraph Company).\nMcCAW CELLULAR COMMUNICATIONS, INC. AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1993\n11. Income taxes:\nDeferred taxes are determined based on the estimated future tax effects of differences between the financial statement and the tax basis of assets and liabilities given the provisions of the enacted tax laws. The components of the net deferred tax liability are as follows:\nDecember 31, 1993 1992 ---- ---- (In thousands)\nDeferred tax liabilities: Property and equipment, licensing costs and other intangibles $2,115,261 $1,967,690 Other 26,975 48,334 ---------- ---------- Total deferred tax liability 2,142,236 2,016,024 ---------- ---------- Deferred tax assets: Net operating loss and alternative minimum tax credit carry forwards (130,485) (116,443) Finance costs (30,189) -- Other (30,300) -- ---------- ---------- (190,974) (116,443) Valuation allowance 4,425 -- ---------- ---------- Total deferred tax asset (186,549) (116,443) ---------- ---------- Net deferred tax liability $1,955,687 $1,899,581 ========== ==========\nMcCAW CELLULAR COMMUNICATIONS, INC. AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1993\n11. Income taxes (continued):\nThe components of income tax (expense) benefit exclusive of the tax effect of the extraordinary item, are as follows:\nYear Ended December 31, 1993 1992 1991 ---- ---- ---- (In thousands)\nCurrent: Federal $(72,519) $(22,265) $(1,250) State (7,869) (25,780) (18,944) ------- ------- ------- (80,388) (48,045) (20,194) ------- ------- ------- Deferred: Federal 14,182 78,793 41,993 State (31,713) 4,244 5,018 ------- ------- ------- (17,531) 83,037 47,011 ------- ------- ------- $(97,919) $34,992 $26,817 ========= ======= =======\nAt December 31, 1993, the Company, exclusive of LIN, has approximately $172 million of regular tax operating loss carry forwards which expire in the years 2007 and 2008. The Company, exclusive of LIN, has alternative minimum tax credits aggregating approximately $33 million, which carry forward indefinitely for federal income tax purposes. These credits can be used in the future to the extent that the Company s regular tax liability exceeds their liability calculated under the alternative minimum tax system.\nThe Omnibus Budget Reconciliation Act of 1993 increased the corporate tax rate to 35% from 34% effective January 1, 1993. Pursuant to Statement of Financial Accounting Standards No. 109, \"Accounting for Income Taxes,\" the Company recorded an additional tax expense of $49.6 million, with a corresponding increase in deferred tax liability.\nThe following table reconciles the amount which would be provided by applying the 35% federal income tax rate in 1993, and the 34% federal income tax rate in 1992 and 1991, to income (loss) before (expense) benefit for income taxes to the income taxes actually provided. McCAW CELLULAR COMMUNICATIONS, INC. AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1993\n11. Income taxes (continued):\nYear Ended December 31, 1993 1992 1991 ---- ---- ---- (In thousands)\n(Expense) benefit assuming federal statutory rates $(8,245) $57,783 $ 52,203\nAmortization of goodwill (4,744) (5,875) (6,012) State and local taxes, net of federal tax benefit (39,860) (14,214) (9,191) Equity investments 2,019 4,169 3,770 Tax expense not provided on minority partners share of income 4,126 4,734 3,343 Increase in federal statutory rate (49,568) -- -- Other (1,647) (11,605) (17,296) -------- -------- -------- $(97,919) $34,992 $26,817 ========= ======= =======\n12. Retirement benefits:\nLIN has a contributory retirement plan covering certain employees of LIN and its wholly owned television subsidiaries who meet certain requirements, including length of service and age. Pension benefits vest upon completion of five years of service and are computed, subject to certain adjustments, by multiplying 1.25% of the employee's last three years average annual compensation times the number of years of credited service. Funding is based upon legal requirements and tax considerations. No funding was required during the three year period ended December 31, 1993.\nMcCAW CELLULAR COMMUNICATIONS, INC. AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1993\n16. Merger with American Telephone and Telegraph Company:\nOn August 16, 1993, the Company entered into an Agreement and Plan of Merger (the Merger Agreement) with AT&T, pursuant to which the Company would become a wholly owned subsidiary of AT&T and each share of Class A Common Stock and Class B Common Stock of the Company would be converted into one AT&T common share, subject to certain adjustments. Each outstanding option to purchase the Company s stock would be assumed by AT&T and would be exercisable for a proportionate number of AT&T common shares. The merger has been approved by the respective Boards of Directors of AT&T and the Company and the Company's stockholders, but is subject to the satisfaction of several conditions, including the receipt of necessary governmental consents.\nEach party will have a right to terminate the Merger Agreement if it has not closed by September 30, 1994. Separately, AT&T has agreed to purchase at the Company s option, exercisable in the event the Merger Agreement is terminated, approximately 11.7 million newly issued shares of the Company s Class A Common Stock at $51.25 per share, for a total price of $600 million. This right will not be exercisable if the merger is completed. Such transaction would be subject to the receipt of necessary governmental approvals, which have not yet been applied for or received.\nPursuant to the Merger Agreement, on February 8, 1994, the Company, through a wholly owned subsidiary, entered into a credit agreement with AT&T under which an aggregate of $350 million is available (the AT&T Credit Agreement). Under the AT&T Credit Agreement, interest is payable quarterly at an applicable margin in excess of the prevailing LIBOR rate and is fixed for a period ranging from one month to twelve months. Amounts outstanding under the AT&T Credit Agreement are due and payable two years after the earlier of (i) the closing under the Merger Agreement or (ii) the termination of the Merger Agreement. The AT&T Credit Agreement provides for fees of .5% per annum on the unused portion of the $350 million commitment. The assets of the wholly owned subsidiary are pledged as security for this debt. As of March 15, 1994, $67.5 million was outstanding and $282.5 million was available under the AT&T Credit Agreement.\nSeparately, on February 23, 1993, AT&T purchased approximately 14.5 million newly issued shares of the Company's Class A Common Stock at $27.625 per share, for a total price of $400 million.\nREPORT OF ERNST & YOUNG, INDEPENDENT AUDITORS\nThe Board of Directors and Stockholders of LIN Broadcasting Corporation\nWe have audited the accompanying combined balance sheets of LIN Broadcasting Corporation's Unconsolidated Affiliates listed in Note 1 (the Ventures) as of December 31, 1993 and 1992, and the related combined statements of income, Ventures' equity, and cash flows for each of the three years in the period ended December 31, 1993. Our audits also included the financial statement schedules listed in the Index at Item 14(a). These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits. We did not audit the 1993 and 1992 consolidated financial statements of AWACS, Inc. and subsidiaries, which statements reflect total assets constituting 24% and 20% as of December 31, 1993 and 1992, respectively and net revenues constituting 19% and 17% for the years then ended of the related combined totals. Those statements were audited by other auditors whose report, which also places reliance on other auditors, has been furnished to us, and our opinion, insofar as it relates to data included for AWACS, Inc. and subsidiaries, is based solely on the reports of the other auditors.\nWe conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform our 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 and the reports of other auditors provide a reasonable basis for our opinion.\nIn our opinion, based on our audits and the reports of other auditors, the combined financial statements referred to above present fairly, in all material respects, the combined financial position of the Ventures at December 31, 1993 and 1992, and the combined results of their operations and their cash flows for each of the three years in the period ended December 31, 1993, in conformity with generally accepted accounting principles. Also, in our opinion, based on our audits and the reports of other auditors, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. ERNST & YOUNG Seattle, Washington February 4, 1994\nINDEPENDENT AUDITORS' REPORT\nBoard of Directors and Stockholders AWACS, Inc. Wayne, Pennsylvania\nWe have audited the consolidated balance sheet of AWACS, Inc. and subsidiaries as of December 31, 1993 and 1992, and the related consolidated statements of operations and retained earnings and of cash flows for the years then ended (not presented separately herein). 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 did not audit the financial statements of Garden State Cablevision L.P. (\"Garden State\"), the Company's investment in which is accounted for by the use of the equity method. The Company's equity of $32,302,000 and $22,369,000 in Garden State's deficit at December 31, 1993 and 1992, respectively, and of $9,933,000 and $2,985,000 in that entity's net losses for the years then ended are included in the accompanying consolidated financial statements. The financial statements of Garden State were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for Garden State, is based solely on the report of such other auditors.\nWe conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.\nIn our opinion, based on our audits and the report of other auditors, such consolidated financial statements present fairly, in all material respects, the financial position of AWACS, Inc. and subsidiaries as of December 31, 1993 and 1992 and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles.\nAs discussed in the notes to the consolidated financial statements, the Company changed its method of accounting for income taxes effective January 1,1993 to conform with Statement of Financial Accounting Standards No. 109 \"Accounting for Income Taxes.\"\nDELOITTE & TOUCHE Philadelphia, Pennsylvania\nFebruary 18, 1994\nREPORT OF INDEPENDENT PUBLIC ACCOUNTANTS\nTo Garden State Cablevision L.P.:\nWe have audited the accompanying balance sheets of Garden State Cablevision L.P. (a Delaware Limited Partnership) as of December 31,1993 and 1992, and the related statements of operations, partners' (deficit) capital and cash flows for the years then ended. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits.\nWe conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.\nIn our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Garden State Cablevision L.P. as of December 31,1993 and 1992, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles.\nThe accompanying financial statements have been prepared assuming that the Partnership will continue as a going concern. As discussed in Note 2, the Partnership has obtained financing proposals for the repayment of the Senior Debt and Subordinated Debt which become due in 1994. As of the date of this report, the Partnership has not received a written commitment for the required financing and this raises substantial doubt about its ability to continue as a going concern. Management's plans in regard to this matter are described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.\nARTHUR ANDERSEN & CO.\nPhiladelphia, Pa., February 23, 1994\nLIN BROADCASTING CORPORATION'S UNCONSOLIDATED AFFILIATES COMBINED BALANCE SHEETS DECEMBER 31, 1993 AND 1992 (Dollars in thousands)\nASSETS 1993 1992 - ---------------------------------------------------------------- Current assets: Cash and cash equivalents $54,357 $40,815 Accounts receivable, less allowance for doubtful accounts (1993-$9,829; 1992-$14,440) 111,723 84,926 Prepaid expenses and other 17,497 11,812 - ---------------------------------------------------------------- Total current assets 183,577 137,553 - ---------------------------------------------------------------- Property and equipment, at cost, less accumulated depreciation 452,447 417,297 Other assets 2,108 1,143 Cellular FCC licenses, less accumulated amortization (1993-$506) 13,564 -- Organization costs, less accumulated amortization (1993-$6,785; 1992-$5,780) 3,265 4,270 Due from majority stockholder of AWACS 16,387 -- Notes receivable, less allowance for doubtful accounts (1993-$150; 1992-$198) 281 966 - ---------------------------------------------------------------- Total assets $671,629 $561,229 ================================================================\n(continued)\nLIN BROADCASTING CORPORATION'S UNCONSOLIDATED AFFILIATES COMBINED BALANCE SHEETS (continued) DECEMBER 31, 1993 AND 1992 (Dollars in thousands)\nLIABILITIES AND EQUITY 1993 1992 - ----------------------------------------------------------------\nCurrent liabilities: Accounts payable $37,801 $22,378 Accrued expenses 39,180 27,889 Unearned revenues 27,610 16,818 Commissions payable 14,439 10,868 Notes payable 2,946 -- Other current liabilities 6,000 5,199 - ---------------------------------------------------------------- Total current liabilities 127,976 83,152 - ---------------------------------------------------------------- Notes payable to affiliates 63,126 93,827 Investment in affiliate 32,302 22,369 Deferred income taxes 4,236 13,434 Other long-term liabilities 1,286 1,302\nEquity: Contributed capital 78,690 63,817 Excess cost of limited Current assets: Cash and cash equivalents $54,357 $40,815 Accounts receivable, less allowance for doubtful accounts (1993-$9,829; 1992-$14,440) 111,723 84,926 Prepaid expenses and other 17,497 11,812 - ---------------------------------------------------------------- =============================================\nSee accompanying notes.\nLIN BROADCASTING CORPORATION'S UNCONSOLIDATED AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS (Dollars in thousands)\nNOTE 1 -- Basis of Presentation\nThese combined financial statements have been prepared to comply with the Securities and Exchange Commission's Regulation S-X requirement, in connection with LIN Broadcasting Corporation's (\"LIN\") consolidated financial statements, which requires separate or combined financial statements of significant subsidiaries 50% or less controlled.\nThese combined financial statements include 100% of the accounts of the operating ventures listed in the table below in which LIN has voting interests of 50% or less (the \"Ventures\"). These Ventures are included in LIN's consolidated financial statements on the equity accounting method. During 1992, LIN acquired an indirect interest in Galveston Cellular Telephone Company. As a result of this acquisition, the results of the Galveston venture are included in the combined financial statements from the date of acquisition.\nVoting\/ Name and Location Equity Management - ----------------------------------------------------------------- AWACS Inc., d\/b\/a Comcast Metrophone Corporation 49.99% 49.99% Philadelphia\nLos Angeles Cellular Telephone Co., Partnership 39.97% 50.00% Los Angeles\nHouston Cellular Telephone Co., Partnership 56.25% 50.00% Houston\nGalveston Cellular Telephone Co., Corporation 34.60% 50.00% Galveston\nNOTE 2 -- Significant Accounting Policies\nThe following are the Ventures' significant accounting policies:\nCASH EQUIVALENTS: Certain highly liquid, short-term investments which have a maturity of three months or less are considered cash equivalents. Excess cash is primarily invested in U.S. Government obligations.\nPROPERTY AND EQUIPMENT: Cellular system equipment is recorded at cost and is depreciated on a straight-line basis over an 8 or 10 year period. All other property and equipment, including betterments to existing facilities, are recorded at cost and\nLIN BROADCASTING CORPORATION'S UNCONSOLIDATED AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS (Dollars in thousands)\nNOTE 2 -- Significant Accounting Policies (continued)\ndepreciated on a straight-line basis over their estimated useful lives of three to twenty years. Beginning in 1993, AWACS revised the useful lives used to compute depreciation for its cell site equipment from 10 to 8 years and for its computer equipment from 5 to 3 years. The change had the effect of increasing depreciation expense by approximately $4.4 million.\nCELLULAR FCC LICENSES AND ORGANIZATION COSTS: Cellular FCC Licenses represent costs to acquire cellular licenses authorized by the Federal Communications Commission and are amortized using the straight line method over 40 years. Organization costs, consisting principally of legal fees, feasibility studies and other costs related to obtaining required licenses and regulatory approvals, are amortized using the straight-line method over a 10 year period.\nINCOME TAXES: Accelerated depreciation methods are used for tax purposes. AWACS, which is a corporation, provides deferred taxes related to this and other timing differences. Effective January 1, 1993, AWACS adopted the provisions of Statement of Financial Accounting Standards (\"SFAS\") No. 109, \"Accounting for Income Taxes\" (see Note 7). No provision is made for income taxes for either the Los Angeles or Houston ventures as the income or loss is includable in the tax returns of the respective partners of these partnerships.\nREVENUE RECOGNITION: Cellular airtime is recorded as revenue when earned. Unearned revenues consist principally of amounts billed to customers for access fees which are payable one month in advance.\nRECLASSIFICATIONS: Certain reclassifications have been made to the prior years' combined financial statements in order to conform to the 1993 presentation.\nNOTE 3 -- Property and Equipment\nThe major classifications of property and equipment were as follows: December 31, 1993 1992 ------------------ Land $1,379 $1,271 Buildings and improvements 6,583 5,084 Cellular equipment 576,655 511,993 Other 70,997 40,093 ------- ------- 655,614 558,441 Less accumulated depreciation 203,167 141,144 ------- ------- $452,447 $417,297 ======== ========\nLIN BROADCASTING CORPORATION'S UNCONSOLIDATED AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS (Dollars in thousands)\nNOTE 4 -- Notes Payable to Affiliates\nThe Houston venture has entered into agreements with the partners under which it has borrowed $2,946 and $35,946 as of December 31, 1993 and 1992, respectively. The borrowings were made to fund capital expenditures and to retire existing equipment vendor financings. The notes to partners mature in June 1994, are nonamortizing and bear interest at a rate of prime (6% as of December 31, 1993) plus 1%. The Galveston venture also entered into an agreement with an affiliate under which it has borrowed $4,717 and $5,478 as of December 31, 1993 and December 31, 1992, respectively. This note matures beginning in 1995 and bears interest at prime plus 2%.\nNOTE 5 -- Investment in Affiliate\nOn September 30, 1992, an indirect subsidiary of AWACS acquired from the majority stockholder of AWACS a 40% limited partnership interest in Garden State Cablevision L.P. (\"Garden State\"). Consideration consisted of a note with an initial principal amount of $51,000 which is included in Notes payable to affiliates. The note bears interest at a rate of 11% per annum. Interest is payable on a quarterly basis to the extent of available cash, with any unpaid interest added to principal. The note is due September 30, 1997. AWACS anticipates there will be no significant amount of cash available for payment of interest on the note, and accordingly, interest accrued on the note during 1993 and 1992 of $6,006 and $1,403, respectively, was added to principal.\nAWACS' acquisition of the 40% interest in Garden State was recorded as a negative investment in an affiliate of $19,384, which represented the carryover basis from the majority stockholder. AWACS' excess of purchase price over the carrying value was recorded as a reduction of stockholders' equity in the amount of $70,384. The investment is accounted for on the equity method and under the terms of the partnership agreement, 49.5% of the net losses of Garden State are allocated to AWACS. Such losses, which amounted to $9,933 and $2,985 during 1993 and 1992, respectively, were added to the investment in affiliate.\nSummarized financial information for Garden State for the year ended December 31, 1993 and the three months ended December 31, 1992 is as follows:\nLIN BROADCASTING CORPORATION'S UNCONSOLIDATED AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS (Dollars in thousands)\nNOTE 5 -- Investment in Affiliate (Continued)\nThree Months Year Ended Ended December 31, December 31, 1993 1992 ------------ ----------- (Unaudited)\nResults of Operations\nRevenues $90,824 $21,779\nCosts and expenses 41,647 9,915 Depreciation and amortization 47,682 12,139 ------- ------- Operating loss 1,495 (275) Interest expense, net 20,904 5,755 ------- ------- Loss before cumulative effect of accounting change $(19,409) $(6,030) Cumulative effect of accounting change (657) -- ------- ------- Net loss $(20,066) $(6,030) ======= ======== Equity in net loss $(9,933) $(2,985) ======= ========\nFinancial position at December 31, 1993 and 1992\nCurrent assets $7,328 $15,861 Noncurrent assets 246,512 285,828 Current liabilities 294,325 23,198 Noncurrent liabilities 779 299,689\nGarden State's Senior Loan Credit Agreement matures on March 30, 1994, but may be extended through December 31, 1999, upon the satisfaction of certain conditions as specified by the agreement. These conditions include, among other things, the refinancing of the subordinated debt, which matures on June 30,1994, at terms approved by the senior lenders. In connection therewith, Garden State has obtained financing proposals for the repayment of the senior debt ($196,475,000 at December 31, 1993) and subordinated debt ($75,926,919 at December 31, 1993, including deferred interest of $7,523,428). Management believes that Garden State will be successful in obtaining the required financing. As of February 18, 1994, Garden State had not received a written commitment for the required financing. Garden State's ability to continue as a going concern is dependent upon obtaining the required financing.\nLIN BROADCASTING CORPORATION'S UNCONSOLIDATED AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS (Dollars in thousands)\nNOTE 5 -- Investment in Affiliate (Continued)\nIn November 1993, Garden State signed a letter of intent to purchase the general partner's interest in Garden State. The general partner has also retained its rights under the Partnership Agreement that beginning August 15, 1994, for a period of 90 days, it shall have the right to cause Garden State to purchase all of its partnership interest. The purchase price shall be equal to the greater of 150% of the general partner's aggregate capital contributions or 120% of the general partner's percentage of the system's fair market value as determined by an independent appraisal.\nDuring 1993 and 1994, the FCC adopted and modified various regulations governing the rates charged to cable subscribers. Because of these regulations, future revenue growth from cable services will rely to a much greater extent that has been true in the past on increased revenues from unregulated services and new subscribers than from increases in previously unregulated rates.\nNOTE 6 -- Equity\nIn accordance with the various partnership agreements, income of the partnerships is allocated to each owner's respective capital account in accordance with its respective equity interest.\nAdditional capital contributions may be called based on annual construction and operating budgets submitted by the partnerships and agreed upon by the operating committees of each partnership.\nNOTE 7 -- Postretirement Benefits Other Than Pensions\nEffective January 1, 1993, AWACS adopted SFAS No. 106. This statement requires AWACS to accrue the estimated cost of retiree benefits earned during the years the employee provides services. AWACS previously expensed the cost of these benefits as claims were incurred. AWACS recorded the cumulative effect of the obligation for its allocated cost of such benefits in 1993. AWACS' retiree benefit obligation is unfunded and all benefits are paid by Comcast. The cumulative effect as of January 1, 1993 of the adoption of SFAS No. 106 was to reduce the AWACS net income by approximately $375 (net of tax). The effect of SFAS No. 106 on AWACS' income before cumulative effect of the accounting changes was not significant to AWACS' results of operations.\nNOTE 8 -- Income Taxes\nEffective January 1, 1993, AWACS adopted SFAS No. 109, \"Accounting for Income Taxes.\" As a result, AWACS recorded a cumulative effect of accounting change of $12,517. The adoption of SFAS No. 109 did not have a significant impact on the amount of income tax expense recorded by AWACS during 1993.\nLIN BROADCASTING CORPORATION'S UNCONSOLIDATED AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS (Dollars in thousands)\nNOTE 8 -- Income Taxes (continued)\nIncome tax expense consists of the following:\nYear Ended December 31, 1993 1992 1991 ---- ---- ---- Current: Federal $3,543 $3,179 $3,840 State 4,653 2,041 1,374 ------ ------ ------ 8,196 5,220 5,214 ------ ------ ------ Deferred: Federal 4,381 2,509 1,841 State (1,330) 735 922 ------ ------ ------ 3,051 3,244 2,763 ------ ------ ------ $11,247 $8,464 $7,977 ======= ======= ======\nTotal tax expense differs from the amount computed by multiplying income before tax by the statutory federal tax rate primarily due to non-deductible depreciation and amortization expense and state income taxes.\nDeferred taxes are attributable primarily to excess tax over book depreciation and certain expenses not deductible for tax purposes until paid.\nNOTE 9 -- Related-Party Transactions\nDuring the years ended December 31, 1993, 1992 and 1991, the two partnerships recorded management fees payable to affiliates of their partners of $4,200, $4,200 and $4,200, respectively, for management consultation, legal services and various other professional services.\nAWACS is required to advance to its majority stockholder certain amounts based on AWACS' cash flow (as defined) on a semiannual basis. During 1993, AWACS advanced $15,970 to the majority stockholder in the form of a note bearing interest at the prime rate plus 1%. Pursuant to the terms of the note, unpaid interest of $417 was capitalized and added to the principal outstanding. For the year ended December 31, 1993, AWACS is required to advance to the majority stockholder an additional $4,460 by April 30, 1994.\nIn addition to the transactions described above, the Ventures routinely enter into transactions with the Company or other affiliates of the Company (including McCaw), or other affiliates\nLIN BROADCASTING CORPORATION'S UNCONSOLIDATED AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS (Dollars in thousands)\nNOTE 9 -- Related-Party Transactions (continued)\nof the partners. Such transactions include roaming agreements and participation in the North American Cellular Network, among other things. Such transactions are not separately disclosed in the financial statements as they are carried out in the normal course of business.\nNOTE 10 -- Commitments\nThe Ventures lease office space, land and buildings for cell sites and vehicles under operating leases which expire through the year 2010. Total rent expense for the years ended December 31, 1993, 1992 and 1991 was $13,945, $11,909 and $8,788, respectively. Some of the leases include escalation clauses based on increases in the Consumer Price Index. Several of the leases include options to extend the lease term.\nFuture minimum payments under noncancellable operating leases with initial or remaining terms of one year or more at December 31, 1993 are:\n1994 $14,286 1995 13,037 1996 10,841 1997 8,918 1998 6,811 1999 and beyond 10,809 -------- $64,702 ========\nNOTE 11 -- Contingencies\nThe Ventures are from time to time defendants in and are threatened with various legal proceedings arising from their regular business activities. The Ventures are also party to routine filings with the FCC and state regulatory authorities and customary regulatory proceedings pending in connection with interconnection, rates, and practices and proceedings concerning the telecommunications industry in general and other proceedings which management does not expect to have a material adverse effect on the financial position or results of operations of the Ventures.\nIn August 1993 and in December 1993, two dealers for the Los Angeles cellular partnership filed lawsuits against the partnership and certain other parties in the California state court, seeking injunctive relief and monetary damages. The lawsuits allege various torts and statutory violations, including price-fixing regarding cellular equipment and service, below-cost sales of equipment, fraud, interference with economic relationship, unfair competition, discrimination among agents,\nLIN BROADCASTING CORPORATION'S UNCONSOLIDATED AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS (Dollars in thousands)\nNOTE 11 -- Contingencies (continued)\nand conspiracy. The lawsuits are in their early stages and plaintiffs have made a motion to consolidate them. The partnership intends to defend each lawsuit vigorously, believes that it has meritorious defenses to the allegations contained in the complaints, and does not expect that the ultimate results of these legal proceedings will have a material adverse effect on its financial position or results of operations.\nIn September 1993, a proposed class action lawsuit was filed by a cellular subscriber in a District Court in Texas. The lawsuit alleges that the renewal provisions and liquidated damages provisions of the annual subscriber agreements of various cellular carriers, including the Houston cellular partnership, are void and unenforceable, and are contrary to public policy. The plaintiffs also seek monetary damages. No class has yet been certified. The partnership intends to defend the lawsuit vigorously, believes that it has meritorious defenses to the allegations contained in the complaint, and does not expect that the ultimate results of this legal proceeding will have a material adverse effect on its financial position or results of operations.\nAPPENDIX\nOMITTED GRAPHICAL MATERIAL\nGraphical material omitted from this EDGAR filing includes two pages of maps. Such maps are described in the body of the Form 10-K under Item 1 - \"Business--Cellular Interests\".","section_15":""}
{"filename":"50916_1993.txt","cik":"50916","year":"1993","section_1":"ITEM 1. BUSINESS:\n(a) General Development of Business.\nInter-Regional Financial Group, Inc. (the \"Company\") is a holding company, formed in 1973 and based in Minneapolis, Minnesota. The Company offers regional securities brokerage and investment banking services through its wholly owned subsidiaries, Dain Bosworth Incorporated (\"Dain Bosworth\"), headquartered in Minneapolis, Minnesota, and Rauscher Pierce Refsnes, Inc. (\"Rauscher Pierce Refsnes\"), headquartered in Dallas, Texas. The Company's largest subsidiary, Dain Bosworth, serves the Midwest, Rocky Mountain and Pacific Northwest regions of the United States. At December 31, 1993, Dain Bosworth had 1,700 employees located in 16 states. Rauscher Pierce Refsnes primarily serves the Southwest region of the United States. At December 31, 1993, Rauscher Pierce Refsnes had 920 employees located in eight states. Rauscher Pierce Refsnes also serves as clearing agent for approximately 125 correspondent brokerage firms through its RPR Clearing Services unit (\"RPRC\") based in St. Louis, Missouri. In April 1993 the Company consolidated the securities operations and settlement activities previously performed by each of Dain Bosworth and Rauscher Pierce Refsnes as self-clearing firms into a third wholly owned subsidiary, Regional Operations Group, Inc. (\"ROG\"), which was registered as a broker-dealer. Each of Dain Bosworth and Rauscher Pierce Refsnes, as well as the RPRC correspondents and other broker- dealers previously clearing through them, now clears on a fully disclosed basis through ROG. ROG, which was previously named IFG Information Services, Inc., also provides data processing and information services to IFG and its subsidiaries. Insight Investment Management, Inc., the Company's wholly owned money management subsidiary (\"Insight Management\"), manages a series of mutual funds, Great Hall Investment Funds, and also provides fixed income portfolio management services. Dain Corporation, another wholly owned subsidiary of the Company, engages in real estate services. The Company is a Delaware corporation with its executive offices located at Dain Bosworth Plaza, 60 South Sixth Street, Minneapolis, Minnesota 55402-4422. Its telephone number is (612) 371-7750.\n(b) Financial Information About Industry Segments\nThe Company, through its principal subsidiaries, operates in a single segment, the securities brokerage and investment banking business.\nThe following table lists the Company's revenues by source for the last three years. Because these classes of services use the same distribution personnel and facilities and the same support services, it is impractical to identify the cost, expenses and profitability of each class of service.\n(c) Narrative Description of Business\nSecurities Business\nGeneral. The securities brokerage and investment banking activities of the Company are conducted through Dain Bosworth and Rauscher Pierce Refsnes. Both Dain Bosworth and Rauscher Pierce Refsnes deal in securities of and are market-makers for entities based throughout the United States. In general, research and investment banking activities are concentrated on entities based in their respective regions. At December 31, 1993, Dain Bosworth had 745 retail sales representatives and 55 institutional sales representatives in 60 offices located in 16 states and Rauscher Pierce Refsnes had 287 retail sales representatives and 45 institutional sales representatives in 23 offices located in seven states. Both firms are member firms of the New York Stock Exchange (\"NYSE\") and are registered in the NASDAQ system as market makers. At December 31, 1993, Dain Bosworth was registered as a market maker for 369 companies and Rauscher Pierce Refsnes was registered as a market maker for 275 companies.\nDain Bosworth's and Rauscher Pierce Refsnes' operating results are sensitive to many factors outside the control of the Company, including volatility of securities prices and interest rates, trading volume of securities, income and capital gains tax legislation and demand for investment banking services. Economic conditions in the regions in which Dain Bosworth and Rauscher Pierce Refsnes operate also affect operating results.\nPrincipal Transactions. Dain Bosworth and Rauscher Pierce Refsnes are dealers in corporate, tax-exempt and governmental fixed income securities and corporate equity securities and may recognize profits or losses on transactions in, or fluctuations in the value of, such securities held in inventory. Internal guidelines intended to limit the size and risk of inventories maintained have been established and are periodically reviewed. These inventories require the commitment of substantial capital and expose the companies to the risk of a loss if market prices of the securities held in inventory decrease. General market conditions, interest rates and the financial prospects for issuers of such securities may affect the market price of securities held in inventory.\nCommission Business. As securities brokers, Dain Bosworth and Rauscher Pierce Refsnes act as agents in the purchase and sale of securities, options, commodities and futures contracts traded on various securities and commodities exchanges or in the over-the-counter (\"OTC\") market. Dain Bosworth and Rauscher Pierce Refsnes charge a brokerage commission when acting as agent for the purchaser or seller of a security. If the security is listed on an exchange, the transaction is generally effected through Dain Bosworth's or Rauscher Pierce Refsnes' own floor broker or a floor broker who is unaffiliated with either of them. If the security is traded in the OTC market, transactions are generally effected with a market maker in the security. In addition, Dain Bosworth and Rauscher Pierce Refsnes also earn commissions from transactions involving various other financial products including mutual funds. Dain Bosworth's and Rauscher Pierce Refsnes' commission business is derived primarily from individual investors. However, commission revenues from institutional investors have increased in recent years and both companies are investing resources to develop more fully their institutional businesses.\nInvestment Banking Activities. Dain Bosworth and Rauscher Pierce Refsnes earn investment banking revenues by assisting clients in planning to meet their financial needs and advising them on the most advantageous means of raising capital. Such plans are sometimes implemented by managing or co-managing public offerings of securities or by arranging private placements of securities with institutional or individual investors. The syndicate departments coordinate the distribution of managed and co-managed corporate underwritings, accept invitations to participate in competitive or negotiated underwritings managed by other investment banking firms, and allocate and merchandise Dain Bosworth's and Rauscher Pierce Refsnes' selling allotments to their branch office systems, to institutional clients and to other broker-dealers. Both companies are among the leaders in their respective regions in the origination, syndication and distribution of securities of municipalities, state and local agencies, health care organizations and financial institutions. Participation in underwritings can expose the companies to material risk since the possibility exists that securities they have committed to purchase cannot be sold at the initial offering price. Federal and state securities laws and regulations also affect the activities of underwriters and impose substantial potential liabilities for violations in connection with sales of securities by underwriters to the public. In addition to public offerings and private placements, Dain Bosworth and Rauscher Pierce Refsnes provide other consulting services, including appraising securities, arranging and evaluating mergers and acquisitions and advising clients with respect to financing plans and related matters.\nCustomer Financing. A significant portion of Dain Bosworth's and Rauscher Pierce Refsnes' profitability is derived from net interest income, the major portion of which relates to customer balances. Customer transactions are effected on either a cash or margin basis. Purchases on a cash basis require full payment by the designated settlement date, generally the fifth business day following the transaction date. Beginning in April 1993, ROG began carrying all customer balances of each of Dain Bosworth and Rauscher Pierce Refsnes and allocating interest income and expense related to customers, as well as uncollectible amounts due from customers, back to Dain Bosworth and Rauscher Pierce Refsnes. Both Dain Bosworth and Rauscher Pierce Refsnes are at risk in the event a customer fails to settle a trade and the value of the securities declines subsequent to the transaction date. When a purchase is made on a margin basis, Dain Bosworth or Rauscher Pierce Refsnes, through ROG, extends credit to the customer for a portion of the purchase price. The amount of the loan is subject to margin regulations of the Federal Reserve Board, the NYSE and the internal policies of Dain Bosworth, Rauscher Pierce Refsnes and ROG, which are generally more stringent than applicable regulations. In permitting customers to purchase on margin, Dain Bosworth and Rauscher Pierce Refsnes, through ROG, take the risk that a market decline could reduce the value of the collateral securing the margin loan below the amount of the customer's indebtedness and that the customer might be unable to repay the indebtedness. Interest is charged at a floating rate based on amounts borrowed by customers to finance purchases on margin. The rate charged is dependent on the average net debit balance in the customer's accounts, the activity level in the accounts and the applicable cost of funds.\nCustomers will at times accumulate credit balances in their accounts. Such balances result from payment of dividends, interest or principal on securities held for such customers, from funds received in connection with sales of a customer's securities and from cash deposits made by customers pending investment. Pending investment of such funds or reimbursement upon the customer's request, ROG pays interest on those credit balances on behalf of Dain Bosworth and Rauscher Pierce Refsnes. ROG uses available credit balances to lend funds to Dain Bosworth and Rauscher Pierce Refsnes customers purchasing securities on margin. Excess customer credit balances are invested in short- term securities in accordance with applicable regulations and are segregated for the exclusive benefit of customers. Both Dain Bosworth and Rauscher Pierce Refsnes generate net interest income through ROG from the positive interest rate spread between the rate earned from margin lending and alternative short-term investments and the rate paid on customer credit balances.\nDain Bosworth, Rauscher Pierce Refsnes and ROG are members of the Securities Investor Protection Corporation (\"SIPC\"), which insures customer accounts up to specified limits in the event of liquidation of either firm. Additionally, all three firms maintain insurance coverage in order to insure customer accounts to specified amounts in excess of SIPC coverage.\nSecurity Repurchase Activities. Dain Bosworth and Rauscher Pierce Refsnes act as principals in the purchase and sale to their customers of securities of the United States Government and its agencies, including repurchase agreements in such securities and certain other money market instruments. Dain Bosworth and Rauscher Pierce Refsnes may match purchases and sales of these securities. Dain Bosworth and Rauscher Pierce Refsnes are at risk to the extent that they do not properly match the contracts or their customers are unable to meet their obligations, especially during periods of rapidly changing interest rates and fluctuations in market conditions. All positions are collateralized. Dain Bosworth and Rauscher Pierce Refsnes generally take physical possession of securities purchased under agreements to resell. Such agreements provide Dain Bosworth and Rauscher Pierce Refsnes with the right to maintain the relationship between the market value of the collateral and the receivable. Typically, these contracts are entered into only with clients of substantial size and credit-worthiness. Dain Bosworth and Rauscher Pierce Refsnes also periodically utilize securities sold under repurchase agreements as a means of financing portions of their trading inventories.\nSecurities Lending and Borrowing Activities. Securities brokers and dealers, including ROG, borrow securities from and lend securities to other brokers and dealers to facilitate clearance and delivery of securities that have been sold when customers fail to deliver securities prior to settlement date. ROG also will act as a conduit by arranging securities lending transactions between brokers wishing to lend securities and those wishing to borrow the same securities. When such transactions occur, the lending broker provides excess customer margin securities to the borrowing broker in return for a cash deposit that is generally equivalent to 102 percent of the market value of the securities loaned. Both the lending and borrowing brokers have the right to mark the securities to market in order to maintain the relationship between the market value of the securities loaned and the cash collateral deposited. When the securities are no longer needed by the borrowing firm, they are returned to the lending broker, which returns the cash deposit held, plus interest, to the borrowing broker. When engaging in such securities lending and borrowing activities, ROG collects cash deposits from brokers that collateralize the securities loaned, invests the cash deposit and profits from the spread between the interest rate paid to the borrowing broker on the cash deposit and the rate earned by ROG. In all securities lending transactions, ROG is at risk to the extent that it does not maintain the relationship between the market value of securities loaned and the value of the cash deposit held. ROG is also at risk to the extent that securities it borrows decline in value and the loaning broker fails to return ROG's cash deposit.\nResearch Activities. Both Dain Bosworth and Rauscher Pierce Refsnes have research departments which provide analysis, investment recommendations and market information with an emphasis on companies located in their respective regions. At December 31, 1993, Dain Bosworth had 20 securities analysts and Rauscher Pierce Refsnes had 10. Both companies also purchase certain research products from independent research organizations to supplement their internal research activities.\nRegulation. The securities industry is subject to comprehensive regulation by federal and state governments, the various securities and commodities exchanges and self-regulatory bodies. The regulations cover all aspects of the securities business including sales methods, trade practices among broker- dealers, transactions with affiliates, conflicts of interest, uses and safekeeping of customers' funds and securities, capital levels of securities firms, record keeping and the conduct of employees. Violations of these rules and regulations can result in censure, fines, suspensions and revocation of the right to do business. Dain Bosworth, Rauscher Pierce Refsnes, ROG and Insight Investment Management believe they have operated in compliance with such rules and regulations in all material respects.\nUniform Net Capital Rule. As broker-dealers and member firms of the NYSE, Dain Bosworth, Rauscher Pierce Refsnes and ROG are subject to the Uniform Net Capital Rule (the \"Rule\") promulgated by the Securities and Exchange Commission (the \"Commission\"). The Rule is designed to measure the general financial integrity and liquidity of a broker-dealer and the minimum net capital deemed necessary to meet the broker-dealer's continuing commitments to its customers. The Rule provides for two methods of computing net capital. ROG currently uses what is generally referred to as the alternative method. Minimum net capital is defined under this method to be equal to 2 percent of customer debit balances, as defined. The NYSE may also require a member organization to reduce its business if net capital is less than 4 percent of such aggregate debit items and may prohibit a member firm from expanding its business and declaring cash dividends if its net capital is less than 5 percent of such aggregate debit items. In computing net capital, various adjustments are made to exclude assets which are not readily convertible into cash and to provide a conservative valuation of other assets such as a company's trading securities. Failure to maintain the required net capital may subject a firm to suspension or expulsion by the NYSE, the Commission and other regulatory bodies and may ultimately require its liquidation. Dain Bosworth and Rauscher Pierce Refsnes, which do not carry customer accounts, must maintain minimum net capital of $1 million each. At all times, Dain Bosworth, Rauscher Pierce Refsnes and ROG have maintained their net capital above the required levels. See Note K to \"Consolidated Financial Statements.\"\nMoney Management\nInsight Management currently sponsors and serves as investment adviser to Great Hall Investment Funds, Inc. (\"Great Hall\"), an open-end management investment company currently offering its shares in five series each of which, in essence, is a separate mutual fund with its own portfolio of assets and liabilities. Three of the series are money market funds which were introduced to Dain Bosworth and Rauscher Pierce Refsnes customers in 1991 as a replacement for comparable funds managed by Carnegie Capital Management Company (\"Carnegie\"), 48 percent of which was then owned by Dain Bosworth and Rauscher Pierce Refsnes. The two remaining series of Great Hall invest primarily in longer-term municipal securities and were initially capitalized in June 1992 with the transfer of assets and liabilities of comparable funds managed by Carnegie for which Insight Management acted as sub-adviser. Also in June 1992, the assets and liabilities of six other mutual funds then managed by Carnegie were transferred to comparable funds managed by Fortis Advisers, Inc. (\"Fortis\"). In connection with this transfer, the Company entered into certain agreements to perform or cause its affiliates to perform future marketing and other services for Fortis and to refrain from sponsoring or acting as investment adviser of any open-end, domestic equity or taxable bond investment company for periods ranging from two to three years. Under these agreements, the Company is entitled to receive fees based upon the level of assets transferred to the Fortis funds and certain other factors in exchange for such services and agreements. Following these transactions, the shares of Carnegie's stock then owned by Dain Bosworth and Rauscher Pierce Refsnes were redeemed.\nIn addition to its mutual fund operations, Insight Management provides private portfolio management services to individuals and institutions. Although Insight Management's expertise historically has been in the tax-exempt fixed-income area, a major initiative of Insight Management in 1994 and beyond will be building its portfolio management business through the expansion of its taxable fixed income management capabilities, which Insight Management anticipates will be marketed primarily to institutional investors.\nDuring 1993 Insight Management introduced and sponsored two series of Great Hall Value Ten Trusts, \"unit investment trusts\" which each offered units in a portfolio of \"blue-chip\" equity securities. In 1994 Insight Management plans to sponsor three or four additional equity unit investment trusts.\nAdditionally, in 1994 and beyond, Insight Management expects to implement a comprehensive new program that enables sales representatives of Dain Bosworth, Rauscher Pierce Refsnes and RPR Clearing to offer their clients a full spectrum of high quality mutual funds under flexible new pricing arrangements.\nReal Estate Services\nMinneapolis-based Dain Corporation provides real estate investment services. In so doing, it generates revenues from property management activities and may generate fees from refinancing and property disposal activities performed for limited partnerships in which it serves as the general partner. Prior to 1989, Dain Corporation sold participation interests in the partnerships to individual and institutional investors primarily through the sales representatives of Dain Bosworth, Rauscher Pierce Refsnes and other financial services firms. However, federal tax reform, depressed market values and extremely tight credit conditions have dramatically affected the real estate industry in recent years and, as a result, Dain Corporation has not raised capital for new property syndications since 1988. It is currently focusing its resources on managing the portfolios of properties owned by partnerships in which it serves as general partner and on selling certain partnership properties as it deems appropriate.\nAt December 31, 1993, Dain Corporation was a general partner in 10 operating public and private partnerships which own 21 properties consisting primarily of garden apartment complexes and suburban office developments in major metropolitan areas in the United States. Until February 28, 1993, Dain Corporation managed most of its syndicated properties indirectly through its 50- percent ownership of Griffin Dain Property Management Company, a joint venture established in 1990 with Griffin Real Estate Company. On February 28, 1993, Dain Corporation sold its partnership interest to The Griffin Group and terminated the joint venture. The Griffin Group continues to manage certain Dain Corporation multi-family properties. Remaining properties are managed indirectly through third-party management contracts. At December 31, 1993, Dain Corporation had approximately 2,200 apartment units, 5 office buildings and 3 shopping centers under management.\nClearing and Other Services\nIn April 1993, ROG, a wholly owned subsidiary of the Company based in Minneapolis, Minnesota, began clearing and settling trades for Dain Bosworth, and Rauscher Pierce Refsnes, and the correspondent brokerage firms clearing through them on a fully disclosed basis. Previously, Dain Bosworth and Rauscher Pierce Refsnes cleared and settled their own trades and the trades of correspondent firms clearing through them. RPR Clearing Services, a division of Rauscher Pierce Refsnes, is in the business of marketing correspondent clearing services and as of December 31, 1993, provided clearing services with ROG to approximately 125 correspondent brokerage firms.\nA single operations subsidiary has as one of its objectives, positioning the Company to grow its core brokerage business more effectively in the future. ROG also continues to provide data processing services to the Company and its subsidiaries. ROG's costs are allocated to the Company and its other subsidiaries based on their use of its services. Correspondent brokerage firms clearing through RPR Clearing Services and ROG are charged fees based on their use of services.\nCompetition\nDain Bosworth, Rauscher Pierce Refsnes and Insight Management encounter intense competition in their businesses and compete directly with numerous firms, many of which have substantially greater capital and other resources. Such subsidiaries also encounter competition from banks, insurance companies and financial institutions in many elements of their businesses. Legislative proposals currently under consideration would permit banks to offer additional services which have traditionally been provided only by securities and money management firms. Additionally, competition among securities firms and other competitors for successful sales representatives, securities traders and investment bankers is intense and continuous.\nDain Bosworth and Rauscher Pierce Refsnes compete with other securities firms and with banks, insurance companies and other financial institutions principally on the basis of service, product selection, location and reputation in local markets. Dain Bosworth and Rauscher Pierce Refsnes operate at a price disadvantage to discount brokerage firms that do not offer equivalent services.\nInsight Investment competes with other fixed income money managers principally on the basis of portfolio performance, price and convenience.\nEmployees\nAt December 31, 1993, the Company had approximately 2,950 full-time employees. Of these, 1,700 were employed by Dain Bosworth, 920 were employed by Rauscher Pierce Refsnes, 275 were employed by ROG and the rest were employed in other activities. None of the Company's employees is represented by a collective bargaining unit.\nITEM 2.","section_1A":"","section_1B":"","section_2":"ITEM 2. PROPERTIES:\nThe headquarters and administrative offices of the Company, Dain Bosworth, Insight Management, Dain Corporation and ROG are located in two buildings in downtown Minneapolis, Minnesota. The Company began occupying space in the new Dain Bosworth Plaza under a long-term operating lease in January 1992. The Company's office space in the second building remains under a long-term lease commitment and was renovated in 1992 to facilitate the consolidation of Dain Bosworth's and Rauscher Pierce Refsnes' clearance and settlement functions into ROG (see \"Clearing and Other Services\"). Rauscher Pierce Refsnes leases office space in Dallas, Texas that is used as its corporate headquarters. Both Dain Bosworth and Rauscher Pierce Refsnes have extensive branch office systems which lease space in various locations throughout their regions. The Company believes that its facilities are suitable and adequate to meet its needs and that such facilities have sufficient productive capacity and are appropriately utilized.\nFurther information about the lease obligations of the Company is provided in Note I to the \"Consolidated Financial Statements.\"\nITEM 3.","section_3":"ITEM 3. LEGAL PROCEEDINGS:\nDain Bosworth and Rauscher Pierce Refsnes are defendants in various civil actions and arbitrations incidental to their business involving alleged violations of federal and state securities laws and other laws. Some of these actions, including certain actions against Rauscher Pierce Refsnes that are described in more detail below, have been brought on behalf of purported classes of plaintiffs claiming substantial damages relating to underwritings of securities.\nRauscher Pierce Refsnes is named as a defendant in a number of class action complaints that have been consolidated in a multi-district proceeding, In Re Taxable Municipal Bond Securities Litigation (MDL 863), in the Eastern District of Louisiana, as well as in certain Texas state court actions and arbitrations that have either been consolidated into such proceeding or stayed pending its resolution. Such actions have been described in detail in periodic reports previously filed by the Company on Forms 10-K and 10-Q. Such actions resulted from Rauscher Pierce Refsnes participation as a member of the underwriting syndicates in seven taxable municipal bond offerings for an aggregate of $1.55 billion in 1986. The proceeds of such bond offerings were invested in guaranteed investment contracts issued by Executive Life Insurance Company which was placed in conservatorship by the State of California in 1991. Rauscher Pierce Refsnes has also been named as a defendant in a contingent claim for damages in state court in California in connection with the conservatorship proceeding. This claim was contingent upon the determination of the priority status of the investment contracts, which issue has been favorably resolved. Rauscher Pierce Refsnes underwrote an aggregate of $57.8 million of bonds in all of such offerings, and served as co-manager of one $200 million bond offering. Drexel Burnham Lambert Incorporated, the lead managing underwriter for all of such offerings, and one other member of the underwriting syndicates, filed for reorganization under the bankruptcy laws and have failed to honor their syndicate obligations in connection with those claims. Plaintiffs in certain of these actions allege violations of federal and state securities laws, common law fraud, negligence and various other claims. Plaintiffs in certain of these actions also alleged violations of the Racketeer Influenced and Corrupt Practices Act, but such claims have been dismissed. Rauscher Pierce Refsnes believes that it has substantial and meritorious defenses to the claims raised by plaintiffs and will defend itself vigorously against these actions.\nWhile the outcome of any litigation is uncertain, management, based in part upon consultation with legal counsel as to certain of the actions pending against Dain Bosworth and Rauscher Pierce Refsnes, believes that the resolution of all such matters will not have a material adverse effect on the Company's consolidated financial condition.\nITEM 4.","section_4":"ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS: No matters were submitted to a vote of security holders during the fourth quarter ended December 31, 1993.\nEXECUTIVE OFFICERS OF THE REGISTRANT\nThe following officers have been designated by the Board of Directors of the Company as its current Executive Officers. All officers are generally elected annually at the Board Meeting held in conjunction with the Company's Annual Stockholders meeting and hold such offices until the following year, subject to their earlier death, resignation or removal.\nPrincipal Occupation and Business Experience Name Age for the Past Five Years - ----------------------------------------------------------------- John C. Appel............45 President and Chief Operating Officer, Dain Bosworth Incorporated since February 1994; Executive Vice President and Chief Financial Officer, Dain Bosworth Incorporated April 1990 to February 1994; Executive Vice President, IFG since April 1990; Senior Vice President of IFG from May 1986 to April 1990; Chief Financial Officer of IFG from May 1986 to February 1994. Member of IFG Executive Committee.\nRichard D. McFarland.....64 Chairman of the Board, IFG since June 1985; Chief Executive Officer of IFG from June 1985 to December 1989; President of IFG from January 1982 to June 1985.\nDaniel J. Reuss..........38 Senior Vice President, IFG since May 1991; Vice President, IFG April 1987 to May 1991; Treasurer, IFG since May 1989; Corporate Controller, IFG since February 1985.\nDavid A. Smith...........47 Chief Executive Officer, Rauscher Pierce Refsnes since May 1983; President, Rauscher Pierce Refsnes since January 1985; Chairman of the Board, Rauscher Pierce Refsnes since January 1990; Executive Vice President of IFG since May 1991; Member of IFG Executive Committee.\nJ. Scott Spiker..........38 Senior Vice President and Director of Strategic Planning and Corporate Development, IFG since February 1994; Senior Vice President and Manager Employee Benefit Services, Norwest Bank Minnesota, N.A. June 1989 to January 1994; Vice President, Strategic Planning and Acquisitions, Norwest Corporation, December 1987 to June 1989.\nIrving Weiser............46 Chief Executive Officer, IFG since January 1990; President, IFG since July 1985; Chief Executive Officer, Dain Bosworth Incorporated since April 1990; Chairman of the Board, Dain Bosworth Incorporated since April 1990; President, Dain Bosworth Incorporated April 1990 to February 1994. Member of IFG Executive Committee.\nPART II\nITEM 5.","section_5":"ITEM 5. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS:\n(a) Market Information.\nThe Company's common stock trades on the NYSE under the symbol \"IFG.\" The high and low sales prices per share of the Company's common stock by quarter for the last two years were as follows:\n(b) Holders.\nAt February 28, 1994, there were approximately 5,700 shareholders of the Company's common stock. The number of shareholders was determined by adding the number of recordholders to the estimated number of proxies to be sent to street name holders.\n(c) Dividends.\nCash dividends per common share paid by the Company by quarter for the last two years were as follows:\nThe Company paid a special cash dividend of $.16 per share on its common stock during the first quarter of 1992 and regular quarterly cash dividends of $.04 per share each quarter thereafter through the first quarter of 1993. Beginning in the second quarter of 1993, the regular quarterly dividend was increased to $.08 per share. The determination of the amount of future cash dividends, if any, to be declared and paid will depend on the Company's future financial condition, earnings and available funds. Prior to 1992 the Company was prevented from paying cash dividends on its common stock by a cumulative net earnings test contained in its convertible subordinated debt agreements.\nITEM 6.","section_6":"ITEM 6. SELECTED FINANCIAL DATA:\nITEM 7.","section_7":"ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS:\nBusiness Environment\nThe Company's subsidiaries are principally engaged in securities brokerage, investment banking and trading as principals in equity and fixed income securities. All of these activities are highly competitive and sensitive to many factors outside the control of the Company, including volatility of securities prices and interest rates, trading volume of securities, economic conditions in the regions in which the Company does business, income tax legislation and demand for investment banking services. While revenues are dependent upon the level of trading volume, which may fluctuate significantly, a large portion of the Company's expenses remain fixed. Consequently, net earnings can vary significantly from period to period.\nThree Years Ended December 31, 1993\nSummary of Operating Results\nDuring 1993 net earnings totaled $47.6 million, an increase of $13.1 million or 38 percent over the prior year. Net earnings and net revenues (revenues less interest expense) for 1993 represent the highest achieved in the Company's history. The Company, along with the rest of the securities industry, benefited in 1993 from continued strong financial markets, low interest rates, high securities prices and increased levels of municipal and corporate underwritings. As a result of the favorable economic environment and, in management's opinion, actions taken during the past several years, the Company's core securities brokerage and investment banking businesses within Dain Bosworth and Rauscher Pierce Refsnes all posted record results for 1993.\nEarnings before extraordinary items totaled $34.5 million in 1992, an increase of $13.4 million or 63 percent over 1991. Net earnings increased 24 percent over the $27.7 million earned in the prior year. 1991 net earnings included $6.6 million of extraordinary gains, primarily tax benefits from the utilization of net operating loss carryforwards. As was the case throughout the securities industry, all facets of Dain Bosworth's and Rauscher Pierce Refsnes' broker-dealer operations generated significantly higher revenues and profits in 1992 than in the prior year. However, the traditional strengths of the two securities firms, the retail brokerage business at Dain Bosworth and the fixed income business at Rauscher Pierce Refsnes, were the primary reasons for the improved operating results. Additionally, the Company believes that actions taken to strengthen the firms' core securities brokerage and investment banking operations, as well as actions taken to reduce long-term debt levels at the parent company, favorably impacted 1992 and 1991 earnings.\nComparative Net Revenues and Expenses Summary. The following is a summary of the year-to-year increases (decreases) in categories of net revenues and operating expenses:\nNet interest income accounted for 5 percent of the Company's net revenues in 1993 and 6 percent in each of 1992 and 1991. Short-term investments segregated for regulatory purposes and margin loans to customers, both financed primarily by credit balances in customer accounts, comprise the majority of the Company's interest-earning assets. Fixed income trading inventories, which are generally financed with short-term bank borrowings or repurchase agreements, also generated significant net interest income. The Company's net interest income is dependent upon the level of customer balances and trading inventories, as well as the spread between the rate it earns on those assets compared with its cost of funds.\nAs long as favorable interest rate spreads are maintained and the level of interest-bearing accounts remains stable, the Company expects net interest income to continue to be a significant component of its earnings. The Company continues to examine alternative cash management products and services that it may offer to customers with credit balances in their accounts. Management believes that implementation of new cash management products and services would not have a material effect on net earnings. Average balances and interest rates for 1991 through 1993 are:\nThe $3.1 million increase in net interest income in 1993 over 1992 was principally attributable to an increase in average margin loan balances to customers of $89.0 million resulting from increased individual investor participation in the financial markets. See \"Liquidity and Capital Resources.\"\nThe $4.1 million increase in net interest income in 1992 is due primarily to decreased interest expense from lower interest rates on bank borrowings and from reduced levels of subordinated and other long-term debt. See \"Liquidity and Capital Resources.\" These positive factors were partially offset by the negative effect of slightly reduced spreads on customer balances.\nAsset Management\nDuring 1993 asset management revenues increased $3.4 million or 36 percent from 1992, as a result of a 12-percent increase in assets under management at Insight Management, as well as increased revenues from larger volumes of assets in fee-based, managed account programs at Dain Bosworth and Rauscher Pierce Refsnes.\nAsset management revenues increased $6.6 million from 1991 to 1992, primarily due to increased revenues from Insight Management's first full year of operation and, to a lesser extent, increases in revenues from fee-based, managed account programs at Dain Bosworth and Rauscher Pierce Refsnes.\nCorrespondent Clearing and Other Revenues\nCorrespondent clearing revenues increased $1.9 million or 19 percent from 1992 to 1993 primarily as a result of increased trade volumes and a 13-percent increase in the number of correspondents handled by RPR Clearing, the Rauscher Pierce Refsnes unit that serves as clearing agent for approximately 125 correspondent brokerage firms. Approximately $5.2 million of the increase in other revenues from 1992 to 1993 was the result of a one-time gain recorded during the third quarter of 1993 from the sale of the Minneapolis Energy Center, a district heating and cooling company owned by a partnership in which Dain Bosworth was the general partner. Net of expenses, this transaction increased the Company's pretax earnings by $4.0 million, net earnings by $2.4 million and earnings per share by $.29.\nCorrespondent clearing revenues increased $2.7 million from 1991 to 1992 as a result of increased trade volumes handled by RPR Clearing. Other revenues declined $2.6 million in 1992 from 1991 due primarily to the loss of $3.2 million in fees paid by Carnegie to the Company for Dain Bosworth and Rauscher Pierce Refsnes customer balances held in funds managed by Carnegie before their transfer to money market funds managed by Insight Management. As of December 31, 1992, substantially all of Dain Bosworth and Rauscher Pierce Refsnes customers' money market fund balances previously held in funds managed by Carnegie had been transferred to funds managed by Insight Management.\nCompensation and Benefits\nCompensation and benefits expense is generally affected by the level of operating revenues, earnings and the number of employees. The 1993 and 1992 increases in compensation and benefits expense of 16 percent and 25 percent, respectively, were comprised primarily of increased commissions, incentive compensation and related benefits that rose in conjunction with increased operating revenues and earnings. The increases for 1993 and 1992 were also partially the result of increases in the average number of employees of 8 percent each year.\nOther Expenses\nDuring 1993 expenses other than compensation and benefits and interest increased $13.6 million or 14 percent principally as a result of volume-driven increases in the use of communications, market data and clearing services; increased travel costs associated with the generation of new business; increased reserves; and increased occupancy expenses related to higher real estate and operating costs at the Company's Minneapolis headquarters, the net addition of nine operating office locations and the expansion of several others.\nDuring 1992 expenses other than compensation and benefits and interest rose $12.0 million or 14 percent, due primarily to higher usage of communications and market data services; increased occupancy costs related to the Company's new headquarters and moving or opening several branch locations; increased travel and promotional costs from the larger number of investment executives qualifying for incentive awards; higher floor brokerage and clearing costs due to heavier trade volumes; and increased expenses associated with preparations for the April 1993 consolidation of Dain Bosworth's and Rauscher Pierce Refsnes' operations areas into Regional Operations Group.\nManagement anticipates higher operating expenses in 1994 and subsequent years as the Company expects to make additional investments in new or expanded operating offices, hire additional employees, and make additional investments in systems, training and other areas in connection with the Company's strategic growth initiatives over the next five years.\nEffect of Recent Accounting Standards\nIn November 1992 the Financial Accounting Standards Board issued a new statement on accounting for post-employment benefits other than pensions. The standard will be adopted as required in 1994. The Company does not expect the statement to have a material effect on financial results.\nInflation\nSince the Company's assets are primarily liquid in nature and experience a high rate of turnover, they are not significantly affected by inflation. However, the rate of inflation does affect many of the Company's operating costs which may not be readily recoverable through price increases on services offered by the Company.\nLiquidity and Capital Resources\nThe Company's assets are substantially liquid in nature and consist mainly of cash or assets readily convertible into cash. These assets are financed primarily by interest-bearing and non- interest bearing customer credit balances, repurchase agreements, other payables, short-term and subordinated bank borrowings and equity capital. Changes in the amount of trading securities owned by the Company, customer and broker receivables and securities purchased under agreements to resell directly affect the amount of the Company's financing requirements.\nThe Company has various sources of capital for operations and growth. In addition to capital provided by earnings, Regional Operations Group maintains uncommitted lines of credit from a number of banks to finance transactions (principally trading and underwriting positions of Dain Bosworth and Rauscher Pierce Refsnes) when internally generated capital is not sufficient. These uncommitted lines of credit are collateralized by trading securities and customers' excess margin securities. Also, the Company has a $15 million, committed, unsecured revolving credit facility that is used for advances to its subsidiaries and general corporate purposes. On February 28, 1994, $15 million of this revolving credit facility was unused.\nDain Bosworth and Rauscher Pierce Refsnes must comply with certain regulations of the Securities and Exchange Commission measuring capitalization and liquidity and restricting amounts of capital that may be transferred to affiliates. In April 1993 the Company's new operations subsidiary, Regional Operations Group, began clearing and settling trades for Dain Bosworth and Rauscher Pierce Refsnes (including the accounts of RPR Clearing). Regional Operations Group now carries all customer accounts, extends margin credit to customers, pays interest on credit balances of customers and invests any excess customer balances. As a result, Regional Operations Group is subject to similar Securities and Exchange Commission regulations. During 1993 Dain Bosworth, Rauscher Pierce Refsnes and Regional Operations Group all operated above the minimum net capital standards. At December 31, 1993, regulatory net capital was $46.2 million at Regional Operations Group, which was 8.2 percent of aggregate debit balances and $18.2 million in excess of the 5-percent requirement. Beginning in April 1993, Dain Bosworth's and Rauscher Pierce Refsnes' net capital requirement was reduced to $1 million for each company because neither carries customer balances on its balance sheet. At December 31, 1993, Dain Bosworth and Rauscher Pierce Refsnes had net capital of $18.4 million and $19.0 million, respectively, in excess of the $1 million requirement.\nThe Company paid a special cash dividend of $.16 per share on the Company's common stock during the first quarter of 1992 and regular quarterly cash dividends of $.04 per share thereafter through the first quarter of 1993. Beginning in the second quarter of 1993, the regular quarterly dividend was increased to $.08 per share. The determination of future cash dividends, if any, to be declared and paid will depend on the Company's future financial condition, earnings and available funds. Prior to 1992 the Company had been prevented from paying cash dividends on its common stock by a cumulative net earnings test contained in its subordinated debt agreements.\nIn 1993 the Company purchased automated workstations totaling approximately $4.6 million in conjunction with the rollout of the Client Management System, which is designed to improve the productivity and client service of Dain Bosworth and Rauscher Pierce Refsnes investment executives. The purchases were financed with a series of secured notes which require the Company to make 48 equal monthly payments of principal plus interest.\nRauscher Pierce Refsnes entered into a $3.0 million, five- year subordinated bank loan during the first quarter of 1993. Proceeds of the loan qualify as regulatory capital and will be used for general corporate purposes.\nITEM 8.","section_7A":"","section_8":"ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA\nIndex to Consolidated Financial Statements As of December 31, 1993 and 1992, and for each of the years in the three-year period ended December 31, 1993 and Supplementary Data\nPage\nIndependent Auditors' Report............................... 18\nConsolidated Financial Statements:\nConsolidated statements of operations................. 19\nConsolidated balance sheets........................... 20\nConsolidated statements of shareholders' equity....... 21\nConsolidated statements of cash flows................. 22\nNotes to consolidated financial statements............ 23\nQuarterly Financial Information............................ 31\nINDEPENDENT AUDITORS' REPORT\nBoard of Directors and Shareholders Inter-Regional Financial Group, Inc.:\nWe have audited the accompanying consolidated balance sheets of Inter-Regional Financial Group, Inc. and subsidiaries as of December 31, 1993 and 1992, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1993. In connection with our audits of the consolidated financial statements, we have also audited the financial statement schedules as listed in the table of contents on page 36 hereof. These consolidated financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on our audits.\nWe conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.\nIn our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Inter-Regional Financial Group, Inc. and subsidiaries as of December 31, 1993 and 1992, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1993, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.\nKPMG Peat Marwick\nMinneapolis, Minnesota February 1, 1994\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended December 31, 1993, 1992 and 1991\nInter-Regional Financial Group, Inc. and Subsidiaries\nA. Summary of Significant Accounting Policies\nBasis of Presentation: The consolidated financial statements include the Company and its subsidiaries, all of which are wholly owned. All material inter-company balances and transactions have been eliminated in consolidation. Certain prior year amounts in the financial statements have been reclassified to conform to the 1993 presentation.\nCash and Cash Equivalents: Cash and cash equivalents include cash on hand, cash in depository accounts with other financial institutions and money market investments with original maturities of 90 days or less.\nSecurities: Securities transactions and the related commission revenues and expenses are recorded on settlement date, which is not materially different than if transactions were recorded on trade date.\nTrading securities owned and trading securities sold, but not yet purchased, are stated at market value. Unrealized gains and losses on such securities are recognized currently in revenues.\nRepurchase Transactions: Securities purchased under agreements to resell (reverse repurchase agreements) and securities sold under repurchase agreements are accounted for as financing transactions and are recorded at the contract amount at which the securities will subsequently be resold or reacquired, plus accrued interest.\nDepreciation and Amortization: Equipment is depreciated using the straight-line method over estimated useful lives of two to eight years. Leasehold improvements are amortized over the lesser of the estimated useful life of the improvement or the life of the lease. Buildings are depreciated using the straight- line method over an estimated useful life of 25 years.\nIncome Taxes: Effective January 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109, \"Accounting for Income Taxes.\" Under this method, deferred tax liabilities and assets and the resultant provision for income taxes are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Financial statements for prior years have not been restated and the cumulative effect of the accounting change was not material. (See note M.)\nPrior to 1993 the provision for income taxes was based on income and expenses included in the accompanying consolidated statements of operations. Differences between taxes so computed and taxes payable under applicable statutes and regulations were classified as deferred taxes arising from timing differences.\nFair Values of Financial Instruments: Substantially all of the Company's financial assets and liabilities are carried at market value or at amounts which, because of their short-term nature, approximate current fair value. The Company's borrowings, if recalculated based on current interest rates, would not differ significantly from the amounts recorded at December 31, 1993.\nRecent Accounting Pronouncements: In November 1992 the Financial Accounting Standards Board issued Statement No. 112 - Employers' Accounting for Post-Employment Benefits Other Than Pensions (FAS 112). The Company expects to adopt the provisions of FAS 112 when required in 1994 and does not expect the statement to have a material effect on financial results.\nEarnings Per Share: Primary earnings per share are based upon the weighted average number of common shares outstanding and the dilutive effect of common stock options and, in years prior to 1993, the assumed conversion of the Series 10% and 12% convertible preferred stock.\nFully diluted earnings per share for 1992 and 1991 reflect the additional dilutive effect of the assumed conversion of convertible subordinated debentures. The weighted average number of shares used in the primary and fully diluted computations, respectively, are: 1993 - 8,404,501 and 8,466,797; 1992 - 8,573,507 and 8,960,560; and 1991 - 8,463,211 and 10,066,831.\nB. Extraordinary Items\nDuring 1991 the Company recognized net extraordinary gains of $6,611,000. This amount was comprised of the realization of tax benefits from utilization of net operating loss carryforwards of $6,953,000 and a net loss from the redemption and buyback of the Company's 11-1\/2% convertible subordinated debentures of $342,000.\nC. Receivable From and Payable to Customers\nThe amounts receivable from and payable to customers result from cash and margin transactions. Securities owned by customers and held as collateral for receivables and securities sold short by customers are not reflected in the consolidated financial statements. Included in payable to customers are customer funds on deposit for reinvestment totaling $713 million and $687 million as of December 31, 1993 and 1992, respectively. The Company pays interest on such funds at varying rates, the weighted average of which was 2.4 percent at December 31, 1993.\nD. Receivable From and Payable to Brokers and Dealers\nSecurities failed to deliver and receive represent the contract value of securities which have not been delivered or received subsequent to settlement date. Deposits paid for securities borrowed and deposits received for securities loaned approximate the market value of the related securities.\nE. Trading Securities\nThe market values of trading security positions are summarized as follows:\nF. Short-Term Borrowings\nThe loans to the securities subsidiaries consist primarily of bank borrowings on uncommitted lines of credit collateralized by trading securities owned and securities held in customer margin accounts, and have a floating rate of interest approximately .50 percent above the Federal Funds rate. The market value of trading securities pledged as collateral at December 31, 1993 was $113 million.\nRevolving credit loan borrowings and irrevocable letters of credit are available under a commitment totaling $15 million (all of which was unused as of December 31, 1993) which expires June 30, 1995. Loans under this facility are unsecured and bear interest at a floating rate of Federal Funds plus 1.125 percent. The Company must maintain certain levels of net worth under the agreement.\nG. Subordinated and Other Debt\nOther debt is used primarily to finance equipment and building improvements and is payable in monthly or quarterly installments and bears interest at floating rates which approximated 5.8 percent at December 31, 1993. The Company must maintain certain levels of net worth under one of the debt agreements.\nAnnual principal payments on subordinated bank loans and other debt (excluding obligations under capital leases) during the next five years are as follows: 1994-$1,463,000; 1995- $3,782,000; 1996-$4,273,000; 1997-$3,908,000; 1998-$468,000.\nH. Shareholders' Equity\nCommon Stock: The common stock has a par value of $.125 per share; 20,000,000 shares are authorized.\nAt December 31, 1993, 1,761,000 shares of the Company's common stock were reserved for the 1986 Stock Option Plan and 106,000 shares were reserved for issuance to the IFG Stock Bonus Plan.\nDividends: The Company paid a special cash dividend of $.16 per share during the first quarter of 1992 and regular quarterly cash dividends of $.04 per share each quarter thereafter through the first quarter of 1993. Beginning in the second quarter of 1993, the regular quarterly dividend was increased to $.08 per share. The determination of the amount of future cash dividends, if any, to be declared and paid will depend on the Company's future financial condition, earnings and available funds. Prior to 1992 the Company was prevented from paying cash dividends on its common stock by a cumulative net earnings test contained in its convertible subordinated debt agreements.\nStock Options: The Company maintains a stock option plan, under which key employees and outside directors may be granted options to purchase common stock at not less than 100 percent of the fair market value of the shares at the date of grant for incentive stock options or 50 percent for non-qualified options. Options granted to employees prior to December 31, 1989, generally become exercisable at the rate of 33-1\/3 percent each year and expire five years from the grant date. Options granted to employees subsequent to December 31, 1989, generally become exercisable at rates of 20, 50 and 100 percent as of two, three and four years, respectively, after the date of grant and expire ten years from date of grant. Options granted to outside directors prior to December 31, 1991, become exercisable immediately and expire five years from grant date. Options granted to outside directors subsequent to December 31, 1991, become exercisable six months after grant date and expire five years after grant date. At December 31, 1993, 1,067,884 shares of common stock were available for grant.\nThe following table summarizes the activity related to the Company's stock option plan for each of the last three years:\nAll outstanding options were granted at 100 percent of the fair market value of the shares at the date of grant. The Company's closing stock price on December 31, 1993 was $27.875.\nI. Commitments and Contingent Liabilities\nLeases: The Company and its subsidiaries lease office space, furniture and communications and data processing equipment under several noncancelable leases. Most office space leases are subject to escalation and provide for the payment of real estate taxes, insurance and other expenses of occupancy, in addition to rent.\nAggregate minimum rental commitments as of December 31, 1993 are as follows:\nRental expense for operating leases was $19,085,000, $18,741,000 and $15,486,000, for the years ended December 31, 1993, 1992 and 1991, respectively. Included in net equipment, leasehold improvements and buildings at December 31, 1993 and 1992, is $5,952,000 and $6,915,000, respectively, for leases which have been capitalized.\nLitigation: The Company's securities subsidiaries are defendants in various civil actions and arbitrations incidental to their business involving alleged violations of federal and state securities laws, and other laws. Some of these actions have been brought on behalf of purported classes of plaintiffs claiming substantial damages relating to underwritings of securities.\nSeveral such actions resulted from Rauscher Pierce Refsnes' participation as a member of the underwriting syndicates in seven taxable municipal bond offerings for an aggregate of $1.55 billion in 1986. Rauscher Pierce Refsnes agreed to underwrite approximately $57.8 million of these bonds, and served as co- manager in one offering of $200 million of bonds. Drexel Burnham Lambert Incorporated, the lead managing underwriter for all seven of such offerings, and one other member of the underwriting syndicates for certain of such offerings have filed for reorganization under the bankruptcy laws and have failed to honor their syndicate obligations in connection with such claims. Plaintiffs in certain of these actions allege violations of federal and state securities laws, common law fraud, negligence, and various other claims. Plaintiffs in certain of the actions also alleged violations of the Racketeer Influenced and Corrupt Practices Act, but such claims have been dismissed. Plaintiffs seek an unspecified amount of actual and punitive damages, rescission and other relief. Rauscher Pierce Refsnes believes that it has substantial and meritorious defenses available and plans to defend itself vigorously against these actions.\nWhile the outcome of any litigation is uncertain, management, based in part upon consultation with legal counsel as to certain of these actions, believes that the resolution of these matters will not have a material adverse effect on the Company's consolidated financial condition.\nJ. Financial Instruments with Off-Balance-Sheet Risk\nIn the normal course of business, the Company's activities involve the execution, settlement and financing of various securities transactions. These activities may expose the Company to off-balance-sheet credit and market risks in the event the customer or counterparty is unable to fulfill its contractual obligations. Such risks may be increased by volatile trading markets.\nIn the normal course of business, the securities subsidiaries enter into when-issued underwriting and purchase commitments. Transactions relating to such commitments open at year end and subsequently settled had no material effect on the consolidated financial statements.\nAs part of its normal brokerage activities, the Company sells securities not yet purchased (short sales) for its own account. The establishment of short positions exposes the Company to off-balance-sheet risk in the event prices increase, as the Company may be obligated to acquire the securities at prevailing market prices.\nThe Company also periodically hedges its fixed income trading inventories with financial futures contracts. These contracts expose the Company to off-balance-sheet risk in the event that the change in the futures price does not closely correlate with the change in the inventory price. At December 31, 1993, the Company had open commitments under financial futures contracts with a notional amount of $2.0 million.\nThe Company does not enter into interest-rate swap agreements, foreign currency contracts or interest-rate option agreements.\nThe Company seeks to control the risks associated with its customer activities by requiring customers to maintain margin collateral in compliance with various regulatory and internal guidelines. The Company monitors required margin levels daily and, pursuant to such guidelines, requires customers to deposit additional collateral or to reduce positions when necessary.\nA portion of the Company's customer activity involves the sale of securities not yet purchased and the writing of option contracts. Such transactions may require the Company to purchase or sell financial instruments at prevailing market prices in order to fulfill the customer's obligations.\nThe Company lends money subject to reverse repurchase agreements. All positions are collateralized, primarily with U.S. government or U.S. government agency securities. The Company generally takes physical possession of securities purchased under agreements to resell. Such transactions may expose the Company to risk in the event such borrowers do not repay the loans and the value of collateral held is less than that of the underlying receivable. These agreements provide the Company with the right to maintain the relationship between market value of the collateral and the receivable.\nThe Company may pledge firm or customer margin securities for bank loans, repurchase agreements, securities loaned or to satisfy margin deposits of clearing organizations. In the event the counterparty is unable to return such securities pledged, the Company may be exposed to the risks of acquiring the securities at prevailing market prices or holding collateral possessing a market value less than that of the related pledged securities. The Company seeks to control these risks by monitoring the market value of securities pledged and requiring adjustments of collateral levels where necessary. At December 31, 1993, the market value of such securities pledged approximated the borrowings outstanding.\nK. Regulatory Requirements\nDain Bosworth and Rauscher Pierce Refsnes are subject to the Securities and Exchange Commission's Uniform Net Capital Rule. In April 1993 the Company's new operations subsidiary, Regional Operations Group, began clearing and settling trades for Dain Bosworth and Rauscher Pierce Refsnes (including the accounts of RPR Clearing). Regional Operations Group now carries all customer accounts, extends margin credit to customers, pays interest on credit balances of customers and invests any excess customer balances. As a result, Regional Operations Group is subject to the Uniform Net Capital Rule whereby net capital of not less than 2 percent of aggregate debit items must be maintained. The New York Stock Exchange, Inc. also may require a member organization to reduce its business if regulatory net capital is less than 4 percent of such aggregate debit items, and may prohibit a member firm from expanding its business and declaring cash dividends if its regulatory net capital is less than 5 percent of such aggregate debit items. At December 31, 1993, net capital was $46.2 million at Regional Operations Group, which was 8.2 percent of aggregate debit balances and $18.2 million in excess of the 5-percent requirement. Beginning in April 1993, Dain Bosworth's and Rauscher Pierce Refsnes' net capital requirement was reduced to $1 million for each company as neither firm carries customer balances on its balance sheet. At December 31, 1993, Dain Bosworth and Rauscher Pierce Refsnes had net capital of $18.4 million and $19.0 million, respectively, in excess of the $1 million requirement.\nRule 15c3-3 of the Securities Exchange Act of 1934 specifies certain conditions under which brokers and dealers carrying customer accounts are required to maintain cash or qualified securities in a special reserve account for the exclusive benefit of customers. Amounts to be maintained are computed in accordance with a formula defined in the Rule. At December 31, 1993, Regional Operations Group had $581.0 million segregated in special reserve accounts. This amount consisted of qualified securities purchased under agreements to resell and was collateralized by U.S. government or government agency securities.\nL. Employee Benefit Plans\nThe Company and its participating subsidiaries have profit sharing and stock bonus plans which cover substantially all full- time employees who are at least 21 years of age and have been employed for at least one year.\nCompany contributions to the profit sharing plan are 3 percent of each participant's eligible compensation, plus a discretionary contribution determined by each participating company's board of directors based on profits. Employees may contribute on a pretax basis up to 10 percent of their eligible compensation to the plan, less any amounts contributed to the stock bonus plan and subject to certain aggregate limitations under federal regulations.\nStock bonus plan contributions are used to purchase common stock of the Company. Employees may allot on a pretax basis up to 5 percent of their eligible compensation to the plan, subject to certain aggregate limitations with contributions to the profit sharing plan under federal regulations. The Company and its participating subsidiaries match 50 percent of their employees' contributions to the stock bonus plan. The Company also makes matching contributions to the stock bonus plan equal to 25 percent of employee pretax contributions of up to 5 percent of eligible compensation (less any amount contributed to the stock bonus plan) to the profit sharing plan. Only aggregate employee pretax contributions of up to 5 percent for both the stock bonus plan and profit sharing plan are eligible for Company matching contributions.\nThe Company's policy is to fund currently profit sharing and stock bonus plan costs. Earnings have been charged for contributions, net of forfeitures, to the above plans as follows:\nM. Income Taxes\nIncome tax expense consists of the following:\nA reconciliation of ordinary federal income taxes (based on rates of 35 percent for 1993 and 34 percent for 1992 and 1991) with the actual tax expense provided on earnings is as follows:\nDeferred income tax expenses\/benefits result from differences in the timing of revenue and expense recognition for financial statement and tax reporting purposes. The sources and tax effect of the changes in deferred taxes are:\nThe tax effects of temporary differences that give rise to the deferred tax assets and deferred tax liabilities are:\nThe Company has determined that it is not required to establish a valuation allowance for the deferred tax asset since it is more likely than not that the deferred tax asset will be realized principally through carryback to taxable income in prior years, and future reversals of existing taxable temporary differences, and, to a lesser extent, future taxable income.\nITEM 9.","section_9":"ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE:\nNone.\nPART III\nITEM 10.","section_9A":"","section_9B":"","section_10":"ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT:\nSee Part I, Item 4 of this Annual Report for information with respect to executive officers of the Company. Other information required in Item 10 will be contained in the Company's definitive Proxy Statement to be filed pursuant to Regulation 14A within 120 days after the close of the fiscal year for which this Report is filed and is incorporated herein by reference.\nITEM 11.","section_11":"ITEM 11. EXECUTIVE COMPENSATION:\nThe information required in Item 11 will be contained in the Company's definitive Proxy Statement to be filed pursuant to Regulation 14A within 120 days after the close of the fiscal year for which this Report is filed and is incorporated herein by reference, except that, pursuant to Item 402(a)(8) of Regulation S-K, the information to be contained in the Company's definitive Proxy Statement in response to paragraphs (k) and (l) of Item 402 is not incorporated by reference herein.\nITEM 12.","section_12":"ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT:\nThe information required in Item 12 will be contained in the Company's definitive Proxy Statement to be filed pursuant to Regulation 14A within 120 days after the close of the fiscal year for which this Report is filed and is incorporated herein by reference.\nITEM 13.","section_13":"ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS:\nThe information required in Item 13 will be contained in the Company's definitive Proxy Statement to be filed pursuant to Regulation 14A within 120 days after the close of the fiscal year for which this Report is filed and is incorporated herein by reference.\nPART IV\nITEM 14.","section_14":"ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K:\n(a) Documents filed as part of this Report:\nPage ---- 1. Financial statements: Reference is made to the table of contents to financial statements and financial statement schedules hereinafter contained 36\n2. Financial statement schedules: Reference is made to the table of contents to financial statements and financial statement schedules hereinafter contained for all other financial statement schedules 36\n3. Exhibits:\nItem No. Item Method of Filing - -------- ---- ----------------\n3(a) Certificate of Incorporated by Incorporation of the reference to Exhibit Company, as amended. 3(a) to the Company's Annual Report on Form 10-K for the year ended December 31, 1988.\n3(b) Bylaws of the Company, as Incorporated by amended. reference to Exhibit 3(b) to the Company's Annual Report on Form 10-K for the year ended December 31, 1989.\n4(a) Credit Agreement dated Incorporated by June 23, 1994. reference to Exhibit 4(a) to the Company's Current Report on Form 8-K dated July 15, 1993.\n4(b) First Amendment to Credit Incorporated by Agreement dated November reference to Exhibit 30, 1993. 4(a) to the Company's Current Report on Form 8-K dated February 11, 1994.\n4(c) Term Loan Agreement dated Incorporated by October 16, 1992. reference to Exhibit 4(e) to the Company's Annual Report on Form 10-K for the year ended December 31, 1992.\n4(d) First Amendment to Term Incorporated by Loan Agreement dated reference to Exhibit March 12, 1993. 4(g) to the Company's Annual Report on Form 10-K for the year ended December 31, 1992.\n4(e) Second Amendment to Term Incorporated by Loan Agreement dated June reference to Exhibit 23, 1993. 4(b) to the Company's Current Report on Form 8-K dated July 15, 1993.\n4(f) Third Amendment to Term Incorporated by Loan Agreement dated reference to Exhibit November 30, 1993. 4(b) to the Company's Current Report on Form 8-K dated February 11, 1994.\n10(a)* 1986 Stock Option Incorporated by Plan, as amended on April reference to Exhibit 24, 1987, May 9, 1990, 10(b) to the Company's March 3, 1993 and April Current Report on Form 27, 1993. 8-K dated July 15, 1993.\n10(b) Form of Indemnity Incorporated by Agreement with Directors reference to Exhibit and Officers of the 10(c) to the Company's Company. Annual Report on Form 10-K for the year ended December 31, 1990.\n10(c)* Retirement Agreement Incorporated by between the Company and reference to Exhibit Richard D. McFarland 10(f) to the Company's dated January 1, 1990. Annual Report on Form 10-K for the year ended December 31, 1989.\n10(d)* Form of Non-Employee Incorporated by Director Retirement reference to Exhibit Compensation Agreement. 10(g) to the Company's Annual Report on Form 10-K for the year ended December 31, 1992.\n10(e)* IFG Executive Deferred Incorporated by Compensation Plan dated reference to Exhibit March 31, 1993. 10(a) to the Company's Current Report on Form 8-K dated July 15, 1993.\n10(f) Trust Agreement for Filed herewith. Executive Deferred Compensation Plan dated February 11, 1994.\n11 Computation of net Filed herewith. earnings per share.\n21 List of subsidiaries. Filed herewith.\n23 Independent Auditors' Filed herewith. consent.\n24 Power of attorney. Filed herewith.\n* Management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 14(c) of this report.\n(b) No reports on Form 8-K were filed during the fourth quarter of 1993.\nREPORT FOR EMPLOYEE STOCK PURCHASE PLAN:\nThe financial statements required by Form 11-K with respect to the Company's Stock Bonus Plan will be filed by amendment hereto within 180 days of such plan's fiscal year end as permitted by Rule 15d-21.\nSIGNATURES\nPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.\nINTER-REGIONAL FINANCIAL GROUP, INC.\nBy Daniel J. Reuss __________________________ Daniel J. Reuss Senior Vice President, Corporate Controller and Treasurer\nDated: March 21, 1994\nPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated:\nSignature Title\nIrving Weiser President, Chief Executive _____________________ Officer (Principal Executive Irving Weiser Officer) and Director\nDaniel J. Reuss Senior Vice President, Controller _____________________ and Treasurer (Principal Daniel J. Reuss Financial and Accounting Officer)\nSusan S. Boren Director _____________________ Susan S. Boren\nF. Gregory Fitz-Gerald Director By Daniel J. Reuss _____________________ _________________ F. Gregory Fitz-Gerald Daniel J. Reuss Pro Se and as Attorney-in-Fact Richard D. McFarland Chairman of the Dated: March 21, 1994 _____________________ Board and Richard D. McFarland Director\nLawrence Perlman Director _____________________ Lawrence Perlman\nC.A. Rundell, Jr. Director _____________________ C.A. Rundell, Jr.\nRobert L. Ryan Director _____________________ Robert L. Ryan\nArthur R. Schulze, Jr. Director _____________________ Arthur R. Schulze, Jr.\nDavid A. Smith Executive Vice President _____________________ and Director David A. Smith\nINTER-REGIONAL FINANCIAL GROUP, INC. AND SUBSIDIARIES\nFINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES As of December 31, 1993 and 1992 and for each of the years in the three-year period ended December 31, 1993\nPage ---- Independent Auditors' Report 18\nConsolidated Financial Statements:\nConsolidated statements of operations 19\nConsolidated balance sheets 20\nConsolidated statements of shareholders' equity 21\nConsolidated statements of cash flows 22\nNotes to consolidated financial statements 23\nFinancial Statement Schedules:\nSchedule III - Condensed financial information of the registrant 37\nSchedule IX - Short-term borrowings 41\n___________\nSchedules not listed above have been omitted because they are either not applicable or the required information has been provided in the consolidated financial statements or notes thereto.\nSCHEDULE IX - SHORT-TERM BORROWINGS\nExhibit 10(f)\nTRUST AGREEMENT IFG EXECUTIVE DEFERRED COMPENSATION PLAN First Effective February 11, 1994\nPage ---- SECTION 1 INTRODUCTION 2\nSECTION 2 ESTABLISHMENT OF TRUST 4\nSECTION 3 PAYMENTS TO PLAN PARTICIPANTS AND THEIR BENEFICIARIES 4\nSECTION 4 PAYMENTS TO COMPANY 5\nSECTION 5 TRUSTEE RESPONSIBILITY REGARDING PAYMENTS TO TRUST BENEFICIARY WHEN COMPANY IS INSOLVENT 5\nSECTION 6 INVESTMENT AUTHORITY 6\nSECTION 7 DISPOSITION OF INCOME 6\nSECTION 8 ACCOUNTING BY TRUSTEE 6\nSECTION 9 RESPONSIBILITY OF TRUSTEE 7\nSECTION 10 COMPENSATION AND EXPENSES OF TRUSTEE 7\nSECTION 11 RESIGNATION AND REMOVAL OF TRUSTEE 7\nSECTION 12 APPOINTMENT OF SUCCESSOR 8\nSECTION 13 AMENDMENT OR TERMINATION 8\nSECTION 14 MISCELLANEOUS 9\nSECTION 15 EFFECTIVE DATE 9\nSIGNATURES 9\nTRUST AGREEMENT IFG EXECUTIVE DEFERRED COMPENSATION PLAN\nTHIS TRUST AGREEMENT, Made and entered into as of February 11, 1994, by and between INTER-REGIONAL FINANCIAL GROUP, INC., a Delaware corporation (hereinafter sometimes referred to as \"IFG\"), and First Trust National Association , a national banking association, as trustee (said trustee and its successor or successors in trust from time to time being hereinafter collectively referred to as the \"Trustee\"):\nWHEREAS, IFG has established a nonqualified deferred compensation plan for the benefit of its eligible employees and eligible employees of affiliated corporations by the adoption of a document known as the \"IFG EXECUTIVE DEFERRED COMPENSATION PLAN\" (the \"Plan\"); and\nWHEREAS, IFG may from time to time hereafter amend, renew and extend such Plan; and\nWHEREAS, the Plan is unfunded and is maintained by IFG primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees for purposes of Title I of the Employee Retirement Income Security Act of 1974; and\nWHEREAS, IFG has determined that it will establish a trust fund which, subject to the claims of creditors of IFG, shall be held to pay such portion of the benefits under the Plans which IFG does not directly pay; and\nWHEREAS, the creation of such a trust fund requires that IFG select a Trustee and enter into a Trust Agreement; and\nWHEREAS, this is the Trust Agreement so contemplated; and\nWHEREAS, the Trustee has agreed to serve as Trustee according to the terms of this Trust Agreement and the officers of IFG are authorized to execute this Trust Agreement on behalf of IFG;\nNOW, THEREFORE, in consideration of the premises, the parties hereto do hereby agree as follows:\nSECTION 1 INTRODUCTION\n1.1. Definitions. When used herein with initial capital letters, the following words have the following meanings:\n1.1.1. Beneficiary - a person designated by a Participant (or automatically by operation of the Plan Statement) to receive any benefit remaining at the death of a Participant under the terms of the Plan Statement.\n1.1.2. Change in Control -\n(1) the public announcement (which, for purposes of this definition), shall include, without limitation, a report filed pursuant to Section 13(d) of the Securities Exchange Act of 1934, as amended (the \"Exchange Act\") that any person, entity or \"group,\" within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act, other than IFG or any of its subsidiaries, or the IFG Stock Bonus Plan or any other employee benefit plan of IFG or any of its subsidiaries, or any entity holding shares in IFG's Common Stock organized, appointed or established for, or pursuant to the terms of, any such plan, has become the beneficial owner (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 35% or more of the combined voting power of IFG's then outstanding voting securities in a transaction or series of transactions;\n(2) the Continuing Directors cease to constitute a majority of IFG's Board of Directors;\n(3) the shareholders of IFG approve (1) any consolidation or merger of IFG in which IFG is not the continuing or surviving corporation or pursuant to which shares of IFG's stock would be converted into cash, securities or other property, other than a merger of IFG in which shareholders immediately prior to the merger have the same proportionate ownership of stock of the surviving corporation immediately after the merger; (2) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all or substantially all of the assets of IFG; or (3) any plan of liquidation or dissolution of IFG; or\n(4) the majority of the Continuing Directors determine in their sole and absolute discretion that there has been a change in control of IFG.\n\"Continuing Director\" shall mean any person who is a member of the Board of Directors of IFG, while such a person is a member of the Board of Directors, who is not an Acquiring Person (as hereinafter defined) or an Affiliate or Associated (as hereinafter defined) of an Acquiring Person, or a representative of an Acquiring Person or of any such Affiliate or Associate, and who (A) was a member of the Board of Directors on the date of this Agreement or (B) subsequently becomes a member of the Board of Directors, if such person's initial nomination for election or initial election to the Board of Directors is recommended or approved by a majority of the Continuing Directors.\nFor purposes of this Section, \"Acquired Person\" shall mean any \"person\" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) who or which, together with all Affiliates and Associates of such person, is the \"beneficial owner\" (as defined in Rule 13d-3 promulgated under the Exchange Act), directly or indirectly, of securities of IFG representing 35% or more of the combined voting power of IFG's then outstanding securities, but shall not include IFG, any subsidiary of IFG or any employee benefit plan of IFG or of any subsidiary of IFG or any entity holding shares of IFG's Common Stock organized, appointed or established for, or pursuant to the terms of, any such plan; and \"Affiliate\" and \"Associate\" shall have the respective meanings ascribed to such terms in Rule 12b-2 promulgated under the Exchange Act.\n1.1.3. Company - Inter-Regional Financial Group, Inc., a Delaware corporation, and any successor thereof that adopts the Plan.\n1.1.4. Compensation Committee - the Compensation and Organization Committee of the Board of Directors of IFG or any successor Committee thereto established by such Board of Directors.\n1.1.5. Fund - the assets held under this Trust Agreement by the Trustee from time to time, including all contributions of the Company and the investments and reinvestments, earnings and profits thereon.\n1.1.6. Insolvent, Insolvency - the condition which exists when Company is: (i) generally unable to pay its debts when they are due, or (ii) subject to a pending proceeding as a debtor under the United States Bankruptcy Code.\n1.1.7. Participant - an employee of the Company who has become and remains a participant in the Plan in accordance with the provisions of the Plan Statement.\n1.1.8. Plan - the unfunded, nonqualified \"IFG Executive Deferred Compensation Plan\" of the Company which is established for the benefit of a select group of management or highly compensated employees eligible to participate therein, as set forth in the Plan Statement and as amended, renewed or extended from time to time.\n1.1.9. Plan Statement - the separate written documents, as adopted by Company which sets forth the terms, conditions and provisions of the Plan, as the same may be amended, renewed or extended from time to time thereafter.\n1.1.10. Trust Agreement - this written document entitled \"TRUST AGREEMENT, IFG EXECUTIVE DEFERRED COMPENSATION PLAN\" entered into by and between Company and the Trustee effective as of February 11, 1994, as the same may be amended from time to time thereafter.\n1.1.11. Trustee - the Trustee originally named hereunder and its successor in trust.\n1.1.12. Valuation Date - each December 31.\n1.2. Rules of Interpretation. Whenever appropriate, words used herein in the singular may be read in the plural, or words used herein in the plural may be read in the singular; the masculine may include the feminine; and the words \"hereof,\" \"herein\" or \"hereunder\" or other similar compounds of the word \"here\" shall mean and refer to this entire Trust Agreement and not to any particular paragraph or section of this Trust Agreement unless the context clearly indicates to the contrary. The titles given to the various sections of this Trust Agreement are inserted for convenience of reference only and are not part of this Trust Agreement, and they shall not be considered in determining the purpose, meaning or intent of any provision hereof. Any reference in this Trust Agreement to a statute or regulation shall be considered also to mean and refer to any subsequent amendment or replacement of that statute or regulation. This instrument has been executed and delivered in the State of Minnesota and has been drawn in conformity to the laws of that State and shall be construed and enforced in accordance with the laws of the State of Minnesota.\nSECTION 2 ESTABLISHMENT OF TRUST\n2.1. Establishment Of Trust. Company hereby deposits with Trustee in trust $2,832,193.00, which shall become the principal of the Trust to be held, administered and disposed of by Trustee as provided in this Trust Agreement. The Company shall make additional deposits of cash or other property from time to time as it may determine in its sole and absolute discretion. Neither Trustee nor any Participant or beneficiary shall have any right to compel any additional deposits.\n2.2. Fund Established. A Fund is hereby established by Company. The Fund shall be held by Trustee in trust and dealt with in accordance with the provisions of this Trust Agreement. This Trust Agreement is intended to create a trust which is a grantor trust within the meaning of section 671 of the Internal Revenue Code, as amended, and shall be construed accordingly. Subject to all other terms and provisions of this Trust Agreement, the Fund shall be held and disposed of:\n2.2.1. For the purpose of paying benefits required to be paid under the Plan Statement to Participants and Beneficiaries, as provided in Section 3; and\n2.2.2. To satisfy claims of creditors of Company in the event Company is determined to be Insolvent; and\n2.2.3. To return assets to Company which both are requested by Company and are determined by the Trustee to be in excess of amounts reasonably believed necessary to satisfy the claims of all Participants and Beneficiaries under the terms of the Plan, as provided in Sections 3 and 4.\n2.3. Valuation. Trustee shall value the Fund as of each Valuation Date, which valuation shall reflect, as nearly as possible, the then fair market value of the assets comprising the Fund (including income accumulations therein).\n2.4. Irrevocability of Trust. The Trust hereby established shall be irrevocable by Company.\nSECTION 3 PAYMENTS TO PLAN PARTICIPANTS AND THEIR BENEFICIARIES\n3.1. Payments to Plan Participants -\n3.1.1. Company shall deliver to Trustee from time to time one or more schedules (the \"Payment Schedule\") that indicate the amounts payable in respect of each Participant (and his or her Beneficiaries), that provides a formula or other instructions acceptable to Trustee for determining the amounts so payable, the form in which such amount is to be paid (as provided for or available under the Plan), and the time of commencement for payment of such amounts. Except as otherwise provided herein, Trustee shall make payments to the Participants and their Beneficiaries in accordance with the Payment Schedule. Trustee shall make provision for the reporting and withholding of any federal, state or local taxes that may be required to be withheld with respect to the payments of benefits pursuant to the terms of the Plan and shall pay amounts withheld to the appropriate taxing authorities or determine that such amounts have been reported, withheld and paid by Company.\n3.1.2. The entitlement of a Participant or his Beneficiaries to benefits under the Plan shall be determined by Company or such party as it shall designate under the Plan, and any claim for such benefits shall be considered and reviewed under the procedures set forth in the Plan.\n3.1.3. Company may make payment of benefits directly to Participants or their Beneficiaries as they become due under the terms of the Plan. Company shall notify Trustee of its decision to make payment of benefits directly prior to the time amounts are payable to Participants or their Beneficiaries. In addition, if the principal of the Trust, and any earnings thereon, are not sufficient to make payments of benefits in accordance with the terms of the Plan, Company shall make the balance of each such payment as it falls due. Trustee shall notify Company where principal and earnings are not sufficient. Trustee shall also notify the Company when and if any assets may be returned to the Company as provided in Section 2.2.3 hereof.\nSECTION 4 PAYMENTS TO COMPANY\nExcept as provided in Section 2.2.3 and Section 3 hereof, Company shall have no right or power to direct Trustee to return to Company or to divert to others any of the Trust assets before all benefits have been paid to all Participants and Beneficiaries pursuant to the terms of the Plan.\nSECTION 5 TRUSTEE RESPONSIBILITY REGARDING PAYMENTS TO TRUST BENEFICIARY WHEN COMPANY IS INSOLVENT\n5.1. Cease Payments. Trustee shall cease payment of benefits to Participants and Beneficiaries if the Company is Insolvent.\n5.2. Claims of Creditors. At all times during the continuance of this Trust, the principal and income of the Trust shall be subject to claims of general creditors of Company under federal and state law as set forth below.\n5.2.1. The Compensation Committee shall have the duty to inform Trustee in writing of Company's Insolvency. If a person claiming to be a creditor of Company alleges in writing to Trustee that Company has become Insolvent, Trustee shall determine whether Company is Insolvent and, pending such determination, Trustee shall discontinue payment of benefits to Participants or Beneficiaries.\n5.2.2. Unless Trustee has actual knowledge of Company's Insolvency, or has received notice from Company or a person claiming to be a creditor alleging that Company is Insolvent, Trustee shall have no duty to inquire whether Company is Insolvent. Trustee may in all events rely on such evidence concerning Company's solvency as may be furnished to Trustee and that provides Trustee with a reasonable basis for making a determination concerning Company's solvency.\n5.2.3. If at any time Trustee has determined that Company is Insolvent, Trustee shall discontinue payments to Participants and Beneficiaries and shall hold the assets of the Trust for the benefit of Company's general creditors. Nothing in this Trust Agreement shall in any way diminish any rights of Participants and Beneficiaries to pursue their rights as general creditors of Company with respect to benefits due under the Plan or otherwise.\n5.2.4. Trustee shall resume the payment of benefits to Participants and Beneficiaries in accordance with Section 3 of this Trust Agreement only after Trustee has determined that Company is not Insolvent (or is no longer Insolvent).\n5.3. Resumption of Payments. Provided that there are sufficient assets, if Trustee discontinues the payment of benefits from the Trust pursuant to Section 5 hereof and subsequently resumes such payments, the first payment following such discontinuance shall include the aggregate amount of all payments due to Participants and Beneficiaries under the terms of the Plan for the period of such discontinuance, less the aggregate amount of payments, if any, made to Participants and Beneficiaries by Company pursuant to the Plan during any such period of discontinuance.\nSECTION 6 INVESTMENT AUTHORITY\nTrustee shall invest any funds transferred to it by Company in such manner as may reasonably be requested by Company. In the event Company fails to give such instructions to Trustee or Trustee determines such instructions are grossly unreasonable, Trustee shall then have full authority to invest any funds transferred to it by Company as Trustee sees fit, consistent with the terms and conditions of this Trust Agreement and the Plan. Trustee may invest in securities (including stock or rights to acquire stock) or obligations issued by Company. All rights associated with assets of the Trust, including voting rights with respect to any equity securities held by the Trust (including shares of IFG's Common Stock), shall be exercised by Trustee or the person designated by Trustee, and shall in no event be exercisable by or rest with Participants.\nCompany shall have the right at any time, and from time to time in its sole discretion, to substitute assets, acceptable to Trustee, of equal fair market value for any asset held by the Trust. This right is exercisable by Company in a nonfiduciary capacity without the approval or consent of any person in a fiduciary capacity.\nSECTION 7 DISPOSITION OF INCOME\nDuring the term of this Trust, all income received by the Trust, net of expenses and taxes, if any, shall be accumulated and reinvested in accordance with the terms hereof.\nSECTION 8 ACCOUNTING BY TRUSTEE\nTrustee shall keep accurate and detailed records of all investments, receipts, disbursements, and all other transactions required to be made, including such specific records as shall be agreed upon in writing between Company and Trustee. Within sixty (60) days following the close of each calendar year and within sixty (60) days after the removal or resignation of Trustee, Trustee shall deliver to Company a written account of its administration of the Trust during such year or during the period from the close of the last preceding year to the date of such removal or resignation, setting forth all investments, receipts, disbursements and other transactions effected by it, including a description of all securities and investments purchased and sold with the cost or net proceeds of such purchases or sales (accrued interest paid or receivable being shown separately), and showing all cash, securities and other property held in the Trust at the end of such year or as of the date of such removal or resignation, as the case may be.\nSECTION 9 RESPONSIBILITY OF TRUSTEE\n9.1 General Duty of Care. Trustee shall act with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent person acting in like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims, provided, however, that Trustee shall incur no liability to any person for any action taken pursuant to a direction, request or approval given by Company which is contemplated by, and in conformity, the terms of the Plan or this Trust and is given in writing by Company. In the event of a dispute between Company and any person, Trustee may apply to a court of competent jurisdiction to resolve the dispute.\n9.2. Litigation Expenses. If Trustee undertakes or defends any litigation arising in connection with this Trust, Company agrees to indemnify Trustee against Trustee's costs, expenses and liabilities (including, without limitation, attorneys' fees and expenses) relating thereto and to be primarily liable for such payments. If Company does not pay such costs, expenses and liabilities in a reasonably timely manner, Trustee may obtain payment from the Trust.\n9.3 Use of Counsel. Trustee may consult with legal counsel (who may also be counsel for Company generally) with respect to any of its duties or obligations hereunder.\n9.4 Use of Agents. Trustee may hire agents, accountants, actuaries, investment advisors, financial consultants or other professionals to assist it in performing any of its duties or obligations hereunder.\n9.5. General Grant of Authority. Trustee shall have, without exclusion, all powers conferred on trustees by applicable law, unless expressly provided otherwise herein.\n9.6. No Business Obligation. Notwithstanding any powers granted to Trustee pursuant to this Trust Agreement or to applicable law, Trustee shall not have any power that could give this Trust the objective of carrying on a business and dividing the gains therefrom, within the meaning of Section 301.7701-2 of the Procedure and Administrative Regulations promulgated pursuant to the Internal Revenue Code of 1986, as amended.\nSECTION 10 COMPENSATION AND EXPENSES OF TRUSTEE\nCompany shall pay all administrative and Trustee's fees and expenses. If not so paid, the fees and expenses shall be paid from the Trust.\nSECTION 11 RESIGNATION AND REMOVAL OF TRUSTEE\n11.1. Resignation. Trustee may resign at any time by written notice to Company, which shall be effective thirty (30) days after receipt of such notice unless Company and Trustee agree otherwise.\n11.2. Removal. Trustee may be removed by Company on thirty (30) days notice or upon shorter notice accepted by Trustee\n11.3. Change in Control. Upon a Change in Control, as defined herein, Trustee may not be removed by Company for ninety (90) days. If for any reason Trustee resigns or is removed within ninety (90) days of a Change in Control, Trustee shall select a successor Trustee in accordance with the provisions of Section 12.2 hereof prior to the effective date of Trustee's resignation or removal.\n11.4. Transfer of Assets. Upon resignation or removal of Trustee and appointment of a successor Trustee, all assets shall subsequently be transferred to the successor Trustee. The transfer shall be completed within thirty (30) days after receipt of notice of resignation, removal or transfer, unless Company extends the time limit.\n11.5. Court Appointment. If Trustee resigns or is removed, a successor shall be appointed, in accordance with the terms hereof. If no such appointment has been made, Trustee may apply to a court of competent jurisdiction for appointment of a successor or for instructions. All expenses of Trustee in connection with the proceeding shall be allowed as administrative expenses of the Trust.\nSECTION 12 APPOINTMENT OF SUCCESSOR\n12.1. New Trustee. If Trustee resigns or is removed in accordance with Section 11 hereof,the Compensation Committee may appoint any third party, such as a bank trust department or other party that may be granted corporate trustee powers under Minnesota law, as a successor to replace Trustee upon resignation or removal. The appointment shall be effective when accepted in writing by the new Trustee, who shall have all of the rights and powers of the former Trustee, including ownership rights in the Trust assets. The former Trustee shall execute any instrument necessary or reasonably requested by Company or the successor Trustee to evidence the transfer.\n12.2. Change in Control. Upon a Change in Control, if Trustee resigns or is removed and selects a successor Trustee pursuant to Section 11.3, Trustee may appoint any third party such as a bank trust department or other party that may be granted corporate trustee powers under Minnesota law. The appointment of a successor Trustee shall be effective when accepted in writing by the new Trustee. The new Trustee shall have all the rights and powers of the former Trustee, including ownership rights in Trust assets. The former Trustee shall execute any instrument necessary or reasonably requested by the successor Trustee to evidence the transfer.\n12.3. Successor Trustee Not Liable. The successor Trustee need not examine the records and acts of any prior Trustee and may retain or dispose of existing Trust assets, subject to the terms hereof. The successor Trustee shall not be responsible for and Company shall indemnify and defend the successor Trustee from any claim or liability resulting from any action or inaction of any prior Trustee or from any other past event, or any condition existing at the time it becomes successor Trustee.\nSECTION 13 AMENDMENT OR TERMINATION\n13.1. Amendment. This Trust Agreement may be amended by a written instrument executed by Trustee and Company. Notwithstanding the foregoing, no such amendment shall conflict with the terms of the Plan or shall make the Trust revocable. Notwithstanding the foregoing, after a Change in Control, and prior to the time that all liabilities to all Participants and all Beneficiaries under the Plan have been satisfied in full, no amendment to this Trust Agreement shall be effective without the affirmative, prior written concurrence of all Participants and all Beneficiaries of deceased Participants (determined as of the time any such amendment is to be adopted).\n13.2. Termination. Subject to Company's powers set forth in Sections 13.1 hereof, which may not be exercised to commence an early termination of the Trust, the Trust shall not terminate until the date on which all Participants and Beneficiaries are no longer entitled to benefits pursuant to the terms of the Plan. Notwithstanding the foregoing, Company may terminate the Trust prior to the satisfaction of all such benefits if Company obtains the prior written concurrence of Participants and Beneficiaries of deceased Participants (determined as of the time of such termination) whose accounts are credited with seventy-five percent (75%) of all of the assets of the Trust. All assets remaining a part of the Trust at its termination shall be returned to Company.\nSECTION 14 MISCELLANEOUS\n14.1. Separability. Any provision of this Trust Agreement prohibited by law shall be ineffective to the extent of any such prohibition, without invalidating the remaining provisions hereof.\n14.2. Spendthrift Provision. Benefits payable to Participants and Beneficiaries under this Trust Agreement may not be anticipated, assigned (either at law or in equity), alienated, pledged, encumbered or subjected to attachment, garnishment, levy, execution or other legal or equitable process.\nSECTION 15 EFFECTIVE DATE\nThe effective date of this Trust Agreement shall be February 11, 1994.\nIN WITNESS WHEREOF, each of the parties hereto has caused this Trust Agreement to be executed as of the day and year first above written.\nINTER-REGIONAL FINANCIAL GROUP, INC.\nBy: Connie L. Bush By: Daniel J. Reuss Its: Vice President Its: Senior Vice President\nFIRST TRUST NATIONAL ASSOCIATION\nAnd: Beth A. Mega And: Dale Schumachar Its: Vice President Its: Vice President\nEXHIBIT 11\nEXHIBIT 22\nEXHIBIT 23\nINDEPENDENT AUDITORS' CONSENT\nBoard of Directors Inter-Regional Financial Group, Inc.:\nWe consent to the incorporation by reference in Registration Statement No. 33-59426, Registration Statement No. 33-39261, Registration Statement No. 33-39182, Registration Statement No. 33-25979, post-effective amendment No. 1 to Registration Statement No. 33-13068, post-effective amendment No. 2 to Registration Statement No. 33-10243, post-effective amendment No. 2 to Registration Statement No. 33-10242, post-effective amendment No. 4 to Registration Statement No. 2-90634, post- effective amendment No. 8 to Registration Statement No. 2-61514, post-effective amendment No. 11 to Registration Statement No. 2- 57759, post-effective amendment No. 15 to Registration Statement No. 2-53289 and post-effective amendment No. 16 to Registration Statement No. 2-51150, on Form S-8 of Inter-Regional Financial Group, Inc., and subsidiaries of our report dated February 1, 1994, relating to the consolidated balance sheets of Inter- Regional Financial Group, Inc. and subsidiaries as of December 31, 1993 and 1992, and the consolidated statements of operations, shareholders' equity and cash flows and related financial statement schedules for each of the years in the three-year period ended December 31, 1993, which report appears in the December 31, 1993 Annual Report on Form 10-K of Inter-Regional Financial Group, Inc.\nKPMG Peat Marwick\nMinneapolis, Minnesota March 21, 1994\nExhibit 24\nPOWER OF ATTORNEY\nThe undersigned hereby constitute and appoint IRVING WEISER and DANIEL J. REUSS and each of them his true and lawful attorneys- in-fact and agents, with full powers of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign the Annual Report on Form 10-K of Inter-Regional Financial Group, Inc. for the fiscal year ending December 31, 1993 and all amendments to such Annual Report on Form 10-K, and to file the same with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, each acting alone, full power and authority to do and perform to all intents and purposes as he might or could do in person, hereby ratifying all that said attorneys-in-fact and agents, each acting alone, or his substitutes, may lawfully do or cause to be done by virtue thereof.\nSIGNATURE DATE --------- ----\nSusan S. Boren - -------------------------------- March 6, 1994 Susan S. Boren\nF. Gregory Fitz-Gerald - -------------------------------- March 1, 1994 F. Gregory Fitz-Gerald\nRichard D. McFarland - -------------------------------- March 7, 1994 Richard D. McFarland\nLawrence Perlman - -------------------------------- March 1, 1994 Lawrence Perlman\nDaniel J. Reuss - -------------------------------- March 1, 1994 Daniel J. Reuss\nC.A. Rundell, Jr. - -------------------------------- March 5, 1994 C.A. Rundell, Jr.\nRobert L. Ryan - -------------------------------- March 7, 1994 Robert L. Ryan\nArthur R. Schulze, Jr. - -------------------------------- March 1, 1994 Arthur R. Schulze, Jr.\nDavid A. Smith - -------------------------------- March 14, 1994 David A. Smith\nIrving Weiser - -------------------------------- March 7, 1994 Irving Weiser","section_15":""}
{"filename":"44570_1993.txt","cik":"44570","year":"1993","section_1":"Item 1. Business\nBUSINESS OF ENTERGY\nGeneral\nEntergy Corporation was originally incorporated under the laws of the State of Florida on May 27, 1949. On December 31, 1993, in connection with the Merger (see \"Entergy Corporation-GSU Merger,\" below), Entergy Corporation merged with and into Entergy-GSU Holdings, Inc., a Delaware corporation (Holdings), and Holdings was renamed Entergy Corporation. Entergy Corporation is a holding company registered under the Holding Company Act and does not own or operate any physical properties. Entergy Corporation owns all of the outstanding common stock of five retail operating electric utility subsidiaries, AP&L, GSU, LP&L, MP&L, and NOPSI. AP&L was incorporated under the laws of the State of Arkansas in 1926; GSU was incorporated under the laws of the State of Texas in 1925; LP&L and NOPSI were incorporated under the laws of the State of Louisiana in 1974 and 1926, respectively; and MP&L was incorporated under the laws of the State of Mississippi in 1963. As of December 31, 1993, these operating companies provided electric service to approximately 2.3 million customers in the States of Arkansas, Louisiana, Mississippi, Missouri, and Texas. In addition, GSU furnished gas service in the Baton Rouge, Louisiana area, and NOPSI furnished gas service in the City of New Orleans. GSU's steam products department produces and sells, on an unregulated basis, process steam and by- product electricity supplied from its steam electric extraction plant to a large industrial customer. The business of the System is subject to seasonal fluctuations with the peak period occurring during the third quarter. During 1993, the System's (excluding GSU) electricity sales as a percentage of total System energy sales were: residential - 28.1%; commercial - 19.9%; and industrial - 36.9%. Electric revenues from these sectors as a percentage of total System electric revenues were: 36.3% - residential; 24.4% - commercial; and 27.3% - industrial. Sales to governmental and municipal sectors and to nonaffiliated utilities accounted for the balance of energy sales. During 1993, GSU's electric department sales as a percentage of total GSU energy sales were: residential - 25.5%; commercial - 20.3%; and industrial - 50.8%. Electric revenues from these sectors as a percentage of total GSU electric revenues were: 33.5% - residential; 23.8% - commercial; and 37.2% - industrial. Sales to governmental and municipal sectors and to nonaffiliated utilities accounted for the balance of GSU's energy sales. The System's major industrial customers are in the chemical processing, petroleum refining, paper products, and food products industries.\nEntergy Corporation also owns all of the outstanding common stock of System Energy, Entergy Services, Entergy Operations, Entergy Power, and Entergy Enterprises. System Energy is a nuclear generating company that was incorporated under the laws of the State of Arkansas in 1974. System Energy sells the capacity and energy at wholesale from its 90% interest in Grand Gulf 1 to its only customers, AP&L, LP&L, MP&L, and NOPSI (see \"Capital Requirements and Future Financing - - Certain System Financial and Support Agreements - Unit Power Sales Agreement,\" below). System Energy has approximately a 78.5% ownership interest and an 11.5% leasehold interest in Grand Gulf 1. Entergy Services provides general executive and advisory services, and accounting, engineering, and other technical services to certain of the System companies, generally at cost. Entergy Operations is a nuclear management company that operates ANO, River Bend, Waterford 3, and Grand Gulf 1, subject to the owner oversight of AP&L, GSU, LP&L, and System Energy, respectively. Entergy Power, an independent power producer, owns 809 MW of generating capacity and markets its capacity and energy in the wholesale market outside Arkansas and Missouri and in markets not otherwise presently served by the System. (For further information on regulatory proceedings related to Entergy Power, see \"Rate Matters and Regulation - Rate Matters - Wholesale Rate Matters - Entergy Power,\" below). Entergy Enterprises is a nonutility company that invests in businesses whose products and activities are of benefit to the System's utility business (see \"Corporate Development,\" below). Entergy Enterprises also markets technical expertise developed by the System companies when it is not required in the System's operations. Entergy Enterprises has received SEC approval to provide services to certain nonutility companies in the System. In 1992 and 1993, several new Entergy Corporation subsidiaries were formed to participate in utility projects located outside the System's retail service territory, both domestically and in foreign countries (see \"Corporate Development,\" below).\nAP&L, LP&L, MP&L, and NOPSI own, in ownership percentages of 35%, 33%, 19%, and 13%, respectively, all of the common stock of System Fuels, a non-profit subsidiary, that implements and\/or maintains certain programs to procure, deliver, and store fuel supplies for the System.\nGSU has four wholly-owned subsidiaries: Varibus Corporation, GSG&T, Inc., Southern Gulf Railway Company, and Prudential Oil & Gas, Inc. Varibus Corporation operates intrastate gas pipelines in Louisiana, which are used primarily to transport fuel to two of GSU's generating stations, and has marketed computer-aided engineering and drafting technologies and related computer equipment and services. GSG&T, Inc. owns the Lewis Creek Station, a 532 MW (as of December 31, 1993) gas-fired generating plant, which is leased and operated by GSU. Southern Gulf Railway Company will own and operate several miles of rail track being constructed in Louisiana for the purpose of transporting coal for use as a boiler fuel at Nelson Unit 6. Prudential Oil & Gas, Inc., which was formerly in the business of exploring, developing, and operating oil and gas properties in Texas and Louisiana, is presently inactive.\nEntergy Corporation-GSU Merger\nOn December 31, 1993, Entergy Corporation consummated its acquisition of GSU. Entergy Corporation merged with and into Holdings, and Holdings was renamed Entergy Corporation. GSU became a wholly-owned subsidiary of Entergy Corporation and continues to operate as a public utility under the regulation of the PUCT and the LPSC. As consideration to GSU's shareholders, Entergy Corporation paid $250 million in cash and issued 56,667,726 shares of its common stock at a price of $35.8417 per share, in exchange for outstanding shares of GSU common stock. In addition, $33.5 million of transaction costs were capitalized in connection with the Merger. See \"Rate Matters and Regulation - Regulation - Other Regulation and Litigation,\" for, information on requests for rehearing and appeals of certain regulatory approvals of the Merger.\nThe information contained in this Form 10-K is filed on behalf of all the registrants of Entergy, including GSU. Unless otherwise noted, consolidated financial and statistical information contained in this report that is stated as of December 31, 1993 (such as assets, liabilities, and property), includes the associated GSU amounts, and consolidated financial and statistical information for periods ending before January 1, 1994 (such as revenues, sales, and expenses), does not include GSU amounts; those amounts are presented separately for GSU herein.\nCertain Industry and System Challenges\nThe System's business is affected by various challenges and issues including those that confront the electric utility industry in general. These issues and challenges include:\n- an increasingly competitive environment (see \"Competition,\" below);\n- compliance with regulatory requirements with respect to nuclear operations (see \"Rate Matters and Regulation - Regulation - Regulation of the Nuclear Power Industry,\" below) and environmental matters (see \"Rate Matters and Regulation - Regulation - Environmental Regulation,\" below);\n- adaptation to structural changes in the electric utility industry, including increased emphasis on least cost planning and changes in the regulation of generation and transmission of electricity (see \"Competition - General\" and \"Competition - Least Cost Planning,\" below);\n- continued cost management (particularly in the area of operation and maintenance costs at nuclear units) to improve financial results and to delay or to minimize the need for rate increase requests in light of current rate freezes and rate caps at the System operating companies (see \"Rate Matters and Regulation - Rate Matters - Retail Rate Matters,\" below);\n- integrating GSU into the System's operations and achieving cost savings (see \"Entergy Corporation-GSU Merger,\" above);\n- achieving enhanced earnings in light of lower returns and slow growth in the domestic utility business (see \"Corporate Development,\" below); and\n- resolving GSU's major contingencies, including potential write- offs and refunds related to River Bend (see \"Rate Matters and Regulation - Rate Matters - Retail Rate Matters - GSU,\" below) and litigation with Cajun relating to its ownership interest in River Bend (see \"Rate Matters and Regulation - Regulation - Other Regulation and Litigation - GSU,\" below).\nCorporate Development\nEntergy continues to consider new opportunities to expand its regulated electric utility business, as well as to expand into utility and utility-related businesses that are not regulated by state and local regulatory authorities (nonregulated businesses). Investments in nonregulated businesses are likely to draw upon the System's skills in power generation and customer service as well as its strengths in the fuels area. Entergy Corporation's investment strategy with respect to nonregulated businesses is to invest in nonregulated business opportunities wherein Entergy Corporation has the potential to earn a greater rate of return compared to its regulated utility operations. Entergy Corporation's nonregulated businesses fall into two broad categories: overseas power development and new electro- technologies. Entergy Corporation has made investments in Argentina's electric energy infrastructure, as described below, and is pursuing additional projects in Central America, South America, South Africa, and Asia. Entergy Corporation will also open offices in Buenos Aires, Argentina and Hong Kong in 1994. In addition, Entergy Corporation is seeking to provide telecommunications services based upon its experience with interactive communications systems that allow customers to control energy usage. Entergy Corporation expects to invest approximately $150 million per year in nonregulated businesses.\nCurrent investments in nonregulated businesses include the following:\n(1) Entergy Corporation's subsidiary, Entergy Power Development Corporation (an EWG under the provisions of the Energy Act), through its subsidiary (which is also an EWG) Entergy Richmond Power Corporation, owns a 50% interest in an independent power plant in Richmond, Virginia. The power plant is jointly-owned and operated by the Enron Power Corporation, a developer of independent power projects. The plant owners have a 25-year contract to sell electricity to Virginia Electric & Power Company. Entergy Corporation's investment in the project totals approximately $12.5 million.\n(2) Entergy Enterprises has a 9.95% equity interest in First Pacific Networks, Inc. (FPN), a communications company, and a license from FPN in connection with utility applications, being jointly developed by Entergy Enterprises and FPN, for FPN's patented communications technology. Entergy Enterprises' investment in FPN is approximately $20.1 million, of which $9.7 million is equity investment.\n(3) Entergy Enterprises' subsidiary, Entergy Systems and Service, Inc. (Entergy SASI), holds a 9.95% equity interest in Systems and Service International, Inc. (SASI), a manufacturer of efficient lighting products. This subsidiary also made a loan to SASI, acquired the business and assets of SASI's distribution subsidiary, and entered into an agreement to distribute SASI's products. Entergy Enterprises' initial investment in this business was approximately $11 million (of which $2.3 million is invested in SASI common stock). Entergy Corporation has provided to Entergy SASI $6.0 million in loans, as of December 31, 1993, to fund Entergy SASI's installment sale agreements with its customers.\n(4) Entergy Corporation's subsidiary, Entergy, S.A., participated in a consortium with other nonaffiliated companies that acquired a 60% interest in Argentina's Costanera steam electric generating facility consisting of seven natural gas- and oil-fired generating units, with a total installed capacity of 1,260 MW. Entergy Corporation's initial investment to acquire its 10% interest in the consortium was approximately $11 million and its maximum financial obligation currently authorized by the SEC in connection with this investment is $22.5 million.\n(5) In January 1993, Entergy Corporation, through a new subsidiary, Entergy Argentina, S.A., participated in a consortium with other nonaffiliated companies that acquired a 51% interest in a foreign electric distribution company providing service to Buenos Aires, Argentina. Entergy Corporation's initial investment to acquire its 10% interest in the consortium was approximately $58 million and its maximum financial obligation currently authorized by the SEC in connection with this investment is $77.5 million.\n(6) In July 1993, Entergy Corporation, through a new subsidiary, Entergy Transener, S.A., participated in a consortium with other nonaffiliated companies that acquired a 65% interest in a foreign transmission system providing service in the country of Argentina. Entergy Corporation's initial investment to acquire its 15% interest in the consortium was $18.5 million.\nIn the near term, these investments are likely to have a minimal effect on earnings; but the possibility exists that they could contribute to future earnings growth. However, due to the absence of an allowed rate of return, these investments involve a higher degree of risk.\nInternational operations are subject to certain risks that are inherent in conducting business abroad, including possible nationalization or expropriation, price and exchange controls, limitations on foreign participation in local governmental enterprises, and other restrictive actions. Changes in the relative value of currencies take place from time to time and their effects may be favorable or unfavorable on results of operations. In addition, there are exchange control restrictions in certain countries relating to repatriation of earnings.\nSelected Data\nSelected customer and sales data for 1993 are summarized in the following tables:\n1993 - Selected Customer Data\nCustomers as of December 31, 1993 ------------------ Area Served Electric Gas ----------- -------- --- AP&L Portions of State of Arkansas 590,862 - GSU Portions of the States of Texas 593,975 85,040 and Louisiana LP&L Portions of State of Louisiana 599,991 - MP&L Portions of State of Mississippi 361,692 - NOPSI City of New Orleans, except Algiers, is provided electric service by LP&L 190,613 154,251 --------- ------- System 2,337,133 239,291 ========= =======\nNOPSI sold 17,437,292 MCF of natural gas to retail customers in 1993. Revenues from natural gas operations for each of the three years in the period ended December 31, 1993, were material for NOPSI, but not material for the System (see \"Industry Segments,\" below, for a description of NOPSI's business segments).\nGSU sold 6,786,794 MCF of natural gas to retail customers in 1993. Revenues from natural gas operations for each of the three years in the period ended December 31, 1993, were not material for GSU.\nSee \"Entergy Corporation and Subsidiaries Selected Financial Data - - Five-Year Comparison,\" \"AP&L Selected Financial Data - Five-Year Comparison,\" \"GSU Selected Financial Data - Five-Year Comparison,\" \"LP&L Selected Financial Data - Five-Year Comparison,\" \"MP&L Selected Financial Data - Five-Year Comparison,\" \"NOPSI Selected Financial Data - - Five-Year Comparison,\" and \"System Energy Selected Financial Data - Five-Year Comparison,\" (which follow each company's notes to financial statements herein) incorporated herein by reference, for further information with respect to operating statistics of the System and of AP&L, GSU, LP&L, MP&L, NOPSI, and System Energy, respectively.\nEmployees\nAs of December 31, 1993, Entergy had 16,679 employees as follows:\nFull-time: Entergy Corporation 6 AP&L 2,557 GSU (1) 4,765 LP&L 1,727 MP&L 1,236 NOPSI 716 System Energy - Entergy Operations 3,508 Entergy Services (2) 1,986 Other Subsidiaries 24 ------ Total Full-time 16,525 Part-time 154 ------ Total Entergy System 16,679 ====== __________________\n(1) As of December 31, 1993, GSU had not been functionally aligned into Entergy. In December 1993, GSU recorded $17 million for an announced early retirement program in connection with the Merger. Of the 503 employees eligible, 369 employees elected to participate in the program.\n(2) As a result of System realignment of operations along functional lines, certain employees of AP&L, LP&L, MP&L, and NOPSI transferred to Entergy Services during 1993.\nCompetition\nGeneral. Entergy and the electric utility industry are experiencing increased competitive pressures both in the retail and wholesale markets. The economic, social, and political forces behind these competitive pressures are numerous and complex. They include legislative and regulatory changes, technological advances, consumer demands, greater availability of natural gas, environmental needs, and others. Entergy looks at these competitive pressures both as opportunities to compete for new customers and as risks for loss of customers.\nOn October 24, 1992, Congress passed the Energy Act. The Energy Act addresses a wide range of energy issues and alters the way Entergy and the rest of the electric utility industry will operate in the future. The Energy Act creates exemptions from regulation under the Holding Company Act and creates a class of EWG's consisting of utility affiliates and nonutilities that are owners and operators of facilities for the generation and transmission of power for sales at wholesale. These exemptions offer an incentive for Entergy to participate in the development of wholesale power generation. In addition, the Holding Company Act has been amended to allow utilities to compete on a global scale with foreign entities to own and operate generation, transmission, and distribution facilities. The Energy Act also gives FERC the authority to order investor-owned utilities, including the System operating companies, to transmit power and energy to or for wholesale purchasers and sellers. The law creates the potential for electric utilities and other power producers to gain increased access to the transmission systems of other entities to facilitate wholesale sales. FERC may also require electric utilities to increase their transmission capacity to provide these services. The impact of this provision on the System operating companies should be lessened by their joint filing of open access transmission service tariffs with FERC in 1991 (see \"Rate Matters and Regulation - Rate Matters - Wholesale Rate Matters,\" below). The Energy Act also amends PURPA by requiring states to consider (1) new regulatory standards that would require electric utilities to undertake integrated resource planning, and (2) allowing energy efficiency programs to be at least as profitable as new energy supply options. Entergy is unable to predict the ultimate impact the Energy Act will have on its operations.\nWholesale Competition. Entergy has, like other utility systems, generating capacity (most of which is owned by Entergy Power) and energy available for a period of time for sale to other utility systems. The System is in competition with neighboring systems, as well as EWG's, to sell such capacity and energy. Given this competition, the ability of the System to sell this capacity and energy is limited. However, in 1993, the System sold 8,291 million KWH of energy (compared to 7,979 million KWH in 1992) to nonaffiliated utilities. The System also sold 1,234 MW of long-term capacity (compared to 1,048 MW in 1992) to nonaffiliated utilities outside of the System's service area. These capacity sales represent 8% of the System's net capability (excluding GSU) at year-end 1993. Under AP&L's and LP&L's Grand Gulf 1 rate orders, and under GSU's River Bend rate order in Louisiana, a portion of the capacity of Grand Gulf 1 and River Bend represents capacity that is available for sale, subject to regulatory approval, to nonaffiliated parties. In some cases, profits from such sales must be shared between ratepayers and shareholders.\nAs discussed in \"Rate Matters and Regulation - Rate Matters - Wholesale Rate Matters - Open Access Transmission,\" below, Entergy Power and the System operating companies will be permitted by FERC to make wholesale capacity sales in bulk power markets at rates based primarily upon negotiation and market conditions rather than cost of service. In order to receive authorization to make such sales, AP&L, LP&L, MP&L, and NOPSI also filed with FERC open access transmission service tariffs. FERC has approved this filing, subject to certain modifications. Revisions to the tariffs were filed in December 1993 to recognize GSU's inclusion in the Entergy System. When the modified tariffs are made effective, Entergy Power and the System operating companies may engage in sales at market prices. It is anticipated that these tariffs will enable any electric utility (as defined in such tariffs) to use Entergy 's integrated transmission system for the transmission of capacity and energy produced and sold by such electric utility or by third parties. Other similar open access transmission tariffs have also been filed with FERC for several large utility companies or systems and more open access transmission tariffs are anticipated. Concurrently, capacity resources are being developed and used to make wholesale sales from a range of non-traditional sources, including nonutility generators as well as cogenerators and small power producers qualifying under PURPA.\nThese developments simultaneously produce increased marketing opportunities for utility systems such as Entergy and expose the System to loss of load or reduced sales revenues due to displacement of System sales by alternative suppliers with access to the System's primary areas of service. Entergy Power, which owns 809 MW of capacity, was formed to compete with other utilities and independent power producers in the bulk power market. As of December 31, 1993, Entergy Power has accumulated total losses from operations of $52.5 million. Entergy Power has entered into several long-term contracts for the sale of capacity and associated energy from its resources and has also made short-term capacity and energy sales. Entergy Power continues to actively market its capacity and energy in the bulk power market. (See \"Corporate Development,\" above, for information with respect to a wholly-owned subsidiary of Entergy, Entergy Power Development Corporation, organized as an EWG to compete in the wholesale power market.)\nRetail Competition. Scheduled increases in the price of power sold by the System pursuant to the operation of phase-in plans (see \"Rate Matters and Regulation - Rate matters - Retail Rate Matters,\" below) will affect the competitiveness of certain classes of industrial customers whose costs of production are energy-sensitive. Entergy is constantly working with these customers to address their concerns. It is the practice of the System operating companies to negotiate the renewal of contracts with large industrial customers prior to their expiration. In certain cases (particularly for GSU), contracts or special tariffs that use incentive pricing below total cost have been negotiated with industrial customers to keep these customers on the System. These contracts and tariffs have generally resulted in increased KWH sales at lower margins over incremental cost. While the System operating companies anticipate they will be successful in renegotiating such contracts, they cannot assure that they will be successful or that future revenues will not be lost to other forms of generation. To date, through these efforts, Entergy has been largely successful in retaining its industrial load. This competitive challenge could increase.\nCogeneration is generally defined as the combined production of electricity and steam. Cogenerated power may be either sold by its producer to the local utility at its avoided cost under PURPA, or utilized by the cogenerator to displace purchases from the utility. To the extent that cogeneration is used by industrial customers to meet their own power requirements, the System may suffer loss of industrial load. Cogenerated power delivered to the System would be purchased at avoided cost, which for a number of years is expected to be equivalent to avoided energy cost, and as such, the cost of these purchases would not impact earnings. To date, only a few cogeneration facilities have been installed in areas served by the System, excluding GSU. The primary purpose of these facilities is to displace power that was purchased from the System. The economic advantage to the customer is generally due to the customer having waste products that can be used as fuel. Presently, the loss of load to cogeneration and the amount of cogenerated power delivered under PURPA to the System (excluding GSU) is not significant. The System is prepared to participate (subject to regulatory approval) in various phases of the design, construction, procurement, and ownership of cogeneration facilities. The System has entered into several cogeneration deferral agreements with certain of its retail customers, which give the System the right of first refusal to participate in any of such customers' cogeneration activities. Such participation could occur in the event there are individual customers whose long-term interests, along with Entergy's, can best be served by installing cogeneration facilities. No such participation has occurred to date, except by GSU.\nExisting qualifying facilities in the GSU service territory are estimated to total approximately 2,400 MW's or over 10% of Entergy's total owned and leased generating capability as of December 31, 1993. GSU currently believes that no significant load will be lost to cogeneration projects during the next several years; however, GSU is currently negotiating a contract with a large industrial customer, which is scheduled to expire in 1996. If the contract is not renewed, GSU would lose approximately $40 million in base revenues.\nAlthough GSU has competed in the past for various retail and wholesale customers, the System (excluding GSU) generally is not in direct competition with privately-owned or municipally-owned electric utilities for retail sales. However, a few municipalities distribute electricity within their corporate limits and some of these generate all or a portion of their requirements. A number of electric cooperative associations or corporations serve a substantial number of retail customers in or adjacent to areas served by the System . Sales of energy by the System to privately- or municipally-owned utilities amounted to approximately 4.6% of total System energy sales in 1993 (excluding GSU).\nLegislatures and regulatory commissions in several states have considered, or are considering, retail wheeling, which is the transmission by an electric utility of energy produced by another entity over the utility's transmission and distribution system to a retail customer in the electric utility's service territory. Retail wheeling would permit retail customers to elect to purchase electric capacity and\/or energy from the electric utility in whose service area they are located or from any other electric utility or independent power producer. Retail wheeling is not currently required within the Entergy System service area. See \"Rate Matters and Regulation - Regulation - Other Regulation and Litigation,\" below for information on proceedings brought by Cajun seeking transmission access to certain of GSU's industrial customers.\nLeast Cost Planning. The System continues to pursue least cost planning, also known as integrated resource planning, in order to compete more effectively in both retail and wholesale markets. Least cost planning is the development of strategies to add resources to meet future electricity demands reliably and at the lowest possible cost. The least cost planning process includes the study of electric supply- and demand-side options. The resultant plan uses demand-side options, such as changing customer consumption patterns, to limit electricity usage during times of peak demand, thus delaying the need for new capacity resources. Least cost planning offers the potential for the System to minimize customer costs, while providing an opportunity to earn a return.\nOn December 1, 1992, AP&L, LP&L, MP&L, and NOPSI each filed a Least Cost Plan with its respective regulator, and on July 1, 1993, each company filed a near-term revision to such plan. Each Least Cost Plan details the resources that the System intends to use to provide reasonably priced, reliable electric service to its customers over the next 20 years. Such plan includes 925 MW of DSM resources, such as programs for efficient air conditioning and heating, high efficiency lighting, and CCLM. CCLM is the subject of recent Entergy proposals (filed, or to be filed, by AP&L, LP&L, MP&L, and NOPSI with their respective regulators) requesting the CCLM pilot be withdrawn from consideration in the existing Least Cost Plan dockets on the basis of a new proposal by Entergy to undertake the initial pilot development of CCLM at Entergy stockholder expense. To date, the Council and the LPSC are the only regulators that have addressed the proposal. The System expects to spend a total of approximately $800 million for DSM resources over the next 20 years. Such plan also includes significant resource additions, but does not contemplate construction of any generating facilities at new sites. All incremental supply-side resources will come from either delayed retirements or repowering of existing generating units. The System estimates that, over the next 20 years, least cost planning, if implemented in accordance with the terms of each filed Least Cost Plan, will reduce revenue requirements by approximately $2.3 billion ($600 million on a net present value basis), thereby avoiding the need for related rate increase requests. Each Least Cost Plan includes specific actions that the System will undertake pursuant to regulatory approval, including the recovery of costs associated with DSM (for further information, see \"Rate Matters and Regulation - Rate Matters - Retail Rate Matters,\" below).\nCAPITAL REQUIREMENTS AND FUTURE FINANCING\nConstruction expenditures for the System are estimated to aggregate $586 million, $560 million, and $550 million for the years 1994, 1995, and 1996, respectively. No significant costs are expected in connection with the System's generating facilities. Actual construction costs may vary from these estimates because of a number of factors, including changes in load growth estimates, changes in environmental regulations, modifications to nuclear units to meet regulatory requirements, increasing costs of labor, equipment and materials, and cost of capital.\nConstruction expenditures by company (including immaterial environmental expenditures and AFUDC, but excluding nuclear fuel and the impact of the ice storm that occurred in February 1994) for the period 1994-1996 are estimated as follows:\n1994 1995 1996 Total ---- ---- ---- ----- (In Millions)\nAP&L $181 $172 $175 $528 GSU 134 128 119 381 LP&L 156 143 142 441 MP&L 61 63 63 187 NOPSI 26 26 26 78 System Energy 26 22 23 71 Entergy Power 2 6 2 10 System $586 $560 $550 $1,696\nIn addition to construction expenditure requirements, the estimated amounts required during 1994-1996 to meet scheduled long- term debt and preferred stock maturities and cash sinking fund requirements are: AP&L - $83 million; GSU - $214 million; LP&L - $158 million; MP&L - $212 million; NOPSI - $80 million; and System Energy - $615 million. A substantial portion of the above capital and refinancing requirements is expected to be satisfied from internally generated funds and cash on hand supplemented by the issuance of debt and preferred stock. Certain System companies may also continue with the acquisition or refinancing of all, or a portion of, certain outstanding series of preferred stock and long-term debt.\nIn early February 1994, an ice storm left more than 221,000 Entergy customers without electric power across the System's four- state service area. The storm was the most severe natural disaster ever to affect the System, causing damage to transmission and distribution lines, equipment, poles, and facilities in certain areas, particularly in Mississippi. A substantial portion of the related costs, which are estimated to be $110 million - $140 million, are expected to be capitalized. The MPSC acknowledged that there is precedent in Mississippi for recovery of certain costs associated with storms and natural disasters and the restoration of service resulting from such events. MP&L plans to immediately file for rate recovery of the costs related to the ice storm (see \"Rate Matters and Regulation - Rate Matters - Retail Rate Matters - MP&L,\" below).\nEntergy Corporation's current primary capital requirements are to periodically invest in, or make loans to, its subsidiaries. Entergy Corporation has SEC authorization to make additional investments in Entergy Power, Entergy S.A., Entergy Argentina, S.A., Entergy Transener, S.A., Entergy SASI, and FPN. Entergy Corporation expects to meet these requirements in 1994-1996 with internally generated funds and cash on hand. Entergy receives funds through dividend payments from its subsidiaries. Certain restrictions may limit the amount of these distributions. See Entergy Corporation and Subsidiaries' Notes to Consolidated Financial Statements, Note 2, \"Rate and Regulatory Matters\" and Note 8, \"Commitments and Contingencies,\" incorporated herein by reference, regarding River Bend rate appeals and pending litigation with Cajun. Substantial write- offs or charges resulting from adverse rulings in these matters could adversely affect GSU's ability to continue to pay dividends.\nEntergy Corporation continues to consider new opportunities to expand its electric energy business, including expansion into related nonregulated businesses. Entergy Corporation expects to invest up to approximately $150 million per year over the next three years in nonregulated business opportunities. Entergy Corporation may finance any such expansion with cash on hand. Further, shareholder and\/or regulatory approvals may be required for such acquisitions to take place. Also, Entergy Corporation has SEC authorization to repurchase shares of its outstanding common stock. Market conditions and board authorization determine the amount of repurchases. Entergy Corporation has requested SEC authorization for a $300 million bank line of credit, the proceeds of which are expected to be used for common stock repurchases and other optional activities.\n(For further information on the capital and refinancing requirements, capital resources, and short-term borrowing arrangements of AP&L, GSU, LP&L, MP&L, NOPSI, and System Energy, respectively, refer in each case to AP&L's, GSU's, LP&L's, MP&L's, NOPSI's, and System Energy's \"Management's Financial Discussion and Analysis - Liquidity and Capital Resources,\" Note 4 of AP&L's, GSU's, LP&L's, MP&L's, NOPSI's, and System Energy's Notes to Financial Statements, \"Lines of Credit and Related Borrowings,\" Note 5 of AP&L's and NOPSI's Notes to Financial Statements, \"Preferred Stock\", Note 5 of GSU's Notes to Financial Statements, \"Preferred, Preference and Common Stock\", Note 5 of LP&L's and MP&L's Notes to Financial Statements, \"Preferred and Common Stock,\" Note 6 of AP&L's, GSU's, LP&L's, MP&L's, and NOPSI's and Note 5 of System Energy's Notes to Financial Statements, \"Long-Term Debt,\" and Note 8 of AP&L's, GSU's, LP&L's, MP&L's, and NOPSI's and Note 7 of System Energy's Notes to Financial Statements, \"Commitments and Contingencies - Capital Requirements and Financing,\" each incorporated herein by reference. For further information concerning Entergy Corporation's capital requirements and resources, refer to Entergy Corporation and Subsidiaries' \"Management's Financial Discussion and Analysis - Liquidity and Capital Resources,\" and Note 4 of Entergy Corporation and Subsidiaries' Notes to Consolidated Financial Statements, \"Lines of Credit and Related Borrowings,\" incorporated herein by reference. For further information on the subsequent event, see Note 12 of AP&L's and Note 11 of MP&L's Notes to Financial Statements, \"Subsequent Event (Unaudited),\" incorporated herein by reference.)\nCertain System Financial and Support Agreements\nUnit Power Sales Agreement. The Unit Power Sales Agreement allocates capacity and energy from System Energy's 90% ownership and leasehold interest in Grand Gulf 1 (and the costs related thereto) to AP&L (36%), LP&L (14%), MP&L (33%), and NOPSI (17%). AP&L, LP&L, MP&L, and NOPSI pay rates to System Energy for their respective entitlements of capacity and energy on a full cost-of-service basis regardless of the quantity of energy delivered, so long as Grand Gulf 1 remains in commercial operation. Payments under the Unit Power Sales Agreement are System Energy's only source of operating revenues. The financial condition of System Energy depends upon the continued commercial operation of Grand Gulf 1 and upon the receipt of payments from AP&L, LP&L, MP&L, and NOPSI. (See \"Rate Matters and Regulation - Rate Matters - Wholesale Rate Matters - System Energy,\" below for further information with respect to proceedings relating to the Unit Power Sales Agreement.)\nAvailability Agreement. The Availability Agreement was entered into among System Energy and AP&L, LP&L, MP&L, and NOPSI in 1974 in connection with the financing by System Energy of the Grand Gulf Station. The agreement provided that System Energy would join in the agreement among AP&L, LP&L, MP&L, and NOPSI for the sharing of generating capacity and other capacity and energy resources on or before the date on which Grand Gulf 1 was placed in commercial operation. It also provided that System Energy would make available to AP&L, LP&L, MP&L, and NOPSI all capacity and energy available from System Energy's share of the Grand Gulf Station. System Energy and AP&L, LP&L, MP&L, and NOPSI further agreed that if this agreement were terminated, or if any of the parties thereto withdrew from it, then System Energy would enter into a separate agreement with all of such parties or the withdrawing party, as the case may be, with respect to the purchase of capacity and energy on the same terms as if this agreement were still controlling.\nAP&L, LP&L, MP&L, and NOPSI also agreed severally to pay System Energy monthly for the right to receive capacity and energy available from the Grand Gulf Station in amounts that (when added to any amounts received by System Energy under the Unit Power Sales Agreement, or otherwise) would be at least equal to System Energy's total operating expenses for the Grand Gulf Station (including depreciation at a specified rate) and interest charges.\nAs amended to date, the Availability Agreement provides that:\n- the obligation of AP&L, LP&L, MP&L, and NOPSI for payments for Grand Gulf 1 became effective upon commercial operation of Grand Gulf 1 on July 1, 1985;\n- the sale of capacity and energy generated by the Grand Gulf Station may be governed by a separate power purchase agreement among System Energy and AP&L, LP&L, MP&L, and NOPSI;\n- the September 1989 write-off of System Energy's investment in Grand Gulf 2, amounting to approximately $900 million, will be amortized for Availability Agreement purposes over 27 years rather than in the month the write-off was recognized on System Energy's books; and\n- the allocation percentages under the Availability Agreement are fixed as follows: AP&L - 17.1%; LP&L - 26.9%; MP&L - 31.3%; and NOPSI - 24.7%.\nAs noted above, the Unit Power Sales Agreement provides for different allocation percentages for sales of capacity and energy from Grand Gulf 1. However, the allocation percentages under the Availability Agreement remain in effect and would govern payments made thereunder in the event of a shortfall of funds available to System Energy from other sources, including payments by AP&L, LP&L, MP&L, and NOPSI to System Energy under the Unit Power Sales Agreement.\nSystem Energy has assigned its rights to payments and advances from AP&L, LP&L, MP&L, and NOPSI under the Availability Agreement as security for its first mortgage bonds and reimbursement obligations to certain banks providing the letters of credit in connection with the equity funding of the sale and leaseback transactions described under \"Sale and Leaseback Arrangements - System Energy,\" below. In these assignments, AP&L, LP&L, MP&L, and NOPSI further agreed that in the event they were prohibited by governmental action from making payments under the Availability Agreement (if, for example, FERC reduced or disallowed such payments as constituting excessive rates; see the second succeeding paragraph), they would then make subordinated advances to System Energy in the same amounts and at the same times as the prohibited payments. System Energy would not be allowed to repay these subordinated advances so long as it remained in default under the related indebtedness or in other similar circumstances.\nEach of the assignment agreements relating to the Availability Agreement provides that AP&L, LP&L, MP&L, and NOPSI shall make payments directly to System Energy. However, if there is an event of default, AP&L, LP&L, MP&L, and NOPSI shall make those payments directly to the holders of indebtedness secured by such assignment agreements. The payments shall be made pro rata according to the amount of the respective obligations secured.\nThe obligations of AP&L, LP&L, MP&L, and NOPSI to make payments under the Availability Agreement are subject to receipt and continued effectiveness of all necessary regulatory approvals. Sales of capacity and energy under the Availability Agreement would require that the Availability Agreement be submitted to FERC for approval with respect to the terms of such sale. No filing with FERC has been required because sales of capacity and energy from the Grand Gulf Station are being made under the Unit Power Sales Agreement. Other aspects of the Availability Agreement, including the obligations of AP&L, LP&L, MP&L, and NOPSI to make subordinated advances, are subject to the jurisdiction of the SEC under the Holding Company Act, which approval has been obtained. If, for any reason, sales of capacity and energy are made in the future pursuant to the Availability Agreement, the jurisdictional portions of the Availability Agreement would be submitted to FERC for approval. (Refer to the second preceding paragraph.)\nAmounts that have been received by System Energy under the Unit Power Sales Agreement have exceeded the amounts payable under the Availability Agreement. Consequently, no payments under the Availability Agreement by AP&L, LP&L, MP&L, and NOPSI have ever been required. If AP&L, LP&L, MP&L, or NOPSI became unable in whole or in part to continue making payments to System Energy under the Unit Power Sales Agreement, and System Energy were unable to procure funds from other sources sufficient to cover any potential shortfall between the amount owing under the Availability Agreement and the amount of continuing payments under the Unit Power Sales Agreement plus other funds then available to System Energy, LP&L and NOPSI could become subject to claims or demands by System Energy or its creditors for payments or advances under the Availability Agreement or the assignments thereof for the difference between their required Unit Power Sales Agreement payments and their required Availability Agreement payments. The amount, if any, which these companies would become liable to pay or advance, over and above amounts they would be paying under the Unit Power Sales Agreement for capacity and energy from Grand Gulf 1, would depend on a variety of factors (especially the degree of any such shortfall and System Energy's access to other funds). It cannot be predicted whether any such claims or demands, if made and upheld, could be satisfied. In NOPSI's case, if any such claims or demands were upheld, the holders of certain of NOPSI's outstanding general and refunding mortgage bonds could require redemption of their bonds at par. The ability of AP&L, LP&L, MP&L, and NOPSI to sustain payments under the Availability Agreement and the assignments thereof in material amounts without substantially equivalent recovery from their customers would be limited by their respective available cash resources and financing capabilities at the time.\nThe ability of AP&L, LP&L, MP&L, and NOPSI to recover from their customers payments made under the Availability Agreement, or under the assignments thereof, would depend upon the outcome of regulatory proceedings before the state and local regulatory authorities having jurisdiction. In view of the controversies that arose over the allocation of capacity and energy from Grand Gulf 1 pursuant to the Unit Power Sales Agreement, opposition to recovery would be likely and the outcome of such proceedings, should they occur, is not predictable.\nReallocation Agreement. On November 18, 1981, the SEC authorized LP&L, MP&L, and NOPSI to indemnify AP&L against principally its responsibilities and obligations with respect to the Grand Gulf Station contained in the Availability Agreement and the assignments thereof. The revised percentages of allocated capacity of System Energy's share of Grand Gulf 1 and Grand Gulf 2 were, respectively: LP&L - 38.57% and 26.23%; MP&L - 31.63% and 43.97%; and NOPSI - 29.80% and 29.80%. FERC's decision allocating the capacity and energy of Grand Gulf 1 to AP&L, LP&L, MP&L, and NOPSI supersedes the Reallocation Agreement insofar as it relates to Grand Gulf 1. However, responsibility for any Grand Gulf 2 amortization amounts (see \"Availability Agreement,\" above) has been allocated to LP&L - 26.23%, MP&L - 43.97%, and NOPSI - 29.80% under the terms of the Reallocation Agreement. The Reallocation Agreement does not affect the obligation of AP&L to System Energy's lenders under the assignments referred to in the fifth preceding paragraph, and AP&L would be liable for its share of such amounts if LP&L, MP&L, and NOPSI were unable to meet their contractual obligations. No payments of any amortization amounts will be required as long as amounts paid to System Energy under the Unit Power Sales Agreement, together with other funds available to System Energy, exceed amounts required under the Availability Agreement, which is expected to be the case for the foreseeable future.\nCapital Funds Agreement. System Energy and Entergy Corporation have entered into the Capital Funds Agreement whereby Entergy Corporation has agreed to supply to System Energy sufficient capital to (1) maintain System Energy's equity capital at an amount equal to a minimum of 35% of its total capitalization (excluding short-term debt), and (2) permit the continuation of commercial operation of Grand Gulf 1 and to pay in full all indebtedness for borrowed money of System Energy when due under any circumstances.\nEntergy Corporation has entered into various supplements to the Capital Funds Agreement, and System Energy has assigned its rights thereunder as security for its first mortgage bonds and reimbursement obligations to certain banks providing letters of credit in connection with the equity funding of the sale and leaseback transactions described under \"Sale and Leaseback Arrangements - System Energy,\" below. Each such supplement provides that permitted indebtedness for borrowed money incurred by System Energy in connection with the financing of the Grand Gulf Station may be secured by System Energy's rights under the Capital Funds Agreement on a pro rata basis (except for the Specific Payments, as hereinafter defined). In addition, in the particular supplements to the Capital Funds Agreement relating to the specific indebtedness being secured, Entergy Corporation has agreed to make cash capital contributions to System Energy sufficient to enable System Energy to make payments when due on such indebtedness (Specific Payments).\nExcept with respect to the Specific Payments, which have been approved by the SEC under the Holding Company Act, the performance by both Entergy Corporation and System Energy of their obligations under the Capital Funds Agreement, as supplemented, is subject to the receipt and continued effectiveness of all governmental authorizations necessary to permit such performance, including approval by the SEC under the Holding Company Act. Each of the supplemental agreements provides that Entergy Corporation shall make its payments directly to System Energy. However, if there is an event of default, Entergy Corporation shall make those payments directly to the holders of indebtedness secured by the supplemental agreements. The payments (other than the Specific Payments) shall be made pro rata according to the amount of the respective obligations secured by the supplemental agreements.\nSale and Leaseback Arrangements\nLP&L. On September 28, 1989, LP&L entered into arrangements for the sale and leaseback of an approximate aggregate 9.3% ownership interest in Waterford 3. LP&L has options to terminate the leases and to repurchase the sold interests in Waterford 3 at certain intervals during the basic terms of the leases. Further, at the end of the terms of the leases, LP&L has options to renew the leases or to repurchase the interests in Waterford 3. If LP&L does not exercise its options to repurchase the interests in Waterford 3 on the fifth anniversary (September 28, 1994) of the closing date of the sale and leaseback transactions, LP&L will be required to provide collateral to the owner participants for the equity portion of certain amounts payable by LP&L under the lease. The required collateral is either a bank letter or letters of credit or the pledging of new series of first mortgage bonds issued by LP&L under its first mortgage bond indenture. (For further information on LP&L's sale and leaseback arrangements, including the required maintenance by LP&L of specified capitalization and fixed charge coverage ratios, see Note 9 of LP&L's Notes to Financial Statements, \"Leases - Waterford 3 Lease Obligations,\" incorporated herein by reference.)\nSystem Energy. On December 28, 1988, System Energy entered into arrangements for the sale and leaseback of an 11.5% ownership interest in Grand Gulf 1. System Energy has options to terminate the leases and to repurchase the undivided interest in Grand Gulf 1 at certain intervals during the basic lease term. Further, System Energy has an option at the end of the basic lease term to renew the leases or to repurchase the undivided interest in Grand Gulf 1. In connection with the equity funding of the sale and leaseback arrangements, letters of credit are required to be maintained by System Energy under the leases to secure certain amounts payable for the benefit of the equity investors. The letters of credit currently maintained are effective until January 15, 1997. Under the provisions of a reimbursement agreement, dated December 1, 1988, as amended, entered into by System Energy and various banks in connection with the sale and leaseback arrangements related to the letters of credit, System Energy has agreed to a number of covenants relating to, among other things, the maintenance of certain capitalization and fixed charge ratios. In connection with an audit of System Energy by FERC, if a decision of FERC issued on August 4, 1992 (August 4 Order) is ultimately sustained and implemented, System Energy would need to obtain the consent of certain banks to waive the capitalization and fixed charge coverage covenants for a limited period of time in order to avoid violation of such covenants. System Energy has obtained the consent of the banks to waive these covenants for the twelve-month period beginning with the earlier of the write-off or the first refund, if the August 4 Order is implemented prior to December 31, 1994. Absent a waiver, failure by System Energy to perform these covenants could give rise to a draw under the letters of credit and\/or an early termination of the letters of credit, and, if such letters of credit were not replaced in a timely manner, could result in a default under, or other early termination of, System Energy's leases. (For further information on the potential effects of the August 4 Order on System Energy's financial condition, see Note 2 of System Energy's Notes to Financial Statements, \"Rate and Regulatory Matters - FERC Audit,\" incorporated herein by reference, and for a further discussion of the provisions of System Energy's Reimbursement Agreement, see System Energy's Notes to Financial Statements, Note 6, \"Dividend Restrictions\" and Note 7, \"Commitments and Contingencies - Reimbursement Agreement,\" incorporated herein by reference.)\nRATE MATTERS AND REGULATION\nRATE MATTERS\nThe System operating companies' retail rates are regulated by their respective state and\/or local regulatory authorities, as described below, and their rates for wholesale sales (including intrasystem sales pursuant to the System Agreement) and interstate transmission of electricity are regulated by FERC. Rates for System Energy's sales of capacity and energy from Grand Gulf 1 to AP&L, LP&L, MP&L, and NOPSI pursuant to the Unit Power Sales Agreement are also regulated by FERC.\nWholesale Rate Matters\nGSU. For information, see \"Retail Rate Matters - GSU,\" below and \"Regulation - Other Regulation and Litigation - GSU,\" below.\nSystem Energy. As described above under \"Certain System Financial and Support Agreements,\" System Energy recovers costs related to its interest in Grand Gulf 1 through rates charged to AP&L, LP&L, MP&L, and NOPSI for Grand Gulf 1 capacity and energy under the Unit Power Sales Agreement. Several proceedings currently pending or recently concluded at FERC affect these rates.\nIn connection with an audit report covering a review of System Energy's books and records for the years 1986-1988, on August 4, 1992, FERC issued an opinion and order (1) finding that System Energy overstated its Grand Gulf 1 utility plant by approximately $95 million for costs included in utility plant that are related to the System's income tax allocation procedures, and (2) requiring System Energy to make adjusting accounting entries and refunds, with interest, to AP&L, LP&L, MP&L, and NOPSI within 90 days from the date of the order. System Energy requested a rehearing of the order, and on October 5, 1992, FERC issued an order allowing additional time for its consideration of such request and deferring System Energy's refund obligation until 30 days following issuance of FERC's order on rehearing. (For further information on FERC's order and its potential effect on System Energy's and Entergy's consolidated financial position, see Note 2 of System Energy's Notes to Financial Statements and Note 2 of Entergy Corporation and Subsidiaries' Notes to Consolidated Financial Statements, \"Rate and Regulatory Matters - FERC Audit,\" incorporated herein by reference.)\nIn a separate proceeding, on August 24, 1992, FERC instituted an investigation of the justness and reasonableness of certain of Entergy's formula wholesale rates, including System Energy's rates under the Unit Power Sales Agreement. Various regulatory authorities intervened in the proceeding. On August 2, 1993, Entergy and the intervenors settled the proceeding and agreed that System Energy's rate of return on equity would be reduced from 13% to 11%, and such rate would remain in effect until at least August 1995. Refunds were payable by System Energy with respect to the period from November 2, 1992, through the effective date of the settlement. FERC approved the settlement on October 25, 1993, and System Energy credited AP&L, LP&L, MP&L, and NOPSI with an aggregate of $29.6 million on their October 1993 bills. This matter is now final. (See Note 2 of System Energy's Notes to Financial Statements, \"Rate and Regulatory Matters - FERC Return on Equity Case,\" incorporated herein by reference.)\nEntergy Power. In 1990, authorizations were obtained from the SEC, FERC, the APSC, and the Public Service Commission of Missouri for Entergy Power to purchase AP&L's interests in Independence 2 and Ritchie 2, and to begin marketing the capacity and energy from the units in certain wholesale markets. The SEC order approving various aspects of the transaction was appealed by various intervenors in the proceeding to the D.C. Circuit, which reversed a portion of the order and remanded the case to the SEC for consideration of the effect of the transfers on the System's future costs of replacement generating capacity and fuel. In response to a June 24, 1993 SEC order setting a procedural schedule for the filing of further pleadings in the proceeding, in July 1993, the Entergy parties filed a post-effective amendment to their application addressing the issues specified in the SEC order. On September 9, 1993, the City of New Orleans and the LPSC each requested a hearing. However, on January 5, 1994, the City of New Orleans withdrew from the proceeding, as agreed in its settlement with NOPSI of various issues related to the Merger.\nSystem Agreement. AP&L, LP&L, MP&L, and NOPSI engage in the coordinated planning, construction, and operation of generation and transmission facilities pursuant to the terms of the System Agreement (described under \"Property - Generating Stations,\" below). GSU became a party to the System Agreement upon consummation of the merger of Entergy's and GSU's electric systems, and GSU now participates in this System-wide coordination. For further information, see Note 2 of GSU's Notes to Financial Statements and Note 2 of Entergy Corporation and Subsidiaries' Notes to Consolidated Financial Statements, \"Rate and Regulatory Matters - Merger-Related Rate Agreements.\"\nIn connection with the Merger, FERC approved certain rate schedule changes to integrate GSU into the System Agreement. Certain commitments were adopted to provide reasonable assurance that the ratepayers of the existing Entergy operating companies will not be allocated higher costs, including, among other things: (1) a tracking mechanism to protect operating companies from certain unexpected increases in fuel costs; (2) excluding GSU from the distribution of profits from power sales contracts entered into prior to the Merger; (3) a methodology to estimate the cost of capital in future FERC proceedings; and (4) a stipulation that the operating companies will be insulated from certain direct effects on capacity equalization payments should GSU, due to a finding of imprudent GSU management prior to the Merger, be required to purchase Cajun's 30% share in River Bend. See \"Regulation - Other Regulation and Litigation,\" for information on requests for rehearing of FERC's approval.\nOn August 20, l990, the City of New Orleans filed a complaint against Entergy Corporation, AP&L, LP&L, MP&L, NOPSI, and System Energy requesting that FERC investigate AP&L's transfer of its interest in Independence 2 and Ritchie 2 to Entergy Power (see \"Entergy Power,\" above) and the effect of the transfer on AP&L, LP&L, MP&L, and NOPSI and their ratepayers. Various parties, including certain of the System's state regulators, intervened in the proceeding. FERC issued an order on March 19, 1991, setting for investigation (l) the question of whether overall billings under the System Agreement will increase as a result of the transfer to Entergy Power, and (2) if so, whether such increased billings reflect prudently incurred costs that may reasonably be charged under the System Agreement. In two separate decisions with respect to these issues, the FERC ALJ assigned to the matter ruled on May 14, l992 and October 30, 1992, respectively, that there was sufficient evidence to show that overall billings would increase as a result of the transfer, but that the transfer was prudent. On December 15, 1993, FERC issued an opinion declining to address the prudence issue until a future time when replacement capacity has been added or planned and finding that, until such time, billings under the System Agreement as affected by the transfer of the two units are reasonable. The Entergy parties and the City of New Orleans each filed a request for rehearing of this order. If FERC's decision were reversed and any refunds were ordered, they would be retroactive to October 19, 1990.\nOpen Access Transmission. On August 2, 1991, Entergy Services, as agent for AP&L, LP&L, MP&L, NOPSI, and Entergy Power, submitted to FERC (1) proposed tariffs that, subject to certain conditions, would provide to electric utilities \"open access\" to the System's integrated transmission system, and (2) rate schedules providing for sales of wholesale power at market-based rates. Under FERC policy, sales of power at market-based rates would be permitted only if FERC found, among other things, that Entergy did not have market power over transmission. Permitting \"open access\" to the System's transmission system helps support such a finding. Various parties, including the Council, the APSC, the MPSC, and the LPSC, intervened in the proceeding. On March 3, 1992, FERC approved the filing, with some modifications, and on August 7, l992, FERC denied rehearing of its March 1992 order. On August 24, l992, various parties filed petitions with the D.C. Circuit for review of FERC's 1992 orders, and these petitions have been consolidated. The revised tariffs, submitted by Entergy Services in response to FERC's 1992 orders, were accepted for filing and made effective, subject to further modifications, by order dated April 5, l993. Entergy Services made a further compliance filing on May 5, l993, reflecting these modifications and requesting reconsideration of certain limited matters, which is subject to approval by FERC. On December 31, 1993, Entergy Services filed revisions to the transmission service tariff to recognize GSU's inclusion in the Entergy System. These matters are pending.\nRetail Rate Matters\nGeneral. AP&L, LP&L, MP&L, and NOPSI currently have retail rate structures sufficient to recover their costs, including costs associated with their allocated shares of capacity and energy from Grand Gulf 1 under the Unit Power Sales Agreement, and a return on equity. Certain costs related to Grand Gulf 1 (and in LP&L's case, Waterford 3 are being phased-into retail rates over a period of time, in order to avoid the \"rate shock\" associated with increasing rates to reflect all of such costs at once. The deferral period in which costs are incurred but not currently recovered has expired for all of these programs, and AP&L, LP&L, MP&L, and NOPSI are now recovering those costs that were previously deferred. Also, AP&L and LP&L have retained a portion of their shares of Grand Gulf 1 capacity and GSU is operating under a deregulated asset plan for a portion of its share of River Bend.\nGSU is involved in several rate proceedings involving recovery, among other things, of costs associated with River Bend. Some rate relief has been received, but GSU has been unable to obtain recognition in rates for a substantial portion of its River Bend investment. Recovery of certain costs has been disallowed, while other costs are being deferred for future recovery, held in abeyance pending further regulatory action, or treated as investments in deregulated assets. There are ongoing rate proceedings and appeals relating to these issues (see \"GSU,\" below).\nThe System is committed to taking actions that will stabilize retail rates and avoid the need for future rate increases. In the short-term, this involves containing costs to the greatest degree practicable, thereby avoiding erosion of earnings and delaying for as long as possible the need for general rate increases. In accordance with this retail rate policy, the System operating companies have agreed to retail rate caps and\/or rate freezes for specified periods of time.\nIn the longer term, as discussed in \"Business of Entergy - Competition - Least Cost Planning\" above, and also as discussed specifically for each applicable company below, the System is pursuing implementation of least cost planning to minimize the cost of future sources of energy.\nEffective January 1, 1993, the System adopted SFAS No. 106 (SFAS 106), an accounting standard that requires accrual of the costs of postretirement benefits other than pensions prior to the time these costs are actually incurred. In 1992, the System operating companies requested from their retail rate regulators authorization to recognize in rates the costs associated with implementation of SFAS 106. For further information, see Note 10 of Entergy Corporation and Subsidiaries', Note 9 of MP&L's and NOPSI's, and Note 10 of AP&L's, GSU's, and LP&L's Notes to Financial Statements, \"Postretirement and Postemployment Benefits,\" incorporated herein by reference.\nAP&L\nRate Freeze. In connection with the settlement of various issues related to the Merger, AP&L agreed that it will not request any general retail rate increase that would take effect before November 3, 1998, except, among other things, for increases associated with the Least Cost Plan (discussed below); recovery of certain Grand Gulf 1- related costs, excess capacity costs, and costs related to the adoption of SFAS 106 that were previously deferred; recovery of certain taxes; fuel adjustment recoveries; recovery of nuclear decommissioning costs; and force majeure (defined to include, among other things, war, natural catastrophes, and high inflation).\nRecovery of Grand Gulf 1 Costs. Under the settlement agreement entered into with the APSC in 1985 and amended in 1988, AP&L agreed to retain a portion of its Grand Gulf l-related costs, recover a portion of such costs currently, and defer a portion of such costs for future recovery. In 1994 and subsequent years, AP&L will retain 7.92% of such costs (stated as a percentage of System Energy's 90% share of the unit) and will recover 28.08% currently. Deferrals ceased in l990, and AP&L is recovering a portion of the previously deferred costs each year through l998. As of December 31, l993, the balance of deferred uncollected costs was $568.0 million. AP&L is permitted to recover on a current basis the incremental costs of financing the unrecovered deferrals.\nAP&L has the right to sell capacity and energy from its retained share of Grand Gulf 1 to third parties and to sell such energy to its retail customers at a price equal to AP&L's avoided energy cost. Proceeds of sales to third parties of AP&L's retained share of Grand Gulf l capacity and energy generally accrue to the benefit of AP&L's stockholder; however, half of the proceeds of such sales to third parties prior to January 1, 1996, are used to reduce the balance of uncollected deferrals and thus accrue to the benefit of retail ratepayers. If AP&L makes sales to third parties prior to that date in excess of the retained share, the proceeds of such excess are also split between the stockholder and the ratepayers, except that the portion of the sale that accrues to the stockholder's benefit cannot exceed the retained share.\nLeast Cost Planning. On December 1, 1992 and July 1, 1993, AP&L filed with the APSC the Least Cost Plan described in \"Business of Entergy - Competition - Least Cost Planning,\" above. AP&L also requested authorization to recover development and implementation costs and costs and incentives related to the DSM aspects of the plan. On October 13, 1993, the APSC found AP&L's plan to be complete and directed the APSC staff to conduct a series of public forums in late 1993, including focus groups, town meetings, and collaborative workshops, before it would establish a procedural schedule that would include evidentiary hearings and the issuance of a Least Cost Plan order. Several of these meetings were delayed into 1994, but are expected to be completed by March 1994. At or before that time, AP&L expects the APSC to issue a procedural schedule that will allow the APSC to issue an order before the end of 1994. On January 19, 1994, AP&L filed a request with the APSC for permission to withdraw the CCLM portion of the filing and to continue such programs on a pilot basis at shareholder expense. The APSC has not yet ruled on AP&L's request.\nFuel Adjustment Clause. AP&L's retail rate schedules have a fuel adjustment clause that provides for recovery of the excess cost of fuel and purchased power incurred in the second preceding month. The fuel adjustment clause also contains a nuclear reserve fund designed to cover the cost of replacement energy during scheduled maintenance and refueling outages at ANO, and an incentive provision that permits over- or under-recovery of the excess cost of replacement energy when ANO is operating or down for reasons other than refueling.\nGSU\nRate Cap and Other Merger-Related Rate Agreements. The LPSC and the PUCT approved separate regulatory proposals that include the following elements: (1) a five-year rate cap on GSU's retail electric base rates in the respective states, except for force majeure (defined to include, among other things, war, natural catastrophes, and high inflation); (2) a provision for passing through to retail customers in the respective states the jurisdictional portion of the fuel savings created by the Merger; and (3) a mechanism for tracking nonfuel operation and maintenance savings created by the Merger. The LPSC regulatory plan provides that such nonfuel savings will be shared 60% by the shareholder and 40% by ratepayers during the eight years following the Merger. The LPSC plan requires regulatory filings each year by the end of May through 2001. The PUCT regulatory plan provides that such savings will be shared equally by the shareholder and ratepayers, except that the shareholder's portion will be reduced by $2.6 million per year on a total company basis in years four through eight. The PUCT plan also requires a series of regulatory filings, currently anticipated to be in June 1994, and February 1996, 1998, and 2001, to ensure that the ratepayers' share of such savings be reflected in rates on a timely basis and requires Entergy Corporation to hold GSU's Texas retail customers harmless from the effects of the removal by FERC of a 40% cap on the amount of fuel savings GSU may be required to transfer to other Entergy operating companies under the FERC tracking mechanism (see \"Rate Matters - Wholesale Rate Matters - System Agreement,\" above). On January 14, 1994, Entergy Corporation filed a request for rehearing of FERC's December 15, 1993 order approving the Merger, requesting that FERC restore the 40% cap provision in the fuel cost protection mechanism (see \"Regulation - Other Litigation and Regulation,\" below). The matter is pending.\nRecovery of River Bend Costs. GSU deferred approximately $369 million of River Bend operating costs, purchased power costs, and accrued carrying charges pursuant to a 1986 PUCT accounting order. Approximately $182 million of these costs are being amortized over a 20-year period, and the remaining $187 million are not being amortized pending the ultimate outcome of the Rate Appeal (see \"Texas Jurisdiction - River Bend,\" below). As of December 31, 1993, the unamortized balance of these costs was $330.3 million. Further, GSU deferred approximately $400.4 million of similar costs pursuant to a 1986 LPSC accounting order. These costs, of which approximately $160.4 million are unamortized as of December 31, 1993, are being amortized over a 10-year period.\nIn accordance with a phase-in plan approved by the LPSC, GSU deferred $324.7 million of its River Bend costs related to the period December 1987 through February 1991. GSU has amortized $86.6 million through December 31, 1993, and the remainder of $238.1 million will be recovered over approximately 3.8 years.\nTexas Jurisdiction - River Bend. In May 1988, the PUCT granted GSU a permanent increase in annual revenues of $59.9 million resulting from the inclusion in rate base of approximately $1.6 billion of company-wide River Bend plant investment and approximately $182 million of related Texas retail jurisdiction deferred River Bend costs (Allowed Deferrals). In addition, the PUCT disallowed as imprudent $63.5 million of company-wide River Bend plant costs and placed in abeyance, with no finding of prudency, approximately $1.4 billion of company-wide River Bend plant investment and approximately $157 million of Texas retail jurisdiction deferred River Bend operating and carrying costs. The PUCT affirmed that the ultimate rate treatment of such amounts would be subject to future demonstration of the prudency of such costs. GSU and intervening parties appealed this order (Rate Appeal) and GSU filed a separate rate case asking that the abeyed River Bend plant costs be found prudent (Separate Rate Case). Intervening parties filed suit in district court to prohibit the Separate Rate Case. The district court's decision was ultimately appealed to the Texas Supreme Court which ruled in 1990 that the prudence of the purported abeyed costs could not be relitigated in a separate rate proceeding. Further, the Texas Supreme Court's decision stated that all issues relating to the merits of the original order of the PUCT, including the prudence of all River Bend-related costs, should be addressed in the Rate Appeal.\nIn October 1991, the district court in the Rate Appeal issued an order holding that, while it was clear the PUCT made an error in assuming it could set aside $1.4 billion of the total costs of River Bend and consider them in a later proceeding, the PUCT, nevertheless, found that GSU had not met its burden of proof related to the amounts placed in abeyance. The court also ruled that the Allowed Deferrals should not be included in rate base under a 1991 decision regarding El Paso Electric Company's similar deferred costs (El Paso Case). The court further stated that the PUCT erred in reducing GSU's deferred costs by $1.50 for each $1.00 of revenue collected under the interim rate increases authorized in 1987 and 1988. The court remanded the case to the PUCT with instructions as to the proper handling of the Allowed Deferrals. GSU's motion for rehearing was denied, and in December 1991, GSU filed an appeal of the October 1991 district court order. The PUCT also appealed the October 1991 district court order, which served to supersede the district court's judgment, rendering it unenforceable under Texas law.\nIn August 1992, the court of appeals in the El Paso Case handed down its second opinion on rehearing modifying its previous opinion on deferred accounting. The court's second opinion concluded that the PUCT may lawfully defer operating and maintenance costs and subsequently include them in rate base, but that the Public Utility Regulatory Act prohibits such rate base treatment for deferred carrying costs. The court stated, however, its opinion would not preclude the recovery of deferred carrying costs. The August 1992 court of appeals opinion was appealed to the Texas Supreme Court where arguments were heard in September 1993. The matter is still pending.\nIn September 1993, the Texas Third District Court of Appeals (the Third District Court) remanded the October 1991 district court decision to the PUCT \"to reexamine the record evidence to whatever extent necessary to render a final order supported by substantial evidence and not inconsistent with our opinion.\" The Third District Court specifically addressed the PUCT's treatment of certain costs, stating that the PUCT's order was not based on substantial evidence. The Third District Court also applied its most recent ruling in the El Paso Case to the deferred costs associated with River Bend. However, the Third District Court cautioned the PUCT to confine its deliberations to the evidence addressed in the original rate case. Certain parties to the case have indicated their position that, on remand, the PUCT may change its original order only with respect to matters specifically discussed by the Third District Court which, if allowed, would increase GSU's allowed River Bend investment, net of accumulated depreciation and related taxes, by approximately $48 million as of December 31, 1993. GSU believes that under the Third District Court's decision, the PUCT would be free to reconsider any aspect of its order concerning the abeyed $1.4 billion River Bend investment. GSU has filed a motion for rehearing asking the Third District Court to modify its order so as to permit the PUCT to take additional evidence on remand. The PUCT and other parties have also moved for rehearing on various grounds. The Third District Court has not yet ruled on any of these motions.\nAs of December 31, 1993, the River Bend plant costs disallowed for retail ratemaking purposes in Texas, and the River Bend plant costs held in abeyance and the related cost deferrals totaled (net of taxes) approximately $14 million, $300 million (both net of depreciation), and $171 million, respectively. Allowed Deferrals were approximately $95 million, net of taxes and amortization, as of December 31, 1993. GSU estimates it has collected approximately $139 million of revenues as of December 31, 1993, as a result of the originally ordered rate treatment of these deferred costs. However, if the PUCT adopts the most recent decision in the El Paso Case, the possible refunds approximate $28 million as a result of the inclusion of deferred carrying costs in rate base for the period July 1988 through December 1990. However, if the PUCT reverses its decision to reduce GSU's deferred costs by $1.50 for each $1.00 of revenue collected under the interim rate increases authorized in 1987 and 1988, the potential refund of amounts described above could be reduced by an amount ranging from $7 million to $19 million.\nNo assurance can be given as to the timing or outcome of the remands or appeals described above. Pending further developments in these cases, GSU has made no write-offs for the River Bend related costs. Management believes, based on advice from Clark, Thomas & Winters, a Professional Corporation, legal counsel of record in the Rate Appeal, that it is reasonably possible that the case will be remanded to the PUCT, and the PUCT will be allowed to rule on the prudence of the abeyed River Bend plant costs. Rate caps imposed by the PUCT's regulatory approval of the Merger could result in GSU being unable to use the full amount of a favorable decision to immediately increase rates; however, a favorable decision could permit some increases and\/or limit or prevent decreases during the period the rate caps are in effect. At this time, management and legal counsel are unable to predict the amount, if any, of the abeyed and previously disallowed River Bend plant costs that ultimately may be disallowed by the PUCT. A net of tax write-off as of December 31, 1993, of up to $314 million could be required based on the PUCT's ultimate ruling.\nIn prior proceedings, the PUCT has held that the original cost of nuclear power plants will be included in rates to the extent those costs were prudently incurred. Based upon the PUCT's prior decisions, management believes that its River Bend construction costs were prudently incurred and that it is reasonably possible that it will recover in rate base, or otherwise through means such as a deregulated asset plan, all or substantially all of the abeyed River Bend plant costs. However, management also recognizes that it is reasonably possible that not all of the abeyed River Bend plant costs may ultimately be recovered.\nAs part of its direct case in the Separate Rate Case, GSU filed a cost reconciliation study prepared by Sandlin Associates, management consultants with expertise in the cost analysis of nuclear power plants, which supports the reasonableness of the River Bend costs held in abeyance by the PUCT. This reconciliation study determined that approximately 82% of the River Bend cost increase above the amount included by the PUCT in rate base was a result of changes in federal nuclear safety requirements and provided other support for the remainder of the abeyed amounts.\nThere have been four other rate proceedings in Texas involving nuclear power plants. Investment in the plants ultimately disallowed ranged from 0% to 15%. Each case was unique, and the disallowances in each were made on a case-by-case basis for different reasons. Appeals of most, if not all, of these PUCT decisions are currently pending.\nThe following factors support management's position that a loss contingency requiring accrual has not occurred, and its belief that all, or substantially all, of the abeyed plant costs will ultimately be recovered:\n1. The $1.4 billion of abeyed River Bend plant costs have never been ruled imprudent and disallowed by the PUCT. 2. Sandlin Associates' analysis which supports the prudence of substantially all of the abeyed construction costs. 3. Historical inclusion by the PUCT of prudent construction costs in rate base. 4. The analysis of GSU's internal legal staff, which has considerable experience in Texas rate case litigation.\nAdditionally, management believes, based on advice from Clark, Thomas & Winters, a Professional Corporation, legal counsel of record in the Rate Appeal, that it is probable that the deferred costs will be allowed. However, assuming the August 1992 court of appeals' opinion in the El Paso Case is upheld and applied to GSU and the deferred River Bend costs currently held in abeyance are not allowed to be recovered in rates as allowable costs, a net-of-tax write-off of up to $171 million could be required. In addition, future revenues based upon the deferred costs previously allowed in rate base could also be lost and no assurance can be given as to whether or not refunds (up to $28 million as of December 31, 1993) of revenue received based upon such deferred costs previously recorded will be required.\nSee Note 12 of GSU's Notes to Financial Statements, \"Entergy Corporation-GSU Merger,\" for the accounting treatment of preacquistion contingencies, including a River Bend write-down.\nTexas Jurisdiction - Fuel Reconciliation. In January 1992, GSU applied with the PUCT for a new fixed fuel factor and requested a final reconciliation of fuel and purchased power costs incurred between December 1, 1986 and September 30, 1991. GSU proposed to recover net underrecoveries and interest (including underrecoveries related to NISCO, discussed below) over a twelve month period. In April 1993, the presiding PUCT ALJ issued a report which concluded that GSU incurred approximately $117 million of nonreimbursable fuel costs on a company-wide basis (approximately $50 million on a Texas retail jurisdictional basis) during the reconciliation period.\nIncluded in the nonreimbursable fuel costs were payments above GSU's avoided cost rate for power purchased from NISCO. The PUCT ordered in 1986 that the purchased power costs from NISCO in excess of GSU's avoided costs be disallowed. The PUCT disallowance resulted in approximately $12 million to $15 million of unrecovered purchased power costs on an annual basis, which GSU continued to expense as the costs were incurred. In April 1991, the Texas Supreme Court, in the appeal of such order, ordered the PUCT to allow GSU to recover purchased power payments in excess of its avoided cost in future proceedings, if GSU established to the PUCT's satisfaction that the payments were reasonable and necessary expenses.\nIn June 1993, the PUCT, in the fuel reconciliation case, concluded that the purchased power payments made to NISCO in excess of GSU's avoided cost were not reasonably incurred. As a result of the order, GSU recorded additional fuel expenses (including interest) of $2.8 million for non-NISCO related items. The PUCT's order resulted in no additional expenses related to the NISCO issue, or for overcollections related to the fixed fuel factor, as those charges were expensed by GSU as they were incurred. The PUCT concluded that GSU had over-collected its fuel costs in Texas and ordered GSU to refund approximately $33.8 million to its Texas retail customers, including approximately $7.5 million of interest. The PUCT reduced GSU's fixed fuel factor in Texas from about 2.1 cents per KWH to approximately 1.84 cents per KWH. GSU had requested a new fixed fuel factor of about 2.02 cents per KWH. Based on current sales forecasts, adoption of the PUCT's recommended fixed fuel factor would reduce GSU's revenues by approximately $34 million annually. In October 1993, GSU appealed the PUCT's order to the Travis County District Court. No assurance can be given as to the timing or outcome of the appeal.\nTexas - Cities Rate Settlement. In June 1993, thirteen cities within GSU's Texas service area instituted an investigation to determine whether GSU's current rates were justified. In October 1993, the general counsel of the PUCT instituted an inquiry into the reasonableness of GSU's rates. In November 1993, a settlement agreement was filed with the PUCT which provides for an initial reduction in annual retail base revenues in Texas of approximately $22.5 million effective for electric usage on or after November 1, 1993, and a second reduction of $20 million to be effective September 1994. Further, the settlement provided for GSU to reduce rates with a $20 million one-time bill credit in December 1993, and to refund approximately $3 million to Texas retail customers on bills rendered in December 1993. The cities rate inquiries had been settled earlier on the same terms.\nIn November 1993, in association with the settlement of the above- described rate inquiries, GSU entered into a settlement covering issues related to a March 1991 non-unanimous settlement in another proceeding. Under this settlement, a $30 million rate increase approved by the PUCT in March 1991, became final and the PUCT's treatment of GSU's federal tax expense was settled, eliminating the possibility of refunds associated with amounts collected resulting from the disputed tax calculation.\nIn December 1993, a large industrial customer of GSU announced its intention to oppose the settlement of the PUCT rate inquiry. The customer's opposition does not affect the cities' rate settlement. The customer's opposition requires the PUCT to conduct a hearing concerning GSU's rates charged in areas outside the corporate limits of the cities in its Texas service territory to determine whether the settlement's rates are just and reasonable. A hearing has been set for July 8, 1994. GSU believes that the PUCT will ultimately approve the settlement, but no assurance can be provided in this regard.\nLouisiana Jurisdiction - River Bend. Previous rate orders of the LPSC have been appealed, and pending resolution of various appellate proceedings, GSU has made no write-off for the disallowance of $30.6 million of deferred revenue requirement that GSU recorded for the period December 16, 1987 through February 18, 1988.\nIn January 1992, the LPSC ordered a deregulated asset plan for $1.4 billion of River Bend plant costs not allowed in rates. The plan allows GSU to sell the generation from the approximately 22% of River Bend to Louisiana customers at 4.6 cents per KWH, or off-system at higher prices. Incremental revenues from off-system sales above 4.6 cents per KWH will be shared 60% by shareholders and 40% by ratepayers (see GSU's \"Management's Financial Discussion and Analysis,\" incorporated herein by reference, for the effects of the plan on GSU's 1993 results of operations).\nLPSC - Return on Equity Review. In the June 1993 open session, a preliminary report was made comparing the authorized and actual earned rates of return for electric and gas utilities subject to the LPSC's jurisdiction. The preliminary report indicated that several electric utilities, including GSU, may be over-earning based on current estimated costs of equity. The LPSC requested those utilities to file responses indicating whether they agreed with the preliminary report, and to provide their reasons if they did not agree. GSU provided the LPSC with information that GSU believes supports the current rate level. The LPSC decided at its September 7, 1993 open session to defer review of GSU's base rates until the first earnings analysis after the Merger, scheduled for mid-1994.\nLPSC Fuel Cost Review. In November 1993, the LPSC ordered a review of GSU's fuel costs. The LPSC stated that fuel costs for the period October 1988 through September 1991 would be reviewed based on the number of outages at River Bend and the findings in the June 1993 PUCT fuel reconciliation case. Hearings are scheduled to begin in March 1994.\nLeast Cost Planning. Currently, the PUCT does not have least cost planning rules in place, and GSU has not filed a Least Cost Plan with the PUCT. However, the PUCT staff has begun a rulemaking process for such rules, and GSU is actively participating in this process. GSU has not yet filed a Least Cost Plan with the LPSC.\nFuel Recovery. In January 1993, the PUCT adopted a new rule for setting a fixed fuel factor that is intended to recover projected allowable fuel and purchased power costs not covered by base rates. To the extent actual costs vary from the fixed factor, the PUCT may require refunds of overcharges or permit recovery of undercharges. Under the new rule, fuel factors are to be revised every six months, and GSU is on a schedule providing for revision each March and September. The PUCT is required to act within 60 or 90 days, depending on whether or not a hearing is required, and refunds and surcharges will be required based upon a materiality threshold of 4% of Texas retail fuel revenues. Fuel charges will also be subject to reconciliation proceedings every three years, at which time additional adjustments may be required (see \"Texas Jurisdiction - Fuel Reconciliation,\" above). All of GSU's rate schedules in Louisiana include a fuel adjustment clause to recover the cost of fuel and purchased power energy costs. The fuel adjustment reflects the delivered cost of fuel for the second preceding month.\nLP&L\nLPSC Jurisdiction. In a series of LPSC orders, court decisions, and agreements from late 1985 to mid-1988, LP&L was granted rate relief with respect to costs associated with Waterford 3 and LP&L's share of capacity and energy from Grand Gulf l, subject to certain terms and conditions. With respect to Waterford 3, LP&L was granted an increase aggregating $170.9 million over the period 1985-1988, and LP&L agreed to permanently absorb, and not recover from retail ratepayers, $284 million of its investment in the unit and to defer $266 million of its costs related to the years 1985-1988 to be recovered over approximately 8.6 years beginning in April 1988. As of December 31, 1993, LP&L's unrecovered deferral balance was $82.5 million. With respect to Grand Gulf l, LP&L agreed to absorb, and not recover from retail ratepayers, 18% of its 14% share (approximately 2.52%) of the costs of Grand Gulf l capacity and energy. LP&L is allowed to recover, through the fuel adjustment clause, 4.6 cents per KWH (currently 2.55 cents per KWH through May 1994) for the energy related to the permanently absorbed percentage, with LP&L's permanently absorbed retained percentage to be available for sale to non-affiliated parties, subject to LPSC approval. (See Note 2 of LP&L's Notes to Financial Statements, \"Rate and Regulatory Matters - Waterford 3 and Grand Gulf 1,\" incorporated herein by reference, for further information on LP&L's Grand Gulf 1 and Waterford 3-related rates.)\nIn a subsequent rate proceeding, on March 1, l989, the LPSC issued an order providing that, in effect, LP&L was entitled to an approximately $45.9 million annual retail rate increase, but that, in lieu of a rate increase, LP&L would be permitted to retain $188.6 million of the proceeds of a 1988 settlement of litigation with a gas supplier, and to amortize such proceeds into revenues over a period of approximately 5.3 years. The amortization of the proceeds will expire in mid-1994 and this source of revenue will no longer be available to LP&L. LP&L believes that the amortization has resulted in approximately the same amount of additional net income as an annual rate increase of $45.9 million would have provided over the same period. In connection with this order, LP&L agreed to a five-year base rate freeze scheduled to expire in March 1994 at then current levels subject to certain conditions. (See Note 2 of LP&L's Notes to Financial Statements, \"Rate and Regulatory Matters - March 1989 Order,\" incorporated herein by reference, for further information on the terms of this order.)\nBy letter dated July 27, 1993, the LPSC requested LP&L to explain its \"relatively high cost of debt\" compared to other electric utilities subject to LPSC jurisdiction. LP&L responded to the request on August 11, 1993. On August 14, 1993, the LPSC's consultants acknowledged LP&L's rationale for its cost of debt and suggested that certain aspects of LP&L's cost of debt could be taken up in rate proceedings after the expiration of LP&L's rate freeze. On October 7, 1993, the LPSC approved a schedule to conduct a review of LP&L's rates and rate structure upon the expiration of the rate freeze in March 1994.\nCouncil Jurisdiction. Under the Algiers rate settlement entered into with the Council in l989, LP&L was granted rate relief with respect to its Grand Gulf l and Waterford 3-related costs, subject to certain terms and conditions. LP&L was granted an annual rate increase of $9.5 million that was phased-in over the two-year period beginning in July 1989, and was permitted to retain $4.2 million (the Council's jurisdictional portion) of the proceeds of litigation with a gas supplier and to amortize such proceeds plus interest into revenues over the same two-year period. LP&L agreed to absorb and not recover from Algiers retail ratepayers $17 million of fixed costs associated with Grand Gulf l and Waterford 3 incurred prior to the date of the settlement, $5.9 million of its investment in Waterford 3, and 18% of the Algiers portion of LP&L's Grand Gulf l-related costs incurred after the settlement. However, LP&L is allowed to recover 4.6 cents per KWH or the avoided cost, whichever is higher, for the energy related to the permanently absorbed percentage through the fuel adjustment clause, with the permanently absorbed percentage to be available for sale to non-affiliated parties, subject to the Council's right of first refusal. LP&L also agreed to a rate freeze for Algiers customers until July 6, l994, except in the case of catastrophic events, changes in federal tax laws, or changes in LP&L's Grand Gulf l costs resulting from FERC proceedings.\nLeast Cost Planning. On December l, l992, and July 1, l993, LP&L filed with the LPSC and the Council the Least Cost Plan described under \"Business of Entergy - Competition - Least Cost Planning,\" above. LP&L also requested authorization to recover development and implementation costs and costs and incentives related to the DSM aspects of the plan. Discovery in the LPSC review of LP&L's Least Cost Plan filing is continuing, and the current procedural schedule (which maybe extended) contemplates that, after hearings and briefings, a report of the LPSC special counsel will be issued on June 14, 1994. The LPSC could render a decision on the basis of this report. On January 19, 1994, LP&L filed a motion with the LPSC to dismiss or withdraw without prejudice the CCLM and to proceed with a pilot CCLM at shareholder expense. The LPSC granted LP&L's motion on February 2, 1994, subject to LP&L, among other things, keeping the LPSC timely informed as to LP&L's CCLM activities. (See \"NOPSI - Least Cost Planning,\" below, for further information on LP&L's and NOPSI's proceedings pending before the Council.)\nFuel Adjustment Clause. LP&L's rate schedules include a fuel adjustment clause to reflect the delivered cost of fuel in the second preceding month and purchased power energy costs. The fuel adjustment also reflects a surcharge for deferred fuel expense arising from the monthly reconciliation of actual fuel cost incurred with fuel cost revenues billed to customers. LP&L defers on its books fuel costs that will be reflected in customer billings in the future under the fuel adjustment clause.\nMP&L\nRate Freeze. In a stipulation entered into by MP&L in connection with the settlement of various issues related to the Merger, MP&L agreed that (1) for a period of five years beginning on November 9, 1993, retail base rates under the FRP (see \"Incentive Rate Plan,\" below) would not be increased above the level of rates in effect on November 1, 1993, and (2) MP&L would not request any general retail rate increase that would increase retail rates above the level of MP&L's rates in effect as of November l, 1993, and that would become effective in such five-year period except, among other things, for increases associated with the Least Cost Plan (discussed below), recovery of deferred Grand Gulf 1-related costs, recovery under the fuel adjustment clause, adjustments for certain taxes, and force majeure (defined to include, among other things, war, natural catastrophes, and high inflation).\nRecovery of Grand Gulf 1 Costs. The MPSC's Final Order on Rehearing, issued in 1985, affirmed by the United States Supreme Court in 1988, and subsequently revised in 1988, granted MP&L an annual base rate increase of approximately $326.5 million in connection with its allocated share of Grand Gulf 1 costs. The Final Order on Rehearing also provided for the deferral of a portion of such costs that were incurred each year through 1992, and recovery of these deferrals over a period of six years ending in 1998. As of December 31, 1993, the uncollected balance of MP&L's deferred costs was approximately $601.4 million. MP&L is permitted to recover the carrying charges on all deferred amounts on a current basis.\nIncentive Rate Plan. In July 1993, the MPSC ordered MP&L to file a formulary incentive rate plan designed to allow for periodic small adjustments in rates based upon a comparison of earned to benchmark returns and upon performance factors incorporated in the plan. Pursuant to this order, on November 1, 1993, MP&L filed a proposed formula rate plan. MPSC was also expected to conduct a general review of MP&L's current rates in the course of approving an incentive rate plan.\nOn January 28, 1994, MP&L and the Mississippi Public Utilities Staff (MPUS) entered into a Joint Stipulation in this proceeding. Under the Joint Stipulation, MP&L and the MPUS agreed on a number of accounting adjustments for the test year ending June 30, 1993, (June 30 Test Year) that resulted in a reduction to MP&L's base rate revenues in the June 30 Test Year of approximately 4.3%, or $28.1 million. This translates into approximately a 3.7% decrease in overall revenues from sales to retail customers, which include revenues related to fuel, taxes, and Grand Gulf. MP&L and the MPUS agreed on a required return on equity of 11% for the June 30 Test Year.\nMP&L and the MPUS also stipulated to a revised Formula Rate Plan (FRP). The stipulated FRP is essentially the same as the proposed plan filed by MP&L on November 1, 1993. Certain of the accounting changes agreed to by the MPUS and MP&L for the June 30 Test Year are incorporated into the stipulated FRP. Also, the formula in the stipulated FRP for determining required return on equity would have produced a required return on equity for MP&L of 11.07% for the June 30 Test Year. The stipulated return on equity formula will be applied for the first time in the first Evaluation Report under the stipulated FRP. The first Evaluation Report will be filed in March 1995 for the Evaluation Period ending December 31, 1994.\nOn February 10, 1994, MP&L, the Mississippi Industrial Energy Group (MIEG), and the MPUS entered into and filed with the MPUS, a Joint Stipulation (MIEG Joint Stipulation) resolving the issues raised by the MIEG in the docket. On February 16, 1994, MP&L and the Mississippi Attorney General entered into a Joint Stipulation that resolved the issues raised by the Mississippi Attorney General in the docket. Other parties in the case, including two gas utility intervenors, were not parties to the Joint Stipulations.\nIn late February 1994, the MPSC conducted a general review of MP&L's current rates and on March 1, 1994, issued a final order in which the MPSC approved each of the Joint Stipulations. The MPSC ordered MP&L to file rates designed to provide a reduction of $28.1 million in operating revenues for the June 30 Test Year on or before March 18, 1994, to become effective for service rendered on and after March 25, 1994. The FRP also was approved and will be effective on March 25, 1994, with any initial adjustment to base rates, if any, in May 1995. Under the FRP, a formula will be established under which MP&L's earned rate of return will be calculated automatically every 12 months and compared to a benchmark rate of return calculated under a separate formula within the FRP. If MP&L's earned rate of return falls within a bandwidth around the benchmark rate of return, there will be no adjustment in rates. If MP&L's earnings are above the bandwidth, the FRP will automatically reduce MP&L's base rates. Alternatively, if MP&L's earnings are below the bandwidth, the FRP will automatically increase MP&L's base rates (see \"Rate Freeze\" above for information on a cap on base rates at November 1993 levels for a period of five years). The reduction or increase in base rates will be an amount representing 50% of the difference between the earned rate of return and the nearest limit of the bandwidth. In no event will the annual adjustment in rates exceed the lesser of 2% of MP&L's aggregate annual retail revenues, or $14.5 million. Under the FRP the benchmark rate of return, and consequently the bandwidth, will be adjusted slightly upward or downward based upon MP&L's performance on three performance factors: customer reliability, customer satisfaction, and customer price.\nIn its Final Order, the MPSC also recognized that on February 9 and 10, 1994, a severe ice storm struck northern Mississippi causing extensive and widespread damage to MP&L's transmission and distribution facilities in approximately 15 counties. Although the MPSC made no findings in the final order as to MP&L's costs associated with the ice storm and restoration of service, the MPSC acknowledged that there is precedent in Mississippi for recovery of certain costs associated with storms and natural disasters and restoration of service. The MPSC stated the recovery of MP&L's ice storm costs should be addressed in a separate docket. MP&L plans to immediately file for rate recovery of the costs related to the ice storm.\nLeast Cost Planning. On December 1, 1992 and July 1, 1993, MP&L filed with the MPSC the Least Cost Plan described in \"Business of Entergy - Competition - Least Cost Planning,\" above. MP&L also requested a finding by the MPSC that the plan's cost recovery methodology is reasonable and appropriate. MP&L will request approval of cost recovery mechanisms after the plan has been approved by the MPSC. On October 6, 1993, the MPSC, on its own motion, stayed all proceedings in this docket. The MPSC stay order regarding MP&L's Least Cost Plan filing remains in effect even though MP&L and the MPUS have stipulated to an FRP (see \"Incentive Rate Plan,\" above). Because the stay order remains in effect, MP&L has not yet filed a request that the CCLM portion of the filing be withdrawn and that a pilot CCLM program be implemented.\nFuel Adjustment Clause. MP&L's rate schedules include a fuel adjustment clause that permits recovery from customers of changes in the cost of fuel and purchased power. The monthly fuel adjustment rate is based on projected sales and costs for the month, adjusted for differences between actual and estimated costs for the second prior month.\nNOPSI\nElectric Retail Rate Reduction. On November 18, 1993, in connection with the settlement of various issues related to the Merger, the Council adopted a resolution requiring NOPSI to reduce its annual electric base rates by $4.8 million on bills rendered on or after November 1, 1993.\nRecovery of Grand Gulf 1 Costs. Under NOPSI's various Rate Settlements with the Council (which include the 1986 NOPSI Settlement, the February 4 Resolution relating to prudence issues, and the 1991 NOPSI Settlement of the issues raised in the February 4 Resolution), NOPSI agreed to absorb and not recover from ratepayers a total of $186.2 million of its Grand Gulf 1 costs. NOPSI was permitted to implement annual rate increases in decreasing amounts each year through 1995, and to defer certain costs, and related carrying charges, for recovery on a schedule extending from 1991 through 2001. As of December 31, 1993, the uncollected balance of NOPSI's deferred costs was $228.8 million. NOPSI also agreed to a base rate freeze through October 31, 1996, excluding the scheduled increases, certain changes in tax rates, and increases related to catastrophic events. (See Note 2 of NOPSI's Notes to Financial Statements, \"Rate and Regulatory Matters - Prudence Settlement and Finalized Phase-In Plan,\" incorporated herein by reference, for further information.)\nGas Rates. In May 1992, NOPSI and the Council settled a pending application for gas rate increases. The settlement provided for annual rate increases of approximately $3.8 million in May 1992 and 1993, and the deferral of an additional $3 million for recovery in the years beginning in May 1993 through May 1996. NOPSI also agreed to a base rate freeze, except for the scheduled increases and certain other exceptions, through October 31, 1996.\nLeast Cost Planning. On December 1, 1992, and July 1, 1993, NOPSI filed with the Council the Least Cost Plan described under \"Business of Entergy - Competition - Least Cost Planning,\" above. NOPSI also requested authorization to recover development and implementation costs and costs and incentives related to DSM aspects of the plan. After hearings and briefings, the Council issued, on November 22, 1993, a resolution that requires NOPSI and LP&L to provide, within certain time frames, additional information, among other things, on how the seven full scale DSM programs approved by the Council in the resolution will be implemented. Such programs are estimated to cost approximately $13 million over the next three years. The Council provided in the resolution certain assurances regarding recovery of costs associated with these programs. Discovery is proceeding and testimony is being filed, with the second round of hearings to begin in February 1994. After the hearings are concluded and briefs have been filed, the Council will address the second round issues in early April 1994. On February 3, 1994, the Council issued a resolution and order granting the motions of NOPSI and LP&L to dismiss without prejudice the CCLM portion of the filing, authorizing NOPSI and LP&L to proceed with a pilot CCLM (other than the construction of a fiber optics\/coaxial cable network) in New Orleans at shareholder expense (subject to certain conditions). The Council also opened a new docket to expeditiously address issues related to the CCLM pilot, and directing NOPSI and LP&L to obtain Council authorization in the new docket before constructing such a fiber optics\/coaxial cable network.\nIn connection with the settlement of various issues related to the Merger, the Council adopted a resolution on November 18, 1993, that provides that the Council will not disallow the first $3.5 million of costs incurred by NOPSI through October 31, 1993, in connection with the Least Cost Plan.\nFuel Adjustment Clause. NOPSI's electric rate schedules include a fuel adjustment clause to reflect the delivered cost of fuel in the second preceding month, adjusted by a surcharge for deferred fuel expense arising from the monthly reconciliation of actual fuel cost incurred with fuel cost revenues billed to customers. The adjustment clause, on a monthly basis, also reflects the difference between nonfuel Grand Gulf 1 costs paid by NOPSI and the estimate of such costs provided in NOPSI's Grand Gulf 1 Rate Settlements. NOPSI's gas rate schedules include a gas cost adjustment to reflect gas costs in excess of those collected in rates, adjusted by a surcharge similar to that included in the electric adjustment clause. NOPSI defers on its books fuel and purchased gas costs to be reflected in billings to customers in the future under the fuel adjustment clause.\nREGULATION\nFederal Regulation\nHolding Company Act. Entergy Corporation is a registered public utility holding company under the Holding Company Act. As such, Entergy Corporation and its various direct and indirect subsidiaries (with the exception of its independent power\/EWG subsidiaries) are subject to the broad regulatory provisions of that Act. Except with respect to investments in certain EWG projects and foreign utility company projects (see \"Business of Entergy - Competition - General,\" above for a discussion of the Energy Act), Section 11(b)(1) of the Holding Company Act limits the operations of a registered holding company system to a single, integrated public utility system, plus additional systems and businesses as provided by that section.\nFederal Power Act. The System operating companies, System Energy, and Entergy Power are subject to the Federal Power Act as administered by FERC and the DOE. The Federal Power Act provides for regulatory jurisdiction over the licensing of certain hydroelectric projects, the business of, and facilities for, the transmission and sale at wholesale of electric energy in interstate commerce and certain other activities of the System operating companies, System Energy, and Entergy Power as interstate electric utilities, including accounting policies and practices. Such regulation includes jurisdiction over the rates charged by System Energy for capacity and energy provided to AP&L, LP&L, MP&L, and NOPSI, or others, from Grand Gulf 1.\nAP&L holds a license for two hydroelectric projects (70 MW) that was renewed on July 2, 1980. This license, granted by FERC, will expire in February 2003.\nRegulation of the Nuclear Power Industry\nGeneral. Under the Atomic Energy Act of 1954 and Energy Reorganization Act of 1974, operation of nuclear plants is intensively regulated by the NRC, which has broad power to impose licensing and safety-related requirements. In the event of non-compliance, the NRC has the authority to impose fines or shut down a unit, or both, depending upon its assessment of the severity of the situation, until compliance is achieved. AP&L, GSU, LP&L, and System Energy, as owners of all or a portion of ANO, River Bend, Waterford 3, and Grand Gulf 1, respectively, and Entergy Operations, as the operator of these units, are subject to the jurisdiction of the NRC. Revised safety requirements promulgated by the NRC have, in the past, necessitated substantial capital expenditures at System nuclear plants and additional such expenditures could be required in the future.\nThe nuclear power industry faces uncertainties with respect to the cost and availability of long-term arrangements for disposal of spent nuclear fuel and other radioactive waste, nuclear plant operational issues, the technological and financial aspects of decommissioning plants at the end of their licensed lives, and the effect of certain requirements relating to nuclear insurance. These matters are briefly discussed below.\nSpent Fuel and Other High-Level Radioactive Waste. Under the Nuclear Waste Policy Act of 1982, the DOE is required, for a specified fee, to construct storage facilities for, and to dispose of, all spent nuclear fuel and other high-level radioactive waste generated by domestic nuclear power reactors. The NRC, pursuant to this Act, also requires operators of nuclear power reactors to enter into spent fuel disposal contracts with the DOE, and the affected System companies have entered into such disposal contracts. However, the DOE has not yet identified a permanent storage repository and, as a result, future expenditures may be required to increase spent fuel storage capacity at the plant sites. (For further information concerning spent fuel disposal contracts with the DOE, schedules for initial shipments of spent nuclear fuel, current on-site storage capacity, and costs of providing additional on-site storage capacity, with respect to AP&L, GSU, LP&L, and System Energy, respectively, see Note 8 of AP&L's, GSU's, and LP&L's, and Note 7 of System Energy's, Notes to Financial Statements, \"Commitments and Contingencies - Spent Nuclear Fuel and Decommissioning Costs,\" incorporated herein by reference.)\nLow-Level Radioactive Waste. The availability and cost of disposal facilities for low-level radioactive waste resulting from normal operation of nuclear units are subject to a number of uncertainties. Under the Low-Level Radioactive Waste Policy Act of 1980, as amended, each state is responsible for disposal of its own waste, and states may join in regional compacts to jointly fulfill their responsibilities. The States of Arkansas and Louisiana participate in the Central States Compact, and the State of Mississippi participates in the Southeast Compact. Two disposal sites are currently operating in the United States, and one of them, which is located in Washington, is closed to out-of-region generators. The second site, the Barnwell Disposal Facility (Barnwell) located in South Carolina, is operated by the Southeast Compact and the State of Mississippi is expected to have access to this site through December 1995. Barnwell had been open to out-of-region generators (including generators in Arkansas and Louisiana) in the past; however, on April 14, 1993, the Southeast Compact voted to deny access to Barnwell to members of the Central States Compact. Such access was reinstated for the period from October 1993 through June 1994, at which time legislative action by the State of South Carolina would be required to permit further access to out-of-region generators. Beginning in July 1994, low-level radioactive waste generators in the Central States Compact, including AP&L, GSU, and LP&L, will be required to store such waste on-site until a Central States Compact facility becomes operational or another site becomes accessible.\nBoth the Central States Compact and the Southeast Compact are working to establish additional disposal sites. The System, along with other waste generators, funds the development costs for new disposal facilities. The System's expenditures to date are approximately $30 million; and future levels of expenditures cannot be predicted. Until such facilities are established, the System will continue to seek access to existing facilities, which may be available at costs that are higher than those incurred in the past, or which may be unavailable. If such access is unavailable, the System will store low-level waste on-site at the affected units. ANO has on-site storage that is estimated to be sufficient until 1999. Construction of on-site storage at the other nuclear units is being considered, along with other alternatives. A coordinated design concept that can be utilized at both Waterford 3 and River Bend is being evaluated. Grand Gulf 1 will have continued disposal access through December 1995; therefore, no immediate plans for on-site storage are needed for Grand Gulf 1. The estimated construction costs for storage sufficient for approximately five years at Grand Gulf 1, Waterford 3, and River Bend are in the range of $2.0 million to $5.0 million for each site. As an alternative to on-site storage, Entergy is working with other industry groups to influence the continued operation of the Barnwell disposal facility for out-of-region generators.\nDecommissioning. AP&L, GSU, LP&L, and System Energy are recovering portions of their estimated decommissioning costs for ANO, River Bend, Waterford 3, and Grand Gulf 1, respectively. These amounts are being deposited in external trust funds that, together with the earnings thereon, can only be used for future decommissioning costs. Estimated decommissioning costs are regularly reviewed and updated to reflect inflation and changes in regulatory requirements and technology, and applications will be made to appropriate regulatory authorities to recover in rates any projected increase in decommissioning costs above that currently being recovered. (For additional information with respect to decommissioning costs for ANO, River Bend, Waterford 3, and Grand Gulf 1, respectively, see Note 8 of AP&L's, GSU's, and LP&L's and Note 7 of System Energy's Notes to Financial Statements, \"Commitments and Contingencies - Spent Nuclear Fuel and Decommissioning Costs,\" incorporated herein by reference.)\nUranium Enrichment Decontamination and Decommissioning Fees. The Energy Act requires all electric utilities (including AP&L, GSU, LP&L, and System Energy) that have purchased uranium enrichment services from the DOE to contribute up to a total of $150 million annually, adjusted for inflation, up to a total of $2.25 billion over approximately 15 years, for decommissioning and decontamination of enrichment facilities. AP&L's, GSU's, LP&L's, and System Energy's estimated annual contributions to this fund are $3.3 million, $0.6 million, $1.2 million, and $1.3 million, respectively, in 1993 dollars over approximately 15 years. Contributions to this fund are to be recovered through rates in the same manner as other fuel costs.\nNuclear Insurance. The Price-Anderson Act provides for a limit of public liability for a single nuclear incident. As of December 31, 1993, the limit of public liability for such type of incident was approximately $9.4 billion. AP&L, GSU, LP&L, and System Energy have protection with respect to this liability through a combination of private insurance and an industry assessment program, and also have insurance for property damage, costs of replacement power, and other risks relating to nuclear generating units. (For a discussion of insurance applicable to nuclear programs of AP&L, GSU, LP&L, and System Energy, see Note 7 of System Energy's and Note 8 of AP&L's, GSU's, and LP&L's Notes to Financial Statements, and Note 8 of Entergy Corporation and Subsidiaries, Notes to Consolidated Financial Statements, \"Commitments and Contingencies - Nuclear Insurance,\" incorporated herein by reference.)\nNuclear Operations\nGeneral. Entergy Operations operates ANO, River Bend, Waterford 3, and Grand Gulf 1, subject to the owner oversight of AP&L, GSU, LP&L, and System Energy, respectively. AP&L, GSU, LP&L, and System Energy, and the other Grand Gulf 1, Waterford 3, and River Bend co- owners, have retained their ownership interests in their respective nuclear generating units. AP&L, GSU, LP&L, and System Energy have also retained their associated capacity and energy entitlements, and pay directly or reimburse Entergy Operations at cost for its operation of the units.\nOn June 24, 1992, the NRC issued a bulletin requiring all utilities using a certain fire barrier material in a nuclear power plant to take certain actions related to the material. This material may have been used in as many as 87 nuclear plants in the United States, including ANO, River Bend, Waterford 3, and Grand Gulf 1 (see \"River Bend,\" below for additional information).\nANO. In 1990, in response to a special diagnostic evaluation report by the NRC, AP&L implemented a comprehensive action plan for ANO designed to correct certain management, organizational, and technical problems, and to improve the long-term operational effectiveness and safety of the units. This action plan was largely completed in 1993.\nLeaks in certain steam generator tubes at ANO 2 were discovered and repaired during an outage in March 1992; and during a refueling outage in September 1992, a comprehensive inspection of all steam generator tubing was conducted and necessary repairs were made. During a mid-cycle outage in May 1993, a scheduled special inspection of certain steam generator tubing was conducted by Entergy Operations and additional repairs were made. Entergy Operations proposes to operate ANO 2 with no further steam generator inspections until the next refueling outage, which is scheduled for the spring of 1994, and the NRC has concurred with this proposal. The operations and power output of the unit have not been adversely affected to date by these repairs.\nRiver Bend. The Nuclear Information and Resource Service petitioned the NRC to shut down the River Bend plant in July 1992 because of alleged defects in a fire barrier material. GSU has used this material in its River Bend plant and is in compliance with the requirements of the bulletin. On August 19, 1992, the NRC denied the petitioner's request. In a December 1993 letter, the NRC requested additional technical information on the use of the material in the plant, and requested GSU's plans and schedules for resolving technical issues associated with the use of the material in certain configurations. GSU has provided the information requested in the NRC letter.\nOn January 13, 1993, in connection with the Merger, GSU filed two applications with the NRC to amend the River Bend operating license. The applications sought the NRC's consent to the Merger and to a change in the licensed operator of the facility from GSU to Entergy Operations. On August 6, 1993, Cajun filed a petition to intervene and request for a hearing in the proceedings. On January 27, 1994, the presiding NRC Atomic Safety and Licensing Board (ASLB) issued an order granting Cajun's petition to intervene and ordered a hearing on one of Cajun's contentions. On February 15, 1994, GSU filed an appeal of the ASLB Order with the NRC. On December 16, 1993, prior to this ASLB ruling, the NRC Staff issued the two license amendments for River Bend, making them effective immediately upon consummation of the Merger. On February 16, 1994, Cajun filed with the D.C. Circuit petitions for review of the two license amendments issued by the NRC. These two amendments are in full force and effect, but are subject to the outcome of the two proceedings. A hearing on the proceeding before the ALSB is not expected to begin prior to the fall of 1994.\nIn February 1993, GSU and the other affected utilities were served with a federal grand jury subpoena to produce documents and other information relating to the fire barrier material used in the plant. Nothing in the subpoena indicates that GSU or any employee is a target of the grand jury investigation. GSU is cooperating fully with the government in its investigation. The requested documentation and other information were produced in March 1993, and no additional requests have been received.\nOn October 25, 1993, the NRC staff began an operational safety team inspection at River Bend that was concluded by mid-November 1993. The NRC held the inspection to verify that the plant is being operated safely and in conformance with regulatory requirements. The team's findings were discussed at a public meeting in November 1993, and a written inspection report was issued in January 1994. The inspection team found apparent violations in two categories: (1) procedure adequacy, and (2) concerns with the corrective action program. Due to the nature of these apparent violations, an enforcement conference was not warranted and no fine was proposed.\nState Regulation\nGeneral. Each of the System operating companies is subject to regulation by its respective state and\/or local regulatory authorities with jurisdiction over the service areas in which each company operates. Such regulation includes authority to set rates for electric and gas service provided at retail. (See \"Rate Matters and Regulation - Rate Matters - Retail Rate Matters,\" above)\nAP&L is subject to regulation by the APSC and the Tennessee Public Service Commission (TPSC). APSC regulation includes the authority to set rates, determine reasonable and adequate service, fix the value of property used and useful, require proper accounting, control leasing, control the acquisition or sale of any public utility plant or property constituting an operating unit or system, set rates of depreciation, issue certificates of convenience and necessity and certificates of environmental compatibility and public need, and control the issuance and sale of securities. Regulation by the TPSC includes the authority to set standards of service and rates for service to customers in the state, require proper accounting, control the issuance and sale of securities, and issue certificates of convenience and necessity.\nGSU is subject to the jurisdiction of the municipal authorities of incorporated cities in Texas as to retail rates and services within their boundaries, with appellate jurisdiction over such matters residing in the PUCT. GSU is also subject to regulation by the PUCT as to retail rates and services in rural areas, certification of new generating plants, and extensions of service into new areas. GSU is subject to regulation by the LPSC as to electric and gas service, rates and charges, certification of generating facilities and power or capacity purchase contracts, and other matters.\nLP&L is subject to the jurisdiction of the LPSC as to rates and charges, standards of service, depreciation, accounting, and other matters, and is subject to the jurisdiction of the Council with respect to such matters within Algiers.\nMP&L is subject to regulation as to service, service areas, facilities, and retail rates by the MPSC. MP&L is also subject to regulation by the APSC as to the certificate of environmental compatibility and public need for the Independence Station.\nNOPSI is subject to regulation as to electric and gas service, rates and charges, standards of service, depreciation, accounting, issuance of certain securities, and other matters by the Council.\nFranchises. AP&L holds franchises to provide electric service in 301 incorporated cities and towns in Arkansas, all of which are unlimited in duration and terminable by either party.\nGSU holds non-exclusive franchises, permits, or certificates of convenience and necessity to provide electric and gas service in 55 incorporated villages, cities, and towns in Louisiana and 64 incorporated cities and towns in Texas. GSU ordinarily holds 50-year franchises in Texas towns and 60-year franchises in Louisiana towns. The present terms of GSU's electric franchises will expire in the years 2007-2036 in Texas and in the years 2015-2046 in Louisiana. The natural gas franchise in the City of Baton Rouge will expire in the year 2015.\nLP&L holds franchises to provide electric service in 116 incorporated villages, cities, and towns. Most of these franchises have 25-year terms expiring during the period 1995-2015. However, six of these municipalities have granted 60-year franchises, with the last one expiring in the year 2040. Of these franchises, none has expired to date, one is scheduled to expire as early as 1995, and 37 are scheduled to expire by year-end 2000. LP&L also supplies electric service in 353 unincorporated communities, all of which are located in parishes (counties) from which LP&L holds franchises to serve the areas in which the unincorporated communities are located.\nMP&L has received from the MPSC certificates of public convenience and necessity to provide electric service to the areas of Mississippi that MP&L serves, which include a number of municipalities. MP&L continues to serve in such municipalities upon payment of a statutory franchise fee, regardless of whether an original municipal franchise is still in existence.\nNOPSI provides electric and gas service in the City of New Orleans pursuant to city ordinances, which state, among other things, that the City has a continuing option to purchase NOPSI's electric and gas utility properties.\nSystem Energy has no franchises from any municipality or state. Its business is currently limited to wholesale sales of power.\nEnvironmental Regulation\nGeneral. In the areas of air quality, water quality, control of toxic substances and hazardous and solid wastes, and other environmental matters, the System operating companies, System Energy, Entergy Power, and Entergy Operations are subject to regulation by various federal, state, and local authorities. Each of the Entergy companies considers itself to be in substantial compliance with those environmental regulations currently applicable to its business and operations. Entergy has incurred increased costs of construction and other increased costs in meeting environmental protection standards. Because environmental regulations are continually changing, the ultimate compliance costs to Entergy cannot be precisely estimated at any one time. However, Entergy currently estimates that its potential capital expenditures for environmental control purposes, including those discussed in \"Clean Air Legislation,\" below, will not be material for the System as a whole.\nClean Air Legislation. The Clean Air Act Amendments of 1990 (the Act) place limits on emissions of sulfur dioxide and nitrogen oxide from fossil-fueled generating plants. Entergy has evaluated the Act to determine the impact on the System's overall cost of emission control and monitoring equipment. Based upon such evaluation in connection with existing generating facilities, the System has determined that no additional control equipment will be required to control sulfur dioxide. In the area served by GSU, control equipment will be required for nitrogen oxide reductions due to the ozone nonattainment status of the Baton Rouge, Louisiana and Beaumont and Houston, Texas air quality control regions no later than May 1995. The cost of such control equipment is estimated at $16.0 million. The remainder of the System may be required to install nitrogen oxide emission controls on its coal units by the year 2000. The EPA is currently drafting rules that will determine the levels of nitrogen oxide emissions that will be allowed by affected units. Under the latest EPA-proposed regulations on nitrogen oxide, Entergy would not have to install additional controls. It is not possible to determine at this time if the final regulations promulgated by EPA would require the System's coal units to install nitrogen oxide emission controls. Should additional controls be required, the overall cost would vary depending on the eventual emission levels that are set.\nIn addition, the System will be required to install additional continuous emission monitoring equipment at its coal units to comply with final EPA regulations. It is estimated that the continuous emission monitoring systems could cost as much as $1.0 million for all of the coal units. Final EPA regulations established the acceptable continuous monitoring methods, as well as alternative monitoring methods, that make it possible to determine the compliance of the units with respect to emission levels through fuel sampling and other estimation methods. Capital expenditures of approximately $11.0 million are estimated for continuous emission monitoring systems at the other fossil-fueled units.\nThe authority to impose permit fees has been delegated to the states by EPA and, depending on the extent of the state program and the fees imposed by each state regulatory authority, permit fees for the System could range from $1.6 to $5.0 million annually.\nThere are several other areas, such as air toxins and visibility, that will require regulatory study and rule promulgation to determine whether pollution control equipment is necessary.\nRegarding sulfur dioxide emissions, the Act provides \"allowances\" to most Entergy units based upon past emission levels and operating characteristics. Each unit of allowance is an entitlement to emit one ton of sulfur dioxide per year. Under the Act, utilities will be required to possess allowances for sulfur dioxide emissions from affected units. Based on Entergy's past operating history, it is considered a \"clean\" utility and as such will receive more allowances than are currently necessary for normal operations. The System believes that it will be able to operate its units efficiently without installing scrubbers or purchasing allowances from outside sources, and the System may have excess allowances available for sale to other utilities.\nEntergy currently estimates that total capital costs of approximately $39.4 million could be required to comply with the Act. These estimated costs for each legal entity are as follows:\nNitrogen Continuous Company Oxide Emissions Control Monitors Total ---------------------- -------- ---------- ----- (In Thousands)\nAP&L $ 7,275 $ 3,300 $10,575 GSU 16,000 4,900 20,900 LP&L - 2,300 2,300 MP&L 2,500 1,500 4,000 NOPSI - - - System Energy - - - Entergy Power 1,575 - 1,575 ------- ------- ------- Total Entergy System $27,350 $12,000 $39,350 ======= ======= =======\nOther Environmental Matters. The provisions of the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended (Superfund), among other things, authorize the EPA and, indirectly, the states to require the generators and certain transporters of certain hazardous substances released from or at a site, and the owners or operators of such site, to clean up the site or reimburse the costs therefor. This statute has been interpreted to impose joint and several liability on responsible parties. In compliance with applicable laws and regulations at the time, the System operating companies have sent waste materials to various disposal sites over the years. Also, past operating procedures and maintenance practices, which were not subject to regulation at that time, are now regulated by various environmental laws. Some of these sites have been the subject of governmental action, thereby causing one or more of the System operating companies to be involved with site cleanup activities. The System operating companies have participated to various degrees in accordance with their potential liability with these site cleanups and have, therefore, developed experience with cleanup costs. Their experience in these matters, and their judgments related thereto, are utilized by them in evaluating these sites. In addition, the System operating companies have established reserves for environmental clean-up\/restoration activities.\nAP&L. AP&L has received notices from time to time between 1989 and 1993, from the EPA, the Arkansas Department of Pollution Control and Ecology (ADPC&E), and others that it (among numerous others, including various utilities, municipalities and other governmental units, and major corporations) may be a PRP for cleanup costs associated with various sites in Arkansas. Most of these sites are neither owned nor operated by any System company. Contaminants at the sites include principally polychlorinated biphenyls (PCB's), lead, and other hazardous wastes. These sites and others are described below.\nAP&L received notices from the EPA and ADPC&E in 1990 and 1991, identifying it as one of 30 PRP's (along with LP&L and GSU) at two Saline County sites in Arkansas. Both sites are believed to be contaminated with PCB's and lead. Cleanup costs for both sites are estimated at $6.0 million, with AP&L's total share of the costs being estimated at approximately $2.0 million. AP&L to date has expended approximately $1.0 million for remediation at one of these sites. The total liability cannot be precisely determined until remediation is complete at both sites. AP&L believes its potential liability for these sites will not be material.\nReynolds Metals Company (RMC) and AP&L notified the EPA in 1989, of possible PCB contamination at two former RMC plant sites in Arkansas to which AP&L had supplied power. AP&L completed remediation at the substations serving the plant sites at a cost of $1.7 million. Additional PCB contamination was found in a portion of a drainage ditch that flows from the RMC's Patterson facility to the Ouachita River. RMC has demanded that AP&L participate in the remediation efforts with respect to the ditch. AP&L and independent contractors engaged by AP&L conducted an investigation of the ditch contamination and the potential migration of PCB's from the electrical equipment that AP&L maintained at the plant. The investigation concluded that little, if any, of the contamination was caused by AP&L. AP&L's expenditures thus far on the ditch have been approximately $150,000. It is AP&L's understanding that RMC has spent approximately $10.0 million to complete remediation of the ditch contamination. AP&L has not received a notice from the EPA that it may be a PRP with respect to remediation costs for this site. However, RMC is seeking reimbursement of $5.0 million (50% of expenditures) from AP&L. AP&L continues to deny responsibility for any of such remediation costs and believes that its potential liability, if any, for this site will not be material.\nAP&L entered into a Consent Administrative Order dated February 21, 1991, with the ADPC&E that named AP&L as a PRP for cleanup of contamination associated with the Utilities Services, Inc. state Superfund site located near Rison, Arkansas. Such site was found to have soil contaminated by PCB's and pentachlorophenol (a wood preservative chemical). Also, containers and drums that contained PCB's and other hazardous substances were found at the site. AP&L's share of total remediation costs are estimated to range between $3.0 million and $5.0 million. AP&L is attempting to identify and notify other PRP's. AP&L has received assurances from the ADPC&E that it will use its enforcement authority to allocate remediation expenses among AP&L and any other PRP's that can be identified (approximately 30 - 35 have been identified to date). AP&L has performed the activities necessary to stabilize the site, which to date has cost approximately $114,000. AP&L believes that its potential liability for this site will not be material.\nAP&L received Notice of Potential Liability and a Demand for Payment in November 1992 from the EPA in conjunction with a contaminated site in Union County, Arkansas. AP&L was identified as one of eleven PRP's, which also include LP&L. The EPA has already completed cleanup of the site. An agreement has been negotiated with the EPA which determined AP&L to be a de minimis party with total liability of approximately $47,000.\nAs a result of an internal investigation, AP&L has discovered soil contamination at two AP&L-owned sites located in Blytheville, Arkansas and Pine Bluff, Arkansas. The contamination appears to be a result of past operating procedures that were performed prior to any applicable environmental regulation. AP&L is still investigating these sites to determine the full extent of the contamination. Until the investigations are complete, AP&L cannot estimate the liabilities associated with these sites. However, AP&L believes its potential liability for both of the sites should not be material.\nFor all of these sites and for certain sites in which remediation has been completed, AP&L has expended approximately $3.2 million for cleanup costs since 1989.\nGSU. GSU has been notified by the EPA that it has been designated as a PRP for the cleanup of sites on which GSU and others have, or have been alleged to have, disposed of hazardous materials. GSU is currently negotiating with the EPA and various state authorities regarding the cleanup of some of these sites. Several class action and other suits have been filed seeking relief from GSU and others for damages caused by the disposal of hazardous waste and for asbestos-related disease that allegedly occurred from exposure on GSU premises or on premises on which GSU allegedly disposed of materials (see \"Other Regulation and Litigation - GSU,\" below). While the amounts at issue in the cleanup efforts and suits may be very substantial sums, management believes that its financial condition and results of operations will not be materially affected by the outcome of the suits. These environmental liabilities are described below.\nIn 1971, GSU purchased certain property near its Sabine generating station for possible cooling water capability expansion. Although it was not known to GSU at the time of the purchase, the property was utilized by area industries in the 1950's and 1960's as an industrial waste dump. GSU sold the property in 1984. In October 1984 the abandoned waste site on the property was included on the Superfund National Priorities List (NPL) by the EPA. The EPA has indicated that it believes GSU to be a PRP for cleanup of the site based on its past ownership. GSU has advised the EPA that it does not believe that it has such responsibility. GSU has pursued negotiations with the EPA and is a member of a task force made up of other PRP's for the voluntary cleanup of the waste site. A Consent Decree has been signed by all parties. Because additional wastes have been discovered at the site since the original cleanup costs were estimated, the total costs for the voluntary cleanup are unknown. However, it is estimated that cleanup will exceed $15.0 million. GSU has negotiated a responsible share of 2.26% of the estimated cleanup cost. Federal and state agencies are presently examining potential liabilities associated with natural resource damages. This matter is currently under negotiation with the other PRP's and the agencies. Remediation of the site is expected to be completed in 1996.\nIn March 1993, GSU completed its cleanup activities at a site in Houston, Texas, which is included in the NPL. On September 20, 1993, GSU received formal notification from the EPA of its acceptance of the remedial activities conducted at the site. Currently, other parties are conducting cleanup activities at the site. However, these cleanup activities are unrelated to GSU's involvement at the site. Through 1993, GSU incurred cleanup costs of approximately $3.3 million. Pursuant to the Consent Decree, GSU is responsible for oversight costs incurred by the EPA. GSU has not received a reimbursement request for outstanding oversight costs, but anticipates these costs may total between $250,000 and $500,000. GSU is pursuing contribution for the cleanup costs at the site from other parties believed to be potentially responsible.\nGSU is currently involved in a multi-phased remedial investigation of an abandoned manufactured gas plant (MGP) site located in Lake Charles, Louisiana. The property was the site of an MGP that is believed to have operated during the period from approximately 1916 to 1931. Coal tar, a by-product of the distillation process, was apparently routed to a portion of the property for disposal. Since GSU purchased the property in 1926, the same area has been filled with soil and used as a landfill for miscellaneous items including electrical poles, electrical equipment, and other debris. Under an Order by the Louisiana Department of Environmental Quality (LDEQ), which is currently stayed, GSU was required to investigate and, if necessary, take remedial action at the site. The EPA has notified GSU that it is performing an independent review and ranking of the site to determine whether the site should be listed on the NPL. Another PRP has been identified and is believed to have had a role in the ownership and operation of the MGP. Negotiations with that company for joint participation and any remedial action are expected to continue. GSU currently is awaiting notification from the EPA before initiating additional cleanup negotiations or actions. While studies to determine the location of the coal tar have been conducted, the cleanup costs of the site are unknown. GSU does not presently believe that its ultimate responsibility with respect to this site will be material.\nGSU has also been advised that it has been named as a PRP, along with a number of other companies (including LP&L), for an abandoned waste oil recycling plant site in Livingston Parish, Louisiana, which is included on the NPL. Although significant remediation has been completed, additional studies are expected to continue in 1994. GSU and LP&L have been named as defendants in a class action lawsuit lodged against a group of PRP's associated with the site. (For information regarding litigation in connection with the Livingston Parish site, see \"Other Regulation and Litigation - GSU,\" below.) GSU does not presently believe that its ultimate responsibility with respect to this site will be material.\nGSU received notification in 1992 from the EPA of potential liability at a site located in Iota, Louisiana. This site accepted a variety of wastes, including medical and chemical wastes. In addition to GSU, over 200 parties have been named as PRP's. The EPA is continuing its investigation of the site and has notified the PRP's of the possibility of this site being linked to another site. To date, GSU has not received notification of liability with regard to the other site. GSU does not presently believe its ultimate responsibility with respect to this site will be material.\nGSU has also been notified by the EPA of potential liability at two sites located in Saline County, Arkansas. It is believed that both sites served as a salvaging facility for transformers and batteries. In addition to GSU, 32 other parties (including AP&L and LP&L) have been named as PRP's. At this time, GSU's involvement with the site is unknown. GSU does not presently believe that its ultimate responsibility with respect to this site will be material.\nIn November 1993, GSU received informal notification from the Rhode Island Department of Environmental Management regarding a site at which electrical capacitors had been located. The State traced several of these capacitors to GSU. GSU records indicate these capacitors were returned under warranty to the manufacturer in the 1960's due to defects. GSU does not presently believe it is responsible for any alleged activities occurring at this site.\nAs of December 31, 1993, GSU had expended $7.0 million toward the cleanup of such sites.\nIn 1990, GSU received an order from the LDEQ to reduce emissions of nitrogen oxides and reactive hydrocarbons at its Willow Glen and Louisiana Station plants located near Baton Rouge, Louisiana. GSU has requested an adjudicatory hearing on the matter, which the LDEQ secretary has deemed as staying the order. In the interim, GSU has joined several other Baton Rouge industries to develop and submit to LDEQ a comprehensive set of short- and long-range reduction plans. In 1993, LDEQ adopted regulations requiring permanent reductions in nitrogen oxides emissions at Willow Glen and Louisiana Station and is considering requirements for further reductions. The estimates for actions necessary to comply with these regulations are included in the discussion under \"Clean Air Legislation,\" above. GSU believes these regulations implement the intent of the 1990 order, and actions beyond those required by the regulations will not be required.\nLP&L and NOPSI. LP&L and NOPSI have received notices from time to time between 1986 and 1993 from the EPA and\/or the states of Louisiana and Mississippi that each or either of the companies may be a PRP for cleanup costs associated with disposal sites that are currently in various stages of remediation in Arkansas, Illinois, Louisiana, Mississippi, and Missouri that are neither owned nor operated by any System company.\nAs to one Missouri site, LP&L's and NOPSI's aggregate liability is currently estimated not to exceed $558,000, and because of the type and the large number of PRP's (over 700, including many large utilities and national and international corporations), LP&L and NOPSI do not expect liabilities in excess of this amount. For the other Missouri site, LP&L and the other 64 PRP's (including several large, creditworthy utility companies) have received an EPA demand to pay approximately $1.2 million expended by the EPA. In June of 1993, LP&L paid $12,392 in full payment of its share of the cleanup costs. LP&L considers cleanup at this site to be complete.\nAs to the two Saline County, Arkansas sites (involving AP&L, GSU, and LP&L), LP&L has been advised that current estimates for total cleanup are approximately $6.0 million. LP&L believes that, because of the number and nature of the PRP's, its exposure for these sites will not be material. Initial indications are that LP&L was involved in the Saline sites, but LP&L believes that because of the limited scope of its involvement and the number and nature of PRP's, its exposure for these sites will not be material.\nLP&L received notice from the EPA in November 1992, that it (along with AP&L) was involved in the Union County, Arkansas site. An agreement has been negotiated with the EPA that determined LP&L to be a de minimis party with a total liability of approximately $47,000 (see \"AP&L,\" above.)\nAs to the Mississippi site, LP&L (along with System Energy) understands that EPA has expended approximately $740,000 for this site (three separate locations being treated administratively as one). The State of Mississippi has indicated it intends to have PRP's conduct a cleanup of the site but has not yet taken formal action. LP&L has expended $22,300 to settle with the EPA for its costs for this site and, because there are 44 PRP's for this site (including a number of major oil companies), does not expect its share of future costs to be material.\nFor a Livingston Parish, Louisiana site (involving at least 70 PRP's, including GSU and many other large and creditworthy corporations), LP&L has found in its records no evidence of its involvement. (For information regarding litigation in connection with the Livingston Parish site, see \"Other Regulation and Litigation - LP&L,\" below.) At a second Louisiana site (also included on the NPL and involving 57 PRP's, including a number of major corporations), NOPSI believes it has no liability for the site because the material it sent to the site was not a hazardous substance.\nFor the Illinois site, NOPSI, upon its review of the site documentation and of its own records, has asserted to the EPA that it has no involvement in this site. However, NOPSI is participating with other PRP's (including many large and creditworthy corporations) as a prudent means of resolving potential liability, if any.\nFor all these sites, LP&L has expended approximately $349,000 and NOPSI has expended approximately $172,000 for cleanup costs (commencing in 1986) to date.\nDuring 1993, LP&L performed preliminary site assessments at the locations of two retired power plants previously owned and operated by two Louisiana municipalities. LP&L had purchased the power plants by agreement (as part of the municipal electric systems) after operating them for the last few years of their useful lives. The assessments indicated some subsurface contamination from fuel oil. LP&L and the LDEQ are now reviewing site remediation procedures that LP&L estimates will not exceed $650,000 in the aggregate.\nDuring 1993, the LDEQ issued new rules for solid waste regulation, including waste water impoundments. LP&L has determined that certain of its power plant waste water impoundments are affected by these regulations and has chosen to close them rather than retrofit and permit them. The aggregate cost of the impoundment closures, to be completed by 1996, is estimated to be $7.3 million.\nSystem Energy. In February 1990, System Energy received an EPA notice that it (among numerous other companies) may be a PRP for cleanup costs associated with the same site in Mississippi in which LP&L is involved. Potential liability is based on the alleged shipment of waste oil to the site from 1981 to 1985. System Energy does not expect its share of the total expenditures to be material because there are 44 PRP's for this site, including a number of major oil companies.\nOther Regulation and Litigation\nEntergy Corporation and GSU. In July and August 1992, Entergy Corporation and GSU filed applications with FERC, the LPSC, and the PUCT, and Entergy Corporation, Entergy Operations, and Entergy Services filed an application with the SEC under the Holding Company Act, seeking authorization of various aspects of the Merger. In January 1993, GSU filed two applications with the NRC seeking approval of the change in ownership of GSU and an amendment to the operating license for River Bend to reflect its operation by Entergy Operations. All regulatory approvals were obtained in 1993 and the Merger was consummated on December 31, 1993 (see \"Business of Entergy - Entergy Corporation-GSU Merger,\" above, for further information).\nRequests for rehearing of certain aspects of the FERC order were filed on January 14, 1994, by 14 parties, including Entergy Corporation, the APSC, the Mississippi Attorney General, the LPSC, the MPSC, the Texas Office of Public Utility Counsel, and the PUCT. Entergy Corporation, the LPSC, the Texas Office of Public Utility Counsel, and the PUCT are requesting FERC to restore a 40% cap on the amount of fuel savings GSU may be required to transfer to other Entergy operating companies under a tracking mechanism designed to protect the other companies from certain unexpected increases in fuel costs. The other parties are seeking to overturn FERC's decision on various grounds. Requests for rehearing of the SEC order were filed with the SEC by Houston Industries Incorporated and Houston Lighting & Power Company on December 28, 1993, and petitions for review seeking to set aside the SEC order were filed with the D.C. Circuit by these parties on February 15, 1994 and by Cajun on February 14, 1994.\nSee \"Nuclear Operations - River Bend,\" above for information on challenges to the NRC's approval of GSU's applications.\nAppeals seeking to set aside the LPSC order related to the Merger were filed in the 19th Judicial District Court for the Parish of East Baton Rouge, Louisiana, by Houston Lighting & Power Company on August 13, 1993, and by the Alliance for Affordable Energy, Inc. on August 20, 1993. Subsequently, on February 9, 1994, Houston Lighting & Power Company filed a motion voluntarily dismissing its appeal.\nAP&L. Three lawsuits (which have been consolidated) were filed in the Arkansas District Court by numerous plaintiffs against AP&L and Entergy Services in connection with the operation of two dams during a period of heavy rainfall and flooding in May 1990. The consolidated lawsuits sought approximately $14.4 million in property losses and other compensatory damages, and $500 million in punitive damages. In their responses to these complaints, AP&L and Entergy Services asserted, among other things, that AP&L owns flowage easements giving it the permanent right to inundate the lands owned or occupied by the plaintiffs in connection with the operation of the dams. In June 1991, the Arkansas District Court granted summary judgment to AP&L with respect to the enforceability of its flowage easements. In November 1991, the Arkansas District Court ruled that Entergy Services was entitled to the benefit of AP&L's flowage easements, in effect, removing from consideration damages in the approximate amount of $13.5 million alleged to have occurred within the areas covered by the easements. As a result, over 300 plaintiffs claiming damage within the easements were dismissed from the consolidated case in December 1991. Certain plaintiffs appealed these orders to the Eighth Circuit, which appeal was denied in March 1992. Following the Eighth Circuit's denial of their interlocutory appeal from the Arkansas District Court's orders, certain of the plaintiffs, without prejudice to their right to refile, voluntarily dismissed their claims which had not been disposed of in the Arkansas District Court's orders, thus making the orders a final adjudication, and appealed these orders to the Eighth Circuit. The remaining plaintiffs obtained a stay and an administrative termination of their claims, pending the outcome of the appeal. In December 1993, a three-judge panel of the Eighth Circuit filed its opinion affirming the judgment of the Arkansas District Court and entered judgment accordingly. The plaintiffs appealing the Arkansas District Court's orders filed petitions with the Eighth Circuit for a rehearing by the entire Court sitting en banc, which petitions were denied. The plaintiffs may petition the U.S. Supreme Court to issue a writ of certiorari to permit its review of the Eighth Circuit's decisions. Neither AP&L nor Entergy Services can predict whether the U.S. Supreme Court will grant such a petition, if one is filed.\nGSU. Between 1986 and 1993, GSU and approximately 70 other defendants, including many national and international corporations, including LP&L, have been sued in 17 suits in the Livingston Parish, Louisiana District Court (State District Court) by a number of plaintiffs who allegedly suffered damage or injury, or are survivors of persons who allegedly died, as a result of exposure to \"hazardous toxic waste\" that emanated from a site in Livingston Parish. The plaintiffs alleged that the defendants generated, transported, or participated in the storage of such wastes at the facility, which was previously operated as a waste oil recycling facility. These State District Court suits, which seek damages in total amounts ranging from $1.0 million to $10.0 billion and are now consolidated in a class action, and three federal suits in three states other than Louisiana involving issues arising from the same facility, have been removed and transferred, respectively, to the U.S. District Court for the Middle District of Louisiana (Federal District Court). Motions to remand the class action to the State District Court have been filed, and procedural issues regarding the federal suits are being considered as well. It is not known what effect any action taken on these motions and issues, whenever taken by the Federal District Court, would have on the April 11, 1994 State District Court trial date that was established before the suits were removed to Federal District Court; but it is unlikely such trial date will be met. The matter is pending.\nIn October 1989, an amended lawsuit petition was filed on behalf of 985 plaintiffs in the District Court of Jefferson County, Texas, 60th Judicial District in Beaumont, Texas, naming 55 defendants including GSU. In February 1990, another amended lawsuit petition was filed in a different state District Court in Jefferson County, Texas, on behalf of over 200 plaintiffs (subsequently amended to include a total of 660) naming 127 defendants including GSU. Possibly 300 to 400 or more of the plaintiffs in Texas may have worked at GSU's premises. At least five other individual suits have been filed in Beaumont against GSU and others, seeking damages for alleged asbestos exposure. All of the plaintiffs in such suits are also suing GSU and all other defendants on a conspiracy count. There are 25 asbestos- related law suits filed in the 14th Judicial District Court of Calcasieu Parish in Lake Charles, Louisiana, on behalf of an aggregate of 53 plaintiffs naming from 16 to 24 defendants including GSU, and GSU is aware of as many as 61 additional cases that may be filed. The suits allege that each plaintiff contracted an asbestos-related disease from exposure to asbestos insulation products on the premises of such defendants. Management believes that GSU has meritorious defenses, but there can be no assurance as to the outcome of these cases or that additional claims may not be asserted. In asbestos- related suits against the manufacturers, very substantial recoveries have been achieved by large groups of claimants. GSU does not presently believe that the ultimate resolution of these cases will materially adversely affect the financial position of GSU.\nOn February 3, 1984, Dow Chemical Company filed a request with the LPSC for a hearing to consider issues related to the purchase of cogenerated power by GSU. Other industries subsequently filed similar requests and the matters were consolidated. In November 1984, the LPSC completed hearings on rules, policies, and pricing methodologies applicable to cogeneration. Key issues were whether or not (1) GSU should be required to pay the industries for avoided capacity costs, and (2) GSU should be required to wheel power to or from the industrial plants. While the matter is still pending before the LPSC, the LPSC did set interim rates, subject to refund by either Dow or GSU, which exclude capacity costs.\nGSU has significant business relationships with Cajun, primarily co-ownership of River Bend and Big Cajun 2 Unit 3. GSU and Cajun own 70% and 30% of River Bend, respectively, while Big Cajun 2 Unit 3 is owned 42% and 58% by GSU and Cajun, respectively. GSU operates River Bend and Cajun operates Big Cajun 2 Unit 3.\nGSU was requested by Cajun and Jefferson Davis Electric Cooperative, Inc., (Jefferson Davis) to provide transmission of power over GSU's system for delivery to the Industrial Road area near Lake Charles, Louisiana. GSU provides electric service to industrial and other customers in such area, and Cajun and Jefferson Davis do not. On October 10, 1989, Cajun filed a complaint at FERC contending that GSU wrongfully refused to provide Cajun certain transmission services so that its member, Jefferson Davis, could provide service to certain industrial customers, and it requested FERC to order GSU to provide the service. On October 26, 1989, FERC summarily dismissed Cajun's complaint, but the D.C. Circuit reversed FERC's summary determination and remanded the case to FERC for a hearing. On June 24, 1992, after a hearing, an ALJ issued an Initial Decision, again dismissing Cajun's complaint. The ALJ found that the parties' contract did not require GSU to provide the service and that Cajun's member, Jefferson Davis, had not sought permission from the LPSC to serve the end-use customers in question. If Jefferson Davis secured permission from the LPSC, the ALJ believed (but did not decide) that FERC would require GSU to provide the requested transmission service. Both Cajun and GSU have filed exceptions to the ALJ's decision, and the matter is pending before FERC.\nCajun and Jefferson Davis also brought a related action in federal court in the Western District of Louisiana alleging that GSU breached its obligations under the parties' contract and violated the antitrust laws by refusing to provide the transmission service described above. Cajun and Jefferson Davis seek an injunction requiring GSU to provide the requested service and unspecified treble damages for GSU's refusal to provide the service. On November 9, 1989, the district court judge denied Cajun's and Jefferson Davis' motion for a preliminary injunction. On May 3, 1991, the judge stayed the proceeding pending final resolution of the matters still pending before FERC.\nGSU and Cajun are parties to FERC proceedings regarding certain long-standing disputes relating to transmission service charges. Cajun asserts that GSU has improperly applied the terms of a rate schedule, Service Schedule CTOC, to its billings to Cajun and it seeks an order from FERC directing GSU to recompute the bills. GSU asserts that Cajun underpaid its bills, and it seeks an order directing Cajun to pay surcharges to make up the underpayments. On April 10, 1992, FERC issued an order affirming in part and reversing in part an ALJ's recommendations. Both GSU and Cajun have requested rehearing, and the requests are still pending. In addition, on August 25, 1993, the United States Court of Appeals for the Fifth Circuit reversed portions of FERC's order previously decided adversely to GSU, and remanded the case to FERC for further proceedings. On January 13, 1994, FERC rejected GSU's proposal to collect an interim surcharge while FERC considers the court's remand. GSU interprets FERC's 1992 order and the Court of Appeals decision to mean that Cajun owes GSU approximately $85 million through December 31, 1993. If GSU also prevails on all of the issues raised in its pending request for rehearing of FERC's earlier orders, then GSU estimates that Cajun would owe GSU approximately $118 million through December 31, 1993. If GSU does not prevail on its rehearing request, and Cajun prevails on its rehearing request, and if FERC rejects the modifications GSU interprets the court of appeals to have directed, then GSU would owe Cajun an estimated $76 million through December 31, 1993. Pending FERC's ruling on the May 1992 motions for rehearing, GSU has continued to bill Cajun utilizing the historical billing methodology and has booked underpaid transmission charges, including interest, in the amount of $140.8 million as of December 31, 1993. This amount is reflected in long-term receivables and in other deferred credits, with no effect on net income.\nOn December 7, 1993, Cajun filed a complaint in the Middle District of Louisiana alleging that GSU failed to provide Cajun an opportunity to construct certain facilities that allegedly would have reduced its rates under Service Schedule CTOC, and Cajun seeks an order compelling the conveyance of certain facilities and unspecified damages. GSU has moved to dismiss the complaint on the basis, among others, that FERC has already addressed the matter in the proceedings described above.\nIn May 1990, GSU received a subpoena from the Office of Inspector General - Investigations, United States Department of Agriculture, seeking production of documents relating to the construction costs of River Bend. Such office is authorized to investigate matters relating to programs of the Department of Agriculture. GSU has been sued by Cajun with respect to its participation in River Bend with funds made available through Department programs administered by the REA. GSU has failed in its efforts to have the REA made a party to the Cajun litigation. GSU does not know the purpose of such Office's investigation, but presently assumes that it relates to the Cajun civil litigation since the production of documents sought by such Office is similar to that sought by Cajun in its action against GSU. However, there can be no assurance given by GSU as to the real purpose of such Office's investigation. Among other areas of responsibility, such office is authorized to investigate possible violations of law. GSU believes the subpoena proceeding has been administratively dismissed without prejudice to the parties.\nOn December 2, 1991, Cajun filed a complaint seeking declaratory and injunctive relief from the U. S. District Court for the Middle District of Louisiana. The complaint concerns GSU's position that Cajun is in default with respect to paying its share of certain expenditures to repair corrosion damage in the service water system, to repair a feedwater nozzle crack, and to repair a turbine rotor. Cajun alleges that it has no obligation to pay its share of such costs and seeks a declaration that it may elect not to participate in the funding of such costs and enjoining GSU from demanding payment therefor or attempting to implement default provisions in the Operating Agreement with respect thereto. Cajun alleges that if it is required to pay its share of such costs it would be forced to default on other obligations and would be forced to seek relief in bankruptcy. GSU believes that Cajun is in default under the provisions of the Operating Agreement. No assurance can be given as to the outcome or timing of this action brought by Cajun.\nOn November 25, 1992, Dixie Electric Membership Corporation and Southwest Louisiana Electric Membership Corporation, both members of Cajun, filed suit in the U.S. District Court for the Western District of Louisiana seeking a declaration that the River Bend Joint Ownership Agreement between GSU and Cajun is void because an allegedly required approval of the LPSC was not obtained. This suit has been transferred from the Western District to the Middle District, and is being processed in conjunction with the suit described in the following paragraph. GSU believes the suit is without merit.\nIn June 1989, Cajun filed a civil action against GSU in the U. S. District Court for the Middle District of Louisiana. Cajun stated in its complaint that the object of the suit is to annul, rescind, terminate, and\/or dissolve the Joint Ownership Participation and Operating Agreement entered into on August 28, 1979 (Operating Agreement), related to River Bend. Cajun alleges fraud and error by GSU, breach of its fiduciary duties owed to Cajun, and\/or GSU's repudiation, renunciation, abandonment, or dissolution of its core obligations under the Operating Agreement, as well as the lack or failure of cause and\/or consideration for Cajun's performance under the Operating Agreement. The suit seeks to recover Cajun's alleged $1.6 billion investment in the unit as damages, plus attorneys' fees, interest, and costs. In March 1992, the district court appointed a mediator to engage in settlement discussions and to schedule settlement conferences between the parties. Discussions with the mediator began in July 1992, however, GSU cannot predict what effect, if any, such discussions will have on the timing or outcome of the case. A trial without a jury is set for April 12, 1994, on the portion of the suit by Cajun to rescind the Operating Agreement. GSU believes the suits are without merit and is contesting them vigorously. No assurance can be given as to the outcome of this litigation. If GSU were ultimately unsuccessful in this litigation and were required to make substantial payments, GSU would probably be unable to make such payments and would probably have to seek relief from its creditors under the Bankruptcy Code.\nSee Note 12 of GSU's Notes to Financial Statements, \"Entergy Corporation-GSU Merger,\" for the accounting treatment of preacquisition contingencies, including a charge resulting from an adverse resolution of the litigation with Cajun related to River Bend.\nIn July 1992, Cajun notified GSU that it would fund a limited amount of costs related to the fourth refueling outage at River Bend, completed in September 1992. Cajun has also not funded its share of the costs associated with certain additional repairs and improvements at River Bend completed during the refueling outage. GSU has paid the costs associated with such repairs and improvements without waiving any rights against Cajun. GSU believes that Cajun is obligated to pay its share of such costs under the terms of the applicable contract. Cajun has filed a suit seeking a declaration that it does not owe such funds and seeking injunctive relief against GSU. GSU is contesting such suit and is reviewing its available legal remedies.\nIn September 1992, GSU received a letter from Cajun alleging that the operating and maintenance costs for River Bend are \"far in excess of industry averages\" and that \"it would be imprudent for Cajun to fund these excessive costs.\" Cajun further stated that until it is satisfied it would fund a maximum of $700,000 per week under protest for the remainder of 1992. In a December 1992 letter, Cajun stated that it would also withhold costs associated with certain additional repairs, of which the majority will be incurred during the next refueling outage, currently scheduled for April 1994. GSU believes that Cajun's allegations are without merit and is considering its legal and other remedies available with respect to the underpayments by Cajun. The total resulting from Cajun's failure to fund repair projects, Cajun's funding limitation on the fourth refueling outage, and the weekly funding limitation by Cajun was $33.3 million as of December 31, 1993, compared with a $28.4 million unfunded balance as of December 31, 1992.\nDuring 1994, and for the next several years, it is expected that Cajun's share of River Bend-related costs will be in the range of $60 million to $70 million per year. Cajun's weak financial condition could have a material adverse effect on GSU, including a possible NRC action with respect to the operation of River Bend and a need to bear additional costs associated with the co-owned facilities. If GSU were required to fund Cajun's share of costs, there can be no assurance that such payments could be recovered. Cajun's weak financial condition could also affect the ultimate collectibility of amounts owed to GSU.\nSince 1986, GSU had been in litigation with the Southern Company regarding unit power and long-term power purchase contracts with the Southern Company. GSU entered into a settlement agreement dated December 21, 1990, which was consummated on November 7, 1991, and the settlement obligations were fully satisfied in 1993.\nIn 1986, the PUCT and the LPSC disallowed the pass-through by GSU in its retail rates of the costs of the capacity purchases from the Southern Company, which were being incurred by GSU. GSU appealed the actions of the PUCT and the LPSC disallowing pass-through of Southern Company capacity charges to the appropriate state courts. The appeal from the LPSC is pending. As part of a settlement of a retail rate case in Texas during the fourth quarter of 1993, GSU has discontinued its appeal of the PUCT disallowance.\nFollowing the announcement of the execution of the Reorganization Agreement, a purported class action complaint was filed on June 9, 1992, in the District Court 60th Judicial District in Jefferson County, Texas (District Court) against GSU and its directors relating to the then proposed business combination with Entergy Corporation. On June 11, 1992, two additional purported class action complaints were filed against such defendants in the District Court. All three of the complaints (the Shareholder Actions) were filed by persons alleged to be shareholders of GSU and seeking declaration of a class action on behalf of all persons owning common stock of GSU.\nGSU has executed a Memorandum of Understanding with counsel for the plaintiffs in these suits agreeing in principle to settle such actions subject to execution of an appropriate stipulation of settlement, approval by the court, and certain other conditions. In the Memorandum, the defendants have denied any actionable acts or omissions and state that they have entered into the Memorandum solely to eliminate the burden and expense of further litigation and to facilitate the consummation of the business combination. The Memorandum memorialized certain agreements by GSU and Entergy Corporation for the benefit of shareholders principally in the event the business combination were not consummated, including a covenant to consider reinstitution of dividends on the common stock of GSU in such event. The business combination was consummated on December 31, 1993. Incident to the settlement, the defendants agreed not to oppose an application for attorneys' fees by plaintiffs' counsel that do not exceed $500,000 or for an award of expenses not to exceed $50,000. The individual directors named as defendants in these complaints are entitled to indemnification pursuant to GSU's Restated Articles of Incorporation, By-laws, and individual indemnity agreements, provided that the terms and conditions of the indemnities are satisfied.\nLP&L. For information regarding litigation in connection with an abandoned waste oil recycling plant site in Livingston Parish, Louisiana, in which LP&L and GSU are defendants, see \"GSU,\" above. LP&L does not believe that it was a generator of any material delivered to this facility and is defending vigorously against the claims in these suits.\nSince the mid-1980's, LP&L and the tax authorities of St. Charles Parish, Louisiana (Parish), in which Parish Waterford 3 is located, have disputed use taxes paid on nuclear fuel ($4.9 million through 1989) under protest by LP&L. LP&L has been successful in a lawsuit in the Parish with regard to recovering these taxes, plus interest, and also with regard to Parish lease tax issues pertaining to fuel financing arrangements. On the grounds of the previous favorable court decisions, LP&L continues to challenge in the courts additional use tax assessments that it has paid to the Parish and to seek additional interest that LP&L claims it is due. Also, in early procedural stages are (1) suits by LP&L with regard to the state use tax on nuclear fuel, and (2) LP&L's defense (and indemnification, if necessary) of nuclear fuel lessors under LP&L's fuel financing arrangements in the suits filed by the Parish use tax authorities claiming approximately $64.0 million in lease and use taxes. These matters are pending.\nSystem Energy. In connection with an IRS audit of Entergy's 1988, 1989, and 1990 consolidated federal income tax returns, the IRS is proposing that adjustments be made to the Grand Gulf 2 abandonment loss deduction claimed on Entergy's 1989 consolidated federal income tax return. If any such adjustments are necessary, the effect on System Energy's net income should be immaterial. Entergy intends to contest the proposed adjustments if finalized by the IRS. The outcome of such proceedings cannot be predicted at this time.\nEARNINGS RATIOS OF SYSTEM OPERATING COMPANIES AND SYSTEM ENERGY\nThe System operating companies and System Energy have calculated ratios of earnings to fixed charges and ratios of earnings to fixed charges and preferred dividends pursuant to Item 503 of Regulation S-K of the SEC as follows:\n____________________\n(a) \"Earnings\" as defined by SEC Regulation S-K represent the aggregate of (1) net income, (2) taxes based on income, (3) investment tax credit adjustments-net, and (4) fixed charges. \"Fixed Charges\" include interest (whether expensed or capitalized), related amortization, and interest applicable to rentals charged to operating expenses.\n(b) \"Preferred Dividends\" as defined by SEC Regulation S-K are computed by dividing the preferred dividend requirement by one hundred percent (100%) minus the income tax rate.\n(c) System Energy's Amended and Restated Articles of Incorporation do not currently provide for the issuance of preferred stock.\n(d) \"Preferred Dividends\" in the case of GSU also include dividends on preference stock.\n(e) Earnings for the year ended December 31, 1989, include the impact of the write-off of $60 million of deferred Grand Gulf 1-related costs pursuant to an agreement between MP&L and the MPSC.\n(f) Earnings for the year ended December 31, 1989, were inadequate to cover fixed charges due to System Energy's cancellation and write- off of its investment in Grand Gulf 2 in September 1989. The amount of the coverage deficiency for fixed charges was $745.2 million.\n(g) Earnings for the year ended December 31, 1991, include the $90 million effect of the 1991 NOPSI Settlement.\n(h) Earnings for the year ended December 31, 1993, include approximately $81 million, $52 million, and $18 million for AP&L, MP&L, and NOPSI, respectively, related to the change in accounting principle to provide for the accrual of estimated unbilled revenues.\n(i) Earnings for the year ended December 31, 1990, for GSU were not adequate to cover fixed charges by $60.6 million. Earnings for the years ended December 31, 1990 and 1989, were not adequate to cover fixed charges and preferred dividends by $165.1 million and $190.8 million, respectively. Earnings in 1990 include a $205 million charge for the settlement of a purchased power dispute.\nINDUSTRY SEGMENTS\nNOPSI\nNarrative Description of NOPSI Industry Segments\nElectric Service. NOPSI supplied electric service to 190,613 customers as of December 31, 1993. During 1993, 36% of electric operating revenues was derived from residential sales, 40% from commercial sales, 6% from industrial sales, 15% from sales to governmental and municipal customers, and 3% from sales to public utilities and other sources.\nNatural Gas Service. NOPSI supplied natural gas service to 154,251 customers as of December 31, 1993. During 1993, 56% of gas operating revenues was derived from residential sales, 18% from commercial sales, 9% from industrial sales, and 17% from sales to governmental and municipal customers. (See \"Fuel Supply - Natural Gas Purchased for Resale,\" incorporated herein by reference.)\nSelected Financial Information Relating to Industry Segments\nFor selected financial information relating to NOPSI's industry segments, see NOPSI's financial statements and Note 11 of NOPSI's Notes to Financial Statements, \"Business Segment Information,\" incorporated herein by reference.\nEmployees by Segment\nNOPSI's full-time employees by industry segment as of December 31, 1993, were as follows:\nElectric 568 Natural Gas 148 --- Total 716\n(For further information with respect to NOPSI's segments, see \"Property.\")\nGSU\nFor the year ended December 31, 1993, 96% of GSU's operating revenues were derived from the electric utility business. The remainder of operating revenues were derived 2% from the steam business and 2% from the natural gas business. Segment information for GSU is not provided.\nPROPERTY\nGenerating Stations\nThe total capability of Entergy 's owned and leased generating stations as of December 31, 1993, by company, is indicated below:\n_______________________\n(1) \"Owned and Leased Capability\" is the dependable load carrying capability of the stations, as demonstrated under actual operating conditions based on the primary fuel (assuming no curtailments) that each station was designed to utilize.\n(2) Excludes the capacity of fossil-fueled generating stations placed on extended reserve as follows: AP&L - 506 MW; GSU - 405 MW; LP&L - 19 MW; MP&L - 73 MW; and NOPSI - 143 MW. Generating stations that are not expected to be utilized in the near-term to meet load requirements are placed in extended reserve shutdown in order to minimize operating expenses.\n(3) Excludes net capability of Entergy Power, which owns 809 MW of fossil-fueled capacity (see \"Rate Matters and Regulation - Rate Matters - Wholesale Rate Matters - Entergy Power,\" above).\n(4) Independence 2, a coal unit operated by AP&L and jointly owned 25% by MP&L (210 MW), 31.5% by Entergy Power (265 MW), and the balance by various municipalities and a cooperative. The unit was out of service, due to an explosion from August 11, 1993 to February 18, 1994.\n(5) GSU's nuclear capability represents its 70% ownership interest in River Bend; Cajun owns the remaining 30% undivided interest.\n(6) LP&L's nuclear capability represents its 90.7% ownership interest and 9.3% leasehold interest in Waterford 3.\n(7) System Energy's capability represents its 90% interest in Grand Gulf 1 (78.5% ownership interest and 11.5% leasehold interest). South Mississippi Electric Power Association has the remaining 10% undivided ownership interest in Grand Gulf 1. Entitlement to System Energy's capacity has been allocated to AP&L, LP&L, MP&L, and NOPSI pursuant to the Unit Power Sales Agreement.\n(8) Includes 188 MW of capacity leased by AP&L through 1999.\nRepresentatives of the System regularly review load and capacity projections in order to coordinate and recommend the location and time of installation of additional generating capacity and of interconnections in light of the availability of power, the location of new loads, and maximum economy to the System. Based on load and capability projections, the System has no need to install additional generating capacity until 1999. To delay the need for new capacity, the System is engaging in conservation and DSM programs, as discussed in \"Business of Entergy - Competition - Least Cost Planning,\" above. When new generation resources are needed, the System plans to meet this need with a variety of sources other than construction of new base load generating capacity. In the meantime, the System will meet capacity needs by, among other things, removing generating stations from extended reserve shutdown. Generating stations brought out of extended reserve shutdown during 1993 added 248 MW to meet operating requirements.\nUnder the terms of the System Agreement, some of the generating capacity and other power resources are shared among the System operating companies. Among other things, the System Agreement provides that parties having generating capacity greater than their load requirements sell such capacity to those parties having deficiencies in generating capacity and that the purchasers pay to the sellers a charge sufficient to cover certain of the sellers' ownership costs, including operating expenses, fixed charges on debt, dividend requirements on preferred and preference stock, and a fair rate of return on common equity investment. Under the System Agreement, these charges are based on costs associated with the sellers' steam electric generating units fueled by oil or gas. In addition, for all energy to be exchanged among the System operating companies under the System Agreement, the purchasers are required to pay the cost of fuel consumed in generating such energy plus a charge to cover other associated costs (see \"Rate Matters and Regulation - Rate Matters - Wholesale Rate Matters - System Agreement,\" above, for a discussion of FERC proceedings relating to the System Agreement).\nThe System's business is subject to seasonal fluctuations with the peak period occurring in the summer months. Excluding GSU, Entergy 's 1993 peak demand of 12,858 MW occurred on August 19, 1993. The net System capability at the time of peak was 14,029 MW, which reflects a reduction of the System's total 14,765 MW of owned and leased capability by net off-system firm sales of 736 MW. The capacity margin at the time of the peak was approximately 8.4%, not including units placed on extended reserve and capacity owned by Entergy Power.\nGSU's 1993 peak demand of 5,612 MW occurred on August 18, 1993. The net GSU capability at the time of peak was 6,704 MW, which reflects an increase of GSU's total 6,420 MW of owned and leased capability by net off-system purchases of 284 MW. The capacity margin at the time of the peak was approximately 18.2%, not including units placed on extended reserve.\nInterconnections\nThe electric power supply facilities of Entergy consist principally of steam-electric production facilities strategically located with reference to availability of fuel, protection of local loads, and other controlling economic factors. These are interconnected by a transmission system operating at various voltages up to 500 KV. Generally, with the exception of Grand Gulf 1, Entergy Power's capacity and a small portion of MP&L's capacity, operating facilities or interests therein are owned by the System operating company serving the area in which the facilities are located. However, all of the System's generating facilities are centrally dispatched and operated with a view to realizing the greatest economy. This operation seeks, among other things, the lowest cost sources of energy from hour to hour. The minimum of investment and the most efficient use of plant are sought to be achieved, in part, through the coordinated scheduling of maintenance, inspection, and overhaul.\nThe System operating companies have direct interconnections with neighboring utilities including, in individual cases, Mississippi Power Company, Southwestern Electric Power Company, Southwest Power Administration, Central Louisiana Electric Company, Inc., Oklahoma Gas and Electric Company, The Empire District Electric Company, Union Electric Company, Arkansas Electric Cooperative Corporation, Tennessee Valley Authority, Cajun, Sam Rayburn Dam Electric Cooperative, Inc., SRG&T, SRMPA, Associated Electric Cooperative, Inc., Municipal Energy Agency of Mississippi, Louisiana Energy and Power Authority, Farmers Electric Cooperative, South Mississippi Electric Power Authority, and the cities of Lafayette, Plaquemine, and New Roads, Louisiana. GSU also has an interconnection agreement with Houston Lighting and Power Company providing a minor amount of emergency service only. The System operating companies also have interchange agreements with Alabama Electric Cooperative, Big Rivers Electric Cooperative, Northeast Texas Electric Cooperative, Inc., Sam Rayburn G&T Electric Cooperative, Inc., Florida Power Corporation, Florida Power & Light Company, Jacksonville Electric Authority, Oglethorpe Power Cooperative, the City of Lafayette, Louisiana, the City of Springfield, Missouri, and East Kentucky Electric Cooperative.\nThe System operating companies are members of the Southwest Power Pool, the primary purpose of which is to ensure the reliability and adequacy of the electric bulk power supply in the southwest region of the United States. The Southwest Power Pool is a member of the North American Electric Reliability Council. AP&L, LP&L, MP&L, and NOPSI are also members of the Western Systems Power Pool.\nGas Property\nAs of December 31, 1993, NOPSI distributed and transported natural gas for distribution solely within the limits of the City of New Orleans through a total of 1,422 miles of gas distribution mains and 32 miles of gas transmission lines. NOPSI receives deliveries of natural gas for distribution purposes at 14 separate locations, including deliveries from United Gas Pipe Line Company (United) at six of these locations. Of the remaining delivery points, two are principally served by interstate suppliers and the remaining are served by intrastate suppliers.\nAs of December 31, 1993, the gas property of GSU was not material to GSU.\nTitles\nThe System's generating stations are generally located on lands owned in fee simple. The greater portion of the transmission and distribution lines of the System operating companies has been constructed over lands of private owners pursuant to easements or on public highways and streets pursuant to appropriate permits. The rights of each company in the realty on which its properties are located are considered by it to be adequate for its use in the conduct of its business. Minor defects and irregularities customarily found in properties of like size and character exist, but such defects and irregularities do not materially impair the use of the properties affected thereby. The System operating companies generally have the right of eminent domain whereby they may, if necessary, perfect or secure titles to, or easements or servitudes on, privately-held lands used or to be used in their utility operations.\nSubstantially all the physical properties owned by each System operating company and System Energy are subject to the lien of the mortgage and deed of trust securing the first mortgage bonds of such company. The Lewis Creek generating station is owned by GSG&T, Inc., and is not subject to the lien of the GSU mortgage securing the first mortgage bonds of GSU, but is leased and operated by GSU. In the case of LP&L, certain properties are subject to the liens of second mortgages securing other obligations of LP&L. In the case of MP&L and NOPSI, substantially all of their properties and assets are subject to the second mortgage lien of their respective general and refunding mortgage bond indentures.\nFUEL SUPPLY\nThe following tabulation shows the percentages of natural gas, fuel oil, nuclear fuel, and coal used in generation, excluding that of Entergy Power, during the past three years. It also shows the average fuel cost per KWH generated by each type of fuel during that period. The balance of generation, which was immaterial, was provided by hydroelectric power.\nENTERGY EXCLUDING GSU\nGSU\nThe following tabulation shows the percentages of generation by fuel type used in generation, excluding that of Entergy Power, for 1993 (actual) and 1994 (projected).\n_______________________\n(a) The System's 1993 actual generation by fuel type excludes GSU; 1994 estimated generation by fuel type includes GSU.\n(b) Capacity and energy from System Energy's interest in Grand Gulf 1 is allocated as follows: AP&L - 36%; LP&L - 14%; MP&L - 33%; and NOPSI - 17%.\nNatural Gas\nThe System operating companies have various long-term gas contracts that will satisfy a significant percentage of each operating company's needs; however, such contracts typically require the operating companies to purchase less than half of their annual gas requirements under such contracts. Additional gas requirements are satisfied under less expensive short-term contracts and spot-market purchases. In November 1992, GSU entered into a transportation service agreement with a gas supplier that obligates such supplier to provide GSU with flexible natural gas swing service to certain generating stations by using such supplier's pipeline and salt dome gas storage facility.\nMany factors influence the availability and price of natural gas supplies for power plants including wellhead deliverability, storage and pipeline capacity, and the demand requirements of the end users. This demand is closely tied to the severity of the weather conditions in the region. Furthermore, pricing relative to other energy sources (i.e. fuel oil, coal, purchased power, etc.) will affect the demand for natural gas for power plants. Supplies of natural gas are expected to be adequate in 1994.\nPursuant to FERC and state regulations, gas supplies may be interrupted to power plants during periods of shortage. To the extent natural gas supplies may be disrupted, the System operating companies will use alternate sources of energy such as fuel oil.\nCoal\nAP&L has long-term contracts for the supply of low-sulfur coal for the White Bluff Steam Electric Generating Station and the Independence Steam Electric Station (which is owned 25% by MP&L). Coal for the White Bluff Station is supplied under a contract from a mine in the State of Wyoming. The coal contract provides for the delivery of sufficient coal to operate the White Bluff Station through approximately 2002. Coal for the Independence Station is also supplied under a contract from a mine in the State of Wyoming. Coal supplied under this contract is expected to meet the requirements of the Independence Station through at least 2014. GSU has a contract for a supply of low-sulfur Wyoming coal for Nelson Unit 6, which should be sufficient to satisfy the fuel requirements at Nelson Unit 6 through 2004. Cajun has advised GSU that it has contracts that should provide an adequate supply of coal until 1997 for the operation of Big Cajun 2, Unit 3 (which is operated by Cajun and of which GSU owns 42%).\nNuclear Fuel\nGenerally, the supply of fuel for nuclear generating units involves the mining and milling of uranium ore to produce a concentrate, the conversion of uranium concentrate to uranium hexafluoride gas, enrichment of that gas, fabrication of the nuclear fuel assemblies, and disposal of the spent fuel.\nSystem Fuels is responsible for contracts to acquire nuclear fuel to be used in AP&L's, LP&L's, and System Energy's nuclear units and for maintaining inventories of such materials during the various stages of processing. Each of these companies is currently responsible for contracting for the fabrication of its own nuclear fuel and for purchasing the required enriched uranium hexafluoride from System Fuels. Currently, the requirements for GSU's River Bend plant are covered by contracts made by GSU.\nOn October 3, 1989, System Fuels entered into a revolving credit agreement with banks permitting it to borrow up to $45 million to finance its nuclear materials and services inventory. AP&L, LP&L, and System Energy agreed to purchase from System Fuels the nuclear materials and services financed under the agreement if System Fuels should default in its obligations thereunder. Such purchases would be allocated based on percentages agreed upon among the parties. In the absence of such agreement, AP&L, LP&L, and System Energy would each be obligated to purchase one-third of the nuclear materials and services.\nBased upon the planned fuel cycles for the System's nuclear units, the following tabulation shows the years through which existing contracts and inventory will provide materials and services:\nAcquisition of or Conversion Spent Uranium to Uranium Enrich- Fabri- Fuel Concentrate Hexafluoride ment(3) cation Disposal ----------- ------------ ------- ------ -------- ANO 1 (1) (1) 1995 1997 (4) ANO 2 (1) (1) 1995 1994 (4) River Bend (2) (2) 2000 1995 (4) Waterford 3 (1) (1) 1995 1999 (4) Grand Gulf 1 (1) (1) 1995 1995 (4) __________________________\n(1) Current contracts will provide these materials and services through termination dates ranging from 1994-1997. Additional materials and services required beyond these dates are estimated to be available for the foreseeable future.\n(2) Current GSU contracts will provide a significant percentage of these materials and services for River Bend through 1995.\n(3) Enrichment services for ANO 1, ANO 2, Waterford 3, and Grand Gulf 1 are provided by a System Fuels contract with the United States Enrichment Corporation (USEC). The contract has been terminated after 1995 to permit flexibility on future pricing and terms that could be obtained. Enrichment services for River Bend are provided by a GSU contract with USEC that may be partially terminated after 1998 and fully terminated after 2000. (See \"Rate Matters and Regulation - Regulation - Regulation of the Nuclear Power Industry - Decommissioning,\" above for information on annual contributions to a federal decontamination and decommissioning fund required by the Energy Act to be made by AP&L, GSU, LP&L, and System Energy as a result of their enrichment contracts with DOE.)\n(4) The Nuclear Waste Policy Act of 1982 provides for the disposal of spent nuclear fuel or high level waste by the DOE. Under this Act, the DOE was to begin accepting spent fuel in 1998 and to continue until the disposal of all spent fuel from reactor sites has been accomplished. In November 1989, the DOE indicated that the repository program will be delayed. Current on-site spent fuel storage capacity at ANO, River Bend, Waterford 3, and Grand Gulf 1 is estimated to be sufficient to store fuel from normal operations until 1995, 2003, 2000, and 2004, respectively. It is expected that any additional storage capacity required, due to delay of the DOE repository program, will have to be provided by the affected companies (see \"Rate Matters and Regulation - Regulation - Regulation of the Nuclear Power Industry - Spent Fuel and Other High-Level Radioactive Waste,\" above).\nThe System will require additional arrangements for segments of the nuclear fuel cycle beyond the dates shown above. Except as noted above, Entergy cannot predict the ultimate availability or cost of such arrangements at this time.\nAP&L, GSU, LP&L, and System Energy currently have nuclear fuel leasing arrangements that provide that AP&L, GSU, LP&L, and System Energy may lease up to $125 million, $105 million, $95 million, and $105 million of nuclear fuel, respectively. As of December 31, 1993, the unrecovered cost base of AP&L's, GSU's, LP&L's, and System Energy's nuclear fuel leases amounted to approximately $93.6 million, $96.5 million, $61.3 million, and $79.7 million, respectively. Each lessor finances its acquisition and ownership of nuclear fuel under a credit agreement and through the issuance of intermediate-term notes. The credit agreements, which were entered into by AP&L in 1988, by LP&L and System Energy in 1989, and GSU in 1993, had initial terms of five years, with the exception of GSU, which has an initial term of three years. These agreements are subject to annual renewal with, in LP&L's and GSU's case, the consent of the lenders. The credit agreements for AP&L, LP&L, and System Energy have all been extended and now have termination dates of December 1996, January 1997, and February 1997, respectively. The credit agreement for GSU was entered into in December 1993 and has a termination date of December 1996. The intermediate-term notes have varying maturities through January 31, 1999. It is expected that the credit agreements will be extended, or alternative financing will be secured by each lessor, based on the particular lessee's nuclear fuel requirements. If extensions or alternative financing cannot be arranged, the particular lessee must purchase sufficient nuclear fuel to allow the lessor to retire such borrowings.\nNatural Gas Purchased for Resale\nNOPSI has several suppliers of natural gas for resale. Its system is interconnected with three interstate and three intrastate pipelines. Presently, NOPSI's primary suppliers of natural gas for resale are United, an interstate pipeline, and Bridgeline and Pontchartrain, intrastate pipelines. NOPSI has a firm gas purchase contract with United and receives this service subject to FERC- approved rates pursuant to a certificate granted by FERC. NOPSI also has firm contracts with its two intrastate suppliers and also makes interruptible spot market purchases when economically attractive. In recent years, natural gas deliveries have been subject primarily to weather-related curtailments. However, NOPSI has experienced no such curtailments.\nIn April 1992, FERC issued Order No. 636, which mandated interstate pipeline restructuring. The order requires interstate pipelines to cease selling gas to local distribution customers at the city-gate interconnection although transportation service can be provided in lieu of the former sale. As a result, in the future, NOPSI must substitute sources upstream of the United system for its current gas supply from United. NOPSI is considering purchases from independent intrastate or interstate supply aggregators and\/or from intrastate pipeline sources in a manner consistent with its economic and supply reliability objectives.\nPrior to the effectiveness of Order No. 636, discussed above, in the event of a natural gas shortage on the United system, NOPSI would have received a portion of the available gas supply from United and its other suppliers. After Order No. 636 mandated restructuring (October 31, 1993), curtailments of supply could occur if NOPSI's suppliers failed to perform their obligations to deliver gas under their supply agreements with NOPSI. United could curtail transportation capacity only in the event of pipeline system constraints. Based on the current supply of natural gas, and absent extreme weather related curtailments, NOPSI does not anticipate that there will be any interruptions in natural gas deliveries to its customers.\nGSU purchases natural gas for resale from a single interstate supplier. Abandonment of service by the present supplier would be subject to abandonment proceedings by FERC.\nResearch\nAP&L, GSU, LP&L, MP&L, and NOPSI are members of the Electric Power Research Institute (EPRI). EPRI conducts a broad range of research in major technical fields related to the electric utility industry. Entergy participates in various EPRI projects, based on its needs and available resources. During 1991, 1992, and 1993, the System, including GSU, contributed approximately $12 million, $16 million, and $17 million, respectively, for the various research programs in which Entergy was involved.\nItem 2.","section_1A":"","section_1B":"","section_2":"Item 2. Properties\nRefer to Item 1. \"Business - Property,\" incorporated herein by reference, for information regarding the properties of the registrants.\nItem 3.","section_3":"Item 3. Legal Proceedings\nRefer to Item 1. \"Business - Rate Matters and Regulation,\" incorporated herein by reference, for details of the registrants' material rate proceedings and other regulatory proceedings and litigation that are pending or that terminated in the fourth quarter of 1993.\nItem 4.","section_4":"Item 4. Submission of Matters to a Vote of Security Holders\nA consent in lieu of a special meeting of common stockholders of Entergy-GSU Holdings, Inc. (Holdings) was executed on December 30, 1993, pursuant to a Delaware statute that permits such a procedure. The consent was signed on behalf of Entergy Corporation and GSU, which at that time owned all of the outstanding common stock of Holdings. The common stockholders acted to: (1) increase the number of directors from 2 to 18 upon the occurrence of the combination of Entergy Corporation and GSU, such expanded board to consist of Edwin Lupberger and Joseph Donnelly, who continued as directors, and the following new directors: W. Frank Blount; John A. Cooper, Jr.; Brooke H. Duncan; Lucie J. Fjeldstad; Kaneaster Hodges, Jr.; Robert v.d. Luft; Adm. Kinnaird R. McKee; Paul W. Murrill; James R. Nichols; Eugene H. Owen; John N. Palmer, Sr.; Robert D. Pugh; H. Duke Shackelford; Wm. Clifford Smith; Bismark A. Steinhagen; and Dr. Walter Washington; (2) approve the terms and provisions of certain agreements related to such combination; (3) approve the actions of the officers in connection with those agreements and the transactions contemplated thereby; (4) approve the assumption and adoption by Holdings of certain benefit plans of Entergy Corporation; and (5) approve the taking of actions to issue stock with respect to such plans, including the listing of Holdings' common stock on the New York, Pacific, and Midwest Stock Exchanges and the filing of registration statements with the Securities and Exchange Commission. After the consummation of the transactions involved in the combination, the name of Holdings was changed to Entergy Corporation. On January 22, 1994, Mr. Donnelly resigned from the position of director of Entergy Corporation.\nPART II\nItem 5.","section_5":"Item 5. Market for Registrants' Common Equity and Related Stockholder Matters\nEntergy Corporation. The shares of Entergy Corporation's common stock are listed on the New York, Midwest, and Pacific Stock Exchanges.\nThe high and low prices for each quarterly period in 1993 and 1992, were as follows:\n1993 1992 --------------- ---------------- High Low High Low ------ ------ ------ ------ (In Dollars) First 36 1\/2 32 1\/2 29 5\/8 27 1\/8 Second 38 1\/4 33 1\/4 28 1\/2 26 1\/8 Third 39 7\/8 36 1\/4 31 7\/8 28 1\/4 Fourth 39 1\/4 35 1\/8 33 5\/8 30 1\/2\nFour consecutive quarterly cash dividends on common stock were paid to stockholders of Entergy Corporation in each of 1993 and 1992. In 1993, dividends of 40 cents per share were paid in each of the first three quarters and dividends of 45 cents per share were paid in the last quarter. Dividends of 35 cents per share were paid in each of the first three quarters of 1992, and dividends of 40 cents per share were paid in the last quarter of 1992.\nAs of February 24, 1994, there were 63,779 stockholders of record of Entergy Corporation.\nFor information with respect to Entergy Corporation's future ability to pay dividends, refer to Note 7 of Entergy Corporation and Subsidiaries' Notes to Consolidated Financial Statements, \"Dividend Restrictions,\" incorporated herein by reference. In addition to the restrictions described in Note 7, the Holding Company Act provides that, without approval of the SEC, the unrestricted, undistributed retained earnings of any Entergy Corporation subsidiary are not available for distribution to Entergy Corporation's common stockholders until such earnings are made available to Entergy Corporation through the declaration of dividends by such subsidiaries.\nAP&L, GSU, LP&L, MP&L, NOPSI, and System Energy. There is no market for the common stock of System Energy and the System operating companies, all of which is owned by Entergy Corporation. Prior to December 31, 1993, GSU's common stock was publicly held. Effective with the Merger, all shares of GSU common stock were acquired by Entergy Corporation. No cash dividends on common stock were paid by GSU to its stockholders in 1992-1993. Cash dividends on common stock paid by AP&L, LP&L, MP&L, NOPSI, and System Energy to Entergy Corporation during 1993 and 1992, were as follows:\n1993 1992 ------ ------ (In Millions)\nAP&L $156.3 $ 75.0 LP&L 167.6 174.6 MP&L 85.8 68.4 NOPSI 43.9 32.2 System Energy 233.1 137.7\nFor information with respect to restrictions that limit the ability of System Energy and the System operating companies to pay dividends, and for information with respect to dividends paid to Entergy Corporation by its subsidiaries subsequent to December 31, 1993, refer respectively, to Note 6 of System Energy's and Note 7 of AP&L's, GSU's, LP&L's, MP&L's, and NOPSI's Notes to Financial Statements, \"Dividend Restrictions,\" incorporated herein by reference.\nItem 6.","section_6":"Item 6. Selected Financial Data\nEntergy Corporation. Refer to information under the heading \"Entergy Corporation and Subsidiaries Selected Financial Data - Five- Year Comparison,\" which information is incorporated herein by reference.\nAP&L. Refer to information under the heading \"Arkansas Power & Light Company Selected Financial Data - Five-Year Comparison,\" which information is incorporated herein by reference.\nGSU. Refer to information under the heading \"Gulf States Utilities Company Selected Financial Data - Five-Year Comparison,\" which information is incorporated herein by reference.\nLP&L. Refer to information under the heading \"Louisiana Power & Light Company Selected Financial Data - Five-Year Comparison,\" which information is incorporated herein by reference.\nMP&L. Refer to information under the heading \"Mississippi Power & Light Company Selected Financial Data - Five-Year Comparison,\" which information is incorporated herein by reference.\nNOPSI. Refer to information under the heading \"New Orleans Public Service Inc. Selected Financial Data - Five-Year Comparison,\" which information is incorporated herein by reference.\nSystem Energy. Refer to information under the heading \"System Energy Resources, Inc. Selected Financial Data - Five-Year Comparison,\" which information is incorporated herein by reference.\nItem 7.","section_7":"Item 7 \"Financial Statements and Exhibits\".\nA current report on Form 8-K, dated January 18, 1994, was filed with the SEC on January 18, 1994, reporting information under Item 5 \"Other Materially Important Events\".\nA current report on Form 8-K, dated February 1, 1994, was filed with the SEC on February 8, 1994, reporting information under Items 2 and 7.\nEntergy Corporation, AP&L, GSU, LP&L, MP&L and NOPSI\nCurrent Reports on Form 8-K, dated December 31, 1993, were filed by these companies on January 3, 1994 reporting the consummation of the Entergy Corporation - GSU merger under Item 5 (in the case of AP&L, LP&L, MP&L and NOPSI), Items 2 and 7 (in the case of Entergy Corporation and GSU).\nEXPERTS\nAll statements in Part I of this Annual Report on Form 10-K as to matters of law and legal conclusions, based on the belief or opinion of System Energy or any System operating company or otherwise, pertaining to the titles to properties, franchises and other operating rights of certain of the registrants filing this Annual Report on Form 10-K, and their subsidiaries, the regulations to which they are subject and any legal proceedings to which they are parties are made on the authority of Friday, Eldredge & Clark, 2000 First Commercial Building, 400 West Capitol, Little Rock, Arkansas, as to AP&L and as to Entergy Services in regards to flood litigation; Monroe & Lemann (A Professional Corporation), 201 St. Charles Avenue, Suite 3300, New Orleans, Louisiana, as to LP&L and NOPSI; and Wise Carter Child & Caraway, Professional Association, Heritage Building, Jackson, Mississippi, as to MP&L and System Energy.\nThe statements attributed to Clark, Thomas & Winters, a professional corporation, as to legal conclusions with respect to GSU's rate regulation in Texas under Item 1. \"Rate Matters and Regulation - Rate Matters - Retail Rate Matters - GSU\" and in Note 2 to Entergy Corporation and Subsidiaries Consolidated Financial Statements and GSU's Financial Statements, \"Rate and Regulatory Matters,\" have been reviewed by such firm and are included herein upon the authority of such firm as experts.\nThe statements attributed to Sandlin Associates regarding the analysis of River Bend Construction costs of GSU under Item 1. \"Rate Matters and Regulation - Rate Matters - Retail Rate Matters - GSU\" and in Note 2 to Entergy Corporation and Subsidiaries Consolidated Financial Statements and GSU's Financial Statements, \"Rate and Regulatory Matters\", have been reviewed by such firm and are included herein upon the authority of such firm as experts.\nENTERGY CORPORATION\nSIGNATURES\nPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. The signature of the undersigned company shall be deemed to relate only to matters having reference to such company and any subsidiaries thereof.\nENTERGY CORPORATION\nBy \/s\/ Lee W. Randall Lee W. Randall, Vice President and Chief Accounting Officer\nDate: March 14, 1994\nPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. The signature of each of the undersigned shall be deemed to relate only to matters having reference to the above-named company and any subsidiaries thereof.\nSignature Title Date\n\/s\/ Lee W. Randall Vice President and March 14, 1994 Lee W. Randall Chief Accounting Officer (Principal Accounting Officer)\nEdwin Lupberger (Chairman of the Board, Chief Executive Officer and Director; Principal Executive Officer); Gerald D. McInvale (Senior Vice President and Chief Financial Officer; Principal Financial Officer); W. Frank Blount, John A. Cooper, Jr., Brooke H. Duncan, Lucie J. Fjeldstad, Kaneaster Hodges, Jr., Robert v.d. Luft, Kinnaird R. McKee, Paul W. Murrill, James R. Nichols, Eugene H. Owen, John N. Palmer, Robert D. Pugh, H. Duke Shackelford, Wm. Clifford Smith, Bismark A. Steinhagen, and Walter Washington (Directors).\nBy: \/s\/ Lee W. Randall March 14, 1994 (Lee W. Randall, Attorney-in-fact)\nARKANSAS POWER & LIGHT COMPANY\nSIGNATURES\nPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. The signature of the undersigned company shall be deemed to relate only to matters having reference to such company and any subsidiaries thereof.\nARKANSAS POWER & LIGHT COMPANY\nBy \/s\/ Lee W. Randall Lee W. Randall, Vice President and Chief Accounting Officer\nDate: March 14, 1994\nPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. The signature of each of the undersigned shall be deemed to relate only to matters having reference to the above-named company and any subsidiaries thereof.\nSignature Title Date\n\/s\/ Lee W. Randall Lee W. Randall Vice President and Chief March 14, 1994 Accounting Officer (Principal Accounting Officer)\nEdwin Lupberger (Chairman of the Board, Chief Executive Officer and Director; Principal Executive Officer); Gerald D. McInvale (Senior Vice President and Chief Financial Officer; Principal Financial Officer); Michael B. Bemis, John A. Cooper, Jr., Cathy Cunningham, Richard P. Herget, Jr., Tommy H. Hillman, Donald C. Hintz, Kaneaster Hodges, Jr., Jerry D. Jackson, R. Drake Keith, Jerry L. Maulden, Raymond P. Miller, Sr., Roy L. Murphy, William C. Nolan, Jr., Robert D. Pugh, Woodson D. Walker, Gus B. Walton, Jr., Michael E. Wilson (Directors).\nBy: \/s\/ Lee W. Randall March 14, 1994 (Lee W. Randall, Attorney-in-fact)\nGULF STATES UTILITIES COMPANY\nSIGNATURES\nPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. The signature of the undersigned company shall be deemed to relate only to matters having reference to such company and any subsidiaries thereof.\nGULF STATES UTILITIES COMPANY\nBy \/s\/ Lee W. Randall Lee W. Randall, Vice President and Chief Accounting Officer\nDate: March 14, 1994\nPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. The signature of each of the undersigned shall be deemed to relate only to matters having reference to the above-named company and any subsidiaries thereof.\nSignature Title Date\n\/s\/ Lee W. Randall Vice President and March 14, 1994 Lee W. Randall Chief Accounting Officer (Principal Accounting Officer)\nEdwin Lupberger (Chairman of the Board, Chief Executive Officer and Director; Principal Executive Officer); Gerald D. McInvale (Senior Vice President and Chief Financial Officer; Principal Financial Officer); Robert H. Barrow, Frank F. Gallaher, Frank W. Harrison, Jr., Donald C. Hintz, Jerry L. Maulden, Paul W. Murrill, Eugene H. Owen, M. Bookman Peters, Monroe J. Rathbone, Jr., Sam F. Segnar, Bismark A. Steinhagen, James E. Taussig, II. (Directors).\nBy: \/s\/ Lee W. Randall March 14, 1994 (Lee W. Randall, Attorney-in-fact)\nLOUISIANA POWER & LIGHT COMPANY\nSIGNATURES\nPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. The signature of the undersigned company shall be deemed to relate only to matters having reference to such company and any subsidiaries thereof.\nLOUISIANA POWER & LIGHT COMPANY\nBy \/s\/ Lee W. Randall Lee W. Randall, Vice President and Chief Accounting Officer\nDate: March 14, 1994\nPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. The signature of each of the undersigned shall be deemed to relate only to matters having reference to the above-named company and any subsidiaries thereof.\nSignature Title Date\n\/s\/ Lee W. Randall Lee W. Randall Vice President and Chief March 14, 1994 Accounting Officer (Principal Accounting Officer)\nEdwin Lupberger (Chairman of the Board, Chief Executive Officer and Director; Principal Executive Officer); Gerald D. McInvale (Senior Vice President and Chief Financial Officer; Principal Financial Officer); Michael B. Bemis, John J. Cordaro, Donald C. Hintz, William K. Hood, Jerry D. Jackson, Tex R. Kilpatrick, Joseph J. Krebs, Jr., Jerry L. Maulden, H. Duke Shackelford, Wm. Clifford Smith (Directors).\nBy: \/s\/ Lee W. Randall March 14, 1994 (Lee W. Randall, Attorney-in-fact)\nMISSISSIPPI POWER & LIGHT COMPANY\nSIGNATURES\nPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. The signature of the undersigned company shall be deemed to relate only to matters having reference to such company and any subsidiaries thereof.\nMISSISSIPPI POWER & LIGHT COMPANY\nBy \/s\/ Lee W. Randall Lee W. Randall, Vice President and Chief Accounting Officer\nDate: March 14, 1994\nPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. The signature of each of the undersigned shall be deemed to relate only to matters having reference to the above-named company and any subsidiaries thereof.\nSignature Title Date\n\/s\/ Lee W. Randall Lee W. Randall Vice President and Chief March 14, 1994 Accounting Officer (Principal Accounting Officer)\nEdwin Lupberger (Chairman of the Board, Chief Executive Officer and Director; Principal Executive Officer); Gerald D. McInvale (Senior Vice President and Chief Financial Officer; Principal Financial Officer); Michael B. Bemis, Frank R. Day, John O. Emmerich, Jr., Norman B. Gillis, Jr., Donald C. Hintz, Jerry D. Jackson, Robert E. Kennington, II, Jerry L. Maulden, Donald E. Meiners, John N. Palmer, Sr., Clyda S. Rent, Walter Washington, Robert M. Williams, Jr. (Directors).\nBy: \/s\/ Lee W. Randall March 14, 1994 (Lee W. Randall, Attorney-in-fact)\nNEW ORLEANS PUBLIC SERVICE INC.\nSIGNATURES\nPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. The signature of the undersigned company shall be deemed to relate only to matters having reference to such company and any subsidiaries thereof.\nNEW ORLEANS PUBLIC SERVICE INC.\nBy \/s\/ Lee W. Randall Lee W. Randall, Vice President and Chief Accounting Officer\nDate: March 14, 1994\nPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. The signature of each of the undersigned shall be deemed to relate only to matters having reference to the above-named company and any subsidiaries thereof.\nSignature Title Date\n\/s\/ Lee W. Randall Lee W. Randall Vice President and Chief March 14, 1994 Accounting Officer (Principal Accounting Officer)\nEdwin Lupberger (Chairman of the Board, Chief Executive Officer and Director; Principal Executive Officer); Gerald D. McInvale (Senior Vice President and Chief Financial Officer; Principal Financial Officer); Michael B. Bemis, James M. Cain, John J. Cordaro, Brooke H. Duncan, Norman C. Francis, Donald C. Hintz, Jerry D. Jackson, Jerry L. Maulden, Anne M. Milling, John B. Smallpage, Charles C. Teamer, Sr. (Directors).\nBy: \/s\/ Lee W. Randall March 14, 1994 (Lee W. Randall, Attorney-in-fact)\nSYSTEM ENERGY RESOURCES, INC.\nSIGNATURES\nPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. The signature of the undersigned company shall be deemed to relate only to matters having reference to such company and any subsidiaries thereof.\nSYSTEM ENERGY RESOURCES, INC.\nBy \/s\/ Lee W. Randall Lee W. Randall, Vice President and Chief Accounting Officer\nDate: March 14, 1994\nPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. The signature of each of the undersigned shall be deemed to relate only to matters having reference to the above-named company and any subsidiaries thereof.\nSignature Title Date\n\/s\/ Lee W. Randall Lee W. Randall Vice President and Chief March 14, 1994 Accounting Officer (Principal Accounting Officer)\nDonald C. Hintz (President, Chief Executive Officer and Director; Principal Executive Officer); Gerald D. McInvale (Senior Vice President and Chief Financial Officer; Principal Financial Officer); Edwin Lupberger (Chairman of the Board), Jerry D. Jackson, Jerry L. Maulden (Directors).\nBy: \/s\/ Lee W. Randall March 14, 1994 (Lee W. Randall, Attorney-in-fact)\nEXHIBIT 23(a)\nINDEPENDENT AUDITORS' CONSENT\nWe consent to the incorporation by reference in Post-Effective Amendment Nos. 2, 3, 4A, and 5A on Form S-8 to Registration Statement No. 33-54298 of Entergy Corporation on Form S-4, and the related Prospectuses, of our reports dated February 11, 1994 (which express an unqualified opinion and include explanatory paragraphs as to uncertainties because of certain regulatory and litigation matters), appearing in this Annual Report on Form 10-K of Entergy Corporation for the year ended December 31, 1993.\nWe also consent to the incorporation by reference in Registration Statements Nos. 33-36149, 33-48356 and 33-50289 of Arkansas Power & Light Company on Form S-3, and the related Prospectuses, of our reports dated February 11, 1994, appearing in this Annual Report on Form 10-K of Arkansas Power & Light Company for the year ended December 31, 1993.\nWe also consent to the incorporation by reference in Registration Statements Nos. 33-46085, 33-39221 and 33-50937 of Louisiana Power & Light Company on Form S-3, and the related Prospectuses, of our reports dated February 11, 1994, appearing in this Annual Report on Form 10-K of Louisiana Power & Light Company for the year ended December 31, 1993.\nWe also consent to the incorporation by reference in Registration Statements Nos. 33-53004, 33-55826 and 33-50507 of Mississippi Power & Light Company on Form S-3, and the related Prospectuses, of our reports dated February 11, 1994, appearing in this Annual Report on Form 10-K of Mississippi Power & Light Company for the year ended December 31, 1993.\nWe also consent to the incorporation by reference in Registration Statement No. 33-57926 of New Orleans Public Service Inc. on Form S-3, and the related Prospectus, of our reports dated February 11, 1994, appearing in this Annual Report on Form 10-K of New Orleans Public Service Inc. for the year ended December 31, 1993.\nWe also consent to the incorporation by reference in Registration Statement No. 33-47662 of System Energy Resources, Inc. on Form S-3, and the related Prospectus, of our reports dated February 11, 1994 (which express an unqualified opinion and include an explanatory paragraph as to an uncertainty resulting from a regulatory proceeding), appearing in this Annual Report on Form 10-K of System Energy Resources, Inc. for the year ended December 31, 1993.\n\/s\/ Deloitte & Touche\nDELOITTE & TOUCHE New Orleans, Louisiana March 14, 1994\nEXHIBIT 23(b)\nCONSENT OF INDEPENDENT ACCOUNTANTS\nWe consent to the incorporation by reference in the registration statements of Gulf States Utilities Company on Form S-3 (File Numbers 33-49739 and 33-51181) and Form S-8 (File Numbers 2-76551 and 2-98011) of our reports, dated February 11, 1994, on our audits of the financial statements and financial statement schedules of Gulf States Utilities Company as of December 31, 1993 and 1992, and for the years ended December 31, 1993, 1992 and 1991, which reports include explanatory paragraphs related to rate-related contingencies, legal proceedings and changes in accounting for income taxes, postretirement benefits, unbilled revenue and power plant materials and supplies and are included in this Annual Report on Form 10-K.\n\/s\/ Coopers & Lybrand\nCoopers & Lybrand\nHouston, Texas March 14, 1994\nEXHIBIT 23(c)\nCONSENT OF EXPERTS\nWe consent to the reference to our firm under the heading \"Experts\" in this Annual Report on Form 10-K. We further consent to the incorporation by reference of such reference to our firm into Arkansas Power & Light Company's (\"AP&L\") Registration Statements (Form S-3, File Nos. 33-36149, 33-48356 and 33-50289) and related Prospectuses, pertaining to AP&L's First Mortgage Bonds and Preferred Stock.\nVery truly yours,\n\/s\/ Friday, Eldredge & Clark\nFRIDAY, ELDREDGE & CLARK\nDate: March 14, 1994\nEXHIBIT 23(d)\nCONSENT\nWe consent to the reference to our firm under the heading \"Experts\", and to the inclusion in this Annual Report on Form 10-K of Gulf States Utilities Company (\"GSU\") of the statements of legal conclusions attributed to us herein (the Statements of Legal Conclusions) under Part I, Item 1. Business - \"Rate Matters and Regulation\" and in the discussion of Texas jurisdictional matters set forth in Note 2 to GSU's Financial Statements and Note 2 to Entergy Corporation and Subsidiaries Consolidated Financial Statements appearing as Item 8.","section_7A":"","section_8":"","section_9":"","section_9A":"","section_9B":"","section_10":"","section_11":"","section_12":"","section_13":"","section_14":"","section_15":""}
{"filename":"707605_1993.txt","cik":"707605","year":"1993","section_1":"ITEM 1. BUSINESS\nGeneral USBANCORP, Inc. (the \"Company\") is a registered bank holding company organized under the Pennsylvania Business Corporation Law and is registered under the Bank Holding Company Act of 1956, as amended (the \"BHCA.\") The Company became a holding company upon acquiring all of the outstanding shares of United States National Bank in Johnstown (\"U.S. Bank\") on January 5, 1983. The Company also acquired all of the outstanding shares of Three Rivers Bank and Trust Company (\"Three Rivers Bank\") in June 1984, McKeesport National (\"McKeesport Bank\") on December 1, 1985 (which was subsequently merged into Three Rivers Bank), and Community Bancorp, Inc. (whose sole direct subsidiary is Community Savings Bank) in March 1992. In addition, the Company formed United Bancorp Life Insurance Company (\"United Life\") in October 1987 and USBANCORP Trust Company (the \"Trust Company\") in October 1992. The Company's principal activities consist of owning and operating its five wholly-owned subsidiary entities. At December 31, 1993, the Company had, on a consolidated total assets, deposits, and stockholders' equity of $1.24 billion, $1.05 billion and $117 million, respectively. The Company and the subsidiary entities derive substantially all their income from banking and bank-related services. The Company functions primarily as a coordinating and servicing unit for its subsidiary entities in general management, credit policies and procedures, accounting and taxes, loan review, auditing, investment advisory, compliance, marketing, insurance risk management, general corporate services, and financial and strategic planning. The Company, as a bank holding company, is regulated under the BHCA, and is supervised by the Board of Governors of the Federal Reserve System (the \"Board.\") In general, the Act limits the business of bank holding companies to owning or controlling banks and engaging in such other activities as the Board may determine to be so closely related to banking or managing or controlling banks as to be a proper incident thereto.\nUSBANCORP Banking Subsidiaries:\nU.S. Bank U.S. Bank is a national banking association organized under the laws of the United States. Through 17 locations in Cambria, Clearfield, Somerset, and Westmoreland Counties, Pennsylvania, U.S. Bank conducts a general banking business. It is a full-service bank offering (i) retail banking services, such as demand, savings and time deposits, money market accounts, secured and unsecured loans, mortgage loans, safe deposit boxes, holiday club accounts, collection services, money orders, and traveler's checks; (ii) lending, depository and related financial services to commercial, industrial, financial, and governmental customers, such as real estate-mortgage loans, short- and medium-term loans, revolving credit arrangements, lines of credit, inventory and accounts receivable financing, personal and commercial property lease financing, real estate-construction loans, business savings accounts, certificates of deposit, wire transfers, night depository, and lock box services; and (iii) credit card operations through MasterCard and VISA. U.S. Bank also operates 16 automated bank teller machines (\"ATM\") through its 24 Hour Banking Network which is linked with MAC and HONOR, regional ATM networks, and CIRRUS, a national ATM network.\nU.S. Bank's deposit base is such that loss of one depositor or a related group of depositors would not have a materially adverse effect on its business. In addition, the loan portfolio is also diversified so that one industry or group of related industries does not comprise a material portion of the loan portfolio.\nU.S. Bank's business is not seasonal nor does it have any risks attendant to foreign sources.\nSince U.S. Bank is federally chartered, it is subject to primary supervision of the Office of the Comptroller of the Currency. U.S. Bank is also subject to the regulations of the Board of Governors of the Federal Reserve Bank and the Federal Deposit Insurance Corporation.\nThe following is a summary of key data and ratios at December 31, 1993:\nHeadquarters Johnstown, PA Chartered 1933 Total Assets $511,587,000 (41.2% of the Company's total) Total Investment Securities Available for Sale $182,453,000 (42.6% of Company's total) Total Loans (net of unearned income) $289,042,000 (39.8% of the Company's total) Total Deposits $452,968,000 (43.2% of the Company's total) Total Net Income before SFAS #109 benefit $4,692,000 (42.5% of the Company's total) Total Equity to Assets Ratio 8.81% 1993 Return on Average Assets before SFAS #109 benefit 0.89% Total Full-time Equivalent Employees 306 (46.0% of the Company's total) Number of Offices 17 (41.4% of the Company's total)\nThree Rivers Bank Three Rivers Bank is a state bank chartered under the Pennsylvania Banking Code of 1965, as amended (the \"Pennsylvania Banking Code.\") Through 12 locations in Allegheny and Washington Counties, Pennsylvania, Three Rivers Bank conducts a general retail banking business consisting of granting commercial, consumer, construction, mortgage and student loan and offering checking, interest bearing demand, savings and time deposit services. It also operates 12 ATMs which are affiliated with MAC, a regional ATM network, and Plus System, a national ATM network. Three Rivers Bank also offers wholesale banking services to other banks, merchants, governmental units, and other large commercial accounts. Such services include balancing services, lock box accounts, and providing coin and currency. Three Rivers Bank has an arrangement with Statewide Security Transport, Inc. (which conducts business under the name of Landmark Security Transport) pursuant to which it also provides cash collection and deposit services to its customers.\nThree Rivers Bank's deposit base is such that loss of one depositor or a related group of depositors would not have a materially adverse effect on its business. In addition, the loan portfolio is also diversified so that one industry or group of related industries does not comprise a material portion of the loan portfolio.\nThree Rivers Bank's business is not seasonal nor does it have any risks attendant to foreign sources.\nAs a state chartered, federally-insured bank and trust company which is not a member of the Federal Reserve System, Three Rivers Bank is subject to supervision and regular examination by the Pennsylvania Department of Banking and the Federal Deposit Insurance Corporation. Various federal and state laws and regulations govern many aspects of its banking operations.\nThe following is a summary of key data and ratios at December 31, 1993:\nHeadquarters McKeesport, PA Chartered 1965 Total Assets $340,123,000 (27.4% of the Company's total) Total Investment Securities Available for Sale $128,414,000 (30.0% of Company's total) Total Loans (net of unearned income) $187,552,000 (25.8% of the Company's total) Total Deposits $304,161,000 (29.0% of the Company's total) Total Net Income before SFAS #109 benefit $2,783,000 (25.2% of the Company's total) Total Equity to Assets Ratio 6.82% 1993 Return on Average Assets before SFAS #109 benefit 0.91% Total Full-time Equivalent Employees 214 (32.2% of the Company's total) Number of Offices 12 (29.3% of the Company's total)\nCommunity As part of the Company's strategy of expanding in suburban Pittsburgh, in March 1992, USBANCORP acquired Community Bancorp, Inc., a bank holding company regulated under the BHCA and supervised by the Federal Reserve Board, and its sole direct subsidiary, Community Savings Bank (\"Community.\")\nCommunity is a Pennsylvania-chartered savings bank registered under the Pennsylvania Banking Code. Community currently conducts its banking operation through 12 locations in Allegheny, Washington, and Westmoreland Counties, Pennsylvania. Traditionally, Community originated and held fixed-rate residential mortgage loans which were funded primarily by certificates of deposit and offered a few fee-based services. Under the direction of personnel transferred to Community from U.S. Bank and Three Rivers Bank, Community has begun the process of expanding its product offerings through the introduction of commercial lending and expanded consumer lending and deposit gathering in order to position it as a full-service community bank.\nAs part of the Community Acquisition, USBANCORP acquired Community's direct subsidiaries: Community First Capital Corporation (a special purpose finance subsidiary), Community First Financial Corporation (a subsidiary engaged in real estate joint ventures with assets totalling $1.2 million), and Frontier Consumer Discount Company. In accordance with Federal Reserve policy, USBANCORP has committed to divest its equity investment in Community First Financial Corporation within two years of the date of the Community Acquisition, or such longer period as the Federal Reserve Board may approve.\nCommunity's deposit base is such that loss of one depositor or a related group of depositors would not have a materially adverse effect on its business. In addition, the loan portfolio contains a high portion of residential mortgage and consumer loans that have less credit risk associated with them. In addition, the loan portfolio is also diversified so that one industry or group of related industries does not comprise a material portion of the loan portfolio.\nCommunity's business is not seasonal nor does it have any risks attendant to foreign sources.\nAs a Pennsylvania-chartered, federally-insured savings bank that is not a member of the Federal Reserve System, Community Savings Bank is subject to supervision and regular examination by the Pennsylvania Department of Banking and the FDIC. Various federal and state laws and regulations also govern many aspects of its banking and bank-related operations.\nThe following is a summary of key data and ratios at December 31, 1993:\nHeadquarters Monroeville, PA Chartered 1890 Total Assets $364,879,000 (29.4% of the Company's total) Total Investment Securities Available for Sale $91,198,000 (21.3% of Company's total) Total Loans (net of unearned income) $248,968,000 (34.3% of the Company's total) Total Deposits $291,737,000 (27.8% of the Company's total) Total Net Income before SFAS #109 benefit $3,333,000 (30.2% of the Company's total) Total Equity to Assets Ratio 6.51% 1993 Return on Average Assets before SFAS #1 benefit 0.91% Total Full-time Equivalent Employees 100 (15.0% of the Company's total) Number of Offices 12 (29.3% of the Company's total)\nUSBANCORP Non-Banking Subsidiaries:\nUnited Life United Life is a captive insurance company organized under the laws of the State of Arizona. United Life engages in underwriting as reinsurer of credit life and disability insurance within the Company's six county market area. Operations of United Life are conducted in each office of the Company's banking subsidiaries. United Life is subject to supervision regulation by the Arizona Department of Insurance, the Insurance Department of the Commonwealth of Pennsylvania, and the Board of Governors of the Federal Reserve Bank. At December 31, 1993, United Life had total assets of $1.3 million and total shareholder's equity of $692,000.\nUSBANCORP Trust Company USBANCORP Trust Company is a trust company organized under Pennsylvania law in October 1992. USBANCORP Trust Company was formed to consolidate the trust functions of U.S. Bank and Three Rivers Bank and to increase market presence. As a result of this formation, the Trust Company now offers a complete range of trust services through each of the Company's subsidiary banks. At December 31, 1993, USBANCORP Trust Company had $942.6 million in assets under management which included both discretionary and non-discretionary assets.\nExecutive Officers Information relative to current executive officers of the Company or its subsidiaries is listed in the following table:\nName Age Office with USBANCORP, Inc. and\/or Subsidiary Terry K. Dunkle 52 Chairman, President & Chief Executive Officer of USBANCORP, Inc. and Chairman of U.S. Bank, Three Rivers Bank, and Community Bancorp, Inc.\nOrlando B. Hanselman 34 Executive Vice President, Chief Financial Officer & Manager of Corporate Services of USBANCORP, Inc.\nLouis Cynkar 49 President & Chief Executive Officer of U.S. Bank\nW. Harrison Vail 53 President & Chief Executive Officer of Three Rivers Bank\nKenneth J. Tyson(1) 63 President of Community Bancorp, Inc. and Community Savings Bank\nDennis J. Fantaski 49 Executive Vice President & Chief Executive Officer of Community Bancorp, Inc. and Community Savings Bank\n(1) Mr. Tyson retired as of March 31, 1994.\nIn July 1993, it was announced that Mr. Dunkle would succeed Clifford A. Barton as Chairman, President and Chief Executive Officer of USBANCORP. In April 1988, Mr. Dunkle was appointed as President and Chief Executive Officer of U.S. Bank and Executive Vice President and Secretary of USBANCORP. Mr. Dunkle served the five previous years as Executive Vice President of Commonwealth National Bank in Harrisburg, Pennsylvania. Mr. Hanselman joined U.S. Bank in January 1987 as Vice President and Chief Financial Officer and received his present title in February 1994. Prior to joining U.S. Bank, he served as Senior Accountant and Consultant in the Financial Industry Specialty Group of Price Waterhouse in Pittsburgh, Pennsylvania. Mr. Cynkar was designated to succeed Mr. Dunkle as President and Chief Executive Officer of U.S. Bank in July 1993. Mr. Cynkar joined U.S. Bank in 1986 as Senior Vice President, commercial lending. Mr. Vail has been President and Chief Executive Officer of Three Rivers Bank since January 1985. He joined Three Rivers Bank as President on August 1, 1984. Mr. Tyson has served as President and Chief Executive Officer of Community since 1969 and Community Bancorp, Inc. since 1988. Mr. Fantaski was named Chief Executive Officer of Community in March 1993. Prior to joining Community, Mr. Fantaski was Senior Vice President and head of retail banking at U.S. Bank from 1988 through 1991.\nMonetary Policies Commercial banks are affected by policies of various regulatory authorities including the Federal Reserve System. An important function of the Federal Reserve System is to regulate the national supply of bank credit. Among the instruments of monetary policy used by the Board of Governors are: open market operations in U.S. Government securities, changes in discount rate on member bank borrowings, and changes in reserve requirements on bank deposits. These means are used in varying combinations to influence overall growth of bank loans, investments, and deposits, and may also affect interest rate charges on loans or interest paid for deposits. The monetary policies of the Board of Governors have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future. In view of changing conditions in the national economy and the money markets (as well as the effect of actions by\nmonetary and fiscal authorities including the Board of Governors), no prediction can be made as to possible future changes in interest rates, deposit levels or loan demand, or as to the impact of such changes on the business and earnings of the Company and its subsidiary entities.\nCompetition The subsidiary entities face strong competition from other commercial banks, savings banks, savings and loan associations, and several other financial or investment service institutions for business in the communities they serve. Several of these institutions are affiliated with major banking and financial institutions, such as Mellon Bank Corporation and PNC Financial Corporation, which are substantially larger and have greater financial resources than the subsidiary entities.\nAs the financial services industry continues to consolidate, the scope of potential competition affecting the subsidiary entities will also increase. For most of the services that the subsidiary entities perform, there is also competition from credit unions and issuers of commercial paper and money market funds. Such institutions, as well as brokerage house consumer finance companies, factors, insurance companies, and pension trusts, are important competitors for various types of financial services. In addition, personal and corporate trust investment counseling services are offered by insurance companies, other firms, and individuals.\nMarket Area The Company, headquartered in Johnstown, Pennsylvania, operates through 41 branch offices in six southwestern Pennsylvania counties with a combined population of approximately 2.2 million: Allegheny, Cambria, Clearfield, Somerset, Washington, and Westmoreland. With the acquisition of four Integra branches, the Company's Community and Three Rivers bank subsidiaries have a combined 24 offices and $700 million asset presence in the Western Region, largely comprised of the Greater Pittsburgh marketplace.\nThe economy of western Pennsylvania continues to experience modest expansion, but at a slower pace than the nation-at-large. Retail sales, durable goods orders, and consumer real estate activity continue to foster the expansion. Correspondingly, the statewide seasonally adjusted unemployment rate for December 1993 fell to 5.8%, representing a 1% improvement from the adjusted December 1992 unemployment rate. The Company believes that as the economy continues to expand the conditions in the state will slowly improve throughout 1994.\nThe Greater Johnstown economy improved at a slightly faster pace. The unemployment rate declined 1.9% to 9.0% at December 1993 when compared to the December 1992 rate. Economic news continues to be encouraging for the region with slow expansion firmly imbedded. The modernization planned by Veritas Capital, Inc. in the purchase plan of Bethlehem Steel's Johnstown mills is progressing. The project could make the Bar, Rod, and Wire mill a state-of-the-art facility in the industry and enhance employment in the region by 1,200 or 1.3% within four or five years. Diversification continues to be a key element to the community's growth. The opening of several new businesses and facilities has benefited the area by shifting the area's focus from the historic over-reliance on heavy industry to more light manufacturing and service related businesses. Examples of this would include the National Drug Intelligence Center which brought 150 new jobs to the area and expected growth at Laurel Technologies, Concurrent Technologies, Johnstown Wire Technologies, and others which are anticipated to generate approximately 200 new jobs in 1994. This diversification of the local economy is further exemplified by the nature of the ten largest non-\ngovernment employers in the region which include: three hospitals; a state-wide electric utility; a regional food retailer; a steel manufacturer; a ladies apparel manufacturer; a national life insurance company; and a long distance trucking company.\nThe suburban Pittsburgh market area, where Three Rivers Bank and Community operate, is anticipated to benefit from the planned Station Square Expansion Project set to begin in March 1994. This project will develop a $4.1 million park on 2.5 acres at Station Square. Armco, Inc. announced plans to recapitalize its carbon steel venture with Kawasaki Steel Corporation by selling $590 million in new stock and debt. USX announced that it also will test the investor market for steel by issuing 4.5 million shares of common stock. This interest in capital creation clearly shows expansion potential in the region. It is also expected that the completed expansion and modernization of the new Pittsburgh International Airport known as \"Midfield Terminal\" will continue to contribute to growth in the economy. The economy is generally well diversified as exemplified by the ten largest non-government employers in the region which include: two hospitals; USAir; the University of Pittsburgh; Westinghouse; two money center banks; USX Corporation; a multi- state grocery retailer; and a multi-state restaurant chain.\nThe Company believes that the state and regional economy will continue its diversification and show improvement throughout 1994. Consequently, the Company's marketplace should continue to display modest strengthening.\nEmployees The Company employed approximately 773 persons as of December 31, 1993, in full and part-time positions. Approximately 213 non-supervisory employees of U.S. Bank are represented by a union. U.S. Bank and such employees are parties to a labor contract pursuant to which employees have agreed not to engage in any work stoppage during the term of the contract which will expire on October 15, 1994. U.S. Bank has not experienced a work stoppage since 1979. Management considers relations with employees to be satisfactory.\nCommitments and Lines of Credit The Company's banking subsidiaries are obligated under commercial, standby, and trade-related irrevocable letters of credit aggregating $5.4 million at December 31, 1993. In addition, the subsidiary banks have issued lines of credit to customers generally for periods of up to one year. Borrowings under such lines of credit are usually for the working capital needs of the borrower. At December 31, 1993, the Company's banking subsidiaries had unused loan commitments of approximately $168 million.\nStatistical Disclosures for Bank Holding Companies Certain information regarding statistical disclosure for bank holding companies pursuant to Guide 3 is provided in the 1993 Annual Report to Shareholders and such pages are incorporated herein by reference. The remaining Guide 3 information is included in this Form 10-K as listed below:\nI. Distribution of Assets, Liabilities, and Stockholders' Equity; Interest Rates and Interest Differential Information. This section is presented on pages 44, 45, and 54. II. Investment Portfolio Information required by this section is presented on pages 68, 69, and 70. III.Loan Portfolio Information required by this section appears on pages 20, 21, 70, and 71. IV. Summary of Loan Loss Experience Information required by this section is presented on pages 20, 51, 52, and 53.\nV. Deposits Information required by this section follows on pages 71 and 72. VI. Return on Equity and Assets Information required by this section is presented on page 38. VII. Short-Term Borrowings Information required by this section does not meet the materiality test for disclosure and therefore is not presented.\nInvestment Portfolio Effective September 30, 1992, USBANCORP designated the entire investment securities portfolio as \"available for sale.\" All or part of these \"available for sale\" assets may be sold at any time for interest rate, prepayment, credit, or liquidity considerations and other factors as deemed appropriate by management. These assets are carried on the balance sheet at the lower of their aggregate amortized cost or market value. Any unrealized net valuation adjustments will be included in USBANCORP's income statement. While designation of these assets as \"available for sale\" may increase income volatility for financial reporting purposes, management believes designation of these assets as \"available for sale\" permits USBANCORP to react more quickly to changing market conditions and opportunities and more effectively interest rate risk. (See Investment Securities Available for Sale Policy on page 18 for further discussion of SFAS #115 impact).\nThe following table sets forth the book and market value of USBANCORP's investment portfolio as of the periods indicated:\nThe $61.8 million increase in total investment securities was due entirely to the redeployment of a significant portion of the $88 million of acquired Integra deposits and the $24.6 million of funds from the secondary market common stock issuance into the securities portfolio. Within the portfolio, the decline in other securities reflects a shift emphasis towards mortgage-backed securities and collateralized mortgage obligations which provide a recurrent source of cash flow.\nThe book value of total investment securities increased from $289.8 million at December 31, 1991, to $366.9 million at December 31, 1992. The increase in the total investment securities was due to the inclusion of $82.9 million of Community's investment securities which included the securities purchased with approximately $30 million of proceeds from of fixed-rate mortgage loans. This increase was partially offset by the cash payment made by USBANCORP to shareholders of the parent of Community, a reduction in interest bearing deposits at other institutions, and the continued rapid paydown of mortgage-backed securities in a low interest rate environment.\nAt December 31, 1993, investment securities having a book value of $83.8 million were pledged as collateral for public funds and other purposes as required by law.\nThe Company and its subsidiaries, collectively, did not hold securities of any single issuer, excluding U.S. Treasury and U.S. Agencies, that exceeded 10% of stockholders' equity at December 31, 1993.\nMaintaining investment quality is a primary objective of the Company's investment policy which, subject to certain minor exceptions, prohibits the purchase of any investment security below a Moody's Investor Service or Standard & Poor's rating of \"A.\" At December 31, 1993, 89.2% of the portfolio was rated \"AAA\" and 91.0% was rated at least \"AA\" as compared to 85.4% and 86.5%, respectively, at December 31, 1992. Only 3.2% of the portfolio was rated below \"A\" or unrated at December 31, 1993.\nThe following table sets forth the contractual maturity distribution of the investment securities available for sale, book and market values, and the weighted average yield for each type and range of maturity as of December 31, 1993. Yields, which are not presented on a tax-equivalent basis, are based upon book value and are weighted for the scheduled maturity. Average maturities are based upon the original contractual maturity dates with the exception of collateralized mortgage obligations and asset-backed securities for which the average lives were used. Also, where applicable, put-option dates were used as the maturity dates. At December 31, 1993, USBANCORP's consolidated investment securities available for sale had an average contractual maturity of approximately 10.70 years and an average cash flow payback of approximately 2.81 years. However, as previously discussed, any security may be sold prior to contractual maturity at the discretion of management.\nDuring both 1993 and 1992, the Company sold approximately $22 million and $32 million, respectively, of investment securities available for sale which resulted in the recognition of net investment security gains of $583,000 and $393,000 respectively. These gains resulted primarily from the execution of several investment strategies to capture available market premiums on mortgage-backed securities which had the characteristics of low remaining balances and fast prepayment histories.\nLoan Portfolio The following table sets forth the Company's loans by major category as of the dates set forth below:\nFrom December 31, 1992, to December 31, 1993, loans increased by $72.2 million or 10.9% from $659.8 million to $732.0 million. As a result of the low rate environment, less inflationary fears, and a moderate economic recovery, each of the Company's banking subsidiaries experienced heightened loan demand in 1993. Within the loan portfolio, each of the major loan categories experienced growth in the following amounts since December 31, 1992: commercial loans up by $22.7 million or 29.5%, real estate-mortgage loans up by $39.8 million or 13.3%, consumer loans up by $9.5 million or 6.0%, and commercial loans secured by real estate up by $200,000 or only .2%. The commercial loan growth resulted from successful business development efforts in both regions of the Company's marketplace which includes suburban Pittsburgh and Greater Johnstown. The net growth in mortgage loans (including home equity) occurred despite the sale of approximately $22 million of 30-year fixed-rate product that originated during 1993. The majority of the mortgage growth occurred at Community with approximately 60% of this growth related to refinancing activity with new customers. The net growth of consumer loans outstanding is noteworthy since it represents a significant reversal of the trend of net consumer loan run-off which had occurred throughout 1992. Improved consumer demand, acquisition of Integra loans, and heavy marketing of debt consolidation loans, combined with a general stabilizing of indirect auto loan run-off, were the factors responsible for the increase in consumer loan balances outstanding.\nFrom December 31, 1991, to December 31, 1992, loans increased by $213.3 million or 47.8% from $446.5 million to $659.8 million. This increase in the loan portfolio was due to the inclusion of Community's $238.4 million loan portfolio. Without Community, USBANCORP's loan portfolio decreased from $446.5 million on December 31, 1991, to $421.4 million on December 31, 1992. The decline in the loan portfolio was due to the softness in consumer and commercial demand.\nThe amount of loans outstanding by category as of December 31, 1993, which are due in (i) one year or less, (ii) more than one year through five years, and (iii) over five years, are shown in the following table. Loan balances are also categorized according to their sensitivity to changes in interest rates.\nThe loan maturity information is based upon original loan terms and is not adjusted for \"rollovers.\" In the ordinary course of business, loans maturing within one year may be renewed, in whole or in part, as to principal amount at interest rates prevailing at the date of renewal.\nAt December 31, 1993, 71.6% of total loans were fixed-rate compared to 75.0% at December 31, 1992. This decrease was due to a combination of growth experienced in floating rate commercial loans and management's ongoing effort to continue to diversify Community's loan portfolio by selling new 30-year fixed-rate mortgage loans. During 1993, $22 million of this type of loan product was sold. For additional information regarding intesest sensitivity, see \"Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations--Interest Rate Sensitivity.\"\nDeposits The following table sets forth the average balance of the Company's deposits and the average rates paid thereon for the past three calendar years:\nThe Company's deposits increased on average in 1993 by $113.8 million or 12.5% due entirely to the $88 million of acquired Integra deposits and the inclusion of Community's deposits for the entire year. Trends noted within the deposit portfolio included increased customer preference in the low rate environment for money market, savings, and NOW account deposits. Although these types of core deposit balances are more liquid and sensitive than certificates of deposit, they do provide a relatively stable and less costly source of funding for the earning asset base than do certificates of deposit. Overall, the core deposit base is stable as approximately 97% of total deposits are considered core accounts. The remaining 3% are certificates of deposit over $100,000. The Company does not use any volatile funding sources such as brokered deposits.\nThe following table indicates the maturities and amounts of certificates of deposit issued in denominations of $100,000 or more as of December 31, 1993:\nITEM 2.","section_1A":"","section_1B":"","section_2":"ITEM 2. PROPERTIES\nThe principal offices of the Company and U.S. Bank occupy a five-story building at the corner of Main and Franklin Streets in Johnstown plus several floors of the building adjacent thereto. The Company occupies the main office and its subsidiary entities have 31 other locations which are owned in fee. Ten additional locations are leased with terms expiring March 31, 1994, to December 31, 2003.\nITEM 3.","section_3":"ITEM 3. LEGAL PROCEEDINGS\nThe Company is subject to a number of asserted and unasserted potential legal claims encountered in the normal course of business. In the opinion of both management and legal counsel as of January 28, 1994, there is no present basis to conclude that the resolution of these claims will have a material adverse effect on the Company's consolidated financial position or results of operations.\nITEM 4.","section_4":"ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS\nNo matter was submitted by the Company to its shareholders through the solicitation of proxies or otherwise during the fourth quarter of the fiscal year covered by this report.\nPART II\nITEM 5.","section_5":"ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS\nInformation relating to the Company's Common Stock is presented on pages 28 and 37. As of January 31, 1994, the Company had 4,734 shareholders of its Common Stock.\nITEM 6.","section_6":"ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA\nInformation required by this section is presented on page 38.\nITEM 7.","section_7":"ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS\nInformation required by this section is presented on pages 40 to 58.\nITEM 8.","section_7A":"","section_8":"ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA\nInformation required by this section is presented on pages 14 to 32.\nITEM 9.","section_9":"ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE\nIn accordance with Instruction 1 to Item 304 of Regulation S-K, information requested by this Item of Form 10-K was previously reported on the Company's Current Report on Form 8-K dated November 26, 1991.\nPART III\nITEM 10.","section_9A":"","section_9B":"","section_10":"ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT\nInformation required by this section relative to Directors of the Registrant is presented in the Proxy Statement for the Annual Meeting of Shareholders. Executive officer information has been provided in Item 1.\nITEM 11.","section_11":"ITEM 11. EXECUTIVE COMPENSATION\nInformation required by this section is presented in the Proxy Statement for the Annual Meeting of Shareholders.\nITEM 12.","section_12":"ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT\nInformation required by this section is presented in the Proxy Statement for the Annual Meeting of Shareholders.\nITEM 13.","section_13":"ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS\nInformation required by this section is presented in the Proxy Statement for the Annual Meeting of Shareholders.\nPART IV\nITEM 14.","section_14":"ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K\nConsolidated Financial Statements Filed: The consolidated financial statements listed below are from the 1993 Annual Report to Shareholders and Part II--Item 8. Page references are to said Annual Report.\nConsolidated Financial Statements:Page USBANCORP, Inc. and Subsidiaries Consolidated Balance Sheet, 14 Consolidated Statement of Income, 15 Consolidated Statement of Changes in Stockholders' Equity, 16 Consolidated Statement of Cash Flows, 17 Notes to Consolidated Financial Statements, 18 Statement of Management Responsibility, 33 Reports of Independent Public Accountants, 34\nConsolidated Financial Statement Schedules: These schedules are not required or are not applicable under Securities and Exchange Commission accounting regulations and therefore have been omitted.\nReports on Form 8-K: Current Report on Form 8-K dated November 19, 1993. USBANCORP, Inc. and Johnstown Savings Bank had jointly signed a definitive agreement to which Johnstown Savings Bank would merge with United States National Bank, one of USBANCORP's three banking subsidiaries.\nExhibits: The exhibits listed below are filed herewith or to other filings.\nExhibit Prior Filing or Sequential Number Description Page Number Herein\n3(a) Articles of Incorporation Exhibit III, Part II to Form S-14 File No. 2-79639 Exhibit 4.2 to Form S-2 File No. 33-685 Exhibit 4.3 to Form S-2 File No. 33-685\n3(b) Bylaws Exhibit IV, Part II to Form S-14 File No. 2-79639\n4.3 Shareholder Protection Rights Exhibit 4.3 to form S-2 Agreement, dated as of File No. 33-56684 November 10, 1989, between USBANCORP, Inc. and United States National Bank in Johnstown, as Rights Agent.\n10.1 Agreement of Reorganization and Exhibit 10.1 to Form S-2 Merger between USBANCORP, Inc. File No. 33-56684 and Community Bancorp, Inc., dated November 19, 1991.\n10.2 Agreement, dated as of April 22, Exhibit 10.2 to Form S-2 1988, between USBANCORP, Inc. File No. 33-56684 and Terry K. Dunkle.\n10.3 Agreement, dated as of June 23, Exhibit 10.3 to Form S-2 1988, between USBANCORP, Inc. File No. 33-56684 and W. Harrison Vail.\n10.4 Employment Agreement, dated Exhibit 10.4 to Form S-2 November 19, 1991, between File No. 33-56684 Community Bancorp, Inc. and Kenneth J. Tyson.\n10.5 Purchase and Assumption Exhibilt 10.5 to Form S-2 Agreement, dated November 17, File No. 33-56684 1992, between Three Rivers Bank & Trust Company Integra National Bank\/Pittsburgh.\n10.6 Loan Agreement, dated March 26, Exhibit 10.6 to Form S-2 1992, between USBANCORP, Inc. File No. 33-56684 and Pittsburgh National Bank.\n10.7 Collective Bargaining Agreement, Exhibit 10.7 to form S-2 dated October 16, 1991, File No. 33-56684 between United States National Bank in Johnstown and Steel Workers of America, AFL-CIO-CLC Local Union 8204.\n10.8 Agreement, dated January 8, Exibit 10.8 to Form S-2 1990, between USBANCORP, Inc. File No. 33-56684 and Brookside Associates, Inc., First Carolina Investors, Inc. Foundation Lyric, Hoffin, Anstalt, John G. Ogilvie, Trust Alvant, and Robert G. Wilmers.\n10.9 1991 Stock Option Plan, dated Exhibit 10.9 to Form S-2 August 23, 1991. File No. 33-56684\n10.10 Installment Sale Agreement, Exhibit 10.10 to Form S-2 dated as of March 1, 1979, File No. 33-56684 between the Cambria County Industrial Development Authority, United States National Bank in Johnstown, and Somerset Trust Company.\n13 1993 Annual Report to Page 1 Shareholders.\n22 Subsidiaries of the Registrant. Below\n24.1 Consent of Price Waterhouse.\n24.2 Consent of Arthur Andersen & Co.\nUSBANCORP, INC.\nTHIS PAGE IS INTENTIONALLY LEFT BLANK.\nEXHIBIT A\n(22) Subsidiaries of the Registrant\nPercent Jurisdiction Name of Ownership of Organization\nUnited States National Bank 100% United States in Johnstown of America Main and Franklin Streets P.O. Box 520 Johnstown, PA 15907\nThree Rivers Bank and 100% Commonwealth of Trust Company Pennsylvania 633 State Route 51, South Jefferson Borough P.O. Box 10915 Pittsburgh, PA 15236\nCommunity Bancorp, Inc. 100% Commonwealth of 2681 Moss Side Boulevard Pennsylvania Monroeville, PA 15146\nUnited Bancorp Life 100% State of Arizona Insurance Company 1421 East Thomas Road Phoenix, AZ 85014\nUSBANCORP Trust Company 100% Commonwealth of Main and Franklin Streets Pennsylvania P.O. Box 520 Johnstown, PA 15907\nSIGNATURES\nPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.\nUSBANCORP, Inc. (Registrant)\nDate: March 7, 1994 By:\/s\/Terry K. Dunkle TERRY K. DUNKLE Chairman, President and Chief Executive Officer\nPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 7, 1994:\n\/s\/Terry K. Dunkle Chairman, President TERRY K. DUNKLE and Chief Executive Officer; Director\n\/s\/Orlando B. Hanselman Executive Vice President, Chief ORLANDO B. HANSELMAN Financial Officer & Manager of Corporate Services\n\/s\/Jerome M. Adams \/s\/Frank J. Pasquerilla JEROME M. ADAMS, Director FRANK J. PASQUERILLA, Director\n\/s\/Robert A. Allen \/s\/Jack Sevy ROBERT A. ALLEN, Director JACK SEVY, Director\n\/s\/Clifford A. Barton \/s\/Thomas C. Slater CLIFFORD A. BARTON, Director THOMAS C. SLATER, Director\n\/s\/Michael F. Butler \/s\/James C. Spangler MICHAEL F. BUTLER, Director JAMES C. SPANGLER, Director\n\/s\/Louis Cynkar \/s\/Kenneth J. Tyson LOUIS CYNKAR, Director KENNETH J. TYSON, Director\n\/s\/Richard W. Kappel \/s\/W. Harrison Vail RICHARD W. KAPPEL, Director W. HARRISON VAIL, Director\n\/s\/John H. Kunkle, Jr. \/s\/Robert L. Wise JOHN H. KUNKLE, JR., Director ROBERT L. WISE, Director\n\/s\/James F. O'Malley JAMES F. O'MALLEY, Director\nUSBANCORP, INC.\nTHIS PAGE IS INTENTIONALLY LEFT BLANK.\nUSBANCORP, INC.\nTHIS PAGE IS INTENTIONALLY LEFT BLANK.\nUSBANCORP, INC.\nDIRECTORS, GENERAL OFFICERS, and ADVISORY BOARDS\nCOMMUNITY OFFICES\nSHAREHOLDER INFORMATION\nUSBANCORP, INC.\nTHIS PAGE IS INTENTIONALLY LEFT BLANK.\nUSBANCORP, INC.\nBoard of Directors\nJerome M. Adams Senior Partner, Adams, Myers & Baczkowski Attorneys-at-Law\nRobert A. Allen Retired Former President, Sani-Dairy\nClifford A. Barton Retired Chairman, President & CEO, USBANCORP, Inc. Retired Chairman of the Board, United States National Bank, Three Rivers Bank & Trust Company, Community Bancorp, Inc., and USBANCORP Trust Company\nMichael F. Butler Business Consultant and Attorney-at-Law\nLouis Cynkar President & CEO, United States National Bank\nTerry K. Dunkle Chairman, President & CEO, USBANCORP, Inc. Chairman of the Board, United States National Bank, Three Rivers Bank & Trust Company, Community Bancorp, Inc., and USBANCORP Trust Company\nRichard W. Kappel Secretary & Treasurer, William J. Kappel Co., Retail Jewelry Store Chain\nJohn H. Kunkle, Jr. Retired Former Vice-Chairman & Director, Commonwealth Land Title Insurance Co.\nJames F. O'Malley Senior Lawyer, Yost & O'Malley Attorneys-at-Law\nFrank J. Pasquerilla Chairman of the Board & Chief Executive Officer, Crown American Realty Trust\nJack Sevy Retired Former Owner\/Operator, New Stanton West Auto Truck Plaza\nThomas C. Slater Owner, President & Director, Slater Laboratories, Inc. Clinical Laboratory\nJames C. Spangler Retired Former Owner, Somerset Auction and Transfer, Inc.\nKenneth J. Tyson Retired President, Community Bancorp, Inc. and Community Savings Bank\nW. Harrison Vail President & CEO, Three Rivers Bank & Trust Company\nRobert L. Wise President, Pennsylvania Electric Company (Public Utility)\nGeneral Officers\nTerry K. Dunkle Chairman, President & Chief Executive Officer\nOrlando B. Hanselman Executive Vice President, Chief Financial Officer & Manager of Corporate Services\nRichard L. Barron Vice President & Human Resources Director\nRay M. Fisher Vice President & Chief Investment Officer\nJohn H. Follansbee III Vice President, Compliance\nDan L. Hummel Vice President & Marketing Director\nJohn J. Legath Vice President, Community Reinvestment\nGary M. McKeown Vice President, Manager of Credit Policy and Administration\nLeslie N. Morgenstern Vice President, Loan Review\nJeffrey A. Stopko Vice President, Chief Accounting Officer & Comptroller\nJohn Suierveld, Jr. Vice President & Chief Auditor\nJames E. Vennebush Vice President, Manager of General Services\nU.S. BANK\nBoard of Directors\nRobert A. Allen Retired Former President, Sani-Dairy\nClifford A. Barton Retired Chairman, President & CEO, USBANCORP, Inc. Retired Chairman of the Board, United States National Bank, Three Rivers Bank & Trust Company, Community Bancorp, Inc. and USBANCORP Trust Company\nMichael F. Butler Business Consultant and Attorney-at-Law\nWilliam F. Casey President & CEO, Conemaugh Memorial Hospital\nDaniel R. DeVos President and CEO, Concurrent Technologies Corporation\nBruce E. Duke III, M.D. Surgeon, Valley Surgeons\nTerry K. Dunkle Chairman, President & CEO, USBANCORP, Inc. Chairman of the Board, United States National Bank, Three Rivers Bank & Trust Company, Community Bancorp, Inc. and USBANCORP Trust Company\nJames F. O'Malley Senior Lawyer, Yost & O'Malley, Attorneys-at-Law\nRev. Christian R. Oravec President, St. Francis College\nFrank J. Pasquerilla Chairman of the Board & Chief Executive Officer, Crown American Realty Trust\nFred R. Shaffer Manager\/President, Findley's Pharmacy, Inc.\nThomas C. Slater Owner, President & Director, Slater Laboratories, Inc. Clinical Laboratory\nJames C. Spangler Retired Former Owner, Somerset Auction and Transfer, Inc.\nRobert L. Wise President, Pennsylvania Electric Company (Public Utility)\nGeneral Officers\nTerry K. Dunkle Chairman of the Board\nLouis Cynkar President & Chief Executive Officer\nJames S. Bubenko Vice President & Consumer Lending Manager\nLeo J. Fronczek Vice President, Management Information Systems\nMichael F. Komara Vice President, Human Resources\nFrank A. Krall Vice President, Mortgage Lending\nWilliam J. Locher, Jr. Vice President, Commercial Loans\nPaul E. Lovett, Jr. Vice President, Consumer Lending\nKermit L. Miller Vice President, Area Manager\nVictor L. Tatum Vice President & Commercial Equipment Leasing Manager\nWilliam E. Wood Vice President, Branch Administration\nDirectors Emeriti John N. Crichton Owen D. Griffith John L. Williams\nAdvisory Boards\nCarrolltown, Ebensburg, Lovell Park, Loretto, Nanty Glo, Coalport (Northern Cambria County\/Coalport) Frank J. Kuzemchak, Chairman Charles Glasgow Richard W. Hegarty Joseph E. Lacue Joseph E. Stevens, Sr.\nSomerset E. Charles Kaufman, Chairman James R. Cascio Fred R. Shaffer Marlin C. Sherbine James C. Spangler\nWindber, Central City, St. Michael, University Heights John F. Hollern, Chairman Chester F. Fluder David J. Rizzo Lloyd E. Zimmerman\nWestmont, West End, Seward Edward J. Cernic, Chairman Robert A. Cameron Teresa T. Chianese David N. Crichton Max J. Critchfield Harvey Supowitz Carl H. Vulcan Dr. William A. Yates\nTHREE RIVERS BANK\nBoard of Directors\nJerome M. Adams Senior Partner, Adams, Myers, & Baczkowski Attorneys-at-Law\nClifford A. Barton Retired Chairman, President & CEO, USBANCORP, Inc. Retired Chairman of the Board, United States National Bank, Three Rivers Bank & Trust Company, Community Bancorp, Inc., and USBANCORP Trust Company\nJaney D. Barton Retired Vice President Three Rivers Bank & Trust Company\nTerry K. Dunkle Chairman, President & CEO, USBANCORP, Inc. Chairman of the Board, United States National Bank, Three Rivers Bank & Trust Company, Community Bancorp, Inc., and USBANCORP Trust Company\nJ. Terrence Farrell Attorney-at-Law\nJames R. Ferry President, Ferry Electric Company Electrical Contractor\nCharles M. Hammerberg President, Hammerberg Construction, Inc.\nMichael D. Hanna, Jr. President, Tippecanoe Insurance Agency, Inc.\nStephen I. Richman Senior Partner, Ceisler, Richman, Smith Law Firm\nJack Sevy Retired Former Owner\/Operator, New Stanton West Auto Truck Plaza, Inc.\nW. Harrison Vail President & Chief Executive Officer, Three Rivers Bank & Trust Company\nGeneral Officers\nTerry K. Dunkle Chairman of the Board\nW. Harrison Vail President & Chief Executive Officer\nLouis S. Klippa Executive Vice President Chief Operating Officer & Secretary\nJeryl L. Graham Senior Vice President Senior Loan Officer\nHarry G. King Senior Vice President Community Banking\nJames F. Ackman Vice President Consumer Loans\nRobert J. DeGrazia Vice President Information Systems\nRobert J. Smerker Vice President Operations\nMary Pat Soltis Vice President Regional Manager\nJoseph M. Trifaro, Jr. Vice President Regional Manager\nVincent W. Locher Vice President and Commercial Loan Officer\nDirectors Emeriti J. Paul Farrell William R. Hoag Ray A. Liddle\nCOMMUNITY BANCORP, INC.\nBoard of Directors\nClifford A. Barton Retired Chairman, President & CEO, USBANCORP, Inc. Retired Chairman of the Board United States National Bank, Three Rivers Bank, Community Bancorp, Inc., and USBANCORP Trust Company\nTerry K. Dunkle Chairman, President & CEO, USBANCORP, Inc. Chairman of the Board United States National Bank, Three Rivers Bank, Community Bancorp, Inc., and USBANCORP Trust Company\nDennis J. Fantaski Executive Vice President Chief Executive Officer & Secretary\nJames R. Ferry President, Ferry Electric Company Electrical Contractor\nRichard W. Kappel Secretary & Treasurer William J. Kappel Co., Retail Jewelry Store Chain\nJohn H. Kunkle, Jr. Vice Chairman--Retired, Commonwealth Land Title Insurance Company\nThomas J. McCaffrey Grubb & Ellis Company\nWilliam C. McNary Financial Consultant--Retired, CIGNA Individual Financial Services Co.\nCarl E. Nickel Owner Carl E. Nickel Company\nEdward W. Seifert Attorney at Law Partner, Reed, Smith, Shaw, & McClay\nKenneth J. Tyson Retired President, Community Bancorp, Inc., and Community Savings Bank\nGeneral Officers\nTerry K. Dunkle Chairman of the Board\nDennis J. Fantaski President & Chief Executive Officer\nAnthony D. Denunzio Senior Vice President Marketing\nThomas J. Chunchick Vice President Retail Banking\nFred Geisler Vice President Mortgage Lending\nRobert L. Rogers Vice President Commercial Loans\nDelbert O. Hague Vice President Residential Lending\nUSBANCORP TRUST COMPANY\nBoard of Directors\nJerome M. Adams Senior Partner, Adams, Myers & Baczkowski Attorneys-at-Law\nClifford A. Barton Retired Chairman, President & CEO, USBANCORP, Inc. Retired Chairman of the Board, United States National Bank, Three Rivers Bank & Trust Company, Community Bancorp, Inc., and USBANCORP Trust Company\nJohn N. Crichton Chairman, Concurrent Technologies Corporation\nLouis Cynkar President & CEO, United States National Bank\nTerry K. Dunkle Chairman, President & CEO, USBANCORP, Inc. Chairman of the Board, United States National Bank, Three Rivers Bank & Trust Company, Community Bancorp, Inc., and USBANCORP Trust Company\nRichard W. Kappel Secretary & Treasurer, William J. Kappel Co., Retail Jewelry Store Chain\nJohn H. Kunkle, Jr. Retired Former Vice Chairman & Director, Commonwealth Land Title Insurance Co.\nDarryl L. Myers President & CEO, USBANCORP Trust Company\nRev. Christian R. Oravec President, St. Francis College\nKenneth J. Tyson Retired President, Community Bancorp, Inc. and Community Savings Bank\nW. Harrison Vail President & CEO, Three Rivers Bank & Trust Company\nRobert L. Wise President, Pennsylvania Electric Company (Public Utility)\nGeneral Officers\nTerry K. Dunkle Chairman of the Board\nDarryl L. Myers President & Chief Executive Officer\nOrlando B. Hanselman Treasurer\nAnne G. Bump Vice President & Employee Benefits Officer\nJudith A. Duchene Vice President & Trust Portfolio Manager\nJames C. McGough Vice President & Institutional Investment Sales Officer\nDavid L. Mordan Vice President & Manager of Financial Services\nMildred L. Nelson Vice President & Trust Officer\nJames T. Vaughan Vice President & Senior Trust Officer\nJames M. Young Vice President & Chief Investment Officer\nWilliam E. Wood Vice President, Branch Administration\nTrust Company Offices Main and Franklin Streets, 11th Floor U.S. Bank Building P.O. Box 520 Johnstown, Pennsylvania 15907-0520\n600 Fifth Avenue, 2nd Floor Three Rivers Bank and Trust Company Building McKeesport, Pennsylvania 15132-2500\n2681 Moss Side Boulevard, First Floor Community Savings Building Monroeville, Pennsylvania 15146-3394\nU.S. BANK\nOFFICE LOCATIONS\n*Main Office Downtown 216 Franklin Street P.O. Box 520 Johnstown, PA 15907-0520 (814) 533-5300\n*Westmont Office 1738 Lyter Drive Johnstown, PA 15905-1207 (814) 255-6836\n*University Heights Office 1404 Eisenhower Boulevard Johnstown, PA 15904-3280 (814) 266-9691\nWest End Office 163 Fairfield Avenue Johnstown, PA 15906-2392 (814) 533-5436\n*Carrolltown Office 109 S. Main Street P.O. Box 507 Carrolltown, PA 15722-0507 (814) 344-6501\nEbensburg Office High & Center Streets P.O. Box 209 Ebensburg, PA 15931-0209 (814) 472-8706\n*Lovell Park Office New Germany Road & Park Avenue R.D. 3, Box 598 Ebensburg, PA 15931-9004 (814) 472-5200\nNanty Glo Office 928 Roberts Street Nanty Glo, PA 15943-1303 (814) 749-9227\nNanty Glo Drive-In 1383 South Shoemaker Street Nanty Glo, PA 15943-1254 (814) 749-0955\nLoretto Office 180 St. Mary's Street P.O. Box 116 Loretto, PA 15940-0116 (814) 472-8452\nSt. Michael Office Locust Street P.O. Box C St. Michael, PA 15951-0393 (814) 495-5514\nCoalport Office Main Street P.O. Box 356 Coalport, PA 16627-0356 (814) 672-5303\n*Seward Office # 1, Roadway Plaza Seward, PA 15954-9501 (814) 446-5655\nWindber Office 1501 Somerset Avenue Windber, PA 15963-1745 (814) 467-4591\nCentral City Office 104 Sunshine Avenue Central City, PA 15926-1129 (814) 754-4141\n*Somerset Office 108 W. Main Street Somerset, PA 15501-2035 (814) 445-4193\n*Derry Office 112 South Chestnut Street Derry, PA 15627-1938 (412) 537-9180 (412) 694-8887\nTHREE RIVERS BANK\nOFFICE LOCATIONS\n*Boston Office 1701 Boston Hollow Road McKeesport, PA 15135-1217 (412) 664-8765\n*Century III Office 269 Clairton Boulevard Pittsburgh, PA 15236-1499 (412) 382-1006\n*Franklin Mall Office 1500 W. Chestnut Street Washington, PA 15301-5871 (412) 228-0065\n*Glassport Office 600 Monongahela Avenue Glassport, PA 15045-1608 (412) 664-8760\n*Jefferson Borough Office Route 51, South P.O. Box 10915 Pittsburgh, PA 15236-0915 (412) 382-1000\n*Liberty Boro Office 3107 Liberty Way McKeesport, PA 15133-2198 (412) 664-8707\n*McKeesport Office 500 Fifth Avenue McKeesport, PA 15132-2500 (412) 664-8700\n*Motor Bank 1415 Fifth Avenue McKeesport, PA 15132-2427 (412) 664-8755\n*Port Vue Office 1194 Romine Avenue McKeesport, PA 15133-3596 (412) 664-8975\n*Rainbow Village Office 1 Rainbow Village Shopping Center White Oak, PA 15131-2415 (412) 664-8771\n*South Strabane Office 590 Washington Road Washington, PA 15301-9621 (412) 225-9800\n*University Office 2016 Eden Park Boulevard McKeesport, PA 15132-7619 (412) 664-8780\n*Remote 24-Hour Banking Locations *Main Office, 216 Franklin Street, Johnstown *Richland Mall, Elton Road, Johnstown *Lee Hospital, Main Street, Johnstown *Century III Mall, West Mifflin *Sheetz, Broad Street, Johnstown *The Galleria, Johnstown *Sheetz, Graham Avenue, Windber *Hills, Clairton Road, West Mifflin *Shop & Save, Ohio Avenue, Glassport *Wal-Mart, Oak Spring Road, Washington *Washington Mall, Oak Springs Road, Washington\nCOMMUNITY SAVINGS BANK\nOFFICE LOCATIONS\n*Lawrenceville 4319 Butler Street Pittsburgh, PA 15201-3094 (412) 681-8390\n*New Kensington 2 Feldarelli Square 2360 Freeport Road New Kensington, PA 15068-4669 (412) 335-9811\n*North Side 401 East Ohio Street Pittsburgh, PA 15212-5588 (412) 231-4300\n*Northway Mall 1102 Northway Mall Pittsburgh, PA 15237-3098 (412) 364-8692\n*Moon Township 914 Narrows Run Road Coraopolis, PA 15108-2306 (412) 262-2210\n*Monroeville 2681 Moss Side Boulevard Monroeville, PA 15146-3394 (412) 856-8410\n*North Versailles Great Valley Shopping Center 500 Lincoln Highway North Versailles, PA 15137-1524 (412) 829-1360\n*Baldwin Brownsville Plaza 5253 Brownsville Road Pittsburgh, PA 15236-2796 (412) 655-2217\n*Carrick 1817 Brownsville Road Pittsburgh, PA 15210-3999 (412) 881-3500\n*Bethel Park 2739 South Park Road Bethel Park, PA 15102-3805 (412) 835-2100\n*Finleyville 3576 Sheridan Avenue Finleyville, PA 15332-1018 (412) 348-6626\n*Jeannette 401 Clay Avenue Jeannette, PA 15644-2124 (412) 527-1501\n*24-Hour Banking Available\nSHAREHOLDER INFORMATION\nSecurities Markets USBANCORP, Inc. Common Stock is publicly traded and quoted on the NASDAQ National Market System. The common stock is traded under the symbol of \"UBAN.\" The listed market makers for the stock are:\nBear Stearns & Co., Inc. 245 Park Avenue New York, NY 10167 Telephone: (212) 272-4506\nBoenning & Scattergood, Inc. 200 Four Falls Corporate Center Suite 212 West Conshohocken, PA 19428 Telephone: (800) 883-8383\nGruntal & Co., Incorporated 14 Wall Street New York, NY 10005 Telephone: (212) 267-8800\nHerzog, Heine, Geduld, Inc. 26 Broadway First Floor New York, NY 10004 Telephone: (212) 908-4156\nJanney Montgomery Scott, Inc. 1801 Market Street_10th Floor Philadelphia, PA 19103 Telephone: (215) 665-6500\nLegg Mason Wood Walker, Inc. 227 Franklin Street P.O. Box 1207 Johnstown, PA 15907-1207 Telephone: (814) 535-5551\nMerrill Lynch Equity Markets Group North Tower World Financial Center New York, NY 10281-1305 Telephone: (212) 449-4162\n(1)Not a NASDAQ Dealer\n(1)Anthony Misciagna & Co., Inc. 6 Bird Cage Walk Hollidaysburg, PA 16648 Telephone: (800) 343-5149\nF. J. Morrissey & Co., Inc. 1700 Market Street Suite 1420 Philadelphia, PA 19103-3913 Telephone: (215) 563-8500\nOppenheimer & Co., Inc. Oppenheimer Tower One World Financial Center New York, NY 10281 Telephone: (212) 667-7000\nParker\/Hunter, Inc. 416 Main Street Johnstown, PA 15901 Telephone: (814) 535-8403\nRyan, Beck & Co., Inc. 80 Main Street West Orange, NJ 07052 Telephone: (800) 325-7926\nSandler O'Neill & Partners, L.P. 2 World Trade Center 104th Floor New York, NY 10048 Telephone: (800) 635-6860\nSherwood Securities Corp. One Exchange Plaza New York, NY 10006 Telephone: (800) 435-1235\nTroster Singer Corporation, Inc. 10 Exchange Place Jersey City, NJ 07302 Telephone: (212) 422-2400\nWheat First Securities 100 Pasquerilla Plaza P.O. Box 96 Johnstown, PA 15907 Telephone: (814) 535-1516\nForm 10-K USBANCORP, Inc.'s Annual Report to the Securities and Exchange Commission on Form 10-K is integrated within this Annual Report.\nCorporate Offices The corporate offices of USBANCORP, Inc. are located in the United States National Bank Building at Main and Franklin Streets, Johnstown, PA 15901. Mailing address: P. O. Box 430 Johnstown, PA 15907 (814) 533-5300\nAgents The transfer agent and registrar for USBANCORP, Inc.'s common stock is USBANCORP Trust Company.\nShareholder Data As of January 31, 1994, there were 4,734 shareholders of common stock and 4,730,909 shares outstanding. Of the total shares outstanding, approximately 237,000 or 5% are held by insiders (directors and executive officers) while approximately 1,455,000 or 31% are held by institutional investors (mutual funds, employee benefit plans, etc.).\nDividend Reinvestment Shareholders seeking information about USBANCORP, Inc.'s dividend reinvestment plan should contact Betty L. Jakell, Executive Office, at (814) 533-5158.\nInformation Analysts, investors, shareholders, and others seeking financial data about USBANCORP, Inc. or any of its subsidiaries--annual and quarterly reports, proxy statements, 10-K, 10-Q, 8-K, and call reports are asked to contact Orlando B. Hanselman, Executive Vice President, Chief Financial Officer & Manager of Corporate Services at (814) 533-5319.\nUSBANCORP, INC. 1993 ANNUAL REPORT AND FORM 10-K\nCONTENTS\nFinancial Highlights at a Glance 2 Financial Highlights 3 Shareholder Information at a Glance 4 Message to the Shareholder 5 Johnstown Savings Bank Acquisition Pro Formas 10\nService Area Map 11 Consolidated Balance Sheet 14 Consolidated Statement of Income 15 Consolidated Statement of Changes in Stockholders' Equity 16 Consolidated Statement of Cash Flows 17 Notes to Consolidated Financial Statements 18 Statement of Management Responsibility 33 Reports of Independent Public Accountants 34 Market Price and Dividend Data 37 Selected Five-Year Consolidated Financial Data 38 Selected Quarterly Consolidated Financial Data 39 Management's Discussion and Analysis 40 Form 10-K 59 USBANCORP Directors and General Officers 83 Subsidiaries' Directors, General Officers, and Advisory Boards 84 Office Locations 87 Shareholder Information 88\nFINANCIAL HIGHLIGHTS -- AT A GLANCE\n(six graphs)\nSHAREHOLDER INFORMATION -- AT A GLANCE\n(six graphs)\nMESSAGE TO THE SHAREHOLDER\nDear Shareholder:\nBuilding upon success was the challenge your management team faced when entering 1993. Time is proving that our steady and consistent approach to enhancing shareholder value is the best way to ensure continued growth for your Company. It has been gratifying to reach new goals; and for 1993, we can report achievements such as increasing earnings, building non-interest income, generating loan growth, and raising the common dividend. We began 1993 with challenges and have once again set an elevated standard for 1994.\nFINANCIAL AND STRATEGIC HIGHLIGHTS\nI am pleased to report that earnings for the year ended December 31, 1993, reached a record high of $12,488,000 or $2.72 per share on a fully diluted basis. Your Company's 1993 net income included a $1,452,000 non-recurring federal income tax benefit due to the adoption of Statement of Financial Accounting Standards NO.109, \"Accounting for Income Taxes.\" Before this one-time benefit, 1993 net income totaled $11,036,000 or $2.41 per fully diluted share compared to reported net income of $8,883,000 or $2.53 for the year ended December 31, 1992.\nYour Company's overall improved net income in 1993 included a consistent uptrending of quarterly earnings during the year. This pattern of increased core earnings growth reflects improved performance in several key areas:\n- - Non-interest income for the full year ended December 31, 1993, was $10,150,000 and reflects an approximate 22% growth over 1992. This key area of primarily non-interest sensitive fee income includes enhanced earnings from trust income, deposit service charges, wholesale cash processing operations, and gains from fixed-rate mortgage loan sales. The performance of our Trust Company is particularly noteworthy as it continued its profitable expansion throughout western Pennsylvania including the Greater Pittsburgh marketplace. Specifically, trust assets (both discretionary an non-discretionary) totaled $943 million at December 31, 1993, an increase of 45% since the prior year end.\n- - Strong loan growth was experienced at each of the banking subsidiaries during 1993. Total loans outstanding equaled $727 million at December 31, 1993, representing an increase of $78 million or 12% from the December 31, 1992, level. Your Company's balance sheet liquidity will continue to provide the banking subsidiaries with the financial capacity to profitably fund these growing customer borrowing needs, a result of the current modest economic recovery which is anticipated to gain momentum during 1994.\n- - Your Company's asset quality continues to be a source of strength. Even with the loan growth mentioned above, total non-performing assets declined during 1993 and totaled only $6.5 million or .89% of total loans at December 31, 1993. For each non-accrual loan dollar, our management maintained a loan loss reserve of $2.88 at year end.\n- - A continued diligent focus on controlling and reducing non-interest expense, combined with the growth in non-interest income discussed earlier, resulted in the Company's net overhead to average assets ratio declining from 2.68% in 1992 to a record low of 2.51% in 1993. The Company's net overhead to net interest income ratio also showed comparable improvement as it declined from 62.80% in 1992 to 61.80% in 1993. The successful conversion to one centralized data processing\nsystem for the Western Region in the fourth quarter of 1993 was one example of a significant economy of scale benefit achieved by yout Company, which will generate annual pre-tax savings approximating $300,000 beginning in 1994. Your Company's management is committed to further reducing the net overhead to net interest income ratio to its long-term strategic plan goal of 55% and will continue to make progress in this goal achievement during 1994. Due to economy of scale benefits, such as this conversion, each of our two subsidiaries in the Western Region should be below the 55% goal by year-end 1994.\nAlong with this improved core financial performance, your Company was also able to achieve several long-term strategic successes during 1993. Foremost among these successes was an over-subscribed secondary offering of 1,150,000 new common shares at a price of $24.50 which generated net proceeds to your Company of approximately $26 million. Management had expected to utilize the majority of these new funds to retire the Company's outstanding preferred stock. Since preferred shareholders elected to convert 90% of the outstanding preferred stock into the Company's common stock, however, there was a need for only $1.4 million of cash to redeem the unconverted preferred shares. Additionally, $2 million of the offering proceeds was downstreamed as a capital infusion into Three Rivers Bank in connection with the acquisition of the Integra branches to adequately capitalize the deposits acquired. Consequently, the retention of the majority of the funds from the secondary offering allowed our common stock market capitalization to reach approximately $117 million--a level well above the $100 million benchmark at which we receive much heightened following and purchase interest in our common stock by institutional owners and nationally recognized bank stock analysts. Your Company will continue to make diligent efforts to look for ways to better leverage this capital strength in 1994. Possible alternatives include the acquisition of a whole organization--such as the Johnstown Savings Bank acquisition which is expected to be consummated by the end of the second quarter of 1994--or individual branch locations, and a higher dividend payout. The Company will also implement its February 25th announced common stock buyback program to better leverage its capital strength.\nAnother key strategic success was the continuation of an increasing quarterly cash dividend to you our shareholders. As a result of the increased core earnings performance, the Board of Directors declared a 10% increase in the quarterly cash dividend in 1993. This increase to $.22 per share became effective for the last three quarters of 1993 and made the total 1993 cash dividend $.86 per share compared to $.75 per share in 1992. This increase in the dividend, your Company's fifth increase since 1990, is consistent with our five-year Capital Plan. This rising common dividend, combined with an increase in the market value of our common stock, further demonstrates our ongoing commitment to a progressive total shareholder return which amounted to approximately 11.8% in 1993 compared to a total return for the Standard & Poor's (\"S&P\") 500 Index of 10.0%. Interestingly, your Company's total shareholder return for the period 1988-1993 was 163.7% compared to the S&P's 500 Index total return of 125.6%-an historic record of achievement and a challenge to better in the future.\nPUTTING A STRATEGIC PLAN INTO ACTION FOR OUR CUSTOMERS\nAt your Company, transforming a strategic plan into quality financial services and delivering these services through competently trained banking professionals is fundamental to the creation of a progressive total shareholder return. Successful\nfinancial companies incorporate several imperative ingredients that ultimately lead to business prosperity and shareholder value. These ingredients were first outlined in the 1988 Strategic Plan for USBANCORP, Inc.. Today, the strategic plan, community involvement, total shareholder return, and quality customer service are bound together more tightly than ever before. The fundamental actions inspired by this original strategic plan have become part of the corporate plans for each of the affiliates. \"Doing the little things better\" has been our abbreviated mission statement for each subsidiary, and in 1994 we promise to embellish this theme for each customer--demonstrating conclusively that we ultimately deliver the best possible customer service.\nFundamental to achieving quality customer service is a corporate culture that gets its strength from shared values, beliefs, expectations, and attitudes. Rising from this common focus are customer benefits that will continue to position your Company as a leader in the community--both for financial services and community involvement. Delivering first rate customer service during banking transactions is the most obvious element. The leader's role also includes an enthusiastic approach towards civic and charitable community involvement and the development of new products designed to meet the changing needs of our diverse customer base. This active culture of community involvement is leading to a more positive image through corporate sponsorship and employee involvement with civic and charitable organizations. These organizations are as nationally recognized as the United Way, American Red Cross, and chambers of commerce, or more hometown such as the Lawrenceville Boys and Girls Club, White Oak PTA, Cambria County Meals-On-Wheels, and the Coalport VFW Ladies Auxiliary.\nA quality service initiative at U.S. National Bank was in full operation during 1993. Each employee received an average of 15 hours of quality service skills training that not only highlighted more effective external customer interaction skills, but also skills that fostered improved internal teamwork. The internal teamwork element of this quality service program remains integral as it leads to a cooperative atmosphere among all employees. Together we direct our energies to accomplish a common set of goals at every level of the organization. In 1994, this corporate quality service initiative, while being introduced to our western affiliates, becomes the practice at U.S. National Bank. The end result is an employee team trained and motivated to live up to the role as a community leader.\nRecognizing the importance of this employee role, your Company has invested more than 1,000 hours of formal corporate training for management and customer service employees at U.S. National Bank. The data center conversion involving Three Rivers Bank and Community Savings Bank was a success largely due to a comprehensive training program that prepared every employee for the changes brought on by this consolidation of services. A unique \"Community Conversion College\" was attended by all Community Savings Bank employees to make them as comfortable as possible with the improved data system. In total, Three Rivers Bank and Community Savings Bank invested more than 1,500 hours of formal training. Your Company also recognizes the importance of a sound mind and body. During 1993, the first corporate sponsored Wellness Program began to encourage employee participation in physical activity. Two-thirds of all U.S. National Bank employees took advantage of one or more of the Wellness Program events in 1993. The program's goal is to encourage employees to live healthier lifestyles, both on and off the job, ultimately leading to healthier and more productive employees.\nPRODUCT AND SERVICE NEWS\nAn active product support culture is apparent as a result of new product introductions in 1993 designed to fill customer and social responsibility needs. We directed specific attention towards products which enhance the subsidiaries' presence in the community in 1993. For example, Three Rivers Bank introduced the TRUE Account followed later in the year by National Bank's First Account and CHAMP Mortgage Loan program. These products include features such as a basic checking service and affordable loan options, making them ideal for approved low-to-moderate income customers. The most recent federal banking regulators' reviews prove our success in this area as both Three Rivers Bank and U.S. National Bank enter 1994 with an \"outstanding\" Community Reinvestment Act (\"CRA\") review rating. This is the highest ranking a bank can receive for its community involvement and lending practices.\nAnother new product introduction was the Tax Advantage Pathroad Account. This USBANCORP Trust Company service features tax-free investments which are regularly reviewed and redirected via asset allocation_the investment management approach used for the original Pathroad Account. Due in part to newly introduced investment products such as the Tax Advantage Pathroad and Pathroad Accounts, USBANCORP Trust Company is now beyond the $900 million milestone for trust assets under management.\nConsolidation to achieve more cost effectiveness led to the creation of the combined Three Rivers Bank and Community Savings Bank Retail Loan and Operation Centers. Opened in August 1992 at the McKeesport Office, the Retail Loan Center approves, processes, collects, and maintains files for all direct and indirect consumer loans originated at the western affiliates. The Loan Center also handles collections for the mortgage loan portfolios at each institution. The Operation Center, located at the Three Rivers Bank Jefferson Borough Office, opened in October 1993 to provide immediate answers to customer banking inquiries via a toll-free service number. Both the Loan and Operation Centers are consolidating services as a result of the successful 1993 data systems conversion at Community Savings Bank.\nThree Rivers Bank enlarged its branch network with the addition of four offices of Integra Bank acquired during the first quarter of 1993. The offices are located in Glassport, Liberty Borough, Port Vue, and White Oak in Allegheny County. The White Oak Office was later consolidated into the nearby Rainbow Village Office of Three Rivers Bank. The deposits of the four acquired offices totalled nearly $90 million. This 1993 acquisition was valuable to your Company by increasing our presence in the Greater Pittsburgh suburban area by 20%, at a modest deposit premium price of 1.40%.\nAll of our customers enjoy easy access to our products and services because of improvements made to our facilities in 1993, as our subsidiaries worked to achieve compliance with the Americans with Disabilities Act (\"ADA\"). The most obvious provision of this government regulation is in the area of public accommodations. Bank facilities have been reviewed for compliance with the ADA; modifications have been made to accommodate disabled customers. These modifications include easy access doorways, ramps, and other facility alterations designed to eliminate barriers for the disabled.\nSUCCESSOR MANAGEMENT\nIn addition to my February 1994 succession of the retired Clifford A. Barton as chairman, president & CEO, there have been four other notable management changes since the beginning of 1993. These changes include:\nKenneth J. Tyson, president and chief executive officer of Community Savings Bank, resigned as the bank's CEO in March 1993. Mr. Tyson remained as president until his retirement in March 1994.\nDennis J. Fantaski, executive vice president and chief operating officer, succeeded Mr. Tyson as CEO and later as president of Community Savings Bank. Mr. Fantaski has 16 years of banking experience and has held various management positions. He was senior vice president and head of retail banking at U.S. National Bank, and prior to that Mr. Fantaski held management positions in residential real estate, personal banking, and corporate banking at Dollar Bank in Pittsburgh.\nThe new U.S. National Bank president and CEO is Louis Cynkar, previously senior vice president and head of the bank's commercial and retail banking units. Mr. Cynkar has more than 30 years of banking experience, 24 of which were spent with the former Equibank of Pittsburgh where he rose through the ranks to become senior vice president of commercial lending. He joined U.S. National Bank in 1986 as senior vice president of commercial lending. In 1991, he was promoted to senior vice president and head of both the commercial and retail banking groups within U.S. National Bank. His thorough knowledge of the operation of U.S. National Bank and his devotion to the community served by the bank will make for a smooth transition in 1994.\nIn February 1994, Orlando B. Hanselman was promoted to executive vice president, chief financial officer & manager of corporate services within USBANCORP. In his new role, Mr. Hanselman is responsible for the direction and strategic efforts of finance, accounting, investments, marketing, CRA, investor relations, and facilities management. Mr. Hanselman joined the holding company in 1987 after five years of public accounting with Price Waterhouse in Pittsburgh. In 1989, Mr. Hanselman was promoted to senior vice president, treasurer & chief financial officer. Mr. Hanselman has been a major contributor to the direction and strength of USBANCORP. His commitment to shareholder interests and his diverse talents continue to be valuable within the new management team.\nIn conclusion, I want to thank our dedicated employees and directors for their efforts and you, our shareholder, for your support. I would also like to express deepest appreciation to Cliff Barton for his seven years of dedicated service and visionary leadership. We enjoyed a year of record performance in 1993; together we look forward to building up successes of our past as we focus on a new year of business and achievement at USBANCORP.\n\/s\/Terry K. Dunkle Terry K. Dunkle Chairman, President & CEO USBANCORP, Inc.\nJOHNSTOWN SAVINGS BANK (\"JSB\") ACQUISITION 1993 PRO FORMAS -- AT A GLANCE\n(four graphs)\nSERVICE AREA MAP\nTHIS PAGE IS INTENTIONALLY LEFT BLANK.\nUSBANCORP, INC.\nFINANCIAL STATEMENTS (title page)\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS AT AND FOR THE YEARS ENDED DECEMBER 31, 1993, 1992, AND 1991\n1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES\nBusiness: USBANCORP, Inc. (the \"Company\") and its subsidiaries' operations relate primarily to commercial banking activities which represent one industry segment.\nPrinciples of Consolidation: The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, United States National Bank in Johnstown (\"U.S. Bank\"), Three Rivers Bank and Trust Company (\"Three Rivers Bank\"), Community Bancorp, Inc. (\"Community\"), USBANCORP Trust Company (\"Trust Company\"), and United Bancorp Life Insurance Company (\"United Life\"). Intercompany accounts and transactions have been eliminatedin preparing the consolidated financial statements.\nInvestment Securities and Investment Securities Available for Sale: Prior to September 30, 1992, investment securities have been stated at cost adjusted for amortization of premium and accretion of discount. Both accretion and amortization are determined by the straight-line method which is not materially different from the level yield method. Effective September 30, 1992, the investment portfolio was reclassified as \"available for sale.\" Since that date, the portfolio has been carried at the lower amortized cost or market value. Any unrealized adjustments are reflected in \"N loss on investment securities available for sale\" on the Consolidated Realized gain or loss on securities sold is computed based upon the ad securities sold.\nIn May 1993, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (\"SFAS\") #115, \"Accounting for Certain Investments in Debt and Equity Securities.\" This Statement addresses the accounting and reporting for investments in equity securities that have readily determinable fair values and for all investments in debt securities. Management does not believe that the adoption of this statement material impact on the results of operations or the financial positive adoption of this statement in the first quarter of 1994, management plans to rec tax-free municipal securities as \"held to maturity\" and carry them at amortize investment securities portfolio will continue to be classified as \"availibility carried at market value.\nLoans: Interest income is recognized using methods which approximate a level yield related to principal amounts outstanding. The subsidiaries immediately discontinue the accrual of interest income when loans, except for loans that are insured for credit loss, become 90 days past due in either principal or interest. In addition, if circumstances warrant, the accural of interest may be discontinued prior to 90 days. In all cases, payments received loans are credited to principal until full recovery of principal has after full recovery of principal that any additional payments received are recognized as interest income. A non-accrual loan is placed on accrual status after becoming current and remaining current for twelve consecutive payments (except for residential mortgage loans which have to become current and remain current for six consecutive payments) and upon the approval of the Credit Committee and\/or Board Discount\/Loan Committee with final approval resting with the Chief Financial Officer.\nLoan Fees: Loan origination and commitment fees, net of associated direct costs, are deferred and amortized into interest and fees on loans over the loan or commitment period. Fee amortization is determined by either the straight-line method, or the effective interest method, which do not differ materially.\nFixed-Rate Mortgage Loans Held For Sale: All newly originated 30-year fixed-rate residential mortgage loans are classified as \"held for sale.\" It is management's intent to periodically sell these residential mortgage loans and retain servicing rights for the remaining lives; this strategy will be executed in an effort to help neutralize long-term interest rate risk. The residential mortgage loans held for sale are carried at the lower of aggregate cost or market value. At December 31, 1993, the cost of these loans approximated market value. Realized gains and losses will be calculated by the specific identification method and will be included in \"Net realized gain or loss on loans held for sale\"; unrealized net valuation adjustments (if any) will be recorded in \"Net unrealized gain or loss on loans held for sale\" on the Consolidated Statement of Income.\nPremises and Equipment: Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is charged to operations over the estimated useful lives of the premises and equipment using the straight-line method. Useful lives of up to 45 years for buildings and up to 12 years for equipment are utilized. Leasehold improvements are amortized using the straight-line method over the terms of the respective leases or useful live improvements, whichever is shorter. Maintenance, repairs, and minor alterations are charged to current operations as expenditures are incurred.\nAllowance for Loan Losses and Charge-off Procedures: As a financial institution which assumes lending and credit risks as a principal element in its business, the Company anticipates that credit losses will be experienced in the normal course of business. Accordingly, management of the Company makes a quarterly determination as to an appropriate provision from earnings necessary to maintain an allowance for loan losses which would be adequate for potential yet undetermined losses. The amount charged against earnings is based upon several factors including, at a minimum, each of the following:\n- - A continuing review of delinquent, classified and non-performing loans, \t\t\t\t\tlarge loans, and overall portfolio quality. This continuous review assesses \t\t\t\t the risk characteristics of both individual loans and the total loan \t\t\t\t portfolio.\n- - Regular examinations and reviews of the loan portfolio by representatives \t\t\t\t\tof the regulatory authorities.\n- - Analytical review of loan charge-off experience, delinquency rates, and \t\t\t\t\tother relevant historical and peer statistical ratios.\n- - Management's judgment with respect to local and general economic \t\t\t\t\tconditions and their impact on the existing loan portfolio.\nWhen it is determined that the prospects of recovery of the principal of a loan have significantly diminished, the loan is immediately charged against the allowance account and subsequent recoveries, if any, are credited to the allowance account. Loans are charged-off promptly upon determination that a loss is anticipated. In addition, non-accrual and large delinquent loans are reviewed monthly to determine potential losses. Consumer loans are considered losses when they are 90 days past due, except loans that are insured for credit loss.\nTrust Fees: All trust fees are recorded on the cash basis which approximates the accrual basis for such income.\nEarnings Per Common Share: Primary earnings per share amounts are computed by dividing net income, after deducting preferred stock dividend requirements, by the weighted average number of common stock and common stock equivalent shares outstanding. Fully diluted earnings per share amounts are calculated assuming that the Series A $2.125 Cumulative Convertible Non-Voting Preferred Stock was converted at the beginning of the year into 1.136 shares of the Company's Common Stock and that no preferred dividends were paid. By April 7, 1993, a Preferred Stock was either redeemed or converted to the Company's Common Stock.\nConsolidated Statement of Cash Flows: On a consolidated basis, cash equivalents include cash and due from banks, interest bearing deposits with banks, and federal funds sold and securities purchased under agreements to resell; for the Company, cash equivalents include short-term investments. The Company made $4,300,000 in federal income tax payments in 1993; $3,986,000 in 1992; and $3,336,000 in 1991. The Company made total interest expense payments of $34,153,000 in $40,942,000 in 1992; and $33,475,000 in 1991.\nIncome Taxes: As discussed in Note 13, the Company adopted Statement of Financial Accounting Standards #109, \"Accounting for Income Taxes\" in the first quarter of 1993. Under SFAS #109, deferred tax assets or liabilities are computed based on the difference between the financial statement and income tax bases of assets and liabilities using the enacted marginal tax rate. Deferred income tax expenses or credits are based on the changes in the asset or liability from period to period. Prior to 1993, deferred income tax expenses or credits were recorded to reflect the tax consequences of timing differences between the recording of income and expenses for financial reporting purposes and for purposes of filing federal income tax returns at income tax rates in effect when the difference arose.\n2. CASH AND DUE FROM BANKS\nCash and due from banks at December 31, 1993, and 1992, included $11,857,000 and $10,384,000, respectively, of reserves required to be maintained under Federal Reserve Bank regulations.\n3. INTEREST BEARING DEPOSITS WITH BANKS\nThe book value of interest bearing deposits with domestic banks are as follows:\nThe Company had no such deposits in foreign banks nor in foreign branches of United States banks.\nThe maturity of interest bearing deposits with banks at book value is summarized as follows:\n4. INVESTMENT SECURITIES AND INVESTMENT SECURITIES AVAILABLE FOR SALE\nBeginning September 30, 1992, the entire investment security portfolio as described in the table below was reclassified as \"available for sale.\" All or part of the investment security portfolio may be sold at any time for interest rate, prepayment, credit, liquidity considerations, or other factors as determined appropriate by management. The investment security portfolio is carried at the lower of aggregate amortized cost or market value; any necessary adjustments are recorded in the Income Statement. Prior to September 30, 1992, there were no investment securities categorized as \"available for sale.\"\nThe book and market values of investment securities \"available for sale\" and carried at the lower of amortized cost or market value are summarized as follows:\nThere was no trading within the investment portfolio during the periods presented. Prior to the Company classifying its investment portfolio as \"available for sale\" on September 30, 1992, the Company's policy limited any investment security sale before its maturity primarily to the infrequent occurrences which required protection of the investment portfolio quality.\nMaintaining investment quality is a primary objective of the Company's investment policy which, subject to certain limited exceptions, prohibits the purchase of any investment security below a Moody's Investors Service or Standard & Poor's rating of \"A.\" At December 31, 1993, 89.2% of the portfolio was rated \"AAA\" and 91.0% \"AA\" or higher as compared to 85.4% and 86.5%, respectively, at December 31, 1992. Only 3.2% of the portfolio was rated below \"A\" or unrated on December 31, 1993.\nThe book value of securities pledged to secure public and trust deposits, as required by law, was $83,769,000 at December 31, 1993, and $61,062,000 at December 31, 1992. The Company realized $827,000 and $472,000 of gross investment security gains and $244,000 and $79,000 of gross investment security losses in 1993 and 1992, respectively.\n5. LOANS\nThe loan portfolio of the Company consisted of the following:\nReal estate construction loans were not material at these presented dates and comprised 2.5% of total loans net of unearned income at December 31, 1993. The Company has no credit exposure to foreign countries or highly leveraged transactions. Additionally, the Company has no significant industry lending concentrations.\nIn the ordinary course of business, the subsidiaries have transactions, including loans, with their officers, directors, and their affiliated companies. These transactions were on substantially the same terms as those prevailing at the time for comparable transactions with unaffiliated parties and do not involve more than the normal credit risk. These loans totaled $15,074,000 and $12,824,000 at December 31, 1993, and 1992, respectively. An analysis of these related party loans follows:\n6. ALLOWANCE FOR LOAN LOSSES\nAn analysis of the changes in the allowance for loan losses follows:\n7. NON-PERFORMING ASSETS\nNon-performing assets are comprised of (i) loans which are on a non-accrual basis, (ii) consumer loans which are contractually past due 90 days or more as to interest or principal payments and which are insured for credit loss, and (iii) other real estate owned (real estate acquired through foreclosure and in-substance foreclosures). All loans, except for loans are insured for credit loss, are placed on non-accrual status immediately upon becoming 90 days past due in either principal or interest. In addition, if circumstances warrant, the accrual of interest may be discontinued prior to 90 days. In all cases, payments received on non-accrual loans are credited to principal until full recovery of principal has been recognized; it is only after full recovery of principal that any additional payments received are recognized as interest income.\nThe following table presents information concerning non-performing assets:\nThe Company is unaware of any additional loans which are required to either be charged-off or added to the non-performing asset totals disclosed above. Other real estate owned is recorded at the lower of fair value or carrying cost based upon appraisals.\nThe following table sets forth, for the periods indicated, (i) the gross interest income that would have been recorded if non-accrual loans had been current in accordance with their original terms and had been outstanding throughout the period or since origination if held for part of the period, (ii) the amount of interest income actually recorded on such loans, and (iii) the net reduction in interest income attributable to such loans:\n8. PREMISES AND EQUIPMENT\nAn analysis of premises and equipment follows:\nThe related depreciation charged against income is as follows:\n9. FEDERAL FUNDS PURCHASED, SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE, AND OTHER SHORT-TERM BORROWINGS\nThe outstanding balances and related information for federal funds purchased, securities sold under agreements to repurchase, and other short-term borrowings are summarized as follows:\nThe aggregate amount of certificates of deposit in denominations of $100,000 or more at December 31, 1993, 1992, and 1991 and the related interest expense for the three years then ended are presented below:\n11. ADVANCES FROM FEDERAL HOME LOAN BANK, COLLATERALIZED MORTGAGE OBLIGATION, AND LONG-TERM DEBT\nAdvances from Federal Home Loan Bank: Advances from Federal Home Loan Bank consist of the following:\nAll Federal Home Loan Bank stock and an interest in unspecified mortgage loans, with an aggregate statutory value equal to the amount of the advances, have been pledged as collateral with the Federal Home Loan Bank of Pittsburgh.\nCollateralized Mortgage Obligation: The collateralized mortgage obligation was issued through Community First Capital Corporation (\"CFCC\"), a wholly- owned, single-purpose finance subsidiary of Community Savings Bank. Community Savings Bank transferred in 1988 Federal Home Loan Mortgage Corporation (\"FHLMC\") securities with a book value of approximately $31,500,000 to CFCC which were then used as collateral for issuance of bonds with a par value of $27,787,000 in the form of a collateralized mortgage obligation.\nThere are four classes of bonds, including one class of zero coupon bonds, which mature in the years 2000 through 2018; however, payments of the bonds may occur prior to maturity in accordance with certain provisions of the Trust Indenture between CFCC and the trustee. The remaining bonds have a weighted average adjusted effective rate of 10.20%.\nAssets held in trust for the collateralized mortgage obligation of $12,674,000 at December 31, 1993, consist of the following:\nUnder provisions of the Trust Indenture, the bonds are fully collateralized by the FHLMC securities and funds held by the trustee. Funds held by the trustee represent payments received on FHLMC securities, collateral reserves, and reinvestment of earnings on such funds which have not been applied to pay principal and interest on the bonds. These funds are restricted to assure payment on the bonds in accordance with the Indenture.\nLong-Term Debt: The Company's long-term debt consisted of the following:\nMortgage bonds represented Cambria County Industrial Development Authority Bonds at an average rate of 6.87% over the life of the bond issue. These bonds were issued on March 29, 1979, to finance U.S. Bank's Main Office Headquarter's facility, which served as security for the bonds, and required annual debt service payments through the year 2004.\nOn October 1, 1993, the Company redeemed all remaining outstanding principal on the bonds which totalled $5,075,000. The bonds were redeemed at par value with no early redemption penalties which was in accordance with the provisions of the indenture agreement since the bonds had already been outstanding in excess of the minimum required time period of ten years.\nThe bank note evidences a $4,000,000 loan to partially finance the acquisition of Community Bancorp, Inc.. The loan originally was payable in equal quarterly amounts of principal and interest of approximately $196,000 through April 1999 and had a fixed annual interest rate of 9.50%. On August 31, 1993, the Company refinanced this note and shortened the maturity date to July 31, 1996, and reduced the interest rate to one that floats at the Prime Rate. The Company paid a prepayment premium of $170,000 to effect these favorable modifications to the original note.\nScheduled maturities of long-term debt for each of the five years subsequent to December 31, 1993, are $1,275,000 in 1994; $1,234,000 in 1995; $878,000 in 1996; $13,000 in 1997; and $45,000 in 1998.\n12. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS\nStatement of Financial Accounting Standards #107, \"Disclosures about Fair Value of Financial Instruments,\" requires all entities to disclose the estimated fair value ofits financial instrument assets and liabilities. For the Company, as for most financial institutions, approximately 95% of its assets and liabilities are considered financial instruments as defined #107. Many of the Company's financial instruments, however, lack an available trading market as characterized by a willing buyer and willing seller engaging in an exchange transaction.Therefore, significant\nestimations and present value calculations were used by the Company for the purpose of this disclosure.\nEstimated fair values have been determined by the Company using the best available data, as generally provided in the Company's FRY-9C Regulatory Reports , and an estimation methodology suitable for each category of financial instruments. Management believes that cash, cash equivalents, and loans and deposits with floating interest rates have estimated fair values which approximate the recorded book balances. The estimation method used, the estimated fair values, and recorded book balances at December 31, 1993, were as follows:\n- - Financial instruments actively traded in a secondary market have been \t\t\t\t\tvalued using quoted available market prices.\n- - Financial instruments with stated maturities have been valued using a present value discounted cash flow with a discount rate approximating current market for similar assets and liabilities.\n- - Financial instrument liabilities with no stated maturities have an estimated fair value equal to both the amount payable on demand and the recorded book balance.\n- - The net loan portfolio has been valued using a present value discounted cash flow. The discount rate used in these calculations is based upon the treasury yield curve adjusted for non-interest operating costs, credit loss, and assumed prepayment risk.\nChanges in assumptions or estimation methodologies may have a material effect on these estimated fair values.\nThe Company's remaining assets and liabilities which are not considered financial instruments have not been valued differently than has been customary with historical cost accounting. No disclosure of the relationship value of the Company's deposits is required by SFAS #107. Because of the Company's stable core deposit base (which comprises 97% of total deposits), its non-use of volatile funding sources such as brokered deposits, and a peer comparable cost of deposits (actual cost in 1993 of 3.61% vs. a peer a of 3.44% as of September 30, 1993), management believes the relationship deposits is significant. Based upon limited secondary market transactions involving similar deposits, management estimates the relationship value of these funding liabilities to range between $14 million to $30 million less than their estimated fair value shown above. There is no material difference between the notational amount and the estimated fair value of off-balance sheet items which total $173.8 million and are primarily comprised of unfunded loan commitments which are generally priced at market at the time of funding.\nManagement is concerned that reasonable comparability of these disclosed fair values between financial institutions may not be likely due to the wide range of permitted valuation techniques and numerous estimates which must be made given the absence of active secondary markets for many of the financial instruments. This lack of uniform valuation methodologies also introduces a greater degree of subjectivity to these estimated fair values.\n13. INCOME TAXES\nDuring the first quarter of 1993 the Company adopted Statement of Financial Accounting Standards #109, \"Accounting for Income Taxes.\" SFAS $NO109 utilizes the liability method and deferred taxes are determined based on the estimated future tax effects of differences between the financial statement and income tax bases of assets and liabilities given the provisions of the enacted tax laws. This adoption resulted in the recognition of a non-rec net benefit of $1,452,000 or $0.35 per share on a fully diluted basis. The ef standard on income tax expense (exclusive of the cumulative effect adjustment) for December 31, 1993, was not material.\nThe provision for federal income taxes (before SFAS $NO109 benefit) is summarized below:\nThe remaining net operating loss (\"NOL\") carryforward of $2,952,000 was utilized to reduce federal income tax expense for financial reporting purposes in 1991.\nThe reconciliation between the federal statutory tax rate and the Company's effective consolidated income tax rate is as follows:\nDeferred income taxes result from timing differences in the recognition of revenue and expense for tax and financial reporting purposes. The following table presents the impact on income tax expense of the principal timing differences and the tax effect of each:\nAt December 31, 1993 and 1992, deferred taxes are included in the other assets line item in the accompanying consolidated balance sheet. The following table highlights the major components comprising the deferred tax assets and liabilities for each of the periods presented:\nIn August 1993, Congress passed the Omnibus Budget Reconciliation Act of 1993 which increased the corporate tax rate from 34% to 35% on income greater than $10 million. As a result of this increase in the tax rate, the Company recognized an approximate $100,000 addition to the net deferred tax asset. This caused a corresponding benefit to the provision for income taxes.\n14. PENSION AND PROFIT SHARING PLANS\nU.S. Bank: U.S. Bank has a trusteed, noncontributory defined benefit pension plan covering all employees who work at least 1,000 hours per year for U.S. Bank or the Company and who have not yet reached age 60 at their employment date. The benefits of the plan are based upon the employee's years of service and average annual earnings for the highest five consecutive calendar years during the final ten-year period of employment. U.S. Bank's plan fun been to contribute annually an amount within the statutory range of allowance actuarially determined tax-deductible contributions. Plan assets are primarily debt securities (including U.S. Agency and Treasury securities, corporate notes and bonds), listed common stocks, mutual funds, and short-term cash equivalent instruments.\nNet periodic pension cost for the plan is as follows:\nA reconciliation of the funded status of the plan to the recorded net pension liability is as follows:\nThe actuarial present value of benefit obligations is as follows:\nThe following rate assumptions were used in the plan accounting:\nThe above pension disclosures include the information for the supplemental plan for certain management employees which was implemented January 1, 1992.\nU.S. Bank also has a trusteed deferred profit sharing plan with contributions made by U.S. Bank based upon income as defined in the plan. All employees of U.S. Bank and the Company who work over 1,000 hours per year participate in the plan beginning on January 1 following six months of service. Contributions to this profit sharing plan were $489, 1993; $500,000 in 1992; and $474,000 in 1991. Plan assets are primarily debt securities including U.S. Agency and Treasury securities, corporate notes and bonds), listed common stocks (including shares of USBANCORP, Inc. common stock), mutual funds, and short-term cash equivalent instruments.\nThree Rivers Bank: Three Rivers Bank has a trusteed, noncontributory defined benefit pension plan covering all employees who work at least 1,000 hours per year and who have not yet reached age 60 at their employment date. The benefits of the plan are based upon the employee's years of service and average annual earnings for the highest five consecutive calendar years during the final ten-year period of employment. Three Rivers Bank's plan funding policy has been to contribute annually an amount within the statutory range of allowable minimum an determined tax-deductible contributions. Plan assets are primarily debt securities (including U.S. Agency and Treasury securities, corporate notes and bonds), listed common stocks , mutual funds, and short-term cash equivalent instruments.\nNet periodic pension cost for the plan is as follows:\nA reconciliation of the funded status of the plan to the recorded net pension (liability) prepaid asset is as follows:\nThe bank recognized in 1993 an intangible asset of $818,000 related to the adjustment to recognize the minimum required liability due to unrecognized prior service costs from amendments to plan benefits in 1993.\nThe actuarial present value of benefit obligations is as follows:\nThe following rate assumptions were used in the plan accounting:\nThe above pension disclosures include the information for the supplemental plan for certain management employees which was implemented July 1, 1993.\nThree Rivers Bank also has a trusteed 401(k) plan with contributions made by Three Rivers Bank matching those by eligible employees up to a maximum of 1% of their annual salary. All employees of Three Rivers Bank who work over 1,000 hours per year are eligible to participate in the plan beginning on January 1 following six months of service. Three Rivers Bank's contribution to this 401(k) plan was $27,000 in 1993; $24,000 in 1992;and $20,000 in 1991.\nCommunity: Eligible Community employees participated in a non-contributory defined multi-employer pension plan through June 30, 1993. The net pension cost for contributions made to the plan amounted to $80,000 for the six month period in 1993 and $40,000 for the 1992 plan year. Effective July 1, 1993, the Company began the process of merging Community's employees into Three Rivers Bank pension plan. It is the Company's intent to recognize the transfer in the 1994 financial statements. It is anticipated by management, based upon advice from the Company's actuary, that this transfer will have no significant impact on the bank's financial statements.\nExcept for the above pension benefits provided by each subsidiary, the Company has no significant additional exposure for any other post-retirement benefits.\n15. LEASE COMMITMENTS\nThe Company's obligation for future minimum lease payments on operating leases at December 31, 1993, is as follows:\nIn addition to the amounts set forth above, certain of the leases require payments by the Company for taxes, insurance, and maintenance.\nRent expense included in total non-interest expense amounted to $493,000, $414,000, and $364,000 in 1993, 1992, and 1991, respectively.\n16. COMMITMENTS AND CONTINGENT LIABILITIES\nThe Company's banking subsidiaries incur off-balance sheet risks in the normal course of business in order to meet the financing needs of their customers. These risks derive from commitments to extend credit and standby letters of credit. Such commitments and standby letters of credit involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated financial statements.\nCommitments to extend credit are obligations to lend to a customer as long as there is no violation of any condition established in the loan agreement. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, commitment amounts do not necessarily represent future cash requirements. The banking subsidiaries evaluate each customer's creditworthiness on a case-by-case basis. Collat-\neral which secures these types of commitments is the same as for other types of secured lending such as accounts receivable, inventory, and fixed assets.\nStandby letters of credit are conditional commitments issued by the banking subsidiaries to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including normal business activities, bond financings , and similar transactions. The credit risk involved in letters of credit is essentially the same as that involved in extending loan of credit are issued both on an unsecured and secured basis. Collateral securing transactions is similar to collateral securing the subsidiary banks' commercial loans.\nThe Company's exposure to credit loss in the event of nonperformance by the other party to these commitments to extend credit and standby letters of credit is represented by their contractual amounts. The banking subsidiaries use the same credit and collateral policies in making commitments and conditional obligations as for all other lending. The Company had outstanding various commitments to extend credit approximating $168,477,000 and standby letters of credit of $5,367,000 as of December 31, 1993.\nAdditionally, the Company is also subject to a number of asserted and unasserted potential claims encountered in the normal course of business. In the opinion of management and legal counsel, neither the resolution of these claims nor the funding of these credit commitments will have a material adverse effect on the Company's consolidated financial position or results of operation.\n17. INCENTIVE STOCK OPTION PLAN\nIn 1991, the Company's board of directors adopted an Incentive Stock Option Plan authorizing the grant of options covering 128,000 shares of common stock. Under the Plan, options can be granted (the \"Grant Date\") to employees with executive, managerial, technical, or professional responsibility, as selected by a committee of the board of directors. The option price at which a stock option may be exercised shall be a price as determined by the committee, but shall not be less than 100% of the fair market value per share of common stock on the Grant Date. The maximum term of any option granted under the Plan cannot exceed 10 years. The following stock option activity was recognized:\nOn or after the first anniversary of the Grant Date, one-third of such options may be exercised. On or after the second anniversary of the Grant Date, two-thirds of such options may be exercised minus the aggregate number of such options previously exercised. On or after the third anniversary of the Grant Date, the remainder of the options may be exercised.\n18. PREFERRED STOCK\nOn November 20, 1992, the Board of Directors authorized the redemption of all outstanding shares of the Company's Series A $2.125 Cumulative Convertible Non-Voting Preferred Stock. The redemption date was established as April 7, 1993. The Preferred Stock redemption presented shareholders with the choice of either redeeming their shares at the redemption price of $25.638 per share or converting their shares into 1.136 shares of the Company Stock. Shareholders of only 53,283 shares opted to redeem their shares resuume redemption payout of approximately $1.4 million; shareholders of 498,717 shares 90%) elected to convert their shares. This conversion resulted in the issuance of 566,543 new common shares.\n19.DIVIDEND REINVESTMENT PLAN\nThe Company's revised Dividend Reinvestment and Common Stock Purchase Plan provides each holder of Common Stock and Series A Preferred Stock (the \"Eligible Securities\") with a method of purchasing additional common shares without payment of any brokerage commission, service charge, or other similar expense. A participant in the Plan may elect either to reinvest dividends on all of his shares of Eligible Securities and\/or to make optional co payments of not less than $10 each purchase up to a maximum of $2,000 per quarter and continue to receive regular dividend payments on his other shares. A participant may withdraw from the Plan at any time.\nThe price of shares purchased by a participant in the Plan will be 100% of the average of the daily high and low sales prices of the shares quoted on the NASDAQ National Market System on the investment date. Since such additional shares of Common Stock will be purchased directly from the Company, the Company will receive additional funds for general corporate purposes. At December 31, 1993, the Company had 281,923 unissued reserved shares under the Plan.\n20. SHAREHOLDER RIGHTS PLAN\nEach share of the Company's Common Stock has attached to it one right (a \"Right\") issued pursuant to a Shareholder Protection Rights Agreement, dated November 10, 1989, (the \"Rights Agreement\"). Each Right will initially entitled a holder to buy one-tenth of a share of the Company's Series B Preferred Stock at a price of $40.00, subject to adjustment (the \"Exercise Price\"). The Rights become exercisable if a person, group, or other entities acquires or announces a tender offer for 20% or more of the Company's Common Stock. They can also be exercised if a person or group who has become a beneficial owner of at least 10% of the Company's Common Stock is declared by the board of directors to be an \"adverse person\" (as defined in the Rights Agreement). Under the Rights Agreement, any person, group, or entity will be deemed a beneficial owner of the Company's Common Stock if such person, group, or entity would be deemed to beneficially own the Company's Common Stock under the rules of the Securities and Exchange Commission which generally require that such person, group, or entity have, or have the right to acquire within sixty days, voting or dispositive power of the Company's Common Stock; provided, however, that the Rights Agreement excludes from the definition of beneficial owner, holders of revocable proxies, employee benefit plans of the Company its subsidiaries and the Trust Company. After the Rights become exercisable, the Rights (other than Rights held by a 20% beneficial owner or an \"adverse person\") will entitle the holders to purchase, under certain circumstances, either the Company's Common Stock or common stock of the potential acquirer having a value equal to twice the Exercise Price. The Company is generally entitled to redeem the Rights at $.01 per Right at any time until the twentieth business day following public announcement that a 20% position has been acquired or the board of directors has designated a holder of the Company's Common Stock an adverse person. The Rights expire on November 10, 1994. The Rights Agreement may have the effect of deterring or discouraging a non-negotiated tender or exchange offer for the Company, the acquisition of a large block of the Company's Common Stock, and the removal of the Company's management.\n21. COMMUNITY BANCORP, INC. MERGER\nEffective as of the beginning of business on March 23, 1992, the Company merged Community Bancorp, Inc. with and into a newly formed subsidiary of the Company with Community surviving the merger. Community Bancorp, Inc., a Pennsylvania corporation, is a registered bank holding company under the Bank Holding Company Act of 1956, as amended, whose sole direct subsidiary is Community (formerly Community Savings Association), a Pennsylvania-chartered FDIC-insured savings bank. Community has the following direct subsidiaries: Community First Capital Corporation (a special purpose finance subsidiary), Community First Financial Corporation (a subsidiary engaged in real estate joint ventures), and Frontier Consumer Discount Company. In accordance with Federal Reserve Board policy, the Company has committed to divest its equity investment in Community First Financial Corporation within two years after the effective date or such longer period as the Federal Reserve Board. The Company acquired all of the outstanding common stock and stock options of Community Bancorp, Inc. with Community Bancorp, Inc. shareholders receiving $14.1 million in cash and 388,213 shares of the Company's common stock. The total cost was $21,709,000. The acquisition has been accounted for by the purchase method and, accordingly, Community's assets and liabilities have been adjusted estimated fair values at the effective date. The fair value of Community's net assets acquired exceeded the purchase price by $2,677,000 which reduced the value assigned to the premises and equipment of Community. The results of operations of Community for the period from March 23, 1992, through December 31, 1992, amounting to $2,980,000 of net income, was included in the Company's 1992 income statement.\nThe pro forma combined results of operations of the Company for the years ended December 31, 1992 and 1991, after giving effect to the pro forma adjustments as of the beginning of the periods, are as follows:\nThe ability of subsidiary banks to upstream cash to the Company is restricted by regulations. Federal law prevents the Company from borrowing from its subsidiary banks unless the loans are secured by specified assets. Further, such secured loans are limited in amount to ten percent of the subsidiary banks' capital and surplus. In addition, the subsidiary banks are subject to legal limitations on the amount of dividends that can be paid shareholder. The dividend limitation generally restricts dividend payments to a bank's retained net income for the current and preceding two calendar years. Cash may also be upstreamed to the Parent Company by the subsidiary banks as an inter-entity management fee; these fees must be based upon the fair market value of services provided by the Company. At December 31, 1993, the subsidiary banks were permitted to upstream an additional $10,799,000 in cash dividends on a secured basis $2,923,000 to the Company. The subsidiary banks also had a combined $81,230,000 of restricted surplus and retained earnings at December 31, 1993.\nThe Company also had available at December 31, 1993, a $1 million unused line of credit from a non-affiliated correspondent bank. This line of credit is unsecured and is subject to annual review on September 30, 1994. Future drawdowns on this line, if any, would be at a rate of \"Prime.\" Additionally, there is an annual commitment fee of 1\/4% on any unused portion of the line.\nBased on the risk-based capital guidelines of the Board of Governors of the Federal Reserve System, a bank holding company such as the Company, is required to maintain a Tier 1 capital to risk-adjusted assets ratio of 4.00% and total capital to risk-adjusted assets of 8.00%. At December 31, 1993, the Company and each of its banking subsidiaries exceeded their respective regulatory requirements.\n24. SUBSEQUENT EVENT (unaudited)\nThe Company and Johnstown Savings Bank announced on January 18, 1994, that they have reached agreement on revised terms to the definitive agreement pursuant to which Johnstown Savings Bank (\"JSB\") would merge with United States National Bank in Johnstown. The definitive agreement was signed by the parties on November 10, 1993, and provided for the payment to JSB stockholders at the closing of the merger .528 share of the Company's common stock and $11.03 in cash for each JSB share outstanding based upon an assumed market value of the Company's common stock of $25.50. With a 55% stock and 45% cash split, this represented a transaction value of approximately $47.5 million or $24.50 per JSB common share.\nOn December 20, 1993, the Company proposed that the definitive agreement be amended to the effect that JSB stockholders would receive at closing .464 share of the Company's common stock and $9.68 in cash for each JSB share outstanding based on an assumed market value of $25.50 for the Company's common stock. At the average closing price of the Company's common stock for the ten trading days immediately preceding the December 20th announcement, this modification translated into an indicated transaction value or $21.02 per JSB common share.\nAfter negotiations, the parties executed an amendment to the definitive agreement which provides that the Company will pay $10.13 in cash and a fraction of a share of the Company's common stock based upon a formula relating to the average closing price for the Company's common stock on the NASDAQ National Market System for the ten trading days immediately preceding the closing date. If the average closing price for the Company's common stock on the closing date of the merger: (a) is less than or equal to $24.50 then the stock component of the merger consideration will be .505 of a share of the stock; (b) is greater than or equal to $25.50, then the stock component of will be .485 of a share of the Company's common stock; and (c) is greater than but less than $25.50 per share, then the stock component of the merger considered determined by dividing $22.50 by the average closing price and multiplying the resulting amount by 55%. JSB has the right to terminate the amended agreement in the event that the average closing price of the Company's common stock for the ten trading days immediately preceding the closing is less than $20.50 per share.\nAt the time the amendment was signed by the parties, final for each party provided a written opinion to the Boards of Directors of the Company and Johnstown Savings Bank that the revised merger consideration set forth in the amendment was fair from a financial point of view to the Company and the stockholders of JSB.\nThe amendment further permitted JSB to seek bids for the merger or acquisition of JSB from other interested parties until February 17, 1994. If any bid exceeded the consideration provided for in the amendment, then JSB's Board of Directors would have been free to terminate its agreement with the Company and enter into an agreement with such bidder with no liability to the Company. The Company's option to acquire up to 19.9% of the outstanding shares of JSB was suspended during this marketing period.\nOn February 18, 1994, the Company and JSB announced the expiration of the marketing period where JSB had the ability to seek a merger with a third party at a higher price per share than agreed to by the Company. Johnstown Savings Bank has informed the Company that it did not enter into a merger agreement with another party and that by the terms of the agreement JSB will proceed with the USBANCORP merger. Based upon a February 17, 1994, USBANCORP closing stock price of $24.00, this would imply an acquisition cost approximately $43.3 million.\nThe transaction is subject to regulatory approvals and to the approvals of the stockholders of the Company and Johnstown Savings Bank.\nSTATEMENT OF MANAGEMENT RESPONSIBILITY\nJanuary 28, 1994\nTo the Stockholders and Board of Directors of USBANCORP, Inc.\nManagement of USBANCORP, Inc. and its subsidiaries have prepared the consolidated financial statements and other information in the \"Annual Report and Form 10-K\" in accordance with generally accepted accounting principles and are responsible for its accuracy.\nIn meeting its responsibility, management relies on internal accounting and related control systems, which include selection and training of qualified personnel, establishment and communication of accounting and administrative policies and procedures, appropriate segregation of responsibilities, and programs of internal audit. These systems are designed to provide reasonable assurance that financial records are reliable for preparing financial statements and maintaining accountability for assets and that assets are safeguarded against unauthorized use or disposition. Such assurance cannot be absolute because of inherent limitations in any internal control system.\nManagement also recognizes its responsibility to foster a climate in which Company affairs are conducted with the highest ethical standards. The Company's Code of Conduct, furnished to each employee and director, addresses the importance of open internal communications, potential conflicts of interest, compliance with applicable laws, including those related to financial disclosure, the confidentiality of proprietary information, and other items. There is an ongoing program to assess compliance with these policies.\nThe Audit Committee of the Company's Board of Directors consists solely of outside directors. The Audit Committee meets periodically with management and the independent accountants to discuss audit, financial reporting, and related matters. Arthur Andersen & Co. and the Company's internal auditors have direct access to the Audit Committee.\n\/s\/Terry K. Dunkle \/s\/Orlando B. Hanselman Terry K. Dunkle Orlando B. Hanselman Chairman, Executive Vice President, President & CEO Chief Financial Officer & Manager of Corporate Services\nREPORTS OF INDEPENDENT PUBLIC ACCOUNTANTS\nTo the Stockholders and Board of Directors of USBANCORP, Inc.:\nWe have audited the accompanying consolidated balance sheets of USBANCORP, Inc. (a Pennsylvania corporation) and subsidiaries as of December 31, 1993 and 1992, and the related consolidated statements of income, stockholders' equity and cash flows for the years then ended. 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. The financial statements of USBANCORP, Inc. as of December 31, 1991, was audited by other auditors whose report, dated February 12, 1992, expressed an unqualified opinion on that statement.\nWe conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.\nIn our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of USBANCORP, Inc. and subsidiaries as of December 31, 1993 and 1992, and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles.\nAs discussed in Note 13 to the Consolidated Financial Statements, effective January 1, 1993, the Company changed its method of accounting for income taxes.\n\/s\/Arthur Andersen & Co. Pittsburgh, Pennsylvania January 28, 1994 (except for the matter discussed in Note 24 as to which the date is February 18, 1994).\nFebruary 12, 1992\nTo the Stockholders and Board of Directors of USBANCORP, Inc.\nIn our opinion, the consolidated statement of income, of cash flow, and of changes in stockholders' equity for the year ended December 31, 1991, present fairly, in all material respects, the results of operations and cash flows of USBANCORP, Inc. and its subsidiaries (the \"Company\") for the year ended December 31, 1991, in conformity with generally accepted accounting principles. 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 audit. We conducted our audit of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for the opinion expressed above. We have not audited the consolidated financial statements of the Company for any period subsequent to December 31, 1991.\n\/s\/Price Waterhouse 600 Grant Street Pittsburgh, Pennsylvania 15219\nUSBANCORP, INC.\nMANAGEMENT'S DISCUSSION AND ANALYSIS\nFORM 10-K\nTHIS PAGE IS INTENTIONALLY LEFT BLANK.\nMARKET PRICE AND DIVIDEND DATA\nCommon Stock USBANCORP's Common Stock is traded on the NASDAQ National Market System under the symbol \"UBAN.\" The following table sets forth the high and low closing prices and the cash dividends declared per share for the periods indicated:\nPreferred Stock USBANCORP's Series A $2.125 Cumulative Convertible Preferred Stock was traded in the over-the-counter market and was quoted on the NASDAQ National Market System under the symbol \"UBANP.\" The following table sets forth the range of the high and low bid prices and the cash dividends declared per share for the periods indicated:\nThe bid prices set forth in the above table for the Preferred Stock reflect prices between dealers, do not include retail markups, markdowns, or commissions , and do not necessarily represent actual transactions. All Preferred Shares were converted to the Company's Common Stock or redeemed by April 7, 1993.\nSELECTED QUARTERLY CONSOLIDATED FINANCIAL DATA\nThe following table sets forth certain unaudited quarterly consolidated financial data regarding the Company:\nMANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS (\"M. D. & A.\")\nThe following discussion and analysis of financial condition and results of operations of USBANCORP should be read in conjunction with the consolidated financial statements of USBANCORP, including the related notes thereto, included elsewhere herein.\nRESULTS OF OPERATIONS FOR THE FISCAL YEARS ENDED DECEMBER 31, 1993, 1992, AND 1991\nPERFORMANCE OVERVIEW...The Company's net income for 1993 was $12,488,000 or $2.72 on a fully diluted per share basis compared to net income of $8,883,000 or $2.53 per fully diluted share for 1992 and net income of $7,312,000 or $2.29 per fully diluted share for 1991. The Company's current year net income includes a $1,452,000 or $.35 per fully diluted share non-recurring benefit due to the adoption of Statement of Financial Accounting Standards NO.109, \"Accounting for Income Taxes.\" (See further discussion under \"Income Tax Expense.\") Before the SFAS $NO109 benefit, 1993 net income was $11,036,000 or $2.41 per fully diluted share. Similarly, the 1991 net income included a $1,004,000 or $.31 per fully diluted share extraordinary income tax benefit resulting from the full utilization of all remaining net operating loss carryforward. Before this extraordinary item, 1991 net income was $6,308,000 or $1.97 per fully diluted share. The Company's 1992 results were not impact extraordinary items.\nWhen 1993 is compared with 1992, the Company's net income before the SFAS #109 benefit increased by $2,153,000 or 24.2% while fully diluted earnings per share decreased by $.12 or 4.7%. Similar trends were noted for two other key performance ratios as the Company's return on assets before the SFAS $NO109 benefit improved by six-basis points to .91% while the return on equity before the SFAS $NO109 benefit declined by 128 basis points 10.13%. The increase in net income is attributed to the Company's ability to continue to enhance Community's net income and the accretive impact of the purchase of the four Integra branch offices. Additionally, net income and return on assets increased due to continued core growth in non-interest income, increased gains realized on the sale of investment securities available for sale, and the interest earnings generated on $24.6 million of net funds provided from the Company's secondary common stock offering completed in February 1993. This secondary common stock offering resulted in the issuance of 1,150,000 new shares of the Company's common stock causing a 30.5% increase in weighted average fully diluted shares outstanding to approximately 4.59 million. The initial temporary dilutive effect of these additional shares was the major factor responsible for the $.12 decline in fully diluted earnings per share 128 basis point drop in return on average equity experienced in 1993.\nWhen 1992 is compared with 1991, each of the Company's key performance indicators demonstrated improvement on a before extraordinary item basis. These increased financial results reflect the accretive impact of the Community Acquisition, increased gains realized on the sale of fixed-rate mortgage loans held for sale and investment securities available for sale, and core growth in non-interest income. The more significant 202 basis point increase in return on equity as compared to the two-basis point improvement in return on assets was due to increased\nleveraging of the Company's capital as a result of the Community Acquisition. The following table summarizes some of the Company's key performance indicators for each of the past three years:\nIMPACT OF THE ACQUISITIONS...The Community Acquisition was consummated on March 23, 1992, and was a key factor responsible for the Company's improved earnings. The 1993 results include Community for the entire year compared to only slightly over nine months for 1992. The 1993 earnings reflect a net income contribution of $3,333,000 (before the favorable effect of SFAS NO.109) from Community compared to a $2,980,000 net income contribution from Community for 1992. This net income increase of $353,000 resulted primarily from the additional days of ownership and increased fee income as Community's total non-interest income grew at an annualized rate of 13% in 1993.\nThe Integra Branches Acquisition, consummated on April 2, 1993, also had a favorable impact on 1993 earnings. Due to conversion related expenses and lags in the timing of settlement of investment security purchases, the net income benefit that the Integra Branches Acquisition contributed for the second quarter of 1993 amounted to approximately $70,000. This net income contribution from Integra doubled to approximately $140,000 for each of the third and fourth quarters making the total 1993 income contribution from this acquisition $350,000.\nIn addition to the overall net income comparison mentioned above, these acquisitions also caused a material increase in average earning assets, average interest bearing liabilities, and the major income and expense line item components. In addition to the increase in aggregate balances of average earning assets andaverage interest bearing liabilities, the also a significant change in balance sheet composition and loan loss reserve coverage. The following discussion identifies the principal effects of the acquisitions, as well as, underlying trends affecting USBANCORP.\nNET INTEREST INCOME AND MARGIN...The following table summarizes the Company's net interest income performance for each of the past three years:\nWhen 1993 is compared to 1992, USBANCORP's net interest income increased by $5.0 million or 11.0% while the net interest margin percentage declined by 24 basis points to 4.34%. The increased net interest income was due primarily to a higher volume of earning assets resulting from the previously mentioned acquisitions and the $24.6 million in net funds provided from the secondary common stock offering. For 1993, total average earning a $167 million higher than 1992. The contraction in the net interest margin percentage can be best explained by the following factors:\n- - The Company, through asset restructurings and effective asset liability management practices, has stabilized Community's net interest margin in the 3.80% to 4.00% range while reducing Community's overall exposure to interest rate risk. This current net interest margin represents an improvement over Community's pre-acquisition net interest margin performance which averaged 2.84% for the fiscal year ended September 30, 1991. It is, however, lower than the net interest margin operating performance of approximately 4.60% experienced at the Company's other banking subsidiaries margin performance at Community can be attributed to its more typical savings bank balance sheet mix; this mix includes a greater proportion of one-to-four family residential mortgage loans and more reliance on certificates of deposit, rather than non-interest bearing demand deposit accounts, as a funding source. It is the Company's intent to gradually improve Community's margin to a higher operating level by diversifying the loan mix to include more rate sensitive and shorter maturity commercial and consumer loans. This diversification of the loan portfolio has already begun as commercial loans comprised 15% of Community's total loan portfolio at December 31, 1993, compare only 4% at March 31, 1992. A similar decline in the dependence on real estate was experienced as Community's real estate loan portfolio composition percentage decreased from 82% to 74% between these same two dates. Continued pursuit of this loan mix diversification strategy should allow the Company to further improve Community's net interest margin from the current 3.80% to 4.00% level.\n- - Since only $10 million of loans were acquired with the Integra branch offices, the majority of the $88 million of acquired Integra deposits were redeployed into investment securities. Additionally, $24.6 million of funds provided from the secondary common stock issuance were also invested in the securities portfolio. This initial dependence on the investment portfolio as the primary source of return on these acquired deposits and stock issuance proceeds was also a major factor contributing to the contraction in the net interest margin percentage. It is management's intent to use a portion of this excess investment portfolio liquidity to more profitably fund anticipated loan growth in order to improve the net interest margin; this should be achievable since the yield on currently originated loans ranges from 100 to 225 basis points more than the average fourth quarter 1993 yield of 5.54% in the investment portfolio. This margin improvement, however, will be gradual since the earning asset yield will continue to be negatively impacted by regularly scheduled maturities and prepayments of higher yielding loans and securities purchased or originated several years ago; the downward magnitude of the repricing on these older earning assets will exceed the repricing benefits experienced on the liability side of the balance sheet since the short-term certificates of deposit and low cost core savings accounts have generally already been repriced to current market rates.\nWhen 1992 is compared with 1991, the Company's net interest income increased by $11.8 million or 35.3% while the net interest margin percentage declined by 11 basis points to 4.58%. The inclusion of Community's net interest income of $11.7 million was the principal reason for the increase. Likewise, the contraction in the net interest margin percentage was also attributed to Community for the same reasons previously mentioned. The amount of the margin contraction in 1992 was not as significant as that experienced in 1993 since several of the asset restructuring strategies were not executed until the fourth quarter of 1992. Additionally, a significant portion of the initial favorable impact of deposit rate reductions designed to make Community's pricing more consistent with bank competition and the Company's other subsidiaries was experienced in 1992.\nThe table that follows provides an analysis of net interest income on a tax-equivalent basis setting forth (i) average assets, liabilities, and stockholders' equity, (ii) interest income earned on interest earning assets and interest expense paid on interest bearing liabilities, (iii) average yields earned on interest earning assets and average rates paid on interest bearing liabilities, (iv) USBANCORP's interest rate spread (the difference between the average yield earned on interest earning assets and the average rate paid on interest bearing liabilities), and (v) USBANCORP's net interest margin (net interest income as a percentage of average total interest earning assets). For purposes of this table, loan balances include non-accrual loans and interest income on loans includes loan fees or amortization of such fees which have been deferred as well as interest recorded on non-accrual loans as cash is received once the principal has been fully paid.\nNet interest income may also be analyzed by segregating the volume and rate components of interest income and interest expense. The table below sets forth an analysis of volume and rate changes in net interest income on a tax-equivalent basis. For purposes of this table, changes in interest income and interest expense are allocated to volume and rate categories based upon the respective percentage changes in average balances and average rates. Changes in net interest income that could not be specifically identified as either a rate or volume change were allocated proportionately to changes in volume and changes in rate.\nRegarding the separate components of net interest income, the Company's total interest income for 1993 increased by $2.9 million or 3.6% when compared to 1992. This increase was due entirely to the previously mentioned $167 million increase in the total volume of average earning assets which resulted in a $7.5 million increase in interest income between years. This positive factor was offset by an unfavorable rate variance of $4.6 million a the Company's earning assets have repriced downward in conjunction with the in interest rates. Specifically, the yield on the loan portfolio has decreased 8.61% while the yield on total investment securities and investment securities available for sale as dropped 124 basis points to 5.70%. The national and local market trend of accelerated customer refinancing of mortgage loans has contributed materially to the declining yields experienced in both of these portfolios. Finally, the previously mentioned increased dependence on investment securities as a funding use has negatively impacted the earning asset mix.\nThe Company's total interest income increased $16.6 million or 24.8% for the year ended December 31, 1992, compared to the same 1991 period as a result of the Community Acquisition, which added $24.7 million of total interest income. Excluding the Community Acquisition, USBANCORP's total interest income decreased by $8.1 million or 12.1% over the prior year ended December 31, 1991. This decrease was a result of a decline in interest rates that was partially offset by a shift in the composition of average earning response to the declining rate environment and reduced consumer and commercial loan demand, USBANCORP shifted its average portfolio composition from short-term investments such as interest bearing deposits with banks, federal funds sold and securities purchased under agreements to resell to investments with longer average maturities and higher yields. An emphasis was placed on the purchase of short average life mortgage- and asset-backed securities which source of monthly cash flow.\nThe Company's total interest expense for 1993 decreased by $2.1 million or 5.5% when compared to 1992. This decline occurred despite an additional $7.1 million of interest expense generated from a $115 million increase in the volume of average interest bearing liabilities. This negative factor was more than offset by a $9.2 million favorable rate variance which resulted primarily from management repricing all deposit categories downward declining interest rate environment. The magnitude of the downward repricing was more pronounced at Community as their deposit rate structure was reduced to levels more consistent with bank competition and the Company's other banking subsidiaries. It has been management's ongoing pricing strategy to position USBANCORP's deposit rates within the lowest quartile of deposit rates offered by commercial banks in its market area. Management believes that a constant level of high service quality mitigates the impact of incremental downward rate movement deposit base size and funds availability provided that the rates offered are not appreciably below competition. Regarding the deposit mix, the Company has experienced a shift of funds from short-term certificates of deposit into more liquid interest bearing demand and savings accounts due to the narrowing of the rate spread between these products and customer preference for liquidity in this low interest rate environment. The Company has also used an add million (average balance) of advances from the Federal Home Loan Bank to extend the liability maturity base at Community in order to better manage interest rate risk. These price and liability composition movements allowed USBANCORP to lower the average cost of interest bearing liabilities by 76 basis points from 4.52% in 1992 to 3.76% in 1993.\nUSBANCORP's total interest expense increased to $38.3 million for 1992 from $33.5 million for 1991 as a result of the Community Acquisition. Excluding the Community Acquisition, USBANCORP's total interest expense decreased $8.2 million for 1992 compared to 1991 primarily as a result of a decline in interest rates, implementation of management's strategy of reducing deposit rates, and lessening reliance on high cost certificates of deposit in excess of $100,000 by $10.8 million. USBANCORP also experienced a shift from long-term into short-term deposits due to the previously mentioned customer preference for liquidity in the low rate environment that prevailed during the period. These price and deposit composition movements, combined with the economic climate of declining interest rates, allowed USBANCORP to lower the average cost of interest bearing liabilities from 5.70% during 1991 to 4.52% during 1992.\nPROVISIONS FOR LOAN LOSSES...USBANCORP's provision for loan losses in 1993, 1992, and 1991 was $2.4 million, $2.2 million, and $900,000, respectively. When expressed as a percentage of average loans, the provision has averaged .34% for 1993, .36% for 1992, and .21% for 1991. The $200,000 or 9.0% increase in the\nprovision between 1993 and 1992 was due to the inclusion of a full year's provision at Community. Similarly, the increase between 1991 and 1992 was primarily because of a $1.3 million provision for loan losses made at Community. As a result of these increased provision levels in 1992 and 1993, Community was able to build its level of loan loss reserves to conform with USBANCORP's policy and make its reserve coverage more consistent with banking industry levels.\nNet charge-offs for 1993 were $892,000 or 0.13% of average loans and loans held for sale compared to $3.6 million or 0.58% in 1992, and $367,000 or 0.08% in 1991. The 1993 amount represents a more recurrent net charge-off level for the Company. The higher 1992 net charge-offs resulted primarily from portfolio cleanup at Community immediately following the acquisition. The provision for loan losses less net charge-offs in 1993 add $1.5 million to the allowance for loan losses which increased to $15.3 million at December 31, 1993. (See additional discussion under \"Allowance for Loan Losses.\")\nNON-INTEREST INCOME...Non-interest income for 1993 totalled $10.2 million which represented a $1.8 million or 21.6% increase over 1992. This increase was primarily due to an $855,000 increase in service charges on deposit accounts, a $524,000 increase in trust fees, a $190,000 increase in realized gains on the sale of investment securities classified as \"available for sale,\" and a $92,000 increase in wholesale cash processing fees. These positive factors were partially offset by a$144,000 decrease in gains realized on classified as \"held for sale.\"\nThe $855,000 or 44.6% increase in deposit service charges resulted partly from higher deposit levels due to the acquisitions. Additionally, the other significant part of this increase was due to the benefits of a revised deposit service charge pricing strategy implemented at Community on March 1, 1993. As a result of implementation of this pricing strategy, deposit service charges at Community increased by approximately $400,000 in 1993. During the course of 1993, management has noted that customers at Community have adjusted their savings patterns to minimize the impact of the new service charge pricing; and consequently, as a result of these customer adjustments, management expects the recurring benefit to decline to $300,000 annually. This new deposit service charge pricing strategy has raised Community's fee structure to a level commensurate with its banking competition and the Company's other banking subsidiaries.\nThe $524,000 or 25.5% increase in trust fees resulted primarily from continued successful business development efforts as total trust assets (discretionary and non-discretionary) have grown by 45.1% since December 31, 1992, to $943 million at December 31, 1993. Specifically, corporate trust assets grew by $98 million or 44%, employee benefit assets grew by $60 million or 26%, and personal trust assets grew by $75 million or 29% growth in personal trust assets was fueled by the continued successful sales of the Pathroad Account, a competitively priced mutual fund product. Trust income for 1993 was also enhanced by a $75,000 increase in estate fees making the core trust fee growth rate for the current period approximately 22%. This core trust fee growth is prompted by the expansion of the Company's business throughout western Pennsylvania including the Greater Pittsburgh marketplace. The Trust staff's marketing skills combined with their ability to deliver quality service has been the key to the Company's growth rate; and, while there can be no assurances of continuation of this approximate 22% average annual trust fee growth experienced over the past four years, these factors provide a foundation for future growth of this important source of non-interest sensitive fee income.\nThe increase in realized gains on the sale of investment securities available for sale resulted from the execution of several investment strategies to capture available\nmarket premiums on various mortgage-backed securities which had the characteristics of low remaining balances and fast prepayment histories. Also, the $92,000 increase in wholesale cash processing fees resulted from continued growth in the customer base. Even though it was a $144,000 reduction from 1992, the Company realized $593,000 in gains from the sale of approximately $22 million of 30-year fixed-rate residential mortgage loans which were originated during 1993. These loans were classified as \"held for sale\" in accordance with a previously disclosed strategy by the Company to sell new 30-year fixed-rate mortgage products in an effort to help neutralize long-term interest rate risk. Servicing rights amounting to approximately 35 basis points on the loan balance outstanding were retained on these sold loans in order to provide the Company with a recurrent source of fee income. Given the Company loan pricing strategy of offering zero point mortgage loans at a slight pre-market rates, management expects to generate modest gains from fixed rate mortgage sales each quarter. The amount of the gain may, however, vary depending upon the volume of new 30-year mortgage loan activity and market conditions at the time of sale.\nTotal non-interest income of $8.3 million increased by $2.3 million or 38.3% between 1991 and 1992. This increase in non-interest income was primarily due to the Community Acquisition which added $1.45 million in non-interest income and gains on sales of investments of $393,000. Of the $1.45 million of non-interest income from Community, $737,000 resulted a gain recognized on the sale of fixed rate mortgage loans.\nNon-interest income, excluding net gains on the disposition of investment securities available for sale and loans held for sale, increased by approximately 19% for the year ended December 31, 1992, compared to the same period for 1991. This increase in non-interest income was primarily due to an increase in trust fees, wholesale cash processing fees, and service charges on deposit accounts. Trust fees grew to $2.1 million or successful business development efforts in both the personal trust and employee benefits areas. The increase in wholesale cash processing fees was the result of the election by several customers to be assessed actual fees instead of maintaining compensating balances and overall growth in the customer base. The increase in service charge income on deposit accounts was primarily due to higher volume of fees combined with growth of a packaged deposit product.\nNON-INTEREST EXPENSE...Total non-interest expense of $40.7 million increased by $4.5 million or 12.3% when compared to 1992. This increase was primarily caused by the following items:\n- - a $1.5 million increase in other expense due in part to a loss on the disposition of another real estate owned property which had a book value of approximately $3.1 million. The Company initially took a $550,000 charge in the second quarter of 1993 to write-down the property to its estimated fair market value. When the property was finally sold in the fourth quarter of 1993, the Company recovered $263,000 of the initial write-down making the net loss on the transaction $287,000. Also contributing to expense increase was $183,000 of amortization expense of the core deposit premium purchased. Integra deposits and approximately $50,000 of final expenses related this same acquisition. Additionally, there were approximately $300,000 of non-recurring expenses incurred for a computer conversion at Community from an outside data processing contractor toan in-house computer processing system at Three Rivers Bank in the fourth quarter of 1993. Management expects to fully recover these one-time conversion costs in 1994 as the efficiencies generated from a centralized western region data\nprocessing center is expected to generate $300,000 of ongoing annual savings. Finally, in the fourth quarter of 1993, the Company also charged-off $73,000 of remaining debt issuance costs due to the early retirement of the mortgage bonds used to finance U.S. Bank's Main Office headquarter's facility. This charge will be fully recovered in 1994 through improved net interest margin performance as short-term investments and investment securities yielding approximately 4.50% were liquidated to retire this $5,075,000 debt that had an average cost of approximately 7%.\n- - a $1,914,000 or 10.6% increase in salaries and employee benefits due to planned wage increases approximating 4%, an additional 30 (average) full-time equivalent employees due to the previously mentioned acquisitions and increased group hospitalization expense.\n- - a $464,000 or 15.8% increase in net occupancy expense due to the additional branch facilities acquired, higher maintenance and repair costs, and a $100,000 increase in depreciation expense due to a purchase price allocation adjustmentrelated to Community.\nTotal non-interest expense of $36.2 million increased by $7.4 million or 25.6% for 1992 compared to 1991. Of this increase, $6.3 million was a result of the Community Acquisition. The remaining increase of $1.1 million was primarily due to increases in salaries and employee benefits, net occupancy expense, equipment expense, professional fees, and FDIC deposit insurance expense. Non-interest expense in 1992 included approximately $400,000 of non-recurring expenses for fees paid to productivity consultants.\nNET OVERHEAD BURDEN...Although non-interest expense has increased as a result of the Community and Integra Branches Acquisitions, these acquisitions have contributed favorably to lowering USBANCORP's net overhead ratios. Specifically, the Company's ratio of net overhead expense (non-interest expense less non-interest income) to net interest income has shown continued improvement as it averaged 61.8% in 1993 compared to 62.8% in 1992 and 69.4% in 1991. Furthermore, when the 1993 ratio is compared to the 1988 aver 83.8%, this reflects a more dramatic decrease. Similarly, the Company's net overhead to average assets ratio has improved from 3.01% in 1991 to 2.68% in 1992 to a record low of 2.51% in 1993. Employee productivity has also increased annually for each of the past five years as total assets per employee has increased noticeably from $1.35 million in 1989 to $1.87 million in a 38% improvement. The improvement in each of these net overhead measures demonstrates management's ongoing commitment to achieving productivity enhancement operational efficiencies, and economy of scale benefits. Management has targeted a goal of reducing the Company's net overhead expense to net interest income ratio to 55% over the five year strategic planning forecast. The successful acquisition of JSB should allow the Company to reach this goal even sooner than originally planned.\nINCOME TAX EXPENSE...As discussed earlier, the Company adopted Statement of Financial Accounting Standards $NO109, \"Accounting For Income Taxes,\" in the first quarter of 1993. This adoption resulted in the recording of a deferred tax asset of $1,452,000 and a corresponding credit to the income statement as a cumulative effect of change in accounting principle. Excluding this non-recurring benefit, the Company's provision for income taxes was $5.5 million reflecting an effective tax rate of 33.2%. This represented a tax expense increase of $44,000 over 1992 due solely to the higher pre-tax income since the effective tax rate between years declined as a result of increased tax-free asset holdings.\nThe provision for income taxes was $5.4 million for 1992 compared to $2.9 million for 1991. The increase in the provision for income taxes in 1992 was primarily due to the Community Acquisition and its higher effective combined income tax rate. In addition, in 1991, the Company recognized a benefit of $1.0 million due to utilization of all remaining net operating loss carry forward.\nSIGNIFICANT NON-RECURRING INCOME AND EXPENSE...In 1993, USBANCORP recognized the net unfavorable effect of several non-recurring items aggregating approximately $367,000. The largest items were $350,000 of expenses related to the Community data processing and Integra branch conversions, a $287,000 loss on an other real estate owned property, a $73,000 write-off of bond issuance costs, and $343,000 of realized gains from fixed-rate mortgage loan sales. (While heavily affected by economic and market circumstances, it is management's expectation to generate recurrent annual income of $250,000 from its ongoing program of selling new 30-year fixed rate mortgage loans. Accordingly, $343,000 of the total $593,000 of realized gains from fixed-rate mortgage loan sales in 1993 are considered non-recurring.)\nIn 1992, USBANCORP recognized the net favorable effect of several non-recurring items aggregating approximately $138,000. The largest items were a $737,000 gain from fixed-rate mortgage loan sales and $400,000 of expenses incurred for productivity consultants. In 1991, USBANCORP recognized the net unfavorable effect of several non-recurring items aggregating approximately $325,000, including a $300,000 negative interest accrual adjustment resulting from certain clerical errors.\nBALANCE SHEET...The Company's total consolidated assets were $1.242 billion at December 31, 1993, compared with $1.140 billion at December 31, 1992, which represents an increase of $102 million or 8.9%. This asset growth was funded primarily by $51.3 million of increased deposits, $24.6 million of net cash provided from the Company's secondary common stock offering in February 1993 (see further discussion under \"Capital Resources\") and $20 million of advances from the Federal Home Loan Bank. These funds have been invested in the loan and investment security portfolios which have increased by $73.3 million and $61.8 million, respectively, since December 31, 1992. A $30.4 million reduction in the Company's overnight federal funds sold position also was used to fund the observed investment security and loan growth. This planned reduction in the Company's overnight federal funds sold position resulted from management's strategy to shift to a federal funds purchased position to enhance the net interest margin by better leveraging the investment securities portfolio in this low interest rate environment.\nAs a result of the low rate environment, less inflationary fears, improved consumer confidence, and a moderate economic recovery, each of the Company's banking subsidiaries experienced heightened loan demand in 1993. Within the loan portfolio, each of the major loan categories experienced net growth in the following amounts since December 31, 1992:commercial loans up by $22.7 million or 29.5%, real estate-mortgage loans up by $39.8 million or 13.3%, consumer loans up by $9.5 million or 6.0%, and commercial loans secured by real estate up by $200,000 or only .2%. The commercial loan growth resulted from successful business development efforts in both regions of the Company's marketplace which includes suburban Pittsburgh and Greater Johnstown. The net growth in mortgage loans (including home equity) occurred despite the sale of approximately $22 million of 30-year fixed-rate product that originated during 1993. The majority of the mortgage growth occurred at Community with approximately 60% of this growth related to refinancing activity customers. The net growth of consumer loans outstanding is noteworthy since it represents a significant reversal\nof the trend of net consumer loan run-off which had occurred throughout 1992. Improved consumer demand, acquisition of Integra loans, and heavy marketing of debt consolidation loans, combined with a general stabilizing of indirect auto loan run-off, were the factors responsible for the increase in consumer loan balances.\nLOAN QUALITY...USBANCORP's written lending policies require underwriting, loan documentation, and credit analysis standards to be met prior to funding any loan. After the loan has been approved and funded, continued periodic credit review is required. Annual credit reviews are mandatory for all commercial loans in excess of $100,000 and for all commercial mortgages in excess of $250,000. In addition, due to the secured nature of residential mortgages and the smaller balances of individual installment loans, sampling techniques on acontinuing basis for credit reviews in these loan areas.\nThe following table sets forth information concerning USBANCORP's loan delinquency and other non-performing assets:\nAt December 31, 1993, non-accrual loans and non-performing assets as a percentage of total loans and loans held for sale, net of unearned income, and other real estate owned were 0.73% and 0.89%, respectively. The decreases from December 31, 1992, in each of these categories were due primarily to the Company's ongoing loan work-out program which has been implemented at each banking subsidiary. Overall, total loan delinquency (past due 30 to 89 days) as a percentage of total loans, net of unearned income, totalled 1.43% at December 31, 1993, and was relatively stable between years.\nPotential problem loans consist of loans which are included in performing loans, but for which potential credit problems of the borrowers have caused management to have concerns as to the ability of such borrowers to comply with present repayment terms. At December 31, 1993, all identified potential problem loans were included in the preceding table.\nALLOWANCE FOR LOAN LOSSES...As a financial institution which assumes lending and credit risks as a principal element of its business, the Company anticipates that credit losses will be experienced in the normal course of business. Accordingly, management of the Company makes a quarterly determination as to an appropriate provision from earnings necessary to maintain an allowance for loan losses that is adequate for potential yet undetermine losses. The amount charged against earnings is based upon several factors including, at a minimum, each of the following:\n- - a continuing review of delinquent, classified and non-accrual loans, large loans, and overall portfolio quality. This continuous review assesses the risk characteristics of both individual loans and the total loan portfolio.\n- - regular examinations and reviews of the loan portfolio by representatives of the regulatory authorities.\n- - analytical review of loan charge-off experience, delinquency rates, and other relevant historical and peer statistical ratios.\n- - management's judgment with respect to local and general economic conditions and their impact on the existing loan portfolio.\nWhen it is determined that the prospects for recovery of the principal of a loan have significantly diminished, the loan is immediately charged against the allowance account; subsequent recoveries, if any, are credited to the allowance account. In addition, non-accrual and large delinquent loans are reviewed monthly to determine potential losses. Consumer loans are considered losses when they are 90 days past due, except loans that are insured for credit loss.\nUSBANCORP has no credit exposure to foreign countries, foreign borrowers or highly leveraged transactions.\nThe following table sets forth changes in the allowance for loan losses and certain ratios for the periods ended:\nWhen December 31, 1993, is compared to December 31, 1992, the allowance coverage ratios for non-accrual loans and non-performing assets increased due to the previously discussed improvement in the Company's asset quality combined\nwith an increased balance in the allowance for loan losses. The December 31, 1993, allowance to total loans and loans held for sale, net of unearned income, ratio of 2.10% declined by only two basis points from the December 31, 1992, level of 2.12% despite the $78.3 million of growth experienced in the loan portfolio. Community's non-performing assets declined by $1.3 million to $3.0 million at December 31, 1992, due to $1.1 million of loans charged-off against the allowance for loan losses during the second quarter of 1992. A substantial portion of Community's loan charge-offs were commercial loans. These charge-offs, which had been identified as part of the Company's pre-acquisition due diligence, were offset by a loan loss provision of $1.3 million at Community for the period ended December 31, 1992.\nTypically, as in the case of Community, the loan portfolio of a savings and loan association or savings bank contains a high proportion of secured residential mortgage and consumer loans which are generally believed to have less credit risk as compared to commercial loans. Over 80% of Community's loan portfolio is residential mortgage and consumer loans historically have a lower charge-off to loans percentage compared to commercial USBANCORP's policies require greater allowance coverage for its subsidiaries than was required at Community prior to its acquisition; in order to make the allowance coverage of the loan portfolio consistent with USBANCORP's policy and general banking industry levels, management increased the provision for loan losses at Community in both 1992 and 1993 to build the reserve to conform with USBANCORP policy requirements. At December 31, 1993 and 1992, management believed the allowance for loan losses was adequate at each subsidiary bank inherent in the portfolio at those dates. However, there can be no assurance the quality deteriorates in future periods material additions to the allowance for loan losses will not be required.\nUSBANCORP's management is unable to determine in what loan category future charge-offs and recoveries may occur. The following schedule sets forth the allocation of the allowance for loan losses among various categories. The portion of the allowance allocated to general risk to protect the Company against potential yet undetermined losses increased by $2.2 million to $7.6 million or 50% of the total allowance at December 31, 1993. This allocation is based upon historical experience. The entire allowance for loan losses is available to absorb future loan losses in any loan category.\nINTEREST RATE SENSITIVITY...Asset\/liability management involves managing the risks associated with changing interest rates and the resulting impact on the Company's net interest income. The management and measurement of interest rate risk at USBANCORP is performed by using the following tools: 1) Static \"GAP\"\nanalysis which analyzes the extent to which interest rate sensitive assets and interest rate sensitive liabilities are matched at specific points in time; 2) simulation modeling which analyzes the impact of interest rates changes on net interest income and capital levels over specific future time periods by projecting the yield performance of assets and liabilities in numerous varied interest rate environments.\nFor static GAP analysis, USBANCORP typically defines interest rate sensitive assets and liabilities as those that reprice within one year. Maintaining an appropriate match is one method of avoiding wide fluctuations in net interest margin during periods of changing interest rates. The difference between rate sensitive assets and rate sensitive liability known as the \"interest sensitivity GAP.\" A positive GAPoccurs when rate sensitive assets exceed rate sensitive liabilities repricing in the same time period and a negative GAP occurs when rate sensitive liabilities exceed rate sensitive assets repricing in the same time period. A GAP ratio (rate sensitive assets divided by rate sensitive liabilities) of one indicates a statistically perfect match. A GAP ratio of less than one suggests that a financial institution may be better positioned to take advantage of declining interest rates rather than increasing interest rates, and a GAP ratio of more than one suggests the converse. Since 1987, USBANCORP has generally endeavored to one year GAP position thereby minimizing the impact (either positive or changing interest rates on both net interest income and capital levels.\nThe following table presents a summary of the Company's static GAP positions at December 31, 1993:\nThere are some inherent limitations in using static GAP analysis to measure and manage interest rate risk. For instance, certain assets and liabilities may have similar maturities or periods to repricing but the magnitude or degree of the repricing may vary significantly with changes in market interest rates. As a result of these GAP\nlimitations, management places considerable emphasis on simulation modeling to manage and measure interest rate risk. At December 31, 1993, these eight varied economic interest rate simulations indicated that the variability of USBANCORP's net interest income over the next twelve month period was below the Company's $PM5% policy limit given positive or negative interest rate changes of up to 250 basis points; indeed these simulations show the greatest variability, $MI3.0%, in an economic scenario of an extreme immediate 250 basis point decline in interest rates.\nBeginning September 30, 1992, USBANCORP's investment portfolio was reclassified as \"available for sale.\" This classification provides management with greater flexibility to more actively manage the securities portfolio to better achieve overall balance sheet rate sensitivity goals. Furthermore, it is USBANCORP's intent to continue to diversify Community's loan portfolio to increase liquidity and rate sensitivity and to better manage USBANCORP's long-term interest rate risk.Specific rate sensitivity strategies were executed in 1992 as approximately $30 million of Community's fixed rate mortgage loans were sold with the proceeds reinvested into rate sensitive investment securities with a significantly shorter weighted average maturity. This long-term interest rate risk reduction strategy continued during 1993 a additional $22 million of newly originated 30-year fixed rate mortgage loans were sold. Community retained all servicing rights and will recognize fee income over the remaining lives of the loans sold at an average rate of approximately 35 basis points on the loan balances outstanding. The Company plans to continue to originate and sell future fixed rate 30-year mortgages to help manage interest rate risk and provide a source of recurrent servicing fee income.\nLIQUIDITY...Financial institutions must maintain liquidity to meet day-to-day requirements of depositor and borrower customers, take advantage of market opportunities, and provide a cushion against unforeseen needs. Liquidity needs can be met by either reducing assets or increasing liabilities. Normal sources of asset liquidity are provided by short-term investment securities, time deposits with banks, federal funds sold, banker's acceptances, and commercial paper. These assets totaled $151 million at December 31, 1993, compared to $176 million at December 31, 1992. Maturing and repaying loans, as well as, the monthly cash flow associated with certain asset- and mortgage-backed securities are other sources of asset liquidity.\nLiability liquidity can be met by attracting deposits with competitive rates, using repurchase agreements, buying federal funds, or utilizing the facilities of the Federal Reserve or the Federal Home Loan Bank systems. USBANCORP's subsidiaries utilize a variety of these methods of liability liquidity. At December 31, 1993, USBANCORP's subsidiaries had approximately $89.6 million of unused lines of credit available under arrangements with correspondent banks compared to $88.6 million at December lines of credit enable USBANCORP's subsidiaries to purchase funds for short-term needs at current market rates. Additionally, each of the Company's subsidiary banks are members of the Federal Home Loan Bank which provides the opportunity to obtain intermediate to longer-term advances up to approximately 80% of their investment in assets secured by one to four family residential real estate; based upon December 31, 1993, balances, this would suggest available FHLB borrowing capacity of approximately $504 million. Furthermore, USBANCORP had available at December 31, 1993, an unused $1 million unsecured line of credit.\nLiquidity can be further analyzed by utilizing the Consolidated Statement of Cash Flows. Cash equivalents decreased by $32 million from December 31, 1992, to December 31, 1993. Both the financing and investing activities were augmentedby the net $76.5 million in cash received from the Integra branches acquired. Financing activities were also impacted by the net $24.6 million from the secondary\ncommon stock offering and the $10 million increase in advances from the Federal Home Loan Bank. There was a decrease in net cash provided by investing activities at December 31, 1993, primarily due to a net increase in loans of $78.6 million and a net increase in the investment security portfolio of $62.2 million. These increases were due to the redeployment of Integra funds along with a reduction in the Company's short-term liquid assets.\nEFFECTS OF INFLATION...USBANCORP's asset and liability structure is primarily monetary in nature. As such, USBANCORP's assets and liabilities tend to move in concert with inflation. While changes in interest rates may have an impact on the financial performance of the banking industry, interest rates do not necessarily move in the same direction or in the same magnitude as prices of other goods and services and may frequently reflect goverment policy initiatives or economic factors not measured by a price index.\nCAPITAL RESOURCES...Total shareholders' equity at December 31, 1993, was $116.6 million. This represented an increase of $33.6 million or 40.5% from the December 31, 1992, level due to the completion of the secondary common stock offering and from the retention of earnings (net of dividends paid) during 1993. On February 10, 1993, USBANCORP completed the sale of 1,150,000 shares of common stock at an offering price of $24.50 per share. This provided the Company with $26 million in proceeds after payment of related issuance expenses. Approximately $1.4 million of the offering proceeds were used to redeem the remaining unconverted Series A Preferred Stock on April 7, 1993. Of the offering proceeds, $2 million was downstreamed as a capital infusion into Three Rivers Bank on April 5, 1993, in connection with the Integra Branches Acquisition to adequately capitalize the $88 million of deposits acquired. The remaining offering proceeds of $22.6 million will be used by USBANCORP for general corporate purposes and other accepted shareholder total return enhancement strategies. Specifically, in 1994 the Company will use approximately $20 million of these funds to assist in the financing of the JSB acquisition. The following table highlights the Company's compliance with the required regulatory capital ratios for each of the periods presented:\nAs the previous table indicates, the Company exceeds all regulatory capital ratios for each of the periods presented. The significant increase in each of the regulatory capital ratios at December 31, 1993, was a direct result of the successful secondary common stock offering discussed earlier. Furthermore, each of the Company's subsidiary banks are considered \"well capitalized\" under all applicable FDIC regulations. While remaining committed to maintaining this \"well capitalized\" designation, the Company will prudently pursue throughout 1994 appropriate strategies to improve its leveraging and use of capital to enhance total shareholder return.\nThe Company's declared common stock cash dividend per share was $.86 for 1993 which was a 14.7% increase over the $.75 per share dividend for 1992. The current dividend yield on the Company's common stock now approximates 3.5% compared to an average Pennsylvania bank holding company yield of approximately 2.5%. The Company remains committed to a progressive total shareholder return which includes a competitive common dividend yield.\nFUTURE OUTLOOK...The Company will look to build upon the successes achieved in 1993 as we begin to address the challenges and opportunities of 1994. Numerous strategies are being explored to ensure that the Company continues to provide a progressive total shareholder return. Paramount among the challenges faced is the Company's desire to better leverage its capital strength. The successful acquisition of JSB, which is expected to be consummated by the end of the second quarter of 1994, will be a key element in helping to leverage the Company's capital base. The Company will also leverage its capital base by a more extensive use of the borrowing capabilities available from the Federal Home Loan Bank now that each of its subsidiary banks is a member. In 1994, USBANCORP will also execute its announced treasury stock repurchase program with the intent, dependent upon market circumstances, to buy back up to 5% of the total common shares outstanding. Management will continue to re-evaluate its dividend policies throughout the year in an ongoing effort to ensure a competitive dividend yield. Each of these actions will be directed to the goal of improved capital usage and leverage.\nThe Company also expects to improve its core financial performance by focusing on several key areas in 1994: continued diversification of the earning asset mix emphasizing more reliance on loans rather than investments as a source of return; restructuring of the investment portfolio to obtain yield enhancements while maintaining credit quality and adequate liquidity; careful, policy-controlled use of hedging tools such as derivative products to aid in the overall management of interest rate and market value risk; continued growth of key non-interest income generating businesses such as the Trust Company, mortgage servicing, and the wholesale cash processing division; diligent control of non-interest expense growth with ongoing focus on achieving further productivity improvements; and reduced loan loss provision levels provided that the Company continues to maintain better than peer asset quality and net charge-off levels. Successful execution of these strategies will provide for growth in earnings per share which the Company believes is a critical element to enhancing total shareholder value. Without the JSB acquisition, which will initially be moderately dilutive to earnings per share (exclusive of certain non-recurring acquisition charges) and book value, and prior to consideration of the effect of the SFAS NO.109 benefit in 1993, management generally expects to recognize an earnings per share improvement of between 7.5% and 10.0% in 1994.\nOverall corporate performance in 1994 will be greatly affected by the consummation of the JSB acquisition which is expected to occur during the second quarter of 1994. USBANCORP anticipates recognizing approximately six months of earnings in 1994 from this latest acquisition; for the year ended December 31, 1993, JSB reported net income of $3,361,000. The Company will also recognize monthly after-tax purchase accounting net charges of approximately $120,000. Additionally, non-recurring acquisition expenses, including such items as severance and professional fees, will be recognized in the quarter of consummation and are estimated to approximate $1,700,000 after-tax. Finally, the Company will issue approximately 982,000 additional common shares to effect the merger. Each of these items in significant impact to the financial performance reported by USBANCORP during 1994. Management continues to believe that the JSB acquisition will become accretive to the Company's earnings during 1996 once all cost reductions and earnings enhancement opportunities have been successfully identified and implemented.","section_15":""}
{"filename":"904255_1993.txt","cik":"904255","year":"1993","section_1":"ITEM 1. BUSINESS.\nOVERVIEW\nAirTouch Communications, formerly PacTel Corporation (the \"Company\"), is one of the world's leading wireless telecommunications companies, with significant cellular interests in the United States, Germany, and Japan. The Company's worldwide cellular interests represented 75.3 million POPs and more than 1.2 million subscribers on a proportionate basis at December 31, 1993. In the United States, the Company has 34.9 million POPs and controls or shares control over cellular systems in ten of the thirty largest markets, including Los Angeles, San Francisco, San Diego, Detroit, and Atlanta. Internationally, the Company has 40.4 million POPs and holds significant ownership interests, with board representation and substantial operating influence, in national cellular systems operating in Germany, Portugal, and Sweden and in cellular systems under construction in three major metropolitan areas in Japan, including Tokyo and Osaka. The Company is also the fourth largest provider of paging services in the United States, based on industry surveys, with approximately 1.2 million units in service at December 31, 1993.\nThe following table sets forth the Company's POPs and proportionate subscribers at December 31, 1993.\nPROPORTIONATE POPS SUBSCRIBERS(1) ---- ------------- (In thousands)\nDomestic Cellular: Southern California........................ 15,551 436 San Francisco Bay Area..................... 3,075 104 Sacramento Valley.......................... 1,817 67 Michigan\/Ohio(2)........................... 8,866 267 Georgia and Kansas\/Missouri................ 4,825 172 Other domestic interests................... 755 ------ ------ Domestic Total........................... 34,889 1,046 ------ ------ International Cellular: Germany(3)................................. 23,378 144 Portugal................................... 2,254 9 Japan(4)................................... 10,332 Sweden..................................... 4,437 7 ------ ------ International Total...................... 40,401 160 ------ ------ Worldwide Total.......................... 75,280 1,206 ====== ====== _______________ (1) Domestic proportionate subscriber data does not include subscribers to cellular systems over which the Company does not have or share operational control. For a list of such systems, see \"Domestic Cellular.\"\n(2) POPs and proportionate subscribers for the Michigan\/Ohio region reflect both the Company's 50% interest in a partnership with Cellular Communications, Inc. (\"CCI\") and the Company's ownership of approximately\n12% of the equity in CCI at December 31, 1993. (3) Includes POPs and proportionate subscribers represented by a 2.25% interest which, under the terms of the cellular license, the Company is under a current obligation to sell to small and medium-sized German businesses. See \"International Cellular-Germany.\" (4) Three regional cellular systems in Japan in which the Company has an ownership interest are under construction and are expected to commence operations by the end of 1994.\nOn December 2, 1993, the Company sold 68,500,000 shares of common stock, par value $.01 per share (the \"Common Stock\") representing 13.9% of the total number of outstanding shares, in an initial public offering (the \"Offering\"). The net proceeds to the Company from the Offering were approximately $1.5 billion. The remaining 86.1% of the Company's outstanding Common Stock is owned by Pacific Telesis Group (\"Telesis\"). On March 10, 1994, the Telesis Board of Directors approved a distribution to Telesis shareowners of all of the Common Stock of the Company owned by Telesis (the \"Spin-off\"). The distribution, which will be tax-free, will be effective as of April 1, 1994 and will be made on a one-for-one basis to Telesis shareowners of record as of March 21, 1994.\nINVESTMENT CONSIDERATIONS\nThe following factors, in addition to the other information contained elsewhere herein, should be considered carefully in evaluating the Company and its business.\nRELATIONSHIP BETWEEN THE COMPANY AND TELESIS\nIn February 1993, the California Public Utilities Commission (\"CPUC\") instituted an investigation of the Spin-off for the purpose of assessing any effects it might have on the telephone customers of Pacific Bell, the California telephone subsidiary of Telesis. On November 2, 1993, the CPUC issued a decision authorizing Telesis to proceed with the Spin-off. On December 3, 1993, two parties filed applications for rehearing with the CPUC and the CPUC staff filed a petition to modify the decision, all of which were denied on March 9, 1994. Under California law, judicial review of the CPUC decision is available only by petition for writ of certiorari or review to the California Supreme Court, and any such petition must be filed by early April 1994. In the event the California Supreme Court were to review and reverse the CPUC's decision, no assurance can be given that the CPUC might not reach a new decision materially less favorable to the Company. In addition, a substantial period of time could elapse before final resolution of these issues should a review be granted. Based on the Company's evaluation of the legal and factual matters relating to the investigation and matters of public and regulatory policy, the Company believes that any request for judicial review would be without merit and that the California Supreme Court will deny any such request.\nUntil the Spin-off is effected, Telesis will control the Company. The Company currently has a variety of contractual relationships with Telesis and its affiliates, including an agreement with respect to the allocation of corporate opportunities arising prior to the Spin-off. See \"Transactions between the Company and Telesis.\"\nIn order to minimize any potential confusion concerning the relationship of the Company to Telesis, the Company changed its name to \"AirTouch Communications\" in March 1994. In addition, the Company has agreed not to use\nthe name \"PacTel,\" including the names \"PacTel Cellular\" and \"PacTel Paging,\" after the second anniversary of the Spin-off. Furthermore, the Company's right to use the PacTel name prior to that date is non-exclusive. As a result, after the Spin-off Telesis will be free to market wireless services under the \"PacTel\" name. The Company may initially encounter difficulty in marketing its wireless services under its new brand names, and has incurred, and expects to continue to incur, certain expenses in connection with the transition to such names.\nSHARES ELIGIBLE FOR FUTURE SALE; EFFECT OF THE SPIN-OFF ON THE PUBLIC MARKET\nThe Spin-off will involve the distribution of 424,000,000 shares of Common Stock of the Company to the shareowners of Telesis. Substantially all of such shares would be eligible for immediate resale in the public market. The Company is unable to predict whether substantial amounts of Common Stock will be sold in the open market in anticipation of, or following, the Spin-off. Sales of substantial amounts of Common Stock in the public market, or the perception that such sales might occur, whether as a result of the Spin-off or otherwise, could adversely affect the market price of the Common Stock. Purchasers of the Company's Common Stock prior to the Spin-off are referred to the statement in the CPUC's decision that anyone who might seek to control the Company should be mindful that under Section 854 of the California Public Utilities Code, acquisition of control of a utility without CPUC authorization is void.\nCOMPETITION\nThe offering of cellular and paging services in each of the Company's markets is expected to become increasingly competitive. In Germany, for example, Mannesman Mobilfunk GmbH (\"MMO\") will face competition from a third cellular operator in 1994, and in Japan, the Company's systems will compete against three other cellular operators. In the United States, where the Company currently has one competitor in each cellular market, competition is expected to increase as a result of recent regulatory and legislative initiatives. The Federal Communications Commission (\"FCC\") has licensed specialized mobile radio (\"SMR\") system operators to construct digital mobile communications systems on existing SMR frequencies in many cities throughout the United States. When constructed, these systems are expected to be competitive with the Company's cellular service. One such operator began offering service in the Los Angeles metropolitan area in early 1994, and has announced plans to initiate service in the San Francisco Bay Area by mid-1994 and in several other metropolitan areas, including Dallas, by mid-1995. In addition, the FCC has recently allocated radiofrequency spectrum for seven personal communications services (\"PCS\") licenses in each market. Auctions for such licenses are expected to begin in late 1994. See \"Domestic Cellular-Competition\" and \"Domestic Paging-Competition.\" Although the Company plans to pursue PCS licenses, whether through consortia or otherwise, the Company may not be successful in expanding the scale of its wireless services coverage. In such event, the Company may be adversely affected.\nThe Company has been conducting tests with both code division multiple access (\"CDMA\") and time division multiple access (\"TDMA\") digital technology and intends to determine which technology to deploy in particular markets based upon customer service and efficiency considerations. Any commercial implementation by the Company of CDMA-based service in its markets may be delayed up to two years beyond the introduction of TDMA-based service by the Company's competitors in certain such markets. Thus, to the extent the Company deploys CDMA in certain markets, it may not be able to offer digital service\nfor a period during which its competitors may have deployed TDMA. See \"Domestic Cellular-Technology.\"\nThe Company faces competition in its pursuit of new wireless telecommunications opportunities in international markets. In deciding which companies should engineer, build and manage their new telecommunications systems, most countries have adopted merit-based selection criteria to ensure the necessary expertise and financial strength. The Company believes that its technical and operating expertise have been critical in its success in attracting desirable joint venture partners and winning international wireless licenses. However, in prior application processes it is possible that foreign countries may have taken into account the fact that the Company was a wholly owned subsidiary of Telesis. Although the Company believes that its capitalization will be more than adequate to allay any concerns that licensing authorities or joint venture partners might have regarding the Company's financial strength, there can be no assurance that this will be the case. See \"Future Funding Requirements.\" Recently, several countries have included an \"auction\" element among the criteria used to determine the award of wireless licenses. While auction procedures have not been adopted by any of the other countries in which the Company is competing or planning to compete for wireless licenses, such procedures may be adopted in the future. In the United States, the Omnibus Budget Reconciliation Act of 1993 authorized the FCC to auction future licenses for services utilizing radio frequency spectrum, including PCS. Where auction procedures apply, whether domestically or internationally, there can be no assurance that the Company will be willing or able to compete as successfully as certain of its competitors possessing greater financial resources.\nREGULATION\nThe licensing, construction, operation, sale and acquisition of wireless systems, as well as the number of competitors permitted in each market, are regulated by the FCC and its counterparts in other countries. In addition, certain aspects of the Company's domestic wireless operations, including the setting of rates, may be subject to public utility regulation in the state in which service is provided. The cellular regulatory structure in California is the subject of a CPUC investigation, which is in rehearing. An order adopted by the CPUC in October 1992 would have imposed on cellular operators an accounting methodology to separate wholesale and retail costs, permitted resellers to operate a switch interconnected to the cellular carrier's facilities, and required the unbundling of certain wholesale rates to the resellers. These unbundled rates would have been calculated by applying a rate of return of 14.75% to the cost basis of assets utilized by such reseller switch. The issues raised in the rehearing were consolidated with a new investigation, which commenced in December 1993, into the regulation of all wireless services provided in California. The CPUC instituted the investigation to review the wireless market in light of the entrance of multiple new competitors in 1994 and 1995, including PCS and SMR. The order proposes a dominant\/nondominant regulatory framework whereby cellular carriers would be classified as dominant carriers as controllers of facilities characterized by the CPUC as \"bottleneck\" facilities, and may be subject to cost-based rate regulation. The CPUC also intends to explore regulation that would require cellular carriers to offer the radio portion of cellular service on an unbundled basis from all other aspects of services they may offer. Nondominant carriers, including PCS and SMR, would be subject to minimal regulation involving registration, record inspection and consumer safeguards. The Company believes, and will urge in the proceeding, that regulation of cellular carriers in California should be reduced, not increased, in order to\nencourage competition and innovation. The CPUC also is investigating whether California cellular carriers have complied with the CPUC's rules regarding the filing of applications and permits to locate and construct cell sites. No assurance can be given that the outcome of either of these investigations, or regulatory changes that may be enacted by federal, state or foreign governmental authorities, will not have a material adverse effect on the Company's business.\nThe Company, as an affiliate of Telesis' subsidiaries Pacific Bell and Nevada Bell, is also currently subject to the 1982 consent decree known as the Modification of Final Judgment (\"MFJ\"), which imposes lines-of-business restrictions on affiliates of the Bell operating companies. The Company will remain subject to the MFJ until the Spin-off. The Company believes, based on the terms of the MFJ and its underlying policies, that the MFJ will cease to apply to it thereafter, although there can be no assurance that will be the case because the MFJ does not expressly provide that former affiliates of Bell operating companies are not subject to the MFJ. For a further description of the restrictions imposed by the MFJ and the reasons for the Company's belief that the MFJ will not apply to it after the Spin-off, see \"Regulation-MFJ.\"\nFinally, the FCC granted all cellular licenses in the United States with an initial 10-year term. The Company has filed an application for renewal of its Los Angeles cellular license, whose initial term expired in October 1993. The Company expects that its application will be granted, although an opposing party has filed an informal objection and a petition to deny the Company's application, alleging violations of FCC rules and the Communications Act of 1934. See \"Regulation-Federal.\" The Company's licenses in San Diego, Detroit, Cleveland and Sacramento expire in October 1994 and all of its other significant domestic cellular licenses expire before the end of 1996. While the Company believes that each of these licenses will be renewed based upon FCC rules establishing a presumption in favor of licensees that have complied with their regulatory obligations during the initial license period, there can be no assurance that any license will be renewed. The licensing authorities in Germany and Portugal have not established any procedures for renewal of the cellular licenses held by MMO and Telecel Comunicacoes Pessoais, S.A. (\"Telecel\"). Such licenses expire in 2009 and 2006, respectively. See \"Regulation.\"\nPOTENTIAL DILUTION OF FUTURE OPERATING RESULTS\nThe Company is currently pursuing opportunities to expand its wireless operations in international markets and intends to participate actively in the license application process for PCS in the United States. To the extent that the Company is successful in its pursuit of new wireless licenses, the Company will incur start-up expenses, which, at least in the short-term, will have a dilutive effect on the Company's future earnings. For example, primarily as a result of start-up losses from MMO, Telecel, and the Company's other international wireless ventures, the Company had international equity losses of $37.5 million (including a $20.7 million tax benefit recognized as a result of the adoption of SFAS 109), $38.5 million (including a $32.0 million tax benefit) and $21.4 million for 1993, 1992, and 1991, respectively.\nFUTURE FUNDING REQUIREMENTS\nThe Company expects that proceeds from the Offering and cash flows from operations will provide the Company with adequate capital to satisfy its projected funding requirements through mid-1995. The Company, however, currently is pursuing or planning to pursue several wireless license awards\nand is continually considering acquisitions and other new opportunities for future growth both domestically and internationally. If the Company is more successful than anticipated in its pursuit of license opportunities, the Company may require substantial additional external funding prior to mid-1995 for any related acquisition costs, auction fees, construction costs or start-up losses. Furthermore, in October 1995, the Company has certain obligations to purchase additional equity in CCI. These obligations are expected to require the Company to raise substantial additional funding through bank borrowings or public or private sales of debt or equity securities. See \"Domestic Cellular-Joint Ventures-New Par.\" The Company believes that it will be able to access the capital markets on terms and in amounts that will be adequate to accomplish its objectives, although there can be no assurance that that will be the case. The Company was essentially debt-free at year-end 1993 and that has been assigned a BBB+ implied senior debt rating by Standard & Poor's based in part upon that agency's analysis of the expected future financial performance of the Company. See Item 7, \"Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources.\"\nCCI TRANSACTION\nConcurrent with the formation in 1991 of an equally owned joint venture with CCI (\"New Par\"), the Company purchased 5% of the equity in CCI, agreed to purchase additional equity in CCI and obtained the right to acquire all of CCI's remaining equity in stages over the next several years. The Company currently owns approximately 12% of the equity in CCI and has the right to purchase up to an additional 15.5% of CCI's equity in the open market, through privately negotiated transactions or otherwise, through October 1995. Pursuant to an agreement between the Company and CCI, in October 1995 the Company is obligated to purchase up to approximately $720 million of stock and stock options in CCI, depending on the number of shares tendered to CCI in a related redemption. The per share purchase price underlying such obligation is $60. The stock and options that the Company is obligated to purchase represented approximately 25% of CCI's equity on a fully diluted basis at December 31, 1993. The Company also has the right (but not the obligation) during an 18-month period commencing in August 1996 to purchase the remainder of CCI (but excluding any assets and related liabilities other than CCI's interest in New Par unless otherwise agreed by the partners) at a price that reflects appraised private market value of CCI (excluding such assets and related liabilities) at that time. In the event that the Company does not exercise such right, New Par effectively terminates and CCI may be obligated to sell its assets, including those relating to the joint venture, to a third party. If New Par assets (and related liabilities) are sold within a specified period (not to exceed two years) at less than the appraised price, the Company will be obligated to effect certain \"make-whole\" payments to CCI's stockholders based upon the amount of the shortfall. The Company's exercise of its rights to purchase additional equity in CCI will depend upon the Company's evaluation of the market for CCI's stock, CCI's business, prospects and financial condition, other investment opportunities available to the Company, prospects for the Company's business, general economic conditions, and other factors. No assurance can be given that the Company's investment in CCI will be favorable to the Company or that any sale of the joint venture assets, if required, will be consummated at a price that will eliminate the Company's make-whole obligation. See \"Domestic Cellular-Joint Ventures-New Par.\"\nIMPLICATIONS OF LICENSEE OWNERSHIP STRUCTURE\nThe Company holds most of its domestic cellular properties through partnership\ninterests, a number of which are controlling interests. In addition, the Company's interests in international wireless licenses are held almost exclusively through foreign corporations in which the Company is a significant, but not controlling, shareholder. Many of these partnerships or corporations were formed in connection with the applications for new licenses. Others, like New Par and an equally owned joint venture with McCaw Cellular Communications, Inc. (\"CMT Partners\"), were formed as part of the Company's strategy to create regional networks. Under the governing documents for certain of these partnerships and corporations, decisions as to the timing and amount of cash distributions may require a greater percentage vote than that held by the Company. Although the Company has not been materially impeded by the nature of its wireless ownership interests from pursuing its corporate objectives, no assurance can be given that it will not experience difficulty in this regard in the future. The Company expects to enter into similar arrangements in the future as it participates in consortia to pursue wireless opportunities.\nFLUCTUATIONS IN THE VALUE OF WIRELESS LICENSES\nA substantial portion of the Company's assets consists of interests in entities holding cellular licenses, the value of which will depend significantly upon the success of the operations of such entities and the growth and future direction of the industry generally. Values of licenses also have been affected by fluctuations in the level of supply and demand for such licenses. Any transfer of control of an entity holding a domestic license is subject to prior FCC (and possibly state regulatory) approval. Analogous governmental approvals are required for transfers of interests in foreign licenses. Where licenses are held by partnerships or foreign corporations, transfers of interests also are often subject to contractual restrictions. See \"Regulation\" and \"International Cellular.\"\nThe Company believes that major license awards in the next several years will establish two or more cellular competitors in most of the world's developed countries and that international cellular opportunities thereafter will arise primarily through acquisitions or combinations with existing license holders or through awards by developing countries. Investment returns from acquisitions of interests in existing entities holding wireless licenses or from licenses acquired through auctions may be lower than those resulting from the Company's prior license awards because of the substantial purchase prices required to acquire such interests. In addition, licenses in developing countries may involve risks beyond those encountered in developed countries.\nEXCHANGE RATE FLUCTUATIONS\nForeign currency exchange rates are increasingly material to the Company's results of operations. The Company evaluates the risk of significant exchange rate volatility and its ability to hedge as part of its decision whether to pursue an international opportunity. A significant weakening against the dollar of the currency of a country where the Company recognizes revenues or earnings may adversely affect the Company's results, while any weakening of the dollar against such currency could have an adverse effect if the Company is obligated to make significant foreign denominated capital investments in such country. The Company attempts to mitigate the effect of foreign currency fluctuations through the use of foreign currency contracts and local banking accounts.\nRADIOFREQUENCY EMISSIONS CONCERNS\nMedia reports have suggested that certain radiofrequency (\"RF\") emissions from portable cellular telephones might be linked to cancer. The Company has collected and reviewed relevant scientific information and, based on such information, is not aware of any credible evidence linking the usage of portable cellular telephones with cancer. The FCC currently has a rulemaking proceeding pending to update the guidelines and methods it uses for evaluating RF emissions in radio equipment, including cellular telephones. While the proposal would impose more restrictive standards on RF emissions from low power devices such as portable cellular telephones, it is anticipated that all cellular telephones currently marketed and in use will comply with those standards. Additional concerns have been expressed about the safety of emissions from cellular facilities which transmit calls to subscriber's telephone handsets. The Company's facilities are licensed by the FCC and comply with the exposure levels set by the FCC. The CPUC has also opened an investigation into the safety of cellular facilities licensed in California. The Company submitted extensive scientific data to the CPUC to support its conclusion that cellular emissions will cause no adverse health effects. A CPUC staff report issued in December 1993 concluded that the CPUC is unlikely to adopt stricter requirements than the FCC absent convincing evidence of risk.\nDOMESTIC CELLULAR\nThe Company is one of the largest providers of cellular services in the United States, with interests in some of the most attractive cellular markets based upon total population and demographic characteristics. The Company's United States cellular interests represented 34.9 million POPs and more than 1 million proportionate subscribers at December 31, 1993. The Company has or shares operational control over cellular systems in Los Angeles, San Francisco, San Diego, Atlanta, Detroit, Cleveland, San Jose, Sacramento, Cincinnati, and Kansas City. These cities represent ten of the thirty largest cellular markets in the United States. The Company also has or shares operational control over cellular systems in 34 additional markets, including Columbus, Dayton and Toledo, Ohio, and owns minority interests in cellular systems serving 10 other markets, including Dallas\/Fort Worth, Tucson, and Las Vegas.\nThe FCC licenses only two cellular systems in each market. One license (the \"Block B\" license) was initially reserved for applicants affiliated with a company engaged in the wireline telephone business (the \"wireline licensee\") and the other license (the \"Block A\" license) was initially reserved for a non-wireline licensee. Through FCC license applications and grants, the Company acquired controlling interests in wireline licensees in San Diego, the greater Los Angeles area, including Oxnard and Ventura, and the greater Sacramento area, including Stockton and Reno. Following the FCC's initial license awards, the Company has aggressively pursued the acquisition of additional cellular interests throughout the United States. In evaluating its acquisition opportunities, the Company considers the attractiveness of the market for cellular services, the Company's ability to control or significantly influence the operations of the system and the opportunity to create a regional network through integration with the Company's existing systems or by acquiring licenses in adjacent markets.\nThe following table sets forth as of December 31, 1993, (i) by region the markets in which the Company owns an interest in a cellular system, (ii) whether each such system is the wireline or non-wireline licensee, (iii) the total population of the market served by such system, (iv) the Company's percentage ownership in the operator of the system, and (v) the Company's POPs based on its percentage ownership.\nMARKETING\nThe Company aggressively markets its cellular services through its own sales force and arrangements with independent agents, as well as newspaper and radio advertising, toll-free telephone numbers and affiliations with nationwide groups of cellular carriers under the brand names MobiLink and Cellular One. In certain markets, the Company's cellular service is sold through resellers who, pursuant to FCC requirements, are allowed to purchase blocks of cellular telephone numbers and access to cellular services at wholesale rates for resale to the public. Agents are independent contractors who solicit customers for the Company's cellular service, and typically include automobile dealers, specialized electronics stores and department stores. The Company generally pays its agents a commission for each subscriber who uses the Company's service for a specified period and makes residual payments to the agent based on the subscriber's ongoing service charges. Recently, the Company has been placing greater emphasis on residual payments in order to align more closely the payment of sales commissions with revenues. The Company is continually seeking new methods of marketing its cellular service. In 1991 and 1992, the Company introduced cellular telephone rental programs in the systems it contributed to New Par and in its Atlanta system. Under these rental programs, new subscribers rent cellular telephones for a nominal monthly fee and commit to a two-year subscription. The Company believes that this program, which eliminates the need to purchase a cellular telephone, has contributed significantly to subscriber growth and has reduced customer disconnects in these markets.\nThe Company and fourteen other cellular companies have formed an alliance to market their Block B (wireline) cellular service in the United States and Canada under the brand name MobiLink. The group has set common standards for cellular service, set up cellular telephone service centers, established standard dialing codes for customer service, dialing instructions and technical assistance and offers a 24-hour customer service line. Members of the MobiLink group utilize new software that makes it much easier for subscribers to make and receive telephone calls when they are traveling within the area covered by the MobiLink network. This national network became operational in July 1993 and covers more than 80% of the population of the United States and Canada. Through licensing agreements, MobiLink expects to cover virtually all of North America.\nThe Company's block a (non-wireline) cellular systems in the San Francisco Bay Area and in Michigan\/Ohio are part of the North American Cellular Network, an alliance of non-wireline cellular operators that offers service under the Cellular One brand name in broad areas throughout the United States and Canada. The North American Cellular Network allows subscribers to travel from city to city within the coverage area and have their calls and custom calling features, such as call waiting, three-way calling and call-forwarding, follow them automatically without having to notify callers of their location or to rely on access codes.\nIn June 1993, the Company and three other cellular operators entered into an arrangement to simplify and enhance calling services for their subscribers in the southeastern United States. The new service, SouthReach, connects the Company's Georgia regional network with nearby systems of other operators, enabling cellular customers in an area covering more than 85,000 square miles to make and receive intermarket calls as easily as calls in their home markets. Another feature of SouthReach allows subscribers to continue calls without interruption while traveling between systems served by the four operators.\nSERVICES\nIn addition to providing high quality wireless telephone service, in most markets the Company makes available to subscribers custom calling services such as voice-mail, call-forwarding, call-waiting, three-way calling, no-answer and busy transfer. In some markets, the Company also provides news, weather, sports and financial news recordings. The Company charges its subscribers for service activation, monthly access, per-minute airtime and custom calling features. The Company pays the local telephone service company directly for interconnection of cellular telephone calls with the wireline telephone network. Subscribers are billed directly by their selected long distance carrier or the Company provides the billing services for a fee charged to the long distance carrier. The Company generally offers a variety of pricing options, most of which combine a fixed monthly access fee and per-minute charges.\nService is generally arranged on a month-by-month basis with access fees paid in advance. The Company has developed a variety of rate plans to serve specific market segments. The Company has roaming agreements with other cellular carriers across the United States and Canada that permit the Company's subscribers to receive service while they are traveling in cellular markets other than those served by the Company.\nThe Company maintains a customer service department in each of its cellular markets for billing and service inquiries. Using a toll free telephone number, customers are able to report any problems and obtain up-to-date information with respect to their accounts. In each of its markets, the Company has technicians on call on a 24-hour basis. Through the use of sophisticated monitoring equipment, these technicians are able to check the performance of the cellular network.\nThe Company also has improved its business operations to deliver a higher level of customer service. The Company recently developed automated systems designed to sharply reduce the time it takes to activate service for a new customer. Paperless activation now allows the Company to perform a credit check and activate a cellular telephone in approximately ten minutes. Previously, this process consumed an hour or more. The Company is exploring the possibility of introducing remote phone programming capability in connection with its digital cellular service.\nNEW SERVICES\nWIRELESS DATA. The Company is developing additional revenue sources such as wireless data for delivery over its existing cellular networks. In 1992, the Company established a wireless data division which focuses on opportunities for using the Company's cellular network to transmit data. For example, the Company and three other cellular carriers were the primary developers of the United States' first nationwide cellular data service for United Parcel Service (\"UPS\"). This service allows UPS drivers, who record package tracking information on an electronic clipboard, to send the information over the networks of cellular carriers throughout the country, including the Company's networks, to UPS' private network and ultimately to UPS' mainframe computers.\nThe Company and several other cellular operators have formed a consortium to test packet-switching technology, which the Company believes will create significant new opportunities in the wireless data market. Packet-switching technology is designed to allow data to be transmitted much more quickly and efficiently than the current circuit-switching technology. Packet-switching\nuses the intervals between voice traffic on cellular channels to send packets of data, instead of tying up dedicated cellular channels. The packets of information, which may be transmitted using several different channels, are reassembled and directed to the correct party at the receiving end. It is expected that the development of this technology will make it possible for cellular carriers to offer a broad range of cost-effective wireless data services, including fax and electronic mail transmissions and communications between laptop units and local area networks or other computer databases. In November 1993, the Company announced that it expects to begin offering data transmission services using packet-switching technology in most of its domestic markets by the end of 1994.\nPERSONAL COMMUNICATIONS SERVICES. The Company is actively exploring opportunities to provide PCS. While the marketing and technical elements of PCS are not yet well defined, the Company anticipates that PCS will involve a network of small, low-powered transceivers placed throughout a neighborhood, business complex, community or metropolitan area to provide customers with mobile voice and data communications. PCS subscribers could have dedicated personal telephone numbers and would communicate using small digital radio handsets that can be carried in a pocket or purse. PCS also could be used for data transmission utilizing computers, portable facsimile machines or other devices. Through an affiliate of Telesis, the Company currently is conducting trials under experimental licenses for PCS granted by the FCC. The Company believes that it is capable of offering PCS over its existing cellular networks and plans to do so where there is sufficient demand for such services. The Company is also planning to participate actively, through consortia or otherwise, in the auction process for PCS licenses.\nLONG DISTANCE SERVICES. The Company believes that following the Spin-off it will no longer be subject to the restrictions of the MFJ. Among other things, freedom from the MFJ would permit the Company to begin providing long distance telephone services across local access and transport area (\"LATA\") boundaries. As an affiliate of a Bell operating company, the Company currently is prohibited, absent a court waiver, from directly connecting calls across LATAs, even within its contiguous operating areas. See \"Regulation-MFJ.\" Such calls must be directed to the subscriber's interexchange carrier, which separately charges the subscriber for long distance services. Unencumbered by the MFJ, the Company would be able to complete its subscribers' interexchange calls by a variety of methods, including through an exclusive arrangement with a single interexchange carrier or by establishing its own microwave network. Either of these methods would create a new source of revenue and allow its subscribers to avoid a separate long distance charge.\nTECHNOLOGY\nThe Company is an industry leader in cellular technology. The Company's Los Angeles network was the first to introduce cell site sectorization and overlay\/underlay techniques which simultaneously provide increased coverage in high traffic areas and umbrella coverage of difficult terrain. The Company was an early proponent of research into CDMA and worked with Qualcomm Incorporated (\"Qualcomm\") and others to develop this technology. In July 1993, the Cellular Telephone Industry Association adopted an interim standard based on Qualcomm's CDMA technology. In 1991, the Company became the first to deploy microcells, which make use of low power antennas located significantly farther from cell sites than permitted by earlier technology, thereby allowing coverage inside buildings, in canyons and tunnels and in other areas that are difficult or impossible to serve with conventional cellular technology. Microcell technology also includes a fast hand-off capability, which is valuable in\ndowntown settings where a greater number of antennas at lower power settings allows the network to handle high traffic densities.\nThe Company also has developed advanced network design and management tools. The Company's proprietary software predicts cell site coverage, which is critical in engineering new cellular networks and in making design improvements to existing systems. Other proprietary software developed by the Company detects and analyzes system problems, allowing the Company to react quickly, often before the problem noticeably affects service quality.\nThe Company introduced digital cellular service in its network in the San Francisco Bay Area in October 1993 and plans to introduce digital service in its other regional networks by late 1995. Currently, in most markets the radio transmission between the cellular telephone and the cell site is an analog transmission, and both the cellular telephone and the transmitting equipment are designed to send and receive voice signals exclusively in this mode. The Company believes that digital technology will offer many advantages over analog technology, including substantially increased capacity, improved voice quality, greater call privacy, lower operating costs and the opportunity to provide improved data transmissions. Because existing analog cellular telephones will not be able to receive digital transmissions from the cell site, the Company expects that the transition by subscribers who prefer digital service will occur over a number of years. During such transition, cellular systems will maintain transmitting equipment to serve both formats and it is expected that manufacturers will make dual-mode cellular telephones capable of sending and receiving both analog and digital transmissions in order to meet subscriber needs for roaming.\nThe Company has been conducting tests with both CDMA and TDMA and intends to determine which to deploy in particular markets based upon customer service and efficiency considerations. The Company has agreed to purchase CDMA infrastructure equipment for Los Angeles and certain other markets as well as CDMA-compatible cellular telephone handsets for sale in such markets following the installation of the system. The Company will continue to evaluate the choice of a digital standard in all of its markets. In certain markets, the Company may defer the installation of digital equipment until competitive conditions or capacity constraints warrant digital service.\nCOMPETITION\nThe cellular services industry in the United States is highly competitive. Cellular systems compete principally on the basis of network quality, customer service, price and coverage area. The Company's chief competition in each market is from the other cellular licensee. In certain markets, the Company also competes at the retail level with resellers. The Company believes that its technological expertise, emphasis on customer service, large coverage areas, and development of new products and services make it a strong competitor.\nSeveral recent FCC initiatives indicate that the Company is likely to face greater competition in the future. The FCC has permitted SMR system operators to construct digital mobile communications systems on existing SMR frequencies in many metropolitan areas throughout the United States. When constructed, these multi-site configuration systems will offer interconnected mobile telephone service and are expected to compete with the Company's cellular service. One such operator, NexTel Communications, Inc., initiated service in the Los Angeles metropolitan area in early 1994 and has announced plans to initiate service in the San Francisco Bay Area by mid-1994 and in several\nother metropolitan areas, including Dallas, by mid-1995. At this time, the Company is unable to predict the extent to which NexTel's service will successfully compete with cellular service. In March 1994, NexTel and MCI announced the formation of a strategic alliance to provide wireless services under the MCI brand name throughout the United States. As a result, the Company's domestic cellular systems may encounter such competition sooner then previously anticipated.\nPursuant to the FCC's decision to allocate radio frequency spectrum for PCS, seven new licenses will be granted: two 30 MHz blocks, one 20 MHz block and four 10 MHz blocks. (By comparison, the two cellular carriers in each market currently have 25 MHz of spectrum each.) Each 30 MHz license will authorize the holder to provide service in one of 51 geographic market areas covering the United States referred to as Major Trading Areas (\"MTAs\"), and each of the other licenses will cover one of 492 Basic Trading Areas (\"BTAs\"), representing smaller areas within the MTAs. The rules adopted by the FCC permit a licensee to acquire up to 40 MHz in a single service area. Cellular licensees (defined as entities owning more than 20% of a cellular system) are not restricted from participating in PCS in areas outside of their cellular service areas, although they are only permitted to obtain a 10 MHz block in their cellular service areas. The Company expects that certain PCS services will be competitive with the Company's cellular service.\nAT&T's announcement in August 1993 that it will merge with McCaw may increase the level of competition that the Company faces in Los Angeles and Sacramento, where the Company's cellular operations compete with McCaw. The merger will permit McCaw to use the AT&T brand name in marketing its cellular services and give McCaw access to AT&T's sales, customer service and distribution channels, as well as to the research and development capabilities of AT&T Bell Laboratories. The Company and McCaw jointly operate cellular systems in San Francisco, San Jose, Dallas, Kansas City and certain other markets through CMT Partners. See \"Joint Ventures CMT Partners.\"\nJOINT VENTURES\nNEW PAR. In August 1991, the Company and CCI formed New Par, to which CCI contributed its cellular systems, located primarily in Ohio, and the Company contributed its cellular systems in Michigan and Ohio. New Par is equally owned by CCI and the Company and is governed by a four-person committee, with two members appointed by each company.\nThe Company and CCI have entered into an agreement (the \"Merger Agreement\") under which CCI will, in October 1995, offer to redeem up to 10.04 million shares of its redeemable stock at $60 per share and the Company is obligated to purchase from CCI shares or stock options representing in the aggregate approximately 2.4 million shares at a price of $60 per share, less the exercise price in the case of stock options (the \"MRO\"). The Company is obligated to purchase from CCI at $60 per share a number of newly issued shares of stock equal to the number of shares purchased by CCI in the MRO. Pursuant to the Merger Agreement, the Company acquired approximately 5% of CCI and obtained the right to acquire all of CCI's remaining equity in stages over the next several years. The Company currently owns approximately 12% of CCI and has the right to purchase up to an additional 15.5% of CCI's equity in the open market, through privately negotiated purchases or otherwise, through October 1995.\nBeginning in August 1996, the Company has the right, by causing CCI to redeem all of its redeemable stock not held by the Company (the \"Redemption\"), to\nacquire CCI, including its interests in New Par and such other CCI assets and related liabilities as the Company and CCI may agree upon, at a price per share that reflects the appraised private market value of New Par (and such other CCI assets and related liabilities as the Company and CCI agree shall be retained) determined in accordance with an appraisal process set forth in the Merger Agreement. The Company has the opportunity to evaluate up to three different appraisal values during the 18-month period beginning in August 1996, prior to determining whether to cause the Redemption. The Company will finance the Redemption by providing to CCI any necessary funds.\nIn the event that the Company does not exercise its right to cause the Redemption, CCI is obligated to promptly commence a process to sell itself (and, if directed by the Company, the Company's interest in New Par). In the event that the Company does not direct CCI to sell the Company's interest in New Par, such partnership will dissolve and the assets will be returned to the contributing partner. CCI may, in the alternative, purchase the Company's interest in CCI or CCI and New Par, as the case may be, at a price based upon their appraised values determined in accordance with the Merger Agreement. If CCI or its interest in New Par is sold within certain specified time periods not to exceed two years for a price less than the appraised private market value, the Company is obligated to pay to each other CCI stockholder a specified percentage of such shortfall.\nIn connection with the Merger Agreement, Telesis delivered a letter of responsibility in which it agreed, among other things, to continue to own a controlling interest in the Company. Telesis and CCI have agreed to the termination of such letter of responsibility at the time that Telesis no longer has a controlling interest in the Company in exchange for the provision by the Company of substitute credit assurance, consisting of a $600 million letter of credit and a pledge of up to 15% of CCI's shares on a fully diluted basis, for the Company's obligations in connection with the MRO and for the payment of any make-whole obligation, respectively.\nCMT PARTNERS. In September 1993, the Company and McCaw formed CMT Partners, an equally owned partnership that holds interests in cellular systems operating in San Francisco, San Jose, Dallas, Kansas City and certain adjacent suburban areas. CMT Partners is governed by a four-person committee consisting of two members from each company. The Company's contributions to the partnership included its 61.1% interest in Bay Area Cellular Telephone Company (\"BACTC\"), which operates in the San Francisco and San Jose markets, and its 34% interest in the non-wireline licensee operating in the Dallas\/Fort Worth market, as well as certain assets and liabilities of its retail reseller operations in the San Francisco Bay Area. McCaw contributed its 32.9% interest in BACTC, as well as its interests in the nearby Vallejo, Santa Rosa and Salinas\/Monterey systems. McCaw also contributed its interests in Kansas City, Missouri, Lawrence, Kansas and St. Joseph, Missouri. In addition, the Company purchased McCaw's interests in the Wichita and Topeka, Kansas cellular systems for $100 million. The partnership has a 99-year term. Upon dissolution of CMT Partners its assets will be sold unless either the Company or McCaw elects to have the assets distributed in kind. If that election is made, the Dallas\/Fort Worth interest would be distributed to McCaw, the Kansas\/Missouri interests would be distributed to the Company, and the interests in the other systems held by the partnership would be distributed pro rata to both partners.\nINTERNATIONAL CELLULAR\nThe Company has been highly successful in obtaining significant interests in cellular licenses in some of the world's most attractive markets. The\nCompany's cellular interests in Germany, Portugal and Japan reflect government preferences or requirements that local owners hold at least a majority interest in their telecommunications licenses. However, the Company has board representation and substantial operating influence in each of its cellular systems outside of the United States. The Company has the second largest ownership position in MMO and three of the Japanese companies, and currently has the third largest ownership position in Telecel. In addition, agreements among the shareholders of MMO and Telecel require the Company's consent on such matters as annual budgets and business plans, capital calls, the incurrence of certain recourse debt and certain other fundamental corporate actions. The Company has appointed the director of engineering of each of its cellular systems in Germany, Portugal and Japan. Each of these directors is responsible for network buildout and technical operations.\nGERMANY\nThe Company currently holds a 29.15% interest and is the second largest shareholder of MMO, the joint venture that holds the second of three national digital cellular licenses in Germany. The Company's interest in MMO includes a 2.25% interest which, under the terms of MMO's license, the Company is under a current obligation to sell to small or medium-sized German businesses. MMO began commercial operations in June 1992 and had approximately 493,000 subscribers at December 31, 1993. The system presently covers approximately 94% of the population, including all of the major cities and highways.\nMMO's network, known as \"D2,\" was the world's first commercial cellular system to be operated on the pan-European Global System for Mobile Communications (\"GSM\"). The Company played the lead role in the design and construction of the D2 network. In June 1991, the government extended MMO's license by four years to December 31, 2009 in exchange for MMO's agreement to extend the network to the former East Germany. The Company believes that Germany's dense population, high per capita income and attractive workforce profile make it a promising market for cellular services. Cellular use may have been constrained in Germany by the quality of the state-owned analog system, which operated without competition until MMO initiated operations in June 1992, and by relatively high analog cellular telephone and service prices. Cellular penetration in Germany is approximately 2.2%, as compared to approximately 5.5% in the United States. There can be no assurance, however, that cellular penetration in Germany will be comparable to that in the United States.\nThe other principal shareholders of MMO and their ownership interests are Mannesmann AG (\"Mannesmann\"), a German industrial engineering company and steel manufacturer (55.02%, including 2.25% held in trust for sale to small and medium-sized German businesses), Deutsche Genossenschaftsbank, a German commercial bank (10.29%), and Cable & Wireless plc, a British telecommunications company (5.03%). At December 31, 1993, MMO's contributed capital was approximately DM 1.62 billion (US $931 million), of which the Company's contribution has been approximately DM 472 million (US $271 million). MMO does not expect to require further capital contributions from its shareholders and will fund its remaining capital needs through operating cash flows and bank loans. MMO has a DM 1.1 billion credit facility, of which DM 518 million (US $298 million) had been drawn down at December 31, 1993.\nOPERATIONS. The Company has had significant participation in the design and operation of the D2 network. In addition to appointing the director of engineering, the Company provided a large technical staff during the design and construction phase of operations. The Company also has contributed to the development and installation of MMO's customer service and billing system and\nhas assisted with MMO's business planning and marketing, sales and distribution arrangements. The Company continues to influence MMO's operations through its right to appoint two of the eight members of the shareholder board, including the deputy chairman.\nThe Company believes that D2's success in attracting customers reflects the significantly improved quality of the digital system, falling equipment prices, D2's customer-oriented service and aggressive marketing. For example, all D2 subscribers have 24-hour toll-free telephone access to customer service. Demand is expected to increase as hand-held cellular telephones, as well as roaming on the GSM standard within Europe, become more available.\nMMO utilizes three channels of distribution. Resellers have provided the most significant portion of D2's subscribers to date. While they receive a discount from the retail rate based on customer longevity, the Company believes that such resellers nonetheless are an efficient means of distribution. D2 also makes use of an increasing number of third-party agents and dealers. Agent commissions generally are paid per new subscriber and are based primarily on the volume of subscribers generated by the dealer. The remainder of D2's customers are acquired through direct sales.\nWhile D2's per-minute charges are relatively high by United States standards, they are comparable to those of the competing digital cellular system. Unlike in the United States, there is no additional charge for long distance service within Germany. In addition, because D2 is a national franchise, there is no roaming charge within Germany, although such a charge is imposed for international roaming. In further contrast to United States systems, the calling party in Germany pays for cellular calls. Accordingly, cellular users in Germany are generally less reluctant than their counterparts in the United States to make available their cellular telephone numbers.\nCOMPANY RIGHTS AND OBLIGATIONS. Under MMO's joint venture agreement, the Company has significant participation in management. The Company's consent is required for such matters as increases in capital contributions, incurrence of certain recourse debt, material transactions with affiliates and any fundamental corporate transactions. In addition, the Company must consent to the adoption of annual budgets and business plans (which cover, among other matters, distributions to the partners, external financing and projected reserves). MMO's senior management group consists of six members, of which the Company has appointed the director of engineering and, jointly with Mannesmann, the director of marketing and the director of operations. In addition, the Company and Mannesmann each appoint one member to a technical committee, which is charged with resolving matters presented by the director of engineering and must do so unanimously. The joint venture agreement provides that any transfer of MMO shares is subject to the other partners' rights of first refusal. Under the terms of the license, any transfer of an ownership interest in MMO must be approved by the German telecommunications ministry. Mannesmann and the Company have committed in principle to maintaining a substantial share of ownership in MMO until certain debt is retired pursuant to agreements with MMO's banks.\nCOMPETITION. Deutsche Bundespost Telekom (\"DBPT\"), the state-owned telephone and postal carrier, currently is MMO's sole competitor. It operates three mobile telephone networks. DBPT's \"D1\" network also operates on the GSM standard. D1 commenced operations in July 1992 and had a reported 480,000 subscribers at January 1, 1994. Although D1 benefits from DBPT's name recognition and a well-developed distribution channel integrated with the landline service, the Company believes that D2 competes favorably with the\nstate-owned digital system based upon network quality and customer service. DBPT also operates \"B-Netz,\" which is an older system with fewer than 20,000 subscribers. It is no longer marketed and is used primarily by government agencies. DBPT's third system, \"C-Netz,\" is an analog cellular system covering all of Germany that began operations in 1985 and is reportedly near capacity, with approximately 800,000 subscribers reported at January 1, 1994.\nIn February 1993, the German government awarded a third digital license to E-Plus Mobilfunk GmbH. The third digital system, known as \"E1,\" will reportedly emphasize buildout initially in eastern Germany, where telephone density is much lower, and is expected to begin commercial operations in Berlin and Leipzig by the spring of 1994. The terms of the license require that over 90% of the population of Germany be covered by 1997. The pricing for this service has not been announced. The Company expects E1 to be a significant competitor in the German cellular market. Because E1 will use a different set of frequencies than those of the GSM cellular systems being constructed throughout Europe, E1 subscribers will in general not be able to make calls from or receive calls on such GSM systems without a \"dual-mode\" handset.\nThe German government has stated that no additional licenses will be issued for cellular or cellular-like services through 1996.\nPORTUGAL\nThe Company owns a 23% interest in Telecel, the cellular company that was awarded one of two national GSM licenses by the Portuguese government in October 1991. Telecel began commercial service in October 1992, covering all of Portugal's major cities and highways, and had approximately 40,000 subscribers at December 31, 1993. Telecel currently covers approximately 92% of the population and is required under the terms of its license to cover 99% by October 1996.\nThe Company's equity interest in Telecel will increase by up to an additional 12% if Portugal changes its law to allow non-residents to own a greater than 25% interest in its telecommunications licenses. Under an agreement among the shareholders of Telecel, until January 1, 1997 the Company is required to fund Telecel's capital as if it held a 35% equity interest. To the extent that the Company's funding exceeds the amount it would be required to contribute as a 23% shareholder in Telecel, such funding is required to be in the form of five-year interest-free loans. If Portuguese law is amended to permit greater than 25% ownership by non-residents, the Company has the assignable obligation to convert its loans into an additional 12% equity interest (or such lesser percentage as is permitted under the new law). In the event that Portugal does not relax its non-resident ownership restrictions before October 1996, the Company has agreed to nominate a third party to purchase and convert the loans, subject to the approval of the shareholders of Telecel. As of December 31, 1993, Telecel's contributed capital was approximately ESC 18.3 billion (US $103.4 million), of which the Company's contribution was approximately ESC 6.4 billion (US $36.2 million). The Company expects that it will be required to contribute approximately an additional $18 million to Telecel through 1995, after which Telecel's capital needs will be met through operating cash flow and borrowings. At December 31, 1993, Telecel had approximately ESC 6 billion (US $33.9 million) in short-term commercial paper and other short-term borrowings outstanding.\nIn addition to the Company, Telecel's shareholders include Espirito Santo e Irmaos, SA (34.33%), an affiliate of Espirito Santo-Sociedade de Investimentos, SA, a Lisbon-based international finance and investment company; Amorim, Investimentos e Participacoes SGPS, SA (34.33%), a diversified Portuguese company; Centrel, Gestao e Comparticipacoes, SA (6.34%), a Portuguese telecommunications manufacturer; and Eurofon of Portugal, Inc. (2%), a subsidiary of LCC Incorporated, a United States software and engineering company.\nOPERATIONS. The Company appoints Telecel's director of network engineering and operations and provides other seconded employees. The Company has played the lead role in the design and implementation of Telecel's network. The Company also is active in many other areas of Telecel's business, including marketing, strategic planning, management information systems, and customer service. The Company anticipates that it will continue to have significant involvement in Telecel's operations.\nTelecel has a distribution network of exclusive agents that account for a majority of customer activations. These agents, through their own outlets and those of subagents, represent several hundred points of sale in Portugal. Telecel also has a direct sales force which accounts for the balance of the activations. There are no resellers in Portugal. Telecel's pricing plan is slightly more expensive than that of its sole competitor, Telecomunicacoes Moveis Nacionais (\"TMN\"), which is operated by the three Portuguese state-owned wireline telephone companies.\nCOMPANY RIGHTS AND OBLIGATIONS. Under the Telecel shareholders' agreement, the Company appoints the director of engineering, who occupies one of five positions on the board of directors, and three of the eleven members of Telecel's shareholder board. As a greater than 20% shareholder, the Company's consent is necessary for certain fundamental corporate actions such as issuances of stock or debt convertible into stock, as well as for the incurrence of recourse debt, material transactions with affiliates and the approval of business plans and budgets. Telecel's shareholders may not transfer their shares to non-shareholders without government approval for five years following the grant of the license. Any transfer, other than in connection with the conversion of the Company's loans to equity or a transfer to a parent or affiliate of the transferring partner, is subject to the other shareholders' rights of first refusal.\nCOMPETITION. TMN was awarded the competing GSM license in Portugal, and commenced operations at approximately the same time as Telecel. TMN's digital service was reported to have approximately 31,000 subscribers at January 1, 1994. Management believes that Telecel competes favorably with TMN based upon coverage, network quality, service offerings, customer service, distribution network and price. Cellular service has been available in Portugal since September 1989 when TMN initiated analog cellular service. TMN's analog system, which utilizes technology similar to that of the German C-Netz system, was estimated to have approximately 31,000 subscribers at January 1, 1994.\nJAPAN\nThe Company is the second largest shareholder in three companies licensed to build and operate digital cellular systems in the Tokyo, Kansai (Western) and Tokai (Central) regions of Japan. These three systems are expected to be operational by the end of 1994 and are expected to be able to offer service to approximately 74 million people, or 60% of the Japanese population, by 1997. In February 1994, the Company agreed to acquire a 4.5% interest in a fourth\ncompany, which plans to build a digital cellular system that will reach about 70% of the population of the Kyushu\/Okinawa region when it begins offering service in 1996. There are approximately 15 million people in the region, which is the fourth most populous of Japan's 11 cellular regions.\nTokyo Digital Phone Company (\"TDP\"), in which the Company owns a 15% interest, was granted a cellular license in April 1992 for the Tokyo metropolitan region, covering 39 million people. Service in metropolitan Tokyo is scheduled to begin by mid-1994. The Company also owns a 13% stake in Kansai Digital Phone Company (\"KDP\"), which is licensed to serve the cities of Osaka, Kyoto and Kobe, a region with a population of approximately 21 million people. Central Japan Digital Phone Company (\"CDP\"), in which the Company owns a 13% interest, holds a license for the Tokai region of over 14 million people. Nagoya is the principal city in this region, which is located between Tokyo and Kansai. KDP and CDP received their licenses in August and December, 1992, respectively. Both companies expect to begin service by December 1994. The three companies' contributed capital through December 31, 1993 was approximately Y26 billion (US $232.5 million), of which the Company's share was approximately Y3.6 billion (US $32.2 million). The Company does not expect to be required to make additional capital contributions to TDP, KDP and CDP. The principal shareholders of each of the three companies include Japan Telecom (a long distance carrier in Japan) as lead partner, a regional railway company, Cable & Wireless plc and Toyota Motor Corporation.\nThe Company believes that favorable demographics make Japan an attractive cellular market. Currently, cellular penetration in Japan is approximately 1.6%, which is attributable to several factors, including the relatively high activation, access and usage charges that have characterized the current Nippon Telegraph and Telephone (\"NTT\") analog system, the only recent introduction of non-wireline competitors, and the traditional requirement of the Japanese Ministry of Post and Telecommunications (\"MPT\") that customers lease or rent (not purchase) cellular phones. The MPT has adopted regulations, effective April 1, 1994, permitting the purchase of cellular handsets.\nOPERATIONS. The Company has been integrally involved in the design of each of the systems through its appointment of the director of engineering for each company. The Company also has contributed in other areas, including assisting with preparation of business plans. The Company is working with senior management of each venture to ensure that the systems operate to the extent possible as one network with common marketing and pricing policies and equipment offerings.\nCOMPANY RIGHTS AND OBLIGATIONS. The Company has the right to appoint one member to each board of directors. To date, the Company's appointee to the board of directors of each company has also functioned as the director of engineering.\nCOMPETITION. Cellular competition is anticipated to be substantial in Japan, with up to four digital cellular operators in each of the markets served by TDP, KDP and CDP. Currently, there are two existing analog operators in each region: NTT, which provides nationwide service, and one other provider for each region. Each of the analog providers has been awarded additional spectrum to introduce digital service by the end of 1994. In addition to the licenses held by the Company's joint ventures, another digital license has been awarded in each of the Company's markets and the recipients have made in-service commitments similar to those made by the Company's systems.\nSWEDEN\nIn October 1993, the Company acquired a 51% interest in NordicTel Holdings AB (\"NordicTel\"), one of three providers of GSM cellular services in Sweden, for $153 million. The Company also contributed $5.4 million to NordicTel's equity capital. The other principal shareholders of NordicTel are Vodafone Group Plc, with an 18.5% interest, and AB Volvo, Trellswitch Intressenter AB, and Spectra-Physics AB, the three of which hold in the aggregate a 28.5% interest. The Company also holds an option, exercisable between July 1 and September 30, 1994, to purchase from Vodafone an additional 6.75% of NordicTel's equity for approximately $20 million. The Company expects that it will be required to contribute an additional Skr 282 million (US $35.7 million) to NordicTel in 1994. NordicTel's capital requirements thereafter are expected to be met through operating cash flow. NordicTel is planning an initial public offering in 1994.\nNordicTel's cellular service, which is marketed under the name \"Europolitan,\" began offering service in late 1992. The system presently covers approximately 80% of the population and all of the major cities. Under the terms of the authority granted by the Swedish government, NordicTel will be required to cover all of the major highways and all cities with a population greater than 10,000 by the end of 1995. Cellular penetration in Sweden, which has a population of 8.7 million and more than 800,000 cellular subscribers at December 31, 1993, is among the highest in the world.\nCOMPANY RIGHTS AND OBLIGATIONS. Under the NordicTel shareholders agreement, the Company is entitled to appoint five of the nine members of NordicTel's board of directors. In addition, under such agreement, 80% shareholder approval is required for material corporate actions. The approval required for certain of such actions will decrease to 51% following NordicTel's initial public offering.\nCOMPETITION. NordicTel competes with two other cellular operators in Sweden. Telia Mobitel AB, a wholly owned subsidiary of the state-owned telephone company, operates one GSM network and two analog networks. Comvik GSM AB operates the third GSM network. Nearly all of Sweden's cellular subscribers belong to one of Telia Mobitel's two analog networks, which had no GSM competition until late 1992, when all three GSM networks commenced operations. Subscriber growth on the three Swedish GSM networks has been hampered to date by limited GSM system coverage and a shortage of digital cellular telephone handsets, which is expected to ease significantly.\nDENMARK OPTION. Prior to the Company's acquisition, NordicTel held a 20% interest in Dansk Mobiltelefon I\/S (\"DMT\"), one of two GSM cellular licensees in Denmark, through a wholly owned subsidiary, NordicTel Dk (\"Dk\"). Certain shareholders of DMT have taken the position that the indirect acquisition by the Company of a controlling interest in Dk would, under the terms of the DMT joint venture agreement, trigger a transfer at book value to them of Dk's interest in DMT. NordicTel and the Company oppose that position, and the issue is expected to be submitted to arbitration for a binding decision.\nIn order not to trigger such a transfer, NordicTel sold Dk to the shareholders of NordicTel other than the Company (the \"Dk Shareholders\") immediately prior to the Company's acquisition of its 51% interest in NordicTel. NordicTel also undertook to be responsible to the government of Denmark, jointly with the Dk Shareholders, for fulfillment of DMT's obligations under the terms of its license. The DK Shareholders have in turn agreed to hold NordicTel harmless for any loss caused by such undertaking. NordicTel concurrently entered into\nan agreement with the Dk Shareholders under which it has the right to purchase a 100% interest in Dk in the event that the arbitration concludes, among other things, that the book-value transfer of Dk's interest in DMT would not be triggered. The Company concurrently entered into an agreement with the Dk Shareholders under which it has the right to purchase a 49% interest in Dk. The Company's right is exercisable only if NordicTel is unable to exercise its right to repurchase Dk in its entirety. Under such agreements, the Dk Shareholders also have the right to sell either a 100% interest in Dk to NordicTel (exercisable only if NordicTel's right to purchase is exercisable) or a 49% interest in Dk to the Company (exercisable only if the Company's right to purchase is exercisable).\nBELGIUM\nIn July 1993, the Company was chosen by Belgium's state-owned telephone company, Belgacom, from among twenty applicants to provide technical, operating and marketing support for Belgacom's GSM network, which commenced operations on January 1, 1994. Operating under the name \"Proximus,\" the network covers all of the major cities, including Brussels, Antwerp, Liege and Ghent. By the end of 1994, the system is expected to reach approximately 85% of the country and 95% of Belgium's 10 million people. The Company is negotiating with Belgacom to acquire a 25% interest in a new mobile communications joint venture, which will hold Belgacom's analog and GSM cellular telephone operations. The Company currently expects that the terms of its participation in such joint venture will be finalized by mid-1994.\nNEW OPPORTUNITIES\nThe Company plans to actively pursue new opportunities to acquire interests in wireless systems throughout the world. Such opportunities are expected to arise through awards of new licenses and through the acquisition of interests in existing licenses.\nThe Company believes that its proven technical, operating and marketing expertise make it a highly desired participant in consortia formed to pursue new international opportunities. The Company led the design and construction of MMO's and Telecel's nationwide digital cellular systems. The Company also is integrally involved in the design of all three of its digital cellular systems in Japan. The Company believes that the technical expertise it developed in the United States and Germany was a significant factor in the success of the license applications of its consortia in Portugal and Japan and in the Company's selection as technical adviser to Belgacom.\nThe Company measures each international investment against such criteria as demographic factors, the degree of economic, political and regulatory stability, the quality of local partners and the degree to which the Company would control or meaningfully participate in management. Although the Company assesses each opportunity independently, its strategy is to leverage off each venture to evaluate and pursue other telecommunications opportunities in such markets. For example, the Company has won paging licenses in Spain and France and intends to pursue cellular opportunities in both countries. In addition, the Company is now pursuing opportunities to provide paging and long distance services in Germany, where MMO commenced operations in June 1992.\nThe Company's primary focus in pursuing licenses is Europe and Asia because the Company believes that these regions currently provide the highest potential for value creation, although the Company also is considering opportunities in other parts of the world. The Company is currently competing\nor planning to compete for wireless licenses in South Korea, Italy, the Netherlands, Spain and France.\nSOUTH KOREA. Korea Mobile Telecom Corporation, a subsidiary of the government-owned telephone company, is currently the sole provider of cellular service in South Korea. In August 1992, the government's award of the second national cellular license to a consortium not involving the Company was rescinded following allegations of improper influence. In late February 1994, the second license was awarded to a partially formed consortium consisting of a subsidiary of POSCO (Pohang Iron and Steel), and the Kolon Group, which hold interests of 15% and 14%, respectively. Telesis had been a 20% shareholder of the POSCO joint venture. However, all prior agreements between POSCO and Kolon and their respective joint venture partners have been voided and the makeup of the remainder of the consortium is uncertain. According to the announcement of the award, foreign participants would be allowed a maximum interest in the consortium of 20.2%, with no single interest greater than 10%. The Company is actively pursuing a share in the consortium.\nITALY. The state-owned telephone company, \"SIP,\" operates three cellular networks in Italy: two analog cellular systems and one GSM system. The Company has an indirect interest of 10.2% in Omnitel, one of two consortia prequalified by the government to apply for the second license. Ing. C. Olivetti is the lead partner in Omnitel, with an interest of 35.7%; other significant partners include Bell Atlantic (11.6%), Cellular Communications International, Inc. (10.3%), Telia Mobitel AB (6.8%), Lehman Brothers (5.6%) and Mannesmann AG (4.5%). An award of the license is expected by mid-1994.\nTHE NETHERLANDS. The Netherlands has one cellular operator, the state-owned PTT Telecom B.V., which operates two analog systems and is constructing a GSM system. The Netherlands Parliament is currently reviewing legislation that would provide for the awarding of a second GSM license, and a request for proposals is expected in mid-1994. The Company has signed a memorandum of understanding for pursuit of the second GSM license with a consortium including ABN AMRO Bank N.V., Cable & Wireless plc, Radio Holland Cellular Services B.V., De Nationale Investeringsbank N.V., PGEM Energy, a Dutch utility, and Heidemij Holding N.V.\nSPAIN. Telefonica, the partially state-owned telephone company, operates three cellular networks in Spain: two analog systems launched in 1982 and 1990 and a GSM system that commenced service in 1993. The Spanish government is expected to release a request for proposals in mid-1994, for an additional GSM cellular license to be awarded in late 1994 or early 1995. The Company intends to pursue this license actively.\nFRANCE. Cellular service is available in France over two analog and two digital systems, with state-owned France Telecom and Societe Francaise du Radiotelephone, a private concern, operating one of each. The French government is expected to announce the procedure for the award of a PCS license, with service expected to be launched in 1996. Although the Company has held discussions with several potential partners, it has not yet reached an agreement for the pursuit of the PCS license.\nTECHNOLOGY\nGSM. The Company's cellular systems in Germany and Portugal conform to the GSM digital cellular standard. Developed by a standards body within the European Telecommunications Standards Institute with substantial input from the Company's engineers, the GSM standard is a wide-band TDMA standard\nsubstantially different from United States TDMA technology and has been adopted by more than 50 countries worldwide, including all those in the European Union and others such as Australia, New Zealand, Singapore and Hong Kong.\nThe GSM standard allows users to place and receive calls on any GSM cellular telephone while traveling in all countries utilizing the standard. A subscriber identification module (\"SIM\") card is necessary in order to receive GSM cellular service. Each subscriber receives a SIM card, which is about the size of a credit card, that contains a microchip identifying the subscriber. By inserting the card into any GSM telephone, customers can make calls from the telephone and have the calls billed directly to them. The card also allows the subscriber's home GSM system to locate the subscriber on any GSM network throughout the world. In addition to these conveniences, the SIM card can reduce fraud significantly, because each customer has a unique personal identification number that must be used in conjunction with the card. MMO was the first GSM system to offer commercial service.\nPERSONAL DIGITAL CELLULAR (\"PDC\") STANDARD. The technology utilized by TDP, KDP and CDP represents Japan's entry into second-generation cellular communications. The PDC standard uses narrow-band Japanese TDMA technology and allows enhanced roaming potential and expanded supplementary services potential. To provide service to subscribers away from their home regions, TDP, KDP and CDP are implementing automatic roaming throughout their combined coverage areas. Subscribers of any of the companies will be able to initiate and receive calls anywhere within the combined coverage area. Two separate digital system frequencies will be utilized throughout Japan: NTT's network and one competing operator will dominate the 800 MHz band while the main operators in the 1500 MHz band will be TDP, KDP and CDP and the other new market entrant.\nDOMESTIC PAGING\nThe Company offers local, regional, statewide, and nationwide narrow-band data and messaging, or \"paging,\" services in a total of 100 markets in 15 states, including many of the largest metropolitan areas in the United States, such as Atlanta, Dallas\/Fort Worth, Detroit, Houston, Jacksonville, Kansas City, Las Vegas, Los Angeles, Louisville, Miami, Orlando, Phoenix, Portland, Sacramento, Salt Lake City, St. Louis, San Antonio, San Diego, the San Francisco Bay Area, Seattle and Tampa\/St. Petersburg. At December 31, 1993, the Company had approximately 1.2 million paging units in service and, based upon industry surveys, was the fourth largest provider of paging services in the United States. The Company's growth strategy is to expand into new markets through start-ups or acquisitions, to increase its share in existing markets by providing superior customer service, to refine its mix of distribution channels, including further expansion of its retail sales and to provide new narrow-band PCS services.\nPAGING SERVICES. The Company currently offers four types of paging services: numeric display, alphanumeric, tone-only and tone and voice. Numeric display service alerts the subscriber and then displays a short message, usually a telephone number entered by the calling party via a touch-tone keypad. More than 90% of the Company's subscribers use numeric display units. The Company's paging revenues consist primarily of monthly charges for paging service and equipment rental.\nThe Company also offers nationwide coverage on its own private carrier paging frequency through an inter-carrier agreement with other paging providers and\nas a reseller of a nationwide common carrier paging service. A nationwide system permits a subscriber to receive pages in most metropolitan areas of the United States, including markets not otherwise served by the Company. In addition, the Company offers voice retrieval service, which allows callers to leave voice messages instead of telephone numbers, and then alerts the subscriber that a message has been left. Subscribers then call in to retrieve the message, much as they would with a remotely accessible answering machine. The Company is actively exploring new opportunities to provide narrow-band PCS services, including acknowledgment paging and news services. In 1992, the Company began offering its Page Line News Service in San Diego, which provides continuously updated news, financial reports, weather and sports information. The Company now offers Page Line News Service in Los Angeles, Miami, Detroit, Dallas, Phoenix and Seattle. In 1993, the Company introduced KidTrack, a value-priced service specifically designed for families with young children. KidTrack was introduced in the Company's Arizona markets and is now available in San Diego and Las Vegas as well.\nMARKETING. The Company utilizes a decentralized marketing approach, tailored to each market, to promote and sell its paging services. In all of its markets, the Company relies on both direct and indirect sales channels. The Company conducts its direct marketing through its sales, service and customer service representatives, who are located in the Company's local offices in each market. The Company's indirect sales channels generally consist of resellers, who purchase paging services from the Company in bulk quantities at a wholesale monthly rate, and agents and retailers, who sell only pagers and refer purchasers to the Company for service at the Company's rates. The Company typically pays agents and retailers a commission for such referrals. The Company, which was one of the first to offer paging service through retail outlets, has greatly expanded its retail marketing efforts and now has sales arrangements with over 2,000 retail locations nationwide. Sales of pagers and service through retail outlets generally result in lower selling costs per unit sold. In addition, the Company has found that a substantial number of the units added through retail channels are sold to customers who are new to paging.\nCOMPETITION. The Company's paging operations face intense competition from local or regional carriers as well as from carriers with a broad nationwide presence. Paging systems compete primarily on the basis of reliability, geographic coverage, customer service and price. The Company believes that its extensive experience in the paging business and emphasis on cost control and customer service make it an effective paging competitor.\nIn June 1993, the FCC allocated spectrum and adopted rules (which were amended in February 1994) that authorize the operation of narrow-band PCS, which is expected to be competitive with the Company's paging services. Narrow-band PCS offerings over this spectrum could include advanced voice paging, two-way acknowledgment paging, data messaging, electronic mail and facsimile transmissions. The FCC plans to issue nationwide, regional, MTA and BTA licenses for narrow-band PCS and to license certain response channels to existing licensees. The method for selecting licensees is yet to be determined, and licenses may be auctioned. Existing cellular and paging providers will be eligible for such licenses under the FCC's rules. While the Company believes that it will be able to provide many PCS-type services over its existing paging networks, competition is expected to intensify when PCS offerings become available in the Company's paging markets. Technological advances in the telecommunications industry are expected to continue to create new services or products competitive with the paging services currently offered by the Company.\nINTERNATIONAL PAGING\nPORTUGAL. Through Telecel, the Company owns a 23% interest in Telechamada-Servico de Chamada de Pessoas, S.A. (\"Telechamada\"), Portugal's first nationwide private paging company. Telechamada began service in October 1992, on the same date that Telecel's nationwide cellular service became available, six months ahead of schedule. Telechamada received its license in April 1992 and offers numeric and alphanumeric paging services. At December 31, 1993, Telechamada had approximately 4,900 subscribers. Telechamada estimates that it currently covers 91% of the population.\nSPAIN. The Company holds a 17.5% indirect interest in Sistelcom-Telemensaje, S.A., which was awarded a nationwide paging license by the Spanish government in August 1992. By January 1993, the digital paging system was operational in 14 cities, including Madrid, Barcelona and Seville. Sistelcom-Telemensaje offers tone-only, numeric and alphanumeric paging services. At December 31, 1993, Sistelcom-Telemensaje had approximately 17,600 subscribers. The license requires that all provincial capitals and all cities with a population of greater than 150,000 be covered by September 1994.\nTHAILAND. The Company provides nationwide paging service in Thailand through a 49% interest in PerCom Service Limited (\"PerCom\"), which has served all of Thailand's major population centers since February 1991, and through a wholly owned subsidiary that has provided service in Bangkok since 1987. These companies operate together under the name PacLinkTM and jointly served approximately 98,000 subscribers at December 31, 1993. PerCom is obligated under its license to pay between 25% and 40% of its annual paging revenues to the Communications Authority of Thailand (\"CAT\") during the fifteen-year term of the license, with guaranteed payments of approximately $57 million over such period, of which approximately $3.8 million had been paid as of December 1993. Under the Bangkok paging license, the Company is obligated to pay 33% of its annual paging revenues to CAT, with guaranteed payments of at least $12.4 million required during the remaining term of the license.\nFRANCE. In September 1993, the French government awarded one of three national digital paging licenses to Omnicom, a joint venture in which the Company has an 18.5% interest. The Company's principal partners in Omnicom are Bouygues S.A., Societe Generale, Preussen Elektra Telekom GmbH and DeNeufliz-Schlumberger-Mallet Finance. Omnicom will construct and operate a nationwide digital paging network based on ERMES, the European radio messaging standard, and expects to begin service in Paris by the end of 1994. The license requires that 20% of the population be covered by the end of 1994 and 60% by the end of 1999.\nOTHER SERVICES\nTELETRAC. The Company, through its subsidiary Location Technologies, Inc. (\"LTI\"), has a 51% interest in Teletrac, a partnership that offers vehicle location services. Teletrac currently has operations in Los Angeles, Detroit, Chicago, Dallas\/Fort Worth, Houston and Miami, and has licenses to operate in more than 100 additional cities. The Los Angeles system, the first to commence commercial operations, began offering such services in January 1991.\nTeletrac is in the start-up phase of its operations and to date its services have not achieved a significant degree of commercial acceptance. Teletrac reported net losses before taxes of $41.6 million, $49.1 million and $36.8 million in 1993, 1992 and 1991, respectively. The Company does not expect Teletrac's operations to be profitable for several years. The Company intends\nto take actions to reduce Teletrac's operating losses and does not plan to expand Teletrac's operations significantly until its services achieve a higher level of commercial acceptance. In February 1994, the Company reduced Teletrac's workforce by 30%, to approximately 200 employees. The Company is exploring various opportunities to expand the market for Teletrac's services and is continuously evaluating and considering other commercial applications of its technology and radio spectrum.\nTECHNOLOGY. Teletrac locates vehicles through the precise calculation of the time a radio signal takes to travel from a vehicle equipped with a Teletrac vehicle location unit (\"VLU\") to Teletrac's land-based receiver stations. Teletrac's proprietary software automatically determines the vehicle's location based on the time the signal arrives at each station, the geographic relationship between the stations, and the speed at which the signal travels. This location is then displayed on a computer-generated map. This process takes only seconds and is generally accurate to within 100 feet, depending on building obstruction, vehicle direction and radio wave interference.\nPRODUCTS AND SERVICES. Teletrac offers two primary services: fleet tracking and stolen vehicle location. Fleet tracking allows subscribers to monitor the location of all of their vehicles equipped with VLUs, such as taxicabs, ambulances, municipal buses and intra-city delivery trucks. A subscriber may use the fleet tracking service to determine, for example, which vehicle is closest to a customer or whether a vehicle is deviating from its route. In addition, an alert button located in the vehicle allows a driver to signal an emergency. Teletrac had approximately 24,000 fleet tracking units in service at December 31, 1993. Teletrac's stolen vehicle location service is automatically triggered when a car alarm connected to a VLU is not deactivated within a short time after being triggered. The VLU will automatically broadcast a signal that will appear on Teletrac's monitors. Teletrac personnel will simultaneously attempt to contact the owner of the car and the police. Teletrac provides the police with information such as the model and license number of the car, as well as its location. The Company also is in the process of introducing an emergency roadside assistance program for subscribers of its stolen vehicle location service. Teletrac had approximately 6,700 stolen vehicle location units in service at December 31, 1993.\nMARKETING. Teletrac's fleet tracking service is marketed through a direct sales force located in the individual markets served, and, for national accounts, through a sales group located in Los Angeles. Teletrac sells the VLUs used for fleet tracking directly to the purchaser of the service at negotiated prices, and charges a monthly fee based on system usage. Teletrac's stolen vehicle location service is marketed by distributors of VLUs, such as automobile and electronics dealerships who purchase them directly from manufacturers. Teletrac is not involved in the sale of such units. Once a customer has purchased a unit, Teletrac receives an activation fee and a monthly service fee thereafter.\nCOMPETITION. In fleet tracking, Teletrac's competitors include satellite services and traditional fleet management services, such as specialized mobile radio, which allows a driver to communicate with a dispatcher. In the stolen vehicle location market, a competitor that uses a substantially different technology began to offer service in several major cities prior to Teletrac, and competes directly with Teletrac in most of its markets. Another competitor using technology similar to Teletrac's offers services in certain of Teletrac's markets.\nJOINT VENTURE. The Company, through LTI, currently owns 51% of Teletrac. North\nAmerican Teletrac (\"NAT\") (the other partner in Teletrac) owns, directly or indirectly, 49%. Prior to March 31, 1995, and if certain conditions have been fulfilled, LTI and NAT may each elect to cause a combination of NAT and LTI. In the combination, the shareholders of LTI and NAT would receive stock in the combined entity in an amount reflecting their indirect interest in Teletrac. The shareholders of NAT may also elect to have the combined entity register its shares in an initial public offering (the \"LTI IPO\"). The LTI IPO must generally occur prior to March 31, 1995.\nThe Company and its affiliates have the right, but not the obligation, to provide capital to Teletrac or the combined entity using convertible notes, prior to the earlier of March 31, 1995 or the LTI IPO. If the Company's affiliates do not purchase such notes, funds may be sought from other sources (subject to certain restrictions). Teletrac also guaranteed a $49.5 million debt of NAT's subsidiary.\nConvertible securities may only be converted after the earlier of the LTI IPO or March 31, 1995. If converted within two years after that date, the conversion rate will generally be 50% of the price at which stock was sold in the LTI IPO (or, if the LTI IPO did not occur, an appraised price). The Company may not convert during that two-year period to the extent the conversion would result in the Company owning more than 70% of the company. After that time, the conversion rate will equal the LTI IPO price until another limitation, based on a 1:9 relative ownership ratio between the former NAT shareholders and the Company, is reached. Thereafter, the conversion rate will equal the fair market value of the shares.\nLONG DISTANCE. The Company presently holds a 10% interest in International Digital Communications (\"IDC\"). IDC provides long-distance telephone service between Japan and over 60 countries, including the United States, to business and residential customers. IDC also offers private leased circuit services within Japan. In 1991, IDC began offering service over a 5,200 mile undersea fiber optic cable, the first such cable to connect Japan directly with the U.S. mainland.\nCREDIT CARD VERIFICATION. In conjunction with Korea Information and Communications Company, a local service provider in South Korea, the Company sells point-of-sale terminals and provides technology and management support for a nationwide credit card verification system. More than 150,000 terminals have been installed, which are linked to a central data base in Seoul. In 1993, the network handled more than 69 million transactions, representing an increase of 35% over the previous year.\nAIR-TO-GROUND SERVICES. The Company also provides air-to-ground telephone services in Elmira, New York, New York City, Atlanta and Houston. The Company has entered into an agreement to purchase additional air-to-ground facilities in a number of other cities, including Denver, Phoenix, Portland, Oregon and Seattle. Air-to-ground telephone service allows subscribers to place calls over the public switched telephone network while in a private airplane.\nINVESTMENT IN QUALCOMM. The Company owns 400,000 shares of common stock of Qualcomm, a publicly held developer of digital mobile communications technology. The Company also holds warrants to purchase approximately 780,000 additional shares of Qualcomm common stock at an exercise price of $5.50 per share.\nEMPLOYEES\nAt December 31, 1993, the Company had approximately 4,695 employees, none of whom is represented by a labor organization. Management considers its relations with employees to be good.\nREGULATION\nThe Company is subject to extensive regulation by federal, state and foreign governments as a provider of cellular, paging and radiolocation services. The Spin-off has been the subject of an investigation by the CPUC, which resulted in a decision adopted on November 2, 1993. Until the Spin-off, the Company will be subject to the restrictions imposed by the MFJ.\nCPUC SPIN-OFF INVESTIGATION\nIn February 1993, the CPUC instituted an investigation of the Spin-off for the purpose of assessing any effects it might have on the telephone customers of Pacific Bell. On November 2, 1993, the CPUC issued a decision in the investigation authorizing Telesis to proceed with the Spin-off. The decision prohibits the Company and subsidiaries of Telesis from agreeing not to compete after the Spin-off and from transferring utility assets, which may include pension funds, out of the California utilities. The decision further requires an independent auditor (selected by and under contract to the CPUC) to perform an audit and file a compliance report with the CPUC to ensure that Telesis and the Company have complied with the terms of the separation as described to the CPUC and that the transaction complies with the conditions imposed by the decision and the CPUC's affiliate transaction rules. The Company believes that the audit will not result in any material liability for the Company. All five Commissioners concurred in the result permitting Telesis to proceed with the Spin-off. Two Commissioners issued partial dissents contending that further proceedings should be held to determine the amount of customer compensation, of no more than $265 million, for pre-1974 cellular research, cellular licenses, and the Company's use of the PacTel name.\nOn December 3, 1993, two parties filed applications for rehearing with the CPUC and the CPUC staff filed a petition to modify the decision, all of which were denied on March 9, 1994. Under California law, judicial review of the CPUC decision is available only by petition for writ of certiorari or review to the California Supreme Court, and any such petition must be filed by early April 1994. The decision whether to grant a petition for a writ of review of a CPUC decision is at the discretion of the California Supreme Court. There is no time limit within which the Court must act on any such petition.\nIn the event the California Supreme Court were to grant review and thereafter reverse the CPUC's decision in a manner adverse to Telesis or the Company, the CPUC could hold further hearings and reach a new decision with respect to the basis for and amount of any potential compensation to Pacific Bell or its customers. Based on the Company's evaluation of the legal and factual matters relating to the investigation and matters of public and regulatory policy, the Company believes that any petition for a writ of review would be without merit and that the California Supreme Court will deny any such petition that might be filed.\nFEDERAL\nThe construction, operation and transfer of cellular systems in the United States are regulated by the FCC pursuant to the Communications Act of 1934, as\namended (\"Communications Act\"). The FCC has promulgated guidelines for construction and operation of cellular systems and licensing and technical standards for the provision of cellular telephone service. For licensing purposes, the United States is divided into separate markets, called Metropolitan Statistical Areas (\"MSAs\") and Rural Service Areas (\"RSAs\"). In each market, the frequencies allocated for cellular use are divided into two equal blocks designated as Block A or Block B. Block B licenses were initially reserved for entities affiliated with a wireline telephone company such as the Company, while Block A licenses were initially reserved for non-wireline entities. Under current FCC rules, a Block A or Block B license may be transferred after FCC approval, but no entity may own any interest in both systems in any one MSA or RSA. The FCC may prohibit or impose conditions on sales or transfers of licenses.\nInitial operating licenses are generally granted for terms of 10 years, renewable upon application to the FCC. Licenses may be revoked at any time and license renewal applications may be denied for cause. The Company has filed an application for renewal of its Los Angeles cellular license, the initial term of which expired in October 1993. The initial terms of the Company's licenses in San Diego, Detroit, Cleveland and Sacramento expire in October 1994 and the initial terms of all of its other significant domestic cellular licenses expire before the end of 1996. The FCC has issued a decision confirming that current licensees will be granted a relicensing presumption (renewal expectancy) if they have complied with their obligations under the Communications Act during the initial period. The FCC's order has been appealed, and oral argument before the United States Court of Appeals has been set for April 1994. Notwithstanding the status of the appeal, the Company believes that the licenses held by entities controlled by the Company will be renewed upon application for relicensing. Although no competing applications for the Los Angeles license were filed, the Company's operations in Los Angeles and its application for renewal are the subject of an informal objection and a petition to deny, both filed by the same party. The filings allege, among other things, that the Company constructed and operates cells in certain outlying areas of Los Angeles without authorization and filed incorrect or misleading coverage maps with the FCC in violation of its rules and the Communications Act. The Company does not believe that the informal objection and the petition to deny will adversely affect the renewal of its Los Angeles license.\nUnder FCC rules, each cellular licensee was given the exclusive right to construct one of two cellular systems within the licensee's MSA or RSA during the initial five-year period of its authorization. At the end of such five-year period, other persons are permitted to apply to serve areas within the licensed market that are not served by the licensee. Current FCC rules provide that competing \"unserved area\" applications are to be resolved through a lottery. In 1988, several entities, including the party that filed the informal objection and petition to deny the Company's Los Angeles renewal application, applied to the FCC to obtain the rights to serve certain sparsely populated areas within the Los Angeles market that were unserved by the Company at the end of its initial five-year period. The Company has also applied for such rights. The Company does not expect any material adverse impact on its operations or financial performance in the event that others ultimately acquire rights to such unserved areas.\nThe Company's radio common carrier activities in connection with its paging services also are subject to regulation by the FCC. The Company's paging activities are conducted on radio frequencies assigned by the FCC. The FCC allocates radio common carrier frequencies in specific geographic areas and\ngrants licenses for use of an initial frequency only upon a satisfactory demonstration of an applicant's legal and technical qualifications. The FCC allocates frequencies to a number of competitors in each paging market, unlike the FCC's limitation to two cellular licenses in each cellular market. The Company's paging licenses are subject to periodic renewal by the FCC and, as with all such licenses, can be revoked at any time for cause. However, renewal applications are generally granted by the FCC upon a showing of compliance with FCC regulations and the provision of adequate service to the public.\nThe Communications Act prohibits the holding of a common carrier license (such as the Company's cellular licenses) by a corporation of which any officer or director is an alien, or of which more than 20% of the capital stock is owned directly or beneficially by aliens. Where a corporation such as the Company controls another entity that holds an FCC license, such corporation may not have any aliens as officers, may not have more than 25% of its directors as aliens, and may not have more than 25% of its capital stock owned directly or beneficially by aliens, in each case if the FCC finds that the public interest would be served by such prohibitions. Failure to comply with these requirements may result in fines or a denial or revocation of the license.\nThe FCC regulates the operation and construction of vehicle location systems. Certain of Teletrac's radio frequencies are subordinate to industrial, scientific and government uses. In a rulemaking before the FCC, Teletrac is seeking improved radio frequency interference protection from vehicle identification systems and other location systems utilizing the radio spectrum. However, others have opposed all or parts of Teletrac's request. One service provider is seeking to have the FCC shift Teletrac's frequencies, which would have a material adverse impact on Teletrac's operations. The Company is unable to predict the outcome of this rulemaking. Each of Teletrac's licenses has been issued by the FCC for a term of five years. During that period, the system must be constructed and 1,500 vehicle location units must be placed in service under each license. There are no assurances, even if these requirements are met, that the FCC will renew Teletrac's licenses.\nThe Omnibus Budget Reconciliation Act of 1993 includes a provision preempting state regulation of rates or entry for any \"commercial mobile service.\" The FCC has determined that the Company's cellular, paging and air-to-ground services are commercial mobile services, and that the Company's vehicle location services are private services. The FCC has also exercised its authority to forbear from rate and entry regulation, including tariffs, for cellular, paging and air-to-ground services. In states that regulate cellular services, such as California, authority to continue such regulation extends until August 10, 1994, prior to which time a state may petition the FCC for continued authority. The state must show either that \"market conditions with respect to [commercial mobile] services fail to protect subscribers adequately from unjust and unreasonable rates or rates that are unjustly or unreasonably discriminatory\" or that such conditions exist and commercial mobile service is a \"replacement for land line telephone exchange service for a substantial portion of the telephone land line exchange service within such state.\" The FCC must take final action on a state petition within one year of receipt, and the state retains regulatory authority over cellular services during its petition's pendency.\nSTATE AND LOCAL\nIn many states, the Company must obtain approvals and certification from state regulators prior to the commencement of commercial service by a cellular\nsystem (or in certain states, prior to construction). In addition, certain state authorities, including the CPUC, regulate the acquisition of control of cellular systems and the prices of services or require the filing of prices, price changes and other terms and conditions of service. The siting and construction of cellular transmitter towers, antennas and equipment shelters are often subject to state or local zoning, land use and other local regulation, which may include zoning and building permit approvals or other state or local certification.\nIn November 1988, the CPUC began an examination of the regulation of cellular radiotelephone utilities operating in California. In June 1990, the CPUC issued an interim order which granted cellular carriers greater pricing flexibility and a faster approval process for rate changes. The interim order deferred several issues to further proceedings in 1991, including a request by resellers to perform switching functions, and certain modifications to the system of accounts used by cellular companies. In October 1992, the CPUC issued its decision on these deferred issues. Among other things, the order adopted by the CPUC would have imposed on cellular utilities an accounting methodology to separate wholesale and retail costs, would have permitted resellers to operate a switch interconnected to the cellular carrier's facilities, and would have required the unbundling of certain wholesale rates to the resellers. These unbundled rates would have been calculated by applying a rate of return of 14.75% to the cost basis of utility assets utilized by such reseller switch. In addition, the order would have required the Company to divest its retail reseller operations in the San Francisco Bay Area. In October 1992, the Company filed an Application for Rehearing, which stayed the effect of the decision. In May 1993, the CPUC granted limited rehearing of the decision on the issues of the unbundling of carriers' wholesale rates and the imposition of a 14.75% benchmark rate of return. The CPUC noted that the hearing record was sufficient regarding the technical feasibility of a reseller switch and would seek comments only on the economic aspects of the concept. The CPUC also rescinded its order to modify the method for allocating costs between wholesale and retail operations. The CPUC did not alter its prohibition on resales of cellular service by a carrier's affiliate in the same market. As a result, the Company transferred its reseller operations in the San Francisco Bay Area directly to its San Francisco\/San Jose cellular system at the time of the formation of CMT Partners. In December 1993, the CPUC consolidated the foregoing issues designated for rehearing into a new order instituting investigation (the \"OII\") into mobile telephone service and wireless communications. The OII will review the wireless market in light of the entrance of multiple new competitors in 1994 and 1995 such as PCS and SMR. The order proposes a dominant\/nondominant regulatory framework whereby cellular carriers would be classified as dominant carriers and controllers of facilities characterized by the CPUC as \"bottleneck\" facilities, and may be subject to cost based rate regulation. The CPUC also intends to explore regulation that would require cellular carriers to offer the radio portion of cellular service on an unbundled basis from all other aspects of services they may offer. Nondominant carriers, including PCS and SMR, would be subject to minimal regulation involving registration, record inspection and consumer safeguards. The Company believes, and will urge in the proceeding, that regulation of cellular carriers in California should be reduced, not increased, in order to encourage competition and innovation.\nCellular carriers, as well as other telecommunications service providers, have been named as respondents to the proceeding. The order solicits comments on the status of the mobile telecommunications market and the appropriate regulatory response. Opening and reply comments on the issues raised in the OII have been filed. The CPUC will hold a prehearing conference to determine\nif any issues will proceed to hearing. The Company is unable to estimate the effects of the OII, which could be material, because the impact on future operations will depend on the ultimate outcome of the OII or other subsequent proceedings.\nIn November 1992, the CPUC staff issued an interim report outlining the partial findings of an investigation into compliance with General Order 159 (\"G.O. 159\"), which requires prior CPUC approval of cellular facility additions. In January 1993, the Company responded to the report indicating that it contains significant inaccuracies and goes beyond the scope of the CPUC's authority. In April 1993, the CPUC alleged that the Company failed to obtain five required permits and issued an order requesting that the Company show why a particular cellular facility should not be disapproved. Certain of the Company's markets may have taken steps that the CPUC might consider to be construction of cellular facilities prior to filing advice letters with the CPUC and\/or might be considered by the CPUC to involve the failure to obtain necessary governmental permits for certain cellular facilities. The Company does not anticipate that sanctions, if any, that may be imposed by the CPUC for any failures to comply with G.O. 159 or to obtain other governmental permits will have a material adverse effect on the Company.\nIn April 1993, Pacific Bell filed a petition with the CPUC seeking authority to place cellular and paging interconnection service under tariff. Currently, the price, terms and conditions of cellular and paging interconnection to landline telephone company facilities are governed by negotiated contracts. Concurrent with the petition, Pacific Bell filed an amended application in a collateral CPUC case setting forth the proposed tariff rates if the petition is granted. The Company's preliminary evaluation of the Pacific Bell tariff rates suggests that the elimination of negotiated contracts could increase the cost to the Company of cellular interconnection by as much as 15% in some markets. The Company opposes the elimination of contracts for interconnection service. The impact of the Pacific Bell request on future operations is uncertain and depends upon the outcome of proceedings before both the CPUC and FCC.\nCertain states also require radio common carriers providing paging services to be certified prior to commencing operations. Certain states in which the Company operates paging activities require the carrier to file notices of its prices or price changes for informational purposes or regulate the acquisition of control of paging systems.\nINTERNATIONAL REGULATION\nGERMANY. MMO holds a license to operate the D2 network to supply digital cellular mobile telephone services in the Federal Republic of Germany. The license was issued in accordance with, and is governed by, the applicable provisions of the German Law on Telecommunications Installations. Under such law the right to erect and operate telecommunications facilities is reserved to the government, represented by the Federal Ministry of Postal and Telecommunications Services. The law contains the authority for the Minister for Postal and Telecommunications Services to grant licenses for the exercise of the right to erect and operate telecommunications installations. The Minister also determines the terms and conditions of any license so granted and, to ensure compliance therewith, issues regulations for the supervision of telecommunications installations erected and\/or operated by a licensee. To date, no such regulations have been issued.\nPORTUGAL. Cellular and paging services in Portugal are governed by laws\nestablishing the public tender process for the granting of licenses to provide telecommunications services as well as the guidelines for installation, management and use of network equipment. The government agency with oversight over cellular and paging providers is the Institute das Comunicacoes de Portugal (\"ICP\"). The applicable Portuguese laws require that licensed operators commence providing service within eighteen months of the date of issuance of their licenses and restrict changes in share ownership for five years from such date without the permission of the ICP.\nJAPAN. Telecommunication companies (\"TCs\") engaged in cellular telecommunications businesses in Japan are regulated by (i) the Telecommunications Business Law (\"TBL\") with respect to the installation of telecommunication circuits, and (ii) the Electric Wave Law (\"EWL\") with respect to the establishment of electric wave stations. The Ministry of Posts and Telecommunications (\"MPT\") has the authority under these laws to grant licenses to TCs which will engage in these businesses. Under the TBL and EWL, material restrictions imposed upon foreign companies and foreign persons (collectively \"Foreigners\") include: (a) Foreigners may not be selected as the representative director or other representing position of TCs; (b) the number of Foreigners who may be elected as directors and senior officers (including statutory auditors) shall be limited to less than one-third of the total number of those directors and officers of a TC; and (c) the number of voting rights which may be held directly or indirectly by Foreigners shall be limited to less than one-third of the voting rights in a TC. A prior notice to, and clearance from, the Ministry of Finance and other relevant ministries are required under the Foreign Exchange Law (\"FEL\") before Foreigners may acquire shares in TCs. Such FEL requirement has been complied with by the Company with respect to the three cellular companies in Japan in which the Company has investments.\nSWEDEN. Under the Swedish Act on Telecommunications, a mobile telephone operator is required to have a license in order to provide services over a public telecommunication network, if the operator's business, measured by area of distribution, number of users and other factors, is substantial. The licensing authority is the National Telecommunications Board, which is also the supervisory authority. A license application is typically approved, and an applicant is disqualified only if there is a reason to believe that the licensing requirements cannot be met by the applicant. NordicTel has applied for a license and expects that its application will be approved. However, the terms and conditions of the license have not been finalized.\nA mobile telephone operator must also obtain permission under the Act on Radio Communications to hold and use radio transmitters. Such permission is granted by the National Telecommunications Board and an application for permission is typically approved. NordicTel's license application includes an application for permission in accordance with the Act on Radio Communications.\nMFJ\nPrior to the Spin-off, the Company will be subject to the restrictions imposed by the MFJ, as modified from time to time. In general, the MFJ provided for the divestiture by AT&T of the Bell Operating Companies (\"BOCs\") by means of a reorganization of the BOCs into seven regional holding companies (\"RHCs\"), including Telesis, and imposed restrictions on the business activities of the BOCs and their affiliates, successors and assigns. Among other things, the MFJ generally prohibits BOCs and their affiliates from providing voice and data services that cross LATAs. The MFJ also precludes BOCs and their affiliates from engaging in the design, development or manufacturing of\ntelecommunications equipment or \"customer premises equipment\" such as cellular telephones or the provision of telecommunications equipment such as switches. The stated purpose of the MFJ was to prevent BOCs and their affiliated enterprises from using a BOC's asserted local exchange monopoly to discriminate against companies in other markets in which BOCs or their affiliates compete.\nAlthough the MFJ does not contain any provisions directly governing the termination of status as a BOC or BOC affiliate, the Company believes, based on the terms of the MFJ and its underlying policies, that it will not be bound by the MFJ after the planned Spin-off. This conclusion is consistent with the conclusion apparently reached in other transactions in which BOC affiliates or their assets have been sold. For example, BellSouth Corporation has sold or traded cellular properties to, among others, McCaw, United Telespectrum, Contel Cellular Inc., United States Cellular Corporation and ALLTEL Corporation, and NYNEX Corporation has sold its paging operations to Page America of New York, Inc. Neither the Federal District Court which administers the MFJ (the \"Court\") nor the United States Department of Justice (\"DOJ\") has, to the Company's knowledge, taken the position that the purchasers of these assets or affiliates are bound by the MFJ.\nBy letter dated January 19, 1993, Telesis notified the DOJ of its planned Spin-off and advised the DOJ of its belief that the MFJ would not apply to the Company after the Spin-off. DOJ has not stated any intention to object to Telesis' position. There is no assurance, however, that DOJ or a third party might not object at some time in the future or that the Court would not interpret the MFJ contrary to Telesis' position.\nThe Company will remain subject to the MFJ until the Spin-off by virtue of Telesis' ownership of Pacific Bell and Nevada Bell. The MFJ provides that the Court may waive certain of the restrictions on the BOCs and their affiliates. When a waiver is contested by the DOJ or AT&T, however, it will be granted only upon a showing that there is no substantial possibility that the BOC's market power could be used to impede competition in the markets it or its affiliate seeks to enter. If neither the DOJ nor any other party to the MFJ contests the waiver, then the Court should grant the requested waiver of these restrictions if it would serve the public interest. In the past, the Court has imposed conditions on waivers with respect to cellular and paging lines of business restricted by the MFJ.\nTelesis has been granted a number of waivers of the MFJ with regard to the cellular and paging services provided by the Company. For example, in November 1988, following the acquisition of certain cellular systems in the Detroit metropolitan area, Telesis was granted a waiver to allow it to operate the cellular system among the LATAs in Michigan and northwestern Ohio. In February 1993, Telesis was granted a waiver to allow New Par to provide interLATA cellular service in northern Ohio. While Telesis ultimately has been successful in obtaining each of the waivers it has requested on behalf of the Company, the waiver process is lengthy.\nITEM 2.","section_1A":"","section_1B":"","section_2":"ITEM 2. PROPERTIES.\nFor each market served by the Company's cellular operations, the Company maintains at least one sales or administrative office and many transmitter and antenna sites. Some of the facilities are leased, and some are owned. The Company also maintains both owned and leased sales and administrative facilities for its paging services. The Company believes that its facilities are suitable for its current business and that additional facilities will be\navailable for its foreseeable needs.\nITEM 3.","section_3":"ITEM 3. LEGAL PROCEEDINGS.\nThe Company is involved in legal proceedings that have arisen in the ordinary course of business. While complete assurance cannot be given as to the outcome of any litigation, the Company believes that with respect to such pending litigation, any financial impact or effect on the business of the Company would not be material. In addition, the Company may be subject to legal challenges and litigation from time to time in connection with matters under the jurisdiction of the FCC and state regulatory authorities with respect to its wireless businesses and with respect to requests for waivers from provisions of the MFJ. On November 24, 1993, a class action complaint was filed in Orange County Superior Court naming, among others, the Company, as general partner of Los Angeles SMSA Limited Partnership, and Los Angeles Cellular Telephone Company (\"LACTC\"). The complaint alleges that the Company and LACTC conspired to fix the prices of retail and wholesale cellular radio services in the Los Angeles market, and alleges damages for the class \"in a sum in excess of $100,000,000.\" The Company filed a demurrer to the complaint on January 31, 1994 and at March 3, 1994, no discovery or other action had taken place. The Company intends to defend itself vigorously and does not expect that this proceeding will have a material adverse effect on its financial condition.\nITEM 4.","section_4":"ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.\nNo matters were submitted to a vote of security holders during the quarter ended December 31, 1993.\nPART II\nITEM 5.","section_5":"ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.\nThe Common Stock has been listed on the New York and Pacific Stock Exchanges under the symbol PTW since the Company's initial public offering on December 2, 1993, and will be listed under the symbol \"ATI\" following the spin-off. The following table sets forth, for the periods indicated, the high and low sales prices of the Common Stock as reported in published financial sources.\nYEAR HIGH LOW ---- -------- -------- 1993: Fourth Quarter (December 3 $27 1\/4 $24 3\/4 to December 31) 1994: First Quarter (to March 4) $25 3\/4 $21\nAs of March 4, 1994, there were 9,411 holders of record of the Company's Common Stock. Such number does not include persons whose shares are held of record by a broker or clearing agency, but does include such broker house or clearing agency as one recordholder.\nThe Company currently intends to retain future earnings for the development of its business and does not anticipate paying cash dividends on its Common Stock in the foreseeable future. The Company's future dividend policy will be determined by its Board of Directors on the basis of various factors, including the Company's results of operation, financial condition, capital requirements and investment opportunities.\nIn February 1994, Telesis as sole shareholder of record, approved the reincorporation of the Company in Delaware subject to the condition subsequent that the Board of Directors of the Company, after such further study as it deems necessary or appropriate, also shall have approved the reincorporation. If any such reincorporation in approved, the articles and bylaws of the new Delaware company are expected to be substantially the same as those of the Company immediately prior to any such reincorporation, except for such modifications, amendments or deletions as the Board of Directors determines are necessary to comply with Delaware law or which it deems necessary or appropriate and relate to provisions required under California but not Delaware law. The Board of Directors of the Company is expected to resolve by year-end 1994 whether to pursue such a reincoporation. Any such reincorporation would be subject to any necessary governmental approvals.\nITEM 6.","section_6":"ITEM 6. SELECTED FINANCIAL DATA.\nSet forth below are selected consolidated financial data with respect to the Company for each of the five fiscal years in the period ended December 31, 1993. The selected consolidated financial data at December 31, 1993 and 1992 and for each of the three years in the period ended December 31, 1993, have been derived from the consolidated financial statements included elsewhere herein and audited by Coopers & Lybrand as set forth in their report also included elsewhere herein. The selected consolidated financial data for the year ended December 31, 1990, has been derived from audited consolidated financial statements not included herein. The selected consolidated financial data as of December 31, 1990 and 1989, and for the year ended December 31,\n1989, have been derived from unaudited consolidated financial statements not included herein. The selected consolidated financial data presented below should be read in conjunction with the consolidated financial statements and related notes thereto appearing elsewhere herein; note references below are to the notes to those consolidated financial statements.\nSUMMARY CONSOLIDATED STATEMENTS OF INCOME\nFor the Year Ended December 31, ---------------------------------------------- 1993(1) 1992 1991(1) 1990 1989 -------- -------- -------- -------- -------- (Dollars in millions, except per share amounts) NET OPERATING REVENUES....... $988.0 $838.5 $753.2 $677.4 $536.4 TOTAL OPERATING EXPENSES..... 859.8 742.6 616.6 510.7 408.7 -------- -------- -------- -------- -------- OPERATING INCOME............. 128.2 95.9 136.6 166.7 127.7 Interest expense............. (22.1) (52.9) (37.6) (21.7) (17.2) Minority interests in net income of consolidated part- nerships and corporations.. (46.4) (45.5) (45.2) (38.1) (34.1) Equity in net income (loss) of unconsolidated partner- ships and corporations: Domestic................... 70.4 41.1 15.5 5.3 2.1 International.............. (37.5) (38.5) (21.4) (11.2) (2.8) Gain on sale of telecommuni- cations interests.......... 3.8 - 26.0 - - Other income (expense)....... 11.5 14.3 19.0 0.7 (1.1) -------- -------- -------- -------- -------- INCOME BEFORE INCOME TAXES, EXTRAORDINARY ITEM AND CUMULATIVE EFFECTS OF ACCOUNTING CHANGES......... 107.9 14.4 92.9 101.7 74.6\nIncome taxes................. 67.8 24.5 49.8 51.7 35.2 -------- -------- -------- -------- -------- INCOME (LOSS) BEFORE EXTRA- ORDINARY ITEM AND CUMULATIVE EFFECTS OF ACCOUNTING CHANGES ................... 40.1 (10.1) 43.1 50.0 39.4 Extraordinary item-loss from retirement of debt (net of income taxes of $5.1) (Note G) .................. - (7.6) - - - Cumulative effect of accounting change for postretirement costs in 1993 (net of income taxes of $3.5) (Notes A and J) and income taxes in 1992 (Notes A and H) ........... (5.6) 27.9 - - - -------- -------- -------- -------- -------- NET INCOME .................. $ 34.5 $ 10.2 $ 43.1 $ 50.0 $ 39.4 ======== ======== ======== ======== ======== Income per share before Extraordinary item and cumulative effects of accounting changes ........ $ 0.09 $(0.02) $ 0.10 $ 0.12 $ 0.09 ======== ======== ======== ======== ======== Weighted average shares outstanding (in millions).. 429.6 424.0 424.0 424.0 424.0 ======== ======== ======== ======== ========\nSUMMARY CONSOLIDATED BALANCE SHEETS\nFor the Year Ended December 31, ------------------------------------------------ 1993(1) 1992 1991(1) 1990 1989 -------- --------- --------- --------- --------- (Dollars in millions)\nTotal assets .............. $4,076.7 $2,371.1 $1,900.1 $1,433.2 $1,173.0 Total long-term obligations .. $ 78.9 $ 257.3 $ 276.0 $ 225.1 $ 220.2 Total shareholders' equity. $3,337.3 $ 752.1 $ 635.2 $ 644.6 $ 613.8 Working capital (deficit).. $1,346.8 $ (698.4) $ (426.3) $ (147.4) $ (41.5) Capital expenditures, excluding acquisitions .. $ 225.9 $ 231.0 $ 230.2 $ 241.3 $ 263.7\n(1) In 1991 and 1993, the Company contributed net cellular assets totaling $330.0 million to the New Par joint venture and net cellular assets totaling $206.0 million to the CMT Partners joint venture, respectively. See Note E \"Joint Ventures and Acquisitions,\" under Cellular Communications, Inc. and McCaw Cellular Communications, Inc. The effect of these transactions was a reduction in the individual assets and liabilities and income statement accounts, and the reporting of income and expense associated with these assets in the line item entitled \"Equity in net income (loss) of unconsolidated partnerships and corporations: Domestic.\"\nSELECTED REPORTS OF OPERATIONS\nThe following table sets forth unaudited, supplemental financial data for the Company's total, domestic cellular, and domestic paging operations. The table reflects the proportionate consolidation of each cellular entity in which the Company has or shares operational control and excludes certain minority investments, principally the Company's investments in cellular systems serving Dallas\/Fort Worth, Las Vegas and Tucson, for which the Company does not receive timely financial and operating data and which in total represented approximately five percent of its proportionate domestic cellular operating income in 1993. Domestic Paging is 100% owned. This table does not include any data for the Company's international cellular and paging operations, except for the Selected Total Proportionate Data.\nTOTAL PROPORTIONATE DATA (1,2)\nFor the Year Ended December 31, -------------------------------- 1993 1992 1991 ---------- --------- ---------- (Dollars in millions)\nTotal proportionate net operating revenues. $1,226.1 $ 873.2 $ 687.0 Total proportionate operating cash flow.... $ 351.5 $ 191.5 $ 223.9\nSelected Proportionate Domestic Cellular Operating Results (1,2)\nFor the Year Ended December 31, -------------------------------- 1993 1992 1991 ---------- --------- ---------- (Dollars in millions)\nCellular service and other revenues ....... $ 892.0 $ 699.4 $ 564.6 Equipment sales ........................... $ 40.2 $ 24.8 $ 19.3 Cost of equipment sales ................... $ (42.2) $ (23.9) $ (18.4) Net operating revenues .................... $ 890.0 $ 700.3 $ 565.5 Total operating expenses .................. $ 675.1 $ 545.3 $ 412.3 Operating income .......................... $ 214.9 $ 155.0 $ 153.2 Operating cash flow ....................... $ 379.6 $ 279.1 $ 246.9 Capital expenditures, excluding acquisitions ............................ $ 198.4 $ 199.8 $ 159.6\nCELLULAR OPERATING DATA\nFor the Year Ended December 31, ---------------------------------- 1993 1992 1991 ---------- ---------- ---------- Domestic POPs(3)............................ 34,889,000 34,121,000 32,560,000 POPs in controlled markets(4)...... 33,595,000 32,264,000 30,806,000 Proportionate subscribers(5)....... 1,046,000 744,000 558,000 Penetration(6)..................... 3.1% 2.3% 1.8% Controlled markets(7).............. 51 42 41 Total markets(8)................... 61 55 54 International POPs(9)............................ 40,401,000 35,347,000 24,991,000 Proportionate subscribers(10)...... 159,600 35,200 0 Countries(11)...................... 4 3 2\nSELECTED DOMESTIC PAGING OPERATING RESULTS\nFor the Year Ended December 31, ---------------------------------- 1993 1992 1991 ---------- --------- --------- (Dollars in millions)\nPaging service and other revenues...... $145.7 $113.5 $ 92.6 Equipment sales........................ $ 35.2 $ 22.2 $ 9.7 Cost of equipment sales................ $(31.9) $(19.2) $ (7.4) Net operating revenues................. $149.0 $116.5 $ 94.9 Total operating expenses............... $129.3 $100.3 $ 79.6 Operating income....................... $ 19.7 $ 16.2 $ 15.3 Operating cash flow (2)................ $ 50.3 $ 42.5 $ 38.7 Capital expenditures, excluding acquisitions......................... $ 53.4 $ 42.9 $ 34.8\nPAGING OPERATING DATA\nFor the Year Ended December 31, ---------------------------------- 1993 1992 1991 ---------- --------- --------- Domestic Units in service (12)............... 1,167,000 821,000 601,000 Markets (13)........................ 100 81 60 International Proportionate units in service (14). 101,200 78,200 68,200 Countries (15)...................... 3 2 1\n------------------------ (1) Significant assets of the Company are not consolidated, and because of the substantial effect of the formation of certain joint ventures on the year-to-year comparability of the Company's consolidated financial results, the Company believes that proportionate operating data and results facilitate the understanding and assessment of its consolidated financial statements. Unlike consolidated accounting, proportionate accounting is not in accordance with generally accepted accounting principles for the cellular industry. Proportionate accounting reflects the relative weight of the Company's ownership interests in its domestic cellular systems.\n(2) Total proportionate operating revenues net of cellular and paging costs of equipment sales and total proportionate operating cash flow. Total proportionate operating cash flow equals proportionate operating income plus depreciation and amortization. Proportionate amounts are computed by multiplying the entities' total amount by the Company's interests in the entities. The total proportionate amount includes proportionate domestic cellular, 100% domestic paging, 100% Teletrac, 100% headquarter's costs and the Company's proportionate interests in MMO, Telecel and NordicTel. Proportionate domestic cellular operating results represent the Company's interests in the entities multiplied by the entities' operating data.\n(3) \"POPs\" for domestic cellular markets means the population of a Federal Communications Commission (\"FCC\") licensed cellular market based on Donnelly Marketing Information Service population estimates for counties comprising such market, multiplied by the Company's ownership interest in the cellular licensee operating in such market as of the date specified.\n(4) POPs in controlled markets include only POPs of Controlled Cellular Systems (i.e., those cellular systems that are included in Selected Proportionate Domestic Cellular Operating Results).\n(5) Aggregate number of subscribers to Controlled Cellular System multiplied by the Company's ownership interest in the operator of such systems. Excludes subscribers to cellular systems in which the Company has an ownership interest but does not have or share operational control.\n(6) Proportionate subscribers to the Company's Controlled Cellular System divided by the Company's POPs in such Controlled Cellular Systems.\n(7) Number of Metropolitan Statistical Areas (\"MSAs\") and Rural Service Areas (\"RSAs\") in which the Company has a Controlled Cellular System.\n(8) Number of MSAs and RSAs in which the Company owns an interest in a cellular system.\n(9) International POPs is based upon mid-1992 estimated population of the licensed cellular market, multiplied by the Company's ownership interest in the cellular licensee operating in such market as of the date specified and includes POPs for networks under construction. Includes POPs represented by a 2.25% interest in the Company's cellular system in Germany which, under the terms of the cellular license, the Company is under a current obligation to sell to small and medium-sized German businesses.\n(10) Total subscribers to all cellular systems outside the United States in which the Company owns an interest multiplied by the Company's ownership interest. Includes proportionate subscribers represented by a 2.25% interest\nin the Company's cellular system in Germany which, under the terms of the cellular license, the Company is under a current obligation to sell to small and medium-sized German businesses.\n(11) Number of countries outside the United States in which the Company owns an interest in a cellular system that is in operation or under construction.\n(12) The 1993 amount includes 22,000 units that were purchased through a fourth quarter acquisition.\n(13) Number of markets in which the Company provides paging services.\n(14) Total units in service of all paging systems outside the United States in which the Company owns an interest multiplied by the Company's ownership interest.\n(15) Number of countries outside the United States in which the Company owns an interest in a provider of paging services.\nITEM 7.","section_7":"ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.\nGENERAL\nThe following discussion is intended to facilitate the understanding and assessment of significant changes and trends related to the results of operations and financial condition of AirTouch Communications (\"the Company\"). This discussion and analysis should be read in conjunction with the Company's consolidated financial statements and notes.\nCONSOLIDATION VS. EQUITY METHOD OF ACCOUNTING. For financial statement reporting purposes, the Company consolidates each wireless subsidiary and partnership in which it has a controlling interest. Therefore, in addition to the Company's wholly owned cellular systems in San Diego and Atlanta, the Company consolidates the entities that hold the licenses for cellular systems operating in Los Angeles and Sacramento. The Company also consolidated the partnership which operates a cellular system in the San Francisco and San Jose markets prior to the closing of the partnership with McCaw (\"CMT Partners\") in September 1993. In addition, the Company consolidates its domestic paging operations, all of which are wholly owned, PacTel Teletrac (\"Teletrac\"), a 51%-owned partnership offering vehicle location service in six markets in the United States, NordicTel Holdings AB (\"NordicTel\"), a 51%-owned cellular network in Sweden, its paging subsidiaries in Thailand, and the Korean subsidiary providing credit card verification system sale and support. Revenues, expenses, assets and liabilities of consolidated entities are reflected in the corresponding line items in the Company's consolidated financial statements.\nThe Company's consolidated financial statements during the period from January 1, 1991 through March 31, 1992 also reflect the consolidation of International Teletrac Systems (\"ITS\"), a corporation owned by the minority partner in Teletrac. While the Company did not own an equity interest in ITS or its assets prior to March 31, 1992, the Company believes that consolidation of ITS is appropriate under applicable accounting guidelines as a result of the Company's guarantee of ITS' substantial indebtedness during such period. The Company had agreed to guarantee ITS' debt as part of the arrangement under which Teletrac acquired an option to purchase the assets of ITS. At March 31, 1992, the Company had guaranteed bank loans totaling $49.5 million, the\nproceeds of which had been used to fund ITS' capital expenditures and start-up operating losses. This note has since been retired. Teletrac exercised its option to acquire the assets of ITS effective March 31, 1992. The exercise of such option had been prohibited prior to the generic waiver of the MFJ's information services restrictions in July 1991.\nThe equity method of accounting is generally used to account for the operating results of entities over which the Company has significant influence but in which it does not have a controlling interest. These entities primarily include the partnership with CCI (\"New Par\"), CMT Partners (commencing in September 1993), and certain international interests, including Mannesmann Mobilfunk GmbH (\"MMO\") and Telecel Comunicacoes Pessoais, S.A. (\"Telecel\"). With respect to the entities accounted for under the equity method, the Company recognizes its proportionate share of the net income (loss) of each such entity in the line item entitled \"Equity in net income (loss) of unconsolidated partnerships and corporations.\" The revenues and expenses of such entities are not otherwise reflected in the Company's consolidated financial statements.\nPrior to the formation of New Par in August 1991, the operations of the Company's cellular systems in Michigan and northwestern Ohio were consolidated. The use of the equity method to account for New Par since its formation has reduced the growth of the Company's reported revenues and expenses. The formation of CMT Partners in September 1993 had a similar effect in the third and fourth quarters of 1993.\nPROPORTIONATE ACCOUNTING. Because significant assets of the Company are not consolidated and because of the substantial effect of formation of New Par and CMT Partners on the year-to-year comparability of the Company's consolidated financial results, the Company believes that proportionate operating data facilitates the understanding and assessment of its consolidated financial statements. Unlike consolidation accounting, proportionate accounting is not in accordance with generally accepted accounting principles (\"GAAP\") for the cellular industry. Proportionate accounting reflects the relative weight of the Company's ownership interests in its domestic cellular systems.\nFor example, under GAAP, 100% of the operating revenues and expenses of the Los Angeles cellular system would be included in the respective line items in the Company's consolidated financial statements with 16% of the net income from the system included in the line item entitled \"Minority interests in consolidated partnerships and corporations.\" By contrast, under proportionate accounting, only 84% of such system's revenues and expenses would be included. In addition, under proportionate accounting, the Company includes its share of revenues and expenses of equity investments in which it shares control. For example, 50% of the revenues and expenses of New Par, as well as an additional interest reflecting the Company's ownership of equity in CCI, would be included.\nA discussion of the Company's domestic cellular results of operations on a proportionate basis is set forth below under \"Proportionate Results of Operations.\"\nRESULTS OF OPERATIONS\nNET OPERATING REVENUES. The following table sets forth the components of the Company's net operating revenues for each of the last three years.\nYear Ended December 31, ------------------------------- 1993 1992 1991 --------- --------- --------- (Dollars in millions)\nNET OPERATING REVENUES Wireless services and other revenues: Cellular service ...................... $787.0 $681.7 $625.4 Paging service ........................ 148.7 117.9 98.0 Vehicle location service .............. 4.0 2.4 0.7 Other revenues ........................ 47.6 32.8 25.4 --------- --------- --------- 987.3 834.8 749.5 --------- --------- --------- Net cellular and paging equipment sales: Revenues .............................. 70.4 45.4 31.6 Costs of equipment sold ............... (69.7) (41.7) (27.9) --------- --------- --------- 0.7 3.7 3.7 --------- --------- --------- Net operating revenues .................. $988.0 $838.5 $753.2 ========= ========= =========\nCELLULAR SERVICE. Cellular service revenues primarily consist of air time, access fees, and in-bound roaming charges. Cellular service revenues increased by 15.4% from 1992 to 1993 and by 9.0% from 1991 to 1992. The increase in cellular service revenues in both 1993 and 1992 was primarily due to continued domestic subscriber growth. On a percentage basis, subscriber growth in Southern California lagged behind the Company's other markets in 1992 as a result of the severity of the economic recession in Southern California. However, the Company's Los Angeles cellular system experienced a dramatic increase in the number of subscribers from the fourth quarter of 1992 through 1993 in response to advertising and promotional campaigns which commenced in September 1992. The increase in cellular service revenues did not keep pace with subscriber growth because of declining average revenue per subscriber, caused by lower usage by new subscribers and rate reductions made in 1993 to meet competitive pressures. The Company expects that average revenue per subscriber will continue to decline as it adds new subscribers and responds to further competitive pressures. Reported revenues also were affected by the formation of both New Par in August 1991 and CMT Partners in September 1993. Since the formation of each partnership, the Company's share of the net income has been recorded in \"Equity in net income (loss) of unconsolidated partnerships and corporations.\" The change from consolidation to the equity method of accounting for these partnerships decreased 1993, 1992, and 1991 cellular service revenues by $232.9 million, $138.8 million, and $51.3 million, respectively, from what would have been reported had the Company been able to include in its revenues a 50% share of New Par's and CMT Partners' revenues. This change similarly increased \"Equity in net income (loss) of unconsolidated partnerships and corporations\" by $64.3 million, $34.5 million, and $9.1 million, respectively.\nPAGING SERVICE. Paging service revenues primarily consist of paging service charges and rentals of paging units in the United States and, to a small extent, Thailand. Paging service revenues increased 26.1% in 1993 and 20.3% in 1992, as compared to the previous year. Such increases in paging service revenues primarily resulted from 42.1% and 36.6% increases in the number of domestic paging units in service in 1993 and 1992, respectively, as compared to the previous year. The increases in domestic paging units in service reflect increased penetration in existing markets primarily through successful retail and reseller pager sales programs, the establishment of new paging operations, and the purchase of Front Page, adding approximately 22,000 units. With the acquisition of Front Page, the Company entered the Salt Lake City paging market and further expanded its existing substantial customer base in Northern California, San Diego, Los Angeles, Phoenix, and Tucson. The effect of the growth in paging units in service on revenues was offset in part by the decrease in the average revenue per paging unit in service, due to the increase in customer owned and maintained units (i.e., a corresponding loss in lease and maintenance revenues) as pager prices declined, and reduced contract prices to match competition. The decline in average revenue per paging unit is expected to continue.\nVEHICLE LOCATION SERVICE. Vehicle location service revenues from Teletrac primarily consist of charges on corporate fleet tracking and stolen vehicle tracking services. Teletrac's vehicle location business is in the start-up phase and its services have not yet achieved a significant degree of commercial acceptance. Teletrac initiated operations in Los Angeles, Chicago, Detroit, and Dallas\/Fort Worth in 1991 and in Miami and Houston in 1992. Teletrac's vehicle location service revenues were $4.0 million in 1993, $2.4 million in 1992, and $0.7 million in 1991.\nOTHER REVENUES. Other revenues consist of cellular equipment rental and installation charges, pager replacement program revenues, paging voice retrieval revenues, paging activation charges, vehicle location unit sales and revenues related to credit card verification terminal sales and maintenance. Other revenues increased 45.1% and 29.1% in 1993 and 1992, respectively. The increases in both years are due to higher vehicle location unit sales, paging activation and voice retrieval charges, and credit card verification sales and maintenance charges.\nNET PAGING AND CELLULAR EQUIPMENT SALES. Equipment sales consist of revenues from sales of cellular telephones and sales of paging units. Equipment sales are not a primary part of the Company's cellular and paging businesses and therefore the costs associated with these sales have been removed from the cost of revenues and netted with equipment sales in the revenue section of the income statement. All prior periods have been revised to conform to this presentation format. The increase in equipment sales in 1993 and 1992 is attributable to increases in sales of paging units and, to a lesser extent, sales of cellular telephones. The Company sells cellular telephones at or below cost and paging units approximately at cost.\nOPERATING EXPENSES. The following table sets forth the components of the Company's operating expenses for each of the last three years.\nYear Ended December 31, --------------------------------- 1993 1992 1991 ---------- --------- --------- (Dollars in millions) OPERATING EXPENSES Cost of revenues...................... $144.0 $132.7 $110.5 Selling and customer operations expenses............................ 291.3 262.9 201.5 General, administrative, and other expenses............................ 250.3 203.6 174.6 Depreciation and amortization......... 174.2 143.4 130.0 ---------- --------- --------- Total operating expenses.............. $859.8 $742.6 $616.6 ========== ========= =========\nCOST OF REVENUES. Cost of revenues primarily consists of charges for interconnections of the Company's cellular and paging operations with wireline telephone companies and other network-related expenses. As a percentage of net operating revenues, cost of revenues remained relatively constant at 14.6%, 15.8%, and 14.7% in 1993, 1992, and 1991, respectively. The 1993 improvement was due to reassessment of property taxes and lower interconnect charges. Cost of revenues increased 8.5% in 1993 and 20.1% in 1992 as compared to the previous year as a result of the interconnection and other charges generated by the Company's increased wireless services customer base. Reported cost of revenues were also affected by the formation of both New Par in August 1991 and CMT Partners in September 1993. This change decreased cost of revenues by $30.1 million and $19.3 million in 1993 and 1992, respectively.\nSELLING AND CUSTOMER OPERATIONS EXPENSES. Selling and customer operations expenses primarily consist of compensation to sales channels, salaries, wages, and related benefits for sales and customer service personnel, and billing, advertising, and promotional expenses. As a percentage of net operating revenues, these expenses were 29.4%, 31.4%, and 26.8% in 1993, 1992, and 1991, respectively. The decrease in 1993 was primarily attributable to increased revenues from the larger subscriber base and cost containment initiatives particularly in the Company's domestic billing operations. This was partially offset by an increase in agent commissions resulting from the increase in new cellular subscribers and the increase in marketing and promotional expenses which commenced in 1992. The 1992 increase similarly reflects commissions paid for new cellular subscribers, expenses associated with new marketing efforts, and other business development initiatives. In particular, in both years, there were significant increases in commission expenses in the fourth quarter as a result of a large increase in the number of cellular subscribers during the quarter, with the related increases in revenue from the new subscribers not being realized until after year-end. In addition, as penetration of the consumer market increases, the most recently added cellular subscribers typically generate less average revenue per subscriber than existing subscribers. The 1992 increase in marketing and promotional expenses was substantial, particularly in the Company's Los Angeles and Atlanta markets. The Company expects to continue to have various promotional programs and marketing efforts in the future. In addition, billing expenses increased substantially during 1992 due to hardware and software upgrades in the billing\nsystem employed by the Company in its Los Angeles, Atlanta, and Sacramento cellular markets and its retail reseller operation in the San Francisco Bay Area. These upgrades were made in part to support the Company's rapid cellular subscriber growth. The Company expects continued investment in the billing system will be required to support subscriber growth, as well as, new cellular products and services. These investments are not expected to result in higher per subscriber costs, which should be at or below 1993 levels. The Company continues to explore more efficient billing delivery options.\nGENERAL, ADMINISTRATIVE, AND OTHER EXPENSES. General, administrative, and other expenses primarily consist of salaries and wages and related benefits for general and administrative personnel, international license application costs, and other overhead expenses. As a percentage of net operating revenues, these expenses were 25.3%, 24.3%, and 23.2% in 1993, 1992, and 1991, respectively. The increase in 1993 was primarily due to organizational and other costs associated with the spin-off, including a $5.0 million after-tax spin-off related reserve and increased start-up expenses relating to the development of wireless data services. In addition, the Company experienced an increase in bad debt expense as a percentage of revenues in 1993 in most of its markets; the Los Angeles market was particularly affected as a result of the lingering recession in Southern California. In response, the Company has initiated different means to limit exposure (e.g., prepayment for service and credit limits for high risk customers) while promoting subscriber growth. Increased expenses were partially offset by cost containment initiatives. The increase in 1992 from the previous year was primarily due to greater costs associated with the Company's pursuit of international license awards and expenses associated with investments in new products and services, such as wireless data. Increased start-up expenses for Teletrac's vehicle location operations also contributed to the increase.\nThe Company expects that its selling and customer operations expenses and general, administrative, and other expenses as a percentage of net operating revenues will increase as a result of the reduction from 61.1% to 47.0% in the Company's interest in the San Francisco\/San Jose cellular system following the formation of CMT Partners on September 1, 1993.\nThe Company also expects that it will experience additional expenses as it begins to perform, as a separate publicly traded company in connection with the planned spin-off, certain corporate functions previously provided to the Company by Pacific Telesis Group (\"Telesis\"). The Company estimates $15.0 million in incremental operating expenses in 1994 for these activities. This, combined with the costs of supporting the Company's anticipated growth, including entry into new business opportunities, is expected to cause general, administrative, and other expenses to continue increasing as a percentage of net operating revenues.\nDEPRECIATION AND AMORTIZATION. Depreciation and amortization primarily consist of depreciation expense on the Company's domestic cellular and paging networks, as well as amortization of intangibles such as FCC license costs and goodwill. The increase in depreciation and amortization expense for 1993 and 1992 mainly reflects increased capital investment in the Company's domestic cellular network. The planned deployment of digital technology in the Company's domestic cellular markets is expected to have minimal impact on depreciation expense since most of the analog equipment will be redeployed in other areas or used in parallel systems needed for compatibility with existing customer equipment. The Company has negotiated to purchase network assets currently in service in the Dallas\/Fort Worth market. As a result, depreciation expense will be lower than if the assets had been purchased new.\nNON-OPERATING INCOME (EXPENSE). The following table sets forth the components of the Company's non-operating income (expense) for each of the last three years: Year Ended December 31, -------------------------------- 1993 1992 1991 --------- --------- --------- (Dollars in millions)\nInterest expense....................... $(22.1) $(52.9) $(37.6) Minority interests in net income of consolidated partnerships and corporations..................... $(46.4) $(45.5) $(45.2) Equity in net income (loss) of unconsolidated partnerships and corporations: Domestic........................... $ 70.4 $ 41.1 $ 15.5 International...................... (37.5) (38.5) (21.4) --------- --------- --------- $ 32.9 $ 2.6 $ (5.9) ========= ========= ========= Interest income........................ $ 12.0 $ 13.3 $ 13.8 ========= ========= ========= Gain on sale of telecommunications interests............................ $ 3.8 - $ 26.0 ========= ========= ========= Miscellaneous income (expense)......... $ (0.5) $ 1.0 $ 5.2 ========= ========= =========\nINTEREST EXPENSE. The $30.8 million decrease in interest expense in 1993 compared to the 1992 period primarily resulted from lower borrowings from PacTel Capital Resources (\"PTCR\") due to $1,179.8 million in equity contributions from Telesis. Interest expense increased in 1992 over the prior year primarily due to increased borrowings from PTCR used to fund construction costs and start-up losses for international joint ventures, the Company's purchases of equity in CCI, and start-up losses for Teletrac. The Company's indebtedness to PTCR totaled $0.3 million and $958.4 million at December 31, 1993 and 1992, respectively. At December 31, 1993, the debt outstanding on the note assumed by the Company as part of the NordicTel acquisition was $50.1 million. See Note G to the Consolidated Financial Statements of AirTouch Communications and Subsidiaries.\nInterest expense incurred during each of the periods presented will not be indicative of future expense. During 1993, Telesis settled the Company's tax benefits receivable arising from the tax losses utilized in the Telesis consolidated tax returns which the Company used to eliminate some of its indebtedness to PTCR. The Company used the equity contributions received from Telesis during 1993 to substantially eliminate its remaining indebtedness to PTCR. The Company believes that the net proceeds from the Initial Public Offering (\"IPO\"), together with cash flow from operations, will be sufficient to satisfy the Company's estimated funding requirements through mid-1995. See \"Liquidity and Capital Resources.\"\nMINORITY INTERESTS IN NET INCOME OF CONSOLIDATED PARTNERSHIPS AND CORPORATIONS. The minority partners' portions of net income in consolidated partnerships and corporations are reported as \"Minority interests in net income of consolidated partnerships and corporations.\" The increases in 1993 and 1992 are primarily attributable to better operating results for these\npartnerships and corporations. These increases were partially offset by the effect of the change from consolidation to equity method of accounting as a result of the formation of New Par and CMT Partners.\nEQUITY IN NET INCOME (LOSS) OF UNCONSOLIDATED PARTNERSHIPS AND CORPORATIONS.\nDOMESTIC. Domestic equity earnings increased in 1993 and 1992 over the prior year period primarily as a result of the inclusion of New Par commencing August 1, 1991 and CMT Partners commencing September 1, 1993. For at least the near term, equity earnings attributable to CMT Partners are likely to be less than the Company's prior share of the net income of the cellular systems which the Company contributed to the partnership.\nINTERNATIONAL. The decrease in international equity losses in 1993 was primarily due to lower losses incurred by MMO, partially offset by higher losses for cellular operations in Portugal and systems under construction in Japan, and paging systems in Portugal and Spain. In 1992, international equity losses increased due to the commencement of recognition of equity losses from Telecel and the Company's cellular systems under construction in Japan, and due to higher operating losses from the start-up of MMO. The international equity losses in 1992 were partially offset by $32.0 million in tax benefits recognized as a result of the adoption of Statement of Financial Accounting Standards No. 109, \"Accounting for Income Taxes\" (\"SFAS 109\"). The adoption of SFAS 109 had a similar earnings impact in 1993, resulting in a $20.7 million reduction in equity losses, due to a reduction in the German corporate tax rate. The deferred tax benefits recognized by MMO were lower in 1993. See \"Income Taxes.\"\nFluctuations in currency exchange rates will affect the equity earnings and losses from the Company's international ventures. For example, a significant weakening against the dollar of the currency of a country in which the Company's venture is generating net income would adversely affect the Company's results, although conversely it could reduce the Company's start-up losses.\nINTEREST INCOME. The Company's interest income in each of the periods presented was primarily the result of the interest earned on amounts loaned to an affiliate and interest earned by the San Francisco\/San Jose cellular system. In 1993, interest income also reflected earnings on IPO proceeds, and in 1991, interest on an Internal Revenue Service tax settlement relating to 1987. The affiliated loan was settled during the third quarter of 1993 and the interest earned by the San Francisco\/San Jose cellular system is no longer reflected in this account subsequent to the September 1, 1993 formation of CMT Partners, which is accounted for under the equity method. The Company expects to continue to earn interest income on the investment of the net proceeds from the IPO prior to their application, and therefore, interest income is expected in the near term to be higher than in 1993.\nGAIN ON SALE OF TELECOMMUNICATIONS INTERESTS. The 1991 gain of $26.0 million resulted from the sale of the Company's cellular holdings in St. Louis and the sale of the Company's interest in a personal communication services (\"PCS\") licensee in the United Kingdom. The $3.8 million gain in 1993 resulted from the sale of small interests in three wireline cellular systems in the San Francisco Bay Area. FCC rules required the Company to sell its interests in two of the three systems because the Company acquired interests in competing non-wireline carriers as a result of the formation of CMT Partners.\nMISCELLANEOUS INCOME (EXPENSE). Miscellaneous income (expense) primarily consists of currency exchange gains or losses on financial instruments which have not been deferred and one-time items such as gains or losses on sales of property, plant, or equipment. Such income in 1991 included $12.0 million received in settlement of litigation. The $0.5 million loss in 1993 primarily represented currency exchange losses of $3.4 million, which were partially offset by a $3.0 million net settlement gain due to an early retirement election by the employees of a joint venture who participated in the Company's qualified defined benefit plan. (See Note I to the Consolidated Financial Statements of AirTouch Communications and Subsidiaries.) The Company attempts to mitigate the effects of foreign currency fluctuation through the use of hedges and local banking accounts. At December 31, 1993, the Company had hedged a majority of its international investments against the risk of currency fluctuations. Certain of these hedge instruments do not qualify, in whole or in part, as hedges for financial accounting purposes. Accordingly, the Company is required to recognize the currency exchange gain or loss on these hedge instruments in the current period results of operations. The Company is unable to determine the impact of future currency exchange gains and losses.\nINCOME TAXES. The Company's income tax expenses and effective tax rates for 1993, 1992, and 1991 were $67.8 million (62.8%), $24.5 million (170.1%), and $49.8 million (53.6%), respectively. The effective tax rates for all such periods were primarily affected by the international equity losses of unconsolidated partnerships and corporations and ITS' losses prior to March 31, 1992, for which no U.S. tax provisions were made. See Note H to the Consolidated Financial Statements of AirTouch Communications and Subsidiaries for a detailed reconciliation of the effective tax rates to statutory rates.\nEffective January 1, 1992, the Company adopted SFAS 109. The use of the new rules resulted in a $59.8 million tax benefit to 1992 reported earnings. On the 1992 Statement of Income, $32.0 million of this increase is reflected in equity earnings and $27.9 million as the cumulative effect of an accounting change, offset by $0.1 million as income tax expense. The adoption of SFAS 109 had a similar impact in 1993, resulting in a $20.7 million reduction in equity losses. Financial statements of prior years before the effective date were not restated as permitted by SFAS 109. No deferred tax assets were recorded on the Company's books. Instead, the deferred tax assets were recorded on the joint ventures' books based on the applicable foreign tax rates as an adjustment to convert to U.S. GAAP. The Company recorded its share of the operating losses which reflected these tax benefits.\nAt December 31, 1993, the Company had deferred tax assets and liabilities of $33.4 million and $205.9 million, respectively. A valuation allowance of $4.8 million has been provided for deferred tax assets. The Company believes that it is more likely than not that the future benefits from the remaining deferred tax assets will be realized in full.\nOf the $20.7 million tax benefit related to international equity earnings in 1993, approximately 58% ($12.0 million) is attributable to the tax benefits recorded by MMO for its net operating losses (\"NOLs\"). SFAS 109 requires that the tax benefit of such operating losses be recorded as an asset to the extent that management assesses the utilization of such losses to be \"more likely than not.\" Accordingly, these assets represent the future realization of tax benefits to be gained by deducting current MMO operating losses from future taxable income. Although MMO has not yet reached break-even, the Company and MMO believe it is more likely than not that MMO will generate sufficient taxable income in the future to utilize its accumulated NOLs. Through\nDecember 31, 1993, MMO had accumulated NOLs of approximately $384.6 million (adjusted for U.S. GAAP and translated at December 31, 1993 spot rate), of which the Company's share is approximately $109.5 million. The Company's belief that MMO will produce taxable income sufficient to utilize its NOLs is based on the following facts and assumptions.\nMMO's current operating losses result from it being in the initial phase of its operations. In this initial phase, MMO is incurring substantial selling and marketing costs while building its subscriber base. At December 31, 1993 MMO had approximately 493,000 subscribers. It added, on average, more than 30,000 subscribers each month in 1993. At this rate MMO would reach break-even by mid-1994, at which time it would have over 600,000 subscribers. This represents a market penetration rate for MMO of approximately 0.7% on an estimated total German cellular market penetration of 2.3% to 2.5%. Market penetration is the percentage of Germany's population of approximately 80.2 million that subscribes to cellular service. Based on such number of subscribers and assuming an average revenue per subscriber of $112 per month, MMO's total revenues by mid-1994 would be in excess of $300 million. At this growth rate, MMO's accumulated NOLs would be fully utilized by the end of 1996, at which time its subscriber base would be over 1,300,000. Based on such number of subscribers and assuming an average revenue per subscriber of $90 per month, MMO's total revenues in 1996 would be approximately $1.4 billion. If subscriber growth dropped as low as 5,000 per month after MMO's operations reach break-even in mid-1994, MMO's NOLs would still be fully utilized by 1996. Under German tax law, NOLs can be carried forward indefinitely.\nThe Company also has available to it tax planning strategies that would allow it to realize a United States tax benefit from MMO's losses. These strategies primarily involve the sale of all or part of its investment in MMO. In such a sale, the excess of tax basis over book basis in this investment would create either a lower tax gain or a greater tax loss than book gain or loss (depending on the sales price), thereby recognizing the deferred tax asset. If the sale were to result in a capital loss due to an unexpectedly low sales price, the Company has available to it sale or leaseback transactions for various other properties that could generate capital gain sufficient to offset any possible capital loss. However, because applicable tax rates in the United States are lower than in Germany, the United States tax benefit at December 31, 1993 would be approximately $38.3 million, which is $10.3 million less than the German tax benefit reflected in the Company's financial statements, including the impact of foreign currency translation.\nIn July 1993, the German Parliament passed the German Tax Act of 1994 which, among other things, decreases the corporate tax rate on distributed earnings effective January 1, 1994. Accordingly, as required by SFAS 109, the deferred tax benefits recognized by MMO were adjusted downward to reflect the lower tax rate. The Company's share of the adjustment reduced net income by approximately $3.1 million in 1993.\nWhile the Company believes that it is more likely than not that the recorded deferred tax benefits will be fully realized, there can be no assurance that this will happen as certain factors beyond control of the joint ventures and the Company, such as worsening local economic conditions and increasing competition, can affect future levels of taxable income.\nIn August 1993, the United States government enacted the Omnibus Budget Reconciliation Act of 1993, which incorporates new business tax provisions. These include an increase in the corporate tax rate from 34% to 35%\nretroactive to January 1, 1993. The Company's adjustment for the change in tax rate reduced net income by $4.4 million in 1993.\nINCOME (LOSS) BEFORE EXTRAORDINARY ITEM AND CUMULATIVE EFFECTS OF ACCOUNTING CHANGES. The Company reported income (loss) before extraordinary item and cumulative effects of accounting changes of $40.1 million, $(10.1) million, and $43.1 million (which included a $26.0 million pre-tax gain on the sale of wireless interests) for 1993, 1992, and 1991, respectively. The increase in income in 1993 was primarily due to increased cellular and paging revenues, cost containment initiatives, and decrease in interest expense, partially offset by additional agent commissions resulting from the increase in new cellular subscribers, expenses related to the spin-off, and start-up losses from wireless data service. The 1992 loss was primarily the result of increasing start-up losses from the Company's international wireless ventures, interest expenses related to the Company's international investments, expenses associated with the Company's international license applications, and operating losses from Teletrac.\nThe Company experiences fraud in all of its markets. Costs of this fraud, which are common throughout the industry, include variable interconnect costs of usage, costs related to preventive measures, and payments to other carriers for unbillable fraudulent roaming activity. The Company is unable to quantify the costs of fraud. The incidence of fraud is generally increasing, particularly in the Los Angeles market. The Company is implementing measures to identify and block fraudulent usage.\nTeletrac (including ITS) reported pre-tax losses of $41.6 million, $49.1 million, and $36.8 million during 1993, 1992, and 1991, respectively. The Company does not expect Teletrac's operations to be profitable for several years. The Company intends to take actions to reduce Teletrac's operating losses and does not intend to expand Teletrac's operations significantly until its services achieve a higher level of commercial acceptance. In February of 1994, the Company reduced Teletrac's staff by 30% to approximately 200 employees. The Company is continuously evaluating and considering other commercial applications of its technology and radio location spectrum.\nThe Company is currently pursuing opportunities to expand its wireless operations in international markets and intends to participate actively in the license application process for PCS in the United States. The Company will continue its efforts to grow and develop its wireless data operations. To the extent that the Company is successful in its pursuit of new wireless licenses and its development of wireless data operations, the Company will incur start-up expenses which, at least in the short-term, will have a dilutive effect on the Company's future earnings.\nEXTRAORDINARY ITEM. The extraordinary item recorded by the Company in 1992 is the result of a $12.7 million early redemption expense related to the refinancing of $100 million of long-term debt. The debt was retired with short-term funding provided by PTCR.\nCUMULATIVE EFFECT OF ACCOUNTING CHANGE. The Company adopted SFAS 106, \"Employers' Accounting for Postretirement Benefits Other Than Pensions,\" effective January 1, 1993 and recognized $5.6 million (net of $3.5 million tax benefit) transition obligation. See \"Effects of Recently Issued Accounting Standards.\"\nPROPORTIONATE RESULTS OF OPERATIONS\nThe following table sets forth unaudited, supplemental financial and operating data for the Company's domestic cellular operations. The table reflects the proportionate consolidation of each cellular entity in which the Company has or shares operational control and excludes certain minority investments, principally the Company's investments in cellular systems serving Dallas\/Fort Worth, Las Vegas and Tucson, for which the Company does not timely receive financial and operating data and which in total represented approximately 5% of its proportionate domestic cellular operating income in 1993.\nSELECTED PROPORTIONATE DOMESTIC CELLULAR OPERATING DATA (1)\nYear Ended December 31, ------------------------------- 1993 1992 1991 --------- ---------- ---------- (Dollars in millions) OPERATING RESULTS: Service and other revenues............. $ 892.0 $ 699.4 $ 564.6 Equipment sales........................ 40.2 24.8 19.3 Cost of equipment sales................ (42.2) (23.9) (18.4) --------- ---------- ---------- Net operating revenues............... 890.0 700.3 565.5 --------- ---------- ----------\nCost of revenues....................... 116.3 98.7 80.0 Selling, general and administrative expenses............................. 394.1 322.5 238.6 Depreciation and amortization.......... 164.7 124.1 93.7 --------- ---------- ---------- Total operating expenses............. 675.1 545.3 412.3 --------- ---------- ----------\nOperating income....................... $ 214.9 $ 155.0 $ 153.2 ========= ========== ========== Operating cash flow (2)................ $ 379.6 $ 279.1 $ 246.9 ========= ========== ========== Capital expenditures, excluding acquisitions......................... $ 198.4 $ 199.8 $ 159.6 ========= ========== ==========\nYear Ended December 31, ----------------------------------- 1993 1992 1991 ----------- ----------- ----------- OPERATING DATA: POPs (3)......................... 34,889,000 34,121,000 32,560,000 POPs in controlled markets (4)... 33,595,000 32,264,000 30,806,000 Proportionate cellular subscribers (4)............... 1,046,000 744,000 558,000 Penetration (5).................. 3.1% 2.3% 1.8%\n-------------------- (1) Unaudited, supplemental operating results for the Company's domestic cellular operations. This presentation differs from the consolidation and equity methods used to prepare the Company's audited financial statements, which are in accordance with generally accepted accounting principles.\n(2) Operating income plus depreciation and amortization. Proportionate operating cash flow represents the Company's interest in the entities multiplied by the entities' operating cash flow. As such, proportionate operating cash flow does not represent cash available to the Company.\n(3) \"POPs\" for domestic cellular markets means the population of a Federal Communications Commission (\"FCC\") licensed cellular market based on Donnelly Marketing Information Service population estimates for counties comprising such market, multiplied by the Company's ownership interest in the cellular licensee operating in such market as of the date specified.\n(4) POPs in controlled markets and cellular subscriber data include only those cellular systems that are included in the operating results shown in the Selected Proportionate Domestic Cellular Operating Data table.\n(5) Proportionate cellular subscribers divided by the Company's POPs in Controlled Cellular Systems.\nCellular service and other revenues increased on a proportionate basis 27.5% in 1993 over 1992 and 23.9% in 1992 over 1991, primarily as a result of a 40.6% and 33.3% year-to-year increase in cellular subscribers in 1993 and 1992, respectively. In 1993, fixed-term discount plans and various promotional programs reduced customer disconnects in all of the Company's cellular markets and accounted for the increase in subscriber growth. Increase in cellular service revenues did not keep pace with subscriber growth because of declining average revenue per subscriber, caused by lower usage by new subscribers and rate reductions made in 1993 to meet competitive pressures. The Company plans to mitigate the impacts of the lower average revenue per subscriber by offering new products and services. The Company expects that average revenues per subscriber will continue to decline as it adds new subscribers and responds to further competitive pressures. In 1992 New Par and the Company's Atlanta cellular system experienced significant growth in subscribers on a percentage basis. Each of these regional networks benefitted from a cellular telephone rental program that was already in place in CCI's Ohio properties at the time New Par was formed in August 1991. The rental program was expanded throughout New Par and a similar program was introduced by the Atlanta system in mid-1992, making these programs the primary driver for subscriber growth in 1992.\nEquipment sales consist of revenues from sales of cellular telephones. Equipment sales are not a primary part of the Company's cellular business and therefore the costs associated with these sales have been removed from the cost of revenues and netted with equipment sales in the revenue section of the income statement. All prior periods have been revised to conform to this presentation format.\nTotal operating expenses on a proportionate basis as a percentage of net operating revenues were 75.9%, 77.9%, and 72.9% in 1993, 1992, and 1991, respectively. These percentages reflect increases in expenses associated with subscriber growth and increased investments in new products and services, offset by cost containment efforts in 1993. Total operating expenses include cost of revenues, selling, general, and administrative expenses, and depreciation and amortization. Cost of revenues remained constant as a percentage of net operating revenues between 1991 and 1992, and declined in 1993. The trend reflects technical efficiencies and realization of economies of scale, and in 1993, the reassessment of property taxes and lower interconnect charges. Selling, general, and administrative expenses increased as a percentage of net operating revenues in 1992 and decreased in 1993. The\n1992 increase reflects higher advertising and promotional expenses, increased agent commissions paid for new subscribers, who on average generate less revenue per month than existing subscribers, increased billing expenses associated with the increased number of domestic cellular subscribers and other expenses associated with the Company's business development initiatives, and investments in new technologies such as wireless data. The 1993 decrease reflects the effects of cost containment initiatives. The increase in depreciation and amortization expense in each year during the three- year period ended December 31, 1993 reflects the Company's increasing capital investment in its cellular systems.\nBUSINESS ENVIRONMENT\nCOMPETITION. The competitive and regulatory environment for wireless communications companies in the United States is in a rapid state of development. The Company's domestic cellular systems are expected to encounter increased competition as a result of new operators of digital mobile communications systems, including NexTel Communications, Inc. (\"NexTel\"), which initiated service in Los Angeles in early 1994 with plans to expand to San Francisco by mid-1994, and Dallas and other markets by mid-1995. NexTel has announced that it intends to position itself as the third major provider of mobile telephone services in its markets. In March 1994, Nextel and MCI announced the formation of a strategic alliance to provide wireless services under the MCI brand name throughout the United States. As a result, the Company's domestic cellular systems may encounter such competition sooner than previously anticipated.\nIn addition, the FCC has recently allocated radio frequency spectrum for seven PCS licenses in each market. Auctions for narrowband PCS licenses are expected to begin by May 1994 while broadband PCS licenses are not expected to be auctioned until much later in the year. Although the marketing and technical elements of PCS are not yet well defined, the Company expects some PCS services to be competitive with the Company's cellular and paging operations. The Company is unable to estimate the impact of such potentially competitive services on the Company's operations.\nAT&T's announcement in August 1993 that it will merge with McCaw may increase the level of competition that the Company faces in Los Angeles and Sacramento, where the Company's cellular operations compete with McCaw. The merger will permit McCaw to use the AT&T brand name in marketing its cellular service and give McCaw access to AT&T's sales, customer service and distribution channels, as well as to the research and development capabilities of AT&T Bell Laboratories. The Company and McCaw jointly operate cellular systems in San Francisco, San Jose, Kansas City, Dallas, and certain other markets through CMT Partners.\nREGULATION. The Company's operations are highly regulated and its results of operations may be significantly affected by new regulatory developments. For example, a decision rendered on October 26, 1993 by the California Public Utilities Commission (\"CPUC\") as a result of an investigation into the cellular industry would have imposed on cellular operators an accounting methodology to separate wholesale and retail cost, permitted resellers to operate a switch interconnected to the cellular carrier's facilities, and required unbundling of certain wholesale rates to the resellers. These unbundled rates would have been calculated by applying a rate of return of 14.75% to the cost basis of assets utilized by such reseller switch. On May 19, 1993, the CPUC granted limited rehearing of the decision. The CPUC\ngranted the Company's application for rehearing on the issue of the unbundling of carrier's wholesale rates and the imposition of a 14.75% benchmark rate of return. It noted that the hearing record was sufficient regarding the technical feasibility of a reseller switch and would seek comments only on the economic aspects of the concept. The CPUC also rescinded its order to modify the method for allocating cost between wholesale and retail operations. On December 17, 1993, the CPUC issued an Order Instituting Investigation (\"OII\")into the regulation of Mobile Telephone Service and Wireless Communications, consolidating the rehearing of the above issues into a new investigation. The OII initiates a review of the Commission's historic policies governing cellular telephone service and proposes to classify cellular carriers as dominant carriers and resellers and new providers of mobile services as non-dominant carriers. The Commission requests comments on alternative frameworks for regulating cellular carriers: (1) price caps at current rates (the existing framework); (2) rate-of-return or cost-based price caps which would result in mandatory price reductions; and (3) relaxed regulation. Comments and rebuttals have been filed. Because the outcome of the OII is uncertain, the Company cannot estimate the effects of this matter, which could be material, on the Company's financial condition and results of operations. No assurance can be given that regulatory changes that may be enacted by federal, state, or foreign governmental authorities will not have a material adverse effect on the Company's future business.\nInitial operating licenses are generally granted for terms of 10 years, renewal upon application to the FCC. Licenses may be revoked any time and license renewal applications may be denied for cause. The Company has filed an application for renewal of its Los Angeles cellular license, whose initial term expired in October 1993. The Company expects that its application will be granted, although an opposing party has filed an informal objection and a petition to deny the Company's application, alleging violations of FCC rules and Communications Act of 1934. The Company's licenses in San Diego, Detroit, Cleveland and Sacramento expire in October 1994 and all of its other significant domestic cellular licenses expire before the end of 1996. While the Company believes that each of these licenses will be renewed based upon FCC rules establishing a presumption in favor of licensees that have complied with their regulatory obligations during the initial period, there can be no assurance that any license will be renewed. The licensing authorities in Germany and Portugal have not established any procedures for renewal of the cellular licenses held by MMO and Telecel. Such licenses expire in 2009 and 2006, respectively.\nEFFECT OF RECESSION. The effects of the recession have been felt in the areas of bad debt, increased promotional expense and rate reductions to generate subscriber growth, and lower usage. As most of the country slowly recovers, the California economy is still lagging. If the recession continues, the Company will continue to focus on cost containment efforts, closely monitor bad debt, and promote its products in existing markets.\nINTERNATIONAL ENVIRONMENTAL CONDITIONS. The Company has been successful in obtaining significant interests in cellular licenses in Germany, Portugal, Japan, and Sweden. Its paging and other operations cover Spain, Portugal, Thailand, France, and Korea. The Company is not presently aware of any economic, political, or competitive conditions in such countries that would have a material adverse effect on the Company.\nCONTINGENCIES\nGARABEDIAN DBA WESTERN MOBILE TELEPHONE COMPANY V. LASMSA LIMITED PARTNERSHIP, ET AL. A class action complaint has been filed naming as defendants, among others, Los Angeles Cellular Telephone Company (\"LACTC\") and the Company, as general partner for Los Angeles SMSA Limited Partnership. The plaintiff alleges that LACTC and the Company conspired to fix the price of wholesale and retail cellular service in the Los Angeles market. The plaintiff alleges damages for the class \"in a sum in excess of $100 million.\" On January 31, 1994, the Company filed a demurrer to the complaint. No discovery has been undertaken as of March 3, 1994. The Company intends to defend itself vigorously. The Company does not anticipate this proceeding will have a material adverse effect on the Company's financial position. Also, see Note N to the Consolidated Financial Statements of AirTouch Communications and Subsidiaries.\nLIQUIDITY AND CAPITAL RESOURCES\nThe Company defines liquidity as its ability to generate resources to finance business expansion, construct capital assets, and pay its current obligations. The Company has met its financing needs from internally generated funds, equity infusions from Telesis, and external financing through issuance of common stock.\nThe Company requires substantial capital to expand and operate its existing wireless systems, to construct new wireless systems and to acquire interests in existing wireless systems. In the past, the Company has met its funding requirements primarily through short-term borrowings from PTCR and equity contributions from Telesis. During 1993, Telesis provided equity contributions of $1,179.8 million which the Company used to significantly reduce its indebtedness to PTCR. The Company's indebtedness to PTCR totaled $958.4 million at December 31, 1992 and, as a result of debt repayments and the settlement of the Company's tax benefits receivable from Telesis, the Company reduced its indebtedness to PTCR to $0.3 million at December 31, 1993. Prior to the IPO, the Company continued to borrow from PTCR to the extent that its existing cash resources and cash flow from operations were not sufficient to meet the Company's funding requirements. On December 2, 1993, the Company sold to the public 68,500,000 shares of Common Stock, representing 13.9% of the total number of outstanding shares. The net proceeds to the Company from such sale were $1,489.2 million.\nThe Company generated cash from operating activities of $439.7 million, $198.9 million, and $169.1 million during 1993, 1992, and 1991, respectively. The Company's domestic cellular and paging operations were primarily responsible for these cash flows. The increase in 1993 also included the settlement of the Company's tax benefits receivable from Telesis. (See \"Interest Expense\" and \"Income Taxes.\")\nThe Company's cash used for investing activities was $1,441.4 million, $491.9 million, and $430.2 million in 1993, 1992, and 1991, respectively. The Company's cash used for investing activities increased in 1993 primarily due to the investment of the proceeds from the IPO, and investments in Wichita and Topeka Cellular and NordicTel. The increase in investments in 1992 reflects increased construction funding for MMO's and Telecel's cellular systems (both of which became operational in 1992) and the purchase of an additional 6.6% equity in CCI for approximately $92.0 million.\nThe Company will be required to make substantial expenditures in connection\nwith its efforts to expand its wireless business. The size of such expenditures is difficult to anticipate primarily because of uncertainty as to the Company's success in its pursuit of new wireless licenses and attractive acquisition opportunities. In the United States, the Company plans to pursue additional cellular and paging opportunities and intends to participate actively in the license application process for PCS. Internationally, the Company currently is negotiating to acquire an interest in a digital cellular system in Belgium, is competing or planning to compete for wireless licenses in South Korea, Italy, the Netherlands, Spain, and France and also is considering opportunities in other parts of the world.\nThe Company also expects to make capital expenditures of approximately $700 million with respect to its existing domestic and international wireless systems, including the deployment of digital technology in its domestic cellular systems during 1994 and 1995. As of March 1, 1994, the Company was committed to spend up to $191 million for the acquisition of property, plant and equipment and expects that capital contributions to its existing international ventures will total approximately $135 million prior to the end of 1995. The Company used approximately $49.5 million of the net IPO proceeds to purchase notes in connection with which a subsidiary of the Company has issued a letter of responsibility. For a description of a note payable to an affiliate to which these notes relate, see Notes E and G to the Consolidated Financial Statements of AirTouch Communications and Subsidiaries. The Company has agreed to fund CCI's redemption of up to 10.04 million shares of CCI stock at $60 per share in October 1995 and to purchase from CCI shares or stock options representing in the aggregate approximately 2.4 million shares at a price of $60 per share, less the exercise price in the case of stock options (the \"Mandatory Redemption Obligation\" or \"MRO\"). The Company's funding obligation in connection with the MRO will not exceed $720 million. In addition, the Company may be obligated to make payments to CCI stockholders in the event that the Company does not elect, after three appraisals during the 18-month period beginning in August 1996, to purchase, at a price reflecting the appraised private market value of CCI's interest in New Par (and such other CCI assets and related liabilities as the Company and CCI agree shall be retained), all of the outstanding shares of CCI stock which it does not then hold. The Company has agreed to provide CCI with a $600 million letter of credit in support of the Company's obligations in the MRO. See Note E to the Consolidated Financial Statements of AirTouch Communications and Subsidiaries.\nThe Company's cash received from financing activities was $1,631.3 million, $293.1 million, and $254.6 million for 1993, 1992, and 1991, respectively. The cash received from financing activities primarily reflects proceeds from the IPO, short-term borrowings from PTCR, and equity contributions from Telesis. The Company does not expect its operations to generate sufficient cash to meet its capital requirements for the next several years. However, the Company currently believes that the net proceeds from the IPO, together with cash flow from operations, will be sufficient to satisfy the Company's estimated funding requirements through mid-1995. After such proceeds are invested, the Company expects that it will need to raise additional funds through bank borrowings or public or private sales of debt or equity securities. Although there can be no assurance that such funding will be available, the Company believes that it will be able to access the capital markets on terms and in amounts adequate to meet its objectives.\nDIVIDEND POLICY\nThe Company currently intends to retain future earnings for the development of its business and does not anticipate paying cash dividends on its Common Stock\nin the foreseeable future. The Company's future dividend policy will be determined by its Board of Directors on the basis of various factors, including the Company's results of operations, financial condition, capital requirements and investment opportunities.\nEFFECTS OF RECENTLY ISSUED ACCOUNTING STANDARDS\nPOSTRETIREMENT BENEFITS OTHER THAN PENSIONS. In December 1990, the Financial Accounting Standards Board (\"FASB\") issued SFAS No. 106, \"Employers' Accounting for Postretirement Benefits Other than Pensions\" (\"SFAS 106\"). The Company currently offers postretirement benefits other than pensions which are primarily retiree health care and life insurance benefits. SFAS 106 requires the Company to change the method of accounting for these postretirement benefits from a cash basis to an accrual basis. The Company adopted SFAS 106 effective January 1, 1993 with immediate recognition of its $9.1 million transition obligation (before tax benefit of $3.5 million) as permitted by SFAS 106. This accounting change increased the Company's 1993 operating expenses by approximately $1.9 million.\nPOSTEMPLOYMENT BENEFITS. In November 1992, the FASB issued SFAS No. 112, \"Employers' Accounting for Postemployment Benefits\" (\"SFAS 112\"). The Company offers workers' compensation, short- and long-term disability, medical benefit continuation, and severance pay. These benefits are paid to former employees not yet retired. SFAS 112 requires that these postemployment benefits be accounted for on an accrual basis beginning in 1994. The Company adopted SFAS 112 on January 1, 1994. Based on the accrual requirements, the Company expects that future recognized expense under SFAS 112 will not differ materially from current expenses and therefore believes that the adoption of SFAS 112 will not have a material impact on the Company's results of operations or financial condition.\nINVESTMENTS IN DEBT AND EQUITY SECURITIES. In May 1993, the FASB issued SFAS No. 115, \"Accounting for Certain Investments in Debt and Equity Securities\" (\"SFAS 115\"). The new standard will change the carrying basis for certain equity and debt securities. The Company adopted SFAS 115 on January 1, 1994, consistent with the required adoption period. The Company does not expect SFAS 115 to materially affect its financial position or results of operations.\nITEM 8.","section_7A":"","section_8":"ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.\nThe Company's consolidated financial statements and supplemental data, as well as those of its significant subsidiaries, New Par and MMO, together with the reports of Coopers & Lybrand, Ernst & Young and KPMG Peat Marwick, independent accountants, are included elsewhere herein. Reference is made to the \"Index to Financial Statements\" immediately preceding page.\nITEM 9.","section_9":"ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.\nNo disagreements with accountants on any accounting or financial disclosure occurred during the Company's two most recent fiscal years or any subsequent interim period.\nPART III\nITEM 10.","section_9A":"","section_9B":"","section_10":"ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.\nSet forth below is certain information concerning the persons who serve as directors and executive officers of the Company. The executive officers serve at the pleasure of the Board of Directors and are subject to removal at any time. At the time of the Spin-off, Messrs. Ginn, Christensen, Gyani and Sarin, who are also officers of Telesis, will resign their positions at Telesis. Directors are elected by shareholders at each annual meeting or, in the case of a vacancy or increase in the number of directors, by the directors then in office, to serve until the next annual meeting of shareholders and until their successors are elected and qualified.\nNAME AGE POSITION AND OFFICES HELD ------------------------ ----- --------------------------------------\nSam Ginn ............... 56 Chairman of the Board and Chief Executive Officer C. Lee Cox ............. 52 President and Chief Operating Officer and Director Lydell L. Christensen .. 59 Executive Vice President and Chief Financial Officer Margaret G. Gill ....... 54 Senior Vice President, Legal and External Affairs and Secretary Arun Sarin ............. 39 Senior Vice President, Corporate Strategy\/ Development and Human Resources F. Craig Farrill ....... 41 Vice President, Technology, Planning and Development Mohan S. Gyani ......... 42 Vice President, Finance and Treasurer George F. Schmitt ...... 50 Vice President, International Operations Susan G. Swenson ....... 45 Vice President Paul H. White .......... 49 General Counsel Charlie E. Jackson ..... 59 President and Chief Executive Officer, AirTouch Paging John R. Lister ......... 55 President and Co-Chief Executive Officer, PacTel Teletrac Jan K. Neels .......... 55 President and Chief Executive Officer, AirTouch International Carol A. Bartz ........ 45 Director Donald G. Fisher ...... 65 Director James R. Harvey ....... 59 Director Paul Hazen ............ 51 Director Arthur Rock ........... 67 Director Charles R. Schwab ..... 56 Director George P. Shultz ...... 72 Director\nMr. Ginn has been Chairman of the Board, President and Chief Executive Officer of Telesis since 1988. He served as President and Chief Operating Officer of Telesis from 1987 through 1988 and as Vice Chairman of the Board from 1983 through 1987. Previously, Mr. Ginn served as a director and as President and Chief Operating Officer of the Company from 1984, when the Company was formed, to 1987. He has been Chairman of Pacific Bell since 1988 and was Vice Chairman from 1987 through 1988. Mr. Ginn has been a director of Telesis since 1983 and is also a director of Chevron Corporation, Safeway Inc. and Transamerica Corporation. Mr. Ginn will resign from the Board of Directors of Telesis at the time of the Spin-off.\nMr. Cox has been President of the Company since 1987. Mr. Cox was a director of the Company from 1987 to April 1993 and became a director again in January 1994. Mr. Cox has been a director and a Group President of Telesis since 1988. Mr. Cox began his career with Pacific Bell in 1964 and, prior to joining the Company in 1987, held various senior management positions at Pacific Bell. Mr. Cox will resign from the Board of Directors of Telesis at the time of the Spin-off.\nMr. Christensen was named Executive Vice President, Chief Financial Officer and Treasurer of Telesis in 1992. In March 1993, Mohan S. Gyani, who reports to Mr. Christensen, was named Treasurer of Telesis. From 1987 to 1992, Mr. Christensen was Vice President and Treasurer of Telesis. He was a director of the Company from 1992 to 1993.\nMrs. Gill became Senior Vice President, Legal and External Affairs and Secretary of the Company in January 1994. She had been a partner in the law firm of Pillsbury Madison & Sutro since 1973 and was the head of the firm's Corporate and Securities Group.\nMr. Sarin was named Senior Vice President, Corporate Strategy\/Development and Human Resources of the Company in December 1993. Mr. Sarin became a joint officer of Telesis and the Company in March 1993 when he was named Vice President, Organization Design at Telesis and Vice President, Strategy at the Company. In 1992, he became Vice President and General Manager, Bay Operations for Pacific Bell. In 1990, he became Vice President, Chief Financial Officer and Controller of Pacific Bell. He joined Pacific Bell in 1989 and shortly thereafter was named Vice President, Corporate Strategy for Telesis. In 1987, Mr. Sarin was named Vice President and Chief Financial Officer of PacTel Personal Communications (\"PerCom\"), the former holding company for AirTouch Cellular and AirTouch Paging.\nMr. Farrill has been Vice President, Technology, Planning and Development for the Company since 1990. From 1987 to 1990, Mr. Farrill was a Vice President of AirTouch Cellular responsible for the engineering, design and management of domestic cellular operations.\nMr. Gyani became Vice President, Finance and Treasurer of the Company in November 1993. He has been a Vice President and the Treasurer of Telesis since March 1993. In 1992 he was named Vice President and Controller at Pacific Bell. Previously Mr. Gyani held various positions at Telesis and Pacific Bell. He began his career with Pacific Bell in 1978.\nMr. Schmitt has been Vice President of the Company and a member of the Board of Management of MMO since 1990. From 1987 to 1990, Mr. Schmitt was Vice President for State Regulatory Affairs for Pacific Bell. Mr. Schmitt began his career with Pacific Bell in 1965 and became a Vice President in 1985.\nMs. Swenson has been Vice President of the Company and President of Bay Area Cellular Telephone Company since March 1994. From April 1993 to March 1994, she was Vice President and General Manager of Pacific Bell's Bay Area Regional Marketing Group, and from 1990 to April 1993, she was President and Chief Operating Officer of AirTouch Cellular. Prior to joining AirTouch Cellular, Ms. Swenson was Pacific Bell's Vice President for Customer Services in Southern California.\nMr. White has been General Counsel for the Company since 1987. Mr. White was Assistant General Counsel for Telesis from 1985 to 1987 and prior to that was an attorney for Pacific Bell. Mr. White began his career with Pacific Bell in\n1977.\nMr. Jackson has been President and Chief Executive Officer of AirTouch Paging since 1986. He was named to that position after Telesis acquired Communication Industries, Inc. Prior to the acquisition, Mr. Jackson was President and General Manager of Gencom Incorporated, a subsidiary of Communication Industries that provided paging, mobile telephone and cellular services.\nMr. Lister has been President and Co-Chief Executive Officer of PacTel Teletrac since April 1992. He has also been a Vice President of the Company since 1992. In November 1990, Mr. Lister joined PacTel Teletrac as President and Chief Operating Officer. Since 1988, Mr. Lister had been a Vice President at AirTouch Cellular. Mr. Lister joined PerCom in 1987 as Vice President of Corporate Development.\nMr. Neels has been President and Chief Executive Officer of AirTouch International since 1987. Mr. Neels joined AirTouch International in 1986 as a Vice President, overseeing the business operations and marketing activities of subsidiaries in Spain, Japan, Korea and Thailand.\nMs. Bartz became a director of the Company in February 1994. She has been Chairman of the Board, President and Chief Executive Officer of Autodesk, Inc. since April 1992. From 1983 to April 1992, Ms. Bartz served in various positions with Sun Microsystems, Inc., most recently as Vice President of Worldwide Field Operations.\nMr. Fisher became a director of the Company in January 1994, and is a member of the Compensation and Personnel and Nominating Committees. Mr. Fisher is the founder, Chairman of the Board and Chief Executive Officer of The Gap, Inc. He is a director of Ross Stores, Inc., The Charles Schwab Corporation, San Francisco Bay Area Council and the National Retail Federation.\nMr. Harvey became a director of the Company in April 1993, and is Chairman of the Compensation and Personnel Committee and a member of the Executive and Nominating Committees. Mr. Harvey has been Chairman of the Board of Transamerica Corporation since 1983 and was Chief Executive Officer of Transamerica from 1981 through 1991. He is a director of Telesis, The Charles Schwab Corporation, McKesson Corporation, Sedgwick Group plc, The National Park Foundation and The Nature Conservancy. Mr. Harvey will resign from the Board of Directors of Telesis at the time of the Spin-off.\nMr. Hazen became a director of the Company in April 1993, and is Chairman of the Audit Committee and a member of the Executive and Nominating Committees. Mr. Hazen has been President and Chief Operating Officer of Wells Fargo & Company and its principal subsidiary, Wells Fargo Bank, N.A., since 1984. He is a director of Telesis, Wells Fargo & Company and its subsidiary, Wells Fargo Bank, N.A., Phelps Dodge Corporation and Safeway Inc. Mr. Hazen will resign from the Board of Directors of Telesis at the time of the Spin-off.\nMr. Rock became a director of the Company in January 1994, and is a member of the Audit and Nominating Committees. Mr. Rock has been a principal in Arthur Rock & Co., a venture capital firm, since 1969. He is a director of Intel Corporation, Argonaut Group, Inc. and Teledyne, Inc. Mr. Rock is married to Toni Rembe, who is a director of Telesis. Ms. Rembe beneficially owns 1,573 shares of Telesis stock and holds options to purchase an additional 3,000 shares of Telesis stock.\nMr. Schwab became a director of the Company in January 1994, and is Chairman\nof the Nominating Committee and a member of the Compensation and Personnel Committee. Mr. Schwab is the founder, Chairman of the Board and Chief Executive Officer of The Charles Schwab Corporation and Chairman of Charles Schwab & Co. Inc. He is a director of The Gap, Inc. and Transamerica Corporation.\nMr. Shultz became a director of the Company in January 1994, and is a member of the Compensation and Personnel, Executive, and Nominating Committees. Mr. Shultz has been a Professor at the Stanford University Graduate School of Business since 1974. He served as United States Secretary of State from 1982 to 1989. Mr. Shultz is a Distinguished Fellow at the Hoover Institution, a member of the Board of the Bechtel Group, Chairman of J.P. Morgan's International Council and Chairman of the Governor's California Economic Policy Advisory Council.\nITEM 11.","section_11":"ITEM 11. EXECUTIVE COMPENSATION.\nThe following table discloses compensation earned by the Chief Executive Officer and the four other most highly paid executive officers (the \"Named Executive Officers\") for the three fiscal years ended December 31, 1993. Unless otherwise indicated, positions listed are with the Company.\n1993 LONG-TERM STOCK INCENTIVE PLAN\nADOPTION AND AMENDMENTS. The Company's 1993 Long-Term Stock Incentive Plan (the \"Stock Plan\") was initially adopted by the Company's Board of Directors on June 25, 1993, and approved by Telesis (as the Company's majority shareholder) upon the recommendation of the Compensation and Personnel Committee of the Telesis Board. Such committee consists entirely of directors of Telesis who are not officers or employees of Telesis, the Company or any subsidiary of either. The Stock Plan has been amended from time to time thereafter, and the Board of Directors may amend any aspect of the Stock Plan at any time in the future. Amendments are subject to the approval of the Company's shareholders only to the extent required by applicable laws or regulations.\nSHARES AVAILABLE FOR ISSUANCE. The Stock Plan provides for awards in the form of restricted shares, stock units, options or SARs, or any combination thereof. The total number of shares of Common Stock available for issuance under the Stock Plan is 24,000,000, subject to anti-dilution provisions. If any restricted shares, stock units, options or Spars granted under the Plan are forfeited, or if options or Spars terminate for any other reason prior to exercise, then the underlying shares of Common Stock again become available for awards.\nADMINISTRATION. The Stock Plan is administered by the Compensation and Personnel Committee (the \"C&P Committee\") of the Company's Board of Directors. The C&P Committee consists entirely of directors of the Company who are not officers or employees of Telesis, the Company or any subsidiary of either. The C&P Committee selects the employees of the Company or any subsidiary who will receive awards, determines the size of the award (limited, in the case of options or SARs, to 500,000 shares of Common Stock in any calendar year for any employee) and establishes the vesting or other conditions. The Company's Board of Directors may also appoint an additional committee, which consists of directors who may be officers of the Company. This committee may administer the Stock Plan with respect to participants other than directors and officers.\nELIGIBILITY. Employees, directors, consultants and advisors of the Company, its subsidiaries, or affiliates of which the Company owns at least 50% are eligible to participate in the Stock Plan, although incentive stock options may be granted only to employees of the Company or a subsidiary. The participation of nonemployee directors of the Company is limited to certain automatic grants of nonstatutory stock options, except to the extent the Company's Board of Directors implements provisions that would permit a nonemployee director to convert the annual retainer payments and meeting fees to stock options or stock units, as described below.\nPAYMENT. In general, no payment will be required upon receipt of an award. The Stock Plan, however, permits the grant of awards in consideration of a cash payment or a voluntary reduction in cash compensation.\nRESTRICTED STOCK. Restricted shares are shares of Common Stock that are subject to forfeiture in the event that the applicable vesting conditions are not satisfied, and they are nontransferable prior to vesting (except for certain transfers to a trustee). Restricted shares have the same voting and dividend rights as other shares of Common Stock.\nSTOCK UNITS. A stock unit is an unfunded bookkeeping entry representing the equivalent of one share of Common Stock, and it is nontransferable prior to the holder's death. A holder of stock units has no voting rights or other\nprivileges as a stockholder but may be entitled to receive dividend equivalents equal to the amount of any dividends paid on the same number of shares of Common Stock. Dividend equivalents may be converted into additional stock units or settled in the form of cash, Common Stock or a combination of both.\nStock units, when vested, may be settled by distributing shares of Common Stock or by a cash payment corresponding to the fair market value of the appropriate number of shares of Common Stock, or a combination of both. The number of shares of Common Stock (or the corresponding amount of cash) distributed in settlement of stock units may be greater or smaller than the number of stock units, depending upon the attainment of performance objectives. Vested stock units will be settled at the time determined by the C&P Committee. If the time of settlement is deferred, interest or additional dividend equivalents may be credited on the deferred payment. The recipient of restricted shares or stock units may pay all projected withholding taxes relating to the award with Common Stock rather than cash.\nSTOCK OPTIONS. Options may include nonstatutory stock options (\"NSOs\") as well as incentive stock options (\"ISOs\") intended to qualify for special tax treatment. The term of an ISO cannot exceed 10 years, and the exercise price of an ISO must be equal to or greater than the fair market value of the Common Stock on the date of grant. (On March 4, 1994, the closing sale price of the Company's Common Stock on the New York Stock Exchange was $23 3\/8) The Stock Plan permits the grant of NSOs with an exercise price that varies according to a predetermined formula.\nThe exercise price of an option may be paid in any lawful form permitted by the C&P Committee, including (without limitation) the surrender of shares of Common Stock or restricted shares already owned by the optionee. The Stock Plan also allows the optionee to pay the exercise price of an option by giving \"exercise\/sale\" or \"exercise\/pledge\" directions. If exercise\/ sale directions are given, the option shares are issued directly to a securities broker selected by the Company who, in turn, sells shares in the open market. The broker remits to the Company the proceeds from the sale of these shares to the extent necessary to pay the exercise price and any withholding taxes, and the optionee receives the remaining option shares or cash. If exercise\/pledge directions are given, the option shares are issued directly to a securities broker or other lender selected by the Company. The broker or other lender will hold the shares as security and will extend credit for up to 50 percent of their market value. The loan proceeds will be paid to the Company to the extent necessary to pay the exercise price and any withholding taxes. Any excess loan proceeds may be paid to the optionee. If the loan proceeds are insufficient to cover the exercise price and withholding taxes, the optionee will be required to pay the deficiency to the Company at the time of exercise. The C&P Committee may also permit optionees to satisfy their withholding tax obligation upon exercise of an NSO by surrendering a portion of their option shares to the Company.\nSTOCK APPRECIATION RIGHTS (\"SARs\"). SARs permit the participant to elect to receive any appreciation in the value of the underlying stock from the Company, either in shares of Common Stock or in cash or a combination of the two, with the C&P Committee having the discretion to determine the form in which such payment will be made. The amount payable on exercise of an SAR is measured by the difference between the market value of the underlying stock at exercise and the exercise price. SARs may, but need not, be granted in conjunction with options. Upon exercise of an SAR granted in tandem with an option, the corresponding portion of the related option must be surrendered\nand cannot thereafter be exercised. Conversely, upon exercise of an option to which an SAR is attached, the SAR may no longer be exercised to the extent that the corresponding option has been exercised. All options and SARs are nontransferable prior to the optionee's death.\nVESTING CONDITIONS. As noted above, the C&P Committee determines the number of restricted shares, stock units, options or SARs to be included in the award as well as the vesting and other conditions. The vesting conditions may be based on the employee's service, his or her individual performance, the Company's performance or other criteria. Vesting may be accelerated in the event of the employee's death, disability or retirement, in the event of a change in control with respect to the Company, or upon other events. Moreover, the C&P Committee may determine that outstanding options and SARs will become fully vested if it has concluded that there is a reasonable possibility that a change in control will occur within six months thereafter.\nFor purposes of the Stock Plan, the term \"change in control\" is defined as (1) the acquisition, directly or indirectly, of at least 20 percent of the outstanding securities of the Company by a person other than Telesis or an employee benefit plan of the Company, (2) a greater than one-third change in the composition of the Board of Directors of the Company over a period of 24 months or, if fewer than 24 months have elapsed since the Spin-off, over the period following the Spin-off (if such change was not approved by a majority of the existing directors), (3) certain mergers and consolidations involving the Company, (4) a liquidation of the Company or (5) a sale of all or substantially all of the Company's assets. The term \"change in control\" does not include a reincorporation of the Company in a different state, the Spin-off and certain other transactions.\nLIMITATIONS UNDER TAX LAWS. Awards under the Stock Plan may provide that if any payment (or transfer) by the Company to a recipient would be nondeductible by the Company for federal income tax purposes pursuant to section 280G of the Internal Revenue Code, then the aggregate present value of all such payments (or transfers) will be reduced to an amount which maximizes such value without causing any such payment (or transfer) to be nondeductible.\nMODIFICATIONS. The C&P Committee is authorized, within the provisions of the Stock Plan, to amend the terms of outstanding restricted shares or stock units, to modify or extend outstanding options or SARs or to exchange new options for outstanding options, including outstanding options with a higher exercise price than the new options.\nNONEMPLOYEE DIRECTORS. Members of the Company's Board of Directors who are not employees of the Company or its subsidiaries will receive an annual grant of 1,000 NSOs (subject to anti-dilution adjustments) under the Stock Plan. Starting in 1995, these grants are made at the conclusion of each regular annual meeting of the Company's shareholders to nonemployee directors who will continue to serve on the Board of Directors thereafter. Nonemployee directors who join the Company's Board of Directors on or after February 25, 1994, will receive a one-time grant of 10,000 NSOs (subject to anti-dilution adjustments). As a condition to these one-time grants, the nonemployee director must demonstrate that he or she beneficially owns shares of Common Stock with a value of $100,000 or more within 30 days after the grant. The exercise price of NSOs granted to nonemployee directors is equal to the market value of Common Stock on the date of grant. The NSOs will become exercisable one year after the grant or, if earlier, in the event of the director's death or total and permanent disability or in the event of a change in control of the Company. The NSOs expire (i) ten years after the date of grant, (ii) 36\nmonths after the termination of the director's service due to disability or due to retirement after serving at least three years, (iii) 12 months after the director's death, and (iv) three months after the termination of the director's service for any other reason.\nNonemployee directors and prospective nonemployee directors named in the prospectus for the Company's initial public offering received a one-time grant of 10,000 NSOs under the Stock Plan on November 19, 1993. The exercise price is equal to the initial public offering price ($23 per share). These NSOs will become exercisable on the latest of (i) the first anniversary of the initial public offering (December 2, 1994), (ii) the date when the optionee completes one year of service as a member of the Company's Board of Directors or (iii) the Spin-off. These NSOs also become exercisable in full in the event of the director's death or total and permanent disability or a \"change in control\" of the Company. The NSOs expire on the earliest of (i) November 18, 2003, (ii) 12 months after the nonemployee director's death, (iii) 36 months after the termination of the director's service due to retirement after serving at least three years or due to disability or (iv) three months after the termination of the director's service for any other reason. As a condition to these one-time grants, the nonemployee director or prospective nonemployee director was required to demonstrate that he beneficially owned shares of Common Stock with a value of $100,000 or more at any time within 30 days after the initial public offering.\nFinally, the Company's Board of Directors may implement provisions of the Stock Plan that permit a nonemployee director to elect to receive all or a portion of his or her annual retainer payments and meeting fees in the form of NSOs or stock units to be issued under the Stock Plan, provided the election is made at least six months before such fees are payable.\nTELESIS OPTIONS. It is expected that, in connection with the Spin-off, unexercised Telesis Options held by the directors, officers and other employees of the Company will be replaced by Company Options granted under the Stock Plan. See \"-Stock Ownership\" for a description of the method by which Telesis Options will be converted into Company Options.\nTELESIS AND COMPANY LTIP AWARDS. It is expected that, in connection with the Spin-off, the awards made to officers of the Company under the Long-Term Incentive Plans of Telesis and the Company for the three-year performance cycles ending December 31, 1994 and December 31, 1995 will be converted into awards relating to the Company's Common Stock. Awards for those portions of these performance cycles which are completed as of the Spin-off will be settled on the basis of the actual results achieved under the applicable performance measures up to the date of the Spin-off. Settlement will be made in the form of restricted shares of the Company's Common Stock granted under the Stock Plan. Restricted shares granted in lieu of awards for the performance cycle ending December 31, 1994 will vest not later than January 28, 1995, and restricted shares granted to replace awards for the performance cycle ending December 31, 1995 will vest not later than January 27, 1996. Awards for the uncompleted portions of these performance cycles, and the dividend equivalents that would have been paid with respect to such awards, will be replaced by options to purchase Common Stock granted under the Stock Plan. To determine the number of options to be granted, an appropriate option valuation model will be used. Options granted to replace awards for the performance cycle ending December 31, 1994 will become exercisable not later than January 28, 1995, and options granted in substitution for awards for the performance cycle ending December 31, 1995 will become exercisable not later than January 27, 1996.\nINITIAL RESTRICTED STOCK GRANT. The Company intends to grant restricted shares under the Stock Plan to all employees of the Company and its wholly owned subsidiaries at the time of the Spin-off, except those employees who have received stock options under the Pacific Telesis Group Stock Option and Stock Appreciation Rights Plan. The value of shares included in each employee's award will not exceed 10% of that employee's total compensation. It is expected that these shares will vest on the earlier of (a) the date 10 years after the Spin-off or (b) the 15th consecutive trading day on which the closing price of Common Stock is at least 200% of the initial public offering price ($23 per share). If an employee's service terminates before these shares vest, they will be forfeited, except that a stock award agreement may provide for accelerated vesting in the event of termination of service on account of death, total and permanent disability, or retirement. As an example, assuming a price for the Common Stock of the Company of $23 per share at the time of the Spin-off, the Company would grant approximately 400,000 shares of restricted stock.\nTAX CONSEQUENCES OF OPTIONS. Neither the optionee nor the Company will incur any federal tax consequences as a result of the grant of an option. The optionee will have no taxable income upon exercising an ISO (except that the alternative minimum tax may apply), and the Company will receive no deduction when an ISO is exercised. Upon exercising an NSO, the optionee generally must recognize ordinary income equal to the \"spread\" between the exercise price and the fair market value of Common Stock on the date of exercise; the Company ordinarily will be entitled to a deduction for the same amount. In the case of an employee, the option spread at the time an NSO is exercised is subject to income tax withholding, but the optionee generally may elect to satisfy the withholding tax obligation by having shares of Common Stock withheld from those purchased under the NSO. The tax treatment of a disposition of option shares acquired under the Stock Plan depends on how long the shares have been held and on whether such shares were acquired by exercising an ISO or by exercising an NSO. The Company will not be entitled to a deduction in connection with a disposition of option shares, except in the case of a disposition of shares acquired under an ISO before the applicable ISO holding periods have been satisfied.\nEMPLOYEE STOCK PURCHASE PLAN\nThe principal terms of an Employee Stock Purchase Plan (the \"ESPP\") were approved by the Company's Board of Directors on July 22, 1993 and by Telesis (as the Company's majority shareholder) upon the recommendation of the Compensation and Personnel Committee of the Telesis Board. The ESPP is expected to be adopted prior to the Spin-off and to take effect upon the Spin-off. The ESPP is intended to meet the requirements of Internal Revenue Code section 423. The ESPP will provide eligible employees of the Company and designated subsidiaries the opportunity to purchase Common Stock at a discount. Specific purchase periods will be established during which participants will contribute toward the purchase of stock through regular payroll deductions. Participants may withdraw their contributions at any time before the close of the purchase period. A pool of 2,400,000 shares of Common Stock has been reserved for issuance under the ESPP, subject to anti-dilution adjustments.\nSHORT-TERM INCENTIVE PLAN\nThe Company sponsors a Short-Term Incentive Plan applicable to executive officers and all employees (except certain salespersons) that represents the\nbonus component of their compensation. Under the plan, the Board of Directors determines a standard award amount for each employee position or level. The plan provides for annual payment of individual cash awards in amounts equal to a percentage of the standard award, based on the level of achievement of corporate performance objectives and on individual performance in the preceding year. Performance objectives are established by the Board and are generally financial, operating and strategic in nature. Amounts awarded for a fiscal year are normally paid in February of the following year.\nPENSION PLANS\nIt is expected that the Company's qualified pension plan, in connection with the Spin-off, will assume the liability for any accrued benefits of the Company's executive officers under a qualified pension plan of Telesis. (\"Qualified pension plans\" are plans that are intended to qualify for preferential tax treatment under section 401(a) of the Internal Revenue Code of 1986.) Corresponding assets will be transferred from the Telesis qualified plan to the Company's qualified plan. The accrual of service credit under the Company's qualified pension plan was discontinued on December 31, 1986 for most employees as of that date, although increases in compensation are still reflected in the computation of pensions. Accordingly, service after the Spin-off will not be counted in calculating the benefits of the Company's executive officers under the Company's qualified pension plan, but salary increases after the Spin-off will be taken into account.\nThe following table shows the total annual pension benefits (stated as a single-life annuity) that would be received by an executive officer of the Company retiring today at age 65 under the Telesis qualified and nonqualified pension plans. It assumes various specified levels of total years of service and average annual compensation (which includes base salary and the standard award under the Short-Term Incentive Plan) during the final five years of service. The benefits shown in the table generally are not subject to offsets for Social Security benefits or other payments.\nAverage Annual Compensation During Final Years of Service Prior to Retirement Five Years of Service 15 20 25 30 35 --------------- ---------- ---------- --------- ---------- ----------\n$ 450,000 $ 97,875 $130,500 $163,125 $195,750 $228,375 500,000 108,750 145,000 181,250 217,500 253,750 650,000 141,375 188,500 235,625 282,750 329,875 700,000 152,250 203,000 253,750 304,500 355,250 800,000 174,000 232,000 290,000 348,000 406,000 900,000 195,750 261,000 326,250 391,500 456,750 1,000,000 217,500 290,000 362,500 435,000 507,500 1,150,000 250,125 333,500 416,875 500,250 583,625 1,250,000 217,875 362,500 453,125 543,750 634,375 1,400,000 304,500 406,000 507,500 609,000 710,500\nThe 1993 compensation of Messrs. Ginn, Cox, Christensen, Schmitt and Neels covered by the pension plans was $1,230,000, $720,000, $425,000, $399,300, and $0, respectively. As of December 31, 1993, the years of service of Messrs. Ginn, Cox, Christensen, Schmitt and Neels that are credited under the pension plans were 33, 29, 6, 28 and 0, respectively. Because Mr. Christensen is covered under a Telesis nonqualified pension plan providing increased pension benefits to mid-career hires, his pension is effectively calculated as if he had 12 years of service.\nUnder other provisions of the Telesis nonqualified pension plans, eligible officers who terminate after attaining age 55 and completing 10 years of service as an officer are entitled to a minimum pension of 45% of average annual compensation. This minimum pension is increased by an additional 1% per year, up to a maximum of 50%, at 15 or more years of service as an officer. As of December 31, 1993, the completed years of service of Messrs. Ginn, Cox, Christensen, Schmitt and Neels that are credited under the minimum pension provisions were 15, 9, 5, 7 and 5, respectively.\nEMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT OR CHANGE-IN-CONTROL ARRANGEMENTS\nTelesis has entered into employment agreements with certain officers of Telesis or the Company, including each of the Named Executive Officers, which provide for specified payments in the event of an involuntary termination of employment. Such agreements do not have a fixed term and may be terminated by either party upon three years' notice (in the case of Messrs. Ginn, Cox and Christensen) or one year's notice (in the case of Messrs. Schmitt and Neels). Telesis has assigned, or will assign prior to the Spin-off, such agreements to the Company (except that Mr. Ginn's employment agreement by its terms may not\nbe assigned).\nThe amount of the payments depends on whether the involuntary termination occurs within three years after a \"change in control.\" If an officer's employment is involuntarily terminated for any reason other than cause, death or disability, whether or not there has been a \"change in control,\" Telesis or the Company, as applicable, will make a cash payment of three times base compensation for Messrs. Ginn, Cox and Christensen or of one times base compensation for Messrs. Schmitt and Neels, plus 100% of the standard award under the Short-Term Incentive Plan applicable for that calendar year. In such event, Telesis or the Company will also compensate the officer for the value of any forfeited units under the Long-Term Incentive Plan, based on the fair market value of Telesis common stock on the date of employment termination, and for the value of any stock options and SARs that terminate at the officer's termination of employment, based on the difference between the fair market value of Telesis common stock at the effective date of termination and the option price (in the case of SARs, the difference between such fair market value and the option price at which the stock option related to the SAR was granted).\nUpon an involuntary termination (including \"constructive termination,\" which is defined as a material reduction in responsibilities, a material reduction in salary or benefits or a requirement to relocate) within three years after a \"change in control,\" all officers will receive a severance payment, in addition to the payments described in the preceding paragraph, when applicable, equal to approximately 200% of the officer's award under the Long-Term Incentive Plan for one year. Messrs. Ginn, Cox and Christensen would also receive approximately 200% of their standard award under the Short-Term Incentive Plan for the year in which employment terminates. For these agreements, \"change in control\" is defined generally as a party's acquisition, directly or indirectly, of 20% or more of Telesis' securities, a greater than one-third change in the composition of the Telesis Board of Directors in 24 months that was not approved by the majority of the existing directors, or certain mergers, consolidations, sales or liquidations of substantially all of the assets of Telesis. Any payments under the employment agreements are subject to the limitation that if the auditors of Telesis determine that any portion of the payments to be made is nondeductible by Telesis because of section 280G of the Internal Revenue Code, payments will be reduced to the extent of the nondeductible amount.\nIn connection with the Spin-off, it is expected that such agreements will be replaced by new agreements between the Company and its executive officers, the terms and conditions of which will be determined prior to the Spin-off by the Company's Board of Directors upon the recommendation of its C&P Committee.\nDIRECTOR COMPENSATION AND RELATED TRANSACTIONS\nNonemployee directors of the Company receive an annual retainer of $20,000 and fees of $1,200 for each board meeting attended and $800 for each committee meeting attended. The chairmen of the Audit, Compensation and Personnel, and Finance Committees each receive an additional annual retainer of $5,000, and the chairs of other committees of the Board receive additional annual retainers of $4,000. In addition, nonemployee directors are entitled to reimbursement for out-of-pocket expenses in connection with attendance at Board and committee meetings. Nonemployee directors may elect to defer receipt of all or part of their fees and retainers. Amounts deferred in 1994 will earn interest at a rate of 7.33% in 1994.\nEach nonemployee director of the Company has been granted stock options under the Company's 1993 Long-Term Stock Incentive Plan. See \"-1993 Long-Term Stock Incentive Plan - Nonemployee Directors.\" In addition, the Company has adopted an equity purchase program for nonemployee directors under which unsecured loans of up to $100,000 will be available to enable such directors to purchase shares of the Company's Common Stock. The term of any loan under the program will be five years, with an option to extend for an additional five years. Final maturity is ten years or 30 days following the borrower's resignation from the Board. The interest rate for such loans would be the greater of the mid-term, adjusted Applicable Federal Rate, as published by the Internal Revenue Service (currently 5.23%) or the Company's cost of funds, currently equivalent to the five-year Treasury rate plus 85 basis points (currently 6.75%), but in no event higher than permitted under California usury laws (10%). The interest rate will be established at the time the loan is made and will be reset if the loan is renewed for an additional five years. Interest will compound annually and be paid at the end of each five-year term.\nMessrs. Harvey and Hazen, who are also directors of Telesis, will resign as such upon the Spin-off. They have not received annual retainers from the Company during their terms as joint directors of Telesis and the Company, but they have received fees for attendance at Board and committee meetings in the amounts specified above.\nDirectors who are also employees of the Company receive no remuneration for serving as directors or as members of committees of the Board.\nAll of the Company's directors are also reimbursed for the costs of certain telecommunications services and equipment. Employee directors receive similar reimbursements for services and equipment as part of their compensation as officers. The Company also provides travel accident insurance covering nonemployee directors on Company business.\nThe Company has entered into indemnity agreements with each of its directors that provide for indemnification against any judgements or costs assessed against them in the course of their service as directors. Such agreements do not permit indemnification for acts or omissions for which indemnification is not permitted under California law.\nITEM 12.","section_12":"ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.\nThe following table sets forth, as of February 28, 1994, certain information concerning the ownership of the Company's Common Stock by each shareholder known to the Company to be the beneficial owner of more than 5% of the outstanding shares of Common Stock, each Named Executive Officer, each director and by all executive officers and directors as a group.\nAmount and Nature of Name of Beneficial Owner Beneficial Ownership Percent of Class ------------------------------- -------------------- ---------------- Pacific Telesis Group ......... 424,122,960 86.1% 130 Kearny Street San Francisco, CA 94108\nSam Ginn ...................... 10,100 * C. Lee Cox .................... 500 * Lydell L. Christensen ......... 5,000 * George F. Schmitt ............. 5,000 * Jan K. Neels .................. 500 * Carol A. Bartz ................ 0 * Donald G. Fisher .............. 4,000 * James R. Harvey ............... 5,000 * Paul Hazen .................... 4,348 * Arthur Rock ................... 150,100 * Charles R. Schwab ............. 4,000 * George P. Shultz .............. 10,000 *\nAll directors and executive officers as a group (20 persons).................. 215,448 * _____________________\n* Less than 1%.\nThe following table sets forth, as of February 28, 1994, the number of shares of common stock of Telesis beneficially owned by each Named Executive Officer, each director, and all executive officers and directors of the Company as a group, as well as their options to purchase shares of common stock of Telesis exercisable as of February 28, 1994. The total number of shares of common stock of Telesis beneficially owned by the group is less than 1% of the class outstanding.\nAmount and Nature of Presently Beneficial Exercisable Name of Beneficial Owner Ownership Options Total ------------------------------ ------------ ------------- ----------\nSam Ginn ..................... 9,883(1)(2) 166,600 176,483 C. Lee Cox ................... 6,598 93,000 99,598 Lydell L. Christensen ........ 1,489 23,750 25,239 George F. Schmitt ............ 689 20,800 21,489 Jan K. Neels ................. 1,482 19,047 20,529 Carol A. Bartz ............... 0 0 0 Donald G. Fisher ............. 0 0 0 James R. Harvey .............. 2,467(1) 3,000 5,467 Paul Hazen ................... 1,750 3,000 4,750 Arthur Rock .................. Charles R. Schwab . . . . . . 0 0 0 George P. Shultz . . . . . . 0 0 0 All directors and executive .. 0 0 0 officers as a group (20 persons) . . . . . . . . 41,133 458,590 499,723\n_____________________ (1) Includes the following shares of Telesis common stock in which the beneficial owner shares voting and investment power: Mr. Ginn, 1,860 shares; and Mr. Harvey, 2,467 shares.\n(2) Includes one share beneficially owned by a dependent child, for which beneficial ownership is disclaimed.\nAt the time of the Spin-off, such officers and, directors will receive shares of Common Stock in proportion to the shares of the common stock of Telesis they own and that unexercised options to purchase common stock of Telesis (\"Telesis Options\") held by directors, officers and employees of the Company will be replaced by options to purchase Common Stock of the Company (\"Company Options\"). Company Options will be granted under the Company's 1993 Long-Term Stock Incentive Plan.\nTo determine the number and exercise price of Company Options to be granted to replace the Telesis Options, an exchange ratio will be computed by dividing the market price of the Company's Common Stock before the Spin-off by the market price of Telesis common stock before the Spin-off. The number of shares subject to each Telesis Option will be divided by that ratio, and the original exercise price per share under such Telesis Option will be multiplied by that ratio. The aggregate spread between the option exercise price and the market value of the underlying stock will not change as a result of the substitution of a Company Option for a Telesis Option, and the terms of the option (other than the exercise price) will remain the same in all material respects. As an example, based upon an assumed average price for Telesis common stock of $55 per share for the last 10 consecutive trading days before the ex-dividend date and an assumed average price for the Common Stock of the Company of $23 per share for the same period, and assuming that all options held on December 31, 1993, remain outstanding, the following individuals and groups would hold the Company Options exercisable in the following amounts: Mr. Ginn, 398,391 shares; Mr. Cox, 222,391 shares; Mr. Christensen, 56,793 shares; Mr. Schmitt, 49,739 shares; Mr. Neels, 45,547 shares; Mr. Harvey, 7,174 shares; Mr. Hazen, 7,174 shares; and all directors and executive officers as a group, 1,096,628 shares. Additional options to purchase Common Stock may be granted to directors, officers and other key employees of the Company in the future under the Company's plan. See \"-1993 Long-Term Stock Incentive Plan.\"\nITEM 13.","section_13":"ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.\nThe Company currently has a variety of contractual and other relationships with Telesis and its affiliates and has entered or will enter into other arrangements to facilitate the Spin-off. A description of these existing and contemplated arrangements follows.\nPAST TRANSACTIONS WITH TELESIS AND ITS AFFILIATES\nThe Company and Telesis maintain a number of financial and administrative arrangements and regularly engage in transactions with each other and their affiliates. The CPUC and the FCC have established rules and regulations requiring that the Company and its affiliates be fully separated from Pacific Bell and Nevada Bell. In addition, transactions between the Company and such entities are governed by extensive rules, regulations and reporting requirements established by the CPUC. The following summarizes transactions between the Company and Telesis or subsidiaries of Telesis since January 1, 1990.\nIn the past, the Company has met its funding requirements primarily through borrowings from PTCR and equity contributions from Telesis. During the years ended December 31, 1993, 1992 and 1991, the largest aggregate month-end amount of indebtedness outstanding to PTCR was $718.0 million, $958.4 million and $597.9 million, respectively. During the third quarter of 1993, Telesis substantially settled the Company's tax benefits receivable arising from tax\nlosses utilized in Telesis' consolidated tax returns. This settlement was used to substantially eliminate the Company's indebtedness to PTCR at December 31, 1993. PTCR has charged the Company interest on such borrowings at rates which averaged 6.1%, 5.7% and 8.1% during the years ended December 31, 1993, 1992 and 1991, respectively. Telesis' equity contributions to the Company were primarily used to repay the Company's loans from PTCR. Equity contributions to the Company by Telesis were $1,179.8 million, $212.2 million and $71.4 million in the years ended December 31, 1993, 1992 and 1991, respectively.\nThe Company also paid dividends to Telesis. Such dividends totaled $113.6 million, $108.3 million and $125.3 million in the years ended December 31, 1993, 1992 and 1991, respectively.\nIn addition, Telesis has historically provided administrative services, and Pacific Bell and Nevada Bell have provided interconnection with their wireline telephone systems and other services, to the Company. In the years ended December 31, 1993, 1992 and 1991, amounts paid by the Company to Telesis for accounting, tax, legal and other such services were $15.2 million, $13.3 million and $11.9 million, respectively. Amounts paid by the Company to Pacific Bell and Nevada Bell for interconnection and other expenses during such periods were $28.5 million, $29.0 million and $29.3 million, respectively.\nThe Company paid insurance premiums in 1993, 1992 and 1991 of $2.6 million, $1.9 million and $1.2 million, respectively, to PacTel Reinsurance, a reinsurance subsidiary of Telesis. In addition, the Company recognized expenses in such years of $1.8 million, $2.2 million and $1.2 million, respectively, in connection with work done for Telesis Technologies Laboratory, a research and development subsidiary of Telesis.\nTelesis has issued various forms of financial support on behalf of the Company. Some of these forms of financial support have been renegotiated and the remainder will be renegotiated prior to the planned Spin-off. No assurance can be given that similar terms can be obtained.\nFUTURE RELATIONSHIP WITH TELESIS AND ITS AFFILIATES\nIn anticipation of the separation of the ownership of the Company from Telesis, the Company and Telesis have reviewed the contractual and other arrangements that are necessary and appropriate for the Company and Telesis to operate effectively after the Spin-off.\nPRE-SPIN-OFF FUNDING\nTelesis has advised the Company that it may offer to purchase shares of Common Stock from the Company prior to the Spin-off at market prices if the Company requires additional funding to effect currently unanticipated opportunities arising during such period. Any shares of Common Stock so purchased by Telesis would be included in the Spin-off.\nSEPARATION AGREEMENT\nTelesis and the Company have entered into an agreement relating to various aspects of their operations (the \"Separation Agreement\") that will govern the relationship between the Company and Telesis and its subsidiaries other than the Company (collectively, the \"Telesis Companies\") after the Offering. The following summary of certain aspects of the Separation Agreement is qualified in its entirety by reference to the Separation Agreement, a copy of which has\nbeen filed as an exhibit to the Registration Statement.\nCORPORATE OPPORTUNITIES. Under the Separation Agreement, Telesis and the Company have agreed to allocate corporate business opportunities between (i) the Telesis Companies on the one hand and (ii) the Company on the other hand. This agreement, by its terms, will terminate at the time of the Spin-off. The agreement provides that Telesis will have the right to determine, in its sole discretion, what future business opportunities the Telesis Companies will pursue, in addition to or to the exclusion of the Company, even if such determination excludes the Company from currently existing or future opportunities that could be considered logical, natural or beneficial extensions of the Company's business. Notwithstanding the foregoing, the agreement further provides that (i) the Company will have the right to pursue, to the exclusion of the Telesis Companies, all domestic and international business opportunities which, in whole or substantial part, are: (a) cellular (as defined in 47 C.F.R. 22.900 et seq.), (b) paging or (c) radiolocation opportunities; and (ii) in the unlikely event that to any extent the FCC in its final regulations does not permit separate applications for PCS licenses (as defined in FCC GEN Docket No. 90-314) by both the Telesis Companies and the Company, whether by denial of waivers or otherwise, the Company will have the right to such extent to pursue, to the exclusion of the Telesis Companies, all PCS opportunities outside California and Nevada, and the Telesis Companies will have the right to such extent to pursue, to the exclusion of the Company, all PCS opportunities inside California and Nevada. If the FCC does not permit such separate applications and if the territory intended to be served under a prospective PCS license includes portions of California or Nevada as well as territories outside California and Nevada, the Telesis Companies will have the right to pursue such opportunity to the exclusion of the Company. (Such right is subject to an obligation on the part of the Telesis Companies to use their reasonable best efforts to assign (at the expense of the Company) all such opportunities outside California and Nevada to the Company, and if the Board of Directors of Telesis determines that the Telesis Companies would for any reason be unable to accomplish this assignment, the Board of Directors of Telesis will decide, in its sole discretion, whether such opportunity should be pursued exclusively by the Telesis Companies or exclusively by the Company.)\nThe agreement also provides that each party must use its best efforts to decide whether to pursue a business opportunity as soon as reasonably possible after first learning of the opportunity. If a party decides not to pursue a business opportunity that it has the right to pursue to the exclusion of the other party, it must promptly inform the other party of such decision. The other party would then be free to pursue such opportunity.\nThe Company's Amended and Restated Articles of Incorporation provide that the Company may not bring any claim against the Telesis Companies or the Company, or any officer, director or other affiliate thereof, for breach of any duty, including, but not limited to, the duty of loyalty or fair dealing, on account of a diversion of a corporate business opportunity to the Telesis Companies unless such opportunity relates solely to a business that the Company has the right to elect to pursue, to the exclusion of the Telesis Companies, pursuant to the agreement described above. Notwithstanding the foregoing, no such claim may be made in any event if the Company's directors who are not employees of any of the Telesis Companies disclaim the opportunity by a unanimous vote.\nEMPLOYEE BENEFITS. Another component of the Separation Agreement provides for (1) the exchange of participation, service and compensation records of employees who transfer between Telesis and the Company; (2) the filing of\nannual reports and compliance with other legal requirements applicable to the parties' employee benefit plans; (3) the transfer of pension assets and liabilities from Telesis to the Company and vice versa for employees who transfer between the two; (4) the allocation of assets and liabilities under various nonqualified pension and deferred-compensation plans maintained by Telesis for the benefit of employees and non-employee directors; (5) the disposition of outstanding stock options, stock appreciation rights and long term incentive awards; (6) the allocation of assets and liabilities pertaining to post-retirement life insurance and health care benefits; (7) the allocation of liabilities for accrued vacation, paid leave and certain other benefits; and (8) mutual indemnification by Telesis and the Company for certain matters.\nTAX SHARING. The Separation Agreement also governs the manner in which Telesis and the Company will allocate their respective shares of federal and state income taxes and make payments between them and to taxing authorities in accordance with such tax allocations.\nThe Company will continue to join in filing consolidated federal income tax returns with Telesis for all taxable years in which the parties are required or permitted to file a consolidated return. In each taxable year for which the parties file a consolidated return, Telesis will pay the tax to the taxing authority, and the Company will pay Telesis the Company's share of the consolidated tax liability based upon the Company's separate taxable income. If the Company would have reported a net operating loss for any such year, Telesis will pay to the Company an amount equal to Telesis' reduction in tax liability attributable to the Company's net operating loss. The party with more than 50% of the liability exposure or refund claim for an issue will, to the extent possible, control any audit, appeals and refund procedures for that issue.\nIn addition, the Separation Agreement provides that tax liabilities from the Spin-off and certain related transactions will be allocated to the Company if such liabilities result from any event occurring in the 24-month period commencing on the date of the Spin-off and involving either the stock or assets of the Company. The Company has not taken, and does not anticipate taking, any actions that it believes would result in the allocation to the Company of any material liabilities pursuant to this provision.\nINTELLECTUAL PROPERTY. The Separation Agreement addresses Telesis' and the Company's respective rights and obligations after the Spin-off with respect to pre-Spin-off intellectual property, including proprietary information, copyrights and copyrightable works, patents and patentable inventions, and trademarks and trade names as well as the use of proprietary information by employees of Telesis and the Company, including employees transferred in connection with the Spin-off. Telesis will convey or license certain intellectual property to the Company effective as of the Spin-off. Among other things, the Company is required to terminate its use of the Telesis symbol mark and the names \"Pacific Telesis International\" and \"PacTel,\" including the \"PacTel Cellular\" and \"PacTel Paging\" brand names. The Company will have a non-exclusive license to use the PacTel name until the second anniversary of the Spin-off.\nCONTINGENT LIABILITIES. The Separation Agreement allocates financial responsibility for liabilities which are not recorded on the books of the Company or the Telesis Companies prior to the Spin-off and which are attributable to (1) a pre-Spin-off event, (2) a condition that existed prior to the Spin-off, or (3) a post-Spin-off event attributable to the separation of the Company and the Telesis Companies. In general, financial responsibility\nfor liabilities associated with the business of the Company is placed with the Company and liabilities associated with the business of the Telesis Companies is placed with Telesis. The agreement allocates responsibility for the defense of litigation and other proceedings. The Separation Agreement also contains mutual releases from certain liabilities arising from events occurring on or before the Spin-off, including transactions and activities involved in implementing the Spin-off.\nTELESIS TECHNOLOGIES LABORATORY. The Separation Agreement provides that, no later than the Spin-off, Telesis will transfer to the Company certain assets that have been engaged in the wireless communications research and development work of Telesis Technologies Laboratory (\"TTL\"), which will remain a subsidiary of Telesis after the Spin-off. The experimental PCS licenses currently held by TTL will remain with TTL. Telesis and the Company will agree on the manner in which any uncompleted work of TTL will be completed after the Spin-off. Existing agreements governing the ownership of, and other rights in, the intellectual property work product of TTL produced prior to the Spin-off will remain in effect and will also apply to any current TTL work jointly completed by Telesis and the Company after the Spin-off. Such existing agreements provide that TTL owns all such TTL intellectual property and that the Company has a royalty-free, nonexclusive, perpetual license to use it.\nOTHER MATTERS. The Separation Agreement also governs, among other things, (1) the provision by Telesis of certain administrative services, such as tax, accounting and legal services, prior to the Spin-off and, if mutually agreed, for up to 90 days thereafter and the compensation to be paid by the Company for such services, (2) the transfer of certain additional assets and liabilities from Telesis to the Company at net book value, (3) the termination of certain specified agreements between the Company and Telesis upon the Spin-off and (4) the separation of the Company from the existing Telesis property and casualty insurance program, the allocation of insurance-related liabilities of Telesis and the Company and other insurance issues.\nMr. White's wife is a principal of Price Waterhouse, which provides auditing, consulting, and tax return preparation services to the Company and certain of its subsidiaries. During the year ended December 31, 1993, the Company and such subsidiaries paid that firm fees of approximately $0.3 million. Charles Schwab & Co. Inc., of which Mr. Schwab is Chairman, has subleased office space from Telesis since April 6, 1992 under a lease that expires on December 17, 1999. The minimum rent payable over the entire term of the lease is approximately $5.6 million.\nPART IV\nITEM 14.","section_14":"ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.\n(a) Documents filed as part of this report:\n1. Financial Statements:\nAIRTOUCH COMMUNICATIONS AND SUBSIDIARIES\nReport of Independent Accountants\nConsolidated Statements of Income Years ended December 31, 1993, 1992, and 1991\nConsolidated Balance Sheets December 31, 1993 and 1992\nConsolidated Statements of Shareholders' Equity Years ended December 31, 1993, 1992, and 1991\nConsolidated Statements of Cash Flows Years ended December 31, 1993, 1992 and 1991\nNotes to Consolidated Financial Statements\nMANNESMANN MOBILFUNK GMBH\nIndependent Auditors' Report\nBalance Sheets - December 31, 1993 and 1992\nStatements of Operations - Years ended December 31, 1993, 1992, and\nStatements of Capital Subscribers' Equity - Years ended December 31, 1993, 1992, and 1991\nStatements of Cash Flows - Years ended December 31, 1993, 1992, and\nNotes to Financial Statements\nNEW PAR\nReport of Independent Auditors\nConsolidated Balance Sheets December 31, 1993 and 1992\nConsolidated Statements of Income Years ended December 31, 1993 and 1992 and the period from August 1, 1991 (inception) to December 31, 1991\nConsolidated Statements of Partners' Capital Years ended December 31, 1993 and 1992 and the period from August 1, 1991 (inception) to December 31, 1991\nConsolidated Statements of Cash Flows Years ended December 31, 1993 and 1992 and the period from August 1, 1991 (inception) to\nDecember 31, 1991\nNotes to Consolidated Financial Statements\n2. Financial Statement Schedules:\nAIRTOUCH COMMUNICATIONS AND SUBSIDIARIES\nSchedule I -- Marketable Securities\nSchedule II -- Amounts Receivable from Related Parties and Underwriters, Promoters and Employees Other Than Related Parties\nSchedule IV -- Indebtedness of and to Related Parties - Not Current\nSchedule V -- Property, Plant and Equipment\nSchedule VI -- Accumulated Depreciation, Depletion and Amortization of Property, Plant and Equipment\nSchedule VIII -- Valuation and Qualifying Accounts and Reserves\nSchedule IX -- Short-Term Borrowings\nSchedules other than those listed above are omitted because they are either not required or not applicable, or the required information is presented in the Consolidated Financial Statements.\n3. Exhibits:\nExhibits identified in parentheses below, on file with the Commission, are incorporated by reference as exhibits hereto.\nExhibit Number Description ------- ----------- 3.1 Amended and Restated Articles of Incorporation of the Company, as filed with the Secretary of State of the State of California on November 29, 1993\n3.2 Certificate of Amendment of Articles of Incorporation of the Company, as filed with the Secretary of State of the State of California on March 10, 1994\n3.3 Amended and Restated By-laws of the Company, as amended to February 25, 1994\n4.1 Form of Common Stock certificate (Exhibit 4.1 to the Company's Registration Statement on Form S-1, File No. 33-68012)\n4.2 Rights Agreement between the Company and The Bank of New York, Rights Agent, dated as of July 22, 1993 (Exhibit 4.2 to the Company's Registration Statement on Form S-1, File No. 33-68012)\n10.1 Separation Agreement by and between the Company and Pacific Telesis Group, dated as of October 7, 1993 (Exhibit 10.1 to the Company's Registration Statement on Form S-1, File No. 33-68012)\n10.2 Amendment No. 1 to Separation Agreement, dated November 2, 1993\n10.3 Amended and Restated Plan of Merger and Joint Venture Organization by and among the Company, CCI, CCI Newco, Inc. and CCI Newco Sub, Inc. dated as of December 14, 1990 (Exhibit 1 to the Company's Statement on Schedule 13D filed on February 18, 1992)\n10.4 Termination Agreement by and among Telesis, the Company, CCI and Cellular Communications of Ohio, Inc. dated December 11, 1992 (Exhibit 5 to Amendment No. 28 to the Company's Statement on Schedule 13D filed on December 12, 1992)\n10.5 Joint Venture agreement between Mannesmann Kienzle GmbH, Pacific Telesis Netherlands B.V., Cable and Wireless plc, DG Bank Deutsch Genossenschaftsbank and Lyonnaise des Eaux SA dated June 30, 1989 (Exhibit 10.43 to the Company's Registration Statement on Form S-1, File No. 33-68012)\n10.6 Form of Indemnity Agreement between the Company and each of its directors (Exhibit 10.2 to the Company's Registration Statement on Form S-1, File No. 33-68012)\n10.7 PacTel Corporation 1993 Long-Term Stock Incentive Plan\n10.8 PacTel Corporation Long-Term Incentive Plan (Exhibit 10.4 to the Company's Registration Statement on Form S-1, File No. 33-68012)\n10.9 PacTel Corporation Short-Term Incentive Plan\n10.10 PacTel Corporation Deferred Compensation Plan for Nonemployee Directors\n10.11 PacTel Corporation Deferred Compensation Plan\n10.12 PacTel Corporation Supplemental Executive Pension Plan\n10.13 PacTel Corporation Executive Life Insurance Plan\n10.14 PacTel Corporation Executive Long-Term Disability Plan\n10.15 Representative Employment Agreement for Certain Senior Officers of Pacific Telesis Group (Exhibit 10pp to Form 10-K of Telesis for 1988, File No. 1-8609)\n10.16 Pacific Telesis Group Senior Management Short Term Incentive Plan (Exhibit 10-aa to Pacific Telesis Group Shareowner Dividend Reinvestment and Stock Purchase Plan Registration Statement No. 2-87852)\n10.17 Resolutions amending the Plan, effective August 28, 1987 (Exhibit 10aa to Form 10-K of Telesis for 1991, File No. 1-8609)\n10.18 Pacific Telesis Group Senior Management Long Term Incentive Plan (Exhibit 10aa to Form 10-K of Telesis for 1985, File No. 1-8609)\n10.19 Pacific Telesis Group Executive Life Insurance Plan (Exhibit 10cc to Form 10-K of Telesis for 1986, File No. 1-8609)\n10.20 Pacific Telesis Group Senior Management Long Term Disability and Survivor Protection Plan (Exhibit 10dd to Form 10-K of Telesis for 1988, file No. 1-8609)\n10.21 Resolutions amending the Plan effective May 2, 1992 and November 20, 1992 (Exhibit 10dd(i) to Form 10-K of Telesis for 1992, File No. 1-8609)\n10.22 Pacific Telesis Group Senior Management Transfer Program (Exhibit 10ee to Pacific Telesis Group Shareowner Dividend Reinvestment and Stock Purchase Plan Registration Statement No. 2-87852)\n10.23 Pacific Telesis Group Senior Management Financial Counseling Program (Exhibit 10ff to Pacific Telesis Group Shareowner Dividend Reinvestment and Stock Purchase Plan Registration Statement No. 2-87852)\n10.24 Pacific Telesis Group Deferred Compensation Plan for Nonemployee Directors (Exhibit 10gg to Form 10-K of Telesis for 1990, File No. 1-8609)\n10.25 Resolutions amending the Plan effective December 21, 1990, November 20, 1992 and December 18, 1992 (Exhibit 10gg(i) to Form 10-K of Telesis for 1992, File No. 1-8609)\n10.26 Description of Pacific Telesis Group Directors' and Officers' Liability Insurance Program (Exhibit 10hh to Form 10-K of Telesis for 1992, File No. 1-8609)\n10.27 Description of Pacific Telesis Group for Nonemployee Directors' Travel Accident Insurance (Exhibit 10ii to Form 10-K of Telesis for 1989, File No. 1-8609)\n10.28 Resolutions amending the Plan, effective as of June 28, 1991 (Exhibit 10kk to Form 10-K of Telesis for 1991, File No. 1-8609)\n10.29 Resolutions amending the Plan effective May 22, 1992 and November 20, 1992 (Exhibit 10kk(ii) to Form 10-K of Telesis for 1992, File No. 1-8609)\n10.30 Pacific Telesis Group Mid-Career Hire Program (Exhibit 10mm to Form 10-K of Telesis for 1988, File No. 1-8609)\n10.31 Pacific Telesis Group Mid-Career Pension Plan (Exhibit 10nn to Form 10-K of Telesis for 1986, File No. 1-8609)\n10.32 Resolutions amending the Plan effective May 22, 1992 and November 20, 1992 (Exhibit 10kk(ii) to Form 10-K of Telesis for 1992, File No. 1-8609)\n10.33 Pacific Telesis Group Executive Deferral Plan (Exhibit 1011 to Form 10-K of Telesis for 1989, File No. 1-8609)\n10.34 Resolutions amending the Plan effective November 20, 1992 and December 23, 1992 (Exhibit 1011(i) to Form 10-K of Telesis for 1992, File No. 1-8609)\n10.35 Pacific Telesis Group Stock Option and Stock Appreciation Rights Plan (Plan Text, Sections 1-17, in Registration Statement No. 33-15391)\n10.36 Resolutions amending the Plan effective November 17, 1989 and June 26, 1992 (Exhibit 10oo(i) to Form 10-K of Telesis for 1992, File No. 1-8609)\n10.37 Pacific Telesis Group Outside Directors' Retirement Plan (Exhibit 10ss to Form 10-K of Telesis for 1984, File No. 1-8609)\n10.38 Resolution amending the Plan effective May 25, 1990 (Exhibit 10ss(i) to Form 10-K of Telesis for 1992, File No. 1-8609)\n10.39 Representative Indemnity Agreement between Pacific Telesis Group and certain of its officers and each of its directors (Exhibit 10tt to Form 10-K of Telesis for 1987, File No. 1-8609)\n10.40 Trust Agreement between Pacific Telesis Group and Bank of America National Trust and Savings Association in connection with the Pacific Telesis Group Executive Deferral Plan (Exhibit 10uu to Form 10-K of Telesis for 1988, File No. 1-8609)\n10.41 Amendment to Trust Agreement No. 1 effective December 11, 1992 (Exhibit 10uu(i) to Form 10-K of Telesis of 1992, File No. 1-8609)\n10.42 Trust Agreement between Pacific Telesis Group and Bank of America National Trust and Savings Association in connection with the Pacific Telesis Group Deferred Compensation Plan for the Non- Employee Directors (Exhibit 10vv to Form 10-K of Telesis for 1988,\nFile No. 1-8609)\n10.43 Amendment to Trust Agreement No. 2 effective December 11, 1992 (Exhibit 10vv(i) to Form 10-K of Telesis for 1992, File No. 1-8609)\n10.44 Pacific Telesis Group Long Term Incentive Award Deferral Plan (Exhibit 10ww to Form 10-K of Telesis for 1989, File No. 1-8609)\n10.45 Resolutions merging the Plan with the Executive Deferral Plan effective May 22, 1992 (Exhibit 10ww(i) to Form 10-K of Telesis for 1992, File No. 1-8609)\n10.46 Pacific Telesis Group Nonemployee Director Stock Option Plan (Exhibit A to Pacific Telesis Group's 1990 Proxy Statement filed February 26, 1990, File No. 1-8609)\n10.47 Pacific Telesis Group Supplemental Executive Retirement Plan (Exhibit 10yy to Form 10-K of Telesis for 1990, File No. 1-8609)\n10.48 Resolutions amending the Plan effective November 20, 1992 (Exhibit 10yy(i) to Form 10-K of Telesis for 1992, File No. 1-8609)\n21 Subsidiaries of the Company (Exhibit 21 to the Company's Registration Statement on Form S-1, File No. 33-68012)\n23.1 Consent of Coopers & Lybrand\n23.2 Consent of Ernst & Young\n23.3 Consent of KPMG Deutsche Treuhand-Gesellschaft\n24 Powers of Attorney\n99 Modification of Final Judgment, United States District Court, District of Columbia, in \"U.S. v. American Tel. & Tel. Co.,\" Civil Action No. 82-0192 (Exhibit 99 to the Company's Registration Statement on Form S-1, File No. 33-68012)\n(b) Reports on Form 8-K:\nNo reports on Form 8-K were filed during the last quarter of the period covered by this report.\nSIGNATURES ----------\nPursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.\nAIRTOUCH COMMUNICATIONS\nBy: \/s\/ Mohan S. Gyani\nTitle: Vice President, Finance and Treasurer\nDate: March 22, 1994\nPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.\nSignatures Title ---------- -----\nSamuel L. Ginn * Chairman of the Board and Chief Executive Officer (Principal Executive Officer)\nLydell L. Christensen * Executive Vice President and Chief Financial Officer and Treasurer (Principal Financial Officer)\nMohan S. Gyani * Vice President - Finance and Treasurer (Chief Accounting Officer)\nC. Lee Cox * President and Chief Operating Officer and Director\nJames R. Harvey * Director\nPaul Hazen * Director\nDonald G. Fisher * Director\nArthur Rock * Director\nCharles R. Schwab * Director\nGeorge P. Shultz * Director\n* By \/s\/ Mohan S. Gyani Mohan S. Gyani, Attorney-in-fact Date: March 22, 1994\nPAGE ---- AIRTOUCH COMMUNICATIONS AND SUBSIDIARIES Report of Management . . . . . . . . . . . . . . . . . . . . . . . Report of Independent Accountants . . . . . . . . . . . . . . . . . Consolidated Statements of Income for the years ended December 31, 1993, 1992, and 1991 . . . . . . . . . . . . . . . . Consolidated Balance Sheets as of December 31, 1993 and 1992 . . . Consolidated Statements of Shareholders' Equity for the years ended December 31, 1993, 1992, and 1991 . . . . . . . . . . Consolidated Statements of Cash Flows for the years ended December 31, 1993, 1992, and 1991 . . . . . . . . . . . . . . . . Notes to Consolidated Financial Statements . . . . . . . . . . . .\nNEW PAR (PARTNERSHIP BETWEEN CCI AND THE COMPANY) Report of Independent Auditors . . . . . . . . . . . . . . . . . . Consolidated Balance Sheets as of December 31, 1993 and 1992 . . . Consolidated Statements of Income for the year ended December 31, 1993 and 1992 and the period from August 1, 1991 (inception) to December 31, 1991 . . . . . . . . . Consolidated Statements of Partners' Capital for the years ended December 31, 1993 and 1992 and the period from August 1, 1991 (inception) to December 31, 1991 . . . . . . . . . Consolidated Statements of Cash Flows for the years ended December 31, 1993 and 1992 and the period from August 1, 1991 (inception) to December 31, 1991 . . . . . . . . . Notes to Consolidated Financial Statements . . . . . . . . . . . .\nMANNESMANN MOBILFUNK GMBH Independent Auditors' Report . . . . . . . . . . . . . . . . . . . Balance Sheets as of December 31, 1993 and 1992 . . . . . . . . . . Statements of Operations for the years ended December 31, 1993, 1992, and 1991 . . . . . . . . . . . . . . . . Statements of Capital Subscribers' Equity for the years ended December 31, 1993, 1992, and 1991 . . . . . . . . . . . . . . . . Statements of Cash Flows for the years ended December 31, 1993, 1992, and 1991 . . . . . . . . . . . . . . . . Notes to Financial Statements . . . . . . . . . . . . . . . . . . .\nREPORT OF MANAGEMENT\nTo the Shareholders of AirTouch Communications:\nFINANCIAL STATEMENTS\nAirTouch Communications' management prepared the accompanying financial statements and is responsible for their integrity and objectivity. The statements were prepared in accordance with generally accepted accounting principles applied on a consistent basis and are not misstated as a result of material fraud or error. The financial statements include amounts based on management's best estimates and judgments, where necessary. Management also prepared the other information in this annual financial review and is responsible for its accuracy and consistency with the financial statements.\nThe Company's financial statements have been audited by Coopers & Lybrand, independent accountants, whose appointment has been ratified by the Board of Directors. Management has made available to Coopers & Lybrand all the Company's financial records and related data, as well as the minutes of meeting of the Board of Directors. Furthermore, management believes that all of the representations made to Coopers & Lybrand during its audit were valid and appropriate.\nINTERNAL CONTROL SYSTEM\nAirTouch Communications maintains a system of internal controls over financial reporting, one of the purposes of which is to provide reasonable assurance to the Company's management and Board of Directors regarding the preparation of reliable published financial statements. The Audit Committee of the Pacific Telesis Board of Directors is responsible for overseeing the Company's financial reporting process on behalf of the Board. During 1993, the Audit committee met regularly with management, internal audit and the independent accountants to review internal controls, accounting, auditing, and financial reporting matters.\nThe system of internal controls contains self-monitoring mechanisms, and actions are taken to correct deficiencies as they are identified. Even an effective internal control system, no matter how well designed, has inherent limitations including the possibility of the circumvention or overriding of controls and therefore can provide only reasonable assurance with respect to financial statement preparation. Further, because of changes in conditions, internal control system effectiveness may vary over time.\nThe Company assessed its internal control system in its consolidated operations throughout the year ended December 31, 1993 in relation to criteria for effective internal control over financial reporting described in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). To assess the internal control systems in its unconsolidated partnerships and corporations, management relied on reports issued by various external public accountants who performed audits of those entities, where such reports were available. Based on these assessments, the Company believes that, as of December 31, 1993, its overall system of internal control over financial reporting met the COSO criteria.\n\/s\/ Sam L. Ginn \/s\/ Lydell L. Christensen Chairman and Chief Executive Officer Executive Vice President and March 3, 1994 Chief Financial Officer\nREPORT OF INDEPENDENT ACCOUNTANTS\nTo the Board of Directors and Shareholders of AirTouch Communications:\nWe have audited the accompanying consolidated balance sheets of AirTouch Communications (formerly PacTel Corporation) and Subsidiaries (the \"Company\") as of December 31, 1993 and 1992 and the related consolidated statements of income, shareholders' equity, and cash flows 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 did not audit the 1993 and 1992 financial statements of Mannesmann Mobilfunk GmbH (\"MMO\"), an equity investee of the Company, which statements reflect total assets of $1,221,135,000 and $850,661,000 as of December 31, 1993 and 1992, respectively, and total net loss of $67,655,000 and $52,983,000 for the years ended December 1993 and 1992, respectively. Those statements were audited by other auditors whose reports have been furnished to us, and our opinion, insofar as it related to the amounts included for MMO, is based solely on the reports of the other auditors.\nWe conducted our audits in accordance with generally accepted accounting standards. Those standards require that we plan and perform an audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the reports of other auditors provide a reasonable basis for our opinion.\nIn our opinion, based on our audits and the reports of other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of AirTouch Communications and Subsidiaries as of December 31, 1993 and 1992 and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1993, in conformity with generally accepted accounting principles.\nAs discussed in Notes A and H to the consolidated financial statements, in 1992 the Company adopted the provisions of Statement of Financial Accounting Standards No. 109, \"Accounting for Income Taxes.\" As discussed in Notes A and J, in 1993 the Company adopted Statement of Financial Accounting Standards No. 106, \"Employers' Accounting for Postretirement Benefits Other than Pensions.\"\n\/s\/ Coopers & Lybrand San Francisco, California March 3, 1994 (except for Notes B, L, and R, as to which the date is March 9, 1994)\nAIRTOUCH COMMUNICATIONS AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME\nFor the Year Ended December 31, ------------------------------- 1993 1992 1991 -------- -------- --------- (Dollars in millions, except per share amounts) OPERATING REVENUES Wireless services and other revenues........ $987.3 $834.8 $749.5 Cellular and paging equipment sales......... 70.4 45.4 31.6 Cost of cellular and paging equipment sales. (69.7) (41.7) (27.9) -------- -------- -------- NET OPERATING REVENUES...................... 988.0 838.5 753.2 -------- -------- -------- OPERATING EXPENSES Cost of revenues............................ 144.0 132.7 110.5 Selling, general, administrative, and other expenses........................ 541.6 466.5 376.1 Depreciation and amortization............... 174.2 143.4 130.0 -------- -------- -------- TOTAL OPERATING EXPENSES.................... 859.8 742.6 616.6 -------- -------- -------- OPERATING INCOME............................ 128.2 95.9 136.6\nInterest expense............................ (22.1) (52.9) (37.6) Minority interests in net income of consol- idated partnerships and corporations...... (46.4) (45.5) (45.2) Equity in net income (loss) of unconsol- idated partnerships and corporations: Domestic................................ 70.4 41.1 15.5 International........................... (37.5) (38.5) (21.4) Interest income............................. 12.0 13.3 13.8 Gain on sale of telecommunications interests 3.8 - 26.0 Miscellaneous income (expense).............. (0.5) 1.0 5.2 -------- -------- -------- INCOME BEFORE INCOME TAXES, EXTRAORDINARY ITEM AND CUMULATIVE EFFECTS OF ACCOUNTING CHANGES................................... 107.9 14.4 92.9 Income taxes................................ 67.8 24.5 49.8 -------- -------- -------- INCOME (LOSS) BEFORE EXTRAORDINARY ITEM AND CUMULATIVE EFFECTS OF ACCOUNTING CHANGES.. 40.1 (10.1) 43.1 Extraordinary item-loss from retirement of debt (net of income taxes of $5.1) (Note T).................................. - (7.6) - Cumulative effect of accounting change for income taxes (Notes A and H).......... - 27.9 - Cumulative effect of accounting change for other postretirement benefits (net of income taxes of $3.5) (Notes A and J)..... (5.6) - - -------- -------- -------- NET INCOME.................................. $ 34.5 $ 10.2 $ 43.1 ======== ======== ========\n(Continued next page)\nAIRTOUCH COMMUNICATIONS AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Continued)\nFor the Year Ended December 31, ------------------------------- 1993 1992 1991 -------- -------- -------- (Dollars in millions, except per share amounts)\nPER SHARE AMOUNTS: Income (loss) before extraordinary item and cumulative effect of the changes in accounting for other postretirement benefits in 1993 and income taxes in 1992....................................... $0.09 $(0.02) $0.10\nExtraordinary item........................... - (0.02) -\nCumulative effect of the changes in accounting for other postretirement benefits in 1993 and income taxes in 1992.. (0.01) 0.06 - -------- -------- -------- NET INCOME................................... $0.08 $0.02 $0.10 ======== ======== ========\nWeighted average shares outstanding (in millions).............................. 429.6 424.0 424.0 ======== ======== ========\nThe accompanying Notes are an integral part of the Consolidated Financial Statements.\nAIRTOUCH COMMUNICATIONS AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS\nDecember 31, -------------------- 1993 1992 --------- --------- (Dollars in millions) ASSETS Cash and cash equivalents............................ $ 646.7 $ 17.1 Accounts receivable-net of allowance for uncollectibles of $9.2 and $10.0, in 1993 and 1992, respectively ................................ 132.7 121.6 Short-term investments............................... 814.0 - Other receivables.................................... 15.1 24.9 Due from affiliates.................................. 7.0 246.9 Other current assets................................. 45.3 28.6 --------- --------- Total current assets................................. 1,660.8 439.1 --------- --------- Property, plant, and equipment....................... 1,175.5 1,098.8 Less: accumulated depreciation....................... 433.4 373.1 --------- --------- Property, plant, and equipment-net................... 742.1 725.7 Investments in unconsolidated partnerships and corporations...................... 1,154.5 935.4 Intangible assets-net................................ 413.2 225.0 Deferred charges and other noncurrent assets......... 106.1 45.9 --------- --------- TOTAL ASSETS......................................... $4,076.7 $2,371.1 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Accounts payable..................................... $ 149.2 $ 141.8 Due to affiliates within one year.................... 40.7 906.7 Other current liabilities............................ 124.1 89.0 --------- --------- Total current liabilities............................ 314.0 1,137.5 Due to non-affiliates................................ 68.6 22.4 Due to affiliates.................................... - 134.5 Deferred income taxes................................ 197.6 180.4 Deferred credits..................................... 54.1 17.6 --------- --------- TOTAL LIABILITIES.................................... 634.3 1,492.4 --------- --------- Commitments and contingencies.\nMinority interests in consolidated partnerships and corporations...................... 105.1 126.6 --------- ---------\n(Continued on next page)\nAIRTOUCH COMMUNICATIONS AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Continued)\nDecember 31,\n-------------------- 1993 1992 --------- ---------\n(Dollars in millions, except per share amounts) Preferred stock ($.01 par value; 50,000,000 shares authorized; no shares issued or outstanding)....... - - Common stock ($.01 par value; 1,100,000,000 shares authorized; 492,622,960 shares issued and 492,500,000 shares outstanding at December 31, 1993; 424,122,960 shares issued and 424,000,000 shares outstanding at December 31, 1992)........... 4.9 4.2 Additional paid-in capital .......................... 3,719.5 1,051.2 Accumulated deficit.................................. (387.9) (308.8) Currency translation adjustment...................... 0.8 5.5 --------- --------- TOTAL SHAREHOLDERS' EQUITY........................... 3,337.3 752.1 --------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........... $4,076.7 $2,371.1 ========= =========\nThe accompanying Notes are an integral part of the Consolidated Financial Statements.\nAIRTOUCH COMMUNICATIONS AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY\nFor the Year Ended December 31, ------------------------------- 1993 1992 1991 --------- --------- --------- PREFERRED STOCK (Dollars in millions) Balance at beginning of period............ - - - --------- --------- --------- Balance at end of period.................. - - - --------- --------- --------- COMMON STOCK Balance at beginning of period............ $ 4.2 $ 4.2 $ 4.2 Shares issued during the period .......... 0.7 - - --------- --------- --------- Balance at end of period ................. 4.9 4.2 4.2 --------- --------- --------- ADDITIONAL PAID-IN CAPITAL Balance at beginning of period ........... 1,051.2 839.0 767.6 Equity infusion by parent................. 1,179.8 212.2 71.4 Net proceeds from stock offering ......... 1,488.5 - - --------- --------- --------- Balance at end of period.................. 3,719.5 1,051.2 839.0 --------- --------- --------- ACCUMULATED DEFICIT Balance at beginning of period............ (308.8) (210.7) (128.5) Net income ............................... 34.5 10.2 43.1 Dividends paid to parent.................. (113.6) (108.3) (125.3) --------- --------- --------- Balance at end of period.................. (387.9) (308.8) (210.7) --------- --------- --------- CURRENCY TRANSLATION ADJUSTMENT Balance at beginning of period............ 5.5 2.7 1.3 Gains (losses)............................ (4.7) 2.8 1.4 --------- --------- --------- Balance at end of period.................... 0.8 5.5 2.7 --------- --------- --------- TOTAL SHAREHOLDERS' EQUITY.................. $3,337.3 $ 752.1 $ 635.2 ========= ========= ========= COMMON SHARES OUTSTANDING (in millions) Balance at beginning of period............ 424.0 424.0 424.0 Shares issued during the period........... 68.5 - - --------- --------- --------- Balance at end of period.................. 492.5 424.0 424.0 ========= ========= =========\nThe accompanying Notes are an integral part of the Consolidated Financial Statements.\nAIRTOUCH COMMMUNICATIONS AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS\nFor the Year Ended\nDecember 31, -------------------------- 1993 1992 1991 -------- -------- -------- CASH FROM (USED FOR) OPERATING ACTIVITIES: (Dollars in millions) Net income................................. $ 34.5 $ 10.2 $ 43.1 Adjustments to reconcile net income for items currently not affecting operating cash flows: Depreciation and amortization.......... 174.2 143.4 130.0 Deferred income taxes.................. 15.5 36.0 33.5 Minority interests in net income of consolidated partnerships and corporations......................... 46.4 45.5 45.2 Equity in net (income) loss of unconsolidated partnerships and corporations......................... (32.9) (2.6) 5.9 Gain on sale of telecommunications interests............................ (3.8) - (26.0) Distributions received from equity investments.......................... 42.2 17.0 - Loss on sale of property, plant, and equipment............................ 7.2 3.9 4.1 Loss from retirement of debt........... - 12.7 - Cumulative effect of accounting change for income taxes..................... - (27.9) - Cumulative effect of accounting change for postretirement costs............. 9.1 - - Changes in assets and liabilities: Accounts receivable-net.............. (30.3) (21.8) (21.1) Other current assets and receivables. 131.8 (126.8) (10.8) Deferred charges and other noncurrent assets............................. 3.1 47.7 (49.4) Accounts payable and other current liabilities........................ 18.0 62.4 17.8 Deferred credits and other liabilities........................ 24.7 (0.8) (3.2) -------- -------- -------- CASH FROM OPERATING ACTIVITIES............. 439.7 198.9 169.1 -------- -------- -------- CASH FROM (USED FOR) INVESTING ACTIVITIES: Additions to property, plant, and equipment (226.3) (233.0) (234.8) Proceeds from sale of property, plant, and equipment............................ 9.5 7.6 20.3 Proceeds from sale of telecommunications interests................................ 4.3 8.1 37.4 Capital contributions to unconsolidated partnerships and corporations............ (123.8) (135.0) (93.8)\n(Continued on next page)\nAIRTOUCH COMMMUNICATIONS AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS\nFor the Year Ended December 31, ----------------------------- 1993 1992 1991 --------- --------- --------- Cost of acquiring telecommunications (Dollars in millions) interests: Cellular Communications, Inc............. (9.9) (92.2) (89.7) Wichita and Topeka Cellular.............. (100.0) - - NordicTel Holdings AB.................... (153.0) - - Other ................................... (0.2) (6.6) (36.5) Purchase of short-term investments......... (814.0) - - Other investing activities................. (28.0) (40.8) (33.1) --------- --------- --------- CASH USED FOR INVESTING ACTIVITIES......... (1,441.4) (491.9) (430.2) --------- --------- --------- CASH FROM (USED FOR) FINANCING ACTIVITIES: Retirement of notes and obligations payable.................................. (1.0) (100.7) (0.8) Retirement of long-term debt from affiliate (234.5) - - Distributions to minority interests in consolidated partnerships and corporations............................ (30.3) (41.5) (28.1) Contributions from minority interests in consolidated partnerships and corporations............................ 2.8 3.3 10.2 Dividends paid to parent................... (113.6) (108.3) (125.3) Increase (decrease) in short-term borrowings from affiliates.............. (773.1) 275.5 351.3 Proceeds from non-current affiliate borrowings.............................. - 85.0 40.0 Proceeds from issuing long-term debt....... 13.8 1.2 11.3 Proceeds from stock offering............... 1,489.2 - - Equity infusion by parent.................. 1,179.8 212.2 71.4 Issuance of loan to affiliate.............. (6.8) (30.0) (79.4) Loan repayments from affiliate............. 106.5 5.5 4.2 Other financing activities................. (1.5) (9.1) (0.2) --------- --------- --------- CASH FROM FINANCING ACTIVITIES............. 1,631.3 293.1 254.6 --------- --------- --------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS......................... 629.6 0.1 (6.5) BEGINNING CASH AND CASH EQUIVALENTS........ 17.1 17.0 23.5 --------- --------- --------- ENDING CASH AND CASH EQUIVALENTS........... $ 646.7 $ 17.1 $ 17.0 ========= ========= =========\nThe accompanying Notes are an integral part of the Consolidated Financial Statements.\nAIRTOUCH COMMUNICATIONS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS\nA. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES\nBASIS OF PRESENTATION\nAirTouch Communications (the \"Company\"), formerly PacTel Corporation, and its subsidiaries provide wireless telecommunications services in the United States, Europe, and Asia. The Company is a holding company. Its principal subsidiaries are AirTouch Cellular, AirTouch Paging, AirTouch International, and PacTel Teletrac. These subsidiaries principally provide cellular, paging, and vehicle location services.\nThe Company is an 86.1% owned subsidiary of Pacific Telesis Group (\"Telesis\"), a reporting company under the Securities and Exchange Act of 1934 that also owns Pacific Bell and Nevada Bell, its local telephone companies. In December 1992, Telesis announced that its Board of Directors had approved a plan to separate its wireless telecommunications operations from its other businesses (principally Pacific Bell and Nevada Bell) through a distribution to its shareowners of all of the Common Stock of the Company (the \"spin-off\") held by Telesis. For further discussion see Note B.\nThe Consolidated Financial Statements include the accounts of the Company and its subsidiaries and partnerships in which the Company has controlling interests. All significant intercompany balances and transactions have been eliminated. Prior periods have been revised to agree with the 1993 presentation format. Equipment sales and cost of equipment are now both presented in the revenue section of the income statements. The Consolidated Financial Statements have been prepared in accordance with generally accepted accounting principles applicable in the United States.\nCASH AND CASH EQUIVALENTS\nAll highly liquid monetary instruments with original maturities of ninety days or less from the date of purchase are considered to be cash equivalents.\nFINANCIAL INSTRUMENTS\nShort-term investments consist principally of highly liquid financial instruments with original maturities in excess of three months and are carried at cost, which approximates market.\nMarket value gains and losses on financial instruments that are designated and effective as hedges of foreign currency commitments and net investments are deferred to the extent that the financial instrument is equal to or less than the underlying commitment or investment. The cash that is received from or used for the hedges is reflected as an investing activity in the statements of cash flows.\nFOREIGN CURRENCY TRANSLATION AND TRANSACTIONS\nResults of operations for foreign investments are translated using average exchange rates during the period, while assets and liabilities are translated using end-of-period rates. The resulting net exchange gains or losses are accumulated in a separate section of shareholders' equity titled \"Currency translation adjustment.\" Gains and losses resulting from foreign currency transactions are generally included in operations.\nAIRTOUCH COMMUNICATIONS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)\nPROPERTY, PLANT, AND EQUIPMENT\nAssets of businesses purchased are recorded at their fair values at the date of acquisition. All other property, plant, and equipment are recorded at cost. Depreciation is computed using the straight-line method over the related assets' estimated useful lives ranging from three to forty years except land, which is not depreciated (see Note C). Gains and losses on disposals are included in income at amounts equal to the difference between net book value of the disposed assets and proceeds received upon disposal. Expenditures for replacements and betterments are capitalized, while expenditures for maintenance and repairs are charged against earnings as incurred.\nFCC LICENSES\nThe Federal Communications Commission (\"FCC\") issues licenses that enable cellular carriers to provide service in specific Cellular Geographic Service Areas. A cellular license is issued conditionally for ten years. The FCC has stated that \"a renewal expectancy would be awarded to a cellular licensee if, during the past ten-year term, it had substantially complied with applicable commission rules, policies, and the Communications Act; and not otherwise engaged in substantial relevant misconduct.\" Historically, the FCC has granted license renewals routinely. The Company believes it has complied and intends to continue to comply with these standards and is amortizing the related costs using the straight-line method over forty years. FCC licenses acquired by the Company through business combinations are stated at appraised values as of the date of acquisition and amortized using the straight-line method over forty years. The Company also has FCC licenses for its paging and vehicle location operations. Amortization is computed on a straight-line basis over periods ranging from twenty to forty years.\nLICENSE APPLICATION COSTS\nCosts associated with international license applications for telecommunications services are expensed as incurred. Once the license is granted, the Company capitalizes and amortizes these costs using the straight-line method over the term of the license.\nSUBSCRIBER LISTS\nSubscriber lists acquired through business combinations are stated at appraised values as of the date of acquisition. Amortization is computed using the straight-line method over estimated useful lives of up to thirty-six months.\nGOODWILL\nThe excess of the purchase price paid over the fair value of net assets acquired in business combinations is recorded as goodwill and is amortized using the straight-line method over twenty to forty years.\nINVESTMENTS IN UNCONSOLIDATED PARTNERSHIPS AND CORPORATIONS\nThe equity method is used to account for all domestic cellular markets and international consortia in which the Company has significant influence but is\nAIRTOUCH COMMUNICATIONS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)\nnot the controlling or managing general partner, even though the ownership percentage may be less than 20%. Limited partnership interests and joint ventures in which the Company does not have significant influence are accounted for using the cost method.\nEARNINGS PER SHARE\nEarnings per share are calculated by using weighted average common shares outstanding.\nINCOME TAXES\nEffective January 1, 1992, the Company adopted new accounting rules for accounting for income taxes (see Note H) which require the use of the liability method of accounting for deferred income taxes. As permitted under the new rules, prior years' financial statements have not been restated. Use of the new rules resulted in a $59.8 million tax benefit to 1992 earnings. Of this amount, $32.0 million is included in \"Equity in net income (loss) of unconsolidated partnerships and corporations-international\" and $27.9 million is reported within \"Cumulative effect of accounting change for income taxes.\" These amounts were offset by $0.1 million included in \"Income Taxes.\" Deferred income taxes are provided to reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for tax purposes, income tax loss carryforwards and income tax credits. The Company accounts for investment tax credits under the deferral method. The Company is included in the consolidated federal and combined state income tax returns of Telesis (see Note Q).\nOTHER POSTRETIREMENT BENEFITS\nIn December 1990, the Financial Accounting Standards Board (\"FASB\") issued Statement of Financial Accounting Standards No. 106, \"Employers' Accounting for Postretirement Benefits Other than Pensions\" (\"SFAS 106\"). The Company currently offers postretirement benefits other than pensions (\"postretirement benefits\") which are primarily retiree health care and life insurance benefits.\nSFAS 106 requires the Company to change the method of accounting for these postretirement benefits from a cash basis to an accrual basis beginning in 1993 (see Note J). In the first quarter of 1993, the Company recorded a one-time pre-tax expense and liability of $9.1 million for the transition obligation. In addition, the Company recorded $2.0 million pre-tax expense for the periodic SFAS 106 charge for 1993. The income tax benefits related to these expenses totalled $4.4 million.\nOTHER POSTEMPLOYMENT BENEFITS\nIn November 1992, the FASB issued Statement of Financial Accounting Standards No. 112, \"Employers' Accounting for Postemployment Benefits\" (\"SFAS 112\"). The Company offers workers' compensation, short- and long-term disability benefits, medical benefit continuation, and severance pay. These benefits are paid to former employees not yet retired.\nSFAS 112 requires accrual basis accounting for these postemployment benefits\nAIRTOUCH COMMUNICATIONS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)\nto begin no later than January 1, 1994. The Company intends to adopt this standard by the required adoption date. The Company expects that future recorded expense under SFAS 112 (including any cumulative adjustment upon adoption) will not differ materially from expenses recorded using the current method and therefore believes the adoption of SFAS 112 will not have a material impact on the Company's results of operations and financial condition.\nINVESTMENTS IN DEBT AND EQUITY SECURITIES\nIn May 1993, the FASB issued Statement of Financial Standards No. 115, \"Accounting for Certain Investments in Debt and Equity Securities\" (\"SFAS 115\"). The new standard will change the carrying basis for certain equity and debt securities. The Company intends to adopt SFAS 115 in 1994, consistent with the required adoption period. The Company does not expect SFAS 115 to affect materially its financial position or results of operations.\nB. PLANNED SPIN-OFF\nIn December 1992, Telesis announced that its Board of Directors had approved a plan to separate its wireless telecommunications operations from its other businesses (principally Pacific Bell and Nevada Bell, its local telephone companies) through a distribution to its shareowners of all of the common stock of the Company held by Telesis.\nIn March 1993, the Company accrued an after tax reserve of $5.0 million related to incremental costs directly attributable to the spin-off. Of such amount, approximately $3.8 million represents estimated costs that will be incurred in connection with the Company's name change, including new signage for the Company's retail and other business locations showing the new name and logo. The remaining $1.2 million represents estimated moving and relocation expenses. All these costs are expected to be incurred only after the spin-off. The Company's operations will continue to function under its current structure. Accordingly, the Company does not expect to write down any assets as a result of the spin-off.\nIn March 1994, Telesis announced that its Board of Directors had given final approval to the spin-off of the Company, which will occur April 1, 1994. On the spin-off date, Telesis will distribute to its shareowners all common shares of the Company it holds.\nAIRTOUCH COMMUNICATIONS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)\nC. Property, Plant, and Equipment\nProperty, plant, and equipment consists of the following:\nDecember 31, Depreciable -------------------- Lives 1993 1992 ----------- --------- ---------- (Dollars in millions) Property, plant, and equipment: Land and buildings................... 5-40 years $ 128.2 $ 140.1 Cellular plant and equipment......... 5-15 years 647.3 587.1 Pagers, paging terminals, and other paging equipment......... 3-15 years 165.0 138.6 Office furniture and other equipment.................... 3-7 years 172.8 163.7 Construction in progress................ 62.2 69.3 --------- --------- 1,175.5 1,098.8 Less: accumulated depreciation.......... 433.4 373.1 --------- --------- $ 742.1 $ 725.7 ========= =========\nDepreciation and amortization expense relating to property, plant, and equipment for the years ended December 31, 1993, 1992, and 1991 was $161.7 million, $132.4 million, and $114.0 million, respectively.\nCommitments for future acquisitions of property, plant, and equipment at December 31, 1993 are approximately $86.1 million and, depending upon final design specifications, could reach approximately $104.1 million.\nD. INVESTMENTS IN UNCONSOLIDATED PARTNERSHIPS AND CORPORATIONS\nInterests owned in cellular and other telecommunications systems of unconsolidated partnerships and corporations are as follows:\nDecember 31, -------------------- 1993 1992 --------- ---------\n(Dollars in millions)\nInvestments at equity.............................. $1,127.2 $ 913.6 Investments at cost................................ 27.3 21.8 --------- --------- $1,154.5 $ 935.4 ========= =========\nAIRTOUCH COMMUNICATIONS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)\nDecember 31, -------------------- 1993 1992 --------- --------- At equity: (Dollars in millions) Centel Cellular Company of Nevada Limited Partnership (Las Vegas, Nevada)........... 28% 28% Metroplex Telephone Company (Dallas\/Fort Worth, Texas)............................................ - 34% Tucson Cellular Telephone Company (Tucson, Arizona). 6% 6% New Par (Ohio\/Michigan)............................. 50% 50% Telecel Comunicacoes Pessoais, S.A. (Portugal)...... 23% 23% Mannesmann Mobilfunk GmbH (Germany)................. 29% 28% Tokyo Digital Phone Co. (Japan)..................... 15% 15% Kansai Digital Phone Co. (Japan).................... 13% 13% Central Japan Digital Phone Co. (Japan)............. 13% 13% Telechamada-Servico de Chamada de Pessoas, S.A. (Portugal)................................... 23% 23% Sistelcom, S.A. (Spain)............................. 25% 25% Cellular Communications, Inc. (Ohio\/Michigan)....... 12% 12% Nevada RSA2 Ltd. Partnership (Lander, Nevada)....... 50% 50% Muskegon Cellular Partnership (Muskegon, Michigan).. 41% 41% CMT Partners (California, Texas, Missouri, and Kansas)........................................... 50% - Omnicom, S.A. (France).............................. 19% -\nIn May 1993, the Company purchased an additional 0.75% interest in Mannesmann Mobilfunk GmbH (\"MMO\").\nCellular Communications, Inc. (\"CCI\") represents the only equity method investment for which a quoted market price is available. At December 31, 1993, the market value of this investment was $235.8 million, compared to the Company's recorded net investment of $174.2 million. The Company has the right to purchase the remainder of CCI at a price reflecting private market value (see Note E).\nCMT Partners was formed in September 1993 and the Metroplex Telephone Company was one of the investments contributed by the Company in the formation of this partnership (see Note E). December 31, -------------------- 1993 1992 --------- --------- At cost: Fresno MSA Limited Partnership (Fresno, California)................................... 1% 1% GTE Mobilnet of California Limited Partnership (Salinas, Santa Cruz, and Santa Rosa, California)................................... - 3% GTE Mobilnet of Santa Barbara Limited Partnership (Santa Barbara, California)................... 10% 10% Cal-One Cellular Limited Partnership (Eureka, California)................................... 6% 6% IDC (Japan)..................................... 10% 10% Qualcomm (San Diego, California)................ 1% 1%\nAIRTOUCH COMMUNICATIONS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)\nQualcomm represents the only cost method investment for which a quoted market price is available. At December 31, 1993, the market value of this investment was $10.6 million compared to the Company's recorded net investment of $2.0 million.\nCondensed combined financial information for unconsolidated partnerships and corporations accounted for under the equity method is summarized as follows:\nDecember 31, --------------------------------------- 1993 1992 ------------------- ------------------- Inter- Inter- Domestic national Domestic national --------- --------- --------- ---------\n(Dollars in millions)\nCurrent assets................ $ 350.4 $ 370.0 $ 289.1 $ 250.0 Noncurrent assets............. 1,513.7 1,631.5 1,102.8 923.4 Current liabilities........... (116.3) (373.0) (81.6) (228.9) Noncurrent liabilities........ (420.1) (630.8) (341.4) (30.2) Redeemable preferred stock.... - - (32.7) - --------- --------- --------- --------- Total partners' and shareholders'capital........ $1,327.7 $ 997.7 $ 936.2 $ 914.3 ========= ========= ========= ========= Total partners' and shareholders'capital........ $1,327.7 $ 997.7 $ 936.2 $ 914.3 Other partners' and shareholders' share of capital..................... 753.4 732.8 554.2 679.6 --------- --------- --------- --------- Company share of capital...... 574.3 264.9 382.0 234.7 Goodwill and other intangible items....................... 255.8 32.2 273.6 23.3 --------- --------- --------- --------- Equity investments in unconsolidated partnerships and corporations............ $ 830.1 $ 297.1 $ 655.6 $ 258.0 ========= ========= ========= =========\nAIRTOUCH COMMUNICATIONS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)\nFor the Year Ended December 31, -------------------------------------------------------- 1993 1992 1991 -------------------------------------------------------- Inter- Inter- Inter- Domestic national Domestic national Domestic national -------- -------- -------- -------- -------- -------- (Dollars in millions) Net operating revenues.......... $ 697.5 $ 527.7 $501.6 $ 75.9 $338.8 $ 2.2 Cost of revenues.... 223.0 194.7 154.6 97.8 125.2 32.0 -------- -------- -------- -------- -------- ------- Gross profit (loss). 474.5 333.0 347.0 (21.9) 213.6 (29.8) Selling, general, administrative, and other expenses, net............... 277.3 555.8 226.2 244.7 178.1 53.9 Interest expense (income).......... 10.8 10.7 11.8 (20.3) 11.7 (10.8) Income tax expense (benefit)......... 6.5 (93.3) 2.2 (114.0) - - -------- -------- -------- -------- -------- ------- Income (loss) before accounting change. 179.9 (140.2) 106.8 (132.3) 23.8 (72.9) Cumulative effect of accounting changes 8.5 - - 51.4 - - -------- -------- -------- -------- -------- ------- Net income (loss)... $188.4 $(140.2) $106.8 $(80.9) $ 23.8 $(72.9) ======== ======== ======== ======== ======== ======= Net income (loss)... $188.4 $(140.2) $106.8 $(80.9) $ 23.8 $(72.9) Other partners' and shareholders'share of net income (loss)............ 110.4 (103.5) 60.0 (56.6) 5.2 (51.8) -------- -------- -------- -------- -------- ------- Company share of net income (loss). 78.0 (36.7) 46.8 (24.3) 18.6 (21.1) Cumulative effect of accounting change for income taxes recorded by the Company........... - - - (13.7) - - Amortization of goodwill and other intangible items.. (7.6) (0.8) (5.7) (0.5) (3.1) (0.3) -------- -------- -------- -------- -------- ------- Equity in net income (loss) of unconsolidated partnerships and corporations...... $ 70.4 $(37.5) $ 41.1 $(38.5) $ 15.5 $(21.4) ======== ======== ======== ======== ======== =======\nAIRTOUCH COMMUNICATIONS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)\nGoodwill and other intangible items are amortized primarily over forty years. Anticipated future international capital calls are $140.7 million at December 31, 1993.\nCCI adopted Statement of Financial Accounting Standards No. 109, \"Accounting for Income Taxes,\" (\"SFAS 109\") effective January 1, 1993. The Company's portion of the increase to CCI's net income from adoption was approximately $1.0 million.\nE. JOINT VENTURES AND ACQUISITIONS\nCELLULAR COMMUNICATIONS, INC.\nOn August 1, 1991, the Company and CCI combined their cellular telephone interests in Ohio and Michigan by forming an equally owned joint venture (\"New Par\"). The Company also purchased an initial ownership interest in CCI of approximately 5% for $39 per share, or approximately $90.0 million including related acquisition costs. During 1992 the Company increased its holding in CCI to approximately 12% through open-market purchases of stock. Both the Company's joint venture interest in New Par and its purchase of CCI shares are accounted for under the equity method. The investment in net assets contributed by the Company to the joint venture has been recorded at the same net book value reflected in the Company's consolidated accounts prior to closing (see Note S).\nThe Company and CCI have entered into an agreement (the \"Merger Agreement\") under which CCI will, in October 1995, offer to redeem up to 10.04 million shares of its redeemable stock at $60 per share (the \"Mandatory Redemption Obligation\" or \"MRO\"). The Company is obligated to purchase from CCI at such price a number of newly issued shares of stock equal to the number of shares purchased by CCI in the MRO. At the same time, the Company is obligated to purchase from CCI shares or stock options representing in the aggregate approximately 2.4 million shares at a price of $60 per share, less the exercise price in the case of stock options. Pursuant to the Merger Agreement, the Company initially acquired approximately 5% of CCI and obtained the right to acquire all of CCI's remaining equity in stages over the next several years.\nBeginning in August 1996, the Company has the right, by causing CCI to redeem all of its redeemable stock not held by the Company (the \"Redemption\"), to acquire CCI, including its interests in New Par and such other CCI assets and related liabilities as the Company and CCI may agree upon, at a price per share that reflects the appraised private market value of New Par (and such other CCI assets and related liabilities as the Company and CCI agree shall be retained) determined in accordance with an appraisal process set forth in the Merger Agreement.\nThe Company has the opportunity to evaluate up to three different appraisal values during the 18-month period beginning in August 1996, prior to determining whether to cause the Redemption. The Company will finance the Redemption by providing to CCI any necessary funds.\nIn the event that the Company does not exercise its right to cause the Redemption, CCI is obligated to commence promptly a process to sell itself (and, if directed by the Company, the Company's interest in New Par). In the\nAIRTOUCH COMMUNICATIONS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)\nevent that the Company does not direct CCI to sell the Company's interest in New Par, such partnership dissolves and the assets are returned to the contributing partner. CCI may, in the alternative, purchase the Company's interest in CCI or CCI and New Par, as the case may be, at a price based upon their appraised values determined in accordance with the Merger Agreement. If CCI or its interest in New Par is sold within certain specified time periods not to exceed two years for a price less than the appraised private market value, the Company is obligated to pay to each other CCI stockholder a specified percentage of such shortfall.\nIn connection with the CCI transaction, Telesis delivered a letter of responsibility in which it agreed, among other things, to continue to own a controlling interest in the Company. Telesis and CCI have agreed to the termination of such letter of responsibility at the time that Telesis no longer has a controlling interest in the Company in exchange for the provision by the Company of substitute credit assurance, consisting of a $600 million letter of credit and a pledge of up to 15% of CCI's shares on a fully diluted basis, for the Company's obligations in connection with the MRO and for the payment of any make-whole obligation, respectively (see Note R).\nMCCAW CELLULAR COMMUNICATIONS, INC.\nIn September 1993, the Company and McCaw Cellular Communications, Inc. (\"McCaw\") contributed their respective cellular operations in San Francisco, San Jose, Dallas, Kansas City (Missouri\/Kansas) and certain adjoining areas to a joint venture with equal ownership by each company. The new venture (\"CMT Partners\") manages two large cellular regional networks covering an estimated population of 9.2 million people. (The Company previously had operations covering an estimated population of 4.5 million people in the joint venture service area.) In a related transaction, the Company purchased McCaw's Wichita and Topeka systems for $100.0 million.\nPACTEL TELETRAC\nPacTel Teletrac (\"Teletrac\"), a start-up company offering vehicle location services in six markets in the United States, is 51% owned by the Company, and thus its operations are consolidated with the Company. Effective March 31, 1992, Teletrac exercised its option to acquire all of the assets of International Teletrac Systems (\"ITS\"). The acquisition price was $9.5 million to be paid over two years and the creation of a $69.7 million \"preferred capital account,\" for the benefit of ITS, which Teletrac accounted for as long-term debt. This amount was netted with a $20.2 million receivable from ITS and was reflected as $49.5 million long-term debt in the Consolidated Balance Sheet at December 31, 1992 (see Note G). This $49.5 million debt has since been retired. Additionally, the Company's 49% partner in Teletrac provided ITS with a 24% ownership interest in Teletrac, and, as a part of the purchase agreement, Teletrac credited ITS' capital account $2.5 million.\nPrior to the March 31, 1992 acquisition of ITS' assets, Teletrac had no ownership interest in ITS. However, the Company had an obligation through Teletrac to ITS' lender, who had funded the substantial operating losses of ITS. Because of this obligation, Teletrac has consolidated ITS for all periods presented.\nThrough December 31, 1993, the Company had advanced Teletrac a total of $170.5\nAIRTOUCH COMMUNICATIONS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)\nmillion for ongoing operating expenses, of which $91.0 million was advanced in 1993. Teletrac pays interest quarterly at Wells Fargo's prime rate plus 2%. Advances issued prior to May 29, 1992 have a three-year term with an option to extend for up to an additional five years. Advances issued after May 29, 1992 have a six-year term. The Company can convert the advances into additional equity interests in Teletrac or Teletrac's corporate successor. The conversion rate may be based on an appraised price or a percentage of the price of stock issued in an initial public offering for Teletrac's corporate successor. Such initial public offering, which may be solely elected by the shareholders of the minority partner of Teletrac, must generally occur prior to March 31, 1995.\nNORDICTEL\nIn October 1993, the Company acquired a 51% interest in NordicTel Holdings AB (\"NordicTel\"), one of three providers of global digital services in Sweden, for $153.0 million. The Company also contributed $5.4 million to NordicTel's equity capital. The Company also holds an option exercisable between July 1 and September 30, 1994, to purchase an additional 6.75% of NordicTel's equity for approximately $20.0 million.\nPRO FORMA RESULTS (UNAUDITED)\nThe unaudited pro forma data for significant acquisitions occurring in 1993 include the results of the Company, Wichita, Topeka, NordicTel, and the Company's share of the results of CMT Partners. The results listed below reflect purchase method accounting adjustments assuming the acquisitions occurred at the beginning of each year presented. The unaudited pro forma results are not necessarily indicative of what actually would have occurred if the acquisitions had been in effect for the entire periods and are not necessarily indicative of the results of future operations.\nDecember 31, ------------------- 1993 1992 --------- --------- (Dollars in millions, except per share amounts)\nNet operating revenues.......................... $844.3 $645.6 Income (loss) before extraordinary item and cumulative effects of accounting changes.... $ 15.4 $(33.9) Net income (loss)............................... $ 9.8 $(13.6) Net income (loss) per share before extraordinary item and cumulative effects of accounting changes..................................... $ 0.04 $(0.08)\nAIRTOUCH COMMUNICATIONS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)\nF. INTANGIBLE ASSETS\nIntangible assets consist of the following:\nDecember 31, ------------------- 1993 1992 --------- --------- (Dollars in millions) FCC licenses, at cost, less accumulated amortization of $36.9 and $26.8 for 1993 and 1992, respectively....................... $143.7 $ 163.8 Goodwill, at cost, less accumulated amortization of $8.4 and $8.0 for 1993 and 1992, respectively........................... 262.3 45.9 Other intangible assets, at cost, less accumulated amortization of $9.6 and $20.3 for 1993 and 1992, respectively.............. 7.2 15.3 --------- --------- $ 413.2 $ 225.0 ========= =========\nIn 1993 goodwill increased approximately $133.7 million as a result of purchasing NordicTel in October 1993, and approximately $85.7 million as a result of purchasing McCaw's cellular systems in Wichita and Topeka in September 1993 (see Note E for further discussion).\nAmortization expense relating to intangible assets for the years ended December 31, 1993, 1992, and 1991 was $12.5 million, $11.0 million, and $16.0 million, respectively.\nG. DEBT\nDUE TO AFFILIATES WITHIN ONE YEAR\nAmounts due to affiliates at December 31, 1993 consisted principally of accounts payable and accrued liabilities. Amounts due to affiliates within one year at December 31, 1992 of $906.7 million were primarily promissory notes bearing interest at variable rates which averaged 6.1% during 1993 and 5.7% during 1992. Included in this amount were accounts payable and accrued liabilities totalling $33.3 million at December 31, 1992.\nAIRTOUCH COMMUNICATIONS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)\nNON-CURRENT BORROWINGS DUE TO AFFILIATES\nNon-current borrowings due to affiliates are as follows:\nDecember 31, ------------------- 1993 1992 --------- --------- (Dollars in millions)\nVariable rate note payable relating to the CCI transaction. Interest averaged 6.1% during 1993 and 5.7% during 1992 and was payable semi-annually. Principal was originally due in 1997. This note was redeemed in 1993.......................................... - $ 85.0\nVariable rate note payable relating to the Teletrac transaction with interest payable quarterly at prime plus 3%. Principal originally due in 1995 and 1996. This note was redeemed in 1993 (see related discussion in Note E).................................... - 49.5\nVariable rate note payable which matured September 25,1993. Interest averaged 6.1% during 1993 and 5.7% during 1992 and was payable semi-annually......................... - 100.0 --------- --------- - 234.5 Less portion due within one year................ - 100.0 --------- --------- - $ 134.5 ========= =========\nAIRTOUCH COMMUNICATIONS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)\nNON-CURRENT BORROWINGS DUE TO NON-AFFILIATES\nNon-current borrowings due to non-affiliates are as follows:\nDecember 31, ------------------- 1993 1992 --------- --------- (Dollars in millions) Variable rate revolving credit facility expiring in 1998. The credit available under this agreement, approximately $51 million, supports a NordicTel purchase contract. Principal and interest are due in ten equal semi-annual installments beginning in June, 1994. Amounts repaid, except prepayments, are available for redrawing. The draw-down period for the additional advances commences on January 1, 1994 and ends on December 31, 1997*............. $50.1 -\nNotes (two) payable to a bank. The first note, which has two draw-downs, matures May 30, 1999, and had interest rates of 5.4% for the first draw-down and 7.2% for the second draw-down; semi-annual interest payments began November 30, 1993. The second note matures June 10, 2001, with an interest rate of 7.5%; semi-annual interest payments begin December 10, 1995. Balances are payable in full at maturity **............................. 24.1 $20.7\nVarious other notes and obligations............... 4.7 2.1 --------- -------- 78.9 22.8 Less portion due within one year.................. 10.3 0.4 --------- -------- $68.6 $22.4 ========= ========\n------------------------- * Terms of the note prevent NordicTel from making distributions\/ repayments or interest payments on its common stock or on shareholders' contribution until at least 50% of the credit has been repaid. Such distributions \/ repayments or interest payments can be made only if the funds available for such payment exceed $24.0 million and only from funds in excess of that amount. In addition, all of the outstanding shares of NordicTel have been pledged as collateral until the credit has been repaid in full. The lender also holds as collateral a chattel mortgage on NordicTel's principal subsidiary. The total amount of chattel mortgages outstanding at December 31, 1993 was approximately $39.0 million.\n** Under the terms of both notes, prepayment of the entire outstanding balance may be made after May 1994 at a premium of 0.25% of the amount payable. Terms of the notes require Telesis to retain 51% of the\nAIRTOUCH COMMUNICATIONS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)\nownership of AirTouch International, formerly Pacific Telesis International. The Company has been granted a temporary waiver of this restriction and continues to renegotiate this restriction.\nMaturities of non-current borrowings due to non-affiliates are as follows:\nDecember 31, 1993 ------------------- (Dollars in millions) Maturities: 1995............................................. $13.2 1996............................................. 10.0 1997............................................. 10.0 1998............................................. 10.0 1999............................................. 17.6 Thereafter....................................... 6.4 ------- 67.2 Long-term capital lease obligations................... 1.4 ------- $68.6 ======= LINES OF CREDIT\nThe Company has various lines of credit with certain banks. For the most part, these arrangements do not require compensating balances or commitment fees and, accordingly, are subject to continued review by the lending institutions. At December 31, 1993 and 1992, the total unused lines of credit available were approximately $86.2 and $5.0 million, respectively.\nH. INCOME TAXES\nEffective January 1, 1992, the Company adopted the provisions of SFAS 109. This standard requires companies to record all deferred tax liabilities or assets for the deferred tax consequences of all temporary differences and requires ongoing adjustments for enacted changes in tax rates and laws.\nAIRTOUCH COMMUNICATIONS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)\nThe components of income tax expense for each year ended December 31, are as follows: 1993 1992 1991 -------- -------- -------- (Dollars in millions) Current: Federal..................................... $48.8 $ 1.5 $17.0 State and other taxes....................... 9.4 (4.4) 6.1 -------- -------- -------- Total current............................... 58.2 (2.9) 23.1 -------- -------- -------- Deferred: Federal..................................... 8.5 19.1 25.1 Change in federal enacted tax rate.......... 4.4 - - State and other taxes....................... (3.3) 8.4 2.7 -------- -------- -------- Total deferred.............................. 9.6 27.5 27.8 -------- -------- -------- Amortization of investment tax credits-net................................. - (0.1) (1.1) -------- -------- -------- Total income taxes............................ $67.8 $24.5 $49.8 ======== ======== ========\nThe Company recorded international tax expense on its consolidated foreign subsidiaries for 1993, 1992, and 1991 of $1.6 million, $1.3 million, and $2.2 million, respectively.\nThe net change in the valuation allowance for deferred tax assets was an increase of $1.8 million relating to benefits arising from foreign net operating loss carryforwards of consolidated subsidiaries. At December 31, 1993, the Company had unused tax benefits of $4.8 million related to foreign net operating loss carryforwards. Of this amount, $0.7 million can be carried forward indefinitely and the balance expires at various dates through 2001. The loss before income tax expense on the Company's consolidated foreign subsidiaries was $5.2 million and $1.5 million in 1993 and 1992, respectively. Significant components of the Company's deferred tax assets and liabilities as of December 31, are as follows:\nAIRTOUCH COMMUNICATIONS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)\n1993 1992 -------- -------- (Dollars in millions) Deferred tax liabilities: Depreciation and amortization............... $124.6 $111.9 Equity investments.......................... 59.0 54.9 Other....................................... 22.3 19.0 -------- -------- 205.9 185.8 -------- -------- Deferred tax assets: Postretirement benefits obligation.......... 4.4 - Foreign tax benefits in consolidated subsidiaries (1).......................... 4.8 3.0 Equity investments.......................... - 0.2 Accruals deductible for tax purposes when paid................................. 16.0 10.2 Other....................................... 8.2 4.5 -------- -------- 33.4 17.9\nValuation allowance (1)....................... (4.8) (3.0) -------- -------- Total deferred taxes recorded in consolidated balance sheets................. $177.3 $170.9 ======== ========\nCurrent....................................... $(13.1) $ (3.5) Non-current................................... 190.4 174.4 -------- -------- Net deferred tax liabilities.................. $177.3 $170.9 ======== ========\n(1) 1992 has been revised to agree with the 1993 presentation.\nAt December 31, 1993, amounts due to affiliates include $20.6 million for the Company's tax liability to be included in the Telesis consolidated tax returns. At December 31, 1992, amounts receivable from affiliates include $101.9 million for the Company's tax losses utilized in the Telesis consolidated tax returns (see Note Q).\nAIRTOUCH COMMUNICATIONS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)\nThe components of federal, state, and other deferred income taxes for the year ended December 31, 1991 are as follows (dollars in millions):\nDeferred tax-due to: Depreciation and amortization....................... $26.2 Interest capitalized................................ 1.5 FCC license adjustment.............................. - Partnership income-net.............................. 2.8 Reserves............................................ (0.9) State taxes......................................... (1.6) Other............................................... (0.2) --------- Total deferred taxes................................ $27.8 =========\nThe reasons for differences each year between the statutory federal income tax rate and the effective income tax rate are provided in the following reconciliations:\n1993 1992 1991 -------- -------- -------- Statutory federal income tax rate............. 35.0% 34.0% 34.0% Increase (decrease) in taxes resulting from: Equity losses of unconsolidated partnerships and corporations............. 11.5 101.0 5.6 ITS losses prior to March 31, 1992.......... - 36.8 10.2 Nondeductible amortization.................... 3.0 4.6 2.6 Change in deferred taxes due to tax rate change................................. 4.1 - - Nondeductible amortization of investment tax credits..................................... - (0.6) (1.2) State income taxes-net of federal tax benefit................................. 3.7 (9.3) 4.7 Tax on international income................... 1.5 8.9 2.4 Settlement of litigation...................... - - (4.4) Other......................................... 4.0 (5.3) (0.3) -------- -------- -------- Effective income tax rate..................... 62.8% 170.1% 53.6% ======== ======== ========\nIn July 1993, the German Parliament passed the German Tax Act of 1994 which, among other provisions, decreases the corporate tax rate on distributed earnings effective January 1, 1994. As required by SFAS 109, deferred tax assets recognized by MMO through June 1993 were adjusted downward to reflect the lower tax rate. The Company's share of this adjustment reduced net income by $3.1 million in 1993. The Company's investment balance in MMO, an equity method investee, contains significant deferred tax asset amounts as shown in the attached MMO financial statements and notes thereto.\nAt December 31, 1993, deferred tax liabilities relating to cumulative unrepatriated earnings on consolidated foreign subsidiaries totalling $7.3 million were excluded from recognition under SFAS 109, because such earnings are intended to be reinvested indefinitely. Federal income tax expense of $2.6 million would be due if this income were repatriated.\nAIRTOUCH COMMUNICATIONS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)\nIn August 1993, the United States government enacted the Omnibus Budget Reconciliation Act of 1993 which incorporates new business tax provisions. These include an increase in the corporate tax rate from 34% to 35% retroactive to January 1, 1993. The Company's adjustment for this change reduced net income by $4.4 million in 1993.\nI. EMPLOYEE RETIREMENT PLANS\nDEFINED BENEFIT PLAN\nThe Company provides pension, death, and survivor benefits under a qualified defined benefit plan, the PacTel Corporation Employees Pension Plan, qualified under Section 401(a) of the Internal Revenue Code, which covers employees of the Company and certain subsidiaries. Benefits are based on a percentage of final five-year average pay and vary according to years of service. The accrual of service credit was discontinued on December 31, 1986 for most employees. Certain long-service employees were given the option of continuing to have their service credited under this pension plan in lieu of full participation in the Company's defined contribution plan.\nThe Company is responsible for contributing enough to the pension plan to ensure that adequate funds are available to provide benefit payments upon the employee's retirement. These contributions are made to an irrevocable trust fund in amounts determined using the aggregate cost actuarial method, one of the actuarial methods specified by the Employee Retirement Income Security Act of 1974 (\"ERISA\"), subject to ERISA and IRS limitations.\nA joint venture of Telesis has been treated as a participating employer in the defined benefit pension plan. Approximately 130 joint venture employees who previously were employees of the Company were not included in the Company's pension obligation or plan assets. However, pursuant to recent IRS regulations, the Company determined that its pension obligation and plan assets should include amounts attributable to the joint venture employees. The Company has approved plan changes effective November 1, 1993, requiring pension assets and obligations for the joint venture employees to be included in the footnotes to the financial statements for the year ended December 31, 1993. These actions increased the reported plan assets by $3.7 million and the reported actuarial present value of projected benefit obligations by $2.1 million.\nIn November and December of 1993, approximately 85% of the employees at the joint venture who participated in the qualified defined benefit plan elected early retirement or termination benefits from the plan under a program offered by the Company. The 1993 annual pension income in the table below excludes a one-time $3 million net gain recognized for this program, under Statement of Financial Accounting Standards No. 88, \"Employers' Accounting for Settlements and Curtailments of Defined Benefit Plans and for Termination Benefits.\"\nAIRTOUCH COMMUNICATIONS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)\nAnnual pension income for each year consisted of the following components:\n1993 1992 1991 -------- -------- -------- (Dollars in millions)\nService cost-benefits earned during the year.... $(0.1) $(0.3) $(0.2) Interest cost on projected benefit obligations.. (2.6) (1.6) (1.1) Actual return on assets......................... 10.2 0.6 7.3 Net amortization and deferral of items subject to delayed recognition*....................... (4.8) 3.4 (3.0) -------- -------- -------- Pension income recognized....................... $ 2.7 $ 2.1 $ 3.0 ======== ======== ========\n* Under Statement of Financial Accounting Standard No. 87, \"Employers' Accounting for Pensions,\" (\"SFAS 87\"), differences between actual returns and losses on assets and assumed returns, which are based on an expected long-term rate of return, are deferred and included with other \"unrecognized net gain\" (see following table). During 1993, actual returns exceeded assumed returns by $5.8 million. During 1992, actual returns were less than assumed returns by $3.5 million. During 1991, actual returns exceeded assumed returns by $6.3 million. Recognition of these differences has been deferred.\nThe amount of annual pension income recognized in 1993, 1992, and 1991 reflects a substantially diminished participant count since inception of the plan (which reduces both service and interest costs) and the effects of strong fund asset performance.\nThe following table sets forth the status of the plan's assets and obligations and the amounts recognized in the Company's consolidated balance sheets:\nDecember 31, -------------------- 1993 1992 --------- --------- (Dollars in millions)\nPlan assets at estimated fair value.............. $68.3 $60.7 Actuarial present value of projected benefit obligations.................................... 31.1 28.5 --------- --------- Plan assets in excess of projected benefit obligations.................................... 37.2 32.2 Less items subject to delayed recognition: Unrecognized net gain *........................ 15.4 18.1 Unrecognized transition amount **.............. 5.3 6.6 Unrecognized prior service cost................ 1.1 (0.3) --------- --------- Prepaid pension cost recognized in the consolidated balance sheets.................... $15.4 $ 7.8 ========= =========\nAIRTOUCH COMMUNICATIONS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)\n---------------------- * Gains or losses from actual returns on assets different from assumed returns, as well as from demographic experience different from assumed and the effects of changes in other assumptions, are recognized through amortization, over time, when the cumulative gains or losses exceed certain limits.\n** The $10.2 million excess of the fair value of the plan's assets over projected benefit obligations as of the January 1, 1987 adoption of SFAS 87 is being recognized through amortization over approximately 17 years. Recognition has been accelerated due to the settlement of pension obligations through lump sum benefit payments.\nThe assets of the plan are primarily composed of common stocks, United States government and corporate obligations, index funds, and real estate investments. The plan's projected benefit obligations for employee service to date reflect the Company's expectations of the effects of future salary progressions of 5.5% per year. As of December 31, 1993 and 1992, the actuarial present value of the plan's accumulated benefit obligations, which do not anticipate future salary increases, were $26.1 million and $22.0 million, respectively. Of these amounts, $23.2 million and $19.3 million, respectively, were vested. The assumptions used in computing the present values of benefit obligations include a discount rate of 7.5% for 1993 and 8.5% for 1992 and 1991. An 8.0% long-term rate of return on assets was assumed in calculating pension costs in 1993 and 1992.\nDEFINED CONTRIBUTION PLAN\nThe Company sponsors a defined contribution plan, the PacTel Corporation Retirement Plan, formerly the Retirement Plan, which covers substantially all full-time employees. The Company's contributions to the AirTouch Communications Retirement Plan are based on a combination of percentage of pay and on matching a portion of employee contributions. The cost recognized for the plan was $12.9 million, $9.8 million, and $5.4 million for 1993, 1992, and 1991, respectively.\nJ. OTHER POSTRETIREMENT BENEFITS\nThe Company provides health care benefits for retired employees and their eligible dependents and provides life insurance benefits to retired employees. Employees become eligible for these benefits upon retirement with eligibility for a service pension under the defined benefit pension plan or attainment of \"retirement status\" under the defined contribution plan. Substantially all retirees and their dependents are covered under the Company's plans for medical, dental, and life insurance benefits. Approximately 50 retirees were eligible to receive benefits as of January 1, 1993. The Company retains the right, subject to applicable legal requirements, to amend or terminate these benefits.\nThe Company currently pays a portion of the cost of these benefits, with retirees paying monthly contributions for medical and dental costs based on the individual's family status. Commencing in 1994, the Company has implemented managed care in order to reduce and contain medical costs. The terms of this cost sharing have been reflected in the financial statements. Through 1992, postretirement health care costs were expensed as claims were\nAIRTOUCH COMMUNICATIONS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)\nincurred. Postretirement life insurance benefits were expensed as premiums were paid. The costs of these benefits recognized in 1992 and 1991 were $0.2 million and $0.3 million, respectively.\nOn January 1, 1993, the Company implemented SFAS 106 on an immediate recognition basis. The standard requires that the cost of retiree benefits be recognized in the financial statements from an employee's date of hire until becoming eligible for these benefits. Previously, the Company expensed these retiree benefits as they were paid. Immediate recognition of the transition obligation resulted in a one-time, noncash expense of $9.1 million before a tax benefit of $3.5 million. In addition, the periodic expense recognized in 1993 amounted to $2.0 million before a tax benefit of $0.9 million. The $2.0 million is an increase of $1.9 million over the amount that would have been expensed during the period using the previous method of accounting. The projected unit credit actuarial method was used to determine the cost of these benefits.\nA discount rate of 7.5% was used to measure the accumulated postretirement benefit obligation (\"APBO\") at December 31, 1993. An 8.5% discount rate was assumed in calculating the 1993 net periodic postretirement benefit cost. At December 31, 1993, the other postretirement benefits plans were unfunded.\nThe 1993 annual net periodic postretirement benefit cost consisted of the following components : --------- (Dollars in millions)\nService cost.............................................. $1.2 Interest cost on accumulated postretirement benefit obligation.............................................. 0.8 --------- Postretirement benefit cost............................... $2.0 =========\nThe following table sets forth the funded status of the plans and the amounts recognized in the Company's consolidated balance sheets:\nDecember 31, 1993 --------------- (Dollars in millions) Retirees.............................................. $ 3.5 Eligible active employees............................. 1.0 Other active employees................................ 7.9 ------------- Total accumulated postretirement benefit obligation... 12.4 Less fair value of plan assets........................ - Less unrecognized net loss (1), subject to delayed recognition......................................... 1.1 ------------- Accrued postretirement benefit obligation in excess of plan assets...................................... $11.3 =============\nAIRTOUCH COMMUNICATIONS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)\n(1) Gains or losses from actual returns on assets different than assumed returns, as well as from demographic experience different than assumed and the effects of changes in other assumptions, are recognized through amortization, over time, when the cumulative gains or losses exceed certain limits.\nA 14% annual increase in health care costs is assumed in 1994 for retirees in the medical network and for those outside the network. The rate of increase is assumed to decline to an ultimate 6% by the year 2002. Should the health care cost trend rate increase by 1% each year, the 1993 impact increases the APBO by $2.1 million and the aggregate of the service and interest cost components of the net period cost by $0.5 million.\nK. FINANCIAL INSTRUMENTS\nThe Company uses various financial instruments that involve off-balance-sheet risk. These include foreign currency swap contracts. These contracts are used to reduce the impact of foreign currency fluctuations on international investments. The Company also engages in forward contracts.\nAs of December 31, 1993 and 1992, the Company had outstanding foreign currency swap and forward contracts with face amounts totalling $291.2 million and $354.0 million, respectively, with maturities through November 2001.\nThe off-balance-sheet risk in these contracts involves both the risk of a counterparty not performing under the terms of the contract and the risk associated with changes in market value. The counterparties to these contracts are major financial institutions. The Company monitors its positions, the credit ratings of counterparties and the level of contracts the Company enters with any one party. Therefore, the Company believes the likelihood of realizing material losses from counterparty nonperformance is remote. The settlements of these transactions are not expected to have any material adverse effect upon the Company's financial position or results of operations.\nThe following disclosure of the estimated fair value of financial instruments is made in accordance with the requirements of Statement of Financial Accounting Standard No. 107, \"Disclosures about Fair Value of Financial Instruments.\" The Company uses available market information and appropriate valuation methods to determine fair value amounts. However, considerable judgment enters into estimates of fair value. Accordingly, the estimates presented may not be indicative of the amounts that the Company could realize in a current market exchange.\nAIRTOUCH COMMUNICATIONS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)\nDecember 31, ------------------------------------------ 1993 1992 ------------------------------------------ Estimated Estimated Carrying Fair Carrying Fair Amount Value Amount Value ---------- --------- ---------- ---------- (Dollars in millions) Assets: Cash and cash equivalents..... $646.7 $646.7 $ 17.1 $ 17.1 Short-term investments........ $814.0 $814.0 - - Notes receivable.............. - - $ 99.8 $ 99.8 Long-term investments: Practicable to estimate fair value................ $ 2.0 $ 10.6 $ 2.0 $ 4.9 Not practicable to estimate fair value................ $ 25.3 - $ 19.8 -\nLiabilities: Current obligations........... $ 12.7 $ 12.7 $878.5 $878.5 Deposit liabilities........... $ 22.4 $ 22.4 $ 23.1 $ 23.1 Long-term debt................ $ 67.2 $ 70.0 $155.7 $155.7\nOff-balance-sheet financial instruments-net............... - $ 13.8 - $ 11.0\nCash and cash equivalents, short-term investments, notes receivable, and current obligations. Carrying amounts are a reasonable approximation of fair value.\nLong-term investments. It is not practicable to estimate the fair value of the Company's investment in several joint ventures since valuations are not available in the current market. Ownership interests in such joint ventures range from 1% to 10% in various cellular companies and a network cable under the Pacific Ocean. Certain of these ventures are in the start-up mode. At December 31, 1993, the Company's ownership interest in these ventures' assets and shareholders' equity was approximately $72.9 million and $3.9 million, respectively. In addition, the Company's ownership interest in 1993 revenues and net loss was $42.3 million and $5.0 million, respectively.\nLong-term debt. Interest rates that are currently available to the Company for issuance of debt with similar terms and remaining maturities are used to estimate fair value for debt issues that are not quoted on an exchange.\nOff-balance-sheet financial instruments. These amounts primarily represent foreign exchange hedge contracts. Fair value is based upon current value in the market for transactions with similar terms. As a result of the planned spin-off, these contracts will be renegotiated. No assurances can be given that similar terms can be obtained.\nFinancial guarantees. The Company has letters of responsibility and letters of support for various credit facilities and financing activities of certain of its subsidiaries and affiliates (see Note N). Fair value is based on estimated fees to enter similar agreements. There is no carrying value since\nAIRTOUCH COMMUNICATIONS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)\nfees were not paid originally. As a result of the planned spin-off, these letters of responsibility and letters of support will be renegotiated. No assurances can be given that similar terms can be obtained.\nTelesis has issued various forms of financial support on behalf of the Company. All of these forms of financial support will be renegotiated before the planned spin-off. No assurances can be given that similar terms can be obtained.\nL. REGULATORY MATTERS\nSPIN-OFF HEARINGS\nIn February 1993, the CPUC instituted an investigation of the spin-off for the purpose of assessing any effects it might have on the telephone customers of Pacific Bell. The CPUC identified certain issues for evidentiary hearings, including whether Pacific Bell customers should be compensated as a result of the manner in which cellular research and development had been funded by Telesis' predecessor companies (AT&T and the former Bell System operating telephone companies) and cellular licenses had been granted by the FCC, and whether Pacific Bell customers should be compensated for any continued use of the PacTel name by the Company.\nOn November 2, 1993, the CPUC issued a decision in the investigation authorizing Telesis to proceed with the spin-off. Among other things, the decision prohibits the Company and subsidiaries of Telesis from agreeing not to compete after the spin-off and from transferring utility assets, which may include pension funds, out of the California utilities. The CPUC expects Telesis to complete the spin-off in a manner which allows Pacific Bell to compete for PCS licenses. An independent auditor (selected by and under contract to the CPUC) will perform an audit and file a compliance report with the CPUC to ensure that Telesis and the Company have complied with the terms of the separation as described to the CPUC and that the transaction complies with the conditions imposed by the decision and the CPUC's affiliate transaction rules. The Company believes that the audit will not result in any material liability for the Company and that Telesis and the Company will satisfy all conditions in the CPUC decision.\nThe CPUC decision was effective immediately. On December 3, 1993, two parties filed applications for rehearing with the CPUC and the CPUC staff filed a petition to modify the decision. On March 9, 1994, the CPUC denied these requests.\nUnder California law, judicial review of the CPUC decision is available only by petition for writ of certiorari or review to the California Supreme Court. As the CPUC denied the applications for rehearing, only a party that has filed such an application with the CPUC may file such a petition, which must be filed by early April 1994. One of the parties that urged the establishment of a reserve for compensation has stated that it would seek review of the CPUC decision. The decision whether to grant a petition for a writ of review of a CPUC decision is at the discretion of the California Supreme Court. The Company believes the California Supreme Court would deny a review.\nCELLULAR REGULATION\nAIRTOUCH COMMUNICATIONS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)\nIn October 1992, the CPUC issued an order that, among other things: required cellular utilities to adopt a specific accounting methodology to separate wholesale and retail costs; permitted resellers to operate a reseller switch interconnected to the cellular carrier's facilities; mandated the unbundling of certain wholesale rates requiring a cost basis plus a 14.75% rate of return; and directed the Company to divest its reseller operations in the San Francisco Bay Area.\nIn May 1993, the CPUC granted a limited rehearing of its October 1992 order. The CPUC agreed to rehear the issues of unbundling wholesale rates and the imposition of a rate of return. Also, the CPUC rescinded the order's requirement that cellular utilities modify the accounting methodology for allocating wholesale and retail costs. The CPUC did not alter, however, the prohibition of a carrier's affiliate from reselling cellular services in the carrier's same markets. As a result, in September 1993, the Company contributed certain of the assets and liabilities of its retail reseller operations in the San Francisco Bay Area to CMT Partners (see Note E).\nIn December 1993, the CPUC adopted an Order Instituting Investigation into the regulation of Mobile Telephone Service and Wireless Communications. The CPUC has consolidated the rehearing of the October 1992 decision with the new investigation. The new investigation initiates a review of the Commission's historic policies governing cellular telephone service and proposes to classify cellular carriers as dominant carriers and resellers and new providers of mobile service as non-dominant carriers. The Commission requests comments on alternative frameworks for regulating cellular carriers: (1) price caps at current rates (the existing framework); (2) rate-of-return or cost-based price caps which would result in mandatory price reductions; and (3) relaxed regulation. Because the outcome of the CPUC's new investigation is uncertain, the Company cannot estimate the future effects of this investigation.\nGENERAL ORDER 159\nIn November 1992, the CPUC staff issued an interim report outlining the partial findings of an investigation into compliance with General Order 159 (\"G.O. 159\"), which requires prior CPUC approval of cellular facility additions. In January 1993, the Company responded to the report indicating that it contains significant inaccuracies and goes beyond the scope of the CPUC's authority. In April 1993, the CPUC alleged that the Company failed to obtain five required permits and issued an order requesting that the Company show why a particular cellular facility should not be disapproved. Certain of the Company's markets may have taken steps that the CPUC might consider to be construction of cellular facilities prior to filing advice letters with the CPUC and\/or might be considered by the CPUC to involve the failure to obtain necessary governmental permits for certain cellular facilities. The Company does not anticipate that sanctions, if any, that may be imposed by the CPUC for any failure to comply with G.O. 159 or to obtain other governmental permits will have a material adverse effect on the Company.\nFCC LICENSE RENEWAL\nThe Company has filed an application for renewal of its Los Angeles cellular\nAIRTOUCH COMMUNICATIONS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)\nlicense, whose initial term expired in October 1993. The Company expects that its application will be granted, although an opposing party has filed an informal objection and a petition to deny the Company's application, alleging violations of FCC rules and the Communications Act of 1934. The Company's licenses in San Diego, Detroit, Cleveland and Sacramento expire in October 1994 and all of its other significant domestic cellular licenses expire before the end of 1996. While the Company believes that each of these licenses will be renewed based upon FCC rules establishing a presumption in favor of licensees that have complied with their regulatory obligations during the initial license period, there can be no assurance that any license will be renewed. The licensing authorities in Germany and Portugal have not established any procedures for renewal of the cellular licenses held by MMO and Telecel. Such licenses expire in 2009 and 2006, respectively.\nM. CAPITAL STOCK\nCAPITAL RESTRUCTURING\nIn 1993, the Company amended and restated its Articles of Incorporation to include, among other things, the conversion of its existing two classes of no par value common stock into 1,150,000,000 shares of $.01 par value capital stock. In connection with the conversion, the number of common shares outstanding increased from 100,000 to 424,000,000. The Consolidated Financial Statements of prior years have been restated to reflect the new capital structure. The newly authorized capital stock consists of 50,000,000 shares of preferred stock and 1,100,000,000 shares of common stock.\nOn December 2, 1993, the Company completed a public offering of 68,500,000 shares of newly issued common stock for proceeds of $1,489.2 million, net of underwriting discounts and direct stock issuance costs. As a result of this offering, the number of common shares outstanding increased from 424,000,000 to 492,500,000.\nCOMMON STOCK\nIn addition to the 492,500,000 common shares outstanding, a subsidiary of the Company owns 122,960 shares of the Company's common stock. Because the accounting treatment for subsidiary-held shares is similar to that for treasury stock, the subsidiary-held shares are not considered outstanding.\nPREFERRED STOCK\nOf the 50,000,000 authorized shares of preferred stock, 6,000,000 shares have been designated as Series A Participating Preferred Stock. There are no outstanding shares of Series A Participating Preferred Stock. The remaining authorized preferred stock may be issued in one or more series, and the Board of Directors is authorized to designate the series and fix the relative rights, preferences, and limitations of the respective series without any further vote or action of the shareholders.\nSHAREHOLDER RIGHTS PLAN\nIn July 1993, the Company's Board of Directors adopted a shareholder rights plan (the \"Rights Plan\"), which provides for the distribution of rights\nAIRTOUCH COMMUNICATIONS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)\n(\"Rights\") to holders of outstanding shares of common stock. Except as set forth below, each Right, when exercisable, entitles the shareholder to purchase from the Company one one-hundredth of a share of Series A Participating Preferred Stock at a price of $80 per share, subject to adjustment.\nThe Rights are not currently exercisable, but would become exercisable if certain events occurred related to a person or group (\"Acquiring Party\") acquiring or attempting to acquire 10% or more of the Company's common stock. In the event that the Rights become exercisable, each holder of a Right (other than an Acquiring Party) would be entitled to purchase, for the exercise price then in effect, shares of the Company's common stock having a market value at the time of such transaction of two times the exercise price for each Right.\nThe Board of Directors, at its option, may at any time after a person becomes an Acquiring Party (but not after the acquisition by such person of 50% or more of the outstanding common stock) exchange on behalf of the Company all or part of the then outstanding and exercisable Rights for shares of common stock at an exchange ratio of one share of common stock for each Right.\nAt any time prior to the earlier of the occurrence of either (i) a person becoming an Acquiring Party or (ii) the expiration of the Rights, the Company may redeem the Rights in whole, but not in part, at a price of $0.01 per Right.\nN. COMMITMENTS AND CONTINGENCIES\nCELLULAR PLUS INC.\nA complaint has been filed in San Diego against the Company's wholly owned subsidiary, AirTouch Cellular (\"Cellular\"), formerly PacTel Cellular, and another regional telephone company (Cellular's competitor in San Diego), alleging on behalf of agents and dealers that Cellular engaged in price fixing of wholesale and retail cellular service. The outcome of this action is uncertain. Accordingly, no accrual for a contingency has been made. The Company intends to defend itself vigorously in this action and does not expect that any unfavorable outcome will have a material impact on the Company's results of operations or financial condition.\nGARABEDIAN DBA WESTERN MOBILE TELEPHONE COMPANY V. LASMSA LIMITED PARTNERSHIP, ET AL.\nA class action complaint has been filed naming as defendants, among others, Los Angeles Cellular Telephone Company (\"LACTC\") and the Company, as general partner for Los Angeles SMSA Limited Partnership. The plaintiff alleges that LACTC and the Company conspired to fix the price of wholesale and retail cellular service in the Los Angeles market. The plaintiff alleges damages for the class \"in a sum in excess of $100 million.\" On January 31, 1994, the Company filed a demurrer to the complaint. No discovery had been undertaken as of March 3, 1994. The Company intends to defend itself vigorously. The Company does not anticipate this proceeding will have a material adverse effect on the Company's financial position.\nAIRTOUCH COMMUNICATIONS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)\nOTHER\nThe Company is party to various other legal proceedings in the ordinary course of business. Although the ultimate resolution of these proceedings cannot be ascertained, management does not believe they will have a materially adverse effect on the results of operations or financial position of the Company.\nThe Company has no material long-term capital lease obligations or operating leases. Rental expense for the years ended December 31, 1993, 1992, and 1991 was $33.3 million, $31.9 million, and $26.6 million, respectively.\nThe Company and Telesis have various letters of responsibility and letters of support for performance guarantees, refundable security deposits and credit facilities of certain subsidiaries and affiliates. These letters of responsibility and letters of support do not provide for recourse to either Telesis or to the Company. Separately, as of December 31, 1993, the Company guaranteed approximately $10.4 million owed by a third party. The Company believes that the likelihood of having to pay under the guarantee is remote. A subsidiary of the Company guarantees the liabilities of a third party, for which the subsidiary is indemnified by minority shareholders unaffiliated with the Company. The Company believes it is remote that it will be required to pay under this guarantee.\nAdditionally, in August 1993, the Company provided a letter supporting the commercial paper program entered into by Telecel Comunicacoes Pessoais, S.A. in which the Company may be liable for its proportionate share of the loans issued under the program if certain loan covenants are not met. As of December 31, 1993, the potential liability is approximately $6.5 million. The Company believes that the likelihood of having to pay under the letter is remote.\nO. STOCK OPTIONS AND STOCK APPRECIATION RIGHTS\nCOMPENSATION TO EMPLOYEES\nCertain key employees of the Company are eligible for the grant of options to purchase shares of Telesis common stock and stock appreciation rights (\"SARs\") under the Pacific Telesis Group Stock Option and Stock Appreciation Rights Plan (the \"Plan\"). The Plan was adopted by Telesis on January 1, 1984.\nFollowing the spin-off, it is expected that outstanding awards under the Plan as of the record date for the spin-off will be replaced by Company awards (the \"Replacement Awards\"). For stock options and SARs, it is expected that the Replacement Awards will have the same aggregate exercise prices, cover the same aggregate fair market values of stock and continue the vesting schedules and other conditions for exercise of the Telesis options or SARs they replace. The formula to determine the total number of Replacement Awards to be issued to Company employees is dependent on the respective market values of the Telesis and Company common stock in the 10 trading days prior to the record date associated with the spin-off. As such, the Company cannot accurately determine the number of Replacement Awards that will be outstanding after the spin-off date. The formula is a fraction, with the pre-spin-off market value of Telesis common shares as the numerator and the pre-spin-off market value of the Company's common stock as the denominator, multiplied by the number of Telesis options held by Company employees. At December 31, 1993, Company\nAIRTOUCH COMMUNICATIONS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)\nemployees held approximately 1.3 million options on Telesis common stock.\nCOMPENSATION TO INVESTMENT ADVISERS\nTelesis and the Company have agreed to the terms of compensation to be paid to Sterling Payot Company, an investment firm that advised Telesis and the Company. The terms require Telesis and the Company to each issue 350,000 SARs to Sterling Payot on the spin-off date. The exercise price for one-half of the Telesis and one-half of the Company SARs is $30 per share and $20 per share, respectively, and the exercise price for the remaining one-half is $36 per share and $24 per share, respectively. The agreement provides that once SARs with an aggregate value of $6 million have been exercised, any remaining SARs expire and may not be exercised. The stock appreciation rights are exercisable for three years from the date of issuance.\nP. INTERNATIONAL OPERATIONS\nThe Company's subsidiary, AirTouch International (\"International\"), formerly Pacific Telesis International, provides paging services through two companies in Thailand. Company assets in that nation totalled $34.9 million at December 31, 1993, and 1993 revenues and net loss totalled $26.6 million and $2.6 million, respectively.\nInternational also has substantial investments in consortia that do business in other countries (see Note D). These consortia, for the most part, are start-up businesses that are either in the process of constructing networks or are just beginning operations. One consortium, Mannesmann Mobilfunk GmbH, operates the world's largest digital cellular network. At the end of 1993, the Company had a net investment in this German consortium of $234.2 million. The Company's share of consortium revenues and net loss for 1993 totalled $125.8 million and $20.6 million, respectively.\nIn Japan, the Company owns an interest in three ventures that will provide cellular services to various metropolitan areas, including Tokyo and Osaka. At December 31, 1993, the Company's net investment in these consortia totalled $29.8 million. No revenues were recognized for 1993, and the Company's share of the year's net loss was $4.2 million.\nAnother consortium, Telecel Comunicacoes Pessoais, S.A., operates a national digital cellular system in Portugal. The Company's net investment in this consortium at the end of 1993 totalled $26.9 million. The Company's share of 1993 revenues and net loss was $14.2 million and $6.3 million, respectively.\nIn Sweden, the Company owns a 51% interest in NordicTel, one of three providers of global digital cellular services in Sweden. The Company's assets in NordicTel totalled $77.9 million at December 31, 1993, and 1993 revenues and net loss totalled $1.2 million and $4.2 million, respectively.\nWhile the Company has chosen not to do business in nations with highly inflationary economies, the Company continues to try to mitigate the effects of foreign currency fluctuations through the use of hedges and local banking accounts.\nAIRTOUCH COMMUNICATIONS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)\nQ. RELATED PARTY TRANSACTIONS\nThe Company and Telesis' affiliated companies have entered into several transactions and agreements related to their respective businesses. The following represents the material transactions between the Company and Telesis' affiliated companies.\nEQUITY CONTRIBUTIONS\nTelesis provided equity contributions of $1,179.8 million during 1993 prior to the IPO. Equity contributions from Telesis totalled $212.2 million and $71.4 million during 1992 and 1991, respectively.\nADMINISTRATIVE SERVICES\nThe Company obtains certain administrative services and other additional benefits from Telesis. Service costs that are specifically attributable to the Company are directly charged to the Company by Telesis. Other service costs and corporate charges are allocated proportionately among Telesis' subsidiaries, including the Company. The Company believes that the terms of the arrangements determining charges to it by Telesis are reasonable, although there can be no assurance that these terms are or will be as favorable to the Company as could be obtained from unaffiliated third parties. Telesis may be providing administrative services to the Company for up to 90 days after the spin-off.\nIn the ordinary course of business, the Company participated in the following transactions with affiliated companies: For the Year Ended December 31, ------------------------------- 1993 1992 1991 ---------- ---------- --------- PROVIDED BY THE COMPANY: (Dollars in millions) Revenues from cellular services......... $ 2.7 $ 2.3 $1.8 Revenues from paging services........... $ 1.7 $ 1.4 $1.3\nPROVIDED TO THE COMPANY: Expenses from telephone services........ $28.5 $29.0 $29.3 Expenses from administrative, research and development, and insurance services. $16.3 $17.4 $14.3 Expenses from lending services.......... $19.6 $46.6 $33.1\nCONTEMPLATED AGREEMENTS AND ARRANGEMENTS\nIn contemplation of the proposed spin-off, the Company and Telesis have entered into a separation agreement that provides for complete separation of all properties after the spin-off as well as transition agreements that disengage the affairs of the Company and Telesis in an orderly manner.\nINCOME TAX SHARING\nThe separation agreement provides that the Company will continue to join in filing consolidated federal income tax returns with Telesis for all taxable periods in which the parties are required or permitted to file a consolidated\nAIRTOUCH COMMUNICATIONS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)\nreturn. In each taxable period, the Company must pay Telesis an amount equal to the Company's share of the consolidated tax liability based on the Company's separate taxable income and an amount equal to the Company's contribution to Telesis' state tax liability. If the Company were to report a net operating loss for any such year, Telesis would pay an amount equal to its reduction in tax liability attributable to such loss. A similar method of allocation would be applied to state income taxes filed pursuant to a combined return.\nEMPLOYEE BENEFIT ALLOCATION\nThe separation agreement provides for the transfer of a limited number of employees' and retirees' accounts between Telesis and the Company and for indemnification against certain claims. Telesis and the Company will exchange such payroll data, service records, tax-related information, and other employee information as may be necessary for the effective administration of their benefit plans and compliance with governmental reporting requirements after the spin-off.\nCONTINGENT LIABILITIES\nIn general, the separation agreement will allocate nontax liabilities that become certain after the spin-off and were not recognized in the financial statements according to the origin of the claim and acts by, or benefits to, Telesis or the Company.\nDIVIDEND PAYMENTS\nThe Company does not expect to pay cash dividends on its common stock in the foreseeable future.\nManagement believes that the consolidated financial statements of the Company, presented herein, reasonably reflect the historical relationships with Telesis and its affiliates and reflect all of the Company's costs of doing business. Management believes that there would not have been any material difference from the amounts presented in the historical financial statements had the Company operated on a stand-alone basis. However, the historical financial statements are not necessarily indicative of future financial condition, results of operations, or cash flows.\nR. SUBSEQUENT EVENTS\nIn January 1994, the Company's cellular services subsidiary signed a definitive agreement to purchase digital cellular network equipment for use in the greater Los Angeles area. The contract is initially valued at approximately $77 million but could reach $130 million by the year 2000 depending upon final system design specifications.\nIn February 1994, the Company signed a commitment letter authorizing a major financial institution to proceed with arranging and syndicating a $600 million revolving credit facility. The proposed credit facility, which is subject to the negotiation and execution of a definitive bank loan agreement, would provide the Company with funding for general corporate purposes and with standby letters of credit to support its obligations to purchase additional shares in Cellular Communications, Inc. under the Mandatory Redemption\nAIRTOUCH COMMUNICATIONS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)\nObligation as described in Note E. The new credit facility is anticipated to close on or before the spin-off and would replace an existing letter of responsibility issued by Telesis.\nIn February 1994, the Company announced a new corporate name, AirTouch Communications.\nIn March 1994, Telesis announced that its Board of Directors had given final approval to the spin-off of the Company which will occur on April 1, 1994.\nS. ADDITIONAL FINANCIAL INFORMATION December 31, --------------------- 1993 1992 ---------- ----------\n(Dollars in millions) Accounts payable: Trade............................................. $110.8 $111.5 Other............................................. 38.4 30.3\n---------- ---------- Total............................................. $149.2 $141.8 ========== ========== Miscellaneous other current liabilities: Accrued taxes .................................... $ 28.2 $ 18.7 Advance billings and customer deposits............ $ 22.4 $ 23.1\nAIRTOUCH COMMUNICATIONS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)\nFor the Year Ended December 31, ---------------------------- 1993 1992 1991 -------- -------- -------- (Dollars in millions) Miscellaneous income (expense): Foreign currency transaction gain (loss)..... $(3.4) $ 2.2 $ (1.4) Defined benefit plan settlement gain, net.... 3.0 - - Settlement of litigation..................... - - 12.0 Loss on sale of equipment.................... - - (3.3) Other........................................ (0.1) (1.2) (2.1) -------- -------- -------- Total........................................ $(0.5) $ 1.0 $ 5.2 ======== ======== ========\nWireless services and other revenues: Cellular service............................. $787.0 $681.7 $625.4 Paging service............................... 148.7 117.9 98.0 Vehicle location service..................... 4.0 2.4 0.7 Other revenues............................... 47.6 32.8 25.4 -------- -------- -------- Total........................................ $987.3 $834.8 $749.5 ======== ======== ========\nAdvertising.................................... $ 48.4 $ 37.1 $ 26.3 Property taxes................................. $ 16.7 $ 20.8 $ 18.5\nSupplemental Cash Flow information: Cash payments for: Interest, net*........................... $ 26.4 $ 51.4 $ 37.7 Income taxes............................. $ 51.5 $ 16.3 $ 20.5\nNoncash transactions: Contribution of assets to CMT Partners at book value.......................... $206.0 - - Assumption of liabilities in exchange for ITS' net assets.................... - $ 80.0 - Contribution of assets to CCI joint venture at book value.................. - - $330.0\n----------------- * Net of amounts capitalized of $3.7 million, $3.6 million, and $11.6 million for 1993, 1992, and 1991, respectively.\nAIRTOUCH COMMUNICATIONS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)\nT. QUARTERLY FINANCIAL DATA (UNAUDITED)\n(Dollars in millions, except per share amounts) --------------------------------------- 1993 First Second Third Fourth\n-------------------------------------------------------------------------- Net operating revenues........... $239.1 $259.5 $254.7 $234.7 Operating income................. $ 28.2 $ 42.4 $ 47.9 $ 9.7 Income (loss) before cumulative effect of accounting change.... $ (2.3) $ 12.5 $ 15.3 $ 14.6 Net income (loss)................ $ (7.9) $ 12.5 $ 15.3 $ 14.6\nPer share data: Income (loss) before cumulative effect of accounting change.. $(0.01) $ 0.03 $ 0.04 $ 0.03 Net income (loss).............. $(0.02) $ 0.03 $ 0.04 $ 0.03 - -------------------------------------------------------------------------- 1992 First Second Third Fourth - -------------------------------------------------------------------------- Net operating revenues........... $193.1 $203.1 $214.3 $228.0 Operating income................. $ 24.2 $ 21.6 $ 25.5 $ 24.6 Loss before extraordinary item and cumulative effect of accounting change.......... $ (6.5) $ (0.4) $ (0.1) $ (3.1) Net income (loss)................ $ 21.4 $ (8.0) $ (0.1) $ (3.1)\nPer share data: Loss before extraordinary item and cumulative effect of accounting change............ $(0.01) $ 0.00 $ 0.00 $(0.01) Net income (loss).............. $ 0.05 $(0.02) $ 0.00 $(0.01) ==========================================================================\nIn 1993, the Company implemented SFAS No. 106, \"Employers' Accounting for Postretirement Benefits Other than Pensions.\" The implementation of SFAS No. 106 reduced net income by $5.6 million in the first quarter of 1993.\nEffective January 1, 1992, the Company adopted SFAS No. 109, \"Accounting for Income Taxes.\" The adoption of SFAS No. 109 increased net income by $27.9 million in the first quarter of 1992. In 1992, the Company prepaid $100 million of long-term debt. The early redemption expense related to the prepayment reduced net income by $7.6 million in the second quarter of 1992.\nREPORT OF INDEPENDENT ACCOUNTANTS\nOur report on the consolidated financial statements of AirTouch Communications (formerly PacTel Corporation) and Subsidiaries is included on page of this Form 10-K. In connection with our audits of such financial statements, we have also audited the related financial statement schedules listed in Item 14(a) 2 of the Form 10-K.\nIn 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 required to be included therein.\n\/s\/ Coopers & Lybrand\nSan Francisco, California March 3, 1994\nNew Par (A Partnership) Index of Consolidated Financial Statements\nPage ---- Report of Independent Auditors ............................... Consolidated Balance Sheets - December 31, 1993 and 1992 ..... Consolidated Statements of Income - Years ended December 31, 1993 and 1992 and the period from August 1, 1991 (inception) to December 31, 1991 ............ Consolidated Statement of Partners' Capital - Years ended December 31, 1993 and 1992 and the period from August 1, 1991 (inception) to December 31, 1991 ....... Consolidated Statements of Cash Flows - Years ended December 31, 1993 and 1992 and the period from August 1, 1991 (inception) to December 31, 1991 .......................................... Notes to Consolidated Financial Statements ..................\nReport of Independent Auditors\nThe Partnership Committee New Par\nWe have audited the accompanying balance sheets of New Par and the related consolidated statements of income, partners' capital and cash flows for the years ended December 31, 1993 and 1992 and for the period from August 1, 1991 (inception) to December 31, 1991. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audit.\nWe conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.\nIn our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of New Par at December 31, 1993 and 1992, and the consolidated results of its operations and its cash flows for the years ended December 31, 1993 and 1992 and for the period from August 1, 1991 (inception) to December 31, 1991 in conformity with generally accepted accounting principles.\n\/s\/ Ernst and Young\nColumbus, Ohio February 25, 1994\nNew Par (A Partnership) Consolidated Balance Sheets\nDECEMBER 31,\n---------------------------- 1993 1992 ------------- ------------- ASSETS Current assets: Cash and cash equivalents $ 36,845,000 $ 6,279,000 Accounts receivable trade, less allowance for doubtful accounts of $4,382,000 (1993) and $4,431,000 (1992) 57,691,000 43,770,000 Due from affiliates 49,000 107,000 Telephone equipment inventory 8,149,000 8,225,000 Prepaid expenses and other current assets 1,866,000 1,785,000 ------------- ------------- Total current assets 104,600,000 60,166,000\nProperty, plant and equipment, net 304,548,000 269,734,000 License acquisition costs, net 367,063,000 349,692,000 Other assets, net of accumulated amortization of $10,583,000 (1993) and $8,496,000 (1992) 14,190,000 11,830,000 ------------- ------------- Total assets $790,401,000 $691,422,000 ============= =============\nLIABILITIES AND PARTNERS' CAPITAL Current liabilities: Accounts payable $ 18,148,000 $ 7,577,000 Accrued expenses 14,123,000 17,554,000 Distribution payable to partners 22,982,000 22,318,000 Due to affiliates 1,813,000 1,257,000 Property and other taxes payable 10,955,000 11,541,000 Commissions payable 9,321,000 6,899,000 Deferred revenue 11,066,000 8,886,000 ------------- ------------- Total current liabilities 88,408,000 76,032,000\nCommitments and contingent liabilities\nPartners' capital 701,993,000 615,390,000 ------------- ------------- Total liabilities and partners' capital $790,401,000 $691,422,000 ============= =============\nSee accompanying notes.\nNew Par (A Partnership) Consolidated Statements of Income\nFor the period from August 1, 1991\nYear ended December 31, (inception) to\n---------------------------- December 31, 1993 1992 1991 ------------ ------------ ------------- REVENUES Cellular service $390,181,000 $311,197,000 $109,961,000 Telephone equipment sales, rental and other 45,668,000 29,135,000 9,245,000 ------------ ------------ ------------- 435,849,000 340,332,000 119,206,000 COSTS AND EXPENSES Cost of telephone equipment sold 28,037,000 14,538,000 6,357,000 Operating expenses 85,575,000 69,818,000 23,952,000 Selling, general and administrative expenses 148,248,000 123,108,000 46,283,000 Restructuring charges 648,000 -- 2,697,000 Depreciation expense 39,796,000 30,437,000 10,615,000 Amortization expense 12,950,000 13,572,000 5,484,000 Depreciation of rental telephones 28,496,000 18,957,000 4,756,000 ------------ ------------ ------------- 343,750,000 270,430,000 100,144,000 ------------ ------------ ------------- Operating income 92,099,000 69,902,000 19,062,000\nOther income (expense): Interest and other income 1,100,000 272,000 354,000 Interest expense (124,000) (140,000) (24,000) ------------ ------------ ------------- Income before provision for income taxes 93,075,000 70,034,000 19,392,000 Provision for income taxes (522,000) (771,000) (535,000) ------------ ------------ ------------- Net income $ 92,553,000 $ 69,263,000 $ 18,857,000 ============ ============ =============\nSee accompanying notes.\nNew Par (A Partnership) Consolidated Statement of Partners' Capital\nPacTel CCI Group Group Total ------------ ------------ -------------\nInitial capital contributions $330,187,000 $216,917,000 $547,104,000 Capital contributions 3,000,000 4,337,000 7,337,000 Distribution payable (6,750,000) (6,750,000) (13,500,000) Net income for the period from August 1, 1991 (inception) to December 31, 1991 9,428,500 9,428,500 18,857,000 ------------ ------------ ------------- Balance, December 31, 1991 335,865,500 223,932,500 559,798,000\nCapital contributions 6,694,000 6,694,000 13,388,000 Distribution payable (13,529,500) (13,529,500) (27,059,000) Net income for the year ended December 31, 1992 34,631,500 34,631,500 69,263,000 ------------ ------------ ------------- Balance, December 31, 1992 363,661,500 251,728,500 615,390,000\nCapital contributions -- 29,714,000 29,714,000 Distribution payable (17,832,000) (17,832,000) (35,664,000) Net income for the year ended December 31, 1993 46,276,500 46,276,500 92,553,000 ------------ ------------ ------------- Balance, December 31, 1993 $392,106,000 $309,887,000 $701,993,000 ============ ============ =============\nSee accompanying notes.\nNew Par (A Partnership) Consolidated Statements of Cash Flows For the period from August 1, 1991\nYear ended December 31, (inception) to\n---------------------------- December 31, 1993 1992 1991 ------------ ------------ -------------\nOPERATING ACTIVITIES Net income $ 92,553,000 $ 69,263,000 $ 18,857,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 81,242,000 62,966,000 20,855,000 Provision for losses on accounts receivable 16,877,000 6,603,000 2,973,000 Loss on sale of property, plant and equipment 3,534,000 1,526,000 24,000 Provision for rental telephone losses 4,426,000 1,214,000 592,000 Equity in earnings of unconsolidated partnership -- -- (31,000) Change in operating assets and liabilities: Accounts receivable (30,871,000) (15,987,000) (4,756,000) Due from affiliates 58,000 773,000 (767,000) Inventory 76,000 (2,567,000) (1,246,000) Prepaid expenses and other current assets (41,000) (56,000) 759,000 Other assets (4,278,000) (3,882,000) (2,499,000) Accounts payable 4,460,000 (3,782,000) (10,250,000) Accrued expenses (3,703,000) (3,219,000) 2,462,000 Due to affiliates 556,000 (4,044,000) 4,639,000 Taxes payable (645,000) 3,386,000 3,518,000 Commissions payable 2,422,000 1,537,000 2,584,000 Deferred revenues 2,180,000 2,707,000 113,000 ------------ ------------ ------------- Net cash provided by operating activities 168,846,000 116,438,000 37,827,000 ------------ ------------ ------------- INVESTING ACTIVITIES Purchase of property, plant and equipment (104,288,000) (114,300,000) (27,210,000) Proceeds from sale of property, plant and equipment 1,035,000 617,000 143,000 Purchase of cellular license interests (27,000) (4,463,000) (55,000) ------------ ------------ ------------- Net cash (used in) investing activities (103,280,000) (118,146,000) (27,122,000) ------------ ------------ ------------- (Continued on next page)\nNew Par (A Partnership) Consolidated Statements of Cash Flows (continued) For the period from August 1, 1991\nYear ended December 31, (inception) to\n---------------------------- December 31, 1993 1992 1991 ------------ ------------ ------------- FINANCING ACTIVITIES Capital distributions (35,000,000) (18,241,000) -- Capital contributions -- 4,463,000 6,000,000 Cash contributed at inception -- -- 597,000 Due to affiliate -- -- 4,463,000 ------------ ------------ ------------- Net cash provided by (used in) financing activities (35,000,000) (13,778,000) 11,060,000 ------------ ------------ ------------- Increase (decrease) in cash and cash equivalents 30,566,000 (15,486,000) 21,765,000 Cash and cash equivalents at beginning of period 6,279,000 21,765,000 -- ------------ ------------ ------------- Cash and cash equivalents at end of period $ 36,845,000 $ 6,279,000 $21,765,000 ============ ============ =============\nSupplemental Disclosures of Cash Flow Information: Cash paid during the period for interest $ 76,000 $ 79,000 $ 24,000 Income taxes paid $ 944,000 $ 675,000 $ 392,000\nSupplemental Disclosures of Noncash Investing Activities: Cellular license interests contributed by Cellular Communications, Inc. $28,207,000 $ 4,462,000 $ 1,337,000 Purchases of property, plant and equipment included in current liabilities $10,800,000 $ 4,417,000 $ 7,739,000\nSupplemental Disclosures of Noncash Financing Activities: Distribution payable to partners $22,982,000 $22,318,000 $13,500,000\nSee accompanying notes.\nNew Par (A Partnership) Notes to Consolidated Financial Statements\nDecember 31, 1993 and 1992\n1. ORGANIZATION\nNew Par was formed on August 1, 1991 (inception) pursuant to the Amended and Restated Agreement and Plan of Merger and Joint Venture Organization dated as of December 14, 1990 between PacTel Corporation (\"PacTel\"), Cellular Communications, Inc. (\"CCI\"), CCI Newco, Inc. and CCI Newco Sub, Inc. (the \"Merger Agreement\"). New Par is a Delaware general partnership equally owned by PacTel and CCI through the following wholly-owned, indirect corporate subsidiaries:\nPercentage Ownership of General Partners New Par ---------------- ------------\nThe PacTel Group ---------------- PacTel Cellular Inc. of Michigan 27.74% PacTel Cellular Inc. of Ohio 18.18 PacTel Cellular of Saginaw, Inc. 2.64 PacTel Cellular Inc. of Lima 1.44 --------- 50.00 --------- The CCI Group ------------- Cellular Communications of Cleveland, Inc. 12.45 Cellular Communications of Cincinnati, Inc. 11.22 Cellular Communications of Columbus, Inc. 7.94 Cellular Communications of Dayton, Inc. 5.19 Cellular Communications of Akron, Inc. 4.14 Cellular Communications of Canton, Inc. 2.29 Cellular Communications of Hamilton, Inc. 1.98 Lorain\/Elyria Cellular Telephone Company 1.86 E&J Mobile Radio Service, Inc. .97 Cellular Communications of Mansfield, Inc. .87 Midwest Mobilephone of Cincinnati, Inc. .81 Star-Cel, Inc. .21 Cellular One Sales and Service, Inc. .07 --------- 50.00 --------- 100.00% =========\nNew Par (A Partnership) Notes to Consolidated Financial Statements (continued)\n1. ORGANIZATION (continued)\nEach wholly-owned, indirect corporate subsidiary of PacTel and CCI initially contributed to New Par its interests in the General Partnerships (see below). The initial contributions were accounted for at the net book value of the assets and liabilities of the General Partnerships. Each of these partnerships, among other assets, holds a license or licenses from the Federal Communications Commission (\"FCC\") and state authorities to operate cellular telephone systems in Cellular Geographic Service Areas as listed below. New Par owns 100% of the partnership interests in each partnership, except as noted.\nGeneral Partnership Service Area ----------------------------------------- ------------------\nDetroit Cellular Telephone Company Detroit, MI Northern Ohio Cellular Telephone Company Cleveland, OH Lorain\/Elyria, OH Mansfield, OH Ashtabula, OH Southern Ohio Telephone Company Cincinnati, OH Clinton, OH Columbus Cellular Telephone Company Columbus, OH Mercer, OH Dayton Cellular Telephone Company Dayton, OH Toledo Cellular Telephone Company Toledo, OH Lima, OH Grand Rapids Cellular Telephone Company Grand Rapids, MI Akron Cellular Telephone Company Akron, OH Flint Cellular Telephone Company Flint, MI Saginaw, MI Lansing Cellular Telephone Company Lansing, MI Canton Cellular Telephone Company Canton, OH Hamilton Cellular Telephone Company Hamilton\/Middletown, OH Springfield Cellular Telephone Company Springfield, OH Muskegon Cellular Telephone Company (a) Muskegon, MI\n(a) New Par is a 38.91% general partner in the Muskegon partnership. PacTel Cellular, Inc. of Michigan is a 40.5% general partner. The remaining 20.59% interests are owned by unaffiliated entities.\nEach of the above General Partnerships owns 100% of the FCC license in the Service Area, except for Hamilton\/Middletown and Springfield in which the applicable partnership owns 99.6% and 89.23% of the FCC license, respectively.\nNew Par owns 100% of Cellular One Sales and Service Company, which operates New Par's sales and service center business.\nNew Par (A Partnership) Notes to Consolidated Financial Statements (continued)\n2. SIGNIFICANT ACCOUNTING POLICIES\nPrinciples of Consolidation\nThe consolidated financial statements include the accounts of New Par and its wholly-owned partnerships. Significant intercompany accounts and transactions have been eliminated in consolidation.\nCash and Cash Equivalents\nCash and cash equivalents include cash, deposits in interest-bearing accounts and short-term highly liquid investments purchased with a maturity of three months or less.\nTelephone Equipment Inventory\nTelephone equipment inventory, which consists of telephones and accessories, is stated at the lower of cost (first-in, first-out method) or market.\nProperty, Plant and Equipment\nProperty, plant and equipment is stated at cost. Depreciation is computed by the straight-line method over the estimated useful lives of the assets. Estimated useful lives are as follows: building - 25 years, operating plant and equipment - 7 to 25 years, rental telephones - 3 years and office furniture, computer and other equipment - 3 to 5 years.\nLicense Acquisition Costs\nDeferred cellular license costs include costs incurred to design cellular telephone systems for specific geographic areas, select and acquire sites to place equipment for such systems, demographic and traffic pattern studies, legal and organization costs, and costs incurred in connection with the preparation and filing of FCC license applications. These costs are amortized by the straight-line method from the commencement of operations over the life of the Partnership's initial license period (ten years).\nIn connection with the purchase of license interests, the excess of purchase price paid over the fair market value of tangible assets acquired is amortized by the straight-line method over 40 years.\nRevenue Recognition\nService revenue is recognized at the time the cellular service is rendered. Telephone equipment sales are recorded when the equipment is shipped to the customer. Telephone rental revenue is billed and recognized on a monthly basis.\nNew Par (A Partnership) Notes to Consolidated Financial Statements (continued)\nIncome Taxes\nNo provision has been made for federal income taxes since such taxes, if any, are the responsibility of the individual partners. Provision has been made for state and local income taxes assessed on partnership income which is a liability of the Partnership.\nAllocation of Income\nPursuant to the New Par Partnership Agreement, income is allocated to the General Partners in proportion to their respective percentage ownership of New Par.\nFair Value of Financial Instruments\nNew Par's financial instruments consist primarily of cash and cash equivalents, accounts receivable, due from affiliates, accounts payable, accrued expenses, distribution payable to partners, due to affiliates, property and other taxes payable, and commissions payable. The terms and short term nature of these assets and liabilities result in their carrying value approximating fair value.\n3. LICENSE ACQUISITION COSTS\nLicense acquisition costs consist of:\nDecember 31,\n---------------------------- 1993 1992\n------------- ------------ Deferred cellular license costs $ 3,418,000 $ 3,418,000 Excess of purchase price paid over the fair market value of tangible assets acquired 430,990,000 402,756,000\n------------- ------------ 434,408,000 406,174,000 Accumulated amortization 67,345,000 56,482,000\n------------- ------------ $367,063,000 $349,692,000\n============= ============\nIn August 1991, a subsidiary of CCI (\"CCI RSA\") acquired the Mercer, OH FCC license. This license was contributed to one of the General Partnerships in accordance with the New Par Partnership Agreement. The contribution was initially recorded at CCI RSA's cost through December 31, 1991 of $1,315,000. During 1993, CCI RSA incurred an additional $19,575,000 upon the receipt of a favorable determination with respect to certain FCC matters. The additional cost was recorded as a contribution in 1993.\nIn 1992, New Par purchased the Clinton, OH FCC license from CCI RSA for $8,925,000 (CCI RSA's cost).\nNew Par (A Partnership) Notes to Consolidated Financial Statements (continued)\n3. LICENSE ACQUISITION COSTS (continued)\nIn 1993, a subsidiary of CCI contributed the Ashtabula, OH FCC license and the related assets and liabilities to one of the General Partnerships in accordance with the New Par Partnership Agreement. The contribution was recorded at $10,139,000, of which $8,632,000 was for the FCC license and $1,507,000 was for other assets, net of liabilities.\n4. PROPERTY, PLANT AND EQUIPMENT\nProperty, plant and equipment consists of:\nDecember 31,\n---------------------------- 1993 1992\n------------- ------------ Land $ 8,709,000 $ 6,591,000 Building 10,540,000 6,911,000 Operating plant and equipment 313,966,000 247,493,000 Rental telephones 97,930,000 80,271,000 Office furniture, computer and other equipment 69,587,000 56,181,000 Construction-in-progress 8,940,000 15,014,000\n------------- ------------ 509,672,000 412,461,000 Allowance for depreciation 202,876,000 142,026,000 Allowance for unreturned rental telephones 2,248,000 701,000\n------------- ------------ $304,548,000 $269,734,000\n============= ============\nNew Par (A Partnership) Notes to Consolidated Financial Statements (continued)\n5. RELATED PARTY TRANSACTIONS\nDue from affiliates consists of the following:\nDecember 31,\n---------------------------- 1993 1992\n------------- ------------ CCPR Services, Inc. $24,000 $107,000 Cellular Communications International, Inc. 17,000 - International CableTel Incorporated 8,000 -\n------------- ------------ $49,000 $107,000\n============= ============\nDue to affiliates consists of the following:\nDecember 31,\n---------------------------- 1993 1992\n------------- ------------ PacTel and affiliates $ 937,000 $ 622,000 CCI and subsidiaries 510,000 471,000 OCOM Corporation 366,000 163,000 Cellular Communications International, Inc. - 1,000\n------------- ------------ $1,813,000 $1,257,000\n============= ============\nNew Par (A Partnership) Notes to Consolidated Financial Statements (continued)\n5. RELATED PARTY TRANSACTIONS (continued)\nPursuant to the New Par Partnership Agreement, the CCI Group is responsible for appointing and employing New Par's chief executive officer and half of the next level executives and the PacTel Group is responsible for appointing and employing the other half of the next level executives. In addition, the PacTel Group employed the individuals associated with its former partnerships until July 1, 1992. For the year ended December 31, 1993, New Par was charged $779,000 and $816,000 for payroll and benefits by PacTel affiliates and CCI, respectively, of which $176,000 and $1,419,000 are included in operating expenses and selling, general and administrative expenses, respectively. For the year ended December 31, 1992, New Par was charged $9,364,000 and $836,000 for payroll and benefits by PacTel affiliates and CCI, respectively, of which $2,154,000 and $8,046,000 are included in operating expenses and selling, general and administrative expenses, respectively. For the period from August 1, 1991 (inception) to December 31, 1991, New Par was charged $5,745,000 and $421,000 for payroll and benefits by PacTel affiliates and CCI, respectively, of which $1,147,000 and $5,019,000 are included in operating expenses and selling, general and administrative expenses, respectively.\nIn connection with the Merger Agreement, CCI distributed its wholly-owned subsidiary OCOM Corporation (\"OCOM\") to its shareholders on July 31, 1991. OCOM owns the long distance and microwave operations formerly owned by the partnerships that CCI contributed to New Par. Most of CCI's officers and directors are officers and directors of OCOM. New Par provides billing and collection services to OCOM for the long distance telephone service OCOM sells to certain of New Par's subscribers. OCOM operates the microwave transmission service between the cell sites and switches contributed by CCI. For the years ended December 31, 1993 and 1992 and the period from August 1, 1991 (inception) to December 31, 1991, OCOM charged New Par $4,043,000, $4,846,000 and $1,871,000, respectively, for microwave transmission services which is included in operating expenses.\n6. LEASES\nLeases for office space, sales and service centers and cell sites extend through 2039. Total rent expense for the years ended December 31, 1993 and 1992 and the period from August 1, 1991 (inception) to December 31, 1991 under operating leases was $5,608,000, $4,359,000 and $1,852,000, respectively.\nFuture minimum lease payments under noncancellable operating leases as of December 31, 1993 are as follows:\nYear ending December 31: 1994 $ 4,296,000 1995 3,863,000 1996 3,438,000 1997 2,456,000 1998 1,288,000 Thereafter 8,170,000 -------------- $23,511,000 ==============\nNew Par (A Partnership) Notes to Consolidated Financial Statements (continued)\n7. RESTRUCTURING CHARGES\nRestructuring charges include costs incurred and expected to be incurred for the consolidation of operations, relocation of operations, termination and\/or relocation of employees and abandonment of certain equipment. Restructuring charges included in accrued expenses as of December 31, 1993 and 1992 are $795,000 and $934,000, respectively.\n8. PENSION PLAN\nNew Par has a defined contribution plan covering all employees who have completed six months of service and worked over 500 hours. New Par's matching and discretionary contributions are determined annually by New Par's Operating Committee. Participants can make salary deferral contributions of 1% to 16% of annual compensation not to exceed the maximum allowed by law. New Par's expense for the years ended December 31, 1993 and 1992 was $3,186,000 and $2,272,000, respectively.\n9. COMMITMENTS AND CONTINGENT LIABILITIES\nAs of December 31, 1993, New Par had purchase commitments of approximately $44,012,000 primarily for operating equipment, computer equipment and cellular telephones and accessories.\nIn the ordinary course of business, there are various legal proceedings pending against New Par. Management believes the aggregate liabilities, if any, arising from such proceedings would not have a material adverse effect on New Par's consolidated financial position.\n10. PACTEL AND CCI RELATIONSHIP\nA subsidiary of CCI, Cellular Communications of Ohio, Inc., (the parent of the CCI Group) has a loan agreement which places certain restrictions on New Par. These restrictions include the following: (i) New Par's aggregate lease payments may not exceed $8,000,000 for any twelve consecutive months, (ii) New Par's unsecured indebtedness, capital lease obligations and indebtedness for cellular network equipment or cellular telephones and accessories evidenced by a note or subject to a lien may not exceed $5,000,000, (iii) New Par's borrowings secured by real property may not exceed $10,000,000, (iv) New Par may not enter into an agreement that restricts partnership distributions and (v) the aggregate payment obligations outstanding at any time for (ii) and (iii) may not exceed $5,000,000 for any twelve consecutive months.\nNew Par (A Partnership) Notes to Consolidated Financial Statements (continued)\n10. PACTEL AND CCI RELATIONSHIP (continued)\nPursuant to the Merger Agreement, at specified times from August 1996 through January 1998, PacTel has the right to buy the shares of CCI it does not own at an appraised value, subject to certain adjustments. If PacTel does not exercise this right, it will determine whether New Par should be dissolved or PacTel's interest in New Par and CCI should be sold as a whole. Upon such determination, CCI must promptly commence a process to sell CCI, although in lieu of any sales to a third party, CCI may purchase PacTel's CCI shares and, in certain circumstances, its interest in New Par at their appraised values. Any decision by CCI to buy out PacTel or any irrevocable election by CCI not to effect a sale pursuant to the above sale process would require the approval of CCI stockholders. In the event that either CCI or CCI's interest in New Par is sold to a third party for less than the appraised value of CCI's interest in New Par, PacTel may be required to pay a \"make-whole\" amount, subject to certain downward adjustments, to the other CCI stockholders.\n11. PARTNERS' CAPITAL\nNew Par is required to make cash distributions of a portion of estimated federal taxable income on a quarterly basis, subject to the amount of cash available including cash borrowable by New Par. Such distributions shall be made to the partners in proportion to their respective ownership percentages. As of December 31, 1993 and 1992, there was approximately $22,982,000 and $22,318,000, respectively, payable to the partners for the estimated federal taxable income distribution. During 1993 and 1992, New Par distributed $35,000,000 and $18,241,000, respectively, pursuant to this requirement. New Par must also distribute the amount, if any, that exceeds 120% of the amount required for estimated federal income tax distributions, plus cash reasonably contemplated as being necessary for the cash payment of New Par's operating expenses (net of receipts), debt service, contingencies, budgeted capital expenditures and working capital requirements within 45 days after each quarter. Such distributions are to be made to the partners in proportion to their respective ownership percentages.\nMANNESMANN MOBILFUNK GMBH\nIndependent Auditors' Report ..........................\nBalance Sheets ........................................\nStatements of Operations ..............................\nStatements of Capital Subscribers' Equity .............\nStatements of Cash Flows ..............................\nNotes to Financial Statements .........................\nINDEPENDENT AUDITORS' REPORT ----------------------------\nThe Board of Directors and Capital Subscribers Mannesmann Mobilfunk GmbH\nWe have audited the accompanying balance sheets of Mannesmann Mobilfunk GmbH as of December 31, 1993 and 1992, and the related statements of operations, capital subscribers' equity, and cash flows for the years then ended. 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.\nWe conducted our audits in accordance with generally accepted German auditing standards which, in all material respects, are similar to auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.\nIn our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Mannesmann Mobilfunk GmbH at December 31, 1993 and 1992, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States.\nAs discussed in Notes 1 and 6 to the financial statements, the Company changed its method of accounting for income taxes in 1992 to adopt the provisions of Statement of Financial Accounting Standards No. 109, \"Accounting for Income Taxes.\"\nDusseldorf, Germany, February 28, 1994\nKPMG Deutsche Treuhand-Gesellschaft Aktiengesellschaft Wirtschaftsprufungsgesellschaft\nScheffler Haas Wirtschaftsprufer Wirtschaftsprufer\nMANNESMANN MOBILFUNK GMBH BALANCE SHEETS DECEMBER 31, 1993 and 1992 (In thousands)\nASSETS 1993 1993 1992 ---------------------------- ---------------- ------------- ------------- U.S. Dollars (1) Deutschmarks Deutschmarks Current assets: Cash and cash equivalents (Note 2) ............... $ 17,747 DM 30,848 DM 62,745 Accounts receivable, less allowance for doubtful accounts of DM 10,397 in 1993 and DM 2,561 in 1992 ................... 95,825 166,563 55,328 Due from affiliated companies (Note 3) ..... 8,962 15,577 29,147 Inventories of affiliated products, parts and related supplies (Note 4) ............... 11,103 19,300 8,929 Prepaid expenses ......... 6,211 10,796 5,175 Other current assets ..... 1,151 2,001 768 ------------ ------------ ----------- Total current assets 140,999 245,085 162,092 ------------ ------------ ----------- Property, plant, and equipment (Notes 3 and 5): Telecommunications equipment .............. 912,820 1,586,664 835,396 Equipment in course of construction ........... 65,363 113,614 99,989 Other equipment .......... 37,882 65,847 47,878 ------------ ------------ ----------- 1,016,065 1,766,125 983,263 Less accumulated depreciation ........... 153,051 266,034 87,363 ------------ ------------ ----------- Net property, plant, and equipment .... 863,014 1,500,091 895,900\nOther assets, at cost, less accumulated amortization of DM 45,445 in 1993 and DM 25,096 in 1992 ........ 46,973 81,650 91,480 Deferred tax asset (Note 6) 79,121 137,528 109,616 Due from affiliated company (Notes 3 and 6) .......... 91,028 158,224 119,408 ------------ ------------ ----------- $1,221,135 DM2,122,578 DM1,378,496 ============ ============ ===========\n(Continued on next page)\nMANNESMANN MOBILFUNK GMBH BALANCE SHEETS (Continued) DECEMBER 31, 1993 and 1992 (In thousands)\nLIABILITIES AND CAPITAL SUBSCRIBERS' EQUITY 1993 1993 1992 ---------------------------- ---------------- ------------- ------------- U.S. Dollars (1) Deutschmarks Deutschmarks Current liabilities: Due to banks (Note 9) .... $ 44,671 DM 77,648 - Accounts payable and accrued expenses ....... 190,897 331,815 DM 277,954 Due to affiliated companies (Note 3) ..... 8,788 15,276 13,378 ------------ ------------ ----------- Total current liabilities ....... 244,356 424,739 291,332 ------------ ------------ ----------- Long-term debt (Note 9) .... 253,135 440,000 - Pension liabilities (Note 7) 3,599 6,256 4,982 Other non-current liabilities 2,503 4,350 2,350 ------------ ------------ ----------- Total non-current liabilities ....... 259,237 450,606 7,332 ------------ ------------ ----------- Commitments (Note 10)\nCapital subscribers' equity: Subscribed capital (Note 8) 233,000 405,000 405,000 Additional capital ....... 698,998 1,215,000 1,215,000 Unpaid capital ........... - - (285,000) ------------ ------------ ----------- 931,998 1,620,000 1,335,000 Accumulated deficit ...... (214,456) (372,767) (255,168) ------------ ------------ ----------- Total capital subscribers' equity ............ 717,542 1,247,233 1,079,832 ------------ ------------ ----------- $1,221,135 DM2,122,578 DM1,378,496 ============ ============ ===========\nSee accompanying Notes to financial statements.\nMANNESMANN MOBILFUNK GMBH STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1993, 1992, and 1991 (In thousands)\n1993 1993 1992 1991 ------------ ------------ ------------ ------------ U.S. Dollars Deutschmarks Deutschmarks Deutschmarks (Note 1) (unaudited)\nNet revenues ........... $ 518,468 DM901,201 DM 137,486 - ---------- ---------- ----------- ---------- Operating costs and expenses: Cost of services and products, including DM 2,583, DM 2,134, and DM 1,270 with related parties in 1993, 1992, and 1991, respectively (Note 3) 272,740 474,077 173,598 DM 49,298\nSelling, general, and administrative expenses, including DM 46,302, DM 29,612, and DM 22,800 with related parties in 1993, 1992, and 1991, respectively (Note 3) 231,926 403,134 200,639 74,776\nDepreciation and amortization ....... 118,645 206,229 105,916 15,056 ---------- ---------- ----------- ---------- Operating loss (104,843) (182,239) (342,667) (139,130) ---------- ---------- ----------- ----------\n(Continued on next page)\nMANNESMANN MOBILFUNK GMBH STATEMENTS OF OPERATIONS (Continued) YEARS ENDED DECEMBER 31, 1993, 1992, and 1991 (In thousands)\n1993 1993 1992 1991 ------------ ------------ ------------ ------------ U.S. Dollars Deutschmarks Deutschmarks Deutschmarks (Note 1) (unaudited)\nOther income (expense): Interest income ...... 3,789 6,587 25,809 17,761 Interest expense (Note 5) ........... (5,735) (9,969) (150) (21) Other, net ........... 745 1,294 2,124 423 ---------- ---------- ----------- ---------- (1,201) (2,088) 27,783 18,163 ---------- ---------- ----------- ---------- Loss before income tax benefit and cumulative effect of change in accounting principle (106,044) (184,327) (314,884) (120,967)\nIncome tax benefit (Note 6) ........... 38,389 66,728 148,941 - ---------- ---------- ----------- ---------- Loss before cumulative effect of change in accounting principle (67,655) (117,599) (165,943) (120,967)\nCumulative effect at January 1, 1992 of change in accounting for income taxes (Note 6) ........... - - 80,083 - ---------- ---------- ----------- ---------- Net loss ........... $ (67,655) DM(117,599) DM (85,860) DM(120,967) ========== ========== =========== ==========\nSee accompanying Notes to financial statements.\nMANNESMANN MOBILFUNK GMBH NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1993, 1992, and 1991 (All amounts in thousands of Deutschmarks)\n(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES\n(a) Description of Business\nMannesmann Mobilfunk GmbH was incorporated on September 11, 1989. At December 31, 1993, Mannesmann AG, held a controlling interest of 52.77%, and Pacific Telesis Netherlands B.V. held an interest of 26.90%. In addition, a 4.5% interest equally owned by Mannesmann AG and Pacific Telesis Netherlands B.V. was held in a trust, which under the terms of the Company's license, must be sold to small or medium sized German businesses.\nThe Company's primary business is the construction, manufacture, and operation of a private mobile cellular network (\"D2\") within Germany. It is conducted under a licence agreement with the Federal Postal and Telecommunications Ministry expiring at the end of 2009.\nCommercial activities commenced in mid 1992 and by the end of 1993 the Company had nearly 500,000 customer subscribers.\n(b) Basis of Presentation\nIn order to conform with accounting principles generally accepted in the United States, certain adjustments are reflected in the financial statements which are not recorded in the German books of account. These adjustments relate primarily to capitalization of own payroll and related costs associated with the design and construction of telecommunications equipment and accounting for income taxes.\n(c) Cash and Cash Equivalents\nThe Company considers all highly liquid monetary instruments with original maturities of three months or less to be cash equivalents.\n(d) Inventories\nInventories are stated at the lower of average cost or market.\nMANNESMANN MOBILFUNK GMBH NOTES TO FINANCIAL STATEMENTS (Continued)\n(e) Property, Plant, and Equipment\nProperty, plant and equipment are stated at cost. Depreciation is calculated on both the straight-line and declining balance methods over the estimated useful lives of the assets as follows:\nUseful Classification lives Method ----------------------------- ------ ------------------------------ Telecommunications equipment: D2 infrastructure center 10 10% straight-line Switching locations 15 6.67% straight-line Base station equipment - poles 20 15% declining balance - components 20 5% straight-line Transmission and message switching technology 8 12.5% straight-line\nOther equipment: Data processing equipment 4 30% declining balance Office equipment 10 30% declining balance Measuring instruments 5 30% declining balance Vehicles 4 30% declining balance\nTo the extent permissible under tax laws, systematic depreciation is computed according to the declining balance method at a rate of up to 30 percent. Wherever straight-line depreciation results in higher charges, this method is used.\nCertain equipment installed at third party locations for rental periods less than the above useful lives are depreciated over the corresponding terms of the agreements.\n(f) Other Assets\nOther assets are stated at cost. They consist mainly of computer software, patents, rights, concessions, and loan commitment fees which are being amortized over periods ranging from three to eight years on a straight-line basis.\nMANNESMANN MOBILFUNK GMBH NOTES TO FINANCIAL STATEMENTS (Continued)\n(g) Income Taxes\nEffective January 1, 1992, the Company adopted the provisions of Statement of Financial Accounting Standards No. 109, \"Accounting for Income Taxes,\" and has reported the cumulative effect of the change in the method of accounting for income taxes in the 1992 statement of operations. Under the asset and liability method of Statement 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under Statement 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.\n(h) Pension Plans\nThe Company has defined benefit plans limited to its management group and a small minority of its employees transferred with continuing pension rights from other Mannesmann AG group companies. The benefits are based on years of service and recent compensation. The accumulated benefit obligation is determined based on annual actuarial calculations and recorded as a liability in the balance sheet with a corresponding charge to income. The liability is not funded but represented by the Company's assets.\n(i) Financial Statement Translation\nThe financial statements are expressed in Deutschmarks and, solely for the convenience of the reader, have been translated into United States dollars at the rate of DM 1.7382 to U.S. $1, the 3:00pm (Pacific time - U.S.A.) Reuters quotation on December 31, 1993.\nMANNESMANN MOBILFUNK GMBH NOTES TO FINANCIAL STATEMENTS (Continued)\n(2) CASH AND CASH EQUIVALENTS\nThis caption includes cash equivalents representing time deposits and commercial paper for amounts maturing within periods of between one day and three months. The balances at December 31, 1993 and 1992 are as follows:\n1993 1992 ------------- ------------ Time deposits ................ DM28,000 DM25,000 Commercial paper ............. - 30,000 ------------- ------------ DM28,000 DM55,000 ============= ============\nThe carrying amount of cash and cash equivalents approximates fair value because of the short maturity of the investments.\n(3) RELATED PARTY TRANSACTIONS\nThe Company has significant business transactions with its main capital subscribers, Mannesmann AG and Pacific Telesis Netherlands B.V. and their respective group companies. Such transactions are normally concluded within a range of terms similar to those made with non-related parties.\nThe significant balances and transactions with these related parties are shown separately in the balance sheets and statements of operations. In addition, purchases of property, plant, and equipment and other assets from related parties during the periods stated are shown below:\n1993 1992 1991 --------- --------- --------- (unaudited) Purchases included under property, plant, and equipment........... DM30,050 DM20,176 DM36,387 Purchases included under other assets ........................ - DM 2,996 DM22,253\nMANNESMANN MOBILFUNK GMBH NOTES TO FINANCIAL STATEMENTS (Continued)\n(4) INVENTORIES\nThis caption includes stocks of affiliated products, parts, and related supplies. The balances at December 31, 1993 and 1992 are as follows:\n1993 1992 --------- --------- Mobile telephones .......................... DM10,942 DM5,603 Spare parts ................................ 2,527 1,908 Subscriber identification module cards ..... 5,794 1,240 Other trade goods .......................... 37 178 --------- --------- DM19,300 DM8,929 ========= ========== (5) INTEREST COST\nThe Company commenced capitalization of interest cost during 1993 commensurate with the drawdown of its credit facility to finance continuing expansion of the infrastructure for its private mobile cellular network. Of the total interest cost amounting to DM12,949, DM2,980 has been included in the telecommunications equipment component of property, plant, and equipment.\n(6) INCOME TAXES\nAs discussed in Note 1, the Company adopted Statement 109 as of January 1, 1992. The cumulative effect of this change in accounting for income taxes of DM80,083 was determined as of January 1, 1992 and has been reported separately in the Statement of Operations for the year ended December 31, 1992. As a result of applying Statement 109, the loss from continuing operations for the years ended December 31, 1993 and 1992 was decreased by DM66,728 and DM148,941, respectively, due to the recognition of the net benefits attributable mainly to the deferred tax effects of net operating loss carryforwards offset partially by other temporary differences.\nUnder APB Opinion 11, which was applied to the year ended December 31, 1991 and all prior periods, the Company did not recognize the net tax benefit representing the excess of the tax effect of the tax loss carryforwards, representing deferred tax assets, over the timing differences representing deferred tax liabilities, because the criteria for such recognition were not considered to have been met at any time during that year and all prior periods.\nMANNESMANN MOBILFUNK GMBH NOTES TO FINANCIAL STATEMENTS (Continued)\n(6) INCOME TAXES (Continued)\nAccordingly, income taxes for the years ended December 31, 1993 and 1992, but not 1991 as explained above, consist solely of net deferred income tax benefits. There is no current income tax expense to date due to the net operating loss carryforwards incurred by the Company during its development phase. Such losses recorded in the German books of account can be carried forward indefinitely for German tax purposes. The net deferred income tax benefits were allocated as follows:\n1993 1992 ----------- ---------- Loss from continuing operations ............. DM66,728 DM148,941 Cumulative effect of change in accounting for income taxes .............. 80,083 ----------- ---------- DM66,728 DM229,024 =========== ==========\nThe various types of taxes contributing to the net deferred income tax benefits attributable to the loss from continuing operations for the years ended December 31, 1993 and 1992 are as follows:\n1993 1992 ----------- -----------\nGerman corporate tax ......................... DM45,250 DM113,359 German trade tax ............................. 18,688 35,582 German solidarity surcharge tax .............. 2,790 ----------- ----------- DM66,728 DM148,941 =========== ===========\nThe above reflects a decrease in German corporate tax rates to 30% for 1993 from 36% for 1992, an increase in net German trade tax rates to 12.39% for 1993 from 11.3% for 1992, because the unchanged gross rate of 17.7% is applied to income net of corporate tax, and an increase due to the new German solidarity surcharge tax to be introduced in 1995 at a rate of 1.85%.\nThese rates are based on the assumption that future profits will be distributable, otherwise higher rates would apply to retained profits. Since this accords with the future dividend policy agreed by the capital subscribers, the adoption of the above lower basis rates is considered appropriate.\nMANNESMANN MOBILFUNK GMBH NOTES TO FINANCIAL STATEMENTS (Continued)\n(6) INCOME TAXES (Continued)\nTherefore due to the above changes, the net deferred income tax benefits attributable to the loss from continuing operations differed from the amount computed by applying the combined German corporate and trade tax rate of 44.24% to the pretax loss for the year ended December 31, 1993 as a result of the following:\n------------ Computed \"expected\" tax benefit ......................... DM 81,546 Adjustments to deferred tax assets and liabilities for enacted changes in tax laws and rates from 47.3% to 44.24% ................................ (14,818) ------------ DM 66,728 ============\nFor the year ended December 31, 1992 there was no difference between the \"expected\" tax benefit at a combined rate of 47.3% and that actually recorded.\nThe significant components of the deferred income tax benefits attributable to the loss from continuing operations for the years ended December 31, 1993 and 1992 are as follows:\n1993 1992 ----------- ------------ Tax effect of the German fiscal basis operating loss for the year .......... DM(97,017) DM(159,586) Tax effect of the temporary differences attributable to items expensed for tax purposes but capitalized as property, plant, and equipment and partly depreciated for book purposes ........ 16,353 24,666 Tax effect of the temporary difference attributable to a loan commitment fee expensed for tax purposes but deferred as other assets and partly amortized for book purposes .......... (882) 4,521 Tax effect of the temporary difference attributable to a charge expensed for tax purposes prior to 1992, but expensed for book purposes in 1992 .............................. - (18,542) Adjustments to deferred tax assets and liabilities for enacted changes in tax laws and rates ................... 14,818 - ----------- ------------ Net tax benefit ......................... DM(66,728) DM(148,941) =========== ============\nMANNESMANN MOBILFUNK GMBH NOTES TO FINANCIAL STATEMENTS (Continued)\n(6) INCOME TAXES (continued)\nThe tax effects of temporary differences that give rise to significant portions of the deferred tax asset and deferred tax liabilities at December 31, 1993 and 1992 are presented below:\n1993 1992 ----------- ----------- Deferred tax asset: Net operating loss carryforwards ....... DM237,247 DM199,689\nDeferred tax liabilities: Property, plant, and equipment due to differences in capitalization and related depreciation ............. (96,191) (85,359) Loan commitment fee ..................... (3,528) (4,714) ----------- ----------- Net deferred tax asset .................. DM137,528 DM109,616 =========== ===========\nNo valuation allowance for the deferred tax asset at December 31, 1993 and 1992 has been recognized. In assessing the realizability of the deferred tax asset, management considers whether it is more likely than not that some portion or all of the deferred tax asset will not be realized. The ultimate realization of the deferred tax asset is dependent on the generation of future taxable income. The Company's net operating losses to date have been incurred in the start-up phase of its operations. Based on the growth rate in the number of subscribers and projected market penetration, management believes it is more likely than not that the Company will realize the benefits of the net operating loss carryforwards, which are available to reduce future income taxes over an indefinite period.\nDue to its controlling interest of over 50%, Mannesmann AG has already realized the full benefit of the Company's operating loss carryforwards for German trade tax purposes in its consolidated tax return. Under an agreement common to all majority owned subsidiaries of Mannesmann AG within the German fiscal jurisdiction, the Company will not be liable to such taxes on future profits until all prior losses have been absorbed. This group arrangement is not applicable to corporation tax which is assessed on an individual legal entity basis without the benefit of group relief. Based on the gross rate of 17.7% for both years 1993 and 1992, the DM158,224 and DM119,408 under the caption due from affiliated company at December 31, 1993 and 1992 represent amounts that will be paid by Mannesmann AG on behalf of the Company in respect of German trade tax, as the Company generates future taxable income.\nMANNESMANN MOBILFUNK GMBH NOTES TO FINANCIAL STATEMENTS (Continued)\n(7) PENSION PLANS\nThe Company has two defined benefit pension plans. The first covers all of its 73 member management group (1992 - 73 members, 1991 - 55 members). The second covers only 45 of its employee group (1992 - 45 employees, 1991 - 48 employees) representing those employees transferred with continuing pension rights from other Mannesmann AG group companies. The remaining employees totalling about 2,100 at the end of 1993 (about 1,500 and 800 at the end of 1992 and 1991, respectively) are not presently covered by such plans. It is intended that these employees will be covered by a defined contribution plan funded externally with an insurance company during 1994. All personnel are covered by a German state pension scheme under a defined contribution plan funded equally by the employer and the employee.\nThe pension liabilities shown in the Balance Sheet result directly from independent actuarial calculations based on the situation at the end of each year in accordance with German tax and commercial rules. Due to the relatively insignificant amount of such pension liabilities given the small number of employees covered, together with the short periods of prior service, the Company considers that any potential adjustment or additional disclosures, that would be required had Statement of Financial Accounting Standards No. 87, \"Employers' Accounting for Pensions,\" been applied, would not be material.\nAs noted above, the pension liabilities shown in the Balance Sheet represent the actuarial present value of accumulated benefit obligations. Projected benefit obligations and increases in compensation levels are not considered. The pension liabilities under these plans are not funded but considered to be represented by the Company's assets.\nThe pension costs charged to income for 1993, 1992, and 1991 are DM 1,076, DM 1,192, and DM 854, respectively.\nThe discount rate assumed in the actuarial valuations for each of the years ended December 31, 1993, 1992, and 1991 is 6%.\n(8) SUBSCRIBED CAPITAL\nSubscribed capital is represented by whole sum subscription amounts, issued in the form of participation certificates, on a proportional basis to the various investing parties. The respective amounts of proportional subscriptions directly reflect the percentage of respective ownership and related voting and dividend rights. As discussed below in Note 9, the payment of dividends is restricted under the credit facility agreement.\nMANNESMANN MOBILFUNK GMBH NOTES TO FINANCIAL STATEMENTS (Continued)\n(9) LONG-TERM DEBT\nDuring 1993, the Company began to utilize its unsecured credit facility negotiated with a banking consortium for DM 1,100,000. The Company is entitled to draw against the arrangement until December 31, 1995 and is able to draw Domestic and Eurofacilities on roll-over or fixed interest basis and to choose up to a maximum of five currencies with fixed and variable interest rates. The arrangement provides for a flexible repayment schedule with final maturity between June 30, 1995 and December 30, 2001. During 1993, the Company borrowed DM 440,000 in three drawings on roll-over basis with interest rates between 6.81% and 7.41%. These rates are based on Libor plus a fixed margin.\nIn accordance with the credit facility agreement, the Company is also entitled to borrow up to 10% of its capital subscribers' equity on a short-term basis. The payment of dividends will be dependent upon the attainment of certain minimum cash flow requirements.\nMaturities of non-current borrowings are as follows:\n1994 ...................................... - 1995 ...................................... - 1996 ...................................... - 1997 ...................................... - 1998 ...................................... DM110,000 Thereafter ................................ 330,000 ---------- DM440,000 ==========\nThe carrying amount of the long-term debt at December 31, 1993 is also considered to approximate fair value since market rates and conditions have not changed significantly between the time of initial utilization of the facility during 1993 and the end of the year.\nMANNESMANN MOBILFUNK GMBH NOTES TO FINANCIAL STATEMENTS (Continued)\n(10) COMMITMENTS\nThe Company is obligated under various noncancelable operating leases, primarily of a long-term nature, for the main administrative building, base stations, and sales offices. The rental expense charged to income during 1993, 1992, and 1991 was DM 40,739, DM 25,254, and DM 14,491, respectively.\nFuture minimum lease payments under noncancelable leases (with initial or remaining lease terms in excess of one year) are:\nYear ending December 31:\n1994 ...................................... DM 24,633 1995 ...................................... 23,605 1996 ...................................... 21,924 1997 ...................................... 21,335 1998 ...................................... 9,468 1999 and beyond ........................... 48,622 ----------- Total minimum lease payments ............ DM149,587 ===========\nREPORT OF INDEPENDENT ACCOUNTANTS\nOur report on the consolidated financial statements of AirTouch Communications (formerly PacTel Corporation) and Subsidiaries is included on page of this Form 10-K. In connection with our audits of such financial statements, we have also audited the related financial statement schedules listed in Item 14(a) 2 of the Form 10-K.\nIn 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 required to be included therein.\n\/s\/ Coopers & Lybrand\nSan Francisco, California March 3, 1994\nX-1\nAIRTOUCH COMMUNICATIONS AND SUBSIDIARIES SCHEDULE I - MARKETABLE SECURITIES (Dollars in millions)\nCOL. A COL. B COL. C COL. D COL. E -------------------------- ----------- --------- --------- --------------- Amount at Which Each Portfolio Number of of Equity Shares of Market Security Issues Units - Value of and Each Other Principal Cost Each Issue Security Issue Amounts of of at Balance Carried in the Name of Issuer and Bonds and Each Sheet Balance Sheet Title of Each Issue Notes Issue Date (a) -------------------------- ----------- --------- --------- --------------- As of December 31, 1993:\nUnited States Government Treasury Bonds ....... $650.0 $661.3 $661.3 $672.0\nGovernmental Municipal Bonds ................ 49.9 58.5 58.5 60.0\nOther Municipal Bonds .. 47.0 54.6 54.6 55.3\nMiscellaneous Commercial Paper and Mutual Funds 26.7 26.7 26.7 26.7 ------- ------ ------ ------ Total .................. $773.6 $801.1 $801.1 $814.0 ======= ====== ====== =======\n------------------- (a) Includes accrued interest, except for Miscellaneous Commercial Paper and Mutual Funds.\nX-2\nX-3\nX-4\nX-5\nX-6\nX-7\nX-8\nX-9\nX-10\nX-11\nSheet 3 of 4 AIRTOUCH COMMUNICATIONS AND SUBSIDIARIES SCHEDULE V-PROPERTY, PLANT, AND EQUIPMENT (Dollars in millions)\nCOL. A COL. B COL. C COL. D COL. E COL. F -------------------- ----------- ---------- ---------- ---------- ---------- Transfer Other to Charges Balance Balance at In-Service Add\/ at Beginning Additions & Retire- (Deduct) End of Classification of Period at Cost ments (a) Period --------------------- ---------- ---------- ---------- ---------- ----------\nYear ended December 31, 1991: (b) Land .............. $ 11.2 $ 0.4 $ 2.6 $(0.4) $ 8.6 Buildings and leasehold improvements .... 82.9 40.3 17.6 - 105.6 Cellular plant and equipment ... 445.4 127.2 79.0 0.7 494.3 Pagers, paging terminals, and other paging equipment ....... 101.9 35.1 15.8 (0.6) 120.6 Office furniture and other equipment ....... 81.2 46.1 10.0 (0.4) 116.9 Construction in process ...... 69.2 109.1 128.6 - 49.7 ---------- ---------- ---------- ---------- ---------- Total $791.8 $358.2 $253.6 $(0.7) $895.7 ========== ========== ========== ========== ==========\nSee footnotes on Sheet 4 of 4\nX-12\nSheet 4 of 4 AIRTOUCH COMMUNICATIONS AND SUBSIDIARIES SCHEDULE V-PROPERTY, PLANT, AND EQUIPMENT\n-----------------\n(a) Reductions in 1993 are primarily the result of contributing Property, Plant, and Equipment to CMT Partners, a jointly owned partnership with McCaw Cellular Communications, Inc. See Notes E and S to the Consolidated Financial Statements for further information.\n(b) In 1991 amounts originally recorded to \"Office furniture and other equipment\" were reclassified to other accounts within \"Property, plant, and equipment.\"\nX-13\nSheet 1 of 4\nAIRTOUCH COMMUNICATIONS AND SUBSIDIARIES SCHEDULE VI-ACCUMULATED DEPRECIATION, DEPLETION, AND AMORTIZATION OF PROPERTY, PLANT, AND EQUIPMENT (Dollars in millions)\nCOL. A COL. B COL. C COL. D COL. E COL. F -------------------- ----------- ---------- ---------- ---------- ---------- Transfer Other to Charges Balance Balance at In-Service Add\/ at Beginning Additions & Retire- (Deduct) End of Classification of Period at Cost ments (a) Period --------------------- ---------- ---------- ---------- ---------- ----------\nYear ended December 31, 1993:\nBuildings and leasehold improvements ...... $ 34.9 $ 15.5 $ 0.8 $(13.9) $ 35.7 Cellular plant and equipment ......... 218.4 84.2 0.9 (50.8) 250.9 Pagers, paging terminals, and other paging equipment ......... 56.6 27.3 20.7 - 63.2 Office furniture and other equipment ......... 63.2 34.7 10.3 (4.0) 83.6 ---------- ---------- ---------- ---------- ---------- Total ............... $373.1 $161.7 $32.7 $(68.7) $433.4 ========== ========== ========== ========== ==========\n----------------\nSee footnotes on Sheet 4 of 4\nX-14\nSheet 2 of 4\nAIRTOUCH COMMUNICATIONS AND SUBSIDIARIES SCHEDULE VI-ACCUMULATED DEPRECIATION, DEPLETION, AND AMORTIZATION OF PROPERTY, PLANT, AND EQUIPMENT (Dollars in millions)\nCOL. A COL. B COL. C COL. D COL. E COL. F -------------------- ----------- ---------- ---------- ---------- ---------- Transfer Other to Charges Balance Balance at In-Service Add\/ at Beginning Additions & Retire- (Deduct) End of Classification of Period at Cost ments (a) Period --------------------- ---------- ---------- ---------- ---------- ----------\nYear ended December 31, 1992:\nBuildings and leasehold improvements ...... $ 23.9 $ 11.2 $ 0.2 - $ 34.9 Cellular plant and equipment ..... 145.4 74.2 1.2 - 218.4 Pagers, paging terminals, and other paging equipment ......... 48.4 23.0 14.8 - 56.6 Office furniture and other equipment ......... 41.9 24.0 2.9 $0.2 63.2 ---------- ---------- ---------- ---------- ---------- Total $259.6 $132.4 $19.1 $0.2 $373.1 ========== ========== ========== ========== ==========\n----------------- See footnotes on Sheet 4 of 4\nX-15\nSheet 3 of 4\nAIRTOUCH COMMUNICATIONS AND SUBSIDIARIES SCHEDULE VI-ACCUMULATED DEPRECIATION, DEPLETION, AND AMORTIZATION OF PROPERTY, PLANT, AND EQUIPMENT (Dollars in millions)\nCOL. A COL. B COL. C COL. D COL. E COL. F -------------------- ----------- ---------- ---------- ---------- ---------- Transfer Other to Charges Balance Balance at In-Service Add\/ at Beginning Additions & Retire- (Deduct) End of Classification of Period at Cost ments (a) Period --------------------- ---------- ---------- ---------- ---------- ----------\nYear ended December 31, 1991: (b)\nBuildings and leasehold improvements ...... $ 22.9 $ 8.4 $ 7.3 $(0.1) $ 23.9 Cellular plant and equipment ..... 104.0 67.6 27.3 1.1 145.4 Pagers, paging terminals, and other paging equipment ......... 40.9 19.4 11.9 - 48.4 Office furniture and other equipment ......... 29.0 18.6 4.5 (1.2) 41.9 ---------- ---------- ---------- ---------- ---------- Total $196.8 $114.0 $51.0 $(0.2) $259.6 ========== ========== ========== ========== ==========\n---------------- See footnotes on Sheet 4 of 4\nX-16\nSheet 4 of 4\nAIRTOUCH COMMUNICATIONS AND SUBSIDIARIES SCHEDULE VI-ACCUMULATED DEPRECIATION, DEPLETION, AND AMORTIZATION OF PROPERTY, PLANT, AND EQUIPMENT\n-----------------------\n(a) Reductions in 1993 are primarily the result of contributing Property, Plant, and Equipment and related Accumulated Depreciation to CMT Partners, a jointly owned partnership with McCaw Cellular Communications, Inc. See Notes E and S to the Consolidated Financial Statements for further information.\n(b) In 1991 amounts originally recorded to \"Office furniture and other equipment\" were reclassified to other accounts within \"Property, plant, and equipment.\"\nX-17\nAIRTOUCH COMMUNICATIONS AND SUBSIDIARIES SCHEDULE VIII-VALUATION AND QUALIFYING ACCOUNTS AND RESERVES (Dollars in millions)\nCOL. A COL. B COL. C COL. D COL. E ------------------------------- ---------- ---------- ---------- ---------- Balance Charged at to Costs Balance Beginning and Deductions at End Description of Period Expenses (a) of Period ------------------------------- ---------- ---------- ---------- ---------- Year ended December 31, 1993: Allowance for doubtful accounts ................. $10.0 $23.8 $ 24.6 $ 9.2 Deferred tax valuation allowance ................ $ 3.0 $ 1.8 - $ 4.8 Various loss reserves ...... $ 1.7 $ 5.7 $ 1.8 $ 5.6\nYear ended December 31, 1992: Allowance for doubtful accounts ................ $ 9.7 $15.1 $ 14.8 $10.0 Deferred tax valuation allowance ............... - $ 3.0 - $ 3.0 Various loss reserves ..... $ 2.3 $ 1.2 $ 1.8 $ 1.7\nYear ended December 31, 1991: Allowance for doubtful accounts ................ $ 7.8 $15.4 $13.5 $ 9.7 Various loss reserves...... $10.9 $ 1.7 $10.3 $ 2.3\n-------------------- (a) Amounts in this column reflect items written off, net of recoveries.\nX-18\nX-19\nEXHIBIT INDEX -------------\nExhibits identified in parentheses below, on file with the Commission, are incorporated by reference as exhibits hereto.\nExhibit Number Description ------- ----------- 3.1 Amended and Restated Articles of Incorporation of the Company, as filed with the Secretary of State of the State of California on November 29, 1993\n3.2 Certificate of Amendment of Articles of Incorporation of the Company, as filed with the Secretary of State of the State of California on March 10, 1994\n3.3 Amended and Restated By-laws of the Company, as amended to February 25, 1994\n4.1 Form of Common Stock certificate (Exhibit 4.1 to the Company's Registration Statement on Form S-1, File No. 33-68012)\n4.2 Rights Agreement between the Company and The Bank of New York, Rights Agent, dated as of July 22, 1993 (Exhibit 4.2 to the Company's Registration Statement on Form S-1, File No. 33-68012)\n10.1 Separation Agreement by and between the Company and Pacific Telesis Group, dated as of October 7, 1993 (Exhibit 10.1 to the Company's Registration Statement on Form S-1, File No. 33-68012)\n10.2 Amendment No. 1 to Separation Agreement, dated November 2, 1993\n10.3 Amended and Restated Plan of Merger and Joint Venture Organization by and among the Company, CCI, CCI Newco, Inc. and CCI Newco Sub, Inc. dated as of December 14, 1990 (Exhibit 1 to the Company's Statement on Schedule 13D filed on February 18, 1992)\n10.4 Termination Agreement by and among Telesis, the Company, CCI and Cellular Communications of Ohio, Inc. dated December 11, 1992 (Exhibit 5 to Amendment No. 28 to the Company's Statement on Schedule 13D filed on December 12, 1992)\n10.5 Joint Venture agreement between Mannesmann Kienzle GmbH, Pacific Telesis Netherlands B.V., Cable and Wireless plc, DG Bank Deutsch Genossenschaftsbank and Lyonnaise des Eaux SA dated June 30, 1989 (Exhibit 10.43 to the Company's Registration Statement on Form S-1, File No. 33-68012)\n10.6 Form of Indemnity Agreement between the Company and each of its directors (Exhibit 10.2 to the Company's Registration Statement on Form S-1, File No. 33-68012)\n10.7 PacTel Corporation 1993 Long-Term Stock Incentive Plan\n10.8 PacTel Corporation Long-Term Incentive Plan (Exhibit 10.4 to the Company's Registration Statement on Form S-1, File No. 33-68012)\nI-1\n10.9 PacTel Corporation Short-Term Incentive Plan\n10.10 PacTel Corporation Deferred Compensation Plan for Nonemployee Directors\n10.11 PacTel Corporation Deferred Compensation Plan\n10.12 PacTel Corporation Supplemental Executive Pension Plan\n10.13 PacTel Corporation Executive Life Insurance Plan\n10.14 PacTel Corporation Executive Long-Term Disability Plan\n10.15 Representative Employment Agreement for Certain Senior Officers of Pacific Telesis Group (Exhibit 10pp to Form 10-K of Telesis for 1988, File No. 1-8609)\n10.16 Pacific Telesis Group Senior Management Short Term Incentive Plan (Exhibit 10-aa to Pacific Telesis Group Shareowner Dividend Reinvestment and Stock Purchase Plan Registration Statement No. 2-87852)\n10.17 Resolutions amending the Plan, effective August 28, 1987 (Exhibit 10aa to Form 10-K of Telesis for 1991, File No. 1-8609)\n10.18 Pacific Telesis Group Senior Management Long Term Incentive Plan (Exhibit 10aa to Form 10-K of Telesis for 1985, File No. 1-8609)\n10.19 Pacific Telesis Group Executive Life Insurance Plan (Exhibit 10cc to Form 10-K of Telesis for 1986, File No. 1-8609)\n10.20 Pacific Telesis Group Senior Management Long Term Disability and Survivor Protection Plan (Exhibit 10dd to Form 10-K of Telesis for 1988, file No. 1-8609)\n10.21 Resolutions amending the Plan effective May 2, 1992 and November 20, 1992 (Exhibit 10dd(i) to Form 10-K of Telesis for 1992, File No. 1-8609)\n10.22 Pacific Telesis Group Senior Management Transfer Program (Exhibit 10ee to Pacific Telesis Group Shareowner Dividend Reinvestment and Stock Purchase Plan Registration Statement No. 2-87852)\n10.23 Pacific Telesis Group Senior Management Financial Counseling Program (Exhibit 10ff to Pacific Telesis Group Shareowner Dividend Reinvestment and Stock Purchase Plan Registration Statement No. 2-87852)\n10.24 Pacific Telesis Group Deferred Compensation Plan for Nonemployee Directors (Exhibit 10gg to Form 10-K of Telesis for 1990, File No. 1-8609)\n10.25 Resolutions amending the Plan effective December 21, 1990, November 20, 1992 and December 18, 1992 (Exhibit 10gg(i) to Form 10-K of Telesis for 1992, File No. 1-8609)\n10.26 Description of Pacific Telesis Group Directors' and Officers' Liability Insurance Program (Exhibit 10hh to Form 10-K of Telesis\nI-2\nfor 1992, File No. 1-8609)\n10.27 Description of Pacific Telesis Group for Nonemployee Directors' Travel Accident Insurance (Exhibit 10ii to Form 10-K of Telesis for 1989, File No. 1-8609)\n10.28 Resolutions amending the Plan, effective as of June 28, 1991 (Exhibit 10kk to Form 10-K of Telesis for 1991, File No. 1-8609)\n10.29 Resolutions amending the Plan effective May 22, 1992 and November 20, 1992 (Exhibit 10kk(ii) to Form 10-K of Telesis for 1992, File No. 1-8609)\n10.30 Pacific Telesis Group Mid-Career Hire Program (Exhibit 10mm to Form 10-K of Telesis for 1988, File No. 1-8609)\n10.31 Pacific Telesis Group Mid-Career Pension Plan (Exhibit 10nn to Form 10-K of Telesis for 1986, File No. 1-8609)\n10.32 Resolutions amending the Plan effective May 22, 1992 and November 20, 1992 (Exhibit 10kk(ii) to Form 10-K of Telesis for 1992, File No. 1-8609)\n10.33 Pacific Telesis Group Executive Deferral Plan (Exhibit 1011 to Form 10-K of Telesis for 1989, File No. 1-8609)\n10.34 Resolutions amending the Plan effective November 20, 1992 and December 23, 1992 (Exhibit 1011(i) to Form 10-K of Telesis for 1992, File No. 1-8609)\n10.35 Pacific Telesis Group Stock Option and Stock Appreciation Rights Plan (Plan Text, Sections 1-17, in Registration Statement No. 33-15391)\n10.36 Resolutions amending the Plan effective November 17, 1989 and June 26, 1992 (Exhibit 10oo(i) to Form 10-K of Telesis for 1992, File No. 1-8609)\n10.37 Pacific Telesis Group Outside Directors' Retirement Plan (Exhibit 10ss to Form 10-K of Telesis for 1984, File No. 1-8609)\n10.38 Resolution amending the Plan effective May 25, 1990 (Exhibit 10ss(i) to Form 10-K of Telesis for 1992, File No. 1-8609)\n10.39 Representative Indemnity Agreement between Pacific Telesis Group and certain of its officers and each of its directors (Exhibit 10tt to Form 10-K of Telesis for 1987, File No. 1-8609)\n10.40 Trust Agreement between Pacific Telesis Group and Bank of America National Trust and Savings Association in connection with the Pacific Telesis Group Executive Deferral Plan (Exhibit 10uu to Form 10-K of Telesis for 1988, File No. 1-8609)\n10.41 Amendment to Trust Agreement No. 1 effective December 11, 1992 (Exhibit 10uu(i) to Form 10-K of Telesis of 1992, File No. 1-8609)\n10.42 Trust Agreement between Pacific Telesis Group and Bank of America National Trust and Savings Association in connection with the\nI-3\nPacific Telesis Group Deferred Compensation Plan for the Non- Employee Directors (Exhibit 10vv to Form 10-K of Telesis for 1988, File No. 1-8609)\n10.43 Amendment to Trust Agreement No. 2 effective December 11, 1992 (Exhibit 10vv(i) to Form 10-K of Telesis for 1992, File No. 1-8609)\n10.44 Pacific Telesis Group Long Term Incentive Award Deferral Plan (Exhibit 10ww to Form 10-K of Telesis for 1989, File No. 1-8609)\n10.45 Resolutions merging the Plan with the Executive Deferral Plan effective May 22, 1992 (Exhibit 10ww(i) to Form 10-K of Telesis for 1992, File No. 1-8609)\n10.46 Pacific Telesis Group Nonemployee Director Stock Option Plan (Exhibit A to Pacific Telesis Group's 1990 Proxy Statement filed February 26, 1990, File No. 1-8609)\n10.47 Pacific Telesis Group Supplemental Executive Retirement Plan (Exhibit 10yy to Form 10-K of Telesis for 1990, File No. 1-8609)\n10.48 Resolutions amending the Plan effective November 20, 1992 (Exhibit 10yy(i) to Form 10-K of Telesis for 1992, File No. 1-8609)\n21 Subsidiaries of the Company (Exhibit 21 to the Company's Registration Statement on Form S-1, File No. 33-68012)\n23.1 Consent of Coopers & Lybrand\n23.2 Consent of Ernst & Young\n23.3 Consent of KPMG Deutsche Treuhand-Gesellschaft\n24 Powers of Attorney\n99 Modification of Final Judgment, United States District Court, District of Columbia, in \"U.S. v. American Tel. & Tel. Co.,\" Civil Action No. 82-0192 (Exhibit 99 to the Company's Registration Statement on Form S-1, File No. 33-68012)\n(b) Reports on Form 8-K:\nNo reports on Form 8-K were filed during the last quarter of the period covered by this report.\nI-4","section_15":""}
{"filename":"788816_1993.txt","cik":"788816","year":"1993","section_1":"Item 1. BUSINESS\nOGLETHORPE POWER CORPORATION\nGENERAL\nOglethorpe Power Corporation (An Electric Membership Generation & Transmission Corporation) (\"Oglethorpe\") is an electric generation and transmission cooperative (\"G&T\") incorporated in 1974 in the State of Georgia. It is headquartered in metropolitan Atlanta. Oglethorpe is entirely owned by its 39 retail electric distribution cooperative members (the \"Members\"), who, in turn, are entirely owned by their retail consumers. Oglethorpe is the largest G&T in the United States in terms of operating revenues, assets, kilowatt-hour (\"kWh\") sales and, through the Members, consumers served. It is one of the ten largest electric utilities in the United States in terms of land area served. As of February 28, 1994, Oglethorpe had 505 full-time and 43 part-time employees.\nAs with cooperatives generally, Oglethorpe operates on a not-for-profit basis. Oglethorpe's principal business is providing wholesale electric service to the Members. The Members are local consumer-owned distribution cooperatives providing retail electric service on a not-for-profit basis. In general, the membership of the distribution cooperative Members consists of residential, commercial and industrial consumers within specific geographic areas. As of December 31, 1993, the Members served approximately 1 million electric consumers (meters) representing a total population of approximately 2.3 million people.\nEach Member purchases capacity and energy from Oglethorpe pursuant to a long-term, \"all-requirements\" wholesale power contract between Oglethorpe and the Member (each a \"Wholesale Power Contract\" and collectively the \"Wholesale Power Contracts\"). Oglethorpe supplies the capacity and energy requirements of the Members from a combination of owned and leased generating plants and from power purchased under long-term contracts with other power suppliers, principally Georgia Power Company (\"GPC\"), a wholly owned subsidiary of The Southern Company.\nMEMBER CONTRACTS\nEach Wholesale Power Contract will remain in effect through the year 2025 and thereafter until terminated by three years' written notice by Oglethorpe or the respective Member. Each Wholesale Power Contract provides that, except for power purchased from the Southeastern Power Administration (\"SEPA\"), Oglethorpe shall sell and deliver to the Member, and the Member shall purchase and receive from Oglethorpe, all electric capacity and energy that the Member requires for the operation of its system to the extent that Oglethorpe has capacity and energy and facilities available. In 1993, the aggregate SEPA allocation to the Members was 542 megawatts (\"MW\") plus associated energy, representing approximately 13% of total Member peak demand and approximately 6% of total Member energy requirements. Because the amount of capacity and energy available from SEPA is not expected to increase in an amount sufficient to serve a material portion of the projected growth in the Members' requirements, such growth is expected to be served primarily through Oglethorpe's resources. (See \"Member Demand and Energy Requirements--DISPERSED GENERATION\" and \"THE MEMBERS OF OGLETHORPE--Contracts with SEPA\" herein.)\nEach Wholesale Power Contract provides that, without the approval of both Oglethorpe and the Rural Electrification Administration (\"REA\"), no Member may reorganize, consolidate or merge, or sell, lease or transfer all or a substantial part of its assets (or make any agreement therefor), so long as Oglethorpe has notes outstanding to REA and the FFB, without first paying such portion of any such outstanding notes as may be determined by Oglethorpe with the prior written consent of REA and otherwise complying with such reasonable terms as Oglethorpe and REA may require.\nMEMBER DEMAND AND ENERGY REQUIREMENTS\nThe following table shows the aggregate peak demand and energy requirements of the Members for the years 1991 through 1993 and also shows the amounts of such requirements supplied by Oglethorpe and SEPA. For the years 1991 through 1993, demand and energy requirements increased at an average annual compound growth rate of 8.1% and 7.3%, respectively.\nPrior to 1993, no Member accounted for 10% or more of Oglethorpe's total revenues. In 1993, however, Cobb EMC accounted for approximately 10% of Oglethorpe's total revenues.\nSEASONAL VARIATIONS\nAlthough the demand for energy by the Members is influenced by seasonal weather conditions, Oglethorpe's rate structure is designed to cause capacity revenues, which include margins, to remain relatively level throughout the year. Energy revenues, which do not include margins, track energy costs as they are incurred. Although energy charges, which are based on variable costs, fluctuate from month to month, capacity charges, which are based on annual peak demands, do not fluctuate based on a Member's usage during a given year. Historically, Oglethorpe's peak demand occurs during the months of June through September.\nCONSERVATION AND LOAD MANAGEMENT\nOglethorpe and the Members have implemented various demand management programs. The program goal, developed in conjunction with Oglethorpe's integrated resource planning process, is to modify demand patterns so that current resources are used efficiently and the need for additional generating resources is delayed. The programs that have been implemented include an energy efficient home program (the \"Good Cents Home\" program), remote-controlled switching of air conditioners, water heaters and irrigation pumps, residential energy audits and public appeals to encourage consumers to use less energy during periods of peak demand. The demand management programs have reduced, and are expected to continue to reduce, the growth of peak demand and have resulted in an increase in off-peak sales. (See \"THE POWER SUPPLY SYSTEM--Future Power Resources--OTHER FUTURE RESOURCES\".)\nDISPERSED GENERATION\nOglethorpe and the Members have been discussing the desire of a number of the Members to make greater use of dispersed generation units. If permitted by REA, such units would be used to maintain reliability of electric service during emergencies on a Member's distribution system, to serve specific customer needs and otherwise to be available to Oglethorpe to serve the demands of Members on its system. The installation and use of dispersed generation units by any Member would be governed by policies and procedures, consistent with the Wholesale Power Contract, designed to\nensure system reliability and prevent any material adverse effect on Oglethorpe's revenues or on any other Member's power costs.\nELECTRIC RATES\nEach Member is required to pay Oglethorpe for capacity and energy furnished under its Wholesale Power Contract in accordance with rates established by Oglethorpe. Oglethorpe reviews its rates at such intervals as it deems appropriate but is required to do so at least once every year. Oglethorpe is required to revise its rates as necessary so that the revenues derived from such rates will be sufficient, but only sufficient, with its revenues from all other sources to pay operating and maintenance costs, the cost of purchased power, the cost of transmission services, and principal and interest on all indebtedness (including capital lease obligations) of Oglethorpe and to provide for the establishment and maintenance of reasonable reserves. Rates are also required to be established so as to enable Oglethorpe to comply with all requirements (including coverage ratios) under the Consolidated Mortgage and Security Agreement dated as of September 1, 1993 (the \"REA Mortgage\") among Oglethorpe, as mortgagor, and the United States of America acting through the Administrator of REA, the National Bank for Cooperatives (\"CoBank\"), Credit Suisse, acting by and through its New York Branch (\"Credit Suisse\"), and Trust Company Bank (\"Trust Company\"), as trustee under certain pollution control bond indentures identified in the REA Mortgage. (See \"General--RATES AND FINANCIAL COVERAGE REQUIREMENTS\" in Item 7.)\nOglethorpe's current monthly rate for electric service for capacity and energy delivered to each Member includes energy charges that recover fuel and variable operation and maintenance costs, adjusted semiannually to assure full recovery of such costs, and capacity charges. The rate also includes a provision to reflect the amortization of the deferred margins accumulated from 1985 through 1993, which amounts will be fully amortized by the end of 1995. (See Note 1 of Notes to Financial Statements in Item 8.) Oglethorpe's rate policy provides for a number of separate rates for certain qualified consumer loads, which are designed to have a favorable impact on the Members' competitiveness for certain new industrial and commercial loads. (See \"THE MEMBERS OF OGLETHORPE--Service Area and Competition\".)\nOglethorpe's rates, as established by its Board of Directors, are subject to review and approval by REA. Oglethorpe is required under the REA Mortgage to implement rates designed to maintain a Times Interest Earned Ratio (\"TIER\") of not less than 1.05, Debt Service Coverage Ratio (\"DSC\") of not less than 1.0 and an Annual Debt Service Coverage Ratio (\"ADSCR\") of not less than 1.25. Oglethorpe has always met or exceeded the TIER, DSC and ADSCR requirements of the REA Mortgage. (See \"General--RATES AND FINANCIAL COVERAGE REQUIREMENTS\" in Item 7.)\nThe Wholesale Power Contracts provide that no rate revision shall be effective unless approved by REA, but such rate revisions are not subject to the approval of any other Federal or state agency or authority, including the Georgia Public Service Commission (the \"GPSC\"). To date, REA has not reduced or delayed the effectiveness of any rate increase proposed by Oglethorpe.\nFor information regarding future rates, see \"Results of Operations-- OPERATING REVENUES--SALES TO MEMBERS\" in Item 7.\nCERTAIN FACTORS AFFECTING THE UTILITY INDUSTRY IN GENERAL\nThe electric utility industry is becoming increasingly competitive as a result of deregulation, competing energy suppliers, technologies, and other factors. The Energy Policy Act of 1992 (the \"Energy Policy Act\") amended the Federal Power Act and the Public Utility Holding Company Act to allow for increased competition among wholesale electricity suppliers and increased access to transmission services by such suppliers. A number of other significant factors have affected the operations of electric utilities. They include the availability and cost of fuel for the generation of electric energy, fluctuating rates of load growth, compliance with environmental and other governmental regulations, licensing and other delays affecting the construction, operation and cost of new and existing facilities, and the effects of conservation, energy management and other governmental regulations on the use of electric energy. All of these factors present an increasing challenge to companies in the electric utility industry, including Oglethorpe and the Members, to reduce costs and improve the management of resources. (See \"THE POWER SUPPLY SYSTEM--General\", \"--Future Power Resources\" and \"--Environmental and Other Regulations\".)\nRELATIONSHIP WITH GPC\nOglethorpe's relationship with GPC is a significant factor in several aspects of Oglethorpe's business. GPC is Oglethorpe's principal supplier of purchased power, and Oglethorpe is one of GPC's largest customers. In 1993, Oglethorpe derived 15% of its total revenues from sales to GPC, making GPC Oglethorpe's largest customer. Substantially all of Oglethorpe's generating facilities were purchased at various stages of construction from GPC and were constructed and are now operated by GPC. Oglethorpe is the construction and operating agent for the Rocky Mountain Project, a pumped storage hydroelectric facility (\"Rocky Mountain\"), in which it acquired an interest from GPC. Oglethorpe purchases coordination services from GPC to schedule its power resources and its off-system purchases and sales. Oglethorpe, through the Members, is one of GPC's principal competitors in the State of Georgia for electric service to new customers that have a choice of supplier under the Georgia Territorial Electric Service Act (the \"Territorial Act\"). Likewise, GPC is the principal competitor of the Members for such customers. Oglethorpe and GPC also own transmission facilities that are part of the Integrated Transmission System (the \"ITS\"). GPC provides system operator services and performs most of the required maintenance of Oglethorpe's transmission facilities. GPC and Oglethorpe are parties to an agreement that makes allowance for the joint planning of future generation and transmission facilities. For further information regarding the various relationships and agreements with GPC, see \"THE MEMBERS OF OGLETHORPE--Service Area and Competition\", \"THE POWER SUPPLY SYSTEM--General\", \"--Fuel Supply\", \"--Power Sales to and Purchases from GPC\", \"--Future Power Resources--ROCKY MOUNTAIN\", \"-Transmission and Other Power System Arrangements\", \"CO-OWNERS OF THE PLANTS AND THE PLANT AND TRANSMISSION AGREEMENTS--Co-Owners of the Plants--GEORGIA POWER COMPANY\", \"--The Plant Agreements\", \"--Agreements Relating to the Integrated Transmission System\", and \"--The Joint Committee Agreement\".\nRELATIONSHIP WITH REA\nFederal loan programs administered by REA have provided the principal source of financing for electric cooperatives. Direct loans from REA have been a major source of funding for the Members, while loans guaranteed by REA and made by the Federal Financing Bank (\"FFB\") have been a major source of funding for Oglethorpe. Through provisions of the REA Mortgage, REA exercises substantial control and supervision over Oglethorpe in such areas as accounting, issuing secured indebtedness, rates and charges for the sale of power, construction and acquisition of facilities, and the purchase and sale of power.\nIn recent years, there have been legislative, administrative and budgetary initiatives intended to reduce or, in some cases, eliminate federal funding for electric cooperatives. In addition, the REA loan and guarantee programs have been characterized by the imposition of increasingly problematic terms and conditions and extended delays in access to necessary funding.\nThe President's budget for fiscal year 1995 proposes to set the level of funding for the 100% guarantee program at $275 million, which if sustained at that level in future years would not likely provide adequate funding for the transmission and power supply needs of REA borrowers. Congress historically has increased Administration-proposed lending levels to those necessary to meet borrower demand. Notwithstanding historical practices, however, the future cost, availability and magnitude of REA-guaranteed loans cannot be predicted. See \"THE MEMBERS OF OGLETHORPE-Members' Relationship with REA\" for a discussion of the impact of the budget proposal on the direct loan program.\nREA continues to re-evaluate its regulatory and lending relationship with its borrowers through what it has described as a comprehensive rule-making project. The purpose of the project is to improve the credit-worthiness of loans made or guaranteed by REA. In addition to adopting new rules regulating policies and procedures for insured and guaranteed loans and lien accommodations, REA has published a proposed rule describing a new form of wholesale power contract and has, in an advance notice of proposed rule-making, requested suggestions for revisions to its standard form of mortgage. Many of these rule-makings have taken many months or years to complete and the outcome\nof these various rule-making initiatives, whether others may be forthcoming, whether any of such rule-making initiatives may achieve the objectives stated by REA, or the extent to which such initiatives may affect Oglethorpe or the Members cannot be predicted.\nThe Clinton Administration has proposed that the Department of Agriculture, which includes REA, be reorganized to improve its efficiency. Legislation has been introduced that would authorize the Secretary of Agriculture to implement this reorganization. Under the proposed reorganization, the electric and telephone programs of REA would be included in a new Rural Utilities Service. The rural development functions of REA would be included in a Rural Business and Cooperative Development Service. Both agencies would report to an Under Secretary for Rural Economic and Community Development. Oglethorpe's management does not believe that the reorganization, if implemented as proposed, will have a significant adverse effect on it or the Members.\nTHE MEMBERS OF OGLETHORPE\nSERVICE AREA AND COMPETITION\nThe Members are identified in Item 10(a) of this Report and include 39 of the 42 electric distribution cooperatives in the State of Georgia. As of December 31, 1993, the Members served approximately 1 million electric consumers (meters) representing a total population of approximately 2.3 million people. The Members serve a region covering approximately 40,000 square miles, which is approximately 70% of the land area of Georgia served by the owners of the ITS, encompassing 150 of the State's 159 counties. Sales by the Members in 1993 amounted to approximately 16.2 million megawatt-hours (\"MWh\"), with 74% to residential consumers, 24% to commercial and industrial consumers and 2% to other consumers. No single consumer of any Member constituted more than 1% of the Members' aggregate sales in 1993. The Members are the principal suppliers for the power needs of rural Georgia. While the Members do not serve any major cities, portions of their service territories are in close proximity to urban areas and are experiencing growth due to the expansion of urban areas, including metropolitan Atlanta, into suburban areas and the growth of suburban areas into neighboring rural areas. The Members have experienced average annual compound growth rates from 1991 through 1993 of 4.5% in number of consumers, 6.9% in MWh sales and 8.9% in electric revenues.\nThe Territorial Act regulates the service rights of all retail electric suppliers in the State of Georgia. Pursuant to the Territorial Act, the GPSC assigned substantially all areas in the State to specified retail suppliers. The Members have the exclusive right to provide retail electric service in their respective assigned territories, which are predominately outside of municipal limits. The GPSC may not reassign territory or transfer service except in limited circumstances provided by the Territorial Act. The GPSC may transfer service for specific premises only: (i) upon a determination by the GPSC, after joint application of electric suppliers and proper notice and hearing, that the public convenience and necessity require a transfer of service from one electric supplier to another; or (ii) upon a finding by GPSC, after proper notice and hearing, that an electric supplier's service to a premise is not adequate or dependable or that its rates, charges, service rules and regulations unreasonably discriminate in favor of or against the consumer utilizing such premises and the electric utility is unwilling or unable to comply with an order from GPSC regarding such service. The GPSC may reassign territory only if it determines that an assignee electric supplier has breached the tenets of public convenience and necessity.\nThe territorial assignments under the Territorial Act are also subject to an exception that permits the owner of any new facility located outside of existing municipal limits and having a connected demand upon initial full operation of 900 kilowatts or greater to receive electric service from the retail supplier of its choice. The Members, with Oglethorpe's support, are actively engaged in competition with other retail electric suppliers for these new industrial and commercial loads. The number of commercial and industrial loads served by the Members has increased in recent years.\nCOOPERATIVE STRUCTURE\nThe Members operate their systems on a not-for-profit basis. Accumulated margins derived after payment of operating expenses and provision for depreciation constitute patronage capital of the consumers of the Members. Refunds of accumulated patronage capital to the individual consumers may be made from time to time subject to limitations contained in mortgages between the Members and REA. These mortgages generally prohibit such distributions unless, after any such distribution, the Member's total equity will equal at least 40% of its total assets, except that distributions may be made of up to 25% of the margins and patronage capital received by the Member in the preceding year. As a general matter, the Members distribute accumulated patronage capital from time to time subject to their respective financial policies and in conformity with their respective REA mortgages.\nOglethorpe is a membership corporation, and the Members are not subsidiaries of Oglethorpe. Except with respect to the obligations of the Members under each Member's Wholesale Power Contract with Oglethorpe and Oglethorpe's rights under such contracts to receive payment for power and energy supplied, Oglethorpe has no legal interest in, or obligations in respect of, any of the assets, liabilities, equity, revenues or margins of the Members. (See \"OGLETHORPE POWER CORPORATION--Member Contracts\".) The revenues of the Members are not pledged as security\nto Oglethorpe but are the source from which moneys are derived by the Members to pay for power supplied by Oglethorpe under the Wholesale Power Contracts. Revenues of the Members are, however, pledged under the respective REA mortgages of the Members.\nRATE REGULATION OF MEMBERS\nThrough provisions in the loan documents securing loans to the Members, REA exercises control and supervision over the Members in such areas as: (i) accounting; (ii) borrowings; (iii) rates and charges for the sale of power; (iv) construction and acquisition of facilities; and (v) the purchase and sale of power. The individual REA mortgages of the Members require them to design rates with a view to maintaining an average TIER of not less than 1.50 and an average DSC of not less than 1.25 for the two highest out of every three successive years.\nAlthough the setting of the rates of the Members is not subject to approval of any Federal or state agency or authority other than REA, the Territorial Act prohibits the Members from unreasonable discrimination in the setting of rates, charges, service rules or regulations.\nCONTRACTS WITH SEPA\nIn addition to energy received from Oglethorpe under the Wholesale Power Contracts, the Members purchase hydroelectric power under contracts with SEPA. In 1993, the aggregate SEPA allocation to the Members was 542 MW plus associated energy, representing approximately 13% of total Member peak demand and approximately 6% of total Member energy requirements. (See \"OGLETHORPE POWER CORPORATION-Member Contracts\" and \"-Member Demand and Energy Requirements\" and the table thereunder.)\nIn September 1993, SEPA issued a Notice of Intent to revise its marketing policy for the Georgia-Alabama-South Carolina system of projects, from which the Members purchase SEPA power. This policy will govern the renewal of SEPA's contracts with the Members, which are subject to renewal on May 31, 1994. Although Oglethorpe does not anticipate that such revised policy will result in a significant change, the final marketing policy and its effect on the Members' allocations of capacity and energy cannot be predicted with certainty.\nMEMBERS' RELATIONSHIP WITH REA\nFederal loan programs providing direct loans from REA to electric cooperatives have been a major source of funding for the Members. On November 1, 1993, the President signed into law the Rural Electrification Loan Restructuring Act of 1993, which contains significant revisions to the REA loan program utilized by the Members. The Members previously relied on the 5% insured loan program, under which the REA Administrator could require that up to 30% of a borrower's capital needs be obtained from private sources. The 1993 Act provides for loans to be made at an interest rate equal to that being paid on municipal bonds with comparable maturities. Certain borrowers with either (i) low consumer density or (ii) higher than average rates and consumers having lower than average incomes will have borrowing rates capped at 7%. The 1993 Act continues to make 5% loans available for hardship cases. Loans will also be available to fund demand-side management and conservation programs. Although the 1993 Act will reduce the Government's cost associated with the REA loan program, there is no guarantee that further changes in the cost and availability of the REA lending program will not be made, since the level of funding will remain subject to the Congressional budget and appropriation processes. The President's budget proposal for the fiscal year 1995 includes a proposal to replace most of the \"municipal bond rate\" program with higher-cost loans made at the cost to the United States Department of the Treasury. The outcome of this budget proposal and the future cost, availability and amount of REA direct and guaranteed loans cannot be predicted.\nFor further information regarding the REA program, see \"OGLETHORPE POWER CORPORATION-Relationship with REA\".\nTHIRD-PARTY INTEREST IN MEMBER SYSTEMS\nFrom time to time, utilities may be approached by other utilities or other parties interested in purchasing their systems. Some of Oglethorpe's Members have been approached in the past by third parties indicating an interest in purchasing their systems. The Wholesale Power Contract between Oglethorpe and each Member provides that no Member may reorganize, consolidate or merge, or sell, lease or transfer all or a substantial portion of its assets (or make any agreement therefor), so long as Oglethorpe has notes outstanding to REA and the FFB, without first paying such portion of any such outstanding notes as may be determined by Oglethorpe with the prior written consent of REA and otherwise complying with such reasonable terms and conditions as Oglethorpe and REA may require. The enforceability of the REA form of wholesale power contract has been consistently upheld by the courts in several jurisdictions. In addition, REA has recently stated its policy that it will not encourage or facilitate the buyout of borrowers by third parties and that it will expect cooperative distribution utilities to retire a proportionate share of the associated G&T indebtedness and to pay other appropriate costs and expenses of the G&T as a condition of a buyout.\nOglethorpe's management is unable to predict what transactions, if any, might result from the past third-party interest or whether any other proposals will be made to the Members. Oglethorpe has received an opinion of its counsel that each of the Wholesale Power Contracts is a valid, binding and enforceable obligation of each respective Member. Based on this opinion and other factors, Oglethorpe's management believes that no sale or transfer of Member assets would have a material adverse effect upon its financial condition or results of operations.\nTHE POWER SUPPLY SYSTEM\nGENERAL\nOglethorpe supplies the capacity and energy requirements of the Members from a combination of owned and leased generating plants and power purchased under long-term contracts with other power suppliers. These resources are scheduled and dispatched so as to minimize the operating cost of Oglethorpe's system. In addition, Oglethorpe purchases and sells capacity and energy in the bulk power market to make the best use of its resources and thus minimize the cost of capacity and energy delivered to the Members.\nThe following table sets forth certain information with respect to the generating facilities in which Oglethorpe currently has ownership or leasehold interests, all of which are in commercial operation except for Rocky Mountain, which is under construction. The Edwin I. Hatch Plant (\"Plant Hatch\"), the Hal B. Wansley Plant (\"Plant Wansley\"), the Alvin W. Vogtle Plant (\"Plant Vogtle\") and the Robert W. Scherer Units No. 1 and No. 2 (\"Scherer Units No. 1 and No. 2\") are co-owned by Oglethorpe, GPC, the Municipal Electric Authority of Georgia (\"MEAG\") and the City of Dalton (\"Dalton\"). GPC is the operating agent for each of these plants, except Rocky Mountain. Rocky Mountain is co-owned by Oglethorpe and GPC, and Oglethorpe is the construction and operating agent. Oglethorpe is the sole owner of the Tallassee Project at the Walter W. Harrison Dam (\"Tallassee\"). (See \"CO-OWNERS OF THE PLANTS AND THE PLANT AND TRANSMISSION AGREEMENTS--The Plant Agreements\".)\nUpon completion of Rocky Mountain, Oglethorpe will own or lease 1,500.6 MW of coal-fired capacity, 1,185 MW of nuclear-fueled capacity, an estimated 635.9 MW of pumped storage hydroelectric capacity, 14.8 MW of oil-fired combustion turbine capacity and 2.1 MW of hydroelectric capacity.\nOglethorpe and the other co-owners of the above plants also own transmission facilities which together form the ITS. Through agreements, common access to the combined facilities that compose the ITS enables the owners to use their combined resources to make deliveries to their respective consumers, to provide transmission service to third parties and to make off-system purchases and sales. (See \"Transmission and Other Power System Arrangements\" herein and \"CO-OWNERS OF THE PLANTS AND THE PLANT AND TRANSMISSION AGREEMENTS--Agreements Relating to Integrated Transmission System\".)\nPLANT PERFORMANCE\nThe following table sets forth certain operating performance information of each of the major generating facilities in which Oglethorpe currently has ownership or leasehold interests, except for Rocky Mountain which is not yet in commercial operation:\nThe nuclear refueling cycle for Plants Hatch and Vogtle exceeds twelve months. Therefore, in some calendar years the units at these plants are not taken out of service for refueling, resulting in higher levels of equivalent availability and capacity factor.\nAlthough Plant Scherer is designed for base load operation, it has primarily operated in peaking service due to the historically higher cost of its fuel supply (low-sulfur coal under long-term contracts) relative to the cost of Oglethorpe's other resources. Thus, the capacity factors for Scherer Units No. 1 and No. 2 have been lower than those typical of base loaded units. With the planned acquisition of lower cost low-sulfur coal and expected increases in Member sales, Oglethorpe's management anticipates higher utilization of Scherer Units No. 1 and No. 2 in the future.\nFUEL SUPPLY\nCoal for Plant Wansley is purchased under long-term contracts, which are estimated to be sufficient to provide the majority of the coal requirements of Plant Wansley through 1997, with the remainder being provided through spot market transactions. To comply with the requirements of the Clean Air Act, as amended (the \"Clean Air Act\"), Plant Wansley is being modified to burn low-sulfur coal. As of February 28, 1994, there was a 20-day coal supply at Plant Wansley based on nameplate rating.\nLow-sulfur \"compliance\" coal for Scherer Units No. 1 and No. 2 is purchased under long-term contracts and spot market transactions. As of February 28, 1994, the coal stockpile at Plant Scherer contained a 29-day supply based on nameplate rating. Further, Plant Scherer is being converted to burn both sub-bituminous and bituminous coals, and a separate stockpile of sub-bituminous coal is being built in addition to the stockpile of bituminous coal.\nThe coal supply at Plants Scherer and Wansley is lower than normal due to (i) higher than expected use of Plant Scherer during the summer of 1993 and the winter of 1994 because of abnormal temperatures, (ii) transportation interruptions resulting from severe weather conditions, and (iii) deferred deliveries because of higher replacement prices due to the United Mine Workers of America strike. The supply is planned to be replenished as needed and as competitively priced coal becomes available.\nThe Scherer ownership and operating agreements were amended effective October 1993 to allow each co-owner (i) to dispatch separately its respective ownership interest in conjunction with contracting separately for long-term coal purchases procured by GPC and (ii) to procure separately long-term coal purchases. Oglethorpe elected to dispatch separately in November 1993. Pursuant to the amendments, GPC is expected to implement separate dispatch by May 1, 1994. Oglethorpe intends to continue to use GPC as its agent for fuel procurement. In anticipation of these changes, Oglethorpe formed a wholly owned subsidiary to acquire rail cars designed for hauling coal from the western coal mining regions. The subsidiary, Black Diamond Energy, Inc., has acquired 115 cars, and Oglethorpe anticipates the acquisition of approximately 350 additional cars during the next three years for both Plants Scherer and Wansley. Oglethorpe has entered into an initial 15-year lease with the subsidiary which obligates Oglethorpe to pay all of the ownership and operating expenses of the subsidiary relating to the leased rail cars during the lease term. The co-owners are currently negotiating a similar amendment to the Plant Wansley operating agreement.\nFor information relating to the impact that the Clean Air Act will have on Oglethorpe, see \"Environmental and Other Regulations\" herein.\nGPC, as operating agent, has the responsibility to procure nuclear fuel for Plant Hatch and Plant Vogtle. GPC has contracted with Southern Nuclear Operating Company (\"SONOPCO\") to provide nuclear services, including nuclear fuel procurement. SONOPCO employs both spot purchases and long-term contracts to satisfy nuclear fuel requirements. The nuclear fuel supply and related services are expected to be adequate to satisfy current and future nuclear generation requirements.\nPlants Hatch and Vogtle currently have on-site spent fuel storage capacity. Based on normal operations and retention of all spent fuel in the reactor, it is anticipated that existing on-site pool capacity would not be sufficient in 2003 and 2009, respectively, to accept the number of spent fuel assemblies that would normally be removed from the reactor during a refueling. Contracts with the Department of Energy (\"DOE\") have been executed to provide for the permanent disposal of spent nuclear fuel produced at Plant Hatch and Plant Vogtle. The services to be provided by DOE are scheduled to begin in 1998. However, the actual year that these services will begin is uncertain. If DOE does not begin receiving the spent fuel from Plant Hatch in 2003 or from Plant Vogtle in 2009, alternative methods of spent fuel storage will be needed. One option available is expansion of spent fuel storage at the plant sites. (See \"Environmental and Other Regulations\" herein for a discussion of the Nuclear Waste Policy Act and Note 1 of Notes to Financial Statements in Item 8 regarding nuclear fuel cost.)\nPROPOSED CHANGES TO NUCLEAR PLANT OPERATING ARRANGEMENTS\nIn September 1992, GPC filed applications with the Nuclear Regulatory Commission (the \"NRC\") to add SONOPCO to the operating license of each unit of Plants Hatch and Vogtle and designate SONOPCO as the operator. The application is currently pending before the Atomic Safety and Licensing Board. SONOPCO, a subsidiary of The Southern Company specializing in nuclear services, currently provides certain operating, maintenance, and other services to GPC in accordance with the Amended and Restated Nuclear Managing Board Agreement (the \"Amended and Restated NMBA\") and the agreements referenced in the Amended and Restated NMBA. The co-owners have agreed to a Nuclear Operating Agreement between GPC and SONOPCO, which will be entered into in the event the NRC approves the application. (See \"CO-OWNERS OF THE PLANTS AND THE PLANT AND TRANSMISSION AGREEMENTS--The Plant Agreements--HATCH, WANSLEY, VOGTLE AND SCHERER\".)\nPOWER SALES TO AND PURCHASES FROM GPC\nA significant portion of Oglethorpe's sales are made to GPC and a significant portion of Oglethorpe's purchased power is obtained from GPC. The following table sets forth a summary of Oglethorpe's electric purchases from and sales to GPC and all other utilities as a group:\nThe sales to GPC are made under the GPC Sell-back (as herein defined) and the Coordination Services Agreement (the \"CSA\"). The purchases from GPC are made under the Block Power Sale Agreement (the \"BPSA\") and the CSA.\nGPC SELL-BACK\nPursuant to the contractual arrangements with GPC, Oglethorpe has an obligation to sell to GPC, and GPC has an obligation to buy from Oglethorpe, commencing with the commercial operation of each co-owned unit (other than Rocky Mountain) and extending for various periods, a declining percentage of Oglethorpe's entitlement to the capacity and energy of such unit (the \"GPC Sell-back\"). The GPC Sell-back has expired in accordance with its terms for Plants Wansley, Hatch and Scherer Units No. 1 and No. 2 and continues to decline for Plant Vogtle. The GPC Sell-back will expire for Unit No. 1 of Plant Vogtle at the end of May 1994 and for Unit No. 2 of Plant Vogtle at the end of May 1995. For 1993, the GPC Sell-back represented 6% of total energy sales by Oglethorpe. Capacity and energy revenues from the GPC Sell-back represented 10% of Oglethorpe's total revenues in 1993.\nAs GPC's entitlement to capacity and energy under the GPC Sell-back has decreased and continues to decrease, Oglethorpe's increased entitlement to the output of each unit has been and will continue to be used to serve its\nown requirements. The increased costs thereof will be recovered through Member rates and through off-system sales transactions. The historical ability of Oglethorpe to sell power from new units to GPC under the GPC Sell-back while at the same time purchasing power from GPC under lower-cost arrangements has enabled Oglethorpe to moderate the effects of the higher costs associated with new generating units on Oglethorpe's costs of service, and therefore on the rates charged the Members. (See \"Other Power Purchases\" herein, and \"CO-OWNERS OF THE PLANTS AND THE PLANT AND TRANSMISSION AGREEMENTS--The Plant Agreements-- HATCH, WANSLEY, VOGTLE AND SCHERER\" and Note 1 of Notes to Financial Statements in Item 8.)\nThe following table sets forth the contractual schedule for the fractional portion of capacity and energy retained by GPC for the units for which GPC is currently making GPC Sell-back payments:\nPOWER PURCHASE ARRANGEMENTS\nOglethorpe purchases 1,250 MW of capacity and associated energy from GPC on a take-or-pay basis under the BPSA. The contract expires December 31, 2001. The BPSA, along with the Revised and Restated Integrated Transmission System Agreements (the \"ITSA\") and the CSA, were entered into in 1990 and made effective in 1991 as part of a comprehensive restructuring of the way Oglethorpe plans for and meets the Members' power requirements. These agreements have improved Oglethorpe's ability to buy and sell power and transmission services in the bulk power markets.\nThe capacity purchases under the BPSA are from six Component Blocks (as defined in the BPSA), composed of four Component Blocks of 250 MW each (coal-fired units) and two Component Blocks of 125 MW each (combustion turbine units). Although Oglethorpe may not increase its purchases under the BPSA, it may reduce its purchases by eliminating one or more Component Blocks upon written notice to GPC. Oglethorpe may reduce up to 250 MW with two years' notice, above 250 to 500 MW with four years' notice, and more than 500 MW with seven years' notice. Oglethorpe is entitled to extend the purchase of one or more Component Blocks one additional year at a time under the same notice conditions. The capacity in one or more Component Blocks may, however, be less than 250 MW, as the result of scheduled retirement of units or retirements due to force majeure events. All units in the combustion turbine Component Blocks are scheduled to be retired by 2003.\nUnder the CSA, Oglethorpe schedules and directs GPC to dispatch and coordinate power from all of Oglethorpe's generation and purchased power resources through December 31, 1999. The CSA requires Oglethorpe to give GPC one hour's notice in order to schedule any off-system transactions, which will limit Oglethorpe's ability to compete with GPC for short-term energy transactions requiring less than one hour's notice. Oglethorpe may elect to establish its own control area and terminate regulation services under the CSA upon one year's notice to GPC. Upon such termination, the parties will, if necessary, negotiate new service schedules and applicable rates. In order to optimize its use of coordination services, Oglethorpe is currently installing the equipment that would be necessary to operate its own control area.\nFor a further discussion of the new power supply arrangements, see \"Other Power Purchases\", \"Future Power Resources\", and \"Transmission and Other Power System Arrangements\" herein, and \"CO-OWNERS OF THE PLANTS AND THE PLANT AND TRANSMISSION AGREEMENTS--The Plant Agreements--HATCH, WANSLEY, VOGTLE AND SCHERER\".\nOTHER POWER PURCHASES\nOglethorpe has entered into power purchase contracts with Entergy Power, Inc. (\"EPI\") and Big Rivers Electric Corporation (\"Big Rivers\"), each for the purchase of 100 MW, extending through June and July 2002, respectively. The EPI contract is subject to the approval of REA. The availability of capacity under the EPI contract is dependent on the availability of two specific generating units available to EPI. The Tennessee Valley Authority (\"TVA\") provides the transmission service to deliver the power from the Big Rivers electric system to the ITS. TVA and Southern Company Services, as agent for Alabama Power Company and Mississippi Power Company, provide the transmission service necessary to deliver the power from EPI to the ITS. (See \"Transmission and Other Power System Arrangements\" herein and Note 10 of the Financial Statements in Item 8.)\nIn addition to the purchases from GPC, Big Rivers and EPI, Oglethorpe also purchases small amounts of capacity and energy from \"qualifying facilities\" under the Public Utility Regulatory Policies Act of 1978 (\"PURPA\"). Under a waiver order from the Federal Energy Regulatory Commission (\"FERC\"), Oglethorpe will make all purchases the Members would have otherwise been required to make under PURPA and Oglethorpe was relieved of its obligation to sell certain services to \"qualifying facilities\" so long as the Members make those sales. Oglethorpe provides the Members with the necessary services to fulfill these sale obligations. Purchases by Oglethorpe from such qualifying facilities provided 0.4% of Oglethorpe's energy requirements for the Members in 1993.\nFUTURE POWER RESOURCES\nOglethorpe uses an integrated resources planning process to study regularly the need for and feasibility of adding additional generation facilities. This planning process also considers demand-side management options that could be implemented by the Members as well as off-system sales of capacity and energy to optimize the use of Oglethorpe's resources. Oglethorpe's current resources (both owned or leased generation and purchased power) consist predominately of resources that can be best used in base-load operation. As a result, all of Oglethorpe's currently planned resource additions are for peaking capacity. To further optimize the use of its resources, Oglethorpe is seeking to sell certain amounts of base capacity and associated energy and to replace it with the acquisition of peaking capacity when necessary (see \"Future Long-Term Power Sales\" herein).\nROCKY MOUNTAIN\nRocky Mountain, which is currently under construction by Oglethorpe, is a pumped storage hydroelectric facility with no conventional hydroelectric capability. The facility is designed to consist of three units with a combined nameplate rating of 847.8 MW at maximum head and a FERC-licensed capacity of 760 MW at minimum head. Under optimal operations, the maximum output of the plant will decline steadily over a period of approximately eight hours as the upper reservoir is emptied.\nIn 1988, Oglethorpe acquired from GPC an undivided ownership interest in Rocky Mountain. Under the Rocky Mountain ownership arrangement, Oglethorpe, as agent, is responsible for the design, construction and operation of Rocky Mountain.\nThe license issued by FERC for Rocky Mountain expires in 2027. Among other conditions, the license requires that construction be completed by June 1, 1996. As of February 28, 1994, Rocky Mountain was approximately 92% complete. Rocky Mountain is currently scheduled to begin commercial operation in early 1995. Construction at Rocky Mountain is currently on schedule and under budget.\nUnder the Ownership Participation Agreement (as hereinafter defined), GPC has not been required to expend any funds for construction of Rocky Mountain since December 15, 1988, and is not required to make any additional contributions. Oglethorpe is required to finance and complete Rocky Mountain. (See \"Liquidity and Capital Resources\" in Item 7.) Each party's undivided interest in Rocky Mountain is equal to the proportion that its respective investment bears to the total investment in Rocky Mountain (excluding each party's cost of funds and ad valorem taxes). (See \"CO-OWNERS OF THE PLANTS AND THE PLANT AND TRANSMISSION AGREEMENTS--The Plant\nAgreements--ROCKY MOUNTAIN\".) As of December 31, 1993, Oglethorpe's ownership interest in Rocky Mountain was approximately 70%. Based on current arrangements, Oglethorpe's ultimate ownership interest in Rocky Mountain is estimated to be approximately 75%, with GPC owning the remaining 25%.\nOglethorpe, GPC and certain third parties have had preliminary discussions regarding alternatives by which Oglethorpe may acquire the output of GPC's remaining interest in Rocky Mountain. Options being discussed include a long-term lease or power purchase arrangement with a third party which would purchase GPC's interest or a purchase of such interest directly by Oglethorpe. The nameplate rating of GPC's ultimate ownership interest is estimated to be approximately 212 MW, and if any such transaction is consummated, such output would satisfy a portion of Oglethorpe's long-term capacity needs. The outcome of these discussions cannot be determined at this time.\nHARTWELL PURCHASE\nIn 1992, Oglethorpe entered into a contract for the purchase of approximately 300 MW of capacity with Hartwell Energy Limited Partnership (\"Hartwell\"), a partnership owned 50% by Destec Energy, Inc. and 50% by American National Power, Inc., a subsidiary of National Power, PLC. The contract has a term of 25 years, commencing upon commercial operation, which by contract is scheduled to be no later than June 1994. Under the contract, Hartwell is constructing two 150 MW gas-fired turbine generating units on a site near Hartwell, Georgia. Oglethorpe intends to use the units for peaking capacity but has the right to dispatch the units fully. If Hartwell misses any of a specified list of project milestones, Oglethorpe may terminate the contract and, if it so chooses, purchase the project at fair market value. Hartwell has provided an irrevocable letter of credit payable to Oglethorpe in the amount of $10,360,000, which can be drawn upon if the project is not in service by the scheduled date or as liquidated damages in case of a default by Hartwell. Hartwell has advised Oglethorpe that it expects to begin deliveries of power to Oglethorpe prior to June 1994.\nOTHER FUTURE RESOURCES\nIn its current integrated resource plan, Oglethorpe has identified a potential need for additional peaking capacity in the late 1990s. In November 1993, Oglethorpe issued a Request for Proposals for the purchase of up to 600 MW of long-term peaking capacity to be available by June 1, 1999. Proposals were due March 29, 1994. Oglethorpe has reserved the right to reject any and all bids, and should it do so, Oglethorpe may construct that capacity itself. Oglethorpe has also agreed to purchase from Florida Power Corporation 50 MW of peaking capacity during the summer of 1997 and 275 MW of peaking capacity during the summer of 1998. This purchase is subject to regulatory approval.\nTRANSMISSION AND OTHER POWER SYSTEM ARRANGEMENTS\nAs of February 28, 1994, Oglethorpe owned approximately 2,186 miles of transmission line and 404 substations of various voltages. Oglethorpe provides power and energy to the Members through the ITS consisting of transmission system facilities owned by Oglethorpe, GPC, MEAG and Dalton. As a result of its participation in the ITS, Oglethorpe is entitled to use any of the transmission facilities included in the system, regardless of ownership. Oglethorpe's rights and obligations with respect to the system are governed by the ITSA. (See \"Power Sales to and Purchases from GPC--POWER PURCHASE ARRANGEMENTS\" herein and \"CO-OWNERS OF THE PLANTS AND THE PLANT AND TRANSMISSION AGREEMENTS--Agreements Relating to Integrated Transmission System\".)\nIn addition to the interconnections available to Oglethorpe through the ITS, Oglethorpe has interconnection, interchange, transmission and\/or short-term capacity and energy purchase or sale agreements with Alabama Electric Cooperative, Cajun Electric Power Cooperative, Big Rivers, Seminole Electric Cooperative, Entergy Services (as agent for the Entergy operating companies), TVA, Florida Power Corporation, Jacksonville Electric Authority, Tampa Electric Company, Louisville Gas & Electric Company, Florida Power & Light Company, SEPA, South Carolina Electric & Gas (subject to approval by FERC), South Carolina Public Service Authority, Arkansas Electric Cooperative Corporation and East Kentucky Power Cooperative. The agreements provide variously for the purchase and\/or sale of capacity and energy and\/or for transmission service. Implementation of such contracts and other off-system transactions are accomplished by the CSA (see \"Power Sales to and Purchases from GPC--POWER PURCHASE ARRANGEMENTS\" herein).\nIn addition, Oglethorpe has sold to GPC a portion of its entitlement to the interface capability between the ITS and the Florida electric system through May 1994. Oglethorpe has purchased from GPC sufficient entitlement to the interface between the Integrated Transmission System and TVA to implement the purchases from Big Rivers and EPI. Oglethorpe regularly buys and sells power in the short-term bulk power market.\nFUTURE LONG-TERM POWER SALES\nOglethorpe has signed a Letter of Intent with Alabama Electric Cooperative for the sale of 100 MW of base capacity beginning June 1, 1998, and extending through December 31, 2005. This arrangement is subject to the approval of a definitive agreement by the Boards of Directors of each party. The agreement would also be subject to approval by REA. No assurances can be given that such definitive agreement will be consummated. Oglethorpe has also submitted bids to various formal and informal solicitations for capacity sales. Whether any such bid will be successful is uncertain.\nENVIRONMENTAL AND OTHER REGULATIONS\nGENERAL\nAs is typical in the utility industry, Oglethorpe is subject to Federal, State and local air and water quality requirements which, among other things, regulate emissions of particulates, sulfur dioxide and nitrogen oxide into the air and discharges of pollutants, including heat, into waters of the United States. Oglethorpe is also subject to Federal, State and local waste disposal requirements which regulate the manner of transportation, storage and disposal of solid and other waste. In general, environmental requirements are becoming increasingly stringent, and further or new requirements may substantially increase the cost of electric service by requiring changes in the design or operation of existing facilities as well as changes or delays in the location, design, construction or operation of new facilities. Failure to comply with such requirements could result in the imposition of civil and criminal penalties as well as the complete shutdown of individual generating units not in compliance. There is no assurance that the units in operation or under construction will always remain subject to the regulations currently in effect or will always be in compliance with future regulations.\nCompliance with environmental standards or deadlines will continue to be reflected in Oglethorpe's capital and operating costs. Oglethorpe's direct capital costs to achieve compliance with air and water quality control facilities were approximately $6.5 million in 1993 and are expected to be approximately $3.1 million in 1994, $4.1 million in 1995 and $8.6 million in 1996.\nCLEAN AIR ACT\nThe Clean Air Act seeks to improve the ambient air quality throughout the United States by the year 2000 and beyond. The acid rain provisions of Title IV require the reduction of sulfur dioxide and nitrogen oxide emissions from affected units, including coal-fired electric power facilities. The sulfur dioxide reductions required by Title IV will be achieved in two phases. Phase I addresses specific generating units named in the Clean Air Act. Both units of Plant Wansley are \"affected units\" under Phase I. Scherer Units No. 1 and No. 2 are not \"affected units\" under Phase I but are affected units under Phase II. In Phase II, the total U.S. emissions of sulfur dioxide will be capped at 8.9 million tons by the year 2000, using a \"tradeable allowance\" plan. Final Phase II sulfur dioxide allocations have been published by Environmental Protection Agency (\"EPA\") regulations. Compliance with the Clean Air Act will require expenditures for monitoring, annual permit fees, and in some instances may involve increased operating or maintenance expenses or capital expenditures for pollution control and continuous monitoring equipment.\nCapital improvements, of which Oglethorpe's share is approximately $6.4 million, are in progress at Plant Wansley. Scheduled to be completed in 1994, these improvements are designed to bring the plant into compliance with anticipated requirements for both Phase I and Phase II. Approximately $500,000 in capital improvements, to be completed in 1994, will be made at Plant Scherer. The estimated cost of additional improvements at Plant Wansley and Plant Scherer are\ndependent upon the chosen compliance plan and may be affected by future plan amendments and future regulation. In addition, the final capital cost of improvements and any effect on operating costs will be determined by the compliance plan as finally implemented and any applicable regulatory changes.\nTitle I of the Clean Air Act requires the State of Georgia to conduct specific studies and establish new rules regulating sources of nitrogen oxide and volatile organic compounds. The new rules must be promulgated by November 1994, with attainment demonstrated by November 1999. Metropolitan Atlanta is classified as a \"serious non-attainment area\" with regard to the ozone ambient air quality standards. Plant Wansley is near although not in this non-attainment area. The results of these studies and new rules could require nitrogen oxide controls more stringent than those required for Title IV compliance. The Clean Air Act also requires that several studies be conducted regarding the health effects of power plant emissions of certain hazardous air pollutants. The studies will be used in making decisions on whether additional controls of these pollutants are necessary. The effect of any of these potential regulatory changes under Title I, including new rules under the amended provisions, cannot now be predicted.\nThe Clean Air Act requires the EPA to review all National Ambient Air Quality Standards (\"NAAQS\") periodically, revising such standards as necessary. EPA continues to evaluate the need for a new short-term standard for sulfur oxides (measured as sulfur dioxide). Preliminary results from an EPA study indicate that a new short-term NAAQS for sulfur dioxide might require numerous power plants to install emission controls, perhaps in addition to any required under Title IV of the Clean Air Act. These controls could result in substantial costs to Oglethorpe. EPA is also evaluating the need to revise the NAAQS for nitrogen dioxide and will be updating the criteria document used in its recent decision not to revise the NAAQS for ozone. EPA is not currently formally revising the particulate matter NAAQS but is gathering information which may be used in a revision. The impact of any change in the ozone, sulfur dioxide, nitrogen dioxide or particulate matter NAAQS cannot now be determined because the effect of any change would depend in part on the final ambient standards.\nAlthough Oglethorpe's management is currently unable to determine the overall effect that compliance with requirements under the Clean Air Act will have on its operations, it does not believe that any required increases in capital or operating expenses would have a material effect on its results of operations or financial condition.\nCompliance with requirements under the Clean Air Act may also require increased capital or operating expenses on the part of GPC. Any increases in GPC's capital or operating expenses may cause an increase in the cost of power purchased from GPC. (See \"Power Sales to and Purchases from GPC--POWER PURCHASE ARRANGEMENTS\" herein.)\nCLEAN WATER ACT\nOglethorpe is subject to provisions of the Clean Water Act, as amended. As a result of the 1987 Amendments to the Clean Water Act, the State of Georgia has amended its State Water Quality Standards to make them more stringent. These amendments will cause an increase in Oglethorpe's cost to comply. These costs include capital expenditures for improvements at Plant Scherer to comply with Georgia's new clean water regulations covering waste water discharge. Oglethorpe's share of these improvements, completed in early 1994, was approximately $2 million.\nCongress is considering reauthorizing the Clean Water Act. If that occurs, Oglethorpe's operations could be affected. However, the full impact of any reauthorization cannot now be determined and will depend on the specific changes to the statute, as well as to any implementing state or federal regulations that might be promulgated.\nNUCLEAR REGULATION\nOglethorpe is subject to the provisions of the Atomic Energy Act of 1954, as amended (the \"Atomic Energy Act\"), which vests jurisdiction in the NRC over the construction and operation of nuclear reactors, particularly with regard to certain public health, safety and antitrust matters. The National Environmental Policy Act has been construed to expand the jurisdiction of the NRC to consider the environmental impact of a facility licensed under the Atomic Energy Act. Plants Hatch and Vogtle are being operated under licenses issued by the NRC. All aspects of the operation and maintenance of nuclear power plants are regulated by the NRC. From time to time, new NRC regulations require changes in the design, operation and maintenance of existing nuclear reactors. Operating licenses issued by the NRC are\nsubject to revocation, suspension or modification, and the operation of a nuclear unit may be suspended if the NRC determines that the public interest, health or safety so requires. (See \"Proposed Changes to Nuclear Plant Operating Arrangements\" herein.)\nPursuant to the Nuclear Waste Policy Act of 1982, as amended, the Federal government has the regulatory responsibility for the final disposition of commercially produced high-level radioactive waste materials, including spent nuclear fuel. Such Act requires the owner of nuclear facilities to enter into disposal contracts with DOE for such material. These contracts require each such owner to pay a fee which is currently one dollar per MWh for the net electricity generated and sold by each of its reactors. (See \"Fuel Supply\" herein.)\nFor information concerning nuclear insurance, see Note 9 of Notes to Financial Statements in Item 8. For information regarding NRC's regulation relating to decommissioning of nuclear facilities and regarding DOE's assessments pursuant to the Energy Policy Act for decontamination and decommissioning of nuclear fuel enrichment facilities, see Note 1 of Notes to Financial Statements in Item 8.\nOTHER ENVIRONMENTAL REGULATION\nOglethorpe is subject to other environmental statutes including, but not limited to, the Toxic Substances Control Act, the Resource Conservation & Recovery Act, the Endangered Species Act, the Comprehensive Environmental Response, Compensation and Liability Act, and the Emergency Planning and Community Right to Know Act, and to the regulations implementing these statutes. Oglethorpe does not believe that compliance with these statutes and regulations will have a material impact on its operations. Changes to any of these laws could affect many areas of Oglethorpe's operations. Furthermore, compliance with new environmental legislation could have a significant impact on Oglethorpe. Such impacts cannot be fully determined at this time, however, and would depend in part on any such legislation and the development of implementing regulations.\nThe scientific community, regulatory agencies and the electric utility industry are examining the issues of global warming and the possible health effects of electric and magnetic fields. While no definitive scientific conclusions have been reached regarding these issues, it is possible that new laws or regulations pertaining to these matters could increase the capital and operating costs of electric utilities, including Oglethorpe or entities from which Oglethorpe purchases power.\nENERGY POLICY ACT\nThe Energy Policy Act creates a new class of utilities called Exempt Wholesale Generators (\"EWGs\"), which are exempt from certain restrictions otherwise imposed by the Public Utility Holding Company Act. The effect of this exemption is to facilitate the development of independent third-party generators potentially available to satisfy utilities' needs for increased power supplies. (See \"Future Power Resources--OTHER FUTURE RESOURCES\" herein.) Unlike purchases from qualifying facilities under PURPA (see \"Other Power Purchases\" herein), however, utilities have no statutory obligation to purchase power from EWGs. Furthermore, EWGs are precluded from making direct sales to retail electricity customers.\nThe Energy Policy Act also broadens the authority of FERC to require a utility to transmit power to or on behalf of other participants in the electric utility industry, including EWGs and qualifying facilities, but FERC is precluded from requiring a utility to transmit power from another entity directly to a retail customer.\nCO-OWNERS OF THE PLANTS AND THE PLANT AND TRANSMISSION AGREEMENTS\nCO-OWNERS OF THE PLANTS\nPlants Hatch, Vogtle, Wansley and Scherer Units No. 1 and No. 2 are co-owned by Oglethorpe, GPC, MEAG and Dalton, and Rocky Mountain is co-owned by Oglethorpe and GPC. Each such co-owner owns, and Oglethorpe owns or leases, undivided interests in the amounts shown in the following table (which excludes the Plant Wansley combustion turbine). GPC is the construction and operating agent for each of these plants, except for Rocky Mountain for which Oglethorpe is the construction and operating agent. (See \"The Plant Agreements\" herein.)\nGEORGIA POWER COMPANY\nGPC is a wholly owned subsidiary of The Southern Company, a registered holding company under the Public Utility Holding Company Act, and is engaged primarily in the generation and purchase of electric energy and the transmission, distribution and sale of such energy within the State of Georgia at retail in over 600 communities (including Athens, Atlanta, Augusta, Columbus, Macon, Rome and Valdosta), as well as in rural areas, and at wholesale to Oglethorpe, MEAG and three municipalities. GPC is the largest supplier of electric energy in the State of Georgia. (See \"OGLETHORPE POWER CORPORATION-- Relationship with GPC\".)\nGPC is subject to the informational requirements of the Securities Exchange Act of 1934, as amended, and, in accordance therewith, files reports and other information with the Securities and Exchange Commission (the \"Commission\"). Copies of this material can be obtained at prescribed rates from the Commission's Public Reference Section at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549. Certain securities of GPC are listed on the New York Stock Exchange, and reports and other information concerning GPC can be inspected at the office of such Exchange.\nMUNICIPAL ELECTRIC AUTHORITY OF GEORGIA\nMEAG, an instrumentality of the State of Georgia, was created for the purpose of providing electric capacity and energy to those political subdivisions of the State of Georgia that owned and operated electric distribution systems at that time. MEAG has entered into power sales contracts with each of 47 cities and one county in the State of Georgia. Such political subdivisions, located in 39 of the State's 159 counties, collectively serve approximately 268,000 electric customers.\nCITY OF DALTON, GEORGIA\nThe City of Dalton, located in northwest Georgia, supplies electric capacity and energy to consumers in Dalton, and presently serves more than 10,000 residential, commercial and industrial customers.\nTHE PLANT AGREEMENTS\nHATCH, WANSLEY, VOGTLE AND SCHERER\nOglethorpe's rights and obligations with respect to Plants Hatch, Wansley, Vogtle and Scherer are contained in a number of contracts between Oglethorpe and GPC and, in some instances, MEAG and Dalton. Oglethorpe is a party to four Purchase and Ownership Participation Agreements (\"Ownership Agreements\") under which it acquired from GPC a 30% undivided interest in each of Plants Hatch, Wansley and Vogtle, a 60% undivided interest in Scherer Units No. 1 and No. 2 and a 30% undivided interest in those facilities at Plant Scherer intended to be used in common by Scherer Units No. 1, No. 2, No. 3 and No. 4 (the \"Scherer Common Facilities\"). Oglethorpe has also entered into four Operating Agreements (\"Operating Agreements\") relating to the operation and maintenance of Plants Hatch, Wansley and Vogtle and Scherer, respectively. The Operating Agreements and Ownership Agreements relating to Plants Hatch and Wansley are two-party agreements between Oglethorpe and GPC. The other Operating Agreements and Ownership Agreements are agreements among Oglethorpe, GPC, MEAG and Dalton. The parties to each Ownership Agreement and each Operating Agreement are referred to as \"Participants\" with respect to each such agreement.\nIn 1985, in four separate transactions, Oglethorpe sold its entire 60% undivided ownership interest in Scherer Unit No. 2 to four separate owner trusts established by four different institutional investors. (See Note 4 of Notes to Financial Statements in Item 8.) Oglethorpe retained all of its rights and obligations as a Participant under the Ownership and Operating Agreements relating to Scherer Unit No. 2 for the term of the leases. (In the following discussion, references to Participants \"owning\" a specified percentage of interests include Oglethorpe's rights as a deemed owner with respect to its leased interests in Scherer Unit No. 2.)\nThe Ownership Agreements appoint GPC as agent with sole authority and responsibility for, among other things, the planning, licensing, design, construction, renewal, addition, modification and disposal of Plants Hatch, Vogtle, Wansley and Scherer Units No. 1 and No. 2 and the Scherer Common Facilities. Under the Ownership Agreements, Oglethorpe is obligated to pay a percentage of capital costs of the respective plants, as incurred, equal to the percentage interest which it owns or leases at each plant. GPC has responsibility for budgeting capital expenditures subject to, in the case of Scherer Units No. 1 and No. 2, certain limited rights of the Participants to disapprove capital budgets proposed by GPC and to substitute alternative capital budgets.\nEach Operating Agreement gives GPC, as agent, sole authority and responsibility for the management, control, maintenance, operation, scheduling and dispatching of the plant to which it relates. However, as provided in the recent amendments to the Plant Scherer Ownership and Operating Agreements, Oglethorpe has elected to dispatch separately its ownership share of Scherer Units No. 1 and No. 2. (See \"THE POWER SUPPLY SYSTEM--Fuel Supply\".) In 1990, the co-owners of Plants Hatch and Vogtle entered into the NMBA which amended the Plant Hatch and Plant Vogtle Ownership and Operating agreements, primarily with respect to GPC's reporting requirements, but did not alter GPC's role as agent with respect to the nuclear plants. In 1993, the co-owners entered into the Amended and Restated NMBA which provides for a managing board (the \"Nuclear Managing Board\") to coordinate the implementation and administration of the Plant Hatch and Plant Vogtle Ownership and Operating Agreements and provides for increased rights for the co-owners regarding certain decisions and allowed GPC to contract with a third party for the operation of the nuclear units. In connection with the recent amendments to the Plant Scherer Ownership and Operating Agreements, the co-owners of Plant Scherer entered into the Plant Scherer Managing Board Agreement which provides for a managing board (the \"Plant Scherer Managing Board\") to coordinate the implementation and administration of the Plant Scherer Ownership and Operating Agreements and provides for increased rights for the co-owners regarding certain decisions, but does not alter GPC's role as agent with respect to Plant Scherer.\nThe Operating Agreements provide that Oglethorpe is entitled to a percentage of the net capacity and net energy output of each plant or unit equal to its percentage undivided interest owned or leased in such plant or unit, subject to its obligation to sell capacity and energy to GPC as described below. Except as otherwise provided, each party is responsible for a percentage of Operating Costs (as defined in the Operating Agreements) and fuel costs of each plant or unit equal to the percentage of its undivided interest which is owned or leased in such plant or unit. For Scherer Units No. 1 and No. 2, each party will be responsible for variable Operating Costs in proportion to the net energy output for its ownership interest, while responsibility for fixed Operating Costs will continue to be equal to the percentage undivided ownership interest which is owned or leased in such unit. GPC is required to furnish budgets for Operating Costs, fuel plans and scheduled maintenance plans subject to, in the case of Scherer Units No. 1 and No. 2, certain limited rights of the Participants to disapprove such budgets proposed by GPC and to substitute alternative budgets. (See \"THE POWER SUPPLY SYSTEM--Proposed Changes to Nuclear Plant Operating Arrangements\".)\nDuring the first seven years of Commercial Operation (as defined in the Operating Agreement for Plant Vogtle) of Plant Vogtle, GPC is entitled to a declining percentage of Oglethorpe's capacity and energy for all or a portion of each contract year ending May 31. (See \"THE POWER SUPPLY SYSTEM--Power Sales to and Purchases from GPC--GPC SELL-BACK\" and Note 1 of the Financial Statements in Item 8.) Regardless of the amount of capacity available, GPC is obligated to pay Oglethorpe monthly for the capacity of each unit to which it is entitled, if any, an amount derived by a formula set forth in the Operating Agreement based upon an average of GPC's annual fixed costs and Oglethorpe's annual fixed costs with respect to each unit. In addition, GPC is responsible for the same percentage of Oglethorpe's share of the Operating Costs and fuel-related costs incurred.\nThe Ownership Agreements and Operating Agreements provide that, should a Participant fail to make any payment when due, among other things, such nonpaying Participant's rights to output of capacity and energy would be suspended.\nTERMS. The Operating Agreement for Plant Hatch will remain in effect with respect to Hatch Units No. 1 and No. 2 until 2009 and 2012, respectively. The Operating Agreement for Plant Vogtle will remain in effect with respect to each unit at Plant Vogtle until 2018. The Operating Agreement for Plant Wansley will remain in effect with respect to Wansley Units No. 1 and No. 2 until 2016 and 2018, respectively. The Operating Agreement for Scherer Units No. 1 and No. 2 will remain in effect with respect to Scherer Units No. 1 and No. 2 until 2022 and 2024, respectively. Upon termination of each Operating Agreement, GPC will retain such powers as are necessary in connection with the disposition of the property of the applicable plant, and the rights and obligations of the parties shall continue with respect to actions and expenses taken or incurred in connection with such disposition.\nROCKY MOUNTAIN\nOglethorpe's rights and obligations with respect to Rocky Mountain are contained in several contracts between Oglethorpe and GPC, the co-owners of Rocky Mountain. Pursuant to Rocky Mountain Pumped Storage Hydroelectric Ownership Participation Agreement, by and between Oglethorpe and GPC (the \"Ownership Participation Agreement\"), on December 15, 1988, Oglethorpe acquired a 3% undivided interest in Rocky Mountain, together with a future interest in the remaining 97% undivided interest. In connection with this acquisition, Oglethorpe and GPC also entered into the Rocky Mountain Pumped Storage Hydroelectric Project Operating Agreement (the \"Rocky Mountain Operating Agreement\").\nUnder the Ownership Participation Agreement, Oglethorpe has responsibility for financing and completing the construction of Rocky Mountain. As Oglethorpe expends funds for construction, GPC's ownership interest decreases and Oglethorpe's ownership interest increases. At all times, each party's undivided interest in the project is equal to the proportion that its respective investment bears to the total investment in the project (excluding each party's cost of funds and ad valorem taxes). Except as described below in respect of the exercise by GPC of its option to retain a minimum ownership interest, GPC is not required to expend any funds for construction. GPC's prior investment is determined in \"as-spent\" dollars, while Oglethorpe's investment is discounted to constant 1987 dollars (computed using a semi-annual Handy-Whitman Index).\nThe Ownership Participation Agreement appoints Oglethorpe as agent with sole authority and responsibility for, among other things, the planning, licensing, design, construction, operation, maintenance and disposal of Rocky Mountain. The Ownership Participation Agreement provides that Oglethorpe must use its reasonable best efforts in accordance with Prudent Utility Practices (as defined therein) to have Rocky Mountain in commercial operation by June 1, 1996.\nThe Rocky Mountain Operating Agreement gives Oglethorpe, as agent, sole authority and responsibility for the management, control, maintenance and operation of Rocky Mountain. In general, each co-owner is responsible for payment of its respective ownership share of all Operating Costs and Pumping Energy Costs (as defined in the Rocky Mountain Operating Agreement) as well as costs incurred as the result of any separate schedule or independent dispatch. A co-owner's share of net available capacity and net energy is the same as its respective ownership interest under the Ownership Participation Agreement. GPC will schedule and dispatch Rocky Mountain on a continuous economic dispatch basis, on behalf of itself and Oglethorpe, and will notify Oglethorpe in advance of estimated operating levels, until such time as Oglethorpe may elect to schedule separately its ownership interest. The Rocky Mountain Operating Agreement will terminate on the fortieth anniversary of the Completion Adjustment Date (as defined therein).\nAGREEMENTS RELATING TO THE INTEGRATED TRANSMISSION SYSTEM\nOglethorpe and GPC have entered into the ITSA to provide for the transmission and distribution of electric energy in the State of Georgia, other than in certain counties, and for bulk power transactions, through use of the ITS. The ITS, together with transmission system facilities acquired or constructed by MEAG and Dalton under agreements with GPC referred to below, was established in order to obtain the benefits of a coordinated development of the parties' transmission facilities and to make it unnecessary for any party to construct duplicative facilities. The ITS consists of all transmission facilities, including land, owned by the parties on the date the ITSA became effective and those thereafter acquired, which are located in the State of Georgia other than in the excluded counties and which are used or usable to transmit power of a certain minimum voltage and to transform power of a certain minimum voltage and a certain minimum capacity (the \"Transmission Facilities\"). GPC has entered into agreements with MEAG and Dalton that are substantially similar to the ITSA, and GPC may enter into such agreements with other entities. The ITSA will remain in effect through December 31, 2012 and, if not then terminated by five years' prior written notice by either party, will continue until so terminated.\nThe ITSA is administered by a Joint Committee established by a Joint Committee Agreement, summarized below. Each year, the Joint Committee determines a four-year plan of additions to the Transmission Facilities that will reflect the current and anticipated future transmission requirements of the parties. Oglethorpe and GPC are each required to maintain an original cost investment in the Transmission Facilities in proportion to their respective Peak Loads (as defined in the ITSA).\nOglethorpe and GPC are parties to a Transmission Facilities Operation and Maintenance Contract (the \"Transmission Operation Contract\"), under which GPC provides System Operator Services (as defined in the Transmission Operation Contract) for Oglethorpe. In addition, GPC is required to provide such supervision, operation and maintenance supplies, spare parts, equipment and labor for the operation, maintenance and construction as may be specified by Oglethorpe. GPC is also required to perform certain emergency work under the Transmission Operation Contract. Oglethorpe is permitted, upon notice to GPC, to perform, or contract with others for the performance of, certain services performed by GPC. Absent termination or amendment of the Transmission Operation Contract, however, GPC will continue to perform System Operator Services for Oglethorpe. The term of the Transmission Operation Contract will continue from year to year unless terminated by either party upon four years' notice. Oglethorpe is required to pay its proportionate share of the cost for the services provided by GPC.\nTHE JOINT COMMITTEE AGREEMENT\nOglethorpe, GPC, MEAG and Dalton are parties to a Joint Committee Agreement. In the past, the Joint Committee coordinated the implementation and administration of the various Ownership Agreements and Operating\nAgreements, the various integrated transmission system agreements, and the various integrated transmission system operation and maintenance agreements among the parties. However, the Nuclear Managing Board has assumed such responsibilities for Plants Hatch and Vogtle, the Plant Scherer Managing Board has assumed such responsibilities for Plant Scherer and, if agreed by the co-owners, an operating committee would also assume such responsibilities for Plant Wansley. (See \"The Plant Agreements--HATCH, WANSLEY, VOGTLE AND SCHERER\" herein.) The Joint Committee Agreement also makes allowance for the joint planning of future transmission and generation facilities.\nITEM 2.","section_1A":"","section_1B":"","section_2":"ITEM 2. PROPERTIES\nInformation with respect to Oglethorpe's properties is set forth under the caption \"THE POWER SUPPLY SYSTEM\" included in Item 1 and is incorporated herein by reference.\nITEM 3.","section_3":"ITEM 3. LEGAL PROCEEDINGS\nOglethorpe is a party to various actions and proceedings incident to its normal business. Liability in the event of final adverse determinations in any of these matters is either covered by insurance or, in the opinion of Oglethorpe's management, after consultation with counsel, should not in the aggregate have a material adverse effect on the financial position or results of operations of Oglethorpe.\nITEM 4.","section_4":"ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS\nNot applicable.\nPART II\nITEM 5.","section_5":"ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Not Applicable.\nITEM 6.","section_6":"ITEM 6. SELECTED FINANCIAL DATA - -----------------------------------------------------------------------------\nITEM 7.","section_7":"ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS\nGENERAL\nMARGINS AND PATRONAGE CAPITAL\nOglethorpe operates on a not-for-profit basis and, accordingly, seeks only to generate revenues sufficient to recover its cost of service and to generate margins sufficient to establish reasonable reserves and meet certain financial coverage requirements. Revenues in excess of current period costs in any year are designated in Oglethorpe's statements of revenues and expenses and patronage capital as net margin. Retained net margins are designated on Oglethorpe's balance sheets as patronage capital, which is allocated to each of its 39 retail electric distribution cooperatives (Members) on the basis of its electricity purchases from Oglethorpe. Since its formation in 1974, Oglethorpe has generated a positive net margin in each year and, as of December 31, 1993, had a balance of $290 million in patronage capital.\nPatronage capital constitutes the principal equity of Oglethorpe. As a means of accumulating additional equity, Oglethorpe's Board of Directors amended in 1992 the patronage capital retirement policy for returning margins to the Members to extend the retirement schedule from 13 years to 30 years after the year in which the margins were generated. Pursuant to such policy, no patronage capital would be retired until 2010, at which time the 1979 patronage capital would be returned. Any distributions of patronage capital are subject to the discretion of the Board of Directors and approval by the Rural Electrification Administration (REA).\nOglethorpe's equity ratio (patronage capital and membership fees divided by total capitalization) increased from 5.7% at December 31, 1992 to 6.2% at December 31, 1993.\nRATES AND FINANCIAL COVERAGE REQUIREMENTS\nOglethorpe's policy is to design its rates to generate sufficient revenues to recover its Member cost of service and produce net margins at such levels as Oglethorpe's Board of Directors determines to be consistent with sound financial practice. Rate revisions by Oglethorpe are subject to the approval of the REA and, to date, the REA has not reduced or delayed the effectiveness of any rate increase proposed by Oglethorpe. Oglethorpe has entered into a wholesale power contract with each of its Members that requires rates to be designed to recover all costs as described in such contracts. Oglethorpe's rates include an energy charge that is set annually and adjusted at mid-year to recover actual fuel and variable operations and maintenance costs. Oglethorpe reviews its rates at least annually to ensure that its fixed costs are being adequately recovered and, if necessary, adjusts its rates to meet its net margin goals.\nOglethorpe utilizes a Times Interest Earned Ratio (TIER) as the basis for establishing its annual net margin goal. TIER is determined by dividing the sum of Oglethorpe's net margin plus interest on long-term debt (including interest charged to construction) by Oglethorpe's interest on long-term debt (including interest charged to construction). The REA Mortgage requires Oglethorpe to implement rates that are designed to maintain an annual TIER of not less than 1.05. In addition to the TIER requirement under the REA Mortgage, Oglethorpe is also required under the REA Mortgage to implement rates designed to maintain a Debt Service Coverage Ratio (DSC) of not less than 1.0 and an Annual Debt Service Coverage Ratio (ADSCR) of not less than 1.25. DSC is determined by dividing the sum of Oglethorpe's net margin plus interest on long-term debt (including interest charged to construction) plus depreciation and amortization (excluding amortization of nuclear fuel and debt discount and expense) by Oglethorpe's interest and principal payable on long-term debt (including interest charged to construction). ADSCR is determined by dividing the sum of Oglethorpe's net margin plus interest on long-term debt (excluding interest charged to construction) plus depreciation and amortization (excluding amortization of nuclear fuel and debt discount and expense) by Oglethorpe's interest and principal payable on long-term debt secured under the REA Mortgage (excluding interest charged to construction). Oglethorpe has always met or exceeded the TIER, DSC and ADSCR requirements of the REA Mortgage.\nTIER, DSC and ADSCR for the years 1991 through 1993 were as follows:\nIn 1992, as part of a plan to build additional equity, Oglethorpe's Board of Directors revised its annual net margin goal to be the amount required to produce a TIER of 1.07 in each year through 1995, 1.08 in 1996, 1.09 in 1997 and 1.10 in 1998 and thereafter. Historically, by setting rates to meet the TIER goals established by Oglethorpe's Board, the DSC and ADSCR requirements of the REA Mortgage have always been met or exceeded. Based on Oglethorpe's current financial projections, however, rates based on these levels of TIER may not be sufficient to meet the ADSCR requirement of the REA Mortgage. In that event, rates sufficient to meet the ADSCR requirements would have to be established.\nHISTORICAL FACTORS AFFECTING FINANCIAL PERFORMANCE\nOver the past several years, the most significant factor affecting Oglethorpe's financial performance has been the mechanisms Oglethorpe has utilized to moderate the financial impact of new generating plants. During this period, Oglethorpe's Members absorbed much of the cost of its ownership interests in Plant Vogtle and Scherer Units No. 1 and No. 2.\nThe mechanisms used by Oglethorpe to mitigate the rate impact of absorbing these costs have included both long-term contractual arrangements with Georgia Power Company (GPC) and Board of Directors policies that have resulted in the gradual absorption of costs over several years.\nContractual arrangements with GPC provide that Oglethorpe sell to GPC and GPC purchase from Oglethorpe a declining percentage of Oglethorpe's entitlement to the capacity and energy of certain co-owned generating plants during the initial years of operation of such units (GPC Sell-back). The GPC Sell-back will expire for Plant Vogtle Unit No. 1 as of May 31, 1994, and for Plant Vogtle Unit No. 2 as of May 31, 1995. The GPC Sell-back for Scherer Unit No. 1 expired in May 1991 and for Scherer Unit No. 2, in May 1993. (See Note 1 of Notes to Financial Statements.) The historical ability of Oglethorpe to sell power from new units to GPC under the GPC Sell-back has enabled Oglethorpe to moderate the effects of the higher costs associated with new generating units on Oglethorpe's cost of service and therefore on the rates charged Members. Furthermore, the GPC Sell-back has enabled Oglethorpe to obtain the generating capacity needed to serve anticipated increases in Member loads while minimizing the risks and costs of excess generating capacity.\nPrior to the completion of the first unit of Plant Vogtle in 1987, Oglethorpe's Board of Directors implemented policies that have resulted in the gradual absorption of the costs of Plant Vogtle by the Members. In each of the years 1985 through 1993, Oglethorpe exceeded its net margin goal. The Board adopted resolutions in each of these years requiring that these excess margins be deferred and used to mitigate rate increases associated with Plant Vogtle. In each year beginning with 1989, a portion of these margins has been returned to the Members through billing credits. (See Note 1 of Notes to Financial Statements.)\nFurthermore, during 1986 and 1987, Oglethorpe's rates to its Members included a one mill per kilowatt-hour (kWh) charge (Vogtle Surcharge). The Vogtle Surcharge represented a pre-collection of charges prior to commercial operation of Plant Vogtle the effect of which was to mitigate future rate increases. In addition, two of the Members elected to increase the level of this charge for their systems during this period.\nAs of December 31, 1993, Oglethorpe held a balance of approximately $48 million from deferred margins and the voluntary Vogtle Surcharges to two Members which will be utilized for future rate mitigation. Oglethorpe's Board of Directors and the two Members intend to utilize these amounts as offsets to rates charged during 1994 and 1995. By the end of 1995, all costs associated with Plant Vogtle will be included in Member rates.\nRESULTS OF OPERATIONS\nOPERATING REVENUES\nOglethorpe's operating revenues are derived from sales of electric services to the Members and non-Members. Revenues from Members are collected pursuant to the wholesale power contracts and are a function of the demand for power by the Members' consumers and Oglethorpe's cost of service. Historically, most of Oglethorpe's non-Member revenues have resulted from various plant operating agreements with GPC as discussed below. For the period 1991 through 1993, although total revenues have remained virtually unchanged, the scheduled reduction of the GPC Sell-back has resulted in the planned decrease of non- Member revenues from GPC of almost $130 million. As expected, the capacity and energy no longer being sold to GPC have been used by Oglethorpe to meet increased Member requirements. In addition to increasing sales to Members, Oglethorpe has increased revenues from energy sales and transmission sales to other utilities in order to mitigate the need to recover from the Members costs which were previously recovered through sales to GPC.\nSALES TO MEMBERS. Revenues from sales to Members increased 10.3% in 1993 compared to 1992, and increased 6.9% in 1992 compared to 1991. These increases reflect two factors: first, higher capacity rates, offset by the pass-through of savings in energy costs (see discussion of savings in fuel costs under \"OPERATING EXPENSES\" herein); and second, increased amounts of energy sold. Concerning the first factor, as non-Member revenues from GPC have declined, Oglethorpe has increased rates to Members to recover the fixed costs which had previously been recovered from GPC through the GPC Sell-back. Since December 28, 1990, Oglethorpe has placed into effect four rate changes, as set forth below:\nOglethorpe was able to implement a rate reduction for 1994 because the anticipated additional revenues to be derived based on the increase in the Members' 1993 peak demand more than offset the reduction in revenues from the GPC Sell-back.\nOglethorpe's wholesale rate to the Members sets forth the manner in which energy costs are to be recovered. Oglethorpe's rate provides that actual energy costs be passed through to the Members such that energy revenues equal energy costs.\nThe following table summarizes the amounts of kilowatt-hours sold to Members during each of the past three years:\nThe net impact of the above capacity and energy rate factors, combined with the spreading of fixed capacity costs over an increasing number of kWh sold each year, have resulted in the following average Member revenues:\nOglethorpe is reducing the need to recover from Members the additional costs resulting from reductions to the GPC Sell-back by increasing revenues from off-system sales and reducing fixed and operating costs.\nIn addition to the impact of reductions in GPC Sell-back revenues, future Member rates will also be affected by such factors as fixed costs relating to the Rocky Mountain Project, a pumped storage hydroelectric facility (Rocky Mountain), the cost of adding to Oglethorpe's existing transmission system, changes in fuel costs, environmental and other governmental regulations applicable to Oglethorpe and its suppliers and the completion in 1995 of the amortization of deferred margins. Oglethorpe's future rates will also be affected by its ability to forecast accurately its future power resource needs and by its ability to obtain and manage its power resources, including its purchases and construction of generating capacity and its procurement of coal.\nSALES TO NON-MEMBERS. Sales of electric services to non-Members are primarily made pursuant to three different types of contractual arrangements with GPC and from off-system sales to other non-Member utilities. The following table summarizes the amounts of non-Member revenues from these sources for the past three years:\nRevenues from sales to non-Members declined in 1993 compared to 1992, and in 1992 compared to 1991. These decreases were primarily attributable to scheduled reductions in plant operating agreement revenues attributable to the GPC Sell-back with respect to Plants Vogtle and Scherer.\nThe second source of non-Member revenues is power supply arrangements with GPC. These revenues are derived, for the most part, from energy sales arising from dispatch situations whereby GPC causes co-owned coal-fired generating resources to be operated when Oglethorpe's system does not require all or part of its contractual entitlement to the generation. These revenues essentially represent reimbursement of costs to Oglethorpe because, under the operating agreements, Oglethorpe is responsible for its share of fuel costs any time a unit operates. The greater amount of such revenues in 1992 compared to 1993 and 1991 was largely attributable to GPC's operational decisions causing a higher level of generation at Plant Scherer in 1992.\nThe third source of non-Member revenues is payments from GPC for use of the Integrated Transmission System (ITS) and related transmission interfaces. GPC compensates Oglethorpe to the extent that Oglethorpe's percentage of investment in the ITS exceeds its percentage use of the system. In such case, Oglethorpe is entitled to income as compensation for the use of its investment by the other ITS participants. In addition, beginning in 1991, GPC purchased the right to use the majority of Oglethorpe's share of the interface capability between the ITS and the Florida electric system through May 1994.\nThe higher amount of transmission agreement revenues in 1992 compared to 1993 and 1991 was partially attributable to the receipt by Oglethorpe in 1992 of a payment of $10.5 million from GPC as a result of adjustments of transmission income for the years 1990 through 1992.\nOther revenues from non-Members increased significantly in 1993 compared to 1992 and 1991. This increase reflects greater revenues from off-system energy sales. Oglethorpe is continuing to seek to make off-system sales to non-Members.\nOPERATING EXPENSES\nOglethorpe's operating expenses increased 9.4% in 1993 compared to 1992 and decreased 5.6% in 1992 compared to 1991. The increase in operating expenses in 1993 compared to 1992 was primarily attributable to higher production expenses, purchased power expenses and taxes other than income taxes. The decrease in operating expenses in 1992 compared to 1991 was primarily due to declines in production expenses, depreciation and amortization, taxes other than income taxes and income taxes.\nGenerally, over the years 1991 through 1993, the Members have received the benefit of declining average fuel costs of Oglethorpe's generating resources through the pass-through of lower energy costs. The average fuel costs of Oglethorpe's nuclear and fossil generating resources for the last three years are as follows:\nMuch of the reduction in average fuel costs was attributable to Oglethorpe's nuclear units. Fuel savings were particularly significant at Plant Vogtle where average fuel costs declined by 29% in 1993 compared to 1991. The decline was primarily due to the lower cost of replacement fuel relative to the cost of the initial core loading of fuel. These initial fuel supplies were purchased well in advance of commercial operation of these units\nand carried a significantly higher amount of capitalized interest than subsequent fuel reloads. Additionally, as a result of purchases of nuclear fuel in the spot market, Oglethorpe's costs for nuclear fuel in the last three years have been favorably impacted.\nThe lower amount of production expenses in 1992 compared to 1993 and 1991 was attributable to a reduced number of nuclear refueling outages in 1992. Two of Oglethorpe's nuclear units underwent planned outages in 1992, as compared to three units in both 1993 and 1991.\nThe increase in 1993 in purchased power expenses was the result of a 22% increase in kWh purchases. This increase was, for the most part, necessitated by the greater energy needs of the Members (see \"OPERATING REVENUES - SALES TO MEMBERS\" herein) and by Oglethorpe's increased off-system energy sales (see \"OPERATING REVENUES - SALES TO NON-MEMBERS\" herein).\nThe decline in power delivery expenses from 1991 through 1993 was due to the lengthening of maintenance cycles, particularly on substation equipment, and to delays in 1993 by GPC, Oglethorpe's primary transmission maintenance contractor, in performing authorized work. Additionally, in 1991 Oglethorpe incurred a transmission charge of $3.8 million resulting from a greater percentage use of the ITS compared to its projected percentage of investment. (This amount was subsequently returned to Oglethorpe in 1992. See discussion of transmission income adjustment in 1992 under \"OPERATING REVENUES - SALES TO NON- MEMBERS\" herein.)\nThe increase in sales, administrative and general expense in 1992 compared to 1991 was primarily attributable to increases in property insurance for co-owned plants, expanded marketing programs, and the expenses associated with one-time payments made to separated employees and to the utilization of consultants in a workforce reduction undertaken in 1992.\nDecreases in depreciation and amortization, income taxes and taxes other than income taxes also contributed to the decrease in total operating expenses in 1992 compared to 1991. These lower expense categories also directly contributed to the substantial amount of margins earned in excess of the 1992 TIER-based goal. (See the discussion below under \"OTHER INCOME\" concerning the disposition of this excess.)\nAs a result of depreciation studies undertaken by GPC as operating agent in the fall of 1991, Oglethorpe implemented lower depreciation rates for all co-owned generating units. The lower rates are primarily due to a plant life extension program undertaken by GPC for the co-owned units.\nProperty taxes, which constitute the majority of taxes other than income taxes, decreased in 1992 as a result of the favorable resolution of Oglethorpe's property tax appeal with the State of Georgia for the years 1985 through 1988. The negotiated settlement of this appeal resulted in a reduction of 1992 property tax expense in the amount of approximately $7.5 million.\nIncome taxes were substantially lower in 1992 compared to 1991 due to several factors, including lower interest income, less gain in 1992 than in 1991 from the sale of debt service reserve fund securities (see \"OTHER INCOME\" below) and increased energy sales to GPC and other utilities. These sales to GPC were $16 million higher in 1992, and sales to other utilities were $3 million higher. (See \"OPERATING REVENUES - SALES TO NON-MEMBERS\" herein.) Oglethorpe deducts both fixed and variable costs from the revenues from these energy sales which generated tax losses resulting in lower taxable income from non-Member sales.\nOTHER INCOME\nInterest income decreased in 1993 and in 1992, as a result of lower average interest rates on investments. In 1992 and 1991, Oglethorpe realized the capital appreciation on securities invested for its debt service reserve funds by selling investments bearing coupon yields which were higher than prevailing market rates. The securities sold in 1991 had been held for a number of years and their average rates were substantially higher than market rates at the time of the sale. The 1992 gain captured only the capital appreciation resulting from declining interest rates during the 12 months following the 1991 sale.\nIn 1993, 1992 and 1991, Oglethorpe's Board of Directors authorized the retention of approximately $5 million, $40 million and $12 million, respectively, in excess of the 1.07 TIER margin requirement as deferred margins. The remaining amounts will be available in 1994 and 1995 to mitigate rate increases. Amortization of deferred margins for 1993 was set by Oglethorpe's Board of Directors at $4 million, significantly less than the amounts utilized in 1992 and 1991. (See Note 1 of Notes to Financial Statements for a discussion of deferred margins and amortization of deferred margins.)\nINTEREST CHARGES\nNet interest charges declined in 1993 compared to 1992, and in 1992 compared to 1991. The decrease in interest on long-term debt and capital leases in 1993 was due, for the most part, to the refinancing efforts discussed under \"LIQUITY AND CAPITAL RESOURCES\" herein. Allowance for debt and equity funds used during construction (AFUDC) increased in 1993 and in 1992 as a result of increased construction activity at Rocky Mountain. The decrease in other interest expense in 1993 was primarily due to higher interest expense in 1992 associated with the settlement of the property tax appeal and the federal income tax case. Additionally, Oglethorpe paid a premium in 1992 in connection with its repricing of Federal Financing Bank (FFB) advances at reduced rates. In order to modify the FFB advances, Oglethorpe paid a premium equal to approximately one year's interest on these repriced advances.\nLIQUIDITY AND CAPITAL RESOURCES\nIn the past, Oglethorpe, like most other G&Ts, has obtained the majority of its long-term financing from REA-guaranteed loans funded by the FFB. Oglethorpe has\nalso obtained a substantial portion of its long-term financing requirements from tax-exempt pollution control bonds (PCBs).\nIn addition, Oglethorpe's operations have consistently provided a sizable contribution to the financing of construction programs, such that internally generated funds have provided interim funding or long-term capital for nuclear fuel reloads, new generation, transmission and general plant facilities, and replacements and additions to existing facilities.\nOglethorpe's investment in electric plant, net of depreciation, was approximately $4.5 billion as of December 31, 1993. Expenditures for property additions during 1993 amounted to approximately $235 million, of which $198 million was provided from operations. These expenditures were primarily for the construction of Rocky Mountain and replacements and additions to generation and transmission facilities.\nAs part of its ongoing capital planning, Oglethorpe forecasts expenditures required for generation and transmission facilities and related capital projects. Actual construction costs may vary from the estimates below because of factors such as changes in business conditions, fluctuating rates of load growth, environmental requirements, design changes and rework required by regulatory bodies, delays in obtaining necessary Federal and other regulatory approvals, construction delays, and cost of capital, equipment, material and labor. The table below indicates Oglethorpe's estimated capital expenditures through 1996, including AFUDC:\nBased on its current construction budget, Oglethorpe anticipates that it will fund all capital expenditures through 1996, other than for Rocky Mountain, from operations.\nIn 1988, Oglethorpe acquired from GPC an undivided ownership interest in Rocky Mountain and assumed responsibility for its construction and operation. As of December 31, 1993, Rocky Mountain was approximately 90% complete and Oglethorpe's investment in the project was $414 million. Oglethorpe is financing its share of Rocky Mountain from the proceeds of an REA-guaranteed loan funded through the FFB. As of December 31, 1993, $248 million had been advanced under this loan and $459 million remained available to be drawn as permanent financing for Rocky Mountain. Oglethorpe intends to finance all direct expenditures and capitalized interest associated with the construction of Rocky Mountain through such FFB loan, and management believes the amounts remaining to be drawn under such loan are more than adequate to complete the project. The obligation to advance funds under this loan, however, is subject to certain conditions, including the requirement that Oglethorpe maintain an annual TIER of at least 1.0 and that the REA shall not have determined that there has occurred any material adverse change in the assets, liabilities, operations or financial condition of Oglethorpe or any circumstances involving the nature or operation of the business of Oglethorpe. In management's opinion, no such material adverse change has occurred. The current schedule anticipates commercial operation in early 1995.\nOglethorpe has a commercial paper program under which it may issue commercial paper not to exceed $355 million outstanding at any one time. The commercial paper may be used as a source of short-term funds and is not designated for any specific purpose. Oglethorpe's commercial paper is backed 100% by a committed line of credit provided by a group of banks for which Trust Company Bank acts as agent. Historically, Oglethorpe has not relied on commercial paper for short-term funding due to the availability of internally generated funds and has never utilized the backup line of credit. Oglethorpe has also arranged one committed and two uncommitted lines of credit to provide additional sources of short-term financing. As of December 31, 1993, Oglethorpe's short-term credit facilities were as follows:\nThe maximum amount that can be outstanding at any one time under the commercial paper program and the lines of credit totals $425 million due to certain restrictions contained in the CFC and Trust Company Bank line of credit agreements. As of December 31, 1993, no commercial paper was outstanding and there was no outstanding balance on any line of credit.\nAs part of a March 1993 PCB refinancing transaction involving two forward interest rate swap agreements, Oglethorpe is obligated to maintain minimum liquidity in an amount equal to 25% of the principal amount of the variable rate refunding bonds issued or to be issued in connection therewith. This minimum liquidity requirement currently equals $81 million and will decrease proportionately as such variable rate refunding bonds are retired. The minimum liquidity must consist of (a) any combination of (i) amounts available under committed lines of credit and commercial paper programs to pay termination payments, if any, due upon early termination of the forward interest rate swap transactions, (ii) cash, (iii) United States government securities, and (iv) accounts receivable due within 30 days, less (b) monetary\nobligations due within 30 days. As of December 31, 1993, Oglethorpe had approximately $467 million of such liquidity available to meet this requirement.\nOglethorpe's scheduled maturities of long-term debt over the next five years total $425 million. Of this amount, $299 million, or seventy percent, relates to the repayment of REA and FFB debt.\nREFINANCING TRANSACTIONS\nOver the past few years, Oglethorpe has implemented a program to reduce its interest costs by refinancing or prepaying a sizable portion of its high- interest PCB and FFB debt. Several transactions were completed in 1993 and early 1994, covering approximately $1.3 billion in existing PCB and FFB debt (See Note 5 of Notes to Financial Statements.) The net result of the 1993 transactions was to reduce the average interest rate on total long-term debt from 8.18% at December 31, 1992 to 7.94% at December 31, 1993. The average interest rate was further reduced to 7.13% as a result of the transactions completed in early 1994.\nIn March 1993, Oglethorpe entered into two forward interest rate swap agreements totaling $322 million to refinance $364 million of existing high- interest PCBs. Through this forward swap transaction, Oglethorpe arranged synthetic fixed rate financing at an average effective rate of 6.15% for $200 million of variable rate refunding bonds which were issued on November 30, 1993 and $122 million of variable rate refunding bonds to be issued in the fall of 1994. Interest savings totaling $9.1 million and an additional $4.3 million will occur during the first full year following each respective issuance.\nIn February 1994, Oglethorpe refunded $205 million of PCBs through an issuance of $195 million of fixed rate refunding bonds. With an effective interest rate of 4.8%, this transaction will generate net interest savings of about $10.5 million during the first full year. Oglethorpe expects to achieve additional interest savings through a $35 million current refunding of PCBs in the fall of 1994.\nIn addition to these refinancings, Oglethorpe has also recently taken certain actions to reduce the interest expense on its FFB debt. In January 1993, Oglethorpe prepaid six FFB advances totaling $75 million with interest rates exceeding 10%. These advances, which had become at least 12 years old, were prepaid with one year's interest premium. The net annual average savings in the first full year are $6.9 million.\nDuring 1993, Oglethorpe pursued refinancing all of its approximately $3 billion in outstanding REA and FFB debt (the REA Indebtedness) through the issuance of bonds in the public market which would have resulted in Oglethorpe exiting the REA program (the REA Refinancing). In January 1994, FFB advised Oglethorpe that the Department of the Treasury would not take certain actions requested to facilitate the REA Refinancing. Oglethorpe continues to believe that an REA Refinancing is in its long-term best interest and will continue to evaluate options to exit the REA program. If the REA Refinancing were to be consummated, it would require, among other things, a substitution of the REA Mortgage with a trust indenture which would secure all of Oglethorpe's first lien indebtedness, regulation of Oglethorpe's rates by the Federal Energy Regulatory Commission, and certain amendments to the wholesale power contracts between Oglethorpe and each of its Members. Oglethorpe's management is unable to give any assurance at this time that Oglethorpe will be able to effect the REA Refinancing, or, if so, on what terms and conditions.\nAlthough Oglethorpe continues to pursue the REA Refinancing, it has taken advantage of an option currently available to reduce the interest expense on its FFB debt. At the beginning of 1994, Oglethorpe had over $1 billion of advances that had been outstanding for more than 12 years under notes to the FFB that were eligible to be modified to reduce their interest rates. In two separate transactions in early 1994, Oglethorpe modified certain FFB notes and thereby reduced the interest rates on approximately $795 million of advances. In connection with such note modification, a premium was paid in an amount equal to one year's interest on the advances of approximately $64 million, which will be expensed over the longest remaining life of the subject advances, which is 22 years. These transactions will generate net interest savings of $18.5 million in the first full year. Oglethorpe may elect to reduce the interest rates on approximately $250 million of additional FFB advances through this note modification process. The timing of such election depends on the magnitude of the interest rate savings that can be achieved.\nOglethorpe is also evaluating and may seek to reduce its interest expense by refinancing certain of its other FFB notes upon payment of a premium as permitted under the recently enacted Section 306C of the Rural Electrification Act. Under 306C, an FFB borrower is able to refinance its outstanding indebtedness at interest rates based on the then current Treasury rates upon payment of a premium. Based on current interest rates and the premium that would be due under Section 306C, Oglethorpe is evaluating refinancing a portion of its FFB indebtedness and financing at least a portion of the premium. Oglethorpe's management has not determined whether Oglethorpe will avail itself of such refinancing option.\nMISCELLANEOUS\nAs with utilities generally, inflation has the effect of increasing the cost of Oglethorpe's operations and construction program. Operating and construction costs have been less affected by inflation over the last few years because rates of inflation have been relatively low.\nThe implementation of recently released pronouncements of the Financial Accounting Standards Board, including Statement No. 115, \"Accounting for Certain Investments in Debt and Equity Securities\" and Statement No. 112, \"Employer's Accounting for Postemployment Benefits\", are not expected to have a material effect on Oglethorpe's results of operations.\nITEM 8.","section_7A":"","section_8":"ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA\nOGLETHORPE POWER CORPORATION\nSTATEMENTS OF REVENUES AND EXPENSES - ------------------------------------------------------------------------------- FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991\nSTATEMENTS OF PATRONAGE CAPITAL - ------------------------------------------------------------------------------- FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991\nBALANCE SHEETS - ------------------------------------------------------------------------------- DECEMBER 31, 1993 AND 1992\nTHE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE BALANCE SHEETS.\nSTATEMENTS OF CAPITALIZATION - ------------------------------------------------------------------------------- DECEMBER 31, 1993 AND 1992\nTHE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.\nSTATEMENTS OF CASH FLOWS - ------------------------------------------------------------------------------- FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991\nTHE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.\nNOTES TO FINANCIAL STATEMENTS - ---------------------------------------------------------------------------- FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991\n1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:\nA. BASIS OF ACCOUNTING\nOglethorpe Power Corporation (Oglethorpe) follows generally accepted accounting principles and the practices prescribed in the Uniform System of Accounts of the Federal Energy Regulatory Commission (FERC) as modified and adopted by the Rural Electrification Administration (REA).\nB. ELECTRIC PLANT\nElectric plant is stated at original cost, which is the cost of the plant when first dedicated to public service, plus the cost of any subsequent additions. Cost includes an allowance for the cost of equity and debt funds used during construction. The cost of equity and debt funds is calculated at the embedded cost of all such funds. The plant acquisition adjustments represent the excess of the cost of the plant to Oglethorpe over the original cost, less accumulated depreciation at the time of acquisition, and are being amortized over a ten-year period.\nMaintenance and repairs of property and replacements and renewals of items determined to be less than units of property are charged to expense. Replacements and renewals of items considered to be units of property are charged to the plant accounts. At the time properties are disposed of, the original cost, plus cost of removal, less salvage of such property, is charged to the accumulated provision for depreciation.\nC. OPERATING REVENUES\nSales to Members consist primarily of electricity sales pursuant to long-term wholesale power contracts which Oglethorpe maintains with each of its 39 retail electric distribution cooperatives (Members). These wholesale power contracts obligate each Member to pay Oglethorpe for capacity and energy furnished in accordance with rates established by Oglethorpe. Energy furnished is determined based on meter readings which are conducted at the end of each month.\nFor the year ended December 31, 1993, revenues from Cobb EMC, one of Oglethorpe's Members, accounted for 10.3% of Oglethorpe's total revenues. Prior to 1993, no individual Member accounted for 10% or more of Oglethorpe's total revenues.\nSales to non-Members consist primarily of capacity and energy sales to Georgia Power Company (GPC) under terms of sell-back agreements entered into when Oglethorpe purchased interests in certain of GPC's generation facilities. Pursuant to these agreements, GPC purchases from Oglethorpe a declining fractional part of the capacity and energy during the first seven to ten years of an applicable generating unit's commercial operation. The portion of Oglethorpe's capacity and energy retained by GPC is shown as follows:\n- ---------------------------------------------------------------------------- Fractional Part of Capacity and Energy Retained by GPC during Contract Year Ended May 31 - ----------------------------------------------------------------------------\nPursuant to these sell-back agreements and to other contractual arrangements with GPC, revenues from GPC accounted for approximately 15%, 24%, and 28% of Oglethorpe's total revenues in 1993, 1992, and 1991, respectively.\nD. DEPRECIATION\nDepreciation is computed on additions when they are placed in service using the composite straight-line method. Annual depreciation rates in effect in 1993, 1992 and 1991 were as follows:\nOglethorpe's portion of the cost of decommissioning co-owned nuclear facilities, based on current price levels and decommissioning promptly after the unit is taken out of service, is estimated at approximately $71,000,000 for Hatch Unit No. 1, $93,000,000 for Hatch Unit No. 2, $79,000,000 for Vogtle Unit No.1 and $99,000,000 for Vogtle Unit No. 2. The depreciation rate for nuclear production includes a factor to provide for such expected cost of decommissioning. Oglethorpe accounts for this provision for decommissioning as depreciation expense with an offsetting credit to a decommissioning reserve. Imputed interest calculated based on current investment rates is applied to the decommissioning reserve balance and charged to interest expense. The estimates for the expected cost of decommissioning and the corresponding decommissioning factor in the depreciation rate are adjusted periodically to reflect changing price levels and technology.\nIn compliance with a Nuclear Regulatory Commission (NRC) regulation, Oglethorpe maintains an external trust fund to provide for a portion of the cost of decommissioning its nuclear facilities. The NRC regulation requires funding levels based on average expected cost to decommission only the radioactive portions of a typical nuclear facility. Investment earnings generated from the external trust fund increase the decommissioning fund and interest income.\nE. NUCLEAR FUEL COST\nThe cost of nuclear fuel, including a provision for the disposal of spent fuel, is being amortized to fuel expense based on usage. The total nuclear fuel expense for 1993, 1992 and 1991 amounted to $49,647,000, $55,804,000 and $62,349,000, respectively.\nContracts with the U.S. Department of Energy (DOE) have been executed to provide for the permanent disposal of spent nuclear fuel for the life of Plant Hatch and Plant Vogtle. The services to be provided by DOE are scheduled to begin in 1998. However, the actual year that these services will begin is uncertain. The Plant Hatch spent fuel storage is expected to be sufficient into 2003. The Plant Vogtle spent fuel storage is expected to be sufficient into 2009. If DOE does not begin receiving spent fuel from Plant Hatch in 2003 or from Plant Vogtle in 2009, alternative spent fuel storage will be needed.\nThe Energy Policy Act of 1992 requires that utilities with nuclear plants be assessed, over the next 15 years, an amount which will be used by DOE for the decontamination and decommissioning of its nuclear fuel enrichment facilities. The amount of each utility's assessment is based on its past purchases of nuclear fuel enrichment services from DOE. Based on its ownership in Plants Hatch and Vogtle, Oglethorpe has recorded a nuclear fuel asset of approximately $20,000,000, which is being amortized to nuclear fuel expense over the 15-year assessment period. Oglethorpe has also recorded, net of sell-back, an obligation to DOE which approximated $14,000,000 at December 31, 1993.\nF. PATRONAGE CAPITAL AND MEMBERSHIP FEES\nOglethorpe is organized and operates as a cooperative. The Members paid a total of $195 in membership fees. Patronage capital is the retained net margin of Oglethorpe. As provided in the bylaws, any excess of revenue over expenditures from operations is treated as advances of capital by the Members and is allocated to each of them on the basis of their electricity purchases from Oglethorpe.\nThe margin and patronage capital retirements policy adopted by the Oglethorpe Board of Directors in 1992 extended from 13 years to 30 years the period that each year's net margin will be retained by Oglethorpe. Pursuant to the previous 13-year patronage capital retirement schedule, 1978 patronage capital assignments were retired in 1992, and 1977 assignments in 1991. Under the new 30-year retirement schedule, no patronage capital would be returned to the Members until 2010, at which time the 1979 patronage capital would be returned.\nG. INCOME TAX ACCOUNTING\nOglethorpe is a not-for-profit membership corporation subject to Federal, State of Georgia and State of Alabama income taxes. For years 1981 and prior, Oglethorpe claimed tax-exempt status under Section 501(c)(12) of the Internal Revenue Code of 1954, as amended (the Code). In 1982, Oglethorpe reported as a taxable entity as a result of income received by it from GPC under the capacity and energy sell-back agreement applicable to Scherer Unit No. 1. In connection with its 1985 tax return. Oglethorpe made an election under Section 168(j)(4)(E)(ii) of the Code to remain taxable from 1985 until at least 2005 without regard to the amount of its income from GPC or other non-Members. As a taxable electric cooperative, Oglethorpe has annually allocated its income and deductions between Member and non-Member activities. Any Member taxable income has been offset with a patronage exclusion.\nAs of January 1, 1993, Oglethorpe prospectively adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 109, \"Accounting for Income Taxes\". In adopting SFAS No. 109, Oglethorpe recorded a $13,340,000 reduction in accumulated deferred income taxes and an increase in income from the cumulative effect of a change in accounting principle. SFAS No. 109 requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Deferred tax assets and liabilities are determined based on the differences between the financial and tax bases using enacted tax rates in effect for the year in which the differences are expected to reverse.\nA detail of the provision for income taxes in 1993, 1992 and 1991 is shown as follows:\nThe difference between the statutory federal income tax rate on income before income taxes and accounting changes and Oglethorpe's effective income tax rate is summarized as follows:\nThe components of the net deferred tax liabilities as of December 31, 1993 were as follows:\nOglethorpe has federal tax net operating loss carryforwards (NOLs) and unused general business credits (consisting primarily of investment tax credits) as follows:\nBased on Oglethorpe's historical taxable transactions and the timing of the reversal of existing temporary differences, management believes it is more likely than not that Oglethorpe's future taxable income will be sufficient to realize the benefit of the NOLs existing at December 31, 1993 before their respective expiration dates. However, as reflected in the above valuation allowance, management does not believe it is more likely than not that the tax credits will be utilized before expiration.\nDuring 1992 and 1991, deferred income taxes were provided for significant timing differences between revenues and expenses for tax and financial statement purposes. The source and deferred tax effect of these differences are summarized as follows:\nH. MARGIN POLICY\nOglethorpe's margin policy is based on the provision of a Times Interest Earned Ratio (TIER) established annually by the Oglethorpe Board of Directors. For 1993, 1992, and 1991, the margin goal was the amount required to produce a TIER of 1.07. Oglethorpe's Board of Directors adopted a new margin and patronage capital retirements policy in 1992. Pursuant to the new policy, the annual net margin goal will be the amount required to produce a TIER of 1.07 each year through 1995, 1.08 in 1996, 1.09 in 1997 and 1.10 in 1998 and thereafter.\nThe Oglethorpe Board of Directors adopted resolutions annually requiring that Oglethorpe's net margins for the years 1985 through 1993 in excess of its annual margin goals be deferred and used to mitigate rate increases associated with Plant Vogtle. In addition, during 1986 and 1987, Oglethorpe's wholesale electric rate to its Members provided for a one mill per kilowatt-hour charge (Vogtle Surcharge), also to be used to mitigate the effect of Plant Vogtle on rates. In addition, two of Oglethorpe's Members, with the concurrence of REA, elected to increase the level of this charge for their systems during this period.\nPursuant to rate actions by Oglethorpe's Board of Directors, specified amounts of deferred margins and Vogtle Surcharge were returned in 1989 through 1993 and will be returned in 1994. A summary of deferred margins and Vogtle Surcharge as of December 31, 1993 and 1992 is as follows:\n- ---------------------------------------------------------------------------\nI. CASH AND TEMPORARY CASH INVESTMENTS\nOglethorpe considers all temporary cash investments purchased with a maturity of three months or less to be cash equivalents. Temporary cash investments with maturities of more than three months are classified as other short-term investments.\nJ. ENERGY COST BILLED IN EXCESS OF ACTUAL\nOglethorpe's wholesale power rate sets forth the manner in which energy costs are to be recovered from its Members. The rate in effect for 1993 and 1992 provided that an energy rate be determined based on projected costs and kilowatt-hour sales and that the resulting rate be used to bill Members for a six-month period. Actual energy costs were compared, on a monthly basis, to the billed energy costs, and an adjustment to revenues was made such that energy revenues were equal to actual energy costs. The offset to this adjustment is a payable to or receivable from Members for over or under-collected energy costs. The rate further provides that any cumulative over or under-collection for the previous six-month period be utilized to adjust projected costs for the next six-month period. Therefore, the amounts owed to Members as of December 31, 1993 and 1992 will be and have been utilized to reduce Member billings in 1994 and 1993, respectively.\n2. CAPITAL LEASES:\nIn December 1985, Oglethorpe sold and subsequently leased back from four purchasers its 60% undivided ownership interest in Scherer Unit No. 2. The gain from the sale is being amortized over the 36-year term of the leases. The minimum lease payments under the capital leases together with the present value of net minimum lease payments as of December 31, 1993 are as follows:\nThe capital leases provide that Oglethorpe's rental payments vary to the extent of interest rate changes associated with the debt used by the lessors to finance their purchase of undivided ownership shares in Scherer Unit No. 2. The debt of three of the lessors is financed at fixed interest rates averaging 9.58%. As of December 31, 1993, the variable interest rates of the debt of the remaining lessor ranged from 5.93% to 8.25% for an average rate of 7.27%. Oglethorpe's future rental payments under its leases will vary from amounts shown in the table above to the extent that the actual interest rates associated with the fixed and variable rate debt of the lessors vary from the 11.05% debt rate assumed in the table.\nThe Scherer Unit No. 2 lease meets the definitional criteria to be reported on Oglethorpe's balance sheets as a capital lease. For rate-making purposes, however, Oglethorpe treats this lease as an operating lease; that is, Oglethorpe considers the actual rental payment on the leased asset in its cost of service. Oglethorpe's accounting treatment for this capital lease has been modified, therefore, to reflect it rate-making treatment. Interest expense is applied to the obligation under the capital lease; then, amortization of the leasehold is recognized, such that interest and amortization equal the actual rental payment. Through 1994 the level of actual rental payments is such that amortization of the Scherer Unit No. 2 leasehold calculated in this manner is less than zero. Thereafter, the scheduled cash rental payments increase such that positive amortization of the leasehold occurs, and the entire cost of the leased asset is recovered through the rate-making process. The difference in the amortization recognized in this manner on the statements of revenues and expenses and the straight-line amortization of the leasehold is reflected on Oglethorpe's balance sheets as a deferred charge.\nIn 1991 and 1992, all four of the lessors received Notices of Proposed Adjustments from the IRS proposing adjustments to the tax benefits claimed by these lessors in connection with their purchase and ownership of an undivided interest in Scherer Unit No. 2. The proposed adjustments, if ultimately upheld, would have the effect of reducing the lessors' tax benefits resulting from the sale and leaseback transactions. The lessors filed responses contesting the IRS's assertions as contained in the Notices of Proposed Adjustments.\nIn February 1994, the IRS issued a revised Notice of Proposed Adjustments to one of the lessors which reduced the proposed adjustments to the tax benefits claimed by this lessor in connection with its purchase and ownership of an undivided interest in Scherer Unit No. 2. The IRS has indicated that it will take consistent positions with the other three lessors. If the IRS's current positions regarding the sale and leaseback transactions were ultimately upheld, Oglethorpe would be required to indemnify the four lessors. Oglethorpe's potential indemnification liability in this event is estimated to be approximately $1,200,000 as of February 1994.\n3. FAIR VALUE OF FINANCIAL INSTRUMENTS:\nA detail of the estimated fair values of Oglethorpe's financial instruments as of December 31, 1993 and 1992 is as follows:\nOglethorpe uses the methods and assumptions described below to estimate the fair value of each class of financial instruments. For cash and temporary cash investments and other short-term investments, the carrying amount approximates fair value because of the short-term maturity of those instruments. The fair values of bond, reserve and construction funds and the decommissioning fund are estimated based on quoted market prices for the investments held in the respective funds. The fair value of Oglethorpe's long-term debt is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to Oglethorpe for debt of similar maturities.\nInvestment in associated organizations was as follows at December 31, 1993 and 1992:\nAs a member of National Rural Utilities Cooperative Finance Corporation (CFC), Oglethorpe was obligated to purchase CFC Capital Term Certificates annually through 1984. Such certificates begin maturing in the year 2075 and bear interest at 5%. As a borrower from the National Bank for Cooperatives (CoBank), Oglethorpe is obligated to purchase capital stock in that bank. Under CoBank's capitalization plan, Oglethorpe is required to maintain an investment in the bank equal to 7%-13% of its five-year average loan volume with the bank. The required investment of 1993 was 11.5% of Oglethorpe's five-year average loan volume. It is not anticipated that Oglethorpe will be required to make any additional investments during 1994. The investments in these associated organizations are similar to compensating bank balances in that they are required in order to maintain current financing arrangements. Accordingly, there is no market for these investments.\n4. BOND, RESERVE AND CONSTRUCTION FUNDS:\nBond, reserve and construction funds for pollution control bonds are maintained as required by Oglethorpe's bond agreements. Bond funds serve as payment clearing accounts, reserve funds maintain amounts equal to the maximum annual debt service of each bond issue and construction funds hold bond proceeds for which construction expenditures have not yet been made. As of December 31, 1993 and 1992, substantially all of the funds were invested in U.S. Government securities.\n5. LONG-TERM DEBT:\nLong term debt consists of mortgage notes payable to the Unites States of America acting through the FFB and the REA, mortgage notes issued in conjunction with the sale by public authorities of pollution control revenue bonds and notes payable to CoBank. Oglethorpe's headquarters facility is pledged as security for the CoBank headquarters note; substantially all of the owned tangible and certain of the intangible assets of Oglethorpe are pledged as security for the FFB and REA notes, the remaining CoBank notes and the notes issued in conjunction with the sale of pollution control revenue bonds. The detail of the notes is included in the statements of capitalization.\nOglethorpe currently has ten REA-guaranteed FFB notes of which $3,040,767,000 and $3,111,160,000 were outstanding at December 31, 1993 and 1992, respectively, with rates ranging from 6.61% to 10.95%.\nIn March 1993, Oglethorpe entered into two forward interest rate swap arrangements obligating Oglethorpe to sell $199,690,000 of variable rate refunding bonds in the fall of 1993 and $122,740,000 of variable rate refunding bonds in the fall of 1994, the proceeds of which, together with certain other funds provided or to be provided by Oglethorpe, have been and will be used in January 1994 and January 1995, respectively, to refund certain pollution control revenue bonds previously issued. At December 31, 1993, Oglethorpe accounted for the pending January 1994 retirement of $233,010,000 of previously issued bonds as an in-substance defeasance. Therefore, debt service reserve funds, bonds payable, and the premium and loss on reacquired debt are stated as though the event of retiring the refunded bonds had occurred in 1993.\nIn connection with the March 1993 swap transaction, Oglethorpe recorded redemption premiums which, combined with unamortized transaction costs, totaled $38,128,000. This amount has been reported as a deferred charge on the balance sheets and is being or will be amortized over the life of the related new bonds.\nPursuant to the forward interest rate swap arrangements, Oglethorpe makes payments to the counterparty based on the notional principal at a fixed rate and the counterparty makes payments to Oglethorpe based on the notional principal and on the existing variable rate of the refunding bonds. The differential to be paid or received is accrued as interest rates change and is recognized as an adjustment to interest expense. For the fall 1993 transaction, the notional principal was $199,690,000 and the fixed swap rate is 5.67% (the variable rate at December 31, 1993 was 3.10%). With respect to the fall 1994 transaction, the notional principal will be $122,740,000 and the fixed swap rate is 6.01%. The notional principal amount is used to measure the amount of the swap payments and does not represent additional principal due to the counterparty. The swap arrangements extend for the life of the refunding bonds, with reductions in the outstanding principal amounts of the refunding bonds causing corresponding reductions in the notional amounts of the swap payments.\nThe annual interest requirement for 1994, based upon all debt outstanding at December 31, 1993, will be approximately $339,000,000.\nMaturities for the long-term debt through 1998 are as follows:\nOglethorpe has a commercial paper program under which it may issue commercial paper not to exceed a $355,000,000 balance outstanding at any time. The commercial paper may be used as a source of short-term funds and is not intended for any specific purpose. Oglethorpe's commercial paper is backed 100% by a committed line of credit provided by a group of banks for which Trust Company Bank (Trust Company) acts as agent. As of December 31, 1993 and 1992, no commercial paper was outstanding.\nOglethorpe has arranged for uncommitted short-term lines of credit with CoBank and CFC, and a committed line of credit with Trust Company. The CoBank line amounts to $70,000,000; the CFC line amounts to $50,000,000; and the Trust Company line amounts to $30,000,000. The maximum amount that can be outstanding under these lines of credit and the commercial paper program at any one time totals $425,000,000 due to certain restrictions contained in the CFC and Trust Company line of credit agreements. No balance on any of these three lines of credit was outstanding at either December 31, 1993 or 1992.\nIn January 1994, Oglethorpe completed a note modification pursuant to which it repriced $590,909,000 of FFB advances. In connection with such modification, Oglethorpe paid a premium of $50,745,000. This amount will be reported as a deferred charge on the balance sheets and will be amortized over 22 years, the longest remaining life of the subject advances.\n6. ELECTRIC PLANT AND RELATED AGREEMENTS:\nOglethorpe and GPC have entered into agreements providing for the purchase and subsequent joint operation of certain of GPC's electric generating plants and transmission facilities. A summary of Oglethorpe's plant investments as of December 31, 1993 is as follows:\nIn 1988, Oglethorpe acquired from GPC an undivided ownership interest in the Rocky Mountain Project, a pumped storage hydroelectric facility (Rocky Mountain). Under the Rocky Mountain agreements, Oglethorpe assumed responsibility for construction of the facility, which construction was commenced by GPC. Under the agreements, GPC retained its current investment in Rocky Mountain. The ultimate ownership interests of Oglethorpe and GPC in the facility will be based on the ratio of each party's direct construction costs to total project direct construction costs with certain adjustments. It is expected that the ownership interests of Oglethorpe and GPC in Rocky Mountain at project completion will be approximately 75% and 25%, respectively. Rocky Mountain is subject to a license issued by FERC to Oglethorpe and GPC. This license requires that construction be completed by June 1, 1996. The current schedule anticipates commercial operation in early 1995. Rocky Mountain was approximately 90% complete as of December 31, 1993.\nOglethorpe is financing its share of Rocky Mountain from the proceeds of an REA-guaranteed loan funded through the FFB. As of December 31, 1993, a total of approximately $459,000,000 remained available to be drawn as permanent financing for Rocky Mountain. Such amount is considered more than adequate by Oglethorpe to complete the project. The obligation to advance funds under the FFB loan commitment, however, is subject to certain conditions, including the requirement that Oglethorpe maintain an annual TIER of at least 1.0 and that the REA shall not have determined that there has occurred any material adverse change in the assets, liabilities, operations, or financial condition of Oglethorpe or any circumstances involving the nature or operation of the business of Oglethorpe. In management's opinion, no such material adverse change has occurred.\nOglethorpe is engaged in a continuous construction program and as of December 31, 1993, estimates property additions (including capitalized interest) to be approximately $284,000,000 in 1994, $204,000,000 in 1995 and $148,000,000 in 1996, primarily for construction of Rocky Mountain and replacements and additions to generation and transmission facilities.\nPrimarily as a result of its ownership of a majority interest in Rocky Mountain, Oglethorpe has determined that the Pickens County Pumped Storage Hydroelectric Project is not needed within its present planning horizon. Accordingly, Oglethorpe is amortizing the accumulated project costs in excess of the value of the land purchased. The remaining unamortized project costs of approximately $18,314,000 are reflected as deferred charges on the accompanying balance sheets. Oglethorpe's Board of Directors has authorized that these projects costs be amortized and fully recovered through future rates over a period of 15 years beginning in 1992.\nIn April 1992, Oglethorpe sold to three purchasers certain of the income tax benefits associated with Scherer Unit No. 1 and related common facilities pursuant to the safe harbor lease provisions of the Economic Recovery Tax Act of 1981. Oglethorpe received a total of approximately $110,000,000 from the safe harbor lease transactions. Oglethorpe accounts for the proceeds as a deferred credit, sale of income tax benefits, and is amortizing the amount over the 20- year term of the leases.\nIn October 1989, Oglethorpe sold to GPC a 24.45% ownership interest in the Plant Scherer common facilities as required under the Plant Scherer Purchase and Ownership Agreement to adjust its ownership in the Scherer units. Oglethorpe realized a gain on the sale of $50,600,000. The REA and Oglethorpe's Board of Directors approved a plan whereby this gain was deferred and is being amortized over 60 months beginning in October 1989.\nOglethorpe's proportionate share of direct expenses of joint operation of the above plants is included in the corresponding operating expense captions (e.g., fuel, production or depreciation) on the accompanying statements of revenues and expenses.\n7. INVENTORIES:\nOglethorpe maintains inventories of fossil fuels for its generation plant and spare parts for certain of its generation and transmission plant. These inventories are stated at weighted average cost on the accompanying balance sheets.\nFor its co-owned generating plants, Oglethorpe accounts for inventories on the basis of information furnished by its operating agent, GPC. GPC has historically accounted for spare parts at its generating plants on an expensed- as-purchased basis. Prior to the commercial operation of Vogtle Unit No. 1 in 1987, GPC established a spare parts inventory for that generating facility and used an expensed-as-consumed method of inventory accounting. Subsequently, the spare parts inventories at Plants Hatch, Wansley and Scherer were converted to an expensed-as-consumed method. In connection with these conversions, other income totaling $18,877,000 was recorded by Oglethorpe in 1988 and 1989.\nIn 1992, GPC completed a study the objective of which was to determine the original accounting for spare parts inventory at all of its generating plants, including Plants Hatch, Wansley and Scherer. As a result of this study, Oglethorpe recorded an adjustment of $4,827,000 to the original conversion which reduced other income and plant investment.\nA detail of Oglethorpe's investment in inventories at December 31, 1993 and 1992 is as follows:\n8. EMPLOYEE BENEFIT PLANS:\nOglethorpe has a noncontributory defined benefit pension plan covering substantially all employees. Oglethorpe's pension cost was approximately $1,038,000 in 1993, $362,000 in 1992 and $1,113,000 in 1991. For 1992, pension cost was reduced by $539,000 by a net gain from a plan curtailment. The plan curtailment resulted from a workforce reduction undertaken in the second quarter of 1992. Plan benefits are based on years of service and the employee's compensation during the last ten years of employment. Oglethorpe's funding policy is to contribute annually an amount not less than the minimum required by the Internal Revenue Code and not more than the maximum tax deductible amount.\nThe plan's funded status and pension cost recognized in Oglethorpe's financial statements as of December 31, 1993 and 1992 were as follows:\nThe discount rate and rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligations shown above were 7.5% and 5.0% in 1993, and 8.5% and 5.5% in 1992, respectively. The expected long-term rate of return on plan assets was 8% in 1993 and 1992, and the discount rate used in determining the pension expense was 8.5% in 1993 and 1992.\nOglethorpe has a contributory employee thrift plan covering substantially all employees. Employee contributions to the plan may be invested in one or more of three funds. The employee may contribute up to 10% of his compensation. Oglethorpe will match the employee's contribution up to one-half of the first 6% of the employee's compensation, as long as there is sufficient net margin to do so. Oglethorpe's contributions to the plan were approximately $503,000 in 1993, $503,000 in 1992 and $491,000 in 1991.\nIn December 1990, the FASB issued Statement No. 106 on postretirement benefits other than pensions. The new statement requires the accrual of the expected cost of such benefits during the employees' years of service. Oglethorpe has no postretirement benefits other than pensions available to retirees.\n9. NUCLEAR INSURANCE:\nGPC, on behalf of all the co-owners of Plants Hatch and Vogtle, is a member of Nuclear Mutual Limited (NML), a mutual insurer established to provide property damage insurance coverage in an amount up to $500,000,000 for members' nuclear generating facilities. In the event that losses exceed accumulated reserve funds, the members are subject to retroactive assessments (in proportion to their participation in the mutual insurer). The portion of the current maximum assessment for GPC that would be payable by Oglethorpe, based on ownership share adjusted for sell-back, is limited to approximately $8,600,000 for each nuclear incident.\nGPC, on behalf of all the co-owners of Plants Hatch and Vogtle, is also a member of Nuclear Electric Insurance Limited (NEIL), a mutual insurer, and has coverage with American Nuclear Insurers and Mutual Atomic Energy Liability Underwriters, which provide insurance to cover decontamination, debris removal and premature decommissioning as well as excess property damage to nuclear generating facilities of up to $2,250,000,000 for losses in excess of the $500,000,000 NML coverage described above. Under the NEIL policy, members are subject to retroactive assessments in proportion to their participation if losses exceed the accumulated funds available to the insurer under the policy. The portion of the current maximum assessment for GPC that would be payable by Oglethorpe, based on ownership share adjusted for sell-back, is limited to approximately $8,000,000 for each nuclear incident.\nFor all on-site property damage insurance policies for commercial nuclear power plants, the NRC requires that the proceeds of such policies issued or annually renewed on or after April 2, 1991 shall be dedicated first for the sole purpose of placing the reactor in a safe and stable condition after an accident. Any remaining proceeds are next to be applied toward the costs of decontamination and debris removal operations ordered by the NRC, and any further remaining proceeds are to be paid either to the company or to its bond trustees as may be appropriate under the policies and applicable trust indentures.\nThe Price-Anderson Act, as amended in 1988, limits public liability claims that could arise from a single nuclear incident to $9,400,000,000, which amount is to be covered by private insurance and agreements of indemnity with the NRC. Such private insurance (in the amount of $200,000,000 for each plant, the maximum amount currently available) is carried by GPC for the benefit of all the co-owners of Plants Hatch and Vogtle. Agreements of indemnity have been entered into by and between each of the co-owners and the NRC. In the event of a nuclear incident involving any commercial nuclear facility in the country involving total public liability in excess of $200,000,000, a licensee of a nuclear power plant could be assessed a deferred premium of up to $79,275,000 per incident for each licensed reactor operated by it, but not more than $10,000,000 per reactor per incident to be paid in a calendar year. On the basis of its sell-back adjusted ownership interest in four nuclear reactors, Oglethorpe could be assessed a maximum of $89,320,000 per incident, but not more than $11,270,000 in any one year.\nOglethorpe participates in an insurance program for nuclear workers that provides coverage for worker tort claims filed for bodily injury caused at commercial nuclear power plants. In the event that claims for this insurance exceed the accumulated reserve funds, Oglethorpe could be subject to a total maximum assessment of $3,750,000.\n10. POWER PURCHASE AGREEMENTS:\nOglethorpe has entered into long-term power purchase agreements with GPC, Big Rivers Electric Corporation (Big Rivers), and Entergy Power, Inc. (EPI). Under the agreement with GPC, Oglethorpe will purchase on a take-or-pay basis 1,250 megawatts (MW) of capacity through the period ending December 31, 2001, subject to reductions or extension with proper notice. The Big Rivers agreement commenced in August 1992 and is effective through July 2002. Oglethorpe is obligated under this agreement to purchase on a take-or-pay basis 100 MW of firm capacity and certain minimum energy amounts associated with that capacity. The EPI agreement commenced in July 1992, has a term of ten years and represents a take-or-pay commitment by Oglethorpe to purchase 100 MW of capacity. The EPI contract is subject to approval by REA.\nOglethorpe has a contract with Hartwell Energy Limited Partnership (Hartwell), a partnership 50% owned by Destec Energy, Inc. and 50% owned by American National Power, Inc., a subsidiary of National Power, PLC, for the purchase of approximately 300 MW of capacity from two 150 MW gas-fired turbine generating units, now under construction, for a 25-year period commencing no later than June 1994. Under the terms of this contract, Oglethorpe does not have responsibility for constructing or financing this project.\nAs of December 31, 1993, Oglethorpe's minimum purchase commitments under the above agreements, without regard to capacity reductions or adjustments for changes in costs, for the next five years are as follows:\nOglethorpe's power purchases from these agreements amounted to approximately $192,059,000 in 1993, $192,321,000 in 1992 and $88,500,000 in 1991.\n11. QUARTERLY FINANCIAL DATA (UNAUDITED):\nSummarized quarterly financial information for 1993 and 1992 is as follows:\nOglethorpe's business is influenced by seasonal weather conditions. The negative net margin for the fourth quarter of 1993 was attributable to the deferral of excess margins and to the incurrence of certain non-recurring expenses. The negative net margin for the same period of 1992 was primarily due to the deferral of excess margins. For a discussion of the amounts of excess margins deferred see Note 1.\nREPORT OF MANAGEMENT\nThe management of Oglethorpe Power Corporation has prepared this report and is responsible for the financial statements and related information. These statements were prepared in accordance with generally accepted accounting principles appropriate in the circumstances and necessarily include amounts that are based on best estimates and judgements of management. Financial information throughout this annual report is consistent with the financial statements.\nOglethorpe maintains a system of internal accounting controls to provide reasonable assurance that assets are safeguarded and that the books and records reflect only authorized transactions. Limitations exist in any system of internal control based upon the recognition that the cost of the system should not exceed its benefits. Oglethorpe believes that its system of internal accounting control, together with the internal auditing function, maintains appropriate cost\/benefit relations.\nOglethorpe's system of internal controls is evaluated on an ongoing basis by its qualified internal audit staff. The Corporation's independent public accountants (Arthur Andersen & Co.) also consider certain elements of the internal control system in order to determine their auditing procedures for the purpose of expressing an opinion on the financial statements.\nArthur Andersen & Co. also provides an objective assessment of how well management meets its responsibility for fair financial reporting. Management believes that its policies and procedures provide reasonable assurance that Oglethorpe's operations are conducted with a high standard of business ethics. In management's opinion, the financial statements present fairly, in all material respects, the financial position, results of operations, and cash flow of Oglethorpe Power Corporation.\n\/s\/T.D. Kilgore\nT.D. Kilgore President and Chief Executive Officer\n\/s\/Eugen Heckl\nEugen Heckl Senior Vice President and Chief Financial Officer\nREPORT OF INDEPENDENT PUBLIC ACCOUNTANTS\nTo the Board of Directors of Oglethorpe Power Corporation:\nWe have audited the accompanying balance sheets and statements of capitalization of Oglethorpe Power Corporation (a Georgia corporation) as of December 31, 1993 and 1992 and the related statements of revenues and expenses, patronage capital, and cash flows for each of the three years in the period ended December 31, 1993. These financial statements and the schedules referred to below are the responsibility of Oglethorpe's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.\nWe conducted our audits in accordance with generally accepted auditing standards. Those standard require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit included 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.\nIn our opinion, the financial statements (pages 33 through 47) referred to above present fairly, in all material respects, the financial position of Oglethorpe Power Corporation as of December 31, 1993 and 1992 and the 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.\nAs explained in Note 1 of notes to financial statements, effective January 1, 1993, Oglethorpe Power Corporation changed its method of accounting for income taxes.\nOur audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedules listed in the index in Item 14 are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic financial statements. These schedules have been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.\n\/s\/Arthur Andersen & Co. Arthur Andersen & Co.\nAtlanta Georgia, February 11, 1994.\nITEM 9.","section_9":"ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE\nNone.\nPART III\nITEM 10.","section_9A":"","section_9B":"","section_10":"ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT\n(a) IDENTIFICATION OF DIRECTORS:\nOglethorpe is governed by a Board of 39 Directors, 13 of whom are elected each year for a three-year term. Each of the 39 Members nominates one Director who must also be on the Member's Board of Directors. The Directors are then elected by the Members at their annual meeting. The Members also elect Alternate Directors. Each Alternate Director must serve as the manager of a Member to be eligible to serve as an Alternate Director. Under Oglethorpe's Bylaws, Alternate Directors may attend all Board meetings, but can be counted for quorum purposes and can exercise the powers and duties of a Director only during the period when the directorship for whom he is the alternate is vacant or at any meeting of the Board of Directors when the Director for whom he is the alternate is absent. The Board of Directors generally meets monthly.\nSix standing committees are appointed by the Chairman of the Board and include both Directors and Alternate Directors. Two of these Committees, the External Affairs Committee and the Human Resources Management Committee, are joint committees of Oglethorpe and Georgia Electric Membership Corporation (\"GEMC\"), an affiliated trade organization, and include directors of GEMC. Special committees, as deemed necessary, are also appointed by the Chairman of the Board or the Board of Directors. Committee recommendations and management recommendations, subject to the approval of the Board of Directors, determine the policies and activities of Oglethorpe.\nThe Directors and Alternate Directors of Oglethorpe are as follows:\nALTAMAHA EMC\nJmon Warnock--Director, age 68, is a farmer. He has served on the Board of Directors of Oglethorpe since September 1974. His present term as a Director will expire in March 1995. He is a member of the Finance Committee of Oglethorpe. Mr. Warnock is the President of Altamaha EMC and a Director of GEMC.\nJames D. Musgrove--Alternate Director, age 47, is the General Manager of Altamaha EMC. He has served as an Alternate Director of Oglethorpe since May 1989, with his present term to expire in March 1995. Mr. Musgrove is a Director of Montgomery County Bankshares in Ailey, Georgia.\nAMICALOLA EMC\nCharles R. Fendley--Director, age 48, is a Vice-President of Jasper Yarn Processing, Inc., which processes yarn. He has served on the Board of Directors of Oglethorpe since November 1993, with his present term to expire in March 1995. Mr. Fendley is the President of Amicalola EMC. He is also a Director of GEMC and a Director of Crescent Bank & Trust Co. in Jasper, Georgia.\nJohn S. Dean, Sr.--Alternate Director. For a description of Mr. Dean's background and experience, see \"Identification of Executive Officers and Senior Executives\" below.\nCANOOCHEE EMC\nGeorge C. Martin--Director, age 76, is the owner and operator of a farm in Ellabell, Bryan County, Georgia where he raises beef cattle. He also manages timberland in Bryan County, Georgia and rental properties in Savannah and Pembroke, Georgia. He has served on the Board of Directors of Oglethorpe since March 1977, with his present term to expire in March 1995. From March 1978 to March 1984, he served as Vice President of Oglethorpe.\nDonald F. Kennedy--Alternate Director, age 64, is the General Manager of Canoochee EMC. He has served as an Alternate Director of Oglethorpe since 1985, with his present term to expire in March 1995. He is a member of the GEMC\/Oglethorpe External Affairs Committee. Mr. Kennedy is also a Director of the Tattnall Bank in Reidsville, Georgia.\nCARROLL EMC\nJ. G. McCalmon--Director, age 76, is the owner of a farm in Carrollton, Georgia, where he raises chickens and beef cattle. He has served on the Board of Directors of Oglethorpe since September 1974, with his present term to expire in March 1996. He is Chairman of the Board of Carroll EMC. Mr. McCalmon is also a Director of GEMC, a Director of the Farm Bureau, a Director of Carroll County Sales Barn, and a Director of the Carroll County Chamber of Commerce.\nGary M. Bullock--Alternate Director, age 52, is President and Chief Executive Officer of Carroll EMC. He has served as an Alternate Director of Oglethorpe since June 1978, and his present term will expire in March 1996. He is a member of the Operations Committee. Mr. Bullock is also the Secretary of Southeastern Data Cooperative, Inc., a member of the Institute of Electrical and Electronic Engineers, a Trustee for the GEMC Workers' Compensation Fund, a Director for the Georgia Council of Farmer Cooperatives, a Director of the Carroll County Chamber of Commerce, and a Director of Carrollton Federal Savings & Loan Association in Carrollton, Georgia.\nCENTRAL GEORGIA EMC\nD. A. Robinson, III--Director, age 53, is the owner and operator of a dairy farm in Griffin, Georgia. He has served on the Board of Directors of Oglethorpe since March 1984, and his term will expire in March 1995. He serves as Secretary-Treasurer of Central Georgia EMC.\nGeorge L. Weaver--Alternate Director, age 46, has been the President of Central Georgia EMC since 1989. Prior to that time he was General Manager, Manager of Accounting, and Financial Manager. He has served as an Alternate Director of Oglethorpe since 1983, and his present term will expire in March 1995. He is a member of the Operations Committee. He is also a Director of Federated Rural Electric Insurance Corporation in Shawnee Mission, Kansas and serves on the Advisory Board of NationsBank of GA, N.A.\nCOASTAL EMC\nJames E. Estes--Director, age 58, has served on the Board of Directors of Oglethorpe since March 1982, with his present term to expire in March 1994. He is a member of the Executive Committee. He is also Vice President of the Board of Directors of Coastal EMC. Additionally, he works in avionic maintenance for Georgia Air National Guard, is President of Ways Company, Inc., a real estate development company in Richmond Hill, Georgia, and is a proprietor of Estes Tax Service, an income tax service in Richmond Hill, Georgia.\nWayne Collins--Alternate Director, age 43, is the General Manager of Coastal EMC and has served as an Alternate Director of Oglethorpe since March 1977. His present term as an Alternate Director will expire in March 1994.\nCOBB EMC\nLarry N. Chadwick--Director, age 53, is the owner of Chadwick's Hardware in Woodstock, Georgia. He has served on the Board of Directors of Oglethorpe since July 1989, with his present term to expire in March 1995. He is Chairman of the Board of Cobb EMC. He is Chairman of the Operations Committee.\nDwight Brown--Alternate Director, age 48, is President and Chief Executive Officer of Cobb EMC. He previously served as Vice President of Engineering and Operations for Cobb EMC. He has served as an Alternate Director of Oglethorpe since October 1993, with his present term to expire in March 1995.\nCOLQUITT EMC\nSimmie King--Director, age 50, is the owner and operator of a farm. He has served on the Board of Directors of Oglethorpe since March 1991, with his present term to expire in March 1996.\nR. L. Gaston--Alternate Director, age 46, is the General Manager of Colquitt EMC. From January 1985 to January 1990, he was Manager of Engineering and Operations for Colquitt EMC. He has served as an Alternate Director of Oglethorpe since February 1990, with his present term to expire in March 1996. He is currently a member of the Planning and Construction Committee.\nCOWETA-FAYETTE EMC\nW. F. Farr--Director, age 81, is a banker. He has served on the Board of Directors of Oglethorpe since March 1975, with his present term to expire in March 1995. He is currently the Chairman of the GEMC\/Oglethorpe Human Resources Management Committee. He has been President of Coweta-Fayette EMC since 1974. He previously served as President of the Fayette State Bank in Peachtree City, Georgia and as a Director and Consultant for Citizens and Southern National Bank, South Metro Board in Atlanta, Georgia. Since June 1985, he has been the owner and President of Pioneer Financial Associates, Inc. in Peachtree City, Georgia.\nMichael C. Whiteside--Alternate Director, age 51, has been General Manager of Coweta-Fayette EMC since August 1983. He previously served as Administrative Assistant of Coweta-Fayette EMC. He has served as an Alternate Director of Oglethorpe since September 1983, with his present term to expire in March 1995. He is currently a member of Oglethorpe's Planning and Construction Committee.\nEXCELSIOR EMC\nVacant--Director\nGary T. Drake--Alternate Director, age 45, is the General Manager of Excelsior EMC. He has served as an Alternate Director of Oglethorpe since January 1979, with his present term to expire in March 1994. He was Secretary-Treasurer of Oglethorpe from March 1984 through March 1989. He is currently a member of the Operations Committee. Mr. Drake is also a Director of GEMC and a Director of Pineland State Bank in Metter, Georgia.\nFLINT EMC\nJeff S. Pierce, Jr.--Director, age 62, has served on the Board of Directors of Oglethorpe since June 1992, with his present term to expire in March 1994. He has served as a Director of Flint EMC since 1964. He previously served 28 years as Chief Executive Officer and as a Director for the First Federal Savings and Loan Association in Warner Robins, Georgia. He is also a Director of GEMC.\nHarold B. Smith--Alternate Director, age 57, has been employed as General Manager of Flint EMC since November 1978. He has served as an Alternate Director of Oglethorpe since 1978, with his present term to expire in March 1994. He is currently a member of the Planning and Construction Committee of Oglethorpe and\nChairman of the GEMC\/Oglethorpe External Affairs Committee. Mr. Smith is also the Chairman of the Board of the Food and Energy Council.\nGRADY EMC\nDonald C. Cooper--Director, age 63, is the owner, operator and President of Cooper Farms, Inc., a farm in Grady County, Georgia where he grows row crops and raises cattle. He has served on the Board of Directors of Oglethorpe since March 1975, with his present term to expire in March 1996.\nThomas A. Rosser--Alternate Director, age 46, has been employed as General Manager of Grady EMC since January 1992. He has served as an Alternate Director of Oglethorpe since January 1992, with his present term to expire in March 1996. Mr. Rosser is also a Director of the Cairo Banking Company in Cairo, Georgia.\nGREYSTONE POWER CORPORATION, AN EMC\nJ. Calvin Earwood--Director. For a description of Mr. Earwood's background and experience, see \"Identification of Executive Officers and Senior Executives\" below.\nTim B. Clower--Alternate Director, age 57, is President and Chief Executive Officer of GreyStone Power Corporation, an EMC. He has served as an Alternate Director of Oglethorpe since September 1974, with his present term to expire in March 1995. Mr. Clower serves on the Boards of Directors of Citizens & Merchants State Bank and GEMC Workers' Compensation Fund.\nHABERSHAM EMC\nHerbert Church--Director, age 57, is a logging contractor. He has served on the Board of Directors of Oglethorpe since August 1991, with his present term to expire in March 1996. He has been a Director of Habersham EMC since 1977.\nWilliam E. Canup--Alternate Director, age 58, is the General Manager of Habersham EMC. Mr. Canup was Manager of Engineering\/Operations of Habersham EMC from 1979 to 1984 and served as Assistant Manager of Habersham EMC from 1984 to 1986. He has served as an Alternate Director of Oglethorpe since July 1986, with his present term to expire in March 1996.\nHART EMC\nMac F. Oglesby--Director, age 61, served as Assistant Secretary-Treasurer of Hart EMC from July 1986 through December 1987, when he was appointed President. He has served as a Director of Oglethorpe since February 1987, with his present term to expire in March 1994. He is currently a member of the Planning and Construction Committee of Oglethorpe. He also was a U.S. Postal Service Rural Carrier for 30 years.\nGrooms Johnson--Alternate Director, age 64, has been the General Manager of Hart EMC since March 1991. Prior to that time, he served as Assistant Manager of Hart EMC. He has served as an Alternate Director of Oglethorpe since March 1991, with his present term to expire in March 1994. Mr. Johnson is also a Director of Bank of Hartwell in Hartwell, Georgia.\nIRWIN EMC\nBenny W. Denham--Director. For a description of Mr. Denham's background and experience, see \"Identification of Executive Officers and Senior Executives\" below.\nHarold Randall Crenshaw--Alternate Director, age 42, has been the General Manager of Irwin EMC since February 1988. He has served as an Alternate Director of Oglethorpe since February 1988, with his present term to expire in March 1995. He is a member and past Vice Chairman of the Finance Committee of Oglethorpe.\nJACKSON EMC\nE. L. McLocklin--Director, age 81, is a cattle farmer. He is also Chairman of the Board of Directors of Jackson EMC. He has served as a Director of Oglethorpe since October 1989, with his present term to expire in March 1996.\nRandall Pugh--Alternate Director, age 50, is President and Chief Executive Officer of Jackson EMC. From August 1984 to January 1988 he was General Manager of Jackson EMC. He was also General Manager of Walton EMC from 1977 to August 1984. He has served as an Alternate Director of Oglethorpe since 1977. His present term as Alternate Director will expire in March 1996. He is currently the Chairman of the Finance Committee. Mr. Pugh is also a Director of the First National Bank of Jackson County in Gainesville, Georgia.\nJEFFERSON EMC\nSam Rabun--Director, age 62, is part owner of a livestock farm. He has served as a Director of Oglethorpe since March 1993 with his present term to expire in March 1996. Mr. Rabun is the President of Jefferson EMC.\nRalph E. Lewis--Alternate Director, age 49, has been the General Manager of Jefferson EMC since 1979. He has served as an Alternate Director of Oglethorpe since 1979, with his present term to expire in March 1996. He is also Vice President of the GEMC Workers' Compensation Fund.\nLAMAR EMC\nE. J. Martin, Jr.--Director, age 66, is the owner of the Country Kitchen restaurant in Barnesville, Georgia. He is a retired tax assessor and appraiser for Lamar County. He has served on the Board of Directors of Oglethorpe since March 1982, with his present term to expire in March 1994. He is a member of the GEMC\/Oglethorpe Human Resources Management Committee. Mr. Martin is the President of Lamar EMC and a Director of GEMC.\nJ. Raleigh Henry--Alternate Director, age 43, is General Manager of Lamar EMC. Prior to becoming General Manager, he served as Office Manager of Lamar EMC. He has served as an Alternate Director of Oglethorpe since 1990, with his present term to expire in March 1994.\nLITTLE OCMULGEE EMC\nJ. D. Williams--Director, age 81, is currently retired. He has served on the Board of Directors of Oglethorpe since March 1986, with his present term to expire in March 1994. He is a member of Oglethorpe's Planning and Construction Committee. He previously served as President, then as Vice President of Little Ocmulgee EMC. Mr. Williams is also a Director of Security State Bank in McRae, Georgia, and a Director of Farmers State Bank in Dublin, Georgia.\nA. Arnold Horton--Alternate Director, age 47, is the General Manager of Little Ocmulgee EMC. He previously served as Manager of Engineering and Operations, and has been with Little Ocmulgee EMC since 1983. He has served as the Alternate Director of Oglethorpe since March 1993, with his present term to expire in March 1994.\nMIDDLE GEORGIA EMC\nRonnie Fleeman--Director, age 59, is a self-employed land and timber developer. He has served on the Board of Directors of Oglethorpe since 1990. His present term as a Director will expire in March 1995. He is a member of the GEMC\/Oglethorpe Human Resources Management Committee.\nCharles Hugh Richardson--Alternate Director, age 40, has been General Manager of Middle Georgia EMC since June 1983. From January 1983 to June 1983, he was Acting General Manager of Middle Georgia EMC, and\nfrom September 1976 to January 1983, he was Manager of Engineering at Middle Georgia EMC. He has served as an Alternate Director of Oglethorpe since 1983, with his present term to expire in March 1995.\nMITCHELL EMC\nD. Lamar Cooper--Director, age 58, operates a dairy farm. He has served on the Board of Directors of Oglethorpe since September 1974. His present term as a Director will expire in March 1996. He is a member of the Operations Committee of Oglethorpe.\nGerald Freehling--Alternate Director, age 50, has been General Manager of Mitchell EMC since September 1987. Since that time, he has served as an Alternate Director of Oglethorpe. His present term expires in March 1996. He previously served as General Manager of Steuben Rural Electric Cooperative in Bath, New York.\nOCMULGEE EMC\nBarry H. Martin--Director, age 45, is a farmer. He has served on the Board of Directors of Oglethorpe since March 1983. His present term as a Director expires in March 1994. Mr. Martin is the President of Ocmulgee EMC.\nDennis Grenade--Alternate Director, age 53, has been employed by Ocmulgee EMC since December 1957. He has been General Manager since October 1987 and was previously Acting Manager and Manager of Operations. He has served as an Alternate Director since October 1987 and his present term expires in March 1994. He is a member of the Finance Committee.\nOCONEE EMC\nJohn B. Floyd, Jr.--Director, age 51, has served on the Board of Directors of Oglethorpe since March 1980, with his present term to expire in March 1996. He is currently a member of the Finance Committee. He is the Vice Chairman of the Board of Oconee EMC and is a Director of CFC. Mr. Floyd also serves as First Vice President of The Four County Bank, as Vice President of The Four County Insurance Agency, Inc., and as President of Twiggs Gin, Inc., a home construction company in Allentown, Georgia.\nPreston L. Johnson--Alternate Director, age 59, is President and Chief Executive Officer of Oconee EMC. He has served as an Alternate Director of Oglethorpe since September 1974, with his present term to expire in March 1996. He was Secretary-Treasurer of Oglethorpe from September 1974 to March 1984.\nOKEFENOKE RURAL EMC\nSteve Rawl, Sr.--Director, age 47, has been President of Rawls, Inc., a gift shop, since 1972. He has served as a Director of Oglethorpe since September 1993, with his present term to expire in March 1994. He is also a Director of GEMC.\nW. Don Holland--Alternate Director, age 43, is General Manager of Okefenoke Rural EMC. He has served as an Alternate Director of Oglethorpe since 1979, with his present term to expire in March 1994. He was formerly General Manager of Little Ocmulgee EMC. He is currently Chairman of the Planning and Construction Committee of Oglethorpe.\nPATAULA EMC\nJames Grubbs--Director, age 71, is a farmer. He is involved with fertilizer and chemical sales, and operates an air spray service and a peanut purchasing plant. He has served on the Board of Directors of Oglethorpe since March 1983. His present term as a Director will expire in March 1996. He is a member of the Finance Committee of Oglethorpe.\nGary W. Wyatt--Director, age 41, is General Manager of Pataula EMC. He has served as an Alternate Director of Oglethorpe since July 1986, with his present term to expire in March 1996. He previously was Operations Manager and Assistant Operations Superintendent of Coosa Valley Electric Cooperative.\nPLANTERS EMC\nSammy M. Jenkins--Director, age 67, is in the farm machinery business and has been President of Jenkins Ford Tractor Co., Inc. since 1973. He has served on the Board of Directors of Oglethorpe since March 1988, with his present term to expire in March 1994. He is Vice President of Planters EMC. He was Vice Chairman of the Board of Oglethorpe from March 1989 to March 1990.\nEllis H. Lovett--Alternate Director, age 58, is General Manager of Planters EMC and has served as an Alternate Director of Oglethorpe since 1983. His present term as an Alternate Director will expire in March 1994. He is a member of the Operations Committee of Oglethorpe.\nRAYLE EMC\nJ. M. Sherrer--Director, age 58, is the owner of a grocery, hardware, gas and feed store. He has served on the Board of Directors of Oglethorpe since September 1993, with his present term to expire in March 1994.\nWayne Poss--Alternate Director, age 48, has served as General Manager of Rayle EMC since December 1992. Prior to that time, he served as Manager of Engineering for Rayle EMC. He has served as an Alternate Director to Oglethorpe since February 1993, with his present term to expire in March 1994. He is a member of the GEMC\/Oglethorpe External Affairs Committee.\nSATILLA RURAL EMC\nJack D. Vickers--Director, age 76, is the owner and operator of a farm in Coffee County, Georgia. He has served on the Board of Directors of Oglethorpe since March 1975. His present term will expire in March 1994.\nR. Lehman Lanier--Alternate Director, age 74, is President and Chief Executive Officer of Satilla Rural EMC. He has served as an Alternate Director of Oglethorpe since September 1974, and his present term expires in March 1994. He is a member of the Operations Committee of Oglethorpe. He is also a Director of Southeastern Data Cooperative, Inc.\nSAWNEE EMC\nC. W. Cox, Jr.--Director, age 66, is the owner of Cox Digging & Grading, a general contracting sole proprietorship. He has served as a member of the Board of Directors of Oglethorpe since February 1987, with his present term to expire in March 1994. He is a member of the Planning and Construction Committee.\nMichael A. Goodroe--Alternate Director, age 37, is Executive Vice President and General Manager of Sawnee EMC. He previously served as Assistant General Manager of Sawnee EMC. He has served as an Alternate Director of Oglethorpe since 1990, with his present term to expire in March 1994. He is a member of the GEMC\/Oglethorpe External Affairs Committee.\nSLASH PINE EMC\nJohnnie Crumbley--Director, age 71, is President of Slash Pine EMC. He retired in 1982 from the Seaboard Coastline System. He has served as a member of the Board of Directors of Oglethorpe since March 1978, with his present term to expire in March 1996. He is also a Director of GEMC.\nEdward Teston--Alternate Director, age 59, is Manager of Slash Pine EMC. He has served as an Alternate Director of Oglethorpe since 1985, with his present term to expire in March 1996.\nSNAPPING SHOALS EMC\nJarnett W. Wigington--Director, age 61, is a self-employed wallpapering contractor. He has served on the Board of Directors of Oglethorpe since 1990. His present term expires in March 1994. He is a member of the Executive Committee of Oglethorpe.\nJ. E. Robinson--Alternate Director, age 74, is President, Cheif Executive Officer and Manager of Snapping Shoals EMC. He has been Manager of Snapping Shoals EMC since 1953. He has served as an Alternate Director of Oglethorpe since September 1974, with his present term to expire in March 1994. Mr. Robinson is also a Director of the First National Bank of Newton County.\nSUMTER EMC\nBob Jernigan--Director, age 66, is a manager for Mike L. Moon Enterprises in Columbus, Georgia, which among other things, is involved in real estate development and wholesale and retail women's apparel. He has served as a Director of Oglethorpe since March 1976, with his present term to expire in March 1996. He served as Vice Chairman of the Board of Directors of Oglethorpe from March 1990 to March 1993. He is currently a member of the Executive Committee. He is the President of Sumter EMC and a Director of GEMC.\nJames T. McMillan--Alternate Director, age 44, has been General Manager of Sumter EMC since 1984. Prior to that time, he served as Manager of the Staff Services Department of Sumter EMC, Manager of the Construction and Maintenance Department of Sumter EMC, and Manager of the Office Services Department of Sumter EMC. He has served as an Alternate Director of Oglethorpe since 1984, with his present term to expire in March 1996.\nTHREE NOTCH EMC\nC. Willard Mims--Director, age 47, is a farmer. He has served on the Board of Directors since 1991, with his present term to expire in March 1996. He is a member of the GEMC\/Oglethorpe External Affairs Committee. He is also a Director of GEMC.\nCarlton O. Thomas--Alternate Director, age 46, has been General Manager of Three Notch EMC since 1990. Prior to that time, he served as Office Manager of Three Notch EMC. He has served as an Alternate Director of Oglethorpe since 1990, with his present term to expire in March 1996. He is also a Director of First Federal Savings Bank of Southwest Georgia.\nTRI-COUNTY EMC\nJames E. Dooley--Director, age 67, is self-employed in the real estate business. He has served on the Board of Directors of Oglethorpe since November 1986, with his present term to expire in March 1996. Prior to his retirement in 1982, he was employed as a Director in the U.S. Department of Agriculture.\nCarol Robertson--Alternate Director, age 45, is the General Manager of Tri-County EMC. She has served as an Alternate Director of Oglethorpe since July 1988, with her present term to expire in March 1996. She is a member of the GEMC\/Oglethorpe External Affairs Committee.\nTROUP EMC\nWillis T. Woodruff--Director, age 68, is a self-employed cattleman. He has served on the Board of Directors of Oglethorpe since March 1987, with his present term to expire in March 1995. He is also a Director of GEMC.\nWayne Livingston--Alternate Director, age 42, has been the Executive Vice President and General Manager of Troup EMC since September 1987. Prior to that time, he was General Manager of Ocmulgee EMC. He has served\nas an Alternate Director of Oglethorpe since 1978, with his present term to expire in March 1995. He is a member of the Finance Committee.\nUPSON COUNTY EMC\nHubert Hancock--Director, age 77, has been President of the Upson County EMC for the past 33 years. He has served as a Director of Oglethorpe since September 1974, serving as Vice President from 1975 to 1978, as President from March 1984 to July 1986, and as Chairman of the Board from July 1986 to March 1989. His present term as Director expires in March 1995, and he currently serves on the Executive Committee of Oglethorpe. Prior to his involvement with Oglethorpe and Upson County EMC, Mr. Hancock was a general farmer as well as a peach farmer and cattle farmer. Mr. Hancock is also a Director of West Central Georgia Bank in Thomaston, Georgia, Chairman of Upson County Hospital Authority, and a member of the Thomaston Upson County Industrial Authority.\nWalter E. Hammond--Alternate Director, age 62, is General Manager of Upson County EMC. He has served as an Alternate Director of Oglethorpe since 1978, and his present term will expire in March 1995.\nWALTON EMC\nBob J. Dickens--Director, age 67, retired in 1988 from Thornton Brothers Paper Company, Inc. in Athens, Georgia. He has served on the Board of Directors of Oglethorpe since March 1987, and his present term expires in March 1995. He is a member of Oglethorpe's Operations Committee.\nD. Ronnie Lee--Alternate Director, age 45, has been General Manager of Walton EMC since August 1993. Prior to that time, he served as Manager of Engineering and Operations from January 1979 to August 1993 for Walton EMC. He has served as an Alternate Director of Oglethorpe since September 1993, with his present term to expire in March 1995.\nWASHINGTON EMC\nW. W. Archer--Director, age 62, is a self-employed insurance agent and cattle farmer. He has served on Oglethorpe's Board of Directors since September 1987, and his present term expires in March 1995. He is also a Director of the Bank of Hancock County in Sparta, Georgia.\nRobert S. Moore, Sr.--Alternate Director, age 64, has been General Manager of Washington EMC since April 1982. Prior to that time, he was Assistant General Manager of Washington EMC. He has served as an Alternate Director of Oglethorpe since 1982, with his present term to expire in March 1995. He is a member of the Planning and Construction Committee of Oglethorpe.\n(b) IDENTIFICATION OF EXECUTIVE OFFICERS AND SENIOR EXECUTIVES:\nOglethorpe is managed and operated under the direction of a President and Chief Executive Officer, who is appointed by the Board of Directors. The executive officers of Oglethorpe and their principal occupations are as follows:\nJ. Calvin Earwood, Chairman of the Board, age 52, has served as a principal executive officer of Oglethorpe since March 1984 (from March 1984 to July 1986, as Vice President; from July 1986 to March 1989, as Vice Chairman of the Board; and since March 1989, as Chairman of the Board). Mr. Earwood has served as a Director of Oglethorpe since March 1981, with his present term to expire in March 1995. He is currently the Chairman of the Executive Committee of Oglethorpe and a member of the GEMC\/Oglethorpe Human Resources Management Committee. He was previously a member of the Operations Review Committee of Oglethorpe. From 1965 through 1982, Mr. Earwood was a salesman and part owner of Builders Equipment Company. Since January 1983 he has been the owner and President of Sunbelt Fasteners, Inc., which sells specialty tools and fasteners to the\ncommercial construction trade. He is also Chairman of the Board of Directors of Community Trust Bank in Hiram, Georgia and a Director of GreyStone Power Corporation.\nBenny W. Denham--Vice Chairman of the Board, age 63, has served as a principal executive officer of Oglethorpe since March 1993. He has served as a member of Oglethorpe's Executive Committee and on the Board of Directors of Oglethorpe since December 1988. His present term will expire in March 1995. He was previously a member of the Power Planning and Technical Advisory Committee of Oglethorpe. He is also the past President of GEMC and currently serves on GEMC's Executive Committee and is a Director of Community National Bank in Ashland, Georgia. Mr. Denham is a Director of Irwin EMC.\nJohn S. Dean, Sr., Secretary-Treasurer, age 54, has served as Secretary-Treasurer of Oglethorpe since March 1989. He has served as an Alternate Director of Oglethorpe since 1975, with his present term to expire in March 1995. He is currently a member of the Finance Committee and an ex officio member of the Executive Committee. He previously served on Oglethorpe's Operations Review Committee. Mr. Dean has been General Manager\/Chief Executive Officer of Amicalola EMC since 1974. Prior to his employment with Amicalola EMC, he was Controller of Pickens General Hospital. Currently, he is on the Board of Directors of Southeastern Data Cooperative, Inc., Crescent Bank & Trust Company, CoBank, and GEMC Workers' Compensation Fund. Mr. Dean has a Bachelor of Arts degree in Accounting from the University of Georgia.\nT. D. Kilgore, President and Chief Executive Officer, age 46, has served as an executive of Oglethorpe since July 1984 (from July 1984 to July 1986, as Division Manager, Power Supply; July 1986 to July 1991, as Senior Vice President, Power Supply; and since July 1991, as President and Chief Executive Officer). Mr. Kilgore served as Executive Vice President of GEMC from December 1991 to June 1992. He has served as President and Chief Executive Officer of GEMC from June 1992 until the present. Mr. Kilgore has over 20 years of utility experience, including five years in senior management positions with Arkansas Power & Light Co. and seven years as a civilian employee with the Department of the Army in positions ranging from reliability engineering to construction management. Mr. Kilgore has served on various industry committees including Electric Power Research Institute's Board of Directors and its Advanced Power Systems Division and Coal System Division Advisory Committees. He has also served on the Boards of Directors of the U.S. Committee for Energy Awareness, the Advanced Reactor Corporation, on the Edison Electric Institute's Power Plant Availability Improvement Task Force and the Nuclear Power Oversight Committee, an organization of industry executives which considers policy issues for the nation's nuclear power industry. Mr. Kilgore currently serves on the Board of Directors of the Georgia Chamber of Commerce and on the National Rural Electric Cooperative Association's Power and Generation Committee. Mr. Kilgore has a BS degree in mechanical engineering from the University of Alabama, where he has been recognized as a Distinguished Engineering Fellow, and a ME degree in industrial engineering from Texas A&M.\nThe senior executives assisting Mr. Kilgore, their areas of responsibility and a brief summary of their experience are as follows:\nCharles T. Autry, Senior Vice President and General Counsel, age 45, has served as an executive of Oglethorpe since February 1986 (from February 1986 to July 1986, as Corporate Counsel; from July 1986 to December 1989, as General Counsel; from December 1989 to November 1991, as Senior Vice President, Governmental Affairs and General Counsel; from November 1991 to February 1994, as Senior Vice President, Corporate Services and General Counsel; and since February 1994, as Senior Vice President and General Counsel). Prior to that time, Mr. Autry served as Staff Attorney from August 1979 to January 1985 and as Corporate Attorney from January 1985 to February 1986. Mr. Autry joined Oglethorpe in August 1979 after five years of military and private practice experience. He has been admitted to practice before all State Courts in Georgia as well as the Federal District Court for the Northern District of Georgia, and the Fifth and Eleventh Circuit Courts of Appeal and the U. S. Tax Court. He has a BA degree from the University of Georgia, a JD degree from the University of Alabama School of Law, a LLM degree in Taxation from Emory University School of Law, and an MBA degree from Georgia State University.\nEugen Heckl, Senior Vice President and Chief Financial Officer, age 59, has served as an executive of Oglethorpe since March 1975 (from March 1975 to July 1986, as senior finance and accounting executive; from July 1986 to February 1994 as Senior Vice President, Finance; and since February 1994, as Senior Vice President and Chief Financial Officer). Mr. Heckl has approximately 30 years of experience, including ten years as a consultant and auditor to electric utilities with Arthur Andersen & Co. and two years as Secretary-Treasurer of Davis Brothers, Inc. Mr. Heckl is a Certified Public Accountant in Georgia and has a BS degree in accounting from Samford University and an MBA degree from Emory University. Mr. Heckl has served as a Director of the GEMC Federal Credit Union since 1983, and as its Chief Financial Officer since 1984.\nG. Stanley Hill, Senior Vice President, External Affairs, age 58, has served as an executive of Oglethorpe since October 1975 (from October 1975 to November 1988, as Director of Planning, Director of Power Supply and Planning, Division Manager, Power Supply and Engineering, Division Manager, Engineering, Senior Vice President, Planning and System Operations; from November 1988 to November 1991, as Senior Vice President, Administration; from November 1991 to February 1994, as Senior Vice President, Marketing and Customer Service and since February 1994, as Senior Vice President, External Affairs). Mr. Hill has approximately 36 years experience with electric utilities, including four years in the Engineering Department of the South Carolina Public Service Authority and 11 years as engineer and senior engineer with Southern Engineering Company of Georgia, a consulting engineering firm. Mr. Hill is a registered Professional Engineer and a certified Cogeneration Professional in Georgia and has a BS degree in electrical engineering from Clemson University and an MBA degree from Georgia State University. Mr. Hill is presently an Oglethorpe representative on the Joint Committee. For information about the Joint Committee, see \"CO-OWNERS OF THE PLANTS AND THE PLANT AND TRANSMISSION AGREEMENTS-The Joint Committee Agreement\" in Item 1.\nW. Clayton Robbins, Senior Vice President and Group Executive, Support Services, age 47, has served as an executive of Oglethorpe since December 1991 (from December 1991 to February 1994, as Vice President, Corporate Performance, and since February 1994, as Senior Vice President and Group Executive, Support Services). Prior to that time, Mr. Robbins served as Department Manager, Project Services, from September 1986 to November 1988; as Program Director, Marketing Research and Analysis, from November 1988 to December 1989; and as Vice President, Marketing Research and Analysis, from December 1989 to December 1991. Before coming to Oglethorpe, Mr. Robbins spent 17 years with the Stearns-Catalytic World Corporation and various subsidiaries, including 13 years in management positions responsible for Human Resources, Information Systems, Contracts, Insurance, Accounting, and Project Controls. Mr. Robbins has a BA degree in Business Administration from the University of North Carolina at Charlotte.\nDavid L. Self, Senior Vice President and Group Executive, Generation, age 65, has served as an executive of Oglethorpe since August 1991 (from August 1991 to November 1991, as Senior Vice President, Power Supply; from November 1991 to February 1994, Senior Vice President, Operations; and since February 1994, as Senior Vice President and Group Executive, Generation). Mr. Self joined Oglethorpe in February 1988 as the corporation's on-site representative at Plant Hatch after 30 years in the United States Navy and five years with Illinois Power Company. He is a member of the Board of Trustees of Southern Tech Foundation, Inc. He has a BS degree from Saint Mary's College in California. Mr. Self is presently the Oglethorpe representative on both the Nuclear Managing Board and the Plant Scherer Managing Board, and is an Oglethorpe representative on the Joint Committee. For information about the Managing Boards and the Joint Committee, see \"CO-OWNERS OF THE PLANTS AND THE PLANT AND TRANSMISSION AGREEMENTS-The Plant Agreements\" and \"-The Joint Committee Agreement\" in Item 1.\nNelson G. Hawk, Vice President and Group Executive, Marketing, age 44, joined Oglethorpe in February 1994 after almost 24 years of electric utility experience. Prior to coming to Oglethorpe, he held various management positions with Florida Power & Light Company and related subsidiaries, including as Director of Regulatory Affairs at Florida Power & Light from October 1993 to January 1994; as Director of Market Planning from July 1991 to September 1993; and as Director of Strategic Business and President of FPL Enersys Services, Inc. (a utility subsidiary providing energy services to commercial\/industrial customers) from April 1989 to June 1991. Mr. Hawk has a BS degree in Electrical Engineering from Georgia Institute of Technology and an MBA degree from Florida International University.\nWylie H. Sanders, Vice President and Group Executive, Transmission, age 57, joined Oglethorpe in January 1994 after 35 years of utility experience, including 20 years in management positions with Florida Power & Light Company. Prior to coming to Oglethorpe, he served as Division Commercial Manager from April 1973 to August 1983; as District General Manager from August 1983 to July 1991; and as Director of Transmission from July 1991 to September 1993 with Florida Power & Light. Mr. Sanders has a Bachelor's degree in Industrial Engineering from Georgia Institute of Technology and has participated in Harvard University's postgraduate Program for Management Development.\nITEM 11.","section_11":"ITEM 11. EXECUTIVE COMPENSATION\nSUMMARY COMPENSATION TABLE\nThe following table sets forth for Oglethorpe's President and Chief Executive Officer and the four most highly compensated senior executives all compensation paid or accrued for services rendered in all capacities during the years ended December 31, 1993, 1992 and 1991. Amounts included in the table under \"Bonus\" represent payments based on an incentive compensation policy. All amounts paid under this policy are fully at risk each year and are earned based upon the achievement of corporate goals and each individual's contribution to achieving those goals. In conjunction with this policy, base salaries remain fairly stable and are targeted below the market valuations for similar positions.\nPENSION PLAN TABLE\nThe preceding table shows estimated annual straight life annuity benefits payable upon retirement to persons in specified compensation and years-of-service classifications assuming such persons had attained age 65 and retired during 1993. For purposes of calculating pension benefits, compensation is defined as total salary and bonus, as shown in the above Summary Compensation Table. Because covered compensation changes each year, the estimated pension benefits for the classifications above will also change in future years. The above pension benefits are not subject to any deduction for Social Security or other offset amounts.\nAs of December 31, 1993, the years of credited service under the Pension Plan for the individuals listed in the Summary Compensation Table are as follows:\nCOMPENSATION OF DIRECTORS\nOglethorpe pays its Directors a per diem fee of $200 for meetings attended or $50 for meetings conducted by conference call. Additionally, Oglethorpe reimburses its Directors for out-of-pocket expenses incurred in attending a meeting. Alternate Directors serving as a Director at any meeting receive neither the per diem payment nor the expense reimbursement to which a Director is entitled. The Member of which the Alternate Director is the manager receives reimbursement for the Alternate Director's out-of-pocket expenses.\nThe Chairman of the Board is also paid at least one day's per diem of $200 each month for time involved in carrying out his official duties in addition to the regularly scheduled Board Meeting.\nCOMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION\nW. F. Farr, J. Calvin Earwood, Ronnie Fleeman, E. J. Martin, Jr. and Robert A. Reeves serve as members of the GEMC\/Oglethorpe Human Resources Management Committee which functions as Oglethorpe's compensation committee. J. Calvin Earwood has served as an executive officer of Oglethorpe since 1984 and has served as the Chairman of the Board since 1989.\nITEM 12.","section_12":"ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT\nNot applicable.\nITEM 13.","section_13":"ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS\nNone.\nPART IV\nITEM 14.","section_14":"ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K\nPAGE ---- (a) LIST OF DOCUMENTS FILED AS A PART OF THIS REPORT.\n(1) FINANCIAL STATEMENTS (Included under \"Item 8. Financial Statements and Supplementary Data\") Statements of Revenues and Expenses, For the Years Ended December 31, 1993, 1992 and 1991. . . . . . . . . . 33 Statements of Patronage Capital, For the Years Ended December 31, 1993, 1992 and 1991. . . . . . . . . . . . . 33 Balance Sheets, As of December 31, 1993 and 1992 . . . . . 34 Statements of Capitalization, As of December 31, 1993 and 1992. . . . . . . . . . . . . . . . . . . . . . . . . 36 Statements of Cash Flows, For the Years Ended December 31, 1993, 1992 and 1991 . . . . . . . . . . . . . . . . . 37 Notes to Financial Statements. . . . . . . . . . . . . . . 38 Report of Management . . . . . . . . . . . . . . . . . . . 48 Report of Independent Public Accountants . . . . . . . . . 48\n(2) FINANCIAL STATEMENT SCHEDULES\nSchedule I -- Marketable Securities--Other Security Investments, As of December 31, 1993 78 Schedule V -- Utility Plant, Including Intangibles, For the Years Ended December 31, 1993, 1992 and 1991 79 Schedule VI -- Accumulated Provision for Depreciation of Utility Plant, For the Years Ended December 31, 1993, 1992 and 1991 82 Schedule X -- Supplementary Income Statement Information, For the Years Ended December 31, 1993, 1992 and 1991 85\n(3) EXHIBITS\nNUMBER DESCRIPTION - ------ -----------\n*3(i) -- Restated Articles of Incorporation of Oglethorpe, dated as of July 26, 1988. (Filed as Exhibit 3.1 to the Registrant's Form 10-K for the fiscal year ended December 31, 1988, File No. 33-7591.)\n*3(ii) -- Bylaws of Oglethorpe as amended November 8, 1993. (Filed as Exhibit 3.2 to the Registrant's Form 10-Q for the quarterly period ended September 30, 1993, File No. 33- 7591.)\n*4.1 -- Serial Facility Bond (included in Collateral Trust Indenture listed as Exhibit 4.2).\n*4.2 -- Collateral Trust Indenture, dated as of October 15, 1986, between OPC Scherer Funding Corporation, Oglethorpe and Trust Company Bank, a banking corporation, as Trustee. (Filed\nNUMBER DESCRIPTION - ------ -----------\nas Exhibit 4.2 to the Registrant's Form S-1 Registration Statement, File No. 33- 7591, filed on October 9, 1986.)\n*4.3 -- Refunding Lessor Notes. (Filed as Exhibit 4.3.1 to the Registrant's Form S-1 Registration Statement, File No. 33-7591, filed on October 9, 1986.)\n*4.4(a) -- Nonrecourse Promissory Secured Note, due June 30, 2011, from Wilmington Trust Company and William J. Wade, as Owner Trustees, to Columbia Bank for Cooperatives. (Filed as Exhibit 4.3.4 to the Registrant's Form S-1 Registration Statement, File No. 33- 7591, filed on October 9, 1986.)\n*4.4(b) -- First Amendment to Nonrecourse Promissory Secured Note, dated as of June 30, 1987, by Wilmington Trust Company and The Citizens and Southern National Bank, as Owner Trustee under Trust Agreement No. 1 with IBM Credit Financing Corporation, to Columbia Bank for Cooperatives. (Filed as Exhibit 4.3.4(a) to the Registrant's Form 10-K for the fiscal year ended December 31, 1987, File No. 33-7591.)\n*4.5(a) -- Indenture of Trust, Deed to Secure Debt and Security Agreement No. 2, dated December 30, 1985, between Wilmington Trust Company and William J. Wade, as Owner Trustees under Trust Agreement No. 2 dated December 30, 1985, with Ford Motor Credit Company and The First National Bank of Atlanta, as Indenture Trustee, together with a Schedule identifying three other substantially identical Indentures of Trust, Deeds to Secure Debt and Security Agreements. (Filed as Exhibit 4.4(b) to the Registrant's Form S-1 Registration Statement, File No. 33-7591, filed on October 9, 1986.)\n*4.5(b) -- First Supplemental Indenture of Trust, Deed to Secure Debt and Security Agreement No. 2 (included as Exhibit A to the Supplemental Participation Agreement No. 2 listed as 10.1.1(b)).\n*4.5(c) -- First Supplemental Indenture of Trust, Deed to Secure Debt and Security Agreement No. 1, dated as of June 30, 1987, between Wilmington Trust Company and The Citizens and Southern National Bank, collectively as Owner Trustee under Trust Agreement No. 1 with IBM Credit Financing Corporation, and The First National Bank of Atlanta, as Indenture Trustee. (Filed as Exhibit 4.4(c) to the Registrant's Form 10-K for the fiscal year ended December 31, 1987, File No. 33-7591.)\n*4.6(a) -- Lease Agreement No. 2 dated December 30, 1985, between Wilmington Trust Company and William J. Wade, as Owner Trustees under Trust Agreement No. 2, dated December 30, 1985, with Ford Motor Credit Company, Lessor, and Oglethorpe, Lessee, with a Schedule identifying three other substantially identical Lease Agreements. (Filed as Exhibit 4.5(b) to the Registrant's Form S-1 Registration Statement, File No. 33-7591, filed on October 9, 1986.)\n*4.6(b) -- First Supplement To Lease Agreement No. 2 (included as Exhibit B to the Supplemental Participation Agreement No. 2 listed as 10.1.1(b)).\n*4.6(c) -- First Supplement to Lease Agreement No. 1, dated as of June 30, 1987, between The Citizens and Southern National Bank as Owner Trustee under Trust Agreement No. 1 with IBM Credit Financing Corporation, as Lessor, and Oglethorpe, as Lessee. (Filed as Exhibit 4.5(c) to the Registrant's Form 10-K for the fiscal year ended December 31, 1987, File No. 33-7591.)\nNUMBER DESCRIPTION - ------ -----------\n*4.7(a) -- Amended and Consolidated Loan Contract dated as of June 1, 1984 between Oglethorpe and the United States of America, as amended and supplemented, together with eleven notes executed and delivered pursuant thereto. (Filed as Exhibit 4.6 to the Registrant's Form S-1 Registration Statement, File No. 33-7591, filed on October 9, 1986.)\n*4.7(b) -- Amendments, dated October 17, 1986, and January 9, 1987, to Amended and Consolidated Loan Contract dated as of June 1, 1984 between Oglethorpe and the United States of America. (Filed as Exhibit 4.6(a) to the Registrant's Form 10-K for the fiscal year ended December 31, 1986, File No. 33-7591.)\n*4.7(c) -- Amendment, dated September 30, 1988, to Amended and Consolidated Loan Contract dated as of June 1, 1984 between Oglethorpe and the United States of America. (Filed as Exhibit 4.6(b) to the Registrant's Form 10-K for the fiscal year ended December 31, 1988, File No. 33-7591.)\n*4.7(d) -- Amendment, dated March 20, 1990, to Amended and Consolidated Loan Contract dated as of June 1, 1984 between Oglethorpe and the United States of America. (Filed as Exhibit 4.6(c) to the Registrant's Form 10-K for the fiscal year ended December 31, 1989, File No. 33-7591.)\n*4.7(e) -- Amendment, dated July 1, 1991, to Amended and Consolidated Loan Contract dated as of June 1, 1984 between Oglethorpe and the United States of America. (Filed as Exhibit 4.6(d) to the Registrant's Form 10-K for the fiscal year ended December 31, 1991, File No. 33-7591.)\n*4.7(f) -- Amendment, dated April 6, 1992, to Amended and Consolidated Loan Contract dated as of June 1, 1984 between Oglethorpe and the United States of America. (Filed as Exhibit 4.6(e) to the Registrant's Form 10-K for the fiscal year ended December 31, 1992, File No. 33-7591.)\n*4.7(g) -- Amendment, dated June 12, 1992, to Amended and Consolidated Loan Contract dated as of June 1, 1984 between Oglethorpe and the United States of America. (Filed as Exhibit 4.6(f) to the Registrant's Form 10-K for the fiscal year ended December 31, 1992, File No. 33-7591.)\n*4.7(h) -- Amendment, dated October 20, 1992, to Amended and Consolidated Loan Contract dated as of June 1, 1984 between Oglethorpe and the United States of America. (Filed as Exhibit 4.6(g) to the Registrant's Form 10-K for the fiscal year ended December 31, 1992, File No. 33-7591.)\n*4.7(i) -- Amendment, dated February 25, 1993, to Amended and Consolidated Loan Contract dated as of June 1, 1984 between Oglethorpe and the United States of America. (Filed as Exhibit 4.6(h) to the Registrant's Form 10-K for the fiscal year ended December 31, 1992, File No. 33-7591.)\n4.7(j) -- Amendment, dated August 26, 1993, to Amended and Consolidated Loan Contract dated as of June 1, 1984 between Oglethorpe and the United States of America.\nNUMBER DESCRIPTION - ------ -----------\n*4.8.1(a) -- Mortgage and Security Agreement made by Oglethorpe to United States of America dated as of January 8, 1975. (Filed as Exhibit 4.12(b) to the Registrant's Form S-1 Registration Statement, File No. 33-7591, filed on October 9, 1986.)\n*4.8.1(b) -- Supplemental Mortgage made by Oglethorpe to United States of America dated as of January 6, 1977. (Filed as Exhibit 4.12(a) to the Registrant's Form S-1 Registration Statement, File No. 33-7591, filed on October 9, 1986.)\n*4.8.2(a) -- Consolidated Mortgage and Security Agreement made by and among Oglethorpe, Mortgagor, and United States of America and Trust Company Bank, as trustee under certain indentures identified therein, Mortgagees, dated as of November 1, 1978. (Filed as Exhibit 4.11(c) to the Registrant's Form S-1 Registration Statement, File No. 33- 7591, filed on October 9, 1986.)\n*4.8.2(b) -- Confirmation of Execution And Delivery of Notes And First Amendment to Consolidated Mortgage and Security Agreement, dated as of January 11, 1979. (Filed as Exhibit 4.11(b) to the Registrant's Form S-1 Registration Statement, File No. 33-7591, filed on October 9, 1986.)\n*4.8.2(c) -- Supplement and Second Amendment to Consolidated Mortgage and Security Agreement made by and among Oglethorpe, Mortgagor, and United States of America and Trust Company Bank, as Trustee, Mortgagees, dated April 30, 1980. (Filed as Exhibit 4.11(a) to the Registrant's Form S-1 Registration Statement, File No. 33-7591, filed on October 9, 1986.)\n*4.8.3 -- Consolidated Mortgage and Security Agreement made by and among Oglethorpe, Mortgagor, and United States of America and Trust Company Bank, as trustee under certain indentures identified therein, Mortgagees, dated as of September 15, 1982. (Filed as Exhibit 4.10 to the Registrant's Form S-1 Registration Statement, File No. 33-7591, filed on October 9, 1986.)\n*4.8.4 -- Consolidated Mortgage and Security Agreement made by and among Oglethorpe, Mortgagor, and United States of America, Columbia Bank for Cooperatives, and Trust Company Bank, as trustee under certain indentures identified therein, Mortgagees, dated as of June 1, 1984. (Filed as Exhibit 4.9 to the Registrant's Form S-1 Registration Statement, File No. 33-7591, filed on October 9, 1986.)\n*4.8.5 -- Consolidated Mortgage and Security Agreement made by and among Oglethorpe, Mortgagor, and United States of America, Columbia Bank for Cooperatives, and Trust Company Bank, as trustee under certain indentures identified therein, Mortgagees, dated as of December 1, 1984. (Filed as Exhibit 4.8 to the Registrant's Form S-1 Registration Statement, File No. 33-7591, filed on October 9, 1986.)\n*4.8.6(a) -- Consolidated Mortgage and Security Agreement made by and among Oglethorpe, Mortgagor, and United States of America, Columbia Bank for Cooperatives, and Trust Company Bank, as trustee under certain indentures identified therein, Mortgagees, dated as of October 15, 1985. (Filed as Exhibit 4.7 to the Registrant's Form S-1 Registration Statement, File No. 33-7591, filed on October 9, 1986.)\n*4.8.6(b) -- First Supplement and Amendment to Consolidated Mortgage and Security Agreement made by and among Oglethorpe, Mortgagor, and United States of America, Columbia Bank for\nNUMBER DESCRIPTION - ------ -----------\nCooperatives, and Trust Company Bank, as trustee under certain indentures identified therein, Mortgagees, dated as of November 1, 1988. (Filed as Exhibit 4.7(a) to the Registrant's Form 10-K for the fiscal year ended December 31, 1988, File No. 33- 7591.)\n*4.8.7(a) -- Consolidated Mortgage and Security Agreement made by and among Oglethorpe, Mortgagor, and United States of America, National Bank for Cooperatives, and Trust Company Bank, as trustee under certain indentures identified therein, Mortgagees, dated as of December 1, 1989. (Filed as Exhibit 4.19 to the Registrant's Form 10-K for the fiscal year ended December 31, 1989, File No. 33-7591.)\n*4.8.7(b) -- Supplement to Consolidated Mortgage and Security Agreement made by and among Oglethorpe, Mortgagor, and United States of America, National Bank for Cooperatives, and Trust Company Bank, as trustee under certain indentures identified therein, Mortgagees, dated as of November 20, 1990. (Filed as Exhibit 4.19(a) to the Registrant's Form 10-K for the fiscal year ended December 31, 1990, File No. 33-7591.)\n*4.8.8 -- Consolidated Mortgage and Security Agreement made by and among Oglethorpe, Mortgagor, and United States of America, National Bank for Cooperatives, Credit Suisse, acting by and through its New York branch, and Trust Company Bank, as trustee under certain indentures identified therein, Mortgagees, dated as of April 1, 1992. (Filed as Exhibit 4.21 to the Registrant's Form 10-K for the fiscal year ended December 31, 1992, File No. 33-7591.)\n*4.8.9 -- Consolidated Mortgage and Security Agreement made by and among Oglethorpe, Mortgagor, and United States of America, National Bank for Cooperatives, Credit Suisse, acting by and through its New York branch, and Trust Company Bank, as trustee under certain indentures identified therein, Mortgagees, dated as of October 1, 1992. (Filed as Exhibit 4.22 to the Registrant's Form 10-K for the fiscal year ended December 31, 1992, File No. 33-7591.)\n*4.8.10 -- Consolidated Mortgage and Security Agreement made by and among Oglethorpe, Mortgagor, and United States of America, National Bank for Cooperatives, Credit Suisse, acting by and through its New York branch, and Trust Company Bank, as trustee under certain indentures identified therein, Mortgagees, dated as of December 1, 1992. (Filed as Exhibit 4.23 to the Registrant's Form 10-K for the fiscal year ended December 31, 1992, File No. 33-7591.)\n4.8.11 -- Consolidated Mortgage and Security Agreement made by and among Oglethorpe, Mortgagor, and United States of America, National Bank for Cooperatives, Credit Suisse, acting by and through its New York branch, and Trust Company Bank, as trustee under certain indentures identified therein, Mortgagees, dated as of September 1, 1993.\n++4.9.1 -- Loan Agreement, dated as of October 1, 1992, between Development Authority of Monroe County and Oglethorpe relating to Development Authority of Monroe County Pollution Control Revenue Bonds (Oglethorpe Power Corporation Scherer Project), Series 1992A.\n++4.9.2 -- Note, dated October 1, 1992, from Oglethorpe to Trust Company Bank, as trustee acting pursuant to a Trust Indenture, dated as of October 1, 1992, between Development Authority of Monroe County and Trust Company Bank.\nNUMBER DESCRIPTION - ------ -----------\n++4.9.3 -- Trust Indenture, dated as of October 1, 1992, between Development Authority of Monroe County and Trust Company Bank, Trustee, relating to Development Authority of Monroe County Pollution Control Revenue Bonds (Oglethorpe Power Corporation Scherer Project), Series 1992A.\n+4.10.1 -- Loan Agreement, dated as of April 1, 1992, between Development Authority of Burke County and Oglethorpe relating to Development Authority of Burke County Adjustable Tender Pollution Control Revenue Bonds (Oglethorpe Power Corporation Vogtle Project), Series 1992A.\n+4.10.2 -- Note, dated April 1, 1992, from Oglethorpe to Trust Company Bank, as trustee acting pursuant to a Trust Indenture, dated as of April 1, 1992, between Development Authority of Burke County and Trust Company Bank.\n+4.10.3 -- Trust Indenture, dated as of April 1, 1992, between Development Authority of Burke County and Trust Company Bank, as trustee, relating to Development Authority of Burke County Adjustable Tender Pollution Control Revenue Bonds (Oglethorpe Power Corporation Vogtle Project), Series 1992A.\n+4.10.4 -- First Amended and Restated Letter of Credit Reimbursement Agreement, dated as of June 1, 1992, as amended by First Amendment to First Amended and Restated Letter of Credit Reimbursement Agreement, dated as of September 15, 1993, between Credit Suisse and Oglethorpe relating to an Irrevocable Letter of Credit issued in connection with the Development Authority of Burke County Adjustable Tender Pollution Control Revenue Bonds (Oglethorpe Power Corporation Vogtle Project), Series 1992A.\n+++4.11.1 -- Loan Agreement, dated as of December 1, 1992, between Development Authority of Burke County and Oglethorpe relating to Development Authority of Burke County Adjustable Tender Pollution Control Revenue Bonds (Oglethorpe Power Corporation Vogtle Project), Series 1993A.\n+++4.11.2 -- Note, dated December 1, 1992, from Oglethorpe to Trust Company Bank, as trustee acting pursuant to a Trust Indenture, dated as of December 1, 1992, between Development Authority of Burke County and Trust Company Bank.\n+++4.11.3 -- Trust Indenture, dated as of December 1, 1992, from Development Authority of Burke County to Trust Company Bank, as trustee, relating to Development Authority of Burke County Adjustable Tender Pollution Control Revenue Bonds (Oglethorpe Power Corporation Vogtle Project), Series 1993A.\n+++4.11.4 -- Interest Rate Swap Agreement, dated as of December 1, 1992, by and between Oglethorpe and AIG Financial Products Corp. relating to Development Authority of Burke County Adjustable Tender Pollution Control Revenue Bonds (Oglethorpe Power Corporation Vogtle Project), Series 1993A.\n+++4.11.5 -- Liquidity Guaranty Agreement, dated as of December 1, 1992, by and between Oglethorpe and AIG Financial Products Corp. relating to Development Authority of Burke County Adjustable Tender Pollution Control Revenue Bonds (Oglethorpe Power Corporation Vogtle Project), Series 1993A.\nNUMBER DESCRIPTION - ------ -----------\n+4.11.6 -- Standby Bond Purchase Agreement, dated as of November 30, 1993, between Oglethorpe and The Industrial Bank of Japan, Limited relating to Development Authority of Burke County Adjustable Tender Pollution Control Revenue Bonds (Oglethorpe Power Corporation Vogtle Project), Series 1993A.\n*4.12.1 -- Loan Agreement, Loan No. T-840901, between Oglethorpe and Columbia Bank for Cooperatives, dated as of September 14, 1984. (Filed as Exhibit 4.14.1 to the Registrant's Form S-1 Registration Statement, File No. 33-7591, filed on October 9, 1986.)\n*4.12.2 -- Promissory Note, Loan No. T-840901, in the original principal amount of $8,995,000 from Oglethorpe to Columbia Bank for Cooperatives, dated as of November 1, 1984. (Filed as Exhibit 4.14.2 to the Registrant's Form S-1 Registration Statement, File No. 33-7591, filed on October 9, 1986.)\n*4.13.1 -- Loan Agreement, Loan No. T-831222, between Oglethorpe and Columbia Bank for Cooperatives, dated as of December 30, 1983. (Filed as Exhibit 4.16.1 to the Registrant's Form S-1 Registration Statement, File No. 33-7591, filed on October 9, 1986.)\n*4.13.2 -- Promissory Note, Loan No. T-831222, in the original principal amount of $2,376,000 from Oglethorpe to Columbia Bank for Cooperatives, dated as of June 1, 1984. (Filed as Exhibit 4.16.2 to the Registrant's Form S-1 Registration Statement, File No. 33-7591, filed on October 9, 1986.)\n*4.14.1 -- Loan Agreement, Loan No. T-830404, between Oglethorpe and Columbia Bank for Cooperatives, dated as of April 29, 1983. (Filed as Exhibit 4.18.1 to the Registrant's Form S-1 Registration Statement, File No. 33-7591, filed on October 9, 1986.)\n*4.14.2 -- Promissory Note, Loan No. T-830404-1, in the original principal amount of $9,935,000, from Oglethorpe to Columbia Bank for Cooperatives, dated as of April 29, 1983. (Filed as Exhibit 4.18.2 to the Registrant's Form S-1 Registration Statement, File No. 33-7591, filed on October 9, 1986.)\n*4.14.3 -- Security Deed and Security Agreement, dated April 29, 1983, between Oglethorpe and Columbia Bank for Cooperatives. (Filed as Exhibit 4.18.3 to the Registrant's Form S-1 Registration Statement, File No. 33-7591, filed on October 9, 1986.)\n*10.1.1(a) -- Participation Agreement No. 2 among Oglethorpe as Lessee, Wilmington Trust Company as Owner Trustee, The First National Bank of Atlanta as Indenture Trustee, Columbia Bank for Cooperatives as Loan Participant and Ford Motor Credit Company as Owner Participant, dated December 30, 1985, together with a Schedule identifying three other substantially identical Participation Agreements. (Filed as Exhibit 10.1.1(b) to the Registrant's Form S-1 Registration Statement, File No. 33-7591, filed on October 9, 1986.)\n*10.1.1(b) -- Supplemental Participation Agreement No. 2. (Filed as Exhibit 10.1.1(a) to the Registrant's Form S-1 Registration Statement, File No. 33-7591, filed on October 9, 1986.)\n*10.1.1(c) -- Supplemental Participation Agreement No. 1, dated as of June 30, 1987, among Oglethorpe as Lessee, IBM Credit Financing Corporation as Owner Participant, Wilmington Trust Company and The Citizens and Southern National Bank as Owner Trustee, The First National Bank of Atlanta, as Indenture Trustee, and Columbia Bank for Cooperatives, as\nNUMBER DESCRIPTION - ------ -----------\nLoan Participant. (Filed as Exhibit 10.1.1(c) to the Registrant's Form 10-K for the fiscal year ended December 31, 1987, File No. 33-7591.)\n*10.1.2 -- General Warranty Deed and Bill of Sale No. 2 between Oglethorpe, Grantor, and Wilmington Trust Company and William J. Wade, as Owner Trustees under Trust Agreement No. 2, dated December 30, 1985, with Ford Motor Credit Company, Grantee, together with a Schedule identifying three substantially identical General Warranty Deeds and Bills of Sale. (Filed as Exhibit 10.1.2 to the Registrant's Form S-1 Registration Statement, File No. 33-7591, filed on October 9, 1986.)\n*10.1.3(a) -- Supporting Assets Lease No. 2, dated December 30, 1985, between Oglethorpe, Lessor, and Wilmington Trust Company and William J. Wade, as Owner Trustees, under Trust Agreement No. 2, dated December 30, 1985, with Ford Motor Credit Company, Lessee, together with a Schedule identifying three substantially identical Supporting Assets Leases. (Filed as Exhibit 10.1.3 to the Registrant's Form S-1 Registration Statement, File No. 33-7591, filed on October 9, 1986.)\n*10.1.3(b) -- First Amendment to Supporting Assets Lease No. 2, dated as of November 19, 1987, together with a Schedule identifying three substantially identical First Amendments to Supporting Assets Leases. (Filed as Exhibit 10.1.3(a) to the Registrant's Form 10-K for the fiscal year ended December 31, 1987, File No. 33-7591.)\n*10.1.4(a) -- Supporting Assets Sublease No. 2, dated December 30, 1985, between Wilmington Trust Company and William J. Wade, as Owner Trustees under Trust Agreement No. 2 dated December 30, 1985, with Ford Motor Credit Company, Sublessor, and Oglethorpe, Sublessee, together with a Schedule identifying three substantially identical Supporting Assets Subleases. (Filed as Exhibit 10.1.4 to the Registrant's Form S-1 Registration Statement, File No. 33-7591, filed on October 9, 1986.)\n*10.1.4(b) -- First Amendment to Supporting Assets Sublease No. 2, dated as of November 19, 1987, together with a Schedule identifying three substantially identical First Amendments to Supporting Assets Subleases. (Filed as Exhibit 10.1.4(a) to the Registrant's Form 10-K for the fiscal year ended December 31, 1987, File No. 33-7591.)\n*10.1.5 -- Tax Indemnification Agreement No. 2, dated December 30, 1985, between Ford Motor Credit Company, Owner Participant, and Oglethorpe, Lessee, together with a Schedule identifying three substantially identical Tax Indemnification Agreements. (Filed as Exhibit 10.1.5 to the Registrant's Form S-1 Registration Statement, File No. 33-7591, filed on October 9, 1986.)\n*10.1.6 -- Assignment of Interest in Ownership Agreement and Operating Agreement No. 2, dated December 30, 1985, between Oglethorpe, Assignor, and Wilmington Trust Company and William J. Wade, as Owner Trustees under Trust Agreement No. 2, dated December 30, 1985, with Ford Motor Credit Company, Assignee, together with Schedule identifying three substantially identical Assignments of Interest in Ownership Agreement and Operating Agreement. (Filed as Exhibit 10.1.6 to the Registrant's Form S-1 Registration Statement, File No. 33-7591, filed on October 9, 1986.)\n*10.1.7 -- Consent, Amendment and Assumption No. 2 dated December 30, 1985, among Georgia Power Company and Oglethorpe and Municipal Electric Authority of Georgia and City of Dalton, Georgia and Gulf Power Company and Wilmington Trust Company and William\nNUMBER DESCRIPTION - ------ -----------\nJ. Wade, as Owner Trustees under Trust Agreement No. 2, dated December 30, 1985, with Ford Motor Credit Company, together with a Schedule identifying three substantially identical Consents, Amendments and Assumptions. (Filed as Exhibit 10.1.9 to the Registrant's Form S-1 Registration Statement, File No. 33-7591, filed on October 9, 1986.)\n*10.1.7(a) -- Amendment to Consent, Amendment and Assumption No. 2, dated as of August 16, 1993, among Oglethorpe, Georgia Power Company, Municipal Electric Authority of Georgia, City of Dalton, Georgia, Gulf Power Company, Jacksonville Electric Authority, Florida Power & Light Company and Wilmington Trust Company and NationsBank of Georgia, N.A., as Owner Trustees under Trust Agreement No. 2, dated December 30, 1985, with Ford Motor Credit Company, together with a Schedule identifying three substantially identical Amendments to Consents, Amendments and Assumptions. (Filed as Exhibit 10.1.9(a) to the Registrant's Form 10-Q for the quarterly period ended September 30, 1993, File No. 33-7591.)\n*10.2.1 -- Section 168 Agreement and Election dated as of April 7, 1982, between Continental Telephone Corporation and Oglethorpe. (Filed as Exhibit 10.2 to the Registrant's Form S-1 Registration Statement, File No. 33-7591, filed on October 9, 1986.)\n*10.2.2 -- Section 168 Agreement and Election dated as of April 9, 1982, between National Service Industries, Inc. and Oglethorpe. (Filed as Exhibit 10.3 to the Registrant's Form S-1 Registration Statement, File No. 33-7591, filed on October 9, 1986.)\n*10.2.3 -- Section 168 Agreement and Election dated as of April 9, 1982, between Rollins, Inc. and Oglethorpe. (Filed as Exhibit 10.4 to the Registrant's Form S-1 Registration Statement, File No. 33-7591, filed on October 9, 1986.)\n*10.2.4 -- Section 168 Agreement and Election dated as of December 13, 1982, between Selig Enterprises, Inc. and Oglethorpe. (Filed as Exhibit 10.5 to the Registrant's Form S-1 Registration Statement, File No. 33-7591, filed on October 9, 1986.)\n*10.3.1(a) -- Plant Robert W. Scherer Units Numbers One and Two Purchase and Ownership Participation Agreement among Georgia Power Company, Oglethorpe, Municipal Electric Authority of Georgia and City of Dalton, Georgia, dated as of May 15, 1980. (Filed as Exhibit 10.6.1 to the Registrant's Form S-1 Registration Statement, File No. 33-7591, filed on October 9, 1986.)\n*10.3.1(b) -- Amendment to Plant Robert W. Scherer Units Numbers One and Two Purchase and Ownership Participation Agreement among Georgia Power Company, Oglethorpe, Municipal Electric Authority of Georgia and City of Dalton, Georgia, dated as of December 30, 1985. (Filed as Exhibit 10.1.8 to the Registrant's Form S-1 Registration Statement, File No. 33-7591, filed on October 9, 1986.)\n*10.3.1(c) -- Amendment Number Two to the Plant Robert W. Scherer Units Numbers One and Two Purchase and Ownership Participation Agreement among Georgia Power Company, Oglethorpe, Municipal Electric Authority of Georgia and City of Dalton, Georgia, dated as of July 1, 1986. (Filed as Exhibit 10.6.1(a) to the Registrant's Form 10-K for the fiscal year ended December 31, 1987, File No. 33-7591.)\n*10.3.1(d) -- Amendment Number Three to the Plant Robert W. Scherer Units Numbers One and Two Purchase and Ownership Participation Agreement among Georgia Power Company,\nNUMBER DESCRIPTION - ------ -----------\nOglethorpe, Municipal Electric Authority of Georgia and City of Dalton, Georgia, dated as of August 1, 1988. (Filed as Exhibit 10.6.1(b) to the Registrant's Form 10-Q for the quarterly period ended September 30, 1993, File No. 33-7591.)\n*10.3.1(e) -- Amendment Number Four to the Plant Robert W. Scherer Units Number One and Two Purchase and Ownership Participation Agreement among Georgia Power Company, Oglethorpe, Municipal Electric Authority of Georgia and City of Dalton, Georgia, dated as of December 31, 1990. (Filed as Exhibit 10.6.1(c) to the Registrant's Form 10-Q for the quarterly period ended September 30, 1993, File No. 33-7591.)\n*10.3.2(a) -- Plant Robert W. Scherer Units Numbers One and Two Operating Agreement among Georgia Power Company, Oglethorpe, Municipal Electric Authority of Georgia and City of Dalton, Georgia, dated as of May 15, 1980. (Filed as Exhibit 10.6.2 to the Registrant's Form S-1 Registration Statement, File No. 33-7591, filed on October 9, 1986.)\n*10.3.2(b) -- Amendment to Plant Robert W. Scherer Units Numbers One and Two Operating Agreement among Georgia Power Company, Oglethorpe, Municipal Electric Authority of Georgia and City of Dalton, Georgia, dated as of December 30, 1985. (Filed as Exhibit 10.1.7 to the Registrant's Form S-1 Registration Statement, File No. 33-7591, filed on October 9, 1986.)\n*10.3.2(c) -- Amendment Number Two to the Plant Robert W. Scherer Units Numbers One and Two Operating Agreement among Georgia Power Company, Oglethorpe, Municipal Electric Authority of Georgia and City of Dalton, Georgia, dated as of December 31, 1990. (Filed as Exhibit 10.6.2(a) to the Registrant's Form 10-Q for the quarterly period ended September 30, 1993, File No. 33-7591.)\n*10.3.3 -- Plant Scherer Managing Board Agreement among Georgia Power Company, Oglethorpe, Municipal Electric Authority of Georgia, City of Dalton, Georgia, Gulf Power Company, Florida Power & Light Company and Jacksonville Electric Authority, dated as of December 31, 1990. (Filed as Exhibit 10.6.3 to the Registrant's Form 10-Q for the quarterly period ended September 30, 1993, File No. 33-7591.)\n*10.4.1(a) -- Alvin W. Vogtle Nuclear Units Numbers One and Two Purchase and Ownership Participation Agreement among Georgia Power Company, Oglethorpe, Municipal Electric Authority of Georgia and City of Dalton, Georgia, dated as of August 27, 1976. (Filed as Exhibit 10.7.1 to the Registrant's Form S-1 Registration Statement, File No. 33-7591, filed on October 9, 1986.)\n*10.4.1(b) -- Amendment Number One, dated January 18, 1977, to the Alvin W. Vogtle Nuclear Units Numbers One and Two Purchase and Ownership Participation Agreement among Georgia Power Company, Oglethorpe, Municipal Electric Authority of Georgia and City of Dalton, Georgia. (Filed as Exhibit 10.7.3 to the Registrant's Form 10-K for the fiscal year ended December 31, 1986, File No. 33-7591.)\n*10.4.1(c) -- Amendment Number Two, dated February 24, 1977, to the Alvin W. Vogtle Nuclear Units Numbers One and Two Purchase and Ownership Participation Agreement among Georgia Power Company, Oglethorpe, Municipal Electric Authority of Georgia and City of Dalton, Georgia. (Filed as Exhibit 10.7.4 to the Registrant's Form 10-K for the fiscal year ended December 31, 1986, File No. 33-7591.)\nNUMBER DESCRIPTION - ------ -----------\n*10.4.2 -- Alvin W. Vogtle Nuclear Units Numbers One and Two Operating Agreement among Georgia Power Company, Oglethorpe, Municipal Electric Authority of Georgia and City of Dalton, Georgia, dated as of August 27, 1976. (Filed as Exhibit 10.7.2 to the Registrant's Form S-1 Registration Statement, File No. 33-7591, filed on October 9, 1986.)\n*10.5.1 -- Plant Hal Wansley Purchase and Ownership Participation Agreement between Georgia Power Company and Oglethorpe, dated as of March 26, 1976. (Filed as Exhibit 10.8.1 to the Registrant's Form S-1 Registration Statement, File No. 33-7591, filed on October 9, 1986.)\n*10.5.2 -- Plant Hal Wansley Operating Agreement between Georgia Power Company and Oglethorpe, dated as of March 26, 1976. (Filed as Exhibit 10.8.2 to the Registrant's Form S-1 Registration Statement, File No. 33-7591, filed on October 9, 1986.)\n*10.5.3 -- Plant Hal Wansley Combustion Turbine Agreement between Georgia Power Company and Oglethorpe, dated as of August 2, 1982 and Amendment No. 1, dated October 20, 1982. (Filed as Exhibit 10.18 to the Registrant's Form S-1 Registration Statement, File No. 33-7591, filed on October 9, 1986.)\n*10.6.1 -- Edwin I. Hatch Nuclear Plant Purchase and Ownership Participation Agreement between Georgia Power Company and Oglethorpe, dated as of January 6, 1975. (Filed as Exhibit 10.9.1 to the Registrant's Form S-1 Registration Statement, File No. 33-7591, filed on October 9, 1986.)\n*10.6.2 -- Edwin I. Hatch Nuclear Plant Operating Agreement between Georgia Power Company and Oglethorpe, dated as of January 6, 1975. (Filed as Exhibit 10.9.2 to the Registrant's Form S-1 Registration Statement, File No. 33-7591, filed on October 9, 1986.)\n*10.7.1 -- Rocky Mountain Pumped Storage Hydroelectric Project Ownership Participation Agreement, dated as of November 18, 1988, by and between Oglethorpe and Georgia Power Company. (Filed as Exhibit 10.22.1 to the Registrant's Form 10-K for the fiscal year ended December 31, 1988, File No. 33-7591.)\n*10.7.2 -- Rocky Mountain Pumped Storage Hydroelectric Project Operating Agreement, dated as of November 18, 1988, by and between Oglethorpe and Georgia Power Company. (Filed as Exhibit 10.22.2 to the Registrant's Form 10-K for the fiscal year ended December 31, 1988, File No. 33-7591.)\n*10.8.1(a) -- Wholesale Power Contract dated September 5, 1974, between Oglethorpe and Planters Electric Membership Corporation and all schedules thereto, the Supplemental Agreement dated September 5, 1974, between Oglethorpe and Planters Electric Membership Corporation, relating to such Wholesale Power Contract, and Amendment No. 1 to Wholesale Power Contract dated May 12, 1980, between Oglethorpe and Planters Electric Membership Corporation, together with a Schedule identifying 37 other substantially identical Wholesale Power Contracts, and an additional Wholesale Power Contract that is not substantially identical (filed herewith to reflect update to Schedule A to Wholesale Power Contract). (Filed as Exhibit 10.10 to the Registrant's Form S-1 Registration Statement, File No. 33-7591, filed on October 9, 1986.)\n*10.8.1(b) -- Amended and Consolidated Wholesale Power Contract, dated as of December 1, 1988, between Oglethorpe and Planters Electric Membership Corporation and all schedules thereto, and the Amended and Consolidated Supplemental Agreement, dated December 1, 1988,\nNUMBER DESCRIPTION - ------ -----------\nbetween Oglethorpe and Planters Electric Membership Corporation, together with a Schedule identifying 37 other substantially identical Wholesale Power Contracts, and an additional Wholesale Power Contract that is not substantially identical. (Filed as Exhibit 10.10(a) to the Registrant's Form 10-K for the fiscal year ended December 31, 1988, File No. 33-7591.)\n*10.9 -- Transmission Facilities Operation and Maintenance Contract between Georgia Power Company and Oglethorpe dated as of June 9, 1986. (Filed as Exhibit 10.13 to the Registrant's Form S-1 Registration Statement, File No. 33-7591, filed on October 9, 1986.)\n*10.10(a) -- Joint Committee Agreement among Georgia Power Company, Oglethorpe, Municipal Electric Authority of Georgia and the City of Dalton, Georgia, dated as of August 27, 1976. (Filed as Exhibit 10.14(b) to the Registrant's Form S-1 Registration Statement, File No. 33-7591, filed on October 9, 1986.)\n*10.10(b) -- First Amendment to Joint Committee Agreement among Georgia Power Company, Oglethorpe, Municipal Electric Authority of Georgia and the City of Dalton, Georgia, dated as of June 19, 1978. (Filed as Exhibit 10.14(a) to the Registrant's Form S-1 Registration Statement, File No. 33-7591, filed on October 9, 1986.)\n*10.11 -- Interconnection Agreement between Oglethorpe and Alabama Electric Cooperative, Inc., dated as of November 12, 1990. (Filed as Exhibit 10.16(a) to the Registrant's Form 10- K for the fiscal year ended December 31, 1990, File No. 33-7591.)\n*10.12 -- Oglethorpe Deferred Compensation Plan for Key Employees, as Amended and Restated January, 1987. (Filed as Exhibit 10.19 to the Registrant's Form 10-K for the fiscal year ended December 31, 1986, File No. 33-7591.)\n*10.13.1 -- Assignment of Power System Agreement and Settlement Agreement, dated January 8, 1975, by Georgia Electric Membership Corporation to Oglethorpe. (Filed as Exhibit 10.20.1 to the Registrant's Form S-1 Registration Statement, File No. 33-7591, filed on October 9, 1986.)\n*10.13.2 -- Power System Agreement, dated April 24, 1974, by and between Georgia Electric Membership Corporation and Georgia Power Company. (Filed as Exhibit 10.20.2 to the Registrant's Form S-1 Registration Statement, File No. 33-7591, filed on October 9, 1986.)\n*10.13.3 -- Settlement Agreement, dated April 24, 1974, by and between Georgia Power Company, Georgia Municipal Association, Inc., City of Dalton, Georgia Electric Membership Corporation and Crisp County Power Commission. (Filed as Exhibit 10.20.3 to the Registrant's Form S-1 Registration Statement, File No. 33-7591, filed on October 9, 1986.)\n*10.14 -- Distribution Facilities Joint Use Agreement between Oglethorpe and Georgia Power Company, dated as of May 12, 1986. (Filed as Exhibit 10.21 to the Registrant's Form 0-K for the fiscal year ended December 31, 1986, File No. 33-7591.)\n*10.15.1 -- Long Term Firm Power Purchase Agreement, dated as of July 19, 1989, by and between Oglethorpe and Big Rivers Electric Corporation. (Filed as Exhibit 10.24.1 to the Registrant's Form 10-K for the fiscal year ended December 31, 1989, File No. 33-7591.)\n*10.15.2 -- Coordination Services Agreement, dated as of August 21, 1989, by and between Oglethorpe and Georgia Power Company. (Filed as Exhibit 10.24.2 to the Registrant's Form 10-K for the fiscal year ended December 31, 1989, File No. 33-7591.)\nNUMBER DESCRIPTION - ------ -----------\n*10.15.3 -- Long Term Firm Power Purchase Agreement between Big Rivers Electric Corporation and Oglethorpe, dated as of December 17, 1990. (Filed as Exhibit 10.24.3 to the Registrant's Form 10-K for the fiscal year ended December 31, 1990, File No. 33-7591.)\n*10.15.4 -- Interchange Agreement between Oglethorpe and Big Rivers Electric Corporation, dated as of November 12, 1990. (Filed as Exhibit 10.24.4 to the Registrant's Form 10-K for the fiscal year ended December 31, 1990, File No. 33-7591.)\n*10.16 -- Block Power Sale Agreement between Georgia Power Company and Oglethorpe, dated as of November 12, 1990. (Filed as Exhibit 10.25 to the Registrant's Form 8-K, filed January 4, 1991, File No. 33-7591.)\n*10.17 -- Coordination Services Agreement between Georgia Power Company and Oglethorpe, dated as of November 12, 1990. (Filed as Exhibit 10.26 to the Registrant's Form 8-K, filed January 4, 1991, File No. 33-7591.)\n*10.18 -- Revised and Restated Integrated Transmission System Agreement between Oglethorpe and Georgia Power Company, dated as of November 12, 1990. (Filed as Exhibit 10.27 to the Registrant's Form 8-K, filed January 4, 1991, File No. 33-7591.)\n*10.19 -- ITSA, Power Sale and Coordination Umbrella Agreement between Oglethorpe and Georgia Power Company, dated as of November 12, 1990. (Filed as Exhibit 10.28 to the Registrant's Form 8-K, filed January 4, 1991, File No. 33-7591.)\n*10.20 -- Amended and Restated Nuclear Managing Board Agreement among Georgia Power Company, Oglethorpe Power Corporation, Municipal Electric Authority of Georgia and City of Dalton, Georgia dated as of July 1, 1993. (Filed as Exhibit 10.36 to the Registrant's 10-Q for the quarterly period ended September 30, 1993, File No. 33-7591.)\n*10.21 -- Supplemental Agreement by and among Oglethorpe, Tri-County Electric Membership Cooperation and Georgia Power Company, dated as of November 12, 1990, together with a Schedule identifying 38 other substantially identical Supplemental Agreements. (Filed as Exhibit 10.30 to the Registrant's Form 8-K, filed January 4, 1991, File No. 33-7591.)\n*10.22 -- Unit Capacity and Energy Purchase Agreement between Oglethorpe and Entergy Power Incorporated, dated as of October 11, 1990. (Filed as Exhibit 10.31 to the Registrant's Form 10-K for the fiscal year ended December 31, 1990, File No. 33-7591.)\n*10.23 -- Interchange Agreement between Oglethorpe and Arkansas Power & Light Company, Louisiana Power & Light Company, Mississippi Power & Light Company, New Orleans Public Service, Inc., Energy Services, Inc., dated as of November 12, 1990. (Filed as Exhibit 10.32 to the Registrant's Form 10-K for the fiscal year ended December 31, 1990, File No. 33-7591.)\n*10.24 -- Interchange Agreement between Oglethorpe and Seminole Electric Cooperative, Inc., dated as of November 12, 1990. (Filed as Exhibit 10.33 to the Registrant's Form 10-K for the fiscal year ended December 31, 1990, File No. 33-7591.)\nNUMBER DESCRIPTION - ------ -----------\n*10.25.1 -- Excess Energy and Short-term Power Agreement between Oglethorpe and Tennessee Valley Authority, effective as of January 23, 1991. (Filed as Exhibit 10.34.1 to the Registrant's Form 10-K for the fiscal year ended December 31, 1990, File No. 33-7591.)\n*10.25.2 -- Transmission Service Agreement between Oglethorpe and Tennessee Valley Authority, effective as of January 23, 1991. (Filed as Exhibit 10.34.2 to the Registrant's Form 10-K for the fiscal year ended December 31, 1990, File No. 33-7591.)\n*10.26 -- Power Purchase Agreement between Oglethorpe and Hartwell Energy Limited Partnership, dated as of June 12, 1992. (Filed as Exhibit 10.35 to the Registrant's Form 10-K for the fiscal year ended December 31, 1992, File No. 33-7591).\n22.1 -- Subsidiary of Oglethorpe (not included because the subsidiary does not constitute a \"significant subsidiary\" under Rule 1-02(v) of Regulation S-X).\n- ------------------------- * Incorporated herein by reference.\n+ Pursuant to 17 C.F.R. 229.601(b)(4)(iii), this document is not filed herewith, however the registrant hereby agrees that such documents will be provided to the Commission upon request.\n++ For the reason stated in footnote (+), this document and eight other substantially identical documents are not filed as exhibits to this Registration Statement.\n+++ For the reason stated in the footnote (+), this document and another substantially identical document are not filed as exhibits to this Registration Statement.\nAll other schedules and exhibits are omitted because of the absence of the conditions under which they are required or because the required information is included in the financial statements and related notes to financial statements.\n(b) REPORTS ON FORM 8-K.\nNo reports on Form 8-K were filed by Oglethorpe for the quarter ended December 31, 1993.\nSCHEDULE I\nOGLETHORPE POWER CORPORATION MARKETABLE SECURITIES--OTHER SECURITY INVESTMENTS AS OF DECEMBER 31, 1993 (DOLLARS IN THOUSANDS)\nSCHEDULE V\nOGLETHORPE POWER CORPORATION UTILITY PLANT, INCLUDING INTANGIBLES FOR THE YEAR ENDED DECEMBER 31, 1993 (DOLLARS IN THOUSANDS)\nSCHEDULE V\nOGLETHORPE POWER CORPORATION UTILITY PLANT, INCLUDING INTANGIBLES FOR THE YEAR ENDED DECEMBER 31, 1992 (DOLLARS IN THOUSANDS)\nSCHEDULE V\nOGLETHORPE POWER CORPORATION UTILITY PLANT, INCLUDING INTANGIBLES FOR THE YEAR ENDED DECEMBER 31, 1991 (DOLLARS IN THOUSANDS)\nSCHEDULE VI\nOGLETHORPE POWER CORPORATION ACCUMULATED PROVISION FOR DEPRECIATION OF UTILITY PLANT FOR THE YEAR ENDED DECEMBER 31, 1993 (DOLLARS IN THOUSANDS)\nSCHEDULE VI\nOGLETHORPE POWER CORPORATION ACCUMULATED PROVISION FOR DEPRECIATION OF UTILITY PLANT FOR THE YEAR ENDED DECEMBER 31, 1992 (DOLLARS IN THOUSANDS)\nSCHEDULE VI\nOGLETHORPE POWER CORPORATION ACCUMULATED PROVISION FOR DEPRECIATION OF UTILITY PLANT FOR THE YEAR ENDED DECEMBER 31, 1991 (DOLLARS IN THOUSANDS)\nSCHEDULE X\nOGLETHORPE POWER CORPORATION SUPPLEMENTARY INCOME STATEMENT INFORMATION DECEMBER 31, 1993, 1992 AND 1991 (DOLLARS IN THOUSANDS)\nJ - -\nSIGNATURES\nPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 31st day of March, 1994.\nOGLETHORPE POWER CORPORATION (AN ELECTRIC MEMBERSHIP GENERATION & TRANSMISSION CORPORATION)\nBy: \/s\/ J. CALVIN EARWOOD ----------------------------------------- J. CALVIN EARWOOD, CHAIRMAN OF THE BOARD\nPURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.\nSUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT.\nThe registrant is a membership corporation and has no authorized or outstanding equity securities. Proxies are not solicited from the holders of Oglethorpe's public bonds. No annual report or proxy material has been sent to such bondholders.","section_15":""}
{"filename":"63754_1993.txt","cik":"63754","year":"1993","section_1":"ITEM 1. BUSINESS\nThe Registrant, a diversified specialty food company, is principally engaged in the manufacture of spices, seasonings, flavorings and other specialty food products and sells such products to the retail food market, the foodservice market and to industrial food processors throughout the world. The Registrant also, through subsidiary corporations, manufactures and markets plastic packaging products for the food, cosmetic and health care industries.\nThe Registrant's Annual Report to Stockholders for 1993, which is enclosed as Exhibit 13, contains a description of the general development, during the last fiscal year, of the business of the Registrant, which was formed in 1915 under Maryland law as the successor to a business established in 1889. Pages 7 through 20 of that Report are incorporated by reference. The Registrant's net sales increased 5.8% in 1993 to $1,556,566 due to both sales price and volume changes.\nThe Registrant operates in one business segment and has disclosed in Note 10 of the Notes to Consolidated Financial Statements on page 33 of its Annual Report to Stockholders for 1993, which Note is incorporated by reference, the financial information about the business segment required by this Item.\nSPECIALTY FOOD BUSINESS\nThe Registrant's Annual Report to Stockholders for 1993 sets forth a description of the business conducted by the Registrant on pages 7 through 9. Those pages of the Registrant's Annual Report are incorporated by reference.\nPRINCIPAL PRODUCTS\/MARKETING\nSpices, seasonings, flavorings, and other specialty food products are the Registrant's principal products. Spices, seasonings, flavorings, and other specialty food products accounted for approximately 90% of net sales on a consolidated basis during the three fiscal years ended November 30, 1993. No other product or class of similar products or services contributed as much as 10% to consolidated net sales during the last three fiscal years. The Registrant's efforts will continue to be directed primarily in the area of spices, seasonings, flavorings, and other specialty food products. The Registrant markets its consumer and foodservice products through its own sales organization, food brokers and distributors. In the industrial market, sales are made mostly through the Registrant's own sales force.\nPRODUCTS\/INDUSTRY SEGMENTS\nThe Registrant has not announced or made public information about a new product or industry segment that would require the investment of a material amount of the assets of the Registrant or that otherwise is material.\nRAW MATERIALS\nMany of the spices and herbs purchased by the Registrant are imported into the United States from the country of origin, although substantial quantities of particular materials, such as paprika, dehydrated vegetables, onion and garlic, and substantially all of the specialty food ingredients other than spices and herbs, originate in the United States. Some of the imported materials are purchased from dealers in the United States. The Registrant is a direct importer of certain raw materials, mainly black pepper, vanilla beans, cinnamon, herbs and seeds from the countries of origin. The principal purpose of such purchases is to satisfy the Registrant's own needs. The Registrant also sells imported raw materials to other food processors.\nThe raw materials most important to the Registrant are onion, garlic and capsicums (paprika and chili peppers), which are produced in the United States, black pepper, most of which originates in India, Indonesia, Malaysia and Brazil, and vanilla beans, a large proportion of which the Registrant obtains from the Malagasy Republic and Indonesia.\nTRADEMARKS, LICENSES AND PATENTS\nThe Registrant owns a number of registered trademarks, which in the aggregate may be material to the Registrant's business. However, the loss of any one of those trademarks, with the exception of the Registrant's McCormick and Schilling trademarks, would not have a material adverse impact on the Registrant's business. The McCormick and Schilling trademarks are extensively used by the Registrant in connection with the sale of a substantial number of the Registrant's products in the United States. The McCormick and Schilling trademarks are registered and used in various foreign countries as well. The terms of the trademark registrations are as prescribed by law and the registrations will be renewed for as long as the Registrant deems them to be useful.\nThe Registrant has entered into a number of license agreements authorizing the use of its trademarks by persons in foreign countries. In the aggregate, the loss of those license agreements would not have a material adverse impact on the Registrant's business. The terms of the license agreements are generally 3 to 5 years or until such time as either party terminates the agreement. Those agreements with specific terms are renewable upon agreement of the parties.\nThe Registrant owns various patents, but they are not viewed as material to the Registrant's business.\nSEASONAL NATURE OF BUSINESS\nHistorically, the Registrant's sales and profits are lower in the first two quarters of the fiscal year and increase in the third and fourth quarters.\nWORKING CAPITAL\nIn order to meet increased demand for its products during its fourth quarter, the Registrant usually builds its inventories during the second and third quarters. In common with other companies, the Registrant generally finances working capital items (inventory and receivables) through short-term borrowings, which include the use of lines of credit and the issuance of commercial paper.\nCUSTOMERS\nThe Registrant has a large number of customers for its products. No single customer accounted for as much as 10% of consolidated net sales in 1993. In the same year, sales to the five largest customers represented approximately 20% of consolidated net sales.\nBACKLOG ORDERS\nThe dollar amount of backlog orders of the Registrant's specialty food business is not material to an understanding of the Registrant's business, taken as a whole.\nGOVERNMENT CONTRACTS\nNo material portion of the Registrant's business is subject to renegotiation of profits or termination of contracts or subcontracts at the election of the government.\nCOMPETITION\nAlthough the Registrant is a leader in sales of certain spices and seasoning and flavoring products, and is the largest producer and distributor of dehydrated onions and garlic in the United States, its business is highly competitive. For further discussion, see pages 12 and 14 of the Registrant's Annual Report to Stockholders for 1993, which pages are incorporated by reference.\nRESEARCH AND QUALITY CONTROL\nThe Registrant has emphasized quality and innovation in the development, production and packaging of its products. Many of the Registrant's products are prepared from confidential formulae developed by its research laboratories and product development departments. The long experience of the Registrant in its field contributes substantially to the quality of the products offered for sale. Quality specifications exist for the Registrant's products, and continuing quality control inspections and testing are performed. Total expenditures for these and other related activities during fiscal years 1993, 1992 and 1991 were approximately $38,226,000, $35,968,000 and $33,052,000, respectively. Of these amounts, expenditures for research and development amounted to $12,259,000 in 1993, $11,844,000 in 1992 and $11,438,000 in l991. The amount spent on customer-sponsored research activities is not material.\nENVIRONMENTAL REGULATIONS\nCompliance with Federal, State and local provisions related to protection of the environment has had no material effect on the Registrant's business. No material capital expenditures for environmental control facilities are expected to be made during this fiscal year or the next.\nEMPLOYEES\nThe Registrant had on average approximately 8,600 employees during fiscal year 1993.\nFOREIGN OPERATIONS\nInternational businesses have made significant contributions to the Registrant's growth and profits. In common with other companies with foreign operations, the Registrant is subject in varying degrees to certain risks typically associated with doing business abroad, such as local economic and market conditions, exchange and price controls, restrictions on investment, royalties and dividends and exchange rate fluctuations.\nNote 10 of the Notes to Consolidated Financial Statements on page 33 of the Registrant's Annual Report to Stockholders for 1993 contains the information required by subsection (d) of Item 101 of Regulation S-K, which Note is incorporated by reference.\nPACKAGING OPERATIONS\nThe Registrant's Annual Report to Stockholders for 1993 sets forth a description of the Registrant's packaging group on page 9, which page is incorporated by reference. Setco, Inc. and Tubed Products, Inc., which comprise Registrant's packaging group, are wholly owned subsidiaries of the Registrant and are, respectively, manufacturers of plastic bottles and plastic squeeze tubes.\nSubstantially all of the raw materials used in the packaging business originate in the United States. The market for plastic packaging is highly competitive. The Registrant is the largest single customer of the packaging group. All intracompany sales have been eliminated from the Registrant's consolidated financial statements.\nITEM 2.","section_1A":"","section_1B":"","section_2":"ITEM 2. PROPERTIES\nThe location and general character of the Registrant's principal plants and other materially important physical properties are as follows:\n(a) CONSUMER PRODUCTS\nA plant is located in Hunt Valley, Maryland on approximately 52 acres in the Hunt Valley Business Community. This plant contains approximately 540,000 square feet and is owned in fee. A plant of approximately 475,000 square feet located in Salinas, California is owned in fee and a plant of approximately 108,000 square feet located in Commerce, California is leased. These plants are used for processing, packaging and distributing spices and other food products.\n(b) INDUSTRIAL PRODUCTS\n(i) A plant complex is located in Gilroy, California consisting of connected and adjacent buildings owned in fee and providing approximately 894,000 square feet of space for milling, dehydrating, packaging, warehousing and distributing onion, garlic and capsicums. Adjacent to this plant complex is a 4.3 acre cogeneration facility which supplies steam to the dehydration business as well as electricity to Pacific Gas & Electric Company. The cogeneration facility was financed with an installment note secured by the property and equipment. This note is non-recourse to the Registrant.\n(ii) The Registrant has two principal plants devoted to industrial flavoring products in the United States. A plant of 102,000 square feet is located in Hunt Valley, Maryland and is owned in fee. A plant of 102,400 square feet is located in Dallas, Texas and is owned in fee.\n(c) SPICE MILLING\nLocated adjacent to the consumer products plant in Hunt Valley is a spice milling and cleaning plant which is owned in fee by the Registrant and contains approximately 185,000 square feet. This plant services all food product groups of the Registrant. Much of the milling and grinding of raw materials for Registrant's seasoning products is done in this facility.\n(d) PACKAGING PRODUCTS\nThe Registrant has four principal plants which are devoted to the production of plastic containers. The facilities are located in California, Massachusetts, New York and New Jersey, and range in size from 178,000 to 280,000 square feet. The plants in New York and New Jersey are leased and part of the Massachusetts facility was financed through an industrial revenue bond which is still outstanding.\n(e) INTERNATIONAL\nThe Registrant has a plant in London, Ontario which is devoted to the processing, packaging an distribution of food products. This facility is approximately 145,000 square feet and is owned in fee.\n(f) RESEARCH AND DEVELOPMENT\nThe Registrant has a facility in Hunt Valley, Maryland which houses the corporate research and development laboratories and the technical capabilities of the industrial division. The facility is approximately 200,000 square feet and is owned in fee.\nITEM 3.","section_3":"ITEM 3. LEGAL PROCEEDINGS\nThere are no material pending legal proceedings to which the Registrant or any of its subsidiaries is a party or to which any of their property is subject.\nITEM 4.","section_4":"ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS\nNo matter was submitted during the fourth quarter of Registrant's fiscal year 1993 to a vote of security holders.\nPART II\nITEM 5.","section_5":"ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS\nThe Registrant has disclosed at page 19 of its Annual Report to Stockholders for 1993, which page is incorporated by reference, the information relating to the market, market quotations, and dividends paid on Registrant's common stocks required by this Item.\nThe approximate number of holders of common stock of the Registrant based on record ownership as of January 31, 1994 was as follows: Approximate Number Title of Class of Record Holders\nCommon Stock, no par value 2,075 Common Stock Non-Voting, 10,892 no par value\nITEM 6.","section_6":"ITEM 6. SELECTED FINANCIAL DATA\nThe Registrant has disclosed the information required by this Item in the Historical Financial Summary of its Annual Report to Stockholders for 1993 at page 20, which page is incorporated by reference.\nITEM 7.","section_7":"ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS\nThe Registrant's Annual Report to Stockholders for 1993 at pages 11 through 19 contains a discussion and analysis of the Company's financial condition and results of operations for the three fiscal years ended November 30, 1993. Said pages are incorporated by reference.\nITEM 8.","section_7A":"","section_8":"ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA\nThe financial statements and supplementary data for McCormick & Company, Incorporated are included on pages 21 through 34 of the Annual Report to Stockholders for 1993, which pages are incorporated by reference. The report of independent auditors from Ernst & Young on such financial statements is included on page 35 of the Annual Report to Stockholders for 1993; supplemental schedules for 1991, 1992 and 1993 are included on pages 14 through 19 of this Report on Form 10-K.\nThe unaudited quarterly data required by Item 302 of Regulation S-K is included in Note 11 of the Notes to Consolidated Financial Statements at page 34 of the Registrant's Annual Report to Stockholders for 1993, which Note is incorporated by reference.\nITEM 9.","section_9":"Item 9. Changes in and None. Disagreements with Accountants on Accounting and Financial Disclosure.\nPART III Item 10.","section_9A":"","section_9B":"","section_10":"","section_11":"Item 11. Executive Registrant's Proxy Compensation. Statement dated February 16, 1994\/Pages 9-17.\nItem 12.","section_12":"Item 12. Security Ownership Registrant's Proxy of Certain Statement dated Beneficial February 16, 1994\/Pages Owners and 4-7. Management.\nItem 13.","section_13":"Item 13. Certain Registrant's Proxy Relationships Statement and Related Transactions. dated February 16, 1994\/ Page 7.\nPART IV Item 14.","section_14":"","section_15":""}
{"filename":"67727_1993.txt","cik":"67727","year":"1993","section_1":"ITEM 1. BUSINESS\nGENERAL - INDUSTRY SEGMENTS: The Montana Power Company (the Company) and its subsidiaries conduct a number of diversified, but related businesses. The Company's principal business, which is conducted through its Utility Division, includes regulated utility operations involving the generation, purchase, transmission and distribution of electricity and the production, purchase, transportation and distribution of natural gas. The Company, through its wholly-owned subsidiary, Entech, Inc. (Entech), engages in nonutility operations principally involving the mining and sale of coal and exploration for, and the development, production, processing and sale of oil and natural gas. The Company, through its Independent Power Group (IPG) manages long-term power sales, invests in cogeneration projects, and provides energy-related support services, including the operation and maintenance of power plants. See Item 8, Note 10 to the Consolidated Financial Statements for further information. A group of officers and employees of the Company constitute the Office of the Corporation. The Office of the Corporation provides strategic direction and policy, approves the allocation of capital and provides financial, legal and other services to all of the operating units. The Company was incorporated in 1961 under the laws of the State of Montana, where its principal business is conducted, as the successor to a New Jersey corporation incorporated in 1912.\nUTILITY DIVISION:\nSERVICE AREA AND SALES: The Utility Division's service area comprises 107,600 square miles or approximately 73% of Montana. Its estimated 1993 population was 723,000 or 90% of the total population of the State. Dominant factors in Montana's diversified economy are agriculture and livestock, which constitute Montana's largest industry, tourism and year-round recreation, coal and metals mining, oil and gas production, and the forest products industry which embraces the production of pulp and paper, plywood and lumber.\nElectric service is provided to 186 communities, the rural areas surrounding them and Yellowstone National Park, and natural gas service is provided to 105 communities. Firm electric power is sold at wholesale to two rural electric cooperatives. Natural gas is sold at wholesale or transported to distribution companies in Great Falls, Cut Bank, Shelby, Kevin, Sweetgrass and Sunburst, Montana.\nThe Company's residential and commercial business is substantially free from direct competition with other utilities. The Utility Division is subject to, in certain circumstances, increased competition with self-generation for large industrial loads and with other energy suppliers for large wholesale loads. Because of the absence of competing transmission pipelines in its natural gas service territory, the Utility Division is less subject to bypass by its large industrial and wholesale natural gas customers with respect to wholesale or transportation service.\nWeather is a factor which can significantly affect electric and natural gas revenues. The Company's sales generally increase as a result of colder weather with customer demand peaking during the winter months.\nREGULATION AND RATES: The Company's public utility business in Montana is subject to the jurisdiction of the Public Service Commission of Montana (PSC). The PSC has jurisdiction over the issuance of securities by the Company. The Federal Energy Regulatory Commission (FERC) also has jurisdiction over the Company, under the Federal Power Act, as a licensee of hydroelectric projects and as a public utility engaged in interstate commerce. The importation of natural gas from Canada requires approval by the Alberta Energy Resources Conservation Board, the National Energy Board of Canada and the United States Department of Energy.\nOn June 21, 1993, the Company filed and has since updated general rate increase requests of $30,900,000 annually for electricity and $9,600,000 annually for natural gas based upon a 12.25% return on common equity. Lower interest costs from refinancings will reduce the combined amounts by approximately $3,000,000. A 1% change in the return allowed on common equity would result in a change of approximately $7,000,000 in annual electric revenues and a change of approximately $1,800,000 in annual natural gas revenues. This rate case was filed pursuant to the optional filing rules adopted by the PSC in February 1992. The optional rules improve the matching of test year expenses and costs with the time rates are in effect. The optional rules, as interpreted by the Company, increase the revenue request by $5,700,000 for the electric utility and $1,000,000 for the gas utility. Effective October 18, 1993, the PSC approved interim annual increases of $8,800,000 in electric revenues and $4,000,000 for natural gas revenues. A final decision on the Company's requests is expected in late April.\nIn August 1993, the Company filed an Allocated Cost of Service\/Rate Design Application with the PSC which reevaluates the costs and rates for providing electric service to retail customers. Although the Company's total revenue requirement would remain the same, the amount of revenue collected from each customer class would change. Under the Company's proposal, the share of total revenue collected from the residential and commercial customer classes would increase by 1% and 8%, respectively, while the share of total revenue collected from the industrial class would decrease by 10%. A final decision in this docket is expected in May 1994.\nThe PSC, in 1991, approved the unbundling of natural gas services, authorized open access on the Company's transmission and distribution system, and approved a three-year transition period for customer conversions. On September 1, 1993, natural gas rates for core residential, commercial and other full service customers were increased $2,954,000 for the last of three annual increases to recover costs that had previously been allocated to noncore customers. This rate change did not affect the Company's earnings.\nELECTRIC OPERATIONS: The maximum demand on the Company's resources in 1993 was 1,445,000 kW on January 11, 1993. Total firm capability of the Company's electric system for 1993 was 1,601,000 kW. Of this capability, 1,186,000 kW was provided by the Company's generating facilities, and 415,000 kW was provided by firm long-term power purchases and exchange arrangements. The Company's 1993 reserve margin, as a percentage of maximum demand, was 11%. Planned increases in peak capability are expected to be met with a combination of resources including upgrades to hydroelectric and thermal facilities and both short and long-term purchase contracts. New electric capacity will be required in the late 1990s to meet load growth and the expiration of two power purchase contracts totalling approximately 150 megawatts. Pursuant to a Request for Proposal, a variety of projects, including some proposed by the Company are being evaluated under least cost planning process. To date, the bid resources that have been acquired include the extension to 2003 of an existing 50,000 kW exchange contract with the Idaho Power Company, the purchase of a 15 year 98,000 kW winter season power purchase starting in November 1996 from Basin Electric Power Cooperative, and construction has commenced on a 41,000 kW upgrade to MPC's hydroelectric facility at Thompson Falls. In addition, the Company is continuing to decrease energy and peak demand by investing in demand-side management programs.\nITEM 1. BUSINESS (Continued)\nDuring the year ended December 31, 1993, the sources of the Utility Division electric generation were: hydro, 32%; coal, 40%; and purchased power, 28%. Improved stream flows in 1993 provided 27% more low-cost hydroelectric generation than in 1992. Extended plant outages at the Colstrip plants mostly offset the increased hydrogeneration. The cost of coal burned has been as follows:\nYear Ended December 31 1993 1992 1991\nAverage cost per million Btu's. . . . . . $ 0.65 $ 0.65 $ 0.66 Average cost per ton (delivered). . . . . 11.16 11.30 11.39\nNATURAL GAS OPERATIONS: Natural gas supply requirements in 1993 totaled 22,617 Mmcf, of which 14,680 Mmcf were from Montana and 7,937 Mmcf from Canada. The Company produced 42% of the Montana natural gas. Its Canadian subsidiaries produced 71% of the Canadian natural gas.\nThe Company implemented open access gas transportation on November 1, 1991. As of that date, fifteen large industrial customers and one utility customer of the Gas Utility were allowed to acquire a portion of their gas supply requirements directly from gas suppliers. The Gas Utility transports these gas supplies for these customers. As of September 1993, these customers were able to acquire 100% of their gas supplies directly from other suppliers. The total volumes of natural gas transported during 1993 were 17,900 Mmcf. As a result, the Gas Utility's gas supply requirements declined through 1993 as noncore customers increasingly acquired their own supplies directly.\nTotal 1994 natural gas requirements, estimated to be 21,046 Mmcf, are anticipated to be supplied from existing reserves and purchase contracts. Approximately 14,433 Mmcf of these requirements are expected to be obtained in the United States and 6,613 Mmcf from Canada. The Company expects to produce 40% of the Montana natural gas. Its Canadian subsidiaries are expected to produce 64% of the Canadian natural gas. The 1994 transportation volumes are anticipated to be 23,500 Mmcf.\nExportation of natural gas from Canada is controlled by the Canadian provincial and federal governments. The Company has a long-term export license which entitles it to export up to 10,000 Mmcf, after losses, annually through October 2006.\nENTECH:\nGENERAL: Entech conducts its businesses through various subsidiaries, all of which, with immaterial exceptions, are wholly-owned. It also owns a passive investment in a gold mine in Brazil. Its coal and lignite business is conducted through several subsidiaries. Western Energy Company (Western) holds leases and rights on coal properties in Montana and Wyoming and operates the Rosebud Mine. Western's subsidiary, Western SynCoal Company (SynCoal), and a subsidiary of Northern States Power, each own 50 percent of a patented coal enhancement process and 50 percent of the Rosebud SynCoal Partnership. The Partnership owns and operates a coal enchancement process demonstration plant at the Rosebud Mine. Northwestern Resources Company (Northwestern) holds leases on coal and lignite properties in Texas and Wyoming and operates the Jewett Mine. Basin Resources, Inc. (Basin) operates the Golden Eagle Mine, and North Central Energy Company (North Central) owns and holds leases on coal properties in Colorado. Horizon Coal Services, Inc. (Horizon) markets coal and lignite, and holds leases and rights on lignite properties in Montana, Texas and Alabama. Approximately 93 percent of total annual coal and lignite production is sold under long-term contracts. Entech's oil and natural gas business is conducted in the United States through North American Resources Company and in Canada through both Altana Exploration Company and Roan Resources, Ltd. Entech's other businesses are conducted by various subsidiaries, none of which is a significant subsidiary.\nCOAL OPERATIONS: Western's Rosebud Mine is at Colstrip, Montana, in the northern Powder River Basin, where coal is surface-mined and, after crushing, sold without further preparation, principally for use by electric utilities in steam-electric generating plants. Western's principal customers from this mine are the owners of the four mine-mouth Colstrip units and the Company's Corette Plant located at Billings, Montana. These customers purchased approximately 70 percent of the 1993 production. Most of the remainder of Rosebud coal is sold to customers located in Michigan, Minnesota, North Dakota and Wisconsin.\nDuring 1993, Western mined and sold 12,190,651 tons, of which 3,629,994 tons were sold to the Company. Western's Colstrip production is estimated to be 13,000,000 tons in 1994 and 12,000,000 tons in 1995.\nWestern has experienced competition from southern Powder River Basin producers, primarily those in Wyoming, for its Midwestern coal sales, which represent approximately 26% of total sales. While Western has a per-ton rail rate advantage to some of the upper Midwest markets, Wyoming producers generally experience lower stripping ratios, royalty amount and production taxes. In addition, Western produces coal containing higher, noncompliance levels of sulfur than southern Powder River Basin Mines.\nNorthwestern's Jewett Mine is located in central Texas about midway between Dallas and Houston. Northwestern supplies lignite under a long-term contract to the two electric generating units, located adjacent to the mine, that are owned by Houston Lighting and Power Company. Total deliveries during 1993 were 7,907,585 tons. The estimated production for 1994 and 1995 is 7,900,000 and 7,700,000 tons, respectively.\nBasin's underground Golden Eagle Mine is located in southern Colorado near Trinidad. The coal is processed through an on-site wash plant to reduce the ash content. Total deliveries from the mine, which has a capacity to produce 2,200,000 tons, were 596,700 tons during 1993. Basin has entered into a long-term contract to supply up to 1,200,000 tons annually starting July 1994. Basin has several short-term contracts to supply industrial and utility customers. Basin is also selling coal for test burns by potential customers. Estimated production for 1994 and 1995 is 1,600,000 and 2,000,000 tons, respectively. Entech anticipates an increase in demand for Basin's compliance coal due to the provisions of the Clean Air Act Amendments of 1990.\nOIL AND GAS OPERATIONS: Entech's producing oil and natural gas properties are principally located in the states of Wyoming, Colorado, Kansas, Oklahoma and Montana, and the Province of Alberta, Canada.\nAn Entech Oil Division subsidiary has entered into agreements to supply 174 Bcf of natural gas to four cogeneration facilities over periods of 11 to 15 years. Entech has sufficient proven, developed and undeveloped reserves, and controls related sales of production sufficient to supply all of the natural gas required by those agreements. For information on another subsidiary's participation in an investment in these cogeneration projects, See Item 1 \"Independent Power Group.\"\nNatural gas production in both the United States and Canada is currently sold pursuant to short-term, spot market and long-term contracts. In Canada, approximately 28 Bcf of the Company's natural gas reserves are dedicated to long-term contracts expiring at various times through 2005.\nThrough its subsidiary Entech Altamont, Inc., Entech owns a minority interest in a joint venture to construct the proposed Altamont pipeline. Altamont has received FERC approval to construct a 620 mile pipeline running from the Alberta-Montana border to the Opal area in southwest Wyoming. The decision to proceed with the construction of this pipeline will depend upon obtaining the necessary regulatory approval and shipper commitments.\nINDEPENDENT POWER GROUP:\nGENERAL: The Independent Power Group (IPG) manages sales of the Company's 210 megawatt share of Colstrip Unit 4 generation to the Los Angeles Department of Water and Power and to Puget Sound Power and Light Company under contracts which are coextensive with the Company's leasehold interest in the Unit.\nThe IPG also manages the Company's investment in five operating, natural gas fired, cogeneration projects located in Texas, New York and the United Kingdom, one cogeneration project under construction in Washington, and three projects under development in Washington, Texas and China.\nThe Company's subsidiary, North American Energy Services Company (North American), which is included in the IPG, provides energy-related support services including the operation and maintenance of power plants for private power generating companies and provides maintenance services for power plants owned and operated by electric utilities.\nENVIRONMENT:\nThe information required in this section is contained in Item 7, \"Management's Discussion and Analysis of Financial Condition and Results of Operations\" under \"Environmental Issues.\"\nEMPLOYEES:\nAt December 31, 1993, the Company and its subsidiaries employed 4,089 persons of which 2,364 were utility and Office of the Corporation employees (including 613 employees at the jointly owned Colstrip Units 1-4), 400 Independent Power Group employees and 1,325 Entech employees.\nFOREIGN AND DOMESTIC OPERATIONS:\nSee Item 2, \"Utility Natural Gas Properties,\" for information on the Company's Canadian and domestic utility natural gas properties. See Item 2, \"Entech Oil and Natural Gas Properties\" for information on Entech's Canadian and domestic oil and natural gas properties.\nEXECUTIVE OFFICERS:\nIn 1992, D. T. Berube, 60, was elected Chairman of the Board and Chief Executive Officer. He served as President and Chief Operating Officer, Entech, Inc., 1988-1991.\nIn 1991, J. P. Pederson, 51, was elected Vice President and Chief Financial Officer. He served as Controller - Utility Division 1984-1990 and Vice President Corporate Finance 1990-1991.\nIn 1993, P. K. Merrell, 41, was elected Vice President and Secretary. She served as Staff Attorney 1981-1992, Assistant Secretary 1991-1992, and Secretary 1992-1993.\nIn 1991, M. E. Zimmerman, 45, was elected Vice President and General Counsel. He served as Staff Attorney 1986-1989 and General Counsel from 1989- 1991.\nIn 1990, R. P. Gannon, 49, was elected President and Chief Operating Officer - Utility Division. He served as Vice President and General Counsel 1984-1989.\nIn 1993, A. K. Neill, 56, was elected Executive Vice President - Generation and Transmission. He had previously served as Executive Vice President - Utility Services since 1987.\nIn 1993, J. D. Haffey, 48, was elected Vice President - Administration and Regulatory Affairs. He had previously served as Vice President - Regulatory Affairs for the Utility Division since 1987.\nIn 1993, D. A. Johnson, 48, was elected Vice President - Utility Services. He had previously served as Vice President - Gas Supply and Transportation for the Utility Division since 1984.\nIn 1993, C. D. Regan, 57, was elected Vice President - Natural Gas Supply and Transportation. He had previously served as Vice President - Energy Services for the Utility Division since 1986.\nIn 1988, G. A. Thorson, 59, was elected Vice President - Colstrip Project Division for the Utility Division.\nIn 1993, W. C. Verbael, 56, was elected Vice President - Accounting, Finance and Information Systems. He had previously served as Vice President - Accounting and Finance for the Utility Division since 1984.\nIn 1993, P. J. Cole, 36, was elected Treasurer for the Utility Division. He served as Manager, Corporate Financial Planning and Analysis 1986-1992, and Assistant Treasurer 1992-1993.\nIn 1990, J. S. Miller, 50, was elected Controller for the Utility Division. He served as Assistant Controller 1985-1990.\nIn 1992, J. J. Murphy, 55, was elected President and Chief Operating Officer - Entech, Inc. He served as President and Chief Operating Officer, Western Energy and Northwestern Resources Co., 1988-1991, and Vice President, Mining Division, Entech, Inc., 1988-1991.\nIn 1985, E. M. Senechal, 44, was elected Vice President and Treasurer - Entech, Inc.\nIn 1992, R. F. Cromer, 48, was elected President and Chief Operating Officer - Continental Energy Services, Inc. He served as Vice President and General Manager, Continental Energy Services 1989-1992.\nITEM 2.","section_1A":"","section_1B":"","section_2":"ITEM 2. PROPERTIES\nUTILITY DIVISION:\nELECTRIC PROPERTIES: The Company's Utility Division electric system extends through the western two-thirds of Montana. Generating capability is provided by four coal-fired thermal generation units, with total net capability available to the Company of 697,000 kW, and 12 hydroelectric projects, with total planned net capability of 489,000 kW. The thermal units are (1) Colstrip Unit 3, which has a net capability of 727,000 kW, of which the Company owns 218,000 kW, (2) Colstrip Units 1 and 2, with a combined net capability of 638,000 kW, of which the Company owns 319,000 kW, and (3) the 160,000 kW Corette Plant. All of the Company's coal requirements are supplied by Western Energy Company under long-term contracts. Reliability of service is enhanced by the location of hydroelectric generation on two separate watersheds with different precipitation characteristics and by the availability of thermal generation.\nIn addition to the Company's hydroelectric and thermal resources, it currently receives power through 21 power contracts totaling 415,000 kW of firm winter peak capacity. These existing contracts vary in type, size, seller and ending dates. The Company has one energy contract ending in 1995 for the delivery of power to MPC during the off-peak hours.\nHydroelectric projects are licensed by the FERC under licenses which expire on varying dates from 1994 to 2035. The Company is in the process of relicensing its nine dams located on the Missouri and Madison rivers. See Item 8, \"Note 2 to the Consolidated Financial Statements.\"\nThe Company's electric system forms an integral part of the Northwest Power Pool consisting of the major electric suppliers in the United States, Pacific Northwest and British Columbia, and parts of Alberta, Canada. The Company also is a party to the Pacific Northwest Coordination Agreement which integrates electric and hydroelectric operations of the 18 parties associated with generating facilities in the Columbia River Basin; is a member of the Western Systems Coordinating Council, organized by 62 member systems and 4 affiliates in the 14 western states, British Columbia, Alberta and Mexico to assure reliability of operations and service to their customers; is one of 51 members of the Western Systems Power Pool, organized to enhance the economics of power production and reliability of service among the western states power systems; and is a party to the Intercompany Pool Agreement for the coordination of load, resource and transmission planning, operations and reserve requirements among eight utilities in Washington, Oregon, Idaho, Montana, Wyoming, Nevada and Utah. The Company participates in an interconnection agreement with The Washington Water Power Company, Idaho Power Company, and PacifiCorp, providing for the sharing of transmission capacity of certain lines on their respective interconnected systems. The Company also operates, in coordination with its own transmission lines and facilities, the transmission lines and facilities which are jointly owned by the utility owners of the four Colstrip generating units. The Company and the Western Area Power Administration have transmission interconnection and agreements which provide for the mutual use of excess capacity of certain lines on each party's system for the transmission of power east of the Continental Divide in Montana and for the firm use of certain of the Company's transmission lines to deliver government power.\nAt December 31, 1993, the Company owned and operated 7,074 miles of transmission lines and 14,880 miles of distribution lines.\nNATURAL GAS PROPERTIES: The Company produces natural gas from fields in Montana and Wyoming and through its subsidiary, Canadian-Montana Gas Company, from fields in southeastern Alberta, Canada. Natural gas is also purchased from independent producers in Montana and Alberta.\nAll of the Company's utility natural gas customers are served from its transmission system which extends through the western two-thirds of Montana. The Company operates four natural gas storage fields on the system which enable the Company to store natural gas in excess of system load requirements during the summer and to deliver natural gas during winter periods of peak demand.\nAt December 31, 1993, the Company and its subsidiaries owned and operated 1,912 miles of natural gas transmission lines and 2,890 miles of distribution mains.\nAll natural gas volumes are at a pressure base of 14.73 psia at 60 degrees Fahrenheit, except for those volumes used to compute the average revenues by customer classification.\nFor information pertaining to the Company's net recoverable utility natural gas reserves, see Item 8, \"Supplementary Information.\"\nIn addition to Company-owned reserves, the Company, at December 31, 1993, controlled under purchase contracts, 65,305 Mmcf of proven reserves in the United States and 37,824 Mmcf in Canada. No significant change has occurred and no event has taken place since December 31, 1993, that would materially affect the magnitude of the Company's reserve estimates.\nUtility natural gas reserve estimates have not been filed with any other federal or any foreign governmental agency during the past twelve months. Certain lease and well data, with respect only to owned wells, are filed with the Internal Revenue Service for tax purposes.\nTotal produced, royalty and purchased natural gas volumes in Mmcf during the last three years were as follows:\nThe following table presents information as of December 31, 1993, concerning Company-owned utility natural gas wells and the owned or leased acreages in which they are located.\nUnited States Canada\nGross productive wells. . . . . . . . . . 591 167 Net productive wells. . . . . . . . . . . 485 156 Gross wells with multiple completions . . 17 10 Net wells with multiple completions . . . 11.8 9.5\nGross producing acres . . . . . . . . . . 452,194 203,672 Net producing acres . . . . . . . . . . . 292,820 180,438 Gross undeveloped acres . . . . . . . . . 76,761 54,240 Net undeveloped acres . . . . . . . . . . 58,292 52,640\nThese acreages are located primarily in Montana and Alberta, Canada.\nThe Company anticipates that during 1994 total exploration and development expenditures (expense and capital) will be approximately $1,857,000 in the United States and approximately $960,000 in Canada.\nThe following table presents information on utility natural gas exploratory and development wells drilled during 1993, 1992 and 1991.\nUnited States Canada 1993 1992 1991 1993 1992 1991\nNet productive exploratory wells. . . . . . . . . . . . - - - - - - Net dry exploratory wells. . . - - - - - - Net productive development wells. . . . . . . . . . . . 12.25 6.38 8.31 3.00 - - Net dry development wells. . . 2.00 3.00 1.00 1.00 - -\nThe following table presents average revenues received per Mcf by customer classification for natural gas from all sources for the years 1993, 1992 and 1991. Revenues per Mcf are computed based on volumes at varying pressure bases as billed.\nYear Ended December 31 Customer Classification 1993 1992 1991\nResidential. . . . . . . . . . . . . . . $ 4.35 $ 4.22 $ 3.98 Commercial . . . . . . . . . . . . . . . 4.20 3.91 3.67 Industrial . . . . . . . . . . . . . . . 4.02 3.76 3.19 Other gas utilities. . . . . . . . . . . 3.38 3.33 3.25\nThe following table presents the average production cost per Mcf for produced utility natural gas, in U. S. dollars, for the three years 1993, 1992 and 1991.\nUnited States Canada\n1991. . . . . . $ 1.18 $ 0.52 1992. . . . . . 1.30 0.78 1993. . . . . . 1.44 0.60\nProduction cost per unit fluctuated over the three-year period primarily as a result of expensing fixed costs over varying levels of production resulting from fluctuations in weather sensitive sales.\nENTECH:\nCOAL PROPERTIES: Western leases and produces coal in Montana and Wyoming. Northwestern leases and produces lignite from properties in Texas and leases coal properties in Wyoming. Basin produces coal, and North Central owns and leases coal, in Colorado. Horizon leases lignite properties in Montana, Texas and Alabama. Western SynCoal owns a 50% partnership interest in a coal enhancement demonstration plant at Colstrip, Montana.\nWestern has coal mining leases covering approximately 561,000,000 proved and probable, and recoverable, tons of surface-mineable coal reserves averaging less than 1.25 pounds of sulfur per million Btu (low-sulfur) at Colstrip. Approximately 280,000,000 tons of these reserves are committed to present contracts, including requirements of the Colstrip Units. Western also has coal mining leases covering approximately 6,000,000 proved and probable, and recoverable, tons of surface-mineable coal reserves averaging less than 0.6 pounds of sulfur per million Btu (compliance quality) in Wyoming.\nNorthwestern has lignite mining leases in central Texas at the Jewett Mine covering approximately 186,000,000 proved and probable, and recoverable, tons of surface-mineable lignite. Northwestern has contracted to supply the entire capacity of the Jewett Mine to Houston Lighting and Power Company, which owns two electric generating units located adjacent to the mine.\nIn 1990, Northwestern acquired surface rights and coal leases which contain approximately 628,000,000 proved and probable, and recoverable, tons of compliance quality surface-mineable coal reserves in the southern Powder River coal region located at Rocky Butte, Wyoming. In January 1993, Northwestern acquired an adjacent federal lease which contains approximately 56,000,000 proved and probable, and recoverable tons of compliance quality coal reserves. Northwestern's application with the Department of Interior to combine these leases into one logical mining unit, which was granted in December 1993, requires the property to be developed by 2003. However, a challenge to the 1993 federal lease is pending. If this challenge should be successful, the logical mining unit approved in December 1993 would be nullified and Northwestern would lose the rights to the federal coal leases containing approximately 599,000,000 proved and probable, and recoverable tons of reserves as described above.\nNorth Central owns and leases lands containing approximately 90,000,000 tons of proved and probable, and recoverable, compliance quality underground-mineable coal reserves near Trinidad, Colorado. Approximately 18,000,000 tons of these reserves are dedicated to a long-term contract.\nHorizon has undeveloped mining leases covering lands in three different states. Properties in eastern Montana contain approximately 31,000,000 proved and probable, and recoverable, tons of low-sulfur surface-mineable lignite. Those in southeastern Alabama contain approximately 97,000,000 proved and probable, and recoverable, tons of surface-mineable lignite (averaging greater than 1.25 pounds of sulfur per million Btu). Those in central Texas contain approximately 177,000,000 proved and probable, and recoverable, tons of surface-mineable lignite.\nOIL AND NATURAL GAS PROPERTIES: No significant change has occurred and no event has taken place since December 31, 1993, which would materially affect the estimated quantities of proved reserves. For information pertaining to net recoverable Entech oil and natural gas reserves, see Item 8, \"Supplementary Information to the Consolidated Financial Statements.\"\nAll Entech oil and natural gas volumes are at a pressure base of 14.73 psia at 60 degrees Fahrenheit.\nEntech oil and natural gas reserve estimates have not been filed with any other federal or any foreign government agency during the past twelve months. Certain lease information and well data, only with respect to owned wells, is filed with the Internal Revenue Service for tax purposes.\nThe following table presents information on produced oil and natural gas average sales prices and production costs in U.S. dollars for 1993, 1992 and 1991.\nNatural gas production was converted to barrel of oil equivalents based on a ratio of six Mcf to one barrel of oil.\nEntech's oil, natural gas and natural gas liquids production was sold under both short and long-term contracts at posted prices or under forward market arrangements. From 1992 to 1993, Entech's average sale prices changed due to fluctuations in market prices and currency exchange rates. In the U.S., Entech's average production cost changed reflecting higher production taxes per barrel of oil equivalent due to higher revenues received. In Canada, average production cost decreased because of lower well operating expenses.\nInformation on Entech natural gas and oil wells and the owned or leased acreages in which they are located, as of December 31, 1993, is presented below. United States Canada\nGross productive natural gas wells 400 194 Net productive natural gas wells 205.52 123.71 Gross productive oil wells 250 251 Net productive oil wells 151.86 115.71\nGross producing acres 143,891 192,410 Net producing acres 59,708 95,197 Gross undeveloped acres 235,360 210,405 Net undeveloped acres 112,547 118,731\nThe wells located in Canada include multiple completions of 12 gross productive natural gas wells and 10.56 net productive gas wells.\nThe foregoing acreages are located in the United States and Canada primarily in the Rocky Mountain states and Alberta.\nIt is anticipated that during 1994 total exploration, acquisition and development expenditures (expense and capital) will be approximately $23,000,000 in the United States and approximately $14,600,000 in Canada.\nThe following table presents information on Entech oil and natural gas exploratory and development wells drilled during 1993, 1992 and 1991.\nFor information on properties acquired, see Item 8, \"Supplementary Information - Oil and Natural Gas Producing Activities.\"\nINDEPENDENT POWER GROUP:\nThe IPG manages the sale of power from the Company's 210 MW Colstrip 4 leased interest and associated common and transmission facilities. The IPG also has general and limited partnership interests in or is providing development funding to the following nonutility generation projects:\nProjects in Operation\nProjects Under Development\nITEM 3.","section_3":"ITEM 3. LEGAL PROCEEDINGS\nRefer to Item 7, \"Management's Discussion and Analysis of Financial Condition and Results of Operations.\"\nITEM 4.","section_4":"ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS\nNone.\nPART II\nITEM 5.","section_5":"ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS\nCommon Stock Information\nThe Common Stock of the Company is listed on the New York and Pacific Stock Exchanges. The following table presents the high and low sale prices of the common stock of the Company as well as dividends declared for the years 1993 and 1992. The number of common shareholders on December 31, 1993, was 38,883.\nDividends Declared per 1993 High Low Share\n1st quarter $ 27.875 $ 25.125 $ 0.395 2nd quarter 27.750 25.500 0.395 3rd quarter 28.125 26.375 0.395 4th quarter 27.500 24.500 0.400\nDividends Declared per 1992 High Low Share\n1st quarter $ 28.000 $ 24.000 $ 0.385 2nd quarter 26.375 23.625 0.385 3rd quarter 26.625 24.875 0.385 4th quarter 26.625 24.500 0.395\nITEM 6.","section_6":"ITEM 6. SELECTED FINANCIAL DATA\nIncome Statement Items (000)\nITEM 7.","section_7":"ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS\nResults of Operations:\nThe following discussion presents significant events or trends which have had an effect on the operations of the Company during the years 1991 through 1993. Also presented are factors which are expected to have an impact on operating results in the future. This discussion should be read in conjunction with the Consolidated Statement of Income.\nNet Income Per Share of Common Stock:\nThe Company's consolidated net income increased to $107,211,000 in 1993 compared to $107,065,000 and $105,715,000 in 1992 and 1991, respectively. The following table shows the sources of consolidated net income on a per share basis.\n1993 1992 1991\nUtility Operations $ 1.07 $ 0.97 $ 0.98 Entech 0.91 0.98 0.98 Independent Power Group -- 0.07 0.07\n$ 1.98 $ 2.02 $ 2.03\nColder weather and increased hydroelectric generation combined to increase the earnings of the Utility Division for 1993. The Utility increase offset reduced earnings of Entech and the Independent Power Group (IPG). Entech earnings decreased primarily due to reduced coal sales resulting from an extended outage at a Colstrip generating unit. The IPG earnings decrease resulted primarily from a decrease in cogeneration project development revenues.\nConsolidated net income for 1992 benefited from the higher earnings of Entech's Oil Division, lower interest rates and the gain resulting from the sale of securities held for investment. Net income for the year was also boosted by increased wholesale sales of electricity. The warm, dry weather experienced in the Company's service territory during the first half of 1992 caused power supply costs to increase and natural gas sales to decline. Strong natural gas sales during the fourth quarter resulting from colder weather and record operating performance by the Utility's coal-fired plants throughout the year partially offset the adverse effect of weather early in the year. Losses incurred at a coal mine acquired in June 1991 adversely impacted consolidated net income during 1992.\nUtility Operations:\nThe following table shows changes from the prior year, in millions of dollars, in principal categories of utility revenues and the related percentage changes in volumes sold and prices received:\n1993 1992\nElectric General business - revenue $ 9 $ 9 - volume 3% - - price\/kWh - 2% Other utilities - revenue $ 14 $ 8 - volume 11% 3% - price\/kWh 8% 9%\nNatural Gas General business - revenue $ 14 $ (9) - volume 11% (17%) - price\/Mcf 6% 9% Other utilities - revenue $ (5) $ (4) - volume (53%) (35%) - price\/Mcf 1% 2% Transportation* - revenue $ 2 $ 3 - volume 19% NM** - price\/Mcf 35% (16%)\n*Service commenced November 1, 1991. **Not Meaningful\nWeather can significantly affect electric and natural gas revenues, and should be considered when determining trends. The Company's sales usually increase as a result of colder weather, especially in the winter months. As measured by heating degree days, the weather in 1993 in the Company's service territory was 17% colder than 1992 and 8% colder than normal. The weather in 1992 was 2% warmer than in 1991 and 8% warmer than normal.\n1993 Compared to 1992\nOperating Revenues:\nElectric revenues from general business customers increased due to a 3% increase in volumes sold. Weather, which was 17% colder than 1992, and a 2% increase in the number of customers combined to increase revenues $8,600,000.\nElectric revenues from sales to other utilities increased revenues $14,300,000. Volumes increased 11% and unit prices increased 8%, providing additional revenues of $7,000,000 and $7,300,000, respectively. The increases occurred primarily during the first and fourth quarters as a result of improved regional market conditions during those periods. In spite of reduced steam generation resulting from outages at a Colstrip generating unit, volumes sold increased due to a 27% increase in hydroelectric generation for the year and increased power purchases.\nUnder a transportation tariff effective November 1, 1991, natural gas customers who consume more than 60,000 Mcfs annually (noncore customers) may purchase natural gas from other suppliers and transport that gas on the Company's transportation and distribution system for a fee. One noncore customer was no longer required to purchase any natural gas from the Company. The remaining customers were required to purchase two-thirds of their gas supplies from the Company until September 1, 1992, and thereafter, one-third until September 1, 1993, at which time they became free to purchase all of their gas from other sources. The resulting decline in natural gas sales revenue has been offset by revenues from transportation fees, lower purchase gas costs and increased revenues from higher rates charged to core general business customers.\nNatural gas revenues from general business customers increased $14,500,000. A 19% increase in volumes sold to residential and commercial customers, primarily a result of 17% colder weather and a 4% increase in the number of customers, increased revenues $13,900,000. Rate increases resulting from the transportation phase-in mentioned previously and an interim rate order effective October 18, 1993, increased revenues $4,100,000. These increases were partially offset by a $3,500,000 decrease resulting from a 54% reduction in volumes sold to industrial, government and municipal customers who switched to transportation.\nNatural gas revenues from sales to other utilities also decreased $4,600,000 due to a 53% decrease in volumes resulting from switches to transportation service.\nOperating Expenses and Taxes:\nThe following table shows the Company's sources of electricity and power supply expenses (Operation, Fuel for electric generation, and Maintenance) for 1993 and 1992.\nThe Company's hydroelectric output increased as a result of improved streamflows, offsetting a decline in generation from the Company's coal-fired plants. Purchased power volumes were increased to meet higher sales to general business and wholesale customers.\nIncreases in purchased power costs were partially offset by a $2,900,000 decrease in the amortization of previously deferred costs. Fuel for electric generation decreased $4,900,000 as a result of outages at a Colstrip generating unit. The decrease in fuel was partially offset by a $3,000,000 increase in maintenance of steam plants resulting from scheduled maintenance and unscheduled repairs due to the previously mentioned outages.\nOperations expense not associated with power supply costs increased $9,600,000 primarily due to a $5,000,000 increase in labor costs, a $2,400,000 increase in transmission costs and expenses of $1,600,000 related to property damage to homes at Colstrip.\nPurchased gas increased $1,900,000 primarily as a result of increased deferred amortizations which are offset by similar increases in natural gas revenues through gas cost tracking procedures, and do not affect net income.\nThe $4,100,000 increase in taxes - other than income taxes is principally due to increased property taxes resulting from property additions and higher mill levies.\nInterest Charges:\nThe $1,700,000 decrease in interest on long-term debt is primarily a result of lower interest rates due to refinancings.\n1992 Compared to 1991\nOperating Revenues:\nElectric revenues from general business customers improved $9,100,000. A 2% increase in unit prices, primarily the result of a $16,700,000 annual rate increase effective July 1991, contributed approximately $7,700,000. The remaining $1,400,000 increase resulted from a slight increase in volumes sold.\nElectric revenues from sales to other utilities increased $8,300,000 due to a 9% increase in price and a 3% increase in volumes sold. Price increases were caused by reduced hydroelectric generation throughout the Pacific Northwest, the result of drought conditions that reduced streamflows. Volumes available for sale increased, in spite of reduced hydroelectric generation at Company facilities, as a result of a 10% increase in generation at the Utility's coal-fired plants and purchases.\nNatural gas revenues from general business customers decreased $8,900,000, the result of decreased sales volumes. Specifically, sales volumes to industrial, government and municipal customers decreased 55%, principally as the result of the switch of customers to the gas transportation tariff, reducing revenues $10,300,000. In addition, volumes sold to residential and commercial customers decreased 5%, reducing revenues $3,700,000. Increased consumption resulting from a 3% increase in customers was more than offset by reduced volumes caused by warmer weather. Revenue decreases resulting from lower sales volumes were partially offset by rate adjustments, which contributed approximately $5,000,000. These adjustments consist of $5,900,000 and $2,800,000 annual increases, effective November 1991 and September 1992, respectively, to recover costs that had previously been allocated to non-core customers, partially offset by a $1,900,000 annual decrease, effective November 1991, resulting from a gas cost tracking procedure that annually balances costs collected from customers with the cost of supplying gas. These rate adjustments do not affect earnings.\nNatural gas revenues from other utilities declined $4,400,000 due to a 35% decrease in sales volumes. This decline is largely a result of an eligible customer switching to the gas transportation tariff.\nOperating Expenses and Taxes:\nThe following table shows the Company's sources of electricity and power supply expenses (Operation, Fuel for electric generation, and Maintenance) for 1992 and 1991.\nThe Company's 1992 hydroelectric generation was reduced as a result of the drought conditions experienced in the Pacific Northwest. Increased power purchases from other utilities and qualifying facilities offset the hydro reduction and provided energy for sales to other utilities. In addition, power purchase costs increased $3,500,000 as a result of the amortization of costs related to certain 1991 qualifying facility purchases which were deferred in accordance with regulatory decisions.\nFuel for electric generation was up $2,800,000, largely a result of increased generation by the Corette Plant in 1992. This plant was out-of-service from May through August 1991 for maintenance and rehabilitation work. Maintenance expenses decreased $2,100,000, primarily a result of the aforementioned work at the Corette Plant in 1991.\nPurchased gas expense decreased $8,100,000. The assignment of gas purchase contracts to the customers who switched to gas transportation decreased expense approximately $5,600,000. The remainder of the decrease is largely the result of lower sales due to warmer weather. Since purchased gas expense decreases are offset by similar changes in natural gas revenues through gas cost tracking procedures, net income is not affected.\nThe $3,400,000 increase in taxes - other than income taxes is principally due to increased property taxes resulting from property additions and higher mill levies.\nOther Income and Expense:\nIncome taxes applicable to other income decreased $2,100,000, the result of the recalculation, in 1992, of taxes accrued in 1991.\nInterest Charges:\nThe $2,900,000 decrease in total interest expense is principally the result of lower interest rates on long and short-term debt.\nEntech Operations:\nThe following table shows year-to-year changes for the previous two years, in millions of dollars, in the various classifications of revenues of Entech's businesses with the related percentage changes in volumes sold and prices received:\n1993 1992 Coal -revenue $ (8) $ 5 -volume (7%) - -price\/ton 1% 1%\nOil -revenue $ (5) $ 11 -volume (10%) 61% -price\/bbl (6%) (10%)\nNatural Gas -revenue $ 9 $ 5 -volume 16% 24% -price\/Mcf 20% (3%)\nNatural Gas Marketing -revenue $ 23 $ 13\nOther Operations -revenue $ (6) $ 1\n1993 Compared to 1992\nRevenues:\nCoal revenues at the Rosebud Mine decreased $21,000,000 due to lower volumes sold to the Colstrip units as a result of unscheduled outages and from fewer spot sales to Midwestern customers. This revenue decrease was partially offset by an increase of $5,800,000 from a combination of brokered coal revenues and fees related to operating the SynCoal demonstration plant. At the Jewett Mine, coal revenues increased by $11,400,000 due to higher volumes sold to the mine-mouth power plants, offset by an $8,000,000 decrease from lower reimbursable mining expenses. Higher volumes sold to supply coal for test burns and spot market sales resulted in increased revenues of $4,000,000 at the Golden Eagle Mine. In July 1994, the Golden Eagle Mine will begin delivering up to 1,200,000 tons of coal per year to a new customer under a long-term contract.\nEntech's coal business faces increasing competition for Midwestern customers resulting from surplus coal capacity in the southern Powder River Basin. In 1993, the Rosebud Mine sold approximately 2,000,000 tons of coal under contracts with two Midwestern customers. One of the contracts with a Midwestern customer, totaling approximately 1,000,000 tons per year, has a price reopener at the end of 1994. The other contract, which includes take- or-pay provisions, also totaling approximately 1,000,000 tons, will expire at the end of 1995. It is uncertain whether either of these contracts will be retained. Both customers are expected to purchase the same number of tons during 1994 as they purchased in 1993, and take-or-pay revenues are expected to be at the same levels as in 1993.\nOil revenues decreased $5,400,000 primarily from lower volumes sold as a result of natural declining production and from lower market prices received in both Canada and the U.S. Natural gas revenues increased $9,200,000 principally from higher market prices received and higher volumes sold as a result of development drilling in both Canada and the U.S. The increase in natural gas marketing revenues reflects escalated prices received under three cogeneration supply contracts and higher volumes sold.\nRevenues from Entech's other operations decreased $6,200,000 as a net result of the sale of the waste management operations in May 1993 offset by higher telecommunications revenues resulting from expansion of services into three Northwestern states and increased contractual services provided to common carriers.\nCosts and Expenses:\nCost of sales increased approximately $21,500,000. This amount is comprised of several items. Natural gas for resale increased $23,100,000 and costs from increased production of natural gas increased $1,400,000. In addition, $1,900,000 of the increase resulted from telecommunications services. These amounts were offset by a $4,500,000 decrease as a result of the sale of the waste management operations. Taxes other than income taxes decreased as a result of lower coal revenues at the Rosebud Mine. The decrease in depreciation and depletion results primarily from lower coal production at the Rosebud Mine. Selling, general and administrative expense increased $1,600,000 from the implementation of Statement of Financial Accounting Standards No. 106, \"Employers' Accounting for Postretirement Benefits Other Than Pensions\" and from a non-recurring workers' compensation refund of $800,000 received in 1992.\nInterest income and other-net increased approximately $700,000 from the net effect of several events. Profits from asset sales increased $2,200,000 and an increase of $3,000,000 was realized because of a 1992 payment to settle a lawsuit. These increases were offset by a $3,300,000 decrease in joint ventures income and $1,100,000 less income received from the Brazilian subsidiary in 1993.\n1992 Compared to 1991\nRevenues:\nCoal revenues at the Rosebud Mine improved $8,300,000 principally due to higher volumes sold because of improved operating performance by the Colstrip units and the Company's Corette Plant. Coal revenues decreased at the Jewett Mine $6,900,000 reflecting lower tonnages sold as a result of scheduled and unscheduled power plant maintenance offset by a $4,300,000 increase due to higher reimbursable mining expenses. Coal revenues decreased $600,000 at the Golden Eagle Mine. The mine was temporarily closed in April 1992 because its primary customer discontinued buying coal. The mine resumed limited operations in mid-October 1992 to supply coal for test burn orders. Markets for coal from this mine are being sought.\nThe Coal Division faces increasing price competition for Midwestern customers caused by surplus coal capacity. In 1992, the Rosebud Mine sold approximately 14,700,000 tons of coal. One Rosebud Mine long-term contract with a Midwestern customer, totaling approximately 1,000,000 tons per year, has a price reopener in 1994. Renegotiation of this contract has not yet begun. Another Rosebud Mine long-term contract with another Midwestern customer, totaling approximately 1,000,000 tons per year, will expire in 1995. It is uncertain whether this contract will be renewed.\nOil revenues increased $11,000,000 from higher volumes sold as the result of development drilling and a 1991 Canadian property acquisition. Natural gas revenues increased $5,000,000 primarily from higher volumes sold resulting from development drilling and the property acquisition. The increased natural gas revenues from higher volumes sold were partially offset by lower Canadian natural gas prices. Natural gas marketing revenues increased $13,000,000 from higher volumes sold and escalated prices received under three cogeneration supply contracts.\nIn 1992, the Entech Oil Division entered into forward sales and swap transactions to reduce the effect of fluctuations in oil prices on its profitability and cash flow. Prospectively, the Division has hedged 700,000 barrels, which represent approximately 40% of its 1993 U.S. and Canadian oil production, with various financial instruments. This strategy provides price protection should the Nymex-based price fall below $17.94 per barrel. The difference between market value and hedged contract prices is recognized in income when the hedged production is sold.\nRevenues from Entech's other operations increased approximately $1,000,000 resulting from a $4,400,000 increase in telecommunications operations and a $1,500,000 increase in waste management operations. These increases were partially offset by a $3,000,000 decrease from real estate sales and a $2,200,000 decrease from automated system control contracts. Real estate sales are not expected to make a material contribution to revenues in future periods due to reduced real estate inventory.\nCosts and Expenses:\nCost of sales increased approximately $28,000,000. This amount is comprised of $10,000,000 of increased cost of purchasing natural gas for resale, $7,000,000 of increase coal production costs due to increased volumes and higher maintenance costs at Colstrip, $5,000,000 of increased costs reflecting a full year operation of the Golden Eagle Mine, which was acquired mid-1991, and $6,000,000 of increased oil and gas production costs associated with greater volumes produced. Taxes - other than incomes taxes increased due to the settlement of a state production tax audit and due to higher revenues at Colstrip. The majority of these taxes were passed through to customers under coal contract provisions. The increase in depreciation and depletion results from increased oil and gas production offset by reduced depletion rates due to the Canadian acquisition. Increased interest expense resulted from higher levels of debt outstanding during the period.\nInterest income and other-net decreased $1,600,000 because of a $3,000,000 payment attributable to a lawsuit settlement and $1,000,000 less income received from the Brazilian subsidiary in 1992. These decreases were offset by $2,400,000 increased profits from asset sales. Income tax expense decreased principally due to lower pretax income and additional tax credits.\nIndependent Power Group Operations:\n1993 Compared to 1992\nIPG revenues increased $33,700,000. The acquisition of a company that provides energy-related support services in November 1992 resulted in increased revenues of $39,300,000. The increase was partially offset by a $6,000,000 reduction in cogeneration project development fees. Revenues from electricity sold under long-term contracts remained at 1992 levels.\nIPG expenses increased $37,500,000 primarily as a result of a $38,900,000 increase resulting from the acquisition mentioned above. Expenses also increased $3,000,000 due to increases in purchased power costs resulting from outages at a Colstrip generating unit, $1,000,000 due to the accrual of Colstrip housing damage claims and $3,800,000 resulting from a change in the amount of amortization of the loss on long-term sales. The increases were offset by a $3,500,000 reduction in fuel expense resulting from the plant outages, a $3,000,000 decrease in cogeneration development expenses and a $2,700,000 decrease in income tax expense.\n1992 Compared to 1991\nIPG revenues improved $16,800,000. The acquisition of a company that provides energy-related support services in November 1992 resulted in increased revenues of $8,200,000. Revenues from electricity sales increased $4,600,000, caused by higher prices on electricity sold under long-term contracts. Successful cogeneration project development activities resulted in additional revenues of $3,900,000.\nIPG expenses increased $16,400,000. The acquisition and cogeneration project development activities mentioned above resulted in additional expenses of $8,200,000 and $4,600,000, respectively. Expenses increased an additional $3,600,000 as a result of more scheduled maintenance at a Colstrip generating unit and higher transmission expenses.\nLiquidity and Capital Resources:\nNet cash provided by operating activities was $182,437,000 in 1993 compared to $211,081,000 in 1992 and $193,704,000 in 1991. Cash from operating activities less dividends paid provided 53% of capital expenditures in 1993, down from 80% in 1992 and 61% in 1991.\nThe Company's long-term debt as a percentage of capitalization was 36%, 39% and 41% in 1993, 1992 and 1991, respectively. The Company also has entered into long-term lease arrangements and other long-term contracts for sales and purchases that are not reflected on its balance sheet and impact its liquidity. See Item 8, \"Note 3 to the Consolidated Financial Statements\" for additional information.\nIn addition, $90,460,000 of long-term debt will mature during the years 1994-1998. See Item 8, \"Note 7 to the Consolidated Financial Statements\" for details on maturities of long-term debt.\nFor the years 1994-1998, the Company estimates that approximately 51% of its utility construction program, 100% of Entech capital expenditures and 44% of IPG investments will be financed from funds generated internally and that the balance, as well as maturing long-term debt, will be financed through the incurrence of short and long-term debt and the sales of equity securities, the timing and amounts of which will depend upon future market conditions. The Company has adequate sources of external capital to meet its financing needs.\nDividends on common and preferred stock increased to $87,054,000 in 1993 from $83,209,000 in 1992 and $78,114,000 in 1991. The Company paid dividends of $1.58 per share of outstanding common stock during 1993, up 2.6% from 1992. The dividend paid January 31, 1994 was increased by the Company's Board of Directors to 40 cents per share, an increase of 0.5 cents per share from the previous quarter. This 1.3% increase raises the common stock dividend to an indicated rate of $1.60 per share on an annual basis.\nThe Company and Entech have Revolving Credit and Term Loan Agreements in the amount of $60,000,000 and $75,000,000, respectively. These businesses also have short-term borrowing facilities with commercial banks that provide both committed and uncommitted lines of credit, and the ability to sell commercial paper. See Item 8, \"Notes 7 and 8 to the Consolidated Financial Statements.\"\nDuring the first quarter of 1993, the Company sold $50,000,000 of First Mortgage Bonds and $43,000,000 of Medium-Term Notes, which are secured by First Mortgage Bonds, with interest rates from 7% to 8.11%. The proceeds were used to reduce interest expense by refinancing long-term debt maturities and redeeming, prior to maturity, $60,000,000 of the 8 5\/8% series of First Mortgage Bonds, due 2004.\nIn 1993, the Company sold $90,205,000 of Pollution Control Revenue Bonds, 6 1\/8% series due 2023. The proceeds of this issue were used to redeem, prior to maturity, $90,205,000 of Pollution Control Revenue Bonds, which includes $18,545,000 of the 5.75% series due 2003, $7,000,000 of the 6.3% series due 2007, $39,660,000 of the Adjustable Rate Series due 2014 and $25,000,000 of the Variable Rate Series due 2014. The Company also sold $80,000,000 of Pollution Control Revenue Bonds, 5.9% series due 2023, the proceeds of which were used to redeem, prior to maturity, $80,000,000 of Pollution Control Revenue Bonds which included $40,000,000 of the 10% series due 2004 and $40,000,000 of the 10 1\/8% series due 2014. See Item No. 8, \"Note 7 to the Consolidated Financial Statements.\"\nIn November 1993, the Company sold $50,000,000 of the $6.875 series of perpetual Preferred Stock, stated value and liquidation value $100. The net proceeds from the sale were used to repay short-term debt. The stock is redeemable at the option of the Company, in whole or in part, at any time on or after November 1, 2003.\nOn January 19, 1994, the Company sold $5,000,000 of Secured Medium-Term Notes, 7.25% series due 2024, the proceeds of which were used to repay short- term debt. The Company also intends to sell additional Secured Medium-Term Notes within the first half of 1994 for the purpose of retiring Commercial Paper.\nThe Company's Mortgage and Deed of Trust contains certain restrictions upon the issuance of additional First Mortgage Bonds. At December 31, 1993, after taking into account the sale of $98,000,000 of First Mortgage Bonds and Secured Medium-Term Notes discussed above, the unfunded net property additions and retired bonds test, which is the most restrictive test, would have permitted the issuance of approximately $488,000,000 additional First Mortgage Bonds. There are no restrictions upon issuance of short-term debt or preferred stock in the Company's Restated Articles of Incorporation, its Mortgage and Deed of Trust or its Sinking Fund Debenture Agreement.\nSEC Ratio of Earnings to Fixed Charges:\nFor the twelve months ended December 31, 1993, the Company's ratio of earnings to fixed charges was 2.86 times. Fixed charges include interest, the implicit interest of Unit 4 rentals and one-third of all other rental payments.\nInflation:\nCapital intensive businesses, such as the Company's electric and natural gas operations, are significantly affected by long-term inflation. Neither depreciation charges against earnings nor the ratemaking process reflect the replacement cost of utility plant. However, based on past practices of regulators, these businesses will be allowed to recover and earn on the actual cost of investment in the replacement or upgrade of plant. Although prices for natural gas may fluctuate, earnings are not impacted because a gas cost tracking procedure annually balances gas costs collected from customers with the costs of supplying gas.\nEntech's long-term coal contracts and the IPG's long-term operation, maintenance and power sales contracts provide for the adjustment of prices either through indices, fixed rate escalations and\/or direct pass-through of costs.\nThe Company believes that the effects of inflation, at currently anticipated levels, will not significantly affect results of operations.\nPostemployment Benefits:\nThe Financial Accounting Standards Board released SFAS No. 112, \"Employers' Accounting for Postemployment Benefits,\" in 1992. SFAS No. 112 is not expected to have a significant effect upon results of operations. See Item 8, \"Note 9 to the Consolidated Financial Statements\" for additional information.\nEnvironmental Issues:\nThe Company's businesses are subject to, and in substantial compliance with, existing federal and state environmental regulations. The Company is committed to careful management and actions which will permit it to continue to do its part to protect and maintain the environment.\nThe Clean Air Act Amendments of 1990 should impose no major effects on the Company's electric generation facilities. The Company's coal-fired generating plants meet the 1995 Phase I requirements of the Act. Low-sulfur coal and state-of-the-art scrubbers already result in sulfur dioxide emissions from the Colstrip units well below the new requirements. Either fuel switching or the use of allowances, or both, would permit the Corette Plant to meet the Phase II requirements of the Act in 2000. Despite the expectation that the Corette Plant may be operated to comply with the Act, air quality problems in the Billings, Montana area may result in the imposition of additional emissions restrictions that would require the evaluation of other options.\nModifications will be required at three units in the late 1990's to meet the nitrogen oxide emission standards of the Act. However, Phase I rules implementing the Act have not been published. Nor does the Company know what requirements may result from Phase II Rules, which also are yet to be published. Consequently, the capital costs associated with the modifications to meet the nitrogen oxide standards of the Act have not yet been determined. However, capital improvements that may be required are expected to be recovered through rates and therefore, the costs are not expected to have a material impact on earnings.\nIn 1988, the United States Environmental Protection Agency advised the Company that it, along with certain upstream industries, is a potentially responsible party (PRP) for the release of certain toxic substances which have come to rest behind the dam at the Company's Milltown Hydroelectric Plant. Because of federal legislation specifically relating to Milltown, the Company believes it has no responsibility for any of the alleged releases. If the Company should have some responsibility, it would have to share, together with other responsible parties, the costs related to the handling of these toxic substances. While these costs have not been determined, the Company believes that any portion which it might bear would not have a significant impact upon its earnings.\nThe Company, along with others, has been named a PRP with respect to the Silver Bow Creek\/Butte Area Superfund Site. The alleged contamination is soil and groundwater contamination, for the most part, associated with decades of copper mining in the area. The PRPs have cooperated to summarize the data that currently exists, to evaluate the useability of this existing data and to determine additional data needs. Studies to determine the extent of the alleged contamination, and a proposal for removal or remediation of the alleged contamination are not complete.\nRegarding this superfund site, the Company has focused on its property ownership and alleged contamination that may be attributed to that ownership. It has spent approximately $450,000 to investigate its property within the site, collect data, evaluate studies and monitor its property. Costs to clean up this contamination, including sums spent in the studies mentioned above, are not expected to exceed $1,000,000.\nOther contamination at the Company's property within the site involves heavy metals and substances which may be attributed to mining and activities of others within the greater area of the site. Neither the Company nor, to the best of the Company's knowledge, any PRP or state or federal agency has estimated the total cost of the potential clean-up of mining-related contamination of either its property or other property within the site because the extent of the contamination has not been established. The Company intends to deny any responsibility for costs associated with this contamination.\nThe Company also is a PRP at a second site of soil contamination in Montana, alleged to have resulted from the salvage of electric transformers by a third party or parties who obtained the transformers from the Company. The state agency with jurisdiction over this site has recently determined that the contamination is contained within the site, that temporary measures taken by the Company to contain the contamination are effective, and that contamination has not affected surface water. Costs incurred by the Company are approximately $500,000. Additional costs are not expected to exceed $350,000.\nThe Company is a PRP at two sites in the State of Washington where electric transformers were sent for salvage. At one of the sites, the Company believes it will qualify as a de minimis settlor. At the second site, pursuant to the terms of a Consent Decree, the Company is obligated to pay approximately $350,000.\nThe Company has accrued the estimated minimum costs associated with these matters. The Company does not expect these costs to materially impact the results of its operations.\nITEM 8.","section_7A":"","section_8":"ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA\nAND SUPPLEMENTAL DATA\nPage\nManagement's Responsibility for Financial Statements 40\nReport of Independent Accountants 41\nConsolidated Financial Statements:\nConsolidated Statements of Income for the Years Ended December 31, 1993, 1992 and 1991 42\nConsolidated Balance Sheets as of December 31, 1993 and 1992 43-44\nConsolidated Statements of Cash Flows for the Years Ended December 31, 1993, 1992 and 1991 45\nConsolidated Statements of Common Shareholders' Equity for the Years Ended December 31, 1993, 1992 and 1991 46\nNotes to Consolidated Financial Statements 47-74\nSupplemental Financial Information (Unaudited) 75-83\nFinancial Statement Schedules for the Years Ended December 31, 1993, 1992 and 1991:\nSchedule V - Property, Plant and Equipment 89-94\nSchedule VI - Accumulated Depreciation, Depletion and Amortization of Property, Plant and Equipment 95-96\nSchedule VIII - Valuation and Qualifying Accounts and Reserves 97\nSchedule IX - Short-term Borrowings 98\nSchedule X - Supplementary Income Statement Information 99\nFinancial statement schedules not included in this Form 10-K Annual Report have been omitted because they are not applicable or the required information is shown in the Consolidated Financial Statements or notes thereto.\nMANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS\nThe management of The Montana Power Company is responsible for the preparation and integrity of the consolidated financial statements of the Corporation. These financial statements have been prepared in accordance with generally accepted accounting principles which are consistently applied, and appropriate in the circumstances. In preparing the financial statements, management makes appropriate estimates and judgements based upon available information. Management also prepared the other financial information in the annual report and is responsible for its accuracy and consistency with the financial statements.\nManagement maintains systems of internal accounting control which are adequate to provide reasonable assurance that the financial statements are accurate, in all material respects. The concept of reasonable assurance recognizes that there are inherent limitations in all systems of internal control in that the costs of such systems should not exceed the benefits to be derived. Management believes the Company's systems provide this appropriate balance.\nThe Company maintains an internal audit function that independently assesses the effectiveness of the systems and recommends possible improvements. Price Waterhouse, the Company's independent public accountants, also considered the systems in connection with its audit. Management has considered the internal auditors' and Price Waterhouse's recommendations concerning the systems and has taken cost-effective actions to respond appropriately to these recommendations.\nThe Board of Directors, acting through an Audit Committee composed entirely of directors who are not employees of the Company, is responsible for determining that management fulfills its responsibilities in the preparation of the financial statements. The Audit Committee recommends, and the Board of Directors appoints, the independent public accountants. The independent accountants and internal auditors are assured of full and free access to the Audit Committee and meet with it to discuss their audit work, the Company's internal controls, financial reporting and other matters. The Committee is also responsible for determining that there is adherence to the Company's Code of Business Conduct (Code). The Code addresses, among other things, potential conflicts of interests and compliance with laws, including those relating to financial disclosure and the confidentiality of proprietary information.\nThe financial statements have been examined by Price Waterhouse, which is responsible for conducting its examination in accordance with generally accepted auditing standards.\nReport of Independent Accountants\nTo the Board of Directors and Shareholders of The Montana Power Company\nIn our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of The Montana Power Company and its subsidiaries at December 31, 1993 and 1992, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1993, in conformity with generally accepted accounting principles. 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 of these statements in accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.\nAs discussed in Note 9 to the consolidated financial statements, the Company changed its method of accounting for postretirement benefits other than pensions.\nPRICE WATERHOUSE\nPortland, Oregon February 10, 1994\nCONSOLIDATED STATEMENT OF INCOME The Montana Power Company and Subsidiaries\nThe accompanying notes are an integral part of these statements.\nCONSOLIDATED BALANCE SHEET The Montana Power Company and Subsidiaries ASSETS\nCONSOLIDATED STATEMENT OF CASH FLOWS The Montana Power Company and Subsidiaries\nCONSOLIDATED STATEMENT OF COMMON SHAREHOLDERS' EQUITY The Montana Power Company and Subsidiaries\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS\nNOTE 1 - Summary of significant accounting policies:\nThe Company's accounting policies conform to generally accepted accounting principles. With respect to utility operations, such policies are in accordance with the accounting requirements and ratemaking practices of the regulatory authorities having jurisdiction.\nPrinciples of consolidation:\nThe Consolidated Financial Statements include the accounts of the Company and its subsidiaries, all of which are wholly-owned. The Independent Power Group (IPG) includes the Company's Colstrip Unit 4 operations. The Utility and the IPG purchase coal from Western Energy Company, and sell and purchase electricity to and from each other. In addition, the Utility sells electricity and natural gas to the Entech businesses located within the Utility's service area. Entech sells natural gas to the Utility and to independent power projects in which the IPG has an ownership interest. Finally, a subsidiary of the IPG provides maintenance services to the Utility's power plants, and operation and maintenance services to the independent power projects mentioned above. Intercompany sales and purchases between the Utility, Entech, and the IPG are included in the Consolidated Statement of Income as revenues and expenses. See Note 10 for details.\nAll other significant intercompany items have been eliminated.\nPlant and property:\nAdditions to and replacement of plant and property are recorded at original cost, which includes material, labor, overhead and contracted services. Cost includes interest capitalized and, with respect to utility plant, also includes an allowance for funds used during construction. Gas in underground storage is included in natural gas utility plant. Maintenance and repairs of plant and property, and replacements and renewals of items determined to be smaller than established units of plant, are charged to operating expenses. The cost of units of utility plant retired or otherwise disposed of, adjusted for removal costs and salvage, is charged to the accumulated provision for depreciation and depletion, and the cost of related replacements and renewals is added to utility plant. Gain or loss is recognized upon the sale or other disposition of Entech property, Independent Power Group property and Utility land.\nProvisions for depreciation and depletion are recorded at amounts substantially equivalent to calculations made on straight-line and unit-of-production methods by application of various rates based on useful lives of properties determined from engineering studies. The provisions for utility depreciation and depletion approximated 2.7% for 1993, 1992, and 1991 of the depreciable and depletable utility plant at the beginning of the year.\nThe Company and its subsidiaries have adopted two methods of accounting for oil and gas exploration and development costs. Entech's Oil Division uses the successful efforts method. The regulated natural gas utility capitalizes all costs associated with the successful development of a natural gas well and expenses those costs incurred on an unsuccessful well.\nThe Company is a joint-owner of Colstrip Units 1, 2, and 3 and of transmission facilities serving these Units. At December 31, 1993, the Company's joint ownership percentage and investment in these Units and transmission facilities were:\n*This is an approximate ownership percentage. The ownership percentages are generally based on capacity rights on the various segments of the transmission system.\nThe Company also owns $35,216,000 and $32,953,000 of the Colstrip Unit 4 share of common production plant and transmission plant that had related accumulated depreciation of $10,377,000 and $5,258,000, respectively.\nEach joint-owner provides its own financing. The Company's share of direct expenses associated with the operation and maintenance of these joint facilities is included in the corresponding operating expenses in the Consolidated Statement of Income.\nUtility revenue and expense recognition:\nOperating revenues are recorded on the basis of service rendered.\nIn 1985, the Public Service Commission of Montana (PSC) and the Federal Energy Regulatory Commission (FERC) approved annual electric rate increases in the amounts of $80,400,000 and $7,500,000, respectively, to be collected in accordance with rate-moderation plans. During 1992 and 1991, cash collected under these plans exceeded revenues recorded by $12,462,000 and $23,133,000, respectively. As of October 1992, all deferred revenues under the plans had been collected.\nCosts of service are recognized on the accrual basis and charged to expense currently except for natural gas costs deferred pursuant to PSC- approved deferred gas accounting procedures and other costs deferred pursuant to regulatory decisions which are discussed in the following paragraph of this note.\nCosts deferred to future operating periods:\nAs a result of the adoption of SFAS No. 109 in 1992, the Company must recognize a deferred tax liability for certain temporary differences that were not previously required to be provided. A corresponding asset of $142,123,000 and $137,700,000 has been recorded at December 31, 1993 and 1992, respectively and is classified as a cost deferred to future operating periods. See the Income Taxes section of this note for further information on the effects of the adoption of SFAS No. 109.\nCash and cash equivalents:\nFor the purposes of these financial statements, the Company considers all liquid investments with original maturities of three months or less to be cash equivalents.\nAllowance for funds used during construction:\nThe Company capitalizes, as a part of the cost of utility plant, an allowance for the cost of equity and borrowed funds required to finance construction work in progress. The rate used to compute the allowance is determined in accordance with a formula established by the FERC and was an average of 6.5% for 1993, 7.3% for 1992, and 8.4% for 1991. The Company capitalized an allowance for borrowed funds used during construction of $1,372,000, $1,255,000, and $1,181,000 for 1993, 1992, and 1991, respectively.\nIncome taxes:\nThe Company and its U.S. subsidiaries file a consolidated U.S. income tax return. Consolidated U.S. income taxes are allocated to Utility, Entech, and IPG operations as if separate U.S. income tax returns were filed. The difference, if any, between such amounts and the consolidated U.S. income tax expense is included in utility operations - income taxes applicable to other income. Deferred income taxes are provided for the temporary differences between the financial reporting basis and the tax basis of the Company's assets and liabilities.\nIn 1992, the Company adopted Statement of Financial Accounting Standards No. 109, \"Accounting for Income Taxes\", which required a change to the asset and liability method of accounting for income taxes. Under this method, deferred tax assets or liabilities are computed using the tax rates that are expected to be in effect when the temporary differences reverse. For regulated companies, the changes in tax rates applied to accumulated deferred income taxes may not be immediately recognized because of regulatory practices. For non-regulated companies, the effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date.\nThe Company elected to report the cumulative effect of the change in the method of accounting for income taxes as of January 1, 1987. The cumulative effect of the accounting change was $5,900,000 and was recorded as a reduction in Common Shareholders' Equity.\nPrior to the adoption of SFAS No. 109, deferred income taxes were not provided for certain Utility Operations' temporary differences pursuant to regulatory practices. Now the Company must recognize a deferred tax liability for these temporary differences in the amount of $142,123,000 and $137,700,000 as of December 31, 1993, and 1992, respectively. Because of regulatory precedent and the Company's intent to request rate recovery of these amounts in the future, a corresponding asset has been recorded and is classified as a cost deferred to future operating periods.\nNet income per share of common stock:\nNet income per share of common stock is computed for each year based upon the weighted average number of common shares outstanding. The effect of options outstanding under the Company's Long-Term Incentive Plan is not significant (see Note 5).\nFinancial instruments:\nAll of the Company's significant financial instruments were recognized in the Consolidated Balance Sheet as of December 31, 1993. The value reflected in the Consolidated Balance Sheet (carrying value) approximates fair value for the Company's financial assets and current liabilities. Descriptions of the methods and assumptions used to reach this conclusion are as follows:\nMiscellaneous special funds, cash and temporary cash investments, and current liabilities: These financial instruments have short maturities, or are invested in financial instruments with short maturities.\nInvestment in cogeneration projects and other investments: The carrying value equals cash surrender value, or approximates the present value of future cash flows, discounted using a market rate of return.\nThe fair value of the Company's long-term debt, based on quoted market prices for the same or similar issues or by discounting future cash flows using interest rates that could be obtained currently, exceeds carrying value by approximately 6.7%. This is because the average interest rate of the Company's debt exceeds the rate which could be obtained currently. The Company refinances the debt that is callable when associated benefits exceed costs, and when the Company believes it is an opportunistic time to do so.\nReclassifications:\nCertain reclassifications have been made to the prior year amounts to make them comparable to the 1993 presentation. These changes had no impact on previously reported results of operations or shareholders' equity.\nNOTE 2 - Contingencies:\nThe Company's hydroelectric projects are operated under licenses issued by the FERC, which expire on varying dates from 1994 to 2035. When a license expires, it may be reissued to the Company, issued to a new licensee or the facility may be taken over by the United States. In either of the last two events, the Company would be entitled to compensation equivalent to its net investment in the project plus severance damages. In determining net investment in the project, the licenses provide that there may be deducted the amount contained in an appropriated retained earnings account, which shall be accumulated from a portion of the amount earned in excess of a specified reasonable rate of return after 20 years of operation under the license. At December 31, 1993, the amount of these appropriated retained earnings relating to the Company's hydroelectric projects as computed by the Company is estimated to be $6,238,000. The Board of Directors has appropriated retained earnings in the same amount for this purpose, thereby restricting their availability for dividend purposes.\nUnder a joint 50-year license with the Confederated Salish and Kootenai Tribes (Tribes), the Company will own and operate the Kerr Hydroelectric project until September 2015. The Tribes may take over the project anytime between 2015 and 2025 on one year's written notice in return for payment equal to the Company's remaining net investment. The Company pays the Tribes an annual rental fee that is adjusted yearly to reflect changes in the Consumer Price Index.\nIn 1990, the Company filed with the FERC a plan to mitigate damages to and manage fish and wildlife habitat impacted by the operation of the Kerr Hydroelectric Project. The Management and Mitigation Plan (Plan) was prepared pursuant to the joint license issued by the FERC to the Company and the Tribes. It consists of a one-time payment by the Company of $15,418,000 and annual payments of $965,000 allocated between the Tribes and various groups. The annual payments would be adjusted annually on the basis of the Consumer Price Index. Additionally, the Secretary of Interior may impose certain conditions pertaining to fish and wildlife. While the Company cannot predict when or in what form the Plan finally will be approved, it expects that the cost of mitigation measures will be recovered through rates and, therefore, will not have a materially adverse effect on the Company's financial condition or results of operations.\nIn November 1992, the Company filed with FERC its application to relicense nine Madison and Missouri River hydroelectric facilities with electric generating capacity totaling 292 megawatts. The application, in preparation since 1989, proposes an additional 74 megawatts of generation. The total capital investment of relicensing, including physical improvements, environmental protection, mitigation and enhancement measures, is estimated at $167,600,000. Additional costs for operational changes, as well as annual payments for environmental protection, mitigation and enhancement, are estimated to be about $5,400,000 per year. The Company expects that the relicensing costs will be recovered through rates and, therefore, will not have a materially adverse effect on the Company's financial condition or results of operations.\nThe owners of homes in two residential developments in Colstrip, Montana, which were built for the Colstrip Units 3 and 4 Project have made claims against the Company and the other owners of the Colstrip Units 3 and 4 for property damages to their homes allegedly caused by soil-related subsidence. The Company has settled all of these claims. The other Colstrip 3 and 4 owners have denied responsibility for a substantial part of the settlement costs on the ground that the Company exceeded its authority in settling the claims. The amount in controversy is not expected to exceed $5,000,000. The Company is pursuing resolution and it is uncertain whether it will ultimately pay more than its proportionate share of the settlement costs.\nOther property owners in Colstrip also have made claims against the Company and the other Colstrip Units' owners for property damages allegedly resulting from soil-related subsidence. The Company has not determined the magnitude of such alleged damages or the responsibility, if any, of the Colstrip owners. While the resolution of these claims is uncertain, the Company believes they will not have a materially adverse effect on the Company's financial condition or results of operations.\nA Rosebud Mine coal supply agreement provides for periodic price redetermination over the life of the contract. The first date under the contract that a price redetermination could have occurred was August 1,1991. Negotiations to redetermine the coal price have been unsuccessful and an arbitration proceeding has been scheduled to commence in October, 1994. Through December 31, 1993, 6,923,000 tons, of which 3,466,000 tons were delivered to the Company, have been delivered and are subject to a redetermined price. The price change, if any, from this arbitration is not expected to have a materially adverse effect on the Company's results of operations.\nNOTE 3 - Commitments:\nThe Company purchases approximately 600 million kWh annually under an Exchange Agreement with the Washington Public Power Supply System and the Bonneville Power Administration which expires in 1996. The rate is 4.6 cents per kWh in the contract year which began in July 1993 and will increase each subsequent contract year to approximately 4.8 cents per kWh in the final contract year beginning July 1995. In 1993, the Company entered into a contract to purchase 98 megawatts of seasonal capacity from Basin Electric Power Cooperative beginning in 1996. The rate, including the capacity charge, will be approximately 3.3 cents per kWh in the contract year beginning in November 1996 and will increase each subsequent year to approximately 7.1 cents per kWh in the final contract year which begins in November 2009.\nThe Company also has long-term purchase contracts with certain independent power producers and natural gas producers. The purchased power contracts, including the Basin Electric contract discussed above, provide for capacity payments subject to a facility meeting certain operating standards, and payments based on energy received. The purchased gas contracts provide for take-or-pay payments. The Entech Oil Division has various natural gas transportation contracts with terms that expire beginning in 1998.\nTotal payments under these contracts for the prior three years were as follows:\nThousands of Dollars\nYears Electric Natural Gas Entech 1991. . . . . . . $ 15,553 $ 18,422 $ 713 1992. . . . . . . 18,143 12,496 1,938 1993. . . . . . . 18,434 11,633 2,260\nThe present value of future minimum payments, at an assumed discount rate of 8%, under the above agreements are estimated as follows:\nThousands of Dollars\nYears Electric Natural Gas Entech 1994. . . . . . . $ 3,882 $ 12,164 $ 2,976 1995. . . . . . . 4,280 9,560 2,199 1996. . . . . . . 7,576 7,321 2,021 1997. . . . . . . 10,328 6,026 1,664 1998. . . . . . . 10,296 3,308 1,521 Remainder. . . .. 150,085 8,064 8,658 Total . . . . . $ 186,447 $ 46,443 $ 19,039\nIn 1993, the Company entered into contracts for the construction of a second powerhouse at the Thompson Falls Hydroelectric Plant. In 1993, expenditures for the project were $9,000,000, while the total costs for the next three years are expected to be $51,000,000.\nAn Entech Coal Division coal lease purchase agreement requires minimum annual payments beginning in 1991 of $1,125,000 escalated quarterly by the Gross National Product implicit price deflator. These payments will continue until the equivalent of $18,750,000, in 1986 dollars, has been paid. At December 31, 1993, the remaining payments under this agreement were $14,349,000. A similar agreement requires minimum annual payments of $1,000,000 through 1995. Under current mine plans, the payments made through December 1993 should be recovered.\nIn 1990, a patented coal enhancement process developed by the Entech Coal Division was selected for funding under the U.S. Department of Energy (DOE) Clean Coal Technology Program. The Entech Coal Division and a subsidiary of Northern States Power are partners in a five-year, $69,000,000 coal enhancement demonstration plant at Colstrip, Montana. DOE is funding 50% and the partners share equally in the remaining 50% of the cost of the project. The Division's remaining commitment at December 31, 1993, was $5,100,000.\nThe Entech Oil Division has agreed to supply 174 Bcf of natural gas to four cogeneration facilities over 15 years. The Oil Division has sufficient proven, developed and undeveloped reserves, and controls related sales of production sufficient to supply all of the remaining natural gas required by these agreements.\nThe Entech Oil Division owns a 50% interest in a natural gas marketing company. Entech has agreed to guarantee the performance by the marketing company of $4,300,000 in transportation and purchase contracts. The guaranteed amounts outstanding were $3,400,000 at December 31, 1993.\nRental expense for the prior three years was as follows:\n1993 1992 1991 Thousands of Dollars\nColstrip Unit 4. . . . $ 32,226 $ 32,226 $ 32,226 Kerr project . . . . . 11,837 11,486 11,027 Other. . . . . . . . . 11,917 11,985 13,452 $ 55,980 $ 55,697 $ 56,705\nIn addition, operating expenses include delay rentals paid by the Company to retain mineral rights before development of leased acreage. Delay rentals were $1,021,000, $999,000, and $1,000,000 in 1993, 1992, and 1991, respectively.\nLeases:\nThe Company classifies leases as operating or capitalized leases. Capitalized leases are not material and are included in other long-term debt. On December 30, 1985, the Company sold its 30% share of Colstrip Unit 4 and is leasing back this share under a net lease. The transaction has been accounted for as an operating lease with semiannual lease payments of approximately $16,113,000 over the remaining term of the 25-year lease.\nAt December 31, 1993, the Company's future minimum operating lease payments are as follows:\nThousands of Year Dollars\n1994. . . . . . . . . . . . . . . $ 34,833 1995. . . . . . . . . . . . . . . 34,492 1996. . . . . . . . . . . . . . . 34,362 1997. . . . . . . . . . . . . . . 34,216 1998. . . . . . . . . . . . . . . 34,301 Remainder . . . . . . . . . . . . 393,459 Total . . . . . . . . . . . . $ 565,663\nNOTE 4 - Income tax expense:\nIncome before income taxes for the years ended December 31, 1993, 1992 and 1991 was as follows:\n1993 1992 1991 Thousands of Dollars\nUtility Operations: United States..................... $ 94,247 $ 77,752 $ 75,872 Canada............................ 2,340 1,395 5,073\n96,587 79,147 80,945\nOther Income and Expense: United States..................... 230 1,497 1,061 Canada............................ 609 (314) 46\n839 1,183 1,107\nEntech Operations: United States..................... 58,611 61,409 71,640 Canada............................ 5,842 4,966 (2,665) 64,453 66,375 68,975\nIndependent Power Group Operations: United States.................... (548) 5,999 5,082 $ 161,331 $ 152,704 $ 156,109\nIncome tax expense as shown in the Consolidated Statement of Income consists of the following components:\n1993 1992 1991 Thousands of Dollars\nUtility Operations: Current United States..................... $ 23,519 $ 24,563 $ 24,104 Canada............................ 1,121 879 2,044 State............................. 4,903 4,999 5,370 Deferred United States..................... 6,902 (1,593) (2,507) Canada............................ 80 (191) (262) State............................. 980 (641) (941) 37,505 28,016 27,808\nOther Income and Expense: Current United States..................... (2,281) 1,139 655 State............................. (302) 141 181 Deferred United States..................... 2,410 (1,865) 694 State............................. 32 (204) (252) (141) (789) 1,278\nEntech Operations: Current United States..................... 14,090 14,703 18,180 Canada............................ 2,114 2,283 814 State............................. 2,098 3,442 1,905 Deferred United States..................... (1,619) (3,093) (1,322) Canada............................ 294 (9) 10 State............................. 286 (1,148) 5 17,263 16,178 19,592\nIndependent Power Group Operations: Current United States..................... (4,289) (2,153) (6,286) State............................. (3,177) (275) (1,178) Deferred United States..................... 5,971 3,905 7,645 State............................. 988 757 1,535 (507) 2,234 1,716 $ 54,120 $ 45,639 $ 50,394\nDeferred tax liabilities (assets) are comprised of the following at December 31: 1993 1992 Thousands of Dollars\nPlant Related......................... $ 372,236 $ 353,900 Investment in nonutility generation projects............................ 16,370 13,904 Other................................. 16,260 11,622\nGross deferred tax liabilities........ 404,866 379,426\nCoal reclamation...................... (37,321) (33,005) Amortization of gain on sale\/ leaseback........................... (18,090) (19,295) Investment Tax Credit Amortization.... (32,801) (33,958) Other................................. (14,937) (13,409)\nGross deferred tax assets............. (103,149) (99,667) Net deferred tax liabilities (assets). 301,717 279,759\nCurrent deferred tax assets........... 8,063 8,339\nTotal noncurrent deferred tax liabilities(assets)............... $ 309,780 $ 288,098\nThe change in net deferred liabilities differs from current year deferred tax expense as a result of the following:\nThousands of Dollars Increase (decrease) in total noncurrent deferred tax liabilities (assets).............................. $ 21,682 Costs deferred to future operating periods.......... (4,991) Other............................................... (367) Deferred Tax Expense.............................. $ 16,324\nThe provision for income taxes differs from the amount of income tax determined by applying the applicable U.S. statutory federal income tax rate to pretax income as a result of the following differences:\n1993 1992 1991 Thousands of Dollars\nComputed \"expected\" income tax expense.. $ 56,466 $ 51,919 $ 53,077\nAdjustments for tax effects of:\nStatutory depletion in coal mining operations............ (3,775) (5,920) (5,972) General business and nonconventional fuel tax credits.................. (4,496) (3,723) (2,201) State income tax, net................ 4,704 3,332 4,890 Reversal of excess of U.S. utility income tax depreciation over financial accounting depreciation on utility plant additions......................... 2,281 1,987 2,535\nOther................................ (1,060) (1,956) (1,935)\nActual income tax expense............... $ 54,120 $ 45,639 $ 50,394\nDuring 1993, the federal income tax rate increased from 34% to 35%. The following table summarizes the increased income taxes that resulted.\nThousands of Dollars\nUtility Operations . . . . . . . . . . . . $ 1,072 Entech Operations. . . . . . . . . . . . . 867 Independent Power Group Operations . . . . 749\n$ 2,688\nNOTE 5 - Common stock:\nAt December 31, 1993 and 1992, the Company had 120,000,000 shares of authorized common stock. The Company has a Shareholder Protection Rights Plan which provides one preferred share purchase right (Right) on each outstanding common share of the Company. Each Right entitles the registered holder, upon the occurrence of certain events, to purchase from the Company one one-hundredth of a share of Participating Preferred Shares, A Series, without par value. If it should become exercisable, each Right would have economic terms similar to one share of common stock of the Company. The Rights trade with the underlying shares and will, except under certain circumstances described in the Plan, expire on June 6, 1999, unless earlier redeemed or exchanged by the Company.\nThe Company's Dividend Reinvestment and Stock Purchase Plan allows owners of common and preferred stock, as well as Montana utility customers, to reinvest the dividends paid on their common and preferred stock to purchase shares of common stock. Participants in the plan may also elect to invest by purchasing up to $15,000 per quarter of common stock.\nThe Company has a Deferred Savings and Employee Stock Ownership Plan (Plan) that covers all regular eligible employees. The Company, on behalf of the employee, contributes a percentage of the amount contributed to the Plan by the employee. In 1990, the Company borrowed $40,000,000 at an interest rate of 9.2% to be repaid in equal annual installments over 15 years. The proceeds of the loan were lent on similar terms to the Plan Trustee, which purchased 1,922,297 shares of Company common stock. The loan, which is reflected as long-term debt, is offset by a similar amount in common shareholders' equity as unallocated stock. Company contributions plus the dividends on the shares held under the Plan are used to meet principal and interest payments on the loan. Shares acquired with loan proceeds are allocated to Plan participants. As principal payments on the loans are made, long-term debt and the offset in common shareholders' equity are both reduced. At December 31, 1993, 482,387 shares had been allocated to the participants' accounts.\nExpense for the Plan is recognized using the Shares Allocated Method, and consists of the following for the three years ended December 31, 1993:\n1993 1992 1991\nThousands of Dollars\nPrincipal allocated.................... $ 2,663 $ 2,683 $ 2,672 Interest incurred...................... 3,275 3,448 3,557 Dividends.............................. (3,028) (2,965) (2,843) Additional contribution................ 2,310 1,765 1,290\nTotal Expense..................... $ 5,220 $ 4,931 $ 4,676\nThe Company's amount of Plan costs funded, which currently is less than the aforementioned expense amounts, is included in utility rates. Accordingly, the difference of $758,000, $694,000 and $892,000 for the years ending December 31, 1993, 1992 and 1991, respectively, were recorded as a reduction of Plan expense.\nUnder the Long-Term Incentive Plan, options have been issued to Company employees. Options issued to Utility employees are not reflected in balance sheet accounts until exercised, at which time (i) authorized, but unissued shares are issued to the employee, (ii) the capital stock account is credited with the proceeds, and (iii) no charges or credits to income are made. Options issued to Entech and IPG employees are not reflected in balance sheet accounts. Rather, upon exercise, outstanding shares are purchased at current market prices and compensation expense is charged with the excess of the market price over the option price.\nOption activity is summarized below.\nNumber Option Price Of Shares Per Share\nOutstanding December 31, 1990 436,642 $11.4375 - 20.0625 Granted 372,600 22.125 - 26.50 Exercised (128,930) 11.4375 - 22.125 Cancelled (22,865) 14.25 - 22.125\nOutstanding December 31, 1991 657,447 $11.4375 - 26.50 Granted - Exercised (116,905) 11.4375 - 22.125 Cancelled (4,457) 11.4375 - 22.125\nOutstanding December 31, 1992 536,085 $14.25 - 26.50 Granted - Exercised (118,243) 14.25 - 26.50 Cancelled (5,532) 14.25 - 26.50\nOutstanding December 31, 1993 412,310 $14.25 - 26.50\nOptions Exercisable at December 31, 1993 412,310\nOptions were granted at not less than the closing price on the New York Stock Exchange on the date granted, and generally become exercisable after two years. Options granted prior to January 1, 1987 must be exercised in the order granted. All options expire ten years from the date of grant.\nNOTE 6 - Preferred stock:\nThe number of authorized shares of preferred stock is 5,000,000. No dividends may be declared or paid on common stock while cumulative dividends have not either been declared and set apart or paid on any of the preferred stock.\nIn November 1993, the Company sold $50,000,000 of the $6.875 series of Preferred Stock, stated value and liquidation value $100. The net proceeds from the sale were used to repay short-term debt. The stock is redeemable at the option of the Company, in whole or in part, at any time on or after November 1, 2003.\nPreferred stock, as shown in the Consolidated Balance Sheet, is in four series as detailed in the following table:\nShares Amount Issued and Thousands of Series Outstanding Dollars\n$6.875 500,000 $ 50,000 6.00 159,589 15,959 4.20 60,000 6,025 2.15 1,200,000 30,000 1,919,589 $ 101,984\nThe stated value and liquidation price of preferred shares is $100 for the $6.875 series, the $6.00 series and the $4.20 series and $25 for the $2.15 series, plus accumulated dividends. The preferred stock is redeemable at the option of the Company upon the written consent or affirmative vote of the holders of a majority of the common shares on thirty days notice at $110 per share for the $6.00 series, $103 per share for the $4.20 series and $25.25 per share for the $2.15 series, plus accumulated dividends. The $6.875 series is redeemable in whole or in part, at anytime on or after November 1, 2003 for a price beginning at $103.438 per share with annual decrements through the year 2013, after which the redemption price is $100 per share.\nNOTE 7 - Long-term debt:\nLong-term debt consists of the following: December 31 1993 1992 Thousands of Dollars First Mortgage Bonds: 7.7% series, due 1999...................... $ 55,000 $ 55,000 7 1\/2% series, due 2001.................... 25,000 25,000 8 5\/8% series, due 2004.................... 60,000 7% series, due 2005........................ 50,000 8 1\/4% series, due 2007.................... 55,000 55,000 8.95% series, due 2022..................... 50,000 50,000 Secured Medium-Term Notes.................. 43,000 Pollution Control Revenue Bonds: County of Rosebud, Montana 5 3\/4% series, due 2003.................... 18,545 6.3% series, due 2007...................... 7,000 City of Forsyth, Montana 10% series, due 2004....................... 40,000 10 1\/8% series, due 2014................... 40,000 Variable rate series, due 2014............. 39,660 Adjustable rate series, due 2014........... 25,000 6 1\/8% series, due 2023.................... 90,205 5.9% series, due 2023...................... 80,000 Sinking Fund Debentures: 7 1\/2%, due 1998........................... 17,500 18,000 Revolving Credit Agreements: Entech..................................... 12,000 ESOP Notes Payable, due 2004................... 33,850 35,596 Medium-Term Notes, Series A.................... 67,250 100,000 Long-Term Commercial Paper..................... 20,000 20,000 Other.......................................... 15,144 20,917 Unamortized Discount and Premium.......... (3,880) (3,157) 598,069 618,561 Less: Portion due within one year............. 26,199 37,382 $ 571,870 $ 581,179\nFirst Mortgage Bonds:\nThe Company's Mortgage and Deed of Trust imposes a first mortgage lien on all physical properties owned, exclusive of subsidiary company assets, and certain property and assets specifically excepted. The obligations collateralized are First Mortgage Bonds, including those First Mortgage Bonds securing Pollution Control Revenue Bonds, in the aggregate principal amount of $448,200,000 at December 31, 1993.\nIn February 1993, the Company sold $50,000,000 of First Mortgage Bonds, 7% series due 2005, and $13,000,000 of Secured Medium-Term Notes, 7.25% series due 2008. The proceeds of these sales were used to redeem $60,000,000 of First Mortgage Bonds, 8 5\/8% series due 2004.\nSecured Medium-Term Notes:\nThese notes constitute a series of First Mortgage Bonds. On January 26, 1993, the Company sold $22,000,000 of Medium-Term Notes, $15,000,000 of the 8.11% series due 2023 and $7,000,000 of the 7.23% series due 2003. Another $8,000,000 of the 7.23% series due 2003 was sold on January 28, 1993. The proceeds of these issues were used to repay Long-Term Commercial Paper and other long-term bank debt outstanding.\nIn February 1993, the Company sold $13,000,000 of Secured Medium-Term Notes, 7.25% series due 2008. As previously mentioned, the proceeds of this sale were used to redeem $60,000,000 of First Mortgage Bonds, 8 5\/8% series due 2004.\nOn January 19, 1994, the Company sold $5,000,000 of Secured Medium-Term Notes, 7.25% series due 2024, the proceeds of which were used to repay short- term debt incurred to complete the refinancing of the 10% and 10 1\/8% series Pollution Control Revenue Bonds.\nPollution Control Revenue Bonds:\nIn June 1993, the City of Forsyth, Rosebud County, Montana, sold $90,205,000 of its 6 1\/8% Pollution Control Revenue Refunding Bonds due 2023, the principal of, and interest on, which the Company is obligated to pay. The proceeds from the sale of these Bonds were loaned to the Company and used to redeem, prior to maturity, $18,545,000 of Rosebud County's 5 3\/4% Pollution Control Revenue Bonds due 2003, $7,000,000 of the County's 6.3% Pollution Control Revenue Bonds due 2007, $39,660,000 of the City of Forsyth's Variable Rate Pollution Control Revenue Bonds due 2014 and $25,000,000 of the City's Adjustable Rate Pollution Control Revenue Bonds due 2014, the principal of, and interest on, all of which the Company was obligated to pay.\nOn December 30, 1993, the City of Forsyth, Rosebud County, Montana, sold $80,000,000 of its 5.9% Pollution Control Revenue Refunding Bonds due 2023, the principal of, and interest on, which the Company is obligated to pay. The proceeds from the sale of these Bonds were loaned to the Company and used to redeem, prior to maturity, $40,000,000 of the City of Forsyth's 10% Pollution Control Revenue Bonds due 2004, $40,000,000 of the City's 10 1\/8% Pollution Control Revenue Bonds due 2014, the principal of, and interest on, all of which the Company was obligated to pay. Although not redeemed until January 1, 1994, the 10% and 10 1\/8% series were considered to be retired on December 30, 1993 for financial reporting purposes, since the Company had placed funds on deposit with the trustee at year end to cover all costs associated with the redemption of these bonds. Accordingly, the funds held by the trustee and the bonds do not appear on the December 31, 1993 Consolidated Balance Sheet.\nRevolving Credit Agreements:\nThe Company has a Revolving Credit and Term Loan Agreement that allows it to borrow up to $60,000,000, all of which was unused at December 31, 1993. Under the agreement, borrowings outstanding at October 31, 1995, must be repaid in eight quarterly installments beginning in January 1996.\nEntech has a Revolving Credit and Term Loan Agreement with a group of banks that allows it to borrow up to $75,000,000, all of which was unused at December 31, 1993. Under the agreement, borrowings outstanding at September 30, 1994 must be repaid in eight quarterly installments beginning in December 1994.\nFixed or variable interest rate options are available under the facilities, with commitment fees on the unused portions. On December 31, 1992, Entech had outstanding $12,000,000 under these agreements, at a 4% interest rate.\nESOP Notes Payable:\nIn 1990, the Company borrowed $40,000,000 at an interest rate of 9.2% in a 15-year loan to be repaid in equal annual installments. The proceeds of the loan were used to purchase shares of the Company's stock to pre-fund a portion of the Company's matching requirements under the Deferred Savings and Employee Stock Ownership Plan. See Note 5 for further information.\nMedium-Term Notes, Series A:\nAt December 31, 1993 and 1992, the Company had outstanding $67,250,000 and $100,000,000 principal amount of Medium-Term Notes, respectively, maturing from eleven months to 29 years with interest rates varying between 8.57% and 8.90%.\nOn January 15, 1993, $13,000,000 of Medium-Term Notes, 8.65% series due 1993, matured. The Company retired these notes with the proceeds of short- term borrowing.\nOn December 20, 1993, $19,750,000 of Medium-Term Notes, 8.8% series due 1993, matured. The Company retired these notes with the proceeds of long-term commercial paper.\nDuring the period 1994 through 1998, the Company is required to make the following maturity and sinking fund payments on long-term debt:\n1994 1995 1996 1997 1998 Thousands of Dollars\n7 1\/2% Sinking Fund Debentures............... $ 500 $ 500 $ 500 $ 500 $ 15,500 ESOP Notes Payable......... 1,907 2,082 2,274 2,483 2,712 Medium-Term Notes.......... 19,000 10,000 8,750 7,500 2,500 Other...................... 4,792 4,475 4,092 201 192 $ 26,199 $ 17,057 $ 15,616 $ 10,684 $ 20,904\nNOTE 8 - Short-term borrowing:\nThe Company is currently authorized by the PSC to incur short-term debt not to exceed $150,000,000. The Company and Entech have short-term borrowing facilities with commercial banks that provide both committed, as well as uncommitted, lines of credit, and the ability to sell commercial paper. Bank borrowings either bear interest at the lender's floating base rate and may be repaid at any time, or have fixed rates of interest and maturities. Commercial paper has fixed rates of interest and maturities.\nAt December 31, 1993, the Company had lines of credit consisting of $75,000,000 committed and $65,400,000 uncommitted, and Entech had lines of credit consisting of $15,000,000 committed and $20,000,000 uncommitted. There is a commitment fee on the unused portion of some of these facilities which is not significant. The Company has the ability, subject to the previously mentioned PSC limitation, to issue up to $135,000,000 of commercial paper based on the total of its unused committed lines of credit and its revolving credit agreement and Entech has a $50,000,000 commercial paper facility.\nAt December 31, 1993 and 1992, the Company's and Entech's short-term borrowing included the following:\n1993 1992 Thousands of Dollars\nNotes payable to banks MPC.......................... $ 43,900 $ 34,300 Entech....................... 8,000 13,000 Commercial paper MPC.......................... 16,000 Entech....................... 16,965 $ 68,865 $ 63,300\nNOTE 9 - Retirement plans:\nThe Company maintains trusteed, noncontributory retirement plans covering substantially all employees. Retirement benefits are based on salary, years of service and social security integration levels.\nIn 1993, pension costs funded were less than SFAS No. 87 pension expense by $1,887,000 and the difference was recorded as a reduction of unearned revenue. The amount of utility pension costs funded are included in rates. In 1992 and 1991, pension costs funded exceeded SFAS No. 87 pension expense by $969,000 and $48,000, respectively and the differences were recorded as unearned revenue. At December 31, 1993, the cumulative amount by which pension costs funded exceed SFAS No. 87 pension expense is $1,362,000.\nThe assets of the plans consist primarily of corporate stocks, corporate bonds and U.S. Government securities.\nThe Company also has an unfunded, nonqualified benefit plan for senior management executives and directors that provides for defined benefit payments upon retirement over the life of the participant or to their beneficiary for a minimum fifteen-year period. Life insurance payable to the Company is carried on plan participants as an investment. Utility nonqualified benefit plan expense is not included in rates.\nNet pension and benefit expense includes the following components:\n1993 1992 1991 Thousands of Dollars\nService cost benefits earned during the period.......................... $ 6,746 $ 5,287 $ 4,875 Interest cost on projected benefit obligation.......................... 12,077 9,978 9,230 Actual return market value of assets.. (18,701) (12,688) (20,509) Net amortization and deferral......... 10,891 4,642 14,548\nTotal net periodic pension and benefit expense................... $ 11,013 $ 7,219 $ 8,144\nThe funded status of the pension and benefit plans is as follows:\nIn addition to providing pension benefits, the Company and its subsidiaries provide certain health care and life insurance benefits for eligible retired employees. Until 1993, the cost of retiree health care and life insurance benefits was recognized as expense on a pay-as-you-go (cash) basis. The cost of these benefits in 1993, 1992 and 1991 was $1,387,000, $1,267,000 and $1,187,000, respectively.\nThe Company adopted Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards No. 106, \"Employers' Accounting for Postretirement Benefits Other Than Pensions\" (SFAS No. 106) effective January 1, 1993. SFAS No. 106 requires accrual of the expected cost of these postretirement benefits during the employees' years of service rather than when the costs are paid.\nThe Company's accumulated postretirement benefit obligation at January 1, 1994 is estimated to be $34,400,000, with $24,600,000 and $9,800,000 related to utility and non-utility operations, respectively. The utility and non-utility amounts are being amortized through charges to earnings over 20 and 24-year periods, respectively. The incremental increase in 1993 consolidated expenses due to SFAS No. 106 adoption was $1,600,000, all of which related to the non-utility operations.\nIn accordance with an Accounting Order issued by the PSC on November 10, 1992, the Company has recorded as a deferred expense in 1993 the increased costs of $2,100,000 which resulted from adopting SFAS No. 106 for the Utility Division. The Company requested recovery of utility SFAS No. 106 costs from ratepayers in its rate filing on June 21, 1993 and a final rate order is expected by the end of April 1994. The Company believes that the costs will be allowed in rates based on previous PSC rate decisions addressing this issue.\nThe cost of SFAS No. 106 adoption for the year ended December 31, 1993, a portion of which has been capitalized, includes the following components:\nDecember 31 Thousands of Dollars\nService cost on benefits earned during the year. . . . . . . . . . . . $ 1,356\nInterest cost on projected benefit obligation . . . . . . . . . . . . . . 2,296\nAmortization of transition obligation . . 1,492\nTotal postretirement benefit cost . . . . $ 5,144\nThe funded status of the postretirement benefit plans is as follows:\nDecember 31 Thousands of Dollars\nAccumulated benefit obligation: Fully eligible active employees . . . . . . $ 1,920 Other active employees. . . . . . . . . . . 20,195 Retirees. . . . . . . . . . . . . . . . . . 12,298 Accumulated benefit obligation. . . . . . . 34,413 Plan assets at fair value . . . . . . . . . . 0 Plan assets less than projected benefit obligation. . . . . . . . . . . . . (34,413) Unrecognized net transition obligation. . . . 27,519 Unrecognized net loss from past experience different from that assumed and effects of changes in assumptions. . . . . . . . . . . . . . . 3,113 Prepaid (Accrued) benefits expense. . . . . . $ (3,781)\nThe assumed 1993 health care cost trend rates used to measure the expected cost of benefits covered by the plans are 9% and 12% for the utility and non-utility operations, respectively. Both trend rates decrease through 2003 to an ultimate rate of 5.75%. The trend rates are for pre-65 benefits since most of the plans provide a fixed dollar annual benefit for retirees over age 65. One Entech subsidiary's plan used a trend rate of 9% decreasing through 2003 to an ultimate rate of 5.75% for post-65 benefits. The effect of a 1% increase in each future year's assumed health care cost trend rates increases the service and interest cost from $3,700,000 to $4,100,000 and the accumulated postretirement benefit obligation from $34,400,000 to $37,500,000.\nIn November 1992, the FASB released Statement of Financial Accounting Standards No. 112, \"Employers' Accounting for Postemployment Benefits,\" (SFAS No. 112) effective for fiscal years beginning after December 15, 1993. The Company adopted SFAS No. 112 with respect to disability related benefits up to age 65 effective January 1, 1994. This statement requires the accrual of a liability or loss contingency for the estimated obligation for postemployment benefits. At December 31, 1993, the Company's postemployment benefit liability is estimated to be $10,600,000, with $9,300,000 and $1,300,000 relating to regulated utility and nonregulated operations, respectively. The utility had recorded a liability and recovered through rates by year-end approximately $2,400,000 for disability-related benefits. The incremental increase in 1994 consolidated expenses due to SFAS No. 112 adoption is estimated to be $1,300,000, all of which relates to non-utility operations.\nEffective January 1, 1994, the Company is no longer self-insured for a significant portion of the disability-related benefits relating to the Utility Division. The Company will record as a deferred expense in 1994 the additional postemployment benefit liability of $6,900,000 that was incurred by the utility but not recognized while self-insured. The Company will charge a significant portion of this amount to income and will recover it through rates within 10 years.\nNOTE 10 - Information on industry segments:\nThe Company's principal business includes regulated utility operations involving the generation, purchase, transmission and distribution of electricity and the production, purchase, transportation and distribution of natural gas. The Company, through Entech, engages in nonutility operations principally involving the mining and sale of coal and exploration for, and the development, production, processing and sale of oil and natural gas. The Company, through its Independent Power Group (IPG), manages long-term power sales, invests in cogeneration projects, and provides energy-related support services, including the operation and maintenance of power plants.\nSubstantially all of the natural gas produced by the Company's Canadian utility operations has been sold to the Company's United States utility operations. Operating income before income taxes for utility segments represents operating revenues less total operating expenses and taxes other than income taxes. Operating income for Entech segments represents total revenues less all costs and expenses except interest, interest income and other-net, and income taxes. Depreciation and depletion includes a provision for abandonment of nonproducing leases, amortization of other deferred charges and certain depreciation amounts included in operation expense in the Consolidated Statement of Income. Immaterial intersegment sales are not disclosed.\nIdentifiable assets of each industry segment are those assets used in the Company's operations in such industry segments. Corporate assets are principally miscellaneous special funds, cash and temporary cash investments, other investments and unallocable property. The assets of the Company's Canadian operations were $80,304,000, $83,790,000 and $84,433,000 at December 31, 1993, 1992 and 1991, respectively.\nOperations Information\nOperations Information\nOperations Information\nAssets and Expenditures\nSUPPLEMENTARY INFORMATION OIL AND NATURAL GAS PRODUCING ACTIVITIES\nSUPPLEMENTARY INFORMATION Oil and Natural Gas Producing Activities (Cont.)\nAs determined by utility engineers, natural gas reserves were revised during 1993, 1992 and 1991 due to a change in projected performance or a change in the Company's ownership interest in specific fields.\nIn 1993, Entech's U.S. oil and natural gas reserves increased as a result of the drilling of 55 development wells and 10 exploratory wells in Colorado, North Dakota, Wyoming, Oklahoma and Kansas. Natural gas liquid reserves increased due to the startup of the Fort Lupton, Colorado, gas processing plant in September 1993. Lower oil market prices contributed to downward revisions in U.S. reserves. The Canadian companies participated in 26 development and 13 exploratory wells. Significant gas reserves were added from discoveries in the exploratory wells. Additions in oil reserves were the result of two successful secondary recovery schemes completed in the Manyberries area during 1993. Revisions due to price and performance resulted in a net increase in natural gas liquid reserves and a net decrease in oil reserves.\nIn 1992, the drilling of 43 development wells and one exploratory well in Colorado, Wyoming, and Oklahoma, resulted in additions to Entech's oil and gas reserves in the United States. Price changes also added to the reserves of existing properties. The Canadian companies participated in 59 development and two exploratory wells, resulting in the addition of significant oil and gas reserves. Revisions due to price and improved performance provided a net increase in oil and gas reserves. Natural gas liquid reserves decreased due to a downward revision in unit working interest in the recently developed Shell Caroline area.\nIn 1991, additions to Entech's United States oil and gas reserves resulted from the drilling of 32 development wells and two successful exploratory wells, principally in Colorado, Oklahoma and Wyoming. Acquisitions of new oil and gas properties added reserves in Colorado, North Dakota and Wyoming. Price changes and unsuccessful drilling activities resulted in downward revisions to existing reserves. Additions to oil and gas reserves in Canada resulted from the drilling of 14 development wells in Alberta and one exploratory well in British Columbia. Acquisition of a new oil and gas property, development drilling and favorable production performance in Alberta reflect upward revisions in reserves. Natural gas reserves and associated liquids were revised downward as a result of revised estimates of performance in 26 mature Alberta fields and market price declines.\nThe following table presents information for 1993, 1992 and 1991 on the capitalized costs relating to utility natural gas producing activities, costs incurred in utility natural gas property acquisition, exploration and development activities and certain utility natural gas production costs reflected in results of operations. As a regulated public utility, the Company is authorized to earn a rate of return on its utility natural gas plant rate base. The Company's cost of acquiring utility natural gas reserves and the net cost of natural gas in underground storage are included in the natural gas plant which is a part of the utility rate base. Due to the commingling of produced natural gas with purchased and royalty natural gas for sale to utility customers and application of the ratemaking process to the utility natural gas producing activities, the Company is unable to identify revenues resulting solely from utility natural gas producing activities. Accordingly, the information on revenues, income taxes, results of operations and estimated future net cash flows and changes therein relating to proved utility natural gas reserves are not presented for the Company's utility natural gas producing activities.\nThe following table presents information for 1993, 1992 and 1991 on the capitalized costs relating to Entech oil and natural gas producing activities, costs incurred in Entech oil and natural gas property acquisition, exploration and development activities and results of Entech operations for oil and natural gas producing activities:\nSUPPLEMENTARY INFORMATION Oil and Natural Gas Producing Activities (Cont.)\nEstimated future cash inflows are computed by applying year-end prices and contract prices, when appropriate, of oil and natural gas to year-end quantities of proved reserves. Estimated future development and production costs are determined by estimating the expenditures to be incurred in developing and producing the proved oil and natural gas reserves at the end of the year, based on year-end costs. Estimated future income tax expenses are calculated by applying year-end statutory tax rates to estimated future pretax net cash flows related to proved oil and natural gas reserves, less the tax basis of the properties involved. The future income tax expenses give effect to permanent differences, tax credits and deferred taxes relating to proved oil and natural gas reserves.\nThese estimates are furnished and calculated in accordance with requirements of the Financial Accounting Standards Board and the Securities and Exchange Commission (SEC). Management believes the usefulness of these projections is limited because of the unpredictable variances in expenses, capital forecasts and crude oil and natural gas prices. Estimates of future net cash flows presented do not represent management's assessment of future profitability or future cash flow to the Company. Management's investment and operating decisions are based upon reserve estimates that include proved reserves prescribed by the SEC as well as probable reserves, and upon different price and cost assumptions from those used here.\nStandardized Measure of Discounted Future Net Cash Flows and Changes Therein Relating to Proved Oil and Natural Gas Reserves\nExtensions, discoveries, and improved recovery, less related costs, represent the present value of current year reserve additions valued at year-end prices less actual unit production costs for the current year. For the years 1993 and 1992, the amount described as other is primarily the result of changes in the timing of production.\nQuarterly Financial Data\nOperating revenues, operating income and net income in thousands of dollars and net income per common share for the four quarters of 1993 and 1992 are shown in the tables below. Due to the seasonal nature of the utility business, the annual amounts are not generated evenly by quarter during the year.\nITEM 9.","section_9":"ITEM 9. DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE\nNone.\nPART III\nITEM 10.","section_9A":"","section_9B":"","section_10":"ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS\nSee Item 1. Business - \"Executive Officers.\"\nInformation on Directors is incorporated by reference from the Company's Notice of 1994 Annual Meeting of Shareholders and Proxy Statement, pages 2-5.\nInformation on Section 16(a) compliance is incorporated by reference from the Company's Notice of 1994 Annual Meeting of Shareholders and Proxy Statement, page 20.\nITEM 11.","section_11":"ITEM 11. EXECUTIVE COMPENSATION\nIncorporated by reference from Notice of 1994 Annual Meeting of Shareholders and Proxy Statement, pages 9-12.\nITEM 12.","section_12":"ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT\nIncorporated by reference from Notice of 1994 Annual Meeting of Shareholders and Proxy Statement, pages 5-7.\nITEM 13.","section_13":"ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS\nNone.\nPART IV\nITEM 14.","section_14":"ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.\n(a) Please refer to Item 8, \"Financial Statements and Supplementary Data\" for a complete listing of all consolidated financial statements and financial statement schedules.\n(b) The Company filed the following reports on Form 8-K:\nDate Subject\nNone\nITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.\n3. Exhibits Incorporation by Reference Previous Previous Exhibit Filing Designation\n3(a) Restated Articles of Incorporation 33-42882 4(a) 3(a)(1) Restated Articles of Incorporation 3(a)(2) Amendments to the Restated Articles of Incorporation 3(b) By-laws, as amended 33-42882 4(b) 4(a) Mortgage and Deed Trust 2-5927 7(e) 4(b) First Supplemental Indenture 2-10834 4(e) 4(c) Second Supplemental Indenture 2-14237 4(d) 4(d) Third Supplemental Indenture 2-27121 2(a)-5 4(e) Fourth Supplemental Indenture 2-36246 2(a)-6 4(f) Fifth Supplemental Indenture 2-39536 2(a)-7 4(g) Sixth Supplemental Indenture 2-49884 2(a)-8(a) 4(h) Seventh Supplemental Indenture 2-52268 2(a)-9 4(i) Eighth Supplemental Indenture 2-53940 2(a)-10 4(j) Ninth Supplemental Indenture 2-55036 2(a)-11 4(k) Tenth Supplemental Indenture 2-63264 2(a)-12 4(l) Eleventh Supplemental Indenture 2-86500 2(a)-13 4(m) Twelfth Supplemental Indenture 33-42882 4(c) 4(n) Thirteenth Supplemental Indenture 33-55816 4(a)-14 4(o) Fourteenth Supplemental Indenture 33-64576 4(c) 4(p) Fifteenth Supplemental Indenture 33-64576 4(d) 4(q) Sixteenth Supplemental Indenture 33-50235 99(a) 4(r) Seventeenth Supplemental Indenture\nInstruments defining the rights of holders of long-term debt which are not required to be filed with the Commission will be furnished to the Commission upon request.\nIncorporation by Reference\nPrevious Previous Exhibit Filing Designation\n4(m) Rights Agreement dated as of 33-42882 4(d) June 6, 1989, between The Montana Power Company and First Chicago Trust Company of New York, as Rights Agent\n10(a)(i) Benefit Restoration Plan for 33-42882 10(a)(i) Senior Management Executives and Board of Directors\n10(a)(ii) Deferred Compensation Plan for 33-42882 10(a)(ii) Non-Employee Directors\nIncorporation by Reference\nPrevious Previous Exhibit Filing Designation\n10(a)(iii) Long-Term Incentive Stock 1-4566 10(a)(iii) Ownership Plan 1992 Form 10-K\n10(a)(iv) The Montana Power Company 33-28096 4(c) Employee Stock Ownership Plan (Revised)\n10(a)(v) Termination Compensation 1-4566 10(a)(v) Agreements with Senior 1992 Management Executives Form 10-K\n10(c) Participation Agreements among 33-42882 10(c) United States Trust Company of New York, Burnham Leasing Corporation, and SGE (New York) Associates, Certain Institutions, The Montana Power Company and Bankers Trust Company\n12 Statement re computation of ratio of earnings to Fixed Charges\n21 Subsidiaries of the registrant\nTHE MONTANA POWER COMPANY AND SUBSIDIARIES SCHEDULE V - PROPERTY, PLANT AND EQUIPMENT (INCLUDING INTANGIBLES) Year Ended December 31, 1993 Thousands of Dollars\nTHE MONTANA POWER COMPANY AND SUBSIDIARIES SCHEDULE V - PROPERTY, PLANT AND EQUIPMENT (INCLUDING INTANGIBLES) Year Ended December 31, 1992 Thousands of Dollars\nTHE MONTANA POWER COMPANY AND SUBSIDIARIES SCHEDULE V - PROPERTY, PLANT AND EQUIPMENT (INCLUDING INTANGIBLES) Year Ended December 31, 1991 Thousands of Dollars\nTHE MONTANA POWER COMPANY AND SUBSIDIARIES SCHEDULE VI - ACCUMULATED DEPRECIATION, DEPLETION AND AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT Thousands of Dollars\nTHE MONTANA POWER COMPANY AND SUBSIDIARIES SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES Thousands of Dollars\nTHE MONTANA POWER COMPANY AND SUBSIDIARIES SCHEDULE IX - SHORT-TERM BORROWINGS (a) Thousands of Dollars\nTHE MONTANA POWER COMPANY AND SUBSIDIARIES SCHEDULE X - SUPPLEMENTARY INCOME STATEMENT INFORMATION Thousands of Dollars\nSIGNATURES\nPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.\nTHE MONTANA POWER COMPANY\nBy \/s\/ Daniel T. Berube Daniel T. Berube (Chairman of the Board)\nDate March 22, 1994\nPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.\nSignature Title Date\n\/s\/ Daniel T. Berube Principal Executive Daniel T. Berube Officer and Director March 22, 1994 (Chief Executive Officer)\n\/s\/ J. P. Pederson Principal Financial J. P. Pederson and Accounting Officer March 22, 1994 (Vice President and Chief and Director Financial Officer)\n\/s\/ J. J. Burke Director March 22, 1994 J. J. Burke\n\/s\/ Alan F. Cain Director March 22, 1994 Alan F. Cain\n\/s\/ R. D. Corette Director March 22, 1994 R. D. Corette\n\/s\/Kay Foster Director March 22, 1994 Kay Foster\n\/s\/ Robert P. Gannon Director March 22, 1994 Robert P. Gannon\n\/s\/ Beverly D. Harris Director March 22, 1994 Beverly D. Harris\n\/s\/ Chase T. Hibbard Director March 22, 1994 Chase T. Hibbard\n\/s\/ Daniel P. Lambros Director March 22, 1994 Daniel P. Lambros\n\/s\/ Carl Lehrkind, III Director March 22, 1994 Carl Lehrkind, III\n\/s\/ James P. Lucas Director March 22, 1994 James P. Lucas\n\/s\/ Arthur K. Neill Director March 22, 1994 Arthur K. Neill\n\/s\/ George H. Selover Director March 22, 1994 George H. Selover\n\/s\/ N. E. Vosburg Director March 22, 1994 N. E. Vosburg\nConsent of Independent Accountants\nWe hereby consent to the incorporation by reference in the Prospectus constituting part of the Registration Statement on Form S-3 No. 33-64922, to the incorporation by reference in the Prospectus constituting part of the Registration Statement on Form S-3 No. 33-43655, to the incorporation by reference in the Prospectus constituting part of the Registration Statement on Form S-8 No. 33-64576, to the incorporation by reference in the Prospectus constituting part of the Registration Statement on Form S-8 No. 33-24952, to the incorporation by reference in the Prospectus constituting part of the Registration Statement on Form S-8 No. 33-28096, to the incorporation by reference in the Prospectus constituting part of the Registration Statement on Form S-3 No. 33-32275 and to the incorporation by reference in the Prospectus constituting part of the Registration Statement on Form S-3 No. 33-55816 of our report dated February 10, 1994 appearing on page 41 of The Montana Power Company's Annual Report on Form 10-K for the year ended December 31, 1993.\nPRICE WATERHOUSE\nPortland, Oregon March 28, 1994\nEXHIBIT INDEX\nExhibit 3(a)(1) Restated Articles of Incorporation\nExhibit 3(a)(2) Amendments to the Restated Articles of Incorporation\nExhibit 4(r) Seventeenth Supplemental Indenture\nExhibit 12 Statement re computation of ratio of earnings to Fixed Charges\nExhibit 21 Subsidiaries of the registrant","section_15":""}
{"filename":"74303_1993.txt","cik":"74303","year":"1993","section_1":"ITEM 1. BUSINESS\nGENERAL\nOlin Corporation is a Virginia corporation, incorporated in 1892, having its principal executive offices in Stamford, Connecticut. It is a manufacturer concentrated in chemicals, metals, defense-related products and services, and ammunition. The chemicals segment is divided into three areas or divisions: Chemicals, Chlor-Alkali and Electronic Materials. Chemicals includes industrial isocyanurates and acids, flexible urethanes, pool chemicals, performance urethanes, biocides and surfactants and fluids. Chlor-alkali includes chlor- alkali products, sodium hydrosulfite and high strength bleach products. Electronic Materials includes image-forming and related specialty chemicals and electronic interconnect materials and services. Products in the metals segment include copper and copper alloy sheet, strip, rod, tube and fabricated parts and stainless steel strip. The defense and ammunition segment includes small, medium and large caliber military ammunition, sporting ammunition and advanced technology products and services for aerospace and defense customers.\nInformation as to the sales and assets attributable to each of Olin's industry segments for each of the last ten fiscal years appears on page 19 of the 1993 Annual Report to Shareholders of Olin (\"1993 Shareholders Report\") and in Exhibit 13 hereto. Such information with respect to the last three fiscal years is incorporated by reference in this Report. Information as to operating income of Olin's industry segments for each of the last three fiscal years contained in the Note \"Segment Information\" of the Notes to Financial Statements on pages 28 and 29 of the 1993 Shareholders Report and in Exhibit 13 hereto is incorporated herein by reference.\nThe term \"Olin\" as used herein means Olin Corporation and its subsidiaries unless the context indicates otherwise.\nPRODUCTS AND SERVICES\nThe following is a list of the principal and certain other products and services provided by Olin and its affiliates as of December 31, 1993 within each industry segment. Principal products on the basis of annual revenues are highlighted in bold face.\nCHEMICALS\n- -------------------------------------------------------------------------------- * If site is not operated by Olin or a majority-owned, direct or indirect subsidiary, name of joint venture, affiliate or operator is indicated. Sites manufacture, distribute or market one or more of the identified products or services.\nCHEMICALS (CONT'D)\n- -------------------------------------------------------------------------------- * If site is not operated by Olin or a majority-owned, direct or indirect subsidiary, name of joint venture, affiliate or operator is indicated. Sites manufacture, distribute or market one or more of the identified products or services.\nCHEMICALS (CONT'D)\n- -------------------------------------------------------------------------------- * If site is not operated by Olin or a majority-owned, direct or indirect subsidiary, name of joint venture, affiliate or operator is indicated. Sites manufacture, distribute or market one or more of the identified products or services.\nDEFENSE AND AMMUNITION\n- -------------------------------------------------------------------------------- * If site is not operated by Olin or a majority-owned, direct or indirect subsidiary, name of joint venture, affiliate or operator is indicated. Sites manufacture, distribute or market one or more of the identified products or services.\nDEFENSE AND AMMUNITION (CONT'D)\n- -------------------------------------------------------------------------------- * If site is not operated by Olin or a majority-owned, direct or indirect subsidiary, name of joint venture, affiliate or operator is indicated. Sites manufacture, distribute or market one or more of the identified products or services.\n1993 DEVELOPMENTS\nIn December 1993, Olin announced a series of strategic actions, consisting of personnel reductions, business restructurings, including consolidations and re- alignments within divisions, provisions for costs at sites of discontinued businesses, future environmental liabilities and other charges. As a result of these actions, Olin recorded a pre-tax charge to earnings of $213 million ($132 million aftertax) in the fourth quarter of 1993.\nOn October 1, 1993, Olin sold its interest in Langenberg Kupfer und Messingwerke GmbH & Co KG to its partner, Wieland-Werke AG, and in so doing dissolved their four-year old German joint venture partnership. The companies will continue joint research and development activities, and Wieland will market certain Olin alloys in Europe.\nIn July 1993, Olin and GenCorp Inc. announced that they are holding discussions regarding the possible acquisition by Olin of certain assets of the medium caliber ordnance business of GenCorp Inc. To date, the companies have not reached a definitive agreement. Discussions are continuing and any agreement would be subject to a number of conditions including approval by the boards of directors of both companies.\nINTERNATIONAL OPERATIONS\nOlin has sales offices and subsidiaries in various countries which support the worldwide export of products from the United States as well as overseas production facilities. In addition, Olin has manufacturing interests, both direct and through joint ventures, in several foreign countries.\nAn Olin subsidiary in Ireland manufactures biocides for personal care and industrial applications; a Brazilian subsidiary manufactures urethane systems and Reductone(R) sodium hydrosulfite. An Olin Hunt subsidiary located in Belgium packages toners which are marketed throughout Europe. OCG Microelectronic Materials, a group of companies owned by Ciba-Geigy Limited and Olin, markets photoresists, polyimides and other image forming chemicals throughout Europe. A joint venture of OCG Microelectronic Materials, Inc. and Fuji Photo Film Co., Ltd. manufactures photoresists in Japan and markets them throughout the Far East.\nNordesclor S.A., a joint venture with S.A. Industrias Votorantim, a Brazilian company, manufactures calcium hypochlorite. Through a joint venture with Sentrachem Limited, Olin has an interest in a plant in South Africa for the production of HTH(R) pool chemicals. Olin holds a 100% interest in Hydrochim, S.A. a French chloroisocyanurate repacking operation.\nOlin has interests in plants in Japan and Venezuela for the production of urethane polyols and other specialty chemicals through joint ventures with Asahi Glass Company Ltd. and Corimon, C.A.S.A.C.A., respectively. Olin also has an interest in a plant recently completed in Venezuela for the production of ethylene oxide and ethylene glycol through a joint venture with Corimon, C.A.S.A.C.A., Petroquimica de Venezuela S.A. and the International Finance Corporation. A joint venture of Olin and Asahi Glass Company Ltd. has an interest in a TDI production plant in Japan with Mitsui Toatsu.\nYamaha-Olin Metal Corporation, a joint venture with Yamaha Corporation, manufactures high-performance copper alloys in Japan for sale to the electronics industry throughout the Far East.\nTechniche Olin Limited, a joint venture with a U.K. company, manufactures shaped charge cones in Coventry, England and markets them to prime contractors for inclusion in armor piercing munitions for certain West European countries.\nAn Olin subsidiary loads and packs sporting and industrial ammunition in Australia.\nThe geographic segment data contained in the Note \"Segment Information\" of the Notes to Financial Statements on pages 28 and 29 of the 1993 Shareholders Report and Exhibit 13 hereto are incorporated by reference in this Report.\nCUSTOMERS AND DISTRIBUTION\nDuring 1993, no single nongovernmental customer accounted for more than 2% of Olin's total consolidated sales and U. S. government sales accounted for 15% of Olin's total consolidated sales. Products which Olin sells to industrial or commercial users or distributors for use in the production of other products constitute a major part of Olin's total sales. Some of its products, such as pool chemicals, sporting ammunition and brass, are sold to a large number of users or distributors, while others, such as certain industrial chemicals, are sold in substantial quantities to a relatively small number of industrial users.\nMost of Olin's products and services are marketed primarily through its sales force and sold directly to various industrial customers, the U.S. Government and its prime contractors to wholesalers and other distributors.\nChemicals. Principal customers of Olin's chemicals products include the pulp and paper industries, vinyl chloride manufacturers, household and industrial cleaner suppliers, municipal and industrial wastewater treatment companies, specialty chemical manufacturers, flexible and rigid foam suppliers, automotive companies, packaging suppliers, the refrigeration industry, manufacturers of adhesives, coatings, elastomers and sealants, suppliers of various consumer products including shampoos and swimming pool sanitizers, semiconductor manufacturers, non-impact computer printer manufacturers and defense contractors. Principal customers of Olin's interconnect materials business are suppliers to semiconductor manufacturers and major computer and telecommunications manufacturers.\nMetals. Principal customers of Olin's copper and copper alloy strip, sheet and rod and seamless and welded tube include producers of electrical and electronic equipment, builders' hardware and appliances, the plumbing, automotive and air-conditioning industries and manufacturers of a variety of consumer goods.\nOlin manufactures cartridge brass for its ammunition business and for other ammunition makers. Olin also serves numerous high-technology markets through a thin-gauge reroll operation that produces stainless steels, high-temperature alloys and glass sealing alloys, in addition to copper and copper alloys. Posit-Bond(R) clad metal has made Olin a major supplier of metal to the U.S. Mint. Olin also sells various alloys to foreign governments for coinage purposes.\nThe metal products business is also focused on the electronics market, providing high performance and high quality materials needed by the electronics industry and other advanced technology customers. These materials include Olin- developed proprietary alloys and Copperbond(TM) treated copper foil marketed to the printed circuit industry.\nFabricated products are principally sold to ammunition manufacturers, the U.S. Armed Forces, building product suppliers, household product manufacturers and automotive manufacturers.\nDefense and Ammunition. The principal customers of the Ordnance division are the U.S. Department of Defense and certain foreign governments. Principal customers of the Aerospace division are the U.S. Government, major defense contractors, aerospace companies and certain foreign governments. The principal users of the Winchester division's products are recreational shooters, hunters, law enforcement agencies, the power and concrete industries, the construction industry, the U.S. Armed Forces and certain foreign governments.\nGOVERNMENT SALES\nU.S. Government sales were approximately $354 million in 1993, $409 million in 1992 and $453 million in 1991.\nApproximately 89% of such 1993 sales were to the Department of Defense or agencies thereof. In addition, Olin operates certain Government owned plants, including the Lake City Army Ammunition Plant in Independence, Missouri, for which Olin receives fee income. Products and services sold to the Government, to Government contractors or friendly foreign governments include ammunition, propellant and specialty defense products and services. Olin also manufactures and blends hydrazine based fuels for the Government for use as a propellant for the Space Shuttle, satellites and expendable launch vehicles. The U.S. Mint purchases cupronickel for nickels and Posit-Bond(R) clad metal for other U.S. coins. Ammunition cups and strip are sold to Government contractors for ultimate delivery to the Government.\nOlin's Government business is performed under both cost reimbursement and fixed price contracts. Cost reimbursement contracts provide for the reimbursement of allowable costs plus the payment of a fixed fee, an incentive fee based upon actual performance as compared to contractual targets, or an award fee based upon unilateral evaluation by the Government. Olin's fixed price contracts are either firm fixed price contracts or incentive contracts under which Olin shares certain savings or overruns with the Government.\nGovernment contracts generally have provisions for audit by the Government, and cost reimbursement contracts have limitations on reimbursable costs. Contracts may be terminated at the Government's convenience upon payment of certain termination costs and, in some cases, profits. Olin's Government business is subject to Government procurement regulations.\nContinuing reductions in the levels of defense procurement are currently adversely affecting the Defense and Ammunition segment's performance and may continue to do so in future years. Consequently, these reductions may also adversely affect, to a lesser extent, Olin's financial performance in future years, including its income, liquidity, capital resources and financial condition. In addition, changes in the strategic direction of defense spending and the timing of defense procurement may also adversely affect this segment and Olin. The precise impact of defense spending cutbacks will depend on the level of cutbacks, the extent to which these cutbacks are in the conventional ammunition area and Olin's ability to mitigate the impact of the cutbacks with new business or by business consolidations. Olin currently provides services to the U.S. Government in facilities management and is pursuing other business areas such as ordnance demilitarization. In view of continuing spending cutbacks of the Department of Defense, the historical financial information of the Defense and Ammunition segment and, to a lesser extent, of Olin, may not be indicative of future performance.\nCOMPETITION\nOlin is in active competition with businesses producing the same or similar products, as well as, in some instances, with businesses producing different products designed for the same uses. With respect to certain product groups, such as ammunition and copper alloys, and with respect to certain individual products, such as pool chemicals, chlor-alkali and urethane products, Olin is one of the largest manufacturers or distributors in the United States. With respect to its many other products, Olin's share of total domestic sales varies greatly.\nEMPLOYEES\nAs of December 31, 1993, Olin had approximately 12,438 employees (excluding approximately 1,529 employees at Government owned contractor operated facilities), approximately 11,878 of whom\nwere working in the United States and approximately 560 of whom were working in foreign countries. A majority of the hourly paid employees are represented, for purposes of collective bargaining, by various labor unions. Some labor contracts extend for as long as four years, but during each year new agreements must be negotiated in a number of Olin's plants. Two major labor contracts were renewed in 1993. One major collective bargaining agreement will expire in 1994. While relations between Olin and its employees and their various representatives are generally considered satisfactory, there can be no assurance that new labor contracts can be concluded without work stoppages. No major work stoppages have occurred in the last three years.\nRESEARCH ACTIVITIES; PATENTS\nOlin's research activities are conducted both on a product group and corporate-wide basis at a number of facilities. Company sponsored research expenditures were approximately $41 million during 1993, $39 million during 1992 and $41 million during 1991. Customer sponsored research expenditures (primarily U.S. Government) were approximately $88 million in 1993, $84 million in 1992 and $71 million in 1991.\nOlin owns, or is licensed under, a number of patents, patent applications and trade secrets covering its products and processes. Olin believes that, in the aggregate, the rights under such patents and licenses are important to its operations, but does not consider any patent or license or group thereof related to a specific process or product to be of material importance when viewed from the standpoint of Olin's total business.\nRAW MATERIALS AND ENERGY\nOlin purchases the major portion of its raw material requirements. The principal basic raw materials required by Olin for its production of chemicals are various hydrocarbons, salt, lime, electricity, proplylene oxide, ethylene oxide, natural gas, toluene, sulfur, ammonia and urea. Copper, zinc and various other nonferrous metals are required for the metals business. Lead, brass and propellant are the principal raw materials used in the ammunition business. Olin's principal basic raw materials are typically purchased pursuant to multiyear contracts. In addition, Olin uses many chemicals produced in its own operations as raw materials, intermediates or processing agents in the production of various other chemical products. In the manufacture of ammunition, Olin uses a substantial percentage of its own output of smokeless powder and cartridge brass. Additional information with respect to specific raw materials is set forth in the table above under the caption entitled \"Products and Services.\"\nElectricity is the predominant energy source for Olin's manufacturing facilities. Olin's facilities are served by utilities which generate electricity principally from coal and natural gas.\nENVIRONMENTAL AND TOXIC SUBSTANCES CONTROLS\nThe establishment and implementation of federal, state and local standards to regulate air, water and land quality has affected and will continue to affect substantially all of Olin's plants. Facilities and equipment to protect the environment do not inherently produce any significant increase in product capacity, efficiency or revenue, and their operation generally entails additional expense and energy consumption. Federal legislation providing for regulation of the manufacture, transportation, use and disposal of hazardous and toxic substances has imposed additional regulatory requirements on industry, particularly the chemicals industry. In addition, implementation of environmental laws, such as the Resource Conservation and Recovery Act and the Clean Air Act, has required and will continue to require new capital expenditures and will increase operating costs. Olin employs waste minimization and pollution prevention programs at its manufacturing sites. In order to help finance the cleanup of waste disposal sites, the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended by the Superfund Amendments and Reauthorization Act of 1986 (\"Superfund\"),\nimposes a tax on the sale of various chemicals, including chlorine, caustic and certain other chemicals produced by Olin, and on the disposal of certain hazardous wastes.\nOlin is party to various governmental and private environmental actions associated with waste disposal sites and manufacturing facilities. Associated costs of investigatory and remedial activities are provided for in accordance with generally accepted accounting principles governing probability and the ability to reasonably estimate future costs. Environmental provisions charged to income amounted to $85 million in 1993, $17 million in 1992, and $18 million in 1991. The significant increase in 1993 resulted from expanded volumes of contaminants uncovered while remediating a particular site, combined with the availability of more definitive data from progressing investigatory activities concerning both the nature and extent of contamination and remediation alternatives at other sites. Charges to income for investigatory and remedial efforts were material to operating results in 1993, 1992, and 1991 and may be material to net income in future years.\nCash outlays for environmental-related activities totalled $93 million in 1993 as compared with $103 million in 1992 and $90 million in 1991. During 1993, $49 million of these cash outlays were directed towards normal plant operations for the disposal of waste and the installation, operation and maintenance of pollution control equipment and facilities to ensure compliance with mandated and voluntarily imposed environmental quality standards. Comparable spending for 1992 and 1991 was $62 million and $65 million, respectively. Included in the costs for normal plant operations were environmental capital expenditures for pollution control equipment and pollution abatement facilities. Spending for environmental capital expenditures was $11 million in 1993 and $25 million in both 1991 and 1992. The 1991 and 1992 environmental capital expenditures include construction costs for a waste water treatment facility at the company's Lake Charles plant. Historically, Olin has funded its environmental capital expenditures through cash flow from operations and expects to do so in the future.\nCash outlays for remedial and investigatory activities associated with former waste sites and past operations were $44 million in 1993, $41 million in 1992 and $25 million in 1991. These amounts were not charged to income but instead were charged to reserves established for such costs identified and expensed to income in prior years.\nOlin's estimated environmental liability at the end of 1993 was attributable to 70 sites, 34 of which were on the National Priority List (\"NPL\"). Ten sites accounted for approximately 75% of such liability and, of the remaining sites, no one site accounted for more than three percent of such liability. Four of these ten sites were in the investigatory stage of the remediation process. In this stage, remedial investigation and feasibility studies are conducted by either Olin, the United States Environmental Protection Agency (\"EPA\") or other potentially responsible parties (\"PRP's\"). At another four of the ten sites, a Record of Decision (\"ROD\") or its equivalent has been issued by either the EPA or responsible state agency and Olin either alone, or as a member of a PRP group, was engaged in performing the remedial measures required by that ROD. At the remaining two of the ten sites, part of the site is subject to a ROD and another part is still in the investigative stage of remediation. All ten sites were either former manufacturing facilities or waste sites containing contamination generated by those facilities.\nTotal environmental-related cash outlays for 1994 are estimated to be $90 million, of which $50 million is expected to be spent on normal plant operations, including $10 million on capital projects, and $40 million on investigatory and remedial efforts.\nAnnual environmental-related cash outlays for capital projects, site investigation and remediation, and normal plant operations are expected to range between $90-$105 million over the next several years. While the company does not anticipate a material increase in the projected annual level of its environmental-related costs, there is always the possibility that such increases may occur in the future\nin view of the uncertainties associated with environmental exposures. Environmental exposures are difficult to assess for numerous reasons, including the identification of new sites, developments at sites resulting from investigatory studies, advances in technology, changes in environmental laws and regulations and their application, the scarcity of reliable data pertaining to identified sites, the difficulty in assessing the involvement and financial capability of other potentially responsible parties and the company's ability to obtain contributions from other parties and the time periods (sometimes lengthy) over which site remediation occurs. It is possible that some of these matters (the outcome of which is subject to various uncertainties) may be decided unfavorably against Olin.\nSee also Item 3, Legal Proceedings below, the Note \"Environmental\" of the Notes to Financial Statements contained in the 1993 Shareholders Report and Exhibit 13 hereto, and \"Management's Discussion and Analysis of Financial Condition and Results of Operations\" incorporated in this Report for additional information regarding environmental matters affecting Olin.\nITEM 2.","section_1A":"","section_1B":"","section_2":"ITEM 2. PROPERTIES\nOlin has plants at 35 separate locations in 20 states and 3 plants in 3 foreign countries. Most plants are owned; a number of small plants and portions of one major plant are leased. Listed under Item 1 above in the table set forth under the caption \"Products and Services\" are the locations at or from which Olin's products and services are manufactured, distributed or marketed by segment.\nOlin leases warehouses, terminals and distribution offices and space for executive and branch sales offices and service departments throughout the country and overseas.\nITEM 3.","section_3":"ITEM 3. LEGAL PROCEEDINGS\n(a) In December 1979, an action was commenced in the U.S. District Court in New York by the United States against Occidental Chemical Corporation (then known as Hooker Chemical & Plastics Corporation) (\"Oxychem\"), certain related companies, Olin and the City of Niagara Falls, New York, alleging that chemical wastes are migrating in violation of environmental laws or regulations from a site in Niagara Falls where Oxychem and Olin own adjacent, inactive chemical waste landfills. The United States is seeking injunctive relief and an order requiring Oxychem and Olin, among other things, to secure the landfill site, install a leachate collection system and treat whatever leachate is collected, as well as an order requiring Oxychem and Olin to place $16.5 million in trust or provide a bond to ensure that the site will be secured. The United States is also seeking civil penalties for each day of alleged violation of the Clean Water Act which currently has a maximum daily penalty of $25,000.\nIn November 1980, the State of New York filed a complaint as co-plaintiff in the same action based upon essentially the same factual allegations as in the suit brought by the United States. The State is seeking $100 million compensatory damages and $100 million punitive damages. The State is also requesting a court order to abate the alleged nuisance and penalties of $10,000 per day for alleged violations of each of four provisions of New York's Environmental Conservation Law. In 1983, the State filed a motion to amend its complaint to include a count under CERCLA (Comprehensive Environmental Response, Compensation and Liability Act of 1980) alleging damage to natural resources. In 1986, the Department of Justice filed a motion to amend its complaint to include a CERCLA and SARA (Superfund Amendments and Reauthorization Act of 1986) count. Oxychem and Olin have filed in opposition to the motions and the court has deferred a ruling on both motions.\nThe U.S. Environmental Protection Agency (\"EPA\") notified Olin and Oxychem of an aggregate of $3,050,000 in agency oversight costs on the project.\nUnder a stipulation entered into by all parties in 1984, Olin and Oxychem undertook a site remedial investigation which was completed in October 1988. Subsequently, the parties entered into a further\nstipulation under which Oxychem and Olin conducted a feasibility study of possible remedial measures. Olin does not expect these stipulations to have any further effect on the outcome of this matter. The remedial investigation and feasibility study was completed in July 1990. On September 24, 1990, EPA issued a Proposed Remedial Action Plan and on September 29, 1990 a Record of Decision (\"ROD\"). The EPA selected remedy was estimated to cost $30 million. On September 30, 1991, the EPA issued an administrative order directing Olin and Oxychem to implement the remedy identified in the September 29, 1990 Record of Decision. Olin and Oxychem have agreed to perform the remedy identified on such order. The cost of any remedy is expected to be shared by Olin and Oxychem in an agreed-upon proportion. Olin believes that any liability incurred by it in this matter will not materially affect its financial condition.\n(b) In June 1987, the EPA issued a ROD recommending remedial actions and ecological studies with respect to mercury contamination at the site of Olin's former mercury cell chlor-alkali plant in Saltville, Virginia. In August 1987, EPA, under Section 122 of CERCLA, asked Olin to undertake the work called for in the ROD, and Olin agreed to do so. Olin's commitment was required to be incorporated into a Consent Decree to be filed with a federal district court. EPA's draft of the Consent Decree included a proposed $1.4 million Clean Water Act penalty for past unpermitted discharges from a muck pond at the site, as well as $570,000 in reimbursement of past EPA costs. In response to Olin's request, EPA has agreed to reduce the costs to $456,000 and to sever the penalty from the CERCLA action, making it the subject of separate negotiations after execution of the Consent Decree. In 1988, the proposed $1.4 million Clean Water Act penalty was severed from the Consent Decree entered into by Olin and filed with the U.S. District Court for the Western District of Virginia, and the EPA has taken no further action with respect to any proposed penalty.\n(c) In December 1987, a Federal Trade Commission (\"FTC\") administrative law judge ruled that Olin must divest the chlorinated isocyanurates business acquired from FMC Corporation in 1985, which includes isocyanurates manufacturing and packaging and the Sun(R) brand trademark. The ruling stated that the acquisition lessened competition in markets for chlorinated isocyanurates and calcium hypochlorite dry swimming pool sanitizers. Olin appealed this decision to the FTC. In July 1990, the FTC announced that it had issued an order denying Olin's appeal and requiring Olin to divest itself of such business within one year of the order becoming final following appeal. Olin has appealed the FTC decision to the U.S. Court of Appeals. The U.S. Court of Appeals upheld the FTC decision on February 26, 1993 and Olin's petition for en banc review was denied. Olin petitioned for review by the U.S. Supreme Court and such petition was denied.\nOlin believes that a divestment of this business would not materially affect its financial condition or results of operations.\n(d) In late 1991, the EPA brought a civil action in the U.S. District Court in Tennessee against Olin alleging violations of the Clean Air Act and regulations thereunder with respect to mercury emissions at Olin's Charleston, Tennessee plant. The complaint alleges, among other things, that Olin failed to maintain a mercury cell in a manner to minimize leakage of mercury and mercury contaminated material for a period of approximately 17 months. EPA claims civil penalties of $25,000 per day for each alleged violation. Olin and EPA have reached a settlement in principle in this matter pursuant to which Olin will pay $1 million in penalties.\nOlin believes that any liability incurred by it in this matter will not materially affect its financial condition.\n(e) As part of the continuing environmental investigation by Federal, state and local governments of waste disposal sites, Olin has entered into a number of settlement agreements requiring it to contribute to the cost of the investigation and cleanup of a number of sites. This process of investigation and cleanup is expected to continue.\n(f) On November 21, 1989, a Massachusetts state trial court ruled in Augat, Inc. and Isotronics v. Aegis, Inc., et al. that Aegis, Inc. (\"Aegis\") (a Massachusetts corporation wholly owned by Olin-Asahi Interconnect Technologies) and a certain individual were liable to plaintiffs on matters dealing with employee solicitation and use of certain confidential information, which the trial court found were violations of the Massachusetts Unfair Competition statute. On January 16, 1991, the Supreme Judicial Court of Massachusetts upheld in part and overturned in part the lower court decision. That court held that the defendants were liable to the plaintiffs on the narrow ground that they had induced an employee to breach his fiduciary duty to plaintiffs in soliciting four other Isotronics employees to join Aegis while he was still general manager. As a result the court ruled that defendants were liable to plaintiffs for the Isotronics losses caused by problems arising from the departure of key managerial employees who were approached by the employee while he and they were still employed by Isotronics, provided that the losses were caused by events occurring before Isotronics reasonably should have replaced the departed managerial employees with competent people. The case was remanded to the lower court for trial on damages.\nAfter a trial on damages, the lower court entered a judgment on December 14, 1992 and subsequently modified, awarding plaintiffs $14 million in compensatory damages, $14 million in non-compensatory damages, $10.7 million in interest, $1.2 million in attorneys' fees, and $377,000 in costs. The judgment bears interest at the rate of 12% per year. Defendants and plaintiffs have both appealed. The Massachusetts Supreme Judicial Court agreed to hear the defendants' appeal directly from the trial court and the parties are awaiting the decision of such court.\nAegis was acquired in 1987 by Olin-Asahi Interconnect Technologies, a partnership equally owned by subsidiaries and joint ventures of Olin and Asahi Glass Co., Ltd., of Japan.\nAlthough no allegation of wrongdoing has been made against Olin, Olin has been named a \"reach and apply\" defendant under Massachusetts law in an attempt by the plaintiffs to secure rights under a contractual obligation which may result in a payment by Olin or one of its affiliates of a portion of whatever the judgment is ultimately determined to be after appeal.\n(g) Olin and its subsidiaries are defendants in various other legal actions arising out of their normal business activities, none of which is considered by management to be material.\nITEM 4.","section_4":"ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS\nNo matter was submitted to a vote of security holders during the three months ended December 31, 1993.\nExecutive Officers of Olin Corporation as of March 1, 1994\nNo family relationship exists between any of the above named executive officers or between any of them and any Director of Olin. Such officers were elected to serve as such, subject to the By-Laws, until their respective successors are chosen.\nEach of the above-named executive officers, except L. B. Anziano, G. W. Bersett, A. A. Catani, P. J. Davey, E. J. DiTeresi, G. B. Erensen, P. C. Kosche, J. M. Pierpont and W. W. Smith, has served Olin in an executive capacity for not less than the past five years.\nLeon B. Anziano was elected a Corporate Vice President on April 29, 1993. Prior to that time, since 1988, he has served Olin in the following management capacities: Group Vice President & General Manager, Industrial Chemicals; Group Vice President & General Manager, Urethanes; and President, Basic Chemicals Division.\nGerald W. Bersett was elected a Corporate Vice President on April 29, 1993. Prior to that time, since 1988, he has served Olin in the following management capacities: Division Vice President and General Manager, Winchester and President, Winchester Division.\nAngelo A. Catani was elected a Corporate Vice President on April 29, 1993. Prior to that time, since 1988, he has served Olin in a management capacity as President, Ordnance Division.\nPatrick J. Davey was elected a Corporate Vice President on April 29, 1993. Prior to that time, since 1988, he has served Olin in the following management capacities: Group Vice President, Water Products & Services; and President, Performance Chemicals Division.\nEmanuel J. DiTeresi was elected a Corporate Vice President and Controller on April 26, 1990. Prior to that time, since 1988, he has served Olin in a management capacity as Group Financial Officer, Chemicals.\nGeorge B. Erensen was elected a Corporate Vice President on April 26, 1990. Prior to that time, since 1988, he has served Olin in a management capacity as Staff Vice President, Taxes and Risk Management.\nPeter C. Koche was elected a Corporate Vice President on April 29, 1993. Prior to that time, since 1988, he has served Olin in the following management capacities: General Manager, Pool Chemicals; and Division Vice President, Materials Management.\nJanet M. Pierpont was elected a Corporate Vice President and Treasurer on April 26, 1990. Prior to that time, since 1988, she has served Olin in a management capacity as Assistant Treasurer.\nWilliam W. Smith was elected a Corporate Vice President on April 29, 1993. Prior to that time, since 1988, he has served Olin in a management capacity as President, Aerospace Division.\nPART II\nITEM 5.","section_5":"ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS\nAs of January 31, 1994, there were approximately 12,900 record holders of Olin Common Stock.\nOlin Common Stock is traded on the New York, Chicago and Pacific Stock Exchanges.\nInformation concerning the high and low sales prices of Olin Common Stock and dividends paid on Olin Common Stock during each quarterly period in 1993, 1992, and 1991 appears on page 32 of the 1993 Shareholders Report and in Exhibit 13 hereto and is incorporated herein by reference.\nAmong the provisions of Olin's agreements with its long-term lenders are restrictions relating to payment of dividends and acquisition of common stock. At December 31, 1993, retained earnings of approximately $96 million were not so restricted.\nITEM 6.","section_6":"ITEM 6. SELECTED FINANCIAL DATA\nThe information relating to the last five fiscal years contained under the caption \"Ten-Year Financial Summary\" appearing on page 20 of the 1993 Shareholders Report and in Exhibit 13 hereto is incorporated by reference in this Report.\nITEM 7.","section_7":"ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS\n\"Management's Discussion and Analysis of Financial Condition and Results of Operations\" appearing on pages 12 through 18 of the 1993 Shareholders Report (but excluding the bar graphs appearing on such pages) and in Exhibit 13 hereto is incorporated by reference in this Report.\nITEM 8.","section_7A":"","section_8":"ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA\nThe consolidated financial statements of Olin Corporation and subsidiaries and the related notes thereto together with the report thereon of KPMG Peat Marwick dated January 27, 1994, appearing on pages 21 through 30 of the 1993 Shareholders Report and in Exhibit 13 hereto are incorporated by reference in this Report.\nITEM 9.","section_9":"ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE\nNot applicable.\nPART III\nITEM 10.","section_9A":"","section_9B":"","section_10":"ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT\nThe biographical information relating to Olin's Directors under the heading \"Election of Directors\" in the Proxy Statement relating to Olin's 1994 Annual Meeting of Shareholders (\"1994 Proxy Statement\") is incorporated by reference in this Report. See also the list of executive officers following Item 4 of this Report. The information regarding compliance with Section 16 of the Securities Exchange Act of 1934, as amended, contained in the last paragraph under the heading \"Security Ownership of Directors and Officers\" in the 1994 Proxy Statement is incorporated by reference in this Report.\nITEM 11.","section_11":"ITEM 11. EXECUTIVE COMPENSATION\nThe information under the heading \"Executive Compensation\" in the 1994 Proxy Statement (but excluding the Report of the Compensation and Stock Option Committee on Executive Compensation appearing on pages 11 through 13 of the 1994 Proxy Statement and the graphs appearing on page 17 of the 1994 Proxy Statement) is incorporated by reference in this Report. The information under the headings \"Additional Information Regarding the Board of Directors-- Compensation of Directors\", \"Additional Information Regarding the Board of Directors--Compensation Committee Interlocks and Insider Participation\" and \"Additional Information Regarding the Board of Directors--Directors Retirement Plan\" in the 1994 Proxy Statement is incorporated by reference in this Report.\nITEM 12.","section_12":"ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT\nThe information concerning holdings of Olin stock by certain beneficial owners contained under the heading \"Certain Beneficial Owners\" in the 1994 Proxy Statement and the information concerning beneficial ownership of Olin stock by Directors and officers of Olin under the heading \"Security Ownership of Directors and Officers\" in the 1994 Proxy Statement are incorporated by reference in this Report.\nITEM 13.","section_13":"ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS\nThe information contained under the heading \"Additional Information Regarding the Board of Directors--Compensation Committee Interlocks and Insider Participation\" in the 1994 Proxy Statement is incorporated by reference in this Report.\nPART IV\nITEM 14.","section_14":"ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K\n(a) 1. FINANCIAL STATEMENTS\nConsolidated financial statements of Olin Corporation and subsidiaries and the related notes thereto together with the report thereon of KPMG Peat Marwick dated January 27, 1994, appearing on pages 21 through 30 of the 1993 Shareholders Report and in Exhibit 13 hereto are incorporated by reference in this Report.\n2. FINANCIAL STATEMENT SCHEDULES\nThe following additional information is filed as part of this Report and should be read in conjunction with the financial statements incorporated herein by reference:\nSchedules not included herein are omitted because they are inapplicable or not required or because the required information is given in the consolidated financial statements and notes thereto.\nSeparate financial statements of 50% or less owned subsidiaries accounted for by the equity method are not summarized herein and have been omitted because, in the aggregate, they would not constitute a significant subsidiary.\n3. EXHIBITS\nManagement contracts and compensatory plans and arrangements are listed as Exhibits 10(a) through 10(ee) below.\n- -------- * Previously filed as indicated and incorporated herein by reference. Exhibits incorporated by reference are located in SEC File No. 1-1070 unless otherwise indicated.\n- -------- * Previously filed as indicated and incorporated herein by reference. Exhibits incorporated by reference are located in SEC File No. 1-1070 unless otherwise indicated.\n(b) REPORTS ON FORM 8-K\nNo reports on Form 8-K were filed during the quarter ended December 31, 1993. - -------- * Previously filed as indicated and incorporated herein by reference. Exhibits incorporated by reference are located in SEC File No. 1-1070 unless otherwise indicated.\nSIGNATURES\nPURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.\nOlin Corporation\nDate: February 24, 1994 \/s\/ John W. Johnstone, Jr. By................................... JOHN W. JOHNSTONE, JR. CHAIRMAN OF THE BOARD, PRESIDENT AND CHIEF EXECUTIVE OFFICER\nPURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATE INDICATED.\nS-1\nDate: February 24, 1994\nS-2\nINDEPENDENT AUDITORS' REPORT\nTO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF OLIN CORPORATION:\nUnder date of January 27, 1994, we reported on the consolidated balance sheets of Olin Corporation and subsidiaries as of December 31, 1993 and 1992, and the related consolidated statements of income, shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1993, as contained in the 1993 Annual Report to Shareholders. Our report refers to a change in accounting for postretirement benefits other than pensions and income taxes in 1992. These consolidated financial statements and our report thereon are incorporated by reference in the annual report on Form 10-K for the year 1993. In connection with our audits of the aforementioned consolidated financial statements, we also have audited the related financial statement schedules as listed in Item 14(a)2 of the annual report on Form 10-K for the year 1993. These financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statement schedules based on our audits.\nIn our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.\nKPMG PEAT MARWICK\nStamford, Connecticut January 27, 1994\nSCHEDULE V\nOLIN CORPORATION AND CONSOLIDATED SUBSIDIARIES PROPERTY, PLANT, AND EQUIPMENT\nTHREE YEARS ENDED DECEMBER 31, 1993 (IN MILLIONS)\n- -------- (1) Additions include in 1993 assets of previously nonconsolidated affiliate and assets of business acquired in 1991 as of the date of acquisition. (2) Depreciation is computed on the straight line basis over the estimated useful lives of the related assets resulting in the following ranges of annual depreciation rates:\nSCHEDULE VI\nOLIN CORPORATION AND CONSOLIDATED SUBSIDIARIES ACCUMULATED DEPRECIATION OF PROPERTY, PLANT, AND EQUIPMENT\nTHREE YEARS ENDED DECEMBER 31, 1993 (IN MILLIONS)\n- -------- (1) Other changes include in 1993 accumulated depreciation of previously nonconsolidated affiliate and accumulated depreciation of business acquired in 1991 as of the date of acquisition.\nSCHEDULE VIII\nOLIN CORPORATION AND CONSOLIDATED SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS\nTHREE YEARS ENDED DECEMBER 31, 1993 (IN MILLIONS)\n- -------- (1) Principally bad debts written off, net of recoveries.\nSCHEDULE IX\nOLIN CORPORATION AND CONSOLIDATED SUBSIDIARIES SHORT-TERM BORROWINGS\nTHREE YEARS ENDED DECEMBER 31, 1993 (IN MILLIONS)\n- -------- (1) Commercial paper and bank loans are generally for terms of 30 to 90 days and are non-renewable. Bank loans include borrowings by foreign subsidiaries from local banks. (2) Represents an average of daily balances for commercial paper and primarily an average of daily balances for bank loans. (3) Average amount outstanding during the period compared to total interest expense incurred during the year.\nEXHIBIT INDEX\n- -------- * Previously filed as indicated and incorporated herein by reference. Exhibits incorporated by reference are located in SEC File No. 1-1070 unless otherwise indicated.\n- -------- * Previously filed as indicated and incorporated herein by reference. Exhibits incorporated by reference are located in SEC File No. 1-1070 unless otherwise indicated.","section_15":""}
{"filename":"81020_1993.txt","cik":"81020","year":"1993","section_1":"ITEM 1. BUSINESS\nOrganization\nPSI Energy, Inc. (Energy) is a wholly-owned subsidiary of PSI Resources, Inc. (Resources).\n. Merger Agreement with The Cincinnati Gas & Electric Company (CG&E) - Refer to the information appearing in \"Management's Discussion and Analysis of Financial Condition and Results of Operations\" beginning on page 17 and Notes 19, 20, and 21 of the \"Notes to Consolidated Financial Statements\" beginning on page 61.\n. IPALCO Enterprises, Inc.'s Withdrawn Acquisition Offer - Refer to the information appearing in \"Management's Discussion and Analysis of Financial Condition and Results of Operations\" beginning on page 19.\nThe Company\nEnergy is an Indiana corporation engaged in the production, transmission, dis- tribution, and sale of electric energy in north central, central, and southern Indiana. It serves an estimated population of 1.9 million people located in 69 of the state's 92 counties including the cities of Terre Haute, Kokomo, Columbus, Lafayette, Bloomington, and New Albany.\nPSI Energy Argentina, Inc. (PSI Energy Argentina), a wholly-owned subsidiary of Energy, is an Indiana corporation which was incorporated in 1992. The corporation was formed for the purpose of acquiring, purchasing, owning, and holding the stock of other energy, environmental, or functionally-related corporations and as a holding company for Energy's other energy ventures. PSI Energy Argentina is a member of a multinational consortium which has controlling ownership of Edesur, S.A. (Edesur). Edesur is an electricity- distribution network serving the southern half of Buenos Aires, Argentina. Edesur provides distribution services to 1.8 million customers. PSI Energy Argentina owns a small equity interest in this project and provides operating and consulting services.\nRegulation\nEnergy, being a public utility under the laws of Indiana, is regulated by the Indiana Utility Regulatory Commission (IURC) as to its retail rates, services, accounts, depreciation, issuance of securities, acquisitions and sales of utility properties, and in other respects as provided by Indiana law. Energy is also subject to regulation by the Federal Energy Regulatory Commission (FERC) with respect to borrowings and the issuance of securities not regulated by the IURC, the classification of accounts, rates to wholesale customers, interconnection agreements, and acquisitions and sales of certain utility properties as provided by Federal law.\nFuel Supplies\nEnergy has both long- and short-term coal supply agreements for a major portion of the coal requirements for its generating stations from mines located principally in Indiana and Illinois. Several of these agreements include extension options, and some are subject to price revision. Energy monitors alternative sources to assure a continuing availability of economical fuel supplies. At the present time, Energy is evaluating the use of western and midwestern coal blends in connection with its plans to comply with the acid rain provisions of the Clean Air Act Amendments of 1990.\nRefer to the information appearing in Note 15(c) of the \"Notes to Consolidated Financial Statements\" on page 59.\nCustomer, Kilowatt-hour Sales, and Revenue Data\nThe area served by Energy is a residential, agricultural, and widely diver- sified industrial territory. Approximately 98% of Energy's operating revenues are derived from sales of electricity. As of December 31, 1993, Energy supplied electric service to over 624,000 customers in approximately 700 cities, towns, unincorporated communities, and adjacent rural areas, including municipal utilities and rural electric cooperatives. No one customer accounts for more than 5% of electric operating revenues. Sales of electricity by Energy are affected by the various seasonal patterns throughout the year and, therefore, its operating revenues and associated operating expenses are not generated evenly during the year.\nPower Supply\nEnergy and 28 other electric utilities in an eight-state area are participating in the East Central Area Reliability Coordination Agreement for the purpose of coordinating the planning and operation of generating and transmission facilities to provide for maximum reliability of regional bulk power supply.\nEnergy's electric system is interconnected with the electric systems of CG&E, Kentucky Utilities Company, Louisville Gas and Electric Company, Indianapolis Power & Light Company, Indiana Michigan Power Company, Northern Indiana Public Service Company, Central Illinois Public Service Company, Southern Indiana Gas and Electric Company, and Hoosier Energy R.E.C., Inc. In addition, Energy has a power supply relationship with Wabash Valley Power Association, Inc. (WVPA) and Indiana Municipal Power Agency (IMPA) through power coordination agreements. These two entities are also parties with Energy to a Joint Transmission and Local Facilities Agreement.\nCompetition\nRefer to the information appearing under the caption \"Competitive Pressures\" in \"Management's Discussion and Analysis of Financial Condition and Results of Operations\" beginning on page 12.\nEnvironmental Matters\nRefer to the information appearing in \"Management's Discussion and Analysis of Financial Condition and Results of Operations\" beginning on page 12.\nEmployees\nThe number of employees of Energy at December 31, 1993, was 4,235.\nITEM 2.","section_1A":"","section_1B":"","section_2":"ITEM 2. PROPERTIES\nRefer to the information appearing in Note 17 of the \"Notes to Consolidated Financial Statements\" on page 60.\nSubstantially all electric utility plant is subject to the lien of Energy's first mortgage bond indenture.\nEnergy operates six steam electric generating stations, one hydroelectric generating station, and 16 rapid-start internal combustion generating units, all within the State of Indiana. Energy owns all of the above, except for 49.95% of Gibson Unit 5 which is jointly owned with WVPA (25%) and IMPA (24.95%). Company-owned system generating capability as of December 31, 1993, was 5,807 megawatts (mw). Additionally, in May 1993, the IURC issued \"certificates of need\" for Energy and Destec Energy, Inc.'s 262-mw clean coal power generating facility to be located at Energy's Wabash River Generating Station. The clean coal facility consists of a coal gasification plant and a gas turbine generator. Exhaust heat from the gas turbine (192 mw) will produce steam to repower an existing steam turbine (70 mw). Refer to the information appearing under the caption \"New Generation\" in \"Management's Discussion and Analysis of Financial Condition and Results of Operations\" on page 26.\nEnergy's 1993 summer peak load, which occurred on August 26, was 4,812 mw, and its 1993 winter peak load, which occurred on February 18, was 4,155 mw, exclu- sive of off-system transactions. For the period 1994 to 2003, summer and winter peak load and kilowatt-hour (kwh) sales are each forecasted to have annual growth rates of 2%. These forecasts reflect Energy's assessment of load growth, alternative fuel choices, population growth, and housing starts. These forecasts exclude non-firm power transactions and any potential long- term firm power sales at market-based prices.\nAs of December 31, 1993, Energy's transmission system consisted of 719 circuit miles of 345,000 volt line, 656 circuit miles of 230,000 volt line, 1,601 circuit miles of 138,000 volt line, and 2,418 circuit miles of 69,000 volt line, all within the State of Indiana. As of the same date, Energy's transmission substations had a combined capacity of 20,520,154 kilovolt- amperes and the distribution substations had a combined capacity of 5,952,175 kilovolt-amperes.\nFor the year ended December 31, 1993, 99% and 1% of Energy's kwh production was obtained from coal-fired generation and hydroelectric generation, respectively.\nITEM 3.","section_3":"ITEM 3. LEGAL PROCEEDINGS\nMerger Agreement Litigation Resources' original merger agreement with CG&E was amended in response to a June 25, 1993, ruling by the IURC which dismissed a petition by Energy for approval of the transfer of its license or property to CINergy Corp., an Ohio corporation, pursuant to the original merger agreement. The IURC held that such transfer could not be made to a corporation incorporated outside of Indiana. Under the terms of the amended merger agreement, CINergy Corp. (CINergy), a Delaware corporation, will be the parent holding company of Energy and CG&E and will be required to register under the Public Utility Holding Company Act of 1935 (PUHCA). Pursuant to the amended merger agreement, Energy agreed to appeal the IURC's decision or take other action to obtain the permission of the IURC for a non-Indiana corporation to own Energy's assets. Energy has appealed the IURC's decision. In the event the appeal or other action is successful, the parties to the amended merger agreement could take actions to achieve the original merger structure. The original structure provided that Resources, Energy, and CG&E would be merged into CINergy Corp., an Ohio corporation. Under this structure, Energy and CG&E would become operating divisions of CINergy Corp., ceasing to exist as separate corporations, and CINergy Corp. would not be a registered holding company under the PUHCA. Any action taken with respect to this litigation is not expected to delay the merger of Resources and CG&E under a registered holding company structure.\nThe Katz Action On March 16, 1993, after the announcement of IPALCO Enterprises, Inc.'s acquisition offer, a purported class action was filed by Moise Katz (Katz Action) in the Superior Court for Hendricks County in the State of Indiana (Superior Court) in which Resources and the directors of Resources and Energy were named as defendants. The Katz Action alleges, among other things, that the directors breached their fiduciary duties in connection with the original merger agreement, Resources Stock Option Agreement (see Note 19 of the \"Notes to Consolidated Financial Statements\" beginning on page 61), and Resources Shareholder Rights Plan and seeks, among other things, to enjoin the CINergy merger transaction and to require that an auction for Resources be held. On April 7, 1993, Resources and the other defendants filed a motion to dismiss the Katz Action, and on July 1, 1993, the Superior Court granted that motion. On July 19, 1993, the Superior Court issued an order which vacated its July 1, 1993, order but granted Resources' motion to dismiss Count I of the Katz Action for failure to bring the breach of fiduciary duty claims in a derivative proceeding.\nOn August 18, 1993, a purported third amended class action and derivative complaint was filed in the Katz Action, seeking injunctive relief and damages for alleged breach of fiduciary duty by the directors of Resources. Among other things, this complaint alleges that the defendants failed to disclose (i) the factors that Resources' Board of Directors considered in reaffirming its recommendation that Resources' shareholders approve the merger with CG&E and whether those factors included a consideration of the divestiture of the CG&E gas operations; (ii) whether and to what extent Lehman Brothers took into consideration the divestiture of the CG&E gas operations, and the ramifications thereof, in rendering its July 2, 1993, fairness opinion regarding the merger with CG&E; (iii) the pro forma effect on the merged company taking into consideration the divestiture of the CG&E gas operations; (iv) whether the \"comparable\" company analysis performed by Lehman Brothers consisted of companies operating electrical systems or gas and electrical systems and whether such analysis included or excluded the CG&E gas operations; and (v) whether Resources' Board of Directors was informed of the ramifications of the divestiture of the CG&E gas operations and to what extent, if any, Resources' Board of Directors took into consideration such ramifications before it endorsed the amended merger agreement to Resources' shareholders. Resources denies these allegations. Resources anticipates that the dismissal of the PSI Merger Shareholder Action and the resolution of related attorney fees, as discussed below, will result in the dismissal of the Katz Action.\nThe foregoing descriptions of the July 1993 orders and the August 18, 1993, third amended complaint in the Katz Action are qualified in their entirety by reference to copies of such orders incorporated by reference as exhibits hereto.\nThe PSI Merger Shareholder Action On March 17, 1993, a purported class action was filed by Lydia Grady (Grady Action) in the Superior Court in which Resources and 13 directors of Resources and Energy were named as defendants. On April 13, 1993, the Indiana District Court issued an order which, among other things, consolidated the Grady Action with the following cases: J.E. and Z.B. Butler Foundation v. PSI Resources, Inc., et al.; Lamont Carpenter, et al. v. PSI Resources, Inc., et al.; Ronald Gaudiano, et al. v. PSI Resources, Inc., et al.; and Sonny Merrit v. PSI Resources, Inc., et al. (together, the \"PSI Merger Shareholder Action\").\nOn July 19, 1993, a hearing was held in the Indiana District Court in the PSI Merger Shareholder Action on the plaintiffs' motion for a preliminary injunction. On August 5, 1993, the Indiana District Court issued an order granting the preliminary injunction sought by the plaintiffs and ordered Resources, within 20 days, to provide shareholders with certain additional information relating to the pro forma effect on CINergy Corp.'s financial condition of the possible divestiture of CG&E's gas operations. The Indiana District Court also ordered additional disclosure concerning, among other things, Lehman Brothers' consideration of that possibility in connection with its July 2, 1993, fairness opinion to Resources' Board of Directors. Resources complied with this order in its Proxy Statement Supplement dated August 12, 1993.\nIn January 1994, the parties in the PSI Merger Shareholder Action as well as the parties to the Katz Action signed a Stipulation and Agreement of Dismissal (the \"Stipulation\"). The Stipulation contemplates, among other things, that the parties will jointly move the Indiana District Court for entry of a final order dismissing the PSI Merger Shareholder Action with prejudice and ruling on the plaintiffs' application for fees and expenses. The parties to the Stipulation have agreed to provide notice to Resources' shareholders of a hearing during which the proposed final order will be considered by the Indiana District Court. If the plaintiffs are entitled to recover these fees, Resources does not anticipate this cost to have a material adverse effect on its financial condition.\nThe foregoing descriptions of the April 13, 1993, class actions consolidation order, and the August 5, 1993, Indiana District Court order are qualified in their entirety by reference to copies of such documents incorporated by reference as exhibits hereto.\nIn addition to the above litigation, see Notes 2, 3(a), and 15(b) and (c) beginning on pages 43, 45, and 58, respectively, of the \"Notes to Consolidated Financial Statements\".\nITEM 4.","section_4":"ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None.\nEXECUTIVE OFFICERS OF THE REGISTRANT\nAge at Dec. 31, Name 1993 Office & Date Elected or in Job\nJames E. Rogers 46 Chairman, President and Chief Executive Officer - 1990 Chairman and Chief Executive Officer - 1988\nJon D. Noland 55 Executive Vice President and Chief Administration Officer - 1992 Executive Vice President - 1990 Executive Vice President - Law and Regulation - 1989 Executive Vice President - Law and Financial Services - 1986\nJoseph W. Messick, Jr. 54 Senior Vice President and Chief Engineering and Construction Officer - 1992 Senior Vice President and Chief Operating Officer - Power System Operations - 1990 Senior Vice President - Power System Operations - 1989 Senior Vice President - Power - 1988\nLarry E. Thomas 48 Senior Vice President and Chief Operations Officer - 1992 Senior Vice President and Chief Operating Officer - Customer Operations - 1990 Senior Vice President - Customer Operations - 1986\nJ. Wayne Leonard 43 Senior Vice President and Chief Financial Officer - 1992 Vice President and Chief Financial Officer - 1989 Vice President - Corporate Planning - 1987\nCheryl M. Foley 1\/ 46 Vice President, General Counsel and Secretary - 1991 Vice President and General Counsel - 1989 Vice President and General Counsel - Interstate Pipelines - Enron Corporation 2\/ - 1987\nM. Stephen Harkness 45 Treasurer - 1991 Treasurer and Assistant Secretary - 1986\nCharles J. Winger 48 Comptroller - 1984 EXECUTIVE OFFICERS OF THE REGISTRANT (continued)\nNone of the officers are related in any manner. Executive officers of Energy are elected to the offices set opposite their respective names until the next annual meeting of the Board of Directors and until their successors shall have been duly elected and shall have been qualified.\n1\/ Prior to joining Energy, Mrs. Foley was vice president and general counsel for various divisions\/subsidiaries of Enron Corporation, a diversified energy company headquartered in Houston, Texas.\n2\/ Non-affiliate of Energy.\nPART II\nITEM 5.","section_5":"ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS\nAll Energy common stock is held by Resources; therefore, there is no public trading market for Energy common stock. All Energy cumulative preferred stock sold publicly (except 3 1\/2% Series) is listed on the New York Stock Exchange. Refer to the information in Notes 6 and 7 of the \"Notes to Consolidated Financial Statements\" beginning on page 48.\nITEM 6.","section_6":"ITEM 6. SELECTED FINANCIAL DATA\nITEM 7.","section_7":"ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS\nFINANCIAL CONDITION\nThe financial condition of PSI Energy, Inc. (Energy), the principal subsidiary of PSI Resources, Inc. (Resources), is currently, and will continue to be, significantly affected by:\n. The changing competitive environment for electric utilities, including more intense competition in wholesale power markets and emerging competition for the provision of energy services to retail customers, particularly industrial;\n. The regulatory response to the changing competitive environment, including the application of incentive ratemaking, the need for more flexible pricing, and the treatment of business alliances entered into in response to such changes (e.g., the merger with The Cincinnati Gas & Electric Company [CG&E] discussed further herein); and\n. The substantial costs associated with Energy's construction program, including environmental compliance and the regulatory response to the potentially significant earnings attrition resulting from such program.\nEnergy's goal is to achieve the financial measures necessary to assure access, at a reasonable cost, to the capital required to finance its construction program, which is necessary to provide adequate and reliable service to its customers. Specific financial objectives include achieving and maintaining common equity at a minimum of 45% of capitalization, achieving at least an \"A\" credit rating on senior securities, and increasing the common dividend in an orderly manner. Energy's achievement of its goal is increasingly dependent upon maintaining its favorable competitive position.\nCompetitive Pressures\nThe increasing competitive pressures in the electric utility industry are primarily driven by the need of U.S. industries for low cost power in order to remain competitive in the global marketplace. The restrictions on access to low cost power are exacerbated by cost-of-service regulation which has produced average industrial rates to customers that vary substantially across the U.S. (from 3 cents per kilowatt-hour [kwh] to over 10 cents per kwh). Although the electric utility industry has already experienced substantial competition in the wholesale power market, the effect of competition has arguably had only a marginal effect on the overall profitability of the industry. The effect of the Energy Policy Act of 1992 (Energy Act), the most comprehensive energy legislation enacted since the late 1970s, is to essentially provide open competition, at the wholesale level, for new generation resources. The Energy Act increases the level of competition by creating a new class of wholesale power providers that are not subject to the restrictive requirements of the Public Utility Holding Company Act of 1935 (PUHCA) nor the ownership restrictions of the Public Utility Regulatory Policies Act of 1978. This, combined with the provision of the Energy Act granting the Federal Energy Regulatory Commission (FERC) the authority to order wholesale transmission access, makes the competition real in the wholesale power market. However, by prohibiting the FERC from ordering utilities to provide transmission access to retail customers (retail wheeling), Congress clearly intended to allow states to decide whether a competitive generation market will extend to retail customers. In the face of ongoing international competition, Energy believes major industrial customers of electric utilities will continue to pressure state legislatures and utility regulatory commissions to permit retail wheeling. Although specific proposals for retail wheeling have not been advanced in Indiana, at least eight states are at various stages in considering proposals for retail wheeling.\nIn the fourth quarter of 1993, major credit rating agencies issued reports sounding a warning as to the long-term effect of competition on the electric utility industry. Standard & Poor's (S&P), in particular, announced fundamental changes in the way it evaluates credit quality of electric utilities, essentially declaring its view that business risk is increasing, in part, because electric utility prices will be capped at some level established by competition, regardless of the particular company's costs. Not only will it be difficult for high cost producers to secure further rate increases, they also will likely experience substantial price decreases as competition intensifies. Consequently, it appears inevitable that high cost producers will require better financial fundamentals than low cost producers to secure the same credit rating. Specifically, S&P has categorized each electric utility's business position, ranking it as being above average, average, or below average. As a result, S&P revised the rating outlooks of approximately one-third of the electric utility industry from stable to negative and placed several electric utilities on CreditWatch with negative implications.\nEnergy believes the concerns raised by S&P and other major credit rating agencies, in part, explain recent activity in the electric utility segment of the stock market. The electric utility group dropped substantially more in the fourth quarter of 1993 than the bond market (usually a barometer for electric utility stocks). As a result, the yield spread between long-term U.S. Treasuries and electric utility stocks dropped from the 3 to 5 year average of 110 to 120 basis points to 20 to 30 basis points.\nDuring this same period, several \"sell-side\" equity analysts have expressed their concerns in written reports that investors, particularly small retail investors, do not currently understand the increased business risk facing electric utilities due to competitive pressures, the threat of lower prices to customers, and the threat of \"regulated competition\". As a result, some equity analysts believe that electric utility stock prices were driven upwards to near record market to book levels by investors seeking higher yields during a period of lower interest rates without full recognition of the changed risks in the industry. Similar to S&P's analysis of fixed income securities, Energy believes that many equity analysts are now basing their buy-sell equity recommendations for electric utility stocks, in large part, on (i) the price position of the utility relative to neighboring competition, (ii) the elasticity of the current customer make-up, particularly industrial, (iii) the response of state regulators to competitive issues, and (iv) the aggressiveness of management in \"inventing its own future\".\nEnergy believes it is well positioned to succeed in the increasingly competitive environment. Energy's favorable competitive position is a result of and\/or will be enhanced by:\n. The consummation of the merger with CG&E which will combine two low cost providers of electric energy and provide substantial competitive benefits and opportunities;\n. Energy's demonstrated ability to be a low cost producer of electric energy. Energy has consistently held operating cost increases below inflation and has current average retail rates below 1983 levels. This low cost position is further illustrated in a December 1993 report (using 1992 data) by Bear, Stearns & Co., Inc. which listed Energy as the third lowest cost (fixed plus variable production costs) provider of generation among 28 utilities in the North Central Region of the U.S. Additionally, in a May 1993 study (using 1992 data) by Regulatory Research Associates, Inc. (RRA) of 135 major investor-owned operating utilities and holding companies, Energy's average industrial rate of 3.5 cents per kwh was approximately 30% lower than the national average industrial rate of 5.1 cents per kwh. This same study also indicated that the average rate for Energy's retail customers of 4.6 cents per kwh was at least 35% below the national average of 7.1 cents per kwh, and lower than at least 85% of the companies included in the study. Further, Energy's average industrial and retail rates were both at least 15% below the North Central Region of the U.S. average rates derived from the data relating to these utilities included in the May 1993 RRA report;\n. Management's focus on flexible strategies which are directed toward reducing its cost structure and reducing operating leverage, in part, by shifting the cost mix from fixed to variable. For example, Energy is actively enforcing its rights under its existing coal contracts, litigating where necessary, in order to significantly lower fuel costs. Energy has also recently received approval of its emission allowance banking strategy, which is expected not only to substantially reduce Energy's future cost structure and capital outlays, but also to greatly enhance its flexibility to meet future energy needs and environmental requirements. Additionally, Energy intends to purchase power to defer the construction of new generation which will likely be further deferred if the merger with CG&E is consummated; and\n. Energy's success at creating customer value, as demonstrated by customer satisfaction levels at the top of a peer group of 16 electric and combination electric and gas utilities. This success was further demonstrated during 1993 as several mayors and leaders of communities within Energy's service territory, including over 30 economic development organizations across Energy's service territory and eight Indiana environmental groups, actively supported Energy in its response to IPALCO Enterprises, Inc.'s (IPALCO) hostile takeover attempt, as the electric utility of choice to serve their communities.\nEnergy further believes its low cost position and strategic initiatives will allow it to maintain, and perhaps expand, its wholesale market share and its current base of industrial customers. Sales to industrial customers represented approximately 28% of Energy's 1993 total operating revenues.\nDuring the fourth quarter of 1993, S&P, using its revised benchmarks for rating electric utility senior securities, placed Energy in an above average business position. At the same time, certain sell-side equity analysts placed Energy near the top of their lists of those best equipped to handle increasing competitive pressures. Energy believes that the reaction of these equity analysts and the stock market in 1993 supports its position that its competitive strategy will be successful. According to a January 1994 edition of Electric Utility Week, the 32.5% increase in Resources' stock price was the third highest of the 105 utilities studied, while the group as a whole averaged only a 5.5% gain over 1992.\nIncreasing competitive pressures, and the regulatory response thereto, may ultimately result in some electric utilities being unable to continue their current basis of accounting. The basis of accounting currently followed by most regulated electric utilities is based on the premise that customer rates authorized by regulators are cost based and that a utility will be able to charge and collect rates based on its costs. To the extent regulators no longer provide assurances for recovery of a utility's costs or the marketplace does not allow the pricing necessary to fully recover costs, a regulated utility could be required to prepare its financial statements on the same basis as enterprises in general for all or some portion of its business. Energy believes its low cost position and competitive strategy, combined with its current regulatory environment, would mitigate the potentially adverse effects of such changes.\nSecurities Ratings\nThe current ratings of Energy's senior securities reflect the risk associated with the costs of achieving compliance with environmental laws and regulations. However, Duff & Phelps, Fitch Investors Service, and S&P continue to place Energy's debt ratings on review for possible upgrade primarily as a result of the announced merger with CG&E. The ratings are currently as follows:\nFirst Mortgage Bonds and Secured Preferred Medium-term Notes Stock Duff & Phelps BBB+ BBB Fitch Investors Service BBB+ BBB Moody's Baa1 baa2 Standard & Poor's BBB+ BBB\nThese securities ratings may be revised or withdrawn at any time, and each rating should be evaluated independently of any other rating.\nSignificant Achievements\nThe following events during 1993 indicate Energy's progress towards achieving its financial objectives:\n. The announced merger with CG&E, which was initiated in response to the changing competitive environment in the electric utility industry, was approved by shareholders of Resources and CG&E in November 1993 (see Merger Agreement with CG&E discussion beginning on page 17);\n. In October 1993, Resources' Board of Directors increased its quarterly common dividend 3 cents (10.7%), to 31 cents per share. This marks the fourth consecutive year in which the dividend has increased at a double-digit rate and is an integral part of the ongoing effort to strengthen and broaden the market for Resources' common stock. Future increases in Resources' common dividend will continue to be influenced by Energy's financial condition (see Dividend Restrictions discussion on page 32). Resources currently has an effective shelf registration statement for the sale of up to eight million shares of common stock;\n. The Indiana Utility Regulatory Commission (IURC) issued an order approving Energy's plan for complying with Phase I of the acid rain provisions of the Clean Air Act Amendments of 1990 (CAAA) and Energy's emission allowance banking strategy (see Regulatory Matters and Capital Needs discussions beginning on pages 20 and 23, respectively);\n. Energy filed testimony with the IURC in support of a $103 million, 11.6% retail rate increase. This testimony also includes proposals for certain innovative ratemaking mechanisms designed to reduce business and regulatory risks over the next three years (see Regulatory Matters discussion beginning on page 20);\n. In accordance with a January 1993 IURC order, Energy implemented accounting changes on certain major capital projects to offset the effects of regulatory lag, i.e., earnings attrition. These accounting changes favorably affected 1993 earnings by approximately $7 million. Energy's current retail rate proceeding includes a proposal to continue this accounting treatment for certain major capital projects (see Regulatory Matters discussion beginning on page 20);\n. Energy refinanced $223 million of long-term debt and preferred stock to take advantage of lower interest and dividend rates. Energy expects to save approximately $4 million in annualized interest and preferred stock dividends as a result of these refinancings; and\n. The IURC approved a settlement agreement which resolved outstanding issues related to the IURC's April 1990 rate order (April 1990 Order) and June 1987 tax order (June 1987 Order) (see Regulatory Matters discussion beginning on page 20). Although this settlement resulted in a significant customer refund, it resolved major uncertainties with respect to Energy's financial condition.\nRecent Developments\nMerger Agreement with CG&E\nGeneral Resources, Energy, and CG&E entered into an Agreement and Plan of Reorganization dated as of December 11, 1992, which was subsequently amended and restated on July 2, 1993, and as of September 10, 1993 (as amended and restated, the \"Merger Agreement\"). Under the Merger Agreement, Resources will be merged with and into a newly formed corporation named CINergy Corp. (CINergy) and a subsidiary of CINergy will be merged with and into CG&E (\"CG&E Merger\", collectively referred to as the \"Mergers\"). Following the Mergers, CINergy will be the parent holding company of Energy and CG&E and will be required to register under the PUHCA. The combined entity will be the 13th largest investor-owned electric utility in the nation, based on generating capacity, and will serve approximately 1.3 million electric customers and 420,000 gas customers in a 25,000-square-mile area of Indiana, Ohio, and Kentucky. See the discussion under \"Shareholder and Regulatory Approvals\" for information concerning the possible divestiture of CG&E's gas operations as a consequence of the Mergers. Customer revenue requirement savings as a result of the Mergers are estimated to be approximately $1.5 billion over the first 10 years. These savings are expected to include the elimination or deferral of certain capital expenditures and a reduction in production, administrative, and financing costs.\nThe Merger Agreement can be terminated by any party, without financial penalty, if the Mergers are not consummated by June 30, 1994. Under certain circumstances, the termination of the Merger Agreement would result in the payment of termination fees, which may not exceed $70 million, if Resources is required to pay, or $130 million, if CG&E is required to pay.\nExchange Ratio The Merger Agreement provides that, upon consummation of the Mergers, each outstanding share of common stock of Resources will be converted into the right to receive not less than .909 nor more than 1.023 shares of common stock of CINergy depending on certain closing sales prices of the common stock of CG&E during a period prior to the consummation of the Mergers. The Merger Agreement also provides that, upon consummation of the Mergers, each outstanding share of common stock of CG&E will be converted into the right to receive one share of common stock of CINergy. The outstanding preferred stock and debt securities of Energy and CG&E will not be affected.\nShareholder and Regulatory Approvals In November 1993, the Mergers were approved by the shareholders of Resources and CG&E. In August 1993, the FERC conditionally approved the Mergers. This conditional approval was made by the FERC without a formal hearing and, according to public statements by the FERC Commissioners, was done in reliance, in part, on the FERC's belief that the regulatory commissions of the affected states would have authority to approve or disapprove the Mergers. The companies accepted the FERC's conditions and indicated their belief that none of the conditions would have a material adverse effect on the operations, financial condition, or business prospects of CINergy. Certain parties petitioned for rehearing of the FERC's conditional approval. On September 15, 1993, Energy and CG&E filed a statement with the FERC clarifying their conclusions at that time that the Mergers would not require any prior approval of a state commission under state law. Given the issues raised on the requests for rehearing and the lack of certainty in the record regarding state regulatory powers, on January 12, 1994, the FERC issued an order withdrawing its prior conditional approval of the Mergers and initiating a 60-day, FERC-sponsored settlement procedure. The settlement procedure is expected to be concluded prior to the end of March 1994. The FERC has indicated that, if the settlement procedure is not successful, it intends to issue a further order setting appropriate issues for hearing.\nThe companies are currently participating in a collaborative process with representatives from the IURC, the Public Utilities Commission of Ohio, various consumer groups, and other parties to settle all merger-related issues. Discussions have also taken place with representatives of the Kentucky Public Service Commission (KPSC) regarding merger-related issues at the FERC. In conjunction with the FERC-sponsored settlement procedure, on February 11, 1994, Energy filed a petition with the IURC requesting approval of various proposals regarding state regulation after consummation of the Mergers. These proposals do not address the allocation between shareholders and customers of projected revenue requirement savings as a result of the Mergers. This allocation will be the subject of a subsequent IURC proceeding.\nIn connection with the 60-day, FERC-sponsored settlement procedure and the collaborative process, Resources, Energy, CINergy, the Indiana Utility Consumer Counselor, the Citizens Action Coalition of Indiana, Inc., and industrial customer representatives reached a global settlement agreement on merger-related issues. This agreement was filed with the IURC on March 2, 1994, and is expressly conditioned upon approval by the IURC in its entirety and without any change or condition that is unacceptable to any party. On March 4, 1994, CG&E, the Public Utilities Commission of Ohio, and the Ohio Office of Consumers Counsel reached an agreement substantially similar to the Indiana agreement. Both settlement agreements were filed with the FERC on March 4, 1994. Energy expects the FERC settlement judge to forward the settlements to FERC Commissioners on or about March 21, 1994, beginning what is normally a 30-day comment period. The Indiana settlement addresses, among other things, the coordination of state and Federal regulation, the operation of the combined Energy and CG&E electric utility system, the allocation of costs and their effect on customer rates, and a retail \"hold harmless\" provision that provides that Energy's retail rates will not reflect merger- related costs to the extent that they are not offset entirely by merger- related benefits.\nIURC hearings on the Indiana settlement were held on March 17, 1994. Energy has asked the IURC for an order approving the settlement agreement by early April 1994, which should fall within the expected comment period at the FERC.\nCG&E also filed with the FERC a unilateral offer of settlement addressing all issues raised in the KPSC's application for rehearing with the FERC. On March 15, 1994, CG&E filed an application with the KPSC seeking approval of the indirect acquisition of control of CG&E's Kentucky subsidiary, The Union Light, Heat and Power Company.\nAlso included in the filings with the FERC were settlement agreements with WVPA and the city of Hamilton, Ohio. These agreements resolve issues related to the transmission of power and operation of Energy's jointly owned transmission system. Negotiations with other parties at the FERC are continuing.\nEnergy and CG&E also filed with the FERC the operating agreement among Energy, CG&E, and CINergy Services, Inc., a subsidiary of CINergy. The parties to the Indiana and Ohio FERC settlements have agreed to support or not oppose the operating agreement, and the settlements are conditioned upon the FERC approving the filed operating agreement without material change.\nThe Mergers are also subject to the approval of the Securities and Exchange Commission (SEC) under the PUHCA. An application requesting such SEC approval is expected to be filed during the first quarter or early second quarter of 1994. The PUHCA imposes restrictions on the operations of registered holding company systems. Among these are requirements that securities issuances, sales and acquisitions of utility assets or of securities of utility companies, and acquisitions of interests in any other business be approved by the SEC. The PUHCA also limits the ability of registered holding companies to engage in non-utility ventures and regulates holding company system service companies and the rendering of services by holding company affiliates to the system's utilities. Also, under the PUHCA, the divestiture of CG&E's gas operations may be required. The companies believe they have a justifiable basis for retention of CG&E's gas operations and will request SEC approval to retain this portion of the business. Divestiture, if ordered, would occur after the consummation of the Mergers. Historically, the SEC has allowed companies sufficient time to accomplish divestitures in a manner that protects shareholder value, which, in some cases, has been 10 to 20 years.\nThe companies' goal is to consummate the Mergers during the third quarter of 1994. However, if the settlement procedure is not successful and a hearing is convened by the FERC, the consummation of the Mergers would likely be further extended. There can be no assurance that the Mergers will be consummated.\nSee Notes 19, 20, and 21 beginning on page 61.\nIPALCO's Withdrawn Acquisition Offer\nOn March 15, 1993, IPALCO announced its intention to make an offer to exchange IPALCO common stock and cash for all of the outstanding shares of Resources' common stock (Exchange Offer). IPALCO also announced its intention to solicit proxies to vote (i) in favor of its slate of five nominees for the Board of Directors of Resources at Resources' 1993 Annual Meeting of Shareholders and (ii) against the merger with CG&E. On April 21, 1993, IPALCO commenced its Exchange Offer and also commenced solicitation of proxies. On August 23, 1993, at Resources' 1993 Annual Meeting of Shareholders, IPALCO announced that it had received insufficient proxies to elect its nominees to Resources' Board of Directors, and on that same date, terminated its Exchange Offer.\nOn October 27, 1993, Resources, Energy, CG&E, IPALCO, and other parties entered into a settlement agreement pursuant to which the parties agreed to settle all pending issues related to IPALCO's Exchange Offer. Among other things, the parties agreed, for a period of five years, to grant one another transmission access rights to other utilities, in certain circumstances, if those rights are required for one of the parties to obtain approval for a business combination with another utility. The parties would be fully compensated for any facilities made available. Energy currently has an open access tariff that allows other utilities to use its transmission facilities to deliver power, which it believes should be sufficient to satisfy this provision of the settlement agreement. The settlement agreement also provides that Indianapolis Power & Light (IP&L), IPALCO's principal subsidiary, will have the right to purchase power from Energy at current market prices. Energy has offered to sell IP&L up to 100 megawatts of power for each month in 1996 and up to 250 megawatts for each month in the years 1997 through 2000. The offer will remain open for one year, and if IP&L does not accept the offer, it will have a right of first refusal on the power for an additional six months.\nRegulatory Matters\nEnvironmental Order In 1992, Energy filed its plan for complying with Phase I of the acid rain provisions of the CAAA with the IURC. This filing was made pursuant to a state law enacted in 1991 which allows utilities to seek pre- approval of their compliance plans. In October 1993, the IURC issued an order approving Energy's Phase I compliance plan. The IURC's order also approved Energy's emission allowance banking strategy, which will afford Energy greater flexibility in developing its plan for complying with Phase II of the acid rain provisions of the CAAA. The IURC accepted Energy's proposal to annually review the implementation of its Phase I compliance plan and ordered a semi- annual review of Energy's emission allowance banking plan.\nEnergy had proposed innovative performance incentive mechanisms as part of its Phase I compliance plan and emission allowance banking strategy. In its post- hearing filing, Energy requested that the IURC defer consideration of such incentives to Energy's pending retail rate proceeding in which Energy has proposed modified environmental compliance incentives with respect to its emission allowance banking strategy.\nRate Case Energy filed testimony with the IURC in support of a $103 million, 11.6% retail rate increase. This rate proceeding addresses the financial and operating requirements of Energy on a \"stand-alone\" basis without consideration of the anticipated effects of the Mergers. Approximately 3.7% of the rate increase is needed to meet new environmental requirements, 6.6% is primarily needed to meet Energy's growing electric needs, including construction and operation of one combustion turbine generating unit and implementation of demand-side management (DSM) programs, and 1.3% of the increase is necessary for the recognition of postretirement benefits other than pensions on an accrual basis. Energy's petition for an increase in retail rates includes a \"performance efficiency plan\" which would allow Energy to retain all earnings up to a 12.5% common equity return and provide for sharing of common equity returns from 12.5% to 14.5% between shareholders and ratepayers depending upon Energy's performance on measures of customer prices, customer satisfaction, customer service reliability, equivalent availability of its generating units, and employee safety. All earnings above a 14.5% return on common equity would be returned to ratepayers. In addition, Energy is requesting approval of various ratemaking mechanisms to address regulatory lag on specific environmental and new generation projects to ensure that the interests of ratepayers and shareholders are properly aligned. One such mechanism includes capital costs associated with major environmental compliance projects and the applicable portion of its Wabash River clean coal project (Clean Coal Project) in rate base while the projects are under construction, as permitted by state law, thus allowing Energy to earn a cash return on these costs prior to the projects' in-service dates. Hearings are expected to begin in April 1994, and a final rate order is anticipated in late 1994 or early 1995. Energy cannot predict what action the IURC may take with respect to this proposed rate increase.\nSettlement Agreement In December 1993, the IURC issued an order (December 1993 Order) approving a settlement agreement entered into by Energy, the appellants, and certain other intervenors which resolved the outstanding issues related to the appeals of the IURC's April 1990 Order and June 1987 Order. At issue with respect to the April 1990 Order was whether the level of return on common equity allowed Energy was adequately supported by factual findings. The April 1990 Order had been remanded to the IURC by the Indiana Court of Appeals for further proceedings, including redetermination of the cost of equity and its components. The June 1987 Order, which related to the effect on Energy of the 1987 reduction in the Federal income tax rate, had been remanded to the IURC by the Indiana Supreme Court and was awaiting a final order from the IURC. The December 1993 Order provides for Energy to refund $150 million to its retail customers ($119 million applicable to the June 1987 Order and $31 million applicable to the April 1990 Order). The December 1993 Order further provides for Energy to reduce its retail rates by 1.5% (approximately $13.5 million on an annual basis) to reflect a return on common equity of 14.25%. The refunds and rate reduction commenced in December 1993 (see Note 3 beginning on page 45).\nEnergy had previously recognized a loss of $139 million for the June 1987 Order. The difference between the $139 million and the $119 million portion of the refund applicable to the June 1987 Order is reflected in the Consolidated Statement of Income for the year ended December 31, 1993, as a reduction of the loss. The $31 million portion of the refund applicable to the April 1990 Order is reflected in the Consolidated Statement of Income for the same period as a reduction in operating revenues.\nEnergy has an agreement through January 1996 to sell, with limited recourse, an undivided percentage interest in certain of its accounts receivable from customers up to a maximum of $90 million. The refund provided for by the December 1993 Order reduced Energy's accounts receivable available for sale and caused a termination event under the agreement governing the sale of accounts receivable. Due to the temporary nature of the event, Energy obtained a waiver of the termination event provision of the agreement as it relates to the refund (see Note 9 beginning on page 49).\nManufactured Gas Plants\nCoal tar residues and other substances associated with manufactured gas plant (MGP) sites have been found at former MGP sites in Indiana, including, but not limited to, two sites previously owned by Energy. Energy has identified at least 21 MGP sites which it previously owned, including 19 it sold in 1945 to Indiana Gas and Water Company, Inc. (now Indiana Gas Company [IGC]).\nIn April 1993, IGC filed testimony with the IURC seeking recovery of costs incurred in complying with Federal, state, and local environmental regulations related to MGP sites in which it has an interest, including sites acquired from Energy. In its testimony, IGC stated that it would also seek to recover a portion of these costs from other potentially responsible parties, including previous owners. The IURC has not ruled on IGC's petition.\nWith the exception of one site (Shelbyville), it is premature for Energy to predict the nature, extent, and costs of, or Energy's responsibility for, any environmental investigations and remediations which may be required at MGP sites owned, or previously owned, by Energy. With respect to the Shelbyville site, for which Energy and IGC are sharing the costs, based upon environmental investigations completed to date, Energy believes that any required investigation and remediation will not have a material adverse effect on its financial condition (see Note 15 beginning on page 58).\nOther Industry Issues\nGlobal Climate Change Concern has been expressed by environmentalists, scientists, and policymakers as to the potential climate change from increasing amounts of \"greenhouse\" gases released as by-products of burning fossil fuel and other industrial processes. In response to this concern, in October 1993, the Clinton Administration announced its plan to reduce greenhouse gases to 1990 levels by the year 2000. The plan calls for the reduction of 109 million metric tons of carbon equivalents of all greenhouse gases. Initially, the plan would rely largely on voluntary participation of many industries, with a substantial contribution expected from the utility industry. Numerous utilities, including Energy, have agreed to study voluntary, cost-effective emission reduction programs. Energy's voluntary participation would likely include its residential, commercial, and industrial DSM programs, increased use of natural gas in generation, and other energy efficiency improvements, and possibly other pollution prevention measures. The Clinton Administration has stated it will monitor the progress of industry to determine whether targeted reductions are being achieved. If the Clinton Administration or Congress should conclude that further reductions are needed, legislation requiring utilities to achieve additional reductions is possible.\nAir Toxics The air toxics provisions of the CAAA exempt fossil-fueled steam utility plants from mandatory reduction of 189 listed air toxics until the Environmental Protection Agency (EPA) completes a study on the risk of these emissions on public health. The EPA is not expected to complete its study until November 1995. If additional air toxics regulations are established, the cost of compliance could be significant. Energy cannot predict the outcome of this EPA study.\nFuture Outlook\nNotwithstanding the anticipated benefits from the timely consummation of the Mergers, further improvement in Energy's financial condition is largely dependent on:\n. Effectively responding to the increasing competitive pressures in the electric utility industry;\n. Effectively managing its substantial construction program and achieving favorable results from related regulatory proceedings, including the current retail rate proceeding;\n. Maintaining a regulatory climate that is responsive to and supportive of changes in the utility industry, including increased competition, business alliances, and the need to more closely align the economic interests of customers and shareholders through the application of incentive ratemaking, and more flexible pricing strategies; and\n. Successfully accessing financial markets for capital needs, including issuance by Resources of significant amounts of common stock (see Capital Resources discussion beginning on page 27).\nCAPITAL NEEDS\nConstruction\nEnergy's total construction expenditures over the 1994 to 1998 period are forecasted to be $1.1 billion, of which approximately $.8 billion is for capital improvements to, and expansion of, Energy's operating facilities, $.2 billion is for new generation, and $.1 billion is for environmental compliance. Total construction expenditures for 1993 and forecasted construction expenditures for the 1994 to 1997 period are approximately $.2 billion less than forecasted amounts for the same period reflected in Energy's 1992 Annual Report on Form 10-K, as amended. This reduction reflects continued aggressive management by Energy of its substantial construction program consistent with maintaining its competitive position and providing adequate and reliable service to its customers. (All forecasted amounts are in nominal dollars and reflect assumptions as to the economy, capital markets, construction program, legislative and regulatory actions, frequency and timing of rate increase requests, and other related factors which may be subject to significant change. In addition, forecasted construction expenditures do not reflect any consideration for the effects of the Mergers.)\nForecasted construction expenditures by year for new business, system reliability, new generation, environmental, and other projects are presented in the following table:\nEnvironmental\nThe acid rain provisions of the CAAA require reductions in both sulfur dioxide (SO2) and nitrogen oxide (NOx) emissions from utility sources. Reductions of both SO2 and NOx emissions will be accomplished in two phases. Compliance under Phase I affects Energy's four largest coal-fired generating stations and is required by January 1, 1995. Phase II includes all of Energy's existing power plants, and compliance is required by January 1, 2000.\nTo achieve the SO2 reduction objectives of the CAAA, SO2 emission allowances will be allocated by the EPA to affected sources. Each allowance permits one ton of SO2 emissions. Energy will receive approximately 277,000 of these emission allowances per year during Phase I. As one of the most affected utilities, Energy will also be entitled to approximately 35,000 \"midwestern\" bonus allowances per year from 1995 through 1999. In addition, as a member of the Utility Extension Allowance Pooling Group, a group composed of a majority of the affected utilities currently planning to use qualifying Phase I technologies, e.g., flue-gas desulfurization (scrubbers), Energy expects to receive approximately 150,000 allowances during the Phase I period. The CAAA allows compliance to be achieved on a national level, which provides companies the option to achieve compliance by reducing emissions or purchasing emission allowances.\nThe Chicago Board of Trade (CBOT) was authorized to establish a futures- options market, and the CBOT also plans to administer a cash market in emission allowances. In addition, the CBOT will administer the EPA's annual auction and direct sales of emission allowances. In March 1993, the first annual auction of emission allowances was held. The EPA provided 150,000 allowances for this auction with the intent of stimulating the allowance trading market. The allowances provided by the EPA for auction become useable in either the year 1995 or 2000. The average price paid at the auction for an allowance first useable in 1995 was $156, with prices ranging from $131 to $450. Energy purchased 10,000 of these allowances for $150 each. The prices paid at the auction for an allowance first useable in the year 2000 ranged from $122 to $310 with an average of $136. The availability and economic value of allowances in the long-term is still uncertain.\nAs previously discussed, in October 1993, the IURC issued an order approving Energy's Phase I compliance plan and emission allowance banking strategy. To comply with Phase I of the CAAA SO2 requirements, Energy will have to reduce SO2 emissions by approximately 34% (based on an approximate 334,000 ton annual target) from 1991 levels or acquire offsetting emission allowances. Energy's compliance plan for the Phase I SO2 reduction requirements includes the addition of one scrubber at Gibson Unit 4 by late 1994, installation of flue- gas conditioning equipment on certain units, upgrading certain precipitators, implementation of its DSM programs, burning lower-sulfur coal at its four major coal-fired generating stations, and inclusion of the value of emission allowances in the economic dispatch process. To meet NOx reductions required by Phase I, Energy is installing low-NOx burners on affected units at these same stations. Energy's capital expenditures for Phase I compliance projects totaled approximately $290 million through December 31, 1993. In addition, the successful operation of Energy's Clean Coal Project will further reduce SO2 and NOx emissions (see New Generation discussion on page 26).\nTo comply with Phase II SO2 requirements, Energy must reduce SO2 emissions an additional 38% from 1991 levels (based on an approximate 143,000 ton annual cap) or acquire offsetting emission allowances. Own-system compliance alternatives could include additional scrubbers, use of western and midwestern coal blends, installation of precipitators, and installation of flue-gas conditioning equipment. Energy is evaluating these alternatives in order to provide the most cost-effective strategy for meeting Phase II SO2 requirements while maintaining optimal flexibility to meet potentially significant new environmental demands. To meet NOx reductions required by Phase II, Energy plans to install low-NOx burners on affected units. Energy anticipates filing its Phase II plan with the IURC as early as the fourth quarter of 1994.\nEnergy's implementation of its emission allowance banking strategy is a critical component of maintaining optimal flexibility in its Phase II compliance plan. In order to delay or eliminate own-system compliance alternatives, which could be significantly more costly, Energy intends to utilize its emission allowance banking strategy to the extent a viable emission allowance market is available. Energy is forecasting environmental compliance expenditures to meet the acid rain provisions of the CAAA ranging from $.6 billion to $1.2 billion during the 1994 to 2005 period. Energy's Phase I plan is expected to result in banked emission allowances by the year 2000 sufficient to meet its Phase II SO2 requirements for approximately three years. The low-end of the capital costs range assumes that Energy achieves Phase II compliance primarily by purchasing additional emission allowances and continuing to delay, or eliminate, capital intensive alternatives. However, as previously stated, the availability and economic value of emission allowances in the long-term is still uncertain. As such, the high-end of the range assumes that Energy is forced to achieve compliance through the own- system compliance alternatives previously discussed.\nNew Generation\nIn 1992, the United States Department of Energy (DOE) approved for partial funding a joint proposal by Energy and Destec Energy, Inc. (Destec) for a 262- megawatt clean coal power generating facility to be located at Energy's Wabash River Generating Station. In May 1993, the IURC issued \"certificates of need\" for the project. The total project cost, including construction, Destec's operating costs for a three-year demonstration period, and Energy's operating costs for a one-year demonstration period, is estimated to be $550 million. The DOE awarded the project up to $198 million. Of this amount, Energy will receive approximately $53 million to be used to offset project costs. The remainder of the project costs will be funded by Energy and Destec, with Energy's portion being approximately $108 million. The project is currently under construction and the three-year demonstration period of the project is expected to commence in the third quarter of 1995.\nIn 1992, the IURC issued certificates of need to Energy for the construction of two 100-megawatt combustion turbine generating units adjacent to its Cayuga Generating Station. The first unit went into service in June 1993. Energy intends to defer the second unit until 1996 and will purchase power during the interim period.\nOther\nMandatory redemptions of long-term debt total $97 million during the 1994 to 1998 period (see Note 8 on page 49). Additionally, funds are required to make a payment of $80 million in accordance with the settlement of the Wabash Valley Power Association, Inc. (WVPA) litigation. This payment is not currently expected to occur before 1995 (see Note 2 beginning on page 43).\nSince 1990, Energy has focused its marketing efforts on the aggressive implementation of various DSM programs. DSM generally refers to actions taken by a utility to affect customers' energy usage patterns. DSM programs are evaluated on an \"equal footing\" with supply-side options, with the goal of deferring the need for new generating capacity. The expenditures for these programs over the next five years are forecasted to be approximately $185 million. It is anticipated that these expenditures will result in a summer peak demand reduction of 236 megawatts by 1998, of which approximately 77 megawatts have already been achieved. The IURC has authorized Energy to defer DSM expenditures, with carrying costs, for subsequent recovery through rates. In its current retail rate proceeding, Energy has proposed to amortize and recover amounts deferred through July 1993 ($35 million), together with carrying costs, over a four-year period commencing with the effective date of the IURC's order in the current retail rate proceeding. Deferred DSM costs as of the effective date of an order in Energy's current retail rate proceeding, which are not included for recovery in the current proceeding, will continue to be deferred, with carrying costs, for recovery in subsequent rate proceedings. In addition, Energy has proposed the recovery of approximately $23 million of DSM expenditures in base rates on an annual basis. Energy has also requested that the IURC approve the deferral of reasonably incurred DSM expenditures which exceed the base level of $23 million.\nCAPITAL RESOURCES\nCash flows from operations are forecasted to provide approximately 70% of the capital needs during the 1994 to 1998 period. External funds required during this period are estimated to be $.6 billion. (All forecasted amounts are in nominal dollars and reflect assumptions as to the economy, capital markets, construction program, legislative and regulatory actions, frequency and timing of rate increase requests, and other related factors which may be subject to significant change. In addition, forecasted cash flows from operations do not reflect any consideration for the effects of the Mergers.)\nInternal Cash Flows\nOver the next several years, Energy's internal cash flows are heavily dependent upon timely retail rate relief and obtaining the related requested modifications to traditional regulation. Integral to this effort is Energy's success in controlling its costs, obtaining performance based regulatory incentives, and securing alternative measures where necessary that allow for ultimate, although deferred, recovery of its costs, including a return to investors. This is especially important during the next three years when Energy's substantial construction program creates potentially significant regulatory lag (i.e., scheduling of capital investment projects cannot be fully synchronized with rate case timing). As previously discussed, Energy has filed testimony with the IURC in support of a $103 million, 11.6% retail rate increase. Approximately 10.3% of the pending rate increase request is needed to meet new environmental requirements and Energy's growing electric needs. Energy is also requesting approval of ratemaking mechanisms to provide more timely recovery of the costs associated with environmental and new generation projects. One such mechanism includes capital costs associated with major environmental compliance projects and the applicable portion of its Clean Coal Project in rate base, while the projects are under construction, as permitted by state law, thus allowing Energy to earn a cash return on these costs prior to the projects' in-service dates. The IURC's ruling in this proceeding is anticipated in late 1994 or early 1995.\nWhere the adverse effects on earnings and cash flows cannot be mitigated by rate relief, Energy is further addressing the issue of regulatory lag through accounting and ratemaking mechanisms that align the interests of customers and shareholders. In January 1993, Energy received authority from the IURC to continue accrual of the debt component of the allowance for funds used during construction (AFUDC) and to defer depreciation expense on its planned combustion turbine generating units and major environmental compliance projects from the respective in-service dates until the effective date of an order in its current retail rate proceeding. Energy has requested similar accounting treatment to mitigate regulatory lag in its current retail rate proceeding.\nEnergy's construction program will require rate relief during the next three years in addition to the current petition. Specifically, Energy expects to file for additional rate relief, primarily to reflect the costs of the Gibson Unit 4 scrubber, the Clean Coal Project, and potentially two additional combustion turbine generating units in rates. All of the major projects (Phase I environmental compliance, the Clean Coal Project, and one of the two combustion turbines) creating the need for retail rate relief have received pre-approval from the IURC for construction. Pre-approval of the second combustion turbine generating unit would be required before commencement of the project. Given its current low cost position, Energy believes that these rate increases, while significant, will not prevent it from maintaining competitive rates over the long-term.\nCash flows will be adversely affected by the $150 million refund resulting from the December 1993 Order, which will be partially offset by tax refunds in 1994 of approximately $29 million to realize the remaining tax consequences of the refund.\nExternal Financing\nEnergy currently has IURC authority to issue up to an additional $428 million of long-term debt and $40 million of preferred stock. Energy will request regulatory approval to issue additional amounts of debt securities and preferred stock on an as needed basis. As of December 31, 1993, Energy has effective shelf registration statements for the sale of up to $315 million of debt securities and $40 million of preferred stock. In addition, as of December 31, 1993, Resources has an effective shelf registration statement for the sale of up to eight million shares of Resources' common stock. A public offering of Resources' common stock is expected to occur by mid-1994. The net proceeds from the issuance and sale of this common stock will be used by Resources to reduce its short-term indebtedness, with the balance contributed to the equity capital of Energy. Energy will use this contributed capital for general purposes, including construction expenditures.\nEnergy has regulatory authority to borrow up to $200 million under short-term credit arrangements. In connection with this authority, Energy has unsecured, but committed, lines of credit (Committed Lines) which currently permit borrowings of up to $155 million. In addition, Energy has temporary Committed Lines of $15 million. As of December 31, 1993, Energy had $111 million outstanding under these short-term borrowing arrangements. Energy also has Board of Directors approval to arrange for additional short-term borrowings of up to $100 million with various banks (Uncommitted Lines). The Uncommitted Lines are on an \"as offered\" basis with such banks. Under these arrangements, $16 million was outstanding as of December 31, 1993 (see Note 12 beginning on page 53).\nEnergy believes its current borrowing capacity and Resources' planned common stock issuance will be sufficient to meet short-term cash needs.\nRESULTS OF OPERATIONS\nKilowatt-hour Sales\nNew customers and a return to more normal weather contributed to the 4% increase in total kwh sales in 1993, as compared to 1992. In addition, growth in the primary metals, transportation equipment, and precision instruments, photographic and optical goods sectors resulted in increased industrial sales. Partially offsetting these increases was a reduction in non-firm power sales for resale, which reflected a significant decrease in sales associated with third party short-term power to other utilities through Energy's system.\nThe reduction of sales for resale in 1992 was largely responsible for a 5% decrease in total kwh sales, as compared to 1991. Reflected in this decrease was the reduction of firm power sales to WVPA and the Indiana Municipal Power Agency (IMPA) as they served more of their customers' requirements from their portion of the jointly owned Gibson Unit 5. This resulted from the final (January 1, 1992) scheduled reduction and elimination of Energy's purchase obligations from WVPA and IMPA under the Gibson Unit 5 joint ownership arrangement. In addition, beginning August 1, 1992, WVPA substantially reduced its purchases associated with an interim scheduled power agreement between Energy and WVPA. Non-firm power sales also decreased, partially reflecting a reduction in sales associated with third party short-term power sales to other utilities through Energy's system. The decrease in domestic and commercial sales due to the milder weather experienced in 1992 was offset, in part, by continued growth in industrial sales.\nSales increases in 1991 were primarily related to higher sales to retail customers. Specifically, unusually hot temperatures experienced during the second and third quarters of 1991 contributed to increased sales to domestic and commercial customers, whereas industrial sales increased, in part, due to continued growth in production at Nucor Steel. Partially offsetting these increases were decreased sales for resale due to reduced sales to WVPA and IMPA. They served more of their customers' requirements from their portion of the jointly owned Gibson Unit 5 as a consequence of a scheduled (January 1, 1991) reduction (from 156 megawatts to 78 megawatts) in Energy's purchase obligations from WVPA and IMPA under the Gibson Unit 5 joint ownership arrangement.\nYear-to-year changes in kwh sales for each class of customer are shown below:\nEnergy currently forecasts a 2% annual compound growth rate in kwh sales over the 1994 to 2003 period. This forecast excludes non-firm power transactions and any potential long-term firm power sales at market-based prices.\nRevenues\nRevenues in 1993 remained relatively unchanged, reflecting increased kwh sales which were substantially offset by the $31 million refund resulting from the settlement of the April 1990 Order (see Note 3 beginning on page 45) and the effects of lower fuel costs.\nTotal operating revenues decreased $48 million (4%) in 1992, as compared to 1991, primarily as a result of the lower kwh sales previously discussed.\nIn 1991, revenues increased $14 million (1%). The increases realized from kwh sales were partially offset by the effects of the April 1990 (4.25%) retail rate reduction.\nAn analysis of operating revenues for the past three years is shown below:\nOperating Expenses\nFuel\nFuel costs, Energy's largest operating expense, decreased $6 million (2%) in 1993. This decrease reflects Energy's continuing efforts to reduce the unit cost of fuel, which include increased purchases in the spot market and realized benefits from price reopener provisions of existing contracts. The following is an analysis of fuel costs for the past three years:\nPurchased and Exchanged Power\nIn 1993, Energy increased its purchases of non-firm power primarily to serve its own load, which resulted in an increase in purchased and exchanged power of $11 million (77%), as compared to 1992.\nPurchased and exchanged power decreased $40 million (74%) in 1992, as compared to 1991, reflecting the reduction in third party short-term power sales to other utilities through Energy's system and the scheduled reduction in Energy's purchase obligations from WVPA and IMPA under the Gibson Unit 5 joint ownership arrangement, as previously discussed.\nOther Operation and Maintenance\nCharges in 1991 for the incremental non-capital portion ($5 million) of the costs associated with a severe ice and wind storm primarily attributed to the $8 million (3%) decrease in 1992, as compared to 1991.\nThe incremental non-capital portion ($5 million) of storm damage repair costs described above and general inflationary effects on operating costs contributed to other operation and maintenance expenses increasing $15 million (6%) in 1991.\nDepreciation\nAdditions to electric utility plant led to increases in depreciation expense of $10 million (8%) in 1993 and $6 million (5%) in 1992, when compared to each of the prior years.\nIn 1991, depreciation expense increased $9 million (8%) primarily reflecting additional plant ($7 million) and a full year's effect of the May 1990 revision in depreciation rates ($2 million), following approval by the IURC in its April 1990 Order.\nOther Income and Expense - Net\nOther income and expense, excluding the effects of the loss related to the IURC's June 1987 Order, increased $6 million in 1993, as compared to 1992. This increase was due, in part, to the implementation of the January 1993 IURC order authorizing the accrual of post-in-service carrying costs (see Note 1 beginning on page 42). In addition, the equity component of AFUDC increased primarily as a result of increased construction.\nInterest and Preferred Dividends\nIncreased borrowings and accrued interest of $4 million in connection with the loss related to the IURC's June 1987 Order resulted in increased interest and preferred dividends of $7 million (10%) in 1992, as compared to 1991.\nACCOUNTING CHANGES\nIn 1992, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 112, Employers' Accounting for Postemployment Benefits (Statement 112). Statement 112 establishes accounting standards for the costs of benefits provided to former or inactive employees, including their beneficiaries and dependents, after employment but before retirement. Under the provisions of Statement 112, the costs of these benefits will be recognized for accounting purposes when the employees or their beneficiaries become eligible for such benefits (accrual basis) rather than when such benefits are paid, which is Energy's current practice. Energy's unrecognized and unfunded obligation for these benefits (the transition obligation) as of September 30, 1993, measured in accordance with the new accounting standard, is $8.5 million. The new standard requires immediate recognition of the transition obligation at the date the new standard is adopted. Energy is required to adopt Statement 112 effective January 1, 1994. In connection with its current retail rate proceeding, Energy has requested deferral of the transition obligation for recovery over a reasonable period of time beginning with an order in its next retail rate proceeding.\nINFLATION\nIn a capital-intensive business such as the utility industry, inflation causes the internal generation of funds to be inadequate to replace and add to productive facilities. Depreciation, based on the original cost of property, does not adequately reflect the current cost of plant and equipment consumed during the year. Accounting based on historical cost does not recognize this economic loss nor the partially offsetting gain that arises through financing facilities with fixed-rate obligations such as long-term debt and preferred stock. Under the ratemaking prescribed by regulatory bodies, depreciation expense recoverable through Energy's rates is based on historical cost. Consequently, cash flows are inadequate to replace property in future years or preserve the purchasing power of common equity capital previously invested. As a result, the common shareholder may experience a significant net purchasing power loss under inflationary conditions.\nDIVIDEND RESTRICTIONS\nSee Note 6 on page 48 for a discussion of the restrictions on common dividends.\nIndex to Financial Statements and Financial Statement Schedules\nPage Number Financial Statements\nReport of Independent Public Accountants. . . . . . . . . 34-35 Consolidated Statements of Income for the three years ended December 31, 1993 . . . . . . . . . . 36 Consolidated Balance Sheets at December 31, 1993 and 1992. . . . . . . . . . . . . . . 37-38 Consolidated Statements of Changes in Common Stock Equity for the three years ended December 31, 1993 . . . . . . . . . . . . . . . . 39 Consolidated Statements of Cash Flows for the three years ended December 31, 1993 . . . . . . 40 Cumulative Preferred Stock. . . . . . . . . . . . . . . . 41 Long-term Debt. . . . . . . . . . . . . . . . . . . . . . 41 Notes to Consolidated Financial Statements. . . . . . . . 42-66\nPage Number Financial Statement Schedules\nSchedule V - Electric Utility Plant . . . . . . . . . . . 79-81 Schedule VI - Accumulated Depreciation. . . . . . . . . . 82-84 Schedule VIII - Valuation and Qualifying Accounts . . . . 85-87\nThe information required to be submitted in schedules other than those indicated above has been included in the consolidated balance sheets, the consolidated statements of income, related schedules, the notes thereto or omitted as not required by the Rules of Regulation S-X.\nITEM 8.","section_7A":"","section_8":"ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA\nREPORT OF INDEPENDENT PUBLIC ACCOUNTANTS\nTo the Board of Directors of PSI Energy, Inc.:\nWe have audited the consolidated balance sheets of PSI Energy, Inc. (Energy) (a wholly owned subsidiary of PSI Resources, Inc.) and subsidiary as of December 31, 1993 and 1992, and the related consolidated statements of income, changes in common stock equity and cash flows for each of the three years in the period ended December 31, 1993. These financial statements are the responsibility of the management of Energy. Our responsibility is to express an opinion on these financial statements based on our audits.\nWe conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.\nIn our opinion, the financial statements referred to above present fairly in all material respects, the financial position of Energy and subsidiary as of December 31, 1993 and 1992, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1993, in conformity with generally accepted accounting principles.\nAs more fully discussed in Note 2, Wabash Valley Power Association, Inc. (WVPA) filed suit against Energy for $478 million plus interest and other damages to recover its share of Marble Hill Nuclear Project (Marble Hill) costs. The suit was amended to include as defendants several officers of Energy and certain other parties, and to allege claims under the Racketeer Influenced and Corrupt Organizations Act, which would permit trebling of damages and assessment of attorneys' fees. The suit was further amended to add claims of common law fraud, constructive fraud and deceit and negligent misrepresentation against Energy and the other defendants. Energy and its officers have reached a settlement with WVPA that is subject to the approval of judicial and regulatory authorities and has recorded an estimated loss related to the litigation. The eventual outcome of this litigation cannot presently be determined.\nAs more fully discussed in Notes 11 and 14, effective January 1, 1993, Energy implemented the provisions of Statements of Financial Accounting Standards Nos. 106, \"Employers' Accounting for Postretirement Benefits Other Than Pensions\" and 109, \"Accounting for Income Taxes.\"\nOur audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedules listed in the index on page 33 are presented for purposes of complying with the Securities and Exchange Commission's rules and are not a required part of the basic financial statements. These schedules have been subjected to the auditing procedures applied in our audit of the basic financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.\nARTHUR ANDERSEN & CO. Indianapolis, Indiana, February 22, 1994.\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS\n1. Summary of Significant Accounting Policies\n(a) Consolidation Policy PSI Energy, Inc. (Energy) is a wholly-owned subsidiary of PSI Resources, Inc. (Resources). The accompanying Consolidated Financial Statements include the accounts of Energy and its subsidiary, PSI Energy Argentina, Inc., after elimination of intercompany transactions and balances.\n(b) Regulation Energy is subject to regulation by the Indiana Utility Regulatory Commission (IURC) and the Federal Energy Regulatory Commission (FERC). Energy's accounting policies conform to generally accepted accounting principles, as applied to regulated public utilities, and to the accounting requirements and ratemaking practices of these regulatory authorities.\n(c) Electric Utility Plant, Depreciation, and Maintenance Substantially all electric utility plant is subject to the lien of Energy's first mortgage bond indenture (Indenture).\nConstruction work in progress is charged with a proportionate share of overhead costs. Construction overhead costs include salaries, payroll taxes, fringe benefits, and other expenses. Energy capitalizes an allowance for funds used during construction (AFUDC), an item not representing cash income, which is defined in the regulatory system of accounts prescribed by the FERC as the cost of capital used for construction purposes. The AFUDC rate was 9.5% in 1993, 8.5% in 1992, and 12.0% in 1991, and is compounded semi- annually.\nEnergy's provision for depreciation is determined by using the straight-line method applied to the cost of depreciable plant in service. The composite depreciation rate was 3.8% per year during 1991 to 1993.\nIn January 1993, Energy received authority from the IURC to continue accrual of the debt component of AFUDC (post-in-service carrying costs) and to defer depreciation expense (post-in-service deferred depreciation) on its planned combustion turbine generating units and major environmental compliance projects from the date the projects are placed in service until the effective date of an order in Energy's current retail rate proceeding. This proceeding includes a request for authorization to recover a portion of these deferrals and to continue similar accounting treatment on these projects until an order in Energy's next retail rate proceeding.\nMaintenance and repairs of property units and replacements of minor items of property are charged to maintenance expense. The costs of replacements of property units are capitalized. The original cost of the property retired and the related cost of removal, less salvage recovered, are charged to accumulated depreciation.\n(d) Federal and State Income Taxes Deferred tax assets and liabilities are recognized for the expected future tax consequences of existing differences between the financial reporting and tax reporting bases of assets and liabilities. Investment tax credits utilized to reduce Federal income taxes payable have been deferred for financial reporting purposes and are being amortized over the useful lives of the property which gave rise to such credits.\n(e) Operating Revenues and Fuel Costs Energy records revenues each period for energy delivered during the period.\nRevenues reflect fuel cost charges based on the actual costs of fuel. Fuel cost charges applicable to all of Energy's metered kilowatt-hour sales are included in customer billings based on the estimated costs of fuel. Customer bills are adjusted in subsequent months to reflect the difference between actual and estimated costs of fuel. Indiana law subjects the recovery of fuel costs to a determination that such recovery will not result in earning a return in excess of that allowed by the IURC in its last general rate order.\n(f) Debt Discount, Premium, and Issuance Expense and Costs of Reacquiring Debt Debt discount, premium, and issuance expense on Energy's outstanding long-term debt are amortized over the lives of the respective issues.\nEnergy defers costs (principally call premiums) arising from the reacquisition of long-term debt and amortizes such amounts over the remaining life of the debt reacquired.\n(g) Consolidated Statements of Cash Flows All temporary cash investments with maturities of three months or less, when acquired, are reported as cash equivalents. Energy and its subsidiary had no material non-cash investing or financing transactions during the years 1991 to 1993.\n(h) Reclassification Certain amounts in the 1991 and 1992 Consolidated Financial Statements have been reclassified to conform to the 1993 presentation.\n2. WVPA Litigation\nIn February 1984, Wabash Valley Power Association, Inc. (WVPA) discontinued payments to Energy for its 17% share of Marble Hill, a nuclear project jointly owned by Energy and WVPA which was cancelled by Energy in 1984, and filed suit against Energy in the United States District Court for the Southern District of Indiana (Indiana District Court), seeking $478 million plus interest and other damages to recover its Marble Hill costs. The suit was amended to include as defendants several officers of Energy along with certain contractors and their officers involved in the Marble Hill project, and to allege claims against all defendants under the Racketeer Influenced and Corrupt Organizations Act (RICO). Claims proven and damages allowed under RICO may be trebled and attorneys' fees assessed against the defendants. The suit was further amended to add claims of common law fraud, constructive fraud and deceit, and negligent misrepresentation against Energy and the other defendants.\nIn May 1985, WVPA filed for protection under Chapter 11 of the Federal Bank- ruptcy Code. Due to the Chapter 11 filing, Energy and WVPA entered into an agreement under which Energy agreed to place in escrow 17% of all salvage proceeds received from the sales of Marble Hill equipment, materials, and nuclear fuel after May 23, 1985.\nIn February 1989, Energy and its officers reached a settlement with WVPA which, if approved by judicial and regulatory authorities, will settle the suit filed by WVPA. The settlement is also contingent on the resolution of the WVPA bankruptcy proceeding.\nThe principal terms of the settlement are:\n. Energy, on behalf of itself and its officers, will pay $80 million on behalf of WVPA to the Rural Electrification Administration (REA) and the National Rural Utilities Cooperative Finance Corporation (CFC). The $80 million obligation, net of insurance proceeds, other credits, and applicable income tax effects, was charged to income in 1988 and 1989.\n. Energy will consent to the disbursement to REA and CFC of the balance in the Marble Hill salvage escrow account.\n. Energy will pay to REA and CFC 17% of future Marble Hill salvage pro- ceeds, net of related salvage program expenses.\n. WVPA will transfer its 17% interest in the Marble Hill site to Energy (exclusive of WVPA's interest in future salvage). Energy will assume responsibility for all future costs associated with the site, other than WVPA's 17% share of future salvage program expenses.\n. Energy will enter into a 35-year take-or-pay power supply agreement for the sale of 70 megawatts of firm power to WVPA. Such power will be supplied from Gibson Unit 1 and will be priced at Energy's firm power rates for service to WVPA. The difference between the revenues received from WVPA and the costs of operating Gibson Unit 1 (the Margin) will be remitted annually by Energy, on behalf of itself and its officers, to REA and CFC to discharge a $90 million obligation, plus accrued interest. If, at the end of the term of the power supply agreement, the $90 million obligation plus accrued interest has not been fully discharged, Energy must do so within 60 days. The settlement provides that in the event Energy is party to a merger or acquisition, Energy and WVPA will use their best efforts to obtain regulatory approval to price the power sale exclusive of the effects of the merger or acquisition.\nCertain aspects of the settlement are subject to approval by the FERC and potentially by the IURC and the Michigan Public Service Commission. At such time as the necessary approvals from these regulatory authorities are received, Energy will record a $90 million regulatory asset. Concurrently, a $90 million obligation to REA and CFC will be recorded as a long-term commitment. Recognition of the asset is based, in part, on projections which indicate that the Margin will be sufficient to discharge the $90 million obligation to REA and CFC, plus accrued interest, within the 35-year term of the power supply agreement. If, in some future period, projections indicate the Margin would not be sufficient to discharge the obligation plus accrued interest within the 35-year term, the deficiency would be recognized as a loss.\nThe alternative plans of reorganization sponsored by WVPA and REA incorporate the settlement agreement. However, REA's proposed plan provides for full recovery of principal and interest on WVPA's debt to REA, which is substantially in excess of the amount to be recovered under WVPA's proposed plan. In August 1991, the U.S. Bankruptcy Court for the Southern District of Indiana (Bankruptcy Court) confirmed WVPA's plan of reorganization and denied confirmation of REA's opposing plan. The Bankruptcy Court's approval of WVPA's reorganization plan is contingent upon WVPA's receipt of regulatory approval to increase its rates. REA appealed the Bankruptcy Court's decision to the Indiana District Court. Energy cannot predict the outcome of this appeal, nor is it known whether WVPA can obtain regulatory approval to increase its rates. If reasonable progress is not made in satisfying conditions to the settlement by February 1, 1995, either party may terminate the settlement agreement.\n3. Rates\n(a) Settlement Agreement In April 1993, the Indiana Court of Appeals (Court of Appeals) issued a decision in the appeal of the IURC's April 1990 retail rate order (April 1990 Order). In its decision, the Court of Appeals ruled that the level of return on common equity allowed Energy in the April 1990 Order, including the range of common equity return, was not adequately supported by factual findings. The April 1990 Order was remanded to the IURC by the Court of Appeals for further proceedings including a redetermination of the cost of equity and its components.\nIn December 1993, the IURC issued an order (December 1993 Order) approving a settlement agreement entered into by Energy, the appellants, and certain other intervenors which resolved the outstanding issues related to the appeals of the April 1990 Order and the IURC's June 1987 tax order (June 1987 Order), which related to the effect on Energy of the 1987 reduction in the Federal income tax rate. The June 1987 Order had been remanded to the IURC by the Indiana Supreme Court and was awaiting a final order from the IURC. The December 1993 Order provides for Energy to refund $150 million to its retail customers ($119 million applicable to the June 1987 Order and $31 million applicable to the April 1990 Order). The December 1993 Order further provides for Energy to reduce its retail rates by 1.5% (approximately $13.5 million on an annual basis) to reflect a return on common equity of 14.25%. The refunds and rate reduction commenced in December 1993. As of December 31, 1993, approximately $68 million of the $150 million refund has been reflected as a reduction in accounts receivable, with the remaining amount reflected in the accompanying Consolidated Balance Sheet at December 31, 1993, as \"Refund due to customers\".\nEnergy had previously recognized a loss of $139 million for the June 1987 Order. The difference between the $139 million and the $119 million portion of the refund applicable to the June 1987 Order is reflected in the Consolidated Statement of Income for the year ended December 31, 1993, as a reduction of the loss. The $31 million portion of the refund applicable to the April 1990 Order is reflected in the Consolidated Statement of Income for the same period as a reduction in operating revenues.\n(b) Current Retail Rate Proceeding Energy filed testimony with the IURC in support of a $103 million, 11.6% retail rate increase. The rate increase is needed to meet new environmental requirements, Energy's growing electric needs, including construction and operation of one combustion turbine generating unit and implementation of demand-side management (DSM) programs, and to recognize postretirement benefits other than pensions on an accrual basis. In addition, Energy is requesting approval of various ratemaking mechanisms to address regulatory lag on specific environmental and new generation projects. Hearings are expected to begin in April 1994, and a final rate order is anticipated in late 1994 or early 1995.\n4. Resources' Common Stock\nResources' common stock shares reserved for issuance at December 31, 1993, and the shares issued in 1993, 1992, and 1991 were as follows:\nResources is a party to two Master Trust Agreements whereby all accrued benefit payments or awards under certain benefit plans are to be funded in the event of a \"potential change in control\" (as defined in the Master Trust Agreements). The Master Trust Agreements provide for the payment of amounts which may become due under such plans, subject only to claims of general creditors of Resources in the event Resources were to become bankrupt or insolvent. In addition to the above issuances of common stock, as of December 31, 1993, Resources had issued to the trustee of its Master Trust Agreements 1,093,520 shares of common stock for all employees and directors participating in the 1989 Stock Option Plan, and the Employee Stock Purchase and Savings Plan. These issuances were required as a result of the announcement of the merger with The Cincinnati Gas & Electric Company (CG&E) (see Note 19 beginning on page 61).\nIn April 1990, the shareholders of Resources approved an Employee Stock Purchase and Savings Plan designed to conform with Section 423 of the Internal Revenue Code. The initial offering under the plan allowed eligible employees, through payroll deductions, the option to purchase Resources' common stock at $16.51 per share on August 31, 1992, and the second offering under this plan allows for the purchase of Resources' common stock at $18.05 per share on October 31, 1994. With respect to the second offering, eligible employees purchased 71,188 shares of Resources' common stock at $18.05 per share on February 2, 1994. This accelerated opportunity was a result of the approval of the merger with CG&E by Resources' shareholders in November 1993.\nIn January 1994, Resources' Board of Directors approved the issuance of up to 94,364 shares, distributable over two years, under the Performance Shares Plan, a long-term incentive compensation plan for certain officers.\nResources currently has an effective shelf registration statement for the sale of up to eight million shares of common stock.\n5. Resources' Stock Option Plan\nIn April 1989, the shareholders of Resources approved a stock option plan (1989 Stock Option Plan) under which incentive and non-qualified stock options and stock appreciation rights may be granted to key employees, officers, and outside directors. Common stock granted under the 1989 Stock Option Plan may not exceed 2.5 million shares. Options are granted at the fair market value of the shares on the date of grant, except that non-qualified stock options were granted to two executive officers when the plan was adopted at an option price equal to 91% of the fair market value of the shares at the date of grant. Options have a purchase term of up to 10 years, and all options, not previously vested, became vested upon approval of the merger with CG&E by Resources' shareholders. No incentive stock options may be granted under the plan after January 31, 1999.\nThe 1989 Stock Option Plan activity for 1991, 1992, and 1993 is summarized as follows:\nNo stock appreciation rights have been granted under this plan. The total options exercisable at December 31, 1993, 1992, and 1991, were 1,024,000, 714,900, and 542,400, respectively.\n6. Common Stock\nAll of Energy's common stock is held by Resources. No common dividends can be paid by Energy if there are dividends in arrears on its preferred stock.\nEnergy's Indenture provides that, so long as any bonds are outstanding under the Indenture, Energy shall not declare or pay cash dividends on shares of its capital stock (other than on preferred stock) except out of its earned surplus or net profits. In addition, Energy's Amended Articles of Consolidation limit dividends on common stock to 75% of net income available for common stock if the ratio of common stock equity to total capitalization is less than 25%, or to 50% of such net income available if such ratio is less than 20%. Compliance with this provision is determined based on income available for common stock during the preceding 12-month period and the common stock equity balance after payment of the applicable dividend. At December 31, 1993, Energy's common stock equity was 42% of total capitalization, excluding debt due within one year. The above restrictions would limit Energy's common dividends to $347 million as of December 31, 1993.\n7. Preferred Stock\nIn 1993, Energy issued $100 million of 7.44% Series Cumulative Preferred Stock, $25 par value. This preferred stock is not redeemable prior to March 1, 1998, and is redeemable thereafter at the option of Energy. In addition, Energy issued $60 million of 6 7\/8% Series Cumulative Preferred Stock, $100 par value. This preferred stock is not redeemable prior to October 1, 2003, and is redeemable thereafter at the option of Energy. Energy applied the net proceeds of the $60 million issuance to the refinancing of 162,520 shares of 8.38% Series and 211,190 shares of 8.52% Series, $100 par value, Cumulative Preferred Stock at $101 per share and 216,900 shares of 8.96% Series, $100 par value, Cumulative Preferred Stock at $103 per share in December 1993. As of December 31, 1993, Energy can sell up to an additional $40 million of preferred stock under an effective shelf registration statement and IURC authority.\nEnergy retired 237 shares, 10 shares, and 50 shares in 1993, 1992, and 1991, respectively, of its $100 par value, 3 1\/2% Series Cumulative Preferred Stock. In addition, Energy redeemed all 255,000 outstanding shares of its $100 par value, 13.25% Series Cumulative Preferred Stock in 1992 and redeemed 30,000 shares of this series in 1991.\n8. Long-term Debt\nThe sinking fund requirements with respect to Energy's long-term debt outstanding at December 31, 1993, are $.2 million in 1994, $.4 million per year during 1995 to 1997, and $.5 million in 1998.\nLong-term debt maturities for the next five years are $50 million in 1996, $10 million in 1997, and $35 million in 1998.\nEnergy currently has IURC authority to issue up to $428 million of first mortgage bonds or other long-term debt. As of December 31, 1993, Energy can sell up to $315 million of these debt securities under an effective shelf registration statement.\n9. Sale of Accounts Receivable\nEnergy has an agreement through January 1996 to sell, with limited recourse, an undivided percentage interest in certain of its accounts receivable from customers up to a maximum of $90 million. As of December 31, 1993, Energy's obligation under the limited recourse provision is $22 million. The refund provided for by the December 1993 Order, as previously discussed (see Note 3 beginning on page 45), reduced accounts receivable available for sale at December 31, 1993, to $40 million. Accounts receivable on the Consolidated Balance Sheets are net of the $40 million and $90 million interest sold at December 31, 1993, and December 31, 1992, respectively. The excess of $90 million over the accounts receivable available for sale at December 31, 1993, is reflected in the Consolidated Balance Sheet as \"Advance under accounts receivable purchase agreement\".\nThe refund provided for by the December 1993 Order caused a termination event under the agreement governing the sale of accounts receivable. Due to the temporary nature of this event, Energy obtained a waiver of the termination event provision of the agreement as it relates to the refund.\nEffective February 1, 1991, Energy entered into an interest rate swap agreement which effectively changed Energy's variable interest rate exposure on its sale of accounts receivable to a fixed rate of 8.19%. The interest rate swap agreement matures January 31, 1996. In the event of nonperformance by the other parties to the interest rate swap agreement, Energy would be exposed to floating rate conditions.\n10. Pension Plan\nEnergy's defined benefit pension plan (Plan) covers all employees meeting certain minimum age and service requirements. Plan benefits are determined under a final average pay formula with consideration of years of participation, age at retirement, and the applicable average Social Security wage base.\nEnergy's funding policy is to maintain the Plan on an actuarially sound basis. Energy's contribution for the 1993 plan year is $8.2 million. Contributions applicable to the 1992 and 1991 plan years were $7.4 million and $7.9 million, respectively. The Plan's assets consist of investments in equity and fixed income securities.\nPension costs for 1993, 1992, and 1991 include the following components:\nThe following table reconciles the Plan's funded status at September 30, 1993, 1992, and 1991 with amounts recorded in the Consolidated Financial Statements. Under the provisions of Statement of Financial Accounting Standards No. 87, Employers' Accounting for Pensions (Statement 87), certain assets and obligations of the Plan are deferred and recognized in the Consolidated Financial Statements in subsequent periods.\n11. Other Postretirement and Postemployment Benefits\n(a) Postretirement Benefits Energy provides certain health care and life insurance benefits to retired employees and their eligible dependents. Energy's employees are eligible for postretirement health care benefits if they retire at age 55 or older with at least 10 years of service and are eligible for life insurance if they retire with unreduced pension benefits. The health care benefits provided include medical, prescription drugs, and dental. Prior to 1993, the cost of retiree health care was charged to expense as claims were paid and the cost of life insurance benefits was charged to expense at retirement. Energy does not currently pre-fund its obligation for these postretirement benefits.\nEffective with the first quarter of 1993, Energy implemented the provisions of Statement of Financial Accounting Standards No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions (Statement 106). Under the provisions of Statement 106, the costs of health care and life insurance benefits provided to retirees are recognized for accounting purposes during periods of employee service (accrual basis). The unrecognized and unfunded Accumulated Postretirement Benefit Obligation (APBO) existing at the date of initial application of Statement 106 (i.e., the transition obligation) of $107.6 million is being amortized over a 20-year period.\nPostretirement benefit costs for 1993 include the following components:\nAmount (in millions)\nBenefits earned during the period. . . . . . . . $ 3.4 Interest accrued on APBO . . . . . . . . . . . . 9.3 Amortization of transition obligation. . . . . . 5.4\nTotal postretirement benefit costs . . . . . . . $18.1\nIn December 1993, the IURC issued a generic order regarding regulatory treatment of postretirement benefit costs other than pensions determined in accordance with the provisions of Statement 106. In accordance with the provisions of this order, Energy has included a request for recovery of these costs on an accrual basis in its current retail rate proceeding. Prior to the recovery of these costs in customers' rates on an accrual basis, the difference between postretirement benefit costs determined in accordance with the provisions of Statement 106 and the costs determined in accordance with Energy's previous accounting practice is being deferred for future recovery in accordance with the provisions of the generic order.\nPostretirement benefit costs for 1993, 1992, and 1991, determined in accordance with Energy's previous accounting practice, were $5.3 million, $5.0 million, and $4.6 million, respectively.\nThe following table reconciles the APBO of the health care and life insurance plans at September 30, 1993, with amounts recorded in the Consolidated Financial Statements:\nAmount (in millions) Actuarial present value of benefits Fully eligible active plan participants . . . . . $ (20.8) Other active plan participants. . . . . . . . . . (54.7) Retirees and beneficiaries. . . . . . . . . . . . (61.5) Projected APBO. . . . . . . . . . . . . . . . . . . (137.0) Unamortized transition obligation . . . . . . . . . 102.2 Benefit payments subsequent to September 30, 1993. . . . . . . . . . . . . . . . 1.1 Unrecognized net loss resulting from experience different from that assumed and effect of changes in assumptions. . . . . . . 16.0 Accrued postretirement benefit obligation at December 31, 1993 . . . . . . . . . . . . . . . . $ (17.7)\nThe weighted-average discount rate used in determining the APBO at September 30, 1993, was 7.5%. The assumed initial health care cost trend rate used in measuring the APBO was 8% for dental and post-65 medical and 12% for pre-65 medical and prescription drugs. These rates are assumed to decrease gradually to an ultimate level of 5% by the year 2007. Increasing the health care cost trend rate by one percentage point in each year would increase the APBO as of September 30, 1993, by approximately $19 million (14%) and the aggregate of the service and interest cost components of the postretirement benefit costs for 1993 by approximately $2 million (17%).\n(b) Postemployment Benefits In 1992, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 112, Employers' Accounting for Postemployment Benefits (Statement 112). Statement 112 establishes accounting standards for the costs of benefits provided to former or inactive employees, including their beneficiaries and dependents, after employment but before retirement. Under the provisions of Statement 112, the costs of these benefits will be recognized for accounting purposes when the employees or their beneficiaries become eligible for such benefits (accrual basis) rather than when such benefits are paid, which is Energy's current practice. Energy's unrecognized and unfunded obligation for these benefits (the transition obligation) as of September 30, 1993, measured in accordance with the new accounting standard, is $8.5 million. The new standard requires immediate recognition of the transition obligation at the date the new standard is adopted. Energy is required to adopt Statement 112 effective January 1, 1994. In connection with its current retail rate proceeding, Energy has requested deferral of the transition obligation for recovery over a reasonable period of time beginning with an order in its next retail rate proceeding.\n12. Notes Payable\nEnergy currently has IURC authority to borrow up to $200 million under short- term credit arrangements. In connection with this authority, Energy has established agreements with 11 banks for unsecured, but committed, lines of credit (Committed Lines) which currently permit borrowings of up to $155 million. These Committed Lines provide for maturities of one year and one day with interest rate options at or below prime rate. In addition, Energy has a temporary Committed Line with one bank of $15 million which provides for maturities of less than one year. Energy also issues commercial paper from time to time. All outstanding commercial paper is supported by Energy's Committed Lines.\nAmounts outstanding under the above lines of credit would become immediately due upon an event of default which includes non-payment, default under other agreements governing company indebtedness, bankruptcy, or insolvency. Commitment fees, which are assessed on the daily unused portion of the Committed Lines, were immaterial during 1991 to 1993.\nEnergy also has Board of Directors' approval to arrange for additional short- term borrowings of up to $100 million with various banks on an \"as offered\" basis (Uncommitted Lines). All Uncommitted Lines provide for maturities of 364 days with various interest rate options.\nFor the years 1993, 1992, and 1991, short-term borrowings outstanding at various times were as follows:\n13. Fair Value of Financial Instruments\nThe estimated fair values of Energy's financial instruments were as follows:\nDecember 31 December 31 1993 1992 Carrying Fair Carrying Fair Financial Instrument Amount Value Amount Value (in millions)\nCash and temporary cash investments. . . . . . . $ 5 $ 5 $ 9 $ 9 Restricted deposits . . . . . . 49 49 18 18 Long-term debt (includes amounts due within one year). 816 896 777 807 Notes payable . . . . . . . . . 127 127 121 121\nThe following methods and assumptions were used to estimate the fair values of these financial instruments:\nCash and temporary cash investments, restricted deposits, and notes payable The carrying amounts approximate fair values.\nLong-term debt The fair value of Energy's long-term debt issues, excluding tax-exempt bonds, was estimated based on the latest quoted market prices or, if not publicly traded, on the current rates offered to Energy for debt of the same remaining maturities. The fair value of tax-exempt bonds was estimated by obtaining broker quotes.\nUnder current regulatory treatment, gains and losses on reacquisition of long- term debt are amortized in customers' rates over the remaining life of the debt reacquired. Accordingly, any reacquisition would not have a material effect on Energy's financial position or results of operations.\n14. Income Taxes\nEffective with the first quarter of 1993, Energy implemented the provisions of Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes (Statement 109). Statement 109 requires recognition of deferred tax assets and liabilities for the expected future tax consequences of existing differences between the financial reporting and tax reporting bases of assets and liabilities. Energy adopted this new accounting standard as the cumulative effect of a change in accounting principle with no restatement of prior periods. The adoption of Statement 109 had no material effect on Energy's consolidated earnings or the Consolidated Balance Sheet.\nIn August 1993, Congress enacted the Omnibus Budget Reconciliation Act of 1993 (Act), which included a provision to increase the Federal corporate income tax rate from 34% to 35%, retroactive to January 1, 1993. Statement 109 requires adjustment of deferred income taxes upon enacted changes in income tax rates. The change in the income tax rate resulted in an increase in the net deferred income tax liability of approximately $12 million and recognition of a regulatory asset of approximately $12 million to reflect expected future recovery of the increased liability in customers' rates.\nThe significant components of Energy's net deferred income tax liability at December 31, 1993, and January 1, 1993, after adoption of the provisions of Statement 109, are as follows:\nA summary of Federal and state income taxes charged (credited) to income and the allocation of such amounts is as follows:\nEnergy participates in the filing of a consolidated Federal income tax return with its parent, Resources, and other affiliated companies. The current tax liability is determined on a stand-alone basis for each member of the group pursuant to a tax sharing agreement. As a result of the $150 million refund resulting from the December 1993 Order, Energy incurred an alternative minimum tax (AMT) liability of approximately $6.9 million ($2.3 million for the consolidated group) for 1993. AMT paid can be used as a tax credit to offset income taxes (other than AMT) payable in future years. Resources expects to be able to utilize the AMT credit in 1994. Pursuant to the tax sharing agreement, Energy reported the tax benefits of Resources' consolidated net operating loss of approximately $22 million and income taxes paid during 1993 in excess of the AMT liability as \"Income tax refunds\" on the December 31, 1993, Consolidated Balance Sheet.\nFederal income taxes computed by applying the statutory Federal income tax rate to book income before Federal income tax are reconciled to Federal income tax expense reported in the Consolidated Statements of Income as follows:\n18. 1993 and 1992 Quarterly Financial Data (unaudited)\n19. Pending Merger\nGeneral Resources, Energy, and CG&E entered into an Agreement and Plan of Reorganization dated as of December 11, 1992, which was subsequently amended and restated on July 2, 1993, and as of September 10, 1993 (as amended and restated, the \"Merger Agreement\"). Under the Merger Agreement, Resources will be merged with and into a newly formed corporation named CINergy Corp. (CINergy) and a subsidiary of CINergy will be merged with and into CG&E (\"CG&E Merger\", collectively referred to as the \"Mergers\"). Following the Mergers, CINergy will be the parent holding company of Energy and CG&E and will be required to register under the Public Utility Holding Company Act of 1935 (PUHCA).\nThe Merger Agreement can be terminated by any party, without financial penalty, if the Mergers are not consummated by June 30, 1994. Under certain circumstances, the termination of the Merger Agreement would result in the payment of termination fees which may not exceed $70 million, if Resources is required to pay, or $130 million, if CG&E is required to pay.\nIn August 1993, Resources established a $70 million irrevocable standby letter of credit in favor of CG&E to fund the aggregate amounts (not to exceed $70 million) payable in certain circumstances pursuant to the provisions of the Merger Agreement and the related Resources Stock Option Agreement as termination fees, option repurchase payments, and related expenses.\nExchange Ratio The Merger Agreement provides that, upon consummation of the Mergers, each outstanding share of common stock of Resources will be converted into the right to receive that number of shares of the common stock, par value of $.01 each, of CINergy obtained by dividing $30.69 by the average closing sales price of common stock, par value of $8.50 each, of CG&E as reported on the Transaction Reporting System operated by the Consolidated Tape Association for the 15 consecutive trading days preceding the fifth trading day prior to the Mergers; provided that, if the actual quotient obtained thereby is less than .909, the quotient shall be .909, and if the actual quotient obtained thereby is more than 1.023, the quotient shall be 1.023. The Merger Agreement also provides that, upon consummation of the Mergers, each outstanding share of common stock of CG&E will be converted into the right to receive one share of common stock of CINergy. The outstanding preferred stock and debt securities of Energy and CG&E will not be affected.\nShareholder and Regulatory Approvals In November 1993, the Mergers were approved by the shareholders of Resources and CG&E. In August 1993, the FERC conditionally approved the Mergers. This conditional approval was made by the FERC without a formal hearing and, according to public statements by the FERC Commissioners, was done in reliance, in part, on the FERC's belief that the regulatory commissions of the affected states would have authority to approve or disapprove the Mergers. The companies accepted the FERC's conditions and indicated their belief that none of the conditions would have a material adverse effect on the operations, financial condition, or business prospects of CINergy. Certain parties petitioned for rehearing of the FERC's conditional approval. On September 15, 1993, Energy and CG&E filed a statement with the FERC clarifying their conclusions at that time that the Mergers would not require any prior approval of a state commission under state law. Given the issues raised on the requests for rehearing and the lack of certainty in the record regarding state regulatory powers, on January 12, 1994, the FERC issued an order withdrawing its prior conditional approval of the Mergers and initiating a 60-day, FERC-sponsored settlement procedure. The settlement procedure is expected to be concluded prior to the end of March 1994. The FERC has indicated that, if the settlement procedure is not successful, it intends to issue a further order setting appropriate issues for hearing.\nThe companies are currently participating in a collaborative process with representatives from the IURC, the Public Utilities Commission of Ohio, the Kentucky Public Service Commission (KPSC), various consumer groups, and other parties to settle all merger-related issues. In conjunction with the FERC- sponsored settlement procedure, on February 11, 1994, Energy filed a petition with the IURC requesting approval of various proposals regarding state regulation after consummation of the Mergers. These proposals do not address the allocation between shareholders and customers of projected revenue requirement savings as a result of the Mergers. This allocation will be the subject of a subsequent IURC proceeding. Hearings on the current petition are expected to conclude prior to the end of the 60-day settlement period established by the FERC. In addition, CG&E had originally intended to file, in January 1994, an application with the KPSC for approval of the CG&E Merger. However, given the initiation of the FERC settlement procedure, CG&E notified the KPSC, and the KPSC agreed, that CG&E would temporarily defer such filing (see Note 21 on page 66 for a discussion of subsequent events).\nThe Mergers are also subject to the approval of the Securities and Exchange Commission (SEC) under the PUHCA. An application requesting such SEC approval is expected to be filed during the first quarter or early second quarter of 1994. Under the PUHCA, the divestiture of CG&E's gas operations may be required. The companies believe they have a justifiable basis for retention of CG&E's gas operations and will request SEC approval to retain this portion of the business. Divestiture, if ordered, would occur after the consummation of the Mergers. Historically, the SEC has allowed companies sufficient time to accomplish divestitures in a manner that protects shareholder value, which, in some cases, has been 10 to 20 years.\nThe companies' goal is to consummate the Mergers during the third quarter of 1994. However, if the settlement procedure is not successful and a hearing is convened by the FERC, the consummation of the Mergers would likely be further extended. There can be no assurance that the Mergers will be consummated.\nStock Option Agreements Concurrently with the Merger Agreement, Resources and CG&E have entered into reciprocal stock option agreements granting each other the right to purchase certain shares of their common stock under certain circumstances if the Merger Agreement becomes terminable, or is terminated, because of a breach or a third party proposal for a business combination. Specifically, under these certain circumstances, CG&E has the option to purchase 10 million shares of common stock of Resources at a price of $18.65 per share, and Resources has the option to purchase approximately 7.7 million shares of common stock of CG&E at a price of $24.325 per share. These options will terminate upon the earlier of the consummation of the Mergers, termination of the Merger Agreement pursuant to its terms (other than a breach or a third party proposal for a business combination), 180 days, or longer under certain circumstances, following the termination of the Merger Agreement due to a breach or a third party proposal for a business combination, or June 30, 1994.\n20. Pro Forma Condensed Consolidated Financial Information (unaudited)\nThe following pro forma condensed consolidated financial information combines the historical Consolidated Statements of Income and Consolidated Balance Sheets of Resources and CG&E after giving effect to the Mergers. The unaudited Pro Forma Condensed Consolidated Statements of Income for each of the three years ended December 31, 1993, give effect to the Mergers as if the Mergers had occurred at January 1, 1991. The unaudited Pro Forma Condensed Consolidated Balance Sheet at December 31, 1993, gives effect to the Mergers as if the Mergers had occurred at December 31, 1993. These statements are prepared on the basis of accounting for the Mergers as a pooling of interests and are based on the assumptions set forth in the notes thereto. In addition, the following pro forma condensed consolidated financial information should be read in conjunction with the historical consolidated financial statements and related notes thereto of Resources, Energy, and CG&E. The following information is not necessarily indicative of the operating results or financial position that would have occurred had the Mergers been consummated at the beginning of the periods, or on the date, for which the Mergers are being given effect, nor is it necessarily indicative of future operating results or financial position.\n21. Events Subsequent to Date of Report of Independent Public Accountants - Pending Merger (unaudited)\nIn connection with the 60-day, FERC-sponsored settlement procedure and the collaborative process, Resources, Energy, CINergy, the Indiana Utility Consumer Counselor, the Citizens Action Coalition of Indiana, Inc., and industrial customer representatives reached a global settlement agreement on merger-related issues. This agreement was filed with the IURC on March 2, 1994, and is expressly conditioned upon approval by the IURC in its entirety and without any change or condition that is unacceptable to any party. On March 4, 1994, CG&E, the Public Utilities Commission of Ohio, and the Ohio Office of Consumers Counsel reached an agreement substantially similar to the Indiana agreement. Both settlement agreements were filed with the FERC on March 4, 1994. Energy expects the FERC settlement judge to forward the settlements to FERC Commissioners on or about March 21, 1994, beginning what is normally a 30-day comment period. The Indiana settlement addresses, among other things, the coordination of state and Federal regulation, the operation of the combined Energy and CG&E electric utility system, the allocation of costs and their effect on customer rates, and a retail \"hold harmless\" provision that provides that Energy's retail rates will not reflect merger- related costs to the extent that they are not offset entirely by merger- related benefits.\nIURC hearings on the Indiana settlement were held on March 17, 1994. Energy has asked the IURC for an order approving the settlement agreement by early April 1994, which should fall within the expected comment period at the FERC.\nCG&E also filed with the FERC a unilateral offer of settlement addressing all issues raised in the KPSC's application for rehearing with the FERC. On March 15, 1994, CG&E filed an application with the KPSC seeking approval of the indirect acquisition of control of CG&E's Kentucky subsidiary, The Union Light, Heat and Power Company.\nAlso included in the filings with the FERC were settlement agreements with WVPA and the city of Hamilton, Ohio. These agreements resolve issues related to the transmission of power and operation of Energy's jointly owned transmission system. Negotiations with other parties at the FERC are continuing.\nEnergy and CG&E also filed with the FERC the operating agreement among Energy, CG&E, and CINergy Services, Inc., a subsidiary of CINergy. The parties to the Indiana and Ohio FERC settlements have agreed to support or not oppose the operating agreement, and the settlements are conditioned upon the FERC approving the filed operating agreement without material change.\nITEM 9.","section_9":"ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE\nNone.\nPART III\nITEM 10.","section_9A":"","section_9B":"","section_10":"ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT\nBoard of Directors\nReference is made to pages 6 through 9 of the 1994 Information Statement, \"Election of Directors\", with respect to identification of directors and their current principal occupations. In addition, reference is made to pages 21 and 22 of the 1994 Information Statement, \"Directors' Compensation\", regarding compliance with Section 16 of the Securities Exchange Act of 1934.\nExecutive Officers\nThe information included in Part I of this report on pages 9 and 10 under the caption \"Executive Officers of the Registrant\" is referenced in reliance upon General Instruction G to Form 10-K and Instruction 3 to Item 401(b) of Regulation S-K.\nITEM 11.","section_11":"ITEM 11. EXECUTIVE COMPENSATION\nReference is made to the discussion \"Executive Compensation and Other Transactions\" on pages 17 through 26 of the 1994 Information Statement with respect to executive compensation.\nITEM 12.","section_12":"ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT\nReference is made to the discussions \"Introduction\", \"Voting Securities and Principal Shareholders\", and \"Security Ownership of Management\" on pages 2 through 5 of the 1994 Information Statement with respect to security ownership of certain beneficial owners, security ownership of management, and changes in control.\nITEM 13.","section_13":"ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS\nReference is made to the discussion \"Election of Directors\" on pages 6 through 9 of the 1994 Information Statement concerning certain relationships and related transactions.\nPART IV\nITEM 14.","section_14":"ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K\n(a) Financial Statements and Schedules.\nRefer to the page captioned \"Index to Financial Statements and Financial Statement Schedules\", page 33 of this report, for an index of the financial statements and financial statement schedules included in this report.\n(b) Reports on Form 8-K.\nThe following reports on Form 8-K or Form 8-K\/A were filed during the last quarter of 1993 and through March 18, 1994:\nDate of Report Items Filed\nForm 8-K:\nOctober 27, 1993 Item 5 - Other Events. (On October 27, 1993, PSI Resources, Inc., PSI Energy, Inc., IPALCO Enterprises, Inc., Indianapolis Power & Light Company, The Cincinnati Gas & Electric Company, CINergy Corp., James E. Rogers, John R. Hodowal, and Ramon L. Humke entered into an agreement pursuant to which, among other things, the parties agreed to settle certain pending lawsuits and other issues in connection with IPALCO Enterprises, Inc.'s attempted acquisition of PSI Resources, Inc. and IPALCO Enterprises, Inc.'s opposition to the merger of PSI Resources, Inc. and The Cincinnati Gas & Electric Company to create CINergy Corp.) Item 7 - Financial Statements and Exhibits. (Text of Agreement dated October 27, 1993, by and among PSI Resources, Inc., PSI Energy, Inc., The Cincinnati Gas & Electric Company, CINergy Corp., IPALCO Enterprises, Inc., Indianapolis Power & Light Company, James E. Rogers, John R. Hodowal, and Ramon L. Humke (together with the exhibits and schedules thereto) and text of joint press release issued by PSI Resources, Inc. and The Cincinnati Gas & Electric Company on October 27, 1993.)\nNovember 19, 1993 Item 7 - Financial Statements and Exhibits. (The Cincinnati Gas & Electric Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1993.)\nDate of Report Items Filed Form 8-K (continued):\nJanuary 12, 1994 Item 5 - Other Events. (On January 12, 1994, the Federal Energy Regulatory Commission issued an order withdrawing its prior conditional approval of PSI Resources, Inc.'s merger with The Cincinnati Gas & Electric Company and initiating a 60-day, FERC-sponsored settlement procedure.)\nForm 8-K\/A:\nNovember 26, 1993 Item 7 - Financial Statements and Exhibits. (Amendment No. 1 filed by The Cincinnati Gas & Electric Company on Form 10-K\/A dated November 26, 1993, to The Cincinnati Gas & Electric Company's Annual Report on Form 10-K for the year ended December 31, 1992, and Consent of Independent Public Accountants.)\n(c) Exhibits.\nRefer to the page captioned \"Exhibits\", page 70 of this report, for a listing of all exhibits included in this report.\nExhibits\nCopies of the documents listed below which are identified with an asterisk (*) have heretofore been filed with the Securities and Exchange Commission and are incorporated herein by reference and made a part hereof; and the exhibit number and file number of the document so filed, and incorporated herein by reference, are stated in parentheses in the description of such exhibit. Exhibits not so identified are filed herewith.\nExhibit Designation Nature of Exhibit\n2-a *Amended and Restated Agreement and Plan of Reorganization by and among The Cincinnati Gas & Electric Company, PSI Resources, Inc., PSI Energy, Inc., CINergy Corp., an Ohio corporation, CINergy Corp., a Delaware corporation, and CINergy Sub, Inc. dated as of December 11, 1992, as amended and restated on July 2, 1993 (Exhibit to Amendment No. 21 to the Schedule 14D-9 filed by PSI Resources, Inc. (Commission File No. 1-9941) on July 2, 1993), as further amended and restated on September 10, 1993. (Exhibit to PSI Energy, Inc.'s Form 8-K dated September 27, 1993.)\n2-b *Press release issued by The Cincinnati Gas & Electric Company and PSI Resources, Inc. dated July 2, 1993, announcing the restructured merger transaction. (Exhibit to Amendment No. 21 to Schedule 14D-9 filed by PSI Resources, Inc. (Commission File No. 1-9941) on July 2, 1993.)\n2-c *Letter Agreement dated as of August 13, 1993, between PSI Resources, Inc. and The Cincinnati Gas & Electric Company (with attachments thereto). (Exhibit to Amendment No. 32 to the Schedule 14D-9 filed by PSI Resources, Inc. (Commission File No. 1-9941) on August 16, 1993 (PSI Resources, Inc.'s Schedule 14D-9, Amendment No. 32).)\nExhibit Designation Nature of Exhibit\n2-d *Press release issued by PSI Resources, Inc. and The Cincinnati Gas & Electric Company dated August 16, 1993, announcing that The Cincinnati Gas & Electric Company, under a letter agreement, will increase the exchange ratio of CINergy Corp. common stock for PSI Resources, Inc. common stock in the proposed merger to form CINergy Corp., contingent on PSI Resources, Inc.'s nominees for directors being elected at PSI Resources, Inc.'s Annual Shareholders Meeting. (Exhibit to PSI Resources, Inc.'s Schedule 14D-9, Amendment No. 32.)\n3-a *Amended Articles of Consolidation dated May 13, 1992. (Exhibit to PSI Energy, Inc.'s June 30, 1992, Form 10-Q.)\n3-b *By-laws, as amended January 28, 1993, of PSI Energy, Inc. (Exhibit to PSI Energy, Inc.'s 1992 Form 10-K.)\n4-a *Original Indenture (First Mortgage Bonds) dated September 1, 1939, between PSI Energy, Inc. and The First National Bank of Chicago, as Trustee (Exhibit A-Part 3 in File No. 70- 258), and LaSalle National Bank as Successor Trustee (supplemental indenture dated March 30, 1984) and the indentures supplemental thereto dated, respectively, January 1, 1969, January 1, 1971, January 1, 1972, February 1, 1974, January 1, 1977, October 1, 1977, September 1, 1978, September 1, 1978, and March 1, 1979, between PSI Energy, Inc. and said Trustee.\n(Exhibit 2-5 in Second Amendment File No. 2- 30779; Exhibit 2-3 in File No. 2-38994; Exhibit 2-4 in File No. 2-42545; Exhibit 2-5 in File No. 2-50007; Exhibit 2-5 in File No. 2-57828; Exhibit 2-5 in File No. 2-59833; Exhibit 2-4 in File No. 2-62543; Exhibit 2-6 in File No. 2-62543; Exhibit 2-5 in File No. 2-63753.)\n4-b *Thirty-fifth Supplemental Indenture dated March 30, 1984. (Exhibit to PSI Energy, Inc.'s, formerly Public Service Company of Indiana, Inc., 1984 Form 10-K.) Exhibit Designation Nature of Exhibit\n4-c *Thirty-ninth Supplemental Indenture dated March 15, 1987. (Exhibit to PSI Energy, Inc.'s 1987 Form 10-K.)\n4-d *Forty-first Supplemental Indenture dated June 15, 1988. (Exhibit to PSI Energy, Inc.'s 1988 Form 10-K.)\n4-e *Forty-second Supplemental Indenture dated August 1, 1988. (Exhibit to PSI Energy, Inc.'s 1988 Form 10-K.)\n4-f *Forty-third Supplemental Indenture dated September 15, 1988. (Exhibit to PSI Energy, Inc.'s 1988 Form 10-K.)\n4-g *Forty-fourth Supplemental Indenture dated March 15, 1990. (Exhibit to PSI Energy, Inc.'s 1990 Form 10-K.)\n4-h *Forty-fifth Supplemental Indenture dated March 15, 1990. (Exhibit to PSI Energy, Inc.'s 1990 Form 10-K.)\n4-i *Forty-sixth Supplemental Indenture dated June 1, 1990. (Exhibit to PSI Energy, Inc.'s 1991 Form 10-K.)\n4-j *Forty-seventh Supplemental Indenture dated July 15, 1991. (Exhibit to PSI Energy, Inc.'s 1991 Form 10-K.)\n4-k *Forty-eighth Supplemental Indenture dated July 15, 1992. (Exhibit to PSI Energy, Inc.'s 1992 Form 10-K.)\n4-l *Forty-ninth Supplemental Indenture dated February 15, 1993. (Exhibit to PSI Energy, Inc.'s 1992 Form 10-K.)\n4-m *Fiftieth Supplemental Indenture dated February 15, 1993. (Exhibit to PSI Energy, Inc.'s 1992 Form 10-K.)\n4-n Fifty-first Supplemental Indenture dated February 1, 1994.\nExhibit Designation Nature of Exhibit\n4-o *Indenture (Secured Medium-term Notes, Series A), dated July 15, 1991, between PSI Energy, Inc. and The First National Bank of Chicago, as Trustee. (Exhibit to PSI Energy, Inc.'s Form 10-K\/A, Amendment No. 2, dated July 15, 1993.)\n4-p *Indenture (Secured Medium-term Notes, Series B), dated July 15, 1992, between PSI Energy, Inc. and The First National Bank of Chicago, as Trustee. (Exhibit to PSI Energy, Inc.'s Form 10-K\/A, Amendment No. 2, dated July 15, 1993.)\n10-a +PSI Energy, Inc. Annual Incentive Plan, amended and restated July 30, 1991, retroactively effective July 1, 1991.\n10-b *+Supplemental Retirement Plan amended and restated December 16, 1992, retroactively effective January 1, 1989. (Exhibit to PSI Energy, Inc.'s 1992 Form 10-K.)\n10-c *+Excess Benefit Plan, formerly named the Supplemental Pension Plan, amended and restated December 16, 1992, retroactively effective January 1, 1989. (Exhibit to PSI Energy, Inc.'s 1992 Form 10-K.)\n10-d *+Performance Shares Plan, amended and restated January 30, 1992, retroactively effective January 1, 1992. (Exhibit to PSI Energy, Inc.'s 1992 Form 10-K.)\n10-e *+Amendment to Annual Incentive Plan dated December 1, 1992. (Exhibit to PSI Energy, Inc.'s 1992 Form 10-K.)\n10-f *+Employment Agreement dated May 17, 1990, among PSI Resources, Inc., PSI Energy, Inc. and James E. Rogers, Jr. (Exhibit to the Schedule 14D-9 filed by PSI Resources, Inc. (Commission File No. 1-9941) on April 7, 1993 (the \"Resources Schedule 14D-9\").)\nExhibit Designation Nature of Exhibit\n10-g *+Deferred Compensation Agreement, effective as of January 1, 1992, between PSI Energy, Inc. and James E. Rogers, Jr. (Exhibit to PSI Energy, Inc.'s Form 10-K\/A, Amendment No. 1, dated April 29, 1993.)\n10-h *+Split Dollar Life Insurance Agreement, effective as of January 1, 1992, between PSI Energy, Inc. and James E. Rogers, Jr. (Exhibit to PSI Energy, Inc.'s Form 10-K\/A, Amendment No. 1, dated April 29, 1993.)\n10-i *+First Amendment to Split Dollar Life Insurance Agreement between PSI Energy, Inc. and James E. Rogers, Jr. dated December 11, 1992. (Exhibit to PSI Energy, Inc.'s Form 10-K\/A, Amendment No. 1, dated April 29, 1993.)\n10-j *+Employment Agreement dated December 11, 1992, among PSI Resources, Inc., PSI Energy, Inc., The Cincinnati Gas & Electric Company, CINergy Corp. and James E. Rogers, Jr. (Exhibit to the Form S-4 filed by CINergy Corp. (Commission File No. 33-59964) filed March 23, 1993).\n10-k *+Severance Agreement dated December 11, 1992, among PSI Resources, Inc., PSI Energy, Inc. and James E. Rogers, Jr. (Exhibit to PSI Energy, Inc.'s Form 10-K\/A, Amendment No. 1, dated April 29, 1993.)\n10-l *+Form of Severance Agreement dated December 11, 1992, among PSI Resources, Inc., PSI Energy, Inc. and each of Cheryl M. Foley, Joseph W. Messick, Jr., Jon D. Noland, J. Wayne Leonard, and Larry E. Thomas. (Exhibit to PSI Energy, Inc.'s Form 10-K\/A, Amendment No. 1, dated April 29, 1993.)\n10-m *PSI Energy, Inc. Pension Plan, amended and restated December 16, 1992, retroactively effective January 1, 1989. (Exhibit to the Resources Schedule 14D-9.)\nExhibit Designation Nature of Exhibit\n10-n *+Master Trust Agreement for Employees' Plans (the \"Employees' Trust Agreement\") between PSI Resources, Inc. and National City Bank, Indiana. (Exhibit to the Resources Schedule 14D-9.)\n10-o *+Master Trust Agreement for Directors' Plans (the \"Directors' Trust Agreement\") between PSI Resources, Inc. and National City Bank, Indiana. (Exhibit to the Resources Schedule 14D-9.)\n10-p *+PSI Energy, Inc. Executive Supplemental Life Insurance Program. (Exhibit to the Resources Schedule 14D-9.)\n10-q *PSI Energy, Inc. Severance Pay Plan. (Exhibit to the Resources Schedule 14D-9.)\n10-r *+Amendment No. 1 to each of the Employees' Trust Agreement and the Directors' Trust Agreement. (Exhibit to the Resources Schedule 14D-9.)\n10-s *+Form of Amendment No. 2 to the Employees' Trust Agreement. (Exhibit to Amendment No. 1 to the Resources Schedule 14D-9 filed April 23, 1993.)\n10-t *Employment Agreement dated October 4, 1993, among PSI Resources, Inc., PSI Energy, Inc., and John M. Mutz. (Exhibit to PSI Energy, Inc.'s September 30, 1993, Form 10-Q.)\n10-u *Text of Settlement Agreement dated October 27, 1993, by and among PSI Resources, Inc., PSI Energy, Inc., The Cincinnati Gas & Electric Company, CINergy Corp., IPALCO Enterprises, Inc., Indianapolis Power & Light Company, James E. Rogers, John R. Hodowal, and Ramon L. Humke (together with the exhibits and schedules thereto). (Exhibit to PSI Energy, Inc.'s Form 8-K dated October 27, 1993.)\n10-v +Amendment to PSI Energy, Inc.'s Annual Incentive Plan dated July 2, 1993.\nExhibit Designation Nature of Exhibit\n10-w +Amendment No. 2 to the Directors' Trust Agreement.\n10-x +Amendment No. 3 to the Employees' Trust Agreement.\n10-y +Amendment No. 3 to the Directors' Trust Agreement.\n10-z +Amendment No. 4 to the Employees' Trust Agreement.\n21 Subsidiaries of PSI Energy, Inc.\n23 Consent of Independent Public Accountants.\n24 Power of Attorney.\n99-a *Complaint of Lydia Grady, as Plaintiff, and PSI Resources, Inc. et al., as Defendants dated March 17, 1993. Superior Court No. 1 of Hendricks County in the State of Indiana. (Exhibit to PSI Energy, Inc.'s 1992 Form 10-K.)\n99-b *Complaint of Moise Katz, as Plaintiff, and PSI Resources, Inc. et al., as Defendants dated March 16, 1993. Superior Court No. 2 of Hendricks County in the State of Indiana. (Exhibit to PSI Energy, Inc.'s 1992 Form 10-K.)\n99-c *Complaint of J. E. and Z. B. Butler Foundation, as Plaintiff, and PSI Resources, Inc., et al., as Defendants dated March 17, 1993. U.S. District Court for the Southern District of Indiana, Indianapolis Division. (Exhibit to PSI Energy, Inc.'s 1992 Form 10-K.)\n99-d *Amended Complaint of J. E. and Z. B. Butler Foundation, as Plaintiff, and PSI Resources, Inc., et al., as Defendants dated March 23, 1993. U.S. District Court for the Southern District of Indiana, Indianapolis Division. (Exhibit to PSI Energy, Inc.'s 1992 Form 10-K.)\nExhibit Designation Nature of Exhibit\n99-e *Class Action Complaint of Lamont Carpenter, individually, and on behalf of all others situated, as Plaintiffs, and PSI Resources, Inc., et al., as Defendants dated March 26, 1993. U.S. District Court for the Southern District of Indiana, Indianapolis Division. (Exhibit to the Resources Schedule 14D-9.)\n99-f *Complaint of Ronald Gaudiano and Gladys Post, as Plaintiffs, and PSI Resources, Inc., et al., as Defendants dated March 26, 1993. U.S. District Court for the Southern District of Indiana, Indianapolis Division. (Exhibit to the Resources Schedule 14D-9.)\n99-g *Stipulated Order of Consolidation and Appointment of Co-Lead Counsel and Liaison Counsel, dated April 13, 1993, in the case entitled Lydia Grady v. PSI Resources, Inc. et al., (Case No. IP-93-345-C), U.S. District Court for the Southern District of Indiana. (Exhibit to Amendment No. 1 to Schedule 14D-9 filed by PSI Resources, Inc. (Commission File No. 1-9941) on April 23, 1993.)\n99-h *Order of Dismissal dated July 1, 1993, issued in Katz v. PSI Resources, Inc., et al., (Case No. 32D02-9303-CP-27) Superior Court for Hendricks County in the State of Indiana. (Exhibit to Amendment No. 22 to the Schedule 14D-9 filed by PSI Resources, Inc. (Commission File No. 1-9941) on July 6, 1993.)\n99-i *Order entered on July 19, 1993, in Katz v. PSI Resources, Inc., et al., (Case No. 32D02-9303-CP-27), Superior Court for Hendricks County in the State of Indiana. (Exhibit to Amendment No. 26 to the Schedule 14D-9 filed by PSI Resources, Inc. (Commission File No. 1-9941) on July 23, 1993.)\nExhibit Designation Nature of Exhibit\n99-j *Text of an Order Granting Preliminary Injunction dated August 5, 1993, in In re: PSI Merger Shareholder Litigation, (Consolidated Master File No. IP 93-345-C), U.S. District Court for the Southern District of Indiana, Indianapolis Division; Entry Regarding Motion for Preliminary Injunction in the foregoing case. (Exhibit to Amendment No. 29 to the Schedule 14D-9 filed by PSI Resources, Inc. (Commission File No. 1-9941) on August 6, 1993.)\n99-k *Third amended complaint of Moise Katz, as Plaintiff, and PSI Resources, Inc., et al., as Defendants dated August 18, 1993. Superior Court No. 2 of Hendricks County in the State of Indiana. (Exhibit to PSI Energy, Inc.'s September 30, 1993, Form 10- Q.)\n99-l *Press release issued by PSI Resources, Inc. and The Cincinnati Gas & Electric Company announcing that PSI Resources, Inc., The Cincinnati Gas & Electric Company, and IPALCO Enterprises, Inc. had reached a settlement agreement. (Exhibit to PSI Energy, Inc.'s Form 8-K dated October 27, 1993.)\n________________________\n+ Management contract, compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 14(c) of Form 10-K.\nSIGNATURES\nPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.\nPSI ENERGY, INC. Registrant\nDated: March 18, 1994\nBy \/s\/ James E. Rogers (James E. Rogers) Chairman\nPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.\nSignature Title Date James K. Baker Director Hugh A. Barker Director Michael G. Browning Director Kenneth M. Duberstein Director John A. Hillenbrand, II Director John M. Mutz Director Melvin Perelman, Ph.D. Director Van P. Smith Director Robert L. Thompson, Ph.D. Director\n\/s\/ J. Wayne Leonard Senior Vice President and March 18, 1994 (J. Wayne Leonard) Director Attorney-in-fact for all (Principal Financial Officer) the foregoing persons\n\/s\/ James E. Rogers Chairman, President and Director March 18, 1994 (James E. Rogers) (Principal Executive Officer)\n\/s\/ Charles J. Winger Comptroller March 18, 1994 (Charles J. Winger) (Principal Accounting Officer)","section_15":""}
{"filename":"47518_1993.txt","cik":"47518","year":"1993","section_1":"ITEM 1. BUSINESS\nHillenbrand Industries, Inc., an Indiana corporation headquartered in Batesville, Indiana, is a diversified, public holding company and the owner of 100% of the capital stock of its six major operating companies. Unless the context otherwise requires, the terms \"Hillenbrand\" and the \"Company\" refer to Hillenbrand Industries, Inc. and its consolidated subsidiaries. Hillenbrand is organized into two business segments: Funeral Services and Health Care. The Funeral Services Segment consists of Batesville Casket Company, Inc., a manufacturer of caskets, and Forecorp, Inc., a provider of funeral planning insurance products. The Health Care Segment consists of Hill-Rom Company, Inc. a manufacturer of equipment for hospitals; SSI Medical Services, Inc., a provider of wound care, pulmonary\/trauma and incontinence management services; Block Medical, Inc., a provider of home infusion therapy products; and Medeco Security Locks, Inc., a manufacturer of high security locks and access control products for commercial and residential use. (Medeco does not directly serve the health care industry but is included in the Health Care Segment due to its relative size.)\nFUNERAL SERVICES\nBatesville Casket Company, Inc. (\"Batesville\") an Indiana corporation headquartered in Batesville, Indiana, was founded in 1884 and acquired by the Hillenbrand family in 1906. Batesville manufactures and sells several types of steel, copper, bronze and hardwood caskets, including caskets for the cremation market. In addition to caskets, Batesville sells a line of urns used in cremations. All Batesville metal caskets are protective caskets which are electrically welded and made resistant to the entry of air, water and gravesite substances through the use of rubber gaskets and a locking bar mechanism. Batesville Monoseal-R- steel caskets also employ a magnesium alloy bar to cathodically protect the casket from rust and corrosion. The Company believes that this system of Cathodic Protection is featured only on Batesville caskets. Batesville hardwood caskets are made from walnut, mahogany, cherry, maple, pine, oak and poplar. Except for a limited line of hardwood caskets with a protective copper liner, the majority of hardwood caskets are not protective. Batesville caskets are marketed by Batesville's direct sales force to licensed funeral directors operating licensed funeral homes throughout the United States, Australia, Canada and Puerto Rico. Batesville maintains an inventory of caskets at 68 company-operated Customer Service Centers in North America. Batesville caskets are delivered in specially equipped vehicles owned by Batesville. In December 1993, Batesville acquired Industrias Arga, S.A. de C.V., a casket manufacturer in Mexico. Forecorp, Inc., which was founded in 1985, and its subsidiaries, Forethought Life Insurance Company and The Forethought Group, Inc., are headquartered in Batesville, Indiana. These companies serve the country's largest network of funeral planning professionals with marketing support for Forethought-R- funeral plans funded by life insurance policies. This specialized funeral planning product is offered through licensed funeral homes. Customers choose the funeral home, type of service and merchandise they want. The selected funeral home contracts to provide the funeral services and merchandise when needed. With funds provided by a life insurance policy from Forethought Life Insurance Company, the Forethought program offers inflation protection by enabling the funeral home to guarantee that the planned funeral will be available as specified. Certificates of authority to sell life insurance have been obtained in forty-eight (48) states, Puerto Rico and the District of Columbia. Forethought Life Insurance products are available through a network of over 5,000 independent funeral homes in forty-one (41) of these jurisdictions.\nHEALTH CARE\nHill-Rom Company, Inc. (\"Hill-Rom\"), an Indiana corporation headquartered in Batesville, Indiana, has been in the hospital equipment business since its founding in 1929. Hill-Rom is a leading producer of mechanically, electrically and hydraulically controlled adjustable hospital beds,\nhospital procedural stretchers, hospital patient room furniture and architectural systems specifically designed to meet the needs of medical-surgical, critical care and perinatal providers. The Hill-Rom line of electrically and manually adjustable hospital beds includes models which, through sideguard controls, can be raised and lowered, retracted and adjusted to varied orthopedic and therapeutic contours and positions. Hill-Rom also produces beds for special departments such as intensive care, emergency, recovery rooms and labor and delivery rooms. Other Hill-Rom products include sideguard communications, wood finished bedside cabinets, adjustable height overbed tables, mattresses and wood upholstered chairs. Its architectural products include customized, prefabricated modules, either wall-mounted or on freestanding columns, enabling medical gases, communications and electrical services to be distributed in patient rooms. Hill-Rom products are sold directly to hospitals throughout the United States and Canada by Hill-Rom account executives. Most Hill-Rom products sold in the United States are delivered by trucks owned by Hill-Rom. Hill-Rom also operates a Canadian division which distributes Hill-Rom products, principally in Canada, and a German subsidiary which distributes Hill-Rom products throughout Europe. Hill-Rom also sells its domestically produced products through distributorships throughout the world. In 1991, Hill-Rom acquired Le Couviour, a French company which manufactures a variety of mechanically, hydraulically and electrically controlled beds and patient room furniture. Its products are sold directly to hospitals and nursing homes throughout Europe. In February 1994, Hill-Rom completed the acquisition of L. & C. Arnold A.G., of Schorndorf\/Kempen in western Germany. Arnold is one of the oldest and largest manufacturers of hospital beds in Germany. SSI Medical Services, Inc. (\"SSI\"), headquartered in Charleston, South Carolina, was acquired by Hillenbrand in 1985 and is known to the medical community as Support Systems International. SSI is engaged in the manufacture of therapy beds and support surfaces and the rental of these products in the wound care, pulmonary\/trauma and incontinence management markets. Clinical support for SSI products is provided by a sales force composed of nurses and physician assistants. Technical support is made available by technicians and service personnel who provide maintenance and technical assistance from SSI Service Centers. Within the wound care market, CLINITRON-R- Air Fluidized Therapy is provided as a therapeutic adjunct in the treatment of advanced pressure sores, flaps, grafts and burns. The CLINITRON unit achieves its support characteristics from the fluid effect created by forcing air up and through medical-grade ceramic microspheres contained in the unit's fluidization chamber. SSI also offers low airloss therapy through its RESTCUE-R- and FLEXICAIR-R- units. Low airloss support is achieved by distributing air through cushions specially designed to allow some of the air to escape slowly. The advent of the RESTCUE bed in 1989 marked SSI's entry into the pulmonary\/trauma market by incorporating three low airloss modes of operation into an integrated system. In 1992, SSI introduced the RESTCUE-R- CC-TM- therapy unit which provides two additional modes of operation. The RESTCUE-R- CC-TM- is the only unit on the market with five modes of operation on one self-contained hospital bed. FLEXICAIR low airloss therapy is provided for pressure sore prevention and wound treatment when ambulation is a priority or continuous head elevation is desired. The FLEXICAIR unit, which includes a Hill-Rom bed frame unit, regulates air pressure in five zones corresponding to patient body areas. Also in 1992, SSI introduced the CLENSICAIR-R- Incontinence Management System. This innovative unit combines SSI's pressure-relieving low airloss therapy with a breakthrough design for managing incontinence and patient cleansing needs. Other SSI wound care products include the ACUCAIR-R- Continuous Air Flow System and the CLINISERT-R- Pressure Relief System. Both are offered as more effective alternatives to conventional overlays and mattresses. SSI therapy systems are made available to hospitals, long-term care facilities and the home environment on a rental basis through over 150 Service Centers located in the United States, Canada and Western Europe. In May 1993, SSI purchased certain assets of The Mediscus Group, Inc. of Akron, Ohio, which was engaged in business similar to SSI.\nBlock Medical, Inc. (\"Block\"), a Delaware corporation, is headquartered in Carlsbad, California and was acquired by Hillenbrand in 1991. Its manufacturing operations were moved to Mexico in December of 1993. Block is a manufacturer of home infusion products for antibiotic, nutritional, chemotherapy and other drug therapies, including HOMEPUMP-TM-, a disposable infusion pump, and VERIFUSE-TM-, an ambulatory electronic infusion pump. HOMEPUMP, which can be carried in a pocket or specially designed pouch, provides a simple and convenient way for patients to administer their medication with minimum disruption of their lives. VERIFUSE is a computerized electronic infusion pump that is designed to handle more complex infusion medications while enabling the patient to be ambulatory. It is programmed through the use of a built-in bar-code scanner and is capable of delivering four infusion therapies. Block's products are sold to homecare providers throughout the United States and internationally by a direct sales force and through distributors. Medeco Security Locks, Inc. (\"Medeco\"), founded in 1968, was purchased by Hillenbrand in 1984. Medeco manufactures and sells a wide variety of deadbolts, padlocks, switch locks, camlocks, electro-mechanical and other special purpose locks for the high security market. Medeco's double locking mechanism provides a higher level of security than is achievable by more common, single locking devices. Medeco locks are primarily constructed of brass and hardened steel and are manufactured in its Salem, Virginia plant. In 1991, Medeco created the Medeco Security Electronics (MSE) division and entered the electronic high security market with two innovative products. INSITE VLS-TM- replaces the thousands of mechanical keys used in pay telephone and vending machine collection. The INSITE SITEKEY-TM- provides the state-of-the-art in electronic door security. Medeco products are sold domestically and internationally by its sales organization to locksmith supply distributors, original equipment manufacturers and government agencies. Original equipment applications include vending machines, pay telephones, safe and lock boxes, computer equipment, coin-operated laundry machines and communications security devices. Hill-Rom and SSI generate the predominant share of the Health Care segment's revenues and operating profit. Hill-Rom is the larger of these two companies. Medeco and Block had an immaterial effect on the operating results of this segment in 1992 and 1993.\nOTHER\nOn August 30, 1993, the Company sold its luggage business, American Tourister, Inc., to Astrum International Corp. The results of American Tourister, Inc., representing a substantial portion of the previously reported Durables Segment, have been reported separately as discontinued operations in the Statement of Consolidated Income, with prior periods restated to conform to the current presentation.\nBUSINESS SEGMENT INFORMATION\nThe amounts of net revenues, operating profit and identifiable assets attributable to each of the industry segments of the Company are set forth in tables relating to operations by business segment in Note 6 to Consolidated Financial Statements, which statements are included under Item 8.\nRAW MATERIALS\nFUNERAL SERVICES\nBatesville employs carbon and stainless steel, copper and bronze sheet, wood, fabrics, finishing materials, rubber gaskets, zinc and magnesium alloy in the manufacture of its caskets. These materials are available from several sources.\nHEALTH CARE\nPrincipal materials used in Hill-Rom and SSI products include steel, aluminum, stainless steel, wood, high pressure laminates, fabrics, silicone-coated soda-lime glass beads and other materials, substantially all of which are available from several sources. Motors for electrically operated beds and certain other components are purchased from one or more manufacturers. Block uses thermo-plastic materials, elastomeric membranes, electronic components, miniature electric motors, machined metal parts and other materials, substantially all of which are available from multiple sources. Medeco uses brass, hardened steel and other metals, substantially all of which are available from several sources.\nCOMPETITION\nFUNERAL SERVICES\nBatesville believes its dollar volume of sales of finished caskets is the largest in the United States. Batesville competes on the basis of product quality, service to its customers and price, and believes that there are approximately two (2) other companies that also manufacture and\/or sell caskets over a wide geographic area. There are, however, throughout the United States many enterprises that manufacture, assemble, or distribute caskets for sale within a limited geographic area. Forecorp, Inc. competes on the basis of service to its customers and products offered. Forethought Life sells its products in competition with local and state trusts for pre-need funeral planning as well as other life insurance companies. Forethought Life believes it is the leading provider of insurance funded pre-arranged funerals in the United States.\nHEALTH CARE\nHill-Rom competes on the basis of product quality and performance, service to its customers and price. Hill-Rom believes it is the market share leader of electrically operated hospital beds. Hill-Rom sells its products in competition with products of approximately ten (10) other manufacturers, some of which have larger financial resources and sell a broader line of products. SSI competes on the basis of service to its customers and product quality. There are other companies which provide low airloss and other methods of patient support and patient relief. Block competes on the basis of product innovation and quality coupled with attention to customer service. Block believes it is the market leader in providing new innovations to the alternative site health care market, even though several competitors have larger financial resources. Medeco competes on the basis of product quality and performance, and service to its customers. Medeco believes it is the market share leader in the mechanical high security lock market; however, other lock manufacturers produce a broader product line and have larger financial resources. Medeco believes that its patents and channels of distribution are important to its business.\nRESEARCH\nEach of the Company's operating subsidiaries devotes research efforts to develop and improve its products as well as its manufacturing and production methods. All research and development expenses are Company sponsored and, for new products, amounted to approximately $22,270,000 in 1993, $20,321,000 in 1992, and $14,634,000 in 1991. Additionally, $8,089,000 was spent in 1993, $7,689,000 in 1992, and $7,974,000 in 1991 on research and development pertaining to the improvement of existing products. The above amounts exclude expenditures relative to discontinued operations.\nPATENTS AND TRADEMARKS\nThe Company owns a number of patents on its products and manufacturing processes which are of importance to it, but it does not believe that any single patent or related group of patents are of material significance to the business of the Company as a whole. The Company also owns a number of trademarks and service marks relating to its products and product services which are of importance to it, but it does not believe that any single trademark or service mark is of material significance to the business of the Company as a whole.\nEMPLOYEES\nAs of January 18, 1994, the Company employed approximately 9,800 persons in its operations in the United States, Canada and Europe.\nENVIRONMENTAL PROTECTION\nHillenbrand Industries, Inc. is committed to operating all of its businesses in a way that protects the environment. The Company has voluntarily entered into remediation agreements with environmental authorities, and has been issued Notices of Violation alleging violations of certain permit conditions. Accordingly, the Company is in the process of implementing plans of abatement in compliance with agreements and regulations. The Company has also been notified as a potentially responsible party in investigations of certain offsite disposal facilities. The cost of all plans of abatement and waste site cleanups in which the Company is currently involved is not expected to exceed $5,000,000. The Company has provided adequate reserves in its financial statements for these matters. Compliance with other current governmental provisions relating to protection of the environment also does not materially affect the Company's capital expenditures, earnings or competitive position. Recent changes in environmental law might affect the Company's future operations, capital expenditures and earnings. The cost of complying with these provisions is not known.\nFOREIGN OPERATIONS AND EXPORT SALES\nInformation about the Company's foreign operations is set forth in tables relating to geographic information in Note 6 to Consolidated Financial Statements, which statements are included under Item 8. The Company's export revenues constituted less than 10% of consolidated revenues in 1993 and prior years.\nORDER BACKLOG\nOrder backlogs are immaterial to the Company and there was no material change in backlogs during 1993.\nEXECUTIVE OFFICERS OF THE REGISTRANT\nW August Hillenbrand, 53, was elected Chief Executive Officer of the Company on April 11, 1989 and has been President since October 21, 1981. Prior to that he had been a Vice President of the Company since 1972 and has been employed by the Company throughout his business career.\nLonnie M. Smith, 49, was elected Senior Executive Vice President, effective January 1, 1982. From 1978 through 1981, he held the position of Executive Vice President of American Tourister, Inc. From 1976 to 1978, he was Senior Vice President of Strategic Planning for the Company. Prior to that he was employed by the Boston Consulting Group, business consultants.\nTom E. Brewer, 55, has been employed by the Company since May 16, 1983, and was elected Senior Vice President and Chief Financial Officer on May 23, 1983 and Treasurer on September 6, 1991. He had been employed by the Firestone Tire and Rubber Company for the prior 22 years, where he served as Corporate Vice President and Treasurer.\nGeorge E. Brinkmoeller, 58, was elected Vice President, Corporate Services on December 2, 1979, had been Director of Corporate Services since January 1, 1975, and had been Manager of Affiliated Operations since January 1, 1971.\nMark R. Lindenmeyer, M.D., 47, was elected Vice President, General Counsel and Secretary of the Company on October 7, 1991. He has been employed by the Company since August 18, 1986 as Litigation Counsel. Prior to joining the Company, Dr. Lindenmeyer served in the U.S. Army as a military trial attorney and judge and was a partner in a Batesville, Indiana law firm. He has been a practicing physician since 1986 and a licensed attorney since 1972.\nBrian J. Leitten, 44, was elected Vice President, Corporate Development and Technology on November 4, 1991. He has been employed by the Company since September 1, 1983, serving as Intellectual Property Counsel and, since 1986, Director, Corporate Development and Technology. Prior to joining the Company he was a partner with the Washington, D.C. law firm of Burns, Doane, Swecker & Mathis.\nDavid L. Robertson, 48, has been employed by the Company since November 15, 1982, and was elected Vice President of Human Resources on January 25, 1983. For the prior ten years, he was employed by the Olin Corporation, most recently as Corporate Director of Human Resources.\nBradley K. Reedstrom, 32, was elected Vice President, Corporate Planning on December 1, 1991. He has been employed by the Company since June 13, 1985, serving in various capacities in the Corporate Planning department, most recently as Director.\nJames D. Van De Velde, 47, was elected Vice President, Controller on May 13, 1991. He joined the Company on September 1, 1980 as Director, Taxes. Prior to that he was employed by the public accounting firm of Price Waterhouse.\nRobyn P. Washburn, 38, was elected Vice President, Continuous Improvement on April 9, 1991. Prior to that, he served as Vice President, Corporate Planning, and has been employed by the Company since May 10, 1982.\nITEM 2.","section_1A":"","section_1B":"","section_2":"ITEM 2. PROPERTIES\nThe principal properties of the Company and its subsidiaries are listed below, and are owned by the Company or its subsidiaries subject to no material encumbrances except for those facilities (*) which were constructed with funds obtained through Government Issued Bonds (see Note 3 to the Consolidated Financial Statements). All facilities are suitable for their intended purpose, are being efficiently utilized and are believed to provide adequate capacity to meet demand for the next several years.\nLOCATION DESCRIPTION PRIMARY USE -------- ----------- -----------\nHEALTH CARE AND OTHER:\n* Batesville, IN Manufacturing plant and Manufacture of hospital distribution facility equipment Office facilities Administration Charleston, SC Office facility and Administration and assembly plant assembly of therapy units Kempen and Schorndorf, Manufacturing plants and Manufacture of hospital and Germany office facilities nursing home equipment Pluvigner, France Manufacturing plant and Manufacture of hospital office facility equipment Salem, VA Manufacturing plant and Manufacture of mechanical office facility and electronic locks\nFUNERAL SERVICES:\nBatesville, IN Manufacturing plants Manufacture of metal caskets Office facilities Administration Manchester, TN Manufacturing plants Manufacture of metal caskets Campbellsville, KY Manufacturing plant Manufacture of metal caskets Vicksburg, MS Kiln drying and lumber Drying and dimensioning cutting plant lumber * Batesville, MS Manufacturing plant Manufacture of hardwood caskets Nashua, NH Manufacturing plant Manufacture of hardwood caskets\nIn addition to the foregoing, the Company leases or owns a number of warehouse distribution centers and sales offices throughout the United States and Europe.\nITEM 3.","section_3":"ITEM 3. LEGAL PROCEEDINGS\nHill-Rom was recently notified that it is part of an investigation into the hospital bed industry by the Antitrust Division of the Department of Justice (the \"DOJ\"). As a result, the Company was issued a Civil Investigation Demand by the DOJ and served with a subpoena to allow review of internal Hill-Rom files and business practices to determine any irregularities. The Company is cooperating with the DOJ in its investigation. Although the Company believes that it is not in violation of any antitrust law or statute and expects no material, adverse financial effect, it is impossible to predict with certainty when the investigation will be concluded, what the outcome of the investigation will be and what effect, if any, the outcome might have on the Company's financial condition or results of operations. There is no other pending litigation of a material nature in which the Company or its subsidiaries are involved.\nITEM 4.","section_4":"ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS\nThere were no matters submitted to a vote of security holders for the quarter ended November 27, 1993.\nPART II\nITEM 5.","section_5":"ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS\nMARKET INFORMATION\nHillenbrand Industries' common stock is traded on the New York Stock Exchange under the ticker symbol \"HB\". The following table reflects the range of high and low selling prices of the Company's common stock by quarter for 1993 and 1992.\nHOLDERS\nOn January 18, 1994, there were approximately 27,000 holders of the Company's common stock.\nDIVIDENDS\nThe Company has paid cash dividends on its common stock every quarter since its first public offering in 1971, and those dividends have increased each year since 1972. Dividends are paid near the end of February, May, August and November to shareholders of record near the end of January, April, July and October. Cash dividends of $.45 ($.1125 per quarter) in 1993 and $.35 ($.0875 per quarter) in 1992 were paid on each share of common stock outstanding. Cash dividends will be $.57 ($.1425 per quarter) in 1994.\nITEM 6.","section_6":"ITEM 6. SELECTED FINANCIAL DATA\nThe following table presents selected consolidated financial data of Hillenbrand Industries, Inc. for fiscal years 1989 through 1993.\nItem 7.","section_7":"Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS\nThe following discussion and analysis should be read in conjunction with the Company's consolidated financial statements and notes thereto. The discussion of results of operations excludes the results of the Company's luggage business, American Tourister, Inc., which was sold on August 30, 1993. The results of American Tourister, previously combined with Medeco Security Locks to form the Durables segment, have been reported separately as discontinued operations in the Statement of Consolidated Income. Results for American Tourister represented a substantial portion of the Durables segment as previously reported. Results for Medeco are now included in the Health Care segment (which also includes Hill-Rom, SSI and Block) due to Medeco's relative size. The Funeral Services segment includes Batesville Casket and Forethought. Results for prior years have been restated to conform to the current presentation.\nRESULTS OF OPERATIONS\n1993 COMPARED WITH 1992\nNet revenues increased $144.9 million, or 11.1%, to $1.4 billion in 1993. This represents the twenty-second consecutive annual increase in revenues since the Company's initial public offering in 1971. Operating profit of $234.3 million and income from continuing operations of $132.5 million were, respectively, 19.0% and 19.2% higher than in 1992. Fourth quarter 1993 results reflect the $11.6 million net gain on the sale of American Tourister and the $14.0 million write-down of goodwill relative to the acquisition of Block Medical in 1991. First quarter 1992 net income includes the $10.7 million favorable effect of the change in method of accounting for income taxes. Excluding these non-recurring items, total year net income (including the net income (loss) from discontinued operations in both years) increased 40.5% in 1993. Net revenues in the Health Care segment increased $84.7 million, or 10.7%, to $875.7 million in 1993. This growth was lead by Hill-Rom, which recorded increased sales of electric beds (primarily the Advance-R- series), the Affinity-TM- birthing bed and refurbished hospital equipment, as well as higher sales in Europe and Canada. Revenue growth at SSI was driven by increased units in use in its acute care, long-term care and home care markets. SSI's European revenues were down, despite growth in units in use, due to strong price competition in that market. The acquisition of certain assets of The Mediscus Group in May 1993 contributed marginally to SSI's overall revenue growth. Although Block Medical's sales continue to be disappointing, sales of the Verifuse-R- ambulatory electronic pump and its disposable administration sets increased in 1993. Sales of Homepump-R- disposable infusion pumps were down slightly in 1993, but improved steadily during the second half of the year. At Medeco, sales of telephone locks (mechanical and electric) and door security products increased due to strong market acceptance of new product offerings and positive consumer spending. Net revenues in the Funeral Services segment increased $60.2 million, or 11.8%, to $572.2 million in 1993. Net sales at Batesville Casket were higher due to increased unit shipments (including the marginal effect of acquired distributors), successful new product introductions (including a line of cremation products), improved product mix, and a moderate price increase. Forethought's revenue continued its strong growth pattern in 1993 although, as anticipated, at a rate slightly lower than in prior years. Investment income was up due to a larger invested asset base, partially offset by lower yields. Earned premium revenue was higher due to increased policies in force, year over year. The growth in consolidated operating profit of 19.0% compared with consolidated revenue growth of 11.1% reflects the improvement in cost of revenues as a percentage of revenues from 51.8% in 1992 to 51.6% in 1993, and the improvement in administrative, distribution and selling expenses as a percentage of revenues from 33.1% in 1992 to 32.2% in 1993. Operating profit in the Health Care segment of $132.7 million in 1993 was $16.3 million, or 14.0%, higher than in 1992. Hill-Rom's profit margins were negatively affected by continued growth in European operations (which generally realize lower margins), increased refurbished equipment sales and higher sales\ndiscounts in the U.S. and Canada. These factors were largely offset by improved efficiency, productivity and cost control in all operations. Improved operating results at SSI reflected increased therapy unit utilization, the benefits of the field operations reorganization in 1991, and lower depreciation expense associated with the Company's acquisition of SSI in 1985. The results of SSI's international operations were negatively affected by a very strong competitive environment. While Block is not currently contributing to the profitability of the Health Care segment, it continues to improve its products and operations. In the fourth quarter of 1993 the Company reassessed its investment in Block, which was acquired at the end of fiscal year 1991. Based on Block's operating results in 1992 and 1993 and management's current expectations regarding Block's future earnings and cash flow, the Company recorded a charge of $14.0 million to reduce the carrying value of the goodwill related to the Block acquisition. This charge is reflected in administrative, distribution and selling expenses. Without this non-recurring charge, operating profit in the Health Care segment would have increased $30.3 million, or 26.0%, in 1993. Medeco's margins continue to improve due to increases in productivity and efficiency. Operating profit in the Funeral Services segment of $114.6 million was up $16.5 million, or 16.9%, from 1992. Batesville Casket's results were enhanced by improved manufacturing, distribution and administrative efficiencies. Increased sales of higher value products also contributed to Batesville's improved margins. Forethought's profitability was favorably affected by higher investment income, higher insurance in force and the leveraging of fixed administrative expenses. Unassigned corporate administrative expenses declined $4.6 million, or 26.1%, due primarily to lower incentive compensation accruals. Compensation earned under provisions of the performance compensation plan (approved by shareholders on April 7, 1992) in 1992 and 1993, based on the performance of certain subsidiaries and the Company in those years, was accrued primarily in 1992. This factor also positively affected the comparative operating results of both business segments. Other expense, net, of $276 thousand was $6.0 million less than in 1992. This change was due to favorable foreign currency transaction experience in 1993 relative to 1992 and lower net expenses associated with the Company's corporate-owned life insurance program. The effective income tax rate on income from continuing operations increased from 37.5% in 1992 to 40.2% in 1993 primarily as the result of a corporate income tax rate increase enacted retroactive to January 1, 1993 as part of the 1993 tax legislation and the write-down of Block goodwill, which cannot be deducted for tax purposes. This increase was partially offset by decreases in both the state and foreign effective income tax rates.\n1992 COMPARED WITH 1991\nNet revenues increased $218.6 million, or 20.2%, to $1.3 billion in 1992. Operating profit of $196.8 million and income from continuing operations of $111.2 million were, respectively, 23.7% and 23.5% higher than in 1991. Net income in 1992 of $116.3 million reflected the $10.7 million favorable effect of the change in method of accounting for income taxes. Excluding this non-recurring item, net income increased 18.3% in 1992. Net revenues in the Health Care segment increased $165.5 million, or 26.4%, to $791.0 million. Hill-Rom's sales growth was driven by increased shipments of new and enhanced products and expansion in Europe, including sales by Le Couviour which was acquired in the fourth quarter of 1991. In 1992, SSI achieved revenue growth in its acute care, long-term care, home care and European markets as an expanded product offering and increased service improved the Company's competitive position. The revenues of Block Medical (acquired on the last day of fiscal 1991) contributed only marginally to the year-to-year growth of the Health Care segment. Medeco's sales growth was due to successful new product introductions and improved economic conditions. Net revenues in the Funeral Services segment increased $53.1 million, or 11.6%, to $512.0 million in 1992. Batesville Casket's sales were up due to improved product mix, higher unit volume and a moderate price increase. Forethought's earned premium revenue grew primarily as a result of increased business in force, and investment income growth was driven by a higher invested asset base, partially offset by marginally lower yields. Consolidated operating profit increased 23.7% compared to the revenue growth of 20.2%. Cost of revenues as a percentage of revenues improved from 52.8% in 1991 to 51.8% in 1992. Administrative, distribution and selling expenses as a percentage of revenues increased from 32.6%\nin 1991 to 33.1% in 1992. Operating profit in the Health Care segment of $116.4 million was $26.0 million, or 28.7%, higher than in 1991. This growth reflected higher revenues, improved profitability on new products, increased efficiency and European expansion. Additionally, depreciation and amortization expense relative to the SSI acquisition peaked in 1990 and has declined in each subsequent year. Hill-Rom's profit margins were negatively affected by the inclusion of results for Le Couviour. The benefits of a major manufacturing realignment and other efficiency improvements favorably affected fixed costs and productivity at Medeco. Operating profit in the Funeral Services segment of $98.1 million was $16.7 million, or 20.6%, higher than in 1991. Batesville Casket's profitability improved as a result of improved product mix and increased manufacturing efficiencies. Forethought's operating profit growth reflected increased insurance in force, higher investment income and economies of scale in fixed operating expenses. Unassigned corporate administrative expenses of $17.7 million were $5.0 million higher than in 1991. Incentive compensation was higher at corporate and both business segments due to compensation accrued relative to the performance compensation plan approved in 1992. Compensation relative to the performance of certain subsidiaries and the Company in 1992 and 1993 under provisions of this plan was accrued primarily in 1992. Interest expense of $21.2 million in 1992 was $8.0 million higher than in 1991 due to the issuance of debentures in December of 1991 and debt associated with the acquisition of Le Couviour, partially offset by lower imputed interest on the SSI earn-out payments and the retirement in January 1992 of the remaining balance on a 9-1\/8% promissory note. Investment income of $8.4 million was $2.1 million lower than in 1991. Higher average levels of interest-earning assets were offset by significantly lower yields. Other expense, net, of $6.2 million was $3.3 million lower than in 1991 due primarily to the discontinuation of the sale of SSI accounts receivable. The effective income tax rate on income from continuing operations was 37.5% in 1992 compared with 38.7% in 1991. This decrease resulted from implementation of various Federal and state planning strategies.\nINFLATION\nChanging prices had a negligible effect on results of operations in 1993, 1992 and 1991. Improvements in manufacturing and administrative efficiency continue to minimize the effect of price increases.\nLIQUIDITY AND CAPITAL RESOURCES\nNet cash generated from operating activities and selected borrowings represent the Company's primary sources of funds for growth of the business, including capital expenditures and acquisitions. Cash and cash equivalents (excluding investments of the insurance operation) grew from $150.0 million at the end of 1992 to $210.2 million at the end of 1993, an increase of $60.2 million. Net cash flows from operating activities of $218.5 million compares with $200.4 million and $199.3 million generated in 1992 and 1991, respectively. The decline in depreciation and amortization expense in 1993 reflects lower expense associated with the SSI acquisition, partially offset by the write-down of goodwill relative to the Block acquisition. The $19.6 million increase in accounts receivable was largely a function of higher sales volume, especially in the Health Care segment in the fourth quarter. The $50.6 million increase in 1992, as well as the increase in days sales outstanding (DSO) from 64 to 68, was attributable to the unwinding of the SSI accounts receivable sales program ($37.0 million effect). Strong fourth quarter shipments at Hill-Rom also contributed to the higher receivables balance at year-end 1992. DSO increased from 68 at year-end 1992 to 70 at year-end 1993 due primarily to the sale of American Tourister, which had DSO considerably below that of the Company as a whole. This factor was mostly offset by the significant success realized by SSI over the past year in the improvement of third party collections. Accrued expenses were essentially unchanged between 1993 and 1992 as lower income taxes payable (due to higher payments) was offset by higher accrued compensation. The $48.7 million increase in accrued expenses in 1992 reflected higher compensation, including the effect of the performance compensation plan adopted in 1992, and interest expense. Capital spending in 1993 was $112.7 million compared to $98.3 million in 1992 and $59.0\nmillion in 1991. The production of therapy units at SSI increased from $17.4 million in 1992 to $31.8 million in 1993 as new products and enhanced existing products were placed in service. The $39.3 million increase in 1992 was due to new products and expansion of facilities in the Health Care segment and upgrade of the aircraft fleet which is utilized primarily for the Company's customer visitation programs. There were no material commitments for capital spending at year-end 1993. Acquisition payments in 1993 were primarily for the purchase of certain assets of The Mediscus Group, a provider of specialized therapeutic beds and related services. Its operations have been fully integrated into SSI. Acquisition payments in 1992 were for Le Couviour, and payments in 1991 were for Le Couviour and Block. Proceeds (net of disposition costs) on the sale of American Tourister were $55.3 million in 1993. The Company's long-term debt-to-equity ratio decreased from 33.8% at year-end 1992 to 16.9% at year-end 1993. An unsecured promissory note in the amount of $75.0 million due in annual installments in 1994, 1995 and 1996 was reclassified to current liabilities. It is the Company's intent to prepay this note in full in 1994 without penalty. The Company's long-term debt agreement with an insurance company permits a debt-to-tangible net worth ratio of up to 90%. With that ratio at 36.7% at year-end 1993, this debt capacity, combined with existing cash and other working capital, affords the Company considerable flexibility in the funding of internal and external growth. In the fourth quarter of 1993, the Company filed a registration statement with the Securities and Exchange Commission for the future issuance of up to $200 million of debentures. The proceeds will be used for general corporate purposes, including working capital, capital expenditures, possible future acquisitions, refinancing of indebtedness and redemption of securities. Insurance assets of $1,212.4 million grew 32.9% over the past year. Cash and invested assets of $934.0 million constitute 77.0% of the assets. The investments are concentrated in the highest grade, Federal Government, Federal agency and corporate bond securities. The invested assets are more than adequate to fund the insurance reserves and other liabilities of $846.9 million. Statutory reserves represent 65% of the face value of insurance in force. This percentage is far greater than the 1992 national average of 6% for all U.S. life insurance companies. The statutory capital and surplus as a percent of statutory liabilities of the life insurance subsidiary of Forethought was 8.6% at December 31, 1993, up from 7.4% on December 31, 1992. The long-term deferred tax benefit relative to insurance operations results from differences in recognition of insurance policy revenues and expenses for financial accounting and tax reporting purposes. Financial accounting rules require ratable recognition of insurance product revenues over the lives of the respective policies. These revenues are recognized in the year of policy issue for tax purposes. This results in a deferred future tax benefit. Insurance policy acquisition expenses must be capitalized and amortized for both financial accounting and tax purposes. Financial accounting rules require a greater amount to be capitalized and amortized than for tax reporting. This results in a deferred future tax cost, which partially offsets the deferred future tax benefit. The net deferred future tax benefit increased $11.0 million in 1993, compared to $13.0 million in 1992. The reduction in the year to year net increase was attributable to favorable final regulations issued by the Department of the Treasury which reduced the amount of policy acquisition expenses required to be capitalized for tax purposes. The net effect of the temporary differences discussed above is expected to cause the net deferred tax benefit to increase in the future. Cumulative treasury stock acquired increased to 10,213,272 shares in 1993, up from 9,872,446 shares in 1992. The Company currently has Board of Directors' authorization to repurchase up to a total of 14,000,000 shares. Repurchased shares are used for general business purposes. From the cumulative shares acquired, 28,287 shares were reissued in 1993 to individuals under the provisions of the Senior Executive Compensation Program. A total of 4,700 restricted stock shares were forfeited in 1993. Under the restricted stock plan approved by the shareholders of the Company on April 14, 1987, 324,600 shares have been awarded, 268,132 shares have been distributed and\/or deferred, and 56,468 shares have been forfeited to date. No additional awards are contemplated at this time. Under the performance compensation plan approved by the shareholders of the Company on April 7, 1992, 386,096 shares were earned in 1993 based on each subsidiary's and the Company's performance in 1992 and 1993. Quarterly cash dividends were raised 28.6% from 8.75 cents per share in 1992 to 11.25 cents in 1993. An additional increase of 26.7% to 14.25 cents per share was announced in January 1994. The Company expects to continue to share its growth with its shareholders.\nFACTORS THAT MAY AFFECT FUTURE RESULTS\nChanges in the health care delivery system will continue to impact the Company's U.S. customers in the Health Care segment and, therefore, the products and services the Company provides. The uncertainty and extent of future health care reform legislation may also affect the purchasing patterns of these customers. Batesville Casket competes in an essentially flat market. Its future growth will depend in part on its ability to continue to gain market share by offering innovative products and services. The Company believes that the investments it has made in new products and services and process improvements, coupled with its leadership position in the markets it serves, will enable it to successfully compete in this changing environment.\nREPORTING\nThe Financial Accounting Standards Board has recently issued two Statements of Financial Accounting Standards (SFAS) which apply to the Company. SFAS No. 112, \"Employers' Accounting for Post Employment Benefits,\" was issued in November 1992, and establishes standards of financial accounting and reporting for the estimated cost of benefits which will be provided by an employer to former or inactive employees after employment but before retirement. Adoption of this standard, which will occur no later than fiscal year 1995, is not expected to have a material effect on the financial condition or results of operations of the Company. SFAS No. 115, \"Accounting for Certain Investments in Debt and Equity Securities,\" was issued in May 1993. SFAS 115 requires that investments in debt and equity securities be accounted for and classified as follows: debt securities that the Company has the positive intent and ability to hold to maturity are classified as \"held-to-maturity\" and reported at amortized cost; debt and equity securities that are bought and held principally for resale in the near term are classified as \"trading securities\" and reported at fair value, with unrealized gains and losses included in earnings; and debt and equity securities not classified as either of the above are classified as \"available-for-sale\" and reported at fair value, with unrealized gains and losses charged or credited directly to a separate component of shareholders' equity. This Statement will primarily affect the carrying value and presentation of Forethought's investment assets and will be adopted by the Company no later than fiscal year 1995.\nItem 8.","section_7A":"","section_8":"Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA\nINDEX TO CONSOLIDATED FINANCIAL STATEMENTS\nPAGE\nFINANCIAL STATEMENTS:\nReport of Independent Accountants 16 Statements of Consolidated Income for the three years ended November 27, 1993 17 Statements of Consolidated Shareholders' Equity for the three years ended November 27, 1993 18 Statements of Consolidated Cash Flows for the three years ended November 27, 1993 19 Consolidated Balance Sheets at November 27, 1993 and November 28, 1992 20 Notes to Consolidated Financial Statements 22 Financial Statement Schedules for the three years ended November 27, 1993: Schedule V - Equipment Leased to Others and Property 37 Schedule VI - Accumulated Depreciation of Equipment Leased to Others and Property 38 Schedule VIII - Valuation and Qualifying Accounts 39 Schedule IX - Short-Term Borrowings 40 Schedule X - Supplementary Income Statement Information 41\nAll other schedules are omitted because they are not applicable or the required information is shown in the financial statements or the notes thereto.\nREPORT OF INDEPENDENT ACCOUNTANTS\nTo the Shareholders and Board of Directors of Hillenbrand Industries, Inc.\nIn our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Hillenbrand Industries, Inc. and its subsidiaries at November 27, 1993 and November 28, 1992, and the results of their operations and their cash flows for each of the three years in the period ended November 27, 1993, in conformity with generally accepted accounting principles. 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 of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. As discussed in Note 1 to the financial statements, the Company changed its method of accounting for income taxes in 1992.\nPRICE WATERHOUSE\nIndianapolis, Indiana January 10, 1994\nSTATEMENT OF CONSOLIDATED INCOME\nHILLENBRAND INDUSTRIES, INC. AND SUBSIDIARIES (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)\nSEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS\nSTATEMENT OF CONSOLIDATED SHAREHOLDERS' EQUITY\nHILLENBRAND INDUSTRIES, INC. AND SUBSIDIARIES (DOLLARS IN THOUSANDS)\nSEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS\nSTATEMENT OF CONSOLIDATED CASH FLOWS\nHILLENBRAND INDUSTRIES, INC. AND SUBSIDIARIES (DOLLARS IN THOUSANDS)\nSEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS\nCONSOLIDATED BALANCE SHEET\nHILLENBRAND INDUSTRIES, INC. AND SUBSIDIARIES (DOLLARS IN THOUSANDS)\nSEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS\nSEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)\n1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES\nAccounting policies specific to insurance operations are summarized in Note 9.\nPRINCIPLES OF CONSOLIDATION\nThe consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, except for several small subsidiaries which provide ancillary services to the Company and the public. These subsidiaries are not consolidated because of their materiality and are accounted for by the equity method. Their results of operations appear in the income statement, net of income taxes, under the caption \"Other income (expense), net.\" Operating results for American Tourister, which was sold on August 30, 1993, are reported separately as discontinued operations, net of income taxes, in the income statement. Material intercompany accounts and transactions have been eliminated in consolidation. The Company's fiscal year is the 52 or 53 week period ending the Saturday nearest November 30.\nCASH AND CASH EQUIVALENTS\nThe Company considers investments in marketable securities and other highly liquid instruments with a maturity of three months or less to be cash equivalents.\nINVENTORIES\nInventories are valued at the lower of cost, principally on a last-in, first-out (LIFO) basis, or market. The LIFO reserve, which approximates the excess of the current cost of inventories over the stated LIFO values, increased from $8.3 million at year-end 1991 to $9.3 million at year-end 1992. The LIFO reserve fell to $8.2 million at year-end 1993 due to the sale of American Tourister in the fourth quarter. Excluding the effect of the sale, the LIFO reserve increased $1.6 million in 1993. Separate accounts for raw materials, work-in-process and finished goods are not maintained.\nEQUIPMENT LEASED TO OTHERS\nEquipment leased to others represents the cost of remaining CLINITRON-r- therapy units acquired on November 29, 1985 in the acquisition of Support Systems International, Inc. and substantially all other therapy units manufactured and acquired since that date. All units are effectively depreciated on a straight-line basis over their average economic life. These units are leased on a day-to-day basis.\nPROPERTY\nProperty is recorded at cost and depreciated over the estimated useful life of the assets using principally the straight-line method for financial reporting purposes. Generally, when property is retired from service or otherwise disposed of, the cost and related amount of depreciation or amortization are eliminated from the asset and reserve accounts, respectively. The difference, if any, between the net asset value and the proceeds is charged or credited to income. The major components of property at the end of 1993 and 1992 were:\nINTANGIBLE ASSETS\nIntangible assets are stated at cost and are amortized on a straight-line basis over periods ranging from 3 to 40 years. In the fourth quarter of 1993, the Company recorded a $14.0 million charge to reduce the carrying value of the goodwill related to the Block acquisition based on management's expectations for Block's future earnings and cash flow. Accumulated amortization of intangible assets was $119,258 and $106,034 as of November 27, 1993 and November 28, 1992, respectively.\nEARNINGS PER COMMON SHARE\nEarnings per common share are computed by dividing net income by the average number of shares outstanding during each year, including restricted shares issued to employees. Common equivalent shares arising from shares awarded under the Senior Executive Compensation Program, which was initiated in fiscal year 1978, have been excluded from the computation because of their insignificant dilutive effect.\nRETIREMENT PLANS\nThe Company and its subsidiaries have several defined benefit retirement plans covering the majority of employees, including certain employees in foreign countries. The Company contributes funds to trusts as necessary to provide for current service and for any unfunded projected future benefit obligation over a reasonable period. The benefits for these plans are based primarily on years of service and the employee's level of compensation during specific periods of employment. The weighted average discount rate and rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligation were 7.5% and 6.0%, respectively, for 1993, 8.0% and 6.5%, respectively, for 1992, and 8.5% and 8.0%, respectively, for 1991. The expected long-term rate of return on assets was 8.0% for 1993 and 1992 and 8.5% for 1991.\nNet pension expense includes the following components:\nThe funded status of the plans is shown in the table below:\nThe Company also sponsors several defined contribution plans covering certain of its employees. Employer contributions are made to these plans based on a percentage of employee compensation. The cost of these defined contribution plans was $5,928 in 1993, $5,388 in 1992, and $4,313 in 1991.\nINCOME TAXES\nThe Company adopted Statement of Financial Accounting Standards No. 109, \"Accounting for Income Taxes\" (SFAS 109), in 1992. SFAS 109 is an asset and liability method of accounting for income taxes. The asset and liability method requires the recognition of deferred tax assets and liabilities based upon expected future tax consequences of temporary differences between tax bases and financial reporting bases of assets and liabilities.\nNet assets as of December 1, 1991 were increased by $10,747 as a result of adopting SFAS 109. For years prior to 1992, income taxes were computed based on Accounting Principles Board Opinion No. 11.\nFOREIGN CURRENCY TRANSLATION\nAssets and liabilities of foreign operations are translated at year-end rates of exchange and the income statements are translated at the average rates of exchange prevailing during the year. Adjustments resulting from translation of the financial statements of foreign operations are excluded from the determination of net income and included as a separate caption in shareholders' equity. Foreign currency gains and losses resulting from transactions are included in results of operations.\n2. ACQUISITIONS\nIn May 1993, SSI purchased certain assets of The Mediscus Group, Inc. Batesville Casket acquired several regional casket distributors during fiscal 1993. Two acquisitions occurred subsequent to the end of fiscal year 1993. In December 1993, Batesville acquired Industrias Arga, S.A. de C.V., a casket manufacturer in Mexico. In February 1994, Hill-Rom completed the acquisition of L. & C. Arnold A.G., of Schorndorf\/Kempen in western Germany. Amounts paid for these acquisitions were not significant to the Company's financial position.\n3. FINANCING AGREEMENTS\nFinancing agreements with promissory note holders contain various provisions and conditions relating to dividend payments, working capital and additional indebtedness. At November 27, 1993, retained earnings available for dividends were $305,494. The minimum working capital and long-term debt-to-tangible net worth limits afford the Company considerable flexibility in its financing alternatives.\nLong-term debt consists of the following:\nThe scheduled payments of the remaining long-term debt as of November 27, 1993 are: $77,318 in 1994; $2,911 in 1995; $946 in 1996; $679 in 1997 and $490 in 1998. It is the Company's intent to prepay the $75,000 promissory note in full in 1994 without penalty. Short-term debt consists of a non-interest bearing promissory note in the amount of $1,750 payable in 1994 and use of various lines of credit maintained for foreign subsidiaries totaling $10,958.\n4. SHAREHOLDERS' EQUITY\nOne million shares of preferred stock, without par value, have been authorized and none have been issued. The Company's Senior Executive Compensation Program, initiated in fiscal year 1978, provides long-term performance share compensation which contemplates annual payments of common stock of the Company to participants contingent on their continued employment and upon achievement of pre-established financial objectives of the Company over succeeding three-year periods. A total of 1,206,593 shares of common stock of the Company remain reserved for issuance under the program. Total tentative performance shares payable through November 27, 1993, were 99,588. In addition, the Senior Executive Compensation Program provides for participants to defer payment of long-term performance share and other compensation earned in prior years. A total of 202,445 deferred shares are payable as of November 27, 1993. Accruals for payments under these programs are included in \"Other Long-Term Liabilities.\" Members of the Board of Directors may elect to defer fees earned as reinvested in common stock of the Company. A total of 2,692 deferred shares are payable as of November 27, 1993 under this program. On April 7, 1992, the shareholders of the Company approved the adoption of a performance compensation plan whereby key employees will be awarded tentative performance shares based upon achievement of performance targets. An aggregate of 1,675,400 shares of common stock have been authorized and reserved for issuance under this plan. In 1993, 386,096 shares were earned based on the Company's performance. The Board of Directors has authorized the repurchase, from time to time, of up to 14,000,000 shares of the Company's stock in the open market. The purchased shares will be used for general corporate purposes. As of November 27, 1993, a total of 10,213,272 shares had been purchased. On April 14, 1987, the shareholders of the Company approved the adoption of a restricted stock plan whereby key employees may be granted restricted shares of the Company's stock. The restrictions lapse after six years; or earlier if certain financial goals are exceeded. 2,000,000 shares of common stock were designated for this plan. These restricted shares may be awarded during the next four years and the vesting periods begin when the shares are awarded. 324,600 shares have been awarded, 268,132 shares have been distributed and\/or deferred, and 56,468 shares have been forfeited as of November 27, 1993. No additional awards are contemplated at this time.\n5. DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS\nThe following methods and assumptions were used to estimate the fair value of each class of financial instruments (other than Insurance investments which are described in Note 9) for which it is practicable to estimate that value: The carrying amounts of cash and cash equivalents, trade accounts receivable, other current assets, trade accounts payable, and accrued expenses approximate fair value because of the short maturity of those instruments. The fair value of the Company's debt is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to the Company for debt of the same remaining maturities. The estimated fair values of the Company's debt instruments are as follows:\n6. SEGMENT INFORMATION\nINDUSTRY INFORMATION\nThe Company has restated its segment presentation to give effect to the sale of American Tourister and the regrouping of Batesville Casket and Forethought into the Funeral Services segment.\nThe Health Care segment consists of Hill-Rom Company, SSI Medical Services and Block Medical. Results for Medeco Security Locks are included in this segment due to its relative size. Hill-Rom produces and sells electric hospital beds, patient room furniture and patient handling equipment designed to meet the needs of acute care and perinatal providers. SSI provides rental therapy units to health care facilities for wound therapy, the management of pulmonary complications associated with critically ill patients, and incontinence management. Block manufactures and sells home infusion therapy products including disposable infusion pumps and ambulatory electronic infusion pumps for antibiotic, nutritional, chemotherapy and other drug therapies. Medeco produces and sells high-security mechanical locks and lock cylinders and electronic security systems for commercial, residential and government applications.\nThe Funeral Services segment consists of Batesville Casket Company and Forecorp. Batesville manufactures and sells a variety of metal and hardwood caskets and sells a line of urns used in cremation. Batesville's products are sold to licensed funeral directors operating licensed funeral homes. Forecorp's subsidiaries, Forethought Life Insurance Company and The Forethought Group, provide funeral planning professionals with marketing support for Forethought-r- funeral plans funded by life insurance policies. Note 9 contains additional information regarding insurance operations.\nFinancial information regarding the Company's industry segments is presented below:\nGEOGRAPHIC INFORMATION\nThe net revenues, operating profit, and identifiable assets of the Company's foreign operations each constituted less than 10% of the corresponding consolidated items in 1991 and prior years and are therefore not reported separately.\nSales between geographic area are at transfer prices, which are equivalent to market value.\n7. INCOME TAXES\nIn 1992, the Company adopted SFAS 109 \"Accounting for Income Taxes.\" Under SFAS 109, the deferred tax provision is determined using the liability method. This method recognizes deferred tax assets and liabilities measured on differences between financial statement and tax bases of assets and liabilities using presently enacted tax rates.\nThe fiscal year differences between the amounts recorded for income taxes on income from continuing operations for financial statement purposes and the amounts computed by applying the Federal statutory tax rate to income from continuing operations before taxes are explained as follows:\nItems that gave rise to significant portions of the net deferred tax balance sheet accounts are as follows:\nItems that gave rise to significant portions of the deferred provision for income taxes for 1991 are as follows:\n8. SUPPLEMENTARY INFORMATION\nThe following amounts were (charged) or credited to income in the year indicated:\nThe table below indicates the minimum annual rental commitments (excluding renewable periods) aggregating $49,552, primarily for warehouses, under noncancellable operating leases.\nThe table below provides supplemental cash flow information.\n9. INSURANCE OPERATIONS\nForecorp, Inc., through its two subsidiaries, The Forethought Life Insurance Company and The Forethought Group, Inc., serves funeral planning professionals with life insurance policies and marketing support for FORETHOUGHT-R- funeral planning, a pre-need insurance program. Investments are predominantly U.S. Government, Federal agency and corporate debt securities with fixed maturities and are carried on the balance sheet at amortized cost. It is management's intent that these investments be held to maturity. Cash (unrestricted as to use) is held for future investment.\nThe amortized cost and fair values of investments in debt securities at November 27, 1993 are as follows:\nThe amortized cost and fair value of debt securities at November 27, 1993, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or repay obligations with or without call or prepayment penalties.\nProceeds and realized gains and losses from the sale of investments in debt securities were as follows:\nPremiums received are recorded as an increase to benefit reserves or as unearned revenue. Unearned revenues are recognized over the actuarial life of the contract. Policy acquisition costs, consisting of commissions, policy issue expense and premium taxes, are deferred and amortized consistently with unearned revenues. Benefit reserves are equal to the net cash surrender value available to policyholders. Cash surrender values are determined using Commissioner's Standard Ordinary tables with interest rates from 4.0% to 5.5%.\nSummarized financial information of insurance operations included in the consolidated financial statements is as follows:\n10. UNAUDITED QUARTERLY FINANCIAL INFORMATION\n11. DISCONTINUED OPERATION\nOn August 30, 1993, the Company sold its luggage business, American Tourister, Inc., for a cash payment of $63.8 million. Net proceeds (after disposition costs) were $55.3 million. The gain on the sale of $11.6 million is net of income taxes of $4.7 million. The results of American Tourister, Inc., representing a substantial portion of the previously-reported Durables segment, have been reported separately as discontinued operations in the Statement of Consolidated Income for the three year period ended November 27, 1993. The income (loss) from discontinued operations is net of income tax provisions (benefits) of $1,091, ($782) and ($426) in 1993, 1992 and 1991, respectively.\nITEM 9.","section_9":"ITEM 9. DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE\nThere were no disagreements with the independent accountants.\nPART III\nITEM 10.","section_9A":"","section_9B":"","section_10":"ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT\nInformation relating to executive officers is included in this report as the last section of Item 1 under the caption \"Executive Officers of the Registrant.\" Information relating to the directors will appear in the section entitled \"Election of Directors\" in the definitive Proxy Statement to be dated February 25, 1994, and to be filed with the Commission relating to the Company's 1994 Annual Meeting of Shareholders, which section is incorporated herein by reference.\nITEM 11.","section_11":"ITEM 11. EXECUTIVE COMPENSATION\nThe section entitled \"Executive Compensation\" in the definitive Proxy Statement dated February 25, 1994, and to be filed with the Commission relating to the Company's 1994 Annual Meeting of Shareholders, is incorporated herein by reference.\nITEM 12.","section_12":"ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT\nThe section entitled \"Election of Directors\" in the definitive Proxy Statement to be dated February 25, 1994, and to be filed with the Commission relating to the Company's 1994 Annual Meeting of Shareholders, is incorporated herein by reference.\nItem 13.","section_13":"Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS\nThe sections entitled \"About the Board of Directors\" and \"Compensation Committee Interlocks and Insider Participation\" in the definitive Proxy Statement to be dated February 25, 1994, and to be filed with the Commission relating to the Company's 1994 Annual Meeting of Shareholders, are incorporated herein by reference.\nPART IV\nItem 14.","section_14":"Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K\n(a) The following documents have been filed as a part of this report or, where noted, incorporated by reference:\n(1) Financial Statements\nThe financial statements of the Company and its consolidated subsidiaries listed on the index to Consolidated Financial Statements on page 15.\n(2) Financial Statement Schedules\nThe financial statement schedules filed in response to Item 8 and Item 14(d) of Form 10-K are listed on the index to Consolidated Financial Statements on page 15.\n(3) Exhibits\nThe following exhibits have been filed as part of this report in response to Item 14(c) of Form 10-K.\n3 (i) Form of Restated Certificate of Incorporation of the Registrant (Incorporated herein by reference to Exhibit 3 filed with Form 10-K for the year ended November 28, 1992)\n3 (ii) Form of Amended Bylaws of the Registrant\n10 (i) Purchase Agreement dated April 30, 1986, between Registrant and Metropolitan Life Insurance Company (Incorporated herein by reference to Exhibit 4 filed with Form 10-K for the year ended November 29, 1986)\nThe following management contracts or compensatory plans or arrangements are required to be filed as exhibits to this form pursuant to Item 14 (c) of this report:\n10 (ii) Hillenbrand Industries, Inc. Senior Executive Compensation Program (Incorporated herein by reference to Exhibit 10 filed with Form 10-K for the year ended November 30, 1991)\n10 (iii) Hillenbrand Industries, Inc. Performance Compensation Plan (Incorporated herein by reference to the definitive Proxy Statement dated February 28, 1992, and filed with the Commission relative to the Company's 1992 Annual Meeting of Shareholders)\n21 Subsidiaries of the Registrant\n23 Consents of Experts and Counsel\n(b) Reports on Form 8-K for the Quarter Ended November 27, 1993.\nA report on Form 8-K under Item 5 was filed on August 30, 1993, relative to the sale of the Company's luggage business, American Tourister, Inc. The sale did not represent the disposition of a significant amount of assets as would be required to be reported under Item 2 of Form 8-K; however, American Tourister represented a substantial portion of the Company's previously-reported Durables segment. The report included the Company's consolidated balance sheet at November 28, 1992 and November 30, 1991, and consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended November 28, 1992, restated to give effect to the discontinued operations of American Tourister from November 29, 1987.\nSCHEDULE V HILLENBRAND INDUSTRIES, INC. AND SUBSIDIARIES EQUIPMENT LEASED TO OTHERS AND PROPERTY FOR THE YEARS ENDED NOVEMBER 27, 1993, NOVEMBER 28, 1992, AND NOVEMBER 30, 1991 (DOLLARS IN THOUSANDS)\nSCHEDULE VI\nHILLENBRAND INDUSTRIES, INC. AND SUBSIDIARIES ACCUMULATED DEPRECIATION OF EQUIPMENT LEASED TO OTHERS AND PROPERTY FOR THE YEARS ENDED NOVEMBER 27, 1993, NOVEMBER 28, 1992, AND NOVEMBER 30, 1991 (DOLLARS IN THOUSANDS)\nSCHEDULE VIII\nHILLENBRAND INDUSTRIES, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED NOVEMBER 27, 1993, NOVEMBER 28, 1992, AND NOVEMBER 30, 1991 (DOLLARS IN THOUSANDS)\nSCHEDULE IX\nHILLENBRAND INDUSTRIES, INC. AND SUBSIDIARIES SHORT-TERM BORROWINGS FOR THE YEARS ENDED NOVEMBER 27, 1993, NOVEMBER 28, 1992, AND NOVEMBER 30, 1991 (DOLLARS IN THOUSANDS)\nSCHEDULE X\nHILLENBRAND INDUSTRIES, INC. AND SUBSIDIARIES SUPPLEMENTARY INCOME STATEMENT INFORMATION FOR THE YEARS ENDED NOVEMBER 27, 1993, NOVEMBER 28, 1992, AND NOVEMBER 30, 1991 (DOLLARS IN THOUSANDS)\nSIGNATURES\nPursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.\nHILLENBRAND INDUSTRIES, INC.\nBy: \/S\/ W August Hillenbrand ------------------------------------- W August Hillenbrand Dated: January 19, 1994 President and Chief Executive Officer\nPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.\n\/S\/ Daniel A. Hillenbrand \/S\/ Leonard Granoff --------------------------- --------------------------- Daniel A. Hillenbrand Leonard Granoff Chairman of the Board Director\n\/S\/ Tom E. Brewer \/S\/ John C. Hancock --------------------------- --------------------------- Tom E. Brewer John C. Hancock Senior Vice President and Director Chief Financial Officer\n\/S\/ James D. Van De Velde \/S\/ W August Hillenbrand --------------------------- --------------------------- James D. Van De Velde W August Hillenbrand Vice President, Controller Director\n\/S\/ Robert K. Bellamy \/S\/ George M. Hillenbrand II --------------------------- --------------------------- Robert K. Bellamy George M. Hillenbrand II Director Director\n\/S\/ Lawrence R. Burtschy \/S\/ John A. Hillenbrand II --------------------------- --------------------------- Lawrence R. Burtschy John A. Hillenbrand II Director Director\n\/S\/ Peter F. Coffaro \/S\/ Ray J. Hillenbrand --------------------------- --------------------------- Peter F. Coffaro Ray J. Hillenbrand Director Director\n\/S\/ Edward S. Davis \/S\/ Lonnie M. Smith --------------------------- --------------------------- Edward S. Davis Lonnie M. Smith Director Director\nDated: January 19, 1994\nHILLENBRAND INDUSTRIES, INC. INDEX TO EXHIBITS\n3 (i) Form of Restated Certificate of Incorporation of the Registrant (Incorporated herein by reference to Exhibit 3 filed with Form 10-K for the year ended November 28, 1992)\n3 (ii) Form of Amended Bylaws of the Registrant\n10 (i) Purchase Agreement dated April 30, 1986, between Registrant and Metropolitan Life Insurance Company (Incorporated herein by reference to Exhibit 4 filed with Form 10-K for the year ended November 29, 1986)\n10 (ii) Hillenbrand Industries, Inc. Senior Executive Compensation Program (Incorporated herein by reference to Exhibit 10 filed with Form 10-K for the year ended November 30, 1991)\n10 (iii) Hillenbrand Industries, Inc. Performance Compensation Plan (Incorporated herein by reference to the definitive Proxy Statement dated February 28, 1992, and filed with the Commission relative to the Company's 1992 Annual Meeting of Shareholders)\n21 Subsidiaries of the Registrant\n23 Consents of Experts and Counsel","section_15":""}
{"filename":"778977_1993.txt","cik":"778977","year":"1993","section_1":"ITEM 1. BUSINESS\nOVERVIEW\nLevi Strauss Associates Inc. (the Company) acquired Levi Strauss & Co. (LS&CO.) in 1985 and is the world's largest brand-name apparel manufacturer. It designs, manufactures and markets apparel for men, women and children, including jeans, slacks, shirts, jackets, skirts and fleece. Most of its products are marketed under the Levi's(R) and Dockers(R) trademarks and are sold in the United States and in many other locations throughout North and South America, Europe, Asia and Oceania. These products are produced by the Company worldwide at owned and operated facilities or by independent contractors.\nThe Company's revenues are derived mostly from the sale of jeans and jeans- related products. Jeans include pants that usually have five pockets and are made of denim, corduroy, twill and other fabrics. These and other jeans-related products generated approximately 71 percent of the Company's total sales in 1993 ($4.2 billion of $5.9 billion) and are the mainstays of the Company's profitability. Casual products (mostly pants and tops marketed under the Dockers(R) brand that are not jeans or jeans-related products) are increasingly becoming an important source of revenues in the U.S. The non-U.S. businesses generate higher gross profit as a percent of sales than U.S. businesses and are an important source of cash flows.\nThe worldwide apparel market is characterized by constant change and diversity. It is affected by demographic fluctuations in the consumer population, frequent shifts in prevailing fashions and styles, international trade and economic developments, and retailer practices.\nThe Company has historically enjoyed its largest brand share and customer base for jeans among men, especially those aged 15-24 years old, and, to a lesser extent, those aged 25 and over. The demographics of the U.S. and other industrialized countries outside the U.S. reflect aging populations and declining target markets. The demographics of less industrialized countries indicate growing younger populations and increasing target markets for the Company's jeans and jeans-related products.\nThe Company's market success is dependent on the Company's ability to quickly and effectively respond to changes in market trends and other consumer preferences, especially now that U.S. and Canada consumers are more price and value conscious and many competitors are offering lower priced and innovative products. This increasing price consciousness is putting pressure on brand and product loyalty. The ongoing competitive nature of the apparel industry and market trends present a continuous risk that new products or market segments may emerge and compete with the Company's existing products and\/or markets.\nThe Company's business is also dependent on the quality of service the Company provides to its customers. Retailers are striving to maintain lower inventory positions and place orders closer in time to requested delivery dates. As a result, the Company has faced increasing pressure from U.S. retailers to improve its product support and delivery performance. Additionally, the U.S. retail market has changed in recent years, resulting in more centralized\nbuying practices and potentially greater credit exposures from customers. Outside the U.S., customer service and product support demands from large retailers are also increasing.\nORGANIZATION STRUCTURE\nThe Company's current operating structure consists of two principal organizations: Levi Strauss North America (LSNA) and Levi Strauss International (LSI).\nLSNA encompasses the Company's businesses in the U.S., Canada and Mexico. The LSNA operating structure currently consists of seven principal marketing and\/or operating divisions: Men's Jeans, Youthwear, Menswear, Womenswear, Canada, Mexico and Brittania Sportswear Ltd. Jeans and jeans-related products marketed by Men's Jeans and Dockers(R) products marketed by Menswear are the Company's most important source of U.S. sales and earnings. The Womenswear, Youthwear and Canada divisions also market jeans, jeans-related products and casual products, including Dockers(R) products. The Mexico division markets mostly jeans, jeans- related products and Dockers(R) products. Brittania Sportswear Ltd. markets the Brittania(R) line of men's and women's jeans, tops and casual sportswear in the U.S. As part of a strategic initiative, the Company is aligning its U.S. marketing divisions according to the Company's Levi's(R), Dockers(R) and Brittania(R) brands (SEE STRATEGIC INITIATIVES SECTION).\nLSI markets jeans and related apparel outside North America and is a major source of operating income for the Company. Its sourcing methods include owned and operated facilities in certain countries and independent contractors. LSI is organized along geographic lines consisting of the Europe, Latin America and Asia Pacific divisions. Europe is the largest LSI division in terms of sales and profits. Asia Pacific is the second largest LSI division, principally due to the performance of its Japanese operations in recent years.\nThe Company continually evaluates the profitability and cash flow of its global operations. The following table presents U.S. and non-U.S. sales for 1993, 1992 and 1991.\nFor additional financial information concerning the U.S. and non-U.S. operations of the Company, SEE NOTE 2 TO THE CONSOLIDATED FINANCIAL STATEMENTS.\nSTRATEGIC INITIATIVES\nThe Company is in the process of examining and re-engineering various aspects of its brand marketing, customer service and operations\/distribution strategies in response to current market and economic trends and in accordance with its Business Vision (SEE BUSINESS VISION SECTION). The Company believes its initiatives are essential to staying competitive and meeting the changing competitive needs of its customers. Summaries of these initiatives are as follows:\nGLOBAL BRAND ALIGNMENT\nThe Company's strategy, as outlined in its Business Vision, is to position its brands to ensure consistency of image and values to consumers around the world. The Company is taking the following actions to implement this strategy:\nThe Company is aligning its U.S. marketing divisions according to the Company's Levi's(R), Dockers(R) and Brittania(R) brands.\nThe Company is analyzing its customer base and product distribution in all markets to ensure that its retail distribution is consistent with its brand image.\nThe Company is entering into a joint venture to build and operate, in the U.S., stores selling only Levi's(R) jeans and jeans-related products (SEE RETAIL JOINT VENTURE CAPTION).\nThe Company's trademarks and brands differentiate its products from those of competitors. Due to the increasingly global nature of the marketplace, brands that are marketed in divergent distribution channels in different countries may confuse retailers and customers and dilute the Company's brand image. To align its brand image, the Company may alter its distribution and marketing procedures. Retailers may react adversely to changes in product distribution, service levels or other aspects of their customer relationship with the Company. However, the Company believes that consistent brand image, on a global basis, is essential to long-term success and attainment of overall objectives.\nCUSTOMER SERVICE\nThe Company believes that retailer expectations for service from manufacturers are increasing in both the North American and European markets. These expectations and requirements relate to all aspects of the relationship between the manufacturer and retailer. Retailers want manufacturers to develop, deliver and replenish products faster, deliver retail floor-ready merchandise, participate in retail floor product presentation and provide ongoing support for the products on the retail floor. Additionally, manufacturers are expected to establish information systems that would be compatible with retailer systems and to adjust invoicing and payment methods, accordingly. The Company believes that superior customer service, as well as its product development and marketing ability, will be an essential element of competitive strength in the coming years.\nThe Company is engaged in various customer service initiatives in the U.S. and in certain non-U.S. businesses. It is reorganizing and re-engineering its entire U.S. operations to improve customer service, forge stronger relationships with its retail customers and reduce the time it takes to develop products and fill customer orders. The reorganization will affect the Company's entire U.S. supply chain, including product development, production and sourcing, sales and distribution processes, and its information resource systems.\nThe Company expects to upgrade its national distribution network and regionally link manufacturing, finishing and distribution facilities. This will entail the modernization, reconfiguration and expansion of facilities, including purchases of new facilities and equipment. The Company plans to utilize several regional customer service centers to carry core products\nand replenishable seasonal products of each brand for each consumer segment. The Company intends to use a national center to store one-time seasonal products.\nAdditionally, the Company's initiatives will require information system changes to support the changes in its business processes and distribution network. Common data and on-line access for all parts of the supply chain are critical to reducing leadtimes and building alliances with customers and suppliers.\nAlthough key elements of the organizational realignment and distribution system changes are not yet determined, the Company expects to complete this reorganization within the next few years. The Company expects to make capital expenditures of over $300 million during the next few years to support the new distribution network, expanded systems plans, and organization and manufacturing changes. Additionally, the Company expects to spend approximately $200 million for transitional expenses, including software costs, possible write-offs of existing facilities and equipment, training costs and other related expenses. All of these costs may be recognized throughout the implementation period and\/or as expenditures occur, depending on the nature of the cost and the decisions made related to this initiative.\nThe LSI initiative to improve customer service will be consistent with the U.S. initiative framework, but modified based on local analysis of customer service requirements in each market.\nALTERNATIVE MANUFACTURING SYSTEMS\nAlternative Manufacturing Systems (AMS) have been implemented in most of the Company's U.S. sewing plants. Similar programs have been implemented in the Company's Canada and Brazil facilities. AMS is a team-based approach to manufacturing, replacing the traditional assembly line. Team-based manufacturing is intended to improve quality, increase flexibility and shorten leadtimes, thus enabling the Company to respond more quickly to its retail accounts. However, the continuing conversion to and success of team-based manufacturing will require major education and training support for the next several years.\nAdditionally, the Company is implementing a new program (\"F.A.S.T.\") in the U.S. to link specific sewing plants to certain finishing centers and customer service centers to cut leadtimes and decrease the response time in filling customer orders. Traditionally, the U.S. sewing plants shipped products to a variety of finishing centers. The new processing program and the AMS are consistent with the Company's desire to reduce production leadtime and become more responsive to product changes and customer demands.\nRETAIL JOINT VENTURE\nAs part of its efforts to create consistent brand image, the Company continues to explore and consider dedicated distribution channels, such as joint-venture stores in the U.S. that sell only Levi's(R) brand products. The Company currently has numerous franchised retail operations outside the U.S. that sell only Levi's(R) products. Unlike the non-U.S. franchise operations, the Company will have an equity interest in the U.S. joint ventures (SEE OPERATIONS OUTSIDE THE U.S. SECTION). During 1993, the Company entered into an agreement in principle with Designs, Inc., to form a joint venture that will own and operate stores, in the northeastern U.S., selling only Levi's(R) jeans and jeans-related products. The agreement is subject to negotiation of\ndefinitive agreements and final terms and regulatory approvals. The Company will hold a 30 percent interest in this joint venture and will participate in decisions about product presentation and similar image-related matters.\nThe joint ventures will also provide a vehicle for the Company to communicate the benefits of its products to retail customers and consumers, especially since consumers are more price conscious and value-oriented. The Company has very limited experience in operating retail stores in the U.S., therefore it is the Company's intent that its retail partners will have the primary responsibility for day-to-day operations.\nRISKS OF STRATEGIC INITIATIVES\nThe Company is assuming substantial risks in undertaking these initiatives. For example, it faces disruption of its ongoing business operations during implementation. Management, other personnel and job definition changes may distract employees and adversely affect employee morale. The Company may incur unplanned additional implementation costs, with a resulting impact on cash flow and earnings.\nThe Company may face difficulties in developing the information systems necessary to support new business processes and customer service requirements. If the initiatives are adopted, the Company also may rely on new materials handling technologies in the new customer service centers, and must successfully integrate the software that operates the equipment with its business systems. The Company must also successfully manage the transition of employees to new positions and train them to meet the requirements of those positions, including operating effectively in a more team-based and technology-oriented environment. It will be doing so at the same time it is rolling-out a new compensation-based program that is intended to align employee efforts with overall Company strategies.\nMore broadly, these initiatives involve fundamental changes in the way the Company operates its business. There are numerous commercial, operating, financial, legal and other risks and uncertainties presented by the design and implementation of such programs. Furthermore, the Company is not aware of undertakings of comparable magnitude in the apparel industry, and cannot predict with certainty the outcome of these initiatives. Although there can be no assurance that the Company will successfully design and implement these new business processes, or that the costs of these initiatives will not exceed estimates, the Company believes that the re-engineering initiative is essential to maintain its competitive position. Additionally, the Company believes it is important to implement these initiatives at a time when the Company's market and financial performance is strong.\nU.S. OPERATIONS\nThe Company's U.S. operations are currently composed of the Men's Jeans, Youthwear, Menswear, Womenswear and Brittania Sportswear Ltd. marketing divisions that, along with Canada and Mexico, constitute the LSNA organization. Each U.S. division maintains its own merchandising, sales and advertising staff.\nMARKETS\nThe Company's current U.S. apparel market is directly affected by consumer spending, the retail environment and competition. The U.S. economic environment is experiencing moderate inflation growth, low consumer confidence and a stagnant labor market. Consumer spending is low and consumers remain price sensitive. Retailers are responsive to consumer spending patterns and are offering more private label products and demanding higher levels of service and support from their vendors. Additionally, competitors are also becoming more aggressive by offering lower priced and innovative products.\nThe Company's strategy in responding to current market conditions focuses on sensitivity to fashion changes and consumer preferences, brand enhancement, timely product development, innovative marketing activities and enhanced relations with retailers and suppliers. As previously described, superior customer service and efficient product manufacturing is an integral element of the Company's business strategy.\nThe U.S. jeans market in 1993 declined from 1992 levels, with no growth expected in 1994. However, the Company continues to hold a significant market share in the young men's market. Demand for finished jeans products (garments that have been laundered or otherwise treated after assembly), including stonewashed and other wet-processed garments, continues to increase. Over the years, jeans demand by the male consumer has shifted toward substitute products such as casual slacks, shorts and fleecewear. The Company believes that these trends are in part a function of the broad demographic changes described earlier. The women's jeans market tends to be more fragmented among major competitors than jeans for men.\nIn recognition of the ongoing changes in the jeans market, the Company continues to add new designs, finishes, fabrications and colors to its traditional product lines. Ongoing efforts are placed on coordinating with laundry contractors, textile producers and other companies throughout the world to develop concepts and processes to promote finishing development leadership and finished product shade consistency. The growth in new product lines is reflected by the fact that in 1993 traditional \"rigid denim\" products sold by the Men's Jeans and Youthwear divisions provided 6 percent of total unit sales of those divisions, compared to 68 percent in 1985.\nThe casual sportswear market is dynamic, characterized by continuous product innovation and lower margins than those prevailing in the young men's jeans market due to higher labor content. The sportswear market, like the jeans market, is affected by demographic changes and changes in consumer lifestyles and buying habits. Market research indicates that the maturing male consumer is less brand conscious and brand loyal, and more price conscious and value- oriented, than the female consumer or the younger male consumer.\nPRODUCTS AND STRATEGY\nThe Company manufactures and markets basic jeans, branded casual products and jeans-related products in a wide range of moderately-priced apparel categories. The 501(R) family of jeans, other basic denim jeans and related jeans products have traditionally been the Company's key products. In addition to the 501(R) products, the Men's Jeans division also markets the Red Tab(TM), Orange Tab(TM) and silverTab(TM) product lines. The Menswear division manufactures and markets men's casual and dress slacks and branded men's knit and woven shirts, including Dockers(R) and\nLevi's(R) Action product lines. The Womenswear division markets jeans and casual sportswear products for the 501(R), Red Tab(TM), silverTab(TM), 900(R) series and Dockers(R) product lines. The Youthwear division markets jeans and casual youthwear products for the 501(R), Dockers(R) and Little Levi's(TM) product lines. Brittania Sportswear Ltd. manufactures and markets men's and women's jeans, tops and casual sportswear under the Brittania(R) and Brittgear(TM) labels.\nU.S. sales of the 501(R) family of jeans amounted to 26 million units, 33 million units and 37 million units in 1993, 1992 and 1991, respectively. The decrease in unit sales for the 501(R) family of jeans is related to price increases, various counter-diversion tactics (SEE RISKS OF NON-U.S. OPERATIONS CAPTION) and the success of other Company jeans products, such as Orange Tab(TM) and other Red Tab(TM) products. The Company's 1993 market share of the challenging U.S. jeans market remained relatively stable with the previous year. The Company's unit sales for total U.S. jeans offerings totaled approximately 151 million units.\nThe Company launched an advertising campaign late in 1993 that will extend to 1994, to revitalize consumer interest in the 501(R) family of jeans. However, the Company still expects 1994 sales of the 501(R) family of products to decrease slightly. Additionally, the Company expects 1994 unit sales of silverTab(TM) products to decline due to the repositioning of this product line. Lower unit sales for the 501(R) family of jeans and silverTab(TM) products is expected to be partially offset by increased unit sales of lower margin Orange Tab(TM) products.\nThe Dockers(R) product line has been one of the most rapidly growing and successful lines in the U.S. apparel industry. Sales of Dockers(R) products totaled 64 million units, 67 million units and 57 million units in 1993, 1992 and 1991, respectively. The decline in unit sales is mainly attributable to increased competition and market saturation. The Company expects that sales of Dockers(R) products will be flat for the 1994 fiscal year. The Company's 1993 market share of the U.S. casual market was relatively flat with the previous year.\nThe Company's Dockers(R) men's product line and loose-fitting men's jeans represents a response to demographic and fashion changes. The Company continues to expand the Dockers(R) product line and is constantly adding new colors, fabrications and designs to the line. In 1993, the Company introduced a premium line of Dockers(R) casual pants and shirts products, Dockers(R) Authentics, which are intended to meet the demand for casual office-dress apparel.\nAdditionally, the Company plans to introduce a complete line of wrinkle- resistant Dockers(R) products in fiscal 1994. An initial limited release of these products for the 1993 Holiday season indicated positive retail results, however the lack of availability of certain processing equipment utilized in the finishing cycle could have a temporary effect of delaying the availability of these products. Also, there is no assurance that this product will be successful considering the intensity of competition (SEE COMPETITION CAPTION).\nLevi's(R) jeans for women will continue to be updated with new colors and cuts in 1994. However, the women's Dockers(R) product line has not been received as well as the men's Dockers(R) product line and is gradually being repositioned as an upgraded casual sportswear line. Unit sales for women's Dockers(R) products are expected to decrease in 1994 due to the repositioning. Once repositioned, these Dockers(R) products will feature better quality\nconstruction and fabrics. Both the Levi's(R) jeans for women and the women's Dockers(R) product lines will be supported by new advertising campaigns.\nThe Company's Youthwear division primarily markets products to the boy's and girl's markets. Colored denim and loose silhouettes were prominent products sold by the Youthwear division during 1993.\nDollar sales of Men's Jeans products accounted for 33 percent, 31 percent and 29 percent of the worldwide sales of the Company in 1993, 1992 and 1991, respectively. U.S. sales of non-jeans-related casual apparel products represented 19 percent, 21 percent and 24 percent of worldwide dollar sales in those years. For additional financial information on U.S. operations, SEE NOTE 2 TO THE CONSOLIDATED FINANCIAL STATEMENTS.\nThe Brittania(R) brand represents the Company's presence in the growing mass merchant channel, which currently comprises nearly half of the jeans market. Brittania Sportswear Ltd. offers low-priced, high quality products to major mass merchant accounts and is a component of the overall U.S. marketing strategy. During 1993, the Company decided to operate the Brittania business as an independent business unit within LSNA and to move its headquarters to Seattle, Washington. This decision is intended to lower costs and strengthen the brand's competitive position in its marketplace.\nCOMPETITION\nThe Company and its largest competitor in the U.S. jeans market, VF Corporation, account for approximately one-half of the units sold in the U.S. jeans market. The Company believes that the combined brand share of its Levi's(R) and Brittania(R) products in the U.S. jeans market is second only to the combined share of VF Corporation's three principal brands, Wrangler(R), Lee(R) and Rustler(R).\nThe casual apparel market for men and women is characterized by intense competition, among manufacturers and retailers, and ease of entry for new producers. Import competition is more prevalent in the casual apparel market than in the jeans market. Apparel imports have generally lower labor costs and may exert downward pressure on prices of casual wear products. This situation is limited by U.S. trade policies that restrict apparel imports through quotas and tariffs (SEE GLOBAL SOURCING SECTION).\nCotton wrinkle-resistant slacks were introduced by competitors in 1993 and are gaining in popularity. Competitors are now applying the wrinkle-resistant process to other apparel items including shirts and sleepwear. These wrinkle- resistant slacks are in direct competition with the Company's existing Dockers(R) products. The Company plans to introduce a complete line of wrinkle- resistant Dockers(R) products in 1994 (SEE PRODUCTS AND STRATEGY CAPTION).\nBased on the current U.S. economy, the retail environment, increased competition and increases in prices of the Company's jeans products over the last few years, the Company is expecting its U.S. unit sales in 1994 to be slightly lower than 1993.\nDISTRIBUTION\nThe Company distributes its products through retail stores that satisfy its account selection criteria and sell directly to the retail consumer. The Company does not sell its first quality \"in season\" products to wholesalers, jobbers or distributors, and maintains a compliance program to enforce its distribution policy and to control unauthorized diversionary sales of its products (SEE RISKS OF NON-U.S. OPERATIONS CAPTION). The principal channels of distribution of the Company's products are department stores, specialty stores and national chains, including J.C. Penney Company, Inc., Sears Roebuck & Co. and Mervyn's Inc. The Company believes that industry leadership and brand strength of the Company's core products are maintained through the use of traditional distribution channels. U.S. sales to the Company's top 5 accounts represented 38 percent of total 1993 U.S. dollar sales. The Company's top 25 customers accounted for approximately 64 percent of the Company's total U.S. dollar sales. The Company has no long-term contracts or commitments with any of its customers. The loss of any of these customers could have an adverse effect on the Company's results and operations. Retail accounts are currently serviced by approximately 395 sales representatives for the U.S. divisions.\nThe Company continues to explore and consider dedicated U.S. distribution channels, such as stores that sell only Levi's(R) brand products (SEE STRATEGIC INITIATIVES SECTION) and in-store shops at retailer locations, consistent with its Business Vision (SEE BUSINESS VISION SECTION).\nThe Company distributes Brittania(R) products principally through mass merchant channels, including Kmart Corporation, Target Stores and Wal-Mart Stores, Inc. These three customers represent approximately 79 percent of Brittania Sportswear Ltd. total sales. The loss of any of these customers could have an adverse effect on Brittania Sportswear Ltd.'s results and operations, but not a material effect on the Company's total results. Brittania Sportswear Ltd. has no long- term contracts or commitments with any of its customers. Mass merchandisers comprise approximately 5 percent of the Company's U.S. unit sales for jeans.\nADVERTISING\/MARKETING\nThe Company devotes substantial resources to advertising and marketing programs. In the United States, the Company advertises extensively on radio and television and in national publications as well as on billboards and other outdoor displays. It also participates in local co-operative advertising and visual merchandising programs under which the Company shares advertising costs with retailers.\nIn 1993, the Company continued several advertising campaigns that were launched in 1992, including a Men's Jeans and Youthwear campaign for loose-fitting jeans. The Company also initiated new advertising campaigns for women's, men's and boys' products. Additionally, the Company was named \"Advertiser of the Year\" at the 40th Annual Cannes International Advertising Festival in recognition of three decades of advertising excellence. In 1993, U.S. advertising expense was $246 million, a 7 percent increase from 1992.\nThe Company is increasing its use of sell-through presentation in which the Company influences the way its products are presented at the retail level. The Company assists retailers in displaying products in a manner intended to enhance the product's image and promote its quality.\nOPERATIONS OUTSIDE THE U.S.\nORGANIZATION AND PRODUCTS\nOperations outside the U.S. were the Company's most profitable businesses on a per unit basis in 1993. Generally, businesses outside the U.S. record higher gross profit as a percent of sales than businesses in the U.S., mostly due to higher overall average unit selling prices. These operations are generally organized by country, and manufacture and market jeans and related products outside the U.S.\nEach country's operations within the European division are generally responsible for certain marketing activities, sales, distribution, finance and information systems. The European headquarters coordinates production, advertising and merchandising activities for core jeans products and also manages certain information systems development activities. Merchandising activities for tops are decentralized and located in various individual countries. With few exceptions, Canada, Mexico (both included in the LSNA organization), and the Latin America and Asia Pacific divisions are staffed with their own merchandising, sourcing, sales and finance personnel.\nSales for operations outside the U.S. are derived primarily from basic lines of jeans (particularly the 501(R) product line and other Red Tab(TM) products), tops and other denim apparel. These operations mainly sell directly to retailers in established markets. Retail accounts are currently serviced by approximately 360 sales representatives and 50 independent sales agents. Also, in 1993, the Company successfully tested the Dockers(R) line of products in Sweden.\nManufacturing and distribution activities for non-U.S. marketing divisions are independent of the Company's U.S. operations. However, in 1993 non-U.S. operations purchased $164 million of products from the Company's U.S. divisions. This amount is expected to remain stable in 1994.\nThe Company explores and evaluates new markets on an ongoing basis. In addition to its involvement in eastern Europe (including Hungary and Poland), in 1993, the Company commenced operations in Korea and Taiwan and plans to establish operations in India.\nIn 1993, net sales from non-U.S. operations were $2.2 billion compared to $2.1 billion in 1992. The Company believes its success in these markets reflects the Company's brand image and reputation, the continuing focus on core jeans products and the quality of its retail distribution, including stores that sell only Levi's(R) products. Considering the continuous changing needs of customers and consumers, and economic and trade developments (SEE GLOBAL SOURCING SECTION), among other things, there can be no long-term assurances that the Company will maintain such profitability in these markets. For additional financial information about non-U.S. operations SEE NOTE 2 TO THE CONSOLIDATED FINANCIAL STATEMENTS.\nTHE MARKETS, COMPETITION AND STRATEGY\nThe Company markets products in over 40 countries. As in the U.S., demand for jeans outside the U.S. is affected by a variety of factors that vary in importance in different countries, including socio-economic and political conditions such as consumer spending rates, unemployment, fiscal policies and inflation. In many countries, jeans are generally perceived as a fashion item rather than a basic, functional product and, like most apparel items, are higher-\npriced relative to the U.S. The non-U.S. jeans markets are more sensitive to fashion trends than the U.S. market.\nAdditionally, the retail industry differs from country to country. Some of the Company's retail customers in certain countries are large \"chain\" retailers with centralized buying power. In other countries, the retail industry is comprised of numerous smaller, less centralized shops. Some non-U.S. customers are stores that sell only the Company's products and are independent of the Company. The Company distributes to 900 stores outside the U.S. that sell only Levi's(R) brand products. These stores are strategically positioned in prime locations around the world and offer a broad selection of premium Levi's(R) products using state-of-the-art retail fixtures and visual merchandising. Considering the increasingly competitive retail environment, the Company believes these stores are of strategic importance in enhancing the brand image of Levi's(R) products.\nOther general factors, including the relative strength or weakness of the U.S. dollar and competition from local manufacturers, also affect the Company's financial results in markets outside the U.S. The Company has the largest brand share and strongest brand image in virtually all of its established non-U.S. markets. There are numerous local competitors of varying strengths in most of the Company's principal markets outside the U.S., but there is no single competitor with a comparable global market presence. However, VF Corporation is increasing its activity in markets outside the U.S. and is becoming a more important competitor, particularly in Europe.\nIn Europe, consumer demand has been less affected by demographic changes compared to the U.S. Core denim jeans, especially the 501(R) family of products, continue as key products in Europe and Canada. However, to meet the service commitments the Company makes to its customers around the world, and consistent with the customer service initiative in the U.S., the Company is launching a customer service initiative for the non-U.S. divisions.\nSales growth in the Asia Pacific division, particularly in Japan, has slowed during the current year. The Levi's(R) brand continues to be the market share leader in Mexico. The Company's Latin America division activities are mainly in Brazil.\nOutside the U.S., advertising themes and strategies vary by country depending on the culture in each country, while maintaining consistency with the global positioning of the Levi's(R) brand. Advertising expenditures for non-U.S. operations were $130 million in 1993, a 12 percent increase from 1992.\nRISKS OF NON-U.S. OPERATIONS\nThe Company's non-U.S. operations, including its use of non-U.S. manufacturing sources (SEE GLOBAL SOURCING SECTION), are subject to the usual risks of doing business outside the U.S. These risks include adverse fluctuations in currency exchange rates, changes in import duties or quotas, disruptions or delays in shipments and transportation, labor disputes, socio-economic and political instability. The occurrence of any of these events or circumstances could adversely affect the Company's operations and results. The Company evaluates the risk of non-U.S. operations when considering capital and reinvestment alternatives. The Company also uses various currency hedging strategies to mitigate the effects of currency fluctuations. In addition,\nit is not possible to accurately predict the effect that changing political and economic conditions in Russia and Eastern Europe will have on the Company's ability to develop operations there.\nIn many non-U.S. countries, the appeal of Levi's(R) products, particularly the 501(R) family of products, has propelled prices and profit margins far above those in the U.S., which encourages diversion of Levi's(R) products. Accumulators usually buy products in the U.S. at retail prices, or less, and ship them to non-U.S. countries for sale at a higher price, but lower than the retail prices charged by authorized retailers in those countries. Diverters usually procure products in the U.S. at wholesale costs and ship them to other countries for sale at a profit. These diversion tactics reduce the availability of products for U.S. consumers and negatively affect the Company's and retailers' results outside the U.S.\nHigher average unit selling prices in the U.S. for certain products have narrowed the pricing gap between certain U.S. and non-U.S. jeans products, thus discouraging diversion. However, the risks of increasing prices in the U.S. for certain products include retailer and consumer resistance to pricing that exceeds their perception of the value of the Company's products. This is of particular concern in an environment characterized by difficult economic conditions and, in the U.S., increasing acceptance of lower priced or private label products. Also, the Company's distribution policy requires retailers to limit the number of certain jean products a customer can purchase in U.S. metropolitan-area stores. The Company ceases business relations with retailers known to cooperate with diverters.\nAdditionally, sales of counterfeit Levi's(R) products, mostly made in the People's Republic of China, occur in key markets on a regular basis. The Company is concerned about the loss of its reputation with consumers, who may unknowingly buy counterfeit products, and damage to its business in those markets. The Company actively searches for and investigates counterfeit products. It aggressively seeks to protect its trademarks and has filed numerous legal actions against counterfeiters.\nGLOBAL SOURCING\nApparel manufacturing in less-developed countries continues to affect global apparel markets, including the U.S. market. These less-developed countries have lower labor costs and, in some cases, such as in the production of shirts, access to less expensive fabrics. Despite a growth in workers' health and safety and other costs in the U.S., the Company's U.S. owned and operated manufacturing base is trying to stay competitive in jeans production by achieving shorter leadtimes and meeting production requirements through AMS (SEE ALTERNATIVE MANUFACTURING SYSTEMS CAPTION).\nThe Company's imports into the U.S. have significantly increased in the past six years in response to overall sales growth in casual wear apparel. These casual wear products require more sewing and construction time and are, therefore, not as cost competitive when sourced from the Company's U.S. owned and operated facilities.\nThe Company has increased its use of, and has become more reliant upon, independent contractors for product sewing and finishing functions because of the continued growth in recent years in demand for more casual wear products. However, due to excess capacity at its U.S. owned and operated facilities, the Company plans to source more of its 1994 U.S. products\nthrough its facilities, as opposed to independent contractors and locations outside the U.S. Therefore, the Company's use of independent contractors is expected to decrease in 1994. The excess capacity is due to lower production requirements that resulted from the build-up of basic jeans products during 1993 (SEE UNSHIPPED ORDERS AND INVENTORIES SECTION). Additionally, the Company has shifted some of its owned and operated production from basic jeans products to other products due to the high basic jeans inventory and order cancellation levels during the year. This shift in sourcing operations could impact gross margin (SEE MANAGEMENT DISCUSSION AND ANALYSIS SECTION, UNDER ITEM 7, FOR ADDITIONAL INFORMATION).\nIn 1993 and 1992, approximately 54 percent of the apparel production units of the Company's U.S. operations were manufactured by independent contractors. Approximately 49 percent of non-U.S. products in 1993 were manufactured by independent contractors, compared to 48 percent in 1992. In 1993 and 1992, independent contractors were used for the finishing process for approximately 72 percent and 69 percent, respectively, of the finished units of U.S. operations. Approximately 55 percent of the finishing process for non-U.S. finished units in 1993 and 1992 was performed by independent contractors.\nThe Company has no long-term contracts with its manufacturing sources and competes with other companies for production facilities and import quota capacity. Although the Company believes that it has established close relationships with its manufacturing sources, the Company's future success will depend in some measure upon its ability to maintain such relationships and, more broadly, to develop and implement a long-term sourcing plan.\nThe Company established its Global Sourcing Guidelines (GSG) to provide direction for selecting contractors and suppliers that provide labor and\/or material utilized in the manufacture and finishing of its products. These guidelines address issues that contractors and suppliers can control, for example, sharing the Company's ethical standards and commitment to the environment, providing workers with a safe and healthy work environment, maintaining fair employment practices and complying with legal requirements. The GSG also prohibits operating in countries that would have an adverse effect on global brand image or trademarks, expose employees or representatives to unreasonable risks, violate basic human rights, or threaten the Company's commercial interests due to political or social turmoil. The GSG possibly limits some of the Company's sourcing options as well as its access to certain lower cost production.\nTextile trade policy of developed countries has increased the cost of importing apparel products produced in countries with lower labor costs through quotas and high tariffs. However, this protection of apparel manufacturers in developed countries, particularly the U.S., Canada, Australia, the European Free Trade Association countries and the European Economic Community (EEC), is gradually being reduced.\nThe North American Free Trade Agreement (NAFTA) was effective January 1, 1994. Quotas and tariffs will be phased out on specific goods of North American origin over a six-to-seven year period. The effect of NAFTA on the sourcing of goods to and from Mexico will have the most immediate impact on the Company. Once NAFTA is fully phased-in, the impact on the Company will be an approximate 5 percent reduction of tariffs on apparel imports from Mexico, and a 5 percent reduction in tariffs on Mexico imports from the U.S.\nThe member-countries of the international trade organization, the General Agreement on Tariffs and Trade (GATT), have negotiated a proposed agreement to complete the Uruguay Round agreement. The agreement must be approved by the U.S. Congress and the governments of all the member-countries. If approved, the pact would be implemented on January 1, 1995 and phased in over 10 years. The major provision of the draft agreement that would effect the Company is the phase out of the quota system. Therefore, the proposed GATT agreement could have an impact on the Company's sourcing strategy, once the multifiber agreement under GATT phases out. The Company cannot accurately assess at this time how the GATT agreement will affect its financial results and operations.\nRAW MATERIALS\nThe Company's primary raw materials include fabrics made from cotton. Synthetics and blends of synthetics with cotton or wool are used in certain product lines. Fabric is purchased mostly from U.S. textile producers for U.S. operations, and from both U.S. and non-U.S. textile producers for operations outside the U.S. Cone Mills Corp. and Burlington Industries supplied approximately 26 percent and 14 percent, respectively, of the total volume of fabrics purchased by the Company for U.S. operations in 1993. Cone Mills Corp. and Dominion Textiles Incorporated (including Swift Manufacturing Co., its wholly-owned subsidiary) supplied approximately 26 percent and 13 percent, respectively, of the Company's fabric purchases for non-U.S. operations in 1993. Cone Mills Corp. is the sole supplier of 01 denim, the fabric used in manufacturing 501(R) jeans.\nThe Company has not recently experienced and does not expect any substantial difficulty in obtaining raw materials. Its only long-term raw materials contract with a principal supplier is with Cone Mills Corp. The loss of one or more of the Company's principal suppliers could have an adverse effect on the Company's results and operations. As part of its U.S. re-engineering effort, the Company is rationalizing its supplier base to reduce the number of suppliers it uses for certain fabrics. The Company also purchases large quantities of thread and trim (buttons, zippers, snaps, etc.) but is not dependent on any one supplier for such items.\nUNSHIPPED ORDERS AND INVENTORIES\nAs of November 28, 1993, the Company's unshipped order position for all products was approximately 95 million units, representing a decrease of approximately 13 percent over the comparable date last year. The decrease in unshipped orders was primarily attributable to the U.S. marketing divisions, as a result of retailers' reluctance to commit to orders as far in advance. This reduction was also partially attributable to a timing change in the Men's Jeans division from 3 booking seasons in 1992 to 2 booking seasons in 1993. The unshipped orders position for non-U.S. products was relatively flat compared with the previous year, reflecting the continued demand for the Company's products.\nThe Company's finished goods inventory was approximately 45 million units at year-end 1993, which was flat with the prior year's level. Production downtime late in the year reduced a build-up in the Men's Jeans division. The build-up resulted from consumer resistance to higher average unit selling prices and a general decline in consumer spending.\nAdditionally, retailers are keeping less inventory on hand and have been relying on suppliers to provide products on a more timely basis. This practice resulted in a high number of order\ncancellations in 1993. The 1993 unit cancellations increased 30 percent from 1992, mostly due to higher unit cancellations in the Men's Jeans division. The Men's Jeans division, whose inventory consists primarily of first quality saleable basic core products, is reducing some of its future production. Some of the excess production capacity is being shifted to other products (SEE GLOBAL SOURCING SECTION).\nThe Company is making an effort to create the optimal balance between the cost of maintaining current inventory levels with excess production capacity costs and customer service. The need to accommodate shorter delivery dates results in higher inventory levels, which increase the costs of warehousing and the risks of markdowns. Working capital requirements for ongoing operations and other needs were not materially affected by the high inventory unit levels during the year. The Company is in the process of re-engineering its North American operations to reduce the time it takes to develop products and fill customer orders (SEE STRATEGIC INITIATIVES SECTION).\nTRADEMARKS AND LICENSING AGREEMENTS\nThe Company has a general program concerning the protection and enforcement of its trademark rights. The Company has registered the Levi's(R) trademark, one of its most valuable assets, in over 150 countries. The Company owns and has widely registered other trademarks that it uses in marketing jeans and other products, the most important of which in terms of product sales are the 501(R), Dockers(R), Pocket \"TAB\" Device and ARCUATE Design trademarks. The Company vigorously defends its trademarks against infringement, including initiating litigation to protect such trademarks when necessary.\nThe Company has licensing agreements permitting third parties to manufacture and market Levi's(R) branded products in countries where the Company has elected not to, or is unable to, manufacture or market on a direct basis. Additionally, it has agreements permitting third parties to manufacture and distribute certain other products, such as shoes, socks and belts, under the Levi's(R), Dockers(R) and Brittania(R) trademarks.\nSEASONALITY\nThe apparel industry in the United States generally has four selling seasons-- Spring, Summer, Fall and Holiday. New styles, fabrics and colors are introduced on a regular basis, based on anticipated consumer preferences, and are timed to coincide with these retail selling seasons. Historically, seasonal selling schedules to retailers have preceded the related retail season by two to eight months. Outside the U.S., the apparel industry typically has two seasons-- Spring and Fall. The Company's business is impacted by the general seasonal trends that are characteristic of the apparel industry.\nEMPLOYEES\nThe Company employs approximately 36,400 people, a majority of whom are production workers. A substantial number of production workers are employed in plants where the Company has collective bargaining agreements with recognized labor unions. The Company considers its employees to be an important asset of the Company and believes that its relationships with employees are satisfactory.\nSOCIAL RESPONSIBILITY\nSocial responsibility is a matter of strong conviction on the part of the Company. The Company has a longstanding commitment to equal employment opportunity, affirmative action and minority purchasing programs. The Company seeks to be an active corporate citizen in the communities in which it operates and maintains a Worldwide Code of Business Ethics.\nThe Company has traditionally supported charitable social investment programs and intends to maintain its historical practice of charitable giving. During 1993, the Company's donations included $15.5 million to the Levi Strauss Foundation. The Company also contributed $.3 million to support matching gifts to the Red Tab Foundation, which was established to provide emergency financial assistance to the Company's employees and retirees in the United States. The Red Tab Foundation is currently in the process of expanding to non-U.S. affiliates.\nThe Levi Strauss Foundation made grants and contributions totaling approximately $7.9 million in 1993 and the Company made additional contributions of $3.8 million, primarily for international programs. These include grants in three community partnership giving (or staff-directed) areas: AIDS and Disease Prevention, economic development (projects which seek to enhance the economic options and opportunities of low-income individuals) and race relations (Project Change, a program in three U.S. communities). Also included are grants through the Community Involvement Team program (in which groups of employees or retirees volunteer their time to review local community needs and then develop and implement projects to meet those needs), the Corporate Childcare Fund and the employee matching gift and volunteer service program. Contributions by the Levi Strauss Foundation have averaged over $7.0 million for each of the last three years.\nBUSINESS VISION\nThe Company developed its Business Vision to identify its goals and provide direction for prioritizing all its initiatives and strategies. The Business Vision is as follows:\nWe will strive to achieve responsible commercial success in the eyes of our constituencies, which include stockholders, employees, consumers, customers, suppliers and communities. Our success will be measured not only by growth in shareholder value, but also by our reputation, the quality of our constituency relationships, and our commitment to social responsibility. As a global company, our businesses in every country will contribute to our overall success. We will leverage our knowledge of local markets to take advantage of the global positioning of our brands, our product and market strengths, our resources and our cultural diversity. We will balance local market requirements with a global perspective. We will make decisions which will benefit the Company as a whole rather than any one component. We will strive to be cost effective in everything we do and will manage our resources to meet our constituencies' needs. The strong heritage and values of the Company as expressed through our Mission and Aspiration Statements will guide all of our efforts. The quality of our products, services and people is critical to the realization of our business vision.\nWe will market value-added, branded casual apparel with Levi's(R) branded jeans continuing to be the cornerstone of our business. Our brands will be positioned\nto ensure consistency of image and values to our consumers around the world. Our channels of distribution will support this effort and will emphasize the value-added aspect of our products. To preserve and enhance consumers' impressions of our brands, the majority of our products will be sold through dedicated distribution, such as Levi's(R) Only-Stores and in- store shops. We will manage our products for profitability, not volume, generating levels of return that meet our financial goals.\nWe will meet the service commitments that we make to our customers. We will strive to become both the \"Supplier of Choice\" and \"Customer of Choice\" by building business relationships that are increasingly interdependent. These relationships will be based upon a commitment to mutual success and collaboration in fulfilling our customers' and suppliers' requirements. All business processes in our supply chain--from product design through sourcing and distribution--will be aligned to meet these commitments. Our sourcing strategies will support and add value to our marketing and service objectives. Our worldwide owned and operated manufacturing resources will provide significant competitive advantage in meeting our service and quality commitments. Every decision within our supply chain will balance cost, customer requirements, and protection of our brands, while reflecting our corporate values.\nThe Company will be the \"Employer of Choice\" by providing a workplace that is safe, challenging, productive, rewarding and fun. Our global work force will embrace a culture that promotes innovation and continuous improvement in all areas, including job skills, products and services, business processes, and Aspirational behaviors. The Company will support each employee's responsibility to acquire new skills and knowledge in order to meet the changing needs of our business. All employees will share in the Company's success and commitment to its overall business goals, values and operating principles. Our organization will be flexible and adaptive, anticipating and leading change. Teamwork and collaboration will characterize how we address issues to improve business results.\nSTATEMENT OF COMPANY MISSION AND ASPIRATIONS\nThe Company believes that shared goals are as critical to the Company's success as providing quality products and service and being a leader in the apparel industry. In order to identify and focus these shared goals, the Company adopted the following \"Statement of Mission and Aspirations\":\nMISSION STATEMENT\nThe mission of the Company is to sustain responsible commercial success as a global marketing company of branded casual apparel. We must balance goals of superior profitability and return on investment, leadership market positions, and superior products and service. We will conduct our business ethically and demonstrate leadership in satisfying our responsibilities to our communities and to society. Our work environment will be safe and productive and characterized\nby fair treatment, teamwork, open communications, personal accountability and opportunities for growth and development.\nASPIRATIONS FOR THE COMPANY\nWe want a Company that our people are proud of and committed to, where all employees have an opportunity to contribute, learn, grow and advance based on merit, not politics or background. We want our people to feel respected, treated fairly, listened to and involved. Above all, we want satisfaction from accomplishments and friendships, balanced personal and professional lives, and to have fun in our endeavors.\nWhen we describe the kind of company we want in the future what we are talking about is building on the foundation we have inherited: affirming the best of our Company's traditions, closing gaps that may exist between principles and practices and updating some of our values to reflect contemporary circumstances. In order to make our aspirations a reality, we need:\nNEW BEHAVIORS: Leadership that exemplifies directness, openness to influence, commitment to the success of others, willingness to acknowledge our own contributions to problems, personal accountability, teamwork and trust. Not only must we model these behaviors but we must coach others to adopt them.\nDIVERSITY: Leadership that values a diverse workforce (age, sex, ethnic group, etc.) at all levels of the organization, diversity in experience and a diversity in perspectives. We are committed to taking full advantage of the rich backgrounds and abilities of all our people and to promote a greater diversity in positions of influence. Differing points of view will be sought; diversity will be valued and honesty rewarded, not suppressed.\nRECOGNITION: Leadership that provides greater recognition--both financial and psychic--for individuals and teams that contribute to our success. Recognition must be given to all who contribute: those who create and innovate and also those who continually support the day-to- day business requirements.\nETHICAL MANAGEMENT PRACTICES: Leadership that epitomizes the stated standards of ethical behavior. We must provide clarity about our expectations and must enforce these standards throughout the corporation.\nCOMMUNICATION: Leadership that is clear about Company, unit, and individual goals and performance. People must know what is expected of them and receive timely, honest feedback on their performance and career aspirations.\nEMPOWERMENT: Leadership that increases the authority and responsibility of those closest to our products and customers. By\nactively pushing responsibility, trust and recognition into the organization we can harness and release the capabilities of all our people.\nThe Company is providing Aspirations training to employees and holds managers and employees accountable for behaviors that are in accordance with these objectives through its employee performance review process.\nConsistent with the Company's Mission and Aspirations, the Company sets high goals for responsible environmental stewardship and encourages business partners to do the same.\nITEM 2.","section_1A":"","section_1B":"","section_2":"ITEM 2. PROPERTIES\nThe Company's headquarters are located at Levi's Plaza in San Francisco, California. It currently leases approximately 681,000 square feet, of which 127,000 square feet is subleased to others. The Company owns approximately 204,000 square feet of office space adjacent to Levi's Plaza, commonly known as the Icehouse Building. Currently 195,000 square feet of this office space is used by the Company and approximately 9,000 square feet is being leased to others. The Company also leases 137,000 square feet in other locations in San Francisco and surrounding areas and 15,000 square feet in Florida.\nThe Company owns or leases 93 manufacturing, warehousing and distribution facilities, aggregating to approximately 11,031,400 square feet, as shown in the following table:\n- ----------------- (1) Includes properties under capital lease.\nThe Company believes that its existing facilities are in good operating condition. The amounts shown in the table include approximately 406,200 square feet of manufacturing capacity and 1,651,200 square feet of distribution capacity currently subleased to others or not in use. SEE NOTE 9 TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR ADDITIONAL INFORMATION ABOUT MATERIAL LEASES.\nITEM 3.","section_3":"ITEM 3. LEGAL PROCEEDINGS\nThe Company does not consider any pending legal proceeding to be material. In the ordinary course of its business the Company has pending, various cases involving contractual matters, employee-related matters, distribution questions, product liability claims, trademark infringement and other matters. The Company believes that these cases are not material in the aggregate in light of the strength of its legal positions in such matters, its accrued reserves and insurance.\nThe Company evaluates environmental liabilities on an ongoing basis and, based on currently available information, does not consider any environmental exposure to be material.\nITEM 4.","section_4":"ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS\nNone, during the 1993 fourth quarter.\nPART II\nITEM 5.","section_5":"ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS\nThe Company's outstanding Class L common stock is held primarily by members of the families of certain descendants of the Company's founder and certain members of the Company's management. Class E common stock is currently held by the trustee for the Employee Investment Plan of Levi Strauss Associates Inc. (\"EIP\"), the Levi Strauss Associates Inc. Employee Long Term Investment and Savings Plan (\"ELTIS\") and employees who purchased stock through the Employee Stock Purchase and Stock Award Plan of Levi Strauss Associates Inc. (ESAP) (SEE NOTE 12 TO THE CONSOLIDATED FINANCIAL STATEMENTS). There is no established public trading market for either class of common stock and no shares of common stock are convertible into shares of any other classes of stock or other securities. All holders of Class L common stock are parties to, and bound by, an agreement restricting transfer of the Class L common stock. The outstanding shares of Class E common stock are subject to restrictions on transfer imposed by the EIP, ELTIS and ESAP. On January 10, 1994, there were approximately 191 Class L stockholders and 1,107 Class E stockholders.\nSEE NOTE 19 TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR STOCK VALUATION AND DIVIDEND INFORMATION.\nITEM 6.","section_6":"ITEM 6. SELECTED FINANCIAL DATA\nThe following table presents historical income statement data and balance sheet data of the Company for the past five fiscal years. This data has been derived from the consolidated financial statements of the Company, which have been audited by Arthur Andersen & Co., independent public accountants. Unless otherwise indicated, references to years in this Form 10-K refer to the fiscal years of the Company. Unless otherwise stated, the Company's common share amounts, per share data and other financial information appearing in this Form 10-K have been adjusted to reflect the exchange of Class F common stock for Class L common stock during 1991 as part of the recapitalization (SEE NOTE 20 TO THE CONSOLIDATED FINANCIAL STATEMENTS) as well as the two-for-one stock split of Class F common stock, which was effective on November 30, 1989.\n(1) Fiscal year 1993 contained 52 weeks and ended on November 28, 1993. Fiscal year 1992 contained 53 weeks and ended on November 29, 1992. Fiscal years 1991, 1990 and 1989 each contained 52 weeks and ended on November 24, 1991, November 25, 1990 and November 26, 1989, respectively. (2) Fiscal years before 1993 were restated to reflect certain amendments and reclassifications of amounts related to the 1992 stock option charge, amortization of goodwill and intangibles, losses related to property, plant and equipment and certain operations-related items to operating income. SEE NOTE 1 TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR ADDITIONAL INFORMATION.\nITEM 7.","section_7":"ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS\nThe following summary of results of operations, financial condition and liquidity discusses data contained in the Consolidated Financial Statements of the Company. The discussion focuses on 1993, 1992, and 1991 comparisons and includes analyses of major components of net income, specific balance sheet items, liquidity and capital resources. (Fiscal years 1993 and 1991 each contained 52 weeks, while fiscal year 1992 contained 53 weeks.)\nDuring 1993, the Company filed with the Securities and Exchange Commission an amendment to its 1992 Form 10-K under the cover of Form 10-K\/A. The Form 10-K amendments were to reclassify the 1992 stock option charge as an operating expense and to reclassify amounts related to the amortization of goodwill and intangibles and certain losses related to property, plant and equipment from other income, net to marketing, general and administrative expenses on the Consolidated Statements of Income. These reclassifications did not affect net income (SEE NOTE 1 TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR ADDITIONAL INFORMATION).\nAdditionally in 1993, a new line item, other operating (income) expense, net was created for the Consolidated Statements of Income. This new line includes certain operations related items that were previously classified as other income, net or marketing, general and administrative expenses. Certain 1992 and 1991 items have been reclassified to conform to the 1993 presentation format. (SEE NOTE 1 TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR ADDITIONAL INFORMATION.)\nRESULTS OF OPERATIONS\nSUMMARY\nThe Company achieved a net income record of $492.4 million in 1993. Net income for 1993 increased $131.6 million from the previous 1992 record mostly due to a stock option charge that negatively affected 1992 net income (SEE STOCK OPTION CHARGE CAPTION). Excluding the 1992 stock option charge effect, current year net income would have increased $16.6 million from 1992, due to higher 1993 sales volume, a lower effective tax rate and lower interest expense. This net income increase was partially offset by lower other operating (income) expense, net. Cost of goods sold and marketing, general and administrative expenses for 1993 were flat with 1992, as a percent of sales.\nNet income in 1992 of $360.8 million was slightly higher than 1991 net income of $356.7 million. Excluding the effects of the stock option charge, 1992 net income would have been $475.8 million (33 percent above 1991 net income) due to increased 1992 sales volume, a lower effective tax rate and lower interest expense.\nIn connection with a major initiative to align its U.S. marketing divisions by its Levi's(R), Dockers(R) and Brittania(R) brands and greatly improve customer service, the Company is reorganizing and re-engineering its U.S. operations. This will result in significant capital investments, costs and risks (SEE ADDITIONAL INFORMATION SECTION).\nNet income for full year 1994 is expected to be significantly lower than 1993 mostly due to the effects of adopting Statement of Financial Accounting Standards (SFAS) No. 106 \"Employers'\nAccounting for Postretirement Benefits Other Than Pensions\", slightly offset by the effects of adopting SFAS No. 109 \"Accounting for Income Taxes,\" in 1994 (SEE BENEFIT PLANS SECTION AND PROVISION FOR TAXES CAPTION).\nAdditionally, the Company expects dollar sales in 1994 to increase only slightly due to weak global economic conditions and cautious consumer spending. The results of the past three years indicate that certain operating expenses have been growing at a faster rate than sales. The Company has not been able to pass along all of its higher costs through price increases, thus lowering operating income margins. Operating costs associated with the Company's initiative to improve customer service and lower profit margins are also expected to negatively impact 1994 net income.\nNET SALES\nRecord dollar sales for 1993 of $5.9 billion increased 6 percent over the prior year amount of $5.6 billion due to record unit sales and higher average unit selling prices. Unit sales and average unit selling prices for 1993 increased 3 percent over 1992. Sales in 1992 increased 14 percent over 1991 sales of $4.9 billion for the same reasons. Additionally, although fiscal year 1993 contained 52 weeks compared to 53 weeks in 1992, 1993 average weekly sales were approximately 8 percent higher than 1992 sales.\nU.S. dollar sales of $3.7 billion for 1993 increased 7 percent over the previous year amount of $3.5 billion mostly due to a 5 percent increase in average unit selling prices. However, higher order cancellations caused by the slow retail environment, increased prices on certain Company offerings and product competition (particularly private label and casual products), resulted in higher inventory levels of certain products during the year (SEE TRADE RECEIVABLES AND INVENTORIES CAPTION). These factors contributed to the decrease in U.S. dollar and unit sales for Dockers(R) products and the 501(R) family of products compared to 1992. In the U.S., the Company's top 25 retail customers currently account for approximately 64 percent of dollar sales, which was unchanged from the previous two years.\nU.S. dollar sales for 1994 are expected to decrease slightly from the 1993 amount due to anticipated decreases in unit sales of basic high margin products, based on current forecasts of the Company's markets, competition and consumer spending trends.\nRecord dollar sales outside the U.S. of $2.2 billion for 1993 increased 4 percent over the 1992 amount of $2.1 billion due to record unit sales, which increased 8 percent from 1992. The Company's Europe division reported record unit sales, however, dollar sales were negatively impacted by the effects of unfavorable translation rates of certain European currencies to the U.S. Dollar for 1993 versus 1992. The Company's Asia Pacific division experienced record 1993 dollar sales due to record unit sales and favorable currency translation rates, compared to the previous year. The results in Europe and Asia Pacific reflect the continuing demand for the Company's basic denim products (particularly the 501(R) family of products). Overall dollar sales outside the U.S. are expected to grow in 1994. However, dollar sales may be adversely affected if the value of the U.S. Dollar versus European currencies strengthens, and by the weak economic conditions in many of the Company's markets.\nTotal Company dollar sales for 1994 are expected to increase slightly from 1993, mostly due to non-U.S. dollar sales increases. However, overall unit sales are expected to decrease due to the projected lower U.S. unit sales results, which will more than offset increases in non-U.S. unit sales.\nGROSS PROFIT\nAs a percent of sales, the 1993 gross profit percentage of 38 percent was flat with 1992 and 1991. In dollars, 1993 gross profit increased 5 percent compared to the prior year period, despite the continuing growth of product costs and the negative effects of certain foreign currency translation rates. The gross profit increase was primarily attributable to higher unit selling prices and unit sales. Gross profit for 1992, in dollars, increased 14 percent from 1991 due to higher average unit selling prices and higher unit sales that more than offset higher product costs.\nGenerally, businesses outside the U.S. record higher gross profit as a percent of sales than businesses in the U.S., mostly due to higher overall average unit selling prices. The businesses outside the U.S. contributed 37 percent of total Company dollar sales and represented 54 percent of the Company's 1993 profit contribution before corporate expenses and taxes, compared to 53 percent in 1992 and 55 percent in 1991.\nAlthough average unit selling prices in the U.S. increased over the last year, 1993 U.S. gross profit margins were adversely affected by higher product costs for certain products. Overall production requirements in the U.S. were reduced late in the year due to high inventory levels of basic jeans products (SEE TRADE RECEIVABLES AND INVENTORIES CAPTION). To reduce and align inventory levels with projected sales, the Company incurred some excess production capacity costs at certain U.S. owned and operated plants.\nConsequently, the Company will produce a greater proportion of certain U.S. products at its owned and operated plants, as opposed to contractor production, in 1994 to mitigate the downtime at those plants. This change in production sourcing will negatively impact certain gross profits per unit. Additionally, expenses related to the continuing transition to team-based manufacturing and increases in U.S. sales of lower margin products, as opposed to higher margin products, will also impact gross profit.\nMARKETING, GENERAL AND ADMINISTRATIVE EXPENSES\nMarketing, general and administrative expenses, as a percentage of sales, for 1993 were even with 1992 at 24 percent and one percentage point higher than 1991. Marketing, general and administrative expenses, in dollars, for 1993 increased 6 percent over 1992. This increase was mostly due to higher advertising, administrative, marketing and information resource expenses. Marketing, general and administrative expenses in 1992 increased 14 percent over 1991 for the same reasons.\nAdvertising expense for 1993 increased 8 percent over 1992. This increase was substantially due to new U.S. and Europe advertising campaigns and increased point-of-sale and media advertising in Europe. Advertising expense in 1992 increased 22 percent over 1991 mostly due to Men's Jeans, Menswear and Youthwear campaigns. (SEE BUSINESS SECTION, UNDER ITEM 1, FOR ADDITIONAL INFORMATION.)\nAdministrative expense for 1993 increased 8 percent from prior year. This increase was mostly due to expenses for new business development in Europe and Asia Pacific and higher office facility costs. Administrative expenses in 1992 increased 3 percent over 1991 mostly due to higher incentive compensation costs and non-U.S. business development costs that were partially offset by lower leverage buyout amortization expense (related to the 1985 acquisition of Levi Strauss & Co.).\nMarketing expense increased 7 percent from prior year, primarily due to additional U.S. merchandising personnel and higher costs associated with the use of sample products in the U.S. The Company also incurred costs associated with promoting higher visibility of its products at the retail level. Outside the U.S., particularly in Europe, costs increased proportionately with increases in unit sales. Marketing expense increased 33 percent in 1992 over 1991 mostly due to costs related to the use of more sample products and increases in retail coordinators in the U.S.\nInformation resource expense for 1993 increased 8 percent from 1992 due to higher lease costs related to certain telecommunications equipment and depreciation related to new mainframe computer equipment. Additionally, higher programming and restructuring costs contributed to the 1993 increase. Information resource expense for 1992 increased 32 percent over 1991 due to increases in systems support, equipment acquisitions and rentals and development costs. Systems and software costs related to the Company's strategic initiative to increase customer service are expected to increase information resource expenses in 1994 (SEE ADDITIONAL INFORMATION SECTION).\nOTHER OPERATING (INCOME) EXPENSE, NET\nOther operating (income) expense, net for 1993 decreased $14.3 million from 1992 mostly due to anticipated costs related to the Company's initiative to improve customer service (which included potential losses for existing capital assets; SEE ADDITIONAL INFORMATION SECTION), costs related to idle facilities, relocating certain operations and establishing new operations outside the U.S. Other operating (income) expense, net for 1992 decreased $13.0 million from 1991 primarily due to higher licensee expenses and costs associated with idle facilities, which were partially offset by increased royalty income.\nTotal operating expenses are expected to increase in 1994 due to continuing costs related to the Company's initiative on customer service (SEE ADDITIONAL INFORMATION SECTION). (SEE NOTE 1 TO CONSOLIDATED FINANCIAL STATEMENTS REGARDING THE RECLASSIFICATION OF CERTAIN 1992 AND 1991 AMOUNTS TO OTHER OPERATING (INCOME) EXPENSE, NET.)\nSTOCK OPTION CHARGE\nDuring 1992, the Company offered a special payment arrangement under the 1985 Stock Option Plan to facilitate the exercise by optionholders of their outstanding options. Holders of 65 percent of all outstanding options participated in this arrangement.\nAs a result of this arrangement, the Company recognized a pre-tax stock option charge of $158.0 million for all outstanding options during 1992. Separately, the Company also recorded compensation expense for related exercise bonuses and the accelerated use of presently non-vested options. Additionally, the Company disbursed $41.9 million to pay related withholding\ntaxes for optionholders and $4.4 million for related exercise bonuses. A total of 532,368 shares of Class L treasury shares were reissued and 392,755 shares of treasury stock were retired. There are 499,749 options still outstanding and exercisable.\nThe net change in Stockholders' Equity in 1992 due to these stock option transactions (including the after-tax effect of the stock option charge) was an increase of $9.2 million.\nINTEREST EXPENSE\nInterest expense decreased 30 percent from 1992 primarily due to lower 1993 average debt balances. Interest expense in 1992 was 25 percent lower than 1991 due to lower interest rates and lower average debt balances. Cash flows from operations were used to reduce debt levels over the last two years, resulting in the lower average debt balances.\nDuring 1993, the Company repaid debt on its primary and amended credit agreement and repaid and cancelled its outstanding Japanese Yen loan amounts. Additionally, the Company issued four series of notes payable to Class L stockholders in payment of dividends declared during the fourth quarter of 1992. The first series of notes were repaid during 1993. The interest associated with these notes has and is expected to have a minimal impact on interest expense. (SEE LIQUIDITY AND CAPITAL RESOURCES CAPTION.)\nDuring 1992, the Company repaid debt on its then primary credit agreement and redeemed and cancelled the remaining balance outstanding of its 14.45% Subordinated Notes due 2000.\nThe average interest rate in 1993 was approximately 9 percent compared to 10 percent in 1992 and 1991. This decrease over the last year reflects the lower market for interest rates. The average interest rate also reflects the Company's use of interest rate swap transactions to hedge interest rate fluctuations. (SEE NOTE 6 TO THE CONSOLIDATED FINANCIAL STATEMENTS.)\nThe Company expects 1994 interest expense related to borrowings to be lower than 1993 due to anticipated lower 1994 average debt levels (SEE LIQUIDITY AND CAPITAL RESOURCES CAPTION).\nOTHER INCOME, NET\nOther income, net increased $6.7 million in 1993 from the prior year period primarily due to lower interest rate swap termination costs and fewer terminations of lease agreements with tenants. This increase was partially offset by lower interest income on investments. (SEE NOTE 1 TO THE CONSOLIDATED FINANCIAL STATEMENTS REGARDING THE RECLASSIFICATION OF CERTAIN OTHER INCOME, NET AMOUNTS.)\nThe $2.7 million decrease in other income, net for 1992 compared to 1991 was primarily attributable to losses incurred for the termination of several interest rate swap agreements. These swap agreements were terminated as a result of lower average debt levels. Lower interest income on investments in 1992, partially offset by lower net losses on foreign currency transactions, also contributed to the decrease.\nPROVISION FOR TAXES\nThe increase in the 1993 provision for taxes compared to 1992 was substantially due to lower 1992 earnings caused by the stock option charge. The 1993 effective tax rate was 41 percent\ncompared to 43 percent in 1992 and 47 percent in 1991. The reduction in the 1993 effective tax rate from 1992 was primarily due to the mix of non-U.S. and U.S. earnings and the negative effects of the one time stock option charge in 1992. The stock option charge produced a tax benefit of only 27 percent because of its negative impact on the utilization of foreign tax credits in 1992. In addition, the 1993 effective tax rate would have been lower, except for the 1993 U.S. tax bill that increased the U.S. statutory tax rate to 35 percent from 34 percent and, therefore, resulted in a 1 percent increase to the Company's 1993 full year effective tax rate.\nThe reduction in the 1992 rate from 1991 reflected positive changes in the mix of non-U.S. and U.S. earnings. Additionally, the 1992 rate was favorably affected by a settlement reached with the Internal Revenue Service concerning transfer pricing issues, partially offset by the lower tax benefit provided by the stock option charge.\nThe Company will comply in fiscal 1994 with the provisions of SFAS No. 109, which requires an asset and liability approach for financial accounting and reporting of income taxes. The Company will recognize a positive adjustment of $11.4 million upon adoption that will be recorded as a cumulative effect of a change in accounting principles on the Consolidated Statements of Income. (SEE NOTE 3 TO CONSOLIDATED FINANCIAL STATEMENTS FOR ADDITIONAL INFORMATION.)\nEXTRAORDINARY ITEM - LOSS FROM EARLY EXTINGUISHMENT OF DEBT\nIn 1992, the Company used cash generated from operations to purchase on the open market and subsequently cancel all remaining, $33.6 million, 14.45% Subordinated Notes due 2000. In 1991, the Company purchased and subsequently cancelled an aggregate of $97.1 million of the same notes either on the open market or in connection with a recapitalization plan (SEE NOTE 20 TO THE CONSOLIDATED FINANCIAL STATEMENTS). These transactions resulted in an extraordinary loss of $1.6 million in 1992 and $9.9 million in 1991, net of applicable income tax benefits. These losses also reflected accelerated amortization of previously capitalized issuance fees.\nFINANCIAL CONDITION AND LIQUIDITY\nThe following discussion compares the liquidity position and certain balance sheet items of the Company as of year-end 1993 and 1992.\nTRADE RECEIVABLES AND INVENTORIES\nTrade receivables increased 18 percent from 1992 reflecting the 1993 dollar and unit sales records. The increase in trade receivables was also attributable to an increase in U.S. product pre-shipments to retailers during the fourth quarter of 1993. Additionally, the 1993 allowance for doubtful accounts, as a percent of receivables, was 13 percent lower than the 1992 percentage due to a higher number of account bankruptcies and credit failures in 1992.\nInventories at year-end 1993 were 9 percent above prior year, mostly due to the build-up of U.S. basic core inventories. This build-up of inventory was primarily attributable to production planning that was based on strong sale results during the first quarter of 1993. However, as the year progressed, sales were not consistently strong and did not match the production output. Additionally, inventory levels increased due to slow 1993 Back-to-School and Holiday seasons, for most marketing divisions, and increased order cancellations. The higher order cancellations reflected the effects of the Company's higher selling prices for certain products and existing\ninventories at retailers due to a slow retail market. Also, retailers have been keeping less inventory on-hand and relying on suppliers to provide products on a more timely basis. In an effort to partially reduce the high inventory levels during the year, the Company incurred production downtime late in the year.\nAt year-end 1993, unshipped orders were 13 percent below the previous year and order cancellations increased 30 percent, both due to the businesses in the U.S. These results reflect the reluctance of retailers to commit to orders far in advance. Additionally, lower consumer spending is expected to continue into 1994. The Company is currently evaluating its sourcing needs and plans to adjust future production accordingly.\nPROPERTY, PLANT AND EQUIPMENT\nProperty, plant and equipment, net for 1993 increased 9 percent from year-end 1992. The increase in property, plant and equipment was due to capital expenditures that more than offset depreciation expense and retirements during the period. U.S. capital expenditures were related to office renovations, purchases of main-frame data processing equipment, and automation and ergonomic upgrades for the Company's U.S. production facilities. Outside the U.S., the Company upgraded and expanded several of its finishing and distribution facilities in Europe.\nCapital expenditures were $143.2 million in 1993 and $146.2 million in 1992. Approximately $15.0 million of 1993 capital expenditures related to the Company's initiative on customer service. At year-end 1993, the Company had capital expenditure purchase commitments outstanding of approximately $32.6 million. Approximately 67 percent of these commitments were for distribution center and equipment needs in Europe and approximately 13 percent were for equipment needs in North America. The remaining commitments are for general office and information system needs.\nThe Company monitors the efficiencies of its facilities on an ongoing basis in conjunction with production requirements. The Company modernizes facilities and equipment as necessary and anticipates authorizations for capital expenditures of approximately $196.0 million for new 1994 projects, which does not include estimates related to the Company's initiative on customer service. Currently, actual spending on projects during the 1994 year is expected to be $165.0 million, not including spending related to the Company's initiative on customer service. Certain expenditures may be carried over to the following fiscal year based on timing of completion and spending limitations. Additionally, the Company expects to spend over $300.0 million during the next several years in connection with its initiative on customer service (SEE ADDITIONAL INFORMATION SECTION).\nWORKING CAPITAL\nWorking capital of $1.0 billion at year-end 1993 increased $407.6 million from year-end 1992 and the current ratio increased to 1.9 from 1.5, respectively. The increase in working capital was mostly due to lower dividends payable, short-term borrowings and taxes payable and higher trade receivables and inventories. The increase in working capital was partially offset by increases in salaries, wages and employee benefits, mostly due to higher workers' compensation claims, and current maturities of a portion of dividend notes (SEE LIQUIDITY AND CAPITAL RESOURCES CAPTION). Working capital requirements for operations and other needs were\nminimally impacted by the higher inventory levels during the year (SEE TRADE RECEIVABLES AND INVENTORIES CAPTION).\nLIQUIDITY AND CAPITAL RESOURCES\nThe increase of $15.0 million in cash and cash equivalents from year-end 1992 was primarily due to cash provided by operations. Cash provided by operations was mainly used for the net repayment of debt, capital expenditures and the payment of dividends. At year-end 1993, the Company's total outstanding debt balance was $145.8 million, 63 percent lower than year-end 1992.\nIn the first quarter of 1993, the Company renegotiated, amended and restated its primary credit agreement to provide for a $500.0 million unsecured working capital facility. Under the amended credit agreement, the Company no longer pledges as collateral the outstanding shares of common stock of its subsidiaries and its trademarks. This credit agreement will expire in 1997, but is renewable by the Company, with the consent of the lending banks. Commitment fees are paid on the unused portion of the amounts available for borrowing. Under the amended credit agreement the interest rates and commitment fees on the working capital facility are lower and the financial and operating covenants are less stringent compared to the prior credit agreement. At the time the amended agreement was established, the Company had repaid all amounts outstanding ($195.0 million) on its prior credit agreement and subsequently borrowed $125.0 million on the amended credit agreement. Since that time, net repayments on the amended credit agreement have resulted in an outstanding balance of $50.0 million at year-end 1993.\nAdditionally, the Company repaid all its outstanding 4.8 billion Japanese Yen loan amounts (U.S. dollar equivalent of $38.6 million) and cancelled the related credit line agreements during the first quarter of 1993.\nPartially offsetting the 1993 debt reductions were the issuance in December 1992 of four series of notes payable to Class L stockholders for partial payment of a dividend declared in November 1992. These notes are payable in four semi-annual installments commencing June 15, 1993 and collectively total $77.1 million. These notes bear an interest rate incrementally above the six-month Treasury Bill rate. At year-end 1993 the Company had repaid the first series of dividend notes payable to Class L stockholders for an aggregate amount of $18.0 million, plus accrued interest of $.4 million. Subsequent to year-end, the Company repaid the second series of dividend notes payable to Class L stockholders for an aggregate amount of $18.0 million, plus accrued interest of $.7 million (SEE NOTES 6 AND 22 TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR ADDITIONAL INFORMATION).\nThe Company expects 1994 debt levels to be lower than 1993. The Company plans to use a portion of cash generated from operations during 1994 for costs relating to the Company's initiative to improve customer service and for investments in retail joint ventures (SEE ADDITIONAL INFORMATION SECTION).\nThe Company also has interest rate swap transactions. The net amounts paid or received under interest rate swap contracts is recognized as interest expense. Several interest rate swap transactions were cancelled during 1993 and 1992 due to lower average debt levels. The gains\nand losses recognized from these cancellations were recorded as other income, net. (SEE NOTE 6 TO THE CONSOLIDATED FINANCIAL STATEMENTS.)\nThe Company uses forward and option currency contracts to reduce the risks of foreign currency fluctuations on its non-U.S. dollar denominated operations. The Company's market risk is directly related to fluctuations in the currency exchange rates. The Company's credit risk is limited to the currency rate differential for each agreement if a counterparty failed to meet the terms of the contract. The Company does not anticipate nonperformance by any counterparties. (SEE NOTES 1 AND 6 TO 8 TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR ADDITIONAL INFORMATION.)\nFor information regarding the sale of Class E common stock to the Company's employee investment plans, SEE NOTE 12 TO THE CONSOLIDATED FINANCIAL STATEMENTS.\nPAYMENT OF DIVIDENDS ON CLASS E STOCK\nIn June 1993, the Board of Directors declared a dividend of $.55 per share (totaling $.7 million), which was paid on August 27, 1993 to Class E stockholders of record on July 30, 1993. On November 18, 1993, the Board of Directors declared a dividend of $.55 per share (totaling $.7 million), which was paid on December 15, 1993 to Class E stockholders of record on December 1, 1993. There were no dividends declared on Class L common stock during the year. (SEE NOTES 19 AND 22 TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR ADDITIONAL INFORMATION.)\nOTHER LIABILITIES\nOther liabilities increased $85.7 million primarily due to increases in workers' compensation projections and certain pension and benefit plan estimates (SEE NOTE 17 TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR ADDITIONAL INFORMATION).\nBENEFIT PLANS\nPOSTRETIREMENT BENEFIT PLANS\nThe Company will adopt SFAS No. 106 \"Employers' Accounting for Postretirement Benefits Other Than Pensions\" in fiscal 1994. Upon adoption of SFAS No. 106, the Company will recognize an expense to establish a \"transition obligation,\" representing the value at the beginning of the year of the postretirement benefit obligation earned by employees and retirees in prior periods. Based on an actuarial valuation, the transition obligation is estimated to be $402.3 million before taxes and $248.4 million after taxes, when the Company adopts SFAS No. 106 at the beginning of fiscal 1994. The Company will recognize the entire transition obligation in 1994. This transaction will be recorded as a cumulative effect of a change in accounting principles, net of income taxes, on the Consolidated Statements of Income. Additionally, the Company will record an expense for 1994 service and interest costs, which is currently estimated to be $43.0 million. (SEE NOTE 11 TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR ADDITIONAL INFORMATION.)\nHEALTH PLANS\nDuring 1993, a number of major proposals for U.S. health care reform legislation, including the Clinton Administration proposal, were introduced and are being considered by the U.S. Congress. Presently, the Company cannot accurately assess how these or similar legislation might financially impact the Company. The Company currently provides health and welfare benefits to its employees.\nADDITIONAL INFORMATION\nSTRATEGIC INITIATIVES\nThe Company is in the process of examining and re-engineering various aspects of its brand marketing, customer service and operations\/distribution strategies. These initiatives include: aligning the Company's U.S. marketing divisions according to its Levi's(R), Dockers(R) and Brittania(R) brands, developing a customer base and product distribution system that is consistent with its brand image, reconfiguring the organization from a functional to a process orientation, implementing a team-based approach to manufacturing, and investing in retail joint ventures.\nMore broadly, the initiative involves fundamental changes in the way the Company operates its business. There are numerous commercial, operating, financial, legal and other risks and uncertainties presented by the design and implementation of such a program. Furthermore, the Company is not aware of undertakings of comparable magnitude in the apparel industry, and cannot predict with certainty the outcome of the initiative. Although there can be no assurance that the Company will successfully design and implement these new business processes, or that the costs of the initiative will not exceed estimates, the Company believes that the re-engineering initiative is essential to maintain and expand its business.\nAlthough many details and decisions regarding the organizational realignment and distribution system changes are currently being analyzed, the Company expects to complete this reorganization within the next few years. The Company expects to make capital expenditures of over $300.0 million during the next few years to support a new U.S. distribution network, expanded systems plans, organization and manufacturing changes. Additionally, the Company expects to spend approximately $200.0 million for transitional expenses, including software costs, possible impairment costs of existing facilities and equipment, training costs and other related expenses. All of these costs may be recognized ratably throughout the implementation period and\/or as expenditures occur, depending on the nature of the cost and the decisions made related to this initiative. (SEE STRATEGIC INITIATIVES CAPTION OF THE BUSINESS SECTION, UNDER ITEM 1, FOR ADDITIONAL INFORMATION.)\nITEM 8.","section_7A":"","section_8":"ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA\nInformation required by this item and not presented on the following pages is contained in the SUPPLEMENTAL FINANCIAL SCHEDULES that are included in this Form 10-K.\nCONSOLIDATED FINANCIAL STATEMENTS\nLEVI STRAUSS ASSOCIATES INC. AND SUBSIDIARIES\nFor the Years Ended November 28, 1993, November 29, 1992 and November 24, 1991\nLEVI STRAUSS ASSOCIATES INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Dollars In Thousands Except Per Share Data)\n(1) Fiscal years 1993 and 1991 each contained 52 weeks. Fiscal year 1992 contained 53 weeks. (2) Applicable income tax benefits for fiscal years 1992 and 1991 are $947 and $5,799, respectively.\nThe accompanying notes are an integral part of these financial statements.\nPage 1 of 2\nLEVI STRAUSS ASSOCIATES INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in Thousands)\nNovember 28, November 29, 1993 1992 ----------- ------------\nThe accompanying notes are an integral part of these financial statements.\nPage 2 of 2\nLEVI STRAUSS ASSOCIATES INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in Thousands)\nThe accompanying notes are an integral part of these financial statements.\nPage 1 of 3\nLEVI STRAUSS ASSOCIATES INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Dollars in Thousands)\nThe accompanying notes are an integral part of these financial statements.\nPage 2 of 3\nLEVI STRAUSS ASSOCIATES INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Dollars in Thousands)\nThe accompanying notes are an integral part of these financial statements.\nPage 3 of 3\nLEVI STRAUSS ASSOCIATES INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Dollars in Thousands)\nThe accompanying notes are an integral part of these financial statement.\nPage 1 of 2\nLEVI STRAUSS ASSOCIATES INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands)\nThe accompanying notes are an integral part of these financial statements.\nPage 2 of 2\nLEVI STRAUSS ASSOCIATES INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands)\nThe accompanying notes are an integral part of these financial statements.\nLEVI STRAUSS ASSOCIATES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS\nNOTE 1 SIGNIFICANT ACCOUNTING POLICIES\nPRINCIPLES OF CONSOLIDATION\nThe consolidated financial statements include the accounts of Levi Strauss Associates Inc. (LSAI or the Company) and all subsidiaries. All significant intercompany items have been eliminated.\nDEPRECIATION AND AMORTIZATION METHODS\nProperty, plant and equipment is carried at cost, less accumulated depreciation. Depreciation and amortization are computed on a straight-line basis over the estimated useful lives of the related assets. In the case of certain property under capital lease, depreciation is computed over the lesser of the useful life or the lease term.\nINCOME TAXES\nDeferred income taxes result from timing differences in the recognition of revenue, expense and credits for income tax and financial statement purposes. U.S. Federal income tax and foreign withholding taxes are provided on the undistributed earnings of non-U.S. subsidiaries to the extent that taxes on the distribution of such earnings would not be offset by tax credits.\nEffective November 29, 1993, the Company will adopt Statement of Financial Accounting Standards (SFAS) No. 109. This statement requires a change from the deferral method of accounting for income taxes under Accounting Principles Board Opinion No. 11 to the asset and liability method of accounting for income taxes. Under SFAS No. 109, deferred tax assets and liabilities are established at the balance sheet date in amounts that are expected to be recoverable or payable when the difference in the tax bases and financial statement carrying amounts of assets and liabilities (\"temporary differences\") reverse. The 1994 adoption will be recorded as a cumulative effect of a change in accounting principles on the Consolidated Statements of Income.\nPOSTRETIREMENT BENEFIT PLANS\nThe Company will adopt SFAS No. 106 \"Employers' Accounting for Postretirement Benefits Other Than Pensions\" at the beginning of fiscal 1994. Upon adoption of SFAS No. 106, the Company will recognize an expense to establish a \"transition obligation\", representing the value at the beginning of the year of the postretirement benefit obligation earned by employees and retirees in prior periods. This transaction will be recorded as a cumulative effect of a change in accounting principles, net of income taxes, on the Consolidated Statements of Income. Additionally, the Company will record an expense for 1994 service and interest costs.\nINCOME PER COMMON SHARE\nIncome per common share is computed by dividing income (after deducting dividends on preferred stock) by the average number of common shares outstanding for the period.\nCASH EQUIVALENTS\nAll highly liquid investments with an original maturity of three months or less are included as cash equivalents.\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)\nNOTE 1 (CONTINUED) SIGNIFICANT ACCOUNTING POLICIES\nINVENTORY VALUATION\nInventories are valued at the lower of average cost or market and include materials, labor and manufacturing overhead. Market is calculated on the basis of anticipated selling price less allowances to maintain the normal gross margin for each product.\nTRANSLATION ADJUSTMENT\nThe functional currency for most of the Company's foreign operations is the applicable local currency. For those operations, assets and liabilities are translated into U.S. dollars at period-end exchange rates, and income and expense accounts are translated at average monthly exchange rates. Net exchange gains or losses resulting from such translation are accumulated as a separate component of stockholders' equity. The U.S. dollar is the functional currency for foreign operations in countries with highly inflationary economies, for which both translation adjustments and gains and losses on foreign currency transactions are included in other income, net.\nFOREIGN EXCHANGE CONTRACTS\nThe Company enters into foreign exchange contracts to hedge against known foreign currency denominated exposures, particularly dividends and intracompany royalties from its foreign affiliates and licensees. Market value gains and losses on hedge instruments are recognized and offset foreign exchange gains or losses on existing exposures. The effects of exchange rate changes on transactions designated as hedges of net investments are included in the separate component of stockholders' equity. At November 28, 1993, the net effect of exchange rate changes due to net investment hedge transactions was a $9.1 million increase to translation adjustment.\nAMENDMENTS AND RECLASSIFICATIONS\nDuring 1993, the Company filed with the Securities and Exchange Commission an amendment to its 1992 Form 10-K, under the cover of Form 10-K\/A. The Form 10-K amendments reclassified the 1992 stock option charge as an operating expense and reclassified amounts related to the amortization of goodwill and intangibles and losses related to property, plant and equipment from other income, net to marketing, general and administrative expenses on the Consolidated Statements of Income. These reclassifications did not affect net income.\nSeparately, a new line item, other operating (income) expense, net was created for the 1993 Consolidated Statements of Income. This new line includes certain operations-related items that were classified as other income, net or marketing, general and administrative expenses. The other operating (income) expense, net line represents operating income or expense items that are not related to marketing, general and administrative expenses. Certain 1992 and 1991 items have been reclassified to conform to the 1993 presentation format.\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)\nNOTE 2 OPERATIONS\nThe following table presents information concerning U.S. and non-U.S. operations (all in the apparel industry).\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)\nNOTE 2 (CONTINUED) OPERATIONS\nGains or losses resulting from certain foreign currency hedge transactions are included in other income, net, and amounted to losses of $10.0 million, $10.2 million and $19.7 million for 1993, 1992 and 1991, respectively.\nNOTE 3 INCOME TAXES\nThe U.S. and non-U.S. components of income before taxes and extraordinary loss are as follows:\nThe provision for taxes consists of the following:\n- ----------------- Components of the prior year income tax provision have been reclassified from current to deferred to conform to the current year's presentation.\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)\nNOTE 3 (CONTINUED) INCOME TAXES\nAt November 28, 1993, cumulative non-U.S. operating losses of $9.7 million generated by the Company are available to reduce future taxable income primarily between the years 1995 and 1998. The Company has utilized all of its remaining foreign tax credit carryforwards in 1993.\nIncome tax expense (benefit) included in translation adjustment was $(0.1) million, $(8.1) million and $(2.8) million for 1993, 1992 and 1991, respectively.\nThe approximate tax effects of timing differences giving rise to deferred income tax expense (benefit) result from:\nThe Company's effective income tax rate in 1993, 1992 and 1991 differs from the statutory federal income tax rate as follows:\n(1) The stock option charge, which occurred during the third quarter of 1992, produced a tax benefit of only 27.2 percent in 1992 because of its negative impact on the current utilization of foreign tax credits.\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)\nNOTE 3 (CONTINUED) INCOME TAXES\nIn February 1992, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 109 \"Accounting for Income Taxes,\" which requires an asset and liability approach for financial accounting and reporting of income taxes. The Company will comply with the provisions of SFAS No. 109 during the first quarter of fiscal 1994. Preliminary review indicates that adoption will result in a $11.4 million credit to net income. The adoption will be recorded as a cumulative effect of a change in accounting principles on the Consolidated Statements of Income.\nThe Company does not expect the tax aspects of the Omnibus Budget Reconciliation Act of 1993 that was signed into law by President Clinton on August 10, 1993 to materially affect the Company's future tax expense. The primary impact of the new tax law is a one percent increase in the statutory tax rate.\nThe U.S. consolidated tax returns of the Company for 1983 through 1985 are under examination by the Internal Revenue Service (IRS). The audit includes the review of certain transactions of the 1985 leveraged buyout. The Company believes it has made adequate provision for income taxes and interest, which may become payable upon settlement. The IRS has not yet concluded its audit and a settlement has not been negotiated.\nNOTE 4 PROPERTY, PLANT AND EQUIPMENT\nThe components of property, plant and equipment, including both leased and owned assets stated at cost, are as follows:\nThe Company has idle facilities and equipment (all in the U.S.), including closed plants and certain other properties, that are not being depreciated. The book value of these idle facilities and equipment was $30.6 million at November 28, 1993 and November 29, 1992. The carrying values of idle facilities and equipment are not in excess of net realizable value. These facilities are being offered for sale or lease.\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)\nNOTE 4 (CONTINUED) PROPERTY, PLANT AND EQUIPMENT\nDepreciation expense for 1993, 1992 and 1991 was $85.5 million, $73.1 million and $59.2 million, respectively.\nThe Company plans to spend over $300.0 million for capital expenditures over the next few years in conjunction with its initiative to improve customer service. (SEE BUSINESS SECTION, UNDER ITEM 1, FOR ADDITIONAL INFORMATION.)\nNOTE 5 INTANGIBLE ASSETS\nThe components of intangible assets are as follows:\nGoodwill, resulting from the 1985 acquisition of Levi Strauss & Co. by Levi Strauss Associates Inc., is being amortized through the year 2025. Acquisition intangibles include trained workforce, leasehold interest, research and development, and licenses that were valued as a result of the acquisition. Tradenames were also valued as a result of the acquisition.\nIntangible pension asset is not amortized, but is adjusted each year to correspond to changes in the amount of minimum pension liability.\nAmortization expense for 1993, 1992 and 1991 was $24.0 million, $24.0 million and $47.8 million, respectively.\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)\nNOTE 6 DEBT AND LINES OF CREDIT\nDebt and unused lines of credit are summarized below:\nPRIMARY CREDIT AGREEMENT\nDuring 1993, the Company renegotiated, amended and restated its primary credit agreement to provide for a $500.0 million unsecured working capital facility. Under the amended credit agreement, the Company no longer pledges as collateral the outstanding shares of common stock of its subsidiaries and its trademarks. This credit agreement will expire in 1997, but is renewable by the Company with the consent of the lending banks. Commitment fees are paid on the unused portion of the amounts available for borrowing. Under the amended credit agreement, the interest rates and commitment fees are lower than the prior credit agreement.\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)\nNOTE 6 (CONTINUED) DEBT AND LINES OF CREDIT\nPRIMARY CREDIT AGREEMENT (CONTINUED)\nThe primary credit agreement requires the Company to maintain minimum levels of working capital, net worth, interest coverage and other ratios. Additionally, the net worth ratio takes into account the effects of SFAS No. 106 on the Consolidated Financial Statements (SEE NOTE 11). All borrowings under the primary credit agreement bear interest based on either the lending banks' base rate, the certificate of deposit rate or the LIBOR rate (at the Company's option) plus an incremental percentage. Interest rates on borrowings related to the primary credit agreement ranged from 3.6 percent to 6.0 percent during 1993.\nThe Company's prior primary credit agreement provided a $500.0 million working capital line. The borrowings against the Company's working capital line were secured by the outstanding shares of common stock of its principal subsidiary, Levi Strauss & Co. and a wholly owned subsidiary, Brittania Sportswear Ltd., and by its United States and Canadian trademarks.\nJAPANESE YEN CREDIT LINE AGREEMENTS\nIn 1993 the Company repaid all its outstanding 4.8 billion Japanese Yen loan amounts (U.S. dollar equivalent of $38.6 million at the time of repayment) and subsequently cancelled its two unsecured line of credit agreements with two Japanese banks for a total of 6.9 billion Japanese Yen.\nOTHER DEBT\nDuring 1993, the Company issued four series of notes payable collectively totaling $77.1 million to Class L stockholders in partial payment of a dividend declared in November 1992. These notes are payable in four semi-annual installments commencing June 15, 1993 and bear an interest rate incrementally above the six-month Treasury Bill rate. On June 15, 1993, the Company repaid the first series of dividend notes to Class L stockholders for an aggregate amount of $18.0 million, plus accrued interest of $.4 million. Subsequent to year-end on December 15, 1993, the Company repaid the second series of dividend notes to Class L stockholders for an aggregate amount of $18.0 million, plus accrued interest of $.7 million.\nPRINCIPAL DEBT PAYMENTS\nThe required aggregate long-term debt principal payments, excluding capitalized leases, for the next five years are as follows:\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)\nNOTE 6 (CONTINUED) DEBT AND LINES OF CREDIT\nSHORT-TERM CREDIT LINES AND STAND-BY LETTERS OF CREDIT\nThe Company has unsecured and uncommitted short-term credit lines available at various interest rates from various U.S. and non-U.S. banks. These credit arrangements may be cancelled by the lenders upon notice and generally have no compensating balance requirements or commitment fees.\nThe Company has $98.2 million of funds available through standby letters of credit with various international banks. The majority of these agreements serve as guarantees by the creditor banks to cover workers' compensation claims. The Company pays fees on the standby letters of credit and any borrowings against the letters of credit are subject to interest at various rates.\nINTEREST RATE SWAPS\nThe Company enters into interest rate swap transactions to hedge existing floating-rate or fixed-rate liabilities for fixed rates or floating rates. The net interest to be received or paid on the transactions is recorded as an adjustment to interest expense.\nIn 1993, due to lower average debt levels, the Company terminated $100.0 million of interest rate swap agreements and assigned to a third party a $50.0 million interest rate swap agreement that hedged fixed-rate liabilities for floating rates. Additionally, the Company terminated $50.0 million and assigned to a third party $50.0 million of interest rate swap agreements that hedge floating- rate liabilities for fixed rates. This assignment became effective during the fourth quarter of 1993. The Company also terminated a $25.0 million one-way floating-rate swap transaction. These 1993 transactions resulted in a net gain of $.4 million that was classified as other income, net. At year-end 1993, the Company had $100.0 million of interest rate swaps that hedge floating-rate liabilities for fixed rates.\nIn 1992, the Company entered into swap transactions to hedge $50.0 million of existing floating-rate liabilities for fixed rates, swap transactions to hedge $200.0 million of fixed-rate liabilities for floating rates and a one-way floating-rate swap transaction to hedge $25.0 million of floating-rate liabilities. The 1992 swap transactions ranged in maturity from two to four years and were entered into to offset previous existing swap transactions and take advantage of lower interest rates. Due to lower average debt levels in the latter part of the 1992 fiscal year, the Company terminated $150.0 million of swap agreements for a net loss of $5.6 million, included in other income, net.\nThe Company is subject to credit risk exposure from nonperformance of the counterparties to the swap agreements. However, these counterparties are credit-worthy financial institutions and the Company does not anticipate nonperformance.\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)\nNOTE 7 COMMITMENTS AND CONTINGENCIES\nThe Company has forward currency contracts to buy the aggregate equivalent of $192.3 million of the following foreign currencies: Japanese Yen, Spanish Pesetas, Netherlands Guilders, Italian Lire, British Pounds, Finnish Markkaa, German Marks, Swiss Francs and Belgian Francs. The Company has forward currency contracts to sell the aggregate equivalent of $962.1 million of the following foreign currencies: Japanese Yen, Swedish Kroner, Spanish Pesetas, Norwegian Kroner, Netherlands Guilders, Italian Lire, British Pounds, Finnish Markkaa, French Francs, Danish Kroner, German Marks, Swiss Francs and Belgian Francs. These contracts are at various exchange rates and expire at various dates through 1996. The Company's market risk is directly related to fluctuations in the currency exchange rates.\nIn addition, the Company has the right to sell Japanese Yen for $10.0 million. This contract expires in March 1995. The Company's credit risk is limited to the currency rate differential for each agreement, if a counterparty failed to meet the terms of the contract. These instruments are executed with credit worthy financial institutions and the Company does not anticipate nonperformance by the counterparties. SEE NOTE 8 FOR ADDITIONAL INFORMATION.\nThe Company evaluates environmental liabilities on an ongoing basis and, based on currently available information, does not consider any environmental exposure to be material. Additionally, the Company does not consider any pending legal proceedings to be material.\nNOTE 8 FAIR VALUE OF FINANCIAL INSTRUMENTS\nIn 1993, the Company adopted SFAS No. 107 \"Disclosures About Fair Value of Financial Instruments.\" This statement requires companies to disclose the fair value of certain financial instruments, as well as the methods and assumptions used to estimate the fair value.\nThe estimated fair value amounts have been determined by the Company, using available market information and appropriate valuation methodologies. However, considerable judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that the Company could realize in a current market exchange.\nThe carrying amount and estimated fair value of the Company's financial instruments, on the balance sheet, at November 28, 1993 are as follows:\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)\nNOTE 8 (CONTINUED) FAIR VALUE OF FINANCIAL INSTRUMENTS\nQuoted market prices or dealer quotes are used to determine the estimated fair value of the majority of interest rate swap agreements, forward exchange contracts and option contracts. Other techniques, such as the discounted value of future cash flows, replacement cost, and termination cost have been used to determine the estimated fair value for long term debt and the remaining financial instruments. The estimated fair value of the ESAP common stock is based on the latest valuation of Class E common stock.\nThe carrying values of cash and cash equivalents, trade receivables, current assets, current maturities of long-term debt, short-term borrowings, taxes and dividends payable are assumed to approximate fair value. All investments mature in 90 days or less, therefore the carrying values are considered to approximate market value.\nThe fair value estimates presented herein are based on pertinent information available to the Company as of November 28, 1993. Although the Company is not aware of any factors that would substantially affect the estimated fair value amounts, such amounts have not been updated since that date and, therefore, the current estimates of fair value at dates subsequent to November 28, 1993 may differ substantially from these amounts. Additionally, the aggregation of the fair value calculations presented herein do not represent, and should not be construed to represent, the underlying value of the Company.\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)\nNOTE 9 LEASES\nThe Company is obligated under both capital and operating leases for facilities, office space and equipment.\nAt November 28, 1993, obligations under long-term leases are as follows:\nThe total minimum lease payments on capital and operating leases have not been reduced by estimated future income of $19.3 million from noncancelable subleases.\nIn general, leases relating to real estate include renewal options of up to 20 years. Some leases contain escalation clauses relating to increases in executory costs. Certain operating leases provide the Company with an option to purchase the property after the initial lease term at the then-prevailing market value. Rental expense for 1993, 1992 and 1991 was $75.1 million, $67.1 million and $60.4 million, respectively.\nNOTE 10 RETIREMENT PLANS\nThe Company has numerous non-contributory defined benefit retirement plans covering substantially all employees. It is the Company's policy to fund its retirement plans based on actuarial recommendations consistent with applicable laws and income tax regulations. Plan assets are invested in a diversified portfolio of securities including stocks, bonds, real estate\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)\nNOTE 10 (CONTINUED) RETIREMENT PLANS\ninvestment funds and cash equivalents. The weighted average expected long-term rate of return on assets is 9.0 percent. Benefits payable under the plans are based on either years of service or final average compensation.\nThe funded status of the plans, as of November 28, 1993 and November 29, 1992, reconciles with amounts recognized on the balance sheet as follows:\nThe unrecognized net liability at transition (established 1988) is being amortized primarily on a straight-line basis over 15 years. Past service costs are amortized on a straight line basis over the average remaining service period of employees expected to receive benefits.\nThe weighted average discount rate and the rate of increase in future compensation levels used to determine the actuarial present value of the projected benefit obligations for the plans were 6.6 percent and 6.0 percent, respectively, for 1993, 7.6 percent and 7.0 percent, respectively,\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)\nNOTE 10 (Continued) RETIREMENT PLANS\nfor 1992 and 8.1 percent and 7.0 percent, respectively, for 1991. Changes in the discount rate and the rate of increase in future compensation levels used to measure the 1993 pension obligations resulted in increases to those obligations as compared to the prior year.\nDuring 1993, the Company recorded minimum liabilities of $21.4 million for three of its pension plans. The Company also recorded a corresponding intangible asset of $4.8 million and, for two of its pension plans where the required intangible asset exceeded its related prior service costs, an adjustment to stockholders' equity of $16.6 million.\nNet pension expense includes the following components:\nNOTE 11 POSTRETIREMENT BENEFIT PLANS\nCurrently, the Company provides certain health care and life insurance benefits for substantially all active and retired employees through both insured and self-insured programs. The Company recognizes the cost of providing these benefits by charging to expense the annual self-insured claims and insurance premiums amounting to $80.3 million, $71.7 million and $59.9 million in 1993, 1992 and 1991, respectively. The cost of providing these benefits for retirees (approximately 9.3 percent of the total receiving these benefits) is not readily separable from the cost of providing benefits for active employees.\nDuring 1993, a number of major proposals for U.S. health care reform legislation, including the Clinton administration proposal, were introduced and are being considered by the U.S. Congress. Presently, the Company cannot accurately assess how these or similar legislation might financially impact the Company.\nThe Company will adopt SFAS No. 106 \"Employers' Accounting for Postretirement Benefits Other Than Pensions\" effective November 29, 1993. This statement requires the Company to accrue postretirement benefits (other than pensions), including health care and life insurance benefits for retired employees over the period that an employee becomes fully eligible for benefits. Currently, the Company uses a \"pay-as-you-go\" method whereby expenses are recorded as claims are incurred.\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)\nNOTE 11 (Continued) POSTRETIREMENT BENEFIT PLANS\nUpon adoption of SFAS No. 106, the Company will record a one-time, non-cash charge against earnings of $402.3 million before taxes and $248.4 million after taxes. This transition obligation represents the actuarially determined value at November 29, 1993 of the present value of the postretirement benefit obligation earned by employees and retirees in prior periods. The transition obligation will be recorded in 1994 as a cumulative effect of a change in accounting principles, net of income tax effects, on the Consolidated Statements of Income. Also, the change in accounting will result in an additional annual expense for service and interest cost, which is currently estimated to be $43.0 million for 1994.\nNOTE 12 EMPLOYEE INVESTMENT PLANS\nThe Company maintains three employee investment plans. The Employee Stock Purchase and Stock Award Plan of Levi Strauss Associates Inc. (ESAP) is a non- qualified employee equity program for highly compensated (as defined by the Internal Revenue Code) employees. The Employee Investment Plan of Levi Strauss Associates Inc. (EIP) and the Levi Strauss Associates Inc. Employee Long-Term Investment and Savings Plan (ELTIS) are two qualified plans that cover non- highly compensated Home Office employees and U.S. field employees.\nESAP\nUnder the ESAP, eligible employees may invest up to 10 percent of their annual compensation, through payroll deductions, to directly purchase and hold shares of Class E common stock. Employee contributions are made on an after-tax basis. The Company may match 75 percent of the contributions made by employees in stock. Employees are always 100 percent vested in the Company match. Employees may elect to have their withholding taxes deducted from their match shares contributed by the Company. There are various put, call and first refusal rights associated with Class E common stock obtained through the ESAP. The ESAP generally prohibits all transfers of shares other than to the Company. Put rights associated with ESAP entitle participants to sell shares back to the Company in specified circumstances subject to certain restrictions and penalties. It also entitles the Company to buy back shares upon termination of the participant's employment. In all cases, shares are repurchased at the current appraised value of the shares during the semi-annual employee purchase periods. The intent of ESAP is to be a long-term investment plan and therefore the Company does not expect to repurchase large amounts of ESAP shares at any given time. SEE NOTE 19 FOR STOCK VALUATION INFORMATION.\nShares held by participants of the ESAP are classified outside stockholders' equity due to the put rights attached to Class E common stock sold through the ESAP. There were no Class E common stock shares offered for purchase to ESAP participants prior to 1992. The redemption value at the time of repurchase would be based on the latest valuation of Class E common stock. In 1991, the Company registered 5,000,000 additional shares of Class E common stock under the Securities Act of 1933 for sale by the Company under the ESAP. This plan was adopted as part of the 1991 recapitalization (SEE NOTE 20).\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)\nNOTE 12 (Continued) EMPLOYEE INVESTMENT PLANS\nESAP (Continued)\nThe following summary presents ESAP activity for the years ended November 28, 1993, November 29, 1992 and November 24, 1991:\n(1) includes adjustment due to the reissuance of treasury stock purchased in\nOn January 12, 1994, employees under ESAP purchased 31,840 shares of Class E common stock from the Company, also at $114 per share. The Company contributed approximately 19,512 matching shares before taxes to these employees at a cost of approximately $2.2 million, which is mostly included in fiscal 1993 compensation expense.\nEIP\/ELTIS\nUnder the qualified plans, eligible employees may contribute up to 10 percent of their annual compensation to various investment funds, including a fund that invests in Class E common stock. The Company may match 50 percent of the contributions made by employees to the fund that invests in Class E common stock. Effective for fiscal 1994 contributions, the Company may match 50 percent of the contributions made by employees to all funds maintained under the qualified plans. The additional compensation expense associated with this change is expected to be minimal.\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)\nNOTE 12 (Continued) EMPLOYEE INVESTMENT PLANS\nEIP\/ELTIS (Continued)\nEmployees are always 100 percent vested in the Company match. The ELTIS also includes a company profit sharing provision with payments made at the sole discretion of the Board of Directors. The EIP allows employees a choice of either pre-tax or after-tax contributions. Employee contributions under the ELTIS are on a pre-tax basis only.\nDuring 1993, the qualified plans collectively purchased 47,351 shares and 14,436 shares at $116 and $138 per share, respectively, as determined by the valuation of an independent investment banking firm at the time of purchase (the $116 price was based on the independent valuation of $119 per share, less a $3 per share dividend paid after the valuation was issued but before the stock purchase). In addition, the Company contributed 38,263 shares to these plans.\nDuring 1992, the qualified plans purchased 35,997 shares and 13,283 shares at $84 and $122 per share, respectively, and the Company contributed 78,867 matching shares; during 1991, the qualified plans purchased 218,563 shares at $74 per share and the Company contributed 193,193 matching shares (which included a special additional match).\nIt is the Company's intent to have semi-annual sales of Class E common stock to the EIP, ELTIS and ESAP. However, the frequency of these sales may be dependent upon business and economic conditions.\nOn January 12, 1994, EIP and ELTIS purchased 10,208 shares of Class E common stock from the Company at $114 per share as determined by the valuation of an independent investment banking firm. In addition, the Company contributed 16,937 shares (which included a portion related to ELTIS profit sharing) to these plans at a cost of $1.9 million, which is mostly included in fiscal 1993 compensation expense.\nOTHER PLANS\nThe Company has an Interim Cash Performance Sharing Plan for Home Office payroll employees and a Field Profit Sharing Award Plan for U.S. field employees. These cash plans pay out a percentage of covered compensation based on certain Company earnings criteria as approved by the Board of Directors.\nThe aggregate cost of providing all aspects of these plans, along with other savings and compensation plans in 1993, 1992 and 1991 were $45.4 million, $46.0 million and $53.0 million, respectively.\nNOTE 13 MANAGEMENT INCENTIVE PLAN\nThe Company's Management Incentive Plan (\"MIP\") provides selected employees with incentive compensation and provides a tool for recruiting and retaining selected employees. Under the MIP, the Personnel Committee of the Board of Directors, as administrator of the MIP, may\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)\nNOTE 13 (Continued) MANAGEMENT INCENTIVE PLAN\naward discretionary cash payments to selected employees. Such awards are made on the basis of various factors, including profit levels, return on investment, salary grade and individual performance. The amounts charged to expense for the MIP in 1993, 1992 and 1991 were $13.8 million, $12.8 million and $11.9 million, respectively.\nNOTE 14 LONG-TERM PERFORMANCE PLAN\nThe Company has a Long-Term Performance Plan (\"LTPP\"), to provide incentive and reward performance over time and potential future contributions, for certain directors, officers and key employees. Under this plan, a number of performance units are granted to each participant. The value assigned to each unit is based on the Company achieving a target performance measure over a three-year period, as determined by a committee of the Board of Directors. Awards are paid in one- third increments on the third, fourth and fifth anniversaries of the date of the grant. The amounts charged to expense for the plan in 1993, 1992 and 1991 were $25.7 million, $27.9 million and $22.1 million, respectively.\nNOTE 15 EXECUTIVE STOCK APPRECIATION RIGHTS PLAN\nDuring 1992, the Board of Directors approved the Levi Strauss Associates Inc. Executive Stock Appreciation Rights Plan. A total of 114,000 stock appreciation rights (SARs) were granted in 1992 to certain executives at an initial grant value of $84 per SAR. These SARs vest over several years and become exercisable commencing in 1995. The amounts charged to expense for the plan in 1993 and 1992 were $.9 million and $.5 million, respectively.\nNOTE 16 STOCK OPTION PLAN\nThe Company has a 1985 Stock Option Plan (the \"Plan\") for Class L common stock (previously Class F common stock, SEE NOTE 20) under which options are granted at an exercise price determined on the date of grant by a committee of the Board of Directors. Options under the Plan expire ten years from the date of grant and become exercisable as determined by the committee.\nIn 1992, the Board of Directors approved a special payment arrangement under the Plan to facilitate the exercise by optionholders of their outstanding options. This arrangement accelerated vesting on all non-vested options and allowed each optionholder to exercise outstanding options by surrendering a portion of these outstanding options in full payment of the exercise price and related tax obligations. Holders of 65 percent of all outstanding options participated in this arrangement. The special arrangement required the recognition of a fiscal 1992 pre-tax stock option charge of $158.0 million for all outstanding options (the amount equal to the difference between the fair market value of the underlying shares at the exercise date and at the grant date). Separately, the Company also recognized compensation expense for related exercise bonuses and the accelerated use of presently non-vested options. The Company\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)\nNOTE 16 (CONTINUED) STOCK OPTION PLAN\ndisbursed $41.9 million to pay related withholding taxes for optionholders (in exchange for an equal amount of surrendered options) and $4.4 million for related exercise bonuses. The optionholders participating in this arrangement exercised 925,123 options resulting in 532,368 reissued treasury shares of Class L common stock. The Company also retired 392,755 shares of treasury stock, which was equal to the number of options surrendered. The net change in Stockholders' Equity (including the after-tax effect of the stock option charge) was an increase of $9.2 million.\nDuring 1991, non-vested options were accelerated to attain immediate 50 percent vesting. Also, during 1991, cash bonuses totaling $1.6 million were paid on the exercise of options that were granted in 1985 and 1987.\nThe following summary presents stock option activity for the years ended November 24, 1991, November 29, 1992 and November 28, 1993:\nNOTE 17 OTHER LIABILITIES\nThe components of other liabilities are as follows:\nNOTES TO CONSOLIDATED STATEMENTS (CONTINUED)\nNOTE 17 (CONTINUED) OTHER LIABILITIES\nAccrued workers compensation expense and accrued expenses related to the Company's program that provides for early identification and treatment of employee injuries are included in Workers' Health and Safety. Deferred employee benefits include accrued liabilities for the Company's long-term performance plan, deferred compensation, benefit restoration, pension and other plans.\nNOTE 18 SERIES A PREFERRED STOCK\nAt November 28, 1993, there were no shares of Series A preferred stock outstanding. During 1992, the Company redeemed for cash and permanently retired all outstanding shares of Series A preferred stock at $170 per share, for an aggregate of $82.3 million, plus accrued and unpaid dividends of $1.1 million. The Company used cash from operations to purchase the shares. Dividend distributions of $4.3 million and $7.5 million were paid in 1992 and 1991, respectively.\nNOTE 19 COMMON STOCK\nRESTATED CERTIFICATE OF INCORPORATION\nDuring 1993, holders of a majority of outstanding shares (approximately 60 percent) of the Company approved, by written consent, an amendment and restatement of the Company's Certificate of Incorporation (the \"Restatement\"). The Restatement simplifies and shortens the capital stock provisions of the Certificate of Incorporation. It removes the Company's authority to issue, and eliminates all references to, Class F common stock, Series A preferred stock and Series B preferred stock. It does not affect any provisions relating to Class E common stock or Class L common stock, or make any other changes in the Certificate of Incorporation.\nCurrently, the Company has an authorized capital structure consisting of: 270,000,000 shares of common stock, par value $.10 per share, of which 100,000,000 shares are designated Class E common stock and 170,000,000 shares are designated Class L common stock; plus 10,000,000 shares of preferred stock, par value $1.00 per share. Class L common stock is subject to a stockholders' agreement (expiring in April 2001), which limits transfers of the shares. The outstanding shares of Class E common stock are subject to restrictions on transfer imposed by the EIP, ELTIS and ESAP.\nDIVIDENDS\nDuring 1993, there were no dividends declared on Class L common stock. On November 18, 1993, the Board of Directors declared a dividend of $.55 per share (totaling $.7 million), which was paid on December 15, 1993 to Class E stockholders of record on December 1, 1993. In June 1993, the Board of Directors declared a dividend of $.55 per share, for an aggregate of $.7 million, which was paid on August 27, 1993 to Class E stockholders of record on July 30, 1993.\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)\nNOTE 19 (CONTINUED) COMMON STOCK\nDIVIDENDS (CONTINUED)\nIn November 1992, the Board of Directors declared a dividend of $3.00 per share (totaling $2.9 million), which was paid on December 15, 1992, to Class E stockholders of record on December 1, 1992. Also in November 1992, the Board of Directors declared a dividend of $3.00 per share to Class L stockholders of record on December 1, 1992, $1.50 of which (totaling $77.1 million) was paid on December 15, 1992 and $1.50 of which (totaling $77.1 million) is payable in four semi-annual installments commencing June 15, 1993. The notes issued for these dividends bear an interest rate incrementally above the six-month Treasury Bill rate.\nIn June 1992, the Board of Directors declared a common stock dividend of $.40 per share (totaling $21.0 million), which was paid on August 14, 1992, to Class E and Class L stockholders of record on July 31, 1992.\nIn November 1991, the Board of Directors declared a dividend of $.20 per share (totaling $10.3 million) on both Class E and Class L common shares to stockholders of record on December 2, 1991, which was paid on December 16, 1991. In November 1990, a $.525 per share dividend (totaling $31.6 million) was declared on both Class E and Class F common shares to stockholders of record on November 30, 1990, which was paid on December 14, 1990.\nThe declaration of future dividends on Class E and Class L common stock is within the discretion of the Board of Directors of the Company and will depend upon business conditions, earnings, the financial condition of the Company and other factors. It is the Company's intent to not pay another Class L dividend until after the Class L dividend notes have been repaid.\nTREASURY STOCK REISSUANCE\/RETIREMENT\nAs a result of the special payment arrangement under the 1985 Stock Option Plan (SEE NOTE 16), 532,368 shares of Class L treasury stock were reissued and 392,755 shares of Class L treasury stock were retired during 1992. The net change in Stockholders' Equity (including the after-tax effect of the stock option charge) was an increase of $9.2 million.\nThe Company permanently retired 15,595,552 shares of Class L treasury stock during 1991, which resulted in a $553.7 million charge to retained earnings; however, the retirement of treasury stock had no effect on total stockholders' equity.\nCOMMON STOCK - EMPLOYEE INVESTMENT PLANS\nClass E common stock held by participants of the ESAP (SEE NOTE 12) are classified outside stockholders' equity due to the put rights attached to ESAP Class E common stock sold. There were no Class E common shares offered for purchase to ESAP participants prior to 1992. The redemption amount of common stock sold through the ESAP represents the latest independent valuation of $114 per share.\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)\nNOTE 19 (CONTINUED) COMMON STOCK\nCOMMON STOCK - EMPLOYEE INVESTMENT PLANS (CONTINUED)\nClass E common stock is appraised, usually twice a year, by an independent investment banking firm. The latest appraised value of Class E common stock is used as the price for selling or repurchasing Class E common stock from the EIP and ELTIS trustee and ESAP participants. The latest appraised value of Class E common stock is also used as the value for Class L common stock. The investment firm is instructed to value stock as though there had been a public trading market for the stock on the valuation date, and to not give consideration to an acquisition or control premium, or to a private market discount. There is, however, no assurance that the Company's stock would trade at the price determined through the independent investing banking firm valuation had there been a public trading market for the shares on the valuation date.\nNOTE 20 RECAPITALIZATION\nIn 1991, the Company completed a series of transactions in accordance with a recapitalization plan. These transactions included, among other things, substantial new borrowings and financial arrangements and the exchange and repurchase of certain capital stock. The purpose of this recapitalization plan was to facilitate the Company's ability to remain independent, thereby eliminating the pressures that may be created by public ownership to focus on short-term rather than long-term performance, and to preserve family control and ownership.\nSummary descriptions of various transactions completed in 1991 as part of the recapitalization are as follows:\nThe Company repurchased $84.8 million in principal amount (or approximately 71 percent of $118.7 million) of the Company's then outstanding 14.45% Subordinated Notes due 2000. Tendering note holders consented to an amendment to the indenture governing the notes, thereby eliminating a covenant restriction on dividend payments, stock repurchases and other distributions to stockholders. The transaction also involved payments totaling $.4 million to non-tendering holders who consented to the indenture amendment, which deletes restrictions on dividends and distributions. In 1991, an additional $12.3 million of these notes were repurchased on the open market. The 1991 premiums paid and a pro rata portion of the associated unamortized costs of $9.9 million, net of applicable income tax benefits, were reported as an extraordinary loss on early extinguishment of debt. During 1992, all remaining amounts, of $33.6 million, of these notes were repurchased or redeemed and cancelled by the Company. The premiums paid and a pro rata portion of the associated unamortized costs of $1.6 million, net of the applicable income tax benefits, were reported as an extraordinary loss on early extinguishment of debt.\nThe Company entered into a new primary credit agreement which provided for a $300.0 million term loan to be repaid over six years and a working capital line of credit of $500.0 million. This primary credit agreement required the Company to pledge certain of\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)\nNOTE 20 (CONTINUED) RECAPITALIZATION\nits assets, including its material trademarks, and contains certain financial and operating restrictions. During 1993, the primary credit agreement was replaced with a new reducing revolving line of credit (SEE NOTE 6).\nThe Company repurchased 8,333,330 shares of Class F common stock (or approximately 14 percent of the total outstanding common shares) at $54 per share, for an aggregate purchase price of $450.0 million.\nThe Company issued 1,416,623 shares of Series B preferred stock at $54 per share in exchange for the same number of shares of Class F common stock. Subsequent to the recapitalization, all shares of Series B preferred stock were redeemed and permanently retired during 1992 at $54 per share for an aggregate of $76.5 million, plus accrued and unpaid dividends of $3.2 million. Dividend distributions of $3.2 million and $1.5 million were paid in 1992 and 1991, respectively.\nThe Company issued shares of Class L common stock in exchange for all of the remaining shares of Class F common stock. The Class L common stock is subject to a new stockholders' agreement limiting transfers of the shares. The agreement expires in April 2001.\nThe Company adopted a new non-qualified employee equity program (SEE NOTE 12).\nThe Company amended its Certificate of Incorporation (SEE NOTE 19).\nNOTE 21 RELATED PARTIES\nSee Item 13, Other Transactions, for related parties information.\nNOTE 22 SUBSEQUENT EVENTS\nThe Company adopted SFAS No. 106 and recorded a one-time, non-cash charge against earnings of $402.3 million before taxes and $248.4 million after taxes in the first quarter of 1994. (SEE NOTE 11 FOR ADDITIONAL INFORMATION.)\nThe Company adopted SFAS No. 109 and recorded a $11.4 million credit to net income in the first quarter of 1994. (SEE NOTE 3 FOR ADDITIONAL INFORMATION.)\nOn December 15, 1993, the Company repaid its second series of dividend notes to Class L stockholders for an aggregate amount of $18.0 million, plus interest accrued of $.7 million. (SEE NOTE 6 FOR ADDITIONAL INFORMATION.)\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)\nNOTE 22 (CONTINUED) SUBSEQUENT EVENTS\nOn December 15, 1993, the Company paid to Class E stockholders of record dividends of $.55 per share, for an aggregate of $.7 million. (SEE NOTE 19 FOR ADDITIONAL INFORMATION.)\nDuring January 1994, the Company's employee investment plans, collectively, purchased 42,048 shares of Class E common stock from the Company and the Company contributed 36,449 matching shares before taxes to these plans. (SEE NOTE 12 FOR ADDITIONAL INFORMATION.)\nREPORT OF INDEPENDENT PUBLIC ACCOUNTANTS\nTo Levi Strauss Associates Inc.:\nWe have audited the accompanying consolidated balance sheets of Levi Strauss Associates Inc. (a Delaware corporation) and Subsidiaries as of November 28, 1993 and November 29, 1992, and the related consolidated statements of income, stockholders' equity and cash flows for the years ended November 28, 1993, November 29, 1992 and November 24, 1991. 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.\nWe conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.\nIn our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Levi Strauss Associates Inc. and Subsidiaries as of November 28, 1993 and November 29, 1992, and the results of their operations and their cash flows for each of the three years in the period ended November 28, 1993, in conformity with generally accepted accounting principles.\nARTHUR ANDERSEN & CO.\nSan Francisco, California, January 20, 1994\nITEM 9.","section_9":"ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE\nNone.\nPART III\nITEM 10.","section_9A":"","section_9B":"","section_10":"ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT\nThe table below identifies the current directors and executive officers of the Company, along with their offices, positions and ages.\n(1) Robert D. Haas is the son of Walter A. Haas, Jr.; Walter A. Haas, Jr. is the brother of Peter E. Haas, Sr. and Rhoda H. Goldman, and the uncle of Peter E. Haas, Jr. (2) Member, Corporate Ethics and Social Responsibility Committee (3) Member, Audit Committee (4) Member, Personnel Committee Note: John F. Kilmartin retired December 5, 1993 and was replaced by Angela Glover Blackwell.\nDirectors are divided into three classes of equal number. All directors are and will be elected by holders of a majority of the outstanding shares of the Company entitled to vote in the election of directors. Stockholders vote separately for the election of directors in each class. The first class of directors consists of Mr. R. D. Haas, Mrs. Goldman, Ms. Blackwell and Mr. Friedman and the term of office expires at the 1996 annual meeting. The second class consists of Mr. P.E. Haas, Jr., Mr. W. A. Haas, Jr., Mr. Hellman and Ms. Pineda and the term of office expires at the 1994 annual meeting. The third class consists of Mr. Tusher, Mr. P. E. Haas,\nSr., Mr. Gaither and Mr. Koshland and the term of office expires at the 1995 annual meeting of stockholders.\nDirectors who are elected at an annual meeting of stockholders to succeed those whose terms then expire will be identified as being directors of the same class as those they succeed. Staggered board provisions result in the election of only one-third of the Board at each annual meeting. This arrangement limits the ability of a person holding enough stock to control the election process from effecting a rapid change in board composition and therefore may have the effect of delaying, deferring or preventing a change in control of the Company. Executive officers serve at the discretion of the Board of Directors.\nAll members of the Haas family and Mrs. Goldman are direct descendants of the founder of LS&CO., Levi Strauss.\nWALTER A. HAAS, JR. became Honorary Chairman of the Board of LS&CO. and the Company in 1985. He joined LS&CO. in 1939 and held the positions of President from 1958 to 1970 and Chief Executive Officer from 1958 to 1976. He served as Chairman of the Board from 1970 to 1981 and Chairman of the Executive Committee from 1976 until 1985.\nMr. W.A. Haas, Jr. is a director of the National Parks Foundation and a trustee of the Business Enterprise Trust. He was formerly a director of UAL, Inc., United Airlines, Inc., BankAmerica Corporation and Bank of America, NT & SA. He was appointed to the National Commission on Public Service, is a former member of the Citizens Commission on Private Philanthropy and Public Need, a former member of the Trilateral Commission, a former trustee of the Ford Foundation and has served on the Presidential Advisory Council for Minority Enterprise. Mr. Haas is also owner and Managing General Partner of the Oakland Athletics.\nPETER E. HAAS, SR. assumed his present position as Chairman of the Executive Committee of the Board of Directors in March 1989 after serving as Chairman of the Board of LS&CO. since 1981, and of the Company since 1985. He joined LS&CO. in 1945 and became President in 1970 and Chief Executive Officer in 1976. He has served on the Board of LS&CO. since 1948 and has been a director of the Company since its inception in 1985.\nMr. P.E. Haas, Sr. is an Associate of the Smithsonian National Board and a trustee and former Chairman of the Board of Trustees of the San Francisco Foundation. He is a former director of the Northern California Grantmakers, Crocker National Corporation and Crocker National Bank, and American Telephone and Telegraph Co. He is a former President of the United Way of the Bay Area, the Jewish Community Federation, Aid to Retarded Citizens and the Rosenberg Foundation and a former member of the Board of Governors of the United Way of America.\nROBERT D. HAAS assumed his present position as Chairman of the Board of Directors of the Company and LS&CO. in March 1989. Since 1984, he has served as Chief Executive Officer of the Company and LS&CO., and was President of the Company from its inception in 1985 to March 1989. Since he joined LS&CO. in 1973, Mr. Haas served in a number of positions, including Marketing Director and Group Vice President of LSI, Director of Corporate Marketing Development, Senior Vice President of Corporate Planning and Policy and President of the New Business Group. He became President of the Operating Groups in 1980 and was named\nExecutive Vice President and Chief Operating Officer in 1981. He was elected to the LS&CO. Board of Directors in 1980 and has been a director of the Company since its inception in 1985.\nMr. R.D. Haas is an active participant in business and community organizations and is currently Chairman of the Board of Directors of the Levi Strauss Foundation, a trustee of the Ford Foundation, an honorary trustee of the Brookings Institution and an honorary director of the San Francisco AIDS Foundation. He is also a member of the Conference Board, the Council on Foreign Relations, the Trilateral Commission, the Bay Area Council and the California Business Roundtable.\nTHOMAS W. TUSHER, President and Chief Operating Officer, joined LS&CO. in 1969, was elected Executive Vice President and Chief Operating Officer in 1984 and became President and a director of the Company in March 1989. He previously served as President of the Europe Division, Executive Vice President of the International Group and was appointed President of LSI in 1980. He was elected a Vice President of LS&CO. in 1976 and a Senior Vice President in 1977 and was a director of LS&CO. from 1979 until 1985.\nMr. Tusher is a director of Cakebread Cellars and a former director of Great Western Financial Corporation and the San Francisco Chamber of Commerce. He is a member and former Chairman of the Walter A. Haas School of Business Advisory Board, University of California, Berkeley, a member of the Bay Area Sports Hall of Fame Committee and a member of the Board of Trustees of the World Affairs Council.\nANGELA GLOVER BLACKWELL, elected to the Board in February 1994, is the founder and executive director of Urban Strategies Council, established in 1987. Previously, she served as staff attorney and managing attorney for Public Advocates, Inc. Ms. Blackwell serves on the boards of the James Irvine Foundation, Children Now, the Center on Budget and Policy Priorities, Public\/Private Ventures and Common Cause, the Foundation for Child Development and the Urban Institute. She also co-chairs the Commission for Positive Change in the Oakland Public Schools.\nTULLY M. FRIEDMAN, a director since 1985, has been a managing partner of the private investment firm of Hellman & Friedman since its inception in 1984. From 1979 until 1984, he was a general partner and, later, managing director of Salomon Brothers Inc. Currently, he is a director of Mattel, Inc., McKesson Corporation and General Cellular Corporation. He is a member of the Advisory Committee of Falcon Cable TV, a trustee and member of the Executive Committee of the American Enterprise Institute, a director of Stanford Management Company, and a member of the Presidio Advisory Council. He is a former President of the San Francisco Opera Association and a former Chairman of Mount Zion Hospital and Medical Center.\nJAMES C. GAITHER, a director since April 1988, is a partner of the law firm of Cooley, Godward, Castro, Huddleson & Tatum, San Francisco, California. Prior to beginning his law practice with the firm in 1969, he served as law clerk to the Honorable Earl Warren, Chief Justice of the United States, Special Assistant to the Assistant Attorney General in the U.S. Department of Justice and Staff Assistant to the President of the United States, Lyndon B. Johnson. Mr. Gaither is the former President of the Board of Trustees at Stanford University and is a member of the Board of Trustees and executive committees for the Carnegie\nEndowment for International Peace and for The RAND Corporation. He was formerly Chairman of the Board of Trustees for the Center for Biotechnology Research and has served as Chairman of the Board of many educational and philanthropic organizations in the San Francisco Bay Area. Mr. Gaither is currently a director of Basic American Inc., the James Irvine Foundation and has served as a director of several other public and private companies.\nRHODA H. GOLDMAN, a director since 1985, devotes substantial time to public service. She is a current director of Mount Zion Health Systems and a former trustee of Mount Zion Medical Center of the University of California, San Francisco, a member of the Board of Directors of the San Francisco Symphony, the Goldman Environmental Foundation, the Walter A. Haas School of Business Advisory Board, University of California, Berkeley, the ARCS Foundation and the Levi Strauss Foundation. She is past President of Congregation Emanu-El, San Francisco. Additionally, she is Chairperson of the Stern Grove Festival Association and has served as Chairperson of the Distribution Committee of the San Francisco Foundation and the Mayor's Holocaust Memorial Committee.\nPETER E. HAAS, JR., a director since 1985, joined LS&CO. in 1972 as Director of the Minority Purchasing Program. He later transferred to LSI, where he held the positions of Manager of Financial Analysis, Inventory Planning Manager and General Merchandising Manager. He became a Vice President and General Manager in the Menswear Division in 1980, Director of Materials Management for Levi Strauss USA in 1982 and was Director of Product Integrity of The Jeans Company from 1984 to February 1989. Mr. P.E. Haas, Jr. is President of the Board of Trustees of Marin Academy and President of the Board of Directors of the Red Tab Foundation. Additionally, he is director of the following Boards: Vassar College, Levi Strauss Foundation, Novato Youth Center (former President) and North Bay Bancorp.\nF. WARREN HELLMAN, a director since 1985, has been a general partner of the private investment firm of Hellman & Friedman since its inception in 1984. Previously, he was Managing Director of Lehman Brothers Kuhn Loeb, Inc. Mr. Hellman is currently a director of American President Companies, Ltd., Williams- Sonoma, Inc., Franklin Resources, Inc., Il Fornaio America Corporation, DN&E Walter Co., Children Now, Eagle Industries, Inc., Great America Management & Investment, Inc., Basic American Inc., The California Higher Education Policy Center and University of California San Francisco (UCSF) Foundation. He is a trustee of the Brookings Institution, a member of the University of California Berkeley Foundation and Honorary Lifetime Trustee of Mills College.\nJAMES M. KOSHLAND, a director since 1985, is a partner of the law firm of Gray Cary Ware & Freidenrich, a Professional Corporation, Palo Alto, California, with which he has been associated since 1978. He is also a director of the Giarretto Institute, the Newhouse Foundation and the Senior Coordinating Council of the Palo Alto area.\nPATRICIA SALAS PINEDA, a director since 1991, is General Counsel and Assistant Corporate Secretary of New United Motor Manufacturing, Inc., with which she has been associated since 1984. She is currently a trustee of Mills College and a former trustee of the San Francisco Ballet Association. She was formerly a member and served as President of the Port of Oakland Commission and was a former member of the KQED, Inc. Board of Directors and Alameda County Hazardous Waste Authority Committee.\nTHOMAS J. BAUCH, Senior Vice President, General Counsel and Secretary, joined LS&CO. in 1977. He was named General Counsel in 1981, elected a Vice President of LS&CO. in 1982 and assumed his current position as Senior Vice President in 1985. Mr. Bauch serves on the Board of Governors of the Commonwealth Club and the Board of Visitors of the University of Wisconsin Law School. He has served on the Board of Directors of the Urban School of San Francisco and as a legal advisor to the City of Belvedere. He is a member of various bar and legal associations.\nR. WILLIAM EATON, JR., Senior Vice President and Chief Information Officer, joined LS&CO. in 1978. He became Vice President for Information Resources of LSI in 1983, was elected a Vice President of LS&CO. in 1986, was named Chief Information Officer in 1988 and assumed his current position of Senior Vice President in February 1989. Mr. Eaton is a member of the Commonwealth Club and the King's Mountain Community Association.\nDONNA J. GOYA, Senior Vice President, Human Resources, joined LS&CO. in 1970 and became the Director of Equal Employment Opportunity and Personnel Policy in 1980. She became Director of Employee Relations and Policy in 1983 and Vice President of Corporate Personnel in 1984. She was elected a Senior Vice President in 1986. Ms. Goya is a director of the Federated Employers Association of the Bay Area and of INROADS and is a member of the Human Resources Roundtable.\nPETER A. JACOBI, President of Levi Strauss International, joined the Company in 1970 and was named President of the Youthwear Division in 1981. In 1984, he became Executive Vice President of the Jeans Company and was subsequently named President of the Men's Jeans Division. Mr. Jacobi became President of the European Division of LSI in 1988. In 1991, he assumed the position of President of Global Sourcing and was elected Senior Vice President. In 1993, he assumed his current position. Mr. Jacobi is past President of the South-West Apparel and Textile Manufacturers Association and also served on the Board of Directors for the Men's Fashion Association. He is a member of the Board of Directors of the Textile\/Clothing Technology Corporation.\nGEORGE B. JAMES, Senior Vice President and Chief Financial Officer, joined the Company and LS&CO. in 1985. From 1984 to 1985, he was Executive Vice President and Group President of Crown Zellerbach Corporation and from 1982 to 1984, he held the position of Executive Vice President and Chief Financial Officer of Crown Zellerbach Corporation. From 1972 to 1982, he was Senior Vice President and Chief Financial Officer of Arcata Corporation. Mr. James is a director of Basic Vegetable Products, Inc., Fiberboard Corp., the Stanford University Hospital and the San Francisco Chamber of Commerce. In addition, he is a trustee of the San Francisco Ballet Association and serves as trustee for the Stern Grove Festival Association and the Zellerbach Family Fund.\nROBERT D. ROCKEY, JR., President of Levi Strauss North America, joined LS&CO. in 1979 and became President of the Womenswear Division in 1983. In 1984, he was named President of the Europe Division of LSI and, in 1988, he was appointed President of the Men's Jeans Division. During 1991, Mr. Rockey became President of U.S. Marketing Divisions and later was elected Senior Vice President. In 1992, he assumed the position of President of Levi\nStrauss North America. Mr. Rockey is a director and former President of the South-West Apparel and Textile Manufacturers Association.\nINSIDER REPORT FILINGS\nThe Company's executive officers and directors are not obligated, under Section 16(a) of the Securities Exchange Act of 1934, to file initial reports of ownership and reports of changes in ownership with the Securities and Exchange Commission.\nITEM 11.","section_11":"ITEM 11. DIRECTOR AND EXECUTIVE COMPENSATION\nCOMPENSATION OF DIRECTORS\nDirectors of the Company who are also stockholders or employees of the Company do not receive any additional compensation for their services as director. Directors who are not stockholders or employees [Messrs. Kilmartin (before his retirement effective December 5, 1993) and Gaither and Mss. Blackwell and Pineda] receive approximately $36,000 in annual compensation during each of their first five years of service and, beginning in their sixth year of service, are expected to receive annual compensation of approximately $42,000. Such payments include an annual cash retainer of $30,000 for each of the first three years, $20,000 for the fourth year, $10,000 for the fifth year, and $6,000 thereafter, fees of $500 per Board and Board committee meeting attended and award payments under the Company's Long-Term Performance Plan (\"LTPP\"). The amount of each type of payment varies depending on the year of service and the actual value of the LTPP units. Messrs. Gaither and Kilmartin and Ms. Pineda each received grants of 350 performance units under the LTPP in 1993. In 1993, Messrs. Gaither and Kilmartin each received payments under the LTPP of $98,913. Directors who are not employees or stockholders also receive travel accident insurance while on Company business and are eligible to participate in a deferred compensation plan. (SEE LTPP AND DEFERRED COMPENSATION PLAN CAPTIONS.)\nCOMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION\nF. Warren Hellman and Tully M. Friedman, directors of the Company, are general partners of Hellman & Friedman, an investment banking firm. Hellman & Friedman provides financial advisory services to the Company and received $300,205 for such services in 1993. At November 28, 1993 Messrs. Hellman and Friedman and their families and other partners of Hellman & Friedman beneficially owned an aggregate of 1,081,442 shares of Class L common stock. See Item 12, Security Ownership of Certain Beneficial Owners and Management, for additional information concerning Mr. Hellman's and Mr. Friedman's beneficial ownership of Class L common stock.\nSUMMARY COMPENSATION TABLE FOR EXECUTIVE OFFICERS\nThe following table sets forth summary compensation information for 1993, 1992 and 1991 for each of the five most highly compensated executive officers of the Company:\n(1) Fiscal 1993 and 1991 each contained 52 weeks. Fiscal year 1992 contained 53 weeks. (2) Bonuses are paid pursuant to the Company's Management Incentive Plan (\"MIP\") and Interim Cash Performance Sharing Plan. The bonuses include amounts based upon 1993, 1992 and 1991 performance that will be or were paid in 1994, 1993 and 1992, respectively (SEE MANAGEMENT INCENTIVE PLAN AND HOME OFFICE CASH PERFORMANCE SHARING PLAN CAPTIONS). Amounts paid to Mr. Haas relating to MIP bonuses were $1,010,000, $935,000 and $850,000 for 1993, 1992 and 1991, respectively. Amounts paid to Mr. Haas relating to Interim Cash bonuses were $152,795, $147,711 and $126,693 for 1993, 1992 and 1991, respectively. Amounts paid to Mr. Tusher relating to MIP bonuses were $580,000, $545,000, and $525,000 for 1993, 1992 and 1991, respectively. Amounts paid to Mr. Tusher relating to Interim Cash bonuses were $97,063, $97,003 and $84,677 for 1993, 1992 and 1991, respectively. Amounts paid to Mr. James relating to MIP bonuses were $265,000, $240,000 and $225,000 for 1993, 1992 and 1991, respectively. Amounts paid to Mr. James relating to Interim Cash bonuses were $48,231, $47,650 and $43,006 for 1993, 1992 and 1991, respectively. Amounts paid to Mr. Rockey, Jr. relating to MIP bonuses were $271,188, $254,651 and $209,241 for 1993, 1992 and 1991, respectively. Amounts paid to Mr. Rockey, Jr. relating to Interim Cash bonuses were $46,536, $42,842 and $31,483 for 1993, 1992 and 1991, respectively. Amounts paid to Mr. Jacobi relating to MIP bonuses were $240,043, $211,449 and $190,828 for 1993, 1992 and 1991, respectively. Amounts paid to Mr. Jacobi relating to Interim Cash bonuses were $41,370, $40,348 and $34,836 for 1993, 1992 and 1991, respectively. (3) Other annual compensation represents partial tax reimbursement cash bonuses related to certain stock option exercises under the 1985 Stock Option Plan (SEE 1985 STOCK OPTION PLAN CAPTION). (4) See detail table under 1992 Stock Appreciation Rights Plan section. (5) Amounts are paid pursuant to the Company's Long-Term Performance Plan (\"LTPP\"). The LTPP amounts shown in the table include amounts based on LTPP units granted in 1988, 1989 and 1990 that were paid in 1991, 1992 and 1993 or deferred to later years (SEE LTPP CAPTION).\n(6) All other compensation consists of amounts contributed under employee investment plans (ESAP in 1993 and 1992 and EIP in 1991 - SEE EMPLOYEE INVESTMENT PLAN CAPTION) and amounts contributed under the Company's Benefit Restoration Plan (BRP). The Internal Revenue Code (the \"Code\") limits the amount of benefits that may be paid under plans qualified by the Code. The BRP will pay any benefits that exceed such limitations. Amounts contributed to Mr. Haas relating to ESAP\/EIP were $155,958, $148,646 and $0 for 1993, 1992 and 1991, respectively. Amounts contributed to Mr. Haas relating to BRP were $715,102, $476,368 and $272,200 for 1993, 1992 and 1991, respectively. Amounts contributed to Mr. Tusher relating to ESAP\/EIP were $99,054, $108,868 and $0 for 1993, 1992 and 1991, respectively. Amounts contributed to Mr. Tusher relating to BRP were $525,456, $371,516 and $217,861 for 1993, 1992 and 1991, respectively. Amounts contributed to Mr. James relating to ESAP\/EIP were $49,140, $54,876 and $0 for 1993, 1992 and 1991, respectively. Amounts contributed to Mr. James relating to BRP were $111,493, $52,296 and $30,487 for 1993, 1992 and 1991, respectively. Amounts contributed to Mr. Rockey, Jr. relating to ESAP\/EIP were $47,424, $47,420 and $0 for 1993, 1992 and 1991, respectively. Amounts contributed to Mr. Rockey, Jr. relating to BRP were $132,146, $87,608 and $44,169 for 1993, 1992 and 1991, respectively. Amounts contributed to Mr. Jacobi relating to ESAP\/EIP were $42,072, $34,746 and $0 for 1993, 1992 and 1991, respectively. Amounts contributed to Mr. Jacobi relating to BRP were $121,640, $104,009 and $52,415 for 1993, 1992 and 1991, respectively.\nSTOCK OPTION AND STOCK APPRECIATION RIGHTS PLAN\n1985 STOCK OPTION PLAN\nIn 1985, the Board of Directors of the Company adopted the 1985 Stock Option Plan (the \"1985 Plan\"). The 1985 Plan is administered by the Personnel Committee of the Board of Directors (the \"Administrator\"). A total of 5,000,000 shares of Class L common stock (previously Class F common stock, SEE NOTE 20 TO THE CONSOLIDATED FINANCIAL STATEMENTS) may be issued upon exercise of options under the 1985 Plan to eligible employees or non-employee directors of the Company selected by the Board. Options granted under the 1985 Plan are non- qualified stock options and expire ten years from the date of grant. The Board or the Administrator determines the exercise price, exercise schedule, the manner in which payment occurs and any provision for a cash bonus to be paid at or about the time of exercise of the option. In addition the administrator retains discretion, subject to plan limits, to modify the terms (e.g., acceleration or elimination of vesting requirements of outstanding options). There were no option grants during 1993.\nIn 1992, the Board of Directors approved a special payment arrangement under the Plan to facilitate the exercise by optionholders of their outstanding options. This arrangement accelerated vesting on all non-vested options and allowed each optionholder to exercise outstanding options by surrendering a portion of these outstanding options in full payment of the exercise price and related tax obligations. Holders of 65 percent of all outstanding options participated in this arrangement. The special arrangement required the recognition of a fiscal 1992 pre-tax stock option charge of $158.0 million for all outstanding options (the amount equal to the difference between the fair market value of the underlying shares at the exercise date and at the grant date). Separately, the Company also recognized compensation expense for related exercise bonuses and the accelerated use of presently non-vested options. The Company disbursed $41.9 million to pay related withholding taxes for optionholders (in exchange for an equal amount of surrendered options) and $4.4 million for related exercise bonuses. The optionholders participating in this arrangement exercised 925,123 options resulting in 532,368 reissued treasury shares of Class L common stock. The Company also retired 392,755 shares of treasury stock, which was equal to the number of options surrendered. The net change in Stockholders' Equity (including the after-tax effect of the stock option charge) was an increase of $9.2 million. SEE NOTE 16 TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR ADDITIONAL STOCK OPTION PLAN INFORMATION.\n1992 STOCK APPRECIATION RIGHTS PLAN\nIn 1992, the Board of Directors of the Company adopted the 1992 Executive Stock Appreciation Rights Plan of Levi Strauss Associates Inc. The purpose of the 1992 Executive Stock Appreciation Rights Plan is to attract, retain, motivate and reward certain executives by giving them an opportunity to participate in the future success of the Company. The \"stock appreciation rights\" (SARs), are tied to and based on changes in the value of the Company's Class E common stock (Class E common stock is appraised, usually twice a year, by an independent investment banking firm). Upon exercise, the holder is entitled to receive a cash payment from the Company equal to the difference in the fair market value of stock on grant date and exercise date, less related tax withholding. A total of 500,000 rights may be granted under this plan. SARs awarded under the Company's plan may not be transferred.\nThe plan is administered by a committee of at least two members of the Board of Directors of the Company who are disinterested persons. The administrative committee for SARs determines the initial values of the SARs, the exercise schedule and any other terms or conditions applicable to the SARs that may be appropriate. In addition, the administrative committee retains discretion, subject to plan limits, to modify the terms (e.g., acceleration or elimination of vesting requirements) of SARs.\nThe 1992 grant of SARs vest and become exercisable over several years commencing in 1995. One-third of these SARs will be exercisable in 1995, one-third in 1996 and the remaining third in 1997. There were no SAR grants during 1993.\nThe following table presents information for the year ended November 28, 1993 regarding aggregated options\/SARs of executive officers of the Company listed in the Summary Compensation Table.\nLONG-TERM PERFORMANCE PLAN\nThe Company has a Long-Term Performance Plan (\"LTPP\") for outside directors, officers and other key employees, under which performance units are granted to each participant. The value assigned to each unit is determined at the discretion of the Personnel Committee of the Board of Directors. The performance unit value guidelines selected by the Personnel Committee with respect to existing grants are based on the Company's three-year cumulative net earnings before tax. Under such guidelines (which are subject to change by the Personnel Committee), the current forecast value of the units granted in 1993, 1992 and 1991 is $128, $144 and $292 per unit, respectively. The units vest and are paid in cash in one-third increments on the third, fourth and fifth anniversaries of the date of grant or the amounts can be deferred at the election of the participant.\nThe following table sets forth information relating to Long-Term Performance Plan units granted in 1993 for the executive officers of the Company listed in the Summary Compensation Table:\n_________________ (1) The basis for measuring long-term performance is a corporate three-year cumulative earnings performance calculation (e.g., an internal calculation of earnings from operations). (2) The units vest in three years and are paid out in cash in one-third increments payable in June 1996, June 1997 and June 1998. (3) Each LTPP unit is valued at $100.00 if the Company achieves a target level of corporate earnings performance over a three-year period. Performance above target levels will produce increases in award values. There is no cap on the award value; however, the award formula is directly related to the Company's earnings performance. (4) Under the terms of the Company's LTPP, the Personnel Committee retains discretion, subject to plan limits, to modify the terms of outstanding awards to take into account the effect of unforeseen or extraordinary events and accounting changes.\nMANAGEMENT INCENTIVE PLAN\nThe Company's Management Incentive Plan (\"MIP\") provides selected employees with incentive compensation and provides a tool for recruiting and retaining selected employees. Under the MIP, the Personnel Committee of the Board of Directors, as administrator of the MIP, may\naward discretionary cash payments to selected employees. Such awards are made on the basis of various factors, including profit levels, return on investment, salary grade and individual performance.\nHOME OFFICE INTERIM CASH PERFORMANCE SHARING PLAN\nThe Company has an Interim Cash Performance Sharing Plan for all Home Office payroll employees that pays out based on a percentage of base salary and certain Company earnings criteria. This interim cash plan was a transition program for 1991 and 1992 and has been extended to 1994. Participants in the MIP can receive up to 8 percent, while other Home Office employees can receive up to 12 percent, of their covered compensation (fiscal year salary and non-LTPP bonus) under the plan.\nDEFERRED COMPENSATION PLAN\nThe Company has an unfunded Deferred Compensation Plan under which a selected group of employees may elect to defer receipt until termination of employment of up to 33 percent of their base salary and 100 percent of their bonus. The amounts deferred under this plan, plus interest, may be paid prior to termination in certain circumstances specified in the plan. When electing to defer a bonus, eligible employees in certain salary grades may also elect to receive in-service payments of the deferred bonus in five annual installments. The Company also maintains a similar deferred compensation plan for outside directors.\nBENEFIT PLANS\nHOME OFFICE PENSION PLAN\nGenerally, all Home Office payroll employees, including executive officers, participate in the Company's Home Office Pension Plan (the \"Pension Plan\") after completing one year of service. The Pension Plan, subject to Internal Revenue Service (IRS) limitations, provides pension benefits based on an individual's years of service and final average covered compensation (generally, base salary plus bonuses awarded, not exceeding one half of salary, for the five consecutive fiscal years out of the individual's last ten years of service that produces the highest average). Contributions by the Company to the Pension Plan cannot be separately calculated for individual executive officers.\nThe following table shows the estimated annual benefits payable upon retirement under the Pension Plan and the Benefit Restoration Plan to persons in various compensation and years-of-service classifications prior to mandatory offset of Social Security benefits:\nThe preceding table assumes retirement at the age of 65, with payment to the employee in the form of a single-life annuity. As of year-end 1993, the credited years of service for Messrs. R.D. Haas, Tusher, James, Rockey, Jr. and Jacobi were 20, 24, 8, 14 and 23, respectively. The 1993 compensation covered by the Pension Plan for Messrs. R.D. Haas, Tusher, James, Rockey, Jr. and Jacobi was $2,081,171, $1,113,938, $535,880, $633,849, and $563,489, respectively. The 1993 compensation covered by the Pension Plan consists of fiscal year 1993 cash salary and bonus (not including LTPP). These amounts do not correspond to the amounts on the Summary Compensation table because the covered compensation amounts are based on actual cash paid during 1993 and do not include deferred salary (SEE SUMMARY COMPENSATION TABLE CAPTION).\nThe Code limits the amount of pension benefits that may be paid under plans qualified under the Code such as the Pension Plan. The Company maintains a separate unfunded Benefit Restoration Plan (SEE THE BENEFIT RESTORATION PLAN CAPTION) that will pay any retirement benefits under the Pension Plan that exceed such limitations. The five individuals named in the Summary Compensation Table are participants in the Benefit Restoration Plan.\nThe Company has unfunded supplemental pension agreements with Messrs. Tusher and James which provide specific benefits upon retirement. The cost to the Company in 1993 of the agreements for Messrs. Tusher and James was $359,200 and $27,600, respectively.\nBENEFIT RESTORATION PLAN\nThe Company has an unfunded Benefit Restoration Plan (the \"BRP\") that provides eligible employees with benefits that would have been payable from tax-qualified plans of the Company except for limitations imposed on such benefits under the Internal Revenue Code (the \"Code\"). The BRP also provides for the deferral of an eligible employee's current compensation to the extent that such compensation cannot be contributed to the Company's investment plans, due to these limitations, and the restoration of Company matching contributions that could not be credited under those plans as a result. All employees who are subject to such limitations are eligible to participate in the BRP. The BRP is administered by the Administrative Committee of the Retirement Plans.\nEMPLOYEE INVESTMENT PLANS\nThe Company maintains three employee investment plans. Two of these plans, the Employee Investment Plan of Levi Strauss Associates Inc. (EIP) and the Levi Strauss Associates Inc. Employee Long-Term Investment and Savings Plan (ELTIS), are qualified plans that cover Home Office employees and U.S. field employees, respectively. The third plan, the Employee Stock Purchase and Stock Award Plan of Levi Strauss Associates Inc. (ESAP) is a non-qualified employee equity program for highly compensated (as defined by the Code) Home Office employees. Effective December 1990, highly compensated employees were no longer eligible to contribute to the EIP due to amendments to the EIP, which were made to comply with certain changes to the Code. The ESAP commenced in 1992 to allow highly compensated employees to participate in equity ownership.\nThe ESAP is administered by the Personnel Committee of the Board of Directors. The Pension Plan and the EIP are administered by the Administrative Committee of the Retirement Plans of the Company. The Personnel Committee has delegated most of its routine administrative functions to the Administrative Committee and to the Employee Benefits Department. The Administrative Committee is appointed by the Board of Directors and has the general responsibility for the administration and operation of the plans, including compliance with reporting and disclosure requirements, establishing and maintaining plan records and determining and authorizing payments of benefits under the plans.\nThe qualified plans also established an Investment Committee appointed by the Board of Directors. The Investment Committee's duties and responsibilities include (i) reviewing the performance of the trustee under the plans; (ii) appointing, removing and reviewing the performance of investment managers who may be delegated the authority to manage plan assets; (iii) establishing investment standards and policies based upon the objectives of the plans as communicated by the Administrative Committee; and (iv) performing such other functions as are specifically assigned to the Investment Committee under the plans.\nThe foregoing descriptions of the Company's benefit plans and agreements are only summaries and are qualified in their entirety by reference to such agreements and plans.\nADDITIONAL INFORMATION ABOUT CERTAIN COMPANY EMPLOYEE PLANS IS CONTAINED IN NOTES 12 THROUGH 16 TO THE CONSOLIDATED FINANCIAL STATEMENTS.\nITEM 12.","section_12":"ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT\nThe following table sets forth, as of January 10, 1994, certain information with regard to the beneficial ownership of Class L common stock and Class E common stock by each person who beneficially owns more than 5 percent of these outstanding shares, each of the directors, each of the five most highly compensated executive officers and all directors and executive officers of the Company as a group. The business address of all persons listed is 1155 Battery Street, San Francisco, California 94111.\nNote: Class E common stock represents 2 percent of all outstanding common stock. Employees of the Company may invest in Class E common stock under the Company's employee investment plans. The Boston Safe Deposit and Trust Company, trustee for the Company's qualified stock investment plans, holds approximately 75 percent of all outstanding Class E common stock. The business address for the Boston Safe Deposit and Trust Company is 1 Cabot Road, Mail Zone WTO4G, Medford, Massachusetts, 02155-5158. SEE EMPLOYEE INVESTMENT PLAN CAPTION UNDER ITEM 11. (1) The percentage of shares outstanding is not shown for those amounting to less than one percent. (2) Includes 526,286 shares owned by the spouse and daughter of Mr. Haas and by trusts for the benefit of his daughter. Mr. Haas disclaims beneficial ownership of such shares.\n(3) Mr. Haas, as trustee, has sole voting and investing power with respect to these shares. These shares are held by a trust for the benefit of Mr. Haas' nieces and nephews. Mr. Haas disclaims beneficial ownership of such shares. (4) Does not include 158,996 shares held by a trust for the benefit of the sons of Mr. Tusher. Mr. Tusher has neither voting nor investing powers with respect to such shares. (5) Represents shares subject to presently exercisable options. (6) Does not include 3,000,200 shares owned by Miriam L. Haas, the spouse of Mr. Haas. Mr. Haas disclaims beneficial ownership of such shares. (7) Includes 2,903,167 shares in which Mrs. Josephine B. Haas has sole investing power and Mr. Haas has sole voting rights; and 58,800 shares held in trusts for the benefit of his grandnieces and grand nephew in which Mr. Haas has sole voting and investing power. Mr. Haas disclaims beneficial ownership of such shares. (8) Represents shares owned by the Evelyn and Walter Haas, Jr. Fund in which Mr. Haas has shared voting and investing powers. (9) Does not include 4,600 shares held by a trust for the benefit of Mr. Friedman's stepson. Mr. Friedman does not have voting or investing powers with respect to such shares and disclaims beneficial ownership of such shares. (10) Represents shares in which Mr. Friedman has sole voting and investing powers. These shares are held by the Friedman Family Partnership for the benefit of Mr. Friedman's daughter and stepson and Cherry Street Partners for the benefit of Mr. Friedman's former spouse. Mr. Friedman disclaims beneficial ownership of such shares. (11) Includes 1,000,000 shares owned by Mrs. Goldman's spouse. Mrs. Goldman disclaims beneficial ownership of such shares. Does not include 2,886,207 shares held by trusts for the benefit of Mrs. Goldman's grandchildren. Mrs. Goldman neither has voting nor investing rights with respect to such shares. (12) Includes 2,368,785 shares held by trusts for the benefit of Mr. Haas' children and 150,000 shares held by Peter E. Haas and Joanne C. Haas Charitable Annuity Lead Trust and 1,086 shares by the spouse of Mr. Haas. Mr. Haas disclaims beneficial ownership of such shares. (13) Represents shares held by a trust for the benefit of Michael S. Haas in which Mr. Haas has sole voting and investing powers. Mr. Haas disclaims beneficial ownership of such shares. (14) Mr. Hellman's shares are held in his family investment partnership. (15) Mr. Hellman has voting and investing powers with respect to these shares which are held by a trust for the benefit of the daughter of Robert D. Haas. Mr. Hellman disclaims beneficial ownership of such shares. (16) Mr. Kilmartin retired from the Board of Directors on December 5, 1993. (17) James M. Koshland is the son of Daniel E. Koshland, Jr. (18) Represents shares held by trusts for the benefit of James M. Koshland's children. Mr. Koshland disclaims beneficial ownership of such shares. (19) Includes 333,000 shares owned by the spouse of Mrs. Geballe. Mrs. Geballe disclaims beneficial ownership of such shares. (20) Includes 2,903,167 shares in which Mrs. Haas has sole investing powers and Mr. Peter E. Haas, Sr. has sole voting rights. (21) Includes 1,447,855 shares in which Mrs. Haas has shared voting and investing powers and 777,679 shares in which Mrs. Haas has sole voting and investing powers. These shares are held by trusts for the benefit of the son and daughter of Mrs. Haas. Mrs. Haas disclaims beneficial ownership of such shares. (22) Does not include 8,754,426 shares owned by Peter E. Haas, Sr., the spouse of Mrs. Haas. Mrs. Haas disclaims beneficial ownership of such shares. (23) Margaret E. Jones is the daughter of Peter E. Haas, Sr. (24) Represents shares owned by The Koshland Foundation in which Mr. Koshland has sole voting rights. (25) Includes 499,749 shares subject to presently exercisable options. As of January 10, 1994, the Company has 191 and 1,107 record owners of Class L and Class E common stock, respectively.\nHOLDERS OF AND TRANSFER RESTRICTIONS ON COMMON STOCK.\nThere is no trading market for outstanding shares of Class E and Class L common stock. The outstanding shares of Class E common stock are currently held by the trustee of the ELTIS and EIP and by certain employees under the ESAP. Class E common stock is subject to certain restrictions on transfer as provided in the various employee plans. SEE THE EMPLOYEE\nINVESTMENT PLANS CAPTION UNDER ITEM 11 FOR ADDITIONAL INFORMATION. Class L common stock is primarily held by members of the families of certain descendants of the Company's founder and certain members of the Company's Board of Directors and management. Under a stockholder agreement that expires in April 2001, transfer of Class L common stock is prohibited except to certain transferees, specified members of the stockholder's family, trusts, charities or other Class L stockholders.\nITEM 13.","section_13":"ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS\nESTATE TAX REPURCHASE POLICY\nThe Board of Directors has a policy under which the Company will, subject to certain conditions, offer to repurchase a portion of the shares of Class L common stock held by the estate of a deceased stockholder in order to assist the estate in meeting estate tax liabilities. The purchase price will be based on periodic valuations of Class L common stock conducted by an investment banking or appraisal firm (SEE NOTE 19 TO THE CONSOLIDATED FINANCIAL STATEMENTS). Purchases will be made at a discount price reflecting the non-liquidity of large blocks of stock; the discount will be established by the investment banking or appraisal firm. Estate repurchase transactions will be subject to, among other things, compliance with applicable laws governing stock repurchases, satisfaction of certain financial ratios specified in the resolutions adopting the policy, and compliance with any limitations on stock repurchases contained in the Company's credit agreements.\nOTHER TRANSACTIONS\nRhoda H. Goldman is a director of the Company; her son, John Goldman, is the controlling person of Richard N. Goldman and Company (RNG), which acts as an insurance broker for the Company. In 1993, the Company paid RNG approximately $380,245 in fees and commissions for the placement of insurance programs. RNG's insurance programs represent approximately 80 percent of worldwide annual premiums paid by the Company for 1993 property casualty coverage, not including workers' compensation coverage. The Company believes the premiums paid to RNG are competitive. At November 28, 1993, Rhoda H. Goldman had no equity interest in RNG and beneficially owned 3,765,257 shares of the Company's Class L common stock.\nSEE COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION UNDER ITEM 11 FOR ADDITIONAL INFORMATION.\nPART IV\nITEM 14.","section_14":"ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K\n(a)(1) FINANCIAL STATEMENTS Consolidated Statements of Income, Years Ended November 28, 1993, November 29, 1992 and November 24, 1991.\nConsolidated Balance Sheets, November 28, 1993 and November 29, 1992\nConsolidated Statements of Stockholders' Equity, Years Ended November 28, 1993, November 29, 1992 and November 24, 1991\nConsolidated Statements of Cash Flows, Years Ended November 28, 1993, November 29, 1992 and November 24, 1991\nNotes to Consolidated Financial Statements\nReport of Independent Public Accountants\n(2) FINANCIAL STATEMENT SCHEDULES VIII Reserves\nIX Short-Term Borrowings\nX Supplementary Income Statement Information\nAll other schedules have been omitted because they are inapplicable, not required or the information is included in the financial statements or notes thereto.\n(3) MANAGEMENT CONTRACTS AND COMPENSATORY ARRANGEMENTS 1985 Stock Option Plan and forms of related agreements, exhibit 10a.\n1985 Stock Option Plan Notice to Optionholders, exhibit 10b.\nLong Term Performance Plan, exhibit 10c.\nManagement Incentive Plan, exhibit 10d.\nLevi Strauss Associates Inc. Excess Benefit Restoration Plan, exhibit 10e.\nLevi Strauss Associates Inc. Supplemental Benefit Restoration Plan, exhibit 10f.\nAmendment dated February 9, 1993 to the Levi Strauss Associates Inc. Excess Benefit Restoration Plan and Levi Strauss Associates Inc. Supplemental Benefits Restoration Plan, exhibit 10g.\nLevi Strauss Associates Inc. Deferred Compensation Plan for Executives (as adopted in 1971 and as amended through January 1, 1992), exhibit 10h.\nRevised Home Office Pension Plan of Levi Strauss Associates Inc., exhibit 10j.\nRevised Employment Retirement Plan and December 20, 1991 Amendment thereto, exhibit 10k.\nEmployee Stock Purchase and Stock Award Plan of Levi Strauss Associates Inc., exhibit 10n.\nAmendments dated August 5, 1992, March 31, 1992 and January 1, 1992 to the Employee Stock Purchase and Stock Award Plan of Levi Strauss Associates Inc., exhibit 10o.\nAmendment dated February 9, 1993 to the Employee Stock Purchase and Stock Award Plan of Levi Strauss Associates Inc., exhibit 10p.\nAmendment effective as of March 1, 1993 to the Employee Stock Purchase and Stock Award Plan of Levi Strauss Associates Inc., exhibit 10q.\nSupplemental Pension Agreement dated April 16, 1985 between Levi Strauss & Co. and Thomas W. Tusher, exhibit 10v.\nSupplemental Pension Agreement dated November 12, 1985 between Levi Strauss & Co. and George B. James, exhibit 10w.\nLetter Agreement dated August 29, 1985 between the Company and Thomas W. Tusher, exhibit 10x.\nHome Office Interim Cash Performance Sharing Plan of Levi Strauss Associates Inc., exhibit 10z.\nLevi Strauss Associates Inc. 1992 Executive Stock Appreciation Rights Plan, exhibit 10bb.\n(4) EXHIBITS 3a Restated Certificate of Incorporation, incorporated by reference from Exhibit 4 of Form 10-Q filed with the Securities and Exchange Commission on April 13, 1993.\n3b Amended By-Laws of the Company, incorporated by reference from Exhibit 3b of Form 10-K filed with the Securities and Exchange Commission on February 20, 1992.\n4a Form of Series B dividend note, dated as of December 15, 1992, among the Company and note holders, incorporated by reference from Exhibit 4b of Form 10-K filed with the Securities and Exchange Commission on February 25, 1993.\n4b Form of Series C dividend note, dated as of December 15, 1992, among the Company and note holders, incorporated by reference from Exhibit 4c of Form 10-K filed with the Securities and Exchange Commission on February 25, 1993.\n4c Form of Series D dividend note, dated as of December 15, 1992, among the Company and note holders, incorporated by reference from Exhibit 4d of Form 10-K filed with the Securities and Exchange Commission on February 25, 1993.\n4d Form of Class L Stockholders' Agreement, incorporated by reference from Exhibit (c)(5) of the Company's Issuer Tender Offer Statement on Schedule 13E-4, including all amendments thereto, initially filed with the Securities and Exchange Commission on March 4, 1991.\n4e Credit Agreement, dated as of January 21, 1993, among the Company, Levi Strauss & Co., Bank of America N.T. & S.A. and other financial institutions named therein, incorporated by reference from Exhibit 4k of Form 10-K filed with the Securities and Exchange Commission on February 25, 1993.\n4f Amended and Restated Agreement of Master Trust effective as of May 1, 1989 between Levi Strauss Associates Inc. and Boston Safe Deposit and Trust Company, incorporated by reference from Exhibit 4.6 to the Company's Registration Statement on Form S-1, filed with the Securities and Exchange Commission on March 9, 1989 (Reg. No. 33-27465).\n10a 1985 Stock Option Plan and forms of related agreements, incorporated by reference from Exhibit 10.4 to the Company's Registration Statement on Form S-1, filed with the Securities and Exchange Commission on March 9, 1989 (Reg. No. 33-27465).\n10b 1985 Stock Option Plan Notice to Optionholders, incorporated by reference from Exhibit 10b of Form 10-K filed with the Securities and Exchange Commission on February 20, 1992.\n10c Long Term Performance Plan, incorporated by reference from Exhibit 10.7 to the Company's Registration Statement on Form S-1, filed with the Securities and Exchange Commission on March 9, 1989 (Reg. No. 33-27465).\n10d Management Incentive Plan, incorporated by reference from Exhibit 10.12 to the Company's Registration Statement on Form S-1, filed with the Securities and Exchange Commission on March 9, 1989 (Reg. No. 33-27465).\n10e Levi Strauss Associates Inc. Excess Benefit Restoration Plan, incorporated by reference from Exhibit 10e of Form 10-K filed with the Securities and Exchange Commission on February 20, 1992.\n10f Levi Strauss Associates Inc. Supplemental Benefit Restoration Plan, incorporated by reference from Exhibit 10f of Form 10-K filed with the Securities and Exchange Commission on February 20, 1992.\n10g Amendment dated February 9, 1993 to the Levi Strauss Associates Inc. Excess Benefit Restoration Plan and Levi Strauss Associates Inc. Supplemental Benefits Restoration Plan, incorporated by reference from Exhibit 10d of Form 10-Q filed with the Securities and Exchange Commission on July 13, 1993.\n10h Levi Strauss Associates Inc. Deferred Compensation Plan for Executives (as adopted in 1971 and as amended through January 1, 1992).\n10i Deferred Compensation Plan for Outside Directors, incorporated by reference from Exhibit 10.9 to the Company's Registration Statement on Form S-1, filed with the Securities and Exchange Commission on March 9, 1989 (Reg. No. 33-27465).\n10j Revised Home Office Pension Plan of Levi Strauss Associates Inc.\n10k Revised Employment Retirement Plan.\n10l Levi Strauss Associates Inc. Retirement Plan for Over the Road Truck Drivers and Dispatchers.\n10m Levi Strauss & Co. Supplemental Unemployment Benefit Plan and related amendments.\n10n Employee Stock Purchase and Stock Award Plan of Levi Strauss Associates Inc., incorporated by reference from Exhibit 4.2 to the Company's Registration Statement on Form S-8, filed with the Securities and Exchange Commission on June 24, 1991 (Reg. No. 33-41332).\n10o Amendments dated August 5, 1992, March 31, 1992 and January 1, 1992 to the Employee Stock Purchase and Stock Award Plan of Levi Strauss Associates Inc., incorporated by reference from Exhibit 10q of Form 10-K filed with the Securities and Exchange Commission on February 25, 1993.\n10p Amendment dated February 9, 1993 to the Employee Stock Purchase and Stock Award Plan of Levi Strauss Associates Inc., incorporated by reference from Exhibit 10a of Form 10-Q filed with the Securities and Exchange Commission on July 13, 1993.\n10q Amendment effective as of March 1, 1993 to the Employee Stock Purchase and Stock Award Plan of Levi Strauss Associates Inc., incorporated by reference from Exhibit 10e of Form 10-Q filed with the Securities and Exchange Commission on July 13, 1993.\n10r Levi Strauss Associates Inc. Employee Long-Term Investment and Savings Plan, incorporated by reference from Exhibit 4.2 to the Company's Registration Statement on Form S-8, filed with the Securities and Exchange Commission on February 9, 1990 (Reg. No. 33-33415), with amendments incorporated by reference from Exhibit 4.2 to the Company's Registration Statement on Form S-8, filed with the Securities and Exchange Commission on May 31, 1991 (Reg. No. 33-40947).\n10s Amendments dated July 21, 1992 and March 31, 1992 to the Levi Strauss Associates Inc. Employee Long-Term Investment and Savings Plan, incorporated by reference from Exhibit 10s of Form 10-K filed with the Securities and Exchange Commission on February 25, 1993.\n10t Amendment dated February 9, 1993 to the Levi Strauss Associates Inc. Employee Long-Term Investment and Savings Plan, incorporated by reference from Exhibit 10c of Form 10-Q filed with the Securities and Exchange Commission on July 13, 1993.\n10u Employee Investment Plan of Levi Strauss Associates Inc., incorporated by reference from Exhibit 4.3 to the Company's Registration Statement on Form S-8, filed with the Securities and Exchange Commission on February 9, 1990 (Reg. No. 33-33415) with amendments incorporated by reference from Exhibit 4.3 to the Company's Registration Statement on Form S-8, filed with the Securities and Exchange Commission on May 31, 1991 (Reg. No. 33-40947).\n10v Supplemental Pension Agreement dated April 16, 1985 between Levi Strauss & Co. and Thomas W. Tusher, incorporated by reference from Exhibit 10.13 to the Company's Registration Statement on Form S-1, filed with the Securities and Exchange Commission on March 9, 1989 (Reg. No. 33-27465).\n10w Supplemental Pension Agreement dated November 12, 1985 between Levi Strauss & Co. and George B. James, incorporated by reference from Exhibit 10.14 to the Company's Registration Statement on Form S-1, filed with the Securities and Exchange Commission on March 9, 1989 (Reg. No. 33-27465).\n10x Letter Agreement dated August 29, 1985 between the Company and Thomas W. Tusher, incorporated by reference from Exhibit 10.15 to the Company's Registration Statement on Form S-1, filed with the Securities and Exchange Commission on March 9, 1989 (Reg. No. 33-27465).\n10y Agreement dated as of May 1, 1989 between the Company and Boston Safe Deposit and Trust Company, incorporated by reference from Exhibit 10.17 to the Company's Registration Statement on Form S-1, filed with the Securities and Exchange Commission on March 9, 1989 (Reg. No. 33-27465).\n10z Home Office Interim Cash Performance Sharing Plan of Levi Strauss Associates Inc.\n10aa Field Profit Sharing Award Plan of Levi Strauss Associates Inc.\n10bb Levi Strauss Associates Inc. 1992 Executive Stock Appreciation Rights Plan, incorporated by reference from Exhibit 10aa of Form 10-K filed with the Securities and Exchange Commission on February 25, 1993.\n10cc Supply Agreement dated as of March 30, 1992, between Levi Strauss & Co. and Cone Mills Corporation, incorporated by reference from Exhibit 10bb of Form 10-K filed with the Securities and Exchange Commission on February 25, 1993.\n10dd First Amendment to Supply Agreement dated as of March 30, 1992, between Levi Strauss & Co. and Cone Mills Corporation.\n21 Subsidiaries of Levi Strauss Associates Inc.\n23 Consent of Independent Public Accountants.\n(b) REPORTS ON FORM 8-K There were no Reports on Form 8-K filed with the Commission during the fourth quarter of 1993.\nSIGNATURES\nPURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF SAN FRANCISCO, STATE OF CALIFORNIA, ON FEBRUARY 10, 1994.\nLEVI STRAUSS ASSOCIATES INC.\nBy Robert D. Haas ------------------------- Robert D. Haas Chairman of the Board and Chief Executive Officer\nPURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE FOLLOWING CAPACITIES ON FEBRUARY 10, 1994.\nSignature Title --------- -----\nDirector, Honorary Chairman of the Board of Walter A. Haas, Jr. Directors ____________________________________ (Walter A. Haas, Jr.)\nDirector, Peter E. Haas, Sr. Chairman of the Executive Committee ____________________________________ (Peter E. Haas, Sr.)\nDirector, Chairman of the Board of Directors and Robert D. Haas Chief Executive Officer ____________________________________ (Robert D. Haas)\nSignature Title --------- -----\nAngela G. Blackwell Director _____________________________________ (Angela G. Blackwell)\nTully M. Friedman Director _____________________________________ (Tully M. Friedman)\nJames C. Gaither Director _____________________________________ (James C. Gaither)\nRhoda H. Goldman Director _____________________________________ (Rhoda H. Goldman)\nPeter E. Haas, Jr. Director _____________________________________ (Peter E. Haas, Jr.)\nF. Warren Hellman Director _____________________________________ (F. Warren Hellman)\nSignature Title --------- -----\nPatricia S. Pineda Director _____________________________________ (Patricia S. Pineda)\nJames M. Koshland Director _____________________________________ (James M. Koshland)\nDirector, Thomas W. Tusher President and Chief Operating Officer _____________________________________ (Thomas W. Tusher)\nSenior Vice President and George B. James Chief Financial Officer _____________________________________ (George B. James)\nVice President, Controller and Richard D. Murphy Chief Accounting Officer _____________________________________ (Richard D. Murphy)\nSCHEDULE VIII\nLEVI STRAUSS ASSOCIATES INC. AND SUBSIDIARIES RESERVES (In Thousands)\nSCHEDULE IX\nLEVI STRAUSS ASSOCIATES INC. AND SUBSIDIARIES SHORT-TERM BORROWINGS (In Thousands)\n(1) This was relatively high in 1993 as approximately 69 percent of the balance outstanding at the end of 1993 was related to borrowings in Eastern Europe where the average interest rate was substantially higher than other Company borrowings in 1993. In addition, this was relatively high in 1991 as approximately 6 percent of the balance outstanding at the end of 1991 was related to borrowings in Latin America where the average interest rate was substantially higher than other Company borrowings in 1991. (2) The maximum amount outstanding during the period is based on month-end balances. (3) The average amount outstanding during the period is computed based on average daily borrowings. (4) The weighted average interest rate during the period is an annual rate, calculated by dividing the short-term interest expense by the average borrowings. The weighted average interest rate during 1993 would have been 3.7 percent excluding the Eastern European borrowings. The 1992 and 1991 weighted average interest rate would have been 5.4 percent and 7.6 percent, respectively, excluding the Latin American borrowings.\nSCHEDULE X\nLEVI STRAUSS ASSOCIATES INC. AND SUBSIDIARIES SUPPLEMENTARY INCOME STATEMENT INFORMATION (In Thousands)\nItems required in this schedule but not shown were omitted as they did not exceed one percent of net sales or are shown elsewhere in the consolidated Financial Statements of Levi Strauss Associates Inc. and Subsidiaries.\nREPORT OF INDEPENDENT PUBLIC ACCOUNTANTS\nTo Levi Strauss Associates Inc.:\nWe have audited in accordance with generally accepted auditing standards, the financial statements of Levi Strauss Associates Inc. included in this Form 10-K and have issued our report thereon dated January 20, 1994. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. Schedules VIII, IX and X are the responsibility of the Company's management and are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic financial statements. These schedules have been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.\nARTHUR ANDERSEN & CO.\nSan Francisco, California, January 20, 1994\nSUPPLEMENTAL INFORMATION\nThe 1994 Proxy will be furnished to security holders subsequent to this filing.\nCORPORATE DIRECTORY\nEXECUTIVE OFFICE Robert D. Haas, Chairman of the Board of Directors and Chief Executive Officer Thomas W. Tusher, President and Chief Operating Officer\nHONORARY CHAIRMAN OF THE BOARD OF DIRECTORS Walter A. Haas, Jr.\nCHAIRMAN OF THE EXECUTIVE COMMITTEE OF THE BOARD OF DIRECTORS Peter E. Haas, Sr.\nCORPORATE EXECUTIVE OFFICERS Thomas J. Bauch -- Senior Vice President, General Counsel & Secretary R. William Eaton, Jr. -- Senior Vice President, Chief Information Officer Donna J. Goya -- Senior Vice President, Human Resources George B. James -- Senior Vice President, Chief Financial Officer Robert D. Rockey, Jr. -- Senior Vice President, President of Levi Strauss North America Peter A. Jacobi -- Senior Vice President, President of Levi Strauss International\nDIRECTORS Angela Glover Blackwell -- Executive Director, Urban Strategies Council(1,3) Tully M. Friedman -- General Partner, Hellman & Friedman(1,3) James C. Gaither -- Partner, Cooley, Godward, Castro, Huddleson & Tatum(2,3) Rhoda H. Goldman -- Director, Mount Zion Health Systems(2,3) Peter E. Haas, Sr.(3) Peter E. Haas, Jr.(3) Robert D. Haas(3) Walter A. Haas, Jr.(3) F. Warren Hellman -- General Partner, Hellman & Friedman(1,2) James M. Koshland -- Partner, Ware & Freidenrich(1,3) Patricia Salas Pineda -- General Counsel, New United Motor Manufacturing, Inc.(1,2) Thomas W. Tusher(3)\n(1) Member, Audit Committee (2) Member, Personnel Committee (3) Member, Corporate Ethics and Social Responsibility Committee\nEXECUTIVE OFFICES: Levi's Plaza 1155 Battery Street San Francisco, California 94111 (415) 544-6000\nQuestions and communications regarding employee investments should be sent to the Director of Employee Benefits at the above address.\nINDEPENDENT PUBLIC ACCOUNTANTS: Arthur Andersen & Co.","section_15":""}
{"filename":"728535_1993.txt","cik":"728535","year":"1993","section_1":"ITEM 1. BUSINESS\nGENERAL\nJ.B. Hunt Transport Services, Inc. (Services) is a diversified transportation company focusing on the movement of full-load containerizable freight in North America. Services is an Arkansas holding company incorporated on August 10, 1961. Through its wholly-owned subsidiaries, Services operates as an irregular route, common motor carrier operating under the jurisdiction of the Interstate Commerce Commission (ICC) and various state regulatory agencies. References to \"J.B. Hunt\" or \"the Company\" are to Services and its wholly-owned subsidiaries. Utilizing its various operating authorities, the Company may transport any type of freight (except certain types of explosives) from any point in the continental United States to any other point in another state, over any route selected by the Company. The Company also has certain intrastate authorities, allowing it to pick-up and deliver within those states. The principal types of freight transported include foodstuffs, automotive parts, plastics and plastic products, general retail store merchandise, chemicals, paper and paper products, and manufacturing materials and supplies. The Company received Canadian authority in 1988 and 1989, which allowed general commodity service between certain Canadian provinces. Transportation services are also provided to and from all points in the continental United States to Quebec, British Columbia and Ontario. An agreement announced in March 1993 with Canada's largest railway, Canadian National, provides for expanded joint truck and rail service to Canada. J.B. Hunt has provided transportation services to and from Mexico since 1989 through interchange operations with various Mexican motor carriers. In May 1992 a joint venture with Transportacion Maritima Mexicana, the largest transportation company in Mexico, was announced. In 1990, the Company and the Atchison, Topeka and Santa Fe Railway Company (Santa Fe) initiated an intermodal operation with trailer-on-flatcar (TOFC) service. Since this initial agreement with Santa Fe, intermodal operations have been expanded to include nine railroads. The Company also provides double-stack container services which utilize a newly-designed container on a number of rail routes. Substantially all of the freight carried under these rail agreements is guaranteed space on trains and receives preferential loading and unloading at rail terminal facilities. The Company offers related full truckload transportation services such as regional, intrastate, flatbed, special (hazardous) commodities and dedicated equipment and logistics management services. Growth and expansion of these related businesses has been achieved through a combination of new internal service offerings and acquisitions. The new flatbed and special commodities operations were created in 1991. A company with Texas intrastate authority was acquired in 1991. A small hazardous waste carrier was acquired in 1992, and a new dedicated unit commenced operation in 1993.\nMARKETING AND OPERATIONS\nJ.B. Hunt has targeted the service sensitive segment of the truckload dry van market rather than those segments that use price as their primary consideration. The truckload market has traditionally been a lower price, lower service market when\ncompared to the less-than-truckload segment. The Company has opted to provide a premium service and charge compensating rates rather than compete primarily on the basis of price. The Company's business is well diversified and no one customer accounted for more than 6% of revenues during 1992 or 1993. Marketing efforts include significant focus on the diversified group of \"Fortune 500\" customers. A broad geographic dispersion and a good balance in the type of industries served allows J.B. Hunt some protection from major seasonal fluctuations. However, consistent with the truckload industry in general, freight is typically stronger in the second half of the year with peak months being August, September and October, In addition, demand for services is usually strong at the end of the first two quarters, (i.e. March and June). Revenue is also affected by bad weather and holidays, since revenue is directly related to available working days of shippers. The Company markets door-to-door truckload service through its nationwide marketing network. Services involving intermodal transportation mediums are billed by J.B. Hunt and all inquiries, claims and other customer contact is handled by the Company.\nPERSONNEL\nAt December 31, 1993, J.B. Hunt employed 10,476 people including 7,531 drivers. The Company increased the rate of over-the-road driver compensation in late 1990 in order to attract and retain experienced drivers. The pay scale for certain local drivers was increased in January 1993. Both experienced and non-experienced drivers are trained in all phases of Company policies and operations as well as defensive driving, safety techniques and fuel efficient operations of equipment. During 1992 three distinct driving jobs (local, regional and over-the-road) were identified in order to get drivers home more frequently and provide quality service to intermodal and regional operations. Drivers receive additional incentive compensation based upon fuel economy and other operating performance criteria. Each operating unit measures the quality of on-time service provided to customers each day. This focus on quality has also generated internal operating efficiencies in a number of functional areas. None of the Company's drivers or other employees are represented by a collective bargaining unit. In the opinion of management, the Company's relationship with all of its employees is excellent.\nREVENUE EQUIPMENT\nAt December 31, 1993, J.B. Hunt operated 6,775 tractors and 19,089 trailers\/containers. The average age of the tractor fleet at year-end was less than two years. The trailer pool consisted primarily of 48-foot and 53-foot dry vans or containers. The number of 53-foot trailers\/containers has been increased during the last few years in order to offer improved cost advantages to customers. In late 1992, J.B. Hunt announced the development of a new multi-purpose container which can be utilized for over-the-road truck transportation and provide double-stack capabilities for intermodal movements. The Company intends to convert a significant portion of its trailer fleet to these containers\nduring the next few years. At December 31, 1993, there were approximately 7,600 containers in the fleet. The Company strictly enforces a periodic maintenance program based upon the specific type and use of a vehicle. This commitment to a quality maintenance program minimizes equipment downtime and enhances the trade-in value of all used equipment. The Company believes that modern, late-model, clean equipment differentiates service in the market place.\nCOMPETITION\nJ.B. Hunt is one of the two largest irregular route truckload carriers in the country. It competes primarily with other irregular route, short, intermediate and long-haul truckload common carriers. Less-than-truckload motor common carriers and private carriers generally provide competition to a lesser degree. Although any one of these may represent competition on a regional basis, there are a very limited number of companies that represent competition in all markets. The principal method of competition since deregulation of the industry has been through price reductions. Increasingly, shippers are looking for \"core carriers\" that can offer equipment availability, geographical coverage and technical expertise to handle a substantial part of their transportation needs.\nREGULATION\nThe Company is a motor common carrier regulated by the ICC. The ICC generally governs activities such as authority to engage in motor carrier operations, accounting systems, certain mergers, consolidations, acquisitions, and periodic financial reporting. Motor carrier operations are subject to safety requirements prescribed by the United States Department of Transportation (DOT) governing interstate operation. Such matters as weight and dimensions of equipment and commercial driver's licensing are also subject to federal and state regulations. A new federal requirement that all drivers obtain a commercial driver's license became effective in April 1992. The federal Motor Carrier Act of 1980 was the start of a program to increase competition among motor carriers and limit the level of regulation in the industry (sometimes referred to as \"deregulation\"). The Motor Carrier Act of 1980 enables applicants to obtain ICC operating authority more easily and allows interstate motor carriers, such as the Company, to change their rates by a certain percentage per year without ICC approval. The new law also allowed for the removal of many route and commodity restrictions regarding the transportation of freight. As a result of the Motor Carrier Act of 1980, the Company was able to obtain unlimited authority to carry general commodities throughout the 48 contiguous states.\nITEM 2.","section_1A":"","section_1B":"","section_2":"ITEM 2. PROPERTIES\nThe Company's corporate headquarters are in Lowell, Arkansas. A 150,000 square foot building was constructed and occupied in September 1990. The building is situated on a 127-acre tract of land. In addition, to the corporate headquarters, the Company owns a separate 62-acre tract in Lowell, Arkansas with four separate buildings totaling 21,000 square feet of office space and 90,000 square feet of maintenance and\nwarehouse space. These buildings serve as the Lowell operations terminal, tractor and trailer maintenance facilities and additional administrative offices. A summary of the Company's principal facilities follows:\nThe Company owns all of the above listed facilities except Chicago and Oklahoma City which are leased. In addition to the above facilities, the Company leases several small offices and\/or trailer parking yards in various locations throughout the country.\nITEM 3.","section_3":"ITEM 3. LEGAL PROCEEDINGS\nThe Company is a party to routine litigation incidental to its business, primarily involving claims for personal injury and property damage incurred in the transportation of freight. The Company maintains excess insurance above its self-insured levels which covers extraordinary liability resulting from such claims. Adverse results in one or more of these cases would not have a material adverse affect on the financial position of the Company.\nITEM 4.","section_4":"ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS\nThe 1993 Annual Meeting of stockholders was held on May 13, 1993. At that meeting, the following matters were submitted to a vote of security holders:\n1. To elect nine (9) directors as recommended by the Board of Directors\nFor Against Abstain --- ------- -------\nNumber of shares voted 32,070,726 0 60,585 Percentage of shares voted 99.81% -- .19%\n2. To fix the number of Directors for the ensuing year at nine (9)\nFor Against Abstain --- ------- ------- Number of shares voted 32,102,143 13,385 15,783 Percentage of shares voted 99.91% .04% .05%\nNo matters were submitted during the fourth quarter of 1993 to a vote of security holders.\nPART II\nITEM 5.","section_5":"ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS\nPRICE RANGE OF COMMON STOCK\nThe Company's common stock is traded in the over-the-counter market under the symbol \"JBHT\". The following table sets forth, for the calendar periods indicated, the range of high and low sales prices for the Company's common stock as reported by the National Association of Securities Dealers Automated Quotations National Market System (\"NASDAQ\"). The following quotations reflect a three-for-two stock split paid on March 13, 1992.\nOn March 11, 1994, the high and low sales prices for the Company's common stock as reported by the NASDAQ were 24 3\/4 and 24 1\/4 respectively. As of March 11, 1994, the Company had 1,778 stockholders of record.\nDIVIDEND POLICY\nOn January 13, 1994, the Board of Directors declared a quarterly dividend of $.05 per share, payable to shareholders of record on February 3, 1994. Although it is the present intention of the Board of Directors to continue quarterly dividends, payment of future dividends will depend upon the Company's financial condition, results of operations and other factors deemed relevant by the Board of Directors. The Company declared and paid cash dividends of $.20 per share in 1993 and $.20 per share in 1992.\nITEM 6.","section_6":"ITEM 6. SELECTED FINANCIAL DATA\nITEM 7.","section_7":"ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION\nITEM 8.","section_7A":"","section_8":"ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA\nThe information set forth under the sections entitled \"Management's Discussion and Analysis of Results of Operations and Financial Condition\", \"Selected Financial Data\", \"Independent Auditors' Report\", \"Consolidated Statements of Earnings\", \"Consolidated Balance Sheets\", \"Consolidated Statements of Stockholders' Equity\", \"Consolidated Statements of Cash Flows\", and \"Notes to Consolidated Financial Statements\", of the Company's 1993 Annual Report to Stockholders is hereby incorporated by reference for items 6, 7 and 8 above.\nITEM 9.","section_9":"ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE\nNo reports on Form 8-K have been filed within the twenty-four months prior to December 31, 1993, involving a change of accountants or disagreements on accounting and financial disclosure.\nPART III\nITEM 10.","section_9A":"","section_9B":"","section_10":"ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT\nITEM 11.","section_11":"ITEM 11. EXECUTIVE COMPENSATION\nITEM 12.","section_12":"ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT\nThe information set forth under sections entitled \"Proposal One Election of Directors\", \"Board Committees\", \"Executive Officers\", \"Voting Securities and Security Ownership of Management and Principal Stockholders\", \"Executive Compensation and\nOther Information\", \"1994 Performance Based Compensation\" and \"Proposal Two Ratification of Appointment of Auditors\" of the Notice and Proxy Statement For Annual Stockholders' meeting is hereby incorporated by reference for items 10, 11 and 12 above.\nThe Proxy Statement had not yet been mailed to stockholders and was not available as of March 31, 1994. It will be filed no later than April 30, 1994.\nITEM 13.","section_13":"ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS\nNone.\nPART IV\nITEM 14.","section_14":"ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K\nThe following documents are filed as part of this report:\n(a) The following additional information for the years 1993, 1992 and 1991 is submitted herewith. Page references are to the consecutively numbered pages of this report on Form 10-K.\nIndependent Auditors' Report . . . . . . . . . . . . . . . . . . 11 Schedule V - Property and Equipment - Years ended December 31, 1993, 1992, 1991. . . . . . . . . . . . . . . . . 12 Schedule VI - Accumulated Depreciation of Property and Equipment - Years ended December 31, 1993, 1992, 1991. . . . . . . . . . . 13 Schedule X - Supplementary Statement of Earnings Information - Years ended December 31, 1993, 1992, 1991. . . . . . . . . . . 14\n(b) Reports on Form 8-K\nNo reports on Form 8-K were filed during the fourth quarter of 1993.\n(c) Exhibits\nThe response to this portion of ITEM 14 is submitted as a separate section of this report (\"Exhibit Index\").\nSIGNATURES\nPursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Lowell, Arkansas, on the 25th day of March 1994.\nJ.B. HUNT TRANSPORT SERVICES, INC. (Registrant)\nBy: \/s\/ Kirk Thompson ------------------------------------------ Kirk Thompson President and Chief Executive Officer\nPursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.\n\/s\/ John A. Cooper, Jr. Member of the Board March 25, 1994 - ---------------------------- of Directors John A. Cooper, Jr.\n\/s\/ Fred K. Darragh, Jr. Member of the Board March 25, 1994 - ---------------------------- of Directors Fred K. Darragh, Jr.\n\/s\/ Wayne Garrison Member of the Board March 25, 1994 - ---------------------------- of Directors Wayne Garrison\n\/s\/ Gene George Member of the Board March 25, 1994 - --------------------------- of Directors Gene George\n\/s\/ Roy Grimsley Member of the Board March 25, 1994 - --------------------------- of Directors Roy Grimsley\n\/s\/ Bryan Hunt Member of the Board March 25, 1994 - --------------------------- of Directors (Vice Chairman) J. Bryan Hunt, Jr.\n\/s\/ J.B. Hunt Member of the Board March 25, 1994 - --------------------------- of Directors (Chairman) J.B. Hunt\n\/s\/ Johnelle Hunt Member of the Board March 25, 1994 - --------------------------- of Directors (Corporate Johnelle Hunt Secretary)\n\/s\/ Lloyd E. Peterson Member of the Board March 25, 1994 - --------------------------- of Directors Lloyd E. Peterson\n\/s\/ Kirk Thompson Member of the Board March 25, 1994 - --------------------------- of Directors (President and Kirk Thompson Chief Executive Officer)\n\/s\/ Jerry W. Walton Executive Vice President, March 25, 1994 - --------------------------- Finance and Chief Financial Jerry W. Walton Officer\nEXHIBIT INDEX\nExhibit Number\n3A The Company's Amended and Restated Articles of Incorporation dated May 19, 1988 (incorporated by reference from Exhibit 4A of the Company's S-8 Registration Statement filed April 16, 1991; Registration Statement Number 33-40028).\n3B The Company's Bylaws as amended (incorporated by reference from Exhibit 3B of the Company's S-1 Registration Statement filed November 22, 1983; Registration Number 2-86684).\n3C The Company's Amended Bylaws dated September 19, 1983 (incorporated by reference from Exhibit 3C of the Company's S-1 Registration Statement filed February 7, 1985; Registration Number 2-95714).\n10A Material Contracts of the Company (incorporated by reference from Exhibits 10A-10N of the Company's S-1 Registration Statement; Registration Number 2-95714).\n10B The Company has an Employee Stock Purchase Plan filed on Form S-8 on February 3, 1984 (Registration Number 2-93928), and a Management Incentive Plan filed on Form S-8 on April 16, 1991 (Registration Statement Number 33-40028). The Management Incentive Plan is incorporated herein by reference from Exhibit 4B of Registration Statement 33-40028.\n13A Selected Financial Data\n13B Management's Discussion and Analysis of Results of Operations and Financial Condition\n13C Independent Auditor's Report\n13D Financial Statements and Supplementary Data\n22 Subsidiaries of J.B. Hunt Transport Services, Inc.\n* J.B. Hunt Transport, Inc., a Georgia corporation * L.A., Inc., an Arkansas corporation * J.B. Hunt Corp., a Delaware corporation * J.B. Hunt Special Commodities, Inc., an Arkansas corporation * Great Western Trucking Co., Inc., a Texas corporation * J.B. Hunt Logistics, Inc., an Arkansas corporation * Comercializadora Internacional De Cargo S.A. De C.V., a Mexican corporation * Hunt Mexicana, S.A. de C.V., a Mexican corporation\n23 Consent of KPMG Peat Marwick\nINDEPENDENT AUDITORS' REPORT\nThe Board of Directors J.B. Hunt Transport Services, Inc.:\nUnder date of February 11, 1994, we reported on the consolidated balance sheets of J.B. Hunt Transport Services, Inc. and subsidiaries as of December 31, 1993 and 1992, and the related consolidated statements of earnings, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1993, as contained in the 1993 annual report to stockholders. These consolidated financial statements and our report thereon are incorporated by reference in the annual report on Form 10-K for the year 1993. In connection with our audits of the aforementioned consolidated financial statements, we also have audited the related financial statement schedules as listed in the accompanying index. These financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statement schedules based on our audits.\nIn our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.\n\/s\/ KPMG Peat Marwick\nLittle Rock, Arkansas February 11, 1994\nSchedule V\nJ.B. HUNT TRANSPORT SERVICES, INC. AND SUBSIDIARIES\nProperty and Equipment\nYears ended December 31, 1993, 1992 and 1991\n(Dollars in thousands)\nSchedule VI\nJ.B. HUNT TRANSPORT SERVICES, INC. AND SUBSIDIARIES\nAccumulated Depreciation of Property and Equipment\nYears ended December 31, 1993, 1992 and 1991\n(Dollars in thousands)\nSchedule X\nJ.B. HUNT TRANSPORT SERVICES, INC. AND SUBSIDIARIES\nSupplementary Statements of Earnings Information\nYears ended December 31, 1993, 1992 and 1991\n(Dollars in thousands)","section_15":""}
{"filename":"73568_1993.txt","cik":"73568","year":"1993","section_1":"ITEM 1. BUSINESS (A) GENERAL DEVELOPMENT OF BUSINESS\nOak Industries Inc. (the \"Company\") was incorporated under the laws of the State of Delaware in 1960. The predecessor of the Company was incorporated in 1932 under the laws of the State of Illinois. The present corporate name was adopted in 1972. The Company's executive offices are located at Bay Colony Corporate Center, 1000 Winter Street, Waltham, Massachusetts 02154, and its telephone number is (617) 890-0400.\nThe Company manufactures and sells communications components, including cable television (\"CATV\") specialty connectors and frequency control devices, and control components, including electronic and mechanical controls and switches for consumer appliances and testing and industrial equipment. In addition, Oak manufactures and sells railway maintenance-of-way equipment and emergency lighting systems.\nOak Industries Inc. grew rapidly in the early 1980's due primarily to its cable television equipment, subscription television and other media related businesses. From 1982 to 1985, the Company sustained severe losses in this segment as a result of failed product introductions and the collapse of the subscription television industry. Seeking to arrest this decline, the Company initiated a series of actions, including the sale of unprofitable or underutilized assets, cost cutting programs designed to reduce corporate and divisional overhead costs and the substantial reduction of public debt from $230 million in 1986 to zero as of December 31, 1992. A significant amount of this public debt was reduced through a series of debt exchanges, the largest of which involved the 1986 sale of the Company's materials segment to Allied- Signal Inc. for approximately $152 million in cash. These proceeds, combined with the issuance of common stock, were used to retire approximately $197 million of such debt. As a result of these actions, stockholders' equity rose from negative $64.2 million at December 31, 1985 to positive $89.0 million at December 31, 1988.\nDespite these efforts, the Company continued to incur losses from continuing operations exclusive of non-recurring items and, in June 1989, a proxy contest resulted in the election of a new slate of directors. In late 1989 and early 1990, a new management team with extensive experience in industrial operations and acquisitions was installed. The charter of this new management team was and is to: 1) dispose of unprofitable businesses with low potential; 2) improve the profitability of the remaining operations; and 3) pursue a well planned, focused and consistent acquisition strategy. It is the intention of the Board of Directors that the Company will serve as a holding company managing a portfolio of companies which will include both existing operations and other businesses serving markets with good growth and income potential.\nDuring 1990 the Company completed the sales of two of its operating businesses: Oak Communications Inc. and Diamond H Controls Ltd. Oak Communications Inc. designed and manufactured equipment for the cable television market. Diamond H Controls is a Norwich, England based manufacturer of electric range components for the British and European\nappliance markets. This subsidiary was sold due to the lack of strategic fit with other Oak subsidiaries and to redeploy the cash proceeds generated by the transaction into domestic operations with greater growth and earnings potential. Shortly following the disposition of the assets of Oak Communications Inc. based in Rancho Bernardo, California, the Company relocated its corporate headquarters from Rancho Bernardo to Waltham, Massachusetts to be closer to its operating units and to reduce travel costs.\nOn January 4, 1991, the Company acquired the assets of Standard Grigsby, Inc. (\"SGI\"), a subsidiary of Flint Industries, Inc., including the stock of SGI de Mexico, S.A. de C.V., for approximately $7.5 million in cash and the assumption of certain liabilities. SGI manufactured switch products complementary to those of Oak Switch Systems Inc. During 1991, Company management combined the businesses of SGI and Oak Switch Systems, forming OakGrigsby Inc., in order to improve the profitability of each entity.\nOn September 10, 1992, the Company acquired the common stock of H.E.S. International, Inc. (\"H.E.S.\") , a manufacturer of hermetically-sealed packages used by manufacturers of quartz crystals, for approximately $2.8 million in net cash and a $0.3 million note payable through September 1995. H.E.S. manufactured products complementary to those of the Houston Electronics division (\"Houston\") of Oak Crystal Inc. During 1992, Company management combined the operations of Houston into those of H.E.S. in order to improve the profitability of the combined entity.\nOn December 23, 1992, the Company, along with Bain Capital, through an acquisition company, Connector Holding Company (\"Connector\"), acquired 85 percent of the outstanding stock of Gilbert Engineering Co., Inc. (\"Gilbert\"), a Glendale, Arizona manufacturer and supplier of specialty connectors to the cable television and high-end microwave markets. Management of Gilbert retained ownership of the remaining 15 percent of Gilbert. The Company has the right of first refusal should Gilbert management wish to sell their shares in Gilbert. If the Company refuses the offer, Gilbert management may, after a specified period of time and at its option, exchange its shares of Gilbert for the Company's common stock. The Company owns 80 percent of Connector, with Bain Capital owning the other 20 percent. Bain may at any time after December 22, 1995 require Oak to buy and Oak may at any time after December 22, 1996 require Bain to sell its outstanding shares in Connector at a price determined according to the terms of the stockholders agreement entered into by Oak and Bain at the time of the acquisition. The aggregate purchase price was approximately $106.9 million, including refinancing of existing debt of Gilbert and transaction expenses. Gilbert is required to make mandatory debt payments equal to 90% of annual cash flows from operations less capital expenditures and other expenditures as specified in the credit agreement relating to the financing of the acquisition.\nOn January 12, 1993, the Company acquired the assets of the hybrid oscillator business of Spectrum Technology Inc. (\"Spectrum\"), a subsidiary of Datum Inc., for approximately $1.6 million in cash including consolidation costs. Spectrum manufactured products complementary to those of McCoy\/Ovenaire. This acquired business was consolidated into the McCoy\/Ovenaire operations during the first quarter of 1993.\nEffective May 13, 1993, the Company's shareholders approved a one-for- five reverse stock split of the Company's common stock (the \"Reverse Split\"). All share and earnings per share amounts used herein have been restated to reflect the Reverse Split.\nThe Company is party to a 1989 agreement with Invesco MIM Management Limited, formerly MIM Ltd. (\"MIM\"), an international fund management company based in the United Kingdom, pursuant to which MIM and its clients (the \"MIM Group\") purchased 1.4 million shares of the Company's newly issued common stock at $3.75 per share and a warrant to acquire an additional 0.6 million shares at $6.00 per share until January 25, 1996. The agreement with MIM contains certain restrictions on the MIM Group's right to sell, transfer and purchase additional Oak common stock. It also grants the MIM Group certain rights with respect to the registration of the Oak securities acquired under the terms of the agreement. In a separate transaction in 1989, the MIM Group acquired 2 million shares of the Company's common stock previously held by Itel Corporation. In December 1993, the MIM Group sold approximately 1.8 million shares, including 0.5 million shares obtained from the exercise of warrants, pursuant to registration rights under the 1989 agreement with MIM. As of December 31, 1993, the MIM Group held approximately 1.1 million shares, or 6% of the Company's outstanding common stock.\nAs of December 31, 1993, the Company had net operating loss carryforwards for federal income tax purposes of approximately $164.0 million, primarily expiring from 1999 through 2006. Under federal tax law, certain changes in ownership of the Company, which may not be within the Company's control, may operate to restrict future utilization of these carryforwards.\n(B) FINANCIAL INFORMATION ABOUT THE INDUSTRY SEGMENTS\nThe Company's businesses are currently classified into the Components Segment and the Other Segment. For information regarding sales, operating income and identifiable assets attributable to each industry segment, see Note 9 of the Notes to Consolidated Financial Statements which is incorporated herein by reference.\n(C) NARRATIVE DESCRIPTION OF BUSINESS\nThe Company's operations are conducted in two industry segments, the Components Segment and the Other Segment. The Company's Components Segment manufactures connectors for CATV systems and other precision applications, frequency control devices, controls for gas and electric appliances, switches and other products which generally have the common function of controlling or regulating the flow of energy. The Other Segment is composed of the Company's railway maintenance equipment and emergency lighting divisions.\nCOMPONENTS SEGMENT\nThe Company operates principally through its Components Segment, which manufactures and sells communications components and control components.\nCommunications Components The Company's communications components include specialty connectors for use in CATV and other precision applications and devices which control radio frequencies such as quartz crystals, filters and oscillators and their related bases and enclosures. The Company has completed several acquisitions of businesses offering communications components and believes that, over time, the Company will expand its product offerings to the communications markets through new product development and the acquisition of businesses which compete in growing markets and offer strong margin potential. Collectively, communications components accounted for approximately 51% of the Company's net sales for 1993.\nCATV and Specialty Connectors. On December 23, 1992, the Company, along with Bain Capital, through an acquisition company, Connector Holding Company (\"Connector\"), acquired 85 percent of the outstanding stock of Gilbert Engineering Co., Inc. (\"Gilbert\"). Management of Gilbert retained ownership of the remaining 15 percent of Gilbert. The Company owns 80 percent of Connector, with Bain Capital owning the other 20 percent.\nGilbert manufactures and supplies specialty connectors to the cable television and high-end microwave markets. Its operations are based in Glendale, Arizona and Amboise, France.\nDomestic and export sales are made directly to cable television system operators as well as through distributors and manufacturers' representatives. Gilbert's wholly-owned French subsidiary, Societe d'Appareillages Electroniques, S.A. (\"S.A.E.\"), sells primarily to cable operators in France. Gilbert's major customers include cable operators such as Tele-Communications, Inc. (TCI), Sammons Communications, Scripps Howard and Time Warner Cable, and distributors such as Antec Corporation. The top ten customers are responsible for approximately 55 percent of total sales.\nThe cable industry is experiencing a continuing expansion of channel capacity in response to the desire of cable operators to provide subscribers with more programming selections, including pay-per-view and additional programming services. In addition, rapid developments in fiber optic technology, digital compression (which allows several channels to be transmitted within the same bandwidth that a single analog channel currently requires), computer electronics and mass storage technology have placed the U.S. cable industry in a position to market and supply a wide array of communication services. The Company believes that cable operators will continue to invest capital, including investment in fiber optic trunk lines, to upgrade the technological capabilities of their systems, provide higher quality and more reliable signal transmission and increase channel capacity in order to meet subscriber demand for better picture quality and more programming services, such as expanded pay-per-view, premium services and telephony. Once a fiber optic \"trunk\" has replaced or supplemented the existing coaxial trunk in a cable system, or once digital compression is\nutilized in a system, the active electronic components in the shorter \"feeder\" lines (which run from the trunk to the home) are generally upgraded to accommodate the increased information flow. As a general rule, when cable operators replace the active electronic components in a system, the connectors must also be replaced. Although connectors of the type manufactured by Gilbert are not used in fiber optic lines, the Company believes that most feeder lines will remain coaxial due to the lower cost and comparable quality of coaxial cable relative to fiber optic cable over short distances.\nGilbert is the leading U.S. manufacturer of aluminum connectors and a major U.S. manufacturer of brass connectors for the cable television industry. Although the market for these products is highly competitive with respect to quality and delivery, the Company believes it competes favorably with respect to each of these factors. In particular, the Company's aluminum connector products are engineered to meet stringent reliability requirements. Certain parties are also attempting to develop technologies which could compete with those currently employed by Gilbert's customers. If successful, these developments could have a negative impact on Gilbert's business.\nThe primary raw materials used in the manufacture of specialty connectors are aluminum and brass. Gilbert currently purchases all of its aluminum requirements from a single supplier. Although the Company believes several alternative sources of supply of aluminum are available, a sudden disruption of its supply from this supplier could have a temporary adverse effect on the manufacture and sale of Gilbert's connector products. Gilbert is not dependent on any single supplier for its other raw materials. Management does not foresee any problems obtaining the raw materials necessary for the manufacture of specialty connectors.\nGilbert owns a number of patents but does not consider any one patent or group of patents material to the conduct of the business.\nShipments of Gilbert's products are typically made shortly after the receipt of the order. Accordingly, the Company does not consider Gilbert's order backlog at any date to be a significant predictor of Gilbert's future results of operations.\nFrequency Control Devices. Through its frequency control devices business units, McCoy\/Ovenaire\/Spectrum, Croven Crystals and H.E.S. International, the Company offers its precision frequency control devices to original equipment manufacturers for both commercial and military applications. For these products, the Company provides custom design, joint development opportunities, value-added assembly and low cost component and subsystem manufacturing.\nThe Company's frequency control products include crystals, crystal oscillators, and crystal filters for a variety of applications, including key components made for cellular telephone base stations, telecommunications switching equipment, global positioning systems, satellite programs, scientific test and\/or measurement equipment, avionics, and computer systems. Major customers of the Company's frequency control products include Rockwell International, Hewlett-Packard, Hughes Aircraft, AT&T, ITT, Motorola and Alcatel Network Systems.\nThere are many suppliers, both domestic and foreign, of crystal frequency control devices. In order to compete effectively in this market, the company places a strong emphasis on high quality and sophisticated design technology. A large percentage of the Company's frequency control products are manufactured to exacting customer specifications, and the Company relies to a large extent on its engineering staff in identifying customer needs and meeting production and delivery schedules. Sales of the Company's frequency control products are made through a direct sales force and manufacturers' representatives.\nManufacturing facilities for the Company's frequency control products are located in Mt. Holly Springs and Mercersburg, Pennsylvania, and Whitby, Ontario, Canada. Management believes that recent improvements in each facility allow the Company to provide superior quality and delivery performance for such products at competitive prices.\nIn 1993, sales of frequency control products to military contractors constituted less than 10% of the Company's total sales. In recent periods, the Company has reduced the percentage of its sales of frequency control products attributable to such customers through the introduction of new products for the commercial telecommunications industry.\nThe Company believes there is ready availability of the raw materials, principally natural and synthetic quartz, required for the production of its frequency control products. There are multiple suppliers of such raw materials, and the Company utilizes many of these suppliers. Moreover, the Company has recently entered into a strategic alliance with Alfa Quartz (\"Alfa\"), a subsidiary of Sural C.A. Alfa has made significant capital investments in its Venezuelan operation in order to become a major supplier of synthetic quartz crystals on the world market. The strategic alliance is intended to develop Alfa's finishing capabilities and thereby allow it to broaden its product offerings as well as ensure the Company of a ready supply of high-quality, low-cost crystal blanks.\nThe Company also manufactures glass-to-metal hermetically sealed packages used in a variety of products including frequency controls, lithium batteries and semiconductors. These operations are based in Kansas City, Kansas. The Company believes it is a leader in four major types of hermetically sealed packages: cold weld, resistance weld, solder seal and all-glass induction seal. Approximately 85% of the Company's sales of hermetic packages are to customers in the United States. These customers are currently serviced on a factory direct basis. Foreign sales are conducted through direct sales and distributors. In the sale of hermetic packages, the Company believes it enjoys competitive advantages including a worldwide reputation for superior quality and delivery performance, a leadership position in glass-to-metal sealing technology, low-cost, value-added contract assembly operations in Acuna, Mexico, and experience in the custom design of unique packages for customer needs.\nControl Components The Company's controls products include electronic, electro-mechanical and mechanical controls, switches and components sold to various consumer and industrial manufacturers. The Company provides gas range and outdoor grill controls, components and replacement parts through its Harper-Wyman Company subsidiary, and optical, rotary and appliance switches and other products through its OakGrigsby Inc. subsidiary. The Company expects to expand its product offerings to the market for control devices through new product development and acquisitions. Collectively, control components accounted for approximately 41% of the Company's net sales for 1993.\nAppliance Components and Controls. The Company, through its Harper-Wyman Company subsidiary (\"Harper-Wyman\") manufactures a broad line of controls and components for gas and electric range appliances for sale to original equipment manufacturers in the consumer appliance industry. Harper-Wyman has operations in Aurora and Princeton, Illinois and Ciudad Juarez, Mexico.\nHarper-Wyman's major customers include General Electric Corporation, Raytheon Company (Caloric and Amana), Maytag Corporation (Magic Chef and Jenn- Air) and Brown Stove Works Inc.\nThe sale of Harper-Wyman's products is conducted through its direct sales force with assistance from a small number of manufacturers' representatives. Harper-Wyman is dependent on a small number of customers, principally the major original equipment appliance manufacturers. The loss of any one of these customers could have a material adverse effect on Harper-Wyman's business.\nThe market in which Harper-Wyman participates is very competitive in terms of price, quality and delivery, with three significant competitors. Harper-Wyman believes it is a leading supplier to the market for its gas range products.\nHarper-Wyman's domestic control products must conform to Underwriters' Laboratories and American Gas Association specifications. All such approvals have been obtained and Harper-Wyman's quality assurance team maintains compliance with these specifications. Harper-Wyman is not dependent upon any single supplier for raw materials. Harper-Wyman owns a number of patents but does not consider any one patent or group of patents material to the conduct of business.\nHarper-Wyman, through its Harpco Division, is a manufacturer and supplier of replacement parts to the consumer appliance and outdoor grill industries. The market for Harpco Division's products consists of original equipment manufacturers and distributors. Sales are made primarily through manufacturers' representatives.\nSwitch Devices. The Company's OakGrigsby business unit manufactures low- power open frame, enclosed and encoded rotary switches along with solenoids, lighted push-button switches and appliance switches. OakGrigsby has also developed an optical switch which eliminates many of the mechanical aspects of rotary switches providing for a longer product life and more accurate control of switching operations. These products are sold primarily to original equipment manufacturers of industrial, test and medical equipment. The Company has recently introduced a new device which is used in sorting machines used by the U.S. Postal Service. The Company's switch manufacturing operations are located in Sugar Grove, Illinois and Ciudad Juarez, Mexico.\nSome of OakGrigsby's top customers include Rockwell International, Motorola, the U.S. Government, Pitney Bowes and Tektronix. The top ten customers are responsible for approximately 36% of total sales. Open frame rotary switches account for about 36% of total sales revenue. OakGrigsby's marketplace is principally domestic with some product shipped to Canada and Europe. Product is sold by manufacturers' representatives directly to customers across the United States and in Europe, with an increasing amount of product sold through distributors. OakGrigsby supplies to a highly fragmented market and competes primarily on the basis of price, technology, innovation and distribution.\nOakGrigsby owns a number of patents but does not consider any one patent or group of patents material to the conduct of business. Management does not foresee any problems obtaining raw material for use in the production of OakGrigsby's products. The company is not dependent on any single supplier for raw materials.\nOTHER SEGMENT\nThe businesses comprising the Company's Other Segment accounted for approximately 8% of the Company's net sales for 1993.\nRailway Products. Through its Nordco Inc. subsidiary (\"Nordco\"), the Company manufactures, sells and leases products used in the construction, maintenance and repair of railway tracks. Nordco's products fall into three general categories: tie renewal equipment, rail renewal equipment and track inspection equipment. A significant portion of Nordco's business results from sales of replacement parts for these machines.\nThe sale of Nordco's products is conducted through a sales and distribution network throughout North America. Although Nordco has several key competitors, including Fairmont Tamper, the Company believes that no more than three competitors sell against Nordco in any particular product line. Management believes it is well-positioned for this competitive environment. The Company believes Nordco's strong marketing relationships and the resulting awareness of customer needs, combined with superior engineering capability, certain patents, which have remaining lives of 2 to 12 years, and a successful research and development program, have given Nordco a reputation as a technological and quality leader in this industry.\nNordco's primary market includes railroads in the United States and Canada designated as Class I (railroads with revenues in excess of $96.1 million). Other markets for Nordco's products include Mexico , the Scandinavian countries and Australia.\nNordco's new equipment and parts customers have distinct seasonal demands. New equipment shipments are heaviest during early spring when the summer track maintenance programs commence and parts shipments are heaviest during the summer work season.\nNordco is primarily an assembler of purchased components from a wide variety of suppliers, and it is not dependent upon any single supplier.\nEmergency Lighting. Through its Carpenter Emergency Lighting business unit (\"Carpenter\"), the Company manufactures and assembles self-powered emergency lights, exit signs, and portable lights for use in industrial, commercial, and office functions. Carpenter's operations are located in Charlottesville, Virginia.\nCarpenter's products are sold to electrical distributors through a nationwide network of independent manufacturers' representatives. Sales are driven by new construction, renovation, and local safety code ordinances. The industry in which Carpenter operates is highly competitive, with approximately fifteen companies serving the industry. No single competitor has a dominant market share. The Company believes that the quality of Carpenter's products, the experience of its sales force, its short lead times, order to delivery, and competitive product pricing provide Carpenter with competitive advantages.\nRaw materials, primarily plastics, metals, batteries, and electronic components, are purchased from a variety of vendors. Carpenter is not dependent upon any single supplier.\nOTHER INVESTMENTS\nChannel 44. The Company owns a 49% interest in TV Station WSNS which, as a Telemundo affiliate, broadcasts Spanish language programming in the Chicago metropolitan area.\nO\/E\/N India. The Company owns a 45% interest in O\/E\/N India Ltd. (\"O\/E\/N India\"), located in Cochin, Kerala, India. O\/E\/N India assembles and markets relays, potentiometers, and switches for the Indian market. The principal markets include communications systems, data processing equipment and industrial applications. O\/E\/N India and its subsidiaries' products also include floppy diskettes, terminals and connectors. The operations of O\/E\/N India do not have a material impact on the Company's financial condition or results of operations.\nEMPLOYEES\nAt December 31, 1993, the company had approximately 2,620 employees, 1,728 of whom were located in the United States and 892 in foreign countries. Of these employees, 175 are members of unions. The Company believes its relationship with its employees are good.\nBACKLOG\nThe Company's backlog of domestic and foreign orders for each industry segment at the indicated dates was as follows (dollars in thousands):\nSubstantially all orders in each segment's backlog are considered firm and are expected to be delivered within twelve months of the dates indicated above. Consistent with practices in the Company's businesses, a portion of the backlog is unscheduled as to the delivery date. Orders are normally cancelable subject to payment by the purchaser of charges incurred by the Company up to the time of cancellation.\nEXECUTIVE OFFICERS\nThe following table lists the name, age, position and offices of all executive officers of the Company. The term of office of all executive officers will expire upon the holding of the first meeting of the Board of Directors following the 1994 Annual Meeting of Stockholders.\nITEM 3.","section_1A":"","section_1B":"","section_2":"","section_3":"ITEM 3. LEGAL PROCEEDINGS\nVarious pending or threatened legal proceedings by or against the Company or one or more of its subsidiaries involve alleged breaches of contract, torts and miscellaneous other causes of action arising in the ordinary course of business. Some of these proceedings involve claims for punitive damages in addition to other special relief. The Company's management does not consider any of such proceedings to be material.\nITEM 4.","section_4":"ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS\nDuring the fourth quarter of 1993, no matters were submitted to a vote of security holders.\nPART II\nITEM 5.","section_5":"ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS\nThe markets on which the common stock of the Company is traded are the New York Stock Exchange and the Pacific Stock Exchange. As of January 31, 1994, there were approximately 9,666 stockholders of record of common stock of the Company.\nInformation regarding the trading price of the Company's common stock for each quarterly period during the last two fiscal years is set forth below. No dividends on the Company's common stock were paid during 1993 or 1992. (See description of dividend restrictions included in the Revolving Credit Facility Agreement in Note 4 to the Consolidated Financial Statements.)\nITEM 6.","section_6":"ITEM 6. SELECTED FINANCIAL DATA\nFINANCIAL RESULTS\n- ------------------------\nAll prior years' data has been restated to reflect only continuing operations as of December 31, 1993.\nSee description of 1992 change in accounting for income taxes in Note 8 to the Consolidated Financial Statements.\nSee description of December 23, 1992 acquisition of Gilbert Engineering Co., Inc. in Note 2 to the Consolidated Financial Statements.\nITEM 7.","section_7":"ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS\nLIQUIDITY AND CAPITAL RESOURCES\nThe Company's cash flow remained strong throughout 1993 with cash and cash equivalents increasing by $8.4 million to $27.4 million at December 31, 1993. Operations generated $31.3 million of cash during 1993 compared to $10.6 million during 1992. The Company spent $7.0 million for capital equipment and $1.6 million to acquire a business. Cash of $22.7 million was used to repay debt and $6.0 million was freed from restriction due to the elimination of a requirement for collateral for a letter of credit. The Company also received $3.2 million as the result of the exercise of warrants to purchase 540,000 shares of the Company's common stock.\nIn September 1993, the Company entered into a new revolving credit facility with a group of banks, increasing available borrowings from $15.0 million to $30.0 million. The new facility, which is available through December 1995, is at various interest rates at the Company's option based on the prime rate or LIBOR. Borrowings under the facility are secured by the Company's pledge of the outstanding capital stock of certain of the Company's subsidiaries. At December 31, 1993, there were no borrowings outstanding under this facility.\nAt December 31, 1993, cash and unused lines of credit totaled $76.4 million of which $21.2 million was available only to Gilbert and $55.2 million was available for general corporate purposes, including acquisitions. The maximum amount of borrowing under the line of credit available only to Gilbert decreases at each quarter end through 1994 and will be $10.0 million at December 31, 1994. The Company believes its current financial resources are sufficient to meet its continuing operating requirements, service its long- term debt, and provide for future growth.\nThe indebtedness of Gilbert incurred as a result of its acquisition by the Company and Bain Capital is repayable on various dates through 1999. Such indebtedness is collateralized by the assets and common stock of Gilbert and is non-recourse to the Company. At December 31, 1993, the principal amount of such indebtedness, net of original issue discount, was $57.1 million. Such indebtedness as of December 31, 1993 bears various interest rates from LIBOR plus 3.0% to prime plus 3.0% per annum (6.3% to 9.0% at December 31, 1993). In addition to scheduled repayments, Gilbert is required to make mandatory prepayments on this indebtedness equal to 90% of annual cash flows from operations less capital expenditures and certain other expenditures. A portion of this indebtedness is outstanding under Gilbert's line of credit, and a portion of the scheduled repayments of this indebtedness account for the scheduled reductions in the maximum borrowings available under such line of credit described in the immediately preceding paragraph. In January 1994, Gilbert borrowed $10.0 million under its line of credit in order to make certain mandatory prepayments as described above.\nAt December 31, 1993, the Company's Nordco Inc. subsidiary had $5.6 million principal amount of indebtedness outstanding under a term loan agreement. This principal amount bears interest at 12.05% per annum and is repayable in equal semi-annual installments through 1997. The obligations are secured by a pledge of the common stock of Nordco Inc. held by the Company.\nThe Company is involved in certain environmental matters at several of its operating divisions. Management believes that the ultimate resolution of these environmental matters will not have a material effect on the Company's financial position or results of operations. The Company's operations, like those of similar manufacturing businesses, may involve certain ongoing risks to the environment.\nVarious pending or threatened legal proceedings by or against the Company or one or more of its subsidiaries involve alleged breaches of contract, torts and miscellaneous other causes of action arising in the course of business. Some of these proceedings involve claims for punitive damages in addition to other special relief. The Company's management, based upon advice of legal counsel representing the Company with respect to each of these proceedings, does not believe any of these proceedings will have a material effect on the Company's consolidated financial position.\nOn December 23, 1992, the Company, along with certain affiliates of Bain Capital (\"Bain Capital\"), through an acquisition company, Connector Holding Company (\"Connector\"), acquired 85% of the outstanding stock of Gilbert. The aggregate purchase price was approximately $106.9 million, including refinancing of existing debt of Gilbert and transaction expenses. Management of Gilbert retained ownership of the remaining 15% of Gilbert. The Company has the right of first refusal should Gilbert management wish to sell their shares in Gilbert. If the Company refuses the offer, Gilbert management may, after a specified period of time and at its option, exchange its shares of Gilbert for shares of the Company's common stock. The Company owns 80% of Connector, with Bain Capital owning the other 20%.\nBain Capital may at any time after December 22, 1995 require the Company to buy and Oak may at any time after December 22, 1996 require Bain Capital to sell its outstanding shares in Connector at a price determined according to the terms of the stockholders agreement entered into by the Company and Bain Capital at the time of the acquisition (the \"Stockholders Agreement\"). The price is the higher of fair market value as determined by an independent appraisal and a price based upon certain formulas applied to the earnings of Gilbert in certain periods. The Stockholders Agreement limits the ability of Connector or Gilbert to take certain fundamental corporate actions without the prior consent of the Company and Bain Capital. The agreement prohibits the sale by either the Company or Bain Capital of its equity interests in Connector. The Company's shares of Connector have been pledged to Bain Capital to secure the financial obligations of the Company under the Stockholders Agreement.\nAlthough the Company operates internally with several businesses functioning as profit centers, these businesses are also managed as a group. That is, if a given business is performing strongly, corporate management may use this opportunity to invest additional funds in product development and marketing in another business. Certain agreements applicable to Gilbert limit Gilbert's ability to make distributions or advances to the Company and likewise the Company has no obligation to make further advances to, or investments in, Gilbert.\nAs of December 31, 1993, the Company had net operating loss carryforwards (\"NOLs\") for federal income tax purposes of approximately $164.0 million, which will, if unused, expire from 1999 through 2006. Under federal tax law, certain changes in ownership of the Company, which may not be within the Company's control, may operate to restrict future utilization of these carryforwards.\nIn accordance with FAS 109, the Company has recorded as a deferred tax asset the expected tax benefit in future periods associated with the anticipated utilization of these NOLs. At December 31, 1993, this deferred tax asset was $29.4 million. In order to realize the deferred tax asset, the Company must generate domestic pretax profit of at least $80 million before the NOLs expire. Management has determined, based on the Company's history of prior operating earnings, the history of prior operating earnings of Gilbert and the Company's expectations for the future, that income of the Company will more likely than not be sufficient to utilize $29.4 million of benefit from the utilization of NOLs prior to their expiration.\nConsistent with its strategy, the Company will aggressively explore additional acquisition opportunities in 1994. If consummated, an acquisition would involve the expenditure of cash and may require borrowing against its existing revolving credit facility and\/or new borrowing arrangements. Currently, the Company has no commitment, understanding, or arrangement relating to any material acquisition and there can be no assurance that additional transactions will be consummated in 1994.\nRESULTS OF OPERATIONS\nOn December 23, 1992, the Company along with Bain Capital, through their acquisition company, Connector Holding Company (\"Connector\"), acquired 85% of the outstanding stock of Gilbert Engineering Co., Inc. (\"Gilbert\"), a Glendale, Arizona manufacturer and supplier of specialty connectors to the cable television, microwave, and high-end specialty precision markets. Management of Gilbert retained ownership of the remaining 15% of Gilbert. The Company owns 80% of Connector, with Bain Capital owning the other 20%. The acquisition was accounted for as a purchase and, accordingly the operating results of Gilbert for the nine days from the date of acquisition through December 31, 1992 were included in the Company's consolidated statement of operations. The effect of these operating results on the Company's 1992 sales and net income was insignificant.\n1993 COMPARED TO 1992\nConsolidated sales for 1993 were $219.6 million, an increase of $76.4 million, or 53.3%, over 1992. Components Segment sales increased $78.3 million, or 63.4% and Other Segment sales decreased $1.9 million, or 9.6%. The increase in consolidated sales is attributable primarily to the acquisition of Gilbert at the end of 1992.\nNet income during 1993 was $26.7 million compared to net income of $14.4 million in 1992. Each period, however, includes certain non-recurring items shown in the table below. Income from continuing operations before non- recurring items in 1993 increased by $14.6 million, or 217.9% over 1992, primarily as a result of the inclusion of Gilbert's results of operations in the 1993 period. Included in income from continuing operations is equity in net income of affiliated companies of $1.7 million and $2.3 million for 1993 and 1992, respectively.\nNET INCOME ($ MILLIONS)\nThe $14.6 million improvement in income from continuing operations before non-recurring items for 1993 resulted primarily from a $31.1 million increase in segment operating profitability (see discussion under \"Segment Data\") offset, in part, by several non-operating items. Interest expense increased $6.4 million due to higher debt levels resulting from the acquisition of Gilbert. Minority interest in net income of subsidiaries of $5.8 million, before the non-recurring increase of $1.6 million resulting from the FAS 109 adjustment, represents the minority stockholders' proportionate share of the income of Connector and Gilbert. Interest income decreased $0.5 million due to lower invested balances and lower interest rates. Equity in net income of subsidiaries decreased $0.6 million. Income tax expense, excluding the tax benefit related to the settlement of the tax dispute and adjustments to the deferred income tax valuation reserve, increased $1.2 million due to higher foreign and state taxes, reflecting higher earnings levels.\nIn the first quarter of 1993, the Company adopted FAS 106, \"Employers' Accounting for Postretirement Benefits Other than Pensions\". This statement changes the past practice of accounting for the cost of postretirement benefits from a pay-as-you-go (cash) basis to the accrual basis. Under the new statement, the expected cost of providing those benefits to an employee, the employee's beneficiaries, and covered dependents will be recognized in the years that the employee renders the necessary service. The accumulated postretirement benefit obligation as of January 1, 1993 was $1.1 million. The Company has elected to amortize this transition obligation over 20 years in accordance with the provisions of FAS 106. The effect on the financial statements of the adoption of the provisions of this statement was not material in 1993 and is not expected to be material in the future. The Company allows certain employees aged 55 or older and with 10 or more years of service to retire and continue their medical and\/or dental coverage until age 65. In most cases, retirees are responsible for paying premiums to the Company to continue coverage.\nThe Financial Accounting Standards Board has issued FAS 112 \"Employers' Accounting for Postemployment Benefits\". This statement changes the past practice of accounting for the cost of certain postemployment benefits from a pay-as-you-go (cash) basis to an accrual basis. The statement generally requires adoption for fiscal years beginning after December 15, 1993. Management does not expect the effect of the adoption of this statement in 1994 to be material to the Company's financial statements.\nSEGMENT DATA ($ MILLIONS)\nSales of the Components Segment increased $78.3 million, or 63.4%, in 1993 compared to 1992. This increase was due primarily to incremental sales of Gilbert, which was acquired in December 1992, and to a lesser extent, sales of two smaller businesses, acquired in January 1993 and September 1992, and to volume increases in the switch controls business, partially offset by volume declines in the appliance controls business (from historically high levels in 1992). Components Segment order backlog was $39.6 million at December 31, 1993, up $1.2 million, or 3.2% from December 31, 1992.\nExcluding the effect of the restructuring charges discussed above, operating income of the Components Segment increased $30.3 million, or 347.6%, in 1993 as compared to 1992. This improvement was primarily the result of the inclusion of Gilbert's results of operations in 1993.\nThe strength of the operating performance of the Components Segment during the first half of 1993 was primarily attributable to the high sales level of CATV connector products in this period. Sales of such products were slower in the second half of 1993, as cable operators took time to assess the financial impact of the Cable Act of 1992 on their capital spending plans.\nOther Segment sales decreased $1.9 million, or 9.6%, compared to 1992 due to decreased volume from the Company's railway maintenance equipment division. Operating income increased by $0.8 million, or 70.2%, compared to 1992, however, due to higher gross margins resulting from various cost reduction programs. Order backlog for the segment was $1.3 million at December 31, 1993, up $1.1 million from December 31, 1992.\nConsolidated gross profit increased as a percentage of sales in 1993 to 34.1% from 22.8% in 1992 due to higher sales volumes of higher margin products and productivity enhancements. Selling, general and administrative expenses increased $10.3 million primarily as a result of the acquisition of Gilbert. As a percentage of sales, selling, general and administrative expenses decreased from 19.5% to 17.4%.\nEquity in net income of affiliated companies decreased $0.6 million in 1993, primarily as a result of increased amortization and interest expense of the Company's 49%-owned Chicago TV station WSNS (\"Channel 44\") as a result of costs incurred and payments made in connection with the 1992 reacquisition of its license to operate.\n1992 COMPARED TO 1991\nConsolidated sales for 1992 were $143.2 million, an increase of $18.8 million, or 15.2%, from 1991. Components Segment sales increased $14.7 million, or 13.5%, and Other Segment sales increased $4.1 million, or 25.9%. The Company acquired Gilbert on December 23, 1992, and therefore, the acquisition had only a minor effect on the Company's results for 1992.\nConsolidated net income for 1992 was $14.4 million which included income from discontinued operations of $0.5 million and income of $3.5 million resulting from a change in accounting principle for income taxes. Net income for 1991 was $5.6 million, which included income from discontinued operations of $0.3 million. Exclusive of the adjustments for non-recurring items shown in the table below, the current year consolidated income was $2.1 million greater than 1991. The increased income reflects higher operating profits as discussed below under \"Segment Data\".\nNET INCOME ($ MILLIONS)\nSEGMENT DATA ($ MILLIONS)\nComponents Segment sales increased $14.7 million, or 13.5%, from 1991. Contributing to the higher volume was a more robust market as well as increased market share in one part of the business. Partially offsetting this increase were volume declines in other parts of the business resulting from reductions and delays in military spending and continued softness in the economy. Components Segment order backlog was $38.3 million at year end, up $2.2 million from December 31, 1991.\nOperating income from the Components Segment increased $3.8 million, or 111.8%, from 1991. Both 1992 and 1991 operating income included non- recurring charges for reorganizations and facilities consolidations of $1.5 million and $2.6 million, respectively. Exclusive of these non-recurring items, operating income increased $2.3 million. This increase resulted primarily from higher gross profits resulting from the sales increase discussed above.\nOther Segment sales increased $4.1 million, or 25.9%, higher than 1991 due to increased volume from the Company's railway maintenance equipment and emergency lighting divisions reflecting increased purchasing activities by the railroads and higher sales of emergency lights and exit signs. Operating income increased only $0.2 million despite higher sales volumes due to an unfavorable mix of product shipments. Order backlog for the segment was $0.2 million at December 31, 1992, down $1.9 million from the previous year. Backlog at December 31, 1991 was unusually high as several railroad customers placed orders earlier than usual.\nConsolidated gross margins decreased as a percentage of sales in 1992 to 22.8% from 22.9% in 1991 due to higher sales volumes of lower margin products. Selling, general and administrative expenses increased 6.7% due to increased engineering, selling and marketing expenses reflecting the Company's strategy to grow the base businesses.\nEquity in net income of affiliated companies increased $0.5 million in 1992 from $1.8 million in 1991 due to improved operating performance of the Company's 49% owned TV Station WSNS (\"Channel 44\").\nThe Company adopted FAS 109 effective January 1, 1992 on a prospective basis. The effect of such adoption was income of $3.5 million in the first quarter 1992 consolidated statement of operations reported as \"Cumulative effect of change in accounting principle.\" This income resulted from the recognition of a deferred tax asset of $80.1 million, net of a valuation allowance of $76.6 million. At December 31, 1992, the deferred tax asset was $79.3 million and the valuation allowance was $57.3 million resulting in a net asset of $22.0 million. Of the increase in the net deferred tax asset, $16.9 million resulted from purchase accounting related to the acquisitions of Gilbert and H.E.S. during 1992 and $2.5 million resulted from an adjustment to the valuation allowance in the fourth quarter of 1992 due to management's improved expectations of future operating income. This $2.5 million was recognized as an income tax benefit in the fourth quarter 1992 consolidated statement of operations as \"Income taxes\".\nThe tax provision for 1991 includes a benefit of $3.5 million from the favorable resolution of an income tax issue for which a reserve had been previously provided.\nITEM 8.","section_7A":"","section_8":"ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA\nOAK INDUSTRIES INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS\nREPORT OF INDEPENDENT ACCOUNTANTS\nFINANCIAL STATEMENTS -\nConsolidated Balance Sheet at December 31, 1993 and 1992\nConsolidated Statement of Operations for the years ended December 31, 1993, 1992 and 1991\nConsolidated Statement of Stockholders' Equity for the years ended December 31, 1993, 1992 and 1991\nConsolidated Statement of Cash Flows for the years ended December 31, 1993, 1992 and 1991\nNotes to Consolidated Financial Statements\nSCHEDULES -\nII - Amounts Receivable from Related Parties and Underwriters, Promoters and Employers other than Related Parties\nVIII - Valuation and Qualifying Accounts\nX - Supplementary Statement of Operations Information\nREPORT OF INDEPENDENT AUDITORS\nTo the Board of Directors and Stockholders of Oak Industries Inc.\nIn our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Oak Industries Inc. and its subsidiaries at December 31, 1993 and 1992, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1993, in conformity with generally accepted accounting principles. 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 of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.\nAs discussed in Notes 1 and 8 to the consolidated financial statements, the Company changed its method of accounting for income taxes in 1992.\nPRICE WATERHOUSE\nBoston, Massachusetts January 21, 1994\nOAK INDUSTRIES INC. CONSOLIDATED BALANCE SHEET AT DECEMBER 31 (DOLLARS IN THOUSANDS)\nASSETS\n- -------------------- The accompanying Notes to Consolidated Financial Statements are an integral part of these consolidated statements.\nOAK INDUSTRIES INC. CONSOLIDATED BALANCE SHEET AT DECEMBER 31 (DOLLARS IN THOUSANDS)\nLIABILITIES AND STOCKHOLDERS' EQUITY\n- ----------------------- The accompanying Notes to Consolidated Financial Statements are an integral part of these consolidated statements.\nOAK INDUSTRIES INC. CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)\n- -------------------- The accompanying Notes to Consolidated Financial Statements are an integral part of these consolidated statements.\nOAK INDUSTRIES INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31 (DOLLARS IN THOUSANDS)\n- ------------------ The accompanying Notes to Consolidated Financial Statements are an integral part of these consolidated statements.\nOAK INDUSTRIES INC. CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31 (DOLLARS IN THOUSANDS)\nINCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS FROM:\n- ----------------- The accompanying Notes to Consolidated Financial Statements are an integral part of these consolidated statements.\n(1) STATEMENT OF ACCOUNTING POLICIES:\nFollowing are the significant financial and accounting policies of the Company:\nPRINCIPLES OF CONSOLIDATION\nThe consolidated financial statements include the accounts of the Company and all of its majority-owned subsidiaries. All significant transactions between the Company and its subsidiaries are eliminated.\nMINORITY INTEREST\nMinority interest represents the minority stockholders' proportionate share of the equity and the income or loss of Connector and Gilbert (See Note 2). The minority interest in the income of these operations was insignificant in 1992.\nINVESTMENTS IN AFFILIATES\nThe Company owns a 49% interest in TV Station WSNS, which broadcasts Spanish language programming in the Chicago metropolitan area, and a 45% interest in O\/E\/N India Ltd., located in Cochin, Kerala, India, which assembles and markets relays and switches for the Indian market. Investments in these affiliated companies are recorded at cost plus equity in undistributed earnings. The cumulative amount of these undistributed earnings included in consolidated accumulated deficit at December 31, 1993 and 1992 was approximately $8,292,000 and $6,937,000, respectively. Dividends received from these affiliated companies were $317,000, $431,000 and $298,000 for 1993, 1992, and 1991, respectively. Summarized financial information of TV Station WSNS as of and for the year ended December 31 is as follows (dollars in thousands):\nTRANSLATION OF FOREIGN CURRENCIES\nThe financial statements of foreign subsidiaries are translated into U.S. dollars in accordance with FAS 52. Under this statement, balance sheet accounts are translated at the current exchange rate and income statement items are translated at the average exchange rate for the year. Resulting translation adjustments, if any, are made directly to a separate component of stockholders' equity. Foreign currency transaction gains and losses are included in net income when realized.\nREVENUE RECOGNITION\nRevenues from product sales are recognized at the time products are shipped.\nINVENTORIES\nInventories are valued at the lower of cost (first-in, first-out basis) or market. Inventory costs, which include material, labor and factory manufacturing expenses, are as follows (dollars in thousands):\nPLANT AND EQUIPMENT\nPlant and equipment are stated at cost. Replacements and improvements are capitalized, while repairs and maintenance costs are charged to expense as incurred. Depreciation is provided under the straight-line method over the following useful lives:\nBuildings.................. 10 to 40 years Machinery and equipment.... 3 to 15 years Furniture and fixtures..... 5 to 15 years\nThe cost and accumulated depreciation of items sold or retired are removed from the plant and equipment accounts and any resulting profit or loss is recognized currently.\nINTANGIBLE ASSETS\nGoodwill and other intangibles, and the related amortization are as follows (dollars in thousands):\nGoodwill represents the excess of the cost of acquired businesses over the fair market value of their net assets. Goodwill is being amortized on the straight-line method over periods of 15 to 40 years. Other intangibles, including patents and engineering drawings are stated at cost and amortized on the straight-line method over periods of 7 to 17 years.\nCAPITALIZED DEBT COSTS\nThe Company capitalizes all costs related to the issuance of debt. The resulting capitalized debt costs ($2,232,000 and $3,261,000 at December 31, 1993 and 1992, respectively) are classified as \"Other assets\" on the consolidated balance sheet. The capitalized debt costs related to each debt issue are amortized to expense under the interest method over the life of the respective debt issue. During the years 1993, 1992 and 1991 the Company amortized $1,318,000, $93,000 and $38,000, respectively, of capitalized debt costs.\nINCOME TAXES\nEffective January 1, 1992, the Company adopted FAS 109, \"Accounting for Income Taxes\". FAS 109 requires the recognition of deferred tax assets and liabilities for the difference between the financial statement and tax bases of assets and liabilities utilizing current tax rates. Deferred tax assets are recognized, net of any valuation allowance, for deductible temporary differences and operating loss and credit carryforwards. Deferred tax benefit or expense represents the change in the deferred tax asset or liability balances. Previously, the Company used the FAS 96 asset and liability approach which gave no recognition to future events other than the recovery of assets and settlement of liabilities at their carrying amounts.\nRESEARCH AND DEVELOPMENT\nResearch and development costs, expensed as incurred, were $3,345,000, $1,361,000 and $821,000 in 1993, 1992 and 1991, respectively.\nEARNINGS PER COMMON SHARE\nEarnings per share are based on the weighted average number of shares of common stock and common stock equivalents outstanding as follows:\nEffective May 13, 1993, the Company's stockholders approved a one-for- five reverse stock split of the Company's common stock (the \"Reverse Split\"). All share amounts and earnings per share amounts have been restated to reflect the Reverse Split.\nCASH EQUIVALENTS\nThe Company's cash equivalents represent funds invested in a variety of liquid short-term instruments with maturities of less than three months. The carrying amount of these instruments approximates fair value.\nCONSOLIDATED STATEMENT OF CASH FLOWS\nSupplementary information for the consolidated statement of cash flows is as follows (dollars in thousands):\nCash paid during the year for:\nDetails of businesses acquired were as follows:\nRECLASSIFICATIONS\nCertain items in the 1992 and 1991 financial statements have been reclassified to conform with the 1993 presentation.\n(2) ACQUISITIONS:\nOn December 23, 1992, the Company, along with Bain Capital, through their acquisition company, Connector Holding Company (\"Connector\"), acquired 85% of the outstanding stock of Gilbert Engineering Co., Inc. (\"Gilbert\"), a Glendale, Arizona and Amboise, France manufacturer and supplier of specialty connectors to the cable television, local area network, microwave and high-end specialty precision markets. Management of Gilbert retained ownership of the remaining 15% of Gilbert. The Company has the right of first refusal should Gilbert management wish to sell their shares in Gilbert. If the Company refuses the offer, Gilbert management may, after a specified period of time and at its option, exchange its shares of Gilbert for 282,353 shares of the Company's common stock (see Note 5 - Exchangeable Shares). The Company owns 80% of Connector, with Bain Capital owning the other 20%. Bain may at any time after December 22, 1995 require Oak to buy and Oak may at any time after December 22, 1996 require Bain to sell its outstanding shares in Connector at a price determined according to the terms of the stockholders agreement entered into by Oak and Bain at the time of the acquisition. The Company's shares of Connector have been pledged to Bain Capital to secure the financial obligations of the Company under the stockholders agreement.\nThe aggregate purchase price was approximately $106,900,000, including refinancing of existing debt of Gilbert and transaction expenses. The purchase price was financed with (i) a $13,600,000 cash equity investment by the Company, (ii) a $3,400,000 cash investment by Bain Capital, (iii) a $3,000,000 junior subordinated note issued by Connector to the Company, (iv) an aggregate of $10,000,000 of 8% senior subordinated promissory notes issued by Connector to the selling stockholders of Gilbert, and (v) $76,900,000 of senior indebtedness of Gilbert provided by General Electric Capital Corporation. The acquisition was accounted for as a purchase and, accordingly, operating results of this business subsequent to the date of\nacquisition were included in the Company's consolidated statement of operations. Goodwill resulting from this acquisition of approximately $59,737,000 in the United States and $2,773,000 in France is being amortized over 40 and 15 years, respectively. The transaction also resulted in the recording of a deferred tax asset of approximately $16,200,000 which reflects the expected future benefit from the utilization of the Company's net operating loss carryforwards to offset Gilbert's taxable income (see Note 8).\nThe following unaudited pro forma summary combines the consolidated results of operations of the Company and Gilbert as if the acquisition had occurred at the beginning of 1992, after giving effect to certain adjustments, including amortization of goodwill, increased interest expense on the acquisition debt, related income tax effects, and minority interest. The pro forma summary does not necessarily reflect the results of operations as they would have been if the Company and Gilbert had constituted a single entity during such period.\n(Dollars in thousands, except per share amounts.)\nOn September 10, 1992, the Company acquired all of the outstanding common stock of H.E.S. International, Inc. (\"H.E.S.\"), a manufacturer of hermetically sealed packages used by manufacturers of quartz crystals, for approximately $2,800,000 in net cash and a $257,000 note. The acquisition was accounted for as a purchase and, accordingly, operating results of this business subsequent to the date of acquisition were included in the Company's consolidated statement of operations. Goodwill resulting from this acquisition is being amortized over 25 years.\nOn January 12, 1993, the Company acquired the assets of the hybrid oscillator business of Spectrum Technology Inc., a subsidiary of Datum Inc., for approximately $1,594,000 in cash, including consolidation costs. The acquisition was accounted for as a purchase and, accordingly, operating results of the business subsequent to the date of acquisition were included in the Company's consolidated statement of operations. Goodwill resulting from this acquisition is being amortized over 15 years.\nOn January 4, 1991, the Company acquired the assets of Standard Grigsby, Inc. (\"SGI\"), a manufacturer of switches for industrial and commercial applications, including the stock of SGI de Mexico, S.A. de C.V. for approximately $7,529,000 in cash and the assumption of certain liabilities. The acquisition was accounted for as a purchase and, accordingly, operating results of this business subsequent to the date of acquisition were included in the Company's consolidated statement of operations. Goodwill resulting from this acquisition is being amortized over 25 years.\n(3) DISCONTINUED OPERATIONS:\nOn August 3, 1990, the Company sold the assets of its wholly-owned Oak Communications Inc. subsidiary, including the stock of the Taiwan manufacturing subsidiary, Oak Industries Taiwan Ltd., for $7,065,000 (subject to post-closing adjustment) including a note for $2,000,000 and the assumption of certain liabilities. During 1992, the Company and the buyer reached an agreement on the post-closing adjustment and determined the final sale price to be $6,565,000 with the buyer paying the Company an additional $1,500,000 through March 30, 1994. The agreement was renegotiated in December 1992 to settle certain outstanding litigation. This agreement required the buyer to pay a total of $1,385,000 to the Company as settlement of the purchase price dispute, for use of the Company's trademark and to reimburse certain expenses. During 1992, $1,200,000 was received related to these matters. Income from discontinued operations in 1992 includes $800,000 net of related expenses and $400,000 is included in other income. During 1993, the final $185,000 was received related to these matters and is included in other income.\nDuring 1991, a gain on sale of discontinued operations of $305,000 was recorded as a result of the resolution of various commitments and other matters related to the Company's 1984 disposal of STV and related operations.\n(4) INDEBTEDNESS:\nLong-term debt at December 31 is summarized as follows (dollars in thousands):\nIn connection with its acquisition by the Company, Gilbert entered into a credit agreement with General Electric Capital Corporation dated as of December 23, 1992 and amended on April 1, 1993. The Gilbert borrowings under this agreement are collateralized by the assets, excluding the common stock of its foreign subsidiary, and the common stock of Gilbert and are non-recourse to the Company. Gilbert must meet certain financial covenants related to fixed charge coverage, interest coverage and earnings targets. The credit agreement will not allow Gilbert to pay cash dividends to the Company. Gilbert is required to make mandatory debt payments equal to 90% of its annual cash flow from operations less capital expenditures and other expenditures as defined in the credit agreement. As a result of the agreement to make these mandatory debt payments, in January 1994, Gilbert will borrow $10,005,000 on the revolving credit facility and use $7,123,000 to pay off Term Loan B in its entirety and $2,882,000 to pay down Term Loan A. Term Loan A bears interest at LIBOR plus 3.0% or prime plus 1.5% and is repayable from 1995 through 1997. The revolving credit facility, which expires and is repayable on December 23, 1997 and bears interest at LIBOR plus 3.0% or prime plus 1.5%, provides for borrowings up to $21,000,000 at December 31, 1993 decreasing at each quarter end through 1994 to $10,000,000 at December 31, 1994. The book value of these borrowings approximates fair value.\nIn connection with the acquisition of Gilbert, Connector issued $10,000,000 of 8.0% senior subordinated notes to the sellers of Gilbert. These notes are recorded net of original issue discount ($3,750,000 at December 31, 1993) based on an interest rate of 18.5%. These notes are subordinated to the Gilbert borrowings described above and mature on December 23, 1999. The net book value of these borrowings approximates fair value.\nIn December 1987, the Nordco Inc. (\"Nordco\") subsidiary entered into a $13,000,000 financing agreement. Borrowings under this agreement are secured by Nordco common stock pledged by the Company. Warrants to purchase 150,000 shares of the Company's common stock were issued in consideration for execution of the financing agreement (see Note 5). Under the term loan portion of the agreement, Nordco borrowed $7,000,000 at an interest rate of 12.05%. The principal amount of the debt of $5,600,000 at December 31, 1993 is repayable in equal semi-annual installments from 1994 through 1997. Based on the borrowing rates currently available, the fair value of this debt is approximately $6,200,000 at December 31, 1993.\nIn September 1993, the Company entered into a new revolving credit facility with a group of banks, increasing available borrowings from $15,000,000 to $30,000,000. The new facility, which is available through December 1995, is at various interest rates at the Company's option based on the prime rate or LIBOR. Borrowings under the facility are secured by the Company's pledge of the outstanding capital stock of certain of the Company's subsidiaries. At December 31, 1993, there were no borrowings outstanding under this facility.\nScheduled maturities of long-term debt at December 31, 1993 are as follows (dollars in thousands):\n(5) CAPITAL STOCK:\nCOMMON STOCK\nAt December 31, 1990, Invesco MIM Management Limited (\"MIM\"), an international fund management company based in the United Kingdom, and various funds that MIM advises held approximately 3,660,000 shares of the Company's common stock and warrants for the purchase of 600,000 common shares. In 1992, MIM and its clients sold approximately 520,000 shares of the Company's common stock. In November 1992, a MIM client was liquidated and an aggregate of 2,275,540 shares and warrants for the purchase of 420,000 shares were transferred to MIM and a successor fund, Second Consolidated Trust plc (\"Second Consolidated\"). At December 31, 1992, MIM and its clients held\napproximately 1,696,000 shares and warrants for the purchase of 333,000 shares while Second Consolidated held approximately 1,445,000 shares and warrants for the purchase of 267,000 shares. In January 1993, a client of MIM for which one of the Company's directors is the managing director transferred its management contract from MIM to another fund management company. As a result, the holdings managed by MIM decreased by 430,000 common shares and warrants for the purchase of 60,000 shares. In December 1993, MIM and its clients and Second Consolidated sold approximately 1,103,000 shares and 693,000 shares, respectively, including those obtained from the exercise of warrants, in a secondary offering pursuant to registration rights under a 1989 agreement between the Company and MIM. In addition, MIM and its clients sold approximately 345,000 shares during 1993. At December 31, 1993, MIM and its clients held approximately 91,000 shares and Second Consolidated held approximately 1,019,000 shares.\nIn connection with the secondary offering in December 1993, the Company lent $1,305,000 to its corporate officers and certain key divisional managers for the purchase of 90,000 shares of the Company's stock from the selling shareholders. The principal amount of such loans is repayable in full in February 1997, with interest on such loans accruing at prime plus 0.5% per annum, payable annually in February of each year beginning in 1995 until maturity. These loans, which are included in stockholders' equity on the balance sheet, are secured by the common stock purchased and certain other amounts owed to such individuals by the Company.\nEffective May 13, 1993, the Company's stockholders approved a one-for- five reverse stock split of the Company's common stock (the \"Reverse Split\"). All share amounts and earnings per share amounts have been restated to reflect the Reverse Split.\nOn June 3, 1992, the Company's shareholders approved an amendment to the Restated Certificate of Incorporation, as amended, to change the par value of the Company's common stock from $1.00 per share to $.01 per share resulting in a reduction of \"Common stock\" and an increase of \"Additional paid-in capital\" of $16,359,000 on the consolidated balance sheet.\nPREFERRED STOCK\nAt December 31, 1993 and 1992, there were 4,834,237 shares of authorized preferred stock without par value available for issuance. The Company has no issues of preferred stock outstanding.\nWARRANTS\nThe Company, in conjunction with the 1987 Nordco financing (see Note 4), issued Series E warrants to purchase 150,000 shares of common stock to the lender in consideration for execution of the financing agreement.\nThe Company issued Series F warrants in conjunction with the sale of common stock to MIM (see Common Stock). In December 1993, warrants for the purchase of 540,000 shares of common stock were exercised.\nUnder the terms of the warrant agreements, the exercise price of the warrants and the number of shares purchasable with each warrant are adjusted whenever common stock is issued at a share price below the current market value. At December 31, 1993, the following warrants were outstanding:\nEXCHANGEABLE SHARES\nIn connection with the Company's 1992 acquisition of Gilbert, the Company issued options under the 1992 Non-qualified Stock Option Plan (see Note 6) pursuant to which Gilbert management may, beginning in 1995, exchange their shares in Gilbert for 282,353 shares of the Company's common stock.\n(6) STOCK OPTIONS AND AWARDS:\n1982 INCENTIVE STOCK OPTION PLAN\nThe 1982 Incentive Stock Option Plan provides for the issuance of up to 435,400 shares of common stock to key full-time salaried employees at the market value of the stock on the date of the grant. The options vest over periods of three to five years from the date the options are granted. This plan expired on May 16, 1992 and no new options may be granted under this plan.\n1986 STOCK OPTION AND RESTRICTED STOCK PLAN\nThe 1986 Stock Option and Restricted Stock Plan provides for the issuance of up to 600,000 shares of common stock to executives and key employees of the Company at not less than 100% of the market value of such shares on the date of the grant. The options vest over periods of three to four years from the date the options are granted.\n1988 STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS\nThe 1988 Stock Option Plan for Non-Employee Directors of Oak Industries Inc. provides for the issuance of up to 100,000 shares of common stock to non- employee directors at the market value of the stock on the date of the grant. The options vest over a four-year period from the date the options are granted.\n1992 STOCK OPTION AND RESTRICTED STOCK PLAN\nThe 1992 Stock Option and Restricted Stock Plan provides for the issuance of up to 1,000,000 shares of common stock to non-employee directors, executives, and key employees of the Company at the market value of such shares on the date of the grant. The options granted under this plan to date vest over a three year period from the date the options are granted.\n1992 NON-QUALIFIED STOCK OPTION PLAN\nThe 1992 Non-Qualified Stock Option Plan provides for the issuance of up to 500,000 shares of common stock to employees, consultants and advisors of the Company but not to officers and directors. Options become exercisable and terminate as determined by the Compensation Committee and as detailed in the Stock Option Agreements for each grant. The options granted under this plan to date have been granted at the market value of the common stock on the date of grant. In addition to the shares described under \"Exchangeable Shares\" in Note 5 above, 120,000 of such options have been granted and vest over a three year period.\nSTOCK OPTION SUMMARY\nThere were 2,280,517 shares of common stock reserved for issuance in connection with the Company's stock option and award plans at December 31, 1993. Options issued under all option plans, if not exercised, expire ten years from the date of grant.\n(7) POSTRETIREMENT BENEFITS:\nThe Company has a number of noncontributory pension plans covering substantially all of its employees. Benefits under the plans are generally based on years of service and employees' compensation during the last years of employment or a specified dollar benefit. It is the Company's policy to fund at least the minimum amount required by ERISA for each plan.\n\tNet periodic pension cost for all defined benefit plans was comprised of the following (dollars in thousands):\nThe following table sets forth the funded status of all defined benefit plans at December 31, 1993 and 1992 (dollars in thousands):\nIn 1993 and 1991, the Company incurred curtailments in several plans as a result of reduced employment levels and plan design changes. The impact of these curtailments were gains of $359,000 in 1993 and $678,000 in 1991. The 1991 curtailment gain was included in the reorganizations and facility consolidation charges recorded during 1991.\nThe projected benefit obligation was determined using an assumed discount rate of 7.5% for 1993 and 8.5% for 1992 and 1991 and an assumed rate of compensation increase of 5.0% for 1993 and 6.0% for 1992 and 1991. The expected long-term rate of return on plan assets was 9.0% for all three years.\nThe assets of the plans at December 31, 1993 and 1992 consist principally of common stocks, bonds, cash equivalents and real estate.\nThe Company has defined contribution plans covering substantially all full-time employees who meet certain eligibility requirements. Contributions by the Company and the employees are determined according to salary-based formulas. Pension expense recognized by the Company related to these plans was $1,014,000, $382,000 and $280,000 in 1993, 1992 and 1991, respectively. The Company allows certain employees aged 55 or older and with 10 or more years of service to retire and continue their medical and\/or dental coverage until age 65. In most cases, retirees are responsible for paying premiums to the Company to continue coverage.\nIn the first quarter of 1993, the Company adopted FAS 106 \"Employers' Accounting for Postretirement Benefits Other than Pensions.\" This statement changes the past practice of accounting for the cost of postretirement benefits from a pay-as-you-go (cash) basis to an accrual basis. Under the new statement, the expected cost of providing those benefits to an employee, the employee's beneficiaries, and covered dependents will be recognized in the years that the employee renders the necessary service. The accumulated postretirement benefit obligation as of January 1, 1993 was $1,096,000. In determining the present value of the accumulated postretirement benefit obligation, none of which has been funded, the Company used a 15 percent health care cost trend rate for 1993, decreasing 1 percent per year until 1998, then decreasing 1\/2 percent per year until leveling off at 5 percent. A 1 percent increase in the trend rate would increase the accumulated postretirement obligation by approximately 12 percent. The weighted average discount rate used was 7.5 percent. The Company has elected to amortize this transition obligation over 20 years in accordance with the provisions of FAS 106. The effect on the financial statements of the adoption of this statement is not material in 1993 and is not expected to be material in the future.\nThe Financial Accounting Standards Board has issued FAS 112 \"Employers' Accounting for Postemployment Benefits\". This statement changes the past practice of accounting for the cost of certain postemployment benefits from a pay-as-you-go (cash) basis to an accrual basis. Management does not expect the effect of the adoption of this statement in 1994 to be material to the Company's financial statements.\n(8) INCOME TAXES\nPretax income from continuing operations for the years ended December 31 consists of the following sources (dollars in thousands):\nThe income tax benefit for the years ended December 31 consists of the following (dollars in thousands):\nThe Company adopted FAS 109 on a prospective basis. The adjustment to the January 1, 1992 balance sheet to adopt FAS 109 amounted to $3,500,000. This amount is reflected in 1992 net income as the cumulative effect of a change in accounting principle. It primarily represents the tax benefits of net operating loss carryforwards that could not be recorded under FAS 96.\nDeferred income tax assets (liabilities) at December 31 are comprised of the following (dollars in thousands):\nDuring 1993 and 1992, the net deferred income tax asset increased by $6,465,000 and $2,500,000, respectively, reflecting the increase in the expected future benefit from the utilization of the Company's net operating loss carryforwards due to management's improved expectations of future income and an increase in the federal income tax rate. In addition, during 1992, the net deferred income tax asset increased by $16,885,000 which reflected the expected future tax benefits from the utilization of the Company's net operating loss carryforwards to offset taxable income from the Gilbert and H.E.S. acquisitions. At December 31, 1993 and 1992, deferred income tax liabilities of $650,000 and $935,000, respectively, are classified as \"Other liabilities\".\nThe income tax benefit differs from the amount of income tax determined by applying the applicable U.S. statutory federal income tax rate to income from continuing operations before income taxes and minority interest as a result of the following differences (dollars in thousands):\nAt December 31, 1993, the Company has net operating loss carryforwards of approximately $164,000,000 for tax reporting purposes, which will, if unused, expire from 1999 to 2006. The Company has an alternative minimum tax credit carryforward of approximately $513,000 as of December 31, 1993, which may be carried forward indefinitely. The Company has investment tax credit carryforwards of approximately $3,298,000 at December 31, 1993 which, if unused, will expire from 1996 to 2001. The Company also has a research and development tax credit carryforward of approximately $809,000 at December 31, 1993 which will, if unused, expire from 1998 to 2000. The use of the carryforwards is limited to future taxable earnings of the Company. Under Federal tax law, certain potential changes in ownership of the Company, which may not be within the Company's control, may operate to restrict future utilization of these carryforwards.\n(9) SEGMENT INFORMATION:\nThe Company's industry and geographic data for continuing operations for the years ended December 31 are as follows (dollars in thousands):\n(10) ACCRUED LIABILITIES:\nAccrued liabilities at December 31 are summarized as follows (dollars in thousands):\n(11) COMMITMENTS AND CONTINGENCIES:\nRent expense for facilities and office equipment was $3,249,000, $1,721,000 and $1,482,000 in 1993, 1992, and 1991, respectively. At December 31, 1993, the Company was committed under non-cancelable operating leases for minimum annual rentals for the next five years as follows: 1994 - $3,396,000; 1995 - $3,164,000; 1996 - $2,870,000; 1997 - $2,017,000; 1998 - $1,327,000; thereafter - $2,272,000.\nVarious pending or threatened legal proceedings by or against the Company or one or more of its subsidiaries involve alleged breaches of contract, torts and miscellaneous other causes of action arising in the course of business. Some of these proceedings involve claims for punitive damages in addition to other special relief. The Company's management, based upon advice of legal counsel representing the Company with respect to each of these proceedings, does not believe any of these proceedings will have a significant impact on the Company's consolidated financial position.\n(12) OTHER INCOME (EXPENSE):\nOther income (expense) for the years ended December 31 are summarized as follows (dollars in thousands):\n(13) Quarterly Results of Operations (Unaudited):\nThe following is a summary of the unaudited quarterly results of operations for 1993 and 1992 (dollars in thousands, except per share data):\n(13) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) (CONTINUED):\nCONTINUING OPERATIONS\nFOURTH QUARTER - 1993 The Company recognized an income tax benefit of $6,000,000 resulting from an adjustment to its deferred income tax valuation reserve in accordance with FAS 109. This benefit caused minority interest in net income of subsidiaries to increase $1,600,000.\nTHIRD QUARTER - 1993 The Company recognized a gain of $3,878,000 resulting from an Internal Revenue Service refund relating to the settlement of a tax dispute.\nThe Company recognized a restructuring charge of $2,900,000 to cover the costs associated with reorganizing its Mexican manufacturing operations, consolidating certain U.S. operations, and certain other overhead reductions.\nFOURTH QUARTER - 1992 The Company recognized a gain of $2,700,000 related to the sale of its investment in ComStream Corporation, in which the Company held a minority interest.\nThe Company recognized an income tax benefit of $2,500,000 resulting from an adjustment to its deferred income tax valuation reserve in accordance with FAS 109.\nThe Company recognized a charge of $1,500,000 related to certain reorganizations and facilities consolidations at certain divisions.\nDISCONTINUED OPERATIONS\nTHIRD QUARTER - 1992 The Company recognized income of $550,000 related to an additional payment received, net of expenses, resulting from the post-closing adjustment to the sales price of its discontinued Oak Communications business.\nCHANGE IN ACCOUNTING PRINCIPLE\nFIRST QUARTER - 1992 The Company recognized income of $3,500,000 related to the cumulative effect of adopting FAS 109.\nITEM 9.","section_9":"ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE\nNone.\nPART III\nITEM 10.","section_9A":"","section_9B":"","section_10":"ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT\nFor information with respect to the executive officers of the registrant, see \"Executive Officers\" at the end of Part I of this report. For information with respect to the Directors of the registrant, see \"Elections of Directors\" in the Proxy Statement to be filed no later than April 3, 1994 for the Annual Meeting of Stockholders to be held on May 3, 1994 which is incorporated herein by reference.\nITEM 11.","section_11":"ITEM 11. EXECUTIVE COMPENSATION\nThe information set forth under the caption \"Executive Officers, Compensation and Other Information\" in the Proxy Statement to be filed no later than April 3, 1994 for the Annual Meeting of Stockholders to be held on May 3, 1994 is incorporated herein by reference.\nITEM 12.","section_12":"ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT\nThe information set forth under the caption \"Voting Securities and Stock Ownership\" in the Proxy Statement to be filed no later than April 3, 1994 for the Annual Meeting of Stockholders to be held on May 3, 1994 is incorporated herein by reference.\nITEM 13.","section_13":"ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS\nThe information set forth under the caption \"Certain Relationships and Transactions\" in the Proxy Statement to be filed no later than April 3, 1994 for the Annual Meeting of Stockholders to be held on May 3, 1994 is incorporated herein by reference.\nPART IV\nITEM 14.","section_14":"ITEM 14. EXHIBITS, FINANCIAL SCHEDULES AND REPORTS ON FORM 8-K\n(A) LIST OF DOCUMENTS FILED AS PART OF THE REPORT:\n1. Financial Statements\nConsolidated balance sheet at December 31, 1993 and 1992\nConsolidated statement of operations for the years ended December 31, 1993, 1992 and 1991\nConsolidated statement of stockholders' equity for the years ended December 31, 1993, 1992 and 1991\nConsolidated statement of cash flows for the years ended December 31, 1993, 1992 and 1991\nNotes to consolidated financial statements\n2. Schedules\nII - Amounts receivable from related parties and underwriters, promoters and employees other than related parties\nVIII - Valuation and qualifying accounts\nX - Supplementary statement of operations information\nAll other schedules have been omitted since the information is either not applicable, not required or is included in the financial statements or notes thereto.\n3. Exhibit Index\n2(a) Stockholders Agreement dated as of December 22, 1992 by and among Connector Holding Company, Oak Industries Inc., Tyler Capital Fund, L.P., Tyler Massachusetts, L.P., Tyler International, L.P.-II, BCIP Associates, BCIP Trust Associates, and, solely as to Sections 1.5 and 11 thereof, Bain Venture Capital, a California limited partnership filed as Exhibit 2.1 to the Company's Amendment No. 2 to Form S-3 dated December 16, 1993 is incorporated herein by this reference.\n(3)(a) Restated Certificate of Incorporation of Oak Industries Inc. dated October 28, 1980; Certificate of Amendment of Restated Certificate of Incorporation dated May 1, 1981; Certificate of Amendment of Restated Certificate of Incorporation as Amended dated August 14, 1985; Certificate of Amendment of Restated Certificate of Incorporation as Amended dated September 30, 1986; Certificate of Amendment of Certificate of Incorporation as Amended dated July 15, 1987; Certificate of Amendment of Certificate of Incorporation as Amended dated June 3, 1992; and Certificate of Amendment of Restated Certificate of Incorporation, as Amended dated May 7, 1993 all filed as Exhibit 3.1 to the Company's Amendment No. 1 to Form S-3 dated November 24, 1993 are incorporated herein by this reference.\n(3)(b) Bylaws of Oak Industries Inc. as amended through February 3, 1993, filed herewith.\n(4)(a) $3,000,000 Junior Subordinated Note due 2000 issued by Connector Holding Company to the Company, filed as Exhibit (4)-2 to the Company's Form 8-K dated January 6, 1993 is incorporated herein by this reference.\n(4)(b) Form of Senior Subordinated Note issued by Connector Holding Company, filed as Exhibit (4)-3 to the Company's Form 8-K dated January 6, 1993 is incorporated herein by this reference.\n(4)(c) Series E Warrant Agreement dated December 1, 1987, filed as Exhibit 4(k) to the Company's 1988 Annual Report on Form 10-K dated March 31, 1989, is incorporated herein by this reference.\n(10)(a) 1982 Incentive Stock Option Plan filed as Exhibit (A) to the Company's 1982 Proxy Statement is incorporated herein by this reference.\n(10)(b) 1986 Stock Option and Restricted Stock Plan for Executive and Key Employees of Oak Industries Inc. filed as Annex III to the Proxy Statement dated February 14, 1986 for a Special Meeting of Stockholders is incorporated herein by this reference.\n(10)(c) 1988 Stock Option Plan for Non-Employee Directors of Oak Industries Inc. filed as Exhibit A to the Company's Proxy Statement in connection with 1988 Annual Meeting of Stockholders filed with the Commission on April 6, 1988 is incorporated herein by this reference.\n(10)(d) 1992 Stock Option and Restricted Stock Plan filed as Exhibit A to the Company's Proxy Statement in connection with the 1992 Annual Meeting of Stockholders is incorporated herein by this reference.\n(10)(e) Oak Industries Inc. Non-Qualified Stock Option Plan, filed as Exhibit 10(e) to the Company's 1992 Annual Report on Form 10-K dated March 15, 1993 is incorporated herein by this reference.\n(10)(f) Agreement between the Company and MIM Ltd. dated January 25, 1989, filed as Exhibit 10(g) to the Company's 1989 Annual Report on Form 10-K dated March 28, 1990, Commission File Number 1-4474 is incorporated herein by this reference.\n(10)(g) Amended and Restated Revolving Credit Agreement between the Company and The First National Bank of Boston dated as of September 1, 1993, filed herewith.\n(10)(h) First Amendment to the Amended and Restated Revolving Credit Agreement dated as of November 1, 1993 between the Company and The First National Bank of Boston, filed herewith.\n(10)(i) Credit Agreement dated as of December 23, 1992 among General Electric Capital Corporation, Heller Financial, Inc., Gilbert Engineering Co., Inc. and Connector Holding Company, filed as Exhibit (4)-1 to the Company's Form 8-K dated January 6, 1993 is incorporated herein by this reference.\n(10)(j) Amendment No. 1 dated as of December 23, 1992 to Credit Agreement dated as of December 23, 1992 among General Electric Capital Corporation, Heller Financial, Inc., Gilbert Engineering Co., Inc. and Connector Holding Company, filed as Exhibit 10(j) to the Company's 1992 Annual Report on Form 10-K dated March 15, 1993 is incorporated herein by this reference.\n(10)(k) Amendment No. 2 dated as of February 24, 1993 to Credit Agreement dated as of December 23, 1992 among General Electric Capital Corporation, Heller Financial, Inc., Gilbert Engineering Co., Inc. and Connector Holding Company, filed as Exhibit 10(k) to the Company's 1992 Annual Report on Form 10-K dated March 15, 1993 is incorporated herein by this reference.\n(10)(l) Amendment No. 3 dated as of April 1, 1993 to Credit Agreement dated as of December 23, 1993 among General Electric Capital Corporation, Heller Financial, Inc., Gilbert Engineering Co., Inc. and Connector Holding Company filed as Exhibit 10.1 to the Company's Amendment No. 2 to Form S-3 dated December 16, 1993 is incorporated herein by this reference.\n(11) Statement regarding computation of per share earnings, filed herewith.\n(13) 1993 Annual Report to be provided no later than March 31, 1994 for the information of the Commission and not deemed \"filed\" as a part of the filing.\n(21) Subsidiaries of the Company, filed herewith.\n(99)(a) Financial Statements and Financial Statement Schedules of Video 44 for the years ended December 31, 1992, 1991 and 1990, filed as Exhibit (28)(a) to the Company's 1992 Annual Report on Form 10-K dated March 15, 1993, is incorporated herein by this reference.\n(B) REPORTS ON FORM 8-K:\nThe Company filed a report on Form 8-K dated November 5, 1993 relating to (i) its filing of a Registration Statement on Form S-3 with the Securities and Exchange Commission and (ii) certain other financial information.\nCONSENT OF INDEPENDENT ACCOUNTANTS TO INCORPORATION BY REFERENCE INTO FORM S-8 FILING\nWe hereby consent to the incorporation by reference in the Prospectus constituting part of the Registration Statement on Form S-8 (File Nos. 33-14708, 2-71969, 33-32104, 2-83639, 33-53012, and 33-58878) of Oak Industries Inc. of our report dated January 21, 1994 appearing previously in this Form 10-K.\nPRICE WATERHOUSE\nBoston, Massachusetts February 28, 1994\nSIGNATURES\nPURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934, THE COMPANY HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.\nOAK INDUSTRIES INC.\nDated: February 28, 1994 By WILLIAM S. ANTLE III WILLIAM S. ANTLE III President and Chief Executive Officer\nPURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE COMPANY AND IN THE CAPACITIES AND ON THE DATES INDICATED.\nOAK INDUSTRIES INC. SCHEDULE II\nAMOUNTS RECEIVABLE FROM RELATED PARTIES AND UNDERWRITERS, PROMOTERS AND EMPLOYEES OTHER THAN RELATED PARTIES For the Years Ended December 31, 1993, 1992, and 1991 (Dollars in thousands)\nOAK INDUSTRIES INC. SCHEDULE VIII\nVALUATION AND QUALIFYING ACCOUNTS For the Years Ended December 31, 1993, 1992 and 1991 (Dollars in thousands)\nALLOWANCE FOR LOSSES IN COLLECTION\nOAK INDUSTRIES INC. SCHEDULE X\nSUPPLEMENTARY STATEMENT OF OPERATIONS INFORMATION For the Years Ended December 31, 1993, 1992 and 1991 (Dollars in thousands)\n- -------------------\nNote 1: Amounts for other taxes, royalties and advertising have been omitted since each is less than 1% of net sales.","section_15":""}
{"filename":"884219_1993.txt","cik":"884219","year":"1993","section_1":"ITEM 1. BUSINESS\nThe Dial Corp (\"Dial\" or \"Company\"), conducts a consumer products and services business focused on North American markets producing annual revenues in excess of $3 billion.\nDial's CONSUMER PRODUCTS segment operates through four divisions, as follows:\nPERSONAL CARE, which manufactures and markets DIAL, TONE, SPIRIT, PURE & NATURAL and LIQUID DIAL soaps, and other soap and personal care products;\nLAUNDRY, which manufactures and markets PUREX and PUREX ULTRA dry detergent, PUREX heavy duty liquid detergent, TREND, PUREX TOSS 'N SOFT and other laundry products;\nHOUSEHOLD, which manufactures and markets RENUZIT air fresheners, BRILLO scouring pads, SNO BOL and SNO DROPS toilet bowl cleaners, PARSONS ammonia, BRUCE floor care products and other household items; and\nFOOD, which processes and markets ARMOUR STAR chili, beef stew, corned beef hash and Vienna sausage, TREET luncheon meat and other shelf- stable canned foods, LUNCH BUCKET microwaveable meals and other food products.\nDial's SERVICES business operates in three principal business segments through subsidiary corporations of Dial, as follows:\nAIRLINE CATERING AND OTHER FOOD SERVICES, which engages in airline catering operations, providing in-flight meals to more than 60 domestic and international airlines, and operates foodservice facilities ranging from cafeterias in manufacturing plants to corporate executive dining rooms to the food and beverage facilities of the America West Arena in Phoenix, Arizona;\nCONVENTION SERVICES, which provides exhibit design and construction and exhibition preparation, installation, electrical, transportation and management services to major trade shows, manufacturers, museums and exhibit halls and other customers; and\nTRAVEL AND LEISURE AND PAYMENT SERVICES, which engages in airplane fueling and ground handling, cruise line and hotel\/resort operations, recreation and travel services, Canadian intercity bus transportation, and operation of duty-free shops on cruise ships and at international airports, and offers money orders, official checks and negotiable instrument clearing services through a national network of approximately 43,000 retail agents, mid-size bank customers and over 4,500 credit unions in the United States and Puerto Rico.\nDial subsidiaries operate service or production facilities and maintain sales and service offices in the United States, Canada and Mexico. The Company also conducts business in other foreign countries.\nDial had approximately 215 employees at its corporate center at December 31, 1993, providing management, financial and accounting, tax, administrative, legal and other services to its operating units and handling residual matters pertaining to businesses previously discontinued or sold by the Company. Dial is managed by a Board of Directors comprised of 10 nonemployee directors and one employee director and has an executive management team consisting of six Dial officers and seven principal executives of significant operating divisions or companies.\nDial's corporate headquarters and certain Consumer Products division and subsidiary activities are located in Phoenix, Arizona, in a modern high-rise building. A portion of the headquarters building is rented to unaffiliated tenants.\nA description of each of the Dial business segments and recent developments in each follows.\nCONSUMER PRODUCTS SEGMENT CONSUMER PRODUCTS is a leading producer and marketer of personal care, laundry, household and shelf-stable food products. This segment is the outgrowth of the Dial personal care and shelf-stable canned meats unit of Armour and Company, expanded in recent years to include PUREX household and laundry products, BORAXO household and industrial specialty products, BRECK hair care products and RENUZIT air fresheners. The segment manufactures and markets a variety of products, including bar and liquid soaps, liquid and powdered detergents, antiperspirants, hairsprays, shampoos, hair conditioners, bleaches, fabric softeners, soap pads, air fresheners, floor care products, household cleaners, fabric sizing, laundry starch products, borax and industrial specialties products, microwaveable food products and canned meats.\nPERSONAL CARE Personal Care products are marketed under a number of brand names, including DIAL, MOUNTAIN FRESH DIAL, TONE, PURE & NATURAL, SPIRIT and FELS NAPTHA soaps, LIQUID DIAL antibacterial soap, BORAXO powdered hand soap and DIAL antiperspirant. Personal Care also markets the BRECK line of hair care products, including hair sprays, shampoos and hair conditioners. DIAL bar soap is the nation's leading deodorant soap and LIQUID DIAL soap is the nation's leading antibacterial liquid soap. SPIRIT bar soap, a three-in-one combination bar soap that cleans, moisturizes and provides deodorant protection, is now available nationally. In late 1993, DIAL PLUS soap, an antibacterial skin care bar soap with moisturizing ingredients was introduced nationally. Personal Care also markets hotel amenity products, including personal-size bar soaps under the DIAL, TONE and PURE & NATURAL labels, and industrial specialties products, including hand soaps and soap dispensers, sold under the BORAXO and LURON trademarks, hand and body surface cleaners for the medical market and hand cleaners for the automotive market.\nLAUNDRY Laundry products include brands such as PUREX liquid, powdered and ultra laundry detergents, TREND and ULTRA TREND dry detergents, DUTCH detergents, PUREX TOSS 'N SOFT and STA PUF fabric softeners, MAGIC sizing and starch, BORATEEM dry bleach, STA-FLO starch, and 20 MULE TEAM borax. In 1993, Laundry introduced several new products and line extensions, including PUREX liquid detergent with bleach, RINSE 'N SOFT fabric softener, ULTRA TREND detergent and CLASSIC PUREX detergent and TREND detergent with bleach.\nHOUSEHOLD Household products include brands such as RENUZIT air fresheners, BRILLO soap pads, SNO BOL and SNO DROPS toilet bowl cleaners, CAMEO powdered cleanser, PARSONS and BO-PEEP ammonia and BRUCE floor care products. The RENUZIT air freshener brand was acquired in the second quarter of 1993. RENUZIT, a leading brand in the air freshener category, currently offers products for the continuous-action and aerosol segments of the air freshener market, including RENUZIT Adjustable, RENUZIT Aerosol and ROOMMATE products and has completed its rollout of RENUZIT LONGLAST ELECTRIC product, the brand's entry into the electric subsegment of the air freshener category. In 1993, Household introduced SNO BOL thick toilet bowl cleaner and a larger DOBIE scouring pad.\nFOOD In the shelf-stable food category, CONSUMER PRODUCTS processes and markets ARMOUR STAR and TREET canned meats, LUNCH BUCKET microwaveable meals, APPIAN WAY pizza mix, SUNRISE syrup and CREAM corn starch. ARMOUR STAR products maintain a leading market position in the canned meats category. ARMOUR STAR Vienna sausage, potted meat and dried beef lead their respective segments on a national basis. ARMOUR STAR canned meats now account for nearly one-fifth of all canned meat sales in the United States. During 1993, CONSUMER PRODUCTS introduced ARMOUR hot dog chili sauce, ARMOUR meatless sloppy joe sauce and ARMOUR western-style chili, and began test marketing VILLA LORENZO PASTA FOR ONE microwaveable meals, a seven item line of single-serving dry pastas with sauce pouches.\nCUSTOMERS CONSUMER PRODUCTS sells to over 15,000 customers, primarily in the United States, including supermarkets, drug stores, wholesalers, mass merchandisers, membership club stores and other outlets. These customers are served by a national sales organization of approximately 370 employees organized into 6 individual sales regions plus specialized sales operations which sell to large mass merchandisers, membership club stores, chain drug stores, vending and military customers.\nRAW MATERIALS Ample sources of raw materials are available with respect to all major products of the CONSUMER PRODUCTS segment.\nCOMPETITION CONSUMER PRODUCTS competes primarily on the basis of price, brand advertising, customer service, product performance, and product identity and quality. Its operations must compete with numerous well-established local, regional and national companies, some of which are very large and act aggressively in obtaining and defending their products' market shares and brands. Principal competitors, in one or more categories, are Procter & Gamble, Colgate-Palmolive, Lever Brothers Co., American Home Food Products, G. A. Hormel & Co., The Clorox Company, Church & Dwight and S.C. Johnson & Son, Inc.\nSERVICES SEGMENTS SERVICES is built around several company groups which are leading competitors in their businesses, including companies engaged in airline catering (Dobbs International), contract foodservices (Restaura), convention services (GES Exposition Services and Exhibitgroup), payment services (Travelers Express), airplane fueling and ground handling (Aircraft Service International), Canadian intercity bus service (Greyhound Lines of Canada), family cruises (Premier Cruise Lines), airport and cruise ship duty-free businesses (Greyhound Leisure Services), and travel services (Jetsave and Crystal Holidays). SERVICES provides specialized services to both the business and consumer markets, increasingly in the airline travel and leisure services areas. Its money order business, travel and tour operations, restaurants, fast food outlets, gift shops, national park hotel facilities, cruise ships, and duty-free shops located at airports and on cruise ships are directed primarily to the consumer market. Primarily for the business market, in major cities throughout the United States, SERVICES provides airline in-flight catering operations as well as contract foodservices in the form of cafeteria-style operations, private dining rooms, group catering and machine-vended services; performs services as decorating contractor at various convention and trade show sites; designs, fabricates, ships and warehouses displays and exhibits for trade shows, conventions and other exhibitions; and engages in aircraft ground-handling services such as aircraft fueling, cleaning and baggage handling.\nAIRLINE CATERING AND OTHER FOOD SERVICES SERVICES conducts airline catering operations under the \"Dobbs\" name through the Dobbs International group of companies. Dobbs International, which has been conducting airline catering operations since 1941, will become the nation's largest domestic in-flight caterer as a result of its agreement made in November 1993 to acquire from United Airlines 15 in-flight catering kitchens at 12 domestic airports. The acquisition will be phased-in over a period ending in May 1994. Dobbs International will be United's exclusive in-flight caterer at the 12 locations where the kitchens are located. The company also recently expanded its presence in the United Kingdom by the acquisition in February 1994 of 4 catering kitchens in England and Scotland. In 1993, Dobbs International's in-flight catering operations provided in-flight meals to more than 60 domestic and international airlines at 44 airports in the United States plus Heathrow Airport, London, England, and Glasgow Airport, Scotland, and in 1994, as a result of the recent acquisitions, will provide in-flight meals to more than 60 domestic and international airlines at 51 airports. Dobbs International has been involved in a \"Quality Improvement Process\" for many years and has been recognized for its innovations by its customers and suppliers.\nOther food services are provided through the Restaura group of companies. The contract foodservice division of Restaura serves meals to employees at approximately 200 locations, including employees of major companies such as General Motors, IBM and Ford, through cafeteria, executive dining rooms and vending operations. Restaura also acts as the prime concessionaire for all food and beverage services at the America West Arena in Phoenix, Arizona, and operates 7 historic lodges in and around Glacier National Park in Montana and Canada.\nCONVENTION SERVICES Convention services are provided by the Company's GES Exposition and Exhibitgroup companies. GES Exposition, the nation's leading supplier of convention services, provides decorating, exhibit preparation, installation, electrical, transportation and management services for conventions and tradeshows. During 1993 Convention services acquired United Exposition Services Co., Inc., a general-service convention contractor serving locations primarily in the eastern United States; Andrews, Bartlett & Associates, Inc., which has major operations in Chicago, Cleveland, Orlando, New Orleans, Washington, D.C. and Atlanta; and Gelco Convention Services, Inc., which operates principally in the southeastern United States. Exhibitgroup is a leading designer and builder of custom and rental convention exhibits and displays.\nTRAVEL AND LEISURE AND PAYMENT SERVICES Travel and leisure services directed to the consumer market are provided by the Premier Cruise Lines, Greyhound Leisure Services, Jetsave, Crystal Holidays and Greyhound Lines of Canada business units. Premier Cruise Lines provides three and four-day BIG RED BOAT cruises from Port Canaveral, Florida, to the Bahamas and, commencing in April 1994, from Port Tampa, Florida, to Mexico and Key West, and offers a seven-day package which combines a cruise with a three or four-day vacation at Walt Disney World or Universal Studios and Sea World. Premier operates three cruise ships, the Star\/Ship Oceanic, the Star\/Ship Atlantic and the Star\/Ship Majestic. Cruise destinations offer various underwater diving and snorkeling attractions, historical tours, sandy beaches and shopping opportunities. Premier has contracted with Warner Bros. for the right to use Warner Bros.' famous LOONEY TUNES characters (Bugs Bunny and others) commencing in April 1994 for entertainment on board Premier Cruise Lines' ships. Premier's status as Official Cruise Line of Walt Disney World will expire March 31, 1994. Greyhound Leisure Services operates duty-free shipboard concessions on 56 cruise ships and also operates duty-free shops at the Chicago, Miami and Fort Lauderdale\/Hollywood Florida international airports, and in Washington, D.C. Other recreation and travel services are provided under the Jetsave and Crystal Holidays names. Jetsave and Crystal Holidays are leading United Kingdom operators of tour packages and specialty tours throughout Europe, and from Europe to the United States, Canada and the Bahamas. Greyhound Lines of Canada Ltd. (\"GLOC\"), a Canadian publicly traded company, is a 69%-owned subsidiary which operates the largest intercity bus transportation system for passengers, charter service and courier express in Canada. Routes connect with those of other intercity bus carriers, providing interconnecting service to areas of the United States and Canada not served directly by GLOC. GLOC owns and operates 465 intercity coaches. Brewster Transport Company, Ltd., a subsidiary of GLOC, operates tour and charter buses in the Canadian Rockies, engages in travel agency, hotel and snocoach tour operations and holds a joint venture interest in the Mt. Norquay ski attraction in Banff, Canada. Brewster owns and operates 87 intercity coaches, and 13 snocoaches which transport sightseers on tours of the Columbia Icefield. The Aircraft Service International group of companies provides aircraft ground-handling services such as aircraft fueling, aircraft cleaning and baggage handling for major domestic and foreign airlines at 28 airports throughout the United States and in Freeport, Bahamas and London, England. The Travelers Express group of companies engages in the sale of money orders to the public through approximately 43,000 agent locations in the United States and Puerto Rico. Travelers Express is the nation's leading issuer of money orders, issuing approximately 236 million money orders in 1993. The United States Postal Service, which is the second largest issuer, issued approximately 180 million money orders in 1993. Travelers Express also provides processing services for more than 4,500 credit unions and other financial institutions which offer share drafts (the credit union industry's version of a personal check) or official checks (used by financial institutions in place of their own bank check or teller check). Republic Money Order Company, a Travelers Express unit, is a leader in the issuance of money orders through chain convenience and supermarket stores and in money order-issuance technology. Virtually all airport concessions operated by the Company, other than certain concessions at Hartsfield Atlanta International Airport, which are scheduled to expire September 30, 1994, were sold to Host International, Inc., during the second half of 1992.\nCOMPETITION SERVICES companies generally compete on the basis of price, quality, convenience and service, and encounter substantial competition from a large number of providers of similar services, including numerous well-known local, regional and national companies, cruise lines, private money order companies and the U.S. Postal Service (money orders), many of which have greater resources than the Company. Dobbs International also competes on the basis of reliability, appearance of kitchen facilities, quality of truck fleet and on-time record. Caterair International Corporation, Sky Chefs, Inc., and Ogden Corporation are the principal competitors of Dobbs International. Freeman Decorating Company is the principal competitor of GES Exposition. GLOC competes primarily on the basis of price and service. Principal competitors include airlines, private automobiles and other intercity bus lines.\nPATENTS AND TRADEMARKS United States trademark registrations are for a term of 10 years, renewable every 10 years so long as the trademarks are used in the regular course of trade; patents are granted for a term of 17 years. The Dial companies maintain a portfolio of trademarks representing substantial goodwill in the businesses using the marks, and own many patents which give them competitive advantages in the marketplace. Many trademarks used by CONSUMER PRODUCTS, including DIAL, PURE & NATURAL, ARMOUR STAR, TONE, TREET, PARSONS, BRUCE, PUREX, DUTCH, RENUZIT, BRILLO, SNO BOL, BRECK, TREND, PUREX TOSS N' SOFT, STA PUF, FLEECY WHITE, 20 MULE TEAM, BORAXO, LUNCH BUCKET, and MAGIC trademarks, and by SERVICES, including the DOBBS, PREMIER CRUISE LINES, BIG RED BOAT and TRAVELERS EXPRESS service marks, have substantial importance and value. Use of the ARMOUR and ARMOUR STAR trademarks by CONSUMER PRODUCTS is permitted by a license expiring in 2043 granted by ConAgra, Inc. and use of the 20 MULE TEAM trademark is permitted by a perpetual license granted by U.S. Borax, Inc. In addition, certain subsidiaries within SERVICES use the Greyhound and the Image of the Running Dog marks in connection with their businesses. CONSUMER PRODUCTS also has the right, pursuant to license agreements, to operate under certain third-party patents covering specific technologies.\nGOVERNMENT REGULATION Substantially all of the operations of CONSUMER PRODUCTS and many of the operations of SERVICES are subject to various federal laws and agency regulation, in particular, the Food, Drug and Cosmetic Act, the Food and Drug Administration, the Department of Agriculture, the Federal Maritime Commission, and various state laws and regulatory agencies. In addition, other subsidiaries of Dial are subject to similar laws and regulations imposed by foreign jurisdictions. Both rates and routes of GLOC are regulated by federal and provincial authorities of Canada.\nENVIRONMENTAL Dial and its subsidiaries are subject to various environmental laws and regulations in the United States, Canada and other foreign countries where they have operations or own real estate. Dial cannot accurately predict future expenses or liability which might be incurred as a result of such laws and regulations. However, Dial believes that any liabilities resulting therefrom, after taking into consideration Dial's insurance coverage and amounts previously provided, should not have any material adverse effect on Dial's financial position or results of operations.\nEMPLOYEES\nEMPLOYMENT AT DECEMBER 31, 1993\nEMPLOYEES COVERED BY APPROXIMATE NUMBER COLLECTIVE BARGAINING SEGMENT OF EMPLOYEES AGREEMENTS - ------- ------------------ ---------------------\nConsumer Products 4,000 2,100 Airline Catering and Other Food Services 11,900 5,800 Convention Services 2,500 1,100 Travel and Leisure and Payment Services 7,600 3,200\nDial believes that relations with its employees are satisfactory and that collective bargaining agreements expiring in 1994 will be renegotiated in the ordinary course without adverse effect on Dial's operations.\nSEASONALITY The first quarter is normally the slowest quarter of the year for Dial. Consumption patterns, current marketing practices and competition cause CONSUMER PRODUCTS' revenues and operating income to be highest in the second and fourth quarters. Due to increased leisure travel during the summer and year-end holidays, Dial's airline catering, cruise ship and intercity bus travel operations experience peak activity at these times. Convention service companies generally experience increased activity during the first half of the year.\nRESTRUCTURING MATTERS On August 5, 1993, Dial completed the initial public offering of 20 million shares of common stock of Motor Coach Industries International, Inc. (NYSE:MCO), its transportation manufacturing and service parts subsidiary. The transaction followed the March 1992 spin-off of GFC Financial Corporation (NYSE:GFC), a corporation which comprised substantially all of the financial services and insurance businesses of Dial, and was the final step in Dial's restructuring plan to focus its financial and management resources on its consumer products and services business. See Note D of Notes to Consolidated Financial Statements for further information concerning the sale of the Company's transportation manufacturing and service parts segment and the spin-off of GFC Financial Corporation.\nREINCORPORATION MERGER At a special meeting of shareholders of The Dial Corp, an Arizona Corporation (\"Arizona Dial\"), held on March 3, 1992, shareholders of Arizona Dial approved a reincorporation merger proposal to change Arizona Dial's state of incorporation from Arizona to Delaware by means of a merger in which Arizona Dial would be merged with and into Dial. The merger was effected on March 3, 1992.\nBUSINESS SEGMENTS Principal business segment information is set forth in Annex A attached hereto and made a part hereof.\nITEM 2.","section_1A":"","section_1B":"","section_2":"ITEM 2. PROPERTIES During December 1993, a subsidiary of Dial acquired the corporation which owned the remaining 49% interest in a joint venture which owns Dial's headquarters building. Dial owns a 200,000-square-foot facility in Scottsdale, Arizona, which is used by the CONSUMER PRODUCTS segment to conduct much of its research and certain other activities. CONSUMER PRODUCTS operates 13 plants in the United States, 1 plant in Mexico, and 7 offices in 7 foreign countries. All of the plants are owned; 6 of the offices are leased. Principal manufacturing plants are as follows:\nLOCATION SQ. FEET PRODUCTS MANUFACTURED - -------- -------- ---------------------\nAurora, IL 425,000 Bar Soaps Fort Madison, IA 453,000 Canned Meats, Microwaveable Meals St. Louis, MO 475,000 Bleach, Ammonia, Fabric Softener, Laundry Detergents Bristol, PA 253,700 Dry Detergents and Cleansers Hazelton, PA 232,000 Liquid Detergents, Ammonia, Scouring Pads, Fabric Softener Auburndale, FL 208,000 Bleach, Ammonia, Fabric Softener, Dishwashing Detergents Memphis, TN 130,000 Dial Liquid Soap, Antiperspirants, Shampoos and Conditioners, Hotel Amenities (shampoos, conditioners and hand lotions)\nAIRLINE CATERING AND OTHER FOOD SERVICES operates 14 offices, 53 catering kitchens, 37 foodservice facilities and 7 lodges with ancillary foodservice and recreational facilities. All of the properties are in the United States, except for 2 catering kitchens, 1 foodservice facility and 1 lodge which are located in foreign countries. Ten of the catering kitchens, 2 hotels and 3 of the foodservice facilities are owned; all other properties are leased. Five of the hotels are operated pursuant to a concessionaire agreement. CONVENTION SERVICES operates 29 offices and 26 exhibit construction and warehouse facilities. All of the properties are in the United States. One of the offices and one of the warehouses are owned; all other properties are leased. TRAVEL AND LEISURE AND PAYMENT SERVICES operates 54 offices, 191 duty-free shops, 3 cruise ships and 6 hotels with ancillary foodservice and recreational facilities. All of the properties are in the United States, except for 9 offices and 3 hotels, which are located in foreign countries. Travel and Leisure and Payment Services owns 2 of the hotels, leases 1 of the hotels, has a partial interest in the other hotel for which it is also the lessee and operator, and operates 2 of the hotels under management contract. One of the cruise ships is owned; all other properties are leased. Approximate passenger capacity of the cruise ships is 1600, 1500 and 1000 persons, respectively. This segment also operates certain airport concessions which, as discussed earlier, are scheduled to expire September 30, 1994. GLOC operates 10 terminals and 7 garages in Canada. Five terminals and 6 garages are owned; the other properties are leased. In addition, bus stop facilities at approximately 600 locations in Canada are provided by commission agents. Principal properties of GLOC are as follows:\nLOCATION SQ. FEET FUNCTION - -------- -------- --------\nCalgary, Alberta 179,000 Terminal and Headquarters Office Edmonton, Alberta 63,000 Terminal London, Ontario 12,000 Terminal Vancouver, British Columbia 23,000 Terminal Winnipeg, Manitoba 21,000 Terminal Edmonton, Alberta 23,000 Garage Winnipeg, Manitoba 39,000 Garage Toronto, Ontario 46,000 Garage Vancouver, British Columbia 16,000 Garage Calgary, Alberta 135,000 Maintenance and Overhaul Center\nOf the property owned by Dial, only the facility in Auburndale, Florida, is subject to a mortgage with $3,989,000 outstanding at December 31, 1993. Management believes that Dial's facilities in the aggregate are adequate and suitable for their purposes and that capacity is sufficient for current needs.\nITEM 3.","section_3":"ITEM 3. LEGAL PROCEEDINGS During the fourth quarter of 1993, the Company settled the matter of John E. Washburn, Director of Insurance for the State of Illinois, as Liquidator of Pine Top Insurance Company vs. Ralph C. Batastini, et al. The net cost of the settlement is not material to the Company and is being charged against a previously provided reserve. The lawsuit was instituted June 20, 1988, in Circuit Court of Cook County, Illinois. Plaintiff alleged negligent management on the part of certain directors and officers of Pine Top Insurance Company (\"PTIC\"), a discontinued insurance operation.\nOn February 14, 1992, Transportation Manufacturing Corporation, a former subsidiary of Dial (\"TMC\"), filed a lawsuit against Chicago Transit Authority (\"CTA\") in the United States District Court for the District of New Mexico. The lawsuit arises from a contract between TMC and CTA for the manufacture and delivery of 491 wheelchair-lift transit buses. In addition to relief from any liquidated damages for late deliveries, TMC is seeking reimbursement for increased costs due to changes, delays and interferences TMC alleges were caused by CTA. TMC is also seeking treble damages under the New Mexico Unfair Trade Practices Act, alleging that CTA breached its covenant of good faith and fair dealing in the handling of this contract with TMC. TMC was divested by the Company in connection with its sale of MCII in August 1993, but the Company retained rights to certain recoveries, indemnified MCII against certain costs and damages and continued to direct the litigation pursuant to a Litigation Cooperation Agreement. On January 12, 1994, TMC and CTA agreed on a tentative settlement under which the Company would realize certain recoveries. Settlement documents are being finalized. The Company and certain subsidiaries are parties either as plaintiffs or defendants to various other actions, proceedings and pending claims, certain of which are or purport to be class actions. The pending cases range from claims for additional employment benefits to cases involving accidents, injuries, product liability or business contract disputes, certain of which involve claims for compensatory, punitive or other damages in material amounts. Litigation is subject to many uncertainties and it is possible that some of the legal actions, proceedings or claims referred to above could be decided against Dial. Although the amount of liability at December 31, 1993, with respect to matters where Dial is defendant is not ascertainable, Dial believes that any resulting liability should not materially affect Dial's financial position or results of operations.\nITEM 4.","section_4":"ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS.\nNo matters were submitted to a vote of securityholders during the fourth quarter of 1993.\nOPTIONAL ITEM. EXECUTIVE OFFICERS OF REGISTRANT. The names, ages and positions of the executive officers of the Company as of March 15, 1994, are listed below:\nEXECUTIVE POSITION NAME AGE OFFICE HELD SINCE - ---- --- ------ ----------\nJohn W. Teets 60 Chairman, President and 1982 Chief Executive Officer and Director and Chairman of Executive Committee of Registrant\nFrederick G. 60 Vice President and 1977 Emerson Secretary of Registrant\nJoan F. Ingalls 45 Vice President-Human 1991 Resources of Registrant\nF. Edward Lake 59 Vice President-Finance 1987 of Registrant\nL. Gene Lemon 53 Vice President and 1979 General Counsel of Registrant\nRichard C. Stephan 54 Vice President- 1980 Controller of Registrant\nWilliam L. Anthony 51 Executive Vice 1987 President-Administration and Controller, Consumer Products Group of Registrant\nRobert H. Bohannon 49 President and Chief 1993 Executive Officer of Travelers Express Company, Inc., a subsidiary of Registrant\nMark R. Shook 39 Executive Vice 1994 President-General Manager, Laundry and International Divisions, Consumer Products Group of Registrant\nKaren L. Hendricks 46 Executive Vice 1992 President-General Manager, Personal Care Division, Consumer Products Group of Registrant\nFrederick J. Martin 59 President of Dobbs 1985 International Services, Inc., a subsidiary of Registrant\nAndrew S. Patti 53 President and Chief 1986 Operating Officer of the Consumer Products Group of Registrant\nNorton D. 59 Chairman and Chief 1983 Rittmaster Executive Officer of GES Exposition Services, Inc., a subsidiary of Registrant\nPosition currently Executive Vice President- vacant General Manager, Food Division, Consumer Products Group of Registrant\nEach of the foregoing officers, with the exceptions set forth below, has served in the same, similar or other executive positions with Dial or its subsidiaries for more than the past five (5) years.\nMs. Ingalls has served in her current, or a similar, position since 1990, and prior thereto as Executive Director of Compensation and Benefits of the Registrant.\nMr. Bohannon was elected as President and Chief Executive Officer of Travelers Express Company, Inc. effective March 15, 1993. Prior thereto, he was a senior officer at Marine Midland Bank of Buffalo, New York.\nPrior to 1992, Ms. Hendricks was employed at Procter & Gamble as Manager, Worldwide Strategic Planning, Health and Beauty Aids, and prior thereto, as General Manager, US Vidal Sassoon Hair Care Company.\nPrior to March 1994, Mr. Shook was Executive Vice President- General Manager, Food and International Divisions, and prior thereto was Vice President and General Manager of the commercial markets business unit of Registrant's Consumer Products Group.\nThe term of office of the executive officers is until the next annual organization meetings of the Boards of Directors of Dial or appropriate subsidiaries, all of which are scheduled for April or May of this year.\nThe Directors of Dial are divided into three classes, with the terms of one class of Directors to expire at each Annual Meeting of Stockholders. The current term of office of John W. Teets is scheduled to expire at the 1994 Annual Meeting of Stockholders. Mr. Teets has been nominated for reelection at that meeting for a term expiring in May 1997.\nPART II\nITEM 5.","section_5":"ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS\nThe principal market on which the common stock of Dial is traded is the New York Stock Exchange. The common stock is also listed for trading on the Pacific Exchange, and admitted for trading on the Midwest, Philadelphia and Cincinnati Exchanges. The following tables summarize the high and low market prices as reported on the New York Stock Exchange Composite Tape and the cash dividends declared for the two years ended December 31, 1993:\nSALES PRICE RANGE OF COMMON STOCK ---------------------------------\nCALENDAR 1993 1992 QUARTERS HIGH LOW HIGH LOW - -------- ------------------- ------------------- First $44 1\/2 $39 $50 5\/8(1) $37 3\/8(1) Second 43 7\/8 36 7\/8 39 3\/8 33 3\/8 Third 41 1\/8 35 7\/8 39 1\/2 35 1\/2 Fourth 42 1\/4 36 3\/4 42 37\nDIVIDENDS DECLARED ON COMMON STOCK ----------------------------------\nCALENDAR QUARTERS 1993 1992(2) - ----------------- ----- -----\nFebruary $ .28 $ .35 May .28 .28 August .28 .28 November .28 .28 ----- -----\nTOTAL $1.12 $1.19\n(1) On March 18, 1992, the spin-off of GFC Financial Corporation to the Company's stockholders became effective. The closing price of Dial's shares immediately prior to the spin-off was $49 and immediately after the spin-off was $40, as a result of the special distribution. The high and low prices for the period January 1 through March 17, 1992, were $50 5\/8 and $45 3\/8, respectively. The high and low prices for the period March 18 through March 31, 1992, were $40 1\/4 and $37 3\/8, respectively.\n(2) The decline in dividends declared per common share in 1992 and 1993 reflects the spin-off of GFC Financial Corporation.\nRegular quarterly dividends have been paid on the first business day of January, April, July and October.\nAs of March 11, 1994, there were 49,576 holders of record of Dial's common stock.\nITEM 6.","section_6":"ITEM 6. SELECTED FINANCIAL DATA. Applicable information is included in Annex A.\nITEM 7.","section_7":"ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION.\nApplicable information is included in Annex A.\nITEM 8.","section_7A":"","section_8":"ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.\n1. Financial Statements--See Item 14 hereof.\n2. Supplementary Data--See Condensed Consolidated Quarterly Results in Annex A.\nITEM 9.","section_9":"ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.\nNone.\nPART III\nITEM 10.","section_9A":"","section_9B":"","section_10":"ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.\nThe information regarding Directors of the Registrant is included in Dial's Proxy Statement for Annual Meeting of Shareholders to be held on May 10, 1994 (\"Proxy Statement\"), and is incorporated herein and made a part hereof. The information regarding executive officers of the Registrant is found as an Optional Item in Part I hereof.\nITEM 11.","section_11":"ITEM 11. EXECUTIVE COMPENSATION. The information is contained in the Proxy Statement and is incorporated herein and made a part hereof.\nITEM 12.","section_12":"ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.\nThe information is contained in the Proxy Statement and is incorporated herein and made a part hereof.\nITEM 13.","section_13":"ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. None.\nPART IV\nITEM 14.","section_14":"ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.\n(a) List the following documents filed as a part of the report:\n1. FINANCIAL STATEMENTS. The following are included in Annex A: Independent Auditors' Report and consolidated financial statements (Balance Sheet, Income, Cash Flows, Common Stock and Other Equity, and Notes to Financial Statements).\n2. FINANCIAL STATEMENT SCHEDULES.\nIndependent Auditors' Report on Schedules to Consolidated Financial Statements of The Dial Corp is found on page of Annex A.\nSchedule I--Marketable Securities --Other Security Investments is found on page of Annex A.\nSchedule IX--Short-term Borrowings. This information is included in Management's Discussion and Analysis of Results of Operations and Financial Condition and Note G-- Short-Term Debt in Annex A and is incorporated herein by reference.\nSchedule X--Supplementary Income Statement Information is found on page of Annex A.\n3. EXHIBITS.\n3.A Copy of Restated Certificate of Incorporation of Dial, as amended through March 3, 1992, filed as Exhibit (3)(A) to Dial's 1991 Form 10-K, is hereby incorporated by reference.\n3.B Copy of Bylaws of Dial, as amended through February 21, 1992, filed as Exhibit (3)(B) to Dial's 1991 Form 10-K, is hereby incorporated by reference.\n4.A Instruments with respect to issues of long-term debt have not been filed as exhibits to this Annual Report on Form 10-K if the authorized principal amount of any one of such issues does not exceed 10% of total assets of the Company and its subsidiaries on a consolidated basis. The Company agrees to furnish a copy of each such instrument to the Securities and Exchange Commission upon request.\n4.B Copy of Amended and Restated Credit Agreement dated as of December 15, 1993, among Dial, the Banks parties thereto, Bank of America National Trust and Savings Association as Agent and Reporting Agent and Citibank, N.A. as Agent and Funding Agent.*\n10.A Copy of Employment Agreement between Dial and John W. Teets dated April 14, 1987, filed as Exhibit (10)(A) to Dial's 1989 Form 10-K, is hereby incorporated by reference.+\n10.B Sample forms of Contingent Agreements relating to funding of Supplemental Executive Pensions, filed as Exhibit (10)(T) to Dial's 1989 Form 10-K, is hereby incorporated by reference.+\n10.C Copy of The Dial Corp Supplemental Pension Plan, amended and restated as of January 1, 1987, filed as Exhibit (10)(F) to Dial's 1986 Form 10-K, is hereby incorporated by reference.+\n10.C1 Copy of amendment dated February 21, 1991, to The Dial Corp Supplemental Pension Plan, filed as Exhibit (10)(G)(i) to Dial's 1990 Form 10-K, is hereby incorporated by reference.+\n10.D Copy of The Dial Corp 1992 Deferred Compensation Plan for Directors, adopted November 20, 1980, as amended through February 21, 1991, filed as Exhibit (10)(H) to Dial's 1990 Form 10-K, is hereby incorporated by reference.+\n10.E Copy of The Dial Corp Management Incentive Plan.*+\n10.F1 Copy of form of Executive Severance Agreement between Dial and three executive officers, filed as Exhibit (10)(G)(i) to Dial's 1991 Form 10-K, is hereby incorporated by reference.+\n10.F2 Copy of forms of The Dial Corp Executive Severance Plans covering certain executive officers, filed as Exhibit (10)(G)(ii) to Dial's 1992 Form 10-K, is hereby incorporated by reference.+\n10.G Copy of Travelers Express Company, Inc. Supplemental Pension Plan, filed as Exhibit (10)(L) to Dial's 1984 Form 10-K, is hereby incorporated by reference.+\n10.H Copy of Greyhound Dial Corporation 1983 Stock Option and Incentive Plan, filed as Exhibit (28) to Dial's Registration Statement on Form S-8 (Registration No. 33-23713), is hereby incorporated by reference.+\n10.I Copy of The Dial Corp 1992 Stock Incentive Plan, filed as Exhibit (10)(J) to Dial's 1991 Form 10-K, is hereby incorporated by reference.+\n10.J Description of Spousal Income Continuation Plan, filed as Exhibit 10(Q) to Dial's 1985 Form 10-K, is hereby incorporated by reference.+\n10.K Copy of The Dial Corp Director's Retirement Benefit Plan, filed as Exhibit (10)(R) to Dial's 1988 Form 10- K, is hereby incorporated by reference.+\n10.L Copy of The Dial Corp Performance Unit Incentive Plan.*+\n10.M Copy of The Dial Corp Supplemental Trim Plan, filed as Exhibit (10)(S) to Dial's 1989 Form 10-K, is hereby incorporated by reference.+\n10.N Copy of Employment Agreement between Greyhound Exposition Services and Norton Rittmaster dated May 20, 1982, filed as Exhibit (10)(O) to Dial's 1992 Form 10- K, is hereby incorporated by reference.+\n10.O Copy of Greyhound Exposition Services, Inc. Incentive Compensation Plan, filed as Exhibit (10)(P) to Dial's 1992 Form 10-K, is hereby incorporated by reference.+\n10.P Copy of The Dial Corp Performance-Based Stock Plan.*+\n10.Q Copy of The Dial Corp Deferred Compensation Plan.*+\n11 Statement Re Computation of Per Share Earnings.*\n22 List of Subsidiaries of Dial.*\n23 Consent of Independent Auditors to the incorporation by reference into specified registration statements on Form S-3 or on Form S-8 of their reports contained in or incorporated by reference into this report.*\n24 Power of Attorney signed by directors of Dial.*\n*Filed herewith. +Management contract or compensation plan or arrangement.\nNote: The 1993 Annual Report to Securityholders will be furnished to the Commission when, or before, it is sent to securityholders.\n(b) REPORTS ON FORM 8-K. A report on Form 8-K dated October 1, 1993, was filed by the Registrant. The Form 8-K reported under Item 5 the reclassifications of previously filed financial statements and other financial information related to the disposition of Dial's Transportation Manufacturing and Service Parts segment. Included with the 8-K report as Exhibit No. 28 were financial statements and other financial information reflecting the restatements required by such disposition. The financial statements and financial information contained in Dial's 1992 Annual Report on Form 10-K and Quarterly Reports on Form 10-Q for the quarters ended March 31, 1993, and June 30, 1993, were modified or superseded to the extent that the information contained in the Form 8-K modified or superseded such statements and other information.\nSIGNATURES\nPursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in Phoenix, Arizona, on the 25th day of March, 1994.\nTHE DIAL CORP\nBy: \/s\/ John W. Teets John W. Teets Chairman, President and Chief Executive Officer\nPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:\nPrincipal Executive Officer\nDate: March 25, 1994 By: \/s\/ John W. Teets John W. Teets Director; Chairman, President and Chief Executive Officer\nPrincipal Financial Officer\nDate: March 25, 1994 By: \/s\/ F. Edward Lake F. Edward Lake Vice President-Finance\nPrincipal Accounting Officer\nDate: March 25, 1994 By: \/s\/ Richard C. Stephan Richard C. Stephan Vice President-Controller\nDirectors\nJames E. Cunningham Joe T. Ford Thomas L. Gossage Donald E. Guinn Jess Hay Judith K. Hofer Jack F. Reichert Linda Johnson Rice Dennis C. Stanfill A. Thomas Young\nDate: March 25, 1994 By: \/s\/ Richard C. Stephan Richard C. Stephan Attorney-in-Fact\nANNEX \"A\"\nTHE DIAL CORP\n1993 FINANCIAL INFORMATION\n\f\n\f MANAGEMENT'S REPORT ON RESPONSIBILITY FOR FINANCIAL REPORTING\nThe management of The Dial Corp and its subsidiaries has the responsibility for preparing and assuring the integrity and objectivity of the accompanying financial statements and other financial information in this report. The financial statements were developed using generally accepted accounting principles and appropriate policies, consistently applied, except for the change in 1992 to comply with new accounting requirements for postretirement benefits other than pensions as discussed in Note L of Notes to Consolidated Financial Statements. They reflect, where applicable, management's best estimates and judgments and include disclosures and explanations which are relevant to an understanding of the financial affairs of the Company.\nThe Company's financial statements have been audited by Deloitte & Touche, independent auditors elected by the stockholders. Management has made available to Deloitte & Touche all of the Company's financial records and related data, and has made appropriate and complete written and oral representations and disclosures in connection with the audit.\nManagement has established and maintains a system of internal control that it believes provides reasonable assurance as to the integrity and reliability of the financial statements, the protection of assets and the prevention and detection of fraudulent financial reporting. The system of internal control is believed to provide for appropriate division of responsibilities and is documented by written policies and procedures that are utilized by employees involved in the financial reporting process. Management also recognizes its responsibility for fostering a strong ethical climate. This responsibility is characterized and reflected in the Company's Code of Corporate Conduct, which is communicated to all of the Company's executives and managers.\nThe Company also maintains a comprehensive internal auditing function which independently monitors compliance and assesses the effectiveness of the internal controls and recommends possible improvements thereto. In addition, as part of their audit of the Company's financial statements, the independent auditors review and evaluate selected internal accounting and other controls to establish a basis for reliance thereon in determining the audit tests to be applied. There is close coordination of audit planning and coverage between the Company's internal auditing function and the independent auditors. Management has considered the recommendations of both internal auditing and the independent auditors concerning the Company's system of internal control and has taken actions believed to be cost-effective in the circumstances to implement appropriate recommendations and otherwise enhance controls. Management believes that the Company's system of internal control accomplishes the objectives discussed herein.\nThe Board of Directors oversees the Company's financial reporting through its Audit Committee, which regularly meets with management representatives and, jointly and separately, with the independent auditors and internal auditing management to review accounting, auditing and financial reporting matters.\n\/s\/ Ermo S. Bartoletti Ermo S. Bartoletti Vice President - Internal Auditing\n\/s\/ Richard C. Stephan Richard C. Stephan Vice President - Controller\n\f\nINDEPENDENT AUDITORS' REPORT\nTo the Stockholders and Board of Directors of The Dial Corp:\nWe have audited the accompanying consolidated balance sheets of The Dial Corp as of December 31, 1993 and 1992, and the related consolidated statements of income, common stock and other equity and of cash flows 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.\nWe conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.\nIn our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of The Dial Corp as of December 31, 1993 and 1992, and the 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.\nAs discussed in Note L of Notes to Consolidated Financial Statements, the Company changed its method of accounting for postretirement benefits other than pensions in 1992.\n\/s\/ Deloitte & Touche Deloitte & Touche Phoenix, Arizona February 25, 1994\n\f MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION OF THE DIAL CORP\nRESULTS OF OPERATIONS: Dial is a diversified company which sells products and provides services in many markets. Because of this diversity, components of net income are affected, some favorably, others unfavorably, by general economic conditions and other fluctuations which occur in the various markets each year. Inflation has not materially affected operations in recent years.\nDial sold its Transportation Manufacturing and Service Parts Group in 1993 and spun-off GFC Financial Corporation (\"GFC Financial\") in 1992. The Transportation Manufacturing and Service Parts Group and GFC Financial are presented as discontinued operations for all periods. Such dispositions are discussed further in Note D of Notes to Consolidated Financial Statements.\n1993 VS. 1992: Revenues for 1993 were $3 billion compared with $2.9 billion in 1992.\nIncome from continuing operations was $110.3 million in 1993, or $2.56 per share. Before restructuring and other charges, income from continuing operations in 1992 was $94.2 million, or $2.21 per share. After restructuring and other charges of $19.8 million, or $0.47 per share, Dial had income from continuing operations of $74.4 million, or $1.74 per share, in 1992.\nCONSUMER PRODUCTS. The Consumer Products Group's revenues were up $144.7 million, or 11 percent from those in 1992. Operating income was up $20.6 million, or 17 percent over 1992 amounts.\nPersonal Care Division revenues declined $700,000 due primarily to a decline in the sales of Breck hair care products. Offsetting this decline were strong showings by all other personal care products, especially the Dial label products. Personal Care Division operating income increased by $6.4 million due primarily to the increase in Dial product revenues and reduced manufacturing costs. The Breck decline was substantially offset by reduced marketing costs.\nFood Division revenues increased $11.6 million from those of 1992 due to increases in the canned meat line offset in part by a decline in microwaveable product revenue. Operating income increased by $2.3 million primarily due to the favorable sales mix, the pricing of canned meats and reductions in manufacturing costs of microwaveable products.\nHousehold and Laundry Division revenues increased $130 million from 1992, led by strong performances in liquid detergents and liquid fabric softeners. The addition of Rinse 'n Soft as a new product in the liquid fabric softener category and the acquisition of Renuzit during the 1993 second quarter contributed to the favorable comparisons between periods. Operating income increased $10.8 million over 1992 amounts, reflecting higher revenue and improved margins. Margins increased as a result of reduced marketing expenses associated with a modified everyday low pricing strategy.\nInternational revenues and operating results increased $3.8 million and $1.1 million, respectively, from those of 1992 due primarily to an expansion program.\nSERVICES. During 1993, Dial redefined its Services business into three principal segments for financial reporting purposes. Excluding certain airport concession operations, which were sold in September, 1992, and excluding the effects of $30 million of restructuring charges in 1992, combined Services revenues and operating income increased $109.6 million, or 8 percent, and $11.3 million, or 9 percent, respectively.\nAIRLINE CATERING AND OTHER FOOD SERVICES. Revenues of the Airline Catering and Other Food Services Group declined $26.2 million from those of 1992, while operating income increased $6.1 million. Airline catering revenues decreased $21.4 million from those of 1992 due primarily to service cutbacks by major airlines and the effects of the air fare discounts which had boosted 1992 volume; however, operating income was up $600,000 due to new customers and stringent cost controls. The contract food service companies' revenues were down $4.8 million, due primarily to closing marginal locations in 1992. Operating income increased $5.5 million from last year's results, due primarily to a gain from curtailment of a postretirement benefit plan in 1993.\nCONVENTION SERVICES. Convention Services Group revenues and operating income increased $117.6 million and $7.6 million, respectively, from those in 1992. Growth in existing business, the inclusion of operations of United Exposition Service Co., Inc. and Andrews, Bartlett and Associates, Incorporated, which were acquired during the second and fourth quarters, respectively, contributed to the increases.\nTRAVEL AND LEISURE AND PAYMENT SERVICES. Revenues for the Travel and Leisure and Payment Services Group declined $109.9 million, and, excluding the effects of $30 million of restructuring charges in 1992, operating income declined $11.7 million from 1992 results. The declines were primarily attributable to the sale, in late September 1992, of most of Dial's food and merchandise airport terminal concession operations; as a result, revenues and operating income of sold and miscellaneous operations declined $113.9 million and $6.8 million, respectively, from those in 1992.\nRevenues and operating income for aircraft fueling and other ground-handling services declined $3.7 million and $100,000, respectively, due primarily to lower foreign exchange rates.\nRevenues and operating income of the transportation services companies increased $5.5 million and $2.9 million, respectively, from those of 1992. Continued emphasis on cost control programs, the acquisition of a small transportation services company in late 1992 and a gradually recovering Canadian economy contributed to the improved operating results.\nCruise revenues were down $20.4 million and operating results decreased $8.3 million from those of 1992 due to lower passenger counts, increased competition, the major dry-dock of the Oceanic in the 1993 first quarter and the introduction of a new itinerary for the Majestic out of Port Everglades during the second quarter of 1993. Reductions in operating expenses from ongoing cost reduction programs helped limit the decline in operating results.\nTravel tour service revenues and operating income decreased $5 million and $3.9 million, respectively, due to lower results from the U.K. tour operation which is suffering from a slowly recovering economy. In addition, passenger volume to Florida for 1993 was down 30% from the volume in 1992.\nDuty Free and shipboard concession revenues were up $34.5 million due primarily to new business. Operating income increased $900,000 from that of 1992 despite start-up costs associated with a major new contract.\nPayment service revenues decreased $6.9 million due primarily to reduced money order revenues and lower investment income due to lower market interest rates and increased investment in tax-exempt securities. Operating income was $2.7 million ahead of last year's results due primarily to terminating unprofitable business even though investment income was lower for the reasons stated above.\nUNALLOCATED CORPORATE EXPENSE AND OTHER ITEMS, NET. Unallocated corporate expense and other items, net, increased $6.5 million from that in 1992, due primarily to the expiration in early 1993 of subleases of buses and related amortization of deferred intercompany and sale-leaseback profit.\nINTEREST EXPENSE. Interest expense was down $6.1 million from that in 1992, due primarily to lower short-term interest rates and the prepayment of certain high-coupon, fixed-rate debt at the end of the third quarter of 1993.\n1992 VS. 1991: Revenues for 1992 were $2.9 billion, compared to $2.8 billion in 1991.\nIncome from continuing operations before restructuring and other charges described below, was $94.2 million, or $2.21 per share, compared with $80.6 million, or $1.99 per share, in 1991. After restructuring and other charges of $19.8 million, or $0.47 per share, Dial had income from continuing operations of $74.4 million, or $1.74 per share, for the year, compared with $25.8 million, or $0.62 per share, in 1991 after restructuring and other charges and spin-off transaction costs of $54.9 million, or $1.37 per share.\nThe adoption of Statement of Financial Accounting Standards No. 106, \"Employers' Accounting for Postretirement Benefits Other Than Pensions\" (\"SFAS No. 106\") was mandatory for all U.S. public companies beginning in 1993. The statement requires recognition of liabilities for postretirement benefits other than pensions over the period that services are provided by employees, but does not change the pattern of cash payments for such benefits. Dial adopted the new standard in 1992, and recorded the cumulative effect of such initial application rather than amortizing such amount over 20 years, as permitted by the statement. Accordingly, results for 1992 include a one-time charge as of January 1, 1992, for the cumulative effect of the initial application of SFAS No. 106 of $110.7 million (after-tax), or $2.64 per share, and an ongoing annual expense increase of $9.1 million (after-tax), or $0.22 per share.\nRESTRUCTURING AND OTHER CHARGES. Dial recorded restructuring and other charges of $19.8 million (after-tax), or $0.47 per share, in the fourth quarter of 1992, attributable to the Travel and Leisure and Payment Services Group, primarily to provide for termination of an unfavorable airport concession contract and related matters, and to provide for costs to reposition the cruise line to compete more effectively in the Caribbean market.\nIn the fourth quarter of 1991, Dial provided for restructuring and other charges and spin-off transaction costs of $54.9 million (after-tax), or $1.37 per share. Of this amount, $26 million (after-tax) was charged to the Travel and Leisure and Payment Services Group primarily to provide for estimated losses on an unfavorable airport concession contract and for losses as a result of the bankruptcy of a large money order agent in its payment services subsidiary. The remaining provision of $28.9 million (after-tax) was made primarily to provide for transaction costs arising from the spin-off of GFC Financial and for certain income tax matters related to prior years.\nCONSUMER PRODUCTS. The Consumer Products Group reported a $78.9 million increase in revenues over 1991 amounts, and before the $6.8 million ongoing expense increase for 1992 resulting from the adoption of SFAS No. 106, operating income increased $14.8 million over 1991 amounts. The following comments exclude the effects of the ongoing expense increase for 1992 resulting from the adoption of SFAS No. 106.\nRevenues and operating income of the Personal Care Division were up $58.9 million and $7 million, respectively, from those of 1991. The increases were due primarily to strong sales volume performance for Dial Soap and Liquid Dial.\nThe Food Division revenues declined $25.9 million from those of 1991, due primarily to new pricing strategies for microwaveables to adopt everyday low prices, increased competition in the microwaveable meals category and lower meat prices. Operating income of the Food Division increased $3.2 million as the decline in revenues was offset by lower ingredient costs and other efficiencies.\nHousehold and Laundry Division revenues and operating income increased $33.3 million and $7.7 million, respectively, due to increased sales of higher margin detergent products.\nInternational revenues increased $12.6 million while operating income decreased $3.1 million from 1991 amounts. The decline in operating results was due primarily to expansion and product introduction costs.\nSERVICES. Combined Services companies reported a $32.7 million decrease in revenues from those of 1991 due primarily to the sale of most airport concession operations in late September 1992. Excluding the effects of $30 million and $40 million of restructuring and other charges in 1992 and 1991, respectively, and before the $1 million, $700,000 and $1.5 million expense increases for Airline Catering and Other Food Services, Convention Services, and Travel and Leisure and Payment Services, respectively, for 1992 resulting from the adoption of SFAS No. 106, combined Services operating income increased $11.6 million over 1991 amounts. The following comments exclude the effects of restructuring and other charges and the ongoing expense increase for 1992 resulting from the adoption of SFAS No. 106.\nAIRLINE CATERING AND OTHER FOOD SERVICES. Revenues of the Airline Catering and Other Food Services Group were down $19.8 million, while operating income increased $6.3 million from 1991. Airline catering revenues and operating income were up $27.5 million and $5.5 million, respectively, primarily as a result of new customers and growth from existing customers, aided in part by the traffic increase from the air fare discounts in the summer of 1992. Contract food service revenues declined $47.3 million, while operating income increased $800,000. The sale or closure of unprofitable locations in 1992 contributed to the reduction in contract food revenues.\nCONVENTION SERVICES. Revenues and operating income of the Convention Services Group increased $25.9 million and $4.2 million, respectively, due primarily to growth in existing convention show services, new customers and somewhat improved margins.\nTRAVEL AND LEISURE AND PAYMENT SERVICES. Revenues for the Travel and Leisure and Payment Services Group declined $38.8 million and operating income increased $1.1 million from 1991 amounts. The decline in revenues was attributable primarily to the sale, in late September, of most of Dial's food and merchandise airport terminal concession operations. Food and merchandise airport terminal concession and related operations revenues declined $41.8 million due to the September sale, while operating income was up $10.8 million from the prior year, aided by increased traffic from summer air fare discounts up to the sale date.\nAircraft fueling and other ground-handling services revenues and operating income increased $8.2 million and $1 million, respectively, due to new customers and growth from existing customers.\nRevenues and operating income of the transportation services companies were down $16.2 million and $2.2 million, respectively, from those of 1991, reflecting a decrease in ridership as the stagnant Canadian economy continued to lag behind the U.S. recovery. Cost reduction programs helped limit the decline in operating income.\nCruise revenues increased $1.4 million from those of 1991 due primarily to increased onboard revenues, offset partially by lower passenger counts and per diems. Deep discounting in selling prices, resulting from continued sluggish demand, contributed to lower per diems. The heavy discounts in selling prices and higher promotional costs accounted for the $1 million decrease in operating income from that of 1991.\nTravel tour service revenues and operating income increased $6.7 million and $2.3 million, respectively, from 1991 results due primarily to the full-year inclusion of Crystal Holidays Limited which was acquired in mid-1991. In addition, 1991 results were depressed due to the Persian Gulf War and its aftereffects.\nDuty Free and shipboard concession revenues and operating income were up $8.9 million and $600,000, respectively, from those in 1991 as airport terminal traffic increased and the revenue per passenger on vessels where duty free shops are operated increased.\nPayment service revenues were down $6 million due primarily to lower revenue on investments, money order fees and gains on sale of investments. Operating income was about even with that of 1991 as lower revenues were offset by lower expenses, due primarily to lower provisions for credit losses.\nUNALLOCATED CORPORATE EXPENSE AND OTHER ITEMS, NET. Before the $4.4 million ongoing expense increase for 1992 resulting from the adoption of SFAS No. 106, unallocated corporate expense and other items, net, decreased $500,000 from that of 1991.\nINTEREST EXPENSE. Interest expense was down $700,000 from that in 1991, due primarily to lower short-term interest rates and the repayment of certain higher cost debt, partially offset by higher average short-term borrowings of commercial paper and promissory notes. Also, the 1991 period had benefited from a reduction of interest previously accrued for a federal tax audit.\nLIQUIDITY AND CAPITAL RESOURCES: Dial's total debt at December 31, 1993 was $636 million compared to $707 million at December 31, 1992. The debt to capital ratio was 0.55 to 1 and 0.62 to 1 at December 31, 1993 and December 31, 1992, respectively. Capital is defined as total debt plus minority interests, preferred stock and common stock and other equity.\nDuring the third quarter of 1993, Dial utilized the proceeds from the sale of MCII to repurchase approximately 1,000,000 shares of common stock on the open market and to reduce outstanding short-term debt. Dial also prepaid $187 million principal amount of long-term, fixed-rate debt having a weighted average interest rate of 10%. These prepayments resulted in an extraordinary charge for early extinguishment of debt of $21.9 million (net of tax benefit of $11.8 million).\nDuring 1993, Dial filed a $300 million Senior Debt Securities Shelf Registration with the Securities and Exchange Commission under which Dial could issue senior notes for various amounts and at various rates and maturities. During 1993, Dial issued $230 million of debt under the program with maturities of five to eleven years. Subsequent to December 31, 1993, Dial issued the remaining $70 million of debt under the senior note program with maturities of six to fifteen years.\nWith respect to working capital, in order to minimize the effects of borrowing costs on earnings, Dial strives to maintain current assets (principally cash, inventories and receivables) at the lowest practicable levels while at the same time taking advantage of the payment terms offered by trade creditors. These efforts notwithstanding, working capital requirements will fluctuate significantly from seasonal factors as well as changes in levels of receivables and inventories caused by numerous business factors.\nDial satisfies a portion of its working capital and other financing requirements with short-term borrowings (through commercial paper, bank note programs and bank lines of credit) and the sale of receivables. Short-term borrowings are supported by long-term revolving bank credit agreements or short-term lines of credit. At December 31, 1993, Dial had a $500 million long-term revolving credit line in place, of which $257 million was being used to support $225 million of commercial paper and promissory notes and the guarantee of a $32 million ESOP loan. Dial's subsidiaries have agreements to sell $115 million of accounts receivable under which the purchaser has agreed to invest collected amounts in new purchases, providing a stable level of purchased accounts. The commitments to purchase accounts receivable, which are fully utilized, mature in January of each year, but are expected to be extended annually by mutual agreement. The agreements are currently extended to January 1995.\nAs discussed in Note I of Notes to Consolidated Financial Statements, in September 1992, Dial sold 5,245,900 shares of treasury stock to The Dial Corp Employee Equity Trust (the \"Trust\") at $38.125 per share. This Trust is being used to fund certain existing employee compensation and benefit plans over the scheduled 15-year term of the Trust. The Trust acquired the shares of common stock from Dial for a promissory note valued at $200 million at the date of sale. Proceeds from sales of shares released by the Trust are used to repay Dial's note and thereby satisfy benefit obligations. At December 31, 1993, a total of 3,923,933 shares remained in the Trust and are available to fund future benefit obligations.\nCapital spending has been reduced by obtaining, where appropriate, equipment and other property under operating leases. Dial's capital asset needs and working capital requirements are expected to be financed primarily with internally generated funds. Generally, cash flows from operations and the proceeds from the sale of businesses during the past three years along with increased proceeds from the exercise of stock options have been sufficient to finance capital expenditures, the purchase of businesses and cash dividends to shareholders. Dial expects these trends to continue with operating cash flows and proceeds from stock issuances generally being sufficient to finance its business. Should financing requirements exceed such sources of funds, Dial believes it has adequate external financing sources available to cover any such shortfall.\nAs indicated in Note L of Notes to Consolidated Financial Statements, although Dial has paid the minimum funding required by applicable regulations, certain pension plans remain underfunded while others are overfunded. The deficiency in funding of the underfunded plans is expected to be reduced through the payment of the minimum funding requirement over a period of several years. Unfunded pension and other postretirement benefit plans require payments over extended periods of time. Such payments are not likely to materially affect Dial's liquidity.\nAs of December 31, 1993, Dial has recorded U.S. deferred income tax benefits under SFAS No. 109 totaling $170 million, which Dial believes to be fully realizable in future years. The realization of such benefits will require average annual taxable income over the next 15 years (the current Federal loss carryforward period) of approximately $30 million. Dial's average U.S. pretax reported income, exclusive of nondeductible goodwill amortization but after deducting restructuring and other charges, over the past three years has been approximately $113 million. Furthermore, approximately $112 million of the deferred income tax benefits relate to pensions and other postretirement benefits which will become deductible for income tax purposes as they are paid, which will occur over many years.\nDial is subject to various environmental laws and regulations of the United States as well as of the states in whose jurisdictions Dial operates. As is the case with many companies, Dial faces exposure to actual or potential claims and lawsuits involving environmental matters. Dial believes that any liabilities resulting therefrom should not have a material adverse effect on Dial's financial position or results of operations.\nBUSINESS OUTLOOK AND RECENT DEVELOPMENTS: In November 1993, Dial announced the finalization of an agreement to purchase 15 in-flight catering kitchens from United Airlines. Dial purchased the first four kitchens on December 30, with the remaining kitchens expected to be phased-in during the first and second quarters of 1994. In February 1994, Dial announced that it had reached an agreement to acquire the assets of Steels Aviation Services Limited, a British airline caterer that operates four airline catering kitchens in England and Scotland. Management anticipates financing the acquisitions through cash flow from operations and long-term debt.\nThe business outlook holds many uncertainties. Proposed legislation, health care costs, interest rates, tax law changes, environmental issues, competitive pressures from within the marketplace and the unpredictable economic environment, will all affect the growth and future of Dial. Dial remains aggressive in its commitment to monitor and reduce costs and expenses, positioning Dial to continue to produce positive results in the years ahead.\n\f\n\f\n\f\n\f\n\f THE DIAL CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended December 31, 1993, 1992 and 1991\nA. SIGNIFICANT ACCOUNTING POLICIES\nBASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION-The consolidated financial statements of The Dial Corp and subsidiaries (\"Dial\") include the accounts of Dial and all of its subsidiaries. Dial sold its Transportation Manufacturing and Service Parts Group in 1993 and spun-off GFC Financial Corporation (\"GFC Financial\") in 1992. The Transportation Manufacturing and Service Parts Group and GFC Financial are presented as discontinued operations for all periods. Such dispositions are discussed further in Note D of Notes to Consolidated Financial Statements.\nThe consolidated financial statements are prepared in accordance with generally accepted accounting principles. Intercompany accounts and transactions between Dial and its subsidiaries have been eliminated in consolidation. Certain reclassifications have been made to the prior years' financial statements to conform to 1993 classifications. Described below are those accounting policies particularly significant to Dial, including those selected from acceptable alternatives.\nCASH EQUIVALENTS-Dial considers all highly liquid investments with original maturities of three months or less from date of purchase as cash equivalents.\nINVENTORIES-Generally, inventories are stated at the lower of cost (first-in, first-out and average cost methods) or market.\nPROPERTY AND EQUIPMENT-Property and equipment are stated at cost.\nDepreciation is provided principally by use of the straight-line method at annual rates as follows:\nBuildings 2% to 5% Machinery and other equipment 5% to 33% Leasehold improvements Lesser of lease term or useful life\nINVESTMENTS RESTRICTED FOR PAYMENT SERVICE OBLIGATIONS-Investments restricted for payment service obligations include U.S. Treasury and Government agency securities, obligations of states and political subdivisions, debt securities issued by foreign governments, corporate securities, a corporate note and other debt securities due beyond one year. These investments are stated at amortized cost, or at estimated realizable value when there is other than temporary impairment of value.\nMarketable equity securities (common and preferred stocks) are stated at the lower of aggregate cost or market. A valuation allowance, representing the excess of cost over market of equity securities, is included as a reduction of common stock and other equity. The cost of investment securities sold is determined using the specific identification method. Realized gains and losses on the disposition of investment securities and adjustments to reflect other than temporary impairment of the value of investment securities are reflected in income.\nINTANGIBLES-Intangibles (primarily goodwill) are carried at cost less accumulated amortization of $113,453,000 at December 31,1993 and $99,602,000 at December 31, 1992. Intangibles of $166,688,000, which arose prior to October 31, 1970, are not being amortized. Intangibles arising after October 31, 1970 are amortized on the straight-line method over the periods of expected benefit, but not in excess of 40 years. Dial evaluates the possible impairment of goodwill and other intangible assets at each reporting period based on the undiscounted projected operating income of the related business unit.\nINCOME TAXES-Income taxes are provided based upon the provisions of SFAS No. 109, \"Accounting for Income Taxes,\" which, among other things, requires that recognition of deferred income taxes be measured by the provisions of enacted tax laws in effect at the date of the financial statements.\nPENSION AND OTHER BENEFITS-Trusteed, noncontributory pension plans cover substantially all employees. Benefits are based primarily on final average salary and years of service. Funding policies provide that payments to pension trusts shall be at least equal to the minimum funding required by applicable regulations.\nDial has defined benefit postretirement plans that provide medical and life insurance for eligible retirees and dependents. Until 1992, the cost of these benefits was generally expensed as claims were incurred.\nEffective January 1, 1992, Dial adopted the method of accounting for postretirement benefits other than pensions prescribed by SFAS No. 106, \"Employers' Accounting for Postretirement Benefits Other Than Pensions,\" which requires recognition of liabilities for such benefits over the period that services are provided by employees. Dial elected to record the cumulative effect of initial application of SFAS No. 106 rather than amortizing such amount over 20 years as permitted by the standard. See Note L of Notes to Consolidated Financial Statements for further information.\nNET INCOME (LOSS) PER COMMON SHARE-Net income (loss) per common share is based on net income (loss) after preferred stock dividend requirements and the weighted average number of common shares outstanding during each year after giving effect to stock options considered to be dilutive common stock equivalents. Fully diluted net income (loss) per common share is not materially different from primary net income (loss) per common share. The average outstanding common and equivalent shares does not include 3,923,933 and 5,033,565 shares held by the Employee Equity Trust (the \"Trust\") at December 31, 1993 and 1992, respectively. Shares held by the Trust are not considered outstanding for net income (loss) per share calculations until the shares are released from the Trust.\n\f B. ACQUISITIONS OF BUSINESSES AND OTHER ASSETS\nNet cash paid, assets acquired and debt and other liabilities assumed in all acquisitions were as follows:\nDuring 1993, Dial purchased the Renuzit line of air fresheners and three convention services companies.\nIn November 1993, Dial announced the finalization of an agreement to purchase 15 in-flight catering kitchens from United Airlines. Dial purchased the first four kitchens on December 30, 1993. The remaining kitchens are expected to be phased-in during 1994, at a purchase price of approximately $111,000,000.\nIn December 1993, Dial acquired the remaining 49% interest in a joint venture which constructed an office building in Phoenix, Arizona, that serves as its corporate headquarters complex.\nAcquisitions of businesses were accounted for as purchases and the results of their operations have been included in the Statement of Consolidated Income from the dates of acquisition. The results of operations of the acquired companies from the beginning of the year to the dates of acquisition are not material.\n\f C. RESTRUCTURING AND OTHER CHARGES-CONTINUING OPERATIONS\nDial recorded restructuring and other charges of $30,000,000 ($19,800,000 after-tax, or $0.47 per share) in the fourth quarter of 1992, attributable to the Travel and Leisure and Payment Services Group primarily to provide for termination of an unfavorable airport concession contract and related matters, and to provide for costs to reposition the cruise line to compete more effectively in the Caribbean market.\nIn the fourth quarter of 1991, Dial provided for restructuring and other charges and spin-off transaction costs of $64,000,000 ($54,871,000 after-tax, or $1.37 per share). Of this amount, $40,000,000 ($25,971,000 after-tax) was charged to the Travel and Leisure and Payment Services Group primarily to provide for estimated losses on an unfavorable airport concession contract and for losses as a result of the bankruptcy of a large money order agent in its payment services subsidiary. The remaining provision of $24,000,000 ($28,900,000 after-tax) was made primarily to provide for transaction costs arising from the spin-off of GFC Financial and for certain income tax matters related to prior years.\nSuch restructuring and other charges and spin-off transaction costs are summarized below:\n\f D. DISCONTINUED OPERATIONS AND DISPOSITIONS\nOn August 12, 1993, Dial sold, through an initial public offering, 20 million shares of common stock of MCII, pursuant to an underwriting agreement dated August 4, 1993. Transportation Manufacturing Operations, Inc., Dial's Transportation Manufacturing and Service Parts subsidiary, was transferred to MCII in connection with the public offering of MCII shares. The disposition of MCII, the sale of the Canadian transit bus manufacturing business in June 1993, and the liquidation, completed in early 1993, of a trailer manufacturing and transport services company, concluded the disposal of the Transportation Manufacturing and Service Parts Group.\nAt a special meeting on March 3, 1992, shareholders of Dial approved the spin-off of GFC Financial, which comprised Dial's commercial lending and mortgage insurance subsidiaries. As a result of the spin-off, the holders of common stock of Dial received a Distribution (the \"Distribution\") of one share of common stock of GFC Financial for every two shares of Dial common stock.\nIn connection with the dispositions, special charges to earnings were made in 1992 and 1991 to cover restructuring of certain operations, provisions against Latin American and other loans, certain tax, spin-off transaction and other costs and, in 1993 and 1991, provisions related primarily to previously discontinued businesses. In addition, Greyhound Lines, Inc., which was sold in 1987 and filed for bankruptcy on June 4, 1990 as the result of a work stoppage and strike-related violence, emerged from bankruptcy in late 1991, resulting in a partial reversal of a loss provision made in 1990.\n\f\nThe caption \"Income (loss) from discontinued operations\" in the Statement of Consolidated Income for the years ended December 31 includes the following:\nBusinesses, other than those described above, with aggregate net assets of $48,584,000 and $3,713,000 were sold in 1992 and 1991, respectively.\n\f E. INVENTORIES\nInventories at December 31 consisted of the following:\nF. PROPERTY AND EQUIPMENT\nProperty and equipment at December 31 consisted of the following:\n\f G. SHORT-TERM DEBT\nDial satisfies its short-term borrowing requirements with bank lines of credit and by the issuance of commercial paper and promissory notes.\nAt December 31, 1993, outstanding commercial paper and promissory notes were supported by $500,000,000 of credit commitments available under a long-term revolving bank credit agreement. At December 31, 1993, $256,666,000 of the long-term revolving bank credit supported $224,666,000 of commercial paper and promissory notes, and the guarantee of a $32,000,000 ESOP loan.\nDial's foreign subsidiaries also maintain short-term bank lines in various currencies, which amount to approximately $12,269,000, of which $2,335,000 was outstanding at December 31, 1993. The short-term bank lines are subject to annual renewal and, in most instances, can be withdrawn at any time at the option of the banks.\nThe following information pertains to Dial's commercial paper and promissory notes (classified as long-term debt) and other short-term debt:\n\f H. LONG-TERM DEBT\nLong-term debt at December 31 was as follows:\nInterest paid in 1993, 1992 and 1991 was approximately $55,807,000, $59,962,000 and $69,218,000, respectively. As a result of Dial's management of its interest rate exposure through interest rate swap agreements as discussed further in Note N to the Consolidated Financial Statements, the effective interest rate on certain debt may differ from that disclosed above.\nDuring the third quarter of 1993, Dial utilized the proceeds from the sale of MCII to repurchase approximately 1,000,000 shares of Dial's common stock on the open market and to reduce outstanding short-term debt. Dial also prepaid $187,250,000 principal amount of long-term, fixed-rate debt, having a weighted average interest rate of 10%. These prepayments resulted in an extraordinary charge (after-tax) of $21,908,000.\nDuring 1993, Dial filed a $300,000,000 Senior Debt Securities Shelf Registration with the Securities and Exchange Commission under which Dial could issue senior notes for various amounts and at various rates and maturities. During 1993, Dial issued $230,000,000 of debt under the program with maturities of five to eleven years with a weighted average interest rate of 6.2%. Subsequent to December 31, 1993, Dial issued the remaining $70,000,000 of debt under the senior note program with maturities of six to fifteen years with a weighted average interest rate of 6.1%.\nA long-term revolving bank credit is available from participating banks under an agreement which provides for a total credit of $500,000,000. Borrowings were available at December 31, 1993 on a revolving basis until June 30, 1997. Annually, at Dial's request and with the participating banks' consent, the terms of the agreement may be extended for a one-year period.\nThe interest rate applicable to borrowings under the agreement is, at Dial's option, indexed to the bank prime rate or the London Interbank Offering Rate (\"LIBOR\"), plus appropriate spreads over such indices during the period of the borrowing agreement. The agreement also provides for commitment fees. Such spreads and fees can change moderately should Dial's debt ratings change.\nDial, in the event that it becomes advisable, intends to exercise its right under the agreement to borrow for the purpose of refinancing short-term borrowings; accordingly, short-term borrowings totaling $224,666,000 and $336,447,000 at December 31, 1993 and 1992, respectively, have been classified as long-term debt.\nAnnual maturities of long-term debt due in the next five years will approximate $2,295,000 (1994), $22,185,000 (1995), $32,167,000 (1996), $226,714,000 (1997) and $32,043,000 (1998). Included in 1997 is $224,666,000 which represents the maturity of short-term borrowings assuming they had been refinanced utilizing the revolving credit facility and the term of the facility was not extended. However, Dial expects the term of the facility to be extended.\nCanadian revolving credit loans are available to a Canadian Services subsidiary from banks under agreements which provide for credit of $7,554,000.\nDial's long-term debt agreements include various restrictive covenants and require the maintenance of certain defined financial ratios with which Dial is in compliance.\n\f I. PREFERRED STOCK AND COMMON STOCK AND OTHER EQUITY\nAt December 31, 1993, there were 48,554,362 shares of common stock issued and 46,018,008 shares outstanding. At December 31, 1993, 3,923,933 of the outstanding shares were held by The Dial Corp Employee Equity Trust.\nDial has 442,352 shares of $4.75 Preferred Stock authorized, of which 388,352 shares are issued. The holders of the $4.75 Preferred Stock are entitled to a liquidation preference of $100 per share and to annual cumulative sinking fund redemptions of 6,000 shares. Dial presently holds 153,251 shares which will be applied to this sinking fund requirement; therefore, the 235,101 shares held by others are scheduled to be redeemed in the years 2019 to 2058. In addition, Dial has authorized 5,000,000 and 2,000,000 shares of Preferred Stock and Junior Participating Preferred Stock, respectively.\nDial has one Preferred Stock Purchase Right (\"Right\") outstanding on each outstanding share of its common stock. The Rights contain provisions to protect shareholders in the event of an unsolicited attempt to acquire Dial which is not believed by the Board of Directors to be in the best interest of shareholders. The Rights are represented by the common share certificates and are not exercisable or transferable apart from the common stock until such a situation arises. The Rights may be redeemed by Dial at $0.05 per Right prior to the time any person or group has acquired 20% or more of Dial's shares. Dial has reserved 1,000,000 shares of Junior Participating Preferred Stock for issuance in connection with the Rights.\nDuring 1989, Dial arranged to fund its matching contributions to employees' 401k plans through a leveraged Employee Stock Ownership Plan (\"ESOP\"). All eligible employees of Dial and its participating affiliates, other than certain employees covered by collective bargaining agreements that do not expressly provide for participation of such employees in an ESOP, may participate in the ESOP.\nIn June 1989, Dial sold 1,138,791 shares of treasury stock to the ESOP for $35.125 per share. In connection with the spin-off of GFC Financial in March 1992, the ESOP received one share of common stock of GFC Financial for every two shares of Dial common stock held by the ESOP. The ESOP subsequently sold the shares of GFC Financial on the open market and used the proceeds to purchase 273,129 shares of Dial's common stock. ESOP shares are treated as outstanding for net income (loss) per share calculations.\nThe ESOP borrowed $40,000,000 to purchase the 1,138,791 shares of treasury stock in 1989. The ESOP's obligation to repay this borrowing is guaranteed by Dial; therefore, the unpaid balance of the borrowing ($32,000,000 at December 31, 1993) has been reflected in the accompanying balance sheet as long-term debt and the amount representing unearned employee benefits has been recorded as a deduction from common stock and other equity. The liability is being reduced as the ESOP repays the borrowing, and the amount in common stock and other equity is being reduced as the employee benefits are charged to expense. The ESOP intends to repay the loan (plus interest) using Dial contributions and dividends received on the shares of common stock held by the ESOP. Information regarding ESOP transactions for the years ended December 31 is as follows:\nShares are released for allocation to participants based upon the ratio of the year's principal and interest payments to the sum of the total principal and interest payments over the life of the plan. Expense of the ESOP is recognized based upon the greater of cumulative cash payments to the plan or 80% of the cumulative expense that would have been recognized under the shares allocated method, in accordance with Statement of Position 76-3, \"Accounting for Certain Employee Stock Ownership Plans\" and Emerging Issues Task Force Abstract No. 89-8, \"Expense Recognition for Employee Stock Ownership Plans\". Under this method, Dial has recorded expense of $1,782,000, $2,210,000 and $2,630,000 in 1993, 1992 and 1991, respectively.\nESOP shares at December 31 were as follows:\nIn September 1992, Dial sold 5,245,900 shares of treasury stock to The Dial Corp Employee Equity Trust (the \"Trust\") for a promissory note valued at $200,000,000 ($38.125 per share). The Trust is being used to fund certain existing employee compensation and benefit plans over the scheduled 15-year term. Through December 31, 1993, the Trust had sold 1,321,967 shares to fund such benefits. The $200,000,000, representing unearned employee benefits, was recorded as a deduction from common stock and other equity, and is being reduced as employee benefits are funded.\nAt December 31, 1993, retained income of $75,687,000 was unrestricted as to payment of dividends by Dial.\n\f J. STOCK OPTIONS\nThe Board of Directors approved and on March 3, 1992, the shareholders adopted the 1992 Stock Incentive Plan (\"1992 Plan\") for the grant of options and restricted stock to officers, directors and certain key employees. The Plan replaces the 1983 Stock Option and Incentive Plan (\"1983 Plan\"). No new awards will be made under the 1983 Plan except to provide for the adjustments hereafter described. In connection with the Distribution, each option, related Limited Stock Appreciation Right (\"LSAR\") and related Stock Appreciation Right (\"SAR\") held by an employee of Dial who remained an employee of Dial after the Distribution was adjusted so that the aggregate exercise price and the aggregate spread before the Distribution were preserved at the time of the Distribution. For each share of restricted stock held by a Dial employee who remained an employee of Dial after the Distribution, such employee received additional shares of restricted stock with a market value which compensated for the Distribution. Options and restricted stock held by an employee of Dial that became an employee of GFC Financial were surrendered in accordance with the related agreements.\nThe 1992 Plan provides for the following types of awards: (a) stock options (both incentive stock options and nonqualified stock options), (b) SARs, and (c) performance-based and restricted stock. The Plan authorized the issuance of options for up to 2 1\/2% of the total number of shares of common stock outstanding as of the first day of each year; provided that any shares available for grant in a particular calendar year which are not, in fact, granted in such year shall not be added to shares available for grant in any subsequent calendar year. In addition to the limitation set forth above with respect to number of shares available for grant in any single calendar year, no more than 5,000,000 shares of common stock shall be cumulatively available for grant of incentive options over the life of the Plan. In addition, 500,000 shares of Preferred Stock are reserved for distribution under the 1992 Plan.\nThe stock options and SARs outstanding at December 31, 1993 are granted for terms of ten years; 50% become exercisable after one year and the balance become exercisable after two years from the date of grant. Stock options and appreciation rights are exercisable based on the market value at the date of grant. LSARs vest fully at date of grant and are exercisable only for a limited period (in the event of certain tenders or exchange offers for Dial's common stock). SARs and\/or LSARs are issued in tandem with certain stock options and the exercise of one reduces, to the extent exercised, the number of shares represented by the other.\n\f\nInformation with respect to options granted and exercised for the three years ended December 31, 1993 is as follows:\nAt December 31, 1993, stock options with respect to 3,883,370 common shares are outstanding at exercise prices ranging from $18.35 to $42.56 per share, of which 2,653,695 shares are exercisable at an average price of $28.36 per share.\nPerformance-based stock awards (75,900 shares awarded in 1993) vest over a three-year period from the date of grant. The stock awarded vests only if performance targets relative to the S & P 500 stock index and Dial's proxy comparator group are achieved. Restricted stock awards (89,625 shares awarded in 1991) vest generally over periods not exceeding five years from the date of grant. There were no restricted stock awards in 1993 and 1992. However, 85,161 shares of restricted stock were allocated to employees of Dial in 1992 to compensate for the effect of the Distribution. A holder of the performance-based and restricted stock has the right to receive dividends and vote the shares but may not sell, assign, transfer, pledge or otherwise encumber the stock.\n\f K. INCOME TAXES\nDeferred income tax assets (liabilities) included in the Consolidated Balance Sheet at December 31 related to the following:\nDeferred income tax assets (liabilities) at December 31, 1993, relating to interest rate swaps, amortization of intangibles and advertising and promotion costs capitalized for tax, reflect adjustments in 1993 resulting from the settlement of Internal Revenue Service examinations for 1985 and 1986.\nThe consolidated provision (benefit) for income taxes on income from continuing operations for the years ended December 31 consisted of the following:\nIncome taxes paid in 1993, 1992 and 1991, amounted to $12,206,000, $35,160,000 and $35,391,000, respectively.\nCertain tax benefits related primarily to stock options and dividends paid to the ESOP are credited to common stock and other equity and amounted to $1,913,000, $5,382,000 and $1,240,000 in 1993, 1992 and 1991, respectively.\nEligible subsidiaries (including MCII and GFC Financial and certain of their subsidiaries up to the sale and Distribution date, respectively) are included in the consolidated federal and other applicable income tax returns of Dial.\nCertain benefits of tax losses and credits, which would not have been currently available to certain subsidiaries, or MCII and GFC Financial, on a separate return basis, have been credited to those subsidiaries, or MCII and GFC Financial, by Dial. These benefits are included in the determination of the income taxes of those subsidiaries and MCII and GFC Financial and this policy has been documented by written agreements.\nA reconciliation of the provision for income taxes on income from continuing operations and the amount that would be computed using statutory federal income tax rates on income before income taxes for the years ended December 31 is as follows:\nUnited States and foreign income before income taxes from continuing operations for the years ended December 31 is as follows:\nIn the first quarter of 1992, Dial adopted SFAS No. 109, \"Accounting for Income Taxes,\" which had no material effect on the consolidated financial statements.\n\f L. PENSIONS AND OTHER BENEFITS\nPENSION BENEFITS Net periodic pension cost for the three years ended December 31, 1993 included the following components:\nWeighted average assumptions used were:\n\f\nThe following table indicates the plans' funded status and amounts recognized in Dial's consolidated balance sheet at December 31, 1993 and 1992:\nDial recorded an additional minimum liability of $14,451,000, an intangible asset of $8,587,000, a deferred tax asset of $2,053,000 and a reduction of retained income of $3,811,000 at December 31, 1993; and, an additional minimum liability of $6,868,000, an intangible asset of $5,587,000, a deferred tax asset of $436,000 and a reduction of retained income of $845,000 at December 31, 1992. There are restrictions on the use of excess pension plan assets in the event of a defined change in control of Dial. \f\nPOSTRETIREMENT BENEFITS OTHER THAN PENSIONS Dial and its subsidiaries have defined benefit postretirement plans that provide medical and life insurance for eligible employees, retirees and dependents. In addition, Dial retained the obligations for such benefits for eligible retirees of Greyhound Lines, Inc. (sold in 1987) and Armour and Company (sold in 1983). Benefits applicable to retirees of the businesses sold were recorded as accrued liabilities on an estimated present value basis at the respective dates of sale.\nEffective January 1, 1992, Dial and its U.S. subsidiaries adopted the provisions of SFAS No. 106, \"Employers' Accounting for Postretirement Benefits Other Than Pensions\" (\"OPEB\") which requires that estimated OPEB benefits be accrued during the years the employees provide services. Dial elected to recognize the accumulated postretirement benefit obligation as a one-time charge to income. The accumulated postretirement benefit obligation is the aggregate amount that would have been accrued for OPEB benefits in the years prior to adoption of SFAS No. 106 had the new standard been in effect for those years. The adoption of SFAS No. 106 has no cash impact because the plans are not funded and the pattern of benefit payments did not change. Dial expects to adopt SFAS No. 106 for its foreign subsidiaries in 1995, and anticipates that the effect of such adoption will not be material to the consolidated financial statements.\nThe status of the plans as of December 31, was as follows:\nThe assumed health care cost trend rate used in measuring the accumulated postretirement benefit obligation was 14.5% in 1993 gradually declining to 5.5% by the year 2002 and remaining at that level thereafter for retirees below age 65, and 11% in 1993 gradually declining to 5.5% by the year 2002 and remaining at that level thereafter for retirees above age 65. This is a 1\/2% decrease from the trend rates used for 1993 and later years in 1992's valuations.\nA one-percentage-point increase in the assumed health care cost trend rate for each year would increase the accumulated postretirement benefit obligation as of December 31, 1993 by approximately 11% and the ongoing annual expense by approximately 13%.\nThe net periodic postretirement benefit cost at December 31 includes the following components:\n\f M. LEASES\nCertain airport and other retail facilities, cruise ships, plants, offices and equipment are leased. The leases expire in periods ranging generally from one to 30 years and some provide for renewal options ranging from one to 29 years. Also, certain leases contain purchase options. Leases which expire are generally renewed or replaced by similar leases.\nAt December 31, 1993, future minimum rental payments and related sublease rentals receivable with respect to noncancellable operating leases with terms in excess of one year were as follows:\nAt the end of the lease terms, Dial has options to purchase the cruise ships and certain other leased assets for an aggregate purchase price of $136,250,000. If the purchase options are not exercised, Dial will make residual guarantee payments aggregating $93,207,000 which are refundable to the extent that the lessors' subsequent sales prices exceed certain levels.\nAs discussed in Note B of Notes to Consolidated Financial Statements, in November 1993, Dial entered into an agreement to purchase 15 in-flight catering kitchens from United Airlines. Future minimum rental payments for leases related to the kitchens expected to be phased in during 1994 are as follows: $3,875,000 (1994), $4,267,000 (1995), $4,265,000 (1996), $4,275,000 (1997), $4,265,000 (1998), and $90,135,000 thereafter. These amounts are not included in the table of future minimum rental payments at December 31, 1993.\n\f\nInformation regarding net operating lease rentals for the three years ended December 31 is as follows:\nContingent rentals on operating leases are based primarily on sales and revenues for buildings and leasehold improvements and usage for other equipment.\nDial is a 50% partner in a joint venture which owns a resort and conference hotel in Oakbrook, Illinois. Dial has leased the hotel through September 1, 2002, and the future rental payments are included in the table of future minimum rental payments. In addition, Dial and a third party have agreed to lend the joint venture $10,000,000 and $5,000,000, respectively, at 8 3\/4% on July 1, 1997 to be secured by a second mortgage on the property to prepay $15,000,000 of the joint venture's nonrecourse first mortgage obligation. If the joint venture is unable to repay or refinance the first mortgage note, Dial has an option to purchase the note from the lender on September 30, 2002, its due date, at its then unpaid principal amount which is expected to be approximately $24,650,000. If the purchase option is not exercised, Dial will make residual guarantee payments equal to the greater of $5,000,000 or 150% of any shortfall in fair market value of the hotel compared to the unpaid principal amount of the note on such date.\n\f N. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND FAIR VALUE OF FINANCIAL INSTRUMENTS\nFINANCIAL ISNTRUMENTS WITH OFF-BALANCE-SHEET RISK Dial is a party to financial instruments with off-balance-sheet risk which are entered into in the normal course of business to meet its financing needs and to manage its exposure to fluctuations in interest and foreign exchange rates. These financial instruments include revolving sale of receivable agreements, interest rate swap agreements and foreign exchange forward contracts. The instruments involve, to a varying degree, elements of credit, interest rate and exchange rate risk in addition to amounts recognized in the financial statements.\nAt December 31, 1993, Dial's subsidiaries have agreements to sell up to $115,000,000 of accounts receivable with a major financial institution under which the financial institution has agreed to invest collected amounts in new purchases, providing a stable level of purchased accounts. The agreements to purchase accounts receivable, which were fully utilized at December 31, 1993 and December 31, 1992, mature in January of each year, but are expected to be extended annually by mutual agreement. They are currently extended to January 1995. Average monthly proceeds from the sale of accounts receivable were $103,700,000, $91,200,000 and $90,900,000 during 1993, 1992 and 1991, respectively. Dial's exposure to credit loss for receivables sold is represented by the recourse provision under which Dial is obligated to repurchase uncollectible receivables sold subject to certain limitations.\nDial enters into interest rate swap agreements as a means of managing its interest rate exposure. The agreements are with major financial institutions which are expected to fully perform under the terms of the agreements thereby mitigating the credit risk from the transactions. The agreements are contracts to exchange fixed and floating interest rate payments periodically over the life of the agreements without the exchange of the underlying notional amounts. The notional amounts of such agreements are used to measure interest to be paid or received and do not represent the amount of exposure to credit loss. The amounts to be paid or received under the interest rate swap agreements are accrued consistent with the terms of the agreements and market interest rates.\nAt December 31, 1993, Dial had $140,000,000 notional amount of interest rate swap agreements in effect which exchange floating rate interest payments for fixed rate interest payments with a weighted average interest rate of 9.3%. These swap agreements expire as follows: $100,000,000 (1995), and $40,000,000 (1998). Dial also had $250,000,000 notional amount of interest rate swap agreements in effect at December 31, 1993, which exchange fixed rate interest payments with a weighted average interest rate of 5.6% for floating rate interest payments. These swap agreements, which were entered into during 1993, expire as follows: $50,000,000 (1994), and $200,000,000 (2003).\nIn addition, Dial had $332,600,000 notional amount of interest rate swap agreements in effect at December 31, 1993 which were counterswapped, fixing the future net payments owed by Dial against the cash proceeds received by Dial when the swap agreements were entered, at discount rates ranging from 7.1% to 10.4%. The swap and related counterswap agreements expire as follows: $65,000,000 (1994), $67,600,000 (1995), and $200,000,000 (1996), except for $67,600,000 expiring in 1995 and $100,000,000 expiring in 1996, for which the related counterswap agreement expires in 2000. Following the period that the swap agreements expire through 2000, Dial will pay a fixed rate of interest in exchange for a floating rate.\nCash consideration received on the swaps is amortized as an offset to expense from future net swap payments over the life of the related swap. Net expense of $13,999,000, $18,856,000 and $14,048,000 for 1993, 1992 and 1991, respectively, is included in the Statement of Consolidated Income under the caption, \"Unallocated corporate expense and other items, net.\" The unamortized balance ($37,780,000 and $57,709,000 at December 31, 1993 and 1992, respectively) of such consideration is included in the Consolidated Balance Sheet under the caption, \"Other deferred items and insurance reserves.\"\nDial also enters into foreign exchange forward contracts to hedge foreign currency transactions. These contracts are purchased to reduce the impact of foreign currency fluctuations on operating results. Dial does not engage in foreign currency speculation. The contracts do not subject Dial to risk due to exchange rate movements as gains and losses on the contracts offset gains and losses on the transactions being hedged. At December 31, 1993, Dial had approximately $125,000,000 of foreign exchange forward contracts outstanding. Dial's theoretical risk in these transactions is the cost of replacing, at current market rates, these contracts in the event of default by the other party. Management believes the risk of incurring such losses is remote as the contracts are entered into with major financial institutions.\nFAIR VALUE OF FINANCIAL INSTRUMENTS The following disclosure of the estimated fair value of financial instruments is made in accordance with the requirements of SFAS No. 107, \"Disclosures About Fair Value of Financial Instruments.\" The estimated fair value amounts have been determined by Dial using available market information and valuation methodologies described below. However, considerable judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented herein may not be indicative of the amounts that Dial could realize in a current market exchange. The use of different market assumptions or valuation methodologies may have a material effect on the estimated fair value amounts.\n\f\nThe carrying values of cash and cash equivalents, receivables, accounts payable and payment service obligations approximate fair values due to the short-term maturities of these instruments. The carrying amounts and estimated fair values of Dial's other financial instruments at December 31, 1993 are as follows:\nThe methods and assumptions used to estimate the fair values of the financial instruments are summarized as follows:\nInvestments restricted for payment service obligations and equity and debt investments and notes receivable-The fair values of investments were estimated using either quoted market prices or, to the extent there are no quoted market prices, market prices of investments of a similar nature. For notes receivable, the carrying amounts approximate fair values because the rates on such notes are floating rates.\nDebt-The fair value of debt was estimated by discounting the future cash flows using rates currently available for debt of similar terms and maturity. The carrying values of short-term bank loans, commercial paper and promissory notes were assumed to approximate fair values due to their short-term maturities.\nInterest rate swaps-The fair values were estimated by discounting the expected cash flows using rates currently available for interest rate swaps of similar terms and maturities. The fair value represents the estimated amount that Dial would pay to the dealer to terminate the swap agreement at December 31, 1993.\nForeign exchange forward contracts (used for hedging purposes)- The fair value is estimated using quoted exchange rates.\n\f O. LITIGATION AND CLAIMS\nDial and certain subsidiaries are plaintiffs or defendants to various actions, proceedings and pending claims. Certain of these pending legal actions are or purport to be class actions. Some of the foregoing involve, or may involve, compensatory, punitive or other damages in material amounts. Litigation is subject to many uncertainties and it is possible that some of the legal actions, proceedings or claims referred to above could be decided against Dial. Although the amount of liability at December 31, 1993 with respect to these matters is not ascertainable, Dial believes that any resulting liability should not materially affect Dial's financial condition or results of operations.\nDial is subject to various environmental laws and regulations of the United States as well as of the states in whose jurisdictions Dial operates. As is the case with many companies, Dial faces exposure to actual or potential claims and lawsuits involving environmental matters. It is Dial's policy to accrue environmental and clean-up costs when it is probable that a liability has been incurred and the amount of the liability is reasonably estimable. Although Dial is a party to certain environmental disputes, Dial believes that any liabilities resulting therefrom, after taking into consideration Dial's insurance coverage and amounts already provided for, should not have a material adverse effect on Dial's financial position or results of operations.\n\f P. PRINCIPAL BUSINESS SEGMENTS\nFor 1993, Dial's Services companies, previously reported as a single principal business segment, were separated into three principal business segments for financial reporting purposes. Prior year data have been restated to reflect this change. The business activities included in each segment are set forth elsewhere in this Annual Report.\nOperating income by segment represents revenues less costs of sales and services before unallocated corporate and other items, net, interest expense, minority interests and income taxes.\n\f\n\f Q. CONDENSED CONSOLIDATED QUARTERLY RESULTS (UNAUDITED)\nINDEPENDENT AUDITORS' REPORT\nTo the Stockholders and Board of Directors of The Dial Corp:\nWe have audited the consolidated financial statements of The Dial Corp as of December 31, 1993 and 1992, and for the three years in the period ended December 31, 1993, and have issued our report thereon dated February 25, 1993; such report is included elsewhere in this Form 10-K. Our audits also included the financial statement schedules of The Dial Corp listed in Item 14. These financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein.\n\/s\/ Deloitte & Touche Deloitte & Touche Phoenix, Arizona February 25, 1994\n\f\nAll other required items are presented elsewhere in this document or are less than 1% of revenues.","section_15":""}
{"filename":"873084_1993.txt","cik":"873084","year":"1993","section_1":"Item 1. Business\nThe Sears Credit Account Trust 1991 A (the \"Trust\") was formed pursuant to the Pooling and Servicing Agreement dated as of March 1, 1991 (the \"Pooling and Servicing Agreement\") among Sears, Roebuck and Co. (\"Sears\") as Servicer, its wholly-owned subsidiary, Sears Receivables Financing Group, Inc. (\"SRFG\") as Seller, and Continental Bank, National Association as trustee (the \"Trustee\"). The Trust's only business is to act as a passive conduit to permit investment in a pool of retail consumer receivables.\nItem 2.","section_1A":"","section_1B":"","section_2":"Item 2. Properties\nThe property of the Trust includes a portfolio of receivables (the \"Receivables\") arising in selected accounts under open-end credit plans of Sears (the \"Accounts\") and all monies received in payment of the Receivables. At the time of the Trust's formation, Sears sold and contributed to SRFG, which in turn conveyed to the Trust, all Receivables existing under the Accounts as of the end of certain of Sears regular billing cycles ending in February, 1991 and all Receivables arising under the Accounts from time to time thereafter until the termination of the Trust. Information related to the performance of the Receivables during 1993 is set forth in the ANNUAL STATEMENT filed as Exhibit 21 to this Annual Report on Form 10-K.\nItem 3.","section_3":"Item 3. Legal Proceedings\nNone\nItem 4.","section_4":"Item 4. Submission of Matters to a Vote of Security Holders\nNone\nPART II\nItem 5.","section_5":"Item 5. Market for Registrant's Common Equity and Related Stockholder Matters\nInvestor Certificates are held and delivered in book-entry form through the facilities of The Depository Trust Company (\"DTC\"), a \"clearing agency\" registered pursuant to the provisions of Section 17A of the Securities Exchange Act of 1934, as amended. All outstanding definitive Investor Certificates are held by CEDE and Co., the nominee of DTC.\nItem 9.","section_6":"","section_7":"","section_7A":"","section_8":"","section_9":"Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure\nNone\nPART III\nItem 12.","section_9A":"","section_9B":"","section_10":"","section_11":"","section_12":"Item 12. Security Ownership of Certain Beneficial Owners and Management\nAs of March 15, 1994, 100% of the Investor Certificates were held in the nominee name of CEDE and Co. for beneficial owners.\nSRFG, as of March 15, 1994, owned 100% of the Seller Certificate, which represented beneficial ownership of a residual interest in the assets of the Trust as provided in the Pooling and Servicing Agreement.\nItem 13.","section_13":"Item 13. Certain Relationships and Related Transactions\nNone\nPART IV\nItem 14.","section_14":"Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K\n(a) Exhibits:\n21. 1993 ANNUAL STATEMENT prepared by the Servicer.\n28. ANNUAL INDEPENDENT AUDITOR'S REPORTS pursuant to Section 3.06 of the Pooling and Servicing Agreement.\n(a) Review of servicing procedures.\n(b) Annual Servicing Letter.\n(b) Reports on Form 8-K:\nCurrent reports on Form 8-K are filed on or before the Distribution Date each month (on, or the first business day after, the 15th of the month). The reports include as an exhibit, the MONTHLY INVESTOR CERTIFICATEHOLDERS' STATEMENT. Current Reports on Form 8-K were filed on October 15, 1993, November 15, 1993, and December 15, 1993.\nSIGNATURES\nPursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.\nSears Credit Account Trust 1991 A (Registrant)\nBy: Sears Receivables Financing Group, Inc. (Originator of the Trust)\nBy: \/S\/ALICE M. PETERSON _____________________________________ Alice M. Peterson President and Chief Executive Officer\nDated: March 30, 1994\nEXHIBIT INDEX\nPage number in sequential Exhibit No. number system\n21. 1993 ANNUAL STATEMENT prepared by the Servicer.\n28. ANNUAL INDEPENDENT AUDITOR'S REPORTS pursuant to Section 3.06 of the Pooling and Servicing Agreement.\n(a) Review of servicing procedures.\n(b) Annual Servicing Letter.\nExhibit 21\nSEARS CREDIT ACCOUNT TRUST 1991 A\n8.85% CREDIT ACCOUNT PASS-THROUGH CERTIFICATES\n1993 ANNUAL STATEMENT\nPursuant to the terms of the letter issued by the Securities and Exchange Commission dated September 5, 1991 (granting relief to the Trust from certain reporting requirements of the Securities Exchange Act of 1934, as amended), aggregated information regarding the performance of Accounts and payments to Investor Certificateholders in respect of the Due Periods related to the twelve Distribution Dates which occurred in 1993 is set forth below.\n1) The total amount of the distribution to Investor Certificateholders during 1993, per $1,000 interest..$88.50\n2) The amount of the distribution set forth in paragraph 1 above in respect of interest on the Investor Certificates, per $1,000 interest....................$88.50\n3) The amount of the distribution set forth in paragraph 1 above in respect of principal on the Investor Certificates, per $1,000 interest....................$0.00\n4) The aggregate amount of Collections of Principal Receivables processed during the related Due Periods....................................$495,164,278.36\n5) The aggregate amount of Collections of Finance Charge Receivables processed during the related Due Periods....................................$139,525,853.21\n6) The aggregate amount of Collections of Principal Receivables processed during the related Due Periods which were allocated in respect of the Investor Certificates...............................$335,348,694.24\n7) The aggregate amount of Collections of Finance Charge Receivables processed during the related Due Periods which were allocated in respect of the Investor Certificates................................$94,579,855.06\n8) The aggregate amount of Collections of Principal Receivables processed during the related Due Periods which were allocated in respect of the Seller Certificate................................$159,815,584.12\n9) The aggregate amount of Collections of Finance Charge Receivables processed during the related Due Periods which were allocated in respect of the Seller Certificate..................................$44,945,998.15\n10) The excess of the Investor Charged-Off Amount over the sum of (i) payments in respect of the Available Subordinated Amount and (ii) Excess Servicing, if any (an \"Investor Loss\"), per $1,000 interest.............$0.00\n11) The aggregate amount of Investor Losses in the Trust as of the end of the day on December 15, 1993, per $1,000 interest.......................................$0.00\n12) The total reimbursed to the Trust from the sum of the Available subordinated Amount and Excess Servicing, if any, in respect of Investor Losses, per $1,000 interest..............................................$0.00\n13) The amount of the Investor Monthly Servicing Fee payable by the Trust to the Servicer..........$9,999,999.96\n14) The aggregate amount which was deposited in the Principal Funding Account in respect of Collections of Principal Receivables during the related Due Periods..$0.00\n15) The aggregate amount of Investment Income during the related Due Periods...................................$0.00\n16) The total amount on deposit in the Principal Funding Account in respect of Collections of Principal Receivables, as of the end of the reportable year.....$0.00\n17) The Deficit Accumulation Amount, as of the end of the reportable year.......................................$0.00\n18) The aggregate amount which was deposited in the Interest Funding Account in respect of Certificate Interest during the related Due Periods...............$44,250,000.00\n19) The total amount on deposit in the Interest Funding Account in respect of Certificate Interest, as of the end of the reportable year...................$11,062,500.00\nExhibit 28(a)\nFebruary 11, 1994\nMs. Alice M. Peterson Ms. Cynthia K. Duncan Vice President and Treasurer Trust Officer Sears, Roebuck and Co. as Servicer Continental Bank National Sears Tower Association as Trustee Chicago, Illinois 60684 231 South La Salle Street Chicago, Illinois 60697\nWe have applied the procedures listed below to the accounting records of Sears, Roebuck and Co. (\"Sears\") relating to the servicing procedures performed by Sears as Servicer under Section 3.06(b) of the Pooling and Servicing Agreement (the \"Agreement\") for the following Trusts:\nDate of Pooling and Trust Servicing Agreement\nSears Credit Account Trust 1991A March 1, 1991 Sears Credit Account Trust 1991B May 15, 1991 Sears Credit Account Trust 1991C July 1, 1991 Sears Credit Account Trust 1991D September 15, 1991 Sears Credit Account Master Trust I November 18, 1992\nIt is understood that this report is solely for your information and is not be referred to or distributed for any purpose to anyone other than Continental Bank, National Association as Trustee, Investor Certificateholders or the management of Sears. The procedures we performed are as follows:\nCompared the mathematical calculations of each amount set forth in each monthly certificate forwarded by the Servicer, pursuant to Section 3.04(b) of the Agreement, during the calendar year 1993 to the Servicer's computer-generated Portfolio Monitoring and Monthly Cash Flow Allocations report. We found such amounts to be in agreement.\nBecause the above procedures do not constitute an audit conducted in accordance with generally accepted auditing standards, we do not express an opinion on any of the items referred to above.\nFebruary 11, 1994\nMs. Alice M. Peterson Ms. Cynthia K. Duncan Vice President and Treasurer Trust Officer Sears, Roebuck and Co. as Servicer Continental Bank National Association as Trustee\nAs a result of the procedures performed, no matters came to our attention that caused us to believe that the amounts in the monthly certificates require adjustment. Had we performed additional procedures or had we conducted an audit of the monthly certificates in accordance with generally accepted auditing standards, matters might have come to our attention that would have been reported to you. This report relates only to the items specified above and does not extend to any financial statements of Sears taken as a whole.","section_15":""}
{"filename":"14060_1993.txt","cik":"14060","year":"1993","section_1":"Item 1. Business.\n(A) General Description.\nBrenton Banks, Inc. (the \"Parent Company\") is a bank holding company registered under the Bank Holding Company Act of 1956 and a savings and loan holding company under the Savings and Loan Holding Company Act. Brenton Banks, Inc. was organized as an Iowa corporation under the name Brenton Companies in 1948. Subsequently, the Parent Company changed its corporate name to its current name, Brenton Banks, Inc. On December 31, 1993, the Parent Company had direct control of its 13 affiliated banks and 1 savings bank (hereinafter the \"affiliated banks\"), all of which are located in Iowa, 5 of which are national banks organized under the laws of the United States, 8 of which are state banks incorporated under the laws of the State of Iowa, and 1 of which is a federal savings bank organized under the laws of the United States. On December 31, 1993, the affiliated banks were operating 42 banking locations in Iowa. All of the affiliated banks are members of the Federal Deposit Insurance Corporation and all of the affiliated national banks are members of the Federal Reserve System.\nBrenton Banks, Inc. and its subsidiaries (the \"Company\") engages in retail and commercial banking and related financial services. In connection with this banking industry segment, the Company renders the usual products and services of retail and commercial banking such as deposits, commercial loans, personal loans, and trust services. The principal service rendered by the Company consists of making loans. The principal markets for these loans are businesses and individuals. These loans are made at the offices of the affiliated banks and subsidiaries, and some are sold on the secondary market. The Company also engages in activities that are closely related to banking, including mortgage banking and investment brokerage.\nThe Parent Company furnishes specialized services to its affiliated banks and subsidiaries including supervision, administration and review of loan portfolios; administration of investment portfolios, insurance programs and employee benefit plans; performance of examinations and audits; preparation of tax returns; and assistance with respect to accounting and operating systems and procedures, personnel, marketing, trust, investment brokerage services and banking facilities and equipment. Charges for the services are based on the nature and extent of the services provided.\n(B) Recent Developments.\nManagement Changes. Robert L. DeMeulenaere was elected President and Director of Brenton Banks, Inc. at the January 19, 1994 Board of Director's meeting. He succeeds J.C. Brenton as President. J.C. Brenton continues as Director of Brenton Banks, Inc. Robert L. DeMeulenaere joined the organization in 1964 at the Davenport bank. In 1972, he moved to the Cedar Rapids bank as Executive Vice President and in 1982 became President. In 1985, he moved to Des Moines as Senior Vice President-Metro Bank Division, and also became President of Brenton Mortgages, Inc. in 1988. He returned to Cedar Rapids in 1990 as CEO of the Cedar Rapids bank as a result of a major acquisition. In 1994, he returned to Des Moines to assume his new responsibilities as President of Brenton Banks, Inc.\nAccounting Standards. Effective December 31, 1993, the Company adopted the Statement of Financial Accounting Standards No. 115. Under this new accounting standard, the method of classifying investment securities is based on the Company's intended holding period. Accordingly, securities which the Company may sell at its discretion prior to maturity are recorded at their fair value. Additionally, the aggregate unrealized net gains or losses, including the effect of income tax and minority interest, are recorded as a component of common stockholders' equity. At December 31, 1993, aggregate unrealized gains totaled $3,036,270.\nWeather-Related Concerns. Parts of Iowa experienced record flooding during the summer of 1993, but the state's economy did not falter and most Iowans rebounded quickly. The flood had a varied impact in both metropolitan and agricultural areas of the state. Only a few of the businesses served by Brenton\nwere affected by the flood. In some areas, crop production was reduced 25 to 35 percent from flooding, as well as excessive rainfall and fewer days of sunshine; other areas were less severely impacted. Due to the strength of Brenton's borrowers, multi-peril crop insurance, disaster assistance, and government guarantees, Brenton anticipates that the flood will have very little impact on its loan portfolio quality.\nGrowth and Acquisitions. As part of management's strategic growth plans, Brenton Banks, Inc. investigates acquisition opportunities which strengthen the Company's presence in current or selected new market areas.\nDuring 1994, the Company intends to continue to expand both its traditional and non-traditional services. Brenton intends to expand its mortgage banking business in 1994, by expanding mortgage origination and centralizing secondary market operations. Also in early 1994, Brenton purchased an insurance agency in the Tama\/Toledo, Iowa area. The intention is to expand the Tama\/Toledo location to include a loan production office. The Company also intends to open a loan production and investment brokerage office in Newton, Iowa, as well as a retail Brokerage location in downtown Des Moines.\nOn October 1, 1992, Brenton Banks, Inc. merged with Ames Financial Corporation and acquired its wholly-owned subsidiary, Ames Savings Bank, FSB, of Ames, Iowa whose name has since been changed to Brenton Savings Bank, FSB. The institution continues to operate as a federal savings bank, requiring Brenton Banks, Inc. to also register as a savings and loan holding company. As a savings and loan holding company, Brenton Banks, Inc. is required to file certain reports with and be regulated by the Office of Thrift Supervision. See Supervision and Regulation. Late in 1993, Brenton Savings Bank received approval to open a new banking office in Ankeny, Iowa. In addition, the Brenton Savings Bank, FSB has applied to open a banking office in Iowa City, Iowa. Both Ankeny and Iowa City are rapidly expanding markets not presently served by Brenton.\nOther. The information appearing on pages 2 through 8 of the Company's Annual Report to Stockholders for the year ended December 31, 1993 (the \"Annual Report\") filed as Exhibit 13, is incorporated by reference.\n(C) Affiliated Banks.\nThe 14 affiliated banks had 42 banking locations at December 31, 1993, located in 12 of Iowa's 99 counties. These banks serve both agricultural and metropolitan areas. The location and certain other information about the affiliated banks are given below:\nBrenton Bank, N.A., Des Moines is located in the Des Moines, Iowa, metropolitan area. Des Moines is the largest city in Iowa and the population of the metropolitan area is approximately 393,000. In addition to their main banking office, Brenton Bank, N.A., Des Moines has eight offices. All of these offices are located in the Des Moines metropolitan area.\nBrenton Bank and Trust Company, Adel, is located in Adel, Iowa. The bank has offices in Dexter, Redfield and Van Meter, Iowa. Brenton State Bank, Dallas Center, is located in Dallas Center, Iowa and has offices in Granger, Woodward and Waukee, Iowa. These two affiliated banks service customers in parts of Polk, Dallas, Madison, Adair, Guthrie, and Boone counties.\nWarren County Brenton Bank and Trust is located in Indianola, Iowa, and services customers in parts of Polk, Warren, Madison, Marion, Lucas and Clarke counties.\nBrenton National Bank of Perry is located in Perry, Iowa and services parts of Dallas, Boone, Guthrie and Greene counties.\nBrenton State Bank of Jefferson is located in Jefferson, Iowa. This affiliated bank services customers in Greene County.\nBrenton Bank of Palo Alto County is located in Emmetsburg, Iowa and has offices in Mallard and Ayrshire, Iowa. This affiliated bank services Palo Alto County.\nBrenton Bank and Trust Company, Clarion, is located in Clarion, Iowa, and has offices in Eagle Grove and Rowan, Iowa. This affiliated bank services customers in parts of Wright, Humboldt and Webster counties.\nBrenton First National Bank, Davenport, is located in Davenport, Iowa and services customers in the Quad-Cities metropolitan area with a population of approximately 351,000. The bank has four offices in Davenport.\nBrenton National Bank-Poweshiek County is located in Grinnell, Iowa and services parts of Poweshiek and Jasper counties.\nBrenton Bank and Trust Company, Marshalltown, Iowa is located in Marshalltown, Iowa and has one office in Marshalltown and one office in Albion, Iowa. The bank services customers in Marshall County.\nBrenton Bank and Trust Company of Cedar Rapids is located in Cedar Rapids, Iowa and services customers in Linn County, population of approximately 169,000. The bank has three offices in Cedar Rapids and one office in Marion, Iowa.\nBrenton Bank, N.A. Knoxville is located in Knoxville, Iowa. The bank services customers of Marion County south of the Des Moines river.\nBrenton Savings Bank, FSB is located in Ames, Iowa and has one office in Ames and one office in Story City. The savings bank serves customers in Story County.\nAt December 31, 1993, four of the affiliated banks owned and operated insurance agencies handling group, fire, crop, homeowner's, automobile and liability insurance. One of the affiliated banks operates insurance agency activities through a corporate subsidiary and three of the affiliated banks conduct the activities directly. In addition, two of the affiliated banks own and operate real estate agencies. One of the affiliated banks operates real estate agency activities through a corporate subsidiary, while the other bank conducts the activities directly. The total commissions from the insurance and real estate agencies are not substantial in relation to total other receipts of any of the affiliated banks owning these agencies.\n(D) Bank-Related Subsidiaries and Affiliates.\nBrenton Brokerage Services, Inc., a wholly owned subsidiary of Brenton Bank, N.A., Des Moines, was formed in 1992 and provides a full array of retail investment brokerage services to customers. The company is not involved with the direct issuance, floatation, underwriting or public sale of securities. At December 31, 1993, this subsidiary had 25 licensed brokers serving all Brenton banks.\nBrenton Bank Services Corporation, a bank services company owned by the affiliated banks, provides centralized accounting, operations and financial reporting services; and coordinates centralized proof services and the computer processing services for the Company.\nBrenton Mortgages, Inc., a wholly-owned subsidiary of the Parent Company, engages in the mortgage servicing business. This subsidiary services numerous mortgage loans sold to institutional investors and the mortgage loan portfolios of the affiliated banks.\nBrenton Insurance Services, Inc., a wholly-owned subsidiary of the Parent Company, provides insurance risk management services for the Company.\nBrenton Properties, Inc., a wholly-owned subsidiary of the Parent Company, owned an office building in Cedar Rapids, Iowa, part of which was leased to Brenton Bank and Trust Company of Cedar\nRapids for its main banking facility. Brenton Properties, Inc. was dissolved in 1993, when the building was sold to Brenton Bank and Trust Company of Cedar Rapids.\n(E) Executive Officers of the Registrant.\nThe term of office for the executive officers of the Parent Company is from the date of election until the next Annual Organizational Meeting of the Board of Directors. The names and ages of the executive officers of the Parent Company as of March 14, 1994, the Parent Company offices held by these executive officers on that date, the period during which the executive officers have served as such and the other positions held with the Company by these officers during the past five years are set forth below and on the following page:\nAll of the foregoing individuals have been employed by the Company for the past five years, except for Steven F. Schneider, who was an Investment Representative of A.G. Edwards & Sons, Inc., Des Moines, Iowa, prior to February 1990; John R. Amatangelo, who was Senior Vice President and Director of Operations of Ameritrust Indiana Corporation, Indianapolis, Indiana, from May 1989 to August 1991, Senior Vice President and General Manager, Banking Office Support and ATM Administration of MCorp, Dallas, Taxes from September 1988 to May 1989, and Executive Vice President of MBank Brownsville, N.A., Brownsville, Texas, prior to September 1988; Saulene M. Richer, who was the Opportunity Development Director of I.B.M Corporation, Chicago, Illinois from February 1989 to March 1990, and Branch Manager of I.B.M. Corporation, Des Moines, Iowa, prior to February 1989; and Gary D. Ernst, who was Senior Vice President\/Senior Trust Officer of First National Bank, Iowa City, Iowa, from November 1989 to June 1990, President of Massachusetts Fidelity Trust Company, Cedar Rapids, Iowa from May 1988 to November 1989, and Senior Vice President\/Senior Trust Officer of Peoples Bank and Trust Company, Cedar Rapids, Iowa, prior to May 1988.\n(F) Employees.\nOn December 31, 1993, the Parent Company had 47 full-time employees and 4 part-time employees. On December 31, 1993, the Company had 661 full- time employees and 187 part-time employees. None of the employees of the Company are represented by unions. The relationship between management and employees of the Company is considered good.\n(G) Supervision and Regulation.\nThe Company (Brenton Banks, Inc. and its subsidiaries) is restricted by various regulatory bodies as to the types of activities and businesses in which it may engage. References to the provisions of certain statutes and regulations are only brief summaries thereof and are qualified in their entirety by reference to those statutes and regulations. The Parent Company cannot predict what other legislation may be enacted or what regulations may be adopted, or, if enacted or adopted, the effect thereof.\nThe Parent Company, as a bank holding company, is subject to regulation under the Bank Holding Company Act of 1956 (the \"Act\") and is registered with the Board of Governors of the Federal Reserve System. Under the Act, the Parent Company is prohibited, with certain exceptions, from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company which is not a bank and from engaging in any business other than that of banking, managing and controlling banks or furnishing services to its affiliated banks, except that the Parent Company may engage in and may own shares of companies engaged in certain businesses found by the Board of Governors to be so closely related to banking \"as to be a proper incident thereto.\" The Act does not place territorial restrictions on the activities of bank-related subsidiaries of bank holding companies. The Parent Company is required by the Act to file periodic reports of its operations with the Board of Governors and is subject to examination by the Board of Governors. Under the Act and the regulations of the Board of Governors, bank holding companies and their subsidiaries are prohibited from engaging in certain tie-in arrangements in connection with any extension of credit or provision of any property or services.\nAs a savings and loan holding company, Brenton Banks, Inc. is subject to federal regulation and examination by the Office of Thrift Supervision (the \"OTS\"). The OTS has enforcement authority over the Company. This authority permits the OTS to restrict or prohibit activities that are determined to be a serious risk to the subsidiary savings institution. Generally, the activities for a bank holding company are more limited than the authorized activities for a savings and loan holding company.\nThe Parent Company, its affiliated banks and its bank-related subsidiaries are affiliates within the meaning of the Federal Reserve Act and OTS regulations. As affiliates, they are subject to certain restrictions on loans by an affiliated bank to the Parent Company, other affiliated banks or such other\nsubsidiaries, on investments by an affiliated bank in their stock or securities and on an affiliated bank taking such stock and securities as collateral for loans to any borrower. The Company is also subject to certain restrictions with respect to direct issuance, flotation, underwriting, public sale or distribution of certain securities.\nThe five affiliated banks which are national banks are subject to the supervision of and are regularly examined by the Comptroller of the Currency. All other affiliated state banks are subject to the supervision of and are regularly examined by the Iowa Superintendent of Banking and, because of their membership in the Federal Deposit Insurance Corporation (the \"FDIC\"), are subject to examination by the FDIC. All banks are required to maintain certain minimum capital ratios established by their primary regulators. The provisions of the FDIC Improvement Act (the \"FDICA\") restrict the activities that insured state chartered banks may engage in to those activities that are permissible for national banks, except where the FDIC determines that the activity poses no significant risk to the deposit insurance fund and the bank remains adequately capitalized. Furthermore, the FDICIA grants the FDIC the power to take prompt regulatory action against certain undercapitalized and seriously undercapitalized institutions in order to preserve the deposit insurance fund.\nThe affiliated savings bank is subject to the supervision of and is regularly examined by the OTS and FDIC. In addition to the fees charged to by the FDIC, the savings bank is assessed fees by the OTS based upon the savings bank's total assets. As a savings institution, the savings bank is a member of the Federal Home Loan Bank of Des Moines, must maintain certain minimum capital ratios established by the OTS and is required to meet a qualified thrift lender test (the \"QTL\") to avoid certain restrictions upon its operations. On December 31, 1993, Brenton Savings Bank, FSB, complied with the current minimum capital guidelines and met the QTL test, which it has always met since the test was implemented.\nThe Company operates within a regulatory structure that continuously evolves. In the last several years, significant changes have occurred that affect the Company. The material provisions of these changes follow.\nThe FDIC Improvement Act of 1991 (the \"FDICIA\") was primarily designed to recapitalize the FDIC's Bank Insurance Fund (the \"BIF\") and Savings Association Insurance Fund (the \"SAIF\"). To accomplish this purpose the FDIC was: (1) granted additional borrowing authority; (2) granted the power to levy emergency special assessments on all insured depository institutions; (3) granted the right to change the BIF and SAIF rates on deposits on a semiannual basis; and (4) directed to draft regulations that would provide for \"Risk-Based Assessment System\" by January 1994. The FDICIA also imposed additional regulatory standards upon depository institutions and granted additional authority to the FDIC. The FDICIA generally requires that all institutions be examined by the FDIC annually. Under the provisions of the FDICIA, all regulatory authorities are required to examine their regulatory accounting standards and, to the extent possible, are required to conform to Generally Accepted Accounting Principles. Finally, the FDICIA granted to the FDIC, under certain circumstances, the authority to seek regulatory orders against banks where necessary and when the banks' primary bank regulatory agency has refused to act. Certain provisions of the FDICIA were implemented during 1993; therefore, the full extent of the provisions of the new law and its effect upon the Company are not currently known but are not expected to have a significant impact upon the Company.\nThe Company's affiliated banks are assessed fees based on the banks' deposits by the FDIC, to insure the funds of customers on deposit with the banks. The deposits acquired from the Resolution Trust Corporation and the deposits of the savings bank are insured by SAIF, while deposits of the Company's subsidiary banks are insured by the BIF. The FDIC has implemented the \"Risk-Based Assessment System\" which is a system designed to assess higher FDIC insurance premiums to those institutions that are more likely to result in a loss to the deposit insurance fund. Currently, both BIF and SAIF insured institutions are assessed premiums from $.23 to $.31 per $100 of deposits. All Brenton banks currently pay an FDIC insurance premium rate of $.23 per $100 of deposits, the lowest rate under the \"Risk-Based Assessment System\". The FDIC has authority to increase the base BIF and SAIF rates under certain circumstances that are set forth in the law.\nAccording to Iowa's regional interstate banking law, Iowa-based banks and bank holding companies can acquire banks and bank holding companies located in certain other states. Additionally, certain non-Iowa based banks and bank holding companies can acquire Iowa banks and bank holding companies, provided that the total deposits of all banks and savings and loan associations (hereinafter \"thrifts\") controlled by out of state bank holding companies does not exceed thirty-five percent of the total deposits of all banks and thrifts in the state. The law allows regional interstate banking between Iowa and Illinois, Minnesota, Missouri, Nebraska, South Dakota and Wisconsin.\nBank holding companies and banks may acquire thrifts in any state, regardless of whether the acquiror can operate a bank in that state. Such thrifts must conform their activities to those that are permissible for banks or bank holding companies and their subsidiaries.\nIn the first quarter of 1990, an Iowa law was enacted suspending the application of Iowa Banking Law prohibitions against branch banking with respect to the acquisition of troubled thrifts. This law was extended during the second quarter of 1993. The suspension of these prohibitions allows Iowa-based banks and bank holding companies to acquire thrifts in contravention of existing branch banking restrictions until July 1, 1994.\nGenerally, banks in Iowa are prohibited from operating offices in counties other than the county in which the bank's principal office is located and contiguous counties. However, certain banks located in the same or different municipalities or urban complexes may consolidate or merge and retain their existing banking locations by converting to a United Community Bank. The resulting bank would adopt one principal place of business, and would retain the remaining banking locations of the merged or consolidated banks as offices. The Company relied upon the United Community Bank law when it merged Brenton National Bank, Des Moines and Brenton Bank and Trust, Urbandale to form Brenton Bank, N.A., Des Moines. Generally, thrifts can operate offices in any county in Iowa and may, under certain circumstances, acquire thrifts in other states with the approval of the OTS.\n(H) Governmental Monetary Policy and Economic Conditions.\nThe earnings of the Company are affected by the policies of regulatory authorities, including the Federal Reserve System. Federal Reserve System monetary policies have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future. Because of changing conditions in the economy and in the money markets, as a result of actions by monetary and fiscal authorities, interest rates, credit availability and deposit levels may change due to circumstances beyond the control of the Company. Future policies of the Federal Reserve System and other authorities cannot be predicted, nor can their effect on future earnings be predicted.\n(I) Competition.\nThe banking business in Iowa is highly competitive and the affiliated banks compete not only with banks and thrifts, but with sales, finance and personal loan companies; credit unions; and other financial institutions which are active in the areas in which the affiliated banks operate. In addition, the affiliated banks compete for customer funds with other investment alternatives available through investment brokers, insurance companies, finance companies and other institutions.\nThe multi-bank holding companies which own banks in Iowa are in direct competition with one another. The Company is one of the largest multi-bank holding companies operating in Iowa based on deposit size. The largest multi-bank holding company, which is domiciled in Minnesota, has 41 banking locations in various parts of Iowa. The total deposits of this company's affiliated banks located in Iowa are approximately 208 percent greater than the total deposits of the Company. Another multi-bank holding company, domiciled in Wisconsin, has 42 locations in Iowa, and another multi- bank holding company domiciled in Missouri, has 36 locations in Iowa.\nBrenton Banks, Inc. is the second largest multi-bank holding company domiciled in Iowa. The largest Iowa-based bank holding company has 63 banking locations in the state and deposits approximately 27 percent greater than the deposits of the Company.\nThe third largest Iowa-based multi-bank holding company has 24 locations in Iowa and deposits approximately 45 percent less than those of the Company.\nCertain of the subsidiary banks of these multi-bank holding companies may compete with certain of the Parent Company's affiliated banks and any other affiliated financial institutions which may be acquired by the Parent Company. These multi-bank holding companies, other smaller bank holding companies, chain banking systems and others may compete with the Parent Company for the acquisition of additional banks.\nThe Company has also expanded into the related investment brokerage business in the last several years, placing brokers in many Brenton bank locations. The Brenton brokers in small communities compete with brokers from regional and national investment brokerage firms.\nItem 1(I) Business - Statistical Disclosure\nThe following statistical disclosures relative to the consolidated operations of the Company have been prepared in accordance with Guide 3 of the Guides for the Preparation and Filing of Reports and Registration Statements under the Securities Exchange Act of 1934. Average balances were primarily calculated on a daily basis.\nI. Distribution of Assets, Liabilities, and Stockholders' Equity; Interest Rates and Interest Differential\nThe following summarizes the average consolidated statement of condition by major type of account, the interest earned and interest paid and the average yields and average rates paid for each of the three years ending December 31, 1993:\nItem 1(I) Business - Statistical Disclosure, Continued\nI. Distribution of Assets, Liabilities, and Stockholders' Equity; Interest Rates and Interest Differential, Continued\nItem 1(I) Business - Statistical Disclosure, Continued\nI. Distribution of Assets, Liabilities, and Stockholders' Equity; Interest Rates and Interest Differential, Continued\nThe following shows the changes in interest earned and interest paid due to changes in volume and changes in rate for each of the two years ended December 31, 1993:\nItem 1(I) Business - Statistical Disclosure, Continued\nI. Distribution of Assets, Liabilities, and Stockholders' Equity; Interest Rates and Interest Differential, Continued\nInterest Rate Sensitivity Analysis\nThe following schedule shows the matching of interest sensitive assets to interest sensitive liabilities by various maturity or repricing periods as of December 31, 1993. As the schedule shows, the Company is liability sensitive within the six-month and 1-year time frames. Included in the three months or less sensitivity category are all interest-bearing demand and savings accounts. Although these deposits are contractually subject to immediate repricing, they typically are not synchronized with overall market rate movements.\nItem 1(I) Business - Statistical Disclosure, Continued\nII. Investment Portfolio\nThe carrying value of investment securities at December 31 for each of the past three years follows:\nItem 1(I) Business - Statistical Disclosure, Continued\nII. Investment Portfolio\nThe following table shows the maturity distribution and weighted average yields of investment securities at December 31, 1993:\nNOTE: The weighted average yields are calculated on the basis of the cost and effective yields for each scheduled maturity group. The weighted average yields for tax-exempt obligations have been adjusted to a fully taxable basis, assuming a 35 percent federal income tax rate for 1993 and a 34 percent rate for 1992 and 1991, and are adjusted to reflect the effect of the nondeductible interest expense of owning tax-exempt investments.\nAs of December 31, 1993, the Company did not have securities from a single issuer, other than the United States Government or its agencies, which exceeded 10 percent of consolidated common stockholders' equity.\nMaturities of all investment securities are managed to meet the Company's normal liquidity needs. Investment securities available for sale may be sold prior to maturity to meet liquidity needs, to respond to market changes or to adjust the Company's asset\/liability position.\nItem 1(I) Business - Statistical Disclosure, Continued\nIII. Loan Portfolio\nThe following table shows the amount of loans outstanding by type as of December 31 for each of the past five years:\nItem 1(I) Business - Statistical Disclosure, Continued\nIII. Loan Portfolio, Continued\nThe following table shows the maturity distribution of loans as of December 31, 1993 (excluding real estate loans secured by 1-4 family residential property and loans to individuals for personal expenditures):\nThe above loans due after one year which have predetermined and floating interest rates follow:\nPredetermined interest rates $ 94,874 ______\nFloating interest rates $ 57,727 ______\nItem 1(I) Business - Statistical Disclosure, Continued\nIII. Loan Portfolio, Continued\nThe following schedule shows the dollar amount of loans at December 31 for each of the past five years which were either accounted for on a nonaccrual basis, had been restructured to below market terms to provide a reduction or deferral of interest or principal, or were 90 days or more past due as to interest or principal. Each particular loan has been included in only the most appropriate category.\nInterest income recorded during 1993 on nonaccrual and restructured loans amounted to $191,000. The amount of interest income which would have been recorded during 1993 if nonaccrual and restructured loans had been current, in accordance with the original terms, was $359,000.\nThe amounts scheduled above include the entire balance of any particular loan. Much of the scheduled amount is adequately collateralized, and thus does not represent the amount of anticipated charge-offs in the future. The loans scheduled are representative of the entire customer base of the Company and, therefore, are not concentrated in a specific industry or geographic area other than the loans to farmers in Iowa. Overdrafts are loans for which interest does not normally accrue. Since overdrafts are generally low volume, they were not included in the above schedule, unless there was serious doubt concerning collection.\nThe accrual of interest income is stopped when the ultimate collection of a loan becomes doubtful. A loan is placed on nonaccrual status when it becomes 90 days past due, unless it is both well secured and in the process of collection. Once determined uncollectible, previously accrued interest is charged to the allowance for loan losses.\nIn addition to the loans scheduled above, management has identified other loans which, due to a change in economic circumstances or a deterioration in the financial position of the borrower, present serious concern as to the ability of the borrower to comply with present repayment terms. Additionally, management considers the identification of loans classified for regulatory or internal purposes as loss, doubtful, substandard or special mention. This serious concern may eventually result in certain of these loans being classified in one of the above scheduled categories. At December 31, 1993, these loans amounted to approximately $2 million.\nAs of December 31, 1993, management is unaware of any other material interest-earning assets which have been placed on a nonaccrual basis, have been restructured, or are 90 days or more past due. The amount of other real estate owned, which has been received in lieu of loan repayment, amounted to $948,000 and $1,935,000 at December 31, 1993 and 1992, respectively.\nItem 1(I) Business - Statistical Disclosure, Continued\nIV. Summary of Loan Loss Experience\nThe following is an analysis of the allowance for loan losses for years ended December 31, for each of the past five years:\nNOTE: The provision for loan losses charged to operating expenses is based on management's evaluation of the loan portfolio, past loan loss experience and other factors that deserve current recognition in estimating loan losses. The allowance for loan losses is maintained at a level necessary to support management's evaluation of potential losses in the loan portfolio, after considering various factors including prevailing and anticipated economic conditions.\nItem 1(I) Business - Statistical Disclosure, Continued\nIV. Summary of Loan Loss Experience, Continued\nIn the following summary, the Company has allocated the allowance for loan losses, according to the amount deemed to be reasonably necessary to provide for losses within each category of loans. The amount of the allowance applicable to each category and the percentage of loans in each category to total loans follows:\nItem 1(I) Business - Statistical Disclosure, Continued\nV. Deposits\nA classification of the Company's average deposits and average rates paid for the years indicated follows:\nThe following sets forth the maturity distribution of all time deposits of $100,000 or more as of December 31, 1993:\nLarge Time Deposits by Maturity at Maturity Remaining December 31, 1993 (In thousands)\nLess than 3 months $29,155 Over 3 through 6 months 12,652 Over 6 through 12 months 7,927 Over 12 months 12,993 ______\n$62,727 ______\nVI. Return on Equity and Assets\nVarious operating and equity ratios for the years indicated are presented below:\nItem 1(I) Business - Statistical Disclosure, Continued\nVII. Short-Term Borrowings\nInformation relative to federal funds purchased and securities sold under agreements to repurchase follows:\nInformation relative to other short-term borrowings, which consist primarily of notes payable by the Parent Company, Federal Reserve Bank borrowings and U.S. Treasury - tax depository note options, follows:\nItem 2.","section_1A":"","section_1B":"","section_2":"Item 2. Properties.\nAt December 31, 1993, the affiliated banks had 42 banking locations with approximately 281,000 square feet, all located in Iowa. Of these banking locations, 32 were owned by the Company - approximately 223,000 square feet; 3 were owned buildings on leased land - approximately 30,000 square feet and 7 were operated under lease contracts with unaffiliated parties - approximately 28,000 square feet. The Company has recently redesigned most of its banking facilities to enhance the overall appearance and stimulate marketing and selling of products.\nThe Company leases certain real estate and equipment under long- term and short-term leases. The Company owns certain real estate which is leased to unrelated persons.\nItem 3.","section_3":"Item 3. Legal Proceedings.\nThe Company (Brenton Banks, Inc. and its subsidiaries) is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company's financial position or results of operations.\nItem 4.","section_4":"Item 4. Submission of Matters to a Vote of Security Holders.\nThere were no matters submitted during the fourth quarter of the fiscal year covered by this report to a vote of security holders, through the solicitation of proxies or otherwise.\nPART II\nItem 5.","section_5":"Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters.\nThe information appearing on pages 30 and 37 of the Corporation's Annual Report, filed as Exhibit 13 hereto, is incorporated herein by reference.\nThere were approximately 1,563 holders of record of the Parent Company's $5 common stock as of March 14, 1994. The closing bid price of the Parent Company's common stock was $26.75 on March 14, 1994.\nThe Parent Company increased dividends to common shareholders in 1993 to $.60 per share, a 14.3 percent increase over $.525 for 1992. Dividend declarations are evaluated and determined by the Board of Directors on a quarterly basis. In January 1994, the Board of Directors declared a dividend of $.165 per common share. There are no restrictions on the Parent Company's present or future ability to pay dividends.\nItem 6.","section_6":"Item 6. Selected Financial Data.\nThe information appearing on page 19 of the Company's Annual Report, filed as Exhibit 13 hereto, is incorporated herein by reference.\nItem 7.","section_7":"Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.\nThe information appearing on pages 10 through 17 of the Company's Annual Report, filed as Exhibit 13 hereto, is incorporated herein by reference.\nItem 8.","section_7A":"","section_8":"Item 8. Financial Statements and Supplementary Data.\nThe information appearing on pages 20 through 36 of the Company's Annual Report, filed as Exhibit 13 hereto, is incorporated herein by reference.\nItem 9.","section_9":"Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.\nWithin the twenty-four months prior to the date of the most recent financial statements, there has been no change of accountants of the Company.\nPART III\nItem 10.","section_9A":"","section_9B":"","section_10":"Item 10. Directors and Executive Officers of the Registrant.\nThe definitive proxy statement of Brenton Banks, Inc., which will be filed not later than 120 days following the close of the Company's fiscal year ending December 31, 1993, is incorporated herein by reference. See also Item 1(E) of this Form 10-K captioned \"Executive Officers of the Registrant.\"\nItem 11.","section_11":"Item 11. Executive Compensation.\nThe definitive proxy statement of Brenton Banks, Inc., which will be filed not later than 120 days following the close of the Company's fiscal year ended December 31, 1993, is incorporated herein by reference.\nItem 12.","section_12":"Item 12. Security Ownership of Certain Beneficial Owners and Management.\nThe definitive proxy statement of Brenton Banks, Inc., which will be filed not later than 120 days following the close of the Company's fiscal year ending December 31, 1993, is incorporated herein by reference.\nItem 13.","section_13":"Item 13. Certain Relationships and Related Transactions.\nThe definitive proxy statement of Brenton Banks, Inc., which will be filed not later than 120 days following the close of the Company's fiscal year ending December 31, 1993, is incorporated herein by reference.\nPART IV\nItem 14.","section_14":"Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.\nThe following exhibits and financial statement schedules are filed as part of this report:\n(a) 1. Financial Statements: See the financial statements on pages 20 through 36 of the Company's Annual Report, filed as Exhibit 13 hereto, which are incorporated by reference herein.\n2. Financial Statement Schedules: See Exhibits 11 and 12, for computation of earnings per share and ratios.\n3. Exhibits (not covered by independent auditors' report).\nExhibit 3\nThe Articles of Incorporation, as amended, and Bylaws, as amended, of Brenton Banks, Inc.\nExhibit 10\nSummary of the Bank Bonus Plans under which some of the executive officers of the Parent Company and certain other personnel of the subsidiaries are eligible to receive a bonus each year.\nExhibit 10(i)\nSummary of the Executive Bonus Plan under which some of the executive officers of the Parent Company are eligible to receive a bonus each year.\nExhibit 10(ii)\nSummary of the Trust Division Bonus Plan under which one of the executive officers of the Parent Company is eligible to receive a bonus each year.\nExhibit 10(iii)\nSummary of the Brokerage Bonus Plan under which one of the executive officers of the Parent Company is eligible to receive a bonus each year.\nExhibit 10(iv)\nSummary of the Employee Bonus Plan under which employees of the Company are eligible to receive a bonus each year.\nExhibit 10(v)\nEmployment Agreement, dated July 6, 1989, between William H. Brenton and Brenton Banks, Inc. This Employment Agreement is incorporated by reference from Form 10-K of Brenton Banks, Inc., for the year ended December 31, 1989.\nExhibit 10(vi)\nNon-Qualified Stock Option Plan, Administrative Rules and Agreement under which officers of the Company are eligible to receive options to purchase an aggregate of 200,000 shares of the Company's $5 par value common stock. This Non-Qualified Stock Option Plan, Administrative Rules and Agreement is incorporated by reference from Form 10-K of Brenton Banks, Inc., for the year ended December 31, 1992.\nExhibit 10(vii)\nLong-Term Stock Compensation Plan, Agreements and related documents, effective for 1993, under which certain of the Company's senior officers and bank presidents are eligible to receive shares of Brenton Banks, Inc. stock based upon their service to the Company and Company performance.\nExhibit 10(viii)\nLong-Term Stock Compensation Plan, Agreements and related documents, effective for 1992, under which certain of the Company's senior officers and bank presidents are eligible to receive shares of Brenton Banks, Inc. stock based upon their service to the Company and Company performance. This Long-Term Stock Compensation Plan, Agreements and related documents, effective for 1992, are incorporated by reference from Form 10-K of Brenton Banks, Inc., for the year ended December 31, 1992.\nExhibit 10(ix)\nMerger Agreement between Brenton Banks, Inc. and Ames Financial Corporation, dated June 17, 1992. This Merger Agreement is incorporated by reference from Form S-4 of Brenton Banks, Inc. filed on August 13, 1992.\nExhibit 10(x)\nStandard Agreement for Advances, Pledge and Security Agreement between Brenton banks and the Federal Home Loan Bank of Des Moines.\nExhibit 10(xi)\nShort-term note with American National Bank & Trust Company of Chicago as of April 30, 1993, setting forth the terms of the Parent Company's $2,000,000 short-term debt agreement.\nExhibit 10(xii)\nData Processing Agreement dated December 1, 1991 by and between Systematics, Inc. and Brenton Information Systems, Inc. This Data Processing Agreement is incorporated by reference from Form 10-K of Brenton Banks, Inc., for the year ended December 31, 1991.\nExhibit 10(xiii)\nItem Processing Agreement dated December 1, 1991 between Brenton Bank Services, Inc. and the Federal Home Loan Bank of Des Moines. This Item Processing Agreement is incorporated by reference from Form 10-K of Brenton Banks, Inc., for the year ended December 31, 1992.\nExhibit 10(xiv)\nRestated Trust Agreement for Brenton Banks, Inc. Retirement Plan, effective January 1, 1986. This Restated Trust Agreement is incorporated by reference from Form 10-K of Brenton Banks, Inc., for the year ended December 31, 1991.\nExhibit 10(xv)\nAmendment to the Restated Trust Agreement for Brenton Banks, Inc. Retirement Plan, effective May 31, 1989. The Amendment is incorporated by reference from Form 10-K of Brenton Banks, Inc. for the year ended December 31, 1989.\nExhibit 10(xvi)\nIndenture Agreement with respect to Capital Notes dated April 12, 1993.\nExhibit 10(xvii)\nIndenture Agreement with respect to Capital Notes dated April 14, 1992. This Indenture Agreement is incorporated by reference from Form 10-K of Brenton Banks, Inc., for the year ended December 31, 1992.\nExhibit 10(xviii)\nIndenture Agreement with respect to Capital Notes dated August 5, 1991. This Indenture Agreement is incorporated by reference from Form 10-K of Brenton Banks, Inc. for the year ended December 31, 1991.\nExhibit 10(xix)\nIndenture Agreement with respect to Capital Notes dated March 27, 1991. This Indenture Agreement is incorporated by reference from Form 10-K of Brenton Banks, Inc. for the year ended December 31, 1991.\nExhibit 10(xx)\nIndenture Agreement with respect to Capital Notes dated April 5, 1985. This Indenture Agreement is incorporated by reference from Form 10-K of Brenton Banks, Inc. for the year ended December 31, 1991.\nExhibit 11\nStatement of computation of earnings per share.\nExhibit 12\nStatement of computation of ratios.\nExhibit 13\nThe Annual Report to Shareholders of Brenton Banks, Inc., for the 1993 calendar year.\nExhibit 22\nSubsidiaries.\nExhibit 24\nConsent of KPMG Peat Marwick to the incorporation of their report dated January 31, 1994, relating to certain consolidated statements of condition of Brenton Banks, Inc. into the Registration Statement on Form S-8 of Brenton Banks, Inc.\nThe Parent Company will furnish to any shareholder upon request a copy of any exhibit upon payment of a fee of $.50 per page. Requests for copies of exhibits should be directed to Steven T. Schuler, Chief Financial Officer and Vice President\/Treasurer\/Secretary, at Brenton Banks, Inc., P.O. Box 961, Des Moines, Iowa 50304-0961.\n(b) Reports on Form 8-K: No reports on Form 8-K were required to be filed during the last quarter of 1993.\nSIGNATURES\nPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.\nBRENTON BANKS, INC.\nBy \/s\/ C. Robert Brenton Chairman of the Board of Directors C. ROBERT BRENTON\nDate: March 16, 1994\nPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.\nBy \/s\/ William H. Brenton Chairman of the Executive Committee, Vice Chairman of the Board of Directors and Director WILLIAM H. BRENTON Principal Executive Officer\nDate: March 16, 1994\nBy \/s\/ C. Robert Brenton Chairman of the Board and Director C. ROBERT BRENTON Principal Executive Officer\nDate: March 16, 1994\nBy \/s\/ Junius C. Brenton President (1990-1993) and Director JUNIUS C. BRENTON Principal Executive Officer\nDate: March 16, 1994\nBy \/s\/ Robert L. DeMeulenaere President and Director ROBERT L. DEMEULENAERE\nDate: March 16, 1994\nBy \/s\/ Steven T. Schuler Vice President\/Treasurer\/Secretary STEVEN T. SCHULER Chief Financial Officer\nDate: March 16, 1994\nBy \/s\/ Thea H. Oberlander Corporate Controller THEA H. OBERLANDER\nDate: March 16, 1994\nBOARD OF DIRECTORS\nBy \/s\/ R. Dean Duben R. DEAN DUBEN\nDate: March 16, 1994\nBy \/s\/ Thomas R. Smith THOMAS R. SMITH\nDate: March 16, 1994\nEXHIBIT INDEX\nExhibits Page\nExhibit 3\nThe Articles of Incorporation, as amended, and Bylaws, as amended, of Brenton Banks, Inc. . . . . . . . . 37\nExhibit 10\nSummary of the Bank Bonus Plans under which some of the executive officers of the Parent Company and certain other personnel of the subsidiaries are eligible to receive a bonus each year. . . . . . . . . 95\nExhibit 10(i)\nSummary of the Executive Bonus Plan under which some of the executive officers of the Parent Company are eligible to receive a bonus each year. . . . . . . . . 97\nExhibit 10(ii)\nSummary of the Trust Division Bonus Plan under which one of the executive officers of the Parent Company is eligible to receive a bonus each year. . . . . . 99\nExhibit 10(iii)\nSummary of the Brokerage Bonus Plan under which one of the executive officers of the Parent Company is eligible to receive a bonus each year. . . . . . . . . . 101\nExhibit 10(iv)\nSummary of the Employee Bonus Plan under which employees of the Company are eligible to receive a bonus each year. . . . . . . . . . . . . . . . . . . . . 103\nExhibit 10(v)\nEmployment Agreement, dated July 6, 1989, between William H. Brenton and Brenton Banks, Inc. This Employment Agreement is incorporated by reference from Form 10-K of Brenton Banks, Inc., for the year ended December 31, 1989. . . . . . . . . . . . . . . . 105\nExhibit 10(vi)\nNon-Qualified Stock Option Plan, Administrative Rules and Agreement under which officers of the Company are eligible to receive options to purchase an aggregate of 200,000 shares of the Company's $5 par value common stock. This Non-Qualified Stock Option Plan, Administrative Rules and Agreement is incorporated by reference from Form 10-K of Brenton Banks, Inc., for the year ended December 31, 1992. . . . . 106\nExhibit 10(vii)\nLong-Term Stock Compensation Plan, Agreements and related documents, effective for 1993, under which certain of the Company's senior officers and bank presidents are eligible to receive shares of Brenton Banks, Inc. stock based upon their service to the Company and Company performance. . . . . . . . . . . 107\nExhibit 10(viii)\nLong-Term Stock Compensation Plan, Agreements and related documents, effective for 1992, under which certain of the Company's senior officers and bank presidents are eligible to receive shares of Brenton Banks, Inc. stock based upon their service to the Company and Company performance. This Long-Term Stock Compensation Plan, Agreements and related documents, effective for 1992, are incorporated by reference from Form 10-K of Brenton Banks, Inc., for the year ended December 31, 1992. . . . . . . . . . . . 121\nExhibit 10(ix)\nMerger Agreement between Brenton Banks, Inc. and Ames Financial Corporation, dated June 17, 1992. This Merger Agreement is incorporated by reference from Form S-4 of Brenton Banks, Inc. filed on August 13, 1992. . . . . . . . . . . . . . . . . . . . . . 122\nExhibit 10(x)\nStandard Agreement for Advances, Pledge and Security Agreement between Brenton banks and the Federal Home Loan bank of Des Moines. . . . . . . . . . . . . . . . . . 123\nExhibit 10(xi)\nShort-term note with American National Bank & Trust Company of Chicago as of April 30, 1993, setting forth the terms of the Parent Company's $2,000,000 short-term debt agreement. . . . . . . . . . . . . . . . . . . . . . . 128\nExhibit 10(xii)\nData Processing Agreement dated December 1, 1991 by and between Systematics, Inc. and Brenton Information Systems, Inc. This Data Processing Agreement is incorporated by reference from Form 10-K of Brenton Banks, Inc., for the year ended December 31, 1991. . . . . 130\nExhibit 10(xiii)\nItem Processing Agreement dated December 1, 1991 between Brenton Bank Services, Inc. and the Federal Home Loan Bank of Des Moines. This Item Processing Agreement is incorporated by reference from Form 10-K of Brenton Banks, Inc., for the year ended December 31, 1992. . . . . . . . . . . . . . . . . . . . . 131\nExhibit 10(xiv)\nRestated Trust Agreement for Brenton Banks, Inc. Retirement Plan, effective January 1, 1986. This Restated Trust Agreement is incorporated by reference from Form 10-K of Brenton Banks, Inc., for the year ended December 31, 1991. . . . . . . . . . . . 132\nExhibit 10(xv)\nAmendment to the Restated Trust Agreement for Brenton Banks, Inc. Retirement Plan, effective May 31, 1989. The Amendment is incorporated by reference from Form 10-K of Brenton Banks, Inc. for the year ended December 31, 1989. . . . . . . . . . . . 133\nExhibit 10(xvi)\nIndenture Agreement with respect to Capital Notes dated April 12, 1993. . . . . . . . . . . . . . . . . . . . 134\nExhibit 10(xvii)\nIndenture Agreement with respect to Capital Notes dated April 14, 1992. This Indenture Agreement is incorporated by reference from Form 10-K of Brenton Banks, Inc., for the year ended December 31, 1992. . . . . 149\nExhibit 10(xviii)\nIndenture Agreement with respect to Capital Notes dated August 5, 1991. This Indenture Agreement is incorporated by reference from Form 10-K of Brenton Banks, Inc. for the year ended December 31, 1991. . . . . . 150 Exhibit 10(xix)\nIndenture Agreement with respect to Capital Notes dated March 27, 1991. This Indenture Agreement is incorporated by reference from Form 10-K of Brenton Banks, Inc. for the year ended December 31, 1991. . . . . . 151\nExhibit 10(xx)\nIndenture Agreement with respect to Capital Notes dated April 5, 1985. This Indenture Agreement is incorporated by reference from Form 10-K of Brenton Banks, Inc. for the year ended December 31, 1991. . . . . . 152\nExhibit 11\nStatement of computation of earnings per share. . . . . . . 153\nExhibit 12\nStatement of computation of ratios. . . . . . . . . . . . . 155\nExhibit 13\nThe Annual Report to Shareholders of Brenton Banks, Inc., for the 1993 calendar year. . . . . . . . . . . . . . 158\nExhibit 22\nSubsidiaries. . . . . . . . . . . . . . . . . . . . . . . . 201\nExhibit 24\nConsent of KPMG Peat Marwick to the incorporation of their report dated January 31, 1994, relating to certain consolidated statements of condition of Brenton Banks, Inc. into the Registration Statement on Form S-8 of Brenton Banks, Inc. . . . . . . . . . . . . 204","section_15":""}
{"filename":"93751_1993.txt","cik":"93751","year":"1993","section_1":"ITEM 1. BUSINESS THE CORPORATION State Street Boston Corporation (\"State Street\") is a bank holding company organized under the laws of the Commonwealth of Massachusetts. State Street was organized in 1970 and conducts its business principally through its subsidiary, State Street Bank and Trust Company (\"State Street Bank\"), which traces its beginnings to the founding of the Union Bank in 1792. The charter under which State Street Bank now operates was authorized by a special act of the Massachusetts Legislature in 1891, and its present name was adopted in 1960. State Street is the fourth largest provider of trust services in the United States as ranked on the basis of 1992 fiduciary compensation. The major services contributing to fiduciary compensation are portfolio accounting, securities custody and other related services for mutual funds\/collective investment funds; portfolio accounting, securities custody and other related services for retirement and other financial assets of corporations, public funds, endowments, foundations, and nuclear decommissioning trusts; investment management for institutions through State Street Global Advisors; personal trust; services for defined contribution plans; and corporate trust. Ranked on the basis of assets as of December 1992, State Street Bank is the 28th largest commercial bank in the United States. State Street's total assets were $18.7 billion at December 31, 1993, of which $13.5 billion, or 72%, were investment securities and money market assets and $2.6 billion, or 14%, were loans. State Street had $1.6 trillion of assets under custody, $201 billion of bonds under trusteeship, and $142 billion of assets under management at year-end 1993. Services are provided from offices in the United States, as well as from offices in Canada, Grand Cayman, Netherland Antilles, the United Kingdom, France, Belgium, Luxembourg, Germany, United Arab Emirates, Hong Kong, Taiwan, Japan, Australia, and New Zealand. State Street's executive offices are located at 225 Franklin Street, Boston, Massachusetts.\nBUSINESS OF THE CORPORATION State Street has two principal lines of business, financial asset services and commercial lending.\nFINANCIAL ASSET SERVICES Financial asset services is comprised of the business components that service and manage financial assets worldwide. These include services for mutual funds and pension plans, both defined benefit and defined contribution; corporate trusteeship; and management of institutional financial assets and personal trust. A broad array of banking services is provided, including accounting, recordkeeping, custody of securities, information services and recordkeeping; taking short-term customer funds onto State Street's balance sheet; investment management; foreign exchange trading; and cash management. State Street began providing mutual fund services in 1924, and now has $683 billion of the mutual fund industry's assets under custody. State Street is the leading mutual fund custodian in the United States, servicing 37% of the registered funds. Customers who sponsor the 1,948 U.S. mutual funds that State Street services include investment companies, broker\/dealers, insurance companies and others. In addition, State Street services 192 collective investment funds registered outside of the United States. State Street's mutual fund services include domestic and global custody services, which incorporates safekeeping portfolio assets, settling trades, collecting and accounting for income, monitoring corporate actions and reporting investable cash. State Street also offers portfolio accounting, pricing, general ledger accounting, fund administration and other services. Shareholder accounting is provided through a 50%-owned affiliate. State Street began servicing pension assets in 1974. Servicing $574 billion of assets for North American customers, it is currently ranked as the largest servicer of tax exempt assets for corporations and public funds\nin the United States. Financial asset services are also provided for portfolios of unions, endowments, foundations, and nuclear decommissioning trusts. In addition, State Street provides global and domestic services for $66 billion in assets for customers outside North America. In the late 1970s, State Street began managing assets for institutions and was a pioneer in the development of domestic and international index funds. The products now offered also include enhanced and fully active equity strategies, short-term investment funds and fixed income. These products are sold domestically and from nine locations outside the United States. At year- end 1993, institutional assets managed were $136 billion. State Street is ranked as the largest manager of internationally-indexed assets and the third largest manager of tax-exempt money in the United States. State Street is a leading New England trustee and money manager for individuals, and provides planned gift management services for non-profit organizations throughout the United States. State Street acts as participant recordkeeper, securities custodian and trustee for defined contribution plans, such as 401(k) plans and ESOPs, and issues checks for employee benefit distributions. Corporate trust services for asset-backed securities, corporate securities, leveraged leases, and municipal securities are provided to investment banks, corporations, municipalities and government agencies from five offices in the United States. At year ended 1993, bonds under trusteeship totaled $201 billion. State Street acts as a mortgage subservicer through Wendover Funding Inc. in Greensboro, North Carolina. State Street also provides card replacement and other services for a bank card association, processing of unclaimed securities for state governments, accounting services for retained asset accounts of insurance companies and clearing services for correspondent banks. State Street provides foreign exchange trading, global cash management and trading of securities to financial institutions and corporations. Funds are gathered in the form of domestic and foreign deposits, federal funds and securities sold under repurchase agreements from local, national and international sources. Trading and arbitrage operations are conducted with government securities, futures and options. Municipal dealer activities include underwriting, trading and distribution of general obligation tax- exempt bonds and notes. Treasury centers are located in Boston, London, Hong Kong, Tokyo and Sydney. State Street also provides corporate finance services, including private placement of debt and equity, acquisitions and divestitures and project finance.\nCOMMERCIAL LENDING State Street provides corporate banking, specialized lending and international banking to businesses and financial institutions. The corporate banking services are offered primarily to New England middle market companies. Specialized lending is both regional and national, with specialties that include communications, publishing, law firms, broker\/dealers and other financial institutions. In addition, State Street offers asset-based finance, leasing, real estate, and trade finance. Trade finance includes letters of credit, collection, payment and other specialized services for importers and exporters. Dollar clearing and other correspondent banking services are provided through an Edge Act subsidiary in New York City.\nSELECTED STATISTICAL INFORMATION The following tables contain State Street's consolidated statistical information relating to, and should be read in conjunction with, the consolidated financial statements. Additionally, certain previously reported amounts have been reclassified to conform to the present method of presentation.\nDISTRIBUTION OF AVERAGE ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY; INTEREST RATES AND INTEREST DIFFERENTIAL The average statements of condition and net interest revenue analysis for the years indicated are presented below.\nInterest revenue on non-taxable investment securities and loans includes the effect of taxable equivalent adjustments, using a Federal income tax rate of 35% in 1993 and 34% in 1992 and 1991, adjusted for applicable state income taxes net of the related Federal tax benefit.\nDISTRIBUTION OF AVERAGE ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY; INTEREST RATES AND INTEREST DIFFERENTIAL (CONTINUED) The table below summarizes changes in interest revenue and interest expense due to changes in volume of interest-earning assets and interest- bearing liabilities, and changes in interest rates. Changes attributed to both volume and rate have been allocated based on the proportion of change in each category.\nRETURN ON EQUITY AND ASSETS AND CAPITAL RATIOS The return on equity, return on assets, dividend payout ratio, equity to assets ratio and capital ratios for the years ended December 31, were as follows: 1993 1992 1991 ---- ---- ---- Net income to: Average stockholders' equity ................. 17.4% 18.1% 18.0% Average total assets ..... .99 1.03 1.20 Dividends declared to net income ................... 21.9 20.8 20.4 Average equity to average assets ................... 5.7 5.7 6.7 Risk-based ratios: Tier 1 capital ........... 12.1 13.2 14.1 Total capital ............ 12.7 14.6 16.4\nINVESTMENT PORTFOLIO During the fourth quarter of 1992 State Street classified a portion of its investment securities portfolio as being available for sale. This reflects the intent to hold these securities for an indefinite period of time, not necessarily until final maturity. Securities classified as available for sale are carried at the lower of amortized cost or market. Investment securities consisted of the following at December 31:\n1993 1992 1991 ------ ------- ------ (DOLLARS IN MILLIONS) HELD FOR INVESTMENT U.S. Treasury and Federal agencies ................... $1,272 $ 996 $1,583 State and political subdivisions ............... 1,084 451 382 Asset-backed securities .... 2,028 1,618 1,150 Other investments .......... 100 87 135 ------ ------ ------ Total ................ 4,484 3,152 3,250 AVAILABLE FOR SALE U.S. Treasuries ............ 1,122 940 Other investments .......... 95 ------ ------ Total ................ 1,217 940 ------ ------ ------ Total investment securities ......... $5,701 $4,092 $3,250 ------ ------ ------ ------ ------ ------ The maturities of investment securities at December 31, 1993 and the weighted average yields (fully taxable equivalent basis) were as follows:\nLOAN PORTFOLIO Domestic and foreign loans at December 31 and average loans outstanding for the years ended December 31, were as follows:\nSelected loan maturities at December 31, 1993 were as follows:\nThe following table shows the classification of the above loans due after one year according to sensitivity to changes in interest rates:\nLoans are evaluated on an individual basis to determine the appropriateness of renewing each loan. State Street does not have a general policy. Unearned revenue included in loans was $4,423,000 and $5,467,000 at December 31, 1993 and 1992, respectively.\nNON-ACCRUAL LOANS It is State Street's policy to place loans on a non-accrual basis when they become 60 days past due as to either principal or interest, or when in the opinion of management full collection of principal or interest is unlikely. When the loan is placed on non-accrual, the accrual of interest is discontinued and previously recorded but unpaid interest is reversed and charged against current earnings. Past due loans are loans on which principal or interest payments are over 90 days delinquent, but where interest continues to be accrued. The following schedule discloses information concerning non-accrual and past due loans.\nNON-ACCRUAL LOANS (CONTINUED)\nThe interest revenue for 1993 which would have been recorded related to these non-accrual loans is $2,796,000 for domestic loans. The interest revenue that was recorded on these non-accrual loans was $812,000, all of which relates to domestic loans. Loans totaling $12,914,000 were restructured in 1993, are performing in accordance with their new terms and are accruing at a market rate.\nALLOWANCE FOR LOAN LOSSES The changes in the allowance for loan losses for the years ended December 31, were as follows:\nALLOWANCE FOR LOAN LOSSES (CONTINUED) State Street establishes an allowance for loan losses to absorb probable credit losses. Management's review of the adequacy of the allowance for loan losses is ongoing throughout the year and is based, among other factors, on the evaluation of the level of risk in the portfolio, the volume of adversely classified loans, previous loss experience, current trends, and expected economic conditions and their effect on borrowers. While the allowance is established to absorb probable losses inherent in the total loan portfolio, management allocates the allowance for loan losses to specific loans, selected portfolio segments and certain off-balance sheet exposures and commitments. Adversely classified loans in excess of $1 million are individually reviewed to evaluate risk of loss and assigned a specific allocation of the allowance. The allocations are based on an assessment of potential risk of loss and include evaluations of the borrowers' financial strength, cash flows, collateral, appraisals and guarantees. The allocations to portfolio segments and off-balance sheet exposures are based on management's evaluation of relevant factors, including the current level of problem loans and current economic trends. These allocations are also based on subjective estimates and management judgment, and are subject to change from quarter-to-quarter. In addition, a portion of the allowance remains unallocated as a general reserve for the entire loan portfolio. The provision for loan losses is a charge to earnings for the current period which is required to maintain the total allowance at a level considered adequate in relation to the level of risk in the loan portfolio. The provision for loan losses was $11.3 million for 1993, which compares to $12.2 million in 1992. At December 31, 1993, the allowance for loan losses was $54.3 million, or 2.03% of loans. This compares to an allowance of $57.9 million or 2.89% of loans a year ago. This decline reflects improvement in measures of credit quality and improvement in the outlook for general economic conditions and its affect on borrowers. The decline in the allowance for loan losses as a percentage of loan volume is also attributable to the growth in loan exposures to financial asset services customers and securities brokers in conjunction with their trading and settlement activity. These are generally short-term, usually overnight, and are structured to have relatively low credit exposure.\nCREDIT QUALITY At December 31, 1993, loans comprised 14% of State Street's assets, compared to over 55% for other banking companies of comparable size. State Street's loan policies limit the size of individual loan exposures to reduce risk through diversification. In 1993, net charge-offs declined from $20.1 million to $16.3 million. Net charge-offs as a percentage of average loans were .63% compared to .97% for 1992. At December 31, 1993, total non-performing assets were $37.9 million, a $14.9 million decrease from year-end 1992. Non-performing assets include $26.8 million of non-accrual loans and $11.1 million of other real estate owned. In 1993, loans placed on non-accrual status were more than offset by charge-offs, payments, and the return to accrual status of several loans. The decline in other real estate owned resulted from property sales. In 1993, measures of credit quality improved, as discussed above, as did the general economic outlook. The economy in the Northeast began to expand modestly after several years of decline. We expect continued improvement in credit quality in 1994.\nCROSS-BORDER OUTSTANDINGS Countries with which State Street has cross-border outstandings (primarily deposits with banks and letters of credit) of at least 1% of its total assets, all of which were to banks and other financial institutions, at December 31, 1993, 1992 and 1991, were as follows:\nAggregate of cross-border outstandings in countries having between .75% and 1% of total assets at December 31, 1993 was $171,688,000 (Belgium); December 31, 1992 was $139,333,000 (Austria); and at December 31, 1991 was $136,792,000 (Sweden). At December 31, 1993 there was $499,000 of cross-border risk with Mexico.\nDEPOSITS The average balance and rates paid on interest-bearing deposits for the years ended December 31, were as follows:\nMaturities of domestic certificates of deposit of $100,000 or more at December 31, 1993, were as follows:\nAt December 31, 1993, substantially all foreign time deposit liabilities were in amounts of $100,000 or more. Included in noninterest-bearing deposits were foreign deposits of $28,519,000, $41,492,000 and $22,188,000 at December 31, 1993, 1992 and 1991.\nSHORT-TERM BORROWINGS The following table reflects the amounts outstanding and weighted average interest rates of the primary components of short-term borrowings as of and for the years ended:\nFEDERAL SECURITIES SOLD FUNDS UNDER REPURCHASE PURCHASED AGREEMENTS --------- ---------- (DOLLARS IN THOUSANDS) Balance as of December 31: 1993 ................................. $ 269,083 $2,972,928 1992 ................................. 623,670 2,751,416 1991 ................................. 587,985 3,821,035 Maximum outstanding at any month end: 1993 ................................. $1,081,811 $5,297,210 1992 ................................. 1,522,522 4,313,852 1991 ................................. 1,106,712 3,890,188 Average outstanding during the year: 1993 ................................. $ 741,082 $4,133,726 1992 ................................. 919,109 3,290,196 1991 ................................. 837,006 1,765,768 Weighted average interest rate at year end: 1993 ................................. 2.7% 2.7% 1992 ................................. 2.3 2.8 1991 ................................. 3.7 4.1 Weighted average interest rate during the year: 1993 ................................. 2.8 2.9 1992 ................................. 3.4 3.4 1991 ................................. 5.5 5.1\nCOMPETITION State Street is subject to competition in all of its products and markets worldwide. In addition to competition from other deposit taking institutions, State Street competes with investment management firms, private trustees, insurance companies, mutual funds, broker\/dealers, investment banking firms, law firms, benefit consultants, and business service companies. As State Street expands globally, additional types of competition are encountered.\nEMPLOYEES At December 31, 1993, State Street had 10,117 employees, of whom 9,684 were full-time.\nREGULATION AND SUPERVISION State Street is registered with the Board of Governors of the Federal Reserve System (the \"Board\") as a bank holding company pursuant to the Bank Holding Company Act of 1956, as amended (the \"Act\"). The Act, with certain exceptions, limits the activities that may be engaged in by State Street and its non-bank subsidiaries to those which are deemed by the Board to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. In making such determination, the Board must consider whether the performance of any such activity by a subsidiary of State Street can reasonably be expected to produce benefits to the public, such as greater convenience, increased competition or gains in efficiency, that outweigh possible adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interest or unsound banking practices. The Board is authorized to differentiate between activities commenced de novo and those commenced by the acquisition in whole or in part of a going concern. In the opinion of management, all of State Street's present subsidiaries are within the statutory standard or are otherwise permissible. The Act also requires a bank holding company to obtain prior approval of the Board before it may acquire substantially all the assets of any bank or ownership or control of more than 5% of the voting shares of any bank. The Act prohibits a bank holding company from acquiring shares of a bank located outside the state in which the operations of the holding company's banking subsidiaries are principally conducted unless such an acquisition is specifically authorized by statute of the other state. State Street and its non-bank subsidiaries are affiliates of State Street Bank under the federal banking laws, which impose certain restrictions on transfers of funds in the form of loans, extensions of credit, investments or asset\nREGULATION AND SUPERVISION (CONTINUED) purchases by State Street Bank to State Street and its non-bank subsidiaries. Transfers of this kind to State Street and its non-bank subsidiaries by State Street Bank are limited to 10% of State Street Bank's capital and surplus with respect to each affiliate and to 20% in the aggregate, and are also subject to certain collateral requirements. A bank holding company and its subsidiaries are prohibited from engaging in certain tie-in arrangements in connection with any extension of credit or lease or sale of property or furnishing of services. The Board has jurisdiction to regulate the terms of certain debt issues of bank holding companies. The primary banking agency responsible for regulating State Street and its subsidiaries, including State Street Bank, for both domestic and international operations is the Federal Reserve Bank of Boston. State Street is also subject to the Massachusetts bank holding company statute. The Massachusetts statute requires prior approval by the Massachusetts Board of Bank Incorporation for the acquisition by State Street of more than 5% of the voting shares of any additional bank and for other forms of bank acquisitions. State Street's banking subsidiaries located in France, Japan and Luxembourg are also subject to regulation by the regulatory authorities of those countries. The capital of each of these banking subsidiaries is in excess of the minimum legal capital requirements as set by those authorities. State Street Bank is a member of the Federal Reserve System and the Federal Deposit Insurance Corporation (the \"FDIC\") and is subject to applicable federal and state banking laws and to supervision and examination by the Federal Reserve Bank of Boston, as well as by the Massachusetts Commissioner of Banks, the FDIC, and the regulatory authorities of those countries in which a branch of State Street Bank is located. In 1990, Massachusetts adopted a law which permits Massachusetts banking institutions to acquire banking institutions located in other states based on a reciprocal basis. The Financial Institutions Reform, Recovery and Enforcement Act of 1989 (\"FIRREA\") broadened the enforcement powers of the federal banking agencies, including increased power to impose fines and penalties, over all financial institutions, including bank holding companies and commercial banks. The Crime Control Act of 1990 further broadened the enforcement powers of the federal banking agencies in a significant number of areas. The Federal Deposit Insurance Corporation Improvement Act of 1991 (\"FDICIA\") has as its primary objectives to recapitalize the Bank Insurance Fund (\"BIF\") and strengthen the regulation and supervision of financial institutions. During 1993, the federal banking agencies continued the process of promulgating regulations to implement the statute. The \"Prompt Corrective Action\" provisions of the FDICIA are for the stated purpose: \"to resolve the problems of insured depository institutions at the least possible long-term loss to the deposit insurance fund.\" Each federal banking agency has implemented prompt corrective action regulations for the institutions that it regulates. The statute requires or permits the agencies to take certain supervisory actions when an insured depository institution falls within one of five specifically enumerated capital categories. It also restricts or prohibits certain activities and requires the submission of a capital restoration plan when an insured institution becomes undercapitalized. The implementing regulations establish the numerical limits for the capital categories and establish procedures for issuing and contesting prompt corrective action directives. To be within the category \"well capitalized\", an insured depository institution must have a total risk-based capital ratio of 10.0 percent or greater, a Tier 1 risk-based capital ratio of 6.0 percent or greater, and a leverage ratio of 5.0 percent or greater, and the institution must not be subject to an order, written agreement, capital directive, or prompt corrective action directive to meet specific capital requirements. An insured institution is \"adequately capitalized\" if it has a total risk-based capital ratio of 8.0 percent or greater, a Tier 1 risk-based capital ratio of 4.0 percent or greater, and a leverage ratio of 4.0 percent or greater (or a leverage ratio of 3.0 percent or greater if the institution is rated composite 1 under the regulatory rating system). The final three capital categories are levels of undercapitalized, which trigger mandatory statutory provisions. While other factors in addition to capital ratios determine an institution's capital category, State Street and State Street Bank each were within the \"well-capitalized\" category at December 31, 1993. The FDICIA requires the FDIC to recapitalize the BIF within a prescribed time frame of 15 years and to adopt a risk-based deposit insurance assessment system. The FDIC adopted a BIF recapitalization schedule\nREGULATION AND SUPERVISION (CONTINUED) and a final rule establishing a permanent risk-based assessment system, which is based on definitions of capital categories consistent with the \"Prompt Corrective Actions\" provisions. The rule is effective with the assessment period starting on January 1, 1994. Depending on which of the nine capital and supervisory categories a bank falls in, deposit insurance premiums will continue to range from 23 cents per $100 of domestic deposits for well- capitalized, financially sound institutions to a maximum of 31 cents for the lowest category. The Federal Reserve Board adopted a final rule, as required by the FDICIA, prescribing standards that will limit the risks posed by an insured depository institution's exposure to any other depository institution. Banks are required to develop written policies and procedures to monitor credit exposure to other banks, and to limit to 50% and 25% of total capital exposure to \"undercapitalized\" banks in 1994 and 1995, respectively. As required by the FDICIA, the FDIC adopted a regulation that permits only well capitalized banks, and adequately capitalized banks that have received waivers from the FDIC, to accept, renew or rollover brokered deposits. Regulations have also been adopted by the FDIC to limit the activities conducted as a principal by, and the equity investments of, state-chartered banks to those permitted for national banks. Banks may apply to the FDIC for approval to continue to engage in excepted investments and activities. Other FDICIA regulations adopted require independent audits, an independent audit committee of the bank's board of directors, stricter truth- in-savings provisions, and standards for real estate lending. The FDICIA amended deposit insurance coverage and the FDIC has implemented a rule specifying the treatment of accounts to be insured up to $100,000. Under other provisions of FDICIA, the federal banking agencies have proposed safety and soundness standards for banks in a number of areas including: internal controls, internal audit systems, information systems, credit underwriting, interest rate risk, executive compensation and minimum earnings. The agencies have also proposed rules to revise risk-based capital standards to take account of interest rate risk, as required by FDICIA. It is anticipated that the FDICIA and related regulations will result in higher costs for the banking industry in terms of deposit insurance assessments and costs of compliance and recordkeeping.\nDIVIDENDS As a bank holding company, State Street is a legal entity separate and distinct from State Street Bank and its other non-bank subsidiaries. State Street's principal source of cash revenues is dividends from State Street Bank and its other non-bank subsidiaries. The right of State Street to participate as a stockholder in any distribution of assets of a subsidiary upon its liquidation or reorganization or otherwise is subject to the prior claims by creditors of the subsidiary, including obligations for federal funds purchased and securities sold under repurchase agreements, as well as deposit liabilities. Payment of dividends by State Street Bank is subject to provisions of the Massachusetts banking law which provide that dividends may be paid out of net profits provided (i) capital stock and surplus remain unimpaired, (ii) dividend and retirement fund requirements of any preferred stock have been met, (iii) surplus equals or exceeds capital stock, and (iv) there are deducted from net profits any losses and bad debts, as defined, in excess of reserves specifically established therefor. Under the Federal Reserve Act, the approval of the Board of Governors of the Federal Reserve System would be required if dividends declared by the Bank in any year would exceed the total of its net profits for that year combined with retained net profits for the preceding two years, less any required transfers to surplus. Under applicable federal and state law restrictions, at December 31, 1993 State Street Bank could have declared and paid dividends of $366,454,000 without regulatory approval. Future dividend payments of the Bank and non-bank subsidiaries cannot be determined at this time.\nECONOMIC CONDITIONS AND GOVERNMENT POLICIES Economic policies of the government and its agencies influence the operating environment of State Street. Monetary policy conducted by the Federal Reserve Board directly affects the level of interest rates and overall credit conditions of the economy. Policy instruments utilized by the Federal Reserve Board include open market operations in U.S. Government securities, changes in reserve requirements for depository institutions, and changes in the discount rate and availability of borrowing from the Federal Reserve.\nITEM 2.","section_1A":"","section_1B":"","section_2":"ITEM 2. PROPERTIES\nState Street's headquarters are located in the State Street Bank Building, a 34-story building at 225 Franklin Street, Boston, Massachusetts, which was completed in 1965. State Street leases approximately 415,000 square feet (or approximately 45% of the space in this building) for a 30-year initial term with two successive extension options of 20 years each at rentals to be negotiated. State Street exercised the first of the two (2) options which will be effective on January 1, 1996 for a term of 20 years. State Street owns five buildings located in Quincy, Massachusetts, a suburb of Boston. Four of the buildings, containing a total of approximately 1,365,000 square feet, function as the Bank's operations facilities. The Bank occupies approximately 1,275,000 square feet and subleases the remaining space. The fifth building, with 186,000 square feet, is leased to Boston Financial Data Services, Inc., a 50% owned affiliate. Additionally, State Street owns a 98,000 square foot building in Westborough, Massachusetts for use as a second data center. The remaining offices and facilities of State Street and its subsidiaries are leased. As of December 31, 1993, the aggregate mortgage and lease payments, net of sublease revenue, payable within one year amounted to $23,632,000, plus assessments for real estate tax, cleaning and operating escalations.\nITEM 3.","section_3":"ITEM 3. LEGAL PROCEEDINGS\nState Street is subject to pending and threatened legal actions that arise in the normal course of business. In the opinion of management, after discussion with counsel, these can be successfully defended or resolved without a material adverse effect on State Street's financial position or results of operations.\nITEM 4.","section_4":"ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS\nNone\nITEM 4.A. EXECUTIVE OFFICERS OF THE REGISTRANT\nThe following table sets forth certain information with regard to each executive officer of State Street. As used herein, the term \"executive officer\" means an officer who performs policy-making functions for State Street.\nThere are no family relationships between any director and executive officer of State Street. With the exception of Messrs. Carter, Allinson, Logue and Petersen, all of the executive officers have been officers of State Street for five years or more. Mr. Carter became President of State Street in July, 1991, Chief Executive Officer in January, 1992 and Chairman in January, 1993. Prior to joining State Street, he was with Chase Manhattan Bank for 15 years, including the last three as head of global securities services. Mr. Allinson became an officer of State Street in March, 1990. Prior to joining State Street, he was President of Mitchell Hutchins Asset Management, a subsidiary of PaineWebber Incorporated, responsible for six financial service subsidiaries. Mr. Petersen became an officer of State Street in August, 1991. Prior to joining State Street, he was an Executive Vice President at First Empire State Corporation, a bank holding company, responsible for operations and systems. Mr. Logue became an officer of State Street in 1991. Prior to joining State Street, he was Executive Vice President at Bank of New England Corporation where he was head of processing services.\nPART II\nITEM 5.","section_5":"ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS\nInformation concerning the market prices of and dividends on State Street's common stock during the past two years appears on page 34 of State Street's 1993 Annual Report to Stockholders and is incorporated by reference. There were 5,886 stockholders of record at February 28, 1994. State Street's common stock is traded over-the-counter on the National Marker System, ticker symbol: STBK.\nITEM 6.","section_6":"ITEM 6. SELECTED FINANCIAL DATA\nThe information is set forth on page 21 of State Street's 1993 Annual Report to Stockholders and is incorporated by reference.\nITEM 7.","section_7":"ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION\nThe information required by this item appears in State Street's 1993 Annual Report to Stockholders on pages 2 and 3 and pages 22 through 35 and is incorporated by reference.\nITEM 8.","section_7A":"","section_8":"ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL FINANCIAL DATA\nThe Consolidated Financial Statements, Report of Independent Auditors and Supplemental Financial Data appearing on pages 36 through 55 of State Street's 1993 Annual Report to Stockholders and are incorporated by reference.\nITEM 9.","section_9":"ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE\nNone\nPART III\nITEM 10.","section_9A":"","section_9B":"","section_10":"ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT\nInformation concerning State Street's directors appears on pages 1 through 6 of State Street's Proxy Statement for the 1994 Annual Meeting of Stockholders under the caption \"Election of Directors\" which Statement is to be filed with the Securities and Exchange Commission. Such information is incorporated by reference. Information concerning State Street's executive officers appears under the caption \"Executive Officers of the Registrant\" in Item 4.A. of this Report.\nITEM 11.","section_11":"ITEM 11. EXECUTIVE COMPENSATION\nInformation concerning compensation of the executives of State Street appears on pages 10 through 17 in State Street's Proxy Statement for the 1994 Annual Meeting of Stockholders under the caption \"Executive Compensation\". Such information is incorporated by reference.\nITEM 12.","section_12":"ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT\nInformation concerning security ownership of certain beneficial owners and management appears on pages 7 and 8 in State Street's Proxy Statement for the 1994 Annual Meeting of Stockholders under the caption \"Beneficial Ownership of Shares\". Such information is incorporated by reference.\nITEM 13.","section_13":"ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS\nInformation concerning certain relationships and related transactions appears on page 9 in State Street's Proxy Statement for the 1994 Annual Meeting of Stockholders under the caption \"Certain Transactions\". Such information is incorporated by reference.\nPART IV\nSIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, on March 17, 1994, thereunto duly authorized. STATE STREET BOSTON CORPORATION\nBy REX S. SCHUETTE ----------------------------------------- REX S. SCHUETTE Senior Vice President and Comptroller Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on March 17, 1994, by the following persons on behalf of the registrant and in the capacities indicated.\nEXHIBIT INDEX\nEXHIBIT 3. ARTICLES OF INCORPORATION AND BY-LAWS 3.1 Restated Articles of Organization as amended (filed with the Securities and Exchange Commission as Exhibit 3.1 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1988 and incorporated by reference) 3.2 By-laws as amended (filed with the Securities and Exchange Commission as Exhibit 3.2 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1991 and incorporated by reference) 3.3 Certificate of Designation, Preferences and Rights (filed with the Securities and Exchange Commission as Exhibit 3.1 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1991 and incorporated by reference)\nEXHIBIT 4. INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS 4.1 Rights Agreement dated as of September 15, 1988 between State Street Boston Corporation and The First National Bank of Boston, Rights Agent (filed with the Securities and Exchange Commission as Exhibit 4 to Registrant's Current Report on Form 8-K dated September 30, 1988 and incorporated by reference) 4.2 Amendment to Rights Agreement dated as of September 20, 1990 between State Street Boston Corporation and The First National Bank of Boston, Rights Agent (filed with the Securities and Exchange Commission as Exhibit 4 to Registrant's Quarterly Report on Form 10- Q for the quarter ended September 30, 1990 and incorporated by reference) 4.3 Indenture dated as of August 2, 1993 between State Street Boston Corporation and The First National Bank of Boston, as trustee (filed with the Securities and Exchange Commission as Exhibit 4 to the Registrant's Current Report on Form 8-K dated October 8, 1993 and incorporated by reference)\nEXHIBIT 10. MATERIAL CONTRACTS Executive Compensation Plans and Agreements: 10.1 State Street Boston Corporation Long-Term Common Stock Incentive Program, as amended (filed with the Securities and Exchange Commission as Exhibit 10.1 to Registrant's Annual Report on Form 10- K for the year ended December 31, 1981 and incorporated by reference) 10.2 State Street Boston Corporation 1981 Stock Option and Performance Share Plan, as amended (filed with the Securities and Exchange Commission as Exhibit 10.2 to Registrant's Annual Report on Form 10- K for the year ended December 31, 1981 and incorporated by reference) 10.3 State Street Boston Corporation 1984 Stock Option Plan (filed with the Securities and Exchange Commission as Exhibit 4(a) to Registrant's Registration Statement on Form S-8 (File No. 2-93157) and incorporated by reference) 10.4 State Street Boston Corporation 1985 Stock Option and Performance Share Plan (filed with the Securities and Exchange Commission as Exhibit 10.1 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1985 and incorporated by reference) 10.5 Revised Forms of Termination Agreement with Executive Officers (filed with the Securities and Exchange Commission as Exhibit 10.1 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1989 and incorporated by reference) 10.6 State Street Boston Corporation 1989 Stock Option Plan (filed with the Securities and Exchange Commission as Exhibit 10.1 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1989 and incorporated by reference) 10.7 State Street Boston Corporation 1990 Stock Option and Performance Share Plan (filed with the Securities and Exchange Commission as Exhibit 10.1 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1990 and incorporated by reference) 10.8 State Street Boston Corporation Supplemental Executive Retirement Plan, together with individual benefit agreements (filed with the Securities and Exchange Commission as Exhibit 10.1 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1991 and incorporated by reference)\n10.9 Individual Pension Agreement with Marshall N. Carter (filed with the Securities and Exchange Commission as Exhibit 10.1 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1991 and incorporated by reference)\n10.10 Individual Pension Agreement with A. Edward Allinson (filed with the Securities and Exchange Commission as Exhibit 10.1 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1991 and incorporated by reference) 10.11 Supplemental Retirement Agreement with Norton Q. Sloan 10.12 Individual Pension Agreement with Albert E. Petersen 10.13 Termination Benefits Arrangement with Marshall N. Carter 10.14 State Street Global Advisor's Incentive Plan for 1993 10.15 State Street Global Advisor's Incentive Plan for 1994 10.16 Senior Executives Annual Incentive Plan 10.17 1994 Stock Option and Performance Unit Plan\nEXHIBIT 11. STATEMENT RE COMPUTATION OF PER SHARE EARNINGS 11.1 State Street Boston Corporation Computation of Earnings Per Share\nEXHIBIT 12. STATEMENT RE COMPUTATION OF RATIOS 12.1 Statement of ratio of earnings to fixed charges.\nEXHIBIT 13. PORTIONS OF ANNUAL REPORT TO STOCKHOLDERS 13.1 Five Year Selected Financial Data. 13.2 Management's Discussion and Analysis of Financial Condition and Results of Operations for the Three Years Ended December 31, 1993 (not covered by the Report of Independent Public Accountants). 13.3 Letter to Stockholders. 13.4 State Street Boston Corporation Consolidated Financial Statements and Schedules.\nEXHIBIT 21. SUBSIDIARIES 21.1 Subsidiaries of State Street Boston Corporation\nEXHIBIT 23. CONSENTS OF EXPERTS AND COUNSEL 23.1 Consent of Independent Auditors","section_14":"","section_15":""}
{"filename":"29905_1993.txt","cik":"29905","year":"1993","section_1":"Item 1. BUSINESS\nGeneral\nDover Corporation (\"Dover\" or the \"Company\") was originally incorporated in 1947 in the State of Delaware and commenced operations as a public company in 1954 with four operating divisions, engaged primarily in the manufacture of metal fabricated industrial products. Primarily through acquisitions, the Company has grown to encompass over 60 different businesses which fabricate, install and service elevators, and manufacture a broad range of specialized industrial products and electronic components and sophisticated manufacturing equipment. The primary criteria for Dover operating companies is that they strive to be the market leader in their respective market, meeting customer needs with superior products and services with appropriate increased compensation, while achieving long-term earnings growth, high cash flow and superior return on stockholders' equity.\nThe Company's businesses are divided into five business segments. Dover Elevator manufacturers, sells, installs and services elevators primarily in North America. Dover Resources manufactures products primarily to serve the automotive, fuel handling and service and petroleum industries. Dover Industries makes products for use in the waste handling, bulk transport, automotive service, commercial food service and machine tool industries. Dover Technologies builds primarily sophisticated automated electronic assembly equipment and to a lesser degree specialized electronic components. Dover Diversified builds heat transfer equipment, larger power generation, sophisticated assembly and production machines, as well as sophisticated products and control systems for use in the defense, aerospace and commercial building industries. Dover sells its products and services both directly and through various distributors, sales and commission agents and manufacturers representatives, in all cases consistent generally with the custom of the industry and market being served. For more information on these segments and their products, sales, markets served, earnings before tax and total assets for the six years ended December 31, 1993, see pages 6 through 16 of the 1993 Annual Report, which are hereby incorporated by reference.\nDuring the past five years, Dover has spent approximately $550 million on acquisitions of which $321 million was expended in 1993. For more detail regarding acquisitions, see pages 1 through 5 of the 1993 Annual Report as well as Note 2 to the Consolidated Financial Statements on pages 21-22 of the 1993 Annual Report, which are hereby incorporated by reference.\n- 3 - Raw Materials\nDover's operating companies use a wide variety of raw materials, primarily metals, semi-processed or finished components, which are generally available from a number of sources. Temporary shortages may occur occasionally, but have not resulted in business interruptions or major problems, nor are any such problems anticipated.\nResearch and Development\nDover's operating companies are encouraged to develop new products as well as upgrade and improve existing products to satisfy customer needs, expand sales opportunities and improve product reliability and reduce production costs. During 1993, approximately $60 million was spent on research and development, compared with $68 million and $62 million in 1992 and 1991, respectively.\nDover holds or is licensed to use a substantial number of U.S. patents covering a number of its product lines, and to a far lesser degree patents in certain foreign countries where it conducts business. Dover licenses some of its patents to other companies for which it collects royalties which are not significant. These patents have been obtained over a number of years and expire at various times. Although patents in the aggregate are important to Dover, the loss or expiration of any one patent or group of patents would not materially affect Dover or any of its segments. Where patents have expired, Dover believes that its commitment to leadership in continuous engineering improvements, manufacturing techniques, and other sales, service and marketing efforts are significant to maintaining its general market leadership position.\nTrademarks and Tradenames\nSeveral of the Company's products are sold under various trademarks and tradenames owned or licensed by the Company. Among the most significant are: Dover, Heil, Norris, Universal, DEK, Brown & Sharpe, Marathon, OPW, Duncan, Blackmer, Rotary Lift, Groen, Annubar, Sargent, A-C Compressor and Tipper Tie.\nSeasonality\nDover's operations are generally not seasonal.\nCustomers\nDover's businesses serve thousands of customers, no one of which accounted for more than 10% of sales. Within each of the five segments, no customer accounted for more than 10% of segment sales.\n- 4 - Backlog\nBacklog generally is not considered a significant factor in Dover's businesses, as most products have relatively short delivery periods. The only exceptions are in those businesses which produce larger and more sophisticated machines, or have long-term government contractor subcontracts, particularly in the Diversified Group (Belvac, A-C Compressor, Sargent Controls and Sargent Technologies) and the Technologies Group (Universal).\nTotal Company backlog as of December 31, 1993 and 1992 was $710,977,000 and $606,681,000 respectively.\nCompetition\nDover's competitive environment is complex because of the wide diversity of products manufactured and markets served. In general, Dover companies are market leaders which compete with only a few companies. In addition, since most of Dover's manufacturing operation are in the United States, Dover usually is a more significant competitor domestically than in foreign markets. There are some exceptions.\nIn the Elevator segment, Dover competes for the manufacture and installation of elevators with a few generally large multinational competitors and maintains a strong domestic position. For service work, there are numerous local, regional and national competitors.\nIn the Technologies segment, Dover competes globally against a few very large companies, primarily based in Japan or Europe. Within the other three segments, there are a few companies whose markets and competition are international, particularly Wittemann, AOT, Tipper Tie and Belvac.\nInternational\nFor foreign sales and assets, see Note 3 to the Consolidated Financial Statements on page 22 of the 1993 Annual Report and information about the Company's Operations in Different Geographic Areas on page 27 of the 1993 Annual Report, which are incorporated herein by reference. Export sales of domestic operations were $392 million in 1993 and $432 million in 1992.\nAlthough international operations are subject to certain risks, such as price and exchange rate fluctuations and other foreign governmental restrictions, Dover intends to increase its expansion into foreign markets, particularly with respect to its elevator business, as domestic markets mature.\nThe countries where most of Dover's foreign subsidiaries and affiliates are based are Canada, Great Britain and Germany.\n- 5 - Environmental Matters\nDover believes its operations generally are in substantial compliance with applicable regulations. In some instances, particular plants and businesses have been the subject of administrative and legal proceedings with governmental agencies relating to the discharge or potential discharge of materials. Where necessary, these matters have been addressed with specific consent orders to achieve compliance. Dover believes that continued compliance will not have any material impact on the Company's financial position going forward and will not require significant capital expenditures beyond normal requirements.\nEmployees\nThe Company had approximately 20,500 employees as of December 31, 1993.\nItem 2.","section_1A":"","section_1B":"","section_2":"Item 2. DESCRIPTION OF PROPERTY\nThe number, type, location and size of the Company's properties are shown on the following charts, by segment.\nThe facilities are generally well maintained and suitable for the operations conducted and their productive capacity is adequate for current needs.\nItem 3.","section_3":"Item 3. LEGAL PROCEEDINGS\nDover is party to a number of legal proceedings arising out of the normal course of its businesses. In general, most claims arise in connection with activities of its Elevator segment\n- 6 - operations and certain of its other businesses which make products used by the public. In recent years, Dover has also been involved with the Internal Revenue Service regarding tax assessments for the eight years ended December 31, 1989 and certain patent litigation. In addition, matters have arisen under various environmental laws, as well as under local regulatory compliance agencies. For a further description of such matters, see Note 13 to the Consolidated Financial Statements on page 26 of the 1993 Annual Report, which is incorporated herein by reference.\nBased on insurance availability, established reserves and periodic reviews of those matters, management is of the opinion that the ultimate resolution of current pending claims and known contingencies should not have a material adverse effect on Dover's financial position taken as a whole.\nItem 4.","section_4":"Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS\nNot applicable.\nEXECUTIVE OFFICERS OF THE REGISTRANT\nAll officers are elected annually at the first meeting of the Board of Directors following the annual meeting of stockholders and are subject to removal at any time by the Board of Directors. The executive officers of Dover as of March 11, 1994, and their positions with the Company for the past five years are as follows:\n- 7 -\nPART II\nItem 5.","section_5":"Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS\nThe principal market in which the Company's Common Stock is traded is the New York Stock Exchange. Information on the high and low prices of such stock and the frequency and the amount of dividends paid during the last two years, is set forth on Page 32 of the 1993 Annual Report and incorporated herein by reference.\nThe number of holders of record of the Registrant's Common Stock as of February 28, 1994 is approximately 3,100.\nItem 6.","section_6":"Item 6. SELECTED FINANCIAL DATA\nThe information for the years 1983 through 1993 is set forth in the Annual Report on pages 30 and 31 and is incorporated herein by reference.\n- 8 - Item 7.","section_7":"Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS\nThe information set forth in the Annual Report on pages 28 and 29 is incorporated herein by reference.\nItem 8.","section_7A":"","section_8":"Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA\nThe information set forth in the Annual Report on pages 17 through 27 is incorporated herein by reference.\nItem 9.","section_9":"Item 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE\nNot applicable.\nPART III\nItem 10.","section_9A":"","section_9B":"","section_10":"Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT\nThe information with respect to the directors of the Company required to be included pursuant to this Item 10 is included under the caption \"Election of Directors\" in the 1994 Proxy Statement relating to the 1994 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission (the \"Commission\") pursuant to Rule 14a-6 under the Securities Exchange Act of 1934, as amended, and is incorporated in this Item 10 by reference. The information with respect to the executive officers of the Company required to be included pursuant to this Item 10 is included under the caption \"Executive Officers of the Company\" in Part I of this Annual Report on Form 10-K.\nItem 11.","section_11":"Item 11. EXECUTIVE COMPENSATION\nThe information with respect to executive compensation required to be included pursuant to this Item 11 is included under the caption \"Compensation\" in the 1994 Proxy Statement and is incorporated in this Item 11 by reference.\nItem 12.","section_12":"Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT\nThe information regarding security ownership of certain beneficial owners and management that is required to be included pursuant to this Item 12 is included under the captions \"General\" and \"Security Ownership\" in the 1994 Proxy Statement and is incorporated in this Item 12 by reference.\nItem 13.","section_13":"Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS\nThe information with respect to any reportable transaction, business relationship or indebtedness between the Company and the beneficial owners of more than 5% of the Common Stock, the directors or nominees for director of the Company, the\n- 9 - executive officers of the Company or the members of the immediate families of such individuals that is required to be included pursuant to this Item 13 is included under the caption \"Election of Directors\" in the 1994 Proxy Statement and is incorporated in this Item 13 by reference.\nPART IV\nItem 14.","section_14":"Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K\n(a)(1). Financial Statements\nThe following consolidated financial statements of Dover Corporation and its subsidiaries are set forth in the 1993 Annual Report, which financial statements are incorporated herein by reference:\n(A) Independent Auditors' Report.\n(B) Consolidated balance sheets as of December 31, 1993, 1992 and 1991.\n(C) Consolidated statements of earnings for the years ended December 31, 1993, 1992 and 1991.\n(D) Consolidated statements of retained earnings for the years ended December 31, 1993, 1992 and 1991.\n(E) Consolidated statements of cash flows for the years ended December 31, 1993, 1992 and 1991.\n(F) Notes to consolidated financial statements.\n(2) Financial Statement Schedules\nThe following financial statement schedules are included in Part IV of this report:\nIndependent Auditors' Report on Schedules and Consent II - Amounts Receivable from Related Parties and Underwriters, Promoters and Employees Other than Related Parties VIII - Valuation and Qualifying Accounts IX - Short-term Borrowings X - Supplementary Income Statement Information\nAll other schedules are not required and have been omitted.\n(b) No reports on Form 8-K have been filed during the fourth quarter of the fiscal year ended December 31, 1993.\n- 10 - (c) Exhibits:\n(13) Dover's Annual Report to Stockholders for its fiscal year ended December 31, 1993.\n(21) Subsidiaries of Dover.\n(23) Independent Auditors' consent. (See Independent Auditors' Report on Schedules and Consent)\n(24) Powers of Attorney.\nSIGNATURES\nPursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.\nDOVER CORPORATION\nGary L. Roubos By: ------------------------ Gary L. Roubos Chairman\nDate: March 29, 1994\nPursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated.\n- 11 -\nRobert G. Kuhbach * By ------------------------- Robert G. Kuhbach Attorney-in-Fact\n- 12 - INDEPENDENT AUDITORS' REPORT ON SCHEDULES AND CONSENT\nThe Board of Directors and Shareholders Dover Corporation:\nUnder date of February 22, 1994, we reported on the consolidated balance sheets of Dover Corporation and subsidiaries as of December 31, 1993, 1992 and 1991 and the related consolidated statements of earnings, retained earnings, and cash flows of the years then ended, as contained in the 1993 annual report to stockholders. These consolidated financial statements and our report thereon are incorporated by reference in the annual report on Form 10-K for the year 1993. In connection with our audits of the aforementioned consolidated financial statements, we also have audited the related financial statement schedules listed in answer to Part IV, item 14(A)2 of Form 10-K. These financial statement schedules are the responsibility of the Company's management. Our responsibility is the express an opinion on these financial statement schedules based on our audits.\nIn our opinion, such financial statement schedules when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.\nIn addition, we consent to the incorporation by reference of our above- mentioned report dated February 22, 1984 in the Registration Statement (No. 2-58037) on Form S-8 (1974 Incentive Stock Option Plan) in the Registration Statement (No. 33-11229) on Form S-8 the Prospectus dated January 28, 1987 (1984 Incentive Stock Option Plan) and in the Registration Statement (No. 2-91561) on Form S-8 dated July 1, 1984 to the Dover Corporation Employee Savings and Investment Plan. We also consent to the reference to our firm under the heading \"Financial Statements and Experts\" in the Prospectuses.\nKPMG Peat Marwick\nNew York, New York March 29, 1994 SCHEDULE II\nDOVER CORPORATION AND SUBSIDIARIES\nAmounts Receivable from Related Parties and Underwriters, Promoters, and Employees Other Than Related Parties\nYears ended December 31, 1993, 1992 and 1991\nNotes: (1) Unsecured loan to employee, payable on demand, bearing interest at 4.16%.\n(2) Loan to employee for purchase of residence, payable on demand, bearing interest at 8.75%, secured by residence. SCHEDULE VIII\nDOVER CORPORATION AND SUBSIDIARIES\nValuations and Qualifying Accounts\nYears ended December 31, 1992 and 1991\nNotes: (1) Represents uncollectible accounts written off and reductions of prior years over provision less recoveries of accounts previously written off, net of additions and deductions relating to acquired and divested companies. SCHEDULE IX\nDOVER CORPORATION AND SUBSIDIARIES\nShort-Term Borrowings\nYears ended December 31, 1993, 1992 and 1991\nNotes: (1) Represents maximum amount outstanding at any month-end.\n(2) Average of 13 month-end balances (including December of previous year).\n(3) Weighted average of interest rates on all commercial paper outstanding at month-end.\n(4) Includes $250,000 classified as long-term debt. SCHEDULE X\nDOVER CORPORATION AND SUBSIDIARIES\nSupplementary Income Statement Information\nYears ended December 31, 1993, 1992 and 1991\nNotes: * Amounts not shown are not in excess of 1% of total sales. EXHIBIT INDEX\n- 13 -","section_15":""}
{"filename":"71391_1993.txt","cik":"71391","year":"1993","section_1":"ITEM 1. BUSINESS\nThe registrant was incorporated under the laws of the State of Idaho on February 27, 1930, for the primary purpose of exploring and the development of mining properties. Prior to 1993, the Company had owned fifteen unpatented lode mining claims in the Coeur d'Alene Mining District of Shoshone County, Idaho. Due to the increased fees from the Bureau of Land Management on unpatented mining claims, and the depressed prices for silver and lead, the Company decided to abandon these mining claims in 1993. The Company is now an inactive mining company.\nITEM 2.","section_1A":"","section_1B":"","section_2":"ITEM 2. PROPERTIES\nThe registrant abandoned all properties in 1993.\nITEM 3.","section_3":"ITEM 3. LEGAL PROCEEDINGS\nThe registrant is not a party to any litigation.\nITEM 4.","section_4":"ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS\nNo matters were submitted to a vote of the security holders during the fiscal year ended March 31, 1993.\nPART II\nITEM 5.","section_5":"ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS\nThe registrant's common stock is traded on the national over-the-counter market. (\"On pink sheets\")\nAs of March 31, 1993, there were 1,676 registered holders of the Company's common stock.\nITEM 6.","section_6":"ITEM 6. SELECTED FINANCIAL DATA\nThe following data should be read in conjunction with the Company's financial statements and the notes thereto:\nITEM 7.","section_7":"ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS\nThe Company has ceased all exploratory mining activities and has abandoned all of its mining claims. The Company's only asset is 857,100 shares of common stock of United Mines, Inc., with a market value of $34,284. Total liabilities are $17,060, which are comprised of accounts payable of $1,919 and advances from officers of $15,141.\nThe Company has no revenues. Any working capital needs are provided as loans or advances from the corporate officers.\nITEM 8.","section_7A":"","section_8":"ITEM 8. FINANCIAL STATEMENTS\nCONTENTS Page\nStatement of Financial Position as of March 31, 1993 and 1992\nStatement of Operations for the Years Ended March 31, 1993, 1992 and 1991\nStatement of Changes in Stockholders' Equity for the Years Ended March 31, 1993, 1992 and 1991\nStatement of Cash Flows for the Years Ended March 31, 1993, 1992 and 1991\nNotes to Financial Statements\nNEW HILARITY MINING COMPANY Statement of Financial Position as of (Unaudited) March 31, 1993 and 1992 - - ---------------------------------------------------------------------------\nASSETS\nPrepared by management.\nThe accompanying notes are an integral part of these financial statements.\nNEW HILARITY MINING COMPANY Statement of Operations for the Years (Unaudited) Ended March 31, 1993, 1992 and 1991 - - ---------------------------------------------------------------------------\nPrepared by management.\nThe accompanying notes are an integral part of these financial statements.\nNEW HILARITY MINING COMPANY Statement of Changes in Stockholders' (Unaudited) Equity for the Years Ended March 31, 1993, 1992 and 1991 - - ---------------------------------------------------------------------------\nprepared by management.\nThe accompanying notes are an integral part of these financial statements.\nNEW HILARITY MINING COMPANY Statement of Cash Flows for the Years (Unaudited) Ended March 31, 1993, 1992 and 1991 - - ---------------------------------------------------------------------------\nPrepared by management.\nThe accompanying notes are an integral part of these financial statements.\nNEW HILARITY MINING COMPANY Notes to Financial Statements (Unaudited)\n- - ---------------------------------------------------------------------------\nNOTE 1 ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES\nThe Company was originally incorporated as Lexington Mining Company on February 27, 1930 under the laws of the State of Idaho for the primary purpose of mining and exploring for nonferrous and precious metals, primarily silver, lead and zinc. On April 17, 1945, the Company was reorganized, and the name changed to New Hilarity Mining Company. For many years the Company explored for precious metal deposits, but no commercial ore bodies were discovered. In early 1993, the Company abandoned its fifteen unpatented lode mining claims located in the Coeur d'Alene Mining District of Shoshone County, Idaho.\nEarnings (losses) per share are computed on the weighted average number of shares outstanding.\nMarketable trading securities are carried at market value which is based on published over-the-counter market quotes.\nThe preparation of financial statements in conformity with generally accepted accounting principles requires the use of the Company's management estimates for various accounts.\nNOTE 2 MARKETABLE SECURITIES\nThe Company owns 857,100 shares of common stock of United Mines, Inc., which is quoted on the over-the-counter market.\nNOTE 3 RELATED PARTY TRANSACTIONS\nFormer officers of the Company have periodically loaned the Company money for various working capital requirements. These loans are non-interest bearing and are due upon demand.\nNOTE 4 COMMON STOCK\nThe Company was originally incorporated on February 27, 1930, with an authorized capital of 2,000,000 shares of assessable common stock with a par value of $.05 per share. On April 17, 1945, the shareholders increased the authorized common stock to 3,000,000 shares with a par value of $.10 per share and the common stock was changed from assessable to non-assessable. On August 18, 1982, the shareholders increased the authorized common stock to 15,000,000 shares with a par value of $.10 per share.\nNOTE 5 INCOME TAXES\nThe Company has a net operating loss carryover of $401,793 to the fiscal year ended March 31, 1994. These loss carryovers will commence to expire in 2007. The Company has not recorded a deferred tax asset for the net operating loss carryover because it is highly uncertain if the Company will have future taxable income.\nITEM 9.","section_9":"ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTS\nNone\nPART III\nITEM 10.","section_9A":"","section_9B":"","section_10":"ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT\nTerry Dunne, 48, is the president of the Company and a director. Mr. Dunne is a Certified Public Accountant with over 25 years of experience in public accounting. Mr. Dunne has a Master Degree in Business Administration and a Master Degree in Taxation.\nRobert O'Brien, 61, is the secretary of the Company and a director. Mr. O'Brien has recently served as an officer and director of Gold Securities Corporation and Inland Resources, Inc. From 1977 to 1985, Mr. O'Brien was self employed as a general contractor, and from 1958 to 1976, he was executive vice-president of Hamer's, Inc., a chain of high fashion men's clothing stores located in Spokane, Washington.\nMr. O'Brien graduated from Gonzaga University with a degree in economics.\nITEM 11.","section_11":"ITEM 11. EXECUTIVE COMPENSATION\nThe officers and directors of the Company have served without compensation.\nITEM 12.","section_12":"ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT\nThe officers and directors own no common stock of the Company.\nITEM 13.","section_13":"ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS\nNone\nPART IV\nITEM 14.","section_14":"ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K\nNone, other than what is already shown in this 10-K report.\nSIGNATURES\nPursuant to the requirements of Section 13 of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.\nNew Hilarity Mining Company (Registrant)\nBY: \/s\/ Terrence J. Dunne, President\nDated: November 27, 1996\nPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following person on behalf of the registrant and in the capacity and on the date indicated.\nBY: \/s\/ Terrence J. Dunne, President\nDated: November 27, 1996","section_15":""}
{"filename":"821189_1993.txt","cik":"821189","year":"1993","section_1":"ITEM 1. BUSINESS\nGENERAL\nEnron Oil & Gas Company (the 'Company'), a Delaware corporation, is engaged in the exploration for, and the development and production of, natural gas and crude oil primarily in major producing basins in the United States and, to a lesser extent, in Canada, Trinidad and selected other international areas. At December 31, 1993, the Company's estimated net proved natural gas reserves were 1,772 billion cubic feet ('Bcf') and estimated net proved crude oil, condensate and natural gas liquids reserves were 20.9 million barrels ('MMBbl'). (See 'Supplemental Information to Consolidated Financial Statements'). At such date, approximately 78% of the Company's reserves (on a natural gas equivalent basis) was located in the United States, 16% in Canada and 6% in Trinidad. As of December 31, 1993, the Company employed approximately 690 persons.\nThe Company's core areas are the Big Piney area in Wyoming, South Texas primarily centered in the Lobo Trend area, the Matagorda Trend area located in federal waters offshore Texas and the Canyon Trend located in West Texas. The Company's other domestic natural gas and crude oil producing properties are located primarily in other areas of Texas, Utah, New Mexico, Oklahoma and California. The Company also has natural gas and crude oil producing properties located in western Canada, primarily in the provinces of Alberta, Saskatchewan and Manitoba, and in Trinidad. At December 31, 1993, 95% of the Company's proved domestic reserves (on a natural gas equivalent basis) was natural gas and 5% was crude oil, condensate and natural gas liquids. A substantial portion of the Company's natural gas reserves is in long-lived fields with well established production histories. The opportunity exists to increase production in many of these fields through infill drilling.\nEnron Corp. currently owns 80% of the outstanding common stock of the Company. (See 'Relationship Between the Company and Enron Corp.').\nUnless the context otherwise requires, all references herein to the Company include Enron Oil & Gas Company, its predecessors and subsidiaries. Unless the context otherwise requires, all references herein to Enron Corp. include Enron Corp., its predecessors and affiliates, other than the Company and its subsidiaries.\nWith respect to information on the Company's working interest in wells or acreage, 'net' oil and gas wells or acreage are determined by multiplying 'gross' oil and gas wells or acreage by the Company's working interest in the wells or acreage. Unless otherwise defined, all references to wells are gross.\nBUSINESS SEGMENTS\nThe Company's operations are all natural gas and crude oil exploration and production related. Accordingly, such operations are classified as one business segment.\nEXPLORATION AND PRODUCTION\nThe Company's six principal U.S. producing areas are the Big Piney area, South Texas area, Matagorda Trend area, Canyon Trend area, Pitchfork Ranch field and Vernal area. Properties in these areas comprised approximately 76% of the Company's domestic reserves (on a natural gas equivalent basis) and 83% of the Company's maximum domestic net natural gas deliverability as of December 31, 1993 and are substantially all operated by the Company. The Company also has operations in Canada and in Trinidad and is conducting exploration in selected other international areas.\nBIG PINEY AREA. The Company's largest reserve accumulation is located in the Big Piney area in Sublette and Lincoln counties in southwestern Wyoming. The Company is the holder of the largest productive acreage base in this area, with approximately 200,000 net acres under lease directly within field limits. A portion of the natural gas production from new wells drilled during 1991 and 1992 on the Company's leases in the Big Piney area is classified as tight formation natural gas. (See 'Other\nMatters - Tight Gas Sand Tax Credits (Section 29) and Severance Tax Exemption'). The Company operates approximately 461 natural gas wells in this area in which it owns a 91% average working interest. Production from the area net to the Company averaged 126 million cubic feet ('MMcf') per day of natural gas and 1.4 thousand barrels ('MBbl') per day of crude oil, condensate, and natural gas liquids in 1993. At December 31, 1993, maximum natural gas deliverability net to the Company was approximately 138 MMcf per day.\nThe current principal producing intervals are the Frontier and Mesaverde formations. The Frontier formation, which occurs at 6,500-10,000 feet, contains approximately 66% of the Company's current Big Piney reserves. The Company drilled 48 wells in the Big Piney area in 1993 and anticipates an active drilling program will continue for several years.\nSOUTH TEXAS AREA. The Company's activities in South Texas are focused in the Wilcox, Expanded Wilcox, Frio and Lobo producing horizons. The primary area of activity is in the Lobo Trend which occurs primarily in Webb and Zapata counties.\nThe Company operates approximately 625 wells in the South Texas area. Production is primarily from the Lobo sand of the Wilcox formation at depths ranging from 7,000 to 11,000 feet. The Company has approximately 260,000 acres under lease in this area and a majority of the natural gas production from new wells drilled during 1991 and 1992 on Company leases in the South Texas Lobo area is classified as tight formation natural gas. (See 'Other Matters - Tight Gas Sand Tax Credits (Section 29) and Severance Tax Exemption'). Natural gas sales net to the Company averaged 225 MMcf per day in 1993. At December 31, 1993, maximum natural gas deliverability net to the Company was approximately 250 MMcf per day. The Company drilled 104 wells in the South Texas area in 1993 and anticipates an active drilling program will continue for several years.\nMATAGORDA TREND AREA. The Company has an interest in several fields in the Matagorda Trend area, located 20 miles south of Port O'Connor, Texas in federal waters. The Company has a 78% working interest in Block 638 and a 92% working interest in Block 620. In Matagorda Blocks 555, 556, 700 and 713, the Company has an approximate 70%, 50%, 62% and 64% working interest, respectively. In addition, the Company has an approximate 82% and 50% working interest in Mustang Island Blocks 758 and 784, respectively. The Company operates all of the offshore tracts mentioned above. Natural gas sales from these areas net to the Company averaged 59 MMcf per day in 1993. At December 31, 1993, maximum natural gas deliverability net to the Company from these blocks was approximately 76 MMcf per day. The Company expects to maintain an active drilling program in the Gulf of Mexico during 1994.\nCANYON TREND AREA. The Company has added approximately 90,000 acres in this area during the last five years. Activities have been concentrated in Sutton, Crockett and Terrell Counties, Texas where the Company drilled 324 natural gas wells during the period 1991 through 1993. The Company operates approximately 500 natural gas wells in this area in which it owns a 95% average working interest. Production is from the Canyon sands and Strawn limestone at depths from 5,500 to 9,500 feet. At December 31, 1993, maximum natural gas deliverability net to the Company was approximately 70 MMcf per day. The Company expects to maintain an active drilling program in the Canyon Trend area during 1994. (See 'Other Matters - Tight Gas Sand Tax Credits (Section 29) and Severance Tax Exemption').\nPITCHFORK RANCH FIELD. The Pitchfork Ranch field located in Lea County, New Mexico, produces primarily from the Bone Spring, Atoka and Morrow formations. In 1993, natural gas sales net to the Company averaged 44 MMcf per day. At December 31, 1993, maximum natural gas deliverability net to the Company was approximately 46 MMcf per day. During 1993, the Company significantly increased reserves and deliverability through drilling and workovers. The Company expects to maintain an active drilling program in this field during 1994. (See 'Other Matters - Tight Gas Sand Tax Credits (Section 29) and Severance Tax Exemption').\nVERNAL AREA. In the Vernal area, located primarily in Uintah County, Utah, the Company operates approximately 187 producing wells and presently controls approximately 75,000 net acres. A\nmajority of the natural gas production from new wells drilled during 1991 and 1992 on the Company's leases in the Vernal area is classified as tight formation natural gas. (See 'Other Matters - Tight Gas Sand Tax Credits (Section 29) and Severance Tax Exemption'). In 1993, natural gas sales from the Vernal area averaged 24 MMcf per day compared with approximately 29 MMcf per day maximum deliverability, both net to the Company. Production is from the Green River and Wasatch formations located at depths between 4,500-8,000 feet. The Company has an average working interest of approximately 60%. The Company drilled 14 wells in the Vernal area in 1993 and expects to maintain a comparable drilling program during 1994.\nCANADA. The Company is engaged in the exploration for and the development and production of natural gas and crude oil and the operation of natural gas processing plants in western Canada, principally in the provinces of Alberta, Saskatchewan, and Manitoba. The Company conducts operations from offices in Calgary. Effective December 31, 1992, the Company consummated the acquisition of a natural gas property located in the Sandhills field in Saskatchewan. The property was further developed in 1993 through the drilling of 150 wells resulting in deliverability net to the Company from the Sandhills property of approximately 36 MMcf per day at December 31, 1993. Maximum Canadian natural gas deliverability net to the Company at December 31, 1993 was approximately 76 MMcf per day, and the Company held approximately 324,000 net undeveloped acres in Canada. The Company expects to maintain an active drilling program in Canada during 1994.\nTRINIDAD. In November 1992, the Company was awarded a 95% working interest concession in the South East Coast Consortium Block offshore Trinidad, previously held by three government-owned energy companies. Three undeveloped fields containing crude oil and natural gas rich with condensate are scheduled for development over the next three to five years. Existing surplus processing and transportation capacity at the Pelican Field facilities owned and operated by Trinidadian companies is being used to process and transport the production. Natural gas is being sold into the local market under a take-or-pay agreement with the National Gas Company of Trinidad and Tobago. At December 31, 1993, maximum natural gas deliverability net to the Company was approximately 40 MMcf per day and the Company held approximately 74,000 net undeveloped acres in Trinidad. As a result of continued development activities, natural gas deliveries were averaging approximately 60 MMcf per day and condensate deliveries were averaging approximately 3.3 MBbl per day net to the Company as of mid-March 1994. The Company expects to maintain an active development drilling program in this area in 1994.\nOTHER INTERNATIONAL. The Company continues to pursue selected other conventional natural gas and crude oil opportunities outside North America. In 1993, two unsuccessful wells were drilled in Malaysia and one in the United Kingdom North Sea area. During 1994, the Company will pursue other exploitation opportunities in countries where indigenous natural gas reserves have been identified, particularly where synergies in natural gas transportation, processing and power cogeneration can be optimized with other Enron Corp. affiliated companies. The Company currently is actively involved in an effort to obtain joint venture concessions involving two oil fields (Panna and Mukta) and one natural gas field (Tapti) offshore India in the Bombay High area. Resolution is anticipated by mid-1994.\nIn 1993, the Company continued expansion of its international opportunity portfolio in the coalbed methane recovery arena. In September 1992, the Company entered into an operating agreement under which it is serving as operator with another partner in a venture in the Lorraine Basin in France and under which it exercised, in March 1994, an option to acquire a 50% working interest in the concession. In addition, a 100% working interest concession has been obtained in the Galilee Basin in Queensland, Australia. Protocols have also been signed and joint venture agreements are in the government approval process in both Russia and Kazakhstan; joint feasibility studies are underway in China; and, several other high potential countries are under active investigation.\nMARKETING\nWELLHEAD MARKETING. The Company's wellhead natural gas production is currently being sold on the spot market and under long-term natural gas contracts at market responsive prices. In many instances, the long-term contract prices closely approximate the prices received for natural gas being sold on the spot market. Approximately one-half of the Company's wellhead natural gas production is currently being sold to pipeline and marketing subsidiaries of Enron Corp.\nSubstantially all of the Company's wellhead crude oil and condensate is sold under short-term contracts at market responsive prices.\nOTHER MARKETING. Enron Oil & Gas Marketing, Inc. ('EOGM'), a wholly-owned subsidiary of the Company, is a marketing company engaging in various marketing activities. Both the Company and EOGM contract to provide, under long-term agreements, natural gas to various purchasers and then aggregate the necessary supplies for the sales with purchases from various sources including third-party producers, marketing companies, pipelines or from the Company's own production. In addition, EOGM has purchased and constructed several small gathering systems in order to facilitate its entry into the gathering business on a limited basis. EOGM anticipates providing gathering services when such activity will enhance its capability as an aggregator and marketer. Both EOGM and the Company utilize other short and long-term hedging mechanisms including sales and purchases in the futures market and price swap agreements. These marketing activities have provided an effective balance in managing the Company's exposure to commodity price risks in the energy market.\nIn September 1992, the Company sold a volumetric production payment for $326.8 million to a limited partnership of which an Enron Corp. affiliated company is general partner with a 1% interest. Under the terms of the production payment agreements, the Company conveyed a real property interest of approximately 124 billion cubic feet equivalent ('Bcfe') (136 trillion British thermal units) of natural gas and other hydrocarbons in the Big Piney area of Wyoming. Effective October 1, 1993, the agreements were amended providing for the extension of the original term of the volumetric production payment through March 31, 1999 and including a revised schedule of daily quantities of hydrocarbons to be delivered which is approximately one-half of the original schedule. The revised schedule will total approximately 89.1 Bcfe (97.8 trillion British thermal units) versus approximately 87.9 Bcfe (96.4 trillion British thermal units) remaining to be delivered under the original agreement. Daily quantities of hydrocarbons no longer required to be delivered under the revised schedule during the period from October 1, 1993 through June 30, 1996 are available for sale by the Company. The Company retains responsibility for its working interest share of the cost of operations. The Company also entered into a separate agreement with the same limited partnership whereby it has agreed to exchange volumes owned by the Company in the Midcontinent area and the Texas Gulf Coast area for equivalent volumes produced and owned by the limited partnership in the Big Piney area. The costs incurred, if any, to effect redeliveries pursuant to such exchange are borne by the Company.\nThe Company also has contracted to supply natural gas to a Texas City, Texas cogeneration facility which is owned by Cogenron Inc. Cogenron Inc. is 50% owned by Enron Corp. The primary contract provides for the sale of natural gas under a fixed schedule of prices substantially above current spot market prices. Current deliveries of approximately 45 MMcf of natural gas per day are being supplied primarily by purchases at market responsive prices under a long-term agreement with an Enron Corp. subsidiary. The Company has also entered into a price swap agreement with a third party that has the effect of converting the prices under this contract to a fixed schedule of prices. The resulting prices under this combination of purchase and price swap agreements are substantially below the fixed schedule of prices in the primary sales contract. The arrangements are designed, as to the volumes involved, to provide the Company a fixed margin of profit under its agreement with Cogenron Inc. However, the Company's commitment to deliver volumes of natural gas in excess of the current delivery levels at the schedule of predetermined prices discussed above could be disadvantageous to the Company during any time spot market prices exceed the applicable contract prices for natural gas.\nWELLHEAD VOLUMES AND PRICES, AND LEASE AND WELL EXPENSES\nThe following table sets forth certain information regarding the Company's wellhead volumes of and average prices for natural gas per thousand cubic feet ('Mcf'), crude oil and condensate, and natural gas liquids per barrel ('Bbl'), and average lease and well expenses per thousand cubic feet equivalent ('Mcfe' - natural gas equivalents are determined using the ratio of 6.0 Mcf of natural gas to 1.0 barrel of crude oil and condensate or natural gas liquids) delivered during each of the three years in the period ended December 31, 1993:\nYEAR ENDED DECEMBER 31, 1993 1992 1991\nVOLUMES (PER DAY) Natural Gas (MMcf) United States---------------- 648.6(1) 533.6(1) 465.8 Canada----------------------- 58.4 30.0 24.8 Trinidad--------------------- 2.3 - - Total---------------------- 709.3(1) 563.6(1) 490.6 Crude Oil and Condensate (MBbl) United States---------------- 6.6 6.3 5.9 Canada----------------------- 2.2 2.2 2.3 Trinidad--------------------- .1 - - Total---------------------- 8.9 8.5 8.2 Natural Gas Liquids (MBbl) United States---------------- .2 .3 .3 Canada----------------------- .4 .4 .3 Trinidad--------------------- - - - Total---------------------- .6 .7 .6 AVERAGE PRICES Natural Gas ($\/Mcf) United States---------------- $ 1.97(2) $ 1.61(2) $ 1.38 Canada----------------------- 1.34 1.18 1.32 Trinidad--------------------- .89 - - Composite------------------ 1.92(2) 1.58(2) 1.37 Crude Oil and Condensate ($\/Bbl) United States---------------- $ 16.96 $ 18.29 $ 19.24 Canada----------------------- 14.63 16.80 17.58 Trinidad--------------------- 14.36 - - Composite------------------ 16.37 17.90 18.78 Natural Gas Liquids ($\/Bbl) United States---------------- $ 13.85 $ 11.56 $ 10.79 Canada----------------------- 9.46 10.05 12.48 Trinidad--------------------- - - - Composite------------------ 11.12 10.69 11.64 LEASE AND WELL EXPENSES ($\/MCFE) United States---------------- $ .18 $ .20 $ .23 Canada----------------------- .48 .50 .57 Trinidad--------------------- 1.46 - - Composite------------------ .21 .22 .25\n(1) Includes 81.0 MMcf per day in 1993 and 27.6 MMcf per day in 1992 delivered under the terms of a volumetric production payment agreement effective October 1, 1992, as amended.\n(2) Includes an average equivalent wellhead value of $1.57 per Mcf in 1993 and $1.70 per Mcf in 1992 for the volumes described in note (1), net of transportation costs.\nOTHER NATURAL GAS MARKETING VOLUMES AND PRICES\nThe following table sets forth certain information regarding the Company's volumes of natural gas delivered under other marketing and volumetric production payment arrangements, and resulting average of sales prices and per unit amortization of deferred revenues along with associated costs during each of the three years in the period ended December 31, 1993. (See 'Marketing' for a discussion of other natural gas marketing arrangements and agreements).\nYEAR ENDED DECEMBER 31, 1993 1992 1991 Volumes (MMcf per day)--------------- 293.4(1) 254.9(1) 237.2 Average Gross Revenue ($\/Mcf)-------- $ 2.57(2) $ 2.62(2) $ 2.63 Associated Costs ($\/Mcf)(4)---------- 2.32(3) 1.99(3) 1.75 Margin ($\/Mcf)----------------------- $ 0.25 $ 0.63 $ 0.88\n(1) Includes 81.0 MMcf per day in 1993 and 27.6 MMcf per day in 1992 delivered under the terms of volumetric production payment and exchange agreements effective October 1, 1992, as amended.\n(2) Includes per unit deferred revenue amortization for the volumes detailed in note (1) at an equivalent of $2.50 per Mcf ($2.40 per million British thermal units) in 1993 and $2.51 per Mcf ($2.40 per million British thermal units) in 1992.\n(3) Includes an average value of $2.20 per Mcf in 1993 and $2.37 per Mcf in 1992, including average equivalent wellhead value, any applicable transportation costs and exchange differentials, for the volumes detailed in note (1).\n(4) Including transportation and exchange differentials.\nCOMPETITION\nThe Company actively competes for reserve acquisitions and exploration leases, licenses and concessions, frequently against companies with substantially larger financial and other resources. To the extent the Company's exploration budget is lower than that of certain of its competitors, the Company may be disadvantaged in effectively competing for certain reserves, leases, licenses and concessions. Competitive factors include price, contract terms, and quality of service, including pipeline connection times and distribution efficiencies. In addition, the Company faces competition from other producers and suppliers, including competition from Canadian natural gas.\nREGULATION\nDOMESTIC REGULATION OF NATURAL GAS AND CRUDE OIL PRODUCTION. Natural gas and crude oil production operations are subject to various types of regulation, including regulation in the United States by state and federal agencies.\nDomestic legislation affecting the oil and gas industry is under constant review for amendment or expansion. Also, numerous departments and agencies, both federal and state, are authorized by statute to issue and have issued rules and regulations which, among other things, require permits for the drilling of wells, regulate the spacing of wells, prevent the waste of natural gas and crude oil resources through proration, require drilling bonds and regulate environmental and safety matters. The regulatory burden on the oil and gas industry increases its cost of doing business and, consequently, affects its profitability.\nA substantial portion of the Company's oil and gas leases in the Big Piney area and in the Gulf of Mexico, as well as some in other areas, are granted by the federal government and administered by the Bureau of Land Management (the 'BLM') and the Minerals Management Service (the 'MMS') federal agencies. Operations conducted by the Company on federal oil and gas leases must comply with numerous statutory and regulatory restrictions. Certain operations must be conducted pursuant to appropriate permits issued by the BLM and the MMS.\nSales of crude oil, condensate and natural gas liquids by the Company are made at unregulated market prices.\nThe transportation and sale for resale of natural gas in interstate commerce are regulated pursuant to the Natural Gas Act of 1938 (the 'NGA') and the Natural Gas Policy Act of 1978 (the 'NGPA'). These statutes are administered by the Federal Energy Regulatory Commission (the 'FERC'). Effective January 1, 1993, the Natural Gas Wellhead Decontrol Act of 1989 deregulated natural gas prices for all 'first sales' of natural gas, which includes all sales by the Company of its own production. Consequently, sales of the Company's natural gas currently may be made at market prices, subject to applicable contract provisions.\nRegulation of natural gas importation is administered primarily by the Department of Energy's Office of Fossil Energy (the 'DOE\/FE'), pursuant to the NGA. The NGA provides that any party seeking to import natural gas must first seek DOE\/FE authorization, which authorization may be granted, modified or denied in accordance with the public interest. The Energy Policy Act of 1992 amended the NGA's public interest standard with respect to imports from and exports to certain countries, such as Canada, to deem imports from and exports to such countries to be in the public interest, and require such import\/export applications to be granted without delay. In addition, the Energy Policy Act amended the NGPA to treat natural gas imported from Canada as 'first sales' of natural gas under Section 3 of the NGPA, thus allowing such imported natural gas to be sold for resale without certificate authorization from the FERC. Additionally, the National Energy Board of Canada has dramatically revised its natural gas export policies to permit large volumes of Canadian natural gas to compete with natural gas produced in the U.S. for the U.S. spot market. Additional natural gas pipeline capacity from Canada to the U.S. has been built and other such construction proposals are pending approval. While the impact on the Company of this change is uncertain, it is possible that it will increase competition in the markets in which the Company sells natural gas. For example, Canadian natural gas competes directly with natural gas produced from the Company's Big Piney area for customers located in the Pacific Northwest region of the United States.\nSince 1985, the FERC has endeavored to make natural gas transportation more accessible to gas buyers and sellers on an open and non-discriminatory basis. These efforts have significantly altered the marketing and pricing of natural gas. The FERC's latest action in this area is Order No. 636, issued in April 1992, which mandates a fundamental restructuring of interstate pipeline sales and transportation services. Order No. 636 requires interstate natural gas pipelines to 'unbundle' or segregate the sales, transportation, storage, and other components of their existing city-gate sales service, and to separately state the rates for each unbundled service. Under Order No. 636, unbundled pipeline sales can be made only in the production areas. Order No. 636 also requires interstate pipelines to assign capacity rights they have on upstream pipelines to such pipelines' former sales customers and provides for the recovery by interstate pipelines of costs associated with the transition from providing bundled sales services to providing unbundled transportation and storage services. The purpose of Order No. 636 is to further enhance competition in the natural gas industry by assuring the comparability of pipeline sales service and services offered by a pipelines' competitors. Various aspects of Order No. 636 were challenged, including alleged shifts of costs between pipeline customer groups and the continuing reliability of unbundled services. In two subsequent orders on rehearing of Order No. 636, namely Order Nos. 636-A and 636-B, the FERC modified the original order in response to these and other concerns. As of early February 1994, the FERC had issued final orders accepting most pipelines' Order No. 636 compliance filings. Numerous parties have filed petitions for court review of Order Nos. 636, 636-A and 636-B, as well as orders in individual pipeline restructuring proceedings. Upon such judicial review, these orders may be reversed in whole or in part. Order No. 636 does not directly regulate the Company's activities, but has had and will have an indirect effect because of its broad scope. With Order No. 636 only partially implemented and subject to court review, it is difficult to predict with precision its effects. In many instances,\nhowever, Order No. 636 has substantially reduced or brought to an end interstate pipelines' traditional role as wholesalers of natural gas in favor of providing only storage and transportation services. Order No. 636 has also created substantial uncertainty with respect to the marketing and transportation of natural gas. In spite of this uncertainty, Order No. 636 may enhance the Company's ability to market and transport its natural gas production.\nIn December 1992, the FERC issued Order No. 547, governing the issuance of blanket marketer sales certificates to all natural gas sellers other than interstate pipelines. The order eliminates the need for natural gas producers and marketers to seek specific authorization under Section 7 of the NGA from the FERC to make sales of natural gas, such as imported natural gas and natural gas purchased from interstate pipelines. Instead, effective January 7, 1993, these natural gas sellers, by operation of the order, will be issued blanket certificates of public convenience and necessity allowing them to make jurisdictional natural gas sales for resale at negotiated rates without seeking specific FERC authorization. For marketers affiliated with interstate pipelines, Order No. 547 becomes effective for sales involving each affiliated pipeline as that pipeline complies with Order No. 636. The FERC intends Order No. 547, in tandem with Order No. 636, to foster a competitive market for natural gas by giving natural gas purchasers access to multiple supply sources at market-driven prices. The Company, as a natural gas producer, is covered by Order No. 547 and stands to benefit from the opportunity to market natural gas more freely under the blanket certificate as well as from the potential improvement in access to multiple natural gas purchasers.\nIn December 1993, the FERC issued Order No. 497-E, which modified in some respects the standards of conduct, record keeping and reporting requirements and other measures that govern relationships between interstate pipelines and their marketing affiliates. Order No. 497-E narrowed the contemporaneous disclosure standard of conduct and the reporting requirements, while at the same time possibly expanding the class of pipeline and marketing affiliate employees to whom the standards of conduct apply. Order No. 497-E also extended until June 1994 the sunset date of the reporting requirements. The FERC simultaneously issued a notice of proposed rulemaking to revise these reporting requirements, which would establish new rules to go into effect before the June 1994 sunset date. Order No. 497 does not directly regulate the Company's activities, although a substantial portion of the Company's natural gas production is sold to or transported by interstate pipeline affiliates which are subject to the Order. The Company's activities may therefore be indirectly affected by these regulations.\nThe Company owns, directly or indirectly, certain natural gas pipelines that it believes meet the traditional tests the FERC has used to establish a pipeline's status as a gatherer not subject to FERC jurisdiction under the NGA. State regulation of gathering facilities generally includes various safety, environmental, and in some circumstances, non-discriminatory take requirements, but does not generally entail rate regulation. Natural gas gathering may receive greater regulatory scrutiny at both the state and federal levels as the pipeline restructuring under Order No. 636 is implemented. For example, the State of Oklahoma recently enacted a prohibition against discriminatory gathering rates. In certain recent cases, the FERC has asserted ancillary NGA jurisdiction over gathering activities of interstate pipelines and their affiliates. In addition, the FERC recently convened a conference to consider issues relating to gathering services performed by interstate pipelines or their affiliates. The FERC intends to use information obtained to reevaluate the appropriateness of its traditional gathering criteria in light of Order No. 636 and to establish consistent policies for gathering rates and services for both interstate pipelines and their affiliates. It is not possible at this time to predict the outcome of this proceeding although it could ultimately affect access to and gathering rates for interstate gathering services. The Company's gathering operations could be adversely affected should they be subject in the future to the application of state or federal regulation of rates and services.\nThe Company cannot predict the effect that any of the aforementioned orders or the challenges to such orders will ultimately have on the Company's operations. Additional proposals and proceedings that might affect the natural gas industry are pending before Congress, the FERC and the courts.\nThe Company cannot predict when or whether any such proposals or proceedings may become effective. It should also be noted that the natural gas industry historically has been very heavily regulated; therefore, there is no assurance that the less regulated approach currently being pursued by the FERC will continue indefinitely. Thus, the Company cannot predict the ultimate outcome or durability of the unbundled regulatory regime mandated by Order No. 636.\nENVIRONMENTAL REGULATION. Various federal, state and local laws and regulations covering the discharge of materials into the environment, or otherwise relating to the protection of the environment, may affect the Company's operations and costs as a result of their effect on natural gas and crude oil exploration, development and production operations. It is not anticipated that the Company will be required in the near future to expend amounts that are material in relation to its total exploration and development expenditure program by reason of environmental laws and regulations, but inasmuch as such laws and regulations are frequently changed, the Company is unable to predict the ultimate cost of compliance.\nThe Company has been named as a potentially responsible party in one Comprehensive Environmental Response Compensation and Liability Act proceeding. However, management does not believe that any potential assessment resulting from such proceeding will have a materially adverse effect on the financial condition or results of operations of the Company.\nCANADIAN REGULATION. In Canada, the petroleum industry operates under Federal, provincial and municipal legislation and regulations governing land tenure, royalties, production rates, pricing, environmental protection, exports and other matters. The price of natural gas and crude oil in Canada has been deregulated and is now determined by market conditions and negotiations between buyers and sellers.\nVarious matters relating to the transportation and export of natural gas continue to be subject to regulation by both provincial and Federal agencies; however, the North American Free Trade Agreement has reduced the risk of altering cross-border commercial transactions.\nCanadian governmental regulations may have a material effect on the economic parameters for engaging in oil and gas activities in Canada and may have a material effect on the advisability of investments in Canadian oil and gas drilling activities. The Company is monitoring political, regulatory and economic developments in Canada.\nRELATIONSHIP BETWEEN THE COMPANY AND ENRON CORP.\nOWNERSHIP OF COMMON STOCK. Enron Corp. owns 80% of the outstanding shares of common stock of the Company and, through its ability to elect all directors of the Company, has the ability to control all matters relating to the management of the Company, including any determination with respect to acquisition or disposition of Company assets, future issuance of common stock or other securities of the Company and any dividends payable on the common stock. Enron Corp. also has the ability to control the Company's exploration, development, acquisition and operating expenditure plans. If Enron Corp. should sell a substantial amount of the common stock of the Company that it owns, such action could adversely affect the prevailing market price for the common stock and could impair the Company's ability to raise capital through the sale of its equity securities. In addition, a sale by Enron Corp. of any common stock owned by Enron Corp. would cause Enron Corp.'s ownership interest in the Company to fall below 80% with the result that (i) the Company would cease to be included in the consolidated federal income tax return filed by Enron Corp. and (ii) the tax allocation agreement between the Company and Enron Corp. described below would terminate. The Company has granted certain registration rights to Enron Corp. with respect to the common stock owned by Enron Corp. (See 'Contractual Arrangements' below). There is no agreement between Enron Corp. and any other party, including the Company, that would prevent Enron Corp. from acquiring additional shares of common stock of the Company.\nCONTRACTUAL ARRANGEMENTS. The Company entered into a Services Agreement (the 'Services Agreement') with Enron Corp. effective January 1989, pursuant to which Enron Corp. provided various services, such as maintenance of certain employee benefit plans, provision of telecommunications and computer services, lease of office space and the provision of purchasing and operating services and certain other corporate staff and support services. Such services historically have been supplied to the Company by Enron Corp., and the Services Agreement provided for the further delivery of such services substantially identical in nature and quality to those services previously provided. The Company agreed to a fixed rate for the rental of office space and to reimburse Enron Corp. for all other direct costs incurred in rendering services to the Company under the contract and to pay Enron Corp. for allocated indirect costs incurred in rendering such services up to an annual maximum of $8 million, such cap to be increased for inflation and certain changes in the Company's allocation bases with the increase limited to a maximum of 10% per year. The Services Agreement was for an initial term of five years through December 1993. Effective January 1, 1994, the Company and Enron Corp. entered into a new services agreement (the 'New Services Agreement') pursuant to which Enron Corp. will, among other things, provide for the Company similar services substantially identical in nature and quality to those provided under terms of the previous agreement. The Company has agreed to pay and to reimburse Enron Corp. on bases essentially consistent with those included in the previous agreement, except that allocated indirect costs are subject to an annual maximum of $6.7 million for the year 1994 with any increase in such maximum for subsequent years not to exceed 7.5% per year. The New Services Agreement is for an initial term of five years through December 1998 and will continue thereafter until terminated by either party.\nThe Company is included in the consolidated federal income tax return filed by Enron Corp. as the common parent for itself and its subsidiaries and affiliated companies, excluding any foreign subsidiaries. Consistent therewith and pursuant to a Tax Allocation Agreement (the 'Tax Agreement') between the Company, the Company's subsidiaries and Enron Corp., either Enron Corp. will pay to the Company and each subsidiary an amount equal to the tax benefit realized in the Enron Corp. consolidated federal income tax return resulting from the utilization of the Company's or the subsidiary's net operating losses and\/or tax credits, or the Company and each subsidiary will pay to Enron Corp. an amount equal to the federal income tax computed on its separate taxable income less the tax benefits associated with any net operating losses and\/or tax credits generated by the Company or the subsidiary which are utilized in the Enron Corp. consolidated return. Enron Corp. will pay the Company and each subsidiary for the tax benefits associated with their net operating losses and tax credits utilized in the Enron Corp. consolidated return, provided that a tax benefit was realized except as discussed in the following paragraph, even if such benefits could not have been used by the Company or the subsidiary on a separately filed tax return.\nIn 1991, the Company and Enron Corp. modified the Tax Agreement to provide that, through 1992, the Company will realize the benefit of certain tight gas sand federal income tax credits available to the Company on a stand alone basis. The Company has also entered into an agreement with Enron Corp. providing for the Company to be paid for all realizable benefits associated with tight gas sand federal income tax credits concurrent with tax reporting and settlement for the periods in which they are generated. (See 'Other Matters Tight Gas Sand Tax Credits (Section 29) and Severance Tax Exemption').\nThe Tax Agreement applies to the Company and each of its subsidiaries for all years in which the Company or any of its subsidiaries are or were included in the Enron Corp. consolidated return.\nTo the extent a state or other taxing jurisdiction requires or permits a consolidated, combined, or unitary tax return to be filed and such return includes the Company or any of its subsidiaries, the principles expressed with respect to consolidated federal income tax allocation shall apply.\nPursuant to the terms of a Stock Restriction and Registration Agreement with Enron Corp., the Company has agreed that upon the request of Enron Corp. (or certain assignees), the Company will register under the Securities Act of 1933 and applicable state securities laws the sale of the Company\ncommon stock owned by Enron Corp. which Enron Corp. has requested to be registered. The Company's obligation is subject to certain limitations relating to a minimum amount of common stock required for registration, the timing of registration and other similar matters. The Company is obligated to pay all expenses incidental to such registration, excluding underwriters' discounts and commissions and certain legal fees and expenses.\nCONFLICTS OF INTEREST. The nature of the respective businesses of the Company and Enron Corp. and its affiliates is such as to potentially give rise to conflicts of interest between the two companies. Conflicts could arise, for example, with respect to transactions involving purchases, sales and transportation of natural gas and other business dealings between the Company and Enron Corp. and its affiliates, potential acquisitions of businesses or oil and gas properties, the issuance of additional shares of voting securities, the election of directors or the payment of dividends by the Company.\nEnron Corp. has advised the Company that it does not currently intend to engage in the exploration for and\/or development and production of natural gas and crude oil except through its ownership of common stock of the Company. However, circumstances may arise that would cause Enron Corp. to engage in the exploration for and\/or development and production of natural gas and crude oil in competition with the Company. For example, opportunities might arise which would require financial resources greater than those available to the Company or which are located in areas or countries in which the Company does not intend to operate. Also, Enron Corp. might acquire a competing oil and gas business as part of a larger acquisition. In addition, as part of Enron Corp.'s strategy of securing supplies of natural gas, Enron Corp. may from time to time acquire producing properties, and thereafter engage in exploration, development and production activities with respect to such properties. Such acquisition, exploration, development and production activities may directly or indirectly compete with the Company's business. Thus, there can be no assurances that Enron Corp. will not engage in the natural gas and crude oil exploration, development and production business in competition with the Company.\nThe Company and Enron Corp. and its affiliates have in the past entered into significant intercompany transactions and agreements incident to their respective businesses, and the Company and Enron Corp. and its affiliates may be expected to enter into material transactions and agreements from time to time in the future. Such transactions and agreements have related to, among other things, the purchase and sale of natural gas, the financing of exploration and development efforts by the Company, and the provision of certain corporate services. (See 'Marketing' and the Consolidated Financial Statements and notes thereto). The Company believes that its existing transactions and agreements with Enron Corp. and its affiliates have been at least as favorable to the Company as could be obtained from third parties, and the Company intends that the terms of any future transactions and agreements between the Company and Enron Corp. and its affiliates will be at least as favorable to the Company as could be obtained from third parties.\nOTHER MATTERS\nENERGY PRICES. Since the Company is primarily a natural gas company, it is more significantly impacted by changes in natural gas prices than in the prices for crude oil, condensate and natural gas liquids. During recent periods, natural gas has been priced significantly below parity with crude oil, condensate and natural gas liquids based on the energy equivalency of, and differences in transportation and processing costs associated with, the respective products. This imbalance in parity has been primarily driven by, among other things, a supply of domestic natural gas volumes in excess of demand requirements. The Company is unable to predict when this supply imbalance may resolve due to the significant impacts of factors such as general economic conditions, weather and other international energy supplies over which the Company has no control. However, during the latter part of 1993, certain shifts in the pricing structure for natural gas and crude oil and condensate suggest that the significance of the lack of parity between natural gas and crude oil and condensate pricing may be beginning to lessen.\nNatural gas prices have fluctuated, at times rather dramatically, during the last three years. These fluctuations have resulted in an overall increase in average wellhead natural gas prices realized by the Company of 15% from 1991 to 1992 and 22% from 1992 to 1993. Due to the many uncertainties associated with the world political environment, the availabilities of other world wide energy supplies and the relative competitive relationships of the various energy sources in the view of the consumers, the Company is unable to predict what changes may occur in natural gas prices in the future.\nCrude oil and condensate prices also have fluctuated, at times rather dramatically, during the last three years. These fluctuations have resulted in an overall decline in average wellhead crude and condensate prices realized by the Company of 5% from 1991 to 1992 and 9% from 1992 to 1993. Due to the many uncertainties associated with the world political environment, the availabilities of other world wide energy supplies and the relative competitive relationships of the various energy sources in the view of the consumers, the Company is unable to predict what changes may occur in crude oil and condensate prices in the future.\nTIGHT GAS SAND TAX CREDITS (SECTION 29) AND SEVERANCE TAX EXEMPTION. Federal tax law provides a tax credit for production of certain fuels produced from nonconventional sources (including natural gas produced from tight formations), subject to a number of limitations. Fuels qualifying for the credit must be produced from a well drilled or a facility placed in service before January 1, 1993, and must be sold before January 1, 2003.\nThe credit, which is currently approximately $.52 per MMBtu of natural gas, is computed by reference to the price of crude oil, and is phased out as the price of crude oil exceeds $23.50 in 1980 dollars (adjusted for inflation) with complete phaseout if such price exceeds $29.50 in 1980 dollars (similarly adjusted). Under this formula, the commencement of phaseout would be triggered if the average price for crude oil rose above approximately $43 per barrel in current dollars. Significant benefits from the tax credit are accruing to the Company since a portion (and in some cases a substantial portion) of the Company's natural gas production from new wells drilled after November 5, 1990, and before January 1, 1993, on the Company's leases in several of the Company's significant producing areas qualify for this tax credit.\nCertain natural gas production from wells spudded or completed after May 24, 1989 and before September 1, 1996 in tight formations in Texas qualifies for a ten-year exemption, ending August 31, 2001, from Texas severance taxes, subject to certain limitations.\nOTHER. All of the Company's oil and gas activities are subject to the risks normally incident to the exploration for and development and production of natural gas and crude oil, including blowouts, cratering and fires, each of which could result in damage to life and property. Offshore operations are subject to usual marine perils, including hurricanes and other adverse weather conditions, and governmental regulations as well as interruption or termination by governmental authorities based on environmental and other considerations. In accordance with customary industry practices, insurance is maintained by the Company against some, but not all, of the risks. Losses and liabilities arising from such events could reduce revenues and increase costs to the Company to the extent not covered by insurance.\nThe Company's overseas operations are subject to certain risks, including expropriation of assets, risks of increases in taxes and government royalties, renegotiation of contracts with foreign governments, political instability, payment delays, limits on allowable levels of production and current exchange and repatriation losses, as well as changes in laws and policies governing operations of overseas-based companies generally.\nCURRENT EXECUTIVE OFFICERS OF THE REGISTRANT\nThe current executive officers of the Company and their names and ages are as follows:\nNAME AGE POSITION Forrest E. Hoglund----------------- 60 Chairman of the Board, President and Chief Executive Officer; Director Joe Michael McKinney--------------- 54 President-International Operations Mark G. Papa----------------------- 47 President-North American Operations George E. Uthlaut------------------ 60 Senior Vice President-Operations Walter C. Wilson------------------- 51 Senior Vice President and Chief Financial Officer Ben B. Boyd------------------------ 52 Vice President and Controller Dennis M. Ulak--------------------- 40 Vice President and General Counsel\nForrest E. Hoglund joined the Company as Chairman of the Board, Chief Executive Officer and Director in September 1987. Since May 1990, he has also served as President of the Company. Mr. Hoglund was a director of USX Corporation from February 1986 until September 1987. He joined Texas Oil & Gas Corp. ('TXO') in 1977 as president, was named Chief Operating Officer in 1979, Chief Executive Officer in 1982, and served TXO in those capacities until September 1987. Mr. Hoglund is also a director of Texas Commerce Bancshares, Inc.\nJoe Michael McKinney has been President-International Operations since February 1994 with responsibilities for all exploration, drilling, production and engineering activities for the Company's international ventures outside North America. Mr. McKinney joined Enron Exploration Company, a wholly-owned subsidiary of the Company, in December 1991 as Senior Vice President of Operations and was elected President and Chief Operating Officer of Enron Exploration Company in April 1993, a capacity in which he continues to serve. Prior to joining the Company, Mr. McKinney held operations management positions with Union Texas Petroleum Company, The Superior Oil Company and Exxon Company, USA.\nMark G. Papa has been President-North American Operations since February 1994. From May 1986 through January 1994, Mr. Papa served as Senior Vice President-Operations. Mr. Papa joined Belco Petroleum Corporation, a predecessor of the Company, in 1981 as Division Production Coordinator and served as Senior Vice President-Drilling and Production, BelNorth Petroleum Corporation from May 1984 until May 1986.\nGeorge E. Uthlaut has been Senior Vice President-Operations of the Company since November 1987. Mr. Uthlaut was previously employed by Exxon Corporation (and affiliates) for 29 years in a number of managerial and technical positions. His last position was Headquarters Operations Manager, Production Department, Exxon Company, USA.\nWalter C. Wilson has been Senior Vice President and Chief Financial Officer since May 1991. Mr. Wilson joined the Company in November 1987 as Vice President and Controller and was named Senior Vice President-Finance in October 1988. Prior to joining the Company Mr. Wilson held financial management positions with Exxon Company, USA for 16 years and The Superior Oil Company for 4 years.\nBen B. Boyd has been Vice President and Controller since March 1991. Mr. Boyd joined the Company in March 1989 as Director of Accounting and was named Controller in May 1990. Prior to joining the Company, Mr. Boyd held financial management positions with DeNovo Oil & Gas, Inc., Scurlock Oil Company and Coopers & Lybrand.\nDennis M. Ulak has been Vice President and General Counsel since March 1992. Mr. Ulak joined the Company in March 1987 as Senior Counsel and was named Assistant General Counsel in\nAugust 1990. Prior to joining the Company, Mr. Ulak held various legal positions with Enron Corp. and Northern Natural Gas Company.\nITEM 2.","section_1A":"","section_1B":"","section_2":"ITEM 2. PROPERTIES\nOIL AND GAS EXPLORATION AND PRODUCTION PROPERTIES AND RESERVES\nRESERVE INFORMATION. For estimates of the Company's net proved and proved developed reserves of natural gas and liquids, including crude oil, condensate and natural gas liquids, see 'Supplemental Information to Consolidated Financial Statements.'\nThere are numerous uncertainties inherent in estimating quantities of proved reserves and in projecting future rates of production and timing of development expenditures, including many factors beyond the control of the producer. The reserve data set forth in Supplemental Information to Consolidated Financial Statements represent only estimates. Reserve engineering is a subjective process of estimating underground accumulations of natural gas and liquids, including crude oil, condensate and natural gas liquids, that cannot be measured in an exact manner. The accuracy of any reserve estimate is a function of the amount and quality of available data and of engineering and geological interpretation and judgment. As a result, estimates of different engineers normally vary. In addition, results of drilling, testing and production subsequent to the date of an estimate may justify revision of such estimate. Accordingly, reserve estimates are often different from the quantities ultimately recovered. The meaningfulness of such estimates is highly dependent upon the accuracy of the assumptions upon which they were based.\nIn general, the volume of production from oil and gas properties owned by the Company declines as reserves are depleted. Except to the extent the Company acquires additional properties containing proved reserves or conducts successful exploration and development activities, or both, the proved reserves of the Company will decline as reserves are produced. Volumes generated from future activities of the Company are therefore highly dependent upon the level of success in acquiring or finding additional reserves and the costs incurred in doing so.\nThe Company's estimates of reserves filed with other federal agencies agree with the information set forth in Supplemental Information to Consolidated Financial Statements.\nACREAGE. The following table summarizes the Company's developed and undeveloped acreage at December 31, 1993. Excluded is acreage in which the Company's interest is limited to owned royalty, overriding royalty and other similar interests.\nPRODUCING WELL SUMMARY. The following table reflects the Company's ownership in gas wells in 316 fields and oil wells in 75 fields located in Texas, offshore Texas and Louisiana in the Gulf of Mexico, Oklahoma, New Mexico, Utah, Wyoming, California and various other states, Canada and Trinidad at December 31, 1993. Gross oil and gas wells include 229 with multiple completions.\nPRODUCTIVE WELLS GROSS NET Gas---------------------------------- 4,674 3,170 Oil---------------------------------- 884 527 Total---------------------------- 5,558 3,697\nDRILLING AND ACQUISITION ACTIVITIES. During the years ended December 31, 1993, 1992 and 1991 the Company spent approximately $430.1, $395.7 and $254.8 million, respectively, for exploratory and development drilling and acquisition of leases and producing properties. The Company drilled, participated in the drilling of or acquired wells as set out in the table below for the periods indicated:\nAll of the Company's drilling activities are conducted on a contract basis with independent drilling contractors. The Company owns no drilling equipment.\nITEM 3.","section_3":"ITEM 3. LEGAL PROCEEDINGS\nThe Company and its subsidiaries and related companies are named defendants in numerous lawsuits and named parties in numerous governmental proceedings arising in the ordinary course of business. While the outcome of lawsuits or other proceedings against the Company cannot be predicted with certainty, management does not expect these matters to have a material adverse effect on the financial condition or results of operations of the Company. TransAmerican Natural Gas Corporation ('TransAmerican') has filed a petition against the Company and Enron Corp. alleging breach of contract, tortious interference with contract, misappropriation of trade secrets and violation of state antitrust laws. The petition, as amended, seeks actual damages of $100 million plus exemplary damages of $300 million. The Company has answered the petition and is actively defending the matter; in addition, the Company has filed counterclaims against TransAmerican and a third-party claim against its sole shareholder, John R. Stanley, alleging fraud, negligent misrepresentation and breach of state antitrust laws. Trial, originally set for February 7, 1994, is now set for September 12, 1994. Although no assurances can be given, the Company believes that the claims made by TransAmerican are totally without merit, that the ultimate resolution of the matter will not have a materially adverse effect on its financial condition or results of operations, and that such ultimate resolution could result in a recovery to the Company.\nITEM 4.","section_4":"ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS\nThere were no matters submitted to a vote of security holders during the fourth quarter of 1993.\nPART II\nITEM 5.","section_5":"ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS\nThe following table sets forth, for the periods indicated, the high and low sale prices per share for the common stock, as reported on the New York Stock Exchange Composite Tape, and the amount of cash dividends paid per share.\nPRICE RANGE CASH HIGH LOW DIVIDENDS First Quarter-------------------- 22.25 16.25 .05 Second Quarter------------------- 21.50 18.00 .05 Third Quarter-------------------- 24.63 17.63 .05 Fourth Quarter------------------- 25.13 19.25 .05 First Quarter-------------------- 21.88 16.63 .05 Second Quarter------------------- 27.25 20.50 .05 Third Quarter-------------------- 35.88 25.38 .05 Fourth Quarter------------------- 34.38 27.50 .05 First Quarter-------------------- 40.63 26.75 .06 Second Quarter------------------- 45.00 35.75 .06 Third Quarter-------------------- 53.63 39.75 .06 Fourth Quarter------------------- 54.00 34.13 .06\nAs of March 1, 1994, there were approximately 500 record holders of the Company's common stock, including individual participants in security position listings. There are an estimated 5,600 beneficial owners of the Company's common stock, including shares held in street name.\nFollowing the initial public offering and sale of its common stock in October 1989, the Company paid quarterly dividends of $0.05 per share beginning with an initial dividend paid in January 1990 with respect to the fourth quarter of 1989. Beginning in January 1993 with respect to the fourth quarter of 1992, the Company has paid quarterly dividends of $0.06 per share. The Company currently intends to continue to pay quarterly cash dividends on its outstanding shares of common stock. However, the determination of the amount of future cash dividends, if any, to be declared and paid will depend upon, among other things, the financial condition, funds from operations, level of exploration and development expenditure opportunities and future business prospects of the Company.\nITEM 6.","section_6":"ITEM 6. SELECTED FINANCIAL DATA\nITEM 7.","section_7":"ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS\nThe following review of operations for each of the three years in the period ended December 31, 1993 should be read in conjunction with the consolidated financial statements of the Company and notes thereto beginning with page.\nRESULTS OF OPERATIONS\nNET OPERATING REVENUES. Volume and price statistics for the specified years were as follows:\nYEAR ENDED DECEMBER 31, 1993 1992 1991 Wellhead Volumes Natural Gas (MMcf per day)------- 709.3(1) 563.6(1) 490.6 Crude Oil and Condensate (MBbl per day)----------------------- 8.9 8.5 8.2 Natural Gas Liquids (MBbl per day)--------------------------- 0.6 0.7 0.6 Wellhead Average Prices Natural Gas ($\/Mcf)-------------- $ 1.92(2) $ 1.58(2) $ 1.37 Crude Oil and Condensate ($\/Bbl)------------------------ 16.37 17.90 18.78 Natural Gas Liquids ($\/Bbl)------ 11.12 10.69 11.64 Other Natural Gas Marketing Volumes (MMcf per day)----------- 293.4(1) 254.9(1) 237.2 Average Gross Revenue ($\/Mcf)---- $ 2.57(3) $ 2.62(3) $ 2.63 Associated Costs ($\/Mcf) (5)----- 2.32(4) 1.99(4) 1.75 Margin ($\/Mcf)------------------- $ 0.25 $ 0.63 $ 0.88\n(1) Includes 81.0 MMcf per day in 1993 and 27.6 MMcf per day in 1992 delivered under the terms of volumetric production payment and exchange agreements effective October 1, 1992, as amended.\n(2) Includes an average equivalent wellhead value of $1.57 per Mcf in 1993 and $1.70 per Mcf in 1992 for the volumes detailed in note (1), net of transportation costs.\n(3) Includes per unit deferred revenue amortization for the volumes detailed in note (1) at an equivalent of $2.50 per Mcf ($2.40 per million British thermal units) in 1993 and $2.51 per Mcf ($2.40 per million British thermal units) in 1992.\n(4) Includes an average value of $2.20 per Mcf in 1993 and $2.37 per Mcf in 1992, including average equivalent wellhead value, any applicable transportation costs and exchange differentials, for the volumes detailed in note (1).\n(5) Including transportation and exchange differentials.\nDuring 1993, net operating revenues increased to $568 million, up $115 million as compared to 1992.\nAverage wellhead natural gas volumes increased approximately 26% compared to 1992 primarily reflecting the effects of exploration and development activities relating to tight gas sand formations. Wellhead natural gas delivered volumes were curtailed less during portions of 1993 than for the comparable periods in 1992 due to the significant increases realized in wellhead natural gas prices in 1993. Average wellhead natural gas prices were up approximately 22% in 1993 over those received in 1992, adding approximately $87 million to net operating revenues. Increases in wellhead natural gas volumes in 1993 added $83 million to net operating revenues compared to 1992. Average wellhead crude oil and condensate prices in 1993 were down 9% compared to 1992, reducing net operating revenues by $5 million. Increases in wellhead crude oil and condensate volumes in 1993 added approximately $2 million to net operating revenues compared to 1992.\nOther marketing activities associated with sales and purchases of natural gas, natural gas price swap transactions, other commodity price hedging of natural gas and crude oil and condensate prices utilizing futures market transactions, and margins relating to the volumetric production payment added $8 million to net operating revenues during 1993. This decrease of $54 million from 1992 primarily results from shrinking margins associated with sales under long-term fixed price contracts and amortization of volumetric production payment deferred revenue due to increases in market responsive natural gas prices associated with volumes supplying these dispositions and losses on natural gas commodity price hedging activities utilizing NYMEX commodity market transactions. The average associated costs of natural gas marketing, price swap and volumetric production payment transactions, including, where appropriate, average wellhead value, transportation costs and exchange differentials, increased $.33 per Mcf. Related other natural gas marketing volumes increased 15%.\nThe net reduction in benefits from these other marketing activities, a substantial portion of which serve as hedges of commodity price risks for a portion of wellhead deliveries, are more than offset by an increase in revenues associated with market responsive price increases for wellhead deliveries, as noted above. The $18 million hedging loss in 1993 associated with forward sales of natural gas using the NYMEX futures market reflects the effects of transactions sold over a period of time that turned out to be a continually increasing natural gas pricing period. If the stronger market responsive pricing environment continues, the incremental benefits realized by the Company in prior years from these other marketing activities will continue to be reduced. However, in such circumstances the Company will continue to realize more significant benefits from the improved pricing related to wellhead deliveries. (See Note 2 to Consolidated Financial Statements).\nDuring 1992, net operating revenues increased to $453 million, up $65 million as compared to 1991.\nAverage wellhead natural gas volumes increased approximately 15% compared to 1991 primarily reflecting the effects of exploration and development activities relating to tight gas sand formations. Although exploration and development efforts resulted in deliverability increases in certain core areas, the potential earnings and cash flow benefits were mitigated by voluntary curtailments during 1992. Wellhead natural gas delivered volumes were voluntarily curtailed by as much as 25% of deliverability during portions of the year due to lower than acceptable prices. Average wellhead natural gas prices were up approximately 15% and average wellhead crude oil and condensate prices were down 5% compared to 1991. The increase in average wellhead natural gas price received by the Company increased net operating revenues by approximately $38 million. The increase in wellhead natural gas volumes added approximately $43 million to net operating revenues. Increases in wellhead crude oil and condensate delivered volumes added $2 million to net operating revenues. A decrease in the average wellhead crude oil and condensate price decreased net operating revenues by $3 million.\nOther marketing activities associated with sales and purchases of natural gas, natural gas price swap transactions, natural gas and crude oil commodity price hedging utilizing futures market transactions and margins relating to the volumetric production payment added $63 million to net operating revenues during 1992, a decrease of $17 million from 1991. Other natural gas marketing volumes increased 7%. The average associated costs of supplying these commitments, including average equivalent wellhead value, transportation costs and exchange differentials, increased $.24 per Mcf.\nOPERATING EXPENSES. During 1993, total operating expenses of $465 million were $112 million higher than the $353 million incurred in 1992. Lease and well expenses increased approximately $10 million primarily due to expanded domestic and international operations. Exploration expenses increased approximately $4 million primarily due to increased exploration activities in North America. Dry hole expenses increased by almost $8 million and lease impairments were $5 million higher than in 1992. An unsuccessful domestic deep well added nearly $4 million to dry hole expenses and a related $3 million to lease impairments in 1993. Dry hole expenses also reflect the impact of increased drilling activity outside North America. Depreciation, depletion and amortization ('DD&A') expense increased $70 million to $250 million reflecting an increase in production volumes and an average DD&A rate increase from $.79 per Mcfe in 1992 to $.89 per Mcfe for 1993. The DD&A rate increase is primarily due, as expected, to factors associated with the tight gas sands drilling program which costs are being more than offset by benefits realized in the form of tight gas sand federal income tax credits and certain state severance tax exemptions. General and administrative expenses increased almost $9 million to $45 million primarily reflecting cost reductions included in 1992 related to changes associated with certain employee compensation plans and overall higher costs in 1993 due to an expansion of domestic and international operations. Taxes other than income increased $7 million primarily due to increased production volumes and revenues in 1993, partially offset by continuing benefits associated with certain state severance tax exemptions allowed on high cost natural gas sales and a $3 million reduction of state franchise taxes resulting from refunds of prior year payments received in 1993.\nTotal per unit operating costs for lease and well expense, DD&A, general and administrative expense, interest expense, and taxes other than income increased $.03 per Mcfe, averaging $1.43 per Mcfe during 1993 compared to $1.40 per Mcfe for 1992. The total increase was associated with DD&A expense which was up $.10 per Mcfe as noted above being partially offset by a reduction of $.07 Mcfe in all other costs.\nDuring 1992, operating expenses increased $29 million to $353 million as compared to 1991. However, cost per Mcfe, including those associated with exploration expenditures, declined $.08 to $1.56 per Mcfe in 1992. Lease and well expenses remained essentially flat compared to 1991. However, lease and well expense per Mcfe declined $.03 per Mcfe to $.22 per Mcfe in 1992. Per unit operating cost reductions reflect the effects of a continuing focus on controlling operating costs in all areas of Company operations and benefits realized from the sale of properties which required higher maintenance costs along with increasing volumes which tend to reduce per unit impacts of costs that are more fixed in nature. Exploration expenses of $33 million increased $2 million over 1991 due to certain exploration activities in new international areas of interest. Dry hole expenses of $11 million decreased $4 million from 1991 due to decreased drilling activity in areas outside of North America partially mitigated by increased domestic drilling activities. Impairment of unproved oil and gas properties increased approximately $2 million to $15 million primarily reflecting certain costs associated with the decision to discontinue exploration activities in certain areas outside of North America, including Egypt, Indonesia and Syria in addition to reflecting the effects of accelerated relinquishments of certain domestic acreage holdings. DD&A expense increased $19 million to $180 million primarily reflecting increased production mitigated by a decline in the average DD&A rate from $.81 per Mcfe in 1991 to $.79 per Mcfe in 1992. The reduction in DD&A rates per Mcfe reflects the effects of a continuing focus on adding reserves with low finding costs along with the benefits of selling certain properties with higher than average cost bases. General and administrative\nexpenses increased $1 million to $37 million primarily reflecting the effects of expanded operations. Taxes other than income increased $10 million to $28 million due to increased production volumes and revenues in 1992, increases in certain ad valorem and state franchise taxes and earnings benefits associated with the refund of certain state natural gas severance taxes in 1991 resulting from overpayments in prior years. This increase was mitigated by Texas severance tax exemptions for certain high cost gas production during 1992.\nOTHER INCOME. Other income for 1993 of $20 million reflects an increase of $17 million from the $3 million recorded for 1992. Other income for 1993 includes $13 million in gains on sales of oil and gas properties, an increase of $7 million over 1992, $4 million in interest income associated with the investment of funds temporarily surplus to the Company (See Note 3 to Consolidated Financial Statements) and $4 million associated with settlements related to the termination of certain long-term natural gas contracts.\nOther income in 1992 was $3 million compared to $12 million in 1991. Other income in 1992 included $6 million in gains on sales of oil and gas properties compared to $15 million in 1991.\nINTEREST EXPENSE. Net interest expense decreased $12 million, or 55%, to $10 million in 1993 as compared to 1992 reflecting the repayment of a substantial portion of the Company's long-term debt in 1992 with proceeds from the sale of common stock in August 1992 and the sale of a volumetric production payment in September 1992. The estimated fair value of outstanding interest rate swap agreements at December 31, 1993 was a negative $3.3 million based upon termination values obtained from third parties. (See Note 12 to Consolidated Financial Statements).\nNet interest expense decreased $7 million, or 24%, to $22 million in 1992 as compared to 1991, reflecting a restructuring of debt in early 1991 and lower interest rates. Using interest rate swap agreements with third parties effective in January 1992, the Company fixed short-term borrowing costs for the year for the equivalent of $225 million of its floating rate obligations. In addition, two of the interest rate swap agreements in notional amounts totalling $75 million were for a two-year period extending through 1993. Effective January 1, 1993, Enron Corp. assumed the Company's remaining obligations under these swap agreements.\nINCOME TAXES. Income tax benefit in 1993 includes a benefit of approximately $65 million associated with tight gas sand federal income tax credit utilization, an approximate $7 million predominantly one-time non-cash charge recorded in the third quarter of 1993 primarily to adjust the Company's accumulated deferred federal income tax liability for the increase in the corporate federal income tax rate from 34% to 35% and a $12 million benefit from the reduction of the Company's accumulated deferred federal income tax liability resulting from a year end reevaluation of deferred tax liability requirements.\nThe Company adopted SFAS No. 109 effective January 1, 1993 and applied the provisions of the statement retroactively. As a result, the previously reported income tax benefit and net income for 1991 were restated with a reduction to both of $7 million. Net income for 1992 and 1993 was not affected by the restatement. The Company's consolidated balance sheets at December 31, 1992 and 1991 were also restated to reflect the increase to deferred income taxes payable of $7 million and the corresponding decrease to retained earnings of an equal amount.\nIncome tax benefit in 1992 includes a benefit of approximately $43 million associated with tight gas sand federal income tax credit utilization and $2.8 million primarily related to investment tax credit, tight gas sand federal income tax credit and percentage depletion utilization based on actual returns as filed and settlements on audit of tax returns of predecessor companies for the years 1984 through 1985.\nIncome tax benefit in 1991 includes a benefit of approximately $17 million associated with tight gas sand federal income tax credit utilization and $10.5 million related to utilization of net operating loss carryforwards, foreign tax credit and settlements on audit of tax returns of predecessor companies for tax years 1980 through 1983.\nCAPITAL RESOURCES AND LIQUIDITY\nCASH FLOW. The primary sources of cash for the Company during the three-year period ended December 31, 1993 included funds generated from operations, the sale of common stock, the sale of a volumetric production payment and proceeds from the sale of certain oil and gas properties. Primary cash outflows included funds used in operations, exploration and development expenditures, dividends, and the repayment of debt.\nDiscretionary cash flow, a frequently used measure of performance for exploration and production companies, is generally derived by adjusting net income to eliminate the effects of depreciation, depletion and amortization, impairment of unproved oil and gas properties, deferred taxes, property sales net of tax, certain other miscellaneous non-cash amounts, except for amortization of deferred revenue, and exploration and dry hole expenses. In the case of the Company, the elimination of revenues associated with the amortization of deferred revenues created by the sale by the Company of a volumetric production payment is reflected in investing cash flows. The Company generated discretionary cash flow of approximately $487 million in 1993, $320 million in 1992 and $252 million in 1991. The 1993 amount includes $50 million associated with a federal income tax refund resulting from the settlement of an audit of federal income taxes paid in prior years.\nNet operating cash flows were approximately $480 million in 1993, $306 million in 1992 and $242 million in 1991. Increased 1993 net operating cash flows were primarily due to increased net operating revenues and a decrease in provision for current taxes resulting from both increased tight gas sand federal income tax credit utilization and proceeds from the receipt of a refund on settlement of an audit of federal income taxes paid in prior years. Increased 1992 net operating cash flows were primarily due to increased net operating revenues and an increase in current tax benefits as a result of tight gas sand federal income tax credit utilization.\nSALE OF CERTAIN PROPERTIES. In 1993, the Company received proceeds of $42 million from the sale of certain producing and non-producing oil and gas properties. Taxable gains resulting from these sales generated federal income taxes of $8 million, leaving net proceeds of $34 million. During 1992, the Company received proceeds of $33 million from the sale of certain producing and non-producing oil and gas properties. Taxable gains resulting from these sales generated federal income taxes of $8 million, leaving net proceeds of $25 million. In 1991, the Company received proceeds of $23 million from the sale of certain producing and non-producing oil and gas properties. Taxable gains resulting from these sales generated income taxes of $5 million, leaving net proceeds of $18 million.\nSALE OF COMMON STOCK. In August 1992, the Company completed the sale of 4.1 million shares of common stock resulting in aggregate net proceeds to the Company of approximately $112 million used primarily to repay long-term debt. Enron Corp. retained ownership of 80% of the Company.\nSALE OF VOLUMETRIC PRODUCTION PAYMENT. In September 1992, the Company sold a volumetric production payment for $326.8 million to a limited partnership. (See 'Business - Marketing - Other Marketing' and Note 4 to Consolidated Financial Statements). Under the terms of the production payment agreements, the Company conveyed a real property interest in approximately 124 bcfe (136 trillion British thermal units) of natural gas and other hydrocarbons in the Big Piney area of Wyoming to the purchaser. Effective October 1, 1993, the agreements were amended providing for the extension of the original term of the volumetric production payment through March 31, 1999 and including a revised schedule of daily quantities of hydrocarbons to be delivered which is approximately one-half of the original schedule. The revised schedule will total approximately 89.1 Bcfe (97.8 trillion British thermal units) versus approximately 87.9 Bcfe (96.4 trillion British thermal units) remaining to be delivered under the original agreement. Daily quantities of hydrocarbons no longer required to be delivered under the revised schedule during the period from October 1, 1993 through June 30, 1996 are available for sale by the Company. The Company retains responsibility for its working interest share of the cost of operations. A portion of the proceeds of the sale was used to repay a portion of the Company's long-term debt, with surplus funds advanced to Enron Corp. under a promissory note which facilitates the deposit of funds temporarily surplus to the Company. In\naccordance with generally accepted accounting principles, the Company accounted for the proceeds received in the transaction as deferred revenue which is being amortized into revenue and income as natural gas and other hydrocarbons are produced and delivered to the purchaser during the term, as revised, of the volumetric production payment thereby matching those revenues with the depreciation of asset values which remained on the balance sheet following the sale and the operating expenses incurred for which the Company retained responsibility. The Company expects the above transaction, as amended, to have minimal impact on future earnings. However, cash made available by the sale of the volumetric production payment has provided considerable financial flexibility for the pursuit of investment alternatives.\nEXPLORATION AND DEVELOPMENT EXPENDITURES. The table below sets out components of actual exploration and development expenditures for the years ended December 31, 1993, 1992 and 1991, along with those budgeted for the year 1994.\nACTUAL BUDGETED EXPENDITURE CATEGORY 1993 1992 1991 1994 (IN MILLIONS) Capital Drilling and Facilities--------- $ 331.0 $ 259.9 $ 149.3 $ 360.0 Leasehold Acquisitions---------- 29.1 23.0 12.6 20.0 Producing Property Acquisitions-------------------- 9.2 65.2 42.4 4.0 Capitalized Interest and Other------------------------- 13.7 14.3 7.4 10.0 Total----------------------- 383.0 362.4 211.7 394.0 Exploration Expenses---------------- 55.3 44.0 46.1 56.0 Total------------------------------- $ 438.3 $ 406.4 $ 257.8 $ 450.0\nExploration and development expenditures in 1993 increased to $438 million, an 8% increase, as compared to the $406 million expended in 1992. The increase was attributable to increased domestic drilling activity with reduced emphasis on development drilling expenditures associated with tight gas sand formations. The Company also implemented its first development program outside of North America. During 1992 and 1993, the Company had a platform set, production facilities in place and natural gas flowing from the Kiskadee field offshore the southeast coast of Trinidad.\nExploration and development expenditures increased $149 million, or 58%, in 1992 compared to 1991. The increase was primarily attributable to increased development drilling expenditures associated with tight gas sand activities and the acquisition in December 1992 of approximately $40 million of producing properties in Canada. (See 'Business - Exploration and Production' for additional information detailing the specific geographic locations of the Company's drilling programs and 'Outlook' below for a discussion related to 1994 exploration and development expenditure plans).\nFINANCING. The Company's long-term debt-to-total-capital ratio was 14% and 15% as of December 31, 1993 and 1992, respectively. The Company has entered into an agreement with Enron Corp. pursuant to which the Company may borrow funds from Enron Corp. at a representative market rate of interest on a revolving basis. During 1993, there were no funds borrowed by the Company under this agreement. Under a promissory note effective January 1, 1993 at a fixed interest rate of 7%, the Company advances funds temporarily surplus to the Company to Enron Corp. for investment purposes. Daily outstanding balances of funds advanced to Enron Corp. under the note averaged $60 million during 1993 with a balance of $97 million outstanding at December 31, 1993. There were no balances outstanding at December 31, 1993 under a commercial paper program initiated in 1990. The proceeds from the commercial paper program outstanding from time to time are used to fund current transactions. During 1993, total long-term debt increased $3 million to $153 million as a result of $33 million of new borrowings related to certain international drilling\nactivities partially offset by $30 million classified as current maturities. (See Note 3 to the Consolidated Financial Statements). The estimated fair value of the Company's long-term debt, including current maturities of $30 million, at December 31, 1993 was $192 million based upon quoted market prices and, where such prices were not available, upon interest rates currently available to the Company at year end. (See Note 12 to the Consolidated Financial Statements).\nOUTLOOK. While the wellhead natural gas price environment was, on average, stronger during the year 1993, there continues to exist a good deal of uncertainty as to the direction of future natural gas price trends. However, recent experiences continue to suggest a possible converging of the overall supply\/demand relationship reflecting, at least partially, the significantly reduced level of drilling activity during recent years. Management remains confident that continually increasing recognition of natural gas as a more environmentally friendly source of energy along with the availability of significant domestically sourced supplies will result in further increases in demand and a strengthening of the overall natural gas market over time. Being primarily a natural gas producer, the Company is more significantly impacted by changes in natural gas prices than by changes in crude oil and condensate prices. (See 'Business - Other Matters - Energy Prices'). Based on the portion of the Company's anticipated natural gas volumes for which prices have not, in effect, been hedged using the futures market and long-term marketing contracts, the Company's net income and cash flow sensitivity to changing natural gas prices is approximately $7 million for each $.10 per Mcf change in average wellhead natural gas prices. Using various commodity price hedging mechanisms, the Company has, in effect, locked in prices for an average of about two-thirds of its anticipated wellhead natural gas volumes for the year 1994. This level of hedging may change during the remainder of 1994 and will change in future years.\nOther factors representing positive impacts that are more certain continue to hold good potential for the Company in future periods. While the drilling qualification period for the tight gas sand federal income tax credit expired as of December 31, 1992, the Company has continued in 1993, and should continue in the future, to realize significant benefits associated with production from wells drilled during the qualifying period as it will be eligible for the federal income tax credit through the year 2002. However, all other factors remaining equal, the annual benefit, which was $65 million in 1993 and estimated to be approximately $40 million for 1994, is expected to continue to decline in future periods as production from the qualified wells declines. The drilling qualification period for a certain state severance tax exemption available on certain high cost natural gas revenues continues through the latter part of 1996. Consequently, new qualifying production will be added prospectively to that qualified at year end 1993. (See 'Business - Other Matters - Tight Gas Sand Tax Credit (Section 29) and Severance Tax Exemption'). Other natural gas marketing activities are also expected to continue to contribute meaningfully to financial results. However, the Company completed a fairly significant restructure of its other natural gas marketing portfolio during 1992 with the sale of a volumetric production payment of approximately 124 Bcfe (136 trillion British thermal units) for $326.8 million that was subsequently revised in 1993 (See 'Business - Marketing - Other Marketing' and Note 4 to Consolidated Financial Statements) and elimination of most delivery obligations under four long-term fixed price marketing contracts. The proceeds from the sale of the volumetric production payment added substantially to the financial flexibility of the Company supporting future development while the combined effect of all elements of the restructuring on net income has not been, and will not in the future be, significant. These factors are expected to contribute significantly to earnings, cash flow, and the ability of the Company to pursue the continuation of an active exploration, development and selective acquisition program.\nThe Company will continue to focus development and certain exploration expenditures in its core and other major producing areas, and include limited but meaningful exploratory exposure in areas outside of North America. (See 'Business - Exploration and Production' for additional information detailing the specific geographic locations of the related drilling programs). Early-in-year activity will be managed within an annual expected expenditure level of approximately $450 million. This early-in-year planning will address the continuing uncertainty with regard to the future of the\nnatural gas price environment and will be structured to maintain the flexibility necessary under the Company strategy of funding exploration, development and acquisition activities primarily from available internally generated cash flow. Expenditure plans for 1994 will continue to be focused toward certain areas that were not addressed as actively in the recent past due to the increased emphasis on tight gas sand drilling opportunities during 1991 and 1992 that were completed in early 1993. The Company will also be continuing expenditures in new areas outside of North America, primarily for additional development operations in Trinidad, possible new development operations in other countries, such as those currently being pursued in India, and the continued evaluation of coalbed methane recovery potential in France, Australia, China and certain other countries.\nThe level of exploration and development expenditures may vary in 1994 and will vary in future periods depending on energy market conditions and other related economic factors. Based upon existing economic and market conditions, the Company believes net operating cash flow and available financing alternatives in 1994 will be sufficient to fund its net investing cash requirements for the year. However, the Company has significant flexibility with respect to its financing alternatives and adjustment of its exploration and development expenditure plans as circumstances warrant. There are no material continuing commitments associated with expenditure plans.\nITEM 8.","section_7A":"","section_8":"ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA\nThe information required hereunder is included in this report as set forth in the 'Index to Financial Statements' on page.\nITEM 9.","section_9":"ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE\nNone.\nPART III\nITEM 10.","section_9A":"","section_9B":"","section_10":"ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT\nThe information required by this Item regarding directors is set forth in the Proxy Statement under the caption entitled 'Election of Directors', and is incorporated herein by reference.\nSee list of 'Current Executive Officers of the Registrant' in Part I located elsewhere herein.\nThere are no family relationships among the officers listed, and there are no arrangements or understandings pursuant to which any of them were elected as officers. Officers are appointed or elected annually by the Board of Directors at its first meeting following the Annual Meeting of Shareholders, each to hold office until the corresponding meeting of the Board in the next year or until a successor shall have been elected, appointed or shall have qualified.\nITEM 11.","section_11":"ITEM 11. EXECUTIVE COMPENSATION\nThe information required by this Item is set forth in the Proxy Statement under the caption 'Compensation of Directors and Executive Officers', and is incorporated herein by reference.\nITEM 12.","section_12":"ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT\nThe information required by this Item is set forth in the Proxy Statement under the captions 'Election of Directors' and 'Compensation of Directors and Executive Officers', and is incorporated herein by reference.\nITEM 13.","section_13":"ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS\nThe information required by this Item is set forth in the Proxy Statement under the caption 'Compensation Committee Interlocks and Insider Participation', and is incorporated herein by reference.\nPART IV\nITEM 14.","section_14":"ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K\n(A)(1) AND (2) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES\nSee 'Index to Financial Statements' set forth on page.\n(A)(3) EXHIBITS\nSee pages E-1 through E-3 for a listing of the exhibits.\n(B) REPORTS ON FORM 8-K\nNo reports on Form 8-K were filed by the Company during the last quarter of 1993.\nENRON OIL & GAS COMPANY\nPAGE Consolidated Financial Statements: Management's Responsibility for Financial Reporting---- Report of Independent Public Accountants--------------- Consolidated Statements of Income for Each of the Three Years in the Period Ended December 31, 1993---- Consolidated Balance Sheets -December 31, 1993 and 1992--------------------------------------------- Consolidated Statements of Shareholders' Equity for Each of the Three Years in the Period Ended December 31, 1993------------------------------ Consolidated Statements of Cash Flows for Each of the Three Years in the Period Ended December 31, 1993------------------------------------ Notes to Consolidated Financial Statements------------- Supplemental Information to Consolidated Financial Statements----------------------------------------------- Financial Statement Schedules: Schedule V -Property, Plant and Equipment----------- S-1 Schedule VI -Accumulated Depreciation, Depletion and Amortization of Property, Plant and Equipment---- S-2 Schedule VIII -Valuation and Qualifying Accounts and Reserves----------------------------------------- S-3 Schedule X -Supplemental Income Statement Information------------------------------------------- S-4 Other financial statement schedules have been omitted because they are inapplicable or the information required therein is included elsewhere in the consolidated financial statements or notes thereto.\nMANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING\nThe following consolidated financial statements of Enron Oil & Gas Company and its subsidiaries were prepared by management which is responsible for their integrity, objectivity and fair presentation. The statements have been prepared in conformity with generally accepted accounting principles and accordingly include some amounts that are based on the best estimates and judgements of management.\nArthur Andersen & Co., independent public accountants, was engaged to audit the consolidated financial statements of Enron Oil & Gas Company and its subsidiaries and issue a report thereon. In the conduct of the audit, Arthur Andersen & Co. was given unrestricted access to all financial records and related data including minutes of all meetings of shareholders, the Board of Directors and committees of the Board. Management believes that all representations made to Arthur Andersen & Co. during the audit were valid and appropriate. Their audits of the years presented included developing an overall understanding of the Company's accounting systems, procedures and internal controls, and conducting tests and other auditing procedures sufficient to support their opinion on the financial statements. The report of Arthur Andersen & Co. appears on the following page.\nThe system of internal controls of Enron Oil & Gas Company and its subsidiaries is designed to provide reasonable assurance as to the reliability of financial records as represented in published interim and annual financial statements and for the protection of assets. This system includes, but is not limited to, written policies and guidelines including a published code for the conduct of business affairs, the careful selection and training of qualified personnel, and a documented organizational structure outlining the separation of responsibilities among management representatives and staff groups, augmented by a strong program of internal audit.\nThe adequacy of financial controls of Enron Oil & Gas Company and its subsidiaries and the accounting principles employed in financial reporting by the Company are under the general oversight of the Audit Committee of the Board of Directors. No member of this committee is an officer or employee of the Company. Both the independent public accountants and internal\/contract auditors have direct access to the Audit Committee and meet with the committee from time to time to discuss accounting, auditing and financial reporting matters. Effective January 1, 1994, Arthur Andersen & Co. has been contracted to provide operational and internal control audit services previously handled by the internal audit staff of the Company.\nIt should be recognized that there are inherent limitations to the effectiveness of any system of internal control, including the possibility of human error and circumvention or override. Accordingly, even an effective system can provide only reasonable assurance with respect to the preparation of reliable financial statements. Furthermore, the effectiveness of an internal control system can change with circumstances.\nIt is management's opinion that, considering the criteria for effective internal control over financial reporting which consists of interrelated components including the control environment, risk-assessment process, control activities, information and communication systems, and monitoring, the Company maintained an effective system of internal control over the preparation of published interim and annual financial statements for all periods presented.\nBEN B. BOYD WALTER C. WILSON FORREST E. HOGLUND Vice President and Senior Vice President and Chairman of the Board, Controller Chief Financial Officer President and Chief Executive Officer\nHouston, Texas March 18, 1994\nREPORT OF INDEPENDENT PUBLIC ACCOUNTANTS\nTo Enron Oil & Gas Company:\nWe have audited the accompanying consolidated balance sheets of Enron Oil & Gas Company (a Delaware corporation) and subsidiaries as of December 31, 1993 and 1992, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1993. These financial statements and the schedules referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.\nWe conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.\nIn our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Enron Oil & Gas Company and subsidiaries as of December 31, 1993 and 1992, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1993, in conformity with generally accepted accounting principles.\nOur audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The financial statement schedules listed in the index to financial statements are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic financial statements. These schedules have been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.\nAs explained in Note 7 to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards No. 109, 'Accounting for Income Taxes', effective January 1, 1993, and applied the provisions of the statement retroactively.\nARTHUR ANDERSEN & CO.\nHouston, Texas February 18, 1994 (except with respect to the matters discussed in Note 3, as to which the date is March 11, 1994)\nENRON OIL & GAS COMPANY CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)\nYEAR ENDED DECEMBER 31, 1993 1992 1991 (RESTATED) NET OPERATING REVENUES Natural Gas Associated Companies----------- $ 279,921 $ 280,501 $ 275,362 Trade-------------------------- 225,241 108,487 46,241 Crude Oil, Condensate and Natural Gas Liquids Associated Companies----------- 38,953 38,775 41,237 Trade-------------------------- 16,881 20,152 21,599 Other----------------------------- 6,706 5,074 3,166 Total-------------------- 567,702 452,989 387,605 OPERATING EXPENSES Lease and Well-------------------- 59,344 49,406 49,922 Exploration----------------------- 36,921 33,278 31,470 Dry Hole-------------------------- 18,355 10,764 14,698 Impairment of Unproved Oil and Gas Properties---------------------- 20,467 15,136 12,791 Depreciation, Depletion and Amortization-------------------- 249,704 179,839 160,885 General and Administrative-------- 45,274 36,648 36,216 Taxes Other Than Income----------- 35,396 28,346 18,222 Total-------------------- 465,461 353,417 324,204 OPERATING INCOME--------------------- 102,241 99,572 63,401 OTHER INCOME------------------------- 19,953 2,561 11,768 INCOME BEFORE INTEREST EXPENSE AND TAXES------------------------------ 122,194 102,133 75,169 INTEREST EXPENSE Incurred Affiliate---------------------- - 1,747 9,503 Other-------------------------- 15,378 24,122 24,479 Capitalized----------------------- (5,457) (3,580) (4,482) Net Interest Expense----------- 9,921 22,289 29,500 INCOME BEFORE INCOME TAXES----------- 112,273 79,844 45,669 INCOME TAX BENEFIT------------------- (25,752) (17,736) (2,247) NET INCOME--------------------------- $ 138,025 $ 97,580 $ 47,916 EARNINGS PER SHARE OF COMMON STOCK------------------------------ $ 1.73 $ 1.26 $ .63 AVERAGE NUMBER OF COMMON SHARES------ 79,983 77,267 75,900\nThe accompanying notes are an integral part of these consolidated financial statements.\nENRON OIL & GAS COMPANY CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)\nAT DECEMBER 31, 1993 1992 (RESTATED) ASSETS CURRENT ASSETS Cash and Cash Equivalents--------- $ 103,129 $ 132,618 Accounts Receivable Associated Companies----------- 59,143 50,838 Trade-------------------------- 66,109 50,832 Inventories----------------------- 14,082 9,534 Other----------------------------- 6,962 3,190 Total----------------------- 249,425 247,012 OIL AND GAS PROPERTIES (Successful Efforts Method)---------------------- 2,772,220 2,475,371 Less: Accumulated Depreciation, Depletion and Amortization------ 1,226,175 1,007,360 Net Oil and Gas Properties---------------- 1,546,045 1,468,011 OTHER ASSETS------------------------- 15,692 15,989 TOTAL ASSETS------------------------- $ 1,811,162 $ 1,731,012 LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts Payable Associated Companies----------- $ 13,250 $ 1,889 Trade-------------------------- 143,542 128,695 Accrued Taxes Payable------------- 17,354 9,911 Dividends Payable----------------- 4,795 4,800 Current Maturities of Long-Term Debt---------------------------- 30,000 - Other----------------------------- 8,989 49,421 Total----------------------- 217,930 194,716 LONG-TERM DEBT----------------------- 153,000 150,000 OTHER LIABILITIES-------------------- 9,477 8,972 DEFERRED INCOME TAXES---------------- 270,154 248,943 DEFERRED REVENUE--------------------- 227,528 301,395 COMMITMENTS AND CONTINGENCIES (Note 8) SHAREHOLDERS' EQUITY Common Stock, No Par, 80,000,000 Shares Authorized and Issued---- 200,800 200,800 Additional Paid In Capital-------- 417,531 421,747 Cumulative Foreign Currency Translation Adjustment---------- (6,855) (1,726) Retained Earnings----------------- 324,995 206,165 Common Stock Held in Treasury, 80,000 shares------------------- (3,398) - Total Shareholders' Equity---------------------- 933,073 826,986 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY----------------------------- $ 1,811,162 $ 1,731,012\nThe accompanying notes are an integral part of these consolidated financial statements.\nENRON OIL & GAS COMPANY CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)\nENRON OIL & GAS COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)\nYEAR ENDED DECEMBER 31, 1993 1992 1991 CASH FLOWS FROM OPERATING ACTIVITIES (RESTATED) Reconciliation of Net Income to Net Operating Cash Inflows: Net Income------------------------ $ 138,025 $ 97,580 $ 47,916 Items Not Requiring (Providing) Cash Depreciation, Depletion and Amortization----------------- 249,704 179,839 160,885 Impairment of Unproved Oil and Gas Properties--------------- 20,467 15,136 12,791 Deferred Income Taxes---------- 25,612 (17,917) (11,997) Other, Net--------------------- 1,768 5,713 5,073 Exploration Expenses-------------- 36,921 33,278 31,470 Dry Hole Expenses----------------- 18,355 10,764 14,698 Gains On Sales of Oil and Gas Properties---------------------- (13,318) (6,037) (14,983) Other, Net------------------------ 1,242 (6,147) 614 Changes in Components of Working Capital and Other Liabilities Accounts Receivable------------ (24,586) (12,732) (821) Inventories-------------------- (4,548) 3,687 (19) Accounts Payable--------------- 26,208 46,327 381 Accrued Taxes Payable---------- 7,443 247 1,011 Other Liabilities-------------- 772 (2,886) (1,006) Other, Net--------------------- (44,443) 33,784 3,839 Changes in Components of Working Capital Associated with Investing and Financing Activities---------------------- 40,042 (74,232) (7,976) NET OPERATING CASH INFLOWS----------- 479,664 306,404 241,876 INVESTING CASH FLOWS Additions to Oil and Gas Properties---------------------- (383,064) (362,403) (211,673) Exploration Expenses-------------- (36,921) (33,278) (31,470) Dry Hole Expenses----------------- (18,355) (10,764) (14,698) Proceeds from Sale of Properties---------------------- 41,815 33,412 22,827 Proceeds from Sale of Volumetric Production Payment-------------- - 326,775 - Amortization of Deferred Revenue------------------------- (73,867) (25,380) - Changes in Components of Working Capital Associated with Investing Activities------------ (37,256) 74,232 7,976 Other, Net------------------------ (4,905) (3,686) (3,020) NET INVESTING CASH OUTFLOWS---------- (512,553) (1,092) (230,058) FINANCING CASH FLOWS Long-Term Debt Affiliate---------------------- - (132,836) (145,082) Other-------------------------- 33,000 (139,556) 149,114 Common Stock Issued--------------- - 111,861 - Dividends Paid-------------------- (19,200) (15,385) (15,180) Treasury Stock Purchased---------- (16,698) (1,827) - Proceeds from Sales of Treasury Stock--------------------------- 9,084 1,250 - Other, Net------------------------ (2,786) - (466) NET FINANCING CASH INFLOWS (OUTFLOWS)------------------------- 3,400 (176,493) (11,614) INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS------------------------ (29,489) 128,819 204 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR------------------ 132,618 3,799 3,595 CASH AND CASH EQUIVALENTS AT END OF YEAR------------------------------- $ 103,129 $ 132,618 $ 3,799\nThe accompanying notes are an integral part of these consolidated financial statements.\nENRON OIL & GAS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS UNLESS OTHERWISE INDICATED)\n1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES\nPRINCIPLES OF CONSOLIDATION. The consolidated financial statements of Enron Oil & Gas Company (the 'Company'), 80% of the outstanding common stock of which is owned by Enron Corp., include the accounts of all domestic and foreign subsidiaries. All material intercompany accounts and transactions have been eliminated. Certain reclassifications have been made to consolidated financial statements for prior years to conform with the current presentation.\nCASH EQUIVALENTS. The Company records as cash equivalents all highly liquid short-term investments with maturities of three months or less. (See Note 3 'Long-Term Debt, Financing Arrangements with Enron Corp.')\nOIL AND GAS OPERATIONS. The Company accounts for its natural gas and crude oil exploration and production activities under the successful efforts method of accounting.\nOil and gas lease acquisition costs are capitalized when incurred. Unproved properties with significant acquisition costs are assessed quarterly on a property-by-property basis and any impairment in value is recognized. Unproved properties with acquisition costs that are not individually significant are aggregated, and the portion of such costs estimated to be nonproductive, based on historical experience, is amortized over the average holding period. If the unproved properties are determined to be productive, the appropriate related costs are transferred to proved oil and gas properties. Lease rentals are expensed as incurred.\nOil and gas exploration costs, other than the costs of drilling exploratory wells, are charged to expense as incurred. The costs of drilling exploratory wells are capitalized pending determination of whether they have discovered proved commercial reserves. If proved commercial reserves are not discovered, such drilling costs are expensed. The costs of all development wells and related equipment used in the production of crude oil and natural gas are capitalized.\nDepreciation, depletion and amortization of the cost of proved oil and gas properties is calculated using the unit-of-production method. Estimated future dismantlement, restoration and abandonment costs (classified as long-term liabilities), net of salvage values, are taken into account. Certain other assets are depreciated on a straight-line basis.\nInventories, consisting primarily of tubular goods and well equipment held for use in the exploration for, and development and production of crude oil and natural gas reserves, are carried at cost with selected adjustments made from time to time to recognize changes in condition value.\nNatural gas revenues are recorded to recognize that during the course of normal production operations joint interest owners will, from time to time, take more or less than their ultimate share of natural gas volumes from jointly owned reservoirs. These volumetric imbalances are monitored over the life of the reservoir to achieve balancing, or minimize imbalances, by the time reserves are depleted. Final cash settlements are made, generally at the time a property is depleted, under one of a variety of arrangements generally accepted by the industry depending on the specific circumstances involved. The Company accrues revenues associated with undertakes and defers revenues associated with overtakes to recognize these potential ultimate imbalances.\nACCOUNTING FOR FUTURES CONTRACTS. Futures transactions are entered into as hedges of commodity prices associated with the sales and purchases of natural gas and crude oil, in order to mitigate the risk of market price fluctuations. Changes in the market value of futures transactions entered into as hedges are deferred until the gain or loss is recognized on the hedged transactions.\nCAPITALIZED INTEREST COSTS. Certain interest costs have been capitalized as a part of the historical cost of unproved oil and gas properties. Interest costs capitalized during each of the three years in the period ended December 31, 1993 are set out in the Consolidated Statements of Income.\nINCOME TAXES. Taxable income of the Company, excluding that of any foreign subsidiaries, is included in the consolidated federal income tax return filed by Enron Corp. Pursuant to a tax allocation agreement between the Company, the Company's subsidiaries and Enron Corp., either Enron Corp. will pay to the Company and each subsidiary an amount equal to the tax benefit realized in the Enron Corp. consolidated federal income tax return resulting from the utilization of the Company's or the subsidiary's net operating losses and\/or tax credits, or the Company and each subsidiary will pay to Enron Corp. an amount equal to the federal income tax computed on its separate taxable income less the tax benefits associated with any net operating losses and\/or tax credits generated by the Company or the subsidiary which are utilized in the Enron Corp. consolidated return. Enron Corp. will pay the Company and each subsidiary for the tax benefits associated with their net operating losses and tax credits utilized in the Enron Corp. consolidated return, provided that a tax benefit was realized except as discussed in the following paragraph, even if such benefits could not have been used by the Company or the subsidiary on a separately filed tax return.\nIn 1991, the Company and Enron Corp. modified the tax allocation agreement to provide that through 1992, the Company would realize the benefit of certain tight gas sand tax credits available to the Company on a stand alone basis. The Company has also entered into an agreement with Enron Corp. providing for the Company to be paid for all realizable benefits associated with tight gas sand tax credits concurrent with tax reporting and settlement for the periods in which they are generated.\nThe tax allocation agreement applies to the Company and each of its subsidiaries for all years in which the Company or any of its subsidiaries are or were included in the Enron Corp. consolidated return. Taxes for any foreign subsidiaries of the Company are calculated on a separate return basis.\nThe Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 109 -'Accounting for Income Taxes' effective January 1, 1993 and applied the provisions of the statement retroactively. The Company previously accounted for income taxes under the provisions of SFAS No. 96 which was superceded by SFAS No. 109. SFAS No. 109 retains the asset and liability approach for accounting for income taxes. Under this approach, deferred tax assets and liabilities are recognized based on anticipated future tax consequences attributable to differences between financial statement carrying amounts of assets and liabilities and their respective tax bases.\nFOREIGN CURRENCY TRANSLATION. For subsidiaries whose functional currency is deemed to be other than the U.S. dollar, asset and liability accounts are translated at year end rates of exchange and revenue and expenses are translated at average exchange rates prevailing during the year. Translation adjustments are included as a separate component of shareholders' equity.\nEARNINGS PER SHARE. Earnings per share is computed on the basis of the average number of common shares outstanding during the periods.\n2. NATURAL GAS AND CRUDE OIL, CONDENSATE AND NATURAL GAS LIQUIDS NET OPERATING REVENUES\nNatural Gas Net Operating Revenues are comprised of the following:\n1993 1992 1991 Wellhead Natural Gas Revenues Associated Companies(1)---------- $340,508(2) $223,249(2) $171,056 Trade---------------------------- 156,301 103,288 75,037 Total-------------------- $496,809 $326,537 $246,093 Other Natural Gas Marketing Activities Gross Revenues from: Associated Companies(3)------ $139,576 $186,600 $220,152 Trade------------------------ 135,606(4) 57,482(4) 7,215 Total-------------------- 275,182 244,082 227,367 Associated Costs from: Associated Companies(1)(5)-------------- 182,456(6) 133,170(6) 115,601 Trade------------------------ 66,273 52,283 36,011 Total-------------------- 248,729 185,453 151,612 Net---------------------- 26,453 58,629 75,755 NYMEX Commodity Price Hedging Gain (Loss)(7)----------------- (18,100) 3,822 (245) Total-------------------- $ 8,353 $ 62,451 $ 75,510\nCrude Oil, Condensate and Natural Gas Liquids Net Operating Revenues are comprised of the following:\n1993 1992 1991 Wellhead Crude Oil, Condensate and Natural Gas Liquids Revenues Associated Companies------------- $ 38,953 $ 38,474 $ 37,029 Trade---------------------------- 16,881 20,152 21,599 Total------------------------ $ 55,834 $ 58,626 $ 58,628 Other Crude Oil and Condensate Marketing Activities NYMEX Commodity Price Hedging Gain(7)------------------------ $ - $ 301 $ 4,208\n(1) Wellhead Natural Gas Revenues in 1993, 1992 and 1991 include $129,504, $84,317 and $69,175, respectively, associated with deliveries by Enron Oil & Gas Company to Enron Oil & Gas Marketing, Inc., a wholly-owned subsidiary, reflected as a cost in Other Natural Gas Marketing Activities -Associated Costs.\n(2) Includes $46,358 and $20,667 in 1993 and 1992, respectively, associated with the equivalent wellhead value of volumes delivered under the terms of a volumetric production payment agreement effective October 1, 1992, as amended, net of transportation.\n(3) Includes the effect of a price swap agreement with an Enron Corp. affiliated company which in effect fixed the price of certain sales.\n(4) Includes $73,867 and $25,380 in 1993 and 1992, respectively, associated with the amortization of deferred revenues under the terms of volumetric production payment and exchange agreements effective October 1, 1992, as amended.\n(5) Includes the effect of a price swap agreement with a third party which in effect fixed the price of certain purchases.\n(6) Includes $65,042 and $23,977 in 1993 and 1992, respectively, for volumes delivered under volumetric production payment and exchange agreements effective October 1, 1992, as amended, including equivalent wellhead value, any applicable transportation costs and exchange differentials.\n(7) Represents gain or loss associated with commodity futures transactions primarily with Enron Corp. affiliated companies based on NYMEX prices in effect on dates of execution, less customary transaction fees.\n3. LONG-TERM DEBT\nREVOLVING CREDIT AGREEMENT. In March 1994, the Company replaced an existing credit agreement with a Revolving Credit Agreement dated as of March 11, 1994, among the Company and the banks named therein (the 'Credit Agreement'). The Credit Agreement provides for aggregate borrowings of up to $100 million, with provisions for increases, at the option of the Company, up to $300 million. Advances under the Credit Agreement bear interest, at the option of the Company, based on a base rate, an adjusted CD rate or a Eurodollar rate. Each advance under the Credit Agreement matures on a date selected by the Company at the time of the advance, but in no event after January 15, 1998.\nFINANCING ARRANGEMENTS WITH ENRON CORP. The Company engages in various transactions with Enron Corp. that are characteristic of a consolidated group under common control. Activities of the Company not internally funded from operations have been and may be funded from time to time by advances from Enron Corp. The Company entered into an agreement with Enron Corp., effective October 12, 1989 (as amended effective September 29, 1992), under which the Company may borrow funds from Enron Corp. at a representative market rate of interest on a revolving basis. During 1993, there were no funds borrowed by the Company under this agreement. Any loan balance that may be outstanding from time to time is payable on demand but no later than September 29, 1995, the maturity date of this agreement. Any balances outstanding are classified as long-term based on the Company's intent and ability to refinance such amounts using available borrowing capacity. Interest expense recorded in 1992 and 1991 under the terms of this agreement totaled $.1 million and $.2 million, respectively. There was no interest expense relating to this agreement recorded in 1993.\nThe Company also entered into an agreement with Enron Corp., effective October 12, 1989 (as amended effective September 29, 1992), which provides the Company the option of depositing any excess funds that may be available from time to time with Enron Corp. with interest at a representative market rate during the periods the funds were held by Enron Corp. Interest income recorded in 1992 and 1991 under the terms of this agreement totaled $1.4 million and $.3 million, respectively. Effective January 1, 1993, the Company executed a promissory note at a fixed interest rate of 7% with Enron Corp. providing for the investment of funds temporarily surplus to the Company from time to time with Enron Corp. Daily outstanding balances of funds advanced to Enron Corp. under this note averaged $60.3 million during 1993 with a balance of $96.6 million outstanding and included in Cash and Cash Equivalents at December 31, 1993. Interest income recorded in 1993 under the terms of this note totaled $4.4 million.\nOTHER LONG-TERM DEBT. Other long-term debt at December 31 consisted of the following:\n1993 1992 Loans Payable-------------------- $ 50,000 $ 50,000 Senior Notes--------------------- 70,000 100,000 Promissory Note------------------ 33,000 - Total---------------- $ 153,000 $ 150,000\nThe Loans Payable are due in 1995 and bear interest at a variable rate based on the London Interbank Offered Rate which has, in effect, been converted to fixed interest rates ranging from 8.92% to 8.98% through maturity using interest rate swap agreements in equivalent dollar amounts.\nThe Senior Notes bear interest at 9.1% with principal repayments of $30 million due in 1996 and $20 million due in 1997 and 1998. A principal repayment of $30 million is due in 1994 and is classified as current maturities of long-term debt at December 31, 1993.\nThe Promissory Note is payable by one of the Company's subsidiaries to a bank, bears interest at 3 3\/8% and represents interim financing under Section 936(d)(4) of the Internal Revenue Code of 1986, as amended, of a project involving the development of gas and oil fields. The note is due the earlier of April 30, 1994, as extended, or the closing date of the permanent financing and is collateralized with a letter of credit issued by a bank on behalf of the subsidiary and guaranteed by the Company. The note\nis classified as long-term based on the subsidiary's intent and ability to convert the balance of the note to permanent long-term financing. In March 1994, the subsidiary received two advances aggregating $31 million under a credit agreement dated as of March 8, 1994, between the subsidiary and a financial institution. The credit agreement provides for aggregate borrowings of up to $75 million. One of the advances is in the amount of $16 million, bears interest at a fixed rate of 4.52% and is due in 1998. The other advance is in the amount of $15 million, bears interest at a floating rate that resets quarterly equal to 84% of the LIBID Rate which is 1\/8 of 1% less than the London Interbank Offered Rate and is due in 1998. Both advances are collaterized with a letter of credit issued by a bank on behalf of the subsidiary and guaranteed by the Company. The advances were used to partially repay the Promissory Note.\nThere were no balances outstanding at December 31, 1993 and 1992 under a commercial paper program initiated in 1990. The proceeds from the commercial paper program outstanding from time to time are used to fund current transactions.\nCertain of the borrowings described above contain covenants requiring the maintenance of certain financial ratios and limitations on liens, debt issuance and dispositions of assets.\nIn September 1991, the Company filed with the Securities and Exchange Commission a registration statement providing for the issuance and sale from time to time of up to $250 million of debt securities to the public. As of December 31, 1993, no debt securities had been issued under this registration statement.\n4. DEFERRED REVENUE\nIn September 1992, the Company sold a volumetric production payment for $326.8 million to a limited partnership of which an Enron Corp. affiliated company is general partner with a 1% interest. Under the terms of the production payment agreements, the Company conveyed a real property interest of approximately 124 billion cubic feet equivalent ('Bcfe') (136 trillion British thermal units) of natural gas and other hydrocarbons in the Big Piney area of Wyoming. The natural gas and other hydrocarbons were originally scheduled to be produced and delivered over a period of forty-five months which period commenced October 1, 1992. Effective October 1, 1993, the agreements were amended providing for the extension of the original term of the volumetric production payment through March 31, 1999 and including a revised schedule of daily quantities of hydrocarbons to be delivered which is approximately one-half of the original schedule. The revised schedule will total approximately 89.1 Bcfe (97.8 trillion British thermal units) versus approximately 87.9 Bcfe (96.4 trillion British thermal units) remaining to be delivered under the original agreement. Daily quantities of hydrocarbons no longer required to be delivered under the revised schedule during the period from October 1, 1993 through June 30, 1996 are available for sale by the Company. The Company retains responsibility for its working interest share of the cost of operations. The Company also entered into a separate agreement with the same limited partnership whereby it has agreed to exchange volumes owned by the Company in the Midcontinent area and the Texas Gulf Coast area for equivalent volumes produced and owned by the limited partnership in the Big Piney area. The costs incurred, if any, to effect redeliveries pursuant to such exchange are borne by the Company. A portion of the proceeds of the sale was used to repay a portion of the Company's long-term debt, with surplus funds advanced to Enron Corp. under a note agreement which facilitates the deposit of funds temporarily surplus to the Company. The Company accounted for the proceeds received in the transaction as deferred revenue which is being amortized into revenue and income as natural gas and other hydrocarbons are produced and delivered during the term, as revised, of the volumetric production payment. Annual remaining amortization of deferred revenue, based on revised\nscheduled deliveries under the volumetric production payment agreement, as amended, at December 31, 1993 was as follows:\n1994--------------------------------- $ 43,344 1995--------------------------------- 43,344 1996--------------------------------- 43,463 1997--------------------------------- 43,344 1998--------------------------------- 43,344 1999--------------------------------- 10,689 Total------------------------ $ 227,528\n5. SHAREHOLDERS' EQUITY\nIn August 1992, the Company completed the offering and sale of 4.1 million shares of common stock. The shares were priced to the public at $28.50 per share. Net proceeds, after underwriting commissions and expenses, totaled approximately $112 million and were used primarily to repay long-term debt.\nIn December 1992, the Board of Directors of the Company approved the reduction of the authorized common shares from 100 million to 80 million shares and cancelled the authorization for preferred shares. Such actions were approved by the shareholders in May 1993.\nAlso in December 1992, the Board of Directors of the Company approved the purchase of up to 250,000 shares of common stock of the Company for, but not limited to, meeting obligations associated with stock option grants to qualified employees pursuant to the Enron Oil & Gas Company 1992 Stock Plan. (See Note 8 'Commitments and Contingencies -Enron Oil & Gas Company 1992 Stock Plan'). At December 31, 1993, 80,000 shares were held in treasury under this authorization.\nIn February 1994, the Board of Directors authorized submission of a resolution to shareholders for approval at their annual meeting in May 1994 that would, contingent upon the Board of Directors of the Company declaring, on or before May 3, 1995, a stock split of either two-for-one or three-for-two, amend the Restated Certificate of Incorporation of the Company to increase the total number of authorized shares of the common stock of the Company from 80 million to 160 million shares in the event of a two-for-one stock split or to 120 million shares in the event of a three-for-two stock split. Such charter amendment, if adopted, will become effective when the appropriate Certificate of Amendment to the Company's Restated Certificate of Incorporation is filed with the Secretary of State of Delaware, which filing will only be authorized at such time as the Board of Directors takes the requisite action to approve either a two-for-one or a three-for-two stock split in either case effected as a dividend which action, if to be carried out under this resolution, must occur on or before May 3, 1995.\n6. TRANSACTIONS WITH ENRON CORP. AND RELATED PARTIES\nNATURAL GAS AND CRUDE OIL, CONDENSATE AND NATURAL GAS LIQUIDS NET OPERATING REVENUES. Wellhead Natural Gas and Crude Oil, Condensate and Natural Gas Liquids Revenues and Other Natural Gas and Other Crude Oil and Condensate Marketing Activities include revenues from and associated costs paid to various subsidiaries and affiliates of Enron Corp. pursuant to contracts which, in the opinion of management, are no less favorable than could be obtained from third parties. Other Natural Gas and Other Crude Oil and Condensate Marketing Activities also include certain price swap and futures transactions with Enron Corp. affiliated companies which, in the opinion of management, are no less favorable than could be obtained from third parties. (See Note 2 'Natural Gas and Crude Oil, Condensate and Natural Gas Liquids Net Operating Revenues').\nGENERAL AND ADMINISTRATIVE EXPENSES. The Company is charged by Enron Corp. for all direct costs associated with its operations. Such direct charges, excluding benefit plan charges (See Note 8 'Commitments and Contingencies -Employee Benefit Plans'), totaled $11.5 million, $4.9 million and $7.4 million for the years ended December 31, 1993, 1992 and 1991, respectively. Management believes that these charges are reasonable.\nAdditionally, certain administrative costs not directly charged to any Enron Corp. operations or business segments are allocated to the entities of the consolidated group. Allocation percentages are generally determined utilizing weighted average factors derived from property gross book value, net operating revenues and payroll costs. Effective January 1, 1989, the Company entered into an agreement with Enron Corp., with an initial term of five years, providing for, among other things, an annual cap of $8.0 million to be applied to indirect allocated charges subject to adjustment for inflation and certain changes in the allocation bases of the Company. Approximately $7.9 million, $9.5 million, and $9.4 million were charged to the Company for indirect general and administrative expenses for the years ended December 31, 1993, 1992 and 1991, respectively. Management believes the indirect allocated charges for the numerous types of support services provided by the corporate staff are reasonable. Effective January 1, 1994, the Company and Enron Corp. entered into a new services agreement pursuant to which Enron Corp. will, among other things, provide for the Company similar services substantially identical in nature and quality to those provided under terms of the previous agreement. The Company has agreed to pay and to reimburse Enron Corp. on bases essentially consistent with those included in the previous agreement, except that allocated indirect costs are subject to an annual maximum of $6.7 million for the year 1994 with any increase in such maximum for subsequent years not to exceed 7.5% per year. The new services agreement is for an initial term of five years through December 1998 and will continue thereafter until terminated by either party.\nFINANCING. See Note 3 'Long-Term Debt' for a discussion of financing arrangements with Enron Corp.\n7. INCOME TAXES\nAs discussed in Note 1, effective January 1, 1993, the Company adopted SFAS No. 109 and applied the provisions of the statement retroactively. Under the provisions of SFAS No. 109, the effect of a change in a tax rate is recognized in income for the period that includes the date of enactment of such change. Consequently, the previously reported net income for 1991 was restated to $47.9 million ($.63 per share) from $54.9 million ($.72 per share), a reduction of $7.0 million primarily to recognize the enactment of a change in the computation of certain state franchise taxes, a portion of which is treated as an income tax under SFAS No. 109. Net income for 1992 and 1993 was not affected by the restatement. The Company's consolidated balance sheet at December 31, 1992 was also restated to reflect the increase to Deferred Income Taxes of $7.0 million and the corresponding decrease to Retained Earnings of an equal amount. In August 1993, the corporate federal income tax rate increased from 34% to 35% retroactive to January 1, 1993 resulting in an increase to the Company's 1993 deferred income tax provision of approximately $5.9 million with a corresponding increase to the Company's deferred income tax liability of an equal amount and a decrease of approximately $1.2 million to the Company's 1993 current income tax benefit.\nThe principal components of the Company's net deferred income tax liability at December 31, 1993 and 1992 were as follows (in thousands):\n1993 1992 (RESTATED) Deferred Income Tax Assets Non-Producing Leasehold Costs------ $ 5,234 $ 4,661 Seismic Costs Capitalized for Tax------------------------------ 5,643 6,505 Other------------------------------ 6,337 13,167 Total Deferred Income Tax Assets----------------------- 17,214 24,333 Deferred Income Tax Liabilities Oil & Gas Exploration and Development Costs Deducted for Tax Over Book Depreciation, Depletion and Amortization------- 276,422 253,009 Capitalized Interest--------------- 6,866 4,604 Other------------------------------ 4,080 15,663 Total Deferred Income Tax Liabilities------------------ 287,368 273,276 Net Deferred Income Tax Liability-------------------- $ 270,154 $ 248,943\nThe components of income (loss) before income taxes were as follows:\n[CAPTION] 1993 1992 1991 United States------------------------ $ 117,460 $ 74,226 $ 49,187 Foreign------------------------------ (5,187) 5,618 (3,518) Total------------------------ $ 112,273 $ 79,844 $ 45,669\nTotal income tax provision (benefit) was as follows:\n1993 1992 1991 (RESTATED) Current: Federal-------------------------- $ (52,555) $ (292) $ 9,226 State---------------------------- 5 2 - Foreign-------------------------- 1,186 471 524 Total------------------------ (51,364) 181 9,750 Deferred: Federal-------------------------- 20,845 (21,729) (23,917) State---------------------------- 4,357 3,119 11,962 Foreign-------------------------- 410 693 (42) Total------------------------ 25,612 (17,917) (11,997) Income Tax Benefit----------------- $ (25,752) $ (17,736) $ (2,247)\nThe differences between taxes computed at the U.S. federal statutory rate and the Company's effective rate were as follows:\n1993 1992 1991 (RESTATED) Statutory Federal Income Tax--------- $ 39,296 $ 27,147 $ 15,528 State Income Tax, Net of Federal Benefit---------------------------- 2,835 2,059 877 Income Tax Related to Foreign Operations------------------------- 3,461 (1,649) 1,677 Tight Gas Sand Federal Income Tax Credits---------------------------- (65,172) (42,500) (16,926) Revision of Prior Years' Tax Estimates-------------------------- (12,060) (2,842) (10,461) SFAS No. 109 Restatement------------- - - 7,018 Federal Tax Rate Increase------------ 5,875 - - Other-------------------------------- 13 49 40 Income Tax Benefit--------------- $ (25,752) $ (17,736) $ (2,247)\nCurrent income tax receivable from (payable to) Enron Corp. at December 31, 1993, 1992 and 1991 amounted to $(6,892), $5,619 and $(4,522), respectively.\nThe Company has an alternative minimum tax (AMT) credit carryforward of $2.7 million which can be used to offset regular income taxes payable in future years. The AMT credit carryforward has an indefinite carryforward period.\nThe Company's foreign subsidiaries' undistributed earnings of approximately $45 million at December 31, 1993 are considered to be indefinitely invested outside the U.S. and, accordingly, no U.S. federal or state income taxes have been provided thereon. Upon distribution of those earnings in the form of dividends, the Company may be subject to both foreign withholding taxes and U.S. income taxes, net of allowable foreign tax credits. Determination of any potential amount of unrecognized deferred income tax liabilities is not practicable.\nIn 1991, the Company recognized for financial reporting purposes the benefits attributable to the utilization of a previously unrecognized separate company net operating loss carryforward resulting in a tax benefit of approximately $7 million reflected in 1991 net income.\n8. COMMITMENTS AND CONTINGENCIES\nEMPLOYEE BENEFIT PLANS. Employees of the Company are covered by various retirement, stock purchase and other benefit plans of Enron Corp. During each of the years ended December 31, 1993, 1992 and 1991, the Company was charged $4.5 million, $3.6 million and $3.6 million, respectively, for all such benefits, including pension expense totalling $.5 million, $.5 million and $.4 million, respectively, by Enron Corp.\nAs of September 30, 1993, the most recent valuation date, the plan net assets of the Enron Corp. defined benefit plan in which the employees of the Company participate exceeded the actuarial present value of projected plan benefit obligations by approximately $25.3 million. The assumed discount rate, rate of return on plan assets and rate of increases in wages used in determining the actuarial present value of projected plan benefits were 7.0%, 10.5% and 4.0%, respectively.\nThe Company also has in effect a pension and a savings plan related to its Canadian and Trinidadian subsidiaries. Activity related to these plans is not significant to the Company's operations.\nThe Company provides certain medical, life insurance and dental benefits to eligible employees who retire under the Enron Corp. Retirement Plan and their eligible surviving spouses. Effective January 1, 1993, the Company adopted the provisions of SFAS No. 106 'Employers' Accounting for Postretirement Benefits Other Than Pensions'. The standard requires that employers providing postretirement benefits accrue those costs over the service lives of the employees expected to be eligible to receive such benefits. Such costs were previously recorded on a pay-as-you-go basis. The net periodic cost under SFAS No. 106 for 1993 was approximately $1.0 million, including service cost, interest cost and amortization of transition obligation in the amounts of $.1 million, $.5 million and $.4 million, respectively. The transition obligation existing at January 1, 1993 is being amortized over an average period of 19 years. The adoption of SFAS No. 106 did not have a material impact on the Company's results of operations.\nThe accumulated postretirement benefit obligation ('APBO') existing at December 31, 1993 totaled $8.7 million, of which $7.2 million is applicable to current retirees and current employees eligible to retire. The measurement of the APBO assumes a 7% discount rate and a health care cost trend rate of 13% in 1993 decreasing to 5% by the year 2005 and beyond. A 1% increase in the health care cost trend rate would have the effect of increasing the APBO and the net periodic expense by approximately $.8 million and $.1 million, respectively. The Company does not currently intend to prefund its obligations under its postretirement welfare benefit plans.\nENRON OIL & GAS COMPANY 1992 STOCK PLAN. In December 1991, the Board of Directors of the Company adopted the Enron Oil & Gas Company 1992 Stock Plan (the 'Stock Plan'). The Stock Plan was approved by the shareholders in May 1992. Under the Stock Plan, employees of the\nCompany and its subsidiaries may be granted rights to purchase shares of common stock of the Company generally at a price not less than the market price of the stock at the date of grant. Options granted under the Stock Plan vest to the employee over a period of time based on the nature of the grants and as defined in the individual grant agreements.\nThe following table sets forth Stock Plan transactions for the years ended December 31:\nNUMBER OF STOCK OPTIONS 1993 1992 Outstanding at January 1------------- 1,954,025 - Granted-------------------------- 460,300 2,024,025 Exercised------------------------ (335,925) (63,750) Forfeited------------------------ (16,000) (6,250) Outstanding at December 31 (Grant Prices of $18.50-$47.63 per Share)- 2,062,400 1,954,025 Available for Grant at December 31--- 537,925 982,225\nAt December 31, 1993, 1,249,975 of the Stock Plan options outstanding were vested. Of the remaining unvested Stock Plan options, approximately 377,550; 201,750; 157,375 and 75,750 vest in the years 1994, 1995, 1996 and 1997, respectively.\nDuring 1993 and 1992, the Company purchased 335,925 and 63,750 of its common shares, respectively, and simultaneously delivered such shares upon the exercise of stock options. The difference between the cost of the treasury shares and the exercise price of the options, net of federal income tax benefit of $2.8 million, is reflected as an adjustment to Additional Paid In Capital. In addition in October 1993, the Company commenced a stock repurchase program authorized by the Board of Directors to facilitate the availability of treasury shares of common stock for the settlement of employee stock option exercises pursuant to, but not limited to, the Enron Oil & Gas Company 1992 Stock Plan. At December 31, 1993, 80,000 shares were held in treasury under this authorization. (See Note 5 'Shareholders' Equity').\nPursuant to an amendment to and extension of an employment agreement with the Chairman of the Board, President and Chief Executive Officer of the Company (the 'Chairman'), as of January 1, 1992, the Chairman agreed to the cancellation of 1,000,000 previously issued stock appreciation right ('SAR') units. The Chairman was granted 1,110,000 stock options pursuant to the 1992 Stock Plan. These options have a grant price of $18.50 per share; 1,000,000 of the options follow the same vesting schedule as did the SAR unit grant, 100,000 options vest over four years and the remaining 10,000 options vested in one year since such options were granted in lieu of part of the Chairman's 1991 cash bonus. In addition, the Chairman was issued in May 1992, 463,320 shares of Enron Corp. common stock. Such number of shares reflects the effect of a two-for-one split of such stock on August 16, 1993. Of these shares, 370,656 shares are restricted until such shares vest on the earlier to occur of five years after their date of grant or when the Chairman commences receiving benefits from one or more of the qualified pension plans sponsored by Enron Corp.\nIn February 1994, the Board of Directors of the Company adopted the Enron Oil & Gas Company 1994 Stock Plan (the '1994 Stock Plan'). Under the 1994 Stock Plan, employees of the Company and its subsidiaries may be granted rights to purchase shares of common stock of the Company generally at a price not less than the market price of the stock at the date of grant. Options granted under the 1994 Stock Plan vest to the employee over a period of time based on the nature of the grants and as defined in the individual grant agreements. The number of shares available for granting awards under the 1994 Stock Plan is 1,000,000 shares subject to certain adjustments. It is the intention of the Company that grants under the 1994 Stock Plan will be primarily to non-executive employees.\nLETTERS OF CREDIT. At December 31, 1993 and 1992, the Company had letters of credit outstanding totalling approximately $46.2 and $52.9 million, respectively. The letters of credit outstanding at December 31, 1993 include $33 million issued in connection with a promissory note between one of\nthe Company's subsidiaries and a bank. The letters of credit outstanding at December 31, 1992 included $40 million issued in December 1992 in connection with the acquisition of producing properties in Canada, which acquisition was subsequently funded in early 1993. The related liability at December 31, 1992 for the acquisition was included in Other Current Liabilities.\nCONTINGENCIES. There are various suits and claims against the Company having arisen in the ordinary course of business. However, management does not believe these suits and claims will individually or in the aggregate have a material adverse effect on the Company's financial condition or results of operations. TransAmerican Natural Gas Corporation ('TransAmerican') has filed a petition against the Company and Enron Corp. alleging breach of contract, tortious interference with contract, misappropriation of trade secrets and violation of state antitrust laws. The petition, as amended, seeks actual damages of $100 million plus exemplary damages of $300 million. The Company has answered the petition and is actively defending the matter; in addition, the Company has filed counterclaims against TransAmerican and a third-party claim against its sole shareholder, John R. Stanley, alleging fraud, negligent misrepresentation and breach of state antitrust laws. Trial, originally set for February 7, 1994, is now set for September 12, 1994. Although no assurances can be given, the Company believes that the claims made by TransAmerican are totally without merit, that the ultimate resolution of the matter will not have a materially adverse effect on its financial condition or results of operations, and that such ultimate resolution could result in a recovery to the Company. The Company has been named as a potentially responsible party in certain Comprehensive Environmental Response Compensation and Liability Act proceedings. However, management does not believe that any potential assessments resulting from such proceedings will individually or in the aggregate have a materially adverse effect on the financial condition or results of operations of the Company.\n9. CASH FLOW INFORMATION\nGains on sales of certain oil and gas properties in the amount of $13.3 million, $6.0 million and $15.0 million are required to be removed from Net Income in connection with determining Net Operating Cash Inflows while the related proceeds are classified as investing cash flows for the years ended December 31, 1993, 1992 and 1991, respectively. However, current accounting guidelines will not permit the relevant federal income tax impact of these transactions to be reclassified to investing cash flows. The current federal income tax impact of these sales transactions was calculated by the Company to be $8.2 million, $8.2 million and $5.1 million for the years ended December 31, 1993, 1992 and 1991, respectively, which entered into the overall calculation of current federal income tax. The Company believes that this federal income tax impact should be considered in analyzing the elements of the cash flow statement.\nCash paid for interest and paid (received) for income taxes was as follows for the years ended December 31:\n1993 1992 1991 Interest (net of amount capitalized)----------------------- $ 10,517 $ 21,576 $ 30,967 Income taxes------------------------- (67,733) 7,365 6,618\n10. BUSINESS SEGMENT INFORMATION\nThe Company's operations are all natural gas and crude oil exploration and production related. Accordingly, such operations are classified as one business segment. Financial information by geographic area is presented below for the years ended December 31, or at December 31:\n1993 1992 1991 Gross Operating Revenues United States-------------------- $ 640,205 $ 521,128 $ 436,856 Foreign-------------------------- 46,722 32,997 33,186 Total(1)--------------------- $ 686,927 $ 554,125 $ 470,042 Operating Income (Loss) United States-------------------- $ 112,686 $ 109,515 $ 77,333 Foreign-------------------------- (10,445) (9,943) (13,932) Total------------------------ $ 102,241 $ 99,572 $ 63,401 Identifiable Assets United States-------------------- $1,564,330 $1,568,093 $1,309,967 Foreign-------------------------- 246,832 162,919 145,641 Total------------------------ $1,811,162 $1,731,012 $1,455,608\n(1) Not deducted are natural gas associated costs of $119,225, $101,136 and $82,437 in 1993, 1992 and 1991, respectively.\n11. OTHER INCOME\nOther income consisted of the following for the years ended December 31:\n1993 1992 1991 Gains on Sales of Oil and Gas Properties------------------------- $ 13,318 $ 6,037 $ 14,983 Litigation Reserve Accruals---------- (2,520) (2,194) (1,200) Interest Income---------------------- 5,789 1,555 424 Settlement of Natural Gas Contracts-------------------------- 4,248 - - Other, Net--------------------------- (882) (2,837) (2,439) Total------------------------ $ 19,953 $ 2,561 $ 11,768\n12. CONCENTRATIONS OF CREDIT RISK AND ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS\nACCOUNTS RECEIVABLE. Substantially all of the Company's accounts receivable at December 31, 1993 result from crude oil and natural gas sales and\/or joint interest billings to affiliate and third party companies in the oil and gas industry. This concentration of customers and joint interest owners may impact the Company's overall credit risk, either positively or negatively, in that these entities may be similarly affected by changes in economic or other conditions. In determining whether or not to require collateral from a customer or joint interest owner, the Company analyzes the entity's net worth, cash flows, earnings, and credit ratings. Receivables are generally not collateralized. Historical credit losses incurred on receivables by the Company have been immaterial.\nLONG-TERM DEBT. At December 31, 1993, the Company had $153 million of long-term debt and $30 million of current maturities outstanding. (See Note 3 'Long-Term Debt'). The estimated fair value of such debt, including current maturities, at December 31, 1993 was approximately $192 million. The fair value of long-term debt is the value the Company would have to pay to retire the debt, including any premium or discount to the debtholder for the differential between the stated interest rate and the year-end market rate. The fair value of long-term debt is based upon quoted market prices and, where such quotes were not available, upon interest rates available to the Company at year-end.\nINTEREST RATE SWAP AGREEMENTS. In early 1992, the Company entered into $75 million in notional amount of interest rate swap agreements to hedge certain floating interest rate exposure in 1992 and 1993. This floating rate exposure arises from interest-bearing debt with interest payments subject to floating interest rates. (See Note 3 'Long-Term Debt'). Effective January 1, 1993, Enron Corp. assumed the Company's remaining obligations under these swap agreements.\nAt December 31, 1993, the Company had outstanding interest rate swaps with notional principal amounts of $50 million which terminate April 1995. The estimated fair value of the outstanding swap agreements at December 31, 1993 was a negative $3.3 million. The fair value of interest rate swap agreements is based upon termination values obtained from third parties.\nFOREIGN CURRENCY CONTRACTS. The Company enters into foreign currency contracts from time to time to hedge specific currency exposure from commercial transactions. At December 31, 1993, there were no foreign currency contracts outstanding.\nPRICE RISK MANAGEMENT. During 1990 and 1991, the Company entered into certain price swap agreements to, in effect, hedge the market risk caused by fluctuations in the price of natural gas. The agreements call for the Company to make payments to (or receive payments from) the other party based upon the differential between a fixed and a variable price for natural gas as specified by the contract. The current swap agreements run for periods of up to ten years expiring in 2000 and have a notional contract amount of approximately $299 million at December 31, 1993.\nWhile notional contract amounts are used to express the magnitude of price and interest rate swap agreements, the amounts potentially subject to credit risk, in the event of nonperformance by the third parties, are substantially smaller. The Company does not anticipate nonperformance by the third parties.\nENRON OIL & GAS COMPANY SUPPLEMENTAL INFORMATION TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS EXCEPT PER SHARE AMOUNTS UNLESS OTHERWISE INDICATED) (UNAUDITED EXCEPT FOR RESULTS OF OPERATIONS FOR OIL AND GAS PRODUCING ACTIVITIES)\nOIL AND GAS PRODUCING ACTIVITIES\nThe following disclosures are made in accordance with SFAS No. 69 - 'Disclosures about Oil and Gas Producing Activities':\nOIL AND GAS RESERVES. Users of this information should be aware that the process of estimating quantities of 'proved' and 'proved developed' crude oil and natural gas reserves is very complex, requiring significant subjective decisions in the evaluation of all available geological, engineering and economic data for each reservoir. The data for a given reservoir may also change substantially over time as a result of numerous factors including, but not limited to, additional development activity, evolving production history, and continual reassessment of the viability of production under varying economic conditions. Consequently, material revisions to existing reserve estimates occur from time to time. Although every reasonable effort is made to ensure that reserve estimates reported represent the most accurate assessments possible, the significance of the subjective decisions required and variances in available data for various reservoirs make these estimates generally less precise than other estimates presented in connection with financial statement disclosures.\nProved reserves represent estimated quantities of crude oil, condensate, natural gas and natural gas liquids that geological and engineering data demonstrate, with reasonable certainty, to be recoverable in future years from known reservoirs under economic and operating conditions existing at the time the estimates were made.\nProved developed reserves are proved reserves expected to be recovered, through wells and equipment in place and under operating methods being utilized at the time the estimates were made.\nCanadian provincial royalties are determined based on a graduated percentage scale which varies with prices and production volumes. Canadian reserves, as presented on a net basis, assume prices and royalty rates in existence at the time the estimates were made, and the Company's estimate of future production volumes. Future fluctuations in prices, production rates, or changes in political or regulatory environments could cause the Company's share of future production from Canadian reserves to be materially different from that presented.\nEstimates of proved and proved developed reserves at December 31, 1993, 1992 and 1991 were based on studies performed by the Company's engineering staff for reserves in both the United States and Canada. Opinions by DeGolyer and MacNaughton, independent petroleum consultants, for the years ended December 31, 1993, 1992 and 1991 covering producing areas containing 65%, 69% and 73%, respectively, of proved reserves of the Company on a net-equivalent-cubic-feet-of-gas basis, indicate that the estimates of proved reserves prepared by the Company's engineering staff for the properties reviewed by DeGolyer and MacNaughton, when compared in total on a net-equivalent- cubic-feet-of-gas basis, do not differ materially from the estimates prepared by DeGolyer and MacNaughton. Such estimates by DeGolyer and MacNaughton in the aggregate varied by not more than 5% from those prepared by the Company's engineering staff. All reports by DeGolyer and MacNaughton were developed utilizing geological and engineering data provided by the Company.\nNo major discovery or other favorable or adverse event subsequent to December 31, 1993 is believed to have caused a material change in the estimates of proved or proved developed reserves as of that date.\nThe following table sets forth the Company's net proved and proved developed reserves at December 31 for each of the four years in the period ended December 31, 1993, and the changes in the net proved reserves for each of the three years in the period then ended as estimated by the Company's engineering staff.\nNET PROVED AND PROVED DEVELOPED RESERVE SUMMARY\nCAPITALIZED COSTS RELATING TO OIL AND GAS PRODUCING ACTIVITIES. The following table sets forth the capitalized costs relating to the Company's natural gas and crude oil producing activities at December 31, 1993 and 1992:\n1993 1992 Proved properties-------------------- $ 2,675,419 $ 2,396,601 Unproved properties------------------ 96,801 78,770 Total---------------------------- 2,772,220 2,475,371 Accumulated depreciation, depletion and amortization------------------- (1,226,175) (1,007,360) Net capitalized costs---------------- $ 1,546,045 1,468,011\nCOSTS INCURRED IN OIL AND GAS PROPERTY ACQUISITION, EXPLORATION AND DEVELOPMENT ACTIVITIES. The acquisition, exploration and development costs disclosed in the following tables are in accordance with definitions in SFAS No. 19 - 'Financial Accounting and Reporting by Oil and Gas Producing Companies'.\nAcquisition costs include costs incurred to purchase, lease, or otherwise acquire property.\nExploration costs include exploration expenses, additions to exploration wells in progress, and depreciation of support equipment used in exploration activities.\nDevelopment costs include additions to production facilities and equipment, additions to development wells in progress and related facilities, and depreciation of support equipment and related facilities used in development activities.\nThe following tables set forth costs incurred related to the Company's oil and gas activities for the years ended December 31:\nRESULTS OF OPERATIONS FOR OIL AND GAS PRODUCING ACTIVITIES(1). The following tables set forth results of operations for oil and gas producing activities for the years ended December 31:\nSTANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED OIL AND GAS RESERVES. The following information has been developed utilizing procedures prescribed by SFAS No. 69 and based on crude oil and natural gas reserve and production volumes estimated by the engineering staff of the Company. It may be useful for certain comparison purposes, but should not be solely relied upon in evaluating the Company or its performance. Further, information contained in the following table should not be considered as representative of realistic assessments of future cash flows, nor should the Standardized Measure of Discounted Future Net Cash Flows be viewed as representative of the current value of the Company.\nThe future cash flows presented below are based on sales prices, cost rates, and statutory income tax rates in existence as of the date of the projections. It is expected that material revisions to some estimates of crude oil and natural gas reserves may occur in the future, development and production of the reserves may occur in periods other than those assumed, and actual prices realized and costs incurred may vary significantly from those used.\nManagement does not rely upon the following information in making investment and operating decisions. Such decisions are based upon a wide range of factors, including estimates of probable as well as proved reserves, and varying price and cost assumptions considered more representative of a range of possible economic conditions that may be anticipated.\nThe following table sets forth the standardized measure of discounted future net cash flows from projected production of the Company's crude oil and natural gas reserves at December 31, for the years ended December 31:\nCHANGES IN STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS. The following table sets forth the changes in the standardized measure of discounted future net cash flows at December 31, for each of the three years in the period ended December 31, 1993.\nSCHEDULE V\nS-1\nSCHEDULE VI\nENRON OIL & GAS COMPANY SCHEDULE VI -- ACCUMULATED DEPRECIATION, DEPLETION AND AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991 (IN THOUSANDS)\nS-2\nSCHEDULE VIII\nS-3\nSCHEDULE X\nENRON OIL & GAS COMPANY SCHEDULE X -- SUPPLEMENTAL INCOME STATEMENT INFORMATION FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991 (IN THOUSANDS)\nCOLUMN A COLUMN B\nCHARGED TO EXPENSES ITEM 1993 1992 1991 Maintenance and repairs-------------- $ 8,198 $ 7,169 $ 7,107 Taxes, other than payroll and income taxes Property-------------------------- $ 12,525 $ 11,488 $ 6,401 Production\/Severance-------------- 19,578 11,985 9,262 Franchise------------------------- 563 2,788 575 Other----------------------------- 107 32 124 Total-------------------------- $ 32,773 $ 26,293 $ 16,362\nS-4\nEXHIBITS\nExhibits not incorporated herein by reference to a prior filing are designated by an asterisk (*) and are filed herewith; all exhibits not so designated are incorporated herein by reference to the Company's Form S-1 Registration Statement, Registration No. 33-30678, filed on August 24, 1989 ('Form S-1'), or as otherwise indicated.\nE-4\nSIGNATURES\nPURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, ON THE 18TH DAY OF MARCH, 1994.\nENRON OIL & GAS COMPANY (REGISTRANT)\nBy \/s\/ WALTER C. WILSON (WALTER C. WILSON) SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER\nPURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BY THE FOLLOWING PERSONS ON BEHALF OF REGISTRANT AND IN THE CAPACITIES WITH ENRON OIL & GAS COMPANY INDICATED AND ON THE 18TH DAY OF MARCH, 1994. SIGNATURE TITLE \/s\/ FORREST E. HOGLUND Chairman of the Board, President and (FORREST E. HOGLUND) Chief Executive Officer and Director (Principal Executive Officer)\n\/s\/ WALTER C. WILSON Senior Vice President and Chief (WALTER C. WILSON) Financial Officer (Principal Financial Officer)\n\/s\/ BEN B. BOYD Vice President and Controller (BEN B. BOYD) (Principal Accounting Officer)\nFRED C. ACKMAN * Director (FRED C. ACKMAN)\nRICHARD D. KINDER * Director (RICHARD D. KINDER)\nKENNETH L. LAY * Director (KENNETH L. LAY)\nEDWARD RANDALL, III * Director (EDWARD RANDALL, III)\n*By \/s\/ ANGUS H. DAVIS (ANGUS H. DAVIS) (ATTORNEY-IN-FACT FOR PERSONS INDICATED)","section_15":""}
{"filename":"832768_1993.txt","cik":"832768","year":"1993","section_1":"ITEM 1. BUSINESS.\nTHE COMPANY\nThe Morningstar Group Inc. (\"Morningstar\" or the \"Company\") is a national manufacturer and marketer of refrigerated specialty food products that include: (i) branded products and (ii) other specialty, dairy-based ultra-pasteurized (\"UHT\") and cultured products. In addition, the Company operates Velda Farms Inc. (\"Velda\"), a Florida-based regional dairy supplying of dairy products to a broad range of customers.\nThe Company was formed in 1988 to acquire several regional dairies, novelty\/ice cream operations and specialty food operations. Shortly after these acquisitions, significant increases in bulk milk prices adversely affected the Company's operating performance and ability to service its highly leveraged capital structure. In 1989, Morningstar shifted its emphasis to refrigerated specialty food products by reorganizing its operations, introducing its branded product lines and commencing the divestiture of its regional dairy and novelty\/ice cream operations. In March 1991, Hicks, Muse & Co. Incorporated, now Hicks, Muse, Tate & Furst Incorporated (\"Hicks Muse\"), together with certain other investors, recapitalized the Company through a transaction that reduced the Company's leverage (the \"Financial Restructuring\"). Prior to this transaction, the Company is referred to as \"Predecessor\"; after this transaction, the Company is referred to as \"Successor\". In April 1992, the Company completed a public offering of 6,215,000 shares of common stock, consisting of 5,000,000 newly issued shares and 1,215,000 shares from existing stockholders. The net proceeds to the Company from this offering of approximately $50 million, together with the proceeds from new senior loans, were used to redeem all of the Company's outstanding 15% preferred stock and purchase $34 million in principal amount of its 13% senior subordinated debentures at a premium, reducing the Company's interest expense and eliminating the future payment of preferred stock dividends.\nThe Company sold its Texas novelty\/ice cream operation in July 1991 and closed its Missouri novelty\/ice cream operation in October 1991. The Company completed the sales of its Maryland regional dairy and ice cream operations in July 1992. The Company acquired Favorite Foods Inc. (\"Favorite\") on March 31, 1993. Favorite is a cultured products and ultrapasteurized processor headquartered in Fullerton, California which recorded sales of approximately $31 million during the nine months ended December 31, 1993. The results of operations for each respective period presented includes such operations only for the periods that such operations were owned or open for business, as the case may be.\nOn January 6, 1994, the Company announced a restructuring plan designed to sharpen its focus on the faster-growing segments of its core specialty food products business, while reorganizing its operations to increase efficiency. The plan, which resulted in a $9 million charge in the fourth quarter of 1993, includes provisions for reductions in workforce, relocation of the manufacturing for certain product lines to gain operating efficiencies, the abandonment of other product lines, and the retention of C. Dean Metropoulos to provide advisory and related services to the Company. The charge also included $1.9 million representing the excess of the book value of operating assets sold in 1991 and 1992 over their estimated realizable value. The $9 million charge includes noncash expenses of $4.4 million and future cash expenses of $4.6 million. Most of the cash expenditures will occur during 1994. Management believes this plan, which is already being implemented, will result in cost reductions in 1994 of approximately $5 million.\nThe Company has suspended the payment of dividends on its common stock immediately following the $.0375 per share payment to holders of record as of December 31, 1993.\nThe Company also announced that on January 5, 1994, it had signed a letter of intent to sell the stock of Velda for $48 million, of which $45 million is expected to be paid in cash at closing. A gain is expected on the sale. When the sale of Velda is consummated, the Company will have completed its divestiture of regional dairies and these operations will be treated as discontinued operations. There can be no assurance that this sale will be consummated or that the net proceeds will be realized.\nPRODUCTS\nThe following table sets forth sales percentage information by product and business category.\nPercent of Net Sales\n(a) Combines the two months ended February 28, 1991 and the ten months ended December 31, 1991. A change of control occurred on March 1, 1991. Operations prior to that date are referred to as Predecessor and after that date are referred to as Successor.\nREFRIGERATED SPECIALTY FOOD PRODUCTS\nBRANDED SPECIALTY PRODUCTS\nThe Company's branded product business consists of four product lines: International Delight(R), Second Nature(R), Naturally Yours(TM) and Lactaid(R). In the development of its branded product lines, the Company has targeted growing market niches and developed products to meet the specific consumer demands.\nInternational Delight. International Delight is a gourmet flavored coffee creamer that is marketed in several flavors. Beginning in 1994, International Delight will be made available in a new no fat format. International Delight was originally introduced on a regional basis in 1973 and was repackaged, reformulated and marketed as a national brand in 1989. The product is sold in half-ounce single serving, pint and quart sizes to supermarkets, foodservice outlets and convenience stores. International Delight is a non-dairy product that is manufactured using the UHT process and, as a result, has an extended shelf life. The Company encounters competition in this product line from various regional and national competitors.\nSecond Nature. Second Nature is a pasteurized, no fat, no cholesterol egg product. The primary ingredient of Second Nature is egg whites. The product was the first refrigerated alternative to whole eggs to provide the equivalent nutritional\nvalue of whole eggs. Second Nature is another product that was first marketed by the Company as a national brand in 1989. Second Nature was reformulated in a no fat variety and introduced nationally during 1993 in a twin pack containing two eight-ounce containers. Second Nature is typically sold in the fresh egg section of supermarkets, encountering competition from several other national and regional competitors both in the refrigerated format and in a frozen format.\nNaturally Yours. Naturally Yours no fat sour cream is the Company's newest branded product. It was introduced nationally during 1993 following a test market in the last half of 1992. Naturally Yours contains 67% less calories than full fat sour cream while delivering similar taste and texture characteristics. Naturally Yours competes with numerous national and regional competitors in the no fat sour cream category.\nLactaid. Lactaid is a line of lactose reduced and lactose free UHT fluid milks produced by the Company under a license arrangement with McNeil Consumer Products Company (\"McNeil\"), an affiliate of Johnson & Johnson. See \"-- Intellectual Property\". Lactose intolerance afflicts millions of individuals and Lactaid products bring such individuals back into the market for dairy products. Lactaid has been sold by the Company in the western two-thirds of the United States since September 1991.\nOTHER SPECIALTY PRODUCTS\nThe Company manufactures and distributes other dairy based specialty food products, including (i) UHT products, such as whipping cream, aerosol toppings, half & half and coffee creamers, and (ii) cultured products, such as cottage cheese, sour cream, snack dips and yogurt. These products are sold under customers' brand names, and in a wide variety of food service packages as well as under the Company's own regional brand names such as Avoset(R) (creams), Bancroft(R) (cottage cheese and sour cream), Naturally Yours(R) (yogurt), Quip(R) (aerosol toppings) and Trimline(R) (cottage cheese and other low fat products). The Company sells its UHT and cultured products to food service distributors, regional dairies and retail grocery warehouses. The Company also processes several products for other national marketers including Dole(R), Carnation(R), Pepsi-Lipton(R) and Procter & Gamble(R). The Company encounters competition from several other regional UHT and cultured product manufacturers.\nUHT. Certain of the Company's branded products and a number of its other specialty products are produced using the UHT process. The UHT process involves heating products to extremely high temperatures to eliminate all living organisms and then rapidly cooling the products. This process results in product shelf lives in excess of 45 days allowing these products to be shipped relatively long distances and to be distributed through warehouses.\nThe UHT product category includes several products such as whipping cream, half & half, heavy whipping cream, bavarian style cream, light cream, pastry topping, baker's cream, coffee cream, flavored milks and various non-dairy formulas of creams and creamers. The Company packages its UHT products in a wide variety of sizes and packages to facilitate serving the various needs of its diverse customer base. These packages include: 1\/2 ounce and 3\/8 ounce portion control creamers; half pint, pint, quart pure-pak containers; aerosol cans; glass bottles; metal cans; and various multi-gallon containers.\nCultured. Cultured products are derived from milk that is pasteurized, inoculated with beneficial bacterial cultures, cooled and then, in some instances, mixed with other ingredients to provide flavor. The culturing process provides unique flavor and texture characteristics and extends shelf life. The Company's cultured products carry shelf lives from 30 to 60 days allowing distribution through warehouse systems.\nThe cultured products category includes: cottage cheese, sour cream, snack dips and yogurt. Each of these basic products has numerous formula variations primarily related to varying levels of fat content and flavoring options. These products are generally packaged in plastic containers ranging in size from four ounces to 35 pounds.\nPRODUCTION AND DISTRIBUTION\nRefrigerated specialty food products are manufactured at six plants located in California (3), Wisconsin (1), Texas (1) and Maryland (1). UHT products are manufactured in each of the six plants and cultured products are manufactured in each of the plants other than Gustine, California.\nThe Company distributes products from its six plants to over 1,300 customers in 49 states and 16 foreign countries, principally using a dedicated fleet of leased refrigerated vehicles. The Company also uses common carriers for product distribution and certain customers pick up products at the Company's manufacturing facilities.\nMARKETING AND CUSTOMERS\nBranded Specialty Products. The Company develops consumer awareness of its branded products through media advertising of such products, primarily through cooperative advertising with the stores in which its branded specialty products are sold and with manufacturers of products that complement the Company's branded specialty products. The Company also utilizes coupon redemption and in-store demonstrations to develop consumer awareness.\nBranded specialty products are primarily sold to grocery warehouses serving the major supermarket chains and are primarily sold through the Company's network of independent food brokers and nationwide sales force. The typical broker used by the Company generally works exclusively on commission. The broker is responsible for placing the sale of the Company's branded products, and for ensuring that the product is appropriately stocked and positioned in supermarkets.\nThe Company also ships its branded products internationally, currently serving Canada and test marketing branded products in several countries in the Pacific Rim.\nOther Specialty Products. The Company markets its other specialty products directly to dairy companies, private label supermarket wholesalers, grocery warehouses, foodservice outlets and food manufacturers. The primary market for the Company's other specialty products is the United States. The Company also markets certain UHT products in the Pacific Rim, primarily in Hong Kong, Taiwan and Singapore.\nVELDA AND OTHER\nVELDA FARMS\nVelda has been a leading supplier of dairy products in Florida for over 40 years. The Company estimates that, within its marketing area, Velda distributes approximately one-half of all dairy and dairy related products sold to foodservice accounts as well as serving significant shares of the convenience store market.\nVelda operates two processing plants located in Miami and Winter Haven, Florida that process fluid milk, juices and ice cream. Velda's refrigerated and frozen product distribution network reaches customers throughout Florida, with the exception of the northern panhandle. With approximately 145 routes, this delivery system allows Velda to serve customers as diverse as theme parks, first class hotels, restaurants, convenience stores, supermarkets, warehouses and school systems. The Company believes that Velda's extensive distribution capabilities also are attractive to major national and regional suppliers who wish to reach a wide range of Florida consumers.\nVelda's product line includes a wide assortment of refrigerated and frozen dairy products. Velda's principal product category, fluid milk, represented approximately 79% of 1993 sales. This category includes Velda's own brand of milk, Nestles' Quik(R) flavored milks and ice cream mixes for Dairy Queen(R), virtually all of which are manufactured in Velda's own facilities.\nVelda has utilized its distribution strength to expand further its product line beyond fluid milk. These items include a wide variety of ice creams, cultured products, juices, butter, hard cheeses and ultra-pasteurized creams, most of which are purchased from other dairy companies. These products include Yoplait(R) yogurt, Eskimo Pie(R) novelties, Edy's(R) ice cream, Haagen-Dazs(R) ice cream and numerous other readily identifiable branded products.\nDIVESTED OPERATIONS\nDuring 1990, the Company divested Oak Farms Inc. (\"Oak Farms\") and Cabell's Dairy Inc. (\"Cabell's\") regional dairy operations located in Texas, and Adohr Farms Inc. (\"Adohr\") in California. During 1991, the Company divested a novelty\/ice cream operation in Texas and a milk distribution location in Pennsylvania. The Company also closed a novelty operation located in Kansas City, Missouri in October 1991. During 1992, the Company divested Embassy Dairy Inc., a regional dairy in Waldorf, Maryland and East Coast Ice Cream, a novelty\/ice cream operation located in Laurel, Maryland. These divested and closed operations comprise the Divested Operations referred to in the Company's disclosures.\nRESEARCH AND DEVELOPMENT\nThe development of new products and the processes under which they are manufactured has been an important part of the Company's growing emphasis on branded specialty products. In addition to the Company's full-time research technicians, all employees, both at the operating and management levels, are encouraged to play an active role in the development of products and their manufacturing processes. The Company's senior management is closely involved in the identification and development of branded products. The Company utilizes consumer research to test new products prior to market introduction.\nOne of the achievements of this research and development effort was the reformulation of Second Nature to deliver the equivalent nutritional value of whole eggs and more recently reformulated to be a no fat product. In addition, the Company was the first to develop techniques that preserve the taste, quality and nutritional constitution of vegetables during pasteurization. This research effort also developed Naturally Yours(TM) no fat sour cream, a unique product that uses all dairy ingredients. The Company has recently developed a no fat version of International Delight which is currently being introduced to the market place.\nINTELLECTUAL PROPERTY\nGeneral\nThe Company's business involves the use of patents, trademarks and trade secrets and licenses granted both to and by the Company. The Company's most important trademarks include International Delight, Second Nature, Naturally Yours, Velda Farms, Trimline, Avoset, Bancroft and the Company's star logo. The Company has also permitted third parties to use trademarks pursuant to licenses granted by the Company, typically in connection with divestitures.\nLactaid License Arrangement\nLactaid is produced under two Lactaid License Agreements (collectively the \"Lactaid License\") with McNeil. Under the terms of the Lactaid License, McNeil granted the Company the exclusive right to manufacture, produce and package Lactaid modified milk products in the western two-thirds of the United States and certain countries around the Pacific Rim. The Lactaid License provides for payment of a license fee to McNeil based on the volume of Lactaid modified milk products sold by the Company.\nDIVESTITURES\nSouthern Foods Group, Inc. (\"Southern Foods\"), the purchaser of Oak Farms and Cabell's, entered into Supply Agreements (herein so called) with the Company in connection with such purchase. Pursuant to the terms of the Supply Agreements, Southern Foods agreed to purchase substantially all of its juice, yogurt and aerosol topping requirements from the Company for a period of four years ending in 1994. Southern Foods also agreed to purchase plastic bottling supplies from Morningstar for a three year period.\nThe purchasers of Adohr Farms entered into a Requirements and Distribution Agreement (herein so called) pursuant to which they agreed to purchase a minimum of 75% of their UHT and cultured products requirements from the Company for a period of seven years ending in 1997.\nThe purchasers of Embassy Dairy Inc. entered into an agreement pursuant to which they agreed to purchase their requirements of UHT and cultured products for a period of three years ending in 1995.\nThe Company has agreed to indemnify the purchasers of its divested operations with regard to certain potential liabilities arising out of the acquisition of such operations. In connection therewith, the Company has indemnified Southern Foods, the purchaser of the Oak Farms and Cabell's dairy subsidiaries, against claims related to compliance with environmental regulations and fair trade practices arising out of the prior operation of Oak Farms and Cabell's through March 2000. See Item 3 of this Form 10-K.\nSUPPLIERS AND RAW MATERIALS\nThe Company purchases its primary raw material, bulk milk, from farm marketing cooperatives, individual farmers and other dairy companies. The supply and cost of bulk milk are influenced by many factors, including consumer demand, government regulation and seasonality. The Company has not experienced any supply shortages and expects that bulk milk will continue to be available in sufficient quantities to supply its processing requirements.\nCertain other raw materials, such as juice concentrates, sweeteners, flavorings and various packaging supplies, are generally available from a wide variety of sources.\nCUSTOMERS\nThe Company markets products to a broad range of customers including convenience stores, supermarkets, grocery warehouses, independent distributors, other dairies, and food service customers such as hotels, restaurants, nursing homes, schools, cruise ships and theme parks. The Company sells to customers nationwide and a small percentage of its products is distributed in foreign countries, primarily in Canada and the Pacific basin. No customer of the Company accounts for more than 10% of the Company's sales as of December 31, 1993.\nSEASONALITY\nSales of the Company's refrigerated specialty food products exhibit modest seasonality with products such as whipping cream, aerosol toppings, sour cream and International Delight experiencing higher sales in the late fall and winter seasons. Velda's sales exhibit slightly greater seasonality with peak sales from Thanksgiving through Easter, coinciding with Florida's tourist season.\nEMPLOYEES\nAs of December 31, 1993, the Company employed approximately 1,432 personnel of whom approximately 482 were represented by unions under collective bargaining agreements. These agreements cover employees at the following locations: Fullerton, Gustine and Tulare, California; and Madison, Wisconsin. Two of the collective bargaining agreements are due to expire within the next 12 months. The Company will from time to time be negotiating new agreements with the various unions representing these employees and it expects that it will enter into agreements with such unions which are satisfactory to the Company. The Company has had no recent work stoppages and considers its relations with its employees to be satisfactory.\nGOVERNMENT REGULATION\nPUBLIC HEALTH\nAs a manufacturer and distributor of food products, the Company is subject to the Federal Food, Drug, and Cosmetic Act and regulations promulgated thereunder by the FDA. This comprehensive regulatory scheme governs, among other things, the manufacturing, composition and ingredients, labeling, packaging, and safety of food. For example, the FDA regulates manufacturing practices for foods through its current good manufacturing practices regulations, specifies the \"recipes,\" called standards of identity, for certain foods, including many of the kinds of products marketed by the Company (e.g ., ice cream,\nsour cream, half & half, and yogurt), and prescribes the format and content of certain information required to appear on the labels of food products.\nAdditionally, the FDA is responsible for enforcement of the Public Health Service Act and regulations issued thereunder, which authorize regulatory activity necessary to prevent the introduction, transmission or spread of communicable diseases. These regulations require, for example, pasteurization of milk and milk products.\nThe FDA has recently proposed extensive regulations pursuant to the Nutrition Labeling and Education Act of 1990. Such regulations are expected to take effect in May, 1994. Nutritional labeling will be required on all foods that are a meaningful source of nutrition, including the Company's products, and limitations will be placed on the use of certain terms while requiring the use of other terms. The Company is currently revising labeling of its products to conform to the final regulations. The Company does not expect the cost of complying with these regulations to be material.\nIn addition to FDA regulation of the Company's products, the Company's advertising is subject to regulation by the Federal Trade Commission pursuant to the Federal Trade Commission Act and regulations issued thereunder.\nThe Company and its products are also subject to state regulation through such measures as licensing of the Company's dairy plants, enforcement by state health agencies of state standards for the Company's products, inspection of the Company's facilities, and regulation of the Company's trade practices in connection with the sale of the dairy products.\nEnforcement actions for violations of federal and state regulations may include seizure and condemnation of violative products, cease and desist orders, injunctions and\/or monetary penalties.\nThe Company maintains quality control laboratories at each of its food processing facilities to test bulk milk and other ingredients as well as finished products. In addition, the Company has developed and administers Hazard Analysis of Critical Control Point programs designed to detect hazardous levels of bacteria and other contamination that may have occurred during manufacturing. The Company believes that its facilities and practices are sufficient to maintain its compliance with applicable government regulations, although there can be no assurances in this regard.\nINTERSTATE COMMERCE COMMISSION\nThe Company's interstate trucking services to the public in connection with its backhaul operations are subject to regulation by the Interstate Commerce Commission (the \"ICC\"). In order to provide backhaul services, the Company obtained a license from the ICC and must comply with certain safety and insurance requirements promulgated by the ICC on a continuing basis.\nEMPLOYEE SAFETY REGULATIONS\nThe Company is subject to certain health and safety regulations including regulations issued pursuant to the Occupational Safety and Health Act. These regulations require the Company to comply with certain manufacturing, health and safety standards to protect its employees from accidents.\nENVIRONMENTAL REGULATIONS\nThe Company is subject to certain federal, state and local environmental regulations. Certain of the Company's facilities discharge biodegradable wastewater into municipal waste treatment facilities in excess of levels permitted under local regulations. In such circumstances, the Company generally pays wastewater surcharges to municipal water treatment authorities. However, such authorities may require the Company to comply with such regulations and construct pre-treatment facilities or take other action to reduce effluent discharge.\nThe Company maintains underground fuel storage tanks to service its vehicles. All such tanks are periodically inspected to determine compliance with applicable regulations. In connection with these inspections, the Company may, at times, need to make certain expenditures in order to maintain compliance.\nEnvironmental compliance with federal, state or local authorities is not expected to have a material impact on the Company's capital expenditures, earnings or competitive position.\nDAIRY SUPPORT PROGRAM\nThe minimum prices paid for grade-A bulk milk in the United States are controlled in most areas by Federal Milk Marketing Orders or state regulatory agencies. In most areas, the prices paid for bulk milk by processors are higher than these minimums due to premiums charged by suppliers and shippers. The Company has long established relationships with bulk milk suppliers, primarily milk cooperatives in each of its markets and has not experienced any shortages in its supply of fresh bulk milk.\nTHE PUBLIC EQUITY OFFERING\nOn April 24, 1992, the Company issued 5,000,000 shares of new common stock in a public offering at an issue price of $11 per share. Simultaneously 1,215,000 shares were sold to the public by certain selling stockholders. The offering provided net cash proceeds to the Company of approximately $50 million which, combined with approximately $104 million in new senior bank borrowings, was used to purchase approximately $34 million in face amount of Debentures at a cash premium of approximately $4 million, to redeem all the Company's Preferred Stock for approximately $18 million and to refinance approximately $98 million in senior debt.\nITEM 2.","section_1A":"","section_1B":"","section_2":"ITEM 2. PROPERTIES.\nThe Company currently operates processing facilities in the following locations:\n_______________________________\nThe Company also has eight distribution facilities in Florida related to the Velda operations.\nThe Company's executive offices are located in approximately 17,604 square feet of leased office space located at 5956 Sherry Lane, Suite 1100, Dallas, Texas 75225-6522. The lease for this property expires on October 31, 2000 with a five year extension available.\nThe Company believes that its facilities are well maintained and adequate to meet its current needs. The Company does expect to expand the capacity of its existing facilities in order to service future growth expectations.\nITEM 3.","section_3":"ITEM 3. LEGAL PROCEEDINGS.\nFEDERAL INVESTIGATION\nThe Company received a target letter dated December 31, 1991, from the United States Department of Justice informing it that Morningstar is a target of a federal grand jury investigation of suspected bid-rigging and market allocation in the dairy industry in the State of Texas. The investigation relates to activities conducted in the fluid milk industry in Texas. Oak Farms and Cabell's (collectively the \"Texas Dairy Subsidiaries\") were formed by the Company in March 1988 in connection with the acquisition of substantially all of the assets of Southland's dairy operations. The Texas Dairy Subsidiaries conducted fluid milk operations in Texas and were sold to Southern Foods in September 1990, which merged them into its subsidiary, Schepps-Foremost, Inc.\nThe investigation by the Department of Justice is continuing, and the scope and time of the conspiracies that may be alleged by the government is uncertain. Based on the Company's internal investigation to date and the advice of special counsel with respect to such matters, the Company believes Morningstar should not be, and that Morningstar should ultimately be removed as, a target given that (i) all of Morningstar's Texas fluid milk operations were conducted through the Texas Dairy Subsidiaries and (ii) the Company is not aware of any evidence that any officers of Morningstar had any knowledge of or participated in such alleged wrongdoings.\nThe Company has agreed to indemnify purchasers of its divested operations with regard to certain potential liabilities arising out of the acquisition of such operations. In connection therewith, the Company has indemnified Southern Foods, the purchaser of the Oak Farms and Cabell's dairy subsidiaries, against claims related to compliance with environmental regulations and fair trade practices arising out of the prior operaiton of Oak Farms and Cabell's through March 2000. The Company is aware that Southern Foods may claim that the Company is obligated to indemnify Southern Foods with respect to any illegal activities which are found to occur prior to the sale of the Texas Dairy Subsidiaries to Southern Foods.\nThe Company cannot accurately predict the outcome of the government's investigation. However, based upon the information available to the Company at this time, the Company believes that this matter should not have a material impact on the Company's financial position or future results of operations.\nITEM 4.","section_4":"ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.\nNo matters were submitted to a vote of the stockholders during the fourth quarter of the fiscal year.\nPART II\nITEM 5.","section_5":"ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.\nThe information required by this item is included in the Registrant's Annual Report to Stockholders for the year ended December 31, 1993 on page 31 under the caption \"Quarterly Financial Information\" and is incorporated herein by reference.\nITEM 6.","section_6":"ITEM 6. SELECTED FINANCIAL DATA.\nThe information required by this item is included in the Registrant's Annual Report to Stockholders for the year ended December 31, 1993 on page 32 under the caption \"Selected Financial Data\" and is incorporated herein by reference.\nITEM 7.","section_7":"ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.\nThe information required by this item is included in the Registrant's Annual Report to Stockholders for the year ended December 31, 1993 on pages 9 through 12, under the caption \"Management's Discussion and Analysis of Results of Operations and Financial Condition,\" and is incorporated herein by reference.\nITEM 8.","section_7A":"","section_8":"ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.\nThe information required by this item is included in the Registrant's Annual Report to Stockholders for the year ended December 31, 1993 on pages 14 through 31, and is incorporated herein by reference.\nITEM 9.","section_9":"ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.\nNone.\nPART III\nITEM 10.","section_9A":"","section_9B":"","section_10":"ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.\nThe information required by this item is included in the Registrant's definitive Proxy Statement relating to its annual meeting of stockholders to be held on May 19, 1994 under the caption \"Directors and Officers\".\nITEM 11.","section_11":"ITEM 11. EXECUTIVE COMPENSATION.\nThe information required by this item is included in the Registrant's definitive Proxy Statement relating to its annual meeting of stockholders to be held May 19, 1994 under the caption \"Executive Management Compensation\" and is incorporated herein by reference. The foregoing incorporation by reference specifically excludes the discussion under \"Executive Management Compensation - -- Compensation Committee Report\" and \"The Morningstar Group Inc. Stock Price Performance\".\nITEM 12.","section_12":"ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.\nThe information required by this item is included in the Registrant's definitive Proxy Statement relating to its annual meeting of stockholders to be held on May 19, 1994 under the caption \"Voting Securities Outstanding, Security Ownership of Management and Principal Stockholders\" and is incorporated herein by reference.\nITEM 13.","section_13":"ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.\nThe information required by this item is included in the Registrant's definitive Proxy Statement under the captions \"Executive Management Compensation -- Compensation Committee Interlocks and Insider Participation\" and \"Certain Transactions\" and is incorporated herein by reference.\nPART IV\nITEM 14.","section_14":"ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.\n(a) The following documents are filed as a part of this Report. The page number, if any, listed opposite a document indicates the page number in the sequential number system in the manually signed original of this Report where such document can be found.\nPage Number (1) Financial Statements\nSee Item 8 on page 10.\n(2) Index to Financial Statement Schedules\nReport of independent public accountants on financial statement schedules . . . . . . . . . . . . . . . . . . .20\nSchedule V - Property, plant and equipment . . . . . . . .21\nSchedule VI - Accumulated depreciation of property, plant and equipment . . . . . . . . . . . . . . . . . . . . . .22\nSchedule VIII - Allowance for doubtful accounts . . . . . .23\nSchedule X - Supplementary statement of operations information . . . . . . . . . . . . . . . . . . . . . . .24\nAll other schedules have been omitted because they are not applicable, not required, or because the required information is shown in the consolidated financial statements or notes thereto.\n(3) Exhibits required by Item 601 of Regulation S-K\nExhibit Number Description\n3(a) -- Restated Certificate of Incorporation of the Company. (Incorporated by reference to Exhibit 3(a) to the Registrant's Annual Report on Form 10-K of the Registrant for the fiscal year ended December 31, 1992.)*\n3(b) -- Amended and Restated By-laws of the Company. (Incorporated by reference to Exhibit 3(b) to the Registrant's Annual Report on Form 10-K of the Registrant for the fiscal year ended December 31, 1992.)*\n4(a) -- Third Amended and Restated Stockholders' Agreement dated as of March 1, 1991, among the Company and certain stockholders of the Company. (Incorporated by reference to Exhibit 4(d) to the Registrant's Annual Report on Form 10-K of the Registrant for the fiscal year ended December 31, 1990.)*\n____________________________\n* Incorporated by reference as indicated.\nExhibit Number Description\n4(b) -- Stockholders' Agreement dated as of March 1, 1991, among LTCB, NMB, HMCM, the Company and certain stockholders of the Company. (Incorporated by reference to Exhibit 4(e) to the Registrant's Annual Report on Form 10-K of the Registrant for the fiscal year ended December 31, 1990.)*\n4(c) -- Stockholders' Agreement dated February 5, 1992 among the Company and certain stockholders. (Incorporated by reference to Exhibit 4(d) to the Registrant's Annual Report on Form 10-K of the Registrant for the fiscal year ended December 31, 1992.)*\n10(a) -- Dairy Products Purchase Agreement dated April 1, 1988, between Company and Southland (without exhibits). (Incorporated by reference to Exhibit 10(a) to the Registrant's Registration Statement on Form S-1, as amended, registration No. 33-21790.)*\n10(b) -- Stock Purchase Agreement dated as of March 16, 1990, between the Company and Southern Foods Group, Inc. (Incorporated by reference to Exhibit (c)(1) to the Registrant's Current Report on Form 8-K dated September 6, 1990.)*\n10(c) -- First Amendment to Stock Purchase Agreement dated September 6, 1990, among Southern Foods Group, Inc., the Company and Schepps-Foremost, Inc. (Incorporated by reference to Exhibit (c)(2) to the Registrant's Current Report on Form 8-K dated September 6, 1990.)*\n10(d) -- Securities Purchase Agreement dated as of February 22, 1991, between the Company and HMCM. (Incorporated by reference to Exhibit (c)(2) to the Registrant's Current Report on Form 8-K dated March 1, 1991.)*\n10(e) -- Stock Purchase Agreement dated as of March 1, 1991, among the Company, NMB U.S. Finance Corporation and The Long-Term Credit Bank of Japan, Ltd. (Incorporated by reference to Exhibit 10(g) to the Registrant's Annual Report on Form 10-K of the Registrant for the fiscal year ended December 31, 1990.)*\n10(f) -- Financial Advisory Agreement dated as of March 1, 1991, between the Company and Hicks, Muse & Co. Incorporated. (Incorporated by reference to Exhibit 10(h) to the Registrant's Annual Report on Form 10-K of the Registrant for the fiscal year ended December 31, 1990.)*\n10(g) -- Employees' Savings and Profit Sharing Plan dated April 1, 1988. (Incorporated by reference to Exhibit 10(g) to the Registrant's Annual Report on Form 10-K of the Registrant for the fiscal year ended December 31, 1988.)*\n10(h) -- Employment Agreement dated March 1, 1991, between the Company and James A. Bach. (Incorporated by reference to Exhibit 10(k) to the Registrant's Annual Report on Form 10-K of the Registrant for the fiscal year ended December 31, 1990.)*\n10(i) -- Employment Agreement dated March 1, 1991, between the Company and Clifford L. Marquart. (Incorporated by reference to Exhibit 10(l) to the Registrant's Annual Report on Form 10-K of the Registrant for the fiscal year ended December 31, 1990.)*\n____________________________\n* Incorporated by reference as indicated.\nExhibit Number Description\n10(j) -- Employment Agreement dated March 1, 1991, between the Company and Tracy L. Noll. (Incorporated by reference to Exhibit 10(m) to the Registrant's Annual Report on Form 10-K of the Registrant for the fiscal year ended December 31, 1990.)*\n10(k) -- Amendment No. 1 to Employment Agreement, entered into as of September 17, 1991, by and among The Morningstar Group Inc. and James A. Bach.**\n10(l) -- Amendment No. 1 to Employment Agreement, entered into as of September 17, 1991, by and among The Morningstar Group Inc. and Clifford L. Marquart.**\n10(m) -- Amendment No. 1 to Employment Agreement, entered into as of September 17, 1991, by and among The Morningstar Group Inc. and Tracy L. Noll.**\n10(n) -- Purchase Agreement dated as of September 13, 1991, among HMCM, certain sellers (as defined), certain buyers (as defined) and the Company.**\n10(o) -- MorningStar Foods, Inc. 1991 Incentive and Nonstatutory Stock Option Plan.**\n10(p) -- The Morningstar Group Inc. 1992 Incentive and Nonstatutory Option Plan.**\n10(q) -- Second Amended and Restated Credit Agreement dated as of May 4, 1992, among the Company, the financial institutions named therein, LTCB, as Agent, and Banque Paribas as Co-Agent. (Incorporated by reference to Exhibit 10(t) to the Registrant's Annual Report on Form 10-K of the Registrant for the fiscal year ended December 31, 1992.)*\n10(r) -- Licensing Agreement to produce Lactaid Brand Lactose Reduced Milk (Confidential treatment has been requested for this exhibit).**\n10(s) -- Stock Purchase Agreement dated as of January 10, 1992, among Protein Capital Corporation and the Company.***\n10(t) -- First Amendment to Stock Purchase Agreement, dated as of March 31, 1992 to Stock Purchase Agreement dated as of January 10, 1992, among Protein Capital Corporation and the Company.***\n10(u) -- Stock Purchase Agreement dated as of March 31, 1992, among Protein Capital Corporation and the Company.***\n10(v) -- Amendment No. 2 to Employment Agreement, entered into as of April 30, 1992 by and among The Morningstar Group Inc. and James A. Bach. (Incorporated by reference to Exhibit 10(dd) to the Registrant's Annual Report on Form 10-K of the Registrant for the fiscal year ended December 31, 1992.)* ____________________________\n* Incorporated by reference as indicated.\n** Incorporated by reference to the corresponding exhibit to the Registration Statement on Form S-1 (Registration No. 33- 45805) filed by the Registrant on February 19, 1992.\n*** Incorporated by reference to the corresponding exhibit to the Registration Statement on Form S-1 (Registration No. 33- 45805), as amended by the Registrant on April 8, 1992.\nExhibit Number Description\n10(w) -- Amendment No. 2 to Employment Agreement, entered into as of April 30, 1992 by and among The Morningstar Group Inc. and Clifford L. Marquart. (Incorporated by reference to Exhibit 10(ee) to the Registrant's Annual Report on Form 10-K of the Registrant for the fiscal year ended December 31, 1992.)*\n10(x) -- Amendment No. 2 to Employment Agreement, entered into as of April 30, 1992 by and among The Morningstar Group Inc. and Tracy L. Noll. (Incorporated by reference to Exhibit 10(ff) to the Registrant's Annual Report on Form 10-K of the Registrant for the fiscal year ended December 31, 1992.)*\n10(y) -- Amendment No. 1 to Financial Advisory Agreement entered into as of April 30, 1992 between the Company and Hicks, Muse & Co. Incorporated. (Incorporated by reference to Exhibit 10(gg) to the Registrant's Annual Report on Form 10-K of the Registrant for the fiscal year ended December 31, 1992.)*\n10(z) -- Incentive Stock Option Agreement (Tenure Option) entered into as of March 1, 1991, between MorningStar Foods Inc. and James A. Bach.****\n10(aa) -- Incentive Stock Option Agreement (EBITDA Option) entered into as of March 1, 1991, between MorningStar Foods Inc. and James A. Bach.****\n10(bb) -- Incentive Stock Option Agreement (Tenure Option) entered into as of March 1, 1991, between MorningStar Foods Inc. and Clifford L. Marquart.****\n10(cc) -- Incentive Stock Option Agreement (EBITDA Option) entered into as of March 1, 1991, between MorningStar Foods Inc. and Clifford L. Marquart.****\n10(dd) -- Incentive Stock Option Agreement (Tenure Option) entered into as of March 1, 1991, between MorningStar Foods Inc. and Tracy L. Noll.****\n10(ee) -- Incentive Stock Option Agreement (EBITDA Option) entered into as of March 1, 1991, between MorningStar Foods Inc. and Tracy L. Noll.****\n10(ff) -- Amendment No. 1 to Incentive Stock Option Agreement (EBITDA Option) entered into as of September 12, 1991, by and among The Morningstar Group Inc. and James A. Bach.****\n10(gg) -- Amendment No. 1 to Incentive Stock Option Agreement (Tenure Option) entered into as of September 12, 1991, by and among The Morningstar Group Inc. and James A. Bach.****\n10(hh) -- Amendment No. 1 to Incentive Stock Option Agreement (EBITDA Option) entered into as of September 12, 1991, by and among The Morningstar Group Inc. and Clifford L. Marquart.****\n____________________________\n* Incorporated by reference as indicated.\n**** Incorporated by reference to the corresponding exhibit to the Registration Statement on Form S-1 (Registration No 33- 45805), as amended by the Registrant on April 22, 1992.\nExhibit Number Description\n10(ii) -- Amendment No. 1 to Incentive Stock Option Agreement (Tenure Option) entered into as of September 12, 1991, by and among The Morningstar Group Inc. and Clifford L. Marquart.****\n10(jj) -- Amendment No. 1 to Incentive Stock Option Agreement (EBITDA Option) entered into as of September 12, 1991, by and among The Morningstar Group Inc. and Tracy L. Noll.****\n10(kk) -- Amendment No. 1 to Incentive Stock Option Agreement (Tenure Option) entered into as of September 12, 1991, by and among The Morningstar Group Inc. and Tracy L. Noll.****\n10(ll) -- Amendment No. 2 to Incentive Stock Option Agreement (EBITDA Option) entered into as of April 30, 1992 by and among The Morningstar Group Inc. and James A. Bach. (Incorporated by reference to Exhibit 10(tt) to the Registrant's Annual Report on Form 10-K of the Registrant for the fiscal year ended December 31, 1992.)*\n10(mm) -- Amendment No. 2 to Incentive Stock Option Agreement (Tenure Option) entered into as of April 30, 1992 by and among The Morningstar Group Inc. and James A. Bach. (Incorporated by reference to Exhibit 10(uu) to the Registrant's Annual Report on Form 10-K of the Registrant for the fiscal year ended December 31, 1992.)*\n10(nn) -- Amendment No. 2 to Incentive Stock Option Agreement (EBITDA Option) entered into as of April 30, 1992 by and among The Morningstar Group Inc. and Clifford L. Marquart. (Incorporated by reference to Exhibit 10(vv) to the Registrant's Annual Report on Form 10-K of the Registrant for the fiscal year ended December 31, 1992.)*\n10(oo) -- Amendment No. 2 to Incentive Stock Option Agreement (Tenure Option) entered into as of April 30, 1992 by and among The Morningstar Group Inc. and Clifford L. Marquart. (Incorporated by reference to Exhibit 10(ww) to the Registrant's Annual Report on Form 10-K of the Registrant for the fiscal year ended December 31, 1992.)*\n10(pp) -- Amendment No. 2 to Incentive Stock Option Agreement (EBITDA Option) entered into as of April 30, 1992 by and among The Morningstar Group Inc. and Tracy L. Noll. (Incorporated by reference to Exhibit 10(xx) to the Registrant's Annual Report on Form 10-K of the Registrant for the fiscal year ended December 31, 1992.)*\n10(qq) -- Amendment No. 2 to Incentive Stock Option Agreement (Tenure Option) entered into as of April 30, 1992 by and among The Morningstar Group Inc. and Tracy L. Noll. (Incorporated by reference to Exhibit 10(yy) to the Registrant's Annual Report on Form 10-K of the Registrant for the fiscal year ended December 31, 1992.)*\n10(rr) -- Amendment to No. 2 to Lactaid Licensing Agreement and to Distribution Agreement (confidential treatment has been requested for this exhibit).****\n____________________________\n* Incorporated by reference as indicated.\n**** Incorporated by reference to the corresponding exhibit to the Registration Statement on Form S-1 (Registration No 33- 45805), as amended by the Registrant on April 22, 1992.\nExhibit Number Description\n10(ss) -- Amendment No. 3 to Employment Agreement, entered into as of July 30, 1992 by and among The Morningstar Group Inc. and James A. Bach. (Incorporated by reference to Exhibit 10(aaa) to the Registrant's Annual Report on Form 10-K of the Registrant for the fiscal year ended December 31, 1992.)*\n10(tt) -- Amendment No. 3 to Employment Agreement, entered into as of July 30, 1992 by and among The Morningstar Group Inc. and Clifford L. Marquart. (Incorporated by reference to Exhibit 10(bbb) to the Registrant's Annual Report on Form 10-K of the Registrant for the fiscal year ended December 31, 1992.)*\n10(uu) -- Amendment No. 3 to Employment Agreement, entered into as of July 30, 1992 by and among The Morningstar Group Inc. and Tracy L. Noll. (Incorporated by reference to Exhibit 10(ccc) to the Registrant's Annual Report on Form 10-K of the Registrant for the fiscal year ended December 31, 1992.)*\n10(vv) -- Amendment No. 3 to Incentive Stock Option Agreement (Tenure Option) entered into as of October 1, 1992, by and among The Morningstar Group Inc. and James A. Bach. (Incorporated by reference to Exhibit 10(ddd) to the Registrant's Annual Report on Form 10-K of the Registrant for the fiscal year ended December 31, 1992.)*\n10(ww) -- Amendment No. 3 to Incentive Stock Option Agreement (Tenure Option) entered into as of October 1, 1992, by and among The Morningstar Group Inc. and Clifford L. Marquart. (Incorporated by reference to Exhibit 10(eee) to the Registrant's Annual Report on Form 10-K of the Registrant for the fiscal year ended December 31, 1992.)*\n10(xx) -- Amendment No. 3 to Incentive Stock Option Agreement (Tenure Option) entered into as of October 1, 1992, by and among The Morningstar Group Inc. and Tracy L. Noll. (Incorporated by reference to Exhibit 10(fff) to the Registrant's Annual Report on Form 10-K of the Registrant for the fiscal year ended December 31, 1992.)*\n10(yy) -- Letter agreement dated December 15, 1993 between The Morningstar Group and Hicks, Muse & Company, Inc.\n10(zz) -- Agreement dated June 1, 1993 between McNeil Consumer Products Company, a division of McNeil - PPC, Inc. and The Morningstar Group Inc. (Confidential treatment has been requested for this exhibit). (Incorporated by reference to Exhibit 10(a) to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1993.)*\n10(aaa) -- Letter Agreement dated June 1, 1993 between McNeil Consumer Products Company, a division of McNeil - PPC, Inc. and The Morningstar Group Inc. and Avoset Food Corporation (Confidential treatment has been requested for this exhibit). (Incorporated by reference to Exhibit 10(b) to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1993.)*\n10(bbb) -- First Amendment and Waiver to the Second Amended and Restated Credit Agreement dated March 5, 1993 among The Morningstar Group Inc. and The Long-Term Credit Bank of Japan, Limited, New York Branch, Agent and Banque Paribas, Houston Agency as Co-Agent. ____________________________\n* Incorporated by reference as indicated.\nExhibit Number Description\n10(ccc) -- Second Amendment to the Second Amended and Restated Credit Agreement dated October 28, 1993 among The Morningstar Group Inc. and The Long-Term Credit Bank of Japan, Limited, New York Branch, Agent and Banque Paribas, Houston Agency as Co-Agent.\n10(ddd) -- Waiver to the Second Amended and Restated Credit Agreement dated March 4, 1993 among The Morningstar Group Inc. and The Long-Term Credit Bank of Japan, Limited, New York Branch, Agent and Banque Paribas, Houston Agency as Co-Agent.\n10(eee) -- Agreement and Plan of Merger dated February 17, 1994 by and among Engles Dairy Acquisition, Inc., Velda Farms Inc. and The Morningstar Group.\n10(fff) -- Form of Dairy Products Supply Agreement by and among The Morningstar Group Inc., its named subsidiaries and Velda Farms Inc.\n10(ggg) -- Letter of Resignation dated March 17, 1994 from James A. Bach, accepted and agreed to by The Morningstar Group Inc.\n10(hhh) -- Waiver No. 1 to Employment Agreement entered into as of December 15, 1993 by and among The Morningstar Group Inc. and James A. Bach.\n10(iii) -- Waiver No. 1 to Employment Agreement entered into as of December 15, 1993 by and among The Morningstar Group Inc. and Tracy L. Noll.\n10(jjj) -- Advisory Agreement entered into as of October 1, 1993 by and among The Morningstar Group Inc. and C. Dean Metropoulos.\n10(kkk) -- Stock Purchase Agreement entered into as of February 5, 1993 by and among TSC Holdings, Inc. and The Morningstar Group Inc.\n10(lll) -- The Morningstar Group Inc. Employees Savings and Profit Sharing Plan, revised effective April 1, 1988.\n13 -- The Morningstar Group Inc. Annual Report to Stockholders for the year ended December 31, 1993 (except for the pages and information thereof expressly incorporated by reference in this Form 10- K, the annual report is provided solely for the information of the Securities and Exchange Commission and is not to be deemed \"filed\" as part of the Form 10-K).\n22 -- Subsidiaries. Avoset Food Corporation, Avoset International Ltd., Bancroft Dairy Inc., Bancroft Dairy Maryland Inc., Favorite Foods Inc., MSF Subsidiary Corporation, MStar Inc., Star Specialty Foods Inc., Velda Farms Inc.\n(b) Reports on form 8-K\nNone\nSIGNATURES\nPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.\nTHE MORNINGSTAR GROUP INC.\nBy \/s\/ C. DEAN METROPOULOS C. Dean Metropoulos (President, Chief Executive Officer and Director)\nDate: March 17, 1994\nPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:\nREPORT OF INDEPENDENT PUBLIC ACCOUNTANTS\nTo the Stockholders and Board of Directors of The Morningstar Group Inc.:\nWe have audited in accordance with generally accepted auditing standards, the consolidated financial statements of The Morningstar Group Inc., and subsidiaries and the Predecessor Company included in the Annual Report to Stockholders incorporated by reference in this Form 10-K and have issued our report thereon dated February 11, 1994. Our audits were made for the purpose of forming an opinion on those statements taken as a whole. The schedules listed in the Index to Financial Statement Schedules are the responsibility of the Company's management and are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic financial statements. These schedules have been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.\nARTHUR ANDERSEN & CO.\nDallas, Texas, February 11, 1994\nSCHEDULE V\nTHE MORNINGSTAR GROUP INC. AND SUBSIDIARIES AND PREDECESSOR COMPANY\nPROPERTY, PLANT AND EQUIPMENT (Dollars in Thousands)\n___________________________________\n(a) Assets held for sale were segregated and reclassified on the Company's balance sheet.\n(b) The Company adopted a new basis of accounting on March 1, 1991, as the result of a change in ownership.\n(c) Certain Company assets targeted for divestiture were revalued as a result of subsequent transactions.\nSCHEDULE VI\nTHE MORNINGSTAR GROUP INC. AND SUBSIDIARIES AND PREDECESSOR COMPANY\nACCUMULATED DEPRECIATION OF PROPERTY, PLANT AND EQUIPMENT (Dollars in Thousands)\n_____________________________________________\n(a) The Company adopted a new basis of accounting on March 1, 1991 as the result of a change in ownership.\nSCHEDULE VIII\nTHE MORNINGSTAR GROUP INC. AND SUBSIDIARIES AND PREDECESSOR COMPANY\nALLOWANCE FOR DOUBTFUL ACCOUNTS (Dollars in Thousands)\nSCHEDULE X\nTHE MORNINGSTAR GROUP INC. AND SUBSIDIARIES AND PREDECESSOR COMPANY\nSUPPLEMENTARY STATEMENT OF OPERATIONS INFORMATION (Dollars in Thousands)","section_15":""}
{"filename":"316909_1993.txt","cik":"316909","year":"1993","section_1":"ITEM 1. BUSINESS\nGeneral\nLiberty National Bancorp, Inc. (\"Liberty\") is a Kentucky corporation incorporated in 1979 for the purpose of acquiring Liberty National Bank and Trust Company of Kentucky (\"Liberty Bank\"), which is Liberty's principal subsidiary. Liberty is registered as a bank holding company under the Bank Holding Company Act of 1956, as amended, and owns directly or indirectly 100% of ten banks as of December 31, 1993. Liberty ranks third among all bank holding companies headquartered in Kentucky with $4.9 billion of total consolidated assets at December 31, 1993. The following table lists for each of the ten bank subsidiaries that Liberty owns (the \"Banks\"), the primary location of its principal offices, the number of banking offices, and total assets at December 31, 1993.\nHardin County Bank and Trust, Inc., and Farmers Deposit Bank of Brandenburg were merged with Liberty National Bank and Trust Company of Hardin County in February 1994 to form Liberty National Bank and Trust Company of Central Kentucky. In April 1994, pending regulatory approval, Liberty National Bank of Madisonville will be merged with First Federal Savings Bank in Hopkinsville, Kentucky, to form Liberty National Bank and Trust Company of Western Kentucky. The Banks engage in a wide range of commercial and personal banking activities, including accepting demand and time deposits; making secured and unsecured loans to corporations, individuals and others; issuing letters of credit; renting safe deposit boxes; and other financial services for institutions and individuals. The Banks' lending services include making commercial, industrial, real estate, installment and credit card loans. The Banks participate in national and regional automated teller machine networks, which enable customers of participating banks to have access to funds in their accounts throughout the United States. Liberty Investment Services, Inc., a wholly-owned subsidiary of Liberty, offers brokerage services. The Banks provide credit life and accident and health insurance to borrowers through LNB Life Insurance Company, a wholly-owned subsidiary of Liberty Bank. Liberty Bank's Mortgage Origination, Sales and Service Group, sells and services single-family residential loans for other companies' mortgage portfolios and also services Liberty Bank's mortgage portfolio. Liberty Bank is involved in direct and leveraged lease financing, including vehicle leasing, through other wholly-owned subsidiaries. Liberty Bank also maintains a branch facility in the Cayman Islands. Liberty Bank acts as correspondent for banks throughout Kentucky and in Indiana, providing such services as check clearing, transfer of funds, loan participations, investment advice, data processing, and securities custody and clearance. The Banks provide a wide range of personal and corporate trust and trust-related services. At December 31, 1993, Liberty and its subsidiaries had 2,305 full-time equivalent employees.\nCompetition\nThe Banks actively compete on the local, regional and national levels with commercial banks, savings institutions, brokerage houses and other\nfinancial institutions for all types of deposits, loans and trust accounts and other financial services.\nSupervision and Regulation\nLiberty is subject to regulation under the Bank Holding Company Act of 1956, as amended (the \"Act\"). Under the Act, Liberty is required to file with the Federal Reserve Board annual reports and other information regarding its business operations and the business operations of its subsidiaries. The Federal Reserve Board may also make examinations of Liberty and its subsidiaries. The Act also requires the prior approval of the Federal Reserve Board for a bank holding company to acquire or hold more than 5% voting interest in any bank, and currently restricts interstate banking activities. The Act restricts Liberty's nonbanking activities to those which are closely related to banking. The Act does not place territorial restrictions on the activities of nonbank subsidiaries of bank holding companies. Liberty's banking subsidiaries are subject to limitations with respect to intercompany loans and investments. The ability of Liberty's affiliate banks to pay dividends is restricted. See note 10 to Liberty's consolidated financial statements included in Liberty's annual report to stockholders for the year ended December 31, 1993, which is incorporated herein by reference. The subsidiary banks are subject to the provisions of the National Banking Act, are under the supervision and regulation of, and are subject to periodic examination by, one or more of the Comptroller of the Currency, the Federal Reserve Board, the Office of Thrift Supervision or the Federal Deposit Insurance Corporation (\"FDIC\"). Under the Act and Regulations of the Federal Reserve Board, a bank holding company and its subsidiaries are prohibited from engaging in certain tie-in arrangements in connection with the extension of credit. Liberty and its subsidiary banks are also subject to the state banking laws of each state in which such a bank is located. These state laws may restrict branching of banks to other counties within the state and acquisition or merger involving banks and bank holding companies located in other states. Kentucky permits nationwide reciprocal interstate banking acquisitions. The Financial Reform, Recovery, and Enforcement Act of 1989 (\"FIRREA\") placed the savings and loan insurance fund under the control of the FDIC, created the Office of Thrift Supervision in the U.S. Treasury Department and created the Resolution Trust Corporation to act as receiver to liquidate failed thrift institutions. FIRREA further expanded the power of bank holding companies to allow for the acquisition of savings associations and to operate them as separate thrift subsidiaries. FIRREA enhanced the ability of bank holding companies to expand through thrift acquisitions beyond their present geographic interstate banking region. The tandem restrictions placed upon thrift subsidiaries of bank holding companies have been removed allowing linkage of deposit-taking activities and solicitation of deposits and loans on behalf of affiliate companies. FIRREA lead to many structural changes in competition for loans, deposits and other services, affected collateral valuation methods, and the acquisition of financial institutions. The Federal Deposit Insurance Corporation Improvement Act of 1991 (\"FDICIA\") requires bank regulators to take specific prompt actions with respect to insured depository institutions that do not meet minimum capital standards. FDICIA establishes five capital tiers: \"well capitalized,\" \"adequately capitalized,\" \"undercapitalized,\" \"significantly undercapitalized,\" and \"critically undercapitalized.\" An insured depository institution that is not \"well capitalized\" or \"adequately capitalized\" is prohibited from making capital distributions and may be required to submit a capital plan, restrict asset growth and limit new lines of business. Holding companies are also required to guarantee compliance by their insured depository institutions with any capital plans, subject to certain limits. Significantly and critically undercapitalized insured depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become adequately capitalized, requirements to reduce total assets, and cessation of receipt of deposits from correspondent banks. In addition, critically undercapitalized insured depository institutions are subject to appointment of a receiver or conservator. Under FDICIA, an institution that is not well capitalized is generally prohibited from accepting or offering brokered deposits. In addition, \"pass- through\" insurance coverage may not be available for certain employee benefit accounts. Other provisions included the imposition of specific accounting and reporting requirements and risk-based assessments for FDIC insurance. FDICIA contains numerous other provisions, including termination of the \"too big to fail\" doctrine except in special cases, limitations on the FDIC's\npayment of deposits at foreign branches and revised regulatory standards for, among other things, real estate lending and capital adequacy. The provisions of FDICIA are effective on a staggered basis, with some having already taken effect, while others take effect at various dates over the next few years. Since all the regulations implementing this Act have not been finalized at this time, the full effects of FDICIA on the business of Liberty and its subsidiaries cannot be measured currently. However, this comprehensive legislation may significantly increase deposit insurance premiums and the costs of regulatory compliance for the entire banking industry, including Liberty. The monetary policies of regulatory authorities, including the Federal Reserve Board, have a significant effect on the operating results of banks and bank holding companies. The nature of future monetary policies and the effect of such policies on the future business and earnings of Liberty and its subsidiary banks cannot be predicted.\nThe following tables set forth selected statistical information with respect to Liberty and its subsidiaries and should be read together with the consolidated financial statements of Liberty.\nDISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY; INTEREST RATES AND INTEREST DIFFERENTIAL\nThe schedule captioned \"Average Balances and Interest Rates\" included on page 13 of Liberty's annual report to stockholders for the year ended December 31, 1993, which is incorporated herein by reference, shows, for each major category of interest earning asset and interest bearing liability, the average amount outstanding, the interest earned or paid on such amount and the average rate earned or paid for each of the years in the three-year period ended December 31, 1993. The schedule also shows the average rate earned on all interest earning assets and the average rate paid on all interest bearing liabilities and the net interest margin (net interest income divided by total average interest earning assets) for each of the years in the three-year period ended December 31, 1993. Nonaccrual loans outstanding were included in calculating the rate earned on loans. Total interest income includes the effects of taxable equivalent adjustments using a tax rate of 35% for 1993 and 34% for 1992 and 1991. The changes in interest income and interest expense resulting from changes in volume and changes in rates for the years ended December 31, 1993 and 1992 are shown in the schedule captioned \"Analysis of Changes in Net Interest Income\" included on page 6 of Liberty's annual report to stockholders for the year ended December 31, 1993, which is incorporated herein by reference. The change in interest due to both rate and volume has been allocated to change due to volume and change due to rate in proportion to the relationship of the absolute dollar amounts of the change in each. Total interest income includes the effects of taxable equivalent adjustments using a tax rate of 35% for 1993 and 34% for 1992.\nINVESTMENT PORTFOLIO\nThe carrying value of investment securities is summarized as follows:\nThe maturity distribution and weighted average interest rates of investment securities (exclusive of Federal Reserve Bank, Federal Home Loan Bank and corporate stock) at December 31, 1993 are as follows:\nThe weighted average interest rates for each maturity category is computed by dividing annualized interest income (net of amortization of premium or accretion of discount) by the carrying value of the respective investment securities. The weighted average rates on obligations of states and political subdivisions are computed on a taxable equivalent basis using a 35% tax rate.\nLOAN PORTFOLIO\nThe composition of loans is summarized as follows:\nThe following tables show the maturities of loans (excluding real estate - mortgage, consumer and lease financing categories) outstanding as of December 31, 1993 and the amounts due after one year, classified according to the sensitivity to changes in interest rates.\nThe following table summarizes Liberty's nonaccrual, past due and restructured loans. See note 1 to Liberty's consolidated financial statements included in Liberty's annual report to stockholders for the\nyear ended December 31, 1993, which is incorporated herein by reference, for a description of Liberty's policy for placing loans on nonaccrual status.\nInformation with respect to nonaccrual and restructured loans at December 31, 1993 is as follows:\nAt December 31, 1993, Liberty had $46,983,000 in loans for which payments were current, but the borrowers are currently experiencing financial difficulties. These potential problem loans are subject to continuing management attention and their classification is reviewed on a monthly basis.\nSUMMARY OF LOAN LOSS EXPERIENCE\nThe following table summarizes average loans outstanding; changes in the allowance for loan losses arising from loans charged off and recoveries on loans previously charged off, by loan category; additions to the allowance that have been charged to expense; and other changes:\nIn determining the annual provision for loan losses charged to expense, senior management considers many factors. Among these are: (1) the quality of the portfolio, (2) previous loss experience, (3) the size and composition of the portfolio, and (4) an assessment of current economic conditions. Also, a quarterly analysis is performed which considers the above factors. In addition, periodic examinations and evaluations by bank regulators and external auditors are considered. An allocation of the allowance for loan losses according to the amount deemed to be reasonably necessary to provide for the possibility of losses being incurred within the following categories of loans at the dates indicated is as follows:\nThe ratio of loans in each category to total outstanding loans is as follows:\nDEPOSITS\nThe average balance of deposits and average rates paid on such deposits for the years indicated is summarized as follows:\nMaturities of time certificates of deposit of $100,000 or more outstanding at December 31, 1993 are summarized as follows:\nRETURN ON EQUITY AND ASSETS\nThe following table presents various key financial ratios:\n(a) Includes $0.13 per share special dividend declared December 15, 1993 and paid January 1, 1994 in order to align Liberty's current dividend schedule with the current BANC ONE CORPORATION dividend schedule. See note 2 to Liberty's consolidated financial statements included in Liberty's annual report to stockholders for the year ended December 31, 1993, which is incorporated herein by reference.\nSHORT-TERM BORROWING\nFederal funds purchased and securities sold under agreements to repurchase generally mature within one to thirteen days from the date of the transaction. The following table shows information relating to federal funds purchased and securities sold under agreements to repurchase.\nITEM 2.","section_1A":"","section_1B":"","section_2":"ITEM 2. PROPERTIES\nLiberty's investments in premises and equipment are through its subsidiaries. The main offices of Liberty and its principal subsidiary, Liberty Bank, are located at 416 West Jefferson Street, Louisville, Kentucky. Data processing and certain other operations of Liberty Bank are located at 1251 South Fourth Street, Louisville, Kentucky. Both buildings are owned by Investment Realty Company, a wholly-owned subsidiary of Liberty Bank, and occupied entirely by Liberty Bank. In addition, Liberty Bank currently occupies under a long-term lease approximately four floors in a 23-story office building located at One Riverfront Plaza in Louisville, Kentucky. This space is primarily used by Liberty Bank's Retail Banking Group. The Banks also lease a total of approximately 33,000 square feet in five warehouse facilities used to store records and supplies. The Banks lease 44 and own, either directly or indirectly through subsidiaries, 52 of their banking offices. Seven other banking offices are part of land lease arrangements under which the land is leased, but the building thereon is owned. Additionlly, Investment Realty Company has under long-term leases parcels of land and buildings thereon (of which the eight-story Marion E. Taylor office building is one) which are adjacent to the property on which Liberty's main office is located. These leases give Liberty control of the entire block situated between Jefferson and Liberty Streets and bounded by the Fourth Avenue Mall and Fifth Street in Louisville, Kentucky. These leased properties were acquired to fulfill current and future space requirements. Liberty Bank currently occupies all but a portion of two floors in the Marion E. Taylor office building. See note 7 and 12 to Liberty's consolidated financial statements included in Liberty's annual report to stockholders for the year ended December 31, 1993 which is incorporated herein by reference, for\nadditional information relating to amounts in premises and equipment, and lease commitments.\nITEM 3.","section_3":"ITEM 3. LEGAL PROCEEDINGS\nIn 1989, a jury returned a verdict against Liberty Bank for compensatory damages based on lender liability claims which totaled (net of a judgment in Liberty Bank's favor against the borrower of approximately $2.8 million under a note) approximately $4.2 million. On September 23, 1991, the trial court granted Liberty Bank's motion for a judgment notwithstanding the verdict (\"JNOV\") thereby overturning the judgment, and conditionally granted Liberty Bank's motion for a new trial if the JNOV was subsequently vacated or reversed on appeal. On March 19, 1993, the Kentucky Court of Appeals issued an opinion vacating the JNOV and the conditional grant of a new trial and remanded the matter to the trial court for proceedings consistent with the opinion. As previously announced, in September 1993 the Kentucky Supreme Court denied Liberty Bank's motion for discretionary review of the Kentucky Court of Appeals decision. In October 1993, Liberty paid the sum of $4,202,458 in damages and $2,007,542 for interest on that amount to settle the matter. Liberty accrued and charged to operations the settlement amount in the third quarter of 1993. All related federal court proceedings were settled at no additional expense to Liberty. See note 13 to Liberty's consolidated financial statements included in Liberty's annual report to stockholders for the year ended December 31, 1993 which is incorporated herein by reference, for additional information relating to legal proceedings.\nITEM 4.","section_4":"ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS\nNone.\nEXECUTIVE OFFICERS OF THE REGISTRANT\nThe following paragraphs set forth, for each executive officer of Liberty as of March 1, 1994, each person's name, age, position, business experience during the past five years, and the year the person first became an officer of Liberty or its predecessor. There are no family relationships among executive officers. Kathryn Ross Arterberry, age 37, is Assistant Secretary, Executive Vice President and General Counsel of Liberty Bank and Assistant Secretary and, since 1992, General Counsel of Liberty; she first became an officer of Liberty Bank in 1988, and served as Senior Vice President of Liberty Bank through 1993. John F. Barron, age 42, is Assistant Treasurer of Liberty and Senior Vice President and Assistant Comptroller of Liberty Bank: he first became an officer of Liberty Bank in 1978. Paul E. Bleuel, Jr., age 50, is Senior Vice President and Corporate Planning Officer of Liberty and Executive Vice President of Liberty Bank; he first became an officer of Liberty Bank in 1971. Malcolm B. Chancey, Jr., age 62, is Chairman of the Board, President and Chief Executive Officer of Liberty and Chairman of the Board and Chief Executive Officer of Liberty Bank; he first became an officer of Liberty Bank in 1968. Elisabeth Y. Clark, age 44, is Executive Vice President of Liberty Bank; she first became an officer of Liberty Bank in 1980, and served as Senior Vice President from 1984 through 1993. R. Helm Dobbins, age 42, is Executive Vice President of Liberty Bank; he first became an officer of Liberty Bank in 1978, and served as Senior Vice President from 1981 through 1992. Nathan B. Evans, age 42, is Senior Vice President and Director of Credit Review of Liberty and Senior Vice President of Liberty Bank; he first became an officer of Liberty Bank in 1979. Theodore R. Frith, age 51, is Executive Vice President of Liberty Bank; he first became an officer of Liberty Bank in 1970. Richard R. Galaty, age 49, is Executive Vice President of Liberty Bank; he was Senior Loan Administrator of Union Bank in Los Angeles, California, from 1981 to 1989; Senior Credit Administrator of First Interstate Bancorp in Los Angeles from 1989 to 1991; and Chief Credit Officer of First Interstate Bank in Denver, Colorado, from 1991 to 1993, when he joined Liberty Bank. Terry D. Gardner, age 43, is Senior Vice President of Liberty Bank and, since 1993, Senior Vice President and Auditor of Liberty and Senior Auditor\nof Liberty Bank; he first became an officer of Liberty Bank in 1987 and served as Auditor of Liberty Bank through 1993. Maria I. Gerwing, age 46, is Executive Vice President of Liberty Bank; she first became an officer of Liberty Bank in 1974, and served as Senior Vice President from 1979 through 1991. R. K. Guillaume, age 50, is Executive Vice President of Liberty and President of Liberty Bank; he first became an officer of Liberty Bank in 1968. Ronald M. Holt, age 46, has served as Executive Vice President of Liberty Bank since 1990; he served as Director and Executive Vice President of First American Trust Company in Nashville, Tennessee from 1986 until 1990, when he joined Liberty Bank. John P. Knight, Jr., age 49, is Executive Vice President of Liberty Bank; he first became an officer of Liberty Bank in 1969, and served as Senior Vice President from 1978 through 1991. James T. McKenzie, age 44, is Executive Vice President of Liberty Bank; he first became an officer of Liberty Bank in 1972, and served as Senior Vice President of Liberty Bank through 1993. Carl R. Page, age 45, is Secretary of Liberty and Liberty Bank and Executive Vice President of Liberty Bank; he first became an officer of Liberty Bank in 1976. Bruce W. Raque, age 41, is Assistant Treasurer and Tax Officer of Liberty and is Senior Vice President and Assistant Comptroller of Liberty Bank; he first became an officer of Liberty Bank in 1981. W. LeGrande Rives, age 53, is Executive Vice President of Liberty Bank; he first became an officer of Liberty Bank in 1989. Jack H. Shipman, age 57, is Executive Vice President of Liberty and Liberty Bank; he first became an officer of Liberty Bank in 1970. Hugh M. Shwab III, age 56, is Executive Vice President of Liberty Bank; he first became an officer of Liberty Bank in 1970. John Y. Van Bibber, age 63, is Executive Vice President of Liberty Bank; he first became an officer of Liberty Bank in 1964. Carl E. Weigel, age 62, is Treasurer and Chief Financial Officer of Liberty, Executive Vice President and Comptroller of Liberty Bank and has served since 1990 as Cashier of Liberty Bank; he first became an officer of Liberty Bank in 1974. Russell B. Zaino, age 45, is Senior Vice President and Chief Regulations Compliance Officer of Liberty and Senior Vice President of Liberty Bank; he first became an officer of Liberty Bank in 1976. Kevin M. Zemanski, age 35, is Credit Policy Adminstration\/Consumer Compliance Officer of Liberty, served from 1988 to 1992 as Consumer Compliance Officer of Liberty, and is Senior Vice President of Liberty Bank; he first became an officer of Liberty Bank in 1986.\nPART II\nITEM 5.","section_5":"ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS\nThe information captioned \"Market Data\" included on page 14 of Liberty's annual report to stockholders for the year ended December 31, 1993 is incorporated herein by reference.\nITEM 6.","section_6":"ITEM 6. SELECTED FINANCIAL DATA\nThe information captioned \"Consolidated Selected Financial Data\" included on page 14 of Liberty's annual report to stockholders for the year ended December 31, 1993 is incorporated herein by reference.\nITEM 7.","section_7":"ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS\nThe Management's Discussion and Analysis included on pages 4 through 13 of Liberty's annual report to stockholders for the year ended December 31, 1993 is incorporated herein by reference.\nITEM 8.","section_7A":"","section_8":"ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA\nThe following consolidated financial statements of Liberty and report of independent auditors included on pages 16 through 35 in Liberty's annual report to stockholders for the year ended December 31, 1993 are incorporated herein by reference:\nConsolidated balance sheet\nConsolidated statement of income Consolidated statement of changes in stockholders' equity Consolidated statement of cash flows Notes to consolidated financial statements Report of independent auditors\nThe information captioned \"Quarterly Results of Operations\" included on page 15 of Liberty's annual report to stockholders for the year ended December 31, 1993 is incorporated herein by reference.\nITEM 9.","section_9":"ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE\nNone.\nPART III\nITEM 10.","section_9A":"","section_9B":"","section_10":"ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT\nThe information appearing in the section entitled \"Board of Directors and Executive Officers\" in Liberty's Proxy Statement is incorporated herein by reference. In addition, information with respect to Liberty's executive officers is contained in Part I of this report.\nITEM 11.","section_11":"ITEM 11. EXECUTIVE COMPENSATION\nThe information appearing in the section entitled \"Executive Compensation\" in Liberty's Proxy Statement is incorporated herein by reference.\nITEM 12.","section_12":"ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT\nThe information appearing in the sections entitled \"Principal Shareholders\" and \"Board of Directors and Executive Officers\" in Liberty's Proxy Statement is incorporated herein by reference.\nITEM 13.","section_13":"ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS\nThe information appearing in the section entitled \"Board of Directors and Executive Officers\" in Liberty's Proxy Statement is incorporated herein by reference.\nPART IV\nITEM 14.","section_14":"ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K\n(a) (1) List of Financial Statements filed\nThe following consolidated financial statements of Liberty and report of independent auditors included in Liberty's annual report to stockholders for the year ended December 31, 1993 were incorporated by reference in Part II, Item 8 of this report:\nConsolidated balance sheet Consolidated statement of income Consolidated statement of changes in stockholders' equity Consolidated statement of cash flows Notes to consolidated financial statements Report of independent auditors\n(a) (2) List of Financial Statement Schedules filed\nSchedules to the consolidated financial statements required by Article 9 of Regulation S-X are not required under the related instructions or are inapplicable and therefore have been omitted.\n(a) (3) List of Exhibits filed\n(3.1) Liberty's Amended and Restated Articles of Incorporation are incorporated herein by reference to Exhibit (3) to Liberty's Quarterly Report on Form 10-Q for the quarter ended March 31, 1993.\n(3.2) Liberty's Bylaws are incorporated herein by reference to Exhibit (3) (b) to Liberty's Annual Report on Form 10-K for the year ended December 31, 1988.\n(4.1) Rights Agreement dated August 19, 1992, between Liberty National Bancorp, Inc., and Chemical Bank is incorporated by reference to Exhibits 4 and 10.1 to Liberty's Current Report on Form 8-K dated August 19, 1992.\n(4.2) First Amendment dated as of November 2, 1993, to the Rights Agreement dated August 19, 1992, between Liberty National Bancorp, Inc., and Chemical Bank is incorporated by reference to Exhibit 4.1 to Liberty's Current Report on Form 8-K dated November 2, 1993.\n(4.3) Instruments defining the rights of holders of long-term debt of Liberty and its subsidiaries are not filed as Exhibits because the amount of debt under each instrument is less than 10% of the consolidated assets of Liberty. Liberty undertakes to file these instruments with the United States Securities and Exchange Commission (the \"Commission\") upon request.\n(10.1) Liberty National Bank and Trust Company Compensation Deferral Plan is incorporated herein by reference to Exhibit (10.1) to Liberty's Quarterly Report on Form 10-Q for the quarter ended March 31, 1993.\n(10.2) Liberty National Bank and Trust Company Excess Benefit Plan is incorporated herein by reference to Exhibit (10.2) to Liberty's Quarterly Report on Form 10-Q for the quarter ended March 31, 1993.\n(10.3) Liberty National Bancorp, Inc., Management Incentive Compensation Plan amended and restated as of January 1992 is incorporated herein by reference to Exhibit (10) (c) to Liberty's Annual Report on Form 10-K for the year ended December 31, 1991.\n(10.4) Amendment No. 1 to Liberty National Bancorp, Inc., Management Incentive Compensation Plan, as amended and restated as of January 1992, as amended as of December 1993 is incorporated herein by reference to Exhibit 10.5 to Liberty's Form S-8 Registration Statement No. 33-52275.\n(10.5) Form of Officer Compensation Continuation Agreement between Liberty and certain officers of Liberty and the Banks, as amended, is incorporated herein by reference to Exhibit (10) (e) to Liberty's Annual Report on Form 10-K for the year ended December 31, 1989.\n(10.6) Credit Agreement dated as of June 18, 1992 among Liberty National Bancorp, Inc., and The Chase Manhattan Bank (National Association), as Initial Bank and Agent, is incorporated herein by reference to Exhibit (10) to Liberty's Quarterly Report on Form 10-Q for the quarter ended June 30, 1992.\n(10.7) Liberty National Bancorp, Inc., 1986 Stock Option Plan As Amended and Restated as of January 10, 1990, and as further Amended February 16, 1993, is incorporated herein by reference to Exhibit (10) (f) to Liberty's Annual Report on Form 10-K for the year ended December 31, 1992.\n(10.8) First Federal Savings Bank 1992 Stock Option Plan is incorporated herein by reference to Exhibit 10.1 to Liberty's Form S-8 Registration Statement No. 33-52275.\n(11) Statement regarding the computation of per share earnings.\n(13) Portions of the annual report to stockholders for the year ended December 31, 1993 which are expressly incorporated by reference in this filing.\n(21) Subsidiaries of Liberty.\n(23) Consent of Coopers & Lybrand.\n(99.1) Annual report on Form 11-K for The Liberty 1992 Restated Thrift Plan for the year ended December 31, 1993, as authorized by\nRule 15d-21. Plan financial statements are filed in paper under cover of Form SE, as allowed by Rule 311 of Regulation S-T.\n(99.2) Undertakings.\n(b) Reports on Form 8-K\nLiberty filed the following report on Form 8-K during the three month period ended December 31, 1993:\nA Form 8-K dated November 2, 1993 was filed with the Commission relating to the announcement by Liberty and BANC ONE CORPORATION that they have signed an agreement for the merger of Liberty with an affiliate of BANC ONE CORPORATION.\n(c) Exhibits\nThe exhibits listed in response to Item 14(a)(3) are filed as part of this report.\n(d) Financial Statement Schedules\nNone.\nSIGNATURES\nPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Liberty has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.\nLIBERTY NATIONAL BANCORP, INC. (Registrant)\nMarch 16, 1994 By: \/s\/ MALCOLM B. CHANCEY, JR. --------------------------- MALCOLM B. CHANCEY, JR. Chairman of the Board, President and Chief Executive Officer\nPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of Liberty and in the capacities and on the dates indicated.\nChairman of the Board, President and Director (Principal \/s\/ MALCOLM B. CHANCEY, JR. Executive Officer) March 16, 1994 - --------------------------- Malcolm B. Chancey, Jr.\nExecutive Vice President \/s\/ R. K. GUILLAUME and Director March 16, 1994 - --------------------------- R. K. Guillaume\nTreasurer (Principal Financial \/s\/ CARL E. WEIGEL and Accounting Officer) March 16, 1994 - --------------------------- Carl E. Weigel\n\/s\/ JOHN F. BARRON Assistant Treasurer March 16, 1994 - --------------------------- John F. Barron\n\/s\/ STANLEY S. DICKSON Director March 16, 1994 - --------------------------- Stanley S. Dickson\n\/s\/ C. H. DISHMAN III Director March 16, 1994 - --------------------------- C. H. Dishman III\n\/s\/ WALLACE H. DUNBAR Director March 16, 1994 - --------------------------- Wallace H. Dunbar\n\/s\/ OWSLEY BROWN FRAZIER Director March 16, 1994 - --------------------------- Owsley Brown Frazier\n\/s\/ GEORGE E. GANS III Director March 16, 1994 - --------------------------- George E. Gans III\nDirector March , 1994 - --------------------------- George N. Gill\nDirector March , 1994 - --------------------------- Frank B. Hower, Jr.\n\/s\/ NANCY LAMPTON Director March 16, 1994 - --------------------------- Nancy Lampton\n\/s\/ LEONARD E. LYLES Director March 16, 1994 - --------------------------- Leonard E. Lyles\n\/s\/ MARTIN S. MARGULIS Director March 16, 1994 - --------------------------- Martin S. Margulis\n\/s\/ JAMES W. MCDOWELL, JR. Director March 16, 1994 - --------------------------- James W. McDowell, Jr.\n\/s\/ JOHN C. NICHOLS II Director March 16, 1994 - --------------------------- John C. Nichols II\n\/s\/ GOUVERNEUR H. NIXON Director March 16, 1994 - --------------------------- Gouverneur H. Nixon\n\/s\/ JOSEPH W. PHELPS Director March 16, 1994 - --------------------------- Joseph W. Phelps\n\/s\/ CYRUS S. RADFORD, JR. Director March 16, 1994 - --------------------------- Cyrus S. Radford, Jr.\n\/s\/ MAX L. SHAPIRA Director March 16, 1994 - --------------------------- Max L. Shapira\n\/s\/ ROBERT L. TAYLOR Director March 16, 1994 - --------------------------- Robert L. Taylor EXHIBIT INDEX","section_15":""}
{"filename":"108703_1993.txt","cik":"108703","year":"1993","section_1":"ITEM 1. BUSINESS\nGENERAL\nWyman-Gordon Company, founded in 1883, is a leading producer of highly engineered, technically advanced components, primarily for the aerospace industry. The Company uses forging and investment casting technologies to produce components to exacting customer specifications for demanding applications such as jet turbine engines and airframes. The Company also designs and produces prototype products using composite technologies.\nJET ENGINE COMPONENTS\nThe Company manufactures numerous forged and cast components for jet engines for both commercial and defense aircraft produced by all of the major manufacturers, including General Electric, Pratt & Whitney, Rolls-Royce and CFM International. The Company's forged engine parts include fan discs, compressor discs, turbine discs, seals, spacers and cases. Cast engine parts include thrust reversers, valves and fuel system parts such as combustion chamber swirl guides. Jet engines may produce in excess of 100,000 pounds of thrust and may subject parts produced by the Company to temperatures reaching 1,350oF. Components for such extreme conditions require precision manufacturing and expertise with high-purity titanium and nickel-based superalloys. Rotating parts such as fan, compressor and turbine discs must be manufactured to precise quality specifications.\nAIRFRAME STRUCTURAL COMPONENTS\nThe Company manufactures forged and cast structural parts for fixed-wing aircraft and helicopters. These products include wing spars, engine mounts, struts, landing gear beams, landing gear, wing hinges, wing and tail flaps, housings, and bulkheads. These parts may be made of titanium, steel, aluminum and other alloys, as well as composite materials. The Company also produces dynamic rotor forgings for helicopters. Forging is particularly well-suited for airframe parts because of its ability to impact greater proportional strength to metal than other manufacturing processes. Investment casting can produce complex shapes to precise, repeatable dimensions.\nThe Company has been a major supplier for many years of the beams that support the main landing gear assemblies on the Boeing 747 and has begun shipment of main landing gear beams for the new Boeing 777 widebody. The Company forges landing gear and other airframe structural components for the Boeing 747, 757, 767 and 777, the McDonnell Douglas MD-11 and the Airbus A330 and A340. The Company produces structural forgings for the, and fighter aircraft and the Sikorsky Black Hawk helicopter. The Company also produces large, one-piece bulkheads for Lockheed and Boeing for the new advanced tactical fighter.\nOTHER PRODUCTS\nThe Company produces steam turbine and gas turbine generator components for land-based power generation applications. The Company also manufactures shafts, cases, compressor and turbine discs for marine gas turbines. The Company's investment castings operations produces components for medical devices, power equipment, food processing equipment, land-based military equipment such as tanks, and various other applications. The Company derived approximately 5% of its 1993 and 1992 revenues from sales of non-aerospace products. In 1992, the Company received preliminary vendor qualification to provide components to a major producer of land-based gas turbines. The Company expects to receive final vendor qualifications in the second quarter of 1994 and has received an order to produce those components beginning in 1994.\nMARKETS\nCOMMERCIAL AEROSPACE\nThe Company manufactures high-technology forged and cast products for virtually all models of commercial aircraft produced. Forged and investment cast parts include a wide variety of components for both the jet engines and structural airframes of these aircraft. The Company's composite operation designs and produces aerospace prototypes. The Company also produces products utilized in general aviation and business jet aircraft.\nDEFENSE EQUIPMENT\nThe Company is a supplier to builders of military aircraft and missiles, manufacturing forged and investment cast components for jet engines as well as structural components and systems for defense and defense related industries. The Company manufactures fan, compressor and turbine discs, seals and spacers for jet engines, structural components such as aluminum, steel and titanium bulkheads for military aircraft and various fittings, spars and landing gear components. The Company also produces weapon cases for missiles and rockets. For naval defense applications, the Company manufactures components for nuclear propulsion plants, as well as pump, valve, structural and non-nuclear propulsion forgings.\nOTHER MARKETS\nThe Company also participates in a number of other markets, principally in the nuclear and non-nuclear power generation, marine and food processing industries. The Company is actively seeking to identify alternative applications for its capabilities, such as in the automotive and other commercial markets.\nCUSTOMERS\nThe Company has approximately 100 active customers that purchase forgings, approximately 425 active customers that purchase investment castings and approximately ten active customers that purchase composite structures. The Company's principal customers are similar across all of these production processes. Five customers, General Electric Company, United Technologies Corporation (principally its Pratt & Whitney Division), Boeing Company, McDonnell Douglas Corporation and Mitsui & Company U.S.A., accounted for approximately 54% of the Company's revenues during 1993 and approximately 53% of the Company's revenues during 1992. General Electric and United Technologies each accounted for more than 10% of revenues for 1993 and 1992.\nThe Company has organized its operations into product groups which focus on specific customers or groups of customers with similar needs. The Company has become actively involved with its aerospace customers through joint development relationships and cooperative research and development, engineering, quality control, just-in-time inventory control and computerized design programs. This involvement begins with the design of the tooling and processes to manufacture the customer's components to its precise specifications.\nThe Company increasingly participates with its customers in joint development projects. The Company's plasma arc melting (\"PAM\") unit is being developed in cooperation with General Electric Company in order to develop new processing techniques and materials, including alloys for use in components for the new GE90 jet engine. In addition, General Electric has contracted with the Company to produce tooling for several components for the GE90 engine. Another customer partnership involves the creation of a joint venture with Pratt & Whitney and Australian investors to produce aerospace grade, nickel-based superalloy ingot in Perth, Australia. Pratt & Whitney has committed to purchase a portion of the joint venture's output, and the Company anticipates that a part of such commitment will be satisfied through orders of forgings produced by the Company.\nMARKETING AND SALES\nThe Company markets its products principally through its own sales engineers and makes only limited use of manufacturers' representatives. Substantially all sales are made directly to original equipment manufacturers.\nThe Company's sales are not subject to significant seasonal fluctuations, although production in the third quarter normally tends to be somewhat less than that of other quarters as a result of scheduled plant shutdowns.\nA substantial portion of the Company's revenues is derived from long-term, fixed price contracts with major engine and aircraft manufacturers. These contracts are typically \"requirements\" contracts under which the purchaser commits to purchase a given portion of its requirements of a particular component from the Company. Actual purchase quantities are typically not determined until shortly before the year in which products are to be delivered.\nBACKLOG\nThe decreased level of backlog at December 31, 1993 is attributable primarily to (1) continuing lower levels of demand in the commercial aerospace and defense equipment markets, (2) the inclusion at December 31, 1992 of backlog of approximately $12.9 million related to the Company's Wyman-Gordon Composites, Inc. operation which was sold in November 1993 and (3) the continued effect of the implementation of just-in-time delivery schedules by customers.\nAt December 31, 1993 approximately $153.0 million of total backlog was scheduled to be shipped within one year and the remainder in subsequent years, although there can be no assurances that products ordered will not be subject to schedule changes.\nThe decreased level of backlog at December 31, 1992 is attributable primarily to (1) delays by the Company's two largest engine component customers releasing long-term supply agreements to their supplier base, (2) more rapid production cycle times which require shorter lead order times and (3) the implementation of just-in-time delivery schedules by customers.\nMANUFACTURING PROCESSES\nThe Company employs three manufacturing processes: forging, investment casting and composites production.\nFORGING\nForging is the process by which desired shapes, metallurgical characteristics, and mechanical properties are imparted to metal by heating and shaping it through hammering, pressing or ring-rolling. The Company forges alloys of titanium, aluminum and steel as well as high temperature nickel-based superalloys.\nThe Company manufactures most of its forged aerospace components at its facilities in Grafton and Worcester, Massachusetts (although the Company continues to consolidate its forging operations at the Grafton facility). The Company has three large closed- die hydraulic forging presses rated at 18,000, 35,000 and 50,000 tons, an open-die cogging press rated at 2,000 tons and a hydraulic isothermal forging press rated at 8,000 tons. The Company also operates forging hammers rated up to 35,000 pounds, a 220-ton ring- roll and supporting facilities. The Company employs all major forging processes, including the following:\nOpen-Die Forging. In this process, the metal is forged between dies that never completely surround the metal, thus allowing the metal to be observed during the process. Typically, open-die forging is used to create relatively simple, preliminary shapes.\nClosed-Die Forging. Closed-die forging involves hammering or pressing heated metal into the required shapes and size determined by machined impressions in specially prepared dies which exert three dimensional control on the metal. In hot-die forging, a type of closed-die process, the dies are heated to a temperature approaching the transformation temperature of the materials being forged so as to allow the metal to flow more easily within the die cavity, which enhances the repeatability of the part shapes and allows greater metallurgical control. Both titanium and nickel-based superalloys are forged using this process, in which the dies are heated to a temperature of approximately 1,300oF.\nIsothermal Forging. Isothermal forging is a closed-die process in which the dies are heated to the same temperature as the metal being forged, typically in excess of 1,900oF. The forged material typically consists of nickel-based superalloy powders. Because of the extreme temperatures necessary for forming these alloys, the dies must be made of refractory metal (such as molybdenum) so that the die retains its strength and shape during the forging process. Because the dies may oxidize at these elevated temperatures, the forging process is carried on in a vacuum or inert gas atmosphere. The Company's isothermal press also allows it to produce near-net shape components (requiring less machining by the customer) made from titanium alloys, which can be an important competitive advantage in times of high titanium prices. The Company carries on this process in its 8,000-ton isothermal press.\nRing-Rolling. This process, conducted on the Company's 220-ton ring-roll, involves rotating heated metal rings between two rotating rolls to produce seamless metal rings for use as seals, cases, spacers and similar parts for jet turbine engines. The Company can produce rings up to 80 inches in diameter and 20 inches in height.\nTitanium and Superalloy Production. The Company has backward-integrated into the manufacturing of raw materials used in its forging processes. In 1987 the Company began to cast titanium scrap and \"sponge\" into ingot and convert the ingot to billet by forging the ingot in its forging presses. Such billet may be used as raw material for the Company's forgings or may be converted or sold for other uses. The Company markets titanium ingots, billets, engineered mults and open-die forgings for use outside the Company's forging activities. The Company's PAM unit produces high quality titanium and can also be modified for the manufacture of nickel-based superalloy powders through an atomization process. The Company expects that the PAM unit will be certified by certain customers for the manufacture of some of their components in late 1994 and will thereafter produce the high-purity materials required for future high performance jet engines. The Company entered into a joint venture with Pratt & Whitney and certain Australian investors to produce nickel-based superalloy ingots in Perth, Australia. The Company expects that these ingots will be utilized as raw materials for the Company's forging and casting products. See \"Business - Customers\".\nSupport Operations. The Company manufactures its own forging dies out of high-strength steel and molybdenum. These dies can weigh in excess of 100 tons and can be up to 25 feet in length. In manufacturing its dies, the Company takes its customers' drawings and engineers the dies using CAD\/CAM equipment and sophisticated metal flow computer models that simulate metal flow during the forging process. This activity improves die design and process control and permits the Company to enhance the metallurgical characteristics of the forging. The Company also has a large machine shop with computer aided profiling equipment, vertical turret lathes and other equipment that it employs to rough machine products to a shape required to allow inspection of the products. The Company also operates rotary and car-bottom heat treating furnaces that enhance the performance characteristics of the forgings. These furnaces have sufficient capacity to handle all the Company's forged products. The Company subjects its products to extensive quality inspection and contract qualification procedures involving zyglo, chemical etching, ultrasonic, red dye, and electrical conductivity testing facilities.\nINVESTMENT CASTINGS\nThe Company's investment castings operations use modern, automated, high volume production equipment and both air-melt and vacuum-melt furnaces to produce a wide variety of complex investment castings. Castings are made of a range of metal alloys including aluminum, magnesium, steel, titanium and nickel-based superalloys.\nThe Company's castings operations are conducted in facilities located in Connecticut, New Hampshire, Nevada and California. These plants house air and vacuum-melt furnaces, wax injection machines and investment dipping tanks. The Company's Groton, Connecticut facility was recently expanded to produce high quality titanium castings.\nInvestment castings are produced in four major stages. First, aluminum molds, known as \"tools,\" are fabricated in the shape of the component to the specifications of the customer. Tools are primarily purchased from outside die makers, although the Company maintains internal tool-making capabilities. Wax is injected into the mold from a heated reservoir to form a \"pattern.\" In the second stage, the wax patterns are mechanically coated with a sand and silicate-bonded slurry. This forms a ceramic shell which is subsequently air-dried under controlled environmental conditions. The wax inside this shell is then melted and removed in a high temperature steam autoclave and the molten wax is recycled. In the third, or foundry stage, metal is melted in an electric furnace in either an air or vacuum environment and poured into the ceramic shell. After cooling, the ceramic shells are removed by vibration. The metal parts are then cleaned in a high temperature caustic bath, followed by water rinsing. In the fourth, or finishing stage, the castings are finished to remove excess metal. The final product then undergoes a lengthy series of inspections (radiography, fluorescent penetrant, magnetic particle and dimensional) to ensure quality and consistency.\nCOMPOSITES\nThe Company's composites operation, Scaled Composites, Inc., designs, fabricates and tests prototypes for aerospace, automotive and other customers. These customers include Lawrence Livermore Laboratories, Orbital Sciences Corp. and McDonnell Douglas. In November 1993, the Company sold substantially all of the net assets and business operations of its Wyman-Gordon Composites, Inc. operations. Accordingly, such operations are not included in the above discussion.\nRAW MATERIALS\nRaw materials used by the Company in its forgings and castings include alloys of titanium, nickel, steel, aluminum and other high-temperature alloys. The composites operation uses high strength fibers such as fiberglass or graphite, as well as materials such as foam and epoxy, to fabricate composite structures. The major portion of metal requirements for forged and cast products are purchased from major non-ferrous metal suppliers producing forging and casting quality material as needed to fill customer orders. The Company has two or more sources of supply for all significant raw materials. The Company satisfies some of its titanium requirements internally by producing titanium alloy from titanium scrap and \"sponge.\" The Company's PAM unit will also produce high quality titanium and advanced nickel alloys.\nThe titanium and nickel-based superalloys utilized by the Company have a high dollar value. Accordingly, the Company attempts to recover and recycle scrap materials such as machine turnings, forging flash, scrapped forgings, test pieces and casting sprues, risers and gates.\nIn the event of customer cancellation, the Company may, under certain circumstances, obtain reimbursement from the customer if the material cannot be diverted to other uses. Costs of material already on hand, along with any conversion costs incurred, have generally been billed to the customer unless transferable to another order.\nENERGY USAGE\nThe Company is a large consumer of energy. Energy is required primarily for heating materials to be forged and cast, melting of ingots, heat-treating materials after forging and casting, operating forging hammers, forging presses, melting furnaces, ring-rolls, die-sinking, mechanical manipulation and pollution control equipment and space heating. The Company uses natural gas, oil and electricity in varying amounts at its manufacturing facilities. In recent years, the Company's production facilities experienced no energy shortages which caused them to curtail their operations.\nEMPLOYEES\nAs of December 31, 1993, the Company had 1,853 employees of whom approximately 612 were executive, administrative, engineering, research, sales and clerical and 1,241 production and craft. Approximately 44% of the production and craft employees, consisting of employees in the forging business, are represented by a union. In April 1992, the Company entered into a new three year collective bargaining agreement with the forging operation's employees.\nRESEARCH AND PATENTS\nThe Company maintains a research and development center at Millbury, Massachusetts which is engaged in applied research and development work primarily relating to the Company's forging operations. The Company works closely with customers, universities and government technical agencies in developing advanced forging materials and processes. The Company's composites operation conducts research and development related to aerospace composite structures at the Mojave, California facility. The Company expended approximately $2.8 million on applied research and development work during 1993. Although the Company owns patents covering certain of its processes, the Company does not consider that these patents are of material importance to the Company's business as a whole. All of the Company's products are manufactured to customer specifications and, consequently, there are no proprietary products.\nCOMPETITION\nMost of the Company's production capabilities are possessed in varying degrees by other companies in the industry, including both domestic and foreign manufacturers. Competition is intense among the companies currently involved in the industry. Competitive advantages are afforded to those with high quality products, low cost manufacturing, excellent customer service and delivery and engineering and production expertise.\nENVIRONMENTAL REGULATIONS\nThe Company is subject to extensive, stringent and changing federal, state and local environmental laws and regulations, including those regulating the use, handling, storage, discharge and disposal of hazardous substances and the remediation of alleged environmental contamination. Accordingly, the Company is involved from time to time in administrative and judicial inquiries and proceedings regarding environmental matters. Nevertheless, the Company believes that compliance with these laws and regulations will not have a material adverse effect on the Company's operations as a whole. The Company continues to design and implement a system of programs and facilities for the management of its raw materials, production processes and industrial waste to promote compliance with environmental requirements. In the fourth quarter of 1991, the Company recorded a pre-tax charge of $7.0 million with respect to environmental investigation and remediation costs at the Grafton facility and a pre-tax charge of $5.0 million against potential environmental remediation costs upon the eventual sale of the Worcester facility. Pursuant to an agreement entered into with the U.S. Air Force upon the acquisition of the Grafton facility from the federal government in 1982, the Company has agreed to make additional expenditures of approximately $10.1 million for environmental management and remediation projects at that site during the period 1992 through 1999, including $4.4 million for new waste water treatment facilities\nto be constructed during 1993 and 1994 in accordance with an administrative compliance order entered into with the United States Environmental Protection Agency (the \"EPA\"). The Company, together with numerous other parties, has also been alleged to be a potentially responsible party (\"PRP\") at the following four federal or state superfund sites: Operating Industries, Monterey Park, California; Cedartown Municipal Landfill, Cedartown, Georgia; PSC Resources, Palmer, Massachusetts; and the Gemme site, Leicester, Massachusetts. The Company believes that any liability it may incur with respect to these sites will not be material. In view of the relatively small number of PRP's identified at the Gemme site, the possibility exists that the Company could ultimately be liable for remediation costs in excess of its pro rata share of the wastes disposed of at that site. Preliminary engineering studies of the potential remediation costs associated with this site estimate that such costs could range from $0.5 million to $9.9 million depending on the levels of toxicity ultimately found and the method or methods of remediation selected. No allocation of liability has yet been agreed upon by the PRPs.\nThe Company's Grafton, Massachusetts plant location is one of 46 sites throughout the country included in the U.S. Nuclear Regulatory Commission's (\"NRC\") May 1992 Site Decommissioning Management Plan (\"SDMP\") for low-level radioactive waste. The SDMP identifies the Company's site as a \"Priority C\" (lowest priority) site. The NRC conducted a long-range dose assessment in 1992 to determine what action, if any, it would order with respect to the site; its draft report states that the site should be remediated. However, the Company believes that the NRC's draft assessment was flawed and has retained an environmental engineering firm to challenge that draft assessment. The Company has submitted the environmental engineering firm's Dose Assessment Review to the NRC for consideration but has had no response from the NRC to date. The Company has provided $1.5 million for the estimated cost of the remediation. The Company believes that it may have meritorious claims for reimbursement from the U.S. Air Force in respect of any liabilities it may have for such remediation.\nPRODUCT LIABILITY EXPOSURE\nThe Company produces many critical engine and structural parts for commercial and military aircraft. As a result, the Company faces an inherent business risk of exposure to product liability claims. The Company maintains insurance against product liability claims, but there can be no assurance that such coverage will continue to be available on terms acceptable to the Company or that such coverage will be adequate for liabilities actually incurred. The Company has not experienced any material loss from product liability claims and believes that its insurance coverage is adequate to protect it against any claims to which it may be subject.\nLEGAL PROCEEDINGS\nAt December 31, 1993, the Company was involved in certain legal proceedings arising in the normal course of its business. The Company believes the outcome of these matters will not have a material adverse effect on the Company.\nIn December 1992, the Company made a number of modifications to the Company's retiree health plans to limit the Company's obligations thereunder. In 1993, two separate class action suits were filed by certain retirees from the Company's Massachusetts and Michigan facilities contesting the Company's actions. The Company believes that it has meritorious defenses to these lawsuits and intends to defend its actions vigorously. The Company further believes that the outcome of this litigation will not have a material adverse effect on the Company.\nEXECUTIVE OFFICERS OF THE REGISTRANT\nJohn M. Nelson was elected Chairman and Chief Executive Officer of the Company in May 1991. On the date of the Special Meeting to be held in lieu of the 1993 Annual Meeting of Shareholders of the Company, Mr. Nelson will turnover his duties as Chief Executive Officer to David P. Gruber, currently the President and Chief Operations Officer, but will continue as Chairman of the Board of Directors. Prior to election to his present position, he served for many years in a series of executive positions with Norton Company, a manufacturer of abrasives and ceramics based in Worcester, Massachusetts, and was Norton's Chairman and Chief Executive Officer from 1988 to 1990 and its President and Chief Operating Officer from 1986 to 1988. Mr. Nelson is also a Director of Brown & Sharpe Manufacturing Company, Cambridge Biotechnology, Inc., TSI Corporation, Commerce Holdings, Inc. and the TJX Companies, Inc., Vice President of the Worcester Art Museum and Chairman of the Worcester Area Chamber of Commerce.\nDavid P. Gruber was elected President and Chief Operating Officer of the Company in October 1991 and was elected a Director of the Company in August 1992. Mr. Gruber will become President and Chief Executive Officer of the Company on the date of the Special Meeting to be held in lieu of the 1993 Annual Meeting of Shareholders of the Company. Prior to joining the Company, Mr. Gruber served as Vice President, Advanced Ceramics, of Compagnie de Saint Gobain (which acquired Norton Company in 1990), a position he held with Norton Company since 1987. Mr. Gruber previously held various executive and technical positions with Norton Company since 1978.\nLuis E. Leon joined the Company as Vice President-Treasurer in May 1991. In May 1993, he was elected Vice President - Finance and Treasurer. Prior to joining the Company, he had served since 1986 as Treasurer of Milton Roy Company, a manufacturer of fluid control products. From 1983 to 1986 he served as Manager of Treasury Operations of Kerr-McGee Corporation, a diversified energy company.\nSanjay N. Shah serves as Vice President and Assistant General Manager of the Company's Aerospace Forgings Division. Previously he had served as Vice President - Operations since 1990. He has held a number of research, engineering and manufacturing positions at the Company since joining the Company in 1975.\nWallace F. Whitney, Jr. joined the Company in 1991. Prior to that time, he had been Vice President, General Counsel and Secretary of Norton Company since 1988, where he had been employed in various legal capacities since 1973.\nFrank J. Zugel joined the Company in June 1993 when he was elected Vice President - General Manager, Investment Castings. Prior to that time he had served as President of Stainless Steel Products, Inc., a metal fabricator for aerospace applications, since 1992 and before then as Vice President of Pacific Scientific Company, a supplier of components to the aerospace industry, since 1988.\nNone of the executive officers has any family relationship with any other executive officer. All officers are elected annually.\nITEM 2.","section_1A":"","section_1B":"","section_2":"ITEM 2. PROPERTIES\nThe response to Item 2. - Properties incorporates by reference the paragraphs captioned \"Facilities\" included in Item 1. - Business.\nITEM 3.","section_3":"ITEM 3. LEGAL PROCEEDINGS\nThe response to Item 3. - Legal Proceedings incorporates by reference the paragraphs captioned \"Environmental Regulations\" and \"Legal Proceedings\" included in Item 1. - Business.\nITEM 4.","section_4":"ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS\nThere were no matters submitted to a vote of security holders during the fourth quarter of 1993.\nPART II\nITEM 5.","section_5":"ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS\nThe response to Item 5. - Market for the Registrant's Common Equity and Related Stockholder Matters incorporates by reference the \"Market and Dividend Information\" section of the Company's 1993 Annual Report to Stockholders.\nITEM 6.","section_6":"ITEM 6. SELECTED FINANCIAL DATA\nThe response to Item 6. - Selected Financial Data incorporates by reference the 1989 through 1993 columns of the following lines which are included in the \"Consolidated Ten-Year Financial Review\" section of the Company's 1993 Annual Report: revenue, total assets, long-term debt, income (loss) from continuing operations, net income (loss) per share - continuing operations and dividends paid (per share). Also incorporated by reference is the \"Accounting and Tax Matters\" section of the Company's 1993 Annual Report.\nITEM 7.","section_7":"ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS\nThe response to Item 7. - Management's Discussion and Analysis of Financial Condition and Results of Operations incorporates by reference the \"Management's Discussion\" section of the Company's 1993 Annual Report.\nITEM 8.","section_7A":"","section_8":"ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA\nThe response to Item 8. - Financial Statements and Supplementary Data incorporates by reference the following sections of the Company's 1993 Annual Report:\nConsolidated Statements of Operations and Retained Earnings\nConsolidated Balance Sheets\nConsolidated Statements of Cash Flows\nNotes to Consolidated Financial Statements\nReport of Independent Auditors\nITEM 9.","section_9":"ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE\nOn June 17, 1992, the Company changed its independent accountants from Coopers & Lybrand to Ernst & Young. Cooper & Lybrand's report for the year ended December 31, 1991 contained no adverse opinion, disclaimer or qualification as to uncertainty, audit scope or accounting principles. Through the date of dismissal, there were no disagreements between the Company and Coopers & Lybrand on any matter of accounting principles or practices, financial statement disclosures, or auditing scope or procedures that if not resolved to the satisfaction of Coopers & Lybrand would have caused such firm to make reference thereto in connection with its reports on the financial statements of the Company. The Company's decision to change its independent accountants was approved by the Audit Committee of the Company's Board of Directors and by the full Board.\nPART III\nITEM 10.","section_9A":"","section_9B":"","section_10":"ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT\nThe information regarding executive officers is incorporated by reference to PART I, Item 1. BUSINESS, under the caption \"Executive Officers of the Registrant.\"\nELECTION OF DIRECTORS\nFour directors will be elected at the Special Meeting in lieu of the Annual Meeting of Shareholders (the \"Meeting\") each to hold office until the 1997 annual meeting of shareholders and until his or her successor is elected and qualified. All of the nominees are currently directors of the Company. Unless authority to do so has been withheld or limited in the proxy, it is the intention of the persons named as proxies to vote the Shares to which the proxy relates for the election to the Board of Directors the four nominees listed below. The affirmative vote of a majority of the Shares of common stock, par value $1.00 per share, of the Company (\"Shares\") voting at the Meeting is required for election.\nEdouard C. Thys, a director since 1988, retired from the Company in October 1993 and, in accordance with Company policy regarding employee directors, no longer serves as a member of the Board of Directors.\nNOMINEES FOR THREE-YEAR TERM\nThe following is certain information about the directors of the Company who are standing for reelection at the Meeting.\nRobert G. Foster, age 55, President and Director of Commonwealth BioVentures, Inc., Worcester, Massachusetts (a venture capital company engaged in biotechnology). Director of the Company since 1989. Member of the Management Resources and Compensation Committee. Term expires in 1994. Mr. Foster was President and Chairman of Ventrex Laboratories, Inc. from 1976 to 1987, when he assumed his present position. He is also a Director of United Timber Corp.\nJudith S. King, age 59, Community Volunteer, Personal Investments. Director of the Company since 1990. Member of the Audit, Directors and Management Resources and Compensation Committees. Term expires in 1994. Mrs. King is also a Trustee and Treasurer of the Stoddard Charitable Trust.\nJon C. Strauss, age 54, President of Worcester Polytechnic Institute, Worcester, Massachusetts. Director of the Company since 1989. Member of the Audit and Finance Committees. Term expires in 1994. Prior to assuming his current position in 1985, Dr. Strauss was Chief Administrative Officer at the University of Southern California and, before that, Chief Financial Officer at the University of Pennsylvania. He is a Director of Computervision Corporation, a Regional Director of Shawmut Bank, a Trustee of the Massachusetts Biotechnology Research Institute and a Trustee of The Medical Center of Central Massachusetts.\nCharles A. Zraket, age 70, Adjunct Research Scholar, Kennedy School of Government, Harvard University. Trustee and Former President and Chief Executive Officer of the MITRE Corporation, Bedford, Massachusetts (a not-for-profit corporation engaged in systems engineering and research primarily for United States government departments and agencies). Director of the Company since 1990. Chairman of the Management Resources and Compensation Committee and member of the Directors Committee. Term expires in 1994. Mr. Zraket was President and Chief Executive Officer of the MITRE Corporation from 1986 to 1990 after having served as Executive Vice President and Chief Operating Officer. He is a Director of Bank of Boston, Boston Edison Company, Advanced Photovoltaics Systems, Inc. and Aspect Medical Systems. Mr. Zraket also serves as a Trustee of Northeastern University, Beth Israel Hospital and the Hudson Institute.\nCONTINUING DIRECTORS\nThe following is certain information about the directors of the Company who are continuing in office.\nE. Paul Casey, age 64, Chairman and General Partner, Metapoint Partners, Peabody, Massachusetts (an investment partnership). Director of the Company since 1993. Member of the Audit and Management Resources and Compensation Committees. Term expires in 1996. Mr. Casey established Metapoint Partners in 1988. He served as Vice Chairman of Textron, Inc. from 1986 to 1987 and as Chief Executive Officer and President of Ex-Cell-O Corporation during 1978 to 1986. Mr. Casey is a Director of Comerica, Inc. and Hood Enterprises, Inc. and is a Trustee of the Henry Ford Health Care System.\nWarner S. Fletcher, age 49, Attorney and Director of the law firm of Fletcher, Tilton & Whipple, P.C., Worcester, Massachusetts. Director of the Company since 1987. Chairman of the Finance Committee and member of the Audit Committee. Term expires in 1996. Mr. Fletcher is a Director of Mechanics Bank. He is also Chairman of The Stoddard Charitable Trust and a Trustee of the Fletcher Foundation, the Worcester Foundation for Experimental Biology, the Bancroft School and the Worcester Art Museum.\nM Howard Jacobson, age 60, Senior Advisor, Bankers Trust, New York. Director of the Company since 1993. Member of the Finance and Directors Committees. Term expires in 1996. Mr. Jacobson was for many years Chief Executive Officer, President, Treasurer and a Director of Idle Wild Foods, Inc. until that company was sold in 1986. From 1989 to 1991 he was a Senior Advisor to Prudential Bache Capital Funding. Mr. Jacobson is a Director of Allmerica Property & Casualty Cos. Inc., Immulogic Pharmaceutical Corporation, Stoneyfield Farm, Inc., Cyplex, and Boston Chicken, Inc. He is Chairman of the Board of Trustees of Worcester Polytechnic Institute, Chairman of the Board of Directors of the Foundation of The Medical Center of Central Massachusetts, an Overseer of WGBH\/National Public Broadcasting and a Trustee of the Worcester Foundation for Experimental Biology.\nGeorge S. Mumford, Jr., age 65, Professor, Department of Physics and Astronomy, Tufts University. Director of the Company since 1968. Chairman of the Audit Committee and member of the Finance Committee. Term expires in 1996. Mr. Mumford formerly served as Dean of the Graduate School of Arts and Sciences at Tufts University. He was President and a Director of The Manufacturers Company until 1986, and he is a former member of the Board of Directors of the Council of Graduate Schools in the United States and Past President of the Northeast Association of Graduate Schools.\nRussell E. Fuller, age 67, Chairman of REFCO, INC., Boylston, Massachusetts (a supplier of specialty industrial products). Director of the Company since 1988. Chairman of the Directors Committee and member of the Finance Committee. Term expires in 1995. Mr. Fuller is Chairman and Treasurer of The George F. and Sybil H. Fuller Foundation and a Trustee of The Medical Center of Central Massachusetts. He is also a Trustee of the Massachusetts Biotechnology Research Institute and the Worcester County Horticultural Society.\nJohn M. Nelson, age 62, Chairman and Chief Executive Officer of the Company. Director of the Company since 1991. Member (ex officio) of the Audit, Finance and Directors Committees. Term expires in 1995. Mr. Nelson will become Chairman of the Board of Directors of the Company on the date of the Meeting. He was elected to his present position in May 1991. Prior to that time, he served for many years in a series of executive positions with Norton Company (a manufacturer of abrasives and ceramics) and was that company's Chairman and Chief Executive Officer from 1988 to 1990 and its President and Chief Operating Officer from 1986 to 1988. Mr. Nelson is also a Director of Brown & Sharpe Manufacturing Company, Cambridge Biotechnology, Inc., TSI Corporation, Commerce Holdings, Inc. and the TJX Companies, Inc. He is also President of the Greater Worcester Community Foundation, Vice President of the Worcester Art Museum and Chairman of the Worcester Area Chamber of Commerce. At the time of his election to his present position, Mr. Nelson and the Company entered into an agreement that provides for a five-year term of employment, defined pension benefits upon completion of such term and certain other employee benefits. The agreement also provides for accelerated vesting of stock options and pension benefits and continuation of employee benefits in the event of termination of his employment under specified conditions.\nDavid P. Gruber, age 52, President and Chief Operating Officer of the Company. Director of the Company since 1992. Term expires in 1995. In addition to retaining his present office as President of the Company, Mr. Gruber will become Chief Executive Officer of the Company on the date of the Meeting. He was elected to his current position in October 1991. He was previously employed by Norton Company since 1978 and served as its Vice President, Advanced Ceramics from 1987 to 1991 and Vice President- Coated Abrasives from 1986 to 1987.\nMr. Fletcher and Mrs. King are cousins. None of the other Directors has any family relationships.\nITEM 11.","section_11":"ITEM 11. EXECUTIVE COMPENSATION\nMEETINGS OF THE BOARD\nThe Board of Directors held nine meetings during 1993. Non-employee directors of the Company received annual remuneration of $10,000 for their services plus a fee of $600 for each Board meeting attended. Those non-employee directors who are also members of the Audit, Finance, Management Resources and Compensation or Directors Committees of the Board receive additional compensation of $600 for each Committee meeting attended. Each director attended at least seventy-five percent of the total number of Board and Committee meetings held while he or she served as a director or member of a Committee.\nCOMPENSATION COMMITTEE REPORT\nOVERALL POLICY\nThe Management Resources and Compensation Committee (the \"Committee\") of the Board of Directors is composed entirely of independent outside directors. The Committee is responsible for setting and administering the policies which govern the Company's executive compensation and stock ownership programs.\nThe Company's executive compensation program is designed to be closely linked to corporate performance and return to stockholders. To this end, the Company maintains an overall compensation policy and specific compensation plans that tie a significant portion of executive compensation to the Company's success in meeting specified annual performance goals and to appreciation in the price of Shares. To overall objectives of this strategy are to attract and retain talented executives, to motivate those executives to achieve the goals inherent in the Company's business strategy, to link executive and stockholder interests through equity based incentive plans and, finally, to provide a compensation package that recognizes individual contributions as well as overall business results.\nThe Committee approves the compensation of John M. Nelson, the Company's Chief Executive Officer, and Messrs. Gruber, Leon and Whitney, the three corporate executives who report directly to Mr. Nelson. Each of these officers' compensation is detailed below. The Committee also sets policies in order to ensure consistency throughout the executive compensation program. In reviewing the individual performance of the executives whose compensation is determined by the Committee (other than Mr. Nelson), the Committee takes into account Mr. Nelson's evaluation of their performance.\nThere are three principal elements of the Company's executive compensation program: base salary, annual bonus and stock options. The Committee's policies with respect to each of these elements, including the bases for the compensation awarded to Mr. Nelson, are discussed below. In addition, while the elements of compensation described below are considered separately, the Committee takes into account the full compensation package provided by the Company to the individual, including pension benefits, supplemental retirement benefits, savings plans, severance plans, insurance and other benefits, as well as the programs described below. The Committee did not rely on compensation surveys or the services of consultants in making its determinations regarding compensation amounts or the relative proportions of fixed and variable compensation; rather its decision was based on its own judgment as to the most efficient manner of achieving the Company's compensation objective specified above.\nBASE SALARIES\nBase salaries for new executive officers are initially determined by evaluating the responsibilities of the position held and the experience of the individual, taking into account the competitive marketplace.\nAnnual salary adjustments are determined by evaluating the performance of the Company and of each executive officer, and also take into account changed responsibilities. The Committee, where appropriate, also considers non-financial performance measures such as increase in market share, manufacturing efficiency gains, improvements in product quality and improvements in relations with customers, suppliers and employees.\nMr. Nelson serves as Chief Executive Officer of the Company pursuant to a May 21, 1991 employment agreement. Mr. Nelson's employment agreement calls for the payment of an annual base salary of $300,000 during his service as the Company's Chief Executive Officer. In determining Mr. Nelson's base salary, the Committee took into account a comparison of base salaries of chief executive officers of other companies, the Company's financial situation and Mr. Nelson's experience as chief executive officer of a Fortune 500 company. Mr. Nelson's base salary is approximately 35% lower than that of his predecessor. Pursuant to his employment agreement, the Committee granted Mr. Nelson an option in 1991 to purchase 300,000 Shares at a price of $6.625 per Share. This mix of compensation was determined by the Committee based on its philosophy that executive compensation should be variable as much as possible.\nANNUAL BONUS\nThe Company maintains a Management Incentive Plan (\"MIP\") under which executive officers (as well as other key employees) are eligible for an annual cash bonus. The Committee establishes individual and corporate performance objectives at the beginning of each year. Eligible executives are assigned threshold, target and maximum bonus levels. The Committee determines the corporate performance targets for bonus payments based on the corporate financial plan for the ensuing year and may use such measures as operating income and cash generation. If minimum objectives are not met, no bonuses are paid. As in the case of base salary, the Committee may consider individual non-financial performance measures and, where appropriate, unit performance measures, in determining bonus amounts. The Committee has final authority in interpreting the MIP and discretion in making any awards under the MIP.\nIn 1993, as in 1992, the Committee determined that in view of the Company's financial condition, it would be inappropriate to adopt a bonus plan under the MIP and thus no bonuses have been or will be paid under the MIP for 1993 performance.\nAt the recommendation of Mr. Nelson, the Committee authorized the grant of special bonuses in 1993 to Messrs. Gruber, Leon and Whitney to recognize their efforts in successfully refinancing the Company's debt in adverse circumstances during the year. Such bonuses were granted apart from the operation of the MIP and are reported in the Summary Compensation Table following this report.\nSTOCK OPTIONS\nUnder the Company's Long-Term Incentive Plan, options with respect to Shares may be granted to the Company's key employees, including executive officers. The Committee sets guidelines for the size of stock option awards based on factors similar to those used to determine base salaries and annual bonus.\nStock options are designed to align the interests of executives with those of the shareholders. Stock options may be exercised over a ten-year period at an exercise price equal to the market price of the Shares on the date of grant and vest over three years. This approach is designed to provide an incentive for the creation of shareholder value over the long-term since the full benefit of the compensation package cannot be realized unless appreciation of the price of Shares occurs over a number of years. In 1993 the Committee granted options to a total of 48 key employees; the Committee believes that broad dissemination of options within the Company enhances the benefits to the Company of stock-based incentives.\nIn 1993, Mr. Nelson was granted options to purchase 25,000 Shares with an exercise price of $5.125 per Share and now has options to purchase a total of 375,000 Shares. The 1993 grant was made to further the Committee's view that executive compensation ought to be dependent in large measure on the performance of the Company and the Shares. Mr. Nelson now beneficially owns 52,000 Shares that he purchased on the open market since he became Chief Executive Officer. The Committee believes that significant equity interests in the Company held by the Company's management better align the interests of shareholders and management.\nCONCLUSION\nThrough the incentive and stock option programs described above, a significant portion of the Company's executive compensation is linked directly to individual and corporate performances and stock price appreciation. The Committee intends to continue the policy of linking executive compensation to corporate performance and returns to stockholders, recognizing that the ups and downs of the business cycle from time to time may result in an imbalance for a particular period.\nCharles A. Zraket, Chairman E. Paul Casey Robert G. Foster Judith S. King\nEXECUTIVE COMPENSATION\nThe remuneration of the Company's Chief Executive Officer and each of the four most highly compensated executive officers at December 31, 1993 for services rendered to the Company during 1993, 1992 and 1991 is reported in the table set forth below. The remuneration of Edouard C. Thys, who retired from the Company in October 1993, is also reported.\nPENSION BENEFITS\nAll salaried employees and executive officers of the Company participate in a defined benefit pension plan (the \"Pension Plan\"). Under the terms of the Pension Plan each eligible employee receives a retirement benefit based on the number of years of his or her credited service (to a maximum 35 years) and average annual total earnings (salary plus incentive bonus only) for the five consecutive most highly paid years during the ten years preceding retirement. In addition, with the exception of Messrs. Nelson and Thys, the executive officers covered by the Summary Compensation Table and certain other key executives designated by the Committee are eligible to receive benefits under the Supplemental Retirement Plan for Senior Executives (the \"Supplemental Pension Plan\"). Under the Supplemental Pension Plan, participants who have been employed by the Company for at least 15 years and who retire on or after their 62nd birthday receive an annual pension which, when added to other retirement benefits received from the Company, totals 50% of their highest average annual earnings during any preceding 60-consecutive-month period. This supplemental benefit is reduced if the participant has been employed for less than 15 years or retires prior to age 62 and may be further reduced by certain other income benefits payable to participants. Benefits under the Pension Plan are not offset for Social Security payments but Supplemental Pension Plan benefits are offset for such payments. If the Committee so determines, payments under the Supplemental Pension Plan may be terminated if a retired participant becomes \"substantively employed,\" as defined in the Supplemental Pension Plan, by another employer before age 65. The following table indicates the aggregate estimated annual benefits payable, as single life annuity amounts, under both the Pension Plan and the Supplemental Pension Plan to participants retiring in various categories of earnings and years of service. To the extent that an annual retirement benefit exceeds the limit imposed by the Code, the difference will be paid from the general operating funds of the Company.\nAs of December 31, 1993, the individuals named in the Summary Compensation Table had full credited years of service with the Company as follows: Mr. Nelson, 2; Mr. Gruber, 2; Mr. Leon, 2; Mr. Whitney, 2; Mr. Shah, 18; and Mr. Thys, 35.\nSAVINGS\/INVESTMENT PLAN\nAll full-time salaried employees with at least one year's service with the Company may participate in the Savings\/Investment Plan (the \"S\/I Plan\"). Participating employees may through payroll deductions make a basic contribution of up to five percent of their covered compensation and a supplemental contribution of up to an additional ten percent of their covered compensation. The Company currently contributes an amount equal to 50% of participant's basic contribution. The Company's contributions are made in the form of Shares. The right of a participant with less than five years of Company service to such Company contributions vests at the rate of 20% per year. Supplemental employee contributions beyond the five percent limit, when made, receive no matching Company contributions.\nThe S\/I Plan allows participants to take advantage of Section 401(k) of the Internal Revenue Code by realizing a federal income tax deferral through a voluntary salary reduction and equivalent contribution by the Company to the participant's special S\/I Plan account for that purpose. Such tax-deferred savings are not available for withdrawal by an employee before age 59 1\/2 except in circumstances of financial hardship. A participant may elect deductions for regular savings and tax-deferred savings in any combination not exceeding fifteen percent of the participant's covered compensation, provided, however, that tax-deferred savings may not exceed $9,240 in 1994.\nParticipants currently have a choice of six investment funds and may allocate both their personal and Company contributions and earnings as they wish among them. They include Income Accumulation, Growth Stock, S&P 500 Stock, U.S. Treasury and Asset Allocation Funds and a Wyman-Gordon Stock Fund that invests primarily in Shares. A participant retiring under a Company retirement income plan may elect among several methods of distribution of his S\/I Plan account.\nThe S\/I Plan is administered by the Savings\/Investment Plan Committee, whose members are appointed by the Chief Executive Officer.\nAGREEMENTS WITH MANAGEMENT\nIn addition to the employment agreement with John M. Nelson described in \"- Compensation Committee Report - Base Salaries,\" the Company has entered into agreements with each of its executive officers, other than Messrs. Nelson and Thys, that would provide such officers with specified benefits in the event of termination of employment within three years following a change of control of the Company when both employment termination and such change in control occur under conditions defined in the agreements. Such benefits include a payment equal to a maximum of 250% of the executive officer's annual compensation, continuation of insurance coverages for up to twenty-four months following termination and accelerated vesting of existing options and stock appreciation rights. No benefits are payable under the agreements in the event of an executive officer's termination for cause, in the event of retirement, disability or death or in cases of voluntary termination in circumstances other than those specified in the agreements that would entitle an executive officer to benefits.\nITEM 12.","section_12":"ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT\nThe response to Item 12. - Security Ownership of Certain Beneficial Owners and Management incorporates by reference the information under the caption \"Executive Compensation\" included in the Company's response to Item 11 above.\n[FN] (5) Russell E. Fuller is one of seven trustees of the George F. and Sybil H. Fuller Foundation (the \"Fuller Foundation\") and the Shares beneficially owned by the Fuller Foundation are therefore reported in the above table. Mr. Fuller disclaims any beneficial ownership in the Shares beneficially owned by the Foundation.\n(6) Mr. Thys has retired from the Company and is no longer a director.\nITEM 13.","section_13":"ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS\nThe response to Item 13. - Certain Relationships and Related Transactions incorporates by reference the information under the captions \"Nominees for Three-Year Term\" and \"Continuing Directors\" included in the Company's response to Item 10 above and the information under the captions \"Compensation Committee Report\" and \"Agreements with Management\" included in the Company's response to Item 11 above.\nPART IV\nITEM 14.","section_14":"ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K\nEXHIBITS\nThe exhibit listing required by Item 601 of Regulation S-K is included on page E-1.\nFINANCIAL STATEMENTS\nThe following financial statements, together with the report thereon of Ernst & Young dated February 11, 1994 appearing in the 1993 Annual Report are incorporated by reference in this Form 10-K:\nConsolidated Statements of Operations and Retained Earnings\nConsolidated Balance Sheets\nConsolidated Statements of Cash Flows\nNotes to Consolidated Financial Statements\nREPORTS ON FORM 8-K\nNo reports on Form 8-K were filed with the Commission during the fourth quarter of 1993.\nCONSENT OF INDEPENDENT AUDITORS\nWe consent to the incorporation by reference in this Annual Report (Form 10-K) of Wyman-Gordon Company and Subsidiaries of our report dated February 11, 1994, included in the 1993 Annual Report.\nOur audits also included the financial statement schedules of Wyman-Gordon Company listed in Item 14. 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.\nWe also consent to the incorporation by reference in the Registration Statements (Form S-8, File Numbers 2-56547, 2-75980, 33-26980 and 33-48068) pertaining to the Wyman-Gordon Company Executive Long-Term Incentive Program (1975) - Amendment No. 6, the Wyman-Gordon Company Stock Purchase Plan, the Wyman-Gordon Company Savings\/Investment Plan and the Wyman-Gordon Company Long-Term Incentive Plan and in the related Prospectuses of our report dated February 11, 1994, with respect to the consolidated financial statements of Wyman-Gordon Company and Subsidiaries incorporated by reference in the Annual Report (Form 10-K) for the years ended December 31, 1993 and 1992.\nWorcester, Massachusetts ERNST & YOUNG March 28, 1994\nREPORT OF INDEPENDENT ACCOUNTANTS\nOur report on the consolidated financial statements of Wyman-Gordon Company and Subsidiaries has been incorporated by reference in this Form 10-K from page 18 of the 1991 Annual Report to Shareholders of Wyman-Gordon Company. In connection with our audits of such financial statements, we have also audited the related financial statement schedules listed in Item 14 on page 22 of this Form 10-K.\nIn 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 required to be included therein.\nBoston, Massachusetts COOPERS & LYBRAND February 19, 1992\nCONSENT OF INDEPENDENT ACCOUNTANTS\nWe consent to the incorporation by reference in the registration statements of Wyman-Gordon Company on Forms S-8 (File Numbers 2-56547, 2-75980, 33-26980 and 33-48068) of our report dated February 19, 1992, on our audit of the consolidated financial statements and financial statement schedules of Wyman-Gordon Company as of December 31, 1991, and for the year then ended, which report is included or incorporated by reference in this Annual Report on Form 10-K.\nBoston, Massachusetts COOPERS & LYBRAND March 28, 1994\nSIGNATURES\nPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.\nWyman-Gordon Company (REGISTRANT)\nBy \/s\/ LUIS E. LEON March 30, 1994 --------------------------------------- -------------- Luis E. Leon Date Vice President - Finance and Treasurer\nS-1\nS-2\nS-3\nCommercial paper represents paper sold by Wyman-Gordon Company. Bank loans are evidenced by renewable 90-day notes bearing interest at money market rates. The maximum and average amounts outstanding during the period were computed using month-end balances. The weighted average interest rates during 1992 and 1991 were calculated based upon the weighted average interest cost of borrowings throughout the year. Additional information is included in Note C to the 1993 Annual Report.\nS-4\nE-1\nNOTE: Exhibits not physically located in this Form 10-K can be obtained from the Company upon written request to the Assistant Clerk at the address on the cover of this Form 10-K at a cost of $.25 per page.\nE-2","section_15":""}
{"filename":"92108_1993.txt","cik":"92108","year":"1993","section_1":"ITEM 1. BUSINESS\nSouthern California Gas Company (The Gas Company or the Company) is a public utility owning and operating a natural gas transmission, storage and distribution system that supplies natural gas in 535 cities and communities throughout a 23,000-square mile service territory comprising most of Southern California and parts of Central California. The Gas Company is the principal subsidiary of Pacific Enterprises (the \"Parent\").\nThe Gas Company is the nation's largest natural gas distribution utility. It serves approximately 16 million residential, commercial, industrial, utility electric generation and wholesale customers through approximately 4.7 million meters in its service territory. Most of those meters represent \"core\" customers, which are primarily residential and small commercial and industrial accounts. The Gas Company's \"noncore\" customers are served by over 1,000 meters. Noncore customers consist of large-volume gas users such as electric utilities, wholesale and large commercial and industrial customers capable of switching from natural gas to alternate fuels or suppliers.\nThe Company is subject to regulation by the California Public Utilities Commission (CPUC) which, among other things, establishes rates the Company may charge for gas service, including an authorized rate of return on investment. The Company's future earnings and cash flow will be determined primarily by the allowed rate of return on common equity, growth in rate base, noncore pricing and the variance in gas volumes delivered to these customers versus CPUC-adopted forecast deliveries, the recovery of gas and contract restructuring costs if the Comprehensive Settlement (see \"Recent Developments - Comprehensive Settlement of Regulatory Issues\") is not approved and the ability of management to control expenses and investment in line with the amounts authorized by the CPUC to be collected in rates. Also, the Company's ability to earn revenues in excess of its authorized return from noncore customers due to volume increases will be substantially eliminated for the five years of the Comprehensive Settlement referenced above. This is because forecasted deliveries in excess of the 1991 throughput levels used to establish rates were contemplated in estimating the costs of the Comprehensive Settlement, and are reflected in current year liabilities. In addition, the impact of any future regulatory restructuring and increased competitiveness in the industry, including the continuing threat of customers bypassing the Company's system and obtaining service directly from interstate pipelines, can affect the Company's performance.\nFor 1994, the CPUC has authorized the Company to earn a rate of return on rate base of 9.22 percent and a 11.00 percent rate of return on common equity compared to 9.99 percent and 11.90 percent, respectively, in 1993. Growth in rate base for 1993 was approximately 1.8 percent and rate base is expected to\nincrease by approximately 4 percent to 5 percent in 1994. The Company has achieved or exceeded its authorized return on rate base for the last eleven consecutive years and its authorized rate of return on equity for the last nine consecutive years.\nThe Gas Company was incorporated in California in 1910. Its principal executive offices are located at 555 West Fifth Street, Los Angeles, California 90013 and its telephone number is (213) 244-1200.\nRECENT DEVELOPMENTS\nREGULATORY ACTIVITY\nOn December 17, 1993, the CPUC issued its decision in the Company's 1994 general rate case which authorized a net $97 million rate reduction. The Company plans to adjust its operations with the intention of operating within the amounts authorized in rates. Approximately $21 million of the rate reduction represents productivity improvements. Other items include non-operational issues, primarily reductions in marketing programs and income tax effects of the rate reduction. The decision also includes the effects of the reduction of the Company's rate of return authorized in its 1994 cost of capital proceeding, which increased the total reduction in rates to $132 million. New rates emanating from the CPUC decision became effective January 1, 1994.\nRESTRUCTURING OF GAS SUPPLY CONTRACTS\nThe Company and its gas supply affiliates have reached agreements with suppliers of California offshore and Canadian gas for a restructuring of long-term gas supply contracts. The cost of these supplies to the Company has been substantially in excess of its average delivered cost of gas. During 1993, these excess costs totaled approximately $125 million.\nThe new agreements substantially reduce the ongoing delivered costs of these gas supplies and provide lump sum settlement payments of $375 million to the suppliers. The expiration date for the Canadian gas supply contract has been shortened from 2012 to 2003, and the supplier of California offshore gas continues to have an option to purchase related gas treatment and pipeline facilities owned by the Company's gas supply affiliate. The agreement with the suppliers of Canadian gas is subject to certain Canadian regulatory and other approvals.\nCOMPREHENSIVE SETTLEMENT OF REGULATORY ISSUES\nThe Gas Company and a number of interested parties, including the Division of Ratepayer Advocates (\"DRA\") of the CPUC, large noncore customers and ratepayer groups, have filed for CPUC approval a comprehensive settlement (the \"Comprehensive Settlement\") of a number of pending regulatory issues including partial rate recovery of restructuring costs associated with the gas supply contracts discussed above. The Comprehensive Settlement, if approved by the CPUC, would permit the Company to recover in utility rates approximately 80 percent of the contract restructuring costs of $375 million and accelerated depreciation of related pipeline assets of its gas supply affiliates of approximately $130 million, together with interest, over a period of approximately five years. The Gas Company has filed a financing application with the CPUC primarily for the borrowing of $425 million to provide for funds needed under the Comprehensive Settlement. See \"Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Comprehensive Settlement of Regulatory Issues\" for a discussion of the regulatory issues, in addition to the gas supply issues, addressed in the Comprehensive Settlement.\nOPERATING STATISTICS\nThe following table sets forth certain operating statistics of the Company from 1989 through 1993.\nOPERATING STATISTICS\nSERVICE AREA\nThe Gas Company distributes natural gas throughout a 23,000-square mile service territory with a population of approximately 16 million people. As indicated by the following map, its service territory includes most of Southern California and portions of Central California.\n[MAP]\nNatural gas service is also provided on a wholesale basis to the distribution systems of the City of Long Beach, San Diego Gas & Electric Company and Southwest Gas Company.\nUTILITY SERVICES\nThe Gas Company's customers are divided, for regulatory purposes, into core and noncore customers. Core customers are primarily residential and small commercial and industrial customers, without alternative fuel capability. Noncore customers are primarily electric utilities, wholesale and large commercial and industrial customers, with alternative fuel capability.\nThe Gas Company offers two basic utility services, sale of gas and transmission of gas. Residential customers and most other core customers purchase gas directly from The Gas Company. Noncore customers and large core customers have the option of purchasing gas either from The Gas Company or from other sources (such as brokers or producers) for delivery through the Company's transmission and distribution system. Smaller customers are permitted to aggregate their gas requirements and also to purchase gas directly from brokers or producers, up to a limit of 10 percent of the Company's core market. The Gas Company generally earns the same contribution to earnings whether a particular customer purchases gas from the Company or utilizes the Company's system for transportation of gas purchased from others. (See \"Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations-Ratemaking Procedures.\")\nThe Gas Company continues to be obligated to purchase reliable supplies of natural gas to serve the requirements of its core customers. However, the only gas supplies that the Company may offer for sale to noncore customers are the same supplies that it purchases to serve its core customers. Noncore customers that elect to purchase gas supplies from the Company must for a two-year period agree to take-or-pay for 75 percent of the gas that they contract to purchase.\nThe Gas Company also provides a gas storage service for noncore customers on a bid basis. The storage service program provides opportunities for customers to store gas on an \"as available\" basis during the summer to reduce winter purchases when gas costs are generally higher, or to reduce their level of winter curtailment in the event temperatures are unusually cold. During 1993, The Gas Company stored approximately 24 billion cubic feet of customer-owned gas.\nDEMAND FOR GAS\nNatural gas is a principal energy source in the Company's service area for residential, commercial and industrial uses as well as utility electric generation (UEG) requirements. Gas competes with electricity for residential and commercial cooking, water heating and space heating uses, and with other fuels for large industrial, commercial and UEG uses. Demand for natural gas in Southern California is expected to continue to increase but at a slower rate due primarily to a slowdown in housing starts, new energy efficient building construction and appliance standards and general recessionary business conditions.\nDuring 1993, 97 percent of residential energy customers in the Company's service territory used natural gas for water heating and 94 percent for space heating. Approximately 78 percent of those customers used natural gas for cooking and over 72 percent for clothes drying.\nDemand for natural gas by large industrial and UEG customers is very sensitive to the price of alternative competitive fuels. These customers number only approximately 1,000; however, during 1993, accounted for approximately 19 percent of total revenues, 65 percent of total gas volumes delivered and 15 percent of the authorized gas margin. Changes in the cost of gas or alternative fuels, primarily fuel oil, can result in significant shifts in this market, subject to air quality regulations. Demand for gas for UEG use is also affected by the price and availability of electric power generated in other areas and purchased by the Company's UEG customers.\nSince the completion of the Kern River\/Mojave Interstate Pipeline (Mojave) in February 1992, the Company's throughput to customers in the Kern County area who use natural gas to produce steam for enhanced oil recovery projects has decreased significantly because of the bypass of the Company's system. Mojave now delivers to customers formerly served by the Company 350 to 400 million cubic feet of gas per day. The decrease in revenues from enhanced oil recovery customers is subject to full balancing account treatment, except for a five percent incentive to the Company for attaining certain throughput levels, and therefore, does not have a material impact on earnings. However, bypass of other Company markets also may occur as a result of plans by Mojave to extend its pipeline north to Sacramento through portions of the Company's service territory. The effect of bypass is to increase the Company's rates to other customers and thus make its natural gas service less competitive with that of competing pipelines and available alternate fuels.\nIn response to bypass, the Company has received authorization from the CPUC for expedited review of price discounts proposed for long-term gas transportation contracts\nwith some noncore customers. In addition, in December 1992, the CPUC approved changes in the methodology for allocating the Company's costs between core and noncore customers to reduce the subsidization of core customer rates by noncore customers. Effective in June 1993, these new rate changes implemented the CPUC's policy known as \"long-run marginal cost.\" The revised methodologies have resulted in a reduction of noncore rates and a corresponding increase in core rates that better reflect the cost of serving each customer class and, together with price discounting authority, has enabled the Company to better compete with interstate pipelines for noncore customers. In addition, in August 1993 a capacity brokering program was implemented. Under the program, for a fee, the Company provides to noncore customers, or others, a portion of its control of interstate pipeline capacity to allow more direct access to producers. Also, the Comprehensive Settlement (see \"Recent Developments - Comprehensive Settlement of Regulatory Issues\") will help the Company's competitiveness by reducing the cost of transportation service to noncore customers.\nSUPPLIES OF GAS\nIn 1993, The Gas Company delivered slightly less than 1 trillion cubic feet of natural gas through its system. Approximately 64 percent of these deliveries were customer-owned gas for which The Gas Company provided transportation services, compared to 65 percent in 1992. The balance of gas deliveries was gas purchased by The Gas Company and resold to customers.\nMost of the natural gas delivered by The Gas Company is produced outside of California. These supplies are delivered to the California border by interstate pipeline companies (primarily El Paso Natural Gas Company and Transwestern Natural Gas Company) that produce or purchase the supplies or provide transportation services for supplies purchased from other sources by The Gas Company or its transportation customers. These supplies enter The Gas Company's intrastate transmission system at the California border for delivery to customers.\nThe Gas Company currently has paramount rights to daily deliveries of up to 2,200 million cubic feet of natural gas over the interstate pipeline systems of El Paso Natural Gas Company (up to 1,450 million cubic feet) and Transwestern Pipeline Company (up to 750 million cubic feet). The rates that interstate pipeline companies may charge for gas and transportation services and other terms of service are regulated by the Federal Energy Regulatory Commission (FERC).\nThe following table sets forth the sources of gas deliveries by The Gas Company from 1989 through 1993.\nSOURCES OF GAS\nMarket sensitive gas supplies (supplies purchased on the spot market as well as under longer-term contracts ranging from one month to ten years based on spot prices) accounted for approximately 66 percent of total gas volumes purchased by the Company during 1993, as compared with 61 percent and 69 percent, respectively, during 1992 and 1991. These supplies were generally purchased at prices significantly below those for other long-term sources of supply.\nSee \"Item 7. \"Management's Discussion and Analysis of Financial Condition and Results of Operations - Comprehensive Settlement of Regulatory Issues\" for a discussion of the contemplated gas cost incentive mechanism.\nThe Gas Company estimates that sufficient natural gas supplies will be available to meet the requirements of its customers into the next century. Because of the many variables upon which estimates of future service are based, however, actual levels of service may vary significantly from estimated levels.\nRATES AND REGULATION\nThe Gas Company is regulated by the CPUC. The CPUC consists of five commissioners appointed by the Governor of California for staggered six-year terms. It is the responsibility of the CPUC to determine that utilities operate in the best interest of the ratepayer with a reasonable profit. The regulatory structure is complex and has a very substantial impact on the profitability of the Company.\nThe return that the Company is authorized to earn is the product of the authorized rate of return on rate base and the amount of rate base. Rate base consists primarily of net investment in utility plant. Thus, the Company's earnings are affected by changes in the authorized rate of return on rate base and the growth in rate base and by the Company's ability to control expenses and investment in rate base within the amounts authorized by the CPUC in setting rates. In addition, the Company's ability to achieve its authorized rate of return is affected by other regulatory and operating factors. See \"Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Ratemaking Procedures.\"\nThe Gas Company's operating and fixed costs, including return on rate base, are allocated between core and noncore customers under a methodology that is based upon the costs incurred in serving these customer classes. For 1994, approximately 87 percent of the CPUC-authorized gas margin has been allocated to core customers and 13 percent to noncore customers, including wholesale customers. Under the current regulatory framework, costs may be reallocated between the core and the noncore markets once every other year in a biennial cost allocation proceeding (BCAP).\nENVIRONMENTAL MATTERS\nThe Gas Company has identified and reported to California environmental authorities 42 former gas manufacturing sites for which it (together with other utilities as to 21 of the sites) may have remedial obligations under environmental laws. In addition, the Company is one of a large number of major corporations that have been named by federal authorities as potentially responsible parties for environmental remediation of two other industrial sites and a landfill site. These 45 sites are in various stages of investigation or remediation. It is anticipated that the investigation, and if necessary, remediation of these sites will be completed over a period of from ten years to twenty years.\nThe CPUC approved approximately $9 million in the Company's base rates for expenditures beginning in 1990 through 1993 associated with investigating these sites. In addition, the CPUC previously has approved a special ratemaking procedure with respect to environmental remediation costs under which, upon approval by the CPUC on a site-by-site basis, these costs are accumulated for recovery in future rates subject to a reasonableness review. However, in a decision issued in late 1992 in connection with its initial reasonableness review of these costs, the CPUC concluded that the Company had failed to demonstrate by clear and convincing evidence, the reasonableness for rate recovery of the applied for remediation costs under the existing ratemaking procedure. The decision concluded that a reasonableness review procedure may not be appropriate for rate recovery of environmental remediation costs. In addition, the CPUC ordered the Company, along with other California energy utilities and the DRA, to work toward the development of an alternate ratemaking procedure including cost sharing between shareholder and ratepayers.\nIn November 1993, a collaborative settlement agreement between the above parties was submitted to the CPUC for approval that recommends a ratemaking mechanism that would provide recovery of 90 percent of environmental investigation and remediation costs without reasonableness review. In addition, the utilities would have the opportunity to retain a percentage of any insurance recoveries to offset the 10 percent of costs not recovered in rates. On March 10, 1994, an administrative law judge's proposed decision was issued which adopted the sharing mechanism discussed above. A final CPUC decision is expected in mid-1994.\nThrough the end of 1993, preliminary investigations at 33 sites have been completed by the Company and remediation liabilities are estimated to be $82 million for all 45 sites. The liability estimated for these sites is subject to future\nadjustment pending further investigation. (See Note 5 of Notes to Consolidated Financial Statements set forth in Item 8 of this Annual Report.)\nEMPLOYEES\nThe Company employs approximately 9,000 persons. Most field, clerical and technical employees of the Company are represented by the Utility Workers' Union of America, or the International Chemical Workers' Union. Collective bargaining agreements covering these approximately 6,400 employees expired on June 30, 1993, principally as a consequence of failure to reach agreement with respect to The Gas Company's proposal to permit the use of outside contractors for certain services now being provided by union represented employees, if costs were not lowered to an amount that would be incurred through the use of outside contractors. In August 1993, after reaching an impasse, the Company unilaterally implemented the majority of its proposals and after two failed strike votes and further negotiations, the Union membership voted in February 1994 on a contract with terms consistent with that implemented by the Company. On February 28, 1994, the Union notified the Company that the contract had been ratified by the membership and a contract was signed on March 9, 1994. The collective bargaining agreement with respect to wages and working conditions will extend through March 31, 1996. The medical plan agreement will expire on December 31, 1995.\nMANAGEMENT\nThe executive officers of Southern California Gas Company are as follows:\nAll of the Company's executive officers have been employed by the Company, the Parent, or its affiliates in management positions for more than the past five years, except Mr. Sayles. From 1982 until joining the Company in January 1994, Mr. Sayles was Senior Legal Counsel for TRW, Inc. (1982-1990); Commissioner of Corporations (1991-1992) and Secretary of the California Business, Transportation and Housing Agency (1993) for the State of California.\nExecutive officers are elected annually and serve at the pleasure of the Board of Directors.\nThere are no family relationships among any of the Company's executive officers.\nITEM 2.","section_1A":"","section_1B":"","section_2":"ITEM 2. PROPERTIES\nAt December 31, 1993, The Gas Company owned approximately 3,280 miles of transmission and storage pipeline, 42,250 miles of distribution pipeline and 42,406 miles of service piping. It also owned thirteen transmission compressor stations and six underground storage reservoirs (with a combined working storage capacity of approximately 116 billion cubic feet) and general office buildings, shops, service facilities, and certain other equipment necessary in the conduct of its business.\nSouthern California Gas Tower, a wholly-owned subsidiary of The Gas Company, has a 15 percent limited partnership interest in a 52-story office building in downtown Los Angeles. The Gas Company occupies about half of the building.\nITEM 3.","section_3":"ITEM 3. LEGAL PROCEEDINGS\nExcept for the matters referred to in the financial statements filed with or incorporated by reference in Item 8 or referred to elsewhere in this Annual Report, neither the Company nor any of its subsidiaries is a party to, nor is their property the subject of, any material pending legal proceedings other than routine litigation incidental to their businesses.\nITEM 4.","section_4":"ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS\nNo matters were submitted during the fourth quarter of 1993 to a vote of the Company's security holders.\nPART II\nITEM 5.","section_5":"ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS\nThe Parent owns all of the Company's Common Stock. The information required by this item concerning dividends declared is included in the Statement of Consolidated Shareholders' Equity set forth in Item 8 of this Annual Report. Such information is incorporated herein by reference.\nRANGE OF MARKET PRICES OF PREFERRED STOCK\nITEM 6.","section_6":"ITEM 6. SELECTED FINANCIAL DATA\nThe following table sets forth certain selected financial data of the Company for 1989 through 1993.\nSELECTED FINANCIAL DATA\nITEM 7.","section_7":"ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS\nSouthern California Gas Company is a subsidiary of Pacific Enterprises (Parent). This section includes management's analysis of operating results from 1991 through 1993, and is intended to provide additional information about the Company's financial performance. This section also focuses on many of the factors that influence future operating results and discusses future investment and financing plans. This section should be read in conjunction with the Consolidated Financial Statements.\nFINANCIAL AND OPERATING PERFORMANCE. The Gas Company provides natural gas distribution, transmission and storage in a 23,000-square-mile service area in southern California and parts of central California.\nThe Company's markets are separated into core customers and noncore customers. Core customers include approximately 4.7 million customers (4.5 million residential and 0.2 million smaller commercial and industrial customers). The noncore market consists of over 1,000 customers which primarily includes utility electric\ngeneration, wholesale, and large commercial and industrial customers. The noncore customers are sensitive to the price relationship between natural gas and alternate fuels, and are capable of readily switching from one fuel to another, subject to air quality regulations.\nKey financial and operating data for the Company are highlighted in the table below.\nThe Company has achieved or exceeded the rate of return on rate base authorized by the California Public Utilities Commission (CPUC) for 11 consecutive years. In 1994, the Company is authorized to earn 9.22 percent on rate base and 11.00 percent on common equity. This compares to authorized returns of 9.99 percent on rate base and 11.90 percent on common equity in 1993. Rate base is expected to increase approximately 4 percent to 5 percent in 1994.\nNet income decreased $4 million in 1993 due primarily to a reduction in the Company's authorized rate of return on common equity and lower earnings from the noncore market, partially offset by continued reductions in the Company's cost of service, including operating and financing costs, and growth in rate base. During 1992, net income decreased $16 million due primarily to the recognition in 1991 of a $15 million gain on the 1987 sale of the Company's former headquarters property. In addition, 1992 results reflect a reduction in the Company's authorized rate of return on common equity and disallowances related to its new headquarters, partially offset by growth in rate base and higher earnings from the noncore market.\nThe table below summarizes the components of gas revenues.\nThe table shows the composition of the Company's throughput and gas revenue for the past three years. Although the revenues associated with transportation volumes are less than for gas sales, the Company generally earns the same margin whether it buys the gas and sells it to the\ncustomer or transports gas already owned by the customer. Throughput, the total gas sales and transportation volumes moved through the Company's system, is affected by weather and general economic conditions. In addition, throughput has declined over the last two years as a result of bypass of The Gas Company's system, primarily by enhanced oil recovery customers. (See Factors Influencing Future Performance.) The average commodity cost of gas purchased by the Company, excluding fixed charges, for 1993 was $2.21 per thousand cubic feet, compared to $2.24 per thousand cubic feet in 1992 and $2.40 per thousand cubic feet in 1991.\nRATEMAKING PROCEDURES. The Company is regulated by the CPUC. It is the responsibility of the CPUC to determine that utilities operate in the best interest of the ratepayer with a reasonable profit. The current ratemaking procedures are summarized below. Some of these procedures would be modified by the Comprehensive Settlement discussed later in this section.\nThe return that the Company is authorized to earn is the product of the authorized rate of return on rate base and the amount of rate base. Rate base consists primarily of net investment in utility plant. Thus, the Company's earnings are affected by changes in the authorized rate of return on rate base and the growth in rate base and by the Company's ability to control expenses and investment in rate base within the amounts authorized by the CPUC in setting rates. In addition, achievement of the authorized rate of return is affected by other regulatory and operating factors.\nGeneral rate applications are filed every three years. New rates emanating from the Company's most recent rate case went into effect on January 1, 1994. In a general rate case, the CPUC establishes a margin, which is the amount of revenue authorized to be collected from customers to recover authorized operating expenses (other than the cost of gas), depreciation, interest, taxes and return on rate base.\nIn a process referred to as the annual attrition allowance, the CPUC annually adjusts rates for years between general rate cases to cover the effects of inflation and changes in rate base. Separate proceedings are held annually to review The Gas Company's cost of capital, including return on common equity, interest costs and changes in capital structure.\nThe CPUC separately reviews and issues decisions on the reasonableness of various aspects of the Company's operations. The CPUC has disallowed costs it determined to\nbe imprudent, and further disallowances are possible in the future.\nIn the biennial cost allocation proceeding (BCAP), the CPUC specifies for each two-year period the allocation of total margin to be collected from the Company's core and noncore customer classes and the expected volumes of gas each customer class will consume annually. The Company maintains regulatory accounts to accumulate undercollections and overcollections from customers and makes periodic filings with the CPUC to adjust future gas rates to account for variances between forecasted and actual gas costs and deliveries. In August 1993, the Company filed a $134 million rate increase with the CPUC. Included in this BCAP filing is a rate structure designed to further reduce subsidies by nonresidential core customers to residential customers by better aligning residential rates with the cost of providing residential service. The CPUC, in an interim decision, granted the Company a $121 million revenue increase effective January 1, 1994. A final CPUC decision is expected in late 1994.\nFor the core market, the regulatory procedures provide for recording margin ratably each month. The BCAP balancing account procedure, which substantially eliminates the effect on income of variances in gas costs and volumes sold, allows the Company to increase rates for increased gas acquisition costs or for revenue shortfalls due to reductions in demand by core customers. Conversely, the Company reduces rates for decreased gas acquisition costs or for higher than projected revenues from increases in demand by core customers.\nFor the noncore market the CPUC has created a risk-and-reward mechanism. Earnings may be enhanced by delivering higher than forecast gas volumes to noncore customers. Conversely, the Company is at risk for unfavorable variances in noncore volumes or pricing. This upside and downside earnings potential in the noncore market was limited by the CPUC's procurement rulemaking decision in August 1991. This decision significantly reduced the Company's gas procurement activities on behalf of noncore customers and adopted new service level options and rate structures. It also included a provision for balancing account treatment for 75 percent of any undercollection or overcollection in the recovery of noncore margin and other costs, as compared to what was designated by the CPUC, to be recovered or returned in rates at a later date. The CPUC's revised noncore rate design generally provides for single, rolled-in, volumetric rates, which include use-or-pay provisions in lieu of rates with demand charges.\nThe collection of up-front demand charges had provided compensation to The Gas Company for standing ready\nto provide a contracted level of service and buffered the potential earnings loss from lower than forecast volumes in the noncore market. Under certain conditions, noncore rates, including demand charges, and terms of service are negotiable.\nREGULATORY ACTIVITY. On December 17, 1993, the CPUC issued its decision in the Company's 1994 general rate case which authorized a net $97 million rate reduction. The Company plans to attempt to adjust its operations with the intention of operating within the amounts authorized in rates. Approximately $21 million of the rate reduction represents productivity improvements. Other items include non-operational issues, primarily reductions in marketing programs and income tax effects of the rate reduction. The decision also includes the effects of the reduction of the Company's rate of return authorized in its 1994 cost of capital proceeding, which increased the total reduction in rates to $132 million. New rates emanating from the decision became effective on January 1, 1994.\nRESTRUCTURING OF GAS SUPPLY CONTRACTS. The Company and its gas supply affiliates have reached agreements with suppliers of California offshore and Canadian gas for a restructuring of long-term gas supply contracts. The cost of these supplies to the Company has been substantially in excess of the Company's average delivered cost of gas. During 1993, these excess costs totaled approximately $125 million.\nThe new agreements substantially reduce the ongoing delivered costs of these gas supplies and provide lump sum settlement payments of $375 million to the suppliers. The expiration date for the Canadian gas supply contract has been shortened from 2012 to 2003, and the supplier of California offshore gas continues to have an option to purchase related gas treatment and pipeline facilities owned by the Company's gas supply affiliate. The agreement with the suppliers of Canadian gas is subject to certain Canadian regulatory and other approvals.\nCOMPREHENSIVE SETTLEMENT OF REGULATORY ISSUES. The Company and a number of interested parties (including the Division of Ratepayer Advocates of the CPUC, large noncore customers and ratepayer groups) have proposed for CPUC approval a comprehensive settlement (Comprehensive Settlement) of a number of pending regulatory issues including partial rate recovery of restructuring costs associated with the gas supply contracts discussed above. The Comprehensive Settlement, if approved by the CPUC, would permit the Company to recover in utility rates approximately 80 percent of the contract restructuring costs of $375 million and accelerated depreciation of related pipeline assets of its gas supply affiliates of approximately $130\nmillion, together with interest, over a period of approximately five years. The Company has filed a financing application with the CPUC primarily for the borrowing of $425 million to provide for funds needed under the Comprehensive Settlement. In addition to the gas supply issues, the Comprehensive Settlement addresses the following other regulatory issues:\nNONCORE CUSTOMER RATES. The Comprehensive Settlement also contemplates changes in the CPUC ratemaking procedures for determining rates to be charged by the Company to its customers for the five-year period commencing with the approval of the Comprehensive Settlement by the CPUC. Rates charged to the customers would be established based upon the Company's recorded throughput to these customers for 1991. The existing limited regulatory balancing account treatment for variances in noncore volumes from those estimated in establishing rates would be eliminated subject to a crediting mechanism for noncore revenues in excess of certain limits. Consequently, the Company would bear the full risk of any declines in noncore deliveries from 1991 levels. Any revenue enhancement from deliveries in excess of 1991 levels will be limited by a crediting account mechanism that will require a credit to customers of 87.5 percent of revenues in excess of certain limits. These annual limits above which the credit is applicable increase from $11 million to $19 million over the five-year period to which the Comprehensive Settlement is applicable.\nREASONABLENESS REVIEWS. The Comprehensive Settlement contemplates the settlement of all pending CPUC reasonableness reviews with respect to the Company's gas purchases from 1989 through 1992 as well as certain other future reasonableness review issues. The Comprehensive Settlement also allows recovery of future excess interstate pipeline capacity costs in the Company's rates.\nGAS COST INCENTIVE MECHANISM. The Comprehensive Settlement contemplates that a gas cost incentive mechanism (GCIM) would be implemented with an initial term of three years. Gas costs in excess of a tolerance band over average market price would be shared equally between ratepayers and the Company. Savings from gas purchased below the average market price would be also shared equally between the ratepayers and the Company. The GCIM would provide a 4 1\/2 percent tolerance band in 1994 and a 4 percent tolerance band in 1995 and\n1996. The GCIM is intended to replace the current gas procurement reasonableness review process. On March 16, 1994, the CPUC issued its decision approving the GCIM for implementation for a three year trial period beginning April 1, 1994.\nATTRITION ALLOWANCES. The Comprehensive Settlement contemplates that the Company may receive annual allowances for operational attrition for 1995 and 1996 only to the extent that the annual inflation rate for those years exceeds 2 percent or 3 percent, respectively. This is a departure from past regulatory practice of allowing recovery of the full effect of inflation in rates. The Company intends to continue to attempt to control operating expenses and investment in those years to amounts authorized in rates to offset the effect of this regulatory change.\nThe Company believes the Comprehensive Settlement will be approved by the CPUC; therefore, it has been reflected in the Company's financial statements. Approximately $465 million is included in Regulatory Accounts Receivable and Regulatory Assets for the recovery of costs as provided in the Comprehensive Settlement. Upon giving effect to liabilities previously recognized at the Company and amounts absorbed by its gas supply affiliates, the costs of the Comprehensive Settlement, including the restructuring of gas supply contracts, did not result in any additional charge to The Gas Company's consolidated earnings. In the event the Comprehensive Settlement is not approved by the CPUC, the Company will seek other regulatory approvals for the recovery of these costs.\nFACTORS INFLUENCING FUTURE PERFORMANCE. Based on existing ratemaking policies, future Company earnings and cash flow will be determined primarily by the allowed rate of return on common equity, the growth in rate base, noncore pricing and the variance in gas volumes delivered to these customers versus CPUC-adopted forecast deliveries, the recovery of gas and contract restructuring costs if the Comprehensive Settlement is not approved and the ability of management to control expenses and investment in line with the amounts authorized by the CPUC to be collected in rates. Also, the Company's ability to earn revenues in excess of its authorized return from noncore customers due to volume increases will be substantially eliminated for the five years of the Comprehensive Settlement described above. This is because forecasted deliveries in excess of the 1991 throughput levels used to establish rates were contemplated in estimating the costs of the Comprehensive Settlement, and are reflected in current year liabilities. The impact of any future regulatory restructuring and increased competitiveness in the industry, including the continuing threat of customers bypassing the Company's system and obtaining service\ndirectly from interstate pipelines, can also affect the Company's performance.\nThe Gas Company's earnings for 1994 will be affected by the reduction in the authorized rate of return on common equity, reflecting the overall decline in cost of capital offset by higher rate base than in 1993. For 1994, the Company is authorized to earn a rate of return on rate base of 9.22 percent and an 11.00 percent rate of return on common equity compared to 9.99 percent and 11.90 percent, respectively, in 1993. Rate base is expected to increase by approximately 4 percent to 5 percent in 1994.\nSince the completion of the Kern River\/Mojave Interstate Pipeline (Mojave) in February 1992, the Company's throughput to customers in the Kern County area who use natural gas to produce steam for enhanced oil recovery projects has decreased significantly because of the bypass of the Company's system. Mojave now delivers to customers formerly served by the Company 350 million to 400 million cubic feet per day. The decrease in revenues from enhanced oil recovery customers is subject to full balancing account treatment, except for a 5 percent incentive to the Company for attaining certain throughput levels, and therefore, does not have a material impact on the Company's earnings. However, bypass of other markets may also occur as a result of plans by Mojave to extend its pipeline north to Sacramento through portions of the Company's service territory. The effect of bypass is to increase the Company's rates to other customers and thus make its natural gas service less competitive with that of competing pipelines and available alternate fuels.\nIn response to bypass, the Company has received authorization from the CPUC for expedited review of price discounts proposed for long-term gas transportation contracts with some noncore customers. In addition, in December 1992, the CPUC approved changes in the methodology for allocating the Company's cost between core and noncore customers to reduce subsidization of core customer rates by noncore customers. Effective in June 1993, these new rate changes implemented the CPUC's policy known as \"long-run marginal cost.\" The revised methodologies have resulted in a reduction of noncore rates and a corresponding increase in core rates that better reflects the cost of serving each customer class and, together with price discounting authority, has enabled the Company to better compete with interstate pipelines for noncore customers. In addition, in August 1993 a capacity brokering program was implemented. Under the program, for a fee, the Company provides to noncore customers, or others, a portion of its control of interstate pipeline capacity to allow more direct access to producers. Also, the Comprehensive Settlement will help the Company's competitiveness by reducing the cost of transportation service to noncore customers.\nOver the past 11 years, management has been able to control operating expenses and investment within the amounts authorized to be collected in rates and intends to continue to do so. However, it may not be able to accomplish this goal. It also bears the risk of nonrecovery of margin or other costs authorized by the CPUC for the noncore market subject to the Comprehensive Settlement as discussed above. Unanticipated sharp increases in the inflation rate could also reduce earnings and cash flow. This possibility is increased with the limits on attrition allowance in 1995 and 1996 under the proposed Comprehensive Settlement.\nThe Company's earnings are subject to variability depending on gas throughput for its noncore customers. There is a continuing risk that an unfavorable variance in noncore volumes can result from external factors such as weather, the use of increased hydroelectric power, the price relationship between alternative fuels and natural gas and the operational capacity and\/or competing pipeline bypass of the Company's system. In these cases the Company is at risk for the lost revenue. In addition, although an economic downturn or recession does not affect the Company as significantly as nonregulated businesses, there is a risk that an unfavorable variance in the noncore volumes can result.\nThe Gas Company's operations are affected by a growing number of environmental laws and regulations. These laws and regulations affect current operations as well as future expansion and also require cleanup of facilities no longer in use. Because of expected regulatory treatment, the Company believes that compliance with these laws will not have a significant impact on its financial statements. For further discussion of regulatory and environmental matters, see Note 5 of Notes to Consolidated Financial Statements.\nThe Company employs approximately 9,000 persons. Most field, clerical and technical employees of the Company are represented by the Utility Workers' Union of America, or the International Chemical Workers' Union. Collective bargaining agreements covering these approximately 6,400 employees expired on June 30, 1993, principally as a consequence of failure to reach agreement with respect to the Company's proposal to permit the use of outside contractors for certain services now being provided by union represented employees, if costs were not lowered to an amount that would be incurred through the use of outside contractors. In August 1993, after reaching an impasse, the Company unilaterally implemented the majority of its proposals and after two failed strike votes and further negotiations, the Union membership voted in February 1994 on a contract with terms consistent with that implemented by the Company. On February 28, 1994, the Union notified the Company that the contract had been ratified by the membership and a contract was signed on March 9, 1994. The collective bargaining agreement with respect to wages and working conditions will\nextend through March 31, 1996. The medical plan agreement will expire on December 31, 1995.\nOn January 17, 1994, the Company's service area was struck by a major earthquake. The result was a temporary disruption to approximately 150,000 customers and damage to some facilities. The financial impact of the damages related to the earthquake not recovered by insurance is expected to be recovered in rates under an existing balancing account mechanism, and should have no impact on the Company's financial statements.\nCAPITAL EXPENDITURES. Capital expenditures were $318 million, $326 million and $316 million in 1993, 1992 and 1991, respectively. Capital expenditures for utility plant are expected to be $345 million in 1994 and will be financed by internally-generated funds and by issuance of long-term debt.\nLIQUIDITY. In 1993, as a result of the Comprehensive Settlement, Accounts Payable-Affiliates includes the liability for lump sum settlement payments of $375 million to restructure long-term gas supply contracts and the liability for accelerated amortization of related pipeline assets of gas supply affiliates of $130 million; and Regulatory Assets include the long-term portion of the accrual of amounts to be recovered in rates. Regulatory Accounts Receivable increased in 1993 and 1992 reflecting higher undercollections under the BCAP balancing account procedures due primarily to throughput falling below CPUC-adopted forecast levels. The 1993 balance also includes the current portion of the accrual for the Comprehensive Settlement and undercollections for the transition costs in connection with the capacity brokering program.\nRegulatory interest income for 1993 and 1992 increased and decreased $3 million respectively, primarily due to the interest earned on the related interest-bearing regulatory accounts. Other-net (deductions) for 1993 and 1992 reflect the disallowances related to the new headquarters property. The loss on the in-substance defeasance of debt transactions recorded in 1992 is also reflected in Other-net.\nInterest on long-term debt for 1993 decreased $11 million and increased $10 million in 1992 due to the refinancing of debt at lower interest rates and the timing of new and replacement of previously retired debt issues. Other interest charges (credits) in 1993 increased $10 million reflecting higher accruals for regulatory related issues. The $10 million decrease in 1992 reflected lower interest associated with supplier refunds received and reversals of the interest associated with prior income tax exposures.\nThe Company expects to incur additional borrowings of $425 million to finance the Comprehensive Settlement. Borrowings are expected to include primarily commercial paper and medium-term notes. The Company has no plans to issue additional debt\nbeyond that required by the Comprehensive Settlement and up to $100 million to finance ongoing operations.\nITEM 8.","section_7A":"","section_8":"ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA\nSTATEMENT OF CONSOLIDATED INCOME\nSEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.\n- 32 -\nCONSOLIDATED BALANCE SHEET\nSEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.\n- 33 -\nSTATEMENT OF CONSOLIDATED CASH FLOWS\nSEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.\n- 34 -\nSTATEMENT OF CONSOLIDATED LONG-TERM DEBT\n- 35 -\nSEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS\n- 36 -\nSTATEMENT OF CONSOLIDATED SHAREHOLDERS' EQUITY\nSEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS\n- 37 -\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS\n1. Summary of Significant Accounting Policies\nThe Gas Company is a subsidiary of Pacific Enterprises (Parent) which owns approximately 96 percent of The Gas Company's voting stock, including all of its issued and outstanding common stock; therefore, per share data have been omitted.\nPRINCIPLES OF CONSOLIDATION. The consolidated financial statements include the accounts of the Company and its subsidiary, Southern California Gas Tower, a wholly-owned subsidiary that has a 15 percent limited partnership interest in a 52-story office building in which the Company occupies approximately one-half of the leasable space. Investments of less than 20 percent are accounted for using the cost method.\nRESTATEMENTS AND RECLASSIFICATION. Certain changes in account classification have been made in the prior years' consolidated financial statements to conform to the 1993 financial statement presentation.\nREGULATION. The Gas Company is a public utility and follows accounting policies prescribed or authorized by the California Public Utilities Commission (CPUC).\nINVENTORIES. Gas in storage inventory is stated at last-in, first-out (LIFO) cost. As a result of the regulatory accounting procedure, the pricing of gas in storage does not have an effect on net income. If the first-in, first-out (FIFO) method of accounting for gas inventory had been used by the Company, inventory would have been higher than reported at December 31, 1993 and 1992 by $58 million and $66 million, respectively. Materials and supplies are stated at average unit cost.\nUTILITY PLANT. The cost of additions, renewals and improvements to utility plant are charged to the appropriate plant accounts. These costs include labor, material, other direct costs, indirect charges and an allowance for funds used during construction. The cost of utility plant retired or otherwise disposed of, plus removal costs and less salvage, is charged to accumulated depreciation. Depreciation is recorded on the straight-line remaining life basis.\nREVENUES. Operating revenues are recognized in the same period in which the related gas is delivered to customers.\nOTHER. Cash equivalents include short-term investments purchased with maturities of less than 90 days. Interest of $7 million in 1993, $6 million in 1992 and $5\n- 38 -\nmillion in 1991 was capitalized. Other major accounting policies are included in the following notes.\n- 39 -\n2. Gain On Sale Of Headquarters and Relocation\nIn 1987, The Gas Company completed an agreement under which the headquarters office property of the Company was sold. In late 1990, the CPUC ruled that the entire after-tax gain of approximately $24 million be returned to ratepayers over a period of 11 years and 11 months without interest. The Gas Company was permitted to retain the investment income it has earned on the net proceeds from the sale to date and will continue to be entitled to this income through the refund period. As a result, the Company recorded a net after-tax gain of $15 million in 1991, which reflects the $24 million gain reduced by the liability due to ratepayers discounted to the date of sale. At December 31, 1993, the discounted refund obligation remaining for the unamortized pre-tax gain (net proceeds of $62 million less book value of the property) was $21 million and is included in Accounts Payable -Other and Other Deferred Credits in the Consolidated Balance Sheet.\nIn late 1991, the Company moved its corporate headquarters to a new location in downtown Los Angeles. The Company leases about one-half of the space in The Gas Company Tower, and is also a limited partner in the ownership of the building. In connection with the Company's move to The Gas Company Tower, the CPUC performed a review of the costs associated with this new leased office space. In July 1992, the CPUC decided that certain lease expenses and approximately $8 million of related capital expenditures should not be recoverable in future gas rates. The CPUC decision also required that the Company compensate ratepayers over the 20-year life of the lease for the estimated sale value of its 15 percent ownership interest in The Gas Company Tower.\n3. Income Taxes\nIn 1992, the Company adopted Statement of Financial Accounting Standards No. 109, \"Accounting for Income Taxes\", the effect of which was not material.\nA reconciliation of the difference between computed statutory federal income tax expense and actual income tax expense is as follows:\n- 40 -\n- 41 -\nThe components of income tax expense are as follows:\nThe principal components of net deferred tax liabilities are as follows:\nThe Parent files a consolidated federal income tax return and combined California franchise tax reports which include the Company and the Parent's other subsidiaries. The Gas Company pays the amount of taxes applicable to the Company had it filed on a separate return basis.\nThe Company generally provides for income taxes on the basis of amounts expected to be paid currently except for the provision for deferred income taxes on regulatory accounts, customer advances for construction and accelerated depreciation of property placed in service after 1980. In addition, the Company recognizes certain other deferred tax liabilities (primarily accelerated depreciation of property placed in service prior to 1981 and deferred investment tax credits) which are expected to be recovered through future rates. At December 31, 1993 and 1992, $109 million and $105 million, respectively, of deferred income taxes have been offset by an equivalent amount in Regulatory Assets.\n- 42 -\n4. Restructuring of Gas Supply Contracts and Comprehensive Settlement of Regulatory Issues\nRESTRUCTURING OF GAS SUPPLY CONTRACTS. The Company and its gas supply affiliates have reached agreements with suppliers of California offshore and Canadian gas for a restructuring of long-term gas supply contracts. The cost of these supplies to the Company has been substantially in excess of the Company's average delivered cost of gas. During 1993, these excess costs totaled approximately $125 million.\nThe agreements substantially reduce the ongoing delivered costs of these gas supplies and provide lump sum settlement payments of $375 million to the suppliers. The expiration date for the Canadian gas supply contract has been shortened from 2012 to 2003, and the supplier of California offshore gas continues to have an option to purchase related gas treatment and pipeline facilities owned by the Company's gas supply affiliate. The agreement with the suppliers of Canadian gas is subject to certain Canadian regulatory and other approvals.\nCOMPREHENSIVE SETTLEMENT OF REGULATORY ISSUES. The Company and a number of interested parties (including the Division of Ratepayer Advocates (DRA) of the CPUC, large noncore customers and ratepayer groups) have proposed for CPUC approval a comprehensive settlement (Comprehensive Settlement) of a number of pending regulatory issues including partial rate recovery of restructuring costs associated with the gas supply contracts discussed above. The Comprehensive Settlement, if approved by the CPUC, would permit the Company to recover in utility rates approximately 80 percent of the contract restructuring costs of $375 million and accelerated amortization of related pipeline assets of its gas supply affiliates of approximately $130 million, together with interest, over a period of approximately five years. The Company has filed a financing application with the CPUC primarily for the borrowing of $425 million to provide for funds needed under the Comprehensive Settlement. In addition to the gas supply issues, the Comprehensive Settlement addresses the following other regulatory issues:\nNONCORE CUSTOMER RATES. The Comprehensive Settlement also contemplates changes in the CPUC ratemaking procedures for determining rates to be charged by the Company to its customers for the five-year period commencing with the approval of the Comprehensive Settlement by the CPUC. Rates charged to the customers would be established based upon the Company's recorded throughput to these customers for 1991. The existing limited regulatory balancing account treatment for variances in noncore volumes from those estimated in establishing rates would be eliminated subject to a crediting mechanism for noncore revenues in excess of certain limits. Consequently, the Company would bear the full risk of any declines\n- 43 -\nin noncore deliveries from 1991 levels. Any revenue enhancement from deliveries in excess of 1991 levels will be limited by a crediting account mechanism that will require a credit to customers of 87.5 percent of revenues in excess of certain limits. These annual limits above which the credit is applicable increase from $11 million to $19 million over the five-year period to which the Comprehensive Settlement is applicable.\nREASONABLENESS REVIEWS. The Comprehensive Settlement contemplates the settlement of all pending CPUC reasonableness reviews with respect to the Company's gas purchases from 1989 through 1992 as well as certain other future reasonableness review issues. The Comprehensive Settlement also allows recovery of future excess interstate pipeline capacity costs in the Company's rates.\nGAS COST INCENTIVE MECHANISM. The Comprehensive Settlement contemplates that a gas cost incentive mechanism (GCIM) would be implemented with an initial term of three years. Gas costs in excess of a tolerance band over average market price would be shared equally between ratepayers and the Company. Savings from gas purchased below the average market price would be also shared equally between the ratepayers and the Company. The GCIM would provide a 4 1\/2 percent tolerance band in 1994 and a 4 percent tolerance band in 1995 and 1996. The GCIM is intended to replace the current gas procurement reasonableness review process. On March 16, 1994, the CPUC issued its decision approving the GCIM for implementation for a three year trial period beginning April 1, 1994.\nATTRITION ALLOWANCES. The Comprehensive Settlement contemplates that the Company may receive annual allowances for operational attrition for 1995 and 1996 only to the extent that the annual inflation rate for those years exceeds 2 percent and 3 percent, respectively. This is a departure from past regulatory practice of allowing recovery of the full effect of inflation in rates. The Company intends to continue to attempt to control operating expenses and investment in those years to amounts authorized in rates to offset the effect of this regulatory change.\nThe Company believes the Comprehensive Settlement will be approved by the CPUC; therefore, it has been reflected in the Company's financial statements. Approximately $465 million is included in Regulatory\n- 44 -\nAccounts Receivable and Regulatory Assets for the recovery of costs as provided in the Comprehensive Settlement. Accounts Payable-Affiliates include the liability for lump sum settlement payments of $375 million to restructure long-term gas supply contracts. Upon giving effect to liabilities previously recognized at the Company, the costs of the Comprehensive Settlement, including the restructuring of gas supply contracts, did not result in any additional charge to The Gas Company's consolidated earnings. In the event the Comprehensive Settlement is not approved by the CPUC, the Company will seek other regulatory approvals for the recovery of these costs.\n5. Commitments and Contingent Liabilities\nENVIRONMENTAL OBLIGATIONS. The Gas Company has identified and reported to California environmental authorities 42 former gas manufacturing sites for which it (together with other utilities as to 21 of the sites) may have remedial obligations under environmental laws. In addition, the Company is one of a large number of major corporations that have been named by federal authorities as potentially responsible parties for environmental remediation of two other industrial sites and a landfill site. These 45 sites are in various stages of investigation or remediation. It is anticipated that the investigation, and if necessary, remediation of these sites will be completed over a period of from 10 years to 20 years.\nThe CPUC approved approximately $9 million in the Company's base rates for expenditures beginning in 1990 through 1993, associated with investigating these sites. In addition, the CPUC previously has approved a special ratemaking procedure with respect to environmental remediation costs under which, upon approval by the CPUC on a site-by-site basis, these costs are accumulated for recovery in future rates subject to a reasonableness review. However, in a decision issued in late 1992 in connection with its initial reasonableness review of these costs, the CPUC concluded that the Company had failed to demonstrate, by clear and convincing evidence, the reasonableness for rate recovery of the applied for remediation costs under the existing ratemaking procedure. The decision concluded that a reasonableness review procedure may not be appropriate for rate recovery of environmental remediation costs. In addition, the CPUC ordered the Company along with other California energy utilities and the DRA to work toward the development of an alternate ratemaking procedure including cost sharing between shareholder and ratepayers.\nIn November 1993, a collaborative settlement agreement between the above parties was submitted to the CPUC for approval that recommends a ratemaking mechanism that would provide recovery of 90 percent of environmental investigation and remediation costs without reasonableness\n- 45 -\nreview. In addition, the utilities would have the opportunity to retain a percentage of any insurance recoveries to offset the 10 percent of costs not recovered in rates. On March 10, 1994, an administrative law judge's proposed decision was issued which adopted the sharing mechanism discussed above. A final CPUC decision is expected in mid-1994.\nThrough the end of 1993, preliminary investigations at 33 sites have been completed by the Company and investigation and remediation liabilities are estimated to be $82 million for all 45 sites. The liability estimated for these sites is subject to future adjustment pending further investigation. In 1993 and 1992, the Company charged $7 million and $5 million, respectively, to income and the remaining amount is included in Regulatory Assets. The Company believes that any costs not ultimately recovered through rates, insurance or other means, upon giving effect to previously established liabilities, will not have a material adverse effect on the Company's financial statements.\nOTHER COMMITMENTS AND CONTINGENCIES. On January 17, 1994, the Company's service area was struck by a major earthquake. The result was a disruption in service to less than 3 percent of its customers at any given time and damage to some facilities. The financial impact of the damages related to the earthquake not recovered by insurance is expected to be recovered in rates under an existing regulatory mechanism, and should have no impact on the Company's financial statements.\nAt December 31, 1993, the Company had commitments for capital expenditures of approximately $30 million.\n6. Leases\nThe Gas Company has leases on real and personal property expiring at various dates from 1994 to 2011. The rentals payable under these leases are determined on both fixed and percentage bases and most leases contain options to extend which are excercisable by the Company.\nRental expense under operating leases was $39 million, $37 million and $24 million, in 1993, 1992 and 1991, respectively.\n- 46 -\nThe following is a schedule of future minimum operating lease commitments as of December 31, 1993:\n7. Compensating Balances and Short-term Borrowing Arrangements\nThe Company has $825 million of unsecured revolving lines of credit, of which $325 million is a multi-year credit agreement requiring annual fees of .125 percent and $500 million is a 364 day credit agreement requiring annual fees of .10 percent. At December 31, 1993, all bank lines of credit were unused. The unused bank lines of credit support the Company's commercial paper program and provide liquidity for the Company.\nAt December 31, 1993 and 1992, The Gas Company had commercial paper obligations of $267 million and $215 million, respectively, with weighted average annual interest rates of 3.25 percent and 3.81 percent, respectively.\n8. In-Substance Defeasance of Debt\nDuring 1992, the Company established irrevocable trusts to satisfy future principal and interest payments related to $200 million of its Series S and U First Mortgage Bonds. The first mortgage bonds, accrued interest thereon and related unamortized debt discount were removed from the 1992 Consolidated Balance Sheet in an in-substance defeasance transaction. The loss resulting from these transactions did not have a material impact on earnings.\n9. Fair Value of Financial Instruments\nThe carrying amount of cash and cash equivalents approximates fair value because of the short maturity of those instruments. The Company's Flexible Auction Series preferred stocks approximate fair value since they are remarketed periodically.\nThe fair value of the Company's long-term debt and 6 percent preferred, 6 percent Series A preferred and 7 3\/4 percent preferred stock is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to the Company for debt of similar remaining maturities. The fair value of these financial\n- 47 -\ninstruments is different from the carrying amount. The fair value of the swap transaction is the estimated amount that the bank would receive or pay to terminate the swap agreement at the reporting date, taking into account current exchange rates and the current credit worthiness of the swap counterparty.\nThe following financial instruments have a fair value which is different from the carrying amount as of December 31.\n- 48 -\n10. Capital Stock\nThe amount of capital stock outstanding is as follows:\n- 49 -\n11. Transactions with Affiliates\nPacific Interstate Transmission Company, Pacific Interstate Offshore Company and Pacific Offshore Pipeline Company, subsidiaries of the Parent and gas supply affiliates of The Gas Company, sell and transport gas to the Company under tariffs approved by the Federal Energy Regulatory Commission. During 1993, 1992 and 1991, billings for such gas purchases totaled $344 million, $356 million, and $381 million, respectively. The Gas Company has long-term gas purchase and transportation agreements with the affiliates extending through the year 2012 requiring certain minimum payments which allow the affiliates to recover the construction cost of their facilities. The Gas Company is obligated to make minimum annual payments to cover the affiliates' operation and maintenance expenses, demand charges paid to their suppliers, current taxes other than income taxes, and debt service costs, including interest expense and scheduled retirement of debt. These long-term agreements have recently been restructured in conjunction with the Comprehensive Settlement, previously discussed (see Note 4).\n12. Pension, Postretirement and Other Employee Benefit Plans\nPENSION PLANS. The Gas Company has a noncontributory defined benefit pension plan covering substantially all of its employees. Benefits are based on employees' years of service and compensation during his or her last years of employment. The Gas Company's policy is to fund the plan annually at a level which is fully deductible for federal income tax purposes and as necessary on an actuarial basis to provide assets sufficient to meet the benefits to be paid to plan members.\nIn conformity with generally accepted accounting principles for a rate regulated enterprise, The Gas Company has recorded regulatory adjustments to reflect, in net income, pension costs calculated under the actuarial method allowed for ratemaking. The cumulative difference between\n- 50 -\nthe net periodic pension cost calculated for financial reporting and ratemaking purposes has been included as a deferred charge (credit) in the Consolidated Balance Sheet.\nPension expense is as follows:\n- 51 -\nA reconciliation of the pension plans' funded status to the pension liability recognized in the Consolidated Balance Sheet is as follows:\nPOSTRETIREMENT BENEFIT PLANS. In 1993, the Company adopted Statement of Financial Accounting Standards No. 106, \"Employers' Accounting for Postretirement Benefits Other Than Pensions\" (SFAS 106). SFAS 106 requires the accrual of the cost of certain postretirement benefits other than pensions over the active service period of the employee. The Company previously recorded these costs when paid or funded. In accordance with SFAS 106, the Company elected to amortize the unfunded transition obligation of $256 million over 20 years. The CPUC in late 1992 authorized SFAS 106 amounts to be recovered in rates; therefore, a regulatory asset has been recorded to reflect the portion of the liability which will be recovered in future rates.\nThe Company's postretirement benefit plan currently provides medical and life insurance benefits to qualified retirees. In the past, employee cost-sharing provisions have been implemented to control the increasing costs of these benefits. Other changes could occur in the future. The Company's policy is to fund these benefits at a level which is fully tax deductible for federal income tax purposes, not to exceed amounts recoverable in rates, and as\n- 52 -\nnecessary on an actuarial basis to provide assets sufficient to be paid to plan participants. The net periodic postretirement benefit cost was as follows:\nPrior to 1993, the Company commenced funding its future liability for postretirement benefits through the pension plan . Amounts funded were subject to the respective income tax limitations and amounts provided through rates. In 1992 and 1991, the amounts funded totaled $22 million and $16 million, respectively.\nA reconciliation of the plan's funded status to the postretirement benefit liability recognized in the Consolidated Balance Sheet is as follows:\nThe assumed health care cost trend rate is 8 percent for 1994. The trend rate is expected to decrease from 1995 to 1998 with a 6 percent ultimate trend rate thereafter. The effect of a one-percentage-point increase in the assumed health care cost trend rate for each future year is $8 million on the aggregate of the service and interest cost components of net periodic postretirement cost for 1993 and $61 million on the accumulated postretirement benefit obligation at December 31, 1993. The estimated income tax rate used in the return on plan assets is zero since the plan assets are invested in tax exempt funds.\n- 53 -\nOTHER EMPLOYEE BENEFITS PLANS. Upon completion of one year of service, all employees of the Company are also eligible to participate in the Company's retirement savings plan administered by bank trustees. Employees may contribute from 1 to 14 percent of their regular earnings. The Gas Company generally contributes an amount of cash or a number of shares of the Parent's common stock of equivalent fair market value which, when added to prior forfeitures, will equal 50 percent of the first 6 percent of eligible base salary contributed by employees. The employees' contributions, at the direction of the employees, are primarily invested in the Parent's common stock, mutual funds or guaranteed interest accounts. The Gas Company's contributions, which were invested in the Parent's common stock, were $9 million each in 1993 and 1992 and $8 million in 1991.\nIn November 1992, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 112, \"Employers' Accounting for Postemployment Benefits\" (SFAS 112). SFAS 112 requires the accrual of the obligation to provide benefits to former or inactive employees after employment but before retirement. The new standard will be adopted by the Company in 1994 and is not expected to have a material impact on earnings since these costs, primarily disability benefits, are currently recovered in rates as paid.\nIn 1993, the Company offered a special early retirement program for a limited period to certain eligible employees. The cost of this program is included in the total pension expense for 1993.\n- 54 -\nSTATEMENT OF MANAGEMENT RESPONSIBILITY FOR CONSOLIDATED FINANCIAL STATEMENTS\nThe consolidated financial statements have been prepared by management. The integrity and objectivity of these financial statements and the other financial information in the Annual Report, including the estimates and judgments on which they are based, are the responsibility of management. The financial statements have been audited by Deloitte & Touche, independent auditors, appointed by the Board of Directors. Their report is shown on the following page. Management has made available to Deloitte & Touche all of the Company's financial records and related data, as well as the minutes of shareholders' and directors' meetings.\nManagement maintains a system of internal accounting control which it believes is adequate to provide reasonable, but not absolute, assurance that assets are properly safeguarded and accounted for, that transactions are executed in accordance with management's authorization and are properly recorded and reported, and for the prevention and detection of fraudulent financial reporting. Management monitors the system of internal control for compliance through its own review and a strong internal auditing program which also independently assesses the effectiveness of the internal controls. In establishing and maintaining internal controls, the Company exercises judgment in determining that the costs of such controls do not exceed the benefits to be derived.\nManagement acknowledges its responsibility to provide financial information (both audited and unaudited) that is representative of the Company's operations, reliable on a consistent basis, and relevant for a meaningful financial assessment of the Company. Management believes that the control process enables them to meet this responsibility.\nManagement also recognizes its responsibility for fostering a strong ethical climate so that the Company's affairs are conducted according to the highest standards of personal and corporate conduct. This responsibility is characterized and reflected in the Parent's code of corporate conduct, which is publicized throughout the Company. The Parent maintains a systematic program to assess compliance with this policy.\nThe Board of Directors has an Audit Committee composed solely of directors who are not officers or employees of the Company. The Committee recommends for approval by the full Board the appointment of the independent auditors. The Committee meets periodically with management, with the Company's internal auditors and with the independent auditors. The independent auditors and the internal auditors also meet alone with the Audit Committee and have free access to the Audit Committee at any time.\nRichard D. Farman Chief Executive Officer\nRalph Todaro Vice President, Finance and Controller\nJanuary 31, 1994\n- 55 -\nINDEPENDENT AUDITORS' REPORT\nSouthern California Gas Company:\nWe have audited the consolidated financial statements of Southern California Gas Company and its subsidiary (pages 31 to 53) as of December 31, 1993 and 1992, and for each of the three years in the period ended December 31, 1993. Our audits also included the consolidated financial statement schedules listed in the Index at Item 14(a)2. These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.\nWe conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.\nIn our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Southern California Gas Company and its subsidiary as of December 31, 1993 and 1992, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1993, in conformity with generally accepted accounting principles. Also, in our opinion, such consolidated financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein.\nDELOITTE & TOUCHE\nLos Angeles, California January 31, 1994\n- 56 -\nOTHER INFORMATION QUARTERLY FINANCIAL DATA (UNAUDITED)\n- 57 -\nITEM 9.","section_9":"ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE\nNone\nPART III\nITEM 10.","section_9A":"","section_9B":"","section_10":"ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT\nInformation required by this Item with respect to the Company's directors is set forth under the caption \"Election of Directors\" in the Company's Information Statement for its Annual Meeting of Shareholders scheduled to be held on April 25, 1994. Such information is incorporated herein by reference.\nInformation required by this Item with respect to the Company's executive officers is set forth in Item 1 of this Annual Report.\nITEM 11.","section_11":"ITEM 11. EXECUTIVE COMPENSATION\nInformation required by this Item is set forth under the caption \"Election of Directors\", \"Executive Compensation\" and \"Employee Benefit Plans\" in the Company's Information Statement for its Annual Meeting of Shareholders scheduled to be held on April 25, 1994. Such information is incorporated herein by reference.\nITEM 12.","section_12":"ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT\nInformation required by this Item is set forth under the caption \"Election of Directors\" in the Company's Information Statement for its Annual Meeting of Shareholders scheduled to be held on April 25, 1994. Such information is incorporated herein by reference.\nITEM 13.","section_13":"ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS\nNot applicable.\n- 58 -\nPART IV\nITEM 14.","section_14":"ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K\n(a) Documents filed as part of this report:\n1. CONSOLIDATED FINANCIAL STATEMENTS (SET FORTH IN ITEM 8 OF THIS ANNUAL REPORT ON FORM 10-K):\n1.01 Report of Deloitte & Touche Independent Auditors.\n1.02 Statement of Consolidated Income for the years ended December 31, 1993, 1992 and 1991.\n1.03 Statement of Consolidated Cash Flows for the years ended December 31, 1993, 1992 and 1991.\n1.04 Consolidated Balance Sheet at December 31, 1993 and 1992.\n1.05 Statement of Consolidated Long-Term Debt at December 31, 1993 and 1992. 1.06 Statement of Consolidated Shareholders' Equity for the years ended December 31, 1993, 1992 and 1991.\n1.07 Notes to Consolidated Financial Statements.\n2. SUPPLEMENTAL FINANCIAL STATEMENT SCHEDULES:\n2.01 Report of Deloitte & Touche, Independent Auditors (contained in Item 1.01)\n2.02 Utility Plant for the years ended December 31, 1993, 1992 and 1991 - Schedule V. . . . . . . . . . . . . . . . . . . . .\n2.03 Accumulated Depreciation and Amortization of Utility Plant for the years ended December 31, 1993, 1992 and 1991 - Schedule VI . . . . . . . . . . . . . . . . . . . .\n2.04 Short-Term Borrowings, December 31, 1993, 1992 and 1991 - Schedule IX . . . . . . . . . . . .\n- 59 - 3. ARTICLES OF INCORPORATION AND BY-LAWS:\n3.01 Restated Articles of Incorporation of Southern California Gas Company (Note 25; Exhibit 3.01)\n3.02 Bylaws of Southern California Gas Company. . . . . .\n4. INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS:\n(Note: As permitted by Item 601(b)(4)(iii) of Regulation S-K, certain instruments defining the rights of holders of long-term debt for which the total amount of securities authorized thereunder does not exceed ten percent of the total assets of Southern California Gas Company and its subsidiaries on a consolidated basis are not filed as exhibits to this Annual Report. The Company agrees to furnish a copy of each such instrument to the Commission upon request.)\n4.01 Specimen Preferred Stock Certificates of Southern California Gas Company (Note 13; Exhibit 4.01).\n4.02 First Mortgage Indenture of Southern California Gas Company to American Trust Company dated as of October 1, 1940 (Note 1; Exhibit B-4).\n4.03 Supplemental Indenture of Southern California Gas Company to American Trust Company dated as of July 1, 1947 (Note 2; Exhibit B-5).\n4.04 Supplemental Indenture of Southern California Gas Company to American Trust Company dated as of August 1, 1955 (Note 3; Exhibit 4.07).\n4.05 Supplemental Indenture of Southern California Gas Company to American Trust Company dated as of June 1, 1956 (Note 4; Exhibit 2.08).\n4.06 Supplemental Indenture of Southern California Gas Company to Wells Fargo Bank, National Association dated as of August 1, 1972 (Note 7; Exhibit 2.19).\n4.07 Supplemental Indenture of Southern California Gas Company to Wells Fargo Bank, National Association dated as of May 1, 1976 (Note 6; Exhibit 2.20).\n4.08 Supplemental Indenture of Southern California Gas Company to Wells Fargo Bank, National Association dated as of September 15, 1981 (Note 12; Exhibit 4.25).\n- 60 -\n4.09 Supplemental Indenture of Southern California Gas Company to Manufacturers Hanover Trust Company of California, successor to Wells Fargo Bank, National Association, and Crocker National Bank as Successor Trustee dated as of May 18, 1984 (Note 16; Exhibit 4.29).\n4.10 Supplemental Indenture of Southern California Gas Company to Bankers Trust Company of California, N.A., successor to Wells Fargo Bank, National Association dated as of January 15, 1988 (Note 18; Exhibit 4.11).\n4.11 Supplemental Indenture of Southern California Gas Company to First Trust of California, National Association, successor to Bankers Trust Company of California, N.A. dated as of August 15, 1992 (Note 24; Exhibit 4.37).\n4.12 Specimen Flexible Auction Series A Preferred Stock Certificate (Note 21; Exhibit 4.11).\n4.13 Specimen Flexible Auction Series B Preferred Stock Certificate (Note 22; Exhibit 4.12).\n4.14 Specimen Flexible Auction Series C Preferred Stock Certificate (Note 23; Exhibit 4.13).\n4.15 Specimen 7 3\/4% Series Preferred Stock Certificate (Note 25; Exhibit 4.15).\n10. MATERIAL CONTRACTS\n10.01 Restatement and Amendment of Pacific Enterprises 1979 Stock Option Plan (Note 10; Exhibit 1.1).\n10.02 Pacific Enterprises Supplemental Medical Reimbursement Plan for Senior Officers (Note 11; Exhibit 10.24).\n10.03 Pacific Enterprises Financial Services Program for Senior Officers (Note 11; Exhibit 10.25).\n10.04 Southern California Gas Company Retirement Savings Plan, as amended and restated as of August 30, 1988 (Note 15; Exhibit 28.02).\n10.05 Southern California Gas Company Statement of Life Insurance, Disability Benefit and Pension Plans, as amended and restated as of January 1, 1985 (Note 16; Exhibit 10.27).\n- 61 -\n10.06 Southern California Gas Company Pension Restoration Plan For Certain Management Employees (Note 11; Exhibit 10.29).\n10.07 Pacific Enterprises Executive Incentive Plan (Note 18; Exhibit 10.13)\n10.08 Pacific Enterprises Deferred Compensation Plan for Key Management Employees (Note 15; Exhibit 10.41).\n10.09 Pacific Enterprises Stock Incentive Plan (Note 19; Exhibit 4.01).\n22. SUBSIDIARIES OF THE REGISTRANT\n22.01 List of subsidiaries of Southern California Gas Company. . . . . . . . . . . . . . . . . .\n24. CONSENTS OF EXPERTS AND COUNSEL 24.01 Consent of Deloitte & Touche, Independent Auditors. . . . . . . . . . . . . . . . . . .\n25. POWER OF ATTORNEY\n25.01 Power of Attorney of Certain Officers and Directors of Southern California Gas Company (contained on the signature pages of this Annual Report on Form 10-K).\n(b) REPORTS ON FORM 8-K: The following reports on Form 8-K were filed during the last quarter of 1993.\nReport Date Item Reported ----------- ------------- Oct. 29, 1993 Item 5 Nov. 3, 1993 Item 5 Dec. 3, 1993 Item 5 Dec. 17, 1993 Item 5 _________________________\nNOTE: Exhibits referenced to the following notes were filed with the documents cited below under the exhibit or annex number following such reference. Such exhibits are incorporated herein by reference.\n- 62 -\nNote Reference Document 1 Registration Statement No. 2-4504 filed by Southern California Gas Company on September 16, 1940.\n2 Registration Statement No. 2-7072 filed by Southern California Gas Company on March 15, 1947.\n3 Registration Statement No. 2-11997 filed by Pacific Lighting Corporation on October 26, 1955.\n4 Registration Statement No. 2-12456 filed by Southern California Gas Company on April 23, 1956.\n5 Registration Statement No. 2-45361 filed by Southern California Gas Company on August 16, 1972.\n6 Registration Statement No. 2-56034 filed by Southern California Gas Company on April 14, 1976.\n7 Registration Statement No. 2-59832 filed by Southern California Gas Company on September 6, 1977.\n8 Registration Statement No. 2-42239 filed by Pacific Lighting Gas Supply Company (under its former name of Pacific Lighting Service Company) on October 29, 1971.\n9 Registration Statement No. 2-43834 filed by Pacific Lighting Corporation on April 17, 1972.\n10 Registration Statement No. 2-66833 filed by Pacific Lighting Corporation on March 5, 1980.\n11 Annual Report on Form 10-K for the year ended December 31, 1980, filed by Pacific Lighting Corporation.\n12 Annual Report on Form 10-K for the year ended December 31, 1981, filed by Pacific Lighting Corporation.\n13 Annual Report on Form 10-K for the year ended December 31, 1980 filed by Southern California Gas Company.\n14 Quarterly Report on Form 10-Q for the quarter ended September 30, 1983, filed by Southern California Gas Company.\n15 Registration Statement No. 33-6357 filed by Pacific Enterprises on December 30, 1988.\n- 63 -\n16 Annual Report on Form 10-K for the year ended December 31, 1984, filed by Southern California Gas Company.\n17 Current Report on Form 8-K for the month of March 1986, filed by Southern California Gas Company.\n18 Annual Report on Form 10-K for the year ended December 31, 1987 filed by Pacific Lighting Corporation.\n19 Registration Statement No. 33-21908 filed by Pacific Enterprises on May 17, 1988.\n20 Annual Report on Form 10-K for the year ended December 31, 1988, filed by Southern California Gas Company.\n21 Annual Report on Form 10-K for the year ended December 31, 1989, filed by Southern California Gas Company.\n22 Annual Report on Form 10-K for the year ended December 31, 1990, filed by Southern California Gas Company.\n23 Annual Report on Form 10-K for the year ended December 31, 1991, filed by Southern California Gas Company.\n24 Registration Statement No. 33-50826 filed by Southern California Gas Company on August 13, 1992.\n25 Annual Report on Form 10-K for the year ended December 31, 1992, filed by Southern California Gas Company.\n- 64 -\nSIGNATURES\nPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.\nSOUTHERN CALIFORNIA GAS COMPANY\nBy: WILLIS B. WOOD --------------------------------------- Name: WILLIS B. WOOD, JR.\nTitle: Presiding Director\nDated: March 28, 1994\n- 65 -\nEach person whose signature appears below hereby authorizes Lloyd A. Levitin, Ralph Todaro and Warren I. Mitchell, and each of them, severally, as attorney-in-fact, to sign on his or her behalf, individually and in each capacity stated below, and file all amendments to this Annual Report.\nPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.\nSignature Title Date\nWILLIS B. WOOD, JR. Presiding March 28, 1994 - ------------------------------- Director and Director (Willis B. Wood, Jr.) (Principal Executive Officer)\nLLOYD A. LEVITIN Executive Vice - March 28, 1994 - ------------------------------ President and Chief (Lloyd A. Levitin) Financial Officer (Principal Financial Officer)\nHYLA H. BERTEA Director March 28, 1994 - ------------------------------ (Hyla H. Bertea)\nHERBERT L. CARTER Director March 28, 1994 - ------------------------------ (Herbert L. Carter)\nJAMES F. DICKASON Director March 28, 1994 - ------------------------------ (James F. Dickason)\nRICHARD D. FARMAN Director March 28, 1994 - ------------------------------ (Richard D. Farman)\nWILFORD D. GODBOLD, JR. Director March 28, 1994 - ------------------------------ (Wilford D. Godbold, Jr.)\nIGNACIO E. LOZANO, JR. Director March 28, 1994 - ------------------------------ (Ignacio E. Lozano, Jr.)\nHAROLD M. MESSMER, JR. Director March 28, 1994 - ------------------------------ (Harold M. Messmer, Jr.)\n- 66 -\nPAUL A. MILLER Director March 28, 1994 - ------------------------------ (Paul A. Miller)\nJOSEPH N. MITCHELL Director March 28, 1994 - ------------------------------ (Joseph N. Mitchell)\nJOSEPH R. RENSCH Director March 28, 1994 - ------------------------------ (Joseph R. Rensch)\nROCCO C. SICILIANO Director March 28, 1994 - ------------------------------ (Rocco C. Siciliano)\nLEONARD H. STRAUS Director March 28, 1994 - ------------------------------ (Leonard H. Straus)\nDIANA L. WALKER Director March 28, 1994 - ------------------------------ (Diana L. Walker)\nAPPENDIX TO FORM 10-K\nDESCRIPTION OF MAP\nThis is a map of the State of California. The shaded portions of the map, most of southern and parts of central California, indicate the area served by Southern California Gas Company.","section_15":""}
{"filename":"50485_1993.txt","cik":"50485","year":"1993","section_1":"Item 1. BUSINESS Ingersoll-Rand Company (the company) was organized in 1905 under the laws of the State of New Jersey as a consolidation of Ingersoll-Sergeant Drill Company and the Rand Drill Company, whose businesses were established in the early 1870's. Over the years the company has supplemented its original business, which consisted primarily of the manufacture and sale of rock drilling equipment, with additional products which have been developed internally or obtained through acquisition.\nOn December 31, 1986, the company and Dresser Industries, Inc. (Dresser) formed Dresser-Rand Company (Dresser-Rand), a partnership comprising the worldwide reciprocating compressor and turbomachinery businesses of the two companies. Dresser-Rand, originally a 50\/50 partnership, commenced operations on January 1, 1987. Effective October 1, 1992, Dresser increased its ownership interest in the partnership to 51 percent from 50 percent. The company's ownership interest is now 49 percent. Dresser-Rand manufactures products such as gas turbines, gas compressors, power recovery systems, reciprocating gas engines and steam turbines, which were previously manufactured by the company.\nEffective October 1, 1992, the company and Dresser formed Ingersoll-Dresser Pump Company (IDP), a partnership which is owned 51 percent by the company and 49 percent by Dresser. This joint venture includes the majority of the worldwide pump operations of the two companies, and its results have been included in the consolidated financial statements of the company since the formation date.\nThe following acquisitions have been accounted for as purchases and, accordingly, each purchase price was allocated to the acquired assets and assumed liabilities based on their estimated fair values. The results of operations since the dates of acquisition are included in the consolidated financial statements.\no Effective February 1, 1990, the company completed the acquisition of The Aro Corporation (Aro) and its subsidiaries for $131.5 million in cash, from Todd Shipyards Corporation. Aro is a manufacturer of air-powered tools, valves, pumps and related equipment.\no On October 31, 1990, the company acquired ABG Verwaltungs GmbH and related entities (ABG) for $35.4 million in cash. ABG is a manufacturer of paving equipment and other road machinery. During 1990, the company also acquired several smaller operations for approximately $27.7 million in cash.\no In early 1992, the company acquired Industrias del Rodamiento, S.A. (IRSA) for $14.0 million in cash and $1.8 million in notes. IRSA manufactures and markets an extensive line of bearings, as well as wheel kits and automotive accessories.\no In August 1993, the company acquired the Kunsebeck, Germany, needle and cylindrical bearing business of FAG Kugelfischer Georg Schafer AG of Schweinfurt, Germany, for $42.5 million in cash, subject to final contract negotiations.\nDispositions that the company has made in recent years are as follows:\no The company sold on January 18, 1991, Schlage Electronics, a business unit of the company's Schlage Lock Company. The sales price was in excess of the carrying value of the investment in Schlage Electronics.\no The company sold the assets of several small business units in 1993, as well as substantially all of the assets of its coal- mining machinery and aerospace bearings businesses for $55.5 million in cash.\nProducts The company manufactures and sells primarily nonelectrical machinery and equipment. Principal products include the following:\nAbrasive blasting and recovery Industrial pumps systems Lubrication equipment Air compressors Material handling equipment Air dryers Mining machinery Air logic controls Monitoring drills Air motors Needle roller bearings Air tools Pavement-milling machines Architectural hardware trim Paving equipment Asphalt compactors Pellet mills Automated-parts finishing Pneumatic cylinders systems Pneumatic valves Automated production systems Portable compressors Automotive components Portable generators Ball bearings Portable light towers Construction equipment Pulp-processing machinery Dewatering presses Road-building machinery Diaphragm pumps Rock drills Door closers Roller bearings Door hardware Roller mills Door locks Rotary drills Emergency exit devices Rough-terrain forklifts Engineered pumps Separation equipment Engine-starting systems Soil compactors Extrusion systems Spray-coating systems Fluid-handling equipment Waterjet-cutting systems Food-processing equipment Water well drills Foundation drills Winches Hoists\nThese products are sold primarily under the company's name and also under other names including Torrington, Fafnir, Klemm, Schlage, CPM, LCN Closers, Von Duprin, Aro, ABG, Ingersoll-Dresser Pumps, Pacific, Worthington, Jeumont-Schneider Pumps and Pleuger.\nDuring the past three years, the division of the company's sales between capital goods and expendables has been in the approximate ratio of 56 percent and 44 percent, respectively. The company generally defines as expendables those products which are not capitalized by the ultimate user. Examples of such products are parts sold for replacement purposes, power tools and needle bearings.\nThe seasonal business of the company is insignificant.\nAdditional information on the company's business and financial information about industry segments is presented in Footnote 16 of the Annual Report to Shareowners for 1993, incorporated by reference in this Form 10-K Annual Report.\nDistribution The company's products are distributed by a number of methods which the company believes are appropriate to the type of product. Sales are made domestically through branch sales offices and through distributorships and dealers across the United States. International sales are made through approximately 60 subsidiary sales and service companies with a supporting chain of distributors in over 100 countries.\nWorking Capital The working capital requirements of the company vary with respect to the many products and industries in which it is involved. In general, the requirements of its Engineered Equipment Segment, which manufactures machinery for specialized customer needs, involve a relatively long lead time and, at times, more significant company investment with respect to the particular product or order. Historically, these orders are generally covered by progress payments, which reduce the company's investment in the amount of inventory maintained by this segment. The products manufactured by the company's Standard Machinery and Bearings, Locks and Tools segments are more in the nature of standard equipment. Consequently, a wider variety must usually be more readily available to meet rapid delivery requirements. Such working capital requirements are not, however, in the opinion of management, materially different from those experienced by the company's major competitors.\nCustomers No material part of the company's business is dependent upon a single customer or very few customers, the loss of any one of which would have a material adverse effect on the company's operations.\nCompetitive Conditions The company's products are sold in highly competitive markets throughout the world against products produced by both foreign and domestic corporations. The principal methods of competition in these markets relate to price, quality and service. The company believes that it is one of the leading manufacturers in the world of a broad line of air compression systems, anti-friction bearings, construction equipment, air tools and pumps (through the IDP joint venture). In addition, it believes it is also an important factor in domestic markets for locks and other door hardware products.\nInternational Operations Sales to customers outside the United States, including domestic sales for export, accounted for approximately 40 percent of the consolidated net sales in 1993. Information as to operating income by geographic area is set forth in Footnote 16 of the Annual Report to Shareowners for 1993, incorporated by reference in this Form 10-K Annual Report. Sales outside of the United States are made in more than 100 countries; therefore, the attendant risks of manufacturing or selling in a particular country, such as nationalization and establishment of common markets, would not have a significant effect on the company's international operations.\nRaw Materials The company manufactures many of the components included in its products. The principal raw materials required for the manufacture of the company's products are purchased from numerous suppliers, and the company believes that available sources of supply will generally be sufficient for its needs for the foreseeable future.\nBacklog The company's approximate backlog of orders at December 31, 1993, believed by it to be firm, was $134 million for the Standard Machinery Segment, $393 million for the Engineered Equipment Segment and $395 million for the Bearings, Locks and Tools Segment as compared to $131 million, $428 million and $373 million, respectively, at December 31, 1992. These backlog figures are based on orders received. While the major portion of the company's products are built in advance of order and either shipped or assembled from stock, orders for specialized machinery or specific customer application are submitted with extensive lead time and are often subject to revision, deferral, cancellation or termination. The company estimates that approximately 90 percent of the backlog will be shipped during the next twelve months.\nResearch, Engineering and Development The company maintains extensive research, engineering and development facilities for experimenting, testing and developing high quality products. The company employs approximately 1,500 professional employees for its research, engineering and development activities. The company spent $150 million in 1993, $138 million in 1992 and $124 million in 1991 on research, engineering and development.\nPatents and Licenses The company owns numerous patents and patent applications and is licensed under others. While it considers that in the aggregate its patents and licenses are valuable, it does not believe that its business is materially dependent on its patents or licenses or any group of them. In the company's opinion, engineering and production skills, and experience are more responsible for its market position than patents or licenses.\nEnvironmental Matters The company's facilities are subject to environmental regulation by federal, state and local authorities. It is the company's policy to comply with all environmental regulatory requirements and the company is in substantial compliance with those laws and regulations. While there is some degree of uncertainty associated with the compliance costs resulting from new regulatory initiatives such as the 1990 Amendments to the Clean Air Act, which have not as yet been fully implemented, the ongoing cost of compliance has not had, nor is it expected to have, a material adverse effect upon the company's capital expenditures or financial position.\nFederal Superfund and similar state laws impose joint and several responsibility for cleaning up designated hazardous sites not only on the owner and operator but also on any person who contributed hazardous waste to the site. As of December 31, 1993, the company has been identified as a potentially responsible party (\"PRP\") in connection with 29 federal and state superfund sites. At all these sites there are other PRPs and to date there is no indication the company will be liable for more than its pro rata share of remediation costs at any site. While some of these sites are still under investigation, in the aggregate, the company's anticipated pro rata share of responsibility at these sites is not deemed to be material. Additional lawsuits and claims involving environmental matters are likely to arise from time to time. In addition, the company continues to investigate and remediate environmental contamination from past operations at its facilities.\nBased upon the company's experience to date with environmental claims and litigation and with site investigation and remediation, its expenditures for environmental purposes have not been and are not expected to be material or to have a material adverse effect on the company's capital expenditures, earnings or competitive position. (See also Financial Review and Management Analysis in the Annual Report to Shareowners for 1993 included as Exhibit 13 to this report.)\nEmployees There are approximately 35,100 employees of the company throughout the world, of whom approximately 22,800 work in the United States and 12,300 in foreign countries. Approximately 18 percent of the company's production and maintenance employees, who work in 9 plants in the United States, are represented by 7 unions. The company believes relations with its employees are satisfactory.\nItem 2.","section_1A":"","section_1B":"","section_2":"Item 2. PROPERTIES The company's executive offices are located at Woodcliff Lake, New Jersey. Manufacturing and assembly operations are conducted in 48 plants in the United States; 6 plants in Canada; 26 plants in Europe; 5 plants in the Far East; 5 plants in Latin America; 2 plants in Asia and 1 plant in Africa. The company also maintains various warehouses, offices and repair centers in the United States, Canada and abroad.\nSubstantially all plant facilities are owned by the company and the remainder are under long-term lease. The company believes that its plant and equipment have been well maintained and are generally in good condition. The company has several closed facilities that it is actively marketing with the intent of selling them at their net realizable value.\nThe operating segments for which the facilities are primarily used are as described below. Facilities that produce products in several operating segments are classified by the products which they primarily manufacture. Facilities under long-term lease are included below and are not significant to each operating segment's total number of plants or square footage.\nStandard Machinery This segment's products include machinery regularly used in general manufacturing and in industries such as mining and construction. Products range from blasthole drills used in mining and construction to small air compressors found worldwide in auto service stations. The segment is aligned into two operating groups: Air Compressor Group and Construction and Mining Group. The segment's manufacturing locations are as follows: Approximate Number of Plants Square Footage\nDomestic 7 1,884,000 International 11 1,889,000\nTotal 18 3,773,000\nEngineered Equipment The products manufactured by this segment are predominantly designed for specific customer applications. The segment's diverse product line includes pumps, liquid\/solid separation and densification machinery. The segment is organized into two operating groups: Pump Group and Process Systems Group. The segment's manufacturing facilities are as follows: Approximate Number of Plants Square Footage\nDomestic 12 2,473,000 International 19 2,457,000\nTotal 31 4,930,000\nBearings, Locks and Tools This segment primarily serves the automotive, capital goods, energy and construction industries. Products in this segment include bearings for specialized and industrial application, locks and door hardware for residential and commercial buildings, air tools for industrial use, air winches, hoists and engine starting systems, and automated production systems for transportation equipment manufacturers. There are three operating groups in this segment: Bearings and Components Group, Production Equipment Group and Door Hardware Group. The segment's manufacturing facilities are as follows: Approximate Number of Plants Square Footage\nDomestic 29 6,358,000 International 15 1,607,000\nTotal 44 7,965,000\nItem 3.","section_3":"Item 3. LEGAL PROCEEDINGS In the normal course of business, the company is involved in a variety of lawsuits, claims and legal proceedings, including proceedings for the cleanup of 29 waste sites under Superfund and similar state laws. In the opinion of the company pending legal matters, including those discussed below, are not expected to have a material adverse effect on its operations or financial condition.\nBy letter received on May 8, 1991, the Connecticut Department of Environmental Protection (\"CTDEP\") assessed a civil penalty in the amount of $207,500 on The Torrington Company, a wholly-owned subsidiary of the company (\"Torrington\"), for alleged effluent violations of a state wastewater discharge permit issued to Torrington's Newington facility. This penalty amount was calculated by CTDEP based on a stipulated judgment dated September 29, 1988, which provides for civil penalties to be assessed against Torrington for effluent violations of its discharge permit. This Stipulated Judgment was entered in an action entitled Stanley J. Pac, Commissioner of Environmental Protection v. Fafnir Bearing Division, The Torrington Company, in the Superior Court for the Judicial District of Hartford\/New Britain at Hartford. Pursuant to a settlement agreement with CTDEP in February 1994, the penalty assessment was reduced to $130,475 and was paid by Torrington.\nBy letter dated June 18, 1992, Torrington was notified by the Office of the Attorney General of the state of Connecticut of a $675,000 penalty assessed against several of its plants located in Connecticut for alleged violations of state wastewater discharge regulations. On February 28, 1994, a Stipulated Judgment was entered in an action entitled Timothy R. E. Keeney, Commissioner of Environmental Protection v. The Torrington Company, in the Superior Court for the Judicial District of Hartford\/New Britain at Hartford, pursuant to which the penalty assessment was reduced to $271,525 and paid by Torrington. Torrington is required under the Stipulated Judgment to perform certain investigative and testing activities to identify potential sources of contaminants at the involved plants. The Stipulated Judgment also includes stipulated penalties for any future violations of effluent limitations contained in discharge permits held by the involved plants.\nItem 4.","section_4":"Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of the company's security holders during the last quarter of its fiscal year ended December 31, 1993.\nThe following information is included in accordance with the provision of Part III, Item 10. Date of Service as Principal Occupation and an Executive Other Information Name and Age Officer for Past Five Years James E. Perrella(58) 5\/4\/77 Chairman of the Board, President and Chief Executive Officer, Director (President and Director, September 1992 - October 1993; Executive Vice President, 1982 - 1992) Thomas E. Bennett(64) 8\/7\/74 Executive Vice President (Executive Vice President and President of IDP, October 1992 - March 1994; Executive Vice President and President of the Bearings and Components Group, 1989 - October 1992; Vice President and President of the Bearings and Components Group, 1981 - 1989) William G. Mulligan(63) 5\/2\/73 Executive Vice President J. Frank Travis(58) 2\/7\/90 Executive Vice President (Vice President and President of the Bearings and Components Group, February 1992 - December 1993; President of the Air Compressor Group, 1989 - February 1992) Thomas F. McBride(58) 9\/5\/79 Senior Vice President and Chief Financial Officer (Senior Vice President and Comptroller, February 1992 - May 1993; Vice President and Comptroller, 1981 - 1992) William J. Armstrong(52) 8\/3\/83 Vice President and Treasurer Paul L. Bergren(44) 12\/2\/92 Vice President and President of the Air Compressor Group (Vice President and General Manager - Centrifugal Compressor Division, 1989 - 1992) Frederick W. Hadfield(57) 8\/1\/79 Vice President and President of IDP (Vice President, 1979 - March 1994)\nDate of Service as Principal Occupation and an Executive Other Information Name and Age Officer for Past Five Years Daniel E. Kletter(55) 2\/7\/90 Vice President and President of the Construction and Mining Group (Vice President and General Manager - Portable Compressor Division, 1981 - 1989) David W. Lasier(61) 3\/2\/88 Vice President and President of Door Hardware Group Patricia Nachtigal(47) 11\/2\/88 Vice President and General Counsel (Secretary and Managing Attorney, 1988 - 1991) James R. O'Dell(55) 12\/3\/88 Vice President Larry H. Pitsch(53) 2\/7\/90 Vice President and President of the Process Systems Group (President of Industrial Process Machinery Group, 1985 - 1989) Gerald E. Swimmer(49) 5\/1\/82 Vice President R. Barry Uber(48) 2\/7\/90 Vice President and President of the Production Equipment Group (Vice President and General Manager - Power Tool Division, 1985 - 1989) Ronald G. Heller(47) 2\/6\/91 Secretary and Assistant General Counsel (Assistant General Counsel, 1988 - 1991)\nNo family relationship exists between any of the above-listed executive officers of the company. All officers are elected to hold office for one year or until their successors are elected and qualify.\nPART II\nItem 5.","section_5":"Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Information regarding the principal market for the company's common stock and related stockholder matters are as follows:\nQuarterly share prices and dividends for the common stock are shown in the following tabulation. The common shares are listed on the New York Stock Exchange and also on the London and Amsterdam exchanges.\nCommon Stock High Low Dividend First quarter $36 1\/4 $28 3\/4 $.175 Second quarter 35 3\/8 29 1\/2 .175 Third quarter 39 3\/4 31 .175 Fourth quarter 39 7\/8 35 .175\nHigh Low Dividend\nFirst quarter $33 3\/16 $26 1\/4 $.165 Second quarter 32 1\/4 25 3\/8 .175 Third quarter 30 1\/4 25 .175 Fourth quarter 34 1\/4 26 3\/8 .175\nThe Bank of New York (Church Street Station, P.O. Box 11258, New York, NY 10286-1258,(800)524-4458) is the transfer agent, registrar and dividend reinvestment agent.\nThere are no significant restrictions on the payment of dividends.\nThe approximate number of record holders of common stock as of March 10, 1994 was 16,000.\nItem 6.","section_6":"Item 6. SELECTED FINANCIAL DATA Selected financial data for the five years ended December 31, 1993, is as follows (in thousands except per share amounts):\nItem 7.","section_7":"Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's discussion and analysis of financial condition and results of operations is included as Financial Review and Management Analysis in Exhibit 13 - the Annual Report to Shareowners for 1993 and is incorporated by reference in this Form 10-K Annual Report.\nItem 8.","section_7A":"","section_8":"Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following financial statements and supplementary financial information included in the accompanying Annual Report to Shareowners for 1993 are incorporated by reference in this Form 10-K Annual Report:\n(a) The consolidated financial statements and the report thereon of Price Waterhouse dated February 1, 1994, are included as Exhibit 13 - the Annual Report to Shareowners (excluding the Financial Review and Management Analysis) for 1993.\n(b) The unaudited quarterly financial data for the two-year period ended December 31, 1993, is as follows (in thousands except per share amounts):\no During the fourth quarter of 1993, the company retroactively changed its method of accounting for postemployment benefits. The effect of this change on the company amounted to $21.0 million (net of tax) and resulted in the restatement of the company's net earnings for the first quarter from $24.6 million ($0.24 per share) to $3.6 million ($0.04 per share).\no During the second quarter of 1993, the company recorded a $5.0 million ($0.03 per share) restructure of operations charge, related to the sale of substantially all of the underground coal-mining machinery assets (see Note 4 to the Consolidated Financial Statements).\no The reductions in LIFO inventory quantities increased net earnings per share by $0.02, $0.05, $0.01 and $0.02 in the second and fourth quarters of 1993 and 1992, respectively.\no During the fourth quarter of 1992, the company retroactively changed its method of accounting for postretirement benefits other than pensions and deferred income taxes. The effect of these changes for the periods prior to January 1, 1992, amounted to $350.0 million (net of tax), and resulted in the restatement of the company's net earnings for the first quarter from $26.4 million ($0.25 per share) to a net loss of $329.4 million ($3.16 per share). These changes also resulted in the restatement of the company's net earnings for the second and third quarters of the year from $38.6 million ($0.37 per share) and $35.9 million ($0.35 per share) to $32.6 million ($0.31 per share) and $30.0 million ($0.29 per share), respectively.\no The fourth quarter of 1992 included the results of the Ingersoll-Dresser Pump Company formed on October 1, 1992 (see Note 2 to the Consolidated Financial Statements).\no In the third quarter of 1992, the company recorded a $10.0 million ($0.06 per share) restructure of operations charge relating to its aerospace bearings business (see Note 4 to the Consolidated Financial Statements).\no The fourth quarter of 1992 included a $70.0 million restructuring charge relating to the Ingersoll-Dresser Pump Company. The company's portion of the restructure of operations charge for IDP was $35.0 million pretax and $25.7 million ($0.25 per share) after-tax.\nItem 9.","section_9":"Item 9. CHANGES IN AND DISAGREEMENTS WITH INDEPENDENT ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.\nPART III\nItem 10.","section_9A":"","section_9B":"","section_10":"Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by Item 10 is (i) incorporated by reference in this Form 10-K Annual Report from pages 3, 4, 6, and 7 of the company's definitive proxy statement for the Annual Meeting of Shareholders to be held on April 28, 1994, and (ii) included in Part I on pages 11 and 12 of this Form 10-K Annual Report.\nItem 11.","section_11":"Item 11. EXECUTIVE COMPENSATION Information on executive compensation is incorporated by reference in this Form 10-K Annual Report from pages 7 through 19 of the company's definitive proxy statement for the Annual Meeting of Shareholders to be held on April 28, 1994.\nItem 12.","section_12":"Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information on security ownership of directors and nominees, directors and officers as a group and certain beneficial owners is incorporated by reference in this Form 10-K Annual Report on pages 5 and 6 of the company's definitive proxy statement for the Annual Meeting of Shareholders to be held on April 28, 1994.\nItem 13.","section_13":"Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information required by Item 13 is incorporated by reference in this Form 10-K Annual Report from page 20 of the company's definitive proxy statement for the Annual Meeting of Shareholders to be held on April 28, 1994.\nPART IV\nItem 14.","section_14":"Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K\n(a) 1. and 2. Financial statements and financial statement schedules The financial statements, together with the report thereon of Price Waterhouse dated February 1, 1994, included as Exhibit 13 (excluding Financial Review and Management Analysis) and the unaudited quarterly financial data included in Part II Item 8(b) are incorporated by reference in this Form 10-K Annual Report. The financial statement schedules listed in the accompanying index on page 19 should be read in conjunction with the financial statements in such Annual Report to Shareowners for 1993.\nSeparate financial statements for all 50 percent or less owned companies, accounted for by the equity method have been omitted because no individual entity constitutes a significant subsidiary.\n3. Exhibits The exhibits listed on the accompanying index to exhibits on pages 26 and 27 are filed as part of this Form 10-K Annual Report.\n(b) Reports on Form 8-K None.\nINGERSOLL-RAND COMPANY\nAND FINANCIAL STATEMENT SCHEDULES (Item 14 (a) 1 and 2)\nForm 10-K Consolidated Financial Statements: Report of independent accountants . . . . . . . . . . * Consolidated balance sheet at December 31, 1993 and 1992 . . . . . . . . . . . . * For the years ended December 31, 1993, 1992 and 1991: Consolidated statement of income . . . . . . . . . * Consolidated statement of shareowners' equity . . . . . . . . . . . . . . . . . . . . . * Consolidated statement of cash flows . . . . . . . * Notes to consolidated financial statements . . . . . * Selected unaudited quarterly financial data . . . . . . 15\nFinancial Statement Schedules: Report of independent accountants on financial statement schedules . . . . . . . . . . . 20 Consolidated schedules for the years ended December 31, 1993, 1992 and 1991: Schedule V -- Property, Plant and Equipment . . . . 21 Schedule VI -- Accumulated Depreciation and Amortization of Property, Plant and Equipment . . . . . . . . . . . . . . . . . . . . 22 Schedule VIII -- Valuation and Qualifying Accounts . . . . . . . . . . . . . . . . . . . . 23 Schedule IX -- Short-Term Borrowings . . . . . . . 24 Schedule X -- Supplementary Income Statement Information . . . . . . . . . . . . . . . . . . . 25\n* See Exhibit 13 - Ingersoll-Rand Company Annual Report to Shareowners for 1993.\nFinancial statement schedules not included in this Form 10-K Annual Report have been omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.\nFinancial statements of the company's 50 percent or less owned companies, are omitted because individually they do not meet the significant subsidiary test of Rule 3-09 of Regulation S-X.\nREPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULES\nTo the Board of Directors of Ingersoll-Rand Company:\nOur audits of the consolidated financial statements referred to in our report dated February 1, 1994 included as part of Exhibit 13 - the Annual Report to Shareowners for 1993 of Ingersoll-Rand Company, (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the Financial Statement Schedules listed in Item 14(a) of this Form 10-K. In our opinion, these Financial Statement Schedules present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.\n\/S\/ Price Waterhouse PRICE WATERHOUSE Hackensack, New Jersey February 1, 1994\nCONSENT OF INDEPENDENT ACCOUNTANTS\nWe hereby consent to the incorporation by reference in the Prospectuses constituting part of the Registration Statements on Form S-3 (No. 33-53696) and Form S-8 (Post-Effective Amendment No. 4 to No. 2-64708, No. 2-67834, No. 2-98258 and No. 33-35229) of Ingersoll-Rand Company of our report dated February 1, 1994 included as part of Exhibit 13 - the Annual Report to Shareowners for 1993, which is incorporated in this Annual Report on Form 10-K. We also consent to the incorporation by reference of our report on the Financial Statement Schedules, which appears on this page.\n\/S\/ Price Waterhouse PRICE WATERHOUSE Hackensack, New Jersey March 30, 1994\nSCHEDULE VIII\nINGERSOLL-RAND COMPANY\nVALUATION AND QUALIFYING ACCOUNTS\nFOR THE YEARS ENDED DECEMBER 31, 1993, 1992 and 1991 (Amounts in thousands)\nAdditions charged to Balance at costs and Balance beginning expenses Deductions at end Description of year (*) (**) of year\nDoubtful accounts $23,057 $10,218 $11,186 $22,089\nDoubtful accounts $18,772 $12,590 $ 8,305 $23,057\nDoubtful accounts $17,045 $ 9,157 $ 7,430 $18,772\n(*) \"Additions\" include foreign currency translation and in 1992 amounts contributed by Dresser Industries, Inc. to Ingersoll-Dresser Pump.\n(**) \"Deductions\" include accounts and advances written off, less recoveries.\nSCHEDULE X\nINGERSOLL-RAND COMPANY\nSUPPLEMENTARY INCOME STATEMENT INFORMATION\nFOR THE YEARS ENDED DECEMBER 31, 1993, 1992 and 1991 (Amounts in thousands)\nItem Charged to costs and expenses\n1993 1992 1991\nMaintenance and repairs . . . . $78,794 $73,216 $72,771\nAmortization of intangible assets . . . . . . . . . . . $ 5,852 $ 5,597 $ 6,675\nTaxes, other than payroll and income taxes . . . . . . . . $24,875 $28,545 $28,823\nRoyalties and advertising costs were less than one percent of sales.\nINGERSOLL-RAND COMPANY INDEX TO EXHIBITS (Item 14(a)) Description Page 3 (i) Amendment to Restated Certificate of Incorporation of Ingersoll-Rand Company filed May 28, 1992. 30-32\n3 (ii) Restated Certificate of Incorporation of Ingersoll-Rand Company as amended through May 28, 1992. 33-60\n3 (iii) By-Laws of Ingersoll-Rand Company, as amended through October 1, 1993. 61-77\n4 (iii) Ingersoll-Rand Company is a party to several long-term debt instruments under which in each case the total amount of securities authorized does not exceed 10% of the total assets of Ingersoll-Rand Company and its subsidiaries on a consolidated basis. Pursuant to paragraph 4(iii)(A) of Item 601(b) of Regulation S-K, Ingersoll-Rand Company agrees to furnish a copy of such instruments to the Securities and Exchange Commission upon request. --\n10 (iii) The following exhibits constitute management contracts or compensatory plans or arrangements required by Item 601 of Regulation S-K. --\n10 (iii) (a) Management Incentive Unit Plan of Ingersoll- Rand Company. Amendment to the Management Incentive Unit Plan, effective January 1, 1982. Amendment to the Management Incentive Unit Plan, effective January 1, 1987. Amendment to the Management Incentive Unit Plan, effective June 3, 1987. 78-92\n10 (iii) (b) Description of Compensation Plan for Retired Directors of Ingersoll-Rand Company. 93\n10 (iii) (c) Form of Contingent Compensation Agreements with Executive Vice Presidents and Group Presidents of Ingersoll-Rand Company. 94-99\n10 (iii) (d) Description of Bonus Arrangements for Chairman, President and Staff Officers. 100\n10 (iii) (e) Form of Change of Control Arrangements with Chairman and Chief Executive Officer. 101-113\n10 (iii) (f) Form of Change of Control Arrangements with selected executive officers. 114-126\nINGERSOLL-RAND COMPANY INDEX TO EXHIBITS (Item 14(a)) (Continued) Description Page\n10 (iii) (g) Executive Supplementary Retirement Plan for selected senior executives. 127-132\n10 (iii) (h) Incentive Stock Plan of 1985 of Ingersoll- Rand Company. 133-151\n10 (iii) (i) Forms of insurance and related letter agreements with certain executive officers. 152-160\n10 (iii) (j) Incentive Stock Plan of 1990 of Ingersoll- Rand Company. 161-182\n10 (iii) (k) Restated Supplemental Pension Plan effective January 1, 1992. 183-188\n10 (iii) (l) Supplemental Stock and Savings Investment Plan effective as of January 1, 1989. 189-198\n10 (iii) (m) Supplemental Retirement Account Plan effective as of January 1, 1989. 199-206\n11 (i) Computation of Primary Earnings Per Share. 207-208\n11 (ii) Computation of Fully Diluted Earnings Per Share. 209-210\n12 Computations of Ratios of Earnings to Fixed Charges. 211\n13 Ingersoll-Rand Company Annual Report to Shareowners for 1993. (Not deemed to be filed as part of this report except to the extent incorporated by reference). 212-275\n21 List of Subsidiaries of Ingersoll-Rand Company. 276-278\nSIGNATURES\nPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.\nINGERSOLL-RAND COMPANY (Registrant)\nBy \/S\/ Thomas F. McBride Thomas F. McBride Senior Vice President and Chief Financial Officer\nDate March 30, 1994\nPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.\nSignature Title Date\nChairman, President, Chief Executive Officer and Director (Principal \/S\/ James E. Perrella Executive Officer) March 30, 1994 (James E. Perrella)\nSenior Vice President Chief Financial Officer (Principal Financial \/S\/ Thomas F. McBride Officer) March 30, 1994 (Thomas F. McBride)\nController - Accounting and Reporting (Principal Accounting \/S\/ Richard A. Spohn Officer) March 30, 1994 (Richard A. Spohn)\n\/S\/ Donald J. Bainton Director March 30, 1994 (Donald J. Bainton)\n\/S\/ Theodore H. Black Director March 30, 1994 (Theodore H. Black)\nSignature Title Date\n\/S\/ Brendan T. Byrne Director March 30, 1994 (Brendan T. Byrne)\n\/S\/ Joseph P. Flannery Director March 30, 1994 (Joseph P. Flannery)\n\/S\/ William G. Kuhns Director March 30, 1994 (William G. Kuhns)\n\/S\/ Alexander H. Massad Director March 30, 1994 (Alexander H. Massad)\n\/S\/ John E. Phipps Director March 30, 1994 (John E. Phipps)\n\/S\/ Donald E. Procknow Director March 30, 1994 (Donald E. Procknow)\n\/S\/ Cedric E. Ritchie Director March 30, 1994 (Cedric E. Ritchie)\n\/S\/ Willis A. Strauss Director March 30, 1994 (Willis A. Strauss)","section_15":""}
{"filename":"203248_1993.txt","cik":"203248","year":"1993","section_1":"ITEM 1. BUSINESS.\nINTRODUCTION\nSouthern Union Company (\"Southern Union\" and, together with its subsidiaries, the \"Company\") was incorporated under the laws of the State of Delaware in 1932. The Company's principal line of business is the distribution of natural gas as a public utility through Southern Union Gas Company (\"Southern Union Gas\") and Missouri Gas Energy, each of which is a division of the Company. Southern Union Gas serves approximately 483,000 residential, commercial, industrial, agricultural and other customers in the States of Texas (including the cities of Austin, Brownsville, El Paso, Galveston and Port Arthur) and Oklahoma. Missouri Gas Energy, acquired on January 31, 1994, serves approximately 472,000 customers in central and western Missouri (including the cities of Kansas City, St. Joseph, Joplin and Monett). See \"Missouri Acquisition.\"\nSubsidiaries of Southern Union have been established to support and expand natural gas sales and to capitalize on the Company's gas energy expertise. These subsidiaries market natural gas to end-users, sell natural gas as a vehicular fuel, convert vehicles to operate on natural gas, operate intrastate and interstate natural gas pipeline systems, and sell commercial gas air conditioning and other gas-fired engine-driven applications. By providing \"one-stop shopping,\" the Company can serve its various customers' particular energy needs, which encompass substantially all of the natural gas distribution and sales businesses from natural gas sales to specialized energy consulting services. A subsidiary also holds investments in real estate which are used primarily in the Company's utility business. See \"Company Operations.\"\nThe Company is a sales and market-driven energy company whose management is committed to achieving profitable growth of its natural gas energy businesses in an increasingly competitive business environment. Management's strategies for achieving these objectives principally consist of: (i) promoting new sales opportunities and markets for natural gas; (ii) enhancing financial and operating performance; and (iii) expanding the Company through developing existing systems and selectively acquiring new systems. Management developed and continually evaluates these strategies and the Company's implementation of them by applying their experience and expertise in analyzing the energy industry, technological advances, market opportunities and general business trends. Each of these strategies, as implemented throughout the Company's businesses, reflects the Company's commitment to its core natural gas utility business. Central to all of the Company's businesses and strategies is the sale and transportation of natural gas.\nThe Company has a goal of selected growth and expansion, primarily in the natural gas industry. To that extent, the Company intends to consider, when appropriate, and if financially practicable to pursue, the acquisition of other natural gas distribution or transmission businesses. The nature and location of any such properties, the structure for any such acquisitions, and the method of financing any such expansion or growth will be determined by management and the Southern Union Board of Directors.\nMISSOURI ACQUISITION\nOn July 9, 1993, Southern Union entered into an Agreement for the Purchase of Assets (the \"Missouri Asset Purchase Agreement\") with Western Resources, Inc. (\"Western Resources\"), pursuant to which Southern Union purchased from Western Resources (the \"Missouri Acquisition\") certain Missouri natural gas distribution operations (the \"Missouri Business\"). The purchase was consummated on January 31, 1994. Southern Union paid Western Resources approximately $400,300,000 in cash for the Missouri Business. The final determination of the purchase price and all prorations and adjustments is expected to be finalized by May 30, 1994.\nSouthern Union operates the Missouri Business as Missouri Gas Energy, which is headquartered in Kansas City, Missouri. As a result of the Missouri Acquisition, the Company nearly doubled the number of customers served by its natural gas distribution system and became one of the top 15 gas\nutilities in the United States, as measured by number of customers. In addition, the Missouri Acquisition lessens the sensitivity of the Company's operations to weather risk and local economic conditions by diversifying operations into a different geographic area. The incurrence of additional debt and issuance of new equity in connection with the Missouri Acquisition also significantly changed the Company's capital structure. See \"Management's Discussion and Analysis of Financial Condition and Results of Operations (\"MD&A\") -- Investing Activities\" and \"Subsequent Events\" in the Notes to the Consolidated Financial Statements for the year ended December 31, 1993.\nThe approval of the Missouri Acquisition by the Missouri Public Service Commission (\"MPSC\") was subject to the terms of a stipulation and settlement agreement (the \"MPSC Stipulation\") among Southern Union, Western Resources, the MPSC staff and all intervenors in the MPSC proceeding. Among other things, the MPSC Stipulation: (i) provides that the Company attain a total debt to total capital ratio that does not exceed Standard and Poor's Corporation's Utility Financial Benchmark ratio for the lowest investment grade investor-owned natural gas distribution company (which, at January 31, 1994, would be approximately 58%) in order to implement any general rate increase with respect to the Missouri Business; (ii) prohibits Southern Union from implementing a general rate increase in Missouri before January 31, 1997 except in certain unusual events; (iii) required Western Resources to contribute an additional $9,000,000 to the Missouri Business' employees' and retirees' qualified defined benefit plan assets transferred to the Company; and (iv) requires the Company to contribute an additional $3,000,000 to the Company's qualified defined benefit plan applicable to the Missouri Business' employees and retirees; and (v) requires the Company to reduce rate base by $30,000,000 (to be amortized over a ten year period) to compensate rate payers for rate base reductions that were eliminated as a result of the acquisition.\nThe Missouri Acquisition was funded through a $50,000,000 subscription rights offering of Common Stock (the \"Rights Offering\") completed in December 1993 and the sale of $475,000,000 of 7.60% Senior Notes due 2024 (the \"Senior Debt Securities\") in January 1994. The net proceeds from the Rights Offering, together with the net proceeds from the sale of the Senior Debt Securities and working capital from operations, have been or will be used to: (i) fund the Missouri Acquisition; (ii) refinance $20,000,000 aggregate principal amount of 10 1\/8% Notes due May 15, 1994; (iii) repay approximately $59,300,000 of borrowings under the Company's $100,000,000 revolving credit facility, used to fund the acquisition of the Rio Grande Valley Gas Company and to repurchase all of Southern Union's outstanding preferred stock; (iv) refinance $10,000,000 aggregate principal amount of 9.45% Senior Notes due January 31, 2004 and $25,000,000 aggregate principal amount of 10% Senior Notes due January 31, 2012, and the related premium of $10,400,000 resulting from the early extinguishment of the 9.45% and 10% Senior Notes; and (v) refinance $50,000,000 aggregate principal amount of 10.5% Sinking Fund Debentures due May 15, 2017, and the premium of $3,300,000 resulting from the early extinguishment of such debentures. See Business -- \"Other Acquisitions and Divestitures\" and \"MD&A -- Liquidity and Capital Resources.\"\nSouthern Union assumed certain liabilities of Western Resources with respect to the Missouri Business, including liabilities arising from certain specified contracts assigned to Southern Union at closing, including gas supply and transportation contracts, office equipment leases and real estate leases, liabilities arising from certain contracts entered into by Western Resources in the ordinary course of business, certain liabilities that have arisen or may arise from the operation of the Missouri Business, and liabilities for certain accounts payable of Western Resources pertaining to the Missouri Business.\nSouthern Union and Western Resources also entered into an Environmental Liability Agreement at closing. Subject to the accuracy of certain representations made by Western Resources in the Missouri Asset Purchase Agreement, the agreement provides for a tiered approach to the allocation of substantially all liabilities under environmental laws that may exist or arise with respect to the Missouri Business. The agreement contemplates Southern Union first seeking reimbursement from other potentially responsible parties, or recovery of such costs under insurance or through rates charged to customers. To the extent certain environmental liabilities are discovered by Southern\nUnion prior to July 9, 1995, and are not so reimbursed or recovered, Southern Union will be responsible for the first $3,000,000, if any, of out of pocket costs and expenses incurred to respond to and remediate any such environmental claim. Thereafter, Western Resources would share one-half of the next $15,000,000 of any such costs and expenses, and Southern Union would be solely liable for any such costs and expenses in excess of $18,000,000. The Company believes that it will be able to obtain substantial reimbursement or recovery for any such environmental liabilities from other potentially responsible third parties, under insurance or through rates charged to customers.\nPursuant to the terms of an Employee Agreement with Western Resources entered into on July 9, 1993, after the closing of the Missouri Acquisition, Southern Union employed certain employees of Western Resources involved in the operation of the Missouri Business (\"Continuing Employees\"). Under the terms of the Employee Agreement, the assets and liabilities attributable to Continuing Employees and retired employees who had been necessary to the operation of the Missouri Business (\"Retired Employees\") under Western Resources' qualified defined benefit plans were transferred to a qualified defined benefit plan of Southern Union that will provide benefits to Continuing Employees and Retired Employees substantially similar to those provided for under Western Resources' defined benefit plans. Southern Union amended its defined benefit plan to cover the Continuing Employees and Retired Employees and provide Continuing Employees and Retired Employees with certain welfare, separation and other benefits and arrangements.\nOTHER ACQUISITIONS AND DIVESTITURES\nIn September 1993, the Company acquired the Rio Grande Valley Gas Company (\"Rio Grande\"), a subsidiary of Valero Energy Corporation, for approximately $30,500,000 (the \"Rio Grande Acquisition\"). Rio Grande serves approximately 76,000 customers in the south Texas counties of Willacy, Cameron and Hidalgo which includes 32 towns and cities along the Mexico border, including Harlingen, McAllen and Brownsville (the southernmost city in the U.S.). The Company initially funded the purchase with borrowings from its revolving credit facility, which was subsequently paid down out of the net proceeds from the Rights Offering and the sale of the Senior Debt Securities. See MD&A -- \"Liquidity and Capital Resources.\"\nDuring May 1993, the Company acquired the natural gas distribution facilities of Berry Gas Company (the \"Berry Gas Acquisition\") which serves the Texas cities and towns of Nome, Raywood, Hull and Devers for approximately $274,000. In July 1993, the Company acquired the natural gas distribution facilities serving the city of Eagle Pass, Texas (the \"Eagle Pass Acquisition\"), for approximately $2,000,000. Combined, these operations collectively serve approximately 4,600 customers.\nIn February 1993, Southern Union Exploration Company (\"SX\"), a wholly owned subsidiary of Southern Union, entered into a purchase and sale agreement pursuant to which it sold substantially all of its oil and gas leasehold interests and associated production for approximately $22,000,000, effective January 1, 1993. The Company estimated and recorded a book loss on the sale of approximately $4,400,000 as of December 31, 1992. In connection with the sale, the Company recorded an income tax liability of approximately $6,960,000 resulting from the recognition of a tax basis gain of approximately $18,800,000.\nDuring 1992, the Company acquired the natural gas distribution facilities of Nixon, Texas (the \"Nixon Acquisition\"). Also, the Company added approximately 12 miles of pipeline which transports gas to the community of Sabine Pass, Texas. During 1991, the Company acquired the natural gas distribution and transmission facilities serving an area in south Texas that includes the cities of Luling, Lockhart, Cuero, Yoakum, Shiner and Gonzales (the \"South Texas Acquisition\") and the natural gas distribution facilities serving the city of Andrews, Texas (the \"Andrews Acquisition\"). Also in 1991, Southern Union acquired Brazos River Gas Company (the \"Brazos River Acquisition\"), a natural gas distribution company serving the north Texas cities of Mineral Wells, Weatherford, Graham, Breckenridge, Millsap, Jacksboro and surrounding communities. These distribution operations collectively serve approximately 35,000 customers.\nIn November 1991, the Company sold the assets of its Arizona gas utility operations for approximately $46,000,000, including cash of $40,400,000 and assumed liabilities of $5,600,000 (the \"Arizona Sale\"). Cash proceeds after taxes approximated $32,800,000. The Arizona gas operations served approximately 62,000 customers.\nCOMPANY OPERATIONS\nThe Company's principal line of business is the distribution of natural gas through its Southern Union Gas and Missouri Gas Energy divisions. Southern Union Gas provides service to a number of communities and rural areas in Texas, including the municipalities of Austin, Brownsville, El Paso, Galveston, Harlingen, McAllen and Port Arthur, as well as several communities in the Oklahoma panhandle. Missouri Gas Energy provides service to various cities and communities in central and western Missouri including Kansas City, St. Joseph, Joplin and Monett. The Company's gas utility operations are generally seasonal in nature, with a significant percentage of its annual revenues and earnings occurring in the traditional heating-load months.\nWestern Gas Interstate Company (\"WGI\"), a wholly owned subsidiary of Southern Union, operates interstate pipeline systems principally serving the Company's gas distribution properties in the El Paso, Texas area and in the Texas and Oklahoma panhandles. During 1993 WGI received approval in its restructuring and rate case dockets from the Federal Energy Regulatory Commission (FERC) which allowed WGI to implement services pursuant to FERC Order No. 636. WGI is now providing unbundled transportation service for those gas volumes entering the pipeline's transportation system. WGI also completed its second year of exports to Mexico, transporting approximately 8,500 million cubic feet (MMcf) to the city of Juarez and the Samalayuca Power Plant.\nSouthern Transmission Company (\"Southern\"), a wholly owned subsidiary of Southern Union, owns and operates approximately 123 miles of intrastate pipeline. Southern's system connects the cities of Lockhart, Luling, Cuero, Shiner, Yoakum, and Gonzales, Texas, as well as an industrial customer in Port Arthur, Texas. Southern also owns a transmission line which supplies gas to the community of Sabine Pass, Texas.\nMercado Gas Services Inc. (\"Mercado\"), a wholly owned subsidiary of Southern Union, markets natural gas to various large volume customers. Mercado's sales and purchase activities are made through short-term contracts. These contracts and business activities are not subject to direct rate regulation.\nSouthern Union Econofuel Company (\"Econofuel\"), a wholly owned subsidiary of Southern Union, was formed in 1990 to market and sell natural gas for natural gas vehicles (\"NGVs\") as an alternative fuel to gasoline. Econofuel owns fuel dispensing equipment in Austin, El Paso, Port Arthur, and Galveston, Texas located at independent retail fuel stations for NGVs. These stations serve fleet and other public vehicles which have been manufactured or converted to operate on natural gas. In 1991, Econofuel and Natural Gas Development Company, Inc. of California, formed a joint venture that, in 1992 opened the Natural Gas Vehicle Technology Centers, L.L.P. (the \"Tech Center\") in Austin, Texas. The Tech Center converts gasoline-driven vehicles to operate using natural gas. Since its opening, the Tech Center has converted about 1,200 fleet vehicles and buses to operate on natural gas.\nSouthern Union Energy Products and Services Company (\"SUEPASCO\"), a wholly owned subsidiary of the Company, was formed during 1992 to market and sell commercial gas air conditioning, irrigation pumps and other gas-fired engine driven applications and related services.\nSouthern Union Energy International, Inc. (\"International\"), a wholly owned subsidiary of the Company, was also formed during 1992 to participate in energy related projects internationally.\nIn addition, the Company holds investments in commercially developed real estate as well as undeveloped tracts of land through its wholly owned subsidiary, Lavaca Realty Company (\"Lavaca Realty\").\nCOMPETITION\nSouthern Union Gas and Missouri Gas Energy are not currently in significant direct competition with any other distributors of natural gas to residential and small commercial customers within their service areas. In recent years, certain large volume customers, primarily industrial and significant commercial customers, have had opportunities to access alternative natural gas supplies and, in some instances, delivery service from pipeline systems. The Company has offered transportation arrangements to customers who secure their own gas supplies. These transportation arrangements, coupled with the efforts of the Company's marketing subsidiary, Mercado, enable the Company to provide competitively priced gas service to these large volume customers. In addition, the Company has successfully used flexible rate provisions, when needed, to prevent by-pass of the Company's distribution system.\nAs energy providers, Southern Union Gas and Missouri Gas Energy have historically competed with alternative energy sources, particularly electricity and also propane, coal, natural gas liquids and other refined products available in the Company's service areas. At present rates, the cost of electricity to residential and commercial customers in the Company's service areas generally is higher than the effective cost of its natural gas service. There can be no assurances, however, that future fluctuations in gas and electric costs will not reduce the cost advantage of natural gas service.\nThe following operating cost analysis provides a comparison of annual gas and electric costs for three typical residential energy applications in the three largest cities (which represent approximately 72% of the present customers) served by Southern Union Gas and Missouri Gas Energy:\nThe Company believes that similar gas price advantages exist for commercial and industrial applications. In addition, the cost of expansion for peak load requirements of electricity in some of Southern Union Gas' service areas has historically provided opportunities to allow energy switching to natural gas pursuant to integrated resource planning techniques. Electric competition has responded by offering equipment rebates and incentive rates.\nCompetition between the use of fuel oil and natural gas, particularly by industrial, electric generation and agricultural customers, has increased as oil prices have decreased. While competition between such fuels is generally more intense outside the Company's service areas, this competition\naffects the nationwide market for natural gas. Additionally, the general economic conditions in its service areas continue to affect certain customers and market areas, thus impacting the results of the Company's operations.\nGAS SUPPLY\nThe low cost for natural gas service is attributable to efficient operations and the Company's ability to contract for natural gas using favorable mixes of long-term and short-term supply arrangements and favorable transportation contracts. The Company has been directly acquiring its gas supplies since the mid 1980s when interstate pipeline systems opened their systems for transportation service. The Company has the organization, personnel and equipment necessary to dispatch and monitor gas volumes on a daily and even hourly basis to ensure reliable service to customers.\nThis experience will be of major significance in the post FERC Order 636 procurement environment. FERC Order 636 promotes the \"unbundling\" of services offered by interstate pipeline companies. As a result, gas purchasing and transportation decisions and associated risks now shift from the pipeline companies to the gas distributors. The increased demands on distributors to effectively manage their gas supply in an environment of volatile gas prices will provide an advantage to distribution companies such as Southern Union that have demonstrated a history of contracting favorable and efficient gas supply arrangements in an open market system.\nThe majority of Southern Union Gas' 1993 gas requirements for utility operations were delivered under long-term transportation contracts through five major pipeline companies. These contracts have various expiration dates ranging from 1995 through 2011. Southern Union Gas also purchases significant volumes of gas under long-term and short-term arrangements with suppliers. The amounts of such short-term purchases are contingent upon price. Southern Union Gas and Missouri Gas Energy both have firm supply commitments for all areas that are supplied with gas purchased under short-term arrangements.\nGas sales and\/or transportation contracts with interruption provisions, whereby large volume users purchase gas with the understanding that they may be forced to shut down or switch to alternate sources of energy at times when the gas is needed for higher priority customers, have been utilized for load management by Southern Union and the gas industry as a whole for many years. In addition, during times of special supply problems, curtailments of deliveries to customers with firm contracts may be made in accordance with guidelines established by appropriate federal and state regulatory agencies. There have been no supply-related curtailments of deliveries to Southern Union Gas or Missouri Gas Energy utility sales customers during the last ten years.\nThe following table shows, for each of Southern Union Gas' principal service areas, the percentage of gas utility revenues and sales volume for 1993, the average cost per Mcf of gas in 1993, and the primary delivery systems:\nMissouri Gas Energy provides gas service to Kansas City, St. Joseph, Joplin, Monett and surrounding communities in central and western Missouri. The average cost per Mcf of gas supplied to Missouri Gas Energy in 1993 was $3.04. The primary source of supply to Missouri Gas Energy's service areas is Williams Natural Gas Company.\nUTILITY REGULATION AND RATES\nThe Company's rates and operations are subject to regulation by federal, state and local authorities. In Texas, municipalities have primary jurisdiction over rates within their respective incorporated areas. Rates in adjacent environs areas and appellate matters are the responsibility of the Railroad Commission of Texas. Rates in Oklahoma are subject to regulation by the Oklahoma Corporation Commission. In Missouri, rates are established by the MPSC on a system wide basis. The FERC and the Railroad Commission of Texas have jurisdiction over rates, facilities and services of WGI and Southern, respectively.\nThe Company holds non-exclusive franchises with varying expiration dates in all incorporated communities where it is necessary to do so to carry on its business as it is now being conducted. In the five largest cities in which the Company's utility customers are located, such franchises expire as follows: Kansas City, Missouri in 1997; El Paso, Texas in 2000; Austin, Texas in 2006; and Port Arthur, Texas in 2013. The franchise in St. Joseph, Missouri is perpetual.\nGas service rates are established by regulatory authorities to collectively permit utilities to recover operating, administrative and finance costs, and to earn a return on equity. Gas costs are billed to customers through purchase gas adjustment clauses which permit the Company to adjust its sales price as the cost of purchased gas changes. The appropriate regulatory authority must receive notice of such adjustments prior to billing implementation. This is important because the cost of natural gas accounts for a significant portion of the Company's total expenses.\nThe Company must support any service rate changes to its regulators using an historic test year of operating results adjusted to normal conditions and for any known and measurable revenue or expense changes. Because the rate regulatory process has certain inherent time delays, rate orders may not reflect the operating costs at the time new rates are put into effect.\nThe monthly customer bill contains a fixed service charge, a usage charge for service to deliver gas, and a charge for the amount of natural gas used. While the monthly fixed charge provides an even revenue stream, the usage charge increases the Company's annual revenue and earnings in the traditional heating load months when usage of natural gas increases. The majority of the Company's rate increases in Texas and Oklahoma in recent years have been reflected in increased monthly fixed charges which help stabilize earnings. Weather normalization clauses, now in place in Austin and three other service areas in Texas, also help stabilize earnings.\nOn February 10, 1993, the Company's South Texas service area received an annualized rate increase of $777,000. On June 10, 1993, the Austin City Council approved an ordinance reflecting (i) an approximate $1,700,000 base revenue increase, (ii) new and increased fees that will add approximately $250,000 annually, and (iii) weather normalization clause revisions. The Austin rate increase became effective as of July 1, 1993. On October 5, 1993, the MPSC approved an order reflecting a $9,750,000 revenue increase to Missouri Gas Energy. The Missouri rate increase became effective October 15, 1993. On October 12, 1993, the El Paso City Council approved an ordinance reflecting an approximate revenue increase of $463,000. The El Paso rate increase became effective November 1, 1993. These rate increases should contribute significantly to the Company's earnings in 1994.\nThe following table summarizes the rate increases that have been granted over the last three years:\nIn addition to the regulation of its utility and pipeline businesses, the Company is affected by numerous other regulatory controls, including, among others, pipeline safety requirements of the Department of Transportation, safety regulations under the Occupational Safety and Health Act, and various state and federal environmental statutes and regulations. The Company believes that its operations are in compliance with applicable safety and environmental statutes and regulations.\nSTATISTICS OF GAS UTILITY AND RELATED OPERATIONS\nThe following table provides by division and\/or region the number of gas utility customers served:\nSTATISTICS OF GAS UTILITY AND RELATED OPERATIONS. The following table shows certain operating statistics of Southern Union Gas' utility business for the periods indicated:\nThe following table shows certain operating statistics of Missouri Gas Energy for the periods indicated:\nINVESTMENTS IN REAL ESTATE\nIn February 1993, Southern Union entered into a settlement agreement with the Resolution Trust Corporation (\"RTC\") with respect to Southern Union's former subsidiary, First Bankers Trust & Savings Association. As part of the settlement, in return for payment by the Company of $4,792,000, the RTC dismissed a $6,174,000 judgment for specific performance of a contract to\npurchase real estate; canceled notes in the principal amount of $1,600,000; permitted the Company to terminate a $2,000,000 letter of credit; deeded the Company a 21-acre tract in Austin, Texas; and released certain other claims asserted in the settled litigation. This settlement had no impact on earnings since the Company had previously recorded a reserve for the related loss contingency. In December 1993, Lavaca Realty sold this land for approximately $794,000, resulting in an after tax gain of approximately $321,000. See \"Real Estate\" in the Notes to the Consolidated Financial Statements for the year ended December 31, 1993.\nLavaca Realty owns a commercially developed tract of land in the central business district of Austin, Texas, containing a combined 11-story office building, parking garage, a drive-through bank and a mini-bank facility (\"Lavaca Plaza\"). Approximately 49% of the office space at Lavaca Plaza is used in the Company's business while 51% is leased, or under option to lease, to non-affiliated entities. Lavaca Realty also owns a commercially developed tract of land in Austin, Texas that is used exclusively in the Company's business. Other real estate investments held at December 31, 1993 include 12 acres of undeveloped land in Dallas, Texas and 42 acres of undeveloped land in Denton, Texas. The Company is attempting to sell all undeveloped real estate.\nBUSINESS HELD FOR SALE\nIn February 1993, SX entered into a purchase and sales agreement with certain limited partnerships affiliated with a Dallas-based company to sell all of its oil and gas leasehold interests and associated production for approximately $22,000,000, effective as of January 1, 1993. SX, which was engaged in the development and production of oil and gas, held varying interests in producing oil and gas wells located primarily in New Mexico and Texas.\nThe Company accounted for SX as a business held for sale wherein adjustments were made to reflect the valuation of this business to an estimated net realizable value. At December 31, 1992 and 1991, the Company estimated and recorded a book loss on future disposal of $4,400,000 and $2,250,000, respectively. In addition, at the time of the sale the Company incurred a tax liability of approximately $6,960,000 resulting from the recognition of a tax basis gain of approximately $18,800,000. The sale closed on March 31, 1993.\nEMPLOYEES\nAs of February 28, 1994, the Company had 1,923 employees, of whom 1,488 were paid on an hourly basis, 419 were paid on a salary basis and 16 were paid on a commission basis. Of the 1,488 hourly paid employees, approximately 57% were represented by unions. Of those employees represented by unions, 78% are employed by Missouri Gas Energy.\nIn December 1992, the Company announced an early retirement program available to certain of the Company's employees with an election period from January to March 1993. Approximately 75 of an eligible 109 employees accepted the early retirement program.\nFrom time to time the Company may be subject to labor disputes; however, such disputes have not previously disrupted its business. The Company believes that its relations with its employees are good.\nITEM 2.","section_1A":"","section_1B":"","section_2":"ITEM 2. PROPERTIES.\nSee Item 1, \"Business,\" for information concerning the general location and characteristics of the important physical properties and assets of the Company.\nSouthern Union Gas' system consists of 8,452 miles of mains, 3,601 miles of service lines and 307 miles of transmission lines. Missouri Gas Energy's system consists of 6,930 miles of mains, 3,333 miles of service lines and 71 miles of transmission lines. WGI's system consists of 219 miles of transmission lines and 50 miles of gathering lines and Southern's system consists of 123 miles of transmission lines. The Company considers the systems to be in good condition and to be well maintained, and it has a continuing replacement program based on historical performance and system surveillance.\nMissouri Gas Energy is required, pursuant to an MPSC order, to replace certain service and main lines. This has amounted to an annual capital expenditure of approximately $20,000,000. In addition,\nthe MPSC has issued accounting orders in the past to allow the deferral for future recovery in rates of related financing costs, depreciation and property taxes incurred in the periods between rate filings. The Company believes the MPSC will allow Missouri Gas Energy to continue such deferral and recovery.\nITEM 3.","section_3":"ITEM 3. LEGAL PROCEEDINGS.\nSee \"Commitments and Contingencies\" and \"Subsequent Events -- Missouri Acquisition\" in the Notes to Consolidated Financial Statements for the year ended December 31, 1993 for discussions of the Company's legal proceedings.\nITEM 4.","section_4":"ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.\nThere were no matters submitted to a vote of security holders of Southern Union during the quarter ended December 31, 1993.\nPART II\nITEM 5.","section_5":"ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS.\nMARKET INFORMATION\nSouthern Union's common stock is traded on the American Stock Exchange under the symbol \"SUG\". On February 11, 1994 the Company's Board of Directors declared a three for two stock split distributed in the form of a 50% stock dividend on March 9, 1994 to stockholders of record on February 23, 1994. The high and low sales prices (adjusted for the March 9, 1994 distribution) for shares of Southern Union common stock for the period January 1, 1994 through March 21, 1994 and for each quarter in 1993 and 1992 are set forth below:\nHOLDERS\nAs of March 21, 1994, there were 272 holders of record of the registrants' common stock. This number does not include persons whose shares are held of record by a bank, brokerage house, or clearing agency, but does include any such bank, brokerage house or clearing agency.\nThere were 10,900,586 shares of the registrants' common stock outstanding on March 21, 1994 of which 6,496,772 shares were held by non-affiliates.\nDIVIDENDS\nSouthern Union paid no dividends on its common stock in 1993, 1992 or 1991. Provisions in certain of Southern Union's long-term notes and its bank revolving credit facility limit the payment of cash or asset dividends on capital stock. Under the most restrictive provisions in effect, as a result of the January 1994 sale of Senior Debt Securities, Southern Union may not declare or pay any cash or asset dividend on its common stock (other than dividends and distributions payable solely in shares of\nits common stock or in rights to acquire its common stock) or acquire or retire any of Southern Union's common stock, unless no event of default exists and the Company meets certain financial ratio requirements.\nOn February 11, 1994, Southern Union's Board of Directors also approved the commencement of regular stock dividends of approximately 5% annually. The first such dividend is expected to be a 5% stock dividend to be declared in connection with the Company's annual meeting of stockholders to be held on May 25, 1994. The specific declaration, record and distribution dates for each stock dividend will be determined by the Board and announced at a date no later than the annual stockholders meeting each year. A portion of the 5% stock dividend expected to be distributed in 1994 may be characterized as a distribution of capital depending upon the level of the Company's retained earnings available as of the record date of that distribution.\nITEM 6.","section_6":"ITEM 6. SELECTED FINANCIAL DATA.\nITEM 7.","section_7":"ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.\nINTRODUCTION\nThe Company's principal line of business is the distribution of natural gas as a public utility through Southern Union Gas and, subsequent to January 31, 1994, Missouri Gas Energy, each of which is a division of the Company. Missouri Gas Energy was acquired in a transaction accounted for as a purchase on January 31, 1994 and, therefore, its results of operations are not consolidated with those of the Company until after that date. Accordingly, the following discussion of results of operations does not include Missouri Gas Energy. See \"Item I: Business -- Missouri Acquisition.\"\nIn 1993 the Company completed the Rio Grande, Eagle Pass and Berry Gas Acquisitions. In 1992 the Company completed the Nixon Acquisition and in 1991 the Company completed the South Texas, Brazos River and Andrews Acquisitions and the Arizona Sale. See \"Acquisitions and Divestitures\" in the Notes to Consolidated Financial Statements for the year ended December 31, 1993. For these reasons, the results of operations of the Company for the periods presented are not comparable.\nOn February 11, 1994, the Company's Board of Directors declared a three for two stock split distributed in the form of a 50% stock dividend on March 9, 1994 to stockholders of record on February 23, 1994. Effective March 9, 1994 the Company gave retroactive recognition to the equivalent change in capital structure for all periods presented. Consequently, earnings per share for 1993, 1992 and 1991 have been recomputed based on the weighted average number of shares outstanding during each year, adjusted for the stock split.\nSouthern Union Gas, which accounted for approximately 86% of the Company's total revenues for the year ended December 31, 1993, serves approximately 483,000 residential, commercial, industrial, agricultural and other customers in the States of Texas (including the cities of Austin, Brownsville, El Paso, Galveston and Port Arthur) and Oklahoma. In addition, the Company operates interstate and intrastate natural gas pipeline systems, markets natural gas to end users and markets and sells natural gas for natural gas vehicles. The Company also holds investments in real estate.\nSeveral of the Company's business activities are subject to regulation by federal, state or local authorities where the Company operates. Thus, the Company's financial condition and results of operations have been dependent upon the receipt of adequate and timely adjustments in rates. In addition, the Company's business is affected by seasonal weather impacts, competitive factors within the energy industry and economic development and residential growth in its service areas.\nThe Company's revenues and earnings are primarily dependent upon gas sales volumes and gas service rates. Gas purchase costs generally do not affect the Company's earnings because such costs are passed through to customers pursuant to purchase gas adjustment clauses. Accordingly, while changes in the cost of gas may cause the Company's operating revenues to fluctuate, operating margin (defined as operating revenues less gas purchase costs) is generally not affected by gas purchase cost increases or decreases.\nGas sales volumes fluctuate as a function of seasonal weather impact and the size of the Company's customer base, which is affected by competitive factors in the industry as well as economic development and residential growth in its service areas. The primary factors that affect the distribution and sale of natural gas are the seasonal nature of gas use, adequate and timely rate relief from regulatory authorities, competition from alternative fuels, competition within the gas business for industrial customers and volatility in the supply and price of natural gas. Gas service rates, which consist of a monthly fixed charge and a gas usage charge, are established by regulatory authorities and are intended to permit utilities to recover operating, administrative and financing costs and to earn a return on equity. The monthly fixed charge provides a base revenue stream while the usage charge increases the Company's revenues and earnings in colder weather when natural gas usage increases.\nIn recent years weather variances experienced during the traditional heating load months have significantly impacted the Company's results of operations. The average temperatures in Southern Union Gas' service areas during the past several winter seasons have been much warmer than the 30 year normal temperature. To mitigate the impact of these seasonal variances, Southern Union Gas has requested and received approval for weather normalization clauses in Austin and Galveston and in two other service areas in Texas. These clauses allow for rate adjustments that help stabilize the utility's customers' monthly bills and the Company's earnings from the varying effects of weather.\nOver the last three years, an average of 59% of the Company's revenues came from sales to Southern Union Gas' residential customers. Revenues from residential customers have grown as a\nresult of the Company's acquisitions. The growth of its residential base combined with marketing efforts aimed at large volume users have provided overall gains in sales volumes in recent years. The Company plans to continue these marketing efforts.\nRESULTS OF OPERATIONS\nNET EARNINGS AVAILABLE FOR COMMON STOCK\nThe Company recorded net earnings available for common stock of $6,890,000 for the year ended December 31, 1993 compared to net earnings of $1,445,000 for the year ended December 31, 1992, an increase of $5,445,000. Net earnings per common share, based on weighted average shares outstanding were $.87 in 1993 compared to $.18 in 1992 and $.12 in 1991. (Prior to the March 1994 stock split, discussed above, earnings per share in 1993, 1992 and 1991 were $1.31, $.27 and $.19, respectively.) Earnings from continuing operations available for common stock, net of preferred dividends, were $6,890,000 for the year ended December 31, 1993 compared to $3,891,000 for the year ended December 31, 1992, an increase of $2,999,000. Earnings from continuing operations per common share for the year ended December 31, 1993 were $.87 compared to $.49 in 1992 and $.27 in 1991.\nNet earnings for the year ended December 31, 1993 were positively impacted by the receipt of several rate increases during the past year including: a $777,000 annualized increase in the Company's South Texas service area effective February 10, 1993; a $1,950,000 annualized increase in Austin effective July 1, 1993; and a $463,000 annualized increase in El Paso effective November 1, 1993. The Company also recorded a non-recurring accounting adjustment of approximately $2,345,000 to reverse a tax reserve upon the final settlement of prior period federal income tax audits and the filing of amended federal income tax returns.\nOther factors which positively impacted net earnings for the year ended December 31, 1993 included the reduction in payroll expenses of approximately $1,525,000 resulting from the Company's 1993 early retirement program which was finalized during the second quarter of 1993 and the reduction of approximately $1,657,000 of preferred dividends due to the retirement of the Company's Series A 10% Cumulative Preferred Stock in March and June 1993. Net earnings for the year ended December 31, 1993 were negatively impacted by warmer than normal weather during 1993, which was 89% of normal, and by an increase in operating maintenance and general expense associated with severance costs of approximately $1,298,000 resulting from the early retirement program.\nThe Company's net earnings available for common stock for the year ended December 31, 1992 were $1,445,000 compared to $987,000 in 1991. The increase in 1992 net earnings available for common stock was primarily due to reductions in operating costs, which significantly impacted net operating revenues. Other positive factors affecting net earnings in 1992 included increases in rates and changes in rate designs effected during 1992 and subsequent to the winter heating season of 1991, the reversal of certain contingency accruals of $2,200,000 recorded in 1990 related to the February 1990 cash merger between the Company and Metro Mobile CTS, Inc., and the recognition of a gain of approximately $950,000 resulting from a litigation settlement. These increases in earnings were partially offset by warmer weather in 1992, approximately 4% warmer than 1991 and 9% warmer than normal. In addition, the Company recorded a loss on the disposal of a discontinued operation of $4,400,000. The assets of the discontinued operation were sold effective January 1, 1993. See \"Business Held For Sale\" in the Notes to the Consolidated Financial Statements for the year ended December 31, 1993.\nOPERATING REVENUES\nTotal operating revenues in 1993, 1992 and 1991 were $209,005,000, $192,445,000 and $200,261,000, respectively. Revenues are affected by the level of sales volumes and by the pass-through of increases or decreases in the Company's gas purchase costs through its purchase gas adjustment clauses. Operating revenues increased $16,560,000, or approximately 9%, for the year ended December 31, 1993, primarily from an increase in the customer base resulting from the Rio Grande Valley, Berry Gas and Eagle Pass Acquisitions as well as the receipt of rate increases in 1993,\ndescribed above. These acquisitions increased revenues by approximately $8,085,000 in 1993. Operating revenues also increased due to a 24% increase in the average cost of gas from $2.01 per Mcf in 1992 to $2.50 in 1993, which was partially offset by a 12% decrease in gas sales volumes from 51,104 MMcf in 1992 to 44,859 MMcf in 1993. The decline in gas sales volumes reflected a decrease of 7,831 MMcf in gas sales by Mercado, the Company's marketing subsidiary, resulting from the Company's decision in early 1993 to reduce sales to off system markets.\nOperating revenues decreased in 1992 compared to 1991 due to the Arizona Sale in November 1991, warmer than normal weather in 1992, and a 19% decrease in gas costs billed to residential customers. These factors were partially offset by an increase in sales of approximately $16,400,000 due to Mercado's expanding markets, an increase in rates, described above, and the first full year of operations provided by the Brazos River and Andrews Acquisitions which increased revenues by approximately $6,400,000. The Arizona Sale decreased operating revenues by approximately $29,000,000 in 1992 as compared to 1991. Weather during 1992 was 91% of normal with one of the warmest winter seasons in the Company's history.\nGAS SALES AND TRANSPORTATION VOLUMES\nGas sales volumes billed in 1993, 1992 and 1991 totaled 44,203 MMcf, 51,147 MMcf and 44,942 MMcf, respectively, at an average Mcf sales price of $4.42, $3.58 and $4.39, respectively. Gas sales volumes fluctuate as a function of weather and customer base. The decrease in gas sales volumes is due to the weather patterns in the Company's service areas which averaged 11% warmer than normal in 1993 and 9% warmer than normal in 1992. Gas sales volumes also decreased due to a substantial reduction in gas sales for resale by Mercado, as previously discussed. The average customer bases served in 1993, 1992 and 1991 were approximately 421,000, 394,000 and 428,000, respectively. The average sales price per Mcf varied between periods as a result of variations in the average spot market price of natural gas.\nGas transportation volumes in 1993, 1992, and 1991 totaled 22,750 MMcf, 25,438 MMcf and 8,608 MMcf, respectively, at an average transportation rate per Mcf of $.29, $.23 and $.66, respectively. Transportation volumes decreased in 1993 as compared to 1992 as a result of a 6,500 MMcf reduction in volume transported into Mexico by WGI which was partially offset by an increase in transport volumes to several new customers. In addition, the average transportation rate per Mcf increased in 1993 as compared to 1992. Transportation volumes increased in 1992 as compared to 1991 as a result of WGI's transported volumes into Mexico of approximately 15,000 MMcf during 1992.\nGAS PURCHASE COSTS\nGas purchase costs in 1993, 1992 and 1991 were $110,384,000, $102,918,000 and $109,238,000, respectively. The increase in costs in 1993 was due to a 16% increase in the average spot market price of natural gas from $1.69 per MMbtu in 1992 to $1.96 per MMbtu in 1993 and an increase in the average customer base resulting from acquisitions of gas distribution systems, previously discussed. These factors were partially offset by a substantial reduction in gas sales for resale by Mercado, also previously discussed. The average gas purchase cost incurred by the Company was $2.50 per Mcf in 1993, $2.01 in 1992 and $2.43 in 1991. The decrease in gas purchase costs in 1992 was due to a decrease in the average spot market price of natural gas and a decrease in the average customer base resulting from the Arizona Sale in November 1991. The impact of the decrease in 1992 and 1991 gas prices was partially offset by an increase in volumes.\nOPERATING, MAINTENANCE AND GENERAL EXPENSES\nOperating, maintenance and general expenses were $50,076,000, $46,313,000 and $49,022,000 in 1993, 1992 and 1991, respectively. During 1993 these expenses increased $3,763,000 or 8% due principally to increased operating costs of approximately $1,800,000 associated with acquisitions as well as severance costs of approximately $1,298,000 resulting from the early retirement program, each previously discussed. Partially offsetting the overall increase was a reduction in payroll expenses of $1,525,000 as a result of the Company's early retirement program. During 1992 operating, maintenance and general expenses decreased $2,709,000 compared to 1991 due to the cost containment\nefforts implemented by the Company throughout 1992 as well as the reductions resulting from the Arizona Sale in November 1991. These factors were partially offset by increases in medical and hospitalization expenses.\nTAXES\nFederal and state income tax expense in 1993, 1992 and 1991 was $3,855,000, $4,440,000, and $6,635,000, respectively. The decrease in taxes in 1993 as compared to 1992 is due principally to reductions related to amended prior year federal income tax returns and non-taxable income items included with \"other income\" related to the reversal of a tax reserve as discussed below. In July 1993 the Company paid the Internal Revenue Service (\"IRS\") approximately $1,266,000 in settlement for federal income taxes and interest related to the tax years 1984 through 1989. The Company had previously estimated and accrued an amount for the tax deficiencies and related interest and, as a result of the settlement with the IRS for a lesser amount, a non-recurring adjustment was recorded to reverse the tax reserve in excess of the payment made. The reversal of the reserve had no impact on liquidity or cash flows due to the non-cash impact of this adjustment. See \"Taxes on Income\" in the Notes to Consolidated Financial Statements for the year ended December 31, 1993 for further analysis of the Company's federal and state income tax expense.\nTaxes other than income taxes reflect various state and local business and payroll related taxes. The state and local business taxes are generally based on gross receipts and investments in property, plant and equipment and fluctuate accordingly.\nDEPRECIATION AND AMORTIZATION EXPENSE\nDepreciation and amortization expense in 1993, 1992 and 1991 was $14,416,000, $12,737,000 and $13,317,000, respectively. The increase in depreciation and amortization expense of $1,679,000 in 1993 compared to 1992 was primarily attributable to acquisitions of gas distribution systems, previously discussed. The decrease in depreciation expense of $580,000 in 1992 compared to 1991 was principally due to the Arizona Sale in November 1991 and was partially offset by a full year of depreciation on the acquired gas distribution systems. The Company has requested recovery of the amortization of additional purchase cost assigned to utility plant in recent rate filings. At this time, recovery has not been included in gas distribution rates in the Company's major rate jurisdictions. However, during 1993 the Federal Energy Regulatory Commission issued a rate order approving the recovery of additional purchase costs assigned to utility plant associated with WGI, which amount is not material to the consolidated financial statements.\nOTHER INCOME AND EXPENSES, NET\nOther income and expenses, net in 1993, 1992 and 1991 were $8,176,000, $6,531,000 and $2,536,000, respectively. During 1993 the Company recorded a non-recurring adjustment of approximately $2,345,000 to reverse a tax reserve upon the final settlement of prior period federal income tax audits as previously discussed. The reversal of the reserve had no impact on liquidity or cash flows due to the non-cash impact of this adjustment. Other income items recorded in 1993 also included interest income on notes receivable of approximately $830,000; rental income from Lavaca Realty, Southern Union's real estate subsidiary, of approximately $1,835,000; and a pre-tax gain of approximately $494,000 on the sale of undeveloped real estate.\nOther income in 1992 included a $2,200,000 reversal of certain contingency reserves recorded at the time of the 1990 merger that were subsequently resolved or settled and a $950,000 gain resulting from a litigation settlement, each previously discussed. The reversal of these reserves had no impact on liquidity or cash flows due to the non-cash impact of the adjustment. Other income in 1991 also included the recognition of a gain on the Arizona Sale of $4,782,000, to the extent of tax expense incurred, interest income on notes receivable of approximately $528,000 and the recognition of gains on litigation settlements of approximately $1,792,000.\nInterest expense on short-term debt was $1,836,000, $384,000 and $697,000 in 1993, 1992 and 1991, respectively. Average short-term debt outstanding during 1993, 1992 and 1991 of $33,021,000,\n$5,912,000 and $9,184,000 was at an average interest rate of 5.3%, 6.3% and 8.1%, respectively. The variance in the average amounts outstanding coupled with a general reduction in interest rates resulted in the change in other interest expense in each of the years.\nBUSINESS HELD FOR SALE\nThe loss from discontinued operation of $2,446,000 for the year ended December 31, 1992 includes net earnings from oil and gas operations of $1,954,000 which were offset by the estimated loss on disposal of $4,400,000. Similarly, the 1991 loss from discontinued operation of $1,186,000 included net earnings from operations of $1,064,000 and a valuation adjustment of $2,250,000. Increased production volumes in 1992 contributed to an increase in net earnings from operations. See \"Business Held for Sale\" in the Notes to Consolidated Financial Statements for the year ended December 31, 1993.\nLIQUIDITY AND CAPITAL RESOURCES\nThe Company's liquidity is impacted by its ability to generate funds from operations and to access capital markets. The gas utility operations are seasonal in nature with a significant percentage of the Company's annual revenues and earnings occurring in the traditional heating-load months. This seasonality results in a high level of cash flow needs during the peak winter heating-load months, resulting from the required payments to natural gas suppliers in advance of the receipt of cash payments from the Company's customers.\nFINANCING ACTIVITIES\nOn December 31, 1993 Southern Union completed a $50,000,000 Rights Offering (the \"Rights Offering\") to its existing stockholders to subscribe for and purchase 3,000,000 shares of the Company's common stock, par value $1.00 per share, at $16.67 per share, as adjusted for the three for two stock split, for net proceeds of $49,351,000. In addition, on January 31, 1994, the Company completed the sale of $475,000,000 of 7.60% Senior Notes due 2024 (the \"Senior Debt Securities\"). The net proceeds from the sale of the Senior Debt Securities, together with the net proceeds from the Rights Offering and working capital from operations, have been or will be used to: (i) fund the purchase price of the Missouri Acquisition; (ii) refinance the $20,000,000 aggregate principal amount of the 10 1\/8% Notes due May 15, 1994; (iii) repay approximately $59,300,000 of borrowings under the $100,000,000 revolving credit facility, which borrowings were used to fund the Rio Grande Acquisition and repurchase all of the outstanding preferred stock; (iv) refinance the $10,000,000 aggregate principal amount of 9.45% Senior Notes due January 31, 2004, and $25,000,000 aggregate principal amount of 10% Senior Notes due January 31, 2012 and the related premium of $10,400,000 resulting from the early extinguishment of such notes; and (v) refinance $50,000,000 aggregate principal amount of the 10.5% Sinking Fund Debentures due May 15, 2017 and the premium of $3,300,000 resulting from the early extinguishment of such debentures.\nOn September 30, 1993, Southern Union entered into a new revolving credit facility with a three year term (the \"Revolving Credit Facility\") initially underwritten by Texas Commerce Bank, N.A. for $80,000,000. On November 15, 1993, the Revolving Credit Facility was syndicated to five additional banks and the aggregate amount available to be borrowed was increased to $100,000,000. Borrowings under the Revolving Credit Facility are available for Southern Union's working capital and letter of credit requirements. The Revolving Credit Facility can also be used in part, but not to exceed $40,000,000, to fund acquisitions and capital expenditures and it provided the funds to complete the Rio Grande Acquisition. The Revolving Credit Facility contains certain financial covenants that, among other things, restrict cash or asset dividends, share repurchases, certain investments and additional debt. The Revolving Credit Facility is currently uncollaterized. Under certain conditions involving the issuance of collateralized debt of Southern Union, the Revolving Credit Facility automatically would become collateralized by a first priority security interest on substantially all of the accounts receivable, inventory and certain related contract rights of the Company. The amount outstanding under the Revolving Credit Facility at March 21, 1994 was zero.\nDuring March 1993 the Company retired 68,000 shares of the Series A 10% Cumulative Preferred Stock (\"Preferred Stock\") at $103 per share for $7,004,000. In April 1993, the Company retired 77,000 shares of Preferred Stock at $102 per share for $7,854,000. In June 1993, the Company retired 4,000 shares of Preferred Stock at $103.50 per share for $414,000 and the remaining outstanding 100,000 shares at par for $10,000,000.\nIn February 1992 the Company repurchased 77,438 shares of common stock at $10.25, as adjusted for the stock split.\nINVESTING ACTIVITIES\nThe Company has used its revolving loan and credit facilities, internally generated funds and long-term debt to provide funding for its seasonal working capital, continuing construction programs, operational requirements, preferred dividend requirements and acquisitions. During the three years ended December 31, 1993, Southern Union spent approximately $112,000,000 on capital projects. Of that total, $58,000,000 was incurred on normal expansion of its distribution system as well as relocation and replacement, and $54,000,000 was incurred for the acquisition of distribution properties. In addition, during the last three years, approximately $6,500,000 was incurred for the purchase of real estate. For the year ended December 31, 1993, the Company spent approximately $19,000,000 for capital expenditures, exclusive of the acquisitions of natural gas distribution properties, which was used for normal distribution system replacement and expansion.\nOn July 9, 1993, the Company entered into the Missouri Asset Purchase Agreement pursuant to which the Company on January 31, 1994 purchased certain natural gas distribution operations in central and western Missouri. The estimated purchase price paid at closing was $400,300,000 in cash. The Missouri Acquisition was accounted for as a purchase, as previously discussed. Pursuant to the MPSC Stipulation, the additional purchase cost assigned to utility plant may not be included in rate base nor amortized in cost of service. See \"Subsequent Events -- Missouri Acquisition\" in the Notes to the Consolidated Financial Statements for the year ended December 31, 1993.\nOn September 30, 1993, the Company completed the Rio Grande Acquisition for approximately $30,500,000. Rio Grande presently serves approximately 76,000 customers in the south Texas counties of Willacy, Cameron and Hidalgo, including the cities of Harlingen, McAllen and Brownsville (the southernmost city in the U.S.). The Company initially funded the purchase with borrowings from its Revolving Credit Facility. The Rio Grande Acquisition was accounted for as a purchase.\nIn July 1993, the Company completed the Eagle Pass Acquisition for approximately $2,000,000. During May 1993, the Company completed the Berry Gas Acquisition which system serves the Texas cities and towns of Nome, Raywood, Hull and Devers for approximately $274,000. Combined, these operations collectively serve approximately 4,600 customers. These acquisitions were also accounted for as purchases.\nIn October 1992, the Company completed the Nixon Acquisition for approximately $415,000. This system serves approximately 650 customers. In January 1991 the Company completed the South Texas Acquisition consisting of the natural gas distribution and transmission facilities that serve approximately 12,000 customers in several communities. The purchase price for these facilities was approximately $10,200,000. In August 1991, the Company completed the Andrews Acquisition for $1,000,000. This system serves approximately 3,000 customers. In September 1991 the Company completed the Brazos River Acquisition which provides distribution services to approximately 18,000 customers in several communities in north-central Texas. The purchase price for these facilities approximated $7,000,000 of cash and assumption of $3,500,000 of mortgage bond debt. Also in September 1991 the Company purchased a commercially developed tract of land in the central business district of Austin, Texas containing a combined 11-story office building, parking garage, a drive-through bank and a mini-bank facility for $5,300,000. In December 1991, the Company also\npurchased a commercially developed tract of land in Austin, Texas for $1,100,000. Each of these acquisitions and purchases was initially funded under the Company's revolving loan or credit facilities.\nIn March 1993, Southern Union Exploration Company (\"SX\"), pursuant to a purchase and sale agreement entered into in February 1993, sold substantially all of its oil and gas leasehold interests and associated production, for $22,000,000 effective January 1, 1993. The Company recorded a book loss on the sale of approximately $4,400,000 as of December 31, 1992.\nIn November 1991, the Company completed the Arizona Sale for approximately $46,000,000, representing cash of $40,400,000 and assumed liabilities of $5,600,000. The cash proceeds were used to retire the short-term debt which funded the 1991 acquisitions described above. In addition, during 1991 the Company sold a three acre office park project in Dallas, Texas for $1,600,000 and a 120 unit apartment project in Nacogdoches, Texas for cash of $500,000 and a note receivable for $600,000. As a result of these sales, the Company has divested itself of all developed real estate not otherwise used at least partially in the Company's business.\nOTHER MATTERS\nCONTINGENCIES\nThe Company has been named as a potentially responsible party in a special notice letter from the United States Environmental Protection Agency for costs associated with removing hazardous substances from the site of a former coal gasification plant in Vermont. The Company also assumed responsibility for certain environmental matters in connection with the Missouri Acquisition. See \"Commitments and Contingencies\" and \"Subsequent Events -- Missouri Acquisition\" in the Notes to Consolidated Financial Statements for the year ended December 31, 1993.\nIn 1993 the Internal Revenue Service completed its audit of the Company's federal income tax return for 1984 through 1989. The Internal Revenue Service proposed and the Company agreed to deficiencies and related interest of approximately $1,266,000. The Company had fully accrued for such tax deficiencies and related interest.\nREGULATORY\nThe Company is continuing to pursue certain changes to rates and rate structures that are intended to reduce the sensitivity of earnings to weather including weather normalization clauses and higher minimum monthly service charges.\nOn February 10, 1993, the Company's South Texas service area received an annualized rate increase of $777,000. On June 10, 1993, the Austin City Council approved an ordinance reflecting (i) an approximate $1,700,000 base revenue increase, (ii) new and increased fees that will add approximately $250,000 annually and (iii) weather normalization clause revisions. The Austin rate increase became effective as of July 1, 1993. On October 12, 1993, the El Paso City Council approved an ordinance reflecting an approximate revenue increase of $463,000. The El Paso rate increase became effective November 1, 1993. These rate increases should contribute significantly to Southern Union Gas' earnings in 1994.\nDuring 1992, the Company's rate cases continued to focus upon the receipt of timely and adequate revenue increases and on various measures designed to stabilize earnings. Rate cases resolved in El Paso, South Texas, Dell City, Port Arthur, Borger, Galveston, Pecos and Monahans resulted in revenue increases of $2,742,000. The Galveston rate case also provided for an increase in the minimum residential monthly service charge from $7.50 to $10 and the implementation of a weather normalization clause.\nACCOUNTING PRONOUNCEMENTS\nThe Company adopted the provisions of Financial Accounting Standards Board's Statement of Financial Accounting Standards (\"SFAS\") No. 109, \"Accounting for Income Taxes,\" effective as of January 1, 1993. SFAS No. 109 provides for the replacement of the \"deferred method\" of interperiod\nincome tax allocation with the \"liability method\" which bases the amounts of current and future tax assets and liabilities on events recognized in the financial statements and on income tax laws and rates existing at the balance sheet date. The adoption of SFAS No. 109 resulted in the recording of an insignificant amount in 1993.\nThe Company also adopted the provisions of SFAS No. 106, \"Employers' Accounting for Postretirement Benefits Other Than Pensions,\" effective as of January 1, 1993. SFAS No. 106 requires an accrual of postretirement medical and other benefit liabilities on an actuarial basis during the years an employee provides services as compared to the current pay-as-you-go method. The Company records a regulatory asset for the difference between the postretirement costs currently included in rates and SFAS No. 106 expense to the extent the Company files, or intends to file, a rate application to include SFAS No. 106 expense in rates. It is probable that the regulator will allow such expense in future rates. Consequently, earnings were not adversely impacted by the adoption of this statement. The Company's adoption of the provisions of SFAS No. 106 resulted in a transition obligation of approximately $9,328,000 which was subsequently reduced in 1993 to $4,257,000 primarily as a result of certain plan amendments. The Company will amortize the remaining transition obligation over the allowed 20-year period.\nSFAS No. 112, \"Employees Accounting for Postemployment Benefits,\" is required to be adopted effective for fiscal years beginning after December 15, 1993. SFAS No. 112 provides standards for employers who grant benefits to employees after employment but before retirement. The Company anticipates the recovery of the periodic expense through rates and the recording of the future benefits to be paid as a regulatory asset. The Company plans to adopt the provisions of SFAS No.112 effective as of January 1, 1994. The impact of the adoption of SFAS No. 112 is not expected to be material to the financial condition or results of operations of the Company.\nITEM 8.","section_7A":"","section_8":"ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.\nReference is made to the Consolidated Financial Statements of Southern Union and its consolidated subsidiaries listed on page.\nITEM 9.","section_9":"ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.\nNone.\nPART III\nITEM 10.","section_9A":"","section_9B":"","section_10":"ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT.\nThe information required is incorporated herein by reference from Southern Union's definitive Proxy Statement for the annual meeting of stockholders to be held on May 25, 1994, which will be filed on or before April 4, 1994.\nITEM 11.","section_11":"ITEM 11. EXECUTIVE COMPENSATION.\nThe information required is incorporated herein by reference from Southern Union's definitive Proxy Statement for the annual meeting of stockholders to be held on May 25, 1994, which will be filed on or before April 4, 1994.\nITEM 12.","section_12":"ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.\nThe information required is incorporated herein by reference from Southern Union's definitive Proxy Statement for the annual meeting of stockholders to be held on May 25, 1994, which will be filed on or before April 4, 1994.\nITEM 13.","section_13":"ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.\nThe information required is incorporated herein by reference from Southern Union's definitive Proxy Statement for the annual meeting of stockholders to be held on May 25, 1994, which will be filed on or before April 4, 1994.\nPART IV\nITEM 14.","section_14":"ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.\n(a)(1) FINANCIAL STATEMENTS. Reference is made to the Index on page for a list of all financial statements filed as part of this Report.\n(a)(2) FINANCIAL STATEMENT SCHEDULES. Reference is made to the Index on page for a list of all financial statement schedules filed as a part of this Report.\n(a)(3) EXHIBITS. Reference is made to the Exhibit Index on pages E-1 and E-2 for a list of all exhibits filed as a part of this Report.\n(b) REPORTS ON FORM 8-K. A Current Report on Form 8-K was filed on October 13, 1993. Events reported included: (i) the Corpus Christi, Texas, City Council voted not to hold a referendum on selling the city's gas system to the Company; (ii) the Company entered into a new Revolving Credit Agreement with Texas Commerce Bank, N.A., as agent, for an $80,000,000 Revolving Credit Facility, as amended on November 15 to increase the facility to $100,000,000; and (iii) the Company entered into a Purchase Agreement pursuant to which it simultaneously purchased Rio Grande Valley Gas Company for approximately $30,500,000.\nSIGNATURES\nPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Southern Union has duly caused this report to be signed by the undersigned, thereunto duly authorized on March 28, 1994.\nSOUTHERN UNION COMPANY\nBy \/s\/ PETER H. KELLEY\n----------------------------------- Peter H. Kelley, PRESIDENT AND CHIEF OPERATING OFFICER\nPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of Southern Union and in the capacities indicated as of March 28, 1994.\nSOUTHERN UNION COMPANY INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES\nAll other schedules are omitted as the required information is not applicable or the information is presented in the consolidated financial statements, related notes or other schedules.\nREPORT OF INDEPENDENT ACCOUNTANTS\nTo the Stockholders and Board of Directors of Southern Union Company:\nWe have audited the consolidated financial statements and financial statement schedules of Southern Union Company and Subsidiaries listed in the index on page of this Form 10-K. These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits.\nWe conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.\nIn our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Southern Union Company and Subsidiaries as of December 31, 1993 and 1992, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1993 in conformity with generally accepted accounting principles. In addition, 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 required to be included therein.\nAs discussed in the Summary of Significant Accounting Policies note to the consolidated financial statements, effective January 1, 1993 the Company changed its method of accounting for income taxes and postretirement benefits other than pensions.\nCOOPERS & LYBRAND\nAustin, Texas March 11, 1994\nSOUTHERN UNION COMPANY AND SUBSIDIARIES\nSTATEMENT OF CONSOLIDATED OPERATIONS\nSee accompanying notes to the consolidated financial statements.\nSOUTHERN UNION COMPANY AND SUBSIDIARIES\nCONSOLIDATED BALANCE SHEET\nASSETS\nSee accompanying notes to the consolidated financial statements.\nSOUTHERN UNION COMPANY AND SUBSIDIARIES STATEMENT OF CONSOLIDATED CASH FLOWS\nSee accompanying notes to the consolidated financial statements.\nSOUTHERN UNION COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1993, 1992 AND 1991\nSUMMARY OF SIGNIFICANT ACCOUNTING POLICIES\nOPERATIONS AND PRINCIPLES OF CONSOLIDATION\nSouthern Union Company (\"Southern Union\" and, together with its wholly owned subsidiaries, the \"Company\"), is an investor-owned public utility primarily engaged in the distribution and sale of natural gas to residential, commercial, industrial, agricultural and other customers as a public utility in the states of Texas, Oklahoma and Missouri. See \"Subsequent Events -- Missouri Acquisition.\" Subsidiaries of Southern Union also market natural gas to end-users, sell natural gas as a vehicular fuel, convert vehicles to operate on natural gas, operate intrastate and interstate natural gas pipeline systems, and sell commercial gas air conditioning and other gas-fired engine-driven applications. A subsidiary also holds investments in real estate. Substantial operations of the Company are subject to regulation.\nThe consolidated financial statements include the accounts of Southern Union and its wholly owned subsidiaries. All significant intercompany accounts and transactions are eliminated in consolidation. All dollar amounts in the tabulations in the notes to consolidated financial statements, except per share amounts, are stated in thousands unless otherwise indicated. Certain reclassifications have been made to the prior years' financial statements to conform with the current year presentation.\nPROPERTY, PLANT AND EQUIPMENT\nUtility plant in-service and construction work in progress are stated at original cost of construction, less contributions in aid of construction, which includes, where appropriate, payroll related costs such as taxes, pensions, other employee benefits, general and administrative costs and an allowance for funds used during construction. Gain or loss is recognized upon the disposition of significant utility properties and other property constituting operating units. Gain or loss from minor dispositions of property is charged or credited to accumulated depreciation and amortization. The Company capitalizes the cost of significant internally developed computer software systems.\nAcquisitions are recorded at the historical book carrying value of utility plant. Additional purchase cost assigned to utility plant is the excess of the purchase price over the book carrying value of utility plant purchased. In general, the Company has not been allowed direct recovery of additional purchase cost assigned to utility plant in rates. Periodically, the Company evaluates the carrying value of its additional purchase cost assigned to utility plant by comparing the anticipated future operating income from the businesses giving rise to the additional purchase cost with the unamortized balance.\nDEPRECIATION AND AMORTIZATION\nDepreciation of utility plant is provided at an average straight-line rate of approximately 3% per annum of the cost of such depreciable properties less applicable salvage. Franchises are being amortized over their respective lives. Depreciation and amortization of other property is provided at straight-line rates estimated to recover the costs of the properties, after allowance for salvage, over their respective lives. Amortization of the additional purchase cost assigned to utility plant is provided on a straight-line basis over thirty years.\nBUSINESS HELD FOR SALE\nBusiness held for sale is stated at estimated net after-tax sales proceeds.\nLONG-TERM DEBT\nDebt issuance costs are amortized over the lives of the related debt issues.\nSOUTHERN UNION COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)\nGAS UTILITY REVENUES AND GAS PURCHASE COSTS\nGas utility customers are billed on a monthly-cycle basis. The related cost of gas is matched with cycle-billed revenues through operation of purchased gas adjustment provisions in tariffs approved by the regulatory agencies having jurisdiction.\nThe Company recognizes an estimate of unbilled revenues on a monthly-cycle basis which include sales from the cycle-billing dates to the end of the month, unbilled gas purchase costs and revenue related taxes. The accrual for unbilled revenues is included in operating revenues in the statement of consolidated earnings.\nEMPLOYEE RETIREMENT PLAN AND POSTRETIREMENT BENEFITS\nThe Company adopted the provisions of Statement of Financial Accounting Standard (\"SFAS\") No. 106, \"Employer's Accounting for Postretirement Benefits Other Than Pensions,\" effective as of January 1, 1993. This statement requires an accrual of postretirement medical and other benefit liabilities on an actuarial basis during the years an employee provides services. The Company records a regulatory asset for the difference between the postretirement costs currently included in rates and SFAS 106 expense to the extent the Company has filed, or intends to file, a rate application to include SFAS 106 expense in rates and it is probable that the regulator will allow such expense in future rates.\nTAXES ON INCOME\nThe Company adopted the provisions of SFAS No. 109, \"Accounting for Income Taxes,\" effective as of January 1, 1993. SFAS No. 109 provides for the replacement of the \"deferred method\" of interperiod income tax allocation with the liability method which bases the amounts of current and future tax assets and liabilities on events recognized in the financial statements and on income tax laws and rates existing at the balance sheet date.\nPrior to the adoption of SFAS No. 109, the Company followed the provisions of Accounting Principles Board (\"APB\") No. 11, \"Accounting for Income Taxes.\" For the years ended December 31, 1992 and 1991, the interperiod allocation of federal income taxes resulted in the provision of deferred income taxes provided for timing differences between financial and taxable income, principally attributable to accelerated tax depreciation. Investment tax credits allowed on certain qualified properties were deferred and are amortized to income over the estimated life of the related property.\nCASH FLOWS AND CREDIT RISK\nThe Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. The Company places its temporary cash investments with a high credit quality financial institution which, in turn, invests the temporary funds in a variety of high-quality financial securities. Concentrations of credit risk in trade receivables are limited due to the large customer base with relatively small individual account balances.\nEARNINGS PER SHARE\nEarnings per common share is based on net earnings available for common stock using the weighted average shares outstanding during each period. Fully diluted earnings per share is not presented because the relevant stock options are not significant.\nACQUISITIONS AND DIVESTITURES\nIn September 1993, the Company acquired the Rio Grande Valley Gas Company (\"Rio Grande\") for approximately $30,500,000. Rio Grande serves approximately 76,000 customers in the south Texas counties of Willacy, Cameron and Hidalgo which includes 32 towns and cities along the Mexico border, including Harlingen, McAllen and Brownsville (the southernmost city in the U.S.). The Company initially funded the purchase with borrowings from its revolving credit facility which were subsequently paid down out of the net proceeds from the sale of a $50,000,000 Rights Offering completed on\nSOUTHERN UNION COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1993 (the \"Rights Offering\") and the sale of $475,000,000 of 7.60% Senior Notes due 2024 (the \"Senior Debt Securities\") completed on January 31, 1994. See \"Stockholders' Equity -- Rights Offering\" and \"Long-Term Debt.\" The acquisition of Rio Grande was accounted for using the purchase method of accounting. Rio Grande was merged into Southern Union on the date of the acquisition and has been integrated into its Southern Union Gas utility division. The additional purchase cost assigned to utility plant of approximately $11,644,000 reflects the excess of the purchase price over the historical book carrying value of the utility plant purchased.\nThe following unaudited pro forma financial information for the years ended December 31, 1993 and 1992 is presented as though the acquisition of Rio Grande had been consummated at the beginning of 1993 and 1992, respectively. The pro forma financial information, adjusted for the stock split on March 9, 1994, is not necessarily indicative of the results which would have actually been obtained had the acquisition been completed as of the assumed date for the periods presented or which may be obtained in the future.\nIn July 1993, the Company acquired the natural gas distribution facilities serving the city of Eagle Pass, Texas for approximately $2,000,000. In May 1993, the Company acquired the natural gas distribution facilities of Berry Gas Company which serves the Texas cities and towns of Nome, Raywood, Hull and Devers for approximately $274,000. Combined, these operations collectively serve approximately 4,600 customers. These acquisitions were also accounted for as purchases.\nDuring 1992, the Company acquired the natural gas distribution facilities in Nixon, Texas for $415,000. Also, the Company added approximately 12 miles of pipeline which transports gas to the community of Sabine Pass, Texas. During 1991, the Company acquired the natural gas distribution and transmission facilities serving an area in south Texas, including the cities of Lockhart, Luling, Cuero, Shiner, Yoakum and Gonzales, and the natural gas distribution facilities serving the city of Andrews, Texas. Also, in 1991, Southern Union acquired Brazos River Gas Company, a natural gas distribution company serving the north Texas cities of Mineral Wells, Weatherford, Graham, Breckenridge, Millsap, Jacksboro and surrounding communities. The purchase price for the 1991 acquisitions was $18,200,000 in cash and assumption of $3,500,000 of mortgage bonds. The distribution operations acquired in 1992 and 1991 collectively serve approximately 35,000 customers.\nIn February 1993, Southern Union Exploration Company (\"SX\"), a wholly owned subsidiary of Southern Union, entered into a purchase and sale agreement to sell substantially all of its oil and gas leasehold interests and associated production for approximately $22,000,000, which sale was completed in March 1993, effective January 1, 1993. See \"Business Held For Sale\".\nIn November 1991, the Company sold the assets of its Arizona gas utility operations (the \"Arizona Sale\") for approximately $46,000,000, including cash of $40,400,000 and assumed liabilities of $5,600,000. Cash proceeds approximated $32,800,000, net of applicable taxes. The Company recognized a gain of approximately $4,800,000 on the Arizona Sale to the extent of the tax expense incurred on the transaction. The remaining amount in excess of assets sold of approximately $11,400,000 was credited to additional purchase cost assigned to utility plant recorded in February 1990 at the time of the merger of an acquiring company into Southern Union.\nSOUTHERN UNION COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)\nBecause of the aforementioned acquisitions and divestitures in 1993, 1992 and 1991, the results of operations of the Company for the years ended December 31, 1993, 1992 and 1991 are not comparable.\nOTHER INCOME\nDuring 1993, the Company recorded a non-recurring accounting adjustment of approximately $2,345,000 to reverse a tax reserve upon the final settlement of prior period federal income tax audits and the filing of amended federal income tax returns. In July 1993, the Company paid the Internal Revenue Service (\"IRS\") approximately $1,266,000 in settlement for federal income taxes and interest related to the tax years 1984 through 1989. The Company had previously estimated and accrued an amount for the tax deficiencies and related interest and, as a result of the settlement with the IRS for a lesser amount, a non-recurring adjustment was recorded to reverse the tax reserve in excess of the payment made. The reversal of the reserve had no impact on liquidity or cash flows due to the non-cash impact of this adjustment. Other income items recorded in 1993 also included: interest income on notes receivable of approximately $830,000; rental income from Lavaca Realty Company (\"Lavaca Realty\"), the Company's real estate subsidiary, of approximately $1,835,000; and a pre-tax gain of approximately $494,000 on the sale of undeveloped real estate.\nDuring 1992, the Company resolved certain other contingent matters and reversed approximately $2,200,000 of certain contingency reserves, recorded when an acquiring company completed a cash merger into Southern Union during February 1990. The reversal of those reserves had no impact on liquidity or cash flows due to the non-cash impact of this adjustment. In addition, a $950,000 gain resulting from a litigation settlement was recorded in 1992. Other income in 1991 included approximately $1,792,000 in gains resulting from litigation settlements and interest income on notes receivable of approximately $528,000.\nCASH FLOW INFORMATION\nSOUTHERN UNION COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)\nExcluded from the statement of consolidated cash flows were the following effects of non-cash investing and financing activities:\nREAL ESTATE\nIn February 1993, Southern Union entered into a settlement agreement with the Resolution Trust Corporation (\"RTC\") with respect to Southern Union's former subsidiary, First Bankers Trust & Savings Association. As part of the settlement, in return for payment by the Company of $4,792,000, the RTC: dismissed a $6,174,000 judgment for specific performance of a contract to purchase real estate; canceled notes in the principal amount of $1,600,000; permitted the Company to terminate a $2,000,000 letter of credit; deeded the Company a 21-acre tract in Austin, Texas; and released certain other claims asserted in the settled litigation. This settlement had no impact on earnings since the Company had previously recorded a reserve for the related loss contingency. In December 1993, Lavaca Realty sold this land for approximately $794,000 resulting in an after tax gain of approximately $321,000.\nIn 1991, Lavaca Realty purchased a commercially developed tract of land in the central business district of Austin, Texas containing a combined 11-story office building, parking garage, drive-through bank and mini-bank facility (\"Lavaca Plaza\") for $5,300,000. Approximately 49% of the office space at Lavaca Plaza is used in the Company's business while 51% is leased, or is under option to lease, to non-affiliated entities. During 1991, Lavaca Realty sold a three-acre office park project in Dallas, Texas for $1,600,000 and a 120 unit apartment project in Nacogdoches, Texas for cash of $500,000 and a note receivable for $600,000 and, in 1992, sold 11 acres of undeveloped land in Austin, Texas for $335,000. The 1991 sales transactions resulted in the recognition of a tax benefit of approximately $1,300,000.\nSOUTHERN UNION COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)\nSTOCKHOLDERS' EQUITY\nThe changes in common stockholders' equity and cumulative preferred stock were as follows:\nSTOCK SPLIT\nOn February 11, 1994 Southern Union's Board of Directors declared a three for two stock split in the form of a 50% stock dividend which was distributed on March 9, 1994 to stockholders of record on February 23, 1994. Effective March 9, 1994 the Company gave retroactive recognition to the equivalent change in capital structure for all periods presented. Consequently, earnings per share in 1993, 1992 and 1991 were recomputed based on the weighted average number of shares outstanding during each year adjusted for the stock split.\nRIGHTS OFFERING\nOn December 31, 1993, Southern Union consummated a Rights Offering to its existing stockholders to subscribe for and purchase 3,000,000 shares of the Company's common stock, par value $1.00 per share, at $16.67 per share, as adjusted for the March 9, 1994 three for two stock split, for net proceeds of $49,351,000. The proceeds from the Rights Offering, together with the proceeds from the sale of $475,000,000 of 7.60% of Senior Notes due 2024 on January 31, 1994, were used to fund the acquisitions of Rio Grande and certain gas distribution assets in Missouri and to retire certain outstanding debt. See \"Acquisitions and Divestitures,\" \"Long-Term Debt\" and \"Subsequent Events.\"\nSOUTHERN UNION COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)\nCOMMON STOCK\nThe Company had an incentive stock option plan (the \"1982 Plan\") which terminated on December 31, 1991. Under the terms of the 1982 Plan, options to purchase up to an aggregate of 750,000 shares of common stock could have been granted to officers and key employees at prices not less than fair market value on the date of grant. Options granted under the 1982 Plan are exercisable for periods of ten years from the date of grant or such lesser period as may be designated for particular options, and become exercisable after a specified time from the date of grant in cumulative annual installments. Upon exercise of an option, the 1982 Plan permitted the Company to elect, instead of issuing shares, to make a cash payment equal to the difference at the date of exercise between the option price and the market price of the shares as to which option is being exercised.\nOptions under the 1982 Plan for 19,500 shares at $8.17 were exercised in 1993 and options under the 1982 Plan for 13,500 shares at $8.17 were canceled in 1993. No options under the 1982 Plan were exercised in 1992. Options under the 1982 Plan for 15,000 shares at $8.17 per share were canceled in 1992 due to employee terminations in 1992. Options under the 1982 Plan for 4,500 shares at $8.33 were exercised in 1991. No options under the 1982 Plan were granted during the year ended December 31, 1991. At December 31, 1993, 1992 and 1991, options under the 1982 Plan for 195,000, 142,500 and 78,000 shares were exercisable at prices ranging from $8.17 to $9.17.\nThe 1992 Long-Term Stock Incentive Plan (the \"1992 Long-Term Plan\") was approved at the annual meeting of stockholders held on May 12, 1993. Under the 1992 Long-Term Plan options to purchase 780,000 shares may be granted to officers and key employees at prices not less than the market value on the date of grant. Options granted under the 1992 Long-Term Plan are exercisable for periods of ten years from the date of grant or such lesser period as may be designated for particular options, and become exercisable after a specified period of time from the date of grant in cumulative annual installments. The 1992 Long-Term Plan also allows for the granting of stock appreciation rights, dividend equivalents, performance shares and restricted stock.\nNo options under the 1992 Long-Term Plan were granted during 1993. Options under the 1992 Long-Term Plan for 5,250 shares at $10.67 were exercised in 1993 and options under the 1992 Long-Term Plan for 6,000 shares at $10.67 were canceled in 1993. There are 588,000 shares available for future option grants under the 1992 Long-Term Plan at December 31, 1993. Options for 203,250 shares at $10.67 per share, along with dividend equivalents, were granted in October 1992 under the 1992 Long-Term Plan. No options under the 1992 Long-Term Plan were exercised during 1992 and none under the 1992 Long-Term Plan were exercisable at December 31, 1992. At December 31, 1993, options for 38,400 shares at $10.67 were exercisable under the 1992 Long-Term Plan.\nIn 1992 the Company purchased 77,438 shares of its common stock at $10.25, adjusted for the stock split, from a company whose Chairman, Chief Executive Officer and President, at that time, were also executive officers, directors and stockholders of Southern Union.\nRETAINED EARNINGS\nProvisions in certain of Southern Union's long-term notes and Southern Union's charter relating to the issuance of preferred stock limit the payment of cash or asset dividends on capital stock. Under the most restrictive provisions in effect, as a result of the sale of Senior Debt Securities, Southern Union will not declare or pay any cash or asset dividends on common stock (other than dividends and distributions payable solely in shares of its common stock or in rights to acquire its common stock) or acquire or retire any shares of Southern Union's common stock, unless no event of default exists and the Company meets certain financial ratio requirements.\nSOUTHERN UNION COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)\nCUMULATIVE PREFERRED STOCK\nDuring March 1993, Southern Union retired 68,000 shares of the Series A 10% Cumulative Preferred Stock (\"Preferred Stock\") at $103 per share for $7,004,000. In April 1993, Southern Union retired 77,000 shares of Preferred Stock at $102 per share for $7,854,000. In June 1993, Southern Union retired 4,000 shares of Preferred Stock at $103.50 per share for $414,000 and the remaining outstanding 100,000 shares at par for $10,000,000.\nLONG-TERM DEBT\nFirst mortgage bonds, debentures and other long-term debt outstanding, including current maturities, were as follows:\nThe maturities of long-term debt for each of the next five years are: 1994 - -- $20,555,000; 1995 -- $516,000; 1996 -- $545,000; 1997 -- $559,000 and 1998 -- $243,000.\nOn January 31, 1994, Southern Union completed the sale of the Senior Debt Securities. The net proceeds from the sale of the Senior Debt Securities, together with the net proceeds from the Rights Offering and working capital from operations, have been or will be used to: (i) fund the purchase price of the Missouri Acquisition; (ii) refinance the $20,000,000 aggregate principal amount of the 10 1\/8% Notes due May 15, 1994; (iii) repay approximately $59,300,000 of borrowings under the $100,000,000 revolving credit facility, which borrowings were used to fund the acquisition of Rio Grande and repurchase all of the outstanding preferred stock; (iv) refinance the $10,000,000 aggregate principal amount of 9.45% Senior Notes due January 31, 2004, and $25,000,000 aggregate principal amount of 10% Senior Notes due January 31, 2012 and the related premium of $10,400,000 resulting from the early extinguishment of such notes; and (v) refinance $50,000,000 aggregate principal amount of the 10.5% Sinking Fund Debentures due May 15, 2017 and the premium of $3,300,000 resulting from the early extinguishment of such debentures. See \"Subsequent Events.\nNOTES PAYABLE\nOn September 30, 1993, Southern Union entered into an $80,000,000 revolving credit facility with one bank to provide its seasonal working capital and letters of credit requirements. The revolving credit facility was amended on November 15, 1993 to syndicate it to five additional banks and to increase the facility to $100,000,000. The Company may use up to $40,000,000 of this facility to finance future acquisitions. This facility contains covenants with respect to financial parameters and ratios, total debt limitations, borrowing base limitations, restrictions as to dividend payments, stock reacquisitions, certain investments and additional liens. Further, this revolving credit facility is initially uncollaterized; however, it would become collaterized by a first priority security interest in substantially all of the Company's accounts receivable, inventory and certain related contract rights\nSOUTHERN UNION COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) in the event that Southern Union issues debt collaterized by 20% or more of the property, plant and equipment of Southern Union. The facility expires on December 31, 1996, but may be extended annually for periods of one year beginning on September 30, 1994 with the consent of each of the banks. The revolving credit facility is subject to a commitment fee of an annualized .25% on the unused balance. The interest rate on borrowings on the revolving credit facility is calculated based on a formula using the LIBOR and prime interest rates. The average interest rate under the revolving credit facility was 4.7% for the year ended December 31, 1993.\nEMPLOYEE RETIREMENT PLAN AND POSTRETIREMENT BENEFITS\nDEFINED BENEFIT PLAN\nThe Company maintains a trusteed non-contributory defined benefit retirement plan which covers substantially all employees. Benefits are based on years of service and the employee's compensation during the last ten years of employment. The Company funds plan costs in accordance with federal regulations, not to exceed the amounts deductible for income tax purposes. The plan's assets are invested in a cash fund, bond funds and stock funds.\nDuring 1993, the Company completed an early retirement program for certain of the Company's employees. Approximately 75 of an eligible 109 employees accepted the early retirement program. As a result, the Company recognized expenses of approximately $702,000 associated with special termination benefits.\nThe components of net pension expense for the year ended December 31, 1993, 1992 and 1991 consisted of the following:\nThe actuarial computations for the determination of accumulated and projected benefit obligations using the projected unit credit actuarial cost method, assumed a discount rate of 7.5% and a weighted average annual salary increase of 5.8% over the average remaining service lives of employees under the plan as of December 31, 1993. A discount rate of 9% and a weighted average annual salary increase of 6.6% were assumed as of December 31, 1992 and 1991. An expected long-term rate of return on plan assets of 8% was assumed in 1993, 1992 and 1991. As a result of decreasing the discount rate effective January 1, 1994, the provisions of SFAS No. 87, \"Employers Accounting for Pensions\" required the recognition in the balance sheet of an additional minimum liability representing the excess of accumulated benefits over plan assets. A corresponding amount is recognized as an intangible asset to the extent of any unrecognized prior service cost and any remainder as a reduction of stockholders' equity. At December 31, 1993, the Company recorded an additional liability of $4,917,000, an intangible asset of $1,809,000 and a reduction in stockholders' equity of $2,051,000, net of an income tax benefit of $1,057,000.\nSOUTHERN UNION COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)\nThe following is a reconciliation of the funded status of the pension plan and accrued retirement plan liabilities as of December 31, 1993, and 1992:\nPrior service cost is being amortized on a straight line basis over the average remaining expected future service of participants present at the time of amendment.\nThe Company also maintains a supplemental non-contributory defined benefit retirement plan which covers certain employees whose annual earnings exceed $50,000. The purpose of the supplemental plan is to provide part or all of those defined benefit plan benefits which are not payable to certain employees under the primary plan. The Company does not currently fund the supplemental plan. The net pension cost of the supplemental plan for the years ended December 31, 1993, 1992 and 1991 was not significant.\nPOSTRETIREMENT BENEFITS OTHER THAN PENSIONS\nThe Company adopted the provision of SFAS No. 106, \"Employers' Accounting for Postretirement Benefits Other Than Pensions,\" effective as of January 1, 1993 which resulted in a transition obligation of approximately $9,328,000 which was subsequently reduced in 1993 to $4,257,000 primarily as a result of certain plan amendments. The Company will amortize the remaining transition obligation over an allowed 20-year period. This statement requires an accrual of postretirement medical and other benefit liabilities on an actuarial basis during the years an employee provides services. The Company records a regulatory asset for the difference between the postretirement cost currently included in rates and the SFAS No. 106 expense to the extent the Company has filed, or intends to file, a rate application to include SFAS No. 106 expense in rates and it is probable that the regulator will allow such expense in future rates. The total postretirement costs deferred and recorded as a regulatory asset at December 31, 1993 were approximately $501,000. The postretirement costs recognized as expense in 1993 were $489,000. Prior years' costs of $155,000 and $270,000 in 1992 and 1991, respectively, were recognized as expense when claims were paid.\nThe significant features of the substantive plan include the payment for life of a portion of the medical benefit costs for individuals (and their dependents) who retired prior to January 1, 1993 and for certain individuals (and their dependents) who elected to retire during the first quarter of 1993 and for active employees hired prior to January 1, 1993 benefits are provided only to retirees and only until eligibility for Medicare (age 65). The cost-sharing provisions for medical care benefits include an escalation in the retirees share of claims obligations that is expected to follow the trend of claims net of Medicare reimbursements. The substantive plan was amended during 1993 to substantially modify\nSOUTHERN UNION COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) the cost-sharing provisions to decrease the employer's share of expected future claims and make certain other plan changes. During 1992, the Company discontinued offering postretirement medical benefits to dependents to the future retirees after age 65 and employees hired after December 31, 1992.\nThe funding policy is to pay claims as they arise from a tax-exempt trust through 1999. In addition, contributions are currently being made to a separate account within the pension plan to accumulate assets sufficient to fund claims arising after 1999. Assets held in the tax-exempt trust include primarily short-term obligations. Assets held in the separate account within the retirement plan include cash funds, bond funds and stock funds. Non-benefit liabilities are limited to expenses associated with plan operation and administration.\nThe components of net postretirement benefit cost for the year ended December 31, 1993 consisted of the following:\nThe following is a reconciliation of the funded status of the postretirement benefit plan and accrued postretirement liabilities as of December 31, 1993.\nFor purposes of computing the 1993 net periodic cost and transition obligation, the assumed health care cost trend rate used to measure expected cost benefits covered by the plan was 13.7%, gradually decreasing to 7% in year 17 of the projection. For purposes of the December 31, 1993 benefit obligations, the health care cost trend rate was 10% for the first seven years of the projection, thereafter decreasing by .25% per year, reaching 7% in year 18 of the projection. The weighted average assumed discount rate was 9% for purposes of the 1993 net periodic cost and transition obligation and 7.5% for purposes of the December 31, 1993 computation of the accumulated postretirement benefit obligation. The weighted average expected long-term rate of return on plan assets is assumed to be 8% on an after tax basis. In addition, prior service cost is amortized on a straight line basis over the average remaining years of service to full eligibility for benefits of the active plan participants.\nSOUTHERN UNION COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)\nA one percentage point increase in the assumed health care cost trend rates for each future year would increase the aggregate of the service and interest cost components of the net periodic postretirement health care benefit cost by approximately $50,000 and would increase the accumulated postretirement benefit obligation for health care benefits by approximately $500,000.\nTAXES ON INCOME\nThe Company adopted SFAS No. 109 effective January 1, 1993. The effect of this change was not material. Prior to that date, the Company applied the provisions of APB No. 11, \"Accounting for Income Taxes\". The components of taxes on income relating to continuing operations were as follows:\nDeferred credits include $755,000 and $791,000 of unamortized deferred investment tax credit as of December 31, 1993 and 1992, respectively.\nSOUTHERN UNION COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)\nDeferred income taxes result from temporary differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities. The source of these differences and tax effect of each is as follows:\nThe sources of timing differences and the related deferred tax effect for the years ended December 31, 1992 and 1991, pursuant to APB No. 11 were as follows:\nOn August 10, 1993, the United States Congress passed and the President signed into law, the Omnibus Budget Reconciliation Act of 1993 (the \"Act\"). Among other provisions in the Act, effective January 1, 1993, the corporate federal income tax rate was increased to 35% on corporate taxable income in excess of $10,000,000. Total income tax expense differed from the amount computed by\nSOUTHERN UNION COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) applying the applicable federal income tax rate of 35% in 1993 and 34% in 1992 and 1991 to earnings from continuing operations before taxes on income. The reasons for the differences for each of the years were as follows:\nBUSINESS HELD FOR SALE\nIn February 1993, SX entered into a purchase and sale agreement to sell substantially all of its oil and gas leasehold interests and associated production for approximately $22,000,000, which sale was completed in March 1993 effective as of January 1, 1993. SX, engaged in the development and production of oil and gas, held varying interests in producing oil and gas wells located primarily in New Mexico and Texas. The Company accounted for SX as a business held for sale wherein adjustments were made to reflect the valuation of this business to an estimated net realizable value. At December 31, 1992 and 1991, the Company estimated and recorded a book loss on future disposal of $4,400,000 and $2,250,000, respectively. In addition, the Company recorded a tax liability of approximately $6,960,000 resulting from the recognition of a tax basis gain of approximately $18,800,000. The sale closed on March 31, 1993. SX also disposed of various oil and gas properties during 1992 and 1991 for a total of approximately $800,000 and $2,600,000, respectively.\nLEASES\nThe Company leases certain facilities, equipment and office space under cancelable and noncancelable operating leases. The minimum annual rentals under operating leases for the next five years are as follows: 1994 -- $2,325,000; 1995 -- $1,819,000; 1996 -- $1,384,000; 1997 -- $1,113,000; and 1998 -- $900,000; and thereafter $938,000. Rental expense was approximately $2,061,000, $2,372,000 and $1,881,000 in 1993, 1992 and 1991, respectively.\nRELATED PARTIES\nIn April 1992, Southern Union advanced $375,980 to Peter H. Kelley, President, Chief Operating Officer and a Director of Southern Union, to enable him to repay certain funds borrowed by him from his previous employer in connection with his departure from his previous employer to become an executive officer of the Company. The advance is evidenced by a note, payable on demand, bearing an annual percentage interest rate of 6.5% which was equal to the prime rate announced by Texas Commerce Bank, N.A. on the date the advance was made, plus one-half percent. As of December 31, 1993, Mr. Kelley's outstanding principal and accrued but unpaid interest balance was $355,428. This loan is being repaid on schedule.\nIn October 1993, Southern Union's Board of Directors approved and ratified payments by the Company to Activated Communications, Inc. (\"Activated\") for use by the Company of Activated's office space in New York City. Activated is controlled and operated by Company Chairman George L. Lindemann and Vice Chairman John E. Brennan, who, along with Director Adam M. Lindemann, did\nSOUTHERN UNION COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) not participate in such Board action. Monthly rental payments commenced effective as of August 1992 for approximately half of Activated's base lease payments before certain adjustments. Total payments to Activated in 1993 and 1992 were $187,000 and $104,000, respectively.\nFleischman and Walsh, of which Southern Union Director Aaron Fleischman is Senior Partner, provides legal services to the Company. In 1993, 1992 and 1991 the total value of legal services provided by Fleischman and Walsh to the Company was approximately $980,000, $503,000 and $624,000, respectively. On February 10, 1994, Southern Union's Board of Directors granted to Fleischman and Walsh a warrant to purchase up to 37,500 shares of Common Stock, $1 par value per share, at an exercise price of $23.00, as adjusted for the stock split. The warrant expires on February 10, 2004.\nCOMMITMENTS AND CONTINGENCIES\nThe Company is aware of the possibility that it may become a defendant in an action brought by the United States Environmental Protection Agency (\"EPA\") under 42 U.S.C. Section 9607(a) for reimbursement of costs associated with removing hazardous substances from the site of a former coal gasification plant (the \"Pine Street Canal Site\") in Burlington, Vermont. This knowledge arises out of the existence of a prior action, UNITED STATES V. GREEN MOUNTAIN POWER CORP., ET AL, Civil No. 88-307 (D. Vt.) in which the Company became involved as a third-party defendant in January 1989. Green Mountain Power was an action under 42 U.S.C. Section 9607(a) by the federal government to recover clean-up costs associated with the \"Maltex Pond\", which is part of the Pine Street Canal Site. Two defendants in Green Mountain Power, Vermont Gas Systems and Green Mountain Power Corp., claimed that the Company is the corporate successor to People's Light and Power Corporation, an upstream corporate parent of Green Mountain Power Corp. during the years 1928-1931. Green Mountain Power was settled without admission or determination of liability with respect to the Company by order dated December 26, 1990. The EPA has since conducted studies of the clean-up costs for the remainder of the Pine Street Canal Site, but the ultimate costs are unknown at this time. On November 30, 1992, the Company was named as a potentially responsible party in a special notice letter from the EPA. On August 16, 1993, the Company's participation in settlement discussions on technical and allocation issues with the EPA was requested by Green Mountain Power Corp., Vermont Gas Systems, Inc. and New England Electric System (the \"Gas Plant PRPs\"). By letter dated September 20, 1993, the Company informed the Gas Plant PRPs of its reasons for its belief that it has no liability for the site, including (1) that it is not a corporate successor to any entity that owned or was responsible for the Pine Street Canal Site during the period the coal gasification plant was in operation, (2) that any claims against Peoples Light and Power Corporation were discharged in that company's 1936 Plan of Reorganization, and (3) that the Company merged with a successor to People's Light and Power Company, Inc., a separate company incorporated following the bankruptcy of Peoples Light and Power Corporation. Should the Company be made party to any action seeking recovery of remaining clean-up costs, it intends to assert the foregoing defenses and to otherwise vigorously defend against such an action. The Company has made demands of the appropriate insurers that they assume the defense of and liability for any such claim that may be asserted.\nIn 1993, the Internal Revenue Service completed its audit of the Company's federal income tax return for 1984 through 1989. The Internal Revenue Service proposed, and the Company agreed to the deficiencies and related interest of approximately $1,266,000. The Company had fully accrued for the tax deficiencies and interest. Southern Union and its subsidiaries are parties to other legal proceedings that its management considers to be the normal kinds of actions to which an enterprise of its size and nature might be subject. Management believes the outcome of these legal proceedings will not have a material impact on the Company's results of operations or consolidated financial position.\nThe Company has commitments under gas purchase contracts which contain certain minimum purchase provisions for the firm supply of quantities of natural gas. The Company's minimum\nSOUTHERN UNION COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) provisions in its gas supply contracts do not exceed fifty percent of its supply requirements in its service areas. In addition, the Company manages its gas supply purchases to ensure it meets the minimum purchase provisions of its gas purchase contracts. As such, management of the Company believes that take-or-pay provisions within its contracts will not have a material adverse impact on the Company's results of operations or consolidated financial position.\nSUBSEQUENT EVENTS\nMISSOURI ACQUISITION\nOn July 9, 1993, Southern Union entered into an Agreement for the Purchase of Assets (the \"Missouri Asset Purchase Agreement\") with Western Resources, Inc. (\"Western Resources\"), pursuant to which Southern Union purchased from Western Resources (the \"Missouri Acquisition\") certain Missouri natural gas distribution operations (the \"Missouri Business\"). The acquisition was consummated on January 31, 1994 and will be accounted for as a purchase. Southern Union paid approximately $400,300,000 in cash for the Missouri Business. The final determination of the purchase price and all prorations and adjustments are expected to be completed by May 30, 1994.\nSouthern Union operates the Missouri Business as Missouri Gas Energy, a division of Southern Union which is headquartered in Kansas City, Missouri. As of January 31, 1994, Missouri Gas Energy served approximately 472,000 customers in 147 communities in central and western Missouri, including the cities of Kansas City, St. Joseph, Joplin and Monett.\nThe approval of the Missouri Acquisition by the Missouri Public Service Commission (the \"MPSC\") was subject to the terms of a stipulation and settlement agreement (the \"MPSC Stipulation\") among Southern Union, Western Resources, the MPSC staff and all intervenors in the MPSC proceeding. Among other things, the MPSC Stipulation: (i) provides that the Company attain a total debt to total capital ratio that does not exceed Standard and Poor's Corporation's Utility Financial Benchmark ratio for the lowest investment grade investor-owned natural gas distribution company (which, at January 31, 1994, would have been approximately 58%) in order to implement any general rate increase with respect to the Missouri Business; (ii) prohibits Southern Union from implementing a general rate increase in Missouri before January 31, 1997 except in certain unusual events; (iii) required Western Resources to contribute an additional $9,000,000 to the Missouri Business' employees' and retirees' qualified defined benefit plans transferred to the Company; (iv) requires the Company to contribute an additional $3,000,000 to the Company's qualified defined benefit plan applicable to the Missouri Business' employees and retirees; and (v) requires the Company to reduce rate base by $30,000,000 (to be amortized over a ten year period) to compensate rate payers for rate base reductions that were eliminated as a result of the acquisition.\nSouthern Union assumed certain liabilities of Western Resources with respect to the Missouri Business, including liabilities arising from certain specified contracts assigned to Southern Union at closing, including gas supply and transportation contracts, office equipment leases and real estate leases, liabilities arising from certain contracts entered into by Western Resources in the ordinary course of business, certain liabilities that have arisen or may arise from the operation of the Missouri Business, and liabilities for certain accounts payable of Western Resources pertaining to the Missouri Business.\nSouthern Union and Western Resources also entered into an Environmental Liability Agreement at closing. Subject to the accuracy of certain representations made by Western Resources in the Missouri Asset Purchase Agreement, the agreement provides for a tiered approach to the allocation of substantially all liabilities under environmental laws that may exist or arise with respect to the Missouri Business. The agreement contemplates Southern Union first seeking reimbursement from other potentially responsible parties, or recovery of such costs under insurance or through rates charged to customers. To the extent certain environmental liabilities are discovered by Southern\nSOUTHERN UNION COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Union prior to July 9, 1995, and are not so reimbursed or recovered, Southern Union will be responsible for the first $3,000,000, if any, of out of pocket costs and expenses incurred to respond to and remediate any such environmental claim. Thereafter, Western Resources would share one-half of the next $15,000,000 of any such costs and expenses, and Southern Union would be solely liable for any such costs and expenses in excess of $18,000,000.\nThe Missouri Business owns or is otherwise associated with a number of sites where manufactured gas plants were previousy operated. These plants were commonly used to supply gas service in the late 19th and early 20th centuries, in certain cases by corporate predecessors to Western Resources. By-products and residues from manufactured gas could be located at these sites and at some time in the future may require remediation by the EPA or delegated state regulatory authority. By virtue of notice under the Missouri Asset Purchase Agreement and its preliminary, non-invasive review, the Company is aware of eleven such sites in the service territory of the Missouri Business. Based on information reviewed thus far, it appears that neither Western Resources nor any predecessor in interest ever owned or operated at least three of those sites. Western Resources has informed the Company that it was notified in 1991 by the EPA that the EPA was evaluating one of the sites (in St. Joseph, Missouri) for any potential threat to human health and the environment. Western Resources has also advised the Company that to date, the EPA has not notified it that any further action may be required. Evaluation of the remainder of the sites by appropriate federal and state regulatory authorities may occur in the future. At the present time and based upon the preliminary information available to it, the Company believes that the costs of any remediation efforts that may be required for these sites for which it may ultimately have responsibility will not exceed the aggregate amount subject to substantial sharing by Western Resources.\nPursuant to the terms of an Employee Agreement with Western Resources entered into on July 9, 1993, after the closing of the Missouri Acquisition, Southern Union employed certain employees of Western Resources involved in the operation of the Missouri Business (\"Continuing Employees\"). Under the terms of the Employee Agreement, the assets and liabilities under Western Resources' qualified defined benefit plans attributable to Continuing Employees and retired employees who had been necessary to the operation of the Missouri Business (\"Retired Employees\") were transferred to a qualified defined benefit plan of Southern Union that will provide benefits to Continuing Employees and Retired Employees substantially similar to those provided for under Western Resources' qualified defined benefit plans. Southern Union amended its qualified defined benefit plan to cover the Continuing Employees and Retired Employees and provide Continuing Employees and Retired Employees with certain welfare, separation and other benefits and arrangements.\nIn connection with the Missouri Acquisition, on January 31, 1994 Southern Union completed the sale of the Senior Debt Securities. See \"Long-Term Debt.\"\nPRO FORMA FINANCIAL INFORMATION\nThe following unaudited pro forma financial information for the years ended December 31, 1993 and 1992 is presented to give effect to: the funding of the Missouri Acquisition; the completion of the Rights Offering; the sale of Senior Debt Securities; and the refinancing of certain short-term debt, current maturities of long-term debt and certain long-term debt outstanding at December 31, 1993, as if such transactions had been consummated at the beginning of 1993 and 1992, respectively. The pro forma financial information, adjusted for the stock split, is not necessarily indicative of the results\nSOUTHERN UNION COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) which would have actually been obtained had the Missouri Acquisition, the Rights Offering, the sale of Senior Debt Securities or the refinancings been completed as of the assumed date for the periods presented or which may be obtained in the future.\nOTHER EVENT\nOn February 11, 1994, Southern Union's Board of Directors declared a three for two stock split in the form of a 50% stock dividend which was distributed on March 9, 1994 to stockholders of record on February 23, 1994. See \"Stockholder's Equity.\"\nQUARTERLY OPERATIONS (UNAUDITED)\nSCHEDULE V\nSOUTHERN UNION COMPANY AND SUBSIDIARIES\nPROPERTY, PLANT AND EQUIPMENT\nTHREE YEARS ENDED DECEMBER 31, 1993\nS-1\nSCHEDULE VI\nSOUTHERN UNION COMPANY AND SUBSIDIARIES\nACCUMULATED DEPRECIATION AND AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT\nTHREE YEARS ENDED DECEMBER 31, 1993\nS-2\nSCHEDULE IX\nSOUTHERN UNION COMPANY AND SUBSIDIARIES\nSHORT-TERM BORROWINGS\nTHREE YEARS ENDED DECEMBER 31, 1993\nS-3\nSCHEDULE X\nSOUTHERN UNION COMPANY AND SUBSIDIARIES\nSUPPLEMENTARY STATEMENT OF OPERATIONS INFORMATION\nTHREE YEARS ENDED DECEMBER 31, 1993\nS-4\nEXHIBIT INDEX\nE-1\nE-2","section_15":""}
{"filename":"202131_1993.txt","cik":"202131","year":"1993","section_1":"ITEM 1. BUSINESS:\nTHE COMPANY AND ITS SUBSIDIARIES.\nThe Company, incorporated in Texas in 1976, is a holding company operating principally in two business segments, the electric utility business and the cable television business. The Company conducts its operations primarily through three subsidiaries: HL&P, its principal operating subsidiary, KBLCOM and HI Energy. See \"Regulation of the Company\" for a description of the Company's status under the 1935 Act.\nHL&P is engaged in the generation, transmission, distribution and sale of electric energy and serves over 1.4 million customers in an approximately 5,000 square-mile area of the Texas Gulf Coast, including Houston. As of December 31, 1993, the total assets and common stock equity of HL&P represented 88% of the Company's consolidated assets and 113% of the Company's consolidated common stock equity, respectively. For the year ended December 31, 1993, the operations of HL&P accounted for 108% of the Company's consolidated net income. See \"Business of HL&P.\"\nThe cable television operations of the Company are conducted through KBLCOM and its subsidiaries. This segment includes five cable television systems located in four states and a 50% interest in Paragon, a partnership which owns systems located in seven states. As of December 31, 1993, KBLCOM's systems served approximately 605,000 basic cable customers subscribing to approximately 488,000 premium programming units. According to information provided by Paragon's managing partner, Paragon served approximately 932,000 basic cable customers subscribing to approximately 542,000 premium programming units. See \"Business of KBLCOM.\"\nHI Energy was recently organized by the Company to participate in domestic and foreign power generation projects and to invest in the privatization of foreign electric utilities. HI Energy is actively engaged in the evaluation of several such projects, but has not yet committed significant financial or other resources to any single project. See \"Businesses of Other Subsidiaries - HI Energy.\"\nAs of December 31, 1993, the Company and its subsidiaries had 11,350 full-time employees. HL&P had 9,578 full-time employees, and KBLCOM and its subsidiaries had 1,581 full-time employees (excluding employees of joint ventures and partnerships in which the Company holds less than a majority interest).\nFor certain financial information with respect to each of the Company's two principal business segments, see Note 16 to the Company's Consolidated and HL&P's Financial Statements in Item 8 of this Report.\nBUSINESS OF HL&P.\nHL&P, incorporated in Texas in 1906, is engaged in the generation, transmission, distribution and sale of electric energy. Sales are made to residential, commercial and industrial customers in an approximately 5,000 square-mile area of the Texas Gulf Coast, including Houston.\nCERTAIN FACTORS AFFECTING THE ELECTRIC UTILITY BUSINESS\nAs an electric utility, HL&P has been affected, to varying degrees, by a number of factors that have affected the electric utility industry in general. These factors include, among others, difficulty in obtaining rate increases sufficient to provide an adequate return on invested capital, high costs and delays associated with environmental and nuclear regulations, changes in regulatory climate, prudence audits, competition from other energy suppliers and difficulty in obtaining regulatory approval for construction of new generating plants. HL&P is unable to predict the future effect of these or other factors upon its operations and financial condition. HL&P's results of operations are significantly affected by decisions of the Utility Commission primarily in connection with rate increase applications filed prior to 1991 by HL&P. Although Utility Commission action on those applications has been completed, a number of the orders of the Utility Commission are currently subject to judicial review. Rate issues relating to a possible proceeding to review HL&P's rate levels and to review costs associated with the outage of the South Texas Project are also pending before the Utility Commission. For a discussion of these matters, see Notes 9, 10, 11 and 12 to the Company's Consolidated and HL&P's Financial Statements in Item 8 of this Report.\nHL&P is project manager and one of four co-owners of the South Texas Project, which consists of two 1,250 MW nuclear generating units. HL&P owns a 30.8% interest in the South Texas Project. Both generating units at the South Texas Project were out of service from February 1993 to February 1994 when Unit No. 1 was authorized by the NRC to return to service. In June 1993, the NRC placed the South Texas Project on its \"watch list\" of plants with \"weaknesses that warrant increased NRC attention.\" Such action followed the NRC's issuance of a report issued by its Diagnostic Evaluation Team which identified a number of areas requiring improvement. For a description of litigation and regulatory proceedings relating to the South Texas Project including, among other things, the NRC's diagnostic evaluation of the South Texas Project, the operating status of the South Texas Project and Austin's lawsuit filed on February 22, 1994, see \"Regulatory Matters\" below, Item 3 of this Report, \"Results of Operations - HL&P - United States Nuclear Regulatory Commission (NRC) Diagnostic Evaluation of the South Texas Project\" in Item 7 of this Report and Notes 9(b), 9(c), 9(f), 10 and 11 to the Company's Consolidated and HL&P's Financial Statements in Item 8 of this Report.\nIn 1992, Congress enacted the Energy Act which, among other changes, exempts from the 1935 Act EWGs, a class of electric power producers engaged in sales of electric energy exclusively at wholesale. For information with respect to the Energy Act, see \"Competition\" and \"Regulatory Matters\" below and Note 8(a) to the Company's Consolidated and HL&P's Financial Statements in Item 8 of this Report. In 1995, the Texas legislature is expected to consider various proposals regarding the organization and responsibilities of the Utility Commission. For information regarding the Sunset Act review process and Utility Commission rulemaking activities regarding IRP, see \"Regulatory\nMatters - Rates and Services\" below.\nSERVICE AREA\nWhile employment, personal income and industrial activity in the Houston area steadily increased from 1987 to 1990, the effects of the national recession have since slowed growth in HL&P's service area. While the local economy continues to slowly expand and diversify in numerous areas, such as medical, professional and engineering services, it is still dependent, to a large degree, on oil, gas, refined products, petrochemicals and related businesses.\nHL&P operates under a certificate of convenience and necessity granted by the Utility Commission which covers HL&P's present service area and facilities. In addition, HL&P holds franchises to provide electric service within the incorporated municipalities in its service territory. None of such franchises expires before 2007.\nMAXIMUM HOURLY FIRM DEMAND AND CAPABILITY\nThe following table sets forth, for the years indicated, information with respect to HL&P's net capability, maximum hourly firm demand and the resulting reserve margin:\n- -------------------\n(1) Reflects firm capacity purchased.\n(2) Does not include interruptible load at time of peak.\nAt December 31, 1993, HL&P owned and operated generating facilities with installed net generating capability of 13,679 MW.\nHL&P experienced a maximum hourly firm demand in 1993, a year of unusually warm summer weather, of 11,397 MW, a 5.7% increase over the maximum hourly firm demand in 1992, a year of unusually mild summer weather. Including interruptible demand, the maximum hourly firm demand actually served in 1993 was 12,472 MW compared to 11,638 MW in 1992.\nFor planning purposes, HL&P currently expects maximum hourly firm demand for electricity to grow at a compound annual rate of about 1.6% over the next ten years. Assuming average weather conditions, reserve margins are projected to decrease from an estimated 25% in 1994 to an estimated 21% in 1997 as a result of growth in maximum hourly firm demand and the expiration of certain firm cogeneration contracts. Assuming average weather conditions, HL&P projects that reserve margins in 1998 will decrease to 18%. For long-term planning purposes, HL&P expects to maintain a reserve margin in the range of 17%-20% in excess of its\nestimate of maximum hourly firm demand load requirements. See \"Capital Program\" and \"Competition\" below.\nHL&P experiences significant seasonal variation in its sales of electricity. Sales during the summer months are typically higher than sales during other months of the year due, in large part, to the reliance on air conditioning in HL&P's service territory. See Note 20 to the Company's Consolidated and HL&P's Financial Statements in Item 8 of this Report for a presentation of certain quarterly unaudited financial information for 1992 and 1993.\nCAPITAL PROGRAM\nHL&P has a continuous program to maintain its existing facilities and to expand its physical plant as needed to meet customer requirements. Such program and the estimated construction costs set forth below are subject to periodic review and revision because of changes in load forecasts, the need to retire older plants, changing regulatory and environmental standards and other factors. HL&P's capital program is currently estimated to cost approximately $1.28 billion during the three-year period 1994-1996 with approximately $478 million, $381 million and $418 million to be spent in 1994, 1995 and 1996, respectively, excluding AFUDC. In 1993, total capital expenditures and nuclear fuel were approximately $329 million.\nHL&P's capital program for 1994-1996 consists of the following principal estimated expenditures:\nHL&P's near-term construction program includes the installation of two gas turbines with attendant heat recovery steam generators at the DuPont chemical plant located in the Houston area. The project, which is estimated to cost $117 million, is expected to be available for peak demand in 1995 and is designed to add approximately 160 MW of electrical capacity to HL&P's system while providing needed process steam to the DuPont chemical plant. For further information regarding the DuPont project, see \"Liquidity and Capital Resources - - HL&P - Capital Program\" in Item 7 of this Report. The remaining construction expenditures relating to generating facilities expected in 1994-1996 are primarily associated with improvements to existing generating stations. HL&P does not forecast additional capacity needs until 1999-2001. HL&P currently believes that future capacity needs will likely be met through the construction of combined cycle gas turbines at existing HL&P plant sites, the development of additional steam sale projects or through other means, such as purchased power or additional DSM activities.\nThe scheduled in-service dates for the Malakoff units have been indefinitely postponed. For information with respect to expenditures on Malakoff, see Note 12 to the Company's Consolidated and HL&P's Financial\nStatements in Item 8 of this Report.\nExpenditures for environmental protection facilities for the five years ended December 31, 1993 aggregated $34.5 million (excluding AFUDC), including expenditures of $12.8 million and $7.6 million in 1993 and 1992, respectively. Environmental protection expenditures for 1994-1996 are estimated to be $71 million (excluding AFUDC), primarily for nitrogen oxide emissions controls and monitoring equipment. See \"Regulatory Matters - Environmental Quality\" below.\nActual construction expenditures and scheduled in-service dates may vary from estimates as a result of numerous factors including, but not limited to, changes in the rate of inflation, changes in equipment delivery schedules, construction delays and deferrals, the availability and relative cost of fuel, the availability and cost of purchased power, environmental protection requirements, regulatory requirements related to the South Texas Project, the availability of adequate and timely rate relief and other regulatory approvals, ability to secure external financing, legislative changes, and changes in anticipated customer demand and business conditions. In connection with its construction program planning, HL&P employs value-based planning techniques that take into account energy conservation and load management programs along with traditional utility supply options and renewable energy resources to select the plan utilizing the most appropriate and cost-effective alternatives.\nIn 1993, HL&P spent approximately $9.5 million, excluding AFUDC, for uranium concentrate and nuclear fuel processing services for its share of the fuel for the South Texas Project. See \"Fuel - Nuclear Fuel Supply\" below.\nTotal gross additions to the plant of HL&P during the five years ended December 31, 1993 amounted to approximately $2.9 billion and, during the same period, retirements amounted to approximately $351 million. Gross additions during the five-year period amounted to approximately 25% of total utility plant at December 31, 1993.\nCOMPETITION\nHL&P and the electric utility industry in general are experiencing increased competition as a result of legislative and regulatory changes, technological advances, the cost and availability of natural gas, consumer demands, environmental needs and other factors.\nA number of cogeneration facilities have been built in HL&P's service area as a result of the high concentration of process industries located in the Gulf Coast region and the availability of attractively priced fuels. Cogeneration is the simultaneous generation of two forms of energy, usually steam and electricity. The Public Utility Regulatory Policy Act of 1978 generally requires utilities to purchase all electricity offered to them by qualifying cogeneration facilities at or below avoided costs. In Texas, however, cogenerators generally are not permitted to make sales of electricity to parties other than electric utilities or the thermal purchaser. HL&P has experienced the loss of a number of industrial customers and continues to be faced with further customer losses as a result of cogeneration.\nAs of December 31, 1993, HL&P purchased energy from fourteen cogeneration facilities, representing over 3,400 MW of total generating capability. As of December 31, 1993, HL&P had contracts totaling 720 MW\nof firm cogeneration capacity and associated energy which expire as follows: 1994 - 325 MW; 1998 - 125 MW and 2005 - 270 MW. In addition, a ten-year contract for 50 MW of firm capacity and associated energy becomes effective in 1994. Electric utilities in Texas are required to provide transmission wheeling service for power sales by cogenerators to other electric utilities at a compensatory rate. During 1993, approximately 1,400 MW of cogenerated power was transmitted or \"wheeled\" by HL&P to other utilities in Texas.\nGiven the uncertainties associated with efforts to obtain additional commitments for firm power on reasonable terms, HL&P is continuing to pursue plans to meet its needs for increased generation in 1999-2001, which plans include new construction. See \"Capital Program\" above.\nIn October 1992, the Energy Act became law. The Energy Act contains provisions which affect the regulatory structure of the electric utility industry. First, the legislation amends the 1935 Act, exempting a class of power producers known as EWGs. Companies that are already exempt from registration under the 1935 Act, as well as companies not otherwise engaged in the electric utility business, will be permitted to own EWGs without being subject, as a result of such ownership, to the registration requirements and the geographic, ownership and other restrictions imposed by the 1935 Act on non-exempt holding companies and their subsidiaries. Companies registered under the 1935 Act are also permitted to own EWGs. Although the Energy Act instructs state regulatory commissions to consider standards applicable to wholesale power purchases by electric utilities, including purchases from EWGs, EWG generation sources, to the extent any may be located in Texas, currently would be treated as regulated public utilities under PURA. In addition, the Energy Act permits exempt and registered holding companies to acquire and maintain an interest in \"foreign utility companies\" that meet certain requirements for an exemption from the 1935 Act. Second, the Energy Act significantly expands the authority of the FERC to order owners of transmission lines, such as HL&P, to carry power at the request of any electric utility, federal power marketing agency or any person generating electric energy for sale or for resale over such transmission lines. The Energy Act requires transmission for third parties to wholesale customers, provided the reliability of service to the utility's local customer base is protected and the local customer base does not subsidize the third-party service. The Energy Act prohibits the FERC from ordering the transmission of electric energy directly to an ultimate consumer (i.e. retail wheeling); however, it does not affect any authority of any state or local government under state law concerning transmission of electric energy directly to an ultimate consumer.\nThe Energy Act is expected to have significant implications for the utility industry by moving utilities toward a more competitive environment. Competition may be increased in connection with the generation of electricity. Pressure for access to utility retail customers is also expected to increase. The Company will actively oppose any access to its retail customers by third-party generators. In addition, the amendments to the 1935 Act will remove barriers to the Company, allowing it to develop independent electric generating plants in the United States for sales to wholesale customers as well as to contract for utility projects internationally, without becoming subject to registration under the 1935 Act as an electric utility holding company.\nHL&P continues to address the issue of increased competition, among other things, by focusing on the energy needs of its customers and by\ncontrolling and, where possible, reducing the cost to serve its customers. HL&P undertook a major operating performance improvement program in 1992 to improve the effectiveness and efficiency of its operations and continues to seek ways to improve its operations and lower costs. HL&P is attempting to control its fuel costs, which compose a substantial portion of its operating cost, by (1) purchasing gas at generally low prices and utilizing gas storage facilities to mitigate significant variations in gas demand, (2) purchasing spot coal at prices below existing contract terms and (3) contracting for additional purchased power when available on attractive terms. For information on HL&P's operating performance improvement programs, see \"Results of Operations - HL&P - STEP Program\" in Item 7 of this Report and Note 18 to the Company's Consolidated and HL&P's Financial Statements in Item 8 of this Report. Additionally, HL&P continues to encourage industrial expansion in its service area by offering an economic development tariff and economically attractive interruptible rates for those customers capable of taking such service.\nFUEL\nApproximately 42% of HL&P's energy requirements during 1993 were met with natural gas, 40% with coal and lignite and 1% with nuclear fuel. The remaining 17% was purchased power, principally cogenerated power. However, both nuclear-fueled units of the South Texas Project were out of service during most of 1993. During 1992, the most recent year not affected by the outage of the South Texas Project, HL&P's energy requirements were obtained from the following sources: natural gas (34%); coal and lignite (39%); nuclear fuel (9%) and purchased power (18%). Based upon various assumptions relating to the cost and availability of fuels, plant operation schedules, actual in-service dates of HL&P's planned generating facilities, load growth, load management and environmental protection requirements, HL&P currently expects its future energy mix to be in the following proportions for the indicated periods:\nThere can be no assurance that the various assumptions upon which the estimates set forth in the table above are based will prove to be correct, and HL&P's actual energy mix in future years may vary from the percentages shown in the table. For information on the outage of the South Texas Project, see Note 9(f) to the Company's Consolidated and HL&P's Financial Statements in Item 8 of this Report, which is incorporated herein by reference.\nNATURAL GAS SUPPLY. During 1993, HL&P purchased approximately 63% of its natural gas requirements pursuant to long-term contracts with various suppliers. No individual supplier provided more than approximately 24% of HL&P's natural gas requirements during 1993. Substantially all of HL&P's natural gas supply contracts contain pricing\nprovisions based on fluctuating market prices. HL&P's natural gas supply contracts have expiration dates ranging from 1994 to 2002. HL&P believes that it will be able to renew such contracts as they expire or enter into similar contractual arrangements with other natural gas suppliers. HL&P expects to purchase its remaining natural gas requirements on the spot market. HL&P has a long-term contract for gas storage and gas transportation arrangements with gas pipelines connected to certain of its generating facilities. The contract for gas storage provides working storage capacity of up to 3,500 BBtu of natural gas. HL&P's average daily gas consumption during 1993 was 749 BBtu per day with peak consumption of 1,427 BBtu per day.\nAlthough natural gas has been relatively plentiful in recent years, supplies available to HL&P and other consumers are vulnerable to disruption due to weather conditions, transportation disruptions, price changes and other events. Large boiler fuel users of natural gas, including electric utilities, generally have the lowest priority among gas users in the event pipeline suppliers are forced to curtail deliveries due to inadequate supplies. As a result of this vulnerability, supplies of natural gas may become unavailable from time to time, or prices may increase rapidly in response to temporary supply disruptions or other factors. Such events could require HL&P to withdraw gas from its gas storage facility or shift its gas-fired generation to alternative fuel sources such as fuel oil to the extent it has the capability to burn those alternative fuels. Since most of the purchased power capacity available to HL&P is also gas-fired, gas supply disruptions may also affect these suppliers.\nCurrently, HL&P anticipates that its alternate fuel capability, combined with its solid-fueled generating resources and available gas storage capability is adequate to meet fuel needs during any temporary gas supply interruptions. However, there is no assurance that adequate levels of gas supply will be available over the long term.\nHL&P's average cost of natural gas was $2.15 per MMBtu in 1993 (excluding storage costs). HL&P's average cost of natural gas in 1992 and 1991 was $1.85 and $1.54 per MMBtu, respectively.\nCOAL AND LIGNITE SUPPLY. Substantially all of the coal for HL&P's four coal-fired units at W. A. Parish is purchased under two long- term contracts from mines in the Powder River Basin area of Wyoming. Additional coal is obtained on the spot market. The coal is transported under terms of a long-term rail transportation contract to the W. A. Parish coal handling facilities in HL&P's fleet of approximately 2,300 railcars. A substantial portion of the coal requirements for the projected operating lives of the four coal-fired units at W. A. Parish is expected to be met under such contracts.\nThe lignite for the Limestone units is obtained from a mine adjacent to the plant. HL&P owns the mining equipment, facilities and a portion of the lignite leases at the mine, which is operated by a contract miner under the terms of a long-term agreement. The lignite reserves currently under lease and contract are expected to provide a substantial portion of the fuel requirement for the projected operating lives of the Limestone units.\nPrior to October 1993, coal and lignite purchasing, transportation and handling services were provided to HL&P by a subsidiary of the Company, Utility Fuels, which has since been merged into HL&P. See \"Businesses of Other Subsidiaries - Utility Fuels.\"\nNUCLEAR FUEL SUPPLY. The supply of fuel for nuclear generating facilities involves the acquisition of uranium concentrates, conversion to uranium hexafluoride, enrichment of the uranium hexafluoride and fabrication of nuclear fuel assemblies. Contracts have been entered into with various suppliers to provide the South Texas Project with converted uranium hexafluoride to permit operation through 1996, enrichment services through 2014 (except as noted below) and fuel fabrication services for the initial cores and 16 additional years of operation. Contracts for enrichment services from October 2000 through September 2002 have been terminated by HL&P, as Project Manager for the South Texas Project, under a ten-year termination notice provision, because HL&P believes that other, lower-cost options will be available.\nIn addition to the above, flexible contracts for the supply of uranium concentrates and uranium hexafluoride have been entered into that will provide approximately 50% of the uranium needed for South Texas Project operation from 1997 through 2000. Contracts for the balance of the uranium requirements will soon be under negotiation; however, HL&P does not presently anticipate difficulty in obtaining contracts for those requirements.\nBy contract, the DOE will ultimately take possession of all spent fuel generated by the South Texas Project. HL&P has been advised that the DOE plans to place the spent fuel in a permanent underground storage facility in an as-yet undetermined location. The DOE contract currently requires payment of a spent fuel disposal fee on nuclear plant generated electricity of one mill (one-tenth of a cent) per net KWH sold. This fee is subject to adjustment to ensure full cost recovery by the DOE. The South Texas Project is designed to have sufficient on-site storage facilities to accommodate over 40 years of the spent fuel discharges for each unit.\nFor information relating to a fee assessment upon domestic utilities having purchased enrichment services from the DOE, see Note 8(a) to the Company's Consolidated and HL&P's Financial Statements in Item 8 of this Report.\nOIL SUPPLY. Fuel oil is maintained in inventory by HL&P to provide for fuel needs in emergency situations in the event sufficient supplies of natural gas are not available. In addition, certain of HL&P's generating plants have the ability to use fuel oil if oil becomes a more economical fuel than incremental gas supplies. HL&P has storage facilities for over six million barrels of oil located at those generating plants capable of burning oil. HL&P's oil inventory is adjusted periodically to accommodate changes in the availability of primary fuel supplies.\nRECOVERY OF FUEL COSTS. For information relating to the cost of fuel over the last three years, see \"Operating Statistics of HL&P\" below and \"Results of Operations - HL&P - Fuel and Purchased Power Expense\" in Item 7 of this Report. Utility Commission rules provide for the recovery of certain fuel and purchased power costs through an energy component of electric rates (fixed fuel factor). The fixed fuel factor is established during either a utility's general rate proceeding or an interim fuel proceeding and is to be generally effective for a minimum of six months, unless a substantial change in a utility's cost of fuel occurs. In that event, a utility may be authorized to revise the fixed fuel factor in its rates appropriately. In any event, a fuel reconciliation is required every three years.\nIn October 1991, the Utility Commission approved HL&P's fixed fuel factor as contemplated in the settlement agreement reached in February 1991 by HL&P and most other parties to Docket No. 9850. See Note 10(c) to the Company's Consolidated and HL&P's Financial Statements in Item 8 of this Report. In November 1993, the Utility Commission authorized HL&P to implement a higher fuel factor under Docket No. 12370. The Company can request a revision to its fuel factor in April and October each year.\nReconciliation of fuel costs after March 1990 is required in 1994, and under Utility Commission rules, HL&P has anticipated that a filing would be required in May 1994. However, the Utility Commission staff has requested that such filing be delayed to the fourth quarter of 1994. If that request is granted by the Utility Commission, HL&P anticipates that fuel costs through some time in 1994 will be submitted for reconciliation at that time. No hearing would be anticipated in that reconciliation proceeding before 1995, and the schedule for reconciliation of those costs could be affected by the institution of a rate proceeding by the Utility Commission and\/or a prudence inquiry concerning the outage at the South Texas Project. For a discussion of that outage and the possibility that a rate proceeding may be instituted, see Notes 9(f), 10(f) and 10(g), respectively, to the Company's Consolidated and HL&P's Financial Statements in Item 8 of this Report, which notes are incorporated herein by reference.\nREGULATORY MATTERS\nENERGY ACT. In October 1992, the Energy Act became law. For a description of the Energy Act, see \"Competition\" above and Note 8(a) to the Company's Consolidated and HL&P's Financial Statements in Item 8 of this Report.\nRATES AND SERVICES. Pursuant to the PURA, the Utility Commission has original jurisdiction over electric rates and services in unincorporated areas of the State of Texas and in the incorporated municipalities that have relinquished original jurisdiction. Original jurisdiction over electric rates and services in the remaining incorporated municipalities served by HL&P is exercised by such municipalities, including Houston, but the Utility Commission has appellate jurisdiction over electric rates and services within those incorporated municipalities.\nIn 1993, the Texas Legislature considered changes to PURA as part of a required review under the Sunset Act. None of the proposed changes to the Utility Commission or Texas utility regulation were enacted. However, the legislature passed legislation continuing the current PURA until September 1, 1995. The legislature also established a joint interim committee to study certain regulatory issues prior to the next legislative session which begins in January 1995. These issues include, among other items, tax issues relating to public utilities, the organization and authority of the Utility Commission and IRP. Recommendations from this study period will be considered during the next legislative session.\nUTILITY COMMISSION PROCEEDINGS. For information concerning the Utility Commission's orders with respect to HL&P's applications for general rate increases with the Utility Commission (Docket No. 8425 for the 1988 rate case and Docket No. 9850 for the 1990 rate case) and the municipalities within HL&P's service area and the appeals of such orders, see Notes 10(b) and 10(c) to the Company's Consolidated and HL&P's\nFinancial Statements in Item 8 of this Report, which notes are incorporated herein by reference. HL&P's 1986 general rate case (Docket Nos. 6765 and 6766) and 1984 rate case (Docket No. 5779) have been affirmed and are no longer subject to appellate review. For a discussion of the possibility that a rate proceeding may be instituted, see Notes 10(f) and 10(g) to the Company's Consolidated and HL&P's Financial Statements in Item 8 of this Report, which notes are incorporated herein by reference.\nPRUDENCE REVIEW OF CONSTRUCTION OF THE SOUTH TEXAS PROJECT. For information concerning the Utility Commission's orders with respect to a prudence review of the planning, management and construction of the South Texas Project (Docket No. 6668) and the appeals of such orders, see Note 10(d) to the Company's Consolidated and HL&P's Financial Statements in Item 8 of this Report, which note is incorporated herein by reference.\nDEFERRED ACCOUNTING DOCKETS. For information concerning the Utility Commission's orders allowing deferred accounting treatment for certain costs associated with the South Texas Project (Docket Nos. 8230, 9010 and 8425), the appeals of such orders and related proceedings, see Notes 10(b), 10(e) and 11 to the Company's Consolidated and HL&P's Financial Statements in Item 8 of this Report, which notes are incorporated herein by reference.\nENVIRONMENTAL QUALITY. General. HL&P is subject to regulation with respect to air and water quality, solid waste management and other environmental matters by various federal, state and local authorities. Environmental regulations continue to be affected by legislation, administrative actions and judicial review and interpretation. As a result, the precise effect of potential regulations upon existing and proposed facilities and operations cannot presently be determined. However, developments in these and other areas of regulation have required HL&P to make substantial expenditures to modify, supplement or replace equipment and facilities and may, in the future, delay or impede construction and operation of new facilities or require expenditures to modify existing facilities. For information regarding environmental expenditures, see \"Capital Program\" above.\nAir. The TNRCC has jurisdiction and enforcement power to determine the permissible level of air contaminants emitted in the State of Texas. The standards established by the Texas Clean Air Act and the rules of the TNRCC are subject to modification by standards promulgated by the EPA. Compliance with such standards has resulted, and is expected to continue to result, in substantial expenditures by HL&P. In addition, expanded permit and fee systems and enforcement penalties may discourage industrial growth within HL&P's service area.\nIn November 1990, significant amendments to the Clean Air Act became law. The law is designed to control emissions of air pollutants which contribute to acid rain, to reduce urban air pollution and to reduce emissions of toxic air pollutants. Parts of the Clean Air Act are directed at reducing emissions of sulfur dioxide from electric utility generating units. This reduction program includes an \"allowance\" system which sets forth formulas and criteria to establish a cap on sulfur dioxide emissions from utility generating units. HL&P has been allocated allowances sufficient to permit continued operation of its existing facilities and some expansion of its solid-fuel generating facilities without substantial additional expense relating to modification of its facilities.\nHL&P has already made substantial investments in pollution control facilities, and all of its generating facilities currently comply in all material respects with sulfur dioxide emission standards established by the Clean Air Act. As a result of this previous investment, HL&P does not anticipate that significant expenditures for sulfur dioxide removal equipment will be required. Provisions of the Clean Air Act dealing with urban air pollution require establishing new emission limitations for nitrogen oxides from existing sources. Although initial limitations were finalized in 1993, further reductions may be required in the future. The cost of modifications necessary to reduce nitrogen oxide emissions from existing sources has been estimated at $29 million in 1994 and $10.5 million in 1995. The Clean Air Act also calls for additional stack gas continuous emissions monitoring equipment to be installed on various HL&P generating facilities. Capital expenditures of $12 million in 1994 and $2 million in 1995 are anticipated for installation of this new monitoring equipment. See \"Capital Program\" above.\nThe Clean Air Act established a new permitting program to be administered in Texas by the TNRCC. The precise requirements of the program cannot be determined until the permit program is approved by the EPA. However, based on regulations promulgated by the TNRCC, HL&P anticipates that additional expenditures may be required for administering the permitting process. The legislation could also substantially increase the cost of constructing new generating units.\nWater. The TNRCC has jurisdiction over water discharges in the State of Texas and is empowered to set water quality standards and issue permits regulating water quality. The TNRCC jurisdiction is currently shared with the EPA, which also issues water discharge permits and reviews the Texas water quality standards program.\nHL&P has obtained permits from both the TNRCC and the EPA for all facilities currently in operation which require such permits. Applications for renewal of permits for existing facilities have been submitted as required. The reissued permits reflect changes in federal and state regulations which may increase the cost of maintaining compliance. Although compliance with the new regulations has resulted and will continue to result in additional costs to HL&P, the costs are not expected to have a material impact on HL&P's financial condition or results of operations.\nFor a description of certain Administrative Orders issued by the EPA to HL&P under the Clean Water Act and for a description of certain other environmental litigation, see Item 3 of this Report.\nSOLID AND HAZARDOUS WASTE. HL&P is also subject to regulation by the TNRCC and the EPA with respect to the handling and disposal of solid waste generated on-site. Although legislation that would expand the scope of the RCRA was not adopted in 1993, the TNRCC has promulgated new rules regulating the classification of industrial solid waste. These regulations will result in increased analytical and disposal costs to HL&P. Although the precise amount of these costs is unknown at this time, HL&P does not believe, based on its current analysis, that such costs will be material. The EPA has promulgated a number of regulations to protect human health and the environment from hazardous waste. Compliance with the regulations promulgated to date has not materially affected the operation of HL&P's facilities, but such compliance has increased operating costs.\nThe EPA has identified HL&P as a \"potentially responsible party\" for\nthe costs of remediation of a CERCLA site located adjacent to one of HL&P's transmission lines in Harris County. For information regarding this site, see \"Liquidity and Capital Resources - HL&P - Environmental Expenditures\" in Item 7 of this Report.\nFEDERAL REGULATION OF NUCLEAR POWER. Under the Atomic Energy Act of 1954 and the Energy Reorganization Act of 1974, operation of nuclear plants is extensively regulated by the NRC, which has broad power to impose licensing and safety requirements. In the event of non-compliance, the NRC has the authority to impose fines or shut down nuclear plants, or both, depending upon its assessment of the severity of the situation, until compliance is achieved.\nFor information concerning a diagnostic evaluation that was completed by the NRC at the South Texas Project, the placement of the South Texas Project on the NRC's watch list and related matters, see \"Results of Operations - HL&P - - United States Nuclear Regulatory Commission (NRC) Diagnostic Evaluation of the South Texas Project\" in Item 7 of this Report and Note 9(f) to the Company's Consolidated and HL&P's Financial Statements in Item 8 of this Report, which note is incorporated herein by reference.\nLOW-LEVEL RADIOACTIVE WASTE. The federal Low-Level Radioactive Waste Policy Act assigns responsibility for low-level waste disposal to the states. Texas created the Texas Low-Level Radioactive Waste Disposal Authority to build and operate a low-level waste disposal facility. HL&P was assessed approximately $5.9 million in 1993 by the State of Texas for the development work on this facility and estimates that the assessment for 1994 and 1995 will be $2.2 million and $4.2 million, respectively. Texas currently has access to the low-level waste disposal facility at Barnwell, South Carolina through June 1994. Extended access beyond June will depend upon action by the governor and state legislature of South Carolina.\nHL&P has constructed a temporary low-level radioactive waste storage facility at the South Texas Project. The facility was completed in late 1992 and will be utilized for interim storage of low-level radioactive waste after access to the Barnwell facility is suspended and prior to the opening of the Texas Low-Level Radioactive Waste Site.\nNUCLEAR INSURANCE AND NUCLEAR DECOMMISSIONING\nFor information concerning nuclear insurance and nuclear decommissioning, see Notes 9(d) and 9(e) to the Company's Consolidated and HL&P's Financial Statements in Item 8 of this Report, which notes are incorporated herein by reference.\nLABOR MATTERS\nAs of December 31, 1993, HL&P had 9,578 full-time employees of whom 3,715 were hourly-paid employees represented by the International Brotherhood of Electrical Workers under a collective bargaining agreement which expires on May 25, 1995.\nFor a discussion of HL&P's STEP program and related employee matters, see \"Results of Operations - HL&P - STEP Program\" in Item 7 of this Report and Note 18 to the Company's Consolidated and HL&P's Financial Statements in Item 8 of this Report.\nOPERATING STATISTICS OF HL&P\n(1) Both generating units of the South Texas Project were out of service from February 1993 to February 1994 when Unit No. 1 was authorized by the NRC to return to service. See \"Results of Operations-HL&P-Fuel and Purchased Power Expense\" in Item 7 of this Report.\nBUSINESS OF KBLCOM.\nGENERAL\nThe cable television operations of the Company are conducted through KBLCOM and its subsidiaries. KBL Cable, a subsidiary of KBLCOM, owns and operates five cable television systems located in four states. Another subsidiary of KBLCOM owns a 50% interest in Paragon, a Colorado partnership, which in turn owns twenty systems located in seven states. KBLCOM's 50% interest in Paragon is recorded in the financial statements using the equity method of accounting. The remaining 50% interest in Paragon is owned by subsidiaries of ATC, which is a subsidiary of Time Warner Inc. ATC serves as the general manager for all but one of the Paragon systems. The partnership agreement provides that, at any time after December 31, 1993, either partner may elect to divide the assets of the partnership under certain predefined procedures set forth in the agreement. To date, neither party has initiated such procedures.\nAs of December 31, 1993, KBL Cable served approximately 605,000 basic cable customers who subscribed to approximately 488,000 premium programming units. As of the same date, Paragon served approximately 932,000 basic cable customers who subscribed to approximately 542,000 premium programming units.\nThe Company has engaged an investment banking firm to assist in finding a strategic partner or investor for KBLCOM in the telecommunications industry.\nUnless otherwise indicated or the context otherwise requires, all references in this section to \"KBLCOM\" mean KBLCOM and its subsidiaries. All references to KBL Cable mean KBL Cable and its subsidiaries, and all references to Paragon mean the Paragon partnership. All information pertaining to Paragon has been provided to KBLCOM by Paragon's managing partner, ATC, unless stated otherwise. For a discussion regarding recent developments in regulations affecting the cable television industry, see \"Regulation - Rate Regulation\" and \"Regulation - Recent Developments in Rate Regulation\" below.\nCABLE TELEVISION SERVICES\nThe cable television business of KBLCOM consists primarily of selling to subscribers, for a monthly fee, television programming that is distributed through a network of coaxial and fiber optic cables. KBLCOM offers its subscribers both basic services and, for an extra monthly charge, premium services. Each of the KBLCOM systems carries the programming of all three major television networks, programming from independent and public television stations and certain other local and distant (out-of-market) broadcast television stations. KBLCOM also offers to its subscribers locally produced or originated video programming, advertiser-supported cable programming (such as ESPN and CNN), premium programming (such as HBO and Showtime) and a variety of other types of programming services such as sports, family and children, news, weather and home shopping programming. As is typical in the industry, KBLCOM subscribers may terminate their cable television service on notice. KBLCOM's business is generally not considered to be seasonal.\nAll of KBL Cable's systems are \"addressable,\" allowing individual subscribers, among other things, to electronically select pay-per-view programs. Approximately 48% of KBL Cable's customers presently have converters permitting addressability. This allows KBL Cable to offer\npay-per-view services for various movies, sports events, concerts and other entertainment programming.\nOVERVIEW OF SYSTEMS AND DEVELOPMENT\nThe KBL Cable systems are located in the areas of greater San Antonio and Laredo, Texas; Minneapolis, Minnesota; Portland, Oregon and Orange County, California. All of these systems other than the Laredo system, which is the smallest system, were built between 1979 and 1986 and have channel capacities ranging from 46 channels (San Antonio and California) to 132 channels (Minneapolis). The Laredo system was originally wired for cable in the 1960s and upgraded in 1979. It has a 42-channel capacity. Although all of these systems are considered fully built, annual capital expenditures will be required to accommodate growth within the service areas and to replace and upgrade existing equipment. Capital expenditures, which were approximately $54 million in 1993, are expected to be approximately $276 million over the 1994-1996 period. KBL Cable has projected an increase in its capital expenditures over the next three years in order to stay competitive in the increasingly complex cable environment. KBL Cable anticipates increased investments in rebuilds, fiber plant and addressable converter boxes. For additional information with respect to capital expenditures, see \"Liquidity and Capital Resources - KBLCOM\" in Item 7 of this Report and Note 8(b) to the Company's Consolidated Financial Statements in Item 8 of this Report.\nParagon owns cable television systems that serve a number of cities, towns or other areas in Texas (including El Paso), Arizona, Florida (including the Tampa Bay area), New Hampshire, New York (including a portion of Manhattan), Maine and southern California (areas in Los Angeles County). Paragon made capital expenditures of approximately $54 million in 1993 and expects to make capital expenditures of approximately $200.8 million during the 1994-1996 period.\nFor information regarding KBLCOM's financial results and liquidity and the financing of KBLCOM, see \"Results of Operations - KBLCOM\" in Item 7 of this Report and Note 4 to the Company's Consolidated Financial Statements in Item 8 of this Report.\nThe following table summarizes certain information relating to the cable television systems owned by KBL Cable and Paragon:\n1) A KBLCOM subsidiary has a 50% interest in Paragon. Information has been furnished by ATC, the general manager of Paragon.\n2) A home is \"passed by cable\" if it can be connected to cable service without extension of the distribution system.\n3) Basic subscribers means the sum of (i) the number of homes receiving cable services, (ii) all units in multiple dwellings which receive one bill and (iii) each commercial establishment (hotels, hospitals, etc.) less (iv) complimentary accounts.\n4) Premium (or pay) units consist of the number of subscriptions to premium programming services counting, as separate subscriptions, each service received by a subscriber.\nOver the three-year period ended December 31, 1993, growth in the number of subscribers in the KBLCOM systems was achieved through marketing efforts aimed at existing homes passed by cable, population growth in the franchise areas and increased access to potential subscribers through the construction of additional distribution facilities within existing franchise areas. KBLCOM believes these same factors will contribute to continued growth. In addition, KBLCOM may, from time to time, acquire additional cable television systems. In 1993, KBL Cable acquired a small cable television system (comprising approximately 1,150 basic subscribers) which adjoined one of the existing systems. KBLCOM is also actively marketing premium programming services and intends to introduce new services as they become commercially feasible.\nOn February 17, 1994, KBLCOM entered into an agreement to acquire three cable companies serving approximately 47,000 customers in the Minneapolis area. KBLCOM will acquire the stock of the companies in exchange for the issuance of common stock of the Company. The amount of common stock of the Company to be issued, currently estimated to be approximately $24 million, is dependent on the amount of liabilities assumed, currently estimated to be approximately $63 million.\nApproximately 40,000 of the cable customers served by the properties to be acquired are in the Minneapolis metropolitan area. The remaining 7,000 customers are located in small communities south and west of the metropolitan area. Closing of the transaction is subject to the satisfaction of certain conditions.\nSOURCES OF REVENUES AND RATES TO SUBSCRIBERS\nFor the year ended December 31, 1993, the average monthly revenue per subscriber for KBL Cable was approximately $34.43. Approximately 67% of KBL Cable's revenue was derived from monthly fees paid by subscribers for basic cable services, and 16% was derived from premium programming services. Rates to subscribers vary from system to system and in accordance with the type of service selected. As of December 31, 1993, the average monthly basic revenue per subscriber for the KBL Cable systems generally ranged from $18.36 to $23.00. As of December 31, 1993, approximately 39% of KBL Cable's customers subscribed to one or more premium channels. KBL Cable's premium units increased during 1993 and 1992; however, the premium revenue has declined during this period due to the reduction of rates. The rates have been reduced for a variety of reasons including the effect of recessionary economic conditions, value perception and competition from other forms of entertainment such as pay-per-view and home video rental. KBL Cable implemented a number of\nstrategies designed to strengthen this service category including new packaging of premium units and multiplexing, which is the delivery of multiple channels of a premium service (with programs beginning at different times) with no change in price to the subscriber. The fourth quarter of 1993 showed results from these efforts as the premium revenues increased over the corresponding period in the prior year.\nThe remainder of KBL Cable's revenues for the year ended December 31, 1993 was derived from advertising, pay-per-view services, installation fees and other ancillary services. KBL Cable's management believes, within its present markets, the sale of commercial advertising to local, regional and national advertisers, pay-per-view services and other ancillary services offer the potential for increased revenues. Advertising revenues for the year ended December 31, 1993 increased $1.4 million or 10% over the previous year while pay-per-view and the other ancillary revenues increased by $2.0 million or 8%.\nFor the year ended December 31, 1993, the average monthly revenue per subscriber for the Paragon systems was approximately $30.99. Approximately 68% of Paragon's revenues was derived from monthly fees for basic services, and 19% was derived from premium services. As of December 31, 1993, the average monthly basic revenue per subscriber for the Paragon systems ranged from $18.13 to $24.10. As of December 31, 1993, approximately 31% of Paragon's customers subscribed to one or more premium channels.\nFRANCHISES\nKBLCOM's cable television systems generally operate pursuant to non-exclusive franchises or permits awarded by local governmental authorities, and accordingly, other applicants may obtain franchises or permits in franchise areas served by KBLCOM. See \"Regulation\" below. As of December 31, 1993, KBL Cable held 56 franchises with unexpired terms ranging from under one year to approximately 18 years. A single franchise agreement with San Antonio, which expires in 2003, covered approximately 32% of KBL Cable's subscribers as of December 31, 1993. The expiration periods and approximate percentages of subscribers for KBL Cable's franchises are as follows:\nAs of December 31, 1993, Paragon held 147 franchises with unexpired terms ranging from 1994 to 2010. The single largest franchise, which covers a portion of Manhattan, included more than 20% of Paragon's subscribers as of December 31, 1993. This franchise expires in 2003.\nThe provisions of state and local franchises are subject to Federal regulation under the Cable Act. See \"Regulation\" below. Cable television franchises generally can be terminated prior to their stated expiration date under certain circumstances such as a material breach of the franchise by the cable operator. Franchises typically contain a number of provisions dealing with, among other things, minimum technical specifications for the systems; operational requirements; total channel\ncapacity; local governmental, community and educational access; franchise fees (which range up to 5% of cable system revenues) and procedures for renewal of the franchise. Sometimes conditions of franchise renewal require improved facilities, increased channel capacity or enhanced services. One franchise, with approximately 58,000 subscribers as of December 31, 1993, held by a subsidiary of KBL Cable, provides that the city granting the franchise may, at any time, require the KBL Cable subsidiary to sell, at fair market value, its franchise and operations in the city to another cable television operator with a franchise for another portion of the city.\nKBLCOM's franchises are also subject to renewal and generally are not transferable without the prior approval of the franchising authority. In addition, some franchises provide for the purchase of the franchise under certain circumstances, such as a failure to renew the franchise. To date, KBLCOM's franchises have generally been renewed or extended upon their stated expirations, but there can be no assurance of renewal of franchises in the future.\nPROGRAMMING CONTRACTS\nA substantial portion of KBLCOM's programming is obtained under contracts with terms that typically extend for more than one year. KBLCOM generally pays program suppliers a monthly fee per subscriber. Certain of these contracts have price escalation provisions.\nCOMPETITION\nCable television systems experience competition from a variety of sources, including broadcast television signals, multipoint microwave distribution systems, direct broadcast satellite systems (satellite signals directly to a subscriber's satellite dish) and satellite master antenna systems (a satellite dish which receives signals and distributes them within a multiple dwelling unit). The effectiveness of such competition depends, in part, upon the quality of the signals and the variety of the programming offered over such competitive technologies and the cost thereof as compared with cable television systems. These competitive technologies are not generally subject to the same form of local regulation that affects cable television. Cable television systems also compete, to varying degrees, with other communications and entertainment media such as motion picture theaters and video cassette rental stores, and such competition may increase with the development and growth of new technologies.\nIt is expected that, in April 1994, two national direct broadcast satellite (DBS) systems will commence operation. These national DBS providers will compete in all KBLCOM franchise areas and it is expected that they will constitute significant new competition to such KBLCOM systems. As a result of the programming access requirements contained in the 1992 Cable Act, these two national DBS providers will have access to virtually all cable television programming services. Additionally, within the next two years, there may be significant development in the provision of \"Video Dialtone\" programming over telephone company facilities. This new source of competition will result from telephone companies leasing video capacity to independent programmers in KBLCOM service areas. Finally, both federal legislation and FCC proceedings are currently underway which may allow telephone companies to own and distribute their own programming over their own facilities in direct competition with cable systems. Specifically, US West has indicated, in an FCC filing, that it intends to upgrade facilities in at least one\nKBLCOM service area in order to provide either Video Dialtone service or to own and distribute its own video programming services.\nKBLCOM is addressing increased competition by focusing on (i) improving customer service; (ii) carrying a greater variety of local and national programming, some of which will be available in its markets only through KBLCOM and (iii) furthering the development of the interactive use of its cable systems.\nSince KBLCOM's systems operate under non-exclusive franchises, other companies may obtain permission to build cable television systems in areas where KBLCOM presently operates. A 1986 United States Supreme Court decision has raised questions regarding the constitutionality of the cable television franchising process. The decision requires lower courts to decide whether, in areas where more than one cable operator can be physically accommodated by local utilities, franchising authorities may refuse to grant more than one franchise to serve that area. No prediction can be made at this time as to whether additional franchises will be granted to any competitors, or if granted and a cable television system is constructed, what the impact on KBLCOM and the Company might be.\nKBLCOM competes with a variety of other media in the sale of advertising time on its cable television systems.\nREGULATION\nCable television is subject to regulation at the federal, local and, in some cases, state level.\nIn October 1992, the 1992 Cable Act became law. The 1992 Cable Act expands the scope of cable industry regulation beyond that imposed by the Cable Act. The following are new and significant areas of regulation imposed by the 1992 Cable Act as interpreted by the FCC.\nRATE REGULATION. Under the 1992 Cable Act, virtually all of the Company's cable systems are subject to rate regulation. The 1992 Cable Act mandates that the FCC establish rate standards and procedures governing regulation of basic cable service rates. Franchising authorities may certify to the FCC that they will follow the FCC standards and procedures in regulating basic rates, and once such certification is made, the franchising authorities will assume such rate regulation authority over basic rates. The 1992 Cable Act also requires that the FCC, upon complaint from a franchising authority or a cable subscriber, review the reasonableness of rates for additional tiers of cable service. Only rates for premium pay channels, single-event, pay-per-view services and a la carte (pay-per-channel) services are excluded entirely from rate regulation.\nPursuant to the congressional directive in the 1992 Cable Act, the FCC issued rules implementing, among other things, the provisions of the 1992 Act establishing rate standards and procedures governing regulation of cable television services.\nPrior to the release of its rate regulation rules, the FCC entered an order, effective April 5, 1993, freezing rates for all cable television services, other than premium and pay-per-view services, for 120 days (Rate Freeze Order). Under the Rate Freeze Order, the rate frozen is the average monthly subscriber rate for non-premium cable services for the most recent billing cycle ending prior to April 5, 1993.\nThe Rate Freeze Order was subsequently extended by the FCC through May 15, 1994.\nOn May 3, 1993, the FCC issued its rate regulation rules (Rate Rule), which became effective on September 1, 1993. The Rate Rule relies primarily on a \"benchmark\" approach. Current rates charged by cable operators are to be evaluated initially against \"competitive benchmark\" rate formulas established by the FCC based upon a nationwide cable rate survey previously conducted by the FCC. At that time, the FCC estimated that, on average, the cable industry's existing rates exceed its \"benchmark\" levels by approximately 10%, and that up to 75% of all cable television systems have rates which exceed applicable benchmarks. Under the Rate Rule, if a cable system's rates exceed the applicable benchmark, the cable operator can be required to reduce its rates to the higher of (i) a level 10% below the level that existed as of September 30, 1992 or (ii) the applicable benchmark. For additional information regarding rate reductions, see the discussion regarding the FCC's announcement of further changes in the Rate Rule in \"Recent Developments in Rate Regulation\" below.\nThe benchmarks published in the Rate Rule vary depending on the size of cable systems, the total number of channels subject to regulation and the total number of channels which contain satellite-delivered programming. Using the benchmark tables published in the Rate Rule, the cable operator calculates a permitted monthly \"per channel\/per subscriber\" charge. In making this calculation, the operator must include all revenues it derives from the lease of equipment to customers, such as converters, remote control devices and additional outlets, and installation services, such as installation fees, disconnect fees, reconnect fees and tier change fees, during the operator's last fiscal year.\nThe benchmark tables apply to both basic cable services and the tier services, known in the 1992 Act as \"cable programming services\". Once calculated, the same monthly per channel\/per subscriber rate applies to all regulated channels. In addition, once calculated and approved by the applicable regulating authority, this benchmark rate functions as a price cap. In the future, rates for regulated channels must remain at or below this benchmark rate, adjusted for inflation measured on the gross national product-price index (GNP-PI) published by the United States government. Certain limited \"external\" costs beyond the cable operator's control, such as franchise fees or program license fee increases which exceed the level of GNP-PI inflation, can be charged directly through to cable consumers.\nUnder the Rate Rule, a cable operator which believes that the benchmark approach produces a rate which does not adequately cover its actual costs can choose to defend its current rates in a cost-of-service hearing before the applicable regulating authority. Election of this cost-of-service mode of rate regulation preempts the application of the benchmark approach and may result in rates for regulated channels below the indicated benchmark levels.\nOn July 15, 1993, the FCC adopted a notice of proposed rulemaking requesting comment on the substance of, and the procedure for the cost-of-service mode of rate regulation. For additional information regarding the cost-of-service mode of rate regulation, see the discussion regarding the FCC's announcement of interim cost-of-service standards (Interim COS Standards) in \"Recent Developments in Rate Regulation\" below.\nThe Rate Rule implements the requirement in the 1992 Act that local franchising authorities have the opportunity to regulate rates for basic cable service, defined as that level of service containing all local broadcast channels, all public, educational and governmental access channels and all equipment used to receive that level of service. In order for a local franchising authority to exercise regulatory authority under the Rate Rule, the local franchising authority must seek certification from the FCC. A local franchising authority must, among other things, represent in its application to the FCC that it will follow all provisions of the Rate Rule. Certification will be granted no earlier than 30 days after the date the local franchising authority's application is filed with the FCC.\nThe 1992 Cable Act and the Rate Rule vest regulatory authority regarding regulation of cable programming services with the FCC. The FCC's regulatory authority must be triggered, if at all, by the filing of a complaint concerning a cable operator's rate for cable programming service tier(s). Both local franchising authorities and subscribers may file such rate complaints.\nThe Rate Rule defines a new rate standard for commercial leased channels on a cable system. Under this standard, the FCC will allow the cable operator to charge a rate equal to the highest equivalent value which the operator could otherwise secure by distributing commercial programming of its own choice on that channel.\nThe FCC order establishing the September 1, 1993 effective date for the Rate Rule preempted all local, state and federal advance notice requirements, thus permitting KBLCOM to restructure its rates and service offerings up until September 1, 1993 without prior notice to subscribers. Local franchise authorities with jurisdiction over KBLCOM's franchises covering significant numbers of cable television subscribers have given KBLCOM notice that they have obtained, or are seeking, certification from the FCC to regulate basic service level rates.\nRECENT DEVELOPMENTS IN RATE REGULATION. On February 22, 1994, the FCC announced further changes in the Rate Rule in several Executive Summaries. The Commission stated that it has determined that the differential between average cable system rates and rates charged by cable systems in markets with effective competition is 17%, rather than 10% as stated in the Rate Rule. Therefore, the FCC will issue revised benchmark formulas which will produce lower benchmarks, effective on May 15, 1994 (Revised Benchmarks). At that time, cable operators will be required to reduce their rates for regulated services by 17% below the level in effect in September 1992, or to the new benchmark, whichever is higher. The FCC stated that the Revised Benchmarks will require approximately 90% of all cable operators to reduce their regulated rates by about an additional 7% from their current rate levels.\nIn announcing the Revised Benchmarks, the FCC stated that they would apply prospectively. Therefore, the existing Rate Rule governs regulated rates from September 1, 1993 until May 15, 1994, while the Revised Benchmarks will govern regulated rates effective May 15, 1994.\nThe FCC also announced new criteria for determining whether a la carte carriage of previously regulated channels was valid under the 1992 Cable Act. Among other criteria, the FCC stated it will look to: (1) whether a la carte carriage avoids a rate reduction that would otherwise have been required under the FCC's rules; (2) whether an entire tier of regulated services has been converted to a la carte carriage; (3) whether\nthe services involved have been traditionally offered a la carte; (4) whether there is a significant equipment charge to order a la carte services rather than a discounted package of such services; (5) whether the individual subscriber is able to select the channels which comprise the a la carte package and (6) how significantly the package of a la carte services is discounted from the per channel charges for those services. A la carte packages which are found to evade rate regulation rather than enhance subscriber choice will be treated as regulated tiers, and operators engaging in such practices may be subject to sanctions.\nThe FCC also announced, in an Executive Summary, its Interim COS Standards. Under the Interim COS Standards which the FCC characterized as based upon principles similar to those which govern rate regulation of telephone companies, cable operators facing \"unusually\" high costs, may recover through their regulated rates, their normal operating expenses and a \"reasonable\" return on investment. The FCC provided, in the Executive Summary, that the presumptive permissible rate of return on investment under the Interim COS Standard is 11.25%. The FCC presumptively excluded acquisition costs above book value from the rate base because such \"excess acquisition costs\" represent the value of the monopoly rents the acquirer expected to earn during the period when an acquired cable system was effectively an unregulated monopoly. The FCC further stated that it will, under certain unspecified circumstances, allow cable operators to rebut this presumption excluding \"excess acquisition costs.\"\nUnder the Interim COS Standards, cable operators which opt for the cost-of-service approach may make such filings only once every two years. The FCC also announced a streamlined cost-of-service procedure under which cable systems regulated under the Revised Benchmarks will be allowed to recover a share of system upgrade costs, offset for savings in operating expenses due to efficiencies gained by the upgrade.\nWhile KBLCOM believes that the Revised Benchmarks will impose some further reduction in rates and new obligations which are burdensome and will increase KBLCOM's costs of doing business, it is impossible to assess the detailed impact of the Revised Benchmarks on KBLCOM until the FCC completes and issues the actual text of its rules on the Revised Benchmarks and the Interim COS Standards.\nMUST CARRY\/RETRANSMISSION CONSENT. The 1992 Cable Act specified certain rights for mandatory carriage on cable systems for local broadcast stations, known as must-carry rights. As an alternative, local broadcast stations were authorized to elect retransmission consent rights.\nUnder the must carry option, a cable operator can be compelled to allocate up to one-third of its channel capacity for carriage of local commercial broadcast television stations. In addition, a cable operator can also be required to allocate up to three additional channels to local non-commercial broadcast television stations. Such non-commercial broadcasters do not have the retransmission consent option under the 1992 Cable Act.\nUnder the retransmission consent option, a local commercial broadcasters can require a cable operator to make payments as a condition to granting its consent for the carriage of the broadcast station's signal on the cable system. Established \"super stations\" are exempted from this provision.\nOn March 29, 1993, the FCC issued its rules clarifying and implementing the must carry\/retransmission consent portions of the 1992 Cable Act (Must Carry Rule). By June 17, 1993, the deadline specified by the Must Carry Rule, approximately 40% of the local broadcasters in KBL Cable's markets elected retransmission consent. According to the terms of the 1992 Cable Act and the Must Carry Rule, if the local commercial broadcast stations that had elected retransmission consent rights had not granted such consent by October 6, 1993, KBL Cable was required to remove them from carriage on the relevant cable system. To date, all local broadcast stations having elected retransmission consent rights have granted to KBL Cable their consent to carriage at no material cost to KBL Cable. Paragon has also reached retransmission consent agreements with all of the local broadcast affiliates in its service areas.\nA challenge to the Must Carry portion of the 1992 Cable Act is presently pending in the Supreme Court of the United States, Turner Broadcasting System, Inc., et al. v. Federal Communications Commission, et al., No. 93-44. Appellants argue that the Must Carry provisions violate their rights under the First Amendment of the United States Constitution. The Supreme Court has heard oral argument, and a decision is expected by the end of June 1994.\nBUY-THROUGH PROHIBITION. The 1992 Cable Act prohibits cable systems which have addressable technology and addressable converters in place from requiring cable subscribers to purchase service tiers above basic as a condition to purchasing premium channels, such as HBO or Showtime. If cable systems do not have such addressable technology or addressable converters in place, they are given up to ten years to comply with this provision.\nPROGRAMMING ACQUISITION. The 1992 Cable Act directs the FCC to promulgate regulations regarding the sale and acquisition of cable programming between cable operators and programming services in which the cable operator has an attributable interest. The legislation and the subsequent FCC regulations will preclude most exclusive programming contracts, will limit volume discounts that can be offered to affiliated cable operators and will generally prohibit cable programmers from providing terms and conditions to affiliated cable operators that are more favorable than those provided to unaffiliated operators. Furthermore, the 1992 Cable Act requires that such cable programmers make their programming services available to competing video technologies, such as multi-channel, microwave distribution systems and direct broadcast satellite systems on terms and conditions that do not discriminate against such competing technologies.\nPROGRAMMING CARRIAGE AGREEMENTS. The 1992 Cable Act requires the FCC to adopt regulations that will prohibit cable operators from (1) requiring ownership of a financial interest in a program service as a condition to carriage of such service, (2) coercing exclusive rights in a programming service or (3) favoring affiliated programmers so as to restrain unreasonably the ability of unaffiliated programmers to compete.\nOWNERSHIP RESTRICTIONS. The 1992 Cable Act requires the FCC to (1) prescribe rules and regulations establishing reasonable limits on the number of cable subscribers a person is authorized to reach through cable systems owned by such person, or in which such person has an attributable interest; (2) prescribe rules and regulations establishing reasonable limits on the number of channels on a cable system that can be occupied by a video programmer in which a cable operator has an attributable interest and (3) consider the necessity and appropriateness of imposing\nlimitations on the degree to which multi-channel video programming distributors may engage in the creation or production of video programming. Additionally, cable operators are prohibited from selling a cable system within three years of acquisition or construction of such cable system.\nCUSTOMER SERVICE\/TECHNICAL STANDARDS. The 1992 Cable Act requires the FCC to promulgate regulations establishing minimum standards for customer service and technical system performance. Franchising authorities are allowed to enforce stricter customer service requirements than the standards so promulgated by the FCC.\nThe majority of the provisions of the Cable Act remain in place. The Cable Act continues to: (a) restrict the ownership of cable systems by prohibiting cross-ownership by a telephone company within its operating area and cross-ownership by local television broadcast station owners; (b) require cable television systems with 36 or more \"activated\" channels to reserve a percentage of such channels for commercial use by unaffiliated third parties; (c) permit franchise authorities to require the cable operator to provide channel capacity, equipment and facilities for public, educational and governmental access; (d) limit the amount of fees required to be paid by the cable operator to franchise authorities to a maximum of 5% of annual gross revenues; (e) grant cable operators access to public rights of way and utility easements; (f) establish a federal privacy policy regulating the use of subscriber lists and subscriber information; (g) establish civil and criminal liability for unauthorized reception or interception of programming offered over a cable television system or satellite delivered service; (h) authorize the FCC to preempt state regulation of rates, terms and conditions for pole attachments unless the state has issued effective rules; (i) require the sale or lease to subscribers of devices enabling them to block programming considered offensive and (j) contain provisions governing cable operators' compliance with equal employment opportunity requirements.\nThe 1992 Cable Act, together with the Cable Act, creates a comprehensive regulatory framework for cable television. Violation by a cable operator of the statutory provisions or the rules and regulations of the FCC can subject the operator to substantial monetary penalties and other significant sanctions. While many of the specific obligations imposed on cable television systems under the 1992 Cable Act are complex, burdensome and will increase KBLCOM's costs of doing business, it is impossible to assess the detailed impact of the 1992 Cable Act, other than the Rate Rule and the Must Carry Rule on KBLCOM.\nTelephone companies continue in their efforts to repeal legislative prohibitions against their ownership of cable television systems. At this time, RBOCs are still prohibited by the Cable Act from owning or operating a cable television system within their service areas. However, in a decision rendered in The Chesapeake and Potomac Telephone Company of Virginia, et al. v. United States, et al., No. 92-1751-A, on August 24, 1993, the U. S. District Court for the Eastern District of Virginia ruled that the portion of the Cable Act prohibiting subsidiaries of Bell Atlantic from owning a cable television system within their service areas violated the First Amendment to the United States Constitution. The court, in subsequent rulings, refused to extend its ruling to other RBOCs and refused to stay its decision pending appeal. As a consequence, the Bell Atlantic subsidiaries can engage in the cable television business, including owning cable television systems, despite the Cable Act's language. A final affirmation of the court's decision could result in\nadditional direct competition for KBLCOM. No prediction can be made at this time concerning the impact, if any, of this decision on KBLCOM and the Company. Any changes to the ownership prohibitions could result in additional direct competition for KBLCOM.\nFINANCIAL IMPACT ON KBLCOM. KBLCOM's responses to the Rate Rule included, among other things, restructuring of certain program offerings, a reduction in rates for services regulated according to the Rate Rule and an increase in rates for programming services previously offered in the basic service or cable programming service tier which are not subject to rate regulation and for which fees will be charged on a per-channel basis. KBLCOM estimates that revenues in 1993 from its owned and operated cable systems were reduced by approximately $6.8 million. A large portion of this decrease in revenues is derived from a reduction in revenue from additional outlets. There can be no assurance at this time, however, that the reaction of customers to these changes will continue, and variations in such matters could change the financial impact on KBLCOM. For information regarding the impact of the Cable Act regulations on KBLCOM's financial condition and results of operation, see \"KBLCOM - Financial Impact on KBLCOM\" in Item 7 of this Report.\nEMPLOYEES\nExcluding employees of Paragon, KBLCOM had 1,581 full-time employees as of December 31, 1993, none of whom are represented by a union.\nAs of December 31, 1993, Paragon had 1,820 full-time employees of whom 583 were represented by unions.\nBUSINESSES OF OTHER SUBSIDIARIES.\nHI ENERGY\nHI Energy was recently organized by the Company to participate in domestic and foreign power generation projects and to invest in the privatization of foreign electric utilities. HI Energy is actively engaged in the evaluation of several such projects, but has not yet committed significant financial or other resources to any single project.\nHOUSTON ARGENTINA\nHouston Argentina, a subsidiary of the Company located in Buenos Aires, Argentina, acquired a 32.5% interest in Compania de Inversiones en Electricidad S.A. (COINELEC), an Argentine holding company which acquired, in December 1992, a 51% interest in Empresa Distribuidora La Plata S.A. (EDELAP), an electric utility company operating in La Plata, Argentina and surrounding areas. Houston Argentina's share of the purchase price was $37.4 million in cash. Subsequent to the acquisition, the generating assets of EDELAP were transferred to Central Dique S.A., an Argentine corporation, 51% of the stock of which is owned by COINELEC. Houston Argentina provides technical and managerial service to EDELAP and Central Dique S.A.\nUTILITY FUELS\nOn October 8, 1993, Utility Fuels, the Company's coal supply subsidiary, was merged into HL&P. The Company's consolidated financial statements have been reclassified, and HL&P's financial statements have been restated to reflect the merger. See Note 1(b) to the Company's Consolidated and HL&P's Financial Statements in Item 8 of this Report. Prior to the merger, Utility Fuels provided coal and lignite purchasing, transportation and handling services to HL&P. For information with respect to HL&P's sources of coal and lignite, see \"Business of HL&P - Fuel - Coal and Lignite Supply.\"\nREGULATION OF THE COMPANY.\nFEDERAL\n1935 ACT. The Company is a holding company as defined in the 1935 Act. It is exempt from regulation under the 1935 Act except with respect to the acquisition of certain voting securities of other domestic public utility companies and holding companies. The Company's exemption is based upon the intrastate character of the operations of its public utility subsidiary, HL&P, and the filing with the SEC of an annual exemption statement pursuant to Section 3(a)(1) of the 1935 Act and Rule 2 thereunder. The SEC is authorized by the 1935 Act and by its own rules to deny or terminate such an exemption upon a determination that it is detrimental to the public interest or to the interest of investors or consumers. Based on past SEC policy, there may be limits on the extent to which the Company and its non-utility subsidiaries may engage in non-utility activity without affecting the Company's exempt status. The Company has no present intention, however, of becoming a registered holding company subject to regulation by the SEC under the 1935 Act.\nThe Energy Act, which amended the 1935 Act, provides that, subject to certain conditions, foreign utility companies are exempt from the provisions of the 1935 Act and will not be deemed to be \"public utility companies\" under the 1935 Act. For information with respect to the Energy Act, see \"Business of HL&P - Competition\" and \"Business of HL&P - Regulatory Matters\" and Note 8(a) to the Company's and HL&P's Financial Statements in Item 8 of this Report.\nSTATE\nThe Company is not subject to regulation by the Utility Commission under PURA or by the incorporated municipalities served by HL&P. Those regulatory bodies do, however, have authority to review accounts, records and contracts relating to transactions by HL&P with the Company and its other subsidiaries. The exemption for foreign utility affiliates of the Company from regulation under the 1935 Act as \"public utility companies\" is dependent upon certification by the Utility Commission to the SEC to the effect that it has the authority to protect HL&P's ratepayers from any adverse consequences of the Company's investment in foreign utilities and that it intends to exercise its authority. The Utility Commission provided to the SEC such certification at the time of the Company's acquisition of an indirect interest in an Argentine utility company. The certification is subject, however, to being revised or withdrawn by the Utility Commission as to any future acquisition.\nEXECUTIVE OFFICERS OF THE COMPANY (1) AS OF MARCH 1, 1994\n- -----------------\n(1) All of the officers have been elected to serve until the annual meeting of the Board of Directors scheduled to occur on May 4, 1994 and until their successors qualify. (2) At December 31, 1993.\nEXECUTIVE OFFICERS OF HL&P (1)(2) AS OF MARCH 1, 1994\n- -----------------\n(1) All of the officers have been elected to serve until the annual meeting of the Board of Directors scheduled to occur on May 4, 1994 and until their successors qualify. (2) For the purposes of the requirements of this Report, the HL&P officers listed may also be deemed to be executive officers of the Company. (3) At December 31, 1993.\nITEM 2.","section_1A":"","section_1B":"","section_2":"ITEM 2. PROPERTIES.\nThe Company considers its property and the property of its subsidiaries to be well maintained, in good operating condition and suitable for their intended purposes.\nHL&P\nAll of HL&P's electric generating stations and all of the other operating property of HL&P are located in the State of Texas.\nELECTRIC GENERATING STATIONS. As of December 31, 1993, HL&P owned eleven electric generating stations (61 generating units) with a combined turbine nameplate rating of 13,425,868 KW, including a 30.8% interest in one station (two units) with a combined turbine nameplate rating of 2,623,676 KW.\nSUBSTATIONS. As of December 31, 1993, HL&P owned 204 major substations (with capacities of at least 10.0 Mva) having a total installed rated transformer capacity of 55,257 Mva (exclusive of spare transformers), including a 30.8% interest in one major substation with an installed rated transformer capacity of 3,080 Mva.\nELECTRIC LINES-OVERHEAD. As of December 31, 1993, HL&P operated 24,084 pole miles of overhead distribution lines and 3,569 circuit miles of overhead transmission lines including 534 circuit miles operated at 69,000 volts, 2,005 circuit miles operated at 138,000 volts and 1,030 circuit miles operated at 345,000 volts.\nELECTRIC LINES-UNDERGROUND. As of December 31, 1993, HL&P operated 7,840 circuit miles of underground distribution lines and 12.6 circuit miles of underground transmission lines including 8.1 circuit miles operated at 138,000 volts and 4.5 circuit miles operated at 69,000 volts.\nGENERAL PROPERTIES. HL&P owns various properties including division offices, service centers, telecommunications equipment and other facilities used for general purposes.\nTITLE. The electric generating plants and other important units of property of HL&P are situated on lands owned in fee by HL&P. Transmission lines and distribution systems have been constructed in part on or across privately owned land pursuant to easements or on streets and highways and across waterways pursuant to authority granted by municipal and county permits, and by permits issued by state and federal governmental authorities. Under the laws of the State of Texas, HL&P has the right of eminent domain pursuant to which it may secure or perfect rights-of-way over private property, if necessary.\nThe major properties of HL&P are subject to liens securing its long-term debt, and title to some of its properties are subject to minor encumbrances and defects, none of which impairs the use of such properties in the operation of its business.\nKBLCOM\nThe principal tangible assets (other than real estate) relating to KBLCOM's cable television operations consist of operating plant and equipment for each of its cable television systems. These include signal receiving apparatus, \"headend\" facilities, coaxial and fiber optic cable or wire and related electronic equipment over which programming and data\nare distributed, and decoding converters attached to subscribers' television receivers. The signal receiving apparatus typically includes a tower, antennae, ancillary electronic equipment and earth stations for reception of video, audio and data signals transmitted by satellite. Headend facilities, which consist of associated electronic equipment necessary for the reception, amplification, switching and modulation of signals, are located near the signal receiving apparatus and control the programming and data signals distributed on the cable system. For certain information with respect to property owned directly or indirectly by KBLCOM, see \"Business of KBLCOM\" in Item 1 of this Report.\nOTHER SUBSIDIARIES\nFor certain information with respect to property owned directly or indirectly by the other subsidiaries of the Company, see \"Businesses of Other Subsidiaries\" in Item 1 of this Report.\nITEM 3.","section_3":"ITEM 3. LEGAL PROCEEDINGS.\nFor a description of certain legal and regulatory proceedings affecting the Company and its subsidiaries, see Notes 9 through 12 to the Company's Consolidated and HL&P's Financial Statements in Item 8 of this Report, which notes are incorporated herein by reference.\nIn August 1993, HL&P entered into a Consent Agreement with the EPA that resolved three Administrative Orders issued by the EPA in 1991 and 1992 regarding alleged violations of certain provisions of the Clean Water Act at Limestone during the period 1989 through 1992. Pursuant to the Consent Agreement, HL&P, while neither admitting nor denying the allegations contained in the complaint, agreed to pay the EPA $87,500. On August 29, 1991, the EPA issued an Administrative Order related to alleged noncompliance at W. A. Parish. HL&P has taken action to address the issues cited by the EPA and believes them to be substantially resolved at this time.\nFrom time to time, HL&P sells equipment and material it no longer requires for its business. In the past, some purchasers may have improperly handled the material, principally through improper disposal of oils containing PCBs used in older transformers. Claims have been asserted against HL&P for clean-up of environmental contamination as well as for personal injury and property damages resulting from the purchasers' alleged improper activities. Although HL&P has disputed its responsibility for the actions of such purchasers, HL&P has, in some cases, participated in or contributed to the remediation of those sites. Such undertakings in the past have not required material expenditures by HL&P. In 1990, HL&P, together with other companies, participated in the clean-up of one such site. Three suits have been brought against HL&P and a number of other parties for personal injury and property damages in connection with that site and its cleanup. In two of the cases, Dumes, et al. vs. Houston Lighting & Power Company, et al., pending in the United States District Court for the Southern District of Texas, Corpus Christi Division, and Trevino, et al. vs. Houston Lighting & Power Company, et al., pending before the 117th District Court of Nueces County, Texas, landowners near the site are seeking damages primarily for lead contamination to their property. A third lawsuit, Holland vs. Central Power and Light Company, et al., involving an allegation of exposure to PCBs disposed of at the site, was dismissed pursuant to a settlement agreement entered into by the parties in July 1993. The terms of the settlement were not material. In all these cases, HL&P has disputed its responsibility for the actions of the disposal site operator and whether injuries or damages occurred. In addition, Gulf States has filed suit in the United States District Court for the Southern District of Texas, Houston Division, against HL&P and two other utilities concerning another site in Houston, Texas, which allegedly has been contaminated by PCBs and which Gulf States has undertaken to remediate pursuant to an EPA order. Gulf States seeks contribution from HL&P and the other utilities for Gulf States' remediation costs. HL&P does not currently believe that it has any responsibility for that site, and HL&P has not been determined by the EPA to be a responsible party for that site. Discovery is underway in all these pending cases and, although their ultimate outcomes cannot be predicted at this time, HL&P and the Company believe, based on information currently available, that none of these cases will result in a material adverse effect on the Company's or HL&P's financial condition or results of operations.\nFor information with respect to the EPA's identification of HL&P as a \"potentially responsible party\" for remediation of a CERCLA site\nadjacent to one of HL&P's transmission lines in Harris County, see \"Liquidity and Capital Resources - HL&P - Environmental Expenditures\" in Item 7 of this Report, which information is incorporated herein by reference.\nHL&P and the other owners of the South Texas Project have filed suit against Westinghouse in the District Court for Matagorda County, Texas (Cause No. 90-S-0684-C), alleging breach of warranty and misrepresentation in connection with the steam generators supplied by Westinghouse for the South Texas Project. In recent years, other utilities have encountered stress corrosion cracking in steam generator tubes in Westinghouse units similar to those supplied for the South Texas Project. Failure of such tubes can result in a reduction of plant efficiency, and, in some cases, utilities have replaced their steam generators. During an inspection concluded in the fall of 1993, evidence was found of stress corrosion cracking consistent with that encountered with Westinghouse steam generators at other facilities, and a small number of tubes were found to require plugging. To date, stress corrosion cracking has not had a significant impact on operation of either unit; however, the owners of the South Texas Project have approved remedial operating plans and have undertaken expenditures to minimize and delay further corrosion. The litigation, which is in discovery, seeks appropriate damages and other relief from Westinghouse and is currently scheduled for trial in the fall of 1994. No prediction can be made as to the ultimate outcome of that litigation.\nITEM 4.","section_4":"ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.\nThere were no matters submitted to a vote of security holders during the fourth quarter of 1993.\nPART II\nITEM 5.","section_5":"ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.\nThe Company's Common Stock, which at February 1, 1994 was held of record by approximately 70,730 shareholders, is listed on the New York, Chicago (formerly Midwest) and London Stock Exchanges (symbol: HOU). The following table sets forth the high and low sales prices of the Common Stock on the composite tape during the periods indicated, as reported by The Wall Street Journal, and the dividends declared for such periods. Third quarter 1993 includes two quarterly dividends of $.75 per share due to a change in the timing of the Company's Board of Directors' declaration of dividends. Dividend payout was $3.00 per share for 1993. The dividend declared during the fourth quarter of 1993 is payable in March 1994.\nOn December 31, 1993, the consolidated book value of the Company's common stock was $25.06 per share, and the closing market price was $47.63 per share.\nThere are no contractual limitations on the payment of dividends on the common stock of the Company or on the common stock of the Company's subsidiaries other than KBL Cable. Restrictions on distributions and other financial covenants in KBL Cable credit agreements and other debt instruments affecting KBL Cable will effectively prevent the payment of common stock dividends by these subsidiaries for the foreseeable future.\nITEM 6.","section_6":"ITEM 6. SELECTED FINANCIAL DATA OF THE COMPANY\nThe following table sets forth selected financial data with respect to the Company's consolidated financial condition and consolidated results of operations and should be read in conjunction with the Consolidated Financial Statements and the related notes included elsewhere herein.\n(1) Reflects reclassification for the years 1989-1992 due to the merger of Utility Fuels into HL&P. (2) The 1990 cumulative effect reflects the effects for years prior to 1990 of the adoption of SFAS No. 109, \"Accounting for Income Taxes.\" The 1992 cumulative effect relates to the change in accounting for revenues. See also Note 19 to the Company's Consolidated and HL&P's Financial Statements. (3) Year ended December 31, 1993 includes five quarterly dividends of $.75 per share due to a change in the timing of the Company's Board of Directors declaration of dividends. Dividend payout was $3.00 per share for 1993. (4) Amounts differ from previously reported amounts for 1991 and 1992 because of the reclassification of interest income on ESOP note. (5) Includes Cumulative Preferred Stock subject to mandatory redemption.\nITEM 6. SELECTED FINANCIAL DATA OF HL&P\nThe following table sets forth selected financial data with respect to HL&P's financial condition and results of operations and should be read in conjunction with the Financial Statements and the related notes included elsewhere herein.\n(1) The 1992 cumulative effect relates to the change in accounting for revenues. See also Note 19 to HL&P's Financial Statements. (2) Includes Cumulative Preferred Stock subject to mandatory redemption.\nITEM 7.","section_7":"ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS\nRESULTS OF OPERATIONS\nCOMPANY. Selected financial data for Houston Industries Incorporated (Company) is set forth below:\nConsolidated earnings per share were $3.20 for 1993 as compared to $3.36 per share in 1992 and $3.24 per share in 1991. The Company's 1992 earnings were increased by non-recurring items at Houston Lighting & Power Company (HL&P), the Company's electric utility subsidiary, as discussed below. Without these items, the Company's earnings for the year ended 1992 would have been $397.5 million or $3.07 per share. HL&P contributed $3.46 to the 1993 consolidated earnings per share on income of $449.8 million after preferred dividends. KBLCOM Incorporated (KBLCOM), the Company's cable television subsidiary, posted a loss of $13.0 million or $.10 per share. The Company and its other subsidiaries posted a combined loss of $.l6 per share.\nOmnibus Budget Reconciliation Act of 1993 (OBRA). As a result of the 1% general corporate income tax rate increase imposed by OBRA, the Company's 1993 results were negatively impacted by $14.3 million. For additional information regarding the effect of OBRA on the Company, see Note 14 to the Company's Consolidated and HL&P's Financial Statements in Item 8","section_7A":"","section_8":"Item 8 of this Report.\nTHE COMPANY. Sources of Capital Resources and Liquidity. The Company has consolidated its financing activities in order to provide a coordinated, cost-effective method of meeting short and long-term capital requirements. As part of the consolidated financing program, the Company has established a \"money fund\" through which its subsidiaries can borrow or invest on a short-term basis. The funding requirements of individual subsidiaries are aggregated and borrowing or investing is conducted by the Company based on the net cash position. Net funding requirements are met with borrowings under the Company's commercial paper program except that HL&P's borrowing requirements are generally met with HL&P's commercial paper program. As of December 31, 1993, the Company had a bank credit facility of $500 million (exclusive of bank credit facilities of subsidiaries), which was used to support its commercial paper program. At December 31, 1993, the Company had approximately $420 million of commercial paper outstanding. Rates paid by the Company on its short-term borrowings are generally lower than the prime rate. Subsequent to December 31, 1993, the Company's bank line of credit was increased to $600 millon.\nThe Company has registered with the Securities and Exchange Commission (SEC) $250 million principal amount of debt securities which remain unissued. Proceeds from any sales of these debt securities are expected to be used for general corporate purposes including investments in and loans to subsidiaries.\nThe Company also has registered with the SEC five million shares of its common stock. Proceeds from the sale of these securities will be used for general corporate purposes, including, but not limited to, the\nredemption, repayment or retirement of outstanding indebtedness of the Company or the advance or contribution of funds to one or more of the Company's subsidiaries to be used for their general corporate purposes, including, without limitation, the redemption, repayment or retirement of indebtedness or preferred stock.\nEmployee Stock Ownership Plan (ESOP). In October 1990, the Company amended its existing savings plan to add an ESOP component to the plan. The ESOP component of the plan allows the Company to satisfy a portion of its obligations to make matching contributions under the plan. The ESOP trustee purchased shares of the Company's common stock in open market transactions with funds provided by loans from the Company and completed the purchase of stock under the ESOP in December 1991 after purchasing 9,381,092 shares at a cost of $350 million. As the ESOP loans are repaid by the ESOP trustee over a period of up to 20 years, the common stock purchased for the plan will be allocated to the participants' accounts. The loans will be repaid with dividends on the common stock in, and Company contributions to, the plan. The loans to the plan were funded initially by the Company from short-term borrowings which have been refinanced with long-term debt. At December 31, 1993, the balance of the ESOP loans was approximately $332 million. For a further discussion, see Note 7(b) to the Company's Consolidated and HL&P's Financial Statements in Item 8 of this Report.\nHouston Argentina. Houston Argentina S. A. (Houston Argentina), a subsidiary of the Company, owns a 32.5% interest in Compania de Inversiones en Electricidad S. A. (COINELEC), an Argentine holding company which acquired, in December 1992, a 51% interest in Empresa Distribuidora La Plata S. A. (EDELAP), an electric utility company operating in La Plata, Argentina and surrounding regions. Houston Argentina's share of the purchase price was approximately $37.4 million, of which $1.6 million was paid in December 1992 with the remainder paid in March 1993. Subsequent to the acquisition, the generating assets of EDELAP were transferred to Central Dique S. A., an Argentine corporation, 51% of the stock of which is owned by COINELEC.\nHL&P. HL&P's cash requirements stem primarily from operating expenses, capital expenditures, payment of common stock dividends, payment of preferred stock dividends, and interest and principal payments on debt. HL&P's net cash provided by operating activities for 1993 totaled approximately $1.1 billion.\nNet cash used in HL&P's investing activities for 1993 totaled $345.9 million.\nHL&P's financing activities for 1993 resulted in a net cash outflow of $782.4 million. Included in these activities were the payment of dividends, the payment and extinguishment of long-term debt and redemption of preferred stock, partially offset by the issuance of long-term debt. For information with respect to these matters, see Notes 3 and 4 to the Company's Consolidated and HL&P's Financial Statements in Item 8 of this Report.\nCapital Program. HL&P's construction and nuclear fuel expenditures (excluding AFUDC) for 1993 totaled $329 million, which was below the authorized budgeted level of $345 million. Estimated expenditures for 1994, 1995 and 1996 are $478 million, $381 million and $418 million, respectively. Maturities of long-term debt and preferred stock with mandatory redemption provisions and capital leases for this same period include $45 million in 1994, $50 million in 1995 and $200 million in 1996.\nHL&P's construction program for the next three years is expected to relate to costs for production, transmission, distribution, and general plant. HL&P began construction of the E.I. du Pont de Nemours Company (DuPont) project in 1993 in order to provide generating capacity in 1995. The DuPont project is based on a contractual agreement between HL&P and DuPont, whereby HL&P will construct, own, and operate two 80 megawatt gas turbine units located at DuPont's LaPorte, Texas facility. The project will supply DuPont with process steam while all electrical energy will be used in the HL&P system. HL&P's capital program is subject to periodic review and portions may be revised from time to time due to changes in load forecasts, changing regulatory and environmental standards and other factors.\nFinancing Activities. In January 1993, HL&P repaid at maturity $136 million aggregate principal amount of its 9 3\/8% first mortgage bonds.\nIn March 1993, HL&P issued $250 million principal amount of 7 3\/4% first mortgage bonds due 2023 and $150 million principal amount of 6.10% collateralized medium-term notes due 2000. In April 1993, HL&P issued $150 million principal amount of 6.50% collateralized medium-term notes due 2003. Proceeds of the offerings were used to provide funds for the purchases and redemptions of HL&P's first mortgage bonds (including those series described below) and for general corporate purposes, including the repayment of short-term indebtedness of HL&P.\nIn April 1993, HL&P purchased the following first mortgage bonds pursuant to tender offers for any and all bonds of such series:\nIn April 1993, HL&P called for redemption the remaining $18,220,500 of its 8 3\/4% first mortgage bonds due 2005 at 100.61% of their principal amount, the remaining $50,473,500 of its 8 3\/8% first mortgage bonds due 2006 at 100.38% of their principal amount, the remaining $52,565,000 of its 8 3\/8% first mortgage bonds due 2007 at 100.64% of their principal amount, the remaining $54,045,000 of its 8 1\/8% first mortgage bonds due 2004 at 101.13% of their principal amount, the outstanding $50,000,000 of its 7 1\/2% first mortgage bonds due 2001 at 100.85% of their principal amount and the outstanding $30,000,000 of its 7 1\/2% first mortgage bonds due 1999 at 100.68% of their principal amount. Approximately $263 million deposited in the Replacement Fund in March 1993 was applied to the May 1993 redemption of these bonds.\nIn June 1993, HL&P redeemed 400,000 shares of its $8.50 cumulative preferred stock at $100 per share pursuant to sinking fund provisions.\nIn July 1993, HL&P issued $200 million principal amount of 7 1\/2% first mortgage bonds due 2023. Proceeds were used to provide funds for the redemption of HL&P's first mortgage bonds referenced in the following paragraph and the repayment of approximately $80 million aggregate\nprincipal amount of intercompany debt owed to the Company, which was assumed by HL&P upon the merger of Utility Fuels, Inc. into HL&P.\nIn October 1993, HL&P redeemed, at 106.57% of their principal amount, $390,519,000 aggregate principal amount of its 9% first mortgage bonds due 2017.\nIn December 1993, the Brazos River Authority (BRA) and the Gulf Coast Waste Disposal Authority (GCWDA) issued on behalf of HL&P $100,165,000 aggregate principal amount of revenue refunding bonds collateralized by HL&P's first mortgage bonds. The BRA issuance of $83,565,000 principal amount has an interest rate of 5.6% and matures in 2017. The GCWDA issuance of $16,600,000 principal amount has an interest rate of 4.9% and matures in 2003. Proceeds were used in 1994 to redeem, at 102% of their aggregate principal amount, $83,565,000 principal amount of pollution control revenue bonds previously issued on behalf of HL&P by the BRA and, at 100% of their aggregate principal amount, $16,600,000 principal amount of pollution control revenue bonds previously issued on behalf of HL&P by the GCWDA.\nSources of Capital Resources and Liquidity. HL&P expects to finance its capital program for the period 1994-1996 with funds generated internally from operations.\nHL&P has registered with the SEC $230 million aggregate liquidation value of preferred stock and $580 million aggregate principal amount of debt securities that may be issued as first mortgage bonds and\/or as debt securities collateralized by first mortgage bonds. Proceeds from the sales of these securities are expected to be used for general corporate purposes including the purchase, redemption (to the extent permitted by the terms of the outstanding securities), repayment or retirement of outstanding indebtedness or preferred stock of HL&P.\nHL&P's interim financing requirements are met through the issuance of short-term debt, primarily commercial paper. At December 31, 1993, HL&P had outstanding commercial paper of approximately $171 million, which was supported by a bank credit facility of $250 million. Subsequent to December 31, 1993, HL&P's line of credit was increased to $400 millon.\nHL&P's capitalization at December 31, 1993 was 43% long-term debt, 7% preferred stock and 50% common equity.\nEnvironmental Expenditures. In November 1990, the Clean Air Act was extensively amended by Congress. HL&P has already made an investment in pollution control facilities, and all of its generating facilities currently comply in all material respects with sulfur dioxide emission standards established by the statute. Provisions of the Clean Air Act dealing with urban air pollution required establishing new emission limitations for nitrogen oxides from existing sources. The cost of modifications necessary to reduce nitrogen oxide emissions from existing sources has been estimated at $29 million in 1994 and $10.5 million in 1995. In addition, continuous emission monitoring regulations are anticipated to require expenditures of $12 million in 1994 and $2 million in 1995. Capital expenditures are expected to total $71 million for the years 1994 through 1996.\nThe United States Environmental Protection Agency (EPA) has identified HL&P as a \"potentially responsible party\" for the costs of remediation of a Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) site located adjacent to one of HL&P's transmission\nlines in Harris County. Although HL&P did not contribute waste to or operate the site, the party primarily responsible for contributing waste to the site and possibly other potentially responsible parties have alleged that waste disposal pits dug by the site operator encroach onto HL&P's property and therefore HL&P is responsible as a site owner. Although HL&P admits that it owns an adjacent strip of land onto which substances from the site appear to have migrated, it denies that it ever owned the strip of land containing the pits. In June 1993, a Galveston County District Court entered a final judgment to the effect that HL&P did not own the disputed strip of land. In October 1992, the EPA issued an Administrative Order to HL&P and several other companies purporting to require those parties to implement the management of migration remediation at the site. A related Administrative Order had been issued in June 1990. Neither the EPA nor any other responsible party has presented HL&P with a claim for a share of costs for the management of the migration remediation design or operation. However, in the event HL&P were ultimately held to be a responsible party for the remediation of this site and if other responsible parties do not complete the management of migration remediation, CERCLA provides for substantial remedies that could be pursued by the United States, including substantial fines, punitive damages and treble damages for costs incurred by the United States in completing such remediation. The aggregate potential clean-up costs for the entire site have been estimated to be approximately $80 million. Although no prediction can be made at this time as to the ultimate outcome of this matter, in light of all the circumstances, the Company and HL&P do not believe that any costs that HL&P incurs in this matter will have a material adverse effect on the Company's or HL&P's financial condition or results of operations.\nKBLCOM. KBLCOM's cash requirements stem primarily from operating expenses, capital expenditures, and interest and principal payments on debt. KBLCOM's net cash provided by operating activities was $13.9 million in 1993.\nNet cash used in KBLCOM's investing activities for 1993 totaled $61.9 million, primarily due to property additions which approximated $54.5 million. These amounts were financed principally through internally generated funds and intercompany advances. A substantial portion of KBLCOM's 1994-1996 capital requirements is expected to be met through internally generated funds. It is expected that any shortfall will be met through intercompany borrowings.\nKBLCOM's financing activities for 1993 resulted in a net cash inflow of $47.9 million. Included in these activities were the reduction of third party debt, proceeds from additional paid-in capital and an increase in borrowings from the Company.\nFinancing Activities. In the first quarter of 1993, KBL Cable repaid $6.4 million principal amount of its senior notes and senior subordinated notes. In the second and third quarters of 1993, KBL Cable repaid borrowings under its senior bank credit facility in the amounts of $15 million and $56 million, respectively. These repayments were partially offset by $20 million in additional borrowing under the senior bank credit facility during the first quarter of 1993.\nIn the first quarter of 1993, KBLCOM prepaid $167.3 million of senior bank debt funded with proceeds from the Company's additional equity investment. The Company obtained the funds for such investment from the sale of commercial paper. This KBLCOM debt was included in current portion of long-term debt and preferred stock at December 31, 1992 on the Company's Consolidated Balance Sheets.\nSources of Capital Resources and Liquidity. In the first quarter of 1993, KBLCOM reduced its outstanding indebtedness by approximately $153.7 million. This was accomplished through an equity investment of approximately $167.3 million from the Company (funded with proceeds from the sale of commercial paper by the Company) and offset by net additional borrowing of $13.6 million. In the second quarter of 1993, the Company made capital contributions to KBLCOM aggregating approximately $114.3 million. The capital contributions included KBL Cable senior notes aggregating approximately $29 million and KBL Cable senior subordinated notes aggregating approximately $36 million that had been previously acquired by the Company. The Company contributed such notes to KBLCOM which, in turn, contributed such notes to KBL Cable, a subsidiary of KBLCOM which retired and canceled the notes. The balance of the capital contributions resulted from the conversion to equity of intercompany debt payable by KBLCOM to the Company. The capital contributions will have no impact on the consolidated earnings of the Company.\nAdditional borrowing under KBL Cable's bank facility is subject to certain covenants which relate primarily to the maintenance of certain financial ratios, principally debt to cash flow and interest coverages. KBL Cable presently is in compliance with such covenants. Cash requirements for 1994 are expected to be met through intercompany borrowing and contributions, internally generated funds, and borrowing under existing credit lines of KBLCOM's subsidiaries. At December 31, 1993, KBL Cable had $108.5 million available for borrowing under its bank facility. The line of credit has scheduled reductions in March of each year until it is eliminated in March 1999.\nRecent Developments. The Company has engaged an investment banking firm to assist in finding a strategic partner or investor for KBLCOM in the telecommunications industry.\nOn February 17, 1994, KBLCOM entered into an agreement to acquire three cable companies serving approximately 47,000 customers in the Minneapolis area. KBLCOM will acquire the stock of the companies in exchange for the issuance of common stock of the Company. The amount of common stock of the Company to be issued, currently estimated to be approximately $24 million, is dependent on the amount of liabilities assumed, currently estimated to be approximately $63 million.\nApproximately 40,000 of the cable customers served by the properties to be acquired are in the Minneapolis metropolitan area. The remaining 7,000 customers are located in small communities south and west of the metropolitan area. Closing of the transaction is subject to the satisfaction of certain conditions.\nHOUSTON INDUSTRIES FINANCE. During 1992, Houston Industries Finance, Inc. (Houston Industries Finance) purchased accounts receivable of HL&P and of certain KBLCOM subsidiaries. In January 1993, Houston Industries Finance sold the receivables back to the respective subsidiaries. HL&P is now selling its accounts receivable and most of its accrued unbilled revenues to a third party. As of January 12, 1993, Houston Industries Finance ceased operations and its $300 million bank revolving credit facility and related commercial paper program were terminated. The subsidiary was merged into the Company effective June 8, 1993.\nNEW ACCOUNTING PRONOUNCEMENTS\nIn November 1992, the Financial Accounting Standards Board issued SFAS No. 112, \"Employers' Accounting for Postemployment Benefits.\" This\naccounting standard, effective for fiscal years beginning after December 15, 1993 requires companies to recognize the liability for benefits provided to former or inactive employees, their beneficiaries and covered dependents after employment but before retirement. Those benefits include, but are not limited to, salary continuation, supplemental unemployment benefits, severance benefits, disability-related benefits (including worker's compensation), job training and counseling, and continuation of benefits such as health care and life insurance. The Company will adopt SFAS No. 112 in 1994. The transition obligation of approximately $20 million will be expensed upon adoption and reported similar to the cumulative effect of a change in accounting principle. The Company estimates that benefit costs for 1994 (exclusive of the transition obligation) will be approximately $1 million over the expected pay-as-you-go amount.\nITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA\nHOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES\nSTATEMENTS OF CONSOLIDATED INCOME (THOUSANDS OF DOLLARS)\n(continued on next page)\nHOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES\nSTATEMENTS OF CONSOLIDATED INCOME (THOUSANDS OF DOLLARS)\n(CONTINUED)\nSee Notes to Consolidated Financial Statements.\nHOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES\nSTATEMENTS OF CONSOLIDATED RETAINED EARNINGS (THOUSANDS OF DOLLARS)\nSee Notes to Consolidated Financial Statements.\nHOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES\nCONSOLIDATED BALANCE SHEETS (THOUSANDS OF DOLLARS)\nASSETS\nSee Notes to Consolidated Financial Statements.\nHOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES\nCONSOLIDATED BALANCE SHEETS (THOUSANDS OF DOLLARS)\nCAPITALIZATION AND LIABILITIES\nSee Notes to Consolidated Financial Statements.\nHOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES\nCONSOLIDATED STATEMENTS OF CAPITALIZATION (THOUSANDS OF DOLLARS)\n(continued on next page)\nHOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES\nCONSOLIDATED STATEMENTS OF CAPITALIZATION (THOUSANDS OF DOLLARS)\n(CONTINUED)\n(continued on next page)\nHOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES\nCONSOLIDATED STATEMENTS OF CAPITALIZATION (THOUSANDS OF DOLLARS)\n(CONTINUED)\nSee Notes to Consolidated Financial Statements.\nHOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES\nSTATEMENTS OF CONSOLIDATED CASH FLOWS\nINCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (THOUSANDS OF DOLLARS)\n(continued on next page)\nHOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES\nSTATEMENTS OF CONSOLIDATED CASH FLOWS\nINCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (THOUSANDS OF DOLLARS)\nSee Notes to Consolidated Financial Statements.\nHOUSTON LIGHTING & POWER COMPANY\nSTATEMENTS OF INCOME (THOUSANDS OF DOLLARS)\nSee Notes to Financial Statements.\nHOUSTON LIGHTING & POWER COMPANY\nSTATEMENTS OF RETAINED EARNINGS (THOUSANDS OF DOLLARS)\nSee Notes to Financial Statements.\nHOUSTON LIGHTING & POWER COMPANY\nBALANCE SHEETS (THOUSANDS OF DOLLARS)\nASSETS\nSee Notes to Financial Statements.\nHOUSTON LIGHTING & POWER COMPANY\nBALANCE SHEETS (THOUSANDS OF DOLLARS)\nCAPITALIZATION AND LIABILITIES\nSee Notes to Financial Statements.\nHOUSTON LIGHTING & POWER COMPANY\nSTATEMENTS OF CAPITALIZATION (THOUSANDS OF DOLLARS)\n(continued on next page)\nHOUSTON LIGHTING & POWER COMPANY\nSTATEMENTS OF CAPITALIZATION (THOUSANDS OF DOLLARS)\n(CONTINUED)\nSee Notes to Financial Statements.\nHOUSTON LIGHTING & POWER COMPANY\nSTATEMENTS OF CASH FLOWS\nIncrease (Decrease) in Cash and Cash Equivalents (Thousands of Dollars)\n(continued on next page)\nHOUSTON LIGHTING & POWER COMPANY\nSTATEMENTS OF CASH FLOWS\nIncrease (Decrease) in Cash and Cash Equivalents (Thousands of Dollars)\n(Continued)\nSee Notes to Financial Statements.\nHOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS\nFOR THE THREE YEARS ENDED DECEMBER 31, 1993\n(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES\n(A) SYSTEM OF ACCOUNTS. The accounting records of Houston Lighting & Power Company (HL&P), the principal subsidiary of Houston Industries Incorporated (Company), are maintained in accordance with the Federal Energy Regulatory Commission's Uniform System of Accounts as adopted by the Public Utility Commission of Texas (Utility Commission).\n(B) PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries.\nEffective October 8, 1993, the Company merged Utility Fuels Inc. (Utility Fuels), the Company's coal supply subsidiary, into HL&P. Accounting for the merger did not affect consolidated earnings.\nAll significant intercompany transactions and balances are eliminated in consolidation except sales of accounts receivable to Houston Industries Finance, Inc. (Houston Industries Finance), a former subsidiary of the Company, which were not eliminated because of the distinction for regulatory purposes between utility and non-utility operations. As of January 12, 1993, Houston Industries Finance sold the receivables back to the respective subsidiaries and ceased operations. HL&P is now selling its accounts receivable and most of its accrued unbilled revenues to a third party.\nInvestments in affiliates in which the Company has a 20% to 50% interest, which include the investment in Paragon Communications (Paragon), are recorded using the equity method of accounting. See Note 17.\n(C) ELECTRIC PLANT. Additions to electric plant, betterments to existing property and replacements of units of property are capitalized at cost. Cost includes the original cost of contracted services, direct labor and material, indirect charges for engineering supervision and similar overhead items and an Allowance for Funds Used During Construction (AFUDC). Customer advances for construction reduce additions to electric plant.\nHL&P computes depreciation using the straight-line method. The depreciation provision as a percentage of the depreciable cost of plant was 3.1% for 1993, and 3.2% for 1992 and 1991.\n(D) CABLE TELEVISION PROPERTY. KBLCOM Incorporated (KBLCOM), the Company's cable television subsidiary, records additions to property at cost which include amounts for material, labor, overhead and interest. Depreciation is computed using the straight-line method. Depreciation as a percentage of the depreciable cost of property was 11.3% for 1993, 12.1% for 1992, and 11.7% for 1991. Expenditures for maintenance and repairs are expensed as incurred.\n(E) CABLE TELEVISION FRANCHISES AND INTANGIBLE ASSETS. KBLCOM has recorded the acquisition cost in excess of the fair market value of the tangible assets and liabilities of RCA Cablesystems Holding Co. (Cablesystems) in cable television franchises and intangible assets acquired in 1989. Such amount is being amortized over periods ranging from 8 to 40 years on a straight-line basis. KBLCOM periodically reviews the carrying value of\ncable television franchises and intangible assets in relation to current and expected operating results of the business in order to assess whether there has been a permanent impairment of such amounts.\n(F) ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION. HL&P accrues AFUDC on construction projects and nuclear fuel payments, except for amounts included in the rate base pursuant to regulatory authorization. The accrual rates were 7.25% in 1993 and 8.75% in 1992 and 1991.\n(G) REVENUES. Effective January 1, 1992, HL&P changed its method of recording electricity sales from cycle billing to a full accrual method, whereby unbilled electricity sales are estimated and recorded each month in order to better match revenues with expenses. Prior to January 1, 1992, electric revenues were recognized as bills were rendered (see Note 19).\nThe Utility Commission provides for the recovery of certain fuel and purchased power costs through an energy component of base electric rates.\nCable television revenues are recognized as the services are provided to subscribers, and advertising revenues are recorded when earned.\n(H) INCOME TAXES. The Company follows a policy of comprehensive interperiod income tax allocation. Investment tax credits are deferred and amortized over the estimated lives of the related property. In 1992, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 109, \"Accounting for Income Taxes,\" with restatement to January 1, 1990 (see Note 14). Under current tax laws, the Company may realize tax savings by deducting for tax purposes dividends on the Company's common stock that are used to pay debt service on the Employee Stock Ownership Plan (ESOP) loans (see Note 7).\n(I) EARNINGS PER COMMON SHARE. Earnings per common share for the Company is computed by dividing net income by the weighted average number of shares outstanding during the respective period.\n(J) STATEMENTS OF CONSOLIDATED CASH FLOWS. For purposes of reporting cash flows, cash equivalents are considered to be short-term, highly liquid investments readily convertible to cash.\n(2) COMMON STOCK\nIn May 1993, the Company's shareholders approved an increase in the Company's authorized common stock from 200,000,000 shares to 400,000,000 shares.\nIn 1993, the Company paid four regular quarterly dividends aggregating $3.00 per share on its common stock pursuant to dividend declarations made in 1993. In December 1993, the Company declared its regular quarterly dividend of $.75 per share to be paid in March 1994. All dividends declared in 1993 have been included in 1993 common stock dividends on the Company's Statements of Consolidated Retained Earnings and, with respect to the dividends declared in December 1993, in dividends accrued at December 31, 1993 on the Company's Consolidated Balance Sheets.\nIn May 1989, the Company adopted, with shareholder approval, a long-term incentive compensation plan (1989 LICP Plan), which provided for the issuance of certain stock incentives (including performance-based restricted shares and stock options). A maximum of 500,000 shares of common stock may be issued under the 1989 LICP Plan, of which 300,090 shares were available for issuance as of December 31, 1993. In 1993, 73,282 shares of performance-based restricted shares were issued to plan participants. In January 1992, non-statutory stock options for 67,984 shares of the Company's stock were granted to key employees of the Company and its subsidiaries at an option price of $43.50 per share, of which 679 shares were exercised during 1993. Options for 21,430 shares from the January 1992 grant were exercisable on December 31, 1993. In January 1993, non-\nstatutory stock options for 65,776 shares of the Company's stock were granted at an option price of $46.25 per share. Beginning one year after the grant date, the options become exercisable in one-third increments each year. The options expire ten years from the grant date. At December 31, 1993, 7,132 shares had been canceled under provisions of the plan.\nIn May 1993, the Company adopted, with shareholder approval, a new long-term incentive compensation plan (1994 LICP Plan), providing for the issuance of certain stock incentives (including performance-based restricted shares and stock options) of the general nature provided by the 1989 LICP Plan. A maximum of 2,000,000 shares of common stock may be issued under the 1994 LICP Plan. No stock incentives were awarded under the 1994 LICP Plan during the year ended December 31, 1993. However, in January of 1994, the Company granted to certain of its key employees non-statutory stock options under the 1994 LICP Plan for 65,726 shares of common stock at an option price of $46.50 per share. Beginning one year after the grant date, the options will become exercisable in one-third increments each year. The options expire ten years from the grant date.\nIn July 1990, the Company adopted a shareholder rights plan and declared a dividend of one right for each outstanding share of the Company's common stock. The rights, which under certain circumstances entitle their holders to purchase one one-hundredth of a share of Series A Preference Stock for an exercise price of $85, will expire on July 11, 2000. The rights will become exercisable only if a person or entity acquires 20% or more of the Company's outstanding common stock or if a person or entity commences a tender offer or exchange offer for 20% or more of the outstanding common stock. At any time after the occurrence of such events, the Company may exchange unexercised rights at an exchange ratio of one share of common stock, or equity securities of the Company of equivalent value, per right. The rights are redeemable by the Company for $.01 per right at any time prior to the date the rights become exercisable.\nWhen the rights become exercisable, each right will entitle the holder to receive, in lieu of the right to purchase Series A Preference Stock, upon the exercise of such right, a number of shares of the Company's common stock (or under certain circumstances cash, property, other equity securities or debt of the Company) having a current market price (as defined in the plan) equal to twice the exercise price of the right, except pursuant to an offer for all outstanding shares of common stock which a majority of the independent directors of the Company determines to be a price which is in the best interests of the Company and its shareholders (Permitted Offer).\nIn the event that the Company is a party to a merger or other business combination (other than a merger that follows a Permitted Offer), rights holders will be entitled to receive, upon the exercise of a right, a number of shares of common stock of the acquiring company having a current market price (as defined in the plan) equal to twice the exercise price of the right.\nIn October 1990, the Company amended its savings plan to add an ESOP component. The ESOP component of the plan allows the Company to satisfy a portion of its obligation to make matching contributions under the plan. For additional information with respect to the ESOP component of the plan, see Note 7(b).\n(3) PREFERRED STOCK OF HL&P\nHL&P's cumulative preferred stock may be redeemed at the following per share prices, plus any unpaid accrued dividends to the date of redemption:\n(a) Rates for Variable Term Preferred stock as of December 31, 1993 were as follows:\n(b) HL&P is required to redeem 200,000 shares of this series annually. This series is redeemable at the option of HL&P at $100 per share beginning June 1, 1994.\n(c) HL&P is required to redeem 257,000 shares annually beginning April 1, 1995. This series is redeemable at the option of HL&P at $100 per share beginning April 1, 1997.\nAnnual mandatory redemptions of HL&P's preferred stock are $20 million in 1994, $45.7 million for 1995 and 1996, and $25.7 million for 1997 and 1998.\n(4) LONG-TERM DEBT\nHL&P. Sinking or improvement fund requirements of HL&P's first mortgage bonds outstanding will be approximately $37 million for each of the years 1994 through 1998. Of such requirements, approximately $34 million for each of the years 1994 through 1998 may be satisfied by certification of property additions at 100% of the requirements, and the remainder through certification of such property additions at 166 2\/3% of the requirements. Sinking or improvement fund requirements for 1993 and prior years have been satisfied by certification of property additions.\nHL&P has agreed to expend an amount each year for replacements and improvements in respect of its depreciable mortgaged utility property equal to $1,450,000 plus 2 1\/2% of net additions to such mortgaged property made after March 31, 1948 and before July 1 of the preceding year. Such requirement may be met with cash, first mortgage bonds, gross property additions or expenditures for repairs or replacements, or by taking credit for property additions at 100% of the requirements. At the option of HL&P, but only with respect to first mortgage bonds of a series subject to special redemption, deposited cash may be used to redeem first mortgage bonds of such series at the applicable special redemption price. The replacement fund requirement to be satisfied in 1994 is approximately $271 million.\nThe amount of HL&P's first mortgage bonds is unlimited as to issuance, but limited by property, earnings, and other provisions of the Mortgage and Deed of Trust dated as of November 1, 1944, between HL&P and South Texas Commercial National Bank of Houston (Texas Commerce Bank National Association, as Successor Trustee) and the supplemental indentures thereto. Substantially all properties of HL&P are subject to liens securing HL&P's long-term debt under the mortgage.\nHL&P's annual maturities of long-term debt and minimum capital lease payments are approximately $25 million in 1994, $4 million in 1995, $155 million in 1996, $229 million in 1997, and $40 million in 1998.\nKBLCOM and Subsidiaries. As of December 31, 1993, all borrowings under KBLCOM's letter of credit and term loan facility had been repaid and such facility was utilized only in the form of letters of credit aggregating $89.3 million. In January 1994, KBLCOM terminated this facility.\nKBL Cable, Inc. (KBL Cable), a subsidiary of KBLCOM, is a party to a $510.3 million revolving credit and letter of credit facility agreement with annual mandatory commitment reductions (which may require principal payments). At December 31, 1993, KBL Cable had $108.5 million available on such lines of credit. The available line of credit has scheduled reductions in March of each year until it is eliminated in March 1999. Loans have generally borne interest at an interest rate of LIBOR plus an \"applicable margin.\" The margin was .625% at December 31, 1993. The bank credit agreement also contains certain restrictions, including restrictions on dividends, sales of assets and limitations on total indebtedness. The amount of indebtedness outstanding at December 31, 1993 and 1992 was $364 million and $415 million, respectively.\nKBL Cable has interest rate swap agreements with four banks which, as of December 31, 1993 and 1992, effectively fixed the rates on the $200 million of debt under the KBL Cable senior bank credit facility at approximately 9% plus the applicable margin. As of December 31, 1993 and 1992, the effective interest rates on such debt were approximately 9.625% and 9.875%, respectively. Interest rate swaps aggregating $75 million terminated in October 1992. The remaining interest rate swaps terminate in 1994 and 1996. The differential to be paid or received under the interest rate swap agreements is accrued and is recognized over the life of the agreement. KBL Cable is exposed to risk of nonperformance by the other parties to the interest rate swap agreements. However, KBL Cable does not anticipate nonperformance by the parties.\nCommitment fees are required on the unused capacity of the KBL Cable bank credit facility.\nAs of December 31, 1993, KBL Cable had outstanding $67.1 million of 10.95% senior notes and $83.9 million of 11.30% senior subordinated notes. Both\nseries mature in 1999 with annual principal payments which began in 1992. The agreement under which the notes were issued contains restrictions and covenants similar to those contained in the KBL Cable senior bank facility. During the second quarter of 1993, the Company contributed to KBLCOM KBL Cable senior notes aggregating approximately $29 million and KBL Cable senior subordinated notes aggregating approximately $36 million previously held by the Company. KBLCOM subsequently contributed such notes to KBL Cable, which retired and canceled the notes.\nAnnual Maturities of Company Long-Term Debt. Consolidated annual maturities of long-term debt and minimum capital lease payments for the Company are approximately $35 million in 1994, $20 million in 1995, $431 million in 1996, $359 million in 1997 and $181 million in 1998.\n(5) SHORT-TERM FINANCING\nThe interim financing requirements of the Company's operating subsidiaries are met through short-term bank loans, the issuance of commercial paper and short-term advances from the Company. The Company and its subsidiaries had bank credit facilities aggregating $750 million at December 31, 1993 and $1.05 billion at December 31, 1992, under which borrowings are classified as short-term indebtedness. Such bank facilities limit total short-term borrowings and provide for interest at rates generally less than the prime rate. Outstanding commercial paper was $591 million at December 31, 1993 and $564 million at December 31, 1992. Commitment fees are required on the bank facilities. For a description of bank credit facilities of KBLCOM and KBL Cable, borrowings under which are classified as long-term debt or current maturities of long-term debt, see Note 4.\nIn January 1994, the Company's bank credit facility was increased from $500 million to $600 million and HL&P's bank credit facility was increased from $250 million to $400 million. The increased facilities aggregate $1 billion. Borrowings under these facilities continue to be available at rates generally less than the prime rate.\n(6) ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS\nThe carrying amount and estimated fair value of the Company's financial instruments at December 31, 1993 and 1992 are as follows:\nThe fair values of cash and short-term investments, short-term and other notes payable and bank debt are equivalent to the carrying amounts.\nThe fair values of the ESOP loan, the Company's debentures, HL&P's cumulative preferred stock subject to mandatory redemption, HL&P's first mortgage bonds, pollution control revenue bonds issued on behalf of HL&P and KBL Cable senior and senior subordinated notes are estimated using rates currently available for securities with similar terms and remaining maturities.\nThe fair value of interest rate swaps is the estimated amount that the swap counterparties would receive or pay to terminate the swap agreements, taking into account current interest rates and the current creditworthiness of the swap counterparties.\n(7) RETIREMENT PLANS\n(A) PENSION. The Company has noncontributory retirement plans covering substantially all employees. The plans provide retirement benefits based on years of service and compensation. The Company's funding policy is to contribute amounts annually in accordance with applicable regulations in order to achieve adequate funding of projected benefit obligations. The\nassets of the plans consist principally of common stocks and high quality, interest-bearing obligations.\nNet pension cost for the Company includes the following components:\nThe funded status of the Company's retirement plans was as follows:\nThe projected benefit obligation was determined using an assumed discount rate of 7.25% in 1993 and 8.5% in 1992. A long-term rate of compensation increase ranging from 3.9% to 6% was assumed for 1993 and ranging from 6.9% to 9.0% was assumed in 1992. The assumed long- term rate of return on plan assets was 9.5% in 1993 and 1992. The transitional asset at January 1, 1986, is being recognized over approximately 17 years, and the prior service cost is being recognized over approximately 15 years.\n(B) SAVINGS PLANS. In 1993, the Company (which includes HL&P) and KBLCOM had employee savings plans that qualified as cash or deferred arrangements under Section 401(k) of the Internal Revenue Code of 1986, as amended (IRC). Under the plans, participating employees could contribute a portion of their compensation, pre-tax or after-tax, up to a maximum of 16% of compensation limited by an annual deferral limit ($8,994 for calendar year 1993) prescribed by IRC Section 402(g) and the IRC Section 415 annual additions limits. The Company matched 70% (KBLCOM matched 50%) of the first 6% of each employee's compensation contributed, subject to a vesting schedule which entitled the employee to a percentage of the matching contributions depending on years of service. Substantially all of the Company's and KBLCOM's match was invested in the Company's common stock. Effective January 1, 1994, KBLCOM's plan was merged with the Company's plan and KBLCOM's matching contribution was increased to 70% of the first 6% of each employee's contributions.\nUnder the ESOP component of the Company's savings plan, the ESOP trustee purchased shares of the Company's common stock in open-market transactions with funds provided by loans from the Company and completed the purchase of stock under the ESOP in December 1991, after purchasing 9,381,092 shares at a cost of $350 million. At December 31, 1993, the balance of the ESOP loans was approximately $332 million. The loans from the Company to the ESOP are shown on the Company's Consolidated Balance Sheets as a reduction in common stock equity. Principal and interest on the loans will be paid with dividends on the common stock in, and Company contributions to, the ESOP. Repayment of the loan is scheduled to occur over a 20-year period with the first mandatory repayment in 1997. The loans to the ESOP were funded initially by the Company from short-term borrowings which have been refinanced with long-term debt.\nInterest expense related to the ESOP debt service was $32.5 million in 1993, $32.6 million in 1992, and $17.9 million in 1991. ESOP benefit expense was $17.3 million, $20.0 million, and $21.3 million in 1993, 1992 and 1991, respectively.\nThe Company match for the savings plan is satisfied with the allocation to employee accounts of released shares of stock and with cash contributions. Shares are released from the encumbrance of the loans upon the payment of debt service using dividends on unallocated shares in the ESOP, interest earnings and cash contributions by the Company. A summary of dividends on unallocated ESOP shares and ESOP cash contributions for the three years ended December 31, 1993 is as follows:\n(C) POSTRETIREMENT BENEFITS. The Company and HL&P adopted SFAS No. 106, \"Employer's Accounting for Postretirement Benefits Other Than Pensions\" effective January 1, 1993. SFAS No. 106 requires companies to recognize the liability for postretirement benefit plans other than pensions, primarily health care. The Company and HL&P previously expensed the cost of these benefits as claims were incurred. SFAS No. 106 allows recognition of the transition obligation (liability for prior years' service) in the year of adoption or to be amortized over the plan participants' future service period. The Company and HL&P have elected to amortize the estimated transition obligation of approximately $213 million (including $211 million for HL&P) over 22 years. In March 1993, the Utility Commission adopted a rule governing the ratemaking treatment of postretirement benefits other than pensions. This rule provides for recovery in ratemaking proceedings (which, in HL&P's case, has not occurred) of the cost of postretirement benefits calculated in accordance with SFAS No. 106 including amortization of the transition obligation.\nFor 1992, the Company and HL&P continued to fund postretirement benefit costs other than pensions on a \"pay-as-you-go\" basis. The Company made postretirement benefit payments in 1992 of $8.6 million. The Company's postretirement benefit costs were $38 million for 1993, an increase of $27 million over the 1993 \"pay-as-you-go\" amount.\nThe net postretirement benefit cost for the Company in 1993 includes the following components, in thousands of dollars:\nThe funded status of postretirement benefit costs for the Company at December 31, 1993 was as follows, in thousands of dollars:\nThe assumed health care cost trend rates used in measuring the accumulated postretirement benefit obligation in 1993 are as follows:\nThe assumed health care rates gradually decline to 5.4% for both medical categories and 3.7% for dental by the year 2001. The accumulated postretirement benefit obligation was determined using an assumed discount rate of 7.25% for 1993.\nIf the health care cost trend rate assumptions were increased by 1%, the accumulated postretirement benefit obligation as of December 31, 1993 would be increased by approximately 8%. The annual effect of the 1% increase on the total of the service and interest costs would be an increase of approximately 10%.\n(8) COMMITMENTS AND CONTINGENCIES\n(a) HL&P. HL&P has various commitments for capital expenditures, fuel, purchased power, cooling water and operating leases. Commitments in connection with HL&P's capital program are generally revocable by HL&P subject to reimbursement to manufacturers for expenditures incurred or other cancellation penalties. HL&P's other commitments have various quantity requirements and durations. However, if these requirements could not be met, various alternatives are available to mitigate the cost associated with the contracts' commitments.\nHL&P's capital program (exclusive of AFUDC) is presently estimated to cost $478 million in 1994, $381 million in 1995 and $418 million in 1996. These amounts do not include expenditures on projects for which HL&P expects to be reimbursed by customers or other parties.\nHL&P has entered into several long-term coal, lignite and natural gas contracts which have various quantity requirements and durations. Minimum obligations for coal and transportation agreements are approximately $167 million in 1994, and $165 million in 1995 and 1996. In addition, the minimum obligations under the lignite mining and lease agreements will be approximately $14 million annually during the 1994-1996 period. HL&P has entered into several gas purchase agreements containing contract terms in excess of one year which provide for specified purchase and delivery obligations. Minimum obligations for natural gas purchase and natural gas storage contracts are approximately $57.4 million in 1994, $58.9 million in 1995 and $60.5 million in 1996. Collectively, the gas supply contracts included in these figures could amount to 11% of HL&P's annual natural gas requirements. The Utility Commission's rules provide for recovery of the coal, lignite and natural gas costs described above through the energy component of HL&P's electric rates. Nuclear fuel costs are also included in the energy component of HL&P's electric rates based on the cost of nuclear fuel consumed in the reactor.\nHL&P has commitments to purchase firm capacity from cogenerators of approximately $145 million in 1994, $32 million in 1995 and $22 million in 1996. The Utility Commission's rules allow recovery of these costs through HL&P's base rates for electric service and additionally authorize HL&P to charge or credit customers for any variation in actual purchased power cost from the cost utilized to determine its base rates. In the event that the Utility Commission, at some future date, does not allow recovery through rates of any amount of purchased power payments, the three principal firm capacity contracts contain provisions allowing HL&P to suspend or reduce payments and seek repayment for amounts disallowed.\nIn November 1990, the Clean Air Act was extensively amended by Congress. HL&P has already made an investment in pollution control facilities, and all of its generating facilities currently comply in all material respects with sulfur dioxide emission standards established by the legislation. Provisions of the Clean Air Act dealing with urban air pollution required establishing new emission limitations for nitrogen oxides from existing sources. The cost of modifications necessary to reduce nitrogen oxide emissions from existing sources has been estimated at $29 million in 1994 and $10.5 million in 1995. In addition, continuous emission monitoring regulations are anticipated to require expenditures of $12 million in 1994 and $2 million in 1995. Capital expenditures are expected to total $71 million for the years 1994 through 1996.\nThe Energy Policy Act of 1992, which became law in October 1992, includes a provision that assesses a fee upon domestic utilities having purchased enrichment services from the Department of Energy before October 22, 1992. This fee is to cover a portion of the cost to decontaminate and decommission the enrichment facilities. It is currently estimated that the assessment to the South Texas Project Electric Generating Station (South Texas Project) will be approximately $4 million in 1994 and approximately $2 million each year thereafter (subject to escalation for inflation), of which HL&P's share is 30.8%. This assessment will continue until the earlier of 15 years or when $2.25 billion (adjusted for inflation) has been collected from domestic utilities. Based on HL&P's actual payment of $579,810 in 1993, it recorded an estimated liability of $8.7 million.\nHL&P's service area is heavily dependent on oil, gas, refined products, petrochemicals and related business. Significant adverse events affecting these industries would negatively impact the revenues of the Company and HL&P.\n(b) KBLCOM COMMITMENTS AND OBLIGATIONS UNDER CABLE FRANCHISE AGREEMENTS. KBLCOM's capital additions are estimated to be $77 million in 1994, $110 million in 1995 and $89 million in 1996. KBLCOM and its subsidiaries presently have certain cable franchises containing provisions for construction of cable plant and service to customers within the franchise area. In connection with certain obligations under existing franchise agreements, KBLCOM and its subsidiaries obtain surety bonds and letters of credit guaranteeing performance to municipalities and public utilities. Payment is required only in the event of non-performance. KBLCOM and its subsidiaries have fulfilled all of their obligations such that no payments have been required.\n(c) IMPACT OF THE 1992 CABLE ACT ON KBLCOM. In May 1993, the Federal Communications Commission (FCC) issued its rate regulation rules (Rate Rule) which became effective on September 1, 1993. As a result of the Rate Rule, KBLCOM estimates that revenues in 1993 were reduced by approximately $6.8 million. In February 1994, the FCC announced further changes in the Rate Rule and announced its interim cost-of- service standards (Interim COS Standards). The FCC will issue revised benchmark formulas which will produce lower benchmarks, effective May 15, 1994 (Revised Benchmarks). It is impossible to assess the detailed impact of the revised Rate Rule and Interim COS Standards on KBLCOM until the FCC completes and issues the actual text of its rules on the Revised Benchmarks and the Interim COS Standards.\n(9) JOINTLY-OWNED NUCLEAR PLANT\n(a) HL&P INVESTMENT. HL&P is project manager and one of four co-owners in the South Texas Project, which consists of two 1,250 megawatt nuclear generating units. Unit Nos. 1 and 2 of the South Texas Project achieved commercial operation in August 1988 and June 1989, respectively. Each co-owner funds its own share of capital and operating costs associated with the plant, with HL&P's interest in the project being 30.8%. HL&P's share of the operation and maintenance expenses is included in electric operation and maintenance expenses on the Company's Statements of Consolidated Income and in the corresponding operating expense amounts on HL&P's Statements of Income.\nAs of December 31, 1993, HL&P's investments (net of accumulated depreciation and amortization) in the South Texas Project and in nuclear fuel, including AFUDC, were $2.1 billion and $119 million, respectively.\n(b) CITY OF AUSTIN LITIGATION. In 1983, the City of Austin (Austin), one of the four co-owners of the South Texas Project, filed a lawsuit against the Company and HL&P alleging that it was fraudulently induced to participate in the South Texas Project and that HL&P failed to perform properly its duties as project manager. After a jury trial in 1989, judgment was entered in favor of HL&P, and that judgment was affirmed on appeal. In May 1993, following the expiration of Austin's rights to appeal to the United States Supreme Court, the judgment in favor of the Company and HL&P became final.\nOn February 22, 1994, Austin filed a new suit against HL&P. In that suit, filed in the 164th District Court for Harris County, Texas, Austin alleges that the outages at the South Texas Project since February 1993 are due to HL&P's failure to perform obligations it owed to Austin under the Participation Agreement among the four co-owners of the South Texas Project (Participation Agreement). Austin asserts that such failures have caused Austin damages of at least $125 million, which are continuing, due to the incurrence of increased operating and maintenance costs, the cost of replacement power and lost profits on wholesale transactions that did not occur. Austin states that it will file a \"more detailed\" petition at a later date. For a discussion of the 1993 outage, see Note 9(f).\nAs it did in the litigation filed against HL&P in 1983, Austin asserts that HL&P breached obligations HL&P owed under the Participation Agreement to Austin, and Austin seeks a declaration that HL&P had as duty to exercise reasonable care in the operation and maintenance of the South Texas Project. In that earlier litigation, however, the courts concluded that the Participation Agreement did not impose on HL&P a duty to exercise reasonable skill and care as Project Manager.\nAustin also asserts in its new suit that certain terms of a settlement reached in 1992 among HL&P and Central and South West Corporation (CSW) and its subsidiary, Central Power and Light Company (CPL), are invalid and void. The Participation Agreement permits arbitration of certain disputes among the owners, and the challenged settlement terms provide that in any future arbitration, HL&P and CPL would each appoint an arbitrator acceptable to the other. Austin asserts that, as a result of this agreement, the arbitration provisions of the Participation Agreement are void and Austin should not be required to participate in or be bound by arbitration proceedings; alternatively, Austin asserts that HL&P's rights with respect to CPL's appointment of an arbitrator should be shared with all the owners or canceled, and Austin seeks injunctive relief against arbitration of its dispute with HL&P. For a further discussion of the settlement among HL&P, CSW and CPL, see Note 9(c) below.\nHL&P and the Company do not believe there is merit to Austin's claims, and they intend to defend vigorously against them. However, there can be no assurance as to the ultimate outcome of this matter.\n(c) ARBITRATION WITH CO-OWNERS. During the course of the litigation filed by Austin in 1983, the City of San Antonio (San Antonio) and CPL, the other two co-owners in the South Texas Project, asserted claims for unspecified damages against HL&P as project manager of the South Texas Project, alleging HL&P breached its duties and obligations. San Antonio and CPL requested arbitration of their claims under the Participation Agreement. This matter was severed from the Austin litigation and is pending before the 101st District Court in Dallas County, Texas.\nThe 101st District Court ruled that the demand for arbitration is valid and enforceable under the Participation Agreement, and that ruling has been upheld by appellate courts. Arbitrators were appointed by HL&P and each of the other co-owners in connection with the District Court's ruling. The Participation Agreement provides that the four appointed arbitrators will select a fifth arbitrator, but that action has not yet occurred.\nIn 1992, the Company and HL&P entered into a settlement with CPL and CSW with respect to various matters including the arbitration and related legal proceedings. Pursuant to the settlement, CPL withdrew its demand for arbitration under the Participation Agreement, and the Company, HL&P, CSW and CPL dismissed litigation associated with the dispute. The settlement also resolved other disputes between the parties concerning various transmission agreements and related billing disputes. In addition, the parties also agreed to support, and to seek consent of the other owners of the South Texas Project to, certain amendments to the Participation Agreement, including changes in the management structure of the South Texas Project through which HL&P would be replaced as project manager by an independent entity.\nAlthough settlement with CPL does not directly affect San Antonio's pending demand for arbitration, HL&P and CPL have reached certain other understandings which contemplate that: (i) CPL's arbitrator previously appointed for that proceeding would be replaced by CPL; (ii) arbitrators\napproved by CPL and HL&P for any future arbitrations will be mutually acceptable to HL&P and CPL; and (iii) HL&P and CPL will resolve any future disputes between them concerning the South Texas Project without resorting to the arbitration provision of the Participation Agreement. The settlement with CPL did not have a material adverse effect on the Company's or HL&P's financial position and results of operations.\nIn February 1994, San Antonio indicated a desire to move forward with its demand for arbitration and suggested that San Antonio considers all allegations of mismanagement against HL&P to be appropriate subjects for arbitration in that proceeding, not just allegations related to the planning and construction of the South Texas Project. It is unclear what additional allegations San Antonio may make, but it is possible that San Antonio will assert that HL&P has liability for all or some portion of the additional costs incurred by San Antonio due to the 1993 outage of the South Texas Project. For a discussion of that outage see Note 9(f).\nHL&P and the Company continue to regard San Antonio's claims to be without merit. From time to time, HL&P and other parties to these proceedings have held discussions with a view toward settling their differences on these matters.\nWhile HL&P and the Company cannot give definite assurance regarding the ultimate resolution of the San Antonio litigation and arbitration, they presently do not believe such resolutions will have a material adverse impact on HL&P's or the Company's financial position and results of operations.\n(d) NUCLEAR INSURANCE. HL&P and the other owners of the South Texas Project maintain nuclear property and nuclear liability insurance coverages as required by law and periodically review available limits and coverage for additional protection. The owners of the South Texas Project currently maintain $500 million in primary property damage insurance from American Nuclear Insurers (ANI). Effective November 15, 1993, the maximum amounts of excess property insurance available through the insurance industry increased from $2.125 billion to $2.2 billion. This $2.2 billion of excess property insurance coverage includes $800 million of excess insurance from ANI and $1.4 billion of excess property insurance coverage through participation in the Nuclear Electric Insurance Limited (NEIL) II program. The owners of the South Texas Project have approved the purchase of the additional available excess property insurance coverage. Additionally, effective January 1, 1994, ANI will be increasing their excess property insurance limits to $850 million, and the owners of the South Texas Project have also approved the purchase of the additional limits at the March 1, 1994 renewal for ANI excess property insurance. Under NEIL II, HL&P and the other owners of the South Texas Project are subject to a maximum assessment, in the aggregate, of approximately $15.9 million in any one policy year. The application of the proceeds of such property insurance is subject to the priorities established by the United States Nuclear Regulatory Commission (NRC) regulations relating to the safety of licensed reactors and decontamination operations.\nPursuant to the Price Anderson Act, the maximum liability to the public for owners of nuclear power plants, such as the South Texas Project, was increased from $7.9 billion to $9.3 billion effective February 18, 1994. Owners are required under the Act to insure their liability for nuclear incidents and protective evacuations by maintaining the maximum amount of financial protection available from private sources and by maintaining secondary financial protection through an industry retrospective rating plan. Effective August 20, 1993, the assessment of deferred premiums provided by the plan for each nuclear incident has increased from $63 million to up to $75.5 million per reactor subject to indexing for inflation, a possible 5%\nsurcharge (but no more than $10 million per reactor per incident in any one year) and a 3% state premium tax. HL&P and the other owners of the South Texas Project currently maintain the required nuclear liability insurance and participate in the industry retrospective rating plan.\nThere can be no assurance that all potential losses or liabilities will be insurable, or that the amount of insurance will be sufficient to cover them. Any substantial losses not covered by insurance would have a material effect on HL&P's and the Company's financial condition.\n(e) NUCLEAR DECOMMISSIONING. HL&P and the other co-owners of the South Texas Project are required by the NRC to meet minimum decommissioning funding requirements to pay the costs of decommissioning the South Texas Project. Pursuant to the terms of the order of the Utility Commission in Docket No. 9850, HL&P is currently funding decommissioning costs for the South Texas Project with an independent trustee at an annual amount of $6 million.\nAs of December 31, 1993, the trustee held approximately $18.7 million for decommissioning, for which the asset and liability are reflected on the Company's Consolidated and HL&P's Balance Sheets in deferred debits and deferred credits, respectively. HL&P's funding level is estimated to provide approximately $146 million in 1989 dollars, an amount which currently exceeds the NRC minimum. However, the South Texas Project co-owners have engaged an outside consultant to review the estimated decommissioning costs of the South Texas Project which review should be completed by the end of 1994. While changes to present funding levels, if any, cannot be estimated at this time, a substantial increase in funding may be necessary. No assurance can be given that the amounts held in trust will be adequate to cover the decommissioning costs.\n(f) NRC INSPECTIONS AND OPERATIONS. Both generating units at the South Texas Project were out of service from February 1993 to February 1994, when Unit No. 1 was authorized by the NRC to return to service. Currently, Unit No. 1 is out of service for repairs to a small steam generator leak encountered following the unit's shutdown to repair a feedwater control valve. Those repairs are scheduled for completion by mid-March 1994, and no formal NRC approval is required to resume operation of Unit No. 1. Unit No. 2 is currently scheduled to resume operation after completion of regulatory reviews, in the spring of 1994. HL&P removed the units from service in February 1993 when a problem was encountered with certain pumps. At that time HL&P concluded that the units should not resume operation until HL&P had determined the root cause of the failure and had briefed the NRC and corrective action had been taken. The NRC formalized that commitment in a Confirmatory Action Letter, which confirmed that HL&P would not resume operations until it had briefed the NRC on its findings and actions. Subsequently, that Confirmatory Action Letter was supplemented by the NRC to require HL&P, prior to resuming operations, to address additional matters which were identified during the course of analyzing the issues associated with the original pump failure and during various subsequent NRC inspections and reviews.\nIn June 1993, the NRC announced that the South Texas Project had been placed on the NRC's \"watch list\" of plants with \"weaknesses that warrant increased NRC attention.\" Plants in this category are authorized to operate but are subject to close monitoring by the NRC. The NRC reviews the status of plants on this list semi-annually, but HL&P does not anticipate that the South Texas Project would be removed from that list until there has been a period of operation for both units, and the NRC concludes that the concerns which led the NRC to place the South Texas Project on that list have been satisfactorily addressed.\nThe NRC's decision to place the South Texas Project on its \"watch list\" followed the June 1993 issuance of a report by its Diagnostic Evaluation Team (DET) which conducted a review of the South Texas Project in the spring of 1993 and identified a number of areas requiring improvement at the South Texas Project. Conducted infrequently, NRC diagnostic evaluations do not evaluate compliance with NRC regulations but are broad-based evaluations of overall plant operations and are intended to review the strengths and weaknesses of the licensee's performance and to identify the root cause of performance problems.\nThe DET report found, among other things, weaknesses in maintenance and testing, deficiencies in training and in the material condition of some equipment, strained staffing levels in operations and several weaknesses in engineering support. The report cited the need to reduce backlogs of engineering and maintenance work and to simplify work processes which, the DET found, placed excessive burdens on operating and other plant personnel. The report also identified the need to strengthen management communications, oversight and teamwork as well as the capability to identify and correct the root causes of problems. The DET also expressed concern with regard to the adequacy of resources committed to resolving issues at the South Texas Project but noted that many issues had already been identified and were being addressed by HL&P.\nIn response to the DET report, HL&P presented its plan to address the issues raised in that report and began its action program to address those concerns. While those programs were being implemented, HL&P also initiated additional activities and modifications that were not previously scheduled during 1993 but which are designed to eliminate the need for some future outages and to enhance operations at the South Texas Project. The NRC conducted additional inspections and reviews of HL&P's plans and agreed in February 1994 that HL&P's progress in addressing the NRC's concerns had satisfied the issues raised in the Confirmatory Action Letter with respect to Unit No. 1. The NRC concurred in HL&P's determination that Unit No. 1 could resume operation. Work is now underway to address the NRC's concerns with respect to Unit No. 2, which HL&P anticipates will not require as extensive an effort as was required by the NRC for Unit No. 1. However, difficulties encountered in completing actions required on Unit No. 2 and any additional issues which may be raised in the conduct of those activities or in the operation of Unit No. 1 could adversely affect the anticipated schedule for resuming operation of Unit No. 2. During the outage, HL&P has not had, and does not anticipate having, difficulty in meeting its energy needs.\nDuring the outage, both fuel and non-fuel expenditures have been higher for HL&P than levels originally projected for the year. HL&P's non-fuel expenditures for the South Texas Project during 1993 were approximately $115 million greater than originally budgeted levels (of which HL&P's share was $35 million) for work undertaken in connection with the DET and for other initiatives taken during the year. It is expected that, subsequent to 1993, operation and maintenance costs will continue to be higher than previous levels in order to support additional initiatives developed in 1993. Fuel costs also were necessarily higher due to the use of higher cost alternative fuels. However, these increased expenditures are expected to be offset to some extent by savings from future outages that can now be avoided as a result of activities accelerated into 1993 and from overall improvement in operations resulting from implementing the programs developed during the outage. For a discussion of regulatory treatment related to the outage, see Notes 10(f) and 10(g).\nDuring 1993, the NRC imposed a total of $500,000 in civil penalties (of which HL&P's share was $154,000) in connection with violations of NRC requirements.\nIn March 1993, a Houston newspaper reported that the NRC had referred to the Department of Justice allegations that the employment of three former employees and an employee of a contractor to HL&P had been terminated or disrupted in retaliation for their having made safety-related complaints to the NRC. Such retaliation, if proved, would be contrary to requirements of the Atomic Energy Act and regulations promulgated by the NRC. The NRC has confirmed to HL&P that these matters have been referred to the Department of Justice for consideration of further action and has notified HL&P that the NRC is considering enforcement action against HL&P and one or more HL&P employees in connection with one of those cases. HL&P has been advised by counsel that most referrals by the NRC to the Department of Justice do not result in prosecutions. The Company and HL&P strongly believe that the facts underlying these events would not support action by the Department of Justice against HL&P or any of its personnel; accordingly, HL&P intends to defend vigorously against such charges. HL&P also intends to defend vigorously against civil proceedings filed in the state court in Matagorda County, Texas, by the complaining employees and against administrative proceedings before the Department of Labor and the NRC, which, independently of the Department of Justice, could impose administrative sanctions if they find violations of the Atomic Energy Act or the NRC regulations. These administrative sanctions may include civil penalties in the case of the NRC and, in the case of the Department of Labor, ordering reinstatement and back pay and\/or imposing civil penalties. Although the Company and HL&P do not believe these allegations have merit or will have a material adverse effect on the Company or HL&P, neither the Company nor HL&P can predict at this time their outcome.\n(10) UTILITY COMMISSION PROCEEDINGS\nPursuant to a series of applications filed by HL&P in recent years, the Utility Commission has granted HL&P rate increases to reflect in electric rates HL&P's substantial investment in new plant construction, including the South Texas Project. Although Utility Commission action on those applications has been completed, judicial review of a number of the Utility Commission orders is pending. In Texas, Utility Commission orders may be appealed to a District Court in Travis County, and from that Court's decision an appeal may be taken to the Court of Appeals for the 3rd District at Austin (Austin Court of Appeals). Discretionary review by the Supreme Court of Texas may be sought from decisions of the Austin Court of Appeals. The pending appeals from the Utility Commission orders are in various stages. In the event the courts ultimately reverse actions of the Utility Commission in any of these proceedings, such matters would be remanded to the Utility Commission for action in light of the courts' orders. Because of the number of variables which can affect the ultimate resolution of such matters on remand, the Company and HL&P generally are not in a position at this time to predict the outcome of the matters on appeal or the ultimate effect that adverse action by the courts could have on the Company and HL&P. On remand, the Utility Commission's action could range from granting rate relief substantially equal to the rates previously approved, to a reduction in the revenues to which HL&P was entitled during the time the applicable rates were in effect, which could require a refund to customers of amounts collected pursuant to such rates.\nJudicial review has been concluded or currently is pending on the final orders of the Utility Commission described below.\n(a) DOCKET NOS. 6765, 6766 AND 5779. In February 1993, the Austin Court of Appeals granted a motion by the Office of Public Utility Counsel (OPC) to voluntarily dismiss its appeal of the Utility Commission's order in HL&P's 1984 rate case (Docket No. 5779). In December 1993, the Supreme Court of Texas granted a similar motion by OPC to dismiss its appeal of the Utility\nCommission's order in HL&P's 1986 rate case (Docket Nos. 6765 and 6766). As a result, appellate review of the Utility Commission's orders in those dockets has been concluded, and the orders have been affirmed.\n(b) DOCKET NO. 8425. In October 1992, a District Court in Travis County, Texas affirmed the Utility Commission's order in HL&P's 1988 rate case (Docket No. 8425). An appeal to the Austin Court of Appeals is pending. In its final order in that docket, the Utility Commission granted HL&P a $227 million increase in base revenues, allowed a 12.92% return on common equity, authorized a qualified phase-in plan for Unit No. 1 of the South Texas Project (including approximately 72% of HL&P's investment in Unit No. 1 of the South Texas Project in rate base) and authorized HL&P to use deferred accounting for Unit No. 2 of the South Texas Project. Rates substantially corresponding to the increase granted were implemented by HL&P in June 1989 and remained in effect until May 1991.\nIn the appeal of the Utility Commission's order, certain parties have challenged the Utility Commission's decision regarding deferred accounting, treatment of federal income tax expense and certain other matters. A recent decision of the Austin Court of Appeals, in an appeal involving another utility (and to which HL&P was not a party), adopted some of the arguments being advanced by parties challenging the Utility Commission's order in Docket No. 8425. In that case, Public Utility Commission of Texas vs. GTE-SW, the Austin Court of Appeals ruled that when a utility pays federal income taxes as part of a consolidated group, the utility's ratepayers are entitled to a fair share of the tax savings actually realized, which can include savings resulting from unregulated activities. The Texas Supreme Court has agreed to hear an appeal of that decision, but on points not involving the federal income tax issues, though tax issues could be decided in such opinion.\nIn its final order in Docket No. 8425, the Utility Commission did not reduce HL&P's tax expense by any of the tax savings resulting from the Company's filing of a consolidated tax return. Although the GTE decision was not legally dispositive of the tax issues presented in the appeal of Docket No. 8425, it is possible that the Austin Court of Appeals could utilize the reasoning in GTE in addressing similar issues in the appeal of Docket No. 8425. However, in February 1993 the Austin Court of Appeals, considering an appeal involving another telephone utility, upheld Utility Commission findings that the tax expense for the utility included the utility's fair share of the tax savings resulting from a consolidated tax return, even though the utility's fair share of the tax savings was determined to be zero. HL&P believes that the Utility Commission findings in Docket No. 8425 and in Docket No. 9850 (see Note 10(c)) should be upheld on the same principle (i.e., that the Utility Commission determined that the fair share of tax savings to be allocated to ratepayers is determined to be zero). However, no assurance can be made as to the ultimate outcome of this matter.\nThe Utility Commission's order in Docket No. 8425 may be affected also by the ultimate resolution of appeals concerning the Utility Commission's treatment of deferred accounting. For a discussion of appeals of the Utility Commission's orders on deferred accounting, see Notes 10(e) and 11.\n(c) DOCKET NO. 9850. In August 1992, a district court in Travis County affirmed the Utility Commission's final order in HL&P's 1991 rate case (Docket No. 9850). That decision was appealed by certain parties to the Austin Court of Appeals, raising issues concerning the Utility Commission's approval of a non-unanimous settlement in that docket, the Utility Commission's calculation of federal income tax expense and the allowance of deferred accounting reflected in the settlement. In August 1993, the Austin Court of Appeals\naffirmed on procedural grounds the ruling by the Travis County District Court, and applications for writ of error were filed with the Supreme Court of Texas by one of the other parties to the proceeding. The Supreme Court has not yet ruled on these applications. In Docket No. 9850, the Utility Commission approved a settlement agreement reached with most parties. That settlement agreement provided for a $313 million increase in HL&P's base rates, termination of deferrals granted with respect to Unit No. 2 of the South Texas Project and of the qualified phase-in plan deferrals granted with respect to Unit No. 1 of the South Texas Project, and recovery of deferred plant costs. The settlement authorized a 12.55% return on common equity for HL&P, and HL&P agreed not to request additional increases in base rates that would be implemented prior to May 1, 1993. Rates contemplated by that settlement agreement were implemented in May 1991 and remain in effect.\nThe Utility Commission's order in Docket No. 9850 found that HL&P would have been entitled to more rate relief than the $313 million agreed to in the settlement, but certain recent actions of the Austin Court of Appeals could, if ultimately upheld and applied to the appeal of Docket No. 9850, require a remand of that settlement to the Utility Commission. HL&P believes that the amount which the Utility Commission found HL&P was entitled to would exceed any disallowance that would have been required under the Austin Court of Appeals' ruling regarding deferred accounting (see Notes 10(e) and 11) or any adverse effect on the calculation of tax expense if the court's ruling in the GTE decision were applied to that settlement (see Note 10(b) above). However, the amount of rate relief to which the Utility Commission found HL&P to be entitled in excess of the $313 million agreed to in the settlement may not be sufficient if the reasoning in both the GTE decision and the ruling on deferred accounting were to be applied to the settlement agreement in Docket No. 9850. Although HL&P believes that it should be entitled to demonstrate entitlement to rate relief equal to that agreed to in the stipulation in Docket No. 9850, HL&P cannot rule out the possibility that a remand and reopening of that settlement would be required if decisions unfavorable to HL&P are rendered on both the deferred accounting treatment and the calculation of tax expense for ratemaking purposes.\n(d) DOCKET NO. 6668. In June 1990, the Utility Commission issued the final order in Docket No. 6668, the Utility Commission's inquiry into the prudence of the planning, management and construction of the South Texas Project. The Utility Commission's findings and order in Docket No. 6668 were incorporated in Docket No. 8425, HL&P's 1988 general rate case. Pursuant to the findings in Docket No. 6668, the Utility Commission found imprudent $375.5 million out of HL&P's $2.8 billion investment in the two units of the South Texas Project.\nThe Utility Commission's findings did not reflect $207 million in benefits received in a settlement of litigation with the former architect-engineer of the South Texas Project or the effects of federal income taxes, investment tax credits or certain deferrals. In addition, accounting standards require that the equity portion of AFUDC accrued for regulatory purposes under deferred accounting orders be utilized to determine the cost disallowance for financial reporting purposes. After taking all of these items into account, HL&P recorded an after-tax charge of $15 million in 1990 and continued to reduce such loss with the equity portion of deferrals in 1991 related to Unit No. 2 of the South Texas Project. The findings in Docket No. 6668 represent the Utility Commission's final determination regarding the prudence of expenditures associated with the planning and construction of the South Texas Project. Unless the order is modified or reversed on appeal, HL&P will be precluded from recovering in rate proceedings the amount found imprudent by the Utility Commission.\nAppeals by HL&P and other parties of the Utility Commission's order in Docket No. 6668 were dismissed by a District Court in Travis County in May 1991. However, in December 1992 the Austin Court of Appeals reversed the District Court's dismissals on procedural grounds. HL&P and other parties have filed applications for writ of error with the Supreme Court of Texas concerning the order by the Austin Court of Appeals, but unless the order is modified on further review, HL&P anticipates that the appeals of the parties will be reinstated and that the merits of the issues raised in those appeals of Docket No. 6668 will be considered by the District Court, with the possibility of subsequent judicial review once the District Court has acted on those appeals. In addition, separate appeals are pending from Utility Commission orders in Dockets Nos. 8425 and 9850, in which the findings of the order in Docket No. 6668 are reflected in rates. See Notes 10(b) and 10(c).\n(e) DOCKET NOS. 8230 AND 9010. Deferred accounting treatment for Unit No. 1 of the South Texas Project was authorized by the Utility Commission in Docket No. 8230 and was extended in Docket No. 9010. Similar deferred accounting treatment with respect to Unit No. 2 of the South Texas Project was authorized in Docket No. 8425. For a discussion of the deferred accounting treatment granted, see Note 11. In September 1992, the Austin Court of Appeals, in considering the appeal of the Utility Commission's final order in Docket Nos. 8230 and 9010, upheld the Utility Commission's action in granting deferred accounting treatment for operation and maintenance expenses, but rejected such treatment for the carrying costs associated with the investment in Unit No. 1 of the South Texas Project. That ruling followed the Austin Court of Appeals decision rendered in August 1992, on a motion for rehearing, involving another utility which had been granted similar deferred accounting treatment for another nuclear plant. In its August decision, the court ruled that Texas law did not permit the Utility Commission to allow the utility to place the carrying costs associated with the investment in the utility's rate base, though the court observed that the Utility Commission could allow amortization of such costs.\nThe Supreme Court of Texas has granted applications for writ of error with respect to the Austin Court of Appeals decision regarding Docket Nos. 8230 and 9010. The Supreme Court of Texas has also granted applications for writ of error on three other decisions by the Austin Court of Appeals regarding deferred accounting treatment granted to other utilities by the Utility Commission. The Supreme Court heard oral arguments on these appeals on September 13, 1993. The court has not yet ruled.\n(f) DOCKET NO. 12065. HL&P is not currently seeking authority to change its base rates for electric service, but the Utility Commission has authority to initiate a rate proceeding pursuant to Section 42 of the Public Utility Regulatory Policy Act (PURA) to determine whether existing rates are unjust or unreasonable. In 1993, the Utility Commission referred to an administrative law judge (ALJ) the complaint of a former employee of HL&P seeking to initiate such a proceeding.\nOn February 23, 1994, the ALJ concluded that a Section 42 proceeding should be conducted and that HL&P should file full information, testimony and schedules justifying its rates. The ALJ acknowledged that the decision was a close one, and is subject to review by the Utility Commission. However, he concluded that information concerning HL&P's financial results as of December 1992 indicated that HL&P's adjusted revenues could be approximately $62 million (or 2.33% of its adjusted base revenues) more than might be authorized in a current rate proceeding. The ALJ's conclusion was based on various accounting considerations, including use of a different treatment of federal income tax expense than the method utilized in HL&P's last rate case. The ALJ also found that there could be a link between the 1993 outage at the\nSouth Texas Project, the NRC's actions with respect to the South Texas Project and possible mismanagement by HL&P, which in turn could result in a reduction of HL&P's authorized rate of return as a penalty for imprudent management.\nHL&P and the Company believe that the examiner's analysis is incorrect, that the South Texas Project has not been imprudently managed, and that ordering a Section 42 proceeding at this time is unwarranted and unnecessarily expensive and burdensome. HL&P has appealed the ALJ's decision to the Utility Commission.\nIf HL&P ultimately is required to respond to a Section 42 inquiry, it will assert that it remains entitled to rates at least at the levels currently authorized. However, there can be no assurance as to the outcome of a Section 42 proceeding if it is ultimately authorized, and HL&P's rates could be reduced following a hearing. HL&P believes that any reduction in base rates as a result of a Section 42 inquiry would take effect prospectively.\nHL&P is also a defendant in a lawsuit filed in a Fort Bend County, Texas, district court by the same former HL&P employee who originally initiated the Utility Commission complaint concerning HL&P's rates. In that suit, Pace and Scott v. HL&P, the former employee contends that HL&P is currently charging illegal rates since the rates authorized by the Utility Commission do not allocate to ratepayers tax benefits accruing to the Company and to HL&P by virtue of the fact that HL&P's federal income taxes are paid as part of a consolidated group. HL&P is seeking dismissal of that suit because in Texas exclusive jurisdiction to set electric utility rates is vested in municipalities and in the Utility Commission, and the courts have no jurisdiction to set such rates or to set aside authorized rates except through judicial appeals of Utility Commission orders in the manner prescribed in applicable law. Although substantial damages have been claimed by the plaintiffs in that litigation, HL&P and the Company consider this litigation to be wholly without merit, and do not presently believe that it will have a material adverse effect on the Company's or HL&P's results of operations, though no assurances can be given as to its ultimate outcome at this time.\n(g) FUEL RECONCILIATION. HL&P recovers fuel costs incurred in electric generation through a fixed fuel factor that is set by the Utility Commission. The difference between fuel revenues billed pursuant to such factor and fuel expense incurred is recorded as an addition to or a reduction of revenues, with a corresponding entry to under- or over-recovered fuel, as appropriate. Amounts collected pursuant to the fixed fuel factor must be reconciled periodically by the Utility Commission against actual, reasonable costs as determined by the Utility Commission. Any fuel costs which the Utility Commission determines are unreasonable in a fuel reconciliation proceeding would not be recoverable from customers, and a charge against earnings would result. Under Utility Commission rules, HL&P is required to file an application to reconcile those costs in 1994. Such a filing would also be required in conjunction with any rate proceeding that may be filed, such as the Section 42 proceeding described in Note 10(f).\nUnless filed earlier in conjunction with a rate proceeding, HL&P currently anticipates filing its fuel reconciliation application in the fourth quarter of 1994 in accordance with a schedule proposed by the Utility Commission staff. If that schedule is approved by the Utility Commission, HL&P anticipates that fuel costs through some time in 1994 will be submitted for reconciliation. No hearing would be anticipated in that reconciliation proceeding before 1995.\nThe schedule for a fuel reconciliation proceeding could be affected by the institution of a prudence inquiry concerning the outage at the South Texas Project. The Utility Commission staff has indicated a desire to conduct an inquiry into the prudence of HL&P's management prior to and during the outage, but it is currently unknown what action the Utility Commission will take on that request or what the nature and scope of any such proceeding\nwould be. Such an inquiry could also be conducted in connection with a rate proceeding under Section 42 of PURA if one is instituted by the Utility Commission.\nThrough the end of 1993, HL&P had recovered through the fuel factor approximately $115 million (including interest) less than the amounts expended for fuel, a significant portion of which under recovery occurred in 1993 during the outage at the South Texas Project. In any review of costs incurred during the period of the 1993 outage at the South Texas Project, it is anticipated that other parties will contend that a portion of fuel costs incurred should be attributed to imprudence on the part of HL&P and thus should be disallowed as unreasonable, with recovery from rate payers denied. Those amounts could be substantial. HL&P intends to defend vigorously against any allegation that its actions have been imprudent or that any portion of its costs incurred should be judged to be unreasonable, but no prediction can be made as to the ultimate outcome of such a proceeding.\n(11) DEFERRED PLANT COSTS\nDeferred plant costs were authorized for the South Texas Project by the Utility Commission in two contexts. In the first context, or \"deferred accounting,\" the Utility Commission orders permitted HL&P, for regulatory purposes, to continue to accrue carrying costs in the form of AFUDC (at a 10% rate) on its investment in the two units of the South Texas Project until costs of such units were reflected in rates (which was July 1990 for approximately 72% of Unit No. 1, and May 1991 for the remainder of Unit No. 1 and 100% of Unit No. 2) and to defer and capitalize depreciation, operation and maintenance, insurance and tax expenses associated with such units during the deferral period. Accounting standards do not permit the accrual of the equity portion of AFUDC for financial reporting purposes under these circumstances. However, in accordance with accounting standards, such amounts were utilized to determine the amount of plant cost disallowance for financial reporting purposes.\nThe deferred expenses and the debt portion of the carrying costs associated with the South Texas Project are included on the Company's Statements of Consolidated Income in deferred expenses and deferred carrying costs, respectively.\nBeginning with the June 1990 order in Docket No. 8425, deferrals were permitted in a second context, a \"qualified phase-in plan\" for Unit No. 1 of the South Texas Project. Accounting standards require allowable costs deferred for future recovery under a qualified phase-in plan to be capitalized as a deferred charge if certain criteria are met. The qualified phase-in plan as approved by the Utility Commission meets these criteria.\nDuring the period June 1990 through May 15, 1991, HL&P deferred depreciation and property taxes related to the 28% of its investment in Unit No. 1 of the South Texas Project not reflected in the Docket No. 8425 rates and recorded a deferred return on that investment as part of the qualified phase-in plan. Deferred return represents the financing costs (equity and debt) associated with the qualified phase-in plan. The deferred expenses and deferred return related to the qualified phase-in plan are included on the Company's Statements of Consolidated Income and HL&P's Statements of Income in deferred expenses and deferred return under phase-in plan, respectively. Under the phase-in plan, these accumulated deferrals will be recoverable within ten years of the June 1990 order.\nOn May 16, 1991, HL&P implemented under bond, in Docket No. 9850, a $313 million base rate increase consistent with the terms of the settlement. Accordingly, HL&P ceased all cost deferrals related to the South Texas Project and began the recovery of such amounts. These deferrals are being amortized on a straight-line basis as allowed by the final order in Docket No. 9850. The amortization of these deferrals totaled $25.8 million for both 1993 and 1992 and $16.1 million in 1991, and is included on the Company's Statements of Consolidated Income and HL&P's Statements of Income in depreciation and amortization expense. See also Notes 10(b), 10(c) and 10(e).\nThe following table shows the original balance of the deferrals and the unamortized balance at December 31, 1993.\n__________ (a) Amortized over the estimated depreciable life of the South Texas Project.\n(b) Amortized over nine years beginning in May 1991.\nAs of December 31, 1993, HL&P has recorded deferred income taxes of $200.9 million with respect to deferred accounting and $14.5 million with respect to the deferrals associated with the qualified phase-in plan.\n(12) MALAKOFF ELECTRIC GENERATING STATION\nThe scheduled in-service dates for the Malakoff Electric Generating Station (Malakoff) units were postponed during the 1980's as expectations of continued strong load growth were tempered. These units have been indefinitely deferred due to the availability of other cost effective resource options. In 1987, all developmental work was stopped and AFUDC accruals ceased.\nDue to the indefinite postponement of the in-service date for Malakoff, the engineering design work is no longer considered viable. The costs associated with this engineering design work are currently included in rate base and are earning a return per the Utility Commission's final order in Docket No. 8425. Pursuant to HL&P's determination that such costs will have no future value, $84.1 million was reclassified from plant held for future use to recoverable project costs as of December 31, 1992. An additional $7.0 million was reclassified to recoverable project costs in 1993. Amortization of these amounts began in 1993. Amortization amounts will correspond to the amounts being earned as a result of the inclusion of such costs in rate base. The Utility Commission's action in allowing treatment of those costs as plant held for future use has been challenged in the pending appeal of the Utility\nCommission's final order in Docket No. 8425. Also, recovery of such Malakoff costs may be addressed if rate proceedings are initiated such as that proposed under Section 42 of PURA. See Notes 10(b) and 10(f) for a discussion of these respective proceedings.\nIn June 1990, HL&P purchased from its then fuel supply affiliate, Utility Fuels, all of Utility Fuels' interest in the lignite reserves and lignite handling facilities for Malakoff. The purchase price was $138.2 million, which represented the net book value of Utility Fuels' investment in such reserves and facilities. As part of the June 1990 rate order (Docket No. 8425), the Utility Commission ordered that issues related to the prudence of the amounts invested in the lignite reserves be considered in HL&P's next general rate case which was filed in November 1990 (Docket No. 9850). However, under the October 1991 Utility Commission order in Docket No. 9850, this determination was postponed to a subsequent docket.\nHL&P's remaining investment in Malakoff through December 31, 1993 of $167 million, consisting primarily of lignite reserves and land, is included on the Company's Consolidated and HL&P's Balance Sheets in plant held for future use. For the 1994-1996 period, HL&P anticipates $14 million of expenditures relating to lignite reserves, primarily to keep lignite leases and other related agreements in effect.\n(13) RECOVERABLE PROJECT COSTS\nThe Utility Commission has allowed recovery of certain costs over a period of time by amortizing those costs for rate making purposes. However, recoverable project costs have not been included in rate base and, as a result, no return on investment is being earned during the recovery period. Malakoff is the only remaining project with an unrecovered amount of $118 million at December 31, 1993, with remaining recovery periods of 72 months ($78 million) and 78 months ($40 million).\n(14) INCOME TAXES\nThe Company records income taxes under SFAS No. 109, which among other things, (i) requires the liability method be used in computing deferred taxes on all temporary differences between book and tax bases of assets other than goodwill; (ii) requires that deferred tax liabilities and assets be adjusted for an enacted change in tax laws or rates; and (iii) prohibits net-of-tax accounting and reporting. SFAS No. 109 requires that regulated enterprises recognize such adjustments as regulatory assets or liabilities if it is probable that such amounts will be recovered from or returned to customers in future rates. KBLCOM has significant temporary differences related to its 1986 and 1989 acquisitions of cable television systems, the tax effect of which were recognized when SFAS No. 109 was adopted.\nDuring 1993, federal tax legislation was enacted that changes the income tax consequences for the Company and HL&P. The principal provision of the new law which affects the Company and HL&P is the change in the corporate income tax rate from 34% to 35%. A net regulatory asset and the related deferred federal income tax liability of $71.3 million was recorded by HL&P in 1993. The effect of the new law, which decreased the Company's net income by $14.3 million was recognized as a component of income tax expense in 1993. The effect on the Company's deferred taxes for the change in the new law was $10.9 million in 1993.\nThe Company's current and deferred components of income tax expense are as follows:\nThe Company's effective income tax rates are lower than statutory corporate rates for each year as follows:\nFollowing are the Company's tax effects of temporary differences resulting in deferred tax assets and liabilities:\nAt December 31, 1993, pursuant to the acquisition of Cablesystems, KBLCOM has unutilized Separate Return Limitation Year (SRLY) net operating loss tax benefits of approximately $23.1 million and unutilized SRLY investment tax credits of approximately $15.5 million which expire in the years 1995 through 2003, and 1994 through 2003, respectively. In addition, KBLCOM has unutilized restricted state loss tax benefits of $17.2 million, which expire in the years 1994 through 2008, and unutilized minimum tax credits of $1.8 million. The Company does not anticipate full utilization of these losses and tax credits and, therefore, has established a valuation allowance. Utilization of preacquisition carryforwards in the future would not affect income of the Company and KBLCOM but would be applied to reduce the carrying value of cable television franchises and intangible assets.\n(15) SUPPLEMENTARY EXPENSE INFORMATION\nTaxes, other than income taxes, were charged to expense as follows:\n(16) BUSINESS SEGMENT INFORMATION\nThe Company operates principally in two business segments: electric utility and cable television. Financial information by business segment is summarized as follows:\n(a) Amounts do not include amounts attributable to Paragon, which is accounted for under the equity method.\n(b) 1992 amounts include the effect of a charge of $86.4 million which relates to HL&P's restructuring of operations as a result of the\nimplementation of the Success Through Excellence in Performance (STEP) program (see Note 18).\n(17) INVESTMENTS\n(a) Cable Television Partnership. A KBLCOM subsidiary owns a 50% interest in Paragon, a Colorado partnership that owns cable television systems. The remaining interest in the partnership is owned by American Television and Communications Corporation (ATC), a subsidiary of Time Warner Inc. The partnership agreement provides that at any time after December 31, 1993 either partner may elect to divide the assets of the partnership under certain pre-defined procedures set forth in the agreement.\nParagon is party to a $275 million revolving credit and letter of credit facility agreement with a group of banks. Paragon also has outstanding $100 million principal amount of 9.56% senior notes due 1995. In each case, borrowings are non-recourse to the Company and to ATC.\n(b) Foreign Electric Utility. Houston Argentina owns a 32.5% interest in Compania de Inversiones en Electricidad S. A. (COINELEC), an Argentine holding company which acquired, in December 1992, a 51% interest in Empresa Distribuidora La Plata S. A. (EDELAP), an electric utility company operating in La Plata, Argentina and surrounding regions. Houston Argentina's share of the purchase price was approximately $37.4 million, of which $1.6 million was paid in December 1992 with the remainder paid in March 1993. Subsequent to the acquisition, the generating assets of EDELAP were transferred to Central Dique S. A., an Argentine Corporation, 51% of the stock of which is owned by COINELEC.\n(18) RESTRUCTURING\nHL&P recorded a one-time, pre-tax charge of $86.4 million in the first quarter of 1992 to reflect the implementation of the STEP program, a restructuring of its operations. This charge includes $42 million related to the acceptance of an early retirement plan by 468 employees of HL&P, $31 million for severance benefits related to the elimination of an additional 1,100 positions and $13 million in other costs associated with the restructuring.\n(19) CHANGE IN ACCOUNTING METHOD FOR REVENUES\nDuring the fourth quarter of 1992, HL&P adopted a change in accounting method for revenue from a cycle billing to a full accrual method, effective January 1, 1992. Unbilled revenues represent the estimated amount customers will be charged for service received, but not yet billed, as of the end of each month. The accrual of unbilled revenues results in a better matching of revenues and expenses. This change impacts the pattern of revenue recognition, which had the effect of increasing revenues and earnings in the second and third quarters (periods of higher usage) and decreasing revenues and earnings in the first and fourth quarters (periods of lower usage).\nThe cumulative effect of this accounting change, less income taxes of $48.5 million, amounted to $94.2 million, and was included in 1992 income. If this change in accounting method were applied retroactively, the effect on consolidated net income in 1991 would not have been material.\n(20) UNAUDITED QUARTERLY INFORMATION\nThe following unaudited quarterly financial information includes, in the opinion of management, all adjustments (which comprise only normal recurring accruals) necessary for a fair presentation. Quarterly results are not necessarily indicative of a full year's operations because of seasonality and other factors, including rate increases and variations in operating expense patterns.\n(a) Quarterly earnings per common share are based on the weighted average number of shares outstanding during the quarter, and the sum of the quarters may not equal annual earnings per common share.\n(b) Adjustment required to reclassify quarterly amounts for the merger of Utility Fuels into HL&P. (see Note 1(b)).\n(c) Adjustment required to reclassify quarterly amounts for certain advertising expenses at KBLCOM.\n(d) Amounts include the effect of a pre-tax charge of $86.4 million which relates to HL&P's restructuring of operations as a result of the implementation of the STEP program and pre-tax income of $142.7 million associated with the adoption of a change in accounting principle reflecting a change in the timing of recognition of revenue from electricity sales. (see Notes 18 and 19, respectively).\n(e) Loss from continuing operations per share for the first quarter of 1992 was $.33.\n(21) RECLASSIFICATION\nCertain amounts from the previous years have been reclassified to conform to the 1993 presentation of financial statements. Such reclassifications do not affect earnings.\n(22) SUBSEQUENT EVENT\nOn February 17 1994, KBLCOM entered into an agreement to acquire three cable companies serving approximately 47,000 customers in the Minneapolis area. KBLCOM will acquire the stock of the companies in exchange for the issuance of common stock of the Company. The amount of common stock of the Company to be issued, currently estimated to be approximately $24 million, is dependent on the amount of liabilities assumed, currently estimated to be approximately $63 million.\nApproximately 40,000 of the cable customers served by the properties to be acquired are in the Minneapolis metropolitan area. The remaining 7,000 customers are located in small communities south and west of the metropolitan area. Closing of the transaction is subject to the satisfaction of certain conditions.\nHOUSTON LIGHTING & POWER COMPANY\nNOTES TO FINANCIAL STATEMENTS\nFOR THE THREE YEARS ENDED DECEMBER 31, 1993\nExcept as modified below, the Notes to Consolidated Financial Statements of the Company are incorporated herein by reference insofar as they relate to HL&P: (1) Summary of Significant Accounting Policies, (3) Preferred Stock of HL&P, (4) Long-Term Debt, (5) Short-Term Financing, (7) Retirement Plans, (8) Commitments and Contingencies, (9) Jointly-Owned Nuclear Plant, (10) Utility Commission Proceedings, (11) Deferred Plant Costs, (12) Malakoff Electric Generating Station, (13) Recoverable Project Costs, (14) Income Taxes, (15) Supplementary Expense Information, (18) Restructuring, (19) Change in Accounting Method for Revenues, and (21) Reclassification.\n(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES\n(b) MERGER OF UTILITY FUELS INTO HL&P. The merger has been accounted for in a manner similar to a pooling of interests. HL&P's financial statements have been restated to reflect the combined operations for the current and previous periods, with the appropriate eliminating entries. The merger increased HL&P's previously reported earnings by $28.3 million and $24.4 million in 1992 and 1991, respectively.\n(i) EARNINGS PER COMMON SHARE. All issued and outstanding Class A voting common stock of HL&P is held by the Company and all issued and outstanding Class B non-voting common stock of HL&P is held by Houston Industries (Delaware) Incorporated (Houston Industries Delaware), a wholly owned subsidiary of the Company. Accordingly, earnings per share is not computed.\n(j) STATEMENT OF CASH FLOWS. At December 31, 1993, HL&P did not have any investments with affiliated companies (considered to be cash equivalents). At December 31, 1992 and 1991, HL&P had affiliate investments of $2.1 million and $9.7 million, respectively.\n(2) COMMON STOCK\nAll issued and outstanding Class A voting common stock of HL&P is held by the Company and all issued and outstanding Class B non-voting common stock of HL&P is held by Houston Industries Delaware.\n(5) SHORT-TERM FINANCING\nThe interim financing requirements of HL&P are primarily met through the issuance of commercial paper. HL&P had a bank credit facility of $250 million at December 31, 1993 and 1992, which limits total short-term borrowings and provides for interest at rates generally less than the prime rate. Outstanding commercial paper was approximately $171 million at December 31, 1993 and $139 million at December 31, 1992. Commitment fees are required on HL&P's bank credit facility.\n(6) ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS\nThe carrying amount and estimated fair value of HL&P's financial instruments at December 31, 1993 and 1992 are as follows:\nThe fair values of cash and short-term investments, short-term and other notes payable, and notes payable to affiliated company are equivalent to the carrying amounts.\nThe fair values of cumulative preferred stock subject to mandatory redemption, first mortgage bonds and pollution control revenue bonds issued on behalf of HL&P are estimated using rates currently available for securities with similar terms and remaining maturities.\n(7) RETIREMENT PLANS\n(a) PENSION. The Company maintains a noncontributory retirement plan covering substantially all employees of HL&P.\nNet pension cost for HL&P includes the following components:\nThe funded status of HL&P's retirement plan was as follows:\nThe projected benefit obligation was determined using an assumed discount rate of 7.25% in 1993 and 8.5% in 1992. A long-term rate of compensation increase ranging from 3.9% to 6% was assumed for 1993 and ranging from 6.9% to 9.0% was assumed in 1992. The assumed long- term rate of return on plan assets was 9.5% in 1993 and 1992. The transitional asset at January 1, 1986, is being recognized over approximately 17 years, and the prior service cost is being recognized over approximately 15 years.\n(c) POSTRETIREMENT BENEFITS. HL&P adopted SFAS No. 106, \"Employer's Accounting for Postretirement Benefits Other Than Pensions\" effective January 1, 1993. For 1992, HL&P continued to fund postretirement benefit costs on a \"pay-as-you-go\" basis and made payments of $8.6 million. HL&P's 1993 postretirement benefit costs under SFAS No. 106 were $37 million, an increase of approximately $27 million over the 1993 \"pay-as-you-go\" amount.\nThe net postretirement benefit cost for HL&P in 1993 includes the following components, in thousands of dollars:\nThe funded status of postretirement benefit costs for HL&P at December 31, 1993 was as follows, in thousands of dollars:\nThe assumed health care cost trend rates used in measuring the accumulated postretirement benefit obligation in 1993 are as follows:\nThe assumed health care rates gradually decline to 5.4% for both medical categories and 3.7% for dental by the year 2001. The accumulated postretirement benefit obligation was determined using an assumed discount rate of 7.25% for 1993.\nIf the health care cost trend rate assumptions were increased by 1%, the accumulated postretirement benefit obligation as of December 31, 1993 would be increased by approximately 8%. The annual effect of the 1% increase on the total of the service and interest costs would be an increase of approximately 10%.\n(14) INCOME TAXES\nHL&P records income taxes under SFAS No. 109. During 1993, federal tax legislation was enacted that changes the income tax consequences for HL&P. The principal provision of the new law which affects HL&P is the change in the corporate income tax rate from 34% to 35%. A net regulatory asset and the related deferred federal income tax liability of $71.3 million was recorded by HL&P in 1993. The effect of the new law, which decreased HL&P's net income by $8.0 million was recognized as a component of income tax expense in 1993. The effect on HL&P's deferred taxes for the change in the new law was $4.5 million in 1993.\nHL&P's current and deferred components of income tax expense are as follows:\nHL&P's effective income tax rates are lower than statutory corporate rates for each year as follows:\nFollowing are HL&P's tax effects of temporary differences resulting in deferred tax assets and liabilities:\n(20) UNAUDITED QUARTERLY INFORMATION\nThe following unaudited quarterly financial information includes, in the opinion of management, all adjustments (which comprise only normal recurring accruals) necessary for a fair presentation. Quarterly results are not necessarily indicative of a full year's operations because of seasonality and other factors, including rate increases and variations in operating expense patterns.\n(a) Adjustment required to restate quarterly amounts for the merging of Utility Fuels into HL&P. (See Note 1(b))\n(b) Amounts include the effect of a pre-tax charge of $86.4 million which relates to HL&P's restructuring of operations as a result of the implementation of the STEP program and pre-tax income of $142.7 million associated with the adoption of a change in accounting principle reflecting a change in the timing of recognition of revenue from electricity sales. (see Notes 18 and 19, respectively).\n(23) PRINCIPAL AFFILIATE TRANSACTIONS\n(a) Included in Operating Expenses (b) Included in Other Income (Expense)\nDuring 1992 and 1991, Houston Industries Finance purchased accounts receivable of HL&P. In January 1993, Houston Industries Finance sold the receivables back to the respective subsidiaries and ceased operations. HL&P is now selling its accounts receivable and most of its accrued unbilled revenues to an unaffiliated third party.\nINDEPENDENT AUDITORS' REPORT\nHOUSTON INDUSTRIES INCORPORATED\nWe have audited the accompanying consolidated balance sheets and the consolidated statements of capitalization of Houston Industries Incorporated and its subsidiaries as of December 31, 1993 and 1992 and the related statements of consolidated income, consolidated retained earnings and consolidated cash flows for each of the three years in the period ended December 31, 1993. Our audits also included the Company's financial statement schedules listed in Item 14(a)(2). These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits.\nWe conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.\nIn our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company and its subsidiaries at December 31, 1993 and 1992 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1993 in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein.\nAs discussed in Note 19 to the consolidated financial statements, the Company changed its method of accounting for revenues in 1992.\nDELOITTE & TOUCHE\nHouston, Texas February 23, 1994\nINDEPENDENT AUDITORS' REPORT\nHOUSTON LIGHTING & POWER COMPANY\nWe have audited the accompanying balance sheets and the statements of capitalization of Houston Lighting & Power Company (HL&P) as of December 31, 1993 and 1992 and the related statements of income, retained earnings and cash flows for each of the three years in the period ended December 31, 1993. Our audits also included the financial statement schedules of HL&P listed in Item 14(a)(2). These financial statements and financial statement schedules are the responsibility of HL&P's management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits.\nWe conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.\nIn our opinion, such financial statements present fairly, in all material respects, the financial position of HL&P at December 31, 1993 and 1992 and the 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. Also, in our opinion, such financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.\nAs discussed in Note 1 to the financial statements, Utility Fuels, Inc., HL&P's coal supply affiliate, was merged into HL&P in 1993. The merger has been accounted for in a manner similar to a pooling of interests with restatement of all years presented. As discussed in Note 19 to the financial statements, HL&P changed its method of accounting for revenues in 1992.\nDELOITTE & TOUCHE\nHouston, Texas February 23, 1994\nITEM 9.","section_9":"ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.\nNone.\nPART III\nITEM 10.","section_9A":"","section_9B":"","section_10":"ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY AND HL&P.\n(a) The Company\nThe information called for by Item 10, to the extent not set forth under Item 1 \"Business - Executive Officers of the Company\", is or will be set forth in the definitive proxy statement relating to the Company's 1994 annual meeting of shareholders pursuant to the Commission's Regulation 14A. Such definitive proxy statement relates to a meeting of shareholders involving the election of directors and the portions thereof called for by Item 10 is incorporated herein by reference pursuant to Instruction G to Form 10-K.\n(b) HL&P\nThe information set forth under Item 1. \"Business - Executive Officers of HL&P\" is incorporated herein by reference.\nEach member of the board of directors of HL&P is also a member of the board of directors of the Company. Each member of the board of directors of HL&P is elected annually for a one-year term. The HL&P annual shareholder's meeting, at which the Company elects members to the HL&P board of directors, is expected to occur on May 4, 1994. Information is set forth below with respect to the business experience for the last five years of each person who currently serves as a member of the board of directors of HL&P, certain other directorships held by each such person and certain other information. Unless otherwise indicated, each person has had the same principal occupation for at least five years.\nMILTON CARROLL, age 43, has been a director since 1992. He is Chairman, President and Chief Executive Officer of Instrument Products Inc., an oil field supply manufacturing company, in Houston, Texas. Mr. Carroll currently serves as an advisor to Lazard Freres & Co., an investment banking firm, and is a director of Panhandle Eastern Corporation and the Federal Reserve Bank of Dallas.\nJOHN T. CATER, age 58, has been a director since 1983. Mr. Cater is Chairman, Chief Executive Officer and a director of River Oaks Trust Company in Houston, Texas. He also serves as President and director of Compass Bank-Houston. Until his retirement in July 1990, Mr. Cater served as President, Chief Operating Officer and a director of MCorp, a Texas bank holding company. He currently serves as a director of MCorp.(1)\nROBERT J. CRUIKSHANK, age 63, has been a director since 1993. Mr. Cruikshank is primarily engaged in managing his personal investments in Houston, Texas. Prior to his retirement in 1993, Mr. Cruikshank was a Senior Partner in the accounting firm of Deloitte & Touche. Mr. Cruikshank is also Vice-Chairman of the Board of Regents of the University of Texas System. He also serves as a director of MAXXAM Inc., Compass Bank and Texas Biotechnology Corporation.\nLINNET F. DEILY, age 48, has been a director since 1993. Ms. Deily is Chairman, Chief Executive Officer and President of First Interstate Bank of Texas, N.A. She has served as Chairman since 1992, Chief Executive Officer since 1991 and President since 1988. (2)\nJOSEPH M. HENDRIE, PH.D., age 68, has been a director since 1985. Dr. Hendrie is a Consulting Engineer in Bellport, New York, having previously served as Chairman and Commissioner of the U.S. Nuclear Regulatory Commission and as President of the American Nuclear Society. He is also a director of Entergy Operations, Inc. of Jackson, Mississippi.\nHOWARD W. HORNE, age 67, has been a director since 1978. Mr. Horne is Vice Chairman of Cushman & Wakefield of Texas, Inc., a subsidiary of a national real estate brokerage firm. Until 1990, Mr. Horne was Chairman of the Board of The Horne Company, a realty firm. (3)\nDON D. JORDAN, age 61, has been a director of the Company since 1977 and of HL&P since 1974. Mr. Jordan is Chairman and Chief Executive Officer of the Company and Chairman and Chief Executive Officer of HL&P. Mr. Jordan also serves as a director of Texas Commerce Bancshares, Inc. and BJ Services Company, Inc.\nTHOMAS B. MCDADE, age 70, has been a director since 1980. Mr. McDade is primarily engaged in managing his personal investments in Houston, Texas. Mr. McDade also serves as a director and trustee of eleven registered investment companies for which Transamerica Fund Management Company serves as investment advisor. (4)\nALEXANDER F. SCHILT, PH.D., age 53, has been a director since 1992. He is Chancellor of the University of Houston System. Prior to 1990, Dr. Schilt was President of Eastern Washington University in Cheney and Spokane, Washington.\nKENNETH L. SCHNITZER, SR., age 64, has been a director since 1983. Mr. Schnitzer is Chairman of the Board of Schnitzer Enterprises, Inc., a Houston commercial real estate development company, having previously served as a director of American Building Maintenance Industries Incorporated and Weingarten Realty, Inc. (5)\nDON D. SYKORA, age 63, has been a director since 1982. Mr. Sykora is President and Chief Operating Officer of the Company. He also serves as a director of Powell Industries, Inc., Pool Energy Services Company, Inc. and TransTexas Gas Corporation.\nJACK T. TROTTER, age 67, has been a director since 1985. Mr. Trotter is primarily engaged in managing his personal investments in Houston, Texas. He also serves as a director of First Interstate Bank of Texas, N.A., Howell Corporation, Weingarten Realty Investors, Zapata Corporation and Continental Airlines, Inc.\nBERTRAM WOLFE, PH.D., age 66, has been a director since 1993. Prior to his retirement in 1992, Dr. Wolfe was Vice President and General Manager of General Electric Company's nuclear energy business in San Jose, California.\n- -----------------\n(1) In March 1989, the FDIC declared 20 of MCorp's 25 banks to be insolvent and transferred their assets and deposits to another bank. In 1989, MCorp filed for protection under the Federal Bankruptcy Code.\n(2) First Interstate and certain of its affiliates participate in various credit facilities with HL&P, the Company and certain of HL&P's affiliates and other entities in which the Company has an ownership interest. Under these agreements, First Interstate and certain of its affiliates have maximum aggregate loans and commitments to lend approximately $81.24 million.\n(3) Under a consulting arrangement originally with Mr. Horne which was subsequently amended to be an agreement with Cushman & Wakefield of which Mr. Horne is Vice Chairman, Cushman & Wakefield represented the Company in negotiations concerning the purchase of an office building in 1993, for which that firm was paid $358,000 by the Company and $78,000 by the seller of the building.\n(4) Mr. McDade is expected to retire at the date of the Company's 1994 annual meeting of shareholders.\n(5) HL&P and certain of its affiliates currently lease office space in buildings owned or controlled by affiliates of Mr. Schnitzer. HL&P and certain of its affiliates paid a total of approximately $5.4 million to affiliates of Mr. Schnitzer during 1993, and it is expected that approximately $5.6 million will be paid in 1994. HL&P believes such payments are comparable to those that would have been made to other non-affiliated firms for comparable facilities and services.\nITEM 11.","section_11":"ITEM 11. EXECUTIVE COMPENSATION.\n(a) The Company\nThe information called for by Item 11 is or will be set forth in the definitive proxy statement relating to the Company's 1994 annual meeting of shareholders pursuant to the Commission's Regulation 14A. Such definitive proxy statement relates to a meeting of shareholders involving the election of directors and the portions thereof called for by Item 11 (excluding any information required by paragraphs (i), (k) and (l) of Item 402 of Regulation S-K) are incorporated herein by reference pursuant to Instruction G to Form 10-K.\n(b) HL&P\nSUMMARY COMPENSATION TABLE. The following table shows, for the years ended December 31, 1991, 1992 and 1993, the annual, long-term and certain other compensation of the chief executive officer and the other four most highly compensated executive officers of HL&P including Mr. Hall who retired effective January 1, 1994 (Named Officers). The format and information presented are as prescribed in revised rules of the Securities and Exchange Commission (SEC) and in accordance with transitional provisions of the rules, information in the \"All Other Compensation\" column is not presented for 1991.\nSUMMARY COMPENSATION TABLE\n- -----------------\n(1) The amounts shown include salary earned and received by the Named Officers as well as salary earned but deferred. Also included are board of director and committee fees paid in 1991 prior to the time such fees were eliminated for employee directors.\n(2) The amount of bonus earned for 1993 has not been determined because it was not calculable as of the date of this Report. In accordance with the SEC's revised rules on executive compensation, these amounts will be included for such year in HL&P's Annual Report on Form 10-K for the year ended December 31, 1994.\n(3) The amounts shown represent (i) cash paid in 1991 and 1992 under the Company's executive incentive compensation plan for long-term awards based on the performance periods of 1987-1990 and 1988-1991 respectively and (ii) the dollar value of shares of the Company's common stock paid out in 1993 under the Company's long-term incentive compensation plans based on the achievement of certain performance objectives for the 1990-1992 performance cycle, plus dividend equivalent accruals during the performance period.\n(4) The amounts shown include (i) Company contributions to the Company's savings plan and accruals under its savings restoration plan for 1992 and 1993 on behalf of the Named Officers, as follows: Mr. Jordan 1992 - $41,348 and 1993 - $57,152; Mr. Kelly 1992 - $26,141 and 1993 - $19,569; Mr. Letbetter 1992 - $20,225 and 1993 - $16,672; Mr. Hall 1992 - $14,005 and 1993 - $16,933; and\nMr. Greenwade 1992 - $16,898 and 1993 - $14,128 and (ii) the portion of accrued interest on amounts of compensation deferred under the Company's deferred compensation plan and executive incentive compensation plan that exceeds 120% of the applicable federal long-term rate provided under Section 1274(d) of the Internal Revenue Code, as follows: Mr. Jordan 1992 - $501,856 and 1993 - $590,339; Mr. Kelly 1992 - $39,125 and 1993 - $38,649; Mr. Letbetter 1992 - $24,588 and 1993 - $25,890; Mr. Hall 1992 - $1,664 and 1993 - $1,128; and Mr. Greenwade 1992 - $21,286 and 1993 - $22,658. With respect to the accrued interest on deferred amounts referenced in (ii) of this footnote, the Company owns and is the beneficiary under life insurance policies, and it is currently anticipated that the benefits associated with these policies will be sufficient to cover such accumulated interest.\n(5) The information related to Mr. Jordan includes his compensation as Chairman and Chief Executive Officer of the Company.\nSTOCK OPTION GRANTS. The following table contains information concerning the grant of stock options under the Company's long-term incentive compensation plan to the Named Officers during 1993.\nOPTION GRANTS IN 1993\n- -----------------\n(1) The nonstatutory options for shares of the Company's common stock included in the table were granted on January 4, 1993, have a ten-year term and generally become exercisable in one-third increments commencing one year after date of grant, so long as employment with the Company or its subsidiaries continues. If a change in control (as defined in the plan) of the Company occurs before the options become exercisable, the options will become immediately exercisable.\n(2) Based on the Black-Scholes option pricing model adjusted for the payment of dividends. The calculations were made based on the following assumptions: volatility equal to historical volatility of the Company's common stock in the six-month period prior to grant date; risk-free interest rate equal to the ten-year average monthly U.S. Treasury rate for January 1993; option strike price equal to current stock price on the date of grant ($46.25); current dividend rate of $3 per share per year; and option term equal to the full ten-year period until the stated expiration date. No reduction has been made in the valuations on account of non-transferability of the\noptions or vesting or forfeiture provisions. Valuations would change if different assumptions were made. Option values are dependent on general market conditions and the performance of the Company's common stock. There can be no assurance that the values in this table will be realized.\n(3) Under the terms of the Company's long-term incentive compensation plans, Mr. Hall's retirement effective January 1, 1994 resulted in his receiving options for only 770 shares of the originally granted number of shares, and resulted in the forfeiture, for no value, of his options for 1,539 shares. Options expire one year after date of retirement; therefore, Mr. Hall's options expire January 1, 1995.\nSTOCK OPTION VALUES. The following table sets forth information for each of the Named Officers with respect to the unexercised options to purchase the Company's common stock granted under the Company's long-term incentive compensation plans and held as of December 31, 1993, including the aggregate amount by which the market value of the option shares exceeds the exercise price of the option shares at December 31, 1993. No options were exercised by the Named Officers during 1993.\n1993 YEAR-END OPTION VALUES\n- -----------------\n(1) Based on the average of the high and low sales prices of the the Company's common stock on the composite tape, as reported by The Wall Street Journal for December 31, 1993.\nLONG-TERM INCENTIVE COMPENSATION PLANS\nThe following table sets forth information concerning awards made during the year ended December 31, 1993 under the Company's long-term incentive compensation plans. The table represents potential payouts of awards for performance shares (target and opportunity shares) of Common Stock based on the achievement of certain performance goals over a performance cycle of three years. The performance goals are weighted differently depending on the parent or subsidiary company by which the Named Officer is employed. The consolidated performance goal applicable to each of the Named Officers is achieving a superior total return to shareholders in relation to a panel of other companies. With respect to Messrs. Letbetter, Hall and Greenwade, subsidiary performance goals consist of (1) increasing HL&P's competitive rate advantage by\nmaintaining current base electric rates and (2) achieving a superior cash flow performance in relation to a panel of other companies. With respect to Messrs. Jordan and Kelly, subsidiary performance goals include all of the above as well as goals from the Company's other major subsidiary. Each of these goals has attainment levels ranging from 50% to 150% of the target amounts. Target amounts for awards will be earned if goals are achieved at the 100% level; threshold amounts if goals are achieved at the 50% level and maximum amounts if goals are achieved at the 150% level. If a change in control (as defined in the plan) of the Company occurs before the end of a performance cycle, the payouts of awards for performance shares will occur without regard to achievement of the performance goals.\nLONG-TERM INCENTIVE COMPENSATION PLANS - AWARDS IN 1993\n- -----------------\n(1) The table does not reflect dividend equivalent accruals during the performance period.\n(2) Under the terms of the Company's long-term incentive compensation plans, Mr. Hall's retirement effective January 1, 1994 resulted in his receiving a payout in January, 1994 of 799 shares, a pro-rated amount based on the number of days elapsed in the performance cycle.\nRETIREMENT PLANS, RELATED BENEFITS AND OTHER AGREEMENTS. The following table shows the estimated annual benefit payable under the Company's retirement plan, benefit restoration plan and, in certain cases, supplemental agreements, to officers in various compensation classifications upon retirement at age 65 after the indicated periods of service, determined on a single-life annuity basis. The amounts in the table are not subject to any deduction for Social Security payments or other offsetting amounts.\nPENSION PLAN TABLE\nNOTE: The qualified pension plan limits compensation in accordance with IRC 401(a)(17) and also limits benefits in accordance with IRC 415. Pension benefits based on compensation above the qualified plan limit or in excess of the limit on annual benefits are provided through the benefit restoration plan.\nFor the purpose of the pension table above, final average annual compensation means the average of covered compensation for the 36 consecutive months out of the 120 consecutive months immediately preceding retirement in which the participant's covered compensation was the highest. Covered compensation only includes the amounts shown in the \"Salary\" and \"Bonus\" columns of the Summary Compensation Table. At December 31, 1993 the credited years of service and current covered compensation for the following persons are: Mr. Jordan, 35 years $1,360,768; Mr. Kelly, 19 years, 10 of which result from a supplemental agreement $465,939; Mr. Letbetter, 20 years $396,952 and Mr. Greenwade, 28 years $336,380. Mr. Hall , who retired effective January 1, 1994, does not participate in the Company's retirement plan, but under supplemental agreements, he receives a pension of $50,000 per year. Because bonus amounts for 1993 are not yet available, the foregoing covered compensation amounts are based in part on 1992 data.\nThe Company maintains an executive benefits plan that provides certain salary continuation, disability and death benefits to key officers of the Company and certain of its subsidiaries. The Named Officers participate in this plan pursuant to individual agreements. The agreements generally provide for (1) a salary continuation benefit of 100% of the officer's current salary for twelve months after death during active employment and then 50% of salary for nine years or until the deceased officer would have attained age 65, if later, and (2) if the officer retires after attainment of age 65, an annual post-retirement death benefit of 50% of the officer's preretirement annual salary payable for six years.\nEffective in 1994, the Company authorized an executive life insurance plan providing for split-dollar life insurance to be\nmaintained on the lives of certain officers and all members of the Board of Directors. Pursuant to the plan, the Personnel Committee has authorized the Company to obtain coverage for the Named Officers, except for Mr. Hall who has retired. The amounts of their coverages are not finalized, pending completion of arrangements with the insurance carrier and certain elections by participants, but are expected to range from approximately two times current salary to six times current salary, assuming single life coverage is elected.\nThe death benefit for the Company's nonemployee directors is six times the annual retainer (assuming single life coverage is elected). The plan also provides that the Company may make payments to the covered individuals designed to compensate for tax consequences with respect to imputed income that they must recognize for federal income tax purposes based on the term portion of the annual premiums. If a covered executive retires at age 65 or at an earlier age under circumstances approved for this purpose by the Board of Directors, rights under the plan vest so that coverage is continued based on the same death benefit in effect at the time of retirement. Upon death, the Company will receive the balance of the insurance proceeds payable in excess of the specified death benefit which should in all cases be at least sufficient to cover the Company's cumulative outlays to pay premiums and the after-tax cost to the Company of the tax gross-up payments.\nCOMPENSATION OF DIRECTORS. Each nonemployee director receives an annual retainer fee of $20,000, in his or her capacity as a director of the Company, and a fee of $1,000 for each board meeting attended and a fee of $700 for each committee meeting attended. Directors may defer all or a part of their annual retainer fees (minimum deferral $2,000) and meeting fees under the Company's deferred compensation plan.\nNonemployee directors participate in a director benefits plan pursuant to which a director who serves at least one full year will receive an annual benefit in cash equal to the annual retainer payable in the year the director terminates service. Benefits under this plan will be payable to the director, commencing the January following the later of the director's termination of service or attainment of age 65, for a period equal to the number of full years of service of the director.\nNonemployee directors also participate in the Company's executive life insurance plan effective January 1994, described above under \"Retirement Plans, Related Benefits and Other Agreements,\" under which the Company purchases split dollar life insurance so as to provide each nonemployee director a death benefit equal to six times his or her annual retainer (assuming single life coverage is elected) with coverage continuing after termination of service as a director. This plan also permits the Company to provide for a tax gross-up payment to make the directors whole with respect to imputed income recognized with respect to the term portion of the annual insurance premiums.\nFor a description of a consulting arrangement with Mr. Horne and a fee paid to a company of which he is Vice Chairman, see Note 3 to Item 10(b).\nITEM 12.","section_12":"ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.\n(a) The Company\nThe information called for by Item 12 is or will be set forth in the definitive proxy statement relating to the Company's 1994 annual meeting of shareholders pursuant to the Commission's Regulation 14A. Such definitive proxy statement relates to a meeting of shareholders involving the election of directors and the portions thereof called for by Item 12 is incorporated herein by reference pursuant to Instruction G to Form 10-K.\n(b) HL&P\nAs of the date of this Report, the Company owned 1,000 shares of HL&P's Class A common stock, without par value, and Houston Industries (Delaware) Incorporated owned 100 shares of HL&P's Class B common stock, constituting all of the issued and outstanding shares of Class B common stock of HL&P.\nThe following table shows the beneficial ownership reported as of the date of this Report unless otherwise noted of shares of the Company's common stock, including shares as to which a right to acquire ownership exists (for example, through the exercise of stock options) within the meaning of Rule 13d-3(d)(1) under the Securities Exchange Act of 1934, of each current director, the chief executive officer and the four other most highly compensated executive officers of HL&P and, as a group, of such persons and other executive officers of HL&P. No person or member of the group listed owns any equity securities of HL&P or any other subsidiary of the Company. Unless otherwise indicated, each person or member of the group listed has sole voting and investment power with respect to the shares of Common Stock listed. No ownership shown in the table represents 1% or more of the outstanding shares of the Company's common stock.\n- -----------------\n(1) Mr. Cater disclaims beneficial ownership of these shares, which are owned by his adult children.\n(2) Voting power and investment power with respect to the shares listed for Ms. Deily and Dr. Hendrie are shared with the respective spouse of each.\n(3) Mr. Hall's ownership is reported as of December 31, 1993; he retired effective January 1, 1994.\n(4) Includes shares held under the Company's dividend reinvestment plan as of December 31, 1993.\n(5) Voting power and investment power with respect to 576 of the shares listed are shared with Mr. Jordan's spouse.\n(6) Includes shares held under the savings plan of the Company or KBLCOM Incorporated as of December 31, 1993 (which plans merged January 1, 1994), as to which the participant has sole voting power (subject to such power being exercised by the plan's trustees in the same proportion as directed shares in the savings plans are voted in the event the participant does not exercise voting power).\n(7) The ownership shown in the table includes shares which may be acquired within 60 days on exercise of outstanding stock options granted under the Company's long-term incentive compensation plans by each of the persons and group, as follows: Mr. Jordan - 13,115 shares; Mr. Sykora - 6,994 shares; Mr. Kelly - 2,652 shares; Mr. Letbetter - 2,150 shares; Mr. Hall - 2,333 shares; Mr. Greenwade - 1,921 shares and the group - 31,976 shares.\nITEM 13.","section_13":"ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.\n(a) The Company\nThe information called for by Item 13 is or will be set forth in the definitive proxy statement relating to the Company's 1994 annual meeting of shareholders pursuant to the Commission's Regulation 14A. Such definitive proxy statement relates to a meeting of shareholders involving the election of directors and the portions thereof called for by Item 13 is incorporated herein by reference pursuant to Instruction G to Form 10-K.\n(b) HL&P\nThe information set forth in Notes 2, 3 and 5 to Item 10(b) above is incorporated herein by reference.\nPART IV\nITEM 14.","section_14":"ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.\nThe following schedules are omitted because of the absence of the conditions under which they are required or because the required information is included in the financial statements:\nI, II, III, IV, VII, X, XI, XII and XIII.\n(a)(3) EXHIBITS.\nSee Index of Exhibits on page 135, which also includes the management contracts or compensatory plans or arrangements required to be filed as exhibits to this Form 10-K by Item 601(10)(iii) of Regulation S-K.\n(b) REPORTS ON FORM 8-K. None\nHOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES SCHEDULE V - PROPERTY, PLANT AND EQUIPMENT\nFOR THE THREE YEARS ENDED DECEMBER 31, 1993 (THOUSANDS OF DOLLARS)\n_______________\nNotes:\n(A) Substantially all electric utility additions are originally charged to Construction Work in Progress and transferred to electric utility plant accounts upon completion. Additions at cost give effect to such transfers. (B) Additions at cost include noncash charges for AFUDC for HL&P and capitalized interest for other subsidiaries. (C) Depreciation is computed using the straight-line method. The depreciation provisions as a percentage of the depreciable cost of plant were 3.4%, for 1993, 1992 and 1991. (D) Other changes to Plant Held for Future Use in 1993 and 1992 represent the deduction of $7.0 million and $84.1 million, respectively, of recoverable costs related to Malakoff. (E) 1992 and 1991 have been adjusted to reflect reclassifications due to the merger of Utility Fuels into HL&P.\nHOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES SCHEDULE VI - ACCUMULATED PROVISION FOR DEPRECIATION, DEPLETION AND AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT\nFOR THE THREE YEARS ENDED DECEMBER 31, 1993 (THOUSANDS OF DOLLARS)\n__________________________\nNotes:\n(1) 1992 and 1991 have been adjusted to reflect reclassifications due to the merger of Utility Fuels into HL&P.\nHOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES SCHEDULE VIII - RESERVES\nFOR THE THREE YEARS ENDED DECEMBER 31, 1993 (THOUSANDS OF DOLLARS)\n_______________\nNotes:\n(A) Deductions from reserves represent losses or expenses for which the respective reserves were created. In the case of the uncollectible accounts reserve, such deductions are net of recoveries of amounts previously written off. (B) During 1992 and 1991, Houston Industries Finance purchased accounts receivable of HL&P and of certain KBLCOM subsidiaries. In January 1993, Houston Industries Finance sold the receivables back to the respective subsidiaries and ceased operations. HL&P is now selling its accounts receivable and most of its accrued unbilled revenues to a third party.\nHOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES SCHEDULE IX - SHORT-TERM BORROWINGS\nFOR THE THREE YEARS ENDED DECEMBER 31, 1993 (THOUSANDS OF DOLLARS)\n_______________\nNote: The weighted average interest rate during the period is calculated by dividing interest by the weighted average proceeds from the borrowings.\nHOUSTON LIGHTING & POWER COMPANY SCHEDULE V - PROPERTY, PLANT AND EQUIPMENT\nFOR THE THREE YEARS ENDED DECEMBER 31, 1993 (THOUSANDS OF DOLLARS)\n_______________\nNotes:\n(A) 1992 and 1991 have been restated for the merger of Utility Fuels into HL&P. (B) Other Changes in Plant Held for Future Use in 1993 and 1992 represent the deduction of recoverable costs of $7.0 million and $84.1 million, respectively, of recoverable costs related to Malakoff. (C) Substantially all additions are originally charged to Construction Work In Progress and transferred to electric utility plant accounts upon completion. Additions at cost give effect to such transfers. (D) Additions at cost include non-cash charges for an allowance for funds used during construction. (E) HL&P computes depreciation using the straight-line method. The depreciation provisions as a percentage of the average depreciable cost of plant was 3.1% for 1993, 3.2% for 1992 and 1991.\nHOUSTON LIGHTING & POWER COMPANY SCHEDULE VI - ACCUMULATED PROVISION FOR DEPRECIATION, DEPLETION AND AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT\nFOR THE THREE YEARS ENDED DECEMBER 31, 1993 (THOUSANDS OF DOLLARS)\n_______________________\nNotes:\n(1) 1992 and 1991 have been restated for the merger of Utility Fuels into HL&P.\nHOUSTON LIGHTING & POWER COMPANY SCHEDULE VIII - RESERVES\nFOR THE THREE YEARS ENDED DECEMBER 31, 1993 (THOUSANDS OF DOLLARS)\n_______________\nNotes:\n(A) Deductions from reserves represent losses or expenses for which the respective reserves were created. (B) HL&P has no reserves for uncollectible accounts due to sales of accounts receivable.\nHOUSTON LIGHTING & POWER COMPANY SCHEDULE IX - SHORT-TERM BORROWINGS\nFOR THE THREE YEARS ENDED DECEMBER 31, 1993 (THOUSANDS OF DOLLARS)\n_______________\nNote:\n(A) The Balance at End of Period excludes $19 million in notes payable to the Company as of December 31, 1992. (B) The weighted average interest rate is calculated by dividing interest by the weighted average proceeds from the borrowings.\nSIGNATURES\nPURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF HOUSTON AND STATE OF TEXAS, ON THE 10TH DAY OF MARCH, 1994.\nHOUSTON INDUSTRIES INCORPORATED (Registrant)\nBy DON D. JORDAN (Don D. Jordan, Chairman and Chief Executive Officer)\nPURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATE INDICATED.\nSIGNATURES\nPURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF HOUSTON AND STATE OF TEXAS, ON THE 10TH DAY OF MARCH, 1994. THE SIGNATURE OF HOUSTON LIGHTING & POWER COMPANY SHALL BE DEEMED TO RELATE ONLY TO MATTERS HAVING REFERENCE TO SUCH COMPANY AND ANY SUBSIDIARIES THEREOF.\nHOUSTON LIGHTING & POWER COMPANY (Registrant)\nBy DON D. JORDAN (Don D. Jordan, Chairman and Chief Executive Officer)\nPURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATE INDICATED. THE SIGNATURE OF EACH OF THE UNDERSIGNED SHALL BE DEEMED TO RELATE ONLY TO MATTERS HAVING REFERENCE TO HOUSTON LIGHTING & POWER COMPANY AND ANY SUBSIDIARIES THEREOF.\nHOUSTON INDUSTRIES INCORPORATED HOUSTON LIGHTING & POWER COMPANY\nEXHIBITS TO THE ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1993\nINDEX OF EXHIBITS\nExhibits not incorporated by reference to a prior filing are designated by a cross (+); all exhibits not so designated are incorporated herein by reference to a prior filing as indicated. Exhibits designated by an asterisk (*) are management contracts or compensatory plans or arrangements required to be filed as exhibits to this Form 10-K by Item 601(10)(iii) of Regulation S-K.\n(a) Houston Industries Incorporated\nPursuant to Item 601(b)(4)(iii)(A) of Regulation S-K, the Company has not filed as exhibits to this Form 10-K certain long-term debt instruments, under which the total amount of securities authorized do not exceed 10% of the total assets of the Company and its subsidiaries on a consolidated basis. The Company hereby agrees to furnish a copy of any such instrument to the SEC upon request.\n(b) Houston Lighting & Power Company\n+4(a)(8) Sixty-First through Sixty-Third Supplemental Indentures to HL&P Mortgage and Deed of Trust\nThere have not been filed as exhibits to this Form 10-K certain long-term debt instruments, including indentures, under which the total amount of securities do not exceed 10% of the total assets of HL&P. HL&P hereby agrees to furnish a copy of any such instrument to the SEC upon request.","section_15":""}
{"filename":"70858_1993.txt","cik":"70858","year":"1993","section_1":"ITEM 1. BUSINESS GENERAL The registrant is a bank holding company registered under the Bank Holding Company Act of 1956, as amended (the \"Act\"), with its principal assets being the stock of its subsidiaries. Through its banking subsidiaries (the \"Banks\") and its various non-banking subsidiaries, the registrant provides banking and banking-related services, primarily throughout the Southeast and Mid-Atlantic states and Texas. The principal executive offices of the registrant are located at NationsBank Corporate Center in Charlotte, North Carolina 28255. ACQUISITIONS\nOn February 18, 1994, the registrant, through NationsBank of Florida, N.A. and NationsBank of Georgia, N.A., entered into an agreement with California Savings Bank, a Federal Savings Bank, to acquire for cash forty-three branches, including deposits, in Florida and one branch, including deposits, in Georgia at a purchase price of approximately $160 million. The registrant expects to complete the acquisition during the third quarter of 1994.\nOn February 28, 1994, the registrant acquired by merger Corpus Christi National Bank (\"CCNB\") of Corpus Christi, Texas, which had assets at the closing date of $687 million. The registrant acquired all the outstanding capital stock of CCNB by exchanging 2.5 shares of its Common Stock for each share of CCNB common stock outstanding, resulting in a total consideration of approximately $62 million. As a result, the registrant issued 2.6 million shares of Common Stock.\nEffective October 1, 1993, MNC Financial Inc. (\"MNC\"), a bank holding company headquartered in Baltimore, Maryland, with total assets of $16.5 billion, was merged into the registrant pursuant to an Agreement and Plan of Consolidation, dated July 16, 1992, as amended, between the registrant and MNC. Based on 90.8 million shares of MNC common stock outstanding on the closing date, the purchase price for the common stock was approximately $1.39 billion. The registrant paid 50.1% of the purchase price with shares of its common stock (approximately 13.6 million shares), with cash paid in lieu of fractional shares, and 49.9% in cash (approximately $687 million).\nOn July 28, 1993, the registrant entered into an agreement with US WEST, Inc. and US WEST Financial Services, Inc., a corporate finance subsidiary of US WEST, Inc. (\"USWFS\"), to acquire from USWFS for cash, approximately $2.0 billion in net receivables as well as its ongoing business. Effective December 1, 1993, the registrant completed the asset acquisition and established Nations Financial Capital Corporation.\nOn July 2, 1993, the registrant, through NationsBank of North Carolina, N.A. completed its acquisition of substantially all the assets and certain of the liabilities of Chicago Research & Trading Group Ltd. (\"CRT\") and certain of its subsidiaries. Total assets at the date of purchase were approximately $12 billion and consisted primarily of trading account assets and securities purchased under agreements to resell. The options market-making and trading portion of CRT became known as NationsBanc-CRT, and the primary government securities dealer portion became a part of NationsBanc Capital Markets, Inc.\nOn June 7, 1993, the registrant's joint venture with Dean Witter, Discover & Co. to market and sell various investment products and services in selected banking centers commenced operations as NationsSecurities, a Dean Witter\/NationsBank Company. In the past, the registrant has successfully completed numerous bank and bank holding company acquisitions. As part of its operations, the registrant regularly evaluates the potential acquisition of, and holds discussions with, various financial institutions and other businesses of a type eligible for bank holding company investment. In addition, the registrant regularly analyzes the values of, and submits bids for, the acquisition of customer-based funds and other liabilities and assets of failed financial institutions. As a general rule, the registrant publicly announces such material acquisitions when a definitive agreement has been reached. BANKING OPERATIONS The registrant, through its various subsidiaries, provides a diversified range of financial services to its customers. These services include activities related to the banking business as provided through the following\ncustomer groups. The General Bank Group's services include comprehensive service in the commercial and retail banking fields; the origination and servicing of home mortgage loans; the issuance and servicing of credit cards; certain insurance services and private banking services. The Trust Group's services include trust and investment management services and mutual fund products. The Institutional Bank Group's services include comprehensive service in the corporate and investment banking fields; trading in financial futures through contractual arrangements with members of the various commodities exchanges, options market making and trading; and arranging and structuring mergers, acquisitions, leveraged buyouts, private debt placements, international financings and venture capital. The Institutional Bank Group also provides international operations through branches, merchant banks or representative offices located in London, Frankfurt, Singapore, Mexico City, Grand Cayman and Nassau, including the traditional services of paying and receiving, international collections, bankers' acceptances, letters of credit and foreign exchange services, as well as specialized international services, such as tax-based leasing, export financing of certain capital goods and raw materials and capital market services, to its corporate customers. The Secured Lending Group's services include real estate lending; commercial finance and factoring; and leasing and financing a wide variety of commercial equipment. The registrant routinely analyzes its lines of business and from time to time may increase, decrease or terminate one or more of its activities as a result of such evaluation.\nThe following table indicates for each jurisdiction in which the registrant has banking operations its total banking assets, deposits and shareholder's equity and approximate number of banking offices, all as of December 31, 1993:\n(1) This subsidiary is engaged primarily in the business of issuing and servicing credit cards. In addition to the banking offices located in the above states, the various Banks have loan production offices located in New York City, Chicago, Los Angeles, Denver and Birmingham. The Banks also provide fully automated, 24-hour cash dispensing and depositing services throughout the states in which they are located. The Banks have automated teller machines (ATMs) which are linked to the PLUS, CIRRUS, VISA, MASTERCARD, and Armed Forces Financial Network (AFFN) ATM networks. ATMs in the Southeastern and Mid-Atlantic states are linked to HONOR (a regional network). ATMs in Texas are linked to the PULSE network (a regional network throughout the Southwest). ATMs in the Mid-Atlantic states also are linked to MOST (a regional network operating only in the Mid-Atlantic states). NON-BANKING OPERATIONS\nThe registrant conducts its non-banking operations through several subsidiaries. NationsCredit Corporation and several other subsidiaries engage in consumer credit activities. Nations Financial Capital Corporation engages in corporate finance activities. NationsBanc Mortgage Corporation originates and services loans for the Banks as well as for other investors. NationsBanc Commercial Corporation and an additional subsidiary provide services related to the factoring of accounts receivable. NationsBanc Leasing Corporation and several additional subsidiaries engage in equipment and leveraged leasing activities. NationsSecurities, a Dean Witter\/NationsBank Company, provides full service retail brokerage services. NationsBanc Discount Brokerage, Inc. conducts discount brokerage activities.\nIn addition, NationsBanc Capital Markets, Inc. (\"NCMI\"), NationsBank's institutional securities subsidiary, underwrites and deals in bank-eligible securities (generally U.S. government and government agency securities, certain municipal securities, primarily municipal general obligation securities, and certain certificates of deposit, bankers acceptances and money market instruments) and, to a limited extent, certain bank-ineligible securities, including corporate debt, as authorized by the Federal Reserve Board under Section 20 of the Glass-Steagall Act. Through NCMI's securities underwriting authority, NationsBank provides corporate and institutional customers a broad range of debt-related financial services. GOVERNMENT SUPERVISION AND REGULATION GENERAL As a registered bank holding company, the registrant is subject to the supervision of, and to regular inspection by, the Federal Reserve Board. The registrant's banking subsidiaries are organized as national banking associations, which are subject to regulation, supervision and examination by the Office of the Comptroller of the Currency (the \"Comptroller\"). The various banking subsidiaries also are subject to regulation by the FDIC and other federal bank regulatory bodies. In addition to banking laws, regulations and regulatory agencies, the registrant and its subsidiaries and affiliates are subject to various other laws and regulations and supervison and examination by other regulatory agencies, all of which directly or indirectly affect the registrant's operations, manangement and ability to make distributions.\nThe following discussion summarizes certain aspects of those laws and regulations that affect the registrant. Proposals to change the laws and regulations governing the banking industry are frequently introduced in Congress, in the state legislatures and before the various bank regulatory agencies. For example, Federal interstate bank acquisitions and branching legislation currently is being considered by Congress which, if enacted, would permit nationwide interstate branching by the registrant. In addition, other states including Georgia, North Carolina and Virginia recently revised their banking statutes to facilitate interstate banking in other states that have similar statutes regarding interstate banking. Other states in which the registrant has banking operations are considering similar legislation. However, the likelihood and timing of any changes and the impact such changes might have on the registrant and its subsidiaries are difficult to determine.\nUnder the Act, the registrant's activities, and those of companies which it controls or in which it holds more than 5% of the voting stock, are limited to banking or managing or controlling banks or furnishing services to or performing services for its subsidiaries, or any other activity which the Federal Reserve Board determines to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. In making such determinations, the Federal Reserve Board is required to consider whether the performance of such activities by a bank holding company or its subsidiaries can reasonably be expected to produce benefits to the public such as greater convenience, increased competition or gains in efficiency that outweigh possible adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interest or unsound banking practices. Bank holding companies, such as the registrant, are required to obtain prior approval of the Federal Reserve Board to engage in any new activity or to acquire more than 5% of any class of voting stock of any company. The Act also requires bank holding companies to obtain the prior approval of the Federal Reserve Board before acquiring more than 5% of any class of voting shares of any bank which is not already majority-owned. No application to acquire shares of a bank located outside of North Carolina, the state in which the operations of the applicant's banking subsidiaries were principally conducted on the date it became subject to the Act, may be approved by the Federal Reserve Board unless such acquisition is specifically authorized by the laws of the state in which the bank whose shares are to be acquired is located. DISTRIBUTIONS The registrant's funds for cash distributions to its shareholders are derived from a variety of sources, including cash and temporary investments. The primary source of such funds, however, is dividends received from its banking subsidiaries. Without prior regulatory approval the Banks can initiate dividend payments in 1993 of up to $1.4 billion plus an additional amount equal to their net profits for 1994, as defined by statute, up to the date of any such dividend declaration. The amount of dividends that each subsidiary national bank\nmay declare in a calendar year without approval of the Comptroller is the bank's net profits for that year combined with its net retained profits, as defined, for the preceding two years. In addition to the foregoing, the ability of the registrant and the Banks to pay dividends may be affected by the various minimum capital requirements and the capital and non-capital standards to be established under the Federal Deposit Insurance Corporation Improvement Act of 1991 (\"FDICIA\") as described below. Furthermore, the Comptroller may prohibit the payment of a dividend by a national bank if it determines that such payment would constitute an unsafe or unsound practice. The right of the registrant, its shareholders and its creditors to participate in any distribution of the assets or earnings of its subsidiaries is further subject to the prior claims of creditors of the respective subsidiaries. DEPOSIT INSURANCE The deposits of each of the Banks are insured up to applicable limits by the FDIC. Accordingly, the Banks are subject to deposit insurance assessments to maintain the Bank Insurance Fund (the \"BIF\") of the FDIC. As mandated by FDICIA, the FDIC has adopted regulations effective January 1, 1993, for the transition from a flat-rate insurance assessment system to a risk-based system by January 1, 1994. Pursuant to these regulations, a financial institution's deposit insurance assessment will be within a range of 0.23 percent to 0.31 percent of its qualifying deposits, depending on the institution's risk classification. The assessment for the registrant's banks is estimated to average 25.2 cents per $100 of eligible deposits in 1994. SOURCE OF STRENGTH According to Federal Reserve Board policy, bank holding companies are expected to act as a source of financial strength to each subsidiary bank and to commit resources to support each such subsidiary. This support may be required at times when a bank holding company may not be able to provide such support. In the event of a loss suffered or anticipated by the FDIC -- either as a result of default of a banking subsidiary of the registrant or related to FDIC assistance provided to a subsidiary in danger of default -- the other banking subsidiaries of the registrant may be assessed for the FDIC's loss, subject to certain exceptions. CAPITAL AND OPERATIONAL GUIDELINES The narrative comments under the caption \"Capital\" (page 48) set forth in the accompanying 1993 Annual Report to Shareholders of the registrant are hereby incorporated by reference. The Federal Reserve Board risk-based guidelines define a two-tier capital framework. Tier 1 capital consists of common and qualifying preferred shareholders' equity, less certain intangibles and other adjustments. Tier 2 capital consists of subordinated and other qualifying debt, and the allowance for credit losses up to 1.25 percent of risk-weighted assets. The sum of Tier 1 and Tier 2 capital less investments in unconsolidated subsidiaries represents qualifying total capital, at least 50 percent of which must consist of Tier 1 capital. Risk-based capital ratios are calculated by dividing Tier 1 and total capital by risk-weighted assets. Assets and off-balance sheet exposures are assigned to one of four categories of risk-weights, based primarily on relative credit risk. The minimum Tier 1 capital ratio is 4 percent and the minimum total capital ratio is 8 percent. The registrant's Tier 1 and total risk-based capital ratios under these guidelines at December 31, 1993 were 7.41 percent and 11.73 percent, respectively. The leverage ratio is determined by dividing Tier 1 capital by adjusted total assets. Although the stated minimum ratio is 3 percent, most banking organizations are required to maintain ratios of at least 100 to 200 basis points above 3 percent. The registrant's leverage ratio at December 31, 1993 was 6.00 percent. FDICIA identifies the five capital categories for insured depository institutions (well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized) and requires the respective Federal regulatory agencies to implement systems for \"prompt corrective action\" for insured depository institutions that do not meet minimum capital requirements within such categories. FDICIA imposes progressively more restrictive constraints on operations, management and capital distributions, depending on the category in which an institution is classified. Failure to meet the capital guidelines could also subject a banking institution to capital raising requirements. An \"undercapitalized\" bank must develop a capital restoration plan and its parent holding company must guarantee that bank's compliance with the plan. The liability of the parent holding company under any such guarantee is limited to the lesser of 5 percent of the bank's assets at the time it became \"undercapitalized\" or the amount needed to comply with the\nplan. Furthermore, in the event of the bankruptcy of the parent holding company, such guarantee would take priority over the parent's general unsecured creditors. In addition, FDICIA required the various regulatory agencies to prescribe certain non-capital standards for safety and soundness relating generally to operations and management, asset quality and executive compensation and permits regulatory action against a financial institution that does not meet such standards. The various regulatory agencies have adopted substantially similar regulations that define the five capital categories identified by FDICIA, using the total risk-based capital, Tier 1 risk-based capital and leverage capital ratios as the relevant capital measures. Such regulations establish various degrees of corrective action to be taken when an institution is considered undercapitalized. Under the regulations, a \"well capitalized\" institution must have a Tier 1 capital ratio of at least 6 percent, a total capital ratio of at least 10 percent and a leverage ratio of at least 5 percent and not be subject to a capital directive order. An \"adequately capitalized\" institution must have a Tier 1 capital ratio of at least 4 percent, a total capital ratio of at least 8 percent and a leverage ratio of at least 4 percent, or 3 percent in some cases. Under these guidelines, each of the Banks is adequately or well capitalized. ADDITIONAL INFORMATION The following information set forth in the accompanying 1993 Annual Report to Shareholders of the registrant is hereby incorporated by reference: Table 3 (pages 28 and 29) for average balance sheet amounts, related taxable equivalent interest earned or paid, and related average yields earned and rates paid. Tables 3 (pages 28 and 29) and 5 (page 31) and the narrative comments under the caption \"Net Interest Income\" (pages 30 and 32) for changes in taxable equivalent interest income and expense for each major category of interest-earning asset and interest-bearing liability. Tables 9 and 10 (pages 36 and 37, respectively) and the narrative comments under the caption \"Securities\" (pages 36 through 38) for information on the book values, maturities and weighted average yields of the securities (by category) of the registrant; and Note 5 (pages 66 and 67) of the Notes to Consolidated Financial Statements. Tables 19 (page 45), 21 (page 47) and 22 (page 48) for distribution of loans and leases, interest-rate risk and selected loan maturity data. Table 16 (page 43), the narrative comments under the caption \"Nonperforming Assets\" (pages 41 and 43), and Note 1 (pages 62 to 63) of the Notes to Consolidated Financial Statements for information on the nonperforming assets of the registrant. The narrative comments under the captions \"Concentrations of Credit Risk\" (pages 43 to 45) and \"Loans and Leases\" (page 38) for a discussion of the characteristics of the loan portfolio. Tables 14 (page 41) and 15 (page 42), the narrative comments under the caption \"Provision for Credit Losses\" (pages 32 and 33), \"Allowance for Credit Losses\" (pages 40 and 41) and Note 1 (page 62) of the Notes to Consolidated Financial Statements for information on the credit loss experience of the registrant. Tables 11 and 12 (pages 38 and 39, respectively) and the narrative comments under the caption \"Sources of Funds\" (pages 38 to 39) and Note 8 (page 68) of the Notes to Consolidated Financial Statements for deposit information. \"Six-Year Consolidated Statistical Summary\" (page 79) for return on assets, return on equity and dividend payout ratio for 1988 through 1993, inclusive. Table 13 (page 40) and Note 9 (pages 69 and 70) of the Notes to Consolidated Financial Statements for information on the short-term borrowings of the registrant. All tables, graphs, charts, summaries and narrative on pages 1, 25 through 55, and 78 through 79 for additional data on the consolidated operations of NationsBank Corporation and its majority-owned subsidiaries.\nCOMPETITION The activities in which the registrant, its non-banking subsidiaries and the Banks engage are highly competitive. Generally, the lines of activity and markets served involve competition with other banks and non-bank financial institutions, as well as other entities which offer financial services, located both within and without the United States. The methods of competition center around various factors, such as customer services, interest rates on loans and deposits, lending limits and location of offices.\nThe commercial banking business in the various local markets served by the various non-banking subsidiaries and the various Banks is highly competitive, and the non-banking subsidiaries and the Banks compete with other commercial banks, savings and loan associations and other businesses which provide similar services. The non-banking subsidiaries and the Banks actively compete in commercial lending activities with local, regional and international banks and non-bank financial organizations, some of which are larger than certain of the non-banking subsidiaries and the Banks. In its consumer lending operations, the non-banking subsidiaries and the Banks' competitors include other banks, savings and loan associations, credit unions, regulated small loan companies and other non-bank organizations offering financial services. In the trust business, the Banks compete with other banks, investment counselors and insurance companies in national markets for institutional funds and corporate pension and profit sharing accounts. The Banks also compete with other banks, insurance agents, financial counselors and other fiduciaries for personal trust business. The non-banking subsidiaries and the Banks also actively compete for funds. A primary source of funds for the Banks is deposits, and competition for deposits includes other deposit taking organizations, such as commercial banks, savings and loan associations and credit unions, and so-called \"money market\" mutual funds. The non-banking subsidiaries and the Banks also actively compete for funds in the open market.\nThe registrant's ability to expand into additional states remains subject to various federal and state laws. See \"Government Supervision and Regulation -- General\" for a more detailed discussion of interstate branching legislation and certain state legislation. EMPLOYEES At December 31, 1993, the registrant and its subsidiaries had 57,463 full time equivalent employees. Of the foregoing employees, 1,341 were employed by the registrant holding company, 5,832 were employed by the North Carolina subsidiary bank, 7,094 were employed by the Texas subsidiary bank, 5,080 were employed by the Florida subsidiary bank, 2,417 were employed by the South Carolina subsidiary bank, 5,897 were employed by the Virginia subsidiary bank, 3,712 were employed by the Georgia subsidiary bank, 1,595 were employed by the Tennessee subsidiary bank, 5,989 were employed by the Maryland subsidiary banks, 10,268 were employed by NationsBanc Services, Inc. (a subsidiary providing operational support services to the registrant and its subsidiaries) and the remainder were employed by the registrant's other banking and operating subsidiaries. ITEM 2.","section_1A":"","section_1B":"","section_2":"ITEM 2. PROPERTIES Construction was completed in 1992 on the 60-story NationsBank Corporate Center in Charlotte, North Carolina owned by the registrant through subsidiaries who are partners in NationsBanc Corporate Center Associates. NationsBank occupies approximately 475,000 square feet at market rates under a lease which expires in 2002, and approximately 630,000 square feet of office space is available for lease to third parties at market rates. At year end, approximately 95 percent was occupied by the registrant or subject to existing third party leases or letters of intention to lease.\nThe principal offices of NationsBank of North Carolina, N.A. (\"NationsBank North Carolina\") are located in leased space in the 40-story NationsBank Tower located at NationsBank Plaza, Charlotte, North Carolina. NationsBank North Carolina is the major tenant of the building with approximately 588,000 square feet of the net rentable space, of which approximately 456,000 square feet of space is under a lease which expires in 2009 and the remaining space is under leases of shorter duration.\nThe principal offices of NationsBank of Texas, N.A. (\"NationsBank Texas\") are located in approximately 667,000 square feet of leased space in the 72-story NationsBank Plaza in Dallas. NationsBank Texas is the major tenant of the building under a lease which expires in 2001 with renewal options through 2011.\nThe principal offices of NationsBank of Florida, N.A. (\"NationsBank Florida\") are located in approximately 304,000 square feet of leased space in the NationsBank Plaza in downtown Tampa, Florida. The lease is on a staggered schedule such that the upper floors expire in 1996 while the lower floors and branch bank expire in 2000. NationsBank Florida has four five-year renewal options on this space.\nThe principal offices of NationsBank of Virginia, N.A. (\"NationsBank Virginia\") are located in approximately 470,000 square feet of space in NationsBank Center in Richmond, Virginia, a facility that is owned by NationsBank Virginia.\nThe principal offices of NationsBank of Georgia, N.A. (\"NationsBank Georgia\") are located in leased space in the new 55-story NationsBank Plaza in Atlanta, Georgia which was completed in 1992. The registrant, through a subsidiary, is a partner in CSC Associates, L.P., a partnership that was formed with Cousins Properties Incorporated for the development and ownership of the office tower. NationsBank Georgia is the major tenant of the building with approximately 566,000 square feet of the net rentable space, under a lease that expires in 2012. NationsBank Georgia has three ten-year renewal options on this space. Of the approximately 668,000 remaining square feet, 417,000 square feet has been leased to third parties with 251,000 remaining square feet available for lease to third parties at market rates.\nThe principal offices of NationsBank of South Carolina, N.A. (\"NationsBank South Carolina\") are located in approximately 90,921 square feet of leased space in the NationsBank Tower in Columbia, South Carolina, under a lease which expires in 1995. NationsBank South Carolina, through subsidiaries, owns partnership interests in the tower and the underlying land. In addition, NationsBank South Carolina maintains offices in approximately 81,666 square feet of leased space in NationsBank Plaza in Columbia under a lease that expires in 1999. NationsBank South Carolina has four five-year renewal options.\nThe principal offices of NationsBank of Maryland, N.A. (\"NationsBank Maryland\") are located in approximately 142,000 square feet of leased space in the Rockledge Executive Center in Bethesda, Maryland under a lease that expires in 2002. NationsBank Maryland has two five-year renewal options on this space. The principal offices of Maryland National Bank are located in approximately 232,000 square feet of space in Baltimore, Maryland in a facility that is owned by Maryland National Bank.\nThe principal offices of NationsBank of Tennessee, N.A. (\"NationsBank Tennessee\") are located in approximately 191,000 square feet of leased space in One Sovran Plaza in Nashville, Tennessee under a lease that expires in 2012. NationsBank Tennessee has two ten-year and one five-year renewal options on this space.\nThe principal offices of NationsCredit are located in approximately 136,000 square feet of space in Allentown, Pennsylvania in a facility that is owned by NationsCredit. In addition, NationsCredit has approximately 287 leased premises around the country. The principal offices of Nations Financial Capital Corporation are located in approximately 42,880 square feet of leased space in Canterbury Green in Stamford, Connecticut, under a lease which expires in 1997. Nations Financial Capital Corporation, through subsidiaries or branch offices, leases space in the following states: Alabama, Arizona, Florida, Georgia, Illinois, Louisiana, Maryland, Mississippi, Nevada, Ohio, Oregon, Pennsylvania, Tennessee, Texas and Washington.\nAs of December 31, 1993, the registrant and its subsidiaries conducted their banking and bank-related activities in both leased and owned facilities throughout the jurisdictions in which the Banks are located, as follows:\nITEM 3.","section_3":"ITEM 3. LEGAL PROCEEDINGS The registrant and its subsidiaries are defendants in or parties to a number of pending and threatened legal actions and proceedings. Management believes, based upon the opinion of counsel, that the actions and liability and loss, if any, resulting from the final outcome of these proceedings, will not be material in the aggregate. ITEM 4.","section_4":"ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to security holders in the fourth quarter of the registrant's fiscal year. PART II ITEM 5.","section_5":"ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS The principal market on which the registrant's Common Stock (the \"Common Stock\") is traded is the New York Stock Exchange. The registrant also listed certain of its shares of Common Stock for trading on the Pacific Stock Exchange and on the Tokyo Stock Exchange. The high and low sales prices of Common Stock on the Composite Tape, as reported in published financial sources, for each quarterly period indicated below are as follows:\nAs of December 31, 1993, there were 108,435 record holders of Common Stock. During 1992 and 1993, the registrant paid dividends on a quarterly basis, which aggregated $1.51 per share in 1992 and $1.64 per share in 1993. The tenth paragraph of Note 9 (page 70) and Note 12 (page 71) of the Notes to Consolidated Financial Statements in the registrant's accompanying 1993 Annual Report to Shareholders are hereby incorporated by reference. See also \"Government Supervision and Regulation -- Distributions.\"\nITEM 6.","section_6":"ITEM 6. SELECTED FINANCIAL DATA The information set forth in Table 1 (page 25) in the registrant's accompanying 1993 Annual Report to Shareholders is hereby incorporated by reference. ITEM 7.","section_7":"ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS All of the information set forth under the captions \"Management's Discussion and Analysis -- 1993 Compared to 1992\" (pages 25 through 50), \"Management's Discussion and Analysis -- 1992 Compared to 1991\" (pages 50, 51, 54 and 55), \"Report of Management\" (page 56) and all tables, graphs and charts presented under the foregoing captions, in the 1993 Annual Report to Shareholders of the registrant is hereby incorporated by reference. ITEM 8.","section_7A":"","section_8":"ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following information set forth in the accompanying 1993 Annual Report to Shareholders of the registrant is hereby incorporated by reference: The Consolidated Financial Statements of NationsBank Corporation and Subsidiaries together with the report thereon of Price Waterhouse dated January 14, 1994 (pages 57 through 61); all Notes to Consolidated Financial Statements (pages 62 through 77); the unaudited information presented in Table 24 (page 51); and the narrative comments under the caption \"Fourth Quarter Review\" (page 50). ITEM 9.","section_9":"ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There were no changes in or disagreements with accountants on accounting and financial disclosure as defined by Item 304 of Regulation S-K. PART III ITEM 10.","section_9A":"","section_9B":"","section_10":"ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information set forth under the caption \"Election of Directors\" on pages 3 through 12 of the definitive 1994 Proxy Statement of the registrant furnished to shareholders in connection with its Annual Meeting to be held on April 27, 1994 (the \"1994 Proxy Statement\") with respect to the name of each nominee or director, that person's age, that person's positions and offices with the registrant, that person's business experience, that person's directorships in other public companies, that person's service on the registrant's Board and certain of that person's family relationships and information set forth in the first paragraph on page 15 of the 1994 Proxy Statement with respect to Section 16 matters is hereby incorporated by reference. CERTAIN ADDITIONAL INFORMATION CONCERNING EXECUTIVE OFFICERS OF THE REGISTRANT Pursuant to Instructions to Form 10-K and Item 401(b) of Regulation S-K, the name, age and position of each person who presently may be deemed to be an executive officer of the registrant are listed below along with such person's business experience during the past five years. Officers are appointed annually by the Board of Directors at the meeting of directors immediately following the annual meeting of shareholders. There are no arrangements or understandings between any officer and any other person pursuant to which the officer was selected. Fredric J. Figge, II, age 57, Chairman, Corporate Risk Policy of the registrant. Mr. Figge was named Chairman, Corporate Risk Policy in October, 1993 and prior to that time served as Chairman, Credit Policy of the registrant and of the Banks. He first became an officer of the registrant in September, 1987. He also serves as Chairman, Corporate Risk Policy of the Banks and as director of various subsidiaries of the registrant. James H. Hance, Jr., age 49, Vice Chairman and Chief Financial Officer of the registrant. Mr. Hance was named Chief Financial Officer in August, 1988, also served as Executive Vice President from March, 1987 to December 31, 1991 and was named Vice Chairman in October, 1993. He first became an officer of the registrant in 1987. He also serves as a director of Maryland National Bank, NationsBank of D.C., N.A., NationsBank Maryland, NationsBank Tennessee and various other subsidiaries of the registrant.\nKenneth D. Lewis, age 46, President of the registrant. Mr. Lewis was named to his present position in October, 1993. Prior to that time, from June, 1990 to October, 1993 he served as President of the registrant's General Bank and from August, 1988 to June, 1990, he served as President of NationsBank Texas. He first became an officer in 1971. Mr. Lewis also serves as a director of NationsBank Florida, NationsBank Georgia, NationsBank South Carolina and NationsBank Texas. Hugh L. McColl, Jr., age 58, Chairman of the Board and Chief Executive Officer of the registrant. He first became an officer in 1962. Mr. McColl was Chairman of the registrant from September, 1983 until effectiveness of the merger of C&S\/Sovran on December 31, 1991, and was re-appointed Chairman on December 31, 1992. He also serves as a director of the registrant and as Chief Executive Officer of the Banks. Marc D. Oken, age 47, Executive Vice President and Principal Accounting Officer of the registrant. Mr. Oken was named to his present position in July, 1989, and from 1983 to 1989 served as an Audit Partner with Price Waterhouse. He first became an officer in 1989. James W. Thompson, age 54, Vice Chairman of the registrant and Chairman of NationsBank East. Mr. Thompson was named Vice Chairman in October, 1993, and as Chairman of NationsBank East upon effectiveness of the merger of C&S\/Sovran on December 31, 1991. He first became an officer of NationsBank North Carolina in May, 1963. He also serves as chairman of the board of directors of Maryland National Bank, NationsBank North Carolina, NationsBank of D.C., N.A., NationsBank Maryland, NationsBank South Carolina and NationsBank Virginia. ITEM 11.","section_11":"ITEM 11. EXECUTIVE COMPENSATION Information with respect to current remuneration of executive officers, certain proposed remuneration to them, their options and certain indebtedness and other transactions set forth in the 1994 Proxy Statement (i) under the caption \"Board of Directors' Compensation\" on page 17 thereof, (ii) under the caption \"Executive Compensation\" on pages 18 and 19 thereof, (iii) under the caption \"Retirement Plans\" on pages 19 and 20 thereof, (iv) under the caption \"Deferred Compensation Plan\" on pages 20 and 21 thereof, (v) under the caption \"Benefit Security Trust\" on page 21 thereof, (vi) under the caption \"Stock Options\" on page 22 thereof, and (vii) under the caption \"Certain Transactions\" on pages 31 through the first paragraph on page 34 thereof, is, to the extent such information is required by Item 402 of Regulation S-K, hereby incorporated by reference. ITEM 12.","section_12":"ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The security ownership information required by Item 403 of Regulation S-K and relating to persons who beneficially own more than 5% of the outstanding shares of Common Stock or ESOP Preferred Stock is hereby incorporated by reference to the second full paragraph on page 3 of the 1994 Proxy Statement. Such required ownership information relating to directors, nominees and named executive officers individually and directors and executive officers as a group is hereby incorporated by reference to the Equity Securities ownership information set forth on pages 13 through 15 of the 1994 Proxy Statement. ITEM 13.","section_13":"ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information with respect to relationships and related transactions between the registrant and any director, nominee for director, executive officer, security holder owning 5% or more of the registrant's voting securities or any member of the immediate family of any of the above, as set forth in the 1994 Proxy Statement under the caption \"Compensation Committee Interlocks and Insider Participation\" beginning with the second full paragraph on page 29 through page 30 and under the caption \"Certain Transactions\" on pages 31 through the first paragraph on 34 thereof, is, to the extent such information is required by Item 404 of Regulation S-K, hereby incorporated by reference.\nPART IV ITEM 14.","section_14":"ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K a. The following documents are filed as part of this report:\nb. The following reports on Form 8-K have been filed by the registrant during the quarter ended December 31, 1993: Current Report on Form 8-K dated and filed October 8, 1993, Items 2 and 7. Current Report on Form 8-K dated and filed October 18, 1993, Items 5 and 7. Current Report on Form 8-K dated and filed October 29, 1993, Items 5 and 7. Form 8-K\/A Amendment No. 1 to Form 8-K dated and filed November 10, 1993, Item 7. c. The exhibits filed as part of this report and exhibits incorporated herein by reference to other documents are listed in the Index to Exhibits to this Annual Report on Form 10-K (pages E-1 through E-7, including executive compensation plans and arrangements which are identified separately by asterisk). With the exception of the information herein expressly incorporated by reference, the 1993 Annual Report to Shareholders and the 1994 Proxy Statement of the registrant are not to be deemed filed as part of this Annual Report on Form 10-K.\nSIGNATURE Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. NATIONSBANK CORPORATION\nDate: March 30, 1994 By: \/s\/ JAMES H. HANCE, JR. JAMES H. HANCE, JR.\nVICE CHAIRMAN AND CHIEF FINANCIAL OFFICER (PRINCIPAL FINANCIAL OFFICER) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.\nII-1\nII-2\nINDEX TO EXHIBITS\nE-1\nE-2\nE-3\nE-4\n* Denotes executive compensation plan or arrangements. E-5","section_15":""}
{"filename":"790528_1993.txt","cik":"790528","year":"1993","section_1":"ITEM 1. BUSINESS.\nInland Steel Industries, Inc. (the \"Company\"), a Delaware corporation, is the sole stockholder of Inland Steel Company and Inland Materials Distribution Group, Inc. (\"Distribution\"). Inland Steel Company is a fully integrated domestic steel company that produces and sells a wide range of steels, of which approximately 99% consists of carbon and high-strength low-alloy steel grades. It is also a participant in certain steel-finishing joint ventures. Distribution is the sole stockholder of Joseph T. Ryerson & Son, Inc. (\"Ryerson\") and J. M. Tull Metals Company, Inc. (\"Tull\"). Ryerson and Tull are leading steel service, distribution and materials processing organizations.\nBUSINESS SEGMENTS\nThe business segments of the Company and its subsidiaries are Integrated Steel (including iron ore operations) and Steel Service Centers. For the three years ended December 31, 1993, information relating to net sales, operating profit, identifiable assets, depreciation and capital expenditures for both business segments of the Company appears in Note 15 of Notes to Consolidated Financial Statements in the Company's Annual Report to Stockholders for the fiscal year ended December 31, 1993. Such information is hereby incorporated by reference herein.\nIntegrated Steel Operations\nGeneral\nInland Steel Company, a wholly owned subsidiary of the Company, is directly engaged in the production and sale of steel and related products and the transportation of iron ore, limestone and certain other commodities (primarily for its own use) on the Great Lakes. Certain subsidiaries and associated companies of Inland Steel Company are engaged in the mining and pelletizing of iron ore and in the operation of a cold-rolling mill and two steel galvanizing lines. All raw steel made by Inland Steel Company is produced at its Indiana Harbor Works located in East Chicago, Indiana, which also has facilities for converting the steel produced into semi-finished and finished steel products.\nIn August 1988, Inland Steel Company realigned its operations into two divisions -- the Inland Steel Flat Products Company division and the Inland Steel Bar Company division. The purpose of the realignment was to allow management to better focus on the distinctive competitive factors and customer requirements in the markets for the products manufactured by each division. The Flat Products division manages Inland Steel Company's iron ore operations, conducts its ironmaking operations, and produces the major portion of its raw steel. This division also manufactures and sells steel sheet, strip and plate and certain related semi-finished products for the automotive, appliance, office furniture, steel service center and electrical motor markets. The Bar division manufactures and sells special quality bars and certain related semi-finished products for forgers, steel service centers, heavy equipment manufacturers, cold finishers and the transportation industry. The Bar division closed its 28-inch structural mill in early 1991, completing Inland Steel Company's withdrawal from the structural steel manufacturing business.\nInland Steel Company and Nippon Steel Corporation (\"NSC\") are participants, through subsidiaries, in two joint ventures that operate steel-finishing facilities near New Carlisle, Indiana. The total cost of these two facilities was approximately $1.1 billion. I\/N Tek, owned 60% by a wholly owned subsidiary of Inland Steel Company and 40% by an indirect wholly owned subsidiary of NSC, operates a cold-rolling mill that began shipping commercial product in 1990 and reached its design capability in 1992. I\/N Kote, owned equally by wholly owned subsidiaries of Inland Steel Company and NSC (indirect in the case of NSC), operates two galvanizing lines which began start-up production in late 1991, became fully operational in the third quarter of 1992, and were operating near design capacity by August 1993. Inland Steel Company is also a participant, through a subsidiary, in another galvanizing joint venture located near Walbridge, Ohio.\nRaw Steel Production and Mill Shipments\nThe following table shows, for the five years indicated, Inland Steel Company's production of raw steel and, based upon American Iron and Steel Institute data, its share of total domestic raw steel production:\n- --------------- * Net tons of 2,000 pounds.\n** Based on preliminary data from the American Iron and Steel Institute.\nThe annual raw steelmaking capacity of Inland Steel Company was reduced to 6.0 million net tons from 6.5 million net tons effective September 1, 1991, as Inland Steel Company ceased making ingots. The basic oxygen process accounted for 94% of raw steel production of Inland Steel Company in 1993 and 1992. The remainder of such production was accounted for by electric furnaces.\nThe total tonnage of steel mill products shipped by Inland Steel Company for each of the five years 1989 through 1993 was 4.8 million tons in 1993; 4.3 million tons in 1992; 4.2 million tons in 1991; 4.7 million tons in 1990; and 4.9 million tons in 1989. In 1993, sheet, strip, plate and certain related semi-finished products accounted for 88% of the total tonnage of steel mill products shipped from the Indiana Harbor Works, and bar and certain related semi-finished products accounted for 12%.\nIn 1993 and 1992, approximately 93% of the shipments of the Flat Products division and 92% of the shipments of the Bar division were to customers in 20 mid-American states. Approximately 75% of the shipments of the Flat Products division and 83% of the shipments of the Bar division in 1993 were to customers in a five-state area comprised of Illinois, Indiana, Ohio, Michigan and Wisconsin, compared to 72% and 83% in 1992. Both divisions compete in these geographical areas, principally on the basis of price, service and quality, with the nation's largest producers of raw steel as well as with foreign producers and with many smaller domestic mills.\nAccording to data from the American Iron and Steel Institute, steel imports to the United States in 1993 totaled an estimated 19.5 million tons, compared with 17.1 million tons imported in 1992. Steel imports constituted approximately 18.8% of apparent domestic supply in 1993, compared with approximately 17.9% of apparent domestic supply in 1992. During 1984, the peak year for steel imports into the U.S., such imports accounted for 26.4% of apparent domestic supply. In addition to the importation of steel mill products, the U.S. steel industry has faced indirect imports of steel. Data from the American Iron and Steel Institute show that imports of steel contained in manufactured goods exceeded exports by an estimated 16 million tons in 1993.\nMany foreign steel producers are owned, controlled or subsidized by their governments. In 1992, the Company and certain domestic steel producers filed unfair trade petitions against foreign producers of certain bar, rod and flat-rolled products. During 1993, the International Trade Commission (\"ITC\") upheld final subsidy and dumping margins on essentially all of the bar and rod products and about half of the flat-rolled products, in each case based on the tonnage of the products against which claims were brought. The Company and certain domestic producers have filed formal appeals of the adverse ITC decisions in the U.S. Court of International Trade or similar jurisdiction bodies, and foreign producers have appealed certain of the findings against them. These appeals are pending and decisions are not expected before September 1994 in the bar and rod product cases, and mid-1995 in the flat-rolled product cases. It is not certain how the ITC actions and the appeals will impact imports of steel products into the United States or the price of such steel products.\nOn December 15, 1993, President Clinton notified the U.S. Congress of his intent to enter into agreements resulting from the Uruguay Round of multilateral trade negotiations under the General Agreement on Tariffs and Trade. The key provisions applicable to domestic steel producers include an agreement to eliminate steel tariffs in major industrial markets, including the United States, over a period of 10 years commencing July 1995, and agreements regarding various subsidy and dumping practices as well as dispute settlement procedures. Legislation must be enacted in order to implement the Uruguay Round agreements. Until that process is completed, it will not be possible to assess the extent to which existing U.S. laws against unfair trade practices may be weakened.\nPrimarily as a result of the influx of foreign steel imports and the depressed demand for domestic steel products that began in the early 1980s, certain facilities at the Indiana Harbor Works were permanently closed during the second half of the 1980s and the early 1990s and others were shut down for temporary periods. The 28-inch structural mill was closed in early 1991, reflecting a decision to withdraw from the structural steel markets. In late 1991 the mold foundry, No. 8 Coke Oven Battery, and selected other facilities were closed either as part of a program to permanently reduce costs through the closure of uneconomic facilities or for environmental reasons. Provisions with respect to the shut-down of the structural mill were taken in 1987. Provisions for estimated costs incurred in connection with the closure of the mold foundry, No. 8 Coke Oven Battery, and selected other facilities were made in 1991. Included in such provisions were costs associated with Inland Steel Company's closure of its No. 11 Coke Oven Battery in June 1992. All remaining coke batteries were closed by year-end 1993, a year earlier than previously anticipated. An additional provision was required with respect to those closures. (See \"Environment\" below.)\nFor the five years indicated, shipments by market classification of steel mill products produced by Inland Steel Company at its Indiana Harbor Works, including shipments to affiliates of the Company, are set forth below. The table confirms that a substantial portion of shipments by the Flat Products division was to steel service centers and transportation-related markets. The Bar division shipped more than 70% of its products to the steel converters\/processors market over the five-year period shown in the table.\nThe increase in 1993 of sales to the automotive market and the decline in sales to the steel converters\/processors market are indicative of Inland Steel Company's efforts to maximize its sales of value-added and higher margin products.\nSome value-added steel processing operations that Inland Steel Company does not have the capability to perform are performed by outside processors prior to shipment of certain products to Inland Steel Company's customers. In 1993, approximately 16% of the products produced by Inland Steel Company were processed further through value-added services such as electrogalvanizing, painting and slitting.\nApproximately 64% of the total tonnage of shipments by Inland Steel Company during 1993 from the Indiana Harbor Works was transported by truck, with the remainder transported primarily by rail. A wholly\nowned truck transport subsidiary of Inland Steel Company was responsible for shipment of approximately 15% of the total tonnage of products transported by truck from the Indiana Harbor Works in 1993.\nSubstantially all of the steel mill products produced by the Flat Products division are marketed through its own selling organization, with offices located in Chicago; Southfield, Michigan; St. Louis; and Nashville, Tennessee. Substantially all of the steel mill products produced by the Bar division are marketed through its sales office in East Chicago, Indiana.\nSee \"Product Classes\" below for information relating to the percentage of consolidated net sales accounted for by certain classes of similar products of integrated steel operations.\nRaw Materials\nInland Steel Company obtains iron ore pellets primarily from three iron ore properties, located in the United States and Canada, in which subsidiaries of Inland Steel Company have varying interests -- the Empire Mine in Michigan, the Minorca Mine in Minnesota and the Wabush Mine in Labrador and Quebec, Canada. In recent years Inland Steel Company has closed or terminated certain less cost-efficient iron ore mining operations. See \"Properties Relating to Integrated Steel Segment -- Raw Materials Properties and Interests\" in Item 2","section_1A":"","section_1B":"","section_2":"ITEM 2. PROPERTIES.\nPROPERTIES RELATING TO INTEGRATED STEEL SEGMENT\nSteel Production\nAll raw steel made by Inland Steel Company is produced at its Indiana Harbor Works located in East Chicago, Indiana. The property on which this plant is located, consisting of approximately 1,900 acres, is held by Inland Steel Company in fee. The basic production facilities of Inland Steel Company at its Indiana Harbor Works consist of furnaces for making iron; basic oxygen and electric furnaces for making steel; a continuous billet caster, a continuous combination slab\/bloom caster and two continuous slab casters; and a variety of rolling mills and processing lines which turn out finished steel mill products. Certain of these production facilities, including a continuous anneal line and the No. 2 BOF Shop Caster Facility (\"Caster\"), are held by Inland Steel Company under leasing arrangements. Inland Steel Company purchased the equity interest of the lessor of the Caster in March 1994 and currently intends to terminate the lease and prepay or formally assume the applicable debt in the first half of 1994. Substantially all of the remaining property, plant and equipment at the Indiana Harbor Works is subject to the lien of the First Mortgage of Inland Steel Company dated April 1, 1928, as amended and supplemented. See \"Business Segments -- Integrated Steel Operations -- Raw Steel Production and Mill Shipments\" in Item 1 above for further information relating to capacity and utilization of Inland Steel Company's properties. Inland Steel Company's properties are adequate to serve its present and anticipated needs, taking into account those issues discussed in \"Capital Expenditures and Investments in Joint Ventures\" in Item 1 above.\nI\/N Tek, a partnership in which a subsidiary of Inland Steel Company owns a 60% interest, has constructed a 1,500,000-ton annual capacity cold-rolling mill on approximately 200 acres of land, which it owns in fee, located near New Carlisle, Indiana. Substantially all the property, plant and equipment owned by I\/N Tek at this location is subject to a lien securing related indebtedness. The I\/N Tek facility is adequate to serve the present and anticipated needs of Inland Steel Company planned for such facility.\nI\/N Kote, a partnership in which a subsidiary of Inland Steel Company owns a 50% interest, has constructed a 900,000-ton annual capacity steel galvanizing facility on approximately 25 acres of land, which it owns in fee, located adjacent to the I\/N Tek site. Substantially all the property, plant and equipment owned by I\/N Kote is subject to a lien securing related indebtedness. The I\/N Kote facility is adequate to serve the present and anticipated needs of Inland Steel Company planned for such facility.\nPCI Associates, a partnership in which a subsidiary of Inland Steel Company owns a 50% interest, has constructed a pulvarized coal injection facility on land located within the Inland Harbor Works. Inland Steel Company leases PCI Associates the land upon which the facility is located. Substantially all the property,\nplant and equipment owned by PCI Associates is subject to a lien securing related indebtedness. Upon achieving operation at design capacity, the PCI Associates facility will be adequate to serve the anticipated needs of Inland Steel Company planned for such facility.\nInland Steel Company owns three vessels for the transportation of iron ore and limestone on the Great Lakes, and a subsidiary of Inland Steel Company owns a fleet of 404 coal hopper cars (100-ton capacity each) used in unit trains to move coal to the Indiana Harbor Works. See \"Business Segments -- Integrated Steel Operations -- Raw Materials\" in Item 1 above for further information relating to utilization of Inland Steel Company's transportation equipment. Such equipment is adequate, when combined with purchases of transportation services from independent sources, to meet Inland Steel Company's present and anticipated transportation needs.\nInland Steel Company also owns and maintains research and development laboratories in East Chicago, Indiana, which facilities are adequate to serve its present and anticipated needs.\nRaw Materials Properties and Interests\nCertain information relating to raw materials properties and interests of Inland Steel Company and its subsidiaries is set forth below. See \"Business Segments -- Integrated Steel Operations -- Raw Materials\" in Item 1 above for further information relating to capacity and utilization of such properties and interests.\nIron Ore\nThe operating iron ore properties of Inland Steel Company's subsidiaries and of the iron ore ventures in which Inland Steel Company has an interest are as follows:\nThe Empire Mine is operated by the Empire Iron Mining Partnership, in which Inland Steel Company has a 40% interest. Inland Steel Company, through a subsidiary, is the sole owner and operator of the Minorca Mine. The Wabush Mine is a taconite project in which Inland Steel Company owns a 13.75% interest. Inland Steel Company also owns a 38% interest in the Butler Taconite project (permanently closed in 1985) in Nashwauk, Minnesota.\nThe reserves at the Empire Mine, the Minorca Mine and the Wabush Mine are held under leases expiring, or expected at current production rates to expire, between 2012 and 2040. Substantially all of the reserves at Butler Taconite are held under leases. Inland Steel Company's share of the production capacity of its interests in such iron ore properties is sufficient to provide the majority of its present and anticipated iron ore pellet requirements. Any remaining requirements have been and are expected to continue to be readily available from independent sources. During 1992, the Minorca Mine's original ore body was depleted and production shifted to a new major iron ore body, the Laurentian Reserve, acquired by lease in 1990.\nLimestone and Dolomite\nThe limestone and dolomite properties of Inland Steel Company located near the town of Gulliver in the Upper Peninsula of Michigan were permanently closed on December 29, 1989 and sold in 1990.\nCoal\nInland Steel Company's sole remaining coal property, the Lancashire No. 25 Property, located near Barnesboro, Pennsylvania, is permanently closed. All Inland Steel Company coal requirements for the past several years have been and are expected to continue to be met through contract purchases and other purchases from independent sources.\nPROPERTIES OF STEEL SERVICE CENTER SEGMENT\nJoseph T. Ryerson & Son, Inc.\nRyerson owns its regional business unit headquarters offices in Chicago and leases regional headquarters offices in West Chester (PA) and Renton (WA). Ryerson\/East division maintains steel service centers at Allston (MA), Buffalo, Carnegie (PA), Charlotte, Chattanooga, Cleveland, Jersey City, Philadelphia, and Wallingford (CT). Ryerson\/Central's service centers are in Chicago, Cincinnati, Dallas, Detroit, Houston, Indianapolis, Kansas City, Milwaukee, Plymouth (MN), St. Louis, and Tulsa. Ryerson\/West's service centers are in Commerce City (CO), Emeryville (CA), Los Angeles, Phoenix, Portland (OR), Renton (WA), Spokane, and Salt Lake City. Ryerson Coil Processing division's processing facilities are located in Chicago, Marshalltown (IA), Plymouth (MN) and New Hope (MN).\nAll of Ryerson's operating facilities are held in fee with the exception of a portion of the property at St. Louis (held under long-term lease), a portion of the property in Portland (held under short-term lease), a satellite facility at Omaha (held under short-term lease), two facilities in Chicago (held under short-term lease), two facilities in New Hope (MN) (one partly held in fee and partly under short-term lease, the other held under short-term lease), one facility in Marshalltown (IA) (held under an installment purchase contract) and one facility in Salt Lake City (held under short-term lease). In addition, Ryerson holds in fee approximately 44 acres of unimproved property in Powder Springs (GA) and approximately eight acres of property in Elk Grove Village (IL), formerly the site of an operating facility. Ryerson's properties are adequate to serve its present and anticipated needs.\nJ. M. Tull Metals Company, Inc.\nTull maintains service centers in Birmingham, Columbia (SC), Jacksonville, Miami, Tampa, Baton Rouge, New Orleans, Charlotte, Greensboro (NC), Greenville (SC), Richmond, and Norcross (GA), where its headquarters is located. All of these facilities are owned by Tull in fee, except for the Columbia facility, which is held under short-term lease. Tull's AFCO Metals, Inc. subsidiary operates service centers in Fort Smith (AR), Oklahoma City, Shreveport, West Memphis (AR), Wichita, Jackson (MS) and Little Rock. AFCO's headquarters are located in Norcross (GA), where it leases space owned in fee by Tull. Each of AFCO's facilities is held in fee except the Wichita facility, which is held under a short-term lease. Tull holds in fee land improved with a parking garage in Atlanta. Tull's properties are adequate to serve its present and anticipated needs.\nOTHER PROPERTIES\nThe Company and certain of its subsidiaries lease, under a long-term arrangement, approximately 63% of the space in the Inland Steel Building located at 30 West Monroe Street, Chicago, Illinois (where the Company's principal executive offices are located), which property interest is adequate to serve the Company's present and anticipated needs. Approximately 12% of such space is under sublease to other parties.\nMagnetics International, Inc., a subsidiary of the Company, owns approximately 63 acres in northern Indiana, on which site it has constructed an iron oxide plant that began operation in April 1991. Such facility is adequate to serve the present and anticipated needs of Magnetics International, Inc. Certain subsidiaries of the Company hold in fee at various locations an aggregate of approximately 355 acres of land, all of which is for sale. Inland Steel Company also holds in fee approximately 300 acres of land adjacent to the I\/N Tek and I\/N Kote sites, which land is available for future development. Approximately 1,060 acres of rural land, which are held in fee at various locations in the north-central United States by various raw materials ventures, are\nalso for sale. I R Construction Products Company, Inc. (formerly Inryco, Inc.), a subsidiary of Inland Steel Company and the Company's former Construction Products business segment, owns, in fee, a combination office building and warehouse in Hoffman Estates (IL), which is for sale.\nITEM 3.","section_3":"ITEM 3. LEGAL PROCEEDINGS.\nOn August 12, 1992, Inland Steel Administrative Service Company (\"ISAS\"), a wholly owned subsidiary of Inland Steel Company, filed a lawsuit in the Court of Common Pleas in Lorain County, Ohio against Western Steel Group, Inc. (\"Western\") to collect the unpaid balance of its account for steel products sold to Western by Inland Steel Company in the amount of $5.7 million. On October 15, 1992, Western filed a counterclaim against ISAS and a third-party complaint against Inland Steel Company for $40 million actual damages and $100 million punitive damages, alleging, among other things, breach of contract and wrongful interference with contractual relations in connection with a refusal by Inland Steel Company to continue selling steel products to Western and defamation of Western and a patent held by Western in connection with discussions with third parties. All claims were settled between the parties in February 1994 and the settlement was approved by the court. Under the terms of the settlement, ISAS has received $3.4 million and all counterclaims against Inland Steel Company and ISAS have been released.\nOn June 10, 1993, the U.S. District Court for the Northern District of Indiana entered a consent decree that resolved all matters raised by the lawsuit filed by the EPA in 1990. The consent decree includes a $3.5 million cash fine, environmentally beneficial projects at the Indiana Harbor Works through 1997 costing approximately $7 million, and sediment remediation of portions of the Indiana Harbor Ship Canal and Indiana Harbor Turning Basin estimated to cost approximately $19 million over the next several years. The fine and estimated remediation costs were provided for in 1991 and 1992. After payment of the fine, the Company's reserve for environmental liabilities totalled $19 million. The consent decree also defines procedures for corrective action at Inland Steel Company's Indiana Harbor Works. The procedures defined establish essentially a three-step process, each step of which requires agreement of the EPA before progressing to the next step in the process, consisting of: assessment of the site, evaluation of corrective measures for remediating the site, and implementation of the remediation plan according to the agreed-upon procedures. The Company is presently assessing the extent of environmental contamination. The Company anticipates that this assessment will cost approximately $1 million to $2 million per year and take another three to five years to complete. Because neither the nature and extent of the contamination nor the corrective actions can be determined until the assessment of environmental contamination and evaluation of corrective measures is completed, the Company cannot presently reasonably estimate the costs of or the time required to complete such corrective actions. Such corrective actions may, however, require significant expenditures over the next several years that may be material to the results of operations or financial position of the Company. Insurance coverage with respect to such corrective actions is not significant.\nOn March 22, 1985, the EPA issued an administrative order to Inland Steel Company's former Inland Steel Container Company Division (\"Division\") naming the former Division and various other unrelated companies as responsible parties under the Comprehensive Environmental Response, Compensation and Liability Act (\"CERCLA\") in connection with the cleanup of a waste disposal facility operated by Duane Marine Salvage Corporation at Perth Amboy, New Jersey. The administrative order alleged that certain of the former Division's wastes were transported to, and disposed of at, that facility and required Inland Steel Company to join with other named parties in taking certain actions relating to the facility. Inland Steel Company and the other administrative order recipients have completed the work required by the order. In unrelated matters, the EPA also advised the former Division and various other unrelated parties of other sites located in New Jersey at which the EPA expects to spend public funds on any investigative and corrective measures that may be necessary to control any releases or threatened releases of hazardous substances, pollutants and contaminants pursuant to the applicable provisions of CERCLA. The notice also indicated that the EPA believes Inland Steel Company may be a responsible party under CERCLA. The extent of Inland Steel Company's involvement and participation in these matters has not yet been determined. While it is not possible at this time to predict the amount of Inland Steel Company's potential liability, none of these matters is expected to materially affect Inland Steel Company's financial position.\nThe EPA has adopted a national policy of seeking substantial civil penalties against owners and operators of sources for noncompliance with air and water pollution control statutes and regulations under certain circumstances. It is not possible to predict whether further proceedings will be instituted against the Company or any of its subsidiaries pursuant to such policy, nor is it possible to predict the amount of any such penalties that might be assessed in any such proceeding.\nThe Indiana Department of Environmental Management (\"IDEM\") from time to time advises various parties of alleged violations of air pollution regulations by issuing Notices of Violation so as to initiate discussions concerning corrective measures. Inland Steel Company has three currently outstanding unresolved Notices of Violation at its Indiana Harbor Works. Inland Steel Company is presently in discussions with the staff of IDEM with respect to these matters and cannot currently estimate the time period within which these matters will be resolved. While it is not possible at this time to predict the amount of Inland Steel Company's potential liability, none of these matters is expected to materially affect Inland Steel Company's financial position.\nInland Steel Company received a Notice of Violation from IDEM dated March 3, 1989 alleging violations of Inland Steel Company's National Pollution Discharge Elimination System permit regarding water discharges. Inland Steel Company is presently in discussions with the staff of IDEM with respect to these matters and cannot currently estimate the time period within which these matters will be resolved. While it is not possible at this time to predict the amount of Inland Steel Company's potential liability, this matter is not expected to materially affect Inland Steel Company's financial position.\nInland Steel Company received a Special Notice of Potential Liability (\"Special Notice\") from IDEM on February 18, 1992 relating to the Four County Landfill Site, Fulton County, Indiana (the \"Facility\"). The Special Notice stated that IDEM has documented the release of hazardous substances, pollutants and contaminants at the Facility and was planning to spend public funds to undertake an investigation and control the release or threatened release at the Facility unless IDEM determined that a potentially responsible party (\"PRP\") will properly and promptly perform such action. The Special Notice further stated that Inland Steel Company may be a PRP and that Inland Steel Company, as a PRP, may have potential liability with respect to the Facility. In August 1993, Inland Steel Company, along with other PRPs, entered into an Agreed Order with IDEM, pursuant to which the PRPs agreed to perform a Remedial Investigation\/Feasibility Study (\"RI\/FS\") for the Facility and pay certain past and future IDEM costs. In addition, the PRPs agreed to provide funds for operation and maintenance necessary for stabilization of the Facility. Those costs which Inland Steel Company has agreed to assume under the Agreed Order are not currently anticipated to exceed $154,000. The cost of the final remedies which will be determined to be required with respect to the Facility cannot be reasonably estimated until, at a minimum, the RI\/FS is completed. Inland Steel Company is therefore unable to determine the extent of its potential liability, if any, relating to the Facility or whether this matter could materially affect Inland Steel Company's financial position.\nITEM 4.","section_4":"ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS.\nNot applicable.\nEXECUTIVE OFFICERS OF REGISTRANT.\nOfficers are elected by the Board of Directors of the Company to serve for a period ending with the next succeeding annual meeting of the Board of Directors held immediately after the annual meeting of stockholders. All executive officers of the Company, with the exception of Earl L. Mason, H. William Howard, Olivia M. Thompson, and Maurice S. Nelson, Jr., have been employed by the Company or a subsidiary of the Company throughout the past five years.\nSet forth below are the executive officers of the Company as of March 1, 1994 and the age of each as of such date. Their principal occupations held presently and during the past five years, including positions and offices held with the Company or a significant subsidiary of the Company are shown below.\nPART II\nITEM 5.","section_5":"ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS.\nThe common stock of the Company is listed and traded on the New York Stock Exchange. As of March 15, 1994, the number of holders of record of common stock of the Company was 15,388.\nThe remaining information called for by this Item 5 is set forth under the caption \"Summary by Quarter\" in the Company's Annual Report to Stockholders for the fiscal year ended December 31, 1993, and is hereby incorporated by reference herein.\nITEM 6.","section_6":"ITEM 6. SELECTED FINANCIAL DATA.\nThe information called for by this Item 6 with respect to each of the last five years of the Company and its predecessor is set forth under the caption \"Eleven-Year Summary of Selected Financial Data and Operating Results\" in the Company's Annual Report to Stockholders for the fiscal year ended December 31, 1993, and is hereby incorporated by reference herein.\nITEM 7.","section_7":"ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.\nThe information called for by this Item 7 is set forth in the Financial Review section of the Company's Annual Report to Stockholders for the fiscal year ended December 31, 1993, and, excluding the tables entitled \"Inland Steel Company -- Steel Shipments by Market\" and \"Inland Materials Distribution Group - -- Shipments by Market\" and the bar charts entitled \"Inland Steel Industries -- Debt to Total Capitalization,\" \"Inland Steel Industries -- Capital Expenditures versus Depreciation,\" \"Inland Steel Industries -- Total Employment Costs\" and \"Inland Steel Industries -- Average Employment Cost Per Employee\" contained therein, is hereby incorporated by reference herein.\nITEM 8.","section_7A":"","section_8":"ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.\nThe consolidated financial statements of the Company called for by this Item 8, together with the report thereon of the independent accountants dated February 23, 1994, are set forth under the captions \"Report of Independent Accountants\" and \"Statement of Accounting and Financial Policies\" as well as in all consolidated financial statements and schedules of the Company and the \"Notes to Consolidated Financial Statements\" in the Company's Annual Report to Stockholders for the fiscal year ended December 31, 1993, and are hereby incorporated by reference herein. The financial statement schedules listed under Item 14(a)2 of this Report on Form 10-K, together with the report thereon of the independent accountants dated February 23, 1994, should be read in conjunction with the consolidated financial statements. Financial statement schedules not included in this Report on Form 10-K have been omitted because they are not applicable or because the information called for is shown in the consolidated financial statements or notes\nthereto. Separate consolidated financial statements for Inland Steel Company are set forth in Inland Steel Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993. Separate consolidated financial statements for Inland Materials Distribution Group, Inc. are set forth in Appendix A to this Report.\nConsolidated quarterly sales, earnings and per share common stock information for 1992 and 1993 are set under the caption \"Summary by Quarter\" in the Company's Annual Report to Stockholders for the fiscal year ended December 31, 1993, and are hereby incorporated by reference herein.\nITEM 9.","section_9":"ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.\nNone.\nPART III\nITEM 10.","section_9A":"","section_9B":"","section_10":"ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.\nThe information called for by this Item 10 with respect to directors of the Company will be set forth under the caption \"Election of Directors\" in the Company's definitive Proxy Statement which will be furnished to stockholders in connection with the Annual Meeting of Stockholders to be held on May 25, 1994, and is hereby incorporated by reference herein. The information called for with respect to executive officers of the Company is included in Part I of this Report on Form 10-K under the caption \"Executive Officers of Registrant.\"\nITEM 11.","section_11":"ITEM 11. EXECUTIVE COMPENSATION.\nThe information called for by this Item 11 will be set forth under the caption \"Executive Compensation\" in the Company's definitive Proxy Statement which will be furnished to stockholders in connection with the Annual Meeting of Stockholders to be held on May 25, 1994, and is hereby incorporated by reference herein.\nITEM 12.","section_12":"ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.\n(a) The information called for by this Item 12 with respect to security ownership of more than five percent of the Company's common stock, Series E ESOP Convertible Preferred Stock and Series F Exchangeable Preferred Stock will be set forth under the caption \"Additional Information Relating to Voting Securities\" in the Company's definitive Proxy Statement which will be furnished to stockholders in connection with the Annual Meeting of Stockholders scheduled to be held on May 25, 1994, and is hereby incorporated by reference herein.\nThe following beneficial owners of Series A $2.40 Cumulative Convertible Preferred Stock are the only persons known to the Company to be the beneficial owners (as defined by the Securities and Exchange Commission), as of March 15, 1994, of more than five percent of that class of the Company's voting securities:\n(b) The information called for by this Item 12 with respect to the security ownership of directors and of management will be set forth under the caption \"Security Ownership of Directors and Management\" in the Company's definitive Proxy Statement which will be furnished to stockholders in connection with the Annual Meeting of Stockholders to be held on May 25, 1994, and is hereby incorporated by reference herein.\nITEM 13.","section_13":"ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.\nInformation called for by this Item 13 will be set forth under the caption \"Additional Information Relating to Voting Securities -- Certain Relationships and Related Transactions\" in the Company's definitive Proxy Statement which will be furnished to stockholders in connection with the Annual Meeting of Stockholders to be held on May 25, 1994, and is hereby incorporated by reference herein.\nPART IV\nITEM 14.","section_14":"ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.\n(A) DOCUMENTS FILED AS A PART OF THIS REPORT.\n1. CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY. The consolidated financial statements listed below are set forth in the Company's Annual Report to Stockholders for the fiscal year ended December 31, 1993, and are incorporated by reference in Item 8 of this Annual Report on Form 10-K.\nReport of Independent Accountants dated February 23, 1994.\nStatement of Accounting and Financial Policies.\nConsolidated Statements of Operations and Reinvested Earnings for the three years ended December 31, 1993.\nConsolidated Statement of Cash Flows for the three years ended December 31, 1993.\nConsolidated Balance Sheet at December 31, 1993 and 1992.\nSchedules to Consolidated Financial Statements at December 31, 1993 and 1992, relating to:\nInvestments and Advances.\nProperty, Plant and Equipment.\nLong-Term Debt.\nNotes to Consolidated Financial Statements.\n2. FINANCIAL STATEMENT SCHEDULES OF THE COMPANY.\nReport of Independent Accountants on Financial Statement Schedules dated February 23, 1994. (Included on page 27 of this Report)\nConsent of Independent Accountants. (Included on page 27 of this Report)\nFor the years ended December 31, 1993, 1992 and 1991:\nSchedule III -- Condensed Financial Information (Parent Company Only). (Included on pages 28 to 30, inclusive, of this Report)\nSchedule V -- Property, Plant and Equipment. (Included on page 31 of this Report)\nSchedule VI -- Reserve for Depreciation, Amortization and Depletion of Property, Plant and Equipment. (Included on page 32 of this Report)\nSchedule VIII -- Reserves. (Included on page 33 of this Report)\nSchedule IX -- Short-Term Borrowings. (Included on page 34 of this Report)\nSchedule X -- Supplementary Profit and Loss Information. (Included on page 35 of this Report)\n3. CONSOLIDATED FINANCIAL STATEMENTS OF INLAND MATERIALS DISTRIBUTION GROUP, INC.\nThe consolidated financial statements listed below are set forth in Appendix A on pages A-1 to A-13 inclusive, of this Report.\nReport of Independent Accountants dated February 23, 1994. (Page A-2)\nConsolidated Statements of Operations and Reinvested Earnings for the three years ended December 31, 1993. (Page A-3)\nConsolidated Statement of Cash Flows for the three years ended December 31, 1993. (Page A-4)\nConsolidated Balance Sheet at December 31, 1993 and 1992. (Page A-5)\nStatement of Accounting and Financial Policies. (Page A-6)\nNotes to Consolidated Financial Statements. (Pages A-7 to A-13, inclusive)\n4. EXHIBITS. The exhibits required to be filed by Item 601 of Regulation S-K are listed under the caption \"Exhibits\" below.\n(B) REPORTS ON FORM 8-K.\nNo reports on Form 8-K were filed by the Company during the quarter ended December 31, 1993.\n(C) EXHIBITS.\n- ---------------\n* Management contract or compensatory plan or arrangement required to be filed as an exhibit to the Company's Annual Report on Form 10-K.\n- ---------------\n* Management contract or compensatory plan or arrangement required to be filed as an exhibit to the Company's Annual Report on Form 10-K.\n- ---------------\n* Management contract or compensatory plan or arrangement required to be filed as an exhibit to the Company's Annual Report on Form 10-K.\nREPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULES\nTo the Board of Directors of Inland Steel Industries, Inc.\nOur audits of the consolidated financial statements referred to in our report dated February 23, 1994 appearing on page 26 of the 1993 Annual Report to Stockholders of Inland Steel Industries, Inc. (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the Financial Statement Schedules listed in Item 14(a)2 of this Annual Report on Form 10-K. In our opinion, these Financial Statement Schedules present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.\nPRICE WATERHOUSE\nChicago, Illinois February 23, 1994\nCONSENT OF INDEPENDENT ACCOUNTANTS\nWe hereby consent to the incorporation by reference in the Prospectuses constituting part of the Registration Statement on Form S-8 (No. 33-48770), Registration Statement on Form S-8 (No. 33-22902); Registration Statement on Form S-8 (No. 33-32504); and Post-Effective Amendment No. 2 to Form S-8 Registration Statement (No. 33-6627) of Inland Steel Industries, Inc. of our report dated February 23, 1994, appearing on page 26 of the 1993 Annual Report to Stockholders of Inland Steel Industries, Inc. which is incorporated in this Annual Report on Form 10-K. We also consent to the incorporation by reference of our report on the Financial Statement Schedules, which appears above.\nPRICE WATERHOUSE\nChicago, Illinois March 30, 1994\nINLAND STEEL INDUSTRIES, INC. Schedule III--Condensed Financial Information (Parent Company Only)\nSTATEMENT OF OPERATIONS YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991 (DOLLARS IN MILLIONS) - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------\n- --------------- Cr. = Credit\nSee Notes to Consolidated Financial Statements in Item 8. - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------\nINLAND STEEL INDUSTRIES, INC. Schedule III--Condensed Financial Information (Parent Company Only)\nSTATEMENT OF CASH FLOWS YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991 (DOLLARS IN MILLIONS) - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------\nSee Notes to Consolidated Financial Statements in Item 8. - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------\nINLAND STEEL INDUSTRIES, INC. Schedule III--Condensed Financial Information (Parent Company Only)\nBALANCE SHEET AT DECEMBER 31, 1993 AND 1992 (DOLLARS IN MILLIONS--EXCEPT PER SHARE DATA) - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------\nMaturities of Long-Term Debt due within five years are: $7.7 million in 1994, $8.3 million in 1995, $9.0 million in 1996, $9.7 million in 1997, and $10.5 million in 1998. See Notes to Consolidated Financial Statements in Item 8. - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------\nINLAND STEEL INDUSTRIES, INC. AND SUBSIDIARY COMPANIES\nSCHEDULE V--PROPERTY, PLANT AND EQUIPMENT\nFOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991 (DOLLARS IN MILLIONS) - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------\n- --------------- NOTES: (A) Transfer between property, plant and equipment and other assets and other miscellaneous adjustments.\n(B) Reflects the change in book value of rolls, annealing covers and convector plates.\n- -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------\nINLAND STEEL INDUSTRIES, INC. AND SUBSIDIARY COMPANIES\nSCHEDULE VI--RESERVE FOR DEPRECIATION, AMORTIZATION AND DEPLETION OF PROPERTY, PLANT AND EQUIPMENT\nFOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991 (DOLLARS IN MILLIONS) - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------\n- --------------- NOTE: (A) Reclassification among indicated reserve accounts and other miscellaneous adjustments.\n- -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------\nINLAND STEEL INDUSTRIES, INC. AND SUBSIDIARY COMPANIES\nSCHEDULE VIII--RESERVES\nFOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991 (DOLLARS IN MILLIONS) - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------\n- --------------- NOTES: (A) Bad debts written off during year. (B) Allowances granted during year.\n- -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------\nINLAND STEEL INDUSTRIES, INC. AND SUBSIDIARY COMPANIES\nSCHEDULE IX--SHORT-TERM BORROWINGS\nFOR YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991 (DOLLARS IN MILLIONS) - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------\n- --------------- NOTES: (A) The average outstanding amount was computed by aggregating the daily balances of short-term debt outstanding and dividing the aggregate by the number of days in the year. (B) The weighted average interest rate during the year was computed by dividing interest expense on short-term debt by the average short-term debt outstanding during the year.\n- -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------\nINLAND STEEL INDUSTRIES, INC. AND SUBSIDIARY COMPANIES\nSCHEDULE X--SUPPLEMENTARY PROFIT AND LOSS INFORMATION\nFOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991 (DOLLARS IN MILLIONS) - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------\n- -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------\nSIGNATURES\nPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.\nINLAND STEEL INDUSTRIES, INC.\nBy: \/s\/ ROBERT J. DARNALL Robert J. Darnall Chairman, President and Chief Executive Officer\nDate: March 30, 1994\nPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated.\nAPPENDIX A\nINDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF INLAND MATERIALS DISTRIBUTION GROUP, INC. AND SUBSIDIARY COMPANIES (A WHOLLY OWNED SUBSIDIARY OF INLAND STEEL INDUSTRIES, INC.)\nA-1\nREPORT OF INDEPENDENT ACCOUNTANTS\nTO THE BOARD OF DIRECTORS AND STOCKHOLDER OF INLAND MATERIALS DISTRIBUTION GROUP, INC.\nIn our opinion, the consolidated financial statements listed in the index appearing on page A-1 present fairly, in all material respects, the financial position of Inland Materials Distribution Group, Inc. (a wholly owned subsidiary of Inland Steel Industries, Inc.) and Subsidiary Companies at December 31, 1993 and 1992, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1993, in conformity with generally accepted accounting principles. 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 of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.\nAs discussed in Notes 4 and 5 to the consolidated financial statements, in 1992 the Company changed its method of accounting for postretirement benefits other than pensions and for income taxes.\nPRICE WATERHOUSE\nChicago, Illinois February 23, 1994\nA-2\nINLAND MATERIALS DISTRIBUTION GROUP, INC. AND SUBSIDIARY COMPANIES (A WHOLLY OWNED SUBSIDIARY OF INLAND STEEL INDUSTRIES, INC.)\nCONSOLIDATED STATEMENTS OF OPERATIONS AND REINVESTED EARNINGS\nDOLLARS IN MILLIONS - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------\nThe accompanying notes are an integral part of these statements.\n- -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------\nA-3\nINLAND MATERIALS DISTRIBUTION GROUP, INC. AND SUBSIDIARY COMPANIES (A WHOLLY OWNED SUBSIDIARY OF INLAND STEEL INDUSTRIES, INC.)\nCONSOLIDATED STATEMENT OF CASH FLOWS\nDOLLARS IN MILLIONS - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------\nThe accompanying notes are an integral part of these statements.\n- -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------\nA-4\nINLAND MATERIALS DISTRIBUTION GROUP, INC. AND SUBSIDIARY COMPANIES (A WHOLLY OWNED SUBSIDIARY OF INLAND STEEL INDUSTRIES, INC.)\nCONSOLIDATED BALANCE SHEET\nDOLLARS IN MILLIONS - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------\nThe accompanying notes are an integral part of these statements.\n- -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------\nA-5\nINLAND MATERIALS DISTRIBUTION GROUP, INC. AND SUBSIDIARY COMPANIES (A Wholly Owned Subsidiary of Inland Steel Industries, Inc.)\nSTATEMENT OF ACCOUNTING AND FINANCIAL POLICIES - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------\nThe following briefly describes the Company's principal accounting and financial policies.\nPrinciples of Consolidation\nThe accompanying consolidated financial statements include the accounts of Joseph T. Ryerson & Son, Inc., and J. M. Tull Metals Company, Inc., which are wholly owned subsidiaries of the Company. The accounts of J. M. Tull Metals Company, Inc. are consolidated with its wholly owned subsidiary, AFCO Metals, Inc.\nInventory valuation\nInventories are valued at cost which is not in excess of market. Cost is determined principally by the last-in, first-out (LIFO) method.\nProperty, plant and equipment\nProperty, plant and equipment is depreciated, for financial reporting purposes, on the straight-line method over the estimated useful lives of the assets. Expenditures for normal repair and maintenance are charged against income in the period incurred.\nExcess of cost over net assets acquired\nThe excess of cost over fair value of net assets of businesses acquired (goodwill) is amortized on the straight-line method over a 25-year period. Accumulated amortization of goodwill totaled $7.5 million at December 31, 1993 and $6.1 million at December 31, 1992.\nBenefits for retired employees\nPension benefits are provided by the Company to substantially all employees under a trusteed noncontributory plan of Inland Steel Industries, Inc. (\"Industries\"). Life insurance and certain medical benefits are provided for substantially all retired employees.\nThe estimated costs of pension, medical, and life insurance benefits are determined annually by consulting actuaries. With the adoption of Financial Accounting Standards Board (\"FASB\") Statement No. 106, \"Employers' Accounting for Postretirement Benefits Other Than Pensions,\" effective January 1, 1992, the cost of health care benefits for retirees, previously recognized as incurred, is now being accrued during their term of employment (see Note 4). Pensions are funded in accordance with ERISA requirements in a trust established under the plan. Costs for retired employee medical benefits and life insurance are funded when claims are submitted.\nCash and cash equivalents\nCash management activities are performed by the Company's parent, Inland Steel Industries, Inc., to which cash is periodically transferred. Cash equivalents are highly liquid, short-term investments with maturities of three months or less. The carrying amount of cash equivalents approximates fair value because of the short maturity of those instruments.\nIncome taxes\nEffective January 1, 1992, the Company adopted FASB Statement No. 109, \"Accounting for Income Taxes\" (see Note 5).\n- -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------\nA-6\nINLAND MATERIALS DISTRIBUTION GROUP, INC. AND SUBSIDIARY COMPANIES (A Wholly Owned Subsidiary of Inland Steel Industries, Inc.)\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------\nNOTE 1\/INVENTORIES:\nThe Company's inventories consist principally of finished steel, nonferrous and industrial plastic products for sale at service center locations.\nThe difference between LIFO values and approximate replacement costs for the LIFO inventories was $106.0 million at December 31, 1993 and $103.3 million at December 31, 1992.\nNOTE 2\/BORROWING ARRANGEMENTS:\nAt December 31, 1993 and 1992, the Company's subsidiaries had available two unused credit facilities totaling $125 million. Each facility requires compliance with various financial covenants including minimum net worth and leverage ratio tests. The covenants also limit the amount of cash that the Company can transfer to Industries in the form of dividends and other advances.\nA $100 million unsecured credit agreement between Joseph T. Ryerson and Son, Inc. and a group of banks provides a revolving credit facility to March 31, 1995.\nJ. M. Tull Metals Company, Inc. has a $25 million unsecured revolving credit agreement with other banks, which extends to December 15, 1994.\nNOTE 3\/LONG-TERM DEBT:\nThe Company's long-term debt is as follows:\nMaturities of long-term debt are: $5.0 million in 1994, $4.7 million in 1995, $4.7 million in 1996, $5.6 million in 1997, $6.2 million in 1998 and $7.0 million thereafter.\nThe Company has entered into an interest rate swap agreement to reduce the impact of changes in LIBOR on the term note. At December 31, 1993 the Company had outstanding an interest rate swap\n- -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------\nA-7\nINLAND MATERIALS DISTRIBUTION GROUP, INC. AND SUBSIDIARY COMPANIES (A Wholly Owned Subsidiary of Inland Steel Industries, Inc.)\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------\nagreement with the bank having a notional principal amount equal to the outstanding principal of the related term note. This agreement effectively changes the Company's interest rate exposure on its term note to a fixed rate of 5.925%. The interest rate swap matures August 17, 1998. The Company is exposed to potential credit loss in the event of nonperformance by the bank; however, the Company does not anticipate such nonperformance.\nUnder the provisions of certain loan agreements, the Company is required to maintain specified amounts of working capital and net worth, as outlined in the agreements, and is restricted as to dividends that may be paid to Industries.\nThe estimated fair value of the Company's long-term debt (including current portions thereof) using quoted market prices of Company debt securities recently traded and market-based prices of similar securities for those securities not recently traded was $.7 million greater than the carrying value of $33.2 million included in the balance sheet at year-end 1993.\nNOTE 4\/RETIREMENT BENEFITS:\nPensions\nThe Inland Steel Industries Pension Plan and Pension Trust (the \"Plan\"), covers certain employees, retirees and their beneficiaries of Industries and its subsidiaries, including the Company. The Plan is a noncontributory defined benefit plan that provides benefits based on final pay and years of service for all salaried employees and certain wage employees, and years of service and a fixed rate (in most instances based on frozen pay level or on job class) for all other wage employees, including employees under collective bargaining agreements. Because the fair value of pension plan assets pertains to all participants in the Plan, no separate determination is made solely with respect to the Company. At year-end 1993 and 1992, the actuarial present value of benefits for service rendered to date and the fair value of plan assets available for benefits for the Industries consolidated group were as follows:\nIn 1993, Industries recorded an additional minimum pension liability of $122.1 million representing the excess of the unfunded Accumulated Benefit Obligation over previously accrued pension costs. A corresponding intangible asset was recorded as an offset to this additional liability as prescribed.\nA weighted average discount (settlement) rate of 7.25% in 1993 and 8.6% in 1992 was used in the determination of the actuarial present value of benefits.\nThe Company recorded a net pension charge of $.1 million in 1993 and credits of $.4 million in 1992 and $.6 million in 1991.\n- -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------\nA-8\nINLAND MATERIALS DISTRIBUTION GROUP, INC. AND SUBSIDIARY COMPANIES (A Wholly Owned Subsidiary of Inland Steel Industries, Inc.)\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------\nThe cost of other industry welfare and retirement funds, for bargaining unit employees, was $2.9 million in 1993, $2.5 million in 1992, and $2.7 million in 1991.\nBenefits Other Than Pensions\nSubstantially all of the Company's employees are covered under postretirement life insurance and medical benefit plans that involve deductible and co-insurance requirements. The postretirement life insurance benefit formula used in the determination of postretirement benefit cost is primarily based on applicable annual earnings at retirement for salaried employees and specific amounts for hourly employees. The Company did not prefund any of these postretirement benefits in 1993.\nThe Company has adopted FASB Statement No. 106, \"Employers' Accounting for Postretirement Benefits Other Than Pensions,\" effective January 1, 1992. FASB Statement No. 106 requires accrual accounting for all postretirement benefits other than pensions. The Company must be fully accrued for these postretirement benefits by the date each employee attains full eligibility for such benefits. In conjunction with the adoption of FASB Statement No. 106, the Company elected to immediately recognize the accumulated postretirement benefit obligation for current and future retirees (the \"transition obligation\").\nPrior to the adoption of FASB Statement No. 106, the cost of medical benefits for retired employees was expensed as incurred. For 1993, the accrued expense for benefits other than pensions recorded in accordance with FASB Statement No. 106 exceeded the expense that would have been recorded under the prior accounting methods by $4.9 million or $3.2 million after tax. For 1992, the incremental expense was $10.9 million or $7.1 million after tax.\nThe amount of net periodic postretirement benefit cost for 1993 and 1992 is composed of the following:\nThe following table sets forth components of the accumulated postretirement benefit obligation:\n- -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------\nA-9\nINLAND MATERIALS DISTRIBUTION GROUP, INC. AND SUBSIDIARY COMPANIES (A Wholly Owned Subsidiary of Inland Steel Industries, Inc.)\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------\nAny net gain or loss in excess of 10 percent of the accumulated postretirement benefit obligations will be amortized over the remaining service period of active plan participants.\nThe assumptions used to determine the data on the preceding tables are as follows:\nA one percentage point increase in the assumed health care cost trend rates for each future year increases annual periodic postretirement benefit cost and the accumulated postretirement benefit obligation as of December 31, 1993 by $1.5 million and $12.0 million, respectively.\nPostemployment Benefits\nIn November 1992, the FASB issued Statement No. 112, \"Employer's Accounting for Postemployment Benefits.\" Adoption of the new Standard, which is required by the first quarter of 1994, is not anticipated to have a material impact on results of operations or the financial position of the Company.\nNOTE 5\/TAXES ON INCOME:\nThe Company adopted FASB Statement No. 109, \"Accounting for Income Taxes,\" effective January 1, 1992. As a result of adopting Statement No. 109, the Company recorded a $11.8 million charge reflecting the cumulative effect of the change on prior years. The Company is now required to record deferred tax assets and liabilities on its balance sheet as compared with the Company's past practice under APB Opinion No. 11 and Industries' former tax-sharing agreement under which no such recording was required. To comply with the provisions of FASB Statement No. 109, a new tax-sharing agreement was adopted under which current and deferred income tax provisions are determined for each company in the Industries group on a stand-alone basis. Companies with taxable losses record current income tax credits not to exceed current income tax charges recorded by profitable companies. NOL and tax credit carryforwards are allocated to each company in accordance with applicable tax regulations as if a company were to leave the consolidated group.\nThe elements of the provision for income taxes for three years indicated below are as follows:\nIn accordance with FASB No. 109, the Company adjusted its deferred tax assets and liabilities for the effect of the change in the corporate federal income tax rate from 34 to 35 percent, effective January 1, 1993.\n- -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------\nA-10\nINLAND MATERIALS DISTRIBUTION GROUP, INC. AND SUBSIDIARY COMPANIES (A Wholly Owned Subsidiary of Inland Steel Industries, Inc.)\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- A credit to income of $.6 million, which includes the effect of the rate change on deferred tax asset and liability balances as of January 1, 1993 as well as the effect on 1993 tax benefits recorded by the Company prior to the enactment date of August 10, 1993, was recorded in the third quarter of 1993.\nThe components of the deferred income tax assets and liabilities arising under FASB Statement No. 109 were as follows:\nAt December 31, 1993, the Company had approximately $50.7 million of net operating loss carryforwards available for regular Federal income tax purposes, expiring as follows: $16.3 million in the year 2005, $20.9 million in the year 2006, $7.8 million in the year 2007, and $5.7 million in the year 2008.\nThe Company believes that it is more likely than not that the $50.7 million of NOL carryforwards will be utilized prior to their expiration. This belief is based upon the factors discussed below.\nThe NOL carryforwards and existing deductible temporary differences (excluding those relating to FASB Statement No. 106) are offset by existing taxable temporary differences reversing within the carryforward period. Furthermore, any such recorded tax benefits which would not be so offset are expected to be realized by continuing to achieve future profitable operations.\nSubsequent to the adoption of FASB Statement No. 109, the Company adopted FASB Statement No. 106 and recognized the entire transition obligation at January 1, 1992, as a cumulative effect charge in 1992 (Note 4). This adoption resulted in a $47.0 million deferred tax asset at December 31, 1992, and future annual charges under FASB Statement No. 106 are expected to continue to exceed deductible amounts for many years. Thereafter, even if the Company should have a tax loss in any year in which the deductible amount would exceed the financial statement expense, the tax law provides for a 15-year carryforward period of that loss. Because of the extremely long period that is available to realize these future tax benefits, a valuation allowance for this deferred tax asset is not necessary.\n- -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------\nA-11\nINLAND MATERIALS DISTRIBUTION GROUP, INC. AND SUBSIDIARY COMPANIES (A Wholly Owned Subsidiary of Inland Steel Industries, Inc.)\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------\nTotal income taxes reflected in the Consolidated Statement of Operations differ from the amounts computed by applying the Federal tax rate as follows:\n- --------------- Cr. = Credit\nDue to the existence of the former tax-sharing agreement, such reconciliation does not provide meaningful information for 1991 and has therefore been omitted.\nA state tax sharing agreement, similar to the Federal agreement, also exists with Industries for those states in which the consolidated group is charged state taxes on a unitary or combined basis.\nNOTE 6\/RELATED PARTY TRANSACTIONS:\nThe Company sells products to and purchases products from related companies primarily at prevailing market prices. These transactions were as follows:\nAdministrative expenses covering management, financial and legal services provided to the Company were charged to the Company by Industries. Such charges totaled $7.4 million in 1993, $8.4 million in 1992 and $10.6 million in 1991. Additionally, interest, at prevailing prime market rates, is charged on all intercompany loans within the Industries consolidated group. Net intercompany interest expense amounted to $7.7 million in 1993, $8.9 million in 1992 and $8.2 million in 1991.\nIn December 1993, Industries made a capital contribution of $150 million to the Company. The capital contribution has been recorded as \"additional paid in capital\" at December 31, 1993.\nNOTE 7\/COMMITMENTS AND CONTINGENCIES:\nThe Company has noncancellable operating leases for which future minimum rental commitments are estimated to total $31.9 million, including approximately $9.2 million in 1994, $6.8 million in 1995, $4.5 million in 1996, $3.8 million in 1997, $3.8 million in 1998, and $3.8 million thereafter.\n- -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------\nA-12\nINLAND MATERIALS DISTRIBUTION GROUP, INC. AND SUBSIDIARY COMPANIES (A Wholly Owned Subsidiary of Inland Steel Industries, Inc.)\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------\nRental expense under operating leases totaled $16.8 million in 1993, $18.6 million in 1992, and $17.4 million in 1991.\nRyerson is the guarantor of $131 million of the Inland Steel Industries Thrift Plan ESOP notes. The notes are payable in installments through July, 2004.\nThere are various claims and pending actions against the Company. The amount of liability, if any, for these claims and actions at December 31, 1993 is not determinable but, in the opinion of management, such liability, if any, will not have a material adverse effect on the Company's financial position or results of operations.\n- -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------\nA-13\nINDEX TO EXHIBITS\n(i)\n- ---------------\n* Management contract or compensatory plan or arrangement required to be filed as an exhibit to the Company's Annual Report on Form 10-K\n(ii)\n- ---------------\n* Management contract or compensatory plan or arrangement required to be filed as an exhibit to the Company's Annual Report on Form 10-K\n(iii)\n- ---------------\n* Management contract or compensatory plan or arrangement required to be filed as an exhibit to the Company's Annual Report on Form 10-K\n(iv)\n(v)\n(vi)","section_15":""}
{"filename":"770618_1993.txt","cik":"770618","year":"1993","section_1":"ITEM 1. BUSINESS.\n(a) General Developments of Business\nTrump's Castle Funding, Inc. (\"Funding\") was incorporated under the laws of the State of New Jersey in May 1985 and is wholly-owned by Trump's Castle Associates, a New Jersey general partnership (the \"Partnership\"). Funding was formed to serve as a financing corporation to raise funds for the benefit of the Partnership. Since Funding has no business operations, its ability to service its indebtedness is completely dependent upon funds it receives from the Partnership. Accordingly, the discussion herein concentrates upon the Partnership and its operations.\nThe Partnership is owner and operator of Trump's Castle Casino Resort (\"Trump's Castle\"), a luxury casino hotel located in the Marina area of Atlantic City, New Jersey. The partners in the Partnership are TC\/GP, Inc. (\"TC\/GP\"), which has a 37.5% interest in the Partnership, Donald J. Trump (\"Trump\"), who has a 61.5% interest in the Partnership, and Trump's Castle Hotel & Casino, Inc. (\"TCHI\"), which has a 1% interest in the Partnership. Trump, by virtue of his ownership of TC\/GP and TCHI, is the beneficial owner of 100% of the common equity interest in the Partnership, subject to the right of the plaintiffs in certain litigation to be issued warrants for the common stock of TCHI (the \"Litigation Warrants\") representing the right to acquire an indirect beneficial interest in 0.5% of the common equity interest in the Partnership. See \"LEGAL PROCEEDINGS\" below.\nIn December 1993, the Partnership, Funding and certain affiliated entities completed a recapitalization of their debt and equity capitalization (the \"Recapitalization\"). The purpose of the Recapitalization was (i) to improve the debt capitalization of the Partnership and, initially, to decrease its cash charges, (ii) to provide the holders of the Units, each Unit comprised of $1,000 principal amount of Funding's 9.5% Mortgage Bonds due 1998 (the \"Bonds\") and one share of TC\/GP common stock, who participate in the Exchange Offer (as defined below) with a cash payment of $6.19 and securities having a combined principal amount of $905 for each Unit and (iii) to provide Trump with beneficial ownership of 100% of the common equity interests in the Partnership (subject to the Litigation Warrants).\nThe Recapitalization was also designed to take advantage of certain provisions of the Units which were designed to provide Trump with incentives to cause the Units to be repaid or redeemed prior to maturity. The Units were issued in connection with a restructuring (\"the Restructuring\") of the indebtedness of Funding, the Partnership and TCHI through a prepackaged plan of reorganization (the \"Plan\") under chapter 11 of title 11 of the United States Code, as amended, which was consummated on May 29, 1992. The Plan was designed to alleviate a liquidity problem which the Partnership began to experience in 1990.\nThe Recapitalization\nOn December 28, 1993, the Partnership and Funding consummated the first step in the Recapitalization, an exchange offer (the \"Exchange Offer\") pursuant to which each $1,000 principal amount of Bonds accepted for exchange was exchanged for $750 principal amount of Funding's 11-3\/4% Mortgage Notes due 2003\n(the \"Mortgage Notes\"), $120 principal amount of Funding's Increasing Rate Subordinated Pay-in-Kind Notes due 2005 (the \"PIK Notes\") and a cash payment of $6.19, plus accrued interest to the date of exchange. The 3.8% of Bonds not validly tendered in the Exchange Offer were defeased, and pursuant to their terms, called for redemption at a price equal to 75% of the principal amount thereof, plus accrued interest to the date of redemption.\nOn December 28, 1993, Funding issued, through a private placement, $27 million principal amount of its 11-1\/2% Series A Senior Secured Notes due 2000 (the \"Series A Notes\"). The net proceeds from the sale of the Series A Notes were used by the Partnership (i) to fund the redemption of the Bonds not exchanged in the Exchange Offer and (ii) to repay a portion of the Partnership's outstanding indebtedness. Pursuant to the terms of a Registration Rights Agreement with the purchasers of the Series A Notes, Funding and the Partnership have filed a registration statement with the Securities and Exchange Commission (the \"SEC\") for the issuance of $27 million principal amount of Funding's 11-1\/2% Series B Senior Secured Notes (the \"Series B Notes\") in exchange for the $27 million outstanding principal amount of the Series A Notes. The Series B Notes have terms which are virtually identical to those of the Series A Notes. There can be no assurance that such offering will be consummated.\nOn December 30, 1993, the second step in the Recapitalization was consummated, a merger (the \"Merger\") of Trump's Castle Holding, Inc. (\"Holding\"), a Delaware corporation wholly owned by the Partnership, with and into TC\/GP. Pursuant to the terms of the Merger, each holder of TC\/GP Common Stock, other than those who exercised their statutory appraisal rights, received $35 principal amount of PIK Notes for each share of TC\/GP Common Stock. The Partnership, as the holder of all of the outstanding common stock of Holding immediately prior to consummation of the Merger, acquired all of the outstanding common stock of TC\/GP as a result of the Merger. Upon consummation of the Merger, the Partnership distributed all of the TC\/GP common stock to Trump, and the partnership agreement of the Partnership was amended and restated to alter certain governance procedures and to otherwise reflect the Recapitalization.\nAs a result of the Recapitalization, TC\/GP has a 37.5% interest in the Partnership, Trump has a 61.5% interest in the Partnership, TCHI has a 1% interest in the Partnership and Trump is the beneficial owner of 100% of the common equity interests in the Partnership (subject to the Litigation Warrants). Also as a consequence of the Recapitalization, the principal amount of the Partnership's debt has been reduced, and, initially, the Partnership's cash charges have been reduced.\nUpon consummation of the Recapitalization, Funding's outstanding debt consisted of the $27 million principal amount outstanding of its Senior Notes, the approximately $242 million principal amount outstanding of its Mortgage Notes (which are subordinated to the Senior Notes) and the approximately $50 million principal amount outstanding of its PIK Notes (which are subordinated to both the Senior Notes and the Mortgage Notes). Funding has also guaranteed the Midlantic Term Loan (as defined below).\nIn addition, upon consummation of the Recapitalization, the Partnership had outstanding approximately $357 million principal amount of indebtedness, including a term loan due to Midlantic National Bank, which had an aggregate\nprincipal amount outstanding of $38 million as of December 31, 1993 (the \"Midlantic Term Loan\") and the intercompany notes securing the Senior Notes, the Mortgage Notes, and the PIK Notes, which had an aggregate principal amount outstanding of approximately $319 million as of December 31, 1993.\nThe Restructuring\nIn 1990, the Partnership began experiencing a liquidity problem. The Partnership believes that its liquidity problem was attributable, in part, to an overall deterioration in the Atlantic City gaming market, as indicated by reduced rates of casino revenue growth for the industry for the two prior years, aggravated by an economic recession in the Northeast and the Persian Gulf War. Comparatively excessive casino gaming capacity in Atlantic City, due in part to the opening of the Trump Taj Mahal Casino Resort, which at the time was wholly-owned by Trump (the \"Taj Mahal\"), in April 1990, may also have contributed to the Partnership's liquidity problem.\nAs a result of the Partnership's liquidity problem, Funding failed to make interest and sinking fund payments on its public debt securities. In 1990, the Partnership also failed to pay interest installments on certain indebtedness due Midlantic, although the Partnership subsequently made payment to Midlantic of all unpaid interest on such debt and met its debt service obligations to Midlantic.\nIn order to alleviate its liquidity problem, on May 29, 1992, TCHI, Funding and the Partnership (collectively, the \"Debtors\") restructured their indebtedness through the Plan under chapter 11 of the Bankruptcy Code. The purpose of the Restructuring was to improve the amortization schedule and extend the maturity of the Partnership's indebtedness by reducing and deferring the Debtor's annual debt service requirements by (1) lowering the interest rate on the Partnership's and Funding's long term indebtedness to Midlantic and (2) by issuing the Bonds with an overall lower rate of interest as compared with Funding's then outstanding public debt securities.\nUpon consummation of the Plan, each $1,000 principal amount, or accreted amount, of Funding's public debt securities were exchanged for $1,000 in principal amount of Bonds, together with one share of the common stock of TC\/GP and certain other payments. By virtue of TC\/GP's interest in the Partnership, the holders of Funding's public debt securities prior to consummation of the Plan became the beneficial owners of 50% of the Partnership after consummation of the Plan.\nThe terms of the Bonds and the partnership agreement executed upon consummation of the Restructuring were designed to provide Trump with incentives to cause the Bonds to be repaid or redeemed prior to maturity. Under the terms of the indenture pursuant to which the Bonds were issued, the Bonds were initially redeemable at a redemption price equal to 70% of the outstanding principal amount thereof, together with accrued and unpaid interest to the date of redemption. Such redemption price, however, increased over time to par on or after January 1, 1996. In addition, the partnership agreement provided that upon a redemption of the Bonds, the interest of TC\/GP in the Partnership would be decreased, and the interest of Trump in the Partnership would be increased, based upon the redemption date of the Bonds and the redemption price paid with\nrespect thereto. The earlier the redemption and the greater the redemption price paid with respect to the Bonds, the greater the adjustment to TC\/GP's and Trump's partnership interests.\nAs a result of the Exchange Offer, 96.2% of the Bonds were exchanged for Mortgage Notes, PIK Notes, and a cash payment, and 3.8% of the Bonds were redeemed for cash at 75% of their principal amount. In addition, upon consummation of the Merger, each share of TC\/GP common stock was converted into the right to receive $35 principal amount of PIK Notes. See \"The Recapitalization\" above.\n(b) Financial Information About Industry Segments\nThe Partnership operates in only one industry segment. See \"SELECTED CONSOLIDATED FINANCIAL DATA\" below.\n(c) Narrative Description of the Business\nCasino Hotel Operations. The Partnership owns and operates Trump's Castle, a luxury casino hotel located in the Marina District of Atlantic City, New Jersey, seven miles from New Jersey's Garden State Parkway. With its 70,000 square foot casino, first-class guest rooms and other luxury amenities, Trump's Castle has been awarded a \"Four Star\" Mobil Travel Guide rating in each of the last three years. Management believes that the \"Four Star\" rating reflects the high quality amenities and services that Trump's Castle provides to its casino patrons and hotel guests.\nTrump's Castle's casino offers 94 table games (including 13 poker tables) and 2,098 slot machines. During 1993, Trump's Castle completed a 10,000 square foot expansion to its casino which has enabled Trump's Castle to increase the number of slot machines on the casino floor by 300 units, to provide more space between slot machines, and to place stools in front of additional slot machines, all of which are designed to provide the gaming patron with a more comfortable gaming experience. Presently, Trump's Castle is undertaking a 3,000 square foot expansion to accommodate the addition of simulcast race-track wagering. The expansion will also increase casino access and casino visibility for hotel patrons. In addition, Trump's Castle recently completed the construction of a Las Vegas style marquee and reader board, the largest of its kind on the East Coast. See \"PROPERTIES OF THE PARTNERSHIP\" below.\nTrump's Castle has identified exceptional service as a means of differentiating itself from and competing with other casinos in Atlantic City. It has invested significant resources to the development of its 700 managers and 3,000 employees to insure that the corporate culture meets its service strategies. In addition, Trump's Castle's annual capital expenditures are designed to insure that room accommodations, restaurants, public areas, the casino and all other areas of the hotel are maintained in first-class \"Four Star\" condition.\nTrump's Castle's primary marketing strategy focuses on attracting and retaining middle and upper middle market \"drive-in\" patrons who visit Atlantic City frequently and have proven to be the most profitable market segment. Trump's Castle has also recently implemented an aggressive overseas\nmarketing plan designed to broaden its patron base by seeking to attract \"high roller\" table game patrons who tend to wager large sums of money. Recently, Trump's Castle has recruited several senior level casino marketing executives who have extensive experience in overseas marketing and a proven track record of attracting profitable international \"high rollers\". This new strategy will also include promotions and offer special events aimed at the overseas market and is designed to offset the decline of table games play by the domestic market. Trump's Castle also intends to capitalize on its first-class facilities, particularly its luxury suite tower and on-site helipad to attract international patrons.\nCasino gaming in Atlantic City is strictly regulated under the New Jersey Casino Control Act and the regulations promulgated thereunder (the \"Casino Control Act\") and other applicable laws, which affect virtually all aspects of the Partnership's operations. See \"Gaming and Other Laws and Regulations\" below.\nMarketing Strategy.\nGeneral\nIn 1990, the Atlantic City casino industry experienced a significant increase in room capacity and in available casino floor space, due primarily to opening of the Taj Mahal, which at the time was wholly-owned by Trump. Management believes that the opening of the Taj Mahal had a disproportionately adverse effect on Trump's Castle due to the common use of the \"Trump\" name, and the fact that Trump's Castle is reached via the same access road as the Taj Mahal. The Partnership believes that results in 1991 were also affected by the weakness in the economy throughout the Northeast and the adverse impact on tourism and consumer spending in 1991 of the war in the Middle East. See \"Competition\" below.\nIn 1991, the Partnership retained the services of Nicholas L. Ribis, as Chief Executive Officer, and Roger P. Wagner, as President and Chief Operating Officer. At such time, Mr. Ribis was also retained as the chief executive officer of the partnerships which operate the Taj Mahal and Trump Plaza Hotel and Casino, which at the time was wholly owned by Trump (\"Trump Plaza\", and together with the Taj Mahal, the \"Other Trump Casinos\"). Trump and this new management team implemented a new business strategy designed to capitalize on Trump's Castle's first-class facilities and improve operating results.\nKey elements of the new business strategy consist of differentiating Trump's Castle from other Atlantic City casinos based on its level of service, gaming environment and location, redirecting marketing efforts and continually monitoring operations to adapt to, and anticipate, industry trends. After establishing the new marketing strategy in 1991, the Partnership in 1992 implemented an aggressive plan to regain the patrons it had lost in 1990 and 1991 and to attract new patrons by increasing its promotional activities and complimentaries offered. Trump's Castle improved its market share by the end of 1992 and continues to improve operating margins by directing complimentaries and promotional activities to attract the most profitable patrons in each market segment. In addition, Trump's Castle has recently implemented an aggressive overseas marketing plan designed to broaden its patron base by seeking to attract high-end table game patrons. This new strategy will include promotions and offer special events and is designed to offset the decline of table games play by the domestic market.\nService\nThe Partnership has identified service as a means of differentiating itself from and competing with other Atlantic City casinos, and has adopted the slogan \"Trump's Castle Where Service Is King.\" In 1990, the Partnership created a new service enhancement department designed to increase the quality of service provided to casino patrons, and create a service oriented culture.\nThe Partnership believes that in the past most casino services were directed at high rollers and middle market patrons who wagered at table games. By providing a high level of service to all patrons, including middle market slot patrons, the Partnership seeks to foster loyalty among its patrons and repeat play.\nGaming Environment\nIn 1993, the Partnership completed a 10,000 square foot expansion of its main casino floor space bringing the total casino floor space to 70,000 square feet. This expansion enabled the Partnership to introduce live poker games and at the same time to increase the number of slot machines, to provide more space between slot machines, and to place stools in front of additional slot machines. These changes are designed to provide the gaming patron with a more comfortable gaming experience. In addition, Trump's Castle has also introduced a separate non-smoking area on its casino floor. See \"PROPERTIES OF THE PARTNERSHIP\" below.\nThe Partnership continuously monitors the configuration of the casino floor and the games it offers to patrons with a view towards making changes and improvements. Trump's Castle's casino floor was the first in Atlantic City to feature live poker.\nIn recent years, there has been an industry trend towards fewer table games and more slot machines. For the Atlantic City casino industry, revenue from slot machines increased from 54.6% of the industry gaming revenue in 1988 to 67.1% of the industry gaming revenue in 1993. Trump's Castle experienced a similar increase, with slot revenue increasing from 52.5% of gaming revenue in 1988 to 70.2% of gaming revenue in 1993. In response to this trend, Trump's Castle has devoted more of its casino floor space to slot machines and has replaced 900 of its slot machines with newer machines. In the next six months Trump's Castle intends to acquire an additional 100 slot machines to replace less popular, older models. Moreover, as part of its program to attract middle market slot patrons, the Partnership has created \"Castle Square\", a section of the casino floor devoted to one dollar slot machines, and \"Monte Carlo\", a section of the casino floor devoted to high denomination slot machines (most of which provide for $5 or more per play). The Partnership is currently considering introducing another high denomination slot machine area next to the \"King of Clubs\" lounge and intends to introduce \"keno\" in the second quarter of 1994, subject to approval by the CCC.\n\"Comping\" Strategy\nIn order to compete effectively with other Atlantic City casino hotels, the Partnership offers complimentary drinks, meals, room accommodations and\/or travel arrangements to its patrons (\"complimentaries\" or \"comps\"). In 1991 and 1992, Trump's Castle increased promotional activities and complimentaries to its\ntargeted patrons in order to regain lost market share. Currently, the policy at Trump's Castle is to focus promotional activities, including complimentaries, on a middle and upper middle market \"drive-in\" patrons who visit Atlantic City frequently and have proven to be the most profitable market segment.\nEntertainment and Special Events\nThe Partnership pursues a coordinated program of headline entertainment and special events. Trump's Castle offers headline entertainment approximately twelve times a year which, in 1993, included performances by Joan Rivers, Johnny Cash, Ann Margaret, Frankie Avalon, Bobby Rydell, and The Neville Brothers. Headliners who are scheduled to appear at Trump's Castle in 1994 include Tom Jones, Sheena Easton, The Everly Brothers, The Pointer Sisters and The Beach Boys. During 1994, Trump's Castle will also produce a series of review-style shows with up to 12 shows per week for 30 weeks over the year. The review-style shows will focus on attracting mass market customers and will also be used to reward loyal high frequency middle market customers.\nAs a part of its overseas marketing plan, Trump's Castle offers special events aimed at the overseas market. In 1993, for example, Trump's Castle held an Italian Christmas celebration targeted toward the European Market. In addition, Trump's Castle hosts over 100 special events on an invitation only basis in an effort to attract middle market gaming patrons and build loyalty among patrons. These special events include boxing, golf tournaments, birthday parties and theme parties. Headline entertainment is scheduled so as not to overlap with any of these special events.\nPlayer Development and Casino Hosts\nThe Partnership has contracts with approximately ten sales representatives in New Jersey, New York and other states to promote Trump's Castle. Trump's Castle has sought to attract more middle market slot machine gaming patrons, as well as high rollers, through its \"junket\" marketing operations, which involves attracting groups of patrons by providing airfare, gifts and room accommodations. Trump's Castle has also recently undertaken a marketing effort aimed at developing patronage from the high-end table gaming markets in Europe, Asia, Canada and Latin America. The Partnership also has contracts with two international sales representatives and has recruited several senior level casino marketing executives who have extensive experience in overseas marketing and a proven track record of attracting profitable high-end table gaming patrons.\nTrump's Castle's casino hosts assist table game patrons, and Trump's Castle's slot sales representatives assist slot patrons on the casino floor, make room and dinner reservations and provide general assistance. Slot sales representatives also solicit Castle Card (the frequent player slot card) sign-ups in order to increase the Partnership's marketing base.\nPromotional Activities\nThe Castle Card (the frequent player identification slot card) constitutes a key element in Trump's Castle's direct marketing program. Slot machine players are encouraged to register for and utilize their personalized\nCastle Card to earn various complimentaries based upon their level of play. The Castle Card is inserted during play into a card reader attached to the slot machine for use in computerized rating systems. These computer systems record data about the cardholder, including playing preferences, frequency and denomination of play and the amount of gaming revenues produced. Slot sales and management personnel are able to monitor the identity and location of the cardholder and the frequency and denomination of his slot play. They also use this information to provide attentive service to the cardholder while he is on the casino floor.\nTrump's Castle designs promotional offers, conveyed via direct mail and telemarketing, to patrons expected to provide revenues based upon their historical gaming patterns. Such information is gathered on slot wagering by the Castle Card and on table wagering by the casino games supervisor. Trump's Castle also utilizes a special events calendar (e.g., birthday parties, sweepstakes and special competitions) to promote its gaming operations.\nCredit Policy\nHistorically, Trump's Castle has extended credit to certain qualified patrons. For the years ended December 31, 1991 and 1992, credit play at Trump's Castle as a percentage of total dollars wagered was approximately 31% and 28%, respectively. In recognition of the general economic conditions in the Northeast and consistent with a more focused marketing strategy, Trump's Castle also imposed stricter standards on applications for new or additional credit. Although Trump's Castle has successfully attracted high-end table games patrons, who in general tend to use a higher percentage of credit in their wagering, through its \"junket\" marketing operations and has recently undertaken a marketing effort aimed at high-end international table game patrons, who also tend to use a higher percentage of credit in their wagering, credit play as a percentage of total dollars wagered increased to only 29% for the year ended December 31, 1993.\nBus Program\nTrump's Castle has a bus program which transports approximately 2,100 gaming patrons per day during the week and 2,600 per day on the weekends. The Partnership's bus program offers incentives and discounts to certain scheduled and chartered bus customers. Based on historical surveys, the Partnership has determined that gaming patrons who arrive by scheduled bus line as opposed to special charter or who travel distances of 60 miles or more are more likely to create higher gaming revenue for Trump's Castle. Accordingly, Trump's Castle's marketing efforts are focused on such bus patrons.\nRisks Inherent in an International Marketing Strategy\nThe potential benefit derived from the Partnership's recently implemented overseas marketing plan designed to attract \"high rollers\", may not outweigh the high costs associated with attracting such players. In addition, the large sums of money wagered by \"high rollers\" may result in substantial gains or losses by individual patrons, which could increase the volatility of Trump's Castle's results of operations and thus increase the Partnership's need for liquidity. There may also be difficulties presented in collecting from such players.\nAtlantic City Market. Gaming in Atlantic City started in May 1978 when the first casino hotel opened for business. Since 1978, gaming in Atlantic City has grown from one casino to 12 casinos at the beginning of 1994, with approximately $3.3 billion of casino industry revenue generated in 1993. Gaming revenue for all Atlantic City casino hotels has increased approximately 2.6%, 5.2%, 1.3%, 7.5% and 2.6% during 1989, 1990, 1991, 1992 and 1993, respectively (in each case as compared to the prior year). See \"Competition\" below.\nAtlantic City is near many densely populated metropolitan areas. The primary area served by Atlantic City casino hotels is the corridor that extends from Washington, D.C. to Boston and includes New York City and Philadelphia. Within this primary area, Atlantic City may be reached by automobile or bus. Principal arteries lead into Atlantic City from the metropolitan New York area and from the Baltimore\/Washington, D.C. area, both of which are approximately three hours away by automobile. Atlantic City can also be reached by air and rail transportation, although most patrons arrive by automobile or bus.\nHistorically, Atlantic City has suffered from inadequate rail and air transportation. As a result, a majority of Atlantic City gaming patrons travel from the mid-atlantic and northeast regions of the United States by automobile or bus. Rail service to Atlantic City has recently been improved with the introduction of Amtrak express service to and from Philadelphia and New York City. An expansion of the Atlantic City International Airport (located approximately 12 miles from Atlantic City) to handle large airline carriers and large passenger jets was recently completed. Despite the expansion of the Atlantic City International Airport, however, access to Atlantic City by air is still limited by a lack of regularly scheduled flights and by inadequate terminal facilities. The lack of adequate transportation infrastructure has limited the expansion of the Atlantic City gaming industry's geographic patron base and the attractiveness of Atlantic City to major conventions.\nCompetition. Competition in the Atlantic City casino hotel market is intense. Trump's Castle competes primarily with other casinos located in Atlantic City, New Jersey, as well as gaming establishments located on Native American reservations in New York and Connecticut and also would compete with any other facilities in the northeastern and mid-Atlantic regions of the United States at which casino gaming or other forms of wagering may be authorized in the future. To a lesser extent, Trump's Castle faces competition from cruise lines, riverboat gaming and casinos located in Mississippi, Nevada, New Orleans, Puerto Rico, the Bahamas and other locations inside and outside the United States, and from other forms of legalized gaming in New Jersey and in its surrounding states such as lotteries, horse racing (including off-track betting), jai alai and dog racing, and from illegal wagering of various types.\nAt present, there are 12 casino hotels located in Atlantic City, including Trump's Castle, all of which compete for patrons. In addition, there are several sites on The Boardwalk and in the Atlantic City Marina area on which casino hotels could be built in the future, or on which existing casino hotels could expand, including the property commonly known as the \"Trump Regency Hotel\" on which Trump Plaza has an option.\nTotal Atlantic City gaming revenues have increased over the past three years, although at varying rates. In 1991, six Atlantic City casino hotels reported increases in gaming revenues as compared to 1990, and five reported decreases in gaming revenues (including Trump's Castle). The Partnership\nbelieves that results in 1991 were affected by the weakness in the economy throughout the Northeast and the adverse impact in 1991 on tourism and consumer spending of the Persian Gulf War. Although all 12 Atlantic City casinos reported increases in gaming revenues in 1992 as compared to 1991, the Partnership believes that this was due, in part, to the depressed industry conditions in 1991. In 1993, nine casinos (including Trump's Castle) experienced increased casino revenues, as compared to 1992, while three casinos reported decreases.\nIn 1990, the Atlantic City casino industry experienced a significant increase in room capacity and in available casino floor space, including the rooms and floor space made available by the opening of the Taj Mahal, which at the time was wholly-owned by Trump. The effects of such expansion were to increase competition and to contribute to a decline in 1990 in gaming revenues per square foot. In 1990, the Atlantic City casino industry experienced a decline in gaming revenues per square foot of 5.0%, which trend continued in 1991, although at the reduced rate of 2.9%. However, in 1992 and 1993, the Atlantic City casino industry experienced an increase of 6.9% and 1.4%, respectively in gaming revenues per square foot each as compared to the prior year.\nThe profitability of Trump's Castle could be affected by its proximity to Harrah's Marina Hotel Casino, which is owned and operated by a third party not affiliated with the Partnership. Trump's Castle and Harrah's Marina Hotel Casino are the only casino hotels located in the Marina area of Atlantic City. The remaining Atlantic City casino hotels are located on The Boardwalk. The Partnership believes that the concentration of casino hotels on The Boardwalk has resulted in a significant number of patrons being attracted to that area and away from the vicinity of Trump's Castle. The Partnership further believes that the location of Trump's Castle has adversely affected its ability to attract walk-in patrons, although the Partnership believes that its location away from The Boardwalk area serves as an attractive feature to visitors seeking to avoid the congested downtown area. The Partnership also believes that Trump's Castle benefits, to some extent, from its relative geographic isolation by virtue of the fact that patrons do not have the option of walking from one casino to another once they arrive at Trump's Castle.\nCasinos in Atlantic City must be located in approved hotel facilities which offer dining, entertainment and other guest facilities. Competition among casino hotels is based primarily upon promotional allowances, advertising, the attractiveness of the casino area, service, quality and price of rooms, food and beverages, restaurant, convention and parking facilities and entertainment. In order to compete effectively with all other Atlantic City casino hotels, the Partnership offers complimentary drinks, meals, room accommodations and\/or travel arrangements to patrons with a demonstrated propensity to wager at Trump's Castle, as well as cash bonuses and other incentives pursuant to approved coupon programs.\nIn 1988, Congress passed the Indian Gaming Regulatory Act (\"IGRA\"), which requires any state in which casino-style gaming is permitted (even if only for limited charity purposes) to negotiate compacts with federally recognized Native American tribes at the request of such tribes. Under IGRA, Native American tribes enjoy comparative freedom from regulation and taxation of gaming operations, which provides such tribes with an advantage over their competitors, including the Partnership. In 1991, the Mashantucket Pequot Nation opened a casino facility in Ledyard, Connecticut, located in the far eastern portion of such state, an approximately three-hour drive from New York City. In February\n1992, the Mashantucket Pequot Nation initiated 24 hour gaming. In January 1993, slot machines were added at such facility, and the facility currently contains over 3,100 slot machines. The Mashantucket Pequot Nation has announced various expansion plans, including its intention to build another casino in Ledyard together with hotels, restaurants and a theme park.\nTrump, the Partnership and the Other Trump Casinos have recently filed a lawsuit seeking, among other things, a declaration that IGRA is unconstitutional and seeking an injunction against the enforcement of certain provisions of IGRA. The complaint states, among other things, that the Mashantucket Pequot Nation's casino has caused the Partnership substantial economic injury. The complaint states further that any future expansions of existing Native American gaming facilities or new ventures by such persons or others in the northeastern or mid-Atlantic region of the United States would have a further adverse impact on Atlantic City in general and could cause the Partnership further substantial economic injury.\nA group in New Jersey terming itself the \"Ramapough Indians\" has applied to the U.S. Department of the Interior to be recognized formally as a Native American tribe, which recognition would permit it to require the State of New Jersey to negotiate a gaming compact under IGRA. On December 3, 1993, however, the Interior Department proposed that such Federal recognition to the Ramapough Indians be denied. Similarly, a group in Cumberland County, New Jersey calling itself the \"Nanticoke Lenni Lenape\" tribe has filed a notice of intent with the Federal Bureau of Indian Affairs seeking formal recognition as a Native American tribe. Also, it has been reported that a Sussex County, New Jersey businessman has offered to donate land he owns there to the Oklahoma-based Lenape\/Delaware Indian Nation which originated in New Jersey and already has Federal tribal status but does not have a reservation in the state. In addition, in July 1993, the Oneida Nation opened a casino featuring 24-hour table gaming, but without slot machines, near Syracuse, New York. Representatives of the St. Regis Mohawk Nation signed a gaming compact with New York State officials for the opening of a casino, without slot machines, in the northern portion of the state close to the Canadian border. The St. Regis Mohawk Nation has announced that it intends to open their casino in the summer of 1994. The Narragansett Nation of Rhode Island has recently won a Federal court case which will require the Governor of Rhode Island to negotiate a casino gaming compact with the Nation. The Mohegan Nation, which is located in Connecticut, received federal recognition in March 1994. Other Native American Nations are seeking federal recognition, land, and negotiation of gaming compacts in New York, Pennsylvania, Connecticut and other nearby states.\nLegislation permitting other forms of casino gaming has been proposed, from time to time, in various states, including those bordering New Jersey. Trump's Castle's operations would be adversely affected by such competition, particularly if casino gaming were permitted in jurisdictions near or in New Jersey or other states in the Northeast. In December 1993, the Rhode Island Lottery Commission approved the addition of slot machine games on video terminals at Lincoln Greyhound Park and Newport Jai Alai, where poker and blackjack have been offered for over two years. The State of Louisiana recently approved casino gaming in the city of New Orleans, and a developer has been selected. Currently, casino gaming, other than Native American gaming, is not allowed in other areas of New Jersey or in New York or Pennsylvania. However, Trump's Castle expects that proposals may be introduced to legalize riverboat or other forms of gaming in Philadelphia and one or more other locations in\nPennsylvania. To the extent that legalized gaming becomes more prevalent in New Jersey or other jurisdictions, competition would intensify.\nIn addition, legislation has from time to time been introduced in the New Jersey State Legislature relating to types of statewide legalized gaming, such as video games with small wagers. To date, no such legislation, which may require a state constitutional amendment, has been enacted. The Partnership is unable to predict whether any such legislation, if enacted, would have a material adverse impact on the results of operations or financial condition of the Partnership.\nSeasonality. The gaming industry in Atlantic City traditionally has been seasonal, with its strongest performance occurring from May through September, and with December and January showing substantial decreases in activity. Revenues have been significantly higher on Fridays, Saturdays, Sundays and holidays than on other days. In addition, in the summer months, Trump's Castle may be adversely affected by the desire of certain patrons to wager at a location which is readily accessible to The Boardwalk.\nThe Conflicting Interests of Certain Officers and Directors of the Partnership and its Affiliates. Trump is the beneficial owner of Trump Plaza and a 50% beneficial owner of the Taj Mahal and is the sole owner of Trump Plaza Management Corp. (\"TPM\"), an entity that provides management services to Trump Plaza. In addition, Trump has a personal services agreement with the partnership that owns the Taj Mahal (\"TTMA\") pursuant to which he receives substantial compensation based, in part, on the financial results of the Taj Mahal. Under certain circumstances, Trump could increase his beneficial interest in the Taj Mahal to 100%. Trump could under certain circumstances have an incentive to operate the Other Trump Casinos to the competitive detriment of the Partnership. However, the Services Agreement entered into between the Partnership and TC\/GP provides that Trump and his affiliates will not engage in any activity, transaction or action which would result in the Other Trump Casinos realizing a competitive advantage over Trump's Castle. The Other Trump Casinos compete directly with each other and with other Atlantic City casino hotels, including Trump's Castle. Nicholas L. Ribis, the Chief Executive Officer of the Partnership, is also the chief executive officer of the partnerships that own the Other Trump Casinos, and Messrs. Ernest E. East and John P. Burke, officers of the Partnership, are also executive officers of the partnerships that own the Other Trump Casinos. In addition, Messrs. Trump, Ribis, East and Burke serve on the governing bodies of the partnerships that own the Other Trump Casinos. As a result of Trump's interests in three competing Atlantic City casinos, the common chief executive officer, and other common officers, a conflict of interest may be deemed to exist by reason of such persons' access to information and business opportunities possibly useful to any or all of such casinos. Although no specific procedures have been devised for resolving conflicts of interest confronting, or which may confront, Trump, such persons and the Other Trump Casinos, Messrs. Trump, Ribis, East and Burke do not engage in any activity which they reasonably expect will harm Trump's Castle or is otherwise inconsistent with their fiduciary obligations to the Partnership.\nEmployees and Labor Relations. As of December 31, 1993, the Partnership employed approximately 3,700 full and part time employees for the operation of Trump's Castle, of whom approximately 932 were subject to collective bargaining agreements. The Partnership's collective bargaining agreement with Local No. 54 affiliated with the Hotel Employees and Restaurant Employees International Union\nAFL-CIO expires on September 14, 1994. Such agreement extends to approximately 820 employees. Preparation for negotiations for a new collective bargaining agreement with Local No. 54 are currently underway. In addition, three other collective bargaining agreements which expire in 1996 cover approximately 112 maintenance employees. The Partnership believes that its relationships with its employees are satisfactory. Funding has no employees.\nAll of the Partnership's employees are required to be registered with or licensed by the Casino Control Commission (the \"CCC\") pursuant to the Casino Control Act. Casino employees are subject to more stringent licensing requirements than non-casino employees, and must meet applicable standards pertaining to such matters as financial responsibility, good character, ability, casino training, experience and New Jersey residency. Such regulations have resulted in significant competition for employees who meet these requirements.\nGaming and Other Laws and Regulations. The following is only a summary of the applicable provisions of the Casino Control Act and certain other laws and regulations. It does not purport to be a full description thereof and is qualified in its entirety by reference to the Casino Control Act and such other laws and regulations.\nIn general, the Casino Control Act contains detailed provisions concerning, among other things: the granting of casino licenses; the suitability of the approved hotel facility and the amount of authorized casino space and gaming units permitted therein; the qualification of natural persons and entities related to the casino licensee; the licensing and registration of employees and vendors of casino licensees; rules of the games; the selling and redeeming of gaming chips; the granting and duration of credit and the enforceability of gaming debts; management control procedures, accounting and cash control methods and reports to gaming agencies; security standards; the manufacture and distribution of gaming equipment; equal employment opportunity for employees of casino operators, contractors of casino facilities and others; and advertising, entertainment and alcoholic beverages.\nCasino Control Commission\nThe ownership and operation of casino hotel facilities in Atlantic City are the subject of strict state regulation under the Casino Control Act. The CCC is empowered to regulate a wide spectrum of gaming and non-gaming related activities and to approve the form of ownership and financial structure of not only a casino licensee, but also its entity qualifiers and intermediary and holding companies.\nOperating Licenses\nThe Partnership was issued its initial casino license in June 1985. During April 1993, the CCC renewed the Partnership's casino license and approved Trump as a natural person qualifier through May 1995. No assurance can be given that the CCC will renew the Partnership's casino license or, if it does so, as to the conditions it may impose, if any, with respect thereto.\nCasino License\nNo casino hotel facility may operate unless the appropriate license and approvals are obtained from the CCC, which has broad discretion with regard to the issuance, renewal, revocation and suspension of such licenses and approvals, which are non-transferable. The qualification criteria with respect to the holder of a casino license include its financial stability, integrity and responsibility; the integrity and adequacy of its financial resources which bear any relation to the casino project; its good character, honesty and integrity; and the sufficiency of its business ability and casino experience to establish the likelihood of a successful, efficient casino operation. The casino license held by the Partnership is renewable for periods of up to two years. The CCC may reopen licensing hearings at any time, and must reopen a licensing hearing at the request of the Division of Gaming Enforcement (the \"Division\").\nTo be considered financially stable, a licensee must demonstrate the following ability: to pay winning wagers when due, to achieve a gross operating profit; to pay all local, state and federal taxes when due, to make necessary capital and maintenance expenditures to insure that it has a superior first-class facility, and to pay, exchange, refinance or extend debts which will mature or become due and payable during the license term.\nIn the event a licensee fails to demonstrate financial stability, the CCC may take such action as it deems necessary to fulfill the purposes of the Casino Control Act and protect the public interest, including: issuing conditional licenses, approvals or determinations; establishing an appropriate cure period; imposing reporting requirements; placing restrictions on the transfer of cash or the assumption of liability; requiring reasonable reserves or trust accounts; denying licensure; or appointing a conservator. See \"Conservatorship\" below.\nThe Partnership believes that it has adequate financial resources to meet the financial stability requirements of the CCC for the foreseeable future.\nPursuant to the Casino Control Act, CCC Regulations and precedent, no entity may hold a casino license unless each officer, director, principal employee, person who directly or indirectly holds any beneficial interest or ownership in the licensee, each person who in the opinion of the CCC has the ability to control or elect a majority of the board of directors of the licensee (other than a banking or other licensed lending institution which makes a loan or holds a mortgage or other lien acquired in the ordinary course of business), and any lender, underwriter, agent or employee of the licensee or other person whom the CCC may consider appropriate, obtains and maintains qualification approval from the CCC. Qualification approval means that such person must, but for residence, individually meet the qualification requirements as a casino key employee. See \"Employees\" below. Pursuant to conditions of the Partnership's casino license, payments by the Partnership to or for the benefit of any related entity or any partner are subject to prior CCC approval; and, if the Partnership's cash position falls below $5 million for three consecutive business days, the Partnership must present to the CCC and the Division evidence as to why it should not obtain a working capital facility in an appropriate amount.\nControl Persons\nAn entity qualifier or intermediary or holding company, such as TC\/GP, TCHI and Funding, is required to register with the CCC and meet the same basic standards for approval as a casino licensee; provided, however, that the CCC, with the concurrence of the Director of the Division, may waive compliance by a publicly-traded corporate holding company with the requirement that each officer, director, lender, underwriter, agent or employee thereof, or person directly or indirectly holding a beneficial interest or ownership of the securities thereof, individually qualify for approval under casino key employee standards, so long as the CCC and the Director are, and remain, satisfied that such officer, director, lender, underwriter, agent or employee is not significantly involved in the activities of the casino licensee, or that such security holder does not have the ability to control the publicly-traded corporate holding company or elect one or more of its directors. Persons holding five percent or more of the equity securities of such holding company are presumed to have the ability to control the company or elect one or more of its directors and will, unless this presumption is rebutted, be required to individually qualify. Equity securities are defined as any voting stock or any security similar to or convertible into or carrying a right to acquire any security having a direct or indirect participation in the profits of the issuer.\nFinancial Sources\nThe CCC may require all financial backers, investors, mortgagees, bond holders and holders of notes or other evidence of indebtedness, either in effect or proposed, which bears any relation to the casino project, publicly-traded securities of an entity which holds a casino license or is an entity qualifier, subsidiary or holding company of a casino licensee (a \"Regulated Company\"), to qualify as financial sources. In the past, the CCC has waived the qualification requirement for holders of less than 15% of a series of publicly-traded mortgage bonds so long as the bonds remained widely-distributed and freely-traded in the public market and the holder had no ability to control the casino licensee. The CCC may require holders of less than 15% of a series of debt to qualify as financial sources even if not active in the management of the issuer or the casino licensee.\nInstitutional Investors\nAn institutional investor (\"Institutional Investor\") is defined by the Casino Control Act as any retirement fund administered by a public agency for the exclusive benefit of federal, state or local public employees; investment company registered under the Investment Company Act of 1940; collective investment trust organized by banks under Part Nine of the Rules of the Comptroller of the Currency; closed end investment trust; chartered or licensed life insurance company or property and casualty insurance company; banking and other chartered or licensed lending institution; investment advisor registered under the Investment Advisers Act of 1940; and such other persons as the CCC may determine for reasons consistent with the policies of the Casino Control Act.\nAn Institutional Investor may be granted a waiver by the CCC from financial source or other qualification requirements applicable to a holder of publicly-traded securities, in the absence of a prima facie showing by the Division that there is any cause to believe that the holder may be found\nunqualified, on the basis of CCC findings that: (a) its holdings were purchased for investment purposes only and, upon request by the CCC, it files a certified statement to the effect that it has no intention of influencing or affecting the affairs of the issuer, the casino licensee or its holding or intermediary companies; provided, however, that the Institutional Investor will be permitted to vote on matters put to the vote of the outstanding security holders; and (b) if (i) the securities are debt securities of a casino licensee's holding or intermediary companies or another subsidiary company of the casino licensee's holding or intermediary companies which is related in any way to the financing of the casino licensee and represent either (x) 20% or less of the total outstanding debt of the company or (y) 50% or less of any issue of outstanding debt of the company, (ii) the securities are equity securities and represent less than 10% of the equity securities of a casino licensee's holding or intermediary companies or (iii) if the securities so held exceed such percentages, upon a showing of good cause. There can be no assurance, however, that the CCC will make such findings or grant such waiver and, in any event, an Institutional Investor may be required to produce for the CCC or Division upon request, any document or information which bears any relation to such debt or equity securities.\nGenerally, the CCC requires each institutional holder seeking waiver of qualification to execute a certification to the effect that (i) the holder has received the definition of Institutional Investor under the Casino Control Act and believes that it meets the definition of Institutional Investor; (ii) the holder purchased the securities for investment purposes only and holds them in the ordinary course of business; (iii) the holder has no involvement in the business activities of, and no intention of influencing or affecting the affairs of, the issuer, the casino licensee or any affiliate; and (iv) if the holder subsequently determines to influence or affect the affairs of the issuer, the casino licensee or any affiliate, it shall provide not less than 30 days' prior notice of such intent and shall file with the CCC an application for qualification before taking any such action. If an Institutional Investor changes its investment intent, or if the CCC finds reasonable cause to believe that it may be found unqualified, the Institutional Investor may take no action with respect to the security holdings, other than to divest itself of such holdings, until it has applied for interim casino authorization (see \"Interim Casino Authorization\" below) and has executed a trust agreement pursuant to such an application.\nOwnership and Transfer of Securities\nThe Casino Control Act imposes certain restrictions upon the issuance, ownership and transfer of securities of a Regulated Company and defines the term \"security\" to include instruments which evidence a direct or indirect beneficial ownership or creditor interest in a Regulated Company including, but not limited to, mortgages, debentures, security agreements, notes and warrants. Funding and the Partnership are each deemed to be a Regulated Company, and instruments evidencing a beneficial ownership or creditor interest therein, including partnership interest, are deemed to be the securities of a Regulated Company.\nIf the CCC finds that a holder of such securities is not qualified under the Casino Control Act, it has the right to take any remedial action it may deem appropriate including the right to force divestiture by such disqualified holder of such securities. In the event that certain disqualified holders fail to divest themselves of such securities, the CCC has the power to revoke or suspend the casino license affiliated with the Regulated Company which issued the securities. If a holder is found unqualified, it is unlawful for the\nholder (i) to exercise, directly or through any trustee or nominee, any right conferred by such securities, or (ii) to receive any dividends or interest upon any such securities or any remuneration, in any form, from its affiliated casino licensee for services rendered or otherwise.\nWith respect to non-publicly-traded securities, the Casino Control Act and CCC Regulations require that the corporate charter or partnership agreement of a Regulated Company establish a right in the CCC of prior approval with regard to transfers of securities, shares and other interests and an absolute right in the Regulated Company to repurchase at the market price or the purchase price, whichever is the lesser, any such security, share or other interest in the event that the CCC disapproves a transfer. With respect to publicly-traded securities, such corporate charter or partnership agreement is required to establish that any such securities of the entity are held subject to the conditions that, if a holder thereof is found to be disqualified by the CCC, such holder shall dispose of such securities.\nInterim Casino Authorization\nInterim casino authorization is a process which permits a person who enters into a contract to obtain property relating to a casino operation or who obtains publicly-traded securities relating to a casino licensee to close on the contract or own the securities until plenary licensure or qualification. During the period of interim authorization, the property relating to the casino operation or the securities are held in trust.\nWhenever any person enters into a contract to transfer any property which relates to an ongoing casino operation, including a security of the casino licensee or a holding or intermediary company or entity qualifier, under circumstances which would require that the transferee obtain licensure or be qualified under the Casino Control Act, and that person is not already licensed or qualified, the transferee is required to apply for interim authorization. Furthermore, the closing or settlement date in the contract may not be earlier than the 121st day after the submission of a complete application for licensure or qualification together with a fully executed trust agreement in a form approved by the CCC. If, after the report of the Division and a hearing by the CCC, the CCC grants interim authorization, the property will be subject to a trust. If the CCC denies interim authorization, the contract may not close or settle until the CCC makes a determination on the qualifications of the applicant. If the CCC denies qualification, the contract will be terminated for all purposes and there will be no liability on the part of the transferor.\nIf, as the result of a transfer of publicly-traded securities of a licensee, a holding or intermediary company or entity qualifier of a licensee or a financing entity of a licensee, any person is required to qualify under the Casino Control Act, that person is required to file an application for licensure or qualification within 30 days after the CCC determines that qualification is required or declines to waive qualification. The application must include a fully executed trust agreement in a form approved by the CCC or, in the alternative, within 120 days after the CCC determines that qualification is required, the person whose qualification is required must divest such securities as the CCC may require in order to remove the need to qualify.\nThe CCC may grant interim casino authorization where it finds by clear and convincing evidence that: 1) statements of compliance have been issued pursuant to the Casino Control Act; 2) the casino hotel is an approved hotel in accordance with the Casino Control Act; 3) the trustee satisfies qualification criteria applicable to key casino employees, except for residency and casino experience; and 4) interim operation will best serve the interests of the public.\nWhen the CCC finds the applicant qualified, the trust will terminate. If the CCC denies qualification to a person who has received interim casino authorization, the trustee is required to endeavor, and is authorized, to sell, assign, convey or otherwise dispose of the property subject to the trust to such persons who are licensed or qualified or shall themselves obtain interim casino authorization.\nWhere a holder of publicly-traded securities is required, in applying for qualification as a financial source or qualifier, to transfer such securities to a trust in application for interim casino authorization and the CCC thereafter orders that the trust become operative: (a) during the time the trust is operative, the holder may not participate in the earnings of the casino hotel or receive any return on its investment or debt security holdings; and (b) after disposition, if any, of the securities by the trustee, proceeds distributed to the unqualified holder may not exceed the lower of their actual cost to the unqualified holder or their value calculated as if the investment had been made on the date the trust became operative.\nApproved Hotel Facilities\nThe CCC may permit a licensee, such as the Partnership, to increase its casino space if the licensee agrees to add a prescribed number of qualifying sleeping units within two years after the commencement of gaming operations in the additional casino space. However, if the casino licensee does not fulfill such agreement due to conditions within its control, the licensee will be required to close the additional casino space, or any portion thereof that the CCC determines should be closed. Trump's Castle will not be required to add any additional sleeping units in connection with its 3,000 square foot expansion for simulcast race track wagering.\nLicense Fees\nThe CCC is authorized to establish annual fees for the renewal of casino licenses. The renewal fee is based upon the cost of maintaining control and regulatory activities prescribed by the Casino Control Act, and may not be less than $200,000 for a two-year casino license. Additionally, casino licensees are subject to potential assessments to fund any annual operating deficits incurred by the CCC or the Division. There is also an annual license fee of $500 for each slot machine maintained for use or in use in any casino.\nGross Revenue Tax\nEach casino licensee is also required to pay an annual tax of 8% on its gross casino revenues. For the years ended December 31, 1992 and 1993, the Partnership's gross revenue tax was approximately $19 million and $19.7 million,\nrespectively, and its license, investigations, and other fees and assessments totalled approximately $3.2 million and $2.6 million, respectively.\nInvestment Alternative Tax Obligations\nAn investment alternative tax imposed on the gross casino revenues of each licensee in the amount of 2.5% is due and payable on the last day of April following the end of the calendar year. A licensee is obligated to pay the investment alternative tax for a period of 25 years. Estimated payments of the investment alternative tax obligation must be made quarterly in an amount equal to 1.25% of estimated gross revenues for the preceding three-month period. Investment tax credits may be obtained by making qualified investments or by the purchase of bonds issued by the Casino Reinvestment Development Authority (\"CRDA\"). CRDA bonds may have terms as long as 50 years and bear interest at below market rates, resulting in a value lower than the face value of such CRDA bonds.\nFor the first 10 years of its obligation, the licensee is entitled to an investment tax credit against the investment alternative tax in an amount equal to twice the purchase price of bonds issued to the licensee by the CRDA. Thereafter, the licensee is (i) entitled to an investment tax credit in an amount equal to twice the purchase price of such bonds or twice the amount of its investments authorized in lieu of such bond investments or made in projects designated as eligible by the CRDA and (ii) has the option of entering into a contract with the CRDA to have its tax credit comprised of direct investments in approved eligible projects which may not comprise more than 50% of its eligible tax credit in any one year.\nFrom the moneys made available to the CRDA, the CRDA is required to set aside $100,000,000 for investment in hotel development projects in Atlantic City undertaken by a licensee which result in the construction or rehabilitation of at least 200 hotel rooms by December 31, 1996. The CRDA is required to determine the amount each casino licensee may be eligible to receive out of the moneys set aside.\nMinimum Casino Parking Charges\nAs of July 1, 1993, each casino licensee was required to impose on and collect from patrons a standard minimum parking charge of at least $2.00 for the use of parking, space for the purpose of parking, garaging or storing motor vehicles in a parking facility owned or leased by a casino licensee or by any person on behalf of a casino licensee. Of the amount collected by the casino licensee, $1.50 is required to be paid to the New Jersey State Treasurer and paid by the New Jersey State Treasurer into a special fund established and held by the New Jersey State Treasurer for the exclusive use of the CRDA.\nAmounts in the special fund will be expended by the CRDA for (i) eligible projects in the corridor region of Atlantic City, which projects are related to the improvement of roads, infrastructure, traffic regulation and public safety and (ii) funding up to 35% of the cost to casino licensees of expanding their hotel facilities to provide additional hotel rooms, which hotel rooms are required to be available upon the opening of the Atlantic City Convention Center and dedicated to convention events.\nConservatorship\nIf, at any time, it is determined that TC\/GP, TCHI, Funding or the Partnership has violated the Casino Control Act or that any of such entities cannot meet the qualification requirements of the Casino Control Act, such entity could be subject to fines or the suspension or revocation of its license or qualification. If the Partnership's license is suspended for a period in excess of 120 days or revoked or if the CCC fails or refuses to renew such casino license, the CCC could appoint a conservator to operate and dispose of the Partnership's casino hotel facilities. A conservator would be vested with title to all property of the Partnership relating to the casino and the approved hotel subject to valid liens and\/or encumbrances. The conservator would be required to act under the direct supervision of the CCC and would be charged with the duty of conserving, preserving and, if permitted, continuing the operation of the casino hotel. During the period of the conservatorship, a former or suspended casino licensee is entitled to a fair rate of return out of net earnings, if any, on the property retained by the conservator. The CCC may also discontinue any conservatorship action and direct the conservator to take such steps as are necessary to effect an orderly transfer of the property of a former or suspended casino licensee. Such events could result in an event of default under the indentures pursuant to which the Senior Notes, Mortgage Notes and PIK Notes were issued.\nEmployees\nAll employees of the Partnership must be licensed by or registered with the CCC, depending on the nature of the position held. Casino employees are subject to more stringent requirements than non-casino employees and must meet applicable standards pertaining to financial stability, integrity and responsibility, good character, honesty and integrity, business ability and casino experience and New Jersey residency. These requirements have resulted in significant competition among Atlantic City casino operators for the services of qualified employees.\nGaming Credit\nThe Partnership's casino games are conducted on a credit as well as cash basis. Gaming debts arising in Atlantic City in accordance with applicable regulations are enforceable in the courts of the State of New Jersey. The extension of gaming credit is subject to regulations that detail procedures which casinos must follow when granting gaming credit and recording counter checks which have been exchanged, redeemed or consolidated.\nControl Procedures\nGaming at Trump's Castle is conducted by trained and supervised personnel. The Partnership employs extensive security and internal controls. Security checks are made to determine, among other matters, that job applicants for key positions have had no criminal history or associations. Security controls utilized by the surveillance department include closed circuit video cameras to monitor the casino floor and money counting areas. The count of moneys from gaming is also observed daily by representatives of the CCC.\nOther Laws and Regulations\nThe United States Department of the Treasury has adopted regulations pursuant to which a casino is required to file a report of each deposit, withdrawal, exchange of currency, gambling tokens or chips, or other payments or transfers by, through, or to such casino which involves a transaction in currency of more than $10,000 per patron, per gaming day. Such reports are required to be made on forms prescribed by the Secretary of the Treasury and are filed with the Commissioner of the Internal Revenue Service (the \"Service\"). In addition, the Partnership is required to maintain detailed records (including the names, addresses, social security numbers and other information with respect to its gaming customers) dealing with, among other items, the deposit and withdrawal of funds and the maintenance of a line of credit. The Department of the Treasury has adopted further regulations, the effectiveness of which has been suspended until December 1994, which will require the Partnership, among other things, to keep records of the name, permanent address and taxpayer identification number (or in the case of a nonresident alien, such person's passport number) of any person engaging in a currency transaction in excess of $3,000. The Partnership is unable to predict what effect, if any, these new reporting obligations will have on the gaming practices of certain of its patrons.\nIn the past, the Service had taken the position that gaming winnings from table games by nonresident aliens were subject to a 30% withholding tax; however, the Service subsequently adopted a practice of not collecting such tax. Recently enacted legislation exempts from withholding tax table game winnings by nonresident aliens, unless the Secretary of the Treasury determines by regulation that such collections have become administratively feasible.\nAs the result of an audit conducted by the Office of Financial Enforcement of the Department of the Treasury, the Partnership was alleged to have failed to timely file the \"Currency Transaction Report by Casino\" in connection with currency transactions in excess of $10,000 during the period from May 7, 1985 to December 31, 1988. The Partnership entered into a settlement agreement and without admitting to any wrongdoing agreed to pay a civil monetary penalty of $175,500. The Partnership has revised its internal control procedures to ensure continued compliance with these regulations.\nThe Partnership is subject to other federal, state and local regulations and, on a periodic basis, must obtain various licenses and permits, including those required to sell alcoholic beverages. The Partnership believes that it has obtained all required licenses and permits to conduct its business.\n(d) Financial Information About Foreign and Domestic Operations and Export Sales\nNot applicable.\nITEM 2.","section_1A":"","section_1B":"","section_2":"ITEM 2. PROPERTIES OF THE PARTNERSHIP.\nThe Casino Parcel. Trump's Castle is located in the Marina area of Atlantic City on an approximately 14.7 acre triangular-shaped parcel of land, which is owned by the Partnership in fee, located at the intersection of Huron\nAvenue and Brigantine Boulevard directly across from the Marina, approximately two miles from The Boardwalk.\nTrump's Castle has 70,000 square feet of casino space, which accommodates 94 table games (including 13 poker tables) and 2,098 slot machines. In addition to the casino, Trump's Castle consists of a 27 story hotel with 725 guest rooms, including 185 suites, of which 99 are \"Crystal Tower\" luxury suites. Renovation of 300 of the guest rooms was completed in 1993 and 250 more guest rooms are scheduled to be renovated by April of 1994. The facility also offers nine restaurants, a 460 seat cabaret theater, two cocktail lounges, 58,000 square feet of convention, ballroom and meeting space, a swimming pool, tennis courts and a sports and health club facility. Trump's Castle has been designed so that it can be enlarged in phases into a facility containing 2,000 rooms, a 1,600 seat cabaret theater and additional recreational amenities. Trump's Castle also has a nine-story garage providing on-site parking for approximately 3,000 vehicles, and a helipad which is located atop the parking garage making Trump's Castle the only Atlantic City casino with access by land, sea and air.\nDuring 1993, Trump's Castle completed a 10,000 square foot expansion to its casino which has enabled Trump's Castle to increase the number of slot machines on the casino floor by 300 units, to provide more space between slot machines and to place stools in front of additional slot machines, all of which are designed to provide the gaming patron with a more comfortable gaming experience. Presently, Trump's Castle is undertaking a 3,000 square foot expansion to accommodate the addition of simulcast race track wagering. The expansion will also increase casino access and casino visibility for hotel patrons. In addition, Trump's Castle recently completed the construction of a Las Vegas style marquee and reader board, the largest of its kind on the East Coast.\nThe Marina. Pursuant to an agreement (the \"Marina Agreement\") with the New Jersey Division of Parks and Forestry, the Partnership in 1987 began operating and renovating the Marina, including docks containing approximately 600 slips. An elevated pedestrian walkway connecting Trump's Castle to a two story building at the Marina was completed in 1989. The Partnership has reconstructed the two-story building, which contains a 240 seat restaurant and offices as well as a snack bar and a large nautical theme retail store. Any improvements made to the Marina (which is owned by the State of New Jersey), excluding the elevated pedestrian walkway, automatically become the property of the State of New Jersey upon their completion. Pursuant to the Marina Agreement and pursuant to a certain lease between the State of New Jersey, as landlord, and the Partnership as tenant, dated as of September 1, 1990, the Partnership commenced leasing the Marina and the improvements thereon for an initial term of twenty-five years. The lease is a net lease pursuant to which the Partnership, in addition to the payment of annual rent equal to the greater of (i) a certain percentage of gross revenues and (ii) minimum base rent of $300,000 annually (increasing every five years to $500,000 in 2011), is responsible for all costs and expenses related to the premises, including but not limited to, all maintenance and repair costs, insurance premiums, real estate taxes, assessments and utility charges.\nParking Parcel. The Partnership also owns an employee parking lot located on Route 30, approximately two miles from Trump's Castle, which can accommodate approximately 1,000 cars.\nITEM 3.","section_3":"ITEM 3. LEGAL PROCEEDINGS.\nThe Partnership, its partners, certain members of the former Executive Committee, Funding, and certain of their employees are involved in various legal proceedings, some of which are described below. The Partnership and Funding have agreed to indemnify such persons and entities against any and all losses, claims, damages, expenses (including reasonable costs, disbursements and counsel fees) and liabilities (including amounts paid or incurred in satisfaction of settlements, judgments, fines and penalties) incurred by them in said legal proceedings. Such persons and entities are vigorously defending the allegations against them and intend to vigorously contest any future proceedings.\nBondholder Litigation. Since June 1990, various purported class actions were commenced on behalf of the holders of Funding's Old Bonds which were outstanding prior to the consummation of the prepackaged plan of reorganization under chapter 11 of the Bankruptcy Code, and the publicly traded bonds of the Other Trump Casinos.\nBy an order of the Judicial Panel on Multidistrict Litigation dated December 4, 1990, the United States District Court for the District of New Jersey (the \"Court\") was given jurisdiction over these class actions for coordinated consolidated pretrial proceedings. Pursuant to an Order of the New Jersey District Court, on or about March 1, 1991, plaintiffs in the class filed an amended and consolidated complaint (the \"Complaint\") that superseded the complaints originally filed in those actions.\nOn March 5, 1992, the parties executed a Stipulation and Agreement of Compromise and Settlement (the \"Stipulation of Settlement\"), which embodied the agreement contained in a Memorandum of Understanding, dated July 30, 1991. On March 10, 1992, the Court preliminarily approved the terms and conditions of the Settlement proposed in the Stipulation of Settlement (the \"Settlement\") and certified a settlement class (the \"Settlement Class\"). On May 21, 1992 a settlement hearing was held before the Court and the Court approved the Settlement and determined that the Settlement was fair, reasonable, adequate, and in the best interest of the Settlement Class.\nUnder the terms of the Settlement, the holders of Funding's publicly traded bonds outstanding prior to the Restructuring will receive: (1) the Litigation Warrants, giving holders thereof the right to purchase common stock reflecting an indirect .50% of the equity of the Partnership on a fully diluted basis, which Litigation Warrants contain an option, pursuant to which for a six month period commencing March 2000 the holders thereof can require the issuer to repurchase such Litigation Warrants at an aggregate exercise price of $4 million, subject to certain terms and conditions set out more fully in the Memorandum of Understanding, but which include payment in full of the Bonds (which condition has been satisfied), satisfaction of the mortgage securing the Midlantic Term Loan, the Partnership earning net income of $20 million in the\naggregate for the years 1997, 1998 and 1999, and holders of at least 60% of the Litigation Warrants electing to exercise the option; and (2) a settlement in the amount of $1,350,000 in cash, which will be used to satisfy the costs of notice and administration as well as to compensate plaintiffs.\nOther Litigation. Various legal proceedings are now pending against the Partnership. The Partnership considers all such proceedings to be ordinary litigation incident to the character of its business. The majority of such claims are covered by liability insurance (subject to applicable deductibles), and the Partnership believes that the resolution of these claims, to the extent not covered by insurance, will not, individually or in the aggregate, have a material adverse effect on the financial condition or results of operations of the Partnership.\nITEM 4.","section_4":"ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.\nOn December 28, 1993, Funding obtained the consent of the holders of $322,855,072 outstanding principal amount of Bonds (96.2%) to an amendment of the indenture pursuant to which the Bonds were issued shortening the notice period for the redemption of the Bonds. The holders of $173,000 principal amount of Bonds (.05%) voted against such amendment and the holders of $12,698,321 principal amount of Bonds (3.8%) abstained.\nPART II\nITEM 5.","section_5":"ITEM 5. MARKET FOR FUNDING'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.\n(a) There is no established public trading market for Funding's outstanding Common Stock.\n(b) As of December 31, 1993, there was one holder of record of the outstanding Common Stock of Funding.\n(c) Funding has paid no cash dividends on its Common Stock.\nITEM 6.","section_6":"ITEM 6. SELECTED CONSOLIDATED FINANCIAL INFORMATION.\nThe following sets forth certain selected consolidated financial information from Funding's and the Partnership's Consolidated Statements of Operations for the years ended December 31, 1989, 1990, 1991, 1992 and 1993 respectively, and the Consolidated Balance Sheets as of December 31, 1989, 1990, 1991, 1992 and 1993 respectively:\nNotes: (1) On May 29, 1992, Funding, the Partnership and TCHI consummated the Plan, which materially affects the comparability of the information set forth above.\n(2) On December 28, 1993, the Partnership and its affiliated entities consummated the Recapitalization, which materially affects the comparability of the information set forth above.\n(3) The extraordinary gain of $128,187,000, for year ended December 31, 1992 reflects a $96,896,000 accounting adjustment to carry the Bonds at fair market value based on current rates of interest at the date of issuance, an $18,000,000 forgiveness of bank borrowings, $22,805,000 representing discharge of accrued interest and net of the write-off of $9,514,000 of unamortized Bond issuance costs.\n(4) Long-term debt of $337,649,000 and $340,553,000 as of December 31, 1990 and 1991 had been classified as a current liability.\nITEM 7.","section_7":"ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION.\nGeneral. In 1990, the Partnership began experiencing a liquidity problem that culminated in the Restructuring, which was consummated on May 29, 1992. Results of operations of the Partnership through December 31, 1992 were affected by the Restructuring, which resulted in an extraordinary gain of approximately $128.2 million for the year ended December 31, 1992. The Partnership's business is highly competitive, and any future expansions by the Mashantucket Pequot Nation or new gaming ventures by other Native American tribes or other persons in the Northeastern or mid-Atlantic regions of the United States could have a material adverse effect on the Partnership's future financial condition and results of operations. See \"Competition\" above.\nThe financial information presented below reflects the results of operations of the Partnership. Since Funding has no business operations, its results of operations are not discussed below.\nResults of Operations for the Years Ended December 31, 1993 and 1992. The Partnership's net revenues (gross revenues less promotional expenses) for the years ended December 31, 1993 and 1992 totaled approximately $273.2 million and $268.7 million, respectively, representing a $4.5 million (1.7%) increase. Gaming revenues were approximately $246.4 million for the year ended December 31, 1993 and $242.0 million for the comparable period in 1992. Management believes the $4.4 million (1.8%) increase in gaming revenues is attributable primarily to a continuing emphasis on customer service and a repositioning by Trump's Castle to expand profitable market segments.\nGaming revenue is comprised of table game win and slot machine win. For the years ended December 31, 1993 and 1992, slot win at Trump's Castle approximated $173.0 million and $164.3 million, respectively. Dollars wagered on slot machines totaled approximately $1,851.4 million and $1,682.9 million for the years ended December 31, 1993 and 1992, respectively, with a win percentage of 9.3% in 1993 and 9.8% in 1992, respectively. The lower slot win percentage (slot win as a percentage of dollars wagered on slot machines) of 9.3% was largely intentional and designed by Trump's Castle in order to remain competitive and stimulate patron play. Slot machine wagerings increased 10.0% and slot win increased 5.3% for the year ended December 31, 1993 over the comparable period in 1992. For the years ended December 31, 1993 and 1992, table game win at Trump's Castle approximated $73.4 million and $77.7 million, respectively. During these periods, dollars wagered on table games totaled approximately $492.1 million with a win percentage of 14.9% in 1993 and $504.5 million with a win percentage of 15.4% in 1992.\nFor the years ended December 31, 1993 and 1992, gaming credit extended to customers was approximately 28.9% and 28.1% of overall table play, respectively. At December 31, 1993, gaming receivables amounted to approximately $7.3 million, net of allowances for doubtful gaming receivables of approximately $1.9 million, an increase of approximately $2.5 million over gaming receivables of $4.8 million, net of allowances for doubtful gaming receivables of approximately $2.7 million as of December 31, 1992.\nNongaming revenues at Trump's Castle increased approximately $1.2 million from $57.3 million for the twelve months ended December 31, 1992, to $58.5 million for the comparable period in 1993. This improvement was attributable primarily to an increase in rooms revenue of $ 1.9 million (10.5%) to approximately $19.6 million for the year ended December 31, 1993, of which $12.2 million consisted of complimentary rooms. This increase was partially offset by a decline in food and beverage revenues of $0.8 million (-2.4%), to $30.6 million for the year ended December 31, 1993, of which approximately $15.9 million consisted of complimentary food and beverage. Room occupancy at Trump's Castle was 88.0% and 85.8%, including occupancy of 55.3% and 50.7% of the available rooms by patrons receiving complimentary rooms, and the average rate was approximately $78 and $76 for the years ended December 31, 1993 and 1992, respectively. The average rate showed modest growth primarily from pricing casino room promotional allowances at competitive levels in the Atlantic City market. While the number of customers served in the food and beverage outlets increased in 1993, food and beverage revenues declined as a result of a decrease in the average guest check. As a percentage of gaming revenues, promotional allowances did not vary significantly from year to year.\nGeneral and administrative expenses decreased approximately $2.9 million (5.5%) for the year ended December 31, 1993 as compared to the prior year. While gaming revenues improved in 1993, gaming costs and expenses decreased for the year ended December 31, 1993 by $1.0 million (.6%) and all other costs and expenses excluding Depreciation and Amortization and Reorganization costs decreased $2.1 million (6.3%). The reduction in operating expenses was due to previously established cost containment measures including the discontinuance of certain marketing programs. Such measures were implemented to improve overall operating efficiencies while remaining competitive and focusing on long range marketing goals.\nFor the year ended December 31, 1993, depreciation and amortization decreased $3.4 million (-17.1%) over the comparable period in 1992, primarily as a result of the impact of fully depreciated assets as well as the discharge of the outstanding deferred bond costs which were eliminated as a result of the Plan of Reorganization.\nReorganization costs were not incurred in 1993, compared to costs of $6.0 million for the same period in 1992 due to the Plan of Reorganization, which was completed on May 29, 1992.\nIncome from Trump's Castle's operations improved $19.8 million (or $13.8 million excluding restructuring costs) as a result of increased revenues, previously implemented cost containment measures and a continued emphasis on customer service for the year ended December 31, 1993 as compared to the same period in 1992.\nInterest expense increased for the twelve month period ended December 31, 1993 by approximately $11.6 million. The $11.6 million increase includes nonrecurring recapitalization costs of approximately $9.0 million.\nThe Partnership experienced a net loss of $28.4 million for the year ended December 31, 1993 and a profit of $91.4 million, primarily as a result of the Plan of Reorganization, during the comparable period in 1992.\nResults of Operations for the Years Ended December 31, 1992 and 1991. Net revenues (gross revenues, less promotional expenses) for the years ended December 31, 1992 and 1991 totalled approximately $268.7 million and $220.1 million, respectively. Gaming revenues were approximately $242.0 million and $194.8 million in 1992 and 1991, respectively. Management believes the increase in gaming revenues in 1992 of 24.3% is attributable to improved customer service and a refocusing of marketing efforts to reduce unprofitable market segments.\nFor the years ended December 31, 1992 and 1991, table game win approximated $77.7 million and $67.6 million and slot win approximated $164.3 million and $127.2 million, respectively. During these periods, table game win percentage was 15.4% in 1992 and 15.3% in 1991. Slot win percentage in 1992 was 9.8% and 9.9% in 1991. The lower slot win percentage in 1992 was largely intentional and designed to remain competitive and stimulate patron play. Slot machine wagerings increased 31.6% for the twelve months ended December 31, 1992 over the comparable period in 1991, while slot machine revenue increased 29.2%.\nThe Partnership elected to discontinue certain Progressive Slot Jackpot Programs which positively impacted slot revenue by $1.8 million for the year ended December 31, 1992.\nDuring the year ended December 31, 1992, gaming credit extended to customers was approximately 28.1% of overall table play. At December 31, 1992, gaming receivables amounted to approximately $4.8 million, net of allowances for doubtful gaming receivables of approximately $2.7 million.\nNongaming revenues increased approximately $4.1 million from $53.2 million in 1991 to $57.3 million in 1992. This improvement was attributable primarily to an increase in food and beverage revenues of 10.8% in 1992 as compared to 1991 and an increase in revenues from hotel rooms of 7.1% in 1992 as compared to 1991. Revenues from food and beverage sales for this period amounted to approximately $31.4 million, of which approximately $16.1 million consisted of complimentary food and beverage. Revenues from hotel rooms during this period amounted to approximately $17.8 million, of which $11.0 million consisted of complimentary rooms. Trump's Castle's average hotel occupancy rate, based on available rooms, was 85.8% in 1992, including occupancy of 50.7% of the available rooms by patrons receiving complimentary rooms. The average rate remained constant primarily from pricing casino room promotional allowances at competitive levels in the Atlantic City market. Food and beverage revenues improved as the marketing emphasis was shifted from attracting large numbers of mass market gaming patrons to upscale patrons with higher gaming budgets. Offsetting the nongaming revenue increase was an increase in promotional allowances of $2.8 million. Promotional allowances as a percentage of gaming revenues declined to 12.7% in 1992 from 14.3% in 1991.\nGaming costs and expenses increased for the year ended December 31, 1992 by $29.6 million (or 24.8%) and all other operating expenses, excluding depreciation and amortization and restructuring costs, increased $7.3 million (or 9.5%). The comparatively lower percentage increase in other expenses (as compared to the percentage increase in gaming expenses) was due to cost containment measures, including payroll reductions and discontinuance of unprofitable marketing programs. Such measures were implemented to improve overall operating efficiencies while remaining competitive and dedicated to long range marketing goals.\nDepreciation and amortization declined $1.6 million (7.5%) due primarily to the implementation of cost containment measures related to capital expenditures.\nIncome from operations improved $11.7 million primarily as a result of revenue improvements and the continuation of cost containment measures.\nThe Partnership generated a net income of $91.4 million for the year ended December 31, 1992 and incurred a net loss of $50.2 million for the comparable period in 1991. The net income of $91.4 million includes an extraordinary gain, as a result of the Plan of Reorganization, of $128.2 million offset by litigation expenses of $1.4 million.\nInflation. There was no significant impact on the Partnership's operations as a result of inflation during 1993, 1992 and 1991.\nLiquidity and Capital Resources. Cash flow from operating activities is the Partnership's principal source of liquidity. For the year ended December 31, 1993, the Partnership's net cash flow provided by operating activities before cash debt service obligations was $24.7 million and cash debt service was $33.8 million, resulting in net cash used by operating activities of $9.1 million. Cash and cash equivalents of $20.4 million at December 31, 1993 reflects a reduction of $3.0 million from $23.6 million at December 31, 1992. The $3.2 million reduction in cash was due to the $9.1 million used by operating activities, $10.4 million used to acquire capital assets and $3.0 million used to purchase CRDA investments ($22.3 million in the aggregate) offset by a net $19.3 million provided by financing activities.\nUpon consummation of the Recapitalization in December 1993, the Partnership had a working capital surplus of $2.2 million which amount is adequate to meet its needs for cash. The Partnership believes that this level of working capital is adequate to sustain existing operations in the foreseeable future.\nThe effect of the Recapitalization on the Partnership's capital structure has been to increase the Partnership's weighted average cost of debt from approximately 9.43% to approximately 11.74%. The increase in the weighted average cost of debt capital will be offset, at least initially, by an approximately $23 million decrease in the principal amount of the Partnership's outstanding indebtedness and by a reduction in the cash required to meet the Partnership's debt service obligations in the near future. As a result of the Recapitalization, the Partnership's consolidated indebtedness has been reduced from $381 million to $358 million. The pay-in-kind feature of the PIK Notes could, however, result in an additional $130 million of indebtedness over the next ten years, assuming all accrued interest on the PIK Notes is paid in\nadditional PIK Notes. It is projected that the Partnership will require approximately $31.4 million in 1994 and $36.1 million in 1995 in operating cash flow to meet its debt service obligations. If necessary, the Partnership may seek to obtain a credit facility of up to $10 million in principal amount to fund any shortfall in cash available to meet debt service obligations.\nCapital expenditures of $11.0 million for the year ended December 31, 1993 increased approximately $2.4 million due primarily to the expansion of the casino floor and the construction of an electronic graphic sign affixed to the front of the building. Capital expenditures were $8.6 million for the year ended December 31, 1992 and included the Partnership's remaining obligation on the Marina Roadway and the acquisition of new slot machines.\nThe lower level of capital expenditures for 1992 and 1991 of $8.6 million and $5.1 million, respectively, reflected the Partnership's liquidity problems. Anticipated capital expenditures for 1994 are approximately $8 million and include casino floor improvements, renovation of certain hotel rooms and the purchase of additional slot machines for the casino expansion. Management believes that currently planned future levels of capital expenditures would be sufficient to maintain the attractiveness of Trump's Castle and the aesthetics of its casino, hotel rooms and other public areas. The Partnership intends to finance its capital expenditures in the future with existing cash on hand and cash flow from operations.\nManagement also believes, based upon its current level of operations, that although the Partnership is highly leveraged, it will continue to have the ability to pay interest on its indebtedness and to pay other liabilities with funds from operations for the foreseeable future. However, there can be no assurance to that effect. In the event that circumstances change, the Partnership may seek to obtain a working capital facility of up to $10 million, although there can be no assurance that such financing will be available on terms acceptable to the Partnership.\nITEM 8.","section_7A":"","section_8":"ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.\nAn index to financial statements and required financial statement schedules is set forth at Item 14.\nITEM 9.","section_9":"ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.\nNone.\nPART III\nITEM 10.","section_9A":"","section_9B":"","section_10":"ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS.\nAll decisions affecting the business and affairs of the Partnership, including the operation of Trump's Castle, are decided by the general partners acting by and through a Board of Partner Representatives, which includes a minority of Representatives elected indirectly by the holders of the Mortgage Notes and PIK Notes (the \"Board of Partner Representatives\"). As currently constituted, the Board of Partner Representatives consists of Donald J. Trump, Chairman, Nicholas L. Ribis, Roger P. Wagner, Ernest E. East, Asher O. Pacholder, Thomas F. Leahy and Wallace B. Askins. Messrs. Trump, Ribis and East also serve on the governing boards of Trump Taj Mahal Associates (\"TTMA\") and Trump Plaza Associates (\"TPA\").\nThe Partnership also has an Audit Committee on which Mr. Ribis serves with Mr. Leahy and Mr. Askins, who have been appointed thereto in accordance with the requirements of the CCC. The Audit Committee reviews matters of policy, purpose, responsibilities and authority and makes recommendations with respect thereto on the basis of reports made directly to the Audit Committee. The Surveillance Department is responsible for the surveillance, detection and video-taping of unusual and illegal activities in the casino hotel. The Internal Audit Department is responsible for the review of, reporting instances of noncompliance with, and recommending procedures to eliminate weakness in internal controls.\nThe sole director of Funding is Trump. Trump also serves as its Chairman of the Board, President and Treasurer. Patricia M. Wild serves as its Secretary, and Robert E. Schaffhauser serves as its Assistant Treasurer.\nSet forth below are the names, ages, positions and offices held with Funding and the Partnership and a brief account of the business experience during the past five years of each member of the Board of Partner Representatives, the executive officers of Funding and the Partnership, and the director of Funding.\nDonald J. Trump -- Trump, 47 years old, has been the managing general partner of the Partnership and Chairman of the Board of Partner Representatives since May 1992 and Chairman of the Board, President and sole director of Funding since June 1985. Trump has been the President and sole director of TC\/GP since December 1993. Trump served as Chairman of the Executive Committee of the Partnership from June 1985 to May 1992 and as President and sole director of TC\/GP from November 1991 to May 1992. Trump has been a director and Treasurer of TCHI since April 17, 1985. Trump is the sole shareholder, Chairman of the Board of Directors, President and Treasurer of Trump Plaza Funding, Inc. (\"TPFI\"), the managing general partner of TPA. Trump was President and Chairman of the Board of Directors and a 50% shareholder of TP\/GP Corp. (\"TP\/GP\"), the former managing general partner of TPA, from May 1992 through June 1993; and Chairman of the Executive Committee and President of TPA from May 1986 to May 1992. Trump has been a director and President of Trump Plaza Holding, Inc. (\"TPHI\") and a partner in Trump Plaza Holding Associates (\"TPHA\") since February 1993. Trump was Chairman of the Executive Committee of TTMA, from\nJune 1988 to October 1991; and has been Chairman of the Board of Directors of the managing general partner of TTMA since October 1991; and President of the Trump Organization, which has been in the business, through its affiliates and subsidiaries, of acquiring, developing and managing real estate properties for more than the past five years. Trump was a member of the Board of Directors of Alexander's Inc. from 1987 to March 1992.\nNicholas L. Ribis -- Mr. Ribis, 49 years old, has been a partner representative on the Board of Partner Representatives since May 1992 and Chief Executive Officer of the Partnership since March 1991. Mr. Ribis has served as Vice President and Assistant Secretary of TCHI since December 1993 and January 1991, respectively. Mr. Ribis served as a member of the Executive Committee of the Partnership from April 1991 to May 1992 and as Secretary of TC\/GP from November 1991 to May 1992. Mr. Ribis has served as Vice President of TC\/GP since December 1993. Mr. Ribis has served as a director of TPHI since June 1993 and of TPFI since July 1993; as a director and Vice President of TP\/GP from May 1992 to June 1993; Chief Executive Officer of TPA since February 1991; and a member of the Executive Committee of TPA from April 1991 to May 1992. He has been Chief Executive Officer of TTMA since March 1991; a member of the Executive Committee of TTMA from April 1991 to October 1991; and a member of the Board of Directors of the managing general partner of TTMA since October 1991. From January 1980 to January 1991, Mr. Ribis was Senior Partner in, and since February 1991 is Counsel to, the law firm of Ribis, Graham & Curtin, which serves as New Jersey legal counsel to all of the above-named companies, and certain of their affiliated entities. Mr. Ribis serves as the Chairman of the Atlantic City Casino Association and is a member of the Board of Trustees of the CRDA.\nErnest E. East -- Mr. East, 51 years old, has been a partner representative on the Board of Partner Representatives since May 1992 and has been Senior Vice President -- Administrative and Corporate Affairs of the Partnership since July 1991. Mr. East has served as Secretary of TC\/GP since December 1993. Mr. East has been a director of TPHI since June 1993; Secretary of TPFI since July 1992; Senior Vice President -- Administrative and Corporate Affairs of TPA since July 1991; Senior Vice President -- Administrative and Corporate Affairs of TTMA since July 1991; and a member of the Board of Directors of the managing general partner of TTMA since October 1991. Mr. East was formerly the Vice President -- General Counsel of the Del Webb Corporation from January 1984 through June 1991.\nRoger P. Wagner -- Mr. Wagner, 46 years old, has been a partner representative on the Board of Partner Representatives since May 1992 and President and Chief Operating Officer of the Partnership since January 1991. Mr. Wagner served as a member of the Executive Committee of the Partnership from January 1991 to May 1992. Mr. Wagner has been a director and president of TCHI since January 1991. Prior to joining the Partnership, Mr. Wagner served as President of the Claridge Hotel Casino from June 1985 to January 1991.\nAsher O. Pacholder -- Dr. Pacholder, 56 years old, has been a partner representative of the Board of Partner Representatives since May 1992. Dr. Pacholder served as a director and the President of TC\/GP from May 1992 to December 1993. Dr. Pacholder has served as Chairman of the Board and Managing Director of Pacholder Associates, Inc., an investment advisory firm, since 1987. In addition, Dr. Pacholder serves on the Board of Directors of The Southland\nCorporation, United Gas Holding Corp., ICO, Inc., an oil field services company, UF&G Pacholder Fund, Inc., a publicly traded closed end mutual fund, U.S. Trails, Inc., a recreational facility company, and Forum Group, Inc., a retirement community managerial company.\nWallace B. Askins -- Mr. Askins, 63 years old, has been a partner representative of the Board of Partner Representatives since May 1992. Mr. Askins served as a director of TC\/GP from May 1992 to December 1993. From 1987 to November 1992, Mr. Askins served as Executive Vice President, Chief Financial Officer and as a director of Armco Inc. Mr. Askins also serves as a director of EnviroSource, Inc.\nThomas F. Leahy -- Mr. Leahy, 56 years old, has been a Member of the Board of Partner Representatives since June 1993. Mr. Leahy served as a director and Treasurer of TC\/GP from May 1992 to December 1993. From 1987 to July 1992, Mr. Leahy served as Executive Vice President of CBS Broadcast Group, a unit of CBS, Inc. Since November 1992, Mr. Leahy has served as President of the Theater Development Fund, a service organization for the performing arts. From July 1992 through November 1992, Mr. Leahy served as chairman of VT Properties, Inc., a privately-held corporation which invests in literary, stage and film properties.\nPatrick R. Dennehy -- Mr. Dennehy, 45 years old, has been Executive Vice President of Operations of the Partnership since November 1992. Prior to joining the Partnership, Mr. Dennehy was with Harrah's Atlantic City from 1980 until 1992 in the capacity of Director of Gaming Operations, Director of Casino Marketing, Director of Casino Credit and Cashier Manager.\nPatricia M. Wild -- Ms. Wild, 41 years old, has been Secretary of Funding and Senior Vice President and General Counsel of the Partnership and Secretary of TCHI since December 1993. Ms. Wild served as Assistant Secretary of TPFI and Vice President, General Counsel of TPA from February 1991 to December 1993; Vice President and General Counsel of TPFI from July 1992 through December 1993; and Associate General Counsel of TPA from May 1989 through January 1991. From December 1986 to April 1989, Ms. Wild served as Deputy Attorney General on the Environmental Prosecutions Task Force of the New Jersey Department of Law and Public Safety, Division of Criminal Justice. From April 1983 to December 1986, Ms. Wild served as Deputy Attorney General with the New Jersey Division of Gaming Enforcement.\nThomas P. Venier -- Mr. Venier, 42 years old, has been Senior Vice President of Strategic Development and Planning of the Partnership since January 1994 and was Senior Vice President of Finance of the Partnership from September 1991 to January 1994. Mr. Venier has been Chief Financial Officer of TC\/GP since May 1992. Mr. Venier has been Assistant Treasurer of TCHI since March 1992. Previously, Mr. Venier served as Vice President of Finance of the Partnership from May 1988 to September 1991 and Director of Financial Accounting from July 1985 to April 1988.\nNicholas J. Niglio -- Mr. Niglio joined the Partnership as Executive Vice President-Marketing in October 1993. Mr Niglio previously served as Senior Vice President of Eastern Operations of Caesars World Marketing Corporation for three years. Prior to that he served as Vice President-Casino Manager at Caesars Atlantic City for three years.\nRobert E. Schaffhauser -- Mr. Schaffhauser, 47 years old, joined the Partnership as Senior Vice President of Finance in January 1994 and also became an Assistant Treasurer, Chief Financial Officer and Chief Accounting Officer of Funding and an Assistant Treasurer of TCHI and TC\/GP in January 1994. He served as a consultant to Trump during the immediately preceding year. Mr. Schaffhauser previously served as Senior Vice President of Finance and Administration for the Sands Hotel & Casino in Atlantic City for four years. For a period of 13 years prior thereto, he served as the Chief Financial Officer and Secretary for Metex Corporation, a publicly held manufacturer of engineered products. Mr. Schaffhauser also served as a member of Metex Corporation's Board of Directors.\nJohn P. Burke -- Mr. Burke, 46 years old, has been the Corporate Treasurer of the Partnership and TPA since October 1991. Mr. Burke has been Chief Accounting Officer of TC\/GP since May 1992. Mr. Burke has been a Vice President of TCHI, TC\/GP, Funding and the Partnership since December 1993. Mr. Burke has been Vice President of The Trump Organization since September 1990. He is a member of the Board of Directors of the managing general partner of TTMA. Mr. Burke was an Executive Vice President and Chief Administrative Officer of Imperial Corporation of America (\"Imperial\") from April 1989 through September 1990. Previously he was Executive Vice President and Chief Financial Officer of Tamco Enterprises, Inc. from May 1980 through April 1989.\nEach member of the Board Partner of Representatives, of the Audit Committee and all of the other persons listed above have been licensed or found qualified by the CCC.\nThe employees of the Partnership serve at the pleasure of the Board of Partner Representatives subject to any contractual rights contained in any employment agreement. The officers of Funding serve at the pleasure of Donald J. Trump, the sole director of Funding.\nDonald J. Trump, Nicholas L. Ribis and Ernest E. East served as either executive officers and\/or directors of TTMA and its affiliated entities when such parties filed their petition for reorganization under chapter 11 of the Bankruptcy Code on July 17, 1991. The Second Amended Joint Plan of Reorganization of such parties was confirmed on August 28, 1991, and was declared effective on October 4, 1991. Donald J. Trump, Nicholas L. Ribis, Ernest E. East and John P. Burke served as executive committee members, officers, and\/or directors of TPA and its affiliated entities, at the time such parties filed a petition for reorganization under chapter 11 of the Bankruptcy Code on March 9, 1992. The First Amended Joint Plan of Reorganization of such parties was confirmed on April 30, 1992, and declared effective on May 29, 1992. Donald J. Trump, Nicholas L. Ribis, Ernest E. East, Roger P. Wagner and John P. Burke served as either executive officers and\/or directors of the Partnership and its affiliated entities when such parties filed their petition for reorganization under chapter 11 of the Bankruptcy Code in March 1992. The First Amended Joint Plan of Reorganization of such parties was confirmed on May 5, 1992, and was declared effective on May 29, 1992. Donald J. Trump was a partner\nof Plaza Operating Partners Ltd. when it filed a petition for reorganization under chapter 11 of the Bankruptcy Code on November 2, 1992. The Plan of Reorganization was confirmed on December 11, 1992 and declared effective in January 1993. John P. Burke was Executive Vice President and Chief Administrative Officer of Imperial, a thrift holding company whose major subsidiary, Imperial Savings was seized by the Resolution Trust Corporation in February 1990. Subsequently, in February 1990, Imperial filed a petition for reorganization under chapter 11 of the Bankruptcy Code.\nITEM 11.","section_11":"ITEM 11. EXECUTIVE COMPENSATION.\nExecutive officers of Funding do not receive any additional compensation for serving in such capacity. In addition, Funding and the Partnership do not offer their executive officers stock option or stock appreciation right plans, long-term incentive plans or defined benefit pension plans.\nThe following table sets forth compensation paid or accrued during the years ended December 31, 1993, 1992 and 1991 to the Chief Executive Officer, each of the four most highly compensated executive officers of the Partnership whose cash compensation, including bonuses and deferred compensation, exceeded $100,000 for the year ended December 31, 1993. Also included in the table is information regarding Robert Pickus, who served as General Counsel of the Partnership for eleven months of 1993. Compensation accrued during one year and paid in another is recorded under the year of accrual. Information relating to long-term compensation is inapplicable and has therefore been omitted from the table.\n- -------------------------\n(1) Represents the dollar value of annual compensation not properly categorized as salary or bonus, including amounts reimbursed for income taxes and Director's Fees. Following SEC rules, perquisites and other personal benefits are not included in this table if the aggregate amount of that compensation is the lesser of either $50,000 or 10% of the total salary and bonus for that officer.\n(2) Represents vested and unvested contributions made by the Partnership under the Trump's Castle Hotel & Casino Retirement Savings Plan. Funds accumulated for an employee, which consist of a certain percentage of the employee's compensation plus Partnership contributions equalling 50% of the participant's contributions, are retained until termination of employment, attainment of age 59-1\/2 or financial hardship, at which time the employee may withdraw his or her vested funds.\n(3) Messrs. Ribis and East devote approximately one-third of their professional time to the affairs of the Partnership; the compensation for their positions at Other Trump Casinos has not been included.\n(4) Effective December 6, 1993, Mr. Pickus resigned as General Counsel of the Partnership and from all other positions with the Partnership and its affiliated entities to become General Counsel to TPA.\nEmployment Agreements. In September 1993, the Partnership entered into an employment agreement with Nicholas L. Ribis pursuant to which Mr. Ribis acts as Chief Executive Officer of the Partnership. The agreement, which expires in September 1996, provides for an annual salary of $550,000. The salary increases by ten percent for each of the second and third years of the agreement. Upon execution of the employment agreement, Mr. Ribis received a $250,000 signing bonus. In the event the Partnership, or any entity which acquires substantially all of the equity interests or assets of the Partnership, proposes to engage in an offering of common shares to the public, the Partnership and Mr. Ribis have agreed to negotiate new compensation arrangements which shall include equity participation for Mr. Ribis. Mr. Ribis also acts as Chief Executive Officer of TTMA and TPA, the Partnerships that own the Other Trump Casinos, and receives additional compensation from such entities. Mr. Ribis devotes approximately one-third of his professional time to the affairs of the Partnership. All other executive officers of the Partnership, except Messrs. East and Burke, devote substantially all of their time to the business of the Partnership.\nThe Partnership, on January 17, 1991, entered into an employment agreement with Roger P. Wagner, with an amendment thereto dated January 17, 1991, and a second amendment thereto dated July 18, 1992, pursuant to which Mr. Wagner serves as the Partnership's and TCHI's President and Chief Operating Officer. Mr. Wagner's employment agreement, which terminates on January 16, 1997, provides for an annual salary beginning at a minimum of $400,000 until January 16, 1994, thereafter $500,000 per year until January 16, 1995, thereafter $600,000 per year until January 16, 1996, and thereafter $750,000 per year from January 17, 1996 until January 16, 1997 and, subject to CCC approval, 1% of the Partnership's Income from Operations (as defined in such agreement) in excess of $40.0 million.\nThe Partnership has an employment agreement with Ernest E. East, Esq., who is Senior Vice President -- Administration and Corporate Affairs of the Partnership. The agreement, which expires in June 1995, provides for an annual salary of $100,000 and a discretionary bonus. Mr. East also has similar employment agreements with each of TTMA and TPA. Mr. East devotes approximately one-third of his professional time to the affairs of the Partnership.\nPursuant to an employment agreement dated January 31, 1992, as amended March 31, 1993 and December 30, 1993, Thomas P. Venier serves as Senior Vice President of Strategic Development and Planning of the Partnership. The agreement provides for an annual salary of $148,000, which is subject to review. As of April 23, 1993, and on the last day of each week thereafter, the term of the agreement has been automatically extended for one (1) week so that at all times the term during the duration of the agreement is an unexpired period of twelve (12) months. Notwithstanding such provision, Mr. Venier has the right to terminate his employment by giving 30 days written notice to the Partnership of his intent to do so.\nCompensation of Directors. Each Partner Representative of the Partnership (other than Trump) receives an annual fee of $50,000 and $2,500 per meeting attended, plus reasonable out-of-pocket expenses incurred in attending any meeting of the Board.\nCompensation Committee Interlocks and Insider Participation. In general, the compensation of executive officers of the Partnership is determined by the Board of Partner Representatives, which is composed of Donald J. Trump, Nicholas L. Ribis, Roger P. Wagner, Ernest E. East, Asher O. Pacholder, Thomas F. Leahy and Wallace B. Askins. The compensation of Nicholas L. Ribis and Roger P. Wagner is set forth in their employment agreements with the Partnership. The Partnership has delegated the responsibility over certain matters, such as the bonus of Mr. Ribis, to Trump. Executive officers of Funding do not receive any additional compensation for serving in such capacity.\nThe SEC requires issuers to disclose the existence of any other corporation in which both (i) an executive officer of the registrant serves on the board of directors and\/or compensation committee, and (ii) a director of the registrant serves as an executive officer. Messrs. Ribis, East, Wagner and Burke, executive officers of the Partnership, serve on the Board of Directors of other entities in which members of the Board of Partner Representatives (namely, Messrs. Trump and Ribis) serve as executive officers. The Partnership believes that such relationships have not affected the compensation decisions made by the Board of Partner Representatives in the last fiscal year.\nMr. Wagner serves as a director of TCHI, of which Messrs. Trump and Ribis serve as executive officers.\nMessrs. Ribis, East and Burke serve on the Board of Directors of Taj Mahal Holding Corp., which holds an indirect equity interest in TTMA, the partnership that owns the Taj Mahal, of which Messrs. Trump and Ribis are executive officers. Such persons also serve on the Board of Directors of TM\/GP Corporation (a subsidiary of Taj Mahal Holding Corp.), the managing general partner of TTMA, of which Messrs. Trump and Ribis are executive officers. Mr. Ribis is compensated by TTMA for his services as its chief executive officer.\nMr. Ribis also serves on the Board of Directors of Trump Taj Mahal Realty Corp. (\"Taj Realty Corp.\"), which leases certain real property to TTMA, of which Trump is an executive officer. Trump, however, does not receive any compensation for serving as an executive officer of Taj Realty Corp.\nMessrs. Trump and Ribis serve on the Board of Directors of TPFI, the managing general partner of TPA, of which Messrs. Trump, Ribis and East are executive officers. Messrs. Trump, Ribis and East also serve on the Board of Directors of TPHI, of which such persons are also executive officers. Mr. Ribis is compensated by TPA for his services as chief executive officer.\nITEM 12.","section_12":"ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.\nThe following table sets forth information with respect to the amount of Funding's Common Stock owned by beneficial owners of more than 5% of Funding's Common Stock. Funding has no other class of equity securities outstanding.\nTitle or Class Name and address of Amount and Nature of Percent of Beneficial Owners beneficial Ownership class - -------------- ------------------- -------------------- ---------- Common Stock Trump's Castle 200 Shares 100% Associates Huron Avenue and Brigantine Blvd. Atlantic City, New Jersey 08401\nCurrently, Trump, TC\/GP and TCHI hold 61.5%, 37.5% and 1.0% interests, respectively, in Trump's Castle Associates and therefore are the beneficial owners of all of the outstanding shares of Common Stock of Funding.\nITEM 13.","section_13":"ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.\nOther Trump Casinos. The following table sets forth the amounts due to the Partnership from Trump and his Affiliates as of December 31, 1993. For a more detailed description of the Partnership's transactions with Trump and his Affiliates, see \"Other Transactions with Affiliates\" below.\nAmount Due and Outstanding to the Partnership as of December 31, 1993 -------------------------- Trump Plaza Associates .......................... $321,000 Trump Taj Mahal Associates ...................... 69,000 The Trump Organization .......................... 225,000\nTotal Due from Affiliates as of December 31, 1993 .................... $615,000\nOther Transactions With Affiliates. In December 1990, Fred Trump, the father of Donald J. Trump, placed $3.5 million in cash on deposit with the Partnership's casino cage, which was recorded by the Partnership as a gaming patron deposit. Counter check(s) totalling $3.5 million were issued against the deposit, for which Fred Trump received gaming chips valued at $3.5 million. These gaming chips were included in the outstanding chip liability on the Partnership's books at September 30, 1992. In each of October 1992 and December 1993, in accordance with the indenture pursuant to which the Bonds were issued, Fred Trump redeemed $1.0 million in gaming chips for cash.\nThe Partnership has engaged in transactions with TPA, TTMA, Plaza Operating Partners, Ltd. (\"Plaza Hotel\"), the partnership which operates The Plaza Hotel in New York City, and The Trump Organization. TPA, Plaza Hotel, The\nTrump Organization and TTMA are affiliates of Donald J. Trump. These transactions include certain shared payroll costs, fleet maintenance and limousine services, as well as complimentary services offered to customers, for which the Partnership makes the initial payment and is then reimbursed by the Affiliates. During 1993, the Partnership incurred expenses of approximately $1.3 million in corporate salaries, and $1.0 million of other transactions on behalf of these related entities. In addition, the Partnership received payments totalling $2.0 million for services rendered and had $0.4 million of deductions for similar services incurred by these related entities on behalf of the Partnership.\nIn connection with the 1993 Recapitalization, the Partnership purchased the Midlantic Grid Note. Payment of the Midlantic Grid Note was guaranteed by Trump, which guaranty was secured by a pledge of his direct and indirect equity interest in the Partnership. In addition, Winton Associates, Inc. (\"Winton\") was retained by a holder of Units to negotiate the terms of the Recapitalization on behalf of the Unitholders. The Partnership paid Winton a non-refundable fee of $100,000 as well as its out-of-pocket expenses, and an additional fee of $400,000 upon consummation of the Recapitalization. Winton, in turn, retained Prudential Securities, Inc. to assist it in representing Putnam Investment Management, and paid Prudential one-half of the fees described above and reimbursed Prudential for its out-of-pocket expenses. Winton is a wholly owned subsidiary of Pacholder Associates, Inc., of which Dr. Asher Pacholder, a member of the Board of Partner Representatives, is the Chairman of the Board and Managing Director.\nPursuant to the terms of the Partnership Agreement, the Partnership paid a $1.5 million cash bonus to Trump on February 16, 1994.\nServices Agreement. On December 28, 1993, the Partnership cancelled its existing management agreement with a corporation wholly owned by Trump and entered into a Services Agreement with TC\/GP (the \"Services Agreement\"). In general, the Services Agreement obligates TC\/GP to provide to the Partnership, from time-to-time when reasonably requested, consulting services on a non-exclusive basis, relating to marketing, advertising, promotional and other related services (the \"Services\") with respect to the business and operations of the Partnership, in exchange for certain fees to be paid only in those years in which EBITDA (EBITDA represents income from operations before depreciation, amortization, restructuring costs and the non-cash write-down of CRDA investments) exceeds prescribed amounts.\nIn consideration for the Services to be rendered by TC\/GP, the Partnership will pay an annual fee (which is identical to the fee which was payable under the management agreement) to TC\/GP in the amount of $1.5 million for each year in which EBITDA exceeds the following amounts for the years indicated: 1993-$40.5 million; 1994-$45.0 million; 1995 and thereafter-$50.0 million. If EBITDA in any fiscal year does not exceed the applicable amount, the annual fee will be $0. In addition, TC\/GP will be entitled to an incentive fee beginning with the fiscal year ending December 31, 1994 in an amount equal to 10% of EBITDA in excess of $45.0 million for such fiscal year. The Partnership will also be required to advance to TC\/GP $125,000 a month which will be applied toward the annual fee, provided, however, that no advances will be made during any year if and for so long as the Managing Partner (defined in the Services Agreement as Trump) determines, in his good faith reasonable judgment, that the Partnership's budget and year-to-date performance indicate that the EBITDA target for such year will not be met. If for any year during which annual fee\nadvances have been made it is determined that the annual fee was not earned, TC\/GP will be obligated to promptly repay any amounts previously advanced. For purposes of calculating EBITDA under the Services Agreement, any incentive fees paid in respect of 1994 or thereafter shall not be deducted in determining net income.\nUnless sooner terminated pursuant to its terms, the Services Agreement will expire on December 31, 2005.\nPART IV\nITEM 14.","section_14":"ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K\n(A) Financial Statements. See the Index immediately following the signature page.\n(B) Reports on Form 8-K. Funding did not file any reports on form 8-K during the last quarter of the year ended December 31, 1993.\n(C) Exhibits. All exhibits listed below are filed with this Annual Report on Form 10-K unless specifically stated to be incorporated by reference to other documents previously filed with the Securities and Exchange Commission.\nExhibit\n3(15) -Amended and Restated Certificate of Incorporation of Funding.\n3.1(15) -Bylaws of Funding.\n3.2-3.6 -Intentionally omitted.\n3.7(14) -Second Amended and Restated Partnership Agreement of the Partnership.\n4.1-4.10 -Intentionally omitted.\n4.11(14) -Indenture, among Funding, as issuer, the Partnership, as guarantor, and the Mortgage Note Trustee, as trustee.\n4.12(14) -Indenture of Mortgage between the Partnership, as Mortgagor, and Funding, as Mortgagee.\n4.13(14) -Assignment Agreement between Funding and the Mortgage Note Trustee.\n4.14(14) -Partnership Note.\n4.15 -Form of Mortgage Note (included in Exhibit 4.11).\n4.16 -Form of Partnership Guarantee (included in Exhibit 4.11).\n4.17(14) -Indenture between Funding, as issuer, the Partnership, as guarantor, and the PIK Note Trustee, as trustee.\n4.18(14) -Pledge Agreement between Funding and the PIK Note Trustee.\n4.19(14) -Subordinated Partnership Note.\n4.20 -Form of PIK Note (included in Exhibit 4.17).\n4.21 -Form of Subordinated Partnership Guarantee (included in exhibit 4.17).\n4.22(15) -Letter Agreement between the Partnership and the Proposed Senior Secured Note Purchasers regarding the Senior Secured Notes.\n4.23(14) -Note Purchase Agreement for 11-1\/2% Series A Senior Secured Notes of the Partnership due 1999.\n4.24(14) -Indenture, among Funding, as issuer, the Partnership, as guarantor, and the Senior Secured Note Trustee, as trustee.\n4.25(14) -Indenture of Mortgage and Security Agreement between the Partnership, as mortgagor\/debtor, and Funding as mortgagee\/secured party. (Senior Note Mortgage).\n4.26(14) -Registration Rights Agreement by and among the Partnership and certain purchasers.\n4.27 -Intentionally omitted.\n4.28(14) -Guarantee Mortgage.\n4.29(14) -Senior Partnership Note.\n4.30(14) -Indenture of Mortgage and Security Agreement between the Partnership as mortgagor\/debtor and the Senior Note Trustee as mortgagee\/secured party. (Senior Guarantee Mortgage).\n4.31(14) -Assignment Agreement between Funding, as assignor, and the Senior Note Trustee, as assignee. (Senior Assignment Agreement).\n4.32(14) -Amended and Restated Nominee Agreement.\n10.1-10.2 -Intentionally omitted.\n10.3(7) -Employment Agreement dated January 17, 1991, between the Partnership and Roger P. Wagner.\n10.4(2) -Second Amendment to Employment Agreement dated January 17, 1991 between the Partnership, TCHI, and Roger P. Wagner.\n10.5(3) -Form of License Agreement between the Partnership and Donald J. Trump.\n10.6 -Intentionally Omitted.\n10.7(5) -Lease, dated June 25, 1986, between the Partnership and Trump Plaza, as the nominee of the Trump Organization.\n10.8-10.10 -Intentionally omitted.\n10.11(14) -Employment Agreement, between the Partnership and Nicholas Ribis.\n10.12(5) -Trump's Castle Hotel & Casino Retirement Savings Plan, effective as of September 1, 1986.\n10.13-10.16 -Intentionally omitted.\n10.17(9) -Agreement, dated June 1, 1987, between Marina Associates, GNAC Corp., and the Partnership, individually and as assignee of Hilton New Jersey Corporation and the New Jersey Department of Transportation and the New Jersey Department of Environmental Protection.\n10.18(9) -Agreement, dated June 1, 1987, between Marina Associates, the Partnership, individually and as assignee and successor of Hilton New Jersey Corporation and Golden Nugget, Inc., individually and on behalf of all of its past, present and future subsidiaries.\n10.19(7) -Lease Agreement by and between State of New Jersey acting through its Department of Environmental Protection, Division of Parks and Forests, as Landlord, and the Partnership, as tenant, dated September 1, 1990.\n10.20-10.21 -Intentionally omitted.\n10.22(1) -Memorandum of Understanding, dated July 30, 1991, between Willkie Farr & Gallagher, Clapp & Eisenberg and Goodkind Labaton & Rudoff.\n10.23(2) -Form of Employment Agreement between the Partnership and Ernest E. East.\n10.24A(3) -Employment Agreement, dated January 31, 1992 between Thomas P. Venier and the Partnership.\n10.24B(13) -Amendment to Employment Agreement, dated March 19, 1993, between Thomas P. Venier and the Partnership.\n10.25(3) -Stipulation and Agreement of Compromise and Settlement, between Willkie Farr & Gallagher, Clapp & Eisenberg and Goodkind, Labaton, Rudoff & Sucharow.\n10.26A(10) -Employment Agreement, dated November 2, 1992, between Patrick Dennehy and the Partnership.\n10.26B(15) -Amendment of Employment Agreement, dated May 13, 1993, between Patrick Dennehy and the Partnership.\n10.27(15) -Services Agreement.\n10.28-10.29 -Intentionally omitted.\n10.30(15) -Employment Agreement, dated October 4, 1993, between Nicholas Niglio and the Partnership.\n10.31(11) -Employment Agreement, dated January 3, 1994, between Robert E. Schaffhauser and the Partnership.\n10.32(11) -Employment Agreement dated December 20, 1993, between Patricia M. Wild and the Partnership\n10.33(11) -Amendment of Employment Agreement, dated December 30, 1993, between Thomas Venier and the Partnership.\n10.34(11) -Amended and Restated Credit Agreement, dated as of December 28, 1993, among Midlantic, the Partnership and Funding.\n10.35(11) -Amendment No. 1 to Amended and Restated Indenture of Mortgage, between the Partnership, as Mortgagor and Midlantic, as Mortgagee.\n10.36(11) -Amended and Restated Indenture of Mortgage, between the Partnership, as Mortgagor and Midlantic, as Mortgagee, dated as of May 29, 1992.\n10.37(11) -Amendment No. 1 to Amended and Restated Assignment of Leases and Rents, between the Partnership, as assignor, and Midlantic, as assignee.\n10.38(11) -Amended and Restated Assignment of Leases and Rents, between the Partnership, as assignor, and Midlantic, as assignee, dated as of May 29, 1992.\n10.39(11) -Amendment No. 1 to Amended and Restated Assignment of Operating Assets, between the Partnership, as assignor and Midlantic, as assignee.\n10.40(11) -Amended and Restated Assignment of Operating Assets, between the Partnership, as assignor, and Midlantic, as assignee, dated as of May 29, 1992.\n10.41(11) -Intercreditor Agreement, by and among Midlantic, the Senior Note Trustee, the Mortgage Note Trustee, the PIK Note Trustee, Funding and the Partnership.\n- -------------- (1) Incorporated herein by reference to the identically numbered Exhibit to Funding's Registration Statement on Form S-4, Registration No. 33-41759, declared effective on January 23, 1992.\n(2) Incorporated herein by reference to the Exhibit to Funding's Quarterly Report on Form 10-Q for the quarter ended June 30, 1992.\n(3) Incorporated herein by reference to the Exhibit to Funding's Annual Report on Form 10-K for the year ended December 31, 1991.\n(4) Incorporated herein by reference to the Exhibit to Funding's Annual Report on Form 10-K for the year ended December 31, 1987.\n(5) Incorporated herein by reference to the Exhibit to Funding's Annual Report on Form 10-K for the year ended December 31, 1986.\n(6) Incorporated herein by reference to Exhibit 10.12 to Funding's Annual Report on Form 10-K for the year ended December 31, 1989.\n(7) Incorporated herein by reference to the Exhibit to Funding's Annual Report on Form 10-K for the year ended December 31, 1990.\n(8) Incorporated herein by reference to Exhibit 10.2 to Funding's Registration Statement on Form S-1, Registration No. 2-99088, declared effective on September 20, 1985.\n(9) Incorporated herein by reference to the Exhibit to Funding's Registration Statement on Form S-1, Registration No. 33-14907, declared effective on July 21, 1987.\n(10) Incorporated herein by reference to the Exhibit to Funding's Annual Report on Form 10-K for the year ended December 31, 1992.\n(11) Incorporated herein by reference to the identically numbered Exhibit to Funding's Registration Statement on Form S-4, Registration Number 33-52309 filed with the SEC on February 17, 1994.\n(12) Incorporated herein by reference to the Exhibit to TC\/GP's Quarterly Report on Form 10-Q for the quarter ended June 30, 1992.\n(13) Incorporated herein by reference to the Exhibit to Funding's Quarterly Report on Form 10-Q for the quarter ended March 31, 1993.\n(14) Incorporated herein by reference to the Exhibit to Amendment No. 5 to the Schedule 13E-3 of TC\/GP and the Partnership, File No. 5-36825, filed with the SEC on January 11, 1994.\n(15) Incorporated herein by reference to the Exhibit to Funding's and the Partnership's Registration Statement on Form S-4, Registration No. 33-68038.\nReport of Independent Public Accountants\nConsolidated Balance Sheets of Trump's Castle Associates and Subsidiary as of December 31, 1993 and 1992\nConsolidated Statements of Operations of Trump's Castle Associates and Subsidiary for the years ended December 31, 1993, 1992 and 1991\nConsolidated Statements of Capital (Deficit) of Trump's Castle Associates for the years ended December 31, 1993, 1992 and 1991\nConsolidated Statements of Cash Flows of Trump's Castle Associates and Subsidiary for the years ended December 31, 1993, 1992 and 1991\nNotes to Consolidated Financial Statements of Trump's Castle Associates and Subsidiary\nOther Schedules are omitted for the reason that they are not required or are not applicable, or the required information is included in the combined financial statements or notes thereto.\nREPORT OF INDEPENDENT PUBLIC ACCOUNTANTS\nTo Trump's Castle Associates and Subsidiary:\nWe have audited the accompanying consolidated balance sheets of Trump's Castle Associates (a New Jersey general partnership) and Subsidiary as of December 31, 1993 and 1992, and the related consolidated statements of operations, partners' capital (deficit) and cash flows for each of the three years in the period ended December 31, 1993. These consolidated financial statements and the schedules referred to below are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these consolidated financial statements and schedules based on our audits.\nWe conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.\nIn our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Trump's Castle Associates and Subsidiary as of December 31, 1993 and 1992, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1993, in conformity with generally accepted accounting principles.\nOur audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedules listed in the index to the financial statements are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic financial statements. These schedules have been subjected to the auditing procedures applied in our audits of the basic financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.\nArthur Andersen & Co.\nRoseland, New Jersey February 11, 1994\nSIGNATURES\nPursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 30th day of March, 1994.\nTRUMP'S CASTLE FUNDING, INC.\nBy: \/s\/Donald J. Trump ---------------------------- By: Donald J. Trump Title: President\nPursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Annual Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.\nSignature Title Date\nTRUMP'S CASTLE FUNDING, INC.\nBy:\/s\/Donald J. Trump Chairman of the Board, President, March 30, 1994 - --------------------- Chief Executive Officer (Principal Donald J. Trump Executive Officer), Treasurer (Principal Financial Officer) and sole Director of the Registrant.\nBy:\/s\/Robert E. Schaffhauser Assistant Treasurer of the March 30, 1994 - ---------------------------- Registrant (Principal Accounting Robert E. Schaffhauser Officer)\nTRUMP'S CASTLE ASSOCIATES AND SUBSIDIARY\nCONSOLIDATED BALANCE SHEETS -- DECEMBER 31, 1993 AND 1992\nThe accompanying notes to consolidated financial statements are an integral part of these consolidated balance sheets.\nTRUMP'S CASTLE ASSOCIATES AND SUBSIDIARY\nCONSOLIDATED STATEMENTS OF OPERATIONS\nFOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991\nThe accompanying notes to consolidated financial statements are an integral part of these consolidated statements.\nTRUMP'S CASTLE ASSOCIATES AND SUBSIDIARY\nCONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL (DEFICIT)\nFOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991\nThe accompanying notes to consolidated financial statements are an integral part of these consolidated statements.\nTRUMP'S CASTLE ASSOCIATES AND SUBSIDIARY\nCONSOLIDATED STATEMENTS OF CASH FLOWS\nFOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991\nThe accompanying notes to consolidated financial statements are an integral part of these consolidated statements.\nTRUMP'S CASTLE ASSOCIATES AND SUBSIDIARY\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS\n(1) Organization and Operations:\nThe accompanying consolidated financial statements include those of Trump's Castle Associates, a New Jersey general partnership (the \"Partnership\") and its wholly-owned subsidiary, Trump's Castle Funding, Inc., a New Jersey corporation (the \"Company\"). All significant intercompany balances and transactions have been eliminated in the consolidated financial statements.\nThe Partnership was formed as a limited partnership in 1985 for the sole purpose of acquiring and operating Trump's Castle Casino Resort (\"Trump's Castle\"). The Partnership converted to a general partnership in February 1992. As a result of a recapitalization involving the Partnership, the Company and TC\/GP, Inc. (\"TC\/GP\") in December, 1993 (Note 2), the Partnership is wholly owned by Donald J. Trump, and his wholly owned companies, TC\/GP and Trump's Castle Hotel & Casino Inc. (\"TCHC\"). Donald J. Trump has pledged his direct and indirect ownership interest in the Partnership as collateral under various personal debt agreements.\nThe Company was incorporated on May 28, 1985 solely to serve as a financing company to raise funds through the issuance of bonds to the public (Note 4). Since the Company has no business operations, its ability to repay the principal and interest on 11-3\/4% Mortgage Notes due 2003 (the \"Mortgage Notes\") and its Increasing Rate Subordinated Pay-in-Kind Notes due 2005 (the \"PIK Notes\") is completely dependent upon the operations of the Partnership.\n(2) Plan of Reorganization and Subsequent Recapitalization:\nPlan of Reorganization\nOn March 9, 1992, the Partnership, the Company, and TCHC filed a voluntary petition for relief under chapter 11, title 11 of the United States Bankruptcy Code (the \"Bankruptcy Code\") and filed a Plan of Reorganization (the \"Plan\"). The Plan was confirmed by the Bankruptcy Court on May 5, 1992 and the Plan was consummated on May 29, 1992 (the \"Effective Date\"). Pursuant to the terms of the Plan, the Company's then outstanding bonds (the \"Old Bonds\") were exchanged for new bonds and common stock of TC\/GP (Note 4) and certain modifications were made to the terms of bank borrowings (Note 5) and amounts owed to Donald J. Trump (Note 6). The issuance of the common stock of TC\/GP resulted in approximately 50% of the beneficial ownership interest in the Partnership being transferred to the holders of the bonds.\nIn accordance with AICPA Statement of Position 90-7, \"Financial Reporting by Entities in Reorganization Under the Bankruptcy Code,\" the Bonds issued at the time of the reorganization were stated at the present value of amounts to be paid, determined at current interest rates (effective rate of approximately 17.4%). The effective interest rate of these bonds was determined based on the trading price of these bonds for a specific period. Stating the debt at its approximate present value resulted in a reduction in the $322,987,000 initial face amount of these bonds of approximately $96,896,000. This gain will be offset by increased interest costs over the period of the bonds to accrete such bonds to their face value at maturity.\nOn the Effective Date, TC\/GP received a 49.995% Partnership interest in the Partnership and was admitted as a partner. TC\/GP also received a 50% beneficial interest in TCHC, a partner in the Partnership, which held a .01% partnership interest, thereby giving TC\/GP a 50% beneficial interest in the Partnership. On the Effective Date the partners executed the Amended and Restated Partnership Agreement (the \"Partnership Agreement\"), which provided for, among other things, a Board of Partner Representatives (the \"Board\") to oversee the business and operations of the Partnership. Pursuant to the terms of the Partnership Agreement, Donald J. Trump was appointed the Managing General Partner of the Partnership responsible for its day-to-day operations and appointed four of the seven members of the Board. The remaining members of the Board were appointed by TC\/GP through the holders of its Common Stock.\nThe Plan resulted in an extraordinary gain totaling approximately $128,187,000, including the $96,896,000 discussed above, $18,000,000 representing the forgiveness of bank debt (Note 5), and $22,805,000 representing a discharge of accrued interest and accretion on indebtedness less the write-off of unamortized loan issuance costs of $9,514,000. On the Effective date, 35,447 of additional units were issued in lieu of the Bond Carryforward Amount, as defined and the Effective Date Amount, as defined. Additionally, the Plan resulted in a discharge of related party indebtedness in the approximate amount of $33,325,000 which has been accounted for as a contribution to capital (Note 6).\nRecapitalization\nOn December 28, 1993, the Partnership, the Company and TC\/GP consummated a Recapitalization Plan whereby each $1,000 of principal of the 9.5% Mortgage Bonds issued as part of the Plan was exchanged for $750 principal amount of the Company's 11-3\/4% Mortgage Notes due 2003 (the \"Mortgage Notes\"), $120 principal amount of the Company's Increasing Rate Subordinated Pay-in-Kind Notes due 2005 (the \"PIK Notes\") and a cash payment of $6.19 plus all accrued and unpaid interest. Those bondholders who did not elect to exchange their bonds received a cash payment of $750 for each $1,000 of principal amount of bonds plus accrued and unpaid interest. In addition, each share of TC\/GP common stock was exchanged for $35 principal amount of PIK Notes.\nAs a result of the Recapitalization Plan, approximately 96% of the principal amount of the previously issued bonds were exchanged for Mortgage and PIK Notes and the TC\/GP common stock was redeemed. Those bonds that were redeemed for cash were purchased at an amount which approximated their net book value at the date of purchase. The net book value of the exchanged bonds has been carried forward and allocated to the Mortgage and PIK Notes in proportion to the principal amount of Notes issued. The difference between the principal amount and net book value of these Notes will be accreted as a charge to interest expense over the life of the Notes using the effective interest method.\nIn addition to the Mortgage and PIK Notes, the Company issued $27 million of 11-1\/2% Senior Secured Notes, due 2000 (the \"Senior Notes\"). A portion of the proceeds from the Senior Notes were used to repay the $7 million Grid Note (Note 5).\nTransaction costs related to the Recapitalization Plan of approximately $9,000,000 are included in interest expense. Included in these costs is a $1,500,000 bonus to Donald J. Trump for the services he provided in connection with the recapitalization.\n(3) Accounting Policies:\nGaming Revenues\nThe Partnership records as gross gaming revenues the differences between amounts wagered and amounts won by casino patrons.\nDuring 1992, certain Progressive Slot Jackpot Programs were discontinued which resulted in $1,767,000 of related accruals being taken into income.\nPromotional Allowances\nGross revenues include the retail value of the complimentary food, beverage and hotel services furnished to patrons. The retail value of these promotional allowances is deducted from gross revenues to arrive at net revenues. The cost of such complimentaries have been included as casino expenses in the accompanying consolidated statements of operations. The cost of complimentaries allocated from rooms, food and beverage departments to the casino department during the years ended December 31, 1993, 1992 and 1991 are as follows:\n1993 1992 1991 ----------- ----------- ----------- Rooms $ 5,834,000 $ 5,390,000 $ 4,304,000 Food and Beverage 17,332,000 17,351,000 13,694,000 Other 2,073,000 1,954,000 1,360,000 ----------- ----------- ----------- $25,239,000 $24,695,000 $19,358,000 =========== =========== ===========\nIncome taxes\nThe accompanying consolidated financial statements do not include a provision for Federal income taxes of the Partnership, since any income or losses allocated to the partners are reportable for Federal income tax purposes by the Partners.\nUnder the Casino Control Act (the \"Act\") and the regulations promulgated thereunder, the Partnership and the Company are required to file a consolidated New Jersey corporation business tax return. However, no provision for State income taxes has been reflected in the accompanying consolidated financial statements, since the Partnership has experienced cumulative net operating losses.\nAs of December 31, 1993, the Partnership had New Jersey State net operating losses of approximately $144,000,000, which are available to offset taxable income through 2000.\nInventories\nInventories of provisions and supplies are carried at the lower of cost (first-in, first-out basis) or market.\nProperty and equipment\nProperty and equipment is recorded at cost and is depreciated on the straight-line method over the estimated useful lives of the assets. Estimated useful lives for furniture, fixtures and equipment and buildings are from three to eight years and forty years, respectively.\nStatements of cash flows\nFor purposes of the statements of cash flows, the Company and the Partnership consider all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents.\nThe following supplemental disclosures are made to the statements of cash flows:\n1993 1992 1991 ----------- ----------- -----------\nCash paid during the year for interest (net of amounts capitalized) $44,857,000 $8,172,000 $7,902,000 =========== ========== ==========\n(4) Mortgage Bonds and Notes:\nUpon consummation of the Plan on May 29, 1992, each $1,000 principal amount of the Company's then outstanding Series A-1 Bonds or $1,000 accreted amount as\nof December 15, 1990 of Series A-2 Bonds were exchanged for $1,000 in principal amount of the Company's 9.50% Bonds (the \"Bonds\"), together with one share of the Common Stock of TC\/GP and certain other payments. The New Bonds and Common Stock traded together as a unit (the \"Unit\") and could not be transferred separately, except upon the occurrence of certain events.\nThe Bonds had a scheduled maturity of August 15, 1998 and bore interest at 9.50% per annum from the date of issuance, payable semi-annually on each February 15 and August 15, commencing August 15, 1992. The Company was required to pay interest in cash to the holders of the Bonds outstanding on the immediately preceding August 1 or February 1 at varying rates per annum (the \"Mandatory Cash Amounts\") as follows:\nMandatory Cash Rate Interest Payment Date (Per Annum) - --------------------- ----------- August 15, 1992 5.00% February 15, 1993 6.00% August 15, 1993 7.00% February 15, 1994 8.00% August 15, 1994 and thereafter 9.50%\nFor interest payment dates on or before February 15, 1994, the difference between interest calculated at the rate of 9.50% per annum and the Mandatory Cash Amount (the \"Additional Amount\") was required to be payable to holders of the Bonds in cash to the extent that Excess Available Cash, as defined, of the Partnership was available for such purpose and in additional Units to the extent that Excess Available Cash was less than the Additional Amount, as defined. Through August 15, 1993, interest was paid to the bondholders at the mandatory cash rate, with the balance paid in additional units.\nAs discussed in Note 2, On December 28, 1993 all of the outstanding Mortgage Bonds and TC\/GP Common stock were either redeemed or exchanged for Mortgage and PIK Notes. The Mortgage Notes bear interest, payable in cash, semi-annually, commencing May 15, 1994 at 11-3\/4% and mature on November 15, 2003. As discussed in Note 2, Recapitalization, the net book value of the exchanged bonds has been carried forward and allocated to the Mortgage and PIK Notes in proportion to the principal amount of Notes issued. Accordingly, as of December 31, 1993, the Mortgage and PIK Notes outstanding are reflected on the balance sheet net of unamortized discount of $39,589,000 and $8,257,000 respectively. In the event the PIK Notes are redeemed prior to November 15, 1998, the interest rate on the Mortgage Notes will be reduced to 11-1\/2%. The Mortgage Notes may be redeemed at the Company's option at a specified percentage of the principal amount commencing in 1998.\nThe PIK Notes bear interest, payable at the Company's option in whole or in part in cash and through the issuance of additional PIK Notes, semi-annually commencing May 15, 1994 at the rate of 7% through September 30, 1994 and 13-7\/8% through November 15, 2003. Thereafter interest on these Notes is payable in cash, semi-annually at the rate of 13-7\/8%. The PIK Notes mature on November 15, 2005. The PIK Notes may be redeemed at the Company's option at 100% of the principal amount under certain conditions, as defined in the PIK Note Indenture, and are required to be redeemed from a specified percentage of any equity offering which includes the Partnership.\nThe terms of both the Mortgage Notes and PIK Notes include limitations on the amount of additional indebtedness the Partnership may incur, distributions of Partnership capital, investments and other business activities.\nThe Mortgage Notes are secured by a promissory note of the Partnership to the Company (the \"Partnership Note\") in an amount and with payment terms necessary to service the Mortgage Notes. The Partnership Note is secured by a mortgage on Trump's Castle and substantially all of the other assets of the Partnership. The Partnership Note has been assigned by the Company to the Trustee to secure the repayment of the Mortgage Notes. In addition, the Partnership has guaranteed (the \"Guaranty\") the payment of the Mortgage Notes, which Guaranty is secured by a mortgage on Trump's Castle. The Partnership Note and the Guaranty are expressly subordinated to the indebtedness described in Note 5 (the \"Senior Indebtedness\") and the liens of the mortgages securing the Partnership Note and the Guaranty are subordinate to the liens securing the Senior Indebtedness.\nThe PIK Notes are secured by a subordinated promissory note of the Partnership to the Company (the \"Subordinated Partnership Note\"), which has been assigned to the Trustee for the PIK Notes, and the Partnership has issued a subordinated guaranty (the \"Subordinated Guaranty\") of the PIK Notes. The Subordinated Partnership Note and the Subordinated Guaranty are expressly subordinated to the Senior Indebtedness, the Partnership Note and the Guaranty.\n(5) Other Borrowings:\nBank Borrowings\nIn February 1988, the Company and the Partnership entered into a $50,000,000 revolving credit facility with Midlantic National Bank (\"Midlantic\") which was later converted to a term loan in August 1990 (\"Term Loan\"). In addition, in June 1990, the Partnership borrowed $13,000,000 from Midlantic under an unsecured line of credit pursuant to a grid note (\"Grid Note\"). Pursuant to the Plan, the terms of both of these loans were modified.\nThe principal amount of the amended Term Loan (the \"Amended Term Loan\") was reduced to $38,000,000. The Amended Term Loan has an initial maturity of three\nyears from the Effective Date and bears interest at 9% per annum over such period. In accordance with its terms, the Partnership has the option, subject to certain conditions, to extend the Amended Term Loan an additional five years. Upon such an extension, the interest rate on such loan will adjust to a market rate, but not less than a minimum rate of 9%. The Amended Term Loan is secured by a mortgage lien on Trump's Castle that is prior to the lien securing the Mortgage Notes (Note 4) and the Senior Notes described below.\nThe amended Grid Note (the \"Amended Grid Note\") bore interest at 8.5% and the outstanding principal amount was reduced to $7,000,000 payable on demand. On December 28, 1993, the Amended Grid Note was paid in full.\nSenior Notes\nOn December 28, 1993, the Company issued 11-1\/2% Senior Secured Notes, due 2000. Similar to the Mortgage Notes, the Senior Notes are secured by an assignment of a promissory note of the Partnership (the \"Senior Partnership Note\") which is in turn secured by a mortgage on Trump's Castle and substantially all of the other assets of the Partnership. In addition, the Partnership has guaranteed (the \"Senior Guaranty\") the payment of the Senior Notes, which Senior Guaranty is secured by a mortgage on Trump's Castle. The Senior Partnership Note is subordinated to the Amended Term Loan described above.\nInterest on the Senior Notes is payable semiannually commencing May 15, 1994 at the rate of 11-1\/2%; however in the event that the PIK Notes are redeemed prior to November 15, 1998, the interest rate will be reduced to 11-1\/4%. The Senior Notes are subject to a required partial redemption commencing on June 1, 1998 at 100% of the principal amount.\n(6) Related Party Transactions:\nTrump Priority Interest\nDuring 1990, the Partnership borrowed $28,265,000 from Donald J. Trump, one of its general partners, which included $9,889,000 of Series A-1 Bonds (face value $12,480,000), the proceeds of which were used to partially satisfy the June 1990 interest and sinking fund requirements of the Old Bonds. Pursuant to the Plan, the above obligations and related accrued interest of $5,060,000 were canceled and contributed to capital and Donald J. Trump received in exchange therefor a priority interest in the Partnership (the \"Trump Priority Interest\"). The Trump Priority Interest was initially $15,000,000 and pursuant to the terms of the Partnership Agreement, the Partnership was required to pay a priority return thereon semi-annually at a rate per annum of up to 9.50%. Pursuant to the terms of the Recapitalization Plan, the Partnership Agreement was amended to provide, among other things, that Trump will be entitled to receive a priority\ndistribution equal to the Trump Priority Interest upon liquidation and to eliminate the priority return. For the year ended December 31, 1993 and 1992, no amounts were paid as priority return on capital.\nTrump Management Fee\nThe Partnership had a management agreement with Trump's Castle Management Corp. (\"TCMC\"), a corporation wholly owned by Donald J. Trump (the \"Management Agreement\"). The Management Agreement provided that the day-to-day operation of Trump's Castle and all ancillary properties and businesses of the Partnership was to be under the exclusive management and supervision of TCMC.\nPursuant to the Management Agreement, the Partnership was required to pay an annual fee in the amount of $1,500,000 to TCMC for each year in which Earnings Before Interest, Taxes, Depreciation and Amortization (\"EBITDA\"), as defined, exceeds certain levels. In addition, TCMC, beginning with the fiscal year ended December 31, 1994, was to receive an incentive fee equal to 10% of the excess EBITDA over $45,000,000 for such fiscal year. During the years ended 1993 and 1992, the Partnership incurred fees and expenses of $1,647,000 and 888,000 respectively, under the Management Agreement.\nAs a result of the Recapitalization Plan described in Note 2, on December 28, 1993, the Partnership terminated the Management Agreement with TCMC and entered into a Services Agreement with TC\/GP. Pursuant to the terms of the services agreement, TC\/GP is obligated to provide the Partnership, from time to time, when reasonably requested, consulting services on a non-exclusive basis, relating to marketing, advertising, promotional and other similar and related services with respect to the business and operations of the Partnership, including such other services as the Managing Partner may reasonably request.\nIn consideration for the services to be rendered, the Partnership will pay TC\/GP an annual fee on the same basis as that of the previous Management Agreement, discussed above. The Services Agreement expires on December 31, 2005.\nFred Trump Gaming Chip Liability\nIn December 1990, Fred Trump, the father of Donald J. Trump, placed $3,500,000 in cash on deposit with the Partnership's casino cage, which was recorded by the Partnership as a gaming patron deposit. Counter checks totaling $3,500,000 were issued against the deposit, for which Fred Trump received gaming chips valued at $3,500,000. On October 8, 1992, in accordance with the indenture, Fred Trump redeemed $1,000,000 in gaming chips for cash. In December 1993, Fred Trump redeemed $1,000,000 in gaming chips and placed the same amount on deposit in the casino cage. This amount was included in Patrons Deposits as of December 31, 1993 and was subsequently redeemed on January 6, 1994. The remaining liability may be redeemed at any time provided there shall exist no Event of Default, the Partnership shall have achieved EBITDA for any period of\nfour consecutive fiscal quarters in an amount not less than $45,000,000 and or if approved by a unanimous vote of the Board of Partner Representatives with the unanimous consent of the Noteholder Representatives. The remaining gaming chip liability to Fred Trump of $1,500,000 is included in unredeemed chip liability as of December 31, 1993.\nDue from Affiliates\nAmounts due from affiliates were $615,000 and $742,000 as of December 31, 1993 and 1992, respectively. The Partnership has engaged in some limited intercompany transactions with Trump's Plaza Associates (TPA), Trump Taj Mahal Associates, (TTMA), Plaza Operating Partners, Ltd. (Plaza Hotel --the partnership which operates The Plaza Hotel in New York City) and the Trump Organization (TO). TPA, TTMA, Plaza Hotel and TO are affiliates of Donald J. Trump. These transactions include certain shared payroll costs as well as complimentary services offered to customers, for which the Partnership makes initial payments and is then reimbursed by the affiliates.\nDuring 1993, the Partnership incurred expenses of approximately $1,332,000 in corporate salaries and $952,000 of other transactions on behalf of these related entities. In addition, the Partnership received payments totaling $2,004,000 for services rendered and had $407,000 of deductions for similar costs incurred by these related entities on behalf of the Partnership.\nDuring 1992, the Partnership incurred expenses of approximately $1,240,000 in corporate salaries and $513,000 of other transactions on behalf of these related entities. In addition, the Partnership received payments totaling $1,372,000 for services rendered and had $202,000 of deductions for similar costs incurred by these related entities on behalf of the Partnership.\nDuring 1991, the Partnership incurred expenses of approximately $898,000 in corporate salaries, $1,294,000 in fleet maintenance\/limousine services and $623,000 of other transactions on behalf of these related entities. In addition, the Partnership received payments totaling $2,721,000 for services rendered and had $642,000 of deductions for similar costs incurred by these related entities on behalf of the Partnership.\nPartnership Distribution\nUnder the terms of the Partnership Agreement, the Partnership was required to pay all costs incurred by TC\/GP. For the year ended December 31, 1993 and for the period from May 29, 1992 through December 31, 1992, the Partnership paid $736,000 and $473,000, respectively of expenses on behalf of TC\/GP, which has been reflected as a partnership distribution.\n(7) Commitments and Contingencies:\nCasino License Renewal\nThe Partnership is subject to regulation and licensing by the New Jersey Casino Control Commission (the \"CCC\"). The Partnership's casino license must be renewed periodically, is not transferable, is dependent upon the financial stability of the Partnership and can be revoked at any time. Due to the uncertainty of any license renewal application, there can be no assurance that the license will be renewed. Upon revocation, suspension for more than 120 days, or failure to renew the casino license due to the Partnership's financial condition or for any other reason, the Casino Control Act (\"the Act\") provides that the CCC may appoint a conservator to take possession of and title to the hotel and casino's business and property, subject to all valid liens, claims and encumbrances.\nThe CCC renewed the casino license of the Partnership through May 31, 1995 subject to certain continuing reporting and compliance conditions.\nEmployment Agreements\nThe Partnership has entered into employment agreements with certain key employees which expire at various dates through January 16, 1997. Total minimum commitments on these agreements at December 31, 1993 were approximately $6,507,000.\nLegal Proceedings\nThe Partnership is involved in legal proceedings incurred in the normal course of business. In the opinion of management and its counsel, if adversely decided, none of these proceedings would have a material effect on the consolidated financial position of the Partnership.\nCasino Reinvestment Development Authority Obligations\nPursuant to the provisions of the Act, the Partnership, commencing twelve months after the date of opening of Trump's Castle in June 1985 and continuing for a period of twenty-five years thereafter, must either obtain investment tax credits (as defined in the Act), in an amount equivalent to 1.25% of its gross casino revenues (as defined in the Act) or pay an alternative tax of 2.5% of its gross casino revenues. Investment tax credits may be obtained by making qualified investments, as defined, or by the purchase of bonds at below market interest rates from the Casino Reinvestment Development Authority (\"CRDA\"). The Partnership is required to make quarterly deposits with the CRDA to satisfy its investment obligations.\nIn April 1990, the Partnership modified its agreement with the CRDA under which it was required to purchase CRDA bonds to satisfy the investment alternative tax. Under the terms of the agreement, the Partnership donated\n$9,589,000 in deposits previously made to the CRDA for the purchase of CRDA bonds through December 31, 1989 in exchange for satisfaction of an equivalent amount of its prior bond purchase commitments, as well as receiving future tax credits to be used to satisfy substantial portions of the Partnership's future investment alternative tax obligations over the following four to six quarters. As a result of this agreement, the Partnership charged $1,588,000 to operations in 1990 to reduce deposits previously made to the amount of the future tax credits received.\nFor the years ended December 31, 1993, 1992, and 1991, the Partnership charged to operations, $115,000, $679,000 and $1,959,000, respectively, which represents amortization of a portion of the tax credits discussed above. In addition, for the years ended December 31, 1993, 1992, and 1991, the Partnership charged to operations $953,000, $656,000 and $137,000, respectively, to give effect to the below market interest rates associated with purchased CRDA bonds.\n(8) Employee Benefits Plans:\nThe Partnership has a retirement savings plan for its nonunion employees under Section 401(k) of the Internal Revenue Code. Employees are eligible to contribute up to 15% of their earnings to the plan up to the maximum amount permitted by law, and the Partnership will match 50% of an eligible employee's contributions up to a maximum of 4% of the employee's earnings. The Partnership recorded charges of approximately $846,000, $764,000 and $343,000 for matching contributions for the years ended December 31, 1993, 1992 and 1991, respectively.\nThe Partnership makes payments to various trusteed pension plans under industry-wide union agreements. The payments are based on the hours worked by or gross wages paid to covered employees. It is not practical to determine the amount of payments ultimately used to fund pension benefit plans or the current financial condition of the plans. Under the Employee Retirement Income Security Act, the Partnership may be liable for its share of the plans' unfunded liabilities, if any, if the plans are terminated. Pension expense for the years ended December 31, 1993, 1992 and 1991 were $407,000, $397,000 and $308,000, respectively.\nThe Partnership provides no other material post employment benefits.\n(9) Financial Information of the Company:\nFinancial information relating to the Company as of and for the years ended December 31, 1993 and 1992 is as follows:\n1993 1992 ---- ----\nTotal Assets (including $319,876,000 $337,771,000 Mortgage Notes Receivable ============ ============ Of $242,141,000, PIK Notes Receivable of $50,499,000 and Senior Notes Receivable of $27,000,000 in 1993 and Mortgage Bonds Receivable of $326,056,000 in 1992.)\nTotal Liabilities and $319,876,000 $337,771,000 Capital (including ============ ============ Mortgage Notes payable of $242,141,000, PIK Notes payable of $50,499,000 and Senior Notes Payable of $27,000,000 in 1993 and Mortgage Bonds Payable of $326,056,000 in 1992\nInterest Income $ 42,008,000 $ 34,866,000\nInterest Expense $ 42,008,000 $ 34,866,000 ------------ ------------ Net Income $ - $ - ============ ============\n(10) Fair Value of Financial Instruments\nThe carrying amount of the following financial instruments of the Partnership and the Company approximate fair value, as follows: (a) cash and cash equivalents and accrued interest receivables and payables based on the short term nature of the financial instruments, (b) CRDA bonds and deposits based on the allowances to give effect to the below market interest rates (c) the Senior Notes based on the recently negotiated terms as of December 28, 1993.\nThe fair values of the Mortgage Notes and PIK Notes are based on quoted market prices. The fair value of the Mortgage Bonds was based on quoted market prices obtained by the Partnership from its investment advisor.\nThe estimated fair values of other financial instruments are as follows:\nDecember 31, 1993 ----------------------------- Carrying Amount Fair Value --------------- ------------- 11-3\/4% Mortgage Notes............ $ 202,552,000 $ 232,456,000 Increasing Rate PIK Notes.......... $ 42,242,000 $ 42,419,000\nDecember 31, 1992 ----------------------------- Carrying Amount Fair Value --------------- ------------- 9-1\/2% Mortgage Bonds............. $ 234,445,000 $ 233,945,000\nThere are no quoted market prices for the Partnership Amended Term Loan and a reasonable estimate of its value could not be made without incurring excessive costs.\nSCHEDULE II TRUMP'S CASTLE ASSOCIATES AND SUBSIDIARY\nSCHEDULE II -- AMOUNTS RECEIVABLE FROM RELATED PARTIES,\nUNDERWRITERS, PROMOTERS AND EMPLOYEES OTHER THAN RELATED PARTIES\nFOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991\nAll of the above amounts are noninterest bearing and are due on demand.","section_15":""}
{"filename":"751652_1993.txt","cik":"751652","year":"1993","section_1":"","section_1A":"","section_1B":"","section_2":"","section_3":"ITEM 3. LEGAL PROCEEDINGS\nThere are various legal proceedings pending against the Company and its affiliates. While it is not feasible to predict or determine the outcome of these proceedings, the Company's management believes that the outcome will not have a material adverse effect on the Company's financial position. Litigation involving certain environmental matters is described below.\nQuestar, Entrada, and Mountain Fuel have each been named a \"potentially responsible party\" for contaminants on property owned by Entrada in Salt Lake City, Utah. The property, known as the Wasatch Chemical property, was the location of chemical operations conducted by Entrada's Wasatch Chemical division, which ceased operation in 1978. A portion of the property is included on the national priorities list, commonly known as the \"Superfund\" list.\nIn September of 1992, a consent order governing clean-up activities was formally entered by the federal district court judge presiding over the underlying litigation involving the property. The underlying lawsuits seek declaratory relief that the named potentially responsible parties, including the Questar affiliates and unrelated parties, are liable for the expense of the investigation and clean-up. The consent order was agreed to by Questar, Entrada, and other affiliates as well as the Utah Department of Health and the Environmental Protection Agency. Entrada has settled with the named unrelated parties and has assumed the liability of such parties.\nEntrada has obtained approval for a specific design using in situ vitrification procedure to clean up the Wasatch Chemical property and expects this process to begin before year-end. The clean-up procedure may take as long as three years.\nEntrada has recorded all costs spent on the matter and has accounted for all settlement proceeds, accruals, and insurance claims. It has received cash settlements, which together with accruals and insurance receivables, should be sufficient for future clean-up costs.\nITEM 4.","section_4":"ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS\nThe Company did not submit any matters to a vote of stockholders during the last quarter of 1993.\nPART II\nITEM 5.","section_5":"ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS\nInformation concerning the market for the common equity of the Company and the dividends paid on such stock is located in Note O in the Notes to Consolidated Financial Statements. As of March 21, 1994, Questar had 11,614 shareholders of record and estimates that it had an additional 10,000 -- 12,000 beneficial holders.\nITEM 6.","section_6":"ITEM 6. SELECTED FINANCIAL DATA\nNote - Selected financial data for 1989-1992 has been reclassified for the reporting of discontinued operations.\nITEM 7.","section_7":"ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS\nSUMMARY\nQuestar Corporation's income from continuing operations was $84,464,000, or $2.10 per share, in 1993, compared with $73,771,000, or $1.85 per share, in 1992 and $66,752,000, or $1.70 per share, in 1991.\nExploration and production operations had 1993 income of $36,325,000, compared with $27,762,000 in 1992 and $20,965,000 in 1991. Natural gas production and prices increased in 1993 but were partially offset by lower oil production and prices.\nNatural gas transmission operation's 1993 income was $23,275,000 compared with $22,463,000 in 1992 and $22,057,000 in 1991. Questar Pipeline began operating in accordance with Federal Energy Regulatory Commission (FERC) Order No. 636 in September 1993. The demand component of rates is now structured to recover 94% of the cost of service.\nNatural gas distribution operations earned $25,069,000 in 1993 compared with $23,395,000 in 1992 and $25,074,000 in 1991. The 1993 weather was 5% colder than normal and 16% colder than 1992.\nIn October 1993, Questar announced that it had reached a binding agreement to sell Questar Telecom to Nextel Communications, Inc. (Nextel). The sale is expected to be completed in the first half of 1994.\nQuestar spent $168,388,000 for capital expenditures in 1993 and estimates 1994 capital expenditures to be $300,000,000. Cash provided from operating activities financed the majority of the 1993 expenditures. Long-term debt represented 38% of consolidated capitalization at December 31, 1993.\nRESULTS OF OPERATIONS\nEXPLORATION AND PRODUCTION - Celsius Energy, Universal Resources and Wexpro conduct exploration and production (E&P) operations. Following are operating income and statistics for these operations:\nNoncost-of-service natural gas production increased 32% in 1993 following a 73% 1992 increase. The E&P group increased natural gas reserves over the last several years through a successful natural gas exploration, development and acquisition program. The E&P group changed its production strategy in the last half of 1992 by increasing natural gas production to near full capacity. Higher prices and lower full cost amortization rates allowed the E&P group to produce at this level.\nThe natural gas sales price increased 12% in 1993 after a 2% decline in 1992. The E&P group sold the majority of its 1993 and 1992 production based on spot-market or short-term contracts. The national market price of natural gas increased in 1993 because excess delivery capacity decreased. Although Rocky Mountain region natural gas is sold at a lower price than the national average, the differential decreased in 1993. Current low oil prices may limit increases in natural gas prices because many industrial energy users have the ability to switch from natural gas to fuel oil.\nOil and natural gas liquid production decreased 5% in 1993 and increased 2% in 1992. Declining production in mature fields was partially offset by oil reserve increases. The E&P group has focused most of its exploration and development efforts towards natural gas reserves in the last few years, which has lessened the significance of oil and natural gas liquid production to the Company.\nOil and natural gas liquid prices decreased 11% in 1993 and 14% in 1992 as a result of worldwide production increases. The price at the end of 1993 was lower than the average for the year, and therefore, 1994 prices may be lower than 1993. Declining oil prices reduced the oil income sharing paid by Wexpro to Mountain Fuel as required by the Wexpro settlement agreement. See Note L in the Notes to the Consolidated Financial Statements for a description of this agreement.\nNatural gas marketing volumes decreased 10% in 1993 and 23% in 1992. The E&P group changed its marketing strategy from a high volume program to targeting premium markets and marketing of E&P group production (marketing volumes do not include E&P group production). The margin from gas marketing was $3,864,000 in 1993 compared with $1,292,000 in 1992 and $6,833,000 in 1991. The E&P group uses natural gas futures and options to reduce the risk associated with the marketing activity.\nWexpro's revenue from cost-of-service gas operations increased 14% in 1993 and 28% in 1992 as a result of additional investment in gas-development wells and recovery of higher costs associated with increased production. Wexpro's net investment in cost-of-service gas operations was $92,561,000, $81,261,000, and $71,936,000 at December 31, 1993, 1992 and 1991, respectively. Wexpro has increased its investment primarily through participation in infill-drilling programs in the Church Buttes, Bruff, and Birch Creek fields in southwestern Wyoming.\nIn the first quarter of 1994, the E&P group announced two acquisitions of oil and gas reserves, processing plants, gathering systems and leasehold acreage for a cost of $117,100,000. The E&P group obtained oil and gas reserves of approximately 115 Bcf equivalent located in the Midcontinent and San Juan Basin regions. These acquisitions increase the noncost-of-service oil and gas reserves by approximately 45%.\nNATURAL GAS TRANSMISSION - Questar Pipeline conducts natural gas transmission, storage, and gathering operations. Following are operating income and statistics for these operations:\nEffective September 1, 1993, Questar Pipeline began operating in accordance with FERC Order No. 636, which restructured the operations of natural gas transmission companies. The order unbundled the sales-for-resale service from the transportation, gathering and storage services. Questar Pipeline eliminated its merchant function. That activity was assumed by Mountain Fuel along with the gas-purchase contracts.\nOrder No. 636 requires a greater percentage of the cost of service to be collected through demand charges. The percentage of costs included in the demand component of rates increased from 66% prior to implementation to about 94% after implementation. Substantially all of Questar Pipeline's transportation capacity has been reserved by firm-transportation customers. The customers can release that capacity to third parties when it is not required for their own needs. Mountain Fuel has reserved transportation capacity from Questar Pipeline of approximately 800,000 decatherms per day, or approximately 85% of the total transportation capacity.\nAs a result of these changes in the rate structure, Questar Pipeline's transportation throughput volumes do not have a significant impact on short-term operating results. Firm-transportation customers continue to pay the same demand charges regardless of actual volumes transported. After $1.5 million in revenues are received from interruptible transportation customers, 90% of the remaining revenues from the transportation of gas for interruptible customers is credited back to firm customers. Questar Pipeline is allowed to retain all interruptible-transportation revenues from projects that have not been included in the transportation rate case.\nTotal transmission system throughput decreased 2% in 1993 and 1% in 1992. Throughput for Mountain Fuel (including sales for resale and transportation) increased 23% in 1993 and decreased 11% in 1992. The 1993 increase was primarily due to colder weather in Mountain Fuel's service area. Expiring contracts resulted in deceased throughput for other customers.\nReported gathering volumes increased 25% in 1993 and more than doubled in 1992. The 1993 increase was due to higher gas production in the Company's operating areas, including production from affiliates. The 1992 increase was mostly due to a change in rate structure that unbundled gathering from sales for resale. Questar Pipeline began billing separately for gas gathering service provided on sales-for-resale volumes in November 1991.\nStorage revenues increased 88% in 1993 and 19% in 1992. Customers have subscribed to all available working natural gas storage at Questar Pipeline's Clay Basin storage field. A portion of the 1993 increase was due to unbundling of storage services for Mountain Fuel that were included with the sales for resale prior to the implementation of Order No. 636.\nOrder No. 636 allows pipelines to receive rate coverage for all prudently incurred transition costs associated with the restructuring. Questar Pipeline incurred capital costs of approximately $9 million in conjunction with Order No. 636 implementation. Most of these costs were for electronic metering and a bulletin board system and are expected to be included in the next general rate case.\nNATURAL GAS DISTRIBUTION - Mountain Fuel conducts natural gas distribution operations. Following are operating income and statistics for these operations:\nNatural gas volumes sold to residential and commercial customers increased 16% in 1993 following a 10% decrease in 1992. Temperatures were 5% colder than normal in 1993 and 10% warmer than normal in 1992. The number of customers increased 3.4% in 1993 and 3.2% in 1992 because of expanding population and construction in Mountain Fuel's service area.\nNatural gas deliveries to industrial customers increased 5% in 1993 and 7% in 1992, due to increased usage by metals, mining and petroleum customers. These customers are using more natural gas because of expanded operations and environmental concerns. The Company's industrial customers have not switched to residual fuel oil with the decline in oil prices because gas prices have been competitive and sufficient fuel oil is not readily available.\nMountain Fuel assumed the responsibility for purchasing its own gas supplies on September 1, 1993, when Questar Pipeline began operating in accordance with FERC Order No. 636. Questar Pipeline transferred its gas purchase contracts to Mountain Fuel. The majority of these contracts are priced using a current natural gas market value. Mountain Fuel also acquired an inventory of working gas to meet customer requirements.\nMountain Fuel has reserved transportation capacity on Questar Pipeline's system of approximately 800,000 decatherms per day and pays an annual demand charge of $49.2 million for this reservation. Mountain Fuel releases excess capacity to its industrial transportation or other customers and receives a credit from Questar Pipeline for the majority of Questar Pipeline's interruptible-transportation revenues.\nMountain Fuel reached a settlement of its Wyoming general rate case in July 1993, with the new rates effective August 1, 1993. The settlement approved an annualized increase in rates of $721,000, including recovery of costs attributable to FERC Order No. 636 and higher federal income tax rates.\nIn April 1993, Mountain Fuel filed a general rate case with the Public Service Commission of Utah (PSCU). The original rate increase request was revised to $10.3 million based on September 30, 1993 results and included a 12.1% rate of return on equity. Hearings on the case were held in November 1993 and a rate order was received in January 1994. The PSCU rate order granted Mountain Fuel a $1.6 million decrease in general rates and a $2.1 million increase in costs allowed through the purchased-gas adjustment account for a net increase in rates of $500,000. The PSCU allowed a return on equity of 11%, required Mountain Fuel to reduce rates over a five-year period for unbilled revenues, and disallowed rate coverage for certain incentive compensation and advertising costs. Mountain Fuel requested a rehearing of the PSCU order for the allowed return on equity and the treatment of unbilled revenues, and the PSCU granted a rehearing on these issues.\nOTHER OPERATIONS - Following is a summary of the results from Questar's other operations:\nQuestar owns a one-third interest in FuelMaker Corp., a Canadian company that is developing a natural gas vehicle refueling appliance for commercial or home use. Losses continued in 1993 as FuelMaker completed the design and began production of a new model. FuelMaker plans to begin full-scale production of the new model in 1994.\nCorporate and other operations generated positive income in 1993 and 1992 due to lower interest and operating expenses compared with a loss in 1991.\nThe Company's subsidiary, Entrada Industries, Inc., has been named as a potentially responsible party in an environmental clean-up action involving a site in Salt Lake City. The site was the location of chemical operations conducted by Entrada's Wasatch Chemical Division, which ceased operation in 1978. Entrada has proposed a remediation that has received approval from the Environmental Protection Agency and the Utah Department of Health. The Company has reached settlements with the other major potentially responsible parties and has established an accrual for the remedial work costs. Management believes that current accruals of $7,239,000 will be sufficient for estimated future clean-up costs, which are expected to be incurred over the next several years. The Company has recorded a receivable from an insurance company of $3,500,000 for expected payments related to the Wasatch Chemical clean-up. Additional amounts may be collected from the insurance company if clean-up costs are higher than anticipated.\nDISCONTINUED OPERATIONS - In October 1993, the Company announced that it had reached a binding agreement to sell Questar Telecom to Nextel. The Company will receive 3,886,000 shares of Nextel common stock in exchange for all of the common stock of Questar Telecom. The operating results for Questar Telecom have been reported as discontinued operations since Questar Telecom represented all of Questar's investment in the specialized mobile radio business.\nThe sale of Questar Telecom is expected to be completed in the first half of 1994, at which time Questar expects to recognize a gain on the transaction based on the Nextel stock price. Questar's net investment in Questar Telecom is anticipated to be approximately $40 million at the time of the sale, including the acquisition of approximately $11 million of additional channels as required by the sale agreement. Nextel common stock was $37 1\/4 per share at December 31, 1993. Net losses from Questar Telecom subsequent to the sale agreement have been deferred until the sale is recorded. Questar has agreed to continue operating the Questar Telecom business and provide any working capital requirements until the sale is completed.\nCONSOLIDATED OPERATING RESULTS - Consolidated revenues increased 12% in 1993 due to higher natural gas production from the E&P group and greater volumes sold by Mountain Fuel to residential and commercial customers. Consolidated revenues decreased 5% in 1992 because of lower gas marketing volumes and reduced sales to residential and commercial customers.\nNatural gas purchases increased 12% in 1993 after decreasing 19% in 1992 because of greater volumes sold by Mountain Fuel. Operating and maintenance expenses increased 10% in 1993 and 1% in 1992. Major reasons for the 1993 increase were: more customers and expanded service territory for Mountain Fuel, recording of postretirement medical and life insurance benefits on an accrual basis, increased natural gas production and restructuring of Questar Pipeline operations in accordance with FERC Order No. 636. Depreciation and amortization expense increased 18% in 1993 and 13% in 1992 due to capital expenditure programs in all lines of business and higher natural gas production. The full cost amortization rate was $.80 per Mcfe in 1993 compared with $.79 in 1992 and $.99 in 1991.\nThe Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 106 on Employer's Accounting for Postretirement Benefits Other than Pensions effective January 1, 1993. This statement requires the Company to expense the costs of postretirement benefits, principally health-care benefits, over the service life of employees using an accrual method. The Company is amortizing the transition obligation over a 20-year period. Total cost of postretirement benefits other than pensions under SFAS No. 106 was $5,918,000 in 1993 compared with the costs based on cash payments to retirees plus the prefunding of some benefits totaling $1,553,000 in 1992 and $1,740,000 in 1991.\nMountain Fuel and Questar Pipeline account for approximately 57% and 18% of the postretirement benefit costs, respectively. The impact of SFAS No. 106 on Questar's future net income will be mitigated by recovery of these costs from customers. Both the PSCU and the Public Service Commission of Wyoming (PSCW) allowed Mountain Fuel to recover future SFAS No. 106 costs in the 1993 rate cases if the amounts are funded in an external trust. The FERC issued an order granting rate recovery methodology for SFAS No. 106 costs to the extent that pipeline companies contribute the amounts to an external trust. Questar Pipeline expects to receive coverage of future SFAS No. 106 costs in its next general rate case and recovery of costs in excess of the amounts currently included in rates for the period from 1993 to the rate case filing if the rate case is filed prior to January 1, 1996.\nDebt expense decreased 5% in 1993 because of lower rates and the refinancing of higher cost debt in 1993 and 1992.\nThe effective income tax rate was 28.4% in 1993, 32.0% in 1992, and 36.8% in 1991. The 1993 and 1992 rates were lower because of tight-sands gas production credits of $11,026,000 in 1993 and $5,722,000 in 1992. The higher production credits in 1993 were partially offset by an increase in the federal income tax rate to 35% effective January 1, 1993. Mountain Fuel and Questar Pipeline recorded the change in deferred income taxes resulting from the increase in the federal tax rate as an increase to income taxes recoverable from customers since the regulatory commissions have adopted procedures to include underprovided deferred taxes in rates on a systematic basis.\nThe Financial Accounting Standards Board (FASB) has issued SFAS No. 112, Accounting for Postemployment Benefits. This statement requires the Company to recognize the liability for postemployment benefits when employees become eligible for such benefits. Postemployment benefits are paid to former employees after employment has been terminated, but before retirement benefits are paid. The Company's principal liability under SFAS No. 112 is a long-term disability program. The Company is required to adopt SFAS No. 112 in the first quarter of 1994 and recognize a cumulative effect of a change in accounting method amounting to approximately $3,300,000. Some of this amount may be recovered from Mountain Fuel's and Questar Pipeline's customers through subsequent rate changes. The effect on ongoing net income is not expected to be significant.\nThe FASB has issued SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, to be effective beginning in 1994. This statement requires companies to adjust the value of the majority of investments to fair value. The statement would not have a significant impact on current operations, but will require Questar to carry the investment in Nextel stock to be received from the sale of Questar Telecom at fair value.\nLIQUIDITY AND CAPITAL RESOURCES\nThe Company has met the majority of its cash needs for capital expenditures and dividend payments with cash from operations for the last three years. Net cash from operating activities was $194,982,000 in 1993, $160,179,000 in 1992, and $156,029,000 in 1991. Higher income from continuing operations, and increased depreciation and amortization contributed to the higher 1993 amount. Reduced gas storage inventory and increased accounts payable and accrued expenses also provided a source of cash in 1993.\nFollowing is a summary of capital expenditures for 1993, and a forecast of projected 1994 expenditures, which is subject to board of director approval.\nThe exploration and production operations participated in 206 wells in 1993, of which 143 were completed as gas wells, 11 were oil wells, 25 were dry holes and 27 were in progress at year end. The 1993 drilling program had an overall success rate of 86% and included the completion of tight-sands gas credit wells that were spudded in 1992.\nIn the first quarter of 1994, the E&P group announced two acquisitions of oil and gas reserves, processing plants, gathering systems and leasehold acreage for a cost of $117,100,000. The E&P group obtained oil and gas reserves of approximately 115 Bcf equivalent located in the Midcontinent and San Juan Basin regions. The first acquisition was for properties from Petroleum, Inc. and was completed in January 1994 at a cost of $22,600,000. This purchase was financed with short-term debt. In the second acquisition, the E&P group acquired the properties of Amax Oil & Gas's northern division at a cost of $94,500,000 through an alliance with Union Pacific Resources Corporation. This transaction is expected to be closed in the first half of 1994 and will be financed with short-term debt and an expansion of the production-based long-term credit facility.\nQuestar Pipeline is expanding the capacity of its Clay Basin underground gas storage facility. After expansion, the storage field will have a total capacity of 110 Bcf, including 46 Bcf of working gas storage. Capital expenditures include the purchase of cushion gas. The first phase of the expansion project is expected to be completed in mid-1994.\nQuestar Pipeline is a one-third partner in the TransColorado pipeline project. The Company estimates the total cost of this project at $184 million, with Questar Pipeline's equity investment approximately $18 million. Construction of the pipeline has been delayed pending receipt of final regulatory approvals and completion of contracts with shippers.\nMountain Fuel's number of customers increased 18,075 during 1993 and 16,284 in 1992 due to population growth and building construction activity in its service area. The 1994 capital expenditures anticipate a similar level of customer growth.\nQuestar estimates that it will invest an additional $11 million in Questar Telecom for the purchase of FCC licenses and working capital requirements prior to the completion of the sale of Questar Telecom to Nextel.\nThe Company funded its 1993 capital expenditures primarily with cash provided from operations. The Company expects to finance the 1994 capital expenditure program with: cash provided from operations, an expansion of the E&P production-based credit facility, the issuance of an additional $17 million in medium-term notes by Mountain Fuel, and increased borrowing under short-term line-of-credit arrangements. In addition, the Company may issue common stock, or sell or monetize a portion of its investment in Nextel common stock to fund capital expenditures.\nThe Company has short-term line-of-credit arrangements with several banks under which it may borrow up to $150,700,000. These lines are generally below the prime interest rate and are renewable annually. At December 31, 1993, outstanding short-term bank loans were $12,300,000 and commercial paper borrowings were $66,000,000. Commercial paper borrowings are backed by the short-term line-of-credit arrangements. Two national debt-rating agencies have rated Questar's commercial paper P-1 and A-1.\nThe exploration and production operations have a long-term revolving-credit arrangement with a bank to borrow up to $50,000,000. Borrowings under this arrangement were $44,000,000 at December 31, 1993.\nDuring 1993, Mountain Fuel issued $91,000,000 of 15-year and 30-year medium-term notes at interest rates of 7.19% to 8.28%. Proceeds from these notes and $16,000,000 remaining from the 1992 issuances were used to redeem Mountain Fuel's $100,000,000 9 3\/8% debentures and pay the associated refinancing costs. At December 31, 1993, Mountain Fuel had a registration statement filed with the Securities and Exchange Commission to issue an additional $17,000,000 of medium-term notes.\nThe Company typically has negative net working capital at the end of the year because of short-term borrowings. These borrowings are seasonal and generally peak at the end of December because of cold-weather gas purchases.\nQuestar has a consolidated capital structure of 38% long-term debt, 1% preferred stock and 61% common shareholders' equity. Two national debt-rating agencies have rated Mountain Fuel's and Questar Pipeline's long-term debt A1 and A+.\nITEM 8.","section_7A":"","section_8":"ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA\nThe financial statements and financial statement schedules required by this Item are submitted in a separate section of this report.\nITEM 9.","section_9":"ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE\nThe Company has not changed its independent auditors or had any disagreements with them concerning accounting matters and financial statement disclosures within the last 24 months.\nPART III\nITEM 10.","section_9A":"","section_9B":"","section_10":"ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT\nThe information requested in this item concerning Questar's directors is presented in the Company's definitive Proxy Statement dated April 4, 1994, under the section entitled \"Election of Directors\" and is incorporated herein by reference. A copy of the definitive Proxy Statement will be filed with the Securities and Exchange Commission on or about April 4, 1994.\nThe following individuals served as executive officers of the Company during 1993:\nPrimary Positions Held with Name the Company and Affiliates\nR. D. Cash 51 Chairman of the Board of Directors (May 1985); President and Chief Executive Officer, Director (May 1984); Chairman of the Boards of Directors, all affiliates.\nD. N. Rose 49 President and Chief Executive Officer, Mountain Fuel (October 1984); Director (May 1984); Director, Mountain Fuel (May 1984); Senior Vice President, Questar (May 1985).\nClyde M. Heiner 55 Senior Vice President, Questar (May 1988);President and Chief Executive Officer, Questar Service Corporation (February 1993); President and Chief Executive Officer, Questar Development (May 1984); Director, Entrada (May 1984), Questar Development (May 1984), and Questar Service (February 1993).\nA. J. Marushack 58 President and Chief Executive Officer, Questar Pipeline (June 1984); Senior Vice President, Questar (May 1985); Director, Questar Pipeline (May 1984) and Wexpro (May 1985).\nGary L. Nordloh 46 President and Chief Executive Officer, Wexpro, Celsius, and Universal Resources (March 1991); Senior Vice President, Questar (March 1991); Executive Vice President and Chief Operating Officer, Wexpro, Celsius, and Universal Resources (June 1989 to March 1991); Director, Celsius and Wexpro (June 1989); Director, Universal Resources (May 1989); Senior Vice President, Celsius and Wexpro (May 1988 to June 1989).\nW. F. Edwards 48 Senior Vice President and Chief Fi- nancial Officer, Questar (February 1989); Vice President and Chief Financial Officer, affiliates (at various dates beginning in May 1984); Vice President and Chief Financial Officer, Questar (May 1984 to February 1989); Director, Questar Pipeline (May 1985).\nR. G. Groussman 58 Vice President and General Counsel (October 1984); Director, Wexpro (November 1976) and Celsius (May 1988).\nN. R. Potter 51 President and Chief Executive Officer, Questar Telecom (February 1989); President and Chief Executive Officer, Questar Service (January 1985 to February 1993); Vice President, Information Services and Telecommunications (February 1989 to February 1993). (Mr. Potter does not currently function as an executive officer.)\nConnie C. Holbrook 47 Vice President and Corporate Secretary (October 1984); Corporate Secretary, Mountain Fuel and other affiliates (at various dates beginning in March 1982); Director, Celsius (May 1985), Wexpro (May 1988), and Universal Resources (June 1987).\nThere is no \"family relationship\" between any of the listed officers or between any of them and the Company's directors. The executive officers serve at the pleasure of the Board of Directors. There is no arrangement or understanding under which the officers were selected. Information concerning compliance with Section 16(a) of the Securities Exchange Act of 1934, as amended, is presented in the Company's definitive Proxy Statement dated April 4, 1994, under the section entitled \"Section 16(a) Compliance\" and is incorporated herein by reference.\nITEM 11.","section_11":"ITEM 11. EXECUTIVE COMPENSATION\nThe information requested in this item is presented in Questar's definitive Proxy Statement dated April 4, 1994, under the sections entitled \"Executive Compensation\" and \"Election of Directors\" and is incorporated herein by reference. The sections of the Proxy Statement labelled \"Committee Report on Executive Compensation\" and \"Cumulative Total Shareholder Return\" are expressly not incorporated into this document.\nITEM 12.","section_12":"ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT\nThe information requested in this item for certain beneficial owners is presented in Questar's definitive Proxy Statement dated April 4, 1994, under the section entitled \"Security Ownership, Principal Holders\" and is incorporated herein by reference. Similar information concerning the securities ownership of directors and executive officers is presented in the definitive Proxy Statement dated April 4, 1994, under the section entitled \"Security Ownership, Directors and Executive Officers\" and is incorporated herein by reference.\nITEM 13.","section_13":"ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS\nThe information requested in this item for related transactions involving the Company's directors and executive officers is presented in the definitive Proxy Statement dated April 4, 1994, under the section entitled \"Election of Directors.\"\nPART IV\nITEM 14.","section_14":"ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K\n(a)(1)(2) Financial Statements and Financial Statement Schedules. The financial statements and schedules identified in the List of Financial Statements and Financial Statement Schedules are filed as part of this report.\nThe following consolidated financial statement schedules of the Company are included in Item 14(d):\nSchedule V - Property, plant and equipment. Schedule VI - Accumulated depreciation, depletion and amortization of property, plant and equipment. Schedule IX - Short-term borrowing. Schedule X - Supplemental income statement information.\n(a)(3) Exhibits. The following is a list of exhibits required to be filed as a part of this report in Item 14(c).\nExhibit No. Exhibit\n2.* Plan and Agreement of Merger dated as of December 16, 1986, by and among the Company, Questar Systems Corporation, and Universal Resources Corporation. (Exhibit No. (2) to Current Report on Form 8-K dated December 16, 1986.)\n3.1.* Restated Articles of Incorporation effective May 28, 1991. (Exhibit No. 3.2. to Form 10-Q Report for Quarter ended June 30, 1991.)\n3.2.* Bylaws (as amended effective August 11, 1992). (Exhibit No. 3. to Form 10-Q Report for Quarter ended June 30, 1992.)\n4.1.* Rights Agreement, dated as of March 14, 1986, between the Company and Morgan Guaranty Trust Company of New York pertaining to the Company's Shareholder Rights Plan. (Exhibit No. 4. to Current Report on Form 8-K dated March 14, 1986.)\n4.2.* First Amendment to the Rights Agreement, dated as of May 15, 1989, between the Company and Morgan Shareholder Service Trust Company pertaining to the Company's Shareholder Rights Plan. (Exhibit No. 28(a) to Current Report on Form 8-K dated May 15, 1989.)\n10.1.* Stipulation and Agreement, dated October 14, 1981, executed by Mountain Fuel; Wexpro; the Utah Department of Business Regulations, Division of Public Utilities; the Utah Committee of Consumer Services; and the staff of the Public Service Commission of Wyoming. (Exhibit No. 10(a) to Mountain Fuel Supply Company's Form 10-K Annual Report for 1981.)\n10.2.* 1 Questar Corporation Annual Management Incentive Plan, as amended effective February 11, 1992. (Exhibit No. 10.2. to Form 10-K Annual Report for 1991.)\n10.3.* 1 Questar Corporation Executive Incentive Retirement Plan, as amended effective November 1, 1993. (Exhibit No. 10.3. to Form 10-Q Report for Quarter ended September 30, 1993.)\n10.4.* 1 Questar Corporation Stock Option Plan, as amended effective February 13, 1990. (Exhibit No. 10.4. to Form 10-K Annual Report for 1989.)\n10.5.* 1 Questar Corporation Long Term Stock Incentive Plan effective March 1, 1991. (Exhibit No. 10.5. to Form 10-K Annual Report for 1990.)\n10.6.* 1 Questar Corporation Executive Severance Compensation Plan, as amended effective January 1, 1990. (Exhibit No. 10.5. to Form 10-K Annual Report for 1989.)\n10.7.* 1 Questar Corporation Deferred Compensation Plan for Directors, as amended April 30, 1991. (Exhibit No. 10.7. to Form 10-K Annual Report for 1991.)\n10.8.* 1 Questar Corporation Supplemental Executive Retire- ment Plan, as amended and restated effective November 1, 1993. (Exhibit No. 10.8. to Form 10-Q Report for Quarter ended September 30, 1993.)\n10.9.* 1 Questar Corporation Equalization Benefit Plan, as amended and restated effective November 1, 1993. (Exhibit No. 10.9. to Form 10-Q Report for Quarter ended September 30, 1993.)\n10.10.* 1 Questar Corporation Stock Option Plan for Directors, as amended effective February 9, 1993. (Exhibit No. 10.10. to Form 10-K Annual Report for 1992.)\n10.11.* 1 Form of Individual Indemnification Agreement dated February 9, 1993 between Questar Corporation and Directors. (Exhibit No. 10.11. to Form 10-K Annual Report for 1992.)\n10.12.* 1 Questar Corporation Deferred Share Plan, as amended and restated November 1, 1993. (Exhibit No. 10.12. to Form 10-Q Report for Quarter ended September 30, 1993.)\n10.13.* 1 Questar Corporation Deferred Compensation Plan as adopted effective November 1, 1993. (Exhibit No. 10.13. to Form 10-Q Report for Quarter ended September 30, 1993.)\n11. Statement concerning computation of earnings per share.\n22. Subsidiary Information.\n24. Consent of Independent Auditors.\n25. Power of Attorney.\n28.1.* Press Release dated October 18, 1993, announcing the agreement with Nextel Communications, Inc. (Exhibit No. 28.1. to Form 10-Q Report for Quarter ended September 30, 1993.)\n28.2. Form 11-K Annual Report for the Questar Corporation Employee Stock Purchase Plan.\n28.3. Undertakings for Registration Statements on Form S- 3 (No. 33-48168) and on Form S-8 (Nos. 33-4436, 33- 15148, 33-15149, 33-40800, 33-40801, and 33-48169).\n* Exhibits so marked have been filed with the Securities and Exchange Commission as part of the indicated filing and are incorporated herein by reference.\n1 Exhibit so marked is management contract or compensation plan or arrangement\n(b) The Company did not file a Current Report on Form 8-K during the last quarter of 1993.\nANNUAL REPORT ON FORM 10-K\nITEM 8, ITEM 14 (a) (1) and (2), (c) and (d)\nLIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES\nFINANCIAL STATEMENTS AND SUPPLEMENTARY DATA\nCERTAIN EXHIBITS\nFINANCIAL STATEMENT SCHEDULES\nYEAR ENDED DECEMBER 31, 1993\nQUESTAR CORPORATION\nSALT LAKE CITY, UTAH\nFORM 10-K -- ITEM 14 (a) (1) and (2)\nQUESTAR CORPORATION AND SUBSIDIARIES\nLIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES\nThe following consolidated financial statements of Questar Corporation and subsidiaries are included in Item 8:\nConsolidated statements of income -- Years ended December 31, 1993, 1992 and\nConsolidated balance sheets -- December 31, 1993 and 1992\nConsolidated statements of common shareholders' equity -- Years ended December 31, 1993, 1992 and 1991\nConsolidated statements of cash flows -- Years ended December 31, 1993, 1992 and 1991\nNotes to consolidated financial statements\nThe following consolidated financial statement schedules of Questar Corporation and subsidiaries are included in Item 14(d):\nSchedule V -- Property, plant and equipment\nSchedule VI -- Accumulated depreciation, depletion and amortization of property, plant and equipment\nSchedule IX -- Short-term borrowings\nSchedule X -- Supplementary income statement information\nAll other schedules, for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission, are not required under the related instructions or are inapplicable, and therefore have been omitted.\nReport of Independent Auditors\nShareholders and Board of Directors Questar Corporation\nWe have audited the accompanying consolidated balance sheets of Questar Corporation and subsidiaries as of December 31, 1993 and 1992, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1993. Our audits also included the financial statement schedules listed in the Index at Item 14(a). These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.\nWe conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.\nIn our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Questar Corporation and subsidiaries at December 31, 1993 and 1992, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1993, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.\nAs noted in Note K to the financial statements, in 1993 Questar Corporation changed its method of accounting for postretirement benefits other than pensions.\nERNST & YOUNG\nSalt Lake City, Utah February 11, 1994, except for Note M as to which the date is March 1, 1994\nQUESTAR CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME\nSee notes to consolidated financial statements.\nQUESTAR CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS\nASSETS\nSee notes to consolidated financial statements.\nQUESTAR CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' EQUITY\nSee notes to consolidated financial statements.\nQUESTAR CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS\nSee notes to consolidated financial statements.\nQUESTAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS\nNote A - Summary of Accounting Policies\nPrinciples of Consolidation: The consolidated financial statements contain the accounts of Questar Corporation and subsidiaries (Questar or the Company). Questar is engaged in three principal lines of business. Oil and gas exploration and production operations are conducted by Celsius Energy Company (Celsius Energy), Universal Resources Corporation (Universal Resources) and Wexpro Company (Wexpro). Natural gas transmission operations are conducted by Questar Pipeline Company (Questar Pipeline). Natural gas distribution operations are conducted by Mountain Fuel Supply Company (Mountain Fuel). Questar discontinued the consolidation of its specialized mobile radio telecommunication operations in October 1993 with the announced sale of Questar Telecom Inc. (Questar Telecom) discussed in Note B. All significant intercompany accounts and transactions have been eliminated in consolidation.\nRegulation: Mountain Fuel is regulated by the Public Service Commission of Utah (PSCU) and the Public Service Commission of Wyoming (PSCW). Questar Pipeline is regulated by the Federal Energy Regulatory Commission (FERC). These regulatory agencies establish rates for the storage, transportation and sale of natural gas. The regulatory agencies also regulate, among other things, the extension and enlargement or abandonment of jurisdictional natural gas facilities. Regulation is intended to permit the recovery, through rates, of the cost of service, including a rate of return on investment. See Note J on rate matters.\nThe financial statements of rate regulated businesses are presented in accordance with regulatory requirements. Methods of allocating costs to time periods, in order to match revenues and expenses, may differ from those of nonregulated businesses because of cost-allocation methods used in establishing rates.\nPurchased-Gas Adjustments: The Company accounts for purchased-gas costs in accordance with procedures authorized by the PSCU and PSCW whereby purchased-gas costs that are different from those provided for in the present rates are accumulated and recovered or credited through future rate changes.\nCredit Risk: The Company's primary market area is the Rocky Mountain region of the United States. The Company's exposure to credit risk may be impacted by the concentration of customers in this region due to changes in economic or other conditions. The Company's customers include individuals and numerous industries that may be impacted differently by changing conditions. The Company believes that it has adequately reserved for expected credit-related losses.\nProperty, Plant and Equipment: Property, plant and equipment are stated at cost. Celsius Energy and Universal Resources account for exploration and development activities using the full-cost accounting method. Under the full-cost method, all costs associated with acquisition, exploration and development of oil and gas reserves are capitalized. If net capitalized costs exceed the present value of estimated future net revenues from proved oil and gas reserves plus the fair market value of unproved properties, the excess is expensed. Wexpro uses the successful-efforts accounting method to account for its production and development activities under the terms of the Wexpro settlement agreement. See Note L.\nThe provision for depreciation and amortization is based upon rates that will amortize costs of assets over their estimated useful lives. The costs of natural gas distribution and natural gas transmission property, plant and equipment, excluding gas wells, are amortized using the straight-line method. The costs of oil and gas wells, production plants and leaseholds are amortized using the unit-of-production method. Average depreciation and amortization rates used in 1993 were as follows:\nExploration and production, per Mcf equivalent Full-cost amortization rate $0.80 Wexpro amortization rate 0.48 Natural gas transmission 3.6% Natural gas distribution Distribution plant 3.9% Gas wells, per Mcf $0.18 Other operations 12.4%\nInvestment in Unconsolidated Affiliates: The Company uses the equity method to account for affiliates in which it does not own a controlling interest. Principal affiliates include: Overthrust Pipeline Company, FuelMaker Corporation, TransColorado Gas Transmission Company and Canyon Creek Compression Company. The Company's investment in these affiliates equals the underlying equity in net assets.\nFutures Contracts and Options: The Company periodically enters into futures contracts or option agreements to hedge its exposure to price fluctuations on marketing of natural gas. Recognized gains and losses on hedge transactions are reported as a component of the related transaction.\nIncome Taxes: On December 31, 1992, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 109 by recording a cumulative effect of the change in accounting related to prior years. The deferred tax balance represents the temporary differences between book and taxable income multiplied by the effective tax rates. These temporary differences relate primarily to depreciation, intangible drilling costs, unbilled revenues, leasehold costs, purchased-gas adjustments and net operating loss carryforwards. Mountain Fuel and Questar Pipeline use the deferral method to account for investment tax credits as required by regulatory commissions. The Company allocates income taxes to subsidiaries on a seperate return basis except that subsidiaries are paid for all tax benefits utilized in the consolidated tax return. See Note H.\nReacquisition of Debt: Gains and losses on the reacquisition of debt by Mountain Fuel and Questar Pipeline are deferred and amortized as debt expense over the remaining life of the issue or the life of the replacement debt in order to match regulatory treatment.\nAllowance for Funds Used During Construction: The Company's regulated subsidiaries capitalize the cost of capital during the construction period of plant and equipment. This amounted to $1,725,000 in 1993, $1,153,000 in 1992, and $1,040,000 in 1991.\nEarnings Per Common Share: Earnings per common share are computed by dividing net income less preferred stock dividends by the weighted average number of common shares outstanding during the year. Common stock equivalents in the form of stock options do not have a material dilutive effect on the earnings-per-share calculations and are excluded from the computation.\nReclassifications: Certain reclassifications were made to the 1992 and 1991 financial statements to conform with the 1993 presentation.\nNote B - Discontinued Operations\nIn October 1993, the Company announced that it had reached a binding agreement to sell its Questar Telecom to Nextel Communications, Inc. (Nextel). The Company will receive 3,886,000 shares of Nextel common stock in exchange for all of the common stock of Questar Telecom. The operating results for Questar Telecom have been reported as discontinued operations since Questar Telecom represented all of Questar's investment in the specialized mobile radio business.\nThe sale of Questar Telecom is expected to be completed in the first half of 1994, at which time, Questar expects to recognize a gain on the transaction based on the Nextel stock price. Questar's net investment in Questar Telecom is anticipated to be approximately $40 million at the time of the sale, including the acquisition of additional channels as required by the sale agreement. Nextel common stock traded in a range of $17 7\/8 to $54 7\/8 during 1993 and was $37 1\/4 per share at December 31, 1993. Net losses from Questar Telecom subsequent to the sale agreement have been deferred until the sale is recorded.\nQuestar Telecom's operating results prior to the sale agreement were as follows:\nQuestar's investment in discontinued operations at September 30, 1993, including liabilities to be assumed by the purchaser, was as follows:\nNote C - Cash and Short-Term Investments\nShort-term investments at December 31, 1993, and 1992, valued at cost (approximates market), amounted to $11,917,000 and $14,958,000, respectively. Short-term investments consisted principally of Euro-time deposits and repurchase agreements with maturities of three months or less.\nNote D - Debt\nThe Company has short-term line-of-credit arrangements with several banks under which it may borrow up to $150,700,000. These lines have interest rates generally below the prime interest rate and are renewable annually. At December 31, 1993, outstanding short-term bank loans were $12,300,000 at an average interest rate of 3.5% and commercial paper borrowings were $66,000,000 at an average interest rate of 3.5%. Commercial paper borrowings are backed by the short-term line-of-credit arrangements.\nThe details of long-term debt at December 31, were as follows:\nMaturities of long-term debt for the five years following December 31, 1993, are as follows (no amounts are due in 1994):\nThe exploration and production operations have a production-based long-term credit facility with a bank to borrow up to $50,000,000.\nDuring 1993, Mountain Fuel issued $91,000,000 of 15-year and 30-year medium-term notes at interest rates of 7.19% to 8.28%. Proceeds from these notes and $16,000,000 remaining from the 1992 issuances were used to redeem Mountain Fuel's $100,000,000 9 3\/8% debentures and pay the associated refinancing costs. At December 31, 1993, Mountain Fuel had a registration statement filed with the Securities and Exchange Commission to issue an additional $17,000,000 of medium-term notes.\nCash paid for interest was $33,414,000 in 1993, $36,115,000 in 1992, and $37,374,000 in 1991.\nNote E - Redeemable Cumulative Preferred Stock\nMountain Fuel has authorized 4,000,000 shares of nonvoting redeemable cumulative preferred stock with no par value. The two current outstanding issues of stock have a stated and redemption value of $100 per share.\nRedemption requirements for the five years following December 31, 1993, are as follows:\nNote F - Estimated Fair Values of Financial Instruments\nThe carrying amounts and estimated fair values of the Company's financial instruments were as follows:\nThe Company used the following methods and assumptions in estimating fair values: (1) Cash and short-term investments - the carrying amount approximates fair value; (2) Short-term loans - the carrying amount approximates fair value; (3) Long-term debt - the carrying amounts of variable rate debt approximates fair value, the fair value of marketable debt is based on quoted market prices, and the fair value of other debt is based on the discounted present value of cash flows using the Company's current borrowing rates; (4) Redeemable cumulative preferred stock - the fair value is based on the discounted present value of cash flows using current preferred stock rates.\nNote G - Common Stock\nEmployee Investment Plan: An Employee Investment Plan (ESOP) allows the majority of employees to purchase Company stock or other investments with payroll deductions. The Company makes contributions to the ESOP of approximately 75% of the employee's purchases. In June 1989, the Company sold 1,992,884 shares of its common stock (LESOP shares) to the trustee of the ESOP. The ESOP trustee financed the purchase of stock by borrowing $35,000,000 from the Company. The note receivable from the ESOP was recorded as a reduction of common shareholders' equity. At the same time, the Company borrowed $35,000,000 from a group of insurance companies. Interest expense on these notes to the insurance companies totaled $2,918,000 in 1993, 1992 and 1991.\nThe ESOP is repaying the loan to the Company over ten years using Company contributions and dividends on the LESOP shares. The Company's expense and contribution to the ESOP was $2,368,000 in 1993, $2,477,000 in 1992 and $2,884,000 in 1991. Dividends paid by the Company to the ESOP on the LESOP shares totaled $2,112,000 in 1993, $2,033,000 in 1992 and $1,989,000 in 1991. The Company received an income tax benefit for dividends paid on ESOP shares and dividends paid directly to ESOP participants of $911,000 in 1993, $858,000 in 1992 and $835,000 in 1991. Income tax benefits of $351,000 in 1993 and $278,000 in 1992 were recorded as a reduction of income tax expense as required by SFAS No. 109. The remaining tax benefits were recorded as an increase to retained earnings.\nThe American Institute of Certified Public Accountants issued a Statement of Position in 1993 on accounting for ESOPs, which changes the recognition of expense on company contributions. The new rules will not impact expense on the current LESOP shares.\nDividend Reinvestment and Stock Purchase Plan: A Dividend Reinvestment and Stock Purchase Plan (Reinvestment Plan) allows shareholders to reinvest dividends or invest additional funds in common stock. The Reinvestment Plan purchased common stock from the Company amounting to 148,708 shares in 1993, 241,322 shares in 1992 and 498,483 shares in 1991. At December 31, 1993, 1,059,865 shares were reserved for future issuance.\nStock Plans: The Company has a Long-term Stock Incentive Plan for officers and key employees and a Stock Option Plan for nonemployee directors (Stock Plans). The Long-term Stock Incentive Plan was approved by shareholders in 1991 and replaces a previous stock option plan for officers and key employees. The number of shares available for options or other stock awards under the Long-term Stock Incentive Plan is increased each year by 1% of the outstanding shares of common stock on the first day of the calendar year. No awards may be granted under the Long-term Stock Incentive Plan after May 2001. The Stock Option Plan for nonemployee directors was amended in 1991 and the term extended to May 1996.\nTransactions involving option shares in the Stock Plans are summarized as follows:\nShareholder Rights: In 1986, Questar issued one common share purchase right for each outstanding share of stock. The rights expire in March 1996. The rights become exercisable if a person acquires 20% or more of the Company's common stock or announces an offer for 20% or more of the common stock. Each right initially represents the right to buy one share of the Company's common stock for $50. Once any person acquires 20% or more of the Company's common stock, the rights are automatically modified. Each right not owned by the 20% owner becomes exercisable for the number of shares of Questar's stock that have a market value equal to two times the exercise price of the right. This same result occurs if a 20% owner acquires the Company through a reverse merger when Questar and its stock survive. If the Company is involved in a merger or other business combination at any time after the rights become exercisable, rights holders will be entitled to buy shares of common stock in the acquiring company having a market value equal to twice the exercise price of each right. The rights may be redeemed by the Company at a price of $.025 per right until 15 days after a person acquires 20% ownership of the common stock.\nNote H - Income Taxes\nEffective January 1, 1992, the Company changed its method of accounting for income taxes from the deferred method to the liability method required by SFAS No. 109, Accounting for Income Taxes. The Company did not restate prior years' financial statements. The cumulative effect of adopting SFAS No. 109 as of January 1, 1992, increased net income by $9,303,000, or $.23 per share. The application of the rules did not have a significant impact on the 1992 income before cumulative effect.\nRegulated operations recorded cumulative increases in deferred taxes as income taxes recoverable from customers. Mountain Fuel and Questar Pipeline have adopted procedures with their regulatory commissions to include under-provided deferred taxes in customer rates on a systematic basis. The amounts of income taxes recoverable from customers was higher in 1993 due to an increase in the federal income tax rate.\nAs of January 1, 1992, Universal Resources recorded a cumulative decrease in deferred taxes of $8,626,000 as a reduction of property, plant and equipment. This cumulative effect was a result of net operating loss carryforwards acquired by Questar in the 1987 purchase of Universal Resources. At December 31, 1993, the Company had net operating loss carryforwards of $44,778,000 which expire from 1995 through 2001. These carryforwards can be used to offset Universal Resources' future taxable income. The tax benefit of these carryforwards is $15,672,000. For financial reporting purposes, the Company has recorded a valuation allowance of $6,414,000 to offset a portion of the deferred tax asset relating to these carryforwards. Future changes in this valuation allowance will be recorded as an adjustment to property, plant and equipment.\nThe components of income taxes were as follows:\nThe difference between income tax expense and the tax computed by applying the statutory federal income tax rate to income before income taxes is explained as follows:\nSignificant components of the Company's deferred tax liabilities and assets were as follows:\nCash paid for income taxes was $25,588,000 in 1993, $25,028,000 in 1992 and $33,523,000 in 1991.\nNote I - Litigation, Environmental Matters and Commitments\nThe Company's subsidiary, Entrada Industries, Inc., has been named as a potentially responsible party in an environmental clean-up action involving a site in Salt Lake City. The site was the location of chemical operations conducted by Entrada's Wasatch Chemical Division, which ceased operation in 1978. Entrada has proposed a remediation that has received approval from the Environmental Protection Agency and the Utah Department of Health. Settlements have been reached with the other major potentially responsible parties and an accrual has been established for the remedial work costs. Management believes that current accruals of $7,239,000 will be sufficient for estimated future clean-up costs, which are expected to be incurred over the next several years. The Company has recorded a receivable from an insurance company of $3,500,000 for expected payments related to the Wasatch Chemical clean-up. Additional amounts may be collected from the insurance company if clean-up costs are higher than anticipated.\nThe Company and its subsidiaries have received notice that they may be partially liable in several additional environmental clean-up actions on sites that involve numerous other parties. Management believes that the Company's responsibility for remediation will be minor and that any potential liability will not be significant to the results of operations or its financial position.\nThere are various other legal proceedings against Questar and its subsidiaries. While it is not currently possible to predict or determine the outcome of these proceedings, it is the opinion of management that the outcome will not have a material adverse effect on the Company's results of operations, financial position or liquidity.\nMany of Mountain Fuel's gas-purchase contracts include take-or-pay provisions that obligate it, on an annual basis, to take delivery of at least a specified percentage of volumes producible from wells or pay for such volumes. The contracts allow for the subsequent delivery of the gas within a specified period. Other gas-purchase contracts include provisions that obligate Mountain Fuel to schedule a specific volume for delivery on a daily or monthly basis. All gas-purchase contracts were transferred from Questar Pipeline to Mountain Fuel in 1993.\nPurchases of natural gas under gas-purchase contracts totalled $85,909,000 in 1993, $104,032,000 in 1992 and $123,319,000 in 1991. Following is a summary of projected purchase commitments under gas-purchase contracts with terms of one year or more. Prices under these contracts are based on the current market price. These commitments will change as a result of future negotiations with sellers.\nNote J - Rate Matters\nOn September 1, 1993, Questar Pipeline began operating in compliance with FERC Order No. 636. The order unbundled the sale-for-resale service from the transportation, gathering and storage services provided by natural gas pipelines. Questar Pipeline eliminated its merchant function. That activity was assumed by Mountain Fuel along with the gas-purchase contracts. In its order approving Questar Pipeline's Order No. 636 implementation plan, the FERC accepted Questar Pipeline's plan for the assignment of gas-purchase contracts to Mountain Fuel.\nOrder No. 636 requires a greater percentage of the cost of service to be collected through demand charges. The percentage of costs included in the demand component of rates increased from 66% prior to implementation to about 94% after implementation. The majority of Questar Pipeline's transportation capacity has been reserved by firm transportation customers, which, under Order No. 636, can release that capacity to third parties when it is not required for their own needs. After $1.5 million of revenues are received from interruptible transportation customers, 90% of the remaining revenues from the transportation of gas for interruptible customers is credited back to firm customers. Questar Pipeline is allowed to retain all interruptible transportation revenues on projects that have not been included in the transportation rate case.\nMountain Fuel filed a general rate case for its Utah operations in April 1993. The revised amount of deficiency requested in the case was $10.3 million, including a 12.1% return on equity. In January 1994, the PSCU issued a rate order granting Mountain Fuel a $1.6 million decrease in general rates and a $2.1 million increase in costs allowed through the purchase-gas adjustment account for a net increase in rates of $500,000. The PSCU allowed a return on equity of 11%, required Mountain Fuel to reduce rates over a five-year period for unbilled revenues, and disallowed rate coverage for certain incentive compensation and advertising costs. Mountain Fuel requested a rehearing of the PSCU order for the allowed return on equity and the treatment of unbilled revenues and the PSCU granted a rehearing on these issues.\nIn 1993, Mountain Fuel began accruing gas distribution revenues for gas delivered to residential and commercial customers but not billed at the end of the year. The impact of these accruals on the income statement has been deferred in accordance with a rate order received from the PSCU. This rate order reduces customer rates by $2,011,000 per year over the five-year period from 1994 through 1998. Mountain Fuel will recognize the unbilled revenues and the associated gas costs over this same five-year period to offset the reduction in rates.\nIn July 1993, the PSCW issued an order in Mountain Fuel's general rate case for Wyoming operations. The order approved a stipulation that had been negotiated by the Company and the PSCW's staff which allowed for an increase in general rates of $721,000 including recovery of costs attributable to FERC Order No. 636 and higher federal income tax rates.\nNote K - Employee Benefits\nThe Company and its subsidiaries have a defined-benefit pension plan covering the majority of its employees. Benefits are generally based on years of service and the employee's 36-month period of highest earnings during the ten years preceding retirement. The Company's policy is to make contributions to the plan at least sufficient to meet the minimum funding requirements of of the Internal Revenue Code. Plan assets consist principally of equity securities and corporate and U.S. government debt obligations. A summary of pension cost is as follows:\nAssumptions used to calculate cost at January 1, were as follows:\nThe status of the plan at December 31, was as follows:\nThe Company used a discount rate of 7% and a rate of increase in compensation of 5.35% to measure the actuarial present value of benefits at December 31, 1993.\nThe Company pays a portion of the health-care costs and all the life insurance costs for retired employees. Effective January 1, 1992, this program was changed for employees retiring after January 1, 1993, to link the health-care benefit to years of service and to limit the Company's monthly health-care contribution per individual to 170% of the 1992 contribution. The Company's policy is to fund amounts allowable for tax deduction under the Internal Revenue Code. Plan assets consist of equity securities, corporate and U.S. government debt obligation, and insurance company general accounts.\nThe Company adopted the provisions of SFAS No. 106 on Employer's Accounting for Postretirement Benefits Other than Pensions effective January 1, 1993. This statement requires the Company to expense the costs of postretirement benefits, principally health-care benefits, over the service life of employees using an accrual method. The Company is amortizing the transition obligation over a 20-year period. Total cost of postretirement benefits other than pensions under SFAS No. 106 was $5,918,000 in 1993 compared with the costs based on cash payments to retirees plus the prefunding of some benefits totaling $1,553,000 in 1992 and $1,740,000 in 1991.\nComponents of the postretirement benefit cost for 1993 were as follows:\nThe status of the postretirement benefit programs at December 31, 1993 was as follows:\nSignificant assumptions used to measure postretirement benefits at December 31, 1993 were as follows:\nA 1% increase in the health-care inflation rate would increase the service cost by $4,000, the interest cost by $232,000 and the accumulated benefit obligation by $2,898,000.\nMountain Fuel and Questar Pipeline account for approximately 57% and 18% of the postretirement benefit costs, respectively. The impact of SFAS No. 106 on Questar's future net income will be mitigated by recovery of these costs from customers. Both the PSCU and the PSCW allowed Mountain Fuel to recover future SFAS No. 106 costs in the 1993 rate cases if the amounts are funded in an external trust. The FERC issued an order granting rate recovery methodology for SFAS No. 106 costs to the extent that pipeline companies contribute the amounts to an external trust. Questar Pipeline expects to receive coverage of future SFAS No. 106 costs in its next general rate case and recovery of costs in excess of the amounts currently included in rates for the period from 1993 to the rate case filing if the rate case is filed prior to January 1, 1996.\nThe Financial Accounting Standards Board (FASB) has issued SFAS No. 112, Accounting for Postemployment Benefits. This statement requires the Company to recognize the liability for postemployment benefits when employees become eligible for such benefits. Postemployment benefits are paid to former employees after employment has been terminated but before retirement benefits are paid. The Company's principal liability under SFAS No. 112 is a long-term disability program. The Company is required to adopt SFAS No. 112 in the first quarter of 1994 and recognize a cumulative effect of a change in accounting method amounting to approximately $3,300,000. Some of this amount may be recovered from Mountain Fuel's and Questar Pipeline's customers through subsequent rate changes. The effect on ongoing net income is not expected to be significant.\nNote L - Wexpro Settlement Agreement\nWexpro's operations are subject to the terms of the Wexpro settlement agreement. The agreement was effective August 1, 1981, and sets forth the rights of Mountain Fuel's utility operations to share in the results of Wexpro's operations. The agreement was approved by the PSCU and PSCW in 1981 and affirmed by the Supreme Court of Utah in 1983. Major provisions of the settlement agreement are as follows:\na. Wexpro continues to hold and operate all oil-producing properties previously transferred from Mountain Fuel's nonutility accounts. The oil production from these properties is sold at market prices, with the revenues used to recover operating expenses and to give Wexpro a return on its investment. The rate of return is adjusted annually and is currently 14.6%. Any net income remaining after recovery of expenses and Wexpro's return on investment is divided between Wexpro and Mountain Fuel, with Wexpro retaining 46%.\nb. Wexpro conducts developmental oil drilling on productive oil properties and bears any costs of dry holes. Oil discovered from these properties is sold at market prices, with the revenues used to recover operating expenses and to give Wexpro a return on its investment in successful wells. The rate of return is adjusted annually and is currently 19.6%. Any net income remaining after recovery of expenses and Wexpro's return on investment is divided between Wexpro and Mountain Fuel, with Wexpro retaining 46%.\nc. Amounts received by Mountain Fuel from the sharing of Wexpro's oil income are used to reduce natural gas costs to utility customers.\nd. Wexpro conducts developmental gas drilling on productive gas properties and bears any costs of dry holes. Natural gas produced from successful drilling is owned by Mountain Fuel. Wexpro is reimbursed for the costs of producing the gas plus a return on its investment in successful wells. The return allowed Wexpro is currently 22.6%.\ne. Wexpro operates natural gas properties owned by Mountain Fuel. Wexpro is reimbursed for its costs of operating these properties, including a rate of return on any investment it makes. This rate of return is currently 14.6%.\nNote M - Subsequent Events\nIn the first quarter of 1994, the E&P group announced two acquisitions of oil and gas reserves, processing plants, gathering systems and leasehold acreage for a cost of $117,100,000. The E&P group obtained oil and gas reserves of approximately 115 Bcf equivalent located in the Midcontinent and San Juan Basin regions. The first acquisition was for properties from Petroleum, Inc. and was completed in January 1994 at a cost of $22,600,000. This purchase was financed with short-term debt. In the second acquisition, the E&P group acquired the properties of Amax Oil & Gas's northern division at a cost of $94,500,000 through an alliance with Union Pacific Resources Corporation. This transaction is expected to be closed in the first half of 1994 and will be financed with short-term debt and an expansion of the production-based long-term credit facility.\nNote N - Oil and Gas Producing Activities (Unaudited)\nThe following information discusses the Company's oil and gas producing activities. Separate disclosures are presented for cost-of-service and noncost-of-service activities.\nCost-of-service properties are those for which the operations and return on investment are governed by state regulatory agencies or the Wexpro settlement agreement (see Note L). Production from gas properties owned or operated by Wexpro is delivered to Mountain Fuel at cost of service. Noncost-of-service properties are properties from which production is sold at market prices. These properties include all Celsius Energy and Universal Resources properties and Wexpro oil properties. Production from Wexpro oil properties is sold at market prices and the income is shared with Mountain Fuel after a specified return on investment is earned.\nInformation on the results of operations and standardized measure of future net cash flows has not been included for cost-of-service activities because operating results and the value of the related properties is dependent upon returns established by state regulatory agencies based on historical costs or the terms of the Wexpro settlement agreement (see Note L).\nNONCOST-OF-SERVICE ACTIVITIES\nCapitalized Costs: The aggregate amounts of costs capitalized for noncost-of-service oil and gas-producing activities and the related amounts of accumulated depreciation and amortization follow:\nFull-Cost Amortization: Unproved properties held by Celsius Energy and Universal Resources are currently excluded from amortization until evaluation. A summary of costs excluded from amortization at December 31, 1993, and the year in which these costs were incurred is as follows:\nCosts Incurred: The following costs were incurred in noncost-of-service oil and gas-producing activities.\nResults of Operations: Following are the results of operations of noncost-of-service oil and gas-producing activities before corporate overhead and interest expenses.\nStandardized Measure of Future Net Cash Flows Relating to Proved Reserves for Noncost-of-Service Activities: Future net cash flows were calculated using December 31, 1993, prices and known contract price changes. Year-end production, development costs and income tax rates were used to compute the future net cash flows. All cash flows were discounted at 10% to reflect the time value of cash flows, without regard to the risk of specific properties.\nThe assumptions used to derive the standardized measure of future net cash flows are those required by the FASB and do not necessarily reflect the Company's expectations. The usefulness of the standardized measure of future net cash flows is impaired because of the reliance on reserve estimates and production schedules that are inherently imprecise, and because the costs of oil-income sharing under the Wexpro settlement agreement were not included.\nThe principal sources of change in the standardized measure of discounted future net cash flows were:\nCOST-OF-SERVICE ACTIVITIES\nCapitalized Costs: Capitalized costs for cost-of-service oil and gas-producing activities net of the related accumulated depreciation and amortization were as follows:\nCosts Incurred: Costs incurred by Wexpro for cost-of-service gas-producing activities were $21,829,000 in 1993, $18,348,000 in 1992 and $19,771,000 in 1991.\nEstimated Quantities of Proved Oil and Gas Reserves for Cost-of-Service Properties: The following estimates were made by the Company's reservoir engineers. No estimates are available for cost-of-service proved undeveloped reserves that may exist.\nNote O - Quarterly Financial and Stock Price Data (Unaudited)\nFollowing is a summary of quarterly financial and stock price data. The quarterly results have been reclassified for the discontinued operations.\nNote P - Operations by Line of Business\nFollowing is a summary of operations by line of business:\nSCHEDULE V - PROPERTY, PLANT AND EQUIPMENT\nQUESTAR CORPORATION AND SUBSIDIARIES\nNote A - Other changes consist of the following: 1993 - Transfer of a portion of Questar Pipeline's current gas stored underground to cushion gas stored underground of $3,874,000; 1992 - Reduction of Universal Resource's property, plant and equipment for the adoption of SFAS No. 109 of $8,626,000; and 1991 - Reduction of Universal Resource's property, plant and equipment for the effect of preacquisition net operating loss carryforwards of $1,868,000.\nSCHEDULE VI- ACCUMULATED DEPRECIATION, DEPLETION AND AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT\nQUESTAR CORPORATION AND SUBSIDIARIES\nSCHEDULE IX - SHORT-TERM BORROWINGS\nQUESTAR CORPORATION AND SUBSIDIARIES\nNote A - Notes payable to banks represent borrowings under line-of-credit arrangements that have no termination date but are subject to negotiation. Commercial paper matures 30 to 90 days from the date of issue with no provision for the extension of maturity.\nNote B - The average amount outstanding during the period was computed by averaging the daily principal balances.\nNote C - The weighted average interest rate during the period was computed by dividing the actual interest expense by the average short-term debt outstanding during the period.\nSCHEDULE X - SUPPLEMENTARY INCOME STATEMENT INFORMATION\nQUESTAR CORPORATION AND SUBSIDIARIES\nAdvertising costs, which are less than 1% of total revenues, are not presented separately. Royalty costs for exploration and production operations have not been disclosed since production revenues are reported net of royalties. The Company does not have any depreciation and amortization of intangible assets.\nSIGNATURES\nPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 24th day of March, 1994.\nQUESTAR CORPORATION (Registrant)\nBy \/s\/ R. D. Cash R. D. Cash Chairman, President and Chief Executive Officer\nPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.\n\/s\/ R. D. Cash Chairman, President and Chief R. D. Cash Executive Officer (Principal Executive Officer)\n\/s\/ W. F. Edwards Senior Vice President and Chief W. F. Edwards Financial Officer (Principal Financial and Accounting Officer)\n*Robert H. Bischoff Director *R. D. Cash Director *U. Edwin Garrison Director *James A. Harmon Director *W. W. Hawkins Director *W. N. Jones Director *Robert E. Kadlec Director *Dixie L. Leavitt Director *Neal A. Maxwell Director *Gary G. Michael Director *Mary Mead Director *D. N. Rose Director *Harris H. Simmons Director\nMarch 24, 1994 *By \/s\/ R. D. Cash Date R. D. Cash, Attorney in Fact\nEXHIBIT INDEX\nSequential Page Exhibit Number Number Exhibit\n2.* Plan and Agreement of Merger dated as of December 16, 1986, by and among the Company, Questar Systems Corporation, and Universal Resources Corporation. (Exhibit No. (2) to Current Report on Form 8-K dated December 16, 1986.)\n3.1.* Restated Articles of Incorporation effective May 28, 1991. (Exhibit No. 3.2. to Form 10-Q Report for Quarter ended June 30, 1991.)\n3.2.* Bylaws (as amended effective August 11, 1992). (Exhibit No. 3. to Form 10-Q Report for Quarter ended June 30, 1992.)\n4.1.* Rights Agreement, dated as of March 14, 1986, between the Company and Morgan Guaranty Trust Company of New York pertaining to the Company's Shareholder Rights Plan. (Exhibit No. 4. to Current Report on Form 8-K dated March 14, 1986.)\n4.2.* First Amendment to the Rights Agreement, dated as of May 15, 1989, between the Company and Morgan Shareholder Service Trust Company pertaining to the Company's Shareholder Rights Plan. (Exhibit No. 28(a) to Current Report on Form 8-K dated May 15, 1989.)\n10.1.* Stipulation and Agreement, dated October 14, 1981, executed by Mountain Fuel; Wexpro; the Utah Department of Business Regulations, Division of Public Utilities; the Utah Committee of Consumer Services; and the staff of the Public Service Commission of Wyoming. (Exhibit No. 10(a) to Mountain Fuel Supply Company's Form 10-K Annual Report for 1981.)\n10.2.* 1 Questar Corporation Annual Management Incentive Plan, as amended effective February 11, 1992. (Exhibit No. 10.2. to Form 10-K Annual Report for 1991.)\n10.3.* 1 Questar Corporation Executive Incentive Retirement Plan, as amended effective November 1, 1993. (Exhibit No. 10.3. to Form 10-Q Report for Quarter ended September 30, 1993.)\n10.4.* 1 Questar Corporation Stock Option Plan, as amended effective February 13, 1990. (Exhibit No. 10.4. to Form 10-K Annual Report for 1989.)\n10.5.* 1 Questar Corporation Long Term Stock Incentive Plan effective March 1, 1991. (Exhibit No. 10.5. to Form 10-K Annual Report for 1990.)\n10.6.* 1 Questar Corporation Executive Severance Compensation Plan, as amended effective January 1, 1990. (Exhibit No. 10.5. to Form 10-K Annual Report for 1989.)\n10.7.* 1 Questar Corporation Deferred Compensation Plan for Directors, as amended April 30, 1991. (Exhibit No. 10.7. to Form 10-K Annual Report for 1991.)\n10.8.* 1 Questar Corporation Supplemental Executive Retirement Plan, as amended and restated effective November 1, 1993. (Exhibit No. 10.8. to Form 10-Q Report for Quarter ended September 30, 1993.)\n10.9.* 1 Questar Corporation Equalization Benefit Plan, as amended and restated effective November 1, 1993. (Exhibit No. 10.9. to Form 10-Q Report for Quarter ended September 30, 1993.)\n10.10.*1 Questar Corporation Stock Option Plan for Directors, as amended effective February 9, 1993. (Exhibit No. 10.10. to Form 10-K Annual Report for 1992.)\n10.11.*1 Form of Individual Indemnification Agreement dated February 9, 1993 between Questar Corporation and Directors. (Exhibit No. 10.11. to Form 10-K Annual Report for 1992.)\n10.12.*1 Questar Corporation Deferred Share Plan, as amended and restated November 1, 1993. (Exhibit No. 10.12. to Form 10-Q Report for Quarter ended September 30, 1993.)\n10.13.*1 Questar Corporation Deferred Compensation Plan as adopted effective November 1, 1993. (Exhibit No. 10.13. to Form 10-Q Report for Quarter ended September 30, 1993.)\n11. Statement concerning computation of earnings per share.\n22. Subsidiary Information.\n24. Consent of Independent Auditors.\n25. Power of Attorney.\n28.1.* Press Release dated October 18, 1993, announcing the agreement with Nextel Communications, Inc. (Exhibit No. 28.1. to Form 10-Q Report for Quarter ended September 30, 1993.)\n28.2. Form 11-K Annual Report for the Questar Corporation Employee Stock Purchase Plan.\n28.3. Undertakings for Registration Statements on Form S-3 (No. 33-48168) and on Form S-8 (Nos. 33-4436, 33- 15148, 33-15149, 33-40800, 33-40801, and 33-48169).\n*Exhibits so marked have been filed with the Securities and Exchange Commission as part of the indicated filing and are incorporated herein by reference.\n1 Exhibit so marked is management contract or compensation plan or arrangement\n(b) The Company did not file a Current Report on Form 8-K during the last quarter of 1993.","section_15":""}
{"filename":"62996_1993.txt","cik":"62996","year":"1993","section_1":"ITEM 1. BUSINESS.\nMasco manufactures building, home improvement and home furnishings products for the home and family. Masco believes that it is the largest domestic manufacturer of faucets, plumbing supplies, kitchen and bath cabinets and furniture, and that it is a leading domestic producer of a number of other building, home improvement and home furnishings products. Masco was incorporated under the laws of Michigan in 1929 and in 1968 was reincorporated under the laws of Delaware.\nExcept as the context otherwise indicates, the terms \"Masco\" and the \"Company\" refer to Masco Corporation and its consolidated subsidiaries.\nINDUSTRY SEGMENTS\nThe following table sets forth for the three years ended December 31, 1993, the contribution of the Company's industry segments to net sales and operating profit:\n(1) Amounts are before general corporate expense.\nAdditional financial information concerning the Company's operations by industry segment as of and for each of the three years ended December 31, 1993, is set forth in Item 8 of this Report in the Note to the Company's Consolidated Financial Statements captioned \"Segment Information.\"\nBUILDING AND HOME IMPROVEMENT PRODUCTS\nThe Company is among the country's largest manufacturers of brand-name consumer products designed for the building and improvement of the home, including faucets, kitchen and bath cabinets, kitchen appliances, bath and shower enclosure units, spas, shower and plumbing specialties, door locks and other builders' hardware, air treatment products, venting and ventilating equipment and water pumps. These products are sold for the home improvement market to consumers who purchase materials for \"do-it-yourself \" installation or installation by contractors or professional tradespeople as well as for the new home construction market.\nThe Company manufactures a variety of single and double handle faucets. DELTA(R) and PEERLESS(R) single and double handle faucets are used on kitchen, lavatory and other sinks and in bath and shower installations. DELTA faucets are sold through manufacturers' representatives to distributors who sell the faucets to plumbers, building contractors, remodelers, retailers and others. PEERLESS faucets are sold primarily through manufacturers' representatives directly to retail outlets such as mass merchandisers, home centers and hardware stores and are also sold under private label. The Company's EPIC(R), ARTISTIC BRASS(R) and SHERLE WAGNER(TM) faucets and accessories\nproduced for the decorator markets and are sold through wholesalers, distributor showrooms and other outlets. In addition to its domestic manufacturing, the Company manufactures faucets in Denmark, Italy and Canada.\nSales of faucets approximated $608 million in 1993, $528 million in 1992 and $457 million in 1991. The percentage of operating profit on faucets is somewhat higher than that on products within the Building and Home Improvement Products Segment as a whole. The Company believes that the simplicity, quality and reliability of its faucet mechanisms, its marketing and merchandising activities, and the development of a broad line of products have accounted for the continued strength of its faucet sales.\nThe Company manufactures stock, semi-custom and custom kitchen and bath cabinetry in a variety of styles and in various price ranges. The Company sells under a number of trademarks, including MERILLAT(R), KRAFTMAID(R), STARMARK(R) and FIELDSTONE(R), with sales in both the home improvement and new home construction markets. Sales of kitchen and bath cabinets were approximately $570 million in 1993, $515 million in 1992 and $425 million in 1991.\nThe Company's brass and copper plumbing system components and other plumbing specialties are sold to plumbing, heating and hardware wholesalers and to home centers, hardware stores, building supply outlets and other mass merchandisers. These products are marketed for the wholesale trade under the BRASS-CRAFT(R) trademark and for the \"do-it-yourself \" market under the PLUMB SHOP(R) and HOME PLUMBER(R) trademarks and are also sold under private label.\nIn February, 1994 the Company acquired two leading manufacturers of bath accessories and other products. Zenith Products Corporation manufactures bath medicine cabinets, shower curtain rods and rings and other bath storage products for the home. Zenith's medicine cabinets are sold primarily to \"do-it-yourself \" retailers, while its other products are marketed to discount retailers and other mass merchandise stores. Melard Manufacturing Corporation manufactures bath hardware, accessories, plumbing specialty products, and other products. Melard's products are primarily sold for the \"do-it-yourself \" and residential remodeling markets, through mass merchandise stores, hardware stores, home centers and other retail outlets.\nOther specialty kitchen and bath consumer products include THERMADOR(R) cooktops, ovens, ranges and related cooking equipment, which are marketed through appliance distributors and dealers. The Company's acrylic and gelcoat bath and shower units and whirlpools are sold under the AQUA GLASS(R) trademark primarily to wholesale plumbing distributors for use in the home improvement and new home construction markets. Luxury bath and shower enclosures are manufactured and sold by the Company under the HUPPE(R) trademark. The Company's spas are sold under the HOT SPRING SPA(R) and other trademarks directly to retailers for sale to residential customers.\nPremium quality brass rim and mortise locks, knobs and trim and other builders' hardware are manufactured and sold under the BALDWIN(R) trademark for the home improvement and new home construction markets. WEISER(R) door locks and related hardware are sold through contractor supply outlets, hardware distributors and home center retailers. SAFLOK(TM) electronic locks and WINFIELD(TM) mechanical locks are sold primarily to the hospitality market.\nHOME FURNISHINGS PRODUCTS\nThe Company has become the leading domestic manufacturer of brand-name consumer products for the furnishing of the home, including furniture, upholstery and other fabrics, mirrors, lamps and other decorative accessories.\nThe Company manufactures a broad array of home furnishings products and utilizes a variety of distribution channels to market its products. A complete line of traditional, transitional and contemporary wood and upholstered furniture is sold under the HENREDON(R) trademark through Henredon galleries located in furniture stores, designer showrooms, furniture outlets and department stores. DREXEL(R) and HERITAGE(R) wood and upholstered furniture and home furnishings accessories are\nmarketed through Drexel Heritage galleries located in furniture stores, through showcase stores which primarily feature Drexel Heritage furniture and also through independent furniture outlets. The Lexington Furniture Industries group produces youth-correlated furniture, moderately-priced bedroom and dining room groups, occasional and upholstered furniture and woven wicker and rattan products, which are sold through national and regional chains and independent furniture dealers, department stores and interior designers. Universal Furniture Limited manufactures dining room, bedroom, occasional wood and upholstered furniture, which is sold primarily through furniture retailers and department stores under UNIVERSAL(R), BENCHCRAFT(R) and other trademarks. The Company believes that Universal is the largest supplier in the United States of wood dining room furniture, much of which is shipped in unassembled form from the Far East to assembly and distribution centers in the United States. The Company's LINEAGE(R) line of wood and upholstered furniture and home furnishings accessories are sold through exclusive Lineage Pavilions located in retail furniture stores which also feature furniture accessories manufactured by other Company operations. The Company also manufactures and sells designer upholstered products and upholstered furniture under private label to furniture stores and other retailers. In addition, certain of the Company's furniture is sold to contract accounts primarily for use in the hospitality market and in commercial and government buildings. Sales of the Company's furniture products approximated $1.34 billion in 1993, $1.19 billion in 1992 and $1.13 billion in 1991.\nThe Company's textile group includes Robert Allen Fabrics, Inc., Ametex Fabrics, Inc., Sunbury Textile Mills, Inc. and Ramm, Son & Crocker Limited. Robert Allen markets fabrics, which are used primarily for residential furnishings, through independent sales representatives to designers and retailers. Company-operated and independent showrooms have also been established to sell fabrics and display and sell many of the Company's other home furnishings products. Ametex designs and converts moderately-priced fabrics for use in commercial and residential furnishings, which are sold through independent sales representatives to furniture and other furnishings manufacturers, fabric jobbers and the hospitality market. Sunbury manufactures high-quality Jacquard woven fabrics which are sold through sales representatives primarily to furniture manufacturers and decorative jobbers for furniture and other decorative applications. Ramm, Son & Crocker is a United Kingdom supplier of high-quality printed fabrics to the furniture and decorative fabric markets.\nGENERAL INFORMATION CONCERNING INDUSTRY SEGMENTS\nNo material portion of the Company's business is seasonal or has special working capital requirements although the Company maintains a higher investment in inventories for certain of its businesses than the average manufacturing company. See \"Management's Discussion and Analysis of Financial Condition and Results of Operations -- Receivables and Inventories,\" included in Item 7 of this Report. The Company does not consider backlog orders to be a material factor in its industry segments, and no material portion of its business is dependent upon any one customer or subject to renegotiation of profits or termination of contracts at the election of the federal government. Compliance with federal, state and local regulations relating to the discharge of materials into the environment, or otherwise relating to the protection of the environment, is not expected to result in material capital expenditures by the Company or to have a material effect on the Company's earnings or competitive position. In general, raw materials required by the Company are obtainable from various sources and in the quantities desired.\nINTERNATIONAL OPERATIONS\nThe Company, through its subsidiaries, has manufacturing plants in Belgium, Canada, the People's Republic of China, Denmark, France, Germany, Hong Kong, Italy, Malaysia, Mexico, the Philippines, Singapore, Sweden, Taiwan and the United Kingdom. Products manufactured by the Company outside of the United States include faucets and accessory products, bath and shower enclosures, furniture, decorative accessories, door locks and related hardware, ventilating fans and equipment and submersible water pumps.\nThe Company's foreign operations are subject to political, monetary, economic and other risks attendant generally to international businesses. These risks generally vary from country to country.\nFinancial information concerning the Company's foreign and domestic operations, including the amounts of net sales, operating profit and assets employed which are attributable to the Company's operations in the United States and in foreign countries, as of and for the three years ended December 31, 1993, is set forth in Item 8 of this Report in the Note to the Company's Consolidated Financial Statements captioned \"Segment Information.\" From 1991 through 1993, the Company's annual net export sales from the United States to other countries, as a percentage of consolidated annual net sales, approximated three percent.\nEQUITY INVESTMENTS\nIn 1984, Masco transferred its industrial businesses to a newly-formed subsidiary, MascoTech, Inc. (formerly Masco Industries, Inc.), which became a separate public company in July, 1984 when Masco distributed to its stockholders shares of MascoTech common stock as a special dividend. Masco currently owns approximately 42 percent of the outstanding common stock of MascoTech.\nMascoTech is a diversified manufacturer of original equipment and aftermarket parts for the transportation industry and also manufactures commercial, institutional and residential building products for the construction industry as well as other diversified products principally for the defense industry. In 1993, MascoTech had sales from continuing operations of $1.58 billion.\nMascoTech manufactures a broad range of semi-finished components, sub-assemblies and assemblies for the transportation industry. Transportation-related products represented 76 percent of MascoTech's 1993 sales from continuing operations and primarily consist of original equipment products for the automotive and truck industries. Over half of MascoTech's products are used for engine and drivetrain applications (such as semi-finished transmission shafts, drive gears, engine connecting rods, wheel spindles and front wheel drive and exhaust system components) and for chassis and suspension functions (including electromechanical solenoids and relays and suspension components). Products manufactured for exterior body trim applications include automotive trim, luggage racks and accessories, and metal stampings. Aftermarket products include fuel and emission systems components, windshield wiper blades, constant-velocity joints, brake hardware repair kits, and luggage racks and accessories. In addition to its manufacturing activities, MascoTech provides engineering services primarily for the automotive and heavy-duty truck industries, and is engaged in specialty vehicle development and conversion programs. Products are manufactured using various metalworking technologies, including cold, warm and hot forming, powdered metal forming and stamping. During 1993, sales to various divisions and subsidiaries of Ford Motor Company, General Motors Corporation and Chrysler Corporation accounted for approximately 20 percent, 14 percent and 12 percent, respectively, of MascoTech's net sales from continuing operations.\nSpecialty products manufactured by MascoTech include a variety of architectural products for commercial, institutional and residential markets. Products include steel doors and frames; stainable and low maintenance steel doors; wood windows and aluminum-clad wood windows; leaded, etched and beveled glass for decorative windows and entryways; residential entry systems; garage doors; sectional and rolling doors; security grilles; and modular metal partitions. MascoTech's sales of architectural products in 1993 were $289 million. MascoTech's other specialty products consist primarily of defense products, including large diameter cold formed cartridge cases, projectiles and casings for rocket motors and missiles for the United States government and its suppliers. MascoTech also markets waste-water treatment services to other industrial companies principally in southern California. MascoTech's sales in 1993 of these other specialty products were $99 million.\nMascoTech has undertaken the planned disposition of its energy-related business segment, which consisted of seven business units, as part of its long-term strategic plan to de-leverage its balance sheet and increase the focus on its core operating capabilities. As a result, MascoTech's financial statements have been reclassified to present such businesses as discontinued operations. These businesses\nmanufactured specialized tools, equipment and other products for energy-related industries. Two of the businesses were sold in late 1993, including one business to TriMas Corporation, and MascoTech expects to divest the remaining businesses in 1994. MascoTech financial information contained in this Report has been reclassified for these discontinued operations.\nMascoTech currently owns approximately 43 percent of the outstanding common stock of TriMas Corporation, and the Company currently owns approximately 5 percent of the outstanding common stock of TriMas. TriMas is a diversified proprietary products company with leadership positions in commercial, industrial and consumer niche markets including industrial container closures, pressurized gas cylinders, towing systems products, specialty fasteners, specialty products for fiberglass insulation, specialty tapes, specialty industrial gaskets and precision cutting tools.\nPATENTS AND TRADEMARKS\nThe Company holds a number of United States and foreign patents covering various design features and valve constructions used in certain of its faucets, and also holds a number of other patents and patent applications, licenses, trademarks and trade names. As a manufacturer of brand-name consumer products, the Company views its trademarks as important, but does not believe that there is any reasonable likelihood of a loss of such rights which would have a material adverse effect on the Company's industry segments or its present business as a whole.\nCOMPETITION\nThe major domestic and foreign markets for the Company's products in its industry segments are highly competitive. Competition is based primarily on performance, quality, style, service and price, with the relative importance of such factors varying among products. A number of companies of varying size compete with one or more of the Company's product lines.\nEMPLOYEES\nAt December 31, 1993, the Company employed approximately 45,000 people. Satisfactory relations have generally prevailed between the Company and its employees.\nITEM 2.","section_1A":"","section_1B":"","section_2":"ITEM 2. PROPERTIES.\nThe following list includes the Company's principal manufacturing facilities by location and the industry segments utilizing such facilities:\nNote: Multiple footnotes within the same parenthesis indicate the facility is engaged in activities relating to both segments. Multiple footnotes to the same municipality denote separate facilities in that location. Industry segments in the preceding table are identified as follows: (1) Building and Home Improvement Products Segment, and (2) Home Furnishings Products Segment.\nThe home furnishings products manufacturing facilities are located primarily in North Carolina, with principal facilities ranging in size from 700,000 to 1,074,000 square feet. The two principal faucet manufacturing plants are located in Greensburg, Indiana and Chickasha, Oklahoma. The faucet manufacturing plants and the majority of the Company's other facilities range from approximately 20,000 to 700,000 square feet. The Company owns most of its manufacturing facilities and none of the properties is subject to significant encumbrances. The Company also maintains approximately 1.5 million square feet of designer and trade showroom space at various locations throughout the United States where it coordinates the display and sale of its home furnishings products and owns 725,000 square feet of showroom space in High Point, North Carolina utilized for furniture industry trade shows. The Company's corporate headquarters are located in Taylor, Michigan and are owned by the Company. An additional building near its corporate headquarters is used by the Company's corporate research and development department.\nThe Company's buildings, machinery and equipment have been generally well maintained, are in good operating condition, and are adequate for current production requirements.\nThe following list identifies the location of the principal manufacturing facilities of MascoTech and the industry segments utilizing such facilities:\nArizona.................Chandler (2)\nCalifornia..............Santa Fe Springs (4), Vernon (3) and Yuba City (1)\nFlorida.................Auburndale (2), Deerfield Beach (1) and Orlando (2)\nGeorgia.................Adel (1), Lawrenceville (1) and Valdosta (1)\nIndiana.................Kendallville (1)\nIowa....................Dubuque (2)\nKentucky................Nicholasville (1)\nMichigan................Auburn Hills (1)(1), Brighton (1), Burton (1), Coopersville (1), Detroit (1)(1)(1), Farmington Hills (1), Fraser (1), Green Oak Township (1 and 3), Hamburg (1 and 3), Holland (1), Livonia (1), Mesick (1), Mt. Clemens (1), Oxford (1)(1)(1), Port Huron (1), Redford (1), Roseville (1), Royal Oak (1), Shelby Township (1), St. Clair (1), St. Clair Shores (1), Sterling Heights (1), Traverse City (1)(1)(1)(1)(1), Troy (1)(1), Warren (1)(1), West Branch (2) and Ypsilanti (1)\nMississippi.............Nesbit (2)\nNew York................Brooklyn (2) and Maspeth (2)\nOhio....................Blue Ash (2), Bluffton (1), Canal Fulton (1), Columbus (2), Lima (1), Minerva (1), Perrysburg (2), Port Clinton (1) and Upper Sandusky (1)\nOklahoma................Tulsa (4)\nPennsylvania............Ridgway (1)\nTexas...................Bryan (4), Dallas (4), Greenville (4) and Houston (4)(4)(4)\nVirginia................Duffield (1)\nGermany.................Riedstadt (2) and Zell am Harmersbach(1 and 3)\nItaly...................Poggio Rusco (1)\nUnited Kingdom..........Wednesfield, England (1)\nNote: Multiple footnotes within the same parenthesis indicate the facility is engaged in significant activities relating to more than one segment. Multiple footnotes to the same municipality denote separate facilities in that location. Industry segments in the preceding table are identified as follows: (1) transportation-related products; (2) specialty products -- architectural; (3) specialty products -- other; and (4) discontinued operations.\nMascoTech's largest manufacturing facility is located in Vernon, California and is a multi-plant facility of approximately 920,000 square feet. MascoTech owns the largest plant, comprising approximately 540,000 square feet, and operates the remaining portions of this facility under leases, the earliest of which expires at the end of 1994. Except for the foregoing facility and an additional manufacturing facility covering approximately 605,000 square feet, MascoTech's manufacturing facilities range in size from approximately 25,000 to 325,000 square feet, are owned by MascoTech or leased and are not subject to significant encumbrances. MascoTech's executive offices are located in Taylor, Michigan, and are provided by the Company to MascoTech under a corporate services agreement.\nMascoTech's buildings, machinery and equipment have been generally well maintained, are in good operating condition, and are adequate for current production requirements.\nITEM 3.","section_3":"ITEM 3. LEGAL PROCEEDINGS.\nBetween 1982 and 1989, subsidiaries of the Company sold plastic plumbing fittings used to connect plastic pipes for water supply systems in residential construction. A small percentage of these fittings have experienced leaks which the Company believes are caused by deficiencies in the resin supplied to its subsidiaries by E.I. du Pont de Nemours and Company. The Company's policy has been to repair any leaks which have been reported and, as a result, the Company has not experienced litigation of any consequence arising from this situation. Based on the terms of a recent settlement of litigation previously instituted by the Company against du Pont, the Company does not believe that these matters will result in any future material adverse effect on the Company's financial position.\nCivil suits were filed in December 1992 in a California state court by the California Attorney General, the Natural Resources Defense Counsel and the Environmental Law Foundation against a subsidiary of the Company and approximately 15 other manufacturers or distributors of faucets sold in that state. The suits principally allege that brass faucets unlawfully leach lead into tap water and that the defendants have failed to provide clear and reasonable warnings in violation of California law. The plaintiffs have requested, among other things, that the defendants be enjoined from selling products in California that leach lead into tap water, be ordered to offer restitution to California purchasers of defendants' products, and pay unspecified compensatory and punitive damages. Based upon the Company's present knowledge and subject to future legal and factual developments, the Company\ndoes not believe that these suits will result in any material adverse effect on the Company's financial position.\nThe Company is subject to other claims and litigation in the ordinary course of business, but does not believe that any such claim or litigation will have a material adverse effect on its consolidated financial position.\nITEM 4.","section_4":"ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.\nNot applicable.\nSUPPLEMENTARY ITEM. EXECUTIVE OFFICERS OF REGISTRANT (PURSUANT TO INSTRUCTION 3 TO ITEM 401(B) OF REGULATIONS S-K).\nExecutive officers who are elected by the Board of Directors serve for a term of one year or less. Each executive officer has been employed in a managerial capacity with the Company for over five years except for Mr. Gargaro. Richard A. Manoogian, the Chairman of the Board and Chief Executive Officer of the Company, is the son of its Chairman Emeritus, Alex Manoogian.\nMr. Gargaro joined the Company as its Vice President and Secretary on October 1, 1993. Prior to joining the Company, Mr. Gargaro was a partner at the Detroit law firm of Dykema Gossett PLLC. Mr. Gargaro has served as a director and Secretary of MascoTech, Inc., since 1984 and a director and Secretary of TriMas Corporation since 1989.\nPART II\nITEM 5.","section_5":"ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.\nThe New York Stock Exchange is the principal market on which the Company's Common Stock is traded. The following table indicates the high and low sales prices of the Company's Common Stock as reported on the New York Stock Exchange Composite Tape and the cash dividends declared per share for the periods indicated:\nOn March 15, 1994, there were approximately 8,200 holders of record of the Company's Common Stock.\nThe Company expects that its practice of paying quarterly dividends on its Common Stock will continue, although future dividends will continue to depend upon the Company's earnings, capital requirements, financial condition and other factors.\nITEM 6.","section_6":"ITEM 6. SELECTED FINANCIAL DATA.\nThe following table sets forth summary consolidated financial information of the Company, for the years and dates indicated:\nITEM 7.","section_7":"ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.\nCORPORATE DEVELOPMENT\nWhile no major acquisitions occurred in 1993, acquisitions have historically contributed significantly to Masco's long-term growth, even though generally the initial impact on earnings is minimal after deducting acquisition-related costs such as interest and added depreciation and amortization. The important earnings benefit to Masco arises from subsequent growth of acquired companies, since incremental sales are not handicapped by these expenses.\nPROFIT MARGINS\nAfter-tax profit margins as a percent of net sales were 5.7 percent, 5.2 percent and 1.4 percent in 1993, 1992 and 1991, respectively. After-tax profit return on shareholders' equity was 11.7 percent, 10.2 percent and 2.5 percent in 1993, 1992 and 1991, respectively.\nThe increased profit margins for 1993, compared with the previous two years, were primarily the result of increased product sales resulting from improved market shares and the modest economic recovery, as well as increased income related to the Company's equity investments in MascoTech, Inc.\nLIQUIDITY AND CAPITAL RESOURCES\nAt year-end 1993, current assets were approximately 3.4 times current liabilities.\nOver the years, the Company has funded its growth through a combination of cash provided by operations and long-term bank and other borrowings.\nDuring 1993, cash was provided by $261 million from operating activities, $88 million from the sale of affiliate investments to MascoTech, $100 million from the redemption of the MascoTech 10% exchangeable preferred stock and $23 million from other net cash inflows; cash decreased by $167 million for the purchase of property and equipment, $131 million for a net decrease in debt and $99 million for cash dividends paid. The aggregate of the preceding items represents a net cash inflow of $75 million in 1993. Cash provided by operating activities totalled $261 million, $204 million and $244 million in 1993, 1992 and 1991, respectively; the Company has generally reinvested a majority of these funds in its operations.\nDuring 1993, the Company issued $400 million of fixed rate debt securities, with the proceeds being used to eliminate floating-rate borrowings under its bank revolving-credit agreement.\nThe Company's anticipated internal cash flow is expected to provide sufficient liquidity to fund its near-term working capital and other investment needs. The Company believes that its longer-term working capital and other general corporate requirements will be satisfied through its internal cash flow and to the extent necessary in the financial markets.\nRECEIVABLES AND INVENTORIES\nDuring 1993, the Company's receivables increased by $43 million. This increase is primarily the result of increased sales in the fourth quarter of 1993 compared with the same period in 1992.\nDuring 1993, the Company's inventories increased by $39 million. As compared with the average manufacturing company, the Company maintains a higher investment in inventories, which relates to the Company's business strategies of providing better customer service, establishing efficient production scheduling and benefitting from larger, more cost-effective purchasing.\nCAPITAL EXPENDITURES\nCapital expenditures totalled $167 million in 1993, compared with $118 million in 1992. These amounts primarily pertain to expenditures for additional facilities related to increased demand as well as for new Masco products.\nThe Company continues to invest in automating its manufacturing operations and increasing its productivity, in order to be a more efficient producer and improve customer service and response time.\nDepreciation expense and amortization expense were $82.1 million and $33.9 million, respectively, in 1993, compared with $79.4 million and $35.1 million, respectively, in 1992. This continued high level is primarily the result of acquisitions and the Company's capital expenditures programs. The major portion of amortization expense from the excess of cost over net assets acquired, relates to companies acquired in 1986 and 1987. These companies have been successful for many years in established markets not subject to rapid technological changes. At each balance sheet date management assesses whether there has been an impairment in the carrying value of excess of cost over net assets of acquired companies by primarily comparing current and projected sales, operating income and annual cash flows with the related annual amortization expense.\nEQUITY AND OTHER INVESTMENTS IN AFFILIATES\nEquity earnings from affiliates were $18.7 million in 1993 compared with equity earnings of $17.3 million in 1992 and equity loss of $12.6 million in 1991.\nIn March 1993, the Company and MascoTech, Inc., partially restructured their affiliate relationships through transactions that reduced the Company's common equity interest in MascoTech from 47 percent to approximately 35 percent and resulted in MascoTech's acquisition of the Company's investments in Emco Limited. The Company received $87.5 million in cash, $100 million of 10% exchangeable preferred stock and seven-year warrants to purchase 10 million common shares of MascoTech at $13 per share. MascoTech received 10 million of its common shares, $77.5 million of its 12% exchangeable preferred stock, the Company's investments in Emco Limited and a modified option expiring in 1997 to require the Company to purchase up to $200 million aggregate amount of debt securities of MascoTech.\nIn November 1993, MascoTech redeemed for cash its $100 million of 10% exchangeable preferred stock issued in March 1993. As a result of this redemption, the Company realized a $28.3 million pre-tax gain.\nIn December 1993, following MascoTech's call for redemption, the Company converted the 6% debentures due 2011 into MascoTech common stock, thereby increasing the Company's common equity interest in MascoTech from approximately 35 percent to 42 percent.\nCASH DIVIDENDS\nDuring 1993, the Company increased its dividend rate seven percent to $.17 per share quarterly. This marks the 35th consecutive year in which dividends have been increased. Dividend payments over the last five years have increased at an eight percent average annual rate. Although the Company is aware of the greater interest in yield by many investors and has maintained an increased dividend payout in recent years, the Company continues to believe that its shareholders' long-term interests are best served by investing a significant portion of its earnings in the future growth of the Company.\nRECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS\nStatement of Financial Accounting Standards No. 112, Employers' Accounting for Postemployment Benefits, became effective in January 1994. This Standard specifies that the estimated cost of benefits provided by an employer to former or inactive employees after employment but before retirement be accounted for on an accrual basis. This Standard will not have a material impact on the Company's financial statements.\nStatement of Financial Accounting Standards No. 114, Accounting by Creditors for Impairment of a Loan, becomes effective in January 1995. This Standard addresses the accounting for impairment of a loan by specifying how allowances for credit losses should be determined. This Standard will not have a material impact on the Company's financial statements.\nStatement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities, became effective in January 1994. This Standard defines the accounting and reporting for all investments in debt securities and for investments in equity securities that have readily determinable fair values. This Standard will not have a material impact on the Company's financial statements.\nGENERAL FINANCIAL ANALYSIS\n1993 VERSUS 1992\nNet sales in 1993 increased 10 percent to $3,886 million. The sales increase was primarily due to increased shipments of kitchen, bath and home furnishings products. Cost of sales as a percentage of sales was 67.5 percent in both 1993 and 1992. Selling, general and administrative expenses as a percentage of sales decreased modestly to 22.1 percent in 1993 from 22.3 percent in 1992. Operating profit increased 13 percent in 1993 from 1992.\nThe Company's Building and Home Improvement Products sales in 1993 increased 10 percent to $2,188 million while operating profit increased 12 percent to $412 million.\nSales in 1993 of the Company's Home Furnishings Products increased 11 percent to $1,698 million and operating profit increased 15 percent to $69 million.\nIncluded in other income and expense for 1993 are equity earnings from MascoTech, Inc. of $23.2 million, prior to an approximate $10 million after-tax fourth quarter charge which reflects the Company's equity share of MascoTech's loss provision for the disposition of its energy-related businesses and extraordinary loss on the early extinguishment of debt, as compared with $12.6 million of equity earnings in 1992. MascoTech reported income from continuing operations of $70.9 million and $39 million in 1993 and 1992, respectively, and net income, after preferred stock dividends, of $32.7 million for 1993 and $29.1 million for 1992. The results of MascoTech were favorably impacted by internal cost reductions and from increased demand in its transportation industries, which more than offset its 1993 fourth quarter special charges of $26 million after-tax.\nIncluded in the fourth quarter of 1993 is a $28.3 million pre-tax gain (approximately $18 million after-tax) on the redemption of MascoTech's 10% exchangeable preferred stock. This gain was principally offset by the Company's approximate $10 million after-tax equity share of MascoTech's above-mentioned fourth quarter special charges, as well as by charges related to certain restructurings of Company operations which should result in future cost savings.\nThe Company reported increases in net income and earnings per share of 21 percent and 20 percent, respectively, in 1993 as compared with 1992.\n1992 VERSUS 1991\nNet sales in 1992 increased 12 percent to $3,525 million. Cost of sales as a percentage of sales decreased to 67.5 percent in 1992 from 70.2 percent in 1991. Selling, general and administrative expenses as a percentage of sales increased to 22.3 percent in 1992 from 21.8 percent in 1991. The sales increase was primarily due to increased shipments of kitchen, bath and home furnishings products. The decrease in cost of sales as a percentage of sales resulted primarily from profit improvement programs implemented in prior years having a favorable impact on current earnings. The increase in selling, general and administrative expenses as a percentage of sales was primarily due to increased promotional and advertising costs. Operating profit increased 44 percent.\nThe Company's Building and Home Improvement Products sales in 1992 increased 16 percent while operating profit increased 35 percent.\nSales and operating profit in 1992 of the Company's Home Furnishings Products increased 7 percent and 58 percent, respectively.\nIncluded in other income and expense for 1992 are equity earnings from MascoTech, Inc. of $12.6 million as compared with $9.2 million of equity loss in 1991. MascoTech reported net income, after preferred stock dividends, of $29.1 million for 1992, as compared with net loss, after preferred stock dividends, of $18.6 million in 1991. The results of MascoTech were favorably impacted by internal cost reduction and restructuring initiatives and from modest improvement in the economy. Also, lower interest rates contributed to reduced interest expense for 1992.\nIncluded in other income and expense for 1991 is approximately $32 million pre-tax of non-operating charges attributable to write-downs of the Company's carrying value of investments in certain affiliated companies and other long-term investments.\nThe Company reported increases in net income and earnings per share of 308 percent and 303 percent, respectively, in 1992 as compared with 1991.\nITEM 8.","section_7A":"","section_8":"ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.\nREPORT OF INDEPENDENT ACCOUNTANTS\nTo the Board of Directors and Shareholders of Masco Corporation:\nWe have audited the accompanying consolidated balance sheet of Masco Corporation and subsidiaries as of December 31, 1993 and 1992, and the related consolidated statements of income and cash flows for each of the three years in the period ended December 31, 1993, and the financial statement schedules as listed in Item 14(a)(2)(i) of this Form 10-K. These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits.\nWe conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.\nIn our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Masco Corporation and subsidiaries as of December 31, 1993 and 1992, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1993 in conformity with generally accepted accounting principles. In addition, 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 required to be included therein.\nCOOPERS & LYBRAND\nDetroit, Michigan February 24, 1994\nMASCO CORPORATION\nCONSOLIDATED BALANCE SHEET\nDECEMBER 31, 1993 AND 1992\nSee notes to consolidated financial statements.\nMASCO CORPORATION\nCONSOLIDATED STATEMENT OF INCOME\nFOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991\nSee notes to consolidated financial statements.\nMASCO CORPORATION\nCONSOLIDATED STATEMENT OF CASH FLOWS\nFOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991\nSee notes to consolidated financial statements.\nMASCO CORPORATION\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS\nACCOUNTING POLICIES:\nPrinciples of Consolidation. The consolidated financial statements include the accounts of Masco Corporation and all majority-owned subsidiaries. All significant intercompany transactions have been eliminated.\nAverage Shares Outstanding. The average number of common shares outstanding in 1993, 1992 and 1991 approximated 152.7 million, 151.7 million and 149.9 million, respectively.\nCash and Cash Investments. The Company considers all highly liquid investments with a maturity of three months or less to be cash and cash investments.\nReceivables. Accounts and notes receivable are presented net of allowances for doubtful accounts of $19.1 million at December 31, 1993 and $16.3 million at December 31, 1992.\nProperty and Equipment. Property and equipment, including significant betterments to existing facilities, are recorded at cost. Upon retirement or disposal, the cost and accumulated depreciation are removed from the accounts and any gain or loss is included in income. Maintenance and repair costs are charged to expense as incurred.\nDepreciation and Amortization. Depreciation is computed principally using the straight-line method over the estimated useful lives of the assets. Annual depreciation rates are as follows: buildings and land improvements, 2 to 10 percent, and machinery and equipment, 5 to 33 percent. Depreciation was $82.1 million, $79.4 million and $70.2 million in 1993, 1992 and 1991, respectively.\nThe excess of cost over net assets of acquired companies is being amortized using the straight-line method over periods not exceeding 40 years; at December 31, 1993 and 1992, such accumulated amortization totalled $127.2 million and $107.3 million, respectively. At each balance sheet date management assesses whether there has been an impairment in the carrying value of excess of cost over net assets of acquired companies primarily by comparing current and projected sales, operating income and annual cash flows with the related annual amortization expense. Purchase costs of patents are being amortized using the straight-line method over their remaining lives. Amortization of intangible assets was $33.9 million, $35.1 million and $32.5 million in 1993, 1992 and 1991, respectively.\nFair Value of Financial Instruments. The carrying value of financial instruments reported in the balance sheet for current assets and current liabilities approximates fair value. The fair value of financial instruments that are carried as long-term investments (other than those accounted for by the equity method) was based principally on quoted market prices for those or similar investments or by discounting future cash flows using a discount rate that approximates the risk of the investments. The fair value of the Company's long-term debt instruments was based principally on quoted market prices for the same or similar issues or the current rates offered to the Company for debt with similar terms and remaining maturities. The aggregate market value of the Company's long-term investments and long-term debt at December 31, 1993 was approximately $230 million and $1,471 million, as compared with the Company's carrying value of $200 million and $1,418 million, respectively. The aggregate market value of the Company's long-term investments and long-term debt at December 31, 1992 was approximately $530 million and $1,508 million, as compared with the Company's carrying value of $537 million and $1,487 million, respectively.\nRecently Issued Professional Accounting Standards. Statement of Financial Accounting Standards (SFAS) No. 112, Employers' Accounting for Postemployment Benefits, SFAS No. 114, Accounting by Creditors for Impairment of a Loan and SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, which become effective in 1994 and 1995, will not have a material impact on the Company's financial statements.\nMASCO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)\nINVENTORIES:\nInventories are stated at the lower of cost or net realizable value, with cost determined principally by use of the first-in, first-out method.\nEQUITY INVESTMENTS IN AFFILIATES:\nEquity investments in affiliates consist primarily of the following equity and partnership interests:\nExcluding the partnership interest in Hans Grohe, for which there is no quoted market value, the aggregate market value of the Company's equity investments at December 31, 1993 (which may differ from the amounts that could then have been realized upon disposition), based upon quoted market prices at that date, was $889 million, as compared with the Company's related aggregate carrying value of $315 million.\nThe Company's carrying value in the common stock of MascoTech, Inc. (formerly Masco Industries, Inc.) exceeds its equity in the underlying net book value by approximately $63 million at December 31, 1993. This excess, substantially all of which resulted from repurchases by MascoTech of its common stock, is being amortized over a period not to exceed 40 years. The Company's carrying value in the common stock of TriMas Corporation exceeds its equity in the underlying net book value by approximately $8 million at December 31, 1993. The Company's carrying value of its investment in Hans Grohe at December 31, 1993 approximates the Company's equity in the underlying net book value in this affiliate.\nIn March 1993, the Company and MascoTech partially restructured their affiliate relationships through transactions that reduced the Company's common equity interest in MascoTech from 47 percent to approximately 35 percent and resulted in MascoTech's acquisition of the Company's investments in Emco Limited. The Company received $87.5 million in cash, $100 million of 10% exchangeable preferred stock and seven-year warrants to purchase 10 million common shares of MascoTech at $13 per share. MascoTech received 10 million of its common shares, $77.5 million of its 12% exchangeable preferred stock, the Company's investments in Emco Limited and a modified option expiring in 1997 to require the Company to purchase up to $200 million aggregate amount of debt securities in MascoTech.\nIn November 1993, MascoTech redeemed for cash its $100 million of 10% exchangeable preferred stock issued in March 1993. As a result of this redemption, the Company realized a $28.3 million pre-tax gain.\nMASCO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)\nEQUITY INVESTMENTS IN AFFILIATES (CONTINUED): In December 1993, following MascoTech's call for redemption, the Company converted the 6% debentures due 2011 into MascoTech common stock, thereby increasing the Company's common equity interest in MascoTech from approximately 35 percent to 42 percent.\nAs part of the Company's efforts to de-emphasize equity investments, in addition to its disposition of its investments in Emco Limited, in July 1992 the Company sold its 49 percent equity interest in Mechanical Technology Inc. at approximate carrying value.\nApproximate combined condensed financial data of the above companies, excluding data subsequent to 1991 of Emco Limited and Mechanical Technology Inc. as to which the equity method was discontinued as of January 1, 1992, are summarized in U.S. dollars as follows, in thousands:\nCertain amounts for 1992 and 1991 have been restated to reflect MascoTech's formal plan to divest its energy-related business segment.\nEquity in undistributed earnings of affiliates of $132 million at December 31, 1993, $118 million at December 31, 1992 and $105 million at December 31, 1991 are included in consolidated retained earnings.\nOTHER INVESTMENT IN MASCOTECH, INC.:\nIn December 1993, following MascoTech's call for redemption, the Company converted the 6% debentures into MascoTech common stock at $18 per share.\nMASCO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)\nPROPERTY AND EQUIPMENT:\nACCRUED LIABILITIES:\nLONG-TERM DEBT:\nAt December 31, 1993, all of the outstanding notes above are nonredeemable.\nIn March 1993, the $200 million of 8.75% notes due 1996 were redeemed at par with borrowings under the Company's bank revolving-credit agreement.\nMASCO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)\nLONG-TERM DEBT (CONTINUED):\nIn August 1993, the Company issued $200 million of 7.125% notes due August 15, 2013. In September 1993, the Company issued $200 million of 6.125% notes due September 15, 2003. The proceeds from these financings were used to eliminate floating-rate borrowings under the Company's bank revolving-credit agreement.\nIn June 1992, the Company issued $200 million of 6.25% notes due June 15, 1995. In September 1992, the Company issued $200 million of 6.625% notes due September 15, 1999. The proceeds from these financings were used to reduce outstanding bank indebtedness.\nThe 5.25% subordinated debentures due February 15, 2012 are convertible into common stock at $42.28 per share.\nThe notes payable to banks at December 31, 1992 relate to a $750 million revolving-credit agreement, with any outstanding balance due and payable in November 1995. Interest is payable on borrowings under this agreement based upon various floating rates as selected by the Company.\nCertain debt agreements contain limitations on additional borrowings and restrictions on cash dividend payments and common share repurchases. At December 31, 1993, the amount of retained earnings available for cash dividends and common share repurchases approximated $242 million under the most restrictive of these provisions.\nAt December 31, 1993, the maturities of long-term debt during the next five years were approximately as follows: 1994-$8.6 million; 1995-$204.1 million; 1996-$256.9 million; 1997-$1.1 million; and 1998-$1.0 million.\nAt December 31, 1993, the Company had shelf registration statements on file with the Securities and Exchange Commission for up to $200 million of debt securities as well as up to 9.6 million shares of its common stock.\nInterest paid was approximately $104 million, $121 million and $127 million in 1993, 1992 and 1991, respectively.\nMASCO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)\nSHAREHOLDERS' EQUITY:\nIn April 1991, the Company issued 3 million shares of its common stock for approximately $64 million. The proceeds from this offering were used to reduce outstanding bank indebtedness.\nOn the basis of amounts paid (declared), cash dividends per share were $.65 ($.66) in 1993, $.61 ($.62) in 1992 and $.57 ($.58) in 1991.\nMASCO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)\nSTOCK OPTIONS AND AWARDS:\nFor the three years ended December 31, 1993, stock option data pertaining to stock option plans for key employees of the Company and affiliated companies are as follows:\nPursuant to restricted stock incentive plans, the Company granted long-term incentive awards, net, for 100,000, 267,000 and 36,000 shares of common stock during 1993, 1992 and 1991, respectively, to key employees of the Company and affiliated companies. The unamortized costs of unvested awards under these plans, aggregating approximately $47 million at December 31, 1993, are being amortized over the ten-year vesting periods.\nAt December 31, 1993, a combined total of 10,595,000 shares of common stock was available for the granting of stock options and incentive awards under the above plans.\nPursuant to the 1984 Restricted Stock (MascoTech) Incentive Plan, the Company may award to key employees of the Company and affiliated companies, shares of common stock of MascoTech, Inc. held by the Company. No such awards were granted in 1993, 1992 or 1991. At December 31, 1993, there were 4,694,000 of such shares available for granting future awards under this plan.\nMASCO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)\nEMPLOYEE RETIREMENT PLANS:\nThe Company sponsors defined-benefit pension plans for most of its employees. In addition, substantially all salaried employees participate in noncontributory profit-sharing plans, to which payments are determined annually by the Directors. Aggregate charges to income under the pension and profit-sharing plans were $19.2 million in 1993, $16.9 million in 1992 and $15.9 million in 1991. At December 31, 1993, the combined assets of the Company's defined-benefit pension plans exceed the combined accumulated benefit obligation.\nNet periodic pension cost for the Company's pension plans includes the following components:\nMajor assumptions used in accounting for the Company's pension plans are as follows:\nThe funded status of the Company's pension plans at December 31, is summarized as follows, in thousands:\nIn January 1993, Statement of Financial Accounting Standards No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions, became effective. The Company sponsors certain postretirement benefit plans that provide medical, dental and life insurance coverage for eligible retirees and dependents in the United States based on age and length of service. At December 31, 1993, the aggregate present value of the accumulated postretirement benefit obligation approximated $10 million pre-tax and is being amortized over 20 years.\nMASCO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)\nSEGMENT INFORMATION:\nThe Company's operations in the industry segments detailed below consisted of the manufacture and sale principally of the following products:\nBuilding and home improvement -- faucets; plumbing fittings; kitchen and bath cabinets; showertubs, whirlpools and spas; kitchen appliances; builders' hardware; venting and ventilating equipment; and water pumps.\nHome furnishings products -- quality furniture, fabrics and other home furnishings products.\nCorporate assets consisted primarily of cash, real property and other investments.\nPursuant to a corporate services agreement to provide MascoTech, Inc. with certain corporate staff and administrative services, the Company charges a fee approximating .8 percent of MascoTech net sales. This fee approximated $11 million in each of 1993, 1992 and 1991 and is included as a reduction of general corporate expense.\n(1) Income before income taxes and net income from foreign operations for 1993, 1992 and 1991 were $92 million and $55 million, $88 million and $54 million, and $72 million and $43 million, respectively.\nMASCO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)\nOTHER INCOME (EXPENSE), NET:\nOther items in 1991 include write-downs aggregating approximately $32 million pre-tax in the Company's long-term investments.\nMASCO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)\nINCOME TAXES:\nThe effective tax rate differs from the United States federal statutory rate principally due to: equity earnings (1 percent in 1992 and -7 percent in 1991), higher tax rate applicable to foreign earnings (-1 percent in 1993, -2 percent in 1992 and -5 percent in 1991), amortization in excess of tax, net (-1 percent in 1993, -2 percent in 1992 and -6 percent in 1991), dividends-received deduction (1 percent in 1993 and 1992 and 2 percent in 1991), state income tax and other (-2 percent in 1993 and -4 percent in 1992 and 1991), and -1 percent in 1993 to record the effect on deferred tax liabilities caused by the increase in the tax rate from 34 percent to 35 percent.\nIncome taxes paid were approximately $135 million, $97 million and $54 million in 1993, 1992 and 1991, respectively.\nStatement of Financial Accounting Standards No. 109, Accounting for Income Taxes, which requires the use of an asset and liability method of accounting for income taxes, became effective in January 1993. Deferred income taxes result from temporary differences between the tax basis of assets\nMASCO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)\nINCOME TAXES (CONTINUED):\nand liabilities and the related basis as reported in the consolidated financial statements. Prior to 1993, the Company followed the requirements of Statement of Financial Accounting Standards No. 96, Accounting for Income Taxes.\nCOMBINED FINANCIAL STATEMENTS (UNAUDITED):\nThe following presents the combined financial statements of the Company, MascoTech, Inc. (formerly Masco Industries, Inc.), and TriMas Corporation as one entity, with Masco Corporation as the parent company. Certain amounts for 1992 and 1991 have been restated to reflect MascoTech's formal plan to divest its energy-related business segment. Intercompany transactions have been eliminated. Amounts, except earnings per share, are in thousands.\nMASCO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)\nMASCO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)\nMASCO CORPORATION\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)\nINTERIM FINANCIAL INFORMATION (UNAUDITED):\nITEM 9.","section_9":"ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.\nNot applicable.\nPART III\nITEM 10.","section_9A":"","section_9B":"","section_10":"ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.\nInformation regarding executive officers required by this Item is set forth as a Supplementary Item at the end of Part I hereof (pursuant to Instruction 3 to Item 401(b) of Regulation S-K). Other information required by this Item will be contained in the Company's definitive Proxy Statement for its 1994 Annual Meeting of Stockholders, to be filed on or before April 30, 1994, and such information is incorporated herein by reference.\nITEM 11.","section_11":"ITEM 11. EXECUTIVE COMPENSATION.\nInformation required by this Item will be contained in the Company's definitive Proxy Statement for its 1994 Annual Meeting of Stockholders, to be filed on or before April 30, 1994, and such information is incorporated herein by reference.\nITEM 12.","section_12":"ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.\nInformation required by this Item will be contained in the Company's definitive Proxy Statement for its 1994 Annual Meeting of Stockholders, to be filed on or before April 30, 1994, and such information is incorporated herein by reference.\nITEM 13.","section_13":"ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.\nInformation required by this Item will be contained in the Company's definitive Proxy Statement for its 1994 Annual Meeting of Stockholders, to be filed on or before April 30, 1994, and such information is incorporated herein by reference.\nPART IV\nITEM 14.","section_14":"ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.\n(A) LISTING OF DOCUMENTS.\n(1) Financial Statements. The Company's Consolidated Financial Statements included in Item 8 hereof, as required at December 31, 1993 and 1992, and for the years ended December 31, 1993, 1992 and 1991, consist of the following:\nConsolidated Balance Sheet\nConsolidated Statement of Income\nConsolidated Statement of Cash Flows\nNotes to Consolidated Financial Statements\n(2) Financial Statement Schedules.\n(i) Financial Statement Schedules of the Company appended hereto, as required at December 31, 1993, and for the years ended December 31, 1993, 1992 and 1991, consist of the following:\nI. Marketable Securities -- Other Investments II. Amounts Receivable from Related Parties and Underwriters, Promoters, and Employees Other than Related Parties V. Property, Plant and Equipment VI. Accumulated Depreciation, Depletion and Amortization of Property, Plant and Equipment VIII. Valuation and Qualifying Accounts IX. Short-Term Borrowings X. Supplementary Income Statement Information\n(ii) (A) MascoTech, Inc. and Subsidiaries Consolidated Financial Statements appended hereto, as required at December 31, 1993 and 1992, and for the years ended December 31, 1993, 1992 and 1991, consist of the following:\nConsolidated Balance Sheet\nConsolidated Statement of Income\nConsolidated Statement of Cash Flows\nNotes to Consolidated Financial Statements\n(ii) (B) MascoTech, Inc. and Subsidiaries Financial Statement Schedules appended hereto, as required for the years ended December 31, 1993, 1992 and 1991, consist of the following:\nII. Amount Receivable from Related Parties and Underwriters, Promoters, and Employees Other than Related Parties V. Property, Plant and Equipment VI. Accumulated Depreciation, Depletion and Amortization of Property, Plant and Equipment VIII. Valuation and Qualifying Accounts X. Supplementary Income Statement Information\n(3) Exhibits.\n- --------------- (1) Incorporated by reference to the Exhibits filed with Masco Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 1993.\n(2) Incorporated by reference to the Exhibits filed with Masco Corporation's Annual Report on Form 10-K for the year ended December 31, 1992.\n(3) Incorporated by reference to the Exhibits filed with Masco Corporation's Annual Report on Form 10-K for the year ended December 31, 1991.\n(4) Incorporated by reference to the Exhibits filed with Masco Corporation's Annual Report on Form 10-K for the year ended December 31, 1990.\n(B) REPORTS ON FORM 8-K.\nThe following Current Report on Form 8-K was filed by Masco Corporation in the calendar quarter ended March 31, 1994:\nReport on Form 8-K dated March 2, 1994 reporting under Item 5, \"Other Events,\" the 1993 year end financial results of the Company. The following financial statements were filed with such Report:\n(1) Audited consolidated balance sheet of Masco Corporation and subsidiaries as of December 31, 1993 and 1992, and the related consolidated statements of income and cash flows for each of the three years in the period ended December 31, 1993; and\n(2) Audited consolidated balance sheet of MascoTech, Inc. and subsidiaries as of December 31, 1993 and 1992, and the related consolidated statements of income and cash flows for each of the three years in the period ended December 31, 1993.\nSIGNATURES\nPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.\nMASCO CORPORATION\nBy RICHARD G. MOSTELLER RICHARD G. MOSTELLER Senior Vice President -- Finance\nMarch 24, 1994\nPursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.\nMASCO CORPORATION\nFINANCIAL STATEMENT SCHEDULES PURSUANT TO ITEM 14(A)(2) OF FORM 10-K ANNUAL REPORT TO THE SECURITIES AND EXCHANGE COMMISSION\nSchedules, as required, at December 31, 1993 and 1992 and for the years ended December 31, 1993, 1992 and 1991:\nMASCO CORPORATION\nSCHEDULE I. MARKETABLE SECURITIES -- OTHER INVESTMENTS\nDECEMBER 31, 1993\nMASCO CORPORATION\nSCHEDULE II. AMOUNTS RECEIVABLE FROM RELATED PARTIES AND UNDERWRITERS, PROMOTERS, AND EMPLOYEES OTHER THAN RELATED PARTIES\nFOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991\nAll amounts receivable are related to an incentive program of the Company that has been disclosed in previous proxy statements of the Company and that will be described in the Company's definitive Proxy Statement for its 1994 Annual Meeting of Stockholders to be filed on or before April 30, 1994.\nNotes: (A) Amounts receivable from employees are due June 30, 1994. The stated rate of interest is 7%. (B) Represents the discount pertaining to the difference between the stated rate of interest of 7% and the effective rate of interest of approximately 9%.\nActivity for 1992 includes interest income of $1,555,000, discount amortization of $681,000 and, in consideration for return to the Company of assets of approximate equal value, cancellation of the receivable balances of $1,592,000 for two former employees.\nActivity for 1991 includes interest income of $1,733,000 and discount amortization of $545,000.\nMASCO CORPORATION\nSCHEDULE V. PROPERTY, PLANT AND EQUIPMENT\nFOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991\nNotes: (A) Including fixed asset additions of $5,480,000 in 1992 and $5,520,000 in 1991 obtained through the purchase of companies. (B) Adjustments and reclassifications between noncurrent asset accounts and the effect of foreign currency translation.\nMASCO CORPORATION\nSCHEDULE VI. ACCUMULATED DEPRECIATION, DEPLETION AND AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT\nFOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991\nNOTE: (A) Adjustments and reclassifications between noncurrent asset accounts and the effect of foreign currency translation.\nMASCO CORPORATION\nSCHEDULE VIII. VALUATION AND QUALIFYING ACCOUNTS\nFOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991\nNotes: (A) Allowance of companies acquired and companies disposed of, net. (B) Deductions, representing uncollectible accounts written off, less recoveries of accounts written off in prior years.\nMASCO CORPORATION\nSCHEDULE IX. SHORT-TERM BORROWINGS\nFOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991\nNote: (A) Computed primarily using the average daily balances or interest rates.\nMASCO CORPORATION\nSCHEDULE X. SUPPLEMENTARY INCOME STATEMENT INFORMATION\nFOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991\nOther captions provided for under this schedule are excluded as the amounts related to such captions are not material.\nMASCOTECH, INC. AND SUBSIDIARIES\nREPORT OF INDEPENDENT ACCOUNTANTS\nTo the Board of Directors and Shareholders of MascoTech, Inc.:\nWe have audited the accompanying consolidated balance sheet of MascoTech, Inc. and subsidiaries (formerly Masco Industries, Inc.) as of December 31, 1993 and 1992, and the related consolidated statements of income and cash flows for each of the three years in the period ended December 31, 1993, and the financial statement schedules as listed in Item 14(a)(2)(ii) of this Form 10-K. These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits.\nWe conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.\nIn our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of MascoTech, Inc. and subsidiaries as of December 31, 1993 and 1992, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1993, in conformity with generally accepted accounting principles. In addition, 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 required to be included therein.\nCOOPERS & LYBRAND\nDetroit, Michigan February 24, 1994\nMASCOTECH, INC.\nCONSOLIDATED BALANCE SHEET\nDECEMBER 31, 1993 AND 1992\nThe accompanying notes are an integral part of the consolidated financial statements.\nMASCOTECH, INC.\nCONSOLIDATED STATEMENT OF INCOME\nFOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991\n- ------------------------- * Anti-dilutive\nThe accompanying notes are an integral part of the consolidated financial statements.\nMASCOTECH, INC.\nCONSOLIDATED STATEMENT OF CASH FLOWS\nFOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991\nThe accompanying notes are an integral part of the consolidated financial statements.\nMASCOTECH, INC.\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS\nACCOUNTING POLICIES:\nPrinciples of Consolidation. The consolidated financial statements include the accounts of the Company and all majority-owned subsidiaries. All significant intercompany transactions have been eliminated. Corporations that are 20 to 50 percent owned are accounted for by the equity method of accounting. Capital transactions by equity affiliates at amounts differing from the Company's carrying amount are reflected in other income or expense and the investment in affiliates account.\nCertain amounts for the years ended December 31, 1992 and 1991 have been reclassified to conform to the presentation adopted in 1993. The statements of income and cash flows for 1993, 1992 and 1991 and related notes have been reclassified to present the Energy-related segment as discontinued operations. In addition, the balance sheet as of December 31, 1993 reflects the Energy-related segment as discontinued operations (see \"Discontinued Operations\" note). The balance sheet as of December 31, 1992 has not been reclassified for discontinued operations. Effective June 23, 1993 the Company changed its name to MascoTech, Inc. from Masco Industries, Inc.\nThe Company has a corporate services agreement with Masco Corporation, which at December 31, 1993 owned approximately 42 percent of the Company's Common Stock. Under the terms of the agreement, the Company pays fees to Masco Corporation for various corporate staff support and administrative services, research and development and facilities. Such fees, which are determined principally as a percentage of net sales, including net sales related to discontinued operations, aggregated approximately $11 million in each of 1993, 1992 and 1991.\nCash and Cash Investments. The Company considers all highly liquid debt instruments with an initial maturity of three months or less to be cash and cash investments. The carrying amount reported in the balance sheet for cash and cash investments approximates fair value. At December 31, 1993, the Company has $33 million on deposit with a German bank that is subject to currency exchange rate fluctuations.\nReceivables. Receivables are presented net of allowances for doubtful accounts of $5.1 million and $7.2 million at December 31, 1993 and 1992, respectively.\nInventories. Inventories are stated at the lower of cost or net realizable value, with cost determined principally by use of the first-in, first-out method.\nProperty and Equipment, Net. Property and equipment additions, including significant betterments, are recorded at cost. Upon retirement or disposal of property and equipment, the cost and accumulated depreciation are removed from the accounts, and any gain or loss is included in income. Repair and maintenance costs are charged to expense as incurred.\nDepreciation and Amortization. Depreciation is computed principally using the straight-line method over the estimated useful lives of the assets. Annual depreciation rates are as follows: buildings and land improvements, 2 1\/2 to 10 percent, and machinery and equipment, 6 2\/3 to 33 1\/3 percent. Deferred financing costs are amortized over the lives of the related debt securities. The excess of cost over net assets of acquired companies is amortized using the straight-line method over the period estimated to be benefitted, not exceeding 40 years. At each balance sheet date management assesses whether there has been a permanent impairment of the excess of cost over net assets of acquired companies by comparing anticipated undiscounted future cash flows from operating activities with the carrying amount of the excess of cost over net assets of acquired companies. The factors considered by management in performing this assessment include current operating results, business prospects, market trends, potential product obsolescence, competitive activities and other economic factors. Based on this assessment there was no permanent impairment related to excess of cost over net assets of acquired companies at December 31, 1993.\nMASCOTECH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)\nAt December 31, 1993 and 1992, accumulated amortization of the excess of cost over net assets of acquired companies and patents was $98.4 million and $105.1 million, respectively. Amortization expense was $22.2 million, $22.8 million and $21.2 million in 1993, 1992 and 1991, respectively, including amortization expense of approximately $1.6 million in each year related to discontinued operations.\nIncome Taxes. In January, 1993, the Company adopted Statement of Financial Accounting Standards No. 109 (\"SFAS No. 109\"), \"Accounting for Income Taxes.\" SFAS No. 109 is an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. In estimating future tax consequences, SFAS No. 109 generally allows consideration of all expected future events other than enactments of changes in the tax law or tax rates. Previously, the Company used the SFAS No. 96 asset and liability approach that gave no recognition to future events other than the recovery of assets and settlement of liabilities at their carrying amounts. There was no income statement impact from the adoption of SFAS No. 109 and the required balance sheet reclassification was immaterial. Provision is made for U.S. income taxes on the undistributed earnings of foreign subsidiaries unless such earnings are considered permanently reinvested.\nEarnings (Loss) Per Common Share. Primary earnings (loss) per common share are based on the weighted average number of shares of common stock and common stock equivalents outstanding (including the dilutive effect of options and warrants, utilizing the treasury stock method) of 57.4 million, 60.9 million and 59.7 million in 1993, 1992 and 1991, respectively, and earnings (loss) after deducting preferred stock dividends of $14.9 million, $9.3 million and $9.6 million in 1993, 1992 and 1991, respectively.\nFully diluted earnings (loss) per common share are only presented when the assumed conversion of convertible debentures is dilutive. Fully diluted earnings per share in 1993 were calculated based on 68.8 million weighted average common shares outstanding. Convertible securities did not have a dilutive effect on earnings (loss) in 1992 or 1991. The shares of Dividend Enhanced Convertible Stock DECSSM (the \"DECS\") issued in 1993 (see \"Shareholders' Equity\" note) are common stock equivalents, but are not included in the calculation of primary or fully diluted shares outstanding as such inclusion would be anti-dilutive.\nIn late 1993, approximately 10.4 million shares were issued as a result of the conversion of the 6% Convertible Subordinated Debentures (see \"Shareholders' Equity\" note). If such conversion had taken place at the beginning of 1993, the primary earnings per common and common equivalent share amounts would have approximated the amounts presented for earnings per common and common equivalent share, assuming full dilution, for the year ended December 31, 1993.\nAdoption of Statements of Financial Accounting Standards. The Company expects that the adoption of Statements of Financial Accounting Standards (\"SFAS\") No. 112 \"Employers' Accounting for Postemployment Benefits\", SFAS No. 114 \"Accounting by Creditors for Impairment of a Loan\" and SFAS No. 115 \"Accounting for Certain Investments in Debt and Equity Securities\" will not have a material impact on the financial position or the results of operations of the Company when adopted in 1994 and 1995.\nSUPPLEMENTARY CASH FLOWS INFORMATION:\nSignificant transactions not affecting cash were: in 1993: in addition to the payment by the Company of $87.5 million, the non-cash portion of the issuance of Company Preferred Stock and warrants in exchange for Company Common Stock, Company Preferred Stock and Masco Corporation's holdings of Emco Limited common stock and convertible debentures (see \"Shareholders' Equity\" note); conversion of $187 million of convertible debentures into Company Common Stock\nMASCOTECH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)\n(see \"Shareholders' Equity\" note); and conversion of the Company's TriMas Corporation (\"TriMas\") convertible preferred stock holdings into TriMas common stock (see \"Equity and Other Investments in Affiliates\" note); and in 1991: an exchange of certain operating assets (see \"Dispositions of Other Operations\" note); and the assumption of liabilities of $18 million in partial exchange for the acquisition of Creative Industries Group (see \"Equity and Other Investments in Affiliates\" note).\nIncome taxes paid were $32 million in 1993 and $23 million in 1992. Income tax refunds of $8 million were received in 1991. Interest paid was $82 million, $91 million and $115 million in 1993, 1992 and 1991, respectively.\nDISCONTINUED OPERATIONS:\nIn late November, 1993, the Company adopted a formal plan to divest its Energy-related business segment, which consisted of seven business units. Accordingly, the consolidated statements of income and cash flows and related notes have been reclassified to present such Energy-related segment as discontinued operations. During 1993, two such business units were sold for approximately $93 million, including the sale of one business unit to the Company's equity affiliate, TriMas for $60 million cash. The expected loss from the planned disposition of the Company's Energy-related segment resulted in a fourth quarter 1993 pre-tax charge of approximately $41 million (approximately $22 million after-tax), including a provision for the businesses not yet sold and the deferral of a portion of the gain (approximately $6 million after-tax) related to the sale of the business to TriMas. The Company expects to sell the remaining business units in privately negotiated transactions in 1994.\nSelected financial information for discontinued operations is as follows as at December 31, 1993 and for the period up to the decision to discontinue in 1993 and for the years ended December 31, 1992 and 1991:\nThe unusual relationship of income taxes to pre-tax income in 1992 results principally from foreign losses for which no tax benefit was recorded. Operating and pre-tax income include charges of $6 million in 1991, principally related to the discontinuance of product lines and the cost of restructuring several businesses.\nMASCOTECH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)\nDISPOSITIONS OF OTHER OPERATIONS:\nIn separate transactions from late 1989 to early 1991, the Company divested itself of three subsidiaries and received consideration of approximately $160 million, of which $108 million was received in 1990. The remaining $52 million was received in 1991. In addition, in 1991 the Company disposed of certain equity affiliates, and exchanged operating assets aggregating approximately $27 million.\nThese transactions, including the disposition of Masco Capital Corporation (see \"Equity and Other Investments in Affiliates\" note), resulted in an approximate $22 million pre-tax gain in 1991.\nINVENTORIES:\nEQUITY AND OTHER INVESTMENTS IN AFFILIATES:\nEquity and other investments in affiliates consist primarily of the following common stock interests in publicly traded affiliates:\nMASCOTECH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)\nThe carrying amount of investments in affiliates at December 31, 1993 and 1992 and quoted market values at December 31, 1993 for publicly traded affiliates (which may differ from the amounts that could have been realized upon disposition) are as follows:\nIn 1988, the Company transferred several businesses to TriMas, a publicly traded, diversified manufacturer of commercial, industrial and consumer products. In exchange, the Company received $128 million principal amount of 14% Subordinated Debentures (which were subsequently redeemed resulting in prepayment premium income to the Company of $9 million in 1992 and $4 million in 1991), $70 million (liquidation value) of 10% Convertible Participating Preferred Stock and 9.3 million shares of TriMas common stock.\nDuring the second quarter of 1992, TriMas sold 9.2 million shares of newly issued common stock at $9.75 per share in a public offering, which reduced the Company's common equity ownership interest in TriMas to 28 percent from 41 percent. As a result, the Company recognized a pre-tax gain of $16.7 million from the change in the Company's common equity ownership interest in TriMas. In late 1993, the TriMas 10% Convertible Participating Preferred Stock held by the Company was converted at a conversion price of $9 per share into 7.8 million shares of TriMas common stock, increasing the Company's common equity ownership interest in TriMas to 43 percent.\nIn 1993, the Company sold a business unit to TriMas for $60 million cash (see \"Discontinued Operations\" note).\nIncluded in notes receivable are approximately $10.7 million of notes which resulted from the sale by the Company of one million shares of its TriMas common stock holdings to members of the Company's executive management group in mid-1989. The notes have an effective interest rate of nine percent, payable at maturity in mid-1994. Ownership and resale of certain of such shares is restricted and subject to the continuing employment of these executives.\nTriMas' Board of Directors declared a 100 percent stock distribution (one additional share for every share held) to its shareholders effective July 19, 1993. TriMas share amounts and per share prices have been restated to reflect this distribution.\nThe Company's holdings in Emco Limited (\"Emco\") were acquired from Masco Corporation in 1993 (see \"Shareholders' Equity\" note). Emco is a major, publicly traded, Canadian based\nMASCOTECH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) manufacturer and distributor of building and other industrial products with annual sales of approximately $800 million.\nAt December 31, 1992, the Company had an approximate 47 percent common equity ownership interest in Titan Wheel International, Inc. (\"Titan\"), a manufacturer of wheels and other products for agricultural, construction and other off-highway equipment markets. In May, 1993, Titan completed an initial public offering of three million shares of common stock at $15 per share (including 292,000 shares held by the Company), reducing the Company's common equity ownership interest in Titan to 24 percent. The Company's ownership interest was further reduced in late 1993 to 21 percent as a result of the issuance of additional common shares by Titan in connection with an acquisition by Titan. These transactions resulted in 1993 gains aggregating approximately $12.8 million pre-tax (principally in the second quarter) as a result of the sale of shares held by the Company and from the change in the Company's common equity ownership interest in Titan.\nDuring the second quarter of 1991, the Company acquired the remaining 50 percent equity ownership interest of Creative Industries Group, which had sales in 1990 of approximately $150 million.\nIn 1991, Masco Capital Corporation (\"Masco Capital\") sold its principal asset and used the proceeds to repay its outstanding bank borrowings and to make loan repayments and distributions to its shareholders, whereby the Company received approximately $65 million (including repayment of $44 million advanced during 1991). In addition, the Company subsequently sold its 50 percent equity ownership interest in Masco Capital to the other shareholder, Masco Corporation, for approximately $50 million (which resulted in a pre-tax gain of approximately $5 million) and contingent amounts based on the future value of certain assets held by Masco Capital.\nIn addition to its equity and other investments in publicly traded affiliates, the Company retains interests in privately held manufacturers of automotive components, including the Company's 50 percent common equity ownership interests in Autostyle, Inc., a manufacturer of reaction injection molded automotive components, and Elbi-Hi Ram, Inc., a manufacturer of electrical and electronic automotive components.\nApproximate combined condensed financial data of the Company's equity affiliates (including Emco after date of investment, Creative Industries Group through date of acquisition (second quarter 1991) and Masco Capital through date of disposition) are as follows:\nMASCOTECH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)\nEquity and interest income from affiliates consists of the following:\nPROPERTY AND EQUIPMENT, NET:\nDepreciation expense totalled $48 million, $46 million and $47 million in 1993, 1992 and 1991, respectively. These amounts include depreciation expense of approximately $8 million in each year related to discontinued operations.\nACCRUED LIABILITIES:\nMASCOTECH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)\nLONG-TERM DEBT:\nIn 1993, the Company entered into a new $675 million revolving credit agreement with a group of banks, replacing its prior bank credit agreement (which had consisted of a revolving credit facility and a bank term loan at December 31, 1992). Amounts outstanding under the revolving credit agreement are due in January, 1997; however, under certain circumstances, the due date may be extended to July, 1998. The interest rates applicable to the revolving credit agreement are principally at alternative floating rates provided for in the agreement (approximately four percent at December 31, 1993).\nThe revolving credit agreement requires the maintenance of a specified level of shareholders' equity, with limitations on the ratio of senior debt to earnings, long-term debt (at December 31, 1993 additional borrowing capacity of approximately $380 million was available under this agreement), intangible assets and the acquisition of Company Capital Stock. Under the most restrictive of these provisions, $120 million of retained earnings was available at December 31, 1993 for the payment of cash dividends and the acquisition of Company Capital Stock.\nThe 6% Convertible Subordinated Debentures were converted into Company Common Stock in late 1993 (see \"Shareholders' Equity\" note).\nThe senior subordinated notes contain limitations on the payment of cash dividends and the acquisition of Company Capital Stock. In late 1993, the Company called for redemption, on February 1, 1994, the $250 million of 10 1\/4% Senior Subordinated Notes. During 1992, the Company repurchased, in open-market transactions, approximately $67 million of its 10% Senior Subordinated Notes at prices approximating face value.\nIn early 1994, the Company issued, in a public offering, $345 million of 4 1\/2% Convertible Subordinated Debentures due December 15, 2003. These debentures are convertible into Company Common Stock at $31 per share. The net proceeds were used to redeem the $250 million of 10 1\/4% Subordinated Notes (called in late 1993 for redemption on February 1, 1994) and to reduce other indebtedness. In the fourth quarter of 1993, the Company recognized a $5.8 million pre-tax extraordinary charge ($3.7 million after-tax) related to the call premium (1.25%) and unamortized prepaid debenture expense associated with the call for early extinguishment of the $250 million of 10 1\/4% Subordinated Notes. The 10 1\/4% Subordinated Notes are classified as non-current as the Company had the intent and the ability to maintain these borrowings on a long-term basis (due to the issuance of the\nMASCOTECH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)\n4 1\/2% Convertible Subordinated Debentures). The maturities of long-term debt during the next five years are as follows (in millions): 1994 -- $3; 1995 -- $234; 1996 -- $1; 1997 -- $303; and 1998 -- $0.\nSHAREHOLDERS' EQUITY:\nOn March 31, 1993, the Company acquired from Masco Corporation 10 million shares of Company Common Stock, recorded at $100 million, $77.5 million of the Company's previously outstanding 12% Exchangeable Preferred Stock, and Masco Corporation's holdings of Emco Limited common stock and convertible debentures, recorded at $80.8 million. In exchange, Masco Corporation received $100 million (liquidation value) of the Company's 10% Exchangeable Preferred Stock, seven-year warrants to purchase 10 million shares of Company Common Stock at $13 per share, recorded at $70.8 million, and $87.5 million in cash. The transferable warrants are not exercisable by Masco Corporation if an exercise would increase Masco Corporation's common equity ownership interest in the Company above 35 percent. The cash portion of this transaction is included in the accompanying statement of cash flows as cash used for investing activities of $87.5 million. As part of this transaction, as modified in late 1993, Masco Corporation agreed to purchase from the Company, at the Company's option\nMASCOTECH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)\nthrough March, 1997, up to $200 million of subordinated debentures. In late 1993, the Company redeemed the 10% Exchangeable Preferred Stock for its $100 million liquidation value.\nIn July, 1993, the Company issued 10.8 million shares of 6% Dividend Enhanced Convertible Stock (DECS) at $20 per share ($216 million aggregate liquidation amount) in a public offering (classified as Convertible Preferred Stock). The net proceeds from this issuance were used to reduce the Company's indebtedness. On July 1, 1997, each of the then outstanding shares of the DECS will convert into one share of Company Common Stock, if not previously redeemed by the Company or converted at the option of the holder, in both cases for Company Common Stock.\nEach share of the DECS is convertible at the option of the holder anytime prior to July 1, 1997 into .806 of a share of Company Common Stock, equivalent to a conversion price of $24.81 per share of Company Common Stock. Dividends are cumulative and each share of the DECS has 4\/5 of a vote, voting together as one class with holders of Company Common Stock.\nBeginning July 1, 1996, the Company, at its option, may redeem the DECS at a call price payable in shares of Company Common Stock principally determined by a formula based on the then current market price of Company Common Stock. Redemption by the Company, as a practical matter, will generally not result in a call price that exceeds one share of Company Common Stock or is less than .806 of a share of Company Common Stock (resulting from the holder's conversion option).\nThe Company's 6% Convertible Subordinated Debentures were called for redemption in late 1993. Substantially all holders, including Masco Corporation, exercised their right to convert these debentures into Company Common Stock (at a conversion price of $18 per share), resulting in the issuance of approximately 10.4 million shares of Company Common Stock.\nThe Company's consideration for a 1987 acquisition included two million shares of Company Common Stock which were subject to a stock value guarantee agreement. During the second quarter of 1993, the Company's stock value guarantee obligation was settled, resulting in no material financial impact to the Company.\nThe Company commenced paying cash dividends on its Common Stock in August, 1993 and declared three and paid two quarterly dividends in 1993, each in the amount of $.02 per common share.\nSTOCK OPTIONS AND AWARDS:\nFor the three years ended December 31, 1993, stock option data pertaining to stock option plans for key employees of the Company and affiliated companies are as follows:\nMASCOTECH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)\nAs of December 31, 1993, options have been granted and are outstanding with exercise prices ranging from $4 1\/2 to $26 per share, the fair market value at the dates of grant.\nPursuant to restricted stock incentive plans, the Company granted long-term incentive awards, net, for 202,000, 251,000 and 675,000 shares of Company Common Stock during 1993, 1992 and 1991, respectively, to key employees of the Company and affiliated companies. The unamortized costs of incentive awards, aggregating approximately $20 million at December 31, 1993, are being amortized over the ten-year vesting periods.\nAt December 31, 1993 and 1992, a combined total of 5,631,000 and 5,759,000 shares, respectively, of Company Common Stock were available for the granting of options and incentive awards under the above plans.\nEMPLOYEE BENEFIT PLANS:\nPension and Profit-Sharing Benefits. The Company sponsors defined-benefit pension plans for most of its employees. In addition, substantially all salaried employees participate in noncontributory profit-sharing plans, to which payments are approved annually by the Directors. Aggregate charges to income under these plans were $10.9 million in 1993, $10.3 million in 1992 and $8.3 million in 1991, including approximately $.9 million in each year related to discontinued operations.\nNet periodic pension cost for the Company's defined-benefit pension plans includes the following components for the three years ended December 31, 1993:\nMajor assumptions used in accounting for the Company's defined-benefit pension plans are as follows:\nMASCOTECH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)\nThe funded status of the Company's defined-benefit pension plans at December 31, 1993 and 1992 is as follows:\nPostretirement Benefits. The Company provides postretirement medical and life insurance benefits for certain of its active and retired employees.\nEffective January 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 106 \"Employers' Accounting for Postretirement Benefits Other Than Pensions\" (\"SFAS 106\") for its postretirement benefit plans. This statement requires the accrual method of accounting for postretirement health care and life insurance based on actuarially determined costs to be recognized over the period from the date of hire to the full eligibility date of employees who are expected to qualify for such benefits. In conjunction with the adoption of SFAS 106, the Company elected to recognize the transition obligation on a prospective basis and accordingly, the net transition obligation is being amortized over 20 years. Net periodic postretirement benefit cost includes the following components for the year ended December 31, 1993:\nThe incremental cost in 1993 of accounting for postretirement health care and life insurance benefits under SFAS 106 amounted to approximately $1.7 million.\nMASCOTECH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)\nPostretirement benefit obligations, none of which are funded, are summarized as follows for the year ended December 31:\nThe discount rate used in determining the accumulated postretirement benefit obligation was seven percent. The assumed health care cost trend rate in 1993 was 12 percent, decreasing to an ultimate rate in the year 2000 of seven percent. If the assumed medical cost trend rates were increased by one percent, the accumulated postretirement benefit obligation would increase by $2.6 million and the aggregate of the service and interest cost components of net periodic postretirement benefit cost would increase by $.2 million.\nSEGMENT INFORMATION:\nThe Company's business segments involve the production and sale of the following:\nTransportation-Related Products:\nPrecision products, generally produced using advanced metalworking technologies with significant proprietary content, and aftermarket products for the transportation industry.\nSpecialty Products:\nArchitectural -- Doors, windows, security grilles and office panels and partitions for commercial and residential markets.\nOther -- Products manufactured principally for the defense industry.\nAmounts related to the Company's Energy-related segment have been presented as discontinued operations.\nCorporate assets consist primarily of cash and cash investments, equity and other investments in affiliates and notes receivable.\nMASCOTECH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)\n- --------------- (A) Included within this segment are sales to one customer of $324 million, $268 million and $217 million in 1993, 1992 and 1991, respectively; sales to another customer of $222 million, $216 million and $201 million in 1993, 1992 and 1991, respectively; and sales to a third customer of $186 million, $184 million and $126 million in 1993, 1992 and 1991, respectively.\n(B) Included in 1991 operating profit (principally Transportation-Related Products and Architectural Products) are charges of $27 million to reflect the expenses related to the discontinuance of product lines, and the costs of restructuring several businesses. Other expense, net in 1992 and 1991, includes approximately $15 million and $14 million, respectively, to reflect disposition costs related to idle facilities and other long-term assets.\nMASCOTECH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)\nOTHER INCOME (EXPENSE), NET:\nGains realized from sales of marketable securities are determined on a specific identification basis at the time of sale.\nINCOME TAXES:\nMASCOTECH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)\nThe components of the net deferred taxes as at December 31, 1993 were as follows:\nThe following is a reconciliation of tax computed at the U.S. federal statutory rate to the provision for income taxes (credit) allocated to income (loss) from continuing operations before income taxes (credit) and extraordinary loss:\nProvisions for deferred income taxes by temporary difference components for the years ended December 31, 1992 and 1991 were as follows:\nMASCOTECH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)\nFAIR VALUE OF FINANCIAL INSTRUMENTS:\nIn accordance with Statement of Financial Accounting Standards No. 107, \"Disclosures about Fair Value of Financial Instruments,\" the following methods were used to estimate the fair value of each class of financial instruments:\nNotes Receivable and Other Assets. Fair values of financial instruments included in notes receivable and other assets were estimated using various methods including quoted market prices and discounted future cash flows based on the incremental borrowing rates for similar types of investments. In addition, for variable-rate notes receivable that fluctuate with the prime rate, the carrying amounts approximate fair value.\nLong-Term Debt. The carrying amount of bank debt and certain other long-term debt instruments approximate fair value as the floating rates inherent in this debt reflect changes in overall market interest rates. The fair values of the Company's subordinated debt instruments are based on quoted market prices. The fair values of certain other debt instruments are estimated by discounting future cash flows based on the Company's incremental borrowing rate for similar types of debt instruments.\nThe carrying amounts and fair values of the Company's financial instruments at December 31, 1993 and 1992 are as follows:\nMASCOTECH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)\nINTERIM AND OTHER SUPPLEMENTAL FINANCIAL DATA (UNAUDITED):\nMASCOTECH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)\nCertain amounts presented above have been reclassified to present a segment of the Company's business as discontinued operations (see \"Discontinued Operations\" note).\nResults for the second quarters of 1993 and 1992 include pre-tax income of approximately $9 million and $25 million, respectively, as a result of gains associated with the sale of common stock through public offerings by equity affiliates and, in 1992, a prepayment premium related to the redemption of debentures held by the Company. This income was largely offset by costs and expenses related to cost reduction initiatives, the restructuring of certain operations and product lines, adjustments to the carrying value of certain long-term assets, and other costs and expenses.\nResults for the third quarter of 1993 were reduced by a charge of approximately $.04 per common share reflecting the recently increased 1993 federal corporate income tax rate.\nThe fourth quarter of 1993 net loss includes the effect of a $5.8 million pre-tax extraordinary charge ($3.7 million after-tax or $.06 per common share) related to the early extinguishment of subordinated debt (see \"Long-Term Debt\" note). The fourth quarter of 1993 net loss also includes an after-tax charge of approximately $22 million ($.38 per common share) related to the disposition of a segment of the Company's business (see \"Discontinued Operations\" note).\nThe 1993 results include the benefit of approximately $11.5 million pre-tax income ($6.7 million after-tax or $.12 per common share), primarily in the third and fourth quarters, resulting from net gains from sales of marketable securities.\nThe 1992 results include the benefit of approximately $4 million pre-tax income ($2 million after-tax or $.04 per common share), primarily in the fourth quarter, resulting from net gains from sales of marketable securities.\nThe 1993 income (loss) per common share amounts for the quarters do not total to the full year amounts due to the changes in the number of common shares outstanding during the year and the dilutive effect of first, second and third quarter 1993 results.\nThe calculation of earnings per common and common equivalent share for the fourth quarter of 1993 results in dilution for income from continuing operations, assuming full dilution. Therefore, the fully diluted earnings per share computation is used for all computations, even though the result is anti-dilutive for one of the per share amounts.\nMASCOTECH, INC.\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONCLUDED)\nThe following supplemental unaudited financial data combine the Company with Masco Capital Corporation (through date of disposition) and TriMas and have been presented for analytical purposes. The Company had a common equity ownership interest in TriMas of approximately 43 percent at December 31, 1993 and 28 percent at December 31, 1992. The interests of the other common shareholders are reflected below as \"Equity of other shareholders of TriMas.\" All significant intercompany transactions have been eliminated.\nMASCOTECH, INC.\nFINANCIAL STATEMENT SCHEDULES\nPURSUANT TO ITEM 14(A)(2) OF FORM 10-K\nANNUAL REPORT TO THE SECURITIES AND EXCHANGE COMMISSION\nFOR THE YEAR ENDED DECEMBER 31, 1993\nMASCOTECH, INC.\nFINANCIAL STATEMENT SCHEDULES\nSchedules, as required for the years ended December 31, 1993, 1992 and 1991:\nMASCOTECH, INC. SCHEDULE II. AMOUNTS RECEIVABLE FROM RELATED PARTIES AND UNDERWRITERS, PROMOTERS, AND EMPLOYEES OTHER THAN RELATED PARTIES FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991\nAll amounts receivable are related to an incentive program of the Company that has been disclosed in previous proxy statements of the Company and that will be described in the Company's definitive Proxy Statement for its 1994 Annual Meeting of Stockholders to be filed on or before April 30, 1994.\nNOTES:\n(A) Represents accrual of interest.\n(B) Amounts receivable (including interest of $3,400,000) from employees are due June 30, 1994. The stated rate of interest is 7%.\n(C) Represents the discount pertaining to the difference between the stated rate of interest of 7% and the effective rate of interest of approximately 9%. Activity in 1992 includes discount amortization of $550,000 interest of $710,000 and the cancellation of the receivable balance of $1,350,000 for an exempt employee. Activity in 1991 includes discount amortization of $340,000 and interest of $1,040,000.\nMASCOTECH, INC.\nSCHEDULE V. PROPERTY, PLANT AND EQUIPMENT\nFOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991\nNOTES: (A) Includes property, plant and equipment additions of $20 million in 1991 obtained through the acquisition of companies.\n(B) Includes property, plant and equipment from the disposition of certain operations in 1991.\n(C) Adjustments and reclassifications to present the Energy-related segment as discontinued operations in 1993, and the effect of foreign currency translation.\nMASCOTECH, INC.\nSCHEDULE VI. ACCUMULATED DEPRECIATION, DEPLETION AND AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT\nFOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991\nNotes:\n(A) Includes accumulated depreciation of property, plant and equipment from the disposition of operations in 1991.\n(B) Adjustments and reclassifications to present the Energy-related segment as discontinued operations in 1993, and the effect of foreign currency translation.\nMASCOTECH, INC.\nSCHEDULE VIII. VALUATION AND QUALIFYING ACCOUNTS\nFOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991\nNotes:\n(A) Allowance of companies reclassified for discontinuance of Energy-related segment in 1993, and other adjustments, net in 1991.\n(B) Deductions, representing uncollectible accounts written off, less recoveries of accounts written off in prior years.\nMASCOTECH, INC.\nSCHEDULE X. SUPPLEMENTARY INCOME STATEMENT INFORMATION\nFOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991\nNotes:\nOther captions provided for under this schedule are excluded, as the amounts related to such captions are not material.\nAmounts reflect the reclassification of the Company's Energy-related segment as discontinued operations.","section_15":""}
{"filename":"715969_1993.txt","cik":"715969","year":"1993","section_1":"ITEM 1. BUSINESS - ------- -------- (A) GENERAL -------\nUnited Water Resources Inc. (United Water) was incorporated on February 25, 1983. United Water is a New Jersey corporation with its principal office at 200 Old Hook Road, Harrington Park, New Jersey 07640, telephone number 201-784-9434. The principal subsidiary of United Water, Hackensack Water Company (Hackensack), was incorporated by an act of the New Jersey Legislature in 1869. A number of local water companies have been merged into Hackensack since its reorganization in 1880. Spring Valley Water Company Incorporated (Spring Valley) was incorporated under the laws of New York in 1893 and is wholly owned by Hackensack. Other wholly-owned subsidiaries of United Water include Rivervale Realty Company, Inc. (Rivervale), which is engaged in real estate acquisitions and development, leasing and sales, golf course operations and consulting activities; Laboratory Resources, Inc. (Laboratory Resources), a network of private laboratories that provide a variety of laboratory testing services; and Mid-Atlantic Utilities Corporation (Mid-Atlantic), which seeks high growth areas in need of public water or sewer systems and the management necessary to maintain them and is involved with the service and installation of meters. United Water also owns 50% of the common stock of the Dundee Water Power and Land Company.\nHackensack and Spring Valley, engaged solely in the water service business, provide water service to residential, commercial and industrial customers and fire protection within their franchise territories. Hackensack and Spring Valley are subject to regulation by the New Jersey Board of Regulatory Commissioners (BRC) and the New York Public Service Commission (PSC), respectively. At December 31, 1993, the distribution facility that provides water service to these utilities is comprised of approximately 2,955 miles of pipeline.\nUnited Water Resources Inc.\nHackensack supplies water service to 175,044 customers in 60 New Jersey municipalities in most of Bergen County and in the northern part of Hudson County. The total population served is about 750,000 persons (1990 Census).\nHackensack's principal source of water supply is the Hackensack River and its tributary streams, with a watershed of 113 square miles above the dam at Oradell, New Jersey, together with diversions into the Oradell Reservoir from an additional 55 square miles of watershed on the Saddle River, Long Swamp Brook and Sparkill Creek. The water supply of Hackensack is supplemented by ground water supplies derived from wells and by the purchase of water from the systems of Jersey City and the Passaic Valley Water Commission. Hackensack obtains stream flow benefits from Spring Valley which owns and operates an impounding reservoir, Lake DeForest, on the Hackensack River in Rockland County, New York. In addition, Hackensack has available additional water supply from the Wanaque South Project. The Wanaque South Project, which was completed in 1987, was the joint undertaking of Hackensack and the North Jersey District Water Supply Commission. Hackensack has a 50% interest in the utility plant of the project and shares project operating expenses.\nSpring Valley supplies water service to 59,508 customers in substantially all of Rockland County, New York, outside of the Palisades Interstate Park and the areas served by the water systems of the Villages of Nyack and Suffern. Its service area extends from Tomkins Cove on the north, south to the New Jersey state line and comprises about 121 square miles, with a population of about 250,000 persons (1990 Census). Spring Valley's principal source of supply is derived from wells and surface supplies, including Lake DeForest Reservoir and Cedar Pond Brook.\nUnited Water Resources Inc.\nHackensack and Spring Valley have valid franchises authorizing them to conduct their present operations in all or substantially all of the territories in which services are rendered and to maintain their pipes in the streets and highways of these territories. Hackensack and Spring Valley have the right to secure their supplies of water from their present sources. All such franchises and rights are subject to alteration, suspension or repeal by the States of New Jersey and New York, respectively. Their properties are also subject to the exercise of the right of eminent domain as provided by law. Neither Hackensack nor Spring Valley engages in any significant operations outside its franchised territories.\nThe business of Hackensack and Spring Valley is substantially free from direct competition with other public utilities, municipalities and other general public agencies. Both Hackensack and Spring Valley provide water that meets or surpasses the minimum standards of the Federal Safe Drinking Water Act of 1974, as amended.\nRivervale is a non-regulated business engaged in real estate acquisitions and development, leasing and sales, golf course operations and consulting activities. Rivervale owns raw and income producing properties in Bergen and Essex Counties, New Jersey; and Orange, Westchester and Rockland Counties, New York. Rivervale continues to seek and receive municipal and other governmental approvals for several projects, both in New Jersey and New York. Out of its total holdings of approximately 767 acres, various approvals have been received for 198 acres of property in several parcels in northern New Jersey and Rockland County, New York. Applications are pending for projects on another 137 acres.\nLaboratory Resources performs a wide range of environmental analyses for consulting engineers, industry, public water suppliers, wastewater treatment facilities and governmental agencies. In 1993, Laboratory Resources received U.S. Army and Navy environmental cleanup certifications allowing them to enter into a new growing market. In December 1993, Laboratory Resources was awarded a $1 million Army base cleanup contract. Negotiations for other federal contracts are in progress.\nUnited Water Resources Inc.\nMid-Atlantic owns and operates several small water and sewerage utility systems. These include water supply, sewage collection and sewage transmission companies providing service for approximately 2,752 customers in Vernon Township and Mt. Arlington, New Jersey. Mid-Atlantic is subject to regulation by the BRC. At December 31, 1993, its distribution facility is comprised of approximately 26 miles of pipeline. Through the acquisitions of several small companies, Mid-Atlantic expects to add approximately 900 additional customers early in 1994.\nIn 1993, Metering Services Inc. sold its high technology division and retained the water meter installation division.\nUnited Water and its subsidiaries employed 706 persons as of December 31, 1993.\nUnited Water Resources Inc.\n(B) FINANCIAL INFORMATION ABOUT BUSINESS SEGMENTS ---------------------------------------------\nIn September 1993, United Water and GWC Corporation (GWC), a Delaware water utility holding company, entered into a definitive agreement and plan of merger (Merger Agreement), pursuant to which GWC will merge with and into United Water. The Merger Agreement provides that 70% of each holder's GWC common stock will be converted into the right to receive 1.2 shares of United Water common stock and the remaining 30% will be converted at the election of the holder thereof into the right to receive either 1.2 shares United Water Series A Cumulative Convertible Preference Stock or an equivalent amount in cash. At December 31, 1993, United Water and GWC had 20,216,000 and 11,066,600 shares of common stock outstanding, respectively. In addition, the outstanding GWC Series A 7-5\/8% Cumulative Preferred Stock would be converted into shares of United Water preferred stock with equal stated dividends and similar rights and designations.\nUnited Water Resources Inc.\nThe Merger Agreement contains various provisions with respect to the conduct of each company's business pending consummation of the merger, such as prohibiting increases in United Water's common stock quarterly dividend above $.23 per share. Such provisions are not expected to have an adverse effect on United Water and its subsidiaries or limit the ability of United Water or its subsidiaries to operate in any material way.\nDiscussions contained in the following pages of this Report (except where noted) pertain to United Water and its subsidiaries, and projections or estimates contained therein do not reflect the pending merger. For additional information on the merger, reference is made to United Water's Form 8-K's dated September 16, 1993 and March 10, 1994, which are filed as exhibits to this Report and incorporated herein by reference. On March 10, 1994 United Water announced that the shareholders of United Water and GWC overwhelmingly approved the companies' merger agreement at independently conducted shareholder meetings held that day.\nUnited Water Resources Inc.\nITEM 2.","section_1A":"","section_1B":"","section_2":"ITEM 2. PROPERTIES ------- ----------\nHackensack owns and operates two impounding reservoirs, Oradell (3,507 million gallon (MG) capacity) and Woodcliff Lake (871 MG capacity) located in Bergen County, New Jersey and one impounding reservoir, Lake Tappan (3,853 MG capacity), partially located in Bergen County, New Jersey and partially located in Rockland County, New York. In addition, Hackensack obtains stream flow benefits from Spring Valley, which owns and operates an additional impounding reservoir, Lake DeForest (5,671 MG capacity), on the Hackensack River in Rockland County. The Wanaque South Project adds as much as 40 million gallons per day (MGD) to Hackensack's water supply.\nHackensack and Spring Valley own and operate numerous wells throughout their systems. Hackensack also owns and operates a treatment and pumping plant at the Oradell Reservoir, which is comprised of raw and filtered water pumping facilities and purification works. This plant has raw and filtered water pumping capabilities in excess of 200 MGD. At Secaucus, New Jersey, Hackensack owns and operates a treatment and pumping plant for water supplied from the Jersey City aqueduct. This plant is capable of treating 18 MGD. Spring Valley has a pumping and treatment plant adjacent to Lake DeForest Reservoir, in the Town of Clarkstown, New York, with a capability of 20 MGD. A small pumping station and pressure filter plant, with a capacity of 1.5 MGD, located in the Town of Stony Point, New York, treats water from Cedar Pond Brook.\nHackensack and Spring Valley own and maintain various reservoirs, standpipes, elevated tanks, transmission and distribution mains, hydrants, services and meters throughout the distribution system, including booster pump stations. In connection with the Wanaque South Project, Hackensack owns a 17-mile aqueduct from the Wanaque Reservoir to the Oradell Reservoir, along with a booster pumping station. Hackensack also owns 50% of the other elements of the Wanaque South Project, including an 11-mile aqueduct and related pump stations, and has contracted rights to yields derived from the Monksville Reservoir.\nUnited Water Resources Inc.\nOn January 6, 1987, Spring Valley received New York State Department of Environmental Conservation (DEC) approval to build the proposed Ambrey Project, an impounding reservoir and treatment plant. However, construction of the project cannot begin until Spring Valley's water demands have reached a certain \"trigger point\" as determined by average daily water demands. On April 19, 1993, the Company requested the DEC's permission to adjust the Ambrey trigger mechanism to reflect current conditions and water demand characteristics. A decision on this matter is pending.\nHackensack and Spring Valley own and occupy office buildings in Harrington Park and Hackensack, New Jersey; and in West Nyack, New York, respectively.\nRivervale owns approximately 767 acres of land and three (3) major office buildings. Its properties are located in Bergen and Essex Counties, New Jersey; and Orange, Westchester and Rockland Counties, New York.\nLaboratory Resources owns and operates three (3) commercial testing laboratories in Teterboro, New Jersey; Brooklyn, Connecticut; and Bethlehem, Pennsylvania.\nMid-Atlantic owns and operates public water supply, sewage collection and sewage transmission companies in Morris and Sussex Counties, New Jersey.\nUnited Water Resources Inc.\nITEM 3.","section_3":"ITEM 3. LEGAL PROCEEDINGS ------- ------------------\nOn January 12, 1990, the New Jersey Board of Public Utilities (BPU), predecessor of the Board of Regulatory Commissioners (BRC), and the New Jersey Watershed Property Review Board (WRB) approved Hackensack's transfer of approximately 290 acres of excess golf course land to Rivervale. Thereafter, two environmental advocacy groups, the Environmental Defense Fund (EDF) and Save the Watershed Action Network (SWAN), filed a consolidated appeal with New Jersey's Appellate Division contesting the approval. In June 1991, the Appellate Division remanded the matter back to the BPU and the WRB for further proceedings. Thereafter, Hackensack sought Certification to the Supreme Court of New Jersey. However, on October 30, 1991, the Supreme Court decided that it would not entertain that appeal.\nOn February 5, 1991, the BPU denied a petition by the EDF for an enforcement order regarding development of the watershed lands, and in the alternative, a petition for reconsideration of the December 17, 1984 BPU decision approving transfer of approximately 717 acres from Hackensack to Rivervale. The February 5 Order also established a buffer zone of 500 feet for certain parcels of the property. On February 20, 1991, the EDF filed a Notice of Appeal to the New Jersey Appellate Division contesting the February 5 Order denying the reconsideration. Hackensack Water Company subsequently filed a cross appeal contesting the February 5 Order, solely as it related to the 500 foot buffer zone segment.\nOn June 3, 1993, Hackensack and Rivervale executed a stipulation and agreement with EDF\/SWAN, the Staff of the BRC and the New Jersey Department of the Public Advocate's office settling the above litigation subject to approval by the WRB and the BRC. The stipulation reinstates the transfer of the Golf Course Lands to Rivervale while providing for reacquisition by Hackensack of 355 acres transferred to Rivervale in 1984.\nUnited Water Resources Inc.\nBased upon decisions rendered from the WRB on July 6, 1993 and the BRC on August 5, 1993, several lawsuits were settled between Hackensack and two environmental groups related to the land transfers that occurred in 1984 and 1990.\nThe settlement upheld the 1990 transfer from Hackensack to Rivervale of approximately 290 acres of land that are unconditionally and permanently deed restricted to golf course and country club uses. The settlement also required Hackensack to reacquire 355 acres of land which were transferred to Rivervale in 1984. This acreage was added to Hackensack's reservoir protective holdings and rate base.\nThe transfer price of the acreage being returned to Hackensack's plant accounts was valued at $26 million, reflecting development approvals that occurred during the nine years that the land was held by Rivervale. Approximately $11 million (which includes interest) in proceeds from the 1990 golf course transfer to Rivervale was deferred for refund to water customers. To permanently reduce the rate impact of the reacquisition by Hackensack of the 355 acres, $4 million of the proceeds was applied against the utility plant accounts, resulting in a net increase in utility rate base of $22 million. The remaining $7 million of the proceeds will be applied as credits on customer bills to completely offset the impact of the rate increase of approximately 3.1%, or $3.5 million, which became effective October 12, 1993, in recognition of the increment to Hackensack's rate base. It is anticipated that the credits on customer bills will be made for approximately two years. Due to regulatory treatment, the effects of the intercompany transaction were not eliminated in consolidation. As a result of the settlement, Rivervale recognized sales proceeds of $26 million offset by costs of approximately $15.5 million associated with the land.\nIn a separate matter, an appeal was filed with New Jersey's Intermediate Appellate Court by the Division of Rate Counsel, Department of the Public Advocate, from a 1990 BPU Order relating to the Petition of Hackensack for approval of a grant of a ground lease to Sterling Drug Capital Corporation, approving the long-term lease of certain Hackensack property for use as part of a golf course. The appeal contested those provisions of the Order directing that revenues realized from the lease be shared equally\nUnited Water Resources Inc.\nbetween Hackensack's shareholders and customers, and sought to have the lease proceeds inure to the exclusive benefit of the customers. The matter was argued before the Appellate Division and a decision was rendered on February 11, 1993, affirming the 1990 BPU Order.\nThe Paterson Municipal Utilities Authority filed suit against the Hackensack Water Company and the North Jersey District Water Supply Commission. Summons and Complaint were served on August 8, 1990. The suit was based on alleged ownership of various water rights in the Passaic River owned by the Authority and which the Authority claimed were, or may have been, affected by diversions from the Wanaque South Project, in which Hackensack Water Company is an equal partner with the North Jersey District Water Supply Commission. The Company's Motion for Summary Judgement, dismissing the Complaint, was granted on July 23, 1992. On October 5, 1992, the Paterson Municipal Utilities Authority filed a Notice of Appeal. The Appeal is pending.\nThe PSC, on February 20, 1985, authorized the sale and transfer of 23 acres of land from Spring Valley to Rivervale. Subsequently, the PSC initiated an administrative proceeding arising from an Order inquiring into the price for the transfer of the land. In September 1990, the PSC required Spring Valley to record a deferred credit that reduced rate base by $1.2 million to reflect the appreciated value of the property as of the date of sale of the land. In January of 1991, Spring Valley filed an appeal regarding the PSC decision; however, on February 13, 1992, the Appellate Division affirmed the action of the PSC. The effect of that decision on United Water has been recognized by an after-tax charge against income of $809,000 in 1991. The Company filed with the New York Court of Appeals a Motion for Leave to Appeal, which was denied on September 17, 1992. The Company has submitted a proposal to the PSC to make a one-time customer refund through billed credits of a portion of the deferred credit. The Company anticipates a PSC decision on its request in April 1994.\nOn August 6, 1991, Rivervale Realty entered into a modification agreement relating to the outstanding proceeds being held in escrow from the sale of the Emerson Country Club. The modification\nUnited Water Resources Inc.\nprovided for additional collateral to secure the purchase, the loan of the escrow monies in the amount of $13.1 million to the Buyer, and a release of the remaining portion of the escrow funds in the amount of $4.4 million to Rivervale. The release to the Buyer is secured by a note and mortgage on the Country Club and certain other properties owned by the Buyer, together with a guaranty from the Buyer's parent company, as additional security for the substitution of collateral. The Buyer failed to make its scheduled March 1992 and all subsequent payments, and as a result, the note was placed in a non-accrual status. Rivervale has begun an action in foreclosure, which the Buyer has challenged. By Superior Court Order dated February 10, 1993 Rivervale was awarded possession of the course and operated the facility during the 1993 season. On March 18, 1994 Rivervale and Bird Hills entered into a stipulation of settlement whereby Rivervale would pay Bird Hills $2 million in return for additional property acquired by Bird Hills. The stipulation also requires Bird Hills to give up all claims to the golf course parcel. The closing of the settlement is tentatively scheduled for March 30, 1994.\nBased upon advice from counsel, management believes Hackensack, Spring Valley and Rivervale have meritorious defenses in all of the aforementioned claims which remain pending and intends to contest them vigorously. The likelihood that the ultimate resolution will have a material effect upon the financial position or results of operations of United Water or its subsidiaries is considered to be remote.\nUnited Water Resources Inc.\nITEM 4.","section_4":"ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ------- ----------------------------------------------------------- During the fourth quarter of 1993, there were no matters submitted to a vote of security holders.\nUnited Water Resources Inc.\nPART II -------\nITEM 5.","section_5":"ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED ------- ----------------------------------------------------------- STOCKHOLDER MATTERS --------------------\nUnited Water Resources' common stock is traded on the New York Stock Exchange under the symbol UWR. The high and low sales prices for United Water's common stock for 1993, 1992 and 1991 and the dividends paid on the common stock each quarter were as follows:\nThe high and low stock prices from January 1 to February 28, 1994, were 14.750 and 13.750. The number of holders of record of United Water's common stock as of January 31, 1994 were 19,099.\nUnited Water Resources Inc.\nBalance Sheet Data (at end of period) - -------------------------------------\nUnited Water Resources Inc.\nITEM 7.","section_6":"","section_7":"ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ------- ----------------------------------------------------------------- AND RESULTS OF OPERATIONS ---------------------------- LIQUIDITY AND CAPITAL RESOURCES CAPITAL REQUIREMENTS\nUnited Water Resources' (United Water) existing utility subsidiaries expect to spend $89 million on construction programs over the next five years. Expenditures in 1994 and 1995 are projected to be $16.4 million and $18.1 million, respectively. These estimates are subject to continuous review and actual expenditures may vary. The construction programs include the installation of transmission and distribution facilities.\nThe utilities plan to continue to fund their construction programs primarily through internal cash generation. Additional funding, as necessary, will be obtained through the sale of securities, available credit lines, and capital infusions by United Water from its dividend reinvestment and stock purchase plans. The amount and timing of the use of these proceeds and of future financings will depend on actual construction expenditures, the timeliness and adequacy of rate relief, the availability and cost of capital, and the ability to meet interest and fixed charge coverage requirements.\nIn 1991, United Water implemented two enhancements to its dividend reinvestment and stock purchase plans. The first allows plan participants to make additional cash investments in United Water shares at a 5% discount from market price with no brokerage fees. The second provides our utility customers with a 5% discount on their initial investment. The amount received from all plans was: 1993-$20.5 million; 1992-$17.3 million; 1991-$9.7 million.\nIn July 1993, Hackensack Water Company (Hackensack) redeemed $10 million of its $20 million, 9-3\/4% Series First Mortgage Bonds, due 2006. Hackensack redeemed the remaining $10 million in January 1994. In 1993, Hackensack filed a petition requesting the New Jersey Board of Regulatory Commissioners' (BRC) approval to issue and sell $40 million of tax-exempt refunding bonds.\nUnited Water Resources Inc.\nHackensack received BRC approval in February 1994 and plans to use the proceeds of the issue to redeem $20 million 8-3\/4% bonds and $20 million 8% bonds in 1994. On March 22, 1994, Hackensack issued $20 million 5.80% 1994 Series A term bonds and $20 million 5.9% 1994 Series B term bonds, due March 1, 2024.\nIn November 1993, Rivervale Realty Company (Rivervale) reduced its existing $9.5 million Atrium building mortgage by $1.5 million and refinanced the remaining $8.0 million with a floating rate term loan, due 2000. The interest rate will be established every 30 days and is based on London Interbank Offered Rate (LIBOR) plus a premium (4.25% at December 31, 1993).\nIn December 1993, the New York State Environmental Facilities Corporation (EFC) issued $12 million of 5.65% tax-exempt Water Facilities Revenue Bonds (1993 Bonds) due in 2023 with optional redemption provisions on behalf of Spring Valley Water Company Incorporated (Spring Valley). The proceeds will be used to finance certain construction projects through 1995.\nAt December 31, 1993, United Water had available $57.5 million of unused short-term bank lines of credit and $9 million in cash and temporary investments.\nMERGER ------ On September 15, 1993, United Water entered into a definitive agreement to merge with GWC Corporation (GWC), a company based in Wilmington, Delaware. GWC is the parent company of General Waterworks Corporation (General Waterworks), a utility holding company. Under the terms of the agreement, GWC will merge into United Water so that General Waterworks will become a wholly-owned subsidiary of United Water through an exchange of common stock, convertible preference stock, and cash for GWC common stock. The total value of the transaction is approximately $196 million. Lyonnaise des Eaux-Dumez (Lyonnaise), the majority shareholder of GWC, will receive 70% of its consideration in common stock of United Water at a ratio of 1.2 shares of United Water to 1 share of GWC\nUnited Water Resources Inc.\nand the remaining 30% in convertible preference stock. The minority shareholders of GWC will receive 70% of their consideration in common stock of United Water at a ratio of 1.2 shares of United Water to 1 share of GWC. They will also have a choice of taking the remaining 30% in either (i) cash equal to 1.2 times the average market price of United Water common stock on the New York Stock Exchange for 20 trading days prior to the closing, or (ii) an equivalent value of United Water convertible preference stock. The merger is expected to be tax free to the extent common shareholders of GWC receive common stock or preference stock of United Water.\nOn November 30, 1993, the boards of directors of United Water and GWC voted to proceed with the proposed merger subject to various closing conditions. These include approvals from the shareholders of both companies and certain state regulatory agencies. A registration statement (S-4) and joint proxy statement was filed with the Securities and Exchange Commission on February 3, 1994. On March 10, 1994, special shareholder meetings of both companies were held to vote on the merger proposal, resulting in the shareholders of United Water and GWC overwhelmingly approving the companies' merger agreement.\nLyonnaise, a French multi-national corporation and one of Europe's largest water purveyors, currently owns approximately 82% of GWC shares. Lyonnaise voted its shares for the merger in the same proportion as the minority shareholders of GWC. Under the terms of the agreement, Lyonnaise will own approximately 26% of the outstanding United Water shares after the merger. Lyonnaise will enter into a 12-year Governance Agreement with United Water which, subject to certain conditions, will govern the relationship of the parties.\nAs a result of the merger, United Water will become the second largest investor-owned water utility in the country. The service territory will serve more than 2 million people in 14 states. Utility operating revenues are anticipated to double and consolidated assets are expected to exceed $1 billion.\nUnited Water Resources Inc.\nRATE MATTERS\nSPRING VALLEY\nIn 1990 and 1989, Spring Valley deferred revenues totaling $505,000 and $1.2 million, respectively, related to reductions in pension expense and federal income tax rates pursuant to a New York Public Service Commission (PSC) order. As a result of the September 1990 rate application settlement with the PSC, Spring Valley began to refund these revenues to customers. In February 1993, Spring Valley implemented a September 1992 PSC decision which revised its tariff design and discontinued the application of federal income tax revenue credits on customer bills. Spring Valley is using unamortized revenue deferrals to recover the cost of a customer conservation program which began in the second quarter of 1993 and is anticipated to conclude in 1995.\nIn July 1992, Spring Valley applied to the PSC for permission to increase its annual revenues by $5 million, or 14.4%, to offset the effects of continued investment in plant facilities and increases in operating expenses. On May 12, 1993, the PSC rendered its decision. The PSC Opinion No. 93-9 allowed Spring Valley an overall rate of return of 8.75% and a return on equity of 10.5%. The opinion provided for an increase in annual revenues of approximately $1.9 million, or 5.7%, which became effective on May 30, 1993. The PSC also allowed Spring Valley to recover approximately $850,000 of previously deferred expenses and required it to refund certain revenue credits of approximately $1 million immediately. This action, which resulted in a one-time increase in revenues and various expenses in the second quarter of 1993, did not have a material effect on net income. The PSC's decision also permitted Spring Valley to submit a second stage filing after February 1, 1994 to recover increases in property taxes, salaries and wages, and medical benefits that were not provided for in their previous determination. In addition, in its second stage filing, Spring Valley will seek rate recognition of its other postretirement benefits on an accrual basis. In February 1994, Spring Valley filed a request to\nUnited Water Resources Inc.\nincrease revenues by approximately $1.6 million, or 4.4%. Spring Valley anticipates a PSC decision on its request in April 1994.\nThe PSC's May 1993 decision also directed Spring Valley to institute a Revenue Reconciliation Clause (RRC), which requires Spring Valley to reconcile billed revenues with the pro forma revenues that were used to set rates. Any variances outside a 1% range are accrued or deferred for subsequent recovery from or refund to customers. As a result of the hot weather experienced during the summer of 1993, the RRC resulted in the deferral of $1.4 million, which will be used to recover certain deferred costs. The remaining balance will be refunded to Spring Valley customers along with previous RRC credit balances over a three-year period beginning in July 1994.\nIn 1990, the PSC modified its earlier decision regarding the 1985 transfer of 23 acres of land from Spring Valley to Rivervale. They ordered Spring Valley to record a deferred credit that reduced rate base by $1.9 million. In 1991, Spring Valley filed an appeal with the New York State Supreme Court-Appellate Division. In February 1992, a decision was rendered on the appeal affirming the PSC order. The effect of that decision on United Water has been recognized by an after-tax charge against income of $809,000 in 1991. Spring Valley has submitted a proposal to the PSC to make a one-time customer refund through bill credits of a portion of the deferred credit. A PSC decision is anticipated in April 1994.\nHACKENSACK WATER\nBased upon decisions that were rendered by the New Jersey Watershed Property Review Board on July 6, 1993, and the BRC on August 5, 1993, several lawsuits were settled between Hackensack and two environmental groups related to the land transfers that occurred in 1984 and 1990.\nThe settlement upheld the 1990 transfer from Hackensack to Rivervale of approximately 290 acres of land that are unconditionally and permanently deed restricted to golf course and country club\nUnited Water Resources Inc.\nuses. The settlement also required Hackensack to reacquire 355 acres of land which were transferred to Rivervale in 1984. This acreage was added to Hackensack's reservoir protective holdings and rate base.\nThe transfer price of the acreage being returned to Hackensack's plant accounts was valued at $26 million, reflecting development approvals that occurred during the nine years that the land was held by Rivervale. Approximately $11 million (which includes interest) in proceeds from the 1990 golf course transfer to Rivervale was deferred for refund to Hackensack customers. To permanently reduce the rate impact of the reacquisition by Hackensack of the 355 acres, $4 million of the proceeds was applied against the utility plant accounts resulting in a net increase in utility rate base of $22 million. The remaining $7 million of the proceeds are being applied as credits on customer bills to completely offset the impact of the rate increase of approximately 3.1%, or $3.5 million, which became effective October 12, 1993, in recognition of the increment to Hackensack's rate base. It is anticipated that the credits on customer bills will be made for approximately two years. Due to regulatory treatment, the effects of the intercompany transaction were not eliminated in consolidation.\nREAL ESTATE ACTIVITIES\nThe intercompany land transfer settlement discussed above had a positive impact on Rivervale's revenues. Rivervale continues to receive municipal and other governmental approvals for projects in New Jersey and New York. Various approvals have been received pertaining to 198 acres of property in several parcels in northern New Jersey and southern New York. Rivervale is pursuing joint ventures, sales, or direct development opportunities for selected properties in its portfolio. Applications are pending for projects on another 137 acres.\nFunding for Rivervale's real estate activities is anticipated to be obtained from internally generated funds from the sales of properties, rental income, revenues from golf course operations, consulting activities, and borrowings and advances from United Water, as required. The timing and\nUnited Water Resources Inc.\nmagnitude of additional funding for development activities will depend upon the attainment of necessary approvals and market conditions.\nRivervale currently projects spending $27 million over the next five years for capital expenditures on its existing portfolio. Expenditures in 1994 and 1995 are projected to be $4.8 million and $2.5 million, respectively. Funding for these expenditures is projected to be available from internally generated cash.\nRESULTS OF OPERATIONS\nOVERVIEW\nUnited Water's consolidated net income for 1993 of $20 million increased 27% from $15.8 million in 1992. Net income per common share for 1993 was $1.03 versus 87 cents for the same period last year, despite a 6.9% rise in the average number of common shares outstanding. This increase in consolidated net income is primarily attributable to the settlement of litigation surrounding the land transfers as well as the contribution from utility operations.\nREVENUES The increases (decreases) in revenues from the prior periods are attributable to the following factors:\nUnited Water Resources Inc.\nThe rate impact of 1.2% in utility revenues in 1993 resulted from a 5.7% Spring Valley rate increase in May 1993, a 3.1% Hackensack rate increase in October 1993 and the recognition of approximately $1 million of deferred revenue credits relating to Spring Valley's rate case.\nThe 5.6% consumption impact on utility revenues in 1993 is attributable to the 6.8% and 4.6% increase in Hackensack's and Spring Valley's consumption, respectively, due to an unusually warm and dry summer. Pursuant to the PSC Revenue Reconciliation Clause, Spring Valley deferred $1.4 million of revenues in 1993.\nThe $23.2 million or 14.1% increase in real estate revenues was the result of a $26 million land transfer between Hackensack and Rivervale, offset by reduced revenues of land sales to third parties.\nTotal revenues in 1992 were 1.9% above those in 1991, reflecting the contribution of approximately $4.7 million from real estate sales and $2 million from rental activities and reduced customer usage compared with 1991, when the utilities set new daily pumping records during a dry summer.\nUnited Water Resources Inc.\nCOSTS AND EXPENSES\nThe changes in operating expenses from the prior years were due to the following:\nOperation and maintenance expenses increased $25.2 million or 33.5% from 1992. This increase is primarily due to expenses related to the cost of the transferred real estate of $15.5 million, a $4.1 million valuation reserve relating to Rivervale properties, and the recognition of deferred expenses relating to the Spring Valley rate case of approximately $850,000. Higher operational expenses due to greater system demands, contracted labor costs, and higher salaries and wages also contributed to this increase. The 3.9% increase in 1992 over 1991 was primarily attributable to costs of property sold associated with real estate activities.\nDepreciation increased by 2.3% in 1993 and 6.1% in 1992. The higher depreciation expense in both years was primarily due to additional facilities placed in service and the application of higher utility depreciation rates resulting from Hackensack's rate settlement, which was effective in the second quarter of 1991, and the increase in Spring Valley's composite rates from 2% to 2.2% in the second quarter of 1993.\nGeneral taxes increased $1.2 million, or 4%, over 1992, due principally to higher revenue based taxes of 2.1% and an increase of 8.4% in property related taxes. The decline in general taxes of $1.3 million, or 4.4%, in 1992 from 1991 is mainly attributable to the 9.4% decrease in revenue based taxes which was offset by a 13.7% increase in property related taxes.\nUnited Water Resources Inc.\nINTEREST AND OTHER\nConsolidated interest expense decreased 1% in 1993 from 1992 and 2% from 1991, due to lower interest rates on short-term borrowings, the reduction of long-term debt and an increase in short-term borrowings.\nIn 1992, the allowance for funds used during construction decreased 32% from 1991 following the recognition of additional expenditures related to utility plant being placed in service.\nOther income in 1992 decreased 49% from 1991, due to a reduction in interest rates, average temporary cash investments and funds held on deposit.\nINCOME TAXES\nThe effective income tax rates on income before preferred stock dividends were 36% in 1993, 31.1% in 1992 and 31.3% in 1991. In 1993, the provision for income taxes increased $4.5 million, or 56.2% over 1992, due mainly to the effect of the land transfer, higher water sales, the Spring Valley rate decision and the increase in the federal income tax rate. The rate decision resulted in the recognition of deferred IRS audit adjustments of $946,000 relating to the previously settled 1981 through 1988 IRS audit. In 1992, the provision for income taxes decreased 1% from 1991 primarily as the result of lower pre-tax earnings. An analysis of income taxes is included in Note 10 to the financial statements.\nEFFECTS OF INFLATION\nOperating income from utility operations is normally not materially affected by inflation because cost increases generally lead to proportionate increases in revenues allowed through the regulatory process. However, there is a lag in the recovery of higher expenses through the regulatory process, and therefore, high inflation could have a detrimental effect on the company until rate increases are received.\nUnited Water Resources Inc.\nConversely, lower inflation and lower interest rates tend to result in reductions in the rates of return allowed by the utility commissions, as has happened over the last several years.\nUnited Water Resources Inc.\nITEM 8.","section_7A":"","section_8":"ITEM 8. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND ------- ---------------------------------------------------- SUPPLEMENTARY DATA -------------------\nAll other schedules are omitted because they are not applicable, or the required information is shown in the consolidated financial statements or notes thereto. Financial statements of one 50%-owned company have been omitted because the registrant's proportionate share of net income and total assets of the company is less than 20% of the respective consolidated amounts, and the investment in and the amount advanced to the company is less than 20% of consolidated total assets.\nUnited Water Resources Inc.\nREPORT OF INDEPENDENT ACCOUNTANTS\nThe Board of Directors United Water Resources\nIn our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of United Water Resources and its subsidiaries at December 31, 1993 and 1992, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1993, in conformity with generally accepted accounting principles. 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 of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.\nAs discussed in Notes 8 and 10 to the consolidated financial statements, the Company changed its method of accounting for postretirement benefits other than pensions and income taxes, effective January 1, 1993.\nPRICE WATERHOUSE Hackensack, New Jersey February 24, 1994\nCONSOLIDATED BALANCE SHEET\nUnited Water Resources and Subsidiaries\nTHE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.\nSTATEMENT OF CONSOLIDATED INCOME\nUnited Water Resources and Subsidiaries\nSTATEMENT OF CONSOLIDATED COMMON EQUITY\nUnited Water Resources and Subsidiaries\nTHE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.\nSTATEMENT OF CONSOLIDATED CASH FLOWS\nUnited Water Resources and Subsidiaries\nSupplemental disclosures of cash flow information: Cash paid during the year for: Interest (net of amount capitalized) $ 21,328 $ 21,388 $ 21,790 Income taxes $ 2,915 $ 5,023 $ 6,215\nTHE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.\nSTATEMENT OF CONSOLIDATED CAPITALIZATION\nUnited Water Resources and Subsidiaries\nTHE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.\nUnited Water Resources Inc.\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS\nNOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:\nThe consolidated financial statements include the accounts of United Water Resources and its wholly owned subsidiaries (United Water).\nUnited Water's principal utility subsidiaries, Hackensack Water Company (Hackensack) and Spring Valley Water Company Incorporated (Spring Valley), are subject to regulation by the New Jersey Board of Regulatory Commissioners (BRC) and the New York Public Service Commission (PSC), respectively. Their accounting policies comply with the applicable uniform systems of accounts prescribed by these regulatory commissions and conform to generally accepted accounting principles as applied to rate regulated public utilities, which allows, among other things, the recognition of intercompany profit in situations where it is probable such profit will be recovered in the ratemaking process.\nUTILITY PLANT: Utility plant is recorded at cost, which includes direct and indirect labor and material costs associated with construction activities, related operating overheads and an allowance for funds used during construction (AFUDC). AFUDC is not current cash income; it represents the cost of borrowed funds used for construction purposes and a reasonable rate on other funds used. The amount of AFUDC related to equity funds was: 1993-$359,000; 1992-$275,000; 1991-$399,000.\nUtility property retired or otherwise disposed of in the normal course of business is charged to accumulated depreciation, with salvage (net of removal cost) credited thereto, and no gain or loss is recognized. The costs of property repairs, replacements and renewals of minor property items are included in maintenance expense.\nUtility plant includes Hackensack's 50% interest in the Wanaque South Water Supply Project, which, at original cost, totaled $51 million at December 31, 1993 and 1992. The net book value\nUnited Water Resources Inc.\nat December 31, 1993 was $46 million and $46.8 million at December 31, 1992. Hackensack's share of project operating expenses is included in United Water's consolidated operation and maintenance expenses.\nREAL ESTATE: Real estate properties are carried at the lower of cost, which includes original purchase price and direct development costs, or net realizable value. Real estate taxes and interest costs are capitalized during the development period. The amount of interest capitalized in 1993 was $2.6 million and $3 million in 1992 and 1991. Real estate operating revenues include rental income, proceeds from the disposition of real estate properties and revenues from golf course operations.\nProceeds and costs related to pending real estate transactions which do not qualify as completed sales for accounting purposes have been recorded under the deposit method. At December 31, 1993 and 1992, pending proceeds of approximately $17 million have been recorded as deferred credits.\nUNAMORTIZED DEBT EXPENSE: Debt premium, debt discount and debt expense are amortized to income over the lives of the applicable issues.\nPREPAID AND DEFERRED EMPLOYEE BENEFITS: As of December 31, 1993, the prepaid employee benefits include $5.9 million of prepaid pension costs and $4.6 million of prepaid and deferred postretirement health care benefits. Most of the postretirement costs relate to employees and retirees of Hackensack and Spring Valley. Hackensack and Spring Valley have been advised by the BRC and PSC, respectively, that they are allowed to defer accrued postretirement health care costs in excess of amounts included in rates. At December 31, 1993, $3.4 million was deferred for recovery in future rates.\nREVENUES: Hackensack records on its books the estimated amount of accrued but unbilled revenues. Spring Valley does not accrue unbilled revenues. Spring Valley currently has $3.8 million of unamortized revenue deferrals which are available to offset other incremental deferred costs or be refunded to customers over a three-year period. Pursuant to PSC orders, Spring Valley refunded $2.3 million, $1.4 million, and $1.9 million of these revenues to customers in 1993, 1992, and 1991, respectively. Spring Valley also deferred revenues of $1.4 million, $392,000, and $1.9 million in 1993, 1992, and 1991,\nUnited Water Resources Inc.\nrespectively. These deferrals were related to revenues in excess of amounts allowed in rates, reductions in federal income taxes and reductions in pension expenses.\nDEPRECIATION: Depreciation of plant and real estate properties is computed on the straight-line method based on the estimated service lives of the properties. Utility plant depreciation rates are prescribed by the regulatory commissions. The provisions for depreciation in 1993, 1992 and 1991 were equivalent to 2.2%, 2.2%, and 2.1%, respectively, of average depreciable utility plant in service. For federal income tax purposes, depreciation is computed using accelerated methods and, in general, with shorter depreciable lives as permitted under the Internal Revenue Code.\nINCOME TAXES: United Water files a consolidated federal income tax return. Effective January 1, 1993, the company adopted Statement of Financial Accounting Standards (SFAS) No. 109, \"Accounting for Income Taxes.\" SFAS No. 109 requires the company to adjust its recorded deferred income tax balances to reflect an estimate of its future tax liability based on temporary differences between the financial and tax basis of assets and liabilities. This adjustment includes deferred taxes for utility temporary differences not previously recognized. It also includes the effect on the liability of changes in tax laws and rates. The adoption of SFAS No. 109 resulted in the recording of a deferred tax liability and recoverable income taxes of $20.2 million at January 1, 1993, which is reflected on the balance sheet, with no material effect on net income. The recoverable income taxes represent the probable future increase in revenues that will be received through future ratemaking proceedings for the recovery of these deferred taxes.\nFor 1992 and 1991, the provision for income taxes represents the estimated amounts payable for the period and net deferred taxes relating to differences between income for accounting and tax purposes for certain items as discussed in Note 10. Deferred taxes were provided for timing differences between financial and income tax reporting, except where not allowed by regulation.\nUnited Water Resources Inc.\nInvestment tax credits arising from property additions are deferred and amortized over the estimated service lives of the related properties.\nSTATEMENT OF CASH FLOWS: United Water considers all highly liquid investments with original maturities of three months or less to be temporary cash investments.\nUnited Water Resources Inc.\nNOTE 2 - SHORT-TERM BORROWING AGREEMENTS:\nUnited Water has credit lines with several banks which allow for aggregate short-term borrowings of up to $73 million. Borrowings under these credit lines bear interest at a rate between the London Interbank Offered Rate (LIBOR) and the prime lending rate. There was $15.5 million outstanding on these lines at December 31, 1993, at interest rates ranging from 3.5% to 4.4%.\nUnited Water maintains balances and pays commitment fees under arrangements with certain of these banks to compensate them for services and to support these lines of credit. There are no legal restrictions placed on the withdrawal or other use of these bank balances.\nUnited Water Resources Inc.\nNOTE 3 - LONG-TERM DEBT:\nLong-term debt repayable over the next five years is: 1994-$19.8 million; 1995-$1.6 million; $1996-$1.7 million; 1997-$12.6 million and 1998-$3.6 million. Substantially all of the utility plant is subject to first mortgage liens.\nIn July 1993, Hackensack redeemed $10 million of its $20 million, 9-3\/4% Series, First Mortgage Bonds, due 2006. Hackensack redeemed the remaining $10 million in January 1994. In 1993, Hackensack filed a petition requesting BRC approval to issue and sell $40 million of tax- exempt refunding bonds. Hackensack received BRC approval in February 1994 and plans to use the proceeds of the issue to redeem $20 million 8-3\/4% bonds and $20 million 8% bonds in 1994. On March 22, 1994, Hackensack issued $20 million 5.80% 1994 Series A term bonds and $20 million 5.90% 1994 Series B term bonds, due March 1, 2024.\nIn November 1993, Rivervale reduced its existing $9.5 million Atrium building mortgage by $1.5 million and refinanced the remaining $8 million with a floating rate term loan due 2000. The interest rate will be established every 30 days and is based on LIBOR plus a premium (4.25% at December 31, 1993).\nIn December 1993, the New York State Environmental Facilities Corporation (EFC) issued $12 million of 5.65%, tax-exempt, Water Facilities Revenue Bonds (1993 Bonds) due 2023 with optional redemption provisions on behalf of Spring Valley to finance construction programs through 1995. The bonds are insured as to the payment of interest and principal by the AMBAC Indemnity Corporation.\nIn February 1992, Laboratory Resources obtained a $600,000 loan to finance leasehold improvements at its new facility. The loan bears interest at a floating prime (6% at December 31, 1993) with a maturity date of March 1997. Principal is payable in monthly installments.\nUnited Water Resources Inc.\nIn May 1991, United Water obtained a $5 million loan to finance an investment in an unaffiliated New Jersey water company. The loan bears interest at floating LIBOR (4.8125% at December 31, 1993) with a maturity date of October 1994. Management expects to refinance this loan on a long- term basis.\nUnited Water Resources Inc.\nNOTE 4 - CONSTRUCTION EXPENDITURES:\nThe expenditures for the utilities' construction programs over the next five years are expected to total $89 million. Construction expenditures for 1994 and 1995 are estimated to be $16.4 million and $18.1 million, respectively. Rivervale currently projects spending $27 million over the next five years for capital expenditures on its current portfolio. Expenditures in 1994 and 1995 are projected to be $4.8 million and $2.5 million, respectively.\nUnited Water Resources Inc.\nNOTE 5 - PREFERRED STOCK:\nCumulative preferred stock of utility subsidiaries with mandatory redemption is subject to sinking fund requirements. These mandatory requirements total $260,000 in each of the years 1994 through 1997, and total $573,000 in 1998. In addition, optional sinking fund provisions can be exercised and redemptions made at specific prices for all preferred stock issues. Redemptions require payment of accrued and unpaid dividends to the date fixed for redemption.\nIn March 1992, Hackensack issued $15 million of 7-3\/8% cumulative preferred stock, with a $2.1 million annual sinking fund requirement beginning in 2001, for redemption of first mortgage bonds and to provide funds for its ongoing capital programs. Optional redemption of this new series begins in 1997.\nCumulative preferred stock has been redeemed as follows:\nUnited Water Resources Inc.\nNOTE 6 - INCENTIVE STOCK PLANS:\nUnder the Management Incentive Plan, the following options have been granted to key employees:\nThese options are currently exercisable and represent the only stock options outstanding at December 31, 1993. A total of 1,140,625 shares are reserved for issuance under the plan.\nIn May 1993, the shareholders approved the creation of dividend units to be issued in conjunction with stock options granted under the plan. One dividend unit may be attached to an unexercised option to purchase a share of common stock. This will entitle the option holder to accrue the aggregate dividends actually payable on one share of common stock while the dividend unit is in effect. The dividend units are designed to create an incentive for option holders tied to the dividend payments on the common stock. United Water recorded $47,000 in 1993 of compensation expense with respect to this plan.\nUnited Water Resources Inc.\nIn May 1988, the shareholders approved a Restricted Stock Plan for key employees. United Water issued 7,500 shares in 1993; 16,353 shares in 1992; and 12,661 shares in 1991 in connection with the plan and such shares are earned by the recipients over a 5-year period. United Water recorded $301,000 in 1993, $241,000 in 1992 and $265,000 in 1991 of compensation expense with respect to this plan.\nUnited Water Resources Inc.\nNOTE 7 - SHAREHOLDER RIGHTS PLAN:\nIn July 1989, the board of directors of United Water approved a Shareholder Rights Plan designed to protect shareholders against unfair and unequal treatment in the event of a proposed takeover. It also guards against partial tender offers and other hostile tactics to gain control of United Water without paying all shareholders a fair price. Under the plan, each share of United Water's common stock also represents one Series A Participating Preferred Stock Purchase Right (Right) until the Rights become exercisable. The Rights attach to all of United Water's common stock outstanding as of August 1, 1989, or subsequently issued, and expire on August 1, 1999.\nThe Rights would be exercisable only if a person or group acquired 20% or more of United Water's common stock or announced a tender offer that would lead to ownership by a person or group of 20% or more of the common stock.\nIn certain cases where an acquirer purchased more than 20% of United Water's common stock, the Rights would allow shareholders (other than the acquirer) to purchase shares of United Water's common stock at 50% of market price, diminishing the value of the acquirer's shares and diluting the acquirer's equity position in United Water. If United Water were acquired in a merger or other business combination transaction, under certain circumstances the Rights could be used to purchase shares in the acquirer at 50% of the market price. Subject to certain conditions, if a person or group acquired 20% or more of United Water's common stock, United Water's board of directors may exchange each Right held by shareholders (other than the acquirer) for one share of common stock or 1\/100 of a share of Series A Participating Preferred Stock. If an acquirer successfully purchased 80% of United Water's common stock after tendering for all of the stock, the Rights would not operate. If holders of a majority of the shares of United Water's common stock approved a proposed acquisition under specified circumstances, the Rights would be redeemed at one cent each. They could also be redeemed by United Water's board of directors for one cent each at any time prior to the acquisition of 20% of the common stock by an acquirer.\nUnited Water Resources Inc.\nOn September 15, 1993, United Water's Shareholder Rights Plan was amended in connection with United Water's execution of a merger agreement with GWC Corporation. The amendment generally excepts the majority stockholder of GWC Corporation and its affiliates and associates from triggering the Rights through the execution of the merger agreement, the performance of the transactions contemplated therein or otherwise.\nUnited Water Resources Inc.\nNOTE 8 - EMPLOYEE BENEFITS:\nPOSTRETIREMENT BENEFIT PLANS OTHER THAN PENSIONS:\nIn January 1993, the company adopted SFAS No. 106, \"Employers' Accounting for Postretirement Benefits Other Than Pensions.\" This new standard requires that employers recognize these benefits on an accrual basis rather than on a cash basis.\nThe company sponsors one non-contributory defined benefit postretirement plan that covers hospitalization, major medical benefits, and life insurance benefits for salaried and non-salaried employees. The company is funding its postretirement health care benefits through contributions to Voluntary Employees' Beneficiary Association (VEBA) Trusts.\nThe following sets forth the plans' funded status reconciled with the amounts recognized in the company's balance sheet as of December 31, 1993:\nUnited Water Resources Inc.\nNet periodic postretirement benefit cost for the year ended December 31, 1993 includes the following components:\nThe assumed discount rate is 7.75% and the expected rate of return on plan assets is 8.25%, except for Hackensack's non-bargaining plan, which has an expected after-tax yield on assets of 5%. The associated health care cost trend rate used in measuring the postretirement benefit obligation at December 31, 1993 was 14.2%, gradually declining to 5.5% in 2002 and thereafter. Increasing the assumed health care cost trend rate by one percentage point in each year will increase the APBO as of December 31, 1993 by $3.9 million to a total of $38.9 million and the aggregate service and interest cost components of net periodic postretirement benefit cost for 1993 by $896,000 to a total of $5.5 million. Hackensack and Spring Valley have been advised by the BRC and PSC, respectively, that they are allowed to defer postretirement health care costs in excess of those currently included in rates. At December 31, 1993, $3.4 million was deferred for recovery in future rates. Most of the company's postretirement costs relate to employees and retirees of Hackensack and Spring Valley. Therefore, adoption of SFAS No. 106 has not had a material effect on consolidated net income.\nDEFINED BENEFIT PENSION PLAN:\nMost employees are covered by trusteed non-contributory defined benefit pension plans under which benefits are based upon years of service and the employee's compensation during the last five\nUnited Water Resources Inc.\nyears of employment. United Water's policy is to fund amounts accrued for pension expense to the extent deductible for federal income tax purposes. It is expected that no funding will be made for 1993.\nNet periodic pension cost includes the following components at year end:\nThe status of the funded plans at December 31, 1993 and 1992 was as follows:\nUnited Water Resources Inc.\nSignificant actuarial assumptions used in the foregoing calculations were as follows:\nCertain categories of employees are covered by non-funded supplemental plans. The projected benefit obligations of these plans at December 31, 1993, totaled $5.2 million. The unfunded accumulated benefit obligation of $4.9 million has been recorded in other deferred credits and liabilities and an intangible pension asset of $1.5 million recorded in other deferred charges and assets at December 31, 1993.\nUnited Water made contributions of $552,000, $562,000 and $516,000 in 1993, 1992 and 1991, respectively, to a defined contribution savings plan.\nUnited Water Resources Inc.\nNOTE 9 - RATE MATTERS: SPRING VALLEY:\nIn 1990 and 1989, Spring Valley deferred revenues totaling $505,000 and $1.2 million, respectively, related to reductions in pension expense and federal income tax rates pursuant to a PSC order. As a result of the September 1990 rate application settlement with the PSC, Spring Valley began to refund these revenues to customers. In February 1993, Spring Valley implemented a September 1992 PSC decision which revised its tariff design and discontinued the application of federal income tax revenue credits on customer bills. Spring Valley is using unamortized revenue deferrals to recover the cost of a customer conservation program which began in the second quarter of 1993 and is anticipated to conclude in 1995.\nIn July 1992, Spring Valley applied to the PSC for permission to increase its annual revenues by $5 million, or 14.4%, to offset the effects of continued investment in plant facilities and increases in operating expenses. On May 12, 1993, the PSC rendered its decision. The PSC Opinion No. 93-9 allowed Spring Valley an overall rate of return of 8.75% and a return on equity of 10.5%. The opinion provided for an increase in annual revenues of approximately $1.9 million, or 5.7%, which became effective on May 30, 1993. The PSC also allowed Spring Valley to recover approximately $850,000 of previously deferred expenses and required it to refund certain revenue credits of approximately $1 million immediately. This action, which resulted in a one-time increase in revenues and various expenses in the second quarter of 1993, did not have a material effect on net income. The PSC's decision also permitted Spring Valley to submit a second stage filing after February 1, 1994 to recover increases in property taxes, salaries and wages, and medical benefits that were not provided for in their previous determination. In addition, in its second stage filing, Spring Valley will seek rate recognition of its other postretirement benefits. In February 1994, Spring Valley filed a request to increase revenues by\nUnited Water Resources Inc.\napproximately $1.6 million, or 4.4%. Spring Valley anticipates a PSC decision on its request in April 1994.\nThe PSC's May 1993 decision also directed Spring Valley to institute a Revenue Reconciliation Clause (RRC), which requires Spring Valley to reconcile billed revenues with the pro forma revenues that were used to set rates. Any variances outside a 1% range are accrued or deferred for subsequent recovery from or refund to customers. As a result of the hot weather experienced during the summer of 1993, the RRC resulted in the deferral of $1.4 million, which will be used to recover certain deferred costs. The remaining balance will be refunded to Spring Valley customers along with previous RRC credit balances over a three-year period beginning in July 1994.\nIn 1990, the PSC modified its earlier decision regarding the 1985 transfer of 23 acres of land from Spring Valley to Rivervale. They ordered Spring Valley to record a deferred credit that reduced rate base by $1.9 million. In 1991, Spring Valley filed an appeal with the New York State Supreme Court-Appellate Division. In February 1992, a decision was rendered on the appeal affirming the PSC order. The effect of that decision on United Water has been recognized by an after-tax charge against income of $809,000 in 1991. Spring Valley has submitted a proposal to the PSC to make a one-time customer refund through bill credits of a portion of the deferred credit. Spring Valley anticipates a PSC decision on its request in April 1994.\nHACKENSACK WATER:\nBased upon decisions rendered by the New Jersey Watershed Property Review Board on July 6, 1993, and the BRC on August 5, 1993, several lawsuits were settled between Hackensack and two environmental groups related to the land transfers that occurred in 1984 and 1990.\nThe settlement upheld the 1990 transfer from Hackensack to Rivervale of approximately 290 acres of land that are unconditionally and permanently deed restricted to golf course and country club\nUnited Water Resources Inc.\nuses. The settlement also required Hackensack to reacquire 355 acres of land which were transferred to Rivervale in 1984. This acreage was added to Hackensack's reservoir protective holdings and rate base.\nThe transfer price of the acreage being returned to Hackensack's plant accounts was valued at $26 million, reflecting development approvals that occurred during the nine years that the land was held by Rivervale. Approximately $11 million (which includes interest) in proceeds from the 1990 golf course transfer to Rivervale was deferred for refund to Hackensack customers. To permanently reduce the rate impact of the reacquisition by Hackensack of the 355 acres, $4 million of the proceeds was applied against the utility plant accounts, resulting in a net increase in utility rate base of $22 million. The remaining $7 million of the proceeds will be applied as credits on customer bills to completely offset the impact of the rate increase of approximately 3.1%, or $3.5 million, which became effective October 12, 1993, in recognition of the increment to Hackensack's rate base. It is anticipated that the credits on customer bills will be made for approximately two years. Due to regulatory treatment, the effects of the intercompany transaction were not eliminated in consolidation.\nUnited Water Resources Inc.\nNOTE 10 - INCOME TAXES:\nNEW ACCOUNTING STANDARD:\nIn January 1993, the company implemented SFAS No. 109, \"Accounting for Income Taxes.\" SFAS No. 109 requires that United Water adjust its recorded deferred income tax balances to reflect an estimate of its future tax liability based on temporary differences between the financial and tax basis of assets and liabilities. This adjustment includes deferred taxes for utility temporary differences not previously recognized. It also includes the effect on the liability of changes in tax laws and rates.\nThe tax effect of this requirement will be considered in the ratemaking process, resulting in the recognition of recoverable income taxes. The adoption of SFAS No. 109 resulted in the recording of a deferred tax liability and recoverable income taxes of $20.2 million at January 1, 1993, which is reflected on the balance sheet, with no material effect on net income. The recoverable income taxes represent the probable future increase in revenues that will be received through future ratemaking proceedings for the recovery of these deferred taxes.\nThe components of the total recoverable income taxes at December 31, 1993 are as follows:\nUnited Water Resources Inc.\nDeferred tax liabilities (assets) and deferred investment tax credits are comprised of the following at December 31, 1993:\nINCOME TAX PROVISION:\nFederal income tax returns have been settled through 1988. An appeal pertaining to a single issue from 1982 and 1985 was settled in August 1993 without a material effect on net income. Federal income tax returns for 1989, 1990 and 1991 are currently under examination by the Internal Revenue Service. Management believes that the outcome of this examination will not have a material effect upon the financial position of United Water.\nA reconciliation of income tax expense at the statutory federal income tax rate to the actual income tax expense for the years ended December 31, is as follows:\nUnited Water Resources Inc.\nIncome tax expense for the three years ended December 31 consisted of the following:\nUnited Water Resources Inc.\nNOTE 11 - FAIR VALUE OF FINANCIAL INSTRUMENTS:\nThe estimated fair values of United Water's financial instruments at December 31, 1993 and 1992, are as follows:\nThe fair values of financial instruments were determined by obtaining a market valuation of each issue, taking into account current interest rates at December 31, 1993 and 1992, and redemption premiums and dates, where applicable.\nThe carrying amount of cash and short-term investments approximates the fair value, due to the short maturity of those instruments.\nUnited Water Resources Inc.\nNOTE 12 - LEASES:\nRivervale Realty Company owns several office buildings with a net book value totaling $45.9 million (net of accumulated depreciation of $5.3 million) which it leases to tenants under various operating leases. The following is a schedule, by year, of minimum future rentals on non- cancelable operating leases as of December 31, 1993:\nUnited Water Resources Inc.\nQUARTERLY FINANCIAL INFORMATION\nUnited Water Resources Inc.\nITEM 9.","section_9":"ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING ------- ----------------------------------------------------------------- AND FINANCIAL DISCLOSURE --------------------------\nThere were no changes or disagreements with accountants on accounting and financial disclosure in 1993.\nUnited Water Resources Inc.\nPART III\nITEM 10.","section_9A":"","section_9B":"","section_10":"ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT -------- --------------------------------------------------------\nITEM 11.","section_11":"ITEM 11. EXECUTIVE COMPENSATION -------- -----------------------\nITEM 12.","section_12":"ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND -------- --------------------------------------------------------- MANAGEMENT ----------\nITEM 13.","section_13":"ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS -------- --------------------------------------------------\nThe information called for by Items 10 (including information relating to delinquent filers under Section 16 of the Securities Exchange Act of 1934), 11, 12 and 13 is omitted because the registrant will file with the Securities and Exchange Commission, not later than 120 days after the close of the year covered by this Form 10-K, a definitive proxy statement pursuant to Regulation 14A involving the election of directors.\nIn determining which persons may be affiliates of the registrant for the purpose of disclosing on the cover page of this Annual Report the market value of voting shares held by non-affiliates, the registrant has treated only the members of its Board of Directors as affiliates and has excluded from the calculation all shares beneficially owned by them. No determination has been made that any director or person connected with a director is an affiliate or that any other person is not an affiliate. The registrant specifically disclaims any intent to characterize any person as being or not being an affiliate.\nUnited Water Resources Inc.\nPART IV\nITEM 14.","section_14":"ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON -------- ------------------------------------------------------------- FORM 8-K --------- The following documents are filed as part of this report: (a) Financial Statements and Financial Statement Schedules (see Item 8)\n(b) Exhibits\n4(a) Restated Certificate of Incorporation (Articles of Incorporation) of United Water Resources Inc., dated July 14, 1987 (Filed as Exhibit 4(b) to Registration Statement No. 33-20067.)\n4(b) Certificate of Correction to Restated Certificate of Incorporation of United Water Resources Inc., dated August 13, 1987 (Filed as Exhibit 4(c) to Registration Statement No. 33-20067).\n4(c) By-laws of United Water Resources (Filed as Exhibit 4(d) to Registration Statement No. 33-41693).\n4(d) Specimen of United Water Resources Common Stock (Filed as Exhibit 4(d) to Registration Statement No. 2-90540).\n4(e) United Water Resources Inc. and First Interstate Bank Ltd., Rights Agent, Rights Agreement, dated as of July 12, 1989 (Filed as Exhibit 4(c) to Registration Statement No. 33- 32672).\n4(f) Note Agreements, dated as of September 1, 1989, between United Water Resources Inc. and First Colony Life Insurance Company and American Mayflower Life Insurance Company.\n4(g) First Mortgage of Hackensack Water Company to Hudson Trust Company dated March 1, 1946 (including all Supplemental Indentures) (Filed as Exhibit 4(a) to Registration Statement No. 2-82274).\n4(h) Loan Agreement, dated as of November 15, 1986, between the New Jersey Economic Development Authority and Hackensack Water Company (Filed as Exhibit 4(g) to Form 10-K for year ended December 31, 1986).\n4(i) Loan Agreement, dated as of November 15, 1987, between the New Jersey Economic Development Authority and Hackensack Water Company (Filed as Exhibit 4(g) to Form 10-K for year ended December 31, 1987).\nUnited Water Resources Inc.\n4(j) Loan Agreement, dated as of December 1, 1988, between the New York State Environmental Facilities Corporation and Spring Valley Water Company (Filed as Exhibit 4(h) to Form 10-K for year ended December 31, 1988).\n4(k) Loan Agreement, dated as of December 1, 1993, between the New York State Environmental Facilities Corporation and Spring Valley Water Company.\n4(l) By-laws of United Water Resources dated as of March 10, 1994.\n4(m) United Water Resources' Form 8-K's filed on September 16, 1993 and March 10, 1994.\n13 United Water Resources' Annual Report to Shareholders for the year ended December 31, 1993. Such Annual Report, except for those portions expressly incorporated by reference, is furnished for the information of the Commission and is not deemed \"filed\" hereby.\n21 Subsidiaries of registrant\n23 Consent of Independent Accountants\n28 New Indemnification Undertaking\nOther than the aforementioned Exhibits 4(g) and 4(h), the principal amount of debt outstanding under each instrument defining the rights of holders of long-term debt of United Water does not exceed 10% of the total assets of United Water and its subsidiaries on a consolidated basis.\nUpon request by the Securities and Exchange Commission, United Water agrees to file any instrument with respect to long-term debt which has not previously been filed because the total amount of securities authorized thereunder does not exceed 10% of the total assets of United Water and its subsidiaries on a consolidated basis.\n(c) Reports on Form 8-K filed in the fourth quarter of 1993:\nNone\nS I G N A T U R E S\nPursuant 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.\nUNITED WATER RESOURCES INC. ----------------------------- (Registrant)\nMarch 10, 1994 By DONALD L. CORRELL --------------------- ----------------------------------- Donald L. Correll President and Chief Executive Officer\nPursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.\nSIGNATURE TITLE DATE --------- ----- ----\nChairman of the ROBERT A. GERBER Board of Directors March 10, 1994 -------------------------- (Robert A. Gerber)\nSecretary DOUGLAS W. HAWES and Director March 10, 1994 ------------------------- (Douglas W. Hawes)\nVice President JOHN J. TURNER and Controller March 10, 1994 ------------------------- (John J. Turner)\nU N I T E D W A T E R R E S O U R C E S I N C.\nSCHEDULE II - AMOUNTS RECEIVABLE FROM RELATED PARTIES, AND UNDERWRITERS, PROMOTERS, AND EMPLOYEES OTHER THAN RELATED PARTIES (THOUSANDS OF DOLLARS)\nThis indebtedness was in the form of a non-interest bearing note in the principal amount of $168,500 which is secured by a first mortgage on residential property associated with Mr. Hanson's relocation to New Jersey. The note matured in 1991.\nPage 1 of 3\nU N I T E D W A T E R R E S O U R C E S I N C.\nSCHEDULE V - CONSOLIDATED PROPERTY, PLANT AND EQUIPMENT (THOUSANDS OF DOLLARS)\n(1) Represents the purchase price of $26,000 of properties reconveyed to Hackensack from Rivervale, the book value of $14,838 in other adjustments and a ($4,000) adjustment transferred from amounts refundable to customers in additions at cost.\n(2) Contributions in aid of construction ($1,615) credited to plant as required by the New York Public Service Commission.\n(3) Spring Valley Water Company plant acquisition adjustment: $103; Mid-Atlantic Utilities amortization of plant acquisition adjustment: $51.\n(4) Represents $39,421 of additional construction work in progress for the year, less $38,120 transferred to plant in service.\n(5) Represents a valuation adjustment for certain Rivervale Realty Inc. properties ($4,111) and the book value of properties transferred to Hackensack Water from Rivervale Realty ($14,838).\nPage 2 of 3\nU N I T E D W A T E R R E S O U R C E S I N C.\nSCHEDULE V - CONSOLIDATED PROPERTY, PLANT AND EQUIPMENT (THOUSANDS OF DOLLARS)\n(1) Contributions in aid of construction ($576) credited to plant as required by the New York Public Service Commission.\n(2) Amortization of Mid-Atlantic Utilities Corp. plant acquisition adjustment.\n(3) Represents $15,162 of additional construction work in progress for the year less $15,584 transferred to plant in service.\nPage 3 of 3\nU N I T E D W A T E R R E S O U R C E S I N C.\nSCHEDULE V - CONSOLIDATED PROPERTY, PLANT AND EQUIPMENT (THOUSANDS OF DOLLARS)\n(1) Contributions in aid of construction ($497) credited to plant as required by the New York Public Service Commission.\n(2) Amortization of Mid-Atlantic Utilities Corp. plant acquisition adjustment.\n(3) Represents $17,268 of additional construction work in progress for the year, less $19,675 transferred to plant in service.\n(4) Represents proceeds from the settlement of a lawsuit.\nU N I T E D W A T E R R E S O U R C E S I N C.\nSCHEDULE VI - CONSOLIDATED ACCUMULATED DEPRECIATION, DEPLETION AND AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT (THOUSANDS OF DOLLARS)\n* Spring Valley abandonment loss $(11); accumulated depreciation of acquired utility plant (Pothat Water Company) $(135).\n** Pursuant to a rate order, Hackensack reversed its abandonment loss recognized in prior years.\nU N I T E D W A T E R R E S O U R C E S I N C.\nSCHEDULE VI - CONSOLIDATED ACCUMULATED DEPRECIATION, DEPLETION AND AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT (THOUSANDS OF DOLLARS)\nU N I T E D W A T E R R E S O U R C E S I N C.\nSCHEDULE VIII - CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS (THOUSANDS OF DOLLARS)\nU N I T E D W A T E R R E S O U R C E S I N C.\nSCHEDULE IX - CONSOLIDATED SHORT-TERM BORROWING (THOUSANDS OF DOLLARS)\nU N I T E D W A T E R R E S O U R C E S I N C.\nSCHEDULE X - CONSOLIDATED SUPPLEMENTARY INCOME STATEMENT INFORMATION (THOUSANDS OF DOLLARS)","section_15":""}
{"filename":"84548_1993.txt","cik":"84548","year":"1993","section_1":"ITEM 1. BUSINESS.\n(a) GENERAL DEVELOPMENT OF BUSINESS.\nRegistrant and its predecessors have been engaged in the mining of coal in central and western Pennsylvania since 1881. Since the mid-1960's, Registrant and its subsidiaries have been principally engaged in the deep mining of bituminous steam coal for sale to electric generating plants located adjacent to or near Registrant's mines. Substantially all of these sales have been made pursuant to long-term coal supply contracts. Because of the continued availability of low priced coal from other sources, during 1993 the utility customers of Registrant's subsidiaries continued to purchase coal at near minimum contract requirements. In addition, during 1993, a seven-month strike (May 25 through December 16, 1993) by the United Mine Workers of America (the \"UMWA\") against members of the Bituminous Coal Operators Association (the \"BCOA\"), including operations of two of Registrant's subsidiaries, had a significant adverse impact on Registrant's operating results. Tonnage produced and sold was reduced by approximately 42% in 1993 versus 1992. A partial offset in volume and cost of sales, however, occurred because a substantial portion of the costs incurred by the operations of Registrant on strike were reimbursable under the terms of Registrant's subsidiaries long-term coal sales agreements. In 1993, another subsidiary of Registrant commenced development and rehabilitation work at the mine it acquired in 1992.\n(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS.\nRegistrant is of the opinion that all of its material operations are within one industry segment and that no information as to business segments is required pursuant to Statement of Financial Accounting Standards No. 14 or Regulation S-K.\n(c) NARRATIVE DESCRIPTION OF BUSINESS.\nRegistrant, through its subsidiaries, is principally engaged in deep and, to a very minor extent, surface mining of bituminous steam coal in Pennsylvania. Substantially all of Registrant's deep-mined production in 1993 was sold pursuant to two long-term contracts, described below, to two mine-mouth electric generating plants adjacent to or near its mines. Steam coal is not suitable for metallurgical use because of excessive levels of ash or sulphur.\nUnited Eastern Coal Sales Corporation (\"United Eastern\"), a wholly- owned subsidiary, is a coal broker and sales agent which buys and sells, either as principal or agent, coal produced in the United States. Registrant's wholly-owned subsidiary, Rochester & Pittsburgh Coal Co. (Canada) Limited, is engaged in the sale of coal to customers in Canada. Each of Registrant's subsidiaries which buys and sells coal produced by\nothers serves customers principally in the Mid-Atlantic states and the Province of Ontario.\nLeatherwood, Inc. (\"Leatherwood\"), a wholly-owned subsidiary of Registrant, is engaged in developing, owning, and managing solid waste management facilities. To date, Leatherwood has submitted a permit application to the Pennsylvania Department of Environmental Resources (the \"DER\") for a new municipal solid waste landfill in Jefferson County, Pennsylvania. This facility will also accept residual waste. Two Pennsylvania counties have designated this landfill as a secondary disposal facility in their statutorily-required county master plan for the disposal of solid waste and, upon receipt of a permit by Leatherwood, will deem the landfill a primary disposal facility. Discussions with other counties and waste collectors are continuing. Two contracts with collection companies or brokers have been executed contingent, however, upon a permit being issued. The permit application is subject to stringent regulatory standards and is under review by DER. An official response on the application, which will be subject to administrative and judicial review, is expected early in 1994.\nIn 1992, Registrant established two wholly-owned subsidiaries, Eighty-Four Mining Company (\"Eighty-Four\") and Lucerne Land Company (\"Lucerne Land\") to acquire coal properties and Mine No. 84 from Bethlehem Steel Corporation and affiliated entities (\"Bethlehem\"). The final purchase price of Mine No. 84 was $53.6 million after taking into effect post-closing adjustments.\nMine No. 84 was idled in February 1993 to permit renovation, rehabilitation, and replacement of key operating systems. This work will include replacement of the haulage system, by installing a new five mile long, 6,700 ton per hour underground belt conveyor system, upgrading of surface, coal handling and preparation facilities, and installation of two longwall mining units. When these renovations are fully completed and full capacity is reached, which is expected to occur in 1997, Eighty-Four's facilities will permit production of approximately 6.6 million tons of coal per year. Development mining is expected to begin during the second quarter of 1994 in preparation for installation of the first longwall unit in the third quarter of 1995.\nThe properties acquired are estimated to contain approximately 175 million saleable1 tons of high quality Pittsburgh Seam steam and metallurgical coal. The reserve estimate, which was developed by Registrant's Geology and Engineering personnel, is based upon review of data and test results provided by Bethlehem, data available from outside sources, application of generally accepted mining practices in the geographic area of mining, and generally accepted mining practices in the Pittsburgh Seam utilizing longwall mining techniques. This estimate is being further reviewed and verified by Registrant's Geology and Engineering personnel.\n- ----------------------------------\n1 Saleable means total coal mine output less tonnage rejected during processing for market.\nWhile no arrangements or contracts for the sale of coal by Eighty-Four exist at present, extensive efforts to achieve such arrangements occurred in 1993 and are continuing. Written expressions of interest from potential customers have been obtained. The coal from Mine No. 84, however, is of such quality that it should position Registrant to respond to the increased demand for coals that will meet the air quality standards under Phase I of The Clean Air Act when it takes effect in 1995. Longer-term demand for this lower sulphur coal should remain strong because, after cleaning, the coal will remain a cost-effective product for electric generating stations utilizing scrubbers. Additionally, a significant portion of the coal from Mine No. 84 has historically been sold on the domestic and international metallurgical market. Marketing activities undertaken by Eighty-Four have been directed to a diverse geographic and customer base, thus reducing reliance upon a single customer, group of customers, or type of market while enabling price escalation risks to be hedged due to the varying contract durations anticipated.\nRegistrant's wholly-owned subsidiary, Keystone Coal Mining Corporation (\"KCMC\") is a party to a coal supply agreement effective as of January 1, 1991 (the \"Keystone Agreement\") with the seven public utilities (the \"Keystone Owners\") that own the Keystone Steam Electric Station (the \"Keystone Station\") near Shelocta, Pennsylvania. The Keystone Agreement amended, extended, and restated an earlier agreement dated January 1, 1972, among the same parties pursuant to which coal has been delivered to the Keystone Station by KCMC. The Keystone Agreement has a term ending December 31, 2004, and under it KCMC was to sell and deliver 3,900,000 tons to the Keystone Station in 1991, 3,700,000 tons in 1992 and, from 1993 through 1999, will sell and deliver 3,250,000 tons annually subject to increase or decrease by up to 250,000 tons. As a direct result of the strike by the UMWA against KCMC's facilities, in 1993, KCMC delivered 2,339,033 tons to the Keystone Station pursuant to the Keystone Agreement. Should the parties not agree to an extension of the Keystone Agreement beyond its initial term, production and deliveries will decrease between 2000 and 2004 with an aggregate of 6,500,000 tons to be delivered during that five-year period. Substantially all of the coal sold pursuant to the Keystone Agreement is delivered by a series of conveyor belts directly from KCMC's mines (the \"Keystone Mines\") to the Keystone Station.\nIn connection with its Keystone Mines, KCMC also owns and operates a coal handling and preparation facility (the \"Keystone Cleaning Plant\") which processes coal to enhance the thermal value of the product delivered to the Keystone Station.\nThe price paid by the Keystone Owners to KCMC pursuant to the Keystone Agreement consists of an amount equal to all costs of production incurred by KCMC in mining, processing, and delivering the coal, subject to a price cap, including mine development costs and capital expenditures, mine closing costs, general and administrative costs, interest costs, plus a profit\nthat varies according to KCMC's ability to meet or exceed certain cost standards, plus a royalty of $.25 per ton, with an annual minimum royalty payment of $375,000. The profit calculation is subject to adjustment for cumulative changes in the Gross National Product Implicit Price Deflator (\"GNP Deflator\") based upon the Btu content of the coal delivered and KCMC's cost of production compared to standard costs established in the Keystone Agreement. The standard costs are adjusted according to various cost and market price indices.\nKCMC dedicated approximately 90,000,000 tons of coal at January 1, 1991 pursuant to the Keystone Agreement and said coal cannot be mined for sale to others without the Keystone Owners' consent. KCMC has the option on and after July 1, 1995, to remove certain coal properties from the area of dedication if it determines that the same are not required to fulfill its obligations under the Keystone Agreement. Substantially all of the dedicated coal properties are leased or subleased by KCMC from Registrant. Under certain conditions described in the Keystone Agreement, the Keystone Owners have the option to purchase all of the capital stock of KCMC at the net book value thereof at the time of exercising the option ($18,816,536 at December 31, 1993) or its net assets at book value, and to lease KCMC's coal properties from Registrant. In such event, Registrant would receive a royalty per ton equal to approximately $1.03, a substantial portion of which would be adjusted for changes in the GNP Deflator from December 1990. See Note C to the Consolidated Financial Statements incorporated herein by reference. The Keystone Owners also have the right to terminate the Keystone Agreement effective at the end of 1999 or any calendar year thereafter, upon five years prior notice, if the Keystone Owners determine, in their sole discretion, that it is unlawful or commercially impracticable, in light of the then applicable governmental regulations, to operate the Keystone Station with the coal KCMC is able to produce. The Keystone Owners, after a series of progressive steps, also have the right to terminate the Keystone Agreement if certain size and quality requirements are not met by KCMC.\nIn 1993, KCMC delivered 2,301,690 tons of coal from its Keystone Mines and 37,343 tons of purchased coal to the Keystone Station, compared with deliveries to the Keystone Station in 1992 of 3,700,086 tons of deep-mined coal and 27,387 tons of purchased coal.\nRegistrant's wholly-owned subsidiary, Helvetia Coal Company (\"Helvetia\"), is a party to a coal sales agreement dated December 22, 1966, and subsequently amended, (the \"Homer City Agreement\") with the two public utilities (the \"Homer City Owners\") that own the Homer City Steam Electric Station (the \"Homer City Station\") near Homer City, Pennsylvania. The Homer City Agreement, which has a term extending until 2007, provides that Helvetia will sell and deliver to the Homer City Owners annual amounts of coal as specified therein and that the Homer City Owners will purchase from Helvetia the lesser of 1,800,000\ntons or 50% of the coal requirements of the Homer City Station. Coal sold pursuant to the Homer City Agreement is delivered to the Homer City Station by conveyor belts and trucks. Under the Homer City Agreement, Helvetia is required only to reduce raw coal to 1- 1\/4 inches top size. In this process, a Bradford Breaker, which removes some of the impurities from the coal, is used.\nThe price paid by the Homer City Owners to Helvetia pursuant to the Homer City Agreement consists of an amount equal to all costs incurred by Helvetia in mining, processing, and delivering the coal, including mine development costs and capital expenditures, mine closing costs, general and administrative costs, interest costs, a royalty of $.25 per ton and a \"standard\" profit of $1.50 per ton subject to adjustment for cumulative changes in a composite index from calendar year 1988, and also subject to adjustment if certain costs of production are more or less than the standard costs as defined in the Homer City Agreement and quality requirements are met. Additionally, Helvetia is assured a minimum profit of $.60 per ton adjusted for cumulative changes in the composite index so long as quality requirements are met. If minimum quality requirements are not met, Helvetia's minimum profit is reduced below $.60 per ton, depending on quality level, but will not be reduced below zero.\nUnder the Homer City Agreement, Helvetia dedicated up to 85,000,000 tons of coal, all of which are leased from Registrant. Under certain conditions described in the Homer City Agreement, the Homer City Owners have the option to purchase all of the capital stock of Helvetia or its net assets at the net book value thereof ($6,167,174 at December 31, 1993). In such event, the royalty payable to Registrant would be increased from $.25 to $.35 per ton, unless the option were exercised by reason of the default of Helvetia under the Homer City Agreement, in which case the royalty would remain at $.25 per ton. See Note C to the Consolidated Financial Statements incorporated herein by reference.\nAs a direct result of the strike by the UMWA against Helvetia's facilities, during 1993, 839,750 tons of coal were delivered to the Homer City Station from Helvetia's deep mines compared with deliveries of 1,799,949 tons in 1992. Projections provided by the Homer City Owners call for deliveries at the average annual rate of approximately 1,800,000 tons per year through 1997.\nNegotiations between the Homer City Owners and Helvetia regarding a new fixed price, with escalation, contract for Helvetia to continue providing approximately 1.8 million tons of coal per year to the Homer City Station are continuing, and are anticipated to be concluded and effective before the end of 1994. If an agreement is concluded, it would require the opening of a new mine by Helvetia.\nThe Florence Mining Company, (\"Florence\"), formerly a wholly-owned subsidiary of Registrant, was party to a Coal Supply Agreement (the \"Conemaugh Agreement\") with nine public utilities (the \"Conemaugh Owners\") that own the Conemaugh Steam Electric Station (the \"Conemaugh Station\") near New Florence, Pennsylvania. In October 1991, the Conemaugh Owners notified Registrant that they were electing to exercise their option, entered into simultaneously with the Conemaugh Agreement, to acquire the capital stock of Florence and were assigning the option to Quent, Inc., which would exercise it. On October 29, 1991, the capital stock of Florence was transferred to Quent, Inc.\nIn 1993, eight deep mines of Registrant's subsidiaries supplied coal to the Homer City and Keystone Stations. The mines are described in Item 2, to which reference is hereby made.\nRegistrant maintains comprehensive general liability and umbrella liability, pollution liability, and boiler and machinery insurance for all of its operations. Registrant also maintains business interruption and property damage insurance for all of its subsidiaries operations and properties except for KCMC. KCMC is not fully insured for business interruption and property damage because it is able to recover such losses in whole or in part under its long-term coal sales agreement. Registrant has self-insurance programs for workers' compensation and has insurance coverage for catastrophic losses. Registrant also has automobile liability, fiduciary liability, and fidelity insurance.\nThe bituminous coal industry in general is intensely competitive. Although substantially all of Registrant's coal production is sold pursuant to the Keystone and Homer City Agreements, because of the nature of the power supply system in the Mid-Atlantic Region of the United States, Registrant remains subject to material competition from other coal suppliers primarily as to price, coal quality, and environmental considerations, and other types of fuel, principally oil, natural gas, hydroelectric power, and nuclear fuel. That system is operated as a pool of electric power so to the extent that other sources of power within the system, or available to it, are cheaper than the power produced at the Keystone and Homer City Stations, the Owners could reduce the amount of power produced by those Stations and, consequently, the amount of coal purchased from Registrant under the Keystone and Homer City Agreements could be reduced.\nDuring 1993, Registrant's surface-mined coal was sold on the commercial market. To the extent that Registrant is engaged in the wholesale and retail sale of coal, it constitutes a minor competitive factor in such industry and is in competition with other sellers of coal and other fuels, principally oil and natural gas.\nRegistrant's business is materially dependent on the two long-term coal sales agreements, the Keystone Agreement and the Homer City Agreement, described herein. See also Note C to the Consolidated Financial Statements incorporated herein by reference. Gross sales pursuant to the Keystone Agreement and the Homer City Agreement accounted for approximately 66% and 26%, respectively, of Registrant's sales in the year ended December 31, 1993. If the Owners of the Keystone and Homer City Stations were to use other stations not served by Registrant to meet a greater percentage of their power generation demand, or if power were procured from other sources, their requirements for the Keystone and Homer City Stations could decrease, and if such decrease were significant, the change could materially adversely affect the business of Registrant. Registrant's business also was affected by the sale of Florence since sales under the Conemaugh Agreement accounted for approximately 28% of Registrant's sales in the year ended December 31, 1991. See also Note C of the Notes to the Consolidated Financial Statements incorporated herein by reference.\nInformation concerning backlog is not considered material to an understanding of Registrant's business.\nAt December 31, 1993, Registrant had an estimated recoverable2 reserve base3 in leased or owned properties in Armstrong, Indiana, Westmoreland, Washington, and other nearby Pennsylvania counties, of approximately 738,000,000 tons of coal. During 1993, Registrant produced approximately 3,218,013 tons of coal excluding a small quantity of coal produced from Mine No. 84. Of the 738,000,000 tons of estimated recoverable reserve base, approximately 150,000,000 tons of coal (20%), are dedicated under the Keystone and Homer City Agreements. With the exception of the 175,000,000 saleable tons of coal acquired from Bethlehem, recovery of the remaining recoverable reserve base would require new mines which would entail substantial capital expenditures the amount of which cannot be estimated at this time. Registrant has made no decision regarding any new mines and, depending upon Registrant's continuing evaluation of economic conditions affecting the sale of coal in Registrant's present area of operations and the effect of increasingly stringent environmental requirements, Registrant may not open new mines to access its\n- ----------------------------------\n2 Recoverable means those portions of the Reserve Base owned or leased by the Registrant that are potentially extractable using an appropriate factor to account for coal lost-in-mining.\n3 Reserve base means those parts of an identified resource, proven and probable, that are currently economic, marginally economic and some of those that are currently sub-economic that have a reasonable potential for becoming economically available within planning horizons beyond those that assume proven technology and current economics.\nexisting, undedicated coal. The estimated recoverable reserve base stated herein was determined by Registrant's staff based upon the prior experience of Registrant in mining in the area of its present recoverable reserve base and upon data from tests conducted by Registrant, and represent coal which is recoverable on the basis of current mining practices and techniques, and Registrant's mining experience in the seams and area of Registrant's present recoverable reserve base. Consequently, Registrant's estimates are subject to continuing review and refinement.\nRegistrant also owns coal lands in West Virginia, some of which are under lease to another, unrelated coal company. The leased reserves are near exhaustion. Registrant also subleases coal lands in West Virginia to another unrelated coal company.\nPatents and licenses are not material to the operation of Registrant's business.\nIn order to acquire, and to determine the location and extent of, new sources of coal properties, Registrant has entered into option agreements with owners of coal lands in various parts of Pennsylvania. Under these agreements, Registrant obtains the right to explore for and, at its option, to acquire title by lease or purchase to the coal.\nRegistrant has made no public announcement, nor has information otherwise become public, about any new product or line of business which would require the investment of a material amount of Registrant's total assets, other than the development of Leatherwood and the acquisition and development of Mine No. 84 and coal reserves as noted above. While a substantial capital investment may ultimately be made in development of Leatherwood's projects, the amount of such investment has not yet been determined. Registrant has made an equity investment in Eighty-Four and Lucerne Land of $100,000,000 (including the $53.6 million adjusted purchase price). Arrangements are in progress for $85,000,000 in long-term debt and for capital and operating leases to provide remaining funding requirements of the project. See also Notes B and D of the Notes to the Consolidated Financial Statements incorporated herein by reference.\nRegistrant's business is subject to numerous state and federal statutes which establish strict standards with respect to mining health and safety and environmental consequences. In addition to prescribing civil and criminal penalties for violations, both the Federal Mine Safety and Health Act of 1977 and the Surface Mining Control and Reclamation Act of 1977 authorize the closure under certain circumstances of noncomplying operations. Pennsylvania statutes applicable to Registrant's mining operations are both more and less stringent than the federal statutes. Numerous federal and state laws and regulations, pertaining to the discharge of materials into the environment, impose requirements for capital expenditures in the normal course of mine development and for subsequent events which\ncause adverse environmental effects, irrespective of fault or willfulness by the mining company involved. These statutes have in the past and will in the future require substantial capital investments and may adversely affect productivity. Because of the inclusion of environmental related elements in the normal expenditures for mine development and operation, their costs cannot be precisely isolated but Registrant does not believe they have materially adversely affected Registrant's financial condition. See also Item 3 hereof.\nBoth federal and state law and regulations impose sulphur emission standards, which will increase in stringency during the next several years, on uses of coal. However, substantially all of Registrant's coal is sold pursuant to the Keystone and Homer City Agreements, which contain no provisions warranting that the sulphur content of the coal will meet emission standards when burned. The impact of recent legislation on Registrant's business, especially the Clean Air Act Amendments of 1990, cannot be ascertained at this time. Registrant believes that improvements in clean coal technologies or in techniques to neutralize or treat emissions from generating stations are such that, with the benefit of such technologies, its coal will meet standards under currently enacted legislation. However, these amendments could have an adverse effect on the sales of coal to the Keystone Station and the Homer City Station (the \"Stations\"). Also, as described above, at the end of 1999 and any year thereafter, the Keystone Owners have the right to terminate the Keystone Agreement if it is unlawful or commercially impracticable, in light of then applicable government regulations, to operate the Keystone Station with the coal KCMC is able to produce. Moreover, in the event of the enactment of legislation or regulations imposing more stringent environmental standards on the Stations, Registrant could be adversely affected if the owners of the Stations purchased more coal from others or generate less electricity from these Stations. Fuel strategies adopted by utilities have yet to be announced. Environmental legislation and regulation may have an adverse effect on Registrant's ability to market its coal reserves not dedicated under existing contracts and may require modifications to the marketing plans of Eighty-Four.\nAs indicated in the Consolidated Financial Statements incorporated herein by reference, Registrant has made substantial capital investments in the past three years. Inasmuch as a substantial portion of these investments has been for several purposes, e.g., to extend mine and equipment life, to increase productivity, and to comply with safety and\/or environmental legislation, Registrant cannot indicate with precision capital investments required solely to comply with environmental and safety legislation. However, Registrant estimates such expenditures totalled approximately $2,600,000 in the five years ended December 31, 1993, and it is estimated that annual capital expenditures of approximately $1,600,000 per year for the next several years will be attributable to environmental and safety laws. Such legislation also adversely affected Registrant's deep\nmine productivity. While no assurance can be given that additional, more stringent mining and environmental legislation will not be enacted or that such legislation, if enacted, would not have a material adverse effect upon Registrant's operations, it should be noted that for coal sold under the Keystone and Homer City Agreements, Registrant's cost of compliance with such statutes is recovered from the Owners as a cost of production. However, should the cost of compliance as an element of production costs become burdensome, the competitive position and earnings of Registrant could be adversely affected.\nRegistrant currently employs approximately 1,555 persons, of whom 1,400 are engaged directly in the production and processing of coal for sale and 155 are engaged in executive, administrative, engineering, exploration, sales, and clerical capacities. Registrant has approximately 1,120 employees who are covered by the National Bituminous Coal Wage Agreement of 1993 (the \"1993 Agreement\") with the UMWA, which, as noted above, was ratified on December 16, 1993 after a seven-month strike against BCOA member companies. The 1993 Agreement will terminate on or after August 1, 1998 by either party giving to the other party at least 60 days notice of the desired termination date. Additionally, the 1993 Agreement may be reopened at the election of the UMWA prior to the third and fourth anniversary dates for the sole purpose of renegotiating changes in wage rates and pension benefits. The 1993 Agreement may be reopened at the election of the UMWA or the BCOA prior to the third and fourth anniversary dates for the sole purpose of renegotiating changes in the health care bonus and annual health care deductible established under the 1993 Agreement.\nRegistrant's business is not seasonal in any material respect.\nRegistrant is engaged principally in a single line of business, the mining and sale of coal. The following table sets forth the amount of Registrant's sales contributed by each class of Registrant's products which accounted for more than 10% of Registrant's total sales during each of Registrant's three fiscal years ended December 31, 1993, 1992, and 1991.\n(d) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES.\nIn the years ended December 31, 1993, 1992, and 1991, Registrant's subsidiary, Rochester & Pittsburgh Coal Co. (Canada) Limited, had sales of $8,093,174, $9,415,110, and $7,794,813, respectively, primarily to customers located in Canada. Registrant does not consider its sales of coal in Canada to be subject to any particular risks merely because its customers are located there. However, foreign business in general can be subject to special risks, including exchange controls, changes in currency valuations, restrictions on the repatriation of funds, restrictions on the ownership of foreign corporations or the composition of their boards of directors, export restrictions, the imposition or increase of taxes and tariffs, and international financial instability. No assurance can be given that any of these factors might not have an adverse effect on Registrant's future foreign operations.\nITEM 2.","section_1A":"","section_1B":"","section_2":"ITEM 2. PROPERTIES.\nRegistrant's executive and administrative offices are located in a 76,309 square foot building in Indiana, Pennsylvania, which it owns and which was extensively renovated and expanded in 1984. Registrant also owns approximately 39,900 acres of surface land in Pennsylvania. Registrant's subsidiaries lease various properties in the United States and Canada under leases having a current annual aggregate rental of approximately $229,000. These leases expire at various times over the next four years and the amount of aggregate rental payable during that period will depend on the extent of renewals.\nAs indicated in Item 1 hereof, as of December 31, 1993, based upon the prior experience of Registrant in mining in the area of Registrant's operations and data from tests conducted by it and, in the case of the coal acquired from Bethlehem, a review of data provided by others and mining practices in the area and seam acquired, Registrant had an estimated recoverable reserve base in leased or owned properties in Indiana, Armstrong, Westmoreland, Washington and other nearby Pennsylvania counties of approximately 738,000,000 tons of coal. Substantially all of the coal leased by Registrant is leased until exhaustion. Registrant has not conducted sufficient tests to determine the degree to which reserves, if any, exist on its owned or leased properties located outside of Indiana, Armstrong, Westmoreland, Washington and other nearby Pennsylvania counties.\nRegistrant operated nine underground mines in 1993. Information on the estimated recoverable reserves and production of these mines is as follows:\n- ---------------------- (1) These estimated proven and probable reserves which can be economically mined under current conditions are recoverable through existing mine openings and plant facilities and represent calculations based upon continuing refinement of estimates, and are rounded to the nearest thousand. \"Proven Reserves\" represent areas of the total reserve estimate which are within approximately 2,000 feet of an exploration drill hole or other known point. \"Probable Reserves\" represent areas of the total reserve estimate which are greater than 2000 feet from an exploration drill hole or other known point and when consideration is made for other factors, such as mining conditions, coal quality, and mine operating experience. (2) Operated by Helvetia Coal Company. (3) Operated by Keystone Coal Mining Corporation. (4) Operated by The Florence Mining Company. The Florence #2 and Heshbon Mines were transferred to the assignee of the Conemaugh Owners on October 29, 1991. (5) Tonnage figures represent clean coal after washing and preparation at the Florence Preparation Plant, at the Keystone Cleaning Plant or at Mine No. 84's preparation facilities. See also Item 1 hereof. (6) The 1991 figure represents production from \"E\" and \"D\" seam facilities, 120,672 and 303,354 tons, respectively. (7) Operated by Eighty-Four Mining Company\nSurface mining is also conducted by Registrant and by independent contractors utilized by Registrant, who are obligated by law and by contract with Registrant to restore the surface in accordance with Pennsylvania and federal laws. Production from surface mining for the last three years has been as follows: 1991--339,950 tons, 1992--91,921 tons and 1993--53,744 tons. All surface-mined coal produced in 1993 was sold on the commercial market. Registrant anticipates limited surface mining activity in the near future and, therefore, while Registrant is continuing to acquire additional coal properties suitable for surface mining, no assurance can be given that Registrant will be able to maintain adequate resources for surface-mined coal in the future.\nAll of the properties of Registrant and its subsidiaries dedicated under the Keystone and Homer City Agreements are subject to mortgages given as security for indebtedness of Registrant's subsidiaries. See Note D to the Consolidated Financial Statements incorporated by reference herein.\nRegistrant has miscellaneous other non-coal mineral interests, primarily natural gas, which it leases to unrelated parties. Registrant has expanded its role in the natural gas area by participating in joint ventures for 95 natural gas wells in Pennsylvania and nearby states during the past several years.\nITEM 3.","section_3":"ITEM 3. LEGAL PROCEEDINGS.\nThe nature of Registrant's business subjects it to numerous state and federal laws and regulations pertaining to environmental matters and administrative and judicial proceedings involving alleged violations thereof are considered incidental to Registrant's business.\nRegistrant is not a party to any pending litigation which it deems material to its financial condition, although it is a party to litigation incidental to the conduct of its business.\nITEM 4.","section_4":"ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.\nRegistrant did not submit any matters to a vote of security holders during the fourth quarter of 1993.\nEXECUTIVE OFFICERS OF REGISTRANT.\nInformation on executive and other officers of Registrant as of February 28, 1994, is as follows:\n- -------------------- (1) Mr. Peter Iselin is the father of Mr. O'Donnell Iselin II, and the uncle of Mr. Gordon B. Whelpley, Jr., Directors of Registrant.\nOfficers of Registrant are elected annually by the Board of Directors at its organization meeting following the Annual Meeting of Shareholders.\nEach of the officers of Registrant named above has held a position with Registrant or a subsidiary for the past five years with the exception of: Mr. Majcher who joined Registrant as Vice President--Corporate Development in January 1990. Prior to 1990, he had been Director--Planning (1989) BP Coal International, Director--Strategy Development (1988) BP America, Manager--Acquisitions & Divestitures (1987) The Standard Oil Company (Ohio), and Business Manager--Indiana Division (1986) Old Ben Coal Company, all subsidiaries of The British Petroleum Company, P.L.C.\nPART II\nITEM 5.","section_5":"ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.\nThe answer to this Item is incorporated by reference to Registrant's 1993 Annual Report to Shareholders, which is included as Exhibit (13) to this Form 10-K Report, at page 28.\nITEM 6.","section_6":"ITEM 6. SELECTED FINANCIAL DATA.\nThe answer to this Item is incorporated by reference to Registrant's 1993 Annual Report to Shareholders, which is included as Exhibit (13) to this Form 10-K Report, at pages 24 and 25.\nITEM 7.","section_7":"ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.\nThe answer to this Item is incorporated by reference to Registrant's 1993 Annual Report to Shareholders, which is included as Exhibit (13) to this Form 10-K Report, at pages 24 through 27.\nITEM 8.","section_7A":"","section_8":"ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.\nThe answer to this Item is incorporated by reference to Registrant's 1993 Annual Report to Shareholders, which is included as Exhibit (13) to this Form 10-K Report, at page 6, Report of Ernst & Young, Independent Auditors, at pages 7 through 23, and by reference to Item 14 hereof.\nITEM 9.","section_9":"ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.\nDuring applicable time periods, Registrant has not changed accountants and has had no disagreements with its accountants on accounting and financial disclosure matters.\nPART III\nITEM 10.","section_9A":"","section_9B":"","section_10":"ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.\nExcept for information concerning executive officers of Registrant included as an unnumbered item in Part I above, information relating to the Directors of the Registrant is set forth under the caption \"Directors and Nominees For Election as Director\" in Registrant's definitive Proxy Statement in connection with its Annual Meeting of Shareholders to be held May 3, 1994. Such information is incorporated herein by reference.\nITEM 11.","section_11":"ITEM 11. EXECUTIVE COMPENSATION.\nInformation relating to executive compensation is set forth under the caption \"Executive Compensation\" in Registrant's definitive Proxy Statement in connection with its Annual Meeting of Shareholders to be held May 3, 1994. Such information is incorporated herein by reference.\nITEM 12.","section_12":"ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.\nInformation relating to the ownership of equity securities of the Registrant by certain beneficial owners and management is set forth under the caption \"Beneficial Ownership of Common Stock\" in Registrant's definitive Proxy Statement in connection with its Annual Meeting of Shareholders to be held May 3, 1994. Such information is incorporated herein by reference.\nITEM 13.","section_13":"ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.\nInformation relating to certain relationships and certain related transactions is set forth under the caption \"Directors and Nominees For Election as Director\" in Registrant's definitive Proxy Statement in connection with its Annual Meeting of Shareholders to be held May 3, 1994. Such information is incorporated herein by reference.\nPART IV\nITEM 14.","section_14":"ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.\n(a) Financial Statements, Financial Statement Schedules and Exhibits:\n1. Financial Statements\nThe following consolidated financial statements of Rochester & Pittsburgh Coal Company and subsidiaries, included in the Annual Report of Registrant to its shareholders for the year ended December 31, 1993, are incorporated herein by reference in Item 8 (pages 7 through 23 and page 6):\nConsolidated balance sheets-- December 31, 1993, 1992, and 1991 Statements of consolidated income-- Years ended December 31, 1993, 1992, and 1991 Statements of consolidated shareholders' equity-- Years ended December 31, 1993, 1992, and 1991 Statements of consolidated cash flows-- Years ended December 31, 1993, 1992, and 1991 Notes to consolidated financial statements-- December 31, 1993 Report of independent auditors\nThe following financial information for the years 1993, 1992, and 1991 is submitted herewith.\nAll other schedules for Rochester & Pittsburgh Coal Company and subsidiaries for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted.\n3. Exhibits\n(3) Articles of Incorporation and By-laws\nA. Articles of Incorporation, as Amended.\nRegistrant's Articles of Incorporation, as amended, were filed with Registrant's Annual Report on Form 10-K dated March 28, 1991. The Articles, as amended, are incorporated herein by reference.\nB. By-Laws of Registrant, as Amended.\nRegistrant's By-Laws, as amended, were filed with Registrant's Annual Report on Form 10-K dated March 30, 1989. An Amendment to the By-Laws was filed with Registrant's Annual Report on Form 10-K dated March 28, 1991. The By-Laws, as amended, are incorporated herein by reference.\n(10) Material Contracts\nA. 1991 Keystone Coal Supply Agreement.\nThe 1991 Keystone Coal Supply Agreement was filed as an exhibit to Registrant's Annual Report on Form 10-K dated March 28, 1991. The Agreement is incorporated herein by reference.\nB. Homer City Coal Sales Agreement, as Amended.\nThe Homer City Coal Sales Agreement was filed with Registrant's Form 10 Registration Statement dated April 26, 1973. Amendments to the Homer City Coal Sales Agreement were filed with Registrant's Annual Report on Form 10-K dated March 26, 1981, and with Registrant's Annual Report on Form 10-K dated March 28, 1991. The Agreement and amendments are incorporated herein by reference.\nExecutive Compensation Plans and Arrangements\nC. Employment and Deferred Compensation Agreement between Registrant and W. G. Kegel, as Amended.\nThe Employment and Deferred Compensation Agreement between Registrant and W. G. Kegel was filed with Registrant's Annual Report on Form 10-K dated March 26, 1981. Amendments to Employment and Deferred Compensation Agreement were filed with Registrant's Annual Report on Form 10-K dated March 30, 1989. The Agreement and amendments are incorporated herein by reference.\nD. Registrant's Key Executives Incentive Compensation Plan.\nThe Rochester & Pittsburgh Coal Company Key Executives Incentive Compensation Plan was filed with Registrant's Annual Report on Form 10-K dated March 26, 1992. The Plan is incorporated herein by reference.\nE. Registrant's Pension Plan, as Amended.\nRegistrant's Pension Plan was filed with Registrant's Annual Report on Form 10-K dated February 25, 1988. Amendments to the Pension Plan were filed with Registrant's Annual Report on Form 10-K dated March 29, 1990, with Registrant's Annual Report on Form 10-K dated March 28, 1991, with Registrant's Annual Report on Form 10-K dated March 26, 1992, and with Registrant's Annual Report on Form 10-K dated March 25, 1993. The Plan and amendments are incorporated herein by reference.\nF. Employment Agreement between Registrant and T. W. Garges, Jr.\nEmployment Agreement between Registrant and T. W. Garges, Jr. was filed with Registrant's Annual Report on Form 10-K dated March 30, 1989. The Agreement is incorporated herein by reference.\nG. Registrant's 401(k) Savings and Retirement Plan.\nRegistrant's 401(k) Savings and Retirement Plan was filed with Registrant's Annual Report on Form 10-K dated March 28, 1991. The Plan is incorporated herein by reference.\nH. Employment Agreement between Registrant and Thomas W. Garges, Jr.\nEmployment Agreement between Registrant and Thomas W. Garges, Jr., dated as of May 1, 1992, was filed with Registrant's Annual Report on Form 10-K dated March 25, 1993. The Agreement is incorporated herein by reference.\nI. Asset Purchase Agreement Between Bethlehem Steel Corporation and Lucerne Land Company.\nThe Asset Purchase Agreement between Bethlehem Steel Corporation and Lucerne Land Company, dated December 20, 1992, was filed with Registrant's Current Report on Form 8-K dated January 13, 1993. The Agreement is incorporated herein by reference.\nJ. Asset Purchase Agreement Between BethEnergy Mines Inc. and Lucerne Land Company.\nThe Asset Purchase Agreement between BethEnergy Mines Inc. and Lucerne Land Company dated December 10, 1992 was filed with Registrant's Current Report on Form 8-K dated January 13, 1993. The Agreement is incorporated herein by reference.\nK. Asset Purchase Agreement between Bethlehem Steel Corporation and Eighty-Four Mining Company.\nThe Asset Purchase Agreement between Bethlehem Steel Corporation and Eighty-Four Mining Company dated December 10, 1992 was filed with Registrant's Current Report on Form 8-K dated January 13, 1993. The Agreement is incorporated herein by reference.\nL. Asset Purchase Agreement between BethEnergy Mines Inc. and Eighty-Four Mining Company.\nThe Asset Purchase Agreement between BethEnergy Mines Inc. and Eighty-Four Mining Company dated December 10, 1992 was filed with Registrant's Current Report on Form 8-K dated January 13, 1993. The Agreement is incorporated herein by reference.\n(13) Annual Report To Security Holders\nThe following sections of the accompanying Rochester & Pittsburgh Coal Company Annual Report 1993, [filed as Exhibit (13) to this Annual Report on Form 10-K] comprising the respective pages indicated in parentheses, are incorporated herein by reference:\n(i) Market for Registrant's Common Equity and Related Stockholder Matters (page 28).\n(ii) Selected Financial Data (pages 24 and 25).\n(iii) Management's Discussion and Analysis of Financial Condition and Results of Operations (pages 24 through 27).\n(iv) Financial Statements and Supplementary Data (page 6, Report of Ernst & Young, Independent Auditors, and pages 7 through 23).\nExcept as expressly incorporated by reference, the accompanying Rochester & Pittsburgh Coal Company Annual Report 1993 is not to be deemed filed herewith.\n(21) Subsidiaries of the Registrant\nRegistrant's list of subsidiaries [filed as Exhibit (21) to this Annual Report on Form 10-K].\n(b) Reports on Form 8-K:\nNone.\n(c) Exhibits to this Form 10-K:\nPage ---- Exhibit (13) -- Annual Report to Shareholders for 1993 41\nExhibit (21) -- Subsidiaries of Registrant 73\n(d) Financial Statement Schedules Page ---- Schedule I -- Marketable Securities-- other investments 29\nSchedule V -- Property, plant and equipment 30\nSchedule VI -- Accumulated depreciation, depletion and amortization of property, plant and equipment 31\nSchedule VIII -- Valuation and Qualifying Accounts 32\nSchedule IX -- Short-term borrowing 33\nSchedule X -- Supplementary income statement information 34\nSIGNATURES\nPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.\nROCHESTER & PITTSBURGH COAL COMPANY\nBy: THOMAS W. GARGES, JR. Thomas W. Garges, Jr., President and Chief Executive Officer\nDate: March 24, 1994\nPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.\nANNUAL REPORT ON FORM 10-K\nITEM 14(a)(1) and (2) and ITEM 14(c) and (d)\nFINANCIAL STATEMENTS AND FINANCIAL STATEMENTS SCHEDULES\nYEAR ENDED DECEMBER 31, 1993\nROCHESTER & PITTSBURGH COAL COMPANY\nINDIANA, PENNSYLVANIA\nERNST & YOUNG One Oxford Centre Phone: 412-644-7800 Pittsburgh, Pennsylvania 15222\nREPORT OF INDEPENDENT AUDITORS\nTo the Shareholders Rochester & Pittsburgh Coal Company\nWe consent to the incorporation by reference in this Annual Report (Form 10-K) of Rochester & Pittsburgh Coal Company and subsidiaries of our report dated March 11, 1994, included in the 1993 Annual Report to Shareholders of Rochester & Pittsburgh Coal Company and subsidiaries.\nOur audits also included the financial statement schedules of Rochester & Pittsburgh Coal Company 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.\nERNST & YOUNG Ernst & Young\nMarch 11, 1994\nFINANCIAL STATEMENT SCHEDULES\nROCHESTER & PITTSBURGH COAL COMPANY AND SUBSIDIARIES\nDECEMBER 31, 1993\nSCHEDULE I - MARKETABLE SECURITIES - OTHER INVESTMENTS\nROCHESTER & PITTSBURGH COAL COMPANY AND SUBSIDIARIES\nDecember 31, 1993\n(Dollars in thousands)\nSCHEDULE V - PROPERTY, PLANT, AND EQUIPMENT\nROCHESTER & PITTSBURGH COAL COMPANY AND SUBSIDIARIES\n(DOLLARS IN THOUSANDS)\n(1) Additions related principally to the purchase of and expansion and equipping of mines, and for the 1992 purchase of the Mine No. 84 properties. (2) Represents net change for the year. (3) Represents cost of development net of sales revenue from coal produced incidental to development, and includes $3,993 of depreciation charged to capitalized development. (4) Property, plant, and equipment included in the sale of The Florence Mining Company in October, 1991.\nSCHEDULE VI - ACCUMULATED DEPRECIATION, DEPLETION, AND AMORTIZATION\nOF PROPERTY, PLANT, AND EQUIPMENT\nROCHESTER & PITTSBURGH COAL COMPANY AND SUBSIDIARIES\n(Dollars in thousands)\n(1) Includes $3,993 of depreciation charged to Mine No. 84 capitalized development costs. (2) Accumulated depreciation and depletion included in the sale of The Florence Mining Company in October, 1991.\nSCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS\nROCHESTER & PITTSBURGH COAL COMPANY AND SUBSIDIARIES\n(Dollars in thousands)\n(1) Interest earned on funds invested to meet reserve requirements. (2) Expense incurred to satisfy previously reserved requirements. (3) Deductions from the mine closing reserve in 1991 include $1,325 of expenses incurred to satisfy previously reserved requirements and $10,958 related to the sale of The Florence Mining Company in October, 1991. (4) Of this amount, $1,057 represents interest earned on funds invested to meet reserve requirements, and $1,500 represents estimated mine closing obligations assumed with the purchase of Mine No. 84 properties in December 1992.\nSCHEDULE IX - SHORT-TERM BORROWINGS\nROCHESTER & PITTSBURGH COAL COMPANY AND SUBSIDIARIES\n(Dollars in thousands)\n(1) Notes payable to bank represent borrowings under a line of credit borrowing arrangement which is in effect until September 30, 1995. Thereafter, annual extensions may be requested.\n(2) The average amount outstanding during the period was computed by dividing the total daily outstanding principal balances by 360.\n(3) The weighted average interest rate during the period was computed by dividing the actual interest expense by average short-term debt outstanding.\nSCHEDULE X - SUPPLEMENTARY INCOME STATEMENT INFORMATION\nROCHESTER & PITTSBURGH COAL COMPANY AND SUBSIDIARIES\n(Dollars in thousands)\nAmounts for depreciation and amortization of intangible assets, preoperating costs and similar deferrals, royalties, and advertising costs are not presented as such amounts are less than 1% of total sales and revenues.\nSECURITIIES AND EXCHANGE COMMISSION\nWashington, D.C. 20549\nEXHIBITS to FORM 10-K\nAnnual Report\nUnder\nThe Securities Exchange Act of 1934\nROCHESTER & PITTSBURGH COAL COMPANY\n(Exact name of registrant as specified in its charter)\n3. Exhibits Page\n(13) Annual Report to Shareholders for 1993\n(21) Subsidiaries of Registrant","section_15":""}
{"filename":"72207_1993.txt","cik":"72207","year":"1993","section_1":"ITEM 1. BUSINESS.\nGENERAL\nNoble Affiliates, Inc. is a Delaware corporation organized in 1969. The Registrant is principally engaged, through its subsidiaries, in the exploration for and production of oil and gas. In this report, unless otherwise indicated or the context otherwise requires, the \"Company\" or the \"Registrant\" refers to Noble Affiliates, Inc. and its subsidiaries.\nOIL AND GAS\nThe Registrant's wholly owned subsidiary, Samedan Oil Corporation (\"Samedan\"), has been engaged in the exploration for and production of oil and gas since 1932. Samedan conducts its exploration and production operations throughout the major basins in the United States, including the Gulf of Mexico, and in foreign jurisdictions, primarily in Canada and Africa. For information regarding Samedan's oil and gas properties, see \"Item 2","section_1A":"","section_1B":"","section_2":"ITEM 2. PROPERTIES.\nOFFICES\nThe principal executive office of the Company is located at 110 West Broadway, Ardmore, Oklahoma 73401. The principal executive office of Samedan is in Ardmore, Oklahoma, and Samedan also maintains division offices in Oklahoma City, Houston, Denver and Calgary, Canada. Samedan maintains three separate offices in Houston for its international, offshore and onshore oil and gas operations. Samedan maintains an office in Tunis, Tunisia, from which it operates its various concessions and producing property in Tunisia. The principal executive office of Noble Gas Marketing, Inc. is located in Houston.\nOIL AND GAS\nThe estimated proved and proved developed oil and gas reserves of Samedan, as of December 31, 1993, 1992 and 1991 and the standardized measure of discounted future net cash flows attributable thereto at December 31, 1993, 1992 and 1991 are included in Note 9 of Notes to Consolidated Financial Statements appearing on pages 32 through 35 of the Registrant's 1993 annual report to shareholders, which Note is incorporated herein by reference (\"Note 9\").\nNote 9 also includes Samedan's net production (including royalty and working interest production) of oil and natural gas for the three years ended December 31, 1993. Royalty production of both oil and gas (stated in oil barrel equivalents) is included in the \"Crude Oil & Condensate\" presentation in Note 9. Samedan has no oil or gas applicable to long-term supply or similar agreements with foreign governments or authorities in which Samedan acts as producer.\nSince January 1, 1993, no oil or gas reserve information has been filed with, or included in any report to, any federal authority or agency other than the Securities and Exchange Commission and the Energy Information Administration (the \"EIA\"). Samedan files Form 23, including reserve and other information, with the EIA.\nThe following table sets forth for each of the last three years the average sales price (including transfers) per unit of oil produced and per unit of natural gas produced, and the average production (lifting) cost per unit of production.\nThe number of productive oil and gas wells in which Samedan had interests and the developed acreage held as of December 31, 1993, were as follows:\nThe undeveloped acreage (including both leases and concessions) that Samedan held as of December 31, 1993, is as follows:\nThe following table sets forth for each of the last three years the number of net exploratory and development wells drilled by or on behalf of Samedan. An exploratory well is a well drilled to find and produce oil or gas in an unproved area, to find a new reservoir in a field previously found to be productive of oil or gas in another reservoir, or to extend a known reservoir. A development well, for purposes of the following table and as defined in the rules and regulations of the Securities and Exchange Commission, is a well drilled within the proved area of an oil or gas reservoir to the depth of a stratigraphic horizon known to be productive. The number of wells drilled refers to the number of wells completed at any time during the respective year, regardless of when drilling was initiated; and \"completion\" refers to the installation of permanent equipment for the production of oil or gas, or, in the case of a dry hole, to the reporting of abandonment to the appropriate agency.\nSamedan spent approximately $418.5 million in 1993 on the purchase of producing oil and gas properties. See Item 1. \"Business -- Oil and Gas -- Acquisitions\" hereof for a discussion of significant acquisitions in 1993. Approximately $6.2 million and $47.6 million, respectively, were spent on such purchases in 1992 and 1991.\nAt March 16, 1994, Samedan was drilling 9 gross (3.1 net) exploratory wells, and 19 gross (8.1 net) development wells. These wells are located onshore in the United States in California, Colorado, Louisiana, New Mexico, Oklahoma, Texas and Wyoming and Canada in Alberta Province, and offshore Gulf of Mexico and California. These wells have objectives ranging from approximately 2,800 to 15,200 feet. The estimated drilling cost to Samedan of these wells is approximately $11,800,000 if all are dry and approximately $24,600,000 if all are completed as producing wells.\nITEM 3.","section_3":"ITEM 3. LEGAL PROCEEDINGS.\nSamedan is an unsecured creditor of Columbia Gas Transmission Corporation (\"Columbia\") which filed for protection from creditors under Chapter 11 of the Federal Bankruptcy Code on July 31, 1991, in the United States Bankruptcy Court for the District of Delaware (the \"Bankruptcy Court\"). IN RE COLUMBIA GAS TRANSMISSION CORPORATION, Case No. 91-804 (Bankr. D. Del. 1991). Samedan and Columbia are parties to a gas sales contract, which terminates in 1998, covering a property in the Gulf of Mexico. Samedan's gas sales contract was rejected by Columbia in its bankruptcy proceeding. On March 16, 1992, Samedan filed a proof of claim with the Bankruptcy Court in the amount of approximately $117 million covering approximately $3.0 million for the contract price on prepetition gas purchases, approximately $2.0 million for the contract price due on prepetition take or pay obligations, and approximately $112 million for damages arising from the rejection of Samedan's gas sales contract. The full amount of Samedan's claim is classified as an unsecured non-priority claim. The Bankruptcy Court has established a claim procedure pursuant to which the claim of Samedan, and other creditors with claims arising from rejected gas sales contracts, shall be determined. Pursuant to such claims procedure, Charles P. Nomandin has been appointed as claims mediator in order to, among other things, estimate the claims of producers with claims arising from gas supply contracts. Samedan is participating in this claims resolution procedure and intends, if necessary, to advance and litigate the amount of its unsecured claim. A preliminary Plan of Reorganization for Columbia dated January 18, 1994 has been filed by Columbia, but the applicable schedules indicating the sums which individual producer claimants, such as Samedan, would receive under such Plan of Reorganization were not attached to that filing. Columbia has requested, and the Bankruptcy Court has agreed, that no action be taken by the Bankruptcy Court on that filing while settlement discussions take place between Columbia and the various creditor groups. Samedan is participating in such settlement discussions. It is unknown whether resolution of Samedan's claim will occur in 1994, or at what amount the claim may be ultimately resolved.\nThere are no other material pending legal proceedings, other than ordinary routine litigation incidental to the business of the Registrant and its subsidiaries, to which the Registrant or any of its subsidiaries is a party or of which any of their property is the subject.\nITEM 4.","section_4":"ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.\nNot applicable.\nEXECUTIVE OFFICERS OF THE REGISTRANT\nThe following tabulation sets forth certain information, as of March 26, 1994, with respect to the executive officers of the Registrant.\nThe terms of office for the officers of the Registrant continue until their successors are chosen and qualified. No officer or executive officer of the Registrant has an employment agreement with the Registrant or any of its subsidiaries. There are no family relationships between any of the Registrant's officers.\nPART II\nITEM 5.","section_5":"ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.\nThe Registrant's common stock is listed and traded on the New York Stock Exchange under the symbol \"NBL\". The table captioned \"Dividends and Stock Prices by Quarters\" appearing on the inside back cover of the Registrant's 1993 annual report to shareholders contains certain information with respect to sales prices of the common stock and cash dividends declared by the Registrant on the common stock, and such table is incorporated herein by reference.\nAt December 31, 1993, there were 2,100 shareholders of record of the Registrant.\nITEM 6.","section_6":"ITEM 6. SELECTED FINANCIAL DATA.\nSelected financial data of the Registrant is set forth on Page 21 of the Registrant's 1993 annual report to shareholders and is incorporated herein by reference.\nITEM 7.","section_7":"ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.\nManagement's discussion and analysis of financial condition and results of operations is set forth on pages 15 through 20 of the Registrant's 1993 annual report to shareholders and is incorporated herein by reference.\nITEM 8.","section_7A":"","section_8":"ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.\nThe consolidated financial statements, appearing on pages 22 through 31, together with the report thereon of Arthur Andersen & Co. dated January 24, 1994 appearing on page 25, and the unaudited information, appearing on pages 32 through 35, of the Registrant's 1993 annual report to shareholders are incorporated herein by reference. With the exception of the aforementioned information and the information expressly incorporated into Items 2, 5, 6 and 7 hereof, the 1993 annual report to shareholders is not to be deemed to be filed as part of this report.\nThe consolidated balance sheet of Natural Gas Clearinghouse (a Colorado partnership) and subsidiaries as of December 31, 1991, and the related consolidated statements of income, partners' equity and cash flows for the year then ended, appearing on pages through of the Registrant's Form 10-K for the year ended December 31, 1991 (the \"1991 Form 10-K\") together with the report thereon of Arthur Andersen & Co. dated February 21, 1992 appearing on page of the 1991 Form 10-K, are incorporated herein by reference.\nITEM 9.","section_9":"ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.\nNot applicable.\nPART III\nITEM 10.","section_9A":"","section_9B":"","section_10":"ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.\nThe section entitled \"Election of Directors\" appearing on pages 3 and 4 of the Registrant's proxy statement for the 1994 annual meeting of shareholders sets forth certain information with respect to the directors of the Registrant and is incorporated herein by reference. Certain information with respect to the executive officers of the Registrant is set forth under the caption \"Executive Officers of the Registrant\" in Part I of this report.\nThe section entitled \"Certain Transactions\" appearing on page 16 of the Registrant's proxy statement for the 1994 annual meeting of shareholders sets forth certain information with respect to compliance with Section 16(a) of the Exchange Act and is incorporated herein by reference.\nITEM 11.","section_11":"ITEM 11. EXECUTIVE COMPENSATION.\nThe section entitled \"Executive Compensation\" appearing on pages 7 through 16 of the Registrant's proxy statement for the 1994 annual meeting of shareholders sets forth certain information with respect to the compensation of management of the Registrant, and, except for the report of the compensation and benefits committee of the Board of Directors (pages 7 through 10) and the information therein under \"Performance Graph\" (pages 15 and 16), is incorporated herein by reference.\nITEM 12.","section_12":"ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.\nThe sections entitled \"Security Ownership of Certain Beneficial Owners\" and \"Security Ownership of Directors and Executive Officers\" appearing on pages 2 and 5 of the Registrant's proxy statement for the 1994 annual meeting of shareholders set forth certain information with respect to the ownership of the Registrant's common stock, and are incorporated herein by reference.\nITEM 13.","section_13":"ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.\nNot applicable.\nPART IV\nITEM 14.","section_14":"ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.\nAll other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.\nFinancial statements of two 50 percent or less owned entities accounted for by the equity method have been omitted because, in the aggregate, the proportionate share of their profit before income taxes and total assets are less than 20 percent of the respective consolidated amounts, and investments in such entities are less than 20 percent of consolidated total assets, of the Registrant.\n(3) Exhibits:\nThe exhibits required to be filed by this Item 14 are set forth in the Index to Exhibits accompanying this report.\n(b) No report on Form 8-K was filed by the Registrant during the quarter ended December 31, 1993.\nSIGNATURES\nPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.\nNOBLE AFFILIATES, INC.\nDate: March 29, 1994 By: WILLIAM D. DICKSON ---------------------------------- William D. Dickson, Vice President-Finance and Treasurer\nPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.\nS-1\nREPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULES\nTo Noble Affiliates, Inc.:\nWe have audited in accordance with generally accepted auditing standards, the consolidated financial statements included in Noble Affiliates, Inc.'s annual report to shareholders incorporated by reference in this Form 10-K, and have issued our report thereon dated January 24, 1994. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. The schedules listed in the index above are the responsibility of the Company's management and are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic consolidated financial statements. These schedules have been subjected to the auditing procedures applied in the audit of the basic consolidated financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole.\nARTHUR ANDERSEN & CO. Oklahoma City, Oklahoma January 24, 1994\nR-1\nSCHEDULE V ----------\nNOBLE AFFILIATES, INC. AND SUBSIDIARIES\nPROPERTY, PLANT AND EQUIPMENT\n(In thousands of dollars)\nV-1\nSCHEDULE VI -----------\nNOBLE AFFILIATES, INC. AND SUBSIDIARIES\nACCUMULATED DEPRECIATION, DEPLETION AND AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT\n(In thousands of dollars)\nVI-1\nSCHEDULE IX -----------\nNOBLE AFFILIATES, INC. AND SUBSIDIARIES\nSHORT-TERM BORROWINGS\nIX-1\nSECURITIES AND EXCHANGE COMMISSION\nWashington, D.C. 20549\nEXHIBITS TO\nFORM 10-K\nANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934\nFor the fiscal year ended Commission file number: December 31, 1993 0-7062\nNOBLE AFFILIATES, INC. (Exact name of registrant as specified in its charter)\nDelaware 73-0785597 (State of incorporation) (I.R.S. employer identification number)\n110 West Broadway Ardmore, Oklahoma 73401 (Address of principal (Zip Code) executive offices)\nINDEX TO EXHIBITS -----------------\nE-1\nE-2\nE-3\nE-4","section_15":""}
{"filename":"847903_1993.txt","cik":"847903","year":"1993","section_1":"ITEM 1. BUSINESS\n(a) General Development of Business\nRJR Nabisco Holdings Corp. (\"Holdings\") was organized as a Delaware corporation in 1988 at the direction of Kohlberg Kravis Roberts & Co., L.P. (\"KKR\"), a Delaware limited partnership, to effect the acquisition of RJR Nabisco, Inc. (\"RJRN\"), which was completed on April 28, 1989 (the \"Acquisition\"). As a result of the Acquisition, RJRN became an indirect, wholly owned subsidiary of Holdings. After a series of holding company mergers completed on December 17, 1992, RJRN became a direct, wholly owned subsidiary of Holdings. The business of Holdings is conducted through RJRN. Holdings and RJRN are referred to herein collectively as the \"Registrants\".\nRJRN's operating subsidiaries comprise one of the largest tobacco and food companies in the world. In the United States, the tobacco business is conducted by R. J. Reynolds Tobacco Company (\"RJRT\"), the second largest manufacturer of cigarettes, and the packaged food business is conducted by the Nabisco Foods Group (\"NFG\"), the largest manufacturer and marketer of cookies and crackers. Tobacco operations outside the United States are conducted by R. J. Reynolds Tobacco International, Inc. (\"Tobacco International\") and food operations outside the United States and Canada are conducted by Nabisco International, Inc. (\"Nabisco International\"). NFG and Nabisco International are sometimes referred to herein collectively as \"Nabisco\". Together, RJRT's and Tobacco International's tobacco products are sold around the world under a variety of brand names. Nabisco's food products are sold in the United States, Canada, Latin America and certain other international markets. For financial information with respect to RJRN's industry segments, lines of business and operations in various geographic locations, see Item 7, \"Management's Discussion and Analysis of Financial Condition and Results of Operations\" and Note 15 to the consolidated financial statements, and the related notes thereto, of Holdings and RJRN as of December 31, 1993 and 1992 and for each of the years in the three-year period ended December 31, 1993 (the \"Consolidated Financial Statements\").\nRJRN was incorporated in 1970 and can trace its origins back to the formation of R. J. Reynolds Tobacco Company in 1875. Activities were confined to the tobacco industry until the 1960's, when diversification led to investments in transportation, energy and food. With the acquisition of Del Monte Corporation (\"Del Monte\") in 1979, RJRN began to concentrate its focus on consumer products. This strategy led to the acquisition of Nabisco Brands, Inc. in 1985. RJRN today conducts its tobacco line of business through RJRT and Tobacco International and its food line of business through NFG and Nabisco International.\nIn recent years the Registrants have completed a number of acquisitions within these lines of business. These included the 1992 acquisitions of (i) the assets of New York Style Bagel Chip Company, Inc., the country's leading producer and marketer of bagel chips and pita chips; (ii) Plush Pippin Corporation, a leading regional supplier of frozen pies to in-store supermarket bakeries; (iii) Stella D'oro Biscuit Co., Inc., a New York based specialty bakery (\"Stella D'oro\") which manufactures breadsticks, breakfast biscuits, specialty cakes, pastries and snacks; and (iv) the Now & Later confection brand, a fruit chewy taffy product. In 1992, the Registrants also acquired Industrias Alimenticias Maguary S.A., Brazil's largest producer and marketer of packaged fruit-based beverages, Lance S.A. de C.V., one of Mexico's leading biscuit and pasta manufacturers, and six food and pet food businesses in Mexico in exchange for Nabisco International's previous minority interest in a joint venture operating those and other businesses in Mexico. During 1993, Nabisco International acquired a 50% interest in both Royal Brands, S.A. in Spain and Royal Brands Portugal, acquired approximately 95% of Cia. Arturo Field y la Estrella Ltda., S.A. in Peru and increased its equity interest in a partially owned business in Venezuela to 100%. In addition, Tobacco International acquired a 52% interest in a cigarette factory in St. Petersburg, Russia in 1992, and constructed a factory in Turkey and acquired a 70% interest in two cigarette factories in the Ukraine in 1993.\nOn January 4, 1993, the Registrants completed the sale of NFG's ready-to-eat cold cereal business to Kraft General Foods, Inc. and one of its affiliates, for an aggregate cash purchase price of approximately $456 million in cash, prior to post-closing adjustments.\nNFG acquired the Knox gelatin brand in January 1994 and has contractual arrangements pursuant to which it expects to acquire the remaining 50% of Royal Brands, S.A. and Royal Brands Portugal during 1994.\nRJRN will continue to assess its businesses to evaluate their consistency with strategic objectives. Although RJRN may acquire and\/or divest additional businesses in the future, no decisions have been made with respect to any such acquisitions or divestitures. The Registrants' credit agreement, dated as of December 1, 1991, as amended (the \"1991 Credit Agreement\") and credit agreement, dated as of April 5, 1993, as amended (the \"1993 Credit Agreement\", and together with the 1991 Credit Agreement, the \"Credit Agreements\"), prohibit the sale of all or substantially all or any substantial portion of the businesses of certain subsidiaries of RJRN.\n(b) Financial Information about Industry Segments\nDuring 1993, the Registrants' industry segments were tobacco and food.\nFor information relating to industry segments for the years ended December 31, 1993, 1992 and 1991, see Note 15 to the Consolidated Financial Statements.\n(c) Narrative Description of Business\nTOBACCO\nThe tobacco line of business is conducted by RJRT and Tobacco International, which manufacture, distribute and sell cigarettes. Cigarettes are manufactured in the United States by RJRT and in over 30 foreign countries and territories by Tobacco International and subsidiaries or licensees of RJRT and are sold throughout the United States and in more than 160 markets around the world. In 1993, approximately 61% of total tobacco segment net sales (after deducting excise taxes) and approximately 65% of total tobacco segment operating income (before amortization of trademarks and goodwill and the effects of a restructuring expense) were attributable to domestic tobacco operations.\nDOMESTIC TOBACCO OPERATIONS\nThe domestic tobacco business is conducted by RJRT, which is the second largest cigarette manufacturer in the United States. RJRT's largest selling cigarette brands in the United States include WINSTON, DORAL, SALEM, CAMEL, MONARCH and BEST VALUE. RJRT's other cigarette brands, including VANTAGE, MORE, NOW, STERLING, MAGNA and CENTURY, are marketed to meet a variety of smoker preferences. All RJRT brands are marketed in a variety of styles. Based on data collected for RJRT by an independent market research firm, RJRT had an overall share of retail consumer cigarette sales during 1993 of 29.8%, an increase of approximately one share point from 1992. During 1993, RJRT and the largest domestic cigarette manufacturer, Philip Morris U.S.A., together sold approximately 73% of all cigarettes sold in the United States.\nA primary long-term objective of RJRT is to increase earnings and cash flow through selective marketing investments in its key brands and continual improvements in its cost structure and operating efficiency. Marketing programs for full-price brands are designed to build brand awareness and add value to the brands in order to retain current adult smokers and attract adult smokers of competitive brands. In 1993, these efforts included expansion of continuity and relationship-building programs such as CAMEL Cash and the WINSTON Winners Club, and the introduction of line extensions such as CAMEL Special Lights and WINSTON Select Lights. RJRT believes it is essential to compete in all segments of the cigarette market, and accordingly offers a range of lower-priced brands including DORAL, MONARCH and BEST VALUE intended to appeal to more cost-conscious adult smokers.\nFor a discussion on competition in the tobacco business, see \"Other Matters--Competition\" in this Item 1 and \"1993 Competitive Activity\" under Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations.\nRJRT's domestic manufacturing facilities, consisting principally of factories and leaf storage facilities, are located in or near Winston-Salem, North Carolina and are owned by RJRT. Cigarette production is conducted at the Tobaccoville cigarette manufacturing plant (approximately two million square feet) and the Whitaker Park cigarette manufacturing complex (approximately one and one-half million square feet). RJRT believes that its cigarette manufacturing facilities are among the most technologically advanced in the United States. RJRT also has significant research and development facilities in Winston-Salem, North Carolina.\nRJRT's cigarettes are sold in the United States primarily to chain stores, other large retail outlets and through distributors to other retail and wholesale outlets. Except for McLane Company, Inc., which represented approximately 10.9% of RJRT's sales, no RJRT customers accounted for more than 10% of sales for 1993. RJRT distributes its cigarettes primarily to public warehouses located throughout the United States that serve as local distribution centers for RJRT's customers.\nRJRT's products are sold to adult smokers primarily through retail outlets. RJRT employs a decentralized marketing strategy that permits RJRT's sales force to be more flexible in responding to local market dynamics by designing individual in-store programs to fit varying consumption patterns. RJRT utilizes print media, billboards, point-of-sale displays and other methods of advertising. Since 1971, television and radio advertising of cigarettes has been prohibited in the United States.\nINTERNATIONAL TOBACCO OPERATIONS\nTobacco International operates in over 160 markets around the world. Although overall foreign cigarette sales (excluding China, in which production data indicates an approximate 2% per annum growth rate) have increased at a rate of only 1% per annum in recent years, Tobacco International believes that the American Blend segment, in which Tobacco International primarily competes is growing significantly faster. Although Tobacco International is the second largest of two international cigarette producers that have significant positions in the American Blend segment, its share of sales of this segment is approximately one-third of the share of Philip Morris International Inc., the largest American Blend producer.\nTobacco International has strong brand presence in Western Europe and is well established in its other key markets in the Middle East\/Africa, Asia and Canada. Tobacco International is aggressively pursuing development opportunities in Eastern Europe and the former Soviet Union.\nTobacco International markets over 55 brands of which WINSTON, CAMEL and SALEM, all American Blend cigarettes, are its international leaders. WINSTON, Tobacco International's largest selling international brand, has a significant presence in Puerto Rico and has particular strength in the Western Europe and Middle East\/Africa regions. CAMEL is sold in approximately 135 markets worldwide and is Tobacco International's second largest selling international brand. SALEM is the world's largest selling menthol cigarette and has particular strength in Far East markets. Tobacco International also markets a number of local brands in various foreign markets. None of Tobacco International's customers accounted for more than 10% of sales for 1993.\nApproximately 30% of Tobacco International's cigarette volume for 1993 was manufactured by RJRT in the United States for sale in foreign markets. The remainder was manufactured overseas, principally in owned manufacturing facilities or by licensees or joint ventures. Tobacco International operates two tobacco manufacturing facilities in Germany and one located in each of Canada, Hong Kong, Hungary, Malaysia, Poland, Puerto Rico and Switzerland. Tobacco International opened a factory in the People's Republic of China in 1988 as a part of the first cigarette manufacturing joint venture in that country, and in 1993 constructed a factory in Turkey and acquired a 70% interest in two\ncigarette factories in the Ukraine. In addition, in 1992, Tobacco International acquired a 52% interest in a cigarette factory in St. Petersburg, Russia.\nCertain of Tobacco International's foreign operations are subject to local regulations that set import quotas, restrict financing flexibility and affect repatriation of earnings or assets. In recent years, certain trade barriers for cigarettes, particularly in Asia and Eastern Europe, have been liberalized. This may provide opportunities for all international cigarette manufacturers, including Tobacco International, to expand operations in such markets; however, there can be no assurance that the liberalizing trends will be maintained or extended or that Tobacco International will be successful in pursuing such opportunities.\nRAW MATERIALS\nIn its domestic production of cigarettes, RJRT primarily uses domestic burley and flue cured leaf tobaccos purchased at domestic auction. RJRT also purchases oriental tobaccos, grown primarily in Turkey and Greece, and certain other non-domestic tobaccos. Tobacco International uses a variety of tobacco leaf from both United States and international sources. Tobacco leaf is an agricultural commodity subject in the United States to government production controls and price supports that can affect market prices substantially. The tobacco leaf price support program is subject to Congressional review and may be changed at any time in the future. In addition, Congress enacted legislation during 1993 (the Omnibus Budget Reconciliation Act of 1993), which stipulates that, effective January 1, 1994, financial penalties will be assessed against manufacturers if cigarettes produced in the United States do not contain at least 75% (by weight) domestically grown flue cured and burley tobaccos. Currently RJRT expects that compliance with the content regulation will increase its future raw material costs. RJRT and Tobacco International believe there is a sufficient supply of tobacco in the worldwide tobacco market to satisfy their current production requirements.\nLEGISLATION AND OTHER MATTERS AFFECTING THE CIGARETTE INDUSTRY\nThe advertising, sale and use of cigarettes has been under attack by government and health officials in the United States and in other countries for many years, principally due to claims that cigarette smoking is harmful to health. This attack has resulted in a number of substantial restrictions on the marketing, advertising and use of cigarettes, diminishing social acceptability of smoking and activities by anti-smoking groups designed to inhibit cigarette sales, the form and content of cigarette advertising and the testing and introduction of new cigarette products. Together with manufacturers' price increases in recent years and substantial increases in state and federal excise taxes on cigarettes, this has had and will likely continue to have an adverse effect on cigarette sales.\nCigarettes are subject to substantial excise taxes in the United States and to similar taxes in many foreign markets. In 1990, Congress enacted legislation to increase the federal excise tax per pack of 20 cigarettes to 20 cents from 16 cents on January 1, 1991 and provide for an increase in the federal excise tax on January 1, 1993 to 24 cents. In addition, all states and the District of Columbia impose excise taxes of levels ranging from a low of 2.5 cents to a high of 65 cents per pack on cigarettes, and increases in these state excise taxes could also have an adverse effect on cigarette sales. In 1993, thirteen states and the District of Columbia enacted excise tax increases ranging from less than 2 cents per pack to 41 cents per pack.\nIn addition, the Clinton Administration and members of Congress have introduced bills in Congress that would significantly increase the federal excise tax on cigarettes, eliminate the deductibility of a portion of the cost of tobacco advertising, ban smoking in public buildings and workplaces, add additional health warnings on cigarette packaging and advertising and further restrict the marketing of tobacco products.\nIn January 1993, the U.S. Environmental Protection Agency (the \"EPA\") released a report on the respiratory effects of environmental tobacco smoke (\"ETS\") which concludes that ETS is a known\nhuman lung carcinogen in adults; and in children causes increased respiratory tract disease and middle ear disorders and increases the severity and frequency of asthma. RJRT has joined other segments of the tobacco and distribution industries in a lawsuit against the EPA seeking a determination that the EPA did not have the statutory authority to regulate ETS, and that, given the current body of scientific evidence and the EPA's failure to follow its own guidelines in making the determination, the EPA's classification of ETS was arbitrary and capricious.\nIn September 1991, the U.S. Occupational Safety and Health Administration (\"OSHA\") issued a Request for Information relating to indoor air quality, including ETS, in occupational settings. OSHA has announced that it will commence formal rulemaking in 1994. While the Registrants cannot predict the outcome, some form of regulation of smoking in workplaces may result.\nLegislation imposing various restrictions on public smoking has also been enacted in nineteen states and many local jurisdictions, many employers have initiated programs restricting or eliminating smoking in the workplace and nine states have enacted legislation designating a portion of increased cigarette excise taxes to fund either anti-smoking programs, health care programs or cancer research. Federal law prohibits smoking on all domestic airline flights of six hours duration or less and the U.S. Interstate Commerce Commission has banned smoking on buses transporting passengers inter-state.\nA number of foreign countries have also taken steps to discourage cigarette smoking, to restrict or prohibit cigarette advertising and promotion and to increase taxes on cigarettes. Such restrictions are, in some cases, more onerous than restrictions imposed in the United States. In June 1988, Canada enacted a ban on cigarette advertising, the constitutionality of which is before the Supreme Court of Canada.\nOn December 11, 1990, RJRN and other U.S. cigarette manufacturers, through The Tobacco Institute, announced a tobacco industry initiative to assist retailers in enforcing minimum age laws on the sale of cigarettes, to support the enactment of state laws requiring the adult supervision of cigarette vending machines in places frequented by minors, to seek the uniform establishment of 18 as the minimum age for the purchase of cigarettes in all states, to distribute informational materials to assist parents in combatting peer pressure on their children to smoke and to limit voluntarily certain cigarette advertising and promotional practices. In 1992, the Alcohol, Drug and Mental Health Act was signed into law. This Act contains a provision, effective January 1, 1994, that requires states to adopt a minimum age of 18 for purchase of tobacco products to receive federal funding for mental health and drug abuse programs.\nIn 1964, the Report of the Advisory Committee to the Surgeon General of the U.S. Public Health Service concluded that cigarette smoking was a health hazard of sufficient importance to warrant appropriate remedial action. Since 1966, federal law has required a warning statement on cigarette packaging. Since 1971, television and radio advertising of cigarettes has been prohibited in the United States. Cigarette advertising in other media in the United States is required to include information with respect to the \"tar\" and nicotine content of cigarettes, as well as a warning statement.\nDuring the past three decades, various legislation affecting the cigarette industry has been enacted. In 1984, Congress enacted the Comprehensive Smoking Education Act (the \"Smoking Education Act\"). Among other things, the Smoking Education Act: (i) establishes an interagency committee on smoking and health that is charged with carrying out a program to inform the public of any dangers to human health presented by cigarette smoking; (ii) requires a series of four new health warnings to be printed on cigarette packages and advertising on a rotating basis; (iii) increases type size and area of the warning on cigarette advertisements; and (iv) requires that cigarette manufacturers provide annually, on a confidential basis, a list of ingredients used in the manufacture of cigarettes to the Secretary of Health and Human Services. The warnings currently required on cigarette packages and advertisements (other than billboards) are as follows: (i) \"Surgeon General's Warning: Smoking Causes Lung Cancer, Heart Disease, Emphysema, And May Complicate Pregnancy\"; (ii) \"Surgeon General's Warning: Quitting Smoking Now Greatly Reduces Serious Risks To Your Health\"; (iii) \"Surgeon General's Warning: Smoking By Pregnant Women May Result in Fetal Injury, Premature Birth, and\nLow Birth Weight\"; and (iv) \"Surgeon General's Warning: Cigarette Smoke Contains Carbon Monoxide.\" Similar warnings are required on outdoor billboards. In August 1990, the Fire Safe Cigarette Act of 1990 was enacted, which directed the Consumer Product Safety Commission to conduct and oversee research begun under direction of the Cigarette and Little Cigar Fire Safety Act of 1984 and to assess the practicability of developing a performance standard to reduce cigarette ignition propensity. The Commission presented a final report to Congress in August 1993 describing the results of the research. The Commission concluded that while \"it is practicable to develop a performance standard to reduce cigarette ignition propensity, it is unclear that such a standard would effectively address the number of cigarette-ignited fires.\" The Commission further found that additional work would be required before the actual development of a performance standard. Nevertheless, the Commission reported that a test method developed by the National Institute of Standards and Technology was valid and reliable within reasonable limits and could be suitable for use in a performance standard. Although the Registrants cannot predict whether further legislation on this subject may be enacted, some form of regulation of cigarettes based on their propensity to ignite soft furnishings may result.\nSince the initial report in 1964, the Secretary of Health, Education and Welfare and the Surgeon General have issued a number of other reports which purport to link cigarette smoking with certain health hazards, including various types of cancer, coronary heart disease and chronic obstructive lung disease. These reports have recommended various governmental measures to reduce the incidence of smoking.\nIn addition to the foregoing, legislation and regulations potentially detrimental to the cigarette industry, generally relating to the taxation of cigarettes and regulation of advertising, labeling, promotion, sale and smoking of cigarettes, have been proposed from time to time at various levels of the federal government. Various Congressional committees and subcommittees have approved legislation in recent years that (i) would subject cigarettes to regulation in various ways under the U.S. Department of Health and Human Services, (ii) would subject cigarettes generally to regulation under the Consumer Products Safety Act, (iii) could increase manufacturers' costs, (iv) would mandate anti-smoking education campaigns or establish anti-smoking programs, (v) would provide additional funding for federal and state anti-smoking activities, (vi) would require a new list of six health warnings on cigarette packages and advertising, expand the number or required size of the warnings and restrict the contents of cigarette advertising and promotional activities, (vii) would provide that neither the provisions of the Federal Cigarette Labeling and Advertising Act, as amended (the \"Cigarette Act\"), nor the Smoking Education Act should be interpreted to relieve any person from liability under common law or state statutory law and (viii) would permit state and local governments to restrict the sale and distribution of cigarettes and the placement of billboard and transit advertising of tobacco products.\nIt is not possible to determine what additional federal, state or local legislation or regulations relating to smoking or cigarettes will be enacted or to predict any resulting effect thereof on RJRT, Tobacco International or the cigarette industry generally but such legislation or regulations could have an adverse effect on RJRT, Tobacco International or the cigarette industry generally.\nLITIGATION AFFECTING THE CIGARETTE INDUSTRY\nVarious legal actions, proceedings and claims are pending or may be instituted against RJRT or its affiliates or indemnitees, including those claiming that lung cancer and other diseases have resulted from the use of or exposure to RJRT's tobacco products. During 1993, 16 new actions were filed or served against RJRT and\/or its affiliates or indemnitees and 18 such actions were dismissed or otherwise resolved in favor of RJRT and\/or its affiliates or indemnitees without trial. A total of 35 such actions in the United States, one in Puerto Rico and one against RJRT's Canadian subsidiary were pending on December 31, 1993. As of February 7, 1994, 35 active cases were pending against RJRT and\/or its affiliates or indemnitees, 33 in the United States, one in Puerto Rico and one in Canada. Four of the 33 active cases in the United States involve alleged non-smokers claiming injuries resulting from exposure to environmental tobacco smoke. One of such cases is currently scheduled for trial on\nSeptember 5, 1994 and if tried, will be the first such case to reach trial. The United States cases are in 15 states and are distributed as follows: eight in Louisiana, eight in Texas, three in Mississippi, two in Indiana, two in New Jersey and one each in Alabama, Florida, Illinois, Kentucky, Maryland, Massachusetts, Minnesota, New York, Oregon and West Virginia. Of the 33 active cases in the United States, 24 are pending in state court and 9 in federal court. One of the active cases is alleged to be a class action on behalf of a purported class of 60,000 individuals.\nThe plaintiffs in these actions seek recovery on a variety of legal theories, including strict liability in tort, design defect, negligence, breach of warranty, failure to warn, fraud, misrepresentation and conspiracy. Punitive damages, often in amounts totalling many millions of dollars, are specifically pleaded in 20 cases in addition to compensatory and other damages. The defenses raised by RJRT and\/or its affiliates, where applicable, include preemption by the Cigarette Act of some or all such claims arising after 1969; the lack of any defect in the product; assumption of the risk; comparative fault; lack of proximate cause; and statutes of limitations or repose. Juries have found for plaintiffs in two smoking and health cases, but in one such case, which has been appealed by both parties, no damages were awarded. The jury awarded $400,000 in the other case, Cipollone v. Liggett Group, Inc., et al., which award was overturned on appeal and the case was subsequently dismissed.\nOn June 24, 1992, the United States Supreme Court in Cipollone held that claims that tobacco companies failed to adequately warn of the risks of smoking after 1969 and claims that their advertising and promotional practices undermined the effect of warnings after that date were preempted by the Cigarette Act. The Court also held that claims of breach of express warranty, fraud, misrepresentation and conspiracy were not preempted. The Supreme Court's decision was announced through a plurality opinion, and further definition of how Cipollone will apply to other cases must await rulings in those cases.\nCertain legislation proposed in recent years in Congress, among other things, would eliminate any such preemptive effect on common law damage actions for personal injuries. RJRT is unable to predict whether such legislation will be enacted, if so, in what form, or whether such legislation would be intended by Congress to apply retroactively. The Supreme Court's Cipollone decision itself, or the passage of such legislation, could increase the number of cases filed against cigarette manufacturers, including RJRT.\nRJRT understands that a grand jury investigation being conducted in the Eastern District of New York is examining possible violations of criminal law in connection with activities relating to the Council for Tobacco Research-USA, Inc., of which RJRT is a sponsor. RJRT is unable to predict the outcome of this investigation.\nRJRT recently received a civil investigative demand from the U.S. Department of Justice requesting broad documentary information from RJRT. Although the request appears to focus on tobacco industry activities in connection with product development efforts, it also requests general information concerning contacts with competitors. RJRT is unable to predict the outcome of this investigation.\nLitigation is subject to many uncertainties, and it is possible that some of the legal actions, proceedings or claims could be decided against RJRT or its affiliates or indemnitees. Determinations of liability or adverse rulings against other cigarette manufacturers that are defendants in similar actions, even if such rulings are not final, could adversely affect the litigation against RJRT and its affiliates or indemnitees and increase the number of such claims. Although it is impossible to predict the outcome of such events or their effect on RJRT, a significant increase in litigation activities could have an adverse effect on RJRT. RJRT believes that it has a number of valid defenses to any such actions, including but not limited to those defenses based on preemption under the Cipollone decision, and RJRT intends to defend vigorously all such actions.\nFOOD\nThe food line of business conducted by NFG, which comprises the Nabisco Biscuit Company, the LifeSavers Division, the Planters Division, the Specialty Products Company, the Fleischmann's Division, the Food Service Division and Nabisco Brands Ltd, and by Nabisco International.\nFood products are sold under trademarks owned or licensed by Nabisco and brand recognition is considered essential to their successful marketing. None of Nabisco's customers accounted for more than 10% of sales for 1993.\nNABISCO FOODS GROUP OPERATIONS\nNabisco Biscuit Company. Nabisco Biscuit is the largest manufacturer and marketer in the United States cookie and cracker industry with the nine top selling brands, each of which had annual sales of over $100 million in 1993. Overall, in 1993, Nabisco Biscuit had a 39% share of the domestic cookie industry sales, more than double the share of its closest competitor, and a 55% share of the domestic cracker industry sales, more than three times the share of its closest competitor. Leading Nabisco Biscuit cookie brands include OREO, CHIPS AHOY! and NEWTONS. Leading Nabisco Biscuit cracker brands include RITZ, PREMIUM, WHEAT THINS, NABISCO GRAHAMS and TRISCUIT.\nOREO and CHIPS AHOY! are the two largest selling cookies in the United States. OREO, the leading sandwich cookie, is Nabisco Biscuit's largest selling cookie brand. CHIPS AHOY! is the leader in the chocolate chip cookie segment with recent line extensions such as CHUNKY CHIPS AHOY! broadening its appeal and adding incremental sales.\nNEWTONS, the oldest Nabisco Biscuit cookie brand, is the third leading cookie brand in the United States. The introduction of FAT FREE FIG and APPLE NEWTONS in 1992 and the addition of the FAT FREE CRANBERRY, RASPBERRY and STRAWBERRY NEWTONS in 1993 has expanded the appeal of NEWTONS and brought incremental sales to the franchise.\nNabisco Biscuit's cracker division is led by RITZ, the largest selling cracker brand in the United States, which accounted for 12% of cracker sales in the United States in 1993. In addition, PREMIUM, the oldest Nabisco Biscuit cracker brand and the leader in the saltine cracker segment, is joined by WHEAT THINS, NABISCO GRAHAMS and TRISCUIT to comprise, along with RITZ, the five largest selling cracker brands in the United States.\nIn 1991, Nabisco Biscuit introduced MR. PHIPPS PRETZEL CHIPS, the first such product of its kind. Nabisco Biscuit expanded the MR. PHIPPS franchise with the introduction of MR. PHIPPS TATER CRISPS in 1992, which deliver salty snack taste with only half the fat of potato chips, and the introduction of MR. PHIPPS TORTILLA CRISPS in 1993.\nIn 1992, Nabisco Biscuit became the leading manufacturer and marketer of no fat\/reduced fat cookies and crackers with the introduction of the SNACKWELL'S line. In 1993, the SNACKWELL'S brand recorded over $200 million in sales to become the sixth largest cookie\/cracker brand in the United States.\nIn October 1992, Nabisco Biscuit acquired STELLA D'ORO, a leading producer of breadsticks, breakfast biscuits, specialty cakes, pastries and snacks. This line of specialty items gives Nabisco Biscuit an entry to new users and usage occasions, further broadening NFG's cookie and cracker portfolio.\nNabisco Biscuit's other cookie and cracker brands, which include NUTTER BUTTER, NILLA WAFERS, BARNUM'S ANIMALS CRACKERS, BETTER CHEDDARS, HARVEST CRISPS, CHICKEN IN A BISKIT, CHEESE NIPS and NEW YORK STYLE BAGEL and PITA CHIPS,\ncompete in consumer niche segments. Many are the first or second largest selling brands in their respective segments.\nNabisco Biscuit's products are manufactured in 13 Nabisco Biscuit-owned bakeries and in 16 facilities with which Nabisco Biscuit has production agreements. These facilities are located throughout the United States. Nabisco Biscuit is in the process of implementing plans to modernize certain of its facilities. Nabisco Biscuit also operates a flour mill in Toledo, Ohio, which supplies 85% of its flour needs.\nNabisco Biscuit's products are sold to major grocery and other large retail chains through Nabisco Biscuit's direct store delivery system. The system is supported by a distribution network utilizing ten major distribution warehouses and 130 shipping branches where shipments are consolidated for delivery to approximately 111,000 separate delivery points. NFG believes this sophisticated distribution and delivery system provides it with a significant service advantage over its competitors.\nLifeSavers Division. The LifeSavers Division manufactures and markets hard roll and bite-size candy and gum primarily for sale in the United States. LifeSavers' well-known brands include LIFE SAVERS hard roll and bite-size candy, BREATH SAVERS sugar free mints, BUBBLE YUM bubble gum, CARE*FREE sugarless gum, NOW & LATER fruit chewy taffy and LIFE SAVERS GUMMI SAVERS fruit chewy candy. On the basis of the most recent data available, LIFE SAVERS is the largest selling hard roll candy in the United States, with an approximately 25% share of the hard roll candy category, BREATH SAVERS is the largest selling sugar free breath mint in the United States and BUBBLE YUM is the largest selling chunk bubble gum in the United States. LifeSavers' confectionery products are seasonally strongest during the third and fourth quarters.\nLifeSavers sells its products in the United States primarily to large retail outlets, chain accounts and to other retail and wholesale outlets. These include grocery stores, drug\/mass merchandisers, convenience stores, and food service and military suppliers. The products are distributed from 13 distribution centers located throughout the United States. LifeSavers currently owns and operates three manufacturing facilities for its products, one in Holland, Michigan, one in Brooklyn, New York and the other in Las Piedras, Puerto Rico. Sales, for the LifeSavers Division, as well as the Planters, Specialty Products and Fleischmann's Divisions, are handled through NFG's Sales and Integrated Logistics group, which utilize both direct sales and broker sales organizations.\nPlanters Division. The Planters Division produces and\/or markets nuts and snacks largely for sale in the United States, primarily under the PLANTERS trademark. On the basis of the most recent data available, PLANTERS nuts are the clear leader in the packaged nut category, with a market share of more than five times that of its nearest competitor. Planters' products are commodity oriented and are seasonally strongest in the fourth quarter.\nPlanters sells its products in the United States primarily to large retail outlets, chain accounts and to other retail and wholesale outlets. These include grocery stores, drug\/mass merchandisers, convenience stores, and food service and military suppliers. The products are distributed from the same 13 distribution centers utilized by the LifeSavers Division. Planters currently owns and operates three manufacturing facilities for its products, all located in the United States.\nSpecialty Products Company. NFG's Specialty Products Company manufacturers and markets a broad range of food products, with sauces and condiments, pet snacks, ethnic foods and hot cereals representing the largest categories. Many of its products are first or second in their product categories. Well-known brand names include A.1. steak sauces, GREY POUPON mustards, MILK-BONE pet snacks, ORTEGA Mexican foods and CREAM OF WHEAT hot cereals.\nSpecialty Products' primary entries in the sauce and condiment segments are A.1. steak sauces, the leading steak sauces, and GREY POUPON mustards, which include the leading Dijon mustard.\nSpecialty Products also markets REGINA wine vinegar, the leader in its segment of the vinegar market. A.1., GREY POUPON and REGINA products are manufactured in one facility.\nSpecialty Products is the leading manufacturer of pet snacks in the United States with MILK-BONE dog biscuits. MILK-BONE products include MILK-BONE ORIGINAL BISCUITS, FLAVOR SNACKS, DOG TREATS, BUTCHER BONES and BUTCHER'S CHOICE. Pet snacks are produced at a single manufacturing facility.\nSpecialty Products produces shelf-stable Mexican foods under its ORTEGA brand name. Specialty Products also participates in the dry mix dessert category with ROYAL gelatins and puddings and the non-dessert gelatin category with KNOX unflavored gelatins and has lines of regional products including COLLEGE INN broths, VERMONT MAID syrup, MY-T-FINE puddings, DAVIS baking powder and BRER RABBIT molasses and syrup.\nNFG, through its Specialty Products Company, is the second largest manufacturer in the hot cereal category, participating in both the cook-on-stove and mix-in-bowl segments of the category. The Quaker Oats Company, with over 60% of the hot cereal category volume sales, is the most significant participant in the hot cereal category. CREAM OF WHEAT, the leading wheat-based hot cereal, and CREAM OF RICE, participate in the cook-on-stove segment and at least seven varieties of INSTANT CREAM OF WHEAT participate in the mix-in-bowl segment. Hot cereals are manufactured in one facility.\nSpecialty Products sells its products to retail grocery chains through independent brokers and to drug\/mass merchandisers and other major retail outlets through a direct salesforce. The products are distributed from the same 13 distribution centers utilized by the LifeSavers Division.\nFleischmann's Division. The Fleischmann's Division manufactures and markets various margarines and spreads as well as an egg substitute.\nFleischmann's margarine business is the second largest margarine producer in the United States. Fleischmann's currently participates in all three segments of the margarine category, with FLEISCHMANN'S in the premium health segment, BLUE BONNET in the volume segment and MOVE OVER BUTTER in the premium blend segment. Fleischmann's margarines are currently manufactured in three facilities. Fleischmann's is also the market leader in the egg substitute category with EGG BEATERS. Distribution for the Fleischmann's Division is principally direct from plant to stores.\nFood Service Division. The Food Service Division of NFG sells a variety of specially packaged food products of the other groups of NFG through non-grocery channels, including cookies, crackers, cereals, sauces and condiments for the food service and vending machine industry. The Food Service Division is a leading regional supplier of premium frozen pies to in-store supermarket bakeries, wholesale clubs and food service accounts through the Plush Pippin Corporation. The Food Service Division provides NFG with an additional distribution method for its products.\nNabisco Brands Ltd. Nabisco Brands Ltd conducts NFG's Canadian operations through a biscuit division, a grocery division and a food service division. The biscuit division produced nine of the top ten cookies and nine of the top ten crackers in Canada in 1993. Nabisco Brands Ltd's cookie and cracker brands in Canada include OREO, CHIPS AHOY!, FUDGEE-O, PEEK FREANS, DAD'S, DAVID, PREMIUM PLUS, RITZ, TRISCUIT and STONED WHEAT THINS. These products are manufactured in five bakeries in Canada and are sold through a direct store delivery system, utilizing 11 sales offices and distribution centers and a combination of public and private carriers.\nNabisco Brands Ltd's grocery division produces and markets canned fruits and vegetables, fruit drinks and pet snacks. The grocery division is the leading canned fruit producer in Canada and is the second largest canned vegetable producer in Canada. Canned fruits and vegetables and fruit drinks are marketed under the DEL MONTE trademark, pursuant to a license from Del Monte, and under the AYLMER trademark. The grocery division also markets MILK-BONE pet snacks and MAGIC\nbaking powder, each leading brands in Canada. Excluding the facility sold in connection with the sale of Nabisco's ready-to eat cold cereal business, the division operated six manufacturing facilities in 1993, five of which are devoted to canned products, principally fruits and vegetables, and one of which produced pet snacks. The grocery division's products are sold directly to retail chains and are distributed through six regional warehouses.\nNabisco Brands Ltd's food service division sells a variety of specially packaged food products including cookies, crackers, canned fruits and vegetables as well as condiments to non-grocery outlets. The food service division has its own sales and marketing organization and sources product from Nabisco Brands Ltd's other divisions.\nNABISCO INTERNATIONAL OPERATIONS\nNabisco International is a leading producer of powdered dessert and drink mixes, biscuits, baking powder and other grocery items, industrial yeast and bakery ingredients in many of the 17 Latin American countries in which it has operations. Nabisco International also exports a variety of NFG products to markets in Europe and Asia from the United States. Nabisco International is one of the largest multinational packaged food businesses in Latin America.\nNabisco International manufactures and markets yeast, baking powder and bakery ingredients under the FLEISCHMANN'S and ROYAL brands, biscuits and crackers under the NABISCO brand, dessert and drink mixes under the ROYAL brand, processed milk products under the GLORIA brand, and canned fruits and vegetables under the DEL MONTE brand pursuant to a license from Del Monte. Nabisco International's largest market is Brazil, where it operates 15 plants. Nabisco International is the market leader in powdered desserts in most of Latin America, the yeast category in Brazil, biscuits in Peru, Spain, Venezuela and Uruguay, and canned vegetables in Venezuela. Nabisco International also maintains a strong position in the processed milk category in Brazil.\nDuring 1993, Nabisco International significantly increased its presence in Europe through the acquisition of a 50% interest in each of Royal Brands S.A. in Spain and Royal Brands Portugal. Nabisco International has contractual arrangements pursuant to which it expects to acquire the remaining 50% of such businesses in 1994. Nabisco International's products in Spain now include biscuits marketed under the ARTIACH and MARBU trademarks, powder dessert mixes marketed under the ROYAL trademark and various other foods, including canned meats and juices.\nNabisco International's grocery products are sold to retail outlets through its own sales forces and independent wholesalers and distributors. Industrial yeast and bakery products are sold to the bakery trade through Nabisco International's own sales forces and independent distributors.\nRAW MATERIALS\nVarious agricultural commodities constitute the principal raw materials used by Nabisco in its food businesses. Other raw materials used by Nabisco are purchased on the commodities market and through supplier contracts. Prices of agricultural commodities tend to fluctuate due to various seasonal, climatic and economic factors, which factors generally also affect Nabisco's competitors. Nabisco believes that the raw materials for its products are in plentiful supply and all are readily available from a variety of independent suppliers.\nOTHER MATTERS\nCOMPETITION\nGenerally, the markets in which RJRN conducts its businesses are highly competitive, with a number of large participants. Competition is conducted on the basis of brand recognition, brand loyalty and price. For most of RJRN's brands substantial advertising and promotional expenditures are\nrequired to maintain or improve a brand's position or to introduce a new brand. With respect to the tobacco industry, anti-smoking groups have undertaken activities designed to inhibit cigarette sales, the form and content of cigarette advertising and the testing and introduction of new cigarette products.\nBecause television and radio advertising for cigarettes is prohibited in the United States and brand loyalty has tended to be higher in the cigarette industry than in other consumer product industries, established cigarette brands in the United States have a competitive advantage. RJRT has repositioned or introduced brands designed to appeal to adult smokers of the largest selling cigarette brand in the United States, but there can be no assurance that such efforts will be successful.\nIn addition, increased selling prices and taxes on cigarettes have resulted in additional price sensitivity of cigarettes at the consumer level and in a proliferation of discounted brands in the growing savings segment of the market. Generally, sales of cigarettes in the savings segment are not as profitable as those in other segments.\nIn April 1993, RJRT's largest competitor announced a shift in strategy designed to gain share of market while sacrificing short-term profits. The competitor's tactics included increased promotional spending and temporary price reductions on its largest cigarette brand, followed several months later by list price reductions on all its full-price and mid-price brands. RJRT defended its major full-price brands during the period of temporary price reductions and, to remain competitive in the marketplace, also reduced list prices on all its full-price and mid-price brands in August 1993. The cost of defensive price promotions and the impact of lower list prices were primarily responsible for the sharp drop in RJRT's 1993 operating company contribution.\nAlthough some improvement to the stability of the competitive environment has occurred in the fourth quarter of 1993, RJRT cannot predict if or when any further improvement to the competitive environment will occur or whether such stability will continue. In addition, growth in lower price brands was slowed in the second half of 1993 due to net price reductions on full price brands. RJRT is unable to predict whether this trend will continue.\nENVIRONMENTAL MATTERS\nThe U.S. Government and various state and local governments have enacted or adopted laws and regulations concerning protection of the environment. The regulations promulgated by the EPA and other governmental agencies under various statutes have resulted in, and will likely continue to result in, substantial expenditures for pollution control, waste treatment, plant modification and similar activities.\nCertain subsidiaries of the Registrants have been named \"potentially responsible parties\" with third parties under the Comprehensive Environmental Response, Compensation and Liability Act (\"CERCLA\") with respect to approximately fifteen sites.\nRJRN has been engaged in a continuing program to assure compliance with such laws and regulations. Although it is difficult to identify precisely the portion of capital expenditures or other costs attributable to compliance with environmental laws and the Registrants can not reasonably estimate the cost of resolving the above mentioned CERCLA matters, the Registrants do not expect such expenditures or costs to have a material adverse effect on the financial condition of either of the Registrants.\nEMPLOYEES\nAt December 31, 1993, the Registrants together with their subsidiaries had approximately 66,500 full time employees. None of RJRT's operations are unionized. Most of the unionized workers at Nabisco's operations are represented under a national contract with the Bakery, Confectionery and Tobacco Workers International Union, which was ratified in August 1992 and which will expire in August 1996. Other unions represent the employees of a number of Nabisco's operations. In addition, several of Tobacco International's operations are unionized. RJRN believes that its relations with its employees and with the unions in which its employees are members are good.\n(d) Financial Information about Foreign and Domestic Operations and Export Sales\nFor information about foreign and domestic operations and export sales for the years 1991 through 1993, see \"Geographic Data\" in Note 15 to the Consolidated Financial Statements.\nITEM 2.","section_1A":"","section_1B":"","section_2":"ITEM 2. PROPERTIES\nFor information pertaining to the Registrants' assets by lines of business and geographic areas as of December 31, 1993 and 1992, see Note 15 to the Consolidated Financial Statements.\nFor information on properties, see Item 1.\nITEM 3.","section_3":"ITEM 3. LEGAL PROCEEDINGS\nFor information relating to litigation and legal proceedings, see \"Other Matters-Environmental Matters\" and \"Litigation Affecting the Cigarette Industry\" contained in Item 1 hereof.\n------------------------------\nThe Registrants believe that the ultimate outcome of all pending litigation and legal proceedings should not have a material adverse effect on either of the Registrants' financial position; however, it is possible that the results of operations or cash flows of the Registrants in a particular quarterly or annual period could be materially affected by the ultimate outcome of certain pending litigation matters. Management is unable to derive a meaningful estimate of the amount or range of such possible loss in any particular quarterly or annual period or in the aggregate.\nITEM 4.","section_4":"ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS\nNone.\nEXECUTIVE OFFICERS OF THE REGISTRANTS EXECUTIVE OFFICERS OF HOLDINGS\nThe executive officers of Holdings are Charles M. Harper (Chairman of the Board and Chief Executive Officer), Lawrence R. Ricciardi (President and General Counsel), Eugene R. Croisant (Executive Vice President), Stephen R. Wilson (Executive Vice President and Chief Financial Officer), Robert S. Roath (Senior Vice President and Controller) and John J. Delucca (Senior Vice President and Treasurer). The following table sets forth certain information regarding such officers.\nEXECUTIVE OFFICERS OF RJRN NOT LISTED ABOVE\nSet forth below are the names, ages, positions and offices held and a brief account of the business experience during the past five years of each executive officer of RJRN, other than those listed above.\nPART II\nITEM 5.","section_5":"ITEM 5. MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDER MATTERS\nThe common stock of Holdings, par value $.01 per share (the \"Common Stock\"), is listed and traded on the New York Stock Exchange (the \"NYSE\"). Since completion of the Acquisition there has been no public trading market for the common stock of RJRN.\nAs of January 31, 1994, there were approximately 51,000 record holders of the Common Stock. All of the common stock of RJRN is owned by Holdings. The Common Stock closing price on the NYSE for February 22, 1994 was $7 1\/2.\nThe following table sets forth, for the calendar periods indicated, the high and low sales prices per share for the Common Stock on the NYSE Composite Tape, as reported in the Wall Street Journal:\nHoldings has never paid any cash dividends on shares of the Common Stock. Cash dividends paid by RJRN to Holdings are set forth in the Consolidated Statements of Cash Flows in the Consolidated Financial Statements.\nThe operations of the Registrants are conducted through RJRN's subsidiaries and, therefore, the Registrants are dependent on the earnings and cash flow of RJRN's subsidiaries to satisfy their respective debt obligations and other cash needs. The Credit Agreements, which contain restrictions on the payment of cash dividends or other distributions by Holdings in excess of certain specified amounts, and the indentures relating to certain of RJRN's debt securities, which contain restrictions on the payment of cash dividends or other distributions by RJRN to Holdings in excess of certain specified amounts, or for certain specified purposes, effectively limit the payment of dividends on the Common Stock. In addition, the declaration and payment of dividends is subject to the discretion of the board of directors of Holdings and to certain limitations under Delaware law.\nITEM 6.","section_6":"ITEM 6. SELECTED FINANCIAL DATA\nThe selected consolidated financial data presented below as of December 31, 1993 and 1992 and for each of the years in the three-year period ended December 31, 1993 for Holdings was derived from the Consolidated Financial Statements, which have been audited by Deloitte & Touche, independent auditors. In addition, the consolidated financial data as of December 31, 1991, 1990 and 1989, for the year ended December 31, 1990 and for the period from February 9, 1989 through December 31, 1989 for Holdings and for the period from January 1, 1989 through February 8, 1989 for RJRN was derived from the consolidated financial statements of Holdings and RJRN as of December 31, 1991, 1990 and 1989, for the year ended December 31, 1990 and for each of the periods within the one-year period ended December 31, 1989, not presented herein, which has been audited by Deloitte & Touche, independent auditors. The data should be read in conjunction with the Consolidated Financial Statements, related notes and other financial information included herein.\n(Footnotes on following page)\n(Footnotes for preceding page)\n- ---------------\n(1) The 1992 amount includes a gain of $98 million on the sale of Holdings' ready-to-eat cold cereal business.\n(2) The 1989 amount for Holdings included $237 million of interest expense allocated to discontinued operations.\n(3) On November 8, 1991, Holdings issued 52,500,000 shares of Series A Conversion Preferred Stock, par value $.01 per share (\"Series A Preferred Stock\") and sold 210,000,000 $.835 depositary shares (the \"Series A Depositary Shares\"). Each Series A Depositary Share represents a one-quarter ownership interest in a share of Series A Preferred Stock. Each share of Series A Preferred Stock bears cumulative cash dividends at a rate of $3.34 per annum and is payable quarterly in arrears on the 15th day of each February, May, August and November. Because Series A Preferred Stock mandatorily converts into Common Stock by November 15, 1994, dividends on shares of Series A Preferred Stock are reported similar to common equity dividends.\n(4) On December 16, 1991, an amendment to the Amended and Restated Certificate of Incorporation of Holdings was filed which deleted the provisions providing for the mandatory redemption of the redeemable preferred stock of Holdings on November 1, 2015. Accordingly, such securities were presented as a component of Holdings' stockholders' equity as of December 31, 1992 and 1991. Such securities were redeemed on December 6, 1993 (see Note 12 to the Consolidated Financial Statements).\n(5) Holdings' stockholders' equity at December 31 of each year from 1993 to 1989 includes non-cash expenses related to accumulated trademark and goodwill amortization of $3.015 billion, $2.390 billion, $1.774 billion, $1.165 billion and $557 million, respectively. (See Note 13 to the Consolidated Financial Statements.)\nSee Notes to Consolidated Financial Statements.\nITEM 7.","section_7":"ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS\nRJR Nabisco, Inc.'s (\"RJRN\") operating subsidiaries comprise one of the largest tobacco and food companies in the world. In the United States, the tobacco business is conducted by R. J. Reynolds Tobacco Company (\"RJRT\"), the second largest manufacturer of cigarettes, and the packaged food business is conducted by the Nabisco Foods Group (\"NFG\"), the largest manufacturer and marketer of cookies and crackers. Tobacco operations outside the United States are conducted by R.J. Reynolds Tobacco International, Inc. (\"Tobacco International\") and food operations outside the United States and Canada are conducted by Nabisco International, Inc. (\"Nabisco International\").\nThe following is a discussion and analysis of the consolidated financial condition and results of operations of RJR Nabisco Holdings Corp. (\"Holdings\"), the parent company of RJRN. The discussion and analysis should be read in connection with the historical financial information included in the Consolidated Financial Statements.\nRESULTS OF OPERATIONS\nSummarized financial data for Holdings is as follows:\n(Footnotes on following page)\nINDUSTRY SEGMENTS\nThe percentage contributions of each of Holdings' industry segments to net sales and operating company contribution during the last five years were as follows:\n- ---------------\n(1) Operating income before amortization of trademarks and goodwill and exclusive of restructuring expenses (RJRT: 1993-$355 million, 1992-$43 million; Tobacco International: 1993-$189 million, 1992-$0; Total Food: 1993-$153 million, 1992-$63 million; Headquarters: 1993-$33 million, 1992- $0) and a 1992 gain ($98 million) on the sale of Holdings' ready-to-eat cold cereal business as discussed below.\n(2) Contributions by industry segments were computed without effects of Headquarters' expenses.\n(3) Includes predecessor period January 1, 1989 through February 8, 1989.\nTOBACCO\nHoldings' tobacco business is conducted by RJRT and Tobacco International.\n1993 vs. 1992. Holdings' worldwide tobacco business experienced continued net sales growth in its international business that was more than offset by a significant sales decline in the domestic business, resulting in reported net sales of $8.08 billion in 1993, a decline of 11% from the 1992 level of $9.03 billion. Operating company contribution for the worldwide tobacco business of $1.84 billion in 1993 declined 31% from the 1992 level of $2.69 billion, reflecting sharp reductions for the domestic business which were partially offset by gains in the international business. Operating income for the worldwide tobacco business in 1993 of $893 million declined 60% from $2.24 billion in 1992, reflecting the lower operating company contribution and a $544 million restructuring expense in 1993 versus a restructuring expense of $43 million in 1992. The 1993 restructuring expense includes expenses to streamline both the domestic and international operations by the reduction of personnel in administration, manufacturing and sales functions, as well as rationalization of manufacturing and office facilities.\nNet sales for RJRT amounted to $4.95 billion in 1993, a decline of 20% from the 1992 level, reflecting the impact of industry-wide price reductions and price discounting on higher price brands, a higher proportion of sales from lower price brands and an overall volume decline of approximately 3.6%. The 1993 decrease in overall volume resulted from a decline in the full-price segment that more than offset growth in the lower price segment. The growth in lower price brands was slowed in the second half of 1993 by net price reductions on full-price brands. RJRT's operating company contribution was $1.20 billion in 1993, a 43% decline from the 1992 level of $2.11 billion, primarily due to the lower net sales and a higher proportion of sales from the lower margin segment, offset in part by lower operating expenses. RJRT's operating income was $480 million in 1993, a decline of 72% from $1.7 billion in 1992. The decline in operating income reflected the lower RJRT operating company contribution as well as a restructuring expense of $355 million in 1993 which is significantly higher than the $43 million restructuring expense recorded in 1992.\nTobacco International recorded net sales of $3.13 billion in 1993, an increase of 9% from the 1992 level, due to higher volume in all regions of business, the expansion of markets through ventures in Eastern Europe and Turkey, contract sales to the Russian Republic, favorable pricing in certain regions\nand a change in fiscal year end, which more than offset unfavorable currency developments in Western Europe. Tobacco International's operating company contribution rose to $644 million in 1993, an increase of 12% compared to the prior year due to higher volume and pricing which was offset in part by higher operating expenses and to a lesser extent foreign currency developments. Tobacco International's operating income was $413 million for 1993, a decline of 23% from the 1992 level. The decline in operating income reflects a restructuring expense of $189 million in 1993 that more than offset the increase in operating company contribution.\n1993 Competitive Activity. During recent years, the lower price segment of the domestic cigarette market has grown significantly and the full price segment has declined. The shifting of smokers of full price brands to lower price brands adversely affects RJRT's earnings since lower price brands are generally less profitable than full price brands. Although the difference in profitability is often substantial, it varies greatly depending on marketing and promotion levels and the terms of sale. Accordingly, RJRT has in recent years experienced substantial increased volume in the lower price segment, but the earnings attributable to these sales have not been sufficient to offset decreased earnings from declining sales of RJRT's full price brands.\nIn April 1993, RJRT's largest competitor announced a shift in strategy designed to gain share of market while sacrificing short-term profits. The competitor's tactics included increased promotional spending and temporary price reductions on its largest cigarette brand, followed several months later by list price reductions on all its full-price and mid-price brands. RJRT defended its major full-price brands during the period of temporary price reductions and, to remain competitive in the marketplace, also reduced list prices on all its full-price and mid-price brands in August 1993. The cost of defensive price promotions and the impact of lower list prices were primarily responsible for the sharp drop in RJRT's 1993 operating company contribution.\nCurrently, the domestic cigarette market has consolidated list prices for cigarettes from four or more tiers into two tiers, with price competition being conducted principally through trade and retail promotion on a brand-by-brand basis. The resulting effects from increased list prices on lower price brands and reduced promotional spending by RJRT on its full price brands have not been sufficient to offset the effect of decreased list prices on RJRT's full price brands. This has resulted in lower aggregate profit margins for RJRT. These depressed margins are expected to continue until such time as the competitive environment improves and operating costs are further reduced.\nAlthough some improvement to the stability of the competitive environment has occurred in the fourth quarter of 1993, RJRT cannot predict if or when any further improvement to the competitive environment will occur or whether such stability will continue. In addition, growth in lower price brands was slowed in the second half of 1993 due to net price reductions on full price brands. RJRT is unable to predict whether this trend will continue. RJRT's domestic cigarette volume of non-full price brands as a percentage of total domestic volume was 44% in 1993, 35% in 1992 and 25% in 1991 versus 37%, 30% and 25%, respectively, for the domestic cigarette market.\n1993 Governmental Activity. Legislation recently enacted restricts the use of imported tobacco in cigarettes manufactured in the United States and is expected to increase RJRT's future raw material cost. In addition, the Clinton Administration and members of Congress have introduced bills in Congress that would significantly increase the federal excise tax on cigarettes, eliminate the deductibility of a portion of the cost of tobacco advertising, ban smoking in public buildings and workplaces, add additional health warnings on cigarette packaging and advertising and further restrict the marketing of tobacco products. It is not possible to determine what additional federal, state or local legislation or regulations relating to smoking or cigarettes will be enacted or to predict any resulting effect thereof on RJRT, Tobacco International or the cigarette industry generally but such legislation or regulations could have an adverse effect on RJRT, Tobacco International or the cigarette industry generally.\n1992 vs. 1991. Net sales for RJRT rose 5% from 1991 to $6.17 billion in 1992 as higher unit selling prices and volume were offset in part by a higher proportion of sales from lower price brands. Overall volume for the 1992 year increased 3% from the prior year as a result of gains in the lower price segment more than offsetting a decline in the full price segment. RJRT's operating company contribution in 1992 was $2.11 billion, a 5% decline from the prior year. The decline in operating company contribution was primarily due to the higher proportion of sales of lower margin brands and higher marketing and selling expenditures, which when combined more than offset the effect of higher unit selling prices and volume. RJRT's operating income of $1.70 billion in 1992 declined 8% from the prior year as a result of the decline in operating company contribution as well as a $43 million charge incurred in connection with a restructuring plan, the purpose of which was to improve productivity by realigning operations in the sales, manufacturing, research and development, and administrative areas.\nTobacco International recorded net sales of $2.86 billion in 1992, an increase of 7% from 1991. Excluding contract sales to the Russian Republic, for which there were major shipments in 1991, Tobacco International would have reported an increase in net sales in 1992 of 10%. The sales increase is a result of volume gains in Eastern Europe (where the company made several acquisitions), Asia and the Middle East, favorable currency developments and higher selling prices that more than offset lower volume in Western Europe. Operating company contribution and operating income for 1992 rose 15% and 16%, respectively, from the prior year to $575 million and $537 million. The increase in operating company contribution and operating income was due to higher volume, favorable currency developments and higher selling prices offset in part by a higher proportion of sales in the lower margin segment.\nFor a description of certain litigation affecting RJRT and its affiliates, see Note 11 to the Consolidated Financial Statements.\nFOOD\nHoldings' food business is conducted by NFG, which comprises the Nabisco Biscuit Company, the LifeSavers Division, the Planters Division, the Specialty Products Company, the Fleischmann's Division, the Food Service Division and Nabisco Brands Ltd, (collectively the \"North American Group\") and Nabisco International.\n1993 vs. 1992. NFG reported net sales of $7.03 billion in 1993, an increase of 5% from 1992. Excluding the 1992 operating results of the ready-to-eat cold cereal business, which was sold at the end of that year, net sales in 1993 increased 9% from 1992, resulting from higher volume, sales from recently acquired businesses and modest price increases in both the North American Group and Nabisco International. The North American Group volume increase was primarily attributable to the success of new product introductions in the U.S., including the Snackwell's line of low fat\/fat free cookies and crackers, Fat Free Newtons, Life Savers Gummi Savers candy and Planters' stand-up bag line of peanuts and snacks. Nabisco International's net sales increased as a result of the 1993 acquisitions in Spain and Peru and higher volume and prices from its Latin American businesses.\nNFG's operating company contribution of $995 million in 1993 was 5% higher than the 1992 amount. Excluding the 1992 operating results of the ready-to-eat cold cereal business, operating company contribution increased 14%, with the North American Group up 13% and Nabisco International up 18%. The North American Group increase was primarily due to the gain in net sales, savings from productivity programs, and contributions from the recently acquired businesses, offset in part by higher expenses for consumer marketing programs. Nabisco International increased operating company contribution through acquisitions and gains in net sales.\nNFG's operating income was $624 million in 1993, a decrease of 19% from 1992, as a result of the $153 million restructuring expense in 1993, which was significantly higher than the restructuring expense of $63 million recorded in 1992, that more than offset the gain in operating company contribution. Excluding the 1992 operating results of the ready-to-eat cold cereal business and the related gain on its sale, as well as the restructuring expenses in both 1993 and 1992, NFG's operating income was up 16% as a result of the increase in operating company contribution. The 1993 restructuring expense primarily consists of expenses related to the reorganization and downsizing of manufacturing and sales functions which will reduce personnel costs, both domestically and internationally, in order to improve productivity and, to a lesser extent, the rationalization of facilities.\n1992 vs. 1991. NFG reported net sales of $6.71 billion in 1992, an increase of 4% from 1991. The increase primarily results from higher volume and pricing in the Latin American subsidiaries and the addition of recently acquired businesses in Mexico and Brazil. Net sales for the North American Group were relatively flat, as higher unit selling prices and volume in U.S. cookie and selected grocery products, including new products and product varieties, were offset by lower sales in the balance of the food lines as a result of restrained consumer spending. NFG's operating company contribution increased 3% from 1991 to $947 million in 1992 as a result of the increase in net sales in Latin America. Operating company contribution in the North American Group was about even with last year reflecting the modest net sales performance in 1992. Margins in the North America Group were maintained in 1992 as a result of productivity gains offsetting the industry trends toward higher trade promotion spending. NFG's 1992 operating income, which included a restructuring expense of $63 million, as well as a gain of $98 million on the sale of the ready-to-eat cold cereal business, rose 8% from 1991 to $769 million as a result of the increase in 1992 operating company contribution. The $63 million charge was incurred in connection with a restructuring plan, the purpose of which was to reduce costs and improve productivity by realigning sales operations and implementing a voluntary separation program.\nRESTRUCTURING EXPENSE\nHoldings recorded a pre-tax restructuring expense of $730 million in the fourth quarter of 1993 ($467 million after-tax) related to a program announced on December 7, 1993. Such restructuring program was undertaken in response to a changing consumer product business environment and is expected to streamline operations and improve profitability. Implementation of the program, although begun in the latter part of 1993, will primarily occur in 1994. Approximately 75% of the restructuring program will require cash outlays which will occur primarily in 1994 and early 1995. As an offset to the cash outlays, Holdings expects annual after-tax cash savings of approximately $250 million.\nThe cost of providing severance pay and benefits for the reduction of approximately 6,000 employees throughout the domestic and international food and tobacco businesses is approximately $400 million of the charge and is primarily a cash expense. The workforce reduction was undertaken in order to establish fundamental changes to the cost structure of the domestic tobacco business in the face of acute competitive activity in that business and to take advantage of cost savings opportunities in other businesses through process efficiency improvements. Legislation enacted during the third quarter of 1993 stipulates that, effective January 1, 1994, financial penalties will be assessed against manufacturers if cigarettes produced in the United States do not contain at least 75% (by weight) of domestically grown flue cured and burly tobaccos. As a result, the domestic and international tobacco businesses accrued approximately $70 million of related restructuring charges resulting from a reassessment of raw material sourcing and production arrangements. In addition, a shift in pricing strategy designed to gain share of market by RJRT's largest competitor has resulted in a redeployment of spending and changes in sales and distribution strategies resulting in a restructuring charge of approximately $80 million primarily related to contract termination costs. Abandonment of leases related to the above changes in the businesses results in approximately $60 million of restructuring charges. The remainder of the charge, approximately $120 million, represents\nnon-cash costs to rationalize and close manufacturing and sales facilities in both the tobacco and food businesses to facilitate cost improvements.\nINTEREST EXPENSE\n1993 vs. 1992. Consolidated interest expense of $1.19 billion in 1993 decreased 17% from 1992, primarily as a result of the refinancings of debt that were completed during 1992 and 1993, lower debt levels from the application of net proceeds from the issuance of preferred stock in 1993 and lower effective interest rates and the impact of declining market interest rates in 1993.\n1992 vs. 1991. Consolidated interest expense of $1.43 billion in 1992 decreased 32% from 1991, primarily due to the refinancings completed during 1991 and 1992, lower effective interest rates and the impact of declining market interest rates in 1992.\nINCOME TAXES\nEffective January 1, 1993, Holdings and RJRN adopted Statement of Financial Accounting Standards No. 109 (\"SFAS No. 109\"), Accounting for Income Taxes. SFAS No. 109 superseded Statement of Financial Accounting Standards No. 96, the method of accounting for income taxes previously followed by the Registrants. The adoption of SFAS No. 109 did not have a material impact on the financial statements of either Holdings or RJRN.\nHoldings' provision for income taxes for 1993 was increased by $96 million as a result of the enactment of certain federal tax legislation during the third quarter of 1993 which increased federal corporate income tax rates to 35% from 34%, retroactively to January 1, 1993. The components of this increase to Holdings' provision for income taxes included an $86 million non-cash charge resulting primarily from the remeasurement of the balance of deferred federal income taxes at the date of enactment of the new federal tax legislation for the change in the income tax rates, and a $10 million charge resulting from the increase in current federal income taxes accrued for the change in the income tax rates and other effects of the new tax legislation. Also during 1993, Holdings' provision for income taxes was decreased by a $108 million credit resulting from a remeasurement of the balance of deferred income taxes for a change in estimate of the basis of certain deferred tax amounts relating primarily to international operations.\nNET INCOME\n1993 vs. 1992. Holdings reported a net loss of $145 million in 1993, a decrease of $444 million from 1992. Included in Holdings' 1993 net loss is an after-tax extraordinary loss of $142 million related to the repurchases of high cost debt during 1993 and an after-tax restructuring expense of $467 million. Excluding the extraordinary loss and restructuring expense recorded in 1993, Holdings would have reported net income of $464 million in 1993. Excluding a similar after-tax extraordinary loss and an after-tax restructuring expense of $477 million and $66 million, respectively, in 1992, as well as a 1992 after-tax gain on the sale of Holdings' ready-to-eat cold cereal business of $30 million, Holdings would have reported net income of $812 million in 1992. The decrease in net income in 1993 from 1992, after such exclusions, is due to the lower operating income offset in part by lower interest expense.\n1992 vs. 1991. Holdings' net income of $299 million in 1992 includes an after-tax extraordinary loss of $477 million related to the repurchases of high cost debt during 1992. However, after excluding the extraordinary loss, Holdings would have reported net income of $776 million for 1992, an increase of $408 million over last year, primarily as a result of significantly lower interest expense. Net income in 1991 was reduced by $28 million of net charges included in \"Other income (expense), net\" as a result of the write-off of $109 million of unamortized debt issuance costs and the recognition of $144 million of\nunrealized losses from interest rate hedges related to the refinancing of existing credit lines, partially offset by a $225 million credit for a change in estimated postretirement health care liabilities.\nHoldings' net income (loss) applicable to its common stock for 1993, 1992 and 1991 of $(213) million, $268 million and $195 million, respectively, includes a deduction for preferred stock dividends of $68 million, $31 million and $173 million, respectively.\nEffective January 1, 1993, RJRN adopted Statement of Financial Accounting Standards No. 112 (\"SFAS No. 112\"), Employers' Accounting for Postemployment Benefits. Under SFAS No. 112, RJRN is required to accrue the costs for preretirement postemployment benefits provided to former or inactive employees and recognize an obligation for these benefits. The adoption of SFAS No. 112 did not have a material impact on the financial statements of either Holdings or RJRN.\nLIQUIDITY AND FINANCIAL CONDITION\nDECEMBER 31, 1993\nHoldings continued to generate significant free cash flow in 1993, although at a lower level than in 1992. Free cash flow, which represents cash available for the repayment of debt and certain other corporate purposes before the consideration of any debt and equity financing transactions, acquisition expenditures and divestiture proceeds, was $1.0 billion for 1993 and $1.6 billion for 1992. The lower level of free cash flow for 1993 primarily reflects lower operating company contribution in the domestic tobacco business, higher capital expenditures for tobacco manufacturing facilities in Eastern Europe and Turkey and for Nabisco Biscuit facilities and higher taxes paid, offset in part by lower inventory levels in the domestic tobacco business, higher sales of receivables, and a decrease in interest paid.\nThe components of free cash flow are as follows:\n- ---------------\n* Operating cash flow, which is used as an internal measurement for evaluating business performance, includes, in addition to net cash flow from (used in) operating activities as recorded in the Consolidated Statement of Cash Flows, proceeds from the sale of capital assets less capital expenditures, and is adjusted to exclude income taxes paid and items of a financial nature (such as interest paid, interest income, and other miscellaneous financial income or expense items).\n---------------\nIn 1993, Holdings and RJRN continued to enter into a series of transactions designed to refinance long-term debt, lower debt levels and lower interest costs, thereby improving the consolidated debt cost and maturity structure. These transactions included the issuance of preferred stock and the repurchase and redemption of certain debt obligations with funds provided from the issuance of debt securities (including medium-term notes), borrowings under Holdings' and RJRN's credit agreement, dated as of December 1, 1991, as amended (the \"1991 Credit Agreement\"), and free cash flow, as well as RJRN's management of interest rate exposure through swaps, options, caps and other interest rate arrangements. As a result of these transactions and lower market interest rates during 1993, Holdings reduced the effective interest rate on its consolidated long-term debt from 8.7% at December 31, 1992 to 8.4% at December 31, 1993. Future effective interest rates may vary as a result of RJRN's ongoing management of interest rate exposure and changing market interest rates as well as refinancing activities and changes in the ratings assigned to RJRN's debt securities by independent rating agencies.\nOne of Holdings' current financial objectives is to achieve a capitalization ratio of 43% over time. Holdings' capitalization ratio was 44.5% at December 31, 1993. The capitalization ratio, which is\nintended to measure Holdings' long-term debt (including current maturities) as a percentage of total capital, is calculated by dividing (i) Holdings' long-term debt by (ii) the sum of Holdings' total equity, consolidated long-term debt, deferred income taxes and certain other long-term liabilities.\nCertain of Holdings' other current financial objectives, which are all based on income before extraordinary items excluding after-tax amortization of trademarks and goodwill and referred to below as cash net income, are to achieve a 20% return on year beginning common stockholders' equity, a 2.7 interest and preferred stock dividend coverage ratio and a trendline average annual earnings per share growth of 15% over time.\nThe 20% return on year beginning common stockholders' equity objective, which is intended to measure the return to Holdings' common equity holders on the net assets employed in the business, is calculated by dividing (i) cash net income (after deducting preferred stock dividends) by (ii) total stockholders' equity at the beginning of the year exclusive of preferred stockholders' equity interest. For purposes of calculating the return on year beginning common stockholders' equity, Series A Preferred Stock and similar convertible preferred stock securities, if any, are considered common equity and the related dividends thereon are considered common dividends. The 2.7 interest and preferred stock dividend coverage ratio objective, which is intended to measure Holdings' ability to service its annual interest and preferred stock dividend payments, is calculated by dividing (i) operating income before amortization of trademarks and goodwill and depreciation by (ii) the sum of cash interest expense and preferred stock dividends. The trendline average annual earnings per share growth of 15% as adjusted for after-tax amortization of trademarks and goodwill, is intended to measure Holdings' ability to achieve a certain level of earnings per share growth over time.\nAt December 31, 1993, Holdings had an outstanding total debt level (notes payable and long-term debt, including current maturities) and a total capital level (total debt and total stockholders' equity) of approximately $12.4 billion and $21.5 billion, respectively, each of which is lower than the corresponding amounts at December 31, 1992. Holdings' ratio of total debt to total stockholders' equity at December 31, 1993 improved to 1.4-to-1 versus 1.7-to-1 at December 31, 1992. RJRN's ratio of total debt to common equity at December 31, 1993 was 1.3-to-1, compared with 1.6-to-1 at December 31, 1992. Total current liabilities and long-term debt of RJRN's subsidiaries was approximately $3.4 billion at December 31, 1993 and 1992.\nManagement believes that the improvement to Holdings' and its subsidiaries' financial structure since 1991 has enhanced its ability to take advantage of opportunities to further improve its capital and\/or cost structure. Management expects that it will continue to consider opportunities as they arise. Such opportunities, if pursued, could involve further acquisitions from time to time of substantial amounts of securities of Holdings or its subsidiaries through open market purchases, redemptions, privately negotiated transactions, tender or exchange offers or otherwise and\/or the issuance from time to time of additional securities by Holdings or its subsidiaries. Acquisitions of securities at prices above their book value, together with the accelerated amortization of deferred financing fees attributable to the acquired securities, would reduce reported net income, depending upon the extent of such acquisitions. Nonetheless, Holdings' and its subsidiaries' ability to take advantage of such opportunities is subject to restrictions in the 1991 Credit Agreements and Holdings' and RJRN's credit agreement, dated as of April 5, 1993, as amended (the \"1993 Credit Agreement\", and together with the 1991 Credit Agreement, the \"Credit Agreements\"), and in certain of their debt indentures. For a discussion of recent developments affecting the tobacco business and the potential effect on RJRT's cash flow, see \"Results of Operations--Tobacco.\"\nIn addition, management currently is reviewing and expects to continue to review various corporate transactions, including, but not limited to, joint ventures, mergers, acquisitions, divestitures, asset swaps, spin-offs and recapitalizations. Although Holdings has discussed and continues to discuss various transactions with third parties, no assurance may be given that any transaction will be announced or completed. It is likely that Holdings' tobacco and food businesses would be separated should certain of the foregoing transactions be consummated.\nDuring 1993, RJRN issued $750 million principal amount of 8% Notes due 2000, $500 million principal amount of 8 3\/4% Notes due 2005 and $500 million principal amount of 9 1\/4% Debentures due 2013. Also during 1993, RJRN issued medium-term notes maturing in the years 1995-1998 having an aggregate initial offering price of approximately $230 million. The net proceeds from the sale of debt securities and the sale of 50,000,000 depositary shares at $25 per share issued in connection with the issuance of Series B Cumulative Preferred Stock have been or will be used for general corporate purposes, which include refinancings of indebtedness, working capital, capital expenditures, acquisitions and repurchases and redemptions of securities. Pending such uses, proceeds may be used to repay indebtedness under RJRN's revolving credit facilities or for short-term liquid investments.\nA portion of the net proceeds collected from the sale of Holdings' ready-to-eat cold cereal business was used on February 5, 1993 to redeem $216 million principal amount of RJRN's 9 3\/8% Sinking Fund Debentures due 2016 at a price of $1,065.63 for each $1,000 principal amount of such debentures, plus accrued and unpaid interest thereon.\nThe 1991 Credit Agreement is a $6.5 billion revolving bank credit facility that provides for the issuance of up to $800 million of irrevocable letters of credit. Availability under the 1991 Credit Agreement is reduced by an amount equal to the stated amount of such letters of credit outstanding, by commercial paper borrowings in excess of $1 billion and by amounts borrowed under such facility. At December 31, 1993, approximately $456 million stated amount of letters of credit was outstanding and $328 million was borrowed under the 1991 Credit Agreement. Accordingly, the amount available under the 1991 Credit Agreement at December 31, 1993 was $5.72 billion.\nOn April 5, 1993, Holdings and RJRN entered into the 1993 Credit Agreement, which matures on April 4, 1994 and provides a back-up line of credit to support commercial paper issuances of up to $1 billion. Availability thereunder is reduced by an amount equal to the aggregate amount of commercial paper outstanding. At December 31, 1993, approximately $913 million of commercial paper was outstanding. Accordingly, $87 million was available under the 1993 Credit Agreement at December 31, 1993. Holdings and RJRN expect to obtain bank consent to extend the maturity date of the 1993 Credit Agreement for an additional 364 days.\nThe aggregate of consolidated indebtedness and interest rate arrangements subject to fluctuating interest rates approximated $5.5 billion at December 31, 1993. This represents an increase of $800 million from the year end 1992 level of $4.7 billion, primarily due to Holdings' on-going management of its interest rate exposure.\nAs a result of the general decline in market interest rates compared with the high interest cost on certain of Holdings' consolidated debt obligations, the estimated fair value amount of Holdings' long-term debt reflected in its Consolidated Balance Sheets at December 31, 1993 and 1992 exceeded the carrying amount (book value) of such debt by approximately $400 million and $1.1 billion, respectively. For additional disclosures concerning the fair value of Holdings' consolidated indebtedness as well as the fair value of its interest rate arrangements at December 31, 1993 and 1992, see Notes 10 and 11 to the Consolidated Financial Statements.\nCapital expenditures were $615 million, $519 million and $459 million for 1993, 1992 and 1991, respectively. The current level of expenditures planned for 1994 is expected to be approximately $600 million (approximately 60% Food and 40% Tobacco), which will be funded primarily by cash flows from operating activities. Management expects that its capital expenditure program will continue at a level sufficient to support the strategic and operating needs of Holdings' businesses.\nHoldings has operations in many countries, utilizing 35 functional currencies in its foreign subsidiaries and branches. Significant foreign currency net investments are located in Germany, Canada, Hong Kong, Brazil and Spain. Changes in the strength of these countries' currencies relative to the U.S. dollar result in direct charges or credits to equity for non-hyperinflationary countries and direct charges or credits to the income statement for hyperinflationary countries. Translation gains or losses, resulting from foreign-denominated borrowings that are accounted for as hedges of certain\nforeign currency net investments, also result in charges or credits to equity. Holdings also has significant exposure to foreign exchange sale and purchase transactions in currencies other than its functional currency. The exposures include the U.S. dollar, German mark, Japanese yen, Swiss franc, Hong Kong dollar, Singapore dollar and cross-rate exposure among the French franc, British pound, Italian lira and the German mark. Holdings manages these exposures to minimize the effects of foreign currency transactions on its cash flows.\nCertain financing agreements to which Holdings is a party and debt instruments of RJRN directly or indirectly restrict the payment of dividends by Holdings. The Credit Agreements, which contain restrictions on the payment of cash dividends or other distributions by Holdings in excess of certain specified amounts, and the indentures relating to certain of RJRN's debt securities, which contain restrictions on the payment of cash dividends or other distributions by RJRN to Holdings in excess of certain specified amounts, or for certain specified purposes, effectively limit the payment of dividends on the Common Stock. In addition, the declaration and payment of dividends is subject to the discretion of the board of directors of Holdings and to certain limitations under Delaware law. The Credit Agreements and the indentures under which certain debt securities of RJRN have been issued also impose certain operating and financial restrictions on Holdings and its subsidiaries. These restrictions limit the ability of Holdings and its subsidiaries to incur indebtedness, engage in transactions with stockholders and affiliates, create liens, sell certain assets and certain subsidiaries' stock, engage in certain mergers or consolidations and make investments in unrestricted subsidiaries. As a result of the increased competitive conditions in the domestic cigarette market and in order to provide Holdings with additional flexibility under certain financial ratios contained in the Credit Agreements, Holdings obtained an amendment to such Credit Agreements during October 1993. Holdings and RJRN believe that they are currently in compliance with all covenants and restrictions in the Credit Agreements and their other indebtedness.\nOn February 24, 1994, Holdings filed a Registration Statement on Form S-3 for a proposed offering of 300 million depositary shares, each representing a one-tenth ownership interest in a share of a newly created series of Preferred Equity Redemption Cumulative Stock (\"PERCS\"). Each depositary share would mandatorily convert in three years into one share of Common Stock, subject to adjustment and subject to earlier conversion or redemption under certain circumstances. Any net proceeds of a PERCS offering may be used for general corporate purposes which may include refinancings of indebtedness, working capital, capital expenditures, acquisitions and repurchases or redemptions of securities. In addition, such proceeds may be used to facilitate one or more significant corporate transactions, such as a joint venture, merger, acquisition, divestiture, asset swap, spin-off and\/or recapitalization, that would result in the separation of the tobacco and food businesses of Holdings. As of February 24, 1994, the specific uses of proceeds have not been determined. Pending such uses, any proceeds would be used to repay indebtedness under RJRN's revolving credit facilities or for short-term liquid investments.\nENVIRONMENTAL MATTERS\nRJRN has been engaged in a continuing program to assure compliance with U.S. Government and various state and local government laws and regulations concerning the protection of the environment. Certain subsidiaries of the Registrants have been named \"potentially responsible parties\" with third parties under the Comprehensive Environmental Response, Compensation and Liability Act, (\"CERCLA\") with respect to approximately fifteen sites. Although it is difficult to identify precisely the portion of capital expenditures or other costs attributable to compliance with environmental laws and the Registrants can not reasonably estimate the cost of resolving the above-mentioned CERCLA matters, the Registrants do not expect such expenditures or costs to have a material adverse effect on the financial condition of either of the Registrants.\nITEM 8.","section_7A":"","section_8":"ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA\nRefer to the Index to Financial Statements and Financial Statement Schedules on page 34, for the required information.\nITEM 9.","section_9":"ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE\nNone.\nPART III\nITEM 10.","section_9A":"","section_9B":"","section_10":"ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTS\nItem 10 is hereby incorporated by reference to Holdings' Definitive Proxy Statement to be filed with the Securities and Exchange Commission on or prior to April 30, 1994. Reference is also made regarding the executive officers of the Registrants to \"Executive Officers of the Registrants\" following Item 4 of Part I of this Report.\nITEM 11.","section_11":"ITEM 11. EXECUTIVE COMPENSATION\nItem 11 is hereby incorporated by reference to Holdings' Definitive Proxy Statement to be filed with the Securities and Exchange Commission on or prior to April 30, 1994.\nITEM 12.","section_12":"ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT\nItem 12 is hereby incorporated by reference to Holdings' Definitive Proxy Statement to be filed with the Securities and Exchange Commission on or prior to April 30, 1994.\nITEM 13.","section_13":"ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS\nItem 13 is hereby incorporated by reference to Holdings' Definitive Proxy Statement to be filed with the Securities and Exchange Commission on or prior to April 30, 1994.\nPART IV\nITEM 14.","section_14":"ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K\nSIGNATURES\nPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York on February 24, 1994.\nRJR NABISCO HOLDINGS CORP.\nBy: \/s\/ CHARLES M. HARPER .................................... (Charles M. Harper) Chairman of the Board and Chief Executive Officer\nPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on February 24, 1994.\n*By: \/s\/ ROBERT F. SHARPE, JR. ...................................... (Robert F. Sharpe, Jr.) Attorney-in-Fact\nSIGNATURES\nPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York on February 24, 1994.\nRJR NABISCO, INC.\nBy: \/s\/ CHARLES M. HARPER ...................................... (Charles M. Harper) Chairman of the Board and Chief Executive Officer\nPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on February 24, 1994.\n*By: \/s\/ ROBERT F. SHARPE, JR. ....................................... (Robert F. Sharpe, Jr.) Attorney-in-Fact\nINDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES\nFINANCIAL STATEMENT SCHEDULES\nFor the years ended December 31, 1993, 1992 and 1991:\nAll other schedules for which provision is made in the applicable regulations of the Securities and Exchange Commission are omitted because they are not required under the related instructions or are not applicable or the required information is shown in the financial statements or notes thereto.\nREPORT OF DELOITTE & TOUCHE, INDEPENDENT AUDITORS\nRJR Nabisco Holdings Corp.: RJR Nabisco, Inc.:\nWe have audited the accompanying consolidated balance sheets of RJR Nabisco Holdings Corp. (\"Holdings\") and RJR Nabisco, Inc. (\"RJRN\") as of December 31, 1993 and 1992, and the related consolidated statements of income and retained earnings and cash flows for each of the three years in the period ended December 31, 1993. Our audits also included the financial statement schedules of Holdings and RJRN as of December 31, 1993 and 1992, and for each of the three years in the period ended December 31, 1993 as listed in the accompanying Index to Financial Statements and Financial Statement Schedules. These financial statements and financial statement schedules are the responsibility of the companies' management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits.\nWe 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 misstatements. 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.\nIn our opinion, such consolidated financial statements present fairly, in all material respects, the consolidated financial position of Holdings and RJRN at December 31, 1993 and 1992, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1993 in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein.\nDELOITTE & TOUCHE\nNew York, New York February 1, 1994 (except with respect to the subsequent event discussed in Note 17, as to which the date is February 24, 1994)\nRJR NABISCO HOLDINGS CORP. RJR NABISCO, INC. CONSOLIDATED FINANCIAL STATEMENTS\nThe Summary of Significant Accounting Policies below and the notes to consolidated financial statements on pages through are integral parts of the accompanying consolidated financial statements of RJR Nabisco Holdings Corp. (\"Holdings\") and RJR Nabisco, Inc. (\"RJRN\" and, collectively with Holdings, the \"Registrants\") (the \"Consolidated Financial Statements\").\nSUMMARY OF SIGNIFICANT ACCOUNTING POLICIES\nThis Summary of Significant Accounting Policies is presented to assist in understanding the Consolidated Financial Statements included in this report. These policies conform to generally accepted accounting principles.\nConsolidation\nConsolidated Financial Statements include the accounts of each Registrant and its subsidiaries.\nCash Equivalents\nCash equivalents include all short-term, highly liquid investments that are readily convertible to known amounts of cash and so near maturity that they present an insignificant risk of changes in value because of changes in interest rates.\nInventories\nInventories are stated at the lower of cost or market. Various methods are used for determining cost. The cost of U.S. tobacco inventories is determined principally under the LIFO method. The cost of remaining inventories is determined under the FIFO, specific lot and weighted average methods. In accordance with recognized trade practice, stocks of tobacco, which must be cured for more than one year, are classified as current assets.\nDepreciation\nProperty, plant and equipment are depreciated principally by the straight-line method.\nTrademarks and Goodwill\nValues assigned to trademarks are based on appraisal reports and are amortized on the straight-line method over a 40 year period. Goodwill is also amortized on the straight-line method over a 40 year period.\nOther Income (Expense), Net\nInterest income, gains and losses on foreign currency transactions and other financial items are included in \"Other income (expense), net\".\nIncome Taxes\nIncome taxes are accounted for under the provisions of Statement of Financial Accounting Standards No. 109 (\"SFAS No. 109\"), Accounting for Income Taxes, and are calculated for each Registrant on a separate return basis.\nPostretirement Benefits Other Than Pensions\nPostretirement benefits other than pensions are accounted for under the provisions of Statement of Financial Accounting Standards No. 106 (\"SFAS No. 106\"), Employers' Accounting for Postretirement Benefits Other Than Pensions.\nPostemployment Preretirement Benefits\nPostemployment preretirement benefits are accounted for under the provisions of Statement of Financial Accounting Standards No. 112 (\"SFAS No. 112\"), Employers' Accounting for Postemployment Benefits.\nExcise Taxes\nExcise taxes are excluded from \"Net sales\" and \"Cost of products sold\".\nReclassifications and Restatements\nCertain reclassifications have been made to prior years' amounts to conform to the 1993 presentation.\nRJR NABISCO HOLDINGS CORP. RJR NABISCO, INC. CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)\nSee Notes to Consolidated Financial Statements.\nRJR NABISCO HOLDINGS CORP. RJR NABISCO, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN MILLIONS)\nSee Notes to Consolidated Financial Statements.\nRJR NABISCO HOLDINGS CORP. RJR NABISCO, INC. CONSOLIDATED BALANCE SHEETS (DOLLARS IN MILLIONS)\nSee Notes to Consolidated Financial Statements.\nRJR NABISCO HOLDINGS CORP. RJR NABISCO, INC.\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS\nNOTE 1--OPERATIONS\nNet sales and cost of products sold exclude excise taxes of $3.757 billion, $3.560 billion and $3.715 billion for 1993, 1992 and 1991, respectively.\nOperating income in the fourth quarter of 1993 was reduced by a $730 million restructuring expense for a program initiated at the domestic tobacco operations ($355 million), the international tobacco operations ($189 million), the food operations ($153 million) and Headquarters ($33 million). Such restructuring program was undertaken in response to a changing consumer product business environment and is expected to streamline operations and improve profitability. Implementation of the program, although begun in the latter part of 1993, will primarily occur in 1994. Approximately 75% of the restructuring program will require cash outlays which will occur primarily in 1994 and early 1995. As an offset to the cash outlays, Holdings expects annual after-tax cash savings of approximately $250 million.\nThe cost of providing severance pay and benefits for the reduction of approximately 6,000 employees throughout the domestic and international food and tobacco businesses is approximately $400 million of the charge and is primarily a cash expense. The workforce reduction was undertaken in order to establish fundamental changes to the cost structure of the domestic tobacco business in the face of acute competitive activity in that business and to take advantage of cost savings opportunities in other businesses through process efficiency improvements. Legislation enacted during the third quarter of 1993 stipulates that, effective January 1, 1994, financial penalties will be assessed against manufacturers if cigarettes produced in the United States do not contain at least 75% (by weight) of domestically grown flue cured and burly tobaccos. As a result, the domestic and international tobacco businesses accrued approximately $70 million of related restructuring charges resulting from a reassessment of raw material sourcing and production arrangements. In addition, a shift in pricing strategy designed to gain share of market by RJRT's largest competitor has resulted in a redeployment of spending and changes in sales and distribution strategies resulting in a restructuring charge of approximately $80 million primarily related to contract termination costs. Abandonment of leases related to the above changes in the businesses results in approximately $60 million of restructuring charges. The remainder of the charge, approximately $120 million, represents non-cash costs to rationalize and close manufacturing and sales facilities in both the tobacco and food businesses to facilitate cost improvements.\nDuring the fourth quarter of 1992, operating income was reduced by a net charge of $8 million as a result of a $106 million restructuring expense recorded at the tobacco operations ($43 million) and the food operations ($63 million), partially offset by a $98 million gain recognized from the sale of Holdings' ready-to-eat cold cereal business for $456 million in cash, prior to post-closing adjustments. The restructuring expense was incurred in connection with a restructuring plan at the tobacco operations, the purpose of which was to improve productivity by realigning operations in the sales, manufacturing, research and development, and administrative areas and a restructuring plan at the food operations, the purpose of which was to reduce costs and improve productivity by realigning sales operations and implementing a previously announced voluntary separation program. The receivable established at December 31, 1992 for the sale of the ready-to-eat cold cereal business was collected on January 4, 1993, except for certain escrow amounts which were subsequently collected.\nDuring the fourth quarter of 1991, net income was reduced by $28 million of net charges included in \"Other income (expense), net\" as a result of the write-off of $109 million of unamortized debt issuance costs and the recognition of $144 million of unrealized losses from interest rate hedges related\nRJR NABISCO HOLDINGS CORP. RJR NABISCO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)\nNOTE 1--OPERATIONS--(CONTINUED) to the refinancing of the bank credit agreement of RJR Nabisco Capital Corp. (\"Capital\") dated as of January 31, 1989 (as amended, the \"1989 Credit Agreement\") and the repayment of the $2.25 billion bank credit facility (as amended, the \"1990 Credit Agreement\"), partially offset by a $225 million credit for a change in estimated postretirement health care liabilities.\nNOTE 2--EARNINGS PER SHARE\nEarnings per share is based on the weighted average number of shares of common stock and Series A Depositary Shares (hereinafter defined) outstanding during the period and common stock assumed to be outstanding to reflect the effect of dilutive warrants and options. Holdings' other potentially dilutive securities are not included in the earnings per share calculation because the effect of excluding interest and dividends on such securities for the period would exceed the earnings allocable to the common stock into which such securities would be converted. Accordingly, Holdings' earnings per share and fully diluted earnings per share are the same.\nNOTE 3--INCOME TAXES\nThe provision for income taxes consisted of the following:\nRJR NABISCO HOLDINGS CORP. RJR NABISCO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)\nNOTE 3--INCOME TAXES--(CONTINUED)\nThe components of the deferred income tax liability disclosed on the Consolidated Balance Sheet at December 31, 1993 included the following:\nPre-tax income (loss) before extraordinary item for domestic and foreign operations is shown in the following table:\nRJR NABISCO HOLDINGS CORP. RJR NABISCO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)\nNOTE 3--INCOME TAXES--(CONTINUED)\nThe differences between the provision for income taxes and income taxes computed at statutory U.S. federal income tax rates are explained as follows:\nAt December 31, 1993, there was $1.242 billion of accumulated and undistributed income of foreign subsidiaries. These earnings are intended by management to be reinvested abroad indefinitely. Accordingly, no applicable U.S. federal deferred income taxes or foreign withholding taxes have been provided nor is a determination of the amount of unrecognized U.S. federal deferred income taxes practicable.\nAt December 31, 1993, Holdings had cumulative minimum tax credit carryforwards for U.S. federal tax purposes of $64 million.\nEffective January 1, 1993, Holdings and RJRN adopted SFAS No. 109. SFAS No. 109 superseded Statement of Financial Accounting Standards No. 96, the method of accounting for income taxes previously followed by the Registrants. The adoption of SFAS No. 109 did not have a material impact on the financial statements of either Holdings or RJRN.\nHoldings' provision for income taxes for 1993 was increased by $96 million as a result of the enactment of certain federal tax legislation during the third quarter of 1993 which increased federal corporate income tax rates to 35% from 34%, retroactively to January 1, 1993. The components of this\nRJR NABISCO HOLDINGS CORP. RJR NABISCO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)\nNOTE 3--INCOME TAXES--(CONTINUED) increase to Holdings' provision for income taxes included an $86 million non-cash charge resulting primarily from the remeasurement of the balance of deferred federal income taxes at the date of enactment of the new federal tax legislation for the change in the income tax rates, and a $10 million charge resulting from the increase in current federal income taxes accrued for the change in the income tax rates and other effects of the new tax legislation. Also during 1993, Holdings' provision for income taxes was decreased by a $108 million credit resulting from a remeasurement of the balance of deferred income taxes for a change in estimate of the basis of certain deferred tax amounts relating primarily to international operations.\nDuring 1993, $101 million of previously recognized deferred income tax benefits for operating loss carryforwards ($36 million), minimum tax credit carryforwards ($44 million) and other carryforward items ($21 million) were realized for U.S. federal tax purposes.\nNOTE 4--EXTRAORDINARY ITEM\nThe extinguishments of debt of Holdings and RJRN resulted in the following extraordinary losses:\nRJR NABISCO HOLDINGS CORP. RJR NABISCO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)\nNOTE 5--SUPPLEMENTAL CASH FLOWS INFORMATION\nA reconciliation of net income (loss) to net cash flows from operating activities follows:\nCash payments for income taxes and interest were as follows:\nRJR NABISCO HOLDINGS CORP. RJR NABISCO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)\nNOTE 5--SUPPLEMENTAL CASH FLOWS INFORMATION--(CONTINUED)\nCash equivalents at December 31, 1993 and 1992, valued at cost (which approximates market value), totaled $215 million and $99 million, respectively, and consisted principally of domestic and Eurodollar time deposits and certificates of deposit.\nAt December 31, 1993 and 1992, cash of $62 million and $63 million, respectively, was held in escrow as collateral for letters of credit issued in connection with certain foreign currency debt.\nOn February 7, 1990, RJRN entered into an arrangement in which it agreed to sell for cash substantially all of its domestic trade accounts receivable generated during a five-year period to a financial institution. Pursuant to amendments entered into in 1992, the length of the receivable program was extended an additional year. The accounts receivable have been and will continue to be sold with limited recourse at purchase prices reflecting the rate applicable to the cost to the financial institution of funding its purchases of accounts receivable and certain administrative costs. During 1993, 1992 and 1991, total proceeds of approximately $8.2 billion, $8.5 billion and $8.7 billion, respectively, were received by RJRN in connection with this arrangement. At December 31, 1993 and 1992, the accounts receivable balance has been reduced by approximately $437 million and $352 million, respectively, due to the receivables sold.\nFor information regarding certain non-cash financing activities, see Notes 10 and 12 to the Consolidated Financial Statements.\nNOTE 6--INVENTORIES\nThe major classes of inventory are shown in the table below:\nAt December 31, 1993 and 1992, approximately $1.4 billion of inventory was valued under the LIFO method. The current cost of LIFO inventories at December 31, 1993 and 1992 was greater than the amount at which these inventories were carried on the Consolidated Balance Sheets by $284 million and $277 million, respectively.\nFor the years ended December 31, 1993, 1992 and 1991, net income was increased by $6 million, $4 million, and $9 million, respectively, as a result of LIFO inventory liquidations. The LIFO liquidations resulted from programs to reduce leaf durations consistent with forecasts of future operating requirements.\nRJR NABISCO HOLDINGS CORP. RJR NABISCO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)\nNOTE 7--PROPERTY, PLANT AND EQUIPMENT\nComponents of property, plant and equipment were as follows:\nNOTE 8--NOTES PAYABLE\nNotes payable consisted of the following:\nNOTE 9--ACCRUED LIABILITIES\nAccrued liabilities consisted of the following:\nNOTE 10--LONG-TERM DEBT AND INTEREST EXPENSE\nInterest expense consisted of the following:\nRJR NABISCO HOLDINGS CORP. RJR NABISCO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)\nNOTE 10--LONG-TERM DEBT AND INTEREST EXPENSE--(CONTINUED)\nLong-term debt consisted of the following:\nRJR NABISCO HOLDINGS CORP. RJR NABISCO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)\nNOTE 10--LONG-TERM DEBT AND INTEREST EXPENSE--(CONTINUED)\n- ---------------\n(1) The payment of debt through December 31, 1998 is due as follows (in millions): 1995--$617; 1996--$465; 1997--$70 and 1998--$1,714.\n(2) RJRN maintains a revolving credit facility of $6.5 billion of which $6.2 billion was unused at December 31, 1993. At December 31, 1993, availability of the unused portion is reduced by $456 million for the extension of irrevocable letters of credit which support the principal and interest on certain existing foreign debt of RJRN and its subsidiaries. A commitment fee of 1\/4% per annum is payable on the unused portion of the facility.\n(3) RJRN maintains a back-up line of credit to support commercial paper issuances of up to $1 billion. Commercial paper outstanding in excess of $1 billion is supported by the 1991 Credit Agreement.\n(4) As a result of RJRN's management of its interest rate exposure through swaps, options, caps, and other interest rate arrangements, the effective interest rate on certain debt may differ from that disclosed in the table. ------------------------\nDuring 1991, Holdings entered into the following refinancing transactions: (i) the repayment on March 11, 1991 of the aggregate principal amount outstanding of a subordinated promissory note held by a limited partnership affiliated with Kohlberg Kravis Roberts & Co., L.P. (\"KKR\") plus accrued and unpaid interest thereon for a total of approximately $468 million in cash from borrowings under the revolving credit portion of the 1989 Credit Agreement, (ii) the issuance by Capital on April 25, 1991 of $1.5 billion principal amount of 10 1\/2% Senior Notes due 1998 (the \"10 1\/2% Senior Notes\") (the \"Senior Note Offering\") and the repayment of a portion of the amount outstanding under the 1990 Credit Agreement with a portion of the net proceeds from the Senior Note Offering equal to approximately $731 million in cash, (iii) the redemption on June 3, 1991 of 100% of the aggregate principal amount of all outstanding Subordinated Exchange Debentures Due 2007 of RJR Nabisco Holdings Group, Inc. (\"Group\") equal to approximately $1.86 billion plus accrued and unpaid interest thereon to the redemption date with (a) an additional portion of the net proceeds from the Senior Note Offering and (b) the entire net proceeds from the issuance by Holdings on April 18, 1991 of 115,000,000 shares of common stock of Holdings, par value $.01 per share (the \"Common Stock\") at $11.25 per share, (iv) open market purchases of certain of Capital's debentures totalling approximately $128 million with the remaining net proceeds from the Senior Note Offering, (v) the exchange by Holdings of 3.8 shares of Common Stock for each of the 67,997,769 shares of Cumulative Convertible Preferred Stock (the \"Preferred Stock\") exchanged pursuant to an exchange offer commenced on November 7, 1991 and completed on December 7, 1991, (vi) the issuance by Holdings on November 8, 1991 of 52,500,000 shares of Series A Conversion Preferred Stock, par value .01 per share (\"Series A Preferred Stock\") of Holdings and the sale of 210,000,000 $.835 depositary shares (\"Series A Depositary\nRJR NABISCO HOLDINGS CORP. RJR NABISCO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)\nNOTE 10--LONG-TERM DEBT AND INTEREST EXPENSE--(CONTINUED) Shares\") at $10.125 per Series A Depositary Share in connection with such issuance (the \"Series A Preferred Stock Offering\"), (vii) the repayment of the aggregate amount outstanding under the 1990 Credit Agreement, the repayment of a portion of the amount outstanding under the 1989 Credit Agreement and the redemption of certain notes of RJRN with the net proceeds from the Series A Preferred Stock Offering equal to approximately $2.1 billion and (viii) the repayment by Capital on December 19, 1991 of the aggregate amount outstanding under the working capital facility, revolving credit facility and term loan portions of the 1989 Credit Agreement with approximately $3.3 billion in cash from borrowings under a $6.5 billion bank credit facility (as amended, the \"1991 Credit Agreement\").\nOn May 15, 1992, Capital merged with and into its wholly-owned subsidiary, RJRN. As a result of the merger, Group became the direct parent of RJRN and RJRN assumed all of the obligations of Capital under the 1991 Credit Agreement and with respect to the following debt securities: Subordinated Discount Debentures due May 15, 2001 (the \"Subordinated Discount Debentures\"); 15% Payment-in-Kind Subordinated Debentures due May 15, 2001 (the \"15% Subordinated Debentures\"); 13 1\/2% Subordinated Debentures due May 15, 2001 (the \"13 1\/2% Subordinated Debentures\" and, collectively with the Subordinated Discount Debentures and the 15% Subordinated Debentures, the \"Subordinated Debentures\"); 10 1\/2% Senior Notes; 8.30% Senior Notes due April 15, 1999 (the \"8.30% Senior Notes\"); and 8.75% Senior Notes due April 15, 2004 (the \"8.75% Senior Notes\" and, collectively with the 8.30% Senior Notes, the \"1992 Senior Notes\"). Prior to this merger, RJRN had guaranteed all of Capital's obligations with respect to such indebtedness, and the financial statements of RJRN had reflected such indebtedness and all debt related costs.\nOn December 17, 1992, Group merged with and into its wholly-owned subsidiary, RJRN.\nAlso during 1992, Holdings entered into the following refinancing transactions: (i) the redemption on February 15, 1992 of $250 million principal amount of Capital's Subordinated Floating Rate Notes due 1999 (the \"Subordinated Floating Rate Notes\") at a price of $1,005 for each $1,000 principal amount of Subordinated Floating Rate Notes plus accrued and unpaid interest thereon, (ii) the early extinguishments by Capital of approximately $1 billion aggregate principal amount of certain of Capital's subordinated debentures in a privately negotiated transaction (the \"1992 Capital Debenture Repurchase\") for approximately $995 million in cash, consisting of $165 million aggregate principal amount of its 15% Subordinated Debentures, $85 million aggregate principal amount of its 13 1\/2% Subordinated Debentures and $750 million aggregate principal amount (approximately $550 million accreted amount) of its Subordinated Discount Debentures, (iii) the issuance by Capital on April 9, 1992 of $600 million principal amount of 8.30% Senior Notes and $600 million principal amount of 8.75% Senior Notes and the application of substantially all of the net proceeds from the issuance of the 1992 Senior Notes to repay a portion of the funds temporarily drawn under the 1991 Credit Agreement for the redemption of the Subordinated Floating Rate Notes and for the 1992 Capital Debenture Repurchase, (iv) the retirement on May 15, 1992 of $225 million aggregate principal amount of Capital's Subordinated Extendible Reset Debentures due May 15, 1991 (the \"Subordinated Reset Debentures\") at a price of $1,010 for each $1,000 principal amount of Subordinated Reset Debentures plus accrued and unpaid interest thereon with the remaining proceeds available from the 1992 Senior Notes plus temporary borrowings under the 1991 Credit Agreement, which were repaid with proceeds of medium-term notes and (v) the additional repurchases during 1992 for approximately $1.822 billion in cash of certain of RJRN's subordinated debentures consisting of $690 million aggregate principal amount of its 15% Subordinated Debentures, $81 million aggregate principal amount of its 13 1\/2%\nRJR NABISCO HOLDINGS CORP. RJR NABISCO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)\nNOTE 10--LONG-TERM DEBT AND INTEREST EXPENSE--(CONTINUED) Subordinated Debentures and $941 million aggregate principal amount (approximately $728 million accreted amount) of its Subordinated Discount Debentures. The principal or accreted amount of the debentures in item (v) was refinanced with proceeds of debt securities maturing in the years 1999-2004. The purchase of most of such amount had been temporarily funded with borrowings under the 1991 Credit Agreement. Also during 1992, Holdings repurchased $126 million aggregate principal amount (approximately $209 million including accrued interest) of its Senior Converting Debentures due 2009 (the \"Converting Debentures\") for $229 million in cash, and RJRN repurchased $229 million aggregate principal amount of various other debentures for $240 million in cash. The funds for the repurchase of Converting Debentures and various other debentures of RJRN and for a portion of the purchase price of the Subordinated Debentures in item (v) were provided from the issuance of medium-term notes maturing in the years 1995-1997, borrowings under the 1991 Credit Agreement and cash flow from operations.\nDuring 1993, RJRN repurchased for approximately $1.0 billion in cash certain of its subordinated debentures consisting of $153 million aggregate principal amount of its 15% Subordinated Debentures, $82 million aggregate principal amount of its 13 1\/2% Subordinated Debentures and $768 million aggregate principal amount (approximately $671 million accreted amount) of its Subordinated Discount Debentures. The principal or accreted amounts of such debentures was refinanced from proceeds of debt securities maturing after 1998, including debt securities issued during 1993. The purchase of most of such amount had been temporarily funded with borrowings under the 1991 Credit Agreement.\nThe remaining portion of the ESOP participation was repurchased on January 15, 1993 for cash, plus accrued and unpaid interest thereon.\nHoldings redeemed on May 1, 1993, 100% of the aggregate principal amount of its outstanding Converting Debentures at a price of $1,000 for each $1,000 principal amount of Converting Debentures, plus accrued and unpaid interest thereon, for the period from February 9, 1989 through April 30, 1993, of $937.54 for each $1,000 principal amount of Converting Debentures.\nDuring 1993, RJRN issued $750 million principal amount of 8% Notes due 2000, $500 million principal amount of 8 3\/4% Notes due 2005 and $500 million principal amount of 9 1\/4% Debentures due 2013. Also during 1993, RJRN issued medium-term notes maturing in the years 1995-1998 having an aggregate initial offering price of approximately $230 million. The net proceeds from the sale of debt securities and the Series B Preferred Stock Offering (as hereinafter defined) have been or will be used for general corporate purposes, which include refinancings of indebtedness, working capital, capital expenditures, acquisitions and repurchases and redemptions of securities. Pending such uses, proceeds may be used to repay indebtedness under RJRN's revolving credit facilities or for short-term liquid investments.\nA portion of the net proceeds collected from the sale of Holdings' ready-to-eat cold cereal business was used on February 5, 1993 to redeem $216 million principal amount of RJRN's 9 3\/8% Sinking Fund Debentures due 2016 (the \"9 3\/8% Debenture\") at a price of $1,065.63 for each $1,000 principal amount of 9 3\/8% Debentures, plus accrued and unpaid interest thereon.\nOn April 5, 1993, the Registrants entered into a credit agreement (as amended, the \"1993 Credit Agreement\" and together with the 1991 Credit Agreement, the \"Credit Agreements\"), which matures on April 4, 1994 and provides a back-up line of credit to support commercial paper issuances of up to $1 billion. Availability thereunder is reduced by an amount equal to the aggregate amount of commercial\nRJR NABISCO HOLDINGS CORP. RJR NABISCO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)\nNOTE 10--LONG-TERM DEBT AND INTEREST EXPENSE--(CONTINUED)\npaper outstanding. At December 31, 1993, approximately $913 million of commercial paper was outstanding. Accordingly, $87 million was available under the 1993 Credit Agreement at December 31, 1993. Holdings and RJRN expect to obtain bank consent to extend the maturity date of the 1993 Credit Agreement for an additional 364 days.\nBased on RJRN's intention and ability to continue to refinance, for more than one year, the amount of its commercial paper borrowings outstanding either in the commercial paper market or with additional borrowings under the 1991 Credit Agreement, the commercial paper borrowings have been included under \"Long-term debt\".\nAs permitted by the governing indenture, RJRN intends to pay in cash the May 15, 1994 interest payment due on its 15% Subordinated Debentures. Accordingly, the interest accrued thereon as of December 31, 1993 has been included in \"Accrued liabilities\".\nCertain financing agreements to which Holdings is a party and debt instruments of RJRN directly or indirectly restrict the payment of dividends by Holdings. The Credit Agreements, which contain restrictions on the payment of cash dividends or other distributions by Holdings in excess of certain specified amounts, and the indentures relating to certain of RJRN's debt securities, which contain restrictions on the payment of cash dividends or other distributions by RJRN to Holdings in excess of certain specified amounts, or for certain specified purposes, effectively limit the payment of dividends on the Common Stock. In addition, the declaration and payment of dividends is subject to the discretion of the board of directors of Holdings and to certain limitations under Delaware law. The Credit Agreements and the indentures under which certain debt securities of RJRN have been issued also impose certain operating and financial restrictions on Holdings and its subsidiaries. These restrictions limit the ability of Holdings and its subsidiaries to incur indebtedness, engage in transactions with stockholders and affiliates, create liens, sell certain assets and certain subsidiaries' stock, engage in certain mergers or consolidations and make investments in unrestricted subsidiaries.\nThe estimated fair value of Holdings' consolidated long-term debt as of December 31, 1993 and 1992 was approximately $12.4 billion and $14.9 billion, respectively, based on available market quotes, discounted cash flows and book values, as appropriate. The estimated fair value exceeded the carrying amount of Holdings' long-term debt by approximately $400 million and $1.1 billion at December 31, 1993 and 1992, respectively, as a result of the general decline in market interest rates compared with the higher interest cost on certain of Holdings' debt obligations. Considerable judgment was required in interpreting market data to develop the estimates of fair value. In addition, the use of different market assumptions and\/or estimation methodologies may have had a material effect on the estimated fair value amounts. Accordingly, the estimated fair value of Holdings' consolidated long-term debt as of December 31, 1993 and 1992 is not necessarily indicative of the amounts that Holdings could realize in a current market exchange.\nNOTE 11--COMMITMENTS AND CONTINGENCIES\nVarious legal actions, proceedings and claims are pending or may be instituted against R. J. Reynolds Tobacco Company (\"RJRT\") or its affiliates or indemnities, including those claiming that lung cancer and other diseases have resulted from the use of or exposure to RJRT's tobacco products. During 1993, 16 new actions were filed or served against RJRT and\/or its affiliates or indemnities and 18 such actions were dismissed or otherwise resolved in favor of RJRT and\/or its\nRJR NABISCO HOLDINGS CORP. RJR NABISCO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)\nNOTE 11--COMMITMENTS AND CONTINGENCIES--(CONTINUED) affiliates or indemnities. A total of 35 such actions in the United States, one in Puerto Rico and one against RJRT's Canadian subsidiary were pending on December 31, 1993. As of February 7, 1994, 35 active cases were pending against RJRT and\/or its affiliates or indemnities, 33 in the United States, one in Puerto Rico and one in Canada. Four of the 33 active cases in the United States involve alleged non-smokers claiming injuries resulting from exposure to environmental tobacco smoke. One of such cases is currently scheduled for trial on September 5, 1994 and if tried, will be the first such case to reach trial. One of the active cases is alleged to be a class action on behalf of a purported class of 60,000 individuals.\nThe plaintiffs in these actions seek recovery on a variety of legal theories, including strict liability in tort, design defect, negligence, breach of warranty, failure to warn, fraud, misrepresentation and conspiracy. Punitive damages, often in amounts totalling many millions of dollars, are specifically pleaded in 20 cases in addition to compensatory and other damages. The defenses raised by RJRT and\/or its affiliates, where applicable, include preemption by the Federal Cigarette Labeling and Advertising Act, as amended (the \"Cigarette Act\") of some or all such claims arising after 1969; the lack of any defect in the product; assumption of the risk; comparative fault; lack of proximate cause; and statutes of limitations or repose. Juries have found for plaintiffs in two smoking and health cases, but in one such case, which has been appealed by both parties, no damages were awarded. The jury awarded plaintiffs $400,000 in the other such case, Cipollone v. Liggett Group, Inc., et. al., which award was overturned on appeal and the case was subsequently dismissed.\nOn June 24, 1992, the United States Supreme Court in Cipollone held that claims that tobacco companies failed to adequately warn of the risks of smoking after 1969 and claims that their advertising and promotional practices undermined the effect of warnings after that date were preempted by the Cigarette Act. The Court also held that claims of breach of express warranty, fraud, misrepresentation and conspiracy were not preempted. The Supreme Court's decision was announced through a plurality opinion, and further definition of how Cipollone will apply to other cases must await rulings in those cases.\nCertain legislation proposed in recent years in Congress, among other things, would eliminate any such preemptive effect on common law damage actions for personal injuries. RJRT is unable to predict whether such legislation will be enacted, if so, in what form, or whether such legislation would be intended by Congress to apply retroactively. The Supreme Court's Cipollone decision itself, or the passage of such legislation, could increase the number of cases filed against cigarette manufacturers, including RJRT.\nRJRT understands that a grand jury investigation being conducted in the Eastern District of New York is examining possible violations of criminal law in connection with activities relating to the Council for Tobacco Research-USA, Inc., of which RJRT is a sponsor. RJRT is unable to predict the outcome of this investigation.\nRJRT recently received a civil investigative demand from the U.S. Department of Justice requesting broad documentary information from RJRT. Although the request appears to focus on tobacco industry activities in connection with product development efforts, it also requests general information concerning contacts with competitors. RJRT is unable to predict the outcome of this investigation.\nLitigation is subject to many uncertainties, and it is possible that some of the legal actions, proceedings or claims could be decided against RJRT or its affiliates or indemnities. Determinations of\nRJR NABISCO HOLDINGS CORP. RJR NABISCO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)\nNOTE 11--COMMITMENTS AND CONTINGENCIES--(CONTINUED) liability or adverse rulings against other cigarette manufacturers that are defendants in similar actions, even if such rulings are not final, could adversely affect the litigation against RJRT and its affiliates or indemnities and increase the number of such claims. Although it is impossible to predict the outcome of such events or their effect on RJRT, a significant increase in litigation activities could have an adverse effect on RJRT. RJRT believes that it has a number of valid defenses to any such actions, including but not limited to those defenses based on preemption under the Cipollone decision, and RJRT intends to defend vigorously all such actions.\nThe Registrants believe that the ultimate outcome of all pending litigation matters should not have a material adverse effect on either of the Registrants' financial position; however, it is possible that the results of operations or cash flows of the Registrants in a particular quarterly or annual period could be materially affected by the ultimate outcome of certain pending litigation matters. Management is unable to derive a meaningful estimate of the amount or range of such possible loss in any particular quarterly or annual period or in the aggregate.\nCOMMITMENTS\nAt December 31, 1993, other commitments totalled approximately $556 million, principally for minimum operating lease commitments, the purchase of machinery and equipment and other contractual arrangements.\nFINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND SIGNIFICANT CONCENTRATIONS OF CREDIT RISK\nCertain financial instruments with off-balance sheet risk have been entered into by the RJRN to manage its interest rate and foreign currency exposures.\nInterest Rate Arrangements\nAt December 31, 1993 and 1992, RJRN had outstanding interest rate swaps, options, caps and other interest rate arrangements with financial institutions having a total notional principal amount of $5.7 billion and $5.2 billion, respectively. The arrangements at December 31, 1993 mature as follows: 1994--$2.7 billion; 1995--$1.1 billion; 1996--$1.1 billion; 1997--$450 million and 1998 $350 million, respectively. The estimated fair value of these arrangements as of December 31, 1993 and 1992 was favorable by approximately $37 million and unfavorable by approximately $1 million, respectively, based on calculations from independent third parties for similar arrangements.\nBecause interest rate swaps and purchased options and other interest rate arrangements effectively hedge interest rate exposures, the differential to be paid or received is accrued and recognized in interest expense as market interest rates change. If an arrangement is terminated prior to maturity, then the realized gain or loss is recognized over the remaining original life of the agreement if the hedged item remains outstanding, or immediately, if the underlying hedged instrument does not remain outstanding. If the arrangement is not terminated prior to maturity, but the underlying hedged instrument is no longer outstanding, then the unrealized gain or loss on the related interest rate swap, option, cap or other interest rate arrangement is recognized immediately. In addition, for written options and other similar interest rate arrangements that are entered into to manage interest rate exposure, changes in market value of such instruments would result in the current recognition of any related gains or losses.\nRJR NABISCO HOLDINGS CORP. RJR NABISCO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)\nNOTE 11--COMMITMENTS AND CONTINGENCIES--(CONTINUED)\nForeign Currency Arrangements\nAt December 31, 1993 and 1992, RJRN had outstanding forward foreign exchange contracts with banks to purchase or sell an aggregate notional principal amount of $476 million and $566 million, respectively. The estimated fair value of these arrangements as of December 31, 1993 and 1992 was favorable by approximately $3 million and $4 million, respectively, based on calculations from independent third parties for similar arrangements.\nThe forward foreign exchange contracts and other hedging arrangements entered into by RJRN generally mature at the time the hedged foreign currency transactions are settled. Gains or losses on forward foreign currency transactions are determined by changes in market rates and are generally included at settlement in the basis of the underlying hedged transaction. To the extent that the foreign currency transaction does not occur, gains and losses are recognized immediately.\nThe above interest rate and foreign currency arrangements entered into by RJRN involve, to varying degrees, elements of market risk as a result of potential changes in future interest and foreign currency exchange rates. To the extent that the financial instruments entered into remain outstanding as effective hedges of existing interest rate and foreign currency exposure, the impact of such potential changes in future interest and foreign currency exchange rates on the financial instruments entered into would offset the related impact on the items being hedged. Also, RJRN may be exposed to credit losses in the event of non-performance by the counterparties to these financial instruments. However, RJRN continually monitors its positions and the credit rating of its counterparties and therefore, does not anticipate any non-performance.\nThere are no significant concentrations of credit risk with any individual counterparties or groups of counterparties as a result of any financial instruments entered into including those financial instruments discussed above.\nRJR NABISCO HOLDINGS CORP. RJR NABISCO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)\nNOTE 12--CAPITAL STOCK AND PAID-IN CAPITAL\nThe changes in Common Stock and paid-in capital are shown as follows:\nThe changes in stock options are shown as follows:\nAt December 31, 1993, options were exercisable as to 20,018,041 shares, compared with 15,590,909 shares at December 31, 1992, and 11,310,162 shares at December 31, 1991. As of December 31, 1993, options for 66,777,008 shares of Common Stock were available for future grant.\nRJR NABISCO HOLDINGS CORP. RJR NABISCO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)\nNOTE 12--CAPITAL STOCK AND PAID-IN CAPITAL--(CONTINUED)\nTo provide an incentive to attract and retain key employees responsible for the management and administration of the business affairs of Holdings and its subsidiaries, on June 15, 1989 the board of directors of Holdings adopted the Stock Option Plan for Directors and Key Employees of RJR Holdings Corp. and Subsidiaries (the \"Stock Option Plan\") pursuant to which options to purchase Common Stock may be granted. On June 16, 1989, the Stock Option Plan was approved by the written consent of the holders of a majority of the Common Stock. Any director or key employee of Holdings or any subsidiary of Holdings is eligible to be granted options under the Stock Option Plan. A maximum of 30,000,000 shares of Common Stock (which may be adjusted in the event of certain capital changes) may be issued under the Stock Option Plan. The options to key employees granted to key employees under the Stock Option Plan generally vest over a five year period and the options granted to directors under the Stock Option Plan are immediately fully vested. The exercise price of such options is generally the fair market value of the Common Stock on the date of grant.\nOn August 1, 1990, the board of directors of Holdings adopted the 1990 Long Term Incentive Plan (the \"1990 LTIP\") which was approved on such date by the written consent of the holders of a majority of the Common Stock. The 1990 LTIP authorizes grants of incentive awards (\"Grants\") in the form of \"incentive stock options\" under Section 422 of the Code, other stock options, stock appreciation rights, restricted stock, purchase stock, dividend equivalent rights, performance units, performance shares or other stock-based grants. Awards under the 1990 LTIP may be granted to key employees of, or other persons having a unique relationship to, Holdings and its subsidiaries. Directors who are not also employees of Holdings and its subsidiaries are ineligible for Grants. A maximum of 105,000,000 shares of Common Stock (which may be adjusted in the event of certain capital changes) may be issued under the 1990 LTIP pursuant to Grants. The 1990 LTIP also limits the amount of shares which may be issued pursuant to \"incentive stock options\" and the amount of shares subject to Grants which may be issued to any one participant. As of December 31, 1993, purchase stock, stock options other than incentive stock options, restricted stock, performance shares and other stock-based grants have been granted under the 1990 LTIP. The options granted before 1993 under the 1990 LTIP generally will vest over a three year period ending December 31, 1995. Prior to January 1, 1993, such options had vested over a six to eight year period. Options granted in 1993 vest over a three year period beginning from the date of grant. The exercise prices of such options are between $4.50 and $11.56 per share. In connection with the purchase stock grants awarded during 1993, 1992 and 1991, 622,222 shares, 495,000 shares and 2,681,000 shares, respectively, of Common Stock were purchased and options to purchase four shares were granted for every share of such Common Stock purchased. In addition, arrangements were made enabling purchasers to borrow on a secured basis from Holdings the price of the stock purchased, as well as the taxes due on any taxable income recognized in connection with such purchases. The current annual interest rate on such arrangements, which was set in July 1993 at the then applicable federal rate for long-term loans, is 6.37%. These borrowings plus accrued interest and taxes must generally be repaid within two years following termination of active employment. During 1993, 1,484,840 shares of Common Stock were awarded in connection with restricted stock grants. These shares are subject to restrictions that will lapse on December 31, 1994. Performance shares were also granted under the 1990 LTIP during 1993, pursuant to which participants are granted a designated number of performance shares that may be earned over a three year performance period commencing January 1, 1993. Pay outs of awards at the end of the performance period, which are denominated in shares of Common Stock, but which may be paid at Holdings' option in either Common Stock or cash, are currently based on Holdings' cumulative cash-earnings per share during such performance period. During 1993, 3,307,500 performance shares were awarded. The maximum aggregate number of shares of Common Stock that\nRJR NABISCO HOLDINGS CORP. RJR NABISCO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)\nNOTE 12--CAPITAL STOCK AND PAID-IN CAPITAL--(CONTINUED)\nmay be paid at the end of the performance period is 4,961,250. Commitments to make other stock-based awards were made in 1993 under the 1990 LTIP to individuals who previously acquired certain purchase stock under the 1990 LTIP. Under this program, such individuals may receive grants of Common Stock or cash at the Company's election on either three or four annual grant dates beginning July 1994 and ending either July 1, 1996 or July 1, 1997. The fair market value of Common Stock to be awarded on each grant date is equal to the excess, if any, of (i) 33% or 25%, respectively, of the maximum amount the individual could have borrowed to acquire purchase stock, over (ii) the then fair market value of the same percentage of such individual's purchase stock. The grant is increased by the amount of presumed borrowing costs and the amount necessary to hold the individual harmless from income taxes due as a result of the grant. No grant will be made on a grant date if, on such grant date, the amount determined under clause (ii) above equals or exceeds the amount determined in clause (i) above.\nIn addition to the shares purchased under the 1990 LTIP, approximately 550,000 shares of Common Stock were sold during 1991 to certain management investors. No such sales occurred in 1992 or 1993. Unlike the shares sold under the 1990 LTIP, a portion of these shares remain subject to significant restrictions on transferability.\nThe Preferred Stock, together with the Series A Preferred Stock, Series B Preferred Stock and ESOP Convertible Preferred Stock, stated value $16.00 per share and par value $.01 per share, of Holdings (the \"ESOP Preferred Stock\") (150,000,000 aggregate preferred shares authorized at December 31, 1993 and 1992) are senior to the Common Stock as to dividends and preferences in liquidation.\nOn December 6, 1993, the outstanding Preferred Stock was redeemed at a redemption price of $27.0125 per share plus accrued and unpaid dividends thereon. Also during 1993, 123,523 shares of Preferred Stock were converted into 342,976 shares of Common Stock. During 1992, 379 shares of Preferred Stock were converted into 1,051 shares of Common Stock. During 1991, 884 shares of Preferred Stock were converted into 2,450 shares of Common Stock and 67,997,769 shares of Preferred Stock were exchanged for 258,391,523 shares of Common Stock in connection with the December 1991 Exchange Offer. The Preferred Stock, stated value $25 per share at par value $.01 per share, paid cash dividends at a rate of 11.5% of stated value per annum, payable quarterly in arrears commencing January 15, 1991. The Preferred Stock was convertible after May 1, 1991 into shares of Common Stock at a conversion price of $9 of stated value per share of Common Stock.\nEach Series A Depositary Share represents a one-quarter ownership interest in a share of Series A Preferred Stock of Holdings. Each share of Series A Preferred Stock bears cumulative cash dividends at a rate of $3.34 per annum and is payable quarterly in arrears commencing February 18, 1992. Each share of Series A Preferred Stock will mandatorily convert into four shares of Common Stock by November 15, 1994, subject to adjustment in certain events. In addition, each share of Series A Preferred Stock may be convertible upon the occurrence of certain other events, including the option by Holdings to redeem, in whole or in part, at any time at an initial optional redemption price of $64.82 per share, to be paid in shares of Common Stock, plus accrued and unpaid dividends. The initial optional redemption price declines by $.009218 on each day following the issuance of the Series A Preferred Stock to $55.36 on September 15, 1994 and $54.80 thereafter. Holders of Series A Preferred Stock have voting rights with respect to certain matters submitted to a vote of the holders of the Common\nRJR NABISCO HOLDINGS CORP. RJR NABISCO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)\nNOTE 12--CAPITAL STOCK AND PAID-IN CAPITAL--(CONTINUED) Stock. Because Series A Preferred Stock mandatorily converts into Common Stock, dividends on shares of Series A Preferred Stock are reported similar to common equity dividends.\nOn August 18, 1993, Holdings issued 50,000 shares of Series B Cumulative Preferred Stock, par value $.01 per share (\"Series B Preferred Stock\"), and sold 50,000,000 depositary shares (\"Series B Depositary Shares\") at $25 per Series B Depositary Share ($1.250 billion) in connection with such issuance (the \"Series B Preferred Stock Offering\"). Each share of Series B Preferred Stock bears cumulative cash dividends at a rate of $2,312.50 per annum, or $2.3125 per Series B Depositary Share, and is payable quarterly in arrears commencing December 1, 1993. Each Series B Depositary Share represents .001 ownership interest in a share of Series B Preferred Stock of Holdings. At Holdings' option, on or after August 19, 1998, Holdings may redeem shares of the Series B Preferred Stock (and the Depositary will redeem the number of Series B Depositary Shares representing the shares of Series B Preferred Stock) at a redemption price equivalent to $25 per Series B Depositary Share, plus accrued and unpaid dividends thereon.\nOn August 1, 1991, Holdings issued 2,983,904 shares of Common Stock in exchange for certain debentures of RJRN aggregating approximately $32.3 million in principal amount.\nOn April 10, 1991, an employee stock ownership plan established by Holdings borrowed $250 million from Holdings (the \"ESOP Loan\") to purchase 15,625,000 shares of ESOP Preferred Stock. The ESOP Loan, which was renegotiated in 1993, has a final maturity in 2006 and bears interest at the rate of 8.2% per annum. The ESOP Preferred Stock is convertible as of December 31, 1993 into 15,573,973 shares of Common Stock, subject to adjustment in certain events, and bears cumulative dividends at a rate of 7.8125% of stated value per annum at least until April 10, 1999, payable semi-annually in arrears commencing January 2, 1992, when, as and if declared by the board of directors of Holdings. The ESOP Preferred Stock is redeemable at the option of Holdings, in whole or in part, at any time on or after April 10, 1999, at an initial optional redemption price of $16.250 per share. The initial optional redemption price declines thereafter on an annual basis in the amount of $.125 a year to $16 per share on April 10, 2001, plus accrued and unpaid dividends. Holders of ESOP Preferred Stock have voting rights with respect to certain matters submitted to a vote of the holders of the Common Stock. Effective January 1, 1992, RJRN's matching contributions to eligible employees under its Capital Investment Plan are being made in the form of ESOP Preferred Stock. RJRN's matching contribution obligation in respect of each participating employee is equal to $.50 for every pre-tax dollar contributed by the employee, up to 6% of the employee's pay. The shares of ESOP Preferred Stock are allocated at either the floor value of $16 a share or the fair market value of Common Stock, whichever is higher. During 1993 and 1992, approximately $29 million and $29 million, respectively, was contributed to the ESOP by RJRN or Holdings and approximately $20 million and $24 million, respectively, of ESOP dividends were used to service the ESOP's debt to Holdings.\nOn February 9, 1989, 15,254,238 warrants were issued to purchase 15,254,238 shares of Common Stock. Such warrants were initially exercisable at an exercise price of $5.00 per share, subject to adjustment in certain events, at any time prior to February 9, 1999. On November 8, 1991, the exercise price for the warrants and the number of shares of Common Stock issuable upon exercise thereof were adjusted to $4.9164 and 1.017, respectively. During the third quarter of 1992, Holdings repurchased from a limited partnership of which KKR Associates, an affiliate of KKR, is the sole general partner and certain affiliates of Merrill Lynch & Co., Inc. 6,182,586 warrants of the 15,254,238 warrants issued\nRJR NABISCO HOLDINGS CORP. RJR NABISCO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)\nNOTE 12--CAPITAL STOCK AND PAID-IN CAPITAL--(CONTINUED) on February 9, 1989 for approximately $36 million in cash. During October 1992, Holdings repurchased from the same parties the remaining 9,071,652 warrants for approximately $51 million in cash. Each of these warrants allowed the holder to purchase 1.017 shares of Common Stock for an exercise price of $4.9164 at any time on or prior to February 8, 1999.\nWarrants to purchase 45,529,024 shares of Common Stock were issued in connection with the sale of the 15% Subordinated Debentures and the Subordinated Discount Debentures. Such warrants were initially exercisable at an exercise price of $0.07 per share, subject to adjustment in certain events, and expired January 31, 1992. On November 8, 1991, the exercise price for the warrants and the number of shares of Common Stock issuable upon exercise thereof were adjusted to $0.0688 and 1.017, respectively. During 1992, 12,370,936 warrants were exercised at $0.0688 per share. During 1991, 29,695,730 warrants were exercised at $0.07 per share and 3,361,323 warrants were exercised at $0.0688 per share.\nSee Note 10 for transactions involving the exchange of capital stock for long-term debt.\nNOTE 13--RETAINED EARNINGS AND CUMULATIVE TRANSLATION ADJUSTMENTS\nRetained earnings (accumulated deficit) at December 31, 1993, 1992 and 1991 includes non-cash expenses related to accumulated trademark and goodwill amortization of $3.015 billion, $2.390 billion and $1.774 billion, respectively.\nThe changes in cumulative translation adjustments are shown as follows:\nNOTE 14--RETIREMENT BENEFITS\nRJRN sponsors a number of non-contributory defined benefit pension plans covering most U.S. and certain foreign employees. Plans covering regular full-time employees in the tobacco operations as well as the majority of salaried employees in the corporate groups and food operations to provide pension benefits that are based on credits, determined by age, earned throughout an employee's service and final average compensation before retirement. Plan benefits are offered as lump sum or annuity options. Plans covering hourly as well as certain salaried employees in the corporate groups and food operations provide pension benefits that are based on the employee's length of service and final average compensation before retirement. RJRN's policy is to fund the cost of current service benefits and past service cost over periods not exceeding 30 years to the extent that such costs are currently tax deductible. Additionally, RJRN participates in several multi-employer and other defined contribution plans, which provide benefits to certain of RJRN's union employees. Employees in foreign countries who are not\nRJR NABISCO HOLDINGS CORP. RJR NABISCO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)\nNOTE 14--RETIREMENT BENEFITS--(CONTINUED) U.S. citizens are covered by various post-employment benefit arrangements, some of which are considered to be defined benefit plans for accounting purposes.\nA summary of the components of pension expense for RJRN-sponsored plans follows:\nThe principal plans used the following actuarial assumptions for accounting purposes:\nRJR NABISCO HOLDINGS CORP. RJR NABISCO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)\nNOTE 14--RETIREMENT BENEFITS--(CONTINUED)\nThe following table sets forth the funded status and amounts recognized in the Consolidated Balance Sheets at December 31, 1993 and 1992 for RJRN's defined benefit pension plans.\n- ---------------\n(1) Of the net pension liability amounts at December 31, 1993 and 1992, $34 million and $12 million, respectively, were related to qualified plans.\nAt December 31, 1993, approximately 99 percent of the plans' assets were invested in listed stocks and bonds and other highly liquid investments. The balance consisted of various income producing investments.\nIn addition to providing pension benefits, RJRN provides certain health care and life insurance benefits for retired employees and their dependents. Substantially all of its regular full-time employees, including certain employees in foreign countries, may become eligible for those benefits if they reach retirement age while working for RJRN. Effective January 1, 1992, RJRN adopted SFAS No. 106. Under SFAS No. 106, RJRN is required to accrue the costs for retirees' health and other postretirement benefits other than pensions and recognize the unfunded and unrecognized accumulated benefit obligation for these benefits. RJRN had previously accrued a liability for postretirement benefits other\nRJR NABISCO HOLDINGS CORP. RJR NABISCO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)\nNOTE 14--RETIREMENT BENEFITS--(CONTINUED) than pensions and as a result, SFAS No. 106 did not have a material impact on RJRN's financial statements.\nNet postretirement health and life insurance benefit cost for 1993 consists of the following:\nNet postretirement health and life insurance benefit costs representing accretion on the liability balance of $89 million was charged to operations for the year ended December 31, 1991. The reduction in expense in 1992 reflects the reduction of recorded liabilities by approximately $225 million at December 31, 1991 as disclosed in Note 1 to the Consolidated Financial Statements.\nRJRN's postretirement health and life insurance benefit plans currently are not funded. The status of the plans was as follows:\nThe assumed health care cost trend rate used in measuring the accumulated postretirement benefit obligation was 8% in 1993, 9% in 1994 and 10.7% in 1995 gradually declining to 6.0% by the year 2002 and remaining at that level thereafter. A one percentage point increase in the assumed health care cost trend rate for each year would increase the accumulated postretirement benefit obligation as of December 31, 1993 and net postretirement health care cost by approximately 7% and 8.5%, respectively.\nThe assumed discount rate used in determining the accumulated postretirement benefit obligation was 7.5% and 8.5% as of December 31, 1993 and 1992, respectively.\nEffective January 1, 1993, RJRN adopted SFAS No. 112. Under SFAS No. 112, RJRN is required to accrue the costs for preretirement postemployment benefits provided to former or inactive employees and recognize an obligation for these benefits. The adoption of SFAS No. 112 did not have a material impact on the financial statements of either Holdings or RJRN.\nRJR NABISCO HOLDINGS CORP. RJR NABISCO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)\nNOTE 15--SEGMENT INFORMATION\nIndustry Segment Data\nHoldings classifies its continuing operations into two industry segments which are described in Management's Discussion and Analysis of Financial Condition and Results of Operations, appearing elsewhere herein. Summarized financial information for these operations is shown in the following tables.\n- ---------------\n(1) Includes amortization of trademarks and goodwill for Tobacco and Food, respectively, for the year ended December 31, 1993, of $407 million and $218 million; for the year ended December 31, 1992, of $404 million and $212 million and for the year ended December 31, 1991, of $404 million and $205 million.\n(2) The 1993 and 1992 amounts include the effects of the restructuring expense at Tobacco (1993-- $544 million; 1992--$43 million), Food (1993--$153 million; 1992--$63 million) and Headquarters (1993--$33 million; 1992--$0), as applicable, and the sale of Holdings' ready-to-eat cold cereal business (See Note 1 to the Consolidated Financial Statements).\n(3) Cash and cash equivalents for the domestic operating companies are included in Headquarters' assets.\nRJR NABISCO HOLDINGS CORP. RJR NABISCO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)\nNOTE 15--SEGMENT INFORMATION--(CONTINUED)\nGeographic Data\nThe following tables show certain financial information relating to Holdings' continuing operations in various geographic areas.\n- ---------------\n(1) Transfers between geographic areas (which consist principally of tobacco transferred principally from the United States to Europe) are generally made at fair market value.\n(2) The 1993 and 1992 amounts include the effects of the restructuring expense of $730 million and $106 million, respectively, and a gain on the sale of Holdings' ready-to-eat cold cereal business ($98 million) (see Note 1 to the Consolidated Financial Statements).\n(3) Includes amortization of trademarks and goodwill of $625 million, $616 million and $609 million for the 1993, 1992 and 1991 periods, respectively.\nRJR NABISCO HOLDINGS CORP. RJR NABISCO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)\nNOTE 16--QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)\nThe following is a summary of the quarterly results of operations for Holdings for the quarterly periods of 1993 and 1992:\n- ---------------\n(1) Earnings per share is computed independently for each of the periods presented; therefore, the sum of the earnings per share amounts for the quarters may not equal the total for the year. In addition, assuming that the transactions discussed in Notes 10 and 12 to the Consolidated Financial Statements had occurred on January 1, 1993 or January 1, 1992, as applicable, and the net proceeds thereof were used to redeem or to repay outstanding indebtedness, the impact on earnings per share would be anti-dilutive for the reported periods.\nNOTE 17--SUBSEQUENT EVENT\nOn February 24, 1994, Holdings filed a Registration Statement on Form S-3 for a proposed offering of 300 million depositary shares, each representing a one-tenth ownership interest in a share of a newly created series of Preferred Equity Redemption Cumulative Stock (\"PERCS\"). Each depositary share would mandatorily convert in three years into one share of Common Stock, subject to adjustment and subject to earlier conversion or redemption under certain circumstances. Any net proceeds of a PERCS offering may be used for general corporate purposes which may include refinancings of indebtedness, working capital, capital expenditures, acquisitions and repurchases or redemptions of securities. In addition, such proceeds may be used to facilitate one or more significant corporate transactions, such as a joint venture, merger, acquisition, divestiture, asset swap, spin-off and\/or recapitalization, that would result in the separation of the tobacco and food businesses of Holdings. As of February 24, 1994, the specific uses of proceeds have not been determined. Pending such uses, any proceeds would be used to repay indebtedness under RJRN's revolving credit facilities or for short-term liquid investments.\n------------------------------------\nSCHEDULE II\nRJR NABISCO HOLDINGS CORP. SCHEDULE II--AMOUNTS RECEIVABLE FROM RELATED PARTIES AND UNDERWRITERS, PROMOTERS AND EMPLOYEES OTHER THAN RELATED PARTIES FOR THE YEAR ENDED DECEMBER 31, 1993\n- ---------------\n(A) Loan is denominated in a foreign currency. Rate fluctuations are included in the \"Amounts Collected\" column.\nThe amounts presented represent loans to employees in connection with the 1990 Long Term Incentive Plan. See Note 12 to the Consolidated Financial Statements.\nS-1\nSCHEDULE II\nRJR NABISCO HOLDINGS CORP. SCHEDULE II--AMOUNTS RECEIVABLE FROM RELATED PARTIES AND UNDERWRITERS, PROMOTERS AND EMPLOYEES OTHER THAN RELATED PARTIES FOR THE YEAR ENDED DECEMBER 31, 1992\nThe amounts presented represent loans to employees in connection with the 1990 Long Term Incentive Plan. See Note 12 to the Consolidated Financial Statements.\nS-2\nSCHEDULE III\nRJR NABISCO HOLDINGS CORP. SCHEDULE III--CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED STATEMENTS OF INCOME AND RETAINED EARNINGS (DOLLARS IN MILLIONS)\nSee Notes to Condensed Financial Information.\nS-3\nSCHEDULE III\nRJR NABISCO HOLDINGS CORP. SCHEDULE III--CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED STATEMENTS OF CASH FLOWS (DOLLARS IN MILLIONS)\nSee Notes to Condensed Financial Information.\nS-4\nSCHEDULE III\nRJR NABISCO HOLDINGS CORP. SCHEDULE III--CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED BALANCE SHEETS (DOLLARS IN MILLIONS)\nSee Notes to Condensed Financial Information.\nS-5\nSCHEDULE III\nRJR NABISCO HOLDINGS CORP. SCHEDULE III -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT NOTES TO CONDENSED FINANCIAL INFORMATION\nNOTE A--SUPPLEMENTAL CASH FLOWS INFORMATION For information regarding certain non-cash financing activities, see Notes 10 and 12 to the Consolidated Financial Statements.\nNOTE B--LONG-TERM DEBT\nSee Note 10 to the Consolidated Financial Statements for information relating to the Converting Debentures.\nNOTE C--COMMITMENTS AND CONTINGENCIES\nHoldings has guaranteed the indebtedness of RJRN under the Credit Agreements and certain debentures. The guaranties are secured by a pledge of the capital stock of RJRN owned by Holdings. For a discussion of certain restrictive covenants associated with these debt obligations, see Note 10 to the Consolidated Financial Statements.\nFor disclosure of additional contingent liabilities, see Note 11 to the Consolidated Financial Statements.\nS-6\nSCHEDULE V\nRJR NABISCO HOLDINGS CORP. RJR NABISCO, INC. SCHEDULE V--PROPERTY, PLANT AND EQUIPMENT FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991 (DOLLARS IN MILLIONS)\n- --------------- Property, plant and equipment are depreciated principally by the straight-line method. Annual depreciation rates for new assets range principally from 5% to 7% for land improvements; 2% to 33% for buildings and leasehold improvements; and 5% to 33% for machinery and equipment. Correspondingly higher depreciation rates are applicable with respect to assets in service at February 9, 1989, the date of the acquisition by Holdings and its affiliates of RJRN.\nS-7\nSCHEDULE VI\nRJR NABISCO HOLDINGS CORP. RJR NABISCO, INC. SCHEDULE VI--ACCUMULATED DEPRECIATION, DEPLETION, AND AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991 (DOLLARS IN MILLIONS)\nS-8\nSCHEDULE VIII\nRJR NABISCO HOLDINGS CORP. RJR NABISCO, INC. SCHEDULE VIII--VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991 (DOLLARS IN MILLIONS)\n- ---------------\n(A) Miscellaneous adjustments. (B) Principally charges against the accounts. (C) Excludes valuation allowance accounts for deferred tax assets.\nS-9\nSCHEDULE IX\nRJR NABISCO HOLDINGS CORP. RJR NABISCO, INC. SCHEDULE IX--SHORT-TERM BORROWINGS FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991 (DOLLARS IN MILLIONS)\n- ---------------\nS-10\nSCHEDULE X\nRJR NABISCO HOLDINGS CORP. RJR NABISCO, INC. SCHEDULE X--SUPPLEMENTARY INCOME STATEMENT INFORMATION FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991 (DOLLARS IN MILLIONS)\nS-11\nEXHIBIT INDEX\n- --------------- *Filed herewith.","section_15":""}
{"filename":"78003_1993.txt","cik":"78003","year":"1993","section_1":"Item 1. Business\nGeneral\nPfizer Inc. (the \"Company\") is a diversified, research-based health care company with global operations. The Company discovers, develops, manufactures and sells technology-intensive products in four business segments: Health Care, which includes a broad range of prescription pharmaceuticals, orthopedic implants, medical devices and surgical equipment; Consumer Health Care, which includes a variety of nonprescription drugs and personal care products; Animal Health, which includes animal health products and feed supplements; and Food Science, which includes ingredients for the food and beverage industries. Additionally, the Company's Financial Subsidiaries include a banking operation in Europe and a small captive insurance operation.\nComparative Segment and Geographic Data\nComparative segment and geographic data for the three years ended December 31, 1993 are set forth on pages 35 and 36, and in the Note \"Financial Subsidiaries\" on pages 41 and 42, of the Company's Annual Report to Shareholders for the fiscal year ended December 31, 1993 and are incorporated herein by reference.\nHealth Care\nThe Company's Health Care business is comprised of pharmaceuticals and hospital products. The Company competes with numerous other health care companies in the discovery and development of new, technologically advanced pharmaceutical and hospital products; in seeking use of its products by the medical profession; and in the sale of its product lines to wholesale and retail outlets, public and private hospitals, managed care organizations, government and the medical profession.\nMethods of competition in health care vary with the product category. There are a significant number of innovative companies in the field. A critical factor in most markets in which the Company competes is the ability to offer technological advances over competitive products. The productivity of scientific discovery and clinical development efforts is central to long-term operational success since there are many companies that specialize in marketing products that no longer have patent or regulatory protection. Other important factors in these markets include the ability to transfer knowledge of technological advances to the medical community, product quality, prompt delivery and price.\nThe United States pharmaceutical marketplace has in recent years experienced intensified price competition, brought about by a range of market forces, including: increased generic competition, growth of managed care organizations, and legislation requiring pharmaceutical companies to provide rebates and discounts to government purchasers. Similar competitive forces, in varying degrees, have also been present in various other countries in which the Company operates.\nPrescription pharmaceutical and hospital products, both in the United States and abroad, are promoted directly to the medical profession. Pharmaceutical products are distributed in large part to wholesale and retail outlets, hospitals, clinics, and managed care organizations. Hospital products are generally sold directly to medical institutions and, in some cases, through distributors and surgical supply dealers.\nPharmaceuticals\nThe Company's worldwide pharmaceutical products are comprised primarily of drugs which fall into the following major therapeutic classes: cardiovascular agents, anti-infectives, anti-inflammatories, central nervous system agents and anti-diabetes agents. In 1993, pharmaceuticals made up 69% of the Company's consolidated net sales, an increase from 63% in 1992 and 54% in 1991. Increases in both United States and international pharmaceutical revenues in 1993 were principally the result of strong sales of recently introduced products, including Procardia XL (nifedipine GITS), Norvasc (amlodipine besylate), Cardura (doxazosin), Diflucan (fluconazole), Zithromax (azithromycin), and Zoloft (sertraline).\nCardiovascular products are the Company's largest therapeutic product line accounting for 27% of the Company's consolidated 1993 net sales, an increase from 23% in 1992 and 18% in 1991. These products realized sales growth of 22% in 1993, including an 11% increase in sales of Procardia XL, a once-a-day calcium channel blocker for hypertension and angina, as well as the continuing rollout of Norvasc, an intrinsically once-a-day calcium channel blocker for hypertension and angina and Cardura, an alpha blocker for hypertension. U.S. cardiovascular sales grew 18% in 1993 and international sales of cardiovascular agents rose 34%.\nDiflucan, an antifungal agent indicated for use in a variety of fungal infections including certain types which afflict AIDS and immunosuppressed cancer patients, and Zithromax, an oral antibiotic, were the largest products in the anti-infective class in terms of 1993 growth in net sales. Total anti-infective sales accounted for 22% of the Company's consolidated 1993 net sales, an increase from 20% and 18% in 1992 and 1991, respectively.\nWorldwide sales of anti-inflammatories decreased to 5% of the Company's consolidated 1993 net sales. This compares to 9% in 1992 and 10% in 1991. This decline resulted primarily from the availability of generic versions of Feldene (piroxicam) in the United States since August 1992 and new competitive brand name products.\nThe Company's central nervous system agents include Zoloft, an anti-depressant introduced in the U.S. in 1992. Central nervous system agents accounted for less than 10% of the Company's consolidated 1993 net sales.\nThe Company's anti-diabetes agents, including Glucotrol (glipizide), accounted for less than 10% of the Company's consolidated 1993 net sales.\nThe Company's new product portfolio continues to undergo review by various regulatory agencies. The Company's products listed below are undergoing regulatory review by the United States Food and Drug Administration (\"FDA\") for the indications listed.\nProduct Indication(s) ------- ------------- Cardura Benign prostatic hyperplasia Cetirizine (launched in Canada in 1991 under the name Reactine) Low-sedating antihistamine; Pediatric Diflucan Vaginal candidiasis; Pediatric Enable (tenidap) (known as Enablex outside the United States) Osteo- and rheumatoid arthritis Glucotrol XL (glipizide GITS) Sustained-release antidiabetic Unasyn Injectable antibiotic-pediatric Zithromax Oral antibiotic-pediatric Zoloft Obsessive-compulsive disorder\nIn addition, the Company has marketing rights in the United States and Japan to XOMA Corporation, Inc.'s E5, a monoclonal antibody for the treatment of gram negative sepsis, which is undergoing FDA regulatory review.\nTo date, Diflucan has been launched in 60 countries and regulatory approvals have been obtained in 18 additional countries. Norvasc has been launched in 55 countries and approvals have been obtained in 25 additional countries. Cardura has been launched in 21 countries and approvals have been obtained in 35 additional countries. Zithromax has been launched in 19 countries and approvals have been obtained in 17 additional countries. Zoloft has been launched in 14 countries and approvals have been obtained in 9 additional countries.\nHospital Products\nHospital Products Group consists of two divisions - Howmedica and Medical Devices. Howmedica manufactures and markets orthopedic implants. Medical Devices consists of three core businesses - Valleylab, Schneider, and American Medical Systems, and two smaller businesses - Infusaid\/Strato and Biomedical Sensors.\nHowmedica's reconstructive hip, knee and bone cement products are used to replace joints which have deteriorated as a result of disease or injury. Major product lines are P.C.A. Hips, ABG Hips, Duracon Knee, and Simplex Bone Cement. Howmedica's trauma products are used by orthopedic surgeons to aid in trauma surgery and in setting fractures, and include the Gamma Nail, Luhr System and Alta System.\nSchneider, an international leader in angioplasty catheters, also markets a peripheral stent product line. Schneider, which is active in the United States and Europe, acquired a distribution company in Japan with 1993 being the first full year of Schneider's direct operation in that country. Valleylab is a worldwide leader in electrosurgical devices.\nValleylab's continued investment in product lines for minimally invasive surgery represents a significant opportunity for future growth. American Medical Systems is a leader in impotence and incontinence devices. Its major product development activities in 1993 were focused on trends towards minimally invasive surgery.\nPlans are being implemented to take advantage of manufacturing, marketing and distribution synergies between Strato Medical Corporation, a supplier of implantable vascular access ports, and Infusaid, an innovator in implantable infusion pumps. The combined operation will focus on advanced drug delivery systems. In 1993, Biomedical Sensors launched the Paratrend 7 intravascular continuous blood gas monitoring system, incorporating both electrochemical and fiber-optic technology. The continuous monitoring offered by the Paratrend 7 reduces the time to receive vital information, allowing pro-active diagnosis and therapy.\nConsumer Health Care\nThe Company's Consumer Health Care products include proprietary health items, baby care products and toiletries, Plax pre-brushing dental rinse, and a number of products sold only in selected international markets, including Vanart hair care products in Mexico and the TCP line of antiseptic and germicidal products marketed primarily in the United Kingdom.\nAmong the better-known brands manufactured and marketed by Consumer Health Care are Visine (tetrahydrozoline HCl) eyedrops, Ben-Gay analgesic creams, Desitin diaper rash ointments, Unisom (doxylamine succinate) sleep aids, Plax pre-brushing dental rinse, Rid anti-lice products and Barbasol shave creams and gels. In 1993, Consumer Health Care introduced Unisom Sleep Gels, soft liquid-filled gels with a maximum-strength sleep aid formula, Daily Care Desitin for the prevention of diaper rash, and a new formulation of Rid. Advanced Formula Plax was introduced in early 1994.\nMany other companies, large and small, manufacture and sell one or more similar consumer products. The Company is a significant competitor in this extensive market, and its principal methods of competition include product innovation and quality, customer satisfaction, broad distribution capabilities, advertising and promotion, and price. In general, the winning and retention of consumer acceptance of the Company's consumer products involve heavy expenditure for advertising, promotion, and marketing.\nAnimal Health\nThe Company's Animal Health operations include the discovery, development, manufacture and sale of animal health products and feed supplements. Major products include: veterinary products such as Terramycin LA-200 (oxytetracycline) (marketed as TM\/LA outside of North America), a broad-spectrum injectable antibiotic; the Banminth (pyrantel tartrate), Nemex (pyrantel pamoate) and Paratect (morantel tartrate) anthelmintics; Mecadox (carbadox), an antibacterial for pigs; and Terramycin (oxytetracycline), a broad-spectrum antibiotic used for a variety of animal diseases. The Company's animal health business functions on a worldwide basis giving the segment a global approach to marketing and enabling it to effectively coordinate the launches of three animal health products: Advocin (danofloxacin), Dectomax (doramectin), and Aviax (semduramicin). Advocin, a broad-spectrum, third generation quinolone antibacterial used to control respiratory and other diseases in cattle, swine, and poultry has been launched in many Latin American, Asian, and African countries. Dectomax, a novel, second-generation avermectin with broad-spectrum activity against internal and external parasites in a number of animal species has been launched in Brazil, Argentina, and South Africa. Aviax, a potent, broad-spectrum ionophore anticoccidial, used to prevent coccidiosis in poultry is under regulatory review in many countries, with approvals already received in a number of markets.\nAnimal health and nutrition products are sold through drug wholesalers, distributors, retail outlets and directly to users, including feed manufacturers, animal producers and veterinarians.\nA substantial number of other companies manufacture and sell one or more similar products for animal health use. There are hundreds of producers of animal health products throughout the world. The Company is a significant manufacturer of some of the products, such as injectable antibiotics, anthelmintics and anticoccidial products for the food animal market segments. With respect to the smaller pet segment, and other products for the food animal segments, the Company has a less significant market position.\nMethods of competition with respect to animal health and feed supplement products vary somewhat but include product innovation, service, price, quality and effective transfer of technological advances to the market through advertising and promotion.\nFood Science\nThe Food Science Group serves the global food processing industry with innovative food ingredients. Food Science continues to develop a strategic position of global leadership within the food ingredients business through the discovery and introduction of innovative food ingredients, linked with the added features of service and know-how for growth into value-added food ingredients systems. This strategic focus seeks to enable Food Science customers to provide an appealing array of healthy and tasteful foods, and, where possible, to provide a linkage to the Company's healthcare business. The specialty ingredients growth has been led by lite ingredients, including Litesse (polydextrose); dairy ingredients, featuring Chy-Max (chymosin); brewery ingredients; and food protectants. Appeal, taste, freshness and nutritional balance are quality parameters served by Food Science's ingredients and technology. Internal research and development remain key strengths and differentiate Food Science from many of its competitors. Products currently under development include fat extenders, intense sweeteners, flavors, food protectants and high temperature fat substitutes.\nThe Food Science business competes with other organizations for sales of most of their ingredients as well as substitute products. Some of these organizations produce and sell products that are either identical to, or serve the same function as, ingredients marketed by Food Science. The number of competitors varies with each particular ingredient. Methods of competition vary by ingredient but include innovation and quality, prompt delivery, ability to meet exacting specifications, technical service and cost.\nFinancial Subsidiaries\nIn 1992, the Company completed the transfer of its international banking operations from Puerto Rico to the Republic of Ireland. This subsidiary, Pfizer International Bank Europe (PIBE), operates under a full banking license from the Central Bank of Ireland. This reorganization and transfer was made in anticipation of the integration and unification of the European Union's financial markets. PIBE makes loans and accepts deposits in U.S. dollars in international markets and is an active Euromarket lender with a portfolio of loans, floating rate notes and Euronotes of high quality corporates and sovereigns. Loans are made primarily on a short-and medium-term basis, with floating interest rates.\nThe Company's insurance operation, The Kodiak Company Limited, reinsures certain assets, inland transport and marine cargo of Pfizer subsidiaries.\nInternational Operations\nThe Company has significant operations outside the United States that, in general, parallel its United States businesses either through direct operations or through distributors. The Company's international businesses are subject, in varying degrees, to a number of risks inherent in carrying on business in certain countries outside the United States, including possible nationalization, expropriation and other restrictive government actions such as capital regulations. In addition, changes in the values of currencies take place from time to time and can be either favorable or unfavorable to the net income and net assets of subsidiaries operating outside the United States. It is impossible to predict future changes in foreign exchange values or the effect they will have on the Company. The Company actively engages in hedging its current transactional exposures against the impact of unfavorable foreign exchange rate movements. These hedging programs are routinely implemented by the Company's foreign operating units. In addition, from time to time, hedging programs designed to protect selected balance sheet positions and future cash flow exposures are conducted, generally by the Company's headquarters personnel.\nTax Matters\nFor tax years beginning after December 31, 1993, the Omnibus Budget Reconciliation Act of 1993 reduced by 40% the benefits accruing to the Company under Section 936 of the Internal Revenue Code (the \"Puerto Rico tax credit\"). Such tax benefits will decline an additional 5% per year through 1998. For tax years beginning after December 31, 1997, the Puerto Rico tax credit benefit will be fixed at 40% of the current level.\nIn 1989, the Internal Revenue Service issued Notice 89-21 which deals, in part, with the tax accounting treatment of lump sum payments and assignments with respect to certain financial transactions which are similar to transactions entered into by the Company, and reported for tax purposes prior to the date of the Notice. If the Internal Revenue Service were to be successful in applying the Notice to these prior Company transactions, certain amounts which the Company believes are taxable only when and if repatriated to the United States would be required to be included in U.S. taxable income for the years 1988 through 1992. At this time, the Company continues to believe that its tax accounting treatment for the transactions in question was proper.\nThe Company has satisfactorily resolved all issues with the Internal Revenue Service for the years through 1986. The years 1987 through 1989 are currently under audit by the Internal Revenue Service. The Company believes that its accrued tax liabilities are adequate to cover its U.S. and foreign tax contingencies for all open years.\nPatents and Research\nThe Company owns or is licensed under a number of patents relating to its products and manufacturing processes which, in the aggregate, are believed to be of material importance in its business. Based on current product sales, and in view of the vigorous competition with products sold by others, the Company does not consider any single patent or related group of patents to be significant in relation to the enterprise as a whole, except for the Procardia XL, Diflucan, Zoloft and Norvasc patents. Procardia XL is a once-a-day formulation of the Company's calcium channel blocker, Procardia (nifedipine), which is administered for the treatment of angina and hypertension. Procardia XL employs a novel drug delivery system developed and patented by Alza Corporation. The Company holds an exclusive license to use this delivery system with nifedipine until 2003. The Company holds patents relating to Diflucan, Zoloft, and Norvasc.\nThe Company spent approximately $974 million in 1993, $863 million in 1992, and $757 million in 1991 on Company-sponsored research and development throughout the world. In 1994, the Company plans to spend in excess of $1.1 billion on research and development. In 1992, the Company also established Pfizer Research and Development Company (PRDCO) in Ireland with an initial capitalization of approximately $1 billion to engage in research and development through a cost-sharing arrangement with Pfizer Ltd. (a Pfizer U.K. subsidiary) in exchange for a portion of property rights relating to the development of specific products.\nCompetition in research, involving the development of new products and processes and the improvement of existing products and processes, is particularly significant and results from time to time in product and process obsolescence. The development of new and improved products is important to the Company's success in all areas of its business.\nEmployees\nApproximately 40,500 persons are employed by the Company throughout the world as follows: United States, 15,600; Europe, 10,800; Asia, 7,800; Canada\/Latin America, 4,300; and Africa\/Middle East, 2,000. The Company has a good relationship with its employees.\nRegulation\nMost of the Company's businesses are subject to varying degrees of governmental regulation in the countries in which operations are conducted. Such regulation in the United States involves a more complex approval process than in many other countries and therefore, often results in later marketing clearances and a corresponding increase in the expense of introducing new products in the United States. In many international markets, prices of pharmaceuticals are controlled by the government.\nIn 1990, Congress passed the Safe Medical Devices Act. The law contains numerous provisions obligating medical device firms to submit additional information to the U.S. FDA and increased the FDA's powers to investigate and sanction companies for violative practices. To date, the impact of this legislation has been manifested most visibly in delays in processing marketing licenses known as 510 (k) premarket notifications and product marketing applications (\"PMAs\") and in utilization of the new civil monetary penalties provision. The Company's Hospital Products Group is actively implementing strategies to maintain compliance with the requirements and the burdens that arise due to these provisions.\nThe 1990 Omnibus Budget Reconciliation Act requires pharmaceutical companies to extend rebates to state Medicaid agencies based on each state's reimbursement of pharmaceutical products under the Medicaid program. The Veterans Health Care Act, passed in 1992, requires manufacturers to provide discounts on purchases of pharmaceutical products by the Department of Veterans Affairs (DVA) and by certain entities funded by the Public Health Service. The Company's net sales in 1993 were reduced by Medicaid rebates and rebates under related state programs which amounted to $70 million. In addition, in 1993, Pfizer provided $51 million in discounts to the federal government, primarily to the DVA and the Department of Defense, for drugs purchased in accordance with the Veterans Health Care Act.\nIn 1990, the FDA announced a call for data for ingredients contained in products bearing anti-plaque and related claims. The call for data is part of the FDA's ongoing review, begun in 1972, of over-the-counter drug products. The FDA is taking this administrative approach to evaluate the safety and efficacy of anti-plaque products and has not proceeded further with regard to 1989 regulatory letters it issued to the Company and several other manufacturers of products bearing anti-plaque claims. The Company submitted its response to the call for data relating to Plax, its pre-brushing dental rinse, on June 17, 1991. This filing, as well as filings of other manufacturers, is still under review, and is currently being considered by an FDA Advisory Panel.\nIn June 1992, the Generic Drug Enforcement Act was passed into law. The legislation provides for mandatory and permissive debarment of companies convicted of crimes related to abbreviated new drug applications and of individuals convicted of crimes related to development or approval of any drug product. Debarment is a prohibition against the company or individual from submitting, assisting in the submission or providing services for someone who has an approved or pending drug application. The law is reflective of a continuing trend in Congress to enhance FDA's enforcement powers over the entire regulated industry and stiffen penalties for violations of the Food, Drug and Cosmetic Act. To date, the FDA has utilized the provision to debar more than a dozen individuals.\nIn 1992, the Prescription Drug User Fee Act was also signed into law. It imposes fees for: a) certain human drug and biologic product applications, b) certain products listed under provisions of the Food, Drug and Cosmetic Act, and c) establishments in which prescription drugs in final dosage form are manufactured. The fees, which will increase over a five year period and additionally are subject to inflation adjustments, are intended to be dedicated to the review process for human drug applications. The legislative goals, expressed in companion correspondence, are to reduce the backlog of original and supplemental product applications and expedite the review of new applications. User fees were collected on specified applications filed after September 1, 1992. The financial impact of these fees on the Company was not material in 1993, while the Company expects to benefit from expedited review of its applications.\nIn Western Europe, the 12 countries currently comprising the European Union (formerly known as the European Community), are continuing the process of implementing directives, standards and regulatory control mechanisms designed to further harmonize requirements for the Union-wide approval and marketing of drugs and medical devices. These changes, which are not expected to be in full operation before the mid-1990s, are likely to have positive effects upon the Company's businesses. However, until the common requirements are implemented and the Company has some experience with them in practice, it will be impossible to determine the net impact on the Company. Also, by that time, the scope of these measures may have extended to other European countries whose applications to join the European Union are currently pending.\nDuring 1993, Congress began debate on reform of the U.S. health care system. Numerous health care reform bills have been introduced, including the Administration's \"Health Security Act\". The Health Security Act includes provisions that would form an Advisory Council on Breakthrough Drugs, require rebates on pharmaceuticals reimbursed under the Medicare program, and authorize the Secretary of Health and Human Services to exclude from coverage under Medicare, or require prior authorization for, drugs the Secretary considers to be excessively priced. While these provisions could have an adverse impact on the Company's pharmaceutical business in the United States, other bills that have been introduced do not contain such provisions. It is uncertain whether legislation will be enacted in 1994 or, if legislation is enacted, whether it will have a significant adverse effect on the Company.\nRaw Materials and Energy\nRaw materials essential to the business of the Company and its subsidiaries are generally obtainable from multiple sources. The Company did not experience any significant restrictions on availability of raw materials or supplies during the last year, and none is expected in 1994. Energy was available to the Company in sufficient quantities to meet Company requirements and this condition is expected to continue in 1994.\nEnvironment\nCertain of the Company's operations are affected by Federal, State and local laws and regulations relating to environmental quality. The Company has made and intends to continue to make the necessary expenditures for environmental protection. Compliance with such laws and regulations is not expected to have a material adverse effect on the financial position, earnings or competitive position of the Company and its subsidiaries.\nUnited States All Other Total ------------- --------- ----- (Millions of dollars) Environment-related capital expenditures: 1993 Actual ................... $13.2 $17.8 $31.0 1994 Estimated ................ 76.1 16.2 92.3 1995 Estimated ................ 45.6 16.4 62.0\nOther environmental-related expenses: 1993 Actual ................... 26.5 10.3 36.8 1994 Estimated ................ 30.4 12.1 42.5\nItem 2.","section_1A":"","section_1B":"","section_2":"Item 2. Properties\nFollowing is a summary description of the Company's principal plants and properties:\nGroton Plant and Research Laboratories -- These facilities are located in Groton, Connecticut, and surrounding towns, on approximately 649 acres, and include a number of buildings of one to eight stories, containing approximately 3,250,000 square feet of floor space either existing or under construction.\nPrincipal products produced at Groton are bulk pharmaceuticals, specialty chemicals and food ingredients. Since acquiring the plant in 1946, the Company has made major improvements, including construction of production facilities, a powerhouse and generating equipment, and a large research complex adjacent to the plant. In 1992, major improvements to plant facilities were initiated, including a process effluent and waste water treatment facility, and a major pharmaceutical capacity replacement project. Both projects are expected to be completed by 1996. Construction was completed in 1993 on several research expansions including a 156,000 square foot drug safety building addition, a 30,000 square foot central utilities building, and a 442,000 square foot parking facility. In 1993, enlargement of the pharmaceutical research and development facilities was initiated.\nBrooklyn Plant -- The Company's site in Brooklyn, New York, is on approximately 17 acres, including a number of buildings containing approximately 1,172,000 square feet of floor space. The primary operations, pharmaceutical dosage form manufacturing and packaging, are housed in an eight story production facility containing 545,000 square feet.\nVigo Plant and Research Facility -- These facilities, located in Vigo County near Terre Haute, Indiana, are on a site of approximately 2,100 acres owned in fee and consist of a number of buildings of one to five stories containing approximately 706,000 square feet of floor space. Principal products produced at this plant are pharmaceutical products, bulk antibiotics, polydextrose and chymosin. Animal health research is also performed on this site.\nBarceloneta Plant -- Pfizer Pharmaceuticals Inc. is located on an 89-acre property owned by the Company at Barceloneta, Puerto Rico. An additional 151 acres of land adjacent to this property were purchased in 1991 for future utilization. The facilities contain four major manufacturing buildings (of two to four floors) and twelve support buildings with a total approximate area of 397,600 square feet of floor space; and ten additional facilities (tank farms, electrical substations, cooling towers, incinerator, etc.) with an approximate area of 70,400 square feet, for a total plant facilities area of approximately 468,000 square feet. It houses organic synthesis manufacturing, pharmaceutical dosage form manufacturing and packaging facilities, and the required service areas, such as bulk and drum liquid storage, laboratories, utilities, engineering shops, employee services and administration.\nOther U.S. Locations -- The Company also operates 12 other production facilities in the United States and has five regional sales and distribution centers in various parts of the country which are owned in fee.\nThe Company's world headquarters is located at 235 East 42nd Street, New York, NY. The Company owns this 33-story office building which contains approximately 650,000 square feet. The building stands on slightly less than one acre of land which is leased under an agreement expiring in 2057. In 1983, the Company purchased a ten-\nstory office building located at 219 East 42nd Street, containing approximately 263,400 square feet which is immediately adjacent to the Company's headquarters. The Company also leases additional office space in New York City consisting of approximately 155,550 square feet.\nOutside the United States -- The Company's major manufacturing facilities outside the United States are located in Australia, Brazil, France, Germany, Great Britain, India, Ireland, Italy, Japan, Mexico and Spain. The plants in these eleven countries have an aggregate of over two million square feet of floor space. Additional plants are located in over 20 additional countries located in various parts of the world. A large medicinal and animal health research unit is located in Sandwich, England where an 82,000 square foot clinical sciences building became operational in 1993 and a 99,000 square foot animal sciences building became operational in early 1994. Construction is in progress on a 97,000 square foot pharmaceutical sciences building due for occupancy in 1996 and also on a 120,000 square foot administration and services building which is scheduled for completion in 1994. Additional research laboratories exist in France, Japan and Germany.\nThe Company's major manufacturing facilities in the U.S. and the other locations referred to above manufacture various products for all of the Company's businesses. These properties are maintained in good operating condition and the manufacturing facilities have capacities considered adequate to meet the Company's needs.\nItem 3.","section_3":"Item 3. Legal Proceedings\nThe Company is involved in a number of claims and litigations, including product liability claims and litigations considered normal in the nature of its businesses. These include suits involving various pharmaceutical and hospital products that allege either reaction to or injury from use of the product.\nAs previously disclosed, numerous claims have been brought against the Company and Shiley Incorporated, a wholly owned subsidiary, alleging either personal injury from fracture of 60(degree) or 70(degree) Shiley Convexo-Concave (C\/C) heart valves, or anxiety that properly functioning implanted valves might fracture in the future, or, in a few cases, personal injury from a prophylactic replacement of a functioning valve.\nThe Company believes that claims based on properly functioning implanted valves seeking recovery for alleged anxiety that the valves might fracture in the future do not state a cause of action and, accordingly, the Company has vigorously defended these cases. As of January 21, 1994, 59 cases have either been dismissed on motions to dismiss or for summary judgment, or have been voluntarily withdrawn by the plaintiffs. In the case of Kahn v. Shiley Incorporated and Pfizer Inc., however, the California Court of Appeal in 1990 held invalid all of the plaintiff's product liability claims relating to concerns with respect to plaintiff's properly functioning C\/C heart valve, but permitted plaintiff to pursue claims based on deceit, which the trial court has held includes negligent and fraudulent misrepresentations.\nCases involving approximately 200 implantees (and spouses of some of them) were consolidated for certain pretrial purposes under the caption of the Kahn case pending in the Superior Court, Orange County, California. More than 100 of these were settled in early 1993. Trial of the first of the remaining cases, of six selected for trial, began July 29, 1993. After trial, but before verdict, most of the remaining cases as well as several unfiled claims, involving approximately 250 implantees, were settled.\nIn an attempt to resolve all claims alleging anxiety that properly functioning valves might fracture in the future, the Company entered into a settlement agreement in January 1992 in Bowling v. Shiley et al., a case brought in the United States District Court for the Southern District of Ohio that establishes a worldwide settlement class of people with C\/C heart valves and their spouses, except those who elect to exclude themselves. The settlement provides for a Consultation Fund of $90 to $140 million (depending on the number of claims filed) from which valve recipients who make claims will receive payments that are intended to cover their cost of consultation with cardiologists or other health care providers with respect to their valves. The settlement agreement establishes a second fund of at least $75 million to support C\/C valve-related research, including the development of techniques to identify valve recipients who may have significant risk of fracture, and to cover the unreimbursed medical expenses that valve recipients may incur for certain procedures related to the valves. The Company's obligation as to coverage of these unreimbursed medical expenses is not subject to any dollar limitation. Following a hearing on the fairness of the settlement, it was approved by the court on August 19, 1992. An appeal of the court's approval of the settlement was dismissed on December 20, 1993 by the United States Court of Appeals for the Sixth Circuit. A motion for rehearing en banc was denied on March 8, 1994. It is expected that most of the costs arising from the Bowling class\nsettlement will be covered by insurance and the proceeds of the sale of certain product lines of the Shiley businesses in 1992.\nOf approximately 900 implantees (and spouses of some of them) who opted out of the Bowling settlement class, 12 currently have cases or claims pending in the Kahn consolidation in California; 4 have cases or claims pending outside of California; approximately 675 whose claims were included in the Kahn consolidation have been settled; approximately 100 have never filed a case or claim; and approximately 10 have working valve cases pending.\nSeveral claims relating to elective reoperations of valve recipients are currently pending. Some of these claims relate to elective reoperations covered by the Bowling class settlement described above, and, therefore, the claimants are entitled to certain benefits in accordance with the settlement. Such claimants, if they irrevocably waive all of the benefits of the settlement, may pursue separate litigation to recover damages in spite of the class settlement. The Company is defending these claims.\nGenerally, the plaintiffs in all of the pending heart valve litigations discussed above seek money damages. Based on the experience of the Company in defending these claims to date, including available insurance and reserves, the Company is of the opinion that these actions should not have a material adverse effect on the financial position or the results of operations of the Company.\nOn September 30, 1993, Dairyland Insurance Co., a carrier providing excess liability coverage (\"excess carrier\") in the early 1980s, commenced an action in the California Superior Court in Orange County, seeking a declaratory judgment that it was not obligated to provide insurance coverage for Shiley heart valve liability claims. On October 8, 1993, Pfizer filed cross-complaints against Dairyland and filed third-party complaints against 73 other excess carriers who sold excess liability policies covering periods from 1978 to 1985, seeking damages and declaratory judgments that they are obligated to pay for defense and indemnity to the extent not paid by other carriers.\nThe Company's operations are subject to federal, state, and local environmental laws and regulations. Under the Comprehensive Environmental Response Compensation and Liability Act of 1980, as amended (\"CERCLA\" or Superfund\"), the Company has been designated as a potentially responsible party by the United States Environmental Protection Agency with respect to certain waste sites with which the Company may have had direct or indirect involvement. Similar designations have been made by some state environmental agencies under applicable state superfund laws. Such designations are made regardless of the extent of the Company's involvement. There are also claims that the Company is a potentially responsible party or participant with respect to several waste sites in Canada. Such claims have been made by the filing of a complaint, the issuance of an administrative directive or order, or the issuance of a notice or demand letter. These claims are in various stages of administrative or judicial proceedings. They include demands for recovery of past governmental costs and for future investigative or remedial actions. In many cases, the dollar amount of the claim is not specified. In most cases, claims have been asserted against a number of other entities for the same recovery or other relief as was asserted against the Company. The Company is currently participating in remedial action at a number of sites under federal, state and local laws.\nTo the extent possible with the limited amount of information available at this time, the Company has evaluated its responsibility for costs and related liability with respect to the above sites and is of the opinion that the Company's liability with respect to these sites should not have a material adverse effect on the financial position or the results of operations of the Company. In arriving at this conclusion, the Company has considered, among other things, the payments that have been made with respect to the sites in the past; the factors, such as volume and relative toxicity, ordinarily applied to allocate defense and remedial costs at such sites; the probable costs to be paid by the other potentially responsible parties; total projected remedial costs for a site, if known; existing technology; and the currently enacted laws and regulations. The Company anticipates that a portion of these costs and related liability will be covered by available insurance.\nThe Company agreed to a consent order issued by the State of Connecticut's Department of Environmental Protection on January 28, 1994 in connection with the Company's operation of its pharmaceutical research and production facilities in Groton, Connecticut. The consent order, pursuant to which the Company agreed to pay a civil penalty of $150,000, resolves all matters raised in an administrative action brought by the agency against the Company. The action had alleged certain violations of state environmental regulations which incorporate provisions of the federal Resource Conservation and Recovery Act.\nThrough the early 1970s, Pfizer (Minerals Division) and Quigley Company, Inc., a wholly owned subsidiary, sold a minimal amount of one construction product and several refractory products containing some asbestos. These\nsales were discontinued thereafter. Although these sales represented a minor market share, the Company has been named as one of a number of defendants in numerous lawsuits. These actions, and actions related to the Company's sale of talc products in the past, claim personal injury resulting from exposure to asbestos-containing products, and nearly all seek general and punitive damages. In these actions, the Company or Quigley is typically one of a number of defendants, and both are members of the Center for Claims Resolution (the \"CCR\"), a joint defense organization that is defending these claims. The Company and Quigley are responsible for varying percentages of defense and liability payments for all members of the CCR. Prior to September 1990, the cases involving talc products were defended by the CCR, but the Company is now overseeing its own defense of these actions. A number of cases alleging property damage from asbestos-containing products installed in buildings have also been brought against Pfizer.\nOn January 15, 1993, a class action complaint and settlement agreement were filed in the United States District Court for the Eastern District of Pennsylvania involving all personal injury claims by persons who have been exposed to asbestos-containing products but who have not yet filed a personal injury action against the twenty members of the CCR. The settlement agreement establishes a claims-processing mechanism that will provide historic settlement values upon proof of impaired medical condition as well as claims-processing rates over ten years. In addition, the shares allocated to the CCR members eliminate joint and several liability. The settlement is subject to the court's determination that the settlement is fair and reasonable.\nConcurrently with the filing of the future claims class action, the CCR settled approximately 16,360 personal injury cases on behalf of Pfizer and Quigley, leaving approximately 22,900 cases pending (15,400 against Quigley and 7,500 against Pfizer). It is the CCR's intention to settle remaining and opt-out cases and claims on a similar basis to past settlements.\nCosts incurred by the Company in defending the asbestos personal injury claims and the property damage claims, as well as settlements and damage awards in connection therewith, are largely insured against under policies issued by several primary insurance carriers and a number of excess carriers. The Company believes that its costs incurred in defending and ultimately disposing of the asbestos personal injury claims, as well as the property damage claims, will be largely covered by insurance policies issued by carriers that have agreed to provide coverage, subject to deductibles, exclusions, retentions and policy limits. In connection with the future claims settlement, the defendants have commenced a third-party action against their respective excess insurance carriers that have not agreed to provide coverage seeking a declaratory judgment that (a) the future claims settlement is fair and reasonable as to the carriers; (b) the carriers had adequate notice of the future claims class settlement; and (c) the carriers are obligated to provide coverage for asbestos personal injury claims. Based on the Company's experience in defending the claims to date and the amount of insurance coverage available, the Company is of the opinion that these actions should not ultimately have a material adverse effect on the financial position or the results of operations of the Company.\nIn connection with the divestiture of Minerals Technologies Inc. (MTI), to which the net assets of the Pfizer Minerals and the Quigley businesses were transferred, Pfizer and Quigley agreed to indemnify MTI against any liability with respect to products manufactured and sold prior to October 30, 1992, as well as against liability for certain environmental matters.\nThe Company has been named, together with numerous other manufacturers of prescription drugs and certain companies which distribute prescription pharmaceuticals, in at least fifty-one lawsuits (the majority of which are purported to be class actions) in the United States District Courts in Illinois, Pennsylvania, California, Texas, Minnesota and New York, as well as six lawsuits in California state courts, all brought by certain retail pharmacy companies. These cases allege, in essence, that the defendant drug manufacturers have violated the Sherman Act in that they have unlawfully agreed with each other (and, as alleged in some cases, with wholesalers) not to extend to retail pharmacy companies the same discounts which they allege were extended to managed care companies, mail order pharmacies and other institutional purchasers. Certain of the cases also allege violations of the Robinson-Patman Act in that the manufacturers allegedly have unlawfully discriminated against retail pharmacy companies by not extending to them such discounts. It is anticipated that additional cases may be filed. On February 4, 1994, 46 federal suits were transferred to the United States District Court for the Northern District of Illinois for coordinated pretrial preceedings. The remaining federal suits are expected to be transferred there as well. The Company believes these cases are without merit and will vigorously defend them.\nFDA administrative proceedings relating to Plax are pending, principally an industry-wide call for data on all anti-plaque products by the FDA. The call for data notice specified that products that have been marketed for a material time and to a material extent may remain on the market pending FDA review of the data, provided the manufacturer has a good faith belief that the product is generally recognized as safe and effective and is not misbranded. The Company believes that Plax satisfied these requirements and prepared a response to the FDA's request, which was filed on June 17, 1991. This filing, as well as the filings of other manufacturers, is still under review and is currently being considered by an FDA Advisory Committee.\nA consolidated class action on behalf of persons who allegedly purchased Pfizer common stock during the March 24, 1989 through February 26, 1990 period is pending in the United States District Court for the Southern District of New York. This lawsuit, which commenced on July 13, 1990, alleges that the Company and certain officers and former directors and officers violated federal securities law by failing to disclose potential liability arising out of personal injury suits involving Shiley heart valves and seeks damages in an unspecified amount. The defendants in this action believe that the suit is without merit and are vigorously defending it. A derivative action commenced on April 2, 1990 against certain directors and officers and former directors and officers alleging breaches of fiduciary duty and other common law violations in connection with the manufacture and distribution of Shiley heart valves is pending in the Superior Court, Orange County, California. The complaint seeks, among other forms of relief, damages in an unspecified amount. The defendants in the action believe that the suit is without merit and are vigorously defending it.\nOn January 28, 1993, a purported class action entitled Kearse v. Pfizer Inc. and Howmedica Inc. was commenced in the United States District Court for the Northern District of Ohio. Howmedica Inc. (\"Howmedica\") is a wholly owned subsidiary of the Company. The action sought monetary and injunctive relief, including medical monitoring, on behalf of patients implanted with the Howmedica P.C.A. one-piece acetabular hip component, which was manufactured by Howmedica from 1983 to 1990. The complaint alleged that the prostheses were defectively designed and manufactured and posed undisclosed risks to implantees. On August 3, 1993, a virtually identical purported class action, Bradshaw\/Davids v. Pfizer Inc. and Howmedica Inc., was brought and the Kearse case was subsequently voluntarily dismissed. The Company believes that the suit is without merit and is vigorously defending it.\nItem 4.","section_4":"Item 4. Submission of Matters to a Vote of Security Holders\nNot applicable.\nPART II\nItem 5.","section_5":"Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters\nInformation required by this item is incorporated by reference to the notes entitled, \"Long-Term Debt\", \"Earnings per Common Share\", \"Common Stock\", \"Preferred Stock Purchase Rights\", \"Employee Benefit Trust\", \"Cash Dividends\", \"Stock Option Plan\" and \"Quarterly Data (unaudited)\" found on pages 43, 46, 47, 50 and 51 of the Annual Report to Shareholders for the fiscal year ended December 31, 1993.\nItem 6.","section_6":"Item 6. Selected Financial Data\nSelected Consolidated Statement of Income Data\nItem 7.","section_7":"Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations\nInformation required by this item is incorporated by reference to the \"Financial Review\" on pages 26 through 33 of the Annual Report to Shareholders for the fiscal year ended December 31, 1993.\nItem 8.","section_7A":"","section_8":"Item 8. Financial Statements and Supplementary Data\nInformation required by this item is incorporated by reference to the \"Independent Auditors' Report\" found on page 34 and to pages 35 through 51 of the Annual Report to Shareholders for the fiscal year ended December 31, 1993.\nItem 9.","section_9":"Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure\nNot applicable.\nPART III\nItem 10.","section_9A":"","section_9B":"","section_10":"Item 10. Directors and Executive Officers of the Registrant\nInformation with regard to the Directors of the Company, including those of the following Executive Officers who are Directors, is incorporated by reference to pages 3 through 7 of the Company's Proxy Statement dated March 18, 1994.\nThe Board of Directors elects officers at its first meeting after each annual meeting of shareholders. The Board may also elect officers from time to time throughout the year. Elected officers of the Company hold office until their successors are chosen or until their earlier death, resignation or removal.\nBUSINESS EXPERIENCE OF NON-DIRECTOR OFFICERS\nBrian W. Barrett\nMr. Barrett joined Pfizer Canada in 1966, where he served in various financial positions, including Chief Financial Officer of the Canadian subsidiary. In 1971, he was appointed Assistant Controller of Pfizer International in New York; in 1973, Director of International Planning and in 1976, Director of Planning. In 1980, Mr. Barrett was appointed Vice President -- Corporate Strategic Planning; in 1983, he became Vice President -- Finance for Pfizer International; in 1985, President -- Africa\/Middle East and in 1991, President -- Asia\/Canada. In 1992, Mr. Barrett was elected Vice President of the Company. He assumed the responsibilities of his present position, President, Northern Asia, Australasia and Canada -- International Pharmaceuticals Group, in 1993.\nM. Kenneth Bowler\nMr. Bowler joined the Company in 1989, and has been Vice President -- Federal Government Relations since 1990. He formerly served as Staff Director for the House Ways and Means Committee.\nC. L. Clemente\nMr. Clemente joined the Company in 1964 and has served as Vice President; General Counsel and Secretary, Pfizer International, Inc. He has also held the position of Vice President of Coty, formerly Pfizer's fragrance and cosmetic division. In 1983, he was named Associate General Counsel of Pfizer Inc. In 1986, he was elected Vice President; General Counsel and Secretary of the Company. He became a member of the Corporate Management Committee of the Company in 1991. In 1992, he was elected Senior Vice President --Corporate Affairs; Secretary and Corporate Counsel.\nBruce R. Ellig\nMr. Ellig joined the Company in 1960. He progressed through a number of positions of increasing responsibility in the Corporate Personnel Division including Vice President -- Compensation and Benefits in 1978 and Vice President-Employee Relations in 1983. In 1985, he was elected Vice President -- Personnel of the Company.\nDonald F. Farley\nMr. Farley joined the Company in 1965 as Production Engineer for the Chemical Division. After serving in a number of positions of increasing responsibility within the Chemical Division, he was named its Vice President, Operations in 1982. In 1986 he became Senior Vice President of the Division, and in 1988, Executive Vice President - Specialty Chemicals. In 1992, Mr. Farley was named President of the Food Science Group, and in February 1993 was elected a Vice President of the Company.\nDavid Fitzgerald\nMr. Fitzgerald joined the Company's Howmedica division in 1970 as Controller. In 1974, he was promoted to Corporate Controller of Howmedica. He served as Assistant General Manager and Vice President -- General Manager, and in 1980 he assumed responsibility for Howmedica's worldwide orthopedics operations. In 1982, he was appointed Senior Vice President of Howmedica. In 1984, he became President of Howmedica and Senior Vice President of Hospital Products. In 1988, he became Executive Vice President of the Hospital Products Group. In 1992, Mr. Fitzgerald was elected Vice President of the Company.\nGeorge A. Forcier\nDr. Forcier joined the Company in 1966 as Analytical Research Chemist for the Company's Medical Research Laboratories. In 1970, he was named Project Leader, in 1979 Manager, and in 1981, Assistant Director, of the Analytical Research Department. In 1986, he was named Director of the Analytical Research and Development Department and in 1991, he became Group Director. Dr. Forcier was elected Vice President -- Quality Control of the Company, effective January 1, 1994.\nWilliam E. Harvey\nMr. Harvey joined the Company in 1966 as Assistant to the Treasurer of Pfizer International. In 1969, he was appointed Assistant Treasurer, International, and in 1981, he became Assistant Treasurer of the Company. In 1990, Mr. Harvey was elected Vice President; Treasurer of the Company.\nGary N. Jortner\nMr. Jortner joined the Company in 1973 as a Systems Analyst for Pfizer Pharmaceuticals. In 1974, he transferred to product management and progressed through a series of promotions that resulted in his being named Group Product Manager for Pfizer Labs in 1978. In 1981, he became Vice President of Marketing for Pfizer Labs. In 1986, he was promoted to Vice President of Operations for Labs. In 1991, he was named Vice President and General Manager, Pfizer Labs Division. In 1992, Mr. Jortner was elected Vice President of the Company. In 1993, he was named Vice President; Group Vice President, Disease Management -- U.S. Pharmaceuticals Group.\nKaren L. Katen\nMs. Katen joined the Company in 1974 as a Marketing Associate for Pfizer Pharmaceuticals. Beginning in 1975, she progressed through a number of positions of increasing responsibility in the Roerig product management group which resulted in her being named Group Product Manager in 1978. In 1980, she transferred to Pfizer Labs as a Group Product Manager and later became Director, Product Management. In 1983, she returned to Roerig as Vice President - -Marketing. In 1986, she was named Vice President and General Manager --Roerig Division. In 1992, she was elected Vice President of the Company. In May 1993, Ms. Katen became Executive Vice President of the U.S. Pharmaceuticals Group, in addition to remaining General Manager of the Company's Roerig Division.\nHenry A. McKinnell\nDr. McKinnell joined the Company in 1971. In 1977, he became Vice President - --Area Manager for Pfizer Asia. In 1979, he became Executive Vice President and in 1981, President of Pfizer Asia. In 1984, Dr. McKinnell was named Vice President -- Corporate Strategic Planning, and in 1986, he was elected a Vice President of the Company. In 1990, Dr. McKinnell became the Company's Chief Financial Officer and was named Vice President -- Finance of the Company. In 1992, he became a member of the Corporate Management Committee of the Company. In that same year, he became Executive Vice President of the Company, and President of the Company's Hospital Products Group, in addition to remaining the Company's Chief Financial Officer.\nBrower A. Merriam\nMr. Merriam joined the Company in 1969 as Country Manager for Peru, and in 1971, he was appointed Country Manager for Argentina. In 1973, he was appointed President of Pfizer Latin America. He was appointed Director of Pfizer International in 1984, and in 1988 assumed the position of President for Latin America, Southeast Asia, Indo-Pacific and Canada. In 1990, he was appointed Executive Vice President of Pfizer International. In 1991, he\nbecame Executive Vice President of the Animal Health Group and in 1992 was appointed its President. Mr. Merriam was elected a Vice President of the Company in 1992.\nJohn C. Mesloh\nMr. Mesloh joined Howmedica, Inc. as Controller in 1973. In 1974, he was appointed Vice President -- Finance and Treasurer of Howmedica, and in 1980 he was elected Corporate Controller of the Company. In 1989, Mr. Mesloh was elected Vice President of the Company. Mr. Mesloh was elected Vice President, Corporate Purchasing, effective January 1993.\nVictor P. Micati\nMr. Micati joined the Company in 1965 as a Management Candidate for Pfizer Labs. Beginning in 1966, he progressed through a number of positions of increasing responsibility in the Pfizer Labs division, which resulted in his being named Vice President --Marketing in 1971. In 1972 he became Vice President of Pharmaceutical Development for International Pharmaceuticals. In 1980, he was named Executive Vice President of the European Management Center. He returned to the International Pharmaceutical Division in 1984 as Senior Vice President, and in 1990 was named President, Europe. In 1992, Mr. Micati was elected Vice President of the Company.\nPaul S. Miller\nMr. Miller joined the Company in 1971 and was appointed an Assistant Secretary and Assistant General Counsel in 1975. In 1983, he was named Associate General Counsel. In 1986, he became Secretary of the Corporate Management Committee and in that same year he was elected Vice President; General Counsel of the Company. He became a member of the Corporate Management Committee of the Company in 1991. In 1992, Mr. Miller was elected Senior Vice President -- General Counsel of the Company.\nGeorge M. Milne\nDr. Milne joined the Company in 1970 as a Research Scientist. In 1973, he was named Senior Research Scientist and progressed through a number of positions of increasing responsibility which resulted in his being named Vice President, Research and Development Operations in 1985. In 1988, Dr. Milne became Senior Vice President, Research and Development, and in September 1993, he was elected Vice President of the Company and President, Central Research.\nRobert Neimeth\nMr. Neimeth joined the Company in 1962 as a management trainee, subsequently serving as Country Manager, Nigeria, as Vice President, Pharmaceutical Development in Asia, and then as President of Pfizer Asia from 1972 to 1977. He then served as Vice President and Director of Operations for Pfizer Labs. In 1980 he became President Pfizer Europe and, in 1983, Mr. Neimeth became Vice President of the Company. In 1984, he was also elected Executive Vice President of Pfizer International Subsidiaries. In 1990, he was named Vice President; President, Pfizer International Subsidiaries. In 1991, he became Chairman, President and Chief Executive Officer of Pfizer International. He also became a member of the Corporate Management Committee of the Company in 1991. In 1992, he was elected Executive Vice President of the Company, and President, International Pharmaceuticals Group. In this capacity, Mr. Neimeth supervises the Company's International Pharmaceutical and worldwide Animal Health operations.\nJohn F. Niblack\nDr. Niblack joined the Company in 1967 and held various management positions in new drug discovery operations before being appointed in 1984 as Vice President, Medicinal Products Research and in 1986 as Executive Vice President, Central Research. In 1990, Dr. Niblack was named President-Central Research and elected a Vice President of the Company. In September 1993, Dr. Niblack was elected Executive Vice President - Research and Development, and became a member of the Corporate Management Committee of the Company.\nWilliam J. Robison\nMr. Robison joined the Company in 1961 as a Sales Representative for Pfizer Labs. After serving in a number of positions of increasing responsibility in the Labs division, he was appointed Vice President of Sales in 1980, and Senior Vice President Pfizer Labs in 1986. In 1990 he was appointed Vice President and General Manager of Pratt Pharmaceuticals, and in 1992 assumed his present position as President of the Consumer Health Care Group. In 1992, Mr. Robison was also elected Vice President of the Company.\nHerbert V. Ryan\nMr. Ryan joined the Company in 1962 as Supervisor, Capital Assets. In 1964 he was named Supervisor, Corporate Ledger, and in 1966 became Director, Corporate Accounting. In 1981 he was appointed Assistant Controller, Corporate Accounting. Effective January 1993, Mr. Ryan was elected Corporate Controller.\nCraig Saxton\nDr. Saxton joined the Company in 1976 as Clinical Projects Director for the Central Research Division of Pfizer Limited in Sandwich, England. In 1981, he was named Senior Associate Medical Director for the International Division of Pfizer Inc., and in 1982 became the Division's Vice President, Medical Director. Dr. Saxton became Senior Vice President, Clinical Research and Development for the Central Research Division in 1988. In September 1993, he was named Executive Vice President - Central Research and was elected a Vice President of the Company.\nGerald H. Schulze\nMr. Schulze joined the Company in 1971 as a Medical Service Representative for Roerig. He served in a number of positions of increasing responsibility in the Pharmaceuticals and International divisions before being named Vice President -- Business Development for the Consumer Products division in 1985. In 1987, he was named Vice President -- Business Development for Hospital Products, and in 1988, became that division's Senior Vice President. In 1992, he was elected a Vice President of the Company and was named Executive Vice President for the Hospital Products Group and President of the Medical Devices Division. In November 1993, Mr. Schulze was elected Vice President, Corporate Strategic Planning of the Company.\nRobert L. Shafer\nMr. Shafer joined the Company in 1966 as Assistant to the Director of Government Relations. In 1967, he became Associate Director of Government Relations and in 1968, Director of Government Relations. In 1973, Mr. Shafer was elected a Vice President of the Company. In 1982, he was elected Vice President-Public Affairs.\nDavid L. Shedlarz\nMr. Shedlarz joined the Company in 1976 as Senior Financial Analyst for the Pharmaceuticals Division. After serving in a number of positions of increasing responsibility, he was named Production Controller in 1979 and Assistant Group Controller in 1981. In 1984, he became Group Controller and in 1989 was named Vice President of Finance for the Pharmaceuticals Group. In 1992, Mr. Shedlarz was elected Vice President -- Finance of the Company.\nPeter G. Tombros\nMr. Tombros joined the Company as a Marketing Assistant with Pfizer Laboratories in 1968. After serving in a number of different marketing and sales positions, he was appointed to the position of Vice President, Marketing in 1975. In 1980, he was appointed Vice President, Pfizer Pharmaceuticals and General Manager for the Roerig Division. In 1984 he became Senior Vice President of Pfizer Pharmaceuticals and General Manager for the Roerig Division. In 1986, Mr. Tombros was elected Vice President of Pfizer Inc. and Executive Vice President of Pfizer Pharmaceuticals. In 1990 he was named Vice President -- Corporate Strategic Planning of the Company. In December 1993, Mr. Tombros was elected Vice President -- Investor Relations. In 1994, Mr. Tombros announced that he would be leaving the Company on March 22, 1994.\nItem 11.","section_11":"Item 11. Executive Compensation\nInformation with regard to executive compensation is incorporated by reference to pages 9 through 17 of the Company's Proxy Statement dated March 18, 1994.\nItem 12.","section_12":"Item 12. Security Ownership of Certain Beneficial Owners and Management\nInformation with regard to security ownership of certain beneficial owners and management is incorporated by reference to pages 2 through 7 of the Company's Proxy Statement dated March 18, 1994.\nItem 13.","section_13":"Item 13. Certain Relationships and Related Transactions\nInformation with regard to certain relationships and related transactions is incorporated by reference to page 19 of the Company's Proxy Statement dated March 18, 1994.\nPART IV\nItem 14.","section_14":"Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K\nThe following is a list of all Financial Statement Schedules and Exhibits filed as a part of this Annual Report.\n(a)(1) Financial Statements\nSee Part II\n(a)(2) Financial Statement Schedules\nPage ---- Schedule V -- Property, Plant and Equipment 23 Schedule VI -- Accumulated Depreciation, Depletion and Amortization of Property, Plant and Equipment 24 Schedule VIII -- Valuation and Qualifying Accounts 25 Schedule IX -- Short-Term Borrowings 26 Schedule X -- Supplementary Income Statement Information 27\nSchedules not listed above have been omitted for the reason that they are inapplicable or not required or the information is given elsewhere in the financial statements. The financial statements of unconsolidated subsidiaries are omitted on the basis that these subsidiaries, considered in the aggregate, would not constitute a significant subsidiary.\n(a)(3) Exhibits\n3(a) --Restated Certificate of Incorporation of the Company, as of April 1991 (incorporated by reference to Exhibit 4(a) of Form S-8, Registration No. 33-44053).\n3(b) --By-laws of the Company, as amended January 1992 (incorporated by reference to Exhibit 3 of the Company's Form 8-K Current Report dated January 24, 1992).\n10 --Executive Compensation Plans and Arrangements:\n10.1 --Form of Severance Agreement for Certain Executive Officers of the Company (incorporated by reference to Exhibit 10.1 of the Company's Annual Report on Form 10-K for the year ended December 31, 1992).\n10.2 --Pfizer Inc. Performance-Contingent Share Award Program (incorporated by reference to Exhibit A of the Company's Proxy Statement dated March 18, 1994).\n11 --Computation of Earnings Per Common Share and Fully Diluted Earnings Per Common Share.\n12 --Computation of Ratio of Earnings to Fixed Charges.\n13(a)--Portions of the Annual Report of the Company for the fiscal year ended December 31, 1993 which are expressly incorporated by reference herein.\n13(b)--Copy of the Annual Report of the Pfizer Savings and Investment Plan on Form 11-K for the fiscal year ended December 31, 1993.\n13(c)--Copy of the Annual Report of the Pfizer Savings and Investment Plan for Employees Resident in Puerto Rico on Form 11-K for the fiscal year ended December 31, 1993.\n21 --Subsidiaries of the Registrant.\n23 --Report and consent of KPMG Peat Marwick, independent certified public accountants.\n(b) The Company filed a report on Form 8-K dated October 20, 1993.\nExhibits to the Form 10-K are available upon request at the charges set out below. Requests should be directed to C. L. Clemente, Secretary, Pfizer Inc, 235 East 42nd Street, New York, N.Y. 10017.\nExhibit 13(b) ... $1.20 Exhibit 13(c) ... 1.10 Exhibit 21 ...... .50\nThe following trademarks, found in this report, are among those used by Pfizer Inc.\nCardura (doxazosin) Advocin (danofloxacin) Diflucan (fluconazole) Aviax (semduramicin) Enable (tenidap) Banminth (pyrantel tartrate) Enablex (tenidap) Dectomax (doramectin) E5 (anti-endotoxin antibody) Mecadox (carbadox) Feldene (piroxicam) Nemex (pyrantel pamoate) Glucotrol (glipizide) Terramycin LA-200 (oxytetracycline) Glucotrol XL (glipizide GITS) TM\/LA (oxytetracycline) Norvasc (amlodipine besylate) Paratect (morantel tartrate) Procardia (nifedipine) Procardia XL (nifedipine GITS) Reactine (cetirizine) Unasyn IM\/IV (sulbactam\/ampicillin) Unasyn Oral (sultamicillin) Zithromax (azithromycin) Zoloft (sertraline) Barbasol ABG Ben-Gay Alta Daily Care Desitin Duracon Desitin Gamma Plax Luhr Rid Paratrend Unisom (doxylamine succinate) P.C.A. Unisom Sleep Gels Simplex Visine (tetrahydrozoline HC1)\nChy-Max (chymosin) Litesse (polydextrose)\nSIGNATURES\nPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.\nPfizer Inc. (Registrant)\nBy \/s\/ C. L. Clemente --------------------- C. L. Clemente (Secretary)\nDated: March 24, 1994\nPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.\nPFIZER INC. AND SUBSIDIARY COMPANIES\nSCHEDULE V-PROPERTY, PLANT AND EQUIPMENT (a)\nPFIZER INC. AND SUBSIDIARY COMPANIES\nSCHEDULE VI -- ACCUMULATED DEPRECIATION, DEPLETION AND AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT\nPFIZER INC. AND SUBSIDIARY COMPANIES\nSCHEDULE VIII -- VALUATION AND QUALIFYING ACCOUNTS\nPFIZER INC. AND SUBSIDIARY COMPANIES\nSCHEDULE IX -- SHORT-TERM BORROWINGS\nPFIZER INC. AND SUBSIDIARY COMPANIES\nSCHEDULE X-SUPPLEMENTARY INCOME STATEMENT INFORMATION\nCharged to Costs and Expenses -------------------------------- Year Ended December 31, -------------------------------- Item 1993 1992 1991 ---- ------ ------ ------ (Millions of Dollars) Maintenance and repairs .............. $ 98.0(a) $121.4 $122.3 Media advertising costs .............. 254.9 243.2 279.9 Royalties ............................ 225.9 205.0 243.7\n- ------------ Taxes, other than payroll and income taxes and amortization of intangible assets, are omitted as each item does not exceed 1% of Net sales as reported in the Consolidated Statement of Income.\n(a) Decrease due to divsetiture of MTI in 1992.\nEXHIBIT INDEX\n3(a) --Restated Certificate of Incorporation of the Company, as of April 1991 (incorporated by reference to Exhibit 4(a) of Form S-8, Registration No. 33-44053).\n3(b) --By-laws of the Company, as amended January 1992 (incorporated by reference to Exhibit 3 of the Company's Form 8-K Current Report dated January 24, 1992).\n10 --Executive Compensation Plans and Arrangements:\n10.1 --Form of Severance Agreement for Certain Executive Officers of the Company (incorporated by reference to Exhibit 10.1 of the Company's Annual Report on Form 10-K for the year ended December 31, 1992).\n10.2 --Pfizer Inc. Performance-Contingent Share Award Program (incorporated by reference to Exhibit A of the Company's Proxy Statement dated March 18, 1994).\n11 --Computation of Earnings Per Common Share and Fully Diluted Earnings Per Common Share.\n12 --Computation of Ratio of Earnings to Fixed Charges.\n13(a)--Portions of the Annual Report of the Company for the fiscal year ended December 31, 1993 which are expressly incorporated by reference herein.\n13(b)--Copy of the Annual Report of the Pfizer Savings and Investment Plan on Form 11-K for the fiscal year ended December 31, 1993.\n13(c)--Copy of the Annual Report of the Pfizer Savings and Investment Plan for Employees Resident in Puerto Rico on Form 11-K for the fiscal year ended December 31, 1993.\n21 --Subsidiaries of the Registrant.\n23 --Report and consent of KPMG Peat Marwick, independent certified public accountants.","section_15":""}
{"filename":"744437_1993.txt","cik":"744437","year":"1993","section_1":"ITEM 1. BUSINESS\nAll references to \"Notes\" are to Notes to Financial Statements contained in this report.\nThe registrant, JMB Income Properties, Ltd. - XI (the \"Partnership\"), is a limited partnership formed in 1983 and currently governed under the Revised Uniform Limited Partnership Act of the State of Illinois to invest in improved income-producing commercial and residential real property. The Partnership sold $173,406,000 in limited partnership interests (the \"Interests\") commencing on July 11, 1984, pursuant to a Registration Statement on Form S-11 under the Securities Act of 1933 (Registration No. 2-90503). A total of 173,406 Interests were sold to the public at $1,000 per Interest and the holders of 173,406 Interests were admitted to the Partnership in fiscal 1985. The offering closed on November 30, 1984. No Investor has made any additional capital contribution after such date. The Investors in the Partnership share in the benefits of ownership of the Partnership's real property investments according to the number of Interests held.\nThe Partnership is engaged solely in the business of the acquisition, operation and sale and disposition of equity real estate investments. Such equity investments are held by fee title and\/or through joint venture partnership interests. The Partnership's real estate investments are located throughout the nation and it has no real estate investments located outside the United States. A presentation of information about industry segments, geographic regions, raw materials or seasonality is not applicable and would not be material to an understanding of the Partnership's business taken as a whole. Pursuant to the Partnership agreement, the Partnership is required to terminate on or before October 31, 2034. Accordingly, the Partnership intends to hold the real properties it acquires for investment purposes until such time as sale or other disposition appears to be advantageous. Unless otherwise described, the Partnership expects to hold its properties for long- term investment where, due to current market conditions, it is impossible to forecast the expected holding period. At sale of a particular property, the proceeds, if any, are generally distributed or reinvested in existing properties rather than invested in acquiring additional properties.\nThe Partnership has made the real property investments set forth in the following table:\nThe Partnership's real property investments are subject to competition from similar types of properties (including, in certain areas, properties owned or advised by affiliates of the General Partners) in the respective vicinities in which they are located. Such competition is generally for the retention of existing tenants. Additionally, the Partnership is in competition for new tenants in markets where significant vacancies are present. Reference is made to Item 7 below for a discussion of competitive conditions and future renovation and capital improvement plans of the Partnership and certain of its significant investment properties. Approximate occupancy levels for the properties are set forth in the table in Item 2","section_1A":"","section_1B":"","section_2":"ITEM 2. PROPERTIES\nThe Partnership owns directly or through joint venture partnerships the properties or interests in the properties referred to under Item 1 above to which reference is hereby made for a description of said properties.\nThe following is a listing of principal businesses or occupations carried on in and approximate occupancy levels by quarter during fiscal years 1993 and 1992 for the Partnership's investment properties owned during 1993:\nITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS\nLIQUIDITY AND CAPITAL RESOURCES\nOn July 11, 1984, the Partnership commenced an offering to the public of $60,000,000, subject to increase up to $200,000,000, pursuant to a Registra- tion Statement on Form S-11 under the Securities Act of 1933. On November 30, 1984, the initial and final closing of the offering was consummated with the dealer manager of the public offering (an affiliate of which is a limited partner of the Associate General Partner of the Partnership), and 173,406 Interests were issued by the Partnership.\nAfter deducting selling expenses and other offering costs, the Partnership had approximately $156,493,000 with which to make investments in commercial real property, to pay legal fees and other costs (including acquisition fees) related to such investments and for working capital. A portion of such proceeds was utilized to acquire the properties described in Item 1 above.\nAt December 31, 1993, the Partnership had cash and cash equivalents of approximately $267,000. Such funds and short-term investments of approximately $23,681,000 may be utilized for distributions to partners and for working capital requirements including operating deficits, re-leasing costs of vacant space, and certain capital improvements currently being incurred at the Bank of Delaware Office Building and Riverside Square Mall. Additionally, funds may be utilized to fund the Partnership's share of releasing costs and capital improvements at Park Center Financial Plaza. As discussed in Note 2(c), a major tenant at the Bank of Delaware investment property, brought a lawsuit against the Partnership which was decided in the tenants favor in 1990. The Partnership paid the tenant approximately $722,000 and $80,000 in 1991 and 1992, respectively, and may be obligated to fund additional amounts. (See also the discussion of the loan on this property below.) The Partnership and its consolidated ventures have currently budgeted in 1994 approximately $3,943,000 for tenant improvements and other capital expenditures. The Partnership's share of such items and its share of such similar items for its unconsolidated ventures for 1994 is currently budgeted to be $4,809,000. Actual amounts expended in 1994 may vary depending on a number of factors including actual leasing activity, results of property operations, liquidity considerations and other market conditions over the course of the year. The General Partners have been deferring receipt of distributions in accordance with the subordination requirement of the Partnership Agreement as discussed in Notes 5 and 7. The source of capital for such items and for both short-term and long-term future liquidity and distributions is expected to be through net cash generated by the Partnership's investment properties and through the sale of such investments. The Partnership's and its ventures' mortgage obligations are all non-recourse.\nTherefore, the Partnership and its ventures are not obligated to pay mortgage indebtedness unless the related property produces sufficient net cash flow from operations or sale.\nIn January 1992, the Partnership advanced $575,000 to the JMB\/San Jose joint venture for the payment of certain other operating expenses. These monies were paid back to the Partnership by the end of 1992. The venture partners notified the tenants in and invitees to the complex that some of the buildings, particularly the 100-130 Park Center Plaza Buildings and the garage below them, could pose a life safety hazard under certain unusually intense earthquake conditions. While the buildings and the garage were designed to comply with the applicable codes for the period in which they were constructed, and there is no legal requirement to upgrade the buildings for seismic purposes, the venture partners are working with consultants to analyze ways in which such a potential life safety hazard could be eliminated. However, since the costs of both re-leasing space and any seismic program could be substantial, the Partnership has commenced discussions with the appropriate lender for additional loan proceeds to pay for all or a portion of these costs.\nThe Partnership is also continuing to discuss terms for a possible loan extension with the mortgage lender on the 150 Almaden and 185 Park Avenue buildings and certain parking areas as the mortgage loan secured by this portion of the complex matured on October 1, 1993 and was extended to December 1, 1993. This mortgage loan is reflected as a current liability in the accompanying JMB\/San Jose financial statements. However, the Partnership and the lender have not been able to agree upon mutually acceptable terms for a loan extension and the lender has accelerated the loan. Should an agreement not be reached and as the Partnership does not have its share of the outstanding loan balance in its reserves in order to retire the loan, it is possible that the lender would exercise its remedies and seek to acquire title to this portion of the complex. Furthermore, should lender assistance be required to fund significant costs at the 100-130 Park Center Plaza buildings but not be obtained, the Partnership has decided not to commit any additional amounts to this portion of the complex since the likelihood of recovering such funds through increased capital appreciation is remote. The result would be that the Partnership would no longer have an ownership interest in this portion of the complex.\nAs a result, there is uncertainty about the ability to recover the net carrying value of the property through future operations and sale and accordingly, the JMB\/San Jose joint venture has made a provision for value impairment on the 150 Almaden and 185 Park Avenue buildings and certain parking areas of $15,549,935. Such provision at December 31, 1993 is recorded to reduce the net carrying value of these buildings to the then outstanding balance of the related non-recourse financing. Due to the uncertainty of the JMB\/San Jose joint venture's ability to recover the net carrying value of those buildings within the investment property through future operations or sale, the JMB\/San Jose joint venture had recorded a provision for value impairment at December 31, 1991 of $21,175,127 to reduce the net book value of the 100-130 Park Center Plaza buildings and a certain parking area to an amount equal to the then outstanding balance of the related non-recourse financing. Additionally, at December 31, 1992, the JMB\/San Jose joint venture recorded a provision for value impairment of $8,142,152 on certain other portions of the complex to amounts equal to the then outstanding balances of the related non-recourse financing. In the event the lender on any portion of the complex exercised its remedies as discussed above, the result would likely be that JMB\/San Jose joint venture would no longer have an ownership interest in such portion. See Note 3(b) for further discussion of this investment property. Tenants occupying approximately 110,000 square feet (approximately 26% of the buildings) of the Park Center Plaza investment property have leases that expire in 1995, for which there can be no assurance of renewals.\nRiverside Square Mall has been experiencing decreasing sales levels as well as increasing competition for new tenants since a competing regional retail center expanded its operations in 1990. Additionally, approximately 19% of the tenant space at Riverside Square had leases which expired in 1992 and for which a portion did not renew. The remaining portion renewed on a short-term basis pending the final remodeling and remerchandising plan. The Partnership is proceeding with its plans to renovate and remerchandise the center. In connection with the planned renovation, the Partnership, in early 1994, signed 15-year operating covenant extensions with both Saks and Bloomingdales which own their own stores. In return for the additional 15- year time commitment to the center, the Partnership reimbursed Saks for their recent store renovation in the amount of $6,100,000 and is obligated to pay Bloomingdales $5,000,000 toward their store renovation. The Partnership is also required to complete a renovation of the mall, with an additional estimated cost of approximately $12,000,000, pursuant to the terms of this extension. The Partnership is pursuing financing for the planned mall renovation; however, there can be no assurance that such financing will be obtained or that the renovation will be completed as currently planned. The Partnership is still considering possibly expanding the mall at some point in the future as well. Furthermore, the Partnership, as of the date of this report, has commenced the $7,500,000 restoration of the parking deck. The Partnership is continuing to attempt to lease the vacant space in the mall, but the competitive nature of the surrounding retail area and the fact that the mall is in need of a renovation have extended the time period required to re-lease space in the mall as tenant leases expire and are not renewed. On January 7, 1994, Conran's filed for protection pursuant to Chapter 11 bankruptcy petition. The store at the center has commenced a going-out-of- business sale. The Partnership is reviewing its possible alternatives with respect to replacement tenants and its rights with respect to the Conran's lease which is scheduled to expire in January 2000.\nAt the Bank of Delaware Building, a major tenant, E.I. duPont de Nemours (\"duPont\"), comprising approximately 27% of the building, vacated their space upon expiration of their lease in December 1993. The property has cumulatively operated at a cash deficit due to the significant costs incurred in connection with the re-leasing of vacant space and certain capital improvements. Due to the competitive nature of this marketplace, the Partnership estimates the costs associated with re-leasing any vacant space during the next few years, including those costs to remove the remaining asbestos in tenant space, will be substantial. As a result of these leasing concerns, the Partnership recorded a provision for value impairment on the Bank of Delaware Building at June 30, 1992 of $11,476,030 to reduce the net carrying value of the Bank of Delaware Building to the then outstanding balance of the related non-recourse debt. Further, the Partnership has commenced discussions with the building's first mortgage lender in order to seek a loan modification. In connection with these discussions, effective January 1994, the Partnership has suspended payment of debt service to the lender. There can be no assurance the Partnership will be successful in these discussions, and accordingly, the entire balance is reflected as a current liability in the accompanying financial statements. If a suitable modification of the existing loan cannot be arranged, the Partnership has decided not to voluntarily commit any additional amounts to the property. It is likely that the lender will seek to realize upon its collateral security and the Partnership will no longer have an ownership interest in the Property.\nUnder the terms of a mortgage and security agreement, the Partnership, in its capacity as mortgagor of the building, agreed to indemnify the mortgage lender, under certain circumstances, against damages, claims, liabilities and expenses incurred by or asserted against the mortgage lender in relation to asbestos in the building. Asbestos has been abated or encapsulated in approximately 62% of the building's space. The Partnership does not believe that any remaining asbestos in the building presents a hazard and does not believe that such asbestos currently is required to be removed. The Partnership estimates that the current cost of asbestos abatement in a portion of the building that could be incurred under certain circumstances in the future is approximately $800,000. However, the Partnership currently does not believe that it will likely be required to incur (or to indemnify the mortgage lender against) any such cost, although there is no assurance that the Partnership will not be required to pay such cost or indemnification.\nJWP, Inc. began occupying approximately 72,000 square feet of space (approximately 27% of the property) at Royal Executive Park II in August 1992.\nAs a result of the JWP, Inc. lease, the Partnership has received its preferred level of return for 1993 and in addition, recovered a portion of the cumulative shortfall in this return since 1989. The Partnership expects to receive its preferred level of return for 1994 in addition to a partial recovery of its cumulative shortfall in this return since 1989. However, subsequent to the end of the quarter, JWP filed for protection pursuant to a Chapter 11 bankruptcy petition. At this time, it is uncertain what effect this will have on the operations of the complex. As previously reported, JWP has been current in its rental obligations pursuant to its lease which is not scheduled to expire until May 2002. However, JWP has subleased approximately 60,000 square feet of its space and is actively attempting to sublease a significant portion of their remaining space. The manager continues an aggressive marketing program to lease the remaining vacant space but the competitive nature of the market continues to extend the time period required to lease space to initial tenants.\nThere are certain risks associated with the Partnership's investments made through joint ventures including the possibility that the Partnership's joint venture partners in an investment might become unable or unwilling to fulfill their financial or other obligations, or that such joint venture partners may have economic or business interests or goals that are inconsistent with those of the Partnership.\nIn response to the weakness of the economy and the limited amount of available real estate financing in particular, the Partnership is taking steps to preserve its working capital. Therefore, the Partnership is carefully scrutinizing the appropriateness of any discretionary expenditures, particularly in relation to the amount of working capital it has available. By conserving working capital, the Partnership will be in a better position to meet future needs of its properties without having to rely on external financing sources.\nRESULTS OF OPERATIONS\nThe increase in buildings and improvements at December 31, 1993 as compared to December 31, 1992 is primarily due to improvements of approximately $649,000 as a result of leasing a certain tenant's space and approximately $908,000 as a result of the renovation of the parking garage at the Hackensack, New Jersey investment property.\nThe decrease in investment in unconsolidated ventures at December 31, 1993 as compared to December 31, 1992 and the decrease in the Partnership's share of operations of unconsolidated ventures for the twelve months ended December 31, 1993 as compared to the twelve months ended December 31, 1992 is primarily due to the JMB\/San Jose joint venture recording at September 30, 1993 a provision for value impairment of $15,549,935 (of which the Partnership's share is $7,774,967) to reduce the net carrying value of the 150 Almaden and 185 Park Avenue buildings and certain parking areas to the then outstanding balance of the related non-recourse financing. The increase in the Partnership's share of operations of unconsolidated ventures for the twelve months ended December 31, 1992 as compared to the twelve months ended December 31, 1991 was primarily due to the Partnership's share of the provisions for value impairment recorded in 1991 at the San Jose, California investment property, partially offset in 1992 by the effect of an additional provision for value impairment recorded at December 31, 1992. See Note 3(b).\nThe increase in current portion of long-term debt and the decrease in long-term debt as of December 31, 1993 as compared to December 31, 1992, are primarily due to the Partnership's decision to suspend debt service payments at the Wilmington, Delaware real estate property investment.\nThe decrease in accounts payable as of December 31, 1993 as compared to December 31, 1992, is primarily due to the timing of the payment of certain accrued expenses at the Hackensack, New Jersey real estate property investment.\nThe decrease in accrued interest as of December 31, 1993 as compared to December 31, 1992 is primarily due to the timing of interest payments at the Wilmington, Delaware investment property.\nThe decrease in rental income as of December 31, 1993 as compared to December 31, 1992 is primarily due to lower occupancy at the Wilmington, Delaware investment property and tenant billing adjustments of approximately $223,000 at the Hackensack, New Jersey investment property.\nThe decrease in interest income as of December 31, 1993 as compared to December 31, 1992 and December 31, 1992 as compared to December 31, 1991 is primarily due to lower effective yields being earned on U.S. Government obligations held during 1993 and 1992.\nThe decrease in depreciation expense as of December 31, 1993 as compared to December 31, 1992 and December 31, 1991 is primarily due to a reduction of approximately $223,000 in depreciation expense at the Wilmington, Delaware investment property due to the provision for value impairment recorded at September 30, 1992. See Note 2(c).\nThe increase in property operating expenses as of December 31, 1993 as compared to December 31, 1992 is partially due to an increase of approximately $272,000 of snow removal costs primarily due to a blizzard in early 1993 at the Hackensack, New Jersey investment property. The decrease in property operating expenses for the twelve months ended December 31, 1992 as compared to the twelve months ended 1991 was primarily due to lower operating expenses including real estate taxes, repairs and maintenance and land debt expense at the Hackensack, New Jersey investment property. Such costs are primarily recoverable from tenants.\nThe decrease in professional services as of December 31, 1993 as compared to December 31, 1992 and the increases for the twelve months ended December 31, 1992 as compared to the twelve months ended December 31, 1991 is primarily due to legal fees incurred in 1992 by the Partnership in its successful defense of a lawsuit and its subsequent appeal brought against the Hackensack, New Jersey investment property concerning public access issues.\nThe decrease in provision for value impairment as of December 31, 1993 as compared to December 31, 1992 and the increase for the twelve months ended December 31, 1992 as compared to the twelve months ended December 31, 1991 is primarily due to the Partnership recording a provision for value impairment of $11,476,030 at the Wilmington, Delaware investment property at June 30, 1992 to reduce the net carrying value of the investment property to the then outstanding balance of the related non-recourse debt. See Note 1.\nINFLATION\nDue to the decrease in the level of inflation in recent years, inflation generally has not had a material effect on rental income or property operating expenses.\nTo the extent that inflation in future periods does have an adverse impact on property operating expenses, the effect will generally be offset by amounts recovered from tenants as many of the long-term leases at the Partnership's commercial properties have escalation clauses covering increases in the cost of operating and maintaining the properties as well as real estate taxes. Therefore, there should be little effect on operating earnings if the properties remain substantially occupied. In addition, substantially all of the leases at the Partnership's shopping center investments contain provisions which entitle the Partnership to participate in gross receipts of tenants above fixed minimum amounts.\nFuture inflation may also cause capital appreciation of the Partnership's investment properties over a period of time to the extent that rental rates and replacement costs of properties increase.\nITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA\nJMB INCOME PROPERTIES, LTD. - XI (A LIMITED PARTNERSHIP)\nINDEX\nIndependent Auditors' Report Balance Sheets, December 31, 1993 and 1992 Statements of Operations, years ended December 31, 1993, 1992 and 1991 Statements of Partners' Capital Accounts (Deficit), years ended December 31, 1993, 1992 and 1991 Statements of Cash Flows, years ended December 31, 1993, 1992 and 1991 Notes to Financial Statements\nSCHEDULE --------\nSupplementary Income Statement Information X Real Estate and Accumulated Depreciation XI\nSCHEDULES NOT FILED:\nAll schedules other than those indicated in the index have been omitted as the required information is inapplicable or the information is presented in the financial statements or related notes.\nJMB\/SAN JOSE ASSOCIATES (A GENERAL PARTNERSHIP)\nINDEX\nIndependent Auditors' Report Balance Sheets, December 31, 1993 and 1992 Statements of Operations, years ended December 31, 1993, 1992 and 1991 Statements of Partners' Capital Accounts, years ended December 31, 1993, 1992 and 1991 Statements of Cash Flows, years ended December 31, 1993, 1992 and 1991 Notes to Financial Statements\nSCHEDULE --------\nSupplementary Income Statement Information X Real Estate and Accumulated Depreciation XI\nSCHEDULES NOT FILED:\nAll schedules other than those indicated in the index have been omitted as the required information is inapplicable or the information is presented in the financial statements or related notes.\nINDEPENDENT AUDITORS' REPORT\nThe Partners JMB INCOME PROPERTIES, LTD. - XI:\nWe have audited the financial statements of JMB Income Properties, Ltd. - XI (a limited partnership) as listed in the accompanying index. In connection with our audits of the financial statements, we also have audited the financial statement schedules as listed in the accompanying index. These financial statements and financial statement schedules are the responsibility of the General Partners of the Partnership. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits.\nWe conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the General Partners of the Partnership, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.\nIn our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of JMB Income Properties, Ltd. - XI at December 31, 1993 and 1992, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 1993, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.\nKPMG PEAT MARWICK\nChicago, Illinois March 25, 1994\nJMB INCOME PROPERTIES, LTD. - XI (A LIMITED PARTNERSHIP)\nNOTES TO FINANCIAL STATEMENTS\nYEARS ENDED DECEMBER 31, 1993, 1992 AND 1991\n(1) BASIS OF ACCOUNTING\nThe equity method of accounting has been applied in the accompanying financial statements with respect to the Partnership's interest in Royal Executive Park II (\"Royal Executive\") and JMB\/San Jose Associates (\"San Jose\") (note 3). Accordingly, the accompanying financial statements do not include the accounts of Royal Executive and San Jose.\nThe Partnership's records are maintained on the accrual basis of accounting as adjusted for Federal income tax reporting purposes. The accompanying financial statements have been prepared from such records after making appropriate adjustments to present the Partnership's accounts in accordance with generally accepted accounting principles (\"GAAP\"). Such adjustments are not recorded on the records of the Partnership. The net effect of these items for the years ended December 31, 1993 and 1992 is summarized as follows:\nJMB INCOME PROPERTIES, LTD. - XI (A LIMITED PARTNERSHIP)\nNOTES TO FINANCIAL STATEMENTS - CONTINUED\nThe net earnings (loss) per limited partnership interest is based upon the number of limited partnership interests outstanding at the end of the period (173,411). Deficit capital accounts will result, through the duration of the Partnership, in net gain for financial reporting and income tax purposes.\nCertain amounts in the 1992 and 1991 financial statements have been reclassified to conform to the 1993 presentation.\nStatement of Financial Accounting Standards No. 95 requires the Partnership to present a statement which classifies receipts and payments according to whether they stem from operating, investing or financing activities. The required information has been segregated and accumulated according to the classifications specified in the pronouncement. Partnership distributions from unconsolidated ventures are considered cash flow from operating activities only to the extent of the Partnership's cumulative share of net earnings. The Partnership records amounts held in U.S. Government obligations at cost, which approximates market. For the purposes of these statements, the Partnership's policy is to consider all such amounts held with original maturities of three months or less ($0 and $848,678 at December 31, 1993 and 1992, respectively) as cash equivalents with any remaining amounts reflected as short-term investments.\nDeferred expenses consist primarily of loan fees and lease commissions which are amortized over the terms stipulated in the related loan agreements or over the terms of the related leases using the straight-line method.\nAlthough certain leases of the Partnership provide for tenant occupancy during periods for which no rent is due and\/or increases in the minimum lease payments over the term of the lease, rental income is accrued for the full period of occupancy on a straight-line basis.\nIn response to the uncertainties relating to the future recovery of the carrying value of the Wilmington, Delaware investment property through future operations or sale, the Partnership recorded a provision for value impairment on the Wilmington, Delaware investment property of $11,476,030. Such provision made as of June 30, 1992 was recorded to reduce the net carrying value of the investment property to the then outstanding balance of the related non-recourse debt. Reference is made to note 2(c) for further discussion of the current status of this investment property.\nIn response to the uncertainties relating to the JMB\/San Jose joint venture's ability to recover the net carrying value of certain buildings with the Park Center Plaza investment property through future operations or sale, the JMB\/San Jose Joint Venture, at December 31, 1991, recorded a provision for value impairment on certain parcels within the complex of $21,175,127. Such provision was recorded to reduce the net basis of the 100-130 Park Center Plaza Buildings and a certain parking area to the then outstanding balance of the related non-recourse debt. Additionally, a provision for value impairment of $8,142,152 was recorded at December 31, 1992 on certain other portions of the complex to reduce the net basis of these portions to the outstanding balance of the debt at December 31, 1992. Furthermore, a provision for value impairment on the 150 Almaden and 185 Park Avenue buildings and certain parking areas of $15,549,935 was recorded at September 30, 1993 to reduce the net basis to the then outstanding balance of the related non-recourse debt. Reference is made to note 3(b) for further discussion of the current status of this investment property.\nNo provision for State or Federal income taxes has been made as the liability for such taxes is that of the Partners rather than the Partnership. However, in certain instances, the Partnership has been required under applicable law to remit directly to the tax authorities amounts representing withholding from distributions paid to partners.\nJMB INCOME PROPERTIES, LTD. - XI (A LIMITED PARTNERSHIP)\nNOTES TO FINANCIAL STATEMENTS - CONTINUED\n(2) INVESTMENT PROPERTIES\n(a) General\nThe Partnership has acquired, either directly or through joint ventures, two shopping centers and three office complexes. In June 1990, the Partnership sold its interest in the Genesee Valley Shopping Center. All of the remaining properties were in operation at December 31, 1993. The cost of the investment properties represents the total cost to the Partnership plus miscellaneous acquisition costs.\nDepreciation on the properties has been provided over the estimated useful lives of the various components as follows:\nYEARS -----\nBuilding and Improvements -- straight-line. . . . . 30 Personal property -- straight-line. . . . . . . . . 5 ==\nThe investment properties are pledged as security for the long-term debt, for which there is no recourse to the Partnership.\nMaintenance and repair expenses are charged to operations as incurred. Significant betterments and improvements are capitalized and depreciated over their estimated useful lives.\n(b) Riverside Square Mall\nDuring October 1983, the Partnership acquired an existing enclosed regional shopping center in Hackensack, New Jersey. The Partnership's purchase price for the mall was $36,236,282. The Partnership made a cash down payment at closing of $20,000,000. The balance of the purchase price was represented by a first mortgage loan which had a balance at closing of $16,236,282 prior to unamortized discount, based upon an imputed interest rate of 12% (note 4).\nAn affiliate of the General Partners of the Partnership manages the shopping center for a fee equal to 4% of the fixed and percentage rents of the shopping center plus leasing commissions, subject to an aggregate annual maximum amount of 6% of the gross receipts of the property.\n(c) Bank of Delaware - office building\nIn December 1984, the Partnership acquired the interests in a partnership which owned an existing office building in Wilmington, Delaware. The Partnership's purchase price for the building was $20,900,000, of which approximately $4,955,000 was paid in cash at closing. The balance of the purchase price was represented by an existing first mortgage loan, which, at closing, had an outstanding balance of approximately $5,945,000, and five purchase price notes totaling $10,000,000. The five purchase price notes were due and paid as scheduled at various dates from July 1985 to December 1989.\nIn February 1989, the Partnership refinanced the existing first mortgage loan secured by the office building in Wilmington, Delaware. The Partnership received net refinancing proceeds of approximately $4,696,000 which were utilized primarily to pay for the substantially completed renovation program and other capital improvements.\nJMB INCOME PROPERTIES, LTD. - XI (A LIMITED PARTNERSHIP)\nNOTES TO FINANCIAL STATEMENTS - CONTINUED\nA major tenant in the building brought a lawsuit against the Partnership which sought reimbursement from the Partnership for certain improvements made by the tenant to its space in the building. The lawsuit was sent to arbitration and was decided in 1990 in the tenant's favor. The Partnership reimbursed the tenant approximately $722,000 in 1991, and $80,000 in 1992. The tenant may be entitled to reimbursement for further amounts depending upon its future remodeling programs.\nAt the Bank of Delaware Building, a major tenant, E.I. duPont de Nemours (\"duPont\"), comprising approximately 27% of the building, vacated their space upon expiration of their lease in December 1993. The property has cumulatively operated at a cash deficit due to the significant costs incurred in connection with the re-leasing of vacant space and certain capital improvements. Due to the competitive nature of this marketplace, the Partnership estimates the costs associated with re-leasing any vacant space during the next few years, including those costs to remove the remaining asbestos in tenant space, will be substantial. As a result of these leasing concerns, the Partnership recorded a provision for value impairment on the Bank of Delaware Building at June 30, 1992 of $11,476,202 to reduce the net carrying value of the Bank of Delaware Building to the then outstanding balance of the related non-recourse debt. Further, the Partnership has commenced discussions with the building's first mortgage lender in order to seek a loan modification. In connection with these discussions, effective January 1994, the Partnership has suspended payment of debt service to the lender. There can be no assurance the Partnership will be successful in these discussions, and accordingly, the entire balance is reflected as a current liability in the accompanying financial statements. If a suitable modification of the existing loan cannot be arranged, the Partnership has decided not to voluntarily commit any additional amounts to the property. It is likely that the lender will seek to realize upon its collateral security and the Partnership will no longer have an ownership interest in the Property.\nUnder the terms of a mortgage and security agreement, the Partnership, in its capacity as mortgagor of the building, agreed to indemnify the mortgage lender, under certain circumstances, against damages, claims, liabilities and expenses incurred by or asserted against the mortgage lender in relation to asbestos in the building. Asbestos has been abated or encapsulated in approximately 62% of the building's space. The Partnership does not believe that any remaining asbestos in the building presents a hazard and does not believe that such asbestos currently is required to be removed. The Partnership estimates that the current cost of asbestos abatement in a portion of the building that could be incurred under certain circumstances in the future is approximately $800,000. However, the Partnership currently does not believe that it will likely be required to incur (or to indemnify the mortgage lender against) any such cost, although there is no assurance that the Partnership will not be required to pay such cost or indemnification.\nAn affiliate of the General Partner of the Partnership manages the office building for a fee equal to 3% of the gross revenues of the building plus leasing commissions, subject to an aggregate annual maximum amount of 6% of the gross receipts of the property.\n(3) VENTURE AGREEMENTS\n(a) General\nThe Partnership at December 31, 1993 is a party to two operating venture agreements (San Jose and Royal Executive) and has made capital contributions to the respective ventures as discussed below. Under certain circumstances, either pursuant to the venture agreements or due to the Partnership's obligations as a General Partner, the Partnership may be required to make additional cash contributions to the ventures.\nJMB INCOME PROPERTIES, LTD. - XI (A LIMITED PARTNERSHIP)\nNOTES TO FINANCIAL STATEMENTS - CONTINUED\nThere are certain risks associated with the Partnership's investments made through joint ventures including the possibility that the Partnership's joint venture partners in an investment might become unable or unwilling to fulfill their financial or other obligations, or that such joint venture partners may have economic or business interests or goals that are inconsistent with those of the Partnership.\n(b) San Jose\nThe Partnership has acquired, through San Jose, an interest in an existing office building complex in San Jose, California (Park Center Financial Plaza). San Jose acquired nine office buildings and two parking garage structures in June 1985 for a purchase price of approximately $32,472,000 subject to long-term indebtedness of approximately $6,347,000. All of the properties were in operation when acquired.\nIn addition, in May 1986, San Jose purchased an additional office building (150 Almaden) and a parking and retail building (185 Park Avenue) in the Park Center Financial Plaza complex for a total purchase price of approximately $47,476,000. In conjunction with the acquisitions, San Jose reserved approximately $31,590,000 to fund debt service, leasing commissions, and capital and tenant improvements.\nIn September 1986, San Jose obtained a mortgage loan in the amount of $25,000,000 secured by the 150 Almaden and 185 Park Avenue buildings and certain parking areas. The outstanding principal balance, which is non- amortizable, bears interest at the rate of 9.5% per annum and had a scheduled maturity in October 1993 and was extended to December 1, 1993.\nThe property is managed by an affiliate of the General Partners of the Partnership for a fee calculated as 3% of gross receipts.\nThe partners of San Jose are the Partnership and JMB Income Properties, Ltd.-XII, another partnership sponsored by the Managing General Partner of the Partnership (\"JMB-XII\"). The terms of San Jose's partnership agreement generally provide that contributions, distributions, cash flow, sale or refinancing proceeds and profits and losses will be distributed or allocated to the Partnership in their respective 50% ownership percentages.\nIn 1991, all remaining amounts originally set aside by the Partnership to fund debt service, leasing commissions and capital and tenant improvement costs at Park Center Financial Plaza were utilized. In January 1992, the Partnership advanced $575,000 to the JMB\/San Jose joint venture for the payment of certain operating expenses. These monies were paid back to the Partnership by the end of 1992. However, since the costs of both re-leasing space and any seismic program could be substantial, the Partnership has commenced discussions with the appropriate lender for additional loan proceeds to pay for all or a portion of these costs. The venture is also continuing to discuss terms for a possible loan extension with the mortgage lender on the 150 Almaden and 185 Park Avenue buildings and certain parking areas as the mortgage loan secured by this portion of the complex matured October 1, 1993 and was extended to December 1, 1993. However, the venture and the lender have not been able to agree upon mutually acceptable terms for a loan extension and the lender has accelerated the loan. Should an agreement not be reached and as the Partnership does not have its share of the outstanding loan balance in its reserves in order to retire the loan, it is possible that the lender would exercise its remedies and seek to acquire title to this portion of the complex. Furthermore, should lender assistance be required to fund significant costs at the 100-130 Park Center Plaza buildings but not be obtained, the venture has decided not to commit any additional amounts to\nJMB INCOME PROPERTIES, LTD. - XI (A LIMITED PARTNERSHIP)\nNOTES TO FINANCIAL STATEMENTS - CONTINUED\nthis portion of the complex since the likelihood of recovering such funds through increased capital appreciation is remote. The result would be that the Partnership would no longer have an ownership interest in this portion of the complex.\nAs a result, there is uncertainty about the ability to recover the net carrying value of the property through future operations and sale and accordingly, the JMB\/San Jose joint venture has made a provision for value impairment on the 150 Almaden and 185 Park Avenue buildings and certain parking areas of $15,549,935. Such provision at September 30, 1993 was recorded to reduce the net carrying value of these buildings to the then outstanding balance of the related non-recourse financing. Due to the uncertainty of the JMB\/San Jose joint venture's ability to recover the net carrying value of those buildings within the investment property through future operations or sale, the JMB\/San Jose joint venture recorded a provision for value impairment at December 31, 1991 of $21,175,127 to reduce the net book value of the 100-130 Park Center Plaza buildings and a certain parking area to an amount equal to the then outstanding balance of the related non- recourse financing. Additionally, at December 31, 1992, the JMB\/San Jose joint venture recorded a provision for value impairment of $8,142,152 on certain other portions of the complex to amounts equal to the then outstanding balances of the related non-recourse financing. In the event the lender on any portion of the complex exercised its remedies as discussed above, the result would likely be that JMB\/San Jose joint venture would no longer have an ownership interest in such portion.\n(c) Royal Executive\nIn December 1985, the Partnership entered into a commitment to fund a $27,000,000 convertible first mortgage note on a three building office park then under construction in Rye Brook, New York (Royal Executive Park II). The first mortgage note called for monthly installments of interest only at a rate of 10% through the period of equity conversion.\nDuring February 1987, the Partnership exercised its option of converting the $27,000,000 mortgage into an ownership position. Upon the conversion of the mortgage note, the Partnership entered into a joint venture (Royal Executive) with the borrower (joint venture partners). Pursuant to the terms of the venture agreement, until certain rental achievement levels are attained, the Partnership is entitled to a cumulative preferred annual return equal to $2,430,000 per year. The next $2,439,732 of annual cash flow is distributable to the joint venture partners, on a non-cumulative basis, with any remaining cash flow distributable 49.9% to the Partnership and 50.1% to the joint venture partners. Therefore, the Partnership's receipt of cash distributions is subject to the actual operations of the property. The Partnership is entitled to any deficiency in its preferred annual return on a cumulative basis as an annual priority distribution from future available cash flow. The cumulative deficiency in the preferred annual return is approximately $4,938,000 at December 31, 1993.\nOperating profits of the joint venture, in general, will be allocated in proportion to, and to the extent of, distributions and then based on relative ownership percentages. Operating losses, in general, will be first allocated to the joint venture partners to the extent of any additional contributions made to fund operations or the Partnership's guaranteed return. Remaining losses, if any, will be allocated based upon relative ownership interests. Depreciation and amortization will be allocated based upon the relative ownership interests.\nJMB INCOME PROPERTIES, LTD. - XI (A LIMITED PARTNERSHIP)\nNOTES TO FINANCIAL STATEMENTS - CONTINUED\n(4) LONG-TERM DEBT\nLong-term debt consists of the following at December 31, 1993 and 1992:\n1993 1992 ---------- ----------\n9-1\/2% first mortgage note, secured by Riverside Square Mall in Hackensack, New Jersey; payable in monthly installments of principal and interest of $142,945 through January 1, 2008; prepayable for a fee equal to 8% of the then outstanding loan balance, declining 1% per year to a minimum of 1%. Balance is net of unamortized discount of $1,658,738 and $1,819,933 at December 31, 1993 and 1992, respectively, based on an imputed interest rate of 12%.. . . . . . . . . . . . . . . . . $11,634,669 11,903,495\n10-3\/8% mortgage note, secured by Bank of Delaware Office Building in Wilmington, Delaware; payable in monthly installments of interest only of $82,135 through March 1, 1999 when the entire balance is due and payable (see note 2(c)) . . . . . . . . . . . 9,500,000 9,500,000 ----------- ----------\nTotal debt . . . . . . . . . . . . . 21,134,669 21,403,495\nLess current portion of long-term debt . . . . 9,837,354 299,368 ----------- ----------\nTotal long-term debt . . . . . . . . $11,297,315 21,104,127 =========== ==========\nFive year maturities of long-term debt (net of unamortized discount) are summarized as follows for the years ending:\n1994. . . . . . . . . . . . $9,837,354 1995. . . . . . . . . . . . 380,119 1996. . . . . . . . . . . . 428,327 1997. . . . . . . . . . . . 482,649 1998. . . . . . . . . . . . 543,862 ==========\nJMB INCOME PROPERTIES, LTD. - XI (A LIMITED PARTNERSHIP)\nNOTES TO FINANCIAL STATEMENTS - CONTINUED\n(5) PARTNERSHIP AGREEMENT\nPursuant to the terms of the Partnership Agreement, net profits or losses of the Partnership from operations are allocated 96% to the Limited Partners and 4% to the General Partners. Profits from the sale or refinancing of investment properties will be allocated to the General Partners: (i) to the greater of 1% of such profits or the amount of cash distributable to the General Partner from any such sale or refinancing (as described below); and (ii) in order to reduce deficits, if any, in the General Partners' capital accounts to a level consistent with the gain anticipated to be realized from the sale of properties. Losses from the sale or refinancing of investment properties will be allocated 1% to the General Partners. The remaining sale or refinancing profits and losses will be allocated to the Limited Partners.\nThe General Partners are not required to make any additional capital contributions except under certain limited circumstances upon termination of the Partnership. In general, distributions of cash from operations will be made 90% to the Limited Partners and 10% to the General Partners. However, a portion of such distributions to the General Partners is subordinated to the Limited Partners' receipt of a stipulated return on capital.\nThe Partnership Agreement provides that the General Partners shall receive as a distribution from the sale of a real property by the Partnership amounts equal to the cumulative deferrals of any portion of their 10% cash distribution and 3% of the selling price, and that the remaining proceeds (net after expenses and retained working capital) be distributed 85% to the Limited Partners and 15% to the General Partners. However, the Limited Partners shall receive 100% of such net sale proceeds until the Limited Partners (i) have received cash distributions of sale or refinancing proceeds in an amount equal to the Limited Partners' aggregate initial capital investment in the Partnership, (ii) have received cumulative cash distributions from the Partnership's operations which, when combined with sale or refinancing proceeds previously distributed, equal a 7% annual return on the Limited Partners' average capital investment for each year (their initial capital investment as reduced by sale or refinancing proceeds previously distributed) commencing with the first fiscal quarter of 1985 and (iii) have received cash distributions of sale and refinancing proceeds and of the Partnership operations, in an amount equal to the Limited Partners' initial capital investment in the Partnership plus a 10% annual return on the Limited Partners' average capital investment.\n(6) LEASES\nAt December 31, 1993, the Partnership's principal assets are one shopping center and one office building. The Partnership has determined that all leases relating to these properties are properly classified as operating leases; therefore, rental income is reported when earned and the cost of the properties, excluding the cost of the land, is depreciated over the estimated useful lives. Leases with tenants range in term from one to thirty-five years and provide for fixed minimum rent and partial reimbursement of operating costs. In addition, leases with shopping center tenants provide for additional rent based upon percentages of tenants' sales volumes. With respect to the Partnership's shopping center investment, a substantial portion of the ability of retail tenants to honor their leases is dependant upon the retail economic sector.\nJMB INCOME PROPERTIES, LTD. - XI (A LIMITED PARTNERSHIP)\nNOTES TO FINANCIAL STATEMENTS - CONTINUED\nCost and accumulated depreciation of the leased assets are summarized as follows at December 31, 1993:\nOffice Building: Cost. . . . . . . . . . . . . . . . . $15,401,683 Accumulated depreciation. . . . . . . (6,127,709) ----------- 9,273,974 ----------- Shopping Center: Cost. . . . . . . . . . . . . . . . . 42,380,902 Accumulated depreciation. . . . . . . (11,545,311) ----------- 30,835,591 -----------\n$40,109,565 ===========\nMinimum lease payments, including amounts representing executory costs (e.g. taxes, maintenance, insurance) and any related profit, to be received in the future under the operating leases are as follows:\n1994 . . . . . . . . . . . $ 6,173,591 1995 . . . . . . . . . . . 5,477,756 1996 . . . . . . . . . . . 5,115,657 1997 . . . . . . . . . . . 4,565,852 1998 . . . . . . . . . . . 3,949,351 Thereafter . . . . . . . . 13,199,714 -----------\nTotal. . . . . . . . . $38,481,921 ===========\nContingent rent (based on sales by property tenants) included in rental income was as follows:\n1991. . . . . . . . $317,554 1992. . . . . . . . 296,014 1993. . . . . . . . 302,809 =========\n(7) TRANSACTIONS WITH AFFILIATES\nFees, commissions and other expenses required to be paid by the Partner- ship to the General Partners and their affiliates as of December 31, 1993 and for the years ended December 31, 1993, 1992 and 1991 were as follows:\nJMB INCOME PROPERTIES, LTD. - XI (A LIMITED PARTNERSHIP)\nNOTES TO FINANCIAL STATEMENTS - CONCLUDED\nThe General Partners have deferred receipt of certain of their distributions (see note 5) of net cash flow of the Partnership. The amount of such deferred distributions aggregated $1,092,490 as of December 31, 1993. The amount is being deferred in accordance with the subordination requirements of the Partnership Agreement. This amount or amounts currently payable do not bear interest and may be paid in future periods.\n(8) INVESTMENT IN UNCONSOLIDATED VENTURES\nSummary of combined financial information for San Jose and Royal Executive (note 3) as of and for the years ended December 31, 1993 and 1992 are as follows: 1993 1992 ------------ -----------\nCurrent assets . . . . . . . . . . . . $ 2,535,033 4,088,973 Current liabilities. . . . . . . . . . (26,399,404) (25,910,203) ------------ ----------- Working capital. . . . . . . . . . (23,864,371) (21,821,230) ------------ ----------- Investment property, net . . . . . . . 80,714,163 98,707,716 Other assets, net. . . . . . . . . . . 4,293,567 1,995,854 Long-term debt . . . . . . . . . . . . (3,784,508) (4,157,064) Other liabilities. . . . . . . . . . . (190,834) (192,993) Venture partners' equity . . . . . . . (35,040,476) (43,444,416) ------------ ----------- Partnership's capital. . . . . . . $ 22,127,541 31,087,867 ============ =========== Represented by: Invested capital . . . . . . . . . . $ 74,947,712 74,947,712 Cumulative distributions . . . . . . (34,443,911) (29,745,590) Cumulative losses. . . . . . . . . . (18,376,260) (14,114,255) ------------ ----------- $ 22,127,541 31,087,867 ============ =========== Total income . . . . . . . . . . . . . $ 16,499,948 15,934,326 ============ =========== Expenses applicable to operating loss. $ 28,375,860 21,658,285 ============ =========== Net loss . . . . . . . . . . . . . . . $ 11,875,912 5,723,959 ============ ===========\nReference is made to note 3(b) regarding the provisions for value impairments of $15,549,935 and $8,142,152 which were recorded in 1993 and 1992, respectively, by JMB\/San Jose joint venture.\nThe total income, expenses related to operating loss and net loss for the above-mentioned ventures for the year ended December 31, 1991 were $13,923,263, $34,549,910 and $20,626,647, respectively.\n(9) SUBSEQUENT EVENT - DISTRIBUTION TO PARTNERS\nIn February 1994, the Partnership paid a distribution of $520,233 ($3.00 per Interest) to the Limited Partners.\nSCHEDULE X\nJMB INCOME PROPERTIES, LTD. - XI (A LIMITED PARTNERSHIP)\nSUPPLEMENTARY INCOME STATEMENT INFORMATION\nYEARS ENDED DECEMBER 31, 1993, 1992 AND 1991\nCHARGED TO COSTS AND EXPENSES ---------------------------------------------- 1993 1992 1991 ------------ ------------ ------------\nMaintenance and repairs. . $1,652,823 1,557,306 1,612,979\nDepreciation . . . . . . . 1,574,625 1,816,616 2,003,942\nReal estate taxes. . . . . 1,805,617 1,538,392 1,605,061\nAdvertising. . . . . . . . 332,489 512,521 612,705 =========== ========== ===========\nINDEPENDENT AUDITORS' REPORT\nThe Partners JMB\/SAN JOSE ASSOCIATES:\nWe have audited the financial statements of JMB\/San Jose Associates (a general partnership) as listed in the accompanying index. In connection with our audits of the financial statements, we also have audited the financial statement schedules as listed in the accompanying index. These financial statements are the responsibility of the General Partners of the Partnership. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits.\nWe conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the General Partners of the Partnership, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.\nIn our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of JMB\/San Jose Associates at December 31, 1993 and 1992, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 1993, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.\nAs discussed in note 3(b) of Notes to Financial Statements of JMB Income Properties, LTD - XI, the mortgage loan secured by the 150 Almaden and 185 Park Avenue buildings and certain related parking improvements matured December 1, 1993. Should an agreement not be reached to extend the loan, it is possible that the lender would exercise its remedies and seek to acquire title to these properties. Also, the Venture has commenced discussions with the lender on the 100-130 Park Center Plaza properties for additional loan proceeds to cover re-leasing and seismic program costs. Should the lender assistance required to fund these costs not be obtained, the Partnership has decided not to commit additional funds to these properties. The result would be that the Partnership would no longer have an ownership interest in these properties. The Venture has recorded provisions for value impairment to reduce the net book value of such properties to the outstanding balance of the related non-recourse financing.\nKPMG PEAT MARWICK\nChicago, Illinois March 25, 1994\nJMB\/SAN JOSE ASSOCIATES (A GENERAL PARTNERSHIP)\nNOTES TO FINANCIAL STATEMENTS\nYEARS ENDED DECEMBER 31, 1993, 1992 AND 1991\n(1) BASIS OF ACCOUNTING\nThe accompanying financial statements have been prepared for the purpose of complying with Rule 3.09 of Regulation S-X of the Securities and Exchange Commission. They include the accounts of the unconsolidated joint venture, JMB\/San Jose joint venture (\"Venture\"), in which JMB Income Properties, Ltd.- XI (\"JMB Income-XI\") and JMB Income Properties, Ltd.-XII are the partners.\nThe Venture's records are maintained on the accrual basis of accounting as adjusted for Federal income tax reporting purposes. The accompanying financial statements have been prepared from such records after making appropriate adjustments to present the Venture's accounts in accordance with generally accepted accounting principles (\"GAAP\"). Such adjustments are not recorded on the records of the Venture. The net effect of these items for the years ended December 31, 1993 and 1992 is summarized as follows:\nJMB\/SAN JOSE ASSOCIATES (a general partnership)\nNotes to Financial Statements - Continued\nStatement of Financial Accounting Standards No. 95 requires the Venture to present a statement which classifies receipts and payments according to whether they stem from operating, investing or financing activities. The required information has been segregated and accumulated according to the classifications specified in the pronouncement. In addition, the Venture records amounts held in U.S. Government obligations at cost, which approximates market. For purposes of these statements, the Venture's policy is to consider all such amounts held with original maturities of three months or less cash equivalents with any remaining amounts reflected as short-term investments. None of the Partnership's investments in U.S. Government obligations were classified as cash equivalents at December 31, 1993 and December 31, 1992.\nCertain amounts in the 1992 and 1991 financial statements have been reclassified to conform to the 1993 presentation.\nDepreciation on buildings and improvements has been provided over the estimated useful lives of the assets (5 to 30 years) using the straight-line method.\nDeferred expenses consist primarily of loan fees and lease commissions which are amortized over the terms stipulated in the related loan agreements or over the terms of the related leases using the straight-line method.\nAlthough certain leases of the Venture provide for tenant occupancy during periods for which no rent is due and\/or increases in the minimum lease payments over the term of the lease, rental income is accrued for the full period of occupancy on a straight-line basis.\nMaintenance and repair expenses are charged to operations as incurred. Significant betterments and improvements are capitalized and depreciated over their estimated useful lives.\nThe Venture recorded in 1993, as a matter of prudent accounting practice, a provision for value impairment of $15,549,935 on the 150 Almaden and 185 Park Avenue building and certain parking areas. In 1992, the Venture recorded a provision for value impairment of $8,142,152 on certain portions of the complex. In 1991, the Venture recorded a provision for value impairment of $21,175,127 to reduce the net basis of the 100-130 Park Center Plaza Buildings and a certain parking area to the then outstanding balance of the related non- recourse debt.\nNo provision for State or Federal income taxes has been made as the liability for such taxes is that of the venture partners rather than the Venture.\n(2) VENTURE AGREEMENT\nA description of the acquisition of the property is contained in Note 3(b) of JMB Income - XI. Such note is incorporated herein by reference.\nJMB\/SAN JOSE ASSOCIATES (A GENERAL PARTNERSHIP)\nNOTES TO FINANCIAL STATEMENTS - CONTINUED\n(3) LONG-TERM DEBT\nLong-term debt consists of the following at December 31, 1993 and 1992:\n1993 1992 ---------- ---------- 7.75% mortgage note; secured by the 100 Park Center Plaza Buildings, and certain related parking improvements in San Jose, California; principal and interest payments of $34,023 are due monthly through September 2000; additional interest payments of 2% per annum of gross income (total interest not to exceed 9.875%), which amounted to $55,034 in 1993 and $53,936 in 1992. . . $ 2,377,511 2,592,398\n10% mortgage note; secured by the 100 Park Center Plaza Buildings, and certain related parking improvements in San Jose, California; principal and interest payments of $10,353 are due monthly through September 2000. . . . . 608,178 667,948\n7.85% mortgage note; secured by the 170 Almaden Building in San Jose, California; principal and interest payments of $13,537 are due monthly through June 2003 . . . . . . . . . . . . . 1,170,903 1,239,278\n9.5% mortgage note; secured by the 150 Almaden and 185 Park Avenue buildings, and certain related parking improvements in San Jose, California; interest only payments of $197,917 are due monthly through December 1993 when the entire principal was due (currently in default(l)) . . . . . . . . . . . . . . . . 25,000,000 25,000,000 ----------- ----------\nTotal debt . . . . . . . . . . . . . 29,156,592 29,499,624 Less current portion of long-term debt. . . . . . . . . . . 25,372,084 25,342,560 ----------- ----------\nTotal long-term debt . . . . . . . . $ 3,784,508 4,157,064 ============ ==========\nFive year maturities of long-term debt are as follows:\n1994. . . . . . . . . . . $25,372,084 1995. . . . . . . . . . . 403,174 1996. . . . . . . . . . . 437,407 1997. . . . . . . . . . . 474,656 1998. . . . . . . . . . . 515,062 ===========\n(1) A description of the discussions between JMB\/San Jose and the mortgage lender on the 150 Almaden and 185 Park Avenue buildings is contained in Note 3(b) of Notes to Consolidated Financial Statements of JMB Income - XI.\nSuch note is hereby incorporated herein by reference. JMB\/SAN JOSE ASSOCIATES (A GENERAL PARTNERSHIP)\nNOTES TO FINANCIAL STATEMENTS - CONTINUED\n(4) LEASES\nAs Property Lessor\nAt December 31, 1993, the Venture's principal asset is an office building complex. The Venture has determined that all leases relating to this property are properly classified as operating leases; therefore, rental income is reported when earned and the cost of the property, excluding the cost of the land, is depreciated over the estimated useful life. Leases with tenants range in term from one to twenty-five years and provide for fixed minimum rent and partial reimbursement of operating costs.\nMinimum lease payments, including amounts representing executory costs (e.g. taxes, maintenance, insurance) and any related profit, to be received in the future under the operating leases are as follows:\n1994 . . . . . . . . . . . . . . $ 7,563,161 1995 . . . . . . . . . . . . . . 6,626,946 1996 . . . . . . . . . . . . . . 5,573,226 1997 . . . . . . . . . . . . . . 4,508,323 1998 . . . . . . . . . . . . . . 4,187,855 Thereafter . . . . . . . . . . . 15,736,333 -----------\n$44,195,844 ===========\n(5) TRANSACTIONS WITH AFFILIATES\nFees, commissions and other expenses required to be paid by the Venture to the General Partners and their affiliates as of December 31, 1993 and for the years ended December 31, 1993, 1992 and 1991 were as follows:\nSCHEDULE X\nJMB\/SAN JOSE ASSOCIATES (A GENERAL PARTNERSHIP)\nSUPPLEMENTARY INCOME STATEMENT INFORMATION\nYEARS ENDED DECEMBER 31, 1993, 1992 AND 1991\nCHARGED TO COSTS AND EXPENSES ---------------------------------------------- 1993 1992 1991 ------------ ------------ ------------\nMaintenance and repairs. . $ 973,276 1,029,913 965,927\nDepreciation . . . . . . . 1,063,616 1,898,286 2,369,699\nAmortization of deferred expenses. . . . . . . . . 243,694 243,229 193,526\nTaxes:\nReal estate. . . . . . . 991,781 755,041 724,758\nOther. . . . . . . . . . 4,792 5,375 5,410\nAdvertising. . . . . . . . 17,484 -- 57,048 ========== ========= =========\nITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE\nThere were no changes of or disagreements with accountants during 1992 and 1993.\nPART III\nITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE PARTNERSHIP\nThe Managing General Partner of the Partnership is JMB Realty Corporation (\"JMB\"), a Delaware corporation. JMB has responsibility for all aspects of the Partnership's operations, subject to the requirement that sales of real property must be approved by the Associate General Partner of the Partnership, Income Associates-XI, L.P., an Illinois limited partnership with JMB as the sole general partner. The Associate General Partner shall be directed by a majority in interest of its limited partners (who are generally officers, directors and affiliates of JMB or its affiliates) as to whether to provide its approval of any sale of real property (or any interest therein) of the Partnership. Various relationships of the Partnership to the Managing General Partner and its affiliates are described under the caption \"Conflicts of Interest\" at pages 12-16 of the Prospectus, of which description is hereby incorporated herein by reference to Exhibit 3-A to the Partnership's Report on Form 10-K for December 31, 1992 (File No. 0-15966) dated March 19, 1993.\nThe names, positions held and length of service therein of each director and executive officer and certain officers of the Managing General Partner of the Partnership are as follows:\nSERVED IN NAME OFFICE OFFICE SINCE - ---- ------ ------------\nJudd D. Malkin Chairman 5\/03\/71 Director 5\/03\/71 Neil G. Bluhm President 5\/03\/71 Director 5\/03\/71 Jerome J. Claeys III Director 5\/09\/88 Burton E. Glazov Director 7\/01\/71 Stuart C. Nathan Executive Vice President 5\/08\/79 Director 3\/14\/73 A. Lee Sacks Director 5\/09\/88 John G. Schreiber Director 3\/14\/73 H. Rigel Barber Chief Executive Officer 8\/01\/93 Jeffrey R. Rosenthal Chief Financial Officer 8\/01\/93 Gary Nickele Executive Vice President 1\/01\/92 General Counsel 2\/27\/84 Ira J. Schulman Executive Vice President 6\/01\/88 Gailen J. Hull Senior Vice President 6\/01\/88 Howard Kogen Senior Vice President 1\/02\/86 Treasurer 1\/01\/91\nThere is no family relationship among any of the foregoing directors or officers. The foregoing directors have been elected to serve one-year terms until the annual meeting of the Managing General Partner to be held on June 7,\n1994. All of the foregoing officers have been elected to serve one-year terms until the first meeting of the Board of Directors held after the annual meeting of the Managing General Partner to be held on June 7, 1994. There are no arrangements or understandings between or among any of said directors or officers and any other person pursuant to which any director or officer was elected as such.\nJMB is the corporate general partner of Carlyle Real Estate Limited Partnership-VII (\"Carlyle-VII\"), Carlyle Real Estate Limited Partnership-IX (\"Carlyle-IX\"), Carlyle Real Estate Limited Partnership-X (\"Carlyle-X\"), Carlyle Real Estate Limited Partnership-XI (\"Carlyle-XI\"), Carlyle Real Estate Limited Partnership-XII (\"Carlyle-XII\"), Carlyle Real Estate Limited Partnership-XIII (\"Carlyle-XIII\"), Carlyle Real Estate Limited Partnership-XIV (\"Carlyle-XIV\"), Carlyle Real Estate Limited Partnership-XV (\"Carlyle-XV\"), Carlyle Real Estate Limited Partnership-XVI (\"Carlyle-XVI\"), Carlyle Real Estate Limited Partnership-XVII (\"Carlyle-XVII\"), JMB Mortgage Partners, Ltd. (\"Mortgage Partners\"), JMB Mortgage Partners, Ltd.-II (\"Mortgage Partners-II\"), JMB Mortgage Partners, Ltd.-III (\"Mortgage Partners-III\"), JMB Mortgage Partners, Ltd.-IV (\"Mortgage Partners-IV\"), Carlyle Income Plus, Ltd. (\"Carlyle Income Plus\") and Carlyle Income Plus, Ltd.-II (\"Carlyle Income Plus-II\") and the managing general partner of JMB Income Properties, Ltd.-IV (\"JMB Income-IV\"), JMB Income Properties, Ltd.-V (\"JMB Income-V\"), JMB Income Properties, Ltd.-VI (\"JMB Income-VI\"), JMB Income Properties, Ltd.-VII (\"JMB Income-VII\"), JMB Income Properties, Ltd.-VIII (\"JMB Income-VIII\"), JMB Income Properties, Ltd.-IX (\"JMB Income-IX\"), JMB Income Properties, Ltd.-X (\"JMB Income-X\"), JMB Income Properties, Ltd.-XI (\"JMB Income-XI\"), JMB Income Properties, Ltd.-XII (\"JMB Income-XII\") and JMB Income Properties, Ltd.-XIII (\"JMB Income-XIII\"). Most of the foregoing directors and officers are also officer and\/or directors of various affiliated companies of JMB including Arvida\/JMB Managers, Inc. (the general partner of Arvida\/JMB Partners, L.P. (\"Arvida\")), Arvida\/JMB Managers-II, Inc. (the general partner of Arvida\/JMB Partners, L.P.-II (\"Arvida-II\")) and Income Growth Managers, Inc. (the corporate general partner of IDS\/JMB Balanced Income Growth, Ltd. (\"IDS\/BIG\")). Most of such directors and officers are also partners of certain partnerships which are associate general partners in the following real estate limited partnerships: Carlyle-VII, Carlyle-IX, Carlyle-X, Carlyle-XI, Carlyle-XII, Carlyle-XIII, Carlyle-XIV, Carlyle-XV, Carlyle-XVI, Carlyle-XVII, JMB Income-VI, JMB Income-VII, JMB Income-VIII, JMB Income-IX, JMB Income-X, JMB Income-XII, JMB Income-XIII, Mortgage Partners, Mortgage Partners-II, Mortgage Partners-III, Mortgage Partners-IV, Carlyle Income Plus, Carlyle Income Plus-II and IDS\/BIG.\nThe business experience during the past five years of each such director and officer of the Managing General Partner of the Partnership in addition to that described above is as follows:\nJudd D. Malkin (age 56) is an individual general partner of JMB Income-IV and JMB Income-V. Mr. Malkin has been associated with JMB since October, 1969. He is a Certified Public Accountant.\nNeil G. Bluhm (age 56) is an individual general partner of JMB Income-IV and JMB Income-V. Mr. Bluhm has been associated with JMB since August, 1970. He is a member of the Bar of the State of Illinois and a Certified Public Accountant.\nJerome J. Claeys III (age 51) (Chairman and Director of JMB Institutional Realty Corporation) has been associated with JMB since September, 1977. He holds a Masters degree in Business Administration from the University of Notre Dame.\nBurton E. Glazov (age 55) has been associated with JMB since June, 1971 and served as an Executive Vice President of JMB until December 1990. He is a member of the Bar of the State of Illinois and a Certified Public Accountant.\nStuart C. Nathan (age 52) has been associated with JMB since July, 1972. He is a member of the Bar of the State of Illinois.\nA. Lee Sacks (age 60) (President and Director of JMB Insurance Agency, Inc.) has been associated with JMB since December, 1972.\nJohn G. Schreiber (age 47) has been associated with JMB since December, 1970 and served as an Executive Vice President of JMB until December 1990. He holds a Masters degree in Business Administration from Harvard University Graduate School of Business.\nH. Rigel Barber (age 44) has been associated with JMB since March, 1982. He holds a J.D. degree from Northwestern Law School and is a member of the Bar of the State of Illinois.\nJeffrey R. Rosenthal (age 42) has been associated with JMB since December, 1987. He is a Certified Public Accountant.\nGary Nickele (age 41) has been associated with JMB since February, 1984. He holds a J.D. degree from the University of Michigan Law School and is a member of the Bar of the State of Illinois.\nIra J. Schulman (age 42) has been associated with JMB since February, 1983. He holds a Masters degree in Business Administration from the University of Pittsburgh.\nGailen J. Hull (age 45) has been associated with JMB since March 1982. He holds a Masters degree in Business Administration from Northern Illinois University and is a Certified Public Accountant.\nHoward Kogen (age 58) has been associated with JMB since March, 1973. He is a Certified Public Accountant.\nITEM 11. EXECUTIVE COMPENSATION\nThe Partnership has no officers or directors. The General Partners of the Partnership are entitled to receive a share of cash distributions, when and as cash distributions are made to the Investors, and a share of profits or losses as described under the caption \"Compensation and Fees\" at pages 8-12, \"Cash Distributions\" at pages 56-58, \"Allocation of Profits or Losses for Tax Purposes\" at page 58 and \"Cash Distributions; Allocations of Profits and Losses\" at pages A-8 to A-12 of the Partnership Agreement included as an exhibit to the Prospectus, which descriptions are hereby incorporated herein by reference to Exhibit 3-A to Partnership's Report on Form 10-K for December 31, 1992 (File No. 0-15966) dated March 19, 1993. Reference is also made to Notes 5 and 7 for a description of such transactions, distributions and allocations. In 1993, 1992 and 1991, no cash distributions were paid to the General Partners.\nAffiliates of the Managing General Partner provided property management services to the Partnership for 1993 for the Riverside Square Mall in Hackensack, New Jersey at a fee not to exceed 4% of the fixed and percentage rent of property, plus leasing commissions and the Bank of Delaware Office Building in Wilmington, Delaware at fees calculated at 3% of the gross revenues of the property plus leasing commissions. In 1993, such affiliates earned property management and leasing fees amounting to $325,429, all of which was paid as of December 31, 1993. As set forth in the Prospectus of the Partnership, the Managing General Partner must negotiate such agreements on terms no less favorable to the Partnership than those customarily charged for similar services in the relevant geographical area (but in no event at rates greater than 6% of the gross receipts from a property), and such agreements must be terminable by either party thereto, without penalty, upon 60 days' notice.\nJMB Insurance Agency, Inc., an affiliate of the Managing General Partner, earned and received insurance brokerage commissions in 1993 aggregating $54,478 in connection with the provision of insurance coverage for certain of the real property investments of the Partnership and its venture. Such commissions are at rates set by insurance companies for the classes of coverage provided.\nThe General Partners of the Partnership may be reimbursed for their direct salaries and expenses relating to the administration of the Partnership and the operation of the Partnership's real property investments. In 1993, an affiliate of the General Partners earned reimbursement for such expenses in the amount of $110,665, of which $87,093 was unpaid at December 31, 1993.\nThe Partnership is permitted to engage in various transactions involving affiliates of the Managing General Partner of the Partnership, as described under the captions \"Compensation and Fees\" at pages 8-12, \"Conflicts of Interest\" at pages 12-16 and \"Rights, Powers and Duties of General Partners\" at pages A-12 to A-22 of the Partnership Agreement, included as an exhibit to the Prospectus, which descriptions are hereby incorporated herein by reference\nto Exhibit 3-A to Partnership's Report on Form 10-K for December 31, 1992 (File No. 0-15966) dated March 19, 1993. The relationship of the Managing General Partner (and its directors and officers) to its affiliates is set forth above in Item 10 above and Exhibit 21 hereto.\nITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT\n(a) No person or group is known by the Partnership to own beneficially more than 5% of the outstanding Interests of the Partnership.\n(b) The Managing General Partner and its officers and directors own the following Interests of the Partnership:\nNAME OF AMOUNT AND NATURE BENEFICIAL OF BENEFICIAL PERCENT TITLE OF CLASS OWNER OWNERSHIP OF CLASS - -------------- ---------- ----------------- --------\nLimited Partnership JMB Realty Corporation 5 Interests (1) Less than 1% Interests indirectly\nLimited Partnership Managing General 5 Interests (1) Less than 1% Interests Partner and its indirectly officers and directors as a group\n- --------------\n(1) Includes 5 Interests owned by the initial limited partner of the Partnership. The voting and investment power of which is shared by JMB Realty Corporation and an affiliate.\nNo officer or director of the Managing General Partner of the Partnership possesses a right to acquire beneficial ownership of Interests of the Partnership.\n(c) There exists no arrangement, known to the Partnership, the operation of which may at a subsequent date result in a change in control of the Partnership.\n\/TABLE\nITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS\nThere were no significant transactions or business relationships with the Managing General Partner, affiliates or their management other than those described in Items 10 and 11 above.\nPART IV\nITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K\n(a) The following documents are filed as part of this report:\n1. Financial Statements (See Index to Financial Statements filed with this annual report).\n2. Exhibits.\n3-A. The Prospectus of the Partnership dated July 11, 1984 as supplemented July 24, 1984 and November 26, 1984, as filed with the Commission pursuant to Rules 424(b) and 424(c), is hereby incorporated herein by reference. Copies of pages 8-12, 56-58 and A-8 to A-12 are hereby incorporated herein by reference to Exhibit 3-A to the Partnership's Report on Form 10-K for December 31, 1992 (File No. 0-15966) dated March 19, 1993.\n3-B. Amended and Restated Agreement of Limited Partnership set forth as Exhibit A to the Prospectus, which agreement is hereby incorporated herein by reference to Exhibit 3-B to the Partnership's Report on Form 10-K for December 31, 1992 (File No. 0-15966) dated March 19, 1993.\n4-A. Mortgage loan agreement between the Partnership and Teachers Insurance and Annuity Association dated October 19, 1983 relating to Riverside Square are hereby incorporated by reference to the properties prospectus on Form S-11 (File No. 2-90503) dated July 11, 1984.\n4-B. Mortgage loan agreement between the Partnership and Equitable Real Estate Investment Management, Inc. dated February 28, 1989 relating to the Bank of Delaware is hereby incorporated herein by reference to Exhibit 4-B to the Partnership's Report on Form 10-K for December 31, 1992 (File No. 0-15966) dated March 19, 1993.\n4-C. Mortgage loan agreement between San Jose and Connecticut General Life Insurance Co. dated June 20, 1985 relating to Park Center Plaza are hereby incorporated by reference to the Partnership's Report on Form 8-K (File No. 0-15966) dated June 20, 1985.\n10-A. Acquisition documents relating to the purchase by the Partnership of Riverside Square in Hackensack, New Jersey are hereby incorporated by reference to the Partnership's prospectus on Form S-11 (File No. 2-90503) dated July 11, 1984.\n10-B. Acquisition documents relating to the purchase by the Partnership of the Bank of Delaware Office Building in Wilmington, Delaware are hereby incorporated by reference to the Partnership's Report on Form 8-K (File No. 0-15966) dated December 27, 1984.\n10-C. Acquisition documents including the venture agreement relating to the purchase by the Partnership of Park Center Plaza in San Jose, California are hereby incorporated by reference to the Partnership's Report on Form 8-K (File No. 0-15966) dated June 20, 1985.\n10-D. Sale documents and exhibits thereto relating to the Partnership's sale of the Genesee Valley Shopping Center in Flint, Michigan are hereby incorporated by reference to the Partnership's Report on Form 8-K (File No. 0-15966) dated June 29, 1990.\n21. List of Subsidiaries\n24. Powers of Attorney\n--------------\nAlthough certain additional long-term debt instruments of the Registrant have been excluded from Exhibit 4 above, pursuant to Rule 601(b)(4)(iii), the Registrant commits to provide copies of such agreements to the Securities and Exchange Commissions upon request.\n(b) No Reports on Form 8-K were required or filed since the beginning of the last quarter of the period covered by this report.\nNo annual report or proxy material for the year 1993 has been sent to the Partners of the Partnership. An annual report will be sent to the Partners subsequent to this filing.\nSIGNATURES\nPursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the Partnership has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.\nJMB INCOME PROPERTIES, LTD. - XI\nBy: JMB Realty Corporation Managing General Partner\nGAILEN J. HULL By: Gailen J. Hull Senior Vice President Date:March 25, 1994\nPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.\nBy: JMB Realty Corporation Managing General Partner\nJUDD D. MALKIN* By: Judd D. Malkin, Chairman and Director Date:March 25, 1994\nNEIL G. BLUHM* By: Neil G. Bluhm, President and Director Date:March 25, 1994\nH. RIGEL BARBER* By: H. Rigel Barber, Chief Executive Officer Date:March 25, 1994\nJEFFREY R. ROSENTHAL* By: Jeffrey R. Rosenthal, Chief Financial Officer Principal Financial Officer Date:March 25, 1994\nBy: Gailen J. Hull, Senior Vice President Principal Accounting Officer Date:March 25, 1994\nA. LEE SACKS* By: A. Lee Sacks, Director Date:March 25, 1994\nBy: STUART C. NATHAN* Stuart C. Nathan, Executive Vice President and Director Date:March 25, 1994\n*By:GAILEN J. HULL, Pursuant to a Power of Attorney\nGAILEN J. HULL By: Gailen J. Hull, Attorney-in-Fact Date:March 25, 1994\nJMB INCOME PROPERTIES, LTD. - XI\nEXHIBIT INDEX\nDOCUMENT INCORPORATED BY REFERENCE Page ------------ ----\n3-A. Pages 8-12, 56-58 and A-8 to A-12 of the Prospectus dated July 11, 1984 Yes\n3-B. Amended and Restated Agreement of Limited Partnership Yes\n4-A. Mortgage loan agreement related to Riverside Square Yes\n4-B. Mortgage loan agreement related to Bank of Delaware Yes\n4-C. Mortgage loan agreement related to Park Center Financial Center Yes\n10-A. Acquisition documents related to Riverside Square Yes\n10-B. Acquisition documents related to Bank of Delaware Yes\n10-C. Acquisition documents related to Park Center Plaza Yes\n10-D. Sale documents related to Genesee Valley Yes\n21. List of Subsidiaries No\n24. Powers of Attorney","section_3":"","section_4":"","section_5":"","section_6":"","section_7":"ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS\nLIQUIDITY AND CAPITAL RESOURCES\nOn July 11, 1984, the Partnership commenced an offering to the public of $60,000,000, subject to increase up to $200,000,000, pursuant to a Registra- tion Statement on Form S-11 under the Securities Act of 1933. On November 30, 1984, the initial and final closing of the offering was consummated with the dealer manager of the public offering (an affiliate of which is a limited partner of the Associate General Partner of the Partnership), and 173,406 Interests were issued by the Partnership.\nAfter deducting selling expenses and other offering costs, the Partnership had approximately $156,493,000 with which to make investments in commercial real property, to pay legal fees and other costs (including acquisition fees) related to such investments and for working capital. A portion of such proceeds was utilized to acquire the properties described in Item 1 above.\nAt December 31, 1993, the Partnership had cash and cash equivalents of approximately $267,000. Such funds and short-term investments of approximately $23,681,000 may be utilized for distributions to partners and for working capital requirements including operating deficits, re-leasing costs of vacant space, and certain capital improvements currently being incurred at the Bank of Delaware Office Building and Riverside Square Mall. Additionally, funds may be utilized to fund the Partnership's share of releasing costs and capital improvements at Park Center Financial Plaza. As discussed in Note 2(c), a major tenant at the Bank of Delaware investment property, brought a lawsuit against the Partnership which was decided in the tenants favor in 1990. The Partnership paid the tenant approximately $722,000 and $80,000 in 1991 and 1992, respectively, and may be obligated to fund additional amounts. (See also the discussion of the loan on this property below.) The Partnership and its consolidated ventures have currently budgeted in 1994 approximately $3,943,000 for tenant improvements and other capital expenditures. The Partnership's share of such items and its share of such similar items for its unconsolidated ventures for 1994 is currently budgeted to be $4,809,000. Actual amounts expended in 1994 may vary depending on a number of factors including actual leasing activity, results of property operations, liquidity considerations and other market conditions over the course of the year. The General Partners have been deferring receipt of distributions in accordance with the subordination requirement of the Partnership Agreement as discussed in Notes 5 and 7. The source of capital for such items and for both short-term and long-term future liquidity and distributions is expected to be through net cash generated by the Partnership's investment properties and through the sale of such investments. The Partnership's and its ventures' mortgage obligations are all non-recourse.\nTherefore, the Partnership and its ventures are not obligated to pay mortgage indebtedness unless the related property produces sufficient net cash flow from operations or sale.\nIn January 1992, the Partnership advanced $575,000 to the JMB\/San Jose joint venture for the payment of certain other operating expenses. These monies were paid back to the Partnership by the end of 1992. The venture partners notified the tenants in and invitees to the complex that some of the buildings, particularly the 100-130 Park Center Plaza Buildings and the garage below them, could pose a life safety hazard under certain unusually intense earthquake conditions. While the buildings and the garage were designed to comply with the applicable codes for the period in which they were constructed, and there is no legal requirement to upgrade the buildings for seismic purposes, the venture partners are working with consultants to analyze ways in which such a potential life safety hazard could be eliminated. However, since the costs of both re-leasing space and any seismic program could be substantial, the Partnership has commenced discussions with the appropriate lender for additional loan proceeds to pay for all or a portion of these costs.\nThe Partnership is also continuing to discuss terms for a possible loan extension with the mortgage lender on the 150 Almaden and 185 Park Avenue buildings and certain parking areas as the mortgage loan secured by this portion of the complex matured on October 1, 1993 and was extended to December 1, 1993. This mortgage loan is reflected as a current liability in the accompanying JMB\/San Jose financial statements. However, the Partnership and the lender have not been able to agree upon mutually acceptable terms for a loan extension and the lender has accelerated the loan. Should an agreement not be reached and as the Partnership does not have its share of the outstanding loan balance in its reserves in order to retire the loan, it is possible that the lender would exercise its remedies and seek to acquire title to this portion of the complex. Furthermore, should lender assistance be required to fund significant costs at the 100-130 Park Center Plaza buildings but not be obtained, the Partnership has decided not to commit any additional amounts to this portion of the complex since the likelihood of recovering such funds through increased capital appreciation is remote. The result would be that the Partnership would no longer have an ownership interest in this portion of the complex.\nAs a result, there is uncertainty about the ability to recover the net carrying value of the property through future operations and sale and accordingly, the JMB\/San Jose joint venture has made a provision for value impairment on the 150 Almaden and 185 Park Avenue buildings and certain parking areas of $15,549,935. Such provision at December 31, 1993 is recorded to reduce the net carrying value of these buildings to the then outstanding balance of the related non-recourse financing. Due to the uncertainty of the JMB\/San Jose joint venture's ability to recover the net carrying value of those buildings within the investment property through future operations or sale, the JMB\/San Jose joint venture had recorded a provision for value impairment at December 31, 1991 of $21,175,127 to reduce the net book value of the 100-130 Park Center Plaza buildings and a certain parking area to an amount equal to the then outstanding balance of the related non-recourse financing. Additionally, at December 31, 1992, the JMB\/San Jose joint venture recorded a provision for value impairment of $8,142,152 on certain other portions of the complex to amounts equal to the then outstanding balances of the related non-recourse financing. In the event the lender on any portion of the complex exercised its remedies as discussed above, the result would likely be that JMB\/San Jose joint venture would no longer have an ownership interest in such portion. See Note 3(b) for further discussion of this investment property. Tenants occupying approximately 110,000 square feet (approximately 26% of the buildings) of the Park Center Plaza investment property have leases that expire in 1995, for which there can be no assurance of renewals.\nRiverside Square Mall has been experiencing decreasing sales levels as well as increasing competition for new tenants since a competing regional retail center expanded its operations in 1990. Additionally, approximately 19% of the tenant space at Riverside Square had leases which expired in 1992 and for which a portion did not renew. The remaining portion renewed on a short-term basis pending the final remodeling and remerchandising plan. The Partnership is proceeding with its plans to renovate and remerchandise the center. In connection with the planned renovation, the Partnership, in early 1994, signed 15-year operating covenant extensions with both Saks and Bloomingdales which own their own stores. In return for the additional 15- year time commitment to the center, the Partnership reimbursed Saks for their recent store renovation in the amount of $6,100,000 and is obligated to pay Bloomingdales $5,000,000 toward their store renovation. The Partnership is also required to complete a renovation of the mall, with an additional estimated cost of approximately $12,000,000, pursuant to the terms of this extension. The Partnership is pursuing financing for the planned mall renovation; however, there can be no assurance that such financing will be obtained or that the renovation will be completed as currently planned. The Partnership is still considering possibly expanding the mall at some point in the future as well. Furthermore, the Partnership, as of the date of this report, has commenced the $7,500,000 restoration of the parking deck. The Partnership is continuing to attempt to lease the vacant space in the mall, but the competitive nature of the surrounding retail area and the fact that the mall is in need of a renovation have extended the time period required to re-lease space in the mall as tenant leases expire and are not renewed. On January 7, 1994, Conran's filed for protection pursuant to Chapter 11 bankruptcy petition. The store at the center has commenced a going-out-of- business sale. The Partnership is reviewing its possible alternatives with respect to replacement tenants and its rights with respect to the Conran's lease which is scheduled to expire in January 2000.\nAt the Bank of Delaware Building, a major tenant, E.I. duPont de Nemours (\"duPont\"), comprising approximately 27% of the building, vacated their space upon expiration of their lease in December 1993. The property has cumulatively operated at a cash deficit due to the significant costs incurred in connection with the re-leasing of vacant space and certain capital improvements. Due to the competitive nature of this marketplace, the Partnership estimates the costs associated with re-leasing any vacant space during the next few years, including those costs to remove the remaining asbestos in tenant space, will be substantial. As a result of these leasing concerns, the Partnership recorded a provision for value impairment on the Bank of Delaware Building at June 30, 1992 of $11,476,030 to reduce the net carrying value of the Bank of Delaware Building to the then outstanding balance of the related non-recourse debt. Further, the Partnership has commenced discussions with the building's first mortgage lender in order to seek a loan modification. In connection with these discussions, effective January 1994, the Partnership has suspended payment of debt service to the lender. There can be no assurance the Partnership will be successful in these discussions, and accordingly, the entire balance is reflected as a current liability in the accompanying financial statements. If a suitable modification of the existing loan cannot be arranged, the Partnership has decided not to voluntarily commit any additional amounts to the property. It is likely that the lender will seek to realize upon its collateral security and the Partnership will no longer have an ownership interest in the Property.\nUnder the terms of a mortgage and security agreement, the Partnership, in its capacity as mortgagor of the building, agreed to indemnify the mortgage lender, under certain circumstances, against damages, claims, liabilities and expenses incurred by or asserted against the mortgage lender in relation to asbestos in the building. Asbestos has been abated or encapsulated in approximately 62% of the building's space. The Partnership does not believe that any remaining asbestos in the building presents a hazard and does not believe that such asbestos currently is required to be removed. The Partnership estimates that the current cost of asbestos abatement in a portion of the building that could be incurred under certain circumstances in the future is approximately $800,000. However, the Partnership currently does not believe that it will likely be required to incur (or to indemnify the mortgage lender against) any such cost, although there is no assurance that the Partnership will not be required to pay such cost or indemnification.\nJWP, Inc. began occupying approximately 72,000 square feet of space (approximately 27% of the property) at Royal Executive Park II in August 1992.\nAs a result of the JWP, Inc. lease, the Partnership has received its preferred level of return for 1993 and in addition, recovered a portion of the cumulative shortfall in this return since 1989. The Partnership expects to receive its preferred level of return for 1994 in addition to a partial recovery of its cumulative shortfall in this return since 1989. However, subsequent to the end of the quarter, JWP filed for protection pursuant to a Chapter 11 bankruptcy petition. At this time, it is uncertain what effect this will have on the operations of the complex. As previously reported, JWP has been current in its rental obligations pursuant to its lease which is not scheduled to expire until May 2002. However, JWP has subleased approximately 60,000 square feet of its space and is actively attempting to sublease a significant portion of their remaining space. The manager continues an aggressive marketing program to lease the remaining vacant space but the competitive nature of the market continues to extend the time period required to lease space to initial tenants.\nThere are certain risks associated with the Partnership's investments made through joint ventures including the possibility that the Partnership's joint venture partners in an investment might become unable or unwilling to fulfill their financial or other obligations, or that such joint venture partners may have economic or business interests or goals that are inconsistent with those of the Partnership.\nIn response to the weakness of the economy and the limited amount of available real estate financing in particular, the Partnership is taking steps to preserve its working capital. Therefore, the Partnership is carefully scrutinizing the appropriateness of any discretionary expenditures, particularly in relation to the amount of working capital it has available. By conserving working capital, the Partnership will be in a better position to meet future needs of its properties without having to rely on external financing sources.\nRESULTS OF OPERATIONS\nThe increase in buildings and improvements at December 31, 1993 as compared to December 31, 1992 is primarily due to improvements of approximately $649,000 as a result of leasing a certain tenant's space and approximately $908,000 as a result of the renovation of the parking garage at the Hackensack, New Jersey investment property.\nThe decrease in investment in unconsolidated ventures at December 31, 1993 as compared to December 31, 1992 and the decrease in the Partnership's share of operations of unconsolidated ventures for the twelve months ended December 31, 1993 as compared to the twelve months ended December 31, 1992 is primarily due to the JMB\/San Jose joint venture recording at September 30, 1993 a provision for value impairment of $15,549,935 (of which the Partnership's share is $7,774,967) to reduce the net carrying value of the 150 Almaden and 185 Park Avenue buildings and certain parking areas to the then outstanding balance of the related non-recourse financing. The increase in the Partnership's share of operations of unconsolidated ventures for the twelve months ended December 31, 1992 as compared to the twelve months ended December 31, 1991 was primarily due to the Partnership's share of the provisions for value impairment recorded in 1991 at the San Jose, California investment property, partially offset in 1992 by the effect of an additional provision for value impairment recorded at December 31, 1992. See Note 3(b).\nThe increase in current portion of long-term debt and the decrease in long-term debt as of December 31, 1993 as compared to December 31, 1992, are primarily due to the Partnership's decision to suspend debt service payments at the Wilmington, Delaware real estate property investment.\nThe decrease in accounts payable as of December 31, 1993 as compared to December 31, 1992, is primarily due to the timing of the payment of certain accrued expenses at the Hackensack, New Jersey real estate property investment.\nThe decrease in accrued interest as of December 31, 1993 as compared to December 31, 1992 is primarily due to the timing of interest payments at the Wilmington, Delaware investment property.\nThe decrease in rental income as of December 31, 1993 as compared to December 31, 1992 is primarily due to lower occupancy at the Wilmington, Delaware investment property and tenant billing adjustments of approximately $223,000 at the Hackensack, New Jersey investment property.\nThe decrease in interest income as of December 31, 1993 as compared to December 31, 1992 and December 31, 1992 as compared to December 31, 1991 is primarily due to lower effective yields being earned on U.S. Government obligations held during 1993 and 1992.\nThe decrease in depreciation expense as of December 31, 1993 as compared to December 31, 1992 and December 31, 1991 is primarily due to a reduction of approximately $223,000 in depreciation expense at the Wilmington, Delaware investment property due to the provision for value impairment recorded at September 30, 1992. See Note 2(c).\nThe increase in property operating expenses as of December 31, 1993 as compared to December 31, 1992 is partially due to an increase of approximately $272,000 of snow removal costs primarily due to a blizzard in early 1993 at the Hackensack, New Jersey investment property. The decrease in property operating expenses for the twelve months ended December 31, 1992 as compared to the twelve months ended 1991 was primarily due to lower operating expenses including real estate taxes, repairs and maintenance and land debt expense at the Hackensack, New Jersey investment property. Such costs are primarily recoverable from tenants.\nThe decrease in professional services as of December 31, 1993 as compared to December 31, 1992 and the increases for the twelve months ended December 31, 1992 as compared to the twelve months ended December 31, 1991 is primarily due to legal fees incurred in 1992 by the Partnership in its successful defense of a lawsuit and its subsequent appeal brought against the Hackensack, New Jersey investment property concerning public access issues.\nThe decrease in provision for value impairment as of December 31, 1993 as compared to December 31, 1992 and the increase for the twelve months ended December 31, 1992 as compared to the twelve months ended December 31, 1991 is primarily due to the Partnership recording a provision for value impairment of $11,476,030 at the Wilmington, Delaware investment property at June 30, 1992 to reduce the net carrying value of the investment property to the then outstanding balance of the related non-recourse debt. See Note 1.\nINFLATION\nDue to the decrease in the level of inflation in recent years, inflation generally has not had a material effect on rental income or property operating expenses.\nTo the extent that inflation in future periods does have an adverse impact on property operating expenses, the effect will generally be offset by amounts recovered from tenants as many of the long-term leases at the Partnership's commercial properties have escalation clauses covering increases in the cost of operating and maintaining the properties as well as real estate taxes. Therefore, there should be little effect on operating earnings if the properties remain substantially occupied. In addition, substantially all of the leases at the Partnership's shopping center investments contain provisions which entitle the Partnership to participate in gross receipts of tenants above fixed minimum amounts.\nFuture inflation may also cause capital appreciation of the Partnership's investment properties over a period of time to the extent that rental rates and replacement costs of properties increase.\nITEM 8.","section_7A":"","section_8":"ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA\nJMB INCOME PROPERTIES, LTD. - XI (A LIMITED PARTNERSHIP)\nINDEX\nIndependent Auditors' Report Balance Sheets, December 31, 1993 and 1992 Statements of Operations, years ended December 31, 1993, 1992 and 1991 Statements of Partners' Capital Accounts (Deficit), years ended December 31, 1993, 1992 and 1991 Statements of Cash Flows, years ended December 31, 1993, 1992 and 1991 Notes to Financial Statements\nSCHEDULE --------\nSupplementary Income Statement Information X Real Estate and Accumulated Depreciation XI\nSCHEDULES NOT FILED:\nAll schedules other than those indicated in the index have been omitted as the required information is inapplicable or the information is presented in the financial statements or related notes.\nJMB\/SAN JOSE ASSOCIATES (A GENERAL PARTNERSHIP)\nINDEX\nIndependent Auditors' Report Balance Sheets, December 31, 1993 and 1992 Statements of Operations, years ended December 31, 1993, 1992 and 1991 Statements of Partners' Capital Accounts, years ended December 31, 1993, 1992 and 1991 Statements of Cash Flows, years ended December 31, 1993, 1992 and 1991 Notes to Financial Statements\nSCHEDULE --------\nSupplementary Income Statement Information X Real Estate and Accumulated Depreciation XI\nSCHEDULES NOT FILED:\nAll schedules other than those indicated in the index have been omitted as the required information is inapplicable or the information is presented in the financial statements or related notes.\nINDEPENDENT AUDITORS' REPORT\nThe Partners JMB INCOME PROPERTIES, LTD. - XI:\nWe have audited the financial statements of JMB Income Properties, Ltd. - XI (a limited partnership) as listed in the accompanying index. In connection with our audits of the financial statements, we also have audited the financial statement schedules as listed in the accompanying index. These financial statements and financial statement schedules are the responsibility of the General Partners of the Partnership. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits.\nWe conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the General Partners of the Partnership, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.\nIn our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of JMB Income Properties, Ltd. - XI at December 31, 1993 and 1992, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 1993, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.\nKPMG PEAT MARWICK\nChicago, Illinois March 25, 1994\nJMB INCOME PROPERTIES, LTD. - XI (A LIMITED PARTNERSHIP)\nNOTES TO FINANCIAL STATEMENTS\nYEARS ENDED DECEMBER 31, 1993, 1992 AND 1991\n(1) BASIS OF ACCOUNTING\nThe equity method of accounting has been applied in the accompanying financial statements with respect to the Partnership's interest in Royal Executive Park II (\"Royal Executive\") and JMB\/San Jose Associates (\"San Jose\") (note 3). Accordingly, the accompanying financial statements do not include the accounts of Royal Executive and San Jose.\nThe Partnership's records are maintained on the accrual basis of accounting as adjusted for Federal income tax reporting purposes. The accompanying financial statements have been prepared from such records after making appropriate adjustments to present the Partnership's accounts in accordance with generally accepted accounting principles (\"GAAP\"). Such adjustments are not recorded on the records of the Partnership. The net effect of these items for the years ended December 31, 1993 and 1992 is summarized as follows:\nJMB INCOME PROPERTIES, LTD. - XI (A LIMITED PARTNERSHIP)\nNOTES TO FINANCIAL STATEMENTS - CONTINUED\nThe net earnings (loss) per limited partnership interest is based upon the number of limited partnership interests outstanding at the end of the period (173,411). Deficit capital accounts will result, through the duration of the Partnership, in net gain for financial reporting and income tax purposes.\nCertain amounts in the 1992 and 1991 financial statements have been reclassified to conform to the 1993 presentation.\nStatement of Financial Accounting Standards No. 95 requires the Partnership to present a statement which classifies receipts and payments according to whether they stem from operating, investing or financing activities. The required information has been segregated and accumulated according to the classifications specified in the pronouncement. Partnership distributions from unconsolidated ventures are considered cash flow from operating activities only to the extent of the Partnership's cumulative share of net earnings. The Partnership records amounts held in U.S. Government obligations at cost, which approximates market. For the purposes of these statements, the Partnership's policy is to consider all such amounts held with original maturities of three months or less ($0 and $848,678 at December 31, 1993 and 1992, respectively) as cash equivalents with any remaining amounts reflected as short-term investments.\nDeferred expenses consist primarily of loan fees and lease commissions which are amortized over the terms stipulated in the related loan agreements or over the terms of the related leases using the straight-line method.\nAlthough certain leases of the Partnership provide for tenant occupancy during periods for which no rent is due and\/or increases in the minimum lease payments over the term of the lease, rental income is accrued for the full period of occupancy on a straight-line basis.\nIn response to the uncertainties relating to the future recovery of the carrying value of the Wilmington, Delaware investment property through future operations or sale, the Partnership recorded a provision for value impairment on the Wilmington, Delaware investment property of $11,476,030. Such provision made as of June 30, 1992 was recorded to reduce the net carrying value of the investment property to the then outstanding balance of the related non-recourse debt. Reference is made to note 2(c) for further discussion of the current status of this investment property.\nIn response to the uncertainties relating to the JMB\/San Jose joint venture's ability to recover the net carrying value of certain buildings with the Park Center Plaza investment property through future operations or sale, the JMB\/San Jose Joint Venture, at December 31, 1991, recorded a provision for value impairment on certain parcels within the complex of $21,175,127. Such provision was recorded to reduce the net basis of the 100-130 Park Center Plaza Buildings and a certain parking area to the then outstanding balance of the related non-recourse debt. Additionally, a provision for value impairment of $8,142,152 was recorded at December 31, 1992 on certain other portions of the complex to reduce the net basis of these portions to the outstanding balance of the debt at December 31, 1992. Furthermore, a provision for value impairment on the 150 Almaden and 185 Park Avenue buildings and certain parking areas of $15,549,935 was recorded at September 30, 1993 to reduce the net basis to the then outstanding balance of the related non-recourse debt. Reference is made to note 3(b) for further discussion of the current status of this investment property.\nNo provision for State or Federal income taxes has been made as the liability for such taxes is that of the Partners rather than the Partnership. However, in certain instances, the Partnership has been required under applicable law to remit directly to the tax authorities amounts representing withholding from distributions paid to partners.\nJMB INCOME PROPERTIES, LTD. - XI (A LIMITED PARTNERSHIP)\nNOTES TO FINANCIAL STATEMENTS - CONTINUED\n(2) INVESTMENT PROPERTIES\n(a) General\nThe Partnership has acquired, either directly or through joint ventures, two shopping centers and three office complexes. In June 1990, the Partnership sold its interest in the Genesee Valley Shopping Center. All of the remaining properties were in operation at December 31, 1993. The cost of the investment properties represents the total cost to the Partnership plus miscellaneous acquisition costs.\nDepreciation on the properties has been provided over the estimated useful lives of the various components as follows:\nYEARS -----\nBuilding and Improvements -- straight-line. . . . . 30 Personal property -- straight-line. . . . . . . . . 5 ==\nThe investment properties are pledged as security for the long-term debt, for which there is no recourse to the Partnership.\nMaintenance and repair expenses are charged to operations as incurred. Significant betterments and improvements are capitalized and depreciated over their estimated useful lives.\n(b) Riverside Square Mall\nDuring October 1983, the Partnership acquired an existing enclosed regional shopping center in Hackensack, New Jersey. The Partnership's purchase price for the mall was $36,236,282. The Partnership made a cash down payment at closing of $20,000,000. The balance of the purchase price was represented by a first mortgage loan which had a balance at closing of $16,236,282 prior to unamortized discount, based upon an imputed interest rate of 12% (note 4).\nAn affiliate of the General Partners of the Partnership manages the shopping center for a fee equal to 4% of the fixed and percentage rents of the shopping center plus leasing commissions, subject to an aggregate annual maximum amount of 6% of the gross receipts of the property.\n(c) Bank of Delaware - office building\nIn December 1984, the Partnership acquired the interests in a partnership which owned an existing office building in Wilmington, Delaware. The Partnership's purchase price for the building was $20,900,000, of which approximately $4,955,000 was paid in cash at closing. The balance of the purchase price was represented by an existing first mortgage loan, which, at closing, had an outstanding balance of approximately $5,945,000, and five purchase price notes totaling $10,000,000. The five purchase price notes were due and paid as scheduled at various dates from July 1985 to December 1989.\nIn February 1989, the Partnership refinanced the existing first mortgage loan secured by the office building in Wilmington, Delaware. The Partnership received net refinancing proceeds of approximately $4,696,000 which were utilized primarily to pay for the substantially completed renovation program and other capital improvements.\nJMB INCOME PROPERTIES, LTD. - XI (A LIMITED PARTNERSHIP)\nNOTES TO FINANCIAL STATEMENTS - CONTINUED\nA major tenant in the building brought a lawsuit against the Partnership which sought reimbursement from the Partnership for certain improvements made by the tenant to its space in the building. The lawsuit was sent to arbitration and was decided in 1990 in the tenant's favor. The Partnership reimbursed the tenant approximately $722,000 in 1991, and $80,000 in 1992. The tenant may be entitled to reimbursement for further amounts depending upon its future remodeling programs.\nAt the Bank of Delaware Building, a major tenant, E.I. duPont de Nemours (\"duPont\"), comprising approximately 27% of the building, vacated their space upon expiration of their lease in December 1993. The property has cumulatively operated at a cash deficit due to the significant costs incurred in connection with the re-leasing of vacant space and certain capital improvements. Due to the competitive nature of this marketplace, the Partnership estimates the costs associated with re-leasing any vacant space during the next few years, including those costs to remove the remaining asbestos in tenant space, will be substantial. As a result of these leasing concerns, the Partnership recorded a provision for value impairment on the Bank of Delaware Building at June 30, 1992 of $11,476,202 to reduce the net carrying value of the Bank of Delaware Building to the then outstanding balance of the related non-recourse debt. Further, the Partnership has commenced discussions with the building's first mortgage lender in order to seek a loan modification. In connection with these discussions, effective January 1994, the Partnership has suspended payment of debt service to the lender. There can be no assurance the Partnership will be successful in these discussions, and accordingly, the entire balance is reflected as a current liability in the accompanying financial statements. If a suitable modification of the existing loan cannot be arranged, the Partnership has decided not to voluntarily commit any additional amounts to the property. It is likely that the lender will seek to realize upon its collateral security and the Partnership will no longer have an ownership interest in the Property.\nUnder the terms of a mortgage and security agreement, the Partnership, in its capacity as mortgagor of the building, agreed to indemnify the mortgage lender, under certain circumstances, against damages, claims, liabilities and expenses incurred by or asserted against the mortgage lender in relation to asbestos in the building. Asbestos has been abated or encapsulated in approximately 62% of the building's space. The Partnership does not believe that any remaining asbestos in the building presents a hazard and does not believe that such asbestos currently is required to be removed. The Partnership estimates that the current cost of asbestos abatement in a portion of the building that could be incurred under certain circumstances in the future is approximately $800,000. However, the Partnership currently does not believe that it will likely be required to incur (or to indemnify the mortgage lender against) any such cost, although there is no assurance that the Partnership will not be required to pay such cost or indemnification.\nAn affiliate of the General Partner of the Partnership manages the office building for a fee equal to 3% of the gross revenues of the building plus leasing commissions, subject to an aggregate annual maximum amount of 6% of the gross receipts of the property.\n(3) VENTURE AGREEMENTS\n(a) General\nThe Partnership at December 31, 1993 is a party to two operating venture agreements (San Jose and Royal Executive) and has made capital contributions to the respective ventures as discussed below. Under certain circumstances, either pursuant to the venture agreements or due to the Partnership's obligations as a General Partner, the Partnership may be required to make additional cash contributions to the ventures.\nJMB INCOME PROPERTIES, LTD. - XI (A LIMITED PARTNERSHIP)\nNOTES TO FINANCIAL STATEMENTS - CONTINUED\nThere are certain risks associated with the Partnership's investments made through joint ventures including the possibility that the Partnership's joint venture partners in an investment might become unable or unwilling to fulfill their financial or other obligations, or that such joint venture partners may have economic or business interests or goals that are inconsistent with those of the Partnership.\n(b) San Jose\nThe Partnership has acquired, through San Jose, an interest in an existing office building complex in San Jose, California (Park Center Financial Plaza). San Jose acquired nine office buildings and two parking garage structures in June 1985 for a purchase price of approximately $32,472,000 subject to long-term indebtedness of approximately $6,347,000. All of the properties were in operation when acquired.\nIn addition, in May 1986, San Jose purchased an additional office building (150 Almaden) and a parking and retail building (185 Park Avenue) in the Park Center Financial Plaza complex for a total purchase price of approximately $47,476,000. In conjunction with the acquisitions, San Jose reserved approximately $31,590,000 to fund debt service, leasing commissions, and capital and tenant improvements.\nIn September 1986, San Jose obtained a mortgage loan in the amount of $25,000,000 secured by the 150 Almaden and 185 Park Avenue buildings and certain parking areas. The outstanding principal balance, which is non- amortizable, bears interest at the rate of 9.5% per annum and had a scheduled maturity in October 1993 and was extended to December 1, 1993.\nThe property is managed by an affiliate of the General Partners of the Partnership for a fee calculated as 3% of gross receipts.\nThe partners of San Jose are the Partnership and JMB Income Properties, Ltd.-XII, another partnership sponsored by the Managing General Partner of the Partnership (\"JMB-XII\"). The terms of San Jose's partnership agreement generally provide that contributions, distributions, cash flow, sale or refinancing proceeds and profits and losses will be distributed or allocated to the Partnership in their respective 50% ownership percentages.\nIn 1991, all remaining amounts originally set aside by the Partnership to fund debt service, leasing commissions and capital and tenant improvement costs at Park Center Financial Plaza were utilized. In January 1992, the Partnership advanced $575,000 to the JMB\/San Jose joint venture for the payment of certain operating expenses. These monies were paid back to the Partnership by the end of 1992. However, since the costs of both re-leasing space and any seismic program could be substantial, the Partnership has commenced discussions with the appropriate lender for additional loan proceeds to pay for all or a portion of these costs. The venture is also continuing to discuss terms for a possible loan extension with the mortgage lender on the 150 Almaden and 185 Park Avenue buildings and certain parking areas as the mortgage loan secured by this portion of the complex matured October 1, 1993 and was extended to December 1, 1993. However, the venture and the lender have not been able to agree upon mutually acceptable terms for a loan extension and the lender has accelerated the loan. Should an agreement not be reached and as the Partnership does not have its share of the outstanding loan balance in its reserves in order to retire the loan, it is possible that the lender would exercise its remedies and seek to acquire title to this portion of the complex. Furthermore, should lender assistance be required to fund significant costs at the 100-130 Park Center Plaza buildings but not be obtained, the venture has decided not to commit any additional amounts to\nJMB INCOME PROPERTIES, LTD. - XI (A LIMITED PARTNERSHIP)\nNOTES TO FINANCIAL STATEMENTS - CONTINUED\nthis portion of the complex since the likelihood of recovering such funds through increased capital appreciation is remote. The result would be that the Partnership would no longer have an ownership interest in this portion of the complex.\nAs a result, there is uncertainty about the ability to recover the net carrying value of the property through future operations and sale and accordingly, the JMB\/San Jose joint venture has made a provision for value impairment on the 150 Almaden and 185 Park Avenue buildings and certain parking areas of $15,549,935. Such provision at September 30, 1993 was recorded to reduce the net carrying value of these buildings to the then outstanding balance of the related non-recourse financing. Due to the uncertainty of the JMB\/San Jose joint venture's ability to recover the net carrying value of those buildings within the investment property through future operations or sale, the JMB\/San Jose joint venture recorded a provision for value impairment at December 31, 1991 of $21,175,127 to reduce the net book value of the 100-130 Park Center Plaza buildings and a certain parking area to an amount equal to the then outstanding balance of the related non- recourse financing. Additionally, at December 31, 1992, the JMB\/San Jose joint venture recorded a provision for value impairment of $8,142,152 on certain other portions of the complex to amounts equal to the then outstanding balances of the related non-recourse financing. In the event the lender on any portion of the complex exercised its remedies as discussed above, the result would likely be that JMB\/San Jose joint venture would no longer have an ownership interest in such portion.\n(c) Royal Executive\nIn December 1985, the Partnership entered into a commitment to fund a $27,000,000 convertible first mortgage note on a three building office park then under construction in Rye Brook, New York (Royal Executive Park II). The first mortgage note called for monthly installments of interest only at a rate of 10% through the period of equity conversion.\nDuring February 1987, the Partnership exercised its option of converting the $27,000,000 mortgage into an ownership position. Upon the conversion of the mortgage note, the Partnership entered into a joint venture (Royal Executive) with the borrower (joint venture partners). Pursuant to the terms of the venture agreement, until certain rental achievement levels are attained, the Partnership is entitled to a cumulative preferred annual return equal to $2,430,000 per year. The next $2,439,732 of annual cash flow is distributable to the joint venture partners, on a non-cumulative basis, with any remaining cash flow distributable 49.9% to the Partnership and 50.1% to the joint venture partners. Therefore, the Partnership's receipt of cash distributions is subject to the actual operations of the property. The Partnership is entitled to any deficiency in its preferred annual return on a cumulative basis as an annual priority distribution from future available cash flow. The cumulative deficiency in the preferred annual return is approximately $4,938,000 at December 31, 1993.\nOperating profits of the joint venture, in general, will be allocated in proportion to, and to the extent of, distributions and then based on relative ownership percentages. Operating losses, in general, will be first allocated to the joint venture partners to the extent of any additional contributions made to fund operations or the Partnership's guaranteed return. Remaining losses, if any, will be allocated based upon relative ownership interests. Depreciation and amortization will be allocated based upon the relative ownership interests.\nJMB INCOME PROPERTIES, LTD. - XI (A LIMITED PARTNERSHIP)\nNOTES TO FINANCIAL STATEMENTS - CONTINUED\n(4) LONG-TERM DEBT\nLong-term debt consists of the following at December 31, 1993 and 1992:\n1993 1992 ---------- ----------\n9-1\/2% first mortgage note, secured by Riverside Square Mall in Hackensack, New Jersey; payable in monthly installments of principal and interest of $142,945 through January 1, 2008; prepayable for a fee equal to 8% of the then outstanding loan balance, declining 1% per year to a minimum of 1%. Balance is net of unamortized discount of $1,658,738 and $1,819,933 at December 31, 1993 and 1992, respectively, based on an imputed interest rate of 12%.. . . . . . . . . . . . . . . . . $11,634,669 11,903,495\n10-3\/8% mortgage note, secured by Bank of Delaware Office Building in Wilmington, Delaware; payable in monthly installments of interest only of $82,135 through March 1, 1999 when the entire balance is due and payable (see note 2(c)) . . . . . . . . . . . 9,500,000 9,500,000 ----------- ----------\nTotal debt . . . . . . . . . . . . . 21,134,669 21,403,495\nLess current portion of long-term debt . . . . 9,837,354 299,368 ----------- ----------\nTotal long-term debt . . . . . . . . $11,297,315 21,104,127 =========== ==========\nFive year maturities of long-term debt (net of unamortized discount) are summarized as follows for the years ending:\n1994. . . . . . . . . . . . $9,837,354 1995. . . . . . . . . . . . 380,119 1996. . . . . . . . . . . . 428,327 1997. . . . . . . . . . . . 482,649 1998. . . . . . . . . . . . 543,862 ==========\nJMB INCOME PROPERTIES, LTD. - XI (A LIMITED PARTNERSHIP)\nNOTES TO FINANCIAL STATEMENTS - CONTINUED\n(5) PARTNERSHIP AGREEMENT\nPursuant to the terms of the Partnership Agreement, net profits or losses of the Partnership from operations are allocated 96% to the Limited Partners and 4% to the General Partners. Profits from the sale or refinancing of investment properties will be allocated to the General Partners: (i) to the greater of 1% of such profits or the amount of cash distributable to the General Partner from any such sale or refinancing (as described below); and (ii) in order to reduce deficits, if any, in the General Partners' capital accounts to a level consistent with the gain anticipated to be realized from the sale of properties. Losses from the sale or refinancing of investment properties will be allocated 1% to the General Partners. The remaining sale or refinancing profits and losses will be allocated to the Limited Partners.\nThe General Partners are not required to make any additional capital contributions except under certain limited circumstances upon termination of the Partnership. In general, distributions of cash from operations will be made 90% to the Limited Partners and 10% to the General Partners. However, a portion of such distributions to the General Partners is subordinated to the Limited Partners' receipt of a stipulated return on capital.\nThe Partnership Agreement provides that the General Partners shall receive as a distribution from the sale of a real property by the Partnership amounts equal to the cumulative deferrals of any portion of their 10% cash distribution and 3% of the selling price, and that the remaining proceeds (net after expenses and retained working capital) be distributed 85% to the Limited Partners and 15% to the General Partners. However, the Limited Partners shall receive 100% of such net sale proceeds until the Limited Partners (i) have received cash distributions of sale or refinancing proceeds in an amount equal to the Limited Partners' aggregate initial capital investment in the Partnership, (ii) have received cumulative cash distributions from the Partnership's operations which, when combined with sale or refinancing proceeds previously distributed, equal a 7% annual return on the Limited Partners' average capital investment for each year (their initial capital investment as reduced by sale or refinancing proceeds previously distributed) commencing with the first fiscal quarter of 1985 and (iii) have received cash distributions of sale and refinancing proceeds and of the Partnership operations, in an amount equal to the Limited Partners' initial capital investment in the Partnership plus a 10% annual return on the Limited Partners' average capital investment.\n(6) LEASES\nAt December 31, 1993, the Partnership's principal assets are one shopping center and one office building. The Partnership has determined that all leases relating to these properties are properly classified as operating leases; therefore, rental income is reported when earned and the cost of the properties, excluding the cost of the land, is depreciated over the estimated useful lives. Leases with tenants range in term from one to thirty-five years and provide for fixed minimum rent and partial reimbursement of operating costs. In addition, leases with shopping center tenants provide for additional rent based upon percentages of tenants' sales volumes. With respect to the Partnership's shopping center investment, a substantial portion of the ability of retail tenants to honor their leases is dependant upon the retail economic sector.\nJMB INCOME PROPERTIES, LTD. - XI (A LIMITED PARTNERSHIP)\nNOTES TO FINANCIAL STATEMENTS - CONTINUED\nCost and accumulated depreciation of the leased assets are summarized as follows at December 31, 1993:\nOffice Building: Cost. . . . . . . . . . . . . . . . . $15,401,683 Accumulated depreciation. . . . . . . (6,127,709) ----------- 9,273,974 ----------- Shopping Center: Cost. . . . . . . . . . . . . . . . . 42,380,902 Accumulated depreciation. . . . . . . (11,545,311) ----------- 30,835,591 -----------\n$40,109,565 ===========\nMinimum lease payments, including amounts representing executory costs (e.g. taxes, maintenance, insurance) and any related profit, to be received in the future under the operating leases are as follows:\n1994 . . . . . . . . . . . $ 6,173,591 1995 . . . . . . . . . . . 5,477,756 1996 . . . . . . . . . . . 5,115,657 1997 . . . . . . . . . . . 4,565,852 1998 . . . . . . . . . . . 3,949,351 Thereafter . . . . . . . . 13,199,714 -----------\nTotal. . . . . . . . . $38,481,921 ===========\nContingent rent (based on sales by property tenants) included in rental income was as follows:\n1991. . . . . . . . $317,554 1992. . . . . . . . 296,014 1993. . . . . . . . 302,809 =========\n(7) TRANSACTIONS WITH AFFILIATES\nFees, commissions and other expenses required to be paid by the Partner- ship to the General Partners and their affiliates as of December 31, 1993 and for the years ended December 31, 1993, 1992 and 1991 were as follows:\nJMB INCOME PROPERTIES, LTD. - XI (A LIMITED PARTNERSHIP)\nNOTES TO FINANCIAL STATEMENTS - CONCLUDED\nThe General Partners have deferred receipt of certain of their distributions (see note 5) of net cash flow of the Partnership. The amount of such deferred distributions aggregated $1,092,490 as of December 31, 1993. The amount is being deferred in accordance with the subordination requirements of the Partnership Agreement. This amount or amounts currently payable do not bear interest and may be paid in future periods.\n(8) INVESTMENT IN UNCONSOLIDATED VENTURES\nSummary of combined financial information for San Jose and Royal Executive (note 3) as of and for the years ended December 31, 1993 and 1992 are as follows: 1993 1992 ------------ -----------\nCurrent assets . . . . . . . . . . . . $ 2,535,033 4,088,973 Current liabilities. . . . . . . . . . (26,399,404) (25,910,203) ------------ ----------- Working capital. . . . . . . . . . (23,864,371) (21,821,230) ------------ ----------- Investment property, net . . . . . . . 80,714,163 98,707,716 Other assets, net. . . . . . . . . . . 4,293,567 1,995,854 Long-term debt . . . . . . . . . . . . (3,784,508) (4,157,064) Other liabilities. . . . . . . . . . . (190,834) (192,993) Venture partners' equity . . . . . . . (35,040,476) (43,444,416) ------------ ----------- Partnership's capital. . . . . . . $ 22,127,541 31,087,867 ============ =========== Represented by: Invested capital . . . . . . . . . . $ 74,947,712 74,947,712 Cumulative distributions . . . . . . (34,443,911) (29,745,590) Cumulative losses. . . . . . . . . . (18,376,260) (14,114,255) ------------ ----------- $ 22,127,541 31,087,867 ============ =========== Total income . . . . . . . . . . . . . $ 16,499,948 15,934,326 ============ =========== Expenses applicable to operating loss. $ 28,375,860 21,658,285 ============ =========== Net loss . . . . . . . . . . . . . . . $ 11,875,912 5,723,959 ============ ===========\nReference is made to note 3(b) regarding the provisions for value impairments of $15,549,935 and $8,142,152 which were recorded in 1993 and 1992, respectively, by JMB\/San Jose joint venture.\nThe total income, expenses related to operating loss and net loss for the above-mentioned ventures for the year ended December 31, 1991 were $13,923,263, $34,549,910 and $20,626,647, respectively.\n(9) SUBSEQUENT EVENT - DISTRIBUTION TO PARTNERS\nIn February 1994, the Partnership paid a distribution of $520,233 ($3.00 per Interest) to the Limited Partners.\nSCHEDULE X\nJMB INCOME PROPERTIES, LTD. - XI (A LIMITED PARTNERSHIP)\nSUPPLEMENTARY INCOME STATEMENT INFORMATION\nYEARS ENDED DECEMBER 31, 1993, 1992 AND 1991\nCHARGED TO COSTS AND EXPENSES ---------------------------------------------- 1993 1992 1991 ------------ ------------ ------------\nMaintenance and repairs. . $1,652,823 1,557,306 1,612,979\nDepreciation . . . . . . . 1,574,625 1,816,616 2,003,942\nReal estate taxes. . . . . 1,805,617 1,538,392 1,605,061\nAdvertising. . . . . . . . 332,489 512,521 612,705 =========== ========== ===========\nINDEPENDENT AUDITORS' REPORT\nThe Partners JMB\/SAN JOSE ASSOCIATES:\nWe have audited the financial statements of JMB\/San Jose Associates (a general partnership) as listed in the accompanying index. In connection with our audits of the financial statements, we also have audited the financial statement schedules as listed in the accompanying index. These financial statements are the responsibility of the General Partners of the Partnership. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits.\nWe conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the General Partners of the Partnership, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.\nIn our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of JMB\/San Jose Associates at December 31, 1993 and 1992, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 1993, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.\nAs discussed in note 3(b) of Notes to Financial Statements of JMB Income Properties, LTD - XI, the mortgage loan secured by the 150 Almaden and 185 Park Avenue buildings and certain related parking improvements matured December 1, 1993. Should an agreement not be reached to extend the loan, it is possible that the lender would exercise its remedies and seek to acquire title to these properties. Also, the Venture has commenced discussions with the lender on the 100-130 Park Center Plaza properties for additional loan proceeds to cover re-leasing and seismic program costs. Should the lender assistance required to fund these costs not be obtained, the Partnership has decided not to commit additional funds to these properties. The result would be that the Partnership would no longer have an ownership interest in these properties. The Venture has recorded provisions for value impairment to reduce the net book value of such properties to the outstanding balance of the related non-recourse financing.\nKPMG PEAT MARWICK\nChicago, Illinois March 25, 1994\nJMB\/SAN JOSE ASSOCIATES (A GENERAL PARTNERSHIP)\nNOTES TO FINANCIAL STATEMENTS\nYEARS ENDED DECEMBER 31, 1993, 1992 AND 1991\n(1) BASIS OF ACCOUNTING\nThe accompanying financial statements have been prepared for the purpose of complying with Rule 3.09 of Regulation S-X of the Securities and Exchange Commission. They include the accounts of the unconsolidated joint venture, JMB\/San Jose joint venture (\"Venture\"), in which JMB Income Properties, Ltd.- XI (\"JMB Income-XI\") and JMB Income Properties, Ltd.-XII are the partners.\nThe Venture's records are maintained on the accrual basis of accounting as adjusted for Federal income tax reporting purposes. The accompanying financial statements have been prepared from such records after making appropriate adjustments to present the Venture's accounts in accordance with generally accepted accounting principles (\"GAAP\"). Such adjustments are not recorded on the records of the Venture. The net effect of these items for the years ended December 31, 1993 and 1992 is summarized as follows:\nJMB\/SAN JOSE ASSOCIATES (a general partnership)\nNotes to Financial Statements - Continued\nStatement of Financial Accounting Standards No. 95 requires the Venture to present a statement which classifies receipts and payments according to whether they stem from operating, investing or financing activities. The required information has been segregated and accumulated according to the classifications specified in the pronouncement. In addition, the Venture records amounts held in U.S. Government obligations at cost, which approximates market. For purposes of these statements, the Venture's policy is to consider all such amounts held with original maturities of three months or less cash equivalents with any remaining amounts reflected as short-term investments. None of the Partnership's investments in U.S. Government obligations were classified as cash equivalents at December 31, 1993 and December 31, 1992.\nCertain amounts in the 1992 and 1991 financial statements have been reclassified to conform to the 1993 presentation.\nDepreciation on buildings and improvements has been provided over the estimated useful lives of the assets (5 to 30 years) using the straight-line method.\nDeferred expenses consist primarily of loan fees and lease commissions which are amortized over the terms stipulated in the related loan agreements or over the terms of the related leases using the straight-line method.\nAlthough certain leases of the Venture provide for tenant occupancy during periods for which no rent is due and\/or increases in the minimum lease payments over the term of the lease, rental income is accrued for the full period of occupancy on a straight-line basis.\nMaintenance and repair expenses are charged to operations as incurred. Significant betterments and improvements are capitalized and depreciated over their estimated useful lives.\nThe Venture recorded in 1993, as a matter of prudent accounting practice, a provision for value impairment of $15,549,935 on the 150 Almaden and 185 Park Avenue building and certain parking areas. In 1992, the Venture recorded a provision for value impairment of $8,142,152 on certain portions of the complex. In 1991, the Venture recorded a provision for value impairment of $21,175,127 to reduce the net basis of the 100-130 Park Center Plaza Buildings and a certain parking area to the then outstanding balance of the related non- recourse debt.\nNo provision for State or Federal income taxes has been made as the liability for such taxes is that of the venture partners rather than the Venture.\n(2) VENTURE AGREEMENT\nA description of the acquisition of the property is contained in Note 3(b) of JMB Income - XI. Such note is incorporated herein by reference.\nJMB\/SAN JOSE ASSOCIATES (A GENERAL PARTNERSHIP)\nNOTES TO FINANCIAL STATEMENTS - CONTINUED\n(3) LONG-TERM DEBT\nLong-term debt consists of the following at December 31, 1993 and 1992:\n1993 1992 ---------- ---------- 7.75% mortgage note; secured by the 100 Park Center Plaza Buildings, and certain related parking improvements in San Jose, California; principal and interest payments of $34,023 are due monthly through September 2000; additional interest payments of 2% per annum of gross income (total interest not to exceed 9.875%), which amounted to $55,034 in 1993 and $53,936 in 1992. . . $ 2,377,511 2,592,398\n10% mortgage note; secured by the 100 Park Center Plaza Buildings, and certain related parking improvements in San Jose, California; principal and interest payments of $10,353 are due monthly through September 2000. . . . . 608,178 667,948\n7.85% mortgage note; secured by the 170 Almaden Building in San Jose, California; principal and interest payments of $13,537 are due monthly through June 2003 . . . . . . . . . . . . . 1,170,903 1,239,278\n9.5% mortgage note; secured by the 150 Almaden and 185 Park Avenue buildings, and certain related parking improvements in San Jose, California; interest only payments of $197,917 are due monthly through December 1993 when the entire principal was due (currently in default(l)) . . . . . . . . . . . . . . . . 25,000,000 25,000,000 ----------- ----------\nTotal debt . . . . . . . . . . . . . 29,156,592 29,499,624 Less current portion of long-term debt. . . . . . . . . . . 25,372,084 25,342,560 ----------- ----------\nTotal long-term debt . . . . . . . . $ 3,784,508 4,157,064 ============ ==========\nFive year maturities of long-term debt are as follows:\n1994. . . . . . . . . . . $25,372,084 1995. . . . . . . . . . . 403,174 1996. . . . . . . . . . . 437,407 1997. . . . . . . . . . . 474,656 1998. . . . . . . . . . . 515,062 ===========\n(1) A description of the discussions between JMB\/San Jose and the mortgage lender on the 150 Almaden and 185 Park Avenue buildings is contained in Note 3(b) of Notes to Consolidated Financial Statements of JMB Income - XI.\nSuch note is hereby incorporated herein by reference. JMB\/SAN JOSE ASSOCIATES (A GENERAL PARTNERSHIP)\nNOTES TO FINANCIAL STATEMENTS - CONTINUED\n(4) LEASES\nAs Property Lessor\nAt December 31, 1993, the Venture's principal asset is an office building complex. The Venture has determined that all leases relating to this property are properly classified as operating leases; therefore, rental income is reported when earned and the cost of the property, excluding the cost of the land, is depreciated over the estimated useful life. Leases with tenants range in term from one to twenty-five years and provide for fixed minimum rent and partial reimbursement of operating costs.\nMinimum lease payments, including amounts representing executory costs (e.g. taxes, maintenance, insurance) and any related profit, to be received in the future under the operating leases are as follows:\n1994 . . . . . . . . . . . . . . $ 7,563,161 1995 . . . . . . . . . . . . . . 6,626,946 1996 . . . . . . . . . . . . . . 5,573,226 1997 . . . . . . . . . . . . . . 4,508,323 1998 . . . . . . . . . . . . . . 4,187,855 Thereafter . . . . . . . . . . . 15,736,333 -----------\n$44,195,844 ===========\n(5) TRANSACTIONS WITH AFFILIATES\nFees, commissions and other expenses required to be paid by the Venture to the General Partners and their affiliates as of December 31, 1993 and for the years ended December 31, 1993, 1992 and 1991 were as follows:\nSCHEDULE X\nJMB\/SAN JOSE ASSOCIATES (A GENERAL PARTNERSHIP)\nSUPPLEMENTARY INCOME STATEMENT INFORMATION\nYEARS ENDED DECEMBER 31, 1993, 1992 AND 1991\nCHARGED TO COSTS AND EXPENSES ---------------------------------------------- 1993 1992 1991 ------------ ------------ ------------\nMaintenance and repairs. . $ 973,276 1,029,913 965,927\nDepreciation . . . . . . . 1,063,616 1,898,286 2,369,699\nAmortization of deferred expenses. . . . . . . . . 243,694 243,229 193,526\nTaxes:\nReal estate. . . . . . . 991,781 755,041 724,758\nOther. . . . . . . . . . 4,792 5,375 5,410\nAdvertising. . . . . . . . 17,484 -- 57,048 ========== ========= =========\nITEM 9.","section_9":"ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE\nThere were no changes of or disagreements with accountants during 1992 and 1993.\nPART III\nITEM 10.","section_9A":"","section_9B":"","section_10":"ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE PARTNERSHIP\nThe Managing General Partner of the Partnership is JMB Realty Corporation (\"JMB\"), a Delaware corporation. JMB has responsibility for all aspects of the Partnership's operations, subject to the requirement that sales of real property must be approved by the Associate General Partner of the Partnership, Income Associates-XI, L.P., an Illinois limited partnership with JMB as the sole general partner. The Associate General Partner shall be directed by a majority in interest of its limited partners (who are generally officers, directors and affiliates of JMB or its affiliates) as to whether to provide its approval of any sale of real property (or any interest therein) of the Partnership. Various relationships of the Partnership to the Managing General Partner and its affiliates are described under the caption \"Conflicts of Interest\" at pages 12-16 of the Prospectus, of which description is hereby incorporated herein by reference to Exhibit 3-A to the Partnership's Report on Form 10-K for December 31, 1992 (File No. 0-15966) dated March 19, 1993.\nThe names, positions held and length of service therein of each director and executive officer and certain officers of the Managing General Partner of the Partnership are as follows:\nSERVED IN NAME OFFICE OFFICE SINCE - ---- ------ ------------\nJudd D. Malkin Chairman 5\/03\/71 Director 5\/03\/71 Neil G. Bluhm President 5\/03\/71 Director 5\/03\/71 Jerome J. Claeys III Director 5\/09\/88 Burton E. Glazov Director 7\/01\/71 Stuart C. Nathan Executive Vice President 5\/08\/79 Director 3\/14\/73 A. Lee Sacks Director 5\/09\/88 John G. Schreiber Director 3\/14\/73 H. Rigel Barber Chief Executive Officer 8\/01\/93 Jeffrey R. Rosenthal Chief Financial Officer 8\/01\/93 Gary Nickele Executive Vice President 1\/01\/92 General Counsel 2\/27\/84 Ira J. Schulman Executive Vice President 6\/01\/88 Gailen J. Hull Senior Vice President 6\/01\/88 Howard Kogen Senior Vice President 1\/02\/86 Treasurer 1\/01\/91\nThere is no family relationship among any of the foregoing directors or officers. The foregoing directors have been elected to serve one-year terms until the annual meeting of the Managing General Partner to be held on June 7,\n1994. All of the foregoing officers have been elected to serve one-year terms until the first meeting of the Board of Directors held after the annual meeting of the Managing General Partner to be held on June 7, 1994. There are no arrangements or understandings between or among any of said directors or officers and any other person pursuant to which any director or officer was elected as such.\nJMB is the corporate general partner of Carlyle Real Estate Limited Partnership-VII (\"Carlyle-VII\"), Carlyle Real Estate Limited Partnership-IX (\"Carlyle-IX\"), Carlyle Real Estate Limited Partnership-X (\"Carlyle-X\"), Carlyle Real Estate Limited Partnership-XI (\"Carlyle-XI\"), Carlyle Real Estate Limited Partnership-XII (\"Carlyle-XII\"), Carlyle Real Estate Limited Partnership-XIII (\"Carlyle-XIII\"), Carlyle Real Estate Limited Partnership-XIV (\"Carlyle-XIV\"), Carlyle Real Estate Limited Partnership-XV (\"Carlyle-XV\"), Carlyle Real Estate Limited Partnership-XVI (\"Carlyle-XVI\"), Carlyle Real Estate Limited Partnership-XVII (\"Carlyle-XVII\"), JMB Mortgage Partners, Ltd. (\"Mortgage Partners\"), JMB Mortgage Partners, Ltd.-II (\"Mortgage Partners-II\"), JMB Mortgage Partners, Ltd.-III (\"Mortgage Partners-III\"), JMB Mortgage Partners, Ltd.-IV (\"Mortgage Partners-IV\"), Carlyle Income Plus, Ltd. (\"Carlyle Income Plus\") and Carlyle Income Plus, Ltd.-II (\"Carlyle Income Plus-II\") and the managing general partner of JMB Income Properties, Ltd.-IV (\"JMB Income-IV\"), JMB Income Properties, Ltd.-V (\"JMB Income-V\"), JMB Income Properties, Ltd.-VI (\"JMB Income-VI\"), JMB Income Properties, Ltd.-VII (\"JMB Income-VII\"), JMB Income Properties, Ltd.-VIII (\"JMB Income-VIII\"), JMB Income Properties, Ltd.-IX (\"JMB Income-IX\"), JMB Income Properties, Ltd.-X (\"JMB Income-X\"), JMB Income Properties, Ltd.-XI (\"JMB Income-XI\"), JMB Income Properties, Ltd.-XII (\"JMB Income-XII\") and JMB Income Properties, Ltd.-XIII (\"JMB Income-XIII\"). Most of the foregoing directors and officers are also officer and\/or directors of various affiliated companies of JMB including Arvida\/JMB Managers, Inc. (the general partner of Arvida\/JMB Partners, L.P. (\"Arvida\")), Arvida\/JMB Managers-II, Inc. (the general partner of Arvida\/JMB Partners, L.P.-II (\"Arvida-II\")) and Income Growth Managers, Inc. (the corporate general partner of IDS\/JMB Balanced Income Growth, Ltd. (\"IDS\/BIG\")). Most of such directors and officers are also partners of certain partnerships which are associate general partners in the following real estate limited partnerships: Carlyle-VII, Carlyle-IX, Carlyle-X, Carlyle-XI, Carlyle-XII, Carlyle-XIII, Carlyle-XIV, Carlyle-XV, Carlyle-XVI, Carlyle-XVII, JMB Income-VI, JMB Income-VII, JMB Income-VIII, JMB Income-IX, JMB Income-X, JMB Income-XII, JMB Income-XIII, Mortgage Partners, Mortgage Partners-II, Mortgage Partners-III, Mortgage Partners-IV, Carlyle Income Plus, Carlyle Income Plus-II and IDS\/BIG.\nThe business experience during the past five years of each such director and officer of the Managing General Partner of the Partnership in addition to that described above is as follows:\nJudd D. Malkin (age 56) is an individual general partner of JMB Income-IV and JMB Income-V. Mr. Malkin has been associated with JMB since October, 1969. He is a Certified Public Accountant.\nNeil G. Bluhm (age 56) is an individual general partner of JMB Income-IV and JMB Income-V. Mr. Bluhm has been associated with JMB since August, 1970. He is a member of the Bar of the State of Illinois and a Certified Public Accountant.\nJerome J. Claeys III (age 51) (Chairman and Director of JMB Institutional Realty Corporation) has been associated with JMB since September, 1977. He holds a Masters degree in Business Administration from the University of Notre Dame.\nBurton E. Glazov (age 55) has been associated with JMB since June, 1971 and served as an Executive Vice President of JMB until December 1990. He is a member of the Bar of the State of Illinois and a Certified Public Accountant.\nStuart C. Nathan (age 52) has been associated with JMB since July, 1972. He is a member of the Bar of the State of Illinois.\nA. Lee Sacks (age 60) (President and Director of JMB Insurance Agency, Inc.) has been associated with JMB since December, 1972.\nJohn G. Schreiber (age 47) has been associated with JMB since December, 1970 and served as an Executive Vice President of JMB until December 1990. He holds a Masters degree in Business Administration from Harvard University Graduate School of Business.\nH. Rigel Barber (age 44) has been associated with JMB since March, 1982. He holds a J.D. degree from Northwestern Law School and is a member of the Bar of the State of Illinois.\nJeffrey R. Rosenthal (age 42) has been associated with JMB since December, 1987. He is a Certified Public Accountant.\nGary Nickele (age 41) has been associated with JMB since February, 1984. He holds a J.D. degree from the University of Michigan Law School and is a member of the Bar of the State of Illinois.\nIra J. Schulman (age 42) has been associated with JMB since February, 1983. He holds a Masters degree in Business Administration from the University of Pittsburgh.\nGailen J. Hull (age 45) has been associated with JMB since March 1982. He holds a Masters degree in Business Administration from Northern Illinois University and is a Certified Public Accountant.\nHoward Kogen (age 58) has been associated with JMB since March, 1973. He is a Certified Public Accountant.\nITEM 11.","section_11":"ITEM 11. EXECUTIVE COMPENSATION\nThe Partnership has no officers or directors. The General Partners of the Partnership are entitled to receive a share of cash distributions, when and as cash distributions are made to the Investors, and a share of profits or losses as described under the caption \"Compensation and Fees\" at pages 8-12, \"Cash Distributions\" at pages 56-58, \"Allocation of Profits or Losses for Tax Purposes\" at page 58 and \"Cash Distributions; Allocations of Profits and Losses\" at pages A-8 to A-12 of the Partnership Agreement included as an exhibit to the Prospectus, which descriptions are hereby incorporated herein by reference to Exhibit 3-A to Partnership's Report on Form 10-K for December 31, 1992 (File No. 0-15966) dated March 19, 1993. Reference is also made to Notes 5 and 7 for a description of such transactions, distributions and allocations. In 1993, 1992 and 1991, no cash distributions were paid to the General Partners.\nAffiliates of the Managing General Partner provided property management services to the Partnership for 1993 for the Riverside Square Mall in Hackensack, New Jersey at a fee not to exceed 4% of the fixed and percentage rent of property, plus leasing commissions and the Bank of Delaware Office Building in Wilmington, Delaware at fees calculated at 3% of the gross revenues of the property plus leasing commissions. In 1993, such affiliates earned property management and leasing fees amounting to $325,429, all of which was paid as of December 31, 1993. As set forth in the Prospectus of the Partnership, the Managing General Partner must negotiate such agreements on terms no less favorable to the Partnership than those customarily charged for similar services in the relevant geographical area (but in no event at rates greater than 6% of the gross receipts from a property), and such agreements must be terminable by either party thereto, without penalty, upon 60 days' notice.\nJMB Insurance Agency, Inc., an affiliate of the Managing General Partner, earned and received insurance brokerage commissions in 1993 aggregating $54,478 in connection with the provision of insurance coverage for certain of the real property investments of the Partnership and its venture. Such commissions are at rates set by insurance companies for the classes of coverage provided.\nThe General Partners of the Partnership may be reimbursed for their direct salaries and expenses relating to the administration of the Partnership and the operation of the Partnership's real property investments. In 1993, an affiliate of the General Partners earned reimbursement for such expenses in the amount of $110,665, of which $87,093 was unpaid at December 31, 1993.\nThe Partnership is permitted to engage in various transactions involving affiliates of the Managing General Partner of the Partnership, as described under the captions \"Compensation and Fees\" at pages 8-12, \"Conflicts of Interest\" at pages 12-16 and \"Rights, Powers and Duties of General Partners\" at pages A-12 to A-22 of the Partnership Agreement, included as an exhibit to the Prospectus, which descriptions are hereby incorporated herein by reference\nto Exhibit 3-A to Partnership's Report on Form 10-K for December 31, 1992 (File No. 0-15966) dated March 19, 1993. The relationship of the Managing General Partner (and its directors and officers) to its affiliates is set forth above in Item 10 above and Exhibit 21 hereto.\nITEM 12.","section_12":"ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT\n(a) No person or group is known by the Partnership to own beneficially more than 5% of the outstanding Interests of the Partnership.\n(b) The Managing General Partner and its officers and directors own the following Interests of the Partnership:\nNAME OF AMOUNT AND NATURE BENEFICIAL OF BENEFICIAL PERCENT TITLE OF CLASS OWNER OWNERSHIP OF CLASS - -------------- ---------- ----------------- --------\nLimited Partnership JMB Realty Corporation 5 Interests (1) Less than 1% Interests indirectly\nLimited Partnership Managing General 5 Interests (1) Less than 1% Interests Partner and its indirectly officers and directors as a group\n- --------------\n(1) Includes 5 Interests owned by the initial limited partner of the Partnership. The voting and investment power of which is shared by JMB Realty Corporation and an affiliate.\nNo officer or director of the Managing General Partner of the Partnership possesses a right to acquire beneficial ownership of Interests of the Partnership.\n(c) There exists no arrangement, known to the Partnership, the operation of which may at a subsequent date result in a change in control of the Partnership.\n\/TABLE\nITEM 13.","section_13":"ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS\nThere were no significant transactions or business relationships with the Managing General Partner, affiliates or their management other than those described in Items 10 and 11 above.\nPART IV\nITEM 14.","section_14":"ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K\n(a) The following documents are filed as part of this report:\n1. Financial Statements (See Index to Financial Statements filed with this annual report).\n2. Exhibits.\n3-A. The Prospectus of the Partnership dated July 11, 1984 as supplemented July 24, 1984 and November 26, 1984, as filed with the Commission pursuant to Rules 424(b) and 424(c), is hereby incorporated herein by reference. Copies of pages 8-12, 56-58 and A-8 to A-12 are hereby incorporated herein by reference to Exhibit 3-A to the Partnership's Report on Form 10-K for December 31, 1992 (File No. 0-15966) dated March 19, 1993.\n3-B. Amended and Restated Agreement of Limited Partnership set forth as Exhibit A to the Prospectus, which agreement is hereby incorporated herein by reference to Exhibit 3-B to the Partnership's Report on Form 10-K for December 31, 1992 (File No. 0-15966) dated March 19, 1993.\n4-A. Mortgage loan agreement between the Partnership and Teachers Insurance and Annuity Association dated October 19, 1983 relating to Riverside Square are hereby incorporated by reference to the properties prospectus on Form S-11 (File No. 2-90503) dated July 11, 1984.\n4-B. Mortgage loan agreement between the Partnership and Equitable Real Estate Investment Management, Inc. dated February 28, 1989 relating to the Bank of Delaware is hereby incorporated herein by reference to Exhibit 4-B to the Partnership's Report on Form 10-K for December 31, 1992 (File No. 0-15966) dated March 19, 1993.\n4-C. Mortgage loan agreement between San Jose and Connecticut General Life Insurance Co. dated June 20, 1985 relating to Park Center Plaza are hereby incorporated by reference to the Partnership's Report on Form 8-K (File No. 0-15966) dated June 20, 1985.\n10-A. Acquisition documents relating to the purchase by the Partnership of Riverside Square in Hackensack, New Jersey are hereby incorporated by reference to the Partnership's prospectus on Form S-11 (File No. 2-90503) dated July 11, 1984.\n10-B. Acquisition documents relating to the purchase by the Partnership of the Bank of Delaware Office Building in Wilmington, Delaware are hereby incorporated by reference to the Partnership's Report on Form 8-K (File No. 0-15966) dated December 27, 1984.\n10-C. Acquisition documents including the venture agreement relating to the purchase by the Partnership of Park Center Plaza in San Jose, California are hereby incorporated by reference to the Partnership's Report on Form 8-K (File No. 0-15966) dated June 20, 1985.\n10-D. Sale documents and exhibits thereto relating to the Partnership's sale of the Genesee Valley Shopping Center in Flint, Michigan are hereby incorporated by reference to the Partnership's Report on Form 8-K (File No. 0-15966) dated June 29, 1990.\n21. List of Subsidiaries\n24. Powers of Attorney\n--------------\nAlthough certain additional long-term debt instruments of the Registrant have been excluded from Exhibit 4 above, pursuant to Rule 601(b)(4)(iii), the Registrant commits to provide copies of such agreements to the Securities and Exchange Commissions upon request.\n(b) No Reports on Form 8-K were required or filed since the beginning of the last quarter of the period covered by this report.\nNo annual report or proxy material for the year 1993 has been sent to the Partners of the Partnership. An annual report will be sent to the Partners subsequent to this filing.\nSIGNATURES\nPursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the Partnership has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.\nJMB INCOME PROPERTIES, LTD. - XI\nBy: JMB Realty Corporation Managing General Partner\nGAILEN J. HULL By: Gailen J. Hull Senior Vice President Date:March 25, 1994\nPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.\nBy: JMB Realty Corporation Managing General Partner\nJUDD D. MALKIN* By: Judd D. Malkin, Chairman and Director Date:March 25, 1994\nNEIL G. BLUHM* By: Neil G. Bluhm, President and Director Date:March 25, 1994\nH. RIGEL BARBER* By: H. Rigel Barber, Chief Executive Officer Date:March 25, 1994\nJEFFREY R. ROSENTHAL* By: Jeffrey R. Rosenthal, Chief Financial Officer Principal Financial Officer Date:March 25, 1994\nBy: Gailen J. Hull, Senior Vice President Principal Accounting Officer Date:March 25, 1994\nA. LEE SACKS* By: A. Lee Sacks, Director Date:March 25, 1994\nBy: STUART C. NATHAN* Stuart C. Nathan, Executive Vice President and Director Date:March 25, 1994\n*By:GAILEN J. HULL, Pursuant to a Power of Attorney\nGAILEN J. HULL By: Gailen J. Hull, Attorney-in-Fact Date:March 25, 1994\nJMB INCOME PROPERTIES, LTD. - XI\nEXHIBIT INDEX\nDOCUMENT INCORPORATED BY REFERENCE Page ------------ ----\n3-A. Pages 8-12, 56-58 and A-8 to A-12 of the Prospectus dated July 11, 1984 Yes\n3-B. Amended and Restated Agreement of Limited Partnership Yes\n4-A. Mortgage loan agreement related to Riverside Square Yes\n4-B. Mortgage loan agreement related to Bank of Delaware Yes\n4-C. Mortgage loan agreement related to Park Center Financial Center Yes\n10-A. Acquisition documents related to Riverside Square Yes\n10-B. Acquisition documents related to Bank of Delaware Yes\n10-C. Acquisition documents related to Park Center Plaza Yes\n10-D. Sale documents related to Genesee Valley Yes\n21. List of Subsidiaries No\n24. Powers of Attorney","section_15":""}
{"filename":"763901_1993.txt","cik":"763901","year":"1993","section_1":"ITEM 1 BUSINESS\nBANPONCE CORPORATION is a diversified, publicly owned bank holding company (NASDAQ symbol: BPOP), incorporated under the General Corporation Law of Puerto Rico in November 1984. It provides a wide variety of financial services through its principal subsidiaries: Banco Popular de Puerto Rico (\"Banco Popular\"), Vehicle Equipment Leasing Company, Inc. (\"VELCO\") and Popular International Bank, Inc. (PIB). BanPonce Corporation is subject to the provisions of the U.S. Bank Holding Company Act of 1956 (the \"BHC Act\") and, accordingly, subject to the supervision and regulation of the Board of Governors of the Federal Reserve System. BANCO POPULAR DE PUERTO RICO is a member of the Federal Reserve System and is also subject to the supervision of the Office of the Commissioner of Financial Institutions of the Commonwealth of Puerto Rico and the Superintendent of Banks of the State of New York. Deposits of Banco Popular are insured by the Federal Deposit Insurance Corporation. Banco Popular is the Corporation's full-service commercial banking subsidiary and Puerto Rico's largest banking institution, with $11.5 billion in assets, $8.5 billion in deposits, and a delivery system of 165 branches throughout Puerto Rico, 30 branches in New York City, one in Chicago, one in Los Angeles, 7 branches in the U.S. Virgin Islands and one in the British Virgin Islands. In addition, Banco Popular has two subsidiaries, POPULAR LEASING & RENTAL, INC., Puerto Rico's second largest vehicle leasing and daily rental company, and POPULAR CONSUMER SERVICES, INC., a small-loans company with 26 offices operating under the name of Best Finance. VELCO is a wholly owned subsidiary of BanPonce Corporation engaged in finance leasing and daily rental of motor vehicles to corporations and professionals. It is the leading leasing operation in Puerto Rico. PIB, incorporated under the Puerto Rico International Banking Center Act, owns all issued and outstanding stock of BANPONCE FINANCIAL CORP.(\"FINANCIAL\"), a Delaware Corporation. SPRING FINANCIAL SERVICES, INC., also a Delaware Corporation and a wholly owned subsidiary of Financial, is a diversified consumer finance company engaged in the business of making personal and mortgage loans, and dealer finance through 58 offices located in 14 states.\nThe Corporation took on its present form at the end of 1990 when Banco Popular, with assets of $5.9 billion, acquired the \"old\" BanPonce Corporation (including its main subsidiary bank, Banco de Ponce), with assets of $3.1 billion (the \"Merger\"). The name of BanPonce was used for the parent company, while the name of Banco Popular de Puerto Rico was used for the subsidiary bank. While Banco Popular had long been the leading bank in Puerto Rico, its acquisition of \"old\" BanPonce Corporation at year-end 1990 increased its assets by 50% and widened its market share as the Merger joined the institutions that held the first and third positions in many market segments.\nThe Corporation is a legal entity separate and distinct from its subsidiaries. There are various legal limitations governing the extent to which the Corporation's banking subsidiaries may extend credit, pay dividends or otherwise supply funds to, or engage in transactions with, the Corporation or certain of its other subsidiaries. The rights of the Corporation to participate in any distribution of assets of any subsidiary upon its liquidation or reorganization or otherwise are subject to the prior claims of creditors of that subsidiary, except to the extent that the Corporation may itself be a creditor of that subsidiary and its claims are recognized. Claims on the Corporation's subsidiaries by creditors other than the Corporation include long-term debt and substantial obligations with respect to deposit liabilities, federal funds purchased, securities sold under repurchase agreements and commercial paper, as well as various other liabilities.\nThe Corporation's business is described on pages 25 through 27 and pages 31 through 42 of the Business Review Section of the Annual Report to shareholders for the fiscal year ended December 31, 1993, which information is incorporated herein by reference, and in the following paragraphs.\nREGULATION AND SUPERVISION GENERAL\nThe Corporation is a bank holding company subject to supervision and regulation by the Board of Governors of the Federal Reserve System (the \"Federal Reserve Board\") under the Bank Holding Company Act. As a bank holding company, the Corporation's activities and those of its banking and nonbanking subsidiaries are limited to the business of banking and activities closely related or incidental to banking, and the Corporation may not directly or indirectly acquire the ownership or control of more than 5% of any class of voting shares or substantially all of the assets of any company, including a bank, without the prior approval of the Federal Reserve Board.\nBanco Popular is considered a foreign bank for purposes of the International Banking Act of 1978 (the \"IBA\"). Under the IBA and the BHC Act, the Corporation and Banco Popular are not permitted to operate a branch or agency, or acquire more than 5% of any class of the voting shares of, or substantially all the assets of, or control of an additional bank or bank holding company that is located outside of their \"home state\", except that (i) the Corporation may acquire control of a bank in a state if the laws of that state explicitly authorize a bank holding company from such bank holding company's home state to do so and (ii) Banco Popular may continue to operate a \"grandfathered\" branch or agency. The Commonwealth of Puerto Rico is not considered a state for purposes of these geographic limitations. Banco Popular has designated the state of New York as its home state. In addition, some states have laws prohibiting or restricting foreign banks from acquiring banks located in such states and treat Puerto Rico's banks and bank holding companies as foreign banks for such purposes.\nBanco Popular operates branches in Chicago and Los Angeles that are not grandfathered for purposes of the IBA. The Federal Reserve Board has required that Banco Popular conform their existence to the legal requirements set forth above. Banco Popular has petitioned the Federal Reserve Board for a period of four years from December 31, 1990 to conform these activities to the requirements of the IBA and to obtain the necessary approvals of Illinois and California regulatory authorities to maintain these two facilities. There can be no assurance that the Federal Reserve Board will grant Banco Popular's request or that Banco Popular will be able to obtain the regulatory approvals of California and Illinois authorities necessary to maintain these two facilities.\nBanco Popular is subject to supervision and examination by applicable federal, state and Puerto Rican banking agencies, including the Federal Reserve Board. Banco Popular is insured by, and therefore subject to the regulations of, the Federal Deposit Insurance Corporation (the \"FDIC\"), and to the requirements and restrictions under federal, state and Puerto Rican law, including requirements to maintain reserves against deposits, restrictions on the types and amounts of loans that may be granted and the interest that may be charged thereon, and limitations on the types of investments that may be made and the types of services that may be offered. Various consumer laws and regulations also affect the operations of Banco Popular. In addition to the impact of regulation, commercial banks are affected significantly by the actions of the Federal Reserve Board as it attempts to control the money supply and credit availability in order to influence the economy.\nAs a result of the enactment of the Financial Institutions Reform, Recovery and Enforcement Act on August 9, 1989, a depository institution insured by the FDIC can be held liable for any loss incurred by, or reasonably expected to be incurred by, the FDIC after August 9, 1989, in connection with (i) the default of a commonly controlled FDIC-insured depository institution or (ii) any assistance provided by the FDIC to a commonly controlled depository institution in danger of default.\nThe Federal Deposit Insurance Corporation Improvement Act of 1991 (\"FDICIA\") was enacted on December 19, 1991. FDICIA substantially revises the depository institutions regulatory and funding provisions of the Federal Deposit Insurance Act and makes revisions to several other federal banking statutes.\nAmong other things, FDICIA requires the federal banking regulators to take prompt corrective action in respect of depository institutions that do not meet minimum capital requirements. FDICIA established five capital tiers: \"well capitalized\", \"adequately capitalized,\" \"undercapitalized\", \"significantly undercapitalized\", and \"critically undercapitalized\".\nA depository institution is considered \"well capitalized\" if it has (i) a total risk-based capital ratio of 10% or greater, (ii) a Tier 1 risk-based capital ratio of 6% or greater, (iii) a leverage ratio of 5% or greater and (iv) is not subject of any order or written directive to meet and maintain a specific capital level. An \"adequately capitalized\" depository institution is one that has (i) a total risk-based capital ratio of 8% or greater, (ii) a Tier 1 risk-based capital ratio of 4% or greater and (iii) a leverage ratio of 4% or greater (or, in the case of a bank with the highest examination rating, 3%). A depository institution is considered (A) \"undercapitalized\" if it does not meet any of the above definitions; (B) \"significantly undercapitalized\" if it has (i) a total risk-based capital ratio of less than 6%, (ii) a Tier 1 risk-based capital ratio of less than 3% and (iii) a leverage ratio of less than 3%; and (C) \"critically undercapitalized\" if it has a ratio of tangible equity to total assets less than or equal to 2%. A depository institution may be deemed to be in a capitalization category that is lower than is indicated by its actual capital position if it receives a less than satisfactory examination rating in any one of the four rating categories. As of the date hereof, Banco Popular is considered \"well-capitalized\".\nFDICIA generally prohibits a depository institution from making any capital distribution (including payment of a dividend) or paying any management fee to its holding company if the depository institution would thereafter be undercapitalized. Undercapitalized depository institutions are subject to restrictions on borrowing from the Federal Reserve System. In addition, undercapitalized depository institutions are subject to growth limitations and are required to submit capital restoration plans. A depository institution's holding company must guarantee the capital plan, up to an amount equal to the lesser of five percent of the depository institution's assets at the time it becomes undercapitalized or the amount of the capital deficiency when the institution fails to comply with the plan. The federal banking agencies may not accept a capital plan without determining, among other things, that the plan is based on realistic assumptions and is likely to succeed in restoring the depository institution's capital. If a depository institution fails to submit an acceptable plan, it is treated as if it is significantly undercapitalized.\nSignificantly undercapitalized depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient stock to become adequately capitalized, requirements to reduce total assets, and cessation of receipt of deposits from correspondent banks. Critically undercapitalized depository institutions are subject to appointment of a receiver or conservator.\nUnder FDICIA, a depository institution that is not well capitalized is generally prohibited from accepting brokered deposits and offering interest rates on deposits higher than the prevailing rates in its market.\nUnder FDICIA, the FDIC is permitted to provide financial assistance to an insured bank before appointment of a conservator or\nreceiver only under limited circumstances. The FDIC's policy is that for such assistance to be provided, existing shareholders and debt holders must make substantial concessions.\nHOLDING COMPANY STRUCTURE\nBanco Popular is subject to restrictions under federal law that limit the transfer of funds by Banco Popular to the Corporation and its nonbanking subsidiaries, whether in the form of loans, other extensions of credit, investments or asset purchases. Such transfers by Banco Popular to the Corporation or any nonbanking subsidiary of the Corporation are limited in amount to 10% of Banco Popular's capital and surplus and, with respect to the Corporation and all nonbanking subsidiaries, to an aggregate of 20% of Banco Popular's capital and surplus. Furthermore, such loans and extensions of credit are required to be secured in specified amounts.\nUnder Federal Reserve Board policy, a bank holding company is expected to act as a source of financial strength to each of its subsidiary banks and to commit resources to support each such subsidiary bank. This support may be required at times when, absent such policy, the bank holding company might not otherwise provide such support. Any capital loans by a bank holding company to any of its subsidiary banks are subordinated in right of payment to deposits and to certain other indebtedness of such subsidiary bank. In the event of a bank holding company's bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to a priority of payment.\nBecause the Corporation is a holding company, its right to participate in the assets of any subsidiary upon the latter's liquidation or reorganization will be subject to the prior claims of the subsidiary's creditors (including depositors in the case of bank subsidiaries) except to the extent that the Corporation itself is a creditor with recognized claims against the subsidiary.\nDIVIDEND RESTRICTIONS\nVarious statutory provisions limit the amount of dividends Banco Popular can pay to the Corporation without regulatory approval. The principal source of cash flow for the Corporation is dividends from Banco Popular.\nAs a member bank subject to the regulations of the Federal Reserve Board, Banco Popular must obtain the approval of the Federal Reserve Board for any dividend if the total of all dividends declared by the member bank in any calendar year would exceed the total of its net profits, as defined by the Federal Reserve Board, for that year, combined with its retained net profits for the preceding two years. In addition, a member bank may not pay a dividend in an amount greater than its undivided profits then on hand after deducting its losses and bad debts. For this purpose, bad debts are generally defined to\ninclude the principal amount of loans that are in arrears with respect to interest by six months or more unless such loans are fully secured and in the process of collection. Moreover, for purposes of this limitation, a member bank is not permitted to add the balance in its allowance for loan losses account to its undivided profits then on hand, however, it may net the sum of its bad debts as so defined against the balance in its allowance for loan losses account and deduct from undivided profits only bad debts as so defined in excess of that account. At December 31, 1993, Banco Popular could have declared a dividend of approximately $123,794,000 without the approval of the Federal Reserve Board.\nThe payment of dividends by Banco Popular may also be affected by other regulatory requirements and policies, such as the maintenance of adequate capital. If, in the opinion of the applicable regulatory authority, a bank under its jurisdiction is engaged in, or is about to engage in, an unsafe or unsound practice (which, depending on the financial condition of the bank, could include the payment of dividends), such authority may require, after notice and hearing, that such bank cease and desist from such practice. The Federal Reserve Board and the FDIC have issued policy statements that provide that insured bank and bank holding companies should generally pay dividends only out of current operating earnings. In addition, all insured depository institutions are subject to the capital-based limitations described under FDICIA.\nFDIC INSURANCE ASSESSMENTS\nBanco Popular is subject to FDIC deposit insurance assessments for the Bank Insurance Fund (the \"BIF\"). Pursuant to FDICIA, the FDIC has adopted a risk-based assessment system, under which the assessment rate for an insured depository institution varies according to the level of risk incurred in its activities. An institution's risk category is based partly upon whether the institution is well capitalized, adequately capitalized or less that adequately capitalized. Each insured depository institution is also assigned to one of the following \"supervisory subgroups\": \"A\", \"B\" or \"C\". Group \"A\" institutions are financially sound institutions with only a few minor weaknesses; Group \"B\" institutions are institutions that demonstrate weaknesses which, if not corrected, would result in significant deterioration; and Group \"C\" institutions are institutions for which there is a substantial probability that the FDIC will suffer a loss in connection with the institution unless effective action is taken to correct the areas of weakness. Based on its capital and supervisory subgroups, each BIF member institution is assigned an annual FDIC assessment rate varying between 0.23% and 0.31%. It remains possible that assessments may be raised to higher levels in the future.\nCAPITAL ADEQUACY\nThe information in Table N, \"Capital Adequacy Data\", on page 19 of the Financial Review Section of the Corporation's Annual Report to shareholders for the year ended December 31, 1993, is incorporated\nherein by reference.\nThe Federal Reserve Board has adopted risk-based capital guidelines for bank holding companies. Under the guidelines the minimum ratio of qualifying total capital to risk-weighted assets (including certain off-balance sheet items, such as standby letters of credit) is 8%. At least half of the total capital is to be comprised of stockholders' common equity, retained earnings, non-cumulative perpetual preferred stock, and a limited amount of cumulative perpetual preferred stock less goodwill (\"Tier 1 Capital\"). The remainder (\"Tier 2 Capital\") may consist of a limited amount of subordinated debt, other preferred stock, certain other instruments, and a limited amount of loan and lease loss reserves.\nIn addition, the Federal Reserve Board has established minimum leverage ratio (Tier 1 Capital to quarterly average assets) guidelines for bank holding companies. These guidelines provide for a minimum leverage ratio of 3% for bank holding companies that meet certain specified criteria, including that they have the highest regulatory rating. All other bank holding companies are required to maintain a leverage ratio of 3% plus an additional cushion of at least 100 to 200 basis points. The guidelines also provide that banking organizations experiencing internal growth or making acquisitions are expected to maintain strong capital positions substantially above the minimum supervisory levels, without significant reliance on intangible assets. Furthermore, the guidelines indicate that the Federal Reserve Board will continue to consider a \"tangible Tier 1 leverage ratio\" in evaluating proposals for expansion or new activities. The tangible Tier 1 leverage ratio is the ratio of a banking organization's Tier 1 Capital, less all intangibles, to total assets, less all intangibles. The Federal Reserve Board has not advised the Corporation of any specific minimum leverage ratio applicable to it.\nEffective for the periods ending on or after March 15, 1993, the Federal Reserve Board adopted regulations with respect to risk-based and leverage capital ratios that would require most intangibles, including core deposit intangibles, to be deducted from Tier 1 capital. The regulations, however, permit the inclusion of a limited amount of intangibles related to purchased mortgage servicing rights and purchased credit card relationships and includes a \"grandfather\" provision permitting the continued inclusion of certain existing intangibles.\nBanco Popular is subject to similar risk-based and leverage capital requirements adopted by the Federal Reserve Board. As of December 31, 1993, Banco Popular had a tier 1 capital ratio of 11.85%, a total capital ratio of 13.72% and a leverage ratio of 6.96%.\nFailure to meet capital guidelines could subject a bank to a variety of enforcement remedies, including the termination of deposit insurance by the FDIC, and to certain restrictions on its business.\nBank regulators continue to indicate their desire to raise capital\nrequirements applicable to banking organizations beyond their current levels. However, management is unable to predict whether and when higher capital requirements would be imposed and, if so, at what levels and on what schedule.\nThe following table reflects the capital position of the Corporation as of December 31, 1993 and December 31, 1992.\nThe table below describes the components of the Corporations' Tier 1 and Tier 2 Capital.\nPuerto Rico Regulation\nAs a commercial bank organized under the laws of the Commonwealth of Puerto Rico (the \"Commonwealth\"), Banco Popular is subject to supervision, examination and regulation by the Office of the Commissioner of Financial Institutions of the Commonwealth (the \"Office of the Commissioner\"), pursuant to the Puerto Rico Banking Act of 1933, as amended (the \"Banking Law\").\nSection 27 of the Banking Law requires that at least ten percent (10%) of the yearly net income of the Bank be credited annually to a reserve fund. This apportionment shall be done every year until the\nreserve fund shall be equal to ten percent (10%) of the total deposits or the total paid-in capital, whichever is greater. At the end of its most recent fiscal year, the Bank had an adequate reserve fund established.\nSection 27 of the Banking Law also provides that when the expenditures of a bank are greater than the receipts, the excess of the former over the latter shall be charged against the undistributed profits of the bank, and the balance, if any, shall be charged against the reserve fund, as a reduction thereof. If there is no reserve fund sufficient to cover such balance in whole or in part, the outstanding amount shall be charged against the capital account and no dividend shall be declared until said capital has been restored to its original amount and the reserve fund to 20% of the original capital.\nSection 16 of the Banking Law requires every bank to maintain a legal reserve which shall not be less than 20% of its demand liabilities, except government deposits (federal, state and municipal) which are secured by actual collateral. However, if a bank becomes a member of the Federal Reserve System, the 20% legal reserve shall not be effective and the reserve requirements demanded by the Federal Reserve System shall be applicable. Pursuant to an order of the Board of Governors dated November 24, 1982, the Bank has been exempted from such reserve requirements with respect to deposits payable in Puerto Rico.\nSection 14 of the Banking Law authorizes the Bank to conduct certain financial and related activities directly or through subsidiaries, including finance leasing of personal property and operating a small loans company. Banco Popular engages in these activities through its wholly-owned subsidiaries, Popular Leasing & Rental, Inc. and Popular Consumer Services, Inc., respectively, both of which are organized and operate solely in Puerto Rico.\nEmployees\nAt December 31, 1993, the Corporation employed 7,439 persons. None of its employees are represented by a collective bargaining group.\nITEM 2.","section_1A":"","section_1B":"","section_2":"ITEM 2. PROPERTIES\nAs of December 31, 1993, the Bank owned (and wholly or partially occupied) approximately 65 branches and other facilities throughout the Commonwealth, 15 branches in New York, and a branch in Los Angeles. In addition, as of such date, the Bank leased properties for branch operations in approximately 105 locations in Puerto Rico, 15 locations in New York, 7 locations in the U.S Virgin Islands, one location in British Virgin Islands and one location in Chicago . The Corporation's management believes that each of its facilities is well-maintained and suitable for its purpose. The principal properties owned by the Bank for banking operations and other services are described below:\nPopular Center, the metropolitan area headquarters building, located at 209 Munoz Rivera Avenue, Hato Rey, Puerto Rico, a 20 story\noffice building. Approximately 60% of the office space is leased to outside tenants.\nHato Rey Center, a 23 story office structure located at 268 Munoz Rivera Avenue, Hato Rey, Puerto Rico. The office space is mostly rented to outside tenants.\nCupey Center Complex, two buildings of three and two stories, respectively, located at Cupey, Rio Piedras, Puerto Rico. The computer center, operational and support services, and a recreational and training center for employees are some of the main activities conducted at these facilities.\nStop 22 - Santurce building, a twelve story structure located in Santurce, Puerto Rico. A branch, the accounting department, the human resources division, the auditing department and the international division are the main activities conducted at this facility.\nSan Juan building, a twelve story structure located at Old San Juan, Puerto Rico. The Bank occupies 50% of the basement, the entire ground floor, the mezzanine and the 10th floor. Most of the rest of the building is rented to outside tenants.\nMortgage Loan Center, a seven story building located at 153 Ponce de Leon Avenue, Hato Rey, Puerto Rico, is fully occupied by the mortgage loans and mortgage servicing departments.\nLos Angeles building, a nine story structure located at 354 South Spring Street, Los Angeles, California in which office space is mostly rented to outside tenants.\nNew York building, a nine story structure with two underground levels located at 7 West 51th Street, New York City, where approximately 54% of the office space is used for banking operations. The remaining space is rented or available for rent to outside tenants.\nITEM 3.","section_3":"ITEM 3. LEGAL PROCEEDINGS\nThe Corporation and its subsidiaries are defendants in various lawsuits arising in the ordinary course of business. Management is of the opinion that the aggregate liabilities, if any, arising from such actions would not have a material adverse effect in the financial position of the Corporation.\nITEM 4.","section_4":"ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS\nNot Applicable.\nPART II\nITEM 5.","section_5":"ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS\nThe information contained under Table 0, \"Stock Performance\", on page 20, and under the captions \"Common Stock\" and \"Dividends\", on page 19 of the Financial Review Section of the Corporation's Annual Report to shareholders for the year ended December 31, 1993, is incorporated herein by reference.\nInformation concerning legal or regulatory restrictions on the payment of dividends by the Corporation and the Bank is contained under the caption \"Regulation and Supervision\" in Item 1 herein. In addition, the information contained in Notes 13 and 14 to the Consolidated Financial Statements describing various contractual restrictions on the payments of dividends by the Corporation and the Bank is incorporated herein by reference.\nThe Corporation currently has outstanding Senior Notes due January 14, 1997 in the aggregate principal amount of $30,000,000 (the \"1997 Senior Notes\"). The 1997 Senior Notes contain various covenants, which, among others, restrict the payment of dividends. The 1997 Senior Notes prohibit the Corporation from paying dividends or making any other distributions with respect to the Corporation's Common Stock if such aggregate distribution exceeds $50,000,000 plus 50% of consolidated net income (or minus 100% of consolidated net loss), computed on a cumulative basis from January 1, 1992 to the date of payment of any such dividends or other distributions or if an event of default has occurred and is continuing.\nBanco Popular has outstanding $12,000,000 in subordinated notes due in June 28, 1996 (the \"1996 Subordinated Notes\") which contain certain restrictive covenants, including restrictions on the ability of Banco Popular to pay dividends to the Corporation. Pursuant to the covenants contained in the 1996 Subordinated Notes, Banco Popular may not pay dividends or other distribution on its common stock unless the sum of (i) 100% of its capital stock, (ii) its unimpaired reserve fund, and (iii) its undivided profits equals or exceeds the sum of (x) $80,000,000 and (y) the cumulative amount of all cash dividends or other distributions declared or paid after June 30, 1989.\nAs of December 31, 1993, the sum of (i) the capital stock of Banco Popular, (ii) its unimpaired reserve fund, and (iii) its undivided profits was $759,260,753. Dividends and other distributions made with respect to the common stock since June 30, 1989 amounted to $82,937,419 for purposes of the 1996 Subordinated Notes.\nIn addition, the 1996 Subordinated Notes provide that Banco Popular may not pay any dividend or other distributions on its common\nstock except out of undivided profits and only if, after giving effect to such distribution, the following conditions are satisfied: (i) funded debt (as defined in the agreements governing the 1996 Subordinated Notes) of Banco Popular would not exceed the sum of (a) 100% of its capital stock and (b) 50% of its reserve fund; (ii) undivided profits of Banco Popular would not be less than $1,000,000; (iii) certain amounts are transferred as required for redemption of the Subordinated Notes at maturity; and (iv) certain amounts are transferred as required for the redemption of other funded debt at maturity.\nAs of December 31, 1993, funded debt of Banco Popular was approximately $91.5 million, and the sum of 100% of its capital stock and 50% of its reserve fund is $264,233,274.\nAs of March 11, 1994, the Corporation had 5,306 stockholders of record, not including beneficial owners whose shares are held in record names of brokers or other nominees. The last sales price for the Corporation's Common Stock on such date, as quoted on the National Association of Securities Dealers Automated Quotation National Market System, was $31.875 per share.\nThe Puerto Rico Income Tax Act of 1954, as amended, generally imposes a withholding tax on the amount of any dividends paid by corporations to individuals, whether residents of Puerto Rico or not, trusts, estates and special partnerships at a special 20% withholding tax rate. The rate of withholding is 25% if the recipient is a foreign corporation or partnership not engaged in trade or business within Puerto Rico.\nPrior to the first dividend distribution for the taxable year, individuals who are residents of Puerto Rico may elect to be taxed on the dividends at the regular rates, in which case the special 20% tax will not be withheld from such year's distributions.\nUnited States citizens who are non-residents of Puerto Rico may also make such an election, and will not be subject to Puerto Rico tax on dividends, if said individual's gross income from sources within Puerto Rico during the taxable year does not exceed $1,300 if single, or $3,000 if married.\nU.S. income tax law permits a credit against U.S. income tax liability, subject to certain limitations, for certain foreign income taxes paid or deemed paid with respect to such dividends.\nITEM 6.","section_6":"ITEM 6. SELECTED FINANCIAL DATA\nThe information in Table C, \"Selected Financial Data\", for only the years 1993, 1992, 1991, 1990 and 1989, on pages 4 and 5 and the text under the caption \"Earnings Analysis\", on pages 3 and 6 of the Financial Review Section of the Annual Report to shareholders, is incorporated herein by reference, and in the following paragraphs.\nThe Corporation's ratio of earnings to fixed charges on a consolidated basis for each of the last five years is as follows:\nFor purposes of computing these consolidated ratios, earnings represent income before income taxes, plus fixed charges excluding capitalized interest. Fixed charges represent all interest expense (ratios are presented both excluding and including interest on deposits), the portion of net rental expense which is deemed representative of the interest factor, the amortization of debt issuance expense and capitalized interest.\nThe Corporation's long term senior debt and preferred stock on a consolidated basis for each of the last five years ended December 31, is as follows:\nITEM 7.","section_7":"ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS\nThe information under the caption \"Management's Discussion and Analysis of Financial Condition and Results of Operations\", on pages 2 through 26 of the Financial Review Section of the Annual Report to shareholders, is incorporated herein by reference.\nTable K, \"Maturity Distribution of Earning Assets\", on page 16 of the Financial Review Section of the Annual Report to shareholders, has been prepared on the basis of contractual maturities. The Corporation does not have a policy with respect to rolling over maturing loans but rolls over loans only on a case-by-case basis after review of such loans in accordance with the Corporation's lending criteria.\nITEM 8.","section_7A":"","section_8":"ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA\nThe report of the independent accountants, the Consolidated Financial Statements of the Corporation and its subsidiaries, together with the notes, on pages 27 through 47 of the Financial Review Section of the Annual Report to shareholders, are incorporated herein by reference.\nITEM 9.","section_9":"ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE\nNot Applicable.\nPART III\nITEM 10.","section_9A":"","section_9B":"","section_10":"ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT\nThe information contained under the captions \"Shares Beneficially Owned by Directors, Nominees and Executive Officers of the Corporation\", and \"Board of Directors and Committees\" on pages 3 through 8 and \"Nominees for Election as Directors\" on page 9 of the Corporation's definitive proxy statement filed with the Securities and Exchange Commission on March 18, 1994 (the \"Proxy Statement\"), and under the caption \"Executive Officers\", on pages 9 through 11 of the Proxy Statement, is incorporated herein by reference.\nITEM 11.","section_11":"ITEM 11. EXECUTIVE COMPENSATION\nThe information under the caption \"Executive Compensation Program\", on pages 11 through 15 and under the caption \"BanPonce Corporation Performance Graph\" on page 16 of the Proxy Statement, is incorporated herein by reference.\nITEM 12.","section_12":"ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT\nThe information under the captions \"Principal Stockholders\", on page 2 and under \"Shares Beneficially Owned by Directors, Nominees and Officers of the Corporation\", on pages 3 and 4 of the Proxy Statement, is incorporated herein by reference.\nITEM 13.","section_13":"ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS\nThe information under the caption \"Family Relationships\" and \"Other relationships and transactions\", on page 11 of the Proxy Statement, is incorporated herein by reference.\nPART IV\nITEM 14.","section_14":"ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K\nA.1 The following financial statements and reports included on pages 27 through 47 of the financial review section of the Corporation's Annual Report to Shareholders, have been incorporated herein by reference:\nReport of Independent Auditors.\nConsolidated Statements of Condition as of December 31, 1993 and 1992.\nConsolidated Statements of Income for each of the years in the three-year period ended December 31, 1993.\nConsolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 1993.\nConsolidated Statements of Changes in Stockholders' Equity for each of the years in the three-year period ended December 31, 1993.\nNotes to Consolidated Financial Statements.\nA.2 Financial Statement Schedules: No schedules are presented because the information is not applicable or is included in the Consolidated Financial Statements described in A.1 above or in the notes thereto.\nA.3 Exhibits\nB. No report on Form 8-K was filed for the year ended December 31, 1993.\n(1) Incorporated by reference to Exhibit 4.1 of Registration Statement No. 33-39028.\n(1a)Incorporated by reference to exhibit 4.1 of the Corporation's Annual Report on Form 10-K for the year ended December 31, 1990 (the \"1990 Form 10-K\").\n(2) Incorporated by reference to Exhibit 4.3 of Registration Statement No. 33-39028.\n(2a) Incorporated by reference to Exhibit 4(c) to Registration Statement No. 33-41686.\n(2b) Incorporated by reference to Exhibit 2 on Form 8-K filed on October 8, 1991.\n(2c) Incorporated by reference to Exhibit 3 on Form 8-K filed on October 8, 1991.\n(3) Incorporated by reference to Exhibit 4.4 of Registration Statement No. 33-39028.\n(4) Incorporated by reference to Exhibit number 10.2 of Registration Statement No. 33-00497.\n(5) Incorporated by reference to Exhibit 10.3 of the 1991 Form 10-K.\n(6) Incorporated by reference to Exhibit 10.8 of the 1991 Form 10-K.\n(7) Incorporated by reference to Exhibit 10.9 of the 1991 Form 10-K.\n(8) Incorporated by reference to Exhibit 10.10 of the 1991 Form 10-K.\n(9) Incorporated by reference to Exhibit 10.12 of the 1991 Form 10-K.\n(10) Incorporated by reference to Exhibit 10.13 of the 1991 Form 10-K.\n(11) Incorporated by reference to Exhibit 10.14 of the 1991 Form 10-K.\n(12) Incorporated by reference to Exhibit 10.19 of the 1991 Form 10-K.\n(13) Incorporated by reference to Exhibit 10.6 of the 1991 Form 10-K.\n(14) Incorporated by reference to Exhibit 10.14 of the 1992 Form 10-K.\n(15) Incorporated by reference to Exhibit 10.15 of the 1992 Form 10-K.\nSIGNATURES\nPursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.\nBANPONCE CORPORATION (Registrant)\nBy: \/s\/ Richard L. Carrion -------------------------------- Richard L. Carrion Chairman of the Board, President and Chief Executive Officer (Principal Executive Officer)\nBy: \/s\/ David H. Chafey, Jr. -------------------------------- David H. Chafey, Jr. Executive Vice President (Principal Executive Officer)\nBy: \/s\/ Orlando Berges -------------------------------- Orlando Berges Treasurer (Principal Accounting Officer)\nPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.\nEXHIBIT INDEX\nExhibit No. DESCRIPTION\n(1) Incorporated by reference to Exhibit 4.1 of Registration Statement No. 33-39028.\n(1a)Incorporated by reference to exhibit 4.1 of the Corporation's Annual Report on Form 10-K for the year ended December 31, 1990 (the \"1990 Form 10-K\").\n(2) Incorporated by reference to Exhibit 4.3 of Registration Statement No. 33-39028.\n(2a) Incorporated by reference to Exhibit 4(c) to Registration Statement No. 33-41686.\n(2b) Incorporated by reference to Exhibit 2 on Form 8-K filed on October 8, 1991.\n(2c) Incorporated by reference to Exhibit 3 on Form 8-K filed on October 8, 1991.\n(3) Incorporated by reference to Exhibit 4.4 of Registration Statement No. 33-39028.\n(4) Incorporated by reference to Exhibit number 10.2 of Registration Statement No. 33-00497.\n(5) Incorporated by reference to Exhibit 10.3 of the 1991 Form 10-K.\n(6) Incorporated by reference to Exhibit 10.8 of the 1991 Form 10-K.\n(7) Incorporated by reference to Exhibit 10.9 of the 1991 Form 10-K.\n(8) Incorporated by reference to Exhibit 10.10 of the 1991 Form 10-K.\n(9) Incorporated by reference to Exhibit 10.12 of the 1991 Form 10-K.\n(10) Incorporated by reference to Exhibit 10.13 of the 1991 Form 10-K.\n(11) Incorporated by reference to Exhibit 10.14 of the 1991 Form 10-K.\n(12) Incorporated by reference to Exhibit 10.19 of the 1991 Form 10-K.\n(13) Incorporated by reference to Exhibit 10.6 of the 1991 Form 10-K.\n(14) Incorporated by reference to Exhibit 10.14 of the 1992 Form 10-K.\n(15) Incorporated by reference to Exhibit 10.15 of the 1992 Form 10-K.","section_15":""}
{"filename":"6201_1993.txt","cik":"6201","year":"1993","section_1":"ITEM 1. BUSINESS\nAMR Corporation (AMR or the Company) was incorporated in October 1982. AMR's principal subsidiary, American Airlines, Inc. (American), was founded in 1934. With the expansion of, and increased strategic focus on, its information technology businesses, AMR formed The SABRE Technology Group -- later renamed The SABRE Group -- during 1993 to capitalize on the synergies of combining these businesses under common management. To highlight the Company's non-airline activities, this report, for the first time, presents their financial results separately from those of the airline. For financial reporting purposes, AMR's operations fall within three major lines of business: the Air Transportation Group, The SABRE Group and the AMR Management Services Group.\nAIR TRANSPORTATION GROUP\nThe Air Transportation Group consists primarily of American's Passenger and Cargo divisions and AMR Eagle, Inc., a subsidiary of AMR.\nAMERICAN'S PASSENGER DIVISION is one of the largest scheduled passenger airlines in the world. At the end of 1993, American provided scheduled jet service to 106 cities in the U.S. mainland and Hawaii, 28 in Latin America, 14 in Europe and 24 other destinations worldwide, including service to six cities provided through cooperative agreements with other airlines.\nAMERICAN'S CARGO DIVISION provides a full range of freight and mail services to shippers throughout the airline's system. In addition, through cooperative agreements with other carriers, it has the ability to transport shipments to virtually any country in the world.\nAMR EAGLE, INC. owns the four regional airlines which operate as \"American Eagle\" -- Flagship Airlines, Inc., Simmons Airlines, Inc., Executive Airlines, Inc., and Wings West Airlines, Inc. The Eagles' turboprop service complements American's jet service with nearly 1,700 scheduled flights per day, transporting passengers and cargo to 170 cities in the continental U.S., the Bahamas and the Caribbean.\nTHE SABRE GROUP\nThe SABRE Group includes SABRE Travel Information Network (STIN), SABRE Computer Services (SCS) and SABRE Development Services (SDS), which are divisions of American, and AMR Information Services (AMRIS) and American Airlines Decision Technologies (AADT), which are subsidiaries of AMR.\nSTIN provides travel reservation services through its computer reservation system, SABRE -- one of the largest privately owned, real-time computer systems in the world.\nSCS manages AMR's data processing centers, voice and data communications networks and local-area computer networks worldwide.\nSDS provides applications development, software solutions, consulting, and other technology services to other AMR units.\nAMRIS offers a full range of information management services, including complete systems development, network design and management, telemarketing, reservations services and systems, technical training and data management services.\nAADT specializes in providing decision support systems, software packages, systems development and consulting services to companies in the transportation and travel industries, as well as other industries worldwide.\nIn 1994, SABRE Decision Technologies was formed with the combination of AADT, SDS and certain other business units within The SABRE Group.\nAMR MANAGEMENT SERVICES GROUP\nThe AMR Management Services Group consists of five AMR subsidiaries -- AMR Services Corporation, AMR Leasing Corporation, Americas Ground Services, Inc. (AGS), AMR Investment Services, Inc. and AMR Training & Consulting Group, Inc. (AMRTCG).\nAMR SERVICES CORPORATION has three major operating divisions: Airline Services, AMR Combs and AMR Distribution Systems. The Airline Services Division performs airline ground and cargo handling, cabin service and an array of other air transportation-related services for numerous carriers around the world. AMR Combs provides comprehensive executive aviation services at 11 fixed-base operations. AMR Distribution Systems serves the logistics marketplace and specializes in contract warehousing, trucking and multi- modal freight forwarding services.\nAMR LEASING CORPORATION, a financing subsidiary, leases regional aircraft to subsidiaries of AMR Eagle.\nAGS was incorporated in 1993. It provides airline ground and cabin service handling in 13 locations in the Caribbean and Central and South America.\nAMR INVESTMENT SERVICES, INC. serves as an investment advisor to AMR and other institutional investors. It also manages the American AAdvantage Funds, which have both institutional shareholders, including pension funds and bank and trust companies, and individual shareholders. AMR Investment Services is responsible for management of approximately $12.2 billion in assets, including direct management of approximately $5.2 billion in short-term investments.\nAMRTCG was formed in 1992. It provides a full range of training and management consulting services for the aviation and transportation industries worldwide.\nAdditional information regarding business segments is included in Management's Discussion and Analysis on pages 16 through 21 and in Note 13 to the consolidated financial statements.\nROUTES AND COMPETITION\nAIR TRANSPORTATION Service over almost all of the Air Transportation Group's routes is highly competitive. Currently, any carrier deemed fit by the U.S. Department of Transportation (DOT) is free to operate scheduled passenger service between any two points within the U.S. and its possessions. On most of its routes, American competes with at least one, and usually more than one, major domestic airline including: America West Airlines, Continental Airlines, Delta Airlines, Northwest Airlines, Southwest Airlines, Trans World Airlines, United Airlines, and USAir. American also competes with national, regional, all-cargo, and charter carriers and, particularly on shorter segments, ground transportation.\nMost major air carriers have developed hub-and-spoke systems and schedule patterns in an effort to maximize revenue potential of their service. American currently operates six domestic hubs: Dallas\/Fort Worth, Chicago O'Hare, Miami, Raleigh\/Durham, Nashville, and San Juan, Puerto Rico. During 1993, American closed its hub operation at San Jose, California. United Airlines and Delta Airlines have large operations at American's Chicago and Dallas\/Fort Worth hubs, respectively.\nThe American Eagle carriers increase the number of markets the Air Transportation Group serves by providing connections to American at its hubs and certain other major airports. Simmons Airlines, Inc. serves Dallas\/Fort Worth and Chicago. Flagship Airlines, Inc. serves Miami, Raleigh\/Durham, Nashville, and New York John F. Kennedy International Airport. Executive Airlines, Inc. serves San Juan. Wings West Airlines, Inc. serves Los Angeles, Orange County and selected other airports in the western U.S. American's competitors also own or have marketing agreements with regional carriers which provide service at their major hubs.\nIn addition to its extensive domestic service, American provides service to and from cities in various other countries, primarily across North, Central and South America and Europe. In 1991, American added service to 20 cities in 15 countries in Latin America with the acquisition of route authorities from Eastern Air Lines. In 1992, American added service from several U.S. gateway cities to London's Heathrow Airport with the acquisition of Trans World Airlines' route authorities. American's operating revenues from foreign operations were approximately $3.9 billion in 1993, $3.7 billion in 1992 and $2.7 billion in 1991. Additional information about the Company's foreign operations is included in Note 12 to the consolidated financial statements.\nCompetition in international markets is generally subject to more extensive government regulation than domestic markets. In these markets, American competes with foreign-investor owned and national flag carriers and U.S. carriers that have been granted authority to provide scheduled passenger and cargo service between the U.S. and various overseas locations. American's operating authority in these markets is subject to aviation agreements between the U.S. and the respective countries, and in some cases, fares and schedules require the approval of the DOT and the relevant foreign governments. Because international air transportation is governed by bilateral or other agreements between the U.S. and the foreign country or countries involved, changes in U.S. or foreign government aviation policy could result in the alteration or termination of such agreements, diminish the value of such route authorities, or otherwise affect American's international operations. Bilateral relations between the U.S. and various foreign countries served by American are currently being renegotiated.\nOn all of its routes, the Air Transportation Group's pricing decisions are affected by competition from other airlines, some of which have cost structures significantly lower than American's and can therefore operate profitably at lower fare levels. American and its principal competitors use inventory and yield management systems that permit them to vary the number of discount seats offered on each flight in an effort to maximize revenues.\nThe Air Transportation Group believes that it has several advantages relative to its competition. Its fleet is young, efficient and quiet. It has a comprehensive domestic and international route structure, anchored by efficient hubs, which permit it to take full advantage of whatever traffic growth occurs. The Company believes American's AAdvantage frequent flyer program, which is the largest program in the industry, and its superior service also give it a competitive advantage.\nThe major domestic carriers have some advantage over foreign competitors in their ability to generate traffic from their extensive domestic route systems. In many cases, however, U.S. carriers are limited in their rights to carry passengers beyond designated gateway cities in foreign countries. Some of American's foreign competitors are owned and subsidized by foreign governments. To improve their access to each others markets, various U.S. and foreign carriers have made substantial equity investments in, or established marketing relationships with, other carriers.\nCOMPUTER RESERVATION SYSTEMS The complexity of the various schedules and fares offered by air carriers has fostered the development of electronic distribution systems. Travel agents and other subscribers access travel information and book airline, hotel and car rental reservations and issue airline tickets using these systems. American developed the SABRE computer reservation system (CRS), which is the one of the largest CRSs in the world. Competition among the CRS vendors is strong. Services similar to those offered through SABRE are offered by several air carriers and other companies in the U.S. and abroad, including: the Covia Partnership, owned by United Airlines, USAir and various foreign carriers; Worldspan, owned by Delta Airlines, Northwest Airlines, Trans World Airlines, and ABACUS Distribution Systems; and System One, owned by Continental Airlines.\nThe SABRE CRS has several advantages relative to its competition. The Company believes that SABRE ranks first in market share among travel agents in the U.S. The SABRE CRS is furthering its expansion into international markets and continues to be in the forefront of technological innovation in the CRS industry.\nREGULATION\nGENERAL The Airline Deregulation Act of 1978 (Act) and various other statutes amending the Act, eliminated most domestic economic regulation of passenger and freight transportation. However, the DOT and the Federal Aviation Administration (FAA) still exercise certain regulatory authority over air carriers under the Federal Aviation Act of 1958, as amended. The DOT maintains jurisdiction over international route authorities and certain consumer protection matters, such as advertising, denied boarding compensation, baggage liability, and computer reservations systems. The DOT issued certain rules governing the CRS industry which became effective on December 7, 1992, and expire on December 31, 1997.\nThe FAA regulates flying operations generally, including establishing personnel, aircraft and security standards. In addition, the FAA has implemented a number of requirements that the Air Transportation Group is incorporating into its maintenance program. These matters relate to, among other things, inspection and maintenance of aging aircraft, corrosion control, collision avoidance and windshear detection. Based on its current implementation schedule, the Air Transportation Group expects to be in compliance with the applicable requirements within the required time periods.\nThe U.S. Department of Justice has jurisdiction over airline antitrust matters. The U.S. Postal Service has jurisdiction over certain aspects of the transportation of mail and related services. Labor relations in the air transportation industry are regulated under the Railway Labor Act, which vests in the National Mediation Board certain regulatory powers with respect to disputes between airlines and labor unions arising under collective bargaining agreements.\nFARES Airlines are permitted to establish their own domestic fares without governmental regulation, and the industry is characterized by substantial price competition. The DOT maintains authority over international fares, rates and charges. International fares and rates are also subject to the jurisdiction of the governments of the foreign countries which American serves. While air carriers are required to file and adhere to international fare and rate tariffs, many international markets are characterized by substantial commissions, overrides, and discounts to travel agents, brokers and wholesalers.\nFare discounting by competitors has historically had a negative effect on American's financial results because American is generally required to match competitors' fares to maintain passenger traffic. During recent years, a number of new low-cost airlines have entered the domestic market and several major airlines have begun to implement efforts to lower their cost structures. Further fare reductions, domestic and international, may occur in the future. If fare reductions are not offset by increases in passenger traffic or changes in the mix of traffic that improves yields, the Air Transportation Group's operating results will be negatively impacted.\nAIRPORT ACCESS The FAA has designated four of the nation's airports -- Chicago O'Hare, New York Kennedy, New York LaGuardia, and Washington National - -- as \"high density traffic airports\" and has limited the number of take-offs and landings per hour, known as slots, during peak demand time periods at these airports. Currently, the FAA permits the purchasing, selling and trading of these slots by airlines and others, subject to certain restrictions. During 1993, the DOT issued final rules allowing air carriers to convert up to 50 percent of their commuter slots at Chicago O'Hare for use by jets with fewer than 110 seats. Certain foreign airports, including London Heathrow, a major European destination for American, also have slot allocations.\nThe Air Transportation Group currently has sufficient slot authorizations to operate its existing flights and has generally been able to obtain slots to expand its operations and change its schedules. There is no assurance, however, that the Air Transportation Group will be able to obtain slots for these purposes in the future, because, among other factors, slot allocations are subject to changes in government policies.\nENVIRONMENTAL MATTERS The Company is subject to various laws and government regulations concerning environmental matters and employee safety and health in the U.S. and other countries. U.S. federal laws that have a particular impact on the Company include the Airport Noise and Capacity Act of 1990 (ANCA), the Clean Air Act, and the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA or the Superfund). The Company is also subject to the oversight of Occupational Safety and Health Administration (OSHA) concerning employee safety and health matters. The U.S. Environmental Protection\nAgency (EPA), OSHA, and other federal agencies have been authorized to promulgate regulations that have an impact on the Company's operations. In addition to these federal activities, various states have been delegated certain authorities under the aforementioned federal statutes. Many state and local governments have adopted environmental and employee safety and health laws and regulations, some of which are similar to federal requirements. As a part of its continuing environmental program, the Company has maintained compliance with such requirements without any material adverse effect on its business.\nThe ANCA requires the phase-out by December 31, 1999, of Stage II aircraft operations, subject to certain exceptions. Under final regulations issued by the FAA in 1991, air carriers are required to reduce, by modification or retirement, the number of Stage II aircraft in their fleets 25 percent by December 31, 1994; 50 percent by December 31, 1996; 75 percent by December 31, 1998, and 100 percent by December 31, 1999. Alternatively, a carrier may satisfy the regulations by operating a fleet that is at least 55 percent, 65 percent, 75 percent, and 100 percent Stage III by the dates set forth in the preceding sentence, respectively.\nThe ANCA recognizes the rights of airport operators with noise problems to implement local noise abatement programs so long as they do not interfere unreasonably with interstate or foreign commerce or the national air transportation system. Authorities in several cities have promulgated aircraft noise reduction programs, including the imposition of night-time curfews. The ANCA generally requires FAA approval of local noise restrictions on Stage III aircraft first effective after October 1990, and establishes a regulatory notice and review process for local restrictions on Stage II aircraft first proposed after October 1990. At December 31, 1993, approximately 83 percent of American's fleet was Stage III. While American has had sufficient scheduling flexibility to accommodate local noise restrictions imposed to date, American's operations could be adversely affected if locally- imposed regulations become more restrictive or widespread.\nThe Clean Air Act provides that state and local governments may not adopt or enforce aircraft emission standards unless those standards are identical to the federal standards. The engines on American's aircraft meet the EPA's turbine engine emissions standards.\nAmerican has been identified by the EPA as a potentially responsible party (PRP) with respect to the following Superfund Sites: Operating Industries, Inc., California; Cannons, New Hampshire; Byron Barrel and Drum, New York; Palmer PSC, Massachusetts; Frontier Chemical, New York and Duffy Brothers, Massachusetts. American has settled the Operating Industries, Cannons and Byron Barrel and Drum matters, and all that remains to complete these matters are administrative tasks. With respect to the Palmer PSC, Frontier Chemical and Duffy Brothers sites, American is one of several PRPs named at each site. Although they are Superfund Sites, American's alleged waste disposal is minor compared to the other PRPs.\nAMR Combs Memphis, an AMR Services subsidiary, has been named a PRP at an EPA Superfund Site in West Memphis, Tennessee. AMR Combs Memphis' alleged involvement in the site is minor relative to the other PRPs.\nFlagship Airlines, Inc. an AMR Eagle subsidiary, has been notified of its potential liability under New York law at an Inactive Hazardous Waste site in Poughkeepsie, New York.\nAMR does not expect these matters, individually or collectively, to have a material impact on its financial condition, operating results or cash flows.\nLABOR\nThe airline business is labor intensive. On December 31, 1993, AMR had approximately 118,900 employees, approximately 95,800 of whom were American's employees. Wages, salaries and benefits represented nearly 36 percent of AMR's consolidated operating expenses for the year ended December 31, 1993. To improve its competitive position, American has undertaken various steps to reduce its unit labor costs, including workforce reductions.\nThe majority of American's employees are represented by labor unions and covered by collective bargaining agreements. American's relations with such labor organizations are governed by the Railway Labor Act. Under this act, the collective bargaining agreements among American and these organizations become\namendable upon the expiration of their stated term. If either party wishes to modify the terms of any such agreement, it must notify the other party before the contract becomes amendable. After receipt of such notice, the parties must meet for direct negotiations, and if no agreement is reached, either party may request that a federal mediator be appointed. If no agreement is reached in mediation, the National Mediation Board may determine, at any time, that an impasse exists and may proffer arbitration. Either party may decline to submit to arbitration. If arbitration is rejected, a 30-day \"cooling-off\" period commences, following which the labor organization may strike and the airline may resort to \"self-help,\" including the imposition of its proposed amendments and the hiring of replacement workers.\nAmerican's collective bargaining agreement with the Association of Professional Flight Attendants became amendable on December 31, 1992. The National Mediation Board declared a cooling-off period in the negotiations in September 1993, following a long period of negotiation and mediation. After enduring a five-day strike by the union in November, American agreed to resolve the remaining issues through binding arbitration. American imposed certain contract amendments after the union declared the strike. The arbitration process is expected to be complex and will likely not be decided for several months. While the ultimate outcome is uncertain, the new contract will likely result in higher unit labor costs in 1994.\nAmerican's collective bargaining agreements with the Allied Pilots Association and Flight Engineers International Association become amendable on August 31, 1994. American's collective bargaining agreement with the Transport Workers Union becomes amendable on March 1, 1995.\nA majority of the workforces at the four AMR Eagle carriers is represented by labor unions and covered by a number of different collective bargaining agreements. Certain of these agreements are currently in negotiation. In addition, a proceeding is pending before the National Mediation Board in which the issue is whether the four American Eagle carriers should be treated as a single carrier for labor relations purposes. If such a finding ultimately is made, each unionized employee classification would have all members of all four carriers represented for collective bargaining purposes as a single unit. A determination by the National Mediation Board is not likely before late 1994 or early 1995. The ultimate outcome of this proceeding and its effect, if any, on costs is uncertain.\nFUEL\nThe Air Transportation Group's operations are significantly affected by the availability and price of jet fuel. American's fuel costs and consumption for the years 1989 through 1993 were: Percent of\nBased upon American's 1993 fuel consumption, a one-cent change in the average annual price-per-gallon of jet fuel caused a change of approximately $2.5 million in American's monthly fuel costs. AMR's fuel cost in 1993 decreased 1.7 percent over the prior year, primarily due to a 4.9 percent decrease in American's average price per gallon, offset by a 2.7 percent increase in gallons consumed by American.\nChanges in fuel prices have industry-wide impact and benefit or harm American's competitors as well as American. Accordingly, lower fuel prices may be offset by increased price competition and lower revenues for all air carriers. Fuel prices may increase in the future. There can be no assurance that American will be able to pass such cost increases on to its customers by increasing fares in the future.\nMost of American's fuel is purchased pursuant to contracts which, by their terms, may be terminated upon short notice. While American does not anticipate a significant reduction in fuel availability, dependency on foreign imports of crude oil and the possibility of changes in government policy on jet fuel production, transportation and marketing make it impossible to predict the future availability of jet fuel. If there were major reductions in the availability of jet fuel, American's business would be adversely affected.\nFREQUENT FLYER PROGRAM\nAmerican established the AAdvantage frequent flyer program (AAdvantage) to develop passenger loyalty by offering awards to travelers for their continued patronage. AAdvantage members earn mileage credits for flights on American, American Eagle, or certain flights on participating airlines, or by utilizing services of other program participants, including hotels, car rental companies and bank credit card issuers. In addition, American periodically offers special short-term promotions which allow members to earn additional free travel awards or mileage credits. American reserves the right to change the AAdvantage program rules, regulations, travel awards and special offers at any time. American may initiate changes impacting, for example, participant affiliations, rules for earning mileage credit, mileage levels and awards, blackout dates and limited seating for travel awards, and the features of special offers. American reserves the right to end the AAdvantage program with six months notice.\nMileage credits can be redeemed for free, discounted or upgraded travel on American, American Eagle or participating airlines, or for other travel industry awards. Once a member accrues sufficient mileage for an award, the member may request an award certificate from American. Award certificates may be redeemed up to one year after issuance. Most travel awards are subject to blackout dates and capacity control seating. All miles earned after July 1989 must be redeemed within three years or they expire.\nAmerican accounts for its frequent flyer obligation on an accrual basis using the incremental cost method. American's frequent flyer liability is accrued each time a member accumulates sufficient mileage in his or her account to claim the lowest level of free travel award (20,000 miles) and such award is expected to be used for free travel on American. American includes fuel, food, and reservations\/ticketing costs, but not a contribution to overhead or profit, in the calculation of incremental cost. The cost for fuel is estimated based on total fuel burn traced by day by various categories of markets, with an amount allocated to each passenger. Food costs are tracked monthly by market category, with an amount allocated to each passenger. Reservation\/ticketing costs are based on the total number of passengers, including those traveling on free awards, divided into American's total expense for these costs. No accounting is performed for non-travel awards redeemed since the cost to American, if any, is de minimis.\nAt December 31, 1993 and 1992, American estimated that approximately 3.9 million and 3.7 million free travel awards, respectively, were eligible for redemption. At December 31, 1993 and 1992, American estimated that approximately 3.6 million and 3.4 million free travel awards, respectively, were expected to be redeemed for free travel on American. In making this estimate, American has excluded mileage in inactive accounts, mileage related to accounts that have not yet reached the lowest level of free travel award, mileage that is not expected to ever be redeemed for free travel, and mileage related to accounts that have reached the lowest level of free travel award but are estimated based on historical data to be redeemed for discounts and upgrades, free travel on participating airlines other than American, or services other than free travel, for which American has no obligation to pay the provider of those services. The liability for the program mileage that has reached the lowest level of free travel award and is expected to be redeemed for free travel on American and deferred revenues for mileage sold to others participating in the program was $380 million and $285 million, representing 8.6 percent and 6.0 percent of AMR's total current liabilities, at December 31, 1993 and 1992, respectively.\nThe number of free travel awards used for travel on American during the years ended December 31, 1993, 1992 and 1991, was approximately 2,163,000, 1,474,000, and 1,237,000, respectively, representing 9.5 percent, 6.0 percent and 5.3 percent of total revenue passenger miles for each period, respectively. American believes displacement of revenue passengers is insignificant given American's load factors, its ability to manage frequent flyer seat inventory, and the relatively low ratio of free award usage to revenue passenger miles.\nEffective February 1, 1995, the lowest level of free travel award will increase from 20,000 to 25,000 miles.\nOTHER MATTERS\nSEASONALITY AND OTHER FACTORS The Air Transportation Group's results of operations for any interim period are not necessarily indicative of those for the entire year, since the air transportation business is subject to seasonal fluctuations. Higher demand for air travel has traditionally resulted in more favorable operating results for the second and third quarters of the year than for the first and fourth quarters.\nThe results of operations in the air transportation business have also significantly fluctuated in the past in response to general economic conditions. In addition, fare initiatives, fluctuations in fuel prices, labor strikes and other factors could impact this seasonal pattern. Unaudited quarterly financial data for the two-year period ended December 31, 1993, is included in Note 14 to the consolidated financial statements.\nNo material part of the business of AMR and its subsidiaries is dependent upon a single customer or very few customers. Consequently, the loss of the Company's largest few customers would not have a materially adverse effect upon AMR.\nINSURANCE American carries insurance for public liability, passenger liability, property damage and all-risk coverage for damage to its aircraft, in amounts which, in the opinion of management, are adequate.\nOTHER GOVERNMENT MATTERS In time of war or during an unlimited national emergency or civil defense emergency, American and other major air carriers may be required to provide airlift services to the Military Airlift Command under the Civil Reserve Air Fleet program.\nITEM 2.","section_1A":"","section_1B":"","section_2":"ITEM 2. PROPERTIES\nFLIGHT EQUIPMENT\nOwned and leased aircraft operated by AMR's subsidiaries at December 31, 1993, included:\nFor information concerning the estimated useful lives and residual values for owned aircraft, lease terms and amortization relating to aircraft under capital leases, and acquisitions of aircraft, see Notes 1, 3 and 4 to the consolidated financial statements. See Management's Discussion and Analysis for discussion of the retirement of certain widebody aircraft from the fleet.\nLease expirations for leased aircraft operated by AMR's subsidiaries and included in the above table as of December 31, 1993, were:\nThe table excludes leases for 15 Boeing 767-300 Extended Range aircraft which can be canceled with 30 days' notice during the first 10 years of the lease term. At the end of that term in 1998, the leases can be renewed for periods ranging from 10 to 12 years. The table also excludes leases for 12 Saab 340A aircraft and ten Saab 340B aircraft which can be canceled with 30 days' notice. In addition, the table excludes one Boeing 737-200 and four Boeing 737-300 aircraft which have been subleased and one McDonnell Douglas DC-10-30 aircraft which has been grounded.\nSubstantially all of the Air Transportation Group's aircraft leases include an option to purchase the aircraft or to extend the lease term, or both, with the purchase price or renewal rental to be based essentially on the market value of the aircraft at the end of the term of the lease or at a predetermined fixed rate.\nGROUND PROPERTIES\nAmerican leases, or has built as leasehold improvements on leased property, most of its airport and terminal facilities; certain corporate office, maintenance and training facilities in Fort Worth, Texas; its principal overhaul and maintenance base and computer facility at Tulsa International Airport, Tulsa, Oklahoma; its regional reservation offices; and local ticket and administration offices throughout the system. American has entered into agreements with the Tulsa Municipal Airport Trust; the Alliance Airport Authority, Fort Worth, Texas; and the Dallas\/Fort Worth, Chicago O'Hare, Raleigh\/Durham, Nashville, San Juan, New York, and Los Angeles airport authorities to provide funds for, among other things, additional facilities and equipment, and improvements and modifications to existing facilities, which equipment and facilities are or will be leased to American. American also utilizes public airports for its flight operations under lease arrangements with the municipalities or governmental agencies owning or controlling them and leases certain other ground equipment for use at its facilities.\nFor information concerning the estimated lives and residual values for owned ground properties, lease terms and amortization relating to ground properties under capital leases, and acquisitions of ground properties, see Notes 1, 3 and 4 to the consolidated financial statements.\nITEM 3.","section_3":"ITEM 3. LEGAL PROCEEDINGS\nIn December 1992, the U.S. Department of Justice filed an antitrust lawsuit in the U.S. District Court for the District of Columbia under Section 1 of the Sherman Act against several airlines, including the Company, alleging price fixing based upon the industry's exchange of fare information through the Airline Tariff Publishing Company. In March 1994, the Company and the remaining defendants in the case agreed to settle the lawsuit without admitting liability by entering into a stipulated final judgment that prohibits or restricts certain pricing practices including the announcement of fare increases before their effective date. The proposed final judgment is subject to approval by the Court following a public notice and comment period prescribed by statute. The Company does not anticipate a material financial impact from the settlement or compliance with the stipulated judgment. Private class action claims with similar allegations were settled by the Company and other airlines which became final in March 1993. Prior to the private class action settlement becoming final, the Company and several other airlines voluntarily altered certain pricing practices at issue in the lawsuits to avoid exposure to additional claims.\nAmerican has been sued in two class action cases that have been consolidated in the Circuit Court of Cook County, Illinois, in connection with certain changes made to American's AAdvantage frequent flyer program in May, 1988. (Wolens, et al v. American Airlines, Inc., No. 88 CH 7554, and Tucker v. American Airlines, Inc., No. 89 CH 199.) In both cases, the plaintiffs seek to represent all persons who joined the AAdvantage program before May 1988. The complaints allege that, on that date, American implemented changes that limited the number of seats available to participants traveling on certain awards and established holiday blackout dates during which no AAdvantage seats would be available for certain awards. The plaintiffs allege that these changes breached American's contracts with AAdvantage members and were in violation of the Illinois Consumer Fraud and Deceptive Business Practices Act (Consumer Fraud Act). Plaintiffs seek money damages of an unspecified sum, punitive damages, costs, attorneys fees and an injunction preventing the Company from making any future changes that would reduce the value of AAdvantage benefits. American moved to dismiss both complaints, asserting that the claims are preempted by the Federal Aviation Act and barred by the Commerce Clause of the U.S. Constitution.\nThe trial court denied American's preemption motions, but certified its decision for interlocutory appeal. In December 1990, the Illinois Appellate Court held that plaintiffs' claims for an injunction are preempted by the Federal Aviation Act, but that plaintiffs' claims for money damages could proceed. On March 12, 1992, the Illinois Supreme Court affirmed the decision of the Appellate Court. American sought a writ of certiorari from the U.S. Supreme Court; and on October 5, 1992, that Court vacated the decision of the Illinois Supreme Court and remanded the cases for reconsideration in light of the U.S. Supreme Court's decision in Morales v. TWA, et al, which interpreted the preemption provisions of the Federal Aviation Act very broadly. On December 16, 1993, the Illinois Supreme Court rendered its decision on remand, holding that plaintiffs' claims seeking an injunction were preempted, but that identical claims for compensatory and punitive damages were not preempted. On February 8, 1994, American filed petition for a writ of certiorari in the U.S. Supreme Court. The Illinois Supreme Court granted American's motion to stay the state court proceeding pending disposition of American's petition in the U.S. Supreme Court.\nThe Company and American are vigorously defending all of the above claims.\nITEM 4.","section_4":"ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS\nNo matters were submitted to a vote of the Company's security holders during the last quarter of its fiscal year ended December 31, 1993.\nEXECUTIVE OFFICERS OF THE REGISTRANT\nRobert L. Crandall Mr. Crandall became Chairman and Chief Executive Officer of AMR and American in March 1985. He has been President of American since 1980 and of AMR since its formation in 1982. Age 58.\nRobert W. Baker Mr. Baker was elected Executive Vice President in September 1989. He was elected Senior Vice President in July 1987. He served as Senior Vice President - Operations of American since November 1985. From April 1985 to October 1985, he served as Senior Vice President - Information Systems of American. From 1982 to March 1985, he served as Vice President - Marketing Automation Systems of American. Age 49.\nDonald J. Carty Mr. Carty was elected Executive Vice President and Chief Financial Officer of AMR in October 1989. He served as Senior Vice President and Chief Financial Officer of AMR and Senior Vice President - Finance and Planning of American since January 1988. He served as Senior Vice President - Planning of American since April 1987. From March 1985 until March 1987, he was President of Canadian Pacific Air. He served as Senior Vice President and Controller of both AMR and American since March 1983. Age 47.\nGerard J. Arpey Mr. Arpey was elected Senior Vice President in April 1992. He served as Vice President - Financial Planning and Analysis of American since October 1989. He served as Managing Director - Financial Planning from September 1988 to September 1989. From March 1988 to September 1988 he served as Managing Director - Financial Analysis. He served as Managing Director - Airline Profitability from July 1987 to March 1988. Age 35.\nMichael J. Durham Mr. Durham was elected Senior Vice President and Treasurer of AMR in October 1989 as well as Senior Vice President - Finance and Chief Financial Officer of American. He served as Vice President and Treasurer of American from March 1989 to September 1989, Vice President - Corporate Planning and Finance of American from 1987 to 1989, and Vice President - Financial Analysis and Corporate Development of American from 1985 through 1987. Age 43.\nMichael W. Gunn Mr. Gunn was elected Senior Vice President of AMR in May 1991 and Senior Vice President - Marketing for American Airlines in November 1986. From October 1985 to November 1986 he was Senior Vice President - Passenger Marketing for American. From July 1982 to October 1985, he was Vice President - Passenger Sales and Advertising. Age 48.\nMax D. Hopper Mr. Hopper was elected Senior Vice President of AMR in May 1986 and Chairman of The SABRE Group in April 1993. He was elected Senior Vice President - Information Systems of American in November 1985. From September 1982 until November 1985, he was an Executive Vice President of Bank of America. Age 59.\nAnne H. McNamara Mrs. McNamara was elected Senior Vice President and General Counsel in June 1988. She served as Vice President - Personnel since January 1988, and as Corporate Secretary since 1979 for American and held the same position with AMR since its inception in 1982. Age 46.\nCharles D. MarLett Mr. MarLett was elected Corporate Secretary in January 1988. He served as an attorney with American beginning in June 1984 and, prior to that, was associated with the law firm of Drinker, Biddle & Reath, Philadelphia, Pennsylvania, from 1982 to 1984. Age 39.\nKathleen M. Misunas Mrs. Misunas was elected Senior Vice President of AMR and American and President and Chief Executive Officer of The SABRE Group in April 1993. She served as President of SABRE Travel Information Network and Vice President of American since July 1988. Age 43.\nThere is no family relationship (blood, marriage or adoption, not more remote than first cousin) between any of the officers named above.\nThere have been no events under any bankruptcy act, no criminal proceedings, and no judgments or injunctions material to the evaluation of the ability and integrity of any director or executive officer during the past five years.\nPART II\nITEM 5.","section_5":"ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS\nThe Company's common stock is traded on the New York Stock Exchange (symbol AMR). The approximate number of recordholders of the Company's common stock at March 1, 1994, was 17,800.\nThe market range of AMR's common stock on the New York Stock Exchange was:\nNo cash dividends were declared for any period during 1993 or 1992. Payment of dividends is subject to the restrictions described in Note 5 to the consolidated financial statements.\nITEM 6.","section_6":"ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA\n(in millions, except per share amounts)\nNo dividends were declared on common shares during any of the periods above.\nEffective January 1, 1992, AMR adopted Statements of Financial Accounting Standards No. 106, \"Employer's Accounting for Postretirement Benefits Other Than Pensions,\" and No. 109, \"Accounting for Income Taxes.\"\nInformation on the comparability of quarterly results is included in Management's Discussion and Analysis and the notes to the consolidated financial statements.\nITEM 7.","section_7":"ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS\nRESULTS OF OPERATIONS\nSUMMARY AMR's net loss in 1993 was $110 million, or $2.23 per common share (primary and fully diluted). The 1993 results reflect the negative impact of a five-day strike by the union representing American's flight attendants in November. The results also include a $125 million charge ($79 million after tax) for the retirement of certain DC-10 aircraft, a positive $115 million adjustment to revenues ($67 million net of related commission expense and taxes) for a change in estimate related to certain earned passenger revenues, and a $71 million provision ($46 million after tax) for losses associated with a reservations system project and resolution of related litigation. In 1992, AMR recorded a net loss of $935 million, or $12.49 per common share (primary and fully diluted). The loss for 1992, before the effect of the adoption of two new mandatory accounting standards, was $475 million. The Company's 1992 results were also affected by a $165 million provision ($109 million after tax) related to the suspension of the reservations system project. The Company's 1993 operating income was $690 million, compared to an operating loss of $25 million in 1992.\nIn the first quarter of 1993, the Company created and began implementing a new strategic framework, known as the Transition Plan. The Plan has three parts, each intended to improve the Company's results. First, make the core airline business bigger and stronger where economically justified. Second, and conversely, shrink the airline where it cannot compete profitably. Third, reallocate resources and effort to the growing information and management services businesses which are more profitable than the airline.\nMajor events relating to the Transition Plan in 1993 included:\n-- The SABRE Technology Group -- later renamed The SABRE Group -- was formed during the second quarter of 1993.\n-- American announced its decision to retire 42 widebody DC-10 jets to reduce the airline's capacity and lower operating expenses.\n-- American shifted domestic capacity to its major hubs in Dallas\/Fort Worth and Miami. With the acquisition of certain assets from Metroflight, Inc., Simmons Airlines, Inc. opened and rapidly expanded a major hub at Dallas\/Fort Worth. The Eagles also added or increased service in certain other markets as American reduced or withdrew jet service.\n-- American significantly reduced, and Wings West Airlines, Inc. eliminated, service at San Jose, California.\n-- To provide increased value to business customers, American expanded its successful three-class transcontinental service to new markets, added more frequent flights on business routes such as Dallas\/Fort Worth - Chicago, and added more first class seats on some narrowbody aircraft.\n- -- American increased capacity in Latin America by 17.5 percent over 1992.\nAmerican's 1993 results benefited from strengthened domestic revenues in comparison to 1992. American's 1992 domestic revenues suffered from competitive fare reductions below the levels American established in its Value Pricing Plan in April 1992. European revenues, however, were negatively impacted in 1993 by aggressive fare discounting by competitors, weak European economies and a stronger U.S. dollar.\nThe Company's 1993 results also reflect the dramatic adverse impact of a five-day strike by American's flight attendants' union in November. The strike's after-tax impact on fourth quarter results, estimated at $190 million, offset earnings generated earlier in the year.\nWith the downsizing of unprofitable operations, American's workforce began to decline following years of double-digit percentage increases. In 1993, AMR provided $25 million for employee severance, primarily management\/specialist and operations employees.\nTo reduce interest expense, the Company repurchased and retired prior to maturity $802 million in carrying value of long- term debt. The repurchases and retirements resulted in an extraordinary loss of $21 million ($14 million after tax) in 1993.\nBUSINESS SEGMENTS The following sections provide a discussion of AMR's results by reporting segment. A description of the businesses in each reporting segment is included on pages 1 and 2. Additional segment information is included in Note 13 to the consolidated financial statements.\nAIR TRANSPORTATION GROUP FINANCIAL HIGHLIGHTS (dollars in millions)\nREVENUES 1993 COMPARED TO 1992 Air Transportation Group revenues of $14.8 billion in 1993 were up $1.3 billion, 9.7 percent, versus 1992. American's passenger revenues rose 8.4 percent, $1.0 billion, primarily as a result of an 8.8 percent increase in passenger yield (the average amount one passenger pays to fly one mile), offset by a 0.3 percent decline in passenger traffic.\nAmerican's passenger yield in 1993 increased to 13.28 cents, primarily as a result of a very weak comparison base of 1992, when revenues were negatively impacted by competitors' drastic discounting of domestic fares. For the year, domestic yield increased 13.5 percent. International yield was mixed, increasing 13.9 percent in the Pacific, unchanged in Latin America and declining 10.1 percent in Europe. In 1993, American derived 73.8 percent of its passenger revenues from domestic operations and 26.2 percent from international operations.\nAlthough American's system capacity, as measured by available seat miles (ASMs), increased 5.2 percent, its traffic, as measured by revenue passenger miles (RPMs), decreased 0.3 percent. The drastic fare discounting drove traffic up to record levels in 1992. Traffic suffered in 1993 from American's inability to carry passengers during the flight attendants' union strike in November and the adverse effect of the strike on passenger demand during the month of December. American's domestic traffic decreased 3.5 percent, to 69.7 billion RPMs, while domestic capacity grew 2.9 percent. International traffic grew 9.1 percent, to 27.5 billion RPMs on capacity growth of 12.1 percent. The increase in international traffic was led by a 14.7 percent increase in Latin America on capacity growth of 17.5 percent, and a 7.4 percent increase in Europe on capacity growth of 10.8 percent.\nPassenger revenues of the AMR Eagle carriers increased 43.6 percent, $216 million, primarily due to the opening and expansion of regional operations at Dallas\/Fort Worth with assets acquired from Metroflight, Inc. Traffic on the AMR Eagle carriers increased 47.6 percent, to 2.1 billion RPMs, while capacity grew 41.6 percent to 3.8 billion ASMs. Passenger yield decreased 2.7 percent.\nCargo revenues increased 10.7 percent, $62 million, driven by a 22.5 percent increase in American's domestic and international cargo volumes, partially offset by decreasing yields brought about by strong price competition resulting from excess industry capacity.\nOther revenues, consisting of service fees, liquor revenues, duty-free sales, tour marketing and miscellaneous other revenues, increased 5.6 percent, $28 million, primarily as a result of increased capacity.\n1992 COMPARED TO 1991 Air Transportation Group revenues of $13.5 billion in 1992 were up 12.2 percent, $1.5 billion, from 1991. American's passenger revenues rose 11.0 percent, $1.2 billion, primarily as a result of an 18.3 percent increase in American's passenger traffic, offset by a 6.1 percent decline in American's passenger yield. The increase in RPMs was due to capacity growth of 14.6 percent and greater demand for air travel, generated in part by the various fare promotions during 1992. American's domestic traffic increased 13.3 percent, to 72.2 billion RPMs. International traffic grew 35.4 percent, to 25.2 billion RPMs.\nAmerican's passenger yield in 1992 declined to 12.21 cents. Domestic yield experienced a sharp decline of 8.3 percent due to various fare promotions during 1992. International yield was mixed, increasing 2.1 percent in Latin America and 14.1 percent in the Pacific, but declining 6.6 percent in Europe. In 1992, American derived 73.1 percent of its passenger revenues from domestic operations and 26.9 percent from international operations.\nPassenger revenues of the AMR Eagle carriers increased 17.6 percent, $74 million. Traffic on those carriers increased 33.2 percent, to 1.4 billion RPMs, while capacity grew 28.5 percent, to 2.7 billion ASMs. Passenger yield decreased 11.7 percent due principally to various fare promotions in 1992.\nCargo revenues increased 22.3 percent, $106 million, driven by a 30.0 percent increase in American's domestic and international cargo volume.\nOther revenues, consisting of service fees, liquor revenues, duty-free sales, tour marketing and miscellaneous other revenues, increased 26.4 percent, $105 million. The increase resulted from $22 million in revenues from the introduction of service fees on ticket changes and increased traffic.\nEXPENSES 1993 COMPARED TO 1992 Air Transportation Group operating expenses increased 4.5 percent, $627 million. American's capacity increased 5.2 percent, to 160.9 billion ASMs, due primarily to the addition of new aircraft. American's Passenger Division cost per ASM decreased by 2.0 percent, to 8.25 cents.\nWages, salaries and benefits rose 5.3 percent, $245 million, due to wage and salary adjustments for existing employees, rising health-care costs and a 1.7 percent increase in the average number of equivalent employees. In addition, during the fourth quarter, the Air Transportation Group recorded a $13 million severance provision in conjunction with layoffs and voluntary terminations of management\/specialist and operations personnel.\nAircraft fuel expense decreased 1.7 percent, $33 million, due to a 4.9 percent decrease in American's average price per gallon, partially offset by a 2.7 percent increase in gallons consumed by American. American's average price per gallon decreased from $0.65 per gallon in 1992 to $0.62 per gallon in 1993. American consumed an average of 245 million gallons of fuel each month. A one-cent decline in fuel prices saves approximately $2.5 million per month.\nCommissions to agents increased 11.3 percent, $147 million, due principally to increased passenger revenues and increased incentives for travel agents.\nDepreciation and amortization increased 19.9 percent, $167 million, primarily due to the addition of 44 owned jet aircraft, 24 owned turboprop aircraft and other capital equipment.\nOther operating expenses, consisting of aircraft rentals, other rentals and landing fees, food service costs, maintenance expenses, and miscellaneous operating expenses, increased 2.0 percent, $101 million. Aircraft rentals increased 8.8 percent, $65 million, primarily due to the full-year impact of 1992 operating-leased aircraft additions and the addition of operating-leased aircraft during 1993. Other rentals and landing fees increased 4.4 percent, $33 million, due primarily to increased rentals resulting from additions, improvements and renovations to facilities owned by airport authorities and leased to American. Food service cost increased 0.6 percent, $4 million, reflecting the 9.1 percent increase in international traffic, where food costs are greater, offset by the 3.5 percent decrease in domestic traffic. Maintenance materials and repairs expense decreased 3.5 percent, $24 million, due principally to the retirement of older aircraft and increased operational efficiencies. Miscellaneous operating expenses (including crew travel expenses, booking fees, purchased services, communications charges, credit card fees and advertising) increased 1.0 percent, $23 million, primarily due to the increase in capacity.\n1992 COMPARED TO 1991 Air Transportation Group operating expenses increased 12.5 percent, $1.5 billion. American's capacity increased 14.6 percent, to 153.0 billion ASMs, due primarily to the addition of new aircraft. American's Passenger Division cost per ASM decreased 1.8 percent, to 8.42 cents.\nWages, salaries and benefits rose 17.1 percent, $672 million, due in part to wage and salary increases, as well as to a 4.4 percent increase in the average number of equivalent employees. In addition, during 1992, the Air Transportation Group recorded a $22 million severance provision in conjunction with layoffs and voluntary terminations of airline management\/specialist personnel.\nAircraft fuel expense increased 4.8 percent, $87 million, primarily due to a 13.3 percent increase in gallons consumed by American, partially offset by a 7.7 percent decrease in American's average price per gallon. American's average price per gallon decreased from $0.70 per gallon in 1991 to $0.65 per gallon in 1992.\nCommissions to agents increased 13.3 percent, $153 million, due principally to increased passenger revenues and increased incentives for travel agents. The 1992 commissions expense also reflects the fact that American protected agent commissions for domestic tickets that were sold at higher, pre-summer sale levels and reissued at special 50-percent-off fares.\nDepreciation and amortization increased 20.1 percent, $140 million, due to additions to the fleet and the acquisition of other capital equipment.\nOther operating expenses, consisting of aircraft rentals, other rentals and landing fees, food service costs, maintenance expenses and miscellaneous operating expenses, increased 10.3 percent, $482 million. Aircraft rentals increased 10.9 percent, $72 million, due to the full-year impact of 1991 operating-leased aircraft additions and the addition of operating-leased aircraft during 1992. Other rentals and landing fees increased 38.9 percent, $211 million, due primarily to increased rentals resulting from additions, improvements and renovations to facilities owned by airport authorities and leased to American. Landing fees increased, reflecting the Company's additional capacity and rate increases charged by airports. Food service cost increased 11.4 percent, $71 million, due primarily to the increased number of passengers. Maintenance materials and repairs expense increased 2.3 percent, $15 million, due to the increase in the fleet, offset by operating efficiencies and retirement of several inefficient fleet types. Miscellaneous operating expenses (including crew travel expenses, bookings fees, purchased services, communications charges, credit card fees and advertising) increased 5.2 percent, $113 million, primarily due to the increase in capacity and traffic.\nOTHER INCOME (EXPENSE) Other Income (Expense) consists of interest income and expense, interest capitalized and miscellaneous - net.\n1993 COMPARED TO 1992 Interest expense, net of interest income, increased 10.1 percent, $53 million, as a result of additional external financings, offset in part by interest savings generated from declining interest rates, interest rate swap transactions and repurchases and retirement of long-term debt. In addition, interest capitalized decreased 48.0 percent, $47 million, as a result of the decrease in the average balance during the year of purchase deposits for flight equipment and the decline in interest rates.\nMiscellaneous - net for 1993 includes a $125 million charge related to the retirement of 31 DC-10 aircraft. Included in Miscellaneous - net for 1992 is a $14 million provision for a cash payment representing American's share of a multi-carrier antitrust settlement and an $11 million charge associated with the retirement of the CASA aircraft fleet of Executive Airlines, Inc., one of the AMR Eagle carriers.\n1992 COMPARED TO 1991 Interest expense, net of interest income, increased 41.2 percent, $153 million, primarily as a result of additional external financings. In addition, interest capitalized decreased 35.9 percent, $55 million, due to the decrease in the average balance during the year of purchase deposits for flight equipment and the decline in interest rates.\nMiscellaneous - net for 1992 includes a $14 million provision for a cash payment representing American's share of a multi- carrier antitrust settlement and an $11 million charge associated with the retirement of Executive Airlines, Inc.'s CASA aircraft fleet. Included in Miscellaneous - net for 1991 are charges of $77 million related to the retirement of American's British Aerospace BAe 146, and Boeing 737 and 747SP aircraft and the Fairchild Metro III aircraft of certain AMR Eagle carriers.\nTHE SABRE GROUP FINANCIAL HIGHLIGHTS (dollars in millions)\nREVENUES 1993 COMPARED TO 1992 Revenues for The SABRE Group increased 7.8 percent, $99 million, primarily due to increased booking fees resulting from growth in booking volumes and average fees collected from participating vendors.\n1992 COMPARED TO 1991 Revenues for The SABRE Group increased 8.2 percent, $96 million, primarily due to increased booking fees resulting from higher average fees and growth in booking volumes driven by fare initiatives and special promotions and the expansion of STIN in international markets.\nEXPENSES 1993 COMPARED TO 1992 Wages, salaries and benefits increased 12.4 percent, $48 million, due to wage and salary increases, a 3.8 percent increase in the average number of equivalent employees and a $12 million severance provision for workforce reductions associated with the formation of SABRE Decision Technologies. Other operating expenses increased 9.7 percent, $39 million, due to higher incentive payments to travel agents, outsourcing services related to product line expansion and costs associated with international expansion.\n1992 COMPARED TO 1991 Wages, salaries and benefits increased 15.2 percent, $51 million, due to wage and salary increases and an 11.8 percent increase in the average number of equivalent employees. Depreciation and amortization increased 7.6 percent, $12 million, due to the addition of capital equipment.\nOTHER INCOME (EXPENSE) Other Income (Expense) for 1993 includes a $71 million provision for losses associated with a reservations system project and resolution of related litigation. Other Income (Expense) for 1992 includes a $165 million provision related to the suspension of the reservations system project.\nAMR MANAGEMENT SERVICES GROUP FINANCIAL HIGHLIGHTS (dollars in millions)\nREVENUES 1993 COMPARED TO 1992 Revenues for the AMR Management Services Group increased 34.5 percent, $116 million. AMR Services' revenues increased 15.2 percent, $37 million, primarily as a result of strong domestic fuel and deicing sales, expansion of European operations, and the acquisition of an additional domestic fixed-base operator in November. AMR Leasing's revenues increased 73.2 percent, $59 million, with additional turboprop aircraft under rental to subsidiaries of AMR Eagle. In addition, Americas Ground Services ended 1993, its first year, with over $10 million in revenues.\n1992 COMPARED TO 1991 Revenues for the AMR Management Services Group increased 12.4 percent, $37 million. AMR Leasing's revenues increased 62.0 percent, $31 million, due to additional turboprop aircraft under rental to subsidiaries of AMR Eagle.\nEXPENSES 1993 COMPARED TO 1992 Wages, salaries and benefits increased 23.9 percent, $21 million, due primarily to a 37.5 percent increase in the average number of equivalent employees. Aircraft rentals increased 86.4 percent, $38 million, and depreciation and amortization increased 30.3 percent, $10 million, with additional operating-leased and owned aircraft in AMR Leasing's turboprop fleet. Other operating expenses increased 19.7 percent, $28 million, due primarily to the expansion of AMR Services and Americas Ground Services' first year of operations.\n1992 COMPARED TO 1991 Wages, salaries and benefits increased 4.8 percent, $4 million, due primarily to a 1.4 percent increase in the average number of equivalent employees. Aircraft rentals increased 57.1 percent, $16 million, and depreciation and amortization increased 22.2 percent, $6 million, due to additional operating-leased and owned aircraft in AMR Leasing's turboprop fleet.\nINFLATION\nAdjustment of historical cost data to reflect the impact of general inflation and specific price changes would lower AMR's operating results, principally because of the increased depreciation and amortization resulting from the replacement, at current cost, of equipment and property with assets that have the same service potential. However, because AMR's monetary liabilities exceed monetary assets, the reduced operating results would be partially offset by the gain from the decline in purchasing power of the net amounts owed.\nLIQUIDITY AND CAPITAL RESOURCES\nOperating activities provided net cash of $1.4 billion in 1993, $843 million in 1992 and $744 million in 1991. Capital expenditures in 1993 totaled $2.1 billion, compared to $3.3 billion in 1992 and $3.5 billion in 1991. In 1993, The Company took delivery of 44 owned jet aircraft - one Airbus A300-600R, six Boeing 757-200s, six Boeing 767-300ERs, 23 Fokker 100s and eight McDonnell Douglas MD-11s. The Company also took delivery of 24 turboprop aircraft - one ATR-42, six Super ATRs and 17 Saab 340Bs.\nCAPITAL COMMITMENTS\nFIRM DELIVERIES At December 31, 1993, AMR had 58 aircraft on order, aggregating approximately $1.5 billion, for delivery through 1996. The Company had firm orders for 16 Boeing 757-200s, seven Boeing 767-300ERs, 13 Fokker 100s, 19 Super ATRs and three Saab 340Bs.\nIn 1994, the Company will take delivery of 22 jet aircraft -- six Boeing 757-200s, three Boeing 767-300ERs, 13 Fokker 100s and 17 turboprop aircraft -- 14 Super ATRs and three Saab 340Bs. Total expenditures for 1994 for aircraft acquisitions and related equipment will be approximately $800 million.\nOTHER The Company also has planned capital expenditures in 1994 of approximately $900 million for aircraft modifications, renovations of, and additions to, airport and office facilities and various other equipment and assets.\nIn addition, AMR and PWA Corporation, the parent company of Canadian Airlines International Ltd. (CAIL), have entered into a series of agreements which provide for a 20-year services contract under which AMR will furnish a comprehensive package of airline services to CAIL. In addition, AMR will make an investment of approximately $246 million (Canadian) in mandatorily redeemable convertible preferred stock of CAIL. The agreements are subject to significant conditions including approval by the U.S. and Canadian governments, conditions relating to CAIL's capital restructuring program and various conditions related to labor matters.\nAMR intends to finance its capital asset acquisitions through the use of internally generated funds as well as external financing. At December 31, 1993, no borrowings were outstanding and approximately $1.8 billion was available under American's credit facilities, including American's $1.0 billion credit facility expiring in 1994. American expects to replace the $1.0 billion credit facility with a $750 million credit agreement. At February 15, 1994, borrowings of $400 million were outstanding under the credit facilities.\nAMR continually reviews its need for additional aircraft and ground properties and determines its requirements based on return-on-investment analyses and both short-term and long-term profitability forecasts. AMR has several ways to adjust its plans, including terminating certain operating leases, scaling back or canceling planned facility expansions and delaying other planned expenditures.\nAIRCRAFT OPTIONS In addition to aircraft on firm order at December 31, 1993, American has 119 jet aircraft available on option - 21 Boeing 757-200s, eight Boeing 767-300ERs, 15 McDonnell Douglas MD-11s and 75 Fokker 100s. The Company also has 160 turboprop aircraft available on option - 20 Saab 340Bs, 40 Saab 2000s, 20 British Aerospace Jetstream 41s, 10 ATR-42s and 70 Super ATRs.\nOTHER INFORMATION\nWORKING CAPITAL AMR (principally American Airlines) historically operates with a working capital deficit as do most other airline companies. The existence of such a deficit has not in the past impaired the Company's ability to meet its obligations as they become due and is not expected to do so in the future.\nDEFERRED TAX ASSETS As of December 31, 1993, the Company had deferred tax assets aggregating approximately $2.3 billion, including approximately $267 million of alternative minimum tax (AMT) credit carryforwards. The Company believes substantially all the deferred tax assets, other than the AMT credit carryforwards, will be realized through reversal of existing taxable temporary differences. The Company anticipates using its AMT credit carryforwards, which are available for an indefinite period of time, against its future regular tax liability within the next 10 years for several reasons. Although the Company incurred net losses in 1990 through 1993, it recorded substantial income before taxes and taxable income during the seven-year period 1983 through 1989 of approximately $3.4 billion and $2.0 billion, respectively. The Company is aggressively pursuing revenue enhancement and cost reduction initiatives to restore profitability. The Company has also substantially curtailed its planned capital spending program, which will accelerate the reversal of depreciation differences between financial and tax income, thus increasing taxable income.\nENVIRONMENTAL MATTERS Subsidiaries of AMR have been notified of potential liability with regard to several environmental cleanup sites. At sites where remedial litigation has commenced, potential liability is joint and several. AMR's alleged volumetric contributions at the sites are minimal. AMR does not expect these actions, individually or collectively, to have a material impact on its financial condition, operating results or cash flows.\nDISCOUNT RATE Due to the decline in interest rates during 1993, the discount rate used to determine the Company's pension obligations as of December 31, 1993 and the related expense for 1994, has been reduced. The impact on 1994 pension expense of the change in the discount rate will be substantially offset by the significant appreciation in the market value of pension plan assets experienced during 1993.\nPROPOSED SETTLEMENT OF LITIGATION During 1992, American and certain other carriers agreed to settle various class action claims, subject to approval by the U.S. District Court for the Northern District of Georgia. Under the terms of the agreement, the carriers paid a total of approximately $50 million in cash and will jointly issue and distribute approximately $408 million in face amount of certificates for discounts of approximately 10 percent on future air travel on any of the carriers. A liability has not been established for the certificate portion of the settlement since American expects that, in the aggregate, future revenues received upon redemption of the certificates will exceed the related cost of providing the air travel. American anticipates that the share of the certificates redeemed on American may represent, but is not limited to, American's 26 percent market share among the carriers. The ultimate impact of the settlement on American's revenues, operating margins and earnings is not reasonably estimable since both the portion of certificates to be redeemed on American and the stimulative or depressive effect of the certificate redemption on revenues is not known.\nOUTLOOK FOR 1994\nDuring 1993, AMR completed a comprehensive review of the competitive realities of its businesses and determined that the Company must change significantly to generate sufficient earnings. The fundamental problems of the airline -- increasing competition from low-cost, low-fare carriers, its inability to reduce labor costs to competitive levels, and the changing values of its customers -- demand new solutions. As an initial response to that need, the Company created and began implementing a new strategic framework known as the Transition Plan. The plan has three parts, each intended to improve the Company's results. First, make the core airline business bigger and stronger where economically justified. Second, and conversely, shrink the airline where it cannot compete profitably. Third, reallocate resources and effort to the growing information and management services businesses, which are more profitable than the airline.\nThe Transition Plan recognizes the unfavorable and uncertain economics which have characterized the core airline business in recent years, acknowledges the airline cost problem and seeks to maximize the contribution of the Company's more profitable businesses. In 1994, the Company will continue the course of change initiated in 1993 under the Transition Plan. Over the long term, the Company will continue its best efforts to reduce airline costs and to restore the airline operations to profitability. Based upon the success or failure of those efforts, the Company will make ongoing determinations as to the appropriate degree of reallocation of resources from the airline operations to the Company's other businesses, which may include, if the airline cannot be run profitably, the disposition or termination, over the long term, of a substantial part or all of the airline operations.\nAIR TRANSPORTATION GROUP During 1993, American closed its hub and dramatically reduced operations at San Jose, California, and expanded its Dallas\/Fort Worth and Miami hubs. The airline will continue to reduce or eliminate service where it cannot operate profitably. American's regional airline affiliates, subsidiaries of AMR Eagle, have added turboprop service on some routes where jet service has been canceled, and they will continue to pursue these opportunities in 1994.\nIn 1993, American removed 21 McDonnell Douglas DC-10 and 28 Boeing 727 aircraft from service. In 1994, an additional 14 DC- 10s and 31 727s will be retired. As a result, in 1994 American's available seat miles are expected to decrease by almost five percent. Domestic capacity will drop by almost seven percent, while international capacity will increase slightly. The capacity reduction will be the first at American since 1981.\nAircraft retirements have necessitated the furlough of about 3,700 American employees since late 1992. The Company anticipates further workforce reductions in 1994 and, accordingly, made a provision for the cost of these reductions in 1993. Fewer aircraft deliveries will also translate into lower capital spending.\nAmerican's revenue plan for 1994 reflects continued emphasis on producing premium yields by attracting more full fare passengers than its competitors. As part of this plan, American will expand its successful three-class domestic transcontinental service, add more first class seats on some narrowbody aircraft and increase frequencies in business-oriented markets. In addition, American will seek to grow its cargo revenues again in 1994.\nIn 1993, American's cost per available seat mile declined by 2.0 percent, largely due to a 4.9 percent drop in the cost of jet fuel. In 1994, though American will continue its rigorous program of cost control, it expects units costs, excluding fuel, to rise modestly. This increase will be driven by higher unit labor costs due to pay scale and average seniority escalations.\nOn August 10, 1993, the Omnibus Budget Reconciliation Act was signed into law, imposing a new 4.3 cents per gallon tax on commercial aviation jet fuel for use in domestic operations. The new tax will become effective October 1, 1995, and is scheduled to continue until October 1, 1998. American estimates the resulting annual increase in fuel taxes will be approximately $90 million.\nThe Company instituted a program in the latter half of 1993 to reduce interest costs. At year-end interest rates, the Company anticipates that this program, which involves such things as interest rate swaps and the repurchase and retirement of long-term debt, will produce significant interest cost savings. This savings is expected to largely offset the additional interest cost of new financings in 1994.\nIn November 1993, American endured a five-day strike by its flight attendants' union; the strike ended when both sides agreed to binding arbitration. The arbitration process is expected to be complex and will likely not be decided for several months. While the ultimate outcome is uncertain, the new contract will likely result in higher unit labor costs in 1994.\nAmerican's labor contract with its pilots' union becomes amendable in August 1994. The Company and the union leadership are pursuing opportunities to streamline the negotiation and settlement process. The ultimate outcome of these negotiations cannot be estimated at this time.\nTHE SABRE GROUP The integration of AMR's information services businesses will continue in 1994 with the integration of SDS, AADT and other units in The SABRE Group into SABRE Decision Technologies (SDT). SDT will develop and market The SABRE Group's expanding array of information systems products and services to a growing list of customers throughout the world.\nSTIN will seek to sustain its revenue growth through continued geographical expansion of the SABRE computerized reservation system and the sale of its leading-edge automated reservations products such as SABRExpress, SABRExpress Ticketing and SABRE TravelBase, a new travel agency accounting system.\nOther SABRE Group units, providing telemarketing and reservations services, data capture and management services and information systems training, will continue to pursue opportunities to market these services, both domestically and internationally.\nAMR MANAGEMENT SERVICES GROUP AMR Management Services' growth in 1994 will be driven primarily by revenue increases at AMR Services Corporation and AMR Leasing. AMR Services' performance in 1994 will benefit from the full-year operation of AMR Combs' Dallas aviation service center acquired in late 1993 and the continued growth and development of AMR Services' international operations, the majority of which were begun or acquired in 1993. AMR Leasing's revenues will increase in 1994 due to the acquisition of additional turboprop aircraft to be leased to subsidiaries of AMR Eagle. AMR Leasing is also exploring opportunities to lease aircraft to external customers.\nITEM 8.","section_7A":"","section_8":"ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS\nREPORT OF INDEPENDENT AUDITORS\nThe Board of Directors and Stockholders AMR Corporation\nWe have audited the accompanying consolidated balance sheets of AMR Corporation as of December 31, 1993 and 1992, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1993. Our audits also included the financial statement schedules listed in Item 14(a) on page 55. These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.\nWe conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.\nIn our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of AMR Corporation 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. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.\nAs discussed in Notes 7 and 10 to the consolidated financial statements, effective January 1, 1992, the Company changed its method of accounting for income taxes and postretirement benefits other than pensions.\nERNST & YOUNG\n2121 San Jacinto Dallas, Texas 75201 February 15, 1994\nAMR CORPORATION CONSOLIDATED STATEMENT OF OPERATIONS (in millions, except per share amounts)\nContinued on next page.\nAMR CORPORATION CONSOLIDATED STATEMENT OF OPERATIONS (CONTINUED)\nThe accompanying notes are an integral part of these financial statements.\nAMR CORPORATION CONSOLIDATED BALANCE SHEET (in millions)\nThe accompanying notes are an integral part of these financial statements.\nAMR CORPORATION CONSOLIDATED BALANCE SHEET (in millions, except shares and par value)\nThe accompanying notes are an integral part of these financial statements.\nAMR CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS (in millions)\nThe accompanying notes are an integral part of these financial statements.\nAMR CORPORATION CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (in millions, except shares and per share amounts)\nThe accompanying notes are an integral part of these financial statements.\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS\n1. SUMMARY OF ACCOUNTING POLICIES\nBASIS OF CONSOLIDATION The consolidated financial statements include the accounts of AMR Corporation (AMR or the Company) and its wholly-owned subsidiaries. All significant intercompany transactions have been eliminated. Certain amounts from prior years have been reclassified to conform with the 1993 presentation.\nINVENTORIES Spare parts, materials and supplies relating to flight equipment are carried at average cost and are expensed when used in operations. Allowances for obsolescence are provided, over the estimated useful life of the related aircraft and engines, for spare parts expected to be on hand at the date aircraft are retired from service.\nEQUIPMENT AND PROPERTY The provision for depreciation of operating equipment and property is computed on the straight-line method applied to each unit of property, except that spare assemblies are depreciated on a group basis. The depreciable lives and residual values used for the principal depreciable asset classifications are:\n* In connection with a review of its fleet plan, American changed, effective October 1, 1991, the estimated useful lives of its Boeing 727-200 aircraft and engines from a common retirement date of December 31, 1994, to projected retirement dates by aircraft, which results in an average depreciable life of approximately 21 years. ** During 1993, American announced its intention to retire a total of 36 McDonnell Douglas DC-10-10 and six McDonnell Douglas DC-10-30 aircraft. At December 31, 1993, 21 of those aircraft had been grounded. *** Approximate common retirement date.\nEquipment and property under capital leases are amortized over the term of the leases and such amortization is included in depreciation and amortization. Lease terms vary but are generally 10 to 25 years for aircraft and 7 to 40 years for other leased equipment and property.\nMAINTENANCE AND REPAIR COSTS Maintenance and repair costs for owned and leased flight equipment are charged to operating expense as incurred, except engine overhaul costs incurred by AMR's regional carriers, which are accrued on the basis of hours flown.\n1. SUMMARY OF ACCOUNTING POLICIES (CONTINUED)\nINTANGIBLE ASSETS The Company continually evaluates intangible assets to determine whether current events and circumstances warrant adjustment of the carrying values or amortization periods.\nRoute acquisition costs and airport operating and gate lease rights represent the purchase price attributable to route authorities, airport take-off and landing slots and airport gate leasehold rights acquired and are being amortized on a straight-line basis over 10 to 40 years.\nPASSENGER REVENUES Passenger ticket sales are initially recorded as a current liability. Revenue derived from the sale is recognized at the time transportation is provided.\nFREQUENT FLYER PROGRAM The estimated incremental cost of providing free travel awards is accrued when such award levels are reached. Revenues received for miles sold to others participating in the program are deferred and recognized over a period approximating the time transportation is provided.\nINCOME TAXES AMR and its eligible subsidiaries file a consolidated federal income tax return. Deferred income taxes reflect the net tax effects of temporary differences between the financial reporting carrying amounts of assets and liabilities and the income tax amounts.\nDEFERRED GAINS Gains on the sale and leaseback of equipment and property are deferred and amortized over the terms of the related leases as a reduction of rent expense.\nFOREIGN EXCHANGE CONTRACTS AMR enters into foreign exchange contracts as a hedge against certain amounts payable or receivable in foreign currencies. Market value gains or losses are recognized and offset against foreign exchange gains or losses on those obligations or receivables.\nFUEL SWAP CONTRACTS American enters into swap contracts to hedge against market price fluctuations of jet fuel. Gains or losses on these contracts are included in fuel expense when the underlying fuel being hedged is used.\nSTATEMENT OF CASH FLOWS Short-term investments, without regard to remaining maturity at acquisition, are not considered as cash equivalents for purposes of the statement of cash flows.\nLOSS PER COMMON SHARE Loss per share computations are based upon the loss applicable to common shares and the average number of shares of common stock outstanding and dilutive common stock equivalents (stock options, warrants and deferred stock) outstanding. The convertible preferred stock is not a common stock equivalent. The number of shares used in the computations of primary and fully diluted loss per common share for the years ended December 31, 1993, 1992 and 1991, was 76.0 million, 74.9 million and 67.8 million, respectively.\n2. SHORT-TERM INVESTMENTS\nShort-term investments consisted of (in millions):\nThe fair value of short-term investments at December 31, 1993, by contractual maturity was (in millions):\nAll short-term investments were classified as available-for-sale and stated at fair value.\n3. COMMITMENTS AND CONTINGENCIES\nThe Company has on order 36 jet aircraft - 16 Boeing 757-200s, seven Boeing 767-300ERs and 13 Fokker 100s scheduled for delivery through 1996, and 22 turboprop aircraft - 19 Super ATRs and three Saab 340Bs scheduled for delivery through 1995. Deposits of $350 million have been made toward the purchase of these aircraft. Future payments, including estimated amounts for price escalation through anticipated delivery dates for these aircraft and related equipment, will be approximately $800 million in 1994, $500 million in 1995 and $150 million in 1996, a portion of which is payable in foreign currencies.\nIn addition to these commitments for aircraft, the Company has authorized expenditures of approximately $1.2 billion for aircraft modifications, renovations of, and additions to, airport and office facilities and various other equipment and assets. AMR expects to spend approximately $800 million of this amount in 1994.\nAMR and PWA Corporation, the parent company of Canadian Airlines International Ltd. (CAIL), have entered into a series of agreements which provide for a 20-year services contract under which AMR will furnish a comprehensive package of airline services to CAIL. In addition, AMR will make an investment of approximately $246 million (Canadian) in mandatorily redeemable convertible preferred stock of CAIL. The agreements are subject to significant conditions, including approval by the U.S. and Canadian governments, conditions relating to CAIL's capital restructuring program, and various conditions relating to labor matters.\nAMR and American have included an event risk covenant in approximately $397 million of debentures and approximately $2.9 billion of lease agreements. The covenant permits the holders of such instruments to receive a higher rate of return (between 50 and 700 basis points above the stated rate) if a designated event, as defined, should occur and the credit rating of the debentures or the debt obligations underlying the lease agreements is downgraded below certain levels.\nIn July 1991, American entered into a five-year agreement whereby American transfers, on a continuing basis and with recourse to the receivables, an undivided interest in a designated pool of receivables. Undivided interests in new receivables are transferred daily as collections reduce previously transferred receivables. At December 31, 1993 and 1992, Receivables are presented net of approximately $300 million of such transferred receivables. American maintains an allowance for uncollectible receivables based upon expected collectibility of all receivables, including the receivables transferred.\n3. COMMITMENTS AND CONTINGENCIES (CONTINUED)\nSpecial facility revenue bonds have been issued by certain municipalities, primarily to purchase equipment and improve airport facilities which are leased by American. In certain cases, the bond issue proceeds were loaned to American and are included in Long-Term Debt. Certain bonds have rates that are periodically reset and are remarketed by various agents. In certain circumstances, American may be required to purchase up to $413 million of the special facility revenue bonds prior to maturity, in which case American has the right to resell the bonds or to use the bonds to offset its lease or debt obligations. American may borrow the purchase price of these bonds under standby letter-of-credit agreements. At American's option, these letters of credit are secured by funds held by bond trustees and by approximately $448 million of short-term investments.\n4. LEASES\nAMR's subsidiaries lease various types of equipment and property, including aircraft, passenger terminals, equipment and various other facilities. The future minimum lease payments required under capital leases, together with the present value of net minimum lease payments, and future minimum lease payments required under operating leases that have initial or remaining non- cancelable lease terms in excess of one year as of December 31, 1993, were (in millions):\n* Future minimum payments required under capital leases and operating leases include $384 million and $6.0 billion, respectively, guaranteed by AMR relating to special facility revenue bonds issued by municipalities. ** The present value of future minimum lease payments includes $132 million guaranteed by American.\nAt December 31, 1993, the Company had 235 jet aircraft and 144 turboprop aircraft under operating leases and 80 jet aircraft and 63 turboprop aircraft under capital leases.\nThe aircraft leases can generally be renewed at rates based on fair market value at the end of the lease term for one to five years. Most aircraft leases have purchase options at or near the end of the lease term at fair market value, but generally not to exceed a stated percentage of the defined lessor's cost of the aircraft. Of the aircraft American has under operating leases, 15 Boeing 767-300ERs are cancelable upon 30 days' notice during the initial 10-year lease term. At the end of that term in 1998, the leases can be renewed for periods ranging from 10 to 12 years. In 1993, American agreed to forfeit its right to cancel leases for 25 Airbus A300-600R aircraft upon 30 days' notice and extended the terms of the leases for periods ranging from 18 to 19 years.\nRent expense, excluding landing fees, was $1.3 billion for 1993 and 1992 and $1.0 billion for 1991.\n5. INDEBTEDNESS\nShort-term borrowings at December 31, 1992, consisted of commercial paper.\nLong-term debt (excluding amounts maturing within one year) consisted of (in millions):\nMaturities of long-term debt (including sinking fund requirements) for the next five years are: 1994 - $200 million; 1995 - $566 million; 1996 - $226 million; 1997 - $412 million; 1998 - $433 million.\nCertain debt is secured by aircraft, engines, equipment and other assets having a net book value of approximately $1.5 billion.\nDuring 1993, AMR repurchased and retired prior to maturity the zero coupon subordinated convertible notes due 2006 and certain other long-term debt with a total carrying value of $802 million. The repurchases and retirements resulted in an extraordinary loss of $21 million ($14 million after tax). Additional borrowings and cash from operations provided the funding for the repurchases and retirements.\nAmerican has a $500 million short-term credit facility agreement which expires in 1995 and a $1.0 billion credit facility expiring in 1994. American expects to replace the $1.0 billion credit facility with a $750 million credit agreement. American also has $335 million available under a multiple option facility which expires in 1995. Interest on these agreements is calculated at floating rates based upon the London Interbank Offered Rate (LIBOR). At December 31, 1993, no borrowings were outstanding and approximately $1.8 billion was available under these facilities. As of February 15, 1994, borrowings of $400 million were outstanding under the credit facilities.\nAmerican's debt and credit facility agreements contain certain restrictive covenants, including a cash flow coverage test, a minimum net worth requirement and limitations on indebtedness and the declaration of dividends on shares of its capital stock. Certain of these restrictions could affect AMR's ability to pay dividends. At December 31, 1993, under the most restrictive provisions of those agreements, approximately $1.3 billion of American's retained earnings were available for payment of cash dividends to AMR.\nCertain of AMR's debt agreements contain restrictive covenants, including a limitation on the declaration of dividends on shares of capital stock. At December 31, 1993, under the terms of such agreements, all of AMR's retained earnings were available for payment of dividends.\n6. FINANCIAL INSTRUMENTS\nThe fair values of the Company's long-term debt were estimated using quoted market prices, where available. For long-term debt not actively traded, fair values were estimated using discounted cash flow analyses, based on the Company's current incremental borrowing rates for similar types of borrowing arrangements. The fair values of the Company's long-term debt, including current maturities, at December 31, 1993, were (in millions):\nDuring 1993, American entered into interest-rate swap agreements with a number of major financial institutions. Under these swap agreements, American receives fixed-rate payments (4.25% to 6.44%) in exchange for floating-rate payments (3.25% to 4.00% at December 31, 1993) on a total notional principal amount of $1.4 billion. The swap agreements expire over three to 15 years. American is exposed to credit risk in the event of default by the counterparties; however, American does not anticipate such default. Under agreements with certain counterparties, American or the counterparty may be required to post collateral based on certain credit limits and ratings. As of December 31, 1993, no collateral was required under these agreements. The fair value of the Company's interest-rate swap agreements is estimated based on the market prices for similar agreements. The net fair value of the Company's interest rate swap agreements at December 31, 1993, representing the estimated net amount the Company would have to pay to terminate the agreements, was $6 million.\nTo hedge against the risk of future currency exchange rate fluctuations on certain debt and lease obligations and related interest payable in foreign currencies, AMR has entered into various foreign currency exchange agreements. Changes in the value of the agreements due to exchange rate fluctuations are offset by changes in the value of the foreign currency denominated debt and lease obligations translated at the current rate. In the event of default by the counterparties, AMR is exposed to risk for periodic settlements due under the agreements; however, AMR does not anticipate such default. The fair value of the Company's foreign currency exchange agreements is estimated based on quoted market prices of comparable agreements. The net fair values of the Company's foreign currency exchange agreements at December 31, 1993, representing the estimated net amount that AMR would receive to terminate the agreements, were as follows:\n6. FINANCIAL INSTRUMENTS (CONTINUED)\nAmerican has sold options enabling two major banks to put Dutch guilders to American at a fixed rate of guilders per U.S. dollar at periodic intervals through 1994. At December 31, 1993, approximately 680 million guilders remain subject to the put options. The market risk associated with the put options is offset by American's ability, under a purchase agreement, to pay for certain equipment in U.S. dollars or, at American's option, in Dutch guilders, at the same exchange rate as the put options. At dates where American does not have a liability under the equipment purchase agreement due to changes in delivery schedules, American has purchased options to put approximately 50 million guilders to a major bank at the same rate of exchange. American's credit risk is limited to failure of the manufacturer to perform under the purchase agreement or the failure of the bank to perform under the purchased put option agreement; however, American does not anticipate non-performance. The proceeds from the sales of the put options, net of the cost of the put options purchased, were deferred and are being offset against the cost of the equipment acquired under the purchase agreement. The net fair value of these guilder put options was de minimis at December 31, 1993.\n7. INCOME TAXES\nThe significant components of the income tax benefit were (in millions):\nThe income tax benefit includes federal income tax benefit of $30 million, $219 million and $105 million for the years ended December 31, 1993, 1992, and 1991, respectively.\nEffective January 1, 1992, AMR adopted Statement of Financial Accounting Standards No. 109, \"Accounting for Income Taxes,\" (FAS 109), changing its method of accounting for income taxes. As permitted under the new rules, prior years' financial statements have not been restated to reflect the change in accounting method. The cumulative effect of adopting FAS 109 decreased the net loss for the year ended December 31, 1992, by $135 million, or $1.81 per share.\nIn addition, a deferred tax benefit of $322 million was recognized in the year ended December 31, 1992, upon adoption of Statement of Financial Accounting Standards No. 106, \"Employers' Accounting for Postretirement Benefits Other than Pensions,\" (FAS 106).\nThe income tax benefit differed from amounts computed at the statutory federal income tax rate as follows (in millions):\n7. INCOME TAXES (CONTINUED)\nThe components of AMR's deferred tax assets and liabilities were (in millions):\nAt December 31, 1993, AMR had available for federal income tax purposes approximately $267 million of alternative minimum tax credit carryforwards available for an indefinite period, and approximately $1.8 billion of net operating loss carryforwards for regular tax purposes, with $970 million expiring in 2007 and $877 million expiring in 2008.\nThe sources of deferred income taxes and the tax effect of each for the year ended December 31, 1991, before AMR adopted FAS 109, were (in millions):\n8. PREFERRED STOCK AND COMMON STOCK RIGHTS\nIn 1993, AMR issued 22 million depositary shares, each representing 1\/10th of a share of 6% Series A cumulative convertible preferred stock, resulting in net proceeds of approximately $1.1 billion. At the holder's option, each preferred share is convertible into 6.3492 shares of common stock at any time. At the Company's option after February 1, 1996, the preferred shares are redeemable at specified redemption prices.\nEach outstanding share of common stock has one preferred stock purchase right which entitles stockholders to purchase 1\/100th of a share of an authorized series of preferred stock. Generally, the rights will not be exercisable until a party either acquires beneficial ownership of 10% of AMR's common stock or makes a tender offer for at least 30% of its common stock. The rights, which expire in 1996, do not have voting rights and may be redeemed by AMR at $0.05 per right at any time prior to the time that 10% or more of AMR's shares have been accumulated by a single acquirer or group. If AMR is acquired in a merger or business combination, each right has an exercise price of $200 and can be used to purchase the common stock of the surviving company having a market value of twice the exercise price of each right. As a result, the Board has reserved 1,000,000 shares of preferred stock for possible conversion of these rights.\n9. STOCK AWARDS AND OPTIONS\nUnder the 1988 Long Term Incentive Plan (1988 Plan), officers and key employees of AMR and its subsidiaries may be granted stock options, stock appreciation rights, restricted stock, deferred stock, stock purchase rights and\/or other stock-based awards. The total number of common shares reserved for distribution under the 1988 Plan is 4,500,000 shares plus, 7.65% of any increase (other than any increase due to awards under this plan or other plans) in the number of authorized and issued shares of common stock outstanding at December 31, 1987. The 1988 Plan will terminate no later than May 18, 1998. Options granted are exercisable at the market value of the stock upon grant, generally becoming exercisable in equal annual installments over one to five years following the date of grant and expiring 10 years from the date of grant. Stock appreciation rights may be granted in tandem with options awarded. At December 31, 1993, 462,500 stock appreciation rights were outstanding.\nStock option activity was:\n* At prices ranging from $39.6875 to $65.75 in 1993, $27.6875 to $68.25 in 1992 and $12.00 to $58.25 in 1991. ** Includes 21,000, 20,000 and 18,500 options canceled upon exercise of stock appreciation rights for 1993, 1992 and 1991, respectively.\nThe aggregate purchase price of outstanding options, number of exercisable options outstanding and stock awards available for grant were:\nShares of deferred stock are awarded at no cost to officers and key employees under the 1988 Plan and will be issued upon the individual's retirement from AMR or, in certain circumstances, will vest on a pro rata basis. Deferred stock activity was:\nAMR has a restricted stock incentive plan, under which officers and key employees may be awarded, through 1995, shares of its common stock at no cost. In connection with the plan, 250,000 shares have been authorized for issuance; and at December 31, 1993, all authorized shares had been granted. Vesting of the shares occurs generally over a five-year period.\n9. STOCK AWARDS AND OPTIONS (CONTINUED)\nA new performance share plan was implemented in 1993 under which shares of deferred stock are awarded at no cost to officers and key employees under the 1988 Plan. The shares vest over a three-year performance period based upon AMR's ratio of operating cash flow to net assets. During 1993, 246,650 performance shares were granted; none were issued or canceled.\nAt December 31, 1993, 19,064,488 shares of AMR's common stock were reserved for the issuance of stock upon the conversion of convertible preferred stock, the exercise of options and the issuance of restricted stock and deferred stock.\n10. RETIREMENT BENEFITS\nSubstantially all employees of American and employees of certain other subsidiaries are eligible to participate in pension plans. The defined benefit plans provide benefits for participating employees based on years of service and average compensation for a specified period of time before retirement. Airline pilots and flight engineers also participate in defined contribution plans for which company contributions are determined as a percentage of participant compensation.\nCosts for all pension plans were approximately $288 million, $247 million and $187 million in 1993, 1992 and 1991, respectively.\nNet periodic pension cost of the defined benefit plans was (in millions):\nThe funded status and actuarial present value of benefit obligations of the defined benefit plans were (in millions):\n* AMR's funding policy is to make contributions equal to, or in excess of, the minimum funding requirements of the Employee Retirement Income Security Act of 1974.\n10. RETIREMENT BENEFITS (CONTINUED)\nPlan assets consist primarily of government and corporate debt securities, marketable equity securities, and money market and mutual fund shares, of which approximately $99 million and $86 million of plan assets at December 31, 1993 and 1992, respectively, were invested in shares of mutual funds managed by a subsidiary of AMR.\nThe projected benefit obligation was calculated using weighted average discount rates of 7.50%, 9.00% and 9.25% at December 31, 1993, 1992 and 1991, respectively; rates of increase for compensation of 4.40% at December 31, 1993, and 4.90% in December 31, 1992 and 1991; and the 1983 Group Annuity Mortality Table. The weighted average expected long-term rate of return on assets was 10.50% in 1993 and 11.25% in 1992 and 1991. The vested benefit obligation and plan assets at fair value at December 31, 1993, for plans whose benefits are guaranteed by the Pension Benefit Guaranty Corporation are $3.1 billion and $3.5 billion, respectively.\nPension costs for defined contribution plans were approximately $118 million, $108 million and $90 million in 1993, 1992 and 1991, respectively.\nIn addition to pension benefits, other postretirement benefits, including certain health care and life insurance benefits, are also provided to retired employees. The amount of health care benefits is limited to lifetime maximums as outlined in the plan. Substantially all employees of American and employees of certain other subsidiaries may become eligible for these benefits if they satisfy eligibility requirements during their working lives.\nEffective January 1, 1990, AMR's non-union employees that are covered by the health care and life insurance plan, as well as employees who are represented by the Transport Workers Union, began making contributions toward funding a portion of their retiree health care benefits during their working lives. AMR funds benefits as incurred and began, effective January 1993, to match employee prefunding.\nEffective January 1, 1992, AMR adopted FAS 106, changing the method of accounting for these benefits. Prior to 1992, other postretirement benefit expense was recognized by expensing health care claims incurred and annual life insurance premiums. Such expense was $31 million in 1991 and has not been restated. The cumulative effect of adopting FAS 106 as of January 1, 1992, was a charge of $917 million ($595 million after tax, or $7.95 per share). This change also increased other postretirement benefit expense by approximately $90 million ($58 million after tax, or $0.77 per share) for the year ended December 31, 1992.\nNet other postretirement benefit cost was (in millions):\n10. RETIREMENT BENEFITS (CONTINUED)\nThe funded status of the plan, reconciled to the accrued other postretirement benefit cost recognized in AMR's balance sheet, was (in millions):\nPlan assets consist primarily of shares of a mutual fund managed by a subsidiary of AMR.\nFor 1993, future benefit costs were estimated assuming per capita cost of covered medical benefits would increase at an 11% annual rate, decreasing gradually to a 4% annual growth rate in 2000 and thereafter. A 1% increase in this annual trend rate would have increased the accumulated other postretirement benefit obligation at December 31, 1993, by approximately $118 million and 1993 other postretirement benefit cost by approximately $17 million. In 1992, future benefit costs were estimated assuming per capita cost of covered medical benefits would increase at a 12% annual rate, decreasing gradually to a 5% annual growth rate in 1999 and thereafter. The weighted average discount rate used in estimating the accumulated other postretirement benefit obligation was 7.50% and 9.00% at December 31, 1993 and 1992, respectively.\n11. REVENUE AND OTHER EXPENSE ITEMS\nRevenues for the second quarter of 1993 include a $115 million positive adjustment resulting from a change in estimate relating to certain earned passenger revenues.\nMiscellaneous - net in 1993 and 1992 includes provisions of $71 million and $165 million, respectively, for losses associated with a reservations system project and resolution of related litigation. Also included in 1993 is a $125 million charge related to the retirement of 31 McDonnell Douglas DC-10 aircraft. The charge represents the Company's best estimate of the expected loss based upon the anticipated method of disposition. However, should the ultimate method of disposition differ, the actual loss could be different than the amount estimated. Also included in Miscellaneous - net for 1992 are charges aggregating $25 million for a cash payment representing American's share of a multi-carrier antitrust settlement and the retirement of the CASA aircraft fleet of Executive Airlines, Inc., one of the AMR Eagle carriers. Miscellaneous - net for 1991 includes a provision of $42 million for the anticipated cost of lease terminations and aircraft dispositions relating to the retirement of American's Boeing 737 and British Aerospace BAe 146 aircraft fleets. Also included in 1991 are provisions aggregating $35 million for the retirement of American's Boeing 747SP aircraft and the Fairchild Metro III aircraft of certain of the AMR Eagle carriers.\n12. FOREIGN OPERATIONS\nAmerican conducts operations in various foreign countries. American's operating revenues from foreign operations were (in millions):\n13. OTHER FINANCIAL INFORMATION\nAMR's operations fall within three industry segments: the Air Transportation Group, The SABRE Group, and the AMR Management Services Group. For a description of each of these groups, refer to Business on pages 1 and 2.\nRevenues of the industry segments for each of the three years in the period ended December 31, 1993, are included in the Consolidated Statement of Operations. Intergroup revenues were (in millions):\nOperating income (loss), depreciation and amortization and capital expenditures for each of the industry segments for each of the three years in the period ended December 31, 1993, are included in Management's Discussion and Analysis on pages 16, 20 and 21.\nIdentifiable assets of the industry segments were (in millions):\nIdentifiable assets are gross assets used by a business segment, including an allocated portion of assets used jointly by more than one business segment.\nGeneral corporate and other consists primarily of income tax assets.\nThe adoption of FAS 106 reduced the 1992 operating income of the Air Transportation Group and The SABRE Group by $85 million and $5 million, respectively. The impact on the AMR Management Services Group was de minimis.\n13. OTHER FINANCIAL INFORMATION (CONTINUED)\nSupplemental disclosures of cash flow information and non-cash activities (in millions):\n14. QUARTERLY FINANCIAL DATA (UNAUDITED)\nUnaudited summarized financial data by quarter for 1993 and 1992 (in millions, except per share amounts):\n* Results for the first quarter of 1992 have been restated for the cumulative effect of the adoption of FAS 106 and FAS 109, which resulted in a net charge of $460 million after tax. Results for the first three quarters of 1992 have also been restated by the ratable portion of the $90 million current year effect of the accounting change for FAS 106, net of tax benefit.\n14. QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)\nResults for the second quarter of 1993 include a $125 million charge related to the retirement of 31 McDonnell Douglas DC-10 aircraft. Results for the fourth quarter of 1993 reflect the adverse impact of a five-day strike by American's flight attendants' union and include a $71 million charge for losses associated with a reservations system project and resolution of related litigation and a $25 million charge for the cost of severance of certain employees.\nResults for the second quarter of 1992 include a $165 million provision for losses related to the suspension of the reservations system project and a $14 million provision for a cash payment representing American's share of a multi-carrier antitrust settlement. Results for the fourth quarter of 1992 include a $22 million charge for the cost of severance of certain employees and an $11 million charge associated with the retirement of the CASA aircraft fleet of Executive Airlines, Inc.\nITEM 9.","section_9":"ITEM 9. DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE\nNone.\nPART III\nITEM 10.","section_9A":"","section_9B":"","section_10":"ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT\nIncorporated herein by reference from the Company's definitive proxy statement for the annual meeting of stockholders on May 18, 1994. Information concerning the executive officers is included in Part I of this report on pages 12 and 13.\nITEM 11.","section_11":"ITEM 11. EXECUTIVE COMPENSATION\nIncorporated herein by reference from the Company's definitive proxy statement for the annual meeting of stockholders on May 18, 1994.\nITEM 12.","section_12":"ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT\nIncorporated herein by reference from the Company's definitive proxy statement for the annual meeting of stockholders on May 18, 1994.\nITEM 13.","section_13":"ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS\nIncorporated herein by reference from the Company's definitive proxy statement for the annual meeting of stockholders on May 18, 1994.\nPART IV\nITEM 14.","section_14":"ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K\n(a) (1) The financial statements listed in the accompanying index to financial statements and schedules are filed as part of this report.\n(2) The schedules listed in the accompanying index to financial statements and schedules are filed as part of this report.\n(3) Exhibits required to be filed by Item 601 of Regulation S-K. (Where the amount of securities authorized to be issued under any of AMR's long-term debt agreements does not exceed ten percent of AMR's assets, pursuant to paragraph (b)(4) of Item 601 of Regulation S-K, in lieu of filing such as an exhibit, AMR hereby agrees to furnish to the Commission upon request a copy of any agreement with respect to such long-term debt.)\nEXHIBIT\n3(a) Composite of the Certificate of Incorporation of AMR, incorporated by reference to Exhibit 3(a) to AMR's report on Form 10-K for the year ended December 31, 1982, file number 1-8400.\n3(b) Amended Bylaws of AMR, incorporated by reference to Exhibit 3(b) to AMR's report on Form 10-K for the year ended December 31, 1990, file number 1-8400.\n10(a) Purchase Agreement, dated as of February 12, 1979, between American and the Boeing Company, relating to the purchase of Boeing Model 767-323 aircraft, incorporated by reference to Exhibit 10(b)(3) to American's Registration Statement No. 2-76709.\n10(b) Description of American's Split Dollar Insurance Program, dated December 28, 1977, incorporated by reference to Exhibit 10(c)(1) to American's Registration Statement No. 2-76709.\n10(c) American's 1992 Incentive Compensation Plan.\n10(d) 1979 American Airlines (AMR) Stock Option Plan, as amended, incorporated by reference to Exhibit 10(d) to American's report on Form 10-K for the year ended December 31, 1982, file number 1-8400.\n10(e) 1979 American Airlines (AMR) Stock Option Plan, as amended, incorporated by reference to Exhibit 10(e) to American's report on Form 10-K for the year ended December 31, 1982, file number 1-8400.\n10(f) Form of Stock Option Agreement for Corporate Officers under the 1979 American Airlines (AMR) Stock Option Plan, incorporated by reference to Exhibit 10(c)(5) to American's Registration Statement No. 2-76709.\n10(g) Form of Stock Option Agreement under the 1974 and 1979 American Airlines (AMR) Stock Option Plans, incorporated by reference to Exhibit 10(c)(6) to American's Registration Statement No. 2-76709.\n10(h) Deferred Compensation Agreement, dated April 14, 1973, as amended March 1, 1975, between American and Robert L. Crandall, incorporated by reference to Exhibit 10(c)(7) to American's Registration Statement No. 2-76709.\n10(i) Deferred Compensation Agreement, dated October 18, 1972, as amended March 1, 1975, between American and Gene E. Overbeck, incorporated by reference to Exhibit 10(c)(9) to American's Registration Statement No. 2-76709.\n10(j) Deferred Compensation Agreement, dated June 3, 1970, between American and Francis H. Burr, incorporated by reference to Exhibit 11(d) to American's Registration Statement No. 2-39380.\n10(k) Description of informal arrangement relating to deferral of payment of directors' fees, incorporated by reference to Exhibit 10(c)(11) to American's Registration Statement No. 2-76709.\n10(l) Purchase Agreement, dated as of February 29, 1984, between American and the McDonnell Douglas Corporation, relative to the purchase of McDonnell Douglas Super 80 aircraft, incorporated by reference to Exhibit 10(l) to AMR's report on Form 10-K for the year ended December 31, 1983, file number 1-8400.\n10(m) Purchase Agreement, dated as of June 27, 1983, between American and the McDonnell Douglas Corporation, relative to the purchase of McDonnell Douglas Super 80 aircraft, incorporated by reference to Exhibit 4(a)(8) to American's Registration Statement No. 2-84905.\n10(n) AMR Corporation Restricted Stock Incentive Plan, adopted May 15, 1985, incorporated by reference to Exhibit 10(n) to AMR's report on Form 10-K for the year ended December 31, 1985, file number 1-8400.\n10(o) AMR Corporation Preferred Stock Purchase Rights Agreement, adopted February 13, 1986, incorporated by reference to Exhibit 10(o) to AMR's report on Form 10-K for the year ended December 31, 1985, file number 1-8400.\n10(p) Form of Executive's Termination Benefits Agreement incorporated by reference to Exhibit 10(p) to AMR's report on Form 10-K for the year ended December 31, 1985, file number 1-8400.\n10(q) Amendment, dated June 4, 1986, to Purchase Agreement in Exhibit 10(l) above, incorporated by reference to Exhibit 10(q) to AMR's report on Form 10-K for the year ended December 31, 1986, file number 1-8400.\n10(r) Acquisition Agreement, dated as of March 1, 1987, between American and Airbus Industrie relative to the lease of Airbus A300-600R aircraft, incorporated by reference to Exhibit 10(r) to AMR's report on Form 10-K for the year ended December 31, 1986, file number 1-8400.\n10(s) Acquisition Agreement, dated as of March 1, 1987, between American and the Boeing Company relative to the lease of Boeing 767-323ER aircraft, incorporated by reference to Exhibit 10(s) to AMR's report on Form 10-K for the year ended December 31, 1986, file number 1-8400.\n10(t) AMR Corporation 1988 Long-Term Incentive Plan, incorporated by reference to Exhibit 10(t) to AMR's report on Form 10-K for the year ended December 31, 1988, file number 1-8400.\n10(u) Acquisition Agreement, dated as of July 21, 1988, between American and the Boeing Company relative to the purchase of Boeing Model 757-223 aircraft, incorporated by reference to Exhibit 10(u) to AMR's report on Form 10-K for the year ended December 31, 1988, file number 1-8400.\n10(v) Acquisition Agreement, dated as of February 4, 1989, among American and Delta Airlines, Inc. and others relative to operation of a computerized reservations system incorporated by reference to Exhibit 10(v) to AMR's report on Form 10-K for the year ended December 31, 1988, file number 1-8400.\n10(w) Purchase Agreement, dated as of May 5, 1989, between American and the Boeing Company relative to the purchase of Boeing 757-223 aircraft, incorporated by reference to Exhibit 10(w) to AMR's report on Form 10-K for the year ended December 31, 1989, file number 1-8400.\n10(x) Purchase Agreement, dated as of June 9, 1989, between American and Fokker Aircraft U. S. A., Inc. relative to the purchase of Fokker 100 aircraft, incorporated by reference to Exhibit 10(x) to AMR's report on Form 10-K for the year ended December 31, 1989, file number 1-8400.\n10(y) Agreement for Sale and Purchase, dated as of June 12, 1989, between AMR Leasing Corporation and SAAB Aircraft of America, Inc. relative to the purchase of Saab 340B aircraft, incorporated by reference to Exhibit 10(y) to AMR's report on Form 10-K for the year ended December 31, 1989, file number 1-8400.\n10(z) Purchase Agreement, dated as of June 23, 1989, between American and the Boeing Company relative to the purchase of Boeing 767-323ER aircraft, incorporated by reference to Exhibit 10(z) to AMR's report on Form 10-K for the year ended December 31, 1989, file number 1-8400.\n10(aa) Lease Agreement, dated as of June 29, 1989, between AMR Leasing Corporation and British Aerospace, Inc. relative to the lease of Jetstream Model 3201 aircraft, incorporated by reference to Exhibit 10(aa) to AMR's report on Form 10-K for the year ended December 31, 1989, file number 1-8400.\n10(bb) Purchase Agreement, dated as of August 3, 1989, between American and the McDonnell Douglas Corporation relative to the purchase of MD-11 aircraft, incorporated by reference to Exhibit 10(bb) to AMR's report on Form 10-K for the year ended December 31, 1989, file number 1-8400.\n10(cc) Amendment, dated as of August 3, 1989, to the Purchase Agreement in Exhibit 10(l) above, incorporated by reference to Exhibit 10(cc) to AMR's report on Form 10-K for the year ended December 31, 1989, file number 1- 8400.\n10(dd) Amendment, dated as of August 11, 1989, to AMR's Preferred Stock Purchase Rights Agreement in Exhibit 10(o) above, incorporated by reference to Exhibit 10(dd) to AMR's report on Form 10-K for the year ended December 31, 1989, file number 1-8400.\n10(ee) Purchase Agreement, dated as of October 25, 1989, between American and AVSA, S. A. R. L. relative to the purchase of Airbus A300-600R aircraft, incorporated by reference to Exhibit 10(ee) to AMR's report on Form 10-K for the year ended December 31, 1989, file number 1-8400.\n10(ff) Amendment, dated as of November 16, 1989, to Employment Agreement among AMR, American Airlines and Robert L. Crandall, incorporated by reference to Exhibit 10(ff) to AMR's report on Form 10-K for the year ended December 31, 1989, file number 1-8400.\n10(gg) Directors Stock Equivalent Purchase Plan, incorporated by reference to Exhibit 10(gg) to AMR's report on Form 10-K for the year ended December 31, 1989, file number 1-8400.\n10(hh) Deferred Compensation Agreement, dated as of January 31, 1990, between AMR and Edward A. Brennan, incorporated by reference to Exhibit 10(hh) to AMR's report on Form 10-K for the year ended December 31, 1989, file number 1-8400.\n10(ii) Deferred Compensation Agreement, dated as of January 31, 1990, between AMR and Thomas S. Carroll, incorporated by reference to Exhibit 10(ii) to AMR's report on Form 10-K for the year ended December 31, 1989, file number 1-8400.\n10(jj) Deferred Compensation Agreement, dated as of January 31, 1990, between AMR and Antonio Luis Ferre, incorporated by reference to Exhibit 10(jj) to AMR's report on Form 10-K for the year ended December 31, 1989, file number 1-8400.\n10(kk) Deferred Compensation Agreement, dated as of January 31, 1990, between AMR and John D. Leitch, incorporated by reference to Exhibit 10(kk) to AMR's report on Form 10-K for the year ended December 31, 1989, file number 1- 8400.\n10(ll) Deferred Compensation Agreement, dated as of January 31, 1990, between AMR and Charles H. Pistor, Jr., incorporated by reference to Exhibit 10(ll) to AMR's report on Form 10-K for the year ended December 31, 1989, file number 1-8400.\n10(mm) Deferred Compensation Agreement, dated as of January 31, 1990, between AMR and Edward O. Vetter, incorporated by reference to Exhibit 10(mm) to AMR's report on Form 10-K for the year ended December 31, 1989, file number 1-8400.\n10(nn) Amendment, dated as of February 1, 1990, to the Deferred Compensation Agreement, dated December 19, 1984, between AMR and Charles H. Pistor, Jr., incorporated by reference to Exhibit 10(nn) to AMR's report on Form 10- K for the year ended December 31, 1989, file number 1-8400.\n10(oo) Management Severance Allowance, dated as of February 23, 1990, for levels 1-4 employees of American Airlines, Inc., incorporated by reference to Exhibit 10(oo) to AMR's report on Form 10-K for the year ended December 31, 1989, file number 1-8400.\n10(pp) Management Severance Allowance, dated as of February 23, 1990, for level 5 and above employees of American Airlines, Inc., incorporated by reference to Exhibit 10(pp) to AMR's report on Form 10-K for the year ended December 31, 1989, file number 1-8400.\n10(qq) Purchase Agreement, dated as of October 25, 1990, between AMR Leasing Corporation and Avions de Transport Regional relative to the purchase of ATR 42 and Super ATR aircraft, incorporated by reference to Exhibit 10(qq) to AMR's report on Form 10-K for the year ended December 31, 1990, file number 1-8400.\n10(rr) Form of Stock Option Agreement for Corporate Officers under the AMR 1988 Long-Term Incentive Plan, incorporated by reference to Exhibit 10(rr) to AMR's report on Form 10-K for the year ended December 31, 1990, file number 1-8400.\n10(ss) Form of Career Equity Program Deferred Stock Award Agreement under the AMR 1988 Long-Term Incentive Plan, incorporated by reference to Exhibit 10(ss) to AMR's report on Form 10-K for the year ended December 31, 1990, file number 1-8400.\n10(tt) Amendment, dated as of December 3, 1990, to Employment Agreement among AMR, American Airlines and Robert L. Crandall incorporated by reference to Exhibit 10(tt) to AMR's report on Form 10-K for the year ended December 31, 1990, file number 1-8400.\n10(uu) Amendment, dated as of May 1, 1992, to Employment Agreement among AMR, American Airlines and Robert L. Crandall incorporated by reference to Exhibit 10(uu) to AMR's report on Form 10-Q for the period ended June 30, 1992, file number 1-8400.\n10(vv) Irrevocable Executive Trust Agreement, dated as of May 1, 1992, between AMR and Wachovia Bank of North Carolina N.A.\n10(ww) Deferred Compensation Agreement, dated as of December 23, 1992, between AMR and Howard P. Allen.\n10(xx) Deferred Compensation Agreement, dated as of February 5, 1993, between AMR and Charles T. Fisher, III.\n10(yy) Deferred Compensation Agreement, dated as of February 10, 1993, between AMR and Edward O. Vetter.\n10(zz) Deferred Compensation Agreement, dated as of March 8, 1993, between AMR and John D. Leitch.\n10(aaa) Amendment No. 2 to the Rights Agreement, dated as of February 13, 1986, between AMR Corporation and First Chicago Trust Company of New York.\n10(bbb) Form of Performance Share Program Deferred Stock Award Agreement under the 1988 Long-Term Incentive Plan.\n10(ccc) Form of Guaranty to Career Equity Program under the AMR 1988 Long-Term Incentive Plan.\n10(ddd) Amendment, dated as of July 26, 1993, to Career Equity Program Deferred Stock Award Agreements.\n10(eee) Second Amendment, dated as of July 26, 1993, to Career Equity Program Deferred Stock Award Agreements.\n10(fff) Deferred Compensation Agreement, dated as of February 10, 1994, between AMR and Charles T. Fisher, III.\n10(ggg) Deferred Compensation Agreement, dated as of February 11, 1994, between AMR and Howard P. Allen.\n11(a) Computation of primary loss per share for the years ended December 31, 1993, 1992 and 1991.\n11(b) Computation of loss per share assuming full dilution for the years ended December 31, 1993, 1992 and 1991.\n12 Computation of ratio of earnings to fixed charges for the years ended December 31, 1989, 1990, 1991, 1992 and 1993.\n19 The 1974 and 1979 American Airlines (AMR) Stock Option plans as amended March 16, 1983, incorporated by reference to Exhibit 19 to AMR's report on Form 10-K for the year ended December 31, 1983, file number 1-8400. Refer to Exhibits 10(d) and 10(e).\n22 Significant subsidiaries of the registrant.\n23 Consent of Independent Auditors appears on page 56 hereof.\n(b) Reports on Form 8-K:\nNone.\nAMR CORPORATION INDEX TO FINANCIAL STATEMENTS AND SCHEDULES COVERED BY REPORT OF INDEPENDENT AUDITORS (ITEM 14(A))\nAll other schedules are omitted since the required information is included in the financial statements or notes thereto, or since the required information is either not present or not present in sufficient amounts.\nExhibit 23\nCONSENT OF INDEPENDENT AUDITORS\nWe consent to the incorporation by reference in Registration Statements (Form S-8 No. 2-68366), (Form S-8 No. 33-27866), (Form S-3 No. 33-35953), (Form S-3 No. 33-42027), (Form S-3 No. 33-46325), and (Form S-3 No. 33-52121) of AMR Corporation, and in the related Prospectuses, of our report dated February 15, 1994, with respect to the consolidated financial statements and schedules of AMR Corporation included in this Annual Report (Form 10-K) for the year ended December 31, 1993.\nERNST & YOUNG\n2121 San Jacinto Dallas, Texas 75201 March 29, 1994\nAMR CORPORATION Schedule V - Property, Plant and Equipment Year Ended December 31, 1993 (in millions)\nAddtions to Flight Equipment includes amounts tranferred from Purchase Deposits upon delivery of aircraft.\nAMR CORPORATION Schedule V - Property, Plant and Equipment Year Ended December 31, 1992 (in millions)\nAddtions to Flight Equipment includes amounts tranferred from Purchase Deposits upon delivery of aircraft. Net Transfers and Other Adjustments includes the sale and subsequent leaseback of two Boeing 757 aircraft, six Boeing 767 aircraft, three Fokker aircraft and one McDonnell Douglas MD-80 aircraft. Seven of these agreements are accounted for as capital leases.\nAMR CORPORATION Schedule V - Property, Plant and Equipment Year Ended December 31, 1991 (in millions)\nAddtions to Flight Equipment includes amounts tranferred from Purchase Deposits upon delivery of aircraft. Net Transfers and Other Adjustments includes the sale and subsequent leaseback of 13 Boeing 757 aircraft, two Boeing 767 aircraft, six Fokker aircraft and 29 McDonnell Douglas MD-80 aircraft. Six of these agreements are accounted for as capital leases.\nAMR CORPORATION Schedule VI - Accumulated Depreciation, Amortization and Obsolescence of Property, Plant and Equipment Year Ended December 31, 1993 (in millions)\nAMR CORPORATION Schedule VI - Accumulated Depreciation, Amortization and Obsolescence of Property, Plant and Equipment Year Ended December 31, 1992 (in millions)\nNet transfers and other adjustments includes accumulated depreciation related to sale-leaseback transactions. See Schedule V.\nAMR CORPORATION Schedule VI - Accumulated Depreciation, Amortization and Obsolescence of Property, Plant and Equipment Year Ended December 31, 1991 (in millions)\n==========\nNet transfers and other adjustments includes accumulated depreciation related to sale-leaseback transactions. See Schedule V.\nAMR CORPORATION Schedule VII - Guarantees of Securities of Other Issuers December 31, 1993 (in millions)\nAMR CORPORATION Schedule VII - Guarantees of Securities of Other Issuers - Continued December 31, 1993 (in millions)\nn AMR CORPORATION Schedule VIII - Valuation and Qualifying Accounts and Reserves (deducted from asset to which applicable) Year ended December 31, 1993 (in millions)\n(a) See Schedule VI.\n(b) Transfer to Allowance for obsolescence of inventories.\nAMR CORPORATION Schedule VIII - Valuation and Qualifying Accounts and Reserves (deducted from asset to which applicable) Year ended December 31, 1992 (in millions)\n(a) See Schedule VI.\nAMR CORPORATION Schedule VIII - Valuation and Qualifying Accounts and Reserves (deducted from asset to which applicable) Year ended December 31, 1991 (in millions)\n(a) See Schedule VI.\nAMR CORPORATION Schedule IX - Short-Term Borrowings Year ended December 31, 1993 (in millions)\n(a) Computed based on monthly amount outstanding during the year.\n(b) Computed by dividing total interest expense by the average amount outstanding during the year.\n(c) Commercial paper generally matures within 120 days after issue with no provisions for renewal.\nAMR CORPORATION Schedule IX - Short-Term Borrowings Year ended December 31, 1992 (in millions)\n(a) Computed based on monthly amount outstanding during the year.\n(b) Computed by dividing total interest expense by the average amount outstanding during the year.\n(c) Commercial paper generally matures within 120 days after issue with no provisions for renewal.\nAMR CORPORATION Schedule IX - Short-Term Borrowings Year ended December 31, 1991 (in millions)\n(a) Computed based on monthly amount outstanding during the year.\n(b) Computed by dividing total interest expense by the average amount outstanding during the year.\n(c) Commercial paper generally matures within 120 days after issue with no provisions for renewal.\nFacility agreement borrowings generally mature within 100 days after issue, with renewal option available over the term of the facility agreement.\nAMR CORPORATION Schedule X - Supplementary Income Statement Information Years ended December 31, 1993, 1992 and 1991 (in millions)\nPART I - Exhibit 11 (a) AMR CORPORATION Computation of Primary Loss per Share (in millions, except per share amounts)\nPART I - Exhibit 11 (b) AMR CORPORATION Computation of Loss per Share Assuming Full Dilution (in millions, except per share amounts)\nExhibit 12 AMR CORPORATION COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES\n* Previously restated.\nSIGNATURES\nPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.\nAMR CORPORATION\n\/s\/ Robert L. Crandall Robert L. Crandall Chairman, President and Chief Executive Officer (Principal Executive Officer)\n\/s\/ Donald J. Carty Donald J. Carty Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)\nDate: March 16, 1994\nPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates noted:\nDate: March 16, 1994","section_15":""}
{"filename":"23675_1993.txt","cik":"23675","year":"1993","section_1":"ITEM 1. BUSINESS\n(a) General Development of Business - -----------------------------------\nConsolidated Freightways, Inc. is a holding company which participates through subsidiaries in various forms of long-haul and regional trucking, intermodal rail and ocean services, domestic and international air cargo delivery services and related transportation activities. These operations are organized into three primary business groups: Long-Haul Trucking (CF MotorFreight), Regional Trucking and Intermodal (Con-Way Transportation Services), and Air Freight (Emery Worldwide). Consolidated Freightways, Inc. was incorporated in Delaware in 1958 as a successor to a business originally established in 1929. It is herein referred to as the \"Registrant\" or \"Company\".\n(b) Financial Information About Industry Segments - -------------------------------------------------\nThe operations of the Company are primarily conducted in the U.S. and Canada and to a lesser extent in major foreign countries. An analysis by industry group of revenues, operating income (loss), depreciation and capital expenditures for the years ended December 31, 1993, 1992 and 1991, and identifiable assets as of those dates is presented in Note 11 on pages 43 and 44 of the 1993 Annual Report to Shareholders and is incorporated herein by reference. Geographic group information is also presented therein. Intersegment revenues are not material.\n(c) Narrative Description of Business - -------------------------------------\nThe Company has designated three principal operating groups: the CF MotorFreight Group provides intermediate and long-haul, less-than-truckload freight service in the U.S. and portions of Mexico, Canada, the Caribbean, Latin and Central America and Europe; the Con-Way Transportation Services Group provides regional trucking, intermodal movements of truckload freight, non-vessel operating common carriage and ocean container freight services; and, the Emery Worldwide Group is responsible for all domestic and international air freight activities.\nCF MOTORFREIGHT ----------------\nCF MotorFreight (CFMF), the Company's largest single operating unit, is based in Menlo Park, California. The group is composed of Consolidated Freightways Corporation of Delaware (CFCD), which includes CF MotorFreight and three other operating units, and three non-carrier component operations. Its carrier group provides general freight services nationwide and in portions of Canada, Mexico, the Caribbean area, Latin and Central America and Europe. General freight is typically shipments of manufactured or non-perishable processed products having high value and requiring expedited service, compared to the bulk raw materials characteristically transported by railroads, pipelines and water carriers. The basic business of the general freight industry is to transport freight that is less-than-truckload (LTL), an industry designation for shipments weighing less than 10,000 pounds. CFMF is one of the nation's largest motor carriers in terms of 1993 revenues.\nCompetition within the industry has intensified since the passage of the Motor Carrier Act of 1980. Consequently, pricing has become increasingly important as a competitive factor. To retain market share, CFMF is also evolving to provide faster, more time definite, higher quality and lower cost services as shippers seek to compress production cycles and cut distribution costs.\nAs a large carrier of LTL general commodity freight, CFMF has pick-up and delivery fleets in each area served, and a fleet of intercity tractors and trailers. It has a network of 539 U.S. and Canadian freight terminals including 28 regional consolidation centers. CFMF is supported by a sophisticated data processing system for the control and management of the business.\nCFMF provides a regular route, common and contract carrier freight service between points in all 50 states, the Caribbean area, Mexico, Latin and Central America and Europe and to points served by Canadian subsidiaries as discussed below. There is a broad diversity in the customers served, size of shipments, commodities transported and length of haul. No single customer or commodity accounts for more than a small fraction of total revenues.\nCFMF operates daily schedules utilizing primarily relay drivers driving approximately eight to ten hours each. Some schedules operate with sleeper teams driving designated routes. Road equipment consists of one tractor pulling two 28-foot double trailers or, to a limited extent, one semi-trailer or three 28-foot trailers. Legislation enacted in 1982 has provided for the use of 28-foot double trailers and 48-foot semi-trailers throughout the United States. (See \"State Regulation\" below.) Trailers in double or triple combination are more efficient and economical than a tractor and single semi-trailer combination. CFMF utilizes trailer equipment 102-inches in width. In 1993, the Company operated in excess of 537 million linehaul miles in North America, about 90% of which was conducted by equipment in doubles and triples configuration. The accident frequency of the triples configuration was better than all other types of vehicle combinations used by the Company.\nCFMF and other subsidiaries of CFCD serve Canada through terminals in the provinces of Alberta, British Columbia, Manitoba, New Brunswick, Nova Scotia, Ontario, Quebec, Saskatchewan and in the Yukon Territory.\nNon-Carrier Operations ----------------------\nMenlo Logistics provides logistics management services for industrial and retail businesses including carrier management, dedicated fleet and warehouse operations, just-in-time delivery programs, customer order processing and freight bill payment and auditing. The other non-carrier operations within the CF MotorFreight Group generate a majority of their sales from other companies within the CF Group. Road Systems, Inc. primarily manufactures trailers. Willamette Sales Co. serves as a distributor of heavy-duty truck, marine and construction equipment parts.\nEmployees ---------\nApproximately 88% of CFMF's domestic employees are represented by various labor unions, primarily the International Brotherhood of Teamsters (IBT). CFMF and the IBT are parties to a National Master Freight Agreement. The current agreement with the IBT expires on March 31, 1994.\nLabor costs, including fringe benefits, average approximately 65% of revenues. This results in a relatively high proportion of variable costs, which allows CFMF flexibility to adjust certain costs to fluctuations in business levels. CFMF's domestic employment has declined to 21,000 employees at December 31, 1993 from approximately 22,000 at December 31, 1992, primarily the result of declining tonnage and several programs to streamline operations during 1993.\nFuel ----\nFuel prices have fluctuated during the last three years with prices declining in 1991 following a resolution of the Middle East conflict and fuel prices continued to decline in 1992. Fuel prices declined slightly in 1993 despite increased fuel taxation and stricter environmental regulations. CFMF's average annual diesel fuel cost per gallon (without tax) declined from $.671 in 1991 to $.632 and $.615 in 1992 and 1993, respectively.\nFederal and State Regulation ----------------------------\nOn July 1, 1980, the Motor Carrier Act of 1980 became effective. The Act made substantial changes in federal regulation of the motor carrier industry. It provided for easier access to the industry by new trucking companies and eased restrictions on expansion of services by existing carriers. In addition, CFMF's operations are subject to a variety of economic regulations by state authorities. Historically, such regulations also covered, among other things, size and weight of motor carrier equipment.\nFederal legislation applies to the interstate highway system and to other qualifying federal-aid primary system highways in all states. Full implementation of the federal legislation has been hampered by regulations in certain states, which have imposed trailer length, size and weight limitations on access and intercity routes. These limitations do not conform with the federal requirements and therefore are obstacles to efficient operations. CFMF's mainline operations are designed to avoid locales with these limitations.\nCanadian Regulation -------------------\nThe provinces in Canada have regulatory authority over intra-provincial operations of motor carriers and have been delegated by the federal authority to regulate inter-provincial motor carrier activity. Federal legislation to phase in deregulation of the inter-provincial motor carrier industry took effect January 1, 1988. The new legislation relaxes economic regulation of inter-provincial trucking by easing market entry regulations, and implements effective safety regulations of trucking services under Federal jurisdiction. The Company wrote-off substantially all of the unamortized cost of its Canadian operating authority in 1992.\nCON-WAY TRANSPORTATION SERVICES -------------------------------\nCon-Way Transportation Services, Inc. (CTS) is a holding company for operations that individually provide various transportation services, specifically regional trucking, trailer-on-flatcar or containerized movements of truckload freight, non-vessel operating common carriage and ocean container freight services. CTS has five operating units and approximately 7,600 employees. The Con-Way's face more competition than in the past as national LTL companies continue to acquire regional operations, combining previously independent carriers into an inter-regional network. However, growth in quick-response logistics and new service product offerings will provide new market opportunities. Refer to the CF MotorFreight section for a discussion of other factors affecting surface transportation.\nRegional Carriers -----------------\nEach of CTS' four regional carriers operates within a defined geographic area to provide primarily next-day and second day service for freight moving up to 1,000 miles.\nCon-Way Western Express, Inc. (CWX) began operations in May 1983 and operates in California, Nevada, Arizona, New Mexico, western portions of Texas, Hawaii and Mexico. At December 31, 1993, CWX served customers from 51 service centers.\nCon-Way Central Express, Inc. (CCX) inaugurated operations in June 1983 and provides service in 13 states of the mid-west, east, north-east and eastern Canada. CCX operated 156 service centers at December 31, 1993.\nCon-Way Southern Express, Inc. (CSE) began operations in April 1987 and operates in Florida, Alabama, Tennessee, Virginia, North and South Carolina, Maryland, Georgia and Puerto Rico. CSE served customers from 54 service centers at December 31, 1993.\nCon-Way Southwest Express, Inc. (CSW) began operations in November 1989 and operates in seven southwestern states and Mexico. CSW operated 41 service centers at December 31, 1993.\nA joint service program initiated by CTS allows the regional carriers to move freight in two-day lanes from a region serviced by one operating unit to regions serviced by other of the operating units within the existing infrastructure. The program allows CTS to compete for second day business not individually serviced by regional carriers.\nCon-Way Intermodal Inc. -----------------------\nThe Company offers truckload service and ocean container freight handling. The truckload portion of the Company provides door-to-door intermodal movement of full truckload shipments via rail trailer, and with dedicated containers and pick-up and delivery resources in a nationwide stack train network. The ocean service portion provides international shipping services through offices in more than two dozen international trade centers and serves the U.S., Europe, Hong Kong, Australia, other Pacific Rim nations and most recently Latin America.\nEMERY WORLDWIDE ---------------\nEmery Worldwide (EWW), the Company's air freight unit, was formed when the Company purchased Emery Air Freight Corporation in April 1989 and merged it with its air freight operation, CF AirFreight, Inc. The combined companies immediately expanded EWW's ability to deliver air freight within North America and to 88 countries worldwide.\nEWW provides global air cargo services through an integrated freight system designed for the movement of parcels and packages of all sizes and weights. In North America, EWW provides these services through a system of branch offices and overseas through foreign subsidiaries, branches and agents.\nEWW provides door-to-door service within North America by using its own airlift system, supplemented with commercial airlines. International services are performed by operating as an air freight forwarder, using commercial airlines, and with controlled lift, only when necessary. Emery also operates approximately 1,590 trucks, vans and tractors.\nAs of December 31, 1993, EWW utilized a fleet of 50 aircraft, 28 of which are leased on a long-term basis, 9 are owned and 13 are contracted on a short- term basis to supplement nightly volumes and to provide feeder services. The nightly lift capacity of the aircraft fleet, excluding charters, is approximately 3.3 million pounds.\nEmery Worldwide's hub-and-spoke system is centralized at the Dayton International Airport where a leased air cargo facility (Hub) and related support facilities are located. The Hub handles all types of shipments, ranging from small packages to heavyweight cargo, with a total effective sort capacity of approximately 1 million pounds per hour. The operation of the Hub in conjunction with EWW's airlift system enables it to maintain a high level of service reliability.\nIn addition to its nightly Prime Time system, the Company added a new transcontinental daylight service. In the daylight program, two DC-8 freighters crisscross between Hartford, CT and Los Angeles, CA transconnecting the Dayton HUB. These originating cities then connect with their respective regional HUBs. The company added capacity and scheduled the daylight flights to handle increased business levels, respond to customer service needs in key market lanes. The two daylight aircraft are also used in the Prime Time schedule thus achieving better utilization of our assets.\nThrough a separate subsidiary of the Company, Emery Worldwide Airlines, Inc. (EWA), the Company provides nightly cargo airline services under a contract with the U.S. Postal Service (USPS) to carry Express and Priority Mail, using 21 aircraft, 6 of which are leased on a long-term basis and 15 are owned. The original contract for this operation was awarded to EWA in 1989 and had been renewed and extended through early January 1994. A new ten year USPS contract was awarded to the Company during 1993 with service beginning in January 1994. The contract is similar to the previous USPS contract with the exception that the sortation function is not included.\nThe Company has recognized approximately $138 million, $141 million and $199 million of revenue in 1993, 1992 and 1991, respectively, from contracts to carry Express and Priority Mail for the U.S. Postal Service.\nCustomers ---------\nEWW services, among others, the aviation, automotive, machinery, metals, electronic and electrical equipment, chemical, apparel and film industries. Service industries and governmental entities also utilize EWW's services. Both U.S. and International operations of EWW have wide customer bases.\nCompetition -----------\nThe heavy air-freight market within North American is highly competitive and price sensitive. Emery has the largest market share in the heavy air-freight segment. EWW competes with other integrated air freight carriers as well as freight forwarders.\nCompetition in the international markets is also service and price sensitive. In these markets, which are more fragmented than the domestic market, EWW competes with both United States and international airlines and air freight forwarders. The North Atlantic market is especially price sensitive due to the abundance of airlift capacity.\nCustomers are seeking companies such as EWW with combined integrated carrier and freight forwarding capabilities for flexible, cost effective service. Emery believes this infrastructure and the convenience of its 235 worldwide service locations are its principal methods of competing in the market in which it operates.\nRegulation ----------\nRegulation of Air Transportation --------------------------------\nThe air transportation industry is subject to federal regulation by the Federal Aviation Act of 1958, as amended (Aviation Act) and regulations issued by the Department of Transportation (DOT) pursuant to the Aviation Act. EWW, as an air freight forwarder, and EWA, as an airline, are subject to different regulations. Air freight forwarders are exempted from most DOT economic regulations and they are not subject to Federal Aviation Administration (FAA) safety regulations so long as they do not have operational control of aircraft. Airlines are subject to economic regulation by DOT and maintenance, operating and other safety-related regulation by FAA. Thus, EWA and other airlines conducting operations for EWW are subject to DOT and FAA regulation while EWW, itself, is not covered by most DOT and FAA regulations.\nRegulation of Ground Transportation -----------------------------------\nWhen EWW provides ground transportation of cargo having a prior or subsequent air movement, the ground transportation is exempt from regulation by the Interstate Commerce Commission (ICC). However, EWW holds ICC and intrastate motor carrier authorities which can be utilized in providing non-exempt ground transportation. Registration of ICC authorities is required in each state where a motor carrier conducts non-exempt operations, and some states also have required EWW to register as an exempt interstate operator.\nEnvironmental Matters ---------------------\nDuring recent years, operations at several airports have been subject to restrictions or curfews on arrivals or departures during certain night-time hours designed to reduce or eliminate noise for surrounding residential areas. None of these restrictions have materially affected EWW's operations. If such restrictions were to be imposed with respect to the airports at which EWW's activities are centered and no alternative airports were available to serve the affected areas, EWW's operations could be more adversely affected.\nAs provided in Section 611 of the Aviation Act, the FAA with the assistance of the Environmental Protection Agency (EPA), is authorized to establish aircraft noise standards. Under the National Emission Standards Act of 1967, as amended by the Clean Air Act Amendments of 1970, the administrator of the EPA is authorized to issue regulations setting forth standards for aircraft emissions. EWW believes that its present fleet of owned, leased or chartered aircraft is operating in compliance with the applicable noise and emission laws.\nThe Aviation Noise and Capacity Act of 1990 was passed in November of 1990 to establish a national aviation noise policy. The FAA has promulgated regulations under this Act regarding the phase-in requirements for compliance. This legislation and the related regulations will require all of EWW's and EWA's owned and leased aircraft to either undergo modifications or otherwise comply with Stage 3 noise restrictions by year-end 1999.\nFuel and Supplies Cost ----------------------\nEWW purchases substantially all of its jet fuel from major oil companies, refiners and trading companies on annual contracts with prepaid and\/or volume discounts. These contract purchases are supplemented by spot purchases. The weighted average price of domestic jet fuel declined in 1993 and 1992, respectively. During 1991, the weighted average price of domestic jet fuel declined following the resolution of the Middle East conflict early in the year. The 1993 domestic cost per gallon was approximately $.64 compared with 1992 and 1991 weighted average prices of approximately $.67 and $.72 per gallon, respectively.\nEWW believes that it has the flexibility to continue its operations without material interruption unless there are significant curtailments of its jet fuel supplies. Neither Emery Worldwide nor the operators of the aircraft it charters have experienced or anticipate any fuel supply problems. There is a four-million gallon fuel storage facility at the Hub.\nEmployees ---------\nAs of December 31, 1993, Emery Worldwide had approximately 7,500 full and permanent part-time employees as compared to 6,700 in 1992 and 7,000 in 1991. Approximately 15% of these employees are covered by union contracts.\nGENERAL - -------\nThe research and development activities of the Company are not significant.\nDuring 1993, 1992 and 1991 there was no single customer of the Company that accounted for more than 10% of consolidated revenues.\nThe total number of employees is presented in the \"Ten Year Financial Summary\" on pages 46 and 47 of the 1993 Annual Report to Shareholders and is incorporated herein by reference.\nThe Company has been designated a Potentially Responsible Party (PRP) by the EPA with respect to the disposal of hazardous substances at various sites. The Company expects its share of the clean-up cost to be immaterial. The Company expects the costs of complying with existing and future federal, state and local environmental regulations to continue to increase. On the other hand, they do not anticipate that such cost increases will have any materially adverse effects on capital expenditures, earnings or competitive position.\n(d) Financial Information About Foreign and Domestic Operations and Export Sales ----------------------------------------\nInformation as to revenues, operating income (loss) and identifiable assets for each of the Company's business segments and for its foreign operations for 1993, 1992 and 1991 is contained in Note 11 on page 43 and 44 of the 1993 Annual Report to Shareholders and is incorporated herein by reference.\nITEM 2.","section_1A":"","section_1B":"","section_2":"ITEM 2. PROPERTIES\nThe following summarizes the terminals and freight service centers operated by the Company at December 31, 1993:\nOwned Leased Total ----- ------ -----\nCF MotorFreight 275 264 539 Con-Way Transportation Services 38 264 302 Emery Worldwide 9 226 235\nThe following table sets forth the location and square footage of the Company's principal freight handling facilities:\nLocation Square Footage -------- -------------- CFMF - motor carrier LTL consolidation center terminals\nMira Loma, CA 280,672 Chicago, IL 231,159 * Columbus, OH 118,774 Memphis, TN 118,745 Nashville, TN 118,622 Orlando, FL 101,557 * Minneapolis, MN 94,890 St. Louis, MO 88,640 * Pocono, PA 86,285 Chicopee, MA 85,164 Akron, OH 82,494 Sacramento, CA 81,286 Atlanta, GA 77,920 Houston, TX 77,346 Dallas, TX 75,358 * Fremont, IN 73,760\nLocation Square Footage -------- -------------- CFMF - motor carrier LTL consolidation center terminals\n* Peru, IL 73,760 Buffalo, NY 73,380 Cheyenne, WY 71,298 Milwaukee, WI 70,661 Salt Lake City, UT 68,480 Charlotte, NC 66,896 Seattle, WA 59,720 * York, PA 56,384 Kansas City, MO 55,288 * Indianapolis, IN 54,716 Portland, OR 47,824 Phoenix, AZ 20,237\nCTS - freight assembly centers\nChicago, IL 113,116 Oakland, CA 85,600 Dallas, TX 82,000 Atlanta, GA 56,160 Cincinnati, OH 55,618 Columbus, OH 48,527 Detroit, MI 46,240 Santa Fe Springs, CA 45,936 Aurora, IL 44,235 Ft. Wayne, IN 35,400 Pontiac, MI 34,450 St. Louis, MO 29,625 Milwaukee, WI 22,940\nEmery - facilities\n*Dayton, OH 620,000 Los Angeles, CA 78,264 Indianapolis, IN 38,500\n* Facility partially or wholly financed through the issuance of industrial revenue bonds. Principal amount of debt is secured by the property.\nITEM 3.","section_3":"ITEM 3. LEGAL PROCEEDINGS\nThe legal proceedings of the Company are summarized in Note 10 on page 43 of the 1993 Annual Report to Shareholders and are incorporated herein by reference. A discussion of certain environmental matters is presented in Item 1 and Item 7.\nITEM 4.","section_4":"ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS\nNot applicable.\nPART II -------\nITEM 5.","section_5":"ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS\nThe Company's common stock is listed for trading on the New York and Pacific Stock Exchanges.\nThe Company's Common Stock Price is included in Note 12 on page 45 of the 1993 Annual Report to Shareholders and is incorporated herein by reference. Cash dividends on common shares had been paid in every year from 1962 to 1990. In June 1990, however, the Company's Board of Directors suspended the quarterly dividend to minimize the Company's cash requirements. Under the terms of the restructured TASP Notes, as set forth on pages 35 and 36 of the 1993 Annual Report to Shareholders, the Company is restricted from paying dividends in excess of $10 million plus 50% of the cumulative net income applicable to common shareholders since the commencement of the agreement.\nAs of December 31, 1993, there were 15,785 holders of record of the common stock ($.625 par value) of the Company. The number of shareholders is also presented in the \"Ten Year Financial Summary\" on pages 46 and 47 of the 1993 Annual Report to Shareholders and is incorporated herein by reference.\nITEM 6.","section_6":"ITEM 6. SELECTED FINANCIAL DATA\nThe Selected Financial Data is presented in the \"Ten Year Financial Summary\" on pages 46 and 47 of the 1993 Annual Report to Shareholders and is incorporated herein by reference.\nITEM 7.","section_7":"ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS\nManagement's Discussion and Analysis of Financial Condition and Results of Operations is presented in the \"Financial Review and Management Discussion\" on pages 24 through 26, inclusive, of the 1993 Annual Report to Shareholders and is incorporated herein by reference.\nITEM 8.","section_7A":"","section_8":"ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA\nThe Consolidated Financial Statements and Auditors' Report are presented on pages 27 through 33, inclusive, of the 1993 Annual Report to Shareholders and are incorporated herein by reference. The unaudited quarterly financial data is included in Note 12 on page 45 of the 1993 Annual Report to Shareholders and is incorporated herein by reference.\nITEM 9.","section_9":"ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE\nNone.\nPART III --------\nITEM 10.","section_9A":"","section_9B":"","section_10":"ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY\nThe identification of the Company's Directors is presented on pages 3 through 9, inclusive, of the Proxy Statement dated March 18, 1994 and those pages are incorporated herein by reference.\nThe Executive Officers of the Company, their ages at December 31, 1993 and their applicable business experience are as follows:\nDonald E. Moffitt, 61, President and Chief Executive Officer. Mr. Moffitt joined Consolidated Freightways Corporation of Delaware, the Company's principal motor carrier subsidiary, as an accountant in 1955 and advanced to Vice President - Finance in 1973. In 1975, he transferred to the Company as Vice President - Finance and Treasurer and in 1981 was elected Executive Vice President - Finance and Administration. In 1983 he assumed the additional duties of President, CF International and Air, Inc., where he directed the Company's international and air freight businesses. Mr. Moffitt was elected Vice Chairman of the Board of the Company in 1986. He retired as an employee and as Vice Chairman of the Board of Directors in 1988 and returned to the Company as Executive Vice President - Finance and Chief Financial Officer in 1990. Mr. Moffitt was named President and Chief Executive Officer of the Company and was elected to the Board of Directors in 1991. Mr. Moffitt serves on the Executive Committee of the Board of Directors of the Highway Users Federation and is a member of the Board of Directors of the Bay Area Council, the Automotive Safety Foundation and the American Red Cross. He is a member of the California Business Roundtable and a member of the Business Advisory Council of the Northwestern University Transportation Center. He also serves on the Advisory Council of the Peninsula Conflict Resolution Center. Mr. Moffitt is a member of the Advisory Nominating and the Executive Committees of the Company.\nW. Roger Curry, 55, President and Chief Executive Officer of Emery Air Freight Corporation and Senior Vice President of the Company. Mr. Curry joined CFCD in 1969 as a Systems Analyst and became Coordinator, On-Line Systems of the Company in 1970. In 1972 he was named Director of Terminal Properties for CFCD. He became President of CFAF in 1975 and Chief Executive Officer in 1984. Mr. Curry relinquished both offices with CFAF in 1986 when he was elected Senior Vice President - Marketing of the Company. In 1991 he was elected President of Emery Air Freight Corporation.\nRobert H. Lawrence, 56, Executive Vice President - Operations of the Company and President and Chief Executive Officer of CFCD. Mr. Lawrence joined the Company in 1969 as an Assistant Terminal Manager and advanced to Vice President of the Eastern Area by 1977. He became Vice President of Operations for CFCD in 1979 and President in 1986. In 1989, while continuing as President of CFCD, he was elected a Senior Vice President of the Company. In 1991, he was elected as Executive Vice President - Operations of the Company.\nGregory L. Quesnel, 45, Executive Vice President and Chief Financial Officer. Mr. Quesnel joined Consolidated Freightways Corporation of Delaware in 1975 as Director of Financial Accounting. Through several increasingly responsible financial positions, he advanced to become the top financial officer of CFCD. In 1989 he was elected Vice President-Accounting for the Company and in 1990 was named Vice President and Treasurer. Mr. Quesnel became Senior Vice President-Finance and Chief Financial Officer of the Company in 1991 and later Executive Vice President and Chief Financial Officer in 1993.\nRobert T. Robertson, 52, President and Chief Executive Officer of Con-Way Transportation Services, Inc. and Senior Vice President of the Company. Mr. Robertson joined CFCD in 1970 as a sales representative and advanced to Manager of Eastern Area Sales by 1973. He transferred to Texas in 1976 where he became involved in CFCD's operations and was promoted to Division Manager in 1978. In 1983 he was named Vice President and General Manager of Con-Way Transportation Services, Inc. In 1986, Mr. Robertson was elected President of CTS.\nEberhard G.H. Schmoller, 50, Senior Vice President and General Counsel of the Company. Mr. Schmoller joined CFCD in 1974 as a staff attorney and in 1976 was promoted to CFCD assistant general counsel. In 1983, he was appointed Vice President and General Counsel of CF Airfreight and assumed the same position with Emery after the acquisition in 1989. Mr. Schmoller was named Senior Vice President and General Counsel of the Company in 1993.\nITEM 11.","section_11":"ITEM 11. EXECUTIVE COMPENSATION\nThe required information for Item 11 is presented on pages 13 through 16, inclusive, of the Proxy Statement dated March 18, 1994, and those pages are incorporated herein by reference.\nITEM 12.","section_12":"ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT\nThe required information for Item 12 is included on pages 10 and 11 of the Proxy Statement dated March 18, 1994, and is incorporated herein by reference.\nITEM 13.","section_13":"ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS\nNot applicable.\nPART IV -------\nITEM 14.","section_14":"ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K\n(a) Financial Statements and Exhibits Filed ---------------------------------------\n1. Financial Statements See Index to Financial Information.\n2. Financial Statement Schedules See Index to Financial Information.\n3. Exhibits See Index to Exhibits.\n(b) Reports on Form 8-K -------------------\nThere were no reports on Form 8-K filed for the three months ended December 31, 1993.\nSIGNATURES\nPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Form 10-K Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized.\nCONSOLIDATED FREIGHTWAYS, INC. (Registrant)\nMarch 28, 1994 \/s\/Donald E. Moffitt -------------------------------------- Donald E. Moffitt President and Chief Executive Officer\nMarch 28, 1994 \/s\/Gregory L. Quesnel -------------------------------------- Gregory L. Quesnel Executive Vice President and Chief Financial Officer\nMarch 28, 1994 \/s\/Robert E. Wrightson -------------------------------------- Robert E. Wrightson Vice President and Controller\nSIGNATURES\nPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.\nMarch 28, 1994 \/s\/Raymond F. O'Brien ------------------------------------- Raymond F. O'Brien Chairman of the Board\nMarch 28, 1994 \/s\/Donald E. Moffitt ------------------------------------- Donald E. Moffitt President, Chief Executive Officer and Director\nMarch 28, 1994 \/s\/John C. Bolinger, Jr. ------------------------------------- John C. Bolinger, Jr., Director\nMarch 28, 1994 \/s\/Earl F. Cheit ------------------------------------- Earl F. Cheit, Director\nMarch 28, 1994 \/s\/G. Robert Evans ------------------------------------- G. Robert Evans, Director\nMarch 28, 1994 \/s\/Robert Jaunich II ------------------------------------- Robert Jaunich II, Director\nMarch 28, 1994 \/s\/John S. Perkins ------------------------------------- John S. Perkins, Director\nCONSOLIDATED FREIGHTWAYS, INC. FORM 10-K Year Ended December 31, 1993\n- --------------------------------------------------------------------------- - ---------------------------------------------------------------------------\nINDEX TO FINANCIAL INFORMATION ------------------------------\nConsolidated Freightways, Inc. and Subsidiaries - -----------------------------------------------\nThe following Consolidated Financial Statements of Consolidated Freightways, Inc. and Subsidiaries appearing on pages 27 through 45, inclusive, of the Company's 1993 Annual Report to Shareholders are incorporated herein by reference:\nReport of Independent Public Accountants\nConsolidated Balance Sheets - December 31, 1993 and 1992\nStatements of Consolidated Operations - Years Ended December 31, 1993, 1992 and 1991\nStatements of Consolidated Cash Flows - Years Ended December 31, 1993, 1992 and 1991\nStatements of Consolidated Shareholders' Equity - Years Ended December 31, 1993, 1992 and 1991\nNotes to Consolidated Financial Statements\nIn addition to the above, the following consolidated financial information is filed as part of this Form 10-K: Page ----\nConsent of Independent Public Accountants 20\nReport of Independent Public Accountants 20\nSchedule V - Property, Plant and Equipment - Years Ended December 31, 1993, 1992 and 1991 21\nSchedule VI - Accumulated Depreciation of Property, Plant and Equipment - Years Ended December 31, 1993, 1992 and 1991 22\nSchedule VIII - Valuation and Qualifying Accounts 23\nSchedule X - Supplementary Income Statement Information 24\nThe other schedules (Schedules I through IV, VII, IX and XI through XIV) have been omitted because either (1) they are neither required nor applicable or (2) the required information has been included in the consolidated financial statements or notes thereto.\nSIGNATURE\nCONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS -----------------------------------------\nAs independent public accountants, we hereby consent to the incorporation of our reports included and incorporated by reference in this Form 10-K, into the Company's previously filed Registration Statement File Nos. 2-81030, 33-29793, 33-45313 and 33-52599.\n\/s\/Arthur Andersen & Co. ------------------------- ARTHUR ANDERSEN & CO.\nSan Francisco, California March 28, 1994\nREPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ----------------------------------------\nTo the Shareholders and Board of Directors of Consolidated Freightways, Inc.:\nWe have audited in accordance with generally accepted auditing standards, the consolidated financial statements included in Consolidated Freightways, Inc.'s 1993 Annual Report to Shareholders incorporated by reference in this Form 10-K, and have issued our report thereon dated January 28, 1994. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. The schedules on pages 21 through 24 are the responsibility of the Company's management and are presented for the purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic financial statements. These schedules have been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.\n\/s\/Arthur Andersen & Co. -------------------------- ARTHUR ANDERSEN & CO.\nSan Francisco, California January 28, 1994\nSCHEDULE VIII\nCONSOLIDATED FREIGHTWAYS, INC. VALUATION AND QUALIFYING ACCOUNTS THREE YEARS ENDED DECEMBER 31, 1993 (In thousands)\nDESCRIPTION - ----------- ALLOWANCE FOR DOUBTFUL ACCOUNTS\nADDITIONS BALANCE AT CHARGED TO CHARGED TO BALANCE AT BEGINNING COSTS AND OTHER END OF OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD ---------- ---------- ---------- ---------- ----------\n1993 $26,198 $27,127 $ - $(23,545) (a) $29,780 ------- ------- -------- --------- -------\n1992 $25,742 $29,707 $ - $(29,251) (a) $26,198 ------- ------- -------- --------- -------\n1991 $30,385 $29,858 $ - $(34,501) (a) $25,742 ------- ------- -------- --------- -------\na) Accounts written off net of recoveries.\nSCHEDULE X CONSOLIDATED FREIGHTWAYS, INC. SUPPLEMENTARY INCOME STATEMENT INFORMATION Years Ended December 31, (In thousands)\n1993 1992 1991 -------- ------- --------\nMaintenance and Repairs $131,512 $146,375 $151,475 ======== ======== ========\nTaxes, other than Payroll and Income Taxes: Fuel $ 63,147 $ 56,066 $ 54,385 Other 43,647 39,675 41,142 -------- -------- -------- $106,794 $ 95,741 $ 95,527 ======== ======== ========\nINDEX TO EXHIBITS ITEM 14(a)(3)\nExhibit No. - -----------\n(3) Articles of incorporation and by-laws:\n3.1 Consolidated Freightways, Inc. Certificates of Incorporation, as amended. (Exhibit 3(a)(2) to the Company's Quarterly Report Form 10-Q for the quarter ended March 31, 1987*) 3.2 Consolidated Freightways, Inc. By-laws, as amended March 29, 1993.\n(4) Instruments defining the rights of security holders, including debentures:\n4.1 Consolidated Freightways, Inc. Stockholder Rights Plan. (Exhibit 1 on Form 8-A dated October 27, 1986*) 4.2 Certificate of Designations of the Series B Cumulative Convertible Preferred Stock. (Exhibit 4.1 as filed on Form SE dated May 25, 1989*) 4.3 Indenture between the Registrant and Security Pacific National Bank, trustee, with respect to 9-1\/8% Notes Due 1999 and Medium- Term Notes, Series A. (Exhibit 4.1 as filed on Form SE dated March 20, 1990*) 4.4 Form of Security for 9-1\/8% Notes Due 1999 issued by Consolidated Freightways, Inc. (Exhibit 4.1 as filed on Form SE dated August 25, 1989*) 4.5 Officers' Certificate dated as of August 24, 1989 establishing the form and terms of debt securities issued by Consolidated Freightways, Inc. (Exhibit 4.2 as filed on Form SE dated August 25, 1989*) 4.6 Form of Security for Medium-Term Notes, Series A to be issued by Consolidated Freightways, Inc. (Exhibit 4.1 as filed on Form SE dated September 18, 1989*) 4.7 Officers' Certificate dated September 18, 1989, establishing the form and terms of debt securities to be issued by Consolidated Freightways, Inc. (Exhibit 4.2 as filed on Form SE dated September 19, 1989*) 4.8 Form of Certificate of Designations of the Series C Conversion Preferred Stock (incorporated by reference to Exhibit 4.3 contained in Form SE dated January 29, 1992*). 4.9 Form of Stock Certificate for Series C Conversion Preferred Stock (incorporated by reference to Exhibit 4.4 contained in Form SE dated January 29, 1992*). 4.10 Subsidiary Guaranty Agreement dated July 30, 1993 among Consolidated Freightways, Inc. and various financial institutions in connection with the $250 million Credit Agreement of the same date. (Exhibit 4.1 to the Company's Form 10-Q for the quarterly period ended June 30, 1993*).\n* Previously filed with the Securities and Exchange Commission and incorporated herein by reference.\nExhibit No. - -----------\n(4) Instruments defining the rights of security holders, including debentures (continued):\nInstruments defining the rights of security holders of long-term debt of Consolidated Freightways, Inc., and its subsidiaries for which financial statements are required to be filed with this Form 10-K, of which the total amount of securities authorized under each such instrument is less than 10% of the total assets of Consolidated Freightways, Inc. and its subsidiaries on a consolidated basis, have not been filed as exhibits to this Form 10-K. The Company agrees to furnish a copy of each applicable instrument to the Securities and Exchange Commission upon request.\n(10) Material contracts:\n10.1 Consolidated Freightways, Inc. Long-Term Incentive Plan of 1978, as amended through Amendment No. 4. (Exhibit 10(e) to the Company's Form 10-K for the year ended December 31, 1983*) 10.2 Amendments 5, 6 and 7 to the Consolidated Freightways, Inc. Long-Term Incentive Plan of 1978, as amended through Amendment No. 4. (Exhibit 10.1 as filed on Form SE dated March 25, 1991*) 10.3 Consolidated Freightways, Inc. Long-Term Incentive Plan of 1988. (Exhibit 10(g) to the Company's Form 10-K for the year ended December 31, 1987*) 10.4 Amendment 3 to the Consolidated Freightways, Inc. Long-Term Incentive Plan of 1988. (Exhibit 10.2 as filed on Form SE dated March 25, 1991*) 10.5 Consolidated Freightways, Inc. Stock Option Plan of 1978, as amended through Amendment No. 1. (Exhibit 10(e) to the Company's Form 10-K for the year ended December 31, 1981*) 10.6 Consolidated Freightways, Inc. Stock Option Plan of 1988 as amended. (Exhibit 10(i) to the Company's Form 10-K for the year ended December 31, 1987 as amended in Form S-8 dated December 16, 1992*) 10.7 Forms of Stock Option Agreement (with and without Cash Surrender Rights) under the Consolidated Freightways, Inc. Stock Option Plan of 1988. (Exhibit 10(j) to the Company's Form 10-K for the year ended December 31, 1987*) 10.8 Form of Consolidated Freightways, Inc. Deferred Compensation Agreement. (Exhibit 10(i) to the Company's Form 10-K for the year ended December 31, 1981*) 10.9 Consolidated Freightways, Inc. Retirement Plan (formerly Emery Air Freight Corporation Pension Plan), as amended effective through January 1, 1985, and amendments dated as of October 30, 1987. (Exhibit 4.22 to the Emery Air Freight Corporation Quarterly Report on Form 10-Q dated November 16, 1987**)\n* Previously filed with the Securities and Exchange Commission and incorporated herein by reference. ** Incorporated by reference to indicated reports filed under the Securities Act of 1934, as amended, by Emery Air Freight Corporation File No. 1-3893.\nExhibit No. - -----------\n10.10 Emery Air Freight Plan for Retirees, effective October 31, 1987. (Exhibit 4.23 to the Emery Air Freight Corporation Quarterly Report on Form 10-Q dated November 16, 1987**) 10.11 Consolidated Freightways, Inc. Common Stock Fund (formerly Emery Air Freight Corporation Employee Stock Ownership Plan, as effective October 1, 1987 (\"ESOP\"). (Exhibit 4.33 to the Emery Air Freight Corporation Annual Report on Form 10-K dated March 28, 1988**) 10.12 Employee Stock Ownership Trust Agreement, dated as of October 8, 1987, as amended, between Emery Air Freight Corporation and Arthur W. DeMelle, Daniel J. McCauley and Daniel W. Shea, as Trustees under the ESOP Trust. (Exhibit 4.34 to the Emery Air Freight Corporation Annual Report on Form 10-K dated March 28, 1988**) 10.13 Amended and Restated Subscription and Stock Purchase Agreement dated as of December 31, 1987 between Emery Air Freight Corporation and Boston Safe Deposit and Trust Company in its capacity as successor trustee under the Emery Air Freight Corporation Employee Stock Ownership Plan Trust (\"Boston Safe\"). (Exhibit B to the Emery Air Freight Corporation Current Report on Form 8-K dated January 11, 1988**) 10.14 Supplemental Subscription and Stock Purchase Agreement dated as of January 29, 1988 between Emery Air Freight Corporation and Boston Safe. (Exhibit B to the Emery Air Freight Corporation Current Report on Form 8-K dated February 12, 1988**) 10.15 Trust Indenture, dated as of November 1, 1988, between City of Dayton, Ohio and Security Pacific National Trust Company (New York), as Trustee and Bankers Trust Company, Trustee. (Exhibit 4.1 to Emery Air Freight Corporation Current Report on Form 8-K dated December 2, 1988**) 10.16 Bond Purchase Agreement dated November 7, 1988, among the City of Dayton, Ohio, the Emery Air Freight Corporation and Drexel Burnham Lambert Incorporated. (Exhibit 28.7 to the Emery Air Freight Corporation Current Report on Form 8-K dated December 2, 1988**) 10.17 Lease agreement dated November 1, 1988 between the City of Dayton, Ohio and Emery Air Freight Corporation. (Exhibit 10.1 to the Emery Air Freight Corporation Annual Report on Form 10-K for the year ended December 31, 1988**)\n* Previously filed with the Securities and Exchange Commission and incorporated herein by reference. ** Incorporated by reference to indicated reports filed under the Securities Act of 1934, as amended, by Emery Air Freight Corporation File No. 1-3893.\nExhibit No. - -----------\n10.18 Credit Agreement dated January 14, 1993, by and among Emery Receivables Corporation as the borrower, Emery Air Freight Corporation, Consolidated Freightways, Inc., individually and as Servicer and various financial institutions. (Exhibit 10.19 to the Company's Form 10-K for the year ended December 31, 1992*). 10.19 Purchase and Sale Agreement, dated January 14, 1993, among Emery Air Freight Corporation and Emery Distribution Systems, Inc., as Originators, Emery Receivables Corporation, and Consolidated Freightways, Inc., as Servicer. (Exhibit 10.20 to the Company's Form 10-K for the year ended December 31, 1992*). 10.20 Consolidated Freightways, Inc. Directors' Election Form for deferral payment of director's fees. 10.21 Consolidated Freightways, Inc. 1993 Executive Deferral Plan. (Exhibit 10.22 to the Company's Form 10-K for the year ended December 31, 1992*). 10.22 Consolidated Freightways, Inc. Executive Incentive Plan for 1994. 10.23 CF MotorFreight Incentive Plan for 1994. 10.24 Con-Way Transportation Services, Inc. Incentive Plan for 1994. 10.25 Emery Worldwide Incentive Plan for 1994. 10.26 $250 million Credit Agreement dated July 30, 1993 among Consolidated Freightways, Inc. and various financial institutions. (Exhibit 10.1 to the Company's Form 10-Q for the quarterly period ended June 30, 1993*). 10.27 Letter of Credit Facility Agreement dated as of July 30, 1993 between Consolidated Freightways, Inc. and Bank of America National Trust and Savings Association. (Exhibit 10.2 to the Company's Form 10-Q for the quarterly period ended June 30, 1993*). 10.28 Official Statement of the Issuer's Special Facilities Revenue Refunding Bonds, 1993 Series E and F dated September 29, 1993 among the City of Dayton, Ohio and Emery Air Freight Corporation. (Exhibit 10.1 to the Company's Form 10-Q for the quarterly period ended September 30, 1993*). 10.29 Trust Indenture, dated September 1, 1993 between the City of Dayton, Ohio and Banker's Trust Company as Trustee. (Exhibit 10.2 to the Company's Form 10-Q for the quarterly period ended September 30, 1993*). 10.30 Supplemental Lease Agreement dated September 1, 1993 between the City of Dayton, Ohio, as Lessor, and Emery Air Freight Corporation, as Lessee. (Exhibit 10.3 to the Company's Form 10-Q for the quarterly period ended September 30, 1993*). 10.31 Supplemental Retirement Plan dated January 1, 1990. 10.32 Directors' 24-Hour Accidental Death and Dismemberment Plan. 10.33 Executive Split-Dollar Life Insurance Plan dated January 1, 1994. 10.34 Board of Directors' Compensation Plan dated January 1, 1994. 10.35 Excess Benefit Plan dated January 1, 1987. 10.36 Directors' Business Travel Insurance Plan.\n* Previously filed with the Securities and Exchange Commission and incorporated herein by reference.\nExhibit No. - ----------\n10.37 Deferred Compensation Plan for Executives dated October 1, 1993. 10.38 1993 Nonqualified Employee Benefit Plans Trust Agreement dated October 1, 1993.\n(13) Annual report to security holders:\nConsolidated Freightways, Inc. 1993 Annual Report to Shareholders (Only those portions referenced herein are incorporated in this Form 10-K. Other portions such as \"To Our Shareholders and Employees\" are not required and, therefore, are not \"filed\" as part of this Form 10-K.)\n(22) Significant Subsidiaries of the Company.\n(28) Additional documents:\n28.1 Consolidated Freightways, Inc. 1993 Notice of Annual Meeting and Proxy Statement dated March 18, 1994. (Only those portions referenced herein are incorporated in this Form 10-K. Other portions are not required and, therefore, are not \"filed\" as a part of this Form 10-K.) 28.2 Note Agreement dated as of July 17, 1989, between the ESOP, Consolidated Freightways, Inc. and the Note Purchasers named therein. (Exhibit 28.1 as filed on Form SE dated July 21, 1989*) 28.3 Guarantee and Agreement dated as of July 17, 1989, delivered by Consolidated Freightways, Inc. (Exhibit 28.2 as filed on Form SE dated July 21, 1989*). 28.4 Form of Restructured Note Agreement between Consolidated Freightways, Inc., Thrift and Stock Ownership Trust as Issuer and various financial institutions as Purchasers named therein, dated as of November 3, 1992. (Exhibit 28.4 to the Company's Form 10-K for the year ended December 31, 1992*). 28.5 Form of Restructured Guarantee and Agreement between Consolidated Freightways, Inc., as Issuer and various financial institutions as Purchasers named therein, dated as of November 3, 1992. (Exhibit 28.5 to the Company's Form 10-K for the year ended December 31, 1992*).\nThe remaining exhibits have been omitted because either (1) they are neither required nor applicable or (2) the required information has been included in the consolidated financial statements or notes thereto.\n* Previously filed with the Securities and Exchange Commission and incorporated herein by reference.","section_15":""}
{"filename":"14029_1993.txt","cik":"14029","year":"1993","section_1":"Item 1. Business\nGeneral\nBrenco, Incorporated was founded in 1949. Initially Brenco was engaged in the manufacture and sale of bronze bearings for use on railroad freight cars. In the early 1960s Brenco expanded into the manufacture and sale of tapered roller bearings for use on railroad freight cars and in recent years has begun the manufacture and sale of tapered roller bearings and forgings for application in industrial markets. Brenco also services and repairs used railroad bearings, and manufactures lubrication seals for use in railroad bearings and for sale to third parties. In 1979 Brenco discontinued the manufacture of bronze friction bearings.\nThe customer base for Brenco's products and services is made up of major railroads, car builders and automobile manufacturers, of which there are a limited number. During 1993, sales to Trinity Industries, Inc., Ford Motor Company and CSX amounted to $8,236,000, $7,517,000 and $7,237,000, or approximately 8.3%, 7.6% and 7.3% of 1993 net sales, respectively. Accounts receivable at December 31, 1993, includes $901,000, $837,000 and $905,000 for the above customers, respectively.\nRegulations prescribed by the Association of American Railroads require that principal component parts used by a railroad in the repair and maintenance of railroad roller bearings be parts made by the original bearing manufacturer. Thus as domestic sales of new railroad roller bearings increase, it may be anticipated that the market for reconditioned Brenco bearings and component parts for Brenco bearings will also increase.\nIn 1993, sales of automotive forgings represented 11.8% of Brenco's business. Automotive forgings sales amounted to $11.6 million in 1993, $10.9 million in 1992 and $6.9 million in 1991. These products are sold principally to original equipment manufacturers.\nExport sales to India, Canada, Brazil, Korea, Mexico, Saudi Arabia, Australia and to FAG for their worldwide markets amounted to $17.8 million in 1993, $11.1 million in 1992 and $14.1 million in 1991. Brenco has no foreign manufacturing facilities and all products manufactured for export sales are manufactured at Brenco's Petersburg, Virginia facilities. Payment for export sales, other than Canadian, FAG and Australian sales, is made through the utilization of letters of credit. The Company believes the profitability of its export business is approximately the same as its domestic business.\nProducts\nThe roller bearing is an anti-friction bearing that contains steel rollers that turn as the axle rotates. Basically, the tapered roller bearing made by Brenco consists of four components: (1) the cone or inner race, (2) the cup or outer race, (3) the tapered rollers which roll between the cup and cone and (4) the cage which serves as a retainer and maintains proper spacing between the rollers. The design of such bearings permits the distribution of unit pressures over the full length of the roller. This fact, coupled with its tapered design, high precision tolerances and top quality material, provides a bearing with high load carrying capacity, excellent friction-reducing qualities and a significantly longer life than older friction-type bearings. The tapered principle of bearings permits ready absorption of radial loads, imposed at right angles to the axis of the bearing, and thrust loads which are exerted parallel to the axis of the bearing. For this reason, they are particularly adapted to reducing friction where shafts, gears or wheels are used.\nBrenco's tapered roller bearings have wide applications including railroad freight cars. Over-the-road trailers, forklift trucks, construction machinery, oil and gas rigs, steel mills and mining machinery are some of the industrial applications for Brenco's tapered roller bearings.\nBrenco has a separate plant for the manufacture of grease seals which is a component part of the railroad roller bearing.\nBrenco produces automotive forgings for automobile manufacturers. These products are sold as both unmachined and machined forgings.\nSales of all Brenco's products are made through both a company sales force and independent manufacturer's representatives.\nThrough its wholly-owned subsidiary, Rail Link, Inc., Brenco offers third party switching. This service, currently offered in ten different states, entails the switching of railcars between the railroad and the ultimate customers.\nCarolina Coastal Railway, Inc., Carolina and Northwestern Railroad, Inc. and Commonwealth Railway, Inc., wholly-owned subsidiaries of Rail Link, Inc. operate short line railroads in North Carolina and Virginia. In performing this service, railcars are moved over the short line route from the railroad to the ultimate customer. All short line operations are under 25 miles in length.\nIn 1993, the Company purchased from Epilogics, Inc., an engineering design firm in California, the rights to a one-way clutch design for automotive transmissions. The MD clutch has the potential for substantially increasing the future sales of our Powertrain Products division, but will require substantial development and marketing efforts over the next two years in order to gain acceptance of the product by the major U.S. automobile manufacturers. Competition\nBrenco is principally in competition with one other domestic manufacturer of railroad roller bearings, The Timken Company, and a number of foreign bearing manufacturers.\nBearing specifications for railroad roller bearings are largely determined by the Association of American Railroads. As a result, there are no significant differences between manufacturers in terms of bearing design. Consequently, the market for roller bearings, and railroad roller bearings in particular, is extremely competitive in terms of product performance and price. Brenco believes that its emphasis on service to its customers, including the development of a number of service facilities at various locations throughout the United States for the reconditioning of used bearings, has been important to the development of its competitive position.\nThere are numerous manufacturers of automotive forgings including the original equipment manufacturers themselves. Brenco's primary competition is currently these original equipment manufacturers. The market for automotive forgings is extremely price competitive.\nBacklog\nBrenco's backlog of orders at December 31, 1993 was approximately $9.0 million, compared to $19.9 million and $11.5 million at December 31, 1992 and 1991, respectively. There is no seasonal or other significant aspect in the backlog. The backlog at December 31, 1993, represented 1.2 months of sales based upon average monthly sales for 1993. Railroad replacement bearings were down $7.6 million while new bearing orders were up $2.0 million. Automotive forgings were down $3.1 million as compared to the prior year end. Included in the December 31, 1992 backlog of replacement bearings were $2.9 million for India and $3.3 million for Pakistan. There were no large export orders in the backlogs for 1993 or 1991.\nRaw Materials and Energy Use\nRaw materials used in Brenco's business consist principally of high-grade steel bars, sheet and strip, wire and tubing. Such products are available from a number of major steel producers, both domestic and foreign. To date Brenco has experienced no difficulty in obtaining adequate supplies of these raw materials for production purposes. Brenco does not have any long-term supply contracts.\nBrenco is a significant user of electricity. Natural gas is also used in one department. Brenco has had no difficulty in obtaining adequate gas supplies to date, nor has Brenco received any indication that its supply of electricity will be restricted or curtailed in the foreseeable future.\nCapital Expenditures, Plant Expansion and Research\nBrenco's capital expenditures were $8.8 million in 1993.\nBrenco's capital expenditure budget for 1994 is approximately $9.6 million, the major project being a new reconditioning facility in Little Rock, Arkansas.\nThe amount spent on research and development during Brenco's three most recent fiscal years is not material.\nEnvironmental Matters\nIn the first quarter of 1990, the Company voluntarily initiated the process of seeking the approval of the Virginia Department of Waste Management (the \"Virginia Department\") for proposed remediation activities involving industrial waste materials at the Company's original manufacturing site at Puddledock Road in Petersburg, Virginia. The site had been used as a foundry operation during the period of 1950-1979, but has not been used by the Company for manufacturing since that time.\nThe Company had engaged outside consultants to conduct environmental studies at the site and to prepare a proposed remediation plan based on those studies. On the basis of reports to the Company by these consultants, the Company notified the Virginia Department of the presence of certain waste materials at the site. The Company also established a reserve to account for the costs anticipated to be incurred in implementing the remediation plan based on consultants' cost estimates. To reflect the effect of the reserve, the Company took a charge to earnings in the fourth quarter of 1989, which resulted in an after-tax loss of sixteen cents per share for the quarter. The charge reduced 1989 after- tax net income to 31 cents a share, down from 47 cents per share before the charge.\nThe reserve was increased by $300,000 in 1992 and $300,000 in 1991 in anticipation of the impact of inflation on estimated costs of the proposed remediation plan. The additional charges in 1992 and 1991 resulted in an after-tax loss of two cents per share in each year.\nIn November, 1992 the Company received approval from the Virginia Department to proceed with a plan of actual site restoration. The remediation process began in December 1992; however, actual work at the site did not commence until the spring of 1993.\nDuring 1993, the Company's outside consultants reevaluated the expected cost estimate of the remediation plan. Based on the results of this study, an additional $2,300,000 was recorded to the reserve to account for the expected cost to complete the remediation plan. To reflect the effect of the reserve, the Company took a charge to earnings in the fourth quarter of 1993, which resulted in an after-tax loss of fourteen cents per share for the quarter. The charge reduced 1993 after-tax net income to 43 cents a share, down from 57 cents per share before the charge.\nWeather delays, extensive dewatering of the site, and substantially increased quantities of soil removed and processed were the principal causes for exceeding the plan's original estimate of the time and monies required to complete the project. The Company expects the project to be completed in the spring of 1994. Actual cost incurred may vary from the amount reserved.\nEmployees\nBrenco had 901 employees at December 31, 1993. Though union organization campaigns have been conducted at its Petersburg, Virginia plant on several occasions in prior years, Brenco is not a party to any collective bargaining agreement. Brenco believes its employee labor relations are good.\nItem 2.","section_1A":"","section_1B":"","section_2":"Item 2. Properties\nAt December 31, 1993 Brenco operated a total of four manufacturing plants located on approximately 150 acres of land adjoining its headquarters in Petersburg, Virginia. The four plants and surrounding facilities adjacent to its headquarters occupy approximately 60 of the 150 acre tract. Small service plants are operated by Brenco affiliates at three locations in various states. The plants in Virginia are on land owned by Brenco. All other plants are subject to leases that are not considered material. Brenco's production facilities at its Petersburg, Virginia plant occupy approximately 400,000 square feet of production area.\nIn general, the buildings are in good condition, are considered to be adequate for the uses to which they are being put and are in regular use. At December 31, 1993 Brenco was operating at approximately 70% of capacity at its Petersburg manufacturing facility.\nThe Company leases 13,749 square feet on the second floor of a three story concrete and steel building in good condition in Midlothian, Virginia. Approximately 40 people are located at this location including Administration, Finance and Marketing personnel.\nThe Company owns the machinery and equipment which is necessary to conduct its operations.\nItem 3.","section_3":"Item 3. Legal Proceedings\nIn 1984 the Connecticut Department of Transportation (\"CDOT\") and the Metropolitan Transportation Authority (\"MTA\") filed companion lawsuits in the Superior Court of Connecticut against General Electric Company (\"GE\") alleging certain defects and failures with respect to 244 high speed railroad passenger cars supplied to CDOT and MTA by GE. In performing its contracts to supply the railroad cars, GE had purchased certain journal bearings from the Company. GE initially chose not to bring a third-party action against the Company; however, in order to preserve GE's ability to do so at a later date, GE and the Company entered into an agreement tolling the statute of limitations, terminable by either party upon 30 days' notice.\nIn January, 1991, the Company was advised by GE that CDOT, MTA and GE had reached a settlement agreement in 1990 concerning the lawsuits on terms not disclosed by GE. On February 4, 1991 GE filed companion lawsuits against the Company and another major domestic bearing manufacturer in the Federal District Court of Connecticut alleging defects in the roller bearings sold to GE for use on the railroad passenger cars involved in the lawsuits previously settled with CDOT and MTA. In the present suits, GE is attempting to recover from the Company and the other bearing manufacturer the settlement cost and defense expenses it incurred in settling the earlier lawsuits. In September 1992, discovery and counter-discovery proceedings were initiated by the parties. The suits have been pending approximately 3 years. The Company believes it has meritorious defenses to the claims alleged against it by GE. The Company has primary liability insurance coverage applicable to claims such as these and excess coverage in an amount the Company believes to be more than sufficient to cover this exposure. The primary insurance carrier has indicated to the Company that no substantial issues appear to exist regarding the applicability of the Company's primary insurance coverage to the transactions at issue in this litigation.\nExcept as set forth above, neither Brenco nor its subsidiaries is a party to any material pending legal proceeding before any court, administrative agency or other tribunal (See also Item 1, Environmental Matters, page 5).\nItem 4.","section_4":"Item 4. Submission of Matters to a Vote of Security Holders None.\nEXECUTIVE OFFICERS OF THE REGISTRANT\nThe executive officers of Brenco are elected by the board of directors of the Company to serve one year terms. Following is information about the executive officers of Brenco as of the most recent practicable date:\nNeedham B. Whitfield, age 57, has served as Chief Executive Officer and Chairman of the Board of Directors of the Corporation and all subsidiaries since 1985. Mr. Whitfield was a principal in the firm of Harper and Whitfield, P. C., Certified Public Accountants, until August 1989. Mr. Whitfield is the brother-in-law of John C. Kenny, a director.\nJ. Craig Rice, age 46, has served as President, Chief Operating Officer and Director of the Corporation and Director and Officer of all subsidiaries since 1985 and is responsible for overall corporate policy.\nJacob M. Feichtner, age 56, has served as Executive Vice President, Secretary and Treasurer and Director of the Corporation and Director and Officer of all subsidiaries since 1985.\nRobert V. Lawrence, age 56, has served as Vice President of Engineering since 1984.\nHoward J. Bush, age 40, has served as Vice President of Planning, Marketing and Distribution since 1989.\nPART II\nItem 5.","section_5":"Item 5. Market for Brenco, Incorporated Common Stock and Related Shareholder Matters\nThe principal market in which the Common Stock of Brenco, Incorporated is traded is the NASDAQ Over-the-Counter-National Market System. The high and low sales prices for the Common Stock on the NASDAQ Over-the-Counter-National Market System and the dividends paid per Common Share for each quarter in the last two fiscal years are incorporated by reference to page 8 of the 1993 Annual Report. For information on restrictions on payment of dividends, see Note 5 of Notes to Consolidated Financial Statements under item 8 of this Report.\nThe approximate number of shareholders of record on February 25, 1994 was 2,196 (including brokers, dealers, banks and other nominees participating in The Depository Trust Company).\nItem 6.","section_6":"Item 6. Selected Financial Data\nInformation required by this item is incorporated by reference to the Brenco Annual Report to shareholders, page 17.\nItem 7.","section_7":"Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations\nInformation required by this item is incorporated by reference to the Brenco Annual Report to shareholders, pages 17 and 18.\nItem 8.","section_7A":"","section_8":"Item 8. Financial Statements and Supplementary Data\nInformation required by this item is incorporated by reference to the Brenco Annual Report to shareholders as follows:\nFinancial Statements and Independent Auditors' Report - pages 9 through 16.\nSupplementary data - page 8, the information under \"Selected Quarterly Data\".\nItem 9.","section_9":"Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure\nNone.\nPART III\nItem 10.","section_9A":"","section_9B":"","section_10":"Item 10. Directors and Executive Officers of the Registrant\nInformation required by this item concerning directors of the registrant is incorporated by reference to the Brenco Proxy Statement dated March 11, 1994, pages 3 through 5 under \"Election of Directors\". Information on the executive officers of the registrant is included in Part I under the caption \"Executive Officers of the Registrant\".\nItem 11.","section_11":"Item 11. Executive Compensation\nInformation required by this item is incorporated by reference to the Brenco Proxy Statement dated March 11, 1994, pages 6 through 9 under \"Executive Compensation\".\nItem 12.","section_12":"Item 12. Security Ownership of Certain Beneficial Owners and Management\nInformation required by this item is incorporated by reference to the Brenco Proxy Statement dated March 11, 1994, pages 1 through 3 under \"Security Ownership of Certain Beneficial Owners and Management\".\nItem 13.","section_13":"Item 13. Certain Relationships and Related Transactions\nInformation required by this item concerning certain relationships is incorporated by reference to the Brenco Proxy Statement dated March 11, 1994, pages 4 and 5, footnote (1) through (3), under \"Election of Directors.\"\nPART IV\nItem 14.","section_14":"Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K:\n(a) 1. Financial Statements:\nThe following statements are incorporated in Part II, Item 8 by reference to the Brenco Annual Report to Shareholders (page references are to page numbers in the Brenco Annual Report): Page Number ----------- Independent Auditor's Report 16\nConsolidated Balance Sheets as of December 31, 1993 and 1992 11\nConsolidated Statements of Income for the three years ended December 31, 1993, 1992 and 1991 9\nConsolidated Statements of Shareholders' Equity for the three years ended December 31, 1993, 1992 and 1991 10\nConsolidated Statements of Cash Flows for the three years ended December 31, 1993, 1992 and 1991 12\nNotes to Consolidated Financial Statements 13 - 15\n(a) 2. Financial Statement Schedules:\nThe following schedules are included in Part IV of this report:\nIndependent Auditor's Report on Financial Statement Schedules\nV. Property, Plant and Equipment for years ended December 31, 1993, 1992 and 1991\nVI. Accumulated Depreciation and Amortization of Property, Plant and Equipment for years ended December 31, 1993, 1992 and\nVIII. Valuation and Qualifying Accounts for years ended December 31, 1993, 1992 and 1991\nOther schedules or information are omitted because of the absence of conditions under which they are required or because the required information is given in the financial statements or notes thereto.\n(a) 3. Exhibits\n3.1 Articles of Incorporation, as amended. (incorporated herein by reference to Form SE dated March 27, 1991).\n3.2 Bylaws, as amended. (filed under cover of Form SE dated March 25, 1994).\n4.1 Note Agreements dated as of September 1, 1992, providing for the issuance in the aggregate of $10,000,000 7.50% Senior Notes due May 1, 2002 (filed under cover of Form SE dated March 26, 1993).\n10.1 Employment Agreement dated as of September 8, 1983, between the Company and J. Craig Rice (filed under cover of Form SE dated March 26, 1993).\n10.2 Employment Agreement dated as of September 8, 1983, between the Company and Jacob M. Feichtner (filed under cover of Form SE dated March 26, 1993).\n10.3 Employment Agreement dated as of September 8, 1983, between the Company and Robert V. Lawrence (filed under cover of Form SE dated March 25, 1994).\n10.4 1987 Restricted Stock Plan of the Company (incorporated herein by reference to the Company's Proxy Statement for the 1987 Annual Meeting of Stockholders dated March 13, 1987).\n10.5 1988 Stock Option Plan of the Company, as amended (filed under cover of Form SE dated March 25, 1994).\n13. Annual Report to security holders. (filed under cover of Form SE dated March 25, 1994).\n21. Subsidiaries of the registrant.\n23. Consent of Independent Auditors.\nManagement Contracts and Compensatory Plans. Set forth below are the management contracts or compensatory plans and arrangements required to be filed as Exhibits to this Annual Report pursuant to Item 14(c) hereof, including their location:\nEmployment Agreement dated as of September 8, 1983, between the Company and J. Craig Rice - Exhibit 10.1 to the Company's Annual Report on Form 10-K for the year ended December 31, 1992 (filed under cover of Form SE dated March 26, 1993).\nEmployment Agreement dated as of September 8, 1983, between the Company and Jacob M. Feichtner - Exhibit 10.2 to the Company's Annual Report on Form 10-K for the year ended December 31, 1992 (filed under cover of Form SE dated March 26, 1993).\nEmployment Agreement dated as of September 8, 1983, between the Company and Robert V. Lawrence - Exhibit 10.3 to the Company's Annual Report on Form 10-K for the year ended December 31, 1993 (filed under cover of Form SE dated March 25, 1994).\n1987 Restricted Stock Plan of the Company - Exhibit A to the Company's Proxy Statement for the 1987 Annual Meeting of Stockholders dated March 13, 1987.\n1988 Stock Option Plan of the Company, as amended April 15, 1993 - Exhibit 10.5 to the Company's Annual Report on Form 10-K for the year ended December 31, 1994 (filed under cover of Form SE dated March 25, 1994).\n(b) Reports on Form 8-K\nThere were no reports on Form 8-K for the three months ended December 31, 1993.\nSIGNATURES\nPursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.\nBRENCO, INCORPORATED\nMarch 25, 1994 BY: \/s\/ J. Craig Rice -------------------------------------- J. Craig Rice President (Chief Operating Officer)\nMarch 25, 1994 BY: \/s\/ Jacob M. Feichtner -------------------------------------- Jacob M. Feichtner Executive Vice President Secretary and Treasurer (Chief Financial and Accounting Officer)\nPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.\nChairman of the \/s\/ Needham B. Whitfield Board and Chief Executive - ----------------------------- Officer and Director March 25, 1994 Needham B. Whitfield\nPresident and Chief Operating \/s\/ J. Craig Rice Officer of the Company - ----------------------------- and Director March 25, 1994 J. Craig Rice\nExecutive Vice President, \/s\/ Jacob M. Feichtner Secretary and Treasurer of - ----------------------------- the Company and Director March 25, 1994 Jacob M. Feichtner\n\/s\/ Steven M. Johnson Director March 25, 1994 - ----------------------------- Steven M. Johnson\n\/s\/ John C. Kenny Director March 25, 1994 - ----------------------------- John C. Kenny\n\/s\/ James M. Wells III Director March 25, 1994 - ----------------------------- James M. Wells III\n\/s\/ Frederic W. Yocum, Jr. Director March 25, 1994 - ----------------------------- Frederic W. Yocum, Jr.\nINDEPENDENT AUDITOR'S REPORT ON FINANCIAL STATEMENT SCHEDULES\nTo the Board of Directors and Shareholders Brenco, Incorporated Petersburg, Virginia\nIn connection with our audit of the consolidated financial statements of Brenco, Incorporated and subsidiaries as of December 31, 1993 and 1992, and for each of the three years in the period ended December 31, 1993, which is referred to in our report dated January 31, 1994, herein incorporated by reference, we also audited the schedules listed in Item 14 (a) 2. In our opinion, such schedules present fairly, when read in conjunction with the related consolidated financial statements, the financial data required to be set forth therein in conformity with generally accepted accounting principles.\nMcGLADREY & PULLEN\nRichmond, Virginia January 31, 1994\nExhibits 3.1, 3.2, 4.1, 10.1, 10.2, 10.3, 10.4, 10.5, 21 and 23 which are listed under Item 14(a)3 are not included herewith but may be obtained for a fee of $2.00 by writing to:\nSecretary Brenco, Incorporated One Park West Circle Suite 204 Midlothian, Virginia 23113\nBRENCO, INCORPORATED AND SUBSIDIARIES\nSUBSIDIARIES OF THE REGISTRANT\nEXHIBIT 21\nThe Company has the following wholly-owned subsidiaries, incorporated in Virginia and included in the consolidated financial statements:\nQuality Bearing Service of Kentucky, Inc. Quality Bearing Service of Missouri, Inc. Brenco Holdings, Inc. Rail Link, Inc. SealTech, Inc. Full Steam Ahead Rebuilding, Inc.\nThe Company has the following wholly-owned subsidiary, incorporated in California and included in the consolidated financial statements:\nQ.B.S. of California, Inc.\nRail Link, Inc. has the following wholly-owned subsidiaries, incorporated in Virginia and included in the consolidated financial statements:\nCarolina Coastal Railway, Inc. Commonwealth Railway, Inc. Carolina and Northwestern Railroad, Inc.\nEXHIBIT 23\nCONSENT OF INDEPENDENT AUDITORS\nWe consent to the incorporation by reference of our report dated January 31, 1994 in the Company's 1993 Annual Report on Form 10-K, in Post- Effective Amendment No. 2 to Registration Statement No. 2-65364 on Form S- 8, Registration Statement No. 33-31361 on Form S-8, Registration Statement No. 33-45650 on Form S-8 of Brenco, Incorporated filed with the Securities and Exchange Commission.\nMcGLADREY & PULLEN\nRichmond, Virginia March 25, 1994","section_15":""}
{"filename":"856529_1993.txt","cik":"856529","year":"1993","section_1":"ITEM 1. Business\nIntroduction\nBerlitz International, Inc. (the \"Company\") is a New York corporation, organized in 1989. Prior to the organization of the Company, the Company's business was conducted through subsidiaries of Macmillan, Inc. (\"Macmillan\") including: Berlitz Languages, Inc. (Language Instruction and Translation Services), Editions Berlitz, S.A. and Berlitz Publications, Inc. (Publishing). Prior to the Company's initial public offering in December 1989, Macmillan caused the Company to be incorporated and transferred to it the capital stock of these predecessor corporations in exchange for shares of the capital stock of the Company. In February 1993, Fukutake Publishing Co., Ltd. (\"Fukutake\") acquired indirectly through merger (the \"Merger\") 67% of the outstanding common stock, par value $.10 per share, of the Company (\"New Common\") and the existing public shareholders of the Company hold approximately 33% of the Company. See Items 5 and 7 for further discussion.\nThe Company's operations are conducted through the following business segments: Language Instruction, Translation Services, and Publishing. Language Instruction is organized on a geographic basis into five (changed from four in 1992) operating divisions: North America (U.S. and Canada), Western Europe (twelve countries), Central\/Eastern Europe (seven countries), East Asia (Japan, Thailand and Hong Kong) and Latin America (seven countries including Puerto Rico). Some countries are divided into regions and districts. Translation Services is organized on a geographic basis into three operating divisions: the Americas (U.S., Canada and Chile), Europe (13 countries) and East Asia (Japan). Publishing is organized on a geographic basis into two operating divisions (the U.S. and the United Kingdom). The Company's Japanese operations are conducted through its Japanese subsidiary which is owned 80% by the Company and 20% by Fukutake. At least 90% of total East Asia sales, operating profits, assets and employees are attributable to the operations in Japan. Country and division managers determine pricing, teacher\/translator and administrative salaries, leasing of facilities, advertising and promotion, and other administrative matters, within guidelines established at corporate headquarters. The country managers are evaluated and provided incentives based on profit performance of their particular areas while division managers are provided incentives based on profit performance of the Company as a whole. Business segment and geographic area information is incorporated herein in the Notes to Consolidated Financial Statements within Item 8, Financial Statements and Supplementary Data, under Note 15.\nLanguage Instruction\nAs of December 31, 1993, the Company operated 322 language centers in 31 countries using the Berlitz (Registered Trademark) Method, as described herein, and the Company's proprietary instruction material, to provide instruction in virtually all languages. Approximately 4.6 million language lessons were given in 1993, the most frequently taught languages being English, Spanish, French and German. Revenues from Language Instruction accounted for approximately 82%, 83% and 85% of total Company revenues in 1993, 1992 and 1991, respectively.\nThe following tables set forth, by geographic division, the number of language centers and the number of lessons given over the last five years:\nNumber of Centers at December 31, ________________________________________\n1993 1992 1991 1990 1989 ____ ____ ____ ____ ____\nNorth America 72 73 68 67 67 Western Europe 61 68 65 65 62 Central\/Eastern Europe 75 71 58 53 50 East Asia 57 59 56 53 50 Latin America 57 53 51 46 43 ____ ____ ____ ____ ____\nTotal 322 324 298 284 272 ____ ____ ____ ____ ____ ____ ____ ____ ____ ____\nNumber of Lessons (in thousands) _________________________________________\n*1993 1992 1991 1990 1989 _____ _____ _____ _____ _____\nNorth America 1,091 1,123 1,097 1,088 981 Western Europe 892 1,030 1,181 1,297 1,190 Central\/Eastern Europe 904 896 841 878 910 East Asia 844 1,003 1,093 1,148 1,076 Latin America 857 818 713 693 791 _____ _____ _____ _____ _____\nTotal 4,588 4,870 4,925 5,104 4,948 _____ _____ _____ _____ _____ _____ _____ _____ _____ _____\n* Excludes 137 lessons for language centers closed or to be closed in connection with the Merger.\nA lesson consists of a single 45-minute session given by a teacher (regardless of the number of students). In 1993, the United States, Japan, and Germany accounted for 21%, 17% and 13% of lessons given and 21%, 27% and 15% of Language Instruction sales, respectively.\nAll of the Company's language centers are wholly-owned, except for a joint venture operation in Russia and two franchised language centers in Egypt. The following table sets forth, by geographic division, the number of language centers in each of the countries in which the Company owns and operates centers as of December 31, 1993:\nWESTERN EUROPE NORTH AMERICA Belgium 10 United States 62 Denmark 3 Canada 10 Finland 1 Total 72 France 17 Holland 1 Israel 1 LATIN AMERICA Italy 7 Argentina 5 Norway 1 Brazil 16 Portugal 1 Chile 4 Spain 13 Colombia 4 Sweden 1 Mexico 15 United Kingdom 5 Puerto Rico 4 Total 61 Venezuela 9 Total 57\nCENTRAL\/EASTERN EUROPE Austria 8 Czech Republic 3 Germany 48 Hungary 3 EAST ASIA Poland 2 Hong Kong 1 Russia 1 Japan 54 Switzerland 10 Thailand 2 Total 75 Total 57\nIn 1993, 12 language centers were opened and 14 were closed, bringing the worldwide total to 322. The average capital expenditure incurred in connection with opening a new language center in 1993 was approximately $176,000.\nLanguage centers traditionally have been wholly-owned operations and the Company has traditionally financed the cost of expansion with internally generated funds and does not anticipate that borrowing will be necessary to finance the Company's planned expansion.\nBerlitz (Registered Trademark) Method. At the heart of Berlitz (Registered Trademark) Instruction is the successful Berlitz (Registered Trademark) Method, a proven technique that enables students to acquire a working knowledge of the foreign language in a short period of time. Through the exclusive use of the target language in the classroom, students learn to think and speak naturally in the new language, without translation. With its primary objective to develop conversational comprehension and speaking skills, the Berlitz (Registered Trademark) Method combines the use of live instruction with proprietary written and audio-visual support materials to ensure a fast, effective, and enjoyable learning experience.\nBerlitz (Registered Trademark) instructors teach in their native language and are required to complete a seven to ten-day training course in the Berlitz (Registered Trademark) Method. Upon successful completion of this training course, instructors work either full-time or part-time. The Berlitz (Registered Trademark) Method does not require that an instructor be proficient in any language other than the language being taught. This feature of the Berlitz (Registered Trademark) Method greatly increases the number of potential instructors and tends to lower instructor costs.\nThe Company's centralized management and ownership of language centers permits standardization of instructional method and materials. This standardization also allows a client to begin a Berlitz (Registered Trademark) course in one location and complete it anywhere in the worldwide network of Berlitz (Registered Trademark) language centers. Through application of uniform standards to instructor training, development of materials, and classroom instruction, the Company seeks to achieve consistent and predictable instructional results.\nLanguage Instruction Programs. The Company offers several types of language instruction programs, which vary in cost, length and intensity of study. Believing individualized instruction to be the most effective way to learn a foreign language, the Company emphasizes one-on-one instruction, including private lessons and Total Immersion (Registered Trademark) study as described below. The Company also offers semi-private and group lessons.\nApproximately 51% of all tuition revenues in 1993 were from private lessons (excluding Total Immersion (Registered Trademark)). Private instruction is typically provided in blocks of three or more 45-minute lessons, with a short break after each lesson. Total Immersion (Registered Trademark) courses, an intensive form of private instruction, accounted for 5% of tuition revenues in 1993. Total Immersion (Registered Trademark) programs last a full day and generally continue for two to six weeks. The Company also offers semi-private lessons designed for two to four clients, as well as group instruction, where class sizes are three or more students. Group classes generally meet over a period of weeks. Semi-private and group lessons represented 44% of tuition revenues in 1993.\nAs a substantial majority of its clients are enrolled for business or professional reasons, the Company's business is influenced by the level of international trade and economic activity. In addition to individuals seeking work-related language skills, Berlitz (Registered Trademark) clients also include travelers and high school and university students developing course-related language skills.\nIncluded in the Language Instruction business are programs that combine intensive language instruction with first-hand exposure to the cultural environment of the country of the target language. The Company has two programs in this specialty instruction area: Language Institute For English (\"L.I.F.E. (Registered Trademark)\"), a Berlitz (Registered Trademark) branch since 1988, and Berlitz (Registered Trademark) Study Abroad. A third specialty program, Berlitz (Registered Trademark) Jr., provides complete language instruction programs to children in public and private schools throughout the world. Together, these specialty areas accounted for approximately 4% of the Company's revenues in 1993.\nMarketing and Pricing Policy. The Company directs its marketing efforts toward individuals, businesses and governments. The Company utilizes newspaper, magazine and yellow page advertising in addition to direct contacts. Marketing efforts are coordinated on a country-by-country basis. Center directors, district managers and regional managers are responsible for sales development with existing and new clients. In addition, sales forces are maintained in the Company's major markets to supplement other marketing methods.\nTuition, which is payable in advance by most individual clients and some corporate clients, includes a registration fee, a charge for printed and recorded course materials, and a per lesson fee. The per lesson fee varies depending on the language being taught, type of lesson and country. Total Immersion (Registered Trademark) courses are more expensive than standard individualized instruction, while semi-private and group instruction are the least expensive.\nThe Company generally negotiates fees with its corporate clients based on anticipated volume. Concentration on the intensive, individualized segment of the market has enabled the Company to maintain a pricing structure consistent with a premium product. The Company, whose prices are usually higher than those charged by its competitors, believes that it is able to charge premium prices because of its reputation and the high and consistent quality of instruction it provides.\nCompetition. The language instruction industry is fragmented, varying significantly among different geographic locations. In addition to the Company, providers of language instruction generally include individual tutors, small language schools operated by individuals and public institutions, and franchises of large language instruction companies. The smaller operations typically offer large group instruction and self-teaching materials for home study. Rather than compete with these small operators, the Company concentrates on its leading position in the higher-priced, business-oriented segment of the language instruction market through its offering of intensive and individualized instruction. No competitors in this market offer language instruction through wholly-owned operations on a worldwide basis. However, the Company does have a number of competitors organized on a franchise basis which, although not as geographically diverse as the Company, compete with it internationally. The Company also faces significant competition in a number of local markets.\nTranslation Services\nBerlitz (Registered Trademark) Translation Services provides high quality technical translation, interpretation, software localization, electronic publishing, and other foreign language related services. Translations represented approximately 13%, 12% and 9% of total Company revenues in 1993, 1992 and 1991, respectively, and is expected to contribute an increasingly larger percentage of total corporate revenues over the next few years as a result of recent restructuring efforts, an expanded and restructured sales force and a greater focus on larger customers.\nBerlitz (Registered Trademark) Translations sales focus is on industry segments viewed by management as likely to contribute to the future growth of the business, such as: information technology, automotive\/manufacturing, medical technology\/pharmaceutical, and telecommunications. The Company has an international network comprised of 27 translation centers in 18 countries, including Baldock (England), Bergen (Norway), Copenhagen, Dublin, Los Angeles, Montreal, New York, Paris, Santiago, Sindelfingen (Germany), Toronto, Tokyo and other locations worldwide. Materials are electronically transferred between locations to utilize specialized in-country translations and production facilities in order to produce the highest quality products and reduce costs.\nThe Company has developed a global network of translators that provides it with a broad range of technical and linguistic resources. The Company has also developed a production process that incorporates several editing phases designed to maximize the accuracy of its translations. Production staffs at dedicated Translation facilities generally consist of production managers, editors and translators. Managers and editors are generally full-time staff members, while the translator staff is comprised of both full-time employees and freelance workers. Freelance translators provide the specialized skills that are necessary for technical translations at a more cost effective rate than that of full-time employees.\nTranslation Services has expanded through a number of strategic alliances and acquisitions. In 1989, the Company acquired Institute for Fagsprog A\/S (Copenhagen, Denmark) and in 1990 acquired Able Translations, Ltd. (Baldock, England). Kayser Coll. Technische Ubersetzer (Sindelfingen, Germany) and NorDoc A\/S (Norway), were acquired in 1991. Also in 1991, Berlitz acquired a 51% interest in Softrans International Limited (\"Softrans\"), a Dublin-based leading supplier of software localization related services in Europe. In 1993, an additional 19% interest in Softrans was acquired.\nCompetition. In the highly fragmented translation services market, providers compete on the basis of price, accuracy and job turnaround time. The Company does not believe that any one company accounts for a significant portion of the entire commercial translation market.\nPublishing\nThe Company publishes pocket-size travel guides and language phrase books through its facilities in Europe. In addition, Publishing's list includes an extensive range of bilingual dictionaries, trade paperback travel guides and self-teaching language products. It is also involved with licensing projects that capitalize on the Berlitz (Registered Trademark) name in the international consumer market. The Publishing business accounted for approximately 5%, 5% and 6% of total Company revenues in 1993, 1992 and 1991, respectively. Approximately 52%, 55% and 63% of Publishing segment sales in 1993, 1992 and 1991, respectively were in Europe.\nBerlitz (Registered Trademark) Books and Guides. Pocket-size, smaller format travel guides include full-color pictures, maps, brief histories, points of interest, food and shopping information and a practical A to Z section. There are a total of 132 titles in this format published in English, plus approximately 480 titles in more than thirteen other languages. For these multiple-language titles the Company employs manufacturing techniques utilizing the same graphics and layouts to reduce manufacturing costs. Larger format travel guides, which include more detailed descriptive information, are available primarily in English in two series: The Berlitz (Registered Trademark) Travellers Guides and the Discover series. The latter series will incorporate titles previously published in the Blueprint (Registered Trademark) series.\nThe Company's phrase books include common expressions, words and phrases most often used by travelers. These appear in color-coded sections covering such topics as accommodations, eating, sightseeing, shopping, transportation and medical reference. There are a total of 117 phrase books published in twelve languages, of which 29 are for English-speaking travelers. A European Phrase Book and a European Menu Reader are published in eight languages. Additional travel- related language products include Cassette Packs and Compact Disc Packs, which consist of a 90-minute cassette tape or a 75 minute compact disc (\"CD\") and phrase book packaged and sold together.\nRetail distribution for the books and audio products is through established national distributors. These distributors sell to wholesalers, chain stores and individual retail outlets.\nBerlitz (Registered Trademark) Self-Teaching. The audio cassette and CD products produced by the Company are intended for the self-instruction language market and draw on the experience of the Language Centers. These products include courses for children and business people.\nIn the U.S., the audio cassette and CD products are marketed through in-flight airline magazine space advertising, through credit card statement inserts for which the credit card company is compensated based on orders received in response to promotions, and through another performance-based cooperative joint marketing venture with a national magazine publisher. In addition to the audio cassette and CD products, the Company is presently involved in several joint development and licensing arrangements for products which use published Berlitz (Registered Trademark) materials as the basis of alternate media products (such as hand-held electronic reference products and computer software) for which the Company receives royalties.\nThe Company's marketing plan includes the relaunching of certain existing product lines and the creation of new products that will compete in today's market place.\nThe Company establishes retail distribution through national distributors, who are responsible for the retail, wholesale, special sales, and travel industry sales channels. In addition to retail distribution, the Company markets the self-teaching language products through direct mail campaigns. The Company utilizes in-flight airline magazine advertising, credit card statement inserts and consumer magazine advertising in its United States marketing. In Europe and East Asia, the Company handles direct mail through a number of licensees.\nCompetition. The market for the Company's publications and self- teaching language products is sensitive to factors that influence the level of international travel, tourism and business. There is intense competition in nearly all markets in which the Company sells its published products. The Company's market share and Berlitz (Registered Trademark) brand name recognition levels vary considerably depending on market and product line.\nEmployees\nAs of December 31, 1993, the Company employed 1,899 full-time employees and 1,986 full-time employee equivalents. Due to the nature of its businesses, the Company retains a large number of teachers and translators on a freelance basis. Full-time employee equivalents are calculated by aggregating all part-time instructor hours and dividing these by the average number of hours worked by a full- time employee.\nThe Company is party to collective bargaining agreements in Canada, Denmark, France, Austria, Germany, and Italy which do not cover a significant number of employees. The Company believes it has satisfactory employee relations in the countries in which it operates. Certain countries in which the Company operates impose obligations on the Company with respect to employee benefits. None of these obligations materially inhibits the Company's ability to operate its business.\nGeneral\nThe material trademarks used by the Company and its subsidiaries are BERLITZ (Registered Trademark), TOTAL IMMERSION (Registered Trademark) (including foreign language variations used in certain foreign markets) and L.I.F.E. (Registered Trademark). The Company or its subsidiaries hold registrations for these trademarks, where possible, in all countries in which (i) material use is made of the trademarks by the Company or its subsidiaries, and (ii) failure to hold such a registration is reasonably likely to have a material adverse effect on the Company or its subsidiaries. The duration of the registrations varies from country to country. However, all registrations are renewable upon a showing of use. The effect of the registrations is to enhance the Company's ability to prevent certain uses of the trademarks by competitors and other third parties. In certain countries, the registrations create a presumption of exclusive ownership of the trademarks.\nAlthough the Company is not generally regulated as an educational institution in the jurisdictions in which it does business, it is subject to general business regulation and taxation. The Company's foreign operations are subject to the effects of changes in the economic and regulatory environments of the countries in which the Company operates.\nITEM 2.","section_1A":"","section_1B":"","section_2":"ITEM 2. Properties\nThe Company has its headquarters in Princeton, New Jersey and maintains facilities throughout the world. Except for eight facilities in France, Spain, Hungary, Brazil and Chile, all of the Company's facilities, including its headquarters, are leased. Total annual rental expense for the twelve months ended December 31, 1993 was $23,074,000. No one facility is material to the operation of the Company. A typical Berlitz (Registered Trademark) language center has private classrooms designed for one-on-one instruction, as well as some larger rooms suitable for small group instruction.\nThe following tables set forth, as of December 31, 1993, by geographic region, the number of facilities maintained in that region, the use of the Company's facility, whether owned or leased, and the aggregate square footage:\nOWNED FACILITIES\nNumber of Aggregate Region Facilities Use Square Footage ______ __________ ___ ______________\nWestern Europe 3 Center\/Leased to Others 4,370 Central\/Eastern Europe 2 Center 2,895 Latin America 3 Center 19,267 _____ ________\nTotal 8 Total 26,532 _____ ________ _____ ________\nLEASED FACILITIES\nNumber of Aggregate Region Facilities Use Square Footage ______ __________ ___ ______________\nNorth America 80 Center\/Offices 221,733 Western Europe 69 Center\/Offices 223,852 Central\/Eastern Europe 79 Center\/Offices 205,823 East Asia 62 Center\/Offices 142,631 Latin America 53 Center\/Offices 207,662 _____ __________\nTotal 343 Center\/Offices 1,001,701 _____ __________ _____ __________\nITEM 3.","section_3":"ITEM 3. Legal Proceedings\nIn November, 1992, the Company received a complaint entitled \"Irving Kas, on behalf of all others similarly situated v. Berlitz International, Inc., Joe M. Rodgers and Elio Boccitto\" in the U.S. District Court for New Jersey alleging various securities law violations under the Securities Exchange Act of 1934 and alleging various omissions and misrepresentations in connection with the Company's announcements during 1992 with respect to its financial results. In 1993, plaintiff filed a supplemental and amended complaint alleging various violations of the federal securities laws and common-law breaches of fiduciary duties relating primarily to the transaction contemplated by the Merger Agreement, and seeking to add another officer of the Company as a defendant in addition to the two officers named in the initial pleading. On August 4, 1993, the Court granted defendants' motion to dismiss the amended and supplemental complaint, deemed the original complaint to be withdrawn and dismissed the lawsuit in its entirety. Plaintiff's time to appeal has expired.\nThe Company is party to several other actions arising out of the ordinary course of its business. Management believes that none of these actions, individually or in the aggregate, will have a material adverse effect on the financial condition or results of operations of the Company.\nITEM 4.","section_4":"ITEM 4. Submission of Matters to a Vote of Security Holders\nNo matters have been submitted to a vote of security holders during the fourth quarter of 1993.\nPursuant to Instruction 3 to Item 401(b) of Regulation S-K and General Instruction G(3) to Form 10-K, the following information is included in Part I of this Form 10-K.\nExecutive Officers and Directors of the Registrant\nThe following table sets forth certain information concerning the Executive Officers and Directors of the Company as of March 18, 1994.\nName, Age, Position with Registrant Business Experience ___________________________________\nSoichiro Fukutake, 48 Chairman of the Board; Director (A)(C)\nMr. Fukutake joined Fukutake in 1973, and since May 1986 has served as its President and Representative Director. He also serves on the Board of Directors of a number of companies, private foundations and associations in Japan. Mr. Fukutake became a Director of the Company in February 1993. His term will expire in 1995.\nHiromasa Yokoi, 54 Vice Chairman of the Board, Chief Executive Officer and President; Director (A)\nMr. Yokoi was elected Vice Chairman of the Board and Chief Executive Officer of the Company in February 1993 and additionally was elected President effective on August 31, 1993. Mr. Yokoi has served as a director of Fukutake since June 1992 and General Manager of the Overseas Operations Division (formerly the International Division) of Fukutake since October 1990. Prior to that, he served as General Manager of the President's Office of Fukutake from July 1990 to September 1990. From June 1987 to July 1990, he was General Manager of the Corporate International Trade division of Matsushita Electric Industries Co., Ltd.. Between April 1981 and June 1987, he served as Managing Director and Chief Executive Officer of National Panasonic (Australia) PTY Ltd. in Sydney, Australia. Mr. Yokoi has served as a Director of the Company since January 1991. His term will expire in 1994.\nSusumu Kojima, 51 Executive Vice President, Corporate Planning; Director (A)\nMr. Kojima has served as Executive Vice President, Corporate Planning since September 1993. Prior thereto, he was Senior Vice President, Corporate Planning from February 1993 to September 1993. He was elected Executive Vice President, Corporate Planning in February 1993. Mr. Kojima has served as Director of Fukutake since March 1993. Prior to that, he was Joint General Manager of the Business Development Department of The Industrial Bank of Japan, Limited (\"I.B.J.\") from June 1991 to Februar 1993. Between November 1987 and June 1991, he served as Senior Deputy General Manager, Industrial Research Department of I.B.J. after having served as Chief Representative of I.B.J.'s Washington Representative Office from September 1983. Mr. Kojima was elected as a Director of the Company in February 1993. His term will expire in 1995.\nRobert Minsky, 49 Executive Vice President and Chief Financial Officer; Director (A)\nMr. Minsky has served as Executive Vice President, Translations since October 1, 1993, and as Chief Financial Officer since November 1990. From November 1990 to October 1993, he also served as Vice President. From January 1990 to October 1990, Mr. Minsky was Vice President and Chief Financial Officer of DRI\/McGraw-Hill, Inc. Between January 1986 and June 1989, Mr. Minsky served as Vice President and Chief Financial Officer of McCormack & Dodge Corporation, a subsidiary of The Dun & Bradstreet Corporation. Mr. Minsky has served as a Director of the Company since April 1991. His term will expire in 1995.\nManuel Fernandez, 57 Executive Vice President Director (A)\nMr. Fernandez has served as Executive Vice President, Language Services, since September 1993. Prior thereto, he was Vice President, European Operations from October 1989 to September 1993. He previously served as Vice President, European Operations for Berlitz Languages from January 1983 to October 1989. Mr. Fernandez was first employed by Berlitz Languages in 1963 and served in various positions until becoming Vice President in 1983. Mr. Fernandez has served as a Director of the Company since July 1993. His term will expire in 1995.\nOwen Bradford Butler, 70 Director (B)(D)\nFrom 1986 to December 1993, Mr. Butler served as retired Chairman and consultant to The Procter & Gamble Co. He also serves as Non-Executive Chairman of the Board of Directors of Northern Telecom, Ltd., and serves on the Board of Directors of Deere & Company, and Armco, Inc. Mr. Butler became a Director of the Company in February 1993. His term will expire in 1994.\nSaburou Nagai, 63 Director\nMr. Nagai has served as Managing Director of Fukutake since April 1988 and has supervised its general administration and accounting departments since April 1990. Since joining Fukutake in April 1985, he served as General Manager of its accounting department until April 1988 and supervised its corporate identity department (July 1991-April 1992) and personnel department (April 1990-July 1991). Mr. Nagai became a Director of the Company in February 1993. His term will expire in 1994.\nEdward G. Nelson, 62 Director (B)(C)(D)\nSince January 1985, Mr. Nelson has served as Chairman and President of Nelson Capital Corporation. From 1983 to 1985, he was Chairman and Chief Executive Officer of Commerce Union Corporation. He also serves on the Board of Directors of Clintrials, Inc., Osborn Communications Corporation, and A+ Communications, Inc. and is a nominee to Advocat. He is a trustee of Vanderbilt University. Mr. Nelson became a Director of the Company in February 1993. His term will expire in 1994.\nAritoshi Soejima, 67 Director (B)(C)(D)\nMr. Soejima has served as Senior Counselor of Fukutake since December 1980. From 1950 to 1981, Mr. Soejima served in various positions with the Japanese government (including the Ministry of Finance) and multilateral financial institutions (including the World Bank and International Monetary Fund). Mr. Soejima also currently serves as Chairman of Tokyo, Osaka, Tokyo Bay, Nagoya Hilton Company, Ltd. and Counselor of Nippon Hilton Company, Ltd. and Capital International Company, Ltd. and as special advisor to the Board of Directors of the Nippon Fire & Marine Insurance Company, Ltd. In addition, he serves on the Board of Directors of a number of companies, private foundations and associations in Japan. Mr. Soejima became a Director of the Company in February 1993. His term will expire in 1995.\nHenry D. James, 56 Vice President and Controller\nMr. James has served as Vice President and Controller since November 1990. For the period from October 1989 through October 1990, he served as Chief Financial Officer in addition to his present capacity. Prior thereto, he served in the same capacity for Berlitz Languages from 1981 to October 1989. Mr. James joined Berlitz Languages in 1977 and served in various positions with that company prior to 1981.\nRobert C. Hendon, Jr., 56 Secretary and General Counsel\nMr. Hendon has served as Secretary and General Counsel since April 1992. Prior thereto, he was first an associate then a partner at the law firm of Waller Lansden Dortch & Davis from 1964 until April 1992.\nJose Alvarino, 54 Vice President\nMr. Alvarino has been Vice President, Latin American Operations since October 1989. Prior thereto, he served in the same capacity with Berlitz Languages from 1985 until October 1989. Mr. Alvarino was first employed by Berlitz Languages in 1970 and served in various positions from that time until being appointed Vice President in 1985.\nAnthony Tedesco, 51 Vice President\nMr. Tedesco has been Vice President, East Asian Operations since July 1993. Prior thereto, he has served as Vice President, North American Operations from October 1989 to July 1993. Prior thereto, he served in the same capacity with Berlitz Languages from his initial employment in 1983.\nWolfgang Wiedeler, 49 Vice President\nMr. Wiedeler has served as Vice President Language Instruction, European Operations since September 1993. From May 1992 to September 1993 he was Vice President, Central\/Eastern European Operations. Prior thereto, he served as Divisional Manager of German-speaking countries since October 1989. Prior thereto he served in the same capacity for Berlitz Languages from his initial employment in 1984.\n(A) member of the Executive Committee (B) member of the Audit Committee (C) member of the Compensation Committee (D) Disinterested Director\nThere is no family relationship between any of the directors or executive officers of the Company.\nFrom January 1, 1993 until February 8, 1993, the closing of the Merger, the Board of Directors was comprised of Elio Boccitto, John Brademas, Robert Minsky, Rudy Perpich, Rozanne L. Ridgway, Joe M. Rodgers and Hiromasa Yokoi. Mr. Rodgers served as Chairman of the Board and acting Chief Executive Officer from December 23, 1991 until the closing of the Merger. Upon closing the Merger, the Board of Directors was comprised of Soichiro Fukutake, Hiromasa Yokoi, Elio Boccitto, Robert Minsky, Owen Bradford Butler, Saburou Nagai, Edward G. Nelson, Makato Sato and Aritoshi Soejima. Mr. Sato resigned effective February 27, 1993 and the Board appointed Mr. Susumu Kojima to fill the vacancy. Mr. Boccitto resigned as a Director effective July 27, 1993 and the Board appointed Mr. Manuel Fernandez to fill the vacancy.\nPART II\nITEM 5.","section_5":"ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters\nThe New Common is traded on the New York Stock Exchange (\"NYSE\") under the symbol BTZ. Holders of shares of New Common are entitled to receive such dividends as may from time to time be declared by the Board of Directors; however, such dividends are subject to restrictions set forth in the debt facilities incurred in connection with the Merger Agreement with Fukutake. As a result, the Company does not expect to pay dividends during the term of such debt facilities. See Item 7, Management's Discussion and Analysis, Liquidity and Capital Resources, for further discussion. Holders of New Common are entitled to one vote per share on all matters submitted to the vote of such holders, including the election of directors. There were approximately 108 holders of record of New Common as of March 18, 1994.\nThe sales prices per share of the New Common as reported by the NYSE for each quarter during the period from February 9, 1993 until December 31, 1993 ranged as follows:\nPrice per Share ____________________ High Low ______ ________\nFebruary 9, 1993 to March 31, 1993 $15 7\/8 $14 3\/8 Second Quarter 1993 $15 5\/8 $12 1\/4 Third Quarter 1993 $14 1\/8 $12 Fourth Quarter 1993 $14 7\/8 $12 5\/8\nPrior to the Merger, the Company's common stock, par value $.10 per share (40,000,000 shares authorized) (\"Old Common\"), was traded on the NYSE under the symbol BTZ.\nThe sales prices per share of the Old Common as reported by the NYSE for each quarter during the period from January 1, 1992 until February 8, 1993 ranged as follows:\nPrice Per Share ____________________\nHigh Low ______ ________\nJanuary 1, 1993 to February 8, 1993 $23 1\/2 $22 1\/8\nPrice Per Share High Low\nFirst quarter 1992 $20 1\/4 $18 1\/4 Second quarter 1992 $18 1\/2 $16 3\/4 Third quarter 1992 $24 $17 7\/8 Fourth quarter 1992 $23 3\/4 $16 3\/4\nManagement believes the price per share for periods subsequent to February 8, 1993 is not directly comparable to the price per share for the periods presented prior to February 8, 1993 because the outstanding number of shares was reduced as a result of the Merger.\nAggregate common stock dividends of $.42 per share of Old Common were declared in 1992, in quarterly payments. The Company declared regular cash dividends of $.14 per share of Old Common for each of the first, second and third quarters of 1992. No fourth quarter dividend for 1992 nor any dividends for 1993 were declared or paid.\nOn February 5, 1992, the Board of Directors declared a dividend distribution of one Common Share Purchase Right (the \"Right\") for each outstanding share of Old Common to shareholders of record on February 17, 1992, in accordance with the Safeguard Rights Agreement between Berlitz and U.S. Trust Company of New York (the \"Safeguard Rights Plan\"). The Rights were redeemed prior to the closing of the Merger, so that the holders of Rights had no rights other than the right to receive the redemption price of $.01 per Right in cash payable to such shareholders at the time of the closing of the Merger.\nAs a result of certain payment defaults on certain notes held by the Company as discussed in Item 7 and Note 12 to the Consolidated Financial Statements, no dividends were paid on the Preferred Stock during 1992 or 1993.\nITEM 6.","section_6":"ITEM 6. Selected Financial Data\n(1) Income Statement Data give effect to the combination of the results of the Company for the periods January 1, 1993 through January 31, 1993 and February 1, 1993 through December 31, 1993.\n(2) Under the purchase method of accounting, the Post-Merger sales and expenses of facilities closed in connection with the Merger have been reclassified to \"Merger-related restructuring costs\" (33%) and \"Excess of cost over net assets acquired\" (67%).\n(3) Principally represents 33% of severance payments, and language center closing costs.\n(4) Represents the write-off of the Maxwell Note and certain Receivable Notes and other reserves related to the bankruptcy filing of Maxwell Communication Corporation plc. See Notes 2 and 11 to Consolidated Financial Statements.\n(5) Indicates year-over-year increase (decrease) in sales by language centers which were operating during the entirety of both years being compared.\nFor a description of the Merger, see Note 2 to the Consolidated Financial Statements.\nITEM 7.","section_7":"ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations\nGeneral\nThe following discussion should be read in conjunction with the Selected Financial Data and the Consolidated Financial Statements and Notes thereto contained elsewhere in this Annual Report on Form 10-K.\nIn December 1989, the Company sold 8.4 million shares of common stock to the public in an initial public offering and issued to Macmillan Inc. (\"Macmillan\") 200,000 shares of the Company's 7% non-cumulative preferred stock (the \"Preferred Stock\") (of which 20,000 shares were subsequently retired and canceled and 180,000 shares remained outstanding) in exchange for the capital stock of its predecessor companies. See Note 11 to the Consolidated Financial Statements for further discussion. In addition, in anticipation of the initial public offering, the Company entered into a series of financial transactions with Macmillan, Maxwell Communication Corporation plc (\"Maxwell Communication\") and its affiliates as discussed in Note 2 to the Consolidated Financial Statements. The holder of the Preferred Stock was entitled to quarterly dividends at the quarterly rate of the lesser of the 1.75% of the $180.0 million liquidation preference of such shares (i.e. $12.6 million annually) or the quarterly rate which resulted in the aggregate dividends on all shares of the Preferred Stock being equal to the Company's after-tax income during the preceding quarter from the loan of $99.6 million to Maxwell Communication (\"Maxwell Note\") and the 10 year affiliate promissory notes (\"Receivable Notes\").\nOn December 16, 1991, Maxwell Communication filed a petition for protection from its creditors under Chapter 11 of the U.S. Bankruptcy Code and subsequently filed for an order of administration in the United Kingdom. As a result, in 1991 the Company wrote off or provided reserves for the Maxwell Note, Receivable Notes and other related charges, as described in Notes 2 and 11 to the Consolidated Financial Statements, totaling $195.4 million. In the fourth quarter of 1991, payment and other defaults arose on the Maxwell Note and the Receivable Notes. Consequently, as discussed in Note 12 to the Consolidated Financial Statements, the Company's obligation to pay dividends on the Preferred Stock was indefinitely suspended. In the first quarter of 1993, the Company, on behalf of the selling shareholders as discussed below, recovered $30.8 million from the sale of the Maxwell notes previously written off.\nOn December 9, 1992, the Company and Fukutake Publishing Co., Ltd (\"Fukutake\") entered into an amended and restated merger agreement (the \"Merger Agreement\") pursuant to which Fukutake agreed to acquire through a merger of the Company with an indirect wholly-owned U.S. subsidiary (the \"Merger\"), approximately 67% of the outstanding common stock, par value $.10 per share of the Company (\"New Common\"). The Merger was consummated on February 8, 1993. The Company's shareholders received for each share of common stock outstanding prior to the Merger (\"Old Common\"), (i) $19.50 in cash; (ii) 0.165 share of New Common and (iii) $1.48 representing the net proceeds per share from the sale of the Maxwell Note and the Receivable Notes. In addition, the shareholders at the time of the closing received $.01 per share upon redemption of each Common Share Purchase Right (the \"Right\") under the terms of the Safeguard Rights Agreement between the Company and U.S. Trust Company of New York, which was redeemed pursuant to a condition of the Merger. After the Merger, public shareholders of the Company hold approximately 33% of New Common.\nIn addition, the Company incurred approximately $115.0 million of long-term\nindebtedness in connection with the Merger.\nIn January 1993, the Company entered into agreements with Maxwell Communication and Macmillan (the \"Disengagement Agreements\") with respect to disengaging certain relationships among such companies. Pursuant to these agreements, among other things, (i) the Company redeemed from Macmillan all of the outstanding Preferred Stock of the Company, (ii) Maxwell Communication waived a) all claims that payments to the Company should be considered preferential and returned to Maxwell Communication and b) other claims of Maxwell Communication and its affiliates against the Company and its subsidiaries which Maxwell Communication may have as a result of Maxwell Communication's bankruptcy filing on December 16, 1991, and (iii) U.S. and U.K. bankruptcy authorities allowed for all purposes a portion of the Maxwell Note and certain Receivable Notes and a claim against Maxwell Communication as subrogee for Midland Bank plc in the Chapter 11 case (and any superseding Chapter 7 case) and in the Maxwell Communication administration pending in the High Court of Justice in the United Kingdom. In addition, the Company and its subsidiaries (a) sold to Macmillan the Macmillan Note ($64.568 million) and (b) reduced by $58.0 million the amount of their claims against Maxwell Communication in respect of the Maxwell Note and certain Receivable Notes previously written off.\nAs a result of the redemption of the Preferred Stock, the Company's obligation to pay any preferred dividends in the future was eliminated.\nThe Company was included in the consolidated tax returns of the Macmillan Group prior to the Company's initial public offering in December 1989 and consequently is jointly and severally liable for any federal tax liabilities for the Macmillan Group arising prior to that date. Pursuant to the Disengagement Agreements, Macmillan and a new obligor which owns 100% of Macmillan School Publishing, Inc. agreed to pay all such federal tax liabilities pursuant to an amended and restated tax allocation agreement (the \"Tax Allocation Agreement\"), and Maxwell Communication put into escrow $39.5 million to secure Macmillan's obligations.\nOn November 10, 1993, Macmillan commenced a voluntary Chapter 11 case in the United States Bankruptcy Court for the Southern District of New York and filed a prepackaged plan of reorganization (the \"Reorganization Plan\"). The Reorganization Plan provides that the Tax Allocation Agreement, along with many other contracts between Macmillan and other parties, is to be assumed by Macmillan and assigned to a trust intended to have sufficient assets to satisfy the obligations being assumed and assigned. The Reorganization Plan also provides a cash reserve to pay tax claims that are entitled to priority, which may include tax liabilities covered by the Tax Allocation Agreement. On February 18, 1994, the Bankruptcy Court confirmed the Reorganization Plan. Any tax liability assessed against the Company that would otherwise be payable by Macmillan under the Tax Allocation Agreement (as described in the preceding paragraph) is likely to be paid either by the trust or from the cash reserve described above. Management believes that any such liability will not result in a material effect on the financial condition of the Company.\nIn November, 1992, the Company received a complaint entitled \"Irving Kas, on behalf of all others similarly situated v. Berlitz International, Inc., Joe M. Rodgers and Elio Boccitto\" in the U.S. District Court for New Jersey alleging various securities law violations under the Securities Exchange Act of 1934 and alleging various omissions and misrepresentations in connection with the Company's announcements during 1992 with respect to its financial results. In 1993, plaintiff filed a supplemental and amended complaint alleging various violations of the federal securities laws and common-law breaches of fiduciary duties relating primarily to the transaction\ncontemplated by the Merger Agreement, and seeking to add another officer of the Company as a defendant in addition to the two officers named in the initial pleading. On August 4, 1993, the Court granted defendants' motion to dismiss the amended and supplemental complaint, deemed the original complaint to be withdrawn and dismissed the lawsuit in its entirety. Plaintiff's time to appeal has expired.\nOperations Overview\nFor the period beginning January 1, 1991 and ending December 31, 1993, the Company's sales grew at a compound annual growth rate of 2.3%. Under the purchase method of accounting, the sales and expenses in the period February 1, 1993 to December 31, 1993 of language instruction centers to be closed in connection with the Merger have been reclassified to merger-related restructuring costs (33%) and excess of cost over net assets acquired (67%). Exclusive of these Merger-related reclassifications, sales would have grown at a compound annual growth rate of 4.0%.\nThe following table shows the Company's income and expense data as a percentage of sales:\nYear Ended December 31, _____________________________\nPro Forma 1993 (1) 1992 1991 _______ ______ ______\nSales of Services and Products 100.0% 100.0% 100.0% _______ ______ ______\nCosts of services and products sold (2) 62.2% 63.3% 60.3% Selling, general and administrative (3) 30.7% 29.4% 27.7% Amortization of publishing rights and excess of cost over net assets acquired 4.6% 3.7% 4.0% Interest expense on long-term debt 3.3% 0.7% 1.3% Merger-related restructuring costs (4) 1.8% - - Non-recurring Maxwell and Merger-related charges - 0.5% 75.2% Other (income) expense, net (2.6%) (1.0%) (7.0%) _______ ______ ______\nTotal costs and expenses 100.0% 96.6% 161.5% _______ ______ ______ Income (loss) before income taxes and cumulative effect of change in accounting principle 0.0% 3.4% (61.5%) _______ ______ ______ _______ ______ ______\n(1) Gives effect to the combination of the results of the Company for the combined periods January 1, 1993 through January 31, 1993 and February 1, 1993 through December 31, 1993.\n(2) Consists primarily of teachers', translators', and administrative salaries, as well as cost of materials, rent, maintenance and other center operating expenses.\n(3) Consists of headquarters, corporate services, marketing and advertising expenses.\n(4) Primarily severance payments and language center closing costs, including lease cancellation penalties, writeoffs of leasehold improvements, and operating losses for closed centers.\nThe Company's operations from 1991 to 1993 were negatively impacted by the economic downturn in Europe and Japan, which more than offset the growth in Latin America and North America.\nCost of services and products sold as a percentage of sales increased from 60.3% in 1991 to 62.2% in 1993, principally as increases in translator costs and rent charges more than offset the favorable impact of decreases in teacher costs and certain administrative costs.\nSelling, general and administrative expenses as a percentage of sales\nincreased from 27.7% in 1991 to 30.7% in 1993, principally as a result of increased office salaries and a reorganization of the corporate headquarters.\nInterest expense on long-term debt as a percentage of sales increased from 1.3% in 1991 to 3.3% in 1993 as a result of the increased indebtedness in connection with the Merger.\nThe Company's operations are conducted through the following business segments: Language Instruction, Translation Services, and Publishing. Language Instruction sales grew from $220.9 million in 1991 to $223.6 million in 1993, a compound annual growth rate of 0.7%. Exclusive of Merger-related reclassifications, the annual growth rate would have been 2.5%. The number of lessons provided by the Company's language centers were 4.9 million, 4.9 million and 4.6 million in 1991, 1992 and 1993, respectively. Exclusive of Merger-related reclassifications, the number of lessons in 1993 would have been 4.7 million. The growth in sales is largely attributable to the increase in average revenue per lesson as a result of product mix and price increases in excess of inflation.\nOver the three-year period, the Company opened 55 new language centers and closed 17. While the Company has historically experienced strong growth, the continued weakness in the worldwide economy led to weak sales growth in 1992 and 1993. The following table shows the year-over-year increase\/(decrease), including the impact of foreign currency rate fluctuations, in sales by centers which were operating during the entirety of both years being compared.\nPercentage Growth (Decline) ____________________________\n1993 (1) 1992 1991 ________ ______ ______\nSame Center Sales (6.1%) 2.4% (2.8%) ________ ______ ______ ________ ______ ______\n(1) Gives effect to the combination of the results of the Company for the combined periods January 1, 1993 through January 31, 1993 and February 1, 1993 through December 31, 1993.\nDuring the period from 1991 to 1993, the Company's Translations business expanded principally through internal growth and strategic acquisition of operations in the United States and Europe. Translations acquired interests aggregating 70% in Softrans International Limited (\"Softrans\"), a software localization service company located in Dublin, Ireland. Translations, sales grew at a compound annual growth rate of 23.5%, increasing from $23.4 million in 1991 to $35.7 million in 1993. Translations' operating results improved in 1993 as a result of an increase in large volume accounts and continued strong sales efforts, particularly in the technical translations and software localization markets.\nPublishing segment sales decreased from $15.5 million in 1991 to $12.4 million in 1993, reflecting the negative impact of exchange rate fluctuations and product distribution problems, particularly in the United Kingdom. However, these distribution problems were resolved in 1994.\nThe Company's participation in numerous licensing agreements and joint ventures has allowed the Company to expand into new technologies and new markets such as the production of a new line of language instruction products on CD-ROM and multimedia courses for the home, school and business markets.\nDuring the three-year period, the percentage of the Company's annual sales denominated in currencies other than U.S. dollars ranged from 76.9% in 1991 to 73.8% in 1993. As a result, changes in exchange rates had an impact on the Company's sales revenues. The following table shows the impact of foreign currency rate fluctuations on the annual growth rate of sales during the periods presented:\nPercentage Year Ended December 31, Growth (Decline) 1993 (2) 1992 1991 ________________ ________ ________ ________\nSales: Operations (1) (2.4)% 5.0% (1.2)% Exchange (1.0) 3.3 0.6 ________ ________ ________\nTotal (3.4)% 8.3% (0.6)% ________ ________ ________ ________ ________ ________\n(1) Adjusted to eliminate fluctuations in foreign currency from year-to- year by assuming a constant exchange rate over two years, using as the base the first year of the periods being compared.\n(2) Gives effect to the combination of the results of the Company for the combined periods January 1, 1993 through January 31, 1993 and February 1, 1993 through December 31, 1993.\nResults of Operations\nYear Ended December 31, 1993 vs. Year Ended December 31, 1992\nAs discussed in Note 2 to the Consolidated Financial Statements, on February 8, 1993, the Company and Fukutake consummated the Merger. The following selected financial data gives effect to the combination of the results of the Company for the combined periods January 1, 1993 through January 31, 1993 and February 1, 1993 through December 31, 1993.\nTwelve Months Ended December 31, ________________________________\n1993 1992 __________ __________\nSales of services and products $ 271,677 $ 281,320 Total costs and expenses 271,603 271,832 ---------- ---------- Income before income taxes and cumulative effect of change in accounting principle $ 74 $ 9,488 __________ __________ __________ __________\nIncome (loss) available to common shareholders $ (2,018) $ 4,041 __________ __________ __________ __________\nUnder the purchase method of accounting, the post-February 1, 1993 sales and expenses of centers to be closed in connection with the Merger have been reclassified to \"Merger-related restructuring costs\" (33%) and \"Excess of cost over net assets acquired\" (67%). The following selected financial data gives effect to the presentation of 1992 on a pro forma basis, excluding eleven months of activity for those centers to be closed in connection with the Merger:\nTwelve Months Ended December 31, ________________________________\nPro Forma 1993 1992 _________ _________\nSales of services and products $ 271,677 $ 270,790\nLessons given 4,588 4,691\nSales for the twelve months ended December 31, 1993 were $271.7 million, a decrease of $9.6 million, or 3.4%, from sales of $281.3 million in the comparable period in 1992, but an increase of $0.9 million, or 0.3%, from pro forma 1992 sales.\nLanguage Instruction sales were $223.6 million, a decrease of $9.9 million, or 4.2%, from sales of $233.4 million in the comparable period in 1992. However, sales increased $0.4 million over pro forma 1992 sales, as decreases in Western Europe were offset by increases in the other divisions. Sales in the Western European division declined $7.6 million from pro forma 1992 as a result of the unfavorable impacts of exchange rate fluctuation of $4.7 million, combined with the continued economic weakness in this region, particularly in France, Spain, Belgium and England. This decline was offset by increases in North America, Latin America and Central\/Eastern Europe of $0.3 million, $4.2 million and $0.2 million, respectively. In addition, sales of the East Asian division increased by $3.2 million, or 5.5%, over pro forma 1992. However, excluding the favorable impact of exchange rate fluctuations, sales of this region decreased $4.4 million, or 7.5% as a result of the continuing recessionary environment in Japan.\nDuring the twelve-month period ended December 31, 1993, the number of lessons given was approximately 4.6 million, 5.8% below that of the same period in the prior year, and 2.2% below the pro forma 1992 period. Lesson volume in the North American division remained relatively flat at 1.1 million. East Asia and Western Europe experienced lesson volume declines from pro forma 1992 of 6.4% and 7.6%, respectively, due to the continued weak economy. Lesson volume in Latin America increased by 4.8% from prior year in most countries except Argentina, where lesson volume declined 17.2%. Lesson volume in Central\/Eastern Europe increased by 2.4% over pro forma 1992 volume, as activity from the new language centers in the Czech Republic, Poland and Hungary exceeded negative volume variances in the other countries.\nFor the twelve months ended December 31, 1993, average revenue per lesson (\"ARPL\") was $41.07 as compared to $40.51 in the comparable prior-year period and $40.16 in pro forma 1992. ARPL (excluding Russia) ranged from a high of approximately $67.12 in Japan to a low of $13.17 in the Czech Republic, reflecting effects of foreign exchange rates and differences in the economic value of the service. The Company opened 12\nnew language centers during 1993, including six in Central\/Eastern Europe, five in Latin America, and one in Japan.\nTranslation Services sales were $35.7 million for the twelve-month period ended December 31, 1993, an increase of $3.3 million, or 10.3%, from sales of $32.4 million in the comparable period in 1992. Most of this growth came from the U.S. and Ireland, as a result of an increase in large volume accounts, and continued strong sales efforts with particular attention focused on the information technology market segment.\nPublishing segment sales were $12.4 million for the twelve months ended December 31, 1993, a decrease of $3.1 million, or 20.1%, from sales of $15.5 million in the comparable period in 1992. Excluding the unfavorable impact of foreign exchange rate fluctuations, Publishing sales declined by $1.6 million, or 10.5%, largely due to product distribution problems which were resolved in 1994.\nCost of services and products sold, and selling, general, and administrative expenses were negatively impacted by increases in certain fixed costs, primarily office salary and rent, which more than offset the favorable impact of exchange rate fluctuations and an adjustment for the settlement of a lease negotiation ($1.5 million). Amortization of publishing rights and excess of cost over net assets acquired increased by $2.0 million due to the Merger. Interest expense on long-term debt increased by $7.2 million due to the increase in borrowing in connection with the Merger. Merger-related restructuring costs of $4.8 million were recorded, primarily for severance expense and costs of closing language centers, including lease cancellation penalties, write-offs of leasehold improvements, and operating losses for closed centers. Interest income from affiliates decreased $6.7 million as a result of the sale of a promissory note due from an affiliate. The Company recognized a portion ($4.9 million) of the gain on the 1990 sale of 20% of the equity of its Japanese subsidiary, as a result of the elimination of certain contingencies upon consummation of the Merger. Joint venture losses of $1.4 million were recorded in the twelve-month period, primarily as a result of liabilities anticipated to be incurred in connection with the discontinuation of a European Publishing joint venture and an East Asian joint venture. Other income (expense), net, was also favorably impacted in the current year (income of $2.9 million) and unfavorably impacted in the prior year (expense of $1.2 million) by the effect of certain adjustments to minority interest of the Company's Japanese subsidiary.\nFor the twelve months ended December 31, 1993, the Company reported a net loss of $2.0 million as compared to net income of $4.0 million in the same period in 1992. The Company's effective income tax rates for the 1993 Pre-Merger and Post-Merger periods were higher than for the 1992 twelve month period. The increase in the 1993 effective tax rate was due to the Company's inability to utilize net operating losses in certain countries, and to nondeductible amortization charges. The effect of the increase in the U.S. statutory Federal rate from 34 % to 35 % was not material. The Company reported, for the one-month and eleven-month periods ended January 31, 1993 and December 31, 1993, net income of $0.08 per share and net loss of $0.35 per share, respectively, compared to net income of $0.21 per share for the twelve months ended December 31, 1992.\nYear Ended December 31, 1992 vs. Year Ended December 31, 1991\nSales for the year ended December 31, 1992 were $281.3 million, an increase of $21.5 million, or 8.3%, from sales of $259.8 million in 1991. Excluding the positive effects of exchange rate fluctuations, the increase in total Company sales for 1992 was $13.0 million, or 5.0%. Sales of the Language Instruction business were $233.4 million, an increase of $12.5 million, or 5.7%, from sales of $220.9 million in 1991. However, excluding\nthe impact of favorable foreign exchange fluctuations, Language Instruction sales increased only 2.1%. Exclusive of exchange fluctuations, North America, Latin America and Central\/Eastern Europe reported Language Instruction sales increases of 9.1%, 21.3% and 11.1%, respectively, partially offset by decreases in East Asia and Western Europe of 8.2% and 5.6%, respectively.\nDuring 1992, the number of lessons given was approximately 4.9 million, slightly lower than the prior year. The flat lesson volume was due principally to continued weakness in the global economies. Increased lesson volume in North America, Latin America and Central\/Eastern Europe was offset by decreases in the East Asian and the Western European divisions.\nAverage revenue per lesson increased from approximately $38.42 per lesson in 1991 to $40.51 per lesson in 1992. In 1992, average revenue per lesson (excluding Central\/Eastern Europe) ranged from a high of approximately $57.98 in Sweden to a low of $16.38 in Thailand, reflecting effects of foreign exchange rates and differences in the economic value of the service. The Company opened 26 new language centers during 1992, five of which were in North America, three in East Asia, including one in the recently established Hong Kong region, two in Latin America, three in Western Europe and 13 in the expanding Central\/Eastern European division.\nLanguage Instruction sales of the North American division were $51.4 million, an increase of $3.9 million, or 8.6%, over sales of $47.5 million in 1991. Lesson volume of the North American division was 1.1 million lessons, an increase of 2.4% from prior year, as the rapid pace of globalization has increased the demand for language services in the corporate market. Continued growth in the group instruction market, primarily non- corporate clients, also contributed to improved operations. Language Instruction sales of the Western European division were $47.5 million, a decrease of $1.1 million, or 2.2% from prior year. However, excluding favorable exchange rate fluctuations, sales of this division decreased by 5.6%. Lesson volume in this division was 1.0 million lessons, a decrease of 12.8% from prior year. France, Italy and Spain were particularly weakened by high inflation and unemployment which contributed to reduced lesson volume and operating profit. Language Instruction sales in the Central\/Eastern European division were $45.5 million, an increase of $6.8 million, or 17.5% from prior year. Exclusive of favorable exchange rate fluctuations, this increase was 11.1%. Lesson volume in this division was 0.9 million lessons, an increase of 6.4%, due to demand from non-corporate, Central\/Eastern European consumers. In 1992, thirteen new language centers were opened in this division: Germany (8), Switzerland (1), Hungary (1), Austria (1), and the Czech Republic (2). These new language center openings contributed directly to the increase in sales and lesson volume. Language Instruction sales in the East Asian division decreased 2.2% to $64.7 million. Excluding the effect of favorable exchange rate fluctuations, sales of this division decreased by 8.2%. Lesson volume in East Asia for the year was 1.0 million lessons, down 8.2% from 1991. The shortfall in lesson volume was partially offset by an improved average revenue per lesson. The reduction in lesson volume, primarily in the individual consumer market, was a result of the weakened economy in Japan, combined with a slowdown in consumer spending. In addition, Japan was negatively affected by a shift in its product mix from private to group lessons. Language Instruction sales in Latin America were $24.3 million, an increase of $4.3 million, or 21.3%, from prior year. Lesson volume in the Latin American division increased by 14.7% to 0.8 million lessons, led by Argentina, Colombia and Mexico.\nTranslation Services sales were $32.4 million, an increase of $9.0 million, or 38.2%, from sales of $23.4 million in 1991. The gain was achieved as a result of the pursuit of large accounts by a newly created sales force, with particular attention focused on the information technology market segment.\nPublishing sales were flat at $15.5 million. Increased sales in the U.S. were offset by a sales decline in Europe as a result of continued poor economic conditions.\nOperating results in 1992 were negatively impacted by the reduction in lesson volume in East Asia and Western Europe, coupled with higher fixed costs in these divisions compared to other divisions. Translation Services' results were also negatively impacted by a competitive pricing policy and the increased costs of expanding production capacity.\nInterest expense on long-term debt decreased by $1.4 million, to $1.9 million, as a result of an installment payment in December 1992 of $15.0 million and a prepayment in June 1991 of $10.0 million of the Company's long-term borrowing from Societe Generale, and a reduction in the floating bank rate from 6.4125% to 3.975% in 1992. The Company incurred $1.4 million net additional Maxwell and Merger-related charges during 1992. Interest on temporary investments remained flat with prior year, at $3.3 million. The Company suffered a foreign exchange loss of $3.8 million in 1992 compared to a gain of $0.2 million in 1991 as a result of the strengthening of the U.S. dollar against certain currencies, principally in Brazil. Equity in losses of joint ventures of $2.2 million was recorded in 1992 as such ventures completed their first full year of operations. A magazine joint venture in Europe significantly impacted joint venture losses after the bankruptcy of the Company's joint venture partner. Interest income from affiliates decreased by $10.8 million as a result of the payment defaults previously discussed. This amount however, is offset by the suspension of Preferred Stock dividends in 1992. Other income, net increased by $1.4 million, due to a lower charge for minority interest in connection with the Company's 1990 sale of 20% of the equity of its Japanese subsidiary.\nIncome available to common shareholders for the year ended December 31, 1992 was $4.0 million compared to a loss of $181.2 million in 1991. The Company's effective tax rate was 57.4% in 1992 compared to 7.7% in 1991 which was significantly impacted by the establishment of reserves resulting from the Maxwell Communication bankruptcy. The 1992 effective tax rate was increased by the Company's inability to use net operating losses in certain countries, and by non deductible amortization charges. As mentioned in the previous section, payment and other defaults arose on the notes from Maxwell Communication and certain of its affiliates in the fourth quarter of 1991, resulting in the suspension of Preferred Stock dividends. Earnings per common share for the year ended December 31, 1992 were $0.21 compared to a net loss per share of $9.53 in 1991.\nAccounting for Income Taxes\nEffective January 1, 1993, the Company adopted the provisions of Statement of Financial Accounting Standards No. 109, \"Accounting for Income Taxes\" (\"SFAS 109\"). As a result of the adoption of this statement, as of January 1, 1993, the Company recorded a tax credit of $3,172, or $0.17 per share, which resulted in the reduction of the deferred tax liability as of that date. This amount has been reflected in the Consolidated Statement of Operations as the cumulative effect of a change in accounting principle.\nLiquidity and Capital Resources\nThe primary source of the Company's liquidity is the cash provided by operations. The Company's business is not capital intensive and, historically, capital expenditures, working capital requirements and acquisitions have been funded from internally generated cash. The Company's liquidity is\nprincipally generated from the Language Instruction and Translations segments. Similarly, cash requirements for capital expenditures and acquisitions are principally due to the Language Instruction and Translations segments. Net cash needs of Publishing are generally not material.\nAlthough each geographic area exhibits different patterns of lesson volume over the course of the year, the Company's sales are not seasonal in the aggregate; as a result, there is no need for significant amounts of cash at any point in time during the year. Generally, the Company collects cash from the customer in the form of prepayment of fees for instruction that gives rise to deferred revenues.\nNet cash provided by operating activities was $10.8 million, $30.9 million and $14.6 million for the years ended December 31, 1993, 1992 and 1991, respectively, reflecting net income (loss) in each of these years adjusted by non-cash charges, including amortization and certain write-offs and reserves in 1991. Included in the 1993 and 1992 amounts are tax refunds of approximately $5.1 million and $12.8 million, respectively, which were received during the year. In addition, in connection with the Merger, the Company paid $6.6 million in fees in 1993 to secure the Acquisition Debt Facilities. Net cash provided by operating activities was favorably impacted in 1992 by foreign exchange losses of $3.8 million without a similar effect in 1991, and was negatively impacted in 1991 by the payment of taxes of $4.2 million on the 1990 sale of 20% of the Japanese subsidiary.\nNet cash used in investing activities totalled $11.1 million, $11.9 million and $8.4 million in 1993, 1992 and 1991, respectively. The Company made capital expenditures of $8.2 million, $11.2 million, and $6.4 million, in the years ended December 31, 1993, 1992, and 1991, respectively, primarily for the opening of new centers and refurbishing of existing centers. The Company invested $2.9 million and $0.8 million in joint ventures in 1993 and 1992, respectively, primarily for shutdown costs. During 1992, the Company invested $10.5 million of its excess cash in an asset management portfolio consisting of marketable securities with varying maturities. All investments were liquidated in 1992. The Company acquired a translations operation for $3.6 million in cash in 1991. The Company repatriated certain Brazilian cash investments totaling $2.4 million in 1991.\nNet cash used in financing activities totalled $4.9 million in 1993, compared with $25.7 and $33.2 million in 1992 and 1991, respectively. The funds necessary to consummate the Merger on February 8, 1993 and pay related fees and expenses were derived from the following: equity capital from Fukutake of $293.1 million, borrowing under a Bank Term Facility of $59.0 million, issuance of Senior Notes of $56.0 million and the Company's available cash. Such funds were used to pay the cash portion of Merger consideration, including the redemption of certain rights under the Safeguard Rights Agreement, (other than the cash paid to shareholders from the proceeds of the Maxwell Note and certain Receivable Notes) of $374.5 million, to repay the principal amount outstanding under the term loan pursuant to the Societe Generale agreement of $25.0 million and to pay related fees and expenses of approximately $14.0 million. The Merger resulted in a net cash outlay of $11.9 million by the Company. The Company also received proceeds from the sale of the Maxwell Note and certain Receivable Notes and distributed $1.48 per share to existing shareholders as part of the Merger consideration. In addition, subsequent to the Merger, the Company repaid $3.7 million of the Bank Term Facility.\nAs of December 31, 1992, the Company had no established line of credit facility. However, as part of the Acquisition Debt Facilities, the Company established a $10.0 million revolving credit facility in 1993 against which $3.0 million is outstanding at December 31, 1993.\nIn 1992 and 1991, the Company made an installment payment of $15.0 million and a prepayment of $10.0 million, respectively, against its long-term note. At December 31, 1992, $25.0 million remained outstanding on such note.\nCommon stock dividends paid were $10.7 million (including dividends for the fourth quarter of 1991 and the first three quarters of 1992), and $9.8 million in 1992 and 1991, respectively. Certain financial covenants contained in the Acquisition Debt Facilities restrict the ability of the Company to pay dividends. The Company does not expect to pay dividends during the term of the Acquisition Debt Facilities. Dividends paid on the Preferred Stock totalled $12.4 million (of which $3.1 million related to the fourth quarter of 1990) in 1991. As a result of the payment and other defaults and the recording of the write-offs and reserves in the Company's income statement with respect to the notes in the fourth quarter of 1991, no preferred dividends were paid in 1992 or 1993.\nPursuant to a covenant under the Acquisition Debt Facilities, in August 1993 the Company entered into currency coupon swap agreements with a financial institution to hedge the Company's net investements in certain foreign subsidiaries and to help manage the effect of foreign currency fluctuations on the Company's ability to repay its U.S. dollar debt. These agreements require the Company, in exchange for U.S. dollar receipts, to periodically make foreign currency payments, denominated in the Japanese yen, the Swiss franc, the Canadian dollar, the British pound, and the German mark. The first exchange is scheduled for June 1994.\nAs of December 31, 1993, the Company did not have any material commitments for capital expenditures. During 1994, the Company anticipates capital expenditures to be consistent with historical requirements. The Company underwent a significant transition during 1993, and believes that the strategic restructuring undertaken in 1993 will strengthen the core business and position the Company for future growth. Thus, the Company plans to meet its increased debt service requirements and future working capital needs through funds generated from operations, and the increase in available cash as the result of the discontinuation of dividends resulting from restrictions imposed by the Acquisition Debt Facilities.\nInflation\nHistorically, inflation has not had a material effect on the Company's business. Management believes this is due to the fact that the Company's business is a service business which is not capital intensive. The Company has historically adjusted prices to compensate for inflation.\nITEM 8.","section_7A":"","section_8":"ITEM 8. Financial Statements and Supplementary Data\nThe following Consolidated Financial Statements, Supplementary Data and Financial Statement Schedules are filed as part of this Annual Report on Form 10-K:\nPage ____\nReport of Independent Auditors 33\nReport of Independent Accountants 34\nStatement of Management's Responsibility for Consolidated 35 Financial Statements\nConsolidated Financial Statements:\nConsolidated Statements of Operations, period from 36 February 1, 1993 to December 31, 1993, period from January 1, 1993 to January 31, 1993, and years ended December 31, 1992 and 1991\nConsolidated Balance Sheets, December 31, 1993 and 1992 37\nConsolidated Statements of Shareholders' Equity, period 38 from February 1, 1993 to December 31, 1993, period from January 1, 1993 to January 31, 1993, and years ended December 31, 1992 and 1991\nConsolidated Statements of Cash Flows, period from February 39 1, 1993 to December 31, 1993, period from January 1, 1993 to January 31, 1993, and years ended December 31, 1992 and 1991\nNotes to Consolidated Financial Statements 40\nFinancial Statement Schedules:\nSchedule VIII. Valuation and Qualifying Accounts 62\nSchedule X. Supplementary Income Statement Information 63\nAll other schedules are omitted because they are not applicable or the required information is shown in the Consolidated Financial Statements or the Notes thereto.\nREPORT OF INDEPENDENT AUDITORS\nTo the Shareholders and Board of Directors of Berlitz International, Inc.\nWe have audited the accompanying consolidated balance sheet of Berlitz International, Inc. and its subsidiaries as of December 31, 1993 and the related consolidated statements of operations, shareholders' equity, and cash flows for the one-month period ended January 31, 1993 and the eleven-month period ended December 31, 1993. Our audit also included the financial statement schedules for the year ended December 31, 1993, listed in the Index at Item 8. These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedules based on our audit.\nWe conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.\nIn our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Berlitz International, Inc. and its subsidiaries as of December 31, 1993 and the results of their operations and their cash flows for the one-month period ended January 31, 1993 and the eleven-month period ended December 31, 1993, in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedules for the year ended December 31, 1993, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein.\nAs discussed in Note 7 to the financial statements, effective January 1, 1993 the Company changed its method of accounting for income taxes to conform with Statement of Financial Accounting Standards No. 109.\n\/s\/ Deloitte & Touche New York, New York March 4, 1994\nREPORT OF INDEPENDENT ACCOUNTANTS\nTo the Shareholders and Board of Directors of Berlitz International, Inc.:\nWe have audited the consolidated balance sheet of Berlitz International, Inc. (\"Berlitz\") as of December 31, 1992 and the related consolidated statements of operations, shareholders' equity and cash flows for the years ended December 31, 1992 and 1991. We have also audited the financial statement schedules listed in the Index at Item 8 for the years ended December 31, 1992 and 1991. These financial statements and financial statement schedules are the responsibility of Berlitz management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits.\nWe conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.\nAs described in Notes 2 and 11 to the consolidated financial statements, in 1991 the Company recorded a $195.4 million charge to earnings, representing provisions for Maxwell Communication-related matters.\nAs discussed in Note 2 to the consolidated financial statements, the Company completed its merger with Fukutake, effective February 8, 1993. Following the Merger, approximately 67% of the outstanding common stock of the Company is held directly, or indirectly, by Fukutake. In connection with the Fukutake merger, the Company entered into Disengagement Agreements with each of Maxwell Communication and Macmillan which sever certain relationships with Maxwell Communication and Macmillan. The Company also completed the sale of certain Maxwell notes in February, 1993.\nIn our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Berlitz as of December 31, 1992 and the consolidated results of its operations and its cash flows for the years ended December 31, 1992 and 1991, in conformity with generally accepted accounting principles. In addition, 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 required to be included therein.\n\/s\/ Coopers & Lybrand New York, New York March 24, 1993\nSTATEMENT OF MANAGEMENT'S RESPONSIBILITY FOR CONSOLIDATED FINANCIAL STATEMENTS\nTo the Shareholders of Berlitz International, Inc.:\nManagement of Berlitz International, Inc. has prepared and is responsible for the accompanying Consolidated Financial Statements and related information. These financial statements, which include amounts based on judgments of management, have been prepared in conformity with generally accepted accounting principles. Financial data included in other sections of this Annual Report on Form 10-K are consistent with that in the Consolidated Financial Statements.\nManagement believes that the Company's internal control systems are designed to provide reasonable assurance, at reasonable cost, that the financial records are reliable for preparing financial statements and maintaining accountability for assets and that, in all material respects, assets are safeguarded against loss from unauthorized use or disposition. These systems are augmented by written policies, an organizational structure providing division of responsibilities, qualified personnel throughout the organization, and a program of internal audits.\nThe independent accountants are engaged to conduct an audit and render an opinion on the consolidated financial statements in accordance with generally accepted auditing standards. These standards include an assessment of the systems of internal controls and tests of the accounting records and other auditing procedures as they consider necessary to support their opinion.\nThe Board of Directors, through its Audit Committee consisting of outside Directors of the Company, is responsible for reviewing and monitoring the Company's financial reporting and accounting practices. Deloitte & Touche and the internal auditors each have full and free access to the Audit Committee, and meet with it regularly, with and without management.\n\/s\/ Robert Minsky Robert Minsky, Executive Vice President and Chief Financial Officer\nSee accompanying notes to the consolidated financial statements.\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts)\n1. Summary of Significant Accounting Policies\na) Principles of Consolidation - The Consolidated Financial Statements include those of the Company and its subsidiaries. The effects of all significant intercompany transactions have been eliminated.\nb) Foreign Currency Translation - Generally, balance sheet amounts have been translated using exchange rates in effect at the balance sheet dates and the translation adjustment has been included in the cumulative translation adjustment, a separate component of shareholders' equity, with the exception of hyperinflationary countries. Income statement amounts have been translated using the average exchange rates in effect for each period. Revaluation gains and losses on certain intercompany accounts in all countries and translation gains and losses in hyperinflationary countries have been included in other income. Revaluation gains and losses on intercompany balances for which settlement is not anticipated in the foreseeable future are included in the cumulative translation adjustment.\nc) Inventories - Inventories, which consist primarily of finished goods, are valued at the lower of average cost or market.\nd) Deffered Financing Costs - Direct costs relating to the indebtedness incurred in connection with the Merger (see Notes 2 and 8) have been capitalized and are being amortized by the straight-line method over the terms of the related debt.\ne) Property and Equipment - Property and equipment is stated at cost and depreciated over estimated useful lives, using principally accelerated methods.\nf) Publishing Rights - Publishing rights are being amortized on a straight-line basis over 25 years.\ng) Excess of Cost Over Net Assets Acquired - Excess of cost over net assets acquired is being amortized on a straight-line basis over 40 years. It's carrying value is evaluated periodically to determine if there has been a loss in value, by reviewing current and estimated future revenues and cashflows. The excess of cost over net assets acquired will be written off if and when it has been determined that an impairment in value has occurred.\nh) Deferred Revenues - Deferred revenues arise from the prepayment of fees for classroom instruction and are recognized as income over the term of instruction. The Company recognizes in income deferred revenues for lessons paid for and not expected to be taken based upon historical experience by country.\ni) Income Taxes - The Company has filed its own Federal income tax returns since December 1989. The Company was previously included in the consolidated Federal income tax returns of the affiliated group of which Macmillan was the parent (the \"Macmillan Group\"). See Note 2 for further discussion.\nEffective January 1, 1993, the Company adopted the provisions of Statement of Financial Accounting Standards No. 109, \"Accounting for Income Taxes\" (\"SFAS 109\"). SFAS 109 requires recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns.\nUnder this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates expected to apply to taxable income in the periods in which the differences are expected to reverse.\nj) Cash and Temporary Investments - The Company considers all highly liquid instruments purchased with an original maturity of three months or less to be temporary investments.\nk) Investment in Joint Ventures - Investments in joint ventures are carried on the equity basis of accounting and the Company's share of the net profits and losses of such investments is reflected in \"Other (income) expense, net\" in the Consolidated Statement of Operations. The Company's investment in these joint ventures included credit balances of $2,085 and $1,195, classified as other current liabilities on the Consolidated Balance Sheets at December 31, 1993 and 1992, respectively, and represents the Company's obligation in excess of amounts invested with respect to these joint ventures.\nl) Reclassification - Certain reclassifications have been made in prior years' financial statements to conform with the 1993 presentation.\n2. Merger Transaction\nMerger Agreement\nOn December 9, 1992, the Company and Fukutake Publishing Co., Ltd. (\"Fukutake\") entered into an amended and restated merger agreement (the \"Merger Agreement\") pursuant to which Fukutake agreed to acquire, through a merger of the Company with an indirect wholly-owned U.S. subsidiary of Fukutake (the \"Merger\"), approximately 67% of the new common stock, par value $.10 per share (\"New Common\") of the Company. The Merger was consummated on February 8, 1993. The Company's shareholders received, for each of their outstanding shares of common stock held prior to the Merger (\"Old Common\") (i) $19.50 in cash; (ii) 0.165 share of New Common and (iii) $1.48, representing the net proceeds per share received from the sale of a certain promissory note from Maxwell Communication Corporation plc (\"Maxwell Communication\") (the \"Maxwell Note\") and certain 10 year promissory notes due from affiliates (\"Receivable Notes\"). Public shareholders of the Company hold the remaining approximately 33%. In addition, the Company's shareholders received $.01 per share in redemption of Rights in accordance with a Safeguard Rights Agreement between the Company and U.S. Trust Company of New York.\nAccounting Treatment\nThe Merger has been accounted for by the purchase method of accounting. The purchase method of accounting contemplates a step-up in value of the Company's assets based upon the purchase price paid for the outstanding common stock. Utilizing such method, the purchase price paid for approximately 67% of the Company resulted in an increase in value of the Company's assets based upon the amount paid for such shares. The remaining (approximately 33%) ownership will continue to be carried at historical cost. The Fukutake purchase price (including a portion of long-term debt; See Note 8 for further discussion) has been allocated to the Company's assets and liabilities. The Post-Merger financial statements\ninclude an allocation of the Fukutake purchase price. The excess of Fukutake's purchase price over net assets acquired will be amortized on a straight-line basis over 40 years.\nAlthough the Merger was consummated on February 8, 1993, the Consolidated Financial Statements present the 1993 results of operations for the period from January 1, 1993 through January 31, 1993 (\"Pre-Merger\" period) and from February 1, 1993 to December 31, 1993 (\"Post-Merger\" period). Adjustments to such financial information for the period February 1, 1993 through February 8, 1993 are not material to the consolidated results of operations.\nA summary of the purchase price allocation follows: Fukutake purchase price $ 370,117 Net assets acquired: Historical (based on 67% of $327,798) 219,625 Allocation to net assets 15,769 _______\nTotal net assets acquired 235,394 _________\nExcess of cost over net assets acquired $ 134,723 _________ _________\nThe allocation to net assets has been revised as of December 31, 1993 to reflect certain adjustments.\nThe following selected unaudited pro forma information assumes that the transaction occurred on January 1 of each period presented for the selected income statement data. The pro forma information includes an allocation of the Fukutake purchase price and is not indicative of the results which would actually have occurred had the transaction taken place on the dates indicated or of the results which may occur in the future.\nSelected Pro Forma Income Statement Data (Unaudited): Twelve Months Ended December 31, ____________________________________ _______________________________\n1993 1992 ____ ____\nSales of services and products $ 271,677 $ 281,320 Loss before income taxes and cumulative effect of change in accounting principle (1,109) (7,091) Loss before cumulative effect of change in accounting principle (6,353) (6,774)\nLoss per common share before cumulative effect of change in account principle (0.63) (0.68) ________ ________\nAverage number of common shares outstanding (000's) 10,031 10,031 ________ ________ ________ ________\nThe primary difference between the unaudited pro forma selected income statement data and the amounts as reported (for the combined 1993 Pre-Merger and Post-Merger periods and for the twelve months ended December 31, 1992) are increases in amortization of excess of cost over net assets acquired (approximately $201 and $2,403 for the 1993 and 1992 periods, respectively), interest expense, including amortization of deferred financing costs (approximately $883 and $8,035 for the 1993 and 1992 periods, respectively) related to the Acquisition Debt Facilities as described in Note 8 and the elimination of interest income on the Macmillan Note.\nDisengagement Agreements and other Maxwell Matters\nOn December 13, 1989, the Company sold 8.4 million shares of common stock to the public in an initial public offering. In contemplation of the initial public offering, Macmillan Inc. (\"Macmillan\") was issued, in exchange for the capital stock of the Company's predecessors, 10.6 million shares of the Company's common stock and 200,000 shares of the Company's 7% non- cumulative preferred stock (the \"Preferred Stock\"), of which 20,000 shares were subsequently retired and canceled and 180,000 shares remained outstanding. In anticipation of the initial public offering, the Company entered into a series of financial transactions including the loan of $99,600 to Maxwell Communication Corp plc (\"Maxwell Communication\") evidenced by a promissory note (the \"Maxwell Note\"). The Company also converted $89,243 of receivables due from affiliates into 10 year promissory notes (the \"Receivable Notes\").\nOn December 16, 1991, Maxwell Communication filed a petition for protection from its creditors under Chapter 11 of the U.S. Bankruptcy Code and subsequently filed for an order of administration in the United Kingdom. In the fourth quarter of 1991, payment and other defaults arose on the Maxwell Note and the Receivable Notes, which, in view of the bankruptcy of Maxwell Communication, were unlikely to be cured. As a result, in 1991 the Company wrote off or provided reserves totalling $195,354 with respect to the Maxwell Note, the Receivable Notes, and other related charges. Consequently, the Company's obligation to pay dividends on the Preferred Stock was indefinitely suspended.\nIn the first quarter of 1993, the Company recovered, on behalf of the selling shareholders, $30,833 of such notes previously written off, the net proceeds of which were distributed to the shareholders as part of the Merger consideration.\nIn January 1993, the Company entered into agreements with Maxwell Communication and Macmillan (the \"Disengagement Agreements\") which disengaged certain relationships among such companies. Pursuant to these agreements, among other things, (i) the Company redeemed from Macmillan all of the outstanding Preferred Stock of the Company, (ii) Maxwell Communication waived (a) all claims that payments to the Company should be considered preferential and returned to Maxwell Communication and (b) other claims of Maxwell Communication and its affiliates against the Company and its subsidiaries which Maxwell Communication may have as a result of Maxwell Communication's bankruptcy filing on December 16, 1991, and (iii) U.S. and U.K. bankruptcy authorities allowed for all purposes a portion of the Maxwell Note and certain Receivable Notes and a claim by the Company against Maxwell Communication as subrogee of Midland Bank plc in the Chapter 11 case (and any superseding Chapter 7 case) and in the Maxwell Communication administration pending in the High Court of Justice in the United Kingdom. In addition,\nthe Company and its subsidiaries (a) sold to Macmillan the Macmillan Note ($64,568) and (b) reduced by $58,000 the amount of their claims against Maxwell Communication in respect of the Maxwell Note and certain Receivable Notes previously written off.\nThe Company was included in the consolidated tax returns of the affiliated group of which Macmillan was the parent (the \"Macmillan Group\") prior to the Company's initial public offering in December 1989 and consequently is severally liable for any Federal tax liabilities for the Macmillan Group arising prior to that date. Pursuant to the Disengagement Agreements, Macmillan and a new obligor which owns 100% of Macmillan School Publishing, Inc. agreed to pay all such federal tax liabilities pursuant to an amended and restated tax allocation agreement (the \"Tax Allocation Agreement\"), and Maxwell Communication put into escrow $39,500 to secure Macmillan's obligations.\nOn November 10, 1993, Macmillan commenced a voluntary Chapter 11 case in the United States Bankruptcy Court for the Southern District of New York and filed a prepackaged plan of reorganization (the \"Reorganization Plan\"). The Reorganization Plan provides that the Tax Allocation Agreement, along with many other contracts between Macmillan and other parties, is to be assumed by Macmillan and assigned to a trust intended to have sufficient assets to satisfy the obligations being assumed and assigned. The Reorganization Plan also provides a cash reserve to pay tax claims that are entitled to priority, which may include tax liabilities covered by the Tax Allocation Agreement. On February 18, 1994, the Bankruptcy Court confirmed the Reorganization Plan. Any tax liability assessed against the Company that would otherwise be payable by Macmillan under the Tax Allocation Agreement (as described in the preceding paragraph) is likely to be paid either by the trust or from the cash reserve described above. Management believes that any such liability will not result in a material effect on the financial condition of the Company.\nAs part of the Merger, Fukutake established a $50,000 irrevocable letter of credit to be used in the event that income tax liabilities are imposed on the Company that relate to the Macmillan Group. The Company is obligated to pay fees as may be charged in connection with such letter of credit and to reimburse Fukutake for amounts paid by Fukutake to the issuer of the letter of credit to the extent that it is drawn upon.\nMerger-related restructuring costs\nIn connection with the Company's new strategic philosophy arising from the Merger, certain restructuring costs outside the ordinary course of business have been or are anticipated to be incurred. The primary costs represent severance payments and the closing of language centers. 33% of these costs have been recorded in the consolidated statements of operations, and, in accordance with the purchase method of accounting, 67% of these costs have been allocated to the excess of cost over net assets acquired.\n3. Earnings (Loss) Per Share\nEarnings (loss) per share of common stock is determined by dividing net income (loss) (after deducting the Preferred Stock dividend in 1991) by the weighted average number of common shares outstanding.\nPrimary and fully diluted earnings (loss) per share of common stock are the same since common stock equivalents are either anti- dilutive or immaterial in both calculations. The Company had no such common stock equivalents outstanding as of December 31, 1993.\n4. Sale of Interest in Subsidiary\nIn November 1990, the Company completed the sale of 20% of the equity of its Japanese subsidiary, The Berlitz Schools of Languages, Inc. (Japan), to Fukutake for $27,132 and deferred the pre-tax gain of $15,021 because, under the terms of the agreement, Fukutake had an option to sell the shares back to the Company for the original yen denominated purchase price plus 7% interest. The option was terminated in February 1993 in connection with the Merger Agreement. 33% of the deferred gain has been recorded in the consolidated statement of operations and, in accordance with the purchase method of accounting, 67% of the deferred gain has been allocated to the excess of cost over net assets acquired.\nFukutake's equity in the income of the Japanese subsidiary is reflected in the Company's Consolidated Statements of Operations within \"other (income) expense, net\".\n5. Property and Equipment, Net\nDecember 31, ________________________\n1993 1992 __________ _________\nBuilding and leasehold improvements $ 14,817 $ 20,486 Furniture, fixtures and equipment 13,197 20,001 Land 443 497 __________ _________\n28,457 40,984 Less: accumulated depreciation 2,666 14,884 __________ _________\nTotal $ 25,791 $ 26,100 __________ _________ __________ _________\n6. Other (Income) Expense, net\n7. Income Taxes\nEffective January 1, 1993, the Company adopted the provisions of SFAS 109. SFAS 109 requires recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included on the financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates expected to apply to taxable income in the periods in which the differences are expected to reverse.\nAs a result of the adoption of SFAS 109, as of January 1, 1993, the Company recorded a tax credit of $3,172, or $0.17 per share, which resulted in the reduction of the deferred tax liability as of that date. This amount has been reflected in the Consolidated Statement of Operations as the cumulative effect of a change in accounting principle. The principal reason for the tax credit was the difference betweeen SFAS 109 and SFAS 96 as related to the recognition of benefits for certain loss carryforwards.\nThe components of the deferred tax liability as of December 31, 1993 were as follows:\nDeferred tax assets: Inventory $ 511 Joint ventures 86 Deferred revenue 1,781 Accrued expenses 5,368 Net operating losses 22,052 _________\nTotal deferred tax assets 29,798 ---------\nDeferred tax liabilities: Property and equipment depreciation (177) Publishing rights amortization (8,257) Other intangibles amortization (1,286) -------- Total deferred tax liabilities (9,720) ________\nNet deferred tax assets 20,078 Less: Valuation allowance (23,602) -------- Net deferred tax liability $ (3,524) ________ ________\nThe valuation allowance increased by $5,432 from the balance at January 1, 1993 due to increased net operating losses in countries where the realization of a benefit for such losses is uncertain. As a result of the Merger, $16,620 of the valuation allowance will be allocated to reduce goodwill and other intangibles in future periods if realization of net operating losses becomes more likely than not.\nThe Company's effective tax rates for the 1993 Pre-Merger and Post-Merger periods were 63.6% and 431.4%, respectively. As a result of adopting SFAS 109, $2,654 of deferred tax benefits from operating loss carryforwards were recognized at January 1, 1993 as part of the cumulative effect of adopting such Statement. Under prior accounting, a part of these benefits would have been recognized as a reduction of tax expense from continuing operations in 1993. Accordingly, the adoption of SFAS 109 at the beginning of 1993 had the effect of increasing the effective tax rate applied to continuing operations for the Pre-Merger and the Post-Merger periods by 17.2% and 231.4% respectively.\nThe provision (benefit) for income taxes is as follows:\n* Pre-tax income (loss) from foreign operations of the Company was $(6,864), $(2,499), and $(13,410) for the twelve months ended December 31, 1993, 1992 and 1991, respectively.\nThe provision (benefit) for deferred taxes is summarized as follows:\nThe difference between the effective income tax and the U.S. statutory Federal tax rate is explained as follows:\nThe effect of the increase in the US statutory Federal tax rate from 34 % to 35 % was not material.\nFor financial statement purposes, at December 31, 1993 the Company has no U.S. Federal income tax losses. For tax return purposes, the Company has a U.S. Federal net operating loss carry forward of approximately $26,800. Such loss may be carried forward through the year 2006.\nAt December 31, 1993, U.S. income and foreign withholding taxes have not been provided on approximately $27,134 of undistributed earnings of foreign subsidiaries as such earnings are intended to be permanently reinvested. However, it is estimated that foreign withholding taxes of approximately $1,348 may be payable if such earnings were distributed. These taxes, if ultimately paid, may be recoverable as foreign tax credits in the United States. The determination of deferred U.S. tax liability for the undistributed earnings of international subsidiaries is not practicable.\n8. Long-Term Debt\nLong-Term Debt consists of the following: December 31, ________________________\n1993 1992 __________ _________\nTerm Loan $ 55,300 $ - Senior Notes 56,000 - Note payable to bank - 25,000 __________ _________\nTotal debt 111,300 25,000 Less current maturities 5,525 25,000 __________ _________\nLong-term debt $ 105,775 $ - __________ _________ __________ _________\nAnnual maturities of long-term debt outstanding as of December 31, 1993 are as follows: 1994, $5,525; 1995, $9,225; 1996, $11,050; 1997, $14,750; 1998, $14,750; thereafter, $56,000.\nIn connection with the Merger, the Company has outstanding indebtedness through borrowing under a bank term facility (the \"Bank Term Facility\") and the issuance of Senior Notes (collectively the \"Acquisition Debt Facilities\"). The Bank Term Facility consists of a senior term loan facility (\"Term Loan\") originally in an amount equal to $59,000, and a $10,000 senior revolving loan facility (the \"Bank Revolving Facility\"). The Company also issued an aggregate principal amount of Senior Notes of $56,000. The borrowings by the Company under the Acquisition Debt Facilities are collateralized by (i) certain shares of New Common indirectly owned by Fukutake, (ii) the capital stock of the Company's direct and indirect U.S. subsidiaries and a portion of capital stock of certain foreign subsidiaries, (iii) substantially all other tangible and intangible U.S. assets of the Company and its direct and indirect U.S. subsidiaries, other than leases of school premises, and (iv) subject to certain limitations, trademark rights of the Company and its direct and indirect U.S. subsidiaries in certain non-U.S. jurisdictions. The Term Loan amortizes quarterly, beginning March 31, 1993, until final maturity on December 31, 1998. The Company made four quarterly installments of $925 each during the year ended December 31, 1993. The Senior Notes amortize in annual installments of $14,000 on December 31 in each of the years 1999 through 2001, and have a final maturity on December 31, 2002. The Term Loan and Senior Notes are also subject to mandatory prepayment to the extent that the Company receives net proceeds from asset sales or cash flow in excess of certain specified amounts. Under certain circumstances, mandatory prepayments of the Senior Notes resulting from asset sales are required. The Company had $3,000 outstanding under the Bank Revolving Facility at December 31, 1993.\nBorrowings under the Bank Term Facility bear interest at variable rates based on, at the option of the Company, (i) Chemical Bank's alternate base rate plus a spread of 1.0%-1.5% or (ii) the rate offered by certain reference banks to prime banks in the interbank Eurodollar market, fully adjusted for reserves plus a spread of 2.0%-2.5%. The spread applicable to the borrowings under the Bank Term Facility will depend on a specified debt-to-cash flow ratio of the Company. In addition, a commitment fee of approximately 0.4% is charged on the average daily balance of available but unused amounts under the Bank Revolving Facility. The interest rate on the Term Loan and outstanding Bank Revolving Facility at December 31, 1993 was approximately 5.6% and 7.5%, respectively. The Senior Notes bear interest at 9.79%. The rate of interest on the Senior Notes could increase by 1.0% if the Senior Notes receive a rating from the National Association of Insurance Commissioners Securities Valuation Office other than 1 or 2 at any time prior to December 31, 1994.\nThe Acquisition Debt Facilities contain certain covenants, including (i) limitations on the ability of the Company and its subsidiaries to incur indebtedness and guarantee obligations, to prepay indebtedness, to redeem or repurchase capital stock or subordinated debt, to enter into, grant or suffer to exist liens or sale-leaseback transactions, to make loans or investments, to enter into mergers, acquisitions or sales of assets, to change the nature of the business conducted, to amend material agreements, to enter into agreements restricting the ability of the Company and its subsidiaries to grant or to suffer to exist liens, to enter into transactions with affiliates or to limit the ability of subsidiaries to pay dividends or make loans to the Company, (ii) limitations on the payment of dividends by the Company on its capital stock and (iii) a requirement that the Company obtain, within 180 days of the Merger, foreign currency hedge agreements to fix the rate of exchange between the U.S. dollar and such foreign currencies.\nThe Acquisition Debt Facilities also contain financial covenants requiring the Company to maintain certain levels of earnings, liquidity and net worth and imposes limitations on capital expenditures, cash flow and total debt. As of December 31, 1993, the Company was in compliance with all Acquisition Debt Facilities covenants.\nBased on the interest rates currently available for borrowings with similar terms and maturities, the fair values of the Term Loan and the Senior Notes at December 31, 1993 are $55,300 and $58,348, respectively.\nLong-term debt outstanding at December 31, 1992 under a loan agreement with Societe Generale was paid in full on February 8, 1993.\n9. Commitments\nLease Commitments\nThe Company's operations are primarily conducted from leased facilities, many of which are less than 2,500 square feet, which are under operating leases that generally expire within five years.\nRent expense, principally for language centers, amounted to $21,225, $1,849, $21,264, and $17,510 for the period February 1, 1993 to December 31, 1993, the period January 1, 1993 to January 31, 1993 and the years ended December 31, 1992, and 1991, respectively. Certain leases are subject to escalation clauses and\/or renewal options.\nThe minimum rental commitments under noncancellable operating leases with a remaining term of more than one year at December 31, 1993 are as follows: 1994 - $5,674; 1995 - $5,344; 1996 - $4,436; 1997 - $2,736; 1998 - $2,258, and an aggregate of $5,966 thereafter.\nLegal Proceedings\nIn November 1992, the Company received a complaint entitled \"Irving Kas, on behalf of all others similarly situated v. Berlitz International, Inc., Joe M. Rodgers and Elio Boccitto\" in the U.S. District Court for New Jersey alleging various securities law violations under the Securities Exchange Act of 1934 and alleging various omissions and misrepresentations in connection with the Company's announcements during 1992 with respect to its financial results. In 1993, plaintiff filed a supplemental and amended complaint alleging various violations of the federal securities laws and common-law breaches of fiduciary duties relating primarily to the transaction contemplated by the Merger Agreement, and seeking to add another officer of the Company as a defendant in addition to the two officers named in the initial pleading. On August 4, 1993, the Court granted defendants' motion to dismiss the amended and supplemental complaint, deemed the original complaint to be withdrawn and dismissed the lawsuit in its entirety. The plaintiff's time to appeal has expired.\nThe Company is party to several actions arising out of the ordinary course of its business. Management believes that none of these actions, individually or in the aggregate, will have a material adverse effect on the financial condition or results of operations of the Company.\n10. Financial Instruments\nPursuant to a covenant under the Acquisition Debt Facilities, in August 1993 the Company entered into six currency coupon swap agreements with a financial institution to hedge the Company's net investments in certain foreign subsidiaries and help manage the effect of foreign currency fluctuations on the Company's ability to repay its U.S. dollar debt. These agreements, which utilize fixed and floating interest rates, require the Company to periodically exchange foreign currency denominated interest payments for U.S. dollar denominated interest receipts. Under the fixed rate agreements, effective for the period from December 31, 1993 to December 31, 1998, semiannual interest exchanges begin June 30, 1994. Under the floating interest rate agreements, effective for the period from December 31, 1994 to December 31, 1998, quarterly interest exchanges, begin March 31, 1995. Credit loss from counterparty nonperformance is not anticipated.\nThe periodic interest exchanges are based upon annual interest rates applied to notional amounts as follows:\nNo gains or losses on these swap agreements have been recorded in the Company's Consolidated Statement of Operations. The fair market value of these swap agrements at December 31, 1993, representing the amount that could be settled based on estimates obtained from a dealer, was approximately $533.\n11. Related Party Transactions\na) Transactions with current related party\nBerlitz-Japan has a contract (the \"Development Agreement\") with Fukutake, originally executed in 1992 and amended in 1993, for the development of English conversation video taped programs for elementary and junior high school students in Japan. The programs consist of printed study materials, video cassettes and audio cassettes, which are used as the basis of a correspondence course. Under this contract, Fukutake will reimburse Berlitz Japan for project-related production costs incurred, including employee salaries and outside production fees, and pay to Berlitz Japan a one-time development fee of Yen 46,672 (approximately $420) and a coordination fee of 10% of project-related employee salaries, estimated at Yen 2.3 million (approximately $21).\nPursuant to the Development Agreement, the Company received reimbursement for production costs of approximately $1,800 and $296 during 1993 and 1992, respectively. In addition, the Company received the development fee of approximately $420 in 1993. The Company has recorded in accounts receivable $213 and $411 at December 31, 1993 and 1992, respectively.\nPursuant to a June 1, 1993 sublease agreement, the Company subleases space in Fukutake's New York offices at an annual base rent of $79 plus operating expenses. The sublease expires in 1995.\nThe Company has entered into certain other joint business arrangements with Fukutake. It is not anticipated that these arrangements will be material to the Company's business.\nb) Transactions with former related parties\nEffective December 13, 1989, the Company, Macmillan and Maxwell Communication entered into a services agreement under which Macmillan and Maxwell Communication provided various services to the Company, including certain financial, administrative, management and other services and distribution agreements. The Company subleased space for its New York offices pursuant to a sublease agreement with Macmillan, until January 1991, when New York office personnel relocated to the Company's corporate headquarters. In connection with the disengagement of the relationship between the Company, Maxwell Communication and Macmillan in January 1993, Macmillan and the Company entered into an agreement clarifying certain commercial relationships, including formally terminating the services agreement as of December 31, 1991. The distribution agreement remains in effect.\nPursuant to the terms of a distribution agreement between the Company and Maxwell Macmillan Canada, Inc. (\"Maxwell Canada\"), Macmillan and Maxwell Canada serve as the exclusive distributors for certain travel guide books and related publications of the Company in the United States and Canada, respectively. The Company paid Macmillan an aggregate of approximately $564 and $437 pursuant to the terms of these distribution agreements in 1992 and 1991, respectively.\nThe costs of the services provided under the services and distribution agreements are included in the accompanying Consolidated Statements of Operations as selling, general and administrative expenses.\nAmounts applicable to transactions with Macmillan and Maxwell Communication are summarized below:\nYear Ended December 31, ___________________________\n1992 1991 ___________ __________\nBalance, beginning of period $ (617) $ 185,879 Charge from Macmillan for corporate services (26) (292) Charge for distribution services (564) (437) Interest income 6,798 17,565 Cash transfers, net (1,934) 3,672 Dividends declared (4,452) (14,858) Write-off or reserve of affiliate notes - (191,354) Other activity, net 3,109 (792) ___________ __________\nTotal balance, end of period $ 2,314 $ (617) ___________ __________ ___________ __________\n\"Dividends\" includes the declaration of dividends on shares previously held by Macmillan.\nIn October 1989, the Company lent $99,600 to Maxwell Communication as evidenced by the Maxwell Note at 10.5% per annum. In addition, the Company also converted $89,243 of receivables due from affiliates into the Receivable Notes of Maxwell Communication and an affiliate of Macmillan as follows: a 3 billion (Japanese yen) note of Maxwell Communication ($24,078 based on the exchange rate at December 31, 1992), a $3,300 note of MLL Holdings Ltd. (which is a subsidiary of Maxwell Communication) and a $64,568 note of Macmillan. The Maxwell Note and the dollar-denominated Receivable Notes bore interest at 10.5% per annum and the yen-denominated note of Maxwell Communication bore interest at the discount rate of the Bank of Japan plus .25%. Interest income on the Maxwell Note and the Receivable Notes was $6,798 and $15,876 in 1992 and 1991, respectively.\nAs a result of Maxwell Communication filing for protection under Chapter 11 of the U.S. Bankruptcy Code and administration in the United Kingdom, as discussed in Note 2, in 1991 the Company wrote off or provided reserves for the Maxwell Note and the Receivable Notes totalling $191,354. The charges recorded for the notes written off ($126,786) and the provisions for reserves ($64,568) were based on management's best estimates at that time. In addition, in 1991 the Company recorded charges\ntotalling $4,000 representing the Company's estimated losses from cash deposits in a United Kingdom bank which such bank seized to offset debts it was owed by certain Maxwell Communication related companies as part of a credit facility, and the estimated costs for other Maxwell Communication related matters. In 1992, the Company received $975 from Midland Bank plc as a partial settlement for such loss and in January 1993, the Company's claim against Maxwell Communication as subrogee of Midland Bank plc arising from such loss less the partial settlements was admitted for all purposes by the U.S. and U.K. bankruptcy authorities pursuant to the Disengagement Agreements. In addition, the Company incurred $1,356 net additional Maxwell and Merger related costs in 1992. These amounts are included in the Consolidated Statements of Operations as \"Non-recurring Maxwell and Merger related charges.\"\nDuring the first quarter of 1991, the Company elected to participate in the Macmillan Cash Management Investment Program whereby up to a maximum of 50% of the Company's investable excess cash would be invested in an unsecured demand note of Macmillan. The Company made an initial investment of $25,000 and earned interest of $1,689 in 1991. Interest rates during the year ranged from 7.5% to 16.0%. The balance of the Company's excess cash was invested in its own cash management program. All funds were withdrawn from the Program as of December 31, 1991.\nIn March 1991, the Company and several of its subsidiaries agreed in principle to license certain trademarks, self-teaching materials, and copyrighted publications to Maxwell MultiMedia, Limited, a joint venture between Maxwell Communication and N.V. Philips. Also, several of the Company's subsidiaries agreed in principle to license certain trademarks, self-teaching materials and copyrighted publication to Sphere, Inc., an affiliate of Maxwell Communication, for the development, manufacture and sale of an educational foreign-language computer game. It is not anticipated that either of these agreements will be material to the Company's business.\n12. Capital Stock\nPreferred Stock\nThe holders of the Preferred Stock were entitled to quarterly dividends at the quarterly rate, the lesser of 1.75% of $180,000 liquidation preference of such shares (i.e. $12,600 annually) or the quarterly rate which resulted in the aggregate dividends on all shares of the Preferred Stock being equal to the Company's after-tax income during the preceding quarter from the Maxwell Note and the Receivable Notes.\nAs a result of the payment defaults of the Maxwell Note and certain Receivable Notes and the recording of the write-offs and reserves in the Company's 1991 Consolidated Statement of Operations with respect to such Notes, no dividends were paid on the Preferred Stock during 1992 and 1993.\nThe Preferred Stock was redeemed in 1993 in connection with the Merger.\n13. Stock Option and Incentive Plans\nDuring 1989, the Company established the 1989 Stock Option and Incentive Plan (the \"Plan\") which authorized the issuance of up to 2,000,000 shares of common stock. The Plan authorized the issuance of various stock incentives to officers and key employees, including options, stock appreciation rights, restricted stock, deferred stock and certain other stock-based incentive awards. The options were to expire ten years from the date of grant and were exercisable as determined by the committee established to administer the plan.\nA summary of the activity related to the Company's Plan follows:\nShares Price per Share _______ _______________\nOptions outstanding at January 1, 1991 552,000 $ 14.50 - $17.125 Granted 195,000 $ 17.875 - $18.625 Exercised (4,000) $ 16.50 Cancelled (36,000) $ 16.50 _______\nOptions outstanding at December 31, 1991 707,000 $ 14.50 - $18.625 Granted 320,000 $ 17.25 - $18.00 Exercised - Cancelled (26,500) $ 17.875 - $18.625 ________\nOptions outstanding at December 31, 1992 1,000,500 $ 14.50 - $18.625 Exercised (6,000) $ 16.50 Cancelled (10,000) $ 16.50 - $18.00 Merger-related liquidation (984,500) $ 14.50 - $18.625 _______\nOptions outstanding at December 31, 1993 - - _______ _______\nOptions exercisable at December 31, 1992 336,500 $ 14.50 - $18.625 _______\nOptions exercisable at December 31, 1991 200,400 $ 14.50 - $18.625 _______ _______\nAt January 1, 1991, 80,000 restricted shares to key employees were outstanding. The resale restrictions on these shares lapsed in equal installments over five years commencing from date of grant. Deferred compensation in the amount of $1,357, equivalent to the market value of the common stock at the date of grant times the number of shares granted, was charged to Shareholders' Equity as unearned compensation, and was being amortized over the service period. During 1991, 5,000 shares were issued and 10,000 shares were cancelled. During 1992, 3,000 shares were cancelled and 3,500 shares sold. During 1993, prior to the Merger, 2,000 shares were sold.\nAll outstanding options and restricted shares were liquidated on February 8, 1993, in connection with the Merger. See Note 2.\nDuring 1991, the Company established the Non-Employee Directors Stock Plan (\"Directors' Stock Plan\") to provide non-employee Directors of the Company the opportunity to elect to receive a portion of their annual retainer fees in the form of common stock of the Company, or to defer receipt of a portion of such fees and have the deferred amounts treated as if invested in common stock. The Directors' Stock Plan, in which participation was elective for non-employee Directors, limited the benefits paid in the form of stock to 50% of the annual retainer. All deferred amounts outstanding under the Director's Stock Plan were settled in connection with the Merger.\nOn December 2, 1993, the Board of Directors of the Company approved the Long-Term Executive Incentive Compensation Plan and the Short-Term Executive Incentive Compensation Plan (the \"Long-Term Plan\" and \"Short- Term Plan\", respectively). The Long-Term Plan, having an effective date of January 1, 1994, provides for potential cash awards in 1999 to key executive employees if certain financial goals and\/or stock price appreciation are achieved for the five year period ending December 31, 1998. The Short-Term Plan, commencing with the 1993 calendar year, provides for potential cash awards to officers and other key employees if certain financial goals and individual discretionary performance measures are met for the applicable calendar year. The Company is not required to establish any fund or to segregate any assets for payments under the Long-Term Plan or the Short-Term Plan.\nThe Company has severance agreements with six key employees which generally provide that if the Company were to terminate the employee's employment other than for cause or if the employee was to terminate his employment for reasons specified in the agreements, the employee would receive amounts equal to his annual base salary, (except for one employee who will receive two times his annual salary and one employee who will receive two times his annual salary until August 1995, but one time thereafter), plus a pro-rata share of the Company's bonus plan award. The agreements also provide for the continuation of certain benefits. Four of these agreements are in effect for 18 months following a change in control occurring at any time within two years from the date of these agreements. The remaining two agreements,not dependent on a change in control, extend beyond this 18 month period. The maximum contingent liability under such agreements in approximately $2,000.\nThe Company also has a consulting agreement with its former Chief Operating Officer which provides, subject to certain conditions, for payments totalling $220 over the two-year period ended August 31, 1995.\n14. Thrift and Retirement Plans\nThrough December 31, 1991, the Company was included in the Macmillan Thrift and Retirement Plan (the \"Macmillan Plan\"), which covered substantially all of its domestic employees. The retirement portion of the Macmillan Plan provided for the Company to make regular contributions based on salaries of eligible employees. The thrift portion of the Macmillan Plan, in which employee participation was elective, provided for Company matching contributions of up to 3% of salary. Payments upon retirement or termination of employment were based on vested amounts credited to individual accounts.\nEffective December 31, 1991, the Company withdrew from the Macmillan Plan and established the Berlitz International, Inc. Retirement Plan (the \"Berlitz Plan\") which covers substantially all of its domestic employees and provides substantially the same terms as the Macmillan Plan. The Company's transfer of the assets from the Macmillan Plan to the Berlitz Plan occurred subsequent to the March 31, 1992 valuation.\nIn addition, certain foreign operations have other defined contribution benefit plans. Total expense with respect to all benefit plans was $1,417, $121, $1,267, and $1,041, for the period from February 1, 1993 to December 31, 1993, the period from January 1, 1993 to January 31, 1993, and the years ended December 31, 1992 and 1991, respectively.\nThe company does not provide health care or insurance coverage or other post retirement benefits other than pensions to retirees. Therefore, adoption of SFAS No. 106 \"Postretirement Benefits other than Pensions\" has no effect on the Company's consolidated financial statements.\nIn November 1992, the FASB issued SFAS No. 112 \"Employers' Accounting for Postemployment Benefits\". This standard is effective in 1994 and establishes accounting standards for employers who provide benefits to former or inactive employees after employment but before retirment. The Company believes that the adoption of this standard will have no effect on its consolidated financial statements.\n15. Business Segment and Geographic Area Information\nThe Company's operations are conducted through the following business segments: Language Instruction, Translation Services, and Publishing. Prior to 1992, the Translation Services business was not significant to the Company, and therefore the 1991 presentation of operating profit (loss) capital expenditures, depreciation and amorization and identifiable assets, where not practicable, has not been restated. The Company now considers the Translation Services business to be significant enough to warrant being identified as a separate operating segment for financial reporting purposes. Intersegment and intergeographical sales are not significant.\nGeneral corporate identifiable assets are principally property and equipment. Depreciation and amortization relates to property and equipment, excess of cost over net assets acquired and publishing rights.\nAmortization of publishing rights and excess of cost over net assets acquired, included in operating profit (loss) in the period from February 1, 1993 to December 31, 1993, the period from January 1, 1993 to January 31, 1993, and the years ended December 31, 1992 and 1991, amounted to $3,414, $204, $2,452 and $2,453 for North America; $1,656, $189, $2,263 and $2,263 for Western Europe; $1,409, $102, $1,229 and $1,229 for Central\/Eastern Europe; $3,382, $308, $3,697 and $3,697 for East Asia and $1,690, $69, $822 and $822 for Latin America.\nMerger-related restructuring costs, included in operating profit (loss) in the Post Merger period from February 1, 1993 to December 31, 1993, amounted to $122 for North America; $830 for Western Europe; $260 for Central\/Eastern Europe; $2,826 for East Asia; $50 for Latin America, and $720 for Corporate Expenses-North America. No Merger-related restructuring costs were incurred in the Pre- Merger periods.\n16. Quarterly Financial Data (unaudited)\n(1) Gives effect to the combination of the results of the Company for the Pre-Merger and Post-Merger periods. (2) Assumes 10,031,000 shares of common stock outstanding. (3) Reflects effects of Merger-related restructuring adjustments. Refer to Note 2.\n(1) Represents principally net losses incurred in the ordinary course of business and chargeable against the allowance.\n(2) Represents principally foreign currency translation.\n(3) See Notes 2 & 11 regarding the Maxwell Note and the Receivable Notes.\n(4) Gives effect to the combination of the changes in the allowance for doubtful accounts of the Company for the Pre-Merger and Post-Merger periods of the year ended December 31, 1993.\nBERLITZ INTERNATIONAL, INC. SUPPLEMENTARY INCOME STATEMENT INFORMATION (in thousands)\nSchedule X\nYear Ended December 31, _____________________________________\n1993 (1) 1992 1991 ________ _________ ________\nAdvertising Costs $ 12,933 $ 13,233 $ 11,369 ________ _________ ________ ________ _________ ________\nTaxes other than payroll and income taxes, royalties and maintenance, and repairs are less than 1% of sales of services and products.\n(1) Gives effect to the combination of advertising costs incurred for the Pre- Merger and Post-Merger periods of the year ended December 31, 1993.\nITEM 9.","section_9":"ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure\nNot Applicable.\nPART III\nITEM 10.","section_9A":"","section_9B":"","section_10":"ITEM 10. Directors and Executive Officers of the Registrant\nThe information required by Item 401 of Regulation S-K with respect to Directors and Executive Officers of the Company is set forth in Part I of this Form 10-K. The information required by Item 405 of Regulation S-K with respect to directors and executive officers of the Company will be set forth in Amendment #1 to this Form 10-K.\nITEM 11.","section_11":"ITEM 11. Executive Compensation\nThe information required by this item will be set forth in Amendment #1 to this Form 10-K.\nITEM 12.","section_12":"ITEM 12. Security Ownership of Certain Beneficial Owners and Management\nThe information required by this item will be set forth in Amendment #1 to this Form 10-K.\nITEM 13.","section_13":"ITEM 13. Certain Relationships and Related Transactions\nThe information required by this item will be set forth in Amendment #1 to this Form 10-K.\nPART IV\nITEM 14.","section_14":"ITEM 14. Exhibits, Financial Statement Schedules and Reports On Form 8-K\nA. Index to Financial Statements and Financial Statement Schedules\n1. Financial Statements\n2. Financial Statement Schedules\nThe Financial Statements and the Financial Statement Schedules included in the Annual Report on Form 10-K are listed in Item 8 on page 32.\n3. Exhibits\nAll Exhibits listed below are filed with this Annual Report on Form 10-K unless specifically stated to be incorporated by reference to other documents previously filed with the Commission.\nExhibit No.\n2.1 Amended and Restated Agreement and Plan of Merger, dated as of December 9, 1992, among the registrant, Fukutake Publishing Co., Ltd. and BAC, Inc. Exhibit 1 to the registrant's Form 8-K, dated December 9, 1992, is incorporated by reference herein.\n3.1 Restated Certificate of Incorporation of the registrant filed with the State of New York on December 11, 1989. Exhibit 3.4 to Registration Statement No. 33-31589 is incorporated by reference herein.\n3.2 Certificate of Merger of BAC, Inc. into the registrant (including amendments to the registrant's Certificate of Incorporation), filed with the State of New York on February 8, 1993. Exhibit 3.2 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992 is incorporated by reference herein.\n4.1 Specimen Certificate of Old Common Stock with Legend. Exhibit 4.3 to the Company's Form 10-K for the fiscal year ended December 31, 1991 is incorporated by reference herein.\n4.2 Specimen Certificate of Common Stock. Exhibit 4.1 to Registration Statement No. 33-56566 is incorporated by reference herein.\n4.5 Amended and Restated Safeguard Rights Agreement between the registrant and United States Trust Company of New York. Exhibit 1 to the Company's Form 8-K, dated March 6, 1992, is incorporated by reference herein.\n10.1 Credit Agreement, dated as of January 29, 1993, among the\nregistrant, the several lenders from time to time party thereto and Chemical Bank as Agent. Exhibit 10.1 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992 is incorporated by reference herein.\n10.2 Form of Senior Note Agreement, dated as of January 29, 1993, among the registrant and each institutional lender party thereto. Exhibit 10.2 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992 is incorporated by reference herein.\n10.3 Amended and Restated Tax Allocation Agreement among the registrant, Macmillan, Inc. and Macmillan School of Publishing Holding Company, Inc., dated as of October 11, 1989. Exhibit 10.3 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992 is incorporated by reference herein.\n10.4 Agreement among the registrant, Berlitz Financial Corporation, The Berlitz School of Language (Japan) Inc., The Berlitz Schools of Languages Limited and Maxwell Communication Corporation plc, dated January 8, 1993. Exhibit 1 to the Company's Form, 8-K, dated January 7, 1993, is incorporated by reference herein.\n10.5 Agreement among the registrant, Berlitz Financial Corporation, Macmillan, Inc. and Macmillan School Publishing Holding Company, Inc., dated January 8,1993. Exhibit 2 to the Company's Form 8-K, dated January 7, 1993 is incorporated by reference herein.\n10.6 Escrow Agreement among the registrant, Maxwell Communication Corporation plc, the beneficiaries named therein and IBJ Schroder Bank & Trust Company, dated as of January 29, 1993. Exhibit 10.6 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992 is incorporated by reference herein.\n10.7 Settlement Agreement between the registrant and Macmillan, Inc., dated January 8, 1993. Exhibit 3 to the Company's Form 8-K, dated January 7, 1993 is incorporated by reference herein.\n10.8 Distribution Agreement between the registrant and Macmillan, Inc., dated as of October 11, 1989. Exhibit 10.19 to Registration Statement No. 33-31589 is incorporated by reference herein.\n10.9 Distribution Agreement between the registrant and Collier Macmillan Canada, Inc., dated as of October 11, 1989. Exhibit 10.4 to Registration Statement No. 33-31589 is incorporated by reference herein.\n10.10 $99.6 million Term Note pursuant to Term Loan Agreement between the registrant and Maxwell Communication Corporation plc dated November 27, 1989. Exhibit 10.4 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1989 is incorporated by reference herein.\n10.11 3 billion (Japanese yen) Receivable Note from Maxwell Communication Corporation plc dated December 4, 1989. Exhibit 10.5 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1989 is incorporated by reference herein.\n10.12 $64,568,000 Receivable Note from Macmillan, Inc. dated October 1, 1989. Exhibit 10.6 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1989 is incorporated by reference herein.\n10.13 $3.3 millon Receivable Note from MLL Holdings Limited dated October 1, 1989. Exhibit 10.7 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1989 is incorporated by reference herein.\n10.14 Short Term Executive Incentive Compensation Plan. Exhibit 10.12 to Registration Statement No. 33-31589 is incorporated by reference herein.\n10.15 1989 Stock Option and Incentive Plan. Exhibit 10.13 to Registration Statement No. 33-31589 is incorporated by reference herein.\n10.16 1993 Long-Term Executive Incentive Compensation Plan. Exhibit 1 to the Company's Form 8-K, dated December 2, 1993 is incorporated by reference herein.\n10.17 1993 Short-Term Executive Incentive Compensation Plan. Exhibit 2 to the Company's Form 8-K, dated December 2, 1993 is incorporated by reference herein.\n10.18 Form of Indemnity Agreement between the Registrant and Macmillan, Inc. dated October 11, 1989. Exhibit 10.16 to Registration Statement No. 33-31589 is incorporated by reference herein.\n10.19 Letter Agreement, dated October 19, 1990, with Robert Minsky. Exhibit 10.16 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1990 is incorporated by reference herein.\n10.20 Employment Agreement, dated April 27, 1992, between the registrant and Robert Minsky. Exhibit 10.18 to Registration Statement No. 33-56566 is incorporated by reference herein.\n10.21* Employment Agreement, dated October 1, 1993, between the registrant and Robert Minsky.\n10.22 Berlitz International, Inc. Non-Employee Directors' Stock Plan. Exhibit 10.17 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1990 is incorporated by reference herein.\n10.23 Shareholders' Agreement among Berlitz Languages, Inc., Fukutake Publishing Co., Ltd. and the registrant, dated as of November 8, 1990. Exhibit 10.18 to the Company's Annual Report on Form 10- K for the fiscal year ended December 31, 1990 is incorporated by reference herein.\n10.24 Amendment No. 1 to Shareholders' Agreement among Berlitz Languages, Inc., Fukutake Publishing Co., Ltd. and the registrant, dated as of November 8, 1990. Exhibit 10.18 to the Company's\nAnnual Report on Form 10-K for the fiscal year ended December 31, 1990 is incorporated by reference herein. Exhibit 10.21 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992 is incorporated by reference herein.\n10.25 Stock Purchase Agreement, dated as of November 8, 1990, between Berlitz Languages, Inc., the registrant and Fukutake Publishing Co., Ltd. Exhibit 10.19 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1990 is incorporated by reference herein.\n10.26 Form of Indemnification Agreement between the registrant and each of Robert Maxwell, Kevin Maxwell, Martin E. Maleska and David H. Shaffer. Exhibit 10.20 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1990 is incorporated by reference herein.\n10.27 Form of Amended and Restated Indemnification Agreement between the registrant and each of Elio Boccitto, John Brademas, Rozanne L. Ridgway, Joe M. Rodgers, Robert Minsky and Rudy G. Perpich. Exhibit 10.24 to Registration Statement No. 33-56566 is incorporated by reference herein.\n10.28 Amended and Restated Indemnification Agreement between the registrant and Hiromasa Yokoi. Exhibit 10.25 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992 is incorporated by reference herein.\n10.29 Form of Indemnification Agreement between the registrant and each of Soichiro Fukutake, Owen Bradford Butler, Susumu Kojima, Saburou Nagai, Edward G. Nelson, Makoto Sato and Aritoshi Soejima. Exhibit 10.26 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992 is incorporated by reference herein.\n10.30 Form of Indemnification Agreement between the registrant and each of Jose Alvarino, Manuel Fernandez, Paul Gendler, Robert C. Hendon, Jr., Henry James, Jacques Meon, Michael Mulligan, Kim Sonne, Anthony Tedesco and Wolfgang Wiedeler. Exhibit 10.24 to Registration Statement No. 33-56566 is incorporated by reference herein.\n10.31 Letter Agreement, dated July 18, 1990, with Michael J. Mulligan. Exhibit 10.21 to the Company's Report on Form 10-K for the fiscal year ended December 31, 1990 is incorporated by reference herein.\n10.32 Employment Agreement, dated as of December 23, 1991, between the registrant and Joe M. Rodgers with acknowledgement letter attached. Exhibit 10.24 to the registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1991 is incorporated by reference herein.\n10.33 Employment Agreement dated December 4, 1992 between the registrant and Lyle Beasley. Exhibit 10.29 to Registration Statement No. 33-56566 is incorporated by reference herein.\n10.34 Employment Agreement dated December 4, 1992 between the registrant and Robert C. Hendon, Jr. Exhibit 10.30 to Registration Statement No. 33-56566 is incorporated by reference herein.\n10.35 Berlitz International, Inc., Retirement Savings Plan, effective as of January 1, 1992. Exhibit 10.31 to Registration Statement No. 33-56566 is incorporated by reference herein.\n10.36* Letter Agreement, dated July 14, 1993, between the registrant and Elio Boccitto.\n10.37* Employment Agreement, dated June 15, 1993, between the registrant and Anthony Tedesco.\n10.38* Employment Agreement, dated February 6, 1992, between the registrant and Manual Fernandez\n11 Statement regarding computation of per share earnings. Exhibit 11 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992 is incorporated by reference herein.\n21 List of principal subsidiaries of the registrant. Exhibit 22 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992 is incorporated by reference herein.\n23 Consent of Coopers & Lybrand. Exhibit 24 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992 is incorporated by reference herein.\n* Filed herewith.\nB. Reports on Form 8-K:\nA Form 8-K was filed on December 2, 1993, relating to the Company's Long- Term and Short-Term Executive Incentive Compensation Plans.\nSUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT.\nAs of the date of the filing of this Annual Report on Form 10-K no proxy materials have been furnished to security holders. Copies of all proxy materials will be sent to the Commission in compliance with its rules.\nSIGNATURES\nPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Berlitz International, Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.\nBERLITZ INTERNATIONAL, INC.\nBy:\/s\/ HIROMASA YOKOI Hiromasa Yokoi Vice Chairman of the Board, Chief Executive Officer and President\nDated: March 31, 1994\nPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.\n\/s\/ SOICHIRO FUKUTAKE Chairman of the Board March 31, 1994 Soichiro Fukutake\n\/s\/ HIROMASA YOKOI Vice Chairman of the Board, March 31, 1994 Hiromasa Yokoi Chief Executive Officer, and President (Principal Executive Officer)\n\/s\/ SUSUMU KOJIMA Executive Vice President, March 31, 1994 Susumu Kojima Corporate Planning and Director\n\/s\/ ROBERT MINSKY Executive Vice President, March 31, 1994 Robert Minsky Chief Financial Officer and Director (Principal Financial Officer)\n\/s\/ MANUEL FERNANDEZ Executive Vice President and March 31, 1994 Manuel Fernandez Director\n\/s\/ HENRY D. JAMES Vice President and Controller March 31, 1994 Henry D.James (Principal Accounting Officer)\nDirector March 31, 1994 Owen B. Butler\n\/s\/ SABUROU NAGAI Director March 31, 1994 Saburou Nagai\n\/s\/ EDWARD G. NELSON Director March 31, 1994 Edward G. Nelson\n\/s\/ ARITOSHI SOEJIMA Director March 31, 1994 Aritoshi Soejima","section_15":""}
{"filename":"813461_1993.txt","cik":"813461","year":"1993","section_1":"ITEM 1 -- BUSINESS\nGENERAL\nWestcorp, a California corporation, is a financial services holding company which operates principally through its wholly-owned subsidiary, Western Financial Savings Bank, F.S.B. (the \"Bank\"). The Bank owns all of the outstanding capital stock of Westcorp Financial Services, Inc. (\"Westcorp Financial\"), Western Financial Auto Loans, Inc. (\"WFAL\"), Western Financial Auto Loans 2, Inc. (\"WFAL2\"), Western Reconveyance Company, Inc., (\"Recon\"), Westplan Insurance Agency, Inc. (\"Westplan\"), and Western Consumer Services, Inc. (\"WCS\"). Westplan owns all the outstanding stock of Westplan Investments (\"WI\"). WCS owns all the outstanding stock of Westhrift Life Insurance Company (\"Westhrift\"). Unless otherwise expressly indicated, a reference herein to Westcorp or the Bank shall also be deemed to include a reference to their respective subsidiaries.\nWestcorp was formed in 1974 as Western Thrift Financial Corporation, the holding company for Western Thrift & Loan Association (\"Western Thrift\"), a California-licensed thrift and loan association founded in 1972. In 1977, Western Thrift Financial Corporation acquired Amfac Thrift & Loan Association and caused it to be merged with Western Thrift. In March 1986 Western Thrift Financial Corporation changed its name to Westcorp. In May 1986, Westcorp completed its first public offering of 4.5 million shares of common stock. In April 1988, it reincorporated in Delaware as Westcorp, Inc. In September 1990, it reincorporated in California. During 1993, Westcorp completed a common stock offering of 4.3 million shares.\nIn November 1982, Westcorp acquired Evergreen Savings and Loan Association (\"Evergreen\"), a California-licensed savings and loan association, which became a wholly-owned subsidiary of Westcorp. Evergreen's name was ultimately changed to Western Financial Savings Bank. In June 1992, Western Financial Savings Bank converted to a federal charter and added F.S.B. to its name.\nWestcorp's business consists primarily of attracting deposits from the public and using such deposits, together with borrowings and other funds, to purchase retail installment sales contracts secured by motor vehicles primarily from new and used car dealers and to originate and purchase loans secured by residential real estate. Westcorp operates 26 retail banking offices, 8 automobile dealer centers, 32 consumer finance offices specializing in motor vehicle finance and 13 mortgage banking offices located throughout California. Westcorp also has 7 consumer finance offices located in Oregon, Nevada and Arizona. Generally, the dealer centers and mortgage banking offices are located in or near the Bank's branch offices.\nWestcorp's lending activities are conducted primarily in the California marketplace. As of December 31, 1993, Westcorp's loan portfolio totalled approximately $1.6 billion of which approximately 14.8% consisted of outstanding retail installment sales contracts secured by motor vehicles and other consumer loans, and approximately 85.2% consisted of loans secured by real property used primarily for residential purposes. At December 31, 1993, Westcorp also serviced for the benefit of others $1.0 billion of consumer loans and $1.2 billion of real estate loans. Westcorp's revenues are derived principally from interest charged on its loan portfolio, servicing income, and, to a lesser extent, loan fees, insurance revenues and income on other investments. Interest on deposits and borrowings and general and administrative costs are Westcorp's major expense items.\nThe Bank is subject to examination and comprehensive regulation by the Office of Thrift Supervision (\"OTS\") and the Federal Deposit Insurance Corporation (\"FDIC\"). It is also a member of the Federal Home Loan Bank of San Francisco (\"FHLB\"), which is currently one of twelve regional banks for federally insured savings and loan associations and savings banks comprising the Federal Home Loan Bank System (\"FHLB System\"). The FHLB System is under the supervision of the Federal Housing Finance Board which was created by the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (\"FIRREA\"). The Bank is further subject to certain regulations of the Board of Governors of the Federal Reserve System (\"FRB\") governing reserves required to be maintained against deposits and other matters. Westcorp Financial is further regulated by the California Department of Corporations, the Oregon Department of Insurance and Finance and the Arizona Corporation Commission.\nLENDING ACTIVITIES\nGeneral\nWestcorp's loan portfolio (including loans classified as available for sale) totalled $1.6 billion at December 31, 1993, representing 72% of Westcorp's assets at that date. The loan portfolio consists principally of loans secured by motor vehicles, loans secured by single family or multifamily dwellings (\"residential loans\") and residential construction loans. Westcorp's strategy is to focus on and expand its well-defined niches in the motor vehicle finance and single family residential real estate lending markets, the two main lines of business that Westcorp has successfully developed in the financial services industry.\nWestcorp has adopted various measures to protect its loan portfolio from interest rate fluctuations. Such measures include (i) emphasizing short term consumer loans, (ii) originating adjustable-rate mortgages (\"ARMs\") for residential properties, (iii) originating fixed rate and ARMS residential loans documented for sale in the secondary mortgage market, (iv) funding loans with advances of like maturities from the FHLB, and (v) pooling and selling motor vehicle loans through securitized public offerings.\nThe types of loans which Westcorp may originate are limited by federal statutes and regulations promulgated by the OTS. Westcorp may originate or purchase whole loans or loan participations secured by real estate located throughout the United States. Notwithstanding this nationwide lending authority, over 99% of Westcorp's real estate loan portfolio is secured by real estate located in California. As a federally chartered savings institution, the Bank has authority to make various kinds of secured and unsecured consumer and commercial loans. It has not, however, expanded its lending activities to include credit card accounts or significant amounts of commercial loans and has no plans to do so in the foreseeable future.\nThe following table sets forth selected data relating to the composition of Westcorp's loan portfolio by type of loan, including loans classified as available for sale, as of the dates indicated.\nMotor Vehicle Loans\nThe Bank and its predecessors and affiliates have underwritten and purchased motor vehicle loans from dealers and made direct motor vehicle loans (i.e., loans on applications submitted by consumers directly to offices of the Bank or Westcorp Financial) since 1973. Motor vehicle loans are currently underwritten through\nthe Bank's motor vehicle dealer centers (\"Dealer Centers\") or through a Westcorp Financial branch office. Neither the Bank nor Westcorp Financial has minimum or maximum maturity requirements; however, motor vehicle loans of less than three years' maturity or more than six years are seldom purchased due to low customer demand. Each motor vehicle loan is fully amortizing and provides for level payments over the term of the loan with the portion of principal and interest of each level payment determined on the basis of the sum of the digits (also known as the Rule of 78s) or on the simple interest method.\nAt December 31, 1993, approximately 39% of the aggregate outstanding principal amount of motor vehicle loans were advanced by the Bank to finance purchases of new vehicles and approximately 61% were advanced to finance purchases of used vehicles. At December 31, 1992, approximately 43% of the aggregate outstanding principal amount of motor vehicle loans were advanced to finance purchases of new vehicles and approximately 57%, were advanced to finance purchases of used vehicles.\nLoans originated by Westcorp Financial on average have a higher interest rate than those originated by the Bank since Westcorp Financial's underwriting criteria are not as strict as the Bank's. Therefore, Westcorp Financial's loans generally have a higher percentage of delinquencies. Accordingly, the Bank and Westcorp Financial generally service a different customer base.\nThe Credit Officers at the Dealer Centers purchase motor vehicle loans through franchised new car dealers and selected used car dealers. The Westcorp Financial Branch Manager is responsible for purchasing motor vehicle loans through franchised new car dealers and from used car dealers. The marketing is accomplished by sales managers through personal calls to auto dealerships as well as referrals.\nSubstantially all loans purchased by the Bank are reviewed by Bank employees to insure proper documentation and adherence to underwriting guidelines, and all loans purchased by Westcorp Financial are similarly reviewed by Westcorp Financial employees. Substantially all motor vehicle loans are nonrecourse to the originating dealer. In the case of new car loans, the Bank generally lends to the applicant an amount not to exceed the sum of the dealer's cost, taxes, license fees, service warranty cost and, if applicable, premium for credit life or credit disability insurance, and in some cases, miscellaneous costs. Additional advances over the sum of such costs may be made under certain circumstances based on the creditworthiness of the applicant. For used cars, the amount loaned does not exceed the wholesale \"blue book\" value for the car plus related expenses and any additional approved advances. For loans made or purchased by Westcorp Financial, dealers are offered a flexible program as to the amount of additional advances on both new and used vehicles, based on the creditworthiness of the applicant, at a higher rate of interest.\nThe Bank regularly sells the motor vehicle loans originated by it and Westcorp Financial in the secondary market and retains the servicing thereon. At December 31, 1993 and 1992, $102 million and $180 million respectively of motor vehicle loans were classified as held for sale. See \"Loan Sales and Securitizations\".\nReal Estate Loans\nGENERAL\nWestcorp offers three categories of real estate loans on existing improved properties: fixed rate mortgage loans, ARMs with potential negative amortization and ARMs with no negative amortization. Westcorp currently offers fixed rate mortgage loans and ARMs on single family residential properties secured by a first lien with maturities of up to 30 years. Interest rates are adjusted monthly, quarterly, semiannually or annually, at a rate typically equal to 2.25 to 3.0 percentage points above the Cost of Funds Index (\"COFI\") published by the FHLB, Treasury, the Federal Cost of Funds Index, LIBOR or other generally recognized cost of funds indices, with certain rate caps designed to stimulate greater customer acceptance while maintaining the desired interest rate flexibility. Interest rates and loan fees are determined primarily by competitive conditions and profitability requirements. In 1993, Westcorp generally did not offer ARMs with initial rates below those which would prevail under the foregoing general terms to remain competitive with other lenders in its market area.\nThe interest rates on ARMs may increase or decrease no more than 3.0% to 6.0% over the life of the loans. All ARMs are assumable by qualified buyers at the interest rate then in effect on the loan, but the maximum upward or downward interest rate adjustment over the life of the assumed loan may be changed from 3.0% to 6.0% greater or less than the interest rate at the time of assumption. On ARMs with no negative amortization, the maximum change in interest rate per period may be limited to 2 percentage points or less per annum on some loan programs. On ARMs with negative amortization, the amount of any interest due in excess of the monthly payment is capitalized by adding it to the principal balance of the loan, to be repaid through future monthly payments, resulting in negative amortization of principal. So that the loan amortizes fully over the remaining term to maturity, payments may be adjusted by more than 7.5% at the end of each five-year interval throughout the life of the loan or sooner, if the outstanding loan amount reaches a dollar figure specified in the contract (generally no greater than 125% of the original loan amount). As of December 31, 1993 and 1992, the total amount of negative amortization capitalized to principal totalled $0.2 million and $1.8 million, respectively, which represents less than 1% of the total real estate loan portfolio.\nAt December 31, 1993, Westcorp's real estate loan portfolio, based on dollar value, consisted of 14.1% fixed rate loans, 30.8% ARMs with no negative amortization and 55.1% of ARMs with negative amortization. The total of all fixed rate loans and ARMs having a contractual maturity after 1994 is $152 million and $1.0 billion, respectively. Westcorp believes that its lending strategy of diversification in its loan portfolio among its three types of loans reduces the overall risk exposure to the institution. The following table sets forth information on the amount of fixed rate mortgage loans and ARMs, net of undisbursed loan proceeds, in Westcorp's portfolio at the dates indicated:\nCOMPOSITION OF REAL ESTATE PORTFOLIO\nWestcorp's primary real estate lending activity is the origination of mortgage loans to enable borrowers to purchase, refinance or improve residential property. Increasingly, loans originated are in turn sold to others through secondary market activities. Westcorp's total real estate loan portfolio (including those classified as held for sale) consisted of the following:\nWestcorp's portfolio of real estate loans classified as available for sale consists primarily of single family loans totalling $199 million at December 31, 1993 and $62.4 million at December 31, 1992.\nSingle Family Residential Loans. Single family residential loans made by Westcorp are generally under $400,000 in original principal amount but Westcorp may consider making single family residential loans up to $650,000 in original principal amount. Westcorp's single family residential loans consist of 77.7% ARMs and 22.3% fixed rate loans at December 31, 1993. At December 31, 1993, of the total $825 million single family residential loan portfolio, $184 million were fixed rate loans with a weighted average interest rate of 7.8%. Westcorp sells most of the loans originated by it in the secondary market as whole loan transactions through FNMA, FHLMC and other private institutional purchasers, and generally retains the servicing thereon.\nWestcorp also offers 15 year and 30 year fixed rate conventional loans and loans insured by the Federal Housing Administration (\"FHA\") or partially guaranteed by the Veterans Administration (\"VA\"), secured by first liens on single family residences. The general terms of these loans conform to the guidelines established by purchasers of loans in the secondary market.\nGenerally, Westcorp will not advance more than 80.0% of the property's value unless the borrower has private mortgage insurance. On loans for the purchase of owner occupied single family residences, Westcorp may finance up to 95.0% of the market value based on the lesser of the purchase price or appraised value of the property with mandatory private mortgage insurance on loans with loan-to-value ratios that exceed 80.0% at origination insuring the unpaid balance that exceeds 75.0% of the property's value. The cost of this insurance is paid by the borrower during the term of the loan. Residential loans have typically been made for terms of up to 30 years and are amortized on a monthly basis with level payment of principal and interest due each month, subject to periodic adjustment in the case of ARMs. Westcorp regularly reviews its loan policy in light of market conditions and may change its policy in the future.\nAs part of Westcorp's single family residential lending strategy, Westcorp originates both fixed and adjustable rate residential loans secured by second trust deeds. Westcorp offers a second trust deed loan of up to $300,000 with a term from 5 to 15 years at both fixed and adjustable interest rates. These loans amortize on a 15 or 30 year basis and, depending upon the repayment option selected by the borrower, may involve a \"balloon\" payment at the end of the term. When making such loans, Westcorp requires that it be given notice in the event of a default under the first trust deed to enable it to take appropriate steps to protect its interest.\nWestcorp offers a loan referred to as the \"Western Revolver,\" which is a secured line of credit typically collateralized by a second trust deed on a single family residence and bearing an adjustable rate of interest based on a market index. At December 31, 1993 the Bank had committed to lend approximately $111 million of such loans, of which $70 million was outstanding.\nMultifamily Residential Loans. Westcorp is not currently making new multifamily residential loans with the exception of loans to refinance or restructure loans currently in the portfolio or loans to facilitate the disposition of real estate owned. Westcorp may become a more active multifamily lender if and when economic conditions warrant such increased activity. Multifamily lending in the past has consisted of permanent loans secured by multifamily residential properties (generally apartment houses) and were originated by Westcorp both for its own portfolio and for sale to others. Multifamily residential loans made by Westcorp were generally adjustable rate loans under $5.0 million in original principal amount. Westcorp generally has not extended credit above 80.0% of the appraised value of multifamily residences. At December 31, 1993, no multifamily loan exceeded $10 million or .8% of the total real estate loan portfolio.\nConstruction Loans. In the past, Westcorp provided construction loans primarily for multifamily and single family owner occupied residences but currently provides such loans only on single family owner occupied residences. These included (or include with respect to such single family residences) loans for the acquisition and development of unimproved property to be used for residential purposes. At December 31, 1993, Westcorp's construction loans totaled $31.7 million (of which $14.9 million had not been disbursed as of December 31, 1993) or 1.5% of assets.\nConstruction loans generally have adjustable interest rates equal to 2.0 to 3.5 percentage points above a market index, currently the average prime rate of three major banks. Construction loans generally have terms\nranging from 12 to 18 months and advances are generally made to cover actual construction costs and include a reserve for paying the stated interest due on the loan.\nConstruction financing is generally considered to involve a higher degree of risk than long term financing secured by improved owner occupied real estate. Accordingly, these loans generally have fees and rates substantially higher than the fees and rates charged for other types of secured real estate loans made by Westcorp. Westcorp's risk of loss on a construction loan is dependent largely upon the accuracy of the initial estimate of the property's value at completion of construction or development, the estimated construction costs (including interest during construction) and the ability of the borrower to manage the project.\nAt December 31, 1993, Westcorp had no acquisition, development or construction loans on its books.\nLOAN ORIGINATIONS, SALES AND SECURITIZATIONS\nWestcorp's origination activity has continued to increase even as on-balance sheet loans have decreased as a result of greater emphasis on loan sales in the secondary market.\nThe following table sets forth the loan origination, purchase and sale activity of Westcorp for the periods indicated.\n- ---------------\n(1) Includes motor vehicle loans purchased from motor vehicle dealers.\n(2) Motor vehicle loans sold to WFAL2 or a grantor trust.\n(3) Includes scheduled payments, prepayments and charge-offs.\nLoan originations come from a number of sources, which include the Bank and Westcorp Financial's network of offices. This network consists of the Dealer Centers, the Westcorp Financial Branch offices, the mortgage banking offices, and a network of automobile dealers and mortgage brokers. The Bank regards all of its branches as loan solicitation facilities as well as sources of deposits.\nMotor vehicle loans held by the Bank and Westcorp Financial have been purchased from approved motor vehicle dealers on a nonrecourse basis or have been originated directly by the Bank and Westcorp Financial. The Bank and Westcorp Financial believe that the creation and maintenance of close personal relationships at the Dealer Center and motor vehicle dealer-branch office level are major factors in promoting the growth and sustaining the quality of its motor vehicle loan portfolio.\nMost real estate loans are referred from real estate brokers and mortgage brokers. Westcorp hires commissioned loan agents at its mortgage banking offices to originate single family residential loans. The loan agents, whose commissions are based on closed loans, assist walk-in customers as well as serving real estate brokers in the area of each respective branch office. Westcorp is represented in its wholesale real estate lending by salaried employees located at its mortgage banking offices. These employees receive commissions based on the total volume of loans acquired through mortgage brokers. Westcorp has established criteria for the brokers (from whom it will accept loan referrals), and the loan agents endeavor to increase the number of brokers approved by Westcorp for this purpose.\nWestcorp periodically audits its motor vehicle loans and real estate loans to ensure compliance with its underwriting guidelines. In addition, branch manager bonuses are calculated by a formula of production and branch profitability which takes into consideration delinquencies and loan losses. Bonuses are therefore not only determined by the amount of loans but also by their quality.\nBetween January 1, 1986 and December 31, 1993, Westcorp securitized or sold, in 22 transactions, approximately $3.3 billion of its motor vehicle loans in publicly underwritten securitization transactions in which Westcorp continues to service such loans. All 22 issues were rated \"AAA\" by S&P and \"Aaa\" by Moody's, their highest rating categories, as a result of a third party credit enhancement provided by Financial Security Assurance, Inc. (\"FSA\") or due to the structure of the transaction. On March 11, 1994, Westcorp sold an additional $200 million through a similar transaction.\nBeginning in 1990, Westcorp began to securitize its motor vehicle loans using an off-balance sheet structure which utilizes a separate grantor trust for each transaction. These securitizations are structured to be treated as sales without recourse, thereby removing the motor vehicle loans sold from Westcorp's balance sheet. Westcorp retains a residual interest in the excess interest (which is recorded as servicing fee income) which represents the excess of the underlying interest rate on the pool of motor vehicle loans sold over the sum of the pass-through rate on the grantor trust securities, credit losses, administrative expenses and contractual servicing fees. Westcorp securitized $777.5 million and $450.0 million of motor vehicle loans using this structure during 1993 and 1992, respectively.\nWestcorp derives multiple benefits from the grantor trust form of motor vehicle loan securitization, including a stable source of low cost funding, elimination of interest rate risk, enhanced return on assets and improved capital position.\nIn the past, most of the real estate loans originated or purchased by Westcorp have been maintained in its portfolio except for fixed rate conventional, FHA and VA loans, which have historically been originated for sale in the secondary market. In 1993, Westcorp increasingly sold fixed rate loans in the secondary market. In years prior to 1992, Westcorp's real estate loan sales activities were part of its general real estate loan investment strategy. During 1992, these sales activities were segregated into a separate portfolio of real estate loans held for sale and accounted for as a discrete operating activity in accordance with GAAP. Westcorp sold $596.9 million of whole fixed rate conventional loans and $14.4 million of whole FHA and VA fixed rate loans in 1993 compared to $340.8 million and $6.8 million in 1992. Westcorp also sold $192.8 million of ARMs in 1993 compared to $37.2 million in 1992.\nPrior to 1989, Westcorp purchased ARMs and construction loans in the secondary market. Westcorp anticipates that future growth of its real estate loan portfolio will be accomplished primarily by its origination activities rather than by purchases in the secondary market.\nINTEREST RATES AND LOAN FEES\nInterest rates charged on motor vehicle and real estate loans are primarily determined by competitive loan rates offered in the lending area. These rates reflect prevailing levels of interest rates, the availability of lendable funds and the demand for loans.\nIn addition to interest earned on motor vehicle and real estate loans, Westcorp receives loan origination fees for originating real estate loans. Loan origination fees in an amount equal to a percentage of the principal amount of the loans are charged to the borrower for the origination of the loan. Currently, Westcorp receives\nfees of up to 3.63% on its loans. Westcorp generally does not charge a loan fee for the origination or purchase of motor vehicle loans. Loan origination fees are a volatile source of income varying with the volume and type of loans made and with competitive conditions in the mortgage markets. Loan demand and availability of credit affect these market conditions.\nSERVICING OF LOANS\nAdditional fees and charges which relate to the servicing of existing motor vehicle and real estate loans include prepayment fees, late charges and fees collected in connection with an assumption of the loan by a different borrower or other loan modifications. As a result of substantial loan sales during the last three years, loan servicing fee income, which included contractual servicing fees and Westcorp's retained residual interest, substantially increased. This increase in servicing fee income represents a partial offset to the decrease in net interest income. See \"Management's Discussion and Analysis of Financial Condition and Results of Operations -- Comparison of Results of Operations -- Net Interest Income.\"\nLOAN INSURANCE\nEach borrower obtaining a motor vehicle loan from the Bank or Westcorp Financial is required to maintain insurance covering physical damage to the financed vehicle. The insurance policy must name the Bank or Westcorp Financial, as applicable, as a loss payee under the policy, and must cover loss and damage due to collision and other risks included in comprehensive coverage. Since borrowers may choose their own insurers to provide the required coverage, the specific terms and conditions of their policies vary within limits prescribed under applicable insurance law and regulations. If a borrower fails to obtain or maintain the required insurance, the Bank or Westcorp Financial, as applicable has the right to obtain such insurance and add the premium for such insurance to the balance due on the loan. A subsidiary of the Bank, Westplan, acts as an independent agent for unaffiliated insurers in providing material damage insurance coverage on motor vehicles securing loans owned by either the Bank or Westcorp Financial.\nWestcorp requires title insurance, or in some instances lot book insurance, insuring the priority of its liens on loans secured by real property, and may require additional title endorsements to standard policies as necessary to protect its security in the property encumbered. Westcorp requires that fire and extended coverage be maintained in amounts at least equal to the replacement costs of structures and improvements on all properties serving as security for its loans. If the borrower fails to obtain or maintain the required insurance, Westcorp has the right to obtain such insurance and add the premium for such insurance to the balance due on the loan. Westcorp also requires flood insurance on properties that are within areas defined as having a special flood hazard. Private mortgage insurance may be required by regulation, secondary mortgage market saleability or increased risk exposure. In addition, Westcorp offers credit life and credit disability and mortgage life and disability insurance to its loan customers through an independent insurer.\nWesthrift, an indirect subsidiary of the Bank, is engaged in the business of reinsuring policies for credit life and credit disability coverage underwritten by an independent insurer. As of December 31, 1993 the credit life insurance in force was $47.8 million.\nASSET QUALITY\nWestcorp has established procedures to assist in the effective identification, measurement and rehabilitation of delinquent and other problem loans. An integral part of this process is the Internal Asset Review Department (\"IAR\"). The IAR is an independent review function established to measure risk within Westcorp's asset portfolio. The IAR reviews and classifies assets as Pass, Special Mention, Substandard, Doubtful or Loss. Substandard assets have one or more defined weaknesses and are characterized by the distinct possibility that Westcorp may sustain some loss unless the deficiencies are corrected. Doubtful assets have a higher possibility of loss than substandard assets. Special mention assets are assets not falling in the foregoing categories, but which have weaknesses or potential weaknesses deserving management's close attention.\nConsumer Loan Quality\nWestcorp's consumer loan servicing activities are conducted through the Bank and Westcorp Financial. The Bank's consumer loan servicing activities are conducted through its Dealer Centers. Westcorp Financial's servicing activities are conducted by the Westcorp Financial branch that generated the loan.\nIn most cases, delinquencies are cured promptly, but if not, Westcorp reposses and sells the vehicle collateralizing the loan in accordance with the terms of the loan and statutory guidelines. Deficiency balances are charged off against the allowance for loan losses. After charge off, Westcorp pursues collection of deficiency balances subject to applicable law.\nTotal delinquencies and losses increased from 1989 to 1991, which trend was attributable to several factors. The first factor relates to Westcorp's move to new headquarters which was completed in 1990. This resulted in a large turnover in collection personnel in anticipation of the move and the relocation of Westcorp's Southern California servicing activities to Irvine. As a result, prompt follow ups on delinquent loans by personnel were temporarily interrupted. This was followed by conversion onto a new computer system that occurred in the latter part of 1990, creating a need for training on the new system. Total delinquencies and losses decreased during 1993 and 1992 as compared to 1991. Total delinquencies and losses compared to the total amounts of motor vehicle loans outstanding were .90% and 1.79%, 1.12% and 2.05%, and 2.24% and 1.89%, in 1993, 1992 and 1991, respectively.\nManagement attributes such improvement to the completion of its relocation, the substantial conversion to the new computer system (which has resulted in increased employee attention and follow-up on delinquencies) and a change in the charge-off policy requiring the charge-off of loans delinquent 120 days or more rather than 150 days or more. This change may have resulted in slightly lower delinquency figures in 1993 and 1992, in that certain loans not in the process of collection that were delinquent 120 days or more were charged off as compared to prior periods where loans were allowed to go 150 days or more past due prior to charge off. These charged off loans were therefore being carried on the books of Westcorp as delinquent loans for periods of 30 and sometimes 60 days less than in prior reporting periods. This policy was implemented in response to regulatory requirements and was not instituted for the purpose of reducing delinquency.\nLoss experience was higher in the initial months after the change of policy but there has not been a significant overall change in loss experience over the most recent reporting period as a result of the change.\nThe following tables set forth the delinquency and loss experience of Westcorp related to motor vehicle loans, at the dates indicated.\n- ---------------\n(1) The period of delinquency is based on the number of days payments are contractually past due.\n(2) This amount includes unearned add-on interest.\n(3) Includes delinquency information for loans sold to grantor trusts but which were originated and are still serviced by Westcorp.\n- ---------------\n(1) Includes loan loss information for loans sold to grantor trusts that were originated and are still serviced by Westcorp.\nMotor vehicle loans are not placed in nonaccrual status since it is Westcorp's policy to charge-off these loans after 120 days past due unless Westcorp can demonstrate that repayment would occur regardless of delinquency status, (i.e., the loan is well secured by collateral and is in the process of collection). Interest continues to accrue on motor vehicle loans until the loan is charged off. At the time a motor vehicle loan is charged off, all accrued but unpaid interest is reversed.\nReal Estate Loan Quality\nReal estate loan borrowers are provided a 10 to 15 day period after the date payment is due before a late charge is assessed. Customers receive computer generated notices of delinquencies on the fifteenth and thirtieth day of delinquency as well as telephone calls from employees of Westcorp. If delinquencies on real estate loans are not cured promptly, Westcorp normally records a notice of default in the appropriate county recorder's office. If the default is not cured within three months after a notice of default has been recorded, Westcorp proceeds to sell the property at a trustee's sale after appropriate publication. California law does not generally permit a deficiency judgment against the borrower following a trustee's sale. California law does permit a deficiency judgment in some instances following a judicial foreclosure. Due to the time and expense required for a judicial foreclosure, however, such actions are rarely initiated by lenders in California. If Westcorp acquires title to a security property at a trustee's sale, the property so acquired is thereafter sold and, if deemed necessary, may be financed by a loan on terms more favorable to the borrower than normally offered by Westcorp. At December 31, 1993, Westcorp had $19.2 million of these financing arrangements outstanding compared to $8.3 million at December 31, 1992.\nThe following table sets forth the percentages of the dollar amounts of Westcorp's total real estate portfolio, including loans available for sale, represented by delinquent real estate loans for the past five years.\nThe decrease in real estate delinquencies over 60 days is shown by loan type in the table below:\nTotal real estate delinquencies over 60 days at December 31, 1993 were $23.0 million compared to $49.4 million at December 31, 1992 after increases in each year from 1989 to 1992. California, where substantially all of the collateral for Westcorp's real estate loans is located, has experienced significant downturns in the market values of real estate. Although the region is continuing to experience high levels of unemployment and a continued slump in residential construction and new home sales, Westcorp was able to reduce delinquencies during 1993. Westcorp does not believe that its real estate portfolio was adversely affected by the January 17, 1994 Northridge earthquake in any material respects.\nThe Special Asset Department (\"SAD\")is responsible for the management, collection and disposition of all loans, including delinquent or nonperforming loans, which have certain characteristics that indicate current or potential credit weaknesses. SAD has prepared action plans with respect to each of these loans. Action plans vary from recommendations to monitor and review for performing loans that are classified only by virtue of delinquent taxes or inadequate debt service ratios to recommendations to foreclose on loans with chronic or acute problems with no other apparent remedy.\nWestcorp services a pool of multifamily residential loans previously sold by it with an original principal balance of $159.6 million and a current balance at December 31, 1993 of $100.6 million in which the purchaser has recourse against Westcorp up to an amount equal to 20.0% of the total original pool amount. Management has provided an allowance for loan losses which it believes is sufficient to absorb any losses under the recourse provision of this pool.\nNonperforming Assets\nNonperforming assets (NPA) include (i) loans in Westcorp's portfolio that are contractually past due 90 days or more or performing nonaccrual loans with identified credit deficiencies (\"nonperforming loans\"), (ii) insubstance foreclosures, (iii) real estate acquired through foreclosure, and (iv) real estate acquired for investment or development that would otherwise be considered insubstance foreclosure. Collectively, nonperforming assets of $75.0 million represented 3.5% of total assets at December 31, 1993 compared to $102.5 million and 4.1%, respectively, at December 31, 1992. Westcorp's nonperforming assets at December 31, 1993 consisted primarily of multifamily and construction loans.\nIn general, the accrual of interest on real estate loans is discontinued when in management's judgment the interest will not be collectible in the normal course of business or when the loan is 90 days or more past due. When a loan is placed on nonaccrual status, interest accrued to date but not collected is reversed. Accordingly, Westcorp does not accrue or recognize interest income on nonperforming loans.\nNonperforming loans consisted of the following as of December 31:\nNonperforming assets decreased during 1993 to $75.0 million compared to $102.5 at December 31, 1992. At December 31, 1993, NPA included $32.0 million of nonaccrual loans, $20.8 million of insubstance foreclosures, $17.4 million of real estate acquired through foreclosure, and $4.8 million of nonperforming real estate held for development. Assets secured by single family 1-4 unit residences accounted for 37.3% of the total NPA portfolio. The decrease in total NPA is a result of dispositions without corresponding new additions to the NPA portfolio.\nThe migration of nonperforming loans, insubstance foreclosures (\"ISF\") and real estate owned is shown below.\nAllowance for Loan Losses\nConsistent with loan volume, loan sales, losses, nonaccrual loans and other relevant factors, Westcorp maintained its allowance for loan losses at $39.7 million at December 31, 1993 compared with $40.7 million at December 31, 1992. While Westcorp's nonperforming assets are mainly multifamily and construction loans, no single loan or series of such loans predominate. The provision and allowance for loan losses are indicative of loan volumes, loss trends and management's analysis of market conditions. The allowance for loan losses is maintained at a level believed adequate by management to absorb potential losses in the loan portfolio. The table below presents summarized data relative to the allowance for loan losses at December 31:\nThe following table sets forth the activity in the allowance for loan losses.\nWestcorp established an allowance for real estate losses separate from the allowance for loan losses during 1992. The allowance for real estate losses was established to absorb potential losses in the REO portfolio in accordance with generally accepted accounting principles.\nChanges in the allowance for real estate losses at December 31 were as follows:\nPrior to 1992, there was no separate allowance for real estate losses as Westcorp had not prior to that time experienced significant REO activity. Westcorp was of the view that the allowance for loan losses was adequate to also cover the few REO properties and limited number of foreclosures Westcorp had theretofore experienced. In 1992, an allowance for real estate losses was created as Westcorp had a sufficient amount of REO activity to require a separate allowance for real estate losses. The allowance for real estate losses was created by charging real estate operations. The allowance for real estate losses was reduced at December 31, 1993 from the level at December 31, 1992, due primarily to charge-offs taken in the first quarter of 1993 related to certain properties for which specific reserves were provided in the fourth quarter of 1992.\nINVESTMENT AND MORTGAGE BACKED SECURITIES ACTIVITIES\nWestcorp's investments consist primarily of investment securities and mortgage-backed securities. Both of these portfolios are classified as available for sale and are therefore accounted for at the lower of cost or market. Westcorp, through the Bank's subsidiary, WCS, has also entered into joint ventures for the development and sale to individual buyers of single family residences and the construction or rehabilitation of apartment projects. As a result of the passage of FIRREA and the capital standards therein, management anticipates that WCS's joint venture activities will continue to be reduced. See \"Business -- Subsidiaries -- Western Consumer Services, Inc.\"\nINVESTMENT SECURITIES ACTIVITIES\nWestcorp's investment securities portfolio consists primarily of United States Agency and Treasury Securities. This portfolio is maintained primarily for liquidity in accordance with regulatory requirements. The Bank also holds FHLB stock as required by its affiliation with the FHLB System, corporate bonds, and minimal amounts of other investments.\nThe following table sets forth Westcorp's investments at the dates indicated.\n- ---------------\n(1) Excludes investment in common stock of subsidiaries.\nThe following table sets forth the stated maturities of Westcorp's investments at December 31, 1993.\nMortgage Backed Securities Activities\nAt December 31, 1993 the mortgage backed securities portfolio consisted of various issues as follows:\nOther participation certificates were issued to fund certain low-income housing programs designed to provide affordable access to the housing market.\nWestcorp's mortgage-backed securities had maturities at December 31, 1993 of ten years or more, although payments are generally received monthly throughout the life of these securities. These securities had at that date a weighted average interest rate of 5.57%, and had an estimated market value of $95.8 million, as compared to their book value of $94.6 million.\nFUNDING SOURCES\nWestcorp employs various sources to fund its operations, including deposits, commercial paper, advances from the FHLB, repurchase agreements, and other borrowings. The sources used vary depending on such factors as rates paid, maturities, and the impact on capital. See \"Asset Liability Management\" in Management's Discussion and Analysis.\nDEPOSITS\nWestcorp attracts both short term and long term deposits from the general public and institutions by offering a variety of accounts and rates. Westcorp offers regular passbook accounts, various money market accounts, fixed interest rate certificates with varying maturities, and individual retirement accounts. Although Westcorp is authorized to offer negotiable order of withdrawal (\"NOW\") accounts, it has elected not to do so in the belief that its depositors prefer the higher interest rates it can offer on other money market accounts which do not entail the high transaction costs it believes are associated with NOW accounts. Westcorp's deposits are obtained primarily from the areas surrounding its branches in California and a small amount are solicited from areas outside California by employees only at the Bank's headquarters.\nFrom time to time in the past, Westcorp obtained brokered deposits when such deposits were an inexpensive source of funds which generally provided a means of matching Westcorp's ARMs to certain of its liabilities. The Board of Directors of Westcorp has authorized Westcorp to hold up to $100.0 million of brokered deposits if such deposits would be an inexpensive source of funds relative to its other sources of funds and are permitted to be held by Westcorp. As of December 31, 1993, Westcorp had no brokered deposits. See further discussion in the section captioned \"Supervision and Regulation -- The Bank -- Brokered Deposits.\"\nThe following table sets forth the amount of Westcorp's deposits by type for the dates indicated.\nThe variety of savings deposits offered by Westcorp has allowed it to remain competitive in obtaining funds and to respond with flexibility to, but without eliminating the threat of, disintermediation (the flow of funds away from depository institutions such as savings and loan associations into direct investment vehicles such as government and corporate securities). In addition, Westcorp, as well as financial institutions generally, has become much more subject to short term fluctuations in deposit flows, as customers have become more interest rate conscious. The ability of Westcorp to attract and maintain deposits and control its cost of funds has been, and will continue to be, significantly affected by money market conditions. Westcorp's average certificate deposits outstanding are summarized below.\nWestcorp's maturities of certificate accounts greater than or equal to $100,000 are as follows at December 31, 1993:\nBORROWINGS AND OTHER SOURCES OF FUNDS\nWestcorp's other sources of funds include issuances of commercial paper, securities sold under agreements to repurchase, advances from the FHLB and other borrowings as well as loan repayments and cash generated from operations. The FHLB System functions in a reserve capacity for savings institutions. As a member, the Bank is required to own capital stock in the FHLB and is authorized to apply for advances from the FHLB on security of such stock and on certain residential mortgage loans and other assets. The Bank has been preapproved for advances up to 25% of its assets, based on remaining availability under credit facilities established by the Bank with the FHLB, with 24 hours notice. Such borrowings may be made pursuant to several different programs offered from time to time by the FHLB. Additional funds are available subject to additional collateral and other requirements. Each credit program has its own interest rate, which may be fixed or variable, and range of maturities. The FHLB prescribes the acceptable uses to which advances pursuant to each program may be put, as well as limitations on the sizes of advances and repayment provisions. The Bank also has utilized the FHLB for long term borrowings to fund its lending activities and had borrowed $126 million as of December 31, 1993. At December 31, 1993 the Bank had a total unused line of credit with the FHLB of approximately $203 million. The weighted average interest rate as of December 31, 1993 was 7.58%. The maximum amount of advances outstanding at any month-end was $174 million and $279 million during\n1993 and 1992, respectively. The Bank also has a commercial paper facility with a credit line up to $200 million with the FHLB.\nSavings associations such as the Bank also have authority to borrow from the Federal Reserve Bank (the \"FRB\") \"discount window.\" FRB regulations require these institutions to exhaust all reasonable alternative sources of funds, including FHLB sources, before borrowing from the FRB.\nFederal regulations have been promulgated which connect Community Reinvestment Act (the \"CRA\") performance with access to long term advances from FHLB to member institutions. The Bank does not believe that there will be any adverse effect to it relative to access to this source of funds. The Bank received an \"outstanding\" in its most recent CRA evaluation, the highest rating available.\nSUBORDINATED CAPITAL DEBENTURES\nThe Bank issued $125,000,000 of 8.5% Subordinated Capital Debentures due 2003 on June 17, 1993. The Bank subsequently received permission from the OTS to include these debentures in supplementary capital for purposes of determining compliance with risk-based capital requirements. See \"Regulatory Capital Requirements\" in Supervision and Regulation. As a result, the Bank redeemed its $52 million of outstanding 11% Subordinated Capital Debentures due 1999 on September 10, 1993. This early extinguishment of debt resulted in an extraordinary loss of $1.1 million net of related taxes of $0.8 million. See \"Extraordinary Item\" in Management's Discussion and Analysis.\nSUBSIDIARIES\nGeneral\nThe Bank's subsidiaries are Westcorp Financial, WFAL, WFAL2, Westplan (which in turn owns all of the stock of Westplan Investments), Western Reconveyance and WCS, (which in turn owns all of the stock of Westhrift). Each of such subsidiaries are described in detail below. The operations of a former subsidiary, Westamerica Computer Services, Inc., were merged into the Bank effective September 1, 1993.\nWestcorp Financial Services, Inc.\nWestcorp Financial is in the business of consumer finance. Each of its offices are licensed to the extent required by law to conduct business in each respective state. Westcorp Financial initiated operations to serve markets not covered by the Bank. During 1993, Westcorp Financial originated $198.5 million of motor vehicle loans. The loans which Westcorp Financial originates are generally sold to the Bank and are serviced by Westcorp Financial under its license, whether such loans are held by the Bank or sold in securitized offerings. In 1994 Westcorp Financial plans to expand into other states, including Texas.\nWestern Financial Auto Loans, Inc.\nWFAL is a wholly-owned, limited purpose finance subsidiary of the Bank. WFAL was organized primarily for the purpose of purchasing motor vehicle loans from the Bank and issuing obligations collateralized by such loans and engaging in other asset-backed financing transactions. A total of three such transactions totaling $527.5 million were completed during 1993. On March 11, 1994, an additional $200 million of loans were sold in a similar transaction.\nWestern Financial Auto Loans 2, Inc.\nWFAL2 is a wholly-owned, limited purpose finance subsidiary of the Bank. WFAL2 was organized primarily for the purpose of purchasing motor vehicle loans from the Bank originated by the Bank and Westcorp Financial, and issuing obligations collateralized by the motor vehicle loans and engaging in other asset-backed financing transactions. Since December 1986, the Bank sold motor vehicle loans with a principal amount of approximately $2.9 billion to WFAL2 in exchange for the net proceeds of ten bond issues totaling $1.2 billion and nine sales to grantor trusts established by WFAL2 in the amount of $1.6 billion. Each bond issuance to date has been paid off in full at or before its respective maturity date.\nWestplan Insurance Agency, Inc.\nWestplan was incorporated in California in 1980 and is licensed by the California Insurance Commissioner to transact the business of an insurance agency. It acts as an agent for independent insurers in providing property and casualty insurance coverage on collateral, primarily motor vehicles, securing loans made by the Bank and Westcorp Financial, protection insurance and other noncredit related life and disability programs. In addition, Westplan offers annuities through the branch offices. Westplan's revenues consist of commissions received on policies sold to customers of the Bank and Westcorp Financial. See \"Business -- Loan Insurance.\" Westplan was transferred from Westcorp to the Bank effective March 31, 1993 in compliance with OTS regulations pertaining to insurance agencies. The Bank paid $1.5 million to Westcorp for all the stock of Westplan.\nIn addition, Westplan also holds all outstanding stock of Westplan Investments.\nWestplan Investments\nWestplan Investments was incorporated in 1993 as a licensed mutual funds broker dealer in contemplation of selling mutual funds to the general public. Westcorp anticipates that such operations will commence at some time during 1994 although no assurance can be given in this regard.\nWestern Reconveyance Company, Inc.\nWestern Reconveyance is a California corporation which was incorporated in 1979. It acts primarily as the trustee under trust deed loans made by the Bank and Westcorp Financial and is not a significant source of income. Western Reconveyance Company Inc. was transferred from Westcorp to the Bank in 1992. Westcorp received $10,000 from the Bank for the stock of that company.\nWestern Consumer Services, Inc.\nWCS is a company which conducts real estate development activities primarily in the form of joint ventures. The joint ventures are engaged in construction of residential units for sale, construction of rental units and rehabilitation of rental housing, the latter primarily in low and moderate income neighborhoods. WCS's interest in these projects ranges from 51% to 100% and, in some cases, includes a participating share of the profits realized upon sale. Its asset level at December 31, 1993, was approximately $9.2 million. WCS's investment in real estate totaled $0.5 million at December 31, 1993. Westcorp believes that the joint venture operations were affected by the combination of overall recessionary pressures and slower sales activities beginning in August 1990. Westcorp is continuing its efforts to dispose of assets in this real estate investment category to third parties (other than the Laguna Hills property described below).\nThe Bank transferred its ownership of Laguna Hills Country Plaza, which is the location of its Laguna Hills branch office, to WCS in 1992 which resulted in an increase of $7.8 million of real estate being carried on the books of WCS. This transfer occurred as a result of a determination that this property could not be treated as branch premises for regulatory purposes (based on OTS guidelines) since the Bank did not occupy 25.0% of the premises, consistent with OTS guidelines, and was thus required to divest the property. The Bank is required to hold risk based capital against this asset as it does against other assets which are held in its real estate investment subsidiary. If and when the Bank is able to occupy 25% or more of the premises, it may transfer the property from WCS to the Bank.\nAs a result of the passage of FIRREA, certain of the Bank's investments in and extension of credit to any subsidiary engaged in activities not permissible for a national bank must be deducted from the Bank's capital for purposes of determining compliance with the capital standards pursuant to a phase-in schedule. See \"Supervision and Regulation -- Regulatory Capital Requirements.\" In 1992 an amendment to FIRREA provided for an extension of the phase-in period from July 1, 1994 to June 30, 1996 for investments in or extensions of credit to real estate subsidiaries of the Bank subject to the approval of an application submitted to the OTS. The Bank received approval of its application and its real estate subsidiary investment is now subject to a capital phase-in period that expires on July 1, 1996.\nIn addition, WCS also holds all outstanding stock of Westhrift.\nWesthrift Life Insurance Company\nWesthrift, an Arizona corporation, is engaged in the business of reinsuring credit life and credit disability insurance offered to borrowers of the Bank and Westcorp Financial and underwritten by an independent insurer. The credit life insurance policies provide for full payment to the Bank of the insured's financial obligation in the event of the insured's death. The credit disability insurance policies provide for payment to the Bank of an insured's financial obligation during a period of disability resulting from illness or physical injury. In 1987 Westhrift received a Certificate of Authority from the California Insurance Commissioner to conduct insurance business in California. For Arizona statutory purposes, Westhrift's aggregate reserves for credit life and credit disability policies as of December 31, 1993 were $3.7 million, and Westhrift's provision for loss on such policies for the year ended December 31, 1993 was $0.3 million. The aggregate reserves are computed in accordance with commonly accepted actuarial standards consistently applied, and are based on actuarial assumptions which are in accordance with or stronger than those called for in policy provisions. The policies reinsured are underwritten by the independent insurer for no more than the amount that the insured owes to the Bank. Westhrift does not engage in any business except with respect to customers of the Bank and Westcorp Financial. See \"Business -- Loan Insurance.\"\nCOMPETITION\nWestcorp faces strong competition in its lending activities and, with respect to the Bank, in attracting savings deposits. Westcorp believes it is competitive because it offers a high degree of professionalism and quality in the services it provides through longstanding relationships with borrowers, real estate brokers and motor vehicle dealers.\nThe greatest competition for deposits comes from other savings and loan associations, money market funds, commercial banks, credit unions, thrift and loan associations, corporate and government securities and mutual funds. Many of the nation's largest savings and loan associations and other depository institutions are headquartered or have branches in the areas where Westcorp primarily conducts its business. Westcorp competes for deposits primarily on the basis of interest rates paid and quality of service to its customers. Westcorp does not rely on any individual, group or entity for a material portion of deposits. Although the majority of its deposits are placed by depositors in the geographic areas in which Westcorp's branches are located, some are placed by depositors located in other regions across the United States.\nCompetition in originating real estate loans comes primarily from other savings and loan associations, commercial banks and mortgage bankers. Westcorp competes for mortgage loans principally on the basis of the interest rates and loan fees it charges, the types of loans it originates and the quality of services it provides borrowers. Westcorp believes it offers a high degree of professionalism and quality in the services it provides borrowers and real estate brokers.\nWestcorp faces strong competition in the purchase of motor vehicle dealer generated motor vehicle loans from commercial banks, motor vehicle manufacturer finance subsidiaries, consumer finance companies and credit unions. Westcorp competes for the purchase of such loans on the basis of price and the level of service provided to the respective dealers. Westcorp also depends for its share of a particular dealer's motor vehicle loans on the promptness with which it can process and approve a motor vehicle loan application submitted by the dealer. Westcorp must also compete with dealer rebate and interest rate subsidy programs offered by motor vehicle manufacturer's finance subsidiaries.\nSUPERVISION AND REGULATION\nGENERAL\nThe adoption of FIRREA in 1989 substantially restructured the regulatory framework in which Westcorp and the Bank operate. In December 1991, The Federal Deposit Insurance Corporation Improvement Act (\"FDICIA\") was enacted. FDICIA requires specified regulatory agencies to adopt regulations having broad application to insured financial institutions such as the Bank.\nSet forth below is a discussion of the statutory and regulatory framework for Westcorp as affected by FIRREA and FDICIA and the regulations promulgated thereunder. However, to the extent that the following information describes statutory or regulatory provisions, it is qualified in its entirety by reference to the particular statutory and regulatory provisions. Any change in applicable law or regulation or in the policies of various regulatory authorities may have a material effect on the business and prospects of Westcorp and the Bank.\nWESTCORP\nThe Savings and Loan Holding Company Act\nWestcorp, by virtue of its ownership of the Bank, is a savings and loan holding company within the meaning of the Home Owners' Loan Act, as amended by FIRREA (\"HOLA\"). FIRREA transferred, with few changes, the provisions of the Savings and Loan Holding Company Act from the National Housing Act to HOLA. Savings and loan holding companies and their savings association subsidiaries are extensively regulated under federal laws.\nAs a savings and loan holding company registered with the OTS, Westcorp is subject to its regulations, examination and reporting requirements. Westcorp is a \"unitary\" savings and loan holding company within the meaning of regulations promulgated by the OTS, and as a result Westcorp is virtually unrestricted in the types of business activities in which it may engage, provided the Bank continues to meet the Qualified Thrift Lender test under HOLA. Although Westcorp intends to remain a unitary savings and loan holding company, if it acquires one or more insured institutions and operates them as separate subsidiaries rather than merging them into the Bank, or if certain other circumstances not currently applicable to Westcorp arise, Westcorp would be treated as a \"multiple\" savings and loan holding company and could cause additional regulatory restrictions to be imposed on Westcorp. Westcorp does not anticipate that those circumstances will arise unless such institutions are acquired pursuant to a supervisory acquisition and the insured subsidiaries meet the Qualified Thrift Lender test.\nHOLA prohibits a savings and loan holding company, without prior approval of the OTS, from controlling any other savings association or savings and loan holding company.\nAdditionally, FIRREA empowers the OTS to take substantive action when it determines that there is reasonable cause to believe that the continuation by a savings and loan holding company of any particular activity constitutes a serious risk to the financial safety, soundness, or stability of such holding company's subsidiary savings association. Thus, FIRREA confers on the OTS oversight authority for all holding company affiliates, not just the Bank. Specifically, the OTS may, as necessary: (i) limit the payment of dividends by the Bank; (ii) limit transactions between the Bank, the holding company and the subsidiaries or affiliates of either; and (iii) limit any activities of the holding company that might create a serious risk that the liabilities of the holding company and its affiliates may be imposed on the Bank. Any such limits may be issued in the form of regulations, or a directive having the effect of a cease and desist order.\nSavings association subsidiaries of a savings and loan holding company are limited by HOLA in the type of activities and investments in which they may participate if the investment and\/or activity involves an affiliate. In general, savings association subsidiaries of a savings and loan holding company are subject to Sections 23A and 23B of the Federal Reserve Act (\"FRA\") in the same manner and to the same extent as if the savings association were a member bank of the Federal Reserve System. Section 23A of the FRA puts certain quantitative limitations on certain transactions between a bank or its subsidiary and an affiliate, including transactions involving (i) loans or extensions of credit to the affiliate; (ii) the purchase of or\ninvestment in securities issued by an affiliate; (iii) purchase of certain assets from an affiliate; (iv) the acceptance of securities issued by an affiliate as security for a loan or extension of credit to any person; or (v) the issuance of a guarantee, acceptance or letter of credit on behalf of an affiliate. Under Section 23B, transactions between a bank or its subsidiary and an affiliate must meet certain qualitative limitations. Such transactions must be on terms at least as favorable to the bank or its subsidiary as transactions with unaffiliated companies. In addition, Section 11 of the HOLA, as amended by FIRREA, also specifically prohibits a savings association subsidiary of the savings and loan holding company from making a loan or extension of credit to an affiliate unless that affiliate is engaged only in activities permitted to bank holding companies under Section 4(c) of the Bank Holding Company Act or from purchasing or investing in the securities of any affiliate (other than a subsidiary of the savings association). The OTS may issue additional restrictions if necessary to protect the safety and soundness of any savings association. The OTS has issued regulations, consistent with the provisions of Sections 23A and 23B, which exclude transactions between a savings association and its subsidiaries from the limitations of those sections, but those regulations also define certain subsidiaries to be affiliates and subject to the requirements of those sections. At the present time, none of the Bank's subsidiaries are within the definition of an affiliate for purposes of those regulations.\nIn addition, amendments made by FIRREA and FDICIA require that savings associations comply with the requirements of FRA Sections 22(g) and 22(h), and Federal Reserve Board (\"FRB\") Regulation O promulgated thereunder, in the same manner as member banks, with respect to loans to executive officers, directors and principal shareholders. As a matter of policy, the Bank does not make loans to executive officers, directors or principal shareholders.\nTHE BANK\nCalifornia Savings Association Law\nAs a federally chartered institution, the Bank's investments and borrowings, loans, issuance of securities, payments of interest and dividends, establishment of branch offices and all other aspects of its operations are subject to the exclusive jurisdiction of the OTS, to the exclusion of the California Savings Association Law or regulations of the California Savings and Loan Commissioner.\nFederal Home Loan Bank System\nThe Bank is a member of the FHLB System which consists of 12 regional Federal Home Loan Banks. The Federal Home Loan Banks provide a central credit facility for member institutions. The Bank, as a member of the FHLB System, is required to own capital stock in the FHLB in an amount at least equal to the greater of 1.0% of the aggregate outstanding balance of its loans secured by residential real property or 5.0% of the sum of advances outstanding plus committed FHLB commercial paper lines. The Bank is in compliance with this requirement.\nSince the adoption of FIRREA, the dividends which the Bank has received on its FHLB stock have been significantly reduced as a result of requirements imposed by FIRREA on the FHLB System. Each FHLB is required to transfer a certain portion of its reserves and undivided profits to the Resolution Funding Corporation (\"RFC\"), the entity established to raise funds to resolve troubled thrifts, to fund a portion of the interest and the principal on RFC bonds and other obligations. Also, each FHLB is required to transfer a percentage of its annual net earnings to the Affordable Housing Program, as defined in FIRREA, which amount is to increase from 6% of the annual net income of each FHLB in 1994 to at least 10% in 1995 and thereafter. Accordingly, it is anticipated that the level of dividends to be received by the Bank from the FHLB will continue to be less than those received prior to the adoption of FIRREA.\nInsurance of Accounts\nThe FDIC administers two separate deposit insurance funds for financial institutions: (i) the Savings Association Insurance Fund (\"SAIF\"), which insures the deposits of associations that were insured by the FSLIC prior to the enactment of FIRREA, and (ii) the Bank Insurance Fund (\"BIF\"), which insures the deposits of institutions that were insured by the FDIC prior to FIRREA. Thus, commencing in 1989 the\ndeposits of the Bank became insured through the SAIF to the maximum amount permitted by law (currently $100,000).\nDuring 1993 the Bank was required to pay insurance premiums of $5.0 million. FDICIA requires the FDIC to implement, by January 1, 1994, a risk-based assessment system under which an institution's premiums are based on the FDIC's determination of the relative risk the condition of such institution poses to its insurance fund. In response, the FDIC adopted a transitional rule, effective January 1, 1993, and a final rule, effective January 1, 1994. Under these rules, each insured institution is classified as \"well capitalized,\" \"adequately capitalized\" or \"undercapitalized,\" using definitions substantially the same as those adopted with respect to the \"prompt corrective action\" rules adopted by the regulatory agencies under FDICIA. See \"Prompt Corrective Regulatory Action.\" Within each of these classifications, the FDIC has created three risk categories into which an institution may be placed, based upon the supervisory evaluations of the institution's primary federal financial institution regulatory agency and the FDIC. These three categories consist of those institutions deemed financially sound, those with demonstrated weakness that could result in significant deterioration of the institution and risk of loss to the FDIC, and those which pose a substantial probability of loss to the FDIC. Each of these nine assessment categories is assigned an assessment rate ranging from 0.23% to 0.31% of the institutions deposit assessment base. Under these regulations, an institution is precluded from disclosing the risk-based assessment category to which it has been assigned.\nFIRREA established a five year moratorium on conversions from the SAIF to the BIF. The Resolution Trust Corporation Completion Act (\"RTCCA\"), enacted on December 17, 1993, extended this moratorium until the date on which the SAIF first meets the reserve ratio designed for it. There are several exceptions to this moratorium. Most importantly, a SAIF member may convert to bank charter if the resulting bank remains a SAIF member during the term of the moratorium. Additionally, conversions to bank charter can take place during the moratorium if (i) it affects only an \"insubstantial\" portion of an institution's total deposits and is approved by the FDIC; (ii) it results from the acquisition of a troubled institution that is in default or in danger of default and is approved by the FDIC and the Resolution Trust Corporation (the \"RTC\"); or (iii) it results from a merger or consolidation of a bank and a savings association and is approved by the FDIC or the Office of the Comptroller of the Currency (the \"OCC\"), as well as by the FRB.\nThe FDIC may terminate the deposit insurance of any insured depository institution, including the Bank, if it determines after a hearing that the institution has engaged or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, order or any condition imposed by an agreement with the FDIC. It also may suspend deposit insurance temporarily during the hearing process for the permanent termination of insurance, if the institution has no tangible capital. If insurance of accounts is terminated, the accounts at the institution at the time of the termination, less subsequent withdrawals, shall continue to be insured for a period of six months to two years, as determined by the FDIC. Management is aware of no existing circumstances which could result in termination of the Bank's deposit insurance.\nLiquidity Requirements\nUnder OTS regulations, the Bank is required to maintain an average daily balance of liquid assets (cash, certain time deposits, bankers' acceptances and specified United States government, state or federal agency obligations and certain corporate debt obligations and commercial paper) equal to at least 5.0% of its average daily balance of net withdrawal accounts and borrowings payable on demand or in one year or less. If at any time the Bank's liquid assets do not at least equal (on an average daily basis for any month) the amount required by these regulations (which requirement may not be set at less than 4.0% nor more than 10.0% of the Bank's net withdrawable accounts plus short term borrowings), the Bank would be subject to various OTS enforcement procedures, including monetary penalties. The Bank must also maintain an average daily balance of short term liquid assets (generally those having maturities of 12 months or less) equal to at least 1.0% of its average daily balance of net withdrawable accounts plus short term debt. At December 31, 1993, the Bank's liquidity and short term liquidity percentages as calculated for the foregoing purposes were 10.3% and 4.7%, respectively. Thus, the Bank was in compliance with these requirements. See \"Management's Discussion and Analysis of Financial Condition and Results of Operations -- Capital Resources and Liquidity.\"\nBrokered Deposits\nIn June 1992, the FDIC issued regulations under FDICIA that provide for differential regulation relating to brokered deposits based on capital adequacy. Institutions are divided into categories of \"well capitalized,\" \"adequately capitalized\" and \"undercapitalized.\" Only \"well capitalized\" institutions may continue to accept brokered deposits without restriction.\n\"Adequately capitalized\" institutions may accept brokered deposits only if (i) they first obtain a waiver from the FDIC and (ii) the rate of interest paid on such brokered deposits, at the time such funds are accepted, does not \"significantly\" exceed (defined as more than 75 basis points) (a) the rate paid on deposits of similar maturity in such institution's normal market area for deposits accepted in the institution's normal market area or (b) the \"national rate\" paid on deposits of comparable maturity for deposits accepted outside the institution's normal market area. For purposes of these regulations, \"national rate\" means 120% of the current yield on similar maturity U.S. Treasury obligations or, in the case of a deposit at least half of which is uninsured (institutional or wholesale deposits), 130% of such applicable yield. Furthermore, because the term \"deposit broker\" is defined to include an \"adequately capitalized\" association which itself solicits deposits by offering rates of interest that are \"significantly\" higher (defined as more than 75 basis points) than the prevailing rates offered by other insured associations in the offering association's market area, the interest rate limitations applicable to deposits obtained through third party intermediaries will also apply to deposits obtained by the offering association.\n\"Undercapitalized\" institutions are prohibited from (i) accepting brokered deposits or (ii) soliciting any deposits by offering rates of interest that are \"significantly\" higher (defined as more than 75 basis points) than the prevailing rates of interest on insured deposits (i) in such institution's market area or (ii) in the market area in which such deposits would otherwise be accepted. The terms \"well capitalized,\" \"adequately capitalized\" and \"undercapitalized\" have the same meanings as under the regulations pertaining to prompt corrective regulatory action described under \"Prompt Corrective Regulatory Action.\"\nAt December 31, 1993, the Bank met the capital requirements of a well capitalized association as defined by the regulation. Nonetheless, the Bank does not currently accept brokered deposits as defined by the regulation.\nRegulatory Capital Requirements\nFIRREA includes capital requirements intended to require the owners of savings associations to invest more of their own funds in the associations they control, thus providing a greater incentive for the owners of the associations to limit the risks such associations incur. FIRREA mandated that the OTS promulgate final capital regulations which provide capital standards no less stringent than the capital standards applicable to national banks. Those regulations were adopted by the OTS and became effective on December 7, 1989. Additionally, FIRREA requires that these capital standards contain (i) a leverage limit (core capital) requirement; (ii) a tangible capital requirement; and (iii) a risk-weighted capital requirement.\nFIRREA requires savings associations to maintain \"core capital\" in an amount not less than 3.0% of adjusted total assets. Core capital is defined in the OTS capital regulations as including, among other things, (i) common stockholders' equity (including retained earnings); (ii) a certain portion of the association's qualifying supervisory goodwill; (iii) noncumulative perpetual preferred stock and related surplus; and (iv) purchased mortgage servicing rights meeting certain valuation requirements (\"PMSRs\"). FDIC regulations required that the maximum amount of such PMSRs which can be included in core capital and tangible capital not exceed, in the aggregate, an amount equal to 50% of the institutions core capital. Effective March 4, 1994, qualifying intangibles, including PMSRs and purchased credit card relationships (\"PCCRs\") may be included in core and tangible capital, up to a maximum of 50% of core capital with PCCRs, however, limited to 25% of core capital. At December 31, 1993 the Bank had no PMSRs or PCCRs.\nEffective December 31, 1990, the OCC, the principal national bank regulator, amended its capital regulations by requiring a minimum core capital requirement of 3.0% of adjusted total assets for national banks with a composite 1 rating (the highest rating available) under the CAMEL rating system for national\nbanks and substantially higher core capital requirements for lower rated national banks. It is expected that most national banks will be required to maintain core capital of 4.0% to 5.0% under the new regulation. Because FIRREA generally requires that the capital standards applicable to savings institutions be \"no less stringent\" than those applicable to national banks, there is a high likelihood that the OTS will impose substantially equivalent requirements, and in April 1991, the OTS proposed to modify the 3.0% of adjusted total assets core capital requirement in the same manner. Under the OTS proposal, only savings associations rated composite 1 under the OTS MACRO rating system will be permitted to operate at the regulatory minimum core capital ratio of 3.0%. For all other savings associations, the minimum core capital ratio will be 3.0% plus at least an additional 100 to 200 basis points, which thus will increase the core capital ratio requirement to 4.0% to 5.0% (or more) of adjusted total assets. In determining the amount of additional core capital any savings institution will be required to maintain, the OTS will assess both the quality of risk management systems and the level of overall risk in each individual savings association through the supervisory process on a case-by-case basis. The OTS has not yet issued a final rule. The OTS may currently impose a higher individual minimum capital requirement on a case-by-case basis. During 1993, the Bank was required by an Agreement with the OTS, (the \"OTS Agreement\") to maintain core capital of 4.5%. At December 31, 1993, the Bank's core capital was 8.6%. The OTS Agreement was terminated by the OTS effective January 25, 1994. See \"Agreement with the Office of Thrift Supervision\".\nA savings association must maintain \"tangible capital\" in an amount not less than 1.5% of adjusted total assets. \"Tangible capital\" means core capital less any intangible assets (including supervisory goodwill), plus PMSRs and PCCRs to the extent includable in core capital as described above. At December 31, 1993, the Bank's tangible capital was 8.6%.\nA savings institution's investments in and extensions of credit to a subsidiary engaged in any activities not permissible for national banks (\"nonincludable subsidiaries\") generally are deducted from the institution's core capital and tangible capital in determining compliance with capital standards. This deduction is not required for investments in and extensions of credit to a subsidiary engaged solely in mortgage banking, to certain subsidiaries which are themselves insured depository institutions or, unless the FDIC determines otherwise in the interests of safety and soundness, to a subsidiary which engages in such impermissible activities solely as agent for its customers. The Bank is required to deduct from its core and tangible capital its investments in WCS and Westplan (both equity and extensions of credit), as the former is engaged in residential real estate activities not permitted to national banks, and the latter is engaged in an insurance agency business not permitted to national banks. The amount of the deduction related to WCS is to be phased-in through June 30, 1996, while the amount of the deduction related to Westplan is not subject to a phase-in period. By letter dated December 29, 1992, the OTS approved the inclusion in the Bank's core and tangible capital of its investment in WCS at the 75% level through June 30, 1994, at the 60% level from July 1, 1994 through June 30, 1995, and at the 40% level from July 1, 1995 through June 30, 1996. After July 1, 1996 the Bank will not be permitted to include any of its remaining investment in WCS in its core or tangible capital. At December 31, 1993 the amount of its investment in WCS excluded from the Bank's core and tangible capital was $5.8 million (25% of the investment in that subsidiary)and the amount of its investment in Westplan excluded from core and tangible capital was $2.2 million (100% of the investment in that subsidiary).\nAs of December 31, 1993, the Bank's core capital was $186.0 million, exceeding the regulatory requirement of the OTS as set by the OTS Agreement by $88.6 million. The Bank's tangible capital at December 31, 1993 was $186.0 million, exceeding the regulatory requirement of the OTS by $153.5 million.\nThe risk-based component of the capital standards requires that an association have total capital equal to 8.0% of risk-weighted assets on and after December 31, 1992. The OTS risk-based capital regulation provides that for assets sold as to which any recourse liability is retained (including on-balance sheet assets related to the assets sold which are at risk) a savings association must hold capital as a part of its risk-based capital requirement equal to the lesser of (i) the amount of that recourse liability or (ii) the risk-weighted capital requirement for assets sold off-balance sheet as though the assets had not been sold. In addition, in the former instance, when calculating the Bank's risk-based capital ratio (a) the value of those on-balance sheet assets which are subject to recourse, to the extent of that recourse liability (\"fully-capitalized assets\"), is deducted\nfrom the Bank's total capital and (b) neither the risk-weighted value of the asset sold off-balance sheet nor the amount of the fully capitalized assets is included in the Bank's total risk-weighted assets. The Bank held $142.2 million of additional risk-based capital at December 31, 1993 as a result of this requirement due to its recourse liability relating to the Bank's grantor trust financings, all of which related to fully capitalized assets. The Bank's risk-based capital ratio at that date was 15.58%.\nThe Bank's total risk-weighted assets are determined by taking the sum of the products obtained by multiplying each of the Bank's assets and certain off-balance sheet items by a designated risk-weight. Before an off-balance sheet item can be assigned a risk-weight, it must be converted to an on-balance sheet credit equivalent amount.\nFour risk-weight categories now exist for on-balance sheet assets; a fifth category (of 200% risk-weighing) was deleted by the OTS with the reassignment of these assets to the 100% risk-weighted category. The four risk-weighted categories are:\nCATEGORY 1: Zero percent risk-weight. Includes, among other assets, cash, securities issued by, or backed by the full faith and credit of, the U.S. government including GNMA mortgage-backed securities, notes and obligations issued by either the FSLIC or FDIC and backed by the full faith and credit of the U.S. government, and assets directly and unconditionally guaranteed by the U.S. government or its agencies;\nCATEGORY 2: Twenty percent risk-weight. Includes, among other assets, cash items in the process of collection, mortgage related securities issued or guaranteed by FNMA or FHLMC, mortgages guaranteed by the VA or FHA, obligations collateralized by securities issued or guaranteed by the U.S. government, privately issued mortgage related securities qualifying as such under the Secondary Mortgage Enhancement Act, stock in the FHLB, and claims or balances due from the FHLB, the FRB or from domestic depository institutions;\nCATEGORY 3: Fifty percent risk-weight. Includes, among other assets, qualifying mortgage loans (including certain qualifying residential construction loans) and qualifying multifamily mortgage loans, mortgage related securities backed by qualifying mortgage loans;\nCATEGORY 4: One hundred percent risk-weight. Includes, among other assets, consumer loans (including motor vehicle loans), commercial loans, home equity loans, nonqualifying multifamily mortgage loans, nonqualifying residential construction loans, land loans, investments in fixed assets and premises, and intangible assets including goodwill not deducted from capital and equity investments permissible for both savings associations and national banks.\nBefore a risk-weight category can be applied to a consolidated off-balance sheet item, such item must be converted into a credit-equivalent amount by multiplying its face amount by whichever of four conversion factors is appropriate. There is a (i) 100% conversion of direct credit substitutes, including financial guarantees, financial standby letters of credit, assets sold with recourse (unless the full amount of the recourse retained is less than the amount of capital required by the credit-risk component for the total assets sold, in which case the appropriate credit risk component is the full amount of the recourse) and assets sold under an agreement to repurchase; (ii) a 50.0% conversion factor is applied to transaction-related contingencies, such as performance bonds or performance-based standby letters of credit and the unused portions of nonexempt loan commitments; (iii) a 20.0% conversion of trade-related contingencies, such as commercial letters of credit; (iv) a 0% conversion factor applies to the unused portion of exempt loan commitments (those which are unconditionally cancelable, with each draw treated as a separate potential loan to be evaluated) and unused, unconditionally cancelable retail credit card lines. Interest-rate contracts (e.g. swaps, caps, collars, options and forward rate agreements) have special credit equivalent amounts equal to the sum of their current credit exposure plus their potential credit exposure. The risk-weight category to be applied to such amounts in determining the credit risk component would depend on the obligor, but in no event would be higher than 50.0% risk-weight. As of December 31, 1993, the Bank's total risk-weighted assets equaled $1.9 billion.\nTotal capital, as defined by OTS regulations, is core capital plus supplementary capital (supplementary capital cannot exceed 100% of core capital) less direct equity investments not permissible to national banks\n(subject to a phase-in schedule), reciprocal holdings of depository institution capital investments, and that portion of land loans and nonresidential construction loans in excess of 80.0% loan-to-value ratio. Supplementary capital is comprised of three elements: (i) permanent capital instruments; (ii) maturing capital instruments; and (iii) general valuation loan and lease loss allowance.\nDuring 1993 the Bank sold $125.0 million of its 8.5% Subordinated Capital Debentures, due 2003 (the \"8.5% Debentures\"), using the proceeds of that offering to redeem all of its outstanding 11% Subordinated Capital Debentures, due 1999 (the \"11% Debentures\") and for general corporate purposes. Both the 11% Debentures and the 8.5% Debentures are maturing capital instruments as defined by the OTS capital regulations. Those regulations require that as the maturity date of a maturing capital instrument approaches, a specified amount of that instrument must be deducted from total capital each year. Because the 11% Debentures included a sinking fund obligation along with its May 1, 1999 maturity date, the Bank was permitted as of May 1, 1993 to include only $35.1 million of the $52.0 of those debentures outstanding in its total capital.\nThe OTS approved the Bank's application to include the 8.5% Debentures as supplementary capital on August 4, 1993. Following that approval and the subsequent redemption of all of the outstanding 11% Debentures on September 10, 1993, the Bank did include the 8.5% Debentures in its supplementary capital. By the terms of that approval, the amount of the 8.5% Debentures which may be included in supplementary capital may not exceed 40% of the Bank's total capital, and by September 30, 1995, the amount which may be included may not exceed one-third of the Bank's total capital. At December 31, 1993 the $125.0 million of 8.5% Debentures represented 37.5% of the Bank's total capital. Consistent with the OTS capital regulations, the amount of the 8.5% Debentures which may be included as supplementary capital will decrease at the rate of 20% of the amount originally outstanding per year (net of redemptions), commencing on July 1, 1998.\nThe OTS has adopted an interest rate risk component to its capital rules, effective January 1, 1994. The new rule establishes a method for determining an appropriate level of capital to be held by savings associations subject to the supervision of the OTS, such as the Bank, against interest rate risk (\"IRR\"). The new rule generally provides that if a savings association's IRR, calculated in accordance with the rule, exceeds a specified percentage, the savings association must deduct from its total capital an IRR component when calculating its compliance with the risk-based capital requirement.\nSpecifically, the rule provides that a savings association's IRR is to be determined by the decline in that association's Net Portfolio Value (\"NPV\") (i.e. the value of the association's assets as determined in accordance with the provisions of the rule) resulting from a 200 basis point change in market interest rates (increase or decrease, whichever results in a lower NPV) divided by the NPV prior to that change. If that result is a decrease of greater than 2%, the association must deduct from its total capital an amount equal to one-half of the decline in its NPV in excess of 2% of its NPV prior to the interest rate change (the \"IRR component\"). The reduction of an association's total risk-based capital is effective on the first day of the third quarter following the reporting date of the information used to make the required calculations. The rule also contains provisions (i) reducing the IRR component if the association reduces its IRR by the end of the quarter following the reporting date and (ii) permitting the OTS to waive or defer the IRR component on a showing that the association has made meaningful steps to reduce or control its interest rate risk. Westcorp does not believe it will be required to reduce its total capital by an IRR component at July 1, 1994.\nAny savings association that fails any of the capital requirements is subject to possible enforcement actions by the OTS or the FDIC. Such actions could include a capital directive, a cease and desist order, civil money penalties, the establishment of restrictions on an association's operations and the appointment of a conservator or receiver. The OTS' capital regulation provides that such actions, through enforcement proceedings or otherwise, could require one or more of a variety of corrective actions. The OTS must prohibit asset growth by any institution that is in violation of the foregoing minimum capital requirements, and must require any such institution to comply with a capital directive issued by the OTS. See \"Prompt Corrective Regulatory Action\".\nIn summary, the Bank exceeded the current minimum requirements for core capital, tangible capital and risk-weighted capital as of December 31, 1993. However, the required deductions from capital for its\ninvestments in WCS, Westplan and direct real estate investments in facilities in which the Bank uses less than 25% of the available space in its operations are still being phased-in. The Bank's core, tangible and risk-weighted capital ratios at December 31, 1993, on a fully phased-in basis, would be 7.8%, 7.8% and 14.8%, respectively. Accordingly, the Bank meets all of the fully phased-in capital requirements. Westcorp believes that the Bank will continue to meet all of the fully phased-in requirements when required.\nPrompt Corrective Regulatory Action\nFDICIA requires each applicable agency and the FDIC to take prompt corrective action to resolve the problems of insured depository institutions that fall below certain capital ratios. Such action must be accomplished at the least possible long-term cost to the appropriate deposit insurance fund.\nIn connection with such action, each agency must promulgate regulations defining the following five categories in which an insured depository institution will be placed, based on the adequacy of its regulatory capital level: well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. The critically undercapitalized level cannot be set lower than 2% of total assets or higher than 65% of the required minimum leverage capital level. In addition to the various capital levels, FDICIA allows an institution' s primary federal regulatory agency to treat an institution as if it were in the next lower category if that agency (1) determines (after notice and an opportunity for hearing) that the institution is in an unsafe or unsound condition or (2) deems the institution to be engaged in an unsafe or unsound practice.\nAt each successive downward level of capital, institutions are subject to more restrictions and regulators are given less flexibility in deciding how to deal with the bank or thrift. For example, undercapitalized institutions will be subject to asset growth restrictions and will be required to obtain prior approval for acquisitions, branching and engaging in new lines of business. For significantly undercapitalized institutions, the appropriate agency must require the institution to sell shares in order to raise capital, must restrict interest rates offered by the institution, and must restrict transactions with affiliates unless, in each case, the agency determines that such actions would not further the purposes of the prompt corrective action system. In addition, for critically undercapitalized institutions, the agency must require prior agency approval for any transaction outside the ordinary course of business, and the institution must be placed in receivership or conservatorship unless the appropriate agency and FDIC make certain affirmative findings regarding the viability of the institution (which findings must be reviewed every 90 days).\nFDICIA prohibits any insured institution (regardless of its capitalization category) from making capital distributions to anyone or paying management fees to any persons having control of the institution if after such transaction the institution would be undercapitalized. Any undercapitalized institution must submit an acceptable capital restoration plan to the appropriate agency within 45 days of becoming undercapitalized.\nA capital restoration plan will be acceptable only if each company having control over an undercapitalized institution guarantees that the institution will comply with the capital restoration plan until the institution has been adequately capitalized on an average during each of four consecutive calendar quarters and provides adequate assurances of performance. The aggregate liability of such guarantee is limited to the lesser of (i) an amount equal to 5% of the institution's total assets at the time the institution became undercapitalized or (ii) the amount which is necessary to bring the institution into compliance with all capital standards applicable with respect to such institution as of the time the institution fails to comply with its capital restoration plan.\nThe OTS, in conjunction with the other federal financial institution regulatory agencies, adopted regulations defining the five categories of capitalization and implementing a framework of supervisory actions, including those described above, applicable to savings institutions in each category. The regulations provide that a savings association will be deemed to be (i) \"well capitalized\" if it has a total risk-based capital ratio of 10% or greater, a Tier 1 (i.e., core) risk-based capital ratio of 6% or greater, a leverage ratio of 5% or greater and is not subject to any OTS order or directive to meet and maintain a specific capital level for any capital measure; (ii) \"adequately capitalized\" if it has a total risk-based capital ratio of 8% or greater; has a Tier 1 risk-based capital ratio of 4% or greater and has either (a) a leverage ratio of 4% or greater or (b) a leverage\nratio of 3% or greater and is rated composite 1 under the MACRO rating system in the most recent examination of the institution; (iii) \"undercapitalized\" if it has a total risk-based capital ratio that is less than 8%, has a Tier 1 risk-based capital ratio that is less than 4%, has a leverage ratio that is less than 4% or, if rated composite 1 under the MACRO rating system in the most recent examination of the institution, has a leverage ratio that is less than 3%; (iv) \"significantly undercapitalized\" if it has a total risk-based capital ratio that is less than 6%, a Tier 1 risk-based capital ratio that is less than 3% or a leverage ratio that is less than 3%; and (v) \"critically undercapitalized\" if it has a ratio of tangible equity to total assets that is equal to or less than 2%. At December 31, 1993, the Bank met the capital requirements to be considered \"well capitalized\".\nLoans to One Borrower\nUnder FIRREA, the loans-to-one borrower limitations for national banks apply to all savings associations in the same manner and to the same extent as they do to national banks. Thus, savings associations generally are not permitted to make loans to a single borrower in excess of 15% to 25% of the savings associations' unimpaired capital and unimpaired surplus (depending upon the type of loan and the collateral provided therefore), except that a savings association may make loans to one borrower in excess of such limits under one of the following circumstances: (i) for any purpose, in any amount not to exceed $500,000; (ii) to develop domestic residential housing units, in an amount not to exceed the lesser of $30.0 million or 30% of the savings association's unimpaired capital and unimpaired surplus, provided that the association receives the written approval of the OTS to do so (which approval the Bank has not sought) and certain other conditions are satisfied; or (iii) to finance the sale of real property which it owns as a result of foreclosure, providing that no new funds are advanced. In addition, further restrictions on a savings association's loans-to-one borrower authority may be imposed by the OTS if necessary to protect the safety and soundness of the savings association. At December 31, 1993, 15.0% of the Bank's unimpaired capital and unimpaired surplus for loans-to-one borrower purposes was $51.9 million. The largest amount outstanding at December 31, 1993 to one borrower (and related entities) was $17.5 million.\nEquity Risk Investment Limitations\nThe Bank generally is not authorized to make equity investments other than investments in subsidiaries. A savings association may not acquire a new subsidiary or engage in a new activity through an existing subsidiary without giving 30 days prior notice to the OTS and the FDIC, and must conduct the activities of the subsidiary in accordance with the regulations and orders of the OTS. Under certain circumstances, the OTS also may order a savings association to divest its interest in, terminate the activities of, or take other corrective measures with respect to, an existing subsidiary.\nThe Bank's aggregate investment in service corporations subsidiaries was $9.9 million as of December 31, 1993.\nQualified Thrift Lender Test\nA Qualified Thrift Lender (\"QTL\") test was enacted as a part of FIRREA, and was modified by FDICIA. An association that fails to become or remain a QTL must either (i) convert to a bank subject to the banking regulations or (ii) be subject to severe restrictions, including being forbidden to invest in or conduct any activity that is not permissible to both a savings association and a national bank, and certain other restrictions on branching, advances from its Federal Home Loan Bank, and dividends. Effective three years after an association fails to meet its QTL requirements, the association is forbidden from retaining any investment or continuing any activity not permitted for a national bank and must repay promptly all FHLB advances. In addition, companies that control savings associations that fail the QTL test must, within one year of such failure, become a bank holding company subject to the Bank Holding Company Act.\nUnder the existing QTL requirements, a savings association's \"qualified thrift investments\" must equal not less than 65% of the association's \"portfolio assets\" measured on a monthly basis, in 9 of every 12 consecutive months. Qualified thrift investments include all loans or mortgage-backed securities held by an association which are secured or relate to domestic residential or manufactured housing, as well as FHLB\nstock and certain obligations of the FDIC and related entities. Certain other investments are included as qualified thrift investments, but are limited to 20% of an association's portfolio assets, including (i) 50% of residential mortgage loans sold by an association within 90 days of their origination, (ii) investments in subsidiaries which derive at least 80% of their revenue from domestic residential or manufactured housing, (iii) subject to certain limitations, 200% of investments relating to \"starter homes\" or housing and community facilities in \"credit-needy areas\", (iv) consumer loans in the aggregate of not more than 10% of portfolio assets, and (v) FHLMC and FNMA stock. Portfolio assets are total assets less goodwill and other intangible assets, the value of the association's facilities and the association's liquid assets maintained to meet its liquidity requirements (but not over 20% of its total assets).\nAt December 31, 1993 the Bank's percentage of qualified thrift investments to portfolio assets was 87.3%. Westcorp anticipates that the Bank will continue to remain a QTL.\nDividend Regulations\nThe OTS has adopted regulations limiting the amount of capital distributions a savings association may make. The regulation divides savings associations into three tiers; those which meet all of the fully phased-in capital requirements of the OTS both before and after the proposed distribution (Tier 1 Associations), those which meet all of the current capital requirements both before and after the proposed distribution (Tier 2 Associations), and those which fail to meet one or more of the current capital requirements (Tier 3 Associations). Tier 2 Associations are further divided into two levels, based upon the association's degree of compliance with the risk-based capital standard. A Tier 1 Association may make capital distributions in an amount equal to the greater of (i) 100% of its net income for the current calendar year to the date of capital distribution, plus the amount that would reduce by one-half its \"surplus capital ratio\" (the amount by which the association's total capital-to-risk-weighted assets ratio exceeds its fully phased-in requirement of 8%) at the beginning of the current calendar year (i.e. at the end of the immediately prior calendar year), or (ii) 75% of its net income over the most recent four-quarter period preceding the quarter in which the capital distribution is to be made. A Tier 2 Association may make capital distributions of up to 75% of its net income over the past four-quarter period. A Tier 3 Association may not make any capital distribution without the prior authorization of the OTS. Although Tier 1 and Tier 2 Associations do not need to obtain prior approval to make a capital distribution which complies with the requirements of the OTS regulation, the savings association must file a notice with the OTS at least 30 days in advance of the date on which the distribution is to be made. The OTS has the authority, under the regulation, to preclude a savings association from making capital distributions, notwithstanding its qualification to do so on the above tests, if the OTS determines that the savings association is in need of more than normal supervision, or if the proposed distribution will constitute an unsafe or unsound practice given the condition of the savings association. In addition, a Tier 1 Association deemed to be in need of more than normal supervision by the OTS may be downgraded to a Tier 2 or Tier 3 Association as a result of such determination. A savings association may also apply to the OTS for approval to make a capital distribution even though it does not meet the above tests, or for an amount which exceeds the amount permitted by the express terms of the regulation.\nIn addition, another OTS regulation pertaining to holding companies requires that the OTS be given a 30 day advance notice before a savings association subsidiary pays a dividend to its holding company. The notice described above can also constitute the notice for this purpose, if so designated.\nThe Bank is a Tier 1 Association. As of the date hereof, under the limitations of the OTS capital distributions regulation, the Bank may pay dividends up to the greater of 100% of its net income since January 1, 1994 plus 50% of its surplus capital or 75% of its net income over the four-quarter period ending December 31, 1993. However, the Bank is also subject to certain limitations on the payment of dividends by the terms of the indenture for its 8.5% Debentures, which limitations are more severe than the OTS capital distribution regulations. Under the most restrictive of those limitations, the greatest capital distribution which the Bank could currently make is $14.7 million. See \"Market for Registrant's Common Equity and Related Stockholder Matters -- Dividends.\" Westcorp did not receive any dividends from the Bank during 1993. The Bank anticipates making quarterly dividend payments to Westcorp during 1994.\nCommunity Reinvestment Act\nThe CRA requires financial institutions regulated by the federal financial supervisory agencies to ascertain and help meet the credit needs of their delineated communities, including low-and moderate-income neighborhoods within those communities, consistent with safe and sound banking practices. The CRA was amended by FIRREA. The FIRREA amendments require that the federal financial supervisory agencies evaluate an institution's CRA performance based on a four tiered descriptive rating system, and that these ratings and written evaluations be made public. The four possible ratings are: (i) Outstanding record of meeting community credit needs; (ii) Satisfactory record of meeting community credit needs; (iii) Needs to improve record of meeting community credit needs; and (iv) Substantial noncompliance in meeting community credit needs.\nMany factors play a role in assessing a financial institution's CRA performance. The institution's regulator must consider its financial capacity and size, legal impediments, local economic conditions and demographics, including the competitive environment in which it operates. The evaluation does not rely on absolute standards and the institutions are not required to perform specific activities or to provide specific amounts or types of credit.\nThe Bank received a CRA audit in 1992, which was made public in 1993. The Bank's rating was \"outstanding.\" An institution in this group, the highest possible under the CRA, has an outstanding record of ascertaining and helping to meet the credit needs of its entire delineated community, including low-and moderate-income neighborhoods, in a manner consistent with its resources and capabilities.\nEach year, the Bank prepares a CRA statement for public viewing. This document contains the Bank's CRA strategic plan, CRA notice, ascertainment of community credit needs, marketing and types of credit offered and extended, community outreach activities, geographical distribution and record of opening and closing offices, practices intended to discourage discrimination, community development and a file of public comments.\nThe OTS, concurrently with the federal banking regulatory agencies, has proposed to revise the CRA regulations. The proposed procedures are designed to focus on performance rather than process, to promote consistency in assessments, to permit more effective enforcement against institutions with poor performance, and to reduce unnecessary compliance burden while stimulating improved performance. Specifically, the proposed regulations replace the current process-based assessment system with a new evaluation system that would rate institutions based on actual performance in meeting community credit needs. The new system would evaluate the degree to which an institution is providing (i) loans, (ii) branches and other services, and (iii) investments to low and moderate-income areas. The proposed regulations also emphasize the importance of an institution's CRA performance in the corporate application process, and seek to make the regulations more enforceable. The Bank does not believe that its performance, as might be measured by the regulations if they become adopted as proposed will differ materially from its performance under the existing CRA regulations.\nClassification of Assets\nThe OTS has adopted a classification system for problem assets of insured institutions. Problem assets are classified as \"special mention,\" \"substandard,\" \"doubtful\" or \"loss,\" depending on the presence of certain characteristics. An asset will be considered \"special mention\" when assets do not currently expose a savings association to a sufficient degree of risk to warrant classification but possess credit deficiencies or potential weaknesses deserving management's close attention; an asset is \"substandard\" if it is inadequately protected by the current capital and paying capacity of the obligor or by the collateral pledged, if any. \"Substandard\" assets exhibit a well-defined weakness or weaknesses, including the \"distinct possibility\" that the institution will sustain \"some loss\" if the deficiencies are not corrected or that liquidation would not be timely even if there is little likelihood of loss. Assets classified as \"doubtful\" have all of the weaknesses inherent in those classified \"substandard,\" with the added characteristic that the weaknesses make \"collection or liquidation in full,\" on the basis of currently existing facts, conditions and values, \"highly questionable and improbable.\" Assets classified as \"loss\" are those considered \"uncollectible\" and of such little value that their continuance\nas assets without the establishment of a specific loss reserve is not warranted. See \"Management's Discussion and Analysis of Financial Condition and Results of Operations -- Comparison of Results of Operations -- Provision for Loan and Real Estate Losses.\"\nInsured institutions are required to classify their own assets and to establish general valuation allowances (reserves) where appropriate. Assets classified as substandard or doubtful may be reviewed by the OTS examiner and valuation allowances may be required to be increased subject to review by the OTS Regional Director. For the portion of assets classified as loss, the OTS permits 100% of the amount classified to be charged off or the establishment of a specific valuation allowance.\nThe OTS has proposed that it revise its current asset classification scheme with regard to special mention assets. The OTS is proposing to remove the specific reference to special mention assets from its asset classification regulation, and instead issue regulatory guidance on this topic that will more closely align its treatment of special mention assets with the Interagency Policy Statement on Credit Availability issued by the four federal banking regulatory agencies and the OTS. Basically, the guidance will clarify the supervisory treatment of special mention assets and emphasize that such assets are not considered adversely classified assets. In addition, the OTS is considering removing the specific description of assets classified as \"substandard,\" \"doubtful\" and \"loss\" from the regulatory text and providing such descriptions in guidance, as is the practice of the federal banking regulatory agencies. Westcorp does not anticipate that this proposal, when finalized, will result in any increase in its classified assets. As of December 31, 1993 the Bank had established allowances for loan and real estate losses of $43.2 million.\nInsurance Operations\nThe insurance subsidiaries of the Bank are subject to regulation and supervision in the jurisdictions in which they do business. The method and extent of such regulation varies, but the insurance laws of most states establish agencies with broad regulatory and supervisory powers. These powers relate primarily to the establishment of solvency standards which must be met and maintained, the licensing of insurers and their agents, the nature and amount of investments, approval of policy forms and rates, and the form and content of required financial statements. The Bank, through its insurance subsidiaries, is also subject to various state laws and regulations covering extraordinary dividends, transactions with insurance subsidiaries and other matters. The Bank is in compliance with these state laws and regulations.\nConsumer Finance Operations\nWestcorp Financial has offices in California, Oregon, Nevada and Arizona. As such it is subject to audit and examination by the OTS, the FDIC, the California Department of Corporations, the Oregon Department of Insurance and Finance and the Arizona Corporation Commission. At December 31, 1993, and as of the date hereof, Westcorp Financial is in compliance with the licensing and operation laws and regulations applicable to each of its offices in these states. The Bank does not guarantee nor is the Bank responsible for the activities of Westcorp Financial in any of these states.\nInvestment Powers\nPursuant to FDICIA, the OTS and the other federal financial institution regulatory agencies promulgated final rules, which became effective March 19, 1993, pertaining to real estate lending standards. Those standards, entitled Interagency Guidelines for Real Estate Lending Policies, require insured institutions to adopt lending policies consistent with the guidelines, including as to loan portfolio management considerations, underwriting standards and loan administration. In particular, the regulation establishes supervisory loan-to-value (\"LTV\") limits for real property secured loans. Each insured institution is to set its own policy with respect to LTV, but those LTV limits are not to exceed the LTV limits of the guidelines, except as specifically permitted by the guidelines. Generally, the LTV limits are as follows: for raw land, 65%; for land development, 75%; for construction of 1 to 4 family residential housing, 85%, and 80% for other construction loans; and for improved property, 85%. Loans secured by owner occupied 1 to 4 family residences are not subject to a supervisory LTV limit, except that any such loan with a LTV ratio of greater than 90% at\norigination requires either private mortgage insurance or other readily marketable collateral. The Bank's LTV standards are consistent with these supervisory limitations.\nAccounting Requirements\nFIRREA requires the OTS to establish accounting standards to be applicable to all savings associations for purposes of complying with regulations, except to the extent otherwise specified in the capital standards. Such standards must incorporate generally accepted accounting principles to the same degree as is prescribed by the federal banking agencies for banks or may be more stringent than such requirements. Such standards must be fully implemented by January 1, 1994 and must be phased-in as provided in federal regulations in effect on May 1, 1989.\nEffective April 1, 1990, the OTS adopted a statement of policy which provides guidance regarding the proper classification of, and accounting for, securities held for investment, sale and trading. Securities held for investment, sale or trading may be differentiated based upon an institution's desire to earn an interest yield (held for investment), to realize a holding gain from assets held for indefinite periods of time (held for sale), or to earn a dealer's spread between the bid and asked prices (held for trading). Critical to the proper classification of an accounting for securities as investments is the intent and ability of an institution to hold the securities until maturity. A positive intent to hold to maturity, not just a current lack of intent to dispose, is necessary for securities acquired to be considered to be held for investment purposes. Securities held for investment purposes may be accounted for at amortized cost while securities held for sale are to be accounted for at lower of cost or market and securities held for trading are to be accounted for at market. The Bank believes that its investment activities have been and will continue to be conducted in accordance with the requirements of OTS policies and generally accepted accounting principles.\nThe Federal Financial Institutions Examination Council determined in August of 1993 that all federal financial institution regulatory agencies must adopt FAS 115, \"Accounting for Certain Investments in Debt and Equity Securities,\" for fiscal years commencing on or after January 1, 1994. Under FAS 115, savings associations will be required to recognize unrealized gains and losses on \"available for sale\" securities when measuring shareholders' equity. Several issues are under consideration regarding the implementation of FAS 115 by such institutions. The OTS has not yet determined whether to include this equity component in core capital or as a part of supplementary capital. Also to be resolved is how capital shortfalls produced by market movements should be managed from a regulatory standpoint. The OTS is expected to finalize these issues during 1994. While FAS 115 has not yet been adopted, had it been in effect at December 31, 1993 Westcorp would have recognized an increase in shareholders' equity of approximately $1 million. For additional information see Note U to the Consolidated Financial Statements.\nAnnual Examinations\nFDICIA significantly reduces regulatory discretion by mandating the appropriate federal financial institution regulatory agency to conduct a full scope, on-site examination of each insured depository institutions every twelve months. The Bank's last annual examination ended on December 17, 1993.\nFDIC Back-up Enforcement Authority\nThe FDIC has the statutory authority under FDICIA to direct an insured institution's principal regulator to take enforcement action, and to take that action itself if the principal regulator fails to act timely, or in an emergency situation.\nFinancial Reporting\nFDICIA requires insured institutions to submit independently audited annual reports to the FDIC and the appropriate agency. These publicly available reports must include: (i) annual financial statements prepared in accordance with generally accepted accounting principles and such other disclosure requirements as required by the FDIC or the appropriate agency and (ii) a report, signed by the chief executive officer and the chief financial officer or chief accounting officer of the institution which contains statements, attested to by\nindependent auditors, about the adequacy of internal controls and compliance with laws and regulations. Insured institutions such as the Bank are required to monitor these activities through an independent audit committee.\nFDICIA also directs the FDIC to develop with other appropriate agencies a method for insured depository institutions to provide supplemental disclosure of the estimated fair market value of assets and liabilities, to the extent feasible and practicable, in any balance sheet, financial statement, report of condition or any other report of any insured depository institution.\nStandards for Safety and Soundness\nFDICIA requires the federal banking regulatory agencies to prescribe, by regulation, standards for all insured depository institutions and depository institution holding companies relating to: (i) internal controls, information systems and audit systems; (ii) loan documentation; (iii) audit underwriting; (iv) interest rate risk exposure; (v) asset growth; and (vi) compensation fees and benefits. The compensation standards would prohibit employment contracts, compensation or benefit arrangements, stock option plans, fee arrangements or other compensatory arrangements that would provide excessive compensation, fees or benefits or could lead to material financial loss. In addition, the federal banking regulatory agencies are required to prescribe by regulation standards specifying: (i) maximum classified assets to capital ratios; (ii) minimum earnings sufficient to absorb losses without impairing capital; and (iii) to the extent feasible, a minimum ratio of market value to book value for publicly traded shares of depository institutions and depository institution holding companies.\nThe OTS, in conjunction with the federal banking regulatory agencies, has proposed safety and soundness standards to meet the FDICIA requirements. In general, the proposed standards identify emerging safety and soundness problems and ensure that such action is taken to address those concerns before they pose a risk to the deposit insurance fund. More specifically, the proposed rules establish safety and soundness standards addressing (i) Internal Controls and information systems, (ii) Internal audit system, (iii) Loan documentation, (iv) Credit underwriting, (v) Interest rate exposure, (vi) Asset growth, and (vii) Compensation, fees and benefits. In addition, the agencies have proposed standards specifying (i) Maximum ratio of classified assets to capital and (ii) Minimum earnings sufficient to absorb losses without impairing capital. The OTS determined not to propose a minimum ratio of market value to book value for publicly traded equity securities as such ratio would not be a feasible means to achieve the safety and soundness objectives of Congress in enacting the relevant provisions of FDICIA.\nGenerally, the standards proposed do not call for savings institutions to meet specific numerical goals. The proposed rules require savings institutions to take specific actions or adopt particular policies or practices designed to reduce safety and soundness concerns. However, the proposed regulations do set a maximum ratio of 1.0 for classified assets to total capital plus general valuation reserves otherwise not includable in total capital. If adopted, the Bank's ratio would have been .55% at December 31, 1993. In addition, the minimum earnings requirement proposed is such earnings over the past four quarters (whether positive or negative) which, if repeated over the next four quarters, will not result in the savings association becoming capital deficient as to any minimum capital requirement.\nIn the event the OTS determines that a savings association has failed to satisfy the safety and soundness standards pursuant to the proposed rules, the OTS may, upon requisite notice, require such association to submit a compliance plan that sets forth the steps it will take and the time frame required to correct the deficiency. If the association fails to comply with the OTS request, the OTS may then issue an order, subject to appeal by the association, requiring such association to correct a safety and soundness deficiency or to take or refrain from other actions.\nRTC Restructuring Act and RTCCA\nThe RTC's ability to serve as receiver for insolvent thrifts was extended from August 9, 1992 to September 30, 1993 by the RTC Restructuring Act. The RTCCA subsequently extended that period to a date between January 1, 1995 and July 1, 1995, as determined by the Chairman of the Thrift Depositor Protection\nOversight Board. Furthermore the RTC Restructuring Act and the RTCCA restructure the RTC and provide additional funding to carry out the purposes of the RTC.\nThe RTC Restructuring Act clarifies that certain qualifying loans made for construction of a residence consisting of one to four dwelling units and certain qualifying loans made for the purchase of multifamily rental and homeowner properties secured by a first lien on a residence consisting of more than four dwelling units are to be included in the 50.0% risk-weighted category in calculating an institution's compliance with its risk-based capital requirements. See \"Regulatory Capital Requirements.\"\nAgreement with the Office of Thrift Supervision\nOn May 14, 1992, the Bank entered into the OTS Agreement. The Bank entered into the OTS Agreement at the request of the OTS, based on the belief of the OTS that certain acts and practices of the Bank required corrective action. Pursuant to the terms of the OTS Agreement the Bank took certain corrective actions, including adding William J. Crawford and Stanley E. Foster to its Board of Directors, reorganized its management information systems department, upgraded its internal audit and control functions and implemented a restructuring of its Internal Asset Review Department. In further compliance with the OTS Agreement the Bank reduced its level of classified assets as a percentage of GAAP capital plus general valuation allowances and enhanced its compliance with the need to maintain separate corporate identities as between itself and its subsidiaries. The OTS determined during its most recent regular examination of the Bank, which concluded on December 17, 1993 that the Bank had substantially complied with the requirements of the OTS Agreement and on January 25, 1994 advised the Bank, in writing, that the OTS Agreement was terminated.\nGrowth Limitations\nOTS Regulatory Bulletin 3a-1 (\"RB 3a-1\") prohibits those savings associations subject to its provisions from increasing their total assets from one quarter to the next in excess of an amount equal to the interest credited to their deposits during the quarter without the prior written approval of the institution's Regional Director. The savings associations which are subject to RB 3a-1 are those considered by the OTS as requiring more than normal supervision. As a result of determinations made by the OTS at the Bank's examination completed February 7, 1993, the Bank became subject to RB 3a-1. As a result of determinations made by the OTS at the completion on December 17, 1993 of the Bank's latest examination, the Bank is no longer subject to RB 3a-1. The Bank's activities during 1993 were not adversely affected by its compliance with RB 3a-1.\nTAXATION\nFederal Income Tax Provisions\nWestcorp and its subsidiaries file a calendar tax year consolidated federal income tax return.\nThe Bank is a savings and loan association for federal tax purposes. Savings and loan associations satisfying certain conditions are permitted under the Code to establish reserves for bad debts and to make annual additions to these reserves which qualify as deductions from income. The Bank is permitted to compute its additions to its bad debt reserve on qualifying real property loans using one of the following two methods: (i) the percentage of taxable income method; or (ii) the experience method. Qualifying real property loans are generally loans secured by an interest in real property and nonqualifying loans are all other loans. The deduction with respect to nonqualifying loans must be computed under the experience method. The Bank intends, when permitted, to compute its annual bad debt reserve deduction for qualifying real property loans under the method which permits the Bank to obtain the maximum allowable deduction.\nUnder the experience method, a savings and loan association is permitted to deduct the greater of (i) an amount based on average yearly loan losses over the current and previous five years or (ii) an amount that would increase its reserve to an amount not in excess of the reserve balance at December 31, 1987.\nUnder the percentage of taxable income method, as revised by the Act, the Bank may generally deduct an amount equal to 8% of its taxable income, after deducting (i) shareholder distributions included under section\n593 of the Internal Revenue Code, (ii) net gains from sales of stocks or tax exempt obligations, (iii) dividends for which a dividend received deduction was allowed, reduced by 8% of the dividend received deduction, and (iv) the capital gain rate differential portion of the lessor of (a) the tax year's net long-term capital gain or (b) the tax year's net long-term capital gain from the sale of property other than stock sales or sales of tax-exempt obligations, as an addition to its bad debt reserve. This amount is then reduced by any addition to the reserve for nonqualifying loans. In addition, the bad debt deduction under the percentage of taxable income method is allowed only to the extent that it does not exceed the amount necessary to increase the accumulated reserve for qualifying real property loans to 6% of such loans at year end. Finally, the bad debt deduction under the percentage of taxable income method when added to the deduction with respect to nonqualifying loans, is limited to the larger of (i) the amount by which 12% of the total deposits and withdrawable accounts at year end exceeds the sum of surplus, undivided profits and reserves at the beginning of the year or (ii) the reserve amount computed using the experience method.\nThe allowable deduction under the percentage of taxable income method is available only if at least 60% of the total dollar amount of the Bank's assets are qualifying assets. Qualifying assets include, among other things, cash, U.S. government obligations, certificates of deposit, loans secured by an interest in residential real property and loans made for the payment of expenses of a college or university education. As of December 31, 1993, the Bank exceeds the 60.0% requirement for qualifying assets.\nThe net effect of the percentage of taxable income method deduction is that the maximum effective federal income tax rate applicable to a savings and loan association fully able to use this method will be approximately 32.2%, assuming a statutory tax rate of 35%.\nA savings association, such as the Bank, which files its federal income tax return as part of a consolidated group, is required to reduce proportionately its bad debt deduction (if computed under the percentage of taxable income method) for tax losses attributable to activities on non-savings and loan members of the group that are functionally related to the activities of the savings and loan association member of the group. The Bank does not expect this provision to have a significant impact on its otherwise allowable bad debt deduction.\nA savings and loan association which utilizes the percentage of taxable income method is subject to recapture taxes on such reserves if it makes certain distributions to stockholders. Dividends may be paid without the imposition of any tax on the Bank to the extent that the amounts paid as dividends do not exceed the Bank's current or accumulated earnings and profits as calculated for federal income tax purposes. Dividends paid in excess of current and accumulated earnings and profits, distributions in redemption of stock and other distributions with respect to stock such as distributions in partial or complete liquidation, are deemed to be made from the bad debt reserve for qualifying real property loans, to the extent that this reserve exceeds the amount that could have been accumulated under the experience method. The amount of tax that would be payable upon any distribution which is treated as having been from the bad debt reserve for qualifying real property loans is also deemed to have been paid from the reserve to the extent thereof. Management does not contemplate using the reserve in a manner that will create taxable income, but assuming a 35% tax rate, distributions to stockholders which are treated as having been made from the bad debt reserve for qualifying real property loans could result in a federal recapture tax which is approximately equal to one-half of the amount of such distributions, unless offset by net operating losses. In addition, certain large savings and loan associations (including the Bank) are required to recapture their existing bad debt reserves in the event that for any taxable year less than 60% of the association's assets are qualifying assets.\nA savings and loan association is denied any deduction for interest on debt incurred or continued to purchase or carry tax-exempt obligations acquired after August 7, 1986, although an exception is provided for \"qualified tax-exempt obligations,\" which, among other things, must not be issued by an issuer that reasonably anticipates to issue, together with subordinate entities, not more than $10 million of tax-exempt obligations other than private activity bonds during the calendar year. Both bonds qualifying under this exception and certain other bonds acquired after December 31, 1982 and before August 8, 1986, will be permanently subject to the disallowance of 20% of the deduction with respect to interest on indebtedness treated as incurred to purchase or carry tax-exempt bonds.\nMoreover, Westcorp will be subject to the alternative minimum tax if such tax is larger than the regular federal tax otherwise payable. Generally, alternative minimum taxable income is a taxpayer's regular taxable income, increased by the taxpayer's tax preference items for the year and adjusted by computing certain deductions in a special manner which negates the acceleration of such deductions under the regular federal tax. This amount is then reduced by an exemption amount and is subject to tax at a 20% rate. Alternative minimum tax items generally applicable to savings and loan associations include (i) 100% of the excess of a savings and loan association's bad debt deduction over the amount that would have been allowable under the experience method; (ii) interest on certain private activity tax-exempt bonds issued after August 7, 1986; (iii) an amount equal to 75% of the amount by which a corporation's adjusted current earnings exceed its alternative minimum taxable income (computed without regard to this adjustment or the net operating loss deduction); and (iv) a portion of accelerated depreciation on property owned by and used or leased by Westcorp and its subsidiaries. For alternative minimum tax purposes, net operating losses can offset no more than 90% of alternative minimum taxable income. In addition, for taxable years beginning after December 31, 1986 and before January 1, 1996 Westcorp will be subject to an additional environmental tax of .12% of its alternative minimum taxable income with certain adjustments and exclusions.\nAs of December 31, 1993, Westcorp had no net operating loss carry-forwards. For net operating losses incurred in taxable years beginning after 1986, there is a 3-year carryback and a 15-year carry-forward period.\nThe returns of Westcorp and its subsidiaries and affiliates were examined for the years 1982 and 1983 without material change. The returns of Westcorp for the year 1988 and 1989 are currently under examination.\nCalifornia Franchise Tax Provisions\nThe California franchise tax applicable to the Bank is a variable rate tax. This rate is computed under a formula which is higher than the rate applicable to nonfinancial corporations because it includes an amount \"in lieu\" of local personal property and business license taxes paid by nonfinancial corporations (but not generally paid by financial institutions such as the Bank). For taxable year 1993, the total tax rate was set at 11.107%. Under California regulations, bad debts may be treated by savings and loan associations in either of two ways, as debts are ascertained to be worthless in whole or in part or by deducting from income a reasonable reserve addition. The Bank utilizes the latter method, the amount being determined by multiplying loans outstanding at the close of the income year by the ratio of total bad debts sustained to the sum of loans outstanding, using annual averages computed over a three-year or six-year forward period, whichever is greater. The Bank and its subsidiaries file separate tax returns using the combined reporting method.\nThe returns of Westcorp and its subsidiaries and affiliates were examined for the years 1984 through 1987. Assessed amounts were paid by the affiliate company. The returns for the years 1988 and 1989 are currently under examination.\nFor additional information regarding the federal and state taxes payable by Westcorp, see Note Q to the Consolidated Financial Statements.\nEMPLOYEES\nAt December 31, 1993, Westcorp had 1,181 full-time and 37 part-time employees. None of these employees is represented by a collective bargaining unit or union, and Westcorp and its subsidiaries believe they have good relations with their respective personnel.\nITEM 2","section_1A":"","section_1B":"","section_2":"ITEM 2 -- PROPERTIES\nAs of December 31, 1993, the Bank owns 21 properties in California and leases an additional 44 properties, 2 of which are located in Oregon, 2 in Nevada and 1 in Arizona. WCS owns one property as well. Neither Westcorp, nor any of its other subsidiaries, has any material properties.\nThe executive offices, located at 23 Pasteur Road, Irvine, California are owned by the Bank. The remaining owned and leased properties are used as branch offices, dealer centers, mortgage banking offices, and finance company offices. As of December 31, 1993, the net book value of property and leasehold improvements was approximately $59.7 million. The following table sets forth certain information with respect to offices of Westcorp.\n- ---------------\n(1) A mortgage banking office is also located at this address.\n(2) A dealer center is also located at this address.\n(3) A Westcorp Financial Services office is also located at this address.\n(4) Branches are leased from companies controlled by a major stockholder.\n(5) A branch office is also located at this address.\n(6) Leased on month to month term.\nITEM 3","section_3":"ITEM 3 -- LEGAL PROCEEDINGS\nWestcorp is involved as a party to certain legal proceedings incidental to its business. Westcorp believes that the outcome of such proceedings will not have a material effect upon Westcorp's business or financial condition.\nITEM 4","section_4":"ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS\nNone\nPART II\nITEM 5","section_5":"ITEM 5 -- MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS\nPrice Range by Quarter\nThe common stock of Westcorp began trading in the over-the-counter market on May 5, 1986. On June 17, 1993, Westcorp commenced trading on the New York Stock Exchange (NYSE), identified by the symbol, WES. From January 25, 1988 to June 17, 1993 Westcorp was registered with the American Stock Exchange (AMEX), also identified by the symbol WES. The following table illustrates the high and low sale prices by quarter in 1993 and 1992, as reported by NYSE or AMEX, as applicable, which prices are believed to represent actual transactions:\nThere were approximately 1,000 shareholders of Westcorp common stock at December 31, 1993. The number of shareholders was determined by the number of record holders, including the number of individual participants, in security position listings.\nDividends\nWestcorp paid a $.05 per share cash dividend for each of the four quarters of 1993. Westcorp paid a $.04 per share cash dividend for the first quarter of 1992, and $.05 per share cash dividend for each of the last three quarters of 1992. On February 28, 1994, Westcorp declared a cash dividend of $.075 per share.\nWhile Westcorp is not restricted in its ability to pay dividends, the Bank is restricted by regulation and by the indenture relating to the Bank's subordinated debentures as to the amount of funds which can be transferred to Westcorp in the form of dividends. Under the most restrictive of these terms, on December 31, 1993, the maximum dividend the Bank could declare would be $14.7 million. The Bank must notify the OTS of its intent to declare cash dividends 30 days before declaration, and may not pay a dividend or make a loan to Westcorp for any purpose to the extent Westcorp engages in any activity not permitted for a bank holding company. During 1993, the Bank did not pay any dividends to Westcorp. The Bank anticipates making quarterly dividend payments to Westcorp during 1994.\nITEM 6","section_6":"ITEM 6 -- SELECTED FINANCIAL DATA\n- ---------------\n(1) Net of unearned discount, and including loans available for sale of $101,724,718 at December 31, 1993.\n(2) Net of undisbursed loan proceeds, and including loans available for sale of $199,006,560 at December 31, 1993.\n(3) Includes investments available for sale of $118,001,821 at December 31, 1993.\n(4) Includes bonds outstanding issued by finance subsidiaries of the Bank, subordinated debentures issued by the Bank which are included as part of risk-based capital and commercial paper issued by the Bank.\n- ---------------\n(1) During the third quarter of 1993, the Bank redeemed its 11% Subordinated Capital Debentures due 1999 at a loss. See Note K to the financial statements.\n(2) Gives effect to 4 1\/2 to 1 stock split effective March 14, 1986, the issuance of 5.1 million shares of new common stock in 1986, a 5% stock dividend in 1991 and the issuance of 4.3 million shares of common stock in 1993.\nITEM 7","section_7":"ITEM 7 -- MANAGEMENT'S DISCUSSION AND ANALYSES OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS\nThe following discussion and analysis should be read in conjunction with the Consolidated Financial Statements and notes thereto.\nOVERVIEW\nWestcorp originated record levels of motor vehicle loans and single family residential loans during 1993 in spite of the continued recessionary environment. Specifically, Westcorp originated consumer and real estate loans of $829 million and $913 million, respectively, during 1993. This compared to $673 million and $598 million, respectively, during 1992, an overall increase of 37% over 1992's record combined origination level of $1.3 billion. Westcorp continued its ongoing program of motor vehicle and real estate loan sales and securitizations. During 1993, Westcorp sold or securitized $778 million of consumer loans and $804 million of real estate loans compared to $450 million and $385 million, respectively, in 1992.\nWestcorp continued to focus on improving asset quality and experienced a 27% decline in nonperforming assets to $75 million at year-end 1993 compared to $102 million at the end of 1992. Westcorp's capital was also enhanced by completing an offering of 4.3 million shares of common stock and issuing $125 million of subordinated debentures through the Bank. At the end of 1993, Westcorp's equity to assets ratio stood at 9.4% compared to 6.4% at December 31, 1992 and total assets at the end of 1993 totalled $2.2 billion compared to $2.5 billion at the end of 1992. In addition, the Bank's tangible, core, and risk-based capital of 8.6%, 8.6% and 15.6%, respectively, exceeded all regulatory capital requirements. Subsequent to December 31, 1993, the OTS Agreement was also terminated as it was determined by the OTS that the Bank had complied with its terms in all material respects.\nRESULTS OF OPERATIONS\nGeneral\nWestcorp's net income was $12.9 million for the year ended December 31, 1993 compared to $2.3 million for the year ended December 31, 1992 and $21.1 million for the year ended December 31, 1991. The increase in net income for the year ended December 31, 1993 compared to 1992 was primarily attributable to lower provisions for loan and real estate losses and higher loan servicing income, offset by lower net interest income. The decrease in net income in 1992 relative to 1991 was the result of higher provisions for loan and real estate losses combined with lower net interest margins in the real estate portfolio. Provisions for loan and real estate losses were $22.6 million in 1993 compared with $34.3 million and $24.6 million in 1992 and 1991, respectively. Westcorp is continuing to provide loan loss reserves deemed necessary to absorb potential losses in the loan portfolio.\nWestcorp's loan portfolio decreased 26.0% between 1991 and 1993, from $2.1 billion at December 31, 1991 to $1.9 billion and $1.6 billion at December 31, 1992 and December 31, 1993, respectively. Offsetting this decrease, loans outstanding originated by Westcorp and sold to others with servicing retained increased 85% between 1991 and 1993, to $2.2 billion at December 31, 1993 compared to $1.4 billion and $1.2 billion at December 31, 1992 and 1991, respectively. During 1993, Westcorp generated $35.9 million in loan servicing fees compared to $22.8 million and $8.8 million in 1992 and 1991, respectively. Gains on the sale of such loans increased to $18.6 million in 1993 as compared to $11.8 million and $7.3 million in 1992 and 1991, respectively.\nNET INTEREST INCOME\nThe net interest income of Westcorp depends upon the difference between the income it receives from its interest-earnings assets and its cost of funds, which difference is, in turn affected significantly by, first, the spread between yields earned by Westcorp on its interest-earning assets and the rates of interest paid by Westcorp on its interest-bearing liabilities (referred to as interest rate spread), second, the relative amounts of Westcorp's interest-earning assets and interest-bearing liabilities and, third, a combination of the first two. When interest-earning assets approximate or exceed interest-bearing liabilities, any positive interest rate spread will generate net interest income.\nThe following table sets forth certain information regarding changes in interest income and interest expense of Westcorp for the periods indicated. For each category of interest earning assets and interest bearing liabilities, information is provided on changes attributable to (i) changes in volume (change in average portfolio volume multiplied by prior period average rate), (ii) changes in rates (change in weighted average\ninterest rate multiplied by prior period average portfolio balance), and (iii) the combined effect of changes in rates and volume (change in weighted average interest rate multiplied by change in average portfolio balance).\nNet interest income in 1993 was $56.7 million compared with $74.4 million in 1992 and $87.9 million in 1991. The decrease in net interest income resulted from a decrease in both the amount of interest earning assets and a decrease in the interest rate spread in 1993, offset by a decrease in interest bearing liabilities. The decrease in interest earning assets to $1.9 billion for 1993 compared with $2.2 billion for 1992 and $2.4 billion for 1991 is primarily attributable to ongoing consumer and real estate loan sales and increased real estate loan payoffs. The loan sales are part of Westcorp's strategy of securitizing its loans. See \"Business--Loan Sales and Securitizations.\" Increased real estate loan payoffs and mortgage-backed securities reductions during 1993 occurred as borrowers took advantage of low interest rates to refinance home mortgages. The Bank elected to not replace these loans with new portfolio loans, but to concentrate on originating loans for sale. See \"Business -- Loan Sales and Securitizations\". The decrease in interest bearing liabilities resulted primarily from a decrease in deposits due to a pricing strategy aimed at reducing the deposit base commensurate with the lower asset base.\nSince 1990, interest rates have generally declined for Westcorp's interest-earning assets. This decline correlates with overall market interest rate decline. Average yield on interest earning assets decreased to 7.82% for the year ended December 31, 1993 from 9.0%, and 10.9% for the years ended 1992 and 1991, respectively. The yield on the real estate portfolio at December 31, 1993 was 7.2% compared to 8.6% and 10.5% for the years ended December 31, 1992 and 1991, respectively. Consumer loan rates, which are less sensitive to market conditions, were 13.3% for the year ended December 31, 1993 compared to 13.2% for the years ended December 31, 1992 and 1991.\nThe decrease in interest income is primarily the result of an increase in nonaccrual and foreclosed loans and consistent decreases in the 11th District Cost of Funds Index (\"COFI\") during each month of 1993. The continuing deterioration of the California real estate market has led to higher levels of nonaccrual loans and foreclosed assets. Interest income was reduced by $1.2 million in 1993 compared to $8.1 million in 1992 and $2.9 million in 1991. The decrease in COFI was reflected in a decrease in interest earned on interest earning assets, especially for loan rates which were indexed to COFI, and adjustable rate mortgages in particular.\nThese yield declines have been offset to some degree by decreases in interest costs, particularly in the savings deposit portfolio. Westcorp's average cost of funds declined to 5.3% for the year ended December 31, 1993 from 6.1% and 7.7% in the years of 1992 and 1991, respectively. The cost of savings deposits for the year ended December 31, 1993 was 4.8% compared to 5.6% and 7.3% for the years ended December 31, 1992 and\n1991, respectively. Other short-term interest costs, such as those for commercial paper have experienced similar reductions.\nThe cost of FHLB advances during this period has not fallen as quickly because FHLB advances are fixed rate and have longer maturities. The cost of debt (including those characterized as public debt offerings) has remained high primarily due to the 11% Debentures of approximately $52.0 million which were outstanding for most of the year. The weighted average interest cost for other public offerings during 1993 was 7.5% compared to 7.9% and 8.9% for 1992 and 1991, respectively. The decreases are chiefly the result of replacing the issuance of on-balance sheet collateralized bonds with sales of consumer loans in the secondary market beginning in late 1990 as well as the issuance of 8.5% Debentures in 1993 replacing the 11% Debentures previously outstanding.\nThe interest rate spread was 2.5% during 1993 compared to 2.9% and 3.2% during 1992 and 1991, respectively. The following tables present the average interest bearing balances, interest, yield on assets, rates on liabilities and the spread between the combined average yields earned on interest earning assets and average rates paid on interest bearing liabilities for the periods indicated. Average balances are determined on a daily basis.\n- ---------------\n(1) For the purposes of these computations, nonaccruing loans are included in the average loan amounts outstanding.\nThe following table sets forth the weighted average interest rate on Westcorp's interest earning assets, the weighted average rates paid on Westcorp's interest bearing liabilities and the resultant interest rate spread as of each of the three years ended December 31, 1993, 1992, and 1991.\nWestcorp's ability to maintain a positive spread during periods of fluctuating interest rates is determined principally by the relative maturities of its interest-earning assets and interest-bearing liabilities, and the relative repricing mechanisms of its interest sensitive assets and liabilities. Synchronizing the repricing of an institution's liabilities and assets to minimize interest rate risk is commonly referred to as \"gap management.\" \"Negative gap\" occurs when an institution's liabilities reprice more rapidly than its assets and \"positive gap\" occurs when an institution's assets reprice more rapidly than its liabilities.\nAs a result of Westcorp's practice of matching its rate sensitive liabilities with rate sensitive assets, it had a \"positive gap\" of 19.4% at December 31, 1993 for assets and liabilities having an interest rate maturity of one year or less and 14.2% for assets and liabilities having an interest rate maturity of three years or less. At December 31, 1993, over 86% of Westcorp's interest earning assets had interest rate maturities of under three years.\nWestcorp's asset\/liability management strategy is to match its loan products against interest-bearing liabilities with similar repricing characteristics and durations. As part of this strategy, Westcorp has continued to originate fixed-rate consumer loans for securitization and sale in the secondary market. These securitizations allow Westcorp to match assets and liabilities and reduce interest rate risk on this portfolio. Westcorp has also continued to sell fixed-rate mortgage loans in the secondary market in response to these market changes. See \"Business -- Loan Originations, Sales and Securitizations.\" Westcorp also manages its exposure to interest rates by originating ARMs and by match funding fixed rate real estate loans with advances from the FHLB. Westcorp has also introduced loan products tied to current market interest indices such as LIBOR, Treasury and the Federal Cost of Funds Index to reduce the exposure associated with loan products tied to the COFI, which is a lagging market index.\nDuring 1993, Westcorp maintained a positive interest spread despite fluctuations in general interest rates as a result of the short interest rate maturities of its loan portfolio adjusting almost as frequently as its liabilities to changes in interest rates. Westcorp's ability to maintain a positive gap is significantly affected by changes in interest rates due, among other factors, to (i) the lagging nature of the index on which interest rate adjustments on a large percentage of Westcorp's interest earning assets are based, (ii) the fact that Westcorp's interest earning assets and interest bearing liabilities reprice at different times, (iii) the effect of interest rate caps on its assets, (iv) the fact that interest rates on such assets and liabilities may respond to different economic, market and competitive factors, (v) the fact that sustained high levels of interest rates may adversely affect real estate loans, motor vehicle loans and lending markets in general, and (vi) the fact that\nsustained low levels of interest rates may increase the difficulty of originating ARMs as well as increase loan prepayments, which prepayments may be reinvested at lower interest rates.\nThe following table illustrates the projected interest rate maturities, based upon certain assumptions regarding the major asset and liability categories of Westcorp at December 31, 1993. Prepayment and decay assumptions for mortgage loans and savings accounts are developed using both industry averages as provided by the OTS and Westcorp's own prepayment experience. For Westcorp's mortgage loans, the prepayment assumptions range from 7% to 29% of loans prepaying per year depending upon the interest rate, type of loan and contractual repricing terms. For passbook and money market deposit accounts Westcorp uses a rate of 14% to 79% decay per year depending upon the characteristics of each type of account. The interest rate sensitivity of Westcorp's assets and liabilities illustrated in the following table could vary substantially if different assumptions were used or actual experience differs from the assumptions set forth. Although Westcorp's investment securities and mortgage-backed securities are classified as available for sale, they are presented in the repricing categories relative to their respective stated maturities adjusted for any appropriate prepayment assumptions. Loans available for sale are presented as repricing within three months based on management's intent relative to these assets.\n- ---------------\n(1) Based on contractual maturities adjusted by Westcorp's historical prepayment rate.\n(2) Based on interest rate repricing adjusted for projected prepayments.\n(3) Based on assumptions established by the OTS.\n(4) Based on contractual maturity.\n(5) The motor vehicle loan collateralized bonds are amortized based on the scheduled payments of the collateral.\nPROVISIONS FOR LOAN AND REAL ESTATE LOSSES\nValuation allowances for estimated losses on loans and real estate are determined by taking into consideration several factors, including, but not limited to, general economic conditions in the markets Westcorp serves, historical losses, delinquency, individual loan reviews and levels of nonperforming loans and assets relative to reserve levels.\nThe allowance for loan losses (\"ALL\") decreased from $40.7 million at December 31, 1992 to $39.7 million at December 31, 1993. The provision for loan losses totaled $22.6 million during 1993 offset by net charge-offs totaling $23.6 million. This was a decrease in provisions of $11.7 million and $2.0 million compared to 1992 and 1991 respectively. This balance reflects Westcorp's reduction in nonperforming loans during 1993. Westcorp believes that the ALL, which is 124.2% of nonperforming loans, 166.1% of loans past due 60 days or more and 2.55% of total loans, is currently adequate to absorb potential losses in the portfolio.\nThe allowance for real estate losses totaled $3.5 million at December 31, 1993 compared to $20.2 million at December 31, 1992. The allowance for real estate losses decreased $16.7 million during 1993 due primarily to the charge-offs taken in the first quarter of 1993 related to certain properties for which specific reserves were provided in the fourth quarter of 1992. In addition, Westcorp's inventory of real estate (including REO acquired through foreclosure, insubstance foreclosures, and real estate held for investment or development) declined 50.0% to $47.5 compared to $94.9 at December 31, 1992. Furthermore, in addition to general loss reserves, individual properties are written down to estimated current fair value at time of foreclosure. Any additional deterioration in fair value is recorded in a specific reserve on each individual property. Westcorp did not have an allowance or provision related to REO prior to 1992.\nThe table below provides comparative data relative to the allowance for loan and real estate losses for the periods indicated.\n- ---------------\n(1) Nonperforming loans, insubstance foreclosures (including real estate investments classified as insubstance foreclosures) and real estate owned.\n(2) Loans, net of unearned discounts and undisbursed loan proceeds.\nIn the past several years, the national economy has been adversely affected by negative or low rates of economic growth and high unemployment. The effects of the economic downturn have been acute in California, where essentially all of Westcorp's real estate loan portfolio is located. Nonetheless, Westcorp experienced a decrease in delinquencies and nonperforming assets during 1993. Real estate loans past due 60 days or more at December 31, 1993 decreased to $23.0 million or 1.7% of total real estate loans from $49.4 million or 3.1% at year-end 1992. In the same time frame, nonperforming assets decreased 26.8% to $75.0 million from $102.5 million. The decrease has, in part, been the result of loans migrating from\ndelinquent loans to nonperforming loans and, in turn, to ISF or REO. These properties, in turn, have been disposed of by Westcorp's Special Asset Department. The types and migration of nonperforming assets are shown in the tables that follow.\nThrough its Internal Asset Review department, Westcorp has identified and regularly reviews its problem credits as well as potential problem credits. To the extent that the California economy continues to suffer through a severe and protracted downturn, additional loans may begin to experience credit problems. However, the possibility and extent of such an occurrence is impossible to predict at this time.\nOTHER INCOME\nOther income consists of income derived from loan servicing fees, loan related fee income such as late charges and extension fees, gains on sales of loans, mortgage-backed securities and investments, insurance agency activity as well as reinsurance of credit life and credit disability, and real estate operations. Other income totaled $73.8 million for the year ended December 31, 1993, compared to $32.9 million and $37.6 million for the years ended December 31, 1992 and 1991, respectively.\nLoan servicing fees increased to $35.9 million in 1993 from $22.8 million and $8.8 million in 1992 and 1991, respectively. Loans serviced for others, all of which were originated by Westcorp, totaled $2.2 billion at December 31, 1993 compared to $1.4 billion at December 31, 1992 and $1.2 billion at December 31, 1991. Servicing income has continued to increase because of the increased servicing portfolio and larger servicing fee spreads on more recent consumer loan transactions. The following tables indicate the motor vehicle and real estate loan originations and securitizations for each of the years ended December 31, 1993, 1992 and 1991 and the weighted average yield on assets securitized and weighted average off-balance sheet financing costs for motor vehicle securitizations during such periods:\n- ---------------\n(1) Includes loans purchased.\n(2) Represents the weighted average interest rate on securitized transactions.\nThe combined portfolio of loans owned and loans serviced for others generates income from late charges, extension fees, documentation fees, reconveyance fees, and so forth. The increased portfolio, as well as heightened origination activity combined to generate $46.5 million in income during 1993 compared to $32.5 million and $18.2 million in 1992 and 1991, respectively.\nGains on the sale of loans, mortgage-backed securities and investment securities increased to $21.1 million in 1993 from $13.3 million and $8.0 million in 1992 and 1991 respectively. In 1993, Westcorp sold $1.6 billion of loans compared to $834.8 million and $851.3 million for the years ended December 31, 1992 and 1991, respectively. Gains increased during the year ended December 31, 1993 over the years ended December 31, 1992 and 1991 due to higher loan sales volumes and more favorable pricing in the secondary market due to the decline in interest rates.\nInsurance related income for 1993 totalled $7.1 million compared to $5.3 and $5.2 for 1992 and 1991, respectively. This income is generated through various insurance products including credit life and disability policies and annuity sales.\nReal estate operations reflected a net expense for the year ended December 31, 1993 of $5.9 million compared to net expense of $19.3 million in 1992 and net income of $2.8 million in 1991. The net expense in 1993 and 1992 was primarily attributable to the real estate loss provisions previously discussed as well as the expenses of holding and disposing of REO. Real estate operations includes the management and disposition of real estate acquired through foreclosure and real estate joint ventures constructed for development and sale and real estate joint ventures held as operating units. Interests held by Westcorp in these joint venture projects range from 51% to 100%. Westcorp's investment in real estate joint venture projects declined to $9.2 million at\nDecember 31, 1993 compared to $50.3 million at December 31, 1992 and $59.2 million at December 31, 1991. See \"Business -- Subsidiaries -- Western Consumer Services, Inc.\"\nLosses (before elimination of intercompany expenses) from joint venture operations were $2.0 million in 1993 compared to losses of $1.5 million in 1992 and $1.3 million in 1991. Westcorp intends to continue to reduce its involvement in this type of activity.\nOTHER EXPENSE\nOther expenses, which consist of salaries and employee benefits, occupancy, insurance and other miscellaneous expenses increased to $83.6 million in 1993 from $69.4 million in 1992 and $65.3 million in 1991. Other miscellaneous expenses include marketing, telephone, supplies and legal and professional fees. The increases in expenses is related to increased loan servicing portfolios, expansion into other states, higher levels of nonperforming assets and the OTS Agreement reflected in both an increase in personnel and higher personnel costs. In addition, the premium paid to the Savings Association Insurance Fund increased as a result of an increase in premium rates. The ratio of other expenses to average serviced assets was 2.08% in 1993 compared to 1.85% in 1992, and 1.79% in 1991.\nINCOME TAXES\nWestcorp's effective tax rate was 43% for the year ended December 31, 1993 compared to 38% for the year ended December 31, 1992 and 41% for the year ended December 31, 1991.\nOn August 10, 1993, the Omnibus Budget Reconciliation act of 1993 was signed into law. Among other things, it provided for a higher federal tax rate of 35% to be paid by Westcorp (previously the tax rate was 34%). This new tax rate was effective beginning January 1, 1993. Approximately $0.3 million has been included in Westcorp's deferred tax asset as a result of this law change.\nCAPITAL RESOURCES AND LIQUIDITY\nWestcorp's funds are generated primarily through the operations of the Bank and its subsidiaries. In addition, Westcorp completed a public offering of 4.3 million shares of common stock during 1993. The Bank also completed a $125 million offering of subordinated debentures. The proceeds of these offerings were used to pay off higher cost subordinated debentures, to provide the Bank additional capital under regulatory guidelines, and to generate the capital resources to expand.\nWestcorp and its subsidiaries have diversified sources of funds generated through its operations. Primary sources of funds include deposits, loan principal and interest payments received, sales of real estate loans and motor vehicle loans, sales of and payments on mortgage-backed securities, and the maturity or sale of investment securities. Prepayments on loans and mortgage-backed securities and deposit inflows and outflows are affected significantly by interest rates, real estate sales activity and general economic conditions. The recent decline in interest rates resulted in substantially higher levels of loan prepayments during 1993 and 1992. It is difficult to predict whether this trend will continue. The decrease in deposits resulted from a pricing strategy designed to reduce the deposit base commensurate with the lower asset base.\nOther sources of funds include a commercial paper facility totalling $200 million, reverse repurchase agreements and FHLB advances. At December 31, 1993, Westcorp had $125 million of commercial paper outstanding with approximately $75 million still available from this source. FHLB advances outstanding at December 31, 1993 totalled $126 million with approximately $203 million still available under such line. At December 31, 1993, Westcorp had no reverse repurchase agreements.\nWhen conditions are favorable, structured finance capital markets are accessed regularly with respect to Westcorp's motor vehicle loans. In 1993, $777.5 million was raised by Westcorp through motor vehicle loan sale transactions using an off-balance sheet grantor trust structure. An additional $200 million were sold on March 11, 1994. In 1992 and 1991, $450 and $725 million, respectively, were raised in similar loan sale transactions. All of those transactions received the highest rating given by Moody's Investors Service, Inc. (\"Moody's\") and Standard & Poor's Corporation (\"S&P\") at the time of sale based on the structure of the\ntransaction and credit enhancement provided by Financial Security Assurance Inc. (\"FSA\"). In each transaction, FSA issued a financial guaranty insurance policy pursuant to which the payment of interest and principal was guaranteed to the holders of the beneficial interests in the related grantor trust. In addition, during 1993, Westcorp sold $804 million of real estate loans as part of its mortgage banking activity. Westcorp will engage in motor vehicle and real estate loan sales when market conditions are appropriate. If Westcorp does not sell such loans it will hold them in its portfolio, relying on its other sources of funds to meet its liquidity needs.\nWestcorp uses its funds to meet its business needs, which include funding maturing certificates of deposit and savings withdrawals, repaying of borrowings, funding loan and investment commitments and real estate operations, meeting operating expenses, and maintaining minimum regulatory liquidity and capital levels. OTS regulations require the Bank, as a savings association, to maintain a specified level of liquid assets such as cash, and short term U.S. government and other qualifying securities. Such liquid assets must not be less than 5.0% of the Bank's average daily balance of net withdrawable deposit accounts and borrowings payable in one year or less, with short term liquid assets (which generally have a term of less than one year) consisting of not less than 1.0% of that average daily balance amount. For the twelve month periods ended December 31, 1993, 1992 and 1991, such ratios were 10.3%, 5.7% and 6.0%, respectively.\nEFFECT OF INFLATION AND CHANGING PRICES\nUnlike many industrial companies, substantially all of the assets and virtually all of the liabilities of Westcorp are monetary in nature. As a result, interest rates have a more significant effect on Westcorp's performance than the general level of inflation.\nITEM 8","section_7A":"","section_8":"ITEM 8 -- FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA\nWestcorp's consolidated financial statements begin on page of this report.\nITEM 9","section_9":"ITEM 9 -- CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE\nNone\nPART III\nCertain information required by Part III is omitted from this report, in that Westcorp will file a definitive proxy statement (the \"Proxy Statement\") within 120 days after the end of its fiscal year pursuant to Regulation 14A of the Securities Exchange Act of 1934 for its Annual Meeting of Stockholders to be held May 26, 1994 and the information included therein is incorporated herein by reference.\nITEM 10","section_9A":"","section_9B":"","section_10":"ITEM 10 -- DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT\nInformation regarding directors appears under the caption \"Election of Directors\" in the Proxy Statement and is incorporated herein by reference. Information regarding executive officers appears under the caption \"Executive Officers Who Are Not Directors\" in the Proxy Statement and is incorporated herein by reference.\nITEM 11","section_11":"ITEM 11 -- EXECUTIVE COMPENSATION\nInformation regarding executive compensation appears under the caption \"Executive Compensation Summary\" in the Proxy Statement and is incorporated herein by reference.\nITEM 12","section_12":"ITEM 12 -- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT\nInformation regarding security ownership of certain beneficial owners and management appears under the caption \"Security Ownership of Management and Certain Stockholders\" in the Proxy Statement and is incorporated herein by reference.\nITEM 13","section_13":"ITEM 13 -- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS\nInformation regarding certain relationships and related transactions appears under the caption \"Certain Transactions Between Management and Westcorp or its Subsidiaries\" in the Proxy Statement and is incorporated herein by reference.\nPART IV\nITEM 14","section_14":"ITEM 14 -- EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K\n(a) List of documents filed as part of this report:\n(1) FINANCIAL STATEMENTS\nThe following consolidated financial statements and report of independent auditors of Westcorp and subsidiaries are included in this Report commencing on page.\nReport of Independent Auditors\nConsolidated statements of financial condition -- December 31, 1993 and 1992.\nConsolidated statements of income -- Years ended December 31, 1993, 1992, and 1991.\nConsolidated statements of shareholders' equity -- Years ended December 31, 1993, 1992, and 1991.\nConsolidated statements of cash flows -- Years ended December 31, 1993, 1992, and 1991.\nNotes to consolidated financial statements -- December 31, 1993.\n(2) FINANCIAL STATEMENT SCHEDULES\nSchedules to the consolidated financial statements are omitted because the required information is inapplicable or the information is presented in Westcorp's consolidated financial statements or related notes.\n(3) Exhibits\n- ---------------\n* Exhibits previously filed with Westcorp Registration Statement on Form S-4 (File No. 33-34286), filed April 11, 1990 incorporated herein by reference under Exhibit Number indicated.\n** Exhibit previously filed with Westcorp Registration Statement on Form S-1 (File No. 33-4295), filed May 2, 1986 incorporated herein by reference under Exhibit Number indicated.\n*** Exhibit previously filed with Westcorp Registration Statement on Form S-8 (File No. 33-43898), filed December 11, 1991 incorporated herein by reference under the Exhibit Number indicated.\n**** Exhibit previously filed with Westcorp 10-Q filed May 15, 1992 incorporated herein by reference under exhibit number indicated.\n(b) Report on Form 8-K\nA report on Form 8-K was filed November 24, 1993 announcing Westcorp's quarterly dividend and a Board resolution authorizing its Executive Committee to repurchase up to 1,000,000 shares of its common stock.\nA report on Form 8-K was filed February 1, 1994 announcing that on January 25, 1994, the Bank was informed by the OTS that the OTS agreement will be lifted.\nSIGNATURES\nPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.\nWESTCORP\nBy STEPHEN W. PROUGH Stephen W. Prough President and Dated: March 15, 1994 Chief Operating Officer\nPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following on behalf of the registrant in the capacities and on the dates indicated.\nINDEX TO CONSOLIDATED FINANCIAL STATEMENTS\nWESTCORP\nCONSOLIDATED FINANCIAL STATEMENTS AND REPORT OF INDEPENDENT AUDITORS\nREPORT OF INDEPENDENT AUDITORS\nBoard of Directors Westcorp\nWe have audited the consolidated statements of financial condition of Westcorp and Subsidiaries listed in the accompanying Index to Financial Statements (Item 14(a)). These financial statements are the responsibility of Westcorp's management. Our responsibility is to express an opinion on these financial statements based on our audits.\nWe conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.\nIn our opinion, the financial statements listed in the accompanying Index to Financial Statements (Item 14(a)) present fairly, in all material respects, the consolidated financial position of Westcorp and Subsidiaries at December 31, 1993 and 1992, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1993 in conformity with generally accepted accounting principles.\nERNST & YOUNG\nLos Angeles, California January 19, 1994\nWESTCORP AND SUBSIDIARIES\nCONSOLIDATED STATEMENTS OF FINANCIAL CONDITION\nASSETS\nSee notes to consolidated financial statements.\nWESTCORP AND SUBSIDIARIES\nCONSOLIDATED STATEMENTS OF INCOME\nSee notes to consolidated financial statements.\nWESTCORP AND SUBSIDIARIES\nCONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY\nSee notes to consolidated financial statements.\nWESTCORP AND SUBSIDIARIES\nCONSOLIDATED STATEMENTS OF CASH FLOWS\nWESTCORP AND SUBSIDIARIES\nCONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)\nSee notes to consolidated financial statements.\nWESTCORP AND SUBSIDIARIES\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS\nDECEMBER 31, 1993\nNOTE A -- A SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES\nPrinciples of Consolidation: The accompanying consolidated financial statements include the accounts of Westcorp, its wholly-owned subsidiary, Western Financial Savings Bank (the \"Bank\") and its subsidiaries (\"Westcorp\"). All significant intercompany accounts and transactions have been eliminated upon consolidation. Westcorp is a majority owned subsidiary of American Assets, Inc.\nInvestment Securities and Mortgage-Backed Securities Available for Sale: Securities to be held for indefinite periods of time and not necessarily intended to be held to maturity or on a long-term basis are classified as available for sale and carried at the lower of amortized cost or market value. Securities held for indefinite periods of time include securities that management intends to use as part of its asset\/liability management strategy and that may be sold in response to changes in interest rates and resultant prepayment risk, or other factors. Effective December 31, 1992, management classified the entire investment securities and mortgage-backed securities portfolios as available for sale and have recorded these portfolios at the lower of amortized cost or market value. Management may, in the future, originate or purchase investment securities or mortgage-backed securities for investment purposes. Gains and losses on sales of securities are determined by the difference between sales proceeds and the carrying value of the specific securities being sold.\nInterest on Fee Income: Interest income on discounted retail installment sales contracts is being determined on a monthly basis using the sum-of-the-months digits method which approximates the interest method. These contracts are charged off in the normal course of business after 120 days past due, including any interest accrued thereon, unless Westcorp can clearly demonstrate that repayment would occur regardless of delinquency status, i.e., the loan is well secured by collateral and is in the process of collection. Interest income on real estate loans is accrued daily based upon the principal amount outstanding. The accrual of interest is discontinued when, in management's judgement, the interest will not be collectible in the normal course of business or when the loan is 90 days or more past due or full collection of principal is suspect. When a loan is placed on nonaccrual status, interest accrued to date is reversed against interest income.\nWestcorp amortizes loan origination and commitment fees and certain deferred loan origination costs. The net amount is amortized as an adjustment to the related loan's yield. Westcorp is amortizing these amounts over the contractual life of the related loans. Commitment fees based on a percentage of a customer's unused line of credit and fees related to standby letters of credit are recognized over the commitment period. Fees for other services are recorded as income when earned. Unearned fees on loans sold or paid in full are recognized as income.\nAllowance for Loan Losses: The allowance for loan losses is maintained at a level believed adequate by management to absorb potential losses in the loan portfolio. Management's determination of the adequacy of the allowance is based on an evaluation of the portfolio, past loan loss experience, current economic conditions, volume, growth and composition of the loan portfolio, and other relevant factors. The allowance is increased by provisions for loan losses charged against income.\nLoans Available for Sale: Loans available for sale are stated at the lower of aggregate amortized cost or market. The carrying amount of specific loan pools sold is used to compute gain or loss. Market value is based on prevailing market quotes. Westcorp converts loans to mortgage-backed securities (\"MBS\") guaranteed by agencies of the federal government, either holding such securities for its own portfolio or selling such securities to investors and servicing underlying mortgage loans. Upon securitization, Westcorp reviews its financial position and liquidity needs in determining the classification of the MBS. Westcorp has also sold mortgage loans to third parties including FNMA and FHLMC without prior securitization.\nWESTCORP AND SUBSIDIARIES\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)\nDECEMBER 31, 1993\nWestcorp also securitizes and sells retail installment sales contracts while retaining servicing rights. As servicer, Westcorp holds and remits funds collected from the borrowers on behalf of the trustee. These amounts are reported as amounts held on behalf of trustee.\nGains and losses on sales of loans and contracts are determined by the difference between sales proceeds and the cost of the loans or contracts adjusted for the present value of the difference, if any, between the estimated future servicing revenues and normal servicing revenues for those loan sales where servicing is retained by Westcorp. Premiums resulting from the present value of such excess revenues are capitalized and amortized over the estimated lives of the loans or contracts.\nWestcorp regularly evaluates the reasonableness of the assumptions used in the present value gain calculation to reflect actual experience and changes in economic conditions and adjusts the carrying value.\nPremises and Equipment: Premises and equipment are stated at cost, less accumulated depreciation and amortization computed principally on the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized over the lives of the respective leases or the service lives of the improvements, whichever is shorter.\nReal Estate Owned: Real estate acquired through foreclosure is recorded at the lower of the unpaid principal balance on the loan at the foreclosure date or fair value less selling costs. Subsequent valuation adjustments are made if the fair value of the property falls below the carrying amount.\nReal Estate Owned also includes properties classified as insubstance foreclosed loans. Loans are classified as insubstance foreclosed when, in management's judgement, the risks and rewards of ownership have been shifted from the borrower to Westcorp as defined by generally accepted accounting principles. These properties are transferred to real estate owned at the lower of the unpaid balance on the loan or fair value. Subsequent valuation adjustments are made if the fair value of the property falls below the carrying amount.\nThe accompanying consolidated financial statements also include the accounts of certain real estate joint venture partnerships. Westcorp has an ownership interest of greater than 50% in all of its real estate partnership transactions. All significant intercompany transactions have been eliminated in consolidation.\nReal estate acquired for development and sale is carried at the lower of cost or net realizable value. Improvements and holding costs, including interest, are capitalized during construction. The recognition of gains from the sale of real estate is dependent on a number of factors relating to the nature of the property sold, the terms of the sale and the future involvement of Westcorp in the property sold.\nReal estate owned is carried net of an allowance for potential losses and is maintained at a level believed adequate by management to absorb potential losses in the portfolio. Management's determination of the adequacy of the allowance is based on an evaluation of the portfolio, past loss experience, current economic conditions, selling costs and other relevant factors.\nIncome Taxes: Westcorp files consolidated federal and state tax returns with all its subsidiaries except for Westhrift, which files a separate tax return. In February 1992, the Financial Accounting Standards Board issued Statement No. 109, \"Accounting for Income Taxes.\" On January 1, 1992, Westcorp adopted the provisions of the new standard in its financial statements for the year ended December 31, 1992. 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 differences between financial reporting and tax bases 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 tax expense was determined using the liability method prescribed by Statement 96, which is superseded by Statement 109. Among other changes, Statement 109 changes the recognition and measurement criteria for deferred tax assets included in\nWESTCORP AND SUBSIDIARIES\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)\nDECEMBER 31, 1993\nStatement 96. The adoption of Statement 109 had no effect on the net income of Westcorp and prior years' financial statements have not been restated.\nExcess of Purchase Cost over Net Assets Acquired: The excess of amounts paid over the fair value of assets acquired of a business purchased in 1982 is being amortized over twenty-five years, using the straight-line method.\nInsurance Commissions: Commissions on insurance policies sold are recognized as income over the life of the policies.\nInsurance Premiums: Premiums for life and accident\/health insurance policies are recognized as income over the term of the insurance contract.\nNet Income Per Common Share: Net income per common share is based on average shares outstanding during each year plus the net effect of dilutive stock options.\nFair Values of Financial Instruments: In December 1991, the Financial Accounting Standards Board issued Statement No. 107, \"Disclosures about Fair Value of Financial Instruments\". It requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are 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 flows. 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 instrument. Statement 107 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of Westcorp.\nCash and Cash Equivalents: Cash and cash equivalents include cash, interest-bearing deposits with other financial institutions and other short-term investments and have no material restrictions as to withdrawal or usage.\nReclassifications: Certain amounts for 1992 and 1991 have been reclassified to conform with the 1993 presentation.\nNOTE B -- INVESTMENT SECURITIES AVAILABLE FOR SALE\nThe aggregate carrying amounts and approximate market values of investment securities available for sale at December 31 were:\nWESTCORP AND SUBSIDIARIES\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)\nDECEMBER 31, 1993\nGross unrealized and realized gains and losses for 1993 were as follows:\nGross unrealized and realized gains and losses for 1992 were as follows:\nWestcorp has no realized losses during 1992.\nAt December 31, 1993, the stated maturities of Westcorp's investment securities available for sale were as follows:\nWESTCORP AND SUBSIDIARIES\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)\nDECEMBER 31, 1993\nNOTE C -- MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE\nMortgage-backed securities (\"MBS\") available for sale consisted of the following at December 31:\nUnrealized gains and losses for 1993 and 1992 were as follows:\nRealized gains and losses for 1993 and 1992 were as follows:\nThe stated maturities of Westcorp's mortgage-backed securities available for sale at December 31, 1993 were as follows:\nWestcorp has issued certain mortgage-backed securities that include recourse provisions. Subject to certain limitations, Westcorp is required for the life of the loans to repurchase the buyer's interest in individual loans on which foreclosure proceedings have been completed. Securities with recourse sold by Westcorp had a total outstanding balance of $36.6 million and $37.7 million at December 31, 1993 and 1992, respectively.\nWESTCORP AND SUBSIDIARIES\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)\nDECEMBER 31, 1993\nWestcorp has provided for possible losses that may occur as a result of its recourse obligations through the allowance for loan losses. The maximum remaining exposure under these recourse provisions at December 31, 1993 and 1992 was $32.5 and $33.1 million, respectively. Westcorp has pledged $30.3 million of securities as collateral under these recourse provisions.\nNOTE D -- NET LOANS RECEIVABLE\nNet loans receivable consisted of the following at December 31:\nThe allowance for loan loss by loan category was as follows at December 31:\nLoans serviced by Westcorp for the benefit of others totaled approximately $2,170,426,000, $1,410,699,000 and $1,172,994,000 at December 31, 1993, 1992, and 1991, respectively. These amounts are not reflected in the accompanying consolidated financial statements.\nWESTCORP AND SUBSIDIARIES\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)\nDECEMBER 31, 1993\nChanges in the allowance for loan losses were as follows:\nAt the end of the year, interest on nonaccrual loans excluded from interest income was $1.2 million in 1993 and $8.1 million in 1992.\nNOTE E -- PREMISES AND EQUIPMENT\nPremises and equipment consisted of the following at December 31:\nInterest cost capitalized for the year ended December 31, 1993 was $4,902.\nNOTE F -- REAL ESTATE OWNED\nReal estate owned consisted of the following at December 31:\nChanges in the allowance for real estate losses were as follows:\nWestcorp has entered into various partnership agreements to acquire and develop real property. Westcorp's interest in each project is greater than 50% and, in some cases, includes a participating share of the profits realized upon sale.\nWESTCORP AND SUBSIDIARIES\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)\nDECEMBER 31, 1993\nCondensed financial information for these partnerships follows:\n- ---------------\n(1) These amounts are eliminated or reclassified upon consolidation.\nNOTE G -- ACCRUED INTEREST RECEIVABLE\nAccrued interest receivable consisted of the following at December 31:\nNOTE H -- SAVINGS DEPOSITS\nSavings deposits consisted of the following:\nWESTCORP AND SUBSIDIARIES\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)\nDECEMBER 31, 1993\nThe aggregate amount of savings deposits in denominations greater than or equal to $100,000 at December 31, 1993 was $355,901,000.\nScheduled maturities of certificate accounts as of December 31, 1993 are as follows:\nInterest expense on savings deposits consisted of the following at December 31:\nThe following table summarizes certificate accounts by interest rate within maturity categories at December 31, 1993 and 1992:\nWESTCORP AND SUBSIDIARIES\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)\nDECEMBER 31, 1993\nNOTE I -- SHORT-TERM BORROWINGS\nShort-term borrowings consisted of the following at December 31:\nThe maximum amount of commercial paper outstanding at any month-end during 1993 and 1992 was $199,606,000 and $199,041,000, respectively. The average amount of commercial paper outstanding during 1993 and 1992 was $53,079,000 and $58,377,000, respectively, with a weighted average interest rate of 3.30% and 4.06%, respectively.\nNOTE J -- FEDERAL HOME LOAN BANK ADVANCES\nAdvances from the Federal Home Loan Bank (FHLB) are collateralized by the pledge of certain real estate loans with an uncollected principal balance of approximately $603,527,000 and $778,744,000 at December 31, 1993 and 1992, respectively.\nInformation as to interest rates and maturities on the advances from the FHLB as of December 31, 1993 and 1992 follows:\nThe Bank had an unused line of credit with the FHLB at December 31, 1993 of approximately $203,255,000.\nWESTCORP AND SUBSIDIARIES\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)\nDECEMBER 31, 1993\nNOTE K -- OTHER BORROWINGS AND SUBORDINATED DEBT\nOther borrowings consisted of the following at December 31:\nOn June 17, 1993, the Bank issued $125,000,000 of 8.5% Subordinated Capital Debentures. Underwriting discounts and expenses totaling $4,851,797 associated with the issuance were capitalized and are being amortized over seven years. The debentures are redeemable, in whole or in part, at the option of the Bank, on or after July 1, 2000 at 100% of the principal amount being redeemed plus accrued interest to the date of redemption. For regulatory purposes, the subordinated debentures, subject to certain limitations, are included as part of the supplementary capital.\nOn April 29, 1987, the Bank issued $75,000,000 of 11% subordinated debentures, due May 1, 1999. Underwriting discounts and expenses totaling $2,024,000 associated with the issuance were capitalized and amortized over five years. The debentures were redeemed, in whole at the option of the Bank, using the proceeds from the new subordinated debenture offering, on September 10, 1993 at 104.4% of the principal amount then outstanding. This early redemption created an extraordinary loss of $1,113,486 net of respective tax benefit of $811,295.\nThe Bank notified holders of the Bonds of its intent to redeem on April 1, 1994, the bonds due in 1995 as allowed within the Bond indenture.\nThe aggregate amount of maturities for each of the next five years, adjusted for the planned bond redemption, are as follows:\nWESTCORP AND SUBSIDIARIES\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)\nDECEMBER 31, 1993\nNOTE L -- COMMITMENTS AND CONTINGENCIES\nFuture minimum payments under noncancelable operating leases on premises and equipment with terms of one year or more as of December 31, 1993, are as follows:\nRental expense for premises and equipment amounted to $1,958,996, $1,653,886, and $1,816,043 in 1993, 1992, and 1991, respectively.\nWestcorp's outstanding loan commitments were as follows at December 31:\nAt December 31, 1993 Westcorp had a letter of credit outstanding for $1,016,000, which expires September 23, 1994.\nWestcorp has pledged certain assets relative to amounts held on behalf of trustees at December 31, 1993 as follows:\nNOTE M -- STOCK OPTIONS\nIn 1986, Westcorp reserved 945,000 shares of common stock for future issuance to certain employees under an incentive stock option plan. Reserved, unoptioned shares totaled 352,433 and 349,388 shares at December 31, 1993 and 1992, respectively. The options may be exercised at $7.62 per share at any time, in whole or in part, within five years after the date of grant.\nIn 1991, Westcorp reserved an additional 3,150,000 shares of common stock for future issuance to certain employees under a stock option plan. Reserved, unoptioned shares totaled 2,538,316 and 2,746,916 shares at December 31, 1993 and 1992, respectively. The options may be exercised at prices ranging from $7.62 to $11.90 per share at any time, in whole or in part, within five years after the date of grant.\nWESTCORP AND SUBSIDIARIES\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)\nDECEMBER 31, 1993\nStock option activity, adjusted for the 1991 stock dividend, is summarized as follows:\nAt December 31, 1993, there were 89,964 and 206,774 exercisable stock options under the 1986 and 1991 plans, respectively.\nNOTE N -- REGULATORY CAPITAL\nOne of the most significant changes made by FIRREA was that new capital requirements be adopted for savings institutions similar to those of national banks. The new capital standards include three minimum requirements: (1) a leverage (core) ratio; (2) a tangible capital requirement; and (3) a risk-based capital requirement.\nWESTCORP AND SUBSIDIARIES\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)\nDECEMBER 31, 1993\nThe Bank currently exceeds all current capital standards. A reconciliation of the Bank's capital under generally accepted accounting principles (GAAP) as included in its consolidated balance sheet and regulatory capital at December 31, 1993 is as follows:\n- ---------------\n(1) As a percentage of total adjusted assets.\n(2) As a percentage of risk-weighted assets.\n(3) Subsequent to December 31, 1993 this requirement was reduced to 3%.\nNOTE O -- DIVIDENDS AND OTHER RESTRICTIONS\nWestcorp paid cash dividends of $.20, $.19, and $.13 per share for the years ended December 31, 1993, 1992, and 1991, respectively.\nThe Bank is restricted by regulation and by the indenture for its 8.50% Subordinated Capital Debentures (see Note K) as to the amount of funds which can be transferred to Westcorp in the form of dividends. Under the most restrictive of these terms, on December 31, 1993, restricted shareholder's equity of the Bank totaled $179.3 million. The Bank must notify the OTS of its intent to declare cash dividends 30 days before declaration, and may not make a loan to Westcorp to the extent Westcorp engages in any activity not permitted for a bank holding company. During 1993, the Bank paid no dividends to Westcorp.\nNOTE P -- PENSION PLAN\nWestcorp has an Employee Stock Ownership and Salary Savings Plan, which covers essentially all full-time employees who have completed one year of service. Contributions to the plan are discretionary and determined by the Board of Directors within limits set forth by Treasury regulations. Contributions to the plan are fully expensed in the year to which the contribution applies.\nWestcorp's contribution to the plan amounted to $1,000,000 in 1993. Westcorp did not contribute to the plan in 1992. Contributions to the plan amounted to $1,256,826 in 1991.\nWESTCORP AND SUBSIDIARIES\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)\nDECEMBER 31, 1993\nNOTE Q -- INCOME TAXES\nFederal and state franchise taxes (receivable) payable at December 31, were as follows:\nOther assets include federal and state tax receivables of $4,732,058 at both December 31, 1993 and 1992.\nIncome tax expense (benefit) consisted of the following:\nThe difference between total tax provisions and the amounts computed by applying the statutory federal income tax rate of 35% to income before taxes are due to:\nOn August 10, 1993, the Omnibus Budget Reconciliation Act of 1993 was signed into law. Among other things, it provided for a higher tax rate of 35% (previously the tax rate was 34%). This new tax rate was effective beginning January 1, 1993. Approximately $0.3 million has been included in Westcorp's deferred tax asset as a result of this change in the law.\nWESTCORP AND SUBSIDIARIES\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)\nDECEMBER 31, 1993\nDeferred taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of Westcorp's deferred tax liabilities and assets as of December 31, 1993 and 1992 are as follows:\nDEFERRED TAX POSITION\nASSETS\/(LIABILITIES) (IN THOUSANDS)\nNOTE R -- FAIR VALUES OF FINANCIAL INSTRUMENTS\nThe following methods and assumptions were used by Westcorp in estimating its fair value disclosures for financial instruments:\nCash and cash equivalents: The carrying amounts reported in the balance sheet for cash and short-term instruments approximate those assets' fair values.\nInvestment securities (including mortgage-backed securities): Fair values for investment securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments.\nLoans Receivable: For variable-rate loans that reprice frequently, fair values are based on carrying values. The fair values for certain mortgage loans (e.g., one-to-four family residential), and other consumer loans (including automobile loans) are based on quoted market prices of similar loans sold in conjunction with securitization transactions, adjusted for differences in loan characteristics. The fair values for other loans (e.g., rental property mortgage loans) are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality.\nSavings Deposits: The fair values disclosed for passbook accounts, and certain types of money market accounts are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for fixed-rate certificates of deposit are estimated using a discounted\nWESTCORP AND SUBSIDIARIES\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)\nDECEMBER 31, 1993\ncash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.\nShort-term borrowings: The carrying amounts of a commercial paper line with the FHLB and a bank line of credit approximate their fair values.\nLong-term borrowings: The fair values of Westcorp's long-term borrowings (other than deposits) are estimated using discounted cash flow analyses, based on Westcorp's current incremental borrowing rates for similar types of borrowing arrangements.\nThe estimated fair values of Westcorp's financial instruments are as follows:\nNOTE S -- WESTCORP (PARENT COMPANY ONLY) FINANCIAL INFORMATION\nSTATEMENTS OF FINANCIAL CONDITION\nWESTCORP AND SUBSIDIARIES\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)\nDECEMBER 31, 1993\nSTATEMENTS OF INCOME\nWESTCORP AND SUBSIDIARIES\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)\nDECEMBER 31, 1993\nSTATEMENTS OF CASH FLOWS\nWESTCORP AND SUBSIDIARIES\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)\nDECEMBER 31, 1993\nNOTE T -- QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)\nThe following is a summary of unaudited quarterly results of operations for the years ended December 31, 1993 and 1992. Certain quarterly amounts have been adjusted to conform with the year-end presentation.\nWESTCORP AND SUBSIDIARIES\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)\nDECEMBER 31, 1993\nNOTE U -- CURRENT ACCOUNTING PRONOUNCEMENTS\nIn May 1993, the Financial Accounting Standards Board (\"FASB\") issued Standards No. 114, \"Accounting by Creditors for Impairment of a Loan\" (\"SFAS 114\") which is effective for fiscal years beginning after December 15, 1994. SFAS 114 is not expected to have a material impact on Westcorp's financial statements.\nIn May 1993, the Financial Accounting Standards Board (\"FASB\") issued standards No. 115, \"Accounting for Certain Investments in Debt and Equity Securities\" (\"SFAS 115\") which is effective for fiscal years beginning after December 15, 1993. Under SFAS 115, Westcorp would be required to recognize unrealized gains and losses on \"available for sale\" securities as a component of shareholders' equity.\nWhile SFAS 115 has not been adopted by Westcorp, had it been in effect at December 31, 1993 Westcorp would have recognized an increase of approximately $1.0 million (net of tax) in shareholders' equity.\nEXHIBIT INDEX\n- ---------------\n* Exhibits previously filed with Westcorp Registration Statement on Form S-4 (File No. 33-34286), filed April 11, 1990 incorporated herein by reference under Exhibit Number indicated.\n** Exhibit previously filed with Westcorp Registration Statement in Form S-1 (File No. 33-4295), filed May 2, 1986 incorporated by reference under Exhibit Number indicated.\n*** Exhibit previously filed with Westcorp Registration Statement on Form S-8 (No. 33-43898), filed December 11, 1991 incorporated by reference under the Exhibit Number indicated.","section_15":""}
{"filename":"29332_1993.txt","cik":"29332","year":"1993","section_1":"ITEM 1. BUSINESS\nGENERAL\nAn integral part of the Company's strategy during the past two years has been to restructure its operations and expand into floorcovering. Today, the Company operates in two business segments - Textile products and Floorcovering - with approximately half of its sales in each segment. Prior to the acquisitions of Carriage and Masland in 1993, the Company's single line of business, textile products, included the Company's Candlewick carpet yarn operations. With the expansion into the floorcovering business, the Company's carpet yarn operations are now included in the floorcovering segment. Financial information relating to the Company's business segments have been restated for all periods presented and are set forth in Note (O) to the Company's consolidated financial statements.\nTEXTILES\nTEXTILE INDUSTRY - The domestic textile industry manufactures products for a variety of end uses, including home furnishings (domestics, drapery and upholstery), industrial products, transportation applications and apparel. The industry, which encompasses yarn preparation, fabric formation and product distribution, is structured with various degrees of vertical integration, depending upon the particular products involved. The textile industry is made up of a great number of companies, none of which are believed to have sales that comprise as much as 10% of the total market.\nThe domestic apparel market, which includes a substantial portion of the customers for the Company's products, is continually faced with competition from imports; however, management believes that implementation of the North American Free Trade Agreement may increase demand for domestic textile products by continuing to encourage utilization of such products by non-domestic cut and sew operations. Additionally, management believes consumer buying patterns continue to be influenced by mass merchandisers and retailers emphasizing price competition for value-added products. The domestic textile industry also services the home furnishing and other industries in a number of applications which are impacted by housing sales as well as by domestic automotive production levels.\nTHE COMPANY'S TEXTILE PRODUCTS - The Company manufactures and markets yarns, threads and knit fabrics from a variety of natural and man-made fibers. Textile products are primarily sold to manufacturers of apparel, domestics, drapery and upholstery, hosiery, industrial fabrics, transportation and other industries.\nThe Company produces a wide variety of products, with a significant focus on high-end value added products. Although the textile products business is organized into three business groups, substantial sales and customer overlap exists among the groups. Textile products are focused on narrow groups of products, related by manufacturing processes, performance qualities and end uses. No group of such products individually accounts for as much as 10% of Dixie's consolidated revenues for 1993, 1992 or 1991 and no customer's volume exceeded 10 percent of the Company's total sales for 1993.\nThe Company's Yarn Group (\"Yarn Group\") is comprised of the Natural and Dyed Yarn Group and the Synthetics Yarn Group. Products produced and marketed through these groups include ring spun, open end and air jet single and plied yarns which are sold to manufacturers of premium-price apparel, high-end home furnishings, and industrial products. A portion of the yarn produced by the yarn spinning facilities is further processed by the Company's mercerizing and package dyeing facilities. Cotton is the primary fiber for both natural, and mercerized and package dyed markets served. Other markets served include products manufactured from man-made (synthetics) fibers, many of which are high technology fibers that impart strength, heat resistance, stretch and\/or characteristics relating to comfort and insulation properties. Natural, dyed and synthetic yarns are marketed through a combination of salaried sales force and, to a lesser extent, commissioned sales agents.\nThe Company's Industrial Sewing Thread Group (\"Threads USA\") is one of three major domestic manufacturers and marketers of industrial sewing thread, with a full line of products that includes cotton, spun polyester, corespun and filament threads. Thread products are sold directly by the Company's sales personnel through an extensive regional warehouse network as well as to independent wholesale jobbers.\nThe Company's Knit Fabric Group (\"Caro Knit\") knits, dyes and finishes 100 percent cotton circular knit fabrics for apparel and industrial markets. A majority of the yarn used for the production of the knit fabric is supplied by the Company's yarn facilities. Knit products are sold primarily by its own salaried sales force.\nThe Company's sales order backlog position in its textile products business was approximately $79,000,000 on December 25, 1993 compared to approximately $102,000,000 on December 26, 1992. All of these orders can reasonably be expected to be filled within the 1994 fiscal year.\nAlthough the competition faced by the Company's textile business varies depending on the markets involved, a substantial portion of the Company's products in the Company's domestic textile products business is faced with competition from imports.\nThe Company owns a number of patents used in its textile business, and patent protection is sought as a matter of course when machinery or process improvements are made that are considered patentable. However, in the opinion of the Company, its textile operations are not materially dependent upon patents and patent applications.\nFLOORCOVERING\nTHE CARPET INDUSTRY - The carpet industry is composed of approximately 100 manufacturers of which the top 5 account for over 50% of total sales in the industry. The industry has two primary markets, residential and commercial, with the residential market making up the largest portion of industry's sales. A substantial portion of industry shipments is made in response to replacement demand. The residential market consists of broadloom carpets, rugs and bathmats in a broad range of styles, colors, textures and yarns. The carpet industry also manufactures carpet for the automotive, recreational vehicle and recreational boat industries.\nThe carpet industry is highly competitive with competition principally from 100 domestic manufacturers of carpets and rugs. Carpet manufacturers also face competition from the hard surface floorcovering industry. The principal methods of competition within the carpet industry are quality, style, price and service.\nTHE COMPANY'S FLOORCOVERING BUSINESS - The Company's floorcovering business manufactures and markets carpet yarns and floorcovering products for specialty markets through Candlewick Yarns (\"Candlewick\"), Carriage Industries, Inc. (\"Carriage\") and Masland Carpet, Inc. (\"Masland\").\nCandlewick is one of the world's largest independent carpet yarn manufacturers. Its customers include end-use product manufacturers in the bath rug, automotive and broadloom carpet markets. Candlewick is a producer of premier yarns for floorcovering applications. It competes through product quality and innovation. Its product development center and relationships with fiber suppliers have been developed to provide customers a means to evaluate yarn and fiber variations. Candlewick has a significant share of the bath rug yarn market due to the breadth of its product line, service capabilities, quality and history of innovation. Products of Candlewick are marketed through its own salaried sales force.\nCarriage is a vertically integrated carpet manufacturer serving specialized markets. Its highly diversified markets include: original equipment manufacturers of manufactured housing, recreational vehicles, and small boats; the exposition\/trade show market; contract\/residential market; and the home center\/needlebond market. Carriage's manufacturing operations include yarn extrusion, yarn processing,tufting, needlebonding, dyeing, finishing and finished product transportation through its own trucking fleet. Its product line is marketed by a staff of salaried sales personnel and to a lesser extent commission sales representatives.\nCarriage competes only in selected portions of the floorcovering market. Competition is based not only on price, but also on quality of goods, customer service and reputation for reliability. The Company has developed a broad array of specialized products of varying styles, widths, colors and backing. Rapid, just-in-time delivery of customer orders is an important part of the Company's customer service program. The Company controls delivery of its products through its trucking fleet of 68 tractor-trailers and utilization of regional distribution centers for finished goods.\nMasland markets broadloom products for specification by the architectural and design communities and residential carpet and designer rugs to a select group in interior design showrooms and high-end specialty retailers. Each of the markets served require quality, service, innovation in styling and product design. Competition within its business is based primarily on quality, service and styling, with price becoming an increasingly important factor, particularly in the Company's contract business.\nThe Company's sales order backlog position in its floorcovering business was approximately $37,000,000 on December 25, 1993 compared to approximately $24,000,000 on December 26, 1992. All of these orders can reasonably be expected to be filled within the 1994 fiscal year.\nThe Company's floorcovering business owns a variety of trademarks under which its products, particularly those sold by Masland, are marketed. While such trademarks are important to Masland's business, there is no one trademark, other than the name Masland itself, which is of material importance to the segment. There was no single class of products exceeding 10 percent of the Company's sales volume for 1993, 1992 or 1991 and no customer's volume exceeded 10 percent of the Company's total sales for 1993.\nSEASONALITY\nWithin the varied markets serviced by the Company, there are a number of seasonal production cycles, but the Company's business as a whole is not considered to be significantly affected by seasonal factors. Correspondingly, there appear to be no material impacts on working capital relating to seasonality or other business dynamics.\nENVIRONMENTAL\nWhile compliance with current federal, state and local provisions regulating the discharge of material into the environment may require additional expenditures by the Company, these expenditures are not expected to have a material effect on capital expenditures, earnings or the competitive position of the Company.\nRAW MATERIALS\nThe Company obtains natural and synthetic raw materials from a number of domestic suppliers. Cotton fiber is purchased at market rates from numerous cotton merchants and directly from cotton growing cooperatives under short-term supply contracts at costs which are significant factors in the Company's pricing of its products. Man-made fibers are purchased from major chemical suppliers. Although the Company's procurement of raw materials is subject to variations in price and availability due to agricultural and other market conditions and in the price of petroleum used to produce man-made fibers, the Company believes that its sources of raw materials are adequate and that it is not materially dependent on any single supplier.\nUTILITIES\nThe Company uses electricity as its principal energy source, with oil or natural gas used in some facilities for finishing operations as well as heating. During the past five years the Company has not experienced any material problems in obtaining electricity, natural gas or oil at anticipated prices. Nevertheless, energy shortages of extended duration could have an adverse effect on the Company's operations.\nThe Company had approximately 7,300 associates as of the end of fiscal 1993.\nITEM 2.","section_1A":"","section_1B":"","section_2":"ITEM 2. PROPERTIES\nThe following table lists the Company's facilities according to location, type of operation and approximate total floor space as of March 11, 1994.\nApproximate Location Type of Operation Square Feet CORPORATE Administrative: Chattanooga, TN Administrative 41,000\nTEXTILE PRODUCTS Administrative: Gastonia, NC Administrative 61,000\nWarehousing: Gastonia, NC (2 locations) Warehousing 88,000 Sales Branch Warehouses (4 locations) Warehousing 54,000 Total Warehousing 142,000 Manufacturing: Chattanooga, TN Yarn Spinning 440,000 Mebane, NC Yarn Spinning 99,000 Ranlo, NC Yarn Spinning 482,000 Saxapahaw, NC Yarn Spinning 264,000 Tarboro, NC Yarn Spinning 340,000 Chattanooga, TN Package Yarn Dyeing, Bleaching and Mercerizing 276,000 Tryon, NC Bleaching and Mercerizing 63,000 Gastonia, NC Thread Yarn Dyeing and Finishing 530,000 Arroyo, Puerto Rico Thread Yarn Dyeing and Finishing 22,000 Gastonia, NC Thread Yarn Spinning 445,000 Jefferson, SC Knitting, and Fabric Dyeing and Finishing 274,000 Newton, NC Yarn Spinning and Knitting 252,000 Total Manufacturing 3,487,000\nFLOORCOVERING Administrative: Dalton, GA Administrative 13,000 Calhoun, GA Administrative 60,000 Mobile, AL(2) Administrative 20,000 Total Administrative 93,000 Warehousing: Ringgold, GA Warehousing 119,000\nManufacturing: Lemoore, CA Tufted Yarn Spinning 322,000 Ringgold, GA Tufted Yarn Spinning 290,000 Roanoke, AL (1) Tufted Yarn Spinning 190,000 Calhoun, GA Carpet Manufacturing 1,016,000 Chatsworth, GA Carpet Manufacturing 24,000 Atmore, AL Carpet Manufacturing 262,000 Mobile, AL(2) Rug Manufacturing, Distribution 400,000 Total Manufacturing 2,504,000\nTotal 6,447,000\nITEM 2. PROPERTIES - CONTINUED\n(1) This property is currently leased. Under the provisions of the Roanoke, AL lease, the Company is acquiring title to the property over the term of the lease, which is expected to terminate in 2004.\n(2) This property is currently leased. Under the provision of the Mobile, AL lease, the Company will acquire the property at the end of the lease.\nIn addition to the facilities listed above, the Company owns or leases various administrative, storage, warehouse and office spaces.\nIn the opinion of the Company, its manufacturing facilities are well maintained and the machinery is efficient and competitive. Operations at each plant generally vary between 120 hours and 168 hours per week. There are no material encumbrances on any of the Company's operations.\nITEM 3.","section_3":"ITEM 3. LEGAL PROCEEDINGS\nThere are no material pending legal proceedings to which the Company or its subsidiaries are a party or of which any of its property is the subject.\nITEM 4.","section_4":"ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS\nThere were no matters submitted during the fourth quarter of 1993 to a vote of the shareholders.\nPursuant to instruction G of Form 10-K the following is included as an unnumbered item to Part I.\nEXECUTIVE OFFICERS OF THE REGISTRANT\nThe names, ages, positions and offices held by the executive officers of the registrant as of March 11, 1994, are listed below along with their business experience during the past five years.\nName, Age Business Experience During and Position Past Five Years\nDaniel K. Frierson, 52 Director since 1973, Chairman of Chairman of the Board, President the Board since 1987 and Chief and Chief Executive Officer, Executive Officer since 1980. Director, Member of Executive Director of the American National Committee Bank & Trust Co.. Brother of Paul K. Frierson\nPhil Barlow, 45 Corporate Vice President and Corporate Vice President and President of Carriage Industries, President, Carriage Industries, Inc. Inc. since 1993. Vice President of Sales and Marketing, Carriage, 1988- 1993. Director of Sales and Marketing, Carriage, 1986 - 1988.\nDavid C. Clarke, 36 Corporate Vice President and Corporate Vice President and President, Threads USA since President, Threads USA February, 1994. Executive Vice President of Sales, Threads USA, from September, 1992 to February, 1994. Vice President of Direct Sales, Threads USA, from November, 1991 to September, 1992. Director of Direct Sales, Threads USA, from February, 1991 to November, 1991. Director of Sales, American Thread Company, from 1989 - 1991.\nC. Pat Driver, 53 Corporate Vice President and Corporate Vice President and President, Synthetic Yarn Group President, Synthetic Yarns since June, 1992. Corporate Vice President and President, Dixie Yarns Group, from 1989 to June, 1992. President, Carpet Yarns, Group (Candlewick), 1983 - 1989.\nEXECUTIVE OFFICERS OF THE REGISTRANT -- CONT.\nName, Age Business Experience During and Position Past Five Years\nPaul K. Frierson, 56 Director since 1988. Corporate Corporate Vice President and Vice President and President, President, Candlewick Yarns, Carpet Yarns Group (Candlewick) Director since 1989. Executive Vice President of Candlewick from 1984 - 1989. Director of Nationsbank\/Chattanooga. Brother of Daniel K. Frierson.\nCharles P. McCamy, 40 Corporate Vice President and Corporate Vice President and President, Caro Knit Group President, Caro Knit since December, 1992. Vice President of Manufacturing, Caro Knit Group, from January, 1991 to December, 1992. Vice President of Manufacturing, Great American Knitting Mills, 1989 - 1990.\nGeorge B. Smith, 53 Corporate Vice President and Corporate Vice President President, Natural and Dyed Yarn and President, Natural and Dyed Yarns Group since August, 1993. President Natural Yarn Group from October, 1992 to August, 1993. Self-employed (Consulting and Commission Sales) June, 1990 to November, 1992. Corporate Vice President, Avondale Mills, Inc., 1986 - 1990. President, Avondale Yarn Division, 1989 - 1990. President, Avondale Fabric Division, 1986-1989.\nJohn Sturdy, 64 Corporate Vice President and Corporate Vice President President, Masland Carpets, Inc., and President, Masland Carpets, Inc. 1993. President & Chief Executive Officer, Masland Carpets, Inc., 1991 - 1993. President & Chief Operating Officer, The Harbinger Company, Inc., subsidiary of Horizon Industries, Inc. 1984 - 1991.\nW. Derek Davis, 43 Corporate Vice President of Human Corporate Vice President - Resources since January, 1991. Human Resources Corporate Employee Relations Director, 1990 - 1991. Employee Relations Director, Dixie Yarns Group and Carpet Yarns Group (Candlewick), 1988 - 1990.\nEXECUTIVE OFFICERS OF THE REGISTRANT -- CONT.\nName, Age Business Experience During and Position Past Five Years\nJon Faulkner, 34 Corporate Vice President of Corporate Vice President - Administration since 1993. Director Administration of Management Information Systems, 1990 - 1993. Manager of Warehouses and Distribution, Threads USA, 1989 - 1990.\nGary Harmon, 48 Treasurer since 1993. Treasurer Director of Tax and Financial Planning, 1985 - 1993.\nD. Eugene Lasater, 43 Controller since 1988 Controller\nStarr T. Klein, 51 Secretary since November, 1992. Secretary Assistant Secretary, 1987 - 1992.\nThe executive officers of the registrant are elected annually by the Board of Directors at its first meeting held after each annual meeting of the Company's shareholders.\nPART II\nITEM 5.","section_5":"ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS\nThe Company's Common Stock trades on the over-the-counter National Market System with the NASDAQ symbol DXYN. No market exists for the Company's Class B Common Stock.\nAs of March 11, 1994, the total number of record holders of the Company's Common Stock was approximately 6,200 and the total number of holders of the Company's Class B Common Stock was 19. Management of the Company estimates that there are approximately 4,700 shareholders who hold the Company's Common Stock in nominee names. Dividends and Price Range of Common Stock for the four quarterly periods in the years ended December 25, 1993 and December 26, 1992 are as follows:\nITEM 6.","section_6":"ITEM 6. SELECTED FINANCIAL DATA\nThe following selected financial data should be read in conjunction with the related consolidated financial statements and notes thereto included under Items 8, 14(a) (1) and (2) and 14 (d) of the report on Form 10-K.\nITEM 7.","section_7":"ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION\nGENERAL\nAn integral part of the Company's strategy has been to restructure its textile operations and expand into floorcovering. Today, the Company operates in two business segments - Textile products and Floorcovering - with approximately half of its sales in each segment.\nRestructuring - During the latter part of 1991, the Company accrued the estimated cost to restructure its operations of approximately $28.3 million ($18.3 million after-tax) and began implementation of a plan to reduce costs in its operations by consolidating manufacturing facilities and expanding to seven- day scheduled operations. Cost of the restructuring incurred through 1993, consisted of approximately $13.5 million to write-down certain assets to estimated fair market value, approximately $3.2 million for severance payments and approximately $11.1 million for other direct costs of the restructuring. Five smaller manufacturing facilities were closed and one was sold. Production and equipment from the discontinued facilities were consolidated into larger, more efficient units and virtually every textile and carpet yarn facility was impacted by the restructuring. Disruptions associated with product and machinery changes had a negative impact on operating profits, particularly in 1993. Substantially all of the planned changes have been completed; however, additional costs are anticipated in 1994 until operations reach planned efficiency levels.\nExpansion into floorcovering - The carpet industry has been consolidating for a number of years and the Company intends to participate in the industry's consolidation by acquiring carpet companies that serve specialty markets. The acquisition of Carriage Industries, Inc. was completed on March 12, 1993 and Masland Carpets, Inc. was acquired on July 9, 1993. Both Carriage and Masland produce floorcovering products for specialty markets. Carriage is a vertically integrated manufacturer of specialized floorcovering for the manufactured housing, recreational vehicle and small boat industries, the exposition\/trade show market, the contract\/residential market, and the home center\/needlebond market. Masland manufactures high-end residential and contract commercial carpet and designer rugs for interior designers, architects and specialty retailers.\nRESULTS OF OPERATIONS\n1993 Compared with 1992 - Sales for the year ended December 25, 1993 increased approximately 27%. The increase in 1993 sales is attributable to the Company's floorcovering business, which now includes the Company's carpet yarn manufacturing operations and subsequent to their 1993 acquisitions, the operations of Carriage Industries, Inc. and Masland Carpets, Inc.. The dollar volume of sales of the Company's textile products declined 4.5% in 1993, although unit volume increased. The decline in sales of textile products is attributable to weak retail apparel markets and the sale of a dyed yarn facility in the first quarter of 1993.\nNet income was $4.5 million, or $.41 per share, in 1993 compared with $5.5 million, or $.62 per share, in 1992. Operating income for 1993 was 9.2% of sales in the Company's floorcovering business and .5% of sales for textile products, compared with 6.4% and 4.4%, respectively, in 1992. In addition to the 1993 acquisitions, floorcovering enjoyed strong growth and favorable conditions in the markets it serves throughout 1993. The decrease in operating profits for textile products in 1993 is principally due to weak demand for apparel products and raw material price increases that could not be passed along to customers resulting in price and margin erosion, particularly in the third and fourth quarters of 1993. Disruptions associated with production and operating consolidations have had a negative impact on profits of the Company's textile business.\nThe increase in gross profits and selling, general and administrative expenses as a percent of sales in 1993 reflects the traditional higher margins and higher selling and product distribution costs associated with the specialized floorcovering markets serviced by Carriage and Masland.\nThe increase in other income in 1993 is principally the result of approximately $1.8 million of storm insurance proceeds and gains from assets disposals. Interest expense increased in 1993 due to the higher levels of debt. The Company's effective income tax rate differs from the statutory income tax rates due primarily to nondeductible amortization of intangible assets. Also in 1993, a non-cash income tax charge of approximately $.5 million, or $.04 per share, resulted from the effect of the increase in the statutory federal income tax rate on deferred income taxes established in prior years.\nDuring the first quarter of 1993, the Company adopted Statement of Financial Accounting Standards No. 109, \"Accounting for Income Taxes\" and changed its method of accounting for income taxes to the liability method. In connection with the change in method of accounting, financial statements for periods subsequent to 1986 were restated as if the new method had been in effect during those periods. The effect of the change was to decrease 1992 net income by approximately $.2 million, or $.03 per share, and increase the 1991 net loss by approximately $.2 million, or $.02 per share.\nThe Financial Accounting Standards Board has issued Statement of Financial Accounting Standards No. 112, \"Employers' Accounting for Postemployment Benefits,\" which requires, under certain conditions, the adoption of accrual accounting for postemployment benefits no later than 1994. The Company sponsors no such plans and the new standard is not expected to affect the Company's financial statements.\n1992 Compared with 1991 - Dollar sales decreased in 1992 although unit volume increased. The decrease in dollar volume of sales was attributable to the Company's textile products business, which declined in 1992 due to the effect of adverse economic conditions in high-end markets and a greater portion of unit sales consisting of lower priced products. Operating profits, excluding the effect of the restructuring charge in 1991, increased in both the Company's floorcovering and textile products segments increased as a result of reductions in raw materials costs, manufacturing costs, and selling, general and administrative expenses.\nInterest expense decreased in 1992 due to lower interest rates. The Company's effective income tax rate differs from the statutory income tax rate due primarily to nondeductible amortization of intangible assets.\nNet income for 1991 was negatively impacted by an $18.3 million after-tax charge to record the estimated cost of product and facility consolidations associated with the planned restructuring of operations and a $1.5 million after-tax charge for the cumulative effect of the change in method of accounting for postretirement benefits other than pensions when Statement of Financial Accounting Standards No. 106 was adopted.\nLIQUIDITY AND CAPITAL RESOURCES\nDuring the three year period ended December 25, 1993, funds generated from operating activities totaled $117.2 million and funds raised through additional long-term debt amounted to $56.4 million. These cash flows funded the Company's operations, capital expenditures, and cash used in business acquisitions.\nFunds generated from operating activities (including $45 million from the sale of accounts receivables) were $60.2 million in 1993 and were supplemented by $16.5 million of additional senior indebtedness and $9.2 million (exclusive of insurance proceeds) from the disposal of assets. These funds financed, among other things, $38.8 million of capital expenditures (exclusive of storm and fire related expenditures), the retirement of $36.3 million of debt and expenses related to acquisitions, and dividend payments.\nOn March 13, 1993 a severe winter storm damaged a substantial portion of Carriage's manufacturing facilities, and in August 1993, a fire destroyed Bretlin's Chatsworth, Georgia needlebond facility. Carriage and Bretlin have substantially completed the rebuilding of their damaged facilities. Expenditures to replace or repair damaged facilities, costs, and certain losses associated with the storm and fire were approximately $33.5 million in 1993. Both losses were covered by insurance. Through the end of 1993, insurance reimbursements of approximately $28.1 million had been received. Although the insurance recovery for the storm and fire damage has not been concluded, coverage continues to appear adequate.\nCapital expenditures were approximately 128% of depreciation and amortization expenses during the three year period ended December 25, 1993 and were directed toward upgrading equipment, improving quality, and providing for greater production efficiency and flexibility.\nCapital expenditures for 1994 are expected to be below the level of depreciation and amortization expenses and will be concentrated in the Company's floorcovering business.\nThe Company acquired approximately 46% of the outstanding common stock of Carriage Industries, Inc. in 1992 for $27.4 million cash and acquired Carriage's remaining, publicly-held shares on March 12, 1993 in exchange for approximately 2.5 million shares of the Company Common Stock, options to purchase approximately .1 million shares of the Company's Common Stock, and approximately $.7 million cash. On July 9, 1993, the assets of Masland Carpets, Inc. were acquired in exchange for approximately 1.0 million shares of the Company's Common Stock, $1.1 million cash, and the assumption of approximately $.8 million of debt. The holders of the shares issued in the Masland acquisition have the right, after two years, to put the shares to the Company at a price of approximately $18 per share.\nIn October 1993, the Company entered into a seven-year agreement to sell an undivided interest in a revolving pool of its trade accounts receivable. At December 25, 1993, a $45,000,000 interest had been sold under this agreement, and the sale is reflected as a reduction of accounts receivable. The cost of this program are based upon rating agencies' assessment of the quality of the receivables pool and the purchasers' level of investment and are fixed at 6.08% per annum plus administrative fees typical in such transactions. In addition, the Company is generally responsible for credit losses associated with sold receivables.\nAt December 25, 1993, the Company's debt structure consisted of $44.8 million of convertible subordinated debentures, $ 50.0 million of subordinated notes, and $86.5 million of senior indebtedness, principally under a revolving credit and term loan agreement. The convertible subordinated debentures require mandatory sinking fund payments beginning in 1998. Payments are not required under the Company's subordinated notes until 2000. The revolving credit and term loan agreement provides revolving credit up to $125.0 million until September 30, 1995, at which time the outstanding balance, at the Company's election, may be converted into a term loan payable in semi-annual installments over five years. At year-end, the available unused borrowing capacity under the agreement was approximately $38.5 million.\nThe Company's future liquidity requirements are expected to consist primarily of capital expenditures, seasonal working capital requirements, and funds necessary to finance the Company's expansion in the floorcovering business. These liquidity requirements are expected to be financed from operating cash flows, existing credit arrangements, issuance of capital stock, and public or private debt.\nITEM 8.","section_7A":"","section_8":"ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA\nThe supplementary financial information as required by Item 302 of Regulation S-K is included in PART II, ITEM 5 of this report and the remaining response is included in a separate section of this report.\nITEM 9.","section_9":"ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE\nNot applicable\nPART III\nITEM 10.","section_9A":"","section_9B":"","section_10":"ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT\nThe section entitled \"Information about Nominees for Directors\" in the Proxy Statement of the registrant for the annual meeting of shareholders to be held May 5, 1994 is incorporated herein by reference. Information regarding the executive officers of the registrant is presented in Part I of this report.\nITEM 11.","section_11":"ITEM 11. EXECUTIVE COMPENSATION\nThe section entitled \"Executive Compensation Information\" in the Proxy Statement of the registrant for the annual meeting of shareholders to be held May 5, 1994 is incorporated herein by reference.\nITEM 12.","section_12":"ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT\nThe section entitled \"Principal Shareholders\", as well as the beneficial ownership table (and accompanying notes) from the section entitled \"Information About Nominees for Directors\" in the Proxy Statement of the registrant for the annual meeting of shareholders to be held May 5, 1994 is incorporated herein by reference.\nITEM 13.","section_13":"ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS\nThe section entitled \"Certain Transactions Between the Company and Directors and Officers\" in the Proxy Statement of the registrant for the annual meeting of shareholders to be held May 5, 1994 is incorporated herein by reference.\nPART IV\nITEM 14.","section_14":"ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K\n(a) (1) and (2)-- The response to this portion of Item 14 is submitted as a separate section of this report.\n(3) Listing of Exhibits:\n(i) Exhibits Incorporated by Reference:\n(3a) Restated Charter of Dixie Yarns, Inc.\n(3b) Amended and Restated By-Laws of Dixie Yarns, Inc.\n(4a) Second Amended and Restated Revolving Credit and Term Loan Agreement dated January 31, 1992 by and among Dixie Yarns, Inc., and Trust Company Bank, NationsBank of North Carolina, N.A. and Chemical Bank.\n(4b) Loan Agreement dated February 6, 1990, between Dixie Yarn, Inc. and New York Life Insurance Company and New York Life Insurance and Annuity Corporation.\n(4c) Form of Indenture, Dated May 15, 1987 between Dixie Yarns, Inc. and Morgan Guaranty Trust Company of New York as trustee.\n(4d) Revolving Credit Loan Agreement dated as of September 16, 1991 by and among Ti-Caro, Inc. and Trust Company Bank, individually and as Agent, NCNB National Bank and Chemical Bank.\n(4e) First Amendment to Revolving Credit Loan Agreement dated as of August 19, 1992 by and among Ti-Caro, Inc., T-C Threads, Inc. and Trust Company Bank, individually and as agent, NCNB National Bank, and Chemical Bank.\nITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K - CONTINUED\n(3) Listing of Exhibits:\n(10a) Dixie Yarns, Inc. 1983 Incentive Stock Option Plan.\n(10b) Dixie Yarns, Inc. Incentive Stock Plan.\n(10c) Dixie Yarns, Inc. Nonqualified Defined Contribution Plan.\n(10d) Dixie Yarns, Inc. Nonqualified Employee Savings Plan.\n(10e) Dixie Yarns, Inc. Incentive Compensation Plan.\n(10f) Asset Transfer and Restructuring Agreement dated July 19, 1993, by and among Dixie Yarns, Inc., Masland Carpets, Inc., individual management investors of Masland Carpets, Inc., The Prudential Insurance Company of America and Pruco Life Insurance Company\n(10g) Assignment and Bill of Sale dated July 9, 1993, by and between Dixie Yarns, Inc. and Masland Carpets, Inc.\n(10h) Assignment and Assumption Agreement dated July 9, 1993, by and between Dixie Yarns, Inc. and Masland Carpets, Inc.\n(10i) Stock Rights and Restrictions Agreement dated July 9, 1993, by and among Dixie Yarns, Inc., Masland Carpets, Inc., The Prudential Insurance Company of America and Pruco Life Insurance Company of America.\n(10j) Pooling and Servicing Agreement dated as of October 15, 1993, among Dixie Yarns, Inc., Dixie Funding, Inc. and NationsBank of Virginia, N.A. (as Trustee).\n(10k) Annex X - Definitions, to Pooling and Servicing Agreement dated as of October 15, 1993, among Dixie Yarns, Inc., Dixie Funding, Inc. and NationsBank of Virginia, N.A. (as Trustee).\n(10l) Series 1993-1 Supplement, dated as of October 15, 1993, to Pooling and Servicing Agreement dated as of October 15, 1993, among Dixie Yarns, Inc., Dixie Funding Inc. and NationsBank of Virginia, N.A. (as Trustee).\n(10m) Certificate Purchase Agreement dated October 15, 1993, among Dixie Yarns, Inc., Dixie Funding, Inc. and New York Life Insurance and Annuity Corporation.\nITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K - CONTINUED\n(3) Listing of Exhibits --Continued\n(10n) Certificate Purchase Agreement dated October 15, 1993, among Dixie Yarns, Inc., Dixie Funding, Inc. and John Alden Life Insurance Company.\n(10o) Certificate Purchase Agreement dated October 15, 1993, among Dixie Yarns, Inc., Dixie Funding, Inc. and John Alden Life Insurance Company of New York.\n(10p) Certificate Purchase Agreement dated October 15, 1993, among Dixie Yarns, Inc., Dixie Funding, Inc. and Keyport Life Insurance Company.\n(10q) Executive Severance Agreement dated as of September 8, 1988 as amended.\n(ii) Exhibits filed with this report:\n(4f) First Amendment, dated August 25, 1993 to Second Amended and Restated Revolving Credit and Term Loan Agreement dated January 31, 1992, by and among Dixie Yarns, Inc. and Trust Company Bank, NationsBank of North Carolina, N.A. and Chemical Bank.\n(11) Statement Re: Computation of Earnings Per Share.\n(21) Subsidiaries of the Registrant.\n(23) Consent of Ernst & Young.\n(b) Reports on Form 8-K--The following reports on Form 8-K have been filed by the registrant during the last quarter of the period covered by this report:\nCurrent Report on Form 8-K, dated October 15, 1993 reporting the sale of an undivided interest in a revolving pool of its trade accounts receivable.\n(c) Exhibits--The response to this portion of Item 14 is submitted as a separate section of this report. See Item 14 (a) (3) (ii) above.\n(d) Financial Statement Schedules--The response to this portion of Item 14 is submitted as a separate section of this report.\nSIGNATURES\nPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.\nDIXIE YARNS, INC.\nMarch 24, 1994 BY: \/s\/DANIEL K. FRIERSON Daniel K. Frierson, Chairman of the Board, President and Chief Executive Officer\nPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.\nChairman of the Board, President, Director and \/s\/DANIEL K. FRIERSON Chief Executive Officer March 24, 1994 Daniel K. Frierson\nCorporate Vice-President, President of the Candlewick \/s\/PAUL K. FRIERSON Group and Director March 24, 1994 Paul K. Frierson\n\/s\/D. EUGENE LASATER Controller March 24, 1994 D. Eugene Lasater\n\/s\/GARY A. HARMON Treasurer March 24, 1994 Gary A. Harmon\n\/s\/PAUL K. BROCK Director March 24, 1994 Paul K. Brock\nSIGNATURES -- CONTINUED\n\/s\/LOVIC A. BROOKS, JR. Director March 24, 1994 Lovic A. Brooks, Jr.\n\/s\/J. FRANK HARRISON, JR. Director March 24, 1994 J. Frank Harrison, Jr.\n\/s\/JAMES H. MARTIN, JR. Director March 24, 1994 James H. Martin, Jr.\n\/s\/PETER L. SMITH Director March 24, 1994 Peter L. Smith\n\/s\/JOSEPH T. SPENCE, JR. Director March 24, 1994 Joseph T. Spence, Jr.\n\/s\/ROBERT J. SUDDERTH, JR. Director March 24, 1994 Robert J. Sudderth, Jr.\nANNUAL REPORT ON FORM 10-K\nITEM 8, ITEM 14 (a)(1) AND (2) AND ITEM 14(d)\nLIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES\nFINANCIAL STATEMENTS\nFINANCIAL STATEMENT SCHEDULES\nYEAR ENDED DECEMBER 25, 1993\nDIXIE YARNS, INC.\nCHATTANOOGA, TENNESSEE\nFORM 10-K--ITEM 14(a)(1) and (2)\nDIXIE YARNS, INC. AND SUBSIDIARIES\nLIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES\nThe following consolidated financial statements of Dixie Yarns, Inc. and subsidiaries are included in Item 8:\nReport of Independent Auditors\nConsolidated balance sheets--December 25, 1993 and December 26, 1992\nConsolidated statements of income(loss)--Years ended December 25, 1993, December 26, 1992, and December 28, 1991\nConsolidated statements of cash flows--Years ended December 25, 1993, December 26, 1992, and December 28, 1991.\nConsolidated statements of stockholders' equity--Years ended December 25, 1993, December 26, 1992, December 28, 1991\nThe following consolidated financial statement schedules of Dixie Yarns, Inc. and subsidiaries are included in Item 14(d):\nSchedule V--Property, plant and equipment\nSchedule VI--Accumulated depreciation, depletion, and amortization of property, plant and equipment\nSchedule VIII--Valuation and qualifying account\nSchedule X--Supplementary income statement information\nAll other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions, or are inapplicable, or the information is otherwise shown in the financial statements or notes thereto, and therefore have been omitted.\nReport of Independent Auditors\nBoard of Directors Dixie Yarns, Inc.\nWe have audited the accompanying consolidated balance sheets of Dixie Yarns, Inc. and subsidiaries as of December 25, 1993 and December 26, 1992, and the related consolidated statements of income (loss), stockholders' equity, and cash flows for each of the three years in the period ended December 25, 1993. Our audits also included the financial statement schedules listed in the Index at Item 14(a). These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.\nWe conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.\nIn our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Dixie Yarns, Inc. and subsidiaries at December 25, 1993 and December 26, 1992, and the consolidated results of its operations and cash flows for each of the three years in the period ended December 25, 1993, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.\nAs discussed in Note (H) to the consolidated financial statements, in 1993 the Company changed its method of accounting for income taxes.\nERNST & YOUNG\nChattanooga, Tennessee February 17, 1994\nSee notes to consolidated financial statements.\nDIXIE YARNS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS\nNOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES\nPrinciples of Consolidation: The consolidated financial statements include the accounts of Dixie Yarns, Inc. and its wholly-owned subsidiaries (the \"Company\"). Significant intercompany accounts and transactions have been eliminated in consolidation.\nCash Equivalents: Highly liquid investments with original maturities of three months or less when purchased are reported as cash equivalents.\nCredit and Market Risk: The Company sells products primarily to manufacturers located throughout the United States who produce products for a wide variety of end users. The Company performs ongoing credit evaluations of its customers and generally does not require collateral. An allowance for doubtful accounts is maintained at a level which management believes is sufficient to cover potential credit losses. The Company invests its excess cash in short- term investments and has not experienced any losses on those investments.\nInventories: Substantially all inventories are stated at cost determined by the last-in, first-out (LIFO) method, which is less than market.\nInventories are summarized as follows:\n1993 1992 At current cost: Raw materials $ 25,274,771 $ 19,619,417 Work-in-process 24,602,923 15,662,366 Finished goods 62,664,139 41,338,244 Supplies, repair parts and other 9,792,498 10,329,674 122,334,331 86,949,701 Excess of current cost over LIFO value (16,524,443) (19,863,374) $105,809,888 $67,086,327\nDuring 1993 and 1992, the reduction of certain inventory quantities resulted in liquidations of LIFO inventory quantities carried at lower costs prevailing in prior years. The effect of these reductions was to increase net income by approximately $350,000 ($.03 per share) and $506,000 ($.06 per share) for 1993 and 1992, respectively.\nProperty, Plant and Equipment: Provision for depreciation and amortization of property, plant and equipment has been computed using the straight-line method for financial reporting purposes and in accordance with the applicable statutory recovery methods for tax purposes. Depreciation and amortization of property, plant and equipment for financial reporting purposes totaled $29,245,367 in 1993, $23,712,953 in 1992, and $22,847,307 in 1991. When events occur that change the extent or manner in which long-lived assets are used, such as a restructuring of the Company's operations, evidence of physical defects, or technological obsolescence, such impaired assets are written down to their estimated fair market value. If such assets are permanently taken out of service, they are no longer depreciated.\nDIXIE YARNS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS\nNOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)\nIntangible Assets: The excess of the purchase price over the fair market value of identifiable net assets acquired in business combinations is being amortized using the straight-line method over 40 years. The carrying value of goodwill will be reviewed if the facts and circumstances suggest that it may be impaired. Impairment will be measured, and goodwill reduced, for any deficiency of estimated cash flows during the amortization period related to the business acquired.\nIncome Taxes: The Company adopted Statement of Financial Accounting Standards No. 109, \"Accounting for Income Taxes,\" in 1993. See Note (H).\nEarnings per Share: Primary earnings per common and common equivalent share is computed using the weighted average number of shares of Common Stock outstanding and includes the effects of Class B Common Stock and the potentially dilutive effects of the exercise of stock options and the put option. Fully-diluted earnings per share reflects the maximum potential dilution of per share earnings which would have occurred assuming the exercise of stock options, the put option, and the conversion of subordinated debentures into shares of Common Stock. For 1993, 1992 and 1991, the additional dilution computed was less than 3%.\nRevenue recognition: The Company recognizes revenue at the time title passes to the customer.\nPostemployment Benefits: The Financial Accounting Standards Board has issued Statement of Financial Accounting Standards No. 112 \"Employers' Accounting for Postemployment Benefits,\" which requires, under certain conditions, the adoption of accrual accounting for postemployment benefits no later than 1994. The Company sponsors no such plans and the new standard is not expected to affect the Company's financial statements.\nReclassifications: In order to conform to the 1993 presentation, certain operating group expenses for 1992 and 1991 which had previously been reported as cost of sales, were reclassified to selling, general and administrative expenses in the accompanying consolidated statements of income (loss). In addition, corporate expenses have been segregated from selling, general and administrative expenses.\nNOTE B - BUSINESS COMBINATIONS\nOn September 4, 1992, the Company acquired approximately 46% of the outstanding shares of Carriage Industries, Inc. (\"Carriage\") for $27,400,446 cash ($13.25 per share plus expenses) and on March 12, 1993 acquired the remaining shares of Carriage. The Company issued 2,472,884 shares of its Common Stock, options to purchase 83,044 shares of its Common Stock, and approximately $661,000 cash in exchange for the remaining shares and options for shares of Carriage. The acquisition was accounted for as a purchase effective March 12, 1993, and accordingly, the results of operations and accounts of Carriage subsequent to March 12, 1993 are included in the Company's consolidated financial statements. The total purchase price of $63,685,083 (the Company's initial cash investment in Carriage, expenses of the acquisition, and the estimated fair value of the Company's Common Stock and options exchanged) was allocated to the net tangible assets of Carriage based on the estimated fair market values of the assets acquired. As required by the purchase method of accounting, the excess amount of the purchase price over the fair market value of Carriage's net tangible assets was recorded as an intangible asset and is being amortized using the straight-line method over 40 years.\nOn July 9, 1993, the Company acquired the operating assets and liabilities of Masland Carpets, Inc. (\"Masland\") in exchange for 1,029,446 shares of the Company's Common Stock, approximately $1,100,000 cash, and the assumption of $750,000 of debt. The Common Stock was issued subject to an agreement which provides certain registration rights respecting the Common Stock, as well as the right, after two years, to put the shares to the Company at a price of $18.06 per share (reduced by dividends paid). The acquisition was accounted for as a purchase effective July 9, 1993, and accordingly, the results of operations and accounts of Masland subsequent to July 9, 1993 are included in the Company's consolidated financial statements. The total purchase price of $19,622,192 (cash paid, expenses of the acquisition, and estimated fair value of the Company's Common Stock issued subject to put option) was allocated to the net tangible assets of Masland based on the estimated fair market values of the assets acquired.\nA summary of net assets acquired is as follows:\nCarriage Masland\nCurrent assets $ 49,865,747 $ 16,316,797 Property, plant and equipment 53,440,710 11,748,152 Other assets 4,618,971 76,181 Current liabilities (26,802,995) (7,072,437) Long-term debt (27,222,687) (450,000) Other liabilities and deferred taxes (12,326,472) (1,553,215) Intangible asset 21,699,203 ---\nNet Assets Acquired Excluding Cash 63,272,477 19,065,478 Cash 412,606 556,714 Net Assets Acquired $63,685,083 $19,622,192\nThe following unaudited pro forma summary presents the consolidated results of operations as if the acquisitions of Carriage and Masland had occurred at the beginning of each period presented after giving effect to certain adjustments, including amortization of cost in excess of net tangible assets acquired, interest expense on debt to finance the acquisitions and related income taxes. The pro forma results have been prepared for comparative purposes only and do not purport to be indicative of the results that would have occurred had the acquisitions occurred at the beginning of the periods presented or of results which may occur in the future.\n1993 1992\nNet sales $641,950,000 $637,680,000\nIncome from continuing operations 6,218,000 8,628,000 Net income (1) 6,218,000 4,099,000\nPer common and common equivalent share: Income from continuing operations .49 .67 Net income (1) .49 .32 (1) Net income for the fiscal year ended December 26, 1992 includes losses of $3,537,000 after taxes ($.28 per share) on operations of and disposal of a Carriage segment held for sale and a loss of $992,000 after taxes ($.08 per share) to record the cumulative effect of the adoption of Statement of Financial Accounting Standards No. 106,\"Employers Accounting for Postretirement Benefits Other than Pensions\" by Masland.\nPrior to the merger, the Company's initial investment in Carriage was accounted for by the equity method. Accordingly, net income for 1993 and 1992 includes the Company's proportionate share of Carriage's earnings for periods prior to the merger of approximately $320,000 and $538,000 after taxes, respectively.\nCondensed unaudited historical financial information of Carriage at and for the twelve months ended December 27, 1992 and December 29, 1991 is summarized as follows:\n1992 1991 Income statement information: Net sales $133,363,000 $105,976,000 Gross profit 36,096,000 24,936,000 Income from continuing operations 4,697,000 726,000 Net income 1,160,000 974,000 Balance sheet information: Current assets 41,920,000 --- Non-current assets 44,827,000 --- Current liabilities 18,811,000 --- Non-current liabilities 33,617,000 ---\nNOTE C --SALE OF ACCOUNTS RECEIVABLE\nIn October 1993, the Company entered into a seven-year agreement to sell an undivided interest in a revolving pool of its trade accounts receivable. At December 25, 1993, a $45,000,000 interest had been sold under this agreement, reflected as a reduction of accounts receivable in the accompanying consolidated balance sheets. The costs of this program, which were approximately $570,000 in 1993, are based upon rating agencies' assessment of the quality of the receivables pool and the purchasers' level of investment and are fixed at 6.08% per annum plus administrative fees typical in such transactions. These costs are included in other expense. The Company maintains allowances for doubtful accounts at a level which management believes is sufficient to cover potential credit losses relating to trade accounts receivable, including receivables sold. NOTE D--ACCRUED EXPENSES\nAccrued expenses consists of the following:\n1993 1992 Compensation and benefits $ 11,775,625 $ 9,156,692 Interest expense 2,632,072 2,486,885 Restructuring expense 487,376 3,641,046 Other 11,623,356 5,725,462 $ 26,518,429 $21,010,085\nNOTE E--LONG-TERM DEBT AND CREDIT ARRANGEMENTS\nLong-term debt consists of the following: 1993 1992 Senior Debt: Credit line borrowings $ 86,500,000 $ 70,000,000 Other 1,596,700 23,800 88,096,700 70,023,800 Less current portion 446,829 1,300 87,649,871 70,022,500 Subordinated notes 50,000,000 50,000,000 Convertible subordinated debentures 44,782,000 44,782,000 $182,431,871 $164,804,500\nThe Company's revolving credit and term loan agreement provides for borrowings of up to $125,000,000 until September 30, 1995, at which time the outstanding balance, at the Company's election, may be converted into a term loan payable in semi-annual installments over five years. The Company may select from several interest rate options which effectively allow for borrowings at rates equal to or lower than the lender's prime rate. A commitment fee of 1\/4% per annum is payable on the average daily unused balance of the revolving credit line. At December 25, 1993, the Company's unused borrowing capacity under the arrangement was approximately $38,500,000.\nThe Company's subordinated notes are unsecured, bear interest of 9.96% payable semiannually, and are due in semiannual installments $2,381,000 beginning February 1, 2000.\nThe convertible subordinated debentures bear interest of 7% payable semiannually and are due 2012. The debentures are convertible by the holder into shares of Common Stock of the Company at an effective conversion price of $32.20 per share, subject to adjustment under certain circumstances. The debentures are redeemable at the Company's option through May 15, 1997, in whole or in part, at prices ranging from 102.8% to 100.7% of their principal amount. Subsequent to that date the debentures may be redeemed at 100% of their principal amount. Mandatory sinking fund payments commencing May 15, 1998, will retire $2,500,000 principal amount of the debenture annually and approximately 70% of the debentures prior to maturity. The debentures are subordinated in right of payment to all other indebtedness of the Company.\nDuring 1991, the Company repurchased $2,218,000 face value of the debentures resulting in an extraordinary after-tax gain of $451,706 ($.05 per share).\nThe Company's long-term debt and credit arrangements include restrictions relating to minimum net worth, debt to capital ratio, and other financial ratios. The agreements also limit the amount of cash dividends that may be paid. Retained earnings available for payment of dividends amounted to approximately $978,000 at December 25, 1993.\nApproximate maturities of long-term debt for each of the five years succeeding December 25, 1993, assuming conversion of amounts outstanding under the revolving credit arrangement to a term loan as discussed above, are $447,000 in 1994, $459,000 in 1995, $16,471,000 in 1996 $16,317,000 in 1997, and $18,818,000 in 1998.\nInterest payments in 1993, 1992, and 1991 were approximately $12,662,000, $11,077,000, and $11,947,000, respectively.\nNOTE F--FAIR VALUE OF FINANCIAL INSTRUMENTS\nThe carrying amounts and estimated fair values of the Company's financial instruments are as follows:\n1993 1992 Carrying Fair Carrying Fair Amount Value Amount Value\nCash and cash equivalents $ 4,047,459 $ 4,047,459 $ 1,425,985 $ 1,425,985\nLong-term debt (including current portion) 182,878,700 178,974,000 164,805,800 157,893,000\nCommon Stock, subject to put option 18,177,958 18,177,958 --- ---\nThe carrying amounts of cash and cash equivalents approximate fair values due to the short-term maturity of these instruments. The fair values of the Company's long-term debt were estimated using discounted cash flow analysis based on incremental borrowing rates for similar types of borrowing arrangements and quoted market rates for public debt. The fair value of the Company's Common Stock, subject to put option, was based on current interest rates, future cash flows, and the quoted market prices of the Company's Common Stock. NOTE G--CAPITAL STOCK\nHolders of Class B Common Stock have the right to twenty votes per share on matters that are submitted to Shareholders for approval and to dividends in an amount not greater than dividends declared and paid on Common Stock. Class B Common Stock is restricted as to transferability; however, the Class B Common Stock may be converted into Common Stock on a one share for one share basis. The Company's Charter authorizes 200,000,000 shares of Class C Common Stock, $3 par value per share, and 16,000,000 shares of Preferred Stock. No shares of Class C Common Stock or Preferred Stock have been issued. Also see Note (B)\nNOTE H--INCOME TAXES\nIn 1993, the Company adopted Statement of Financial Accounting Standard No. 109, \"Accounting for Income Taxes,\" which requires the liability method of accounting for income taxes. The Company restated financial statements for periods subsequent to December 26, 1986, to reflect application of the new method. The effect of the change was to decrease income from continuing operations and net income for 1992 by approximately $200,000 ($.03 per share) and increase the loss from continuing operations and net loss for 1991 by approximately $200,000 ($.02 per share).\nThe provision (benefit) for income tax on income (loss) from continuing operations consist of the following:\n1993 1992 1991 Current Deferred Current Deferred Current Deferred Federal $ 21,000 $3,490,000 $1,209,000 $1,879,953 $492,000 $(11,501,838) State 547,000 278,000 248,000 143,235 205,000 (1,051,597) $ 568,000 $3,768,000 $1,457,000 $2,023,188 $697,000 $(12,553,435)\nDeferred income taxes reflects the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the tax bases of those assets and liabilities. Significant components of the Company's deferred tax liabilities and assets are as follows:\nDeferred Tax Liabilities 1993 1992 Property, plant and equipment $52,792,000 $41,419,000 Inventories 8,634,000 7,018,000 Other 404,000 1,235,000 Total deferred tax liabilities 61,830,000 49,672,000\nDeferred Tax Assets Post-retirement benefits 4,073,000 95,000 Other employee benefits 3,925,000 3,169,000 Alternative minimum tax 3,361,000 1,871,000 Allowances for bad debts, claims and discounts 2,727,000 1,983,000 Restructuring 730,000 5,765,000 Other 1,737,000 810,000 Valuation reserve --- --- Total deferred tax assets 16,553,000 13,693,000\nNet deferred tax liabilities $45,277,000 $35,979,000\nDifferences between the provision (benefit) for income taxes and the amount computed by applying the statutory federal income tax rate to income (loss) from continuing operations are reconciled as follows:\n1993 1992 1991 Statutory rate applied to income (loss) from continuing operations $3,157,000 $ 3,042,000 $(12,721,000) Plus state income taxes net of federal tax provision (benefit) 536,000 258,000 (559,000) 3,693,000 3,300,000 $(13,280,000)\nIncrease(decrease) attributable to:\nNon deductible amortization of intangible assets resulting from business combinations 559,000 423,000 423,000 (Gain) loss accounted for on equity method (96,000) (153,000) 1,457,000 Effect of Federal tax rate increase on deferred income taxes 500,000 --- --- Other items (320,000) (89,812) (456,435) 643,000 180,188 1,423,565 Total tax provision (benefit) $4,336,000 $3,480,188 $(11,856,435)\nIncome tax payments, net of tax refunds received, in 1993, 1992, and 1991 were approximately $2,079,000, $1,024,000, and $5,066,000, respectively.\nNOTE I--RESTRUCTURING AND PLANT CLOSING COSTS\nIn the fourth quarter of 1991, the Company developed and began implementation of a plan to restructure the Company's manufacturing facilities and support services areas and accrued associated costs of $28,276,000 ($18,271,000 or $2.08 per share after taxes). The plan included, among other things, production and machinery consolidations into fewer facilities, information systems conversions and personnel reductions.\nAs of the end of 1993, the restructuring was substantially complete. Total costs incurred through 1993 consisted of approximately $13,533,000 to write- down certain assets to estimated fair market value, approximately $3,156,000 for severance payments, and approximately $11,100,000 for other direct costs, including product consolidations, equipment relocation, systems conversions, and other related expenses.\nNOTE J--STOCK PLANS\nThe Company's 1990 Incentive Stock Plan reserves 770,000 shares of Common Stock for sale or award to key associates under stock options, stock appreciation rights, restricted stock performance grants, or other awards. Outstanding options are exercisable at a cumulative rate of 25% to 33 1\/3% per year after the second year from the date the options are granted. Options outstanding were granted at prices at or above market price on the date of grant and include grants under the 1983 Incentive Stock Plan, under which no further options may be granted. At December 25, 1993, options to purchase 126,662 shares were exercisable under these plans.\nA summary of the option activity under the 1990 and 1983 Incentive Stock Plans is as follows:\nNumber of Option Price Shares Per Share Outstanding at December 29, 1990 423,874 $ 4.58 - $33.83 Granted 35,000 13.00 - 13.50 Exercised (19,650) 4.58 - 6.42 Cancelled (56,600) 5.83 - 14.00 Outstanding at December 28, 1991 382,624 4.58 - 33.83 Granted 254,000 10.75 - 11.00 Exercised (27,800) 4.58 - 5.83 Cancelled (68,412) 10.75 - 33.83 Outstanding at December 26, 1992 540,412 5.83 - 30.75 Granted 197,000 12.50 - 15.25 Exercised (22,100) 5.83 Cancelled (87,400) 10.75 - 30.75 Outstanding at December 25, 1993 627,912 $10.75 - $30.75\nThe Company also has a stock purchase plan which authorizes 108,000 shares of Common Stock for purchase by supervisory associates at the market price prevailing at the time of purchase. At December 25, 1993, 65,940 shares remained available for issue. Shares sold under this plan are held in escrow until paid for and are subject to repurchase agreements which give the Company the right of first refusal at the prevailing market price. Numbers of shares sold under the plan were 12,700 in 1993, 1,800 in 1992, and 3,300 in 1991.\nThe Company issued options for the purchase of 83,044 shares of Common Stock, which were immediately exercisable at prices ranging from $3.19 - $5.27 per share, in connection with the acquisition of Carriage. During 1993, options for 10,699 shares were exercised at prices ranging from $3.43 - $4.29 per share. At December 25, 1993, options for 72,345 shares at prices ranging from $3.19 - $5.27 per share remain exercisable.\nNOTE K--PENSION PLANS\nThe Company has defined benefit and defined contribution pension plans which cover essentially all associates. Benefits for associates participating in the defined benefit plans are based on years of service and compensation during the period of participation. Plan assets consist primarily of cash equivalents and publicly traded stocks and bonds. The Company's practice is to fund defined benefit plans in accordance with minimum requirements of the Employee Retirement Income Security Act of 1974. Contributions and costs of the defined contribution plans are based on several factors including a percentage of each participant's compensation, the operating performance of the Company, and matching of participant contributions by the Company.\nParticipants in the Company's largest defined benefit plan became eligible participants in a newly established 401(k) defined contribution plan effective in 1994. All accrued benefits under the defined benefit plan became fully vested and were frozen as of December 24, 1993. A portion of the liability of the defined benefit plan was settled through lump sum payments to electing associates. Losses incurred as a result of these settlements and the curtailment described above totaled $768,680 and $358,626 during 1993 and 1992, respectively. Settlement losses of $196,580 included in the 1993 amount were a direct result of the Company's restructuring plan and were charged to the restructuring reserve established in 1991.\nThe net periodic pension cost included the following components:\n1993 1992 1991 Defined benefit plans: Service cost $ 1,315,353 $ 1,446,829 $ 1,522,052 Interest cost 1,625,217 1,841,940 2,000,193 Actual return on plan assets (1,326,794) (1,227,989) (5,022,036) Other Components 153,850 (1,056,697) 2,777,701 1,767,626 1,004,083 1,277,910 Defined contribution plans 410,559 --- --- Net periodic pension expense $ 2,178,185 $ 1,004,083 $ 1,277,910\nThe following table sets forth the funded status of the Company's defined benefit retirement plans and related amounts included in the Company's consolidated balance sheets:\n1993 1992 Actuarial present value of benefit obligations: Vested benefits $24,092,792 $14,753,954 Nonvested benefits 1,336 1,284,875 Accumulated benefit obligations $24,094,128 $16,038,829\nPlan assets at fair value $16,138,289 $18,540,107 Projected benefit obligation (24,094,128) (17,902,255) Projected benefit obligation (in excess of) or less than plan assets (7,955,839) 637,852 Unrecognized net loss 8,764,390 2,918,403 Remaining unrecognized net transition asset (462,761) (995,762) Adjustment to recognize minimum liability (8,301,629) --- Pension related (liability) asset included in the consolidated balance sheets $(7,955,839) $ 2,560,493\nIn accordance with the provisions of Statement of Financial Accounting Standards No. 87, \"Employers' Accounting for Pensions,\" the Company has recorded an additional minimum liability at December 25, 1993 representing the excess of the accumulated benefit obligation over the fair value of plan assets and accrued pension costs. This additional liability reduced stockholders' equity by $4,981,943 (net of income tax benefit of $3,319,686). The increased liability in 1993 results primarily from decreasing the assumed discount rate used in determining the projected benefit obligation from 8.5% to 7.13%.\nThe weighted average discount rate used in determining the projected benefit obligation was 7.13% for 1993, 8.5% for 1992, and 9% for 1991. There was no increase in future compensation levels assumed for 1993 (due to the freezing of benefits), and a 4% and 5% rate of increase was used for 1992 and 1991, respectively. The assumed long-term rate of return on plan assets was 8.5% for 1993 and 1992, and 9% for 1991.\nNOTE L--POSTRETIREMENT BENEFITS OTHER THAN PENSIONS\nThe Company and one of its subsidiaries provided medical, dental and life insurance coverage for retirees under postretirement benefit plans.\nThe parent company provides medical and dental benefits until age 65 to early retirees who have met specified age and service requirements. It pays a portion of these costs for participants who retired prior to 1992 and also pays a portion of the life insurance premiums for a certain group of retirees. No new retirees may become eligible for the life insurance benefits. For measurement purposes, a 12% annual rate of increase in the per capita claims cost for the medical and dental plans was used for 1993, 1992, and 1991. The discount rate used to determine the accumulated postretirement benefit obligations was 7.5% for 1993, 8.5% for 1992, and 9% for 1991. During 1993, the Company settled a portion of its postretirement benefit obligation under the life insurance plan through the payment of lump- sum distributions made to beneficiaries of insured participants. Losses incurred as a result of these settlements totaled $73,049.\nA subsidiary also provides medical, dental and life insurance plans for all retired associates who have completed required service and age requirements. The subsidiary pays the full cost of these benefits for associates who retired prior to June 1992. Eligible retirees after this date pay a portion of these benefits at the equivalent rates under COBRA. The weighted-average annual assumed rates of increase in the per capita cost of covered medical and dental benefits is 15% and 12% in 1993 for pre-65 and post-65 benefits, respectively, gradually declining to 6% in 2005, and remaining at that level thereafter. The accumulated postretirement benefit obligations were determined using an 8% weighted average discount rate.\nThe components of net periodic postretirement benefit cost are as follows:\n1993 1992 1991 Medical Life Medical Life Medical Life and Dental Insurance and Dental Insurance and Dental Insurance Plans Plans Plans Plans Plans Plans Interest cost $107,295 $102,863 $103,719 $63,318 $112,076 $80,964 Service cost 17,766 1,641 --- --- --- --- Amortization of net loss --- 8,942 --- --- --- --- Settlement losses --- 73,049 --- --- --- ---\nNet periodic postretirement benefit cost $125,061 $186,495 $103,719 $63,318 $112,076 $80,964\nThe following table sets forth the funded status of the Company's defined benefit retirement plans and related amounts included in the Company's consolidated balance sheets:\n1993 1992\nLife Life Medical Insurance Medical Insurance Plans Plans Plans Plans\nAccumulated postretirement benefit obligations: Retirees $(1,564,521) $(1,400,126) $(865,400) $(1,141,876) Active participants (476,711) (69,941) --- --- (2,041,232) (1,470,067) (865,400) (1,141,876) Plan assets --- --- --- --- Accumulated postretirement benefit obligation in excess of plan assets (2,041,232) (1,470,067) (865,400) (1,141,876) Unrecognized net actuarial loss due to past experience different from assumptions made 151,957 431,861 --- 318,645 Accrued postretirement benefit liability included in the consolidated balance sheet $(1,889,275) $(1,038,206) $(865,400) $ (823,231) The assumed rate used to measure the per capita claims cost can have a significant effect on the amounts reported. Increasing the assumed rate by one percentage point in each year would increase the accumulated postretirement benefit obligation and net periodic postretirement benefit cost by approximately $170,000 and $14,000, respectively.\nNOTE M --STORM AND FIRE DAMAGE\nOn March 13, 1993, a severe winter storm substantially damaged Carriage's manufacturing facilities, including machinery. On August 4, 1993, a fire destroyed Carriage's Bretlin needlebond facility. Both losses were covered by insurance and the total insurance benefits recognized during 1993 were $33,500,000, including approximately $5,400,000 accrued as a receivable. The Company spent approximately $17,900,000 in 1993 to replace and repair capital assets which had been destroyed or damaged. Insurance proceeds in excess of the net book value of destroyed assets and the repair costs of damaged assets were approximately $13,400,000 and are reflected in the financial statements as other income ($1,800,000) and a reduction to cost of sales ($11,600,000) to offset extra expenses and losses incurred as a result of the storm and fire. The insurance claims have not been concluded.\nNOTE N--COMMITMENTS\nThe Company had outstanding commitments for purchases of machinery and equipment of approximately $11,686,000 at December 25, 1993.\nNOTE O --INDUSTRY SEGMENT INFORMATION\nThe Company operates in two industry segments: textile products and floorcovering. Textile products include yarns, industrial sewing threads and knit fabrics. Floorcovering includes carpet for manufactured housing, recreational vehicles, high-end residential and commercial markets, rugs and yarns. Prior to the acquisitions of Carriage and Masland in 1993, the Company's single line of business, textile products, included the Company's Candlewick sales yarn operations serving the broadloom and rug manufacturing markets. With the expansion into production and sales of finished floorcovering products through the Carriage and Masland acquisitions, the operations of Candlewick are now included in the floorcovering segment. Accordingly, a restatement of the Company's financial information, by segment, is reflected for the periods presented in the consolidated financial statements.\n(dollar amounts in thousands) Net Sales Operating Profit(Loss)(1) 1993 1992 1991 1993 1992 1991 Business Segments Textile products $332,059 $347,802 $370,825 $ 1,629 $15,352 $(14,631) Floorcovering 263,899 123,107 122,273 24,424 7,913 1,416 Intersegment elimination (1,357) (1,077) (1,146) --- --- --- Total $594,601 $469,832 $491,952 26,053 23,265 (13,215) Interest expense 12,773 10,824 12,180 Corporate expenses 5,159 5,600 11,448 Other income (expense)-net(1) 899 2,107 (571) Income (loss) before income taxes $ 9,020 $ 8,948 $(37,414)\nIdentifiable Capital Assets at Year End Expenditures 1993 1992 1991 1993 1992 1991 Business Segments Textile products $306,076 $310,594 $311,039 $27,504 $24,072 $34,109 Floorcovering 181,663 73,973 47,332 10,316 1,854 3,475 Corporate 8,840 12,513 14,436 1,005 398 722 Total $496,579 $397,080 $372,807 $38,825 $26,324 $38,306\nDepreciation and Amortization 1993 1992 1991 Business Segments Textile products $20,531 $19,851 $18,109 Floorcovering 8,051 3,189 3,312 Corporate 663 673 1,426 Total $29,245 $23,713 $22,847\n(1) Net gains (losses) included in operating profit (loss) on a segment basis but classified in \"other income (expense) - net\" in the Company's Consolidated Statements of Income (Loss) are as follows: 1993 - $1,741; 1992 - $(1,851); 1991-$(920). Operating loss for 1991 includes restructuring costs as follows: Textile products - $23,306; Floorcovering - $ 1,222; Corporate - $3,748.\nSCHEDULE X-SUPPLEMENTARY INCOME STATEMENT INFORMATION\nDIXIE YARNS, INC. AND SUBSIDIARIES\nCOL. A COL. B ITEM Charged to Costs and Expenses\nYear Ended December 25, December 26, December 28, 1993 1992 1991\nMaintenance and repairs $27,010,840 $23,209,089 $24,945,876\nAmounts for depreciation and amortization of intangible assets, preoperating costs and similar deferrals; taxes, other than payroll and income taxes; royalties and advertising costs are not presented as such amounts are less than 1% of total sales and revenues.\nANNUAL REPORT ON FORM 10-K\nITEM 14 (c)\nEXHIBITS\nYEAR ENDED DECEMBER 25, 1993\nDIXIE YARNS, INC.\nCHATTANOOGA, TENNESSEE\nExhibit Index\nEXHIBIT NO. EXHIBIT DESCRIPTION INCORPORATION BY REFERENCE\n(3a) Restated Charter of Dixie Incorporated by reference to Yarns, Inc. Exhibit (3a) to Dixie's Annual Report on Form 10-K for the year ended December 30, 1989.*\n(3b) Amended and Restated By- Incorporated by reference to Laws of Dixie Yarns, Inc. Exhibits (3b) and (3c) to Dixie's Annual Report on Form 10-K for the year ended December 29, 1990.*\n(4a) Second Amended and Restated Incorporated by reference to Revolving Credit and Term Exhibit (4a) to Dixie's Annual Loan Agreement, dated Report on Form 10-K for the January 31, 1992, by and year ended December 28, 1991.* among Dixie Yarns, Inc. and Trust Company Bank, NationsBank of North Carolina, N.A. and Chemical Bank.\n(4b) Loan Agreement, dated Incorporated by reference to February 6, 1990 between Exhibit (4d) to Dixie's Annual Dixie Yarns, Inc. and New Report on Form 10-K for the York Life Insurance Company year ended December 30, 1989.* and New York Life Annuity Corporation.\n(4c) Form of Indenture, dated Incorporated by reference to May 15, 1987 between Dixie Exhibit 4.2 to Amendment No. 1 Yarns, Inc. and Morgan of Dixie's Registration Guaranty Trust Company of Statement No. 33-140 78 on Form New York as Trustee. S-3, dated May 19, 1987.\n* Commission File No. 0-2585\nExhibit Index - Continued\nEXHIBIT NO. EXHIBIT DESCRIPTION INCORPORATION BY REFERENCE\n(4d) Revolving Credit Loan Incorporated by reference to Agreement dated as of Exhibit (4d) to Dixie's Annual September 16, 1991 by Report on Form 10-K for the and among Ti-Caro, Inc. and year ended December 28, 1991.* Trust Company Bank, individually and as agent, NCNB National Bank, and Chemical Bank.\n(4e) First Amendment to Revolving Incorporated by reference to Credit Loan Agreement dated Exhibit 4(e) to Dixie's Annual as of August 19, 1992 by and Report on form 10-K for the among Ti-Caro, Inc., T-C year ended December 26, 1992.* Threads, Inc. and Trust Company Bank, individually and as agent, NCNB National Bank, and Chemical Bank.\n(4f) First Amendment, dated Filed herewith August 25, 1993 to Second Amended and Restated Revolving Credit and Term Loan Agreement dated January 31, 1992, by and among Dixie Yarns, Inc. and Trust Company Bank, NationsBank of North Carolina, N.A. and Chemical Bank.\n(10a) Dixie Yarns, Inc. 1983 Incorporated by reference to Incentive Stock Option Exhibit (10c) to Dixie's Annual Plan. Report on Form 10-K for the year ended December 28, 1985.*\n(10b) Dixie Yarns, Inc. Incentive Incorporated by reference to Stock Plan. Exhibit (10) to Dixie's Quarterly Report on Form 10-Q for the quarter ended March 31, 1990.*\n(10c) Dixie Yarns, Inc. Nonquali- Incorporated by reference to fied Defined Contribution Exhibit (10c) to Dixie's Annual Plan. Report on form 10-K for the year ended December 26, 1992.*\n(10d) Dixie Yarns, Inc. Nonquali- Incorporated by reference to fied Employee Savings Plan. Exhibit (10d) to Dixie's Annual Report on form 10-K for the year ended December 26, 1992.*\n* Commission File No. 0-2585\nExhibit Index - Continued\nEXHIBIT NO. EXHIBIT DESCRIPTION INCORPORATION BY REFERENCE\n(10e) Dixie Yarns, Inc. Incentive Incorporated by reference to Compensation Plan. Exhibit (10e) to Dixie's Annual Report on form 10-K for the year ended December 26, 1992.*\n(10f) Asset Transfer and Restruc- Incorporated by reference to turing Agreement dated Exhibit (2a) to Dixie's Current July 9, 1993, by and among Report on Form 8-K dated Dixie Yarns, Inc., Masland July 9, 1993.* Carpets, Inc., individual management investors of Masland Carpets, Inc., The Prudential Insurance Company of America and Pruco Life Insurance Company.\n(10g) Assignment and Bill of Sale Incorporated by reference to dated July 9, 1993, by and Exhibit (2b) to Dixie's Current between Dixie Yarns, Inc. Report on Form 8-K dated July 9, and Masland Carpets, Inc. 1993.*\n(10h) Assignment and Assumption Incorporated by reference to Agreement dated July 9, 1993, Exhibit (2c) to Dixie's Current by and between Dixie Yarns, Report on Form 8-K dated July 9, Inc. and Masland Carpets, 1993.* Inc.\n(10i) Stock Rights and Restrictions Incorporated by reference to Agreement dated July 9, 1993, Exhibit (2d) to Dixie's Current by and among Dixie Yarns, Report on Form 8-K dated July 9, Inc., Masland Carpets, Inc., 1993.* The Prudential Insurance Company of America and Pruco Life Insurance Company.\n(10j) Pooling and Servicing Incorporated by reference to Agreement dated as of Exhibit (2a) to Dixie's October 15, 1993, among Current Report on Form 8-K Dixie Yarns, Inc., Dixie dated October 15, 1993.* Funding, Inc. and NationsBank of Virginia, N.A. (as Trustee).\n* Commission File No. 0-2585\nExhibit Index - Continued\nEXHIBIT NO. EXHIBIT DESCRIPTION INCORPORATION BY REFERENCE\n(10k) Annex X - Definitions, to Incorporated by reference to Pooling and Servicing Exhibit (2b) to Dixie's Agreement dated as of Current Report on Form 8-K October 15, 1993, among dated October 15, 1993.* Dixie Yarns, Inc., Dixie Funding, Inc. and NationsBank of Virginia, N.A. (as Trustee).\n(10l) Series 1993-1 Supplement, Incorporated by reference to dated as of October 15, Exhibit (2c) to Dixie's 1993, to Pooling and Current Report on Form 8-K Servicing Agreement dated as dated October 15, 1993.* of October 15, 1993, among Dixie Yarns, Inc., Dixie Funding, Inc. and NationsBank of Virginia, N.A. (as Trustee).\n(10m) Certificate Purchase Incorporated by reference to Agreement dated October 15, Exhibit (2d) to Dixie's 1993, among Dixie Yarns, Current Report on Form 8-K Inc., Dixie Funding, Inc. dated October 15, 1993.* and New York Life Insurance and Annuity Corporation.\n(10n) Certificate Purchase Incorporated by reference to Agreement dated October 15, Exhibit (2e) to Dixie's 1993, among Dixie Yarns, Current Report on Form 8-K Inc., Dixie Funding, Inc. dated October 15, 1993.* and John Alden Life Insurance Company.\n(10o) Certificate Purchase Incorporated by reference to Agreement dated October 15, Exhibit (2f) to Dixie's 1993, among Dixie Yarns, Current Report on Form 8-K Inc., Dixie Funding, Inc. dated October 15, 1993.* and John Alden Life Insurance Company of New York.\n(10p) Certificate Purchase Incorporated by reference to Agreement dated October 15, Exhibit (2g) to Dixie's 1993, among Dixie Yarns, Current Report on Form 8-K Inc., Dixie Funding, Inc. dated October 15, 1993.* and Keyport Life Insurance Company.\n* Commission File No. 0-2585\nExhibit Index - Continued\nEXHIBIT NO. EXHIBIT DESCRIPTION INCORPORATION BY REFERENCE\n(10q) Executive Severance Incorporated by reference to Agreement dated as of Exhibit (19) to Dixie's Quarterly September 8, 1988 as Report on Form 10-Q for the amended. quarter ended March 27,1993.*\n(11) Statement re: Computation Filed herewith. of Earnings Per Share.\n(21) Subsidiaries of the Filed herewith. Registrant.\n(23) Consent of Ernst & Young. Filed herewith.\n*Commission File No. 0-2585","section_15":""}
{"filename":"89439_1993.txt","cik":"89439","year":"1993","section_1":"ITEM 1. BUSINESS\nINTRODUCTION\nThe Company is a leading fabricator of brass, bronze, copper, plastic and aluminum products. The range of these products is broad: copper tube and fittings; brass and copper alloy rods, bars and shapes; brass and bronze forgings; aluminum and copper impact extrusions; plastic fittings and valves; and refrigeration valves, driers and flare fittings. These operations (the \"Manufacturing Segment\") accounted for approximately 95.3% of the Company's total net sales and 88.7% of total identifiable assets on a consolidated basis in 1993. The Company markets these products to the heating and air conditioning, refrigeration, plumbing, hardware and other industries. Mueller Brass Co. (\"MBCo\") and its subsidiaries operate eight production facilities in four states and Canada and has distribution facilities nationwide and sales representation worldwide.\nThe Company's natural resource operations are conducted through its wholly-owned subsidiary Arava Natural Resources Company, Inc. (\"Arava\") and the Company's 85% owned subsidiary Alaska Gold Company (\"Alaska Gold\"). Natural resource operations consist principally of the operation of a short line railroad and placer gold mining.\nThe Company was incorporated in 1990. Upon the reorganization of Sharon Steel Corporation (\"Sharon\") under Title 11, Chapter 11 of the United States Code (the \"Bankruptcy Code\") on December 28, 1990, Mueller became the successor to Sharon for purposes of the Bankruptcy Code. (See \"Reorganization Under Chapter 11 of the Bankruptcy Code\" below).\nInformation concerning net sales, operating income or loss, and identifiable assets of each segment appears under \"Note 13 - Industry Segments\" on page 31 in the Notes to Consolidated Financial Statements in Mueller's Annual Report to Stockholders for the year ended December 25, 1993. Such information is incorporated herein by reference.\nMANUFACTURING SEGMENT\nMueller's standard products include a broad line of copper tube, which ranges in size from 1\/8 inch to 8 inch diameter, and is sold in various straight lengths and coils. Mueller is a market leader in the air conditioning, refrigeration and dehydrated tube markets. Additionally, Mueller supplies a variety of hard drawn water tube in straight lengths, as well as capped soft coils both used for plumbing applications in virtually every type of construction project.\nOther standard products include wrot, cast and plastic fittings and related components for the plumbing and heating industry that are used in water distribution systems, heating systems, air conditioning and refrigeration applications, and drainage, waste, and vent systems. Additionally, valves, wrot copper and brass fittings, filter driers and other related assemblies are manufactured for commercial air conditioning and refrigeration applications such as vending machines, ice machines, walk-in coolers, and numerous refrigeration applications. The refrigeration product line also includes products for the refrigeration and air conditioning installation and service after-markets. A major portion of Mueller's products are ultimately used in the domestic residential and commercial construction markets and, to a lesser extent, in the automotive and heavy on and off-the-\nroad vehicle markets.\nMueller's industrial products include brass rod, nonferrous forgings and impact extrusions that are sold primarily to OEM customers in the plumbing, refrigeration, fluid power, industrial valves and fittings and automotive industries, as well as other manufacturers and distributors. The Port Huron, Michigan mill extrudes brass, bronze and copper alloy rod in sizes ranging from 3\/8 inches to 4 inches in diameter. These alloys are used in applications that require a high degree of machinability, wear and corrosion resistance, and electrical conductivity. Mueller bronze and aluminum forgings are used in a wide variety of end products, including automotive components, brass fittings, industrial machinery, valve bodies, gear blanks, computer hardware, and fire fighting equipment. The Company also serves the automotive, military ordnance, aerospace and general manufacturing industries with cold-formed aluminum and copper impact extrusions. Typical applications for impacts are high-strength ordnance, high-conductivity electrical components, builders' hardware, hydraulic systems, automotive parts and other uses where toughness must be combined with varying complexities of design and finish. Other applications for these products include screw machine parts, fabricated tube products, gears, bearings, hydraulic pumps, automobile parts, ordnance components, home appliances, air conditioning and refrigeration products and many others.\nMueller's standard products are marketed primarily through its own sales organization, which maintains sales offices throughout the United States and in Canada. Additionally, these products are sold and marketed through a network of agents, which, when combined with the Company's sales organization, provide the Company broad geographic market representation. Industrial products are sold, primarily, direct to customers on an OEM basis. Outside of North America, the Company sells its products through various channels including exclusive distributors, agents and direct sales channels in over 65 countries, primarily in Europe, the Far East and the Middle East.\nThe businesses in which Mueller is engaged are highly competitive. The principal methods of competition for Mueller's products are price, quality and service. No material portion of Mueller's business is dependent upon a single customer or a small group of related customers. The total amount of order backlog for Mueller's products on December 25, 1993 and December 26, 1992 was not significant.\nThe Company competes with various companies depending on the product line. In copper tubing, there are more than five (5) domestic competitors and many actual and potential foreign competitors. Additionally, it competes with a large number of manufacturers of substitute products made from plastic, iron and steel. In the copper fittings market, competitors include Elkhart Products, a division of AMCAST, and NIBCO, Inc. The plastic fittings market competitors include more than a dozen companies. The brass rod market competitors include Cerro Brass, Chase Brass, Extruded Metals and others. As illustrated above, no one competitor offers the range of products as does the Company. Management believes that the Company's ability to offer such a wide ranging product line is a competitive advantage in some markets.\nMueller's products are manufactured in its own plants located in Port Huron, Michigan; Fulton, Mississippi; Covington, Tennessee; Marysville, Michigan; Hartsville, Tennessee; Upper Sandusky, Ohio; and Strathroy, Ontario, Canada. During 1993 and 1992, the Company's Fulton copper tube mill and Port Huron rod mill operated at near capacity. New drawing and finishing equipment at the Fulton facility became fully operational in the fourth quarter of 1993\nwhich increased annual plant capacity by 12 to 15 million pounds. The other plants operated at high levels. The Company's facilities have a combined annual capacity of approximately 425 million pounds of industrial and standard products, which varies depending on product mix.\nIn addition, Mueller leases office and regional warehouse space for its standard products distribution network. Mueller's four factory warehouses service eight regional warehouses and stocking agents warehouses located in key marketing areas throughout the United States. Products are shipped from manufacturing plants to distribution centers and customer locations using a combination of Mueller's own trucking fleet and common carriers.\nThe major portion of Mueller's base metal requirements (primarily copper) are normally obtained through short-term supply contracts with competitive pricing provisions. Other raw materials used in the production of brass, including brass scrap, zinc, tin and lead are obtained from zinc and lead producers, open-market dealers and customers with brass process scrap. Raw materials used in the fabrication of aluminum and plastic products are purchased in the open market from major producers.\nEffective January 13, 1990, Mueller acquired Mueller Plastics Holding Company, Inc. (then known as U-Brand Corporation) which, at that time, manufactured malleable iron and plastic fittings. The malleable iron fittings portion of that business was not profitable and on November 1, 1992, most of its assets were sold. The remaining iron related assets, primarily plant buildings and equipment, have been idled pending their orderly liquidation. The iron fittings business accounted for approximately $20.0 million of the Company's net sales in 1992.\nNATURAL RESOURCES SEGMENT\nMueller, through its subsidiaries Arava and Alaska Gold, is engaged in the operation of a short line railroad and placer gold mining. It also owns interests in other natural resource properties.\nShort Line Railroad\nUtah Railway Company (\"Utah Railway\"), a wholly-owned subsidiary of Arava, operates approximately 100 miles of railroad track in Utah. Utah Railway serves four major customers pursuant to long-term contracts. Utah Railway transports almost 4 million tons of coal per year to an interchange point at Provo, Utah. The coal is then transported by connecting railroads to various customers including electric utilities, cement plants, west coast export facilities and others at destinations throughout the West.\nGold Mining\nAlaska Gold, an 85% owned subsidiary of the Company, mines placer gold in Nome, Alaska. Historically, operations have been conducted using floating bucket-line dredges. The Company plans to cease operating one of two dredges at the end of the 1994 season. The remaining operating dredge will operate as long as it is feasible to do so. Alaska Gold produced 22,440 net ounces of gold in 1993, 17,965 net ounces of gold in 1992, 19,016 net ounces of gold in 1991, 20,771 net ounces in 1990 and 22,412 net ounces in 1989, at a net production cost of $280 per ounce in 1993, $306 per ounce in 1992, $407 per ounce in 1991, $415 per ounce in 1990 and $332 per ounce in 1989.\nProperties consist of approximately 14,500 acres in and adjacent to Nome. In addition, Alaska Gold owns or has patented claims on approximately 10,400 acres in the Fairbanks, Alaska area, and approximately 3,000 acres in the Hogatza, Alaska area.\nDuring 1992-93, Alaska Gold undertook a pilot project to evaluate open pit mining in the Nome area. Under this method of mining, pay gravel is removed during the winter months then processed the following summer after natural thawing has occurred. The results of the initial project were not satisfactory and, consequently, Alaska Gold is conducting a second test pit during the 1993-94 winter. Based on the results of past exploratory drilling, Alaska Gold believes there may be scattered areas available on its properties to sustain open pit mining for ten years. Processing of the stock piled pay gravel from the 1993 pilot project in the summer of 1994 should confirm whether or not this method of mining is viable.\nCoal Mining\nPrior to March 1993, United States Fuel Company (\"U.S. Fuel\"), a wholly- owned subsidiary of Arava, mined steam coal by the deep-mine process at its coal properties located in Carbon and Emery Counties, Utah. Coal sales totaled 68,000 net tons in 1993, 97,000 net tons in 1992, 179,000 net tons in 1991, 636,000 net tons in 1990, and 704,000 net tons in 1989.\nU.S. Fuel's coal properties include approximately 12,700 acres of which approximately 10,000 acres are owned and 2,700 acres are leased. In early 1993, U.S. Fuel sold its rights under its only remaining coal supply contract. Coal production has declined substantially to 13,000 net tons in 1993. As these properties are now undergoing environmental remediation, U.S. Fuel does not expect to produce any additional coal from these properties.\nOther Natural Resources Properties\nThe Company also has interests in various mineral properties located in nine states and Canada. None of these mineral properties are significant to the Company's business, and may be sold or leased in the near future. During 1992, the Company sold its copper mine and mill located in Grant County, New Mexico. This mine had been idled since January, 1982.\nIn 1992, Ruby Hill Mining Company (\"Ruby Hill\") entered into a four-year Exploration Agreement with Purchase Option (the \"Exploration Agreement\") with Homestake Mining Company of California (\"Homestake\") for its property near Eureka, Nevada. Total lease payments due over the four years are $475,000, unless Homestake elects to terminate the Exploration Agreement or exercise its purchase option. Homestake has a substantial exploration and drilling program underway on the property. Should Homestake exercise its option to purchase the property, the total purchase price is $4 million payable over up to a six- year period depending on timing of production decisions and commencement of production. If Homestake produces a total of 500,000 ounces of gold or \"gold equivalents\" of other metals from this property, Ruby Hill is thereafter entitled to a three percent net smelter return royalty, after deduction for certain taxes and transportation. Arava owns 81% of the stock of Richmond- Eureka Mining Company, which owns 75% of the stock of Ruby Hill.\nLABOR RELATIONS\nThe Company employs approximately 2,000 employees of which approximately 975 are represented by various unions. A majority of the unionized employees are under contracts which expire in 1996 through 1999.\nRAW MATERIAL AND ENERGY AVAILABILITY\nAdequate supplies of raw material are available to the Company. Sufficient energy in the form of natural gas, fuel oils and electricity are available to operate the Company's production facilities. While temporary shortages of raw material and fuels may occur occasionally, they have not materially hampered the Company's operations.\nENVIRONMENTAL MATTERS\nThe Company is subject to various federal, state and local laws and regulations relating to environmental quality. Compliance with these laws and regulations is a matter of high priority for the Company's management, not only with respect to existing operations and remediation of sites associated with past operations, but also as an integral part of its planning for future growth.\nMueller's expenditures for compliance with federal, state and local laws and regulations governing the discharge of materials into the environment, or otherwise relating to the protection of the environment during 1991, included a charge to operations of $2.7 million in connection with a consent decree (See \"Michigan Settlement\" below). In 1993, the Company increased its environmental reserves by $1.1 million, which was charged to operations. Except as discussed below, the Company does not anticipate that it will need to make material expenditures for such compliance activities during the remainder of the 1994 fiscal year, or for the next two fiscal years.\nMichigan Settlement\nOn April 22, 1991, MBCo was named defendant in a private enforcement action filed in the United States District Court, Eastern District of Michigan. The suit alleged violations of the Clean Water Act related to operations at MBCo's Port Huron, Michigan facility. In May, 1991, the State of Michigan also gave informal notice of its intent to file a similar action based upon the same alleged violations.\nOn February 25, 1992, MBCo entered into a Consent Decree in the Circuit Court of Ingham County, Michigan. Pursuant to the Consent Decree, in 1992 MBCo contributed $1.0 million towards environmental mitigation projects in Michigan and paid a cash penalty of $500,000 to the State of Michigan. MBCo paid $0.3 million in 1993, $0.1 million in 1994, and will pay another $0.2 million, plus interest, through March, 1995.\nSince 1992, as required by the Consent Decree, MBCo initiated steps to eliminate all potential pollution sources while undertaking a full site investigation into possible contamination at its Port Huron facility. Total costs for these activities were approximately $485,000 in 1993 and $300,000 in 1992. Although total future costs for completion of these projects and related necessary remediation cannot be reliably estimated until the investigation and remediation plans are completed, the Company believes MBCo's established reserves should be adequate to cover anticipated site investigation and remediation costs.\nAlaska Gold\nAlaska Gold requires water for its thawing and dredging operation at Nome, Alaska and must comply with federal and state laws in connection with the appropriation from and discharge into the Snake River. Such operations are under the concurrent jurisdiction of the EPA and the State of Alaska Department of Environmental Conservation (\"ADEC\"). Effective October 15, 1991, the State of Alaska established land reclamation standards and obligations, and created a mandatory system for posting reclamation bonds. Total cost related to reclamation activities are not expected to exceed $125,000 for 1994 and 1995.\nCurrently, Alaska Gold is engaged in one ongoing site investigation related to past mining operations. Gold processing activities were conducted in and around the old \"gold house\" in Fairbanks between 1924 and 1964. Tailings containing arsenopyrite and mercury were generated as a by-product of the process. In 1992, Alaska Gold submitted a plan to the ADEC for clean-up and remediation of the contaminated soil at this site. Alaska Gold proposed to excavate and remove the soil to a pre-approved offsite location owned by Alaska Gold. In 1993, the Company received approval from the ADEC for its remediation proposal. The Company was also granted a special use permit by the Borough Council of Fairbanks (\"Council\") related to the project. However, the Council's decision to grant the permit was appealed by opponents of Alaska Gold's remediation proposal. In response to the opposition to its remediation proposal, Alaska Gold sought and obtained approval from the ADEC to remove the soil to the Borough landfill. Alaska Gold believes that this alternative may alleviate the concerns of those opposing Alaska Gold's current plan. Further, the anticipated costs of this proposed alternative are comparable to the projected costs of the original remediation proposal. Investigation and preparation costs to date are approximately $100,000. If approved, Alaska Gold estimates its plan can be fully implemented for less than $400,000. If the Council does not allow Alaska Gold to implement its proposal, a more costly remedial alternative may be required. In addition, Alaska Gold is aware that the ADEC has proposed to use State funds to conduct a comprehensive Phase I environmental assessment of contamination in an industrial area in downtown Fairbanks. Alaska Gold's Fairbanks properties referred to above are included within this industrial area. The effect, if any, of this assessment on Alaska Gold is unknown.\nMining Remedial Recovery Company\nPursuant to Sharon's plan of reorganization, the subsidiaries of Sharon were realigned and certain stock and assets transferred to Mining Remedial Recovery Company (\"MRRC\"), a wholly-owned subsidiary of Arava. MRRC was formed for the purpose of managing the remediation of certain properties and the appropriate disposition thereof including sites described below. In addition to the stock of certain subsidiaries and certain other property, MRRC was capitalized with a $7.85 million cash contribution. Pursuant to a finding of the bankruptcy court, such cash contribution together with the other assets contributed to MRRC constituted adequate capitalization of MRRC (See \"Reorganization Under Chapter 11 of the Bankruptcy Code\" below). MRRC has instituted efforts to recover expenditures from insurance companies and third parties that allegedly contributed to the environmental conditions requiring remediation. It appears that MRRC will be up to a few million dollars short of having sufficient funds to complete remediation at all its sites, due to cost overruns, unanticipated expenditures, and changing environmental regulations that, in some cases, have increased the costs of remediation, absent some recoveries from insurance companies, third parties or the sale of\nassets. MRRC cannot reasonably estimate the timing or amount of such proceeds or additional costs. If any more of MRRC's sites are included on CERCLA's National Priorities List (see discussion below), MRRC's legal and, perhaps, remediation costs, would be likely to increase.\n1. Cleveland Mill Site\nIn January, 1990, Sharon received a notice from the United States that it was potentially responsible under the Comprehensive Environmental Response, Compensation and Liability Act (\"CERCLA\") for the costs of removal or remediation actions incurred or to be incurred by the United States for an approximately 18 acre site located five miles northeast of Silver City, New Mexico (the \"Cleveland Mill site\"), which has been placed on CERCLA's National Priorities List. At that time, Sharon, which had never operated the mill at this site, denied liability for response costs. In November, 1993, the EPA notified Mueller, Arava, MRRC and other unaffiliated entities that they may be potentially responsible parties (\"PRPs\") at the Cleveland Mill site. The EPA demanded reimbursement for the EPAs past and future response costs and notified the PRPs that they had 60-days to enter into negotiations with the EPA regarding this site. MRRC and Bayard Mining Corporation, a subsidiary of Arava, together with an unaffiliated former owner\/operator of the site, have entered into negotiations with the EPA and confirmed to the EPA that they are prepared to go forward with the negotiation and implementation of a consent decree and the statement of work for remedial design and remedial action at the site. In its September, 1993, Record of Decision, the EPA estimated the costs of its selected remedy at approximately $6 million, in addition to the $1.2 million previously incurred by the EPA at this site. The text of the consent decree has yet to be finalized, and there are substantive differences that are yet to be resolved with the EPA, as well as outstanding allocation issues to be resolved among the various PRPs. If no consent decree is entered into with the EPA, MRRC believes it likely that the EPA would either (i) unilaterally implement its selected remedy and subsequently seek recovery of its costs under CERCLA from the various PRPs or (ii) issue an order requiring the PRPs to implement the selected remedy.\n2. Hanover and Bullfrog Sites\nMRRC is the current owner of 80 acres located in Grant County, New Mexico, called the Hanover site. About 2.7 million cubic yards of mill tailings are concentrated in several sites on the property. No potentially- responsible party notices have been received from the United States under CERCLA, although the New Mexico authorities have done a preliminary study of the Hanover site to possibly include the site within a much larger area, called the Central Mining District, to be proposed for CERCLA's National Priorities List. A substantial majority of the tailings at the Hanover site were deposited by an unaffiliated former operator of the mill, which is a financially solvent entity. Costs associated with capping these tailings on site and regrading the soil are estimated at approximately $1.0 million. MRRC is also the current owner of 148 acres located nearby also in Grant County, New Mexico, called the Bullfrog site. The Bullfrog site is also within the Central Mining District. This site is similar to the Hanover site, except that the volume of tailings is only two-thirds as large. None of the tailings were deposited by unaffiliated solvent entities. Costs associated with capping and regrading at this site are estimated at $0.9 million.\n3. U.S.S. Lead\nU.S.S. Lead Refinery, Inc. (\"Lead Refinery\") is a subsidiary of MRRC. Lead Refinery has executed two partial Interim Agreed Orders (the \"Orders\"), to settle two administrative enforcement cases, in which the State of Indiana alleged that Lead Refinery violated (i) certain solid waste management, storage and disposal provisions under state law; and (ii) certain water discharge provisions that limit the amount of lead that may be discharged into waters adjacent to the Lead Refinery facility. Two other appeals filed by Lead Refinery challenging the State's permitting and waste management actions, which relate to the two enforcement cases, were deferred pending implementation of the Orders.\nPursuant to the Orders, Lead Refinery submitted a closure plan for the site. In phase 1 of 4 of the closure plan, Lead Refinery removed flue dust and calcium sulfate piles from the site. A certification for closure for phase 1 was submitted to the State of Indiana. Lead Refinery also submitted a site assessment plan as phase 2 of the closure plan. As discussed below, the State of Indiana has deferred consideration of the site assessment plan as a result of the execution of a corrective action order between the EPA and Lead Refinery. The appropriateness of imposing any civil penalties on Lead Refinery has been deferred pending implementation of the Orders.\nOn May 17, 1985, the U.S. Department of Justice, on behalf of the EPA, filed a complaint against Lead Refinery in the U.S. District Court for the Northern District of Indiana, alleging that Lead Refinery violated the Federal Clean Water Act by exceeding certain discharge limitations of Lead Refinery's NPDES water discharge permit. On May 28, 1991, the parties signed a consent decree whereby Lead Refinery agreed to pay a civil penalty of $40,000 within one year, with an additional $15,000 depending on resumption of operations or sale of the property, and to cover all existing baghouse dust and calcium sulfate waste piles at the facility.\nIn February, 1991, Lead Refinery received a request from EPA under Superfund for information on whether Lead Refinery arranged for the disposal of hazardous substances at a site located in Pedricktown, New Jersey. Lead Refinery provided information responsive to EPA's request. Lead Refinery has been informed by the former owner and operator that it intends to seek CERCLA response costs for alleged shipments of hazardous substances to the Pedricktown Superfund site. Lead Refinery has executed a tolling agreement with the former owner\/operator regarding the Pedricktown site, which extends the statute of limitations, until such time as either party gives notice of termination of the agreement. There have been no communications from the former owner\/operator since the execution of the tolling agreement in late 1989. In Aril, 1992, Lead Refinery also received a request from EPA under Superfund for information on whether Lead Refinery arranged for the disposal of hazardous substances in the vicinity of the Grand Calumet River\/Indiana Harbor Ship Canal. Lead Refinery responded to that information request. In September 1991, EPA requested information under Superfund regarding the Lead Refinery site in East Chicago, Indiana. Lead Refinery also submitted a response to that request. In February, 1992, EPA advised Lead Refinery of its intent to list the property as a Superfund site. Lead Refinery filed a written response opposing such listing.\nIn September, 1993, Lead Refinery signed a negotiated Administrative Order on Consent (the \"Consent Order\") with the EPA Region V pursuant to Section 3008(h) of the Resource Conservation and Recovery Act (\"RCRA\"). The Consent Order, which the EPA executed in November, 1993, covers remediation activities at the site in East Chicago, Indiana. The Consent Order provides for Lead Refinery to complete certain on-site interim remedial activities and studies that extend off site. Lead Refinery has submitted certain workplans to implement the remedial activities and is awaiting approval from EPA to commence the required corrective actions. The costs for the studies and interim clean up efforts are expected to be between $2.0 million and $2.4 million, the majority of which would be required to be expended in 1994. Once these activities are completed, additional work would likely be needed to remediate any contamination not addressed by the Consent Order. Lead Refinery lacks the financial resources needed to complete remediation and intends to seek financial assistance from other PRPs to permit Lead Refinery to conduct a private-party cleanup under RCRA.\nLead Refinery has also received an administrative order from EPA to perform response actions under Superfund with respect to a site located in Granite City, Illinois. It is the position of Lead Refinery that it did not arrange for the disposal of hazardous substances at that site. In August, 1991, the U.S. Department of Justice, on behalf of the EPA, filed suit against several owners and operators of the site and numerous alleged generators of hazardous waste at the site. Lead Refinery was not named as a defendant in that lawsuit.\nBy letter dated June 23, 1992, the EPA informed Lead Refinery that it is a responsible party under Superfund for the H. Browne site, located in Walker, Michigan, and invited Lead Refinery to execute a de minimus settlement agreement with the agency. By letter dated August 3, 1992, Lead Refinery declined to execute the de minimus settlement agreement.\nMiscellaneous\nIn April, 1992, Mueller received a notice from the State of Indiana, addressed to Sharon c\/o Mueller, notifying Sharon that it had sixty days to coordinate with other potentially responsible parties (\"PRPs\") and present a \"good faith\" proposal to the State regarding a site in Indiana. Sharon is one of nearly two hundred PRPs at a site in Indiana due to disposal of electric arc furnace dust and solvents. Sharon is alleged to have contributed less than 1% of the hazardous wastes at this site. On January 26, 1994, Mueller submitted a proposal to join the PRP Site Participation Agreement along with an addendum preserving its defenses as successor to Sharon, including among other things, Sharon's prior release and discharge in the Bankruptcy Court and the assumption of the Designated Steel Liabilities as more fully set forth in Sharon's Reorganization Plan and the Purchase Agreement and related Documents. (See \"Reorganization Under Chapter 11 of the Bankruptcy Code, Disposition of the Steel Business\" below.) Based upon Sharon's estimated allocated share of liability and estimated total response costs, Mueller's response liability in this matter is estimated at less than $250,000.\nIn November, 1992, Mueller was added as one of more than one hundred third-party defendants to a complaint filed by the Government in 1990 pursuant to CERCLA against 26 corporations alleged to have disposed of hazardous materials at a site in Pennsylvania. Mueller is not required to file an answer and is deemed automatically to have denied any liability. Based on preliminary site clean-up costs and the number of PRPs involved in this site, it does not appear that these proceedings will have any material affect on\nMueller.\nOn August 26, 1993, the EPA served notice to MBCo that it is one of 70 PRPs in the Stoller Chemical Company Site investigation in Jericho, South Carolina. In response to the notice, MBCo filed its response to the EPA's information request in a timely manner and joined a PRP steering committee which was formed to coordinate response activities. On January 21, 1994, the EPA issued a Unilateral Administrative Order pursuant to Section 106(a) of CERCLA setting forth scheduled response activities to be undertaken by the PRPs. Although no estimates of total response costs have been made, the Company does not anticipate that MBCo's allocated share of costs will be material.\nOn March 7, 1994, the Company received notice from the EPA that MBCo was a PRP at the Jack's Creek\/Sitkin Smelting Superfund Site in Eastern Pennsylvania. The site is a former smelting facility which received materials from MBCo in the 1970s. MBCo is one of seventy-five de maximus PRPs and is alleged to have contributed less than 1 percent of the hazardous wastes at this site. Approximately 470 de minimus PRPs are also included in the investigation. No estimated cleanup or response costs are known at this time, and no immediate action has been required. A PRP steering committee is expected to be formed within the next two months.\nIn October, 1986, the EPA notified Sharon that it may be considered a PRP with respect to allegedly hazardous wastes released from past mining operations conducted by UV Industries, Inc. (\"UV\") in Cherokee County, Kansas. The EPA asserted that under CERCLA, Sharon was potentially responsible for the cost of investigation, clean-up and remediation of the wastes allegedly deposited circa 1917 during leasehold operations conducted by UV. Sharon denied liability under CERCLA on the grounds that it was neither the owner nor operator when allegedly hazardous substances were being disposed of at the site and for the reason that UV's leasehold interest had expired prior to the time that Sharon acquired UV's assets. Mueller has never been contacted concerning this site and does not know the estimated costs of remediation of this site.\nOTHER BUSINESS FACTORS\nThe Registrant's business is not materially dependent on patents, trademarks, licenses, franchises or concessions held. In addition, expenditures for company-sponsored research and development activities were not material during 1993, 1992 or 1991. No material portion of the Registrant's business involves governmental contracts.\nREORGANIZATION UNDER CHAPTER 11 OF THE BANKRUPTCY CODE\nOn April 17, 1987, Sharon filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the Western District of Pennsylvania, Erie Division (the \"Bankruptcy Court\"), and was assigned Case No. 87-00207E. On November 21, 1990, the Bankruptcy Court confirmed a plan of reorganization for Sharon proposed by Quantum Overseas, N.V. and Castle Harlan, Inc. (the \"Reorganization Plan\"). The Reorganization Plan, previously filed with the SEC as Exhibit 2.1 to the Company's 1990 Annual Report on Form 10-K, is incorporated by reference in its entirety herein, and the summary of the Reorganization Plan set forth below is qualified in its entirety by reference thereto. The Reorganization Plan was consummated on December 28, 1990 (the \"Consummation Date\"). Upon consummation of the Reorganization Plan, Mueller became a successor to Sharon for purposes\nof the Bankruptcy Code, and assumed the reporting obligations of Sharon under Section 12 of the Securities Exchange Act of 1934.\nPursuant to the Reorganization Plan, on the Consummation Date, Sharon sold its steel business to Sharon Specialty Steel, Inc. (\"New Steelco\"), a Delaware corporation and was reorganized under Chapter 11 of the Bankruptcy Code through a recapitalization of the remaining non-steel businesses (consisting primarily of the copper and brass fabrication business and Sharon's natural resources operations) into a holding company structure. In connection with the recapitalization of Sharon, Sharon merged into its wholly- owned subsidiary, Mueller, realigned its subsidiaries, obtained a $50 million infusion of capital and retained approximately $12.7 million of cash. The proceeds from the capital infusion and such cash were then used by Sharon to make payments to settle certain third party claims. In addition, pursuant to the Reorganization Plan, a $7.85 million capital contribution was made to MRRC (See \"Environmental Matters - Mining Remedial Recovery Company\" above).\nExcept as set forth in the next two sentences and as provided in the Reorganization Plan and certain other related agreements, consummation of the Reorganization Plan operated to discharge all claims against Sharon's Chapter XI case arising before the entry of the Confirmation Order or otherwise settle or resolve all of Sharon's liabilities through the assumption by New Steelco or its subsidiaries of certain Designated Steel Liabilities (as defined in the Purchase Agreement) or otherwise as more fully set forth in the Reorganization Plan (including, without limitation, certain pension fund liabilities, employee-related liabilities and environmental liabilities). Pursuant to the Reorganization Plan, Mueller assumed certain liabilities and obligations on the Consummation Date with respect to the following: a $19 million retiree obligation to employees and retirees of Sharon's steel division; a $9 million pension plan obligation; Mueller's $25 million principal amount of Delayed Distribution Notes; certain tax obligations requiring Mueller to pay, over a period of up to six years from the date of assessment of certain tax claims, an amount estimated at $6.5 million which have subsequently been reduced to approximately $5.3 million through negotiations; Mueller's obligation to purchase from Quantum Fund, certain New Steelco securities for a purchase price of $5 million plus interest; and Mueller's obligation to provide up to a $16.5 million guarantee to finance New Steelco's anticipated acquisition of a continuous caster. In Article X of the Midvale Consent Decree, the Company agreed that all non-Midvale EPA claims, whether stated in a proof of claim or not, would be excepted from discharge, unless otherwise compromised or settled under the Reorganization Plan.\nPursuant to the Reorganization Plan, on the Consummation Date all of Sharon's Old Common Stock was canceled. In connection with the Reorganization Plan, Mueller issued 10,000,000 shares of its common stock, par value $.01 per share (\"Common Stock\"), and $25,000,000 aggregate principal amount of its Delayed Distribution Notes (the \"Delayed Distribution Notes\"). On March 25, 1991, Mueller prepaid in full the Delayed Distribution Notes.\nPursuant to the Reorganization Plan, 7,000,000 of the shares of Mueller's Common Stock and $17,500,000 principal amount of Mueller's Delayed Distribution Notes were issued and distributed on a pro rata basis to the holders of the Allowed General Unsecured Claims in Class 6 (as defined in the Reorganization Plan) or otherwise held in a Disputed Claims Reserve (as defined in the Reorganization Plan) in full satisfaction of such Claims. Through March 16, 1994, 6,931,030 of the 7,000,000 shares of Mueller's Common Stock and approximately $17,327,944 on account of Delayed Distribution Notes have been distributed and 68,970 shares and approximately $172,056 on account\nof Delayed Distribution Notes remain in escrow with Mueller's disputed claims agent (the \"Disputed Claims Agent\"). The Company anticipates that subsequent distribution of its Common Stock and cash on account of the Delayed Distribution Notes will be made to holders of record of Allowed General Unsecured Claims as of November 21, 1990 once the remaining claims still in dispute are resolved. Subsequent distributions, if any, will be de minimus.\nSince consummation of the Reorganization Plan, Mueller negotiated court- approved settlements of all substantial unsecured claims filed against Sharon. In addition, all material administrative claims have been either consensually settled or otherwise disposed of by Bankruptcy Court order. Mueller has, moreover, paid or is currently paying all material priority tax claims in accordance with the Reorganization Plan or pursuant to negotiated agreements. The Company believes that all material outstanding claims and bankruptcy related matters have been resolved.\nThe foregoing summary of the Reorganization Plan and related agreements as well as subsequent settlements related thereto is qualified in its entirety by reference to the following Exhibits which are incorporated by reference in their entirety herein: The Midvale Consent Decree, previously filed as Exhibit 28.7 to the Company's 1990 Report on Form 10-K, the Purchase Agreement and the Tax Benefits Agreement, previously filed as Exhibit 2.6 and 10.5, respectively, to the Company's 1990 Annual Report on Form 10-K. For the terms of actual settlement agreements and related consent decrees, reference is made to Exhibits 28.3 to 28.21 of the Company's Annual Report on Form 10-K, dated March 29, 1991, for the year ended December 31, 1990, Exhibit 28.22 and Exhibits 28.24 to 28.26 of the Company's Annual Report on Form 10-K, dated March 25, 1992, for the year ended December 28, 1991 and Exhibits 28.27 through 28.33 of the Company's Annual Report on Form 10-K, dated March 17, 1993, for the year ended December 26, 1992.\nITEM 2.","section_1A":"","section_1B":"","section_2":"ITEM 2. PROPERTIES\nInformation pertaining to the Registrant's operating facilities is included under \"Business\" in Item 1, which is incorporated herein by reference. Except as noted in Item 1, all of the Registrant's principal properties are owned by it. The Registrant's plants are in satisfactory condition and are suitable for the purpose for which they were designed and are now being used.\nITEM 3.","section_3":"ITEM 3. LEGAL PROCEEDINGS\nCanco Litigation\nIn 1989, Canco Oil & Gas Ltd. (\"Canco\"), a Canadian subsidiary, instituted litigation in the Court of Queen's Bench for Saskatchewan contending that Canco's royalty interests continued against mineral titles transferred to the Government of Saskatchewan (the \"Government\") or Scurry Rainbow Oil Limited (\"Scurry\") or, alternatively, that Scurry had breached its contractual obligations to Canco. In December, 1991, Canco filed a second suit against the Government in the same court seeking a recalculation of royalties against the Government on other expropriated properties. In the Fall of 1992, the Government enacted legislation that expropriated Canco's rights to royalties. At the same time, the Government agreed to stay the implementation of this legislation and indicated a willingness to negotiate a settlement with Canco, provided all issues between the Government, Scurry and Canco under litigation were resolved. All of these have been settled and as part of this settlement Canco has agreed to sell its oil and gas royalty\ninterests in consideration for cash and properties valued at approximately $3.0 million. Closing is anticipated on or about March 25, 1994.\nChapter 11 Proceedings\nReference is made to \"Reorganization Under Chapter 11 of the Bankruptcy Code\" in Item 1 of this Report, which is incorporated herein by reference, for a description of Sharon's voluntary petition for relief filed under Chapter 11 of the Bankruptcy Code on April 17, 1987.\nEnvironmental Proceedings\nReference is made to \"Environmental Matters\" in Item 1 of this Report, which is incorporated herein by reference, for a description of environmental proceedings.\nITEM 4.","section_4":"ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS\nNone.\nPART II\nITEM 5.","section_5":"ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS\nThe information required by Item 5 of this Report is included under the caption \"Capital Stock Information\" on page 35 of the Registrant's Annual Report to Stockholders for the year ended December 25, 1993, which information is incorporated herein by reference.\nITEM 6.","section_6":"ITEM 6. SELECTED FINANCIAL DATA\nSelected financial data are included under the caption \"Selected Financial Data\" on page 36 of the Registrant's Annual Report to Stockholders for the year ended December 25, 1993, which selected financial data is incorporated herein by reference.\nITEM 7.","section_7":"ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS\nManagement's discussion and analysis of financial condition and results of operations is contained under the caption \"Financial Review\" on pages 9 through 11 of the Registrant's Annual Report to Stockholders for the year ended December 25, 1993 and is incorporated herein by reference.\nITEM 8.","section_7A":"","section_8":"ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA\nSee Index to Financial Statements and Supplemental Financial Information on page 28 to 33 of this Annual Report on Form 10-K which is incorporated herein by reference.\nITEM 9.","section_9":"ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE\nNone.\nPART III\nITEM 10.","section_9A":"","section_9B":"","section_10":"ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT\nThe information required by Item 10 is contained under the caption \"Ownership of Common Stock by Directors and Officers and Information about Director Nominees\" in the Company's Proxy Statement for its 1994 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission on or about March 17, 1994 and is incorporated herein by reference.\nITEM 11.","section_11":"ITEM 11. EXECUTIVE COMPENSATION\nThe information required by Item 11 is contained under the caption \"Executive Compensation\" in the Company's Proxy Statement for its 1994 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission on or about March 17, 1994 and is incorporated herein by reference.\nITEM 12.","section_12":"ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT\nThe information required by Item 12 is contained under the captions \"Principal Stockholders\" and \"Ownership of Common Stock by Directors and Officers and Information about Director Nominees\" in the Company's Proxy Statement for its 1994 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission on or about March 17, 1994 and is incorporated herein by reference.\nITEM 13.","section_13":"ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS\nThe information required by Item 13 is contained under the caption \"Certain Relationships and Transactions with Management\" in the Company's Proxy Statement for its 1993 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission on or about March 17, 1994 and is incorporated herein by reference.\nPART IV\nITEM 14.","section_14":"ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K\n(a) The following documents are filed as part of this report:\n1. Financial Statements: the financial statements, notes, and report of independent auditors described in item 8 of this report, which are incorporated by reference.\n2. Financial Statement Schedules: the financial statement schedules, if any, described in Item 8 of this report which are incorporated herein by reference.\n3. Exhibits:\n2.1 (i) Third Amended and Restated Plan of Reorganization for Sharon Steel Corporation dated September 27, 1990, proposed by Quantum Overseas, N.V. and Castle Harlan, Inc. (Incorporated herein by reference to Exhibit 2.1 of the Registrant's Current Report on Form 8-K dated December 28, 1990), and (ii) Motion of Quantum Overseas, N.V. and Castle Harlan, Inc. pursuant to 11 U.S.C. 1127(a) and Bankruptcy Rule 3019 for an Order approving modification of such plan (as so modified, the \"Plan\")\n(Incorporated herein by reference to Exhibit 2.2 of the Registrant's Current Report on Form 8-K dated December 28, 1990).\n2.2 Order of the Bankruptcy Court confirming the Plan, dated November 20, 1990, entered by the Bankruptcy Court on November 21, 1990 (Incorporated herein by reference to Exhibit 2.3 of the Registrant's Current Report on Form 8-K dated December 28, 1990).\n2.3 Order of the Bankruptcy Court pursuant to 11 U.S. C. 1142(b), Bankruptcy Rule 3020(d) and Article XIII.E. of the Plan, in aid of consummation of the Plan, dated December 19, 1990. (Incorporated herein by reference to Exhibit 2.3 of the Registrant's Report on Form 10-K, dated March 29, 1991, for the year ended December 31, 1990).\n2.4 Order of the Bankruptcy Court pursuant to 11 U.S.C. 1142(b), Bankruptcy Rule 3020(d) and Article XIII.E. of the Plan, in aid of consummation of the Plan, dated February 28, 1991 (Incorporated herein by reference to Exhibit 28.1 of the Registrant's Current Report on Form 8-K dated January 28, 1991).\n2.5 Order of the Bankruptcy Court pursuant to 11 U.S.C. 1142(b), Bankruptcy Rule 3020(d) and Article XIII.E. of the Plan, in aid of consummation of the Plan, dated February 19, 1991 (Incorporated herein by reference to Exhibit 28.2 of the Registrant's Current Report on Form 8-K dated February 13, 1991).\n2.6 Asset Purchase Agreement, dated as of December 28, 1990, by and among Sharon, Inc., Franklin E. Agnew III, as Chapter 11 trustee, and Sharon Steel Corporation (which was merged with and into Mueller Industries, Inc.) (Incorporated herein by reference to Exhibit 2.5 of the Registrant's Current Report on Form 8-K dated December 28, 1990).\n3.1 Certificate of Incorporation of Mueller Industries, Inc. and all amendments thereto (Incorporated herein by reference to Exhibit 3.1 of the Registrant's Current Report on Form 8-K dated December 28, 1990).\n3.2 By-laws of Mueller Industries, Inc., as amended and restated, effective October 31, 1991. (Incorporated herein by reference to Exhibit 3.2 of the Registrants Annual Report on Form 10-K, dated March 25, 1992, for the year ended December 28, 1991.)\n4.1 Common Stock Specimen (Incorporated herein by reference to Exhibit 4.1 of the Registrant's Current Report on Form 8-K dated December 28, 1990).\n4.2 Certain instruments with respect to long-term debt of the Company have not been filed as Exhibits to the Report since the total amount of securities authorized under any such instrument does not exceed 10 percent of the total assets of the Company and its subsidiaries on a consolidated basis. The Company agrees to furnish a copy of each such instrument upon request of the Securities and Exchange Commission.\n10.1 Registration Rights Agreement, dated as of December 28, 1990, by and between Quantum Overseas, N.V. (which assigned its rights thereunder to Quantum Fund, N.V.) and Mueller Industries, Inc. (Incorporated herein by reference to Exhibit 10.1 of the Registrant's Report on Form 10-K, dated March 29, 1991, for the year ended December 31, 1990).\n10.2 Agreement Regarding Retiree Obligation, dated as of December 28, 1990, made by Sharon Steel Corporation (which was merged with and into Mueller Industries, Inc.) in favor of Sharon's retiree plans referred to therein (Incorporated herein by reference to Exhibit 10.2 of the Registrant's Report on Form 10-K, dated March 29, 1991, for the year ended December 31, 1990).\n10.3 Pension Plan Contribution Agreement, dated as of December 28, 1990, by and among Sharon, Inc., Mueller Industries, Inc. and Sharon Steel Corporation (which was merged with and into Mueller Industries, Inc.) (Incorporated herein by reference to Exhibit 10.3 of the Registrant's Report on Form 10-K, dated March 29, 1991, for the year ended December 31, 1990).\n10.4 Caster Letter Agreement, dated as of December 28, 1990, by and between Sharon, Inc. and Mueller Industries, Inc. (Incorporated herein by reference to Exhibit 10.4 of the Registrant's Report on Form 10-K, dated March 29, 1991, for the year ended December 31, 1990).\n10.5 Tax Benefits Agreement, dated as of December 28, 1990, by and between Mueller Industries, Inc. and Sharon, Inc. (Incorporated herein by reference to Exhibit 10.5 of the Registrant's Report on Form 10-K, dated March 29, 1991, for the year ended December 31, 1990).\n10.6 Repurchase Agreement, dated December 28, 1990, by and between Mueller Industries, Inc. and Quantum Overseas, N.V. (which assigned its rights thereunder to Quantum Fund, N.V.) (Incorporated herein by reference to Exhibit 10.6 of the Registrant's Report on Form 10-K, dated March 29, 1991, for the year ended December 31, 1990).\n10.7 Amended and Restated Credit Agreement, dated as of March 25, 1991, by and among Mueller Brass Co., Mueller Industries, Inc. and Michigan National Bank (Incorporated herein by reference to Exhibit 10.7 of the Registrant's Report on Form 10-K, dated March 29, 1991, for the year ended December 31, 1990).\n10.8 Guaranty Agreement, made as of March 25, 1991, by Mueller Industries, Inc. in favor of Michigan National Bank (Incorporated herein by reference to Exhibit 10.8 of the Registrant's Report on Form 10-K, dated March 29, 1991, for the year ended December 31, 1990).\n10.9 Amended and Restated Loan Agreement, dated as of March 25, 1991, by and between Michigan National Bank and U-Brand Corporation (Incorporated herein by reference to Exhibit 10.9 of the Registrant's Report on Form 10-K, dated March 29, 1991, for the year ended December 31, 1990).\n10.10 Amended and Restated Guaranty Agreement, made as of March 25, 1991 by Mueller Brass Co. in favor of Michigan National Bank (Incorporated herein by reference to Exhibit 10.10 of the Registrant's Report on Form 10-K, dated March 29, 1991, for the year ended December 31, 1990).\n10.11 Asset Purchase Agreement, dated as of December 28, 1990, by and among Sharon, Inc., Franklin E. Agnew III, as Chapter 11 trustee, and Sharon Steel Corporation (which was merged with and into Mueller Industries, Inc.) (Incorporated herein by reference to Exhibit 2.5 of the Registrant's Current Report on Form 8-K, dated December 28, 1990).\n10.12 Employment Agreement, effective October 1, 1991 by and between Mueller Industries, Inc. and Harvey L. Karp (Incorporated herein by reference to Exhibit 10.3 of the Registrant's Current Report on Form 8-K dated November 22, 1991).\n10.13 Stock Option Agreement, dated December 4, 1991 by and between Mueller Industries, Inc. and Harvey L. Karp (Incorporated herein by reference to Exhibit 10.4 of the Registrant's Current Report on Form 8-K dated November 22, 1991).\n10.14 Indemnification Agreement, dated October 1, 1991 by and between Quantum Fund, N.V. and Harvey L. Karp (Incorporated herein by reference to Exhibit 10.5 of the Registrant's Current Report on Form 8-K dated November 22, 1991).\n10.15 Employment Agreement, effective November 26, 1991 by and between Mueller Industries, Inc. and William H. Hensley (Incorporated herein by reference to Exhibit 10.6 of the Registrant's Current Report on Form 8-K dated November 22, 1991).\n10.16 Mueller Industries, Inc. 1991 Employee Stock Purchase Plan (Incorporated herein by reference to Exhibit 4(a) of the Registrant's Registration Statement on Form S-8 dated June 28, 1991).\n10.17 Mueller Industries, Inc. 1991 Incentive Stock Option Plan (Incorporated herein by reference to Exhibit 4(a) of the Registrant's Registration Statement on Form S-8 dated April 17, 1992).\n10.18 Employment Agreement, effective June 3, 1992 by and between Mueller Industries, Inc. and William D. O'Hagan (Incorporated herein by reference to Exhibit 10.1 of the Registrant's Current Report on Form 8-K dated June 3, 1992).\n10.19 Note Purchase Agreement dated as of August 1, 1992, between Utah Railway Company and John Hancock Mutual Life Insurance Company (Incorporated herein by reference to Exhibit 10.1 of the Registrant's Current Report on Form 8-K dated August 20, 1992).\n10.20 Term Loan Agreement dated as of August 20, 1992, between Sharon Steel Corporation and the Company (Incorporated herein by reference to Exhibit 10.2 of the Registrant's Current Report on Form 8-K dated August 20, 1992).\n10.21 Stock Option Agreement dated as of August 20, 1992, between the Company and Sharon Specialty Steel, Inc. (Incorporated herein by reference to Exhibit 10.3 of the Registrant's Current Report on Form 8-K dated August 20, 1992).\n10.22 Exchange Agreement dated August 20, 1992, between the Company and Sharon Specialty Steel, Inc. (Incorporated herein by reference to Exhibit 10.4 of the Registrant's Current Report on Form 8-K dated August 20, 1992).\n10.23 Intercreditor Agreement dated as of August 20, 1992, by and among Sharon Specialty Steel, Inc., Sharon Steel Corporation, Citibank, N.A., as agent, and the Company (Incorporated herein by reference to Exhibit 10.5 of the Registrant's Current Report on Form 8-K dated August 20, 1992).\n10.24 Bankruptcy Court Order, dated August 19, 1992 (Incorporated herein by reference to Exhibit 10.6 of the Registrant's Current Report on Form 8-K dated August 20, 1992).\n10.25 Releases, dated August 20, 1992, executed by Sharon Specialty Steel, Inc., Sharon Steel Corporation and the Company (Incorporated herein by reference to Exhibit 10.7 of the Registrant's Current Report on Form 8-K dated August 20, 1992).\n10.26 Credit Agreement dated October 1, 1992, between Michigan National Bank and Mueller Industries, Inc. (Incorporated herein by reference to Exhibit 10.27 of the Registrant's Report on Form 10- K, dated March 17, 1993, for the fiscal year ended December 26, 1992.)\n10.27 Summary description of the Registrant's 1994 bonus plan for certain key employees.\n10.28 Amendment to Employment Agreement, effective January 1, 1994, to Employment Agreement by and between Mueller Industries, Inc. and Harvey L. Karp.\n10.29 Employment Agreement, effective as of January 1, 1994, by and between Mueller Industries, Inc. and William D. O'Hagan.\n10.30 Amendment to Employment agreement, effective as of July 23, 1993, by and between Mueller Industries, Inc. and William H. Hensley.\n13.0 Mueller Industries, Inc.'s Annual Report to Shareholders for the year ended December 26, 1993. Such report, except to the extent incorporated herein by reference, is being furnished for the information of the Securities and Exchange Commission only and is not to be deemed filed as a part of this Annual Report on Form 10- K.\n21.0 Subsidiaries of the Registrant.\n23.0 Consent of Independent Auditor. (Includes report on Supplemental Financial Information.)\n99.1 Nominee Agreement, dated as of December 29, 1990, as amended by Amendment No. 1 to Nominee Agreement, dated as of January 28, 1991 and Amendment No. 2 to Nominee Agreement dated as of February 19, 1991 (Incorporated herein by reference to Exhibit 28.1 of the Registrant's Current Report on Form 8-K, dated December 28, 1990).\n99.2 Disputed Claims Agency Agreement, dated as of December 27, 1990 by and between Mueller Industries, Inc. and Bernhard Schaffler, as disputed claims agent (Incorporated herein by reference to Exhibit 28.2 of the Registrant's Report on Form 10-K, dated March 29, 1991, for the year ended December 31, 1990).\n99.3 Master PBGC Agreement, dated as of December 21, 1990, by and among Castle Harlan, Inc., Quantum Overseas, N.V., Franklin E. Agnew III, as Chapter 11 Trustee (the \"Chapter 11 Trustee\") on behalf of Sharon Steel Corporation and the Pension Benefit Guaranty Corporation (Incorporated herein by reference to Exhibit 28.3 of the Registrant's Report on Form 10-K, dated March 29, 1991, for the year ended December 31, 1990).\n99.4 IRS Settlement Agreement, dated as of December 21, 1990, by and between the Chapter 11 Trustee on behalf of Sharon Steel Corporation and Thomas Corbett, United States Attorney, on behalf of the Commissioner of Internal Revenue (Incorporated herein by reference to Exhibit 28.4 of the Registrant's Report on Form 10-K, dated March 29, 1991, for the year ended December 31, 1990).\n99.5 Partial Consent Decree, lodged with the United States District Court for the District of Utah (the \"Utah District Court\") on August 20, 1990, by and among the United States of America on behalf of the United States Environmental Protection Agency, the State of Utah, and Sharon Steel Corporation by and through its Chapter 11 Trustee (the \"Midvale Consent Decree\") (Incorporated herein by reference to Exhibit 28.5 of the Registrant's Report on Form 10-K, dated March 29, 1991, for the year ended December 31, 1990).\n99.6 (i) Order, dated November 13, 1990, approving the Midvale Consent Decree and (ii) Notice of Approval of Midvale Consent Decree (Incorporated herein by reference to Exhibit 28.6 of the Registrant's Report on Form 10-K, dated March 29, 1991, for the year ended December 31, 1990).\n99.7 (i) Midvale Settlement Agreement made as of October 22, 1990, by and among the United States of America on behalf of the United States Environmental Protection Agency, the State of Utah, Sharon Steel Corporation by and through its Chapter 11 Trustee, Castle Harlan, Inc., Quantum Overseas, N.V., Walter Sieckman and Wolfgang Jansen and (ii) Order, dated November 13, 1990, Authorizing Trustee to Enter Into and Render Performance in Accordance with Midvale Consent Decree and Proposed Midvale Settlement Agreement (Incorporated herein by reference to Exhibit 28.7 of the Registrant's Report on Form 10-K, dated March 29, 1991, for the year ended December 31, 1990).\n99.8 (i) Partial Consent Decree, lodged with the Utah District Court on November 13, 1990, by and among the United States of America on behalf of the United States Environmental Protection Agency, UV Industries, Inc. Liquidating Trust, UV Industries, Inc. and the State of Utah (the \"UV Consent Decree\") and (ii) Order, dated November 13, 1990, approving the UV Consent Decree (Incorporated herein by reference to Exhibit 28.8 of the Registrant's Report on Form 10-K, dated March 29, 1991, for the year ended December 31, 1990).\n99.9 (i) UV Settlement Agreement, dated as of October 15, 1990, between UV Industries, Inc. Liquidating Trust, the Chapter 11 Trustee and Sharon Steel Corporation (the \"UV Settlement Agreement\") and (ii) Order, dated November 13, 1990, approving the UV Settlement Agreement (Incorporated herein by reference to Exhibit 28.9 of the Registrant's Report on Form 10-K, dated March 29, 1991, for the year ended December 31, 1990).\n99.10 (i) Order, dated November 15, 1990, pursuant to which Atlantic Richfield Company agreed to withdraw with prejudice its claim and all proceedings against Sharon Steel Corporation, (ii) Withdrawal, dated November 15, 1990, with Prejudice of Claim of Atlantic Richfield Company, (iii) Order, dated November 15, 1990, dismissing with prejudice Atlantic Richfield Company's Adversary Proceeding (No. 90-42) against Sharon Steel Corporation, and (iv) Withdrawal, dated November 14, 1990, with prejudice of Objection of Atlantic Richfield Company to Disclosure Statement (Incorporated herein by reference to Exhibit 28.10 of the Registrant's Current Report on Form 8-K, dated December 28, 1990).\n99.11 (i) Motion, dated November 6, 1990, to approve Settlement and Findings of Fact and Conclusions of Law -- Motion for Consolidation (the \"Carpentertown Settlement\") and (ii) Order, dated November 13, 1990, approving Carpentertown Settlement (Incorporated herein by reference to Exhibit 28.11 of the Registrant's Report on Form 10-K, dated March 29, 1991, for the year ended December 31, 1990).\n99.12 (i) Settlement Agreement, dated November 1990, by and among Sharon Steel Corporation and National Union Fire Insurance Company of Pittsburgh, PA, Landmark Insurance Company and Lexington Insurance Company (the \"Insurance Settlement\") and (ii) Order, dated November 13, 1990, authorizing Trustee to Enter into and Render Performance in accordance with the Insurance Settlement (Incorporated herein by reference to Exhibit 28.12 of the Registrant's Annual Report on Form 10-K, dated March 29, 1991, for the year ended December 31, 1990).\n99.13 (i) Settlement Agreement, dated November 20, 1990, by and among IBJ Schroder Bank & Trust Company, Mellon Bank, N.A., Kirkpatrick & Lockhart and Raymond H. Wechsler and\/or Robert J. Brown as attorney(s)-in-fact (\"Mellon Settlement Agreement\") and (ii) Order dated November 20, 1990, approving Mellon Settlement Agreement (Incorporated herein by reference to Exhibit 28.13 of the Registrant's Annual Report on Form 10-K, dated March 29, 1991, for the year ended December 31, 1990).\n99.14 (i) Stipulation of Settlement, dated as of February 12, 1991, Relating to the Claims of IBJ Schroder Bank & Trust Company (\"Schroder\") entered into by and among Bernhard Schaffler, as Disputed Claims Agent pursuant to the Plan, Mueller Industries, Inc., and Schroder (\"Schroder Settlement\") and (ii) Order, dated February 22, 1991, approving the Schroder Settlement (Incorporated herein by reference to Exhibit 28.14 of the Registrant's Annual Report on Form 10-K, dated March 29, 1991, for the year ended December 31, 1990).\n99.15 (i) Order and Stipulation of Settlement, dated September 21, 1990, Relating to the claims of the Cleveland-Cliffs Iron Company, Cliffs TIOP Inc. and Tilden Iron Ore Partnership (\"Cleveland- Cliffs Settlement\") and (ii) Order, dated November 13, 1990, approving Cleveland-Cliffs Settlement (Incorporated herein by reference to Exhibit 28.15 of the Registrant's Annual Report on Form 10-K, dated March 29, 1991, for the year ended December 31, 1990).\n99.16 (i) Settlement Agreement by and among the Trustee, Sharon Steel Corporation (including certain subsidiaries of Sharon identified therein), the Official Committee of Unsecured Creditors of Sharon Steel and the Posner Affiliates (the \"Posner Settlement\") and (ii) Order, dated October 19, 1990, approving the Posner Settlement (Incorporated herein by reference to Exhibit 28.16 of the Registrant's Annual Report on Form 10-K, dated March 29, 1991, for the year ended December 31, 1990).\n99.17 (i) Stipulation of Settlement, dated December 21, 1990, by and among Rockwell International Corp., the Chapter 11 Trustee, Quantum Overseas, N.V. and Castle Harlan, Inc. (\"Rockwell Settlement\") and (ii) Order, dated December 26, 1990, approving Rockwell Settlement. (Not filed pursuant to seal order entered by the Bankruptcy Court).\n99.18 (i) Stipulation, dated February 14, 1991, settling Claims 1198 and 1199 of Liquid Air Corporation, Bulk Gas Division (\"Liquid Air Corporation Settlement\") and (ii) Order, dated February 15, 1991, approving Liquid Air Corporation Settlement (Incorporated herein by reference to Exhibit 28.18 of the Registrant's Annual Report on Form 10-K, dated March 29, 1991, for the year ended December 31, 1990).\n99.19 Consent Order, dated March 4, 1991, entered into by and among the Disputed Claims Agent, Mueller Industries, Inc. and Insurance Company of North America (\"INA\"), settling the Claims of INA (Incorporated herein by reference to Exhibit 28.19 of the Registrant's Annual Report on Form 10-K, dated March 29, 1991, for the year ended December 31, 1990).\n99.20 Consent Order, dated March 5, 1991, entered into by and among the Disputed Claims Agent, Mueller Industries, Inc. and Atlas Energy Group, Inc. (\"Atlas\"), settling the Claims of Atlas (Incorporated herein by reference to Exhibit 28.20 of the Registrant's Annual Report on Form 10-K, dated March 29, 1991, for the year ended December 31, 1990).\n99.21 (i) Stipulation, dated December 11, 1990, conditionally settling claims of Blue Cross of Western Pennsylvania and Pennsylvania Blue Shield, and (ii) Letter of Understanding, dated February 8, 1991, finalizing the Stipulation Conditionally Settling Claims of Blue Cross of Western Pennsylvania and Pennsylvania Blue Shield (Incorporated herein by reference to Exhibit 28.21 of the Registrant's Annual Report on Form 10-K, dated March 29, 1991, for the year ended December 31, 1990).\n99.22 Disputed Claims Agency Agreement, dated February 4, 1992, by and between Mueller Industries, Inc. and James E. Browne, as disputed claims agent. (Incorporated herein by reference to Exhibit 28.22 of the Registrant's Annual Report on Form 10-K, dated March 25, 1992, for the year ended December 28, 1991.)\n99.23 Consent Decree, dated February 25, 1992, entered into by and among Mueller Brass Co., the State of Michigan, and PIRGIM Public Interest Lobby. (Incorporated herein by reference to Exhibit 28.23 of the Registrant's Annual Report on Form 10-K, dated March 25, 1992, for the year ended December 28, 1991.)\n99.24 Consent Order, dated June 26, 1991, entered into by and among the Disputed Claims Agent, Mueller Industries, Inc. and Texas-New Mexico Power Company (\"TNMP\"), settling the claims of TNMP. (Incorporated herein by reference to Exhibit 28.24 of the Registrant's Annual Report on Form 10-K, dated March 25, 1992, for the year ended December 28, 1991.)\n99.25 Consent Order, dated December 5, 1991, entered into by and among the Disputed Claims Agent, Mueller Industries, Inc. and Harbison- Walker Refractories (\"HWR\"), settling the claims of HWR. (Incorporated herein by reference to Exhibit 28.25 of the Registrant's Annual Report on Form 10-K, dated March 25, 1992, for the year ended December 28, 1991.)\n99.26 Consent Order, dated January 24, 1992, entered into by and among the Disputed Claims Agent, Mueller Industries, Inc. and Luria Brothers, settling the claims of Luria Brothers. (Incorporated herein by reference to Exhibit 28.26 of the Registrant's Annual Report on Form 10-K, dated March 25, 1992, for the year ended December 28, 1991.)\n99.27 Consent Order, dated November 16, 1992, entered into by and among the Disputed Claims Agent, Mueller Industries, Inc. and Drexel Burnham Lambert, Inc. (\"Drexel\"), settling the claims of Drexel. (Incorporated herein by reference to Exhibit 28.27 of the Registrant's Annual Report on Form 10-K, dated March 17, 1993, for the fiscal year ended December 26, 1992.)\n99.28 Consent Order, dated April 3, 1992, entered into by and among the Disputed Claims Agent, Mueller Industries, Inc. and United States Department of Treasury, Internal Revenue Service (the \"IRS\"), settling the claims of the IRS. (Incorporated herein by reference to Exhibit 28.28 of the Registrant's Annual Report on Form 10-K, dated March 17, 1993, for the fiscal year ended December 26, 1992.)\n99.29 Consent Order, dated April 3, 1992, entered into by and among the Disputed Claims Agent, Mueller Industries, Inc. and Commonwealth of Pennsylvania, Department of Revenue (\"Commonwealth\"), settling the claims of the Commonwealth. (Incorporated herein by reference to Exhibit 28.29 of the Registrant's Annual Report on Form 10-K, dated March 17, 1993, for the fiscal year ended December 26, 1992.)\n99.30 Consent Order, dated November 6, 1992, entered into by and among the Disputed Claims Agent, Mueller Industries, Inc. and the State of California, Regional Water Quality Board (the \"State of California\"), settling the claims of the State of California. (Incorporated herein by reference to Exhibit 28.30 of the Registrant's Annual Report on Form 10-K, dated March 17, 1993, for the fiscal year ended December 26, 1992.)\n99.31 Consent Order, dated April 9, 1992, entered into by and among the Disputed Claims Agent, Mueller Industries, Inc. and the State of Ohio Bureau of Workers Compensation (the \"Bureau\"), settling the claims of the Bureau. (Incorporated herein by reference to Exhibit 28.31 of the Registrant's Annual Report on Form 10-K, dated March 17, 1993, for the fiscal year ended December 26, 1992.)\n99.32 Consent Order, dated May 28, 1992, entered into by and among the Disputed Claims Agent, Mueller Industries, Inc. and U.V. Industries, Inc., Liquidating Trust (\"U.V. Trust\"), settling claims of U.V. Trust. (Incorporated herein by reference to Exhibit 28.32 of the Registrant's Annual Report on Form 10-K, dated March 17, 1993, for the fiscal year ended December 26, 1992.)\n99.33 Consent Order, dated April 14, 1992, entered into by and among the Disputed Claims Agent, Mueller Industries, Inc. and Travelers Indemnity Company (\"Travelers\"), settling the claims of Travelers. (Incorporated herein by reference to Exhibit 28.33 of the Registrant's Annual Report on Form 10-K, dated March 17, 1993, for the fiscal year ended December 26, 1992.)\n(b) During the three months ended December 25, 1993, no Current Reports on Form 8-K were filed.\nSIGNATURES\nPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 23, 1994.\nMUELLER INDUSTRIES, INC.\n\/s\/ HARVEY L. KARP Harvey L. Karp, Chairman of The Board\nPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.\nSignature Title Date\n\/S\/HARVEY L. KARP Chairman of the Board, and Director March 23, 1994 Harvey L. Karp\n\/S\/RAY C. ADAM Director March 23, 1994 Ray C. Adam\n\/S\/RODMAN L. DRAKE Director March 23, 1994 Rodman L. Drake\n\/S\/GARY S. GLADSTEIN Director March 23, 1994 Gary S. Gladstein\n\/S\/J. ALLAN MACTIER Director March 23, 1994 J. Allan Mactier\n\/S\/WILLIAM D. O'HAGAN President, Chief Executive Officer, March 23, 1994 William D. O'Hagan Director\n\/S\/ROBERT PASQUARELLI Director March 23, 1994 Robert Pasquarelli\n\/S\/PAUL SOROS Director March 23, 1994 Paul Soros\nPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following person on behalf of the Registrant and in the capacities and on the date indicated.\nSignature and Title Date\n\/S\/EARL W. BUNKERS March 23, 1994 Earl W. Bunkers Chief Financial Officer (Principal Accounting Officer)\n\/S\/KENT A. MCKEE March 23, 1994 Kent A. McKee Treasurer and Assistant Secretary\n\/S\/ROY C. HARRIS March 23, 1994 Roy C. Harris Corporate Controller\nThe consolidated financial statements, together with the report thereon of Ernst & Young dated February 14, 1994, appearing on page 12 through and including 36, of the Company's 1993 Annual Report to Stockholders are incorporated by reference in this Annual Report on Form 10-K. With the exception of the aforementioned information, no other information appearing in the 1993 Annual Report to Stockholders is deemed to be filed as part of this Annual Report on Form 10-K under Item 8. The following Consolidated Financial Statement Schedules should be read in conjunction with the consolidated financial statements in such 1993 Annual Report to Stockholders. Consolidated Financial Statement Schedules not included with this Annual Report on Form 10- K have been omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto.\nSUPPLEMENTAL FINANCIAL INFORMATION\nPage\nSchedules for the fiscal years ended December 25, 1993, December 26, 1992 and December 28, 1991.\nProperty, Plant and Equipment (Schedule V) 29 Accumulated Depreciation, Depletion and Amortization of Property, Plant and Equipment (Schedule VI) 30 Valuation and Qualifying Accounts (Schedule VIII) 31 Short-term Borrowings (Schedule IX) 32 Supplementary Statement of Operations Information (Schedule X) 33\nEXHIBIT INDEX\nExhibits Description Page\n4.2 Certain instruments with respect to long-term debt of the Company have not been filed as Exhibits to the Report since the total amount of securities authorized under any such instrument does not exceed 10 percent of the total assets of the company and its subsidiaries on a consolidated basis. The Company agrees to furnish a copy of each such instrument upon request of the Securities and Exchange Commission.\n10.27 Summary description of the Registrant's 1994 bonus plan for certain key employees.\n10.28 Amendment to Employment Agreement, effective January 1, 1994, to Employment Agreement by and between Mueller Industries, Inc. and Harvey L. Karp.\n10.29 Employment Agreement, effective as of January 1, 1994, by and between Mueller Industries, Inc. and William D. O'Hagan.\n10.30 Amendment to Employment agreement, effective as of July 23, 1993, by and between Mueller Industries, Inc. and William H. Hensley.\n13.0 Mueller Industries, Inc.'s Annual Report to Stockholders for the year ended December 25, 1993. Such report, except to the extent incorporated herein by reference, is being furnished for the information of the Securities and Exchange Commission only and is not to be deemed filed as a part of this Annual Report on Form 10-K.\n21.0 Subsidiaries of the Registrant.\n23.0 Consent of Independent Auditor. (Includes report on Supplemental Financial Information.)","section_15":""}
{"filename":"43512_1993.txt","cik":"43512","year":"1993","section_1":"ITEM 1. BUSINESS\nGENERAL DESCRIPTION\nGreat Western Financial Corporation (\"GWFC\" or \"the Company\"), with consolidated assets of approximately $38.3 billion, is a savings and loan holding company organized in 1955 under the laws of the state of Delaware. The principal assets of the Company are the capital stock of Great Western Bank, a Federal Savings Bank (\"GWB\" or \"the Bank\") and Aristar, Inc. (\"Aristar\"). GWB is a federally chartered stock savings bank and conducts most of its retail banking through 440 offices located in California and Florida. Real estate lending operations are conducted directly by the Bank or by direct subsidiaries through 214 offices in 21 states with concentrations in California, Florida and Washington. Directly or through its subsidiaries, the Bank also engages in consumer finance, mortgage banking, and other related financial services. Aristar conducts consumer finance operations through 522 offices in 23 states, most of which operate principally under the names Blazer Financial Services or City Finance and provide direct installment loans and related credit insurance services and purchase retail installment contracts. For financial information concerning the Company's two principal lines of business, see Segment Data in \"Management's Discussion and Analysis of Financial Condition and Results of Operations\".\nThe Company is a legal entity separate and distinct from the Bank. The principal source of the Company's revenues on an unconsolidated basis has been dividends, interest and management fees from GWB. Dividends from Aristar are expected to be a greater source of revenue in future periods. Various statutory and regulatory restrictions and tax considerations, however, can limit, directly or indirectly, the amounts that may be paid by the Bank. For a discussion of dividend restrictions, see Regulation - Capital Requirements, Capital Distributions by GWB and Restrictions on Transactions with Affiliates.\nThe operations of savings institutions are significantly influenced by general economic conditions, by the related monetary and fiscal policies of the federal government, and by the regulatory policies of financial institution regulatory authorities, including the Federal Reserve Board (\"FRB\"), the Office of Thrift Supervision (\"OTS\") and the Federal Deposit Insurance Corporation (\"FDIC\"). Deposit flows and cost of funds are influenced by interest rates on competing investments and general market rates of interest. Lending and other investment activities are affected by the demand for mortgage financing and consumer and other types of loans, which in turn are affected by the interest rates at which such financing may be offered and other factors affecting the supply of housing and the availability of funds. Weakening real estate markets during the past three years have resulted in reduced loan originations of adjustable rate mortgages (\"ARMs\"). In addition there has been deterioration in collateral values supporting real estate loans which impacted the valuation of the Company's loans and real estate and caused increases in nonperforming assets in 1992 and 1991. In 1993, the Company's program to accelerate its disposition of distressed assets resulted in a significant decline in nonperforming assets.\nACQUISITIONS\nGreat Western Financial Corporation has grown in recent years through acquisitions. During 1993, the Company continued to acquire retail branches and deposits from the Resolution Trust Corporation (\"RTC\"). The transactions, which began in 1990, were primarily branch deposit acquisitions which complemented the California and Florida retail banking operations.\nIn December 1993, GWB purchased certain assets and assumed certain liabilities from the RTC of HomeFed Bank, F.A., San Diego, California. As a result of the transaction, GWB acquired 119 branches with retail deposits of $4.1 billion. The deposits were acquired for a premium of $151 million.\nGWFC is frequently engaged in discussions with other financial institutions of various sizes in various locations throughout the United States and with governmental agencies regarding mergers or acquisitions. No assurance can be given that GWFC will complete any particular transaction.\nAdditional information on specific acquisitions is summarized in Note 2 of the Notes to Consolidated Financial Statements in \"Financial Statements and Supplementary Data\".\nINTEREST RATE MARGINS\nGWFC's core operating results depend primarily on the margin between the income the Bank receives from interest earning assets and its cost of funds. The Bank now competes with commercial banks and other financial intermediaries for funds in a deregulated environment. For additional information see Lending and Customer Accounts below.\nThe composition of the interest rate margin is shown in \"Management's Discussion and Analysis of Financial Condition and Results of Operations\".\nThe following table shows the components of the change in net interest income for the years ended December 31, 1993, 1992 and 1991 that are included in the Consolidated Statement of Operations in \"Financial Statements and Supplementary Data\".\nFor information about real estate loans and mortgage-backed securities (\"mortgages\") available for sale, mortgage sales and servicing income see \"Management's Discussion and Analysis of Financial Condition and Results of Operations\" and Notes 1, 4, 5 and 6 of the Notes to Consolidated Financial Statements in \"Financial Statements and Supplementary Data\".\nFederal savings institutions have consumer lending powers which permit the origination of unsecured as well as secured consumer loans for personal, family or household purposes, which together with investments in commercial paper and corporate debt securities, may not exceed 35 percent of the Bank's assets. The Bank makes unsecured consumer loans in the form of student educational loans, overdraft protection on checking accounts and other consumer loans. GWB also is actively involved in consumer finance through Great Western Financial Services, a division of the Bank. The Bank was well below the maximum allowable percentage. See discussion in Related Financial Services Activities following.\nFederal savings institutions are authorized to invest up to 400 percent of their capital in loans secured by nonresidential real property. GWB's loans secured by nonresidential real property at December 31, 1993 represented approximately 71 percent of its capital. In addition, federal savings institutions may also make secured and unsecured loans for commercial, corporate, business or agricultural purposes in a total amount of not more than 10 percent of the institution's assets. The Bank does not engage in this type of lending.\nLOAN IMPAIRMENT\nThe Company adopted Statement of Financial Accounting Standards No. 114, \"Accounting by Creditors for Impairment of a Loan\" (\"FAS 114\") as of January 1, 1993. FAS 114 provides guidance on the measurement of impaired loans. GWFC measures impairment based primarily on the fair value of the loan's collateral.\nThe recorded investment in loans for which impairment has been recognized in accordance with FAS 114 and the reserve for estimated losses related to such loans follows:\nSingle-family residential mortgage loans are generally evaluated for impairment as homogeneous pools of loans. Certain situations may arise leading to single-family residential mortgage loans being evaluated for impairment on an individual basis.\nNONPERFORMING ASSETS\nThere are certain risks and uncertainties in originating loans. These pertain to credit, appraisals and other underwriting factors occurring in the loan portfolio subsequent to origination. Market risk has become increasingly important in the recent recessionary environment. These risks may result in loans becoming nonperforming assets.\nThe increase in delinquencies and foreclosures of single-family properties has continued from 1991 into 1993. While delinquencies of single- family properties have declined during 1993, due in part to bulk asset sales, management expects increases in the earthquake affected areas in early 1994. Foreclosures continue to occur at historically high levels.\nInformation regarding nonperforming assets, valuation reserves and loss provisions is presented in \"Management's Discussion and Analysis of Financial Condition and Results of Operations\" and in Notes 5 and 7 of the Notes to Consolidated Financial Statements in \"Financial Statements and Supplementary Data\".\nINVESTMENT ACTIVITIES\nIncome from securities and other short-term investments generally provides the largest source of interest income for GWFC after interest on mortgages and consumer loans. The Bank is required to maintain a specified minimum amount of liquid assets which may be invested in securities specified by regulations as qualifying liquidity. Liquidity in excess of legal requirements at December 31, 1993 was $429 million. Substantially all security investments are of investment grade.\nDividends on Federal Home Loan Bank (\"FHLBank\" or \"FHLB\") stock are included in income on securities in the Consolidated Statement of Operations (see Note 9 of the Notes to Consolidated Financial Statements in \"Financial Statements and Supplementary Data\").\nFor information on the Company's securities portfolio, see Notes 1 and 3 of the Notes to Consolidated Financial Statements in \"Financial Statements and Supplementary Data\".\nCUSTOMER ACCOUNTS\nCustomer accounts have traditionally been an important source of the Bank's funds for use in lending and for other general business purposes. Inflows to customer accounts historically have been related to general economic conditions. Rates offered on new accounts are primarily based on yields on Treasury securities and rates offered by competing financial institutions.\nFor information on the Company's customer accounts, see \"Management's Discussion and Analysis of Financial Condition and Results of Operations\" and Note 11 of the Notes to Consolidated Financial Statements in \"Financial Statements and Supplementary Data\".\nBORROWINGS\nGWFC issued debt totaling $375 million in 1993 to facilitate the transfer of Aristar to GWFC from GWB. GWB borrows funds from many sources, including the FHLBank of San Francisco. In addition, both GWB and Aristar have issued commercial paper, medium-term notes and have entered into various borrowing agreements. Securities sold under agreements to repurchase have been a source of short-term funds.\nIn February 1993, Standard and Poor's lowered its ratings on GWFC's senior debt to BBB+ and preferred depositary shares to BBB-, as a result of asset quality pressures from the continuing recession in California. Standard and Poor's also lowered GWB's ratings on senior debt to A-, subordinated debt to BBB+ and commercial paper to A-2. Although the debt ratings were downgraded by one level, the Company still enjoys the benefits of an investment grade rating.\nFor information on the Company's borrowings see \"Management's Discussion and Analysis of Financial Condition and Results of Operations\" and Notes 12 and 13 of the Notes to Consolidated Financial Statements in \"Financial Statements and Supplementary Data\".\nRELATED FINANCIAL SERVICES ACTIVITIES\nThe principal non-depository business activities of GWFC are described below.\nCONSUMER FINANCE GROUP Consumer finance activities are highly regulated by federal and state laws of both general and specific applicability. Federal regulations relate primarily to fair credit practice matters. State regulations may include certain licensing requirements, which vary from state to state and may require periodic examination to verify compliance with, among other restraints, state interest rate and loan size limits. GWB also has industrial banks which conduct activities similar to those of consumer finance operations.\nOTHER ACTIVITIES GWFC and its direct and indirect subsidiaries also engage in related service businesses, including investment company advisor and administration activities, insurance operations, real estate development and other lines of business. GWFC and its direct and indirect subsidiaries in the future may also pursue other business opportunities, although no assurances concerning the timing or nature of such activities can be given.\nCOMPETITION AND OTHER MATTERS\nCompetition for customer accounts comes principally from other savings institutions, commercial banks, money market funds, credit unions, corporations, governmental agencies and governmental debt securities, insurance companies, pension funds, and other investment media, many of which can offer investment alternatives. Many of these institutions also have nationwide retail networks.\nCompetition in residential lending activities comes principally from other savings institutions, mortgage companies, commercial banks and, to a lesser degree, from finance companies, insurance companies, governmental agencies, pension funds and trusts, and sellers of properties.\nCompetition in the provision of services being offered by GWFC and its subsidiaries and affiliates in consumer lending, investment company advisor and administration activities and other activities comes principally from the traditional providers of such services and from other financial institutions.\nINFLATION\nWhile inflation has declined significantly during the past few years, the Company recognizes the adverse effects that inflation could bring to its financial position and operations and consequently monitors its effects closely.\nREGULATION\nHolding Company Regulation\nGeneral The Company is a savings and loan holding company as a result of its control of GWB. As such it is subject to regulation, supervision, and examination by, and the reporting requirements of, the OTS and is governed by the savings and loan holding company provisions of the Home Owners' Loan Act.\nRestrictions on Activities A savings and loan holding company is prohibited, directly or indirectly, from obtaining control of a savings association or savings and loan holding company without the prior approval of the OTS. The Financial Institutions Reform, Recovery and Enforcement Act of 1989 (\"FIRREA\"), permits the acquisition by a savings and loan holding company of up to 5 percent of the voting shares of a savings association or savings and loan holding company which is not one of its present affiliates. No director, officer, or controlling shareholder of the Company may, except with the prior approval of the OTS, acquire control of any savings association which is not a subsidiary of the Company.\nFIRREA empowers the OTS to impose restrictions when it determines that there is reasonable cause to believe that the continuation by a savings and loan holding company of any particular activity constitutes a serious risk to the financial safety, soundness, or stability of a holding company's subsidiary savings association. Thus, FIRREA confers on the OTS oversight authority for all holding company affiliates, not just the savings association. Specifically, the OTS may (i) limit the payment of dividends by a savings association; (ii) limit transactions between a savings association, the holding company and the subsidiaries or affiliates of either; and (iii) limit any activities of the savings association that might create a serious risk that the liabilities of the holding company and its affiliates may be imposed on the savings association. Any such limits will be issued in the form of a directive having the effect of a cease and desist order.\nRegulation of Subsidiaries\nGeneral Deposits in GWB and the Company's industrial banks are insured by the FDIC up to $100,000 and those institutions are regulated by the FDIC. GWB is a federally chartered institution which is also regulated by the OTS. The industrial banks are state chartered institutions which are regulated by state authorities in addition to being regulated by the FDIC. State laws specify the investments which these state institutions may make and the activities in which they may engage. Under the Federal Deposit Insurance Corporation Improvement Act of 1991 (\"FDICIA\"), however, insured state banks may not engage in activities not permissible for national banks unless the FDIC determines the activity will pose no significant risk to the insurance fund and the Bank complies with applicable capital standards.\nThe Company's consumer finance subsidiaries are governed by state and federal laws. Federal laws relate primarily to fair credit practice matters. State laws set out applicable licensing requirements, provide for periodic examinations and establish maximum finance charges on credit extensions.\nThe Company's insurance subsidiaries are governed by state law and the Company's securities brokerage and investment advisory subsidiaries are governed by federal and state laws relating to their operation, registration, capital and other matters.\nQualified Thrift Lender FDICIA imposes revised requirements for qualification as a qualified thrift lender (\"QTL\"). The test requires that 65 percent of an association's \"portfolio assets\" (all assets except goodwill, intangibles, property used to conduct the thrift's business and certain liquid assets up to 20 percent of assets) consist of \"qualified thrift investments\" (including, subject to certain limits, residential mortgage and construction loans, home improvement and repair loans, mortgage- backed securities, home equity loans, FHLBank stock, Federal Savings and Loan\nInsurance Corporation (\"FSLIC\"), FDIC, and RTC obligations, Residential Funding Corporation obligations, Federal National Mortgage Association and Federal Home Loan Mortgage Corporation stock, consumer loans, certain small business loans and loans to construct or purchase or maintain churches, schools, nursing homes and hospitals, investments in residential housing- oriented service corporations, and 50 percent of mortgages originated and sold within 90 days). At December 31, 1993, the asset composition of GWB was substantially in excess of that required to qualify it to meet the QTL test.\nThe following sanctions may apply as the result of failure of a savings association to remain a QTL: (i) required conversion of the savings association's charter to a bank charter; (ii) limitations on new investments and activities to those permissible for national banks; (iii) imposition of branching restrictions applicable to national banks; (iv) prohibitions on new advances to the savings association from its FHLBank; and (v) imposition of dividend restrictions applicable to national banks. Three years after a savings association ceases to be a QTL, it would be required to divest all investments and cease all activities not permissible for national banks and all FHLBank advances would have to be repaid in a prompt and prudent manner. In addition, a savings and loan holding company owning such an association would be required to register as a bank holding company.\nDeposit Insurance The FDIC maintains two separate funds - the Bank Insurance Fund (\"BIF\"), which insures the deposits of the industrial banks (the \"Company's BIF-insured institutions\"), and the Savings Association Insurance Fund (\"SAIF\") which insures the deposits of GWB.\nUnder FDICIA, the FDIC was required to establish a system of risk-based deposit insurance premiums for BIF and SAIF members by no later than January 1, 1994. The legislation requires the FDIC to establish maximum rates and assessments so as to achieve the target ratio (at least 1.25 percent of estimated insured deposits) for each fund within specified periods of time. In addition, FDICIA permits the FDIC to impose one or more emergency special assessments.\nIn September 1992, the FDIC adopted a transitional risk-related deposit insurance premium system which charges higher rates to those institutions which pose greater risks to the deposit insurance funds and lower rates to \"well capitalized\" institutions. The new system took effect on January 1, 1993 and contains premium increases that are intended to raise the reserves of the Bank Insurance Fund and the Savings Association Insurance Fund. Under the system a bank or thrift will pay within a range of .23 percent of domestic deposits to .31 percent of domestic deposits depending upon its risk classification. The current assessment rate for GWB is .26 percent of deposits for the first half of 1994. During 1993, the FDIC adopted a final rule to implement the permanent risk-based assessment system, effective January 1, 1994. The final rule uses the same assessment categories and rates as the transitional system.\nFIRREA requires insured depository institutions to reimburse the FDIC for any loss or anticipated loss to the FDIC that arises from a default of a commonly controlled insured depository institution or assistance provided to such an institution in danger of default. FIRREA provides that, for a period of five years from August 9, 1989, SAIF-insured members, such as GWB, shall have no liability to the FDIC for assistance to or losses incurred as a result of a default by a BIF-insured subsidiary acquired by GWFC prior to August 9, 1989. A like exemption is provided the Company's BIF-insured subsidiaries for assistance to or losses incurred as a result of a default by GWB.\nFIRREA generally imposes a five-year moratorium (from August 1989) on conversions from SAIF membership to BIF membership subject to certain exceptions. FDICIA, however, permits savings associations and banks to merge with each other with federal regulatory approval, so long as the resulting institution continues to pay proportionate assessments to each respective insurance fund until the moratorium expires. The legislation also permits a federal savings association to acquire or be acquired by any insured depository institution.\nCapital Requirements Capital standards applicable to savings associations consist of three components - a leverage ratio requirement, a tangible capital requirement and a risk-based capital requirement. All three components are required by FIRREA to be no less stringent than the corresponding requirements applicable to national banks, except that the risk-based capital requirement for savings associations may deviate to reflect interest-rate risk or other risks if such deviations do not, in the aggregate, result in materially lower levels of capital being required of savings associations than would be required under the risk-based capital standards applicable to national banks.\nThe capital regulations contain special capital rules affecting savings associations with certain kinds of subsidiaries. For purposes of determining compliance with each of the capital standards, a savings association's investment in and extensions of credit to subsidiaries engaged in activities not permissible for a national bank are, with certain exceptions, deducted from the savings association's capital. Until June 1994 a declining percentage (which was 75 percent until July 1992, 60 percent until July 1993, 40 percent until July 1994 and fully phased-in thereafter) of investments in and extensions of credit to subsidiaries which were engaged in activities not permissible for a national bank as of April 12, 1989 may be included in capital. However, on October 30, 1992, the OTS announced that it would allow savings institutions to apply to the OTS to receive an extension until July 1, 1994 on further deductions from regulatory capital for investments in subsidiaries. GWB filed an application with the OTS and received such an extension with respect to its property development subsidiaries until July 1, 1994, at which time the original phase-in schedule will be reinstituted until full phase-in as of July 1996. All or a portion of the assets and liabilities of each of a savings association's subsidiaries are generally consolidated with the capital and liabilities of the savings association for\ncapital purposes unless all of the savings association's investments in and extensions of credit to such subsidiary are deducted from capital. At December 31, 1993, GWB's investments in and extensions of credit to such subsidiaries aggregated $65 million, of which $32 million was included in capital at December 31, 1993. The Bank has filed notice with the OTS of its intent to dividend its property development subsidiary to GWFC.\nThe leverage ratio requirement requires a savings association to maintain \"core capital\" of not less than 3 percent of adjusted total assets. As mentioned below, it is expected that the OTS will adopt a stricter standard which has become applicable to banks and under which banks are required to maintain a core capital ratio of at least 3 percent and up to 5 percent depending upon their condition and the rating they have received from the applicable regulatory body. Under the current standard, \"core capital\" generally includes common equity, noncumulative perpetual preferred stock and related surplus, and minority interests in consolidated subsidiaries, less certain intangible assets (including goodwill), plus qualifying supervisory goodwill and purchased mortgage servicing rights valued on a quarterly basis at not more than the lower of 90 percent of fair value, 90 percent of original cost or the current amortized book value. GWB's ratio at December 31, 1993 was 5.33 percent. GWB's fully phased-in ratio of \"core capital\" to adjusted total assets was 5.25 percent at December 31, 1993. Between January 1992 and January 1995, the amount of qualifying supervisory goodwill which may be included in core capital will be phased out. The Bank has no qualifying supervisory goodwill.\nThe tangible capital requirement requires a savings association to maintain \"tangible capital\" in an amount not less than 1.5 percent of adjusted total assets. \"Tangible capital\" means core capital less any intangible assets (including qualifying supervisory goodwill), plus purchased mortgage servicing rights, valued on a quarterly basis at not more than 90 percent of fair value. At December 31, 1993, GWB had a ratio of tangible capital to total adjusted assets of 5.33 percent. GWB's fully phased-in ratio of tangible capital to total adjusted assets was 5.25 percent at December 31, 1993.\nThe risk-based capital requirements for savings associations are similar in many respects to the risk-based capital guidelines of the FRB, the Comptroller of the Currency and the FDIC. Among other things, the risk-based capital requirements provide that the capital ratio applicable to an asset will be adjusted to reflect the degree of credit risk associated with such asset and the asset base for computing a savings association's capital requirement will include off-balance sheet assets. The regulations require savings associations to maintain capital equal to 8 percent of risk-weighted assets. A savings association's supplementary capital may be used to satisfy the risk-adjusted capital ratios only to the extent of that association's core capital. At December 31, 1993, GWB had a ratio of capital to risk-based assets of 11.88 percent. The fully phased-in ratio of capital to risk-based assets for GWB was 11.69 percent at December 31, 1993.\nFDICIA requires the federal regulatory agencies to review the risk- based capital standards to ensure that they adequately address interest-rate risk, concentration of credit risk and risks from nontraditional activities. On August 31, 1993, the OTS amended its risk-based capital rules to incorporate interest-rate risk (\"IRR\") requirements. Effective January 1, 1994, a savings association is required to hold additional capital if it is projected to experience a 2 percent decline in \"net portfolio value\" in the event interest rates increase or decrease by two percentage points. Additional capital required is equal to one-half of the amount by which any decline in net portfolio value exceeds 2 percent of the savings association's total net portfolio value.\nA savings association which fails to meet the capital standards must submit to the OTS Director a business plan which describes the manner in which it proposes to increase its capital and the activities in which it will engage. Any increase in the association's assets must be met with a commensurate increase in the association's tangible capital and risk-based capital. As part of the submission of a capital plan, a savings association will be required to certify that during the pendency of its application for approval of its capital plan, it will adhere to certain asset growth restrictions, and will not make any capital distributions or engage in certain other prohibited or restricted activities. The OTS Director must, with certain limited exceptions, limit the asset growth of any such association. In addition, the OTS Director may issue a capital directive to such an association which may contain restrictions the OTS Director deems necessary or appropriate.\nPursuant to FDICIA, the federal banking agencies have adopted regulations which became effective on December 19, 1992, and which establish a system of progressive constraints as capital levels decline at banks and savings institutions. The \"prompt corrective action\" rules classify banks and savings institutions into one of five categories based upon capital adequacy, ranging from \"well capitalized\" to \"critically undercapitalized\". Furthermore, FDICIA provides that under certain circumstances a federal banking agency may reclassify an institution to the next lower capital category based on supervisory information other than the capital levels of the institution. Pursuant to FDICIA, the OTS issued a final regulation effective December 19, 1992 under which a savings association is deemed to be \"well capitalized\" if it: (a) has a risk-based capital ratio of 10 percent or greater; (b) has a ratio of core capital to risk-adjusted assets of 6 percent or greater; (c) has a ratio of core capital to adjusted total assets of 5 percent or greater; and (d) is not subject to an order, written agreement, capital directive or prompt corrective action directive to meet and maintain a specific capital level for any capital measure. A savings association is deemed to be \"adequately capitalized\" if it is not \"well capitalized\" and: (a) has a risk-based capital ratio of 8 percent or greater;\n(b) has a ratio of core capital to risk-adjusted assets of 4 percent or greater; and (c) has a ratio of core capital to adjusted total assets of 4 percent or greater (except that certain associations rated \"composite 1\" under the OTS's MACRO rating system may be adequately capitalized if their ratio of core capital to adjusted total assets is 3 percent or greater). GWB believes that it met the requirements to be \"well capitalized\" under the regulations in effect as of December 31, 1993.\nFDICIA also requires the appropriate federal banking agencies to take corrective action to restrict asset growth, acquisitions, branching and new business with respect to an \"undercapitalized\" institution and to take increasingly severe additional actions if the institution becomes \"significantly undercapitalized\" or \"critically undercapitalized\". FDICIA also prohibits dividends and other capital distributions and the payment of management fees to a controlling person if, following such distribution or payment, the institution would fall within one of the three \"undercapitalized\" categories.\nFDICIA also requires an institution which is \"undercapitalized\" to submit a capital restoration plan for improving its capital to the appropriate federal banking agency. The holding company of such an institution must guarantee that the institution will meet its capital restoration plan, subject to certain limitations. If such a guarantee were deemed to be a commitment to maintain capital under the federal Bankruptcy Code, a claim under such guarantee in a bankruptcy proceeding involving the holding company would be entitled to a priority over third party creditors of the holding company.\nAs a condition of prior regulatory approval of certain transactions, the Company has provided federal regulators with a commitment to maintain the regulatory net worth of GWB at the minimum required amount and, if necessary, to infuse sufficient additional capital to maintain such level. See Regulation - Capital Requirements.\nUnder FDICIA, a bank or savings institution that is \"significantly undercapitalized\" is subject to severe restrictions on its activities, and may be required, among other things, to issue additional debt or stock, to sell assets or to be acquired by a depository institution holding company or combine with another depository institution if one or more grounds exist for appointing a conservator or receiver for the institution. A bank or savings institution that is \"critically undercapitalized\" will be subject, with certain exceptions, to the mandatory appointment of a conservator or receiver by the appropriate federal banking agency within 90 days after such institution becomes \"critically undercapitalized\". The effect of this provision is to increase significantly the circumstances in which a conservator or receiver may be appointed for an institution. In addition, a bank or savings institution that is \"critically undercapitalized\" is subject to more severe restrictions on its activities and on payment of subordinated debt, and may be prohibited, among other things, from entering\ninto material investment, expansion, acquisition or disposition transactions or paying interest on new or renewed liabilities at a rate that would significantly increase the institution's weighted average cost of funds. An institution will be considered to be \"critically undercapitalized\" if the institution has a ratio of \"tangible equity\" to total assets that is equal to or less than 2 percent.\nThe FDIC has adopted a minimum core capital standard under which state nonmember banks are required to hold core capital consisting generally of common equity, minority interests in equity accounts of consolidated subsidiaries, and qualifying perpetual preferred stock, of at least 3 percent and up to 5 percent of total assets. Banks receiving the highest rating from the FDIC are permitted to maintain core capital of 3 percent of total assets, while less healthy banks are required to maintain core capital of 4 to 5 percent. A bank with core capital of less than 2 percent would be deemed to be in an unsafe and unsound condition. It is expected that the OTS will adopt a similar standard that will be applicable to savings associations.\nWith respect to savings associations, the FDIC will use the core capital standard in determining whether to approve applications for deposit insurance, the right to exercise additional powers, or to merge or make acquisitions. The FDIC may also use the new standard in determining whether to take enforcement action against a savings association when an unsafe or unsound practice exists.\nThe Company's BIF-insured institutions are required to have risk-based capital of 8 percent of risk-weighted assets, based on the credit risk deemed inherent in institutions' assets, including certain off-balance-sheet assets. In addition, core capital must be 4 percent of risk-weighted assets. At December 31, 1993, the industrial banks exceeded the required ratios.\nCapital Distributions by GWB The Company is a legal entity separate and distinct from the Bank and the Company's other subsidiaries. The primary source of the Company's revenues on an unconsolidated basis has been dividends from GWB. Various regulatory and tax considerations, however, limit directly or indirectly the amount of dividends GWB can pay. Should GWB distribute dividends in excess of the amount of its available earnings and profits (as determined for federal income tax purposes), such excess would be subject to federal income tax. At December 31, 1993, the Bank had approximately $658 million of retained earnings available for the payment of dividends without adverse tax consequences. Dividend payments are further restricted by regulations as discussed below.\nThe OTS regulations impose limitations upon \"capital distributions\" by savings associations, including cash dividends. The regulations established a three-tiered system: Tier 1 includes savings associations with capital at least equal to their fully phased-in capital requirement which have not been notified that they are in need of more than normal supervision; Tier 2 includes savings associations with capital above their minimum capital requirement but less than their fully phased-in requirement; and Tier 3 includes savings associations with capital below their minimum capital requirement. Tier 1 associations may, after prior notice but without approval of the OTS, make capital distributions up to the higher of (1) 100 percent of their net income during the calendar year plus the amount that would reduce by one half their \"surplus capital ratio\" (the excess over their fully phased-in capital requirement) at the beginning of the calendar year or (2) 75 percent of their net income over the most recent four-quarter period. Tier 2 associations may, after prior notice but without approval of the OTS, make capital distributions of up to 25 percent to 75 percent of their net income over the most recent four-quarter period depending upon their current risk-based capital position. Tier 3 associations may not make capital distributions without prior approval. An association subject to more stringent restrictions imposed by agreement may apply to remove the more stringent restrictions.\nThe Company believes that GWB is a Tier 1 association. Notwithstanding the foregoing, the regulatory authorities have broad discretion to prohibit any payment of dividends and take other actions if they determine that the payment of such dividends would constitute an unsafe or unsound practice. Among the circumstances posing such risk would be a capital distribution by a Tier 1 or Tier 2 association whose capital is decreasing because of substantial losses. In addition, FDICIA prohibits dividends and other capital distributions if, following such distribution, the savings association would fall within one of three \"undercapitalized\" categories. See Regulation - Capital Requirements.\nCommunity Reinvestment Act The Community Reinvestment Act (\"CRA\") requires each savings association to identify the communities it serves and the types of credit the association is prepared to extend within those communities. CRA also requires the OTS to assess the association's record of helping to meet the credit needs of its community and to take such assessment into consideration when evaluating applications for mergers, acquisitions and other transactions. A less than satisfactory CRA rating may be the basis for denying such applications.\nIn connection with its assessment of CRA performance, the OTS assigns a rating of \"outstanding\", \"satisfactory\", \"needs to improve\" or \"substantial noncompliance\". Based on the most recent examination conducted in 1993, the Bank received a rating of \"outstanding\". The OTS and other federal bank regulatory agencies recently proposed revisions to the rules governing CRA compliance. The proposed rules are intended to simplify CRA compliance evaluations by establishing performance-based criteria.\nRestrictions on Transactions with Affiliates FIRREA imposes on savings associations the affiliate transaction restrictions contained in Sections 23A, 23B, 22(g) and 22(h) of the Federal Reserve Act in the same manner and to the same extent as such restrictions now apply to member banks. Such restrictions are also applicable to the industrial banks. In addition, a savings association may not make any loan or other extension of credit to an affiliate unless that affiliate is engaged only in activities permissible for bank holding companies. Further, a savings association may not purchase or invest in securities issued by an affiliate other than a subsidiary. The OTS is authorized to impose more stringent restrictions on an association's affiliated transactions than those contained in Sections 23A and 23B.\nSubsidiary Investment Limits The amount which a federal savings bank may invest in service corporations and subsidiaries (whether in equity or debt of such corporations) is limited to an amount equal to 3 percent of assets, provided investments in excess of 2 percent of assets serve certain community purposes. The service corporation investment limit (for institutions like GWB which meet net worth and certain other requirements) is exclusive of an amount not to exceed 50 percent of net worth which may be invested in \"conforming\" (i.e., otherwise authorized) loans to service corporations. At December 31, 1993, GWB's aggregate investment in service corporations (exclusive of conforming loans of $49 million) was approximately .2 percent of its assets.\nNotice of Certain Activities FIRREA requires a savings association seeking to establish a new subsidiary, acquire control of an existing company (after which it would be a subsidiary), or conduct a new activity through a subsidiary, to provide 30 days prior notice to the FDIC and the OTS and conduct any activities of the subsidiary in accordance with regulations and orders of the OTS. The OTS has the power to force a savings association to divest or terminate any activity that it determines is a serious threat to the financial safety, soundness or stability of such institution or is otherwise inconsistent with sound banking practices. In addition, the FDIC is authorized to determine whether any specific investment activity poses a threat to the SAIF and to prohibit any SAIF member from engaging directly in such activity, even if it is an activity that is a permissible investment for a federal savings association.\nLoans-to-One Borrower Limitations FIRREA conforms savings associations' loans-to-one borrower limitations to those applicable to national banks. The lending limits for national banks apply to all savings associations in the same manner and to the same extent as they now apply to national banks. Thus, savings associations generally are not permitted to make loans to a single borrower in excess of 15 percent of the association's unimpaired capital and surplus. It is not expected that this limitation will have any significant effect upon GWB's activities as currently conducted.\nBrokered Deposits A final rule adopted by the FDIC permits only \"well capitalized\" institutions to obtain brokered deposits. \"Adequately capitalized\" institutions may obtain brokered deposits if they receive a waiver from the FDIC. The rule adopted by the FDIC also prohibits institutions which are not \"well capitalized\" from soliciting deposits at rates significantly higher than prevailing rates.\nLiquidity OTS regulations require savings associations to maintain for each calendar month an average daily balance of liquid assets (including cash and certain time deposits, bankers' acceptances, specified corporate obligations and specified United States government, state government and federal agency obligations) of not less than 5 percent of the average daily balance of its net withdrawable deposit accounts (the amount of all deposit accounts less the unpaid balance of all loans made on the security of such accounts) and borrowings payable on demand or in one year or less. This liquidity requirement may be changed from time to time by the OTS within the range of 4 percent to 10 percent. OTS regulations also require each savings association to maintain for each calendar month an average daily balance of short-term liquid assets (generally those having maturities of 12 months or less) at an amount not less than 1 percent of the average daily balance of its net withdrawable accounts plus such short-term debt during the preceding calendar month. At December 31, 1993, the liquidity ratio of GWB was 6.81 percent and its short-term liquidity ratio was 2.57 percent which was in compliance with these requirements.\nFederal Home Loan Bank System GWB is a member of the FHLBank System, which consists of 12 regional Federal Home Loan Banks. It is required to acquire and hold shares of capital stock in the applicable FHLBank in an amount equal to the greater of 1 percent of the aggregate principal amount of its unpaid residential mortgages, one-twentieth of its outstanding advances and letters of credit from the FHLBanks or .3 percent of total assets as of the close of each calendar year.\nThe FHLBank serves as a reserve or central bank for the member institutions within its assigned region. It makes advances (i.e. loans) to members in accordance with its established policies and procedures. The maximum amount of credit which the FHLBank will extend for purposes other than meeting withdrawals varies from time to time in accordance with its policies. The FHLBank interest rates charged for advances vary depending upon maturity, the cost of funds to the FHLBank and the purpose of the borrowing.\nFIRREA requires the FHLBanks to contribute a significant amount of their reserves and up to $300 million a year in annual earnings to fund the principal and a portion of the interest payable on bonds issued to fund the resolution of failed savings associations. In addition, the statute provides that each FHLBank must transfer a percentage of its annual net earnings to a specified affordable housing program. As a result of these requirements, it is anticipated that the FHLBanks will pay reduced dividends with respect to their stock and that GWB will receive reduced dividends on such stock in the foreseeable future. As of December 31, 1993, GWB held $307 million of FHLBank stock and received dividends in the amount of $12.2 million in 1993 with respect to such stock.\nFederal Reserve Board Regulations Pursuant to the Depository Institutions Deregulation and Monetary Control Act of 1980, the FRB adopted regulations that require savings institutions to maintain reserves against their transaction accounts and nonpersonal time deposits. In December 1990, the FRB eliminated the reserve requirement on nonpersonal time deposits. The balances maintained to meet the reserve requirements imposed by the FRB may be used to satisfy liquidity requirements imposed by the OTS. At December 31, 1993, balances at GWB totaled $259 million. The effect of this reserve requirement is to decrease an institution's available investment funds. Effective April 2, 1992, the FRB cut the reserve requirement on transaction accounts to 10 percent from 12 percent. Savings associations have authority to use various FRB services and to borrow from the Federal Reserve Bank's \"discount window\", but FRB regulations require them to exhaust all FHLBank sources before borrowing from a Federal Reserve Bank. In addition, FDICIA restricts the period during which discount advances may be outstanding to undercapitalized depository institutions. As a creditor and a financial institution, GWB is subject to additional regulations promulgated by the FRB, including, without limitation, Regulation B (Equal Credit Opportunity Act), Regulation E (Electronic Funds Transfers Act), Regulation F (Interbank Liabilities), Regulation Z (Truth in Lending Act), Regulation CC (Expedited Funds Availability Act) and Regulation DD (Truth in Savings Act).\nSafety and Soundness Standards Pursuant to statutory requirements, the OTS issued a proposed rule on November 17, 1993 that prescribes certain \"safety and soundness standards\". The standards are intended to enable the OTS to address problems at savings associations before the problems cause significant deterioration in the financial condition of the association. The proposed regulation provides operational and managerial standards for internal controls and information systems, loan documentation, internal audit systems, credit underwriting, interest rate exposure, asset growth and compensation, fees and benefits. The proposed regulation also requires a savings association to maintain a ratio of classified assets no greater than 100 percent of total capital and ineligible allowances. A minimum earnings standard is also included in the proposed regulation requiring earnings sufficient to absorb losses without impairing capital. Earnings are sufficient under the proposed regulation if the association meets applicable\ncapital requirements and would remain in capital compliance if its net income or loss over the last four quarters of earnings continued over the next four quarters of earnings. An association that fails to meet any of the standards must submit a compliance plan. Failure to submit an acceptable compliance plan or to implement the plan could result in an OTS order or other enforcement action against the association.\nReal Estate Lending Standards The federal banking regulatory agencies, including the OTS, adopted final regulations, effective March 19, 1993, which require institutions to adopt written real estate lending policies that, among other things, must be consistent with guidelines adopted by the agencies. Among the guidelines adopted by the OTS and the other agencies are maximum loan-to-value ratios for land loans (65 percent); land development loans (75 percent); construction loans (80-85 percent); loans on owner-occupied 1-4 unit residential properties, including home equity loans (no specific required limit, but loans at or above 90 percent require private mortgage insurance or readily marketable collateral); and loans on other improved property (85 percent).\nThe guidelines permit institutions to make loans in excess of the supervisory loan-to-value limits if such loans are supported by other credit factors, but the aggregate of such nonconforming loans should not exceed the institution's total capital, and the aggregate of nonconforming loans secured by real estate other than 1-4 unit residential properties should not exceed 30 percent of total capital.\nClassification of Assets Savings associations are required to classify their assets on a regular basis, to establish allowances for losses and report the results of such classification quarterly to the OTS. For additional information see Note 1 of the Notes to Consolidated Financial Statements in \"Financial Statements and Supplementary Data\".\nWith respect to classified assets, if the OTS concludes that additional assets should be classified or that the valuation allowances established by the savings association are inadequate, the examiner may determine, subject to review by the savings association's Regional Director, the need for and extent of additional classification or any increase necessary in the savings association's general or specific valuation allowances.\nA savings association is also required to set aside adequate valuation allowances to the extent that an affiliate holds assets posing a risk to the association. A savings association must also establish liabilities for off- balance-sheet items, such as letters of credit, when loss becomes probable and estimable.\nIn August 1993, the OTS issued revised guidance for the classification of assets and a new policy on the classification of collateral-dependent loans (where proceeds from repayment can be expected to come only from the operation and sale of the collateral). With limited exceptions, effective September 30, 1993, for troubled collateral-dependent loans where it is probable that the lender will be unable to collect all amounts due, an association must classify as \"loss\" any excess of the recorded investment in the loan over its \"value\", and classify the remainder as \"substandard\". The \"value\" of a loan is either the present value of expected future cash flows, the loans' observable market price or the fair value of the collateral.\nOn December 21, 1993, the federal banking agencies, including the OTS, issued an interagency policy statement on the allowance for loan and lease losses (the \"Policy Statement\"). The Policy Statement requires that federally-insured depository institutions maintain an allowance for loan and lease losses (\"ALLL\") adequate to absorb credit losses associated with the loan and lease portfolio, including all binding commitments to lend. Given the appropriate facts and circumstances as of the evaluation date, the Policy Statement defines an adequate ALLL as a level that is no less than the sum of (1) for loans and leases classified as substandard or doubtful, credit losses over the remaining effective lives of such loans and leases; (2) for loans and leases that are not classified, all estimated credit losses forecasted for the upcoming twelve months; and (3) amounts for estimated losses from transfer risk on international loans. Additionally, an adequate level of ALLL should reflect an additional margin for imprecision inherent in most estimates of expected credit losses.\nThe Policy Statement also provides guidance to examiners in evaluating the adequacy of the ALLL. Among other things, the Policy Statement directs examiners to check the reasonableness of ALLL methodology by comparing the reported ALLL against the sum of (1) 50 percent of the portfolio that is classified doubtful, (2) 15 percent of the portfolio that is classified substandard; and (3) for the portions of the portfolio that have not been classified (including those loans and leases designated special mention), estimated credit losses over the upcoming twelve months given the facts and circumstances as of the evaluation date (based on the institution's average annual rate of net charge-offs experienced over the previous two or three years on similar loans and leases, adjusted for current conditions and trends).\nThe Policy Statement specifies that the amount of ALLL determined by the sum of the amounts above is neither a floor nor a \"safe harbor\". However, it is expected that examiners will review a shortfall relative to this amount as indicating a need to more closely review management's analysis to determine whether it is reasonable, supported by the weight of reliable evidence and that all relevant factors have been appropriately considered.\nTAXATION\nUnder the Internal Revenue Code, chartered savings institutions that meet certain definitional tests and conditions are allowed federal income tax deductions for additions to bad debt reserves. Such additions may be determined under the experience method or the percentage of taxable income method. In order to retain the special bad debt reserve treatment, savings associations must maintain 60 percent or more of their assets in certain qualifying assets, consisting of some of the same assets as in the QTL test, as well as other assets. GWB has met all tests for all applicable years.\nIf in some future year the Bank either fails the QTL test and converts to a bank charter or fails to meet the tax asset test, it would be ineligible to obtain a bad debt deduction under the reserve method and may be required to recapture its existing tax bad debt reserves.\nIn 1993, GWB paid dividends totaling $501 million to GWFC, which included the book value of Aristar of $369 million. Future dividends by GWB are subject to certain tax restrictions in addition to regulatory and other considerations. Retained earnings that have not been subject to federal income tax, because of the above bad debt deduction, are not available for dividends or any other distribution, including one made on dissolution or liquidation, without the payment of federal income taxes. Further, at December 31, 1993, GWB's limitations on capital distributions would have restricted the payment of dividends before untaxed retained earnings were reached.\nNotes 1, 14, and 16 of the Notes to Consolidated Financial Statements in \"Financial Statements and Supplementary Data\", present the accounting implications for income taxes.\nEMPLOYEES\nGWFC employed 17,029 persons at December 31, 1993. Employees are not represented by a union or collective bargaining group and GWFC considers its employee relations to be satisfactory. Employees are provided retirement, savings incentive and other benefits, including life, health and accident and hospital insurance.\nITEM 2.","section_1A":"","section_1B":"","section_2":"ITEM 2. PROPERTIES\nThe executive offices of both GWFC and GWB are located in the home office building owned by GWB at 9200 Oakdale Avenue, Chatsworth, California. GWFC owns approximately 45 percent of the 6.1 million square feet in which its headquarters, administrative and branch offices are located throughout several states, including California and Florida.\nSee Note 10 of the Notes to Consolidated Financial Statements in \"Financial Statements and Supplementary Data\", for information on properties, leases and property operations.\nITEM 3.","section_3":"ITEM 3. LEGAL PROCEEDINGS\nGWFC and its subsidiaries are parties from time to time in litigation arising in the normal course of business.\nIn the opinion of the management of GWFC, after consultation with various law firms representing it and its subsidiaries in such matters, the outcome of currently pending actions in which it or any of its subsidiaries is a party will not have a material effect on its consolidated financial position or results of operations.\nITEM 4.","section_4":"ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS\nNone.\nPART II\nITEM 5.","section_5":"ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS\nThe following information appears in \"Management's Discussion and Analysis of Financial Condition and Results of Operations\" and \"Financial Statements and Supplementary Data\".\n(a) Market and market prices of the common stock - pages 122, 123 and\n(b) Approximate number of common security holders - pages 122, 123 and 124\n(c) Common stock dividend history and restrictions - pages 122, 123 and 124\n(d) Common stock dividend policy - pages 49, 103, 104 and 105\nITEM 6.","section_6":"ITEM 6. SELECTED FINANCIAL DATA\nThe following summarizes the contribution to net earnings from the principal business units:\nADOPTION OF RECENTLY ISSUED ACCOUNTING STANDARDS\nAs of January 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 114, \"Accounting by Creditors for Impairment of a Loan\". FAS 114 requires that impaired loans be measured based on the present value of expected future cash flows discounted at the loan's effective interest rate. As a practical expedient, impairment may be measured based on the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. When the measure of the impaired loan is less than the recorded investment in the loan, the impairment should be recorded through a valuation allowance.\nAs of December 31, 1993, the Company adopted Statement of Financial Accounting Standards No. 115, \"Accounting for Certain Investments in Debt and Equity Securities\" (\"FAS 115\"). Investments in debt and equity securities for which the Company has the positive intent and ability to hold to maturity are recorded at amortized cost. All other investments are classified as available for sale and recorded at fair value. Unrealized gains and losses on available-for-sale securities are excluded from earnings and reported as a separate component of stockholders' equity. The Company has no trading portfolio as defined by FAS 115.\nThe presentation of this information is included below and in the Notes to Consolidated Financial Statements in \"Financial Statements and Supplementary Data\".\nINTEREST EARNING ASSETS\nInterest earning assets primarily comprise real estate loans and mortgage-backed securities, consumer finance loans and marketable securities. Average interest earning assets declined 1 percent in 1993 after decreases of 3 percent in 1992 and 1 percent in 1991.\nARMs on residential property continue to be the primary lending product. The demand for this product is a primary factor governing asset growth. As a result of the recession, the real estate lending market continued to decline for property sales throughout the past three years, but it was supported by heavier refinance activity during 1992 and 1993. The low interest-rate environment kept adjustable rate lending under extreme pressure. ARMs comprised 62 percent of real estate loans originated in 1993 compared with 54 percent in 1992 and 68 percent in 1991. Loans originated at fixed rates, which comprised the remainder of the volume, were sold to others to minimize portfolio interest-rate risk; however, this limited asset growth. Much of the fixed-rate lending resulted from the active refinance market. Refinance activity comprised 64 percent of real estate lending in 1993 compared with 65 percent in 1992 and 51 percent in 1991.\nThe mix of interest earning assets continued to reflect a rising concentration of single-family loans. The SFR portfolio represented 72 percent of total interest earning assets at year-end 1993 compared with 71 percent at year-end 1992 and 70 percent at year-end 1991. This trend is the result of Great Western's decision, in 1987, to discontinue commercial real estate lending except to finance the sale of foreclosed properties. The increase in the percentage of single-family loans should continue in 1994. The following table shows the shift in the composition of interest earning assets:\nThe following table summarizes the real estate loan portfolio as of December 31, 1993 by security type and year of origination:\nThe tables on pages 112, 117, and 118 in \"Financial Statements and Supplementary Data\" present additional data on the interest earning asset portfolio.\nINTEREST BEARING LIABILITIES\nInterest bearing liabilities comprise retail and wholesale customer accounts and borrowings.\nCustomer account growth totaled $623 million in 1993, or 2 percent of the beginning balance, compared with $338 million, or 1 percent, in 1992 and $921 million, or 3 percent, in 1991. The 1993, 1992 and 1991 increases included approximately $4.4 billion, $2.2 billion and $2.9 billion, respectively, in retail deposits from several acquisitions, primarily from the RTC. Since 1990, Great Western has concentrated on increasing transaction account balances while certificates of deposit declined and were not renewed in many instances because of lower interest rates. The following table shows the shift in interest bearing liabilities:\nTransaction account growth is a principal objective of deposit activity. In 1993, transaction accounts declined $197 million after increases of $2.1 billion in 1992 and $1.9 billion in 1991. The low rates offered on money market accounts in 1993 have prompted customers to seek alternative investments with higher yields. Transaction accounts now comprise 43 percent of total customer deposits compared with 42 percent at year-end 1992 and 32 percent at year-end 1991. These balances include 21 percent, 23 percent and 18 percent, respectively, in money market accounts which were more popular with customers than certificates of deposit in 1993, 1992 and 1991.\nCertificates of deposit have declined over the last three years due to the low interest rates offered on such accounts. A portion of the 1993 decrease in certificates of deposit was the withdrawal of $1.6 billion of deferred compensation accounts, which included $1.3 billion from the State of California. The Company chose to reduce the interest rate offered on these accounts due to other funding opportunities, which reduced the overall cost of funds, thereby increasing the net interest spread, net interest income and net income.\nWholesale accounts, which are able to be used as an alternative source of lendable funds, totaled $588 million at December 31, 1993 and have continued to run off during the past three years. The balance of wholesale accounts at year-end 1993 comprised 1.9 percent of total deposits. Wholesale accounts totaled $683 million at year-end 1992 and $1 billion at year-end 1991. Wholesale account activity will fluctuate depending upon the need for funding sources for asset growth.\nBorrowings, other than customer accounts, totaled $3.5 billion at December 31, 1993 compared with $4.2 billion at December 31, 1992 and $5.6 billion at December 31, 1991. Borrowings have not been a significant factor in funding new lending during the past three years as a result of customer deposit acquisitions. At December 31, 1993, customer accounts comprised 90 percent of interest bearing liabilities, compared with 88 percent and 85 percent at year-ends 1992 and 1991, respectively.\nThe tables on pages 113, 114 and 115 in \"Financial Statements and Supplementary Data\" present a detailed composition of borrowings and customer accounts.\nNET INTEREST INCOME AND NET INTEREST MARGIN\nNet interest income was $1.38 billion in 1993 compared with $1.42 billion in 1992 and $1.27 billion in 1991. For the year 1993, the average net interest margin was 3.79 percent compared with 3.89 percent for 1992 and 3.33 percent for 1991. Net interest income and net interest margin are the two primary measures of core earnings strength. The average net interest margin contracted in 1993 as market rates generally stabilized and the Company's margin was less affected by the ARM repricing lag.\nGreat Western offers two primary adjustable rate mortgage products: one is tied to the Federal Cost of Funds Index (\"FCOFI\"), and the other is tied to the 11th District Federal Home Loan Bank's (\"FHLB\") Cost of Funds Index (\"COFI\"). The FCOFI is tied to two components of the federal government's cost of funds - the monthly average interest rate on all marketable Treasury\nbills and the monthly average interest rate on all marketable Treasury notes. Customer acceptance of either product depends upon the relationship of the index and initial offering rates. The interest differential over the appropriate index is approximately 20 to 25 basis points lower for FCOFI loans than COFI loans. The COFI ARM was the primary mortgage instrument in 1993 and the FCOFI ARM was the product of choice by the customer in 1992.\nThe cost of funds of GWB relative to COFI and FCOFI is shown as follows:\nBoth FCOFI and COFI ARMs lag changes in market rates by approximately two months. In a rising rate environment, the cost of short-term liabilities will increase ahead of the ARMs; whereas, in a declining rate environment, net interest income and net interest margins increase during the lag period. The repricing lag in the declining rate environment added approximately eight basis points in 1993, 24 basis points in 1992 and 23 basis points in 1991 to the effective net interest margin. With the ARM, there is little of the long-term interest-rate risk that is associated with fixed-rate lending.\nThe Company currently originates ARMs for its own portfolio and originates fixed-rate residential loans for sale in the secondary market. In 1991, Great Western commenced a short-term hedge contract program for the fixed-rate commitment period to protect against rate fluctuations on the commitments to fund fixed-rate loans. Hedge contracts are recorded at cost. Fixed-rate lending totaled $3.4 billion in 1993, $4.2 billion in 1992 and $2.5 billion in 1991. Sales of these mortgages totaled $3.1 billion in 1993, $4.1 billion in 1992 and $2.1 billion in 1991. Total mortgage sales in 1993\nwere $3.6 billion, which included $473 million of distressed asset bulk sales, compared with $4.2 billion in 1992 and $2.5 billion in 1991. Nearly all mortgage sales, excluding bulk sales, were loans originated for sale or held as available for sale. At December 31, 1993, the Company serviced for others $12.3 billion in mortgages with a loan servicing spread of 42 basis points compared with $13.1 billion at December 31, 1992 with a loan servicing spread of 34 basis points and $12.8 billion at December 31, 1991 with a loan servicing spread of 48 basis points.\nLoans available for sale are valued at the lower of cost or market. As of December 31, 1993, $320 million of real estate loans, primarily fixed- rate loans, were designated as available for sale. Gains of $23.7 million in the real estate loan portfolio were recognized. Unrecognized gains on real estate loans available for sale totaled $8 million at year end. Mortgage-backed securities and other securities available for sale are carried at fair value. At December 31, 1993, $2.6 billion in mortgage-backed securities, primarily ARM securitized products, were designated as available for sale. Sales of mortgage-backed securities available for sale in 1993 resulted in realized gains of $1.1 million and no realized losses. Gains and losses are calculated on the specific identification method. Securities available for sale at the end of 1993 had a fair value of $871 million. Gains recognized during the year totaled $254,000.\nGreat Western monitors asset and liability maturities and reviews exposure to interest-rate risk, giving consideration to interest-rate trends and funding requirements. The following table shows that the portfolio of short-term assets exceeded liabilities maturing or subject to interest adjustment within one year by $3.1 billion at December 31, 1993. This compared with $5.1 billion and $2.9 billion at December 31, 1992 and 1991, respectively.\nThe following table shows the year-end interest-rate margins and the components used in the margin calculation, reflecting the trends during the past five years:\nBecause the effective yield is subject to varying interest rates during the year and also is affected by the loss of interest on nonaccrual loans, the following table on net interest income shows the average monthly balances, interest income and interest expense, and effective average rates by asset and liability component. This table also reflects the yield which results because of the benefit of interest earning assets exceeding interest bearing liabilities.\nWhile delinquencies in the 30-to-89-day categories have declined during 1993, management expects increases in the earthquake affected areas in early 1994. Foreclosures continue to occur at historically high levels.\nLoans delinquent over 30 days, together with restructured loans, have been included in the process to determine estimated losses. The effects of various loan characteristics such as geographic concentrations, loan purpose, negative amortization and LTV ratios are considered in this review process.\nThe following table shows the trend in single-family residential portfolio and delinquency (two or more payments delinquent) over the past three years:\nThe level of nonperforming assets declined 44 percent in 1993 after increases of 24 percent and 37 percent in 1992 and 1991, respectively. In the second half of 1993, the Company completed four bulk asset sales which totaled $659 million, in an effort to reduce nonperforming assets. The Company completed two sales totaling $330 million of single-family real estate loans and real estate and the sale of $115 million of single-family owned real estate. Nonperforming SFR loans have fallen to $522 million at December 31, 1993 compared with $782 million and $481 million at year-end 1992 and 1991, respectively. A sale of $214 million of income property loans, some of which were performing assets, was also completed in 1993.\nThe loss exposure on the SFR portfolio increased in 1993, due in part to the Company's accelerated disposition program. Net charge-offs in the SFR portfolio increased to $252 million, or .98 percent of the SFR portfolio, in 1993 from $53 million, or .21 percent, in 1992 and $32 million, or .13 percent, in 1991. At December 31, 1993, the Company's real estate loan portfolio included $3.5 billion in uninsured residential mortgage loans that were originated with terms on which the LTV exceeded 80 percent (but not in excess of 90 percent). This balance represents a decline from the level of $4.5 billion a year ago. For the year 1993, losses totaled $44.8 million, or .81 percent of this portfolio, compared with $10.1 million, or .15 percent, in 1992 and $4.4 million, or .06 percent, in 1991. Since November 1, 1990, the Company has purchased mortgage insurance on all new single- family residential mortgages originated with LTVs in excess of 80 percent.\nCertain loans (where GWB works with borrowers encountering economic difficulty) meet the criteria of, and are classified as, troubled debt restructurings (\"TDRs\") because of modification to loan terms. In the second quarter of 1993, Federal Banking Regulators issued a joint release regarding credit availability, which allowed some nonperforming loans to be returned to performing status. As a result, TDRs which meet certain conditions of repayment and performance have not been included in nonperforming assets. At December 31, 1993, $81.6 million of TDRs were classified as performing assets.\nAs a result of the adoption of FAS 114, impaired loans for which foreclosure is probable have been reclassified from real estate available for sale or development to loans receivable on the Consolidated Statement of Financial Condition, and are included in delinquent loans or troubled debt restructurings, as appropriate. The recorded investment in loans for which impairment has been recognized in accordance with FAS 114 totaled $348 million at December 31, 1993. The reserves for estimated losses related to such loans were $40.6 million at December 31, 1993. A change in the fair value of an impaired loan is reported as an increase or reduction to the provision for loan losses.\nReal estate acquired through foreclosure is classified as performing when it meets certain criteria of operating profitability. As of December 31, 1993, such assets totaled $43 million.\nThe following table presents nonperforming assets together with related ratios to total assets:\nThe table on page 117 in \"Financial Statements and Supplementary Data\" presents nonperforming assets together with related ratios to total assets, and the table on pages 119 in \"Financial Statements and Supplementary Data\" presents nonperforming real estate assets by state and by security type.\nProvisions for loan losses totaled $463 million in 1993 compared with $420 million in 1992 and $150 million in 1991. Provisions in 1993 included $125 million related to three bulk loan sales of $544 million and $20 million for the continued accelerated disposition of single-family real estate in 1994. The California real estate market requires continued review. At December 31, 1993, real estate owned had been written down to 70 percent of the previous loan balances. At December 31, 1992, loans carried as in- substance foreclosures and real estate owned had been written down to 67 percent of the previous loan balances. Loan loss reserves were 60 percent of nonperforming or restructured loans as of December 31, 1993, compared with 43 percent a year earlier.\nThe Company recorded provisions for real estate losses of $92 million, $220 million and $21 million for 1993, 1992 and 1991, respectively, on its real estate available for sale or development. Loss provisions in 1993 included $31 million for single-family real estate developments located in Southern California and $25 million related to the $115 million SFR bulk real estate sale. The 1992 provision was primarily for commercial and apartment real estate.\nThe Company's provision for loan losses, charge-off experience, and reserve for estimated losses for the last five years is presented in the Notes to Consolidated Financial Statements in \"Financial Statements and Supplementary Data\" on page 78.\nThe Company has not experienced a need for loss reserves on security investments, which are of investment grade. Security investments available for sale are carried at fair value.\nOPERATIONS\nNet interest income declined in 1993 due to lower net interest earning assets and net interest margin. Other interest income totaled $39 million in 1993. This compared with $35 million in 1992 and $62 million in 1991. Other interest income included interest on settlements with the IRS, dividends on FHLB stock and interest on short-term investments.\nReal estate services net losses were $12 million in 1993 and $101 million in 1992 compared with income of $104 million in 1991. The 1993 and 1992 losses were primarily attributable to the $92 million in 1993 and $220 million in 1992 of loss provisions on real estate as previously discussed. Mortgage servicing income totaled $51.2 million in 1993 compared with $52.7 million in 1992 and $68.4 million in 1991. The 1992 decline reflects a declining net loan servicing spread. Gain on mortgage sales was $24.8 million, $32.8 million and $29.6 million for the years 1993, 1992 and 1991, respectively. The gain as a percent of mortgage-banking sales, primarily fixed-rate mortgages, was .80 percent in 1993 compared with .79 percent in 1992 and 1.19 percent in 1991. Real estate servicing and origination related\nfee income was $37.9 million in 1993 compared with $33.1 million in 1992 and $29.9 million in 1991. Real estate operations included $45.9 million in operating losses and holding costs in 1993, compared with $6.6 million in 1992 and $6.2 million in 1991. The 1993 increase was due in part to an increased volume of new foreclosures and a decision by the Company to expense acquisition and refurbishment costs as incurred. In 1992 and 1991, these costs were added to the carrying value of the asset.\nRetail banking fee income increased in 1993 to $113 million from $92.4 million in 1992 and $71.5 million in 1991. The growth in this income is attributable to higher balances in transaction accounts and to the growth in deposits as a result of acquisitions. The Company has also expanded mutual fund activity and now manages mutual funds with assets aggregating $3.2 billion compared with $2.2 billion at December 31, 1992. Net revenue from these operations, which comprises commissions and other income from mutual fund operations, totaled $38 million in 1993 compared with $36.7 million in 1992 and $18.5 million in 1991.\nThe Company sold its $219 million bank card portfolio because it was not expected to achieve the economies of scale that are increasingly necessary in the bank card business, resulting in a net gain of $22.9 million. The following is a summary of gains and losses on the Company's securities and investments:\nOther income totaled $7 million in 1993 and 1992 compared with $8.9 million in 1991.\nThe growth in operating and administrative expenses during the past three years was primarily the result of significant branch acquisitions. The Company has acquired 399 branches in California and Florida from the RTC and other sources since 1990 when it began its program to increase transaction accounts. Nearly half of these branches were consolidated with existing facilities. Expenses totaled $1.03 billion in 1993 compared with $970 million in 1992 and $844 million in 1991. Operating expenses in 1993 included restructuring charges of $30 million, primarily severance benefits\nassociated with the cost-reduction program at the Company's administrative headquarters. The Company expects to eliminate approximately 1,000 jobs by the end of 1994, or 25 percent of the administrative work force. Approximately 500 of these reductions have been realized by year-end 1993 from a job-hiring freeze imposed in late summer of 1993. The cost-reduction program, which will eliminate unnecessary tasks and improve efficiency, will be phased in throughout 1994. Reductions in nonpersonnel related costs will also contribute to the overall savings through renegotiation of existing vendor contracts and elimination of other administrative expenses. Anticipated savings in 1995 and beyond will exceed $100 million, a portion of which will be realized in 1994.\nThe January 17, 1994 Northridge Earthquake caused damage at the Company's administrative headquarters, however, earthquake insurance will limit the Company's exposure.\nOperating expenses increased by 6.2 percent during the past year compared with 14.9 percent in 1992. The overhead ratios are as follows:\nRevenue is defined as net interest income and other operating income.\nThe Company's effective tax rate for 1993 was 32.6 percent compared with 43.6 percent in 1992 and 41 percent in 1991. The decrease in the effective tax rate in 1993 is mainly due to the favorable settlement of tax issues and the reversal of certain tax liabilities no longer required. The Company also reflected applicable changes pursuant to the Omnibus Budget Reconciliation Act of 1993 including the 1 percent federal corporate tax rate increase. The 1992 rate increase was due in part to the amortization of intangibles, which was only partially deductible for income taxes. In 1992, with the adoption of FAS 109, the Company began to provide a tax benefit for the general loss reserves.\nCAPITAL RESOURCES AND LIQUIDITY\nStockholders' equity (\"capital\") totaled $2.4 billion at year-end 1993 compared with $2.4 billion at year-end 1992 and $2.3 billion at year-end 1991. In 1992, the Company issued $165 million of 8.30 percent cumulative preferred stock. In 1991, the Company issued $129 million of 8.75 percent cumulative convertible preferred stock. The ratio of capital to total assets was 6.3 percent, 6.4 percent and 5.9 percent at December 31, 1993, 1992 and 1991, respectively.\nThe Company's primary subsidiary, GWB, is subject to certain capital requirements under the regulations of the Federal Deposit Insurance Corporation and the Office of Thrift Supervision and meets all such requirements. At December 31, 1993, GWB's capital was $2.7 billion, including subordinated notes of $429 million.\nTotal dividends per share were $.92 in 1993, $.91 in 1992 and $.87 in 1991. The Company increased its quarterly dividend on its common stock to $.23 per share in April 1992. Payment of dividends by the Company is subject to restrictions on the receipt of dividends from GWB. Payment of dividends to the Company by GWB is linked by federal regulation to the Bank's capital. The Bank's level of capital exceeds the requirements for the payment of dividends. Should this level decline below the fully phased-in requirements, limitations on the dividend distributions to a percentage of net income could be imposed.\nLiquidity used in financing activities was $164 million in 1993 compared with $1.1 billion in 1992 and $13 million in 1991. Liquidity used in financing activities was decreased commensurate with funds used in investing activities due to the lack of asset growth in the previous three years. GWB acquired $4.1 billion, $2.3 billion and $3.8 billion in 1993, 1992 and 1991, respectively, in deposits from acquisitions. Planned withdrawals of repriced wholesale accounts totaled $95 million in 1993, $366 million in 1992 and $2.2 billion in 1991. The retail branch network experienced net customer account outflows of $3.4 billion in 1993 compared with $1.6 billion in 1992 and $733 million in 1991, primarily certificate of deposit accounts being repriced downward. In the same three years, repayment of borrowings totaled $672 million, $1.4 billion and $947 million.\nFunds used in investing activities were $238 million in 1993 and $507 million in 1991 compared with funds provided by investing activities of $518 million in 1992. Real estate loans originated for investment were $5.4 billion in 1993, $5 billion in 1992 and $5.1 billion in 1991. Mortgage payments in 1993 were $5.6 billion, $6.1 billion in 1992 and $4.8 billion in 1991. Mortgage payments fluctuate for various reasons including the level of refinancings. Consumer loans declined $98.6 million in 1993 compared with $5.9 million in 1992 and a $408 million increase in 1991.\nFunds provided by operating activities were $341 million in 1993 compared with $862 million in 1992 and $374 million in 1991. Net change in assets available for sale decreased cash $102 million in 1993 compared with cash provided of $68 million in 1992 and a decline of $47 million in cash in 1991. Cash provided from earnings totaled $442 million in 1993 compared with $793 million and $421 million in 1992 and 1991, respectively.\nThe Company has several sources for raising funds for lending among which are customer deposits, mortgage sales, FHLB borrowings and public debt offerings. The following table presents the debt ratings of the Company and GWB at December 31, 1993:\nCash and securities totaled $1.8 billion at December 31, 1993. The balance was $1.7 billion at December 31, 1992 and $1.4 billion at December 31, 1991. GWB is in excess of required liquidity levels. The excess balances in the above amounts over those required for regulatory purposes will fluctuate between periods and are a source of short-term funding.\nSEGMENT DATA\nThe business segment information is presented in the accompanying table.\nSee Notes to Consolidated Financial Statements.\nSee Notes to Consolidated Financial Statements.\nSee Notes to Consolidated Financial Statements.\nConsolidated Statement of Stockholders' Equity\nSee Notes to Consolidated Financial Statements.\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS\nNote 1: Statement of Accounting Policies\nPrinciples of Accounting and Consolidation\nThe accounts of Great Western Financial Corporation and its wholly- owned subsidiaries, Great Western Bank, a Federal Savings Bank, Aristar, Inc., a consumer finance holding company, and companies operating in related fields, are included in the accompanying consolidated financial statements and are referred to collectively as the Company. Significant intercompany items have been eliminated. Certain prior year amounts have been reclassified to conform with the 1993 presentation.\nAdoption of Recently Issued Accounting Standards\nThe Company adopted Statement of Financial Accounting Standards No. 114, \"Accounting by Creditors for Impairment of a Loan\" (\"FAS 114\") as of January 1, 1993. FAS 114 provides guidance on the measurement and recognition of loan impairment.\nFAS 114 requires that impaired loans for which foreclosure is probable continue to be accounted for as loans. Those loans have been reclassified from real estate available for sale or development to loans receivable on the Consolidated Statement of Financial Condition. Impaired loans recorded in accordance with FAS 114 are included in delinquent loans or in troubled debt restructurings, as appropriate. The Company had previously measured loan impairment pursuant to the methods prescribed in FAS 114. As a result, no additional reserves were required by early adoption of the pronouncement.\nThe effect of the adoption of FAS 114 on the Consolidated Statement of Financial Condition follows:\nThe decrease in nonperforming assets represents performing loans which were previously classified as loans in-substance foreclosed.\nThe Company adopted Statement of Financial Accounting Standards No. 115, \"Accounting for Certain Investments in Debt and Equity Securities\" (\"FAS 115\") as of December 31, 1993. FAS 115 requires that investments in debt securities and certain equity securities be reported at fair value unless the Company has the positive intent and ability to hold such securities to maturity. Investments held to maturity are to be reported at amortized cost. Unrealized holding gains and losses on securities available for sale, net of income taxes, are reported as a separate component of stockholders' equity.\nThe adoption of these accounting standards did not materially affect the comparability of the financial statements.\nAccounting Changes\nThe Company adopted Statement of Financial Accounting Standards No. 106, \"Employers' Accounting for Postretirement Benefits Other Than Pensions\" (\"FAS 106\") as of January 1, 1992. FAS 106 requires that the expected cost of postretirement benefits be charged to expense during the period that eligible employees render such service.\nThe unfunded benefit obligation as of January 1, 1992, reflected in other liabilities on the Consolidated Statement of Financial Condition and shown as an accounting change on the Consolidated Statement of Operations follows:\nIn 1992, the Company also adopted Statement of Financial Accounting Standards No. 109, \"Accounting for Income Taxes\" (\"FAS 109\") which supersedes Statement No. 96, \"Accounting for Income Taxes\" which was adopted by the Company in 1987. FAS 109 required the Company to record previously unrecognized tax benefits totaling $61 million as of January 1, 1992 for its general loss reserves.\nThe Company elected to give cumulative effect to the changes in the first quarter of 1992.\nFair Value Disclosure\nQuoted market prices are used, where available, to estimate the fair value of financial instruments. Because no quoted market prices exist for a significant portion of the Company's financial instruments, fair value is estimated using comparable market prices for similar instruments or using management's economic estimates of discounted cash flows for the underlying asset or liability. A change in management's assumptions could significantly affect these estimates and, accordingly, fair value is not necessarily indicative of the value which would be realized upon disposition of the financial instruments.\nCash and Securities\nLiquid assets consist principally of cash, certificates of deposit, federal funds, U.S. government, corporate and other securities approved for investment by regulations. Certificates of deposit and federal funds purchased with a maturity of three months or less are considered to be cash equivalents. Other securities, readily convertible into cash, are available for sale and are recorded at fair value. Fair value is generally determined on the aggregate method. Certain securities are designated as held for investment based on management's positive intent and ability to hold those securities to maturity. Securities held for investment are recorded at amortized cost. Discounts or premiums on securities recorded at cost are amortized using the interest method. For the Consolidated Statement of Cash Flows, cash includes cash on hand, cash in banks and cash equivalents.\nMortgage-backed Securities\nThe Company's mortgage-backed securities portfolio consists of real estate loan receivables originated by the Bank and subsequently securitized primarily through the Federal Home Loan Mortgage Corporation (\"FHLMC\") or the Federal National Mortgage Association (\"FNMA\"). Loans are also securitized for sale directly in the public market. The Company also purchases commercial mortgage pass-through certificates from the RTC. In addition, the Company purchases, for liquidity purposes, investments in Collateralized Mortgage Obligations (\"CMOs\") and Real Estate Mortgage Investment Conduits (\"REMICs\"). REMICs and GWB-originated pass-through certificates are held for investment based on management's positive intent and ability to hold these securities until maturity and recorded at amortized cost. All other mortgage-backed securities are available for sale and recorded at fair value. Fair value is generally determined on the aggregate method. Discounts or premiums on mortgage-backed securities recorded at cost are amortized using the interest method.\nLoans Receivable Real Estate Loans\nThe Company's real estate loan portfolio consists primarily of long- term loans secured by first trust deeds on single-family residences, other residential property, commercial property and land. The adjustable rate mortgage is the Bank's primary loan investment.\nFees are charged for originating loans at the time the loan is granted. Loan origination fees, partially offset by the deferral of certain expenses associated with loans originated, are amortized to interest income over the life of the loan using the interest method. ARMs with a lower rate during the introductory period (usually three months) will reflect the amortization of a substantial portion of the net deferred fee as a yield adjustment during the introductory period. Amortization is discontinued for nonperforming loans and loans available for sale and is realized upon the ultimate disposition of the assets.\nLoan fee income represents income from the prepayment of loans, delinquent payments or miscellaneous loan services and is recorded when collected.\nInterest receivable represents, for the most part, the current month's interest which will be included as a part of the borrower's next monthly loan payment. Interest receivable is accrued only if deemed collectible. Loan payments generally are deemed to be in nonaccrual status when they become 90 days past due. When a loan is designated as nonaccrual, all previously accrued interest is reversed.\nBelow-market-rate loans are made to facilitate the sale of certain foreclosed real estate. These transactions reduce the gain on sale and provide a loan discount which is amortized on the interest method resulting in a market yield on the new loan.\nConsumer Loans\nThe Bank's consumer loans include student educational loans insured by the U.S. government or the state of California, fully secured loans made to holders of customer accounts and checking overdraft loans. Consumer loans made by the consumer finance subsidiaries of Aristar have maximum terms of 180 months. The weighted average contractual term of all loans written by the consumer finance subsidiaries in 1993 was 41 months. Experience, however, has shown that a majority of consumer loans will be renewed prior to maturity. Finance charges included in consumer loans receivable are deferred and amortized into income over the term of the loan with appropriate limitation for delinquent installments for which collection is not reasonably assured. Student educational loans are available for sale and are recorded at the lower of cost or fair value. Fair value is determined on the aggregate method. All other consumer loans are held to maturity.\nReserve for Estimated Loan Losses\nIt is the policy of the Company to provide for estimated losses on real estate loans when any significant and permanent decline in value is identified. A change in the fair value of an impaired loan is reported as an increase or reduction to the provision for loan losses. Periodic reviews are made of major loans and major lending areas in an attempt to identify potential problems at an early date. Various factors will affect the level of reserves, including economic conditions, trends and previous loss experience. Major properties are reviewed individually and are classified as \"satisfactory, special mention, substandard, doubtful or loss.\" Based upon the classification, an appropriate reserve is established. Loans transferred to foreclosed real estate are transferred at the lower of the net loan value or the fair value of the collateral, less estimated costs to sell.\nGeneral loan loss reserves are provided on classified assets. The doubtful, substandard and special mention asset classifications used by the Company for major loans form the basis from which to analyze the possible loss exposure. Consideration is given to the Company's historical experience of losses on loans so classified and to current economic conditions and trends.\nThe single-family residential loan portfolio is reviewed based upon the delinquency and loss experience of the portfolio. The portfolio also is reviewed by geographic area. Based upon the current loss experience and the losses and delinquencies within each lending area, a general loss reserve is provided on the portfolio giving consideration to current economic conditions and trends.\nLoans made by consumer finance subsidiaries are also reviewed on a systematic basis. In evaluating the adequacy of the allowance, consideration is given to recent loan loss experience and such other factors which, in management's judgment, deserve current recognition in estimating losses. Non-real estate secured accounts are charged off based on contractual delinquency of 120 days on closed-end accounts and 180 days on open-end accounts.\nSimilar reviews are made for retail banking consumer loan operations, where provisions are based upon recent loss experience.\nMortgage Banking Activities\nReal estate loans are originated principally for investment. Since the Company is primarily an ARM portfolio lender for its own investment, most other products are originated and available for sale.\nAs of December 31, 1993, the following loans were designated as available for sale and were carried at the lower of cost or fair value:\n1. All single-family, fixed-rate product in the portfolio originated subsequent to January 1, 1989.\n2. Single-family, adjustable rate product designated as available for sale.\n3. Loans other than single-family which have been designated at the date of origination.\nFair value on fixed-rate product is generally determined on the specific identification method. An aggregate method is used on adjustable rate products.\nThe Company sells loans or participating interests in loans to generate servicing income, to limit interest-rate risk and to provide funds for additional investment. Under the servicing agreements, the Company continues to service the loans and the investor is paid its share of principal collections together with interest at an agreed upon rate, which generally differs from the loan's contractual interest rate. Such difference results in a \"loan servicing spread\". Gains or losses on sales of loans are recognized at time of sale and are generally determined by: 1) the difference between the net sales proceeds and the book value of the loans sold; 2) recognition of deferred loan fees; and 3) an adjustment, if necessary, to increase or decrease the loan servicing spread in order to provide for normal servicing. In sales involving credit enhancements, fair value is used in calculating the gain or loss.\nThe Company purchases short-term hedge contracts for the commitment period to protect against rate fluctuations on its commitments to fund fixed- rate loans originated for sale. Hedge contracts are recorded at cost.\nReal Estate Available for Sale or Development\nReal estate available for sale or development comprises both purchased and foreclosed properties. Foreclosed properties are carried at cost at acquisition, which is the lower of the net loan value on the property or the fair value of the property, less estimated costs to sell, at the date of foreclosure. Thereafter, with the implementation of American Institute of Certified Public Accountants' Statement of Position (\"SOP\") 92-3, \"Accounting for Foreclosed Assets\" in July 1992, specific valuation allowances have been established for changes in the fair value of real estate. Prior to the implementation of this SOP, all such valuation adjustments were directly charged against the asset. Other real estate available for sale is carried at the lower of cost or fair value. Property development projects, carried at the lower of cost or net realizable value, are accounted for on the equity method.\nPremises and Equipment\nThe Company has followed the policy of capitalizing expenditures for improvements and major refurbishments and has charged ordinary maintenance and repairs to earnings as incurred. Depreciation and amortization are computed principally on the straight-line method over the estimated useful lives as follows:\nBuildings 30 to 60 years\nLeasehold improvements Lesser of term of lease or useful life of property\nFurniture, fixtures and equipment 3 to 12 years\nIntangibles Arising rom Acquisition\nBecause of the earning power or other special values of certain purchased companies or businesses, the Company paid amounts in excess of fair value for businesses, core deposits and tangible assets acquired. Generally, such amounts are being amortized by systematic charges to income (primarily for periods from six to 25 years) over a period no greater than the estimated remaining life of the assets acquired or not exceeding the estimated average remaining life of the existing deposit base assumed.\nCustomer Accounts\nCustomer accounts comprise primarily the Bank's savings and checking accounts. Customer accounts vary as to terms, with the major differences being minimum balance required, maturity, interest rates and the provisions for payment of interest. The Bank's customer accounts are insured by the FDIC, through either the Bank Insurance Fund (\"BIF\") or Savings Association Insurance Fund (\"SAIF\") for up to an aggregate amount of $100,000 per customer.\nThe Bank may offer large denomination negotiable certificates of deposit. The negotiable certificates of deposit are primarily sold through brokers and may subsequently be traded on the open market.\nInterest is accrued and either paid to the customer or added to the customer's account on a periodic basis. On term accounts, the forfeiture of interest (because of withdrawal prior to maturity) is offset as of the date of withdrawal against interest expense.\nFinancial Instruments with Off-balance-sheet Risk and Concentrations of Credit Risk\nThe Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit, at both fixed and variable rates, loans sold with credit enhancements, standby letters of credit, interest- rate caps and floors written, and interest-rate and cash-flow swap agreements. Purchased put options and forward sales are used as a hedge of fixed-rate commitments. These instruments involve, to\nvarying degrees, elements of credit and interest-rate risk in excess of the amount recognized in the Consolidated Statement of Financial Condition. The contract or notional amounts of these instruments reflect the extent of involvement the Company has in particular classes of financial instruments. For interest-rate caps, floors, swap transactions, purchased put options and forward sales, the contract or notional amounts do not represent exposure to risk of loss.\nThe Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual notional amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on- balance-sheet instruments.\nCommitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since a portion of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained upon extension of credit is based on management's credit evaluation of the counterparty. The value of the property as security for a mortgage loan is determined by qualified real estate appraisers.\nThe Company extends credit and requires collateral for loans sold with credit enhancements under the same lending policies as for all other real estate loans.\nThe Company primarily originates real estate loans of which a substantial portion of the portfolio is secured by real estate located in California and Florida.\nFederal and State Taxes on Income\nTaxes are provided on substantially all income and expense items included in earnings, regardless of the period in which such items are recognized for tax purposes. As of January 1, 1992, tax benefits are recognized for general loss reserve additions.\nBeginning in 1992, taxes on income are determined by using the liability method as prescribed by FAS 109. This approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. In estimating future tax consequences, FAS 109 requires the consideration of all expected future events other than enactments of changes in the tax law or rates.\nEarnings Per Common Share\nIncome for the calculation of primary earnings per common share is based on net income less preferred stock dividend requirements. The average common shares and common share equivalents outstanding, based upon amounts used in the calculation of primary earnings per common share, were 132,007,559 in 1993, 130,735,867 in 1992 and 129,131,472 in 1991. Fully diluted earnings per common share give effect to the dilutive effect of stock options and assume the conversion of all convertible securities into common stock at the later of the beginning of the year or the date of issuance (unless antidilutive).\nNote 2: Acquisitions and Dispositions\nIn December 1993, GWB purchased certain assets and assumed certain liabilities from the RTC of HomeFed Bank, F.A., San Diego, California. As a result of the transaction, GWB acquired 119 branches with retail deposits of $4.1 billion. The deposits were acquired for a premium of $151 million.\nDuring the first quarter 1993, the Company exchanged 12 of its branches located in the State of Washington, with deposits aggregating $327 million, with Pacific First Bank, a Federal Savings Bank for seven branches located in Southern California with deposits aggregating $360 million.\nIn March 1992, GWB acquired from the RTC 53 branches of the former AmeriFirst Federal Savings Bank in Florida with retail customer accounts totaling $1.8 billion. These branches were acquired at a premium of $27.5 million. Also in March, GWB acquired five California branches of Republic Federal Savings and Loan Association and assumed deposits totaling $469 million at a premium of $4.7 million.\nIn December 1991, Aristar acquired assets of $149 million from Capitol Finance Group, a subsidiary of First Union Corporation of Charlotte, North Carolina, for a premium of $21.8 million.\nIn October 1991, GWB consummated the acquisition from the RTC of 23 branches and assumption of certain assets of The First, F.A. in Orlando, Florida. The deposit base assumed totaled $938 million for which a premium of $23.4 million was paid. Consumer loans of approximately $150 million were added to GWB's portfolio. A portion of the assets were sold at a gain resulting in a reduction of the premium paid to $3.3 million.\nIn March 1991, GWB consummated the acquisition and assumption from the RTC of approximately 28 California branches of Lincoln Savings with retail deposits totaling $1 billion and 33 Florida branches of Pioneer Savings with deposits totaling $931 million. An aggregate premium of $17.4 million was paid.\nIntangibles arising from acquisitions as shown on the Consolidated Statement of Financial Condition consisted of the following:\nNote 3: Cash and Securities\nAn analysis of cash and securities by investment type at December 31, 1993 and December 31, 1992 and by maturity at December 31, 1993 is included in the table on page 112 under the caption \"By Type\" and \"Year-end 1993 by Maturity.\"\nFollowing is a summary of the amortized cost and fair values of the Company's securities portfolio available for sale:\nAt December 31, 1993 and 1992, there were no securities held for investment.\nThe fair value of securities is principally based on quoted market prices from various sources. For securities which have no quoted market price and are short-term in nature, the market value is determined to be the book value at the reporting date.\nRealized gains and losses on the available for sale portfolio are calculated on the specific identification method and were as follows:\nThe Company purchases securities under agreements to resell (repurchase agreements) having terms of up to 90 days; however, they are typically overnight investments. Repurchase agreements outstanding were $210,000,000 at 3.36 percent at December 31, 1993, sold by CS First Boston Corporation; and $345,000,000 at 3.37 percent at December 31, 1992, sold by Morgan Stanley & Co. Incorporated. The repurchase agreements were collateralized by federal agency issues with market values at least 2 percent above the repurchase agreements. The highest month-end balances outstanding were $210,000,000 in 1993 and $345,000,000 in 1992. The average balances outstanding were $60,000,000 at a rate of 3.34 percent in 1993 and $78,846,000 at 3.69 percent in 1992.\nGWB is required to maintain certain minimum reserve balances with the FRB. Included in cash were deposits at the FRB of $258,672,000 at December 31, 1993 and $198,708,000 at December 31, 1992.\nNote 4: Mortgage-backed Securities\nAn analysis of the mortgage-backed securities portfolio by loan type at December 31, 1993 and December 31, 1992 is included in the table on page 117 under the caption \"Mortgage-backed Securities by Type.\"\nMortgage-backed securities available for sale consisted of the following:\nMortgage-backed securities held to maturity consisted of the following:\nAt December 31, 1992 there were no mortgage-backed securities held to maturity.\nThe fair value of mortgage-backed securities is principally based on quoted market prices.\nGross realized gains and gross realized losses on mortgage-backed securities, which are included in gain on mortgage sales on the Consolidated Statement of Operations, were as follows:\nGains and losses on mortgage-backed securities are calculated on the specific identification method.\nNote 5: Loans Receivable\nAn analysis of the loan portfolio by type at December 31, 1993 and December 31, 1992 is included in the table on page 117 under the caption \"Loan Portfolio by Type.\" An analysis of the real estate loan portfolio by security type and state at December 31, 1993 is included in the table on page 118 titled \"Real Estate Loans and Real Estate by State.\" An analysis of the California real estate loan portfolio and nonperforming loans by region at December 31, 1993 is included in the table on pages 120 and 121 under the caption \"California Real Estate Loans and Foreclosed Real Estate.\"\nThe following comprised loans receivable:\nAs a result of the adoption of FAS 114, loans previously classified as in-substance foreclosed and reported in real estate are included in loans receivable as of January 1, 1993. The recorded investment in loans for which impairment has been recognized in accordance with FAS 114 totaled $347,755,000 at December 31, 1993. The reserves for estimated losses related to such loans were $40,567,000 at December 31, 1993.\nAn analysis of the fair value of loans receivable follows:\nThe fair value of single-family real estate loans is principally based on readily available market prices, adjusted for excess yields and various risk factors. Fair value of commercial and apartment loans is determined by computing discounted cash flows on various segments of the loan portfolio. Recent national commitment rates were used as a guide in establishing regional discount rates for commercial and apartment loans. Because the Company's primary asset, SFR ARMs, sells at a premium in the secondary market, the fair value was $790,393,000 higher than the book value at year end. The difference between fair value and book value is not expected to vary significantly in the future. The fair value of income-producing real estate loans, fixed-rate SFRs and second trust deed ARMs held for investment was $1,562,000 higher than book value. The fair value of these portfolios will fluctuate with changes in interest rates.\nFair value of consumer loans is based on discounted future cash flows. The discount rate used was based upon a projected treasury yield curve adjusted for various risk factors depending on the type of loan. The fair value of nonterm consumer loans is the book value at the reporting date. These loans include checking overdraft, installment loans and other miscellaneous consumer loan related accounts.\nLoans receivable totaling $5,821,415,000 at December 31, 1993, were pledged to secure FHLB borrowings, certain deposits, securities sold under agreements to repurchase and other obligations and accounts.\nGross unrealized gains on real estate loans available for sale totaled $8,245,000 at December 31, 1993 and $9,266,000 at December 31, 1992.\nThe Company had outstanding commitments to fund real estate loans of $776,574,000 at December 31, 1993 which consisted of $196,472,000 fixed-rate and $580,102,000 adjustable rate. At December 31, 1993, fixed-rate commitments had a fair value of $344,000. Fair value is estimated using current market prices adjusted for various risk factors and market volatility. At December 31, 1993, standby letters of credit totaled $14,272,000.\nThe Company purchases put options as a hedge of fixed-rate commitments. At December 31, 1993, the options had a notional value of $100,000,000 and a fair value of $272,000. Fair value is estimated using current market prices adjusted for various risk factors and market volatility.\nThe Company had outstanding commitments to sell fixed-rate real estate loans of $140,445,000 at December 31, 1993.\nA significant portion of the ARM portfolio is subject to lifetime interest-rate caps and floors. Each loan is priced separately with a maximum cap and a minimum floor. The weighted-average cap was 13.66 percent and the weighted-average floor was 5.72 percent at December 31, 1993. At December 31, 1993, $8,758,905,000 of ARM loans with an average yield of 7.03 percent had reached their floor rate. Without the floor, the average yield on those loans would have been 6.32 percent. The contract amount on ARMs subject to interest-rate caps and floors does not represent the exposure to market loss.\nThe amortization of deferred loan fees included in interest income totaled $50,339,000 in 1993, $51,507,000 in 1992 and $57,239,000 in 1991.\nCertain loans meet the criteria of troubled debt restructurings (\"TDRs\"). TDRs totaled $294,772,000 at December 31, 1993. This compared with $160,513,000 at the end of 1992 and $151,609,000 at the end of 1991. There were no additional funds committed at December 31, 1993.\nThe Company provides a reserve for uncollected interest, which is essentially based upon loans in foreclosure or delinquent 90 days or more. These loans are considered in \"nonaccrual\" status. Interest not accrued on all loans that were nonperforming totaled $79,588,000 for the year ended December 31, 1993 compared with $73,230,000 for the year ended December 31, 1992 and $51,160,000 for the year ended December 31, 1991.\nFollowing is a summary of the reserve for estimated losses and charge- off experience for loans receivable:\nThe ratio of net charge-offs to average loans follows:\nNote 6: Mortgage Banking\nData pertaining to mortgage banking operations follow:\nLoan servicing spread represents net servicing income as a percentage of the average portfolio serviced.\nThe present value of retained yield on loans sold is amortized using the interest method adjusted quarterly for actual prepayment experience. Following is a summary of the net unamortized balance of excess servicing on loans sold included in other assets:\nThe fair value of excess\/short servicing fees at December 31, 1993 was $17,307,000 and $29,434,000 at December 31, 1992, as determined by recalculation of the discounted cash flows at market rates.\nGains on mortgage sales were derived from:\nGWB, as seller and servicer, issued mortgage pass-through certificates comprised of Class A certificates and Class B certificates. The Class B certificate, which GWB retained, are subordinated to the rights of the Class A certificate holders. GWB also sold loans to FNMA and FHLMC whereby a portion of the credit risk was retained. Following are data related to loans sold with credit enhancements and the accompanying exposure related thereto:\nTo facilitate the servicing of delinquent loans under these commitments and to minimize losses to the Company, loans in the amount of $185,825,000 in 1993, $91,263,000 in 1992 and $66,531,000 in 1991 have been repurchased from investors. Repurchased loans are included in the Company's periodic analysis of the adequacy of valuation reserves. Delinquent interest of approximately $8,339,000 in 1993, $6,397,000 in 1992 and $3,453,000 in 1991 was repurchased and subsequently written off.\nNote 7: Real Estate\nAn analysis of the real estate portfolio and nonperforming real estate by state at December 31, 1993 is included in the tables on pages 118 and 119 titled \"Real Estate Loans and Real Estate by State.\" An analysis of California foreclosed real estate and nonperforming real estate by region at December 31, 1993 is included in the table on pages 120 and 121 titled \"California Real Estate Loans and Foreclosed Real Estate.\"\nReal estate available for sale or development consisted of:\nReal estate available for sale was reduced in 1993 by the adoption of FAS 114, which resulted in the reclassification of loans in-substance foreclosed to loans receivable.\nInterest capitalized on property development totaled $7,484,000 at December 31, 1993 and $6,957,000 at December 31, 1992.\nReal estate operations are summarized below:\nFollowing is a summary of the reserve for estimated losses:\nNote 8: Interest Receivable\nFollowing is a summary of interest receivable:\nOther includes interest receivable on property development advances and interest-rate swaps.\nNote 9: Investment in the Federal Home Loan Bank System\nThe investment in the Federal Home Loan Banks consisted of capital stock, at cost, totaling $307,352,000 at December 31, 1993 and $314,373,000 at December 31, 1992.\nThe Company earned 3.93 percent in 1993, 1.88 percent in 1992 and 6.01 percent in 1991 from dividends on its investment in FHLB stock. FHLB capital stock is pledged to secure FHLB borrowings. The future earnings on FHLB stock will presumably be restricted due to the funding requirements imposed on the Federal Home Loan Banks for affordable housing programs and the Resolution Funding Corporation.\nNote 10: Premises and Equipment\nPremises and equipment consisted of the following:\nThe Company leases various branch offices under capital and noncancellable operating leases which expire at various dates through 2032. Some leases contain escalation provisions for adjustments in the consumer price index and provide for renewal options for five-to 10-year periods. Future minimum lease payments under all noncancellable leases at December 31, 1993 were as follows:\nRental expense charged to earnings was $53,638,000 in the year ended December 31, 1993, $57,823,000 in the year ended December 31, 1992 and $51,440,000 in the year ended December 31, 1991.\nNote 11: Customer Accounts\nA summary of balances at December 31, 1993 and December 31, 1992 by type of account, and at December 31, 1993 by maturity of account is presented on pages 114 and 115, under the captions \"By Type,\" \"By Product\" and \"Year- end 1993 by Maturity.\" An analysis of term deposits by interest rate and maturity at December 31, 1993 and by interest rate at December 31, 1992 is presented under the caption \"Year-end 1993 Term Accounts by Maturity by Interest Rate.\"\nThe average interest rate is based upon stated interest rates without giving consideration to daily compounding of interest or forfeiture of interest because of premature withdrawals. Noninterest bearing checking accounts represented 3.95 percent of total customer accounts at December 31, 1993 and 2.77 percent at December 31, 1992. Accrued but unpaid interest on customer accounts included in other liabilities totaled $10,685,000 at December 31, 1993 and $11,520,000 at December 31, 1992.\nIn 1993, GWB entered into a cash-flow swap agreement related to the Investor's CD, an insured account indexed to the Standard and Poor's (\"S&P\") 500 performance. GWB agreed to pay a monthly variable rate in exchange for the customer receiving the S&P 500 return. The swap balance outstanding was $60,864,000 and the average interest rate paid by GWB was 4.09 percent as of December 31, 1993.\nThe following is a summary of interest expense on customer accounts:\nAn analysis of the fair value of customer accounts follows:\nTerm deposits are stratified by remaining maturity, and fair value is calculated based on discounted future cash flows. The discount rate used was based upon a projected treasury yield curve plus 100 basis points. Fair value includes the effects of compounding where applicable.\nThe fair value of nonterm deposits has been determined to be the amount payable on demand at the reporting date. Nonterm deposits include all customer accounts without defined maturities, such as checking, money market savings and regular savings.\nNote 12: Short-term Borrowings\nAn analysis of borrowings by type at December 31, 1993 and December 31, 1992 and by maturity at December 31, 1993 is presented in the table titled \"Borrowings\" on page 113.\nThe following is a summary of short-term borrowings:\nBecause of the short-term nature of these borrowings, fair value approximates book value.\nSecurities sold under agreements to repurchase generally represent borrowings of less than 90 days, and book value approximates fair value. These agreements are secured by mortgage loans and securities held by the Company. The collateral is summarized as follows:\nCommercial paper has maturities of less than 270 days, and at December 31, 1993, the average maturity was 27 days. In 1993, GWB syndicated a $1,000,000,000 Thrift Note program. These notes are sold through securities dealers to institutional investors and have maturities of less than 270 days. Other short-term borrowings mature in periods of up to 12 months.\nGWB has a $220,705,000 financing agreement with the Student Loan Marketing Association (\"Sallie Mae\") and may request advances under the line at a margin over the most recent auction yield for the 91-day U.S. Treasury bill. The borrowings are fully secured by insured student loans made by GWB. The agreement expires March 31, 1994. Borrowings outstanding at December 31, 1993 totaled $177,025,000 at 3.66 percent.\nShort-term borrowings are summarized as follows:\nAn analysis of the fair value of other borrowings follows:\nLong-term borrowings are stratified by remaining maturity, and fair value is calculated based on discounted future cash flows. The discount rate used was based upon a projected treasury yield curve plus 100 basis points. The maturity used in the present value calculations of long-term, variable- rate borrowings is the date at which the borrowing would next be repriced.\nFHLB Borrowings\nFHLB borrowings are secured by pledges of real estate loans and the capital stock of the FHLB. At December 31, 1993, interest rates, both fixed and variable, ranged from 3.35 percent to 12.27 percent. Average FHLB borrowings were $1,058,257,000 in 1993, $342,576,000 in 1992 and $612,233,000 in 1991. Based upon these balances, the weighted average interest rate was 4.59 percent in 1993, 9.05 percent in 1992 and 9.61 percent in 1991.\nGWB has various borrowing alternatives with the FHLB, which include a $122,000,000 facility for overnight advances.\nSenior Debt\nThe Company has the following senior debt outstanding:\nIn July 1993, GWFC issued $225,000,000 in senior debt with a coupon of 6.375 percent which matures on July 1, 2000.\nAlso in July 1993, Aristar issued $150,000,000 in senior debt with a coupon of 5.75 percent and a maturity of July 15, 1998.\nIn June 1993, GWFC issued $150,000,000 in senior debt with a coupon of 6.125 percent and a maturity of June 15, 1998.\nIn July 1992, Aristar issued $100,000,000 in senior debt with a coupon of 6.25 percent and a maturity of July 15, 1996. Also in July 1992, Aristar issued $100,000,000 of senior subordinated debt with a coupon of 7.50 percent and a maturity of July 1, 1999.\nIn February 1992, Aristar issued $100,000,000 in senior debt with a coupon of 7.375 percent and a maturity of February 15, 1997, and $100,000,000 in senior debt with a coupon of 7.875 percent and a maturity of February 15, 1999.\nIn February 1992, GWFC issued $200,000,000 in senior debt with a coupon of 8.60 percent and a maturity of February 1, 2002.\nIn 1993 and 1992, GWB did not have issues under its medium-term note program, and an additional $440,000,000 may be issued under existing shelf registrations.\nCredit Facilities\nIn December 1993, Aristar syndicated a multi-year $120,000,000 International Credit Facility (\"ICF\") with eight banks. This agreement was done to provide for backup liquidity and general corporate purposes. This ICF provides for drawdowns at a spread to London Interbank Offered Rate (\"LIBOR\"). There were no borrowings under this agreement in 1993.\nIn July 1993, GWB syndicated a $175,000,000 ICF with seven international banks for backup liquidity and general corporate purposes. There were no borrowings under this facility in 1993.\nAlso, in July 1993, GWB syndicated a $340,000,000 Domestic Credit Facility (\"DCF\") with seven domestic banks for backup liquidity and general corporate purposes. There were no borrowings under this facility in 1993.\nIn January 1992, Aristar syndicated a multi-year $200,000,000 DCF with 10 domestic banks for backup liquidity and general corporate purposes. There were no borrowings under this facility in 1993 or 1992.\nThe Company is subject to various debt covenants and believes it is in compliance at December 31, 1993.\nInterest-Rate Swaps\nThe Company had interest-rate swaps related to FHLB borrowings of $109,000,000 at December 31, 1993 which yielded a rate of 3.48 percent tied to three-month LIBOR, paid a rate of 5.26 percent and mature in 1998. The net cost of swap agreements was $3,825,000 for the year ended December 31, 1993, $11,045,000 for the year ended December 31, 1992 and $4,304,000 for the year ended December 31, 1991, which was charged to interest expense. The fair value of outstanding swaps at December 31, 1993 was a gain of $97,000 based on expected remaining net cash flows discounted at three-month LIBOR.\nNote 14: Federal and State Taxes on Income\nFollowing is a summary of the provision for taxes on income:\nDeferred tax liabilities (assets) are comprised of the following:\nThe following table reconciles the statutory income tax rate to the consolidated effective income tax rate:\nFor 1991, tax benefits were not recognized for additions to general loss reserves in excess of available tax bad debt deductions of ($851,000). Fully diluted earnings per share would have been $2.23 in 1991 without the impact of the bad debt deduction. In 1992 and 1993, under FAS 109, tax benefits were recognized for additions to general loss reserves without regard to the available tax bad debt deductions.\nTaxes on income included the following:\nThrift institutions that meet certain tests prescribed by the Internal Revenue Code are allowed a bad debt deduction for federal income tax purposes of either 8 percent of taxable income, or an amount determined from the thrift's loss experience. For 1993, 1992 and 1991 the Company used its loss experience to determine federal taxes payable.\nIn accordance with FAS 109, a deferred tax liability of $241,522,000 has not been recognized at December 31, 1993 for $690,064,000 of temporary differences relating to the tax bad debt reserves of the Bank that arose prior to 1988.\nThe Company's tax returns have been audited by the Internal Revenue Service through December 31, 1985 and by the California Franchise Tax Board through December 31, 1986.\nNote 15: Employee Benefit Plans Pension Plans\nThe Great Western Retirement Plan (\"the plan\") covers a majority of employees. Benefits under this plan are generally based on years of service and the highest consecutive 60-months earnings during the last 120 months of credited service prior to retirement. The Company's general funding policy is to contribute the maximum amount deductible for federal income tax purposes. Total plan expense was $8,753,000 in 1993, $6,625,000 in 1992 and $5,620,000 in 1991.\nThe net periodic pension cost is computed as follows:\nAssumptions used in determining the net periodic pension cost were:\nAlthough the actual return on plan assets is shown, the expected long- term rate of return is used in determining net periodic pension cost. The difference between the actual return and expected return is shown as amortization of unrecognized net gain (loss).\nAccumulated plan benefit information and the funded status of the plan follow:\nPlan assets include certificates of deposit at GWB, equity securities, mutual funds, mortgage-backed securities and other fixed-income securities. Certificates of deposit at GWB totaled $24,850,000 at December 31, 1993 and $40,350,000 at December 31, 1992.\nThe Company also sponsors a non-qualified, unfunded, supplemental executive retirement plan for certain senior officers and a nonqualified unfunded directors' retirement plan. Data related to these plans follow:\nPension expense for these plans totaled $4,420,000 for 1993, $3,631,000 for 1992 and $2,850,000 for 1991.\nThe Company provides an optional deferred compensation plan for certain employees. Eligible employees can defer a portion of their compensation and the Company agrees to pay interest on the balance of funds deferred. An enhanced rate is paid on funds deferred over three years.\nThe Company has purchased cost recovery life insurance, primarily with one carrier, on the lives of the participants of the supplemental executive retirement plan, directors' retirement plan and deferred compensation plan and it is sole owner and beneficiary of said policies. The amount of coverage is designed to provide sufficient revenues to fund said plans. The net cash surrender value of this life insurance, recorded in other assets, was $143,069,000 at December 31, 1993 and $116,947,000 at December 31, 1992, and net premium income related to insurance purchased was $5,967,000 in 1993, $3,768,000 in 1992 and $396,000 in 1991.\nPostretirement Plans\nThe Company sponsors unfunded defined benefit postretirement plans that provide medical and life insurance coverage to eligible employees and dependents based on age and length of service. Medical coverage options are the same as available to active employees. The cost of plan coverage for retirees and their qualifying dependents is based upon a point system that combines age and years of service which results, generally, in lower costs to retirees in conjunction with higher accumulated points within limits.\nThe following table shows the plan's funded status reconciled to the accrued postretirement benefit cost included in other liabilities on the Consolidated Statement of Financial Condition.\nThe net postretirement medical and life insurance costs follow:\nThe cost of these benefits, funded currently, was approximately $1,095,000 in 1991.\nFor measurement purposes, the cost of medical benefits was projected to increase at a rate of 13 percent in 1993, thereafter decreasing 1 percent per year until a stable 7 percent medical inflation rate is reached in 1999. Increasing the assumed health care cost trend by 1 percent in each year would increase the accumulated postretirement benefit obligation at December 31, 1993 by approximately $3,500,000 and the aggregate of the service and interest components of net periodic postretirement benefit cost for the year ended December 31, 1993 by $500,000. The present value of the accumulated benefit obligation assumed an 7.75 percent discount rate compounded annually.\nStock Option Plans\nThe Company currently has a stock option plan in effect: the 1988 Stock Option and Incentive Plan (\"stock option plan\"). Options are granted at the market value of the common stock on the date of grant. The stock option plan consists of two separate plans: The Key Employee Program under which options (both incentive and nonqualified), stock appreciation rights, dividend equivalents and certain other performance and incentive awards may be granted to officers, key employees and certain other individuals; and the Non-employee Director Program under which non-qualified options will be automatically granted to non-employee directors under certain circumstances. The Company has set aside 12,500,000 shares of common stock to be delivered pursuant to the stock option plan, of which a maximum of 750,000 may be delivered under the Non-employee Director Program. Options may be exercised either by payment of cash, or the optionee may deliver GWFC common stock of an equivalent market value at the date of exercise. Proceeds from the exercise of stock options are credited to common stock for the aggregate par value of shares issued, and the excess is credited to additional capital.\nIn 1993 and 1992, the Company granted performance-based restricted stock awards to encourage and reward high levels of performance of the Company as measured by returns to shareholders. The shares will fully vest 10 years after the award date, and prior to such time, they are subject to accelerated vesting based on the Company's performance. The Company granted 7,500 shares in 1993, with a value of $122,000 and 1,086,200 shares in 1992, with value of $20,126,000. The unearned compensation is recorded as a separate reduction of stockholders' equity and is being amortized to expense over 60 months. The total amount of compensation expense related to restricted stock awards recorded was $3,693,000 in 1993 and $3,671,000 in 1992.\nStock appreciation rights (\"SAR\") may be granted in conjunction with certain options previously granted or with future options. An SAR entitles the holder, at the discretion of the Company, to receive cash or shares of GWFC common stock, or a combination thereof, at a value equal to the excess of the fair market value on the date of exercise over the option price. Exercise of an option or companion SAR automatically cancels the related option or right.\nInformation with respect to stock options follows:\nCertain debt agreements of GWB and Aristar provide for the maintenance of minimum levels of equity. The federal income tax consequences arising from the payment of dividends by GWB are discussed below. Management believes, after taking into consideration all of the foregoing restrictions and requirements, that the Company will be able to continue to pay dividends to its stockholders without adverse tax consequences.\nThrift institutions that meet certain tests prescribed by the Internal Revenue Code are allowed a bad debt deduction for federal income tax purposes. Because of such deductions, only $658,000,000 of retained earnings of the Bank at December 31, 1993 are available for use without adverse tax consequences. This amount represents the earnings and profits of the Bank which, in accordance with the Internal Revenue Code, are available for the payment of dividends. If retained earnings in excess of earnings and profits are subsequently used by the Bank for purposes other than to absorb loan losses, including distributions in liquidation, the amounts used will be subject to federal income taxes at the then prevailing corporate tax rates. It is not contemplated that retained earnings will be used in a manner which will create federal income tax liabilities.\nNote 17: Contingent Liabilities\nIn the normal course of its business, the Company is named a defendant in various legal proceedings and claims. In the opinion of management, after consultation with outside legal counsel representing the Company in these lawsuits, their outcomes will not have a material effect on the Company's financial position or results of operations.\nNote 18: Parent Company Financial Information\nEffective June 30, 1993, Aristar became a wholly-owned subsidiary of the Company. This realignment was in the form of a dividend from GWB to GWFC and a simultaneous cash capital contribution by GWFC to GWB of $369,473,000 which represented the dividended company's book value. Aristar is expected to be a source of operating income.\nStatement of Operations\nThe parent company joins with its subsidiaries, other than the life insurance subsidiary, in filing a consolidated federal income tax return. In the return, the parent company's taxable income or loss is consolidated with the taxable income or loss of its subsidiaries. The parent company's share of income taxes is based on the amount of tax which would be payable if separate returns were filed. Therefore, the parent company's equity in net earnings of subsidiaries is excluded from its computation of the provision for taxes on income for financial statement purposes. Taxes receivable consist primarily of amounts due from subsidiaries for taxes paid on their behalf.\nStatement of Financial Condition\nFollowing is a summary of the parent company debt by maturity:\nNote 19: Selected Quarterly Financial Data (Unaudited)\nSelected quarterly financial operating data are included in Stockholder Data and Quarterly Information (Unaudited) on pages 122, 123 and 124 of this annual report to stockholders.\nThird quarter 1993 earnings were affected by an additional $150 million of provisions for losses on loans and real estate established for four separate bulk sales of distressed assets.\nIn the fourth quarter of 1992, $335 million was provided for losses on loans and real estate, which resulted primarily from the Company's efforts to accelerate disposition of problem loans and real estate.\nIn the third quarter of 1992, $129 million was provided for losses on loans and real estate, which resulted from continued weakness in real estate markets and an effort to accelerate the liquidation of nonperforming commercial real estate properties.\nNote 20: Segment Data\nThe Company operates in the banking and consumer finance industries. The Bank operations are primarily one business segment, attracting customer deposits for real estate lending. However, ancillary activities related to real estate lending, mortgage banking and retail banking are also included. Consumer finance operations include installment loans to consumers and installment contracts purchased from retail merchants as well as home equity loans. A summary of business segments is included in the table within Segment Data in \"Management's Discussion and Analysis of Financial Condition and Results of Operations\".\nReport of Independent Accountants\nTo the Board of Directors and Stockholders Great Western Financial Corporation\nIn our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Great Western Financial Corporation and its subsidiaries (\"the Company\") at December 31, 1993 and 1992, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1993, in conformity with generally accepted accounting principles. 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 of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.\nAs discussed in Note 1 to the financial statements, the Company adopted accounting standards that changed its methods of accounting for postretirement benefits other than pensions and income taxes in 1992, and its methods of accounting for impairment of loans and certain debt and equity securities in 1993.\n\/s\/Price Waterhouse\nLos Angeles, California January 31, 1994\nManagement's Commentary on Financial Statements\nManagement is responsible for the integrity and objectivity of the financial statements and other information in this report. The statements were prepared in accordance with generally accepted accounting principles appropriate in the circumstances. They meet the requirements of the Securities and Exchange Commission. The financial statements reflect management's judgement and estimates relating to events not concluded by year end.\nThe Company's code of conduct, communicated to all officers and employees, requires adherence to high ethical standards in the conduct of the Company's business.\nManagement is responsible for maintaining a system of internal control and has established a system of internal accounting control designed to provide reasonable assurance that transactions are recorded properly to permit preparation of financial statements, that transactions are executed in accordance with management's authorizations and that assets are safeguarded from significant loss or unauthorized use.\nManagement supports an extensive program of internal audits to evaluate the adequacy of internal controls as well as to monitor compliance with management's directives and regulatory agencies' requirements. The audit committee of the board of directors is composed of nine outside directors, none of whom is an officer or employee of the Company. The audit committee meets with the internal and external auditors to review the scope of audits, findings and actions to be taken by management.\n\/s\/Carl F. Geuther\nCarl F. Geuther Executive Vice President and Chief Financial Officer\nJanuary 31, 1994\nSTATISTICAL INFORMATION Cash and Securities Analysis\n*Less than one percent\nYear-end 1993 Term Accounts by Maturity by Interest Rate\nLoan Analysis\n*Less than one percent\n*Less than one percent\nReal Estate Loans and Real Estate by State\nCalifornia Real Estate Loans and Foreclosed Real Estate\nCalifornia Real Estate Loans and Foreclosed Real Estate (continued)\nExchange Listings: New York Stock Exchange, Pacific Stock Exchange and London Stock Exchange. Approximate number of common stockholders of record at December 31, 1993: 13,467 Under regulations, retained earnings are subject to substantial restrictions for the payment of dividends. See Note 16 to the Consolidated Financial Statements.\nStockholder Data and Quarterly Information (Unaudited)\nStockholder Data and Quarterly Information (Unaudited)\nITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE\nNone.\nPART III\nITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT\nInformation regarding directors, executive officers and principal shareholders appears on pages 5 through 11 and pages 25 and 26 of the Proxy Statement for the Annual Meeting of Stockholders, April 26, 1994, and is incorporated herein by reference, except as noted therein.\nITEM 11. EXECUTIVE COMPENSATION\nInformation regarding executive compensation appears on pages 11 through 15 and pages 19 through 25 of the Proxy Statement for the Annual Meeting of Stockholders, April 26, 1994, and is incorporated herein by reference, except as noted therein.\nITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT\nInformation regarding security ownership of certain beneficial owners and management appears on pages 5, 10, 25 and 26 of the Proxy Statement for the Annual Meeting of Stockholders, April 26, 1994 and is incorporated herein by reference, except as noted therein.\nITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS\nInformation regarding certain relationships and related transactions appears on pages 9, 11, 12, 13 and 19 of the Proxy Statement for the Annual Meeting of Stockholders, April 26, 1994 and is incorporated herein by reference.\nPART IV\nITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K\n(a) 1. Financial Statements\nSee index to \"Financial Statements and Supplementary Data\" on page 52.\n2. Financial Statement Schedules\nNo financial statement schedules are required because they are not applicable or the required information is shown in the financial statements or notes thereto included in \"Financial Statements and Supplementary Data\".\n3. Executive Compensation Plans and Arrangements\nA. Employment Agreement between GWFC and James F. Montgomery dated December 19, 1989 filed as an exhibit to Form 10-K for the year ended 1989 as Exhibit 10.3.\nB. Employment Agreement between GWFC and John F. Maher dated December 19, 1989 filed as an exhibit to Form 10-K for the year ended 1989 as Exhibit 10.4.\nC. Employment Agreement between GWFC and Carl F. Geuther dated as of March 1, 1988 filed as an exhibit to Form 10-K for the year ended 1989 as Exhibit 10.6.\nD. Employment Agreement between GWFC and Michael M. Pappas dated as of March 1, 1988 filed as an exhibit to Form 10-K for the year ended 1989 as Exhibit 10.7.\nE. Employment Agreement between GWFC and J. Lance Erikson dated as of March 1, 1988 filed as an exhibit to Form 10-K for the year ended 1989 as Exhibit 10.8.\nF. Employment Agreement between GWFC and E. A. Crane effective March 1, 1989 filed as an exhibit to Form 10-K for the year ended 1988 as Exhibit 10.11.\nG. Employment Agreement between GWFC and Curtis J. Crivelli effective March 1, 1989 filed as an exhibit to Form 10-K for the year ended 1988 as Exhibit 10.12.\nH. Employment Agreement between GWFC and Joe M. Jackson dated February 1, 1992 filed as an exhibit to Form 10-K for the year ended 1991 as Exhibit 10.10.\nI. Supplemental Executive Retirement Plan as amended, filed as Exhibit 10.11 to Form 10-K for the year ended December 31, 1992.\nJ. 1979 Incentive and Nonstatutory Stock Option and Appreciation Plan as amended, filed as Exhibit 10.12 to Form 10-K for the year ended December 31, 1992.\nK. Addendum to the 1979 Incentive and Non-Statutory Stock Option and Appreciation Plan filed as Exhibit 10.13.\nL. Form of Non-Qualified Stock Option Agreement relating to the 1979 Incentive and Nonstatutory Stock Option and Appreciation Plan utilized from April 20, 1982 to April 22, 1986, filed as an exhibit to Post- Effective Amendment No. 3 to GWFC's Registration Statement No. 2-67233 on Form S-8 as Exhibit 15.7.\nM. Form of Non-Qualified Stock Option Agreement relating to the 1979 Incentive and Nonstatutory Stock Option and Appreciation Plan utilized from April 22, 1986 through 1988 filed as an exhibit to Post-Effective Amendment No. 3 to GWFC's Registration Statement No. 2-67233 on Form S-8 as Exhibit 15.8.\nN. The 1988 Stock Option and Incentive Plan (as amended and restated July 22, 1993) filed as Exhibit 10.16.\nO. Employee Non-Qualified Stock Option Agreement filed as an exhibit to Post-Effective Amendment No. 1 to GWFC's Registration Statement No. 33-21469 on Form S-8 pertaining to GWFC's 1988 Stock Option and Incentive Plan as Exhibit 28.2.\nP. Revised Form of Non-Qualified Stock Option Agreement effective January 28, 1992 filed as an exhibit to Post-Effective Amendment No. 3 to GWFC's Registration Statement No. 33-21469 on Form S-8 pertaining to GWFC's 1988 Stock Option and Incentive Plan as Exhibit 28.3.\nQ. Revised Form of Non-Qualified Stock Option Agreement effective January 25, 1994 filed as Exhibit 10.21.\nR. Form of Non-Qualified Stock Option Agreement (Early Vesting Provisions) filed as Exhibit 10.22.\nS. Form of Restricted Stock Award Agreement and General Provisions Applicable to Restricted Stock Awards Granted Under the 1988 Stock Option and Incentive Plan filed as an exhibit to Post-Effective Amendment No. 3 to GWFC's Registration Statement No. 33-21469 on Form S-8 as Exhibit 28.4.\nT. GWFC Senior Officers' Deferred Compensation Plan (1992 Restatement) filed as an exhibit to Form 10-K for the year ended 1991 as Exhibit 10.21.\nU. Great Western Supplemental Incentive Plan, effective December 1984 filed as an exhibit to Form 10-K for the year ended 1984 as Exhibit 19.1.\nV. GWFC Umbrella Trust for Senior Officers filed as an exhibit to Form 10-Q for the quarter ended March 31, 1989 as Exhibit 19.1.\nW. Summary of certain additional executive benefits, filed as Exhibit 10.27 to Form 10-K for the year ended December 31, 1992.\nX. Employee Home Loan Program, filed as an exhibit to Form 10-Q for the quarter ended June 30, 1993.\nY. Form of Director Stock Option Agreement filed as an exhibit to GWFC's Registration Statement No. 33-21469 on Form S-8 pertaining to GWFC's 1988 Stock Option and Incentive Plan as Exhibit 28.1.\nZ. Form of Director Stock Option Agreement effective January 3, 1994 filed as Exhibit 10.18.\nAA. GWFC Directors' Deferred Compensation Plan (1992 Restatement) filed as an exhibit to Form 10-K for the year ended 1991 as Exhibit 10.22.\nBB. GWFC Umbrella Trust for Directors filed as an exhibit to Form 10-Q for the quarter ended March 31, 1989 as Exhibit 19.2.\nCC. Restated Retirement Plan for Directors filed as an exhibit to Form 10-K for the year ended 1991 as Exhibit 10.27.\nDD. GWFC Annual Incentive Compensation Plan for Executive Officers filed as exhibit 10.33.\n4. Exhibits Required by Securities and Exchange Commission Regulations S-K\n3.1 Restated Certificate of Incorporation of GWFC, as in effect on the date of this report (filed as an exhibit to GWFC's Annual Report on Form 10-K for the year ended December 31, 1992 and incorporated herein by reference).\n3.2 Certificate of Designations of GWFC's 8.30 percent Cumulative Preferred Stock (filed as an exhibit to GWFC's Current Report on Form 8-K dated September 9, 1992, event date September 2, 1992, and incorporated herein by reference).\n3.3 By-laws of GWFC as in effect on the date of this report.\n4.1 GWFC agrees to furnish the Securities and Exchange Commission, upon request, with copies of all instruments defining rights of holders of long-term debt of GWFC and its consolidated subsidiaries.\n4.2 Indenture dated as of May 31, 1988, as amended and supplemented as of June 14, 1988 and October 31, 1988, between GWB and Morgan Guaranty Trust Company of New York (filed as an exhibit to GWFC's Annual Report on Form 10-K for the fiscal year ended December 31, 1989 and incorporated herein by reference).\n10.1 Rights Agreement (the \"Rights Agreement\") dated as of June 24, 1986, between GWFC and Morgan Guaranty Trust Company of New York (filed as Exhibit 1 to the Company's Report on Form 8-K dated July 3, 1986 and incorporated herein by reference).\n10.2 First Amendment to Rights Agreement dated as of February 19, 1988, between GWFC and Morgan Shareholder Services Trust Company, successor to Morgan Guaranty Trust Company of New York as Rights agent (incorporated herein by reference to the Company's Report on Form 8-K (File No. 1-4075) dated February 24, 1988).\n10.3 Employment Agreement between GWFC and James F. Montgomery dated December 19, 1989 (filed as an exhibit to GWFC's Annual Report on Form 10-K for the fiscal year ended December 31, 1989 and incorporated herein by reference).\n10.4 Employment Agreement between GWFC and John F. Maher dated December 19, 1989 (filed as an exhibit to GWFC's Annual Report on Form 10-K for the fiscal year ended December 31, 1989 and incorporated herein by reference).\n10.5 Employment Agreement between GWFC and Carl F. Geuther dated as of March 1, 1988 (filed as an exhibit to GWFC's Annual Report on Form 10-K for the fiscal year ended December 31, 1989 and incorporated herein by reference).\n10.6 Employment Agreement between GWFC and Michael M. Pappas dated as of March 1, 1988 (filed as an exhibit to GWFC's Annual Report on Form 10-K for the fiscal year ended December 31, 1989 and incorporated herein by reference).\n10.7 Employment Agreement between GWFC and J. Lance Erikson dated as of March 1, 1988 (filed as an exhibit to GWFC's Annual Report on Form 10-K for the fiscal year ended December 31, 1989 and incorporated herein by reference).\n10.8 Employment Agreement between GWFC and E. A. Crane effective March 1, 1989 (filed as an exhibit to GWFC's Annual Report on Form 10-K for the fiscal year ended December 31, 1988, and incorporated herein by reference).\n10.9 Employment Agreement between GWFC and Curtis J. Crivelli effective March 1, 1989 (filed as an exhibit to GWFC's Annual Report on Form 10-K for the fiscal year ended December 31, 1988, and incorporated herein by reference).\n10.10 Employment Agreement between GWFC and Joe M. Jackson dated February 1, 1992 (filed as an exhibit to GWFC's Annual Report on Form 10-K for the fiscal year ended December 31, 1991, and incorporated herein by reference).\n10.11 Supplemental Executive Retirement Plan as amended (filed as an exhibit to GWFC's Annual Report on Form 10-K for the fiscal year ended December 31, 1992, and incorporated herein by reference).\n10.12 1979 Incentive and Nonstatutory Stock Option and Appreciation Plan as amended (filed as an exhibit to GWFC's Annual Report on Form 10-K for the fiscal year ended December 31, 1992, and incorporated herein by reference).\n10.13 Addendum to the 1979 Incentive and Nonstatutory Stock Option and Appreciation Plan.\n10.14 Form of Non-Qualified Stock Option Agreement relating to the 1979 Incentive and Nonstatutory Stock Option and Appreciation Plan utilized from April 20, 1982 to April 22, 1986 (filed as an exhibit to Post-Effective Amendment No. 3 to GWFC's Registration Statement No. 2-67233 on Form S-8, and incorporated herein by reference).\n10.15 Form of Non-Qualified Stock Option Agreement relating to the 1979 Incentive and Nonstatutory Stock Option and Appreciation Plan utilized from April 22, 1986 through 1988 (filed as an exhibit to Post- Effective Amendment No. 3 to GWFC's Registration Statement No. 2-67233 on Form S-8, and incorporated herein by reference).\n10.16 The 1988 Stock Option and Incentive Plan (as amended and restated effective July 22, 1993).\n10.17 Form of Director Stock Option Agreement (filed as an exhibit to GWFC's Registration Statement No. 33-21469 on Form S-8 pertaining to GWFC's 1988 Stock Option and Incentive Plan and incorporated herein by reference).\n10.18 Form of Director Stock Option Agreement effective January 3, 1994.\n10.19 Employee Non-Qualified Stock Option Agreement (filed as an exhibit to GWFC's Registration Statement No. 33-21469 on Form S-8 pertaining to GWFC's 1988 Stock Option and Incentive Plan and incorporated herein by reference).\n10.20 Revised Form of Non-Qualified Stock Option Agreement effective January 28, 1992 (filed as an exhibit to Post-Effective Amendment No. 3 to GWFC's Registration Statement No. 33-21469 on Form S-8 pertaining to GWFC's 1988 Stock Option and Incentive Plan and incorporated herein by reference).\n10.21 Revised Form of Non-Qualified Stock Option Agreement effective January 25, 1994.\n10.22 Form of Non-Qualified Stock Option Agreement (Early Vesting Provisions).\n10.23 Form of Restricted Stock Award Agreement and General Provisions Applicable to Restricted Stock Awards Granted Under the 1988 Stock Option and Incentive Plan (filed as an exhibit to Post-Effective Amendment No. 3 to GWFC's Registration Statement No. 33-21469 on Form S-8, and incorporated herein by reference).\n10.24 GWFC Deferred Compensation Plan (1992 Restatement) (filed as an exhibit to GWFC's Annual Report on Form 10-K for the fiscal year ended December 31, 1991, and incorporated herein by reference).\n10.25 GWFC Senior Officers' Deferred Compensation Plan (1992 Restatement) (filed as an exhibit to GWFC's Annual Report on Form 10-K for the fiscal year ended December 31, 1991, and incorporated herein by reference).\n10.26 GWFC Directors' Deferred Compensation Plan (1992 Restatement) (filed as an exhibit to GWFC's Annual Report on Form 10-K for the fiscal year ended December 31, 1991, and incorporated herein by reference).\n10.27 Great Western Supplemental Incentive Plan, effective December 1, 1984 (filed as an exhibit to GWFC's Annual Report on Form 10-K for the fiscal year ended December 31, 1984, and incorporated herein by reference).\n10.28 GWFC Umbrella Trust for Senior Officers (filed as an exhibit to GWFC's Quarterly Report on Form 10-Q for the quarter ended March 31, 1989, and incorporated herein by reference).\n10.29 GWFC Umbrella Trust for Directors (filed as an exhibit to GWFC's Quarterly Report on Form 10-Q for the quarter ended March 31, 1989, and incorporated herein by reference).\n10.30 Restated Retirement Plan for Directors (filed as an exhibit to GWFC's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993, and incorporated herein by reference).\n10.31 Summary of certain additional executive benefits (filed as an exhibit to GWFC's Annual Report on Form 10-K for the fiscal year ended December 31, 1992, and incorporated herein by reference).\n10.32 Employee Home Loan Program (filed as an exhibit to GWFC's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993, and incorporated herein by reference).\n10.33 GWFC Annual Incentive Compensation Plan for Executive Officers.\n11.1 Statement re Computation of Per Share Earnings.\n12.1 Computation of Ratios of Earnings to Fixed Charges.\n21.1 Subsidiaries.\n23.1 Consent of Price Waterhouse included on page 135 of this Form 10-K.\n24.1 Power of Attorney included on page 133 of this Form 10-K.\nThe 1993 Annual Report to Stockholders has already been furnished to each stockholder of record who is entitled to receive a copy thereof. A copy of the 1993 Annual Report to Stockholders will be furnished without charge upon specific request of any stockholder of record on February 28, 1994 and any beneficial owner of the Company's common stock on such date who has not previously received a copy and who represents such facts in good faith to the Company in writing direct to:\nCorporate Secretary Great Western Financial Corporation 9200 Oakdale Avenue Chatsworth, California 91311-6519\nOther exhibits will be supplied to any such stockholder at a charge equal to the Company's cost of copying, postage and handling.\n(b) Reports on Form 8-K\nA current report on Form 8-K dated December 14, 1993 (event date December 3, 1993) reported that Great Western Bank, a Federal Savings Bank, acquired certain assets and assumed certain liabilities of HomeFed Bank, F.A.\nSIGNATURES\nPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.\nGREAT WESTERN FINANCIAL CORPORATION\n\/s\/ James F. Montgomery March 22, 1994 - ------------------------------ ------------------ James F. Montgomery, Chairman Date and Chief Executive\nPOWER OF ATTORNEY\nEach person whose signature appears below hereby authorizes James F. Montgomery, Carl F. Geuther and Jesse L. King, and each of them or any of them, as attorney-in-fact to sign on his or her behalf as an individual and in every capacity stated below, and to file all amendments to the registrant's Form 10-K, and the registrant hereby confers like authority to sign and file in its behalf.\nPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on March 22, 1994, by the following persons on behalf of the registrant and in the capacities indicated.\n\/s\/ James F. Montgomery - ------------------------------------------------------ James F. Montgomery, Chairman and Chief Executive (Principal Executive Officer)\n\/s\/ Carl F. Geuther - ---------------------------------------------------------------------- Carl F. Geuther, Executive Vice President and Chief Financial Officer (Principal Financial Officer)\n\/s\/ Jesse L. King - ------------------------------------------------------------------ Jesse L. King, Senior Vice President and Controller (Principal Accounting Officer)\n\/s\/ John F. Maher - ----------------------------------------------------------- John F. Maher, President and Chief Operating Officer\n\/s\/ Dr. David Alexander \/s\/ Enrique Hernandez, Jr. - ---------------------------------- --------------------------------- Dr. David Alexander, Director Enrique Hernandez, Jr., Director\n\/s\/ H. Frederick Christie - ---------------------------------- ---------------------------------- H. Frederick Christie, Director Charles D. Miller, Director\n\/s\/ Stephen E. Frank \/s\/ Dr. Alberta E. Siegel - ----------------------------------- ---------------------------------- Stephen E. Frank, Director Dr. Alberta E. Siegel, Director\n\/s\/ John V. Giovenco . \/s\/ Willis B. Wood, Jr.\n- ----------------------------------- ---------------------------------- John V. Giovenco, Director Willis B. Wood, Jr., Director\n\/s\/ Firmin A. Gryp - ------------------------------------ Firmin A. Gryp, Director\nINDEX OF\nADDITIONAL FINANCIAL DATA\nPage\nConsent of Independent Accountants S-2\nS-2\nCONSENT OF INDEPENDENT ACCOUNTANTS -----------------------------------\nWe hereby consent to the incorporation by reference in the Prospectuses constituting part of the Registration Statements on Form S-3 (Nos. 33-19884, 2-98811 and 33-60206), on Form S-4 (Nos. 33-15135 and 33-17705) and on Form S-8 (Nos. 2-67233, 2-90750, 33-6174 and 33-21469) of Great Western Financial Corporation of our report dated January 31, 1994 appearing on page 110 of this Form 10-K.\n\/s\/ PRICE WATERHOUSE\nLos Angeles, California March 22, 1994\nGREAT WESTERN FINANCIAL CORPORATION\nEXHIBITS INDEX\nExhibit Page Number Number - ------- ------\n3.3 By-laws of Great Western Financial Corporation\n10.13 Addendum to the 1979 Incentive and Nonstatutory Stock Option and Appreciation Plan.\n10.16 The 1988 Stock Option and Incentive Plan (as amended and restated effective July 22, 1993).\n10.18 Form of Director Stock Option Agreement effective January 3, 1994.\n10.21 Revised Form of Non-Qualified Stock Option Agreement effective January 25, 1994.\n10.22 Form of Non-Qualified Stock Option Agreement (Early Vesting Provisions).\n10.33 Great Western Financial Corporation Annual Incentive Compensation Plan for Executive Officers.\n11.1 Statement re Computation of Per Share Earnings.\n12.1 Computation of Ratios of Earnings to Fixed Charges.\n21.1 Subsidiaries.","section_7":"","section_7A":"","section_8":"","section_9":"ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE\nNone.\nPART III\nITEM 10.","section_9A":"","section_9B":"","section_10":"ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT\nInformation regarding directors, executive officers and principal shareholders appears on pages 5 through 11 and pages 25 and 26 of the Proxy Statement for the Annual Meeting of Stockholders, April 26, 1994, and is incorporated herein by reference, except as noted therein.\nITEM 11.","section_11":"ITEM 11. EXECUTIVE COMPENSATION\nInformation regarding executive compensation appears on pages 11 through 15 and pages 19 through 25 of the Proxy Statement for the Annual Meeting of Stockholders, April 26, 1994, and is incorporated herein by reference, except as noted therein.\nITEM 12.","section_12":"ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT\nInformation regarding security ownership of certain beneficial owners and management appears on pages 5, 10, 25 and 26 of the Proxy Statement for the Annual Meeting of Stockholders, April 26, 1994 and is incorporated herein by reference, except as noted therein.\nITEM 13.","section_13":"ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS\nInformation regarding certain relationships and related transactions appears on pages 9, 11, 12, 13 and 19 of the Proxy Statement for the Annual Meeting of Stockholders, April 26, 1994 and is incorporated herein by reference.\nPART IV\nITEM 14.","section_14":"ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K\n(a) 1. Financial Statements\nSee index to \"Financial Statements and Supplementary Data\" on page 52.\n2. Financial Statement Schedules\nNo financial statement schedules are required because they are not applicable or the required information is shown in the financial statements or notes thereto included in \"Financial Statements and Supplementary Data\".\n3. Executive Compensation Plans and Arrangements\nA. Employment Agreement between GWFC and James F. Montgomery dated December 19, 1989 filed as an exhibit to Form 10-K for the year ended 1989 as Exhibit 10.3.\nB. Employment Agreement between GWFC and John F. Maher dated December 19, 1989 filed as an exhibit to Form 10-K for the year ended 1989 as Exhibit 10.4.\nC. Employment Agreement between GWFC and Carl F. Geuther dated as of March 1, 1988 filed as an exhibit to Form 10-K for the year ended 1989 as Exhibit 10.6.\nD. Employment Agreement between GWFC and Michael M. Pappas dated as of March 1, 1988 filed as an exhibit to Form 10-K for the year ended 1989 as Exhibit 10.7.\nE. Employment Agreement between GWFC and J. Lance Erikson dated as of March 1, 1988 filed as an exhibit to Form 10-K for the year ended 1989 as Exhibit 10.8.\nF. Employment Agreement between GWFC and E. A. Crane effective March 1, 1989 filed as an exhibit to Form 10-K for the year ended 1988 as Exhibit 10.11.\nG. Employment Agreement between GWFC and Curtis J. Crivelli effective March 1, 1989 filed as an exhibit to Form 10-K for the year ended 1988 as Exhibit 10.12.\nH. Employment Agreement between GWFC and Joe M. Jackson dated February 1, 1992 filed as an exhibit to Form 10-K for the year ended 1991 as Exhibit 10.10.\nI. Supplemental Executive Retirement Plan as amended, filed as Exhibit 10.11 to Form 10-K for the year ended December 31, 1992.\nJ. 1979 Incentive and Nonstatutory Stock Option and Appreciation Plan as amended, filed as Exhibit 10.12 to Form 10-K for the year ended December 31, 1992.\nK. Addendum to the 1979 Incentive and Non-Statutory Stock Option and Appreciation Plan filed as Exhibit 10.13.\nL. Form of Non-Qualified Stock Option Agreement relating to the 1979 Incentive and Nonstatutory Stock Option and Appreciation Plan utilized from April 20, 1982 to April 22, 1986, filed as an exhibit to Post- Effective Amendment No. 3 to GWFC's Registration Statement No. 2-67233 on Form S-8 as Exhibit 15.7.\nM. Form of Non-Qualified Stock Option Agreement relating to the 1979 Incentive and Nonstatutory Stock Option and Appreciation Plan utilized from April 22, 1986 through 1988 filed as an exhibit to Post-Effective Amendment No. 3 to GWFC's Registration Statement No. 2-67233 on Form S-8 as Exhibit 15.8.\nN. The 1988 Stock Option and Incentive Plan (as amended and restated July 22, 1993) filed as Exhibit 10.16.\nO. Employee Non-Qualified Stock Option Agreement filed as an exhibit to Post-Effective Amendment No. 1 to GWFC's Registration Statement No. 33-21469 on Form S-8 pertaining to GWFC's 1988 Stock Option and Incentive Plan as Exhibit 28.2.\nP. Revised Form of Non-Qualified Stock Option Agreement effective January 28, 1992 filed as an exhibit to Post-Effective Amendment No. 3 to GWFC's Registration Statement No. 33-21469 on Form S-8 pertaining to GWFC's 1988 Stock Option and Incentive Plan as Exhibit 28.3.\nQ. Revised Form of Non-Qualified Stock Option Agreement effective January 25, 1994 filed as Exhibit 10.21.\nR. Form of Non-Qualified Stock Option Agreement (Early Vesting Provisions) filed as Exhibit 10.22.\nS. Form of Restricted Stock Award Agreement and General Provisions Applicable to Restricted Stock Awards Granted Under the 1988 Stock Option and Incentive Plan filed as an exhibit to Post-Effective Amendment No. 3 to GWFC's Registration Statement No. 33-21469 on Form S-8 as Exhibit 28.4.\nT. GWFC Senior Officers' Deferred Compensation Plan (1992 Restatement) filed as an exhibit to Form 10-K for the year ended 1991 as Exhibit 10.21.\nU. Great Western Supplemental Incentive Plan, effective December 1984 filed as an exhibit to Form 10-K for the year ended 1984 as Exhibit 19.1.\nV. GWFC Umbrella Trust for Senior Officers filed as an exhibit to Form 10-Q for the quarter ended March 31, 1989 as Exhibit 19.1.\nW. Summary of certain additional executive benefits, filed as Exhibit 10.27 to Form 10-K for the year ended December 31, 1992.\nX. Employee Home Loan Program, filed as an exhibit to Form 10-Q for the quarter ended June 30, 1993.\nY. Form of Director Stock Option Agreement filed as an exhibit to GWFC's Registration Statement No. 33-21469 on Form S-8 pertaining to GWFC's 1988 Stock Option and Incentive Plan as Exhibit 28.1.\nZ. Form of Director Stock Option Agreement effective January 3, 1994 filed as Exhibit 10.18.\nAA. GWFC Directors' Deferred Compensation Plan (1992 Restatement) filed as an exhibit to Form 10-K for the year ended 1991 as Exhibit 10.22.\nBB. GWFC Umbrella Trust for Directors filed as an exhibit to Form 10-Q for the quarter ended March 31, 1989 as Exhibit 19.2.\nCC. Restated Retirement Plan for Directors filed as an exhibit to Form 10-K for the year ended 1991 as Exhibit 10.27.\nDD. GWFC Annual Incentive Compensation Plan for Executive Officers filed as exhibit 10.33.\n4. Exhibits Required by Securities and Exchange Commission Regulations S-K\n3.1 Restated Certificate of Incorporation of GWFC, as in effect on the date of this report (filed as an exhibit to GWFC's Annual Report on Form 10-K for the year ended December 31, 1992 and incorporated herein by reference).\n3.2 Certificate of Designations of GWFC's 8.30 percent Cumulative Preferred Stock (filed as an exhibit to GWFC's Current Report on Form 8-K dated September 9, 1992, event date September 2, 1992, and incorporated herein by reference).\n3.3 By-laws of GWFC as in effect on the date of this report.\n4.1 GWFC agrees to furnish the Securities and Exchange Commission, upon request, with copies of all instruments defining rights of holders of long-term debt of GWFC and its consolidated subsidiaries.\n4.2 Indenture dated as of May 31, 1988, as amended and supplemented as of June 14, 1988 and October 31, 1988, between GWB and Morgan Guaranty Trust Company of New York (filed as an exhibit to GWFC's Annual Report on Form 10-K for the fiscal year ended December 31, 1989 and incorporated herein by reference).\n10.1 Rights Agreement (the \"Rights Agreement\") dated as of June 24, 1986, between GWFC and Morgan Guaranty Trust Company of New York (filed as Exhibit 1 to the Company's Report on Form 8-K dated July 3, 1986 and incorporated herein by reference).\n10.2 First Amendment to Rights Agreement dated as of February 19, 1988, between GWFC and Morgan Shareholder Services Trust Company, successor to Morgan Guaranty Trust Company of New York as Rights agent (incorporated herein by reference to the Company's Report on Form 8-K (File No. 1-4075) dated February 24, 1988).\n10.3 Employment Agreement between GWFC and James F. Montgomery dated December 19, 1989 (filed as an exhibit to GWFC's Annual Report on Form 10-K for the fiscal year ended December 31, 1989 and incorporated herein by reference).\n10.4 Employment Agreement between GWFC and John F. Maher dated December 19, 1989 (filed as an exhibit to GWFC's Annual Report on Form 10-K for the fiscal year ended December 31, 1989 and incorporated herein by reference).\n10.5 Employment Agreement between GWFC and Carl F. Geuther dated as of March 1, 1988 (filed as an exhibit to GWFC's Annual Report on Form 10-K for the fiscal year ended December 31, 1989 and incorporated herein by reference).\n10.6 Employment Agreement between GWFC and Michael M. Pappas dated as of March 1, 1988 (filed as an exhibit to GWFC's Annual Report on Form 10-K for the fiscal year ended December 31, 1989 and incorporated herein by reference).\n10.7 Employment Agreement between GWFC and J. Lance Erikson dated as of March 1, 1988 (filed as an exhibit to GWFC's Annual Report on Form 10-K for the fiscal year ended December 31, 1989 and incorporated herein by reference).\n10.8 Employment Agreement between GWFC and E. A. Crane effective March 1, 1989 (filed as an exhibit to GWFC's Annual Report on Form 10-K for the fiscal year ended December 31, 1988, and incorporated herein by reference).\n10.9 Employment Agreement between GWFC and Curtis J. Crivelli effective March 1, 1989 (filed as an exhibit to GWFC's Annual Report on Form 10-K for the fiscal year ended December 31, 1988, and incorporated herein by reference).\n10.10 Employment Agreement between GWFC and Joe M. Jackson dated February 1, 1992 (filed as an exhibit to GWFC's Annual Report on Form 10-K for the fiscal year ended December 31, 1991, and incorporated herein by reference).\n10.11 Supplemental Executive Retirement Plan as amended (filed as an exhibit to GWFC's Annual Report on Form 10-K for the fiscal year ended December 31, 1992, and incorporated herein by reference).\n10.12 1979 Incentive and Nonstatutory Stock Option and Appreciation Plan as amended (filed as an exhibit to GWFC's Annual Report on Form 10-K for the fiscal year ended December 31, 1992, and incorporated herein by reference).\n10.13 Addendum to the 1979 Incentive and Nonstatutory Stock Option and Appreciation Plan.\n10.14 Form of Non-Qualified Stock Option Agreement relating to the 1979 Incentive and Nonstatutory Stock Option and Appreciation Plan utilized from April 20, 1982 to April 22, 1986 (filed as an exhibit to Post-Effective Amendment No. 3 to GWFC's Registration Statement No. 2-67233 on Form S-8, and incorporated herein by reference).\n10.15 Form of Non-Qualified Stock Option Agreement relating to the 1979 Incentive and Nonstatutory Stock Option and Appreciation Plan utilized from April 22, 1986 through 1988 (filed as an exhibit to Post- Effective Amendment No. 3 to GWFC's Registration Statement No. 2-67233 on Form S-8, and incorporated herein by reference).\n10.16 The 1988 Stock Option and Incentive Plan (as amended and restated effective July 22, 1993).\n10.17 Form of Director Stock Option Agreement (filed as an exhibit to GWFC's Registration Statement No. 33-21469 on Form S-8 pertaining to GWFC's 1988 Stock Option and Incentive Plan and incorporated herein by reference).\n10.18 Form of Director Stock Option Agreement effective January 3, 1994.\n10.19 Employee Non-Qualified Stock Option Agreement (filed as an exhibit to GWFC's Registration Statement No. 33-21469 on Form S-8 pertaining to GWFC's 1988 Stock Option and Incentive Plan and incorporated herein by reference).\n10.20 Revised Form of Non-Qualified Stock Option Agreement effective January 28, 1992 (filed as an exhibit to Post-Effective Amendment No. 3 to GWFC's Registration Statement No. 33-21469 on Form S-8 pertaining to GWFC's 1988 Stock Option and Incentive Plan and incorporated herein by reference).\n10.21 Revised Form of Non-Qualified Stock Option Agreement effective January 25, 1994.\n10.22 Form of Non-Qualified Stock Option Agreement (Early Vesting Provisions).\n10.23 Form of Restricted Stock Award Agreement and General Provisions Applicable to Restricted Stock Awards Granted Under the 1988 Stock Option and Incentive Plan (filed as an exhibit to Post-Effective Amendment No. 3 to GWFC's Registration Statement No. 33-21469 on Form S-8, and incorporated herein by reference).\n10.24 GWFC Deferred Compensation Plan (1992 Restatement) (filed as an exhibit to GWFC's Annual Report on Form 10-K for the fiscal year ended December 31, 1991, and incorporated herein by reference).\n10.25 GWFC Senior Officers' Deferred Compensation Plan (1992 Restatement) (filed as an exhibit to GWFC's Annual Report on Form 10-K for the fiscal year ended December 31, 1991, and incorporated herein by reference).\n10.26 GWFC Directors' Deferred Compensation Plan (1992 Restatement) (filed as an exhibit to GWFC's Annual Report on Form 10-K for the fiscal year ended December 31, 1991, and incorporated herein by reference).\n10.27 Great Western Supplemental Incentive Plan, effective December 1, 1984 (filed as an exhibit to GWFC's Annual Report on Form 10-K for the fiscal year ended December 31, 1984, and incorporated herein by reference).\n10.28 GWFC Umbrella Trust for Senior Officers (filed as an exhibit to GWFC's Quarterly Report on Form 10-Q for the quarter ended March 31, 1989, and incorporated herein by reference).\n10.29 GWFC Umbrella Trust for Directors (filed as an exhibit to GWFC's Quarterly Report on Form 10-Q for the quarter ended March 31, 1989, and incorporated herein by reference).\n10.30 Restated Retirement Plan for Directors (filed as an exhibit to GWFC's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993, and incorporated herein by reference).\n10.31 Summary of certain additional executive benefits (filed as an exhibit to GWFC's Annual Report on Form 10-K for the fiscal year ended December 31, 1992, and incorporated herein by reference).\n10.32 Employee Home Loan Program (filed as an exhibit to GWFC's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993, and incorporated herein by reference).\n10.33 GWFC Annual Incentive Compensation Plan for Executive Officers.\n11.1 Statement re Computation of Per Share Earnings.\n12.1 Computation of Ratios of Earnings to Fixed Charges.\n21.1 Subsidiaries.\n23.1 Consent of Price Waterhouse included on page 135 of this Form 10-K.\n24.1 Power of Attorney included on page 133 of this Form 10-K.\nThe 1993 Annual Report to Stockholders has already been furnished to each stockholder of record who is entitled to receive a copy thereof. A copy of the 1993 Annual Report to Stockholders will be furnished without charge upon specific request of any stockholder of record on February 28, 1994 and any beneficial owner of the Company's common stock on such date who has not previously received a copy and who represents such facts in good faith to the Company in writing direct to:\nCorporate Secretary Great Western Financial Corporation 9200 Oakdale Avenue Chatsworth, California 91311-6519\nOther exhibits will be supplied to any such stockholder at a charge equal to the Company's cost of copying, postage and handling.\n(b) Reports on Form 8-K\nA current report on Form 8-K dated December 14, 1993 (event date December 3, 1993) reported that Great Western Bank, a Federal Savings Bank, acquired certain assets and assumed certain liabilities of HomeFed Bank, F.A.\nSIGNATURES\nPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.\nGREAT WESTERN FINANCIAL CORPORATION\n\/s\/ James F. Montgomery March 22, 1994 - ------------------------------ ------------------ James F. Montgomery, Chairman Date and Chief Executive\nPOWER OF ATTORNEY\nEach person whose signature appears below hereby authorizes James F. Montgomery, Carl F. Geuther and Jesse L. King, and each of them or any of them, as attorney-in-fact to sign on his or her behalf as an individual and in every capacity stated below, and to file all amendments to the registrant's Form 10-K, and the registrant hereby confers like authority to sign and file in its behalf.\nPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on March 22, 1994, by the following persons on behalf of the registrant and in the capacities indicated.\n\/s\/ James F. Montgomery - ------------------------------------------------------ James F. Montgomery, Chairman and Chief Executive (Principal Executive Officer)\n\/s\/ Carl F. Geuther - ---------------------------------------------------------------------- Carl F. Geuther, Executive Vice President and Chief Financial Officer (Principal Financial Officer)\n\/s\/ Jesse L. King - ------------------------------------------------------------------ Jesse L. King, Senior Vice President and Controller (Principal Accounting Officer)\n\/s\/ John F. Maher - ----------------------------------------------------------- John F. Maher, President and Chief Operating Officer\n\/s\/ Dr. David Alexander \/s\/ Enrique Hernandez, Jr. - ---------------------------------- --------------------------------- Dr. David Alexander, Director Enrique Hernandez, Jr., Director\n\/s\/ H. Frederick Christie - ---------------------------------- ---------------------------------- H. Frederick Christie, Director Charles D. Miller, Director\n\/s\/ Stephen E. Frank \/s\/ Dr. Alberta E. Siegel - ----------------------------------- ---------------------------------- Stephen E. Frank, Director Dr. Alberta E. Siegel, Director\n\/s\/ John V. Giovenco . \/s\/ Willis B. Wood, Jr.\n- ----------------------------------- ---------------------------------- John V. Giovenco, Director Willis B. Wood, Jr., Director\n\/s\/ Firmin A. Gryp - ------------------------------------ Firmin A. Gryp, Director\nINDEX OF\nADDITIONAL FINANCIAL DATA\nPage\nConsent of Independent Accountants S-2\nS-2\nCONSENT OF INDEPENDENT ACCOUNTANTS -----------------------------------\nWe hereby consent to the incorporation by reference in the Prospectuses constituting part of the Registration Statements on Form S-3 (Nos. 33-19884, 2-98811 and 33-60206), on Form S-4 (Nos. 33-15135 and 33-17705) and on Form S-8 (Nos. 2-67233, 2-90750, 33-6174 and 33-21469) of Great Western Financial Corporation of our report dated January 31, 1994 appearing on page 110 of this Form 10-K.\n\/s\/ PRICE WATERHOUSE\nLos Angeles, California March 22, 1994\nGREAT WESTERN FINANCIAL CORPORATION\nEXHIBITS INDEX\nExhibit Page Number Number - ------- ------\n3.3 By-laws of Great Western Financial Corporation\n10.13 Addendum to the 1979 Incentive and Nonstatutory Stock Option and Appreciation Plan.\n10.16 The 1988 Stock Option and Incentive Plan (as amended and restated effective July 22, 1993).\n10.18 Form of Director Stock Option Agreement effective January 3, 1994.\n10.21 Revised Form of Non-Qualified Stock Option Agreement effective January 25, 1994.\n10.22 Form of Non-Qualified Stock Option Agreement (Early Vesting Provisions).\n10.33 Great Western Financial Corporation Annual Incentive Compensation Plan for Executive Officers.\n11.1 Statement re Computation of Per Share Earnings.\n12.1 Computation of Ratios of Earnings to Fixed Charges.\n21.1 Subsidiaries.","section_15":""}
{"filename":"811669_1993.txt","cik":"811669","year":"1993","section_1":"ITEM 1 -- BUSINESS\nGENERAL\nUST Inc. was formed on December 23, 1986 as a Delaware corporation. Pursuant to a reorganization approved by stockholders at the 1987 Annual Meeting, United States Tobacco Company (originally incorporated in 1911) became a wholly owned subsidiary of UST Inc. on May 5, 1987. UST Inc., through its subsidiaries (collectively \"Registrant\" unless the context otherwise requires), is engaged in manufacturing, importing and selling consumer products in the following industry segments:\nTobacco Products: Registrant's primary activities are manufacturing and selling smokeless tobacco (snuff and chewing tobacco) and importing and selling other tobacco products.\nWine: Registrant produces and sells wine.\nOther: Registrant produces or imports and sells certain other products such as smokers' accessories and operates certain commercial agricultural properties. The international and video entertainment operations as well as certain miscellaneous businesses are included in this segment.\nINDUSTRY SEGMENT DATA\nRegistrant hereby incorporates by reference the Consolidated Industry Segment Data pertaining to the years 1991 through 1993 set forth on page 28 of its Annual Report to stockholders for the fiscal year ended December 31, 1993 (\"Annual Report\"), which page is included as Exhibit 13.1.\nTOBACCO PRODUCTS\nPRINCIPAL PRODUCTS\nRegistrant's principal smokeless tobacco products and brand names are as follows:\nMoist -- COPENHAGEN, SKOAL LONG CUT, SKOAL, SKOAL BANDITS\nDry -- BRUTON, CC, RED SEAL\nChewing -- WB CUT\nIt has been claimed that the use of tobacco products may be harmful to health. To the best of Registrant's knowledge, unresolved controversy continues to exist among scientists concerning the claims made about tobacco and health. In 1986, federal legislation was enacted regulating smokeless tobacco products by, inter alia, requiring health warning notices on smokeless tobacco packages and advertising and prohibiting the advertising of smokeless tobacco products on electronic media. A federal excise tax was imposed in 1986, which was increased in 1991 and 1993. The Health Security Act announced by the Clinton Administration in 1993 seeks, inter alia, a significant federal excise tax increase on moist smokeless and other tobacco products. Also, in recent years, proposals have been made at the federal level for additional regulation of tobacco products including, inter alia, the requirement of additional warning notices, the disallowance of advertising and promotion expenses as deductions under federal tax law, a significant increase of federal excise taxes, a ban or further restriction of all advertising and promotion, regulation of environmental tobacco smoke and increased regulation by new or existing federal agencies. Substantially similar proposals will likely be considered in 1994. In 1993, various state and local governments continued the regulation of tobacco products, including, inter alia, the imposition of significantly higher taxes, sampling and advertising bans or restrictions, regulation of environmental tobacco smoke, negative advertising campaigns and packaging regulations. Additional state and local legislative and regulatory actions will likely be considered in 1994. Registrant is unable to assess the future effects these various actions may have on the sale of its tobacco products.\nRAW MATERIALS\nExcept as noted below, raw materials essential to Registrant's business are generally purchased in domestic markets under competitive conditions.\nIn 1993, Registrant increased its purchases of dark fired, burley and dark air cured tobaccos (\"tobacco\") primarily from domestic sources. Although there was a slight increase in foreign purchases in 1993, purchases from foreign suppliers, as a percentage of total tobacco purchased, declined. Such foreign suppliers were located in Canada, Italy and Mexico. Various factors, including a failure of domestic tobacco production to continue to increase, may require Registrant to purchase additional amounts of tobacco from foreign sources in order to meet future requirements. Tobaccos used in the manufacture of smokeless tobacco products must be processed and aged by Registrant for a period of two to three years prior to their use.\nRegistrant or its suppliers purchase certain flavoring components used in Registrant's tobacco products from European sources.\nAt the present time, Registrant has no reason to believe that its future raw material requirements for its tobacco products will not be satisfied. However, the continuing availability and the cost of tobacco from both domestic and foreign sources is dependent upon a variety of factors which cannot be predicted, including weather, growing conditions, disease, local planting decisions, overall market demands and other factors.\nLICENSE AND DISTRIBUTION ARRANGEMENTS\nRegistrant is a party to license and distribution arrangements that relate to imported pipe tobacco and imported cigarette products, which have been entered into in the ordinary course of Registrant's business, none of which is material to the Tobacco segment.\nWORKING CAPITAL\nThe principal portion of Registrant's operating cash requirements relates to its need to maintain significant inventories of leaf tobacco, primarily for manufacturing of smokeless tobacco products, and its need to age and cure certain of these tobaccos for periods of up to three years prior to use.\nCUSTOMERS\nRegistrant sells tobacco products throughout the United States principally to chain stores and tobacco and grocery wholesalers. Approximately 25% of Registrant's gross sales of tobacco products are made to five customers, one of which accounts for more than 10% of such sales. Registrant has maintained satisfactory relationships with these customers for many years.\nCOMPETITIVE CONDITIONS\nThe tobacco manufacturing industry in the United States is composed of at least five domestic companies larger than Registrant and many smaller ones. The larger companies concentrate on the manufacture and sale of cigarettes; one also manufactures and sells smokeless tobacco products. Registrant is a well established and major factor in the smokeless tobacco sector of the overall tobacco market. Consequently, Registrant competes actively with both larger and smaller companies in the sale of its tobacco products. Registrant's principal methods of competition with its tobacco products include quality, advertising, promotion, sampling, price, product recognition and distribution.\nWINE\nRegistrant is an established producer of premium varietal and blended wines. CHATEAU STE. MICHELLE and COLUMBIA CREST varietal table wines and DOMAINE STE. MICHELLE sparkling wine are produced by Registrant in the state of Washington and sold throughout the United States. Registrant also produces and sells two California premium wines under the labels of VILLA MT. EDEN and CONN CREEK. Approximately 48% of Registrant's wine sales are made to ten distributors, no one of which accounts for more than 20% of total wine sales. Substantially all wines are sold through state-licensed distributors with whom Registrant maintains satisfactory relationships.\nIt has been claimed that the use of alcohol beverages may be harmful to health. To the best of Registrant's knowledge, unresolved controversy continues to exist among scientists concerning the claims made about alcohol beverages and health. In 1988, federal legislation was enacted regulating alcohol beverages by requiring health warning notices on alcohol beverages. Effective in 1991, the federal excise tax on wine was increased from $.17 a gallon to $1.07 a gallon for those manufacturers that produce more than 250,000 gallons a year, such as Registrant. In recent years at the federal level, proposals were made for additional regulation of alcohol beverages including, inter alia, an excise tax increase, modification of the required health warning notices and the regulation of labeling, advertising and packaging. Substantially similar proposals will likely be considered in 1994. Also in recent years, increased regulation of alcohol beverages by various states included, inter alia, the imposition of higher taxes, the requirement of health warning notices and the regulation of advertising and packaging. Additional state and local legislative and regulatory actions affecting the marketing of alcohol beverages will likely be considered during 1994. Registrant is unable to assess the future effects these regulatory and other actions may have on the sale of its wines.\nRegistrant uses grapes harvested from its own vineyards, as well as grapes purchased from independent growers located primarily in Washington State. Total grape harvest yields experienced by Registrant and throughout Washington State in 1993 were significantly higher than the prior year and continue to be adequate to meet requirements for premium varietal wines. From time to time adverse weather conditions have significantly affected grape harvests from Washington State. Should any vineyards be destroyed as a result of such conditions, new vineyards generally require five to six years to provide full yields. At the present time, Registrant has no reason to believe that its future raw material requirements for its wine products will not be satisfied.\nRegistrant's principal competition comes from many larger, well established national companies, as well as smaller wine producers. Registrant's principal methods of competition include quality, price, consumer and trade wine tastings, competitive wine judging and advertising. Registrant is a minor factor in the total nationwide business of producing wines.\nRegistrant concentrates its sales efforts on premium varietal table wines and sparkling wines. The future of Registrant's wine business will be dependent on sales, price and volume growth for premium varietal wines, the success of new products and adequate grape harvest yields from Washington State.\nOTHER\nIncluded in this segment for 1993 were cigarette papers, pipes, smokers' accessories, the international operation, video entertainment, agricultural properties and a majority interest in a company that develops and markets equipment used in filmmaking. None of the above, singly, constitutes a material portion of Registrant's operations. Registrant sold its distribution rights to cigarette papers and related products on March 31, 1993.\nADDITIONAL BUSINESS INFORMATION\nCUSTOMERS\nIn 1993 sales to McLane Co. Inc., a national distributor, exceeded 10% of Registrant's consolidated revenue.\nENVIRONMENTAL REGULATIONS\nRegistrant does not believe that compliance with federal, state and local provisions regulating the discharge of materials into the environment or otherwise relating to the protection of the environment will have a material effect upon the capital expenditures, earnings or competitive position of Registrant.\nNUMBER OF EMPLOYEES\nRegistrant's average number of employees during 1993 was 3,724.\nTRADEMARKS\nRegistrant sells consumer products under a large number of trademarks. All of the more important trademarks either have been registered or applications therefor are pending with the United States Patent and Trademark Office.\nSEASONAL BUSINESS\nNo material portion of the business of any industry segment of Registrant is seasonal.\nORDERS\nBacklog of orders is not a material factor in any industry segment of Registrant.\nITEM 2","section_1A":"","section_1B":"","section_2":"ITEM 2 -- PROPERTIES\nSet forth below is information concerning principal facilities and real properties of Registrant.\nSuch principal properties in Registrant's industry segments were utilized only in connection with Registrant's business operations. Registrant believes that the above properties at December 31, 1993 were suitable and adequate for the purposes for which they were used, and were operated at satisfactory levels of capacity. Registrant is producing moist smokeless tobacco products at both its Franklin Park and Nashville plants where the combined installed capacity was planned to meet larger future demand for these products. While current capacity exceeds current sales, utilization would increase if market demand increases.\nAll principal properties are owned in fee by Registrant.\nITEM 3","section_3":"ITEM 3 -- LEGAL PROCEEDINGS\nRegistrant was named in an amended complaint filed on January 17, 1992, in an action against the major cigarette companies and others entitled Norma R. Broin, et al. v. Philip Morris Companies, Inc. et al. (Case No.: 91-49738 CA (22), Circuit Court, 11th Judicial Circuit, Dade County, Florida) seeking five billion dollars in punitive damages and unspecified compensatory damages. The action purportedly is brought on behalf of flight attendants who have allegedly sustained physical, psychological and emotional injuries as a result of exposure to environmental tobacco smoke on airplanes. On May 19, 1992, the Court dismissed the class action allegations in plaintiffs' amended complaint. Plaintiffs filed a notice of appeal from the Court's dismissal on June 17, 1992 and this appeal has not been decided.\nRegistrant has had only limited involvement with cigarettes. Prior to 1985, Registrant manufactured some cigarette products which had a de minimis market share, and Registrant is indemnified for the small volume of imported cigarettes which it currently distributes.\nRegistrant believes that the action is without merit, intends to defend it vigorously and does not believe it will result in any material liability to Registrant.\nITEM 4","section_4":"ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS\nNot applicable.\nEXECUTIVE OFFICERS OF THE REGISTRANT\nPrior to May 5, 1987, all titles of officers set forth below relate to offices held in United States Tobacco Company.\nPursuant to instruction 3 to Item 401(b) of Regulation S-K, the name, office, age and business experience of each executive officer of Registrant as of March 1, 1994 is set forth below:\nNone of the executive officers of Registrant has any family relationship to any other executive officer or director of Registrant.\nAfter election, all executive officers serve until the next annual organization meeting of the Board of Directors and until their successors are elected and qualified.\nAll of the Executive Officers of Registrant have been employed continuously by it for more than five years except for Mr. Barrett.\nMr. Barrett has served as Executive Vice President since October 7, 1991. He also has served as President of UST Enterprises Inc. since July 1, 1991. Mr. Barrett served as Senior Vice President from January 1, 1991 to October 6, 1991, and served as a member of the Board of Directors from July 27, 1989 through December 13, 1990. Mr. Barrett served as President of Barrett Consultants, a public and government relations firm which he founded in 1980. Mr. Barrett has been employed by Registrant since January 1, 1991.\nMr. Bucchignano has served as Executive Vice President and Chief Financial Officer since October 7, 1991. Mr. Bucchignano served as Senior Vice President and Controller from September 27, 1990 to October 6, 1991, and as Controller from August 1, 1987 to September 26, 1990. Mr. Bucchignano has been employed by Registrant since December 10, 1984.\nMr. Chapin has served as Executive Vice President and General Counsel since September 25, 1991. Mr. Chapin served as Senior Vice President and General Counsel from January 1, 1981 to September 24, 1991. Mr. Chapin has been employed by Registrant since March 1, 1975.\nMr. Gierer has served as Chairman of the Board and Chief Executive Officer since December 1, 1993 and has served as President since September 27, 1990. Mr. Gierer also served as Chief Operating Officer from September 27, 1990 to November 30, 1993 and as Executive Vice President and Chief Financial Officer from February 17, 1988 to September 26, 1990. Mr. Gierer has been employed by Registrant since March 16, 1978.\nMr. Peter has served as Executive Vice President since October 29, 1990. He also has served as President of UST International Inc. since January 1, 1993. Mr. Peter served as Senior Vice President from July 27, 1989 to October 28, 1990 and as Vice President from June 23, 1988 to July 26, 1989. Mr. Peter has been employed by Registrant since February 1, 1988.\nMr. Taddeo has served as Executive Vice President and President of United States Tobacco Company since September 27, 1990. Mr. Taddeo also served as Senior Vice President of United States Tobacco Company from June 23, 1988 to September 26, 1990. Mr. Taddeo has been employed by Registrant since March 29, 1982.\nPART II\nITEM 5","section_5":"ITEM 5 -- MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS\nRegistrant hereby incorporates the information with respect to the market for its common stock, $.50 par value (\"Common Stock\"), and related security holder matters set forth on page 27 of its Annual Report, which page is included herein as Exhibit 13.2. Registrant's Common Stock is listed on the New York Stock Exchange and the Pacific Stock Exchange. As of March 1, 1994, there were approximately 13,621 stockholders of record of its Common Stock.\nITEM 6","section_6":"ITEM 6 -- SELECTED FINANCIAL DATA\nRegistrant hereby incorporates by reference the Consolidated Selected Financial Data set forth on pages 46 and 47 of its Annual Report, which pages are included herein as Exhibit 13.3.\nITEM 7","section_7":"ITEM 7 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS\nRegistrant hereby incorporates by reference the Management's Discussion and Analysis of Results of Operations and Financial Condition set forth on pages 19-27 of its Annual Report, which pages are included herein as Exhibit 13.4.\nITEM 8","section_7A":"","section_8":"ITEM 8 -- FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA\nRegistrant hereby incorporates by reference the information contained in the financial statements, including the notes thereto, set forth on pages 28-43 and 45 of its Annual Report, which pages are included herein as Exhibit 13.5.\nITEM 9","section_9":"ITEM 9 -- CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE\nNot applicable.\nPART III\nITEM 10","section_9A":"","section_9B":"","section_10":"ITEM 10 -- DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT\nRegistrant hereby incorporates by reference the information with respect to the names, ages and business histories of the directors of Registrant which is contained in Table I and the accompanying text set forth under the caption \"Election of Directors\" in its Notice of 1994 Annual Meeting and Proxy Statement. Information concerning executive officers of Registrant is set forth above following Item 4 of this Report.\nITEM 11","section_11":"ITEM 11 -- EXECUTIVE COMPENSATION\nRegistrant hereby incorporates by reference the information with respect to executive compensation which is contained in Tables II through V (including the notes thereto) and the accompanying text set forth under the caption \"Compensation of Executive Officers\" in its Notice of 1994 Annual Meeting and Proxy Statement.\nITEM 12","section_12":"ITEM 12 -- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT\nRegistrant hereby incorporates by reference the information with respect to the security ownership of management which is contained in Table I and the accompanying text set forth under the caption \"Election of Directors\" in its Notice of 1994 Annual Meeting and Proxy Statement.\nITEM 13","section_13":"ITEM 13 -- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS\nRegistrant hereby incorporates by reference certain transactions with directors and information with respect to indebtedness of management which is contained in Table VI and the accompanying text set forth under the caption \"Compensation of Executive Officers\" in its Notice of 1994 Annual Meeting and Proxy Statement.\nPART IV\nITEM 14","section_14":"ITEM 14 -- EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K\n(a) Documents filed as part of this Report:\n(1) and (2) The financial statements of Registrant included in this Report are set forth on pages - hereof.\n(3) The following exhibits are filed by Registrant pursuant to Item 601 of Regulation S-K:\n(b) No current reports on Form 8-K were filed during the fourth quarter of Registrant's most recent fiscal year.\n* Management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 14(c) of this Report.\nSIGNATURE PAGE\nPURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934, REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.\nUST INC. Date: February 16, 1994\nBy: VINCENT A. GIERER, JR. ------------------------------- VINCENT A. GIERER, JR. CHAIRMAN OF THE BOARD, CHIEF EXECUTIVE OFFICER AND PRESIDENT\nPURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.\nITEM 14 (a) (1) AND (2)\nUST AND SUBSIDIARIES\nLIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES\nThe following consolidated financial statements of Registrant, included in the annual report of Registrant to its stockholders for the year ended December 31, 1993, are incorporated by reference in Item 8:\nConsolidated Statement of Financial Position -- December 31, 1993 and\nConsolidated Statement of Earnings -- Years ended December 31, 1993, 1992 and 1991\nConsolidated Statement of Changes in Stockholders' Equity -- Years ended December 31, 1993, 1992 and 1991\nConsolidated Statement of Cash Flows -- Years ended December 31, 1993, 1992 and 1991\nNotes to Consolidated Financial Statements\nThe following consolidated financial statement schedules are included in Item 14(d):\nAll other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted.\nUST AND SUBSIDIARIES\nSCHEDULE II -- AMOUNTS RECEIVABLE FROM RELATED PARTIES AND UNDERWRITERS, PROMOTERS AND EMPLOYEES OTHER THAN RELATED PARTIES\n- -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------\nUST AND SUBSIDIARIES\nSCHEDULE II -- AMOUNTS RECEIVABLE FROM RELATED PARTIES AND UNDERWRITERS, PROMOTERS AND EMPLOYEES OTHER THAN RELATED PARTIES -- (CONTINUED)\n- -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------\nUST AND SUBSIDIARIES\nSCHEDULE II -- AMOUNTS RECEIVABLE FROM RELATED PARTIES AND UNDERWRITERS, PROMOTERS AND EMPLOYEES OTHER THAN RELATED PARTIES -- (CONTINUED)\n- -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------\n- ---------------\n(A) Amounts represent notes arising from installment purchases of common stock under Registrant's Stock Option Plans which carry interest rates ranging from approximately 4% to approximately 9%, provide for payment over periods of up to ten years and are secured by the common stock purchased.\nUST AND SUBSIDIARIES\nSCHEDULE V -- PROPERTY, PLANT AND EQUIPMENT\nYEAR ENDED DECEMBER 31, 1993\n- -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------\n- ---------------\n(A) Reclassified on the Consolidated Statement of Financial Position to land, buildings and machinery and equipment.\n(B) Additions principally relate to the completion of aircraft, new equipment for the wine operations and the Nashville, Franklin Park and Hopkinsville plants, renovation of facilities, and normal replacement of existing manufacturing equipment and motor vehicles.\n(C) Transfers to property accounts are included in Column C.\n(D) The annual provisions for depreciation have been computed principally in accordance with the following rates:\nUST AND SUBSIDIARIES\nSCHEDULE V -- PROPERTY, PLANT AND EQUIPMENT -- (CONTINUED)\nYEAR ENDED DECEMBER 31, 1992\n- -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------\n- ---------------\n(A) Reclassified on the Consolidated Statement of Financial Position to buildings and machinery and equipment.\n(B) Additions principally relate to new equipment for the wine operations and the Nashville and Franklin Park plants, renovation of facilities, and normal replacement for existing manufacturing equipment and motor vehicles.\n(C) Retirements include $7.1 million for aircraft.\n(D) Net increase in account, primarily the partial cost of unfinished aircraft. Transfers to property accounts are included in Column C.\n(E) The annual provisions for depreciation have been computed principally in accordance with the following rates:\nUST AND SUBSIDIARIES\nSCHEDULE V -- PROPERTY, PLANT AND EQUIPMENT -- (CONTINUED)\nYEAR ENDED DECEMBER 31, 1991\n- -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------\n- ---------------\n(A) Reclassified on the Consolidated Statement of Financial Position to buildings and machinery and equipment.\n(B) Additions principally relate to the completion of aircraft, new equipment for the wine operations and the Nashville and Franklin Park plants, vineyard development, renovation of facilities, and normal replacement for existing manufacturing equipment and motor vehicles.\n(C) Increase in account represents consolidation of Camera Platforms International, Inc.\n(D) Net decrease in account, primarily the reclassification of the cost of completed aircraft. Transfers to property accounts are included in Column C.\n(E) The annual provisions for depreciation have been computed principally in accordance with the following rates:\nUST AND SUBSIDIARIES\nSCHEDULE VI -- ACCUMULATED DEPRECIATION, DEPLETION AND AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT\nYEAR ENDED DECEMBER 31, 1993 - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------\nUST AND SUBSIDIARIES\nSCHEDULE VI -- ACCUMULATED DEPRECIATION, DEPLETION AND AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT -- (CONTINUED)\nYEAR ENDED DECEMBER 31, 1992 - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------\nUST AND SUBSIDIARIES\nSCHEDULE VI -- ACCUMULATED DEPRECIATION, DEPLETION AND AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT -- (CONTINUED)\nYEAR ENDED DECEMBER 31, 1991 - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------\nUST AND SUBSIDIARIES\nSCHEDULE IX -- SHORT-TERM BORROWINGS\n- -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------\n- ---------------\n(A) Commercial paper generally matures within 90 days from date of issuance with no provision for extensions of its maturity. Amounts in 1993 are higher than in previous years due to an arbitrage program. (B) Notes payable represent borrowings under lines of credit arrangements. In January 1994, Registrant converted this $40 million loan into a revolving credit and term loan agreement and this amount was classified as long-term debt at December 31, 1993. (See Notes to Consolidated Financial Statements -- Revolving Credit and Term Loan Agreement and Short-Term Lines of Credit.) (C) Represents maximum amount outstanding at any time during the period. (D) The average amount outstanding during the period was computed by dividing the total of the monthly average outstanding principal balances by twelve. (E) The weighted average interest rate during the period was computed by dividing the actual interest expense by the average short-term debt outstanding.\nUST AND SUBSIDIARIES\nSCHEDULE X -- SUPPLEMENTARY INCOME STATEMENT INFORMATION\n- -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------\nOther items have been omitted as each one did not exceed one percent of revenues.\nEXHIBIT INDEX\n* Management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 14(c) of this Report.","section_15":""}
{"filename":"787250_1993.txt","cik":"787250","year":"1993","section_1":"Item 1 - BUSINESS* DPL INC.\nDPL Inc. was organized in 1985 under the laws of the State of Ohio to engage in the acquisition and holding of securities of corporations for investment purposes. The executive offices of DPL Inc. are located at Courthouse Plaza Southwest, Dayton, Ohio 45402 - telephone (513) 224-6000.\nDPL Inc.'s principal subsidiary is The Dayton Power and Light Company (\"DP&L\"). DP&L is a public utility incorporated under the laws of Ohio in 1911. Located in West Central Ohio, it furnishes electric service to 464,000 retail customers in a 24 county service area of approximately 6,000 square miles and furnishes natural gas service to 286,000 customers in 16 counties. In addition, DP&L provides steam heating service in downtown Dayton, Ohio. DP&L serves an estimated population of 1.2 million. Principal industries served include electrical machinery, automotive and other transportation equipment, non-electrical machinery, agriculture, paper, rubber and plastic products. DP&L's sales reflect the general economic conditions and seasonal weather patterns of the area. The solid performance of the economy of West Central Ohio and seasonal summer and winter weather in 1993 contributed to increased energy sales for the year. Electric sales to business customers were up 4% for the year while total electric and natural gas sales increased 4% and 3%, respectively, as compared to 1992. During 1993, cooling degree days were 4% above the twenty year average and 35% above 1992. Heating degree days in 1993 were 3% above the thirty year average and 6% above 1992. Sales patterns will change in future years as weather and the economy fluctuate.\nSubsidiaries of DP&L include MacGregor Park Inc., an owner and developer of real estate; and DP&L Community Urban Redevelopment Corporation, the owner of a downtown Dayton office building.\nOther subsidiaries of DPL Inc. include Miami Valley CTC, Inc., which provides transportation services to DP&L and another unaffiliated Dayton-based company; Miami Valley Leasing, which leases vehicles and miscellaneous communications equipment, owns real estate and has a financial investment in an unaffiliated energy development company; Miami Valley Resources, Inc. (\"MVR\"), a natural gas supply management company; Miami Valley Lighting, Inc., a street lighting business; Miami Valley Insurance Company, an insurance company for DPL Inc. and its subsidiaries; and Miami Valley Development Company, which is engaged in the business of technology research and development.\n* Unless otherwise indicated, the information given in \"Item 1 - BUSINESS\" is current as of March 11, 1994. No representation is made that there have not been subsequent changes to such information.\nI-1\nDPL Inc. and its subsidiaries are exempt from registration with the Securities and Exchange Commission under the Public Utility Holding Company Act of 1935 because its utility business operates solely in the State of Ohio.\nDPL Inc. and its subsidiaries employed 3,147 persons as of December 31, 1993, of which 2,653 are full-time employees and 494 are part-time employees.\nInformation relating to industry segments is contained in Note 11 of Notes to Consolidated Financial Statements on page 26 of the registrant's 1993 Annual Report to Shareholders (\"1993 Annual Report\"), which Note is incorporated herein by reference.\nCOMPETITION\nDPL Inc. competes through its principal subsidiary, DP&L, with privately and municipally owned electric utilities and rural electric cooperatives, natural gas suppliers and other alternate fuel suppliers. DP&L competes on the basis of price and service.\nLike other utilities, DP&L from time to time may have electric generating capacity available for sale to other utilities. DP&L competes with other utilities to sell electricity provided by such capacity. The ability of DP&L to sell this electricity will depend on how DP&L's price, terms and conditions compare to those of other utilities. In addition, from time to time, DP&L also makes power purchases from neighboring utilities.\nIn an increasingly competitive energy environment, cogenerated power may be used by customers to meet their own power needs. Cogeneration is the dual use of a form of energy, typically steam, for an industrial process and for the generation of electricity. The Public Utilities Regulatory Policies Act of 1978 (\"PURPA\") provides regulations covering when an electric utility is required to offer to purchase excess electric energy from cogeneration and small power production facilities that have obtained qualifying status under PURPA.\nThe National Energy Policy Act of 1992 which reformed the Public Utilities Holding Company Act of 1935 allows the federal government to mandate access by others to a utility's electric transmission system and may accelerate competition in the supply of electricity.\nGeneral deregulation of the natural gas industry has continued to prompt the influence of market competition as the driving force behind natural gas procurement. The maturation of the natural gas spot market in combination with open access\nI-2\ninterstate transportation provided by pipelines has provided DP&L, as well as its end-use customers, with an array of procurement options. Customers with alternate fuel capability can continue to choose between natural gas and their alternate fuel based upon overall economics. Therefore, demand for natural gas purchased from DP&L or purchased elsewhere and transported to the end-use customer by DP&L could fluctuate based on the economics of each in comparison with changes in alternate fuel prices. For DP&L, price competition and reliability among both natural gas suppliers and interstate pipeline sources are major factors affecting procurement decisions.\nIn April 1992, FERC issued Order No. 636 (\"Order 636\") amending its regulations governing the service obligations, rate design and cost recovery of interstate pipelines. DP&L's interstate pipeline suppliers have received approval from FERC to implement their restructuring plans to comply with the regulations.\nThe Public Utilities Commission of Ohio (\"PUCO\") has held roundtable discussions and meetings regarding the implications of Order 636 for local distribution companies, producers and consumers. The PUCO has issued interim guidelines allowing utilities to file revised natural gas transportation tariffs to comply with the Order, and is continuing efforts to examine the impact via roundtable discussions. DP&L's natural gas tariffs and operations comply with the PUCO's interim guidelines and the requirements of Order 636.\nIn January 1994, DP&L, the Staff of the PUCO and the Office of the Ohio Consumers' Counsel (the \"OCC\") submitted to the PUCO an agreement which resolves issues relating to the recovery of Order 636 \"transition costs\" to be billed to DP&L by natural gas interstate pipeline companies. The agreement, which is subject to PUCO approval, provides for the full recovery of these transition costs from DP&L customers. The interstate pipelines will file with the FERC for authority to recover these transition costs, the exact magnitude of which has not been established.\nMVR, established in 1986 as a subsidiary of DPL Inc., acts as a broker in arranging and managing natural gas supplies for business and industry. Deliveries of natural gas to MVR customers can be made through DP&L's transportation system, or another transportation system, on the same basis as deliveries to customers of other gas brokerage firms. Customers with alternate fuel capability can continue to choose between natural gas and their alternate fuel based upon overall economics.\nI-3\nDP&L provides service to 12 municipal customers which distribute electricity within their corporate limits. One municipality has signed a contract for DP&L to provide 95% of its requirements. In addition to these municipal customers, DP&L maintains an interconnection agreement with one municipality which can generate all or a portion of its energy requirements. Sales to municipalities represented 1.3% of total electricity sales in 1993. DP&L maintains discussions with these municipalities concerning potential energy agreements.\nCONSTRUCTION AND FINANCING PROGRAM OF DPL INC.\n1994-1998 Construction Program - ------------------------------\nThe estimated construction additions for the years 1994-1998 are set forth below: Estimated 1994 1995 1996 1997 1998 1994-1998 ---- ---- ---- ---- ---- --------- millions Electric generation and transmission commonly owned with neighboring utilities................ $ 22 $ 28 $ 24 $ 41 $ 23 $138 Other electric generation and transmission facilities.. 43 33 34 18 13 141 Electric distribution...... 24 26 31 34 37 152 General.................... 3 3 2 1 1 10 Gas, steam and other facilities............... 17 16 14 15 15 77 --- --- --- --- --- --- Total construction..... $109 $106 $105 $109 $ 89 $518\nEstimated construction costs over the next five years average $104 million annually which is approximately equal to the projected depreciation expense over the same period.\nThe construction additions for the period include plans to construct a series of 70 MW combustion turbine generating units scheduled to be completed at varying intervals dependent upon need. The first unit is scheduled for completion in June 1995.\nI-4\nConstruction plans are subject to continuing review and are expected to be revised in light of changes in financial and economic conditions, load forecasts, legislative and regulatory developments and changing environmental standards, among other factors. DP&L's ability to complete its capital projects and the reliability of future service will be affected by its financial condition, the availability of external funds at reasonable cost and adequate and timely rate increases.\nSee ENVIRONMENTAL CONSIDERATIONS for a description of environmental control projects and regulatory proceedings which may change the level of future construction additions. The potential impact of these events on DP&L's operations cannot be estimated at this time.\n1994-1998 Financing Program - --------------------------- DP&L will require a total of $106 million during the next five years for bond maturities and preferred stock and bond sinking funds in addition to any funds needed for the construction program. DPL Inc. will require an additional $5 million for mandatory redemptions.\nAt year-end 1993, DPL Inc. had a cash and temporary investment balance of $82 million. Proceeds from temporary cash investments, together with internally generated cash and future outside financings, will provide for the funding of the construction program, sinking funds and general corporate requirements.\nIn mid-March 1994, DPL Inc. plans to file a registration statement with the Securities and Exchange Commission for the issuance and sale of approximately three-and-a-half million common shares. The net proceeds from the planned sale of shares, estimated to equal approximately $65 million, would be contributed to DP&L which would use the funds, along with temporary cash investments and\/or short-term borrowings, to redeem in May 1994 all of the outstanding shares of its Preferred Stock, Series D, E, F, H and I, which have an average dividend rate of 8.1%.\nDuring late 1992 and early 1993, DP&L took advantage of favorable market conditions to reduce its cost of debt and extend maturities through early refundings. Three new series of First Mortgage Bonds were issued in 1992 in the aggregate principal amount of $320 million at an average interest rate of 7.8% to finance the redemption of a similar principal amount of debt securities. Additionally, in early 1993, DP&L issued two new series of First Mortgage Bonds in the aggregate principal amount of $446 million at an average interest rate of 8.0% to finance the redemption of a similar principal amount of six series of First Mortgage Bonds. The amounts and timings of future financings will depend upon market and other conditions, rate increases, levels of sales and construction plans.\nI-5\nIn November 1989, DPL Inc. entered into a revolving credit agreement (\"the Credit Agreement\") with a consortium of banks renewable through 1998 which allows total borrowings by DPL Inc. and its subsidiaries of $200 million. DP&L has authority from the PUCO to issue short term debt up to $200 million with a maximum debt limit of $300 million including loans from DPL Inc. under the terms of the Credit Agreement. At December 31, 1993, DPL Inc. had no outstanding borrowings under this Credit Agreement. At December 31, 1992, DPL Inc. had $90 million outstanding under the Credit Agreement which was used to fund share purchases for DPL Inc.'s Employee Stock Ownership Plan. These borrowings were repaid in January 1993 with the proceeds from the issuance of $90 million of DPL Inc.'s 7.83% Notes due 2007.\nDP&L also has $97 million available in short term informal lines of credit At year-end, DP&L had $10 million outstanding from these lines of credit and $15 million in commercial paper outstanding.\nUnder DP&L's First and Refunding Mortgage, First Mortgage Bonds may be issued on the basis of (i) 60% of unfunded property additions, subject to net earnings, as defined, being at least two times interest on all First Mortgage Bonds outstanding and to be outstanding, and (ii) 100% of retired First Mortgage Bonds. DP&L anticipates that, during 1994-98, it will be able to issue sufficient First Mortgage Bonds to satisfy its long-term debt requirements in connection with the financing of its construction and refunding programs discussed above.\nThe maximum amount of First Mortgage Bonds which may be issued in the future will fluctuate depending upon interest rates, the amounts of bondable property additions, earnings and retired First Mortgage Bonds. There are no coverage tests for the issuance of preferred stock under DP&L's Amended Articles of Incorporation.\nELECTRIC OPERATIONS AND FUEL SUPPLY\nDP&L's present winter generating capability is 3,053,000 KW. Of this capability, 2,843,000 KW (approximately 93%) is derived from coal-fired steam generating stations and the balance consists of combustion turbine and diesel-powered peaking units. Approximately 87% (2,472,000 KW) of the existing steam generating capability is provided by certain units owned as tenants in common with the Cincinnati Gas & Electric Company (\"CG&E\") or with CG&E and Columbus Southern Power Company (\"CSP\"). Under the agreements among the companies, each company owns a specified undivided share of each facility, is entitled to its share of capacity and energy output, and has a capital and operating cost responsibility proportionate to its ownership share.\nI-6\nA merger agreement between CG&E and PSI Resources is currently pending. DP&L has intervened in the merger proceeding currently pending at the FERC so that the operations of its commonly owned generating units will not be materially impacted by the merger.\nThe remaining steam generating capability (371,000 KW) is derived from a generating station owned solely by DP&L. DP&L's all time net peak load was 2,765,000 KW, which occurred in July 1993. The present summer generating capability is 3,017,000 KW.\nGENERATING FACILITIES ---------------------\nMW Rating -------------- Owner- Operating DP&L Station ship* Company Location Portion Total - ----------- ----- --------- ------------ ------- ----- Coal Units - ---------- Hutchings W DP&L Miamisburg, OH 371 371 Killen C DP&L Wrightsville, OH 402 600 Stuart C DP&L Aberdeen, OH 820 2,340 Conesville-Unit 4 C CSP Conesville, OH 129 780 Beckjord-Unit 6 C CG&E New Richmond, OH 210 420 Miami Fort- Units 7&8 C CG&E North Bend, OH 360 1,000 East Bend-Unit 2 C CG&E Rabbit Hash, KY 186 600 Zimmer C CG&E Moscow, OH 365 1,300\nCombustion Turbines or Diesel - ----------------------------- Hutchings W DP&L Miamisburg, OH 32 32 Yankee Street W DP&L Centerville, OH 144 144 Monument W DP&L Dayton, OH 12 12 Tait W DP&L Dayton, OH 10 10 Sidney W DP&L Sidney, OH 12 12\n* W = Wholly Owned; C = Commonly Owned\nI-7\nIn order to transmit energy to their respective systems from their commonly-owned generating units, the companies have constructed and own, as tenants in common, 847 circuit miles of 345,000-volt transmission lines. DP&L has several interconnections with other companies for the purchase, sale and interchange of electricity.\nDP&L derived over 99% of its electric output from coal-fired units in 1993. The remainder was derived from units burning oil or natural gas which were used to meet peak demands.\nDP&L estimates that approximately 65-85% of its coal requirements for the period 1994-1998 will be obtained through long term contracts, with the balance to be obtained by spot market purchases. DP&L has been informed by CG&E and CSP through the procurement plans for the commonly owned units operated by them that sufficient coal supplies will be available during the same planning horizon.\nThe prices to be paid by DP&L under its long term coal contracts are subject to adjustment in accordance with various indices. Each contract has features that will limit price escalations in any given year.\nThe total average price per million British Thermal Units (\"MMBTU\") of coal received in each of 1993 and 1992 was $1.46\/MMBTU and $1.56\/MMBTU in 1991.\nThe average fuel cost per kWh generated of all fuel burned for electric generation (coal, gas and oil) for the year was 1.43 cents which represents a decrease from 1.48 cents in 1992 and 1.60 cents in 1991. Through the operation of a fuel cost adjustment clause applicable to electric sales, the increases and decreases in fuel costs are reflected in customer rates on a timely basis. See RATE REGULATION AND GOVERNMENT LEGISLATION and ENVIRONMENTAL CONSIDERATIONS.\nGAS OPERATIONS AND GAS SUPPLY\nDP&L has long term firm pipeline transportation agreements with ANR Gas Pipeline Company (\"ANR\") through 1997 and Columbia Gas Transmission Corporation (\"Columbia\"), Columbia Gulf Transmission Corporation, Texas Gas Transmission Corporation (\"Texas Gas\") and Panhandle Eastern Pipe Line Company (\"Panhandle\") through 2004. Along with the firm transportation services DP&L has approximately 16 billion cubic feet of storage service with the various pipelines. DP&L also maintains and operates four propane-air plants with a daily rated capacity of approximately 67,500 thousand cubic feet (\"MCF\") of natural gas.\nI-8\nCoordinated with the pipeline service agreements, DP&L has 14 firm natural gas supply agreements with various natural gas producers. DP&L purchased approximately 90% of its 1993 supply under these producer agreements and the remaining supplies on the spot\/short term market. DP&L purchased natural gas during 1993 at an average price of $3.65 per MCF, compared to $3.31 per MCF and $2.70 per MCF in 1992 and 1991, respectively. Through the operation of a natural gas cost adjustment clause applicable to gas sales, increases and decreases in DP&L's natural gas costs are reflected in customer rates on a timely basis. See RATE REGULATION AND GOVERNMENT LEGISLATION.\nDP&L is also interconnected with CNG Transmission Corporation and Texas Eastern Transmission Corporation. Several interconnections with various interstate pipelines provide DP&L the opportunity to purchase competitively-priced natural gas supplies and pipeline services.\nDuring 1993, DP&L implemented requirements of Order 636 with all of its natural gas interstate pipeline suppliers. As a result of FERC's mandate that pipelines no longer bundle the product of natural gas with pipeline transportation into one package, DP&L purchased the majority of its natural gas in 1993 under direct market purchases. Additionally, the implementation of Order 636 required DP&L to purchase certain volumes of natural gas from interstate pipelines to fill storage. In the future, DP&L will obtain all its natural gas from direct market purchases or pipelines based on cost and reliability. DP&L has natural gas agreements that meet 90% of its requirements. The remainder will be purchased to meet seasonal requirements under short term purchase agreements.\nThe PUCO continues to support open access, nondiscriminatory transportation of natural gas by the state's local distribution companies for end-use customers. The PUCO has guidelines to provide a standardized structure for end-use transportation programs which requires a tariff providing the prices, terms and conditions for such service. DP&L has filed a transportation tariff to comply with these guidelines and approval is pending. During 1993, DP&L provided transportation service to 185 end-use customers, delivering a total quantity of 13,401,229 MCF.\nColumbia and Panhandle have obtained conditional approval from FERC to recover take-or-pay and contract reformation costs from DP&L through fixed demand surcharges pursuant to revised FERC rules. The validity of the revisions was reviewed and dismissed by the U.S. Court of Appeals for the District of Columbia Circuit. Pursuant to a settlement approved by the PUCO, DP&L may recover take-or-pay costs from its retail and transportation customers.\nI-9\nOn April 30, 1990, Columbia filed an application with FERC to implement a general rate increase in order to recover, among other things, costs associated with construction of certain \"Global Settlement\" facilities. The rates were accepted to become effective November 1, 1990. A partial offer of settlement was accepted on April 16, 1992, and an initial decision on the remaining issues was issued on November 13, 1992. On May 31, 1991, Columbia filed a second application with FERC to implement a general rate increase which was partially accepted effective December 1, 1991. On October 1, 1991, Columbia filed a third application to implement a general rate increase which was partially accepted to become effective April 1, 1992. The second and third applications were subsequently consolidated into one rate proceeding, and rate design, cost classification and cost allocations were further consolidated into Columbia's restructuring proceeding referenced in following paragraphs. A settlement dated November 9, 1992, regarding the remaining cost of service and throughput issues was approved by FERC April 2, 1993.\nOn April 27, 1990, Texas Gas filed an application with FERC to implement a general rate increase which was accepted to become effective November 1, 1990. This docket was consolidated into the Texas Gas restructuring proceeding which was made effective November 1, 1993. On May 1, 1992, Panhandle filed an application with FERC to implement a general rate increase which rates were accepted effective November 1, 1992. A hearing on this matter is set for May 17, 1994. On April 29, 1993 Texas Gas filed a second application with FERC to implement a rate increase which was accepted effective November 1, 1993. A hearing on this matter is set for June 28, 1994. On November 1, 1993, ANR filed an application with FERC to implement a rate increase which was accepted effective May 2, 1994. Through the operation of a natural gas cost adjustment clause applicable to gas sales, increases and decreases in DP&L's natural gas costs are reflected in customer rates on a timely basis.\nOn July 31, 1991, Columbia Gas System Inc. and Columbia, one of DP&L's major pipeline suppliers, filed separate Chapter 11 petitions in U.S. Bankruptcy Court. The bankruptcy court permitted Columbia to break approximately 4,500 long term natural gas contracts with upstream suppliers on August 22, 1991, January 6, 1992, and January 8, 1992. The bankruptcy court issued an order on March 18, 1992, granting approval of an agreement between the customers and Columbia which assures the continuation of all firm service agreements (including storage) through the winter of 1993, with year-to-year continuation unless adequate notice is provided. On February 13, 1992, the bankruptcy court ruled on a motion by Columbia to flow through to its customers all appropriate refunds, including take-or-pay refunds which were received from its upstream suppliers and\nI-10\nexcessive rate refunds except for approximately $18 million of pre-petition take-or-pay refunds. However, on July 6, 1992, the United States District Court for Delaware reversed the bankruptcy court. On July 8, 1993, the Third Circuit Court of Appeals reversed the District Court for Delaware and reinstated the U.S. Bankruptcy Court's ruling that Columbia may flow through to its customers all post petition take-or-pay refunds which were received from its upstream suppliers. The U.S. Supreme Court denied an appeal on February 18, 1994 of the Third Circuit Court of Appeals'1decision. DP&L expects full recovery of all take-or-pay refunds received by Columbia post petition. The parties to the bankruptcy are currently evaluating Columbia's proposed plan of reorganization. Based upon a July 1993 FERC Order disallowing the recovery of natural gas producer contracts rejected in the bankruptcy case, DP&L does not expect the bankruptcy proceedings to have a material adverse effect on its earnings or competitive position.\nIn April 1992 FERC issued Order 636 which amended its regulations governing the service obligations of interstate pipelines. Some of the major changes enacted include unbundling of pipeline sales from transportation, the creation of a \"no-notice\" transportation service, pre-granted abandonment for all interruptible and short term firm transportation subject to a right-of-first refusal, capacity brokering, rate design and transition costs. All interstate pipeline filings were made effective by November 1, 1993.\nIn response to Order 636 issued by FERC, the PUCO has initiated roundtable discussions with natural gas utilities and other interested parties to discuss the impact of the Order and the state regulation of natural gas utilities. The PUCO has issued interim guidelines allowing utilities to file revised natural gas transportation tariffs to comply with Order 636, and is continuing to examine the impact via ongoing roundtable discussions that run concurrently with the interstate pipelines' restructuring proceedings. The interim guidelines also require each natural gas utility to file plans for peak day operations. DP&L's operations comply with all interim guidelines and DP&L expects full recovery of all Order 636 transition costs.\nRATE REGULATION AND GOVERNMENT LEGISLATION\nDPL Inc. and its subsidiaries are exempt from registration with the Securities and Exchange Commission under the Public Utility Holding Company Act of 1935 because its utility business operates solely in the State of Ohio.\nDP&L's sales of electricity, natural gas and steam to retail customers are subject to rate regulation by the PUCO and various municipalities. DP&L's wholesale electric rates to municipal corporations and other distributors of electric energy are subject to regulation by FERC under the Federal Power Act.\nI-11\nOhio law establishes the process for determining rates charged by public utilities. Regulation of rates encompasses the timing of applications, the effective date of rate increases, the cost basis upon which the rates are based and other related matters. Ohio law also established the Office of the OCC, which is authorized to represent residential consumers in state and federal judicial and administrative rate proceedings.\nDP&L's electric and natural gas rate schedules contain certain recovery and adjustment clauses subject to periodic audits by, and proceedings before, the PUCO. Electric fuel and gas costs are expensed as recovered through rates.\nOhio legislation extends the jurisdiction of the PUCO to the records and accounts of certain public utility holding company systems, including DPL Inc. The legislation extends the PUCO's supervisory powers to a holding company system's general condition and capitalization, among other matters, to the extent that they relate to the costs associated with the provision of public utility service. Additionally, the legislation requires PUCO approval of (i) certain transactions and transfers of assets between public utilities and entities within the same holding company system, and (ii) prohibits investments by a holding company in subsidiaries which are not public utilities in an amount in excess of 15% of the aggregate capitalization of the holding company on a consolidated basis at the time such investments are made.\nIn April 1991, DP&L filed an application with the PUCO to increase its electric rates to recover costs associated with the construction of the William H. Zimmer Generating Station (\"Zimmer\"), earn a return on DP&L's investment and recover the current costs of providing electric service to its customers. In November 1991, DP&L entered into a settlement agreement with various consumer groups resolving all issues in the case. The PUCO approved the agreement on January 22, 1992. Pursuant to that agreement, new electric rates took effect February 1, 1992, January 2, 1993 and January 3, 1994. The agreement also established a baseline return on equity of 13% (subject to upward adjustment) until DP&L's next electric rate case. In the event that DP&L's return exceeds the allowed return by between one and two percent, then one half of the excess return will be used to reduce the cost of demand-side management (\"DSM\") programs. Any return that exceeds the allowed return by more than two percent will be entirely credited to these programs. Amounts deferred during the phase-in period, including carrying charges, will be capitalized and recovered over seven years commencing in 1994. Deferrals were $58 million in 1992 and $28 million in 1993. The recovery expected in 1994, net of additional carrying cost deferrals, is $10 million. The phase-in plan meets the requirements of the Financial Accounting Standards Board (\"FASB\") Statement No. 92.\nI-12\nIn addition, DP&L agreed to undertake cost-effective DSM programs with an average annual cost of $15 million for four years commencing in 1992. The amount recovered in rates was $4.6 million in 1992. This amount increased to $7.8 million in 1993 and will remain at that level in subsequent years. The difference between expenditures and amounts recovered through rates is deferred and is eligible for recovery in future rates in accordance with existing PUCO rulings.\nIn March 1991, the PUCO granted DP&L the authority to defer interest charges, net of income tax, on its 28.1% ownership investment in Zimmer from the March 30, 1991, commercial in-service date through January 31, 1992. Deferred interest charges on the investment in Zimmer have been adjusted to a before tax basis in 1993 as a result of FASB Statement No. 109. Amounts deferred are being amortized over the life of the plant.\nRegulatory deferrals on the balance sheet were:\nDec. 31 Dec. 31 1993 1992 -------- -------- --millions--\nPhase-in $ 85.8 $ 57.7 DSM 23.3 2.2 Deferred interest - Zimmer 63.7 43.9 ------ ------ Total $172.8 $103.8 ====== ======\nIn 1989 the PUCO approved rules for the implementation of a comprehensive Integrated Resource Planning (\"IRP\") program for all investor-owned electric utilities in Ohio. Under this program, each utility is required to file an IRP as part of its Long Term Forecast Report (\"LTFR\"). The IRP requires each utility to evaluate available demand-side resource options in addition to supply-side options to determine the most cost-effective means for satisfying customer requirements. The rules currently allow a utility to apply for deferred recovery of DSM program expenditures and lost revenues between LTFR proceedings. Ultimate recovery of deferred expenditures is contingent on review and approval of such programs as cost-effective and consistent with the most recent IRP proceeding. The rules also allow utilities to submit alternative proposals for the recovery of DSM programs and related costs.\nI-13\nIn 1991 the PUCO ruled that DP&L's 1991 LTFR be consolidated and reviewed in conjunction with DP&L's 1992 LTFR proceeding. DP&L filed its 1992 LTFR in June 1992. DP&L also filed its environmental compliance plan in June 1992, and asked the PUCO to consolidate the environmental compliance plan proceeding with the LTFR proceeding. The PUCO granted DP&L's request to consolidate the cases. The evidentiary hearing on DP&L's 1991\/1992 LTFR and environmental compliance plan was held on February 17, 1993. The parties entered into a stipulation in settlement of all issues which continues DP&L's commitment to DSM programs. The stipulation was approved by the PUCO on May 6, 1993.\nDP&L has in place a percentage of income payment plan (\"PIPP\") for eligible low-income households as required by the PUCO. This plan prohibits disconnections for nonpayment of customer bills if eligible low-income households pay a specified percentage of their household income toward their utility bill. The PUCO has approved a surcharge by way of a temporary base rate tariff rider which allows companies to recover arrearages accumulated under PIPP. In 1993 DP&L reached a settlement with the PUCO staff, the Office of the OCC and the Legal Aid Society to provide new and expanded programs for PIPP eligible customers. The expanded programs include greater arrears crediting, lower monthly payments, educational programs and information reports. In exchange, DP&L may accelerate recovery of PIPP and pre-PIPP arrearages and recover program costs. The settlement also established a four year moratorium on changes to the program. The PUCO approved the settlement on December 2, 1993. Pursuant to the terms of the settlement, DP&L filed an application on January 21, 1994 to lower its PIPP rate. To date, the PUCO has not acted on DP&L's application.\nIn 1991 the PUCO issued a Finding and Order which encourages electric utilities to undertake the competitive bidding of new supply-side energy projects. The policy also encourages utilities to provide transmission grid access to those supply-side energy providers awarded bids by utilities. Electric utilities are permitted to bid on their own proposals. The PUCO has issued for comment proposed rules for competitive bidding but has not issued final rules at this time.\nDP&L initiated a competitive bidding process in January 1993 for the construction of up to 140 MW of electric peaking capacity and energy by 1997. Through an Ohio Power Siting Board (\"OPSB\") investigative process, DP&L's self-built option was evaluated to be the least cost option. On March 7, 1994, the OPSB approved DP&L's applications for up to three 70 MW combustion turbines and two natural gas supply lines for the proposed site.\nI-14\nThe OPSB issued rules on March 22, 1993 to provide electric and magnetic field information in applications for construction of major generating and transmission facilities. DP&L has addressed the topics covered by the new rules in all recent projects. One utility requested a rehearing on the rules which was denied by the OPSB on May 24, 1993. At this time DP&L cannot predict the ultimate impact associated with the siting of new transmission lines.\nOn March 25, 1993, the PUCO adopted guidelines for the treatment of emission allowances created by the Clean Air Act Amendments of 1990. Under the guidelines, DP&L's emission allowance trading plans, procedures, practices, activity and associated costs will be reviewed in its annual electric fuel component audit proceeding. The PUCO guidelines are being appealed by an industrial consumer group. In its Entry on emission allowances, the PUCO directed its Staff to develop proposed accounting guidelines for allowance trading programs in accordance with FERC rulemaking efforts. According to FERC Order No. 552 issued on March 23, 1993, DP&L will value allowances based on a weighted average cost methodology.\nOn May 26, 1993, the Senate of the State of Ohio approved the appointment of Mr. David W. Johnson as PUCO commissioner.\nOn January 12, 1994, the Ohio Consumers' Counsel Governing Board appointed Robert S. Tongren, a former assistant attorney general, to the position of Consumers' Counsel. Mr. Tongren replaced William A. Spratley, whose resignation from this position became effective September 30, 1993.\nOn February 22, 1994 a bill was introduced in the State of Ohio House of Representatives which, if approved, would give electric consumers the opportunity to obtain \"retail\" and \"wholesale at retail\" services from electric suppliers other than their current supplier at competitive rates. The ultimate disposition of the bill or its effect on DP&L cannot be determined at this time.\nENVIRONMENTAL CONSIDERATIONS\nThe operations of DP&L, including the commonly owned facilities operated by DP&L, CG&E and CSP, are subject to federal, state, and local regulation as to air and water quality, disposal of solid waste and other environmental matters, including the location, construction and initial operation of new electric generating facilities and most electric transmission lines. DP&L expended $6 million for environmental control facilities during 1993. The possibility exists that current environmental regulations could be revised which could change the level of estimated 1994-1998 construction expenditures. See CONSTRUCTION AND FINANCING PROGRAM OF DPL INC.\nI-15\nAir Quality - -----------\nIn July 1985, the United States Environmental Protection Agency (\"U.S. EPA\") adopted final stack height rules which could result in the lowering of emission limits for sulfur dioxide and particulate matter from affected units. DP&L operates one unit (Killen Station) potentially affected by these rules. The Ohio Environmental Protection Agency (\"Ohio EPA\") has determined that Killen Station is not impacting air quality and, therefore, no further action is needed at this time. CSP has informed DP&L that Conesville Unit 4 is not affected by the rules. CG&E has informed DP&L that Miami Fort Unit 7 is \"grandfathered\" from regulation and that Miami Fort Unit 8 is not affected by the rules because Miami Fort Unit 5 is picking up the necessary emission reductions. On June 17 and July 12, 1988, DP&L and others filed with the U.S. Supreme Court two petitions for a Writ of Certiorari seeking a review of the D.C. Circuit Court of Appeals decision that addressed the 1985 stack height rules. Those petitions were denied in October 1988 and, as a result, the U.S. EPA planned to begin a remand rulemaking to address issues arising from a lower Court's opinion. The U.S. EPA continues to work on a remand rulemaking.\nIn December 1988, the U.S. EPA notified the State of Ohio that the portion of its State Implementation Plan (\"SIP\") dealing with sulfur dioxide emission limitations for Hamilton County (in southwestern Ohio) was deficient and required the Ohio EPA to develop a new SIP within 18 months. The notice affects industrial and utility sources and could require significant reductions in sulfur dioxide emission limitations at CG&E's Miami Fort Units 7 and 8 which are jointly owned with DP&L. In February 1989, CG&E, together with other industrial sources affected by the notice, filed a petition for review in the U.S. Court of Appeals for the Sixth Circuit of the U.S. EPA's issuance of the notice. In July 1989, the Court of Appeals dismissed the petition for review. In April 1990, the Ohio EPA published its proposed revised SIP for comment. In June 1990, CG&E submitted its comments challenging the revisions, arguing that the proposed SIP is based on a computer model which is unsuitable and invalid for the hilly terrain of Hamilton County, and that in the last ten years, no violation of the National Ambient Air Quality Standards for SO2 has ever been monitored.\nIn order to support its position, CG&E is taking part in an air monitoring program designed to prove that the present SIP adequately protects the ambient air quality. In October 1991, the Ohio EPA adopted new SO2 regulations for Hamilton County. These regulations do not change the preexisting requirements for Miami Fort Units 7 and 8. The new regulations have been submitted to the U.S. EPA. On January 27, 1994, the\nI-16\nU.S. EPA provided notice in the Federal Register that the new regulations for the Ohio SIP for Hamilton County were conditionally approved.\nChanging environmental regulations continue to increase the cost of providing service in the utility industry. The Clean Air Act Amendments of 1990 (the \"Act\") will limit sulfur dioxide and nitrogen oxide emissions nationwide. The Act will restrict emissions in two phases with Phase I compliance completed by 1995 and Phase II completed by 2000. Final regulations were issued by the U.S. EPA on January 11, 1993. These regulations are consistent with earlier Act restrictions and do not change the expected costs of compliance of DP&L.\nDP&L's preliminary compliance plan was filed with the PUCO in June 1992 and consolidated with the 1991\/1992 LTFR proceeding. DP&L anticipates meeting the requirements of Phase I by switching to lower sulfur coal at several commonly owned electric generating facilities and increasing existing scrubber removal efficiency. Cost estimates to comply with Phase I of the Act are approximately $10 million in capital expenditures. Phase I compliance is expected to have a minimal 1% to 2% price impact. Phase II requirements can be met primarily by switching to lower sulfur coal at all non-scrubbed coal-fired electric generating units. The stipulation entered into on February 17, 1993 with regards to the LTFR, including the environmental compliance plan, was approved by the PUCO on May 6, 1993. DP&L anticipates that costs to comply with the Act will be eligible for recovery in future fuel hearings and other regulatory proceedings.\nOn March 16, 1993, DP&L received a Finding of Violation from the U.S. EPA regarding opacity standards at Killen Station and, on March 17, 1993, a Notice of Violation from the U.S. EPA regarding opacity standards at Stuart Station. DP&L has subsequently conducted conferences with the U.S. EPA to discuss the Finding and Notice. On October 11, 1993, DP&L entered into negotiated Consent Orders with the U.S. EPA for the alleged violations at Killen and Stuart Stations. The Consent Orders do not require payment of any penalty but require DP&L to formalize emissions control measures.\nLand Use - --------\nDP&L and numerous other parties have been notified by the U.S. EPA that it considers them Potentially Responsible Parties (\"PRPs\") for clean-up at three superfund sites in Ohio - the Sanitary Landfill Site on Cardington Road in Montgomery County Ohio, the United Scrap Lead Site in Miami County, Ohio, and the Powell Road Landfill in Huber Heights, Montgomery County, Ohio.\nI-17\nDP&L received notification from the U.S. EPA in July 1987, for the Cardington Road site. DP&L has not joined the PRP group formed at that site because of the absence of any known evidence that DP&L contributed hazardous substances to this site. The Record of Decision issued by the U.S. EPA identifies the chosen clean-up alternative at a cost estimate of $8.1 million.\nDP&L received notification from the U.S. EPA in September 1987, for the United Scrap Lead Site. DP&L has joined a PRP group for this site, which is actively conferring with the U.S. EPA. The Record of Decision issued by the U.S. EPA estimates clean-up costs at $27.1 million. DP&L is one of over 200 parties to this site, and its estimated contribution to the site is less than .01%. Nearly 60 PRPs are actively working to settle the case. DP&L is participating in the sponsorship of a study to evaluate alternatives to the U.S. EPA's clean-up plan. The final resolution of these investigations will not have a material effect on DP&L's financial position or earnings.\nDP&L and numerous other parties received notification from the U.S. EPA on May 21, 1993 that it considers them PRPs for clean-up of hazardous substances at the Powell Road Landfill Site in Huber Heights, Ohio. DP&L has joined the PRP group for the site. On October 1, 1993, the U.S. EPA issued its Record of Decision identifying a cost estimate of $20.5 million for the chosen remedy. DP&L is one of over 200 PRPs to this site, and its estimated contribution is less than 1%. The final resolution will not have a material effect on DP&L's financial position or earnings.\nI-18\nI-19\nI-20\nI-21\nI-22\nItem 2","section_1A":"","section_1B":"","section_2":"Item 2 - PROPERTIES\nElectric - -------- Information relating to DP&L's electric properties is contained in Item 1 - BUSINESS, DPL INC. (pages I-1 and I-2), CONSTRUCTION AND FINANCING PROGRAM OF DPL INC. (pages I-4 through I-6) and ELECTRIC OPERATIONS AND FUEL SUPPLY (pages I-6 through I-8) and Item 8 - Notes 2 and 7 of Notes to Consolidated Financial Statements on pages 21 and 23, respectively, of the registrant's 1993 Annual Report, which pages are incorporated herein by reference.\nNatural Gas - ----------- Information relating to DP&L's gas properties is contained in Item 1 - - BUSINESS, DPL INC. (pages I-1 and I-2) and GAS OPERATIONS AND GAS SUPPLY (pages I-8 through I-11), which pages are incorporated herein by reference.\nSteam - ----- DP&L owns two steam generating plants and the steam distribution facility serving downtown Dayton, Ohio.\nOther - ----- DP&L owns a number of area service buildings located in various operating centers.\nSubstantially all property and plant of DP&L is subject to the lien of the Mortgage securing DP&L's First Mortgage Bonds.\nItem 3","section_3":"Item 3 - LEGAL PROCEEDINGS\nInformation relating to legal proceedings involving DP&L is contained in Item 1 - BUSINESS, DPL INC. (pages I-1 and I-2), GAS OPERATIONS AND GAS SUPPLY (pages I-8 through I-11), RATE REGULATION AND GOVERNMENT LEGISLATION (pages I-11 through I-15) and ENVIRONMENTAL CONSIDERATIONS (pages I-15 through I-18) and Item 8 - Note 2 of Notes of Consolidated Financial Statements on page 21 of the registrant's 1993 Annual Report, which pages are incorporated herein by reference.\nItem 4","section_4":"Item 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS\nAt DPL Inc.'s Annual Meeting of Shareholders (\"Annual Meeting\") held on April 20, 1993, shareholders approved a proposal to increase the number of authorized common shares of DPL Inc. from 120 million to 250 million. The proposal was approved with 81,668,678 shares voting FOR, 5,395,660 shares AGAINST and 1,770,393 shares ABSTAINED. Three directors of DPL Inc. were elected at the Annual Meeting, each of whom will serve a three year term expiring in 1996. The nominees were elected as follows: James F. Dicke, II, 87,896,326 shares FOR, 938,405 shares WITHHELD; Peter H. Forster, 87,838,970 shares FOR, 995,761 shares WITHHELD; and Jane G. Haley, 87,860,952 shares FOR, 973,779 shares WITHHELD.\nI-23\nPART II - ------- Item 5","section_5":"Item 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS\nThe information required by this item of Form 10-K is set forth on pages 14, 27 and 28 of the registrant's 1993 Annual Report, which pages are incorporated herein by reference. As of December 31, 1993, there were 53,275 holders of record of DPL Inc. common equity, excluding individual participants in security position listings.\nDP&L's Mortgage restricts the payment of dividends on DP&L's Common Stock under certain conditions. In addition, so long as any Preferred Stock is outstanding, DP&L's Amended Articles of Incorporation contain provisions restricting the payment of cash dividends on any of its Common Stock if, after giving effect to such dividend, the aggregate of all such dividends distributed subsequent to December 31, 1946 exceeds the net income of DP&L available for dividends on its Common Stock subsequent to December 31, 1946, plus $1,200,000. As of year end, all earnings reinvested in the business of DP&L were available for Common Stock dividends.\nThe Credit Agreement requires that the aggregate assets of DP&L and its subsidiaries (if any) constitute not less than 60% of the total consolidated assets of DPL Inc., and that DP&L maintain common shareholder's equity (as defined in the Credit Agreement) at least equal to $550 million.\nItem 6","section_6":"Item 6 - SELECTED FINANCIAL DATA\nThe information required by this item of Form 10-K is set forth on page 14 of the registrant's 1993 Annual Report, which page is incorporated herein by reference.\nItem 7","section_7":"Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS\nThe information required by this item of Form 10-K is set forth in Note 2 of Notes to Consolidated Financial Statements on page 21 and on pages 1, 13, 15 and 16 of the registrant's 1993 Annual Report, which pages are incorporated herein by reference.\nItem 8","section_7A":"","section_8":"Item 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA\nThe information required by this item of Form 10-K is set forth on page 14 and on pages 17 through 27 of the registrant's 1993 Annual Report, which pages are incorporated herein by reference.\nII-1\nReport of Independent Accountants on Financial Statement Schedules --------------------------------\nTo The Board of Directors of DPL Inc.\nOur audits of the consolidated financial statements referred to in our report dated January 25, 1994 appearing on page 27 of the 1993 Annual Report to Shareholders of DPL Inc. (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the Financial Statement Schedules listed in Item 14(a) of this Form 10-K. In our opinion, these Financial Statement Schedules present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.\nPrice Waterhouse Dayton, Ohio January 25, 1994\nII-2\nItem 9","section_9":"Item 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE\nNone.\nPART III - -------- Item 10","section_9A":"","section_9B":"","section_10":"Item 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT\nDirectors of the Registrant - --------------------------- The information required by this item of Form 10-K is set forth on pages 2 through 5 of DPL Inc.'s definitive Proxy Statement dated March 2, 1994, relating to the 1994 Annual Meeting of Shareholders (\"1994 Proxy Statement\"), which pages are incorporated herein by reference, and on pages I-21 and I-22 of this Form 10-K.\nItem 11","section_11":"Item 11 - EXECUTIVE COMPENSATION\nThe information required by this item of Form 10-K is set forth on pages 9 through 15 of the 1994 Proxy Statement, which pages are incorporated herein by reference.\nItem 12","section_12":"Item 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT\nThe information required by this item of Form 10-K is set forth on pages 3 through 6 and on pages 14 and 15 of the 1994 Proxy Statement, which pages are incorporated herein by reference.\nItem 13","section_13":"Item 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS\nNone.\nIII-1\nPART IV - ------- Item 14","section_14":"Item 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K\nPages of 1993 Form 10-K Incorporated by Reference ------------------ Report of Independent Accountants..................... II-2\n(a) Documents filed as part of the Form 10-K\n1. Financial Statements Pages of 1993 Annual -------------------- Report Incorporated by Reference -------------------- Consolidated Statement of Results of Operations for the three years in the period ended December 31, 1993..................................... 17\nConsolidated Statement of Cash Flows for the three years in the period ended December 31, 1993..... 18\nConsolidated Balance Sheet as of December 31, 1993 and 1992......................................... 19\nNotes to Consolidated Financial Statements............ 20 - 26\nReport of Independent Accountants..................... 27\n2. Financial Statement Schedules ----------------------------- For the three years in the period ended December 31, 1993: Page No. -------------\nSchedule V - Property and plant IV-7 - IV-9 Schedule VI - Accumulated depreciation and amortization IV-10 - IV-12 Schedule VII - Obligations relating to securities of other issuers IV-13 Schedule VIII - Valuation and qualifying accounts IV-14 Schedule IX - Short-term borrowings IV-15 Schedule X - Supplementary income statement information IV-16\nThe information required to be submitted in schedules I, II, III, IV, XI, XII and XIII is omitted as not applicable or not required under rules of Regulation S-X.\nIV-1\n3. Exhibits -------- The following exhibits have been filed with the Securities and Exchange Commission and are incorporated herein by reference.\nIncorporation by Reference ----------------- 2 Copy of the Agreement of Merger among Exhibit A to the DPL Inc., Holding Sub Inc. and DP&L 1986 Proxy Statement dated January 6, 1986.................. (File No. 1-2385)\n3(a) Copy of Amended Articles of Exhibit 3 to Report on Incorporation of DPL Inc. dated Form 10-K for year ended January 4, 1991, and amendment dated December 31, 1991 December 3, 1991....................... (File No. 1-9052)\n4(a) Copy of Composite Indenture dated as of Exhibit 4(a) to October 1, 1935, between DP&L and Report on Form 10-K The Bank of New York, Trustee with all for year ended amendments through the Twenty-Ninth December 31, 1985 Supplemental Indenture................. (File No. 1-2385)\n4(b) Copy of the Thirtieth Supplemental Exhibit 4(h) to Indenture dated as of March 1, 1982, Registration Statement and The Bank of New York, Trustee...... No. 33-53906\n4(c) Copy of the Thirty-First Supplemental Exhibit 4(h) to Indenture dated as of November 1, 1982, Registration Statement between DP&L and The Bank of New York, No. 33-56162 Trustee................................\n4(d) Copy of the Thirty-Second Supplemental Exhibit 4(i) to Indenture dated as of November 1, 1982, Registration Statement between DP&L and The Bank of New York, No. 33-56162 Trustee................................\n4(e) Copy of the Thirty-Third Supplemental Exhibit 4(e) to Indenture dated as of December 1, 1985, Report on Form 10-K between DP&L and The Bank of New York, for year ended Trustee................................ December 31, 1985 (File No. 1-2385)\n4(f) Copy of the Thirty-Fourth Supplemental Exhibit 4 to Report Indenture dated as of April 1, 1986, on Form 10-Q for between DP&L and The Bank of New York, quarter ended Trustee................................ June 30, 1986 (File No. 1-2385)\n4(g) Copy of the Thirty-Fifth Supplemental Exhibit 4(h) to Indenture dated as of December 1, 1986, report on Form 10-K between DP&L and The Bank of New York, for the year ended Trustee................................ December 31, 1986 (File No. 1-9052)\nIV-2\n4(h) Copy of the Thirty-Sixth Supplemental Exhibit 4(i) to Indenture dated as of August 15, 1992, Registration Statement between DP&L and The Bank of New York, No. 33-53906 Trustee...............................\n4(i) Copy of the Thirty-Seventh Supplemental Exhibit 4(j) to Indenture dated as of November 15, 1992, Registration Statement between DP&L and The Bank of New York, No. 33-56162 Trustee...............................\n4(j) Copy of the Thirty-Eighth Supplemental Exhibit 4(k) to Indenture dated as of November 15, 1992, Registration Statement between DP&L and The Bank of New York, No. 33-56162 Trustee...............................\n4(k) Copy of the Thirty-Ninth Suplemental Exhibit 4(k) to Indenture dated as of January 15, 1993, Registration Statement between DP&L and The Bank of New York, No. 33-57928 Trustee................................\n4(l) Copy of the Fortieth Supplemental Exhibit 4(m) to Report Indenture dated as of February 15, 1993, on Form 10-K for the between DP&L and The Bank of New York, year ended December 31, Trustee................................ 1992 (File No. 1-2385)\n4(m) Copy of the Credit Agreement dated as Exhibit 4(k) to DPL of November 2, 1989 between DPL Inc., Inc.'s Registration the Bank of New York, as agent, and Statement on Form S-3 the banks named therein................ (File No. 33-32348)\n4(n) Copy of Shareholder Rights Agreement Exhibit 4 to Report between DPL Inc. and The First on Form 8-K dated National Bank of Boston................ December 13, 1991 (File No. 1-9052)\n10(a) Description of Management Incentive Exhibit 10(c) to Compensation Program for Certain Report on Form 10-K Executive Officers..................... for the year ended December 31, 1986 (File No. 1-9052)\n10(b) Copy of Severance Pay Agreement Exhibit 10(f) to Report with Certain Executive Officers........ on Form 10-K for the year ended December 31, 1987 (File No. 1-9052)\n10(c) Copy of Supplemental Executive Exhibit 10(e) to Report Retirement Plan amended August 6, on Form 10-K for the 1991................................... year ended December 31, 1991 (File No. 1-9052)\nIV-3\n18 Copy of preferability letter relating Exhibit 18 to Report on to change in accounting for unbilled Form 10-K for the year revenues from Price Waterhouse......... ended December 31, 1987 (File No. 1-9052)\nThe following exhibits are filed herewith:\nPage No. ---------------------- 3(b) Copy of Amendment dated April 20, 1993 to DPL Inc.'s Amended Articles of Incorporation..........................\n10(d) Amended description of Directors' Deferred Stock Compensation Plan effective January 1, 1993..............\n10(e) Amended description of Deferred Compensation Plan for Non-Employee Directors effective January 1, 1993....\n10(f) Copy of Management Stock Incentive Plan amended January 1, 1993...........\n13 Copy of DPL Inc.'s 1993 Annual Report to Shareholders........................\n21 Copy of List of Subsidiaries of DPL Inc................................\n23 Consent of Price Waterhouse............\nPursuant to paragraph (b)(4)(iii)(A) of Item 601 of Regulation S-K, the Company has not filed as an exhibit to this Form 10-K certain instruments with respect to long-term debt if the total amount of securities authorized thereunder does not exceed 10% of the total assets of the Company and its subsidiaries on a consolidated basis, but hereby agrees to furnish to the SEC on request any such instruments.\n(b) Reports on Form 8-K -------------------\nNone\nIV-4\nSIGNATURES\nPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.\nDPL Inc.\nRegistrant\nMarch 15, 1994 Peter H. Forster --------------------------------- Peter H. Forster Chairman, President and Chief Executive Officer\nPursuant to the requirements of the Securities Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.\nT. J. Danis Director March 15, 1994 - ------------------------- (T. J. Danis)\nDirector March , 1994 - ------------------------- (J. F. Dicke, II)\nP. H. Forster Director and Chairman March 15, 1994 - ------------------------- (principal executive (P. H. Forster) officer)\nErnie Green Director March 15, 1994 - ------------------------- (E. Green)\nJ. G. Haley Director March 15, 1994 - ------------------------- (J. G. Haley)\nIV-5\nA. M. Hill Director March 15, 1994 - ------------------------- (A. M. Hill)\nDirector March , 1994 - ------------------------- (W A. Hillenbrand)\nT. M. Jenkins Group Vice President March 15, 1994 - ------------------------- and Treasurer (T. M. Jenkins) (principal financial and accounting officer)\nDirector March , 1994 - ------------------------- (R. J. Kegerreis)\nDirector March , 1994 - ------------------------- (B. R. Roberts)\nIV-6\nIV-7\nIV-8\nIV-9\nIV-10\nIV-11\nIV-12\nIV-13\nIV-14\nIV-15\nIV-16\nEXHIBIT INDEX -------------\nExhibit - -------\n3(b) Copy of Amendment dated April 20, 1993 to DPL Inc.'s Amended Articles of Incorporation..........................\n10(d) Amended description of Directors' Deferred Stock Compensation Plan effective January 1, 1993..............\n10(e) Amended description of Deferred Compensation Plan for Non-Employee Directors effective January 1, 1993....\n10(f) Copy of Management Stock Incentive Plan amended January 1, 1993...........\n13 Copy of DPL Inc.'s 1993 Annual Report to Shareholders........................\n21 Copy of List of Subsidiaries of DPL Inc................................\n23 Consent of Price Waterhouse............","section_15":""}
{"filename":"5907_1993.txt","cik":"5907","year":"1993","section_1":"Item 1. Business.\nGENERAL\nAmerican Telephone and Telegraph Company (\"AT&T\" or \"Company\") was incorporated in 1885 under the laws of the State of New York and has its principal executive offices at 32 Avenue of the Americas, New York, New York 10013-2412 (telephone number 212-387-5400).\nAT&T is a major participant in two industries: the global information movement and management industry and the financial services and leasing industry.\nIn the global information movement and management industry, the Company's services and products include: voice, data and image telecommunications services that can be used with the telecommunications and information products or systems of AT&T and others; telecommunications products and systems, ranging from voice instruments to complex network switching and transmission systems; computer products and systems; products which combine communications and computing; installation, maintenance and repair services for communication and computer products; optical fiber and cable; and components for high-technology products and systems. The above-described services and products are designed to meet the needs of broad categories of customers: the users of telecommunications and information services, including residential, business and government customers; the providers of telecommunications and information services, including telephone companies and other telecommunications agencies around the world; and the manufacturers of telecommunications, data processing and other electronic equipment.\nIn the financial services and leasing industry, the Company provides direct financing and finance leasing programs for its own products and the products of other companies, leases products to customers under operating leases, and is in the general-purpose credit card business.\nAT&T markets its services, products and systems throughout the United States. It also markets many of its services, products and systems outside of the United States.\nThe Company sells its services and products directly to all types of customers through its own direct sales force. The Company also sells certain of its products to distributors and other intermediaries who may resell these products to others. Some of the Company's services are also sold to businesses that resell them, usually in conjunction with other services, to others.\nFor information about the Company's industry and geographic segments, see Note 16 to the Consolidated Financial Statements. Such information is incorporated herein by reference, pursuant to General Instruction G(2).\n- 2 -\nAGREEMENT WITH MCCAW CELLULAR COMMUNICATIONS, INC.\nOn August 16, 1993, AT&T and McCaw Cellular Communications, Inc. (\"McCaw\") entered into a definitive agreement to merge McCaw and a subsidiary of AT&T, making McCaw a wholly owned subsidiary of AT&T (the \"Merger\").\nIn the Merger, each share of McCaw's Class A and Class B common stock will be converted into one share of AT&T common stock. However, if the average of the last reported sales price on the New York Stock Exchange for the 20 most recent trading days ending on the fifth day prior to the date of the closing of the Merger (the \"Closing Date Market Price\") of one share of AT&T common stock is less than $53 per share, the conversion ratio will be adjusted upward to provide shares of AT&T common stock having an aggregate market price of $53 for each share of McCaw common stock, subject to a maximum of 1.111 shares of AT&T common stock. If the Closing Date Market Price of one share of AT&T common stock is greater than $71.73 per share, the conversion ratio will be adjusted downward to provide shares of AT&T common stock having an aggregate market price of $71.73 for each share of McCaw common stock, subject to a minimum of .909 of a share of AT&T common stock.\nPursuant to a separate agreement, AT&T has granted McCaw the right, in the event the Merger does not close, to require AT&T to purchase from McCaw $600 million of McCaw's Class A common stock at a price of $51.25 per share.\nThe Merger is subject to a number of conditions, including the receipt of regulatory approvals, expiration of the waiting period under the Hart- Scott-Rodino Antitrust Improvements Act (the \"HSR Act\"), receipt of opinions that the Merger will be tax free and will be accounted for as a pooling of interests, and McCaw stockholder approval. McCaw stockholders holding a majority of the voting power of the McCaw common stock, including members of the McCaw family and British Telecommunications plc, have agreed to vote in favor of the Merger.\nRegulatory Approvals\nHSR Act and Antitrust. AT&T and McCaw must observe the notification and waiting period requirements of the HSR Act before the Merger may be consummated. The HSR Act provides for an initial 30-calendar day waiting period following the filing with the Federal Trade Commission (the \"FTC\") and the Antitrust Division of the U. S. Department of Justice (the \"Antitrust Division\") of certain Notification and Report Forms by the parties to the Merger and certain other parties. The HSR Act further provides that if, within the initial 30-calendar-day waiting period, the FTC or the Antitrust Division issues a request for additional information or documents, the waiting period will be extended until 11:59 p.m. on the twentieth day after the date of substantial compliance by the filing parties with such request.\nOn September 22, 1993, AT&T and McCaw each received an extensive request from the Antitrust Division for additional information and documents with respect to the Merger and the telecommunications industry. Accordingly, the waiting period under the HSR Act has been extended and will not expire until the twentieth calendar day after AT&T and McCaw have each substantially complied with such request for additional information and documents. Each of AT&T and McCaw is responding to the request as rapidly as practicable but cannot predict when substantial compliance will be achieved.\n- 3 -\nOn December 2, 1993, BellSouth Corporation (\"BellSouth\") filed a motion in the case entitled United States v. Western Electric Co. Inc. et al., Civil Action No. 82-0192, for a declaratory ruling that the Merger would violate Section I(D) of the Modification of Final Judgment (the \"Decree\"), United States v. American Tel. and Tel. Co., 552 F. Supp. 131, 266-34 (D.D.C. 1982), aff'd mem. sub. nom Maryland v. United States, 450 U.S. 1001 (1982) and cannot be consummated without a modification of the Decree. On January 5, 1994, the U.S. Department of Justice filed a response that supported BellSouth's contention that a waiver of the Decree is required. On January 27, 1994, AT&T filed for a determination that a waiver is not required under the Decree or, in the alternative, for waiver of any relevant Decree provisions. AT&T and McCaw believe that BellSouth is not entitled to the relief sought but that a waiver, if necessary, can be obtained. There can be no assurance that AT&T will prevail with respect to the BellSouth challenge or any other challenge to the Merger that may be made on antitrust grounds.\nFCC. On August 23, 1993, AT&T and Craig O. McCaw filed various applications seeking consent of the FCC to the proposed transfer of control of radio licenses held by McCaw to AT&T, which consent is required prior to consummation of the Merger. The FCC has issued public notices concerning these applications and has established a schedule, pursuant to which (i) interested parties were permitted to petition to deny the applications by November 1, 1993, (ii) responses to those petitions were due by December 2, 1993 and (iii) replies to such responses were due by January 18, 1994.\nVarious petitions, responses and replies have been filed and the matter is now pending before the FCC. There can be no assurance that the FCC will give such consent.\nState Governmental Authorities. Pursuant to various applicable statutes, AT&T and McCaw were required to file applications with nine state regulatory commissions seeking approval and\/or a statement of non- opposition to the Merger. Such applications were filed in Alaska, California, Hawaii, Louisiana, Maine, New York, Nevada, Ohio and West Virginia. The commissions of all of the foregoing states, except California, have approved the applications or issued statements of non- opposition; the California application is still pending.\nIn December 1993, AT&T and McCaw entered into a settlement agreement (the \"California Settlement\") with all of the original opposing parties in California regarding the provision of cellular and interexchange services to customers in California. However, there are no assurances that the California commission will approve the California Settlement, or, if approved, when such approval will be granted. There also can be no assurance that additional challenges will not be made or that, if such a challenge is made, AT&T and McCaw will prevail.\nGLOBAL INFORMATION MOVEMENT AND MANAGEMENT\nTo meet the needs of its customers and the demands of the complex and rapidly changing information movement and management industry, AT&T maintains business units that develop, engineer, market, and maintain telecommunications services and business units that develop, manufacture, market, provide, install and service information movement and management products and systems.\n- 4 -\nTo better serve the needs of customers, AT&T's businesses are clustered into functional groups as follows:\nCommunications Services Group\nThe Communications Services Group addresses the needs of large and small businesses, the Federal government, state and local governments and consumers for voice, data and image telecommunications services. Business units within this group provide regular and custom long distance communications services, including message telecommunications services (\"MTS\"), wide area telecommunications services (\"WATS\"), satellite transponder services, AT&T EasyReach# 700 services, toll-free or 800 services, 900 services, private line services, Software Defined Network services (\"SDN\"), and integrated services digital network (\"ISDN\") technology based services. They also provide special long distance services, including AT&T Calling Card services and special calling plans and the Company's domestic and international operators. AT&T provides communications services internationally, including transaction services, global networks, network management and value added network services (i.e., services offered over communications transmission facilities that employ computer processing applications) and sells and maintains submarine cable systems.\nAT&T provides interstate and intrastate long distance telecommunications services throughout the continental United States and provides, or joins in providing with other carriers, interstate telecommunications services to and from Alaska, Hawaii, Puerto Rico and the Virgin Islands and international telecommunications services to and from virtually all nations and territories around the world.\nIn the continental United States, AT&T provides long distance telecommunications services over its own network. Virtually all switched services are computer controlled and digitally switched and interconnected by a packet switched signaling network. Transmission facilities consist of approximately 2 billion circuit-miles using lightwave, satellite, wire and coaxial cable and microwave radio technology. International telecommunications services are provided via multiple international transoceanic submarine cable (primarily lightwave) systems and via international satellite and radio facilities.\nAT&T is subject to the jurisdiction of the Federal Communications Commission (\"FCC\") with respect to interstate and international rates, lines and services, and other matters. For many years prior to July 1, 1989, the system of regulation used by the FCC for AT&T was rate-of-return regulation. Effective July 1, 1989, the FCC adopted a new system of regulating AT&T known as \"price caps\" under which AT&T's prices, rather than its earnings, are limited. The FCC decided in June 1993 to continue price caps for residential services instead of reducing regulation of AT&T.\n____________ # Registered service mark of AT&T\n- 5 -\nAT&T's intrastate telecommunications services are subject to regulation in many states by public service commissions or similar state authorities having regulatory power over intrastate rates, lines and services and other matters. The system of regulation used in many states, at least for some of AT&T's services, is rate-of-return regulation. In recent years, recognizing the competitive nature of AT&T's services, many states have adopted different systems of regulation, such as: complete removal of rate-of-return regulation, pricing flexibility rules for some or all of AT&T's services, price caps, and incentive regulation.\nAT&T Global Information Solutions Company\nAT&T Global Information Solutions Company (\"AT&T GIS\" formerly known as NCR Corporation) develops, manufactures, markets, supports and services business information systems for worldwide markets. AT&T GIS's services and products consist of: industry-specific products, including industry-specific workstations and processors for retail, financial, manufacturing, and other markets; small computer systems and workstations, including small servers, personal computers, office automation workstations, and video display workstations; mid-range computer systems, including workgroup servers, small, medium and large departmental servers, and systems for interactive and batch processing; large computer systems for on-line transaction processing, decision support, and batch processing; imaging systems; communication processors which process information between large computer systems and a variety of data communication devices such as terminals; and synergistic products and services, including semiconductors, data centers, field engineering, software services, business forms and supplies, and education.\nMultimedia Products and Services Group\nThe Multimedia Products and Services Group addresses the equipment needs of large and emerging businesses, the Federal government, state and local governments, international distributors and consumers. Business units in this group offer products such as private branch exchanges (\"PBXs\") including the Definity* communications system, voice processing systems and voice messaging systems including the AUDIX* and Conversant* systems, electronic mail, electronic data interchanges and enhanced facsimile services through AT&T EasyLink* services, video conferencing systems, installations, maintenance and repair services and other business communications systems, corded and cordless telephones, cellular telephones, answering systems, security systems, facsimile machines, modems, multiplexers, data transceivers, the Merlin* and Partner* communications systems, videophone, and imaging and personal communicator products.\nThe Multimedia Products and Services Group also includes AT&T Ventures Corporation. AT&T Ventures Corporation, a wholly owned subsidiary of AT&T, is an internal venture capital business. The mission of this organization is to identify and nurture new markets for the application of AT&T-developed technologies. AT&T Ventures Corporation creates and grows new businesses in markets not addressed by existing business units.\nOn June 14, 1993, AT&T exchanged its 77% interest in UNIX System Laboratories for approximately 3% ownership of Novell, Inc., a leading software development company.\n____________ * Registered trademark of AT&T\n- 6 -\nNetwork Systems Group\nThe Network Systems Group includes business units that primarily manufacture, market, engineer, install and maintain switching systems, transmission systems, cable and wire products, cellular systems, and operations systems for AT&T, local exchange carriers, other carriers, private businesses, government agencies, overseas telephone administrations and others. Switching systems include the 5ESS* switch; transmission systems include lightwave and digital radio products, digital cross connect and multiplex products, and digital loop carrier products; cable and wire products include optical fiber, copper and optical fiber cable and related apparatus; and operations systems include mechanized systems for managing telecommunications networks.\nThe Network Systems Group also includes AT&T Microelectronics, a business unit that produces three broad categories of components: integrated circuits, photonics and other electronic components such as discrete components, power systems and printed wiring boards, which are included in most AT&T products and systems. Certain of these components and many other specially designed components are sold commercially to other companies.\nInternational\nIn 1993, the WorldPartners alliance was formed by AT&T, Kokusai Denshin Denwa Company, Ltd of Japan and Singapore Telecommunications to provide global companies with a new level of service and convenience. WorldPartners expects to be joined by Australia's long distance company Telstra, Unitel of Canada, Korea Telecom, and others, including European partners.\nAT&T has numerous subsidiary companies and offices throughout the world. In 1993, AT&T announced its intention to implement an international organizational structure, along regional lines, to complement the functional groups described above and to promote shared accountability between regional units and those groups. Three regional units, representing all AT&T businesses, are being formed: Latin America, with headquarters in Coral Gables, Florida; Asia\/Pacific, with headquarters in Hong Kong; and Europe\/Middle East\/Africa, with headquarters in Brussels.\nAT&T has established a number of international alliances, ventures and manufacturing facilities. Among these alliances, ventures and manufacturing facilities are the following:\nAsia\/Pacific Region\nAT&T owns 60% of AT&T Taiwan Telecommunications Co., Ltd., a joint venture with the Taiwanese government and others in Taiwan which manufactures switching and transmission systems.\nAT&T owns approximately 15% of United Fiber Optic Communications Inc., a venture with Pacific Electric Wire and Cable Ltd., Chiao Tung Bank and others in Taiwan which manufactures fiber cable and transmission equipment.\nAT&T owns AT&T Telecommunications Products (Thai) Ltd., a Thai company which manufactures telephones.\n____________ * Registered trademark of AT&T\n- 7 -\nAT&T owns semiconductor assembly and test facilities and telephone manufacturing facilities in Singapore and a manufacturing facility on Batam Island, Indonesia which produces cordless telephones.\nAT&T owns 80% of AT&T Software Japan, Ltd., a joint venture with Industrial Bank of Japan and Software Research Associates, which provides software development.\nAT&T owns approximately 60% of AT&T Jens Corporation, a joint venture with 22 major Japanese companies which provides value added network services.\nAT&T owns 44% of a joint venture with the Goldstar group of the Republic of Korea which manufactures and markets switching products.\nAT&T, through joint ventures, operates manufacturing facilities in the People's Republic of China for the production of copper and fiber cable, switching systems, and transmission equipment.\nEurope\/Middle East\/Africa Region\nAT&T owns AT&T ISTEL Limited, a United Kingdom based company, which owns numerous subsidiaries, that manufactures software and provides software related services.\nAT&T Network Systems International B.V. is a joint venture between AT&T International Inc., which owns approximately 94% of the equity and Compagnia Telefonica Nacional de Espana, the national telephone company of Spain, which owns approximately 6%. It designs, develops, manufactures and markets Network Systems' products in Europe and elsewhere. In addition, the joint venture itself has established businesses and participates in joint ventures in a number of countries, including: the Netherlands, Belgium, the People's Republic of China, the Czech Republic, France, Germany, Ireland, Italy, Poland, the Russian Federation and Kazakhstan.\nAT&T owns 20% of Societa Italiana Telecommunicazioni S.p.A. (\"Italtel\"), a subsidiary of STET-Societa' Finaziaria Telefonica-per Azioni (\"STET\"), a telecommunications holding company controlled by the government of Italy, which manufactures and sells telecommunications equipment. AT&T and STET have entered into a cooperation agreement involving the development and marketing of certain public and private telecommunications equipment for Italy, other European countries, the United States and certain other markets.\nAT&T owns Gretag Data Systems AG, a Swiss company that manufactures security-encryption equipment for the financial market.\nAT&T owns 19.5% of UTEL, a Ukrainian joint venture company with PTT Telecom and the Ukrainian State Committee of Communications, which provides services and products to improve Ukraine's domestic and international telecommunications services.\nAT&T owns AT&T Wireless Communications Products Limited (formerly \"Shaye Communications Limited\"), a United Kingdom company engaged in research, development and marketing of products for the ultra low power, portable, radio-based telecommunications market.\n- 8 -\nAT&T owns in excess of 90% of Barphone S.A., a French company engaged principally in the development, design, manufacture and marketing of small PBXs and related equipment.\nAT&T owns 75% of LYCOM A\/S, a Danish company engaged principally in the manufacture of optical fiber.\nAT&T owns 50% of A\/O Telmos, a Russian joint venture company with Moscow City Telephone Company which will own and operate a subscriber network in Moscow.\nAT&T owns various controlling interests in joint ventures in the Czech Republic, Hungary, Poland and the Slovak Republic which market key systems, PBXs and related equipment.\nAT&T owns AT&T Microelectronica de Espana S.A., a Spanish company which manufactures integrated circuits.\nIn addition, AT&T, through joint ventures, operates manufacturing facilities in Ireland, Korea, the People's Republic of China, Taiwan and Thailand.\nLatin America Region\nAT&T owns four manufacturing companies in Mexico. One company manufactures microelectronics products, a second company produces telephone answering machines, a third company is being converted to manufacture corded telephones and a fourth company repairs various items of AT&T's consumer products business unit.\nAT&T owns 51% of AT&T Elecon Telesistemas C.A., a Venezuelan joint venture with Electra Finance, which manufactures copper cable for the Venezuelan market.\nAT&T owns 5% of VenWorld Telecom, C.A., a Venezuelan joint venture company with GTE Corporation and three Venezuelan corporations, which owns 40% of the Venezuelan Post Telephone and Telegraph Company (\"PT&T\"), Compania Anonima Nacional Telefonos de Venezuela (\"CANTV\").\nCanada\nAT&T owns 20% of Unitel Communications, Inc., a Canadian long distance carrier.\nAT&T Bell Laboratories\nAT&T Bell Laboratories provides support to all business units. It designs and develops new products, systems, software and services, and carries out a broad program of fundamental research, to provide the technology base for AT&T's future.\nAT&T Bell Laboratories has made significant contributions to information science and technology since its founding in 1925. These contributions include the invention of the transistor, the development of the nationwide microwave radio network, and the design and development of\n- 9 -\nintegrated circuits and many types of lasers. Areas of AT&T Bell Laboratories research and development work in recent years include lightwave transmission, which offers greater transmission capacity than other transmission systems; electronic switching technology, which enables faster call processing, increased reliability and reduced network costs; and microelectronics components, which bring the latest advantages of scale of integration to the full range of products offered by AT&T.\nOther advances achieved by AT&T Bell Laboratories include: the development of the Karmarkar Algorithm, a mathematical optimization technique which is being applied to the efficient layout of AT&T's long distance telecommunications network; the development of optical amplifiers that dramatically increase the distance messages can be transmitted optically before they must be reamplified, and the invention of a self-electro optic effect device (\"SEED\") useful for optical storage, optical switching and optical logic, thus advancing the future of photonic technologies; the development of polysilicon memory structures widely used in dynamic random access memories (\"DRAMS\"); the development of speech recognizers which provide for the human control of complex systems with verbal commands; and improvements to AT&T's ACCUNET* T1.5 service (a wideband, all-digital, customer-dedicated service that combines voice, data and video communications) that permit customer control of reconfigurations.\nAT&T Bell Laboratories also undertakes the architectural effort required to see that AT&T products can be integrated within a framework of national and international standards. An emphasis on use of the UNIX@ Operating System, \"C\" language and other software suited to open architecture and easy connectivity facilitates this architectural effort. AT&T Bell Laboratories has also made significant contributions to the efficient coding of television pictures and to wireless communications technology.\nIn order to increase focus on customers and to create more nimble organizations, much of the AT&T Bell Laboratories systems engineering and development resource has been more formally aligned with business units. The newly aligned organizations remain AT&T Bell Laboratories, but they receive day-to-day guidance from the business units they support.\nCompetition and Regulation\nIn the global information movement and management industry, AT&T serves markets that are highly competitive and subject to rapid changes in technology and customer needs. Regulatory and court decisions, as well as new technology, have expanded the types of available information movement and management services and products and increased the number of competitors offering such services and products. Many of AT&T's competitors are large companies which have substantial capital, technological and marketing resources.\nThe FCC has ruled that most business and residential customers must select a preferred long distance carrier. In the course of the conversion to \"equal access\" by a telephone company (equal access permits a customer to use the service of any available long distance carrier, without the need to dial a special access code), customers that fail to select a carrier\n____________ * Registered trademark of AT&T @ Registered trademark of Novell, Inc.\n- 10 -\nwill have one selected for them, based on the percentage distribution of customers having made selections. During 1989, as a result of Federal court orders, most owners of premises on which telephone company owned public telephones are located selected a long distance carrier. Premises owners who did not select a long distance carrier had a carrier selected for them through an allocation process similar to that used for business and residential customers.\nThe FCC's \"price caps\" system of regulation, which applies to AT&T's residential and small business outbound services, and all inbound 800 services, is designed to maximize the incentive for AT&T to increase productivity and lower costs and increases AT&T's flexibility to respond to market conditions. AT&T's price capped services are subject to price ceilings, defined by indices based on AT&T's price levels at the initiation of price cap regulation and adjusted annually to reflect changes in inflation and certain other costs of doing business. The price ceilings for services are also subject to a 3% annual decrease, which reflects a 2.5% productivity level that the FCC says AT&T has achieved historically plus an additional 0.5%. AT&T may raise prices of individual services, but must stay within the ceilings overall. Generally AT&T is prohibited from raising or lowering the overall price of particular service categories by more than 5% annually.\nIn 1991, the FCC adopted an order in its \"interexchange competition\" proceeding (CC Docket No. 90-132), confirming that the interexchange market is largely competitive. As a result, the order streamlined the regulation of most AT&T outbound business services. These services are no longer subject to price cap regulation; AT&T can file tariff revisions for these services on 14 days notice; and AT&T can offer individually negotiated contract-based rates for these services. On May 21, 1993, following the implementation of 800 number portability, the regulation of AT&T's 800 services, with the exception of 800 Directory Assistance Service, were streamlined and AT&T was permitted to include these services in its individually negotiated contracts.\nThree bills have been introduced into Congress that concern the telecommunications industry, two in the House of Representatives and one in the Senate. One of the House bills, H.R. 3626, establishes the FCC and U. S. Department of Justice tests the Regional Bell Operating Companies (\"RBOCs\") must meet before they can provide long distance service. These tests vary with the segment of the long distance market the RBOC seeks to enter. This bill also outlines the conditions for RBOC entry into manufacturing of telecommunications equipment.\nThe second House bill, H.R. 3636, would require local telephone companies (\"LECs\") to provide interconnection equal access to their exchanges. In exchange, the LECs will be permitted to provide cable television services.\nThe Senate bill, S. 1822, combines many of the features of the House bills. It includes a test which the RBOCs must meet before they would be permitted to provide long distance service. This test requires that there \"be no substantial possibility the RBOC could use its monopoly power to impede competition\" in the market it seeks to enter. In areas where the\n- 11 -\nRBOC provides local service, they must also prove that they face \"actual and demonstrable competition\" before they could offer long distance service. S. 1822 would also permit the RBOCs into manufacturing immediately, but such activities would be subject to extensive post-entry safeguards. Finally, like H.R. 3636, S. 1822 would permit the LECs to enter the cable television market, but only in exchange for allowing competitors into their local service market.\nFINANCIAL SERVICES AND LEASING\nThe Company's operations in the financial services and leasing industry are conducted through AT&T Capital Corporation (\"AT&T Capital\"), a majority owned subsidiary of AT&T, and AT&T Universal Card Services Corp. (\"AT&T Universal Card Services\"), a wholly owned subsidiary of AT&T.\nAT&T Capital\nOn November 19, 1992, the Company announced that AT&T Capital had begun taking the legal and financial steps necessary to become more financially independent of AT&T.\nOn August 4, 1993, an initial public offering combined with a management stock offering took place, which totaled approximately 14 percent of AT&T Capital's common stock. As a result of the stock offerings, approximately 86 percent of the outstanding common stock of AT&T Capital is owned by AT&T indirectly through subsidiaries.\nAT&T Capital is a full-service diversified equipment leasing and finance company including captive programs, general and specialized leasing throughout the United States and in Canada, Europe and Hong Kong.\nAT&T Capital works side by side with AT&T and its affiliates to provide customized financing for AT&T customers acquiring AT&T and associated equipment. AT&T Capital also provides: financing in connection with general equipment used by AT&T entities; the AT&T affiliate investment recovery program; and AT&T's employee vehicle leasing program. AT&T Capital's captive programs are partially dependent upon sales of products by AT&T and its affiliates and the continued acceptance of these products in the marketplace.\nAT&T Capital's general and specialized financial products are diversified. These financial products include: small and middle ticket general equipment leasing, computer leasing and remarketing, comprehensive fleet vehicle management and asset management.\nAT&T Capital has expanded its international focus through equipment leasing and financial services to customers in Canada, Europe, and Hong Kong.\nCompetition\nThe leasing and finance industry is highly competitive. Participants in the industry compete through price (including the ability to control costs), risk management, innovation and customer service. Principal cost factors include the cost of funds, the cost of selling to or acquiring new end-user customers, and the cost of managing portfolios (including, for example, billing, collection, property and sales tax, residual management, etc.).\n- 12 -\nIn its leasing and financing operations and programs, AT&T Capital competes with captive or related leasing companies (such as General Electric Capital Corporation and IBM Credit Corporation), independent leasing companies (such as Comdisco, Inc.), certain banks engaged in leasing, lease brokers and investment banking firms that arrange for the financing of leased equipment, and manufacturers and vendors who lease their own products to customers. In addition, AT&T Capital competes with all banking and other financial institutions, manufacturers, vendors and others who extend or arrange credit for the acquisition of equipment and, in a sense, with the available cash resources of end-users (i.e., end-users may use their available cash resources to purchase equipment otherwise financeable by AT&T Capital). Many of the competitors of AT&T Capital are large companies that have substantial capital, technological and marketing resources; some of these competitors are significantly larger than AT&T Capital and have access to capital at a lower cost.\nThe activities of AT&T Capital are partially dependent upon sales of products by AT&T and its affiliates. AT&T is subject to substantial competition in the broad markets in which it competes. Thus, there is no assurance as to the volume of financing opportunities that will be generated by sales or leases of equipment by AT&T and its affiliates.\nAT&T Universal Card Services\nAT&T Universal Card Services began operations in early 1990. The AT&T Universal Card is a combined general-purpose consumer credit card and AT&T Calling Card that at year-end had receivables in the amount of $9.2 billion in 1993, $6.6 billion in 1992, $3.8 billion in 1991, and $1.6 billion in 1990. The AT&T Universal Card is offered directly through AT&T Universal Financial Corp., a Utah industrial loan company which is wholly owned by AT&T, and under an affinity relationship with Universal Bank in Columbus, Georgia, a subsidiary of Synovus Financial Corp. AT&T Universal Card Services provides marketing and customer support for the AT&T Universal Card program and it purchases cardholder receivables from Universal Bank.\nThe consumer credit card industry is highly competitive and some seasonality exists, with a higher number of purchases occurring during the year-end holiday season. The Company believes that the AT&T Universal Card program is one of the top two or three bankcard\/credit card programs, based on generally available industry information, and on the number of cardholder accounts in the United States.\nIn May 1990, four major United States banks filed complaints with the FCC alleging, among other things, that the AT&T Universal Card program illegally discriminated against AT&T customers not holding AT&T Universal Cards, as well as credit card issuers in that the AT&T Universal Card program provides for a 10% discount on AT&T calling card rates. These banks also filed petitions with the Federal Deposit Insurance Corporation (\"FDIC\"), the Federal Reserve Board (\"FRB\"), and the Georgia Department of Banking and Finance alleging that the AT&T Universal Card program, in its current form, violated certain banking laws and regulations. The Georgia Department of Banking and Finance, the FDIC and the FRB considered these complaints and decided not to take any action in connection with the AT&T Universal Card program. On December 21, 1993, the FCC released its Memorandum Opinion and Order concluding that there is no merit to the arguments of the banks that the AT&T Universal Card venture is unlawful under the Communications Act or the Commission's Rules and relevant decisions.\n- 13 -\nOn October 9, 1990, VISA U.S.A. announced changes in its affinity card regulations which would limit the operations of affinity card programs. VISA U.S.A. further announced that it will apply these rule changes on a prospective basis, i.e., only to affinity card programs that commenced after October 8, 1990. However, VISA U.S.A. stated that affinity card programs which commenced prior to October 8, 1990, including the AT&T Universal Card program, will be reviewed in the coming months to decide if these new rules should be applied retroactively to such programs. On or about November 29, 1990, VISA U.S.A. established a temporary moratorium, in effect through June 4, 1991, on eligibility for membership in the VISA association by financial institutions owned by nonbanking companies. VISA U.S.A. noted that its moratorium on membership in VISA by financial institutions owned by nonbanks also applies to the acquisition of an existing member by a nonbanking organization. Under this moratorium, any institution which would not be eligible to join VISA directly would be precluded from joining indirectly through an acquisition, unless the acquisition is approved by three-quarters of the VISA U.S.A. board of directors. VISA U.S.A. deferred consideration of these matters until its Board meeting of February 10-11, 1992, when it set aside the moratorium, established an increased fee structure for new members and set forth new affinity rules for card programs that commence after February 11, 1992. In a briefing paper provided by VISA U.S.A. to the press, it confirmed that the new membership rules have no impact on the AT&T Universal Card program.\nOPERATING REVENUE AND RESEARCH AND DEVELOPMENT EXPENSE INFORMATION\nFor information about the consolidated operating revenues contributed by the Company's major classes of products and services and about consolidated research and development expenses, see revenue tables and descriptions on pages 24 thru 27 and Consolidated Statements of Income on page 31, of the Company's annual report to security holders for the year ended December 31, 1993. Such information is incorporated herein by reference, pursuant to General Instruction G(2).\nEMPLOYEE RELATIONS\nAT&T employs approximately 308,700 persons in its operations. About 35% of the employees of AT&T are represented by unions. Of those so represented about 80% are represented by the Communications Workers of America (\"CWA\"), which is affiliated with the AFL-CIO, about 19% by the International Brotherhood of Electrical Workers (\"IBEW\"), which is also affiliated with the AFL-CIO, and the remainder by other unions. Labor agreements with these unions extend through May 27, 1995.\nENVIRONMENTAL MATTERS\nThe operations of the Company involve the release of materials to the environment that are subject to regulation under environmental protection laws. The Company is involved in a number of remedial actions to clean up hazardous wastes in accordance with the Comprehensive Environmental Response, Compensation and Liability Act (\"CERCLA\", or \"Superfund\"), the Resource Conservation and Recovery Act (\"RCRA\") and state environmental laws. Such statutes require that certain parties fund remedial actions regardless of fault. During 1993, as in prior years, the Company has been making capital expenditures for environmental control facilities.\n- 14 -\nAn estimate of the costs of remedial actions or the amounts of capital expenditures for future periods is subject to a number of uncertainties including the following: the developing nature of administrative regulations being promulgated under CERCLA, RCRA and other environmental protection laws; the availability of other responsible parties at a site; the availability of information regarding conditions at potential sites; uncertainty as to how the laws and regulations may be applied to such sites; multiple choices and costs associated with diverse technologies that may be used in corrective actions at such sites; the eventual outcome of claims for insurance coverage; and the time periods (which may be quite lengthy) over which eventual remediation may occur. In the opinion of the Company's management, capital expenditures and expenses in connection with remedial actions to comply with the present environmental protection laws will not have a material effect upon the Company's future expenditures, earnings or competitive position beyond that provided for at year-end.\nItem 2.","section_1A":"","section_1B":"","section_2":"Item 2. Properties.\nThe properties of AT&T consist primarily of plant and equipment used to provide long distance telecommunications services, manufacturing plants at which the Company's products and systems are produced and administrative office buildings.\nTelecommunications plant and equipment consists of: central office equipment, including switching and transmission equipment; connecting lines (cables, wires, poles, conduits, etc.); land and buildings; and miscellaneous properties (work equipment, furniture, plant under construction, etc.). The majority of the connecting lines are on or under public roads, highways and streets and international and territorial waters. The remainder are on or under private property.\nAT&T operates 97 manufacturing facilities located throughout the United States and abroad which at December 31, 1993, had a total of about 33 million square feet. Approximately 30 million square feet are in owned facilities and the remaining 3 million square feet are in leased premises. Some of the non-U.S. operations are operated through joint ventures with other parties (see the discussion of international alliances and ventures contained in Item 1. Business). AT&T also operates a number of sales offices, service, repair and distribution centers, and other facilities, such as research and development laboratories.\nAT&T continues to manage the deployment and utilization of its assets in order to meet its global growth objectives while at the same time, ensuring that these assets are generating economic value added for the shareholder. AT&T will continue to manage its asset base consistent with globalization initiatives, marketplace forces, productivity growth and technology change.\n- 15 -\nA substantial number of the administrative offices of AT&T are in leased buildings. Substantially all of the important communications facilities are in buildings owned by AT&T or leased from the regional holding companies created at divestiture. Substantially all of the major manufacturing plants and major centers are in owned buildings. Many of the smaller facilities are in rented quarters. Most of the important buildings are on land held in fee, but a few are on land held under long-term leases.\nItem 3.","section_3":"Item 3. Legal Proceedings.\nIn the normal course of business, AT&T is subject to proceedings, lawsuits and other claims, including proceedings under government laws and regulations related to environmental and other matters. Such matters are subject to many uncertainties and outcomes are not predictable with assurance. Consequently, AT&T is unable to ascertain the ultimate aggregate amount of monetary liability or financial impact with respect to these matters at December 31, 1993. While these matters could affect operating results of any one quarter when resolved in future periods, it is management's opinion that after final disposition, any monetary liability or financial impact to AT&T beyond that provided for at year-end would not be material to AT&T's annual consolidated financial statements.\nOn July 31, 1991, the United States Environmental Protection Agency Region III issued a complaint pursuant to Section 3008a of the Resource Conservation and Recovery Act alleging violations of various waste management regulations at the Company's Richmond Works, Richmond, Virginia. The complaint seeks a total of $4,184,304 in penalties. The Company is contesting both liability and the penalties.\nIn addition, on July 31, 1991, the United States Environmental Protection Agency filed a civil complaint in the U.S. District Court for the Southern District of Illinois against the Company and nine other parties seeking enforcement of its CERCLA Section 106 cleanup order, issued in November 1990 for the NL Granite City Superfund site, Granite, Illinois, past costs, civil penalties of $25,000 per day and treble damages related to certain United States' costs. The Company is contesting liability.\nOn January 31, 1994, the Company pleaded guilty to a misdemeanor and paid a fine of $175,000 in connection with environmental violations at the Company's facilities in Reading, Pennsylvania.\nThe foregoing environmental proceedings are not material to the consolidated financial statements or business of the Company and would not be reported but for Instruction 5 C. of Item 103 of Regulation S-K, which requires disclosure of such matters.\nSee also the discussion herein in Item 1. Business, for additional information about environmental matters.\nItem 4.","section_4":"Item 4. Submission of Matters to a Vote of Security Holders.\nNo matter was submitted to a vote of security holders in the fourth quarter of the fiscal year covered by this report.\n- 16 -\nExecutive Officers of the Registrant (as of February 1, 1994) Became AT&T Executive Officer Name Age on\nRobert E. Allen* ....... 59 Chairman of the Board and Chief Executive Officer ............ 9-86 Richard S. Bodman ...... 55 Senior Vice President, Corporate Strategy and Development ..... 8-90 Harold W. Burlingame ... 53 Senior Vice President, Human Resources .................... 9-86 Robert M. Kavner ....... 50 Executive Vice President AT&T and Chief Executive Officer, Multimedia Products and Services Group ............... 3-89 Marilyn Laurie ......... 54 Senior Vice President, Public Relations and Employee Information .................. 2-87 Alex J. Mandl .......... 50 Executive Vice President AT&T and Chief Executive Officer, Communications Services Group 8-91 William B. Marx, Jr. ... 54 Executive Vice President AT&T and Chief Executive Officer, Network Systems Group ........ 7-89 John S. Mayo ........... 63 President, AT&T Bell Laboratories ................. 7-91 Richard W. Miller ...... 53 Executive Vice President AT&T and Chief Financial Officer .. 8-93 Victor A. Pelson** ..... 56 Executive Vice President AT&T and Chairman Global Operations Team ......................... 3-89 Jerre L. Stead ......... 51 Executive Vice President AT&T and Chief Executive Officer, AT&T Global Information Solutions Company ...................... 9-91 Sam R. Willcoxon ....... 63 Group Executive AT&T and President, Telephone Pioneers of America ................... 3-89 John D. Zeglis ......... 46 Senior Vice President - General Counsel and Government Affairs ...................... 9-86\n____________ *Member of the Board of Directors and Chairman of the Executive and Proxy Committees. **Member of the Board of Directors.\nAll of the above executive officers have held high level managerial positions with AT&T or its affiliates for more than the past five years, except Messrs. Bodman, Mandl, Miller and Stead who have been officers of AT&T since August 23, 1990, August 1, 1991, August 9, 1993 and September 1, 1991, respectively. Mr. Bodman was President of Washington National Investment Corp., an investment company, for more than five years prior to joining AT&T. Prior to joining AT&T, Mr. Mandl was Chairman and Chief Executive Officer of Sea-Land Service, Inc., an ocean transportation and distribution services company, for three years. Prior to becoming an\n- 17 -\nexecutive officer of AT&T, Mr. Miller was with Wang Laboratories, Inc. from 1989 through 1993 serving as President and Chief Operating Officer and later as Chairman, President and Chief Executive Officer. Prior to that, Mr. Miller held several Executive Management positions with RCA and General Electric. Prior to becoming Chief Executive Officer of AT&T Global Information Solutions, Mr. Stead was President of AT&T Business Communication Systems for two years. Mr. Stead was with Square D Company, a worldwide leader in industrial control and electronical distribution products, systems and services, from 1987 to 1991. He became president of Square D in 1987, and was elected to the additional positions of chief executive officer and chairman of the board in 1989.\nOfficers are not elected for a fixed term of office but hold office until their successors have been elected.\nPART II\nItems 5 through 8.\nThe information required by these items is included in pages 21 through 44 and on the inside back cover of the Company's annual report to security holders for the year ended December 31, 1993. The referenced pages of the Company's annual report to security holders have been filed as Exhibit 13 to this document. Such information is incorporated herein by reference, pursuant to General Instruction G(2).\nItem 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.\nThere have been no changes in independent auditors and no disagreements with independent auditors on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure during the last two years.\nPART III\nItems 10 through 13.\nInformation regarding executive officers required by Item 401 of Regulation S-K is furnished in a separate disclosure in Part I of this report because the Company did not furnish such information in its definitive proxy statement prepared in accordance with Schedule 14A.\nThe other information required by Items 10 through 13 is included in the Company's definitive proxy statement dated March 1, 1994, on page 6, the first paragraph on page 7, the last paragraph on page 7 through page 13, and the last paragraph on page 42 through page 56. Such information is incorporated herein by reference, pursuant to General Instruction G(3).\n- 18 -\nPART IV\nItem 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.\n(a) Documents filed as a part of the report:\n(1) Financial Statements: Pages Report of Management ................................ * Report of Independent Auditors ...................... *\nStatements:\nConsolidated Statements of Income ............... * Consolidated Balance Sheets ..................... * Consolidated Statements of Cash Flows ........... * Notes to Consolidated Financial Statements ...... *\n(2) Financial Statement Schedules:\nReport of Independent Auditors ...................... 22\nSchedules:\nII--Amounts Receivable from Related Parties and Underwriters, Promoters, and Employees Other than Related Parties................... 23 V--Property, Plant and Equipment ................. 28 VI--Accumulated Depreciation ...................... 32 VIII--Valuation and Qualifying Accounts ............. 34 IX--Debt Maturing Within One Year ................. 36 X--Supplementary Income Statement Information .... 37\nSchedules other than those listed above have been omitted because such schedules are not required or applicable.\nSeparate financial statements of subsidiaries not consolidated and 50 percent or less owned persons are omitted since no such entity constitutes a \"significant subsidiary\" pursuant to the provisions of Regulation S-X, Article 3-09.\n____________ *Incorporated herein by reference to the appropriate portions of the Company's annual report to security holders for the year ended December 31, 1993. (See Part II.)\n- 19 - (3) Exhibits:\nExhibits identified in parentheses below, on file with the Securities and Exchange Commission (\"SEC\"), are incorporated herein by reference as exhibits hereto.\nExhibit Number\n(3)a Restated Certificate of Incorporation of the registrant, dated January 10, 1989, Certificate of Change to Restated Certificate of Incorporation dated March 18, 1992, and Certificate of Amendment to Restated Certificate of Incorporation dated June 1, 1992 (Exhibit 4B to Form SE dated July 21, 1992, File No. 1-1105).\n(3)b By-Laws of the registrant, as amended April 20, 1993 (Exhibit 3.02 to Form S-4 dated February 1, 1994 Registration No. 33-52119, File No. 1-1105).\n(4) No instrument which defines the rights of holders of long term debt, of the registrant and all of its consolidated subsidiaries, is filed herewith pursuant to Regulation S-K, Item 601(b)(4)(iii)(A). Pursuant to this regulation, the registrant hereby agrees to furnish a copy of any such instrument to the SEC upon request.\n(10)(iii)(A)1 AT&T Short Term Incentive Plan as amended December 16, 1992 (Exhibit (10)(iii)(A)1 to Form SE, dated March 24, 1993, File No. 1-1105).\n(10)(iii)(A)2 AT&T 1987 Long Term Incentive Program as amended July 17, 1989 (Exhibit (10)(iii)(A)2 to Form SE dated March 24, 1993, File No. 1-1105).\n(10)(iii)(A)3 AT&T Senior Management Individual Life Insurance Program dated January 1, 1987 (Exhibit (10)(iii)(A)1 to Form SE, dated March 25, 1987, File No. 1-1105).\n(10)(iii)(A)4 AT&T Senior Management Long Term Disability and Survivor Protection Plan dated February 23, 1984 (Exhibit (10)(iii)(A)1 to Form SE, dated February 21, 1986, File No. 1-1105).\n(10)(iii)(A)5 AT&T Senior Management Financial Counseling Program dated March 14, 1994.\n(10)(iii)(A)6 AT&T Deferred Compensation Plan for Non-Employee Directors, as amended December 15, 1993.\n(10)(iii)(A)7 AT&T Directors Individual Life Insurance Program dated January 1, 1987 (Exhibit (10)(iii)(A)3 to Form SE, dated March 25, 1987, File No. 1-1105).\n- 20 -\nExhibit Number\n(10)(iii)(A)8 AT&T Plan for Non-Employee Directors' Travel Accident Insurance (Exhibit (10)(iii)(A)8 to Form 10-K for 1990, File No. 1-1105).\n(10)(iii)(A)9 Extract from AT&T (formerly Bell System) Management Pension Plan regarding limitations on and payments of pension amounts which exceed the limitations contained in The Employee Retirement Income Security Act, with amendments effective October 1, 1985 (Exhibit (10)(iii)(A)2 to Form SE, dated February 21, 1986, File No. 1-1105).\n(10)(iii)(A)10 AT&T Non-Qualified Pension Plan, (with amendments effective June 1, 1988) (Exhibit 10(iii)(A)10 to Form SE, dated March 26, 1990, File No. 1-1105).\n(10)(iii)(A)11 AT&T Senior Management Incentive Award Deferral Plan, as amended December 18, 1991.\n(10)(iii)(A)12 AT&T Mid-Career Hire Program revised effective January 1, 1988, including AT&T Mid-Career Pension Plan, as amended May 15, 1985 (Exhibit (10)(iii)(A)4 to Form SE, dated March 25, 1988, File No. 1-1105).\n(10)(iii)(A)13 AT&T 1984 Stock Option Plan, as modified December 19, 1984 (Exhibit 10(t) to Form SE, dated February 27, 1985, File No. 0-13247).\n(10)(iii)(A)14 Form of Indemnification Contract for Officers and Directors (Exhibit (10)(iii)(A)6 to Form SE, dated March 25, 1987, File No. 1-1105).\n(10)(iii)(A)15 Pension Plan for AT&T Non-Employee Directors revised February 20, 1989.\n(10)(iii)(A)16 AT&T Senior Management Basic Life Insurance Program (Exhibit (10)(iii)(A)16 to Form 10-K for 1990, File No. 1-1105).\n(10)(iii)(A)17 Form of AT&T Benefits Protection Trust Agreement (Exhibit (10)(iii)(A)17 to Form SE, dated March 25, 1992, File No. 1-1105).\n(10)(iii)(A)18 Employment Agreement between American Telephone and Telegraph Company and Alex J. Mandl dated August 1, 1991.\n(10)(iii)(A)19 Employment Agreement between American Telephone and Telegraph Company and Jerre L. Stead dated July 31, 1991, supplemented October 18, 1991 and March 29, 1993.\n- 21 -\nExhibit Number\n(12) Computation of Ratio of Earnings to Fixed Charges.\n(13) Specified portions (pages 21 through 44 and the inside back cover) of the Company's Annual Report to security holders for the year ended December 31, 1993.\n(21) List of subsidiaries of AT&T.\n(23) Consent of Coopers & Lybrand.\n(24)a Powers of Attorney executed by officers and directors who signed this report.\n(24)b Board of Directors' Resolution.\nAnnual reports on Forms 11-K for the AT&T Long Term Savings Plan for Management Employees, the AT&T Long Term Savings and Security Plan, the AT&T Retirement Savings and Profit Sharing Plan and the NCR Corporation Savings Plan will be filed separately, on or before April 29, 1994.\nAT&T will furnish, without charge, to a security holder upon request a copy of the annual report to security holders and the proxy statement, portions of which are incorporated herein by reference thereto. AT&T will furnish any other exhibit at cost.\n(b) Reports on Form 8-K:\nForms 8-K dated August 16, 1993, as amended, and October 8, 1993 were filed pursuant to Item 5.","section_5":"","section_6":"","section_7":"","section_7A":"","section_8":"","section_9":"","section_9A":"","section_9B":"","section_10":"","section_11":"","section_12":"","section_13":"","section_14":"","section_15":""}
{"filename":"857775_1993.txt","cik":"857775","year":"1993","section_1":"Item 1. Business - -----------------\nGENERAL\nFord Holdings, Inc. (the \"Company\" or \"Ford Holdings\") was incorporated on September 1, 1989 for the principal purpose of acquiring, owning and managing certain assets of Ford Motor Company (\"Ford\"). The Company's primary activities consist of consumer and commercial financing operations, insurance underwriting and equipment leasing. These activities are conducted through the Company's wholly owned subsidiaries, Associates First Capital Corporation and its subsidiaries (\"The Associates\"), The American Road Insurance Company and its subsidiaries (\"American Road\"), USL Capital Corporation (formerly United States Leasing International, Inc.) and its subsidiaries (\"USL Capital\"), Ford Motor Land Development Corporation and its subsidiaries (\"Ford Land\") and Ford Leasing Development Company and its subsidiaries (\"Ford Leasing\").\nThe Associates, formerly a subsidiary of Paramount Communications Inc., was acquired by the Company on October 31, 1989. The Associates' primary business activities are consumer finance, commercial finance and insurance underwriting. The Associates conducts its operations primarily through its principal operating subsidiary, Associates Corporation of North America (\"ACONA\").\nAmerican Road is principally engaged in underwriting insurance with respect to coverages for physical damage on vehicles financed through Ford Motor Credit Company (\"Ford Credit\"), a wholly owned subsidiary of Ford, credit life and credit disability insurance in connection with retail vehicle financing, and extended service plan products covering vehicle repairs on retail contracts. In addition, Ford Life Insurance Company (\"Ford Life\"), a wholly owned subsidiary of American Road, offers single premium deferred annuities.\nThe principal business of USL Capital is the leasing and financing of office and other business and commercial equipment, the leasing and management of rail cars and commercial auto fleets, the leasing and financing of commercial aircraft, industrial and energy facilities, and equipment financing for state and local governments.\nFord Land's principal business is real estate development and Ford Leasing's principal business is the leasing of dealership facilities to franchised Ford vehicle dealers.\nAll the outstanding Common Stock of the Company, representing 75% of the combined voting power of all classes of capital stock of the Company, is owned, directly or indirectly, by Ford. The balance of the capital stock, consisting of shares of Flexible Rate Auction Preferred Stock (Exchange), Series A Cumulative Preferred Stock, Series B Cumulative Preferred Stock and Series C Cumulative Preferred Stock, accounts for the remaining 25% of the total voting power; none of the preferred stock is held, directly or indirectly, by Ford.\nThe principal executive offices of the Company are located at The American Road, Dearborn, Michigan 48121, and its telephone number is (313) 322-3000.\nItem 1. Business (Continued) - -----------------------------\nBUSINESS OF THE COMPANY\nAs indicated above, the Company is a holding company and conducts its operations through its subsidiaries. The Company, through its subsidiaries, operates in three business segments: consumer finance, commercial finance and insurance underwriting. The consumer finance segment (which includes certain operations of The Associates) is principally engaged in making and investing in residential real estate-secured receivables, making secured and unsecured installment loans to individuals, purchasing consumer retail installment obligations, investing in credit card receivables, financing manufactured housing purchases and providing other consumer financial services. The commercial finance segment (which includes the operations of USL Capital, Ford Land and Ford Leasing and certain operations of The Associates) is principally engaged in financing sales of transportation and industrial equipment, real estate development and leasing, and providing other financial services, including automobile club and relocation services. The insurance segment (which includes the operations of American Road and certain operations of The Associates) is engaged in, among other things, underwriting property, casualty, credit life and disability insurance products, and offering single premium deferred annuities.\nThe business of each of the Company's principal subsidiaries is presented separately below. Segment information for the Company is set forth in Note 18 of Notes to Financial Statements, included on pages FH-19 and FH-20 of this Report.\nTHE ASSOCIATES\nThe Associates' foreign subsidiaries and Associates Federal Savings and Loan Association (sometimes referred to herein, collectively, as the \"transferred operations\") were transferred out of The Associates prior to, and not included in, the acquisition of The Associates by the Company. To provide comparative data for periods prior to the transfer of these operations, certain information included under this Item 1. \"Business-The Associates\" has been reclassified with respect to the transferred operations.\nThe Associates has approximately 1,390 branch offices in the United States and, as of December 31, 1993, employed approximately 12,400 persons. The Associates' primary business activities are consumer finance, commercial finance and insurance underwriting. The Associates conducts its operations primarily through ACONA, its principal operating subsidiary.\nItem 1. Business (Continued) - ----------------------------\nSelected Financial Data. The following table sets forth selected financial information of The Associates (in millions):\n(a) Excludes the results of the transferred operations, except as noted; the Consolidated Statement of Income for the year ended December 31, 1989 is unaudited. (b) Includes net charge of $10 million representing the cumulative effects of changes in accounting principles. (c) Includes the after-tax operating results of the transferred operations through October 30, 1989.\nItem 1. Business (Continued)\nSegment Data. The following table sets forth information by business segment of The Associates for the years ended December 31 (in millions):\n- ----------------- (a) Included in 1993 are $182 million of gross residential real estate-secured and installment finance receivables attributable to the Allied Finance Company acquisition and $216 million of credit card receivables purchased from Great Western Financial Corporation. Included in 1992 are $305 million of gross residential real estate-secured and installment finance receivables purchased from Signal Financial Corporation and $795 million of gross residential real estate-secured and installment finance receivables attributable to the acquisition of First Family Financial Services H.C., Inc. Included in 1991 are $2.7 billion of gross residential real estate-secured finance receivables and contracts for the purchase of manufactured housing purchased from Ford Credit and $337 million of gross installment finance receivables attributable to the acquisition of Kentucky Finance Co., Inc. Included in 1990 are $606 million in gross residential real estate-secured receivables and installment finance receivables attributable to the acquisition of Mellon Financial Services Corporation. (b) Included in 1993 are $597 million of gross heavy-duty truck and truck trailer finance receivables purchased from Mack Financial Corp. Included in 1992 are $57 million of gross industrial equipment finance receivables attributable to the acquisition of Trans-National Leasing, Inc. Included in 1991 are $931 million of gross industrial equipment finance receivables attributable to the acquisition of Chase Manhattan Leasing Company (Michigan), Inc. (renamed \"Clark Credit\").\nItem 1. Business (Continued) - ---------------------------\n____________ (a) Excludes wholesale receivables\nDuring 1993, 23% of the total gross volume of consumer loans, excluding credit card receivables, was made to current creditworthy customers that requested additional funds. The average balance prior to making an additional advance was $9,115 and the average additional advance was $3,112.\nFinance Receivables. The following tables set forth the amounts of gross finance receivables by major categories and average size and number of accounts (dollar amounts in millions):\nItem 1. Business (Continued) - ----------------------------\nThe ten largest accounts at December 31, 1993, other than accounts with affiliates, represented less than 8\/10 of one percent of the total gross finance receivables outstanding. Of such ten accounts, five were secured by heavy-duty trucks or truck trailers, two were secured by construction equipment, two were secured by a manufacturer's endorsement and related to communications equipment and one was secured by auto leasing arrangements. At December 31, 1993, the largest gross balance outstanding in such accounts was $31 million and the average gross balance was $25 million.\nItem 1. Business (Continued) - ----------------------------\nCredit Loss and Delinquency Experience. The credit loss experience, net of recoveries, of the finance business is set forth in the following table (dollar amounts in millions):\nAn analysis of The Associates' allowance for losses on finance receivables is as follows (in millions):\nThe allowance for losses on finance receivables is based on percentages of net finance receivables established by management for each major category of receivables based on historical loss experience, plus an amount for possible adverse deviation from historical experience. Additions to the allowance are charged to the provision for losses on finance receivables.\nItem 1. Business (Continued) - ----------------------------\nFinance receivables are charged to the allowance for losses when they are deemed to be uncollectible. Additionally, The Associates' policy provides for charge-off of various types of accounts as follows: consumer direct installment receivables, except those collateralized by residential real estate, are charged to the allowance for losses when no cash payment has been received for six months; credit card receivables are charged to the allowance for losses when the receivable becomes contractually six months delinquent; all other finance receivables are charged to the allowance for losses when any of the following conditions occur: (i) the related security has been converted or destroyed; (ii) the related security has been repossessed and sold or held for sale for one year; or (iii) the related security has not been repossessed and the receivable has become contractually one year delinquent. Recoveries on losses previously charged to the allowance are credited to the allowance at the time the recovery is collected.\nDelinquency on consumer residential real estate-secured and direct installment and credit card receivables is determined by the date of the last cash payment received from the customer (recency of payment basis), a delinquent loan being one on which the customer has paid no cash whatsoever for a period of time. It is not The Associates' policy to accept token payments on delinquent accounts. A delinquent account on all types of receivables, other than consumer residential real estate-secured and direct installment and credit card receivables, is one on which the customer has not made payments as contractually agreed (contractual payment basis). Extensions are granted on receivables from customers with satisfactory credit and with prior approval of management.\nThe following tables show (i) the gross account balances delinquent 60 through 89 days, 90 days and more, and total gross balances delinquent 60 days and more; and (ii) total gross balances delinquent 60 days and more by type of business (dollar amounts in millions):\nItem 1. Business (Continued) - ----------------------------\nInsurance Underwriting. The Associates is engaged in the property and casualty and accidental death and dismemberment insurance business through Associates Insurance Company (\"AIC\") and in the credit life, credit accident and health insurance business through Associates Financial Life Insurance Company (\"AFLIC\"), principally for customers of the finance operations of The Associates. At December 31, 1993, AIC was licensed to do business in 50 states, the District of Columbia and Canada, and AFLIC was licensed to do business in 49 states and the District of Columbia. In addition, The Associates receives compensation for certain insurance programs underwritten by other companies through marketing arrangements in a number of states.\nThe operating income produced by the finance operations' sale of insurance products is included in the respective finance operations' operating income.\nThe following table sets forth the net property and casualty insurance premiums written by major lines of business (in millions):\nItem 1. Business (Continued) - ----------------------------\nThe following table sets forth the aggregate premium income relating to credit life, credit accident and health and accidental death and dismemberment insurance for the years indicated, and the life insurance in force (in millions):\nThe following table summarizes the revenue of the insurance operation (in millions):\n- ------------------ (a) Includes compensation for insurance programs underwritten by other companies through marketing arrangements.\nCompetition and Regulation. The interest rates charged for the various classes of receivables of The Associates' finance business vary with the type of risk and maturity of the receivable and generally are affected by competition, current interest rates and, in some cases, governmental regulation. In addition to competition with finance companies, competition exists with, among others, commercial banks, thrift institutions, credit unions and retailers.\nConsumer finance operations are subject to detailed supervision by state authorities under legislation and regulations which generally require finance companies to be licensed and which, in many states, govern interest rates and charges, maximum amounts and maturities of credit and other terms and conditions of consumer finance transactions, including disclosure to a debtor of certain terms of each transaction. Licenses may be subject to revocation for violations of such laws and regulations. In some states, the commercial finance operations are subject to similar laws and regulations. Customers may seek damages for violations of state and Federal statutes and regulations governing lending practices, interest rates and other charges. Federal legislation preempts state interest rate ceilings on first mortgage loans and state laws which restrict various types of alternative residential real estate-secured receivables, except\nItem 1. Business (Continued) - ----------------------------\nin those states which have specifically opted out of such preemption. Certain Federal and state statutes and regulations, among other things, require disclosure of the finance charges in terms of an annual percentage rate, make credit discrimination unlawful on a number of bases, require disclosure of a maximum rate of interest on variable or adjustable rate mortgage loans, and limit the types of security that may be taken in connection with non-purchase money consumer loans. Federal and state legislation, in addition to that mentioned above, has been, and from time to time may be, introduced which seeks to regulate the maximum interest rate and\/or other charges on consumer finance receivables, including credit cards.\nAssociates National Bank (Delaware) (\"ANB\") is under the supervision of, and subject to examination by, the Office of the Comptroller of the Currency. In addition, ANB is subject to the rules and regulations of the Federal Reserve Board and the Federal Deposit Insurance Corporation (\"FDIC\"). Associates Investment Corporation is regulated by the FDIC and the Utah Department of Financial Institutions. Areas subject to regulation by these agencies include capital adequacy, loans, deposits, consumer protection, the payment of dividends and other aspects of operations.\nThe insurance business is subject to detailed regulation, and premiums charged on certain lines of insurance are subject to limitation by state authorities. Most states in which insurance subsidiaries of The Associates are authorized to conduct business have enacted insurance holding company legislation pertaining to insurance companies and their affiliates. Generally, such laws provide, among other things, limitations on the amount of dividends payable by any insurance company and guidelines and standards with respect to dealings between insurance companies and affiliates.\nIt is not possible to forecast the nature or the effect on future earnings or otherwise of present and future legislation, regulations and decisions with respect to the foregoing, or other related matters.\nAMERICAN ROAD\nAmerican Road was incorporated as a wholly owned subsidiary of Ford Credit in 1959 and was transferred to Ford Holdings in 1989. It is licensed in 50 states and the District of Columbia and in most provinces of Canada.\nThe operations of American Road consist primarily of underwriting floor plan insurance related to substantially all new vehicle inventories of dealers financed at wholesale by Ford Credit in the United States and Canada, credit life and disability insurance in connection with retail vehicle financing, and insurance related to retail contracts sold by automobile dealers to cover vehicle repairs. In addition, Ford Life, a wholly owned subsidiary of American Road, offers single premium deferred annuities which are sold primarily through banks and brokerage firms. The obligations of Ford Life, including annuities, are guaranteed by American Road.\nIn the second quarter of 1992, Ford Credit discontinued purchasing collateral protection insurance (\"CPI\") from American Road for vehicles financed at retail by Ford Credit. This action continued to have a negative effect on\nItem 1. Business (Continued) - ----------------------------\n1993 earnings. The principal subsidiaries of American Road are Ford Life and Vista Life Insurance Company (\"Vista Life\"). Ford Life primarily offers annuities, credit life and disability insurance on vehicles and equipment financed at retail and Vista Life writes group credit life insurance and credit disability insurance on vehicles financed at retail. Vista Life Insurance Company of Texas, a subsidiary of American Road, was dissolved in April 1993.\nTotal premiums written by American Road and its subsidiaries during the last five years were as follows (in millions): 1993: $309; 1992: $235; 1991: $379; 1990: $437; and 1989: $913. The decrease in premiums written after 1989 resulted primarily from (1) the conversion in October 1989 of a significant portion of the Extended Service Plan from an American Road insurance product to a Ford service contract and (2) the discontinuance in the second quarter of 1992 of Ford Credit's purchase of CPI insurance from American Road. The 1993 increase in premiums written resulted primarily from higher vehicle sales and higher premium rates for floor plan insurance products.\n______________ (a) Includes increase of $16 million resulting from cumulative effect of adopting new accounting rules on income taxes.\nThe detail of premiums earned by American Road was as follows (in millions):\nThe insurance industry is highly regulated by the states with respect to premium rates, policy terms, dividends, investments and many other aspects of the insurance business. American Road competes with many insurance companies and is not a significant factor in car and truck insurance underwriting. The principal competitors of Ford Life and Vista Life are life insurance companies that specialize in credit life and credit disability insurance and insurance companies that offer single premium deferred annuities.\nItem 1. Business (Continued) - ----------------------------\nUSL CAPITAL\nUSL Capital, a diversified commercial leasing and financing organization, originally incorporated in 1956, was acquired by Ford in 1987 and was transferred to Ford Holdings in 1989. In November 1993, the corporation's name was changed from United States Leasing International, Inc. to USL Capital Corporation. USL Capital provides financing to commercial and governmental entities principally in the United States, including: (i) leasing and financing of office, manufacturing, and other general-purpose business equipment; (ii) leasing and management of commercial fleets of automobiles, vans, and trucks; (iii) leasing and financing of large-balance transportation equipment (principally commercial aircraft, rail and marine equipment); (iv) acting as owner-trustee for certain leveraged leases for other investors; (v) first-mortgage, intermediate-term financing of commercial properties; (vi) financing of essential-use equipment for state and local governments; and (vii) purchase of industrial development, private activity and housing bonds and investment in publicly traded and privately placed preferred stocks and senior and subordinated debt of public and private companies. Certain of these financing transactions are carried on the books of Ford affiliates. At December 31, 1993, USL Capital had 682 full-time employees.\nKey Data. The following table sets forth certain data with respect to USL Capital's business for the periods ending on and as of the dates indicated (dollar amounts in millions):\n- ---------------- (a) Principally businesses sold prior to December 31, 1990. (b) Includes reduction of $3 million resulting from cumulative effect of adopting the new accounting standard on health care costs. (c) Includes foreign operations of USL Capital (transferred to Ford subsidiaries in October 1989) through September 30, 1989.\nItem 1. Business (Continued) - ----------------------------\nCredit Loss Experience. The management of credit exposure is an important element of USL Capital's business. USL Capital reviews the credit of all prospective customers, and manages concentration exposure by customer, collateral type and geographic distribution. It establishes appropriate loss allowances based on the credit characteristics and the loss experience for each type of business, and also establishes additional reserves for specific transactions if it believes this action is warranted. Delinquent receivables are reviewed by management monthly, and are generally written down to expected realizable value when, in the opinion of management, they become uncollectible or when they become more than 180 days past due. Collection activities continue on accounts written off when management believes such action is warranted.\nThe table below summarizes certain information on USL Capital's allowance for doubtful accounts at December 31 of the years indicated (dollar amounts in millions):\nAdditions to the allowance for doubtful accounts for 1993 increased by $6 million from 1992, primarily as a result of the increase in earning assets as well as management's evaluation of the adequacy of the loss reserve. In addition, deductions in 1993 increased $1 million from 1992, the largest single transaction being less than $3 million.\nItem 1. Business (Continued) - ----------------------------\nTotal balances of accounts receivable over 90 days past due at year end 1993 decreased $5 million over 1992 primarily because of improved collection and workout activities as well as the write- down of several receivables which were delinquent at December 31, 1992, and which management has since deemed to be uncollectible.\nResidual Policy. The establishment and realization of residual values on both finance and operating leases are important elements of USL Capital's business. In general, finance leases are non-cancelable leases in which the lease payments over the term exceed the cost of the leased equipment plus financing and other expenses. Operating leases are usually of a shorter term and the lease payments by themselves are not sufficient to cover such cost and expenses. Full recovery of equipment cost is dependent upon selling or re-leasing the equipment.\nResidual values are established upon acquisition of the equipment based upon the estimated value of the equipment at the time USL Capital expects to dispose of the equipment under finance leases, and at the end of the equipment's expected useful life under operating leases. Periodically, USL Capital reviews its residual values, and if it determines there has been an other than temporary impairment in value, adjustments are made which result in an immediate charge to income and\/or a reduction in earnings over the remaining term of the lease. Proceeds as a percentage of the adjusted residual values for finance leases were 215% in 1993, 129% in 1992, and 148% in 1991. Proceeds as a percentage of the adjusted residual values for operating leases were 115% in 1993, 1992 and 1991.\nCompetition. In all of its financing programs, USL Capital competes with other leasing and finance companies, banks, lease brokers and investment banking firms who arrange for the financing and leasing of equipment, and manufacturers and vendors who sell, finance and lease their own products to customers.\nFORD LAND\nFord Land was formed by Ford in 1970 to implement a master plan for the development of 2,360 acres of vacant land in Dearborn, Michigan. Since then, Ford Land has expanded its activities to include non-automotive real estate development, management and development of land and facilities related to Ford operations. See Item 2.","section_1A":"","section_1B":"","section_2":"Item 2. \"Properties\" for a description of Ford Land's real estate holdings.\nThe assets employed in, and revenues derived from, Ford Land are not significant in relation to the Company's consolidated operations.\nItem 1. Business (Continued) - ----------------------------\nFORD LEASING\nFord Leasing, which was incorporated by Ford in 1960, acquires real property by purchase or lease and constructs facilities on such property for lease to franchised Ford car and truck dealers where private capital funding is unavailable. Ford Leasing provides dealers with facilities in key markets at affordable rental rates. It sells certain of those dealership facilities to the dealers, and sells to third parties property and facilities which are no longer needed for automobile dealerships.\nThe assets employed in, and revenues derived from, Ford Leasing are not significant in relation to the Company's consolidated operations.\nItem 2. Properties - -------------------\nThe furniture, equipment and other physical property owned by the Company and its subsidiaries are not significant in relation to total assets. Ford Land and its wholly owned subsidiaries own or lease real property consisting of 3,745 acres of land and 6.4 million square feet of improvements having a net book value of $476 million. Of the real property owned or leased by Ford Land and its subsidiaries, 872 acres of land and 3.7 million square feet of improvements are located within the Fairlane Development, a commercial, residential and recreational community being developed by Ford Land in Dearborn and Allen Park, Michigan. The balance of the properties are located in California, Colorado, New Jersey, Massachusetts, Ohio and Virginia. The finance operations of the Company's subsidiaries generally are conducted on leased premises under short-term operating leases normally not exceeding five years.\nItem 3.","section_3":"Item 3. Legal Proceedings - --------------------------\nBecause the finance and insurance businesses involve the collection of numerous accounts, the validity and priority of liens, and loss or damage claims under many types of insurance policies, the finance and insurance subsidiaries of the Company are plaintiffs and defendants in numerous legal proceedings, including class action lawsuits. Neither the Company nor any of its subsidiaries is a party to, nor is the property thereof the subject of, any pending legal proceedings other than (i) ordinary routine litigation or (ii) litigation which should not have a material adverse impact on the consolidated financial position of the Company. There are no proceedings pending or, to the Company's knowledge, threatened by or on behalf of any administrative board or regulatory body which would materially affect or impair the right of the Company or any of its subsidiaries to carry on any of their respective businesses.\nItem 4.","section_4":"Item 4. Submission of Matters to a Vote of Security Holders - ------------------------------------------------------------\nAt the Annual Meeting of Stockholders of the Company held on November 23, 1993 (the \"Annual Meeting\"), the holders of the outstanding shares of the Company's Common Stock elected the following nominees as directors of the Company: Wayland F. Blood, Malcolm S. Macdonald, Terrence F. Marrs, David N. McCammon, Stanley A. Seneker and Kenneth Whipple. Each such person received 1,099 votes; no votes were cast against or withheld from the election of such directors and there were no broker nonvotes.\nAlso at the Annual Meeting, the holders of the outstanding shares of the Company's Flexible Rate Auction Preferred Stock (Exchange), Series A Cumulative Preferred Stock, Series B Cumulative Preferred Stock and Series C Cumulative Preferred Stock elected the following nominees as directors of the Company by the following votes:\nAlso at the Annual Meeting, the holders of the Company's Common Stock, Flexible Rate Auction Preferred Stock (Exchange), Series A Cumulative Preferred Stock, Series B Cumulative Preferred Stock and Series C Cumulative Preferred Stock ratified the selection of Cooper's & Lybrand to audit the Company's books of account and other corporate records for the year 1993 by the following votes:\n______________ (a) Holders of the outstanding shares of Common Stock had 75% of the combined voting power of all classes of capital stock.\n(b) Holders of the outstanding shares of the Flexible Rate Auction Preferred Stock (Exchange), Series A Cumulative Preferred Stock, Series B Cumulative Preferred Stock and Series C Cumulative Preferred Stock together had the remaining 25% of the combined voting power of all classes of capital stock.\nPART II\nItem 5.","section_5":"Item 5. Market for Registrant's Common Equity and Related Stockholder Matters - ----------------------------------------------------------\nAll of the outstanding Common Stock of the Company is owned directly or indirectly by Ford as of March 1, 1994. There is no market for the Company's Common Stock.\nDividends on the Common Stock will be paid when declared by the Board of Directors. No dividends have been paid to date.\nItem 6.","section_6":"Item 6. Selected Financial Data - --------------------------------\nThe following table sets forth selected consolidated financial information regarding the operating results and financial position of the Company and its subsidiaries. The amounts shown for the years ended December 31, 1989 through 1993 represent the consolidated operating results and financial position of the subsidiaries of the Company then owned, directly or indirectly, by Ford. The reorganizations of these subsidiaries, which occurred in October 1989, have been accounted for at historical cost in a manner similar to a pooling-of-interests combination. This table includes The Associates' results for the two-month period ended December 31, 1989 and the full-years ended December 31, 1990 through 1993. The unaudited pro forma adjustments for 1989 reflect the estimated interest expense, net of related income taxes, that the Company would have incurred on the zero-coupon note issued in connection with the transfer from Ford to the Company of USL Capital's domestic operations as if such transfer had occurred on November 1, 1987, the date USL Capital was acquired by Ford. The unaudited pro forma net income for 1989 does not purport to represent what the Company's net income actually would have been had the zero coupon note in fact been issued on November 1, 1987. The information should be read in conjunction with Item 7, \"Management's Discussion and Analysis of Financial Condition and Results of Operations\" and the audited consolidated financial statements and accompanying notes to financial statements included in this Report.\nItem 6. Selected Financial Data (Continued) - --------------------------------------------\nEach of the above-named persons has held the position with the Company set forth opposite his name since October 1989, except that Mr. T. F. Marrs has held his position since March 1990, Mr. W. F. Blood has held his position as Vice President since November 1992 and was elected a director effective May 1, 1993 and Mr. J. M. Rintamaki has held his position since July 1993.\nExcept for Messrs. Toffey and Richardson, all of the above officers and directors have been employed by Ford or its subsidiaries in one or more executive capacities during the past five years. H. J. Toffey, Jr. was a Managing Director of First Boston, Inc. until his retirement in 1986. Mr. Toffey also serves as a director of Sterling Energy Corp. D. E. Richardson was the Chairman of the Board of Directors of Manufacturers National Corporation from October 1973 until his retirement in April 1990. Mr. Richardson serves as a director of Comerica Incorporated, The Detroit Edison Company, Tecumseh Products Company and the Automobile Club of Michigan.\nMr. Seneker serves as a director of Ford. Mr. Whipple serves as a director of CMS Energy Corporation; Consumers Power Company; First Nationwide Bank, A Federal Savings Bank; First Nationwide Financial Corporation; Ford Credit; and USL Capital. Mr. Blood serves as a director of First Nationwide Bank, A Federal Savings Bank and First Nationwide Financial Corporation. Mr. Macdonald serves as a director of The Hertz Corporation. Mr. Marrs serves as a director of USL Capital and The Hertz Corporation. Mr. McCammon serves as a director of Ford Credit and The Hertz Corporation.\nBased on Company records and other information, the Company believes that all SEC filing requirements applicable to its directors and officers with respect to the Company's fiscal year ended December 31, 1993 were complied with except that Mr. D. E. Richardson had one late report of one transaction.\nItem 11.","section_7":"","section_7A":"","section_8":"","section_9":"","section_9A":"","section_9B":"","section_10":"","section_11":"Item 11. Executive Compensation - --------------------------------\nThe directors and executive officers of the Company do not and will not receive any compensation from the Company except that directors of the Company who are not otherwise employed by Ford or another affiliate of the Company will be entitled to director fees in amounts established from time to time by the Board. Currently, each director who is not an employee of Ford or another affiliate of the Company is paid an annual fee of $15,000. Thus in 1993, Messrs. Richardson and Toffee each received annual fees of $15,000. None of the other directors received an annual fee in 1993. All directors and officers are reimbursed for expenses reasonably incurred in connection with their services on behalf of the Company. None of the directors and executive officers of the Company receives or will receive any additional compensation from Ford or any of its affiliates for services rendered on behalf of the Company. The Company compensates Ford for the time during which any salaried officer or employee of Ford performs services for the Company. See Item 13.\nItem 12.","section_12":"Item 12. Security Ownership of Certain Beneficial Owners and Management - ------------------------------------------------------------------------\n(a) Security ownership of certain beneficial owners.\n(b) Security ownership of management.\nNone of the Company's or any of its parents or subsidiaries equity securities is beneficially owned by the Company's directors (and nominees) or officers, except as shown below:\n_________________ (*) Amount owned is less than 0.1% of class. (a) Mr. Richardson owns 4,000 Depositary Shares, each representing 1\/4,000 of a share of Series A Cumulative Preferred Stock.\nItem 12. Security Ownership of Certain Beneficial Owners and Management (Continued) - ---------------------------------------------------------\n______________ (*) Amount owned is less than 0.1% of class. (a) Indicates the number of shares listed with respect to which such person(s) has the right to acquire beneficial ownership within 60 days. (b) Mr. Macdonald owns 1,000 Depositary Shares, each representing 1\/1,000 of a share at Ford Motor Company Series A Cumulative Convertible Preferred Stock. Each Depositary Share is convertible into 1.6327 shares of Ford Motor Company Common Stock.\nItem 13.","section_13":"Item 13. Certain Relationships and Related Transactions - --------------------------------------------------------\nFord is the direct or indirect beneficial owner of all of the outstanding shares of Common Stock of the Company, which represent 75% of the total voting power of the outstanding capital stock of the Company. As majority stockholder, Ford is in a position to cause the election of a majority of the Board of Directors of the Company and to control the Company's affairs.\nThe Company, Ford and Ford Credit also maintain a number of financial and administrative arrangements and regularly engage in transactions with each other. These arrangements include management services agreements between the Company and Ford and the Company and Ford Credit (\"Management Services Agreements\") pursuant to which, upon the reasonable request of the Company, certain employees of Ford and Ford Credit work on the affairs of the Company and its subsidiaries, so as to enable the Company to continue to conduct and operate the business and affairs of the Company and to provide other services required by the Company. The services provided for under the Management Services Agreements include, but are not necessarily limited to, accounting, bookkeeping, finance, treasury, systems, credit, personnel (including administration of pension and other benefit plans), purchasing, engineering, legal, tax, and other technical and professional support, including Ford employees who serve as executive officers of the Company and\/or its subsidiaries.\nUnder the Management Services Agreements, the Company reimburses Ford or Ford Credit, as appropriate, for the costs of the services provided to the Company or its subsidiaries by Ford or Ford Credit, as the case may be. Presently, such costs include an allocation of the total compensation (including benefits) and overhead charges related to such employees, based on the time spent in rendering services under the Management Services Agreements, and in cases where the services are provided for purposes other than to enable the Company to provide, in turn, a service to Ford or Ford Credit, a reasonable markup on such costs. Out-of-pocket expenses incurred by Ford or Ford Credit under the Management Services Agreements also are reimbursed by the Company. The Associates also has similar services agreements with the various Ford subsidiaries that acquired The Associates' former foreign subsidiaries.\nCertain of the arrangements and agreements between the Company (and\/or its subsidiaries) and Ford (and its subsidiaries) were established by Ford prior to the Company's formation and thus were not the result of direct negotiations between Ford and the Company. The Company believes, however, that all such arrangements and agreements are fair and reasonable.\nPART IV\nItem 14.","section_14":"Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K - --------------------------------------------------------------------------\n(a) 1. Financial Statements\nFord Holdings, Inc. and Subsidiaries ------------------------------------\nReport of Independent Accountants.\nConsolidated Statement of Income, for the years ended December 31, 1993, 1992 and 1991.\nConsolidated Balance Sheet, December 31, 1993 and 1992.\nConsolidated Statement of Cash Flows, for the years ended December 31, 1993, 1992 and 1991.\nConsolidated Statement of Stockholders' Equity, for the years ended December 31, 1993, 1992 and 1991.\nNotes to Financial Statements.\nThe Report of Independent Accountants, Financial Statements and Notes to Financial Statements listed above are filed as part of this Report and are as set forth on pages FH-1 through FH-20 immediately following the signature pages of this Report.\n(a) 2. Financial Statement Schedules\nDesignation Description - ----------- ------------ Schedule III Condensed Financial Information of the Registrant (Parent Company)\nSchedule IV Indebtedness of and to Related Parties\nSchedule IX Short-Term Borrowings\nThe Financial Statement Schedules listed above are filed as part of this Report and are as set forth on pages FSS-1 through FSS-4 immediately following page FH-20. The schedules not filed are omitted because the information required to be contained therein is disclosed elsewhere in the financial statements or the amounts involved are not sufficient to require submission.\nItem 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (Continued) - -----------------------------------------------------------------\n(a) 3. Exhibits - ----------------\nItem 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (Continued) - --------------------------------------------------------------\nItem 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (Continued) - -----------------------------------------------------------------\n* Incorporated by reference as an exhibit hereto.\n(b) Reports on Form 8-K\nThe Registrant did not file any Current Reports on Form 8-K during the quarter ended December 31, 1993.\nSIGNATURES\nPursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.\nFORD HOLDINGS, INC.\nBy: \/s\/Terrence F. Marrs* (Terrence F. Marrs) Vice President-Controller\nDate: March 28, 1994\nPursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.\nJ:\\10K\\FHI93.be\nCoopers & Lybrand Certified Public Accountants\nREPORT OF INDEPENDENT ACCOUNTANTS\nTo the Board of Directors and Stockholders Ford Holdings, Inc.\nWe have audited the consolidated balance sheet of Ford Holdings, Inc. and Subsidiaries at December 31, 1993 and 1992, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1993, and the financial statement schedules listed in Item 14(a) of this Form 10-K. These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits.\nWe conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.\nIn our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Ford Holdings, Inc. and Subsidiaries at December 31, 1993 and 1992, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1993, in conformity with generally accepted accounting principles. In addition, 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 required to be included therein.\nAs discussed in Notes 10 and 12 to the consolidated financial statements, the Company changed its method of accounting for income taxes and postretirement benefits other than pensions in 1992.\n\/s\/Coopers & Lybrand\nCoopers & Lybrand 400 Renaissance Center Detroit, Michigan 48243 313-446-7100 February 1, 1994\nFH-1\nThe accompanying notes are part of the financial statements.\nFH-2\nThe accompanying notes are part of the financial statements.\nFH-3\nThe accompanying notes are part of the financial statements.\nCertain amounts for 1992 and 1991 have been reclassified to conform with presentations adopted in 1993.\nFH-4\n- - - - - - *Less than $50,000\nThe accompanying notes are part of the financial statements.\nFH-5\nFord Holdings, Inc. and Subsidiaries\nNotes to Financial Statements\nNOTE 1. Accounting Policies - ---------------------------- Principles of Consolidation - --------------------------- The consolidated financial statements include the accounts of Ford Holdings and all majority-owned subsidiaries (the \"company\"). On September 1, 1989, Ford Holdings, Inc. (\"Ford Holdings\") was formed as a wholly-owned subsidiary of Ford Motor Company (\"Ford\"). The company's wholly-owned subsidiaries include Associates First Capital Corporation and its subsidiaries (\"The Associates\"), The American Road Insurance Company and its subsidiaries (\"American Road\"), USL Capital Corporation (formerly United States Leasing International, Inc.) and its subsidiaries (\"USL Capital\"), Ford Motor Land Development Corporation and its subsidiaries (\"Ford Land\") and Ford Leasing Development Company and its subsidiaries (\"Ford Leasing\"). Investments in certain partnerships and affiliates that are 50% or less owned are included in the consolidated financial statements on an equity basis.\nRevenue Recognition - ------------------- Finance revenues on loans and direct financing leases are recognized in income over the term of the related contract using the interest method. Rental income on operating leases is recognized ratably over the lease term.\nInsurance premiums are recorded as unearned premiums when written and are subsequently recognized in income over the term of the related insurance contracts. The methods of recognizing premium revenue are related to amounts at risk and include historical loss experience, pro rata, and sum-of-the-digits bases.\nGoodwill - -------- Goodwill, arising primarily from the acquisitions of The Associates by Ford Holdings and of USL Capital by Ford, is being amortized using the straight-line method over 40 years.\nInsurance Claims - ---------------- A liability is provided for reported claims and for claims that have been incurred but not reported. The estimate of the liability for claims that have been incurred but not reported is based on prior experience and insurance in-force.\nAnnuity Contracts - ----------------- The liability for annuity contracts reflects deposits received and interest credited, less related withdrawals. The weighted- average interest rate on annuity contracts outstanding at December 31, 1993 and 1992 was 6.2% and 7.3%, respectively. Interest rates offered are initially guaranteed for periods of either one or five years. Interest credited to annuity account balances is recognized as expense; surrender charges are recognized as a reduction of interest credited to annuitants. The fair value of annuity contracts at December 31, 1993 and 1992 approximated book value because the contractual interest rate due holders is reset annually for more than 97% of contracts outstanding.\nCash Equivalents - ---------------- The company considers all highly-liquid investments purchased with a maturity of three months or less to be cash equivalents. The book value of these investments approximates fair value because of the short maturity.\nFH-6\nNOTE 2. Investment and Other Income - ------------------------------------\nInvestment and other income consisted of the following (in millions):\nNOTE 3. Reinsurance Activity - -----------------------------\nA portion of the physical damage and credit life and disability insurance business of the company relates to reinsurance agreements with unaffiliated insurance companies. Amounts added to or deducted from accounts in connection with insurance assumed or ceded were as follows (in millions):\nThe company remains contingently liable with respect to insurance ceded should the reinsurer be unable to meet the obligation assumed under the reinsurance agreement. Amounts recoverable from reinsurers were $7 million in 1993 and $8 million in 1992.\nNOTE 4. Investments in Securities - ---------------------------------- Investments in debt securities are recorded at amortized cost because of the ability to hold such securities until maturity and the intent to hold them for the foreseeable future. If market conditions change, however, certain of these securities may be sold prior to maturity with the realized gain or loss included in investment and other income. The cost of investments sold generally is determined on a specific security basis.\nMarketable equity securities are recorded at fair value with unrealized gains or losses, net of applicable income taxes, recorded directly to stockholders' equity; realized gains and losses are included in investment and other income. The cost of investments sold generally is determined on a first-in, first-out basis.\nFH-7\nNOTE 4. Investments in Securities (Cont'd) - ----------------------------------\nInvestments in debt securities at December 31 were as follows (in millions):\nThe fair value of most securities was estimated based on quoted market prices for those securities. For those securities for which there were no quoted market prices, the estimate of fair value was based on similar types of securities that are traded in the market.\nThe book value and fair value of investments in debt securities at December 31, by contractual maturity, are shown below (in millions). Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalty.\nProceeds from sales of investments in debt securities were $11.1 billion in 1993, $9.9 billion in 1992, and $11.2 billion in 1991. In 1993, gross gains of $112 million and gross losses of $20 million were realized on those sales; gross gains of $90 million and gross losses of $28 million were realized in 1992, and gross gains of $75 million and gross losses of $17 million were realized in 1991.\nThe cost of marketable equity securities at December 31, 1993 and 1992 was $160 million and $262 million, respectively. In 1993, gross unrealized gains totaled $66 million and gross unrealized losses totaled $5 million; in 1992, gross unrealized gains and gross unrealized losses totaled $82 million and $11 million, respectively.\nFH-8\nNOTE 5. Finance Receivables - ----------------------------\nFinance receivables at December 31 were as follows (in millions):\nThe estimated maturities of finance receivables outstanding at December 31, 1993 were as follows (in millions):\nEstimated maturities were based on contractual terms and do not give effect to possible prepayments or renewals.\nThe fair value of most receivables was estimated by discounting future cash flows using an estimated discount rate which reflected the credit, interest rate and prepayment risks associated with similar types of instruments. For receivables with short maturities, the book value approximated fair value.\nAcquisitions - ------------ During 1993, 1992 and 1991, the company made acquisitions of finance businesses and finance receivables, the most significant of which were as follows:\nIn September 1993, The Associates acquired the credit card portfolio of Great Western Financial Corporation. The outstanding balances totaled $216 million.\nIn September 1993, The Associates purchased the assets of Mack Financial Corporation, the financing division of Mack Trucks, Inc., consisting of $552 million of net commercial finance receivables, principally secured by heavy-duty trucks and truck trailers. The fair value of assets acquired and liabilities assumed was $587 million and $380 million, respectively. The transaction was accounted for as a purchase.\nIn April 1993, The Associates purchased the stock of Allied Finance Company, with assets primarily consisting of $146 million of net consumer finance receivables, principally comprised of residential real estate-secured, direct installment and indirect installment receivables. The fair value of assets acquired and liabilities assumed was $197 million and $112 million, respectively. The transaction was accounted for as a purchase.\nFH-9\nNOTE 5. Finance Receivables (Cont'd) - ----------------------------\nIn December 1992, The Associates purchased the stock of Trans- National Leasing, Inc. Approximately $48 million of net commercial finance receivables relating to the financing of fleet vehicles was acquired in the transaction. The fair value of assets acquired and liabilities assumed was $52 million and $45 million, respectively. The transaction was accounted for as a purchase.\nIn November 1992, The Associates purchased substantially all of the assets of First Family Financial Services H. C., Inc., including $546 million of net consumer finance receivables, principally residential real estate-secured and direct installment receivables. The fair value of assets acquired and liabilities assumed was $697 million and $543 million, respectively. The transaction was accounted for as a purchase.\nIn April 1992, The Associates purchased from Signal Financial Corporation $290 million of net consumer finance receivables, consisting primarily of direct installment and residential real estate-secured receivables. The fair value of assets acquired and liabilities assumed was $303 million and $2 million, respectively. The transaction was accounted for as a purchase.\nIn the third quarter of 1991, The Associates acquired Kentucky Finance Co., Inc. and Chase Manhattan Leasing Company (Michigan), Inc. in separate transactions. The transactions involved approximately $1,076 million of net consumer and commercial finance receivables. The fair values of assets acquired and liabilities assumed in the aggregate were $1,184 million and $294 million, respectively. Both transactions were accounted for as purchases.\nIn January 1991, The Associates acquired from Ford Credit approximately $2.2 billion of net consumer finance receivables for a like amount of cash. The purchase price represented the net book value of the receivables, which also approximated fair value. The Associates funded the purchase through the issuance of short-term debt.\nNOTE 6. Investments in Direct Financing Leases - -----------------------------------------------\nMinimum direct financing lease rentals are as follows (in millions): 1994 - $1,375; 1995 - $1,054; 1996 - $703; 1997 - $460; thereafter - $1,554.\nThe estimated residual values represent proceeds expected to be received from the sale of equipment leased under direct financing leases.\nFH-10\nNOTE 7. Investments in Operating Leases - ----------------------------------------\nMinimum equipment operating lease rentals are as follows (in millions): 1994 - $95; 1995 - $67; 1996 - $27; 1997 - $15; thereafter - $51. Revenues from equipment operating leases, included in financing revenues, were as follows (in millions): 1993 - $189; 1992 - $168; 1991 - $202. The cost of equipment under operating leases is capitalized and depreciated over the lease term, primarily on a straight-line basis. Depreciation expense on these operating leases was as follows (in millions): 1993 - $131; 1992 - $159; 1991- $178.\nInvestments in real estate operating leases at December 31 were as follows (in millions):\nNOTE 9. Deferred Policy Acquisition Costs - ------------------------------------------\nCertain costs of acquiring insurance contracts are deferred and amortized over the terms of the related contracts on the same bases on which the premiums are earned. Changes in deferred policy acquisition costs were as follows (in millions):\nNOTE 10. Income Taxes - ----------------------\nThe provision for income taxes was as follows (in millions):\n- - - - - - *Excludes cumulative effects of changes in accounting principles\nThe company adopted Statement of Financial Accounting Standards No. 109 (\"SFAS 109\"), \"Accounting for Income Taxes,\" as of January 1, 1992. The cumulative effect of this change in accounting principle increased 1992 net income by $51 million. Financial statements for prior years were not restated to apply the provisions of SFAS 109. The adoption of SFAS 109 changes the method of accounting for income taxes from the deferred method using Accounting Principles Board Opinion No. 11 (\"APB 11\") to an asset and liability approach.\nUnder SFAS 109, deferred income taxes reflect the estimated tax effect of temporary differences between assets and liabilities for financial reporting purposes and those amounts as measured by tax laws and regulations.\nFH-12\nNOTE 10. Income Taxes (Cont'd) - ----------------------\nThe components of deferred income tax assets and liabilities at December 31 were as follows (in millions):\nDeferred income taxes for 1991 were derived using the guidelines in APB 11. Under APB 11, deferred income taxes result from timing differences in the recognition of revenues and expenses between financial statements and tax returns. The principal sources of these differences and the related effect of each on the provision for income taxes were as follows (in millions):\nA reconciliation of the provision for income taxes compared with the amounts at the U.S. statutory tax rate is shown below (in millions):\nFH-13\nNOTE 11. Debt - --------------\nDebt at December 31 was as follows (in millions):\nThe fair value of debt was estimated based on quoted market prices or current rates for similar debt with the same remaining maturities.\nThe average remaining term of commercial paper was 24 days and 32 days at December 31, 1993 and 1992, respectively.\nLong-term debt at December 31, 1993, including amounts payable within one year, matures as follows (in millions): 1994 - $2,609; 1995 - $2,479; 1996 - $2,955; 1997 - $3,069; 1998 - $1,513; thereafter - $5,752. The interest portion of capital lease obligations was $1 million at December 31, 1993.\nSecured indebtedness is collateralized by mortgages on land and buildings of approximately $99 million and by rentals receivable and rental equipment of approximately $7 million, which are included in investments in leases. At December 31, 1993, warrants were outstanding to purchase $155 million aggregate principal amount of senior notes at specified dates between 1994 and 1999.\nAt December 31, 1993, Ford guaranteed all of Ford Holdings' debt held by nonaffiliated persons, totaling $1,862 million, and $46 million of Ford Leasing's debt.\nAt December 31, 1993, the company had contractually committed revolving credit facilities with banks of $5.3 billion. These facilities were unused at December 31, 1993. Maturity dates for these facilities ranged from February 1994 through September 1998. Also, at December 31, 1993, the company had contractually committed lines of credit with banks of $3.1 billion, none of which were utilized. In addition, the company had $1.2 billion of contractually committed receivables sale facilities, of which about 14% were in use at December 31, 1993. Some of these agreements contain certain provisions related to the continuation of Ford's direct or indirect ownership in the company.\nFH-14\nNOTE 12. Employee Retirement Benefits - --------------------------------------\nEmployee Retirement Plans - -------------------------\nThe Associates sponsors various defined benefit pension plans, which together cover substantially all permanent employees who meet certain eligibility requirements.\nThe Associates' pension expense reflected the following (in millions):\nThe status of these plans for The Associates at December 31 was as follows (in millions):\nUSL Capital sponsors a defined contribution retirement plan which covers substantially all of its employees. Under the profit sharing part, contributions are determined as a percent (6.9%) of each covered participant's salary, minus the Old Age, Survivors, and Disability Insurance portion of social security taxes paid for the participant by USL Capital. Profit sharing cost represents contributions minus the unvested amounts of terminated participants. Under the deferred compensation part, contributions (cost) are determined as 75 cents per dollar for the first 3% and 25 cents per dollar on the next 3% of deferred compensation up to a maximum of 6% of a participant's compensa- tion. The amount charged to operating expenses related to USL Capital's retirement plan was as follows (in millions): 1993 - $4; 1992 - $4; 1991 - $4.\nOther subsidiaries of the company do not have employees but purchase technical and administrative services from Ford, the cost of which includes retirement benefits. Retirement costs included in such service fee billings from Ford were not sig- nificant.\nPostretirement Health Care and Life Insurance Benefits - ------------------------------------------------------\nThe Associates sponsors unfunded plans that provide selected health care and life insurance benefits to substantially all retired employees who have met certain eligibility requirements; however, the benefits of the plan may be modified or terminated at the discretion of The Associates.\nFH-15\nNOTE 12. Employee Retirement Benefits (Cont'd) - --------------------------------------\nUSL Capital sponsors unfunded plans that provide selected health care and life insurance benefits to retired employees, the cost of which is shared between USL Capital and the retiree. The accounting for the health care plan anticipates future cost- sharing changes that are consistent with USL Capital's past practice. USL Capital defines a maximum amount (or \"cap\") that it will contribute toward the health benefits of each retiree. This cap is determined annually and is based on the individual retiree's number of dependents. Over the last six years the aggregate increase in the cap approximates the average increase in the underlying premium costs of the program. This valuation assumed that in future years USL Capital will continue to increase the cap at the average rate of increase of the underlying cost of the retiree benefit program. Benefits and eligibility rules, however, may be modified by USL Capital from time to time.\nPrior to 1992, the expense recognized for postretirement health care benefits was based on actual expenditures for the year. Beginning in 1992, the estimated cost of postretirement health care benefits is accrued on an actuarially determined basis, in accordance with the requirements of Statement of Financial Accounting Standards No. 106 (\"SFAS 106\"), \"Employer's Accounting for Postretirement Benefits Other Than Pensions\". Implementation of SFAS 106 has not increased the company's cash expenditures for postretirement benefits. As of January 1, 1992, The Associates recorded a one-time charge to net income of $40 million, which represented the estimated accumulated postretirement benefit obligation of $65 million, net of deferred income taxes of $21 million and amounts recorded as purchase accounting adjustments of $4 million. In addition, the unamortized amount ($19 million) of the postretirement benefit liability recorded by Ford Holdings at the time The Associates was acquired was reversed with the adoption of the new standard by The Associates. As of January 1, 1992, USL Capital recorded a one-time charge to net income of $3 million, which represented the estimated accumulated postretirement benefit obligation of $5 million, net of deferred income taxes of $2 million. These amounts have been reflected in the Consolidated Statement of Income as a component of the cumulative effects of changes in accounting principles.\nThe combined amount paid by The Associates and USL Capital for postretirement benefits in 1993, 1992 and 1991 was $2 million, $2 million and $1 million, respectively.\nThe combined net postretirement benefit expense for The Associates and USL Capital included the following (in millions):\nFor measurement purposes, The Associates assumed 12.5% and 13.32% weighted average annual rates of increase in per capita cost of covered health care benefits for 1993 and 1992, respectively, decreasing gradually to 5.5% by 2009.\nFH-16\nNOTE 12. Employee Retirement Benefits (Cont'd) - --------------------------------------\nFor measurement purposes, USL Capital assumed 12% and 8% annual rates of increase in per capita cost of postretirement medical benefits for 1993 for the under age 65 indemnity and HMO and over age 65 indemnity plans, respectively; the rates were assumed to decrease gradually to 5.5% by 2006 and remain at that level thereafter. The comparable rates assumed for 1992 were 14% and 9% for the under age 65 indemnity and HMO and over age 65 indemnity plans, respectively.\nChanging the assumed health care cost trend rate by one percentage point would change the aggregate of the service and interest cost components of net periodic postretirement benefit cost of The Associates and USL Capital, on a combined basis, for 1993 and 1992 by $1 million each year, and the accumulated postretirement benefit obligation at December 31, 1993 and 1992 by $7 million and $6 million, respectively.\nNOTE 13. Capital Stock - -----------------------\nThe authorized capital stock of Ford Holdings consists of Common Stock and Preferred Stock. Holders of Preferred Stock generally are entitled to elect not less than 25 percent of the directors of the company. On all matters other than the election of directors as to which stockholders generally have a vote, holders of Common Stock, as a class, are entitled to 75%, and holders of Preferred Stock, as a class, are entitled to 25%, of the total number of votes of all the capital stock of Ford Holdings. At December 31, 1993, the Preferred Stock consisted of $800 million of Cumulative Flexible Rate Auction Preferred Stock (Exchange) (\"Flex-APS\"); $285 million of fixed-rate Series A Cumulative Preferred Stock; $173 million of fixed-rate Series B Cumulative Preferred Stock; and $200 million of fixed-rate Series C Cumulative Preferred Stock.\nDividends on the Flex-APS generally are determined through auction procedures. The maximum applicable dividend rate is a function of the 60-day \"AA\" Composite Commercial Paper rate or the applicable reference rate. The average dividend rate in effect on the Flex-APS in 1993 was 4.38%; the weighted average dividend rate was 4.43% on December 31, 1993. Accumulated and unpaid dividends on the Flex-APS amounted to $4 million at December 31, 1993.\nThe fixed-rate Series A Cumulative Preferred Stock dividend rate is 8% ($2.00 per depository share) per year; accumulated and unpaid dividends were $2 million at December 31, 1993. The fixed-rate Series B Cumulative Preferred Stock dividend rate is 8% ($2.00 per depository share) per year; accumulated and unpaid dividends were $1 million at December 31, 1993. The fixed-rate Series C Cumulative Preferred Stock dividend rate is 7.12% ($1.78 per depository share) per year; accumulated and unpaid dividends were $1 million at December 31, 1993.\nNOTE 14. Dividend Restrictions - -------------------------------\nPayment of dividends by American Road is restricted by insurance regulatory requirements of the State of Michigan. Based on these restrictions at December 31, 1993, management has determined the maximum dividend that may be paid in 1994 to Ford Holdings without regulatory approval is approximately $11 million.\nPayment of dividends by certain subsidiaries of The Associates is restricted under the provisions of certain debt and revolving credit agreements. At December 31, 1993, $222 million was available for the payment of dividends.\nFH-17\nNOTE 15. Litigation and Claims - -------------------------------\nVarious legal actions, governmental investigations and proceedings, and claims are pending or may be instituted or asserted in the future against Ford Holdings and its subsidiaries. Certain of the pending legal actions are, or purport to be, class actions. Some of the foregoing matters involve or may involve compensatory, punitive, or antitrust or other treble damage claims in very large amounts, sanctions, or other relief which, if granted, would require very large expenditures.\nLitigation is subject to many uncertainties, the outcome of individual litigated matters is not predictable with assurance, and it is reasonably possible that some of the foregoing matters could be decided unfavorably to Ford Holdings or the subsidiary involved. Although the amount of the ultimate liability at December 31, 1993 with respect to these matters cannot be ascertained, the company believes that any resulting liability should not materially affect the consolidated financial position of the company at December 31, 1993.\nNOTE 16. Transactions With Affiliated Companies - ------------------------------------------------\nThe company receives technical and administrative advice and services from Ford and utilizes data processing facilities maintained by Ford. The cost of these services is allocated to the company based on actual costs incurred by Ford in performing these services. The company believes this allocation is a reasonable approximation of the costs it would have incurred on a stand-alone basis. Payments to Ford for such services were as follows (in millions): 1993 - $31; 1992 - $41; 1991 - $48.\nThe company provides insurance and other services to Ford and other affiliated companies. Amounts included in revenues for these services were as follows (in millions):\nNet interest income under various financing arrangements between the company and Ford was as follows (in millions): 1993 - $16; 1992 - $33; 1991 - $37.\nIn 1991, Ford Holdings received a capital contribution from Ford Credit of $216 million in the form of cash and stock of certain consumer finance subsidiaries formerly owned by Ford Credit in exchange for additional shares of Ford Holdings' Common Stock. The cash and stock of the consumer finance subsidiaries were then contributed by Ford Holdings to The Associates.\nNOTE 17. Commitments and Contingencies - ---------------------------------------\nThe company has entered into foreign exchange agreements to manage exposure to foreign exchange rate fluctuations. These exchange agreements hedge primarily debt, firm commitments and dividends that are denominated in foreign currencies. Agreements entered into to manage these exposures are comprised primarily of foreign currency swaps. Gains or losses on the various agreements are either recognized during the period or included in the bases of the related transactions.\nFH-18\nNOTE 17. Commitments and Contingencies (Cont'd) - ---------------------------------------\nThe fair value of these foreign exchange agreements generally was estimated using current market prices provided by outside quotation services. The fair value was estimated to be net receivable of $12 million at December 31, 1993 and a net payable of $47 million at December 31, 1992. In the unlikely event that a counterparty fails to meet the terms of a foreign exchange agreement, the company's market risk is limited to the currency rate differential. In the case of currency swaps, the company's market risk also may include an interest rate differential. At December 31, 1993 and 1992, the total amount of the company's foreign currency swaps outstanding was $281 million and $398 million, respectively, maturing primarily through 1996.\nThe company has entered into arrangements to manage exposure to fluctuations in interest rates. These arrangements are comprised primarily of interest-rate swap agreements. The differential paid or received on interest-rate swap agreements is recognized as an adjustment to interest expense.\nThe fair value of interest-rate swaps is the estimated amount the company would receive or pay to terminate the swap agreement. The fair value is calculated using information provided by outside quotation services, taking into account current interest rates and the current credit-worthiness of the swap counterparties. The fair value was estimated to be a net receivable of $7 million at December 31, 1993 and a net payable of $7 million at December 31, 1992. In the unlikely event that a counterparty fails to meet the terms of an interest-rate swap agreement, the company's exposure is limited to the interest rate differential. The underlying principal amounts on which the company has interest-rate swap agreements and futures contracts outstanding aggregated $2.1 billion at December 31, 1993 and $1.9 billion at December 31, 1992.\nCertain Ford Holdings' subsidiaries make credit lines available to holders of their credit cards. At December 31, 1993 and 1992, the unused portion of available credit was approximately $9.6 billion and $5.5 billion, respectively, and is revocable under specified conditions. The fair value of unused credit lines and the potential risk of loss was not considered to be significant.\nIn addition, the company has entered into a variety of other financial agreements which contain potential risk of loss. These agreements include financial guarantees and interest rate caps and floors. The fair value of these agreements and the potential risk of loss was not considered to be significant.\nNOTE 18. Segment Information - -----------------------------\nThe company operates in three business segments: consumer finance, commercial finance, and insurance. The consumer finance segment is engaged primarily in making and investing in direct installment and revolving credit receivables, including credit card receivables, purchasing consumer-related installment obligations, and providing other consumer financial services. The commercial finance segment is engaged primarily in financing sales of transportation and industrial equipment, leasing of equipment either through equipment vendors or directly to end users, and the construction and operation of commercial real estate developments. The insurance segment is engaged primarily in the issuance of single premium deferred annuities, property and casualty insurance relating to extended service plan contracts, credit life and credit disability insurance, and physical damage insurance. These insurance products are provided primarily to purchasers of vehicles financed by Ford subsidiaries and to customers of the finance operations of The Associates.\nCorporate expenses consist primarily of interest on acquisition- related debt. Acquisition-related goodwill has been allocated to the operating segments.\nFH-19\nNOTE 18. Segment Information (Cont'd) - -----------------------------\n(a) Primarily an increase in Ford Land notes receivable from Ford (b) Primarily an increase in receivables at American Road for insurance premiums collected by Ford Credit (c) Primarily higher payables at Ford Land and an increase in State taxes payable at Ford Holdings (d) Primarily interest accrual on Ford Holdings zero-coupon note to Ford and increase in American Road accounts payable to Ford (e) Primarily increases in accounts payables at USL Capital and The Associates with Ford Credit\nFSS-3\nSchedule IX\nFORD HOLDINGS, INC. AND SUBSIDIARIES\nSHORT-TERM BORROWINGS ---------------------\nFor the Years Ended December 31, 1993, 1992 and 1991 (dollar amounts in millions)\n- ------------------------- (a) The average amount outstanding during the period was computed using the amounts outstanding at the end of each month, including the amount at the beginning of the period.\n(b) The weighted average interest rate during the period was computed by dividing actual interest expense on short-term borrowings by the average short-term debt outstanding during the period.\n(c) The increase in debt in 1993, 1992 and 1991 resulted principally from the growth in receivables at The Associates.\nFSS-4\nEXHIBIT INDEX (continued) -------------------------\nEXHIBIT INDEX (continued) -------------------------\nj:\\10k\\exindfh.93","section_15":""}
{"filename":"799274_1993.txt","cik":"799274","year":"1993","section_1":"ITEM 1. BUSINESS\nReeves Industries, Inc., incorporated in Delaware in 1982 (\"Reeves\" or \"the Company\"), a wholly-owned subsidiary of Hart Holding Company Incorporated (\"Hart Holding\"), is a holding company whose principal asset is the common stock of its wholly-owned subsidiary, Reeves Brothers, Inc. (\"Reeves Brothers\"). The Company was acquired by Hart Holding on May 6, 1986. Reeves is a diversified industrial company with operations in two principal business segments, industrial coated fabrics, conducted through its Industrial Coated Fabrics Group (\"ICF\"), and apparel textiles, conducted through its Apparel Textile Group (\"ATG\").\nEffective October 25, 1993, HHCI, Inc., a newly formed, wholly-owned subsidiary of Hart Holding, merged with and into the Company with the Company surviving the merger. HHCI, Inc. was formed as a shell corporation (no operations). As a result of this merger, Hart Holding obtained ownership of 100% of the outstanding shares of the common stock of the Company. See Footnote 10, Stockholder's Equity, of the Notes to Consolidated Financial Statements of Reeves.\nINDUSTRY SEGMENTS\nReeves is a diversified industrial company with operations in two principal business segments, industrial coated fabrics, conducted through its Industrial Coated Fabrics Group, and apparel textiles, conducted through its Apparel Textile Group. In 1993, ICF contributed approximately 49.6% of the Company's net sales and approximately 71.7% of its operating income, and ATG contributed approximately 50.4% of the Company's net sales and approximately 28.3% of its operating income (in each case, excluding corporate expenses, goodwill amortization and facility restructuring charges). Throughout its businesses, the Company emphasizes specialty products, product quality, technological innovation and rapid responses to the changing needs of its customers.\nICF specializes in the coating of various substrate fabrics with a variety of products such as synthetic rubber, vinyl, neoprene, urethane and other elastomers, to produce a diverse line of products for industrial applications. ICF's principal products include: (1) a complete line of printing blankets used in offset lithography, (2) coated automotive airbag materials, (3) specialty coated fabrics and (4) coated fabrics used in industrial coverings.\nThe Company believes that ICF is one of the world's leading producers of offset printing blankets and that ICF has the leading share of the domestic market for coated automotive airbag materials. The Company also believes that ICF is a leading domestic producer of specialty coated fabrics used for a broad range of industrial applications. ICF's products generally involve significant amounts of technological expertise and precise production tolerances. The Company believes that ICF's product development, formulation and production methods are among the most sophisticated in the coated fabrics industry.\nATG manufactures, processes and sells specialty textile fabrics to apparel and other manufacturers. Through its Greige Goods Division, ATG processes raw materials into greige goods (i.e., undyed woven fabrics). Through its Finished Goods Division, ATG functions as a converter and commission finisher, purchasing greige goods (from the Greige Goods Division and others) and contracting to have the goods dyed and finished or dyeing and finishing the goods itself. The dyed and finished goods are then sold for use in a variety of end-products.\nThe Company believes that ATG has developed strong positions in niche markets in the apparel textile industry by offering unique, custom-designed fabrics to leading apparel and specialty garment manufacturers. ATG emphasizes \"short-run\" product orders and targets market segments in which its manufacturing flexibility, rapid response time, superior service and quality and the ability to supply exclusive blends are key competitive factors.\nThe Company's business strategy has focused on the sale of higher-margin niche products and the establishment of leading positions in its principal markets. The Company believes that this strategy, combined with its diverse product and customer base, the development of new products and substantial capital investment, has helped the Company increase its sales and profitability in spite of adverse economic conditions in its U.S. and European markets during 1990-1993.\nThe following table shows the amount of total revenue contributed by product lines which accounted for 10% or more of the Company's consolidated revenues in any of the last three fiscal years (in thousands).\nYear Ended December 31, ---------------------------- 1991 1992 1993 -------- -------- -------- Industrial Coated Fabrics Group: Specialty Materials $ 55,581 $ 61,684 $ 78,151 Graphic Arts 65,683 64,892 62,584 -------- -------- -------- $121,264 $126,576 $140,735 ======== ======== ========\nApparel Textile Group: Finished Goods and Dyeing and Finishing $ 74,893 $ 72,977 $ 77,416 Greige Goods 73,402 71,551 65,502 -------- -------- -------- $148,295 $144,528 $142,918 ======== ======== ========\nReeves does not hold any patents, trademarks, licenses and\/or franchises the loss of which would have a material adverse affect on any of its industry segments.\nAdditional information about industry segments of Reeves is contained in Footnote 14, Financial Information About Industry Segments, of the Notes to Consolidated Financial Statements of Reeves.\nINDUSTRIAL COATED FABRICS GROUP\nThe Industrial Coated Fabrics Group specializes in the coating of various substrate fabrics with a variety of products, such as synthetic rubber, vinyl, neoprene, urethane, and other elastomers, to produce a diverse line of products for industrial applications.\nICF's products comprise four categories: (1) a complete line of printing blankets used in offset lithography, (2) coated automotive airbag materials, (3) specialty coated fabrics, including fluid control diaphragm materials, tank seals, ducting materials and coated fabric materials used for military and commercial life rafts and vests, aircraft escape slides, flexible fuel tanks and general aviation products, and (4) coated fabrics used in industrial coverings, including fabrics coated with rubber and vinyl which are used to make tarpaulins, loading dock shelters and other industrial products.\nICF's products require significant amounts of technological expertise and the Company believes that ICF's product development, formulation and production methods are among the most sophisticated in the coated fabrics industry. Since 1990, ICF has been awarded six patents with respect to polyurethane coatings and has nine pending patent applications relating to printing blankets, airbag fabric and specialty coatings. Approximately eight other patent applications are in process.\nICF generally manufactures specialty coated fabrics according to a production backlog. ICF's products, other than printing blankets and coated automotive airbag material, involve relatively short runs and custom manufacturing. Printing blankets are sold primarily to distributors and dealers. ICF's other products are sold directly to end users and fabricators by its direct sales force.\nPrinting Blankets\nThe Company believes that ICF is one of the world's leading producers of printing blankets used in offset lithography, the predominant printing process for the commercial, financial, publication and industrial printing markets.\nOffset printing blankets are used in the printing process to transfer a printed image from a metal printing plate onto paper or other printing material. ICF markets a complete line of conventional, compressible and sticky-back blankets under the VULCAN (registered trademark) name. The Company's line includes the 714 (registered trademark), the first compressible printing blanket, the 2,000 (registered trademark) PLUS, an advanced general purpose blanket, the VISION SR (trademark), a premium blanket targeted at the sheet-fed market, and the MARATHON (registered trademark), a blanket targeted to the high-speed web press market. Each blanket in the product line is designed for a specific printing need and ICF sells an appropriate blanket for most types of commercial, financial, publication and industrial printing applications.\nThe Company believes that ICF's blankets consistently offer high performance and quality. This performance is due to a number of proprietary features of the blankets, many of which are the subject of pending patent applications. Distinctive characteristics of ICF's blankets include unique printing surface compounds, improved composition and placement of compressible layers, surface buffing and water and solvent-resistant back plies.\nPurchasers of ICF's blankets include commercial, financial and industrial printers and publishers of newspapers and magazines. ICF's blankets are sold to over 10,000 U.S. printers and more than 15,000 foreign printers, in 64 countries worldwide.\nICF has established a network of over 60 distributors and 125 dealers in the United States, Canada and Latin America to market its printing blankets. In addition, ICF is represented by a distributor in most of the other countries in which it does business. The Company's distributors typically purchase rolls of uncut blankets from ICF and then cut, finish and package the blankets prior to delivery to dealers or end-users. Internationally, ICF's relationships with distributors tend to be long-standing and exclusive, with most distributors dealing only in ICF's printing blankets and ICF selling only to such distributors in their respective territories. Domestic distributors tend to carry printing blankets from a number of manufacturers. Dealers generally purchase finished blankets from distributors for resale. ICF services all of its customers, and its direct sales force actively markets and promotes ICF's printing blankets.\nAutomotive Airbag Materials\nReeves believes that ICF has the leading share of the domestic market for coated automotive airbag materials. ICF is a significant supplier of such material to TRW, Inc. (\"TRW\") and the Safety Restraints Division of Allied-Signal, Inc. (\"Allied-Signal\"). Allied-Signal supplies Morton International (\"Morton\") with airbag components. TRW and Morton are two of four major domestic manufacturers of airbag systems and, together with Allied-Signal, supply all of the domestic automobile manufacturers and many of the European and Japanese automobile manufacturers. The Company believes that TRW and Morton account for in excess of 50% of the worldwide market for airbag systems.\nNational Highway Traffic Safety Administration regulations currently mandate the use of both driver-side and passenger-side airbags for all 1998 model year passenger cars and 1999 model year light trucks, vans and multipurpose vehicles (\"LTVs\"). A phase-in schedule establishes that at least 95% of a manufacturer's passenger cars built on or after September 1, 1996 for sale in the United States, must be equipped with an airbag at the driver's and the right front passenger's seating positions. All LTVs built after September 1, 1997, must have some form of automatic occupant protection, and at least 80% must have either driver-side or driver-side and passenger-side airbags.\nDue to market demand for airbag-equipped vehicles, automobile manufacturers have been installing airbags (primarily driver-side) more extensively than required by the foregoing regulations. The Company expects sales of airbag systems and coated airbag fabric to increase substantially in future years and believes that ICF is well-positioned to benefit from such growth.\nFollowing the lead of the U.S. automobile manufacturers, European and Asian automobile manufacturers have begun installation of automobile airbags. No legislation or regulation presently requires the installation of airbags outside of the United States market. Reeves' Italian subsidiary, Reeves S.p.A., has sufficient capacity for production of coated airbag material if demand develops outside of the United States for such products.\nCompany participation in the airbag market to date has been through the use of coated airbag fabric in driver-side applications where coated airbag fabric offers certain advantages such as greater thermal insulation to withstand the rapid inflation of the airbag by means of hot gases and impermeability to prevent the escape of gases. Side-impact airbags (presently offered on certain models of Volvo and Mercedes Benz) are expected to use coated airbag fabric.\nMost passenger-side airbags are currently designed to use uncoated fabrics. Passenger-side airbags deploy more slowly than driver-side airbags. Consequently, they can be manufactured at a lower cost using uncoated fabric. The Company does not presently produce an uncoated airbag fabric. Although there can be no assurance that it will be able to do so, the Company plans to participate in the growth of passenger-side applications through an expansion program capitalizing on its textile expertise and research and development efforts. As part of this program, the Company is constructing an approximately 100,000 square foot facility in Spartanburg, South Carolina for weaving both coated and uncoated airbag fabric. The facility is expected to be operational by the end of 1994.\nThrough its research and development activities, the Company is continuously working to develop new proprietary fabric technologies and procedures for the next generation of driver-side and passenger-side airbags. Airbag fabrics must meet rigorous specifications, testing and certification requirements and airbag fabric contracts tend to be awarded several years in advance. These factors may deter the entry of other manufacturers into this business.\nSpecialty Coated Fabrics\nThe Company believes that ICF is a leading domestic producer of specialty coated fabrics used for a broad range of industrial applications. ICF's specialty coated fabrics business is largely customer or \"job shop\" oriented. In 1993, more than 90% of ICF's sales of specialty coated fabrics were derived from fabrics manufactured to meet particular customer's specifications.\nSpecialty coated fabrics generally consist of a fabric base, or substrate layer, and an elastomer coating (i.e., coating consisting of an elastic substance, such as rubber) which is applied to the fabric base. The Company believes that ICF's line of elastomer-fabric combinations is the most comprehensive in the industry, enabling it to design products to satisfy its customers' needs. Fabric bases used in ICF's specialty coated fabrics include polyester, nylon, cotton, fiberglass and silk. ICF's elastomers include natural rubber, nitrile, THIOKOL (registered trademark), NEOPRENE (registered trademark), silicone, HYPALON (registered trademark), VITON (registered trademark) and polyurethane.\nICF sells its specialty coated fabrics under the registered trademark REEVECOTE (registered trademark). The Company believes that ICF has established a reputation for quality and product innovation in specialty coated fabrics by virtue of ICF's technological capability, advanced plant and equipment, research and development facilities and specialized chemists and engineers.\nICF's specialty coated fabrics are separated into five product lines:\nGeneral purpose goods. This product line includes air cells, tank seals, gaskets, compressor valves, aerosol seals and washers and coated fabrics used by other manufacturers in the production of insulation materials, soundproofing and inflatable \"lifting bags\" used to jack up automobiles or trucks.\nGas meter diaphragms. ICF manufactures a line of rubber diaphragm material for use in gas meters which are the primary mechanisms in gas meters for controlling gas flow. ICF's products are sold to most of the major manufacturers of gas meters.\nSynthetic diaphragms. The Company's synthetic diaphragms are used in carburetors, controls, meters, compressors, fuel pumps and other applications.\nSpecialty products. ICF manufactures a large number of miscellaneous specialty coated products, including v-cups for oil rig drills, expansion joints and urethane specialty items, such as fuel containers, commercial diaphragms and desiccant bags.\nMilitary, marine and aerospace products. ICF produces coated fabrics used in truck and equipment covers, waterproof duffel bags, pneumatic air mattresses, collapsible tanks for fuel and water storage, temporary shelters, rafts, inflatable boats, various types of safety devices, pneumatic and electrical plane de-icers, specialty molded aircraft parts, aerospace fuel cells, aircraft evacuation slides, helicopter floats, surveillance balloons and miscellaneous items. A portion of ICF's work in this area is performed as a subcontractor on United States government contracts.\nICF's direct sales force sells primarily to fabricators who use ICF's specialty coated fabrics in products sold to end-users.\nIndustrial Coverings Fabrics\nICF sells coated fabrics to customers that produce a wide variety of industrial coverings, including truck tarpaulins, trailer covers, cargo covers, agricultural covers, hangar curtains, industrial curtains, boat covers, athletic field covers, temporary shelters, semi-bulk containers and specialized flotation devices used for the containment of oil spills and other environmental pollutants. ICF's industrial coverings fabrics are produced by the same methods as its specialty coated fabrics and are sold under the COVERLIGHT registered trademark.\nThe industrial coverings fabrics business also includes coated fabric for loading dock shelters, which are pads or bumpers placed around the exterior of a loading dock door for weathersealing. ICF sells to manufacturers of loading dock shelter systems and believes it is the leading supplier of loading dock shelter material produced with rubber and other special elastomers.\nICF's sales force sells primarily to fabricators of industrial coverings who in turn sell to end-users. Sales personnel concentrate on the largest producers of industrial coverings and loading dock shelter systems in the United States.\nPrincipal Customers\nICF did not have a customer accounting for more than 10% of consolidated Reeves' sales during the years 1991, 1992 or 1993.\nCompetition\nICF's competitive environment varies by product line. For graphic arts products, the Company's principal competitors are Day International and W. R. Grace. To a lesser extent, the Company also competes with a number of other firms, including David M, Kinyo, Zippy, Sumitomo, DYC and Meiji. The specialty materials product line, except for airbag materials, competes in a number of highly fragmented market segments where competition varies by product. In the United States, competition comes from Chemprene, Archer Rubber, Seaman Corp., Cooley, Fairprene and selected foreign suppliers. Airbag products compete against those of Milliken and Highland Industries as well as several other small manufacturers. Quality, compliance with exacting product specifications, delivery terms and price are important factors in competing effectively in ICF's markets.\nAPPAREL TEXTILE GROUP\nThe Apparel Textile Group consists of two divisions, Greige Goods and Finished Goods. ATG concentrates on segments of the market where its manufacturing flexibility, rapid response time, superior service, quality and the ability to supply customers with exclusive blends are key competitive factors.\nATG's Greige Goods Division processes raw materials into undyed woven fabrics known as greige goods. The Greige Goods Division manufactures greige goods of synthetic fibers, wool, silk, flax and various combinations of these fibers. Products of the Greige Goods Division are primarily utilized for apparel and the Greige Goods Division's most significant customers are outside converters and, to a lesser extent, ATG's Finished Goods Division.\nThe Company believes that the Greige Goods Division is distinguished from its competitors by its ability to efficiently manufacture small yardage runs, its rapid response time, the high quality of its products and its ability to produce samples rapidly on demand. ATG's greige goods plants engage principally in short production runs producing specialty fabrics requiring a variety of blends and textures. Fabrics are produced by the Greige Goods Division according to an order backlog and are typically \"sold ahead\" three to four months in advance. Most of the Greige Goods Division's sales are sold under firm contracts. In comparison to manufacturers of large volume commodity fabrics such as print cloth, corduroy and denim, the Greige Goods Division has been less adversely affected in recent years by foreign imports because of its position as a small quantity, specialty fabric producer.\nATG's Finished Goods Division functions as a converter and commission finisher. The Finished Goods Division purchases greige goods from the Greige Goods Division and other greige suppliers and either contracts to have such goods converted into finished fabrics of varying weights, colors, designs and finishes or converts them itself. The dyed and finished fabrics are used in various end-products and sold primarily to apparel manufacturers in the women's wear, rainwear\/outerwear, men's\/boys' wear and career apparel markets.\nThe Company believes that ATG's Finished Goods Division is one of the most flexible operations of its kind in the United States due to the variety of products it can finish and the broad range of dyeing processes and finishes it is able to offer. The Finished Goods Division focuses on high value-added fabrics with unique colors and specialty finishes. The Finished Goods Division's fabrics are currently being used by a number of the leading men's and women's sportswear manufacturers and its dyeing and finishing services are sold to major domestic converters.\nA wide variety of fabrics can be woven at the Greige Goods Division's two weaving plants. The dyeing and finishing plant of the Finished Goods Division is equipped to do a variety of piece dyeing, as well as to provide specialty finishings. This manufacturing flexibility increases ATG's ability to respond rapidly to changes in market demand.\nSubstantially all of the Apparel Textile Group's products are sold directly to customers through its own sales force. The balance is sold through brokers and agents.\nPrincipal Customers\nATG markets its fabrics to a wide range of customers including H.I.S., the THOMPSON (registered trademark) men's pants division of Salant Corporation, Eddie Haggar Ltd. and V.F. Corporation. ATG also markets its fabrics to major retailers, including J.C. Penney, which specify the Company's fabrics. ATG is a direct supplier of rainwear fabric to Londontown Corporation, the maker of LONDON FOG (registered trademark), and also markets its fabrics to specialty catalogue houses such as Patagonia, L.L. Bean and Eddie Bauer.\nATG did not have a customer accounting for more than 10% of consolidated Reeves sales during the years 1991, 1992 or 1993.\nCompetition\nThe textile industry is highly competitive. While there are a number of integrated textile companies, many larger than ATG, no single company dominates the United States market. Competition from imported fabrics and garments continues to be a significant factor adversely affecting much of the domestic textile industry. Because of the nature of ATG's markets, the Company believes it is less susceptible to foreign imports than the industry as a whole and is more insulated from the risk of foreign imports than high-volume commodity producers. The most important factors in competing effectively in ATG's product markets are service, price, quality, styling, texture, pattern design and color. ATG seeks to maintain its market position in the industry through a high degree of manufacturing flexibility, product quality and competitive pricing policies.\nThe Greige Goods Division distinguishes itself from its competitors by its ability to manufacture runs as small as 40,000 square yards, its rapid response time and the high quality of the products manufactured. The Greige Goods Division has extensive proprietary technical knowledge in the structure of its spinning and weaving operations, which the Company believes represents a significant competitive advantage.\nThe Finished Goods Division is capable of finishing a wide variety of products and offers a broad range of dyeing processes and finishes. This manufacturing flexibility increases the Finished Goods Division's ability to respond rapidly to changes in market demand, which the Company believes enhances its competitive position.\nRAW MATERIALS, MANUFACTURERS AND SUPPLIERS\nThe principal raw materials used by ICF include polymeric resins, natural and synthetic elastomers, organic and inorganic pigments, aromatic and aliphatic solvents, polyurethanes, polyaramids and calendered fabrics. ATG principally utilizes wool, flax, specialty yarn, man-made fibers, including acrylics, polyesters, acetates, rayon and nylon and a wide variety of dyes and chemicals. Such raw materials are largely purchased in domestic markets and are available from a variety of sources. The Company is not presently experiencing any difficulty in obtaining raw materials. However, the Company has from time to time experienced difficulty in obtaining the substrate fabric that it uses to produce coated automotive airbag materials. The Company anticipates that the completion of its new weaving facility in Spartanburg, South Carolina may reduce the risk of such supply shortages. Airbag fabric produced by the new facility will be subject to rigorous testing and certification before it will be available for production.\nFOREIGN OPERATIONS\nAll of Reeves' foreign operations are conducted through Reeves S.p.A., a wholly-owned subsidiary located in Lodi Vecchio, Italy. Reeves S.p.A. forms a part of Reeves' ICF Group. The financial data of Reeves S.p.A. is as follows (in thousands):\n1991 1992 1993 -------- -------- -------- Sales $ 35,437 $ 38,444 $ 36,932\nNet income 6,808 9,165 7,446\nAssets 33,011 31,608 33,092\nThe financial results of Reeves S.p.A. do not include any allocations of corporate expenses or consolidated interest expense.\nBACKLOG\nThe following is a comparison of open order backlogs at December 31 of each year presented (in thousands):\n1991 1992 1993 -------- -------- -------- Industrial Coated Fabrics Group $ 16,942 $ 16,824 $ 17,072 Apparel Textile Group 47,129 32,994 39,390 -------- -------- -------- Totals $ 64,071 $ 49,818 $ 56,462 ======== ======== ========\nThe increase in ICF's backlog from 1992 to 1993 is due to growth in the coated automotive airbag materials business. The decrease in the Apparel Textile Group backlog from 1991 to 1992 was the result of a decrease in government business and reduced orders due to market uncertainty. The increase in the ATG backlog from 1992 to 1993 is due to the addition of several new customers in the Finished Goods Division.\nThe December 31, 1993 backlogs for the Industrial Coated Fabrics Group and the Apparel Textile Group are reasonably expected to be filled in 1994. Under certain circumstances, orders may be canceled at the Company's discretion prior to the commencement of manufacturing. Any significant decrease in backlog resulting from lost customers could adversely affect future operations if these customers are not replaced in a timely manner.\nENVIRONMENTAL MATTERS\nThe Company is subject to a number of federal, state and local laws and regulations pertaining to air emissions, water discharges, waste handling and disposal, workplace exposure and release of chemicals. During 1993, expenditures in connection with the Company's compliance with federal, state and local environmental laws and regulations did not have a material adverse effect on its earnings, capital expenditures or competitive position. Although the Company cannot predict what laws, regulations and policies may be adopted in the future, based on current regulatory standards, the Company does not expect such expenditures to have a material adverse effect on its operations.\nEMPLOYEES\nOn February 1, 1994, the Company employed approximately 2,289 people, of whom 1,855 were in production, 183 were in general and administrative functions, 52 were in sales and 199 were at Reeves S.p.A. At such date, ICF had approximately 639 employees and ATG had approximately 1,398 employees, with the remainder of the Company's employees in general and administrative positions.\nITEM 2.","section_1A":"","section_1B":"","section_2":"ITEM 2. PROPERTIES\nThe Company's principal facilities, their primary functions and their locations as of March 31, 1994 are as follows:\nSize (Sq. Ft.) --------------- Location Function Owned Leased\nManufacturing Facilities\nIndustrial Coated Fabrics Group Rutherfordton, NC Specialty Materials 215,000 Spartanburg, SC Graphic Arts 308,364 Lodi Vecchio, Italy Graphic Arts and Specialty Materials 160,000 4,900 --------- ------- Subtotal 683,364 4,900 --------- ------- Apparel Textile Group Woodruff, SC Greige Goods 368,587 Chesnee, SC Greige Goods 303,100 Bessemer City, NC Greige Goods 218,992 Bishopville, SC Finished Goods 226,684 2,400 Bishopville, SC Warehouse 72,650 --------- ------- Subtotal 1,117,363 75,050 --------- ------- Total Manufacturing Facilities 1,800,727 79,950 --------- -------\nNon-Manufacturing Facilities\nNew York, NY Administrative & Sales 12,000 Spartanburg, SC Administrative & Sales 43,000 Darien, CT Administrative 6,800 --------- ------- Total Non-Manufacturing Facilities 43,000 18,800 --------- ------- TOTAL 1,843,727 98,750 ========= =======\nThe Company is a party to leases with terms ranging from month-to-month to fifteen years, with rental expense aggregating $1.5 million for the twelve months ended December 31, 1993. The Company believes that all of its facilities are suitable and adequate for the current conduct of its operations.\nITEM 3.","section_3":"ITEM 3. LEGAL PROCEEDINGS\nThe Company believes that there are no legal proceedings, other than ordinary routine litigation incidental to the business of the Company, to which the Company or any of its subsidiaries is a party. Management is of the opinion that the ultimate outcome of existing legal proceedings would not have a material adverse effect on the Company's consolidated financial position or results of operations.\nITEM 4.","section_4":"ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS\nOn November 8, 1993, James W. Hart was re-elected as a director of Reeves.\nPART II\nITEM 5.","section_5":"ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS\nAt March 31, 1994, 100% or 35,021,666 shares of Reeves' Common Stock was held by Hart Holding. There is no established public trading market for the Common Stock.\nReeves' debt instruments restrict Reeves from declaring or paying any dividends or making any distributions in respect of its capital stock (other than dividends payable solely in shares of common stock), except under certain conditions as defined therein. See Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operation, and Footnote 7, Long-Term Debt, of the Notes to Consolidated Financial Statements of Reeves.\nITEM 6.","section_6":"ITEM 6. SELECTED FINANCIAL DATA\nThe historical operations and balance sheet data included in the selected financial data set forth below are derived from the consolidated financial statements of Reeves (in thousands except per share data and ratios).\nDecember 31, ------------------------------------------------ 1989 1990 1991 1992 1993 ---- ---- ---- ---- ---- Statement of Operations Data (1):\nNet sales Industrial Coated Fabrics Group $114,313 $119,749 $121,264 $126,576 $140,735 Apparel Textile Group 143,035 138,110 148,295 144,528 142,918 -------- -------- -------- -------- -------- Total net sales $257,348 $257,859 $269,559 $271,104 $283,653 ======== ======== ======== ======== ========\nOperating income Industrial Coated Fabrics Group $ 24,715 $ 23,250 $ 23,940 $ 24,732 $ 29,287 Apparel Textile Group 11,513 10,059 10,121 10,693 11,583 Corporate expenses (5,278) (7,503) (7,278) (8,318) (10,433) Goodwill amortization (1,140) (1,140) (1,157) (1,340) (1,340) Facility restructuring charges (1,003) -------- -------- -------- -------- -------- Total operating income $ 29,810 $ 24,666 $ 25,626 $ 25,767 $ 28,094 ======== ======== ======== ======== ========\nIncome from continuing operations $ 6,100 $ 5,757 $ 4,544 $ 5,976 $ 7,857 ======== ======== ======== ======== ======== Interest expense and amortization of financing costs and debt discount $ 22,590 $ 19,935 $ 21,777 $ 17,633 $ 16,394 ======== ======== ======== ======== ======== Income from continuing operations per share $ .32 $ .30 $ .23 $ .16 $ .22\nSupplemental earnings per share data - income from continuing operations (2) .17 .16 .12\nRatio of earnings to fixed charges (3) 1.6x 1.3x 1.2x 1.5x 1.7x ==== ==== ==== ==== ====\nEarnings (loss) per common share\nPrimary and Fully Diluted: Income from continuing operations $ .32 $ .30 $ .23 $ .16 $ .22 Income (loss) before extraordinary item 1.19 (1.78) .39 .16 .22 Dividends paid Net income (loss) 1.09 (1.78) .39 .08 .22\nWeighted average number of shares Primary 17,471 17,938 18,118 36,724 34,978 Fully diluted 17,500 17,883 18,118 36,724 34,978\nOperating Data:\nDepreciation and goodwill amortization expense $ 6,230 $ 6,637 $ 7,108 $ 8,116 $ 8,544 Capital expenditures 6,718 7,007 11,015 15,788 16,506\nBalance Sheet Data:\nTotal assets (4) $246,910 $228,256 $214,987 $192,931 $203,025\nLong-term debt (including current portion) 149,863 148,837 148,960 132,576 132,677\nStockholder's equity (5) 40,890 13,195 20,477 15,565 21,411\nFootnotes to Statement of Operations and Balance Sheet Data:\n(1) The fiscal year ended December 31, 1989 has been restated to reflect the exclusion of the discontinued operations of the ARA Automotive Group. See Footnote 3, Discontinued Operations and Facility Restructuring Charges, of the Notes to Consolidated Financial Statements of Reeves.\n(2) Effective December 31, 1991, Reeves' Board of Directors approved the exchange of all of its outstanding Series I Preferred Stock, $1.00 par value, valued in the aggregate at $9,410,000, for 18,820,000 shares of Reeves' Common Stock, $.01 par value, valued at $.50 per share. The supplemental earnings per share data is presented for each period as if the exchange occurred on January 1, 1989.\n(3) For the purpose of calculating the ratio of earnings to fixed charges, earnings consist of income from continuing operations before income taxes, plus fixed charges. Fixed charges consist of interest on all indebtedness, which includes amortization of financing costs and debt discounts, and one-third of all rentals, which is considered representative of the interest portion included therein, after adjustments for amounts related to discontinued operations.\n(4) Total assets include the assets of discontinued operations prior to disposal. In 1990, Reeves discontinued the operations of Reeves' ARA Automotive Group.\n(5) The decline in stockholder's equity from 1989 to 1990 includes the recognition of a net loss of $34,594,000 from the disposal of the remaining operations of Reeves' ARA Automotive Group. The decline in stockholder's equity from 1991 to 1992 primarily reflects translation adjustments of $6,626,000 caused by foreign currency fluctuations.\nITEM 7.","section_7":"ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS\nRESULTS OF OPERATIONS (1991-1993)\nSALES\nConsolidated sales increased from $269.6 million in 1991 to $283.7 million in 1993 (5.2%) due to increased sales of the Industrial Coated Fabrics Group (16.0%) related primarily to growth in coated automotive airbag materials, partially offset by a decline in sales of the Apparel Textile Group (3.6%) due to a shift to basic, lower margin products, price competition, adverse recessionary influences affecting domestic textile markets and the cessation of ATG's weaving operations at its Woodruff, South Carolina facility in 1993.\nIndustrial Coated Fabrics Group. ICF's sales were $121.3 million, $126.6 million and $140.7 million in 1991, 1992 and 1993, respectively. The 16.0% increase during the period was due to increased sales of specialty coated fabrics, primarily coated automotive airbag materials, partially offset by a decline in offset printing blanket volume. The increase in coated automotive airbag materials sales was due to an increase in unit volume caused by the increased use of driver-side airbags primarily in cars manufactured in the United States. The decline in domestic printing blanket sales was primarily due to reduced demand as a result of the slowdown in the printing industry. Sales of Reeves Brothers' Italian subsidiary (\"Reeves S.p.A.\") fluctuated during the period primarily due to movements in foreign currency exchange rates.\nApparel Textile Group. ATG's sales were $148.3 million, $144.5 million and $142.9 million in 1991, 1992 and 1993, respectively. The 2.6% sales decline in 1992 as compared to 1991 was evenly distributed between ATG's greige and finishing divisions. The decline in each division was primarily due to unusually strong sales in 1991 to the U.S. military as a result of Operation Desert Storm and, to a lesser extent, the economic recession in the United States in 1992. ATG's products experienced both a decline in unit volume as well as a shift to more basic, lower margin products in 1992 as compared to 1991. The 1.1% decline experienced in 1993 as compared to 1992 resulted from a decrease in greige goods sales as a result of the cessation of weaving operations at the Woodruff, South Carolina facility due to declining sales to the U.S. military, offset partially by the increased sales of finished goods due to greater demand for higher quality and more varied product offerings and styles.\nOPERATING INCOME\nConsolidated operating income was $25.6 million, $25.8 million and $28.1 million in 1991, 1992 and 1993, respectively. The 9.8% increase between 1991 and 1993 resulted primarily from increased profits contributed by ICF's specialty materials products (predominantly coated automotive airbag materials) and to a lesser extent, increased profits contributed by ATG (in spite of reduced sales volume) as a result of cost reductions and productivity gains achieved during the period related to its capital investment program. The operating income increase experienced during the period was partially offset by increased corporate expenses and, in 1993, by facility restructuring charges of $1.0 million. Operating income, as a percentage of sales, increased from 9.5% in 1991 and 1992 to 9.9% in 1993.\nIndustrial Coated Fabrics Group. ICF's operating income was $23.9 million, $24.7 million and $29.3 million in 1991, 1992 and 1993, respectively, and represented 19.7%, 19.5% and 20.8% of ICF's sales in such years. Operating income growth in 1992 as compared to 1991 was due primarily to increased sales of coated automotive airbag materials and, to a lesser extent, the elimination of certain lower-margin specialty coated fabric products. The 18.6% increase in operating income in 1993 as compared to 1992 was primarily due to the benefits of economies of scale realized in connection with increased sales of coated automotive airbag materials. Operating income from printing blankets declined in 1992 and 1993 reflecting the worldwide slowdown in the printing industry partially offset by efficiencies experienced by Reeves S.p.A. primarily related to increased material yields.\nApparel Textile Group. ATG's operating income was $10.1 million, $10.7 million and $11.6 million in 1991, 1992 and 1993, respectively, and represented 6.8%, 7.4% and 8.1% of ATG's sales in such years. The operating income and margin improvement experienced during the period was achieved in spite of an overall 3.6% sales decline reflecting the benefits of cost reductions and productivity improvements realized from ATG's capacity modernization program initiated at its Chesnee and Bishopville, South Carolina facilities.\nCorporate Expenses. Corporate expenses were $7.3 million, $8.3 million and $10.4 million in 1991, 1992 and 1993, respectively, and represented 2.7%, 3.1% and 3.7% of consolidated sales in such years. The increase in corporate expenses during the period related primarily to increased staffing and compensation expense necessary to support corporate development activities. In 1993, corporate expenses included a provision for costs related to the Company's discontinued Buena Vista, Virginia facility of $.5 million.\nGoodwill Amortization and Facility Restructuring Charges. The Company recorded provisions for goodwill amortization of $1.2 million in 1991 and $1.3 million in 1992 and 1993. In 1993, Reeves also recorded facility restructuring charges of $1.0 million. The one-time charges related primarily to the cessation of weaving activities at the Company's Woodruff, South Carolina facility due to declining sales to the U.S. military, the conversion of that facility into a captive yarn mill and consolidation of weaving capacity at ATG's remaining facilities.\nINTEREST EXPENSE, NET\nInterest expense, net consists of consolidated interest expense plus amortization of financing costs and debt discounts less interest income on investments. Interest expense, net was $20.7 million, $17.2 million and $16.2 million in 1991, 1992 and 1993, respectively. Included in such net amounts are provisions for the amortization of financing costs and debt discounts totaling $1.3 million, $1.0 million and $.7 million in 1991, 1992 and 1993, respectively. The decline in interest expense, net during the period resulted primarily from the repayment of bank debt, the refinancing of Reeves' long-term debt in 1992 with proceeds from the sale of the 11% Senior Notes and the repurchase of a portion of the 13 3\/4% Subordinated Debentures.\nINCOME TAXES\nThe Company's effective income tax rate on income from continuing operations before income taxes for 1991, 1992 and 1993 was 7.6%, 30.3% and 33.7%, respectively. The effective income tax rate on income from continuing operations for 1991 and 1992 differed from the federal statutory rate of 34% primarily due to the impact of goodwill amortization and Reeves S.p.A.'s lower effective tax rate. The higher effective income tax rate in 1992 as compared to 1991 was primarily due to an increase in domestic taxable income which is taxed at a higher rate than income earned at Reeves S.p.A., a new Italian tax affecting Reeves S.p.A.'s tax liability and the adoption of Statement of Financial Accounting Standards No. 109, \"Accounting for Income Taxes\" (\"FAS 109\").\nDuring 1993, Reeves established a $.8 million valuation reserve against the Company's deferred tax assets reflecting estimated utilization of foreign tax credits. The Company has foreign tax credit carryforwards of $1.9 million of which $1.7 million expire in 1994 and $.2 million expire at varying dates through 1997. The valuation reserve was established based on the Company's estimate of foreign source taxable income expected to be received from Reeves S.p.A. during the foreign tax credit carryover period.\nINCOME FROM CONTINUING OPERATIONS\nIncome from continuing operations was $4.5 million, $6.0 million and $7.9 million in 1991, 1992 and 1993, respectively. Income from continuing operations excluded (i) a gain on disposal of discontinued operations, net of taxes, aggregating $2.8 million in 1991, (ii) an extraordinary loss of $6.1 million in 1992 from the write-off of financing costs and debt discounts related to the early extinguishment of long-term debt in the Company's 1992 refinancing and (iii) a gain of $3.2 million in 1992 related to the cumulative effect of adopting a change in accounting principle (FAS 109).\nLIQUIDITY AND CAPITAL RESOURCES\nCapital Expenditures\nCommmencing in 1991, the Company began significantly increasing its levels of capital investment in its businesses in order to modernize and expand capacity, reduce its overall cost structure, increase productivity and enhance its competitive position. Between 1991 and 1993, the Company invested approximately $52.1 million in aggregate ($11.0 million in 1991, $15.8 million in 1992, and $16.5 million in 1993 and $8.8 million, representing the cost of manufacturing equipment leased under operating leases, in 1992 and 1993).\nBetween 1991 and 1993, the Company invested approximately $13 million in ICF's domestic facilities in order to purchase new production equipment, to increase productivity and expand capacity in its traditional lines of business as well as to enter the coated automotive airbag materials market. In addition, ICF spent approximately $12 million in its Reeves S.p.A. facilities to construct an 80,000 square foot addition and purchase related equipment. Such investment increased capacity to manufacture offset printing blankets and installed coated fabrics capacity in Europe to meet anticipated demand for sophisticated specialty materials. Between 1991 and 1993, the Company invested approximately $24.2 million in ATG's facilities at Chesnee and Bishopville, South Carolina to increase productivity and manufacturing flexibility, expand capacity for more sophisticated fabrics and allow more rapid response to market demand and a broader product offering. Of such $24.2 million, approximately $8.8 million represents the cost of manufacturing equipment leased under operating leases.\nThe Company intends to substantially increase its capital investment in its existing businesses during the 1994-1997 period. The Company currently anticipates in excess of $40 million of capital expenditures in 1994 and in excess of $100 million of aggregate spending between 1995 and 1997. In 1994, the Company anticipates spending approximately $17 million to construct, furnish and equip a state-of-the-art plant in Spartanburg, South Carolina to weave automotive airbag materials, approximately $5 million to complete the capacity expansion of ATG's Chesnee, South Carolina plant and approximately $16 million to expand the capacity of and improve productivity at ICF's worldwide coated fabrics and offset printing blanket facilities. Projected capital expenditures beyond 1994 are expected to complete ATG's modernization and expansion of its textile capacity, expand ICF's automotive airbag materials capacity in response to anticipated domestic and international market requirements and enhance the profitability and competitive position of ICF's printing blanket and traditional coated fabrics businesses through additional spending for cost reductions and productivity improvements.\nAs a result of the nature of the Company's business and its substantial expenditures for capital improvements over the last several years, current and future capital expenditure requirements are flexible as to both timing and amount of capital required. In the event that cash flow proves inadequate to fund currently projected expenditures, such expenditures can be adjusted so as not to exceed available funds.\nLiquidity\nThe Company's net cash provided by operating activities increased from $7.6 million in 1991 to $15.2 million in 1992 and $25.2 million in 1993. The improvement in net cash provided by operating activities resulted from higher levels of income from continuing operations and significant improvements in working capital management.\nThe Company anticipates that it will be able to meet its projected working capital, capital expenditure and debt service requirements through internally generated funds and borrowings available under its existing $35 million Bank Credit Agreement.\nIn August 1992, in conjunction with the refinancing of the Company's bank and institutional indebtedness, the Company entered into the Bank Credit Agreement which provides the Company with an aggregate $35 million revolving line of credit and letter of credit facility. The Bank Credit Agreement expires on December 31, 1995 and is secured by accounts receivable and inventories. As of March 31, 1994, the Company had available borrowing capacity (net of $1.3 million of outstanding letters of credit) of $28.6 million under the Bank Credit Agreement.\nIMPACT OF INFLATION\nThe Company does not believe that its financial results have been materially impacted by the effects of inflation.\nOTHER MATTERS\nIn February 1992, the Company received approximately $17 million from the federal government in payment of a tax refund. The refund resulted from the Company carrying back tax operating losses generated in 1991, primarily related to the disposal of the ARA Automotive Group, to offset previous years' taxable income.\nIn 1992, Reeves adopted FAS 109 effective as of the beginning of 1992. Under FAS 109, in the year of adoption, previously reported results of operations for the year are restated to reflect the effects of applying FAS 109, and the cumulative effect of adoption on prior years' results of operations is shown in the income statement in the year of change. The cumulative effect of this change in accounting principle increased net income by $3.2 million in 1992.\nITEM 8.","section_7A":"","section_8":"ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA\nSee Part IV, Item 14, for index to financial statements.\nITEM 9.","section_9":"ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE\nNone\nREPORT OF INDEPENDENT ACCOUNTANTS\nTo the Board of Directors and Stockholder of Reeves Industries, Inc.\nIn our opinion, the consolidated financial statements listed in the index appearing under Item 14(a)(1) and (2) present fairly, in all material respects, the financial position of Reeves Industries, Inc. and its subsidiary at December 31, 1992 and 1993, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1993, in conformity with generally accepted accounting principles. 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 of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.\nAs discussed in Notes 2 and 8 to the consolidated financial statements, the Company changed its method of accounting for income taxes in 1992.\nPRICE WATERHOUSE\nAtlanta, Georgia February 11, 1994, except as to Note 16, which is as of March 31, 1994\nREEVES INDUSTRIES, INC. CONSOLIDATED BALANCE SHEET (in thousands except share data)\nDecember 31, ---------------- 1992 1993 ------ ------ ASSETS Current assets Cash and cash equivalents of $3,936 and $7,222 $ 4,165 $ 12,015 Accounts receivable, less allowance for doubtful accounts of $1,570 and $1,467 38,876 45,925 Inventories (Note 4) 35,310 33,969 Deferred income taxes (Note 8) 6,477 5,442 Other current assets 9,814 3,300 Investment in discontinued operations (Note 3) 2,466 -------- -------- Total current assets 97,108 100,651 Property, plant and equipment, at cost less accumulated depreciation (Note 5) 43,526 51,415 Unamortized financing costs, less accumulated amortization of $550 and $1,177 4,390 3,946 Goodwill, less accumulated amortization of $8,091 and $9,431 44,697 43,357 Deferred income taxes (Note 8) 1,951 2,153 Other assets 603 1,503 Investment in discontinued operations (Note 3) 656 -------- -------- Total assets $192,931 $203,025 ======== ========\nLIABILITIES AND STOCKHOLDER'S EQUITY Current liabilities Accounts payable $ 15,352 $ 22,810 Accrued expenses and other liabilities (Note 6) 18,991 21,197 Liabilities related to discontinued operations (Note 3) 3,367 -------- -------- Total current liabilities 37,710 44,007 Long-term debt (Note 7) 132,576 132,677 Deferred income taxes (Note 8) 4,505 4,367 Other liabilities 563 Liabilities related to discontinued operations (Note 3) 2,575 -------- -------- Total liabilities 177,366 181,614 -------- -------- Stockholder's equity (Note 10) Common stock, $.01 par value, 50,000,000 shares authorized; 34,967,973 and 35,021,666 shares issued and outstanding 350 350 Capital in excess of par value 5,069 5,099 Retained earnings 12,107 19,964 Equity adjustments from translation (1,961) (4,002) -------- -------- Total stockholder's equity 15,565 21,411 -------- -------- Commitments and contingencies (Note 15) -------- -------- Total liabilities and stockholder's equity $192,931 $203,025 ======== ========\nThe accompanying notes are an integral part of these financial statements.\nREEVES INDUSTRIES, INC. CONSOLIDATED STATEMENT OF INCOME (in thousands except per share data)\nYear Ended December 31, ---------------------------- 1991 1992 1993 -------- -------- -------- Net sales $269,559 $271,104 $283,653 Cost of sales 216,179 216,043 222,016 -------- -------- -------- Gross profit on sales 53,380 55,061 61,637 Selling, general and administrative expenses 27,754 29,294 32,540 Facility restructuring charges (Note 3) 1,003 -------- -------- -------- Operating income 25,626 25,767 28,094 Other income (expense) Other income, net 1,068 435 158 Interest expense and amortization of financing costs and debt discounts (21,777) (17,633) (16,394) -------- -------- -------- (20,709) (17,198) (16,236) -------- -------- -------- Income from continuing operations before income taxes, extraordinary item and cumulative effect of a change in accounting principle 4,917 8,569 11,858 Income taxes (Note 8) 373 2,593 4,001 -------- -------- -------- Income from continuing operations 4,544 5,976 7,857 Discontinued operations Net gain on disposal of discontinued operations, less applicable income tax provision of $1,732 (Note 3) 2,830 -------- -------- -------- 2,830 -------- -------- -------- Income before extraordinary item and cumulative effect of a change in accounting principle 7,374 5,976 7,857 Extraordinary loss from early extinguishment of debt, less applicable income tax benefits of $3,148 (Note 7) (6,112) Cumulative effect of a change in accounting for income taxes (Note 8) 3,221 -------- -------- -------- Net income $ 7,374 $ 3,085 $ 7,857 ======== ======== ========\nEarnings per common share (Note 10) Primary and fully diluted Income from continuing operations $ .23 $ .16 $ .22 Income before extraordinary item and cumulative effect of a change in accounting principle .39 .16 .22 Cumulative effect of a change in accounting for income taxes .09 Net income .39 .08 .22\nWeighted average number of common shares outstanding Primary and fully diluted 18,118 36,724 34,978\nThe accompanying notes are an integral part of these financial statements.\nREEVES INDUSTRIES, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (in thousands)\nYear Ended December 31, ------------------------ 1991 1992 1993 ------ ------ ------ Cash flows from operating activities Net income $ 7,374 $ 3,085 $ 7,857 Adjustments to reconcile net income to net cash provided by operating activities Write-off of financing costs due to early extinguishment of debt 6,112 Cumulative effect of a change in accounting for income taxes (3,221) Net gain on disposal of discontinued operations (2,830) Depreciation and amortization 8,388 9,146 9,272 Deferred income taxes 601 (112) 694 Changes in operating assets and liabilities Decrease (increase) in accounts receivable 565 2,574 (7,049) Decrease in inventories 486 4,200 1,341 (Increase) decrease in other current assets (1,949) (9,167) 6,514 (Increase) decrease in other assets (254) 134 (900) Increase (decrease) in accounts payable 492 (546) 7,458 (Decrease) increase in accrued expenses and other liabilities (4,920) 6,451 133 Equity adjustments from translation (356) (3,450) (117) ------- -------- ------- Net cash provided by operating activities 7,597 15,206 25,203 ------- -------- ------- Cash flows from investing activities Purchases of property, plant and equipment (11,015) (15,788) (16,506) Net proceeds (payments) from disposal of discontinued operations 2,331 12,438 (536) ------- -------- ------- Net cash used by investing activities (8,684) (3,350) (17,042) ------- -------- ------- Cash flows from financing activities Principal payments of long-term debt (56) (108,726) Net payments on revolving loans (30,000) Borrowings of long-term debt 121,644 Debt issuance costs (5,115) Premium on early retirement of debt (4,876) Purchases of common stock (1,075) (270) Issuance of common stock 300 ------- -------- ------- Net cash (used) provided by financing activities (56) (28,148) 30 ------- -------- ------- Effect of exchange rate changes on cash 122 (535) (341) ------- -------- ------- (Decrease) increase in cash and cash equivalents (1,021) (16,827) 7,850 Cash and cash equivalents, beginning of year 22,013 20,992 4,165 ------- -------- ------- Cash and cash equivalents, end of year $20,992 $ 4,165 $12,015 ======= ======== =======\nThe accompanying notes are an integral part of these financial statements.\nREEVES INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1992 AND 1993\n1. BUSINESS AND ORGANIZATION\nReeves Industries, Inc. (\"Reeves\" or the \"Company\"), a wholly-owned subsidiary of Hart Holding Company Incorporated (\"Hart Holding\"), is a holding company whose principal asset is the common stock of its wholly-owned subsidiary, Reeves Brothers, Inc. (\"Reeves Brothers\"). The Company was acquired by Hart Holding on May 6, 1986. Reeves Brothers is a diversified industrial company engaged in two business segments: industrial coated fabrics and apparel textiles.\n2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES\nPrinciples of consolidation\nThe consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Reeves Brothers. All significant intercompany balances and transactions have been eliminated.\nInventories\nInventories are stated at the lower of cost or market. Cost for approximately 29% and 27% of total inventories was determined on the last-in, first-out (LIFO) method at December 31, 1992 and 1993, respectively. With respect to the remainder of the inventories, cost is determined principally on the first-in, first-out (FIFO) method. Market is determined on the basis of replacement costs or selling prices less costs of disposal. The application of Accounting Principles Board Opinion No. 16, \"Business Combinations,\" for the acquisition of Reeves caused the inventories in the accompanying consolidated balance sheet to exceed inventories used for income tax purposes by approximately $7,320,000 as of December 31, 1993.\nProperty, plant and equipment\nProperty, plant and equipment are stated at cost. Improvements which extend the useful lives of the assets are capitalized while repairs and maintenance are charged to operations as incurred. Depreciation is provided using primarily the straight-line method for financial reporting purposes while accelerated methods are used for income tax purposes. When assets are replaced or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts and any gain or loss is reflected in income.\nFair value of financial instruments\nCash, accounts receivable, accounts payable and accrued expenses and other liabilities are reflected in the financial statements at fair value because of the short-term maturity of these instruments. The fair value of the Company's debt instruments is determined based upon a recent market price quote and is disclosed in Note 7. The fair value of the foreign exchange contracts (used for hedging purposes) is estimated using quoted exchange rates and is disclosed in Note 11.\nForeign currency exchange and translation\nFor Reeves Brothers' wholly-owned foreign subsidiary, the local currency of the country of operation is used as the functional currency for purposes of translating the local currency asset and liability accounts at current exchange rates into the reporting currency. The resulting translation adjustments are accumulated as a separate component of stockholder's equity reflected in the equity adjustments from translation account in the accompanying consolidated financial statements. Gains and losses resulting from translating asset and liability accounts that are denominated in currencies other than the functional currency are included in income.\nAmortization policy\nThe Company is amortizing goodwill on a straight-line basis over forty years. Financing costs and debt discounts are being amortized by the interest method over the life of the respective debt securities. Pre-operating costs associated with the start-up of significant new operations are deferred and amortized over five years.\nRevenue recognition\nSales are generally recorded when the goods are shipped. At the customer's request, shipment of the completed product is sometimes delayed. In such instances, revenues are recognized when the customer acknowledges transfer of title and accepts the related billing.\nIncome taxes\nThe Company is a member of an affiliated group of which Hart Holding is the common parent. Pursuant to a tax allocation agreement with Hart Holding, the Company files a consolidated federal income tax return with Hart Holding. Under the agreement, the Company's tax liability is determined on a separate return basis and any taxes payable are remitted to Hart Holding.\nDuring 1992, the Company adopted Statement of Financial Accounting Standards No. 109, \"Accounting for Income Taxes\" (FAS 109). Income tax accounting information is disclosed in Note 8 to the consolidated financial statements.\nFor the years ended December 31, 1992 and 1993, the provision for income taxes was based on reported earnings before income taxes, and includes appropriate provisions for deferred income taxes resulting from the tax effect of the differences between the tax basis of assets and liabilities and their carrying amounts for financial reporting purposes. Prior to January 1, 1992, deferred income taxes arose from the reporting of certain expenses, principally depreciation, pension costs and other expenses, differently for financial reporting purposes than for income tax reporting purposes.\nAt December 31, 1993, unremitted earnings of Reeves Brothers' foreign subsidiary were approximately $19,500,000. United States income taxes have not been provided on these unremitted earnings as it is the Company's intention to indefinitely reinvest these earnings. However, Reeves Brothers' foreign subsidiary has, in previous years, remitted a portion of its current year earnings as dividends and expects to continue this practice in the future.\nPension plans\nThe Company has noncontributory pension plans covering all eligible domestic employees (Note 9).\nEarnings per share\nEarnings per share are computed based on the weighted average number of common and common equivalent shares, where dilutive, outstanding during each period. A deduction has been made for cumulative preferred dividends earned during such periods the preferred stock was outstanding even though such dividends were not declared or paid. Fully diluted earnings per share are computed assuming that outstanding warrants, where dilutive, were exercised at the beginning of the period or date of issuance, if later. Supplemental earnings per share data is provided giving effect to the exchange of preferred stock for common stock as discussed in Note 10.\nStatement of cash flows\nFor purposes of the statement of cash flows, cash equivalents are defined as highly liquid investment securities with an original maturity of three months or less.\n3. DISCONTINUED OPERATIONS AND FACILITY RESTRUCTURING CHARGES\nDuring 1990 the Company elected to dispose of the operations of its ARA Automotive Group. The Company has realized all of the significant assets and continues to settle remaining estimated liabilities related to the discontinued operation. The remaining estimated amounts to settle such liabilities have been included in accrued expenses and other liabilities as of December 31, 1993.\nDuring 1993, a facility restructuring plan was implemented to reduce the Company's overall cost structure and to improve productivity. The Consolidated Statement of Income includes a charge of approximately $1,003,000 related to this plan. The plan included the cessation of weaving activities at one location and conversion of that facility into a captive yarn mill, consolidating weaving capacity at remaining facilities and implementing cost saving\/state-of-the-art finishing technology.\n4. INVENTORIES\nInventories at December 31, 1992 and 1993, are comprised of the following (in thousands):\n1992 1993\nRaw materials $ 7,084 $ 6,815 Work in process 8,777 8,792 Manufactured and finished goods 19,449 18,362 -------- -------- $ 35,310 $ 33,969 ======== ========\nIf inventories had been calculated on a current cost basis, they would have been valued higher by approximately $2,933,000 and $2,038,000 at December 31, 1992 and 1993, respectively.\n5. PROPERTY, PLANT AND EQUIPMENT\nThe principal categories of property, plant and equipment at December 31, 1992 and 1993, are as follows (in thousands):\n1992 1993\nLand and land improvements $ 794 $ 797 Buildings and improvements 14,355 16,654 Machinery and equipment 56,801 65,400 -------- -------- 71,950 82,851 Less - Accumulated depreciation and amortization (28,424) (31,436) -------- -------- $ 43,526 $ 51,415 ======== ========\n6. ACCRUED EXPENSES AND OTHER LIABILITIES\nAccrued expenses and other liabilities at December 31, 1992 and 1993, are comprised of the following (in thousands):\n1992 1993\nAccrued salaries, wages and incentives $ 3,013 $ 3,145 Product claims reserve 1,277 1,237 Interest payable 6,493 6,512 Income taxes payable 530 548 Deferred compensation 1,322 1,187 Accrued costs related to discontinued operations 145 1,390 Italian severance pay program 2,405 2,391 Other 3,806 4,787 -------- -------- $ 18,991 $ 21,197 ======== ========\n7. LONG-TERM DEBT\nLong-term debt at December 31, 1992 and 1993, consists of the following (in thousands):\n1992 1993\n11% Senior Notes due July 15, 2002, net of unamortized discount of $835 and $747 $121,665 $121,753 13 3\/4% Subordinated Debentures due May 1, 2000, net of unamortized discount of $89 and $76 10,911 10,924 -------- -------- $132,576 $132,677 ======== ========\nIn June 1992, the Company completed a public offering of $122,500,000 of 11% Senior Notes due 2002 (the \"Senior Notes\"). Proceeds of the offering were used to redeem all of the Company's then outstanding 12 1\/2% Senior Notes and 13% Senior Subordinated Debentures and to pay and terminate the revolving loan outstanding under a prior loan agreement.\nIn connection with the liquidation of the 12 1\/2% Senior Notes, the 13% Senior Subordinated Debentures and the prior revolving loan, the Company paid early payment premiums of $4,601,000 and wrote off related debt issuance costs and debt discounts of $3,016,000. In addition, during 1992, the Company purchased $5,000,000 face value of its 13 3\/4% Subordinated Debentures for $5,275,000. As a result of these transactions, the Company recognized an extraordinary loss of $5,775,000 ($.16 per share), net of applicable income tax benefits of $2,974,000.\nThe Company is required to make sinking fund payments with respect to the remaining 13 3\/4% Subordinated Debentures of $6,000,000 on May 1, 1999 and $5,000,000 on May 1, 2000.\nOn August 7, 1992, the Company and Reeves Brothers entered into the Bank Credit Agreement with a group of banks, which was amended in 1993, and which provides the Company and Reeves Brothers with an aggregate $35,000,000 revolving line of credit (the \"Revolving Loan\") and letter of credit facility. The Revolving Loan bears interest at the Alternate Base Rate (defined below) plus 1 1\/2% or Eurodollar Rate plus 2 1\/2%, at the election of the borrower. The Alternate Base Rate is defined as the higher of the Prime Rate (6% at December 31, 1993), Base CD Rate plus 1%, or the Federal Funds Effective Rate plus 1\/2%. The applicable rates above the Alternate Base Rate and Eurodollar Rate decline based on a ratio of earnings to fixed charges, as defined. The Revolving Loan is due December 31, 1995. The Revolving Loan is secured by Reeves Brothers' accounts receivable and inventories. As of December 31, 1993, the Company and Reeves Brothers had available borrowings, net of $1,415,000 of outstanding letters of credit, of $33,585,000. A commitment fee of 1\/2% per annum is required on the unused portion of the Revolving Loan.\nThe Senior Notes, Revolving Loan, and 13 3\/4% Subordinated Debentures contain certain restrictive covenants with respect to Reeves and Reeves Brothers including, among other things, maintenance of working capital, limitations on the payments of dividends, the incurrence of additional indebtedness and certain liens, restrictions on capital expenditures, mergers or acquisitions, investments and transactions with affiliates, and require the maintenance of certain financial ratios and compliance with certain financial tests and limitations.\nInterest paid amounted to $18,155,000, $12,350,000 and $15,306,000 in 1991, 1992 and 1993, respectively.\nThe estimated fair value of the Company's 11% Senior Notes and 13 3\/4% Subordinated Debentures at December 31, 1993 is $131,075,000 and $12,980,000, respectively.\n8. INCOME TAXES\nDuring the third quarter of 1992, the Company adopted FAS 109 effective as of the beginning of 1992. Under FAS 109, in the year of adoption, previously reported results of operations for the year are restated to reflect the effects of applying FAS 109, and the cumulative effect of adoption on prior years' results of operations is shown in the income statement in the year of change. The adoption of FAS 109 did not have a material effect on the Company's 1992 income from continuing operations before income taxes.\nThe provision (benefit) for income taxes from continuing operations is comprised of the following (in thousands):\n1991 1992 1993 Current Federal $ (2,698) $ (401) $ 1,278 Foreign 354 954 811 State 147 174 138 -------- -------- -------- (2,197) 727 2,227 -------- -------- -------- Deferred Federal 1,770 983 945 Foreign 641 826 State 800 242 3 -------- -------- -------- 2,570 1,866 1,774 -------- -------- -------- $ 373 $ 2,593 $ 4,001 ======== ======== ========\nThe provision (benefit) for income taxes from continuing operations differs from taxes computed using the statutory federal income tax rate as follows (in thousands):\n1991 1992 1993\nConsolidated computed statutory taxes $ 1,672 $ 2,914 $ 4,050 State income taxes, net of federal income tax benefit 412 275 93 Amortization of goodwill 393 456 456 Foreign tax rate less than statutory rate (2,081) (868) (1,451) Valuation reserve 800 Other, net (23) (184) 53 -------- -------- -------- $ 373 $ 2,593 $ 4,001 ======== ======== ========\nIn 1990, Reeves Brothers' foreign subsidiary implemented a reorganization allowed under the applicable country's income tax laws. This transaction resulted in the foreign subsidiary revaluing upward its net assets for income tax purposes. Additional depreciation and amortization relating to this revaluation is deductible in determining income tax expense for both financial and income tax reporting. The effect of this revaluation resulted in the foreign subsidiary's effective income tax rate declining from its statutory rate of approximately 46% to 5% for 1991. Due to tax rate increases, other tax law changes, and the adoption of FAS 109, the foreign subsidiary's effective income tax rate for both 1992 and 1993 is approximately 22% versus the statutory rate of 52.2%.\nThe provision from continuing operations for deferred federal income taxes for 1991, the year prior to the effective date of adoption of FAS 109, is comprised of timing differences related to provisions for items not deductible until incurred, principally product claims, bad debts and insurance, depreciation and amortization, compensation agreements and pension costs.\nDeferred tax liabilities and assets under FAS 109 are comprised of the following temporary differences (in thousands):\n1992 1993\nDeferred tax liabilities Inventories $ 2,523 $ 2,584 Depreciation 1,982 1,783 ------- ------- Total deferred tax liabilities $ 4,505 $ 4,367 ======= =======\nDeferred tax assets Current Tentative minimum tax credits $ 854 $ 854 Accrued expenses 3,677 3,490 Foreign tax credit carryforwards 1,946 1,898 Valuation reserve (800) ------- ------- 6,477 5,442 ------- ------- Long-term Depreciation on foreign subsidiary assets 1,951 1,219 Foreign exchange 934 ------- ------- 1,951 2,153 ------- ------- Total deferred tax assets $ 8,428 $ 7,595 ======= =======\nIn adopting FAS 109, the Company recorded deferred tax assets which included foreign tax credit carryovers and the benefits of future depreciation related to Reeves Brothers' foreign subsidiary. The realization of these deferred tax assets is evaluated annually based on expected future taxable income and the carryover period of the credits. During 1993, the Company established an $800,000 valuation reserve against the benefit for utilization of foreign tax credits. The Company has foreign tax credit carry forwards of $1,898,000 of which $1,680,000 expire in 1994 and $218,000 expire at varying dates through 1997. The valuation reserve was established based on the Company's estimate of foreign source taxable income expected to be received from Reeves Brothers' foreign subsidiary during the foreign tax credit carryover period.\nThe sources of income (loss) from continuing operations before income taxes are as follows (in thousands):\n1991 1992 1993\nDomestic $(2,245) $ 1,327 $ 2,774 Foreign 7,162 7,242 9,084 ------- ------- ------- $ 4,917 $ 8,569 $11,858 ======= ======= =======\nIncome taxes paid amounted to approximately $0, $2,406,000 and $1,686,000 in 1991, 1992 and 1993, respectively.\n9. PENSION PLANS\nThe Company sponsors two noncontributory defined benefit pension plans covering substantially all of its domestic salaried and hourly employees. The Reeves Brothers salaried pension plan benefits are based on an employee's years of accredited service. The Reeves Brothers hourly pension plan provides benefits, exclusive of benefits related to former ARA Automotive Group retirement plan participants, of stated amounts based on years of accredited service. The Reeves Brothers hourly pension plan also provides benefits to both the ARA union and non-union employees in accordance with their separate benefit calculations. The ARA non-union plan was merged with the Reeves Brothers hourly pension plan effective December 1990; the ARA union plan was merged with the Reeves Brothers' hourly pension plan effective April 1993. The Company's funding policy is to fund at least the minimum amount required by the Employee Retirement Income Security Act of 1974.\nCombined data\nThe following table presents the combined funded status of the Company's plans at December 31, 1992 and 1993 (in thousands):\n1992 1993 Actuarial present value of accumulated benefit obligation Vested $ 13,731 $ 19,300 Nonvested 866 914 -------- -------- Accumulated benefit obligation $ 14,597 $ 20,214 ======== ========\nPlan assets at fair value $ 24,148 $ 25,450 Projected benefit obligation for services rendered to date 19,129 24,553 -------- -------- Plan assets greater than projected benefit obligation 5,019 897 Unrecognized net transition obligation 2,132 1,955 Unrecognized net gain subsequent to transition (7,097) (3,696) -------- -------- Pension asset (liability) recognized in the consolidated balance sheet $ 54 $ (844) ======== ========\nPlan assets consist primarily of fixed income securities, equity securities, and certificates of deposit.\nPension cost includes the following components (in thousands):\n1991 1992 1993 Service cost - benefits earned during the period $ 929 $ 942 $ 936 Interest cost on projected benefit obligation 1,409 1,456 1,643 Actual return on plan assets (3,700) (2,961) (2,531) Net amortization and deferral 2,283 1,351 754 ------ ------ ------ Pension cost $ 921 $ 788 $ 802 ====== ====== ======\nA weighted average discount rate of 8.5% and 7.25%, and rate of increase in future compensation of 5.5% and 5.0% were used in determining the actuarial present value of the projected benefit obligation in 1992 and 1993, respectively. The long-term expected rate of return on assets was 8.0% in both 1992 and 1993.\nIn December 1990, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 106, \"Employers' Accounting for Postretirement Benefits Other Than Pensions\" (FAS 106), which requires accrual, during an employee's active years of service, of the expected costs of providing postretirement benefits to employees and their beneficiaries and dependents. The Company adopted FAS 106 in 1992, the effect of which was not material to the consolidated financial statements.\n10. STOCKHOLDER'S EQUITY\nCapital stock\nThe capitalization of Reeves consists of one class of common stock, $.01 par value (the \"Common Stock\"). The previously outstanding Series I Preferred Stock, $1.00 par value with a stated value of $5,001,000 (the \"Preferred Stock\") was wholly- owned by Hart Holding. Effective December 31, 1991, the Company's Board of Directors approved the exchange of all the outstanding Preferred Stock held by Hart Holding for 18,820,000 shares of the Company's Common Stock. 250,000 shares of Preferred Stock remain authorized, with no Preferred Stock currently outstanding.\nSupplemental earnings per share data\nThe following supplemental earnings per share data is presented for the year ended December 31, 1991 as if the exchange of Preferred Stock for Common Stock described above occurred on January 1, 1991:\nIncome from continuing operations $ .12 Income before extraordinary item and cumulative effect of a change in accounting principle .20 Net income .20\nWeighted average number of common shares outstanding - primary and fully diluted (in thousands) 36,886\nSettlement of litigation\nIn November 1992, pursuant to a court ordered settlement of a lawsuit brought by the Company against Drexel Burnham Lambert and certain of its affiliates (collectively, the \"Defendants\"), Reeves received 1,918,132 shares of its common stock from the Defendants which were subsequently cancelled and retired.\nMerger with HHCI, Inc.\nEffective October 25, 1993, HHCI, Inc., a newly formed, wholly- owned subsidiary of Hart Holding, merged with and into the Company with the Company surviving the merger. HHCI, Inc. was formed as a shell corporation (no operations) with a $300,000 capital contribution from Hart Holding. As a result of the merger, Hart Holding was issued 535,000 shares of the Company's common stock and acquired the 481,307 shares of its common stock not held by Hart Holding. These shares were subsequently cancelled and retired. As a result of this merger, Hart Holding obtained ownership of 100% of the outstanding shares of the common stock of the Company and the other stockholders of Reeves received $.56 per share in cash.\n11. FOREIGN EXCHANGE\nThe Company enters into foreign exchange forward contracts to hedge risk of changes in foreign currency exchange rates associated with certain assets and future foreign currency transactions, primarily cash flows from accounts receivable and firm purchase commitments. The Company does not engage in speculation. While the forward contracts affect the Company's results of operations, they do so only in connection with the underlying transactions. Gains and losses on these contracts are deferred until the underlying hedged transaction is completed. The cash flows from the forward contracts are classified consistent with the cash flows from the transactions being hedged. As a result, they do not subject the Company to risk from foreign exchange rate movements, because gains and losses on these contracts offset losses and gains on the transactions being hedged.\nAt December 31, 1993, the Company had foreign currency hedge contracts outstanding, equivalent to $14,883,000, to exchange various currencies, including the U.S. dollar, Japanese yen, pound sterling, Deutsche mark, and French franc into Italian Lire. The contracts mature during 1994. The December 31, 1993 fair value of these foreign currency hedge contracts was $14,407,000.\n12. CONCENTRATIONS OF CREDIT RISK\nConcentrations of credit risk with respect to trade receivables are limited due to the wide variety of customers and markets into which the Company's products are sold, as well as their dispersion across many different geographic areas. As a result, at December 31, 1993, the Company does not consider itself to have any significant concentrations of credit risk.\n13. RELATED PARTY TRANSACTIONS\nDuring the years ended December 31, 1991, 1992 and 1993, the Company and its subsidiary paid management fees to Hart Holding of $1,200,000, $1,910,000 and $1,804,000, respectively.\nDuring 1992, Reeves Brothers purchased the residences of three officers of Reeves Brothers for an aggregate amount of $1,015,000. During 1993, the Company recognized a loss of approximately $161,000 on the sale of two of the properties including related expenses. The remaining residence, which has a carrying value of $244,000 at December 31, 1993, is presently being marketed for sale.\n14. FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS\nThe Company, through Reeves Brothers, operates in two principal industry segments: industrial coated fabrics and apparel textiles. The Industrial Coated Fabrics Group manufactures newspaper and graphic art printing press blankets, protective coverings, inflatable aerospace and survival equipment, diaphragms for meters, pump and tank seals and material used in automotive airbags. The Apparel Textiles Group manufactures, dyes and finishes greige goods.\nThe products of the Industrial Coated Fabrics Group and the Apparel Textiles Group are sold in the United States and in certain foreign countries primarily by Reeves Brothers' merchandising and sales personnel and through a network of independent distributors to a variety of customers including converters, apparel manufacturers, industrial users and contractors. Sales offices are maintained in New York, New York, Dallas, Texas, Spartanburg, South Carolina and Milan, Italy.\nThe following table presents certain information concerning each segment (in thousands):\n1991 1992 1993 Net sales Industrial coated fabrics $121,264 $126,576 $140,735 Apparel textiles 148,295 144,528 142,918 -------- -------- -------- $269,559 $271,104 $283,653 ======== ======== ========\nOperating income Industrial coated fabrics $ 23,940 $ 24,732 $ 29,287 Apparel textiles 10,121 10,693 11,583 Corporate expenses (8,435) (9,658) (11,773) Facility restructuring charges (1,003) -------- -------- -------- Operating income 25,626 25,767 28,094\nOther income, net 1,068 435 158 Interest expense and amortization of financing costs (21,777) (17,633) (16,394) -------- -------- -------- Income from continuing operations before income taxes, extraordinary item and cumulative effect of a change in accounting principle $ 4,917 $ 8,569 $ 11,858 ======== ======== ========\nDepreciation Industrial coated fabrics $ 2,598 $ 3,175 $ 3,632 Apparel textiles 2,983 2,913 3,465 Corporate 370 688 107 -------- -------- -------- $ 5,951 $ 6,776 $ 7,204 ======== ======== ========\nCapital expenditures Industrial coated fabrics $ 7,579 $ 6,353 $ 11,459 Apparel textiles 2,994 8,623 4,693 Corporate 442 812 354 -------- -------- -------- $ 11,015 $ 15,788 $ 16,506 ======== ======== ========\nIdentifiable assets Industrial coated fabrics $ 68,403 $ 65,752 $ 75,625 Apparel textiles 60,410 65,111 63,822 Corporate, principally discontinued operations (in 1991 and 1992), goodwill and debt issuance costs 86,174 62,068 63,578 -------- -------- -------- $214,987 $192,931 $203,025 ======== ======== ========\nFinancial data of Reeves Brothers' foreign operation is as follows (in thousands):\n1991 1992 1993\nSales $ 35,437 $ 38,444 $ 36,932 Net income 6,808 9,165 7,446 Assets 33,011 31,608 33,092\nIntersegment sales are not material.\n15. COMMITMENTS AND CONTINGENCIES\nThe Company leases certain operating facilities and equipment under long-term operating leases. At December 31, 1993 future minimum rentals, related to continuing operations, required by operating leases having initial or remaining noncancellable lease terms in excess of one year are as follows: 1994 - $1,853,000; 1995 - $1,811,000; 1996 - $1,800,000; 1997 - $1,800,000; 1998 - $1,800,000; thereafter - $2,945,000.\nRental expense charged to continuing operations was approxi- mately $1,187,000, $1,420,000 and $1,473,000 during the years ended December 31, 1991, 1992 and 1993, respectively.\nThere are various lawsuits and claims pending against the Company and its subsidiary, including those relating to commercial transactions. The outcome of these matters is not presently determinable but, in the opinion of management, the ultimate resolution of these matters will not have a material adverse effect on the results of operations and financial position of the Company.\n16. SUBSEQUENT EVENTS\nOn January 26, 1994, the Board of Directors approved a non- qualified stock option agreement between the Company and the Chairman of the Board of Directors. The agreement grants an option to purchase up to 3,800,000 shares of common stock of the Company, par value $.01 per share, and has an expiration date of December 31, 2023. The option is exercisable at $.56 per share for 1,400,000 shares (exercisable immediately), $.75 per share for 1,400,000 shares (exercisable one year from grant date) and $1.00 per share for 1,000,000 shares (exercisable two years from grant date).\nOn March 9, 1994 Hart Holding organized Reeves Holdings, Inc. as a wholly-owned subsidiary (the \"Issuer\") through a capital contribution of $1,000. The Issuer was formed for the purpose of holding all of the outstanding common stock of the Company. On March 31, 1994 the Issuer filed a Registration Statement on Form S-1 under the Securities Act of 1933, as amended, for the purpose of offering Senior Discount Debentures due 2006 anticipated to yield proceeds of approximately $100,000,000. As of March 31, 1994 the Company's common stock has not been contributed to the Issuer.\nPART III\nITEM 10.","section_9A":"","section_9B":"","section_10":"ITEM 10. DIRECTOR AND EXECUTIVE OFFICERS\nThe sole director of Reeves and Reeves Brothers is James W. Hart. The following table sets forth the name, positions with Reeves and Reeves Brothers, age and principal business experience during the past five years of each executive officer of Reeves and Reeves Brothers. Any executive officer, unless otherwise stated, holds the identical position or positions in both Reeves and Reeves Brothers.\nName Position Age\nRichard W. Ball Treasurer 47\nAnthony L. Cartagine Vice President; President - 59 Apparel Textile Group\nDavid L. Dephtereos Vice President and 39 General Counsel\nJennifer H. Fray Secretary and Assistant 29 General Counsel\nDouglas B. Hart Senior Vice President - 31 Operations\nJames W. Hart Chairman of the Board 60\nJames W. Hart, Jr. President, Chief Executive 40 Officer and Chief Operating Officer\nSteven W. Hart Executive Vice President 37 and Chief Financial Officer\nV. William Lenoci Vice President; 58 President and Chief Executive Officer - Industrial Coated Fabrics Group\nJoseph P. O'Brien Vice President - Finance 53\nPatrick M. Walsh Vice President - Administration 53\nMr. Ball joined Reeves and Reeves Brothers in January 1992 as Treasurer. He served as Treasurer of Hart Holding from June 1992 to December 1992. From 1990 through 1991, Mr. Ball was Corporate Treasurer for Turner Corporation, a world-wide construction and development company. From 1988 through 1989, Mr. Ball was Vice President and Chief Financial Officer of Nuclear Energy Services, Inc., an engineering services subsidiary of Penn Central Corporation.\nMr. Cartagine has been with Reeves Brothers since 1964. He was named President - Greige Goods Division of the Apparel Textile Group in 1984 and President of the Apparel Textile Group in 1986. He was named Vice President of Reeves and Reeves Brothers in 1988.\nMr. Dephtereos joined Hart Holding, Reeves and Reeves Brothers in May 1991 as Vice President, General Counsel and Secretary. He served as Vice President and Secretary of Hart Holding from 1991 to 1992 and Secretary of Reeves and Reeves Brothers from 1991 until 1992. From 1985 through May 1991, Mr. Dephtereos was Vice President, General Counsel and Secretary of Air Express International Corporation, a publicly-held, international transportation company.\nMs. Fray joined Hart Holding, Reeves and Reeves Brothers in September 1992 as Assistant General Counsel. In 1992, she was named Secretary of Hart Holding, Reeves and Reeves Brothers. From 1990 to 1992, Ms. Fray was engaged in studies leading to a Master of Laws Degree in Taxation from Boston University, from 1990 to 1991 she was employed as a Tax Associate at Coopers & Lybrand, certified public accountants, in Boston, Massachusetts and from 1987 to 1990 she was engaged in studies leading to a Juris Doctor Degree from Suffolk University.\nMr. Douglas B. Hart served as a Director of Reeves and Reeves Brothers from 1991 to 1992. He was named Vice President - Real Estate in 1989, Senior Vice President in 1991 and Senior Vice President - Operations in 1992 of Reeves and Reeves Brothers. Mr. Hart served as a Director of Hart Holding from 1991 to 1992, as Vice President - Real Estate of Hart Holding from 1989 to 1991 and as Senior Vice President of Hart Holding from 1991 to 1992. In 1992, Mr. Hart became President, Chief Executive Officer and Chief Operating Officer of Hart Investment Properties Corporation, a wholly-owned diversified corporate investment entity of Hart Holding, with current holdings in real estate. Prior to 1989, Mr. Hart was an Assistant Vice President at Sentinel Real Estate Corporation in New York, an owner\/developer of malls, shopping centers, office buildings and single family residential communities throughout the United States.\nMr. James W. Hart has been a Director of Reeves and Reeves Brothers since 1986 and became Chairman of the Board in 1987. Mr. Hart served as President and Chief Executive Officer of Reeves and Reeves Brothers from 1988 until 1992. Mr. Hart has been a Director, President, Chief Executive Officer, and Chairman of the Board of Hart Holding since 1975 and became Chief Operating Officer and Chief Financial Officer of Hart Holding in 1992.\nMr. James W. Hart, Jr. served as a Director of Reeves and Reeves Brothers from 1986 to 1992. Mr. Hart became Vice President of Reeves and Reeves Brothers in 1987 and was named Senior Vice President - Operations in 1988 and Executive Vice President and Chief Operating Officer in 1989. In 1992, he was named President, Chief Executive Officer and Chief Operating Officer of Reeves and Reeves Brothers. Mr. Hart served as a Director of Hart Holding from 1984 to 1992. He served as Vice President of Hart Holding from 1984 to 1992, Senior Vice President - Operations of Hart Holding from 1988 to 1992 and as Executive Vice President and Chief Operating Officer of Hart Holding from 1989 to 1992.\nMr. Steven W. Hart served as a Director of Reeves and Reeves Brothers from 1986 to 1992. He became Vice President of Reeves and Reeves Brothers in 1987 and was named Senior Vice President and Chief Financial Officer in 1988 and Executive Vice President and Chief Financial Officer in 1989. Mr. Hart served as a Director, Treasurer and Chief Financial Officer of Hart Holding from 1984 to 1992, Vice President of Hart Holding from 1984 to 1988, Senior Vice President of Hart Holding from 1988 to 1989 and Executive Vice President of Hart Holding from 1989 to 1992. Mr. Hart joined Hart Holding in 1983 as Vice President - Strategic Planning.\nMr. Lenoci has been with Reeves since 1967. He was named President - Industrial Coated Fabrics Group in 1986 and Vice President of Reeves and Reeves Brothers in 1988. In 1990, he became Chief Executive Officer of the Industrial Coated Fabrics Group.\nMr. O'Brien joined Reeves and Reeves Brothers in 1993 as Vice President - Finance. From 1980 to 1993, Mr. O'Brien served as Vice President - Finance of Howmet Corporation, an integrated manufacturer of components for gas turbine jet engines and aircraft structural parts.\nMr. Walsh has been with Reeves since 1987, as Director of Human Resources. In 1990, he was elected Vice President - Administration of Reeves Brothers and in 1993, Vice President - Administration of Reeves.\nMr. James W. Hart is the father of Ms. Fray and Messrs. Douglas B. Hart, James W. Hart, Jr. and Steven W. Hart.\nDirectors of Reeves and Reeves Brothers are elected at each annual meeting of the stockholders. The term of office of each director is from the time of his election and qualification until the next annual meeting of stockholders and until his successor shall have been duly elected and qualified, unless such director shall have earlier been removed. Executive officers serve at the discretion of the Boards of Directors of Reeves and Reeves Brothers.\nITEM 11.","section_11":"ITEM 11. EXECUTIVE COMPENSATION\nEXECUTIVE COMPENSATION\nThe following table sets forth information concerning the cash compensation and cash equivalent remuneration paid or accrued by the Company for the years ended December 31, 1993, 1992 and 1991, for those persons who were at December 31, 1993, (i) the chief executive officer, and (ii) the other four most highly compensated executive officers of the Company.\nSummary Compensation Table\nAnnual Compensation All ---------------------------- Other Name and Principal Position Year Salary Bonus(1) Compensation\nAnthony L. Cartagine 1993 $256,357 $ 92,000 - Vice President; 1992 235,144 100,000 - President - Apparel 1991 205,430 112,500 - Textile Group\nDouglas B. Hart 1993 204,500 125,000 - Senior Vice President 1992 - 100,000 - - Operations 1991 - 70,000 -\nJames W. Hart, Jr. 1993 398,750 380,000 - President, Chief 1992 365,000 200,000 - Executive Officer and 1991 355,000 185,000 - Chief Operating Officer\nSteven W. Hart 1993 398,750 230,000 - Executive Vice 1992 365,000 200,000 $31,819 (2) President and Chief 1991 355,000 185,000 - Financial Officer\nV. William Lenoci 1993 293,750 142,000 - Vice President; President 1992 240,249 105,000 - and Chief Executive 1991 204,079 87,500 19,272 (3) Officer - Industrial Coated Fabrics Group\n(1) Annual bonus amounts are earned and accrued under the Management Incentive Bonus Plan during the years indicated and paid subsequent to the end of each year except for a portion of those amounts awarded and paid to the executive officers during 1993. Also, a portion of those amounts awarded during 1992 for James W. Hart, Jr., Steven W. Hart and Anthony L. Cartagine were paid in 1992.\n(2) Represents reimbursement of certain moving expenses.\n(3) Represents the payment of certain life insurance premiums.\nEMPLOYMENT CONTRACTS\nReeves Brothers entered into employment agreements with Messrs. Cartagine and Lenoci during 1991 that provide for base compensation and participation in the Management Incentive Bonus Plan, plus certain other benefits.\nDIRECTORS' COMPENSATION\nReeves and Reeves Brothers pay no remuneration to directors for serving as such.\nPENSION PLANS\nAnnual Pension at Age 65 After Years of Service\nRemuneration 15 20 25 30 35\n$ 125,000 $ 21,357 $ 30,732 $ 40,107 $ 49,482 $ 58,857 150,000 26,982 38,232 49,482 60,732 71,982 175,000 32,607 45,732 58,857 71,982 85,107 200,000 38,232 53,232 68,232 83,232 98,232 225,000 43,857 60,732 77,607 94,482 111,357 250,000 49,482 68,232 86,982 105,732 118,800 300,000 60,732 83,232 105,732 118,800 118,800 350,000 71,982 98,232 118,800 118,800 118,800\nNotes To Pension Plan Table\n(A)(1) Compensation covered by the tax-qualified salaried employees pension plan each year is generally all compensation reported on a participant's Form W-2. The plan's formula is based on average compensation for the participant's highest five consecutive calendar years. However, except in the cases of Messrs. Cartagine and Lenoci, compensation for any year is limited by the compensation cap for that year under section 401(a)(17) of the Internal Revenue Code. For 1993, that limit is $235,840. A supplemental plan provides Messrs. Cartagine and Lenoci the benefits limited under the tax-qualified plan.\n(2) Starting in 1994, the maximum annual compensation that may be taken into account is $150,000. Participants in the pension plan prior to 1994 may have accrued higher benefits than those shown in the table to the extent their average highest compensation exceeded $150,000. Those higher accrued benefits are preserved by law.\n(3) For 1994, the maximum benefit under the pension plan is $118,800.\n(B) Years of service for named executive officers:\nOfficer Years of Service\nAnthony L. Cartagine 30.02 Douglas B. Hart 4.42 James W. Hart, Jr. 9.68 Steven W. Hart 10.59 V. William Lenoci 26.63\n(C) Benefits are computed on the basis of a straight life annuity and are reduced by 50% of the participant's primary Social Security benefit.\nCOMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION DECISIONS\nThe Reeves' and Reeves Brothers' Boards of Directors do not have compensation committees, and all final compensation decisions are made by the respective Boards of Directors. The Reeves Brothers Salary Compensation Committee, which is comprised of Douglas B. Hart, James W. Hart, Jr., Steven W. Hart and Patrick M. Walsh, all of whom are officers of Reeves Brothers, advises Reeves Brothers' Board with respect to compensation.\nITEM 12.","section_12":"ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT\nOwnership of Common Stock of Reeves\nThe following table sets forth certain information at March 31, 1994 with respect to ownership of Reeves and Hart Holding common stock by each person who is known to own beneficially, or who may be deemed to own beneficially, more than 5% of the outstanding shares of common stock, directors, the chief executive officer, the other four most highly compensated executive officers and all directors and executive officers as a group. Unless otherwise stated, common stock is directly owned.\nReeves ----------------------------- Amount and Name and Nature of Percent of address of beneficial Class beneficial owner ownership\nHart Holding Company Incorporated 35,021,666 100.0% 1120 Boston Post Road Darien, CT 06820\nAnthony L. Cartagine (1) 0 0.0% 104 West 40th Street New York, NY 10018\nDouglas B. Hart 0 0.0% 1120 Boston Post Road Darien, CT 06820\nJames W. Hart (2) 36,421,666 100.0% 1120 Boston Post Road Darien, CT 06820\nJames W. Hart, Jr. (3) 0 0.0% 1120 Boston Post Road Darien, CT 06820\nSteven W. Hart (4) 0 0.0% 1120 Boston Post Road Darien, CT 06820\nV. William Lenoci (5) 0 0.0% Highway 29 South Spartanburg, SC 29304\nDirectors and Executive Officers as a Group (6) 36,421,666 100.0%\n(1) As of March 31, 1994, Anthony L. Cartagine is the indirect beneficial owner of 1,000 shares of Hart Holding's common stock, respresenting less than 1% of such outstanding common stock.\n(2) On January 26, 1994, James W. Hart was granted an option to purchase up to 3,800,000 shares of common stock of Reeves, which has an expiration date of December 31, 2023. The option is exercisable at $.56 per share for 1,400,000 shares (exercisable immediately), $.75 per share for 1,400,000 shares (exercisable one year from grant date) and $1.00 per share for 1,000,000 shares (exercisable two years from grant date). Mr. James W. Hart and Hart Holding may be deemed to be controlling persons of Reeves.\nAs of March 31, 1994, James W. Hart is the beneficial owner of 13,623,507 shares of Hart Holding's commmon stock (94.6%) of which (i) 12,123,507 shares are owned directly, and (ii) 1,500,000 shares are subject to a presently exercisable option (the \"Hart Holding Option\") issued in November 1993. The Hart Holding Option expires on December 31, 2028 and provides for the issuance of up to 4,000,000 shares upon exercise of options as follows: 1,500,000 immediately exercisable at $2.25 per share; 1,500,000 exercisable one year from grant date at $2.50 per share; and 1,000,000 exercisable two years from grant date at $2.75 per share.\n(3) As of March 31, 1994, James W. Hart, Jr. is the beneficial owner of 60,300 shares of Hart Holding common stock (representing less than 1% of such outstanding common stock), of which 300 shares are owned directly and the balance is subject to a presently exercisable option.\n(4) As of March 31, 1994, Steven W. Hart is the beneficial owner of 240,300 shares of Hart Holding common stock (1.9%) of which 180,300 shares are owned directly and the balance is subject to a presently exercisable option.\n(5) As of March 31, 1994, V. William Lenoci is the beneficial owner of 5,000 shares of Hart Holding common stock, representing less than 1% of such outstanding common stock.\n(6) As of March 31, 1994, the directors and executive officers of Hart Holding as a group beneficially own an aggregate of 13,930,107 shares of Hart Holding common stock (96%).\nITEM 13.","section_13":"ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS\nIn connection with the acquisition of the Company, Hart Holding, the Company, Reeves Brothers and three subsidiaries of Reeves Brothers entered into a Tax Allocation Agreement dated as of May 1, 1986, which has been amended and restated from time to time (the \"Tax Agreement\"). The Tax Agreement provides that Hart Holding and its subsidiaries will file consolidated federal income tax returns as long as they remain members of the same affiliated group. Pursuant to the Tax Agreement, the Company and its subsidiaries generally will pay to Hart Holding amounts equal to the taxes that the Company and its subsidiaries would otherwise have to pay if they were to file separate federal, state or local income tax returns but for the use of tax deductible items of Hart Holding.\nHart Holding charges a management fee and allocates portions of its corporate expenses to Reeves on a monthly basis. The management fee and expense allocation aggregated $1.2 million, $1.9 million and $1.8 million for the years ended December 31, 1991, 1992 and 1993, respectively.\nEffective October 25, 1993, HHCI, Inc., a newly formed, wholly-owned subsidiary of Hart Holding, merged with and into Reeves with Reeves surviving the merger. HHCI, Inc. was formed as a shell corporation (no operations) with a $300,000 capital contribution from Hart Holding. As a result of this merger, Hart Holding obtained ownership of 100% of the outstanding shares of common stock of Reeves and the other stockholders of Reeves received $.56 in cash for each share held by such stockholders.\nPART IV\nITEM 14.","section_14":"ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K\n(a) The following documents are filed as part of this report:\n1. Consolidated Financial Statements of Reeves Industries, Inc. and Subsidiary:\nReport of Independent Accountants\nConsolidated Balance Sheet at December 31, 1992 and 1993\nConsolidated Statement of Income for the years ended December 31, 1991, 1992, and 1993\nConsolidated Statement of Changes in Stockholder's Equity for the years ended December 31, 1991, 1992, and 1993\nConsolidated Statement of Cash Flows for the years ended December 31, 1991, 1992, and 1993\nNotes to Consolidated Financial Statements\n2. Financial Statement Schedules for the years ended December 31, 1991, 1992 and 1993\nSchedule V - Property, plant and equipment\nSchedule VI - Accumulated depreciation, depletion and amortization of property, plant and equipment\nSchedule VIII - Valuation and qualifying accounts\nSchedule X - Supplementary income statement information\nAll other schedules are omitted because they are not applicable or required information is shown in the consolidated financial statements or notes thereto.\n3. Exhibits\nExhibit No. Name\n3.1 @ Restated Certificate of Incorporation of Reeves Industries, Inc.\n3.2 (1) Bylaws of Reeves Industries, Inc.\n4.1 (2) Purchase Agreement, dated as of May 1, 1986, among Schick Acquisition Corp., A.R.A. Manufacturing Company of Delaware, Inc. and each of the Purchasers.\n4.2 (2) Subordinated Debenture Indenture, dated as of May 1, 1986, between Schick Acquisition Corp. and Fleet National Bank, as Trustee (the \"Subordinated Debenture Trustee\").\n4.3 (2) First Supplemental Indenture, dated as of May 6, 1986, between Reeves Industries, Inc. and the Subordinated Debenture Trustee.\n4.4 (2) Second Supplemental Indenture, dated as of October 15, 1986, between Reeves Industries, Inc. and the Subordinated Debenture Trustee.\n4.5 (3) Third Supplemental Indenture, dated as of March 24, 1988, between Reeves Industries, Inc. and the Subordinated Debenture Trustee.\n4.6 (4) Fourth Supplemental Indenture, dated as of May 7, 1991, between Reeves Industries, Inc. and the Subordinated Debenture Trustee.\n4.7 (1) Fifth Supplemental Indenture, dated as of June 30, 1992, between Reeves Industries, Inc. and the Subordinated Debenture Trustee.\n4.8 (2) Registration Rights Agreement, dated as of May 1, 1986, among Schick Acquisition Corp. and the purchasers.\n4.9 (5) Senior Note Indenture dated as of June 1, 1992, between Reeves Industries, Inc. and Chemical Bank, as Trustee.\n10.01 (1) Credit Agreement, dated as of August 6, 1992 (the \"Credit Agreement\") among Reeves Brothers, Inc., Reeves Indus- tries, Inc., the Banks signatory thereto and Chemical Bank, as Agent.\n10.02 (6) First Amendment, Waiver and Consent, dated as of October 25, 1993, to the Credit Agreement.\n10.03 @ Second Amendment, dated as of December 28, 1993, to the Credit Agreement.\n10.04 (7) Tax Allocation Agreement, effective as of January 1, 1992 by and among Hart Holding Company Incorporated, Reeves Industries, Inc., Reeves Brothers, Inc., Fenchurch, Inc., Turner Trucking Company, Reeves Penna, Inc., A.R.A. Manufacturing Company, Hart Investment Properties Corpo- ration and Hart Capital Corporation.\n10.05 (8) * Reeves Corporate Management Incentive Bonus Plan.\n10.06 (4) * Employment Agreement dated July 1, 1991, between Reeves Brothers, Inc. and Anthony L. Cartagine.\n10.07 @* Employment Agreement dated November 1, 1991, and amended May 18, 1993, between Reeves Brothers, Inc. and Vito W. Lenoci.\n10.08 @* Reeves Brothers, Inc. 401(a)(17) Plan, effective January 1, 1989.\n10.09 @ Non-Qualified Stock Option Agreement, dated as of January 26, 1994, between Reeves Industries, Inc. and James W. Hart.\n10.10 (6) Agreement and Plan of Merger, dated as of October 22, 1993, between Reeves Industries, Inc. and HHCI, Inc.\n10.11 (4) Lease Agreement, dated March 28, 1991, between Springs Industries, Inc., Lessor, and Reeves Brothers, Inc., Lessee.\n11 Calculation of primary and fully diluted earnings per common share.\n12 Computation of Ratio of Earnings to Fixed Charges.\n21 Subsidiaries of Reeves Industries, Inc.\n(1) Previously filed by Reeves Industries, Inc. as an exhibit to Reeves Industries' Annual Report on Form 10-K dated March 31, 1993, which is incorporated by reference herein.\n(2) Previously filed by Reeves Industries, Inc. as an exhibit to Newreeveco's Registration Statement on Form S-1, Registration No. 33-8192, dated August 21, 1986, as amended October 20, 1986, which is incorporated by reference herein.\n(3) Previously filed by Reeves Industries, Inc. as an exhibit to Reeves Industries' Annual Report on Form 10-K dated April 12, 1988, which is incorporated by reference herein.\n(4) Previously filed by Reeves Industries, Inc. as an exhibit to Reeves Industries' Annual Report of Form 10-K dated March 30, 1992, which is incorporated by reference herein.\n(5) Previously filed by Reeves Industries, Inc. as an exhibit to Reeves Industries' Quarterly Report on Form 10-Q dated August 12, 1992, which is incorporated by reference herein.\n(6) Previously filed by Reeves Industries, Inc. as an exhibit to Reeves Industries' Quarterly Report on Form 10-Q dated November 10, 1993, which is incorporated by reference herein.\n(7) Previously filed by Reeves Industries, Inc. as an exhibit to Reeves Industries' Registration Statement on Form S-2, Registration No. 33-47254, dated April 16, 1992, as amended May 28, 1992, which is incorporated by reference herein.\n(8) Previously filed by Reeves Industries, Inc. as an exhibit to Reeves Industries' Annual Report on Form 10-K dated March 28, 1991, which is incorporated by reference herein.\n@ Available from the Company.\n* Management contract or compensatory plan filed pursuant to Item 14(c) of this report.\n(b) Reports on Form 8-K:\nThere were no reports on Form 8-K filed during the fourth quarter of 1993.\nSIGNATURES\nPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.\nREEVES INDUSTRIES, INC. Registrant\nDate: March 31, 1994 By: \/s\/ Steven W. Hart ------------------ Steven W. Hart Executive Vice President and Chief Financial Officer\nPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.\nSignature Title Date\n(i) Principal Executive Officer:\n\/s\/ James W. Hart, Jr. President, Chief March 31, 1994 Executive Officer and James W. Hart, Jr. Chief Operating Officer\n(ii) Principal Financial Officer:\n\/s\/ Steven W. Hart Executive Vice President, March 31, 1994 Chief Financial Officer Steven W. Hart\n(iii) Principal Accounting Officer:\n\/s\/ Joseph P. O'Brien Vice President - Finance March 31, 1994\nJoseph O'Brien\n(iii) A Majority of the Board of Directors:\n\/s\/ James W. Hart Director March 31, 1994\nJames W. Hart\nSUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT\nNo annual report to security holders covering the Registrant's last fiscal year or proxy material with respect to any meeting of security holders has been sent to security holders of the Registrant.\nSCHEDULE X - SUPPLEMENTARY INCOME STATEMENT INFORMATION\nREEVES INDUSTRIES, INC. AND SUBSIDIARY\nColumn A Column B Charged to Item (1) Costs and Expenses ------------------ (In thousands)\nMaintenance and repairs\nYear ended December 31, 1991 $ 7,922 ========\nYear ended December 31, 1992 $ 7,745 ========\nYear ended December 31, 1993 $ 6,328 ========\n(1) Other items are less than 1% of revenues or not applicable.\nINDEX TO EXHIBITS\nExhibit No. Name\n3.1 Restated Certificate of Incorporation of Reeves Industries, Inc.\n10.03 Second Amendment, dated as of December 28, 1993, to the Credit Agreement.\n10.07 Employment Agreement dated November 1, 1991, and amended May 18, 1993, between Reeves Brothers, Inc. and Vito W. Lenoci.\n10.08 Reeves Brothers, Inc. 401(a)(17) Plan, effective January 1, 1989.\n10.09 Non-Qualified Stock Option Agreement, dated as of January 26, 1994, between Reeves Industries, Inc. and James W. Hart.\n11 Calculation of primary and fully diluted earnings per common share.\n12 Computation of Ratio of Earnings to Fixed Charges.\n21 Subsidiaries of Reeves Industries, Inc.","section_15":""}
{"filename":"109710_1993.txt","cik":"109710","year":"1993","section_1":"ITEM 1. BUSINESS\nClark Equipment Company, a Delaware corporation, is the successor to certain corporations the first of which was organized on December 24, 1902. Unless the context otherwise indicates, the terms \"Registrant\", \"Clark\" and \"Company\" when used in this Form 10-K refer to Clark Equipment Company and its consolidated subsidiaries.\nDescription of Business\nClark's business is the design, manufacture and sale of skid steer loaders, construction machinery, transmissions for on-highway trucks and axles and transmissions for off-highway equipment.\nSkid steer loaders, compact excavators and a limited line of agricultural equipment are manufactured by Clark's Melroe Company Business Unit (\"Melroe\"). Off-highway axles and transmissions are manufactured by the Company's Clark-Hurth Components Company Business Unit (\"Clark Hurth\"). On-highway transmissions and a limited amount of off-highway axles and transmissions are manufactured by the Company's Clark Automotive Products Company Business Unit (\"Clark Automotive\"). In this Form 10-K, Melroe and Clark Hurth are included in the Off-Highway Segment, and Clark Automotive is included in the On-Highway Segment.\nIn addition, construction machinery is manufactured by VME Group N.V. (\"VME\"), a joint venture which is owned 50% by the Company and 50% by A.B. Volvo. The Company's share of the joint venture's earnings is included in the Company's financial statements on an equity basis. The discussion of the Company and its operations in Part I of this Form 10-K is limited to Melroe, Clark Hurth and Clark Automotive and does not include VME, unless expressly stated to the contrary.\nOn July 31, 1992, the Company sold all of the outstanding stock of Clark Material Handling Company (\"CMHC\"), and certain other subsidiaries which comprised its material handling equipment business, to Terex Corporation (\"Terex\") for approximately $91 million. A gain of $8.5 million was recognized on the sale which has been included in discontinued operations. CMHC is reflected as a discontinued operation in the statements of income which are filed as a part of this Form 10-K. As a part of the sale, Terex and CMHC assumed substantially all of the obligations of the Company relating to the CMHC operation. In the event that Terex and CMHC fail to perform or are unable to discharge any of the assumed obligations, the Company could be required to discharge such obligations. This issue is discussed in more detail in the footnote captioned \"Contingencies\" in that portion of the Company's Annual Report to Stockholders which is attached hereto as Exhibit 13.\nClark Automotive consists of Clark Automotive Products Corporation, a Michigan corporation (\"CAPCO\"), and its wholly-owned subsidiaries CAPCO do Brasil Empreendimentos e Participacoes Ltda. and Equipamentos Clark Ltda. On February 23, 1994, CAPCO filed a Registration Statement with the Securities and Exchange Commission for an initial public offering of 10 million shares of its common stock with an estimated price range of $14 to $17 per share. Of the total number of shares, 9,174,194 shares will be sold by the Company and 825,806 will be sold by CAPCO. The Company has also granted the underwriter an option to purchase an additional one million shares of common stock to cover overallotments. If the public offering is completed, and assuming that the overallotment option is fully exercised by the underwriter, the Company will have disposed of its entire interest in Clark Automotive.\nBacklog Orders\nFor the On-Highway Segment, the approximate dollar backlog of orders believed to be firm was $25 million at December 31, 1993 and $21 million at December 31, 1992. For the Off-Highway Segment, the approximate dollar backlog of orders believed to be firm was $124 million at December 31, 1993 and $102 million at December 31, 1992. Generally, Clark's customers may cancel their orders without incurring significant cancellation charges, and, therefore, Clark's backlog is essentially a report of the recorded intentions to purchase its products, which could change before the sales are completed. The backlog figures stated above are based on orders to Clark's factories or warehouses from Clark's independent dealers and other customers who buy directly from Clark's factories or warehouses.\nManufacturing\nThe products of the On-Highway Segment are manufactured by Clark Automotive in Brazil and are sold primarily to the Brazilian automobile industry and the North and South American medium-duty truck industry. In addition, Clark Automotive sells a limited amount of off-highway axles and transmissions primarily to customers in Brazil.\nIn the Off-Highway Segment, Melroe products are manufactured in the United States for sale throughout the world to a wide variety of users and industries, including the construction and agricultural industries. These products are distributed under the trademarks \"Melroe\" and \"Bobcat\". In addition, Melroe products are manufactured by a licensee in Australia. Clark Hurth products are manufactured in the United States, Belgium and Italy for sale throughout the world primarily to the construction, mining and material handling equipment industries. In addition, Clark Hurth products are manufactured by a licensee in South Africa.\nDistribution\nThe products of the On-Highway Segment are sold by Clark directly to customers by Clark employee sales representatives, and through manufacturers representatives and independent distributors.\nIn the Off-Highway Segment, Clark Hurth products are also sold directly to customers by employee sales representatives and through manufacturers representatives and independent distributors. Melroe products are sold by Clark primarily through independent dealers. Clark maintains a large modern central parts warehouse in Chicago, which, in\nconjunction with a communications network and electronic data processing equipment, provide expeditious shipment of customers' and dealers' orders for repair and replacement parts for Melroe and VME products.\nOperations Outside the United States\nOperations outside the United States are subject to, among other things, the laws and regulations of foreign governments relating to investments, operations and currency restrictions, import and export duties and revaluations and fluctuations of currencies. Operations outside the United States are also subject to changes in governments and economic policies.\nLicense fees from licensees outside the United States and Canada, other than from consolidated subsidiaries, and dividends from associated companies aggregated approximately $0.3 million in 1993, approximately $0.4 million in 1992 and approximately $5.2 million in 1991.\nRaw Materials and Components\nThe principal raw materials and components purchased by the Off- Highway Segment are steel; castings; engines and accessories; hydraulic motors, pumps, valves and cylinders; fabricated metal parts; fabricated plastic parts; tires and tubes; electrical equipment; drive train components; brakes and brake components; bearings; forgings; fasteners; bushings; electric motors; gears and gear blanks; screw machine products; seals; clutch plates; torque convertors; synchronizer rings; steering arms; CV joints; cardan shafts; seats; paint; sealants and adhesives; antifreeze; batteries; radiators; oil coolers; springs; shocks; chain; sprockets; glass; filters; and rotational and vacuum formed plastics.\nThe principal raw materials and components purchased by the On- Highway Segment are steel, castings, pumps, valves, fabricated metal parts, bearings, forgings, fasteners, screw machine products, seals, torque converters, synchronizer rings, bushings and fabricated plastic parts.\nFor both the Off-Highway and On-Highway Segments, the items described above are purchased from a number of different suppliers, both on an individual purchase commitment basis and on a one-year blanket order basis. Multiple sources for most items are available, but substitution of engines and accessories, hydraulic motors, electrical equipment, pumps, and valves, in the event they were to become unavailable from the usual sources, would in some instances require engineering modifications to the product in which they are used.\nEnergy\nClark's manufacturing operations and those of its suppliers depend to a substantial extent upon the availability of natural gas, fuel oil, propane, electricity, coal, uranium and generating capacity. Clark presently expects that its plants will be able to operate with little or no interruption resulting out of scarcity of energy through 1994.\nEngineering and Product Development\nAn engineering staff is maintained at each of the principal manufacturing facilities of Clark. These staffs are supplemented by laboratories which provide technical support for product testing, materials research and process development. Approximately 277 engineering employees (engineers, designers, draftsmen and technicians) are presently engaged full time in engineering and product development activities. Approximately $19.8 million in 1993, $21.5 million in 1992 and $27.7 million in 1991 was spent on activities relating to the development of new products and the improvement of existing products. These amounts include expenditures by Clark Material Handling Company up to the date of the sale of that company to Terex Corporation on July 31, 1992. Substantially all of these amounts were sponsored by Clark rather than by customers.\nAlthough Clark owns numerous patents and has patent applications pending, its business is not materially dependent upon patent protection.\nCompetition\nClark conducts its domestic and foreign operations under highly competitive conditions and its business is subject to cyclical influences and other factors. The customers for most of Clark's products are commercial, industrial or farm users who use the products in business for profit. Product performance and parts and service availability are primary considerations for these customers in the choice among competing products. Availability of rental and financing programs and warranty policies are also important considerations. In making a purchase decision, the above factors, plus the initial selling price, the date on which delivery can be made, and the general product reputation will be considered by the purchaser, and the order will normally be placed with the seller who comes closest to satisfying the purchaser's particular requirements of all of these factors.\nClark estimates that it has 19 significant competitors in the On- Highway Segment. In addition, this Segment is subject to potential competition from its customers, some of whom could elect to make for themselves the components now purchased from Clark.\nIn the Off-Highway Segment, Melroe is the leading producer of skid steer loaders in the United States and has approximately 20 significant competitors. Clark Hurth has approximately 20 significant competitors and is also subject to potential competition from its customers.\nCustomers\nThe Off-Highway Segment is not dependent upon a single customer or a few customers, the loss of any one or more of which would have a material adverse effect on its operations.\nDuring 1993, approximately 32% of the consolidated revenues of the On-Highway Segment was derived from sales to its largest customer, and approximately 54% of the Segment's consolidated revenues was derived from sales to its two largest customers. Loss of any one or both of these customers could have a material adverse effect on the operations of this segment.\nSeasonality\nAlthough Clark experiences slight seasonal variations in its sales, Clark does not consider any material part of its business to be seasonal.\nEnvironmental Compliance\nClark's facilities are subject to environmental regulation by federal, state and local authorities. In 1993, the Company spent approximately $2.6 million in connection with environmental compliance and cleanup activities. Capital expenditures for environmental control activities are not expected to be material for the remainder of 1994 and 1995. Clark is also involved in environmental cleanup activities or litigation in connection with former waste disposal sites and former plant locations. The Company has and will continue to make provisions for these cleanup costs as necessary and when the Company's liability can be reasonably estimated. As of December 31, 1993, the Company had reserves of $16.4 million for potential future environmental cleanup costs. Although the Company cannot determine whether or not a material effect on future operations is reasonably likely to occur, it believes that the recorded reserve levels are appropriate estimates of the potential liability. The Company further believes that the additional maximum exposure level in excess of the recorded reserve level would not be material to the financial condition of the Company. Although settlement of the reserves will cause future cash outlays, it is not expected that such outlays will materially impact the Company's liquidity position.\nEmployees\nAs of December 31, 1993, Clark employed 2,285 persons in North America and 3,663 persons outside North America. A portion of Clark's production, maintenance and warehouse employees in the United States are represented by local unions affiliated with the Allied Industrial Workers and the International Brotherhood of Teamsters, which are affiliated with the AFL-CIO.\nIndustry Segment and Geographic Area Discussion\nIncorporated by reference to pages 27 to 29 of that portion of the Company's Annual Report which is attached hereto as Exhibit 13.\nITEM 2.","section_1A":"","section_1B":"","section_2":"ITEM 2. PROPERTIES Clark or a subsidiary of Clark owns the following principal facilities in fee, except where a lease is indicated:\nClark owns the production equipment and machines at its plants, except for an insignificant number of items which are leased. All of Clark's principal plants and warehouse facilities are in good operating condition. Clark also owns idle facilities in Georgetown, Kentucky, Atlanta, Georgia and South Bend, Indiana. The Georgetown, Kentucky facility is classified as an asset held for sale in the Company's balance sheet incorporated in this Form 10-K. In 1993 Clark's manufacturing plants operated at approximately 83% of capacity.\nITEM 3.","section_3":"ITEM 3. LEGAL PROCEEDINGS\nIn the Matter of Industrial Pretreatment Violations at Melroe Company, Gwinner, North Dakota\nOn October 5, 1992, the United States Environmental Protection Agency (\"EPA\") issued a Finding of Violation and Order for Compliance (\"Order\") which alleges that the Company has failed to comply with the pretreatment regulations promulgated pursuant to Section 306 and 307 of\nthe Clean Water Act. The Order alleges that certain metal finishing wastewaters generated at the Company's Melroe facility in Gwinner, North Dakota were discharged into the Publicly Owned Treatment Works operated by the City of Gwinner in violation of the applicable pretreatment regulations. The Order also alleges that the Company failed to comply with certain reporting requirements set forth in the pretreatment regulations. The Order requires the Company to comply with the discharge limitations for metal finishing wastewater and all related reporting requirements. The Company is in the process of taking all actions required of it under the Order.\nOn January 31, 1994, the Company received a letter from the U.S. Department of Justice indicating that it would be willing to settle this matter without litigation for a civil penalty of $1.9 million. The Company intends to commence settlement negotiations with the Department of Justice.\nBurkeen et al. v Clark Equipment Company\nOn March 26, 1993, James R. Burkeen, Betty F. Burkeen and Burkeen Manufacturing Company filed a Complaint in the United States District Court for the Northern District of Mississippi. The Complaint alleges fraud, negligent misrepresentation, breach of contract, breach of duty of good faith and fair dealing, breach of warranty and tortious interference with contract and business relations in connection with Registrant's sale of its trencher equipment business to Burkeen Manufacturing Company in December of 1991. Burkeen Manufacturing Company seeks compensatory damages of $40,000,000, James R. Burkeen and Betty F. Burkeen seek compensatory damages of $5,000,000 and all plaintiffs seek punitive damages of $90,000,000.\nThe Registrant has filed an Answer denying liability and a Counterclaim seeking recovery of certain amounts owed by Burkeen Manufacturing Company in connection with the sale. The lawsuit is in the discovery stage. Based on the information available, the Registrant believes that the lawsuit is without merit and that the ultimate resolution of the suit will not have a material adverse effect on the Registrant's financial condition.\nThe Company is a party to ordinary routine litigation incidental to its business. The ultimate results of this litigation are subject to a high degree of estimation and are not determinable with complete precision; however, in the opinion of management either adequate provision for anticipated costs has been made through insurance coverage or accruals, or the ultimate costs of such matters will not materially affect the consolidated financial position of the Company.\nITEM 4.","section_4":"ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS\nNone\nEXECUTIVE OFFICERS OF THE REGISTRANT\nName of Officer and Age as of Principal Occupation Positions\/Offices March 1, Date First and Employment During Presently Held 1994 Elected Past Five Years\nLeo J. McKernan* 56 5\/22\/86 Chairman, President and Chairman, President Chief Executive Officer and Chief Executive Clark Equipment Company. Officer\nFrank M. Sims* 61 3\/17\/87 Senior Vice President of Senior Vice President Clark Equipment Company.\nPaul R. Bowles 56 9\/22\/89 Vice President - Corporate Vice President Development of Clark Equipment Company. Prior to September 1989, President, Edward Lowe Industries, Inc.- clay minerals business.\nThomas L. Doepker 50 7\/13\/84 Vice President and Vice President and Treasurer of Clark Treasurer Equipment Company.\nWilliam N. Harper 49 12\/09\/86 Vice President and Vice President and Controller of Clark Controller Equipment Company.\nBernard D. Henely 50 7\/13\/84 Vice President and Vice President and General Counsel of General Counsel Clark Equipment Company.\nJames D. Kertz 57 2\/9\/93 President, Melroe Company, Vice President a Business Unit of Clark Equipment Company. Prior to September 1992, Executive Vice President, Melroe Company.\nJohn J. Reynolds 60 8\/13\/91 President, Clark-Hurth Vice President Components Company, a Business Unit of Clark Equipment Company. Prior to April 1991, President, Cherry-Burrell Corporation- automatic packaging and processing equipment.\n* Member of the Board of Directors of the Company.\nEach officer's term expires at the annual meeting of the Board of Directors on May 10, 1994.\nPART II\nITEM 5.","section_5":"ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS\nIncorporated by reference to page 31 of that portion of the Company's Annual Report which is attached hereto as Exhibit 13.\nITEM 6.","section_6":"ITEM 6. SELECTED FINANCIAL DATA\nIncorporated by reference to page 34 of that portion of the Company's Annual Report which is attached hereto as Exhibit 13.\nITEM 7.","section_7":"ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS\nIncorporated by reference to pages 1 through 8 of that portion of the Company's Annual Report which is attached hereto as Exhibit 13.\nITEM 8.","section_7A":"","section_8":"ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA\nIncorporated by reference to pages 9 through 26, 30 and 31 of that portion of the Company's Annual Report which is attached hereto as Exhibit 13.\nAlso see Index to Financial Statements on page 13 of this report.\nITEM 9.","section_9":"ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE\nNone\nPART III\nITEM 10.","section_9A":"","section_9B":"","section_10":"ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT\nInformation regarding the directors of the Registrant is incorporated by reference to the section in the Company's Proxy Statement which is captioned \"Identification of Nominees for Director\". Information regarding the executive officers of the Registrant is set forth in Part I of this report under the caption \"Executive Officers of the Registrant\".\nITEM 11.","section_11":"ITEM 11. EXECUTIVE COMPENSATION\nIncorporated by reference to the sections in the Company's Proxy Statement which are captioned \"Executive Compensation\", \"Stock Option\/SAR Tables\", \"Executive Employment Contracts\", \"Retirement Program\", \"Director Compensation Arrangements\", and \"Stock Purchase and Grant Plans for Non-Employee Directors\".\nITEM 12.","section_12":"ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT\nIncorporated by reference to the section in the Company's Proxy Statement which is captioned \"Security Ownership of Certain Beneficial Owners and Management\".\nITEM 13.","section_13":"ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS\nNone\nPART IV\nITEM 14.","section_14":"ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K\n(a) 1. Financial Statements: Incorporated by reference to pages 9 through 34 of that portion of the Company's Annual Report which is attached hereto as Exhibit 13.\n2. Financial Statement Schedules (see index on page 13 of this report).\n3. Exhibits:\nSee Exhibit List and Index attached. Exhibits numbered (10)(a) through (10)(r) are management contracts and compensatory plans or arrangements.\n(b) Reports on Form 8-K:\n1. The Registrant filed a Form 8-K dated October 22, 1993 reporting on Item 5, OTHER EVENTS, and Item 7, FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.\n2. The Registrant filed a Form 8-K dated November 16, 1993 reporting on Item 5, OTHER EVENTS, and Item 7, FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.\nSIGNATURES\nPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on the 30th day of March 1994.\nCLARK EQUIPMENT COMPANY\nBy \/s\/ Leo J. McKernan Leo J. McKernan Chairman, President and Chief Executive Officer\nPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated. Each person whose signature appears below hereby authorizes B. D. Henely and John J. Moran, Jr. and each of them severally, with full power in each to act without the other and with full power of substitution and resubstitution, to execute in the name of each such person, and to file any amendments to this report as the registrant deems appropriate, and appoints such persons as attorneys-in-fact to sign on his behalf individually, and in each capacity stated below, and file all amendments to this report.\nSIGNATURE TITLE DATE\n\/s\/ Leo J. McKernan Chairman, President, Chief March 30, 1994 Leo J. McKernan Executive Officer and Director (Principal Executive Officer)\n\/s\/ William N. Harper Vice President and Controller March 30, 1994 William N. Harper (Principal Financial Officer and Principal Accounting Officer)\nDirectors\n\/s\/ James C. Chapman James C. Chapman Director )\n\/s\/ Donald N. Frey Donald N. Frey Director )\n\/s\/ James A.D. Geier James A.D. Geier Director )\n\/s\/ Gaynor N. Kelley Gaynor N. Kelley Director ) March 30, 1994\n\/s\/ Ray B. Mundt Ray B. Mundt Director )\n\/s\/ Frank M. Sims Frank M. Sims Director )\n\/s\/ Dieter H. Stinnes Dieter H. Stinnes Director )\nCLARK EQUIPMENT COMPANY\nThe financial statements of Clark Equipment Company and its consolidated subsidiaries, together with the report thereon of Price Waterhouse dated February 14, 1994, appearing on pages 9 through 34 of that portion of the Company's 1993 Annual Report which is attached hereto as Exhibit 13, are incorporated by reference in this Form 10-K Annual Report. The following additional financial data should be read in conjunction with such financial statements. Schedules not included with this additional financial data have been omitted because they are not applicable or the required information is shown in the financial 3statements or notes thereto.\nThe combined financial statements of VME Group N.V. (VME) and its subsidiaries have been incorporated beginning on page 19 of this report. VME is a joint venture owned 50 percent each by Clark Equipment Company and A.B. Volvo of Sweden.\nFinancial statements of other unconsolidated majority owned subsidiaries and 50% or less owned persons have been omitted because the proportionate share of the pre-tax income and total assets of each such company is less than 20% of the respective amounts for the registrant and its consolidated subsidiaries, and the investment in and advances to each company is less than 20% of total assets of the registrant and its consolidated subsidiaries.\nAdditional Information:\nPage\nReport of Independent Accountants on Financial Statement Schedules 14\nClark Equipment Company and Consolidated Subsidiaries- Schedule II 15 Schedules V and VI 16 and 17 Schedule VIII 18\nVME Group N.V. and its subsidiaries Combined Financial Statements and Notes to Financial Statements 19 through 44\nReport of KPMG Bohlins AB on the Financial Statements of VME Holding Sweden AB 45\nREPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULES\nBoard of Directors Clark Equipment Company South Bend, Indiana\nOur audits of the consolidated financial statements referred to in our report dated February 14, 1994 appearing on page 42 of the 1993 Annual Report to Stockholders of Clark Equipment Company (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the Financial Statement Schedules listed in Item 14(a) of this Form 10-K. In our opinion, these Financial Statement Schedules present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.\n\/s\/ Price Waterhouse\nPrice Waterhouse South Bend, Indiana February 14, 1994\nCLARK EQUIPMENT COMPANY AND CONSOLIDATED SUBSIDIARIES\nCLARK EQUIPMENT COMPANY AND CONSOLIDATED SUBSIDIARIES\nVME GROUP N.V.\nCONSOLIDATED FINANCIAL STATEMENTS\nDECEMBER 31, 1993\nVME GROUP N.V.\nFINANCIAL STATEMENTS\n* Report of Independent Accountants.\n* Consolidated Balance Sheet - December 31, 1993 and 1992.\n* Consolidated Statement of Operations for the three years ended December 31, 1993.\n* Consolidated Statement of Cash Flows for the three years ended December 31, 1993.\n* Notes to Consolidated Financial Statements.\nSUPPLEMENTAL SCHEDULES\nVIII Valuation and Qualifying Accounts\nIX Short-Term Borrowings\nSCHEDULES OMITTED\n* Other schedules required by Regulation S-X are omitted because of absence of the conditions under which they are required or because information called for is shown in the financial statements and notes thereto.\nBP America Building Telephone 216 781 3700 200 Public Square 27th Floor Cleveland, Ohio 44114-2301\nPrice Waterhouse\nReport of Independent Accountants\nMarch 4, 1994\nTo the Board of Directors and Shareholders of VME Group N.V.\nIn our opinion, based upon our audits and the report of other auditors, the accompanying consolidated balance sheet and the related consolidated statements of operations and of cash flows present fairly, in all material respects, the financial position of VME Group N.V. and its subsidiaries at December 31, 1993 and 1992, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1993, in conformity with generally accepted accounting principles in the United States. Those financial statements are the responsibility of the Group's management; our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements of certain subsidiaries, which statements reflect total assets of $412,297,000 and $497,778,000 at December 31, 1993 and 1992, respectively, and total revenues of $510,999,000, $586,784,000 and $680,736,000 for the years ended December 31, 1993, 1992 and 1991, respectively. Those statements were audited by other auditors whose report thereon has been furnished to us, and our opinion expressed herein, insofar as it relates to the amounts included for these subsidiaries, is based solely on the reports of the other auditors. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits and the report of other auditors provide a reasonable basis for the opinion expressed above.\nAs discussed in Notes 8 and 19, the Group changed its method of accounting for income taxes and postretirement benefits effective January 1, 1993.\n\/s\/ Price Waterhouse\nVME GROUP N.V.\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands)\nNote 1 - Basis of Presentation and Principles of Consolidation\nVME Group N.V. (the Company, VME) is a Netherlands holding company formed on March 28, 1985 to hold, together with Clark Equipment Company (Clark) and AB Volvo, the common stock of its two significant operating subsidiaries, VME Americas Inc. (VMEA), a Delaware Corporation, and VME Holding Sweden AB (VMEHS), a Swedish corporation. AB Volvo and Clark until December 22, 1993, held equal cross-ownership positions in VMEA and VMEHS. On December 22, 1993, Clark and AB Volvo contributed their respective ownership interests in VMEA and VMEHS to VME Group N.V., which resulted in VMEA and VMEHS becoming wholly-owned subsidiaries of the Company. Such contributions were accounted for as transactions between entities under common control. Accordingly, financial statements of the Company have been prepared on a historical cost basis and reflect such contributions on a retroactive basis for all periods presented.\nThe consolidated financial statements have been prepared prior to December 22, 1993, as if the Company and its operating subsidiaries have been consolidated; the consolidation in years prior to 1993 represents a combination of VMEA, VMEHS, their respective subsidiaries and other VME Group N.V. entities.\nInvestments and results of operations of companies in which the Company holds more than 50% of the issued capital stock, are included in the consolidated accounts. Companies in which the Company holds investments between 20% and 50% are accounted for utilizing the equity method of accounting and investments below 20% are accounted for at cost. All material balances and transactions between the entities comprising the Company have been eliminated.\nNote 2 - Description of Business\nThe Company is engaged in the design, manufacture and marketing of off- highway construction equipment on a worldwide basis. This equipment is primarily wheel loaders, articulated haulers, hydraulic excavators and rigid off-highway haulers. The majority of sales are made to end users through a worldwide network of affiliated and independent distributors. The sale of replacement parts is an important component of the Company's business.\nNote 3 - Summary of Significant Accounting Policies\nInventories Inventories of non-U.S. operations are valued at the lower of cost or market on the first-in, first-out (FIFO) method. Substantially all U.S. inventories are valued at the lower of cost or market using the last-in, first-out (LIFO) method.\nProperties and Depreciation Property, plant and equipment are carried at cost. Expenditures for maintenance and repairs are charged to income as incurred and expenditures for major renewals and betterments are capitalized. Depreciation is provided over the useful lives of the assets using primarily the straight- line method. Properties retired or sold are removed from the property accounts with gains or losses on disposal included in income. The useful lives of the assets are primarily as follows :\nBuildings 25 - 50 years Machinery and equipment 5 - 10 years Motor vehicles 5 years Furniture and fixtures 3 years\nGoodwill Goodwill represents the excess of the total costs of businesses acquired in 1991 over the fair market value of their net assets. Goodwill is being amortized on the straight-line method over a period of 40 years. Accumulated amortization expense was $6,298 in 1993 and $4,532 in 1992.\nWarranties Provision is made currently for estimated future costs that are expected to be incurred under product warranties presently in force.\nPension Plans The Company accrues the cost of pension and retirement plans which cover substantially all employees. Benefits are based on employees' years of service and compensation. Pension costs, which are primarily computed using the unit credit method, are funded based on the minimum required contribution under the Employee Retirement Income Security Act of 1974 for the U.S. plans, and in accordance with local laws and income tax regulations for the foreign plans. Plans' assets are invested primarily in listed stocks, guaranteed investment contracts and corporate bonds.\nProduct Liability The Company accrues its best estimate of the most likely amount of settle- ment or claim liability for all asserted claims. For unasserted claims, the Company records an estimate of liability for incurred but not reported claims based on historical amounts of claims and settlements and reporting lag time.\nIncome Taxes In January 1993, the Company adopted Statement of Financial Accounting Standard No. 109 (SFAS 109) \"Accounting for Income Taxes\". The adoption of SFAS 109 changes the method of accounting for income taxes from the deferred method (APB 11) to an asset and liability approach. Previously, the Company deferred the past tax effects of timing differences between financial reporting and taxable income. The asset and liability approach requires the recognition of deferred tax liabilities and assets for the expected future tax consequences or temporary differences between the carrying amount and the tax bases of assets and liabilities. The adoption resulted in the recognition of a net tax benefit of $12,286. No provision for income taxes is made on $56.3 million of undistributed earnings from consolidated subsidiaries, which have been or will be reinvested.\nFair Value of Financial Instruments Pursuant to Financial Accounting Standards No. 107, \"Disclosures about Fair Value of Financial Instruments\", the carrying amount of cash, trade receivables and payables approximates fair value because of the short maturity of those instruments. The carrying value of the Company's long- term debt is considered to approximate the fair value of these instruments based on the borrowing rates currently available to the Company for loans with similar terms and maturities.\nForeign Currency Translation Financial statements of subsidiaries and entities operating outside of the United States are translated into U.S. dollars in accordance with Statement of Financial Accounting Standard No. 52. For subsidiaries whose business activities are based mainly on the U.S. dollar or who operate in a \"highly inflationary economy\", the financial statements are translated into U.S. dollars using: (1) current exchange rates at the balance sheet date for all liabilities and current assets except inventories, (2) exchange rates at the time of acquisition for inventories and properties, and (3) weighted average monthly exchange rates for the year for income and expense amounts, except depreciation and cost of goods sold. The resulting translation gains and losses are included in income.\nExchange losses included in the Income Statement were $18,754, $15,884 and $1,093 in 1993, 1992 and 1991, respectively.\nReclassifications Certain reclassifications have been made for all years presented in the financial statements to conform to the classifications adopted in 1993.\nNote 4 - Acquisitions and Dispositions\nDuring 1993, the Company contributed stock and the book value of specific assets and liabilities in return for an 80.5% ownership interest in a company formed to establish a joint venture with Hitachi Construction Machinery Company, Ltd (HCMC). HCMC contributed cash equal to 19.5% of the total net assets. The joint venture company, Euclid-Hitachi, is fully consolidated in the Company's financial statements. Additionally, HCMC may elect to increase its ownership interest in Euclid-Hitachi by purchasing additional shares from the Company prior to December 31, 1996.\nThe Company completed in the beginning of 1991 the acquisition of Akermans Verkstad AB (VME Excavators), a Swedish manufacturer of hydraulic excavators. The Company also raised during 1991 its shareholding in Zettelmeyer Baumaschinen GmbH (Zettelmeyer), a German manufacturer of construction machinery, primarily wheel loaders, to a majority holding of 70%. Both of the acquisitions have been accounted for as purchases and included in the income statement from January 1, 1991. The total purchase price for the two acquisitions amounted to $172 million.\nIn conjunction with the purchase of Akermans Verkstad AB, a decision was made to restructure the company's distribution organization and production facilities to improve cost efficiency and increase the manufacturing productivity. At December 31, 1993 and 1992, the restructuring reserve relating to Akermans Verkstad AB aggregated $1.4 million and $4.1 million, respectively.\nThe estimated fair values of the Akermans and Zettelmeyer assets acquired and liabilities assumed, as well as the restructuring reserve established are summarized (in millions) as follows :\nCurrent assets (includes cash of $20.1) $ 254.4 Property, plant & equipment 67.9 Long-term assets 6.6 Goodwill 115.4\nCurrent liabilities (134.1) Restructuring liability (46.7) Long-term liabilities assumed (78.1) Minority interest (13.4) $ 172.0 =======\nNote 5 - Statement of Cash Flows\nVME considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents.\nThe following payments were made for: Year Ended December 31, 1993 1992 1991 Interest (net of amount capitalized) $ 35,168 $ 63,747 $ 44,703 Income taxes 6,278 6,415 11,520\nNote 6 - Costs and Expenses\nCosts and expenses include : Year Ended December 31, 1993 1992 1991 Research and development $ 38,521 $ 59,941 $ 65,043 Postretirement insurance & healthcare 12,051 6,670 5,090 Maintenance and repairs 21,758 28,013 31,826 Restructuring costs - 18,712 4,377\nA charge in 1992 for restructuring costs of $18,712 has been made in costs and expenses relating to the decision to restructure the Company's distribution organization and production facilities in North America, to improve cost efficiency and increase the manufacturing productivity and to relocate the German distribution company. The remaining restructuring reserve relating to these activities was $7.9 million at year end 1993 and $16.0 million at year end 1992. The 1991 restructuring costs of $4,377 relates to the closing of the Landskrona plant in Sweden and to the relocation of the German distribution company.\nNote 7 - Depreciation and Amortization Expense\nDepreciation and amortization expense is allocable as follows: Year Ended December 31, 1993 1992 1991 Cost of Sales $ 26,317 $ 37,402 $ 33,276 Selling, general and administrative expense 5,211 5,074 9,318 $ 31,528 $ 42,476 $ 42,594 ======== ======== ========\nNote 8 - Income Taxes\nThe provision for income taxes is based on separate tax computations for each entity. U.S. and non-U.S. income (loss) before income taxes and minority interests is reported below:\nYear Ended December 31, 1993 1992 1991 Income (loss) before income taxes and minority interests : U.S. $ 4,109 $ (15,970) $ (12,541) Non-U.S. 34,225 (97,300) (56,994) $ 38,334 $(113,270) $ (69,535) ========= ========= =========\nThe provision (benefit) for income taxes consists of the following:\nYear Ended December 31, Current tax expense: 1993 1992 1991 U.S. $ 7,897 $ - $ - Non-U.S. 8,151 13,257 1,855 16,048 13,257 1,855\nDeferred tax expense (benefit): U.S. (1,502) - - Non-U.S. 3,328 (36,610) (28,672) 1,826 (36,610) (28,672) ________ ________ ________\nTotal income tax expense (benefit) $ 17,874 $ (23,353) $ (26,817) ========= ========= =========\nTax legislation in Sweden and certain other countries allows companies to reduce their current taxable income through allocations to untaxed reserves. Such amounts are taxed when the untaxed reserves are reduced, except when the purpose of the reduction is to cover a loss or to utilize a tax loss carryforward. Deferred income taxes apply to timing differen- ces primarily resulting from allocations to untaxed reserves (principally inventory and fixed assets related) and other differences between income before income taxes for financial reporting and tax purposes. Deferred tax benefits in 1992 and 1991 are mainly comprised of results from the reversal of untaxed reserves, $21,554 and $25,737 in 1992 and 1991, respectively, in 1992 also sale of property in the amount of $13,252.\nFollowing is a reconciliation of income tax expense (benefit) from the U.S. statutory rate to the effective tax rate:\nYear Ended December 31, 1993 1992 1991 Provision (benefit) for taxes at US statutory rate $ 13,064 $ (38,512) $ (23,642) Effect of permanent basis differences between tax and financial income 1,978 (449) 788 Losses with no available tax benefits 2,019 17,560 11,974 Earnings taxed at other than U.S. rate and release of untaxed reserves 100 (6,104) (14,968) Other 713 4,152 (969) Provision (benefit) for taxes at effective tax rate $ 17,874 $ (23,353) $ (26,817) ========= ========= =========\nDeferred tax assets and liabilities are comprised of the following at December 31, 1993:\nDeferred tax assets relating to :\nAccounts receivable $ 303 Inventories 6,037 Fixed assets 7,961 Pension and postretirement benefits 14,703 Expense accruals and reserves 11,522 Other 5,014 Net operating loss and credit carryforwards 16,969 Total deferred tax assets before valuation allowance 62,509 Deferred tax assets valuation allowance (31,044) Net tax asset $ 31,465\nDeferred tax liabilities relating to :\nAccounts receivable $ 32 Inventories 8,002 Fixed assets 12,616 Pensions 5,212 Other 5,190 Gross deferred tax liabilities $ 31,052\nNet deferred tax asset $ 413\nAt December 31, 1993, VMEA has $2,959 of tax operating loss carryforwards in the United States available to reduce future taxable income which expires in decreasing amounts beginning in 2002 through the year 2006. Other subsidiaries in the Company also have $14,256 of operating loss carryforwards available to offset future taxable income, most of which expire in the year 2002 or thereafter. For Canadian income tax purposes, VMEA's Canadian subsidiary has $18,344 of loss carryforwards to reduce future taxable income which expire in 1998. In addition, for Canadian income tax purposes, the Canadian subsidiary has available certain depreciation allowances aggregating $19,801, which may be utilized to reduce future taxable income in succeeding years. The amount of such depreciation allowance that may be deducted in any one specific year is subject to certain limitations. Also available in Canada are investment tax credit carryforwards of $502 which begin to expire in varying amounts from 1994 through 1998.\nVMEA's Brazilian subsidiary has $5,050 loss carryforwards available to reduce future taxable income of which $735 will expire in 1997 and the remainder of which has no expiration date. Also available in Brazil is a $3,398 tax credit that can also be offset against future income up to 1998.\nNote 9 - Receivables December 31, Receivables consist of the following: 1993 1992\nNotes receivable $ 12,365 $ 6,878 Trade receivables 158,812 183,805 Other receivables 6,867 2,946 Less: Allowance for doubtful accounts (10,161) (12,230) $ 167,883 $ 181,399 ========= =========\nNote 10 - Inventories December 31, Inventories consist of the following: 1993 1992\nSales products $ 187,355 $ 227,315 Raw materials and work in process 116,863 133,867 Reserves (33,012) (36,036) $ 271,206 $ 325,146 ========= =========\nFIFO values of U.S. inventories exceeded LIFO values by $6,910 in 1993 and $6,520 in 1992. The financial statement basis of these inventories exceeds the tax basis by $19,372 in 1993 and $21,330 in 1992.\nNote 11 - Property, Plant and Equipment\nProperty, plant and equipment consist of the following:\nDecember 31, 1993 Accumulated Net Cost Depreciation Book Value Land and land improvements $ 16,242 $ 5,138 $ 11,104 Machinery and equipment 236,137 163,263 72,874 Buildings 116,770 46,024 70,746 $ 369,149 $ 214,425 $ 154,724 ========= ========= =========\nDecember 31, 1992 Accumulated Net Cost Depreciation Book Value Land and land improvements $ 17,888 $ 5,169 $ 12,719 Machinery and equipment 279,915 181,698 98,217 Buildings 128,912 43,543 85,369 $ 426,715 $ 230,410 $ 196,305 ========= ========= =========\nDepreciation expense was $29,098, $39,565 and $40,464 for the three years 1993, 1992 and 1991, respectively.\nNote 12 - Other Long-term Assets Other long-term assets consist of December 31, the following : 1993 1992\nInvestments $ 5,454 $ 8,854 Intangible pension asset 7,109 4,923 Other assets 5,288 13,603 $ 17,851 $ 27,380 ======== ========\nInvestments consist of interests in affiliated companies, which are accounted for by the equity or cost methods.\nNote 13 - Short-term Debt\nLoans consist of the following: December 31, 1993 Year End Line of Interest Credit Amount Rate Available Outstanding\nEurope 6.84% $ 83,146 $ 43,604 Brazil 8.06% 21,656 5,055 Australia 5.85% 5,531 3,559 $ 110,333 $ 52,218 ========= =========\nDecember 31, 1992 Year End Line of Interest Credit Amount Rate Available Outstanding\nNorth America 5.42% $ 52,500 $ 24,500 Europe 11.56% 297,710 204,455 Brazil 12.49% 22,500 9,688 Australia 6.85% 8,289 8,790 $ 380,999 $ 247,433 ========= =========\nThe line of credit arrangements require payment of commitment fees ranging from zero to 1.50% of the individual line of credit.\nThe Company, as a service to distributors in selected geographic areas, has financing agreements with certain financial institutions to assist in the financing of distributor inventory. In general, these agreements require the Company to make monthly interest payments to the financial institutions for a predetermined period or until the inventory is sold by the distributor, whichever occurs first.\nFinancing expenses incurred in conjunction with the above agreements were $5,734, $5,520, and $5,140 in 1993, 1992 and 1991, respectively, and were reflected in selling expenses. The interest rates charged on the above agreements are adjusted based on changes in the prime rate. The financial institutions' aggregate distributor receivable balances were $142,230 and $105,638 at December 31, 1993 and 1992, respectively.\nNote 14 - Other Current Liabilities\nOther current liabilities consist of the December 31, following: 1993 1992\nSalaries, wages and other employee costs $ 50,729 $ 42,481 Warranty obligations 28,721 26,873 Dealer discounts 5,347 9,540 Income taxes 18,073 13,849 Accrued expenses and deferred income 24,742 26,917 Restructuring liability 9,356 20,145 Other 35,538 30,141 $ 172,506 $ 169,946 ========= =========\nNote 15 - Long-Term Debt December 31, The following is a summary of long-term debt: 1993 1992\nBank notes with interest rates ranging from 9.7% to 13.2% payable in annual installments over a ten-year period $ 5,589 $ 47,976\nRevolving Credit Facility Agreement of $250.0 million with interest rates ranging from 6.1% to 8.9% and with a term of three years 44,120 -\nCredit Facility Agreement with a German bank of DEM 45.0 million with an interest rate of 10.6% and with a term of three years 26,041 -\nCapital lease obligations with interest rates ranging from 6.8% to 11.8% payable through 2035 14,411 19,619\nTotal 90,161 67,595\nLess: Current portion of long-term debt (1,519) (4,559)\nTotal long-term debt $ 88,642 $ 63,036 ========= =========\nThe Company leases buildings and land under capital lease arrangements. The related net assets of $14,538 are recorded in property, plant and equipment.\nLong-term debt at December 31, 1993 matures as follows:\n1994 $ 1,519 1995 1,707 1996 71,923 1997 1,824 1998 1,900 Thereafter 11,288 $ 90,161 =========\nIn conjunction with the $250.0 million revolving credit facility agree- ment, certain current assets of VMEA, excluding the current assets of the Brazilian subsidiary, and certain current assets and production equipment of the Swedish companies included in the financial statements, have been pledged as security. In addition other assets (real estate, receivables, inventories and shares) have been pledged as collateral for outstanding loans, pension liabilities and long-term debt at December 31, 1993.\nIn 1992 VMEHS entered into a sale-leaseback transaction involving certain property. The transaction represents a long-term financing arrangement due to the continuing involvement VME has in the buyer of the property. Other long-term liabilities as of December 31, 1993 and 1992 include $38 million and $49 million, respectively, associated with this transaction. The initial amount is to be repaid over a 20 year period. The imputed interest rate was 10.05% at year-end 1993.\nNote 16 - Subordinated shareholders' loans\nSubordinated shareholders' loans totalling $70.0 million with a term of three years have been granted by the shareholders to the Company at the end of 1992. The loans are subordinated to the $250.0 million Revolving Credit Facility agreement signed on February 22, 1993 and the DEM 45.0 million Credit Facility agreement signed on March 12, 1993. See Note 15. The loans bear interest of LIBOR plus 1.3% per annum and are due January 31, 1996.\nNote 17 - Leases and Commitments\nThe Company incurred rent expense of $16,992, $22,734 and $28,884 in 1993, 1992 and 1991, respectively. Future minimum rental commitments under noncancellable operating leases at December 31, 1993 are as follows:\n1994 $ 13,951 1995 9,446 1996 7,847 1997 5,545 1998 4,960 Thereafter 35,863\nThe Company rents equipment to others under operating lease agreements. In 1993, 1992, and 1991, the Company received rental income of $11,882, $9,457, and $7,930, respectively. The net book value of property leased to others aggregated $15,364 and $12,087 at December 31, 1993 and December 31, 1992, respectively. Future minimum rental income under noncancellable operating leases at December 31, 1993 is as follows:\n1994 $ 7,115 1995 1,228 1996 485 1997 333 1998 249 Thereafter 2,986\nDuring 1993, the Company significantly increased the utilization of foreign currency exchange contracts, foreign exchange options and currency swap agreements to reduce its exposure to fluctuations in foreign exchange rates. These instruments were selected to hedge currency risk exposure as a result of amounts recognized in the consolidated balance sheet and anticipated cash flows as a result of export and import transactions expected to occur in 1994. There were no deferred gains or losses on these contracts and the net unrealized currency gain recognized in 1993 was $2.7 million.\nAt December 31, 1993, the Company had foreign exchange contracts maturing during 1994 to purchase approximately $318 million in foreign currency at contract value corresponding to $321 million at market value.\nNote 18 - Pensions\nThe total pension expense charged to operations for 1993, 1992 and 1991 was $34,558, $47,545 and $48,814, respectively.\nIn Sweden, most of the VMEHS plans are administered by governmental or quasi-governmental organizations and actuarial assumptions and methods may not be influenced by the Company. VMEHS accrues pension costs, but is only required to fund a portion of these costs. Annual pension costs include an interest factor on the unfunded obligations. Actuarial information, as supplied by the governmental agency for the plans they administer, indicates that the accrued pension costs approximate the actuarially-computed value of vested and non-vested plan benefits.\nPension expense for the defined contribution plans was $24,884, $37,278, and $39,633 in 1993, 1992 and 1991, respectively. Certain employees are also covered by insured plans which supplement the benefits received from the defined contribution plans.\nU.S. and Swedish Plans Net periodic pension cost consists of the following:\n1993 1992 1991 Service cost - benefits earned during the period $ 1,803 $ 2,017 $ 1,966 Interest cost on projected benefit obligation 13,566 15,573 14,766 Actual return on plan assets (5,015) (5,161) (5,161) Net amortization and deferral (680) (2,162) (2,390) $ 9,674 $ 10,267 $ 9,181 ======== ======== ======= Assumptions used to develop the net periodic pension cost were as follows: 1993 1992 1991\nWeighted average discount rate 8.3% 9.7% 9.7%\nWeighted average long term rate of return on plan assets 9.1% 9.4% 9.4%\nRate of increase in compensation levels 4.6% 5.7% 5.7%\nThe following table sets forth the funded status of these plans at:\nDecember 31, 1993 1992 Actuarial present value of accumulated benefit obligation: Vested benefits $ 146,797 $ 138,972 Non-vested benefits 5,293 2,991 Accumulated benefit obligation $ 152,090 $ 141,963 ========= =========\nProjected benefit obligation $(156,450) $(147,911) Plan assets at fair value 69,715 70,294 Projected benefit obligation in excess of plan assets (86,735) (77,617) Unrecognized net loss from actuarial experiences 28,987 14,421 Unrecognized prior service cost 64 70 Unamortized net asset existing at date of adoption of FAS 87 (18) (1,207) Liability for Swedish early retirement program - (500) Liabilities for other plans (3,859) (6,463) Adjustment required to recognize minimum liability (30,491) (16,293) Total pension liability (92,052) (87,589) Less: current portion 11,216 2,264 Total long-term pension liability $ (80,836) $ (85,325) ========= =========\nCanadian Plans\nNet periodic pension income included the following :\n1993 1992 1991 Service cost - benefits earned during the period $ 176 $ 348 $ 412 Interest cost on projected benefit obligation 315 964 1,014 Actual return on plan assets (1,061) (1,495) (1,557) Net amortization and deferral (192) (322) (347) Net periodic pension income $ (762) $ (505) $ (478) ======= ======= =======\nAssumptions used to develop the net periodic pension income were as follows :\n1993 1992 1991\nWeighted average discount rate 7.5% 9.5% 9.5%\nWeighted average long-term rate of 7.5% 9.5% 9.5% return on plan assets\nRate of increase in compensation levels 4.0% 5.5% 5.5%\nThe following table sets forth the Plans' funded status at:\nDecember 31, Actuarial present value of accumulated 1993 1992 benefit obligation :\nVested benefits $ 4,381 $ 10,086 Non-vested benefits 318 137 Accumulated benefit obligation $ 4,699 $ 10,223 ======== ========\nProjected benefit obligation $ (4,908) $(10,906) Plan assets at fair value 8,216 17,020 Plan assets in excess of projected benefit obligation 3,308 6,114 Unrecognized net gain from actuarial experiences (1,662) (2,229) Unrecognized prior service cost 693 1,572 Unamortized net asset existing at date of adoption of FAS 87 (757) (3,703) Prepaid pension asset $ 1,582 $ 1,754 ======== ========\nOther Plans\nA non-U.S. subsidiary's pension plans and postretirement benefits are funded by a government-administered program. Contributions to the program are based on payroll costs and have been fully provided for through December 31, 1993.\nNote 19 - Postretirement and Postemployment Benefits\nThe Company adopted Statement of Financial Accounting Standard No. 106 (SFAS 106) \"Employers Accounting for Postretirement Benefits other than Pensions\" effective January 1, 1993. This statement requires the Company to recognize, during the working career of those employees who could become eligible for such benefits, the estimated cost of providing certain postretirement benefit costs (other than pensions) for those employees when they retire.\nThe Company and its subsidiaries provide certain health care and life insurance benefits for its U.S. retired employees. Substantially all of the Company's U.S. employees may become eligible for those benefits if they reach normal retirement age while still working for the Company. Those benefits and similar benefits for active employees are provided through an insurance company whose premiums are based on the benefits paid during the year. The total postretirement health care and life insurance expense charged to income was $12,051, $6,670 and $5,090 in 1993, 1992 and 1991, respectively.\nAnnual net postretirement benefit costs under the Company's benefit plan are determined on an actuarial basis. The Company's current policy is to pay these benefits as they become due. The Company has elected to recognize the transition obligation of $84,858 over a 20-year period.\nNet periodic postretirement benefit costs are comprised as follows: Service cost $ 664 Interest cost on projected benefit obligations 7,144 Amortization of transition obligation 4,243 Total net periodic pension cost $ 12,051 ======== Accumulated postretirement benefit obligation is comprised as follows:\nRetired participants $ 79,349 Fully eligible active plan participants 6,538 Other active plan participants 11,569\nTotal accumulated postretirement benefit obligation $ 97,456\nLess : Unrecognized loss 11,218 Less : Unrecognized transition obligation 80,616\nAccrued postretirement benefit cost other than pensions $ 5,622 ========\nThe discount rate used in determining the accumulated benefit obligation was 7.50%. The assumed health care cost trend rates result in per capita net incurred medical claims increasing 12% under age 65 and 10% over age 65. These rates decrease to 6% for both over and under age 65 by the year 2006. If the assumed health care cost trend rate were increased by 1%, the accumulated postretirement benefit obligation as of December 31, 1993, would increase $11,111.\nIn November 1992, the Financial Accounting Standard Board issued SFAS No. 112 \"Employers' Accounting for Postemployment Benefits\". This statement establishes accounting standards for employers who provide benefits such as supplemental unemployment compensation, severance benefits, salary continuation and other benefits to former or inactive employees after employment but before retirement.\nThe Company is not required to adopt this Statement until 1994 and mana- gement has decided not to implement this Statement as of December 31, 1993. Management does not expect the implementation of this Statement to have a material effect upon the Company's financial position.\nNote 20 - Shareholders' Equity\nVME Group N.V. acquired from AB Volvo and Clark Equipment Company all out- standing shares in VMEA and VMEHS in December 1993 in exchange for newly issued shares in VME Group N.V. Previously 195,000 Class A shares and 195,000 Class B shares of VMEA and VMEHS were authorized and the outstanding Class A shares were fully held by VME Group NV and the Class B shares held equally by Clark and AB Volvo.\nAs discussed in Note 1, the contributions by AB Volvo and Clark to the Company were accounted for as transactions between entities under common control. Accordingly, financial statements of the Company have been prepared at a historical cost basis and reflect such contributions on a retroactive basis for all periods presented. Shares of common stock in the amount of 250,000 were reflected as if outstanding for all periods reported.\nChanges in Shareholders' equity are as follows: (Deficit) Cumulative Common Paid-In Retained Adjustments Stock Capital Earnings To Equity Total\nJanuary 1, 1991 $ 25,750 $154,148 $ 83,561 $ 46,624 $310,083 Pension liability in excess of unrecognized prior service cost - - - (3,992) (3,992) Net loss - - (44,664) - (44,664) Dividends paid - - (9,468) - (9,468) Cumulative Translation Adjustment - - - 1,133 1,133 December 31, 1991 $ 25,750 $154,148 $ 29,429 $ 43,765 $253,092\nCapital contribution - 30,000 - - 30,000 Pension liability in excess of unrecognized prior service cost - - - (7,384) (7,384) Net loss - - (93,617) - (93,617) Cumulative Translation Adjustment - - - (27,280) (27,280) December 31, 1992 $ 25,750 $184,148 $(64,188) $ 9,101 $154,811\nPension liability in excess of unrecognized prior service cost - - - (12,301) (12,301) Net income - - 30,023 - 30,023 Cumulative Translation Adjustment - - - (14,122) (14,122) December 31, 1993 $ 25,750 $184,148 $(34,165) $(17,322) $158,411 ======== ======== ======== ======== ======== The capital contribution in 1992 of $30,000 was equally contributed by the two shareholders.\nNote 21 - Contingencies\nThe Company has pending claims with respect to which lawsuits have been filed alleging damages which in the aggregate would be material to the Company. Of the foregoing claims and lawsuits, some involve claims for damages for injury, death or property damage arising from alleged defects in products of the Company or products of Clark Equipment Company or its subsidiaries for which the Company assumed responsibility at the time of its formation. Most of the product-related cases are in varying stages of pretrial completion.\nThe ultimate result of these claims and lawsuits at December 31, 1993 is not determinable, but in the opinion of management, either adequate provision for any anticipated loss has been made by insurance, accruals or otherwise, or the ultimate loss resulting therefrom will not materially affect the financial position or results of operations of the Company.\nThe Internal Revenue Service (IRS) is in the process of conducting an examination of VMEA's federal income tax returns for the years 1988-1991. At this time no final report, assessment or adjustment letter has been issued by the IRS. Issues which may give rise to examination adjustments include a worthless stock deduction, acquired inventories and imputed interest on advances to subsidiaries. The amounts in question are material for the Company but management continues to believe that VMEA has meritorious defenses to the items being questioned by the IRS. Management is unable to estimate a range of liability at this time, but believes the ultimate loss resulting therefrom will not materially affect the financial position or results of operations of the Company.\nThe Company has agreements with selected distributors and customers to repurchase a limited volume of parts at pre-established prices and conditions. The Company is also obligated, under certain conditions, to repurchase some dealer or customer inventory and rental assets funded by financial institutions aggregating $14,000 at December 31, 1993. In the opinion of management, adequate provisions have been made for costs which might be incurred in connection with the agreements.\nThe Company has guaranteed secured obligations of others and discounted notes with recourse in an aggregate amount of $54,920 at December 31, 1993.\nNote 22 - Segment Information\nThe Company operates in primarily one industry segment, the manufacturing and marketing of construction equipment and related parts. Following is financial information by geographic segment:\nYear Ended December 31, 1993 1992 1991 Sales North America $ 480,032 $ 404,940 $ 316,109 Europe 725,709 881,927 911,047 Other 280,802 255,210 278,101 Eliminations (247,235) (184,802) (136,782) $1,239,308 $1,357,275 $1,368,475 ========== ========== ==========\nYear Ended December 31, 1993 1992 1991 Income before taxes North America $ 8,752 $ (37,025) $ (29,987) Europe 29,470 (68,307) (34,580) Other (2,611) (11,638) (6,914) $ 35,611 $ (116,970) $ (71,481) ========== ========== =========\nDecember 31, 1993 1992 1991 Identifiable assets North America $ 204,473 $ 209,397 $ 230,303 Europe 982,537 1,042,815 1,250,238 Other 50,072 58,389 68,561 Eliminations (447,918) (340,744) (353,590) $ 789,164 $ 969,857 $1,195,512 ========== ========== ==========\nNote 23 - Related Party Transactions (in millions)\nThe following is a summary of related party transactions: AB Volvo and Clark and Subsidiaries Subsidiaries\n1993 VME Transactions Sales $ 20 $ - Purchased materials 39 19 Parts distribution service fee - 7 Other expense 10 1 Interest expense 2 2\n1993 VME Balances Accounts receivable 6 1 Accounts payable 2 -\n1992 VME Transactions Sales $ 18 $ 2 Purchased materials 51 23 Parts distribution service fee - 9 Other expense 13 -\n1992 VME Balances Accounts receivable 2 1 Accounts payable 2 2\n1991 VME Transactions Sales $ 44 $ 3 Purchased materials 56 25 Parts distribution service fee - 8 Other expense 8 -\n1991 VME Balances Accounts receivable 16 - Accounts payable 4 4\nNote 24 - Subsequent events\nAs of January 1, 1994, the Company has increased its majority shareholding in Zettelmeyer from 70% to 100% by acquiring the remaining minority interest for $33 million.\nReport of Independent Accountants on Financial Statement Schedules\nMarch 4, 1994\nTo the Board of Directors and Shareholders of VME Group N.V.\nOur audits of the consolidated financial statements referred to in our report dated March 4, 1994 presented in the first section of this document also included an audit of the accompanying Financial Statement Schedules. In our opinion, based upon our audits and the report of other independent accountants referred to in our report on the financial statements, these Financial Statement Schedules present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.\n\/s\/ Price Waterhouse\nCleveland, Ohio\nKPMG Bohlins KPMG Bohlins AB Mail Address Telephone +46(31)61 48 00 Norra hamngatan 22 P.O. Box 11908 Telefax +46(31)15 26 55 Gothenburg S-404 39 Gothenburg Telex 21762 BJGS Sweden Sweden\nIndependent Auditors' Report\nTo the Board of Directors of VME Holding Sweden AB:\nWe have audited the consolidated balance sheets of VME Holding Sweden AB and subsidiaries as of December 31, 1993 and 1992, and the related consolidated statements of income (loss) and cash flows for each of the years in the three year period ended December 31, 1993 (all expressed in U.S. dollars and not presented separately herein). In connection with our audit of the aforementioned consolidated financial statements, we also audited the related consolidated financial statement schedules V, VI, VIII, IX and X (all expressed in U.S. dollars and not presented separately herein). These consolidated financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on our audits.\nWe conducted our audits in accordance with generally accepted auditing standards in Sweden which are similar in all material respects with auditing standards in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures included 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.\nThe consolidated financial statements and financial statement schedules have been translated in accordance with the standards set forth in Statement of Financial Accounting Standards No. 52 from Swedish Kronor (the currency of the country where VME Holding Sweden AB is incorporated and in which it operates) into U.S. dollars for purposes of inclusion in the consolidated financial statements of VME Group N.V.\nIn our opinion, for purposes of inclusion in the consolidated financial statements of VME Group N.V., the translated financial statements present fairly, in all material respects, the consolidated financial position of VME Holding Sweden AB and subsidiaries at December 31, 1993 and 1992 and the consolidated results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1993 in conformity with generally accepted accounting principles in the United States. Also, in our opinion, the related consolidated financial statement schedules, when considered in relation to the basic consolidated financial statements, present fairly in all material respects the information shown therein.\nGothenburg, Sweden \/s\/ KPMG Bohlins AB February 23 1994 KPMG Bohlins AB\nMember Firm of Headoffice Mail address Tel +46 8 723 91 00 Klynveld Peat Tegelbacken 4, P.O. Box 16106 Fax +46 8 10 52 58 Marwick Stockholm S-103 23 Stockholm Goerdeler Sweden Sweden\nEXHIBIT LIST AND INDEX Filed Herewith Unless Exhibit Description Otherwise Indicated\n(3)(a) Restated Certificate of Incorporated by reference Incorporation to Exhibit (3)(a) to Registrant's Form 10-K for the year 1992\n(3)(b) By-laws, as amended Incorporated by reference to Exhibit (3)(b) to Registrant's Form 10-K for the year 1989\n(3)(c) Amended and Restated Rights Incorporated by reference Agreement, dated as of to Exhibit (3)(c) to August 14, 1990 between Registrant's Form 10-Q Clark Equipment Company and for the period ended Harris Trust and Savings Bank September 30, 1990\n(4)(a) Indenture dated as of August 1, Incorporated by reference 1983 between Clark Equipment to Exhibit (4)(a) to Company and Harris Trust and Registrant's Form 10-K Savings Bank as trustee, as to for the year 1992 which Pittsburgh National Bank is successor trustee, as supplemented by a First Supplemental Indenture dated as of February 1, 1991\n(4)(b) Specimen form of 9-3\/4% Note Incorporated by reference issued pursuant to Exhibit to Exhibit (4)(b) to (4)(a) Registrant's Form 10-K for the year 1992\n(4)(c) Registrant is a party to several Pursuant to paragraph other long term debt agreements (4)(iii)(A) of Item under which, in each case, the 601(b) of Regulation total amount of securities S-K, Registrant agrees authorized does not exceed 10% to furnish a copy of of the assets of Registrant and these instruments to its consolidated subsidiaries. the Securities and Exchange Commission upon request.\n(10)(a) Employment contract with Leo Incorporated by reference J. McKernan, Chairman, President to Exhibit (10)(a) to and Chief Executive Officer, Registrant's Form 10-K dated November 12, 1992 for the year 1992\n(10)(b) Employment contract with Frank Incorporated by reference M. Sims, Director and Senior to Exhibit (10)(b) to Vice President, dated Registrant's Form 10-K November 12, 1992 for the year 1992\nFiled Herewith Unless Exhibit Description Otherwise Indicated\n(10)(c) Employment contract with Thomas Incorporated by reference L. Doepker, Vice President and to Exhibit (10)(d) to Treasurer, dated November 12, Registrant's Form 10-K 1992 for the year 1992\n(10)(d) Employment contract with Bernard Incorporated by reference D. Henely, Vice President and to Exhibit (10)(e) to General Counsel, dated Registrant's Form 10-K November 12, 1992 for the year 1992\n(10)(e) Employment contract with William Incorporated by reference N. Harper, Vice President and to Exhibit (10)(f) to Controller, dated November 12, Registrant's Form 10-K 1992 for the year 1992\n(10)(f) Employment contract with Paul Incorporated by reference R. Bowles, Vice President, to Exhibit (10)(i) to dated March 13, 1992 Registrant's Form 10-K for the year 1991\n(10)(g) Employment contract with John Incorporated by reference J. Reynolds, Vice President, to Exhibit 10(i) to dated November 14, 1991 Registrant's Form 10-K for the year 1992\n(10)(h) 1985 Stock Option Plan Incorporated by reference to Exhibit 10(j) to Registrant's Form 10-K for the year 1991\n(10)(i) Stock Purchase Plan (amended Incorporated by reference and restated effective as of to Exhibit (10)(r) to August 15, 1991) Registrant's Form 10-K for the year 1991\n(10)(j) Stock Purchase Plan for Non- Incorporated by reference Employee Directors to Exhibit (19)(a) to Registrant's Form 10-Q for the period ended September 30, 1991\n(10)(k) Stock Grant Plan for Non- Incorporated by reference Employee Directors to Exhibit (19)(b) to Registrant's Form 10-Q for the period ended September 30, 1991\n(10)(l) Incentive Compensation Plan Incorporated by reference for Corporate Office Management to Exhibit (10)(u) to (adopted February 18, 1992) Registrant's Form 10-K for the year 1991\n(10)(m) Incentive Compensation Plan Incorporated by reference for Business Unit Management to Exhibit (10)(v) to (adopted February 18, 1992) Registrant's Form 10-K for the year 1991\nFiled Herewith Unless Exhibit Description Otherwise Indicated\n(10)(n) Performance Unit Plan Incorporated by reference (effective November 9, 1992) to Exhibit (10)(s) to Registrant's Form 10-K for the year 1992\n(10)(o) Form of Grant Letter used to Incorporated by reference award Performance Units to Exhibit (10)(t) to pursuant to the Performance Registrant's Form 10-K Unit Plan (effective for the year 1992 November 9, 1992)\n(10)(p) Form of Grant Letter used to Incorporated by reference award Performance Units in to Exhibit (10)(u) to 1991 Registrant's Form 10-K for the year 1992\n(10)(q) Form of Grant Letter used to Incorporated by reference award Performance Units in to Exhibit (10)(v) to 1989 Registrant's Form 10-K for the year 1992\n(10)(r) Form of Grant Letter used to Incorporated by reference award Performance Units in to Exhibit (10)(w) to 1988 Registrant's Form 10-K for the year 1992\n(13) Portions of Clark Equipment --- Company 1993 Annual Report to Stockholders which are incorporated by reference into this Form 10-K\n(22) Subsidiaries of Clark Equipment --- Company\n(24)(a) Consent of Independent Accountants- --- Price Waterhouse\n(24)(b) Consent of Independent Accountants- --- KPMG Bohlins AB\n(99) Computation of Ratio of Earnings to --- Fixed Charges for the twelve months ended December 31, 1993\nEXHIBIT (13)\nPORTIONS OF ANNUAL REPORT TO STOCKHOLDERS INCORPORATED BY REFERENCE INTO FORM 10-K\nManagement's Discussion and Analysis\nGeneral Overview The Company sold its Clark Material Handling Company (CMHC) business unit to Terex Corporation on July 31, 1992. All prior-year income statements presented reflect CMHC as a discontinued operation.\nClark's net results for consolidated continuing operations, which consist of Melroe, Clark-Hurth Components, and Clark Automotive Products, improved approximately 68.3% in 1993 compared with 1992 results, reflecting increased sales and margins. Sales in 1993 increased 9.0% over 1992 and Clark reported net income from consolidated continuing operations of $34.0 million compared with $20.2 million for 1992. Included in the results for 1993 were several special events that, in the aggregate, lowered net income by $8.7 million, or $.50 per share. They were: 1) Clark-Hurth Components took a $3.3 million after-tax charge for manpower reductions; 2) the increase in the Company's stock price created an after-tax expense of $9.7 million for stock incentive programs; 3) Clark received an after- tax refund of $3.5 million from the U.S. Customs Service as settlement of a disputed duty drawback claim; 4) a $2.2 million after-tax charge to field retrofit one skid-steer loader model with an additional hydraulic lock-out system to prevent potential misuse; and 5) the Company's tax provision was decreased by $3.0 million, reflecting the impact of the increase in U.S. tax rates on recorded deferred tax assets.\nThe profitability of VME Group N.V. (VME), Clark's 50%-owned construction machinery joint venture, improved from 1992 levels, reflecting higher production, better price realization, and savings from cost-reduction activities. Clark reported equity income in VME operations of $7.8 million in 1993 compared with a loss of $48.1 million in 1992. The 1992 results included an $8.5 million restructuring charge.\nIn 1992, Clark's consolidated continuing operations reflected better results than those reported for 1991. Improved sales volumes and margins resulted in income of $20.2 million compared with losses of $29.4 million in 1991. This improvement was offset by Clark's share of the losses of VME, which were $48.1 million in 1992 and $23.1 million in 1991. VME was affected by a depression in world construction industry markets and by the cost of restructuring its operations to improve efficiency and reduce capacity.\nThe Company's 1991 results were adversely impacted by special charges totaling $33.5 million, which consisted of the following:\nAmounts in millions Employment reduction costs in North America and Europe $21.3 North American rationalization costs 5.5 Environmental clean-up costs 4.0 Clark's share of rationalization costs at VME, Clark's 50%-owned joint venture 2.7 $33.5\nIn each of the three years ended December 31, 1993, the Company has reflected accounting changes in its Statement of Income. Effective January 1, 1991, the Company adopted the provisions of Statement of Financial Accounting Standards (FAS) No. 106, \"Employers' Accounting for Postretirement Benefits Other Than Pensions,\" giving immediate recognition to a $244.9 million charge to recognize its postretirement benefit obligations. Effective January 1, 1992, the Company adopted FAS No. 109, \"Accounting For Income Taxes.\" This adoption resulted in the recognition of a cumulative tax benefit of $92 million related to the recognition of additional net deferred tax assets. Effective January 1, 1993, VME adopted FAS No. 109. Clark's share of the cumulative tax benefit resulting from this accounting change was $6.2 million. At the same time, VME also adopted FAS No. 106, and will recognize its estimated obligation on a transitional basis over 20 years. A charge of $1.4 million, which represents Clark's share, is included in 1993 VME results.\nResults of Operations Continuing Consolidated Operations:\nSales in 1993 totaled $874.9 million, an increase of 9.0% from the 1992 level of $802.7 million. The 1992 sales level increased 11.3% from the 1991 level of $721.4 million.\nThe 1993 sales increase of $72.2 million over the 1992 level related to volume and price improvements and offset an unfavorable foreign currency translation impact of about $29 million. The off-highway segment, which consists of the Clark-Hurth Components and Melroe businesses, recorded sales of $690.6 million in 1993 compared with $657.5 million in 1992. In this segment, North American sales increased $88.4 million, or 24.2%, and overseas sales decreased $55.3 million, or 19.0%, when comparing the same periods. The North American increase was mostly volume-related, while about 53% of the overseas decrease was related to changes in foreign currency translation rates. The on-highway segment, which consists of the Brazil-based Clark Automotive Products business, reflected a sales improvement of $39.1 million from the 1992 sales level, about 87.2% of which was volume-related. The improvement relates largely to the light and medium-duty truck transmission business.\nIn 1992, sales increased $81.4 million compared with 1991. Increases occurred at all of the Company's businesses. About 11% of the increase related to changes in foreign currency translation rates. The remaining increase in sales related to volume and pricing improvements.\nGross margins were 20.0% in 1993 compared with 17.3% and 11.6% in 1992 and 1991, respectively. In 1993 margin levels increased to approximately 20% for both of the Company's business segments. Margins in the off-highway segment were 18.8% in 1992 and 12.5% in 1991 while margins in the on- highway segment were 14.5% in 1992 and 11.8% in 1991. The continued level of improvement in 1992 and 1993 in both of the segments relates to higher capacity utilization as a result of higher operating levels and the realization of benefits of cost containment programs implemented since the current recessionary period began in 1990.\nThe financial statements of most of Clark's foreign subsidiaries are translated at current and average exchange rates. Any resulting translation adjustment is included in the cumulative translation adjustment account in stockholders' equity. For Brazil's hyperinflationary economy and for foreign operations that are an extension of U.S. manufacturing concerns, financial statements are translated using a combination of current, average, and historic exchange rates, with the resulting\ntranslation impacts included in income. Transactions carried out in different currencies resulting in exchange adjustments are also included in income. The impact of foreign currency and exchange transactions included in cost of goods sold were gains of $0.2 million in 1993 and losses of $2.9 million and $3.0 million in 1992 and 1991, respectively.\nThe Company exports certain products manufactured in the United States, principally for sale in European countries. In addition, certain products are manufactured in Europe for export sale, primarily in other European countries. These sales are typically invoiced in the currency of the country in which the products are sold and accordingly, the relative strength or weakness of the currency of country in which the products are manufactured can significantly impact the profitability of these sales. Clark periodically hedges these sales to reduce the currency risk, however, fluctuations in profitability will still result with currency movements. Throughout 1993, the Company's results were favorably impacted by currency positions partially secured with hedges.\nResearch and development expenses of $19.8 million, $16.9 million, and $16.5 million were included in cost of goods sold in 1993, 1992, and 1991, respectively. The level of spending reflects the Company's commitment to develop new products and further enhance the quality of existing products through use of the latest technologies.\nThere was no LIFO-related income in 1993. However, due to reductions in domestic inventory levels, $1.8 million and $2.1 million of LIFO income was recorded in the fourth quarters of 1992 and 1991, respectively.\nSelling, general and administrative expenses were $118.5 million, or 13.5% of sales, in 1993 compared with $99.8 million, or 12.4% of sales, in 1992 and $103.2 million, or 14.3% of sales in 1991. The 1993 increase in expenditures from the 1992 level was related to higher sales volume, retiree health care costs, and compensation-related matters, including stock incentive programs, which accounted for $15.5 million of the overall $18.7 million expense increase. The 1992 decrease from 1991 levels resulted from expense control actions and lower interest rates.\nOperating income from continuing operations increased about 42.5% to $56.0 million from the 1992 level of $39.3 million, which compared with a 1991 loss of $19.5 million. The 1993 increase is attributable to the effects of higher sales and higher gross margins, partially offset by increases in selling, general and administrative expenses. The 1992 increase is attributable to higher sales, higher gross margins, and lower expense levels due to cost-reduction actions taken throughout 1991. The 1991 operating loss included $16.9 million of special charges to restructure operations and $4.0 million for environmental clean-up costs.\nOther income was $11.9 million in 1993 compared with $16.9 million in 1992 and $14.6 million in 1991. The 1993 decrease of $5.0 million related principally to expenses associated with Brazilian monetary correction procedures. These procedures, which resulted in the reflection of an expense of $5.8 million, require that tax remittances be indexed from the date incurred until paid to offset the impacts of inflation. Partially offsetting this expense was higher interest income, which increased by an aggregate of $1.5 million despite lower investment rates. The increase can be attributed to $1.7 million of interest from a duty drawback refund received from the U.S. Customs Service and an additional $1.8 million of interest resulting from the settlement of U.S. tax audits for 1989 through 1991.\nInterest expense was $21.5 million in 1993 compared with $25.6 million in both 1992 and 1991. The 1993 decrease of $4.1 million from the 1992 level is due to lower average rates and debt balances outstanding in 1993. The average rates and debt balances outstanding in 1992 approximated those in 1991.\nPre-tax results from consolidated continuing operations were income of $46.5 million in 1993 and $30.6 million in 1992, and a loss of $30.5 million in 1991. The year-to-year improvement in results for 1993 and 1992 reflect higher sales, improved gross margins, and the impact of expense control actions taken in prior years, principally during 1991.\nTax provisions of $12.4 million and $10.4 million were recorded in 1993 and 1992, respectively, and a tax credit of $1.1 million was recorded in 1991. The effective tax rate in 1993 was 26.8%. The U.S. corporate income tax rate was increased from 34% to 35% retroactive to January 1, 1993. A tax credit of $3.0 million was recorded in the third quarter as net U.S. deferred tax assets were revalued at the higher tax rate. Without this item, the effective tax rate would have been 33.2%. The tax rate on operations in 1993 was lower than the U.S. statutory rate and the 1992 tax provision approximated the U.S. statutory rate. The tax rates in both years have been reduced by the utilization of capital loss carryforwards in the United States and net operating loss carryforwards at certain foreign locations. These impacts reduced the overall tax provisions by approximately $4.7 million in 1993 and $2.5 million in 1992. The 1991 overall tax benefit was approximately $1.1 million or 3.5% of the pre-tax loss. This was lower than the U.S. statutory rate because in different taxing jurisdictions carryback ability was limited by either statute or insufficient prior-year income levels.\nEquity in Associated Company\nEquity in the net results of VME, Clark's 50%-owned joint venture, was income of $7.8 million in 1993 and losses of $48.1 million in 1992 and $23.1 million in 1991. VME sales were $1,240 million in 1993, compared with $1,357 million in 1992 and $1,368 million in 1991. The 1993 improvement in operating performance over 1992 is the result of higher capacity utilization; improved margins due to better price realization, partially accounted for by the devaluation of the Swedish krona; and savings from cost-reduction activities initiated in 1992. Improvements in the North American market also contributed to the better performance. The 1992 results included the impacts of Swedish currency devaluation of approximately $2.0 million and a special charge of approximately $8.5 million to close VME's St. Thomas, Ontario, plant and restructure its North American production operations. The charge encompassed employee termination costs, the write-down of certain assets, and moving and start- up costs for production transferred to Asheville, North Carolina, from St. Thomas. Included in the 1991 results was a reserve VME established for the permanent shutdown of one of its European operations. This increased Clark's share of VME's loss by $2.7 million.\nDuring 1992, the Company and AB Volvo each invested $15 million of additional capital into VME, along with an additional $35 million in subordinated loans which are repayable in 1996.\nOn November 17, 1993, VME and Hitachi Construction Machinery Co. Ltd., both worldwide suppliers of construction and mining equipment, signed an agreement to establish a joint venture company in the rigid hauler business. The joint venture company, named Euclid-Hitachi Heavy Equipment Inc., became operational on January 1, 1994. Its headquarters is located in Cleveland, Ohio.\nDiscontinued Operations\nDiscontinued operations consist primarily of the operations of CMHC, which reported income of $1.8 million in 1992 and a loss of $40.8 million in 1991. The 1992 results reflect the operating losses of CMHC through June 30, 1992, and include an $8.5 million gain on the sale of that business, which was completed on July 31, 1992. When compared with 1991, the improved operating results in 1992 reflect the manpower reductions made in late 1991 and higher tax benefits available to offset operating losses. The 1991 results included $9.9 million of special charges to restructure operations.\nDiscontinued operations in 1992 and 1991 include the results of an insurance subsidiary which had been held for sale. The subsidiary continues to be liquidated, and due to immateriality, these results have been reclassified into other income in 1993. The investment in this operation has been reclassified on the Company's Balance Sheet to \"other assets\" for both periods presented.\nAccounting Changes\nEffective January 1, 1991, the Company changed its method of accounting for postretirement benefits by adopting the accrual method of accounting, as prescribed by FAS No. 106, \"Employers' Accounting for Postretirement Benefits Other Than Pensions.\" In making this change, the Company immediately recognized a $244.9 million provision to accrue the estimated Accumulated Postretirement Benefit Obligation (APBO). The APBO represents the present value of estimated future benefits payable to current retirees, including those from discontinued operations, and the earned portion of estimated benefits payable to active employees after retirement. Ongoing additional charges for active employees are accrued annually to the date of full eligibility.\nIn 1991, the APBO was accrued without tax benefit, as required under then- existing accounting pronouncements. With the adoption of FAS No. 109, \"Accounting for Income Taxes,\" in January 1992, Clark recognized a future tax benefit with respect to the APBO.\nEffective January 1, 1992, the Company adopted FAS No. 109, \"Accounting for Income Taxes.\" This resulted in the recognition of a cumulative net tax benefit of $92 million related to the recognition of additional net deferred tax assets. In adopting FAS No. 109, the Company considered the cyclicality of its business, the nature of its prior operating losses, and the probable turnaround of temporary book and tax differences. Through this assessment, management has concluded that with the restructuring actions undertaken, including the sale of CMHC, Clark will be sufficiently profitable in the long-term to realize the tax benefits related to its temporary differences. In the adoption, Clark generally did not reflect benefits related to foreign net operating loss carryforwards or to capital loss carryforwards, due to the limited nature of the carryforward periods, limitations on use, and the underlying business conditions surrounding the operations that gave rise to the carryforwards.\nEffective January 1, 1993, VME adopted FAS No. 109; Clark's share of the cumulative tax benefit resulting from this accounting change was $6.2 million. VME also adopted FAS No. 106, effective January 1, 1993, and will recognize its estimated obligation on a transitional basis over 20 years. A charge of $1.4 million, which represents Clark's share, is included in the 1993 VME results.\nContingencies\nEnvironmental\nThe Company is involved in environmental clean-up activities or litigation in connection with nine former waste disposal sites and five former plant locations.\nAt each of the nine waste disposal sites, Clark contracted with independent waste disposal operators to properly handle the disposal of its waste. The Environmental Protection Agency (EPA) also has identified other parties responsible for clean-up costs at the waste disposal sites. The Company has and will continue to accrue these costs when the liability can be reasonably estimated. As of December 31, 1993, the Company had reserves of approximately $16.4 million for potential future environmental clean-up costs. The environmental reserves represent Clark's current estimate of its liability for environmental clean-up costs and are not reduced by any possible recoveries from insurance companies or other potentially responsible parties not specifically identified by the EPA. Although management cannot determine whether or not a material effect on future operations is reasonably likely to occur, it believes that the recorded reserve levels are appropriate estimates of the potential liability. Further, management believes that the additional maximum exposure level in excess of the recorded reserve level would not be material to the financial condition of the Company. Although settlement of the reserves will cause future cash outlays, it is not expected that such outlays will materially impact the Company's liquidity position. The Company's 1993 expenditures relating to environmental compliance and clean-up activities approximate $2.6 million.\nSale of CMHC\nThe Company sold its forklift truck business, CMHC, to Terex on July 31, 1992. As part of the sale, Terex and CMHC assumed substantially all of the obligations of the Company relating to the CMHC operation, including: 1) contingent liabilities of the Company with respect to floor plan and rental repurchase agreements, 2) certain guarantees of obligations of third parties, and 3) existing and future product liability claims involving CMHC products. In the event that Terex and CMHC fail to perform or are unable to discharge any of the assumed obligations, the Company could be required to discharge such obligations.\nUncertainty exists as to the ultimate effect on Clark if Terex and CMHC fail to perform these obligations and commitments. While the aggregate losses associated with these obligations could be material, the Company does not believe such an event would materially affect the Company's ability to meet its cash requirements.\nIn the latest report on file with the Securities and Exchange Commission (SEC), Terex reported that it was continuing to incur operating losses and had a deficit stockholders' investment. In their report on the financial statements that were filed as part of Terex's Form 10-K for 1992, Terex's independent accountants indicated that Terex's recurring losses, its capital deficiency, and its inability to borrow additional funds under a bank lending agreement raised doubts about Terex's ability to continue as a going concern. In December 1993, Terex announced that it had issued $30 million of preferred stock in a private placement arrangement.\nOther\nClark has certain other contingent liabilities that have arisen in the normal course of business. These, along with additional details on the sale of CMHC, are discussed further in the Notes to Consolidated Financial Statements.\nLiquidity and Capital Resources\nAt December 31, 1993, the Company's cash and short-term investments amounted to $235.8 million compared with $191.9 million at December 31, 1992. At December 31, 1993, the Company's current ratio was 2.2 to 1 compared with 2.1 to 1 at December 31, 1992. The increase in cash is principally due to cash flow from operations and additional debt.\nIn the first quarter of 1993, the Company filed a shelf registration statement with the SEC to register $150 million of medium-term notes. The Company sold $90.2 million of medium-term notes during the second quarter of 1993. This includes $50 million of 30-year notes at rates of approximately 8.20%. The remaining notes have maturities ranging from June 14, 1995 to July 1, 1998 and rates ranging from a floating LIBOR plus .55% to a fixed 6.25%. Approximately $63 million of the notes' proceeds were used to redeem the Company's 9-5\/8% sinking fund debentures and to prepay the LESOP debt.\nCash provided by operations was $69.6 million in 1993, compared with $74.5 million in 1992 and $57 million in 1991. At the end of 1993, working capital increased to $255.0 million from $199.6 million at the end of 1992.\nThe Company has a line of credit of $66.2 million with seven banks which expires in October 1994. As of December 31, 1993, there were no outstanding borrowings under this agreement. The Company is negotiating a new agreement.\nThe Company believes that it has adequate liquidity either through cash reserves, its line of credit, or through its access to public and private markets to meet its operating needs and strategic objectives.\nCapital Investment\nWorldwide capital expenditures - including CMHC through the date of disposition - for facilities, manufacturing equipment, and tooling were as follows: Amounts in millions 1993 1992 1991 By Type Capital facilities and equipment $25.0 $29.4 $40.9 Tooling 4.9 7.9 7.7 Total expenditures $29.9 $37.3 $48.6\nBy Location North America $19.8 $20.6 $26.5 Foreign locations 10.1 16.7 22.1 Total expenditures $29.9 $37.3 $48.6\nDepreciation of fixed assets was $36.4 million in 1993, $44.1 million in 1992, and $45.8 million in 1991.\nCapitalization\nAt December 31, debt as a percent of total capitalization (total debt and stockholders' equity) was 46.9% in 1993, 47.9% in 1992, and 55.4% in 1991. The improvement in the ratio relates principally to increased stockholders' equity, partially offset by the increase in debt from the medium-term notes issued during the second quarter. Total debt increased to $236.9 million from the December 31, 1992, level of $232 million.\nStockholders' equity at year-end was $268.2 million in 1993, $252.6 million in 1992, and $237.5 million in 1991. At December 31, stockholders' equity per share was $15.41 in 1993, $14.56 in 1992, and $13.72 in 1991.\nOutlook The backlog at the end of 1993 was $149 million compared with a backlog of $123 million at December 31, 1992.\nLooking ahead, the Company is cautiously optimistic about 1994. First quarter 1994 results should improve compared to the prior-year period, with growth coming from an improving North American market. Clark operations should make performance gains in 1994, even if markets remain flat. Results are expected to improve as the Company's businesses continue to benefit from recent cost reduction programs. When the worldwide markets strengthen, particularly in Europe, the Company expects further gains in financial performance.\nB A L A N C E S H E E T\nS T A T E M E N T O F I N C O M E\nS T A T E M E N T O F C A S H F L O W S\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS\nSummary of Significant Accounting Policies\nPrinciples of Consolidation - The financial statements of Clark Equipment Company include the accounts of all majority-owned subsidiaries. All material intercompany balances and transactions are eliminated. The Company's investments in associated companies owned 20% or more are accounted for using the equity method. Investments in companies owned less than 20% are carried at cost.\nThe Company sold its Clark Material Handling Company (CMHC) business unit to Terex Corporation on July 31, 1992, and recorded a gain of $8.5 million in the third quarter of 1992. The prior-year Statements of Income have deconsolidated CMHC, reflecting its operations as a discontinued operation for all years presented. Due to the reporting of CMHC on an equity basis, the notes pertaining to the Statement of Income do not reflect the results of CMHC.\nCurrency Translation - Financial statements of subsidiaries operating outside the United States are translated into U.S. dollar equivalents in accordance with the Statement of Financial Accounting Standards (FAS) No. 52.\nForeign currency exchange results reflected in the Statement of Income were losses of $9.2 million in 1993 (including losses of $9.5 million from equity investments), losses of $10.8 million in 1992 (including losses of $7.9 million from equity investments), and losses of $4.3 million in 1991 (including losses of $1.3 million from equity investments).\nRevenue Recognition - The Company's policy is to recognize sales at the time of shipment. The Company allows dealers to return a certain level of parts under a formal parts return program. The estimated cost of this program is reflected in the balance sheet.\nCash, Cash Equivalents, and Short-Term Investments - Cash equivalents and short-term investments include temporary investments of $231.3 million and $180.4 million at December 31, 1993 and 1992, respectively. Temporary investments are recorded at cost plus accrued interest.\nFor purposes of the Statement of Cash Flows, the Company considers all highly liquid investments with a maturity of three months or less from the purchase date to be cash equivalents. The Company's cash flows from operating activities (including CMHC for 1992 and 1991) were reduced by cash paid for interest of $18.8 million, $21.1 million, and $20.8 million and income taxes of $13.2 million, $5.0 million, and $8.0 million during 1993, 1992, and 1991, respectively. The 1991 tax payments include $3.3 million of U.S. taxes relating to prior years' tax audit issues.\nFair Value of Financial Instruments - The Company estimates the fair value of all financial instruments where the face value differs from the fair value, primarily long-term debt and forward exchange contracts, based upon quoted amounts or the current rates available for similar financial instruments. If fair value accounting had been used at December 31, 1993, instead of the historic basis accounting used in the financial statements, long-term debt would exceed the reported level by approximately $20 million, and the value of forward exchange contracts would approximate the amounts reflected in the financial statements.\nInventories - Inventories at December 31, 1993 and 1992, net of valuation reserves of $12.1 million and $15.3 million, respectively, are classified as follows:\nAmounts in millions 1993 1992 Raw materials $ 32.2 $ 26.1 Work in process and finished goods 65.9 62.2 Manufacturing supplies 10.5 12.5 $108.6 $100.8\nInventories are valued at the lower of cost or market by the last-in, first-out (LIFO) method for domestic inventories and by the first-in, first-out (FIFO) method for all foreign inventories.\nIf the FIFO method of inventory accounting had been used worldwide, inventories would have increased by $27.2 million at December 31, 1993, and $26.7 million at December 31, 1992. Inventory subject to LIFO approximates 43% of total inventory at December 31, 1993. During 1992 and 1991, certain domestic inventory quantities were reduced. These reductions resulted in the liquidation of LIFO inventory quantities carried at lower costs prevailing in prior years. The effect decreased cost of goods sold related to continuing operations by approximately $1.8 million and $2.1 million in the fourth quarters of 1992 and 1991, respectively. There was no LIFO-related effect in 1993.\nProperties and Depreciation - Property, plant and equipment are carried at cost. Expenditures for maintenance and repairs are charged to expense as incurred. Expenditures for major renewals and betterments are capitalized. The Company generally uses the straight-line method of depreciation. Depreciation lives generally range from eight to 50 years for land improvements, eight to 50 years for buildings, and three to 25 years for machinery and equipment. Properties retired or sold are removed from the property accounts, with gains or losses on disposal included in income.\nThe year-end property, plant and equipment balances for the past two years are classified as follows:\nAmounts in millions 1993 1992 Land $ 6.9 $ 7.4 Land improvements 5.5 5.9 Buildings 75.6 77.3 Machinery & equipment 399.3 398.4 487.3 489.0 Accumulated depreciation (285.4) (272.8) $201.9 $216.2 Assets Held for Sale - Assets held for sale, which are net of a $6 million valuation reserve at December 31, 1993, represent one of CMHC's former manufacturing facilities and are reflected in the balance sheet at estimated realizable value.\nGoodwill Amortization - The Company is generally amortizing goodwill on a straight-line method over a 40-year period. Goodwill shown in the consolidated financial statements relates to the Company's 1990 acquisition of Hurth Axle S.p.A., an Italy-based company, and is remeasured into U.S. dollars using current exchange rates. The accumulated amortization related to this goodwill approximates $8 million.\nCosts and Expenses - Provisions are made currently for estimated future costs under present product warranties. The costs of health and life insurance postretirement benefits were charged against income as paid in years prior to 1991. Effective January 1, 1991, the Company adopted FAS No. 106, \"Employers' Accounting for Postretirement Benefits Other Than Pensions,\" and immediately recognized a $244.9 million pre-tax provision to accrue the total of its estimated accumulated postretirement benefit obligation at that date. Upon adoption of this Statement, the costs of providing such benefits are accrued as earned. Annual expense represents a combination of the interest and service cost provisions of the annual accrual, along with the actual benefits provided and paid for active employees. Benefits provided and paid on behalf of retirees are charged directly against the established reserve. The accounting for health care benefits anticipates future cost-sharing changes that are consistent with the Company's expressed intent. Effective January 1, 1993, VME Group N.V., the Company's 50%-owned joint venture, adopted FAS No. 106 and will recognize its estimated obligation on a transitional basis over 20 years.\nIncome Taxes - Prior to 1992, the Company accounted for income taxes using Accounting Principles Board Opinion No. 11. Effective January 1, 1992, the Company adopted FAS No. 109, \"Accounting for Income Taxes.\" This adoption resulted in the recognition of a cumulative net tax benefit of $92 million related to the recognition of additional net deferred tax assets. Effective January 1, 1993, VME also adopted FAS No. 109, and Clark's share of the cumulative tax benefit resulting from this accounting change was $6.2 million.\nThe tax cost on foreign earnings remitted to the United States in 1992 and 1991 was $0.6 million and $1.4 million in the respective years. There was no cost on 1993 remittances. The Company considers undistributed earnings of its foreign subsidiaries at December 31, 1993, to be permanently invested.\nGuarantees and Contingencies - Guarantees and contingencies are accrued for when a loss is considered probable and the amount is measurable.\nIncome (Loss) Per Share - Income (loss) per share amounts are based on the weighted average number of shares and the dilutive common equivalent shares outstanding during the years.\nPending Accounting Change - In November, 1992, the Financial Accounting Standards Board issued SFAS No. 112, \"Employers' Accounting for Postemployment Benefits.\" This pronouncement establishes accounting and reporting for the estimated cost of benefits provided by an employer to former or inactive employees after employment but before retirement. For the most part, the Company already accounts for such benefits on an accrual basis. Therefore, the impact of adoption is not anticipated to have a significant effect on the Company's financial position or results of operations.\nDiscontinued Operations\nIn July 1992, the Company sold its material handling business (CMHC). This business has been classified in the Statement of Income as a discontinued operation for all years presented.\nCondensed income statement information related to CMHC for the year ended December 31, 1991, and through July 31, 1992 follows:\nAmounts in millions 1992 1991 Net sales $248.5 $498.2\nPre-tax loss from operations $(11.2) $(44.0)\nNet loss from operations $ (7.0) $(40.7) Gain on sale 8.5 - Total income (loss) related to CMHC $ 1.5 $(40.7)\nIncluded in the pre-tax loss from operations is foreign income of $2.6 million and losses of $16.0 million for 1992 and 1991, respectively. Included in the gain on the sale of CMHC is a tax benefit of $7.6 million.\nDiscontinued operations in 1992 and 1991 include the results of an insurance subsidiary which had been held for sale. The subsidiary continues to be liquidated, and due to immateriality, these results have been reclassified to other income in 1993. The investment in this operation has been reclassified on the Company's Balance Sheet to \"other assets\" for both periods presented.\nInvestments and Advances - VME Group N.V.\nThe Company's investments in VME were $122.1 million and $121.3 million in 1993 and 1992, respectively.\nVME is a joint venture owned 50% each by the Company and AB Volvo of Sweden. Following are condensed financial data of VME: Amounts in millions Year ended December 31, 1993 1992 1991 Net sales $1,240 $1,357 $1,368 Gross profit 281 188 258 Net income (loss) 30 (94) (45)\nAs at December 31, 1993 1992 Current assets $ 531 $ 649 Non-current assets 258 321 Current liabilities 314 515 Non-current liabilities and deferred taxes 247 230 The $7.9 million difference between the Company's investment and its equity in VME net assets at December 31, 1993, relates primarily to additional equity contributions made in prior years, which is treated as goodwill. Goodwill amortization approximated $1.1 million in each year presented. During the second half of 1992, the Company and AB Volvo each invested $15 million in VME's capital and each made subordinated loans of an additional $35 million. The subordinated loans bear interest of 1.3% over LIBOR and are to be repaid in 1996.\nEffective January 1, 1993, VME adopted FAS No. 109, \"Accounting for Income Taxes,\" and recorded a benefit of $12.3 million. VME also adopted FAS No. 106, \"Employers' Accounting for Postretirement Benefits Other Than Pensions,\" effective January 1, 1993, and will recognize its estimated obligation on a transitional basis over 20 years. A charge of $2.8 million\nis included in VME's 1993 net income. Clark's share of each of these accounting changes is consistent with its 50% ownership position in VME.\nTransactions with VME are conducted on the basis of normal commercial relationships, at prevailing market prices, and are considered immaterial.\nAccrued Liabilities\nAccounts payable and accrued liabilities include the following:\nAmounts in millions 1993 1992 Trade payables $ 65.0 $ 56.1 Accrued payrolls and related taxes 34.8 23.4 Accrued warranty 15.5 15.5 Accrued pension 12.5 .6 Other 22.3 22.6 $150.1 $118.2\nOther non-current liabilities include the following:\nAmounts in millions 1993 1992 Accrued pension $ 2.4 $ 10.0 Accrued product liability 9.8 7.8 Environmental 13.5 17.8 Income taxes payable 15.4 19.3 Discontinued operations reserves 9.6 11.0 Other 24.0 24.6 $ 74.7 $ 90.5\nOther Income\nFollowing is a summary of the major elements of other income for the years ended December 31:\nAmounts in millions 1993 1992 1991 Interest income $14.3 $12.8 $10.3 Brazilian monetary correction - taxes payable (5.8) - - Sundry items, net 3.4 4.1 4.3 $11.9 $16.9 $14.6\nThe 1993 interest income includes income of $1.7 million from a duty drawback refund received from the U.S. Customs Service and interest of $1.8 million due from the settlement of U.S. tax audits for 1989 through 1991. The Brazilian monetary correction of $5.8 million relates to a procedure whereby Brazilian tax remittances require indexing for inflation from the date of liability until paid.\nSupplementary Income Statement Information Amounts in millions 1993 1992 1991 Maintenance and repairs $26.4 $24.8 $24.3 Taxes, other than payroll and income taxes 8.0 8.7 6.5 Rents 6.0 6.4 6.9 Advertising costs 6.3 6.8 6.7 Research and development costs 19.8 16.9 16.5\nIncome Taxes\nFollowing is a segregation of pre-tax income (loss) from continuing operations as reported by U.S. and foreign companies (excluding equity earnings of associated companies): Amounts in millions 1993 1992 1991 Pre-tax income (loss) - Consolidated continuing operations: United States $39.3 $23.5 $ (2.9) Foreign 7.2 7.1 (27.6) $46.5 $30.6 $(30.5)\nThe elements of the provision (credit) for income taxes are as follows:\nAmounts in millions 1993 1992 1991 Current income taxes: Federal $ 7.2 $ 2.9 $(1.0) Foreign 5.9 2.8 .9 State .4 .8 .6 Total current 13.5 6.5 .5 Deferred (prepaid) income taxes: United States - recurring 4.5 4.5 - change in tax rates (3.0) - - Foreign (2.6) (.6) (1.6) Total deferred (prepaid) (1.1) 3.9 (1.6) Provision (credit) for income taxes on consolidated continuing operations $12.4 $10.4 $(1.1)\nThe U.S. corporate income tax rate increased from 34% to 35% retroactive to January 1, 1993. A tax credit of $3.0 million was recorded in the third quarter and net U.S. deferred tax assets were revalued at the higher tax rate.\nDeferred tax assets before valuation allowances approximate $163 million as of December 31, 1993, and $154 million as of December 31, 1992. These assets consist of:\nAmounts in millions 1993 1992 Expected future tax benefits relating to postretirement benefits $ 94 $ 90 Self-insurance and warranty reserves 11 8 Environmental reserves 6 6 Pension and deferred compensation commitments 15 14 Loss and credit carryforwards 27 25 Other items 10 11 $163 $154\nThe Company has reduced gross deferred tax assets by valuation reserves that approximate $33 million on December 31, 1993, and $31 million at December 31, 1992. These reserves relate principally to net operating and capital loss carryforwards.\nDeferred tax liabilities as of December 31, 1993, of $15 million are comprised of differences in the recorded book and tax basis of assets.\nAs of December 31, 1993, the Company has foreign net operating loss, U.S. capital loss, and foreign tax credit carryforwards of $9.5 million, $16.0 million and $1.1 million, respectively, for which no financial statement benefit has been recognized. Approximately $3.1 million of the operating losses expire by 1998, while the remainder have an indefinite carryforward period. The capital loss and foreign tax credit carryforwards are limited in use and generally expire by 1997. Benefit relating to these carryforwards has not been reflected because of the limited carryforward periods and the limitations on their use. Future benefit may occur to the extent capital gains or foreign sourced income are recognized prior to the expiration of the carryforwards. During 1993 and 1992, pre-tax capital gain income approximating $3.0 million and $1.8 million, respectively, was earned, favorably impacting the Company's tax provisions.\nNo net benefit has been given to the foreign operating loss carryforwards because of the limited carryforward periods and\/or the uncertain business conditions relating to the operations giving rise to such carryforwards. Future recognition of these carryforwards will be reflected if the foreign entities have sufficient earnings before the expiration periods of the respective loss carryforwards. Tax provisions in 1993 and 1992 were reduced by approximately $3.7 million and $1.8 million, respectively, as a result of the utilization of net operating loss carryforwards at certain locations.\nThe deferred tax asset valuation reserve at December 31, 1993, is approximately $33 million, and is $31 million at December 31, 1992. The valuation reserve increased over the 1992 level as a result of the incurrence of additional net operating loss carryforwards at certain locations, a revised estimate of the capital loss carryforward related primarily to the sale of CMHC, and the revision of foreign tax credit carryforwards resulting from an Internal Revenue Service audit. The reserve was reduced by $3.7 million as a result of the realization of net operating loss carryforwards at the Company's Brazilian operation. The valuation allowance at December 31, 1992, of $31 million was $22.3 million less than that originally provided at the time of the adoption of FAS No. 109. Approximately $19.5 million of this difference relates to the temporary differences of CMHC, net of the unrealized capital loss benefit. Valuation reserves for future tax benefits of CMHC were provided at the time of the adoption of FAS No. 109 because it was expected that such benefits would accrue to the purchaser. The remaining difference is reflective of domestic utilization of capital loss carryforward benefits and the utilization of operating loss carryforwards at certain foreign locations in 1992.\nA reconciliation of the net effective tax rate for consolidated continuing operations to the U.S. statutory federal income tax rate for the three years ended December 31, 1993, is as follows:\nAmounts in millions 1993 1992 1991 U.S. federal statutory rate 35.0% 34.0% (34.0)% Increase (decrease) in rate resulting from: Revaluation of deferred tax assets for change in U.S. tax rates (6.5) - - Utilization of net operating and capital loss carryforwards (10.2) (8.0) - Higher foreign taxes 9.7 4.9 28.8 Foreign distributions, net of foreign tax credits (.1) 1.8 4.7 Other, net (1.1) 1.3 (3.0) Net effective tax rate 26.8% 34.0% (3.5)%\nProvision has not been made for U.S. or any additional foreign taxes on the undistributed earnings or book-tax basis differentials of foreign subsidiaries. Undistributed earnings and basis differentials approximate $66 million at December 31, 1993. Any future dividends declared and remitted are expected to be solely from the current earnings of the respective operations. Undistributed earnings and existing basis differentials will become subject to tax in the event that they are remitted or if the Company should sell such operations. It is not practicable to estimate the amount of additional tax that might be payable on unremitted earnings or basis differentials because it is not known when or on what basis these differences may reverse.\nLong-Term and Short-Term Debt\nFollowing is a summary of long-term debt of the Company and its consolidated subsidiaries due after one year, as of December 31: Amounts in millions 1993 1992 Medium-term notes having maturities ranging from June 14, 1995, to May 15, 2023, and interest rates ranging from a floating LIBOR plus .55% to a fixed 8.35% (face amount $90,250,000) $ 89.6 $ - LESOP loan (interest rate tied to LIBOR) - 40.4 9-3\/4% notes due March 1, 2001 (face amount $100,000,000) 99.7 99.6 9-5\/8% sinking fund debentures - 16.7 6% industrial development revenue bonds, payable $400,000 in 1998 and $900,000 annually in 1999-2002 4.0 4.0 Hurth obligations due in periods ranging from 1994 to 2000, at an average rate of 9.3% 11.5 15.7 Present value of Hurth purchase commitment - 6.4 Other long-term notes - 3.8 $204.8 $186.6\nRequired payments on long-term debt are $9.6 million in 1994, $12.1 million in 1995, $23.0 million in 1996, $1.8 million in 1997, $12.2 million in 1998, and $155.7 million thereafter.\nIn April, the Company began the sale of certain securities under a $150 million shelf registration statement. Clark issued $90.2 million of medium-term notes during the second quarter of 1993. These include $50 million of 30-year notes at an average rate of approximately 8.20%.\nThe remaining notes have maturities ranging from June 14, 1995, to July 1, 1998, at rates ranging from a floating LIBOR plus .55% to a fixed 6.25%. Approximately $63 million of the notes proceeds were used to redeem the Company's 9-5\/8% sinking fund debentures and to prepay the LESOP loan.\nThe Company has a $66.2 million line of credit agreement with seven banks, which expires in October 1994. The Agreement carries restrictions on minimum net worth, debt-to-capitalization ratios, stock repurchases, and dividend payments. At December 31, 1993 and 1992, there were no amounts outstanding under the revolving credit facility and the Company was in compliance with the facility requirements. The Company is currently negotiating a new credit agreement.\nAt December 31, worldwide short-term bank lines of credit, subject to cancellation upon notice by the bank or the Company, were: Amounts in millions 1993 1992 1991 Lines of credit $46.2 $44.3 $79.0 Unused lines of credit 23.7 31.1 36.6 Maximum borrowings during year 22.5 42.7 45.5 Average borrowings 18.2 27.0 44.2 Average rate on foreign borrowings outstanding at December 31 8.2% 9.6% 10.0% Daily weighted average interest rate 11.2% 10.8% 9.9%\nCapital Stock\nThe Company has authorization for 40,000,000 shares of $7.50 par value Common Stock. There were 17,401,903 shares and 17,351,139 shares outstanding at December 31, 1993 and 1992, respectively. These shares include 2,206,741 shares held in the LESOP trust. Shares held as treasury stock were 1,792,431 shares and 1,840,595 shares at the respective year- ends. The Company also has authorization for 3,000,000 shares of $1.00 par value Preferred Stock, none of which have been issued.\nIn 1987, the Board of Directors adopted a Rights Plan, which was amended in 1990 and will expire in 1997. The Rights Plan may become operative in the event that certain change of control conditions occur.\nStock Options\nUnder the 1975 Stock Option Plan, 850 shares and 13,450 shares at December 31, 1993 and 1992, respectively, of authorized but unissued Common Stock were reserved for issue to employees at the market value of the stock on the date the options were granted. Options representing 850 shares were outstanding under the 1975 Plan at December 31, 1993.\nUnder the 1985 Stock Option Plan, 171,301 shares and 292,580 shares at December 31, 1993 and 1992, respectively, of authorized but unissued Common Stock were reserved for issue to employees at the market value of the stock on the date the options were granted. Options representing 171,301 shares were outstanding under the 1985 Plan at December 31, 1993.\nOptions under these plans may not be exercised until one year after the date granted. These options expire 10 years after the date granted. No further options may be granted under either the 1975 or 1985 Stock Option Plans.\nOptions were exercisable for 164,413 shares and 86,449 shares at December 31, 1993 and 1992, respectively. Of the shares for which options have been granted under the plans, 108,795 shares include appreciation rights.\nFollowing is a summary of the changes in options under the plans for each of the last three years:\n1993 1992 1991 Outstanding at January 1, at an average price per share of $20.08, $25.05, and $24.95, respectively 306,030 114,662 125,077 Options granted at an average price per share of $18.50 in 1992 - 219,581 - Cancelled or lapsed (40,002) (28,213) (3,600) Exercise of previously granted options at an average grant price per share of $19.71 and $23.80, respectively (29,278) - (1,115) Exercise of options with appreciation rights (64,599 - (5,700) Outstanding at December 31, at an average price per share of $18.57, $20.08, and $25.05, respectively 172,151 306,030 114,662\nPension Costs\nThe Company has non-contributory defined benefit pension plans covering substantially all of its U.S. employees and certain employees and retirees of previously owned businesses. The plans covering salaried employees provide benefits based upon years of service and final average compensation. The plans covering hourly employees provide monthly benefits based upon a flat rate and years of service.\nAssets of the U.S. plans are invested primarily in U.S. government and agency bonds, equities, fixed income securities, and insurance contracts. The Company's funding policy for its qualified plans generally is to contribute no less than the minimum amount required by law and no more than the maximum amount that can be deducted for federal income tax purposes.\nSome of the Company's foreign subsidiaries also have defined benefit pension arrangements. These plans are not required to report to governmental agencies pursuant to ERISA, and do not otherwise determine the actuarial value of accumulated benefits or net assets available for benefits.\nConsolidated worldwide 1993 pension expense for defined benefit plans was $9.2 million, compared with $6.8 million in 1992 and $5.9 million in 1991. The components of pension expense for each of these years is as follows:\nAmounts in millions 1993 1992 1991 Current service cost $ 2.9 $ 3.1 $ 3.2 Interest cost 25.2 24.9 25.1 Return anticipated on plan assets for the year (actual $70.9 million, $10.4 million, and $33.2 million for the respective years) (22.7) (23.6) (24.1) Other components of pension expense, net 2.7 1.4 0.6 U.S. pension expense 8.1 5.8 4.8 Non-U.S. pension expense 1.1 1.0 1.1 $ 9.2 $ 6.8 $ 5.9\nThe following tables reconcile the funded status of the Company's U.S. pension plans and the amounts recognized on the Company's Balance Sheet:\nAmounts in millions Active Inactive December 31, 1993 Plans Plan Accumulated benefit obligation, including non-vested benefits of $13.5 million $101.9 $226.0 Projected benefit obligation $121.0 $226.0 Unrecognized past service cost (1.2) - Unrecognized net loss from past experience different from that assumed (37.4) (27.2) Unrecognized transition asset 1.8 - Plan assets at fair value (117.7) (188.6) Adjustment required to recognize minimum liability 3.6 27.2 Accrued (prepaid) pension cost $(29.9) $ 37.4\nAmounts in millions Active Inactive December 31, 1992 Plans Plan Accumulated benefit obligation, including non-vested benefits of $10.2 million $ 78.1 $210.4 Projected benefit obligation $ 93.3 $210.4 Unrecognized past service cost (1.3) - Unrecognized net loss from past experience different from that assumed (50.4) (18.3) Unrecognized transition asset 2.1 - Plan assets at fair value (77.4) (174.5) Adjustment required to recognize minimum liability 1.6 18.3 Accrued (prepaid) pension cost $(32.1) $ 35.9\nThe discount rates used to determine the projected benefit obligation was 7.25% in 1993 and ranged from 8.25% to 8.50% in 1992. The rate of increase in future compensation for determining the projected benefit obligation was 5.4%.\nBalance sheet liabilities for worldwide pensions totaled $14.9 million and $10.6 million at December 31, 1993 and 1992, respectively. Of these figures, U.S. plans accounted for $7.5 million and $3.8 million in 1993 and 1992, respectively, while foreign plans accounted for $7.4 million and $6.8 million in 1993 and 1992, respectively.\nThe Company also has certain defined contribution plans in the United States, Italy, and Brazil. Expense relating to these plans totaled $6.5 million, $6.9 million, and $5.9 million in 1993, 1992, and 1991, respectively.\nPostretirement Health Care and Life Insurance Benefits\nThe Company provides certain health care and life insurance benefits for retired employees, including certain retirees of previously owned businesses. Substantially all of the Company's U.S. employees may become eligible for these benefits upon retirement. The coverage is provided on a non-contributory basis for most retirees who retired prior to August 1986, and on a contributory basis for post-August 1986 retirees and all active employees.\nThe Company does not fund its postretirement benefit plans. The following table presents a reconciliation of the APBO to the liability for such costs recognized in the Company's Balance Sheet as of December 31, 1993 and 1992: Amounts in millions 1993 1992 Accumulated Postretirement Benefit Obligation (APBO): Retirees $251.5 $236.6 Fully eligible active participants 12.8 14.3 Other active participants 20.3 18.0 Total APBO 284.6 268.9 Unrecognized past service cost 11.6 12.6 Unrecognized loss from changes in assumptions (43.4) (32.6) Accrued postretirement benefit cost $252.8 $248.9\nNet periodic postretirement benefit expense for each of the three years ended December 31 was comprised of the following components:\nAmounts in millions 1993 1992 1991 Service cost of benefit earned $ 1.3 $ 1.4 $ 2.0 Interest cost on APBO 21.5 21.2 19.0 Other (.6) (.6) - Net periodic postretirement benefit expense $22.2 $22.0 $21.0\nIn measuring the projected APBO for 1993, 1992, and 1991, medical inflation trend rates were initially assumed at 13%, 13%, and 13%, with such rates trending downward to 5%, 5%, and 6%, respectively, by 1999. The weighted average discount rates used in each year were 7.5%, 8.25%, and 8%. If the health care cost trend rate were to be increased by 1%, the APBO as of December 31, 1993, would increase by approximately $23.9 million, and the net periodic postretirement expense would increase by approximately $2.0 million.\nLeveraged Employee Stock Ownership Plan\nThe Company has a Leveraged Employee Stock Ownership Plan (LESOP) for eligible U.S. employees. The Company loaned the LESOP $85 million, which the LESOP used to purchase 2,741,936 shares of Clark Common Stock from the Company. Clark has agreed to make future contributions to the LESOP to service this debt. The related obligation offsets the note due from the LESOP in Clark's Balance Sheet.\nThe Clark Common Stock purchased with the loan proceeds is held by the LESOP trustee as collateral for the loan owed to Clark. Each year, the Company makes contributions to the LESOP which in turn are used to make loan principal and interest payments. With each principal and interest payment, the LESOP allocates a portion of the Common Stock to participating employees. As of December 31, 1993 and 1992, there were 1,730,551 and 1,589,634 shares, respectively, allocated to participants.\nThe LESOP is designed to fund the Company's contributions to the Clark Savings and Investment Plan and the Clark Retirement Program for Salaried Employees. Currently, the Plan is only being used to fund the salaried retirement program.\nThe outstanding balance of the loan from Clark to the LESOP is repayable in semi-annual installments of $2.6 million, with the aggregate amount then remaining unpaid to be paid on July 1, 2001. Interest is payable quarterly at a rate equal to the LIBOR rate plus .25% for the period October 1, 1992, through final maturity. The outstanding balance under the loan as of December 31, 1993, was $42.8 million.\nAt the time the LESOP was established, the value of shares purchased and not allocated to participants was established as an offset to Clark's equity. This offset is reduced as shares are allocated to participants in conjunction with Clark's annual contributions to the LESOP.\nContingencies\nEnvironmental\nThe Company is involved in environmental clean-up activities or litigation in connection with nine former waste disposal sites and five former plant locations.\nAt each of the nine waste disposal sites, Clark contracted with independent waste disposal operators to properly handle the disposal of its waste. The Environmental Protection Agency (EPA) also has identified other parties responsible for clean-up costs at the waste disposal sites. The Company has and will continue to accrue these costs when the liability can be reasonably estimated. As of December 31, 1993, the Company had reserves of approximately $16.4 million for potential future environmental clean-up costs. The environmental reserves represent Clark's current estimate of its liability for environmental clean-up costs and are not reduced by any possible recoveries from insurance companies or other potentially responsible parties not specifically identified by the EPA. Although management cannot determine whether or not a material effect on future\noperations is reasonably likely to occur, it believes that the recorded reserve levels are appropriate estimates of the potential liability. Further, management believes that the additional maximum exposure level in excess of the recorded reserve level would not be material to the financial condition of the Company. Although settlement of the reserves will cause future cash outlays, it is not expected that such outlays will materially impact the Company's liquidity position. The Company's 1993 expenditures relating to environmental compliance and clean-up activities approximate $2.6 million.\nSale of CMHC\nThe Company sold its forklift truck business, CMHC, to Terex on July 31, 1992. As part of the sale, Terex and CMHC assumed substantially all of the obligations of the Company relating to the CMHC operation, including: 1) contingent liabilities of the Company with respect to floor plan and rental repurchase agreements, 2) certain guarantees of obligations of third parties, and 3) existing and future product liability claims involving CMHC products. In the event that Terex and CMHC fail to perform or are unable to discharge any of the assumed obligations, the Company could be required to discharge such obligations.\n1) Repurchase Agreements At the time of the sale, the Company had agreed with an independent finance company to repurchase approximately $220 million of CMHC dealer floor plan and rental inventory in the event of a default by individual dealers for whom the inventory is financed. Since the sale, dealer floor plan and rental inventory obligations have been liquidating in the normal course of business and stand at approximately $88 million at December 31, 1993. These obligations will continue to liquidate in an orderly fashion. The Company will not be required to perform these repurchase obligations unless the dealer defaults in the underlying obligations and Terex and CMHC default in their repurchase obligations. Should that occur, the collateral value securing the obligations should be sufficient to reduce any loss to an immaterial amount.\n2) Third Party Guarantees The Company has guaranteed approximately $27 million of obligations of third parties relating to the CMHC operation. Approximately $18 million of these guarantees relate to national account rental arrangements with a number of large creditworthy customers. Approximately $9 million relate to capital loans given by a finance company to independent CMHC dealers, which are secured by a lien on all of the dealer's assets. These guaranteed obligations are expected to liquidate over time. The Company believes, based on past experience, that the national account customers and dealers, who are the primary obligors, will meet their obligations, resulting in immaterial losses to the Company regardless of whether CMHC and Terex are able to perform their obligations.\n3) Product Liability Claims CMHC had approximately $45 million of reserves relating to existing product liability claims at the time of the sale. Future accidents will likely occur, which will result in increased product liability exposure over time. The Company will incur losses relating to these product liability claims if CMHC and Terex fail to perform their obligations. The impact of any such losses would be mitigated by available tax benefits and by insurance coverage that is available for catastrophic losses. Cash settlement of product liability claims are generally made over extended periods of time, thereby significantly reducing the impact on cash flow in any one year.\nUncertainty exists as to the ultimate effect on Clark if Terex and CMHC fail to perform these obligations and commitments. While the aggregate losses associated with these obligations could be material, the Company does not believe such an event would materially affect the Company's ability to meet its cash requirements.\nIn the latest report on file with the Securities and Exchange Commission, Terex reported that it was continuing to incur operating losses and had a deficit stockholders' investment. In their report on the financial statements that were filed as part of Terex's Form 10-K for 1992, Terex's independent accountants indicated that Terex's recurring losses, its capital deficiency, and its inability to borrow additional funds under a bank lending agreement raised doubts about Terex's ability to continue as a going concern. In December 1993, Terex announced that it had issued $30 million of preferred stock in a private placement arrangement.\nOther\nThe Company is self-insured with respect to product liability risk, although insurance coverage is obtained for catastrophic losses. The Company has pending approximately 65 claims, with respect to which approximately 43 suits have been filed alleging damages for injuries or deaths arising from accidents involving products manufactured by the Company's continuing operations. In the aggregate, these claims could be material to the Company. At December 31, 1993, the Company had reserves of approximately $11.6 million related to product liability exposures.\nThe Company is involved in numerous other lawsuits arising out of the ordinary conduct of its business. These lawsuits pertain to various matters, including warranties, civil rights, safety, antitrust, and other issues. The ultimate results of these claims and proceedings at December 31, 1993, are subject to a high degree of estimation and cannot be determined with complete precision. However, in the opinion of management, either adequate provision for anticipated costs have been made through insurance coverage or accruals, or the ultimate costs will not materially affect the consolidated financial position of the Company.\nThe Company has given certain guarantees to third parties and has entered into certain repurchase arrangements relating to product distribution and product financing activities involving the Company's continuing operations. As of December 31, 1993, guarantees are approximately $20 million and repurchase arrangements relating to product financing by an independent finance company approximate $64 million.\nIt is not practicable to determine the additional amount subject to repurchase solely under dealer distribution agreements. Under the repurchase arrangements, when dealer terminations do occur, a newly selected dealer generally assumes the assets of the prior dealer and any related financial obligation. Accordingly, the risk of loss to the required repurchaser is minimal, and historically Clark has incurred only immaterial losses relating to these arrangements.\nThe Company enters into forward exchange contracts to protect margins on projected future sales denominated in foreign currencies. Settlement dates on executed contracts are generally not more than 18 months in advance of the original execution date. At December 31, 1993, forward exchange contracts of approximately $95 million were outstanding. Maximum risk of loss on these contracts is limited to the amount of the difference between the spot rate at the date of contract delivery and the contracted rate. The Company believes that future sales revenue will generate sufficient foreign currency to meet these commitments.\nBusiness Segment Information The Company's business is the design, manufacture, and sale of skid-steer loaders, construction machinery, transmissions for on-highway equipment, and axles and transmissions for off-highway equipment. Sales to the U.S. government account for less than 1% of total sales.\nThe Company operates in two industry segments, those being \"off-highway\" and \"on-highway\" products in the capital goods industry. The Company has included its Melroe and Clark-Hurth Components business units in the off- highway segment. Melroe produces skid-steer loaders, compact excavators, and a limited number of agricultural products. Clark-Hurth Components produces off-highway axles and transmissions used principally in construction, mining, and material handling applications. Clark Automotive Products principally manufactures transmissions for the Brazilian automobile industry and North and South American medium-duty truck industries and comprises the entire on-highway segment. Although the Brazil-based Clark Automotive Products business unit has a limited amount of off-highway business, the Company has included this entire operation in the on-highway segment. This classification was selected because of the insignificance of the off-highway operations to the business unit, the lack of distinction between the segments in the operation of the business, and the different economic characteristics of the Brazilian markets as compared with other off-highway markets.\nIntersegment transfers are insignificant. Selling prices on such transfers, to the extent that they occur, are determined as nearly as possible on the basis of normal commercial relationships.\nIdentifiable assets by industry are those that are used in the Company's operations in each industry. Corporate assets are principally cash, short-term investments, certain assets of previously sold businesses that are held for sale, deferred tax assets, and fixed assets maintained for general corporate purposes.\nUnallocated corporate and other expenses include certain continuing costs related to previously disposed businesses. These are principally the \"time-value-of-money\" costs related to discounted retiree health care liabilities.\nThere was no single customer from which at least 10% of total revenue was derived during 1991-1993. Export sales of U.S.-manufactured products and parts sold to customers and dealers located outside of the United States were $160.0 million, $178.6 million, and $151.1 million in 1993, 1992, and 1991, respectively.\nFor geographic segment reporting, sales and operating profit (loss) reflect amounts sourced from the identified geographic area.\nI N D U S T R Y S E G M E N T S\nG E O G R A P H I C S E G M E N T S\nC H A N G E S I N S T O C K H O L D E R S ' E Q U I T Y\nQ U A R T E R L Y I N F O R M A T I O N ( U N A U D I T E D )\nReport of Independent Accountants Price Waterhouse Stockholders and Board of Directors Clark Equipment Company South Bend, Indiana\nIn our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income and of cash flows present fairly, in all material respects, the financial position of Clark Equipment Company and its subsidiaries at December 31, 1993 and 1992, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1993, in conformity with generally accepted accounting principles. 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 of these statements in accordance with generally accepted auditing standards, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. As further discussed in the Notes to the Consolidated Financial Statements, effective January 1, 1992, the Company changed its method of accounting for income taxes by adopting Statement of Financial Accounting Standards (FAS) No. 109, \"Accounting for Income Taxes.\" Furthermore, effective January 1, 1991, the Company changed its method of accounting for postretirement health care and life insurance benefits by adopting FAS No. 106, \"Employers' Accounting for Postretirement Benefits Other Than Pensions.\" As further discussed in the Notes to the Consolidated Financial Statements, effective January 1, 1993, the Company's 50%-owned joint venture, VME Group, N.V., changed its methods of accounting for income taxes and postretirement health care and life insurance benefits by also adopting the provisions of FAS No. 109 and FAS No. 106.\nPrice Waterhouse \/s\/ Price Waterhouse South Bend, Indiana February 14, 1994\nReport by Management The preceding financial statements have been prepared by management in conformity with generally accepted accounting principles appropriate in the circumstances. In the preparation of this report, some estimates are necessary and they are made based on currently available information and judgement of current conditions and circumstances. Management is also responsible for all other information contained in this report. Management maintains and depends upon the Company's system of internal controls in meeting its responsibilities for reliable financial statements. This system is designed to provide reasonable assurance that assets are safeguarded and that transactions are properly recorded and executed in accordance with management's authorization. Judgements are required to assess and balance the relative cost and expected benefits of these controls. The financial statements have been audited by the independent accounting firm, Price Waterhouse. Their role is to render an independent professional opinion on management's financial statements to the extent required by generally accepted auditing standards. In addition to the use of independent accountants, the Company also utilizes an independent professional staff of internal auditors who conduct operational and special audits. The Board of Directors elects an Audit Committee from among its members, no member of which is an employee of the Company. The Audit Committee is responsible to the Board for reviewing the accounting and auditing procedures and financial practices of the Company and for recommending appointment of the independent accountants. The Audit Committee meets periodically with management, professional internal auditors, and the independent accountants to review the work of each and satisfy itself that they are properly discharging their responsibilities. Both the independent accountants and the independent professional internal auditors have free access to the Committee, without the presence of management, to discuss their observations on internal controls and to review the quality of financial reporting.\nF I N A N C I A L R E V I E W\nEXHIBIT (22)\nSUBSIDIARIES OF CLARK EQUIPMENT COMPANY (CLARK)\nExcept as otherwise indicated below, the following corporations are wholly owned subsidiaries of Clark.\nJurisdiction of Name (1) Incorporation\nClark Information Technologies Corporation Michigan\nCelfor Services Corporation Michigan Celfor Insurance Co., Ltd. Bermuda Celfor Insurance Company, Inc. Illinois\nAutomotive Products Company Delaware Clark Automotive Products Corporation Michigan CAPCO do Brasil Empreendimentos e Participacoes Ltda. Brazil Equipamentos Clark Ltda. Brazil\nClark Business Services Corporation Michigan Clark Distribution Services Inc. Michigan CDS Midwest, Inc. Michigan CDS South, Inc. Michigan Clark Equipment Belgium N.V. Belgium Clark Equipment of Canada Ltd. Canada Clark-Hurth Components S.p.A. (2) Italy Clark-Hurth Components S.A.R.L. (3) France Clark-Hurth Components Marketing Company Delaware Clark-Hurth Components Vertriebs GmbH West Germany Melroe Equipment Limited Canada Melroe Parts Trading GmbH West Germany\n(1) Where the name of a subsidiary is indented, it is wholly owned by its immediate parent listed at the margin above it, unless otherwise indicated.\n(2) 95.8% owned by Clark Business Services Corporation, 4.2% owned by Antriebstechnick Ets.\n(3) 95% owned by Clark-Hurth Components S.p.A. and 5% owned by Clark Business Services Corporation.\nEXHIBIT (24)(a)\nCONSENT OF INDEPENDENT ACCOUNTANTS\nWe hereby consent to the incorporation by reference in the Prospectuses constituting part of the Clark Equipment Company Registration Statements on Form S-3 (No. 33-60062) and Form S-8 (Nos. 33-44275, 33- 36188, 33-28226, 33-13081, 2-99369, 2-77136, 2-67529, 2-61096, 2-53948, 2- 39610, 2-24730, 2-17758 and 2-16146) of our report dated February 14, 1994 appearing on page 42 of the 1993 Annual Report to Stockholders of Clark Equipment Company which is incorporated by reference in this Annual Report on Form l0-K. We also consent to the incorporation by reference of our report on the Financial Statement Schedules of Clark Equipment Company, which appears on page 14 of this Form 10-K. We also consent to the incorporation by reference of our reports on the Combined Financial Statements and the Financial Statement Schedules of VME Group N.V., which appear on pages 21 and 42 of this Form 10-K.\n\/s\/ Price Waterhouse\nPrice Waterhouse South Bend, Indiana March 30, 1994\nEXHIBIT (24)(b)\nCONSENT OF INDEPENDENT ACCOUNTANTS\nWe consent to incorporation by reference in the Clark Equipment Company Registration Statements on Form S-3 No. 33-60062 and on Form S-8 (Nos. 33- 28226, 33-13081, 2-99369, 2-77136, 2-67529, 2-61096, 2-53948, 2-39610, 2- 24730, 2-17758, 2-16146, 33-36188 and 33-44275) of our report dated February 23, 1994 relating to the consolidated financial statements of VME Holding Sweden AB and subsidiaries and the related financial statement schedules as of December 31, 1993 and 1992, and for each of the years in the three-year period ended December 31, 1993, which report is included in the 1993 Annual Report on Form 10-K of Clark Equipment Company.\nGothenburg, Sweden March 21, 1994\n\/s\/ KPMG Bohlins AB\nKPMG Bohlins AB\nEXHIBIT (99)\nCLARK EQUIPMENT COMPANY COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (DOLLARS IN THOUSANDS)\nTwelve Months\nEarnings (Loss) Before Tax:\nClark-From Continuing Consolidated Operations $ 46,476\nClark's 50% Share of VME (Net of Clark Goodwill Amortization and Other VME Related Expenses) $ 16,119\nTotal Pre-Tax Earnings (1) $ 62,595\nFixed Charges:\nClark: Interest Expense $ 21,506\nInterest Portion of Rent Expense $ 1,994\nClark's Share of VME: Interest Expense $ 16,095\nInterest Portion of Rent Expense $ 2,832\nTotal Fixed Charges (2) $ 42,427\nEarnings from Continuing Operations Before Taxes and Fixed Charges (1 Plus 2) $ 105,022\nRatio of Earnings to Fixed Charges 2.48 =========\nNOTE:\nEarnings to Fixed Charges have been determined based on Continuing Operations and have been computed by dividing Earnings before Income Taxes and Fixed Charges by Fixed Charges. Earnings before Tax includes the pre- tax income from Clark's Consolidated Continuing Operations and Clark's 50% share of VME's pre-tax income, net of Clark Goodwill Amortization related to its VME investment, and other expenses directly related to VME. Fixed Charges include Interest Expense relating to Clark's Consolidated Continuing Operations and Clark's 50% share of VME's interest. Fixed Charges also includes one-third of Clark Rentals for Consolidated Continuing Operations and Clark's 50% share of one-third of the VME Rentals. The Company believes that one-third of such Rentals constitutes a representative interest factor. Capitalized Interest has been excluded from Fixed Charges as it is immaterial.","section_15":""}
{"filename":"85627_1993.txt","cik":"85627","year":"1993","section_1":"ITEM 1. BUSINESS - ----------------- GENERAL ------- Registrant was incorporated under the laws of the State of Ohio in 1920. Registrant and its subsidiaries operate in one industry segment which consists of the manufacture and distribution of plastic and rubber products consumed primarily by the end-user in the consumer, commercial, industrial, agricultural, office, marine, automotive accessories, contract, and children's markets. They include such items as housewares, home horticulture products, decorative coverings, leisure and recreational products, infants and children's toys and furniture, office, and industrial products, and products used in food service, health care, and sanitary maintenance. Registrant's products are distributed through its sales personnel and manufacturers' agents to a variety of retailers, including mass merchandisers and wholesalers, and distributors serving institutional markets.\nRegistrant's basic philosophy since its beginning has been to offer products of high quality and value to the user. The corporate objective, since the late-1970's, has been, and continues to be, to increase sales, earnings, and earnings per share 15% per year, compounded annually. This growth is expected to come from a combination of maximizing core businesses through product line and market extensions, new product introductions, global expansion of the business, and selective acquisitions.\nRegistrant's primary focus is to achieve its earnings and earnings per share growth objective of 15%, compounded annually. Since its inception, the sales growth objective has been based on certain fundamental assumptions: first, an increase of 3-5% in U. S. Gross Domestic Product; second, inflation of 2-4% in Registrant's pricing; and, finally, unit volume growth averaging around 11%. Since Gross Domestic Product increases have been below this assumption and Registrant's pricing has been essentially flat for the past several years, sales growth has been less than the 15% targeted increase. Registrant has been successful, however, in implementing cost reductions and productivity improvement programs to leverage the sales growth towards the earnings goals.\nAmong the businesses acquired by the Registrant are The Little Tikes Company (1984); Gott Corporation (1985); Seco Industries, Inc. (1986); MicroComputer Accessories, Inc. (1986); Viking Brush Limited (1987); EWU (AG) (1990); Eldon Industries, Inc. (1990); CIPSA (1992); and Iron Mountain Forge Corporation (1992).\nCIPSA, the leading plastic housewares manufacturer and marketer in Mexico now operates as Rubbermaid de Mexico and is a part of the Home Products Division.\nIron Mountain Forge Corporation, which now reports to The Little Tikes Company, is a leading manufacturer and marketer of commercial playground equipment. Registrant expects that the synergy with Little Tikes will increase Iron Mountain Forge's strengths in the parks, schools and recreational areas and accelerate the development of the attractive growing child care market.\nThe companies acquired by Registrant all shared many common characteristics with Registrant including a high-quality image, emphasis on new product development and customer service, similar materials and\/or manufacturing processes, and similar distribution channels.\nAdditional expansion has come from new operations formed from existing businesses to focus on specific segments of their markets.\nRubbermaid Specialty Products Inc. was formed in 1988 to consolidate seasonal products with similar channels of distribution into one operation. The resin casual furniture product line was transferred from the Home Products Division to be integrated with home horticulture products, planters, and bird feeders. The GOTT line of insulated products and BLUE ICE refreezable ice substitute were also integrated into this business and rebranded with the Rubbermaid name. This creates the opportunity to utilize seasonal product synergies which, coupled with the Rubbermaid brand, increase critical marketing mass at the trade level. To further increase critical mass, Rubbermaid-Allibert was realigned in 1991 to report to this business.\nIn December 1992, the Rubbermaid-Allibert resin furniture joint venture was dissolved and changed to a strategic alliance with Sommer-Allibert Inc. for interchange of technology, product development and sourcing. Rubbermaid will focus exclusively on the mass market and Allibert on the specialty furniture and contract channels. Rubbermaid Specialty Products retained the Stanley, North Carolina manufacturing facility.\nDuring 1988 Registrant established an Office Products Division which combined the activities of home office products from the Home Products Division, commercial office products from Rubbermaid Commercial Products Inc. and MicroComputer Accessories, Inc. The Division enhanced service for traditional customers while capitalizing on the emerging distribution trends in the industry with concentrated marketing and distribution and a complete and diversified line of products. Early in 1991, the Office Products Division and Eldon Industries, Inc., were combined to form Rubbermaid Office Products Inc. to capitalize on their many synergies and to improve support and service to customers.\nTo better serve certain foreign markets, Registrant and the Dutch chemical conglomerate DSM formed a joint venture in 1990 to manufacture and market plastic and rubber housewares for Europe, the Middle East, and North Africa. The venture, known as Curver Rubbermaid Group, includes Rubbermaid's former European facilities in Germany, France, Austria, The Netherlands, and Switzerland. DSM contributed its Curver Housewares Group which included its subsidiaries - Curver U.K., Curver Netherlands, Lawn Comfort-France and Belgium, Curver France, Rodex-Spain, Curver Italy, Curver Belgium, and Curver Germany. The joint venture subsequently entered into a Scandinavian joint venture as well as one for Hungary and Czechoslovakia. Headquartered in Goirle, The Netherlands, the organization markets products under both the Rubbermaid and Curver brand names. Rubbermaid accounts for its 40% share of the venture using the equity accounting method.\nThe percent of net sales contributed by each of the consumer and institutional classes of products for the three years ended December 31, 1993, was as follows:\nRaw Materials -------------\nThe principal raw materials used in the manufacture of Registrant's products are various plastic resins and synthetic rubber (all of which are derivatives of petroleum or natural gas liquids) and color concentrates. All of these items are available from numerous competitive sources. Even though a significant portion of the Registrant's raw materials are derivatives of natural gas, the increase in crude oil costs during 1990 resulting from the Persian Gulf crisis was reflected in Registrant's costs of raw materials. Since that time, crude oil costs have returned to more normal levels, and resin prices have decreased to more realistic supply\/demand levels. Registrant expects to obtain adequate resins for its needs and has accelerated its continuing program of substituting available or reformulated resins where practical and consistent with quality considerations.\nPatents and Trademarks ----------------------\nThere are no patents or licenses considered material to the business. The Registrant is of the opinion that through sustained advertising and use, the trademark RUBBERMAID has become of value in the identification and acceptance of its products, especially in North America. In addition, Registrant has many well-known brands such as CON-TACT (pressure sensitive decorative coverings), ELDON (office products), LITTLE TIKES (toys), and SECO (floor maintenance products) that compete in domestic and international markets.\nSeasonality -----------\nHistorically, the year-end holiday season records the highest sales volume for the toy industry; however, the Little Tikes spring and summer products have served to more evenly balance monthly shipments. Rubbermaid Specialty Products concentrates its efforts on product categories of a seasonal nature, including insulated products, outdoor casual furniture, planters, and bird feeders. Insulated product and casual resin furniture sales are highest during the first six months of the year, and inventories are built during the other periods of the year in order to more easily accommodate demand. No material portion of the Registrant's other businesses is of a highly seasonal nature.\nWorking Capital ---------------\nWorking capital requirements of the business increase generally as sales volumes increase. There are normally no unusual working capital needs existent at any one time in the ordinary course of business. Dating programs offering extended terms are carried on by the various operating companies as part of their normal marketing activities.\nCustomers ---------\nSales are made to a broad range of customers, one of which accounted for 14%, 13%, and 11% of net sales in 1993, 1992, and 1991, respectively. Due in part to Registrant's perception that consumers are loyal to Registrant's brand names, Registrant does not believe that the loss of any one customer would have a materially adverse effect on its business.\nBacklog -------\nThe Registrant produces to and sells from inventory for the majority of its products. The amount of backlog existent at any one time is not a significant factor in the business.\nCompetition -----------\nAll markets served by the Registrant and its subsidiaries are competitive as to price, service, and product performance. Most of the Registrant's products compete not only with those of other manufacturers using similar raw materials but also with products manufactured from other materials. Many of the competitor companies are either closely held or are divisions of larger entities. The Registrant is recognized as a strong competitive factor in the marketplace, but there is no reliable quantitative manner in which the aggregate competitive position of the Registrant can be determined.\nResearch and Development ------------------------\nThe Registrant expended approximately $28,202,000, $25,951,000, and $23,239,000 during 1993, 1992, and 1991, respectively, on research activities related to product, process and materials development, and mold design. These costs are charged to operations as incurred.\nEnvironmental Matters ---------------------\nCompliance with Federal, State, and local provisions, which have been enacted or adopted regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, is not expected to have an adverse effect upon the capital expenditures, earnings, or competitive position of the Registrant and its subsidiaries. Reference is made to page 35 of the 1993 Annual Report to Shareholders, which is contained in Exhibit 13 hereof, concerning further information regarding Registrant's Environmental Program.\nEmployees ---------\nThe average number of persons employed by Registrant and its subsidiaries during 1993 was 11,978.\nForeign Operations ------------------\nReference is made to page 33 of the 1993 Annual Report to Shareholders, which is contained in Exhibit 13 hereof, for information concerning Registrant's operations in different geographical areas. Export sales are not material and are, therefore, not separately stated.\nRegistrant uses a variety of approaches to expand and develop international markets. To maximize return on existing investments, emphasis is placed on exporting from existing manufacturing facilities. Where market size and economics justify, manufacturing facilities are established - for example, Canada, Europe and Mexico. Licensing arrangements are used in those markets where the costs of importing are prohibitive and where Company-owned manufacturing is not economically justified. Today, Rubbermaid products are distributed worldwide.\nTo accelerate international growth, foreign businesses were repositioned in January 1990 to provide direct line reporting relationships with their counterpart domestic operation. The management of Rubbermaid businesses around the world, plus the coordination of sales and foreign markets, are the responsibility of the respective core operating companies. The Corporate role is to develop and coordinate with the core businesses strategic plans, priorities, and global operations. To improve efficiencies in the new regions being developed, staff functions are centralized, while the line functions are decentralized to each core business.\nNo greater known significant risk is attendant to the foreign business than to the domestic business conducted by the Registrant and its subsidiaries.\nITEM 2.","section_1A":"","section_1B":"","section_2":"ITEM 2. PROPERTIES - ------- ----------\nRegistrant and its subsidiaries have manufacturing and\/or warehousing locations in 14 states and 10 foreign countries.\nMajor plant and warehouse locations of Registrant are as follows:\nHome Products Division - Wooster and Akron, Ohio; Cortland, New York; Cleburne and Greenville, Texas; Phoenix, Arizona; Statesville, North Carolina; Mississauga and Montreal (leased), Canada; and Mexico City, Mexico.\nRubbermaid Specialty Products Inc. - Stanley and Huntersville (leased), North Carolina; and Goddard and Winfield, Kansas.\nThe Little Tikes Company - Hudson, Sebring, and Stow (leased), Ohio; Aurora and Farmington, Missouri; City of Industry, California (leased), Shippensburg, Pennsylvania; Dublin, Ireland; and Guelph, Canada (leased).\nRubbermaid Commercial Products Inc. - Winchester, Virginia; Centerville, Iowa; Cleveland, Tennessee; Oakville, Canada; and Welschenrohr, Switzerland (leased).\nRubbermaid Office Products Inc. - Maryville, Tennessee; Carson, California (leased); Itasca, Illinois (leased); Cranbury, New Jersey (leased); Markham, Canada (leased); Shefford, England (leased).\nCertain portions of the Cortland, New York facility are leased from Industrial Development Authorities pursuant to industrial development bond financing; however, Registrant will own the facilities upon repayment of such financing. Certain other facilities are subject to mortgages securing industrial revenue bond financing.\nThe properties and facilities of the Registrant and its subsidiaries are modern and suitable to the requirements of the business. On an overall basis, these facilities, with certain exceptions due primarily to general economic slowdowns, have been operated near capacity. As a general rule, continuing capital expenditures are required each year to provide the necessary plant, equipment, and tooling to support the growth of the business. To supplement its own facilities, Registrant has followed a practice of sourcing a portion of its production and warehousing requirements from third parties.\nITEM 3.","section_3":"ITEM 3. LEGAL PROCEEDINGS - -------- -----------------\nThere are no material pending legal proceedings to which the Registrant or any of its subsidiaries is a party.\nITEM 4.","section_4":"ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - -------- ---------------------------------------------------\nDuring the fourth quarter of the fiscal year covered by this Form 10-K, no matter was submitted to a vote of Registrant's shareholders, through the solicitation of proxies or otherwise.\nAll executive officers who are officers of Registrant are elected for a one-year term.\nPART II\nITEM 5.","section_5":"ITEM 5. Market for Registrant's Equity Stock and Related Stockholder Matters - ------- --------------------------------------------------------------------\nRegistrant's Common Shares are traded on the New York Stock Exchange under the symbol RBD. As of January 31, 1994, Registrant had approximately 22,700 shareholders of record. Reference is made to page 33 of the 1993 Annual Report to Shareholders, which is contained in Exhibit 13 hereof, for information concerning sales prices for and dividends paid on Registrant's Common Shares during 1993 and 1992.\nITEM 6.","section_6":"ITEM 6. Selected Financial Data - ------- -----------------------\nReference is made to pages 36 and 37 of the 1993 Annual Report to Shareholders, which are contained in Exhibit 13 hereof, which pages include the Summary of Consolidated Operations for the five years ended December 31, 1993 as part of the Registrant's \"Consolidated Financial Summary\", which information is incorporated by reference herein.\nITEM 7.","section_7":"ITEM 7. Management's Discussion and Analysis of Financial Condition and - ------- --------------------------------------------------------------- Results of Operations ---------------------\nReference is made to pages 34 and 35 of the 1993 Annual Report to Shareholders, which are contained in Exhibit 13 hereto, which include \"Management's Discussion and Analysis of Financial Condition and Results of Operations\" for the years 1993, 1992, and 1991, which information is incorporated herein by reference.\nITEM 8.","section_7A":"","section_8":"ITEM 8. Financial Statements and Supplementary Data - ------- -------------------------------------------\nReference is made to pages 25 through 33 of the 1993 Annual Report to Shareholders, which are contained in Exhibit 13 hereto, which include the consolidated financial statements and the notes thereto as of December 31, 1993 and 1992, and for each of the years in the three year period ended December 31, 1993, together with the independent auditors' report thereon of KPMG Peat Marwick dated February 1, 1994, which information is incorporated herein by reference. Supplemental schedules, together with the independent auditors' report thereon, are included herein. Such additional financial data should be read in conjunction with the consolidated financial statements.\nITEM 9.","section_9":"ITEM 9. Changes In and Disagreements with Accountants on Accounting and - ------- --------------------------------------------------------------- Financial Disclosure -------------------- Registrant has not changed its independent auditors, and there have been no reportable disagreements with such auditors regarding accounting principles or practices or financial disclosure matters.\nPART III -------- ITEM 10.","section_9A":"","section_9B":"","section_10":"ITEM 10. Directors and Executive Officers of the Registrant - -------- --------------------------------------------------\nInformation regarding the directors of Registrant is included under the caption \"Election of Directors\" in the Registrant's proxy statement to be dated on or about March 11, 1994, and is incorporated herein by reference. Information regarding the executive officers of Registrant is included under a separate caption in Part I hereof and is incorporated by reference, in accordance with General Instruction G(3) to Form 10-K and Instruction 3 to Item 401(b) of Regulation S-K.\nITEM 11.","section_11":"ITEM 11. Executive Compensation - -------- ----------------------\nInformation regarding the above is included under the caption \"Executive Compensation\" in the Registrant's proxy statement to be dated on or about March 11, 1994, and is incorporated herein by reference.\nITEM 12.","section_12":"ITEM 12. Security Ownership of Certain Beneficial Owners and Management - -------- --------------------------------------------------------------\nInformation regarding the above is included under the captions \"Security Ownership of Certain Beneficial Owners\" and \"Ownership By Management\" in the Registrant's proxy statement to be dated on or about March 11, 1994, and is incorporated herein by reference.\nITEM 13.","section_13":"ITEM 13. Certain Relationships and Related Transactions - -------- ----------------------------------------------\nInformation regarding the above is included under the caption \"Security Ownership of Certain Beneficial Owners\" in the Registrant's proxy statement to be dated on or about March 11, 1994, and is incorporated herein by reference.\nPART IV ------- ITEM 14.","section_14":"ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K - -------- ----------------------------------------------------------------\n(a) The following documents are filed as part of this Form 10-K Report.\n(1) The financial statements referred to in Item 8 above which are contained in Exhibit 13 hereto and which are incorporated by reference thereto.\n(2) The following additional financial information:\nIndependent Auditors' Report on Supporting Schedules Schedule V - Property, Plant, and Equipment Schedule VI - Accumulated Depreciation and Amortization of Property, Plant, and Equipment Schedule VIII - Valuation and Qualifying Accounts Schedule IX - Short-Term Borrowings Schedule X - Supplementary Income Statement Information\n(3) Exhibits 10(a) through 10(h) to this Item 14 constitute each executive compensation plan and arrangement of Registrant.\nAll other schedules have been omitted because the material is not applicable or is not required or because the required information is shown in the consolidated financial statements or in the notes thereto.\n(b) There were no reports on Form 8-K filed for the quarter ended December 31, 1993.\n(c) Exhibits (numbered in accordance with Item 601 of Regulation S-K).\n(3a, 4a) Amended Articles of Incorporation of Rubbermaid Incorporated. Incorporated by reference from Exhibits 3a and 4a to Form 10-K for the year ended December 31, 1992.\n(3b, 4b) Regulations of Rubbermaid Incorporated. Incorporated by reference from Exhibits 3a and 4a to Form 10-K for the year ended December 31, 1992.\n(4c) Amended and Restated Rights Agreement between Rubbermaid Incorporated and Ameritrust Company National Association. Incorporated by reference from Exhibit 4 to Form 8 filed with the Commission on October 26, 1989.\n(10a) Rubbermaid Incorporated Management Incentive Plan.\nIncorporated by reference from Exhibit 10a to Form 10-K for the year ended December 31, 1992.\n(10b) Rubbermaid Incorporated 1979 Restricted Stock Incentive Plan, as amended. Incorporated by reference from Exhibit 10(b) to Form 10-K for the Year ended December 31, 1987.\n(10c) Rubbermaid Incorporated 1989 Restricted Stock Incentive Plan. Incorporated by reference from Exhibit 10(c) to Form 10-K for the year ended December 31, 1989.\n(10d) Rubbermaid Incorporated Supplemental Executive Retirement Plan, as amended.\n(10e) Rubbermaid Incorporated Supplemental Retirement Plan. Incorporated by reference from Exhibit 10(e) to Form 10-K for the year ended December 31, 1991.\n(10f) Change-Of-Control Employment Agreements -\nIdentical agreements have been entered into with Gary S. Baughman, Arthur J. Brown, Charles A. Carroll, Richard D. Gates, Gary E. Kleinjan, Gary F. Mattison, James A. Morgan, Michael E. Naylor, Joseph M. Ramos, Wolfgang R. Schmitt, Thomas W. Ward, and George C. Weigand. Incorporated by reference from Exhibit 10(i) to Form 10-K for the year ended December 31, 1991.\n(10g) Rubbermaid Incorporated Deferred Compensation Plan, as amended. Incorporated by reference from Exhibit 10(k) to Form 10-K for the year ended December 31, 1990.\n(10h) Rubbermaid Incorporated 1993 Deferred Compensation Plan. Incorporated by reference to Exhibit A to Proxy Statement for April 27, 1993 Annual Meeting of Shareholders.\n(13) Consolidated financial statements and other data from pages 25 to 37 of 1993 Annual Report to Shareholders.\n(21) Subsidiaries of Registrant.\n(23) Consent of KPMG Peat Marwick.\n(24) Power of Attorney.\nSIGNATURE - --------- Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.\nPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on March 28, 1994.\nINDEPENDENT AUDITORS' REPORT ----------------------------\nThe Shareholders and Board of Directors Rubbermaid Incorporated:\nUnder date of February 1, 1994, we reported on the consolidated balance sheets of Rubbermaid Incorporated and subsidiaries as of December 31, 1993 and 1992 and the related consolidated statements of earnings, cash flows and shareholders' equity for each of the years in the three-year period ended December 31, 1993 as contained in the 1993 annual report to shareholders. These consolidated financial statements and our report thereon are incorporated by reference in the annual report on Form 10-K for the year ended December 31, 1993. In connection with our audits of the aforementioned consolidated financial statements, we also have audited the related financial statement schedules as listed in Part IV, Item 14(a)(2). These financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statement schedules based on our audits.\nIn our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.\n\/s\/ KPMG Peat Marwick\nCleveland, Ohio February 1, 1994\nSchedule X ---------- RUBBERMAID INCORPORATED AND SUBSIDIARIES Supplementary Income Statement Information Years ended December 31, 1993, 1992 and 1991 (Dollars in thousands)\nEXHIBIT INDEX -------------\nExhibit Number Exhibit Description -------------- ------------------- (3a, 4a) Amended Articles of Incorporation of Rubbermaid Incorporated. Incorporated by reference from Exhibits 3a and 4a to Form 10-K for the year ended December 31, 1992.\n(3b, 4b) Regulations of Rubbermaid Incorporated. Incorporated by reference from Exhibits 3a and 4a to Form 10-K for the year ended December 31, 1992.\n(4c) Amended and Restated Rights Agreement between Rubbermaid Incorporated and Ameritrust Company National Association. Incorporated by reference from Exhibit 4 to Form 8 filed with the Commission on October 26, 1989.\n(10a) Rubbermaid Incorporated Management Incentive Plan. Incorporated by reference from Exhibit 10(a) to Form 10-K for the year ended December 31, 1992.\n(10b) Rubbermaid Incorporated 1979 Restricted Stock Incentive Plan, as amended. Incorporated by reference from Exhibit 10(b) to Form 10-K for the Year ended December 31, 1987.\n(10c) Rubbermaid Incorporated 1989 Restricted Stock Incentive Plan. Incorporated by reference from Exhibit 10(c) to Form 10-K for the year ended December 31, 1989.\n(10d) Rubbermaid Incorporated Supplemental Executive Retirement Plan, as amended.\n(10e) Rubbermaid Incorporated Supplemental Retirement Plan. Incorporated by reference from Exhibit 10(e) to Form 10-K for the year ended December 31, 1991.\n(10f) Change-Of-Control Employment Agreements -Identical agreements have been entered into with Gary S. Baughman, Arthur J. Brown, Charles A. Carroll, Richard D. Gates, Gary E. Kleinjan, Gary F. Mattison,James A. Morgan, Michael E. Naylor, Joseph M. Ramos, Wolfgang R. Schmitt, Thomas W. Ward, and George C. Weigand. Incorporated by reference from Exhibit 10(i) to Form 10-K for the year ended December 31, 1991.\nEXHIBIT INDEX -------------\nExhibit Number Exhibit Description -------------- -------------------\n(10g) Rubbermaid Incorporated Deferred Compensation Plan, as amended. Incorporated by reference from Exhibit 10(k) to Form 10-K for the year ended December 31, 1990.\n(10h) Rubbermaid Incorporated 1993 Deferred Compensation Plan. Incorporated by reference to Exhibit A to Proxy Statement for April 27, 1993 Annual Meeting of Shareholders.\n(13) Consolidated financial statements and other data from pages 25 to 37 of 1993 Annual Report to Shareholders.\n(21) Subsidiaries of Registrant.\n(23) Consent of KPMG Peat Marwick.\n(24) Power of Attorney.","section_15":""}
{"filename":"13390_1993.txt","cik":"13390","year":"1993","section_1":"ITEM 1. BUSINESS.\nGENERAL DEVELOPMENT OF BUSINESS\nBoston Gas Company (the \"Company\") is engaged in the transportation, distribution and sale of natural gas to residential, commercial, and industrial customers which includes the City of Boston, Massachusetts, and 73 other Massachusetts communities. The Company has one subsidiary, Massachusetts LNG Incorporated (\"Mass LNG\"), which holds a long-term lease on two liquefied natural gas facilities. The Company has been in business for 171 years and is the second oldest gas company in the United States. Since 1929, all of the common stock of the Company has been owned by Eastern Enterprises (\"Eastern\"), which is headquartered in Weston, Massachusetts.\nGAS SALES\nFirm gas sales are made under rate schedules or contracts with customers who do not contemplate service interruption. Firm sales of natural gas sold for purposes of space heating are directly related to weather conditions. Consequently, variations in weather patterns can have a significant impact upon the Company's revenues and earnings. The Company also provides seasonal firm sales and transportation services to customers for terms of less than 365 days.\nNon-firm sales include interruptible sales made pursuant to contracts with customers who typically can use oil and gas interchangeably and special sales for resale to other gas companies for distribution to their\ncustomers. Non-firm sales are dependent upon gas supply availability, weather conditions and the price of gas in relation to the price of alternate fuels. The price the Company charges is generally tied to the price of the customer's alternate fuel. Availability of gas supply and price competition from residual oil are important factors in retaining non-firm sales. Beginning November 1, 1993, gross margins from non-firm sales and transportation services ($8,434,000 in 1993 and $10,248,000 in 1992) are passed back to firm customers through the cost of gas adjustment clause up to a threshold based upon the prior season's experience. Non-firm margins realized in excess of the threshold are shared between shareholders and core customers 25% and 75%, respectively.\nOne customer accounted for 4.0% of the Company's operating revenues in 1993, 2.3% in 1992 and 3.5% in 1991.\nGAS SUPPLY\nThe Company purchases approximately 70% of its pipeline gas supplies directly from producers and marketers pursuant to long-term contracts which are subject to review and approval by the Massachusetts Department of Public Utilities (\"Department\"). Seven of the Company's direct purchase agreements have been approved by the Department including two long-term Canadian agreements. Five other long-term agreements are pending before the Department, with orders expected by April, 1994. The Company purchases its remaining pipeline supplies pursuant to short-term, firm winter service agreements and on a spot basis. Pipeline supplies are transported on interstate pipeline systems to the Company's service territory pursuant to transportation agreements approved by the Federal Energy Regulatory Commission (\"FERC\"). The Company has also contracted with pipeline companies and others for the storage of natural gas and related transportation from underground storage fields located in New York and Pennsylvania. Supplemental supplies of liquefied natural gas (\"LNG\") and propane are purchased and produced from foreign and domestic sources.\nAll interstate pipelines serving the Company have implemented service restructuring plans on terms and conditions approved by FERC pursuant to Order No. 636. Order No. 636, issued April 8, 1992, required interstate pipeline companies to unbundle existing gas service contracts into separate gas sales, transportation and storage services. Accordingly, the Company's firm bundled service with Algonquin Gas Transmission Company (\"Algonquin\"), a wholly-owned subsidiary of Algonquin Energy, Inc., a wholly-owned subsidiary of Texas Eastern Transmission Corporation (\"Texas Eastern\"), itself a wholly-owned subsidiary of Panhandle Eastern Corporation, was converted to an annual firm transportation entitlement of 65,600 MMCF. Similarly, the Company's firm bundled sales service with Texas Eastern has been converted to an annual firm transportation entitlement of 100,100 MMCF; and its firm bundled sales service with Tennessee Gas Pipeline Company, a division of Tenneco, Inc. (\"Tennessee\"), has been converted to an annual firm transportation entitlement of 77,800 MMCF. In addition, as a result of industry restructuring, the Company has firm entitlements on interstate pipelines upstream of Tennessee, Texas Eastern, and Algonquin, with direct access to supply areas. Together, these transportation entitlements are used to transport natural gas purchased by the Company from producing regions and underground storage facilities to our service territory. After restructuring, the Company now holds direct entitlements to 16,500 MMCF of storage capacity with Tennessee, Texas Eastern and others. These new transportation and storage agreements with Algonquin, Texas Eastern, and Tennessee have terms generally expiring no earlier than November 1996, April 2012, and April 2000, respectively. The Company is provided rights of first refusal under Order No. 636 to extend the terms of such service. The Company considers the service reliability of its natural gas portfolio after industry restructuring to be comparable to that existing prior to Order No. 636.\nIn addition to its domestic supply arrangements, the Company has three contracts for the purchase of Canadian gas supplies. The Company's contract with Boundary, Inc. provides for the purchase of 3,845 MMCF of gas annually and expires on January, 2003. The Company also has contracts with Alberta Northeast Gas, Ltd. (\"ANE\") to purchase up to 6,242 MMCF of gas annually, and with Imperial Oil of Canada, Ltd. (\"Imperial\"), formerly Esso Resources Canada, Ltd., for the purchase of 12,775 MMCF of gas annually. These contracts expire on November, 2003 and April, 2007, respectively. The Company has contracted with Iroquois Gas Transmission System (\"IGTS\"), Tennessee and Algonquin to transport these\ngas supplies from the Canadian border to delivery points in the Company's service territory. All necessary Canadian government approvals for the purchase, import, and transportation of these volumes have been issued.\nThe Company has contracts, expiring in 1998, with Distrigas of Massachusetts Corporation (\"DOMAC\") for the purchase of an annual quantity of up to 2,000 MMCF of LNG and for 1,000 MMCF of LNG storage capacity and related vaporization services. The Company also purchases LNG from DOMAC on a spot basis when prices are competitive with alternative supplies. DOMAC's affiliate, Distrigas Corporation, imports the LNG from Algeria pursuant to agreements with Sonatrach, the Algerian National Energy Company, through its wholly-owned subsidiary Sonatrading Amsterdam B.V. The United States Department of Energy (\"DOE\") and FERC have granted the necessary approvals for the import, sale and storage of LNG.\nThe Company relies on supplemental supplies to meet firm sendout requirements which are greater than its firm pipeline capacity entitlements. The number of days that peak sendout can be maintained is limited by the capacity of the Company's storage facilities for supplemental gas supplies and the rate at which these supplies can be sent out, and subsequently replenished. Increased deliveries of pipeline supplies have reduced the Company's dependence on more costly supplemental supplies. The Company considers its peak day sendout capability, based on its total supply resources, adequate to meet the requirements of its customers.\nThe Company owns or leases facilities which enable it to store the equivalent of 4,000 MMCF of natural gas in liquid form as LNG and vaporize it for use during periods of high demand. The inventory for these facilities is provided by liquefaction of pipeline gas and from LNG purchased. The maximum storage capacity of these facilities may be limited by various factors, including maintenance and other operating considerations.\nIn addition to LNG, the Company has the ability to use propane to meet its demand requirements during periods of extreme cold weather. Propane can be mixed with air and introduced, along with natural gas, into the gas distribution system at a number of propane-air facilities owned by the Company.\nREGULATION AND RATES\nThe Company's operations are subject to Massachusetts statutes applicable to gas utilities. Rates, the territorial limit of the Company's service area, issuance of securities, affiliated party transactions, purchase of gas and pipeline safety regulations are regulated by the Department.\nThe rates for gas service rendered by the Company are subject to approval by, and are on file with, the Department. Gas operating revenues are recognized when billed. No revenue is recorded for the amount of gas distributed to customers which is unbilled at the end of a period. The Company has a cost of gas adjustment clause which allows for the adjustment of billing rates for firm gas sales to recover the cost of gas delivered to firm customers. For financial reporting purposes, the Company defers the cost of any firm gas that has been distributed, but is unbilled at the end of a period, to a period in which the gas is billed to customers.\nOn October 30, 1993, the Department allowed the Company an annual revenue increase of $37,700,000, effective November 1, 1993, and also approved several rate design changes that reduce the volatility of the Company's margins attributable to weather. This was accomplished by increasing customer charges and moving the recovery of certain local production and storage costs from base rates to the cost of gas adjustment clause.\nFacility expansion is regulated by the Department. Municipal, state and federal authorities have jurisdiction over the use of public ways, land and waters for gas mains and other distribution facilities.\nLICENSES AND FRANCHISES\nThe Company and Eastern were granted an intrastate exemption from the provisions of the Public Utility Holding Company Act of 1935 (\"the Act\") under Section 3(a)(1) thereof, pursuant to an order of the Securities and Exchange Commission (the \"SEC\") dated February 28, 1955, as amended by orders dated November 3, 1967 and August 28, 1975. On February 7, 1989, the SEC issued a proposed rule under the Act which would provide limits for non-utility related diversification by intrastate public utility holding companies, such as Eastern, that are exempt under the Act. Since its proposal in 1989, the SEC has taken no action with respect to this proposed rule. Eastern and the Company cannot predict whether this proposed rule will be adopted or whether it will affect their exemption under the Act.\nExcept as set forth above, there are no patents, trademarks, licenses or concessions that are important to the business of the Company.\nCOMPETITION AND MARKETING\nThe Company competes with fuel oil and electricity and other supplies of gas for residential, commercial and industrial uses. The Company's marketing efforts continue to benefit from growing customer awareness of natural gas as a safe, reliable, economical and environmentally sound fuel. Customer recognition that the use of gas improves overall air quality, reduces pollutants and eliminates on-site fuel storage problems has become increasingly significant.\nThe Company added annual firm sales of approximately 2,443 MMCF in 1993. In the commercial and industrial markets, where the Company has a 22% market share in its service territory, a degree of penetration which is approximately half that of the United States commercial and industrial market share, considerable growth opportunities exist. In 1993, the Company added new firm annual load of 1,812 MMCF in these markets. Increasing environmental regulation of emissions should provide additional opportunities in the commercial and industrial markets. The Company has identified several industrial facilities that must file compliance plans under these regulations by April 1, 1994.\nApproximately 4,391 residential customers converted to gas for central heating last year. Despite lower oil prices, the Company expects continued strong activity in the residential conversion market. Approximately 46% of the Company's existing customers do not use gas for central heating. The Company plans on targeting this group as well as electrically-heated residential complexes with special programs to encourage the conversion to natural gas.\nFERC Order No. 636 and other regulatory changes have increased the potential for competition among existing and new suppliers of natural gas in the Company's service area, particularly in large commercial and industrial markets (see \"Gas Supply\"). The Company believes it is well positioned to respond to such sales competition. The Company received approval from the Department to file contracts designed to compete with non-captive commercial and industrial customers with alternative energy options. This provides for an expedited approval process and enhances the Company's ability to negotiate sales agreements that reflect competitive market conditions. In June 1992, FERC granted the Company authority to make sales for resale in interstate commerce under the terms of a blanket marketing certificate. This additional sales authority allows the Company to maximize the use of its supply entitlements, thereby minimizing the cost of gas to firm customers and making its sales rates more competitive. The Company is also well positioned to provide transportation service to customers who may engage in direct purchases of natural gas from other suppliers under firm and interruptible transportation tariffs approved by the Department. The rate design changes\napproved by the Department in the October 30, 1993 rate order provide for margin neutrality regardless of the customer's decision to purchase gas directly from the Company or purchase third-party gas for transportation on the Company's distribution system.\nThe Company continues to pursue market opportunities in natural gas-powered vehicles. The recent passage of The National Energy Policy Act, as well as the Clean Air Act Amendments of 1990, both of which mandate the use of alternative fuel vehicles by the mid-1990's by certain commercial fleets, have enhanced opportunities in this market. The Company has initiated a number of programs demonstrating the environmental and operating advantages of natural gas vehicles. The Company's marketing activities include the installation of two Company-owned fueling stations, conversion of 92 Company vehicles, and establishment of pilot programs with a number of large fleet operators to demonstrate the advantages of choosing natural gas to meet alternative fuel vehicle requirements.\nOther new markets, such as air conditioning, cogeneration and desiccant dehumidification continue to develop as new technologies emerge.\nENVIRONMENTAL REGULATION\nThe Company is subject to local, state and federal environmental regulation of its operations and properties. The Company is working with the Massachusetts Department of Environmental Protection (\"DEP\") to determine the environmental impact, if any, of by-products associated with 13 former manufactured gas plant (\"MGP\") properties which the Company currently owns and for which the Company may be potentially responsible. The Company is currently assessing seven of these properties pursuant to applicable DEP procedures. The Company expects to spend approximately $1 million in assessing these properties in 1994 and expects similar expenditures for site assessment for the next several years as other properties are investigated. Since the DEP has not yet approved a remediation plan for any Company site, the Company cannot reliably predict the potential liability associated with final remediation of any of these properties. Company experience to date indicates that assessment and remediation costs of at least $18 million could be incurred over the next several years at these thirteen properties, subject to possible contribution or the assumption of responsibility by New England Electric System (\"NEES\") or one of its subsidiaries as discussed below.\nMassachusetts Electric Company, a wholly-owned subsidiary of NEES, has assumed responsibility for remediating a fourteenth property currently owned by the Company (part of the site of gas manufacturing operations in Lynn, Massachusetts) pursuant to the decision of the Court of Appeals for the First Circuit in The John S. Boyd, Inc., et al. v. Boston Gas Company, et al, Civil Action No. 89-575-T (May 26, 1993). The First Circuit found that NEES and its subsidiaries, as the prior owners and operators of the Lynn MGP site, were responsible for remediating the site and that the Company did not assume any liability for environmental remediation when it acquired the property from NEES in 1973. Of the thirteen other sites currently owned by the Company, ten were acquired from NEES. Given substantial similarities between these acquisitions and that involved in Boyd, it is not probable that the Company will have any material exposure for environmental remediation at these ten sites.\nThere are 23 other former MGP sites within the Company's service territory which the Company does not currently own. The DEP has not issued a Notice of Responsibility to the Company for any of these 23 sites. At this time, there is substantial uncertainty as to whether the Company is responsible for remediating any of these sites either because the Company never owned the site, the Company does not have successor liability for contamination of the site by earlier operators, or site conditions do not require remediation by the Company.\nBy an order issued on May 25, 1990, the Department approved a settlement agreement which provides for the recovery through the cost of gas adjustment clause of all environmental response costs associated with former MGP sites over separate, seven-year amortization periods without a return on the unamortized balance. The settlement agreement also provides for no further investigation of the prudency of any Massachusetts gas utility's past MGP operations.\nEMPLOYEE RELATIONS\nAs of December 31, 1993, the Company had 1,720 employees, 71% of whom were organized in six local unions with which the Company has collective bargaining agreements. In 1993, after a seventeen-week work stoppage, the Company entered into a new six-year labor contract with the bargaining units which, among other things, provides for annual general wage increases of approximately 4%, updates work rules and changes health care coverage to a managed care program with cost sharing.\nITEM 2.","section_1A":"","section_1B":"","section_2":"ITEM 2. PROPERTIES.\nThe Company and Mass LNG own or lease facilities which enable them to liquefy natural gas in periods of low demand, store the resulting LNG and vaporize it for use in periods of high demand. The Company owns and operates such a facility in Dorchester, Massachusetts, and Mass LNG leases and operates one such facility in Lynn, Massachusetts, and a storage facility in Salem, Massachusetts. In addition, the Company owns propane-air facilities at several locations throughout its service territory.\nIn addition to the properties described above, the Company owns or leases several small buildings and miscellaneous parcels of land located throughout its service area which are used for such purposes as storage, subsidiary operations centers, district business offices and natural gas receiving stations.\nThe Company's gas distribution system on December 31, 1993 included approximately 5,700 miles of gas mains, 396,000 services and 519,000 active customer meters.\nThe Company's gas mains and services, as well as related equipment, are, in general not on land owned in fee, being in part, in, under or over public ways, land or water and, in part, upon or under private ways or other property not owned by the Company, such occupation of public and private property being, in general, pursuant to easements, licenses, permits or grants of location. Except as stated above, the principal items of property of the Company are owned in fee. A portion of the utility properties and franchises of the Company are pledged as security for the Company's First Mortgage Bonds.\nIn 1993, the Company's expenditures on capital expansion and improvement were $47.1 million. Capital expenditures were principally made for improvements to the distribution system, for system expansion to meet customer demand and for productivity enhancement.\nITEM 3.","section_3":"ITEM 3. LEGAL PROCEEDINGS.\nWith the resolution of the John Boyd case discussed in Item 1 above, and other than normal routine litigation incidental to the Company's business, there are no material pending legal proceedings involving the Company.\nITEM 4.","section_4":"ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.\nNo matter was submitted to a vote of Security Holders in the fourth quarter of 1993.\nPART II\nITEM 5.","section_5":"ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.\nEastern was the holder of record of all of the outstanding common equity securities of the Company throughout the year ended December 31, 1993. Dividends on such common equity amounted to $8,998,219 and $7,712,760 for 1993 and 1992, respectively. At December 31, 1993, under the most restrictive provision limiting dividend payments in the Company's financing indentures, there were no restrictions on retained earnings.\nITEM 6.","section_6":"ITEM 6. SELECTED FINANCIAL DATA.\nNot required.\nITEM 7.","section_7":"ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.\n1993 COMPARED TO 1992\nEarnings available to common shareholders in 1993 of $18.0 million were $9.3 million lower than the prior year. Earnings in 1992 reflect a one-time increase of $7.2 million, as a result of a modification to the Company's gas cost recovery mechanism approved by the Department in May 1992. The modification shifted the recovery of a portion of pipeline gas costs from the non-heating season to the heating season to more closely match revenues with costs incurred. Excluding such modification, earnings year to year decreased $2.1 million. This decline in earnings was primarily due to the seventeen week labor dispute and increased depreciation and amortization expense. In addition, weather was 1.3% warmer than normal and 4.5% warmer than 1992.\nPartially offsetting the above was a $5.0 million increase in net earnings related to the rate increase granted the Company by the Department effective November 1, 1993. The Department awarded the Company an annual revenue increase of $37.7 million, or 6.3%. During 1993, the Company added annual firm sales of approximately 2.4 BCF from the conversion of approximately 4,391 existing non-heating residences to natural gas and the addition of new customers.\nOperating earnings of $49.0 million , excluding the 1992 operating earnings impact of the change in the gas cost recovery mechanism of $11.6 million, were $2.4 million lower than 1992. The increase in operating expenses was mainly due to the work stoppage and its resultant impact on expenditure capitalization. Depreciation and amortization expense increases in 1993 are principally the result of continued investments in system replacement and expansion and productivity programs. Year to year increases in property taxes also contributed to the decline in operating earnings.\n1992 COMPARED TO 1991\nEarnings available to common shareholders in 1992 of $27.3 million were 76% higher than 1991 earnings of $15.5 million primarily due to more seasonable weather and the modification to the Company's gas cost recovery mechanism approved by the Department effective May 1, 1992. Since the change took effect May 1, 1992, the Company recognized a one-time increase in earnings of $7.2 million; however, the modification has no impact on earnings over a 12 month period. Excluding the modification to the gas cost recovery mechanism, earnings year to year increased $4.6 million.\nMore seasonal weather, following unusually warm weather conditions in 1990 and 1991, produced the most favorable impact on 1992 earnings, representing a $9.1 million increase over 1991 results. 1992, which was 19% colder as compared to 1991, resulted in an increase in firm gas sales of 7.3 BCF. Growth in the firm customer base also contributed to the increase in earnings. During 1992, the Company added annual firm sales of approximately 3.1 BCF from the conversion of 4,690 existing non-heating residences to natural gas and the additional new customers.\nOperating earnings, excluding the pre-tax impact of the change in the gas cost recovery mechanism of $11.6 million, were $12.2 million higher than 1991 operating earnings of $39.3 million. Operating expense\nincreases were primarily the result of higher labor and system maintenance costs. Depreciation and amortization expense increased in 1992 due to continued investments related primarily to customer growth, system replacement and productivity improvements. Interest expense increased in 1992 as compared to 1991 due to higher levels of average debt outstanding and reduced capitalized interest.\nLIQUIDITY AND CAPITAL RESOURCES\nThe Company maintains four committed lines of credit totaling $40.0 million. The Company also maintains various uncommitted lines of credit and markets its own commercial paper. In addition, the Company may borrow up to $45.0 million under Eastern's credit facilities.\nIn accordance with the rate order issued by the Department effective October 1, 1988, the Company funds all of its gas inventory through external financing. The costs of such financing are recovered from customers through the Company's cost of gas adjustment clause. Effective December 31, 1993, the Company increased its credit capacity for fuel financing through the negotiation of a credit agreement with a group of banks which provides for borrowing of up to $90.0 million for the purpose of financing its inventory of gas supplies. The Company's' capacity under the prior agreement was $60.0 million. (See Note 4 of the Notes to Consolidated Financial Statements.)\nOn May 12, 1993, the Company received from its shareholder, Eastern Enterprises, a $20.0 million equity contribution, which was used to redeem $20.0 million of the Company's outstanding 9% Debentures, due 2001.\nOn July 13, 1993, the Registrant selected a Final Term which is a Mandatory Redemption Term with respect to its Variable Term Cumulative Preferred Stock, Series A. The dividend rate during the Final Term is 6.421% per annum and dividends are paid quarterly. The Final Term calls for 5% annual sinking fund payments beginning on September 1, 1999, is non-callable for 10 years, and shall end on September 1, 2018.\nThe Company expects capital expenditures for 1994 to be approximately $53.0 million. Capital expenditures will be largely for improvements to the distribution system, for system expansion to meet customer demand and for productivity enhancement. The Company also expects to incur assessment and remediation costs of approximately $1.0 million in 1994 associated with MGP sites. Such costs are recoverable in rates as discussed more fully in Note 12 of Notes to Consolidated Financial Statements.\nOn October 30, 1993, the Department granted the Company an annual revenue increase of $37.7 million effective November 1, 1993.\nIn January 1994, the Company issued $36.0 million of Medium-term Notes Series B, with a weighted average maturity of 24 years and coupon of 6.94% pursuant to a $50.0 million shelf registration statement dated October 28, 1992 on file with the SEC.\nThe Company believes that projected cash flow from operations, in combination with currently available resources, is sufficient to meet 1994 capital expenditures and working capital requirements, normal debt repayments and dividends to shareholders.\nITEM 8.","section_7A":"","section_8":"ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.\nInformation with respect to this item appears commencing on Page of this Report. Such information is incorporated herein by reference.\nITEM 9.","section_9":"ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.\nNone.\nPART III\nITEM 10.","section_9A":"","section_9B":"","section_10":"ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.\nNot required.\nITEM 11.","section_11":"ITEM 11. EXECUTIVE COMPENSATION.\nNot required.\nITEM 12.","section_12":"ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.\nNot required.\nITEM 13.","section_13":"ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.\nNot required.\nPART IV\nITEM 14.","section_14":"ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.\nLIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES.\nInformation with respect to these items appears on Page of this Report. Such information is incorporated herein by reference.\nSIGNATURES\nPURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES AND EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED. BOSTON GAS COMPANY Registrant\nBy: J. F. BODANZA _________________________________ J. F.BODANZA SENIOR VICE PRESIDENT AND TREASURER (PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER)\nDated:\nSchedules other than those listed above have been omitted as the information has been included in the consolidated financial statements and related notes or is not applicable nor required.\nSeparate financial statements of the Company are omitted because the Company is primarily an operating company and its subsidiary is wholly-owned and is not indebted to any person in an amount that is in excess of 5% of total consolidated assets.\nThe accompanying notes are an integral part of these consolidated financial statements.\nThe accompanying notes are an integral part of these consolidated financial statements.\nThe accompanying notes are an integral part of these consolidated financial statements.\nThe accompanying notes are an integral part of these consolidated financial statements.\nThe accompanying notes are an integral part of these consolidated financial statements.\nBOSTON GAS COMPANY AND SUBSIDIARY\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS\n(1) ACCOUNTING POLICIES\nThe significant accounting policies followed by the Company and its subsidiary are described below and in the following footnotes:\nNote 2--Cost of Gas Adjustment Clause and Deferred Gas Costs Note 3--Income Taxes Note 6--Pension Benefits Note 7--Post-Retirement Benefits Other Than Pensions Note 8--Leases\nPrinciples of Consolidation\nThe Company is a wholly-owned subsidiary of Eastern Enterprises (\"Eastern\"). The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Massachusetts LNG Incorporated (\"Mass LNG\"). All material intercompany balances and transactions between the Company and its subsidiary have been eliminated in consolidation.\nDepreciation\nDepreciation is provided at rates designed to amortize the cost of depreciable property, plant and equipment over their estimated remaining useful lives. The composite depreciation rate, expressed as a percentage of the average depreciable property in service, was 3.98% in 1993, 3.80% in 1992 and 3.79% in 1991.\nAccumulated depreciation is charged with the original cost and cost of removal, less salvage value, of units retired. Expenditures for repairs, upkeep of units of property and renewal of minor items of property replaced independently of the unit of which they are a part are charged to maintenance expense as incurred.\nGas Operating Revenues\nGas operating revenues are recorded when billed. Revenue is not recorded for the amount of gas distributed to customers which is unbilled at the end of the period; however, the cost of this gas is deferred as discussed in Note 2.\n(2) COST OF GAS ADJUSTMENT CLAUSE AND DEFERRED GAS COSTS\nThe cost of gas adjustment clause requires the Company to adjust its rates semiannually for firm gas sales in order to track changes in the cost of gas distributed with an annual adjustment of subsequent rates for any collection over or under actual costs incurred. As a result, the Company defers the cost of any firm gas that has been distributed, but is unbilled at the end of a period, to a period in which the gas is billed to customers. The cost of gas adjustment clause also recovers the amortization of all environmental response costs associated with former manufactured gas plant (\"MGP\") sites and costs related to the Company's various conservation and load management programs.\nIn May of 1992, the Company modified the cost of gas adjustment clause shifting a portion of pipeline gas costs from the non-heating to the heating season in order to more closely match revenues with the related costs.\n(3) INCOME TAXES\nThe Company is a member of an affiliated group of companies which files a consolidated federal income tax return. The Company follows the policy, established for the group, of providing for income taxes which would be payable on a separate company basis. The Company's effective income tax rate was 38.4% in 1993,\nBOSTON GAS COMPANY AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)\n(3) INCOME TAXES (CONTINUED) 39.4% in 1992 and 36.2% in 1991. State taxes represent the majority, or 4.3%, 4.6% and 4.8% of the difference between the effective rate and the Federal income tax rate for 1993, 1992 and 1991, respectively.\nEffective January 1, 1992, the Company adopted Statement of Financial Accounting Standards No. 109 (\"SFAS 109\"), \"Accounting for Income Taxes.\" SFAS 109 requires adjustment of deferred tax assets and liabilities to reflect the future tax consequences, at currently enacted rates, of items already reflected in the financial statements. A regulatory asset of $1,880,000 was established for the recovery of prepaid taxes established at the higher federal tax rates in effect prior to 1988. In its most recent rate request proceeding, the Company received permission to recover this amount over three years. A regulatory liability of $6,144,000 was established for the tax benefit of unamortized investment tax credits, which SFAS 109 requires to be treated as a temporary difference. This benefit will be passed on to customers over the lives of property giving rise to the investment credits, consistent with the 1986 Tax Reform Act. About 38% of each of these items reflect a \"gross-up\" for taxes as SFAS 109 eliminated net-of tax accounting for regulatory assets and liabilities. The regulatory liability for excess deferred taxes being returned to customers over a 30 year period pursuant to a 1988 rate order was similarly increased by $4,445,000 upon the adoption of SFAS 109.\nThe Revenue Reconciliation Act of 1993, enacted on August 10, 1993, increased the statutory Federal income tax rate from 34% to 35%, retroactive to January 1, 1993. The provision for income taxes in 1993 includes approximately $300,000 for the impact of the rate change on current earnings. The effect of the rate change on deferred tax requirements at January 1, 1993 is reflected in the regulatory asset and liability established at the adoption of SFAS 109.\nDuring 1991, deferred income taxes were provided for significant timing differences in the recognition of revenue and expenses for tax and financial statement purposes. The principal component of the 1991 deferred provision was $2,308,000 for accelerated depreciation, partially offset by a credit of $1,021,000 for deferred gas costs.\nInvestment tax credits are deferred and credited to income over the lives of the property giving rise to such credits. The credit to income was approximately $689,000 in 1993, $673,000 in 1992 and $692,000 in 1991.\n(4) COMMITMENTS\nLong-term Obligations\nThe First Mortgage Bonds are secured by a first mortgage lien on a portion of the Company's utility properties and franchises. The annual sinking fund requirement for the 8.375% First Mortgage Bonds is $480,000.\nBOSTON GAS COMPANY AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)\n(4) COMMITMENTS (CONTINUED) The 7.95% Sinking Fund Debentures have an annual sinking fund requirement of $425,000. The 9.0% and 8.75% Sinking Fund Debentures require annual sinking fund payments of $5,000,000 and $3,000,000, respectively, beginning in 1997.\nOn October 28, 1992, the Company filed a Shelf registration covering the issuance of up to $50,000,000 of additional Medium-Term Notes through December 31, 1994 for the financing of capital expenditures and the payment of related obligations. In January 1994 the Company issued $36,000,000 of Medium-Term Notes with maturities of 20 - 30 years and an average weighted interest rate of 6.94%.\nThe terms of the various indentures referred to above, as supplemented, provide that dividends may not be paid on common stock of the Company under certain conditions. At December 31, 1993 there were no restrictions on retained earnings available for payment of dividends.\nGas Inventory Financing\nUnder the terms of the general rate order issued by the Department of Public Utilities (the Department) effective October 1, 1988, the Company funds all of its inventory of gas supplies through external sources. All costs related to this funding are recoverable from its customers. The Company maintains a credit agreement with a group of banks which provides for the borrowing of up to $90,000,000 for the exclusive purpose of funding its inventory of gas supplies or for backing commercial paper issued for the same purpose. The Company had $59,297,000 and $48,631,000 of commercial paper outstanding at December 31, 1993 and 1992, respectively, for this purpose. Since the commercial paper is supported by the credit agreement, these borrowings have been classified as non-current in the accompanying consolidated balance sheets. The credit agreement includes a 364 day revolving credit which may be converted to a two-year term loan at the Company's option if the 364 day revolving credit is not renewed by the banks. The Company may select interest rate alternatives based on prime or Eurodollar rates. No borrowings were outstanding under this agreement at December 31, 1993 and no borrowings were outstanding under the prior $60,000,000 credit agreement at December 31, 1992.\nNotes Payable\nThe Company maintains four committed lines of credit totaling $40,000,000 which provide for interest at either prime rate or money market rates. The Company pays facility fees related to these lines of credit. In addition, the Company has various uncommitted lines of credit which provide for interest at the federal funds, money market or prime rates. These lines of credit are used for short-term borrowings. The Company had outstanding borrowings of $106,300,000 and $53,332,000 in commercial paper and bank loans not related to gas inventory financing at December 31, 1993 and 1992, respectively.\nBOSTON GAS COMPANY AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)\n(4) COMMITMENTS (CONTINUED) Eastern Borrowing Arrangement\nEastern has a credit agreement with a group of banks which provides for the borrowing by Eastern and its subsidiaries of up to $60,000,000 (of which the Company may borrow up to $35,000,000) at any time through December 31, 1994, with borrowings thereunder maturing not later than December 31, 1995. The interest rate for such borrowings is the agent bank's prime rate, or at Eastern's option, 1\/4 of 1% over the agent bank's Eurodollar rate or 3\/8 of 1% over the agent bank's certificate of deposit rate. Eastern has the option until December 31, 1994 to convert up to $25,000,000 of the total commitment to a five-year term loan arrangement with the same interest rate provisions through 1994 and thereafter with interest of 1\/8 of 1% over the agent bank's prime rate or 5\/8 of 1% over the agent bank's Eurodollar rate or 7\/8 of 1% over the agent bank's certificate of deposit rate. The credit agreement provides, among other things, for a commitment fee of 1\/4 of 1% on the first $50,000,000 unused portion of the commitment and 3\/16 of 1% on the unborrowed portion of the commitment greater than $50,000,000.\nEastern also has a $10,000,000 line of credit under which the Company is entitled to borrow which provides for interest at the prime rate, or at Eastern's option, rates tied to Eurodollar, certificate of deposit or money market quotes.\n(5) VARIABLE TERM CUMULATIVE PREFERRED STOCK\nOn July 13, 1993, the Company selected a Final Term which is a Mandatory Redemption Term with respect to its Variable Term Cumulative Preferred Stock, Series A. The dividend rate during the Final Term is 6.421% per annum and dividends are paid quarterly. The Final Term calls for 5% annual sinking fund payments beginning on September 1, 1999, is non-callable for 10 years, and shall end on September 1, 2018.\n(6) PENSION BENEFITS\nThe Company, through retirement plans under collective bargaining agreements and participation in Eastern's pension plans, provides retirement benefits for substantially all of its employees. The benefits under these plans are based on stated amounts for years of service or employee's average compensation during the five years prior to retirement. The Company follows a policy of funding retirement and employee benefit plans in accordance with the requirements of the plans and agreements in sufficient amounts to satisfy the \"Minimum Funding Standards\" of the Employee Retirement Income Security Act of 1974 (\"ERISA\").\nThe expected long-term rate of return on assets was 8.5% in 1993 and 1992 and 7.5% in 1991. The discount rate used in determining the actuarial present value of the projected benefit obligation was 7.5% for 1993 as well as for prior years. The rate of increase in future compensation levels was 5.0%.\nBOSTON GAS COMPANY AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)\n(6) PENSION BENEFITS (CONTINUED)\n(7) POST-RETIREMENT BENEFITS OTHER THAN PENSIONS\nIn addition to providing pension benefits, the Company, through participation in Eastern administered plans and welfare plans under collective bargaining agreements, provides certain health care and life insurance benefits for retired employees.\nEffective January 1, 1991, the Company adopted Statement of Financial Accounting Standards No. 106 (\"SFAS 106\"), \"Employers' Accounting for Post-Retirement Benefits Other Than Pensions,\" by immediately recognizing the cumulative effect of the accounting change. SFAS 106 requires that the expected cost of post-retirement benefits other than pensions be charged to expense during the period that the employee renders service. As of the date of adoption, the cumulative effect of the accounting change (\"transition obligation\") was, $89,120,000. With approval by the Department, the Company has deferred the cost of the transition obligation and the amount by which expense under SFAS 106 exceeds amounts currently included in rates. The 1993 rate order allows the Company to phase in incremental costs associated with SFAS 106 over a four-year period. Each year during the phase-in, the Company will file for an increase in rates to reflect an additional increment of SFAS 106 costs. The difference between the incremental annual amount allowed in rates during the phase-in period and the SFAS 106 costs will be deferred as a regulatory asset with carrying costs.\nBOSTON GAS COMPANY AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)\n(7) POST-RETIREMENT BENEFITS OTHER THAN PENSIONS (CONTINUED) Prior to the 1993 rate order, the Company recognized as expense and recovered through rates billed to customers the cost of post-retirement benefits on a claims paid basis. Such costs totalled $4,437,000 in 1993, $4,110,000 in 1992 and $3,431,000 in 1991.\nThe Company established a 501(c)(9) Voluntary Employee Beneficiary Association (\"VEBA\") Trust in 1991 to begin funding its post-retirement benefit obligation for collectively bargained employees. The Company contributed $5,000,000 in 1992 to the VEBA.\nThe weighted average discount rate used in determining the accumulated post-retirement benefit obligation was 7.5% in 1993 and 1992. A 12% and 15% annual increase in the cost of covered health care benefits was assumed for 1993 and 1992, respectively. This rate of increase is assumed to drop gradually to 5% after 7 years. A 1% increase in the assumed health care cost trend would have increased the post-retirement benefit cost by $489,000 and $1,056,000 and the accumulated post-retirement benefit obligation by $5,691,000 in 1993 and $9,164,000 in 1992.\nIn November 1992, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 112 (\"SFAS 112\"), \"Employer's Accounting for Postemployment Benefits\", which establishes standards of financial accounting and reporting for certain postemployment benefit obligations. The adoption of SFAS 112 is not expected to have a material effect on the Company's financial condition or results of operations. SFAS 112 is effective for fiscal years beginning after December 15, 1993.\n(8) LEASES\nThe Company and its subsidiary lease certain facilities and equipment under long-term leases which expire on various dates through the year 2000. Total rentals charged to income under all lease agreements were approximately $7,663,000 in 1993, $6,939,000 in 1992 and $6,417,000 in 1991.\nBOSTON GAS COMPANY AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)\n(8) LEASES (CONTINUED)\nUnder the terms of SFAS 71, the timing of expense recognition on capitalized leases should conform with regulatory rate treatment. The Company has included the rental payments on its financing leases in its cost of service for rate purposes. Therefore, the total depreciation and interest expense that was recorded on the leases was equal to the rental payments included in other operating and maintenance expense in the accompanying consolidated statements of income.\n(9) FAIR VALUES OF FINANCIAL INSTRUMENTS\nThe following methods and assumptions were used to estimate the fair value disclosures for financial instruments:\nCash and Short-term Investments\nThe carrying amounts approximate fair value because of the short maturity of those instruments.\nShort-term Debt\nThe carrying amounts of the Company's short-term debt, including notes payable and gas inventory financing, approximate their fair value.\nLong-term Debt\nThe fair value of long-term debt is estimated based on currently quoted market prices for similar types of borrowing arrangements.\nBOSTON GAS COMPANY AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)\n(9) FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED) Preferred Stock\nThe fair value of the preferred stock for 1993 is based on currently quoted market prices. For 1992 the carrying amount approximates fair value because of the frequency with which dividend rates were reset.\n(10) SUPPLEMENTARY INFORMATION\nThe Company paid Eastern $3,096,000 in 1993, $2,707,000 in 1992 and $2,520,000 in 1991 for various legal, tax and corporate services rendered.\n(11) SIGNIFICANT CUSTOMER\nFirm and non-firm sales to a single customer produced revenues totaling $24,800,000 in 1993, $13,900,000 in 1992 and $18,500,000 in 1991, or 4.0%, 2.3% and 3.5% of total revenues in 1993, 1992 and 1991, respectively.\n(12) ENVIRONMENTAL ISSUES\nThe Company is subject to local, state and federal environmental regulation of its operations and properties. The Company is working with the Massachusetts Department of Environmental Protection (\"DEP\") to determine the environmental impact, if any, of by-products associated with 13 former manufactured gas plant (\"MGP\") properties which the Company currently owns and for which the Company may be potentially responsible. The Company is currently assessing seven of these properties pursuant to applicable DEP procedures. The Company expects to spend approximately $1 million in assessing these properties in 1994 and expects similar expenditures for site assessment for the next several years as other properties are investigated. Since the DEP has not yet approved a remediation plan for any Company site, the Company cannot reliably predict the potential liability associated with final remediation of any of these properties. Company experience to date indicates that assessment and remediation costs of at least $18 million could be incurred over the next several years at these thirteen properties, subject to possible contribution or the assumption of responsibility by New England Electric System (\"NEES\") or one of its subsidiaries as discussed below.\nMassachusetts Electric Company, a wholly-owned subsidiary of NEES, has assumed responsibility for remediating a fourteenth property currently owned by the Company (part of the site of gas manufacturing operations in Lynn, Massachusetts) pursuant to the decision of the Court of Appeals for the First Circuit in The John S. Boyd, Inc., et al. v. Boston Gas Company, et al, Civil Action No. 89-575-T (May 26, 1993). The First Circuit found that NEES and its subsidiaries, as the prior owners and operators of the Lynn MGP site, were responsible for remediating the site and that the Company did not assume any liability for environmental remediation when it acquired the property from NEES in 1973. Of the 13 other sites currently owned by the Company, 10 were acquired from NEES. Given substantial similarities between these acquisitions and that involved in Boyd, it is not probable that the Company will have any material exposure for environmental remediation at these 10 sites.\nBOSTON GAS COMPANY AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)\n(12) ENVIRONMENTAL ISSUES (CONTINUED) There are 23 other former MGP sites within the Company's service territory which the Company does not currently own. The DEP has not issued a Notice of Responsibility to the Company for any of these 23 sites. At this time, there is substantial uncertainty as to whether the Company is responsible for remediating any of these sites either because the Company never owned the site, the Company does not have successor liability for contamination of the site by earlier operators, or site conditions do not require remediation by the Company.\nBy an order issued on May 25, 1990, the Department approved a settlement agreement which provides for the recovery through the cost of gas adjustment clause of all environmental response costs associated with former MGP sites over separate, seven-year amortization periods without a return on the unamoritized balance. The settlement agreement also provides for no further investigation of the prudency of any Massachusetts gas utility's past MGP operations.\n(13) PIPELINE TRANSITION COSTS\nPursuant to Federal Energy Regulatory Commission (\"FERC\") Order No. 636, pipelines will be allowed to recover prudently incurred transition costs, including (1) gas supply realignment costs or the costs of renegotiating existing gas supply contracts with producers; (2) unrecovered purchased gas adjustment costs or unrecovered gas costs at the time the pipelines ceased the merchant function; (3) stranded costs or the unrecovered costs of assets that cannot be assigned to customers of unbundled services; and (4) new facilities costs or the costs of new facilities required to physically implement the order.\nThe Company's obligation for transition costs is $30.6 million and it has recorded this amount less actual billings at December 31, 1993 of $6.3 million as a liability in the accompanying consolidated balance sheet. As pipelines continue to incur and file for recovery of transition costs, the Company's obligation may increase.\nThe Company's obligation to Tennessee for transition costs is $12.0 million, based on filings by Tennessee at FERC. Payments to Tennessee for such costs commenced in October 1993. The Company's obligations to Texas Eastern and Algonquin for transition costs is $18.6 million, based on filings by Texas Eastern and Algonquin at FERC. Payments to Texas Eastern and Algonquin began in July 1993.\nThe Department has allowed recovery of the Company's transition costs liability over a five-year period commencing in May 1994. Accordingly, the Company has recorded a regulatory asset equivalent to the liability established at December 31, 1993.\nREPORT OF INDEPENDENT PUBLIC ACCOUNTANTS\nTo Boston Gas Company:\nWe have audited the accompanying consolidated balance sheets of Boston Gas Company (a Massachusetts Corporation and wholly-owned subsidiary of Eastern Enterprises) and subsidiary as of December 31, 1993 and 1992, and the related consolidated statements of earnings, retained earnings and cash flows for each of the three years in the period ended December 31, 1993. These financial statements and the schedules referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.\nWe conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.\nIn our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Boston Gas Company and subsidiary as of December 31, 1993 and 1992 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1993, in conformity with generally accepted accounting principles.\nOur audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedules listed in the index to consolidated financial statements and schedules are presented for purposes of complying with the Securities and Exchange Commission's rules and are not a part of the basic financial statements. These schedules have been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly state, in all material respects, the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.\nARTHUR ANDERSEN & CO. Boston, Massachusetts February 4, 1994\nBOSTON GAS COMPANY AND SUBSIDIARY\nINTERIM FINANCIAL INFORMATION FOR THE TWO YEARS ENDED DECEMBER 31, 1993 (UNAUDITED)\nThe following table summarizes the Company's reported quarterly information for the years ended December 31, 1993 and 1992:\nThe above amounts vary significantly due to the seasonality of the Company's business.\nSCHEDULE V\nBOSTON GAS COMPANY AND SUBSIDIARY\nPROPERTY, PLANT AND EQUIPMENT FOR THE YEAR ENDED DECEMBER 31, 1993 (IN THOUSANDS)\nSCHEDULE VI\nACCUMULATED DEPRECIATION AND AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT FOR THE YEAR ENDED DECEMBER 31, 1993 (IN THOUSANDS)\nSCHEDULE V\nBOSTON GAS COMPANY AND SUBSIDIARY\nPROPERTY, PLANT AND EQUIPMENT FOR THE YEAR ENDED DECEMBER 31, 1992 (IN THOUSANDS)\nSCHEDULE VI\nACCUMULATED DEPRECIATION AND AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT FOR THE YEAR ENDED DECEMBER 31, 1992 (IN THOUSANDS)\nSCHEDULE V\nBOSTON GAS COMPANY AND SUBSIDIARY\nPROPERTY, PLANT AND EQUIPMENT FOR THE YEAR ENDED DECEMBER 31, 1991 (IN THOUSANDS)\nSCHEDULE VI\nACCUMULATED DEPRECIATION AND AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT FOR THE YEAR ENDED DECEMBER 31, 1991 (IN THOUSANDS)\nSCHEDULE VIII\nBOSTON GAS COMPANY AND SUBSIDIARY\nVALUATION AND QUALIFYING ACCOUNTS FOR THE YEAR ENDED DECEMBER 31, 1993 (IN THOUSANDS)\nSCHEDULE VIII\nBOSTON GAS COMPANY AND SUBSIDIARY\nVALUATION AND QUALIFYING ACCOUNTS FOR THE YEAR ENDED DECEMBER 31, 1992 (IN THOUSANDS)\nSCHEDULE VIII\nBOSTON GAS COMPANY AND SUBSIDIARY\nVALUATION AND QUALIFYING ACCOUNTS FOR THE YEAR ENDED DECEMBER 31, 1991 (IN THOUSANDS)\n- ---------------\n(1) Reclassified from other accounts\nSCHEDULE IX\nBOSTON GAS COMPANY AND SUBSIDIARY\nSHORT-TERM BORROWINGS FOR THE YEARS ENDED DECEMBER 31, 1991, 1992 AND 1993 (IN THOUSANDS)\n- ---------------\n(A) Average daily balances. (B) Actual interest incurred divided by average amount outstanding during the year.\nSCHEDULE X\nBOSTON GAS COMPANY AND SUBSIDIARY\nSUPPLEMENTARY EARNINGS STATEMENT INFORMATION FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991 (IN THOUSANDS)","section_15":""}
{"filename":"737468_1993.txt","cik":"737468","year":"1993","section_1":"ITEM 1. BUSINESS - ---------------- Washington Trust Bancorp, Inc. - ------------------------------ Washington Trust Bancorp, Inc. (\"the Corporation\") is a publicly-owned, registered bank holding company, organized in 1984 under the laws of the state of Rhode Island whose subsidiaries are permitted to engage in banking and other financial services and businesses. The Corporation conducts its business through its wholly-owned subsidiary, The Washington Trust Company (\"the Bank\"), a Rhode Island chartered commercial bank. The deposits of the Bank are insured by the Federal Deposit Insurance Corporation (\"FDIC\").\nThe Corporation was formed in 1984 under a plan of reorganization in which outstanding common shares of The Washington Trust Company were exchanged for common shares of Washington Trust Bancorp, Inc. At December 31, 1993 the Corporation had total consolidated assets of $487 million, deposits of $423 million and equity capital of $38 million.\nThe Washington Trust Company - ---------------------------- The Washington Trust Company was originally chartered in 1800 as the Washington Bank and is the oldest banking institution headquartered in its market area. Its current corporate charter dates to 1902. See \"Market Area and Competition\" below for further information.\nA broad range of financial services are provided by the Bank, including:\n- - Residential mortgages - Commercial and consumer demand deposits - - Commercial loans - Savings, NOW and money market deposits - - Construction loans - Certificates of deposit - - Installment loans - Retirement accounts - - Home equity lines of credit - Electronic funds transfer - - VISA and Mastercard accounts - Safe deposit boxes - - Merchant credit card services - Trust and investment services\nThe Bank's primary source of income is net interest income, the difference between interest earned on interest-earning assets and interest paid on interest-bearing deposits and other borrowed funds. Sources of noninterest income include fees for management of customer investment portfolios, trusts and estates, service charges on deposit accounts, merchant processing fees and other banking-related fees. Noninterest expenses include the provision for loan losses, salaries and employee benefits, occupancy, equipment, office supplies deposit taxes and assessments, foreclosed property costs and other administrative expenses.\nAutomated teller machines (ATM's) are located at each of the six banking offices. The Bank is a member of the NYCE, Yankee 24, Plus, and Cashstream ATM networks.\nData processing for most of the Bank's deposit and loan accounts and other applications is conducted internally using owned equipment. Application software is primarily obtained through purchase or licensing agreements.\nThe Bank's Trust and Investment Department provides fiduciary services as trustee under wills and trust agreements; as executor or administrator of estates; as a provider of agency and custodial investment services to individuals and institutions; and as a trustee for employee benefit plans. The value of total trust assets amounted to $390 million as of December 31, 1993.\nThe following is a summary of the relative amounts of income producing functions as a percentage of gross operating income during the past five years:\nThe percentage of gross income derived from interest and fees on loans has fallen to 71% in 1993, down from 77% in 1992 and 80% in 1991, primarily as a result of declining interest rates.\nMarket Area and Competition - --------------------------- The Bank's market area includes most of southern Rhode Island (Washington County) and a portion of New London County in southeastern Connecticut. The Bank's six banking offices are located in the following Rhode Island communities:\n- Westerly (2) - Charlestown - New Shoreham (Block Island) - Richmond - Narragansett\nThe Bank's offices in Charlestown and on Block Island are the only bank facilities in those communities. No other financial institution has more than three offices within the Bank's market area. The Block Island office was acquired from another Rhode Island bank in 1984. The Charlestown office was opened in 1988 and the Narragansett office was opened in 1989.\nThe Bank faces strong competition from branches of major Rhode Island and regional commercial banks, local branches of certain Connecticut banks, as well as various credit unions, savings institutions and, to some extent, finance companies. The principal methods of competition are through interest rates,\nfinancing terms and other customer conveniences. The Washington Trust Company had 36% of total deposits held by financial institutions within its market area as of June 30, 1993. The three closest competitors held 14%, 14%, and 7% of total deposits in the market area, respectively. The Corporation believes that being the largest commercial banking institution headquartered within the market area provides a competitive advantage over other financial institutions. The Bank has a marketing department which is responsible for the review of existing products and services and the development of new products and services.\nEmployees - --------- As of December 31, 1993 the Corporation employed approximately 232 full-time and 55 part-time employees. Management believes that its employee relations are good.\nSupervision and Regulation - -------------------------- General - The business in which the Corporation and the Bank are engaged is subject to extensive supervision, regulation, and examination by various bank regulatory authorities and other agencies of federal and state government. The supervisory and regulatory activities of these parties are often intended primarily for the protection of depositors or are aimed at carrying out broad public policy goals that may not be directly related to the financial services provided by the Corporation and the Bank nor intended for the protection of the Corporation's shareholders. Proposals to change regulations and laws which affect the banking industry are frequently raised at the federal and state level. The potential impact on the Corporation of any future revisions to the supervisory or regulatory structure cannot be determined.\nThe Corporation and Bank are required by various authorities to file extensive periodic reports of financial and other information and such other reports as the regulatory and supervisory authorities may require. The Corporation is also subject to the reporting and other requirements of the Securities Exchange Act of 1934.\nThe Corporation is a bank holding company registered under the Bank Holding Company Act of 1956, as amended (the \"BHC Act\"). As a bank holding company, the activities of the Corporation are regulated by the Board of Governors of the Federal Reserve System (the \"Federal Reserve Board\"). The BHC Act requires that the Corporation obtain prior approval of the Federal Reserve Board to acquire control over a bank or nonbank entity and restricts the activities of the Corporation to those related to banking. In addition, the BHC Act restricts interstate acquisitions of banks or branching unless specifically authorized by local law.\nFederal law also regulates transactions between the Corporation and its subsidiary, The Washington Trust Company, including loans or extensions of credit. As a state chartered institution, The Washington Trust Company is subject to various Rhode Island business and banking regulations.\nFederal Deposit Insurance Corporation Act of 1991 (FDICIA) - FDICIA was enacted in December 1991 and has resulted in extensive changes to the federal banking laws. One of the primary purposes of the legislation was to recapitalize the Bank Insurance Fund (BIF). The FDIC adopted a risk-related premium system for\nthe assessment period beginning January 1, 1993. Under this new system, each institution's assessment rate is based on its capital ratios in combination with a supervisory evaluation of the risk the institution poses to the BIF. Banks deemed to be well-capitalized and who pose the lowest risk to the BIF will pay the lowest assessment rates, while undercapitalized banks, who present the highest risk, will pay the highest rates. At December 31, 1993, the Bank's capital ratios placed it in the well-capitalized category.\nFDICIA contains other significant provisions that require the federal banking regulators to establish standards for safety and soundness for depository institutions and their holding companies in three areas: (i) operational and managerial; (ii) asset quality, earnings and stock valuation; and (iii) management compensation. The legislation also requires that risk-based capital requirements contain provisions for interest rate risk, credit risk and risks of nontraditional activities. FDICIA imposes numerous restrictions on state- chartered banks and contains several consumer banking law provisions.\nThe provisions of FDICIA will phase in over several years. While final rules have been issued on numerous provisions, others have yet to be issued. The full impact of FDICIA will not be known until all of the related regulations have been adopted by the various federal banking agencies.\nDividend Restrictions - The Corporation's revenues consist of cash dividends paid to it by the Bank. Such payments are restricted pursuant to various state and federal regulatory limitations. On February 29, 1994, the Bank's primary federal regulator, the Federal Deposit Insurance Corporation (FDIC), agreed to release the subsidiary bank from a January 1993 board of directors resolution regarding the payment of dividends and other matters. The resolution stated that the subsidiary bank would not pay any dividend to the Corporation unless it provided advance notification to its regulators and received no reasonable objection. The board resolution also required the subsidiary bank to continue to maintain plans and procedures for the maintenance of asset quality, risk control and capital adequacy. The January 1993 resolution had been accepted by the FDIC pursuant to the termination of a 1991 memorandum of understanding which required the subsidiary bank to obtain prior regulatory approval for the payment of dividends to the Corporation.\nReference is made to Note 16 to the Corporation's Consolidated Financial Statements included in its 1993 Annual Report to Shareholders incorporated herein by reference for additional discussion of the Corporation's ability to pay dividends.\nCapital Guidelines - Regulatory guidelines have been established that require bank holding companies and banks to maintain minimum ratios of capital to risk- adjusted assets. Banks are required to have minimum core capital (Tier 1) of 4% and total risk-adjusted capital (Tier 1 and Tier 2) of 8%. For the Corporation, Tier 1 capital is essentially equal to shareholders' equity while Tier 2 capital consists of a portion of the reserve for possible loan losses (limited to 1.25% of total risk-weighted assets). As of December 31, 1993, net risk-weighted assets amounted to $324.4 million, the Tier 1 capital ratio was 11.86% and the total risk-based capital ratio was approximately 13.12%.\nThe Tier 1 leverage ratio is defined as Tier 1 capital (as defined under the risk-based capital guidelines) divided by average assets (net of intangible\nassets). The minimum leverage ratio is 3% for banking organizations that do not anticipate significant growth and that have well-diversified risk (including no undue interest rate risk), excellent asset quality, high liquidity, and strong earnings. Other banking organizations are expected to have ratios of at least 4-5%, depending on their particular condition and growth plans. Higher capital ratios could be required if warranted by the particular circumstances or risk profile of a given banking organization. The Corporation's Tier 1 leverage ratio was 7.84% as of December 31, 1993. The Federal Reserve has not advised the Corporation of any specific minimum Tier 1 leverage capital ratio applicable to it.\nGUIDE 3 STATISTICAL DISCLOSURES - ------------------------------- The following tables contain additional consolidated statistical data about the Corporation and its subsidiary.\nI. Distribution of Assets, Liabilities and Shareholders' Equity; Interest Rates and Interest Differential ------------------------------------------------------------- A. Average balance sheets are presented on page 27 of the Corporation's 1993 Annual Report to Shareholders under the caption \"Average Balances\/Net Interest Margin (Fully Taxable Equivalent Basis)\", and are incorporated herein by reference. Nonaccrual loans are included in average loan balances. Average balances are based upon daily averages.\nB. An analysis of net interest earnings, including interest earned and paid, average yields and costs, and net yield on interest-earning assets is presented on page 27 of the Corporation's 1993 Annual Report to Shareholders under the caption \"Average Balances\/Net Interest Margin (Fully Taxable Equivalent Basis)\", and is incorporated herein by reference.\nInterest income is reported on the fully taxable-equivalent basis. Tax exempt income is converted to a fully taxable equivalent basis by assuming a 34% federal income tax rate adjusted for applicable state income taxes net of the related federal tax benefit. For dividends on corporate stocks, the 70% federal dividends received deduction is also used in the calculation of tax equivalency. Interest on nonaccrual loans is included in the analysis of net interest earnings to the extent that such interest income has been recognized in the Consolidated Statements of Income. See Guide 3 Item III.C.1.\nC. An analysis of rate\/volume changes in interest income and interest expense is presented on page 28 of the Corporation's 1993 Annual Report to Shareholders under the caption \"Volume\/Rate Analysis - Interest Income and Expense (Fully Taxable Equivalent Basis)\", and is incorporated herein by reference. The net change attributable to both volume and rate has been allocated proportionately.\nII. INVESTMENT SECURITIES AND SECURITIES AVAILABLE FOR SALE ------------------------------------------------------- A. The carrying amounts of investment securities as of the dates indicated are presented in the following table:\nThe December 31, 1992 balance of mortgage-backed securities includes $19,209,775 of securitized mortgages originated by the subsidiary bank which were previously classified as loans in the Corporation's 1992 consolidated financial statements.\nThe carrying amounts of securities available for sale at December 31, 1993 and 1992 are summarized as follows:\nAll securities were classified as investment securities at December 31, 1991.\nB. Maturities of debt securities as of December 31, 1993 are presented in the following tables. Mortgage-backed securities are included based on their weighted average maturities, adjusted for anticipated future prepayments.\nC. Not applicable.\nIII. LOAN PORTFOLIO -------------- A. Types of Loans\nB. An analysis of the maturity and interest rate sensitivity of real estate construction and commercial and other loans as of December 31, 1993 follows:\nSensitivity to changes in interest rates for all such loans due after one year is as follows:\nC. Risk Elements Reference is made to the caption \"Asset Quality\" included in Management's Analysis of Financial Statements on pages 24-26 of the Corporation's 1993 Annual Report to Shareholders incorporated herein by reference. Included therein is a discussion of the Corporation's credit review and collection practices. Also included therein is information concerning property acquired through foreclosure and in-substance foreclosures held at December 31, 1993 and the Corporation's ongoing efforts to dispose of such properties.\n1. Nonaccrual, Past Due and Restructured Loans. (a). Nonaccrual loans as of the dates indicated were as follows:\nLoans, with the exception of credit card loans, are placed on nonaccrual status and interest recognition is suspended when such loans are 90 days or more overdue with respect to principal and\/or interest. Interest previously accrued, but not collected on such loans is reversed against current period income. Subsequent cash receipts on nonaccrual loans are applied to the outstanding principal balance of the loan, or recognized as interest income, depending on management's assessment of the ultimate collectibility of the loan. Loans are removed from nonaccrual status when they have been current as to principal and interest for a period of time, the borrower has demonstrated an ability to comply with repayment terms, and when, in management's opinion, the loans are considered to be fully collectible.\nFor the year ended December 31, 1993, the gross interest income that would have been recognized if loans on nonaccrual status had been current in accordance with their original terms was approximately $1,021,000. Interest recognized on these loans amounted to approximately $597,000.\nThere were no significant commitments to lend additional funds to borrowers whose loans were on nonaccrual at December 31, 1993.\n(b). Loans contractually past due 90 days or more and still accruing for the dates indicated were as follows:\nIn years prior to 1992, commercial loans were placed on nonaccrual status and interest recognition was suspended when they were 90 days or more overdue. Residential mortgages and consumer loans were placed on nonaccrual status when in management's judgment, the probability of collection was deemed insufficient to warrant further income recognition.\n(c). Restructured accruing loans for the dates indicated were as follows:\nRestructured accruing loans include those for which concessions, such as reduction of interest rates other than normal market rate adjustments or deferral of principal or interest payments, have been granted due to a borrower's financial condition. Interest on restructured loans is accrued at the reduced rate. Loans restructured during 1993 amounted to $404,595 and are included in nonaccrual loans reported in Section III.C.1.(a) above.\n2. Potential Problem Loans. The Corporation assesses the quality of its loans by performing ongoing reviews of the loans in its portfolio to determine potential loss exposure and to assess delinquency trends. During this review, management gives consideration to such factors as overall borrower relationship, delinquency trends, credit and collateral quality, prior loss experience, current and expected economic conditions, and other pertinent factors.\nNot included in the analysis of nonperforming loans in item 1. above are accruing commercial loans amounting to approximately $1.2 million that were 30-89 days past due at December 31, 1993, including certain loans classified as substandard by the subsidiary bank's primary regulator during their most recent examination completed in the fourth quarter of 1993. The Corporation's loan policy provides guidelines for the review of such loans in order to facilitate collection.\nAt December 31, 1993, commercial loans which were contractually current but which had been classified as substandard by the subsidiary bank's primary regulator amounted to approximately $3.9 million. The classification of these loans is generally attributable to weaknesses in the financial condition of borrowers or collateral deficiencies. These factors are considered in management's analysis of credit quality and evaluation of collectibility of the loan portfolio.\nAt December 31, 1993, approximately 3.2% of total residential mortgage and installment loans was 30-89 days past due. Based on historical experience, the delinquency status of some of these loans may be expected to improve as a result of collection efforts, while other loans may eventually become more seriously delinquent, resulting in some amount of losses. These factors are considered by management in its analysis of credit quality and in the evaluation of the adequacy of the reserve for possible loan losses.\nSubsequent to December 31, 1993, approximately $1.1 million of loans 30-89 days past due have been reclassified to nonaccrual status. In addition, approximately $1.2 million of loans on nonaccrual status at December 31, 1993 have been subsequently restored to accruing status.\n3. Foreign Outstandings. None\n4. Loan Concentrations. The Corporation has no concentration of loans which exceed 10% of its total loans except as disclosed by types of loan in Section III.A.\nD. Other Interest-Bearing Assets: None\nIV. SUMMARY OF LOAN LOSS EXPERIENCE ------------------------------- A. The reserve for possible loan losses is available for future credit losses inherent in the loan portfolio. The level of the reserve is based on management's ongoing review of the growth and composition of the loan portfolio, net charge-off experience, current and expected economic conditions, and other pertinent factors. Loans (or portions thereof) deemed to be uncollectible are charged against the reserve and recoveries of amounts previously charged to earnings are added to the reserve to bring it to the desired level.\nThe following table presents the allocation of the allowance for loan losses.\nLoss experience on loans is presented in the following table for the years indicated.\nV. DEPOSITS -------- A. Average deposit balances outstanding and the average rates paid thereon are presented in the following table:\nB. Not Applicable\nC. Not Applicable\nD. The maturity schedule of time deposits in amounts of $100,000 or more at December 31, 1993 was as follows:\nE. Not applicable\nVI. RETURN ON EQUITY AND ASSETS ---------------------------\nVII. SHORT-TERM BORROWINGS --------------------- The average balance of short-term borrowings during the reported periods did not exceed 30% of shareholders' equity at the end of any reported period.\nITEM 2.","section_1A":"","section_1B":"","section_2":"ITEM 2. PROPERTIES - ------------------ As of December 31, 1993 the Corporation was operating six facilities including its main office and five branch banking facilities. All sites are owned, except for the Block Island, Rhode Island branch facility, which is leased. The main office premises, containing the corporate offices and a banking facility, consists of a five story building and an adjacent two story building in Westerly, Rhode Island. The buildings, which are connected, contain approximately 50,000 square feet of space, 42,000 square feet of which is occupied by the Corporation. The remaining space is leased to merchant and professional tenants under short-term lease arrangements and could be used for expansion of the Corporation's offices. The main office location also contains a three level retail parking garage with 80,000 square feet of space.\nThe Corporation has made a substantial investment in branch office facilities during the past several years. The Charlestown banking office opened in 1988 in a newly constructed facility. The Narragansett banking office began operations in June 1989 in a building which had been acquired in 1988 and was completely renovated. A major renovation and expansion of the Richmond banking office was completed in January of 1990. The Richmond site also contains a separate building operated as a restaurant by a restaurant chain under a long-term lease.\nITEM 3.","section_3":"ITEM 3. LEGAL PROCEEDINGS - ------------------------- Neither the Corporation nor its subsidiary is a party to any pending legal proceedings which are material, other than routine litigation incidental to their business activities.\nITEM 4.","section_4":"ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ----------------------------------------------------------- No matters were submitted to a vote of security holders during the fourth quarter of the year ended December 31, 1993.\nEXECUTIVE OFFICERS OF THE REGISTRANT - ------------------------------------\nFollowing is a list of all executive officers of the Corporation with their titles, ages, and length of service with the Corporation as of December 31, 1993. (Service prior to 1984 was with the Bank.)\nJoseph H. Potter and Louis J. Luzzi are first cousins.\nJoseph J. Kirby joined the Bank in 1963 as an Investment Officer. He was elected Vice President and Investment Officer in 1965 and Executive Vice President in 1972. He was elected president in 1982.\nJoseph H. Potter joined the Bank in 1958 and was elected Secretary in 1967. He was elected Vice President and Secretary in 1973 and Executive Vice President in 1982.\nDavid V. Devault joined the Bank in 1986 as Controller. He was elected Vice President and Chief Financial Officer of the Corporation and the Bank in 1987. He was elected Senior Vice President and Chief Financial Officer of the Bank in 1990. Prior to joining the Bank he was a Senior Manager with the firm of KPMG Peat Marwick.\nLouis J. Luzzi joined the Bank in 1960 and was elected Assistant Vice President in 1969. He was elected Vice President in 1979 and Vice President and Treasurer in 1983.\nHarvey C. Perry, II joined the Bank in 1974 and was elected Assistant Trust Officer in 1977, Trust Officer in 1981 and Secretary and Trust Officer in 1982. He was elected Vice President and Secretary of the Corporation and the Bank in 1984, and Senior Vice President and Secretary of the Bank in 1990.\nPART II -------\nITEM 5.","section_5":"ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS - ------------------------------------------------------------- The Corporation's common stock has traded on the NASDAQ Small-Cap Market since June 19, 1992. Previously, the Corporation's common stock had been listed on the NASDAQ Over-The-Counter Market system since June 1987.\nThe quarterly common stock price ranges and dividends paid per share for the years ended December 31, 1993 and 1992 are presented in the following table. For periods prior to June 19, 1992, stock prices reflect the high and low bid quotations for that period. Bid quotations may not necessarily represent actual transactions. For periods subsequent to June 19, 1992, stock prices are based on the high and low sales prices during the respective quarter.\nThe Corporation will continue to review future common stock dividends based on profitability, financial resources and economic conditions. The Corporation has recorded consecutive quarterly dividends for over one hundred years. On March 17, 1994, the Corporation's Board of Directors declared a cash dividend of $.25 per share, payable April 15, 1994 to shareholders of record as of April 1, 1994.\nThe Corporation's primary source of funds for dividends paid to shareholders is the receipt of dividends from the Bank. A discussion of the restrictions on the advance of funds or payment of dividends to the Corporation is included in Note 16 to the Consolidated Financial Statements included in the 1993 Annual Report to Shareholders which is incorporated herein by reference.\nAt December 31, 1993 there were 1,133 holders of record of the Corporation's common stock.\nITEM 6.","section_6":"ITEM 6. SELECTED FINANCIAL DATA - ------------------------------- Selected consolidated financial data for the five years ended December 31, 1993 appears under the caption \"Five Year Summary of Selected Consolidated Financial Data\" on page 22 of the Corporation's 1993 Annual Report to Shareholders which is incorporated herein by reference.\nITEM 7.","section_7":"ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - ------------------------------------------------------------------------------- The information required by this Item appears under the caption \"Management's Analysis of Financial Statements\" on pages 23-33 of the Corporation's 1993 Annual Report to Shareholders which is incorporated herein by reference.\nITEM 8.","section_7A":"","section_8":"ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - --------------------------------------------------- The financial statements and supplementary data are contained in the Corporation's 1993 Annual Report to Shareholders, filed as Exhibit 13, on the pages indicated in the following table, and are incorporated herein by reference.\nPage of 1993 Annual Report ------------- Consolidated Balance Sheets 34 Consolidated Statements of Income 35 Consolidated Statements of Changes in Shareholders' Equity 37 Consolidated Statements of Cash Flows 36 Notes to Consolidated Financial Statements 38 Parent Company Financial Statements 51 Independent Auditors' Report 53 Summary of Unaudited Quarterly Financial Information 54\nITEM 9.","section_9":"ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE - ---------------------------------------------------------- None.\nPART III --------\nITEM 10.","section_9A":"","section_9B":"","section_10":"ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - ----------------------------------------------------------- Identification of directors is presented under the caption \"Nominees for Director\" in the Corporation's Proxy Statement dated April 5, 1994 prepared for the 1994 Annual Meeting of Shareholders and incorporated herein by reference.\nThe information regarding directors and executive officers of the Corporation is included in Part I under the caption \"Executive Officers of the Registrant\" in the Corporation's Proxy Statement dated April 5, 1994 prepared for the 1994 Annual Meeting of Shareholders and incorporated herein by reference.\nITEM 11.","section_11":"ITEM 11. EXECUTIVE COMPENSATION - ------------------------------- The information required by this Item appears under the caption \"Executive Compensation\" in the Corporation's Proxy Statement dated April 5, 1994 prepared for the 1994 Annual Meeting of Shareholders which is incorporated herein by reference.\nITEM 12.","section_12":"ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT - ------------------------------------------------- The information required by this Item appears under the caption \"Nominees for Director\" in the Corporation's Proxy Statement dated April 5, 1994 prepared for the 1994 Annual Meeting of Shareholders which is incorporated herein by reference.\nITEM 13.","section_13":"ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - ------------------------------------------------------- The information required by this Item is incorporated herein by reference to the caption \"Indebtedness and Other Transactions\" of the Corporation's Proxy Statement dated April 5, 1994 prepared for the 1994 Annual Meeting of Shareholders.\nPART IV -------\nITEM 14.","section_14":"ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K - ------------------------------------------------------------------------ (a) 1. The financial statements of Washington Trust Bancorp, Inc. required in response to this Item are listed in response to Item 8 of this Report and are incorporated herein by reference.\n2. Financial Statement Schedules. All schedules normally required by Article 9 of Regulation S-K and all other schedules to the consolidated financial statements of the Corporation have been omitted because the required information is either not required, not applicable, or is included in the consolidated financial statements or notes thereto.\n(b) None.\n(c) Exhibit Index.\nExhibit Number -------------- 3 Restated articles of incorporation and by-laws *\n10 Material contracts\n13 1993 Annual Report to Shareholders\n21 Subsidiaries of the Registrant\n23 Consent of Independent Auditors\n* Incorporated by reference to Exhibit 3 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1990, previously filed with the Commission.\n(d) Financial Statement Schedules.\nNone.\nSIGNATURES\nPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.\nWASHINGTON TRUST BANCORP, INC. ------------------------------ (Registrant)\nMarch 17, 1994 Joseph J. Kirby Date ________________ By ______________________________________ Joseph J. Kirby, President, Principal Executive Officer and Director\nMarch 17, 1994 David V. Devault Date_________________ By ______________________________________ David V. Devault, Vice President, Chief Financial Officer and Principal Accounting Officer\nPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.\nMarch 17, 1994 Joseph H. Potter Date ________________ ______________________________________ Joseph H. Potter, Executive Vice President and Director\nDate ________________ ______________________________________ Gary P. Bennett, Director\nMarch 17, 1994 Steven J. Crandall Date ________________ ______________________________________ Steven J. Crandall, Director\nMarch 17, 1994 Jacques de Laporte Date ________________ ______________________________________ Jacques de Laporte, Director\nMarch 17, 1994 Richard A. Grills Date ________________ ______________________________________ Richard A. Grills, Director\nDate ________________ ______________________________________ Larry J. Hirsch, Director\nMarch 17, 1994 Katherine W. Hoxsie Date ________________ ______________________________________ Katherine W. Hoxsie, Director\nDate ________________ ______________________________________ Mary E. Kennard, Director\nMarch 17, 1994 James W. McCormick, Jr. Date ________________ ______________________________________ James W. McCormick, Jr., Director\nMarch 17, 1994 Thomas F. Moore, Jr. Date ________________ ______________________________________ Thomas F. Moore, Jr., Director\nMarch 17, 1994 Brendan P. O'Donnell Date ________________ ______________________________________ Brendan P. O'Donnell, Director\nMarch 17, 1994 Victor J. Orsinger, II Date ________________ ______________________________________ Victor J. Orsinger, II, Director\nMarch 17, 1994 Anthony J. Rose, Jr. Date ________________ ______________________________________ Anthony J. Rose, Jr., Director\nMarch 17, 1994 James P. Sullivan Date ________________ ______________________________________ James P. Sullivan, Director\nNeil H. Thorp Date ________________ ______________________________________ Neil H. Thorp, Director","section_15":""}
{"filename":"5850_1993.txt","cik":"5850","year":"1993","section_1":"Item 1. Business 1 Item 2.","section_1A":"","section_1B":"","section_2":"Item 2. Properties 15 Item 3.","section_3":"ITEM 3. LEGAL PROCEEDINGS\nThe Company has been made a defendant in a lawsuit brought by Entech Sales & Service, Inc., on behalf of a purported class of contractors engaged in the service and repair of commercial air conditioning equipment. The suit, which was filed on March 5, 1993, in the United States District Court for the Northern District of Texas, alleges principally that the manner in which Air Conditioning Products distributes repair service parts for its equipment violates Federal antitrust laws and demands $680 million in damages (which are subject to trebling under the antitrust laws) and injunctive relief. The Company has filed an answer denying all claims and is preparing to defend itself vigorously. The issue of whether Entech may maintain this action as a class action is pending before the court. In management's opinion the litigation should not have any material adverse effect on the financial position, cash flows, or results of operations of the Company.\nThere are no other material legal proceedings. For a discussion of German tax issues see \"ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Liquidity and Capital Resources\". For a discussion of environmental issues see \"ITEM 1. BUSINESS - -- Regulations and Environmental Matters.\"\nITEM 4.","section_4":"ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS\nBy the unanimous written consent of the sole holder of the common stock of the Company dated as of December 2, 1993, the following individuals were elected as directors of the Company, each to serve in office until the next annual meeting of the stockholder of the Company or until such individual's respective successor shall have been elected and shall qualify, or until such individual's earlier death, resignation or removal as provided in the By-laws of the Company:\nHorst Hinrichs Frank T. Nickell Emmanuel A. Kampouris J. Danforth Quayle George H. Kerckhove John Rutledge Shigeru Mizushima Joseph S. Schuchert\nTHIS\nPAGE\nLEFT\nBLANK\nINTENTIONALLY\nPART II\nITEM 5.","section_5":"ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS\nThe Company's only issued and outstanding common equity, 1,000 shares of common stock $.01 par value, is owned by Holding. There is no established public trading market for these shares.\nThere were no dividends declared on the Company's common stock in 1992 and 1993.\nITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS\nResults of Operations\nAs a result of the Acquisition, results of operations include purchase accounting adjustments and reflect a highly leveraged capital structure. Sales Year Ended December 31, 1993 1992 1991 (Dollars in millions) Air Conditioning Products(a) $2,100 $ 1,892 $ 1,836 Plumbing Products 1,167 1,170 1,018 Transportation Products 563 730 741 Sales $3,830 $ 3,792 $ 3,595 ====== ======= =======\nOperating Income (Loss) Before Income Taxes, Extraordinary Loss, and Cumulative Effects of Changes in Accounting Methods\nYear Ended December 31, 1993 1992 1991 (Dollars in millions) Air Conditioning Products(a) $133 $ 104 $ 55 Plumbing Products 108 108 66 Transportation Products 41 88 121 Operating income 282 300 242\nInterest expense (278) (289) (286) Corporate items(b) (85) (63) (44) Loss before income taxes, extraordinary loss, and cumulative effects of changes in accounting methods $(81) $ (52) $ (88) ==== ===== =====\n(a) For 1991 the amounts presented for Air Conditioning Products include the following amounts for Tyler Refrigeration (which was sold on September 30, 1991): sales of $99 million and operating loss of $18 million (including a $22 million loss on the sale).\n(b) Corporate items include administrative and general expenses, accretion charges on postretirement benefit liabilities, minority interest, foreign exchange transaction gains and losses, and miscellaneous income and expense.\nThe following section summarizes the Company's consolidated results of operations and then discusses the results of its three operating segments. The Company's businesses are cyclical. Air Conditioning Products and Plumbing Products are particularly affected by the level of residential and commercial building activity.\nThe following table presents a summary of statistics on U.S. non-residential construction activity and housing starts for the years 1989 through 1993.\nU.S. Non- Residential Contract Awards U.S. Housing (Millions % Change Starts % Change of square Year (Thousands of Year feet)(a) to Year units)(b) to Year 1989 1,322 - 1% 1,376 - 8% 1990 1,155 -13% 1,193 -13% 1991 953 -17% 1,015 -15% 1992 903 - 5% 1,200 +18% 1993 (c) 930 + 3% 1,290 + 7%\n(a) Source: F.W. Dodge Division, McGraw Hill, Inc.\n(b) Source: U.S. Department of Commerce, Bureau of Census.\n(c) Preliminary data.\nThe market for replacement sales and servicing of air conditioning and plumbing products, which accounts for a substantial portion of sales for Air Conditioning Products and Plumbing Products, is less cyclical and sometimes countercyclical.\nThe following table presents a summary of statistics on unit production of trucks, buses, and trailers in excess of six tons in Western Europe for the years 1989 through 1993 (units in thousands).\nWestern Europe % Change Western Europe % Change Truck and Bus Year Trailer Year Production(a) to Year Production(a) to Year\n1989 376 4% 125 9% 1990 343 -9% 128 2% 1991 353 3% 139 9% 1992 314 -11% 115 -17% 1993 223 -29% 88 -23%\n(a) Principal sources: Verband der Deutschen Automobilindustrie (Germany); Society of Motor Manufacturers and Traders (United Kingdom); and Chambre Syndicate des Constructeurs Automobiles (France).\n1993 Compared with 1992\nU.S. housing starts increased by 7% in 1993 from the 1992 level, which was up 18% over 1991 after four consecutive years of decline. U.S. non-residential contract awards increased by 3% in 1993 after five years of decline. The 1993 improvement in housing starts came in the second half of the year with third- and fourth-quarter starts up 10% and 12%, respectively, over the preceding quarter. The gain in non-residential awards occurred over the last nine months of 1993. Western European truck and bus production declined 29% in 1993 after an 11% decline in 1992. However, the rate of decline in the truck market slowed in the fourth quarter of 1993.\nConsolidated sales for 1993 were $3.83 billion, an increase of 1% (6% excluding the unfavorable effects of foreign exchange) over the $3.79 billion for 1992. A sales increase of 11% for Air Conditioning Products was partly offset by a sales decline for Transportation Products of 23% (16% excluding the unfavorable effects of foreign exchange). Sales for Plumbing Products were flat (but up by 9% excluding the effects of foreign exchange).\nOperating income for 1993 was $282 million, a decrease of $18 million, or 6% (but an increase of less than 1% excluding the effects of foreign exchange), from $300 million in 1992. The increase in operating income of 28% for Air Conditioning Products was more than offset by a 53% decrease in operating income for Transportation Products. Plumbing Products' operating income was flat (but increased 15% excluding the effects of foreign exchange). The gain for Air Conditioning Products was the result of higher volume, increased sales of higher-margin products, the benefits of manufacturing improvements, and the effects of restructuring and cost-containment efforts undertaken in 1991 and 1992, offset partly by the costs of further restructuring in 1993. For Plumbing Products the effects of increased volume for the Far East Group were offset partly by lower margins for the U.S. group and lower volumes and unfavorable foreign exchange effects for the European group. Transportation Products' operating income decreased primarily as a result of lower volumes due to reduced demand in depressed markets in Europe, offset partly by the effects of improvements in manufacturing efficiency.\nAir Conditioning Products Segment\nYear Ended December 31, 1993 1992 1991 (Dollars in millions)\nSales: Domestic portion $1,786 $1,572 $1,453 Foreign portion 314 320 284 Subtotal 2,100 1,892 1,737 Tyler Refrigeration - - 99 Total $2,100 $1,892 $1,836 ====== ====== ======\nOperating income (loss): Domestic portion $ 148 $ 112 $ 58 Foreign portion (15) (8) 15 Subtotal 133 104 73 Tyler Refrigeration - - (18)(a) Total $ 133 $ 104 $ 55 ====== ====== ======\nAssets $1,167 $1,156 $1,174 Goodwill and purchase accounting adjustments included in assets 372 398 417 Capital expenditures 38 33 46(b) Depreciation and amortization 53 55 56(c)\n(a) Includes $22 million loss on the sale of Tyler Refrigeration.\n(b) Includes capital expenditures of Tyler Refrigeration of $1 million.\n(c) Includes depreciation and amortization of Tyler Refrigeration of $3 million.\nThe domestic portion of Air Conditioning Products is composed of the Unitary Products Group, the Commercial Systems Group (excluding Canada), and exports from the United States by the International Group. The foreign portion consists of the foreign-based operations of the International Group and the Canadian operations of the Commercial Systems Group.\nSales and operating income of Air Conditioning Products both increased in 1993 despite the continuing recession in U.S. and Canadian commercial new construction and only moderate increase in residential new construction in the U.S. and despite the economic decline in Europe. Sales of Air Conditioning Products, which accounted for approximately 55% of the Company's 1993 sales, increased by 11% (with little effect from foreign exchange) to $2,100 million in 1993 from $1,892 million in 1992. There was a significant sales increase for each of the three operating groups.\nOperating income of Air Conditioning Products increased year to year by 28% (with little effect from foreign exchange) to a record high of $133 million in 1993 from $104 million in 1992. The increase was attributable to gains achieved by all three groups.\nUnitary Products Group\nIn 1993 sales of the Unitary Products Group, which accounted for approximately 42% of Air Conditioning Products sales, increased by 15% over the 1992 sales level. Residential markets were up 15%, as a result of an unusually hot summer in the northern United States and a 7% increase in housing starts. Sales of residential products increased by 18% year over year, principally because of higher volumes driven by the improved market, increased furnace sales in the replacement market, and a shift in the market to more efficient products, offset partly by the continuation from 1992 of price degradation due to competitive pressures. Commercial markets for unitary products were up 9% overall from the 1992 markets, as the commercial replacement market strengthened further. New-construction activity continued to struggle, however. Sales of commercial unitary products increased by 10% overall, primarily as a result of higher volume (driven by the strong replacement market for both light and large commercial products); a shift to higher-priced, higher-tonnage products; and a gain in market share for light commercial products due to the success of the large Voyager products (packaged rooftop air conditioners). As a result of these factors, together with product cost improvements, improved labor productivity, and the benefits of organizational restructuring which reduced the salaried workforce in 1992, the operating income for Unitary Products in 1993 increased by 43% year over year. This improvement was achieved even though 1993 included the initial start-up costs of the new national distribution center in St. Louis, Missouri, and higher advertising costs.\nUnitary Products' sales increased through the success of new and redesigned products introduced recently and improved distribution channels. Commercial products that were introduced included the 20-to-25-ton Voyager products in 1992, which more than doubled market share in that size range; commercial microprocessor-controlled products; a line of convertible air handlers; and rooftop and air cooled chiller products using more efficient scroll compressors. Residential products introduced included the American-Standard brand outdoor units and new lines of luxury and conventional retail residential products.\nCommercial Systems Group\nSales of the Commercial Systems Group, which accounted for approximately 37% of Air Conditioning Products' sales, increased 10%, primarily on volume increases for most product lines, especially air handling systems and water chillers (principally due to improved replacement markets and increased market share), and increased revenue from Company-owned sales offices (acquisitions and volume growth). These gains were partly offset by lower volume in Canada, which continues to be adversely affected by recession. The non-residential new-construction market increased 3% in the United States in 1993, following decreases of 5% in 1992 and 17% in 1991. The non-residential replacement market was up by 6% over 1992.\nOperating income for Commercial Systems increased 12% in 1993 over the recession-affected amount of 1992. The increase was primarily the result of volume gains, improvements in manufacturing efficiency, operating expense reductions, and the benefits of restructuring actions taken in 1992. The effects of these factors were partly offset by slightly lower prices, increases in material, labor, and benefit costs, the costs of additional restructuring actions in 1993, and a larger loss in the weak Canadian market.\nProduct development emphasis for Commercial Systems in 1993 and 1992 was on new compressor, heat transfer and microelectronic control technology; adaptation of products to refrigerants that comply with recent government regulations; energy-efficient products; products for the aftermarket and replacement market (which exceeded the new-construction market in both 1993 and 1992); and products redesigned to improve manufacturing productivity. This strategy benefited operations in 1993 and 1992, and the Company expects that this product development emphasis will result in greater sales over the next several years.\nInternational Group\nSales of Air Conditioning Products' International Group, which accounted for approximately 21% of Air Conditioning Products' 1993 sales, increased 7% from those of 1992 (10% excluding the unfavorable effect of foreign exchange). Most of the gain was from higher volume in the Far East (especially Hong Kong, Taiwan, and export sales from the U.S.) resulting from expanded markets and increased penetration; higher export sales from the U.S. to the Middle East (markets were significantly stronger) and Latin America (improved penetration in a market that was up 20%); and higher volumes in Mexico. These gains were partly offset by lower sales in Europe (lower prices and volumes in a declining market). Markets were down in all European countries except the U.K., but the effect was partly offset by increased revenues from service companies acquired in 1992 and prior years. Market growth in the Far East was 6% overall, led by the PRC market, which was up by 21%. The sales growth in Hong Kong was driven by the very strong market in the PRC. Markets in Thailand also grew, and the Latin American market grew by 20%.\nOperating income for the International Group increased by approximately 39% in 1993. The increase was primarily the result of higher export sales from the U.S. to the Middle East and Far East, offset partly by a larger operating loss in Europe primarily because of the weak markets and lower margins, costs related to restructuring in response to the lower markets, and the unfavorable effects of lower volume on factory performance. Overall, income from the Far East and Latin America was essentially unchanged from the prior year, as volume gains were offset by increased costs related to expansion of distribution channels and joint ventures and development of new and improved products to support present and future growth.\nEnvironmental Matters\nFor a discussion of environmental matters see \"Business -- Regulations and Environmental Matters.\"\nBacklog\nThe worldwide backlog for Air Conditioning Products at the end of 1993 was $407 million, up 13% from 1992, excluding the effects of foreign exchange. The backlog increased as a result of increased volume for the Commercial Systems Group, market penetration and improved distribution channels in the Middle East and Far East, and sales growth for commercial Unitary Products.\nPlumbing Products Segment\nYear Ended December 31, 1993 1992 1991 (Dollars in millions)\nSales: Foreign portion $ 865 $ 885 $ 783 Domestic portion 302 285 235 Total $1,167 $1,170 $1,018 ====== ====== ====== Operating income (loss): Foreign portion $ 131 $ 124 $ 93 Domestic portion (23) (16) (27) Total $ 108 $ 108 $ 66 ====== ====== ======\nAssets $ 960 $1,002 $1,069 Goodwill and purchase accounting adjustments included in assets 376 392 447 Capital expenditures 46 48 40 Depreciation and amortization 49 49 48\nThe foreign portion of Plumbing Products is composed of the European Plumbing Products Group, the Americas International Group, and the Far East Group. The domestic portion of sales and operating results is generated primarily by the U.S. Plumbing Products Group and by export sales from the U.S.\nSales of Plumbing Products in 1993, at $1,167 million, which accounted for approximately 30% of the Company's 1993 sales, were at essentially the same level as the $1,170 million of sales in 1992 (but increased by 9% excluding the unfavorable effects of foreign exchange). Sales increases of 42% for the Far East Group (46% excluding foreign exchange), 9% for the Americas International Group (14% excluding foreign exchange), and 6% for the U.S. Plumbing Products Group were offset partly by a sales decrease of 10% for the European Plumbing Products Group (which had a 4% increase excluding the effects of foreign exchange).\nIn 1993 operating income of Plumbing Products was $108 million, the same amount as in 1992, but excluding the unfavorable effects of foreign exchange operating income increased by 15%. The increase (on an exchange-adjusted basis) was attributable primarily to increased profitability for the Far East Group and for the Americas International Group, offset partly by a decline for the U.S. group.\nEuropean Plumbing Products Group\nSales of the European group, which accounted for approximately 51% of Plumbing Products' sales for 1993, decreased 10% in 1993 from 1992 but increased by 4% excluding the unfavorable effects of foreign exchange. The exchange-adjusted gain resulted from price increases, especially in Italy, Germany, the U.K., and Greece, offset partly by lower volume in most countries because of depressed markets. In Italy sales were up with price increases for most product lines, offset partly by lower volume and a less favorable product mix. The German market was stable in total, as price gains were offset by volume and mix declines. Greece, which had been in recession for three years, recovered somewhat in 1993. The European group's strength has been sales in the replacement market, which has more than made up for the effects of poor new-construction markets.\nOperating income for the European group decreased 7% but increased 10% excluding the effects of foreign exchange. This increase occurred primarily because of the price gains and cost reductions resulting from restructuring and efficiency improvements in the U.K., France, Italy, and Germany. Partly offsetting those favorable effects were the effects of lower volumes and the unfavorable effect on margins caused by the decline in value of many European currencies agains the Deutschemark. The increased cost of fittings purchased from Germany could not be completely recovered through sales price increases in most of the operations in other countries.\nU.S. Plumbing Products Group\nSales of the U.S. group, which accounted for approximately 26% of total 1993 Plumbing Products sales, increased 6% in 1993. During 1993 the U.S. building industry continued to be adversely affected by the low level of new construction, although non-residential construction increased 3% from 1992 and new residential construction continued to recover from the lowest levels since the mid-1940's (up by 7% in 1993 and 18% in 1992 but\nstill below pre-1990 levels). A basic shift from wholesale distribution channels to retail channels has been developing over the last few years, a trend the Company believes will continue and will be beneficial to the Company because of strong product and brand-name recognition. Retail markets now account for 20% of the total sales of the U.S. group. The growth of sales for the U.S. group was largely the result of increased export sales from the U.S. and to a lesser extent price increases on certain products, a more favorable sales mix, and a small increase in the growing retail channel business. The overall gain in the retail business was small because significant volume gains due to an expanding customer base were partly offset by the loss of an important customer.\nThe operating loss for the U.S. group in 1993 was greater than that of the prior year. Despite higher sales, operating results were poorer primarily because of lower margins on both domestic and export sales, increased advertising costs and other expenses associated with expansion of the retail distribution channel, costs related to start-up and expansion of the low-water-volume toilet line (now mandated for new construction), and factory performance problems caused in part by the effects of fluctuating volumes. In addition, costs were incurred in business system re-engineeering activities intended to improve customer service.\nAmericas International and Far East Groups\nCombined sales of the Americas International and Far East Groups, which accounted for approximately 23% of total Plumbing Products sales, increased 21% in 1993 (26% excluding the effects of foreign exchange). The sales gain was due primarily to the consolidation of Incesa (a previously unconsolidated group of Central American joint ventures) effective January 1, 1993, as a result of the purchase of additional shares of stock, and to higher volume and prices in Thailand, the PRC, the Philippines, and Brazil, offset partly by decreases in sales in Mexico, Canada, and Korea.\nCombined operating income of the Americas International and Far East Groups in 1993 increased 72% over the 1992 level. Gains were realized in all operations except Mexican chinaware operations, which were adversely affected by poor economic conditions and the uncertainty related to the North American Free Trade Agreement. The increase was primarily from higher prices and volumes in Brazil, Thailand, and the PRC the consolidation of Incesa, and a smaller loss for Mexican fittings operations.\nEnvironmental Matters\nFor a discussion of environmental matters see \"ITEM 1. BUSINESS -- Regulations and Environmental Matters.\"\nBacklog\nPlumbing Products' year-end 1993 backlog of $143 million was down 9% from 1992, excluding foreign exchange effects. The decrease resulted from a significant drop for European Plumbing Products (particularly Italy because of economic uncertainty, tempered somewhat by increases for England and Germany), and a drop in backlog for export sales from the U.S., partly offset by increases in the Far East (primarily Thailand).\nTransportation Products Segment\nYear Ended December 31, 1993 1992 1991 (Dollars in millions)\nSales $ 563 $730 $741 Operating income 41 88 121 Assets 652 722 828 Goodwill and purchase accounting adjustments included in assets 422 458 510 Capital expenditures 14 27 24 Depreciation and amortization 35 37 34\nSales of Transportation Products, which accounted for 15% of the Company's 1993 sales, were $563 million, down 23% from $730 million in 1992 (16% excluding the effects of foreign exchange). The sales decrease was due primarily to a volume decline in Germany as a result of a 29% decrease in Western European truck and bus production, led by a 34% decline in Germany, and a 23% decrease in Western European trailer production. Volumes were also down in all other European countries in which Transportation Products has operations, although at the end of 1993 sales and order trends were upward. Volume in Brazil was slightly higher. Original equipment sales volume in Europe was down 22%, and aftermarket business was down 10%. These declines affected both conventional and electronic products.\nOperating income for Transportation Products in 1993 decreased 53% (50% excluding foreign exchange effects) to $41 million from $88 million in 1992, principally because of the lower sales and production volume and the inability to pass on material and labor cost increases in a very competitive, declining market. In response to reduced production levels, plant employment was reduced by 15%, the costs of which further depressed 1993 operating income. Those effects were partly offset by the favorable effects of cost improvements in manufacturing from Demand Flow implementa- tion and reduced operating expenses.\nDespite the market downturn, significant progress was made during 1993 in obtaining market acceptance of electronically controlled air suspension systems for commercial vehicles and for antilock braking systems on trailers.\nBacklog\nTransportation Products' year-end 1993 order backlog of $185 million was 2% lower than the 1992 year-end backlog, excluding the effects of foreign exchange, as a result of the poor market conditions.\nFinancial Review\n1993 Compared with 1992\nThe Company's financing and corporate costs were $363 million and $352 million in 1993 and 1992, respectively. The principal causes of the increase were effects of year-to-year changes in foreign exchange transaction gains and losses, higher minority interest, lower equity income, higher accretion expense on postretirement benefits, and lower miscellaneous income. Interest expense, which accounted for most of these costs, decreased primarily because of lower overall interest rates on new debt issued as part of the Refinancing (described below), partly offset by additional interest expense as a result of the exchange of the 12-3\/4% Exchangeable Preferred Stock for the 12-3\/4% Junior Subordinated Debentures.\nThe tax provision for 1993 was $36 million despite a pre-tax loss of $81 million, whereas in 1992 the tax provision was $5 million on a pre-tax loss from continuing operations of $52 million. The 1993 provision reflected taxes payable on profitable foreign operations and was higher than in 1992 primarily because no tax benefits were available on domestic losses. The unusual relationship between the pre-tax losses and the tax provision is explained by the nondeductibility for tax purposes of the amortization of goodwill and other purchase accounting adjustments and the share allocations made by the Company's ESOP as well as by tax rate differences and withholding taxes on foreign earnings.\nAs a result of the Refinancing in 1993 there was an extraordinary charge of $92 million related to the debt retired (including call premiums, the write-off of deferred debt issuance costs, and loss on cancellation of foreign currency swap contracts) on which there was no tax benefit.\nLiquidity and Capital Resources\nAs a result of the Acquisition the Company's capital structure became highly leveraged. Net cash flow from operations, after cash interest expense of $195 million, was $201 million for the year ended December 31, 1993. Utilizing this cash flow and cash on hand at December 31, 1992, the Company devoted $98 million to capital expenditures, including $8 million of investments in affiliated companies, and repaid $50 million of term loans.\nIn July 1993 the Company completed a refinancing (the \"Refinancing\") that included (a) the issuance of $200 million principal amount of 9-7\/8% Senior Subordinated Notes Due 2001; (b) the issuance of approximately $751 million principal amount of 10-1\/2% Senior Subordinated Discount Debentures Due 2005, which yielded proceeds of approximately $450 million; (c) the amendment and restatement of the Company's 1988 Credit Agreement (the \"1988 Credit Agreement\" and as so amended and restated, the \"Credit Agreement\") to establish a $1 billion secured, multi-currency, multi-borrower credit facility; and (d) the application of the proceeds of\nsuch issuances and such borrowings as follows: (i) the redemption on July 1, 1993, of all of the outstanding 12-7\/8% Senior Subordinated Debentures Due 2000 at a redemption price of 104.83% ($571.3 million), (ii) the redemption on July 2, 1993, of a majority of the outstanding 14-1\/4% Subordinated Discount Debentures Due 2003 at a redemption price of 105% ($389.5 million), (iii) the refunding of bank borrowings ($405 million of term loans and $77 million of other bank debt including revolving credit debt), (iv) the refunding of letters of credit ($58 million), and (v) payment of related fees and expenses.\nThe Credit Agreement provided to American Standard Inc. and certain subsidiaries (the \"Borrowers\") a $1 billion facility as follows: (a) a $250 million multi-currency revolving credit facility (the \"Revolving Credit Facility\") available to all Borrowers, which expires in 2000; (b) a $225 million multi-currency periodic access facility (the \"Periodic Access Facility\") available to all Borrowers, which expires in 2000; and (c) three term loan facilities (the \"Term Loans\") consisting of a $225 million U.S. dollar facility available to American Standard Inc., which expires in 2000; a $200 million Deutschemark facility available to a German subsidiary, which expires in 1997; and a $100 million U.S. dollar facility available to all Borrowers, which expires in 1999. In August 1993 the Company repaid $50 million, and the amount available under the Credit Agreement by its terms was reduced to $950 million.\nThe Company is required to reduce to $50 million the amount of borrowings outstanding under the Revolver for at least 30 consecutive days in each 12-month period ending May 31. In December 1993 the Company met this requirement for the 12 months ending May 31, 1994. Commencing August 31, 1994, the Revolver is reduced by $8.3 million annually, with a final maturity on June 1, 2000. In addition, the Company is required to repay the full amount of each of its outstanding revolving loans at the end of each interest period (a maximum of six months). The Company may, however, immediately reborrow such amounts subject to compliance with applicable conditions of the Credit Agreement.\nThe Credit Agreement provides the Company with increased operating and financial flexibility, including the ability to shift from time to time a portion of borrowings among borrowers and currencies. As a result of the Refinancing there was a significant reduction in annual interest expense, which was partly offset by additional interest expense on the 12-3\/4% Junior Subordinated Debentures exchanged for the 12-3\/4% Exchangeable Preferred Stock. The Company believes that the amounts available from operating cash flows and under the Revolving Credit Facility will be sufficient to meet its expected cash needs, including planned capital expenditures.\nAs described in Note 8 of Notes to Consolidated Financial Statements, the Credit Agreement contains various covenants that limit, among other things, indebtedness, dividends on and redemptions of capital stock of the Company, purchases and redemptions of other indebtedness of the Company (including its outstanding debentures and notes), rental expense, liens, capital expenditures, investments or acquisitions, disposal of assets, the use of proceeds from asset sales, and certain other business activities and require the Company to meet certain financial tests. In order to\nmaintain compliance with the covenants and restrictions contained in the 1988 Credit Agreement, the Company from time to time has had to obtain waivers and amendments. In February 1994 the Company obtained an amendment to the Credit Agreement that among other things relaxed certain financial tests and convenants, and facilitated the investment in an air conditioning joint venture and the formation of a holding company to establish joint ventures in the People's Republic of China for the manufacture and sale of plumbing products. The Company currently believes it will comply with the amended financial tests and covenants but may have to obtain similar amendments or waivers in the future.\nOn June 30, 1993, in exchange for all of the Company's outstanding shares of 12-3\/4% Exchangeable Preferred Stock, the Company issued $141.8 million of 12-3\/4% Junior Subordinated Debentures Due 2003 to the holder of the Exchangeable Preferred Stock. Those debentures were sold by the holder in a registered public offering in August 1993. The Company received none of the proceeds of this offering.\nThe indentures related to the Company's debentures and notes contain various covenants which, among other things, limit debt and preferred stock of the Company and its subsidiaries, dividends on and redemption of capital stock of the Company and its subsidiaries, redemption of certain subordinated obligations of the Company, the use of proceeds from asset sales, and certain other business activities.\nIn connection with examinations of the tax returns of the Company's German subsidiaries for the years 1984 through 1990, the German tax authorities have raised questions regarding the treatment of certain significant matters. The Company has paid approximately $20 million of a disputed German income tax. A suit is pending to obtain a refund of this tax. The Company anticipates that the German tax authorities may propose other adjustments resulting in additional taxes of approximately $105 million, plus penalties and interest for the tax return years under audit. In addition, significant transactions similar to those which gave rise to such possible adjustments occurred in years subsequent to 1990. The Company, on the basis of the opinion of legal counsel, believes the tax returns are substantially correct as filed and intends to vigorously contest any adjustments which have been or may be assessed. Accordingly, the Company had not recorded any loss contingency at December 31, 1993, with respect to such matters. Under German tax law the authorities may demand immediate payment of a tax assessment prior to final resolution of the issues. The Company also believes, on the basis of opinion of legal counsel, that it is highly likely that a suspension of payment will be obtained if additional taxes are assessed. However, if payment is required the Company expects that it will be able to meet such payment from available sources of liquidity or credit support but that future cash flows and capital expenditures, and therefore subsequent results of operations for any particular quarterly or annual period, could be adversely affected.\nCapital Expenditures\nThe Company's capital expenditures for 1993 amounted to $98 million, including investments of $8 million in affiliated companies. The amount\nof capital expenditures was $10 million less than in 1992 ($6 million less excluding the effects of foreign exchange). Decreases in capital spending by Plumbing Products and Transportation Products were partly offset by an increase in spending by Air Conditioning Products. The Company believes capital spending was sufficient for maintenance purposes, for important product and process redesigns, for expansion projects, and for strategic investments.\nCapital expenditures by Air Conditioning Products were $38 million in 1993. This amount was 15% more than that of 1992. Capital expenditures in 1993 included continuing projects related to Demand Flow and spending on new products such as the Voyager III (medium-tonnage product line), the scroll compressor, and the Series R chiller line, expansion of Voyager I and Voyager II capacity and tooling and equipment for the American Standard product line.\nPlumbing Products' capital expenditures in 1993 were $46 million, including investments of $8 million in affiliated companies in France (Porcher) and the Czech Republic. Excluding the investments in affiliated companies and the effects of foreign exchange, capital spending was 34% higher than in 1992 as a result of spending increases in Europe and the Far East. Major projects included capacity expansion in Thailand and China and various projects related to Demand Flow implementation.\nCapital expenditures for Transportation Products totaled $14 million in 1993. Excluding the effects of foreign exchange, capital spending was 41% less than in 1992, a year with significant spending related to Demand Flow cost-reduction projects in production and material flow.\n1992 Compared with 1991\nU.S. housing starts increased by 18% in 1992 from the 1991 level, but non-residential contract awards decreased by 5%. Both of these economic indicators had declined in each of the previous four years.\nConsolidated sales for 1992 were $3.8 billion, an increase of 5% (4% excluding the favorable effects of foreign exchange) over the $3.6 billion for 1991. The 1991 amount included the sales of Tyler Refrigeration, which was sold September 30, 1991. Excluding Tyler Refrigeration, sales in 1992 were up 8% (7% excluding foreign exchange effects). Sales increases of 15% for Plumbing Products and 9% for Air Conditioning Products (excluding Tyler Refrigeration) were partly offset by a sales decline for Transportation Products of 1% (6% excluding the favorable effects of foreign exchange).\nOperating income for 1992 was $300 million, an increase of $58 million, or 24% (19% excluding the effects of foreign exchange), from $242 million in 1991. The 1991 amount included a loss for Tyler Refrigeration. Excluding Tyler Refrigeration, operating income in 1992 was up 15% (10% excluding foreign exchange effects.) Increases in operating income of 42% for Air Conditioning Products (excluding Tyler Refrigeration) and 64% for Plumbing Products were partly offset by a 27% decrease in operating income for Transportation Products.\nExcept as otherwise indicated, the following discussion, including the financial comparisons, does not include the results of Tyler Refrigeration or the $22 million loss on the sale of Tyler Refrigeration in 1991.\nAir Conditioning Products Segment\nSales of Air Conditioning Products, which accounted for approximately 50% of the Company's 1992 sales, increased by 9% to $1,892 million in 1992 from $1,737 million in 1991. There was a significant sales increase for each of the three operating groups -- for the Unitary Products Group in both residential and commercial products primarily because of higher volume and more favorable product mix (partly offset by lower prices), for the Commercial Systems Group primarily because of higher volume and prices, and for the International Group principally because of increased volume in Europe and the Far East.\nOperating income of Air Conditioning Products increased year to year by 42% (with little effect from foreign exchange) to $104 million in 1992 from $73 million in 1991. The increase was attributable to the sales gains, the benefits of manufacturing improvements and restructuring and cost containment in the Unitary Products and Commercial Systems Groups, and the fact that in 1991 results of the Commercial Systems Group had been adversely affected by a 54-day work stoppage at its LaCrosse, Wisconsin, facility. The impact of these factors was partly offset by a margin decline for the International Group and costs related to the start-up of new facilities, sales offices, and distribution channels.\nUnitary Products Group\nSales in 1992 of the Unitary Products Group, which accounted for approximately 41% of Air Conditioning Products sales, increased by 6% over the 1991 sales level. Commercial markets for unitary products were up 6% overall from the depressed 1991 markets, as a very strong commercial replacement market more than offset the effects of low new-construction activity. Sales of commercial unitary products increased by 7% overall, primarily as a result of higher volume (driven by the strong replacement market), a shift to higher-priced, higher-tonnage products, and a gain in market share for light commercial products. Residential markets were down 3.5%, as poor replacement activity, a result of an unseasonably cool summer, more than offset the 18% increase in new housing starts. Despite this poorer market, sales of residential products increased by 5% year over year, principally because of larger market share, improved furnace markets, and a partial shift in the market to more efficient products stimulated by Federal standards, offset partly by price degradation due to competitive pressures. As a result of these factors, together with benefits of manufacturing improvements, cost containment, and organizational restructuring which reduced the salaried workforce, the operating profit for Unitary Products in 1992 increased by 50% from the depressed level of 1991.\nCommercial Systems Group\nSales of the Commercial Systems Group, which accounted for approximately 38% of Air Conditioning Products' sales, increased 9% primarily on volume increases in aftermarket replacement and parts sales, increased revenue from Company-owned sales offices (volume growth and acquisitions), and small price increases on most product lines. Other factors contributing to the increase were higher sales of large applied systems and the fact that in 1991 there was a 54-day work stoppage at the LaCrosse, Wisconsin, plant. These gains were partly offset by lower volume in Canada, which was adversely affected by recession.\nOperating income for Commercial Systems increased 129% in 1992 over the recession-affected and work-interrupted level of 1991. The increase was primarily the result of the volume and price gains, improvements in manufacturing efficiency, cost containment and restructuring, and the fact that 1991 included the adverse impact of the LaCrosse work stoppage. The effects of these factors were partly offset by slightly lower gross margins, as the price increases did not completely recover increases in material, labor and benefits costs.\nInternational Group\nSales of Air Conditioning Products' International Group, which accounted for approximately 21% of Air Conditioning Products' 1992 sales, increased 15% from those of 1991 (10% excluding the favorable effect of foreign exchange). Most of the gain was from higher volumes in Mexico (two new sales offices resulted in expanded distribution and penetration), the Far East (especially Hong Kong and Singapore), the Middle East (markets were significantly stronger), and Europe (sales of new products and increased penetration despite declining markets). Markets were down in almost all European countries except Italy, with the largest drop in the U.K., offset partly by increased revenues from acquired service companies.\nOperating income for the International Group decreased by approximately 68% in 1992. The decline occurred in Europe, primarily because of the weak markets and lower prices, costs related to the start-up of new facilities and new distribution networks in the U.K. and France, costs related to the introduction of new products, start-up costs of a company in Spain acquired near the end of 1991, and foreign exchange transaction losses from currency fluctuations in the latter half of 1992. Income from the Far East and Latin America was essentially unchanged from the prior year, as volume gains were offset by increased costs related to expanded distribution channels, start-up of new joint ventures, and development of new and improved products to support present and future growth.\nPlumbing Products Segment\nSales of Plumbing Products, which accounted for approximately 31% of the Company's 1992 sales, increased by 15% in 1992 (14% excluding the effects of foreign exchange) to $1,170 million from $1,018 million in 1991. The improvement resulted from sales increases of 9% (7% excluding the effects of foreign exchange) for the European Plumbing Products Group, 21% for the U.S. Plumbing Products Group, 4% for the Americas International Group (7% excluding foreign exchange), and 101% for the Far East Group (98% excluding foreign exchange).\nIn 1992 operating income of Plumbing Products increased 64% (56% excluding the effects of foreign exchange) to $108 million from $66 million in 1991. The increase was attributable primarily to increased profitability for the European group on higher prices and volumes (especially in Italy and Germany) although improved results in the U.S., Americas International, and Far East groups contributed.\nEuropean Plumbing Products Group\nSales of the European group, which accounted for approximately 57% of Plumbing Products' sales for 1992, increased 9% in 1992 over 1991, 7% excluding the favorable effects of foreign exchange. The gain resulted primarily from price and volume increases, especially in Italy and Germany, offset partly by lower volume in France from declining demand and lower prices in the U.K. caused by a very poor market. In Italy sales were up 9%, with gains for most product lines in price, volume and market share. The gains in Germany were the result of higher volumes and prices for brass fittings and luxury chinaware.\nOperating income for the European group increased 28% (23% excluding the effects of foreign exchange) primarily from the price and volume gains in Italy and Germany and higher margins on German brass operations resulting from improved manufacturing processes and cost containment, offset partly by lower profitability in France because of decreased volume and in the U.K. because of the recession. A recession depressed operating results in Greece.\nU.S. Plumbing Products Group\nSales of the U.S. group, which accounted for approximately 24% of total 1992 Plumbing Products sales, increased 21% in 1992. During 1992 the U.S. building industry continued to be severely affected by the low level of new construction, with non-residential construction down 5% from 1991 and with new residential construction recovering from the lowest levels since the mid-1940's (though up by 18%, it was still low in historical terms). The U.S. market for plumbing products was up an estimated 3% to 4%, with more than half the gain occurring in the replacement and remodeling markets, which accounts for about 60% of the total U.S. market. The growth of sales for the U.S. group was largely a result of the strength of retail business (which had a significant\nincrease in volume and accounted for 20% of sales of the U.S. group in 1992) and increased export sales from the U.S., together with smaller gains resulting from price increases and higher wholesaler distribution sales. Sales of AMERICAST products more than doubled in 1992, and smaller volume gains were achieved for acrylic products, fixtures, and faucets.\nThe operating loss for the U.S. group in 1992 was less than that of the prior year. The improvement was primarily due to price increases and secondarily to volume and margin gains (as a result of sourcing product from the Company's Latin American plants), offset partly by non-recurring costs related to implementation of improved manufacturing processes and the effects of a shift in overall sales mix from commercial and luxury to lower-margin products.\nAmericas International and Far East Groups\nCombined sales of the Americas International and Far East Groups, which accounted for approximately 19% of total Plumbing Products sales, increased 26% in 1992 (28% excluding the effects of foreign exchange). The sales gain was due primarily to the consolidation in 1992 of a previously unconsolidated joint venture in Thailand and to a lesser extent to price and volume increases in Mexico and Korea and higher volumes in Brazil, offset partly by lower sales in Canada, which were adversely affected by severe recession.\nCombined operating income of the Americas International and Far East Groups in 1992 increased 134% over the 1991 level. Gains were realized in all operations except Canada and the Philippines, both of which were adversely affected by poor economies. The increase was primarily from price and volume gains in Mexico and Korea, higher volume and margins in Brazil, and higher volume in China.\nTransportation Products Segment\nSales of Transportation Products, which accounted for 19% of the Company's 1992 sales, were $730 million, down 1% from $741 million in 1991 (6% excluding the effects of foreign exchange). The sales decrease was due primarily to a volume decline in Germany as a result of a significant decrease in truck and bus production. Volumes were also down in nearly all other European countries in which Transportation Products has operations except the U.K. There was also a decline in prices of electronic control products, primarily as a result of industry cost reductions.\nOperating income for Transportation Products in 1992 decreased 27% (32% excluding foreign exchange effects) to $88 million from $121 million in 1991, principally because of the lower sales and production volume, lower prices, and increased spending for product engineering. Plant employment was kept in line with reduced production levels, but the costs associated with these reductions also depressed 1992 operating income. Those effects were partly offset by the favorable effects of cost reductions and increases in efficiency achieved in manufacturing operations.\nFinancial Review\n1992 Compared with 1991\nThe Company's financing and corporate costs were $352 million and $330 million in 1992 and 1991, respectively. The principal causes of the increase were year-to-year effects of changes in foreign exchange transaction gains and losses, higher minority interest, and lower miscellaneous income. Interest expense and accretion expense on postretirement benefits, which accounted for most of these costs, also increased.\nThe tax provision for 1992 was $5 million despite a pre-tax loss of $52 million, whereas in 1991 the tax provision was $23 million on a pre-tax loss from continuing operations of $88 million. The 1992 provision reflected taxes payable on profitable foreign operations offset partly by available domestic tax benefits. The 1992 provision was lower than in 1991 primarily because of lower pre-tax earnings in foreign operations. In 1992 the provision was also lower because of future income tax benefits resulting from carrybacks of foreign net operating losses and the existence of deferred tax credits which reverse in the carryforward period applicable to other foreign net operating losses. The unusual relationship between the pre-tax losses and the tax provision is explained by the nondeductibility for tax purposes of the amortization of goodwill and other purchase accounting adjustments and the share allocations made by the Company's ESOP as well as by tax rate differences and withholding taxes on foreign earnings.\nITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA\nRESPONSIBILITY FOR FINANCIAL STATEMENTS\nThe accompanying consolidated balance sheets at December 31, 1993 and 1992, and related consolidated statements of operations, stockholder's equity (deficit), and cash flows for the years ended December 31, 1993, 1992 and 1991, have been prepared in conformity with generally accepted accounting principles, and the Company believes the statements set forth a fair presentation of financial condition and results of operations. The Company believes that the accounting systems and related controls that it maintains are sufficient to provide reasonable assurance that the financial records are reliable for preparing financial statements and maintaining accountability for assets. The concept of reasonable assurance is based on the recognition that the cost of a system of internal control must be related to the benefits derived and that the balancing of those factors requires estimates and judgment. Reporting on the financial affairs of the Company is the responsibility of its principal officers, subject to audit by independent auditors, who are engaged to express an opinion on the Company's financial statements. The Board of Directors has an Audit Committee of non-employee Directors which meets periodically with the Company's financial officers, internal auditors, and the independent auditors and monitors the accounting affairs of the Company.\nAmerican Standard Inc.\nNew York, New York March 14, 1994\nREPORT OF ERNST & YOUNG, INDEPENDENT AUDITORS\nThe Board of Directors American Standard Inc.\nWe have audited the accompanying consolidated balance sheets of American Standard Inc. and subsidiaries as of December 31, 1993 and 1992, and the related consolidated statements of operations, stockholder's equity (deficit), and cash flows 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.\nWe conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.\nIn our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of American Standard Inc. and subsidiaries at December 31, 1993 and 1992, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1993, in conformity with generally accepted accounting principles.\n\/s\/Ernst & Young\nErnst & Young\nNew York, New York March 14, 1994\nAMERICAN STANDARD INC. AND SUBSIDIARIES\nCONSOLIDATED STATEMENT OF OPERATIONS (Dollars in thousands)\nYear Ended December 31, 1993 1992 1991\nSales $3,830,462 $3,791,929 $3,595,267 Costs and expenses Cost of sales 2,902,562 2,852,230 2,752,068 Selling and administrative expenses 692,229 678,742 614,259 Other expense 38,281 24,672 8,082 Interest expense (includes debt issuance cost amortization of $11,461 for 1993, $5,983 for 1992 and $5,335 for 1991) 277,860 288,851 286,316 Loss on sale of Tyler Refrigeration - - 22,391 3,910,932 3,844,495 3,683,116 Loss before income taxes, extra- ordinary loss and cumulative effects of changes in accounting methods (80,470) (52,566) (87,849) Income taxes 36,165 4,672 23,033 Loss before extraordinary loss and cumulative effects of changes in accounting methods (116,635) (57,238) (110,882) Extraordinary loss on retirement of debt (Note 8) (91,932) - - Cumulative effects of changes in accounting methods (Notes 2 and 3) - - (32,291)\nNet loss (208,567) (57,238) (143,173)\nPreferred dividend (8,624) (15,707) (13,855)\nNet loss applicable to common shares $ (217,191) $ (72,945) $ (157,028) ========== ========== ==========\nSee notes to consolidated financial statements.\nAMERICAN STANDARD INC. AND SUBSIDIARIES\nCONSOLIDATED BALANCE SHEET (Dollars in thousands)\nASSETS At December 31, 1993 1992 Current assets Cash and certificates of deposit $ 53,237 $ 111,549 Cash in escrow 932 1,722 Accounts receivable, less allowance for doubtful accounts-- 1993, $15,666; 1992, $12,827 507,322 468,731 Inventories 325,819 384,857 Future income tax benefits 24,562 33,192 Other current assets 29,811 31,199 Total current assets 941,683 1,031,250 Facilities, at cost net of accumulated depreciation 820,523 832,811 Other assets Goodwill, net of accumulated amortization -- 1993, $169,879; 1992 $141,858 1,025,774 1,101,716 Debt issuance costs, net of accumulated amortization-- 1993 $9,670; 1992, $77,776 78,102 51,308 Prepaid ESOP expense 4,331 9,527 Other 120,997 109,333 $2,991,410 $3,135,945 ========== ==========\nLIABILITIES AND STOCKHOLDER'S DEFICIT\nCurrent liabilities Loans payable to banks $ 38,036 $ 99,150 Current maturities of long-term debt 105,939 13,458 Accounts payable 307,326 271,855 Accrued payrolls 99,758 105,400 Other accrued liabilities 258,322 225,335 Taxes on income 47,003 18,848 Total current liabilities 856,384 734,046 Long-term debt 2,191,737 2,032,064 Other long-term liabilities Reserve for postretirement benefits 387,038 368,868 Deferred tax liabilities 45,625 73,307 Other 204,170 212,383 Total liabilities 3,684,954 3,420,668 Commitments and contingencies Exchangeable preferred stock - 133,176 Stockholder's deficit Preferred stock, Series A, 1,000 shares issued and outstanding, par value $.01 - - Common stock, 1,000 shares issued and outstanding, par value $.01 - - Capital surplus 211,333 210,409 Accumulated deficit (750,003) (541,436) Foreign currency translation effects (149,220) (86,872) Minimum pension liability adjustment ( 5,654) - Total stockholder's deficit (693,544) (417,899) $2,991,410 $3,135,945 ========== ==========\nSee notes to consolidated financial statements.\nAMERICAN STANDARD INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS\nNote 1. Basis of Presentation\nOn March 17, 1988, American Standard Inc. and subsidiaries (the \"Company\") agreed to be acquired by an affiliate of Kelso & Company L.P. (\"Kelso\"), an investment banking firm that specializes in leveraged buyouts. On March 21, 1988, the Kelso affiliate commenced a tender offer (the \"Tender Offer\") for all of the Company's common stock at $78 per share in cash. On April 27, 1988, the Kelso affiliate completed the Tender Offer with the purchase of approximately 95% of the Company's shares.\nPursuant to an Agreement and Plan of Merger, a merger was consummated (the \"Merger\") on June 29, 1988, whereby the Company became a wholly owned subsidiary of ASI Holding Corporation, a Delaware corporation (\"Holding\") organized by Kelso to participate in the acquisition of the Company. At that time the remaining shares of the Company's common stock were converted into the right to receive cash of $78 per share. The Tender Offer, Merger, and related transactions are hereinafter referred to as the \"Acquisition.\" For financial statement purposes the Acquisition has been accounted for under the purchase method.\nNote 2. Accounting Policies\nConsolidation\nThe financial statements include on a consolidated basis the results of all majority-owned subsidiaries. All material intercompany transactions are eliminated. Investments in affiliated companies are included at cost plus the Company's equity in their net results.\nTranslation of Foreign Financial Statements\nAssets and liabilities of most foreign operations are translated at year-end rates of exchange, and the income statements are translated at the average rates of exchange for the period. Gains or losses resulting from translating foreign currency financial statements are accumulated in a separate component of stockholder's equity until the entity is sold or substantially liquidated.\nGains or losses resulting from foreign currency transactions (transactions denominated in a currency other than the entity's local currency) are included in net income. For operations in countries that have high rates of inflation, net income includes gains and losses from translating assets and liabilities at year-end rates of exchange, except for inventories and facilities, which are translated at historical rates.\nRevenue Recognition\nSales are recorded when shipment to a customer occurs.\nAMERICAN STANDARD INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS\nStatement of Cash Flows\nCash and certificates of deposit include all highly liquid investments with an original maturity of three months or less.\nInventories\nInventory costs are determined by the use of the last-in, first-out (LIFO) method on a worldwide basis, and inventories are stated at the lower of such cost or realizable value.\nFacilities\nThe Company capitalizes costs, including interest during construction, of fixed asset additions, improvements, and betterments that add to productive capacity or extend the asset life. Maintenance and repair expenditures are charged against income. Significant foreign investment grants are amortized into income over the period of benefit.\nGoodwill\nGoodwill is being amortized over 40 years.\nDebt Issuance Costs\nThe costs related to the issuance of debt are amortized using the interest method over the lives of the related debt.\nWarranties\nThe Company provides for estimated warranty costs at the time of sale. Warranty obligations beyond one year are included in other long-term liabilities.\nThe Company changed its method of accounting for revenues from extended warranty contracts at the beginning of 1991 to conform with the FASB Technical Bulletin, \"Accounting for Separately Priced Extended Warranty and Product Maintenance Contracts.\" The bulletin requires the deferral of the revenue from the sales of such contracts and amortization thereof on a straight-line basis over the terms of the contracts. The cumulative effect of this accounting change for all contracts in place as of December 31, 1990, increased the net loss in 1991 by $7 million, net of income tax benefit. The effect on the 1991 net loss, excluding the cumulative effect upon adoption, was not material.\nAMERICAN STANDARD INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS\nLeases\nThe asset values of capitalized leases are included with facilities, and the associated liabilities are included with long-term debt.\nPostretirement Benefits\nPostretirement benefits are provided for substantially all employees of the Company, both in the United States and abroad. In the United States the Company also provides various postretirement health care and life insurance benefits for some of its employees. Effective January 1, 1991, such costs are calculated in accordance with Statement of Financial Accounting Standards No. 106, \"Employers' Accounting for Postretirement Benefits Other Than Pensions\" (\"FAS 106\").\nDepreciation\nDepreciation and amortization are computed on the straight-line method based on the estimated useful life of the asset or asset group.\nResearch and Development Expenses\nResearch and development costs are expensed as incurred except for costs incurred (after technological feasibility is established) for computer software products expected to be sold. The Company expensed costs of approximately $41 million in 1993, $40 million in 1992, and $36 million in 1991 for research activities and product development. Computer software product development costs capitalized in 1993 amounted to $2 million.\nIncome Taxes\nIn 1991 the Company adopted Statement of Financial Accounting Standards No. 109, \"Accounting for Income Taxes\" (\"FAS 109\"), and elected to apply the provisions retroactively to January 1, 1989.\nThe Company recognizes deferred tax assets for the tax effects of items that will be deducted for tax purposes in later years together with the tax effects of income items included in current reporting for tax purposes but in later years for financial statement purposes and the effects of certain tax attributes such as net operating losses.\nThe Company provides for United States income taxes and foreign withholding taxes on foreign earnings expected to be repatriated. Deferred tax liabilities are provided on the excess of the financial statement basis over the tax basis of certain assets, primarily for inventories and fixed assets, including fair value adjustments resulting from purchase accounting in connection with the Acquisition; fixed assets due to accelerated depreciation deductions for tax purposes; and non-permanent investments in certain foreign subsidiaries.\nAMERICAN STANDARD INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS\nFinancial Instruments with Off-Balance-Sheet Risk\nThe Company from time to time enters into foreign currency exchange agreements in the management of foreign currency exposure. Gains and losses from exchange rate changes are included in income unless the contract hedges a net investment in a foreign entity or a firm commitment, in which case gains and losses are deferred as a component of foreign currency translation effects in stockholder's equity or included as a component of the transaction.\nNote 3. Postretirement Benefits\nThe Company sponsors postretirement benefit plans covering substantially all employees, including an Employee Stock Ownership Plan (the \"ESOP\") for the Company's U.S. salaried employees and certain U.S. hourly employees. In 1988 in conjunction with the Acquisition the ESOP purchased 5,000,000 shares (adjusted for a 100-for-1 stock split) of common stock of Holding. The ESOP is an individual account, defined contribution plan. The valuation of the ESOP shares is determined by independent appraisals. The common stock acquired by the ESOP is being allocated to the accounts of eligible employees over a period not exceeding eight plan years, including basic allocation of 3% of covered compensation and a matching Company contribution of up to 6% of covered compensation invested in the Company's savings plan by employees.\nPension plan benefits are generally based on years of service and employees' compensation during the last years of employment. In the United States the Company also provides various postretirement health care and life insurance benefits for some of its employees. Funding decisions are based upon the tax and statutory considerations in each country. Accretion expense is the implicit interest cost associated with amounts accrued and not funded and is included in \"other expense\". At December 31, 1993, funded plan assets related to pensions were held primarily in fixed income and equity funds. Postretirement health and life insurance benefits are not prefunded.\nEffective January 1, 1991, the Company changed its method of accounting for postretirement benefits other than pensions to conform with FAS 106. The cumulative effect of this change increased the recorded obligation for such benefits by $40 million, thereby increasing the net loss in 1991 by $25 million (net of the related income tax benefit). The effect of the change on the 1991 net loss, excluding the cumulative effect upon adoption, was not material.\nThe following table sets forth the Company's postretirement plans' funded status and amounts recognized in the balance sheet at December 31, 1993 and 1992.\nTotal postretirement costs were: Year Ended December 31, 1993 1992 1991 (Dollars in millions)\nPension benefits $37.5 $35.4 $32.4 Health and life insurance benefits 17.8 16.7 15.2 Defined benefit plan cost 55.3 52.1 47.6 Defined contribution plan cost (a) 22.4 20.4 20.0 Total postretirement cost, including accretion expense $77.7 $72.5 $67.6 ===== ===== ===== (a) Principally ESOP cost.\nAMERICAN STANDARD INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS\nNote 4. Other Expense\nOther income (expense) was as follows:\nYear Ended December 31, 1993 1992 1991 (Dollars in millions)\nInterest income $ 8.5 $ 8.7 $ 8.3 Royalties 2.6 3.8 2.5 Equity in net income (loss) of affiliated companies (0.1) 4.9 10.2 Minority interest (14.0) (9.8) (3.1) Accretion expense (30.5) (29.8) (27.9) Other, net (4.8) (2.5) 1.9 $(38.3) $(24.7) $ (8.1) ====== ====== ======\nThe decrease in equity in net income of affiliated companies and the increase in minority interest in 1993 and 1992 compared with 1991 were primarily the result of consolidation of the plumbing companies in Thailand, the People's Republic of China, and Incesa, previously unconsolidated joint ventures.\nNote 5. Income Taxes\nThe Company's loss before income taxes, extraordinary loss, and cumulative effects of changes in accounting methods (\"pre-tax income (loss)\") and the applicable provision (benefit) for income taxes were:\nYear Ended December 31, 1993 1992 1991 (Dollars in millions) Pre-tax income (loss): Domestic $ (223.2) $ (170.1) $(272.6) Foreign 142.7 117.5 184.8 Pre-tax loss $ (80.5) $ (52.6) $ (87.8) Provision (benefit) for income taxes: Current: Domestic $ 12.4 $ 5.1 $ 5.1 Foreign 43.0 63.0 71.3 55.4 68.1 76.4 Deferred: Domestic 1.1 (35.8) (52.4) Foreign (20.3) (27.6) (1.0) (19.2) (63.4) (53.4) Total provision $ 36.2 $ 4.7 $ 23.0 ======== ======== =======\nAMERICAN STANDARD INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS\nA reconciliation between the actual income tax expense provided and the income tax benefit computed by applying the statutory federal income tax rate of 35% in 1993 and 34% in 1992 and 1991 to the pre-tax loss is as follows:\nYear Ended December 31, 1993 1992 1991 (Dollars in millions) Tax benefit at statutory rate $(28.2) $(17.9) $(29.9) Nondeductible goodwill charged to operations 10.4 10.5 10.6 Nondeductible goodwill related to operations sold - 25.1* Nondeductible ESOP allocations 6.1 4.9 4.6 Rate differences and withholding taxes related to foreign operations 9.0 1.4 4.7 Foreign exchange gains (7.0) (6.3) (2.1) State tax benefits (5.5) (3.3) (3.4) Other, net 8.7 5.5 5.6 Increase in valuation allowance 42.7 9.9 7.8 Total provision $ 36.2 $ 4.7 $ 23.0 ====== ====== ======\n* Includes goodwill eliminated in the sale of Tyler Refrigeration.\nIn addition to the valuation allowance increase of $42.7 million shown above, a valuation allowance of $32.1 million was provided for the entire amount of the tax benefit related to the extraordinary loss on retirement of debt (see Note 8 of Notes to Consolidated Financial Statements).\nThe following table details the gross deferred liabilities and the gross deferred tax assets and the related valuation allowances.\nAt December 31, 1993 1992 (dollars in millions) Deferred tax liabilities: Facilities (accelerated depreciation, capitalized interest and purchase accounting differences) $ 141.1 $ 154.1 Inventory (LIFO and purchase accounting differences) 18.5 30.3 Employee benefits 11.0 6.6 Foreign investments 50.1 48.8 Other 26.2 26.6 246.9 266.4 Deferred tax assets: Employee benefits (pensions and other postretirement benefits) 110.7 97.7 Warranties 37.4 30.0 Alternative minimum tax 19.4 21.8 Foreign tax credits and net operating losses 57.5 42.3 Reserves 58.7 45.1 Other 46.0 18.5 Valuation allowances (103.9) (29.1) 225.8 226.3 Net deferred tax liabilities $ 21.1 $ 40.1 ========= ========\nAMERICAN STANDARD INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS\nDeferred tax assets related to foreign tax credits, net operating loss carryforwards, and future tax deductions have been reduced by a valuation allowance since realization is dependent in part on the generation of future foreign source income as well as on income in the legal entity which gave rise to tax losses. Other deferred tax assets have not been reduced by valuation allowances because of carrybacks and existing deferred tax credits which reverse in the carryforward period. The foreign tax credits and net operating losses are available for utilization in future years. In some tax jurisdictions the carryforward period is limited to as little as five years; in others it is unlimited.\nAs a result of the Acquisition (see Note 1) and the allocation of purchase accounting (principally goodwill) to foreign subsidiaries, the book basis in the net assets of the foreign subsidiaries exceeds the related U.S. tax basis in the subsidiaries' stock. Such investments are considered permanent in duration, and accordingly no deferred taxes have been provided on such differences, which are significant. It is impracticable because of the complex legal structure of the Company and the numerous tax jurisdictions in which the Company operates to determine such deferred taxes.\nCash taxes paid were $41 million, $56 million, and $79 million in the years 1993, 1992, and 1991, respectively.\nIn connection with examinations of the tax returns of the Company's German subsidiaries for the years 1984 through 1990, the German tax authorities have raised questions regarding the treatment of certain significant matters. The Company has paid approximately $20 million of a disputed German income tax. A suit is pending to obtain a refund of this tax. The Company anticipates that the German tax authorities may propose other adjustments resulting in additional taxes of approximately $105 million, plus penalties and interest for the tax return years under audit. In addition, significant transactions similar to those which gave rise to such possible adjustments occurred in years subsequent to 1990. The Company, on the basis of the opinion of legal counsel, believes the tax returns are substantially correct as filed and intends to vigorously contest any adjustments which have been or may be assessed. Accordingly, the Company had not recorded any loss contingency at December 31, 1993 with respect to such matters. Under German tax law the authorities may demand immediate payment of a tax assessment prior to final resolution of the issues. The Company also believes, on the basis of opinion of legal counsel, that it is highly likely that a suspension of payment will be obtained if additional taxes are assessed. However, if payment is required, the Company expects that it will be able to make such payment from available sources of liquidity or credit support but that future cash flows and capital expenditures and therefore subsequent results of operations for any particular quarterly or annual period could be adversely affected.\nAMERICAN STANDARD INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS\nNote 6. Inventories\nThe components of inventory are as follows:\nAt December 31, 1993 1992 (Dollars in millions)\nFinished products $169.0 $200.6 Products in process 78.0 95.8 Raw materials 78.8 88.5 Inventory at cost $325.8 $384.9 ====== ======\nThe carrying cost of inventories reflects purchase accounting adjustments and therefore exceeds current cost.\nNote 7. Facilities\nThe components of facilities, at cost, are as follows:\nAt December 31, 1993 1992 (Dollars in millions)\nLand $ 66.2 $ 65.0 Buildings 314.6 310.2 Machinery and equipment 739.9 719.4 Improvements in progress 54.4 45.6 Gross facilities 1,175.1 1,140.2 Less: accumulated depreciation 354.6 307.4 Net facilities $ 820.5 $ 832.8 ======== ========\nNote 8. Debt\nThe 1993 Refinancing\nIn July 1993 the Company completed a refinancing (the \"Refinancing\") that included (a) the issuance of $200 million principal amount of 9-7\/8% Senior Subordinated Notes Due 2001; (b) the issuance of approximately $751 million principal amount of 10-1\/2% Senior Subordinated Discount Debentures Due 2005, which yielded proceeds of approximately $450 million; (c) the amendment and restatement of the Company's 1988 Credit Agreement (the \"1988 Credit Agreement\" and as so amended and restated, the \"Credit Agreement\") to establish a $1 billion secured, multi-currency, multi-borrower credit facility; and (d) the application of the proceeds of such issuances and such borrowings as follows: (i) the redemption on July 1, 1993, of all of the outstanding 12-7\/8% Senior Subordinated Debentures Due 2000 (the \"12-7\/8% Senior Subordinated Debentures\") at a redemption price of 104.83% ($571.3 million), (ii) the redemption on July 2, 1993, of\nAMERICAN STANDARD INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS\na majority of the outstanding 14-1\/4% Subordinated Discount Debentures Due 2003 (the \"14-1\/4% Subordinated Discount Debentures\") at a redemption price of 105% ($389.5 million), (iii) the refunding of bank borrowings ($405 million of term loans and $77 million of other bank debt including revolving credit debt), (iv) the refunding of letters of credit ($58 million), and (v) payment of related fees and expenses.\nThe Credit Agreement provided to American Standard Inc. and certain subsidiaries (the \"Borrowers\") a $1 billion facility as follows: (a) a $250 million multi-currency revolving credit facility (the \"Revolving Credit Facility\") available to all Borrowers, which expires in 2000; (b) a $225 million multi-currency periodic access facility (the \"Periodic Access Facility\") available to all Borrowers, which expires in 2000; and (c) three term loan facilities (the \"Term Loans\") consisting of a $225 million U.S. dollar facility (\"Tranche A\") available to American Standard Inc., which expires in 2000; a $200 million Deutschemark facility (\"Tranche B\") available to a German subsidiary, which expires in 1997; and a $100 million U.S. dollar facility (\"Tranche C\") available to all Borrowers, which expires in 1999. In August 1993 the Company repaid $50 million and the amount available under the Credit Agreement by its terms was reduced to $950 million.\nBorrowings under the Periodic Access Facility and the Term Loans generally bear interest at the London interbank offered rate (\"LIBOR\") plus 2-1\/2% except for the $225 million U.S. dollar facility, which bears interest at LIBOR plus 3%, and the $200 million Deutschemark facility, which bears interest at LIBOR plus 2%. The Company pays a commitment fee of 0.5% per annum on the unused portion of the Revolving Credit Facility and a fee of 2.5% plus issuance fees for letters of credit.\nAs a result of the Refinancing, results for the year ended December 31, 1993, included an extraordinary charge of $92 million related to the debt retired (including call premiums, the write-off of deferred debt issuance costs, and loss on cancellation of foreign currency swap contracts) on which there was no tax benefit (see Note 5).\nShort-term\nThe Revolving Credit Facility (the \"Revolver\") provides for aggregate borrowings of up to $250 million for working capital purposes, of which up to $200 million may be used for the issuance of letters of credit and $40 million of which is available for same-day short-term borrowings (\"Swingline Loans\"). At December 31, 1993, there were $7 million of borrowings outstanding under the Revolver and $66 million of letters of credit. Availability under the Revolver at December 31, 1993, was $177 million. Average borrowings under this facility and under the revolving credit facility available under the previous 1988 Credit Agreement for 1993, 1992, and 1991 were $39 million, $14 million, and $44 million, respectively. The Revolver and the Swingline Loans bear interest at the prime rate plus 1-1\/2% or LIBOR plus 2-1\/2%.\nThe Company is required to reduce to $50 million the amount of borrowings outstanding under the Revolver for at least 30 consecutive days in each 12-month period ending May 31. In December 1993 the Company met this requirement for the 12-month period ending May 31, 1994. Commencing August 31, 1994, the Revolver is reduced by $8.3 million annually, with a\nAMERICAN STANDARD INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS\nfinal maturity on June 1, 2000. In addition, the Company is required to repay the full amount of each of its outstanding revolving loans at the end of each interest period (a maximum of six months). The Company may, however, immediately reborrow such amounts subject to compliance with applicable conditions of the Credit Agreement.\nOther short-term borrowings are available outside the United States under informal credit facilities and are typically a result of overdrafts. At December 31, 1993, the Company had $31 million of such foreign short-term debt outstanding at an average interest rate of 11% per annum. The Company also had an additional $50 million of unused foreign facilities. These facilities may be withdrawn by the banks at any time.\nLong-term\nLong-term debt was as follows:\nAt December 31, 1993 1992 (Dollars in millions)\nCredit Agreement $ 689.9 $ - 1988 Credit Agreement - 402.3 9 1\/4% sinking fund debentures, due in installments from 1997 to 2016 150.0 150.0 10 7\/8% senior notes due 1999 150.0 150.0 11 3\/8% senior debentures due 2004 250.0 250.0 9 7\/8% senior subordinated notes due 2001 200.0 - 10 1\/2% senior subordinated discount debentures (net of unamortized discount of $272.9 million in 1993) due in installments from 2003 to 2005 477.8 - 12 7\/8% senior subordinated debentures - 545.0 14 1\/4% subordinated discount debentures (net of unamortized discount of $36.3 million in 1992) due in installments from 2002 to 2003 175.0 509.5 Other long-term debt 63.1 53.3 12 3\/4% junior subordinated debentures due in installments from 2001 to 2003 (Note 9) 141.8 - Foreign currency swap contracts - (14.6) 2,297.6 2,045.5 Less current maturities 105.9 13.4 $ 2,191.7 $ 2,032.1 ========= =========\nThe amounts of long-term debt maturing from 1995 through 1998 are: 1995-$126.3 million, 1996-$123.5 million, 1997 $121.2 million, 1998-$117.5 million.\nInterest costs capitalized as part of the cost of constructing facilities for the years ended December 31, 1993, 1992, and 1991, were $2.7 million, $3.1 million, and $3.6 million, respectively. Cash interest paid for those same years on all outstanding indebtedness amounted to $198 million, $210 million, and $224 million, respectively.\nAMERICAN STANDARD INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS\nCredit Agreement loans, maturities, and effective weighted average interest rates in effect at December 31, 1993, were as follows:\nU.S. Dollar Equivalent (in millions) Periodic Access Facility, due in semi-annual installments from February 1994 to February 2000: British sterling loans at 7.85% $ 95.8 Deutschemark loans at 9.06% 49.4 Canadian dollar loans at 6.50% 20.2 French franc loans at 9.17% 18.5 Italian lira loans at 12.19% 8.7 Total Periodic Access loans 192.6\nTerm Loans: Tranche A U.S. dollar loans, due in semi-annual installments from August 1997 to February 2000 at 6.50% 225.0 Tranche B Deutschemark loans, due in semi-annual installments from February 1994 to February 1997 at 7.88% 172.3 Tranche C U.S. dollar loans, due in semi-annual installments from February 1994 to August 1999 at 6.01% 100.0 Total Term Loans 497.3\nTotal Credit Agreement long-term loans 689.9\nRevolver loans at 7.5% 7.0\nTotal Credit Agreement loans $ 696.9 ========\nUnder the 1988 Credit Agreement the various term loans and effective weighted average interest rates in effect at December 31, 1992, were as follows: U.S. Dollar Equivalent (in millions) Deutschemark loans at 11.4% $249.8 Canadian dollar loans at 13.05% 152.5 Total $402.3 ======\nThe 9-7\/8% Senior Subordinated Notes may be redeemed at the Company's option, in whole or in part, on and after June 1, 1998, at redemption prices declining from 102.82% in 1998 to 100% on June 1, 2000, and thereafter. The 10-1\/2% Senior Subordinated Discount Debentures may be redeemed at the Company's option, in whole or in part, on and after June 1, 1998, at redemption prices declining from 104.66% in 1998 to 100% on June 1, 2002, and thereafter. The payment of the principal and interest on the\nAMERICAN STANDARD INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS\n9-7\/8% Senior Subordinated Notes and on the 10-1\/2% Senior Subordinated Discount Debentures (together the \"Senior Subordinated Debt\") is subordinated in right of payment to the payment when due of all Senior Debt (as defined in the related indenture) of the Company, including all indebtedness under the Credit Agreement and the 9-1\/4% Sinking Fund Debentures, the 10-7\/8% Senior Notes, and the 11-3\/8% Senior Debentures (the said notes and debentures together the \"Senior Securities\").\nThe 9-1\/4% Sinking Fund Debentures are redeemable at the Company's option, in whole or in part, at redemption prices declining from 105.55% in 1994 to 100% in 2006 and thereafter. The 10-7\/8% Senior Notes are not redeemable by the Company. The 11-3\/8% Senior Debentures are redeemable at the option of the Company, in whole or in part, on or after May 15, 1997, at redemption prices declining from 105.69% in 1997 to 100% on May 15, 2002, and thereafter.\nThe 14-1\/4% Subordinated Discount Debentures are redeemable at the Company's option, in whole or in part, at redemption prices of 105% prior to June 30, 1994, declining to 100% on and after June 30, 1995. The payment of the principal and interest on the 14-1\/4% Subordinated Discount Debentures issued by the Company in 1988 is subordinated in right of payment to the payment when due of all Senior Debt (as defined in the related indenture) of the Company, including all indebtedness under the Credit Agreement, the Senior Securities, and the Senior Subordinated Debt. The 14-1\/4% Subordinated Discount Debentures rank senior to the 12-3\/4% Junior Subordinated Debentures (described below).\nThe 12-3\/4% Junior Subordinated Debentures may be redeemed, at the Company's option, in whole or in part at a redemption price of 101.8% prior to June 30, 1994, and at 100% thereafter. The payment of principal and interest on the 12-3\/4% Junior Subordinated Debentures is subordinated in right of payment to the payment when due of all Senior Debt (as defined in the related indenture) of the Company, including all indebtedness under the Credit Agreement, the Senior Securities, the Senior Subordinated Debt, and the 14-1\/4% Subordinated Discount Debentures.\nObligations under the Credit Agreement are guaranteed by ASI Holding Corporation (the Company's parent), the Company, and significant domestic subsidiaries of the Company (with foreign borrowings also guaranteed by certain foreign subsidiaries) and are secured by U.S., Canadian, and U.K. properties, plant, and equipment; by liens on receivables, inventories, intellectual property, and other intangibles; and by a pledge of the Company's stock and nearly all shares of subsidiary stock. In addition, the obligations of the Company under the Senior Securities are secured, to the extent required by the related indentures, by mortgages on the principal U.S. properties of the Company equally and ratably with the indebtedness under the Credit Agreement and certain related indebtedness.\nThe Senior Subordinated Debt, the 14-1\/4% Subordinated Discount Debentures, and the 12-3\/4% Junior Subordinated Debentures are unsecured.\nThe Credit Agreement contains various covenants that limit, among other things, indebtedness, dividends on and redemption of capital stock of the Company, purchases and redemptions of other indebtedness of the Company (including its outstanding debentures and notes), rental expense, liens, capital expenditures, investments or acquisitions, disposal of assets, the\nAMERICAN STANDARD INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS\nuse of proceeds from asset sales, and certain other business activities and require the Company to meet certain financial tests. In order to maintain compliance with the covenants and restrictions contained in the 1988 Credit Agreement, the Company from time to time has had to obtain waivers and amend- ments. In February 1994 the Company obtained an amendment to the Credit Agreement that among other things relaxed certain financial tests and covenants and facilitated the investment in an air conditioning joint venture and the formation of a holding company to establish joint ventures in the People's Republic of China for the manufacture and sale of plumbing products. The Company currently believes it will comply with the amended financial tests and covenants but may have to obtain similar waivers or amendments in the future.\nThe indentures related to the Company's debentures and notes contain various covenants which, among other things, limit debt and preferred stock of the Company and its subsidiaries, dividends on and redemption of capital stock of the Company and its subsidiaries, redemption of certain subordinated obligations of the Company, the use of proceeds from asset sales, and certain other business activities.\nNote 9. Exchange of Exchangeable Preferred Stock\nOn June 30, 1993, in exchange for all of the Company's outstanding shares of 12-3\/4% Exchangeable Preferred Stock, the Company issued $141.8 million of 12-3\/4% Junior Subordinated Debentures Due 2003 to the holder of the Exchangeable Preferred Stock. Those debentures were sold by the holder in a registered public offering in August 1993. The Company received none of the proceeds of this offering.\nNote 10. Foreign Currency Translation\nAssets and liabilities of most foreign operations are translated at year-end rates of exchange, and the resulting gains or losses, net of income tax effects, are accumulated in a separate component of stockholder's equity.\nChanges in exchange rates which gave rise to significant translation effects included in stockholder's equity for the years ended December 31, 1993, 1992, and 1991, are summarized in the accompanying table.\nChange in End of Period Exchange Rate Currency 1993 1992 1991\nBritish sterling (2)% (19)% (3)% Canadian dollar (4) ( 9) - French franc (6) (6) (2) Deutschemark (7) (6) (1) Italian lira (14) (22) (2) ===== ===== ===== Translation loss included in stockholder's equity, net of tax (dollars in millions) $ (62.3) $ (36.2) $ (2.1) ====== ====== =====\nAMERICAN STANDARD INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS\nThe allocation of purchase costs increased the net asset exposure of foreign operations; however, since June 29, 1988, the date of the Merger, the effects of exchange volatility have been ameliorated by the fact that a portion of the Company's borrowings has been denominated in foreign currencies.\nThe losses from foreign currency transactions and translation from operations in countries with high inflation rates reflected in expense were $21.9 million in 1993, $19.3 million in 1992, and $14.4 million in 1991.\nNote 11. Fair Values of Financial Instruments\nStatement of Financial Accounting Standards No. 107, \"Disclosures About Fair Values of Financial Instruments\" (\"FAS 107\"), requires disclosure information about all financial instruments of a company except certain excluded instruments and instruments for which it is not practicable to estimate fair value. The fair values presented below are estimates as of December 31, 1993, and are not necessarily indicative of amounts the Company could realize or settle currently or indicative of the intent or ability of the Company to dispose of or liquidate such instruments.\nThe following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments:\nCash and certificates of deposit: The carrying amount reported in the balance sheet for cash and certificates of deposit approximates its fair value.\nLong- and short-term debt: The fair values of the Company's Credit Agreement loans are estimated using indicative market quotes obtained from a major bank. The fair values of senior notes, senior debentures, senior subordinated notes, senior subordinated discount debentures, subordinated discount debentures, the sinking fund debentures, and the junior subordinated debentures are based on indicative market quotes obtained from a major securities dealer. The fair values of other loans approximate their carrying value.\nThe carrying amounts and estimated fair values of selected financial instruments at December 31, 1993 are as follows: (dollars in millions) Carrying Fair Amount Value Credit Agreement loans $ 697 $ 679 10 7\/8% senior notes 150 163 11 3\/8% senior debentures 250 276 9 7\/8% senior subordinated notes 200 208 10 1\/2% senior subordinated discount debentures 478 505 14 1\/4% subordinated discount debentures 175 184 9 1\/4% sinking fund debentures 150 152 12-3\/4% junior subordinated debentures 142 143 Other loans 63 63\nAMERICAN STANDARD INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS\nNote 12. Related Party Transactions\nThe Company received non-cash capital contributions from Holding in the form of shares of common stock awarded to employees under various stock compensation plans totalling $5.3 million, $3.8 million, and $7.1 million in 1993, 1992 and 1991 respectively. The Company has agreed to pay Kelso an annual fee of $2.75 million for providing management consulting and advisory services. In June 1993 the Company issued 1,000 shares of a new, non-voting Series A Preferred Stock, par value $.01 per share, for $10,000 to an affiliate of Kelso & Company. The Company is committed to contribute $5 million of capital to a Kelso limited partnership. In addition, Tyler Refrigeration was sold to an affiliate of Kelso in 1991.\nNote 13. Leases\nThe cumulative minimum rental commitments under the terms of all noncancellable operating leases in effect at December 31, 1993, were $108 million. Net rental expenses for operating leases were $34 million, $32 million, and $28 million for the years ended December 31, 1993, 1992, and 1991, respectively.\nNote 14. Commitments and Contingencies\nThe Company and certain of its subsidiaries are parties to a number of pending legal and tax proceedings. The Company is also subject to federal, state and local environmental laws and regulations and is involved in environmental proceedings concerning the investigation and remediation of numerous sites. In those instances where it is probable that the Company will incur costs from such proceedings and the amounts can be reasonably determined the Company has recorded a liability. The Company believes that these legal, tax, and environmental proceedings will not have a material adverse effect on its consolidated financial position, cash flows, or results of operations.\nThe tax returns of the Company's German subsidiaries are currently under examination by the German tax authorities (see Note 5).\nNote 15. Segment Data\nSales and operating income by geographic location for the years ended December 31, 1993, 1992, and 1991, are shown on the following page. Identifiable assets are also shown as at years ended 1993, 1992, and 1991. See \"Business\" for a description of each business segment and \"Management's Discussion and Analysis of Financial Condition and Results of Operations\" for capital expenditures and depreciation and amortization.\nAMERICAN STANDARD INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS\nQUARTERLY DATA (Unaudited) (Dollars in millions)\nFirst Second Third Fourth Sales $879.4 $995.5 $976.5 $979.1 Cost of sales 650.5 754.5 727.7 769.9 Income (loss) before income taxes and extraordinary loss (9.5) (28.2) 4.1 (46.9) Tax provision 8.1 6.1 7.2 14.8 Loss before extraordinary loss (17.6) (34.3) (3.1) (61.7) Extraordinary loss (Note 8) - (91.9) - - Net loss $(17.6) $(126.2) $ (3.1) $(61.7) ====== ======= ====== ======\nFirst Second Third Fourth Sales $901.0 $995.9 $980.9 $914.1 Cost of sales 672.0 734.1 742.2 703.9 Income (loss) before income taxes (8.1) 11.4 (16.5) (39.3) Tax provision (benefit) 5.5 9.2 (1.5) (8.5) Net income (loss) $(13.6) $ 2.2 $(15.0) $(30.8) ====== ======= ====== ======\nITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCING DISCLOSURE.\nNot applicable.\nMANAGEMENT\nITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY\nThe following table sets forth certain information as of March 31, 1994, with respect to each person who is an executive officer or director of the Company:\nName Age Position with Company\nEmmanuel A. Kampouris 59 Chairman, President and Chief Executive Officer, and Director\nHorst Hinrichs 61 Senior Vice President, Transportation Products, and Director\nGeorge H. Kerckhove 56 Senior Vice President, Plumbing Products, and Director\nFred A. Allardyce 52 Vice President and Chief Financial Officer\nAlexander A. Apostolopoulos 51 Vice President and Group Executive, Americas, Plumbing Products\nThomas S. Battaglia 51 Vice President and Treasurer\nRoberto Canizares M. 44 Vice President, Air Conditioning Products' Asia\/America Zone\nWilfried Delker 53 Vice President and Group Executive, Worldwide Fittings, Plumbing Products\nAdrian B. Deshotel 48 Vice President, Human Resources\nCyril Gallimore 65 Vice President, Systems and Technology\nLuigi Gandini 55 Vice President and Group Executive, European Plumbing Products\nDaniel Hilger 53 Vice President and Group Executive, Air Conditioning Products in Europe, Middle East and Africa\nJoachim D. Huwendiek 63 Vice President, Automotive Products in Germany\nName Age Position with Company\nFrederick W. Jaqua 72 Vice President and General Counsel and Secretary\nW. Craig Kissel 42 Vice President and Group Executive, Unitary Products Group\nWilliam A. Klug 62 Vice President, Trane International\nPhilippe Lamothe 57 Vice President, Automotive Products in France\nG. Eric Nutter 58 Vice President, Automotive Products in the United Kingdom\nRaymond D. Pipes 44 Vice President and Group Executive, Plumbing Products in the Far East\nBruce R. Schiller 49 Vice President and Group Executive, Compressor Business\nJames H. Schultz 45 Vice President and Group Executive, Commercial Systems Group\nG. Ronald Simon 52 Vice President and Controller\nWade W. Smith 43 Vice President, U.S. Plumbing Products\nBenson I. Stein 56 Vice President, General Auditor\nRobert M. Wellbrock 47 Vice President, Taxes\nShigeru Mizushima 50 Director\nRoger W. Parsons 52 Director\nFrank T. Nickell 46 Director\nJ. Danforth Quayle* 47 Director\nJohn Rutledge 45 Director\nJoseph S. Schuchert* 65 Director\n* The Management Development Committee functions as the compensation committee of the Company. Since December 2, 1993, its members have been Messrs. Quayle and Schuchert. Prior thereto Mr. Schuchert and two other directors who retired in December, Richard M. Cyert and Edward Donley, served as members of the committee.\nDirectors are elected to hold office until the next annual meeting of stockholders or until their successors are elected. Messrs. Kampouris, Mizushima, Nickell, and Schuchert were elected in 1988; Mr. Kerckhove in September 1990; Mr. Hinrichs in March 1991; Dr. Rutledge in March 1993; Mr. Quayle in September 1993; and Mr. Parsons in March 1994.\nHolding, Kelso ASI Partners, L.P. (the 73 percent owner of Holding) (\"ASI Partners\"), and executive officers and certain other management personnel of the Company who purchased shares of Holding common stock (\"Management Investors\") entered into a Stockholders Agreement that, among other things, provides for arrangements regarding the control of the election of directors of Holding.\nUntil the earlier of (i) the occurrence of a public offering pursuant to an effective registration statement under the Securities Act covering the offer and sale of Holding common stock to the public and underwritten by an investment banking firm of nationally recognized standing and (ii) July 7, 1998, the Management Investors as a group are entitled to nominate at least two directors to the Board of Directors of Holding, and ASI Partners is entitled to nominate the remaining directors. As a result, during such period ASI Partners will control the Board of Directors. To effectuate their rights, the Management Investors and ASI Partners have agreed in the Stockholders' Agreement to grant an irrevocable proxy to the Secretary of Holding to vote their shares of common stock in accordance with such nominations. Such grant of an irrevocable proxy terminates upon Holding's becoming subject to the proxy rules under the Securities Exchange Act of 1934. At present the Board of Directors of Holding consists of nine directors.\nThe sole holder of the outstanding common stock of American Standard Inc. is Holding, and Holding exclusively elects the directors of American Standard Inc. Currently the directors of Holding are also the directors of American Standard Inc.\nSet forth below is the principal occupation of each of the executive officers and directors named above during the past five years (except as noted, all positions are with the Company).\nMr. Kampouris was elected Chairman in December 1993 and President and Chief Executive Officer in February 1989. Prior thereto he was Senior Vice President, Building Products, from 1984 to February 1989. He is also a director of Daido Hoxan Inc. Mr. Kampouris has served as a director of the Company since July 1988.\nMr. Hinrichs was elected Senior Vice President, Transportation Products, in December 1990. Prior thereto he served as Vice President and Group Executive, Automotive Products, from 1987 to 1990. Mr. Hinrichs has served as a director of the Company since March 1991.\nMr. Kerckhove was elected Senior Vice President, Plumbing Products, in June 1990. Prior thereto he was Vice President (from 1985 until June 1990) and Group Executive (from 1988 until June 1990) of European Plumbing Products. Mr. Kerckhove has served as a director of the Company since September 1990.\nMr. Allardyce was elected Vice President and Chief Financial Officer in January 1992. Prior thereto he served as Vice President and Controller from February 1983 until December 1991.\nMr. Apostolopoulos was elected Vice President and Group Executive, Americas Plumbing Products, in December 1990. Prior thereto he served as the executive in charge of Plumbing Products' joint ventures from September 1989 to November 1990 and Managing Director of the Company's Egyptian subsidiary from July 1984 to August 1989.\nMr. Battaglia was elected Vice President and Treasurer in September 1991. Prior thereto he was Assistant Treasurer.\nMr. Canizares was elected Vice President, Air Conditioning Products' Asia\/America Zone, in December 1990. Prior thereto he served as the executive in charge of this zone and Manager of Planning and Distribution from November 1986 to November 1990.\nMr. Delker was elected Vice President and Group Executive, Worldwide Fittings, Plumbing Products, in April 1990. Prior thereto he served as executive in charge of the Company's brass fittings manufacturing operations from June 1982 until March 1990.\nMr. Deshotel was elected Vice President, Human Resources, in January 1992. Prior thereto he served as Group Vice President, Human Resources, for U.S. Plumbing Products from September 1986 until December 1991.\nMr. Gallimore was elected Vice President, Systems and Technology, in December 1990. Prior thereto he served as the executive in charge of Manufacturing and Technology from 1984 to November 1990.\nMr. Gandini was elected Vice President and Group Executive, European Plumbing Products, in July 1990. Prior thereto he served as General Manager of Ideal Standard S.p.A., the Italian subsidiary of the Company, from January 1978 until June 1990.\nMr. Hilger was elected Vice President and Group Executive, Air Conditioning Products, in Europe, Middle East and Africa, in June 1988.\nMr. Huwendiek was elected Vice President, Automotive Products in Germany, in January 1992. Prior thereto he served as Managing Director of WABCO Germany since June 1987.\nMr. Jaqua was elected Vice President and General Counsel and Secretary in April 1989. Prior thereto he was Associate General Counsel and Assistant Secretary.\nMr. Kissel was elected Vice President in charge of Air Conditioning Products' Unitary Products Group in January 1992, becoming Group Executive in March 1994. He served as Vice President, Sales and Distribution, for Air Conditioning Products, from December 1990 until January 1992 and served as divisional Senior Vice President in charge of U.S. Sales from January to November 1990. He was in charge of Western Regional Sales from January 1989 to January 1990.\nMr. Klug was elected Vice President in 1985 and has been in charge of Trane International since December 1993. He served as Group Executive, Unitary Products Group, from April 1990 until December 1993. He was Group Executive, North American Sales and Distribution, Air Conditioning Products, from October 1987 to March 1990.\nMr. Lamothe was elected Vice President, Automotive Products in France, in January 1992. He served as Group Vice President of the French transportation business during 1991 and prior thereto was General Manager of the French transportation subsidiary.\nMr. Nutter was elected Vice President, Automotive Products in the United Kingdom, in January 1992. Prior thereto he served as Vice President and General Manager of WABCO Transportation U.K. Limited, the United Kingdom transportation subsidiary of the Company from March 1991 until December 1991 and Group Managing Director of the United Kingdom transportation subsidiary from June 1987 until February 1991.\nMr. Pipes was elected Vice President and Group Executive for the Far East Region of Plumbing Products in May 1992. Prior thereto he served as Managing Director of the Company's Philippine subsidiary from May 1990 until April 1992 and was Group Vice President, Control & Finance, of U.S. Plumbing Products from March 1985 until April 1990.\nMr. Schiller was elected Vice President and Group Executive, Compressor Business (Air Conditioning Products) in March 1994. Prior thereto he served as General Manager, Compressor Business Group, from May 1993 to February 1994 and Manager and then General Manager of the Company's Tyler, Texas, facility from March 1986 to April 1993.\nMr. Schultz was elected Vice President and Group Executive, Commercial Systems, in 1987.\nMr. Simon was elected Vice President and Controller in January 1992. Prior thereto he served as Vice President and Controller of the Air Conditioning Products' Commercial Systems Group from December 1984 to December 1991.\nMr. Wade W. Smith was elected Vice President, U.S. Plumbing Products, in May 1992. Prior thereto he served as Group Vice President in charge of the Chinaware Business Unit of U.S. Plumbing Products from February 1992 until April 1992 and from April 1987 to February 1992 he was Vice President and General Manager of the Building Automation Systems Division of the Commercial Systems Group of Air Conditioning Products.\nMr. Stein was elected Vice President, General Auditor, in March 1994; from December 1986 to February 1994 he was the Company's General Auditor.\nMr. Wellbrock was elected Vice President, Taxes, effective January 1, 1994. Prior thereto he served as Director of Taxes from 1988 through 1993.\nMr. Mizushima has been President and Chief Operating Officer of Daido Hoxan Inc. since the merger in April 1993 of Hoxan Corporation with Daido Sanso Company (a subsidiary of Air Products and Chemicals Inc.). Prior thereto Mr. Mizushima was President of Hoxan Corporation, a position he held since 1984. He is also a director of Daido Hoxan. Daido Hoxan Inc is the second largest supplier of industrial gases in Japan. One of its subsidiaries is a distributor of American-Standard plumbing products in Japan. Mr. Mizushima has served as a director of the Company since July 1988.\nMr. Nickell has been President and a director of Kelso & Companies, Inc., since March 1989. Kelso & Companies, Inc. is the general partner of Kelso & Company, L.P. From 1984 to 1989 Mr. Nickell was a general partner of Kelso & Company, L.P. He is also a director of Club Car, Inc.; King Holding Corp; and Tyler Holdings Corporation. Mr. Nickell has served as a director of the Company since May 1988.\nMr. Parsons is Managing Director of Rea Brothers Group PLC (\"Rea Brothers Group\"), which he joined in 1988 after a long banking career. Rea Brothers Group is a U.K. holding company of subsidiaries engaged in the investment banking business. He also holds directorships in several subsidiaries of Rea Brothers Group. Mr. Parsons was elected as a director of the Company on March 2, 1994.\nMr. Quayle served as Vice President of the United States from January 1989 to January 1993. Since leaving that office Mr. Quayle has been associated with Circle Investors, Inc. (an investment planning and consulting firm), and FX Strategic Advisors, Inc. (an international trade consulting firm), both of which he serves as Chairman. He is a Director of Central Newspapers, Inc. Mr. Quayle has served as a director of the Company since September 1993.\nDr. Rutledge has been Chairman of Rutledge & Company, Inc., a merchant banking firm, since January 1991. He is the founder and Chairman of Claremont Economics Institute, an economic research firm established in 1975. He is also a director of Earle M. Jorgensen & Company, Lazard Freres Funds, Medical Specialties Group, and Utendahl Capital Partners and is a special advisor to Kelso & Company. Dr. Rutledge has served as a director of the Company since March 1993.\nMr. Schuchert has been Chairman, CEO, and a director of Kelso & Companies, Inc., since March 1989. Kelso & Companies, Inc. is the general partner of Kelso & Company, L.P. From 1984 to 1989 Mr. Schuchert was managing general partner of Kelso & Company, L.P. He is also a director of Earle M. Jorgensen & Company. Mr. Schuchert has served as a director of the Company since May 1988.\nOn December 23, 1992, Kelso & Company and its chief executive officer, Mr. Schuchert, without admitting or denying the findings contained therein, consented to an administrative order in respect of a Securities and Exchange Commission (\"Commission\") inquiry relating to the 1990 acquisition of a portfolio company by a Kelso affiliate. The order found that Kelso's tender offer filing in connection with the acquisition did not comply fully with the Commission's tender offer reporting requirements, and required Kelso and Mr. Schuchert to comply with these requirements in the future.\nCompensation Committee Interlocks and Insider Participation\nMr. Schuchert is a member of the Management Development Committee (the Compensation Committee) of the Company's Board of Directors. He is Chairman of Kelso & Companies, Inc. (the general partner of Kelso & Company, L.P.) and a general partner of American Standard Partners, the general partner of Kelso ASI Partners.\nThe Company pays Kelso an annual fee of $2.75 million for providing management consulting and advisory services, including those of Messrs. Schuchert and Nickell. The fee is reduced depending on the number of shares Kelso controls of Holding or the Company, with final termination when Kelso's ownership control falls below 20 percent.\nThe Company also entered into a transaction with Kelso Insurance Services, Incorporated (an affiliate of Kelso) (\"Kelso Insurance\"), and American Telephone and Telegraph Company (\"AT&T\") pursuant to which the Company as well as other Kelso affiliated companies participates in a telecommunications network under which AT&T provides communications services to the group at a special lower tariff rate. In connection with that transaction the Company has guaranteed a minimum annual usage by it of $2 million for a period of five years commencing 1993. No fee was paid by the Company to Kelso Insurance in connection with this transaction.\nIn August 1993 the Company purchased a limited partnership interest in Kelso Investment Associates V, L.P. (\"KIA V\") in exchange for its commitment to make a capital contribution of $5 million to KIA V. KIA V was formed to seek out business opportunities and invest primarily in equity securities, leveraged buy-outs, and joint ventures. Kelso Partners V, L.P. serves as the general partner of KIA V. The general partners of Kelso Partners V, L.P., include Messrs. Schuchert and Nickell. Kelso & Co., L.P., is the manager of KIA V and, as such, acts as investment adviser of KIA V. The management fee relating to the interest held by the Company has been waived.\nThe Supplemental Plan benefits are based on credited years of service and average annual compensation for the highest three calendar years of the final ten calendar years of employment (not exceeding 60 percent of average annual compensation for such years of service) and are reduced by an offset consisting of certain other retirement benefits, including amounts payable under the Terminated Plan, annual allocations to the executive officer's Employee Stock Ownership Plan (\"ESOP\") accounts, and Social Security benefits. Benefits under the Supplemental Plan are vested after five years of service or employment continuation through age 65. Compensation used in determining Supplemental Plan benefits (covered compensation) includes only salary and bonus reflected in the Summary Compensation Table above. No covered compensation of any Named Officer differs by more than 10% from the salary and bonus set forth in the Summary Compensation Table.\nThe years of credited service under the Supplemental Plan for the Named Officers are as follows: Mr. Kampouris, 28 years; Mr. Hinrichs, 35 years; Mr. Kerckhove, 32 years; Mr. Allardyce, 17 years; Mr. Gandini, 33 years; and Mr. H.T. Smith, 13 years.\nThe current annual target benefit for Mr. Kampouris is approximately 20 percent higher than that shown in the above table since a different benefit formula under the pre-1990 version of the Supplemental Plan applies to his period of service and earnings prior to April 27, 1991. The method of calculating the lump sum payable to Mr. Kampouris that is attributable to his accrued benefit through April 27, 1991, has been adjusted to reflect the recent increase in the Federal ordinary income tax rates.\nAn amendment to the Supplemental Plan in 1993 established minimum annual lump sum payments for certain Named Officers which, after giving effect to Plan offsets, are estimated as follows: Mr. Kampouris, $427,000; Mr. Hinrichs, $143,000; Mr. Kerckhove, $37,000; and Mr. Gandini, $24,000.\nShares of Holding Common Stock distributable to Plan participants are delivered to a grantor's trust for their benefit. The trust will terminate following a public offering of Holding Common Stock, at which time shares or cash credited to each participant's account is to be distributed. Payment, however, may be deferred if an event of default under the Company's loan agreements or debt indentures has occurred or will occur as a result of such payment. Until distribution, assets of the trust are subject to the claims of creditors of Holding or the Company. Shares held by the trust are voted by the trustee in accordance with the Company's directions.\nDirectors' Fees and Other Arrangements\nIn the first half of 1993 each outside director was paid a fee of $5,000 per calendar quarter and in addition received a fee of $500 for each meeting of the Board attended; in the last half each outside director was paid a fee of $6,750 per calendar quarter and in addition received a fee of $1,000 for each meeting of the Board attended. Effective with the third quarter, an outside director is also paid $1,000 for attending a Committee meeting. (Previously an outside director was paid $500 for attending a Committee meeting not held on the day of a Board meeting.) The only directors currently eligible for directors' fees are directors who are neither employees of the Company or Kelso. They are Messrs. Mizushima, Parsons, Quayle, and Rutledge. All directors are reimbursed for reasonable expenses incurred in connection with attendance at any meetings. No separate directors' fees are paid for attendance at meetings of Holding that are held on the same day the Company's Board meets.\nA Supplemental Compensation Plan for Outside Directors (\"Supplemental Compensation Plan\") was adopted in June 1989. A Plan Account was establish- ed for each participating director at that time consisting of units equivalent to $50,000 of Holding common stock with each unit having a value of $19 per share, the independently appraised value of the shares of Holding as of December 31, 1988. For the purpose of providing a measure of parity among the directors, the $50,000 amount was increased to $100,000 for participating directors who became Board Members after January 1, 1993, with such amount converted into units for the account of such directors at the rate of $42.96 per unit ($42.96 representing the independently appraised value of the shares of Holding as of December 31, 1992). When a participating director ceases to be a member of the Board, he or his beneficiary will receive a cash payment equal to the number of units in his Plan Account multiplied by the per-share value of Holding common stock based on the then last year-end appraisal. If a participating director is removed for cause, his entire interest in the Plan is forfeited. Employee-directors and Messrs. Nickell and Schuchert do not participate in this Plan.\nMr. Donley and Dr. Cyert, directors who retired in December 1993, each received a payment of $113,053 pursuant to the Supplemental Compensation Plan.\nCorporate Officers Severance Plan and Other Employment or Severance Arrangements\nThe Board of Directors approved a severance plan for executive officers (the \"Officers Severance Plan\"), effective April 27, 1991. The Officers Severance Plan provides that any participant whose employment is involuntarily terminated by the Company without \"Cause\" (as defined in the Officers Severance Plan) or who leaves the Company for \"Good Reason\" (as defined in the Officers Severance Plan) shall be paid an amount equal to the sum of two (three in the case of the Chief Executive Officer) times such participant's annual base salary at the rate in effect at the time of termination, a proration of the then Annual Incentive Plan target award (described previously), and one (two in the case of the Chief Executive Officer) times such target award. In addition, group life, accident, and disability insurance coverages, as well as group medical coverage, will be continued for up to 24 (36 in the case of the Chief Executive Officer) months following such officer's termination. The Named Officers (other than Mr. Smith, who retired in December 1993) are participants in this Plan.\nAn agreement was entered into with H. Thompson Smith in December 1993 concerning the terms of his termination of employment and retirement. Under that agreement he is entitled to receive his 1993 Annual Incentive Plan award in the amount of $154,000 and will be entitled to receive the same amount in March 1995. In addition, Mr. Smith is retained as a consultant through 1995 at the rate of $29,583 per month. In the event of Mr. Smith's death, the fees remaining through the end of 1995 are payable in a lump sum to his spouse or estate. He is also entitled to receive payments under the Company's Long-Term Incentive Compensation Plan for the 1992-1994 and 1993-1995 performance periods in accordance with its terms, such awards to be prorated to December 31, 1993. Mr. Smith continues under the Company's medical and life insurance programs through 1995.\nITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT\nAll of the common stock, $.01 par value, of American Standard Inc., the only voting stock of American Standard Inc., is owned by Holding. Set forth below is the number of shares of Common Stock, par value $.01 per share, of Holding, the only outstanding voting stock of Holding, beneficially owned as of March 10, 1994, by each Director and nominee, each Named Executive Officer, all Directors and executive officers of Holding as a group, and each 5% holder.\nShares Percent Name and Address Beneficially of Title of Class of Beneficial Owner Owned Class Holding common stock, par value - Kelso ASI Partners, L.P.(a) 18,000,000 73% $.01 per share (\"ASI Partners\") Joseph S. Schuchert(a) 18,000,000(d) 73% (d) Frank T. Nickell(a) 18,000,000(d) 73% (d) George E. Matelich(a) 18,000,000(d) 73% (d) Thomas R. Wall IV(a) 18,000,000(d) 73% (d) Emmanuel A. Kampouris(b) 225,000 * George H. Kerckhove(b) 113,000 * Horst Hinrichs(b) 90,000 * Fred A. Allardyce(b) 113,000 * American-Standard Employee Stock Ownership Plan(c) 4,267,710 17% All current directors and executive officers of Holding and the Company as a group 18,824,900(e) 77% (e)\n* Less than one percent.\n(a) The business address for such persons is c\/o Kelso & Company, 350 Park Avenue, New York, N.Y. 10022.\n(b) Mr. Kampouris is Chairman, President and Chief Executive Officer and a director of the Company and of Holding. Messrs. Hinrichs and Kerckhove are Named Officers and directors of the Company and of Holding, and Mr. Allardyce is a Named Officer of the Company and of Holding.\n(c) The business address for the ESOP is c\/o American Standard Inc., 1114 Avenue of the Americas, New York, N.Y. 10036. At December 31, 1993, 3,548,609 Plan shares were allocated to executive officers of Holding and the Company and other ESOP participants. The number of shares shown for executive officers in the table above does not reflect shares allocated to their accounts in the ESOP. Shares in the ESOP account are voted by the ESOP trustee as directed by the plan board (the board administering the trust which currently consists of executive officers of the Company). However, participants may direct the vote of their ESOP account shares in matters involving mergers, recapitalizations, or dispositions of substantial assets. Until termination of employment a participant cannot dispose of shares in his ESOP account. Shares distributed to a participant on termination are subject to the Company's right of first refusal. The shares in the Named Officers ESOP accounts are as follows: Mr. Kampouris, 3,995 shares; Mr. Kerckhove, 3,953 shares; Mr. Hinrichs, 4,266 shares; Mr. Allardyce, 4,246 shares; and Mr. Gandini, 2,225 shares. The shares in the ESOP accounts for all executive officers total 69,218 shares.\nThe number of shares shown for executive officers in the table above also does not reflect shares of Holding Common Stock issued as part of the payouts under the LTIP and held for them in trust under a trust agreement dated as of January 1, 1993. Shares in the trust are voted by the trustee as directed by the Company. Until termination of the trust, a beneficiary of the Trust cannot dispose of shares credited to his account. Shares in the Named Officers' accounts in the trust are as follows: Mr. Kampouris, 4,453 shares; Mr. Kerckhove, 2,012 shares; Mr. Hinrichs, 1,787 shares; Mr. Allardyce, 1,224 shares; and Mr. Gandini, 1,176 shares. The shares in the trust accounts for all executive officers total 28,620 shares.\nAlso not included above are 19,198 shares of ASI Holding common stock held in a similar grantor's trust for the account of certain executive officers. These were earned by them under an employee incentive plan prior to their becoming officers.\n(d) Messrs. Schuchert and Nickell, each a director of the Company and of Holding, and Messrs. Matelich and Wall may be deemed to share beneficial ownership of shares owned of record by ASI Partners by virtue of their status as general partners of American Standard Partners, the general partner of ASI Partners. Messrs. Schuchert, Nickell, Matelich and Wall share investment and voting power with respect to securities owned by ASI Partners. See \"Certain Transactions and Relationships.\" Dr. Cyert, who was a director of Holding and the Company until December 1993, is a limited partner in one of the Kelso partnerships that has invested in ASI Partners.\n(e) Out of such 18,824,900 shares, 18,000,000 shares represent shares of Common Stock owned by ASI Partners in which Messrs. Schuchert and Nickell, each a director of Holding, may be deemed to share beneficial ownership by virtue of their status as general partners of American Standard Partners, the general partner of ASI Partners.\nITEM 13. CERTAIN TRANSACTIONS AND RELATIONSHIPS\nMessrs. Schuchert and Nickell, directors of Holding and the Company, are Chairman and President, respectively, of Kelso & Companies, Inc. (the general partner of Kelso & Company, L.P.), and are general partners of American Standard Partners, the general partner of Kelso ASI Partners. Mr. Schuchert is also a member of the Management Development Committee (the compensation committee) of the Company's Board of Directors.\nThe Company pays Kelso an annual fee of $2.75 million for providing management consulting and advisory services, including those of Messrs. Schuchert and Nickell. The fee is reduced depending on the number of shares Kelso controls of Holding or the Company, with final termination when Kelso's ownership control falls below 20 percent.\nThe Company also has entered into a transaction with Kelso Insurance Services, Incorporated (an affiliate of Kelso) (\"Kelso Insurance\"), and American Telephone and Telegraph Company (\"AT&T\") pursuant to which the Company as well as other Kelso affiliated companies participates in a telecommunications network under which AT&T provides communications services to the group at a special lower tariff rate. In connection with that transaction the Company has guaranteed a minimum annual usage by it of $2 million for a period of five years commencing 1993. No fee was paid by the Company to Kelso Insurance in connection with this transaction.\nIn August 1993 the Company purchased a limited partnership interest in Kelso Investment Associates V, L.P. (\"KIA V\"), in exchange for its commitment to make a capital contribution of $5 million to KIA V. KIA V was formed to seek out business opportunities and invest primarily in equity securities, leveraged buy-outs, and joint ventures. Kelso Partners V, L.P. serves as the general partner of KIA V. The general partners of Kelso Partners V, L.P., include Messrs. Schuchert and Nickell. Kelso & Co., L.P. is the manager of KIA V and, as such, acts as investment adviser of KIA V. The management fee relating to the interest held by the Company has been waived.\nThe Company will invest in a Cayman Islands corporation, A-S China Plumbing Products Limited (\"ASPPL\"), to be used for the establishment of various joint ventures in the People's Republic of China. The Company will have a 21% voting interest in ASPPL. Shares in ASPPL will also be sold in a private placement to certain institutions and other investors, including certain executive officers and employees of the Company and its subsidiaries.\nMr. Mizushima, a director of the Company and of Holding, is President and Chief Operating Officer of Daido Hoxan Inc., a Japanese corporation which has an approximately 11 percent limited partnership interest in ASI Partners. Daido Hoxan Inc. is the largest distributor of the Company's plumbing products in Japan. Its transactions as distributor with the Company and its subsidiaries in 1992, which were on customary terms and in the ordinary course of business, were not material to either the Company or Daido Hoxan Inc. The Company also entered into leasing transactions with an affiliate of Daido Hoxan whereby it has leased certain machinery and equipment on financial terms that were comparable to those available from other leasing companies. The leasing transactions were not material to either the Company or Daido Hoxan Inc.\nFidelity Management Trust Company (\"Fidelity\") is the owner of record of the shares of Holding held by the ESOP, a 17% owner of Holding shares. Fidelity was paid by the Company approximately $180,000 in 1993 for services in connection with administering the Company's ESOP and Savings Plan.\nMr. Nickell's father is an officer and owns more than 10 percent of AC Corporation, a contracting company which purchases air conditioning products from the Company's Trane Division. Such purchases in 1993 were on customary terms and in the ordinary course of business and were not material to either the Company or AC Corporation.\nManagement Investors Stockholders Agreement\nUnder the Stockholders Agreement, pursuant to which Management Investors purchased shares of Holding common stock, Holding is obligated to repurchase, subject to the limitations contained in the Company's lending arrangements and debt instruments, such shares at certain fair market prices in case of the death, disability, retirement, or termination of employment of a Management Investor. Shares are paid for within the constraints of the Company's lending arrangement and debt instruments, as supplemented by a Schedule of Priorities established by Holding's Board of Directors. The Named Officers (other than Mr. Gandini) and most of the executive officers are Management Investors and parties to the Stockholders Agreement.\nPART IV\nITEM 14. CONSOLIDATED EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.\n(a) 1 and 2. Financial statements and financial statement schedules\nThe financial statements and schedules listed in the accompanying index to financial statements are filed as part of this annual report on Form 10-K.\n3. Exhibits\nThe exhibits listed on the accompanying index to exhibits are filed as part of this annual report on Form 10-K.\nIncluded in the exhibits are the following management contracts or compensatory plan arrangements required to be filed as exhibits pursuant to Item 14(c) of Form 10-K\nAmerican Standard Inc. Long-Term Incentive Compensation Plan, as amended Trust Agreement for American Standard Inc. Long-Term Incentive Compensation Plan American Standard Inc. Annual Incentive Plan American Standard Inc. Management Partner's Bonus Plan with amendments American Standard Inc. Executive Supplemental Retirement Benefit Program American Standard Employee Stock Ownership Plan with amendments Estate Preservation Plan with amendments Corporate Officers Severance Plan American Standard Inc. Supplemental Compensation Plan for Outside Directors ASI Holding Corporation 1989 Stock Purchase Loan Program Summary of Terms of Unfunded Deferred Compensation Plan Letter of Agreement with respect to H. Thompson Smith's retirement and consulting services\n(b) Reports on Form 8-K for the quarter ended December 31, 1993.\nNone\nSignatures\nPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.\nAMERICAN STANDARD INC.\nBy \/s\/ Emmanuel A. Kampouris (Emmanuel A. Kampouris) (Chairman, President and Chief Executive Officer)\nMarch 30, 1994\nPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:\n\/s\/ Emmanuel A. Kampouris Director, Chairman and President March 30, 1994 (Emmanuel A. Kampouris) (Chief Executive Officer)\n\/s\/ Fred A. Allardyce Vice President and Chief March 30, 1994 (Fred A. Allardyce) Financial Officer\n\/s\/ G. Ronald Simon Vice President & Controller March 30, 1994 (G. Ronald Simon) (Principal Accounting Officer)\n\/s\/ Horst Hinrichs Director March 30, 1994 (Horst Hinrichs)\n\/s\/ George H. Kerckhove Director March 30, 1994 (George H. Kerckhove)\n\/s\/ Shigeru Mizushima Director March 30, 1994 (Shigeru Mizushima)\n\/s\/ Frank T. Nickell Director March 30, 1994 (Frank T. Nickell)\n\/s\/ J. Danforth Quayle Director March 30, 1994 (J. Danforth Quayle)\n\/s\/ Roger W. Parsons Director March 30, 1994 (Roger W. Parsons)\n\/s\/ Joseph S. Schuchert Director March 30, 1994 (Joseph S. Schuchert)\n\/s\/ John Rutledge Director March 30, 1994 (John Rutledge)\nAMERICAN STANDARD INC. AND FINANCIAL STATEMENT SCHEDULES COVERED BY REPORT OF INDEPENDENT AUDITORS (Item 14 (a))\nForm 10-K (Pages) 1. Financial Statements\nConsolidated Balance Sheet at December 31, 1993 and 1992 42 Years ended December 31, 1993, 1992 and 1991, Consolidated Statement of Operations 41 Consolidated Statement of Stockholder's Equity (Deficit) 43 Consolidated Statement of Cash Flows 44-45 Notes to Consolidated Financial Statements 46-62 Segment Data 63 Segment data for capital expenditures, depreciation and amortization 23-29 Quarterly Data (Unaudited) 64 Report of Independent Auditors 40\n2. Financial statement schedules, years ended December 31, 1993, 1992 and 1991: Report of Independent Auditors 84\nV Facilities 85 VI Accumulated Depreciation of Facilities 86 VIII Reserves 87 IX Short-Term Borrowings 88 X Supplementary Income Statement Information 89\nAll other schedules have been omitted because the information is not applicable or is not material or because the information required is included in the financial statements or the notes thereto.\nReport of Independent Auditors\nStockholders and Board of Directors American Standard Inc.\nWe have audited the consolidated financial statements of American Standard Inc. as of December 31, 1993 and 1992, and for each of the three years in the period ended December 31, 1993, and have issued our report thereon dated March 14, 1994 (included elsewhere in this Annual Report on Form-10K). Our audits also included the consolidated schedules listed in Item 14(a)2. These schedules are the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits.\nIn our opinion, the consolidated 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 required to be stated therein.\n\/s\/ Ernst & Young Ernst & Young\nMarch 14, 1994\nAMERICAN STANDARD INC.\nINDEX TO EXHIBITS\n(Item 14(a)3 - Exhibits Required by Item 601 of Regulation S-K and Additional Exhibits)\n(The File Number of American Standard Inc., the Registrant, and for all Exhibits incorporated by reference is 1-470, except those Exhibits incorporated by reference in filings made by ASI Holding Corporation (\"Holding\") whose File Number is 33-23070)\n(3) (i) Restated Certificate of Incorporation of American Standard Inc. (the \"Company\"); previously filed as Exhibit (3)(i) in the Company's Form l0-K for the fiscal year ended December 31, 1988, and herein incorporated by reference.\n(ii) Certificate of Designation, Preferences and Relative, Participating, Optional and other Special Rights of Preferred Stock and Qualifications, Limitations and Restrictions thereof of Series A Preferred Stock.\n(iii) By-laws of the Company; previously filed as Exhibit (3)(ii) in the Company's Form l0-K for the fiscal year ended December 31, 1988, and herein incorporated by reference.\n(4) (i) Indenture, dated as of November 1, 1986, between the Company and Manufacturers Hanover Trust Company, Trustee, including the form of 9-1\/4% Sinking Fund Debenture Due 2016 issued pursuant thereto on December 9, 1986, in the aggregate principal amount of $150,000,000; previously filed as Exhibit (4)(iii) in the Company's Form l0-K for the fiscal year ended December 31, 1986, and herein incorporated by reference.\n(ii) Instrument of Resignation, Appointment and Acceptance, dated as of April 25, 1988 among the Company, Manufacturers Hanover Trust Company (the \"Resigning Trustee\") and Wilmington Trust Company (the \"Successor Trustee\"), relating to resignation of the Resigning Trustee and appointment of the Successor Trustee under the Indenture referred to in Exhibit (4)(i) above; previously filed as Exhibit 4(ii) in Registration Statement No. 33-64450 of the Company under the Securities Act of 1933, as amended, and herein incorporated by reference.\nINDEX TO EXHIBITS - (Continued)\n(iii) Form of Indenture, dated as of July 1, 1988, between the Company and Shawmut Bank Connecticut, National Association (formerly known as The Connecticut National Bank), as Trustee, relating to the Company's 14-1\/4% Subordinated Discount Debentures due 2003; previously filed as Exhibit 4.3 in Amendment No. 2 to Registration Statement No. 33-22126 of the Company under the Securities Act of 1933, as amended, and herein incorporated by reference.\n(iv) Form of Debenture evidencing the 14-1\/4% Subordinated Discount Debentures due 2003 included as Exhibit A to the Form of Indenture referred to in (4)(iii) above.\n(v) Indenture dated as of May 15, 1992, between the Company and First Trust National Association, Trustee, relating to the Company's 10-7\/8% Senior Notes due 1999, in the aggregate principal amount of $150,000,000; previously filed as Exhibit (4)(i) in the Company's Form 10-Q for the quarter ended June 30, 1992, and herein incorporated by reference.\n(vi) Form of 10-7\/8% Senior Notes due 1999 included as Exhibit A to the Indenture described in (4)(v) above.\n(vii) Indenture dated as of May 15, 1992, between the Company and First Trust National Association, Trustee, relating to the Company's 11-3\/8% Senior Debentures due 2004, in the aggregate principal amount of $250,000,000; previously filed as Exhibit (4)(iii) in the Company's Form 10-Q for the quarter ended June 30, 1992, and herein incorporated by reference.\n(viii) Form of 11-3\/8% Senior Debentures due 2004 included as Exhibit A to the Indenture described in (4)(vii) above.\n(ix) Form of Indenture, dated as of June 1, 1993, between the Company and United States Trust Company of New York, as Trustee, relating to the Company's 9-7\/8% Senior Subordinated Notes Due 2001; previously filed as Exhibit 4(xxxi) in Amendment No. 1 to Registration Statement No. 33-61130 of the Company under the Securities Act of 1933, as amended, and herein incorporated by reference.\n(x) Form of Note evidencing the 9-7\/8% Senior Subordinated Notes Due 2001 included as Exhibit A to the Form of Indenture referred to in 4(ix) above.\nINDEX TO EXHIBITS - (Continued)\n(xi) Form of Indenture, dated as of June 1, 1993, between the Company and United States Trust Company of New York, as Trustee, relating to the Company's 10-1\/2% Senior Subordinated Discount Debentures Due 2005; previously filed as Exhibit (4)(xxxiii) in Amendment No. 1 to Registration Statement No. 33-61130 of the Company under the Securities Act of 1933, as amended, and herein incorporated by reference.\n(xii) Form of Debenture evidencing the 10-1\/2% Senior Subordinated Discount Debentures Due 2005 included as Exhibit A to the Form of Indenture referred to in (4)(xi) above.\n(xiii) Form of Indenture, dated as of October 25, 1990, as amended and restated as of June 15, 1993, between the Company and Shawmut Bank, N.A., as Trustee, relating to Company's 12-3\/4% Junior Subordinated Debentures Due 2003; previously filed as Exhibit (4)(xx) in Amendment No. 2 to Registration Statement No. 33-64450 of the Company under the Securities Act of 1933, as amended, and herein incorporated by reference.\n(xiv) Form of Indenture evidencing the 12-3\/4% Junior Subordinated Debentures Due 2003 included as Exhibit A to the Form of Indenture referred to in (4)(xiii) above.\n(xv) Assignment and Amendment Agreement, dated as of June 1, 1993, among the Company, Holding, certain subsidiaries of the Company, Bankers Trust Company, as agent under the 1988 Credit Agreement, the financial institutions named as Lenders in the 1988 Credit Agreement and certain additional Lenders and Chemical Bank, as Administrative Agent and Arranger; previously filed as Exhibit (4)(xiii) in Amendment No. 1 to Registration Statement No. 33-64450 of the Company under the Securities Act of 1933, as amended, and herein incorporated by reference.\n(xvi) Credit Agreement, dated as of June 1, 1993, among the Company, Holding, certain subsidiaries of the Company and the lending institutions listed therein, Chemical Bank, as Administrative Agent and Arranger; Bankers Trust Company, The Bank of Nova Scotia, The Chase Manhattan Bank, N.A., Deutsche Bank AG, The Long-Term Credit Bank of Japan, Ltd., New York Branch, and NationsBank of North Carolina, N.A., as Managing Agents, and Banque Paribas, Citibank, N.A., and Compagnie Financiere de CIC et de l'Union Europeenne, New York Branch, as Co-Agents; previously filed as Exhibit (4)(xiv) in Amendment No. 1 to Registration Statement No. 33-64450 of the Company under the Securities Act of 1933, as amended, and herein incorporated by reference.\n(xvii) First Amendment, Consent and Waiver, dated as of February 10, 1994, to the Credit Agreement referred to in (4)(xvi) above.\nINDEX TO EXHIBITS - (Continued)\n(xviii) Stockholders Agreement, dated as of July 7, 1988, as amended as of August 1, 1988, among Holding, Kelso ASI Partners, L.P., and the Management Stockholders named therein; previously filed as Exhibit 4.19 in Amendment No. 2 in the Registration Statement No. 33-23070 of Holding under the Securities Act of 1933, as amended, and herein incorporated by reference.\n(xix) Amendment to Section 2.1 of the Stockholders Agreement referred to in paragraph (4)(xviii) above, effective as of January 1, 1991; previously filed as Exhibit (4)(xxvii) by Holding in its Form 10-K for the year ended December 31, 1992, and herein incorporated by reference.\n(xx) Supplement and Amendment dated as of September 4, 1991 to the Stockholders Agreement, dated as of July 7, 1988, as amended, referred to in paragraph (4)(xviii) above; previously filed as Exhibit (4)(ii) by Holding in its Form 10-Q for the quarter ended September 30, 1991, and herein incorporated by reference.\n(xxi) Amended Section 6.1 of the Stockholders Agreement referred to in paragraph (4)(xviii) above, effective as of September 2, 1993; copy of amended Section is being filed as Exhibit (4)(xvii) by Holding in its Form l0-K for the year ended December 31, 1993, concurrently with the filing of the Company's Form 10-K for the same year, and herein incorporated by reference.\n(xxii) Revised Schedule of Priorities effective as of September 5, 1991, as adopted by the Board of Directors of Holding, pursuant to the Stockholders Agreement referred to in paragraph (4)(xviii) above; previously filed as Exhibit (4)(iii) by Holding in its Form l0-Q for the quarter ended September 30, 1991 and herein incorporated by reference.\n(10) (i) Agreement and Plan of Merger, dated as of March 16, 1988, among the Company, ASI Acquisition Company and Holding and Offer Letter, dated March 16, 1988, between the Company and Kelso & Company, L.P.; previously filed as Exhibit 2 to the Company's Schedule 14D-9 filed March 21, 1988, in connection with the offer for all the shares of the Company's Common Stock by a corporation formed by Kelso & Company, L.P., and herein incorporated by reference.\nINDEX TO EXHIBITS - (Continued)\n(ii) Amendment, dated June 3, 1988 to Agreement and Plan of Merger referred to in (l0)(i) above; previously filed as Exhibit 2.50 in Amendment No. 1 to the Registration Statement No. 33-22126 of the Company under the Securities Act of 1933, as amended, and herein incorporated by reference.\n(iii) American Standard Inc. Long-Term Incentive Compensation Plan, as amended through February 6, 1992; previously filed as Exhibit (10)(iv) in the Company's Form 10-K for the fiscal year ended December 31, 1992, and herein incorporated by reference.\n(iv) Trust Agreement for American Standard Inc. Long-Term Incentive Compensation Plan.\n(v) American Standard Inc. Annual Incentive Plan; previously filed as Exhibit (l0)(vii) in the Company's Form l0-K for the fiscal year ended December 31, 1988, and herein incorporated by reference.\n(vi) American Standard Inc. Management Partners' Bonus Plan effective as of July 7, 1988; previously filed as Exhibit (l0)(i) in the Company's Form l0-Q for the quarter ended September 30, 1988, and herein incorporated by reference; amendments to Plan adopted on June 7, 1990, previously filed as Exhibit (4)(ii) in the Company's Form l0-Q for the quarter ended June 30, 1990, and herein incorporated by reference.\n(vii) American Standard Inc. Executive Supplemental Retirement Benefit Program, as restated to include all amendments through December 31, 1993.\n(viii) Stock Purchase Agreement, dated April 27, 1988, between ASI Acquisition Company and General Electric Capital Corporation (without schedules); previously filed as Exhibit 2.4 in Registration Statement No. 33-22126 of the Company under the Securities Act of 1933, as amended, and herein incorporated by reference.\nINDEX TO EXHIBITS - (Continued)\n(ix) Amendment, dated June 3, 1988, to Stock Purchase Agreement referred to in (l0)(viii) above; previously filed as Exhibit 2.6 in Amendment No. 1 in Registration Statement No. 33-22126 of the Company under the Securities Act of 1933, as amended, and herein incorporated by reference.\n(x) Form of Composite American-Standard Employee Stock Ownership Plan incorporating amendments through December 3, 1992; previously filed as Exhibit (10)(x) in Registration Statement No. 33-61130 of the Company under the Securities Act of 1933, as amended, and herein incorporated by reference.\n(xi) American-Standard Employee Stock Ownership Trust Agreement, dated as of December 1, 1991, between ASI Holding Corporation and Fidelity Management Trust Company (as successor to Citizens & Southern Trust Company (Georgia), N.A.), as trustee; previously filed as Exhibit (10)(xiv) in the Company's Form 10-K for the year ended December 31, 1991, and herein incorporated by reference.\n(xii) Consulting Agreement made July 1, 1988, with Kelso & Company, L.P. concerning general management and financial consulting services to the Company; previously filed as Exhibit (l0)(xviii) in the Company's Form l0-K for the fiscal year ended December 31, 1988, and herein incorporated by reference.\n(xiii) American Standard Inc. Supplemental Compensation Plan for Outside Directors, as amended through September 1993.\n(xiv) ASI Holding Corporation 1989 Stock Purchase Loan Program; previously filed as Exhibit l0(i) in Holding's Form l0-Q for the quarter ended September 30, 1989, and herein incorporated by reference.\n(xv) Corporate Officers Severance Plan adopted in December, 1990, effective April 27, 1991; previously filed as Exhibit (l0)(xix) in the Company's Form l0-K for the fiscal year ended December 31, 1990, and herein incorporated by reference.\n(xvi) Estate Preservation Plan adopted in December, 1990; previously filed as Exhibit (l0)(xx) in the Company's Form l0-K for the fiscal year ended December 31, 1990, and herein incorporated by reference.\n(xvii) Amendment adopted in March 1993 to Estate Preservation Plan referred to in (10)(xvi) above.\n(xviii) Summary of terms of Unfunded Deferred Compensation Plan, adopted December 2, 1993.)\n(xix) Retirement\/Consulting Agreement, dated December 28, 1993, between H. Thompson Smith and the Company.\n(21) Listing of the Company's subsidiaries.","section_6":"","section_7":"ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS\nResults of Operations\nAs a result of the Acquisition, results of operations include purchase accounting adjustments and reflect a highly leveraged capital structure. Sales Year Ended December 31, 1993 1992 1991 (Dollars in millions) Air Conditioning Products(a) $2,100 $ 1,892 $ 1,836 Plumbing Products 1,167 1,170 1,018 Transportation Products 563 730 741 Sales $3,830 $ 3,792 $ 3,595 ====== ======= =======\nOperating Income (Loss) Before Income Taxes, Extraordinary Loss, and Cumulative Effects of Changes in Accounting Methods\nYear Ended December 31, 1993 1992 1991 (Dollars in millions) Air Conditioning Products(a) $133 $ 104 $ 55 Plumbing Products 108 108 66 Transportation Products 41 88 121 Operating income 282 300 242\nInterest expense (278) (289) (286) Corporate items(b) (85) (63) (44) Loss before income taxes, extraordinary loss, and cumulative effects of changes in accounting methods $(81) $ (52) $ (88) ==== ===== =====\n(a) For 1991 the amounts presented for Air Conditioning Products include the following amounts for Tyler Refrigeration (which was sold on September 30, 1991): sales of $99 million and operating loss of $18 million (including a $22 million loss on the sale).\n(b) Corporate items include administrative and general expenses, accretion charges on postretirement benefit liabilities, minority interest, foreign exchange transaction gains and losses, and miscellaneous income and expense.\nThe following section summarizes the Company's consolidated results of operations and then discusses the results of its three operating segments. The Company's businesses are cyclical. Air Conditioning Products and Plumbing Products are particularly affected by the level of residential and commercial building activity.\nThe following table presents a summary of statistics on U.S. non-residential construction activity and housing starts for the years 1989 through 1993.\nU.S. Non- Residential Contract Awards U.S. Housing (Millions % Change Starts % Change of square Year (Thousands of Year feet)(a) to Year units)(b) to Year 1989 1,322 - 1% 1,376 - 8% 1990 1,155 -13% 1,193 -13% 1991 953 -17% 1,015 -15% 1992 903 - 5% 1,200 +18% 1993 (c) 930 + 3% 1,290 + 7%\n(a) Source: F.W. Dodge Division, McGraw Hill, Inc.\n(b) Source: U.S. Department of Commerce, Bureau of Census.\n(c) Preliminary data.\nThe market for replacement sales and servicing of air conditioning and plumbing products, which accounts for a substantial portion of sales for Air Conditioning Products and Plumbing Products, is less cyclical and sometimes countercyclical.\nThe following table presents a summary of statistics on unit production of trucks, buses, and trailers in excess of six tons in Western Europe for the years 1989 through 1993 (units in thousands).\nWestern Europe % Change Western Europe % Change Truck and Bus Year Trailer Year Production(a) to Year Production(a) to Year\n1989 376 4% 125 9% 1990 343 -9% 128 2% 1991 353 3% 139 9% 1992 314 -11% 115 -17% 1993 223 -29% 88 -23%\n(a) Principal sources: Verband der Deutschen Automobilindustrie (Germany); Society of Motor Manufacturers and Traders (United Kingdom); and Chambre Syndicate des Constructeurs Automobiles (France).\n1993 Compared with 1992\nU.S. housing starts increased by 7% in 1993 from the 1992 level, which was up 18% over 1991 after four consecutive years of decline. U.S. non-residential contract awards increased by 3% in 1993 after five years of decline. The 1993 improvement in housing starts came in the second half of the year with third- and fourth-quarter starts up 10% and 12%, respectively, over the preceding quarter. The gain in non-residential awards occurred over the last nine months of 1993. Western European truck and bus production declined 29% in 1993 after an 11% decline in 1992. However, the rate of decline in the truck market slowed in the fourth quarter of 1993.\nConsolidated sales for 1993 were $3.83 billion, an increase of 1% (6% excluding the unfavorable effects of foreign exchange) over the $3.79 billion for 1992. A sales increase of 11% for Air Conditioning Products was partly offset by a sales decline for Transportation Products of 23% (16% excluding the unfavorable effects of foreign exchange). Sales for Plumbing Products were flat (but up by 9% excluding the effects of foreign exchange).\nOperating income for 1993 was $282 million, a decrease of $18 million, or 6% (but an increase of less than 1% excluding the effects of foreign exchange), from $300 million in 1992. The increase in operating income of 28% for Air Conditioning Products was more than offset by a 53% decrease in operating income for Transportation Products. Plumbing Products' operating income was flat (but increased 15% excluding the effects of foreign exchange). The gain for Air Conditioning Products was the result of higher volume, increased sales of higher-margin products, the benefits of manufacturing improvements, and the effects of restructuring and cost-containment efforts undertaken in 1991 and 1992, offset partly by the costs of further restructuring in 1993. For Plumbing Products the effects of increased volume for the Far East Group were offset partly by lower margins for the U.S. group and lower volumes and unfavorable foreign exchange effects for the European group. Transportation Products' operating income decreased primarily as a result of lower volumes due to reduced demand in depressed markets in Europe, offset partly by the effects of improvements in manufacturing efficiency.\nAir Conditioning Products Segment\nYear Ended December 31, 1993 1992 1991 (Dollars in millions)\nSales: Domestic portion $1,786 $1,572 $1,453 Foreign portion 314 320 284 Subtotal 2,100 1,892 1,737 Tyler Refrigeration - - 99 Total $2,100 $1,892 $1,836 ====== ====== ======\nOperating income (loss): Domestic portion $ 148 $ 112 $ 58 Foreign portion (15) (8) 15 Subtotal 133 104 73 Tyler Refrigeration - - (18)(a) Total $ 133 $ 104 $ 55 ====== ====== ======\nAssets $1,167 $1,156 $1,174 Goodwill and purchase accounting adjustments included in assets 372 398 417 Capital expenditures 38 33 46(b) Depreciation and amortization 53 55 56(c)\n(a) Includes $22 million loss on the sale of Tyler Refrigeration.\n(b) Includes capital expenditures of Tyler Refrigeration of $1 million.\n(c) Includes depreciation and amortization of Tyler Refrigeration of $3 million.\nThe domestic portion of Air Conditioning Products is composed of the Unitary Products Group, the Commercial Systems Group (excluding Canada), and exports from the United States by the International Group. The foreign portion consists of the foreign-based operations of the International Group and the Canadian operations of the Commercial Systems Group.\nSales and operating income of Air Conditioning Products both increased in 1993 despite the continuing recession in U.S. and Canadian commercial new construction and only moderate increase in residential new construction in the U.S. and despite the economic decline in Europe. Sales of Air Conditioning Products, which accounted for approximately 55% of the Company's 1993 sales, increased by 11% (with little effect from foreign exchange) to $2,100 million in 1993 from $1,892 million in 1992. There was a significant sales increase for each of the three operating groups.\nOperating income of Air Conditioning Products increased year to year by 28% (with little effect from foreign exchange) to a record high of $133 million in 1993 from $104 million in 1992. The increase was attributable to gains achieved by all three groups.\nUnitary Products Group\nIn 1993 sales of the Unitary Products Group, which accounted for approximately 42% of Air Conditioning Products sales, increased by 15% over the 1992 sales level. Residential markets were up 15%, as a result of an unusually hot summer in the northern United States and a 7% increase in housing starts. Sales of residential products increased by 18% year over year, principally because of higher volumes driven by the improved market, increased furnace sales in the replacement market, and a shift in the market to more efficient products, offset partly by the continuation from 1992 of price degradation due to competitive pressures. Commercial markets for unitary products were up 9% overall from the 1992 markets, as the commercial replacement market strengthened further. New-construction activity continued to struggle, however. Sales of commercial unitary products increased by 10% overall, primarily as a result of higher volume (driven by the strong replacement market for both light and large commercial products); a shift to higher-priced, higher-tonnage products; and a gain in market share for light commercial products due to the success of the large Voyager products (packaged rooftop air conditioners). As a result of these factors, together with product cost improvements, improved labor productivity, and the benefits of organizational restructuring which reduced the salaried workforce in 1992, the operating income for Unitary Products in 1993 increased by 43% year over year. This improvement was achieved even though 1993 included the initial start-up costs of the new national distribution center in St. Louis, Missouri, and higher advertising costs.\nUnitary Products' sales increased through the success of new and redesigned products introduced recently and improved distribution channels. Commercial products that were introduced included the 20-to-25-ton Voyager products in 1992, which more than doubled market share in that size range; commercial microprocessor-controlled products; a line of convertible air handlers; and rooftop and air cooled chiller products using more efficient scroll compressors. Residential products introduced included the American-Standard brand outdoor units and new lines of luxury and conventional retail residential products.\nCommercial Systems Group\nSales of the Commercial Systems Group, which accounted for approximately 37% of Air Conditioning Products' sales, increased 10%, primarily on volume increases for most product lines, especially air handling systems and water chillers (principally due to improved replacement markets and increased market share), and increased revenue from Company-owned sales offices (acquisitions and volume growth). These gains were partly offset by lower volume in Canada, which continues to be adversely affected by recession. The non-residential new-construction market increased 3% in the United States in 1993, following decreases of 5% in 1992 and 17% in 1991. The non-residential replacement market was up by 6% over 1992.\nOperating income for Commercial Systems increased 12% in 1993 over the recession-affected amount of 1992. The increase was primarily the result of volume gains, improvements in manufacturing efficiency, operating expense reductions, and the benefits of restructuring actions taken in 1992. The effects of these factors were partly offset by slightly lower prices, increases in material, labor, and benefit costs, the costs of additional restructuring actions in 1993, and a larger loss in the weak Canadian market.\nProduct development emphasis for Commercial Systems in 1993 and 1992 was on new compressor, heat transfer and microelectronic control technology; adaptation of products to refrigerants that comply with recent government regulations; energy-efficient products; products for the aftermarket and replacement market (which exceeded the new-construction market in both 1993 and 1992); and products redesigned to improve manufacturing productivity. This strategy benefited operations in 1993 and 1992, and the Company expects that this product development emphasis will result in greater sales over the next several years.\nInternational Group\nSales of Air Conditioning Products' International Group, which accounted for approximately 21% of Air Conditioning Products' 1993 sales, increased 7% from those of 1992 (10% excluding the unfavorable effect of foreign exchange). Most of the gain was from higher volume in the Far East (especially Hong Kong, Taiwan, and export sales from the U.S.) resulting from expanded markets and increased penetration; higher export sales from the U.S. to the Middle East (markets were significantly stronger) and Latin America (improved penetration in a market that was up 20%); and higher volumes in Mexico. These gains were partly offset by lower sales in Europe (lower prices and volumes in a declining market). Markets were down in all European countries except the U.K., but the effect was partly offset by increased revenues from service companies acquired in 1992 and prior years. Market growth in the Far East was 6% overall, led by the PRC market, which was up by 21%. The sales growth in Hong Kong was driven by the very strong market in the PRC. Markets in Thailand also grew, and the Latin American market grew by 20%.\nOperating income for the International Group increased by approximately 39% in 1993. The increase was primarily the result of higher export sales from the U.S. to the Middle East and Far East, offset partly by a larger operating loss in Europe primarily because of the weak markets and lower margins, costs related to restructuring in response to the lower markets, and the unfavorable effects of lower volume on factory performance. Overall, income from the Far East and Latin America was essentially unchanged from the prior year, as volume gains were offset by increased costs related to expansion of distribution channels and joint ventures and development of new and improved products to support present and future growth.\nEnvironmental Matters\nFor a discussion of environmental matters see \"Business -- Regulations and Environmental Matters.\"\nBacklog\nThe worldwide backlog for Air Conditioning Products at the end of 1993 was $407 million, up 13% from 1992, excluding the effects of foreign exchange. The backlog increased as a result of increased volume for the Commercial Systems Group, market penetration and improved distribution channels in the Middle East and Far East, and sales growth for commercial Unitary Products.\nPlumbing Products Segment\nYear Ended December 31, 1993 1992 1991 (Dollars in millions)\nSales: Foreign portion $ 865 $ 885 $ 783 Domestic portion 302 285 235 Total $1,167 $1,170 $1,018 ====== ====== ====== Operating income (loss): Foreign portion $ 131 $ 124 $ 93 Domestic portion (23) (16) (27) Total $ 108 $ 108 $ 66 ====== ====== ======\nAssets $ 960 $1,002 $1,069 Goodwill and purchase accounting adjustments included in assets 376 392 447 Capital expenditures 46 48 40 Depreciation and amortization 49 49 48\nThe foreign portion of Plumbing Products is composed of the European Plumbing Products Group, the Americas International Group, and the Far East Group. The domestic portion of sales and operating results is generated primarily by the U.S. Plumbing Products Group and by export sales from the U.S.\nSales of Plumbing Products in 1993, at $1,167 million, which accounted for approximately 30% of the Company's 1993 sales, were at essentially the same level as the $1,170 million of sales in 1992 (but increased by 9% excluding the unfavorable effects of foreign exchange). Sales increases of 42% for the Far East Group (46% excluding foreign exchange), 9% for the Americas International Group (14% excluding foreign exchange), and 6% for the U.S. Plumbing Products Group were offset partly by a sales decrease of 10% for the European Plumbing Products Group (which had a 4% increase excluding the effects of foreign exchange).\nIn 1993 operating income of Plumbing Products was $108 million, the same amount as in 1992, but excluding the unfavorable effects of foreign exchange operating income increased by 15%. The increase (on an exchange-adjusted basis) was attributable primarily to increased profitability for the Far East Group and for the Americas International Group, offset partly by a decline for the U.S. group.\nEuropean Plumbing Products Group\nSales of the European group, which accounted for approximately 51% of Plumbing Products' sales for 1993, decreased 10% in 1993 from 1992 but increased by 4% excluding the unfavorable effects of foreign exchange. The exchange-adjusted gain resulted from price increases, especially in Italy, Germany, the U.K., and Greece, offset partly by lower volume in most countries because of depressed markets. In Italy sales were up with price increases for most product lines, offset partly by lower volume and a less favorable product mix. The German market was stable in total, as price gains were offset by volume and mix declines. Greece, which had been in recession for three years, recovered somewhat in 1993. The European group's strength has been sales in the replacement market, which has more than made up for the effects of poor new-construction markets.\nOperating income for the European group decreased 7% but increased 10% excluding the effects of foreign exchange. This increase occurred primarily because of the price gains and cost reductions resulting from restructuring and efficiency improvements in the U.K., France, Italy, and Germany. Partly offsetting those favorable effects were the effects of lower volumes and the unfavorable effect on margins caused by the decline in value of many European currencies agains the Deutschemark. The increased cost of fittings purchased from Germany could not be completely recovered through sales price increases in most of the operations in other countries.\nU.S. Plumbing Products Group\nSales of the U.S. group, which accounted for approximately 26% of total 1993 Plumbing Products sales, increased 6% in 1993. During 1993 the U.S. building industry continued to be adversely affected by the low level of new construction, although non-residential construction increased 3% from 1992 and new residential construction continued to recover from the lowest levels since the mid-1940's (up by 7% in 1993 and 18% in 1992 but\nstill below pre-1990 levels). A basic shift from wholesale distribution channels to retail channels has been developing over the last few years, a trend the Company believes will continue and will be beneficial to the Company because of strong product and brand-name recognition. Retail markets now account for 20% of the total sales of the U.S. group. The growth of sales for the U.S. group was largely the result of increased export sales from the U.S. and to a lesser extent price increases on certain products, a more favorable sales mix, and a small increase in the growing retail channel business. The overall gain in the retail business was small because significant volume gains due to an expanding customer base were partly offset by the loss of an important customer.\nThe operating loss for the U.S. group in 1993 was greater than that of the prior year. Despite higher sales, operating results were poorer primarily because of lower margins on both domestic and export sales, increased advertising costs and other expenses associated with expansion of the retail distribution channel, costs related to start-up and expansion of the low-water-volume toilet line (now mandated for new construction), and factory performance problems caused in part by the effects of fluctuating volumes. In addition, costs were incurred in business system re-engineeering activities intended to improve customer service.\nAmericas International and Far East Groups\nCombined sales of the Americas International and Far East Groups, which accounted for approximately 23% of total Plumbing Products sales, increased 21% in 1993 (26% excluding the effects of foreign exchange). The sales gain was due primarily to the consolidation of Incesa (a previously unconsolidated group of Central American joint ventures) effective January 1, 1993, as a result of the purchase of additional shares of stock, and to higher volume and prices in Thailand, the PRC, the Philippines, and Brazil, offset partly by decreases in sales in Mexico, Canada, and Korea.\nCombined operating income of the Americas International and Far East Groups in 1993 increased 72% over the 1992 level. Gains were realized in all operations except Mexican chinaware operations, which were adversely affected by poor economic conditions and the uncertainty related to the North American Free Trade Agreement. The increase was primarily from higher prices and volumes in Brazil, Thailand, and the PRC the consolidation of Incesa, and a smaller loss for Mexican fittings operations.\nEnvironmental Matters\nFor a discussion of environmental matters see \"ITEM 1. BUSINESS -- Regulations and Environmental Matters.\"\nBacklog\nPlumbing Products' year-end 1993 backlog of $143 million was down 9% from 1992, excluding foreign exchange effects. The decrease resulted from a significant drop for European Plumbing Products (particularly Italy because of economic uncertainty, tempered somewhat by increases for England and Germany), and a drop in backlog for export sales from the U.S., partly offset by increases in the Far East (primarily Thailand).\nTransportation Products Segment\nYear Ended December 31, 1993 1992 1991 (Dollars in millions)\nSales $ 563 $730 $741 Operating income 41 88 121 Assets 652 722 828 Goodwill and purchase accounting adjustments included in assets 422 458 510 Capital expenditures 14 27 24 Depreciation and amortization 35 37 34\nSales of Transportation Products, which accounted for 15% of the Company's 1993 sales, were $563 million, down 23% from $730 million in 1992 (16% excluding the effects of foreign exchange). The sales decrease was due primarily to a volume decline in Germany as a result of a 29% decrease in Western European truck and bus production, led by a 34% decline in Germany, and a 23% decrease in Western European trailer production. Volumes were also down in all other European countries in which Transportation Products has operations, although at the end of 1993 sales and order trends were upward. Volume in Brazil was slightly higher. Original equipment sales volume in Europe was down 22%, and aftermarket business was down 10%. These declines affected both conventional and electronic products.\nOperating income for Transportation Products in 1993 decreased 53% (50% excluding foreign exchange effects) to $41 million from $88 million in 1992, principally because of the lower sales and production volume and the inability to pass on material and labor cost increases in a very competitive, declining market. In response to reduced production levels, plant employment was reduced by 15%, the costs of which further depressed 1993 operating income. Those effects were partly offset by the favorable effects of cost improvements in manufacturing from Demand Flow implementa- tion and reduced operating expenses.\nDespite the market downturn, significant progress was made during 1993 in obtaining market acceptance of electronically controlled air suspension systems for commercial vehicles and for antilock braking systems on trailers.\nBacklog\nTransportation Products' year-end 1993 order backlog of $185 million was 2% lower than the 1992 year-end backlog, excluding the effects of foreign exchange, as a result of the poor market conditions.\nFinancial Review\n1993 Compared with 1992\nThe Company's financing and corporate costs were $363 million and $352 million in 1993 and 1992, respectively. The principal causes of the increase were effects of year-to-year changes in foreign exchange transaction gains and losses, higher minority interest, lower equity income, higher accretion expense on postretirement benefits, and lower miscellaneous income. Interest expense, which accounted for most of these costs, decreased primarily because of lower overall interest rates on new debt issued as part of the Refinancing (described below), partly offset by additional interest expense as a result of the exchange of the 12-3\/4% Exchangeable Preferred Stock for the 12-3\/4% Junior Subordinated Debentures.\nThe tax provision for 1993 was $36 million despite a pre-tax loss of $81 million, whereas in 1992 the tax provision was $5 million on a pre-tax loss from continuing operations of $52 million. The 1993 provision reflected taxes payable on profitable foreign operations and was higher than in 1992 primarily because no tax benefits were available on domestic losses. The unusual relationship between the pre-tax losses and the tax provision is explained by the nondeductibility for tax purposes of the amortization of goodwill and other purchase accounting adjustments and the share allocations made by the Company's ESOP as well as by tax rate differences and withholding taxes on foreign earnings.\nAs a result of the Refinancing in 1993 there was an extraordinary charge of $92 million related to the debt retired (including call premiums, the write-off of deferred debt issuance costs, and loss on cancellation of foreign currency swap contracts) on which there was no tax benefit.\nLiquidity and Capital Resources\nAs a result of the Acquisition the Company's capital structure became highly leveraged. Net cash flow from operations, after cash interest expense of $195 million, was $201 million for the year ended December 31, 1993. Utilizing this cash flow and cash on hand at December 31, 1992, the Company devoted $98 million to capital expenditures, including $8 million of investments in affiliated companies, and repaid $50 million of term loans.\nIn July 1993 the Company completed a refinancing (the \"Refinancing\") that included (a) the issuance of $200 million principal amount of 9-7\/8% Senior Subordinated Notes Due 2001; (b) the issuance of approximately $751 million principal amount of 10-1\/2% Senior Subordinated Discount Debentures Due 2005, which yielded proceeds of approximately $450 million; (c) the amendment and restatement of the Company's 1988 Credit Agreement (the \"1988 Credit Agreement\" and as so amended and restated, the \"Credit Agreement\") to establish a $1 billion secured, multi-currency, multi-borrower credit facility; and (d) the application of the proceeds of\nsuch issuances and such borrowings as follows: (i) the redemption on July 1, 1993, of all of the outstanding 12-7\/8% Senior Subordinated Debentures Due 2000 at a redemption price of 104.83% ($571.3 million), (ii) the redemption on July 2, 1993, of a majority of the outstanding 14-1\/4% Subordinated Discount Debentures Due 2003 at a redemption price of 105% ($389.5 million), (iii) the refunding of bank borrowings ($405 million of term loans and $77 million of other bank debt including revolving credit debt), (iv) the refunding of letters of credit ($58 million), and (v) payment of related fees and expenses.\nThe Credit Agreement provided to American Standard Inc. and certain subsidiaries (the \"Borrowers\") a $1 billion facility as follows: (a) a $250 million multi-currency revolving credit facility (the \"Revolving Credit Facility\") available to all Borrowers, which expires in 2000; (b) a $225 million multi-currency periodic access facility (the \"Periodic Access Facility\") available to all Borrowers, which expires in 2000; and (c) three term loan facilities (the \"Term Loans\") consisting of a $225 million U.S. dollar facility available to American Standard Inc., which expires in 2000; a $200 million Deutschemark facility available to a German subsidiary, which expires in 1997; and a $100 million U.S. dollar facility available to all Borrowers, which expires in 1999. In August 1993 the Company repaid $50 million, and the amount available under the Credit Agreement by its terms was reduced to $950 million.\nThe Company is required to reduce to $50 million the amount of borrowings outstanding under the Revolver for at least 30 consecutive days in each 12-month period ending May 31. In December 1993 the Company met this requirement for the 12 months ending May 31, 1994. Commencing August 31, 1994, the Revolver is reduced by $8.3 million annually, with a final maturity on June 1, 2000. In addition, the Company is required to repay the full amount of each of its outstanding revolving loans at the end of each interest period (a maximum of six months). The Company may, however, immediately reborrow such amounts subject to compliance with applicable conditions of the Credit Agreement.\nThe Credit Agreement provides the Company with increased operating and financial flexibility, including the ability to shift from time to time a portion of borrowings among borrowers and currencies. As a result of the Refinancing there was a significant reduction in annual interest expense, which was partly offset by additional interest expense on the 12-3\/4% Junior Subordinated Debentures exchanged for the 12-3\/4% Exchangeable Preferred Stock. The Company believes that the amounts available from operating cash flows and under the Revolving Credit Facility will be sufficient to meet its expected cash needs, including planned capital expenditures.\nAs described in Note 8 of Notes to Consolidated Financial Statements, the Credit Agreement contains various covenants that limit, among other things, indebtedness, dividends on and redemptions of capital stock of the Company, purchases and redemptions of other indebtedness of the Company (including its outstanding debentures and notes), rental expense, liens, capital expenditures, investments or acquisitions, disposal of assets, the use of proceeds from asset sales, and certain other business activities and require the Company to meet certain financial tests. In order to\nmaintain compliance with the covenants and restrictions contained in the 1988 Credit Agreement, the Company from time to time has had to obtain waivers and amendments. In February 1994 the Company obtained an amendment to the Credit Agreement that among other things relaxed certain financial tests and convenants, and facilitated the investment in an air conditioning joint venture and the formation of a holding company to establish joint ventures in the People's Republic of China for the manufacture and sale of plumbing products. The Company currently believes it will comply with the amended financial tests and covenants but may have to obtain similar amendments or waivers in the future.\nOn June 30, 1993, in exchange for all of the Company's outstanding shares of 12-3\/4% Exchangeable Preferred Stock, the Company issued $141.8 million of 12-3\/4% Junior Subordinated Debentures Due 2003 to the holder of the Exchangeable Preferred Stock. Those debentures were sold by the holder in a registered public offering in August 1993. The Company received none of the proceeds of this offering.\nThe indentures related to the Company's debentures and notes contain various covenants which, among other things, limit debt and preferred stock of the Company and its subsidiaries, dividends on and redemption of capital stock of the Company and its subsidiaries, redemption of certain subordinated obligations of the Company, the use of proceeds from asset sales, and certain other business activities.\nIn connection with examinations of the tax returns of the Company's German subsidiaries for the years 1984 through 1990, the German tax authorities have raised questions regarding the treatment of certain significant matters. The Company has paid approximately $20 million of a disputed German income tax. A suit is pending to obtain a refund of this tax. The Company anticipates that the German tax authorities may propose other adjustments resulting in additional taxes of approximately $105 million, plus penalties and interest for the tax return years under audit. In addition, significant transactions similar to those which gave rise to such possible adjustments occurred in years subsequent to 1990. The Company, on the basis of the opinion of legal counsel, believes the tax returns are substantially correct as filed and intends to vigorously contest any adjustments which have been or may be assessed. Accordingly, the Company had not recorded any loss contingency at December 31, 1993, with respect to such matters. Under German tax law the authorities may demand immediate payment of a tax assessment prior to final resolution of the issues. The Company also believes, on the basis of opinion of legal counsel, that it is highly likely that a suspension of payment will be obtained if additional taxes are assessed. However, if payment is required the Company expects that it will be able to meet such payment from available sources of liquidity or credit support but that future cash flows and capital expenditures, and therefore subsequent results of operations for any particular quarterly or annual period, could be adversely affected.\nCapital Expenditures\nThe Company's capital expenditures for 1993 amounted to $98 million, including investments of $8 million in affiliated companies. The amount\nof capital expenditures was $10 million less than in 1992 ($6 million less excluding the effects of foreign exchange). Decreases in capital spending by Plumbing Products and Transportation Products were partly offset by an increase in spending by Air Conditioning Products. The Company believes capital spending was sufficient for maintenance purposes, for important product and process redesigns, for expansion projects, and for strategic investments.\nCapital expenditures by Air Conditioning Products were $38 million in 1993. This amount was 15% more than that of 1992. Capital expenditures in 1993 included continuing projects related to Demand Flow and spending on new products such as the Voyager III (medium-tonnage product line), the scroll compressor, and the Series R chiller line, expansion of Voyager I and Voyager II capacity and tooling and equipment for the American Standard product line.\nPlumbing Products' capital expenditures in 1993 were $46 million, including investments of $8 million in affiliated companies in France (Porcher) and the Czech Republic. Excluding the investments in affiliated companies and the effects of foreign exchange, capital spending was 34% higher than in 1992 as a result of spending increases in Europe and the Far East. Major projects included capacity expansion in Thailand and China and various projects related to Demand Flow implementation.\nCapital expenditures for Transportation Products totaled $14 million in 1993. Excluding the effects of foreign exchange, capital spending was 41% less than in 1992, a year with significant spending related to Demand Flow cost-reduction projects in production and material flow.\n1992 Compared with 1991\nU.S. housing starts increased by 18% in 1992 from the 1991 level, but non-residential contract awards decreased by 5%. Both of these economic indicators had declined in each of the previous four years.\nConsolidated sales for 1992 were $3.8 billion, an increase of 5% (4% excluding the favorable effects of foreign exchange) over the $3.6 billion for 1991. The 1991 amount included the sales of Tyler Refrigeration, which was sold September 30, 1991. Excluding Tyler Refrigeration, sales in 1992 were up 8% (7% excluding foreign exchange effects). Sales increases of 15% for Plumbing Products and 9% for Air Conditioning Products (excluding Tyler Refrigeration) were partly offset by a sales decline for Transportation Products of 1% (6% excluding the favorable effects of foreign exchange).\nOperating income for 1992 was $300 million, an increase of $58 million, or 24% (19% excluding the effects of foreign exchange), from $242 million in 1991. The 1991 amount included a loss for Tyler Refrigeration. Excluding Tyler Refrigeration, operating income in 1992 was up 15% (10% excluding foreign exchange effects.) Increases in operating income of 42% for Air Conditioning Products (excluding Tyler Refrigeration) and 64% for Plumbing Products were partly offset by a 27% decrease in operating income for Transportation Products.\nExcept as otherwise indicated, the following discussion, including the financial comparisons, does not include the results of Tyler Refrigeration or the $22 million loss on the sale of Tyler Refrigeration in 1991.\nAir Conditioning Products Segment\nSales of Air Conditioning Products, which accounted for approximately 50% of the Company's 1992 sales, increased by 9% to $1,892 million in 1992 from $1,737 million in 1991. There was a significant sales increase for each of the three operating groups -- for the Unitary Products Group in both residential and commercial products primarily because of higher volume and more favorable product mix (partly offset by lower prices), for the Commercial Systems Group primarily because of higher volume and prices, and for the International Group principally because of increased volume in Europe and the Far East.\nOperating income of Air Conditioning Products increased year to year by 42% (with little effect from foreign exchange) to $104 million in 1992 from $73 million in 1991. The increase was attributable to the sales gains, the benefits of manufacturing improvements and restructuring and cost containment in the Unitary Products and Commercial Systems Groups, and the fact that in 1991 results of the Commercial Systems Group had been adversely affected by a 54-day work stoppage at its LaCrosse, Wisconsin, facility. The impact of these factors was partly offset by a margin decline for the International Group and costs related to the start-up of new facilities, sales offices, and distribution channels.\nUnitary Products Group\nSales in 1992 of the Unitary Products Group, which accounted for approximately 41% of Air Conditioning Products sales, increased by 6% over the 1991 sales level. Commercial markets for unitary products were up 6% overall from the depressed 1991 markets, as a very strong commercial replacement market more than offset the effects of low new-construction activity. Sales of commercial unitary products increased by 7% overall, primarily as a result of higher volume (driven by the strong replacement market), a shift to higher-priced, higher-tonnage products, and a gain in market share for light commercial products. Residential markets were down 3.5%, as poor replacement activity, a result of an unseasonably cool summer, more than offset the 18% increase in new housing starts. Despite this poorer market, sales of residential products increased by 5% year over year, principally because of larger market share, improved furnace markets, and a partial shift in the market to more efficient products stimulated by Federal standards, offset partly by price degradation due to competitive pressures. As a result of these factors, together with benefits of manufacturing improvements, cost containment, and organizational restructuring which reduced the salaried workforce, the operating profit for Unitary Products in 1992 increased by 50% from the depressed level of 1991.\nCommercial Systems Group\nSales of the Commercial Systems Group, which accounted for approximately 38% of Air Conditioning Products' sales, increased 9% primarily on volume increases in aftermarket replacement and parts sales, increased revenue from Company-owned sales offices (volume growth and acquisitions), and small price increases on most product lines. Other factors contributing to the increase were higher sales of large applied systems and the fact that in 1991 there was a 54-day work stoppage at the LaCrosse, Wisconsin, plant. These gains were partly offset by lower volume in Canada, which was adversely affected by recession.\nOperating income for Commercial Systems increased 129% in 1992 over the recession-affected and work-interrupted level of 1991. The increase was primarily the result of the volume and price gains, improvements in manufacturing efficiency, cost containment and restructuring, and the fact that 1991 included the adverse impact of the LaCrosse work stoppage. The effects of these factors were partly offset by slightly lower gross margins, as the price increases did not completely recover increases in material, labor and benefits costs.\nInternational Group\nSales of Air Conditioning Products' International Group, which accounted for approximately 21% of Air Conditioning Products' 1992 sales, increased 15% from those of 1991 (10% excluding the favorable effect of foreign exchange). Most of the gain was from higher volumes in Mexico (two new sales offices resulted in expanded distribution and penetration), the Far East (especially Hong Kong and Singapore), the Middle East (markets were significantly stronger), and Europe (sales of new products and increased penetration despite declining markets). Markets were down in almost all European countries except Italy, with the largest drop in the U.K., offset partly by increased revenues from acquired service companies.\nOperating income for the International Group decreased by approximately 68% in 1992. The decline occurred in Europe, primarily because of the weak markets and lower prices, costs related to the start-up of new facilities and new distribution networks in the U.K. and France, costs related to the introduction of new products, start-up costs of a company in Spain acquired near the end of 1991, and foreign exchange transaction losses from currency fluctuations in the latter half of 1992. Income from the Far East and Latin America was essentially unchanged from the prior year, as volume gains were offset by increased costs related to expanded distribution channels, start-up of new joint ventures, and development of new and improved products to support present and future growth.\nPlumbing Products Segment\nSales of Plumbing Products, which accounted for approximately 31% of the Company's 1992 sales, increased by 15% in 1992 (14% excluding the effects of foreign exchange) to $1,170 million from $1,018 million in 1991. The improvement resulted from sales increases of 9% (7% excluding the effects of foreign exchange) for the European Plumbing Products Group, 21% for the U.S. Plumbing Products Group, 4% for the Americas International Group (7% excluding foreign exchange), and 101% for the Far East Group (98% excluding foreign exchange).\nIn 1992 operating income of Plumbing Products increased 64% (56% excluding the effects of foreign exchange) to $108 million from $66 million in 1991. The increase was attributable primarily to increased profitability for the European group on higher prices and volumes (especially in Italy and Germany) although improved results in the U.S., Americas International, and Far East groups contributed.\nEuropean Plumbing Products Group\nSales of the European group, which accounted for approximately 57% of Plumbing Products' sales for 1992, increased 9% in 1992 over 1991, 7% excluding the favorable effects of foreign exchange. The gain resulted primarily from price and volume increases, especially in Italy and Germany, offset partly by lower volume in France from declining demand and lower prices in the U.K. caused by a very poor market. In Italy sales were up 9%, with gains for most product lines in price, volume and market share. The gains in Germany were the result of higher volumes and prices for brass fittings and luxury chinaware.\nOperating income for the European group increased 28% (23% excluding the effects of foreign exchange) primarily from the price and volume gains in Italy and Germany and higher margins on German brass operations resulting from improved manufacturing processes and cost containment, offset partly by lower profitability in France because of decreased volume and in the U.K. because of the recession. A recession depressed operating results in Greece.\nU.S. Plumbing Products Group\nSales of the U.S. group, which accounted for approximately 24% of total 1992 Plumbing Products sales, increased 21% in 1992. During 1992 the U.S. building industry continued to be severely affected by the low level of new construction, with non-residential construction down 5% from 1991 and with new residential construction recovering from the lowest levels since the mid-1940's (though up by 18%, it was still low in historical terms). The U.S. market for plumbing products was up an estimated 3% to 4%, with more than half the gain occurring in the replacement and remodeling markets, which accounts for about 60% of the total U.S. market. The growth of sales for the U.S. group was largely a result of the strength of retail business (which had a significant\nincrease in volume and accounted for 20% of sales of the U.S. group in 1992) and increased export sales from the U.S., together with smaller gains resulting from price increases and higher wholesaler distribution sales. Sales of AMERICAST products more than doubled in 1992, and smaller volume gains were achieved for acrylic products, fixtures, and faucets.\nThe operating loss for the U.S. group in 1992 was less than that of the prior year. The improvement was primarily due to price increases and secondarily to volume and margin gains (as a result of sourcing product from the Company's Latin American plants), offset partly by non-recurring costs related to implementation of improved manufacturing processes and the effects of a shift in overall sales mix from commercial and luxury to lower-margin products.\nAmericas International and Far East Groups\nCombined sales of the Americas International and Far East Groups, which accounted for approximately 19% of total Plumbing Products sales, increased 26% in 1992 (28% excluding the effects of foreign exchange). The sales gain was due primarily to the consolidation in 1992 of a previously unconsolidated joint venture in Thailand and to a lesser extent to price and volume increases in Mexico and Korea and higher volumes in Brazil, offset partly by lower sales in Canada, which were adversely affected by severe recession.\nCombined operating income of the Americas International and Far East Groups in 1992 increased 134% over the 1991 level. Gains were realized in all operations except Canada and the Philippines, both of which were adversely affected by poor economies. The increase was primarily from price and volume gains in Mexico and Korea, higher volume and margins in Brazil, and higher volume in China.\nTransportation Products Segment\nSales of Transportation Products, which accounted for 19% of the Company's 1992 sales, were $730 million, down 1% from $741 million in 1991 (6% excluding the effects of foreign exchange). The sales decrease was due primarily to a volume decline in Germany as a result of a significant decrease in truck and bus production. Volumes were also down in nearly all other European countries in which Transportation Products has operations except the U.K. There was also a decline in prices of electronic control products, primarily as a result of industry cost reductions.\nOperating income for Transportation Products in 1992 decreased 27% (32% excluding foreign exchange effects) to $88 million from $121 million in 1991, principally because of the lower sales and production volume, lower prices, and increased spending for product engineering. Plant employment was kept in line with reduced production levels, but the costs associated with these reductions also depressed 1992 operating income. Those effects were partly offset by the favorable effects of cost reductions and increases in efficiency achieved in manufacturing operations.\nFinancial Review\n1992 Compared with 1991\nThe Company's financing and corporate costs were $352 million and $330 million in 1992 and 1991, respectively. The principal causes of the increase were year-to-year effects of changes in foreign exchange transaction gains and losses, higher minority interest, and lower miscellaneous income. Interest expense and accretion expense on postretirement benefits, which accounted for most of these costs, also increased.\nThe tax provision for 1992 was $5 million despite a pre-tax loss of $52 million, whereas in 1991 the tax provision was $23 million on a pre-tax loss from continuing operations of $88 million. The 1992 provision reflected taxes payable on profitable foreign operations offset partly by available domestic tax benefits. The 1992 provision was lower than in 1991 primarily because of lower pre-tax earnings in foreign operations. In 1992 the provision was also lower because of future income tax benefits resulting from carrybacks of foreign net operating losses and the existence of deferred tax credits which reverse in the carryforward period applicable to other foreign net operating losses. The unusual relationship between the pre-tax losses and the tax provision is explained by the nondeductibility for tax purposes of the amortization of goodwill and other purchase accounting adjustments and the share allocations made by the Company's ESOP as well as by tax rate differences and withholding taxes on foreign earnings.\nITEM 8.","section_7A":"","section_8":"ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA\nRESPONSIBILITY FOR FINANCIAL STATEMENTS\nThe accompanying consolidated balance sheets at December 31, 1993 and 1992, and related consolidated statements of operations, stockholder's equity (deficit), and cash flows for the years ended December 31, 1993, 1992 and 1991, have been prepared in conformity with generally accepted accounting principles, and the Company believes the statements set forth a fair presentation of financial condition and results of operations. The Company believes that the accounting systems and related controls that it maintains are sufficient to provide reasonable assurance that the financial records are reliable for preparing financial statements and maintaining accountability for assets. The concept of reasonable assurance is based on the recognition that the cost of a system of internal control must be related to the benefits derived and that the balancing of those factors requires estimates and judgment. Reporting on the financial affairs of the Company is the responsibility of its principal officers, subject to audit by independent auditors, who are engaged to express an opinion on the Company's financial statements. The Board of Directors has an Audit Committee of non-employee Directors which meets periodically with the Company's financial officers, internal auditors, and the independent auditors and monitors the accounting affairs of the Company.\nAmerican Standard Inc.\nNew York, New York March 14, 1994\nREPORT OF ERNST & YOUNG, INDEPENDENT AUDITORS\nThe Board of Directors American Standard Inc.\nWe have audited the accompanying consolidated balance sheets of American Standard Inc. and subsidiaries as of December 31, 1993 and 1992, and the related consolidated statements of operations, stockholder's equity (deficit), and cash flows 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.\nWe conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.\nIn our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of American Standard Inc. and subsidiaries at December 31, 1993 and 1992, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1993, in conformity with generally accepted accounting principles.\n\/s\/Ernst & Young\nErnst & Young\nNew York, New York March 14, 1994\nAMERICAN STANDARD INC. AND SUBSIDIARIES\nCONSOLIDATED STATEMENT OF OPERATIONS (Dollars in thousands)\nYear Ended December 31, 1993 1992 1991\nSales $3,830,462 $3,791,929 $3,595,267 Costs and expenses Cost of sales 2,902,562 2,852,230 2,752,068 Selling and administrative expenses 692,229 678,742 614,259 Other expense 38,281 24,672 8,082 Interest expense (includes debt issuance cost amortization of $11,461 for 1993, $5,983 for 1992 and $5,335 for 1991) 277,860 288,851 286,316 Loss on sale of Tyler Refrigeration - - 22,391 3,910,932 3,844,495 3,683,116 Loss before income taxes, extra- ordinary loss and cumulative effects of changes in accounting methods (80,470) (52,566) (87,849) Income taxes 36,165 4,672 23,033 Loss before extraordinary loss and cumulative effects of changes in accounting methods (116,635) (57,238) (110,882) Extraordinary loss on retirement of debt (Note 8) (91,932) - - Cumulative effects of changes in accounting methods (Notes 2 and 3) - - (32,291)\nNet loss (208,567) (57,238) (143,173)\nPreferred dividend (8,624) (15,707) (13,855)\nNet loss applicable to common shares $ (217,191) $ (72,945) $ (157,028) ========== ========== ==========\nSee notes to consolidated financial statements.\nAMERICAN STANDARD INC. AND SUBSIDIARIES\nCONSOLIDATED BALANCE SHEET (Dollars in thousands)\nASSETS At December 31, 1993 1992 Current assets Cash and certificates of deposit $ 53,237 $ 111,549 Cash in escrow 932 1,722 Accounts receivable, less allowance for doubtful accounts-- 1993, $15,666; 1992, $12,827 507,322 468,731 Inventories 325,819 384,857 Future income tax benefits 24,562 33,192 Other current assets 29,811 31,199 Total current assets 941,683 1,031,250 Facilities, at cost net of accumulated depreciation 820,523 832,811 Other assets Goodwill, net of accumulated amortization -- 1993, $169,879; 1992 $141,858 1,025,774 1,101,716 Debt issuance costs, net of accumulated amortization-- 1993 $9,670; 1992, $77,776 78,102 51,308 Prepaid ESOP expense 4,331 9,527 Other 120,997 109,333 $2,991,410 $3,135,945 ========== ==========\nLIABILITIES AND STOCKHOLDER'S DEFICIT\nCurrent liabilities Loans payable to banks $ 38,036 $ 99,150 Current maturities of long-term debt 105,939 13,458 Accounts payable 307,326 271,855 Accrued payrolls 99,758 105,400 Other accrued liabilities 258,322 225,335 Taxes on income 47,003 18,848 Total current liabilities 856,384 734,046 Long-term debt 2,191,737 2,032,064 Other long-term liabilities Reserve for postretirement benefits 387,038 368,868 Deferred tax liabilities 45,625 73,307 Other 204,170 212,383 Total liabilities 3,684,954 3,420,668 Commitments and contingencies Exchangeable preferred stock - 133,176 Stockholder's deficit Preferred stock, Series A, 1,000 shares issued and outstanding, par value $.01 - - Common stock, 1,000 shares issued and outstanding, par value $.01 - - Capital surplus 211,333 210,409 Accumulated deficit (750,003) (541,436) Foreign currency translation effects (149,220) (86,872) Minimum pension liability adjustment ( 5,654) - Total stockholder's deficit (693,544) (417,899) $2,991,410 $3,135,945 ========== ==========\nSee notes to consolidated financial statements.\nAMERICAN STANDARD INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS\nNote 1. Basis of Presentation\nOn March 17, 1988, American Standard Inc. and subsidiaries (the \"Company\") agreed to be acquired by an affiliate of Kelso & Company L.P. (\"Kelso\"), an investment banking firm that specializes in leveraged buyouts. On March 21, 1988, the Kelso affiliate commenced a tender offer (the \"Tender Offer\") for all of the Company's common stock at $78 per share in cash. On April 27, 1988, the Kelso affiliate completed the Tender Offer with the purchase of approximately 95% of the Company's shares.\nPursuant to an Agreement and Plan of Merger, a merger was consummated (the \"Merger\") on June 29, 1988, whereby the Company became a wholly owned subsidiary of ASI Holding Corporation, a Delaware corporation (\"Holding\") organized by Kelso to participate in the acquisition of the Company. At that time the remaining shares of the Company's common stock were converted into the right to receive cash of $78 per share. The Tender Offer, Merger, and related transactions are hereinafter referred to as the \"Acquisition.\" For financial statement purposes the Acquisition has been accounted for under the purchase method.\nNote 2. Accounting Policies\nConsolidation\nThe financial statements include on a consolidated basis the results of all majority-owned subsidiaries. All material intercompany transactions are eliminated. Investments in affiliated companies are included at cost plus the Company's equity in their net results.\nTranslation of Foreign Financial Statements\nAssets and liabilities of most foreign operations are translated at year-end rates of exchange, and the income statements are translated at the average rates of exchange for the period. Gains or losses resulting from translating foreign currency financial statements are accumulated in a separate component of stockholder's equity until the entity is sold or substantially liquidated.\nGains or losses resulting from foreign currency transactions (transactions denominated in a currency other than the entity's local currency) are included in net income. For operations in countries that have high rates of inflation, net income includes gains and losses from translating assets and liabilities at year-end rates of exchange, except for inventories and facilities, which are translated at historical rates.\nRevenue Recognition\nSales are recorded when shipment to a customer occurs.\nAMERICAN STANDARD INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS\nStatement of Cash Flows\nCash and certificates of deposit include all highly liquid investments with an original maturity of three months or less.\nInventories\nInventory costs are determined by the use of the last-in, first-out (LIFO) method on a worldwide basis, and inventories are stated at the lower of such cost or realizable value.\nFacilities\nThe Company capitalizes costs, including interest during construction, of fixed asset additions, improvements, and betterments that add to productive capacity or extend the asset life. Maintenance and repair expenditures are charged against income. Significant foreign investment grants are amortized into income over the period of benefit.\nGoodwill\nGoodwill is being amortized over 40 years.\nDebt Issuance Costs\nThe costs related to the issuance of debt are amortized using the interest method over the lives of the related debt.\nWarranties\nThe Company provides for estimated warranty costs at the time of sale. Warranty obligations beyond one year are included in other long-term liabilities.\nThe Company changed its method of accounting for revenues from extended warranty contracts at the beginning of 1991 to conform with the FASB Technical Bulletin, \"Accounting for Separately Priced Extended Warranty and Product Maintenance Contracts.\" The bulletin requires the deferral of the revenue from the sales of such contracts and amortization thereof on a straight-line basis over the terms of the contracts. The cumulative effect of this accounting change for all contracts in place as of December 31, 1990, increased the net loss in 1991 by $7 million, net of income tax benefit. The effect on the 1991 net loss, excluding the cumulative effect upon adoption, was not material.\nAMERICAN STANDARD INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS\nLeases\nThe asset values of capitalized leases are included with facilities, and the associated liabilities are included with long-term debt.\nPostretirement Benefits\nPostretirement benefits are provided for substantially all employees of the Company, both in the United States and abroad. In the United States the Company also provides various postretirement health care and life insurance benefits for some of its employees. Effective January 1, 1991, such costs are calculated in accordance with Statement of Financial Accounting Standards No. 106, \"Employers' Accounting for Postretirement Benefits Other Than Pensions\" (\"FAS 106\").\nDepreciation\nDepreciation and amortization are computed on the straight-line method based on the estimated useful life of the asset or asset group.\nResearch and Development Expenses\nResearch and development costs are expensed as incurred except for costs incurred (after technological feasibility is established) for computer software products expected to be sold. The Company expensed costs of approximately $41 million in 1993, $40 million in 1992, and $36 million in 1991 for research activities and product development. Computer software product development costs capitalized in 1993 amounted to $2 million.\nIncome Taxes\nIn 1991 the Company adopted Statement of Financial Accounting Standards No. 109, \"Accounting for Income Taxes\" (\"FAS 109\"), and elected to apply the provisions retroactively to January 1, 1989.\nThe Company recognizes deferred tax assets for the tax effects of items that will be deducted for tax purposes in later years together with the tax effects of income items included in current reporting for tax purposes but in later years for financial statement purposes and the effects of certain tax attributes such as net operating losses.\nThe Company provides for United States income taxes and foreign withholding taxes on foreign earnings expected to be repatriated. Deferred tax liabilities are provided on the excess of the financial statement basis over the tax basis of certain assets, primarily for inventories and fixed assets, including fair value adjustments resulting from purchase accounting in connection with the Acquisition; fixed assets due to accelerated depreciation deductions for tax purposes; and non-permanent investments in certain foreign subsidiaries.\nAMERICAN STANDARD INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS\nFinancial Instruments with Off-Balance-Sheet Risk\nThe Company from time to time enters into foreign currency exchange agreements in the management of foreign currency exposure. Gains and losses from exchange rate changes are included in income unless the contract hedges a net investment in a foreign entity or a firm commitment, in which case gains and losses are deferred as a component of foreign currency translation effects in stockholder's equity or included as a component of the transaction.\nNote 3. Postretirement Benefits\nThe Company sponsors postretirement benefit plans covering substantially all employees, including an Employee Stock Ownership Plan (the \"ESOP\") for the Company's U.S. salaried employees and certain U.S. hourly employees. In 1988 in conjunction with the Acquisition the ESOP purchased 5,000,000 shares (adjusted for a 100-for-1 stock split) of common stock of Holding. The ESOP is an individual account, defined contribution plan. The valuation of the ESOP shares is determined by independent appraisals. The common stock acquired by the ESOP is being allocated to the accounts of eligible employees over a period not exceeding eight plan years, including basic allocation of 3% of covered compensation and a matching Company contribution of up to 6% of covered compensation invested in the Company's savings plan by employees.\nPension plan benefits are generally based on years of service and employees' compensation during the last years of employment. In the United States the Company also provides various postretirement health care and life insurance benefits for some of its employees. Funding decisions are based upon the tax and statutory considerations in each country. Accretion expense is the implicit interest cost associated with amounts accrued and not funded and is included in \"other expense\". At December 31, 1993, funded plan assets related to pensions were held primarily in fixed income and equity funds. Postretirement health and life insurance benefits are not prefunded.\nEffective January 1, 1991, the Company changed its method of accounting for postretirement benefits other than pensions to conform with FAS 106. The cumulative effect of this change increased the recorded obligation for such benefits by $40 million, thereby increasing the net loss in 1991 by $25 million (net of the related income tax benefit). The effect of the change on the 1991 net loss, excluding the cumulative effect upon adoption, was not material.\nThe following table sets forth the Company's postretirement plans' funded status and amounts recognized in the balance sheet at December 31, 1993 and 1992.\nTotal postretirement costs were: Year Ended December 31, 1993 1992 1991 (Dollars in millions)\nPension benefits $37.5 $35.4 $32.4 Health and life insurance benefits 17.8 16.7 15.2 Defined benefit plan cost 55.3 52.1 47.6 Defined contribution plan cost (a) 22.4 20.4 20.0 Total postretirement cost, including accretion expense $77.7 $72.5 $67.6 ===== ===== ===== (a) Principally ESOP cost.\nAMERICAN STANDARD INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS\nNote 4. Other Expense\nOther income (expense) was as follows:\nYear Ended December 31, 1993 1992 1991 (Dollars in millions)\nInterest income $ 8.5 $ 8.7 $ 8.3 Royalties 2.6 3.8 2.5 Equity in net income (loss) of affiliated companies (0.1) 4.9 10.2 Minority interest (14.0) (9.8) (3.1) Accretion expense (30.5) (29.8) (27.9) Other, net (4.8) (2.5) 1.9 $(38.3) $(24.7) $ (8.1) ====== ====== ======\nThe decrease in equity in net income of affiliated companies and the increase in minority interest in 1993 and 1992 compared with 1991 were primarily the result of consolidation of the plumbing companies in Thailand, the People's Republic of China, and Incesa, previously unconsolidated joint ventures.\nNote 5. Income Taxes\nThe Company's loss before income taxes, extraordinary loss, and cumulative effects of changes in accounting methods (\"pre-tax income (loss)\") and the applicable provision (benefit) for income taxes were:\nYear Ended December 31, 1993 1992 1991 (Dollars in millions) Pre-tax income (loss): Domestic $ (223.2) $ (170.1) $(272.6) Foreign 142.7 117.5 184.8 Pre-tax loss $ (80.5) $ (52.6) $ (87.8) Provision (benefit) for income taxes: Current: Domestic $ 12.4 $ 5.1 $ 5.1 Foreign 43.0 63.0 71.3 55.4 68.1 76.4 Deferred: Domestic 1.1 (35.8) (52.4) Foreign (20.3) (27.6) (1.0) (19.2) (63.4) (53.4) Total provision $ 36.2 $ 4.7 $ 23.0 ======== ======== =======\nAMERICAN STANDARD INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS\nA reconciliation between the actual income tax expense provided and the income tax benefit computed by applying the statutory federal income tax rate of 35% in 1993 and 34% in 1992 and 1991 to the pre-tax loss is as follows:\nYear Ended December 31, 1993 1992 1991 (Dollars in millions) Tax benefit at statutory rate $(28.2) $(17.9) $(29.9) Nondeductible goodwill charged to operations 10.4 10.5 10.6 Nondeductible goodwill related to operations sold - 25.1* Nondeductible ESOP allocations 6.1 4.9 4.6 Rate differences and withholding taxes related to foreign operations 9.0 1.4 4.7 Foreign exchange gains (7.0) (6.3) (2.1) State tax benefits (5.5) (3.3) (3.4) Other, net 8.7 5.5 5.6 Increase in valuation allowance 42.7 9.9 7.8 Total provision $ 36.2 $ 4.7 $ 23.0 ====== ====== ======\n* Includes goodwill eliminated in the sale of Tyler Refrigeration.\nIn addition to the valuation allowance increase of $42.7 million shown above, a valuation allowance of $32.1 million was provided for the entire amount of the tax benefit related to the extraordinary loss on retirement of debt (see Note 8 of Notes to Consolidated Financial Statements).\nThe following table details the gross deferred liabilities and the gross deferred tax assets and the related valuation allowances.\nAt December 31, 1993 1992 (dollars in millions) Deferred tax liabilities: Facilities (accelerated depreciation, capitalized interest and purchase accounting differences) $ 141.1 $ 154.1 Inventory (LIFO and purchase accounting differences) 18.5 30.3 Employee benefits 11.0 6.6 Foreign investments 50.1 48.8 Other 26.2 26.6 246.9 266.4 Deferred tax assets: Employee benefits (pensions and other postretirement benefits) 110.7 97.7 Warranties 37.4 30.0 Alternative minimum tax 19.4 21.8 Foreign tax credits and net operating losses 57.5 42.3 Reserves 58.7 45.1 Other 46.0 18.5 Valuation allowances (103.9) (29.1) 225.8 226.3 Net deferred tax liabilities $ 21.1 $ 40.1 ========= ========\nAMERICAN STANDARD INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS\nDeferred tax assets related to foreign tax credits, net operating loss carryforwards, and future tax deductions have been reduced by a valuation allowance since realization is dependent in part on the generation of future foreign source income as well as on income in the legal entity which gave rise to tax losses. Other deferred tax assets have not been reduced by valuation allowances because of carrybacks and existing deferred tax credits which reverse in the carryforward period. The foreign tax credits and net operating losses are available for utilization in future years. In some tax jurisdictions the carryforward period is limited to as little as five years; in others it is unlimited.\nAs a result of the Acquisition (see Note 1) and the allocation of purchase accounting (principally goodwill) to foreign subsidiaries, the book basis in the net assets of the foreign subsidiaries exceeds the related U.S. tax basis in the subsidiaries' stock. Such investments are considered permanent in duration, and accordingly no deferred taxes have been provided on such differences, which are significant. It is impracticable because of the complex legal structure of the Company and the numerous tax jurisdictions in which the Company operates to determine such deferred taxes.\nCash taxes paid were $41 million, $56 million, and $79 million in the years 1993, 1992, and 1991, respectively.\nIn connection with examinations of the tax returns of the Company's German subsidiaries for the years 1984 through 1990, the German tax authorities have raised questions regarding the treatment of certain significant matters. The Company has paid approximately $20 million of a disputed German income tax. A suit is pending to obtain a refund of this tax. The Company anticipates that the German tax authorities may propose other adjustments resulting in additional taxes of approximately $105 million, plus penalties and interest for the tax return years under audit. In addition, significant transactions similar to those which gave rise to such possible adjustments occurred in years subsequent to 1990. The Company, on the basis of the opinion of legal counsel, believes the tax returns are substantially correct as filed and intends to vigorously contest any adjustments which have been or may be assessed. Accordingly, the Company had not recorded any loss contingency at December 31, 1993 with respect to such matters. Under German tax law the authorities may demand immediate payment of a tax assessment prior to final resolution of the issues. The Company also believes, on the basis of opinion of legal counsel, that it is highly likely that a suspension of payment will be obtained if additional taxes are assessed. However, if payment is required, the Company expects that it will be able to make such payment from available sources of liquidity or credit support but that future cash flows and capital expenditures and therefore subsequent results of operations for any particular quarterly or annual period could be adversely affected.\nAMERICAN STANDARD INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS\nNote 6. Inventories\nThe components of inventory are as follows:\nAt December 31, 1993 1992 (Dollars in millions)\nFinished products $169.0 $200.6 Products in process 78.0 95.8 Raw materials 78.8 88.5 Inventory at cost $325.8 $384.9 ====== ======\nThe carrying cost of inventories reflects purchase accounting adjustments and therefore exceeds current cost.\nNote 7. Facilities\nThe components of facilities, at cost, are as follows:\nAt December 31, 1993 1992 (Dollars in millions)\nLand $ 66.2 $ 65.0 Buildings 314.6 310.2 Machinery and equipment 739.9 719.4 Improvements in progress 54.4 45.6 Gross facilities 1,175.1 1,140.2 Less: accumulated depreciation 354.6 307.4 Net facilities $ 820.5 $ 832.8 ======== ========\nNote 8. Debt\nThe 1993 Refinancing\nIn July 1993 the Company completed a refinancing (the \"Refinancing\") that included (a) the issuance of $200 million principal amount of 9-7\/8% Senior Subordinated Notes Due 2001; (b) the issuance of approximately $751 million principal amount of 10-1\/2% Senior Subordinated Discount Debentures Due 2005, which yielded proceeds of approximately $450 million; (c) the amendment and restatement of the Company's 1988 Credit Agreement (the \"1988 Credit Agreement\" and as so amended and restated, the \"Credit Agreement\") to establish a $1 billion secured, multi-currency, multi-borrower credit facility; and (d) the application of the proceeds of such issuances and such borrowings as follows: (i) the redemption on July 1, 1993, of all of the outstanding 12-7\/8% Senior Subordinated Debentures Due 2000 (the \"12-7\/8% Senior Subordinated Debentures\") at a redemption price of 104.83% ($571.3 million), (ii) the redemption on July 2, 1993, of\nAMERICAN STANDARD INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS\na majority of the outstanding 14-1\/4% Subordinated Discount Debentures Due 2003 (the \"14-1\/4% Subordinated Discount Debentures\") at a redemption price of 105% ($389.5 million), (iii) the refunding of bank borrowings ($405 million of term loans and $77 million of other bank debt including revolving credit debt), (iv) the refunding of letters of credit ($58 million), and (v) payment of related fees and expenses.\nThe Credit Agreement provided to American Standard Inc. and certain subsidiaries (the \"Borrowers\") a $1 billion facility as follows: (a) a $250 million multi-currency revolving credit facility (the \"Revolving Credit Facility\") available to all Borrowers, which expires in 2000; (b) a $225 million multi-currency periodic access facility (the \"Periodic Access Facility\") available to all Borrowers, which expires in 2000; and (c) three term loan facilities (the \"Term Loans\") consisting of a $225 million U.S. dollar facility (\"Tranche A\") available to American Standard Inc., which expires in 2000; a $200 million Deutschemark facility (\"Tranche B\") available to a German subsidiary, which expires in 1997; and a $100 million U.S. dollar facility (\"Tranche C\") available to all Borrowers, which expires in 1999. In August 1993 the Company repaid $50 million and the amount available under the Credit Agreement by its terms was reduced to $950 million.\nBorrowings under the Periodic Access Facility and the Term Loans generally bear interest at the London interbank offered rate (\"LIBOR\") plus 2-1\/2% except for the $225 million U.S. dollar facility, which bears interest at LIBOR plus 3%, and the $200 million Deutschemark facility, which bears interest at LIBOR plus 2%. The Company pays a commitment fee of 0.5% per annum on the unused portion of the Revolving Credit Facility and a fee of 2.5% plus issuance fees for letters of credit.\nAs a result of the Refinancing, results for the year ended December 31, 1993, included an extraordinary charge of $92 million related to the debt retired (including call premiums, the write-off of deferred debt issuance costs, and loss on cancellation of foreign currency swap contracts) on which there was no tax benefit (see Note 5).\nShort-term\nThe Revolving Credit Facility (the \"Revolver\") provides for aggregate borrowings of up to $250 million for working capital purposes, of which up to $200 million may be used for the issuance of letters of credit and $40 million of which is available for same-day short-term borrowings (\"Swingline Loans\"). At December 31, 1993, there were $7 million of borrowings outstanding under the Revolver and $66 million of letters of credit. Availability under the Revolver at December 31, 1993, was $177 million. Average borrowings under this facility and under the revolving credit facility available under the previous 1988 Credit Agreement for 1993, 1992, and 1991 were $39 million, $14 million, and $44 million, respectively. The Revolver and the Swingline Loans bear interest at the prime rate plus 1-1\/2% or LIBOR plus 2-1\/2%.\nThe Company is required to reduce to $50 million the amount of borrowings outstanding under the Revolver for at least 30 consecutive days in each 12-month period ending May 31. In December 1993 the Company met this requirement for the 12-month period ending May 31, 1994. Commencing August 31, 1994, the Revolver is reduced by $8.3 million annually, with a\nAMERICAN STANDARD INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS\nfinal maturity on June 1, 2000. In addition, the Company is required to repay the full amount of each of its outstanding revolving loans at the end of each interest period (a maximum of six months). The Company may, however, immediately reborrow such amounts subject to compliance with applicable conditions of the Credit Agreement.\nOther short-term borrowings are available outside the United States under informal credit facilities and are typically a result of overdrafts. At December 31, 1993, the Company had $31 million of such foreign short-term debt outstanding at an average interest rate of 11% per annum. The Company also had an additional $50 million of unused foreign facilities. These facilities may be withdrawn by the banks at any time.\nLong-term\nLong-term debt was as follows:\nAt December 31, 1993 1992 (Dollars in millions)\nCredit Agreement $ 689.9 $ - 1988 Credit Agreement - 402.3 9 1\/4% sinking fund debentures, due in installments from 1997 to 2016 150.0 150.0 10 7\/8% senior notes due 1999 150.0 150.0 11 3\/8% senior debentures due 2004 250.0 250.0 9 7\/8% senior subordinated notes due 2001 200.0 - 10 1\/2% senior subordinated discount debentures (net of unamortized discount of $272.9 million in 1993) due in installments from 2003 to 2005 477.8 - 12 7\/8% senior subordinated debentures - 545.0 14 1\/4% subordinated discount debentures (net of unamortized discount of $36.3 million in 1992) due in installments from 2002 to 2003 175.0 509.5 Other long-term debt 63.1 53.3 12 3\/4% junior subordinated debentures due in installments from 2001 to 2003 (Note 9) 141.8 - Foreign currency swap contracts - (14.6) 2,297.6 2,045.5 Less current maturities 105.9 13.4 $ 2,191.7 $ 2,032.1 ========= =========\nThe amounts of long-term debt maturing from 1995 through 1998 are: 1995-$126.3 million, 1996-$123.5 million, 1997 $121.2 million, 1998-$117.5 million.\nInterest costs capitalized as part of the cost of constructing facilities for the years ended December 31, 1993, 1992, and 1991, were $2.7 million, $3.1 million, and $3.6 million, respectively. Cash interest paid for those same years on all outstanding indebtedness amounted to $198 million, $210 million, and $224 million, respectively.\nAMERICAN STANDARD INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS\nCredit Agreement loans, maturities, and effective weighted average interest rates in effect at December 31, 1993, were as follows:\nU.S. Dollar Equivalent (in millions) Periodic Access Facility, due in semi-annual installments from February 1994 to February 2000: British sterling loans at 7.85% $ 95.8 Deutschemark loans at 9.06% 49.4 Canadian dollar loans at 6.50% 20.2 French franc loans at 9.17% 18.5 Italian lira loans at 12.19% 8.7 Total Periodic Access loans 192.6\nTerm Loans: Tranche A U.S. dollar loans, due in semi-annual installments from August 1997 to February 2000 at 6.50% 225.0 Tranche B Deutschemark loans, due in semi-annual installments from February 1994 to February 1997 at 7.88% 172.3 Tranche C U.S. dollar loans, due in semi-annual installments from February 1994 to August 1999 at 6.01% 100.0 Total Term Loans 497.3\nTotal Credit Agreement long-term loans 689.9\nRevolver loans at 7.5% 7.0\nTotal Credit Agreement loans $ 696.9 ========\nUnder the 1988 Credit Agreement the various term loans and effective weighted average interest rates in effect at December 31, 1992, were as follows: U.S. Dollar Equivalent (in millions) Deutschemark loans at 11.4% $249.8 Canadian dollar loans at 13.05% 152.5 Total $402.3 ======\nThe 9-7\/8% Senior Subordinated Notes may be redeemed at the Company's option, in whole or in part, on and after June 1, 1998, at redemption prices declining from 102.82% in 1998 to 100% on June 1, 2000, and thereafter. The 10-1\/2% Senior Subordinated Discount Debentures may be redeemed at the Company's option, in whole or in part, on and after June 1, 1998, at redemption prices declining from 104.66% in 1998 to 100% on June 1, 2002, and thereafter. The payment of the principal and interest on the\nAMERICAN STANDARD INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS\n9-7\/8% Senior Subordinated Notes and on the 10-1\/2% Senior Subordinated Discount Debentures (together the \"Senior Subordinated Debt\") is subordinated in right of payment to the payment when due of all Senior Debt (as defined in the related indenture) of the Company, including all indebtedness under the Credit Agreement and the 9-1\/4% Sinking Fund Debentures, the 10-7\/8% Senior Notes, and the 11-3\/8% Senior Debentures (the said notes and debentures together the \"Senior Securities\").\nThe 9-1\/4% Sinking Fund Debentures are redeemable at the Company's option, in whole or in part, at redemption prices declining from 105.55% in 1994 to 100% in 2006 and thereafter. The 10-7\/8% Senior Notes are not redeemable by the Company. The 11-3\/8% Senior Debentures are redeemable at the option of the Company, in whole or in part, on or after May 15, 1997, at redemption prices declining from 105.69% in 1997 to 100% on May 15, 2002, and thereafter.\nThe 14-1\/4% Subordinated Discount Debentures are redeemable at the Company's option, in whole or in part, at redemption prices of 105% prior to June 30, 1994, declining to 100% on and after June 30, 1995. The payment of the principal and interest on the 14-1\/4% Subordinated Discount Debentures issued by the Company in 1988 is subordinated in right of payment to the payment when due of all Senior Debt (as defined in the related indenture) of the Company, including all indebtedness under the Credit Agreement, the Senior Securities, and the Senior Subordinated Debt. The 14-1\/4% Subordinated Discount Debentures rank senior to the 12-3\/4% Junior Subordinated Debentures (described below).\nThe 12-3\/4% Junior Subordinated Debentures may be redeemed, at the Company's option, in whole or in part at a redemption price of 101.8% prior to June 30, 1994, and at 100% thereafter. The payment of principal and interest on the 12-3\/4% Junior Subordinated Debentures is subordinated in right of payment to the payment when due of all Senior Debt (as defined in the related indenture) of the Company, including all indebtedness under the Credit Agreement, the Senior Securities, the Senior Subordinated Debt, and the 14-1\/4% Subordinated Discount Debentures.\nObligations under the Credit Agreement are guaranteed by ASI Holding Corporation (the Company's parent), the Company, and significant domestic subsidiaries of the Company (with foreign borrowings also guaranteed by certain foreign subsidiaries) and are secured by U.S., Canadian, and U.K. properties, plant, and equipment; by liens on receivables, inventories, intellectual property, and other intangibles; and by a pledge of the Company's stock and nearly all shares of subsidiary stock. In addition, the obligations of the Company under the Senior Securities are secured, to the extent required by the related indentures, by mortgages on the principal U.S. properties of the Company equally and ratably with the indebtedness under the Credit Agreement and certain related indebtedness.\nThe Senior Subordinated Debt, the 14-1\/4% Subordinated Discount Debentures, and the 12-3\/4% Junior Subordinated Debentures are unsecured.\nThe Credit Agreement contains various covenants that limit, among other things, indebtedness, dividends on and redemption of capital stock of the Company, purchases and redemptions of other indebtedness of the Company (including its outstanding debentures and notes), rental expense, liens, capital expenditures, investments or acquisitions, disposal of assets, the\nAMERICAN STANDARD INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS\nuse of proceeds from asset sales, and certain other business activities and require the Company to meet certain financial tests. In order to maintain compliance with the covenants and restrictions contained in the 1988 Credit Agreement, the Company from time to time has had to obtain waivers and amend- ments. In February 1994 the Company obtained an amendment to the Credit Agreement that among other things relaxed certain financial tests and covenants and facilitated the investment in an air conditioning joint venture and the formation of a holding company to establish joint ventures in the People's Republic of China for the manufacture and sale of plumbing products. The Company currently believes it will comply with the amended financial tests and covenants but may have to obtain similar waivers or amendments in the future.\nThe indentures related to the Company's debentures and notes contain various covenants which, among other things, limit debt and preferred stock of the Company and its subsidiaries, dividends on and redemption of capital stock of the Company and its subsidiaries, redemption of certain subordinated obligations of the Company, the use of proceeds from asset sales, and certain other business activities.\nNote 9. Exchange of Exchangeable Preferred Stock\nOn June 30, 1993, in exchange for all of the Company's outstanding shares of 12-3\/4% Exchangeable Preferred Stock, the Company issued $141.8 million of 12-3\/4% Junior Subordinated Debentures Due 2003 to the holder of the Exchangeable Preferred Stock. Those debentures were sold by the holder in a registered public offering in August 1993. The Company received none of the proceeds of this offering.\nNote 10. Foreign Currency Translation\nAssets and liabilities of most foreign operations are translated at year-end rates of exchange, and the resulting gains or losses, net of income tax effects, are accumulated in a separate component of stockholder's equity.\nChanges in exchange rates which gave rise to significant translation effects included in stockholder's equity for the years ended December 31, 1993, 1992, and 1991, are summarized in the accompanying table.\nChange in End of Period Exchange Rate Currency 1993 1992 1991\nBritish sterling (2)% (19)% (3)% Canadian dollar (4) ( 9) - French franc (6) (6) (2) Deutschemark (7) (6) (1) Italian lira (14) (22) (2) ===== ===== ===== Translation loss included in stockholder's equity, net of tax (dollars in millions) $ (62.3) $ (36.2) $ (2.1) ====== ====== =====\nAMERICAN STANDARD INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS\nThe allocation of purchase costs increased the net asset exposure of foreign operations; however, since June 29, 1988, the date of the Merger, the effects of exchange volatility have been ameliorated by the fact that a portion of the Company's borrowings has been denominated in foreign currencies.\nThe losses from foreign currency transactions and translation from operations in countries with high inflation rates reflected in expense were $21.9 million in 1993, $19.3 million in 1992, and $14.4 million in 1991.\nNote 11. Fair Values of Financial Instruments\nStatement of Financial Accounting Standards No. 107, \"Disclosures About Fair Values of Financial Instruments\" (\"FAS 107\"), requires disclosure information about all financial instruments of a company except certain excluded instruments and instruments for which it is not practicable to estimate fair value. The fair values presented below are estimates as of December 31, 1993, and are not necessarily indicative of amounts the Company could realize or settle currently or indicative of the intent or ability of the Company to dispose of or liquidate such instruments.\nThe following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments:\nCash and certificates of deposit: The carrying amount reported in the balance sheet for cash and certificates of deposit approximates its fair value.\nLong- and short-term debt: The fair values of the Company's Credit Agreement loans are estimated using indicative market quotes obtained from a major bank. The fair values of senior notes, senior debentures, senior subordinated notes, senior subordinated discount debentures, subordinated discount debentures, the sinking fund debentures, and the junior subordinated debentures are based on indicative market quotes obtained from a major securities dealer. The fair values of other loans approximate their carrying value.\nThe carrying amounts and estimated fair values of selected financial instruments at December 31, 1993 are as follows: (dollars in millions) Carrying Fair Amount Value Credit Agreement loans $ 697 $ 679 10 7\/8% senior notes 150 163 11 3\/8% senior debentures 250 276 9 7\/8% senior subordinated notes 200 208 10 1\/2% senior subordinated discount debentures 478 505 14 1\/4% subordinated discount debentures 175 184 9 1\/4% sinking fund debentures 150 152 12-3\/4% junior subordinated debentures 142 143 Other loans 63 63\nAMERICAN STANDARD INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS\nNote 12. Related Party Transactions\nThe Company received non-cash capital contributions from Holding in the form of shares of common stock awarded to employees under various stock compensation plans totalling $5.3 million, $3.8 million, and $7.1 million in 1993, 1992 and 1991 respectively. The Company has agreed to pay Kelso an annual fee of $2.75 million for providing management consulting and advisory services. In June 1993 the Company issued 1,000 shares of a new, non-voting Series A Preferred Stock, par value $.01 per share, for $10,000 to an affiliate of Kelso & Company. The Company is committed to contribute $5 million of capital to a Kelso limited partnership. In addition, Tyler Refrigeration was sold to an affiliate of Kelso in 1991.\nNote 13. Leases\nThe cumulative minimum rental commitments under the terms of all noncancellable operating leases in effect at December 31, 1993, were $108 million. Net rental expenses for operating leases were $34 million, $32 million, and $28 million for the years ended December 31, 1993, 1992, and 1991, respectively.\nNote 14. Commitments and Contingencies\nThe Company and certain of its subsidiaries are parties to a number of pending legal and tax proceedings. The Company is also subject to federal, state and local environmental laws and regulations and is involved in environmental proceedings concerning the investigation and remediation of numerous sites. In those instances where it is probable that the Company will incur costs from such proceedings and the amounts can be reasonably determined the Company has recorded a liability. The Company believes that these legal, tax, and environmental proceedings will not have a material adverse effect on its consolidated financial position, cash flows, or results of operations.\nThe tax returns of the Company's German subsidiaries are currently under examination by the German tax authorities (see Note 5).\nNote 15. Segment Data\nSales and operating income by geographic location for the years ended December 31, 1993, 1992, and 1991, are shown on the following page. Identifiable assets are also shown as at years ended 1993, 1992, and 1991. See \"Business\" for a description of each business segment and \"Management's Discussion and Analysis of Financial Condition and Results of Operations\" for capital expenditures and depreciation and amortization.\nAMERICAN STANDARD INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS\nQUARTERLY DATA (Unaudited) (Dollars in millions)\nFirst Second Third Fourth Sales $879.4 $995.5 $976.5 $979.1 Cost of sales 650.5 754.5 727.7 769.9 Income (loss) before income taxes and extraordinary loss (9.5) (28.2) 4.1 (46.9) Tax provision 8.1 6.1 7.2 14.8 Loss before extraordinary loss (17.6) (34.3) (3.1) (61.7) Extraordinary loss (Note 8) - (91.9) - - Net loss $(17.6) $(126.2) $ (3.1) $(61.7) ====== ======= ====== ======\nFirst Second Third Fourth Sales $901.0 $995.9 $980.9 $914.1 Cost of sales 672.0 734.1 742.2 703.9 Income (loss) before income taxes (8.1) 11.4 (16.5) (39.3) Tax provision (benefit) 5.5 9.2 (1.5) (8.5) Net income (loss) $(13.6) $ 2.2 $(15.0) $(30.8) ====== ======= ====== ======\nITEM 9.","section_9":"ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCING DISCLOSURE.\nNot applicable.\nMANAGEMENT\nITEM 10.","section_9A":"","section_9B":"","section_10":"ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY\nThe following table sets forth certain information as of March 31, 1994, with respect to each person who is an executive officer or director of the Company:\nName Age Position with Company\nEmmanuel A. Kampouris 59 Chairman, President and Chief Executive Officer, and Director\nHorst Hinrichs 61 Senior Vice President, Transportation Products, and Director\nGeorge H. Kerckhove 56 Senior Vice President, Plumbing Products, and Director\nFred A. Allardyce 52 Vice President and Chief Financial Officer\nAlexander A. Apostolopoulos 51 Vice President and Group Executive, Americas, Plumbing Products\nThomas S. Battaglia 51 Vice President and Treasurer\nRoberto Canizares M. 44 Vice President, Air Conditioning Products' Asia\/America Zone\nWilfried Delker 53 Vice President and Group Executive, Worldwide Fittings, Plumbing Products\nAdrian B. Deshotel 48 Vice President, Human Resources\nCyril Gallimore 65 Vice President, Systems and Technology\nLuigi Gandini 55 Vice President and Group Executive, European Plumbing Products\nDaniel Hilger 53 Vice President and Group Executive, Air Conditioning Products in Europe, Middle East and Africa\nJoachim D. Huwendiek 63 Vice President, Automotive Products in Germany\nName Age Position with Company\nFrederick W. Jaqua 72 Vice President and General Counsel and Secretary\nW. Craig Kissel 42 Vice President and Group Executive, Unitary Products Group\nWilliam A. Klug 62 Vice President, Trane International\nPhilippe Lamothe 57 Vice President, Automotive Products in France\nG. Eric Nutter 58 Vice President, Automotive Products in the United Kingdom\nRaymond D. Pipes 44 Vice President and Group Executive, Plumbing Products in the Far East\nBruce R. Schiller 49 Vice President and Group Executive, Compressor Business\nJames H. Schultz 45 Vice President and Group Executive, Commercial Systems Group\nG. Ronald Simon 52 Vice President and Controller\nWade W. Smith 43 Vice President, U.S. Plumbing Products\nBenson I. Stein 56 Vice President, General Auditor\nRobert M. Wellbrock 47 Vice President, Taxes\nShigeru Mizushima 50 Director\nRoger W. Parsons 52 Director\nFrank T. Nickell 46 Director\nJ. Danforth Quayle* 47 Director\nJohn Rutledge 45 Director\nJoseph S. Schuchert* 65 Director\n* The Management Development Committee functions as the compensation committee of the Company. Since December 2, 1993, its members have been Messrs. Quayle and Schuchert. Prior thereto Mr. Schuchert and two other directors who retired in December, Richard M. Cyert and Edward Donley, served as members of the committee.\nDirectors are elected to hold office until the next annual meeting of stockholders or until their successors are elected. Messrs. Kampouris, Mizushima, Nickell, and Schuchert were elected in 1988; Mr. Kerckhove in September 1990; Mr. Hinrichs in March 1991; Dr. Rutledge in March 1993; Mr. Quayle in September 1993; and Mr. Parsons in March 1994.\nHolding, Kelso ASI Partners, L.P. (the 73 percent owner of Holding) (\"ASI Partners\"), and executive officers and certain other management personnel of the Company who purchased shares of Holding common stock (\"Management Investors\") entered into a Stockholders Agreement that, among other things, provides for arrangements regarding the control of the election of directors of Holding.\nUntil the earlier of (i) the occurrence of a public offering pursuant to an effective registration statement under the Securities Act covering the offer and sale of Holding common stock to the public and underwritten by an investment banking firm of nationally recognized standing and (ii) July 7, 1998, the Management Investors as a group are entitled to nominate at least two directors to the Board of Directors of Holding, and ASI Partners is entitled to nominate the remaining directors. As a result, during such period ASI Partners will control the Board of Directors. To effectuate their rights, the Management Investors and ASI Partners have agreed in the Stockholders' Agreement to grant an irrevocable proxy to the Secretary of Holding to vote their shares of common stock in accordance with such nominations. Such grant of an irrevocable proxy terminates upon Holding's becoming subject to the proxy rules under the Securities Exchange Act of 1934. At present the Board of Directors of Holding consists of nine directors.\nThe sole holder of the outstanding common stock of American Standard Inc. is Holding, and Holding exclusively elects the directors of American Standard Inc. Currently the directors of Holding are also the directors of American Standard Inc.\nSet forth below is the principal occupation of each of the executive officers and directors named above during the past five years (except as noted, all positions are with the Company).\nMr. Kampouris was elected Chairman in December 1993 and President and Chief Executive Officer in February 1989. Prior thereto he was Senior Vice President, Building Products, from 1984 to February 1989. He is also a director of Daido Hoxan Inc. Mr. Kampouris has served as a director of the Company since July 1988.\nMr. Hinrichs was elected Senior Vice President, Transportation Products, in December 1990. Prior thereto he served as Vice President and Group Executive, Automotive Products, from 1987 to 1990. Mr. Hinrichs has served as a director of the Company since March 1991.\nMr. Kerckhove was elected Senior Vice President, Plumbing Products, in June 1990. Prior thereto he was Vice President (from 1985 until June 1990) and Group Executive (from 1988 until June 1990) of European Plumbing Products. Mr. Kerckhove has served as a director of the Company since September 1990.\nMr. Allardyce was elected Vice President and Chief Financial Officer in January 1992. Prior thereto he served as Vice President and Controller from February 1983 until December 1991.\nMr. Apostolopoulos was elected Vice President and Group Executive, Americas Plumbing Products, in December 1990. Prior thereto he served as the executive in charge of Plumbing Products' joint ventures from September 1989 to November 1990 and Managing Director of the Company's Egyptian subsidiary from July 1984 to August 1989.\nMr. Battaglia was elected Vice President and Treasurer in September 1991. Prior thereto he was Assistant Treasurer.\nMr. Canizares was elected Vice President, Air Conditioning Products' Asia\/America Zone, in December 1990. Prior thereto he served as the executive in charge of this zone and Manager of Planning and Distribution from November 1986 to November 1990.\nMr. Delker was elected Vice President and Group Executive, Worldwide Fittings, Plumbing Products, in April 1990. Prior thereto he served as executive in charge of the Company's brass fittings manufacturing operations from June 1982 until March 1990.\nMr. Deshotel was elected Vice President, Human Resources, in January 1992. Prior thereto he served as Group Vice President, Human Resources, for U.S. Plumbing Products from September 1986 until December 1991.\nMr. Gallimore was elected Vice President, Systems and Technology, in December 1990. Prior thereto he served as the executive in charge of Manufacturing and Technology from 1984 to November 1990.\nMr. Gandini was elected Vice President and Group Executive, European Plumbing Products, in July 1990. Prior thereto he served as General Manager of Ideal Standard S.p.A., the Italian subsidiary of the Company, from January 1978 until June 1990.\nMr. Hilger was elected Vice President and Group Executive, Air Conditioning Products, in Europe, Middle East and Africa, in June 1988.\nMr. Huwendiek was elected Vice President, Automotive Products in Germany, in January 1992. Prior thereto he served as Managing Director of WABCO Germany since June 1987.\nMr. Jaqua was elected Vice President and General Counsel and Secretary in April 1989. Prior thereto he was Associate General Counsel and Assistant Secretary.\nMr. Kissel was elected Vice President in charge of Air Conditioning Products' Unitary Products Group in January 1992, becoming Group Executive in March 1994. He served as Vice President, Sales and Distribution, for Air Conditioning Products, from December 1990 until January 1992 and served as divisional Senior Vice President in charge of U.S. Sales from January to November 1990. He was in charge of Western Regional Sales from January 1989 to January 1990.\nMr. Klug was elected Vice President in 1985 and has been in charge of Trane International since December 1993. He served as Group Executive, Unitary Products Group, from April 1990 until December 1993. He was Group Executive, North American Sales and Distribution, Air Conditioning Products, from October 1987 to March 1990.\nMr. Lamothe was elected Vice President, Automotive Products in France, in January 1992. He served as Group Vice President of the French transportation business during 1991 and prior thereto was General Manager of the French transportation subsidiary.\nMr. Nutter was elected Vice President, Automotive Products in the United Kingdom, in January 1992. Prior thereto he served as Vice President and General Manager of WABCO Transportation U.K. Limited, the United Kingdom transportation subsidiary of the Company from March 1991 until December 1991 and Group Managing Director of the United Kingdom transportation subsidiary from June 1987 until February 1991.\nMr. Pipes was elected Vice President and Group Executive for the Far East Region of Plumbing Products in May 1992. Prior thereto he served as Managing Director of the Company's Philippine subsidiary from May 1990 until April 1992 and was Group Vice President, Control & Finance, of U.S. Plumbing Products from March 1985 until April 1990.\nMr. Schiller was elected Vice President and Group Executive, Compressor Business (Air Conditioning Products) in March 1994. Prior thereto he served as General Manager, Compressor Business Group, from May 1993 to February 1994 and Manager and then General Manager of the Company's Tyler, Texas, facility from March 1986 to April 1993.\nMr. Schultz was elected Vice President and Group Executive, Commercial Systems, in 1987.\nMr. Simon was elected Vice President and Controller in January 1992. Prior thereto he served as Vice President and Controller of the Air Conditioning Products' Commercial Systems Group from December 1984 to December 1991.\nMr. Wade W. Smith was elected Vice President, U.S. Plumbing Products, in May 1992. Prior thereto he served as Group Vice President in charge of the Chinaware Business Unit of U.S. Plumbing Products from February 1992 until April 1992 and from April 1987 to February 1992 he was Vice President and General Manager of the Building Automation Systems Division of the Commercial Systems Group of Air Conditioning Products.\nMr. Stein was elected Vice President, General Auditor, in March 1994; from December 1986 to February 1994 he was the Company's General Auditor.\nMr. Wellbrock was elected Vice President, Taxes, effective January 1, 1994. Prior thereto he served as Director of Taxes from 1988 through 1993.\nMr. Mizushima has been President and Chief Operating Officer of Daido Hoxan Inc. since the merger in April 1993 of Hoxan Corporation with Daido Sanso Company (a subsidiary of Air Products and Chemicals Inc.). Prior thereto Mr. Mizushima was President of Hoxan Corporation, a position he held since 1984. He is also a director of Daido Hoxan. Daido Hoxan Inc is the second largest supplier of industrial gases in Japan. One of its subsidiaries is a distributor of American-Standard plumbing products in Japan. Mr. Mizushima has served as a director of the Company since July 1988.\nMr. Nickell has been President and a director of Kelso & Companies, Inc., since March 1989. Kelso & Companies, Inc. is the general partner of Kelso & Company, L.P. From 1984 to 1989 Mr. Nickell was a general partner of Kelso & Company, L.P. He is also a director of Club Car, Inc.; King Holding Corp; and Tyler Holdings Corporation. Mr. Nickell has served as a director of the Company since May 1988.\nMr. Parsons is Managing Director of Rea Brothers Group PLC (\"Rea Brothers Group\"), which he joined in 1988 after a long banking career. Rea Brothers Group is a U.K. holding company of subsidiaries engaged in the investment banking business. He also holds directorships in several subsidiaries of Rea Brothers Group. Mr. Parsons was elected as a director of the Company on March 2, 1994.\nMr. Quayle served as Vice President of the United States from January 1989 to January 1993. Since leaving that office Mr. Quayle has been associated with Circle Investors, Inc. (an investment planning and consulting firm), and FX Strategic Advisors, Inc. (an international trade consulting firm), both of which he serves as Chairman. He is a Director of Central Newspapers, Inc. Mr. Quayle has served as a director of the Company since September 1993.\nDr. Rutledge has been Chairman of Rutledge & Company, Inc., a merchant banking firm, since January 1991. He is the founder and Chairman of Claremont Economics Institute, an economic research firm established in 1975. He is also a director of Earle M. Jorgensen & Company, Lazard Freres Funds, Medical Specialties Group, and Utendahl Capital Partners and is a special advisor to Kelso & Company. Dr. Rutledge has served as a director of the Company since March 1993.\nMr. Schuchert has been Chairman, CEO, and a director of Kelso & Companies, Inc., since March 1989. Kelso & Companies, Inc. is the general partner of Kelso & Company, L.P. From 1984 to 1989 Mr. Schuchert was managing general partner of Kelso & Company, L.P. He is also a director of Earle M. Jorgensen & Company. Mr. Schuchert has served as a director of the Company since May 1988.\nOn December 23, 1992, Kelso & Company and its chief executive officer, Mr. Schuchert, without admitting or denying the findings contained therein, consented to an administrative order in respect of a Securities and Exchange Commission (\"Commission\") inquiry relating to the 1990 acquisition of a portfolio company by a Kelso affiliate. The order found that Kelso's tender offer filing in connection with the acquisition did not comply fully with the Commission's tender offer reporting requirements, and required Kelso and Mr. Schuchert to comply with these requirements in the future.\nCompensation Committee Interlocks and Insider Participation\nMr. Schuchert is a member of the Management Development Committee (the Compensation Committee) of the Company's Board of Directors. He is Chairman of Kelso & Companies, Inc. (the general partner of Kelso & Company, L.P.) and a general partner of American Standard Partners, the general partner of Kelso ASI Partners.\nThe Company pays Kelso an annual fee of $2.75 million for providing management consulting and advisory services, including those of Messrs. Schuchert and Nickell. The fee is reduced depending on the number of shares Kelso controls of Holding or the Company, with final termination when Kelso's ownership control falls below 20 percent.\nThe Company also entered into a transaction with Kelso Insurance Services, Incorporated (an affiliate of Kelso) (\"Kelso Insurance\"), and American Telephone and Telegraph Company (\"AT&T\") pursuant to which the Company as well as other Kelso affiliated companies participates in a telecommunications network under which AT&T provides communications services to the group at a special lower tariff rate. In connection with that transaction the Company has guaranteed a minimum annual usage by it of $2 million for a period of five years commencing 1993. No fee was paid by the Company to Kelso Insurance in connection with this transaction.\nIn August 1993 the Company purchased a limited partnership interest in Kelso Investment Associates V, L.P. (\"KIA V\") in exchange for its commitment to make a capital contribution of $5 million to KIA V. KIA V was formed to seek out business opportunities and invest primarily in equity securities, leveraged buy-outs, and joint ventures. Kelso Partners V, L.P. serves as the general partner of KIA V. The general partners of Kelso Partners V, L.P., include Messrs. Schuchert and Nickell. Kelso & Co., L.P., is the manager of KIA V and, as such, acts as investment adviser of KIA V. The management fee relating to the interest held by the Company has been waived.\nThe Supplemental Plan benefits are based on credited years of service and average annual compensation for the highest three calendar years of the final ten calendar years of employment (not exceeding 60 percent of average annual compensation for such years of service) and are reduced by an offset consisting of certain other retirement benefits, including amounts payable under the Terminated Plan, annual allocations to the executive officer's Employee Stock Ownership Plan (\"ESOP\") accounts, and Social Security benefits. Benefits under the Supplemental Plan are vested after five years of service or employment continuation through age 65. Compensation used in determining Supplemental Plan benefits (covered compensation) includes only salary and bonus reflected in the Summary Compensation Table above. No covered compensation of any Named Officer differs by more than 10% from the salary and bonus set forth in the Summary Compensation Table.\nThe years of credited service under the Supplemental Plan for the Named Officers are as follows: Mr. Kampouris, 28 years; Mr. Hinrichs, 35 years; Mr. Kerckhove, 32 years; Mr. Allardyce, 17 years; Mr. Gandini, 33 years; and Mr. H.T. Smith, 13 years.\nThe current annual target benefit for Mr. Kampouris is approximately 20 percent higher than that shown in the above table since a different benefit formula under the pre-1990 version of the Supplemental Plan applies to his period of service and earnings prior to April 27, 1991. The method of calculating the lump sum payable to Mr. Kampouris that is attributable to his accrued benefit through April 27, 1991, has been adjusted to reflect the recent increase in the Federal ordinary income tax rates.\nAn amendment to the Supplemental Plan in 1993 established minimum annual lump sum payments for certain Named Officers which, after giving effect to Plan offsets, are estimated as follows: Mr. Kampouris, $427,000; Mr. Hinrichs, $143,000; Mr. Kerckhove, $37,000; and Mr. Gandini, $24,000.\nShares of Holding Common Stock distributable to Plan participants are delivered to a grantor's trust for their benefit. The trust will terminate following a public offering of Holding Common Stock, at which time shares or cash credited to each participant's account is to be distributed. Payment, however, may be deferred if an event of default under the Company's loan agreements or debt indentures has occurred or will occur as a result of such payment. Until distribution, assets of the trust are subject to the claims of creditors of Holding or the Company. Shares held by the trust are voted by the trustee in accordance with the Company's directions.\nDirectors' Fees and Other Arrangements\nIn the first half of 1993 each outside director was paid a fee of $5,000 per calendar quarter and in addition received a fee of $500 for each meeting of the Board attended; in the last half each outside director was paid a fee of $6,750 per calendar quarter and in addition received a fee of $1,000 for each meeting of the Board attended. Effective with the third quarter, an outside director is also paid $1,000 for attending a Committee meeting. (Previously an outside director was paid $500 for attending a Committee meeting not held on the day of a Board meeting.) The only directors currently eligible for directors' fees are directors who are neither employees of the Company or Kelso. They are Messrs. Mizushima, Parsons, Quayle, and Rutledge. All directors are reimbursed for reasonable expenses incurred in connection with attendance at any meetings. No separate directors' fees are paid for attendance at meetings of Holding that are held on the same day the Company's Board meets.\nA Supplemental Compensation Plan for Outside Directors (\"Supplemental Compensation Plan\") was adopted in June 1989. A Plan Account was establish- ed for each participating director at that time consisting of units equivalent to $50,000 of Holding common stock with each unit having a value of $19 per share, the independently appraised value of the shares of Holding as of December 31, 1988. For the purpose of providing a measure of parity among the directors, the $50,000 amount was increased to $100,000 for participating directors who became Board Members after January 1, 1993, with such amount converted into units for the account of such directors at the rate of $42.96 per unit ($42.96 representing the independently appraised value of the shares of Holding as of December 31, 1992). When a participating director ceases to be a member of the Board, he or his beneficiary will receive a cash payment equal to the number of units in his Plan Account multiplied by the per-share value of Holding common stock based on the then last year-end appraisal. If a participating director is removed for cause, his entire interest in the Plan is forfeited. Employee-directors and Messrs. Nickell and Schuchert do not participate in this Plan.\nMr. Donley and Dr. Cyert, directors who retired in December 1993, each received a payment of $113,053 pursuant to the Supplemental Compensation Plan.\nCorporate Officers Severance Plan and Other Employment or Severance Arrangements\nThe Board of Directors approved a severance plan for executive officers (the \"Officers Severance Plan\"), effective April 27, 1991. The Officers Severance Plan provides that any participant whose employment is involuntarily terminated by the Company without \"Cause\" (as defined in the Officers Severance Plan) or who leaves the Company for \"Good Reason\" (as defined in the Officers Severance Plan) shall be paid an amount equal to the sum of two (three in the case of the Chief Executive Officer) times such participant's annual base salary at the rate in effect at the time of termination, a proration of the then Annual Incentive Plan target award (described previously), and one (two in the case of the Chief Executive Officer) times such target award. In addition, group life, accident, and disability insurance coverages, as well as group medical coverage, will be continued for up to 24 (36 in the case of the Chief Executive Officer) months following such officer's termination. The Named Officers (other than Mr. Smith, who retired in December 1993) are participants in this Plan.\nAn agreement was entered into with H. Thompson Smith in December 1993 concerning the terms of his termination of employment and retirement. Under that agreement he is entitled to receive his 1993 Annual Incentive Plan award in the amount of $154,000 and will be entitled to receive the same amount in March 1995. In addition, Mr. Smith is retained as a consultant through 1995 at the rate of $29,583 per month. In the event of Mr. Smith's death, the fees remaining through the end of 1995 are payable in a lump sum to his spouse or estate. He is also entitled to receive payments under the Company's Long-Term Incentive Compensation Plan for the 1992-1994 and 1993-1995 performance periods in accordance with its terms, such awards to be prorated to December 31, 1993. Mr. Smith continues under the Company's medical and life insurance programs through 1995.\nITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT\nAll of the common stock, $.01 par value, of American Standard Inc., the only voting stock of American Standard Inc., is owned by Holding. Set forth below is the number of shares of Common Stock, par value $.01 per share, of Holding, the only outstanding voting stock of Holding, beneficially owned as of March 10, 1994, by each Director and nominee, each Named Executive Officer, all Directors and executive officers of Holding as a group, and each 5% holder.\nShares Percent Name and Address Beneficially of Title of Class of Beneficial Owner Owned Class Holding common stock, par value - Kelso ASI Partners, L.P.(a) 18,000,000 73% $.01 per share (\"ASI Partners\") Joseph S. Schuchert(a) 18,000,000(d) 73% (d) Frank T. Nickell(a) 18,000,000(d) 73% (d) George E. Matelich(a) 18,000,000(d) 73% (d) Thomas R. Wall IV(a) 18,000,000(d) 73% (d) Emmanuel A. Kampouris(b) 225,000 * George H. Kerckhove(b) 113,000 * Horst Hinrichs(b) 90,000 * Fred A. Allardyce(b) 113,000 * American-Standard Employee Stock Ownership Plan(c) 4,267,710 17% All current directors and executive officers of Holding and the Company as a group 18,824,900(e) 77% (e)\n* Less than one percent.\n(a) The business address for such persons is c\/o Kelso & Company, 350 Park Avenue, New York, N.Y. 10022.\n(b) Mr. Kampouris is Chairman, President and Chief Executive Officer and a director of the Company and of Holding. Messrs. Hinrichs and Kerckhove are Named Officers and directors of the Company and of Holding, and Mr. Allardyce is a Named Officer of the Company and of Holding.\n(c) The business address for the ESOP is c\/o American Standard Inc., 1114 Avenue of the Americas, New York, N.Y. 10036. At December 31, 1993, 3,548,609 Plan shares were allocated to executive officers of Holding and the Company and other ESOP participants. The number of shares shown for executive officers in the table above does not reflect shares allocated to their accounts in the ESOP. Shares in the ESOP account are voted by the ESOP trustee as directed by the plan board (the board administering the trust which currently consists of executive officers of the Company). However, participants may direct the vote of their ESOP account shares in matters involving mergers, recapitalizations, or dispositions of substantial assets. Until termination of employment a participant cannot dispose of shares in his ESOP account. Shares distributed to a participant on termination are subject to the Company's right of first refusal. The shares in the Named Officers ESOP accounts are as follows: Mr. Kampouris, 3,995 shares; Mr. Kerckhove, 3,953 shares; Mr. Hinrichs, 4,266 shares; Mr. Allardyce, 4,246 shares; and Mr. Gandini, 2,225 shares. The shares in the ESOP accounts for all executive officers total 69,218 shares.\nThe number of shares shown for executive officers in the table above also does not reflect shares of Holding Common Stock issued as part of the payouts under the LTIP and held for them in trust under a trust agreement dated as of January 1, 1993. Shares in the trust are voted by the trustee as directed by the Company. Until termination of the trust, a beneficiary of the Trust cannot dispose of shares credited to his account. Shares in the Named Officers' accounts in the trust are as follows: Mr. Kampouris, 4,453 shares; Mr. Kerckhove, 2,012 shares; Mr. Hinrichs, 1,787 shares; Mr. Allardyce, 1,224 shares; and Mr. Gandini, 1,176 shares. The shares in the trust accounts for all executive officers total 28,620 shares.\nAlso not included above are 19,198 shares of ASI Holding common stock held in a similar grantor's trust for the account of certain executive officers. These were earned by them under an employee incentive plan prior to their becoming officers.\n(d) Messrs. Schuchert and Nickell, each a director of the Company and of Holding, and Messrs. Matelich and Wall may be deemed to share beneficial ownership of shares owned of record by ASI Partners by virtue of their status as general partners of American Standard Partners, the general partner of ASI Partners. Messrs. Schuchert, Nickell, Matelich and Wall share investment and voting power with respect to securities owned by ASI Partners. See \"Certain Transactions and Relationships.\" Dr. Cyert, who was a director of Holding and the Company until December 1993, is a limited partner in one of the Kelso partnerships that has invested in ASI Partners.\n(e) Out of such 18,824,900 shares, 18,000,000 shares represent shares of Common Stock owned by ASI Partners in which Messrs. Schuchert and Nickell, each a director of Holding, may be deemed to share beneficial ownership by virtue of their status as general partners of American Standard Partners, the general partner of ASI Partners.\nITEM 13. CERTAIN TRANSACTIONS AND RELATIONSHIPS\nMessrs. Schuchert and Nickell, directors of Holding and the Company, are Chairman and President, respectively, of Kelso & Companies, Inc. (the general partner of Kelso & Company, L.P.), and are general partners of American Standard Partners, the general partner of Kelso ASI Partners. Mr. Schuchert is also a member of the Management Development Committee (the compensation committee) of the Company's Board of Directors.\nThe Company pays Kelso an annual fee of $2.75 million for providing management consulting and advisory services, including those of Messrs. Schuchert and Nickell. The fee is reduced depending on the number of shares Kelso controls of Holding or the Company, with final termination when Kelso's ownership control falls below 20 percent.\nThe Company also has entered into a transaction with Kelso Insurance Services, Incorporated (an affiliate of Kelso) (\"Kelso Insurance\"), and American Telephone and Telegraph Company (\"AT&T\") pursuant to which the Company as well as other Kelso affiliated companies participates in a telecommunications network under which AT&T provides communications services to the group at a special lower tariff rate. In connection with that transaction the Company has guaranteed a minimum annual usage by it of $2 million for a period of five years commencing 1993. No fee was paid by the Company to Kelso Insurance in connection with this transaction.\nIn August 1993 the Company purchased a limited partnership interest in Kelso Investment Associates V, L.P. (\"KIA V\"), in exchange for its commitment to make a capital contribution of $5 million to KIA V. KIA V was formed to seek out business opportunities and invest primarily in equity securities, leveraged buy-outs, and joint ventures. Kelso Partners V, L.P. serves as the general partner of KIA V. The general partners of Kelso Partners V, L.P., include Messrs. Schuchert and Nickell. Kelso & Co., L.P. is the manager of KIA V and, as such, acts as investment adviser of KIA V. The management fee relating to the interest held by the Company has been waived.\nThe Company will invest in a Cayman Islands corporation, A-S China Plumbing Products Limited (\"ASPPL\"), to be used for the establishment of various joint ventures in the People's Republic of China. The Company will have a 21% voting interest in ASPPL. Shares in ASPPL will also be sold in a private placement to certain institutions and other investors, including certain executive officers and employees of the Company and its subsidiaries.\nMr. Mizushima, a director of the Company and of Holding, is President and Chief Operating Officer of Daido Hoxan Inc., a Japanese corporation which has an approximately 11 percent limited partnership interest in ASI Partners. Daido Hoxan Inc. is the largest distributor of the Company's plumbing products in Japan. Its transactions as distributor with the Company and its subsidiaries in 1992, which were on customary terms and in the ordinary course of business, were not material to either the Company or Daido Hoxan Inc. The Company also entered into leasing transactions with an affiliate of Daido Hoxan whereby it has leased certain machinery and equipment on financial terms that were comparable to those available from other leasing companies. The leasing transactions were not material to either the Company or Daido Hoxan Inc.\nFidelity Management Trust Company (\"Fidelity\") is the owner of record of the shares of Holding held by the ESOP, a 17% owner of Holding shares. Fidelity was paid by the Company approximately $180,000 in 1993 for services in connection with administering the Company's ESOP and Savings Plan.\nMr. Nickell's father is an officer and owns more than 10 percent of AC Corporation, a contracting company which purchases air conditioning products from the Company's Trane Division. Such purchases in 1993 were on customary terms and in the ordinary course of business and were not material to either the Company or AC Corporation.\nManagement Investors Stockholders Agreement\nUnder the Stockholders Agreement, pursuant to which Management Investors purchased shares of Holding common stock, Holding is obligated to repurchase, subject to the limitations contained in the Company's lending arrangements and debt instruments, such shares at certain fair market prices in case of the death, disability, retirement, or termination of employment of a Management Investor. Shares are paid for within the constraints of the Company's lending arrangement and debt instruments, as supplemented by a Schedule of Priorities established by Holding's Board of Directors. The Named Officers (other than Mr. Gandini) and most of the executive officers are Management Investors and parties to the Stockholders Agreement.\nPART IV\nITEM 14. CONSOLIDATED EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.\n(a) 1 and 2. Financial statements and financial statement schedules\nThe financial statements and schedules listed in the accompanying index to financial statements are filed as part of this annual report on Form 10-K.\n3. Exhibits\nThe exhibits listed on the accompanying index to exhibits are filed as part of this annual report on Form 10-K.\nIncluded in the exhibits are the following management contracts or compensatory plan arrangements required to be filed as exhibits pursuant to Item 14(c) of Form 10-K\nAmerican Standard Inc. Long-Term Incentive Compensation Plan, as amended Trust Agreement for American Standard Inc. Long-Term Incentive Compensation Plan American Standard Inc. Annual Incentive Plan American Standard Inc. Management Partner's Bonus Plan with amendments American Standard Inc. Executive Supplemental Retirement Benefit Program American Standard Employee Stock Ownership Plan with amendments Estate Preservation Plan with amendments Corporate Officers Severance Plan American Standard Inc. Supplemental Compensation Plan for Outside Directors ASI Holding Corporation 1989 Stock Purchase Loan Program Summary of Terms of Unfunded Deferred Compensation Plan Letter of Agreement with respect to H. Thompson Smith's retirement and consulting services\n(b) Reports on Form 8-K for the quarter ended December 31, 1993.\nNone\nSignatures\nPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.\nAMERICAN STANDARD INC.\nBy \/s\/ Emmanuel A. Kampouris (Emmanuel A. Kampouris) (Chairman, President and Chief Executive Officer)\nMarch 30, 1994\nPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:\n\/s\/ Emmanuel A. Kampouris Director, Chairman and President March 30, 1994 (Emmanuel A. Kampouris) (Chief Executive Officer)\n\/s\/ Fred A. Allardyce Vice President and Chief March 30, 1994 (Fred A. Allardyce) Financial Officer\n\/s\/ G. Ronald Simon Vice President & Controller March 30, 1994 (G. Ronald Simon) (Principal Accounting Officer)\n\/s\/ Horst Hinrichs Director March 30, 1994 (Horst Hinrichs)\n\/s\/ George H. Kerckhove Director March 30, 1994 (George H. Kerckhove)\n\/s\/ Shigeru Mizushima Director March 30, 1994 (Shigeru Mizushima)\n\/s\/ Frank T. Nickell Director March 30, 1994 (Frank T. Nickell)\n\/s\/ J. Danforth Quayle Director March 30, 1994 (J. Danforth Quayle)\n\/s\/ Roger W. Parsons Director March 30, 1994 (Roger W. Parsons)\n\/s\/ Joseph S. Schuchert Director March 30, 1994 (Joseph S. Schuchert)\n\/s\/ John Rutledge Director March 30, 1994 (John Rutledge)\nAMERICAN STANDARD INC. AND FINANCIAL STATEMENT SCHEDULES COVERED BY REPORT OF INDEPENDENT AUDITORS (Item 14 (a))\nForm 10-K (Pages) 1. Financial Statements\nConsolidated Balance Sheet at December 31, 1993 and 1992 42 Years ended December 31, 1993, 1992 and 1991, Consolidated Statement of Operations 41 Consolidated Statement of Stockholder's Equity (Deficit) 43 Consolidated Statement of Cash Flows 44-45 Notes to Consolidated Financial Statements 46-62 Segment Data 63 Segment data for capital expenditures, depreciation and amortization 23-29 Quarterly Data (Unaudited) 64 Report of Independent Auditors 40\n2. Financial statement schedules, years ended December 31, 1993, 1992 and 1991: Report of Independent Auditors 84\nV Facilities 85 VI Accumulated Depreciation of Facilities 86 VIII Reserves 87 IX Short-Term Borrowings 88 X Supplementary Income Statement Information 89\nAll other schedules have been omitted because the information is not applicable or is not material or because the information required is included in the financial statements or the notes thereto.\nReport of Independent Auditors\nStockholders and Board of Directors American Standard Inc.\nWe have audited the consolidated financial statements of American Standard Inc. as of December 31, 1993 and 1992, and for each of the three years in the period ended December 31, 1993, and have issued our report thereon dated March 14, 1994 (included elsewhere in this Annual Report on Form-10K). Our audits also included the consolidated schedules listed in Item 14(a)2. These schedules are the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits.\nIn our opinion, the consolidated 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 required to be stated therein.\n\/s\/ Ernst & Young Ernst & Young\nMarch 14, 1994\nAMERICAN STANDARD INC.\nINDEX TO EXHIBITS\n(Item 14(a)3 - Exhibits Required by Item 601 of Regulation S-K and Additional Exhibits)\n(The File Number of American Standard Inc., the Registrant, and for all Exhibits incorporated by reference is 1-470, except those Exhibits incorporated by reference in filings made by ASI Holding Corporation (\"Holding\") whose File Number is 33-23070)\n(3) (i) Restated Certificate of Incorporation of American Standard Inc. (the \"Company\"); previously filed as Exhibit (3)(i) in the Company's Form l0-K for the fiscal year ended December 31, 1988, and herein incorporated by reference.\n(ii) Certificate of Designation, Preferences and Relative, Participating, Optional and other Special Rights of Preferred Stock and Qualifications, Limitations and Restrictions thereof of Series A Preferred Stock.\n(iii) By-laws of the Company; previously filed as Exhibit (3)(ii) in the Company's Form l0-K for the fiscal year ended December 31, 1988, and herein incorporated by reference.\n(4) (i) Indenture, dated as of November 1, 1986, between the Company and Manufacturers Hanover Trust Company, Trustee, including the form of 9-1\/4% Sinking Fund Debenture Due 2016 issued pursuant thereto on December 9, 1986, in the aggregate principal amount of $150,000,000; previously filed as Exhibit (4)(iii) in the Company's Form l0-K for the fiscal year ended December 31, 1986, and herein incorporated by reference.\n(ii) Instrument of Resignation, Appointment and Acceptance, dated as of April 25, 1988 among the Company, Manufacturers Hanover Trust Company (the \"Resigning Trustee\") and Wilmington Trust Company (the \"Successor Trustee\"), relating to resignation of the Resigning Trustee and appointment of the Successor Trustee under the Indenture referred to in Exhibit (4)(i) above; previously filed as Exhibit 4(ii) in Registration Statement No. 33-64450 of the Company under the Securities Act of 1933, as amended, and herein incorporated by reference.\nINDEX TO EXHIBITS - (Continued)\n(iii) Form of Indenture, dated as of July 1, 1988, between the Company and Shawmut Bank Connecticut, National Association (formerly known as The Connecticut National Bank), as Trustee, relating to the Company's 14-1\/4% Subordinated Discount Debentures due 2003; previously filed as Exhibit 4.3 in Amendment No. 2 to Registration Statement No. 33-22126 of the Company under the Securities Act of 1933, as amended, and herein incorporated by reference.\n(iv) Form of Debenture evidencing the 14-1\/4% Subordinated Discount Debentures due 2003 included as Exhibit A to the Form of Indenture referred to in (4)(iii) above.\n(v) Indenture dated as of May 15, 1992, between the Company and First Trust National Association, Trustee, relating to the Company's 10-7\/8% Senior Notes due 1999, in the aggregate principal amount of $150,000,000; previously filed as Exhibit (4)(i) in the Company's Form 10-Q for the quarter ended June 30, 1992, and herein incorporated by reference.\n(vi) Form of 10-7\/8% Senior Notes due 1999 included as Exhibit A to the Indenture described in (4)(v) above.\n(vii) Indenture dated as of May 15, 1992, between the Company and First Trust National Association, Trustee, relating to the Company's 11-3\/8% Senior Debentures due 2004, in the aggregate principal amount of $250,000,000; previously filed as Exhibit (4)(iii) in the Company's Form 10-Q for the quarter ended June 30, 1992, and herein incorporated by reference.\n(viii) Form of 11-3\/8% Senior Debentures due 2004 included as Exhibit A to the Indenture described in (4)(vii) above.\n(ix) Form of Indenture, dated as of June 1, 1993, between the Company and United States Trust Company of New York, as Trustee, relating to the Company's 9-7\/8% Senior Subordinated Notes Due 2001; previously filed as Exhibit 4(xxxi) in Amendment No. 1 to Registration Statement No. 33-61130 of the Company under the Securities Act of 1933, as amended, and herein incorporated by reference.\n(x) Form of Note evidencing the 9-7\/8% Senior Subordinated Notes Due 2001 included as Exhibit A to the Form of Indenture referred to in 4(ix) above.\nINDEX TO EXHIBITS - (Continued)\n(xi) Form of Indenture, dated as of June 1, 1993, between the Company and United States Trust Company of New York, as Trustee, relating to the Company's 10-1\/2% Senior Subordinated Discount Debentures Due 2005; previously filed as Exhibit (4)(xxxiii) in Amendment No. 1 to Registration Statement No. 33-61130 of the Company under the Securities Act of 1933, as amended, and herein incorporated by reference.\n(xii) Form of Debenture evidencing the 10-1\/2% Senior Subordinated Discount Debentures Due 2005 included as Exhibit A to the Form of Indenture referred to in (4)(xi) above.\n(xiii) Form of Indenture, dated as of October 25, 1990, as amended and restated as of June 15, 1993, between the Company and Shawmut Bank, N.A., as Trustee, relating to Company's 12-3\/4% Junior Subordinated Debentures Due 2003; previously filed as Exhibit (4)(xx) in Amendment No. 2 to Registration Statement No. 33-64450 of the Company under the Securities Act of 1933, as amended, and herein incorporated by reference.\n(xiv) Form of Indenture evidencing the 12-3\/4% Junior Subordinated Debentures Due 2003 included as Exhibit A to the Form of Indenture referred to in (4)(xiii) above.\n(xv) Assignment and Amendment Agreement, dated as of June 1, 1993, among the Company, Holding, certain subsidiaries of the Company, Bankers Trust Company, as agent under the 1988 Credit Agreement, the financial institutions named as Lenders in the 1988 Credit Agreement and certain additional Lenders and Chemical Bank, as Administrative Agent and Arranger; previously filed as Exhibit (4)(xiii) in Amendment No. 1 to Registration Statement No. 33-64450 of the Company under the Securities Act of 1933, as amended, and herein incorporated by reference.\n(xvi) Credit Agreement, dated as of June 1, 1993, among the Company, Holding, certain subsidiaries of the Company and the lending institutions listed therein, Chemical Bank, as Administrative Agent and Arranger; Bankers Trust Company, The Bank of Nova Scotia, The Chase Manhattan Bank, N.A., Deutsche Bank AG, The Long-Term Credit Bank of Japan, Ltd., New York Branch, and NationsBank of North Carolina, N.A., as Managing Agents, and Banque Paribas, Citibank, N.A., and Compagnie Financiere de CIC et de l'Union Europeenne, New York Branch, as Co-Agents; previously filed as Exhibit (4)(xiv) in Amendment No. 1 to Registration Statement No. 33-64450 of the Company under the Securities Act of 1933, as amended, and herein incorporated by reference.\n(xvii) First Amendment, Consent and Waiver, dated as of February 10, 1994, to the Credit Agreement referred to in (4)(xvi) above.\nINDEX TO EXHIBITS - (Continued)\n(xviii) Stockholders Agreement, dated as of July 7, 1988, as amended as of August 1, 1988, among Holding, Kelso ASI Partners, L.P., and the Management Stockholders named therein; previously filed as Exhibit 4.19 in Amendment No. 2 in the Registration Statement No. 33-23070 of Holding under the Securities Act of 1933, as amended, and herein incorporated by reference.\n(xix) Amendment to Section 2.1 of the Stockholders Agreement referred to in paragraph (4)(xviii) above, effective as of January 1, 1991; previously filed as Exhibit (4)(xxvii) by Holding in its Form 10-K for the year ended December 31, 1992, and herein incorporated by reference.\n(xx) Supplement and Amendment dated as of September 4, 1991 to the Stockholders Agreement, dated as of July 7, 1988, as amended, referred to in paragraph (4)(xviii) above; previously filed as Exhibit (4)(ii) by Holding in its Form 10-Q for the quarter ended September 30, 1991, and herein incorporated by reference.\n(xxi) Amended Section 6.1 of the Stockholders Agreement referred to in paragraph (4)(xviii) above, effective as of September 2, 1993; copy of amended Section is being filed as Exhibit (4)(xvii) by Holding in its Form l0-K for the year ended December 31, 1993, concurrently with the filing of the Company's Form 10-K for the same year, and herein incorporated by reference.\n(xxii) Revised Schedule of Priorities effective as of September 5, 1991, as adopted by the Board of Directors of Holding, pursuant to the Stockholders Agreement referred to in paragraph (4)(xviii) above; previously filed as Exhibit (4)(iii) by Holding in its Form l0-Q for the quarter ended September 30, 1991 and herein incorporated by reference.\n(10) (i) Agreement and Plan of Merger, dated as of March 16, 1988, among the Company, ASI Acquisition Company and Holding and Offer Letter, dated March 16, 1988, between the Company and Kelso & Company, L.P.; previously filed as Exhibit 2 to the Company's Schedule 14D-9 filed March 21, 1988, in connection with the offer for all the shares of the Company's Common Stock by a corporation formed by Kelso & Company, L.P., and herein incorporated by reference.\nINDEX TO EXHIBITS - (Continued)\n(ii) Amendment, dated June 3, 1988 to Agreement and Plan of Merger referred to in (l0)(i) above; previously filed as Exhibit 2.50 in Amendment No. 1 to the Registration Statement No. 33-22126 of the Company under the Securities Act of 1933, as amended, and herein incorporated by reference.\n(iii) American Standard Inc. Long-Term Incentive Compensation Plan, as amended through February 6, 1992; previously filed as Exhibit (10)(iv) in the Company's Form 10-K for the fiscal year ended December 31, 1992, and herein incorporated by reference.\n(iv) Trust Agreement for American Standard Inc. Long-Term Incentive Compensation Plan.\n(v) American Standard Inc. Annual Incentive Plan; previously filed as Exhibit (l0)(vii) in the Company's Form l0-K for the fiscal year ended December 31, 1988, and herein incorporated by reference.\n(vi) American Standard Inc. Management Partners' Bonus Plan effective as of July 7, 1988; previously filed as Exhibit (l0)(i) in the Company's Form l0-Q for the quarter ended September 30, 1988, and herein incorporated by reference; amendments to Plan adopted on June 7, 1990, previously filed as Exhibit (4)(ii) in the Company's Form l0-Q for the quarter ended June 30, 1990, and herein incorporated by reference.\n(vii) American Standard Inc. Executive Supplemental Retirement Benefit Program, as restated to include all amendments through December 31, 1993.\n(viii) Stock Purchase Agreement, dated April 27, 1988, between ASI Acquisition Company and General Electric Capital Corporation (without schedules); previously filed as Exhibit 2.4 in Registration Statement No. 33-22126 of the Company under the Securities Act of 1933, as amended, and herein incorporated by reference.\nINDEX TO EXHIBITS - (Continued)\n(ix) Amendment, dated June 3, 1988, to Stock Purchase Agreement referred to in (l0)(viii) above; previously filed as Exhibit 2.6 in Amendment No. 1 in Registration Statement No. 33-22126 of the Company under the Securities Act of 1933, as amended, and herein incorporated by reference.\n(x) Form of Composite American-Standard Employee Stock Ownership Plan incorporating amendments through December 3, 1992; previously filed as Exhibit (10)(x) in Registration Statement No. 33-61130 of the Company under the Securities Act of 1933, as amended, and herein incorporated by reference.\n(xi) American-Standard Employee Stock Ownership Trust Agreement, dated as of December 1, 1991, between ASI Holding Corporation and Fidelity Management Trust Company (as successor to Citizens & Southern Trust Company (Georgia), N.A.), as trustee; previously filed as Exhibit (10)(xiv) in the Company's Form 10-K for the year ended December 31, 1991, and herein incorporated by reference.\n(xii) Consulting Agreement made July 1, 1988, with Kelso & Company, L.P. concerning general management and financial consulting services to the Company; previously filed as Exhibit (l0)(xviii) in the Company's Form l0-K for the fiscal year ended December 31, 1988, and herein incorporated by reference.\n(xiii) American Standard Inc. Supplemental Compensation Plan for Outside Directors, as amended through September 1993.\n(xiv) ASI Holding Corporation 1989 Stock Purchase Loan Program; previously filed as Exhibit l0(i) in Holding's Form l0-Q for the quarter ended September 30, 1989, and herein incorporated by reference.\n(xv) Corporate Officers Severance Plan adopted in December, 1990, effective April 27, 1991; previously filed as Exhibit (l0)(xix) in the Company's Form l0-K for the fiscal year ended December 31, 1990, and herein incorporated by reference.\n(xvi) Estate Preservation Plan adopted in December, 1990; previously filed as Exhibit (l0)(xx) in the Company's Form l0-K for the fiscal year ended December 31, 1990, and herein incorporated by reference.\n(xvii) Amendment adopted in March 1993 to Estate Preservation Plan referred to in (10)(xvi) above.\n(xviii) Summary of terms of Unfunded Deferred Compensation Plan, adopted December 2, 1993.)\n(xix) Retirement\/Consulting Agreement, dated December 28, 1993, between H. Thompson Smith and the Company.\n(21) Listing of the Company's subsidiaries.","section_11":"","section_12":"ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT\nAll of the common stock, $.01 par value, of American Standard Inc., the only voting stock of American Standard Inc., is owned by Holding. Set forth below is the number of shares of Common Stock, par value $.01 per share, of Holding, the only outstanding voting stock of Holding, beneficially owned as of March 10, 1994, by each Director and nominee, each Named Executive Officer, all Directors and executive officers of Holding as a group, and each 5% holder.\nShares Percent Name and Address Beneficially of Title of Class of Beneficial Owner Owned Class Holding common stock, par value - Kelso ASI Partners, L.P.(a) 18,000,000 73% $.01 per share (\"ASI Partners\") Joseph S. Schuchert(a) 18,000,000(d) 73% (d) Frank T. Nickell(a) 18,000,000(d) 73% (d) George E. Matelich(a) 18,000,000(d) 73% (d) Thomas R. Wall IV(a) 18,000,000(d) 73% (d) Emmanuel A. Kampouris(b) 225,000 * George H. Kerckhove(b) 113,000 * Horst Hinrichs(b) 90,000 * Fred A. Allardyce(b) 113,000 * American-Standard Employee Stock Ownership Plan(c) 4,267,710 17% All current directors and executive officers of Holding and the Company as a group 18,824,900(e) 77% (e)\n* Less than one percent.\n(a) The business address for such persons is c\/o Kelso & Company, 350 Park Avenue, New York, N.Y. 10022.\n(b) Mr. Kampouris is Chairman, President and Chief Executive Officer and a director of the Company and of Holding. Messrs. Hinrichs and Kerckhove are Named Officers and directors of the Company and of Holding, and Mr. Allardyce is a Named Officer of the Company and of Holding.\n(c) The business address for the ESOP is c\/o American Standard Inc., 1114 Avenue of the Americas, New York, N.Y. 10036. At December 31, 1993, 3,548,609 Plan shares were allocated to executive officers of Holding and the Company and other ESOP participants. The number of shares shown for executive officers in the table above does not reflect shares allocated to their accounts in the ESOP. Shares in the ESOP account are voted by the ESOP trustee as directed by the plan board (the board administering the trust which currently consists of executive officers of the Company). However, participants may direct the vote of their ESOP account shares in matters involving mergers, recapitalizations, or dispositions of substantial assets. Until termination of employment a participant cannot dispose of shares in his ESOP account. Shares distributed to a participant on termination are subject to the Company's right of first refusal. The shares in the Named Officers ESOP accounts are as follows: Mr. Kampouris, 3,995 shares; Mr. Kerckhove, 3,953 shares; Mr. Hinrichs, 4,266 shares; Mr. Allardyce, 4,246 shares; and Mr. Gandini, 2,225 shares. The shares in the ESOP accounts for all executive officers total 69,218 shares.\nThe number of shares shown for executive officers in the table above also does not reflect shares of Holding Common Stock issued as part of the payouts under the LTIP and held for them in trust under a trust agreement dated as of January 1, 1993. Shares in the trust are voted by the trustee as directed by the Company. Until termination of the trust, a beneficiary of the Trust cannot dispose of shares credited to his account. Shares in the Named Officers' accounts in the trust are as follows: Mr. Kampouris, 4,453 shares; Mr. Kerckhove, 2,012 shares; Mr. Hinrichs, 1,787 shares; Mr. Allardyce, 1,224 shares; and Mr. Gandini, 1,176 shares. The shares in the trust accounts for all executive officers total 28,620 shares.\nAlso not included above are 19,198 shares of ASI Holding common stock held in a similar grantor's trust for the account of certain executive officers. These were earned by them under an employee incentive plan prior to their becoming officers.\n(d) Messrs. Schuchert and Nickell, each a director of the Company and of Holding, and Messrs. Matelich and Wall may be deemed to share beneficial ownership of shares owned of record by ASI Partners by virtue of their status as general partners of American Standard Partners, the general partner of ASI Partners. Messrs. Schuchert, Nickell, Matelich and Wall share investment and voting power with respect to securities owned by ASI Partners. See \"Certain Transactions and Relationships.\" Dr. Cyert, who was a director of Holding and the Company until December 1993, is a limited partner in one of the Kelso partnerships that has invested in ASI Partners.\n(e) Out of such 18,824,900 shares, 18,000,000 shares represent shares of Common Stock owned by ASI Partners in which Messrs. Schuchert and Nickell, each a director of Holding, may be deemed to share beneficial ownership by virtue of their status as general partners of American Standard Partners, the general partner of ASI Partners.\nITEM 13.","section_13":"ITEM 13. CERTAIN TRANSACTIONS AND RELATIONSHIPS\nMessrs. Schuchert and Nickell, directors of Holding and the Company, are Chairman and President, respectively, of Kelso & Companies, Inc. (the general partner of Kelso & Company, L.P.), and are general partners of American Standard Partners, the general partner of Kelso ASI Partners. Mr. Schuchert is also a member of the Management Development Committee (the compensation committee) of the Company's Board of Directors.\nThe Company pays Kelso an annual fee of $2.75 million for providing management consulting and advisory services, including those of Messrs. Schuchert and Nickell. The fee is reduced depending on the number of shares Kelso controls of Holding or the Company, with final termination when Kelso's ownership control falls below 20 percent.\nThe Company also has entered into a transaction with Kelso Insurance Services, Incorporated (an affiliate of Kelso) (\"Kelso Insurance\"), and American Telephone and Telegraph Company (\"AT&T\") pursuant to which the Company as well as other Kelso affiliated companies participates in a telecommunications network under which AT&T provides communications services to the group at a special lower tariff rate. In connection with that transaction the Company has guaranteed a minimum annual usage by it of $2 million for a period of five years commencing 1993. No fee was paid by the Company to Kelso Insurance in connection with this transaction.\nIn August 1993 the Company purchased a limited partnership interest in Kelso Investment Associates V, L.P. (\"KIA V\"), in exchange for its commitment to make a capital contribution of $5 million to KIA V. KIA V was formed to seek out business opportunities and invest primarily in equity securities, leveraged buy-outs, and joint ventures. Kelso Partners V, L.P. serves as the general partner of KIA V. The general partners of Kelso Partners V, L.P., include Messrs. Schuchert and Nickell. Kelso & Co., L.P. is the manager of KIA V and, as such, acts as investment adviser of KIA V. The management fee relating to the interest held by the Company has been waived.\nThe Company will invest in a Cayman Islands corporation, A-S China Plumbing Products Limited (\"ASPPL\"), to be used for the establishment of various joint ventures in the People's Republic of China. The Company will have a 21% voting interest in ASPPL. Shares in ASPPL will also be sold in a private placement to certain institutions and other investors, including certain executive officers and employees of the Company and its subsidiaries.\nMr. Mizushima, a director of the Company and of Holding, is President and Chief Operating Officer of Daido Hoxan Inc., a Japanese corporation which has an approximately 11 percent limited partnership interest in ASI Partners. Daido Hoxan Inc. is the largest distributor of the Company's plumbing products in Japan. Its transactions as distributor with the Company and its subsidiaries in 1992, which were on customary terms and in the ordinary course of business, were not material to either the Company or Daido Hoxan Inc. The Company also entered into leasing transactions with an affiliate of Daido Hoxan whereby it has leased certain machinery and equipment on financial terms that were comparable to those available from other leasing companies. The leasing transactions were not material to either the Company or Daido Hoxan Inc.\nFidelity Management Trust Company (\"Fidelity\") is the owner of record of the shares of Holding held by the ESOP, a 17% owner of Holding shares. Fidelity was paid by the Company approximately $180,000 in 1993 for services in connection with administering the Company's ESOP and Savings Plan.\nMr. Nickell's father is an officer and owns more than 10 percent of AC Corporation, a contracting company which purchases air conditioning products from the Company's Trane Division. Such purchases in 1993 were on customary terms and in the ordinary course of business and were not material to either the Company or AC Corporation.\nManagement Investors Stockholders Agreement\nUnder the Stockholders Agreement, pursuant to which Management Investors purchased shares of Holding common stock, Holding is obligated to repurchase, subject to the limitations contained in the Company's lending arrangements and debt instruments, such shares at certain fair market prices in case of the death, disability, retirement, or termination of employment of a Management Investor. Shares are paid for within the constraints of the Company's lending arrangement and debt instruments, as supplemented by a Schedule of Priorities established by Holding's Board of Directors. The Named Officers (other than Mr. Gandini) and most of the executive officers are Management Investors and parties to the Stockholders Agreement.\nPART IV\nITEM 14.","section_14":"ITEM 14. CONSOLIDATED EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.\n(a) 1 and 2. Financial statements and financial statement schedules\nThe financial statements and schedules listed in the accompanying index to financial statements are filed as part of this annual report on Form 10-K.\n3. Exhibits\nThe exhibits listed on the accompanying index to exhibits are filed as part of this annual report on Form 10-K.\nIncluded in the exhibits are the following management contracts or compensatory plan arrangements required to be filed as exhibits pursuant to Item 14(c) of Form 10-K\nAmerican Standard Inc. Long-Term Incentive Compensation Plan, as amended Trust Agreement for American Standard Inc. Long-Term Incentive Compensation Plan American Standard Inc. Annual Incentive Plan American Standard Inc. Management Partner's Bonus Plan with amendments American Standard Inc. Executive Supplemental Retirement Benefit Program American Standard Employee Stock Ownership Plan with amendments Estate Preservation Plan with amendments Corporate Officers Severance Plan American Standard Inc. Supplemental Compensation Plan for Outside Directors ASI Holding Corporation 1989 Stock Purchase Loan Program Summary of Terms of Unfunded Deferred Compensation Plan Letter of Agreement with respect to H. Thompson Smith's retirement and consulting services\n(b) Reports on Form 8-K for the quarter ended December 31, 1993.\nNone\nSignatures\nPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.\nAMERICAN STANDARD INC.\nBy \/s\/ Emmanuel A. Kampouris (Emmanuel A. Kampouris) (Chairman, President and Chief Executive Officer)\nMarch 30, 1994\nPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:\n\/s\/ Emmanuel A. Kampouris Director, Chairman and President March 30, 1994 (Emmanuel A. Kampouris) (Chief Executive Officer)\n\/s\/ Fred A. Allardyce Vice President and Chief March 30, 1994 (Fred A. Allardyce) Financial Officer\n\/s\/ G. Ronald Simon Vice President & Controller March 30, 1994 (G. Ronald Simon) (Principal Accounting Officer)\n\/s\/ Horst Hinrichs Director March 30, 1994 (Horst Hinrichs)\n\/s\/ George H. Kerckhove Director March 30, 1994 (George H. Kerckhove)\n\/s\/ Shigeru Mizushima Director March 30, 1994 (Shigeru Mizushima)\n\/s\/ Frank T. Nickell Director March 30, 1994 (Frank T. Nickell)\n\/s\/ J. Danforth Quayle Director March 30, 1994 (J. Danforth Quayle)\n\/s\/ Roger W. Parsons Director March 30, 1994 (Roger W. Parsons)\n\/s\/ Joseph S. Schuchert Director March 30, 1994 (Joseph S. Schuchert)\n\/s\/ John Rutledge Director March 30, 1994 (John Rutledge)\nAMERICAN STANDARD INC. AND FINANCIAL STATEMENT SCHEDULES COVERED BY REPORT OF INDEPENDENT AUDITORS (Item 14 (a))\nForm 10-K (Pages) 1. Financial Statements\nConsolidated Balance Sheet at December 31, 1993 and 1992 42 Years ended December 31, 1993, 1992 and 1991, Consolidated Statement of Operations 41 Consolidated Statement of Stockholder's Equity (Deficit) 43 Consolidated Statement of Cash Flows 44-45 Notes to Consolidated Financial Statements 46-62 Segment Data 63 Segment data for capital expenditures, depreciation and amortization 23-29 Quarterly Data (Unaudited) 64 Report of Independent Auditors 40\n2. Financial statement schedules, years ended December 31, 1993, 1992 and 1991: Report of Independent Auditors 84\nV Facilities 85 VI Accumulated Depreciation of Facilities 86 VIII Reserves 87 IX Short-Term Borrowings 88 X Supplementary Income Statement Information 89\nAll other schedules have been omitted because the information is not applicable or is not material or because the information required is included in the financial statements or the notes thereto.\nReport of Independent Auditors\nStockholders and Board of Directors American Standard Inc.\nWe have audited the consolidated financial statements of American Standard Inc. as of December 31, 1993 and 1992, and for each of the three years in the period ended December 31, 1993, and have issued our report thereon dated March 14, 1994 (included elsewhere in this Annual Report on Form-10K). Our audits also included the consolidated schedules listed in Item 14(a)2. These schedules are the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits.\nIn our opinion, the consolidated 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 required to be stated therein.\n\/s\/ Ernst & Young Ernst & Young\nMarch 14, 1994\nAMERICAN STANDARD INC.\nINDEX TO EXHIBITS\n(Item 14(a)3 - Exhibits Required by Item 601 of Regulation S-K and Additional Exhibits)\n(The File Number of American Standard Inc., the Registrant, and for all Exhibits incorporated by reference is 1-470, except those Exhibits incorporated by reference in filings made by ASI Holding Corporation (\"Holding\") whose File Number is 33-23070)\n(3) (i) Restated Certificate of Incorporation of American Standard Inc. (the \"Company\"); previously filed as Exhibit (3)(i) in the Company's Form l0-K for the fiscal year ended December 31, 1988, and herein incorporated by reference.\n(ii) Certificate of Designation, Preferences and Relative, Participating, Optional and other Special Rights of Preferred Stock and Qualifications, Limitations and Restrictions thereof of Series A Preferred Stock.\n(iii) By-laws of the Company; previously filed as Exhibit (3)(ii) in the Company's Form l0-K for the fiscal year ended December 31, 1988, and herein incorporated by reference.\n(4) (i) Indenture, dated as of November 1, 1986, between the Company and Manufacturers Hanover Trust Company, Trustee, including the form of 9-1\/4% Sinking Fund Debenture Due 2016 issued pursuant thereto on December 9, 1986, in the aggregate principal amount of $150,000,000; previously filed as Exhibit (4)(iii) in the Company's Form l0-K for the fiscal year ended December 31, 1986, and herein incorporated by reference.\n(ii) Instrument of Resignation, Appointment and Acceptance, dated as of April 25, 1988 among the Company, Manufacturers Hanover Trust Company (the \"Resigning Trustee\") and Wilmington Trust Company (the \"Successor Trustee\"), relating to resignation of the Resigning Trustee and appointment of the Successor Trustee under the Indenture referred to in Exhibit (4)(i) above; previously filed as Exhibit 4(ii) in Registration Statement No. 33-64450 of the Company under the Securities Act of 1933, as amended, and herein incorporated by reference.\nINDEX TO EXHIBITS - (Continued)\n(iii) Form of Indenture, dated as of July 1, 1988, between the Company and Shawmut Bank Connecticut, National Association (formerly known as The Connecticut National Bank), as Trustee, relating to the Company's 14-1\/4% Subordinated Discount Debentures due 2003; previously filed as Exhibit 4.3 in Amendment No. 2 to Registration Statement No. 33-22126 of the Company under the Securities Act of 1933, as amended, and herein incorporated by reference.\n(iv) Form of Debenture evidencing the 14-1\/4% Subordinated Discount Debentures due 2003 included as Exhibit A to the Form of Indenture referred to in (4)(iii) above.\n(v) Indenture dated as of May 15, 1992, between the Company and First Trust National Association, Trustee, relating to the Company's 10-7\/8% Senior Notes due 1999, in the aggregate principal amount of $150,000,000; previously filed as Exhibit (4)(i) in the Company's Form 10-Q for the quarter ended June 30, 1992, and herein incorporated by reference.\n(vi) Form of 10-7\/8% Senior Notes due 1999 included as Exhibit A to the Indenture described in (4)(v) above.\n(vii) Indenture dated as of May 15, 1992, between the Company and First Trust National Association, Trustee, relating to the Company's 11-3\/8% Senior Debentures due 2004, in the aggregate principal amount of $250,000,000; previously filed as Exhibit (4)(iii) in the Company's Form 10-Q for the quarter ended June 30, 1992, and herein incorporated by reference.\n(viii) Form of 11-3\/8% Senior Debentures due 2004 included as Exhibit A to the Indenture described in (4)(vii) above.\n(ix) Form of Indenture, dated as of June 1, 1993, between the Company and United States Trust Company of New York, as Trustee, relating to the Company's 9-7\/8% Senior Subordinated Notes Due 2001; previously filed as Exhibit 4(xxxi) in Amendment No. 1 to Registration Statement No. 33-61130 of the Company under the Securities Act of 1933, as amended, and herein incorporated by reference.\n(x) Form of Note evidencing the 9-7\/8% Senior Subordinated Notes Due 2001 included as Exhibit A to the Form of Indenture referred to in 4(ix) above.\nINDEX TO EXHIBITS - (Continued)\n(xi) Form of Indenture, dated as of June 1, 1993, between the Company and United States Trust Company of New York, as Trustee, relating to the Company's 10-1\/2% Senior Subordinated Discount Debentures Due 2005; previously filed as Exhibit (4)(xxxiii) in Amendment No. 1 to Registration Statement No. 33-61130 of the Company under the Securities Act of 1933, as amended, and herein incorporated by reference.\n(xii) Form of Debenture evidencing the 10-1\/2% Senior Subordinated Discount Debentures Due 2005 included as Exhibit A to the Form of Indenture referred to in (4)(xi) above.\n(xiii) Form of Indenture, dated as of October 25, 1990, as amended and restated as of June 15, 1993, between the Company and Shawmut Bank, N.A., as Trustee, relating to Company's 12-3\/4% Junior Subordinated Debentures Due 2003; previously filed as Exhibit (4)(xx) in Amendment No. 2 to Registration Statement No. 33-64450 of the Company under the Securities Act of 1933, as amended, and herein incorporated by reference.\n(xiv) Form of Indenture evidencing the 12-3\/4% Junior Subordinated Debentures Due 2003 included as Exhibit A to the Form of Indenture referred to in (4)(xiii) above.\n(xv) Assignment and Amendment Agreement, dated as of June 1, 1993, among the Company, Holding, certain subsidiaries of the Company, Bankers Trust Company, as agent under the 1988 Credit Agreement, the financial institutions named as Lenders in the 1988 Credit Agreement and certain additional Lenders and Chemical Bank, as Administrative Agent and Arranger; previously filed as Exhibit (4)(xiii) in Amendment No. 1 to Registration Statement No. 33-64450 of the Company under the Securities Act of 1933, as amended, and herein incorporated by reference.\n(xvi) Credit Agreement, dated as of June 1, 1993, among the Company, Holding, certain subsidiaries of the Company and the lending institutions listed therein, Chemical Bank, as Administrative Agent and Arranger; Bankers Trust Company, The Bank of Nova Scotia, The Chase Manhattan Bank, N.A., Deutsche Bank AG, The Long-Term Credit Bank of Japan, Ltd., New York Branch, and NationsBank of North Carolina, N.A., as Managing Agents, and Banque Paribas, Citibank, N.A., and Compagnie Financiere de CIC et de l'Union Europeenne, New York Branch, as Co-Agents; previously filed as Exhibit (4)(xiv) in Amendment No. 1 to Registration Statement No. 33-64450 of the Company under the Securities Act of 1933, as amended, and herein incorporated by reference.\n(xvii) First Amendment, Consent and Waiver, dated as of February 10, 1994, to the Credit Agreement referred to in (4)(xvi) above.\nINDEX TO EXHIBITS - (Continued)\n(xviii) Stockholders Agreement, dated as of July 7, 1988, as amended as of August 1, 1988, among Holding, Kelso ASI Partners, L.P., and the Management Stockholders named therein; previously filed as Exhibit 4.19 in Amendment No. 2 in the Registration Statement No. 33-23070 of Holding under the Securities Act of 1933, as amended, and herein incorporated by reference.\n(xix) Amendment to Section 2.1 of the Stockholders Agreement referred to in paragraph (4)(xviii) above, effective as of January 1, 1991; previously filed as Exhibit (4)(xxvii) by Holding in its Form 10-K for the year ended December 31, 1992, and herein incorporated by reference.\n(xx) Supplement and Amendment dated as of September 4, 1991 to the Stockholders Agreement, dated as of July 7, 1988, as amended, referred to in paragraph (4)(xviii) above; previously filed as Exhibit (4)(ii) by Holding in its Form 10-Q for the quarter ended September 30, 1991, and herein incorporated by reference.\n(xxi) Amended Section 6.1 of the Stockholders Agreement referred to in paragraph (4)(xviii) above, effective as of September 2, 1993; copy of amended Section is being filed as Exhibit (4)(xvii) by Holding in its Form l0-K for the year ended December 31, 1993, concurrently with the filing of the Company's Form 10-K for the same year, and herein incorporated by reference.\n(xxii) Revised Schedule of Priorities effective as of September 5, 1991, as adopted by the Board of Directors of Holding, pursuant to the Stockholders Agreement referred to in paragraph (4)(xviii) above; previously filed as Exhibit (4)(iii) by Holding in its Form l0-Q for the quarter ended September 30, 1991 and herein incorporated by reference.\n(10) (i) Agreement and Plan of Merger, dated as of March 16, 1988, among the Company, ASI Acquisition Company and Holding and Offer Letter, dated March 16, 1988, between the Company and Kelso & Company, L.P.; previously filed as Exhibit 2 to the Company's Schedule 14D-9 filed March 21, 1988, in connection with the offer for all the shares of the Company's Common Stock by a corporation formed by Kelso & Company, L.P., and herein incorporated by reference.\nINDEX TO EXHIBITS - (Continued)\n(ii) Amendment, dated June 3, 1988 to Agreement and Plan of Merger referred to in (l0)(i) above; previously filed as Exhibit 2.50 in Amendment No. 1 to the Registration Statement No. 33-22126 of the Company under the Securities Act of 1933, as amended, and herein incorporated by reference.\n(iii) American Standard Inc. Long-Term Incentive Compensation Plan, as amended through February 6, 1992; previously filed as Exhibit (10)(iv) in the Company's Form 10-K for the fiscal year ended December 31, 1992, and herein incorporated by reference.\n(iv) Trust Agreement for American Standard Inc. Long-Term Incentive Compensation Plan.\n(v) American Standard Inc. Annual Incentive Plan; previously filed as Exhibit (l0)(vii) in the Company's Form l0-K for the fiscal year ended December 31, 1988, and herein incorporated by reference.\n(vi) American Standard Inc. Management Partners' Bonus Plan effective as of July 7, 1988; previously filed as Exhibit (l0)(i) in the Company's Form l0-Q for the quarter ended September 30, 1988, and herein incorporated by reference; amendments to Plan adopted on June 7, 1990, previously filed as Exhibit (4)(ii) in the Company's Form l0-Q for the quarter ended June 30, 1990, and herein incorporated by reference.\n(vii) American Standard Inc. Executive Supplemental Retirement Benefit Program, as restated to include all amendments through December 31, 1993.\n(viii) Stock Purchase Agreement, dated April 27, 1988, between ASI Acquisition Company and General Electric Capital Corporation (without schedules); previously filed as Exhibit 2.4 in Registration Statement No. 33-22126 of the Company under the Securities Act of 1933, as amended, and herein incorporated by reference.\nINDEX TO EXHIBITS - (Continued)\n(ix) Amendment, dated June 3, 1988, to Stock Purchase Agreement referred to in (l0)(viii) above; previously filed as Exhibit 2.6 in Amendment No. 1 in Registration Statement No. 33-22126 of the Company under the Securities Act of 1933, as amended, and herein incorporated by reference.\n(x) Form of Composite American-Standard Employee Stock Ownership Plan incorporating amendments through December 3, 1992; previously filed as Exhibit (10)(x) in Registration Statement No. 33-61130 of the Company under the Securities Act of 1933, as amended, and herein incorporated by reference.\n(xi) American-Standard Employee Stock Ownership Trust Agreement, dated as of December 1, 1991, between ASI Holding Corporation and Fidelity Management Trust Company (as successor to Citizens & Southern Trust Company (Georgia), N.A.), as trustee; previously filed as Exhibit (10)(xiv) in the Company's Form 10-K for the year ended December 31, 1991, and herein incorporated by reference.\n(xii) Consulting Agreement made July 1, 1988, with Kelso & Company, L.P. concerning general management and financial consulting services to the Company; previously filed as Exhibit (l0)(xviii) in the Company's Form l0-K for the fiscal year ended December 31, 1988, and herein incorporated by reference.\n(xiii) American Standard Inc. Supplemental Compensation Plan for Outside Directors, as amended through September 1993.\n(xiv) ASI Holding Corporation 1989 Stock Purchase Loan Program; previously filed as Exhibit l0(i) in Holding's Form l0-Q for the quarter ended September 30, 1989, and herein incorporated by reference.\n(xv) Corporate Officers Severance Plan adopted in December, 1990, effective April 27, 1991; previously filed as Exhibit (l0)(xix) in the Company's Form l0-K for the fiscal year ended December 31, 1990, and herein incorporated by reference.\n(xvi) Estate Preservation Plan adopted in December, 1990; previously filed as Exhibit (l0)(xx) in the Company's Form l0-K for the fiscal year ended December 31, 1990, and herein incorporated by reference.\n(xvii) Amendment adopted in March 1993 to Estate Preservation Plan referred to in (10)(xvi) above.\n(xviii) Summary of terms of Unfunded Deferred Compensation Plan, adopted December 2, 1993.)\n(xix) Retirement\/Consulting Agreement, dated December 28, 1993, between H. Thompson Smith and the Company.\n(21) Listing of the Company's subsidiaries.","section_15":""}
{"filename":"854087_1993.txt","cik":"854087","year":"1993","section_1":"ITEM 1. BUSINESS\nFairwood Corporation, formerly MHS Holdings Corporation (\"Fairwood\" or the \"Company\"), is a privately-held Delaware corporation organized in 1988 by investors including Citicorp Venture Capital Limited (\"CVCL\") for the purpose of acquiring all of the common stock of Mohasco Corporation (\"Mohasco\").\nIn 1988 Fairwood, through its wholly-owned subsidiary MHS Acquisition Corporation (\"Acquisition\"), acquired by tender offer a majority of the common stock of Mohasco. In September 1989, Acquisition was merged with Mohasco (the \"Merger\") and Mohasco thereby became a wholly-owned subsidiary of Fairwood.\nThe principal executive offices of the Company are located at c\/o Mohasco Corporation, 4401 Fair Lakes Court, Suite 100, Fairfax, Virginia 22033. The Company's primary asset is all of the common stock of Mohasco.\nOn December 31, 1988, Mohasco sold all of the issued and outstanding capital stock of its wholly owned subsidiaries, Mohasco Carpet Corporation (\"Carpet\") and Cort Furniture Rental Corporation (\"Rental\"). In connection with the sale of the capital stock of Rental, the Company received an aggregate amount of approximately $151.1 million, in the form of promissory notes and assumption of long-term indebtedness and lease obligations of Rental. Approximately $21.0 million of the promissory notes was prepaid in December 1989 and the balance was prepaid in January 1990.\nIn an effort to better meet the service and delivery requirements of West Coast customers and to further penetrate the large West Coast regional market, the Company opened an upholstered furniture manufacturing plant in Ontario, California in the last quarter of 1990 and expanded this operation by adding a warehouse in 1992. Correspondingly, the Company's Clinton, North Carolina plant was closed in 1991 due to a shift in the geographical demand for the Company's upholstered furniture and such plant is under contract for sale. Clinton production was shifted to New Albany and Okolona, Mississippi and Ontario, California.\nOn March 10, 1992, Mohasco, the Company's principal operating subsidiary, entered into two Agreements and Plans of Merger, which provided for the disposition of two wholly owned subsidiaries, Chromcraft Corporation (\"Chromcraft\") and Peters-Revington Corporation (\"Peters-Revington\") to Chromcraft Revington, Inc., an affiliate. The mergers were consummated on April 23, 1992 and the proceeds of the disposition were used by Mohasco to repay long-term debt owed to Court Square Capital Limited (\"CSCL\"), an affiliate of CVCL, under Mohasco's Credit Agreement with CSCL (the \"Credit Agreement\").\nThrough its subsidiaries, the Company manufactures upholstered stationary and motion furniture, furniture mechanisms for motion furniture, such as sleepers, recliners and rockers and mechanisms for office furniture, hospital beds and related health care products.\n- 2 - OPERATIONS\nThe Company, through its subsidiary, Mohasco, and Mohasco's subsidiaries, serves selected segments of the highly diversified $19+ billion residential furniture market. The Company's operations engage in the manufacture and sales of a diversified line of upholstered furniture under several brand names, as well as furniture mechanisms. While most of its products are moderately priced and designed to appeal to a wide range of furniture buyers, certain products have been successfully targeted to a more selective, higher priced market. The products are sold nationally to furniture retailers and department stores mainly through commissioned sales forces.\nMohasco entered the furniture industry through a series of acquisitions commencing in 1964. There are currently three separate operating companies, organized as two subsidiaries of Mohasco. Each company markets and manufactures one or more specific brands of furniture. The Stratford Company (\"Stratford\") makes and sells mid-priced upholstered stationary and motion furniture under the brand names of Stratford, Stratolounger, Stratopedic and Avon. The Barcalounger Company (\"Barcalounger\") manufactures and sells higher-priced motion furniture and is well known for its high-quality recliners. Super Sagless Corporation (\"Super Sagless\") is a major fabricator of recliner, incliner, rocker, glider and sleeper mechanisms which are sold throughout the furniture industry. In 1992, Super Sagless added the tilt swivel for office chairs to its line of mechanisms and entered the hospital bed market with a portable hospital bed for home use as well as a line of beds for hospitals and related products.\nThe furniture industry is affected to a substantial degree by style, value and fashion. The subsidiaries of Mohasco participate in important furnishings market showings held during the year in a number of larger cities to acquaint retailers with the significant number of new products introduced each year. The Company frequently reviews its product lines to evaluate whether minor or major restyling of such lines is warranted. To generate new product and style ideas based upon consumer and retailer response, the companies maintain in-house design staffs and contract with outside designers. The designers consult with manufacturing management to analyze the economic feasibility of producing new products based on their designs.\nThe marketing strategy of Stratford is to maintain and increase its market share in the upholstered furniture market by anticipating trends in furniture fashions and responding to the many changes in consumer and retailer demand. Stratford's goal is to provide moderate pricing and to offer selling support at the retail level for customers in the form of sales aids, promotions, advertising plans and programs as well as training for the retail customers' salespeople. Accordingly, management must develop product lines with appealing style, in various targeted price ranges that provide good value via efficient production methods and technologies. This adaptive process requires market sensitivity, a close and empathetic relationship with retailers, and tight controls with flexibility in the manufacturing process. Stratford is extremely proud of its reputation as an innovator in modular and motion upholstery furniture designs and the high-quality tailoring of its products compared to similarly and higher-priced competitive furniture.\nBarcalounger targets a selected market for its high-end recliner chair and living room motion furniture. Barcalounger sells mainly to furniture stores\n- 3 - that carry more expensive products and provide interior design services directly or indirectly. Barcalounger gives extensive warranties for its products. The value and fine quality of their furniture is apparent as only hardwood frames are used and only the finest leathers and fabrics are offered. Barcalounger has significant brand recognition and has a reputation of having one of the best product lines in terms of value, quality, design and service in the more expensive segment of the motion furniture industry. They have the distinction of introducing the latest technology in motion mechanisms which they design, develop and tool for their own exclusive use.\nApproximately 30%, 25% and 28% in 1993, 1992 and 1991, respectively, of Super Sagless' production of mechanisms were sold to other Mohasco subsidiaries and the remainder were sold to other furniture manufacturers who do not manufacture their own mechanisms. The health care product line is sold to dealers. Super Sagless operates a large metal fabrication plant with low, well controlled costs. Super Sagless' marketing strategy is to press this advantage to expand their sales to motion furniture and office chair manufacturing while continuing to seek other related metal fabrication sales in other industries and developing and expanding their health care product line business.\nStratford and Barcalounger are well known in the furniture industry which is characterized by a large number of relatively small manufacturers. The following are among the Company's larger competitors: Masco Corporation, Interco Industries, La-Z-Boy, Sealy, LADD Furniture, and Bassett. Competition is intense at all levels, stressing price, style, fabric and product finish.\nFACTORS AFFECTING THE HOME FURNISHINGS INDUSTRY\nThe furniture industry as a whole is affected by demographics, household formations, the level of personal discretionary income, household mobility and the rate of new home construction. There exists a substantial replacement market that is relatively less affected by these factors.\nRESEARCH AND DEVELOPMENT\nSince the furniture industry is characterized by active competition among a large number of companies, many of which also have substantial facilities and resources, the Company believes that the maintenance of high product quality and the development of new products are essential to maintaining its competitive position. In support of these goals, the Company conducts research and development activities which are decentralized and directed by the individual operating companies.\nThe operating divisions, excluding Chromcraft and Peters-Revington, expended a total of $22,030,000 in the past five years for research and development programs of which $4,043,000, $3,853,000 and $4,325,000 were expended in 1993, 1992 and 1991, respectively.\nEMPLOYEES\nThe Company and its subsidiaries employed 3,539 persons at December 31, 1993. Mohasco has a long record of generally harmonious relations with employees. - 4 - BACKLOG\nThe backlog of orders among the Company's furniture operations was approximately $26,345,000 at December 31, 1993 and approximately $24,110,000 at December 31, 1992. It is expected that the backlog at December 31, 1993 will be filled in the current year. The Company does not consider backlog to be a significant indicator of the sales outlook for its products beyond the period of a few months.\nSEASONALITY AND CUSTOMERS\nThere are seasonal factors which affect the Company's business. Spring and fall are generally considered periods of increased interest by consumers in interior furnishings since these are periods of increased real estate activity involving relocation of families. The Christmas holiday season and other special occasions usually generate increased sales of some of the Company's furniture lines. On the other hand, inclement weather in mid-winter generally discourages the purchase of interior furnishings. Similarly, the closedown of a portion of the Company's activities for vacation periods of one or two weeks in July has a limiting effect on production as well as sales. The Company maintains adequate levels of inventory to meet seasonal demands.\nSears accounted for approximately sixteen, thirteen and nine percent of the Company's furniture sales during the years 1993, 1992 and 1991, respectively. Export sales have not been significant.\nENVIRONMENTAL AND RAW MATERIALS\nIn 1993, there were no significant effects upon the capital expenditures, earnings and competitive position of the Company and its subsidiaries occasioned by compliance with provisions of federal, state and local laws regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment.\nRaw materials purchased by the Company are all procured in the open market from a number of suppliers. In general, no major difficulties have been experienced in obtaining raw materials.\nPATENTS\nPatents are not a significant consideration in the manufacture of most of the Company's products. The Company does not believe that its operating income is materially dependent on any one patent or license or group of related patents or licenses.\nITEM 2.","section_1A":"","section_1B":"","section_2":"ITEM 2. PROPERTIES\nThe furniture manufacturing activities of the Company are conducted in modern facilities of suitable construction. These facilities are in good operating condition, reasonably maintained and contain reasonably modern equipment. All of the principal items of machinery and equipment located in these facilities are owned by the subsidiaries of Mohasco.\n- 5 - The Company's subsidiaries also lease showroom and warehouse space throughout the United States for display and storage of products. Mohasco owned until March 1993 an office building located in Fairfax, Virginia. Office space is now leased.\nThe Company believes that the plants and facilities, in the aggregate, are adequate, suitable and of sufficient capacity for purposes of conducting its current business.\nAs of December 31, 1993, the Company's subsidiaries have twelve plants and furniture facilities located in three states, California, North Carolina and Mississippi, occupying a total of approximately 3.0 million square feet. Of these plants and facilities, a total of approximately .1 million square feet of floor space is owned by the subsidiaries of Mohasco. A total of 2.9 million square feet is leased under long-term leases with various municipalities and counties with various expiration dates extending to 2048.\nSubstantially all of the assets of Mohasco and its subsidiaries are subject to a lien in favor of CSCL granted in connection with the Credit Agreement.\nITEM 3.","section_3":"ITEM 3. LEGAL PROCEEDINGS\nThe Internal Revenue Service (\"IRS\") has completed the audit examination of the consolidated Federal income tax returns of the Company and its subsidiaries, including Mohasco (the \"Consolidated Group\"), for the years ended December 31, 1988 through December 31, 1991, and has delivered to the Company a \"30-day letter\" and Revenue Agent's Report (\"RAR\") proposing to adjust the Company's taxable income in the years in issue and in prior years to which net operating losses of the Consolidated Group were carried back. The cumulative proposed deficiency in Federal income tax arising from the proposed adjustments is approximately $63 million, before applicable statutory interest. The Company estimates that the aggregate proposed liability would, together with statutory interest through the year ended December 31, 1993, and net of any applicable deduction for such interest, total $90 million. The principal issues addressed in the RAR are (i) the proposed disallowance of approximately $164 million of interest expense claimed by the Consolidated Group with respect to debt incurred in connection with the 1988 acquisition of Mohasco by the Company under the theory that such debt should be recharacterized as equity for tax purposes, (ii) the proposed disallowance of approximately $18 million of investment banking, legal and other fees incurred by the Consolidated Group and deducted in the years in issue under the theory that such expenses are capital in nature and related theories, and (iii) the proposed disallowance of approximately $4 million of compensation expense deducted by the Consolidated Group under the theory that such expense constitutes non-deductible \"golden parachute\" payments. The Company believes that the proposed adjustments are in error and intends to contest vigorously this matter. Under available administrative procedures, the Company will protest the proposed adjustments and request a conference or conferences with the IRS Appeals division. Depending upon the outcome of discussions of the issues with the IRS Appeals division, the Company may litigate one or more of the issues.\nOn October 14, 1993, Mohasco was served with a complaint filed in U.S. District Court in Philadelphia by third party plaintiffs against Mohasco and its former subsidiary, Sloane Blabon Corporation, which engaged in the linoleum business, U.S. vs. Berks Associates, et al., Civ. No. 91-4868, U.S.D.C., E.D. PA.\n- 6 - The original complaint in the case was filed by the Environmental Protection Agency against Berks Associates and others to recover over $200 million from twelve defendants (not including Mohasco) for costs incurred or to be incurred in connection with the investigation and remediation of a Super Fund site in Douglasville, PA. The original defendants then sued over 600 third party defendants to share in the liability, if any. Sloane Blabon is alleged to have disposed of benzine at the site from 1949 through May, 1953, when Sloane Blabon sold the relevant assets to Congoleum Corporation. During that period, Sloane Blabon disposed of substantial quantities of benzine to Berks Associates at the Douglasville site. The Company does not believe its disposals were toxic as alleged. The damages sought from Sloane Blabon and Mohasco are unspecified. On November 1, 1993, the Company filed a Notice and Certification denying the charges. The Company believes the charges are without merit and that it has valid defenses to the claims. At present, no trial date has been set.\nAs of the date hereof, there are certain other legal proceedings pending, which arise out of the normal course of the Company's business, the financial risk of which is not considered material in relation to the consolidated financial position of the Company.\nITEM 4.","section_4":"ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS\nNot applicable.\nPART II\nITEM 5.","section_5":"ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREOWNER MATTERS\nThe Registrant's common stock is privately held. At year end 1993 and 1992, there were three shareowners of the Company's common stock. No dividends were declared on the Company's common stock in 1993 and 1992. The ability of the Company to pay dividends and make distributions in respect of its common stock is restricted by instruments relating to the Company's debt. Futhermore, the ability of Mohasco and its subsidiaries to transfer monies to the Company (including without limitation by dividend or distribution) is restricted by instruments relating to Mohasco's and its subsidiaries' debt, including the Credit Agreement. See Item 7, \"Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources\" and Note 4 to the Company's Consolidated Financial Statements set forth in Item 8.\nCommon stock purchase warrants issued by the Registrant in connection with the Merger are held by the public. The common stock purchase warrants become exercisable in September 1994. See Note 4 to the Company's Consolidated Financial Statements set forth in Item 8. The warrant exercise price is $1 per share (subject to adjustment). There is no established market for the Registrant's common stock purchase warrants.\n- 7 -\nITEM 6.","section_6":"ITEM 6. SELECTED FINANCIAL DATA\nFAIRWOOD CORPORATION AND SUBSIDIARIES\nFive Year Summary of Financial Data (Dollar Amounts in Millions Except Per Share Data)\nThe Company acquired Mohasco in a purchase transaction deemed to be effective as of July 3, 1988. In 1992, the excess of purchase cost over fair value of assets acquired in the purchase of Mohasco was written off due to the determined unrecoverability of these costs. Also in 1992, operations data includes the activities of Chromcraft and Peters-Revington for the period ended April 23, 1992. Accordingly, the data presented for 1993 and 1992 is not comparable with one another or prior periods.\nThe provision for income taxes associated with Rental's prepayment of promissory notes in 1989 and 1990 are reflected in discontinued operations.\nFor additional information, see the Company's Consolidated Financial Statements included with this report, including Notes 3 and 12 thereto regarding certain tax and liquidity matters.\n- 8 -\nITEM 7.","section_7":"ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS\nRESULTS OF OPERATIONS\nThe following table indicates the percentage of sales accounted for by certain items in the Consolidated Statements of Operations.\n1993 VS 1992\nNet sales of approximately $261.4 million for 1993 decreased slightly from 1992 net sales of approximately $267.0 million, due to the disposition of Chromcraft and Peters-Revington in April 1992. Excluding Chromcraft and Peters-Revington, net sales for 1993 were approximately $261.4 million as compared to approximately $231.5 million for 1992, an increase of approximately 13%, primarily due to an increase in the number of units sold of upholstered furniture in 1993.\nCost of sales decreased in 1993 to approximately $221.5 million from approximately $233.8 million in 1992, primarily due to the disposition of Chromcraft and Peters-Revington. Excluding Chromcraft and Peters-Revington, cost of sales were approximately $221.5 million and $206.9 million for 1993 and 1992, respectively, or 84.7% and 89.4% of sales for 1993 and 1992, respectively. The 4.7% reduction in cost of sales as a\n- 9 - percentage of sales from 1992 to 1993, while sales increased approximately 13%, was primarily due to favorable manufacturing variances associated with higher volume of production and cost reduction and quality improvement programs at all subsidiary company manufacturing facilities. These programs include the streamlining of work flows, utilization of cellular production techniques, establishment of focused factory systems and implementation of benchmarking methods to lower and control both unit and factory overhead costs.\nSelling, administrative and general expenses decreased to approximately $38.0 million in 1993 from approximately $51.7 million in 1992, in part due to the disposition of Chromcraft and Peters-Revington. Excluding Chromcraft and Peters-Revington, selling, administrative and general expenses were approximately $38.0 million and $46.5 million for 1993 and 1992, respectively. This decrease in selling, administrative and general expenses from 1992 to 1993 is primarily due to more effective utilization of resources and reduction of personnel due to the consolidation of administrative functions.\nOther expenses, net, decreased approximately $2.4 million to approximately $4.3 million in 1993 from approximately $6.7 million in 1992, primarily due to recording in 1992 anticipated losses in connection with the sale, completed in March 1993, of the Company's Fairfax, Virginia office building, and the transfer of corporate functions to the operating companies, which were partially offset by 1993 losses on sales of property and costs associated with divested operations.\n1992 VS 1991\nNet sales for 1992 decreased from 1991 sales of approximately $341.4 million to approximately $267.0 million, primarily due to the disposition of Chromcraft and Peters-Revington. Excluding Chromcraft and Peters-Revington, net sales for 1992 were approximately $231.5 million compared to approximately $225.3 million for 1991, an increase of approximately 2.8% primarily due to the number of units sold of upholstered furniture in 1992.\nCost of sales for 1992 decreased to approximately $233.8 million from approximately $290.9 million in 1991, primarily due to the disposition of Chromcraft and Peters-Revington. Excluding Chromcraft and Peters-Revington, cost of sales were approximately $206.9 million and $203.8 million for 1992 and 1991, respectively, or 89.4% and 90.5% of sales for 1992 and 1991, respectively. The improvement in the percentage of sales is primarily due to favorable manufacturing variances associated with higher volume of production and a cost reduction program.\nSelling, administrative and general expenses decreased to approximately $51.7 million in 1992 from approximately $62.4 million in 1991, primarily due to the disposition of Chromcraft and Peters-Revington. Excluding Chromcraft and Peters-Revington, selling, administrative and general expenses were approximately $46.5 million and $46.4 million in 1992 and 1991, respectively.\nOther expenses increased approximately $5.8 million to approximately $6.7 million in 1992 from approximately $.9 million in 1991, primarily due to anticipated losses in connection with the sale, completed in March 1993, of the Company's Fairfax, Virginia office building and the transfer of many corporate functions to the operating companies.\n- 10 - A restructuring charge of approximately $85.9 million in 1992 was due to the write-off of the excess of purchase cost over the fair value of assets acquired in the 1988 purchase of Mohasco due to the unrecoverability of these costs. The Company determined that the write up in assets resulting from the 1988 purchase was unrecoverable due to the continuing significant losses of the operating companies, and a lower of cost or market analysis of the Company's assets.\nPROVISION FOR INCOME TAXES\nAn income tax refund receivable, included in other accounts and notes receivable on the balance sheet, of approximately $1.4 million was recorded in 1993 due to an operating loss carryback. A cumulative effect of change in accounting principle of $2.1 million was recorded in 1993, which is described in Note 1, Summary of Significant Accounting Policies, in the Notes to Consolidated Financial Statements. Due to the taxable income generated as a result of the disposition of Chromcraft and Peters-Revington, the Company provided for taxes of approximately $4.5 million in 1992, which were partially offset by the utilization of a net operating loss carry-forward of approximately $1.9 million, shown as an extraordinary item on the Consolidated Statements of Operations, yielding a net provision of approximately $2.6 million. The Company had a tax benefit of approximately $7.4 million in 1991 due to an operating loss carryback. Please refer to Note 3, Income Taxes, in the Notes to Consolidated Financial Statements.\nLIQUIDITY AND CAPITAL RESOURCES\nCapital requirements for operations during 1993 and 1992 were provided by financing channels and operating cash flow.\nThe Company had working capital of approximately $43.3 million and $23.1 million at December 31, 1993 and 1992, respectively. At December 31, 1993, the Company had long-term debt of approximately $386.0 million of which $.2 million was current. Long-term debt at December 31, 1992 was approximately $330.8 million of which $.1 million was current. In April 1992, the proceeds to Mohasco from the disposition of Chromcraft and Peters-Revington were used to repay secured, senior debt of Mohasco and its subsidiaries in the approximate amount of $83 million. All outstanding debt at December 31, 1993 and 1992, excluding the merger debentures and capitalized lease obligations, is payable to CSCL, which is an indirect subsidiary of Citicorp, a bank holding company, and an affiliate of CVCL. The Company will attempt either to refinance, or negotiate an extension of, the debt payable to CSCL when due, although there can be no assurance that such attempts will be successful. Interest on the revolving credit loan of Mohasco and its subsidiaries is payable quarterly at 1 1\/2% above the prime rate, which prime rate was 6.0% at December 31, 1993. Interest on the senior subordinated debentures of Mohasco is payable semi-annually at 18%. Interest on the senior subordinated pay-in-kind debentures and merger debentures of Fairwood is payable semi-annually at 15 1\/2% and 16 7\/8%, respectively. The Company has the option until April 1, 1995 to pay interest on its senior subordinated pay-in-kind debentures and merger debentures either by cash or by the distribution of additional securities. Additional securities were issued in lieu of the cash payments of interest due April 1, 1993 and October 1, 1993 on both the senior subordinated pay-in-kind debentures and merger debentures. Accordingly, the principal amount of the Company's senior subordinated pay-in-kind debentures and merger debentures increased by $12.6 million and $8.0 million, respectively, since December 31, 1992. For further details on financing and debt see Note 4 to Consolidated Financial Statements.\nCapital additions were approximately $4.2 million, $3.2 million and $4.4 million for the years 1993, 1992 and 1991, respectively. Additions for 1994 are budgeted at approximately $5.1 million, primarily for the purchase of new manufacturing equipment.\n- 11 - Mohasco is expected in 1994 to service debt from its cash flow from operations and available credit facilities. Throughout 1993, 1992 and 1991, Mohasco funded interest obligations related to long-term indebtedness through increased borrowings from CSCL. However, during 1992 the proceeds to Mohasco from the disposition of Chromcraft and Peters-Revington of approximately $83 million were used to repay debt of Mohasco and its subsidiaries.\nThe Company is dependent upon CSCL for funding of its debt service costs. Instruments relating to the revolving credit facility and senior subordinated debentures have been amended and certain provisions thereof waived at various times through March 1994 to provide more favorable terms to Mohasco and, in certain instances, to avoid defaults thereunder. Under the Credit Agreement, relating to the revolving credit facility, Mohasco and its subsidiaries are generally restricted from transferring monies to the Company (including without limitation by dividend or distribution) with the exception of amounts for (a) specified administrative expenses of the Company not exceeding $275,000 per year and (b) payment of income taxes. Futhermore, Mohasco is subject to additional restrictions on transferring monies to the Company (including without limitation by dividend or distribution) under its senior subordinated debentures, which generally require the satisfaction of certain financial conditions for such transfers. Fairwood is subject to additional restrictions on payment or transfer of monies (including without limitation by dividend or distribution) under its senior subordinated pay-in-kind debentures and merger debentures, which generally require the satisfaction of certain financial conditions for such transfers. The Company anticipates that funds provided by operations and available credit facilities will be adequate in 1994 for the capital addition program, working capital requirements and any cash payments then due on the Company's debt.\nITEM 8.","section_7A":"","section_8":"ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA\nThe following financial statements and supplementary data are filed as a part of this report:\nIndependent Auditors' Report Consolidated Balance Sheets at December 31, 1993 and 1992 Consolidated Statements of Operations for the Years ended December 31, 1993, 1992 and 1991 Consolidated Statements of Common Stock and Other Shareowners' Equity (Deficit) for the Years ended December 31, 1993, 1992 and 1991 Consolidated Statements of Cash Flows for the Years ended December 31, 1993, 1992 and 1991 Notes to Consolidated Financial Statements\n- 12 -\nIndependent Auditors' Report\nThe Shareowners and Board of Directors Fairwood Corporation and Subsidiaries:\nWe have audited the consolidated financial statements of Fairwood Corporation and subsidiaries as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedules as listed in the accompanying index. These consolidated financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on our audits.\nWe conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.\nIn our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Fairwood Corporation and subsidiaries as of December 31, 1993 and 1992, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1993, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.\nAs discussed in Note 3 to the consolidated financial statements, the Company has been notified by the Internal Revenue Service of proposed adjustments to its Federal income tax returns for the years 1988 through 1991. Such adjustments would result in a net tax cost to the Company of approximately $90 million, including interest, through the year ended December 31, 1993. The Company has indicated that it disagrees with the proposed adjustments and intends to contest vigorously the positions taken by the Internal Revenue Service. The ultimate outcome of these proposed adjustments cannot presently be determined. Accordingly, no provision for any liability that may result upon ultimate resolution of these proposed adjustments has been recognized in the accompanying consolidated financial statements.\nAs discussed in Notes 1 and 3 to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes, as of January 1, 1993.\n\/s\/ KPMG Peat Marwick KPMG Peat Marwick\nWashington, D.C. February 7, 1994, except as to note (4) which is as of March 25, 1994\n- 13 - FAIRWOOD CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets December 31, 1993 and 1992 (In thousands except share data)\nSee accompanying notes to consolidated financial statements.\n- 14 -\nFAIRWOOD CORPORATION AND SUBSIDIARIES Consolidated Statements of Operations\nSee accompanying notes to consolidated financial statements.\n- 15 -\nFAIRWOOD CORPORATION AND SUBSIDIARIES Consolidated Statements of Common Stock and Other Shareowners' Equity (Deficit) Years Ended December 31, 1993, 1992 and 1991\n(In thousands)\nSee accompanying notes to consolidated financial statements.\n- 16 - FAIRWOOD CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows\nSee accompanying notes to consolidated financial statements.\n- 17 -\nFAIRWOOD CORPORATION AND SUBSIDIARIES\nNotes to Consolidated Financial Statements\n(1) Summary of Significant Accounting Policies\nPrinciples of Consolidation\nThe consolidated financial statements represent a consolidation of the financial statements of Fairwood Corporation (\"Fairwood\" or the \"Company\"), and Mohasco Corporation (\"Mohasco\") and all of its subsidiaries. All inter- company balances, transactions and profits have been eliminated in consolidation.\nInventories\nAll inventories (materials, labor and overhead) are valued at the lower of cost or market using the last-in, first-out (LIFO) method.\nA LIFO liquidation occurred during 1992 and 1991 but did not result in any significant reduction of cost of sales.\nThe components of inventory at December 31 are as follows:\nSee \"Restructuring Charge\".\nProperty, Plant and Equipment\nDepreciation and amortization of property, plant and equipment is provided principally on a straight-line basis over the estimated useful lives as follows: buildings and buildings capitalized under long-term leases from 30 to 45 years; machinery and equipment from 3 to 14 years; and leasehold improvements over the term of related leases.\nLong-term leases for manufacturing and warehousing facilities which were constructed by various local governmental bodies have been capitalized.\nStatements of Cash Flows\nCash and cash equivalents include cash in banks and highly liquid short-term investments having a maturity of three months or less on the date of purchase.\n- 18 -\nFAIRWOOD CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements\nIncome Taxes\nIn February 1992, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes, (\"Statement 109\"). Statement 109 requires a change from the deferred method of accounting for income taxes to the asset and liability method. Under the asset and liability method of Statement 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under Statement 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date of the change in tax rates.\nEffective January 1, 1993, the Company adopted Statement 109. The adoption of Statement 109 resulted in a cumulative effect adjustment of $2,100,000 which reduced the net loss for 1993, and which is reflected in the 1993 statement of operations.\nUnder the deferred method, which was applied in 1992 and prior years, deferred income taxes are recognized for income and expense items that are reported in different years for financial reporting and tax purposes using the tax rate applicable for the year of the calculation. Under the deferred method, deferred taxes are not adjusted for subsequent changes in tax rates.\nRestructuring Charge\nIn December 1992, the excess of purchase cost over the fair value of assets acquired in the 1988 and 1989 purchase of Mohasco was written off due to the unrecoverability of these costs. The charge includes the following costs:\nThe Company determined that the write up in assets resulting from the purchase was unrecoverable due to the continuing significant losses of the operating companies, and a lower of cost or market analysis of the Company's assets.\n- 19 -\nFAIRWOOD CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements\n(2) Divestitures\nThe disposition of Chromcraft Corporation (\"Chromcraft\") and Peters- Revington Corporation (\"Peters-Revington\") to Chromcraft Revington, Inc., an affiliate, occurred in April 1992. The proceeds from the disposition amounted to approximately $83.1 million, approximately $30.9 million greater than the net book value of the net assets of Chromcraft and Peters-Revington. Due to the affiliated nature of the transaction, the $30.9 million was accounted for as contributed capital. The proceeds were used to repay long-term debt owed Court Square Capital Limited (\"CSCL\"), an affiliate, under Mohasco's Credit Agreement with CSCL (the \"Credit Agreement\") relating to Mohasco's revolving credit facility. The disposition generated taxable income which resulted in a tax provision for the year 1992.\nDuring the four months ended April 23, 1992, Chromcraft and Peters- Revington generated net earnings of approximately $700,000. For 1991 Chromcraft and Peters-Revington generated net earnings of approximately $1,900,000.\n- 20 - FAIRWOOD CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements\n(3) Income Taxes\nAs discussed in note 1, the Company adopted Statement 109 as of January 1, 1993, which resulted in a cumulative effect adjustment of $2,100,000 which decreased the net loss for the year 1993. The effect of Statement 109 on the provision for income taxes for the year 1993 was not material.\nComponents of the provision for income taxes (benefit) are summarized, in thousands, as follows:\nThe differences between the actual taxes (benefit) and taxes (benefit) computed at the U.S. Federal Income tax rate of 34% are summarized as follows:\n- 21 - FAIRWOOD CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements\nThe tax effects of temporary differences as of December 31, 1993, in thousands, are as follows:\nThe valuation allowance for deferred tax assets as of January 1, 1993 was $7,047,000. The net change in the total valuation allowance for the year ended December 31, 1993 was an increase of $19,320,000.\nAt December 31, 1993, the Company's net operating loss carryforwards of approximately $48,356,000 expire in 2008.\nCertain timing differences exist which cause current income taxes actually payable to differ from the amounts provided as follows:\nCurrent deferred income tax benefits of $2,827,000 at December 31, 1993 are included in other current assets in the accompanying consolidated balance sheets.\nThe Internal Revenue Service (\"IRS\") has examined the Company's Federal income tax returns for the years 1988 through 1991 and is challenging certain deductions, of which the most significant involves an effort to recharacterize interest deductions as dividend distributions. The IRS has delivered proposed adjustments that approximate a net tax cost of $90 million, including interest through the year ended December 31, 1993. The Company believes the IRS's position with respect to these issues is incorrect and plans to contest vigorously the proposed adjustments. The Company cannot predict the ultimate outcome nor the impact on its financial statements, if any.\n- 22 - FAIRWOOD CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements\n(4) Long-term Debt\nIn conjunction with the Company's acquisition of Mohasco by merger on September 22, 1989, certain bridge loans were refinanced with new debt, and in exchange for the approximately 6.85% of Mohasco common stock then outstanding, the Company issued $33.5 million of subordinated pay-in-kind merger debentures and 918,170 warrants (as discussed below) to purchase, in the aggregate, 142,900 shares of the Company's Class A common stock. The assets of Mohasco and its subsidiaries are pledged as security for a portion of the new debt. Certain instruments related to the new debt were amended through March 1994. Among other things, these amendments extended certain debt due dates, increased certain debt limits and credit lines and modified selected financial covenant tests. Certain provisions of these instruments were waived at various times through April 1993. Proceeds from the disposition of Chromcraft and Peters-Revington were used to repay a portion of the new secured debt owed CSCL.\nThe outstanding debt at December 31 was as follows (in thousands):\nAll outstanding debt at December 31, 1993 with the exception of the merger debentures and other is payable to CSCL. Substantially all of the Company's debt instruments restrict the payment of dividends and the Credit Agreement with CSCL, relating to Mohasco's revolving credit facility, contains certain financial covenant tests. The Company plans to attempt to refinance, or negotiate an extension of, the debt payable to CSCL when due. The Company has the option until April 1, 1995 to pay interest on the senior subordinated pay-in-kind debentures and merger debentures either by cash or by the distribution of additional securities. Through October 1, 1993, the Company has issued additional securities in lieu of cash payments of interest.\nThe aggregate maturities of long-term debt (including capitalized lease obligations) during the next five years and thereafter are as follows: $150,000 in 1994; $160,000 in 1995; $240,597,000 in 1996; $180,000 in 1997; $190,000 in 1998; and $144,690,000 subsequent to 1998.\nThe warrants issued with the merger debentures, discussed above, are exercisable during the one-year period beginning on the earliest to occur of: (1) 180 days after the public offering by the Company of common stock meeting certain conditions, (2) the closing of a merger, consolidation or other business combination or a purchase of assets in which the Company is the surviving corporation meeting certain conditions, or (3) September 22, 1994. The warrant exercise price is $1 per share (subject to adjustment).\n- 23 -\nFAIRWOOD CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements\n(5) Redeemable Preferred Stock\nThe Company issued 1,000 shares of junior preferred stock, par value $.01, in exchange for $100,000, which are held by CSCL. Dividends are accrued at $18 per share annually. As of December 31, 1993, dividends payable are approx- imately $110,000.\n(6) Common Stock\nHolders of Class A common stock are entitled to convert their shares to an equal number of Class B common stock and holders of Class B common stock are entitled to convert their shares to an equal number of Class A common stock.\n(7) Employee Benefit Plans\nAll salaried employees, excluding certain key executives, and hourly paid employees of the Company with one year of service were covered by non-contribu- tory defined benefit retirement plans through May 31, 1993, at which time further benefit accruals ceased. Benefits for the plans are determined using the projected unit credit actuarial cost method. The cost of the retirement plans is accrued annually; funding is in accordance with actuarial requirements of the plans, subject to the Employee Retirement Income Security Act of 1974.\nPension expense, in thousands, is as follows:\n- 24 - FAIRWOOD CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements\nInformation with respect to the retirement plans for 1993 and 1992 has been determined by consulting actuaries. The following table sets forth the plans' funded status at December 31, 1993 and September 30, 1992, respectively, and reconciles amounts recognized in the consolidated balance sheets at December 31, 1993 and 1992, respectively (in thousands):\nAs a result of the disposition of Chromcraft and Peters-Revington in April 1992, all employees of Chromcraft and Peters-Revington were vested in their retirement benefits under the plans.\nEffective June 1, 1993, the following defined contribution plans were adopted by the Company's operating companies:\nBARCALOUNGER RETIREMENT PLAN, designed to provide income at retirement, covers all Barcalounger employees with one or more years of service and is non-contributory. Annual company contributions are based on individual participant's earnings and length of service. For the period June 1, 1993 to December 31, 1993, company contributions were $115,000.\nBARCALOUNGER SAVINGS PLAN, designed to provide a savings vehicle for Barcalounger employees with one or more years of service who may elect to participate by saving on a before-tax and\/or after-tax basis in one or more of four investment funds available. Annual company contributions match 25% of participants' contributions of up to four percent of earnings. For the period June 1, 1993 to December 31, 1993, company matching contributions were $35,000.\nSTRATFORD RETIREMENT PLAN, designed to provide income at retirement, covers all Stratford employees with one or more years of service and is non-contributory. Annual company contributions are based on individual participant's earnings and length of service. For the period June 1, 1993 to December 31, 1993, company contributions were $630,000.\n- 25 -\nFAIRWOOD CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements\nSUPER SAGLESS RETIREMENT-SAVINGS PLAN is a retirement income plan fully financed by the company combined with an employee savings plan. All employees with one or more years of service are participants in the retirement income part of the plan and also may elect to invest on a before-tax and\/or after-tax basis in one or more of four funds available in the savings part of the plan. Annual company contributions to the retirement income part of the plan are based on individual particpant's earnings and length of service and the company matches 100% of participants' before-tax savings of up to two percent of earnings in the savings part of the plan. For the period June 1, 1993 to December 31, 1993, aggregate company contributions to the plan were $492,000.\nThe Company also maintained a non-qualified retirement plan for certain key executives, who were excluded from participation in Mohasco's Salaried Retirement Plan. Benefits of the executive retirement plan were substantially the same as the Salaried Retirement Plan. The executive retirement plan ceased benefit accruals in December 1992. The cost of this plan was approximately $751,000 in 1992 and $520,000 in 1991. As of December 31, 1993, the plan liabilities are approximately $401,000, and are included in other long-term liabilities.\nUnder various incentive compensation plans, certain employees earned bonuses for reaching specific performance criteria amounting to $964,000 in 1993, $346,000 in 1992 and $1,038,000 in 1991.\nThe Company has an investment plan for all employees. The plan previously covered all employees but, since the adoption of the Barcalounger and Super Sagless plans, noted above, now covers all employees not covered by such plans. Since the time of adoption of the Barcalounger and Super Sagless plans, Barcalounger and Super Sagless participants' account balances were transferred to the Barcalounger and Super Sagless plans. Company contributions to the Company's investment plan were $50,000 in 1993, $177,000 in 1992 and $606,000 in 1991.\n- 26 -\nFAIRWOOD CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements\n(8) Rental Commitments\nThe Company and its subsidiaries lease certain manufacturing and ware- housing facilities (capitalized leases), equipment (primarily transportation equipment), and warehouse and showroom facilities (operating leases).\nFuture minimum lease payments at December 31, 1993 under all non-cancellable leases are as follows:\nIt is expected that, in the normal course of business, non-cancellable leases that expire will be renewed or replaced.\nRental expense was as follows:\n- 27 -\nFAIRWOOD CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements\n(9) Supplemental Income Statement Information\nAmounts charged to costs and expenses in the consolidated financial statements include the following:\n(10) Financial Information by Industry Segments\nThe Company is engaged in only one segment of business, the manufacture of furniture. Sears Roebuck and Co. accounted for approximately sixteen percent, thirteen percent and nine percent of the Company's sales in each of the years 1993, 1992 and 1991, respectively.\n(11) Contingencies\nThere were contingent liabilities at December 31, 1993 consisting of purchase commitments and legal proceedings arising in the ordinary course of business. The financial risk involved in connection with all contingent liabilities, except the proposed adjustments delivered by IRS, see note 3, is not considered material in relation to the consolidated financial position of the Company.\n- 28 -\nFAIRWOOD CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements\n(12) Liquidity\nMohasco is expected to service its long-term debt under the Credit Agreement, relating to the revolving credit facility, and senior subordinated debentures from its cash flow from operations and available credit facilities. Interest on Fairwood's senior subordinated pay-in-kind debentures and merger debentures is expected to be paid by distribution of additional securities through September 1994. Fairwood has substantially no assets other than the common stock of Mohasco, and Mohasco and its subsidiaries have pledged substantially all of their assets to secure their obligations under the Credit Agreement. Throughout 1993, 1992 and 1991, Mohasco did not generate sufficient funds from operations to fully meet its interest obligations related to its long-term indebtedness. Mohasco funded these interest obligations through increased borrowings from CSCL under the Credit Agreement. However, during 1992 the proceeds to Mohasco from the disposition of Chromcraft and Peters-Revington of approximately $83 million were used to repay debt of Mohasco and its subsidiaries under the Credit Agreement.\nThe Company is dependent upon CSCL for funding of its debt service costs. CSCL has in the past increased its revolving credit line to Mohasco under the Credit Agreement which has enabled Mohasco to meet its debt service obligations. Under the Credit Agreement, Mohasco and its subsidiaries are generally restricted from transferring monies to the Company with the exception of amounts for (a) specified administrative expenses of the Company not exceeding $275,000 per year and (b) payment of income taxes. The senior subordinated debentures, senior subordinated pay-in-kind debentures and merger debentures also have certain restrictions as to payment and transfer of monies. Management believes that cash flow from operations and funding from CSCL will be adequate for its working capital requirements and any cash payments due on the Company's debt through December 31, 1994.\n- 29 -\nITEM 9.","section_9":"ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE\nNot applicable.\nPART III\nITEM 10.","section_9A":"","section_9B":"","section_10":"ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT\nDIRECTORS AND EXECUTIVE OFFICERS\nThe name, age and position or principal occupation during the past five years of each member of the Board of Directors and executive officer of the Company are set forth below. Directors serve for a term of one year and until their successors are elected and qualified. Officers are elected annually by the Board of Directors to serve for the ensuing year and until their respective successors are elected.\n- 30 -\nThe following are subsidiary presidents and may be deemed to be executive officers of the Company.\nThere are no family relationships among any of the Company's directors or officers.\nThe following is a brief account of the business experience during the past five years of each of the subsidiary presidents:\nMr. Lake has been employed by the Company since September 1991 in his present position. From prior to 1989 to February 1991 he was Vice President and General Manager of Clark Components N.A.\nMr. Shaughnessy has been employed by the Company since July 1992 in his present position. From February 1991 to July 1992 he was Vice President, Marketing, Outboard Marine Corporation, from June 1990 to February 1991 he worked as a consultant and from prior to 1989 to June 1990 he was Senior Vice President, Navistar.\nIn connection with services provided by The Finley Group, a management consulting firm, Mr. Stephens, a principal of that firm, has acted as president of a number of companies; he was president from September 1989 to January 1990 of Southwest Elevator Corporation, from January 1990 to January 1991 of Munford, Inc., from January 1991 to October 1991 of Specialty Paperboard, Inc., from January 1992 to October 1992 of Docktor Pet, Inc. and from October 1992 to April 1993 as President and Chief Executive Officer of the Barcalounger Division of Mohasco Upholstered Furniture Corporation. While continuing in his role as President and Chief Executive Officer of the Barcalounger division, in April 1993, Mr. Stephens became a direct consultant to the Company and in January 1994 an employee of Mohasco Upholstered Furniture Corporation. Prior to joining The Finley Group in September 1989, Mr. Stephens was a partner with Deloitte & Touche, a public accounting firm.\n- 31 - ITEM 11.","section_11":"ITEM 11. EXECUTIVE COMPENSATION\nEXECUTIVE OFFICERS' COMPENSATION\nInformation concerning the compensation earned by the above named executive officers is set forth in the Summary Compensation Table.\nSUMMARY COMPENSATION TABLE\n(1) 1993 and 1991 amounts represent company contributions to the Investment Plan. 1992 includes $150,510 distribution under the Executive Retirement Plan, $5,400 excess of book value over purchase price of company car, and $1,925 company contribution to Salaried Investment Plan.\n(2) Deferred executive incentive award given in 1989 and payable in 1992. No deferred awards have been given since 1989.\n(3) 1993 includes $12,916 distribution under the Executive Retirement Plan, $1,518 company contribution to the Super Sagless Retirement-Savings Plan, and $1,375 company contribution to Investment Plan. 1992 amount represents the company contribution to Investment Plan.\n(4) For the period October 1992 to April 1993, $155,682 was paid to The Finley Group for services it rendered through Mr. Stephens. For the period May 1993 to December 1993, $200,000 was paid to Mr. Stephens as a consultant.\nEMPLOYMENT AGREEMENT\nMohasco entered into an employment agreement with Mr. Sganga, who is named in the summary compensation table, effective December 15, 1993, which provides for an annual salary, plus such bonuses as may be awarded in the discretion of the Board of Directors. This agreement will remain in effect through December 31, 1995 unless terminated sooner with or without cause by the Board of Directors. If employment is terminated without cause, other than due to death or disability or other incapacity, Mr. Sganga will be entitled to receive a severance payment in an amount equal to the lesser of (i) $150,000 and (ii) an amount equal to sum of the base salary payments that he would have received had he remained in the employ of the Company until December 31, 1995. No severance will be paid if termination is for cause, or due to death, disability or other incapacity.\n- 32 - RETIREMENT PLAN\nMessrs. Sganga, Lake, Shaughnessy and Stephens, who are named in the Summary Compensation Table, are not participants in the Salaried and Sales Employees Retirement Plan of Mohasco, which ceased further benefit accruals as of May 31, 1993.\nMohasco adopted in 1990 a non-qualified non-contributory Executive Retirement Plan for certain of its executives in the operating companies and corporate office, including Messrs. Sganga and Lake. Participants in this plan are not eligible to participate in the Mohasco Salaried and Sales Employees Retirement Plan. Executives designated as participants begin to accrue retirement benefits following completion of one year of employment. Benefits accrued under the plan are reduced by any benefits to which the individual may be entitled under a prior or current defined benefit pension or supplemental retirement plan of Mohasco.\nIn December 1992, benefit accruals were ceased to the Executive Retirement Plan and Messrs. Sganga and Lake received payment in full settlement of the accrued benefit obligation under the plan. Mr. Sganga received $150,510 in 1992 and Mr. Lake received $12,916 in 1993. Messrs. Shaughnessy and Stephens were not eligible to participate in the Executive Retirement Plan.\nSALARIED INVESTMENT PLAN\nOfficers of Mohasco are eligible to participate in its tax-qualified Investment Plan for Salaried and Sales Employees. Directors who are not officers are not eligible. Mohasco may, but is not obligated to, contribute up to 100% of any savings of a participant not exceeding 4% of salary.\nThe full value of a participant's investment in the plan becomes payable upon retirement, disability or death. Upon termination of employment for other reasons, a participant is entitled to the accumulated value of his or her savings, and to varying amounts of Mohasco's contributions depending on years of membership in the plan, with 100% thereof payable if years of membership are 5 or more.\nDuring 1993, such contributions for Mr. Sganga were $1,907 and for Mr. Lake were $1,375. In June 1993, the following defined contribution plans were adopted: Barcalounger Retirement Plan, Barcalounger Savings PLan, Stratford Retirement Plan, and Super Sagless Retirement-Savings Plan. Please refer to note 7, Employee Benefit Plans, in the Notes to Consolidated Financial Statements. The company contribution for Mr. Lake in the Super Sagless Retirement-Savings Plan was $1,518. Mr. Shaughnessy is not a member of the Stratford Retirement Plan and Mr. Stephens was not eligible for membership in the Barcalounger Retirement Plan nor the Barcalounger Savings Plan.\nINCENTIVE PLAN\nMohasco maintains an executive incentive (bonus) plan implemented to provide individual awards for attainment of specified business objectives. Under the executive incentive plan, each of Mohasco's profit centers is assigned certain business goals annually, which for 1993 were based on earnings and cash flow. Awards are made to profit center participants based upon the extent to which their respective profit centers attain their goals. Total awards made for the 1993 Plan Year were $964,000, including awards of $172,975 for Mr. Lake and $141,934 for Mr. Shaughnessy.\nDIRECTORS' COMPENSATION\nAs of the date of this Annual Report on Form 10-K, the Company has not determined what compensation directors who are not officers of the Company will receive for their service as director. No compensation was paid to directors for their services as directors in 1993.\n- 33 - COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION\nThe Company's board of directors does not have a separate compensation committee. Accordingly, the entire board of directors considers executive compensation matters, except that any executive officer who is a director does not take part in executive compensation matters regarding that executive officer.\nITEM 12.","section_12":"ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT\nPRINCIPAL STOCKHOLDERS\nThe Company's common stock consists of both voting stock and non-voting stock. The table below sets forth, as of February 28, 1994, certain information regarding each person who owns of record or beneficially 5% or more of the outstanding shares of common stock. Such beneficial owners own their shares directly and have sole voting and investment power with respect to their shares.\n- ---------------------------\n* Owns 999,800 shares of the Company's Class B Non-Voting Common Stock and 300 shares of the Company's Class A Voting Common Stock. Under the Company's Certificate of Incorporation, the Class B Non-Voting Common Stock is convertible into Class A Voting Common Stock, so long as the holder of the Class B Stock would be permitted to hold the resulting Class A Stock under applicable law. On December 31, 1990, CVCL and Holdings entered into an Agreement and Plan to Relinquish Control pursuant to which CVCL converted 200 shares of Class B Stock into 200 shares of Class A Stock and increased its ownership of the outstanding Class A Stock from 33-1\/3% to 60%. Under this Agreement, CVCL is required to convert a sufficient number of shares of Class A Stock into Class B Stock to reduce CVCL's ownership of Class A Stock such that CVCL will no longer be presumed to have control of Holdings under the regulations of the Small Business Administration upon the earlier of (i) the date on which the Company's ratio of earnings before interest, taxes and depreciation to interest expense on a consolidated basis has been 1.5 to 1 for three consecutive fiscal quarters or (ii) December 31, 1997 (or such later date as may be consented to by the Small Business Administration). The Agreement has been accepted by the Small Business Administration. CVCL is a subsidiary of Citibank, N.A., a national bank which is owned by Citicorp a publicly owned bank holding company, and is an affiliate of CSCL.\nOWNERSHIP BY DIRECTORS AND OFFICERS\nAs of February 28, 1994, no shares of the Company's common stock were beneficially held by any director or officer.\n- 34 -\nITEM 13.","section_13":"ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS\nAs further described in the Company's financial statements in Item 8, a large majority of the Company's long-term debt at December 31, 1993 is payable to CSCL, an affiliate of CVCL, the Company's majority shareowner. M. Saleem Muqaddam, a director of the Company, is a vice president of CVCL and CSCL. During 1993, the largest aggregate amount of indebtedness outstanding that was payable to CSCL was approximately $332.1 million; as of February 28, 1994, the aggregate amount of such indebtedness was approximately $330.1 million. See Note 4, Long-term Debt, in the Notes to Consolidated Financial Statements set forth in Item 8.\nOn December 13, 1989 and January 18, 1990 Rental, a wholly-owned subsidiary of Cort Holdings Corporation (\"Cort Holdings\"), paid to Mohasco, in cash, approximately $21.5 million and $131.2 million, respectively, as prepayment on all remaining indebtedness outstanding on the promissory notes issued as part of the consideration for the sale of Rental in December 1988. At the time of the payments, CVCL and certain of its affiliates were significant investors in the Company, Mohasco, Rental and Cort Holdings.\n399 Venture Partners, Inc., an affiliate of CVCL, owns approximately 49% of Chromcraft Revington, Inc. M. Saleem Muqaddam, vice president of CVCL and director of the Company, is a director of Chromcraft Revington, Inc.\n- 35 -\nPART IV\nITEM 14.","section_14":"ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K\nOther schedules are omitted because of the absence of conditions under which they are required or because the required information is given in the financial statements or notes thereto.\n- 36 -\n3. EXHIBITS --------\nExhibits are listed by numbers corresponding to the Exhibit Table of Item 601 in Regulation S-K (3.1) Certificate of Incorporation of the Registrant, as amended (incorporated by reference to Exhibit 3.3 of the Registrant's Registration Statement on Form S-4 (the \"Form S-4\")). (3.2) By-Laws of the Registrant (incorporated by reference to Exhibit 3.4 of the Form S-4). (3.3) Certificate of Amendment of Certificate of Incorporation, dated March 22, 1993 (incorporated by reference to Exhibit 3.3 of the Registrant's annual report on Form 10-K for the year ended December 31, 1992 (the \"1992 Form 10-K\")) (4.1) Indenture, dated as of August 15, 1989, between Fairwood Corporation, formerly MHS Holdings Corporation (the \"Company\") and Bankers Trust Company, as Trustee, relating to the 16-7\/8% Subordinated Pay-In-Kind Debentures due 2004 (the \"Merger Debentures\"), (incorporated by reference to Exhibit 4.1 of the Registrant's third quarter report on Form 10-Q for the quarter ended September 30, 1989 (the \"1989 Third Quarter 10-Q\")). (4.2) Form of Merger Debentures, included as Exhibit A to Exhibit 4.1, (incorporated by reference to Exhibit 4.2 of the 1989 Third Quarter 10-Q). (4.3) Pledge and Security Agreement, dated as of August 15, 1989, made by the Company to Bankers Trust Company, as Trustee, (incorporated by reference to Exhibit 4.3 of the 1989 Third Quarter 10-Q). (4.4) Warrant Agreement, dated as of August 15, 1989, between the Company and Pittsburgh National Bank, as Warrant Agent, (incorporated by reference to Exhibit 4.4 of the 1989 Third Quarter 10-Q). (4.5) Form of Warrants, included as Exhibit A to Exhibit 4.4, (incorporated by reference to Exhibit 4.5 of the 1989 Third Quarter 10-Q). (4.6) 15-1\/2% Senior Subordinated Pay-In-Kind Debentures of the Company, dated as of September 22, 1989, issued to Citicorp Capital Investors Ltd. (incorporated by reference to Exhibit 4.6 of the 1989 Third Quarter 10-Q). (4.7) Pledge and Security Agreement, dated September 22, 1989, made by the Company to Citicorp Capital Investors Ltd., as Agent, (incorporated by reference to Exhibit 4.7 of the 1989 Third Quarter 10-Q). (4.8) Credit Agreement dated as of September 22, 1989 among Mohasco Corporation (\"Mohasco\"), Mohasco Upholstered Furniture Corporation, Chromcraft Corporation, Super Sagless Corporation, Choice Seats Corporation and Peters Revington Corporation and Citicorp Capital Investors Ltd. (the \"Credit Agreement\"), (incorporated by reference to Exhibit 4.8 of the Registrant's annual report on Form 10-K for the year ended December 31, 1989 (the \"1989 Form 10-K\")). (4.9) Amendment, dated December 15, 1989, to the Credit Agreement, (incorporated by reference to Exhibit 4.9 of the 1989 Form 10-K). (4.10) Amendment, dated March 13, 1990, to the Credit Agreement, (incorporated by reference to Exhibit 4.10 of the 1989 Form 10-K).\n- 37 - (4.11) Notice of Election and Waiver, dated March 13, 1990, to the Credit Agreement, (incorporated by reference to Exhibit 4.11 of the Registrant's annual report on Form 10-K for the year ended December 31, 1990 (the \"1990 Form 10-K\")). (4.12) Term Note B, dated March 13, 1990, issued to Court Square Capital Limited, (incorporated by reference to Exhibit 4.12 of the 1989 Form 10-K). (4.13) Agreement and Waiver, dated August 15, 1990, to the Credit Agreement, (incorporated by reference to Exhibit 4.13 of the 1990 Form 10-K). (4.14) Agreement and Waiver, dated September 5, 1990, to the Credit Agreement, (incorporated by reference to Exhibit 4.14 of the 1990 Form 10-K). (4.15) Agreement and Waiver, dated September 15, 1990, to the Credit Agreement, (incorporated by reference to Exhibit 4.16 of the 1990 Form 10-K). (4.16) Waiver and Amendment, dated September 15, 1990, to the Credit Agreement and letter, dated September 15, 1990, related thereto, (incorporated by reference to Exhibit 4.16 of the 1990 Form 10-K). (4.17) Waiver and Fourth Amendment, dated as of December 31, 1990, to the Credit Agreement, (incorporated by reference to Exhibit 4.17 of the 1990 Form 10-K). (4.18) Revolving Credit Note, dated September 22, 1989, amended and restated as of September 15, 1990, issued to Court Square Capital Limited, and Endorsement No. 1 thereto, dated as of December 31, 1990, (incorporated by reference to Exhibit 4.18 of the 1990 Form 10-K). (4.19) Increasing Rate Senior Subordinated Debentures of Mohasco Corporation dated as of September 22, 1989 issued to Citicorp Capital Investors Ltd. (the \"Senior Subordinated Debentures\"), (incorporated by reference to Exhibit 4.13 of the 1989 Form 10-K). (4.20) Amendment, dated March 30, 1990, to the Senior Subordinated Debentures, (incorporated by reference to Exhibit 4.14 of the 1989 Form 10-K). (4.21) Second Amendment, dated as of December 31, 1990, to the Senior Subordinated Debentures, (incorporated by reference to Exhibit 4.21 of the 1990 Form 10-K). (4.22) Endorsement No. 1, dated as of December 31, 1990, to the Senior Subordinated Debentures, (incorporated by reference to Exhibit 4.22 of the 1990 Form 10-K). (4.23) Waiver, dated as of June 29, 1991, to the Credit Agreement, (incorporated by reference to Exhibit 4.23 of the Registrant's annual report on Form 10-K for the year ended December 31,1991 (the \"1991 Form 10-K\")). (4.24) Waiver, dated as of October 31, 1991, to the Credit Agreement, (incorporated by reference to Exhibit 4.24 of the 1991 Form 10-K). (4.25) Letter Agreement, dated as of October 31, 1991, between the Company and Manufacturers Hanover, as Warrant Agent and letter from Pittsburgh National Bank, dated October 28, 1991, related thereto, (incorporated by reference to Exhibit 4.25 of the 1991 Form 10-K). (4.26) Waiver and Fifth Amendment, dated as of March 27, 1992, to Credit Agreement, (incorporated by reference to Exhibit 4.26 of the 1991 Form 10-K).\n- 38 - (4.27) Third Amendment, dated as of March 27, 1992, to the Senior Subordinated Debentures, (incorporated by reference to Exhibit 4.27 of the 1991 Form 10-K). (4.28) Endorsement No. 2, dated as of March 27, 1992, to the Senior Subordinated Debentures, (incorporated by reference to Exhibit 4.28 of the 1991 Form 10-K). (4.29) Sixth Amendment, dated as of April 23, 1992, to Credit Agreement, (incorporated by reference to Exhibit 4.1 of the Registrant's second quarter report on Form 10-Q for the quarter ended June 27, 1992 (the \"1992 Second Quarter 10-Q\")). (4.30) Seventh Amendment, dated as of April 23, 1992, to Credit Agreement, (incorporated by reference to Exhibit 4.2 of the 1992 Second Quarter 10-Q). (4.31) Eighth Amendment, dated as of September 26, 1992, to Credit Agreement, (incorporated by reference to Exhibit 4.1 of the Registrant's third quarter report on Form 10-Q for the quarter ended September 26,1992 (the \"1992 Third Quarter 10-Q\")). (4.32) Waiver and Ninth Amendment, dated as of February 4, 1993, to Credit Agreement, (incorporated by reference to Exhibit 4.32 of the 1992 Form 10-K. (4.33) Tenth Amendment, dated as of March 22, 1993, to Credit Agreement, (incorporated by reference to Exhibit 4.33 of the 1992 Form 10-K. (4.34) Recision of Waiver, dated as of April 30, 1993, to Credit Agreement, (incorporated by reference to Exhibit 4.1 of the Registrant's first quarter report on Form 10-Q for the quarter ended April 3, 1993 (the \"1993 First Quarter 10-Q\")). (4.35) Eleventh Amendment, dated as of March 25, 1994, to Credit Agreement. (4.36) Fourth Amendment, dated as of January 3, 1994, to the Senior Subordinated Debentures. (10.1) Employment Agreement, between Mohasco and Robert W. Hatch, dated September 21, 1989, (incorporated by reference to Exhibit 10.1 of the 1989 Form 10-K). (10.2) Supplemental Executive Retirement Agreement, between Mohasco and Robert W. Hatch, dated September 27, 1990, (incorporated by reference to Exhibit 10.2 of the 1990 Form 10-K). (10.3) Mohasco Executive Retirement Plan, (incorporated by reference to Exhibit 10.5 of the 1990 Form 10-K). (10.4) Mohasco Corporation Executive Incentive Plan, (incorporated by reference to Exhibit 10.6 of the 1990 Form 10-K). (10.5) Amendment, dated December 31, 1991, to the Mohasco Executive Retirement Plan, (incorporated by reference to Exhibit 10.6 of the 1991 Form 10-K). (10.6) Merger Agreement dated March 10, 1992 among Chromcraft Revington, Inc., Chromcraft Merger Subsidiary, Inc., Mohasco Corporation, Chromcraft Corporation and the Company, (incorporated by reference to Exhibit 10.1 of the March 17, 1992 Form 8-K). (10.7) Merger Agreement dated March 10, 1992 among Chromcraft Revington, Inc., PR Merger Subsidiary, Inc., Mohasco Corporation, Peters-Revington Corporation and the Company, (incorporated by reference to Exhibit 10.2 of the March 17, 1992 Form 8-K). (10.8) Employment Agreement, between Mohasco and John B. Sganga, dated December 15, 1993. (21.1) List of Subsidiaries of the Registrant.\n- 39 - The Company agrees to furnish the Securities and Exchange Commission, upon request, a copy of any instrument defining the rights of holders of long term debt of the Company and its consolidated subsidiaries.\n(B) REPORTS ON FORM 8-K\nNo reports were filed on Form 8-K for the three months ended December 31, 1993.\n- 40 - Schedule V FAIRWOOD CORPORATION AND SUBSIDIARIES Property, Plant and Equipment Years ended December 31, 1993, 1992 and 1991 (In Thousands)\nNotes: (1) Represents the difference between expenditures for new construction during the year and the cost of completed projects transferred to appropriate captions. (2) Includes adjustments relating to the disposition of Chromcraft and Peters-Revington of $24,371 and restructuring charge of $9,618.\n- 41 -\nSchedule VI FAIRWOOD CORPORATION AND SUBSIDIARIES Accumulated Depreciation and Amortization of Property, Plant and Equipment Years ended December 31, 1993, 1992 and 1991 (In Thousands)\nNotes: (1) Represents adjustments relating to the disposition of Chromcraft and Peters-Revington.\n- 42 -\nSchedule VIII FAIRWOOD CORPORATION AND SUBSIDIARIES Valuation and Qualifying Accounts and Reserves Years ended December 31, 1993, 1992 and 1991 (In Thousands)\n- 43 - SIGNATURES\nPursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.\nFAIRWOOD CORPORATION\nBy: \/s\/ John B. Sganga --------------------------- John B. Sganga Chief Financial Officer, Executive Vice President, Secretary and Treasurer\nDate: March 29, 1994 --------------\nPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on March 29, 1994 by the following persons on behalf of the Registrant and in the capacities indicated.\nTitle -----\n\/s\/ John B. Sganga Director and Chief - --------------------------- John B. Sganga Financial Officer, Executive Vice President, Secretary and Treasurer (principal executive, financial and accounting officer)\n- 44 -\nSIGNATURE\nPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on March 29, 1994 by the following person on behalf of the Registrant and in the capacity indicated.\nTitle -----\n\/s\/ M. Saleem Muqaddam Director - -------------------------------- M. Saleem Muqaddam\n- 45 -\nSIGNATURE\nPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on March 29, 1994 by the following person on behalf of the Registrant and in the capacity indicated.\nTitle -----\n\/s\/ Randolph I. Thornton, Jr. Director - ---------------------------------- Randolph I. Thornton, Jr.\n- 46 -\nSIGNATURE\nPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on March 29, 1994 by the following person on behalf of the Registrant and in the capacity indicated.\nTitle -----\n\/s\/ L. David Callaway - ----------------------------------- L. David Callaway Director\n- 47 -\nEXHIBIT INDEX\n- 48 -\n- 49 -\n- 50 -\n* These items are incorporated by reference as described in Item 14(a)(3) of this report.\n- 51 -","section_15":""}
{"filename":"714278_1993.txt","cik":"714278","year":"1993","section_1":"ITEM 1. BUSINESS - ----------------- INTRODUCTION ------------\nInformation Resources, Inc. (the \"Company\") provides a variety of information services and business intelligence software products to its customers. The Company is a leading provider of information services to the consumer packaged goods industry and believes that its proprietary data bases, analytical models and business intelligence software enable consumer packaged goods manufacturers and retailers to make better, more cost-effective decisions in marketing and selling their products. The Company's business intelligence software products are also used across a wide range of industries and governmental agencies worldwide.\nThe consumer packaged goods industry is comprised of numerous firms which manufacture and market products distributed in supermarket, drug, mass merchandiser and other outlets. Consumer packaged goods manufacturers require information on consumer purchasing to measure market performance and to evaluate the impact of marketing activities. The Company provides consumer purchase data through its range of information services. Consumer packaged goods clients may also purchase the Company's software products to help them analyze, manipulate and interpret consumer purchase data.\nThe Company's software products can be used in tandem with the Company's information services or can be used separately with other data bases. Approximately 31% of the Company's clients currently purchasing the Company's information services also purchase its business intelligence software and services.\nThe Company's business intelligence software products are widely applicable and are used outside of the consumer packaged goods industry by Fortune 1000 corporations and comparable companies around the world covering a variety of businesses and industries, including pharmaceuticals, health care, telecommunications, financial services, transportation and government agencies. In 1993, approximately 51% of the Company's software and support services revenue was derived from clients outside of the consumer packaged goods industry.\nThe Company operates in one industry segment, business information services. The business of the Company has evolved into primarily two categories of services, information services and software products and services. The Company's principal information services are InfoScan(R), InfoScan(R) Census, QScan\/TM\/, BehaviorScan(R), other testing services and Towne-Oller. InfoScan Census and QScan are national and local market tracking and evaluation services for the consumer packaged goods industry. Using the universal product code (\"UPC\") printed on products and scanners installed in supermarket, drug, mass merchandiser and other retail stores, InfoScan tracks consumer purchasing of products sold in a representative, national, projectable sample of stores. In 1992, the Company began development of a retailer service named QScan which obtains scan data from all stores within a chain (i.e., a \"census\") rather than just a sample. In 1994, the Company is introducing its InfoScan Census service for manufacturers which tracks consumer purchasing in all stores within participating retail chains rather than just stores within projectable samples. Major costs to deliver the InfoScan services are data acquisition costs, provision of software and hardware to participating retailers, expenses associated with the collection of causal [i.e., promotional] data, compensation to participating panel households, computer and personnel resources to process the data and personnel costs for\ninterpreting and analyzing data for clients. BehaviorScan is a test marketing system that enables clients to measure the effect of different marketing variables on consumer purchasing. It uses supermarket, drug store and mass merchandiser scan data to measure the impact of changes in marketing variables on consumer purchasing. Major costs to deliver the BehaviorScan service are data costs (comprised of store equipment depreciation expense and cash payments to retailers), compensation to participating panel households, field personnel costs, costs to operate and maintain cable television studios, computer resources and client service personnel costs. Towne-Oller is in the business of tracking deliveries of health and beauty care products from retailer and wholesaler warehouses to approximately 30,000 individual drug stores and 30,000 individual supermarkets. Towne-Oller is currently the only supplier of such data to the U. S. consumer packaged goods industry. Major costs to deliver the Towne- Oller service are data acquisition payments to retailers, computer and personnel resources to process the data, and personnel costs related to client service.\n\"IRI Software\", the Company's software business unit, provides business intelligence software, including decision support software (\"DSS\") executive information systems (\"EIS\") and related support services. DSS and EIS are licensed as the EXPRESS(R) family of computer software and application solutions. Through another division, the Company also markets retailer software products that mainly carry the APOLLO(tm) name. Major costs to deliver these software products are costs to develop and maintain software, personnel costs to develop custom applications for clients and costs for computer resources.\nOnly a portion of the cost to deliver information services and software support services is directly attributable to any specific product. A significant portion of the cost elements is provided by shared resources.\nThe approximate revenues attributable to the Company's information and software support services were as follows for the periods shown:\nThe majority of the Company's information services business is of a recurring nature performed subject to a written contract. The Company's software business is comprised of a mix of new client projects, sale of new application solutions to existing clients and a growing software maintenance base. For a fee, implementation and consulting services are also provided to client companies as required to deliver EXPRESS-based solutions. In 1993, approximately 64% of the Company's total revenue from information services and software products and services was attributed to ongoing contractual arrangements. Other nonrecurring revenues were attributed to licenses of software and from the sale of customized analytical projects.\nThe Company was incorporated in Delaware in 1982. Its principal offices and corporate headquarters are located at 150 North Clinton Street, Chicago, Illinois 60661. Its telephone number is (312) 726-1221.\nDESCRIPTION OF THE COMPANY'S BUSINESS\nA. Principal Products & Services\n1. Information Services --------------------\nThe Company provides a variety of products and services utilizing its data bases to assist its clients in tracking and understanding consumer purchase behavior and the impact of promotions, advertising and price changes on that behavior, evaluating the sales potential of new products and media advertising, and providing clients with comparative information about their competitors. Based upon revenues, the Company believes it is the second largest marketing research firm providing continuous sales measurement services to the consumer packaged goods industry worldwide.\n(a) InfoScan, InfoScan Census and QScan\nInfoScan, InfoScan Census and QScan are national and local market scanner tracking services for the consumer packaged goods industry. InfoScan tracks consumer purchasing of UPC-coded products sold in a representative, national, projectable sample of supermarkets, drug stores, mass merchandisers, convenience stores, and warehouse membership clubs covering major metropolitan markets, smaller cities and individual chains. InfoScan also tracks promotional activities which motivate consumer purchasing, such as temporary price reductions, newspaper feature advertising, couponing and in-store displays. During 1992, the Company began collecting scan data from all stores within individual supermarket chains (i.e. \"census\" data) to be utilized in its InfoScan and QScan services. The Company is currently collecting such data from approximately 9,000 supermarkets. The Company's InfoScan Census service provides manufacturers with a measurement of consumer purchasing in all stores within participating individual retail chains rather than just stores within projectable samples. The Company's QScan service provides retailers with consumer purchasing information based on all stores within participating chains. The Company expects to complete the introduction of its enhanced InfoScan Census service for supermarkets by the third quarter of 1994, with an expansion to drug and mass merchandisers planned for 1995 and beyond. A benefit of census\nbased retail account data is that it is expected to provide more complete and accurate information because it eliminates sampling error. In addition, the Company believes that census based scan data will facilitate the implementation of \"pay-for-performance\" promotions, more effective salesforce and broker compensation programs, improved inventory and distribution management, and just-in-time inventory replenishment systems.\nInfoScan tracking reports are available to clients in hard copy format and\/or via electronic access through proprietary Company software or other software. Clients may elect to receive periodic hard copy tracking reports which include scanner-based sales data measuring volume, market share, and price, together with information relating store sales to promotional and merchandising conditions. Weekly InfoScan data are available before printed four-week reports are issued and may be accessed by personal computers through proprietary software developed by the Company using pcInfoScan(R), DataServer(TM) and The Partners(TM) software packages specifically designed to analyze scanner data. In addition, clients may select tracking reports that provide national data or reports that reflect results for individual markets, groups of markets, or custom-defined sales geographies. Further, through agreements with many retailer chains, the Company is able to provide its manufacturer clients with \"key account\" retailer reports that track consumer purchasing in specific identifiable chains. The majority of supermarket key account reports are now census based (i.e., reflect all stores within participating individual chains rather than just projectable samples). The Company believes that its ability to be a single source for both sample and census data, in conjunction with its analytical software applications, represents a significant competitive advantage.\nThrough the Company's panel data base, InfoScan provides access to individual household purchase data collected from approximately 60,000 households in the Company's metro-sampling pods and mini-markets. Quarterly reports which tabulate household purchase data by four-week periods may be presented to the client. Household panel data are also used for custom client analysis of issues such as store and brand loyalties, trial and repeat purchasing of new products, demographic patterns, consumer response to promotional activities, and overall store shopping behavior. The Company's computerized software system, EZ Prompt(TM), provides on-line access to its InfoScan panel data base through a terminal and telephone link. Through this computer access to the data base, which may be accomplished either by Company representatives or directly by the client, a client is able to address numerous marketing issues for the specific brand or category in question. Such issues are addressed using the Company's software packages and may involve evaluation of issues such as the socioeconomic profiles of buyers, the degree of interaction between a major national brand and its regional competitor, the role of price features in promoting brand switching, or numerous other marketing issues.\nUnder the typical InfoScan contract, the client subscribes to services on a specified consumer product category. The Company agrees that during the term of the contract it will maintain data collection facilities in its mini-markets, in specified major metropolitan markets and in other geographically dispersed areas, and that scanner sales data will be collected from a minimum of 2,380 supermarkets. In contracts for drug, mass merchandiser and warehouse membership clubs, the Company also guarantees data collection from a minimum number of such outlets. The Company also agrees to collect data on newspaper feature ads and retail displays from stores that provide sample scan data and to collect manufacturer coupon distribution data on a weekly basis. The Company also agrees to maintain facilities for the collection of household purchase\ndata (i.e., panel data) in several mini-markets and in specified major metropolitan markets and to maintain an average sample size of 60,000 households across these markets. Initial InfoScan contracts generally require a one-year client commitment and increasingly include commitments for up to three years or more. After the initial commitment, the contract generally continues indefinitely unless cancelled by the client on six months prior notice.\n(b) BehaviorScan\/Other Testing Services\nThe Company's BehaviorScan system offers consumer packaged goods manufacturers and other non-CPG marketers a cost-effective, accurate and technologically advanced method for testing alternative marketing strategies. The BehaviorScan system permits clients to measure the impact of different marketing variables on product purchases. In a typical marketing test performed by the Company, one group of consumer panelists is exposed to one or more test variables while another group of panelists is used as a control group. Typical marketing variables tested are television advertisements, newspaper ads, manufacturers' coupons, free samples, in-store displays, shelf price, and packaging changes.\nWith the BehaviorScan system, the Company can target alternate advertising messages over cable television to groups of pre-selected households, collect household purchase data through the use of supermarket and drug store point-of- sale scanners, and analyze the effect of client advertising by means of the Company's computer systems and analytical software.\nA feature of the BehaviorScan system is the ability to send different television messages to selected panel households using the Company's patented targetable television technology. Using the Company's proprietary software, a microcomputer at the Company's television studio is able to substitute, for the advertisement which would normally appear, a special test advertisement being simultaneously broadcast by the Company on an unused cable channel. This advertising substitution can be done on a household-by-household basis for the majority of panel households and is computer-controlled. Thus, by using targetable television, a manufacturer can expose select groups of panelists to alternative levels of advertising or alternative advertising campaigns and use the UPC-scanner data to obtain an accurate measure of sales response.\nThe Company has made arrangements with supermarkets, mass merchandiser outlets, drug stores, newspapers, selected magazines, television stations, and cable television operators in the BehaviorScan markets to cooperate with the Company in controlling marketing variables. These arrangements are contractual in nature and provide that the Company may measure, and in some cases control, the nature and content of advertising and other marketing programs to which consumers are exposed, for purposes of measuring the relative sales impact of such programs.\nTypical BehaviorScan tests last about one year, although many tests are of shorter duration and a few last longer than a year. Clients receive four-week period summaries of household purchases and store sales along with other statistical summaries. The Company's senior research consultants work with the client to design marketing tests, analyze test results, and interpret the marketing implications of such tests. A detailed analysis of test results and recommendations is provided on an interim and final basis as scheduled by the client.\nA typical BehaviorScan contract grants the client the exclusive right to the Company's service with respect to one specified product category and within specified mini-markets for the term of the contract. The Company has divided consumer packaged goods available in its market areas into approximately 450 categories. Individual clients utilizing the BehaviorScan system for more than one category generally enter into a separate contract for each category. Because the client can run multiple tests within a product category, some clients with multiple brands maintain an ongoing usage of the BehaviorScan system. Expired contracts have tended to involve tests which were one-time in nature, such as a new product introduction. The Company may not terminate a contract with a client for the purpose of offering a category to a third party.\nIn a typical BehaviorScan contract, the Company agrees to maintain the following within each of the specified markets: (1) UPC scanners at checkouts in at least six supermarkets representing not less than 80% of total supermarket volume within the area; (2) consumer panels of approximately 2,500 households for whom individual purchase records will be maintained for all UPC-coded items purchased at participating stores; (3) apparatus for delivery of commercial messages by cable television to separate groups of panel households within each market, with selection capability on a household-by-household basis for approximately 1,500 households in each market; (4) cooperation of retailers for in-store placement by the Company of test products not generally available except in such test markets; and (5) apparatus for in-store coding of products not coded with the UPC. The Company also agrees to collect sales data for a specified term on the relevant category for all scanner-equipped stores and for all panel members on a household-by-household basis and to provide a specified number of cable television advertising test insertions during the term of the contract.\nIn addition to BehaviorScan, the Company also provides other testing services primarily for consumer packaged goods manufacturers including Controlled Retail Testing, Matched Market analyses, and other special analyses accessing the Company's proprietary data bases. Controlled Retail Testing involves conducting experiments outside the BehaviorScan markets wherein the Company will arrange for and implement special conditions in retail stores and read the results through scanner data and\/or manual audits. Typical tests involve the placement of new products or manipulation of shelf location, price or promotional conditions in retail outlets. The Company's existing field organization and InfoScan data bases are customarily utilized in conjunction with Controlled Retail Testing. Matched Market and other special analyses to evaluate the impact of advertising and other marketing variables as they occur outside the BehaviorScan markets typically do not involve field activities by the Company, but simply involve custom manipulation and analysis of the Company's InfoScan data.\n(c) Towne-Oller\nTowne-Oller is in the business of tracking deliveries of health and beauty care products from retailer and wholesaler warehouses to approximately 30,000 individual drug stores and 30,000 individual supermarkets. Towne-Oller data represents approximately 80% of total food and drug store health and beauty care sales. Towne-Oller purchases computerized records of these shipments from warehouses to individual supermarket and drug stores. Towne-Oller is currently the only supplier of such data to the U.S. consumer packaged goods industry.\nTowne-Oller clients receive periodic reports measuring store receipt volume and market share within specific consumer product categories. Clients may elect to receive their reports via DataServer computerized software, which provides user-friendly access of data as well as the capability of downloading to other software applications.\nIn general, the client subscribes to the store receipt service on a specified consumer product category. Initial contracts require a one-year commitment, continue indefinitely and are cancelable by the client on 90 days written notice.\n2. Software Support Services\n(a) Decision Support Software\nPrimarily through its software business unit, \"IRI Software\", the Company provides business intelligence software products and services to major corporations and governmental agencies around the world to assist marketing, sales, operations, financial and executive decision-making. These products and services provide decision makers with access to corporate and external data, together with tools and applications developed by the Company to analyze that data. Business intelligence applications are made available through the use of the Company's principal software product known as EXPRESS, which is available to end users on a direct license or on-line basis through a variety of third party channels. Customers utilizing EXPRESS generally also engage the Company in its consulting capacity to help define solutions to business problems and build or enhance applications with EXPRESS to deliver these solutions.\n(i) EXPRESS\nAt the core of EXPRESS is a multi-dimensional data base management system. This system differs from traditional data base management systems that organize data on an individual transaction or record basis which is the way in which data is collected. Instead, EXPRESS stores data in a manner that is more useful for user analysis. The EXPRESS data base is flexible enough to accommodate the need to handle current, historical and forecast data, internal and external data sources, periodic updates, dynamic restructuring, data sharing, and data organized for ease of understanding and use. The data base is accessed through a fourth generation language integrated with a range of query, graphics, statistical and modeling tools. In addition, the data base may be accessed through a variety of graphical user interfaces. EXPRESS has been used to build and support a wide range of application products for end users across numerous functional areas.\n(ii) Application Products\nUsing EXPRESS technology, the Company has developed a family of strategic software application products. Most are applicable across all industries, but some have been designed specifically for the consumer packaged goods industry. They include:\n. DataServer - DataServer is a business intelligence application that integrates sales and marketing data from multiple internal and external sources and provides a wide range of\nad hoc analysis and reporting tools. The system allows users to retrieve, view and analyze internal and external information to identify problems and opportunities. Through a Microsoft Windows interface, users can perform competitive analyses, track new product introductions, evaluate promotional effectiveness, conduct market-by-market comparisons, isolate trouble spots, and adjust marketing and sales strategies based on insight delivered by the system. DataServer is used by companies in a wide variety of industries, including pharmaceuticals, retail, financial services, telecommunications, transportation and consumer packaged goods.\n. Sales Management System - This application helps sales professionals develop, manage and evaluate sales strategies and tactics. Recognizing time constraints and performance pressures that sales professionals encounter, Sales Management System delivers a library of sales-oriented, pre-defined reports and graphs. This library is organized by subject area, with each area focused on a typical business sales issue. These issues include: quota; distribution; ranking; exceptions; trends; comparisons; and growth. By simply choosing a report or graph, users get answers to a wide variety of sales performance questions. Now in DOS, the Microsoft Windows version is scheduled to be available mid year.\n. The Partners(TM) - The Partners (an integration of products formerly known as BrandPartner(R), SalesPartner(TM), and Promotion Manager(TM)) is an interactive sales and marketing system that addresses the day-to-day business issues of the consumer packaged goods industry. The Partners help sales and marketing professionals understand product performance, identify opportunities to improve performance and automate the creation of high quality presentations to retailers and senior management. The Partners offer a focused approach to gaining an accurate picture of how a product or retail account is performing in any given market. By providing a connection to multi-outlet sales, promotion, distribution, consumer franchise, advertising and pricing data, The Partners provide users with the information needed to develop appropriate sales and marketing strategies. Now in DOS, the Windows version of The Partners is scheduled to be available by mid-year.\n. EXPRESS(R)\/Financial Management System - The EXPRESS Financial Management System addresses the full range of financial management problems, from financial consolidation, management reporting and budgeting to forecasting and planning. The system is built on a single integrated architecture specifically designed to address the needs of finance and the enterprise as a whole. With distributed budget preparation, EXPRESS Financial Management System also provides the controls for central budgeting departments to coordinate an enterprise-wide process. It delivers easy-to-use budget preparation and exception reporting, as well as the ability to perform comprehensive analyses. The Microsoft Windows version of EXPRESS Financial Management System is expected to be released in May 1994.\n. Financial CoverStory - Financial CoverStory is a value-added supplemental option to EXPRESS\/Financial Management System which utilizes expert system concepts to deliver a rule-based exception reporting and analysis system for financial analysis. Leveraging the Company's expertise in delivering similar systems to marketing and sales\nusers, Financial CoverStory brings to financial analysis an automated, in- depth understanding of financial data and the causal relationships driving financial performance.\n. EXPRESS(R)\/EIS - EXPRESS\/EIS is an enterprise-wide business intelligence system that provides an interactive environment for executives, managers and analysts to investigate, review, annotate and communicate key business management information. EXPRESS\/EIS combines a powerful set of tools for designing and implementing customized, enterprise-wide applications. By delivering fast, flexible access to information to support all business tracking and management activities, EXPRESS\/EIS alerts executives to the important news in the data, provides line managers with ad hoc query and trend capabilities and gives analysts the ability to perform integrated analyses. The value of EXPRESS\/EIS is derived from EXPRESS, the system's underlying architecture, which permits users to perform data-driven analysis and reporting to find more detail, rotate dimensions to view data from different perspectives and highlight exceptions.\n(b) Retailer Products\nThe Company offers the APOLLO Space Management System(TM) which utilizes proprietary software to enable manufacturers and retailers to better manage retail shelf space. The APOLLO Space Management System provides a complete range of tools for space management, including APOLLO VIVID(TM) for producing picture schematics of shelf layouts, Total Store APOLLO(TM) for evaluating space utilization within a total supermarket, APOLLO Briefcase(TM) which utilizes Windows technology and is designed for field sales use, and the National Product Library(TM), which provides a national data base of product dimensions and product images for use in the APOLLO system. Other retail products include Pricing Manager(TM) which is designed to help retailers optimize price points for individual products and categories to remain competitive while meeting profit objectives and Merchandising Manager(TM) which evaluates various promotional program scenarios.\n3. Efficient Consumer Response (\"ECR\")\nEfficient Consumer Response (\"ECR\") is an initiative being pursued by manufacturers, retailers and wholesalers of consumer packaged goods products that is aimed at reducing the cost of distributing products through the supermarket channel. Some $30 billion of excess costs in the U.S. supermarket distribution system have been identified that could be eliminated by more efficient procedures. Through ECR initiatives, the supply chain from manufacturers to supermarket retailers and finally to consumers is expected to be re-engineered and redesigned to maximize effectiveness and reduce costs.\nThe Company is utilizing its proprietary software and unique data bases to offer a full line of ECR services:\n(i) InfoScan Census and QScan - These services are being used to provide manufacturers and retailers with the most accurate information on consumer\npurchasing at the retail chain and individual store level, thereby improving decision making regarding a variety of sales and marketing issues.\n(ii) Catalina Information Resources (\"CIR\") - This joint venture with Catalina Marketing Corporation utilizes Catalina's electronic network to efficiently and quickly retrieve daily, store-specific scan data from a large sample of supermarkets. Coupled with the Company's analytical application software, the data can be used by manufacturers and retailers to more effectively monitor local marketing\/sales programs and to improve inventory management techniques, thereby helping to reduce costs in the supply chain.\n(iii) Customer Marketing Resources (\"CMR\") - The Company's CMR division plans, executes and administers scanner-based product movement and merchandising performance-based trade marketing programs. By utilizing the Company's and CIR's census data bases, CMR helps manufacturers issue promotional payments to retailers based upon actual consumer purchasing, thereby helping improve the efficiency of promotional programs for manufacturers and retailers alike.\n(iv) LogiCNet - LogiCNet (an abbreviation for Logistics Communications Network) is an integrated single source system aimed at improving the efficiency of product replenishment across the entire grocery distribution channel. The LogiCNet system utilizes Distribution Resource Planning (DRP) software, training\/integration support and forecasts of consumer demand based upon the Company's and CIR's various census data bases. LogiCNet is designed to eliminate the need for manufacturers to have different inventory and distribution systems for each retailer and provides accurate and consistent data flows between retailer and manufacturer.\nB. Data Collection\nThe Company's proprietary data bases include sales and price information for individual product items collected by universal product code scanners in retail outlets (scan data), together with detailed data on promotion and merchandising activities (causal data). Scan data are currently collected from approximately 9,000 supermarkets in 75 individual markets and in a number of other communities across the United States, and from nearly 2,000 drug stores, 250 mass merchandiser outlets and approximately 350 warehouse membership clubs. Causal data are available for a representative subset of these stores. Scan data utilized in the Company's business are obtained through data purchase contracts, usually in exchange for a payment in cash or equivalent services, independently negotiated with supermarkets, drug stores, mass merchandisers, warehouse membership clubs and independent outlets. Data from approximately 60,000 individual households are collected in eight small cities called \"mini-markets\" (including six BehaviorScan markets) and in 22 \"metro sampling pods\" in 19 large cities. Promotion and merchandising data are collected by the Company's own employees, and include weekly audit visits to the stores.\nIn 1993, the Company introduced its InfoScan convenience store service, based upon the collection of sales and causal data from convenience stores and small grocery outlets. Forward data collection activities for certain categories began in April 1993 for a sample of 575 stores, with sales data being obtained through a combination of in-store scanners and manual sales audits.\nTowne-Oller is in the business of tracking deliveries of health and beauty care products from retailer and wholesaler warehouses to approximately 30,000 individual drug stores and 30,000 individual supermarkets. Towne-Oller data represents approximately 80% of total food and drug store health and beauty care sales. Towne-Oller purchases computerized records of these individual food and drug store health and beauty care receipts to produce its reports. Towne-Oller is currently the only supplier of such data to the U.S. consumer packaged goods industry.\n1. Mini-Market Facilities\nIn each mini-market, the Company installs UPC scanners and on-site computers or otherwise establishes procedures for the collection of data in supermarkets representing substantially all of the supermarket sales in the local marketing area. Data collection procedures have also been established in drug stores and mass merchandisers in several of the mini-markets. The Company currently has mini-market facilities located in Pittsfield, Massachusetts; Marion, Indiana; Midland, Texas; Eau Claire, Wisconsin; Grand Junction, Colorado; Cedar Rapids, Iowa; Rome, Georgia; and Visalia, California.\nThe Company organizes consumer panels in each of its mini-markets consisting of approximately 2,000 to 3,000 households. Each panel member is issued an identification card which is presented at checkout stations in participating supermarkets and drug stores. Sales data at a total store level, not at the panel household level, are captured in mass merchandiser outlets in several of the mini-markets. The Company maintains incentive programs to encourage panelists to present their identification cards on all shopping trips to any participating store. When an identification card is presented, the cashier enters the panelist's identification number into the on-site computer to identify the panelist's scanner-recorded purchases with the panel household. Through UPC scanning, the Company collects data on the purchases made by all panelists as well as data on all coded products sold by the store. The Company then receives each store's data (generally via telecommunication lines) at its central computer facility, where it becomes a part of the Company's data base.\nThe Company employs in-market personnel to train cashiers, perform quality control checks at the stores, and assist the retailers in maintaining efficient, accurate scanning practices. Daily data retrieval occurs with nearly all stores in the mini-market sample, allowing the Company to identify any problems quickly. Technical support personnel in the Company's headquarters are responsible for resolving hardware and software issues with respect to scanning equipment. Since substantially all of the supermarket retailers in the BehaviorScan market area are participating in the system, household panelists can shop at virtually any store in the area and have their purchases monitored by the Company.\nThe Company also maintains facilities in six of its mini-markets to implement and support various marketing tests conducted under the BehaviorScan system. The active BehaviorScan markets are located in Pittsfield, Massachusetts; Marion, Indiana; Eau Claire, Wisconsin; Midland, Texas; Grand Junction, Colorado; and Cedar Rapids, Iowa.\nOne of the key features of the BehaviorScan system is its targetable cable television capability, which permits the Company to direct television advertising to selected households within the consumer panel. The Company also maintains warehouse facilities and staff in its BehaviorScan markets to support tests run for the Company's clients, including tests of new\nproducts, television and newspaper advertising, in-store displays, price, couponing and free sample promotions.\nThe Company maintains facilities in cable television studios in its BehaviorScan markets which are used to direct television advertisements as described above. The studio equipment includes modulators and demodulators, switching and monitoring equipment, microcomputers, and auxiliary equipment used to originate test advertisements.\n2. Metro-Sampling Pods\nThe Company has installed two metro-sampling pods in each of the three largest cities in the United States (Chicago, Los Angeles, and New York) and one pod in each of 16 other cities across the country (Atlanta, Boston, Charlotte, Cleveland, Denver, Detroit, Houston, Kansas City, Memphis, Minneapolis, Philadelphia, Pittsburgh, San Francisco, Seattle, St. Louis and Tampa). The Company installs UPC scanners or otherwise establishes data collection procedures in substantially all of the supermarkets within a selected neighborhood or neighborhoods within the metropolitan area. In some instances, participating retail stores have already purchased their own UPC-scanning equipment, in which case the Company contracts to purchase the scanning data directly from the retailer. The Company's metro-sampling contracts expire at various dates in 1994 and thereafter. While there can be no assurance that retailer contracts will be renewed at the end of their terms, the Company has generally been successful in negotiating renewals of these contracts as they expire, on essentially the same terms.\nMetro-sampling pods are similar to mini-markets except that they have fewer participating retail stores. None of the pods have the targetable cable television capability. The Company maintains consumer panels of 1,000 to 1,500 households in each metro-sampling pod in substantially the same manner as in the mini-markets. Also, the Company collects and generally transmits data to its central computers in the same manner as in the mini-markets. The Company maintains a staff in each city to record newspaper advertising by retailers, to verify the presence of in-store displays, and to collect coupons redeemed by panelists.\n3. Retail Outlet Data Collection\n(i) InfoScan Sample Stores - The Company has contracted with supermarkets, drug, mass merchandisers, and warehouse club stores to purchase weekly scanner sales and price data for all UPC-coded items from a representative sample of stores. Generally, these contracts are for one-year periods, renewing automatically unless cancelled on 90 days' prior notice.\n(ii) InfoScan Census Stores - The Company has obtained census scan data covering approximately 11,000 stores, most of which are supermarkets. Generally, these data are obtained in exchange for retailer use of the Company's data management and category management software, including computer work stations as required. These contracts are typically for a three to five year period.\nIn 1993, the Company began negotiating for data collection rights with convenience stores and small supermarket operators with the launch of the Company's \"convenience store\" InfoScan service. A sample of nearly 575 stores is now in place, with most of the retailer contracts involving cash payments for scanner data and\/or cooperation with manual audits. For\nsome retailers, the Company pays for, and helps install, scanning equipment.\nMaintenance and refinement of the InfoScan sample, along with changes in retailer merchandising practices and market shares, require that the Company regularly drop individual stores from the sample and replace them with others from the same or alternate retailers. For example, the entry of a new retailer into an established InfoScan market will cause the Company to reallocate its sample across chains to include the new retailer. Turnover may also be caused by stores closing, ceasing to collect data via scanners or failing to provide accurate data in a timely fashion. The Company's personnel are continually monitoring the quality of data received from each store and work with participating retailers to correct problems and\/or identify alternate stores to include in its sample. Changes in the sample also result from the Company's efforts to refine and improve the set of stores selected from key chains, often with the suggestions for changes in the composition of the stores coming from the retailers themselves. For the reasons such as those referenced above, a minor percentage of the stores in the sample turn over on an annual basis, with the vast majority of these changes resulting from Company-initiated action. Such turnover reflects the nature of sample-based data collection techniques and the Company's procedures for addressing these changes helps ensure consistency in the data provided to clients. One of the key benefits of census scan data is that it eliminates the need to maintain a representative sample of stores and eliminates sampling error.\nThe Company employs full-time and part-time personnel in the InfoScan markets to collect newspaper ad, in-store display and other merchandising data. This \"causal\" data is incorporated into the InfoScan service offered to clients. The Company's field personnel also confirm the description of new items that appear in the general marketplace.\n4. Importance of Contractual Relationships With Data Sources\nScanner installations for the collection of household panel data are made pursuant to contracts which typically provide that, in the Company's mini-market and metro sampling pod facilities, the Company will install the equipment for the use by the retailer. Where scanners have been installed previously by the retail operator, the contracts typically provide for cash payments to the retailer for the information collected. Generally, contracts for panel data collection are for seven-year periods (subject to earlier termination in certain circumstances), and contracts with nonsupermarket retailers are generally for five to seven-year terms. These contracts provide that the parties will jointly own the information collected, and provide that the retailer may not sell the information collected to third parties. The Company's panel data collection contracts with retailers expire at various dates between 1994 and 2000. While there can be no assurance that retailer contracts for either BehaviorScan, InfoScan or Towne-Oller stores will be renewed at the end of their terms, the Company has generally been successful in negotiating renewals of these contracts as they expire, on essentially the same terms.\nC. Developments in 1993\nDuring 1993, the Company added InfoScan coverage of convenience and wholesale club stores. Also during 1993, the Company continued to add stores under its QScan initiative. The Company views this expanded data base capability as a significant competitive advantage for its InfoScan service, both in terms of data accuracy and new applications of the information. The Company anticipates expanding its census based services to drug and mass merchandise retailers\nin 1994 and 1995. The Company believes that census based data will facilitate the implementation of a variety of ECR services, including \"pay-for-performance\" promotions, more effective salesforce and broker compensation programs, improved inventory and distribution management and just-in-time replenishment systems.\nIn 1993, the Company began equipping participating households with small handheld scanners, which allow a shopper to record its purchases of consumer package goods across all types of outlets, thereby enhancing the coverage of the Company's household panel data base. The Company expects to eventually build a sample of approximately 20,000 households using this device.\nFor a discussion of business acquisitions and joint ventures by the Company in 1993, see Management's Discussion and Analysis of Financial Condition and Results of Operations - Other Developments.\nD. Patents and Proprietary Software Protection\nThe Company holds certain patents relating to the targetable television technology utilized in its BehaviorScan service. The patents expire at various dates between 1999 and 2005. Loss or infringement of these patents may have a material adverse effect upon the Company's BehaviorScan revenues. The Company's computer software bears appropriate copyright notices. The Company is the owner of various trademarks, including BehaviorScan, InfoScan, Shoppers' Hotline, APOLLO, EXPRESS, pcEXPRESS, DataServer, The Partners, SalesPartner(TM), BrandPartner(R), EZ Prompt(R), IRI Software(TM), QScan(TM), InfoScan(R) Census, LogiCNet(TM), CouponScan(TM), PromotionScan(TM) and Customer Marketing Resources(TM) as well as other major branded products and services. The Company believes that, because of the rapid pace of technological change in the computer industry, patent or copyright protection is of less significance than factors such as the knowledge and experience of the Company's personnel and their ability to develop and market new systems and services. The Company regards its software and data bases as proprietary and, in addition to copyright protection, relies upon trade secret laws, the limitations it imposes on access to its computer source codes, confidentiality agreements with clients and internal nondisclosure safeguards to protect its rights to proprietary interests.\nE. Working Capital Practices\nClients are invoiced in accordance with contract terms. Information services contracts generally require payment at the time the contract is signed for 25% to 50% of the first year contract amount. However, in some circumstances delayed billings are granted. Generally, subsequent invoices and renewals are prorated quarterly or monthly. Software support services licenses usually require payment in full upon acceptance of the software. Supplies and services are accrued for as received or incurred. Payments to vendors are generally made in accordance with vendor terms. Company management believes these payment practices and policies are consistent with industry practices.\nF. Customers\nThe Company had approximately 820, 630 and 520 clients using its information services in 1993, 1992 and 1991, respectively. Many of the Company's clients are nationally recognized manufacturers of consumer packaged goods. No client of the Company accounted for revenues in excess of 10% of the Company's total revenues.\nG. Backlog Orders\nAt December 31, 1993, 1992 and 1991, the Company had committed contract revenues for information services of approximately $152 million, $142 million and $74 million, respectively. Initial InfoScan contracts generally require a minimum one-year client commitment and increasingly include commitments up to three years or more. Contracts continuing beyond the initial commitment are generally cancelable at any time by the client on six months prior notice. Committed contract revenues include only the noncancelable portion of a contract. The portion of these committed contract revenues expected to be earned subsequent to 1994 is approximately 45%.\nH. Competition\nThere are numerous other firms engaged in supplying marketing and advertising research services to consumer packaged goods manufacturers. Some of these firms may have financial, research and development and marketing resources equal to or greater than the Company. Principal competitive factors include innovation, the quality, reliability and comprehensiveness of the analytical services and data provided, flexibility in tailoring services to client needs, experience, the capability of technical and client service personnel, data processing and decision support software, reputation, price and geographical coverage. The Company has a history of successful innovation and considers itself to be the second largest marketing research firm (based upon revenues) providing sales measurement services to the consumer packaged goods industry worldwide.\nCompetition for software support services comes primarily from specialized products which perform some, but not all, of EXPRESS's functions. These specialized products, including data base management systems, front-end query tools, financial modeling languages, graphics and statistical packages, apply competitive pressure on the Company on an application-by-application basis. Microcomputer software also represents competition as a substitute product in the general decision support area, although not in the Company's major application areas.\nI. Research and Development\nThe Company is continuously developing new business products and services. In this regard, the Company is actively engaged in research and development of new software technologies and new data base analyses and applications. Expenditures for research and development for the years ended December 31, 1993, 1992 and 1991 approximated $33.7 million, $19.5 million and $15.2 million, respectively. Included in these expenditures were $10.2 million, $8.8 million and $6.5 million of software development costs that were capitalized. Expenditures not capitalized were charged to expense as incurred.\nJ. Personnel\nAt December 31, 1993, the Company had 3,600 full-time and 2,200 part-time employees.\nThe Company depends to a significant extent on its skilled technical personnel. Its future success will depend to a large degree upon its ability to continue to hire, train and retain its professional staff. The Company competes with many other companies in attracting qualified personnel.\nK. Foreign Operations\nThe Company maintains offices in France, Germany, Great Britain, the Netherlands and Turkey to market its information and software support services. The Company also maintains offices in Australia, Belgium, Canada, Denmark, Hong Kong, India, Italy, Japan, Singapore and United Arab Emirates to market its software support services. The Company has also entered into distributorship agreements in Canada, France, Germany, Holland, Japan and Sweden to market APOLLO Space Management System software in those countries.\nThe Company participates in a joint venture in Great Britain with GfK AG (\"GfK\") of Nuremberg and Taylor Nelson Group Limited (now known as Taylor Nelson AGB plc) of London. This joint venture operates InfoScan NMRA Limited, a retail audit and scanner-based information business. During 1993, the Company continued its expansion of its international information services business through the formation of a joint venture in France with SECODIP, S.A., (\"SECODIP\") of Paris, a subsidiary of SOFRES, S.A., and GfK. The joint venture, known as IRI-SECODIP, S.N.C., operates a retail audit and scanner based information business. In July 1993, the Company and GfK completed the reorganization of their 1988 EuroScan joint venture, which now operates exclusively in Germany. In July 1993, a joint venture was created in the Netherlands by the Company, De Vin Holding Company of the Netherlands, GfK and Secodip to launch a scanner based information business in the Netherlands. The business of each joint venture will operate exclusively in the respective country providing the development of the Company's scanner-based information services through InfoScan and other information services. See NOTES B and D to Consolidated Financial Statements.\nSee Management's Discussion and Analysis of Financial Condition and Results of Operations.\nITEM 2.","section_1A":"","section_1B":"","section_2":"ITEM 2. PROPERTIES\nThe Company markets and provides its information services and software support services to domestic clients from full-service sales offices in New York, New York; San Francisco and Los Angeles, California; Cincinnati, Ohio; Darien, Connecticut; Fairfield, New Jersey; Plano, Texas and Toronto, Canada as well as from its headquarters in Chicago and systems development headquarters in Waltham, Massachusetts. The Company markets to international clients through subsidiaries and\/or offices in Australia, Belgium, Canada, Denmark, France, Germany, Great Britain, Hong Kong, India, Italy, Japan, Netherlands, Singapore, Turkey and United Arab Emirates and through its various distributors.\nPrincipal leased facilities of the Company are as follows:\nThe Company maintains $18,335,000 of business interruption insurance.\nITEM 3.","section_3":"ITEM 3. LEGAL PROCEEDINGS\nOn May 8, 1989, two shareholders each filed a class action complaint against the Company in the United States District Court for the Northern District of Illinois. Shortly thereafter, a third shareholder filed a similar class action complaint. All three cases have been consolidated.\nIn their consolidated complaint, the plaintiffs purport to represent a class consisting generally of persons who purchased the Company's common stock between February 6, 1989 and May 2, 1989. The plaintiffs allege Section 10(b) and Rule 10b-5 violations of the Securities Exchange Act of 1934, and common law fraud and deceit charges, by reason of alleged omissions of the Company in setting forth material facts in disclosures and public statements about the Company. These alleged omissions include information relating to the Company's finances, results of operations and prospects of achieving growth in earnings and revenues during the referenced period when class members were acquiring shares of the Company's stock.\nThe plaintiffs seek compensatory and punitive damages and attorneys' fees against the Company, five of its former directors and one of its former officers. The Court previously granted defendants' motion to dismiss plaintiffs' claims of negligent misrepresentation from the case, and as a result, the officer and certain of its directors previously named as defendants have been voluntarily dropped from the case by the plaintiffs. The two claims which remain pending against the defendants are for violation of Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934 and for common law fraud and deceit. The plaintiffs retained an individual who testified in his deposition that the total damages suffered by the class as a result of the allegedly wrongful conduct of the defendants were approximately $21.7 million. The Company retained an expert who testified in his deposition that the total damages suffered by the plaintiffs, assuming the defendants are to be found liable, would approximate $850,000. The Company has a directors and officers liability insurance policy having a policy limit of $10 million. Proceeds of the policy have been used for certain defense costs of the directors. The remainder of the proceeds may be available to cover damages assessed against the director defendants. The policy does not cover damages which may be assessed against the Company itself.\nDiscovery with respect to the action is now completed and trial is currently scheduled to commence in early April 1994. The Company's management believes that the Company has valid defenses to these claims and that the ultimate resolution of the case will not have a material impact on the Company's consolidated financial position.\nThe Company has been involved in patent infringement litigation concerning its targetable cable television technology used in its BehaviorScan mini- markets. In December 1990, a trial court ruled that the Company had infringed the opposing parties' patent during the period from 1979 to 1986. On December 21, 1992, a United States District Court assessed damages against the Company of approximately $4 million plus interest and costs (The \"District Court Order\"). In the fourth quarter of 1992, the Company established a reserve of $4 million for such damages and $391,000 of legal costs related to the case. On December 27, 1993, the Court of Appeals for the Federal Circuit of Washington D.C. affirmed the award of damages against the Company. The Company has satisfied the judgment by full payment of the amount due and, as a result, the case has been concluded. See Management's Discussion and Analysis of Financial Condition and Results of Operations -- Other Income (Expense).\nITEM 4.","section_4":"ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS\nNone.\nITEM 4(A). EXECUTIVE OFFICERS OF THE REGISTRANT\nNAME AGE POSITION WITH COMPANY AND BUSINESS EXPERIENCE ------------ --- ----------------------------------------------\nGian M. Fulgoni 46 Chairman of the Board of the Company since February 1991; Chief Executive Officer since January 1986; Vice Chairman from November 1988 until February 1991; President and Chief Operating Officer from December 1981 until November 1989; Director since 1981; Director of PLATINUM technology, inc., and U. S. Robotics, Inc.\nJames G. Andress 55 President and Chief Operating Officer of the Company since March 1994; Chief Executive Officer since May 1990; Vice Chairman from July 1993 until March 1994; President from November 1989 until July 1993; Chief Operating Officer from November 1989 until May 1990; Director since November 1989. Chairman of Smith Kline Beecham Healthcare Products and Services from July 1989 until November 1989; Chairman of Beecham Pharmaceuticals from July 1988 until July 1989; President and Chief Operating Officer of Sterling Drug, Inc., from May 1985 until July 1988; Director of the Liposome Co., Inc., NeoRx Corp., Sepracor, Inc., Genelabs Technologies, Inc., Genetics Institute, Inc., OptionCare, Inc., America Online, Inc., Walsh International, Inc. and Allstate Insurance Co., Inc.\nGerald Eskin, Ph.D. 59 Co-Founder of the Company; Vice Chairman since December 1981; Professor of Marketing at the University of Iowa since 1974 (currently adjunct status); Director since 1977.\nMagid Abraham, Ph.D. 35 Vice Chairman of the Company since March 1994; President and Chief Operating Officer from July 1993 until March 1994; Group President -Information Services Group from February 1991 until July 1993; President of the Product Development Division from December 1988 until February 1991; Vice President since December 1988; Divisional Executive Vice President from August 1988 until December 1988; Employed by the Company in product development positions since June 1985; Director since July 1993.\nThomas M. Walker 46 Executive Vice President and Chief Financial and Administrative Officer of the Company since March 1994; President of the Finance and Administration Group since September 1990; Chief Financial Officer and Treasurer from September 1990 until March 1994; Vice President of Finance and Administration, and Chief Financial Officer of Praxis Biologics, Inc. from 1988 until September 1990; Corporation Director of Finance and Administration of Sterling Drug, Inc. from 1986 until 1988; Vice President of Finance and Planning for the Japan-Canada-Australia-Pacific, International Group and the world-wide Chemical Group of Sterling Drug, Inc. from 1983 until 1986; Director of the Company since March 1994.\nNAME AGE POSITION WITH COMPANY AND BUSINESS EXPERIENCE ------------ --- ----------------------------------------------\nJeffrey P. Stamen 48 Vice President of the Company since January 1986; President - IRI Software Group (formerly known as the Software Products Group) since February 1991; President of the DSS Division from February 1988 until February 1991; Employed by the Company in senior management positions since June 1985; Director of the Company since March 1994.\nRandall S. Smith 42 Vice President of the Company since January 1986 and President - International Operations Division since December 1993; President of European Data Operations Division from February 1993 until December 1993; President of the Testing Services Division from October 1990 to January 1993; President of Operations Group from January 1988 until February 1989; President of the Data Base Division and Vice President since January 1986; President of the Administration Division from January 1987 until September 1990.\nGeorge R. Garrick 41 Vice President of the Company and President - IRI North America Group since November 1993; President and Chief Operating Officer of the Nielsen Marketing Research U.S.A. unit of A.C. Nielsen Co. from July 1993 to October 1993; President of European Information Services from July 1992 until June 1993; President of the Syndicated Information Services Division from February 1991 to June 1992; President of the Consumer Packaged Goods Division from February 1989 until February 1991; Vice President since May 1988; Divisional Executive Vice President from March 1984 until January 1989.\nEdward S. Berger 53 Division Executive Vice President since June 1993; Secretary and General Counsel of the Company since September 1988; Division Senior Vice President of the Company from February 1991 until June 1993; Vice President, Assistant Secretary and General Attorney from December 1985 until September 1988.\nAll of the foregoing executive officers hold office until the next annual meeting of the Board of Directors and until their successors are elected and qualified.\nPART II\nITEM 5.","section_5":"ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER'S MATTERS - --------------------------------------------------------------------------------\nThe Company's common stock has been traded in the NASDAQ over-the-counter market since March 4, 1983 and in the NASDAQ National Market System since February 1984. Share data has been adjusted for all stock splits and stock dividends to date.\nThe high and low closing sales prices for the Company's common stock are as follows:\nThe last sale price on February 28, 1994 was $26 per share. As of February 28, 1994 there were 507 record holders of the Company's common stock.\nThe Company has never paid cash dividends. It is the present policy of the Company's Board of Directors to retain earnings for use in the Company's business. Accordingly, the Board of Directors does not anticipate that cash dividends will be paid in the foreseeable future. In addition, the Company's lease agreement pertaining to the Company's corporate headquarters contains certain restrictions on the payment of cash dividends.\nITEM 6.","section_6":"ITEM 6. SELECTED FINANCIAL DATA - --------------------------------\n(1) (See NOTE C to Consolidated Financial Statements.)\nITEM 7.","section_7":"ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS\nThe Company experienced significant growth in revenues and earnings over the past three years. During the three year period, operating profits have increased while operating and selling, general and administrative expenses have also increased. The Company made a decision to dispose of certain non-strategic assets which impacted 1993 operating results. Also in 1993, the Company made a change in its policy for the accounting of income taxes.\nRESULTS OF OPERATIONS\nREVENUES FROM CONTINUING OPERATIONS. Revenues from continuing operations increased from $222.7 million in 1991 to $276.4 million in 1992 and $334.5 million in 1993. The percentage growth rates were 23.9% in 1991, 24.1% in 1992 and 21.1% in 1993. The Company's revenue growth was principally due to strong growth in InfoScan services and increased revenues from its line of business intelligence software products. The growth in InfoScan's revenues was the result of both new clients and increased utilization of InfoScan's services by existing clients. The Company continues to generate additional revenue from its expansion of its InfoScan's supermarket, drug and mass merchandiser services. Business intelligence software products, primarily EXPRESS Software products, experienced significant growth in both domestic and international revenues. BehaviorScan\/Other Testing Services remained relatively constant over the prior years' amounts.\nOPERATING EXPENSES. Operating expenses increased from $175.3 million in 1991 to $209.1 million in 1992 and $258.7 million in 1993. As a percentage of revenues, operating expenses decreased from 78.7% to 75.7% and increased to 77.4% over the three-year period. The 1993 increase over 1992 in operating expenses reflected a $29.7 million increase in compensation expense, an $11.5 million increase in amortization of deferred data procurement costs and a $4.8 million increase in travel related expenses. Operating expenses in 1992 increased from 1991 levels principally as a result of a $24.0 million increase in compensation expense, an $8.0 million increase in the amortization of deferred data procurement costs and a $1.0 million increase in computer operation expenses.\nSELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased from $22.0 million in 1991 to $29.6 million in 1992 and $34.9 million in 1993. As a percentage of revenue, SG&A expenses increased from 9.9% in 1991 to 10.7% in 1992 and decreased to 10.4% in 1993. The increase in 1993 expense, as in prior years, was primarily due to increases in compensation and related staffing costs associated with the Company's growth in both domestic and international operations, and increased recruiting and employee development expenses. The decrease as a percentage of revenue in 1993 from 1992 was due to control of expenses and the spreading of fixed administrative expenses over a larger revenue base.\nLOSS ON DISPOSITION AND WRITE-OFF OF ASSETS. The Company recorded a pre-tax charge of approximately $805,000 in the third quarter of 1993 to expense various intangibles related to its 1991 agreements with VideOcart, Inc. Also in the first quarter of 1993, the Company provided for the expected loss of $2.2 million on the disposition of certain nonstrategic assets.\nOPERATING PROFIT. Operating margins improved as a percentage of revenues from 11.4% in 1991 to 13.6% in 1992 and decreased to 11.3% in 1993. Operating margins were adversely affected by higher operating expense levels and expenses related to the loss on disposition and write-off of assets. The 1992 operating margin improvement reflected increased revenues from the Company's InfoScan product line and business intelligence software products, the lower cost of maintaining a reduced number of BehaviorScan markets and, in general, the impact of spreading fixed administrative and operating expenses over a larger revenue base.\nOTHER INCOME (EXPENSE). Other expense increased from $897,000 in 1991 to $5.1 million in 1992. In 1993, the Company recorded other income of $168,000. The fluctuation of expense to income was principally due to the reduction in interest expense from $2.5 million in 1992 to $1.0 million in 1993. Reduced interest expense levels reflected lower borrowing levels. The increase in other expense in 1992 was principally due to the nonrecurring provision for patent infringement litigation. See Legal Proceedings.\nEQUITY IN LOSS OF AFFILIATED COMPANIES. Equity in loss of affiliated companies reflected losses recognized related to equity investments. (See NOTE D of Notes to Consolidated Financial Statements).\nINCOME TAX EXPENSE. The Company's effective tax rates for 1991, 1992 and 1993 were 37.0%, 40.2% and 42.8%, respectively. The 1993 tax rate on operations including minority interest was 41.0%. The 1993 tax rate includes the effect of the Company increasing its domestic deferred tax liability in 1993 as a result of legislation enacted during 1993 increasing the Federal corporate tax rate from 34% to 35%. The 1991 tax rate reflected a tax benefit from the liquidation of a foreign subsidiary, the disposition of an equity investment and the utilization of net operating loss carryforwards for which tax benefits had not previously been reflected. The 1991, 1992 and 1993 tax rates also reflect the effect of state income taxes net of the federal benefits.\nMINORITY INTEREST. Minority interest reflects non-Company owned stockholder interest in InfoScan NMRA Limited. (See NOTE B of Notes to Consolidated Financial Statements).\nCUMULATIVE EFFECT ON PRIOR YEARS OF CHANGES IN ACCOUNTING PRINCIPLE. In 1993, the Company adopted Statement of Financial Accounting Standards No. 109 - Accounting for Income Taxes effective January 1, 1993. The cumulative effect of this change at January 1, 1993 was to recognize a tax benefit of $1.9 million or $.07 per share.\nNET INCOME. As a result of the factors described above, net income increased from $15.4 million in 1991 to $19.2 million in 1992 and to $24.1 million in 1993.\nFINANCIAL CONDITION\nLIQUIDITY AND CAPITAL RESOURCES. During 1993 and 1992, the Company's cash requirements were satisfied through internally generated funds and proceeds from previous equity offerings. Working capital at December 31, 1993 was $92.0 million, reflecting an increase of $4.0 million over December 31, 1992. The net increase results from the adoption of Statement of Financial Accounting Standards No. 109 - Accounting for Income Taxes, which increased working capital by $17.1 million, net of a reduction in working capital items other than deferred income taxes\nof $13.1 million. In 1992, the Company replaced its $25 million credit facility with a new facility of the same amount. The new facility expires in 1996. The Company has received a firm commitment from its lender to increase its credit facility to $50 million. In September 1992, the Company issued 1,380,000 shares of its common stock for $24.00 per share, resulting in net proceeds of approximately $31.2 million.\nWorking capital requirements continue to be extensive due to the Company's expansion of its business and investment in its InfoScan data base, international operations and its software development activities. As of December 31, 1993, the Company had capital commitments of approximately $3.9 million, which were primarily for computer equipment and scanner equipment. Although not yet committed, the Company expects to spend a substantially greater amount than its initial commitments during 1994 for such capital items. For 1993 and 1992, total capital expenditures were $25.9 million and $20.0 million respectively. The investment in the InfoScan data bases and software development will continue to increase due to expansion of operations. The Company also expects to expand its operations and investments internationally, which may require significant resources. See Other Developments.\nThe Company believes it will have sufficient funds from its cash balances, internally generated funds and bank credit facility to satisfy its working capital requirements for 1994 and the foreseeable future.\nOTHER DEVELOPMENTS\nIn April 1993, the Company acquired a 45% ownership interest in a French market information business through the formation of a joint venture with SECODIP, S.A. of Paris, a subsidiary of SOFRES, S.A., and GfK AG of Germany. SECODIP and SOFRES held a 45% and 10% interest, respectively. The Company and GfK AG contributed their investments in the former EuroScan France operations to the joint venture company, while SECODIP, S.A. contributed certain assets related to its retail audit business. The name of the joint venture company is IRI-SECODIP, S.N.C. The business of the joint venture includes the development of the Company's scanner-based information services in the French markets. In connection with the formation of the joint venture, the Company obtained certain intangible rights from SECODIP, S.A., some of which the Company then licensed to the joint venture. The Company's investments in connection with the joint venture, including its acquisition costs, approximated $13.0 million.\nIn July 1993, the Company and GfK AG completed the reorganization of their 1988 EuroScan joint venture. GfK AG contributed its consumer panel and retail audit businesses to the already established scanner-based information businesses of the EuroScan joint venture. The Company's ownership interest in the joint venture company, GfK Panel Services GmbH, is 15%. The Company's net investment made to the joint venture company in connection with the reorganization was $7.2 million, including transaction costs. The Company also reacquired certain Western European rights to its InfoScan production technology for $2.0 million.\nIn February 1994, the Company signed an agreement in principle with privately held Asia-based SRG Holdings Limited (\"SRG\") to acquire SRG in an exchange of stock valued at approximately $76.0 million. SRG is Asia's largest market research firm, operating in 12 countries in the Asia Pacific Region. SRG had worldwide sales in excess of $70.0 million in 1993. See NOTE P to Consolidated Financial Statements.\nITEM 8.","section_7A":"","section_8":"ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA\nListed below are the financial statements and supplementary data included in this part of the Annual Report on Form 10-K:\nFinancial statement schedules are included on pages 62 to 64 following the signature pages of this report (See Item 14).\nREPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS\nBoard of Directors and Stockholders Information Resources, Inc. and Subsidiaries\nWe have audited the accompanying consolidated balance sheets of Information Resources, Inc. and Subsidiaries as of December 31, 1993 and 1992, and the related consolidated statements of income, stockholders' equity and cash flows 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.\nWe conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.\nIn our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Information Resources, Inc. and Subsidiaries at December 31, 1993 and 1992, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended December 31, 1993, in conformity with generally accepted accounting principles.\nAs discussed in NOTE C, effective January 1, 1993, the Company changed its method of accounting for income taxes.\nGRANT THORNTON\nChicago, Illinois February 10, 1994\nInformation Resources, Inc. and Subsidiaries\nCONSOLIDATED BALANCE SHEETS\nDecember 31, (Dollars in thousands)\nThe accompanying notes to consolidated financial statements are an integral part of these statements.\nInformation Resources, Inc. and Subsidiaries\nCONSOLIDATED BALANCE SHEETS\nDecember 31, (Dollars in thousands)\nThe accompanying notes to consolidated financial statements are an integral part of these statements.\nInformation Resources, Inc. and Subsidiaries\nCONSOLIDATED STATEMENTS OF INCOME\nYear Ended December 31, (Dollars in thousands, except per share data)\nThe accompanying notes to consolidated financial statements are an integral part of these statements.\nInformation Resources, Inc. and Subsidiaries\nCONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY\nThree Years Ended December 31, (Dollars in thousands)\nThe accompanying notes to consolidated financial statements are an integral part of these statements\nInformation Resources, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended December 31, (Dollars in thousands)\nThe accompanying notes to consolidated financial statements are an integral part of these statements.\nInformation Resources, Inc. and Subsidiaries\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS\nDecember 31, 1993, 1992, and 1991\nNOTE A - SUMMARY OF ACCOUNTING POLICIES\nA summary of significant accounting policies applied in the preparation of the accompanying consolidated financial statements follows:\n1. Principles of Consolidation ---------------------------\nThe consolidated financial statements include the accounts of Information Resources, Inc. (\"IRI\" or the \"Company\") and all wholly or majority owned subsidiaries. The minority interest separately disclosed herein reflects the non-Company owned stockholder interest in InfoScan NMRA Limited. The equity method of accounting is used for investments in which the Company has a 50% or less ownership and exercises significant influence over operating and financial policies. All significant intercompany accounts and transactions have been eliminated in consolidation.\n2. Revenue Recognition -------------------\nInfoScan and PromotionScan products generally have contract terms of a period not less than one year. Contracts are generally categorized into one of two classes: 1) cancelable at the end of each year with six months written notice by either party, or 2) multi-year contracts either non-cancelable or cancelable only with significant penalties generally cancelable with six months notice after the initial term. A portion of the base contract revenue, approximately 15% of a calculated first year price, is recognized in the period between client commitment and the delivery of forward data to match revenue with costs to customize and set up client reports. An additional 25% is recognized in the period between commitment and the delivery of forward data to match revenue with the costs allocated to the period for which historical data, usually one to two years, is furnished. The remaining revenue from the first commitment period is recognized ratably over the initial contract term. Revenues from remaining years of multi-year contracts, extensions and renewals are recognized ratably over their extension periods. After the initial commitment, the contract generally continues indefinitely, unless cancelled by the client on six months prior notice. Revenue for special analytical services is recognized as services are performed. Initial BehaviorScan contracts typically commence within three months after execution and provide clients with historical data covering the six-month to one-year period prior to a contract's commencement date and with data, testing services and analyses for the twelve-month period covering the minimum term of the contract. A portion of the revenue from the contract, approximately 25% of the first year minimum, is recognized in the period between the client's commitment and the test commencement. This revenue is recognized to match revenue with cost allocated to the period for which historical data is furnished. The remaining revenue from the minimum period is recognized ratably over the initial contract term. Revenues from contract extensions are recognized ratably over their extension periods, typically year-to-year.\nInformation Resources, Inc. and Subsidiaries\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS\nDecember 31, 1993, 1992, and 1991\nNOTE A - SUMMARY OF ACCOUNTING POLICIES - Continued\nRevenues from the sale of EXPRESS, APOLLO and other software application products, under licensing agreements, are recognized upon delivery where there is a reasonable basis for estimating collectibility and the Company has no significant remaining obligations. If there are significant other obligations, revenues are recognized on the basis of estimated cost. Related software maintenance fees are recognized as earned over the terms of their respective contracts.\nRevenues from market research and consulting projects are recognized as services are performed. Certain of these projects are fixed-price in nature and use the percentage-of-completion method for the recognition of revenue. Revenues for projects that include a timesharing aspect are allocated over the timesharing period based on the costs incurred to provide the service.\nBillings to customers in advance of revenue recognition are reflected in the consolidated financial statements as deferred revenue. Unbilled charges are included as a part of accounts receivable and represent accrued revenues and fees on contracts and other services incurred to date.\n3. Property and Equipment ----------------------\nProperty and equipment is recorded at cost and depreciated over the estimated service lives. For financial statement purposes, depreciation is provided by the straight-line method. For income tax purposes, accelerated methods are used.\nLeasehold improvements are amortized over the shorter of their estimated service lives or the terms of their respective lease agreements for financial statement purposes. For income tax purposes, leasehold improvements are amortized over the service lives of the buildings.\nDuring 1993, the Company reduced store operating equipment and related accumulated depreciation by $13.0 million for equipment which was no longer used, obsolete or reverted to store owners.\n4. Other Assets ------------\nOther assets include deferred data procurement costs, goodwill, capitalized software, data and solicitation rights and non-compete agreements. Data procurement costs are capitalized as incurred and amortized over periods not exceeding twenty-eight months. Goodwill represents the unamortized cost in excess of fair value of the net assets of acquired subsidiaries and the excess of cost over the allocation to data and solicitation rights. Goodwill is amortized on a straight-line basis over periods from ten to twenty years. Capitalized costs of computer software to be sold are amortized on a straight- line basis beginning upon general release date and not exceeding three years. Solicitation rights are amortized on a straight line basis over the expected useful lives of six to ten years. Non-compete agreements are being amortized over periods from two to seven years.\nInformation Resources, Inc. and Subsidiaries\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS\nDecember 31, 1993, 1992, and 1991\nNOTE A - SUMMARY OF ACCOUNTING POLICIES - Continued\n5. Stock Options -------------\nFor options granted at fair market value, the proceeds are credited to the capital accounts upon exercise. For options granted at less than fair market value, the difference between the exercise price and fair market value at date of grant is recognized as compensation expense over the vesting period. With respect to nonqualified options, the Company recognizes a tax benefit upon exercise of these options in an amount equal to the difference between the option price and the fair market value of the common stock. With respect to incentive stock options, tax benefits arising from disqualifying dispositions are recognized at the time of disposition. Tax benefits related to stock options are credited to capital in excess of par value.\n6. Income per Common and Common Equivalent Share ---------------------------------------------\nIncome per common and common equivalent share is based on the weighted average number of shares of common stock and common stock equivalents (if dilutive) outstanding during each year.\nThe effect of dilution from the exercise of stock options is considered in the computation of income per common and common equivalent share. The modified treasury stock method was used to compute income per common and common equivalent share for the quarters ended June 30 and September 30, 1992 and for all quarters in 1993 since options and warrants outstanding exceeded 20% of the shares of common stock outstanding. The treasury stock method was used to calculate income per common and common equivalent share for other periods.\n7. Income Taxes ------------\nThe Company adopted Statement of Financial Accounting Standards No. 109 - Accounting for Income Taxes (FAS 109) effective January 1, 1993. FAS 109 requires an asset and liability approach in accounting for income taxes. Under this method, deferred income taxes are recognized, at enacted rates, to reflect the future effects of tax carryforwards and temporary differences arising between the tax bases of assets and liabilities and their financial reporting amounts at each year end. (See NOTE C). Prior to January 1, 1993, the Company followed the provisions of Financial Accounting Standards No. 96 - Accounting for Income Taxes. Among other things, its provisions include providing deferred taxes based upon enacted tax rates which would apply during the period in which taxes become payable (receivable) and the adjustment of cumulative deferred taxes for any changes in the tax rates.\nDeferred U.S. income taxes are not provided on the undistributed earnings of foreign subsidiaries since such earnings are considered to be permanently invested in those operations. Cumulative undistributed earnings of foreign subsidiaries were not significant at December 31, 1993.\nInformation Resources, Inc. and Subsidiaries\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED\nDecember 31, 1993, 1992, and 1991\nNOTE A - SUMMARY OF ACCOUNTING POLICIES - Continued\n8. Reclassifications -----------------\nCertain reclassifications have been made in the prior years' consolidated financial statements to conform to the 1993 presentation.\n9. Cash and Cash Equivalents -------------------------\nFor purposes of reporting cash flows, cash and cash equivalents include cash on hand and funds held in money market accounts with a maturity of three months or less. The carrying amount approximates fair value.\n10. Supplemental Cash Flow Information ----------------------------------\nCash paid for interest and income taxes during the years ended December 31, was as follows:\nThe Company had noncash financing transactions relating to capital lease obligations for new equipment. These totaled $1,053,000 and $6,881,000 for 1992 and 1991, respectively.\nThe Company had noncash investing transactions resulting from the reclassification of receivables due from some of the Company's joint ventures and joint venture partners in satisfaction of cash contributions the Company otherwise would have made to various joint ventures. The amounts totaled $1,800,000 in 1993.\nThe Company had noncash financing transactions relating to income tax benefits realized from the exercise of nonqualified stock options. These totaled $6,846,000, $5,890,000 and $3,313,000 for 1993, 1992 and 1991, respectively.\nIn 1991 the Company purchased all of the outstanding warrants held by Citicorp Credit Services, Inc. (Citicorp) in exchange for a promissory note in the principal amount of $12.5 million. In 1992, this promissory note was repaid in full.\n11. Fair Value of Financial Instruments -----------------------------------\nThe carrying value of the Company's financial instruments is a reasonable approximation of their fair values.\nInformation Resources, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED\nDecember 31, 1993, 1992, and 1991\nNOTE A - SUMMARY OF ACCOUNTING POLICIES - Continued\n12. Concentrations of Credit Risk\nFinancial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash equivalents and trade receivables.\nThe Company's cash equivalents are placed in high quality securities and diverse investment funds. Concentrations of credit risk with respect to trade receivables are limited due to the large number of customers comprising the Company's customer base, and their dispersion across different businesses and geographic areas.\nAs of December 31, 1993 and 1992, the Company had no significant concentrations of credit risk.\nNOTE B - ACQUISITIONS\nIn July 1993, the Company and GfK AG completed the reorganization of their 1988 EuroScan joint venture. GfK AG contributed its consumer panel and retail audit businesses to the already established scanner-based information businesses of the EuroScan joint venture. The Company's ownership interest in the joint venture company, GfK Panel Services GmbH, is 15%. The Company's net investment made to the joint venture company in connection with the reorganization was $7.2 million, including transaction costs. The Company also reacquired certain Western European rights to its InfoScan production technology for $2.0 million.\nIn April 1993, the Company acquired a 45% ownership interest in a French market information business through the formation of a joint venture with certain European market research companies. SECODIP, S.A. of Paris, a subsidiary of SOFRES, S.A., holds a 45% interest in the joint venture company, and GfK AG of Germany has a 10% interest. The Company and GfK AG contributed their investments in the former EuroScan France operations to the joint venture company, while SECODIP, S.A. contributed certain assets related to its retail audit business. The name of the joint venture company is IRI - SECODIP, S.N.C. The purpose of the joint venture includes the development of the Company's scanner-based information services in the French markets. In connection with the formation of the joint venture, the Company obtained certain intangible rights from SECODIP, S.A., some of which the Company then licensed to the joint venture. The Company's investments in connection with the joint venture, including its acquisition costs, approximated $13.0 million.\nIn December 1992, the Company organized LogiCNet, Inc. as a joint venture company along with other parties to pursue development of a distribution resource planning system incorporating inventory management and product reordering systems. The Company intends to underwrite development costs, for which it may be reimbursed by others, and has the option to acquire up to a 65% ownership interest in the venture.\nIn November 1992, Catalina Marketing Corporation and the Company formed a joint venture company, Catalina Information Resources, Inc., to develop products and services designed to enhance decision-making capabilities involving quick response product reordering and day-after sales performance tracking. The Company initially contributed $425,000 in cash and licensed certain software capabilities in return for a 50% ownership interest. During 1993, the Company contributed $350,000 in cash to the joint venture.\nInformation Resources, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED\nDecember 31, 1993, 1992, and 1991\nNOTE B - ACQUISITIONS - Continued\nIn June 1992, the Company formed a joint venture, InfoScan NMRA Limited, with GfK AG of Nuremberg, Germany and Taylor Nelson Group Limited (now known as Taylor Nelson AGB plc) of London to purchase certain assets of the NMRA Retail Audit business of BGA Audits Limited (formerly Audits of Great Britain), a United Kingdom market research company in administration. The Company purchased 60% of the joint venture for $2.9 million including direct costs of acquisition. During 1993, as a result of disproportionate capital contributions made by the joint venture partners, the Company's ownership interest increased to approximately 75% at December 31, 1993. The other partners may reestablish their ownership interest percentages to their original levels within a specified period of time. The accounts of the joint venture have been included in the accompanying consolidated financial statements.\nIn May 1992, the Company acquired Towne-Oller & Associates (\"Towne-Oller\"). The transaction was effected through the exchange of approximately 690,000 shares of the Company's common stock for all of the issued and outstanding shares of Towne-Oller. The acquisition has been accounted for as a pooling-of-interests and accordingly, the accompanying consolidated financial statements have been restated to reflect the acquisition.\nNOTE C - CHANGE IN ACCOUNTING PRINCIPLE\nEffective January 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109 -Accounting for Income Taxes (FAS 109). The effect of the adoption was to record a $1,864,000 favorable cumulative effect adjustment as of January 1, 1993 in the statement of income for the year ended December 31, 1993. The adjustment primarily represents the impact of recognizing tax benefits for future taxable losses that could not be recorded under FAS 96.\nInformation Resources, Inc. and Subsidiaries\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED\nDecember 31, 1993, 1992, and 1991\nNOTE D - INVESTMENTS\nInvestments at December 31 are as follows:\nAt December 31, 1993 and 1992, the amount of investments in companies accounted for by the equity method included goodwill in the amount of $3,246,000 and $559,000 which is being amortized into income over periods not exceeding 15 years. This amortization is included in the equity in loss of affiliated companies.\nAt December 31, 1993, the Company had outstanding receivables of $2.5 million due from affiliates.\nInformation Resources, Inc. and Subsidiaries\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED\nDecember 31, 1993, 1992, and 1991\nNOTE E - OTHER ASSETS\nOther assets at December 31 are as follows:\nIn 1993 and 1992, deferred data procurement costs of $32,867,000 and $30,594,000 respectively, became fully amortized. Such fully amortized costs are excluded from the amounts shown above.\nIn 1993 and 1992, capitalized software costs of $6,712,000 and $8,283,000 respectively became fully amortized. Such fully amortized costs are excluded from the amounts shown above.\nInformation Resources, Inc. and Subsidiaries\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED\nDecember 31, 1993, 1992, and 1991\nNOTE F - NOTE PAYABLE\nOn November 25, 1991, the Company purchased the outstanding warrants held by Citicorp in exchange for a promissory note in the principal amount of $12.5 million. The note bore an interest rate of 1% over the Citicorp base rate with interest payable monthly. The note was due December 31, 1992 and the outstanding principal and related interest were paid in full.\nNOTE G - ACCRUED EXPENSES\nAccrued expenses at December 31 are as follows:\nNOTE H- LONG-TERM DEBT\nLong-term debt at December 31, is as follows:\nMaturities of long-term debt during each of the years 1994 through 1997 are $1,691,000, $1,523,000, $912,000 and $652,000, respectively.\nThe amount consists primarily of leases for telephone and computer equipment expiring in 1997. Total interest in the amount of $605,000 to be paid over the period of the lease is not included in the lease commitment.\nOn December 22, 1992, the Company entered into a new bank credit facility replacing its previous facility dated October 30, 1990. The credit facility allows borrowings up to $25 million due April 30, 1996 at an interest rate at or below prime. Interest is payable quarterly. The credit facility contains certain financial covenants including: limitations on acquisitions, restrictions on additional indebtedness and liens and maintenance of minimum levels of tangible net worth, current and cash flow coverage ratios. There were no amounts outstanding under the credit facility at December 31, 1993 and December 31, 1992.\nInformation Resources, Inc. and Subsidiaries\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED\nDecember 31, 1993, 1992, and 1991\nNOTE I - INCOME TAXES\nThe components of income before income taxes are as follows:\nIncome tax expense for the three years ended December 31 consists of the following components:\nInformation Resources, Inc. and Subsidiaries\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED\nDecember 31, 1993, 1992, and 1991\nNOTE I - INCOME TAXES - Continued\nTemporary differences and carryforwards, which give rise to deferred income tax assets and liabilities at December 31, 1993 are as follows:\nIn 1992 and 1991, deferred income tax expense included taxes resulting from timing differences in the recognition of revenue and expense for income tax and financial statement purposes. The sources of these differences and their net tax effects for the two years ended December 31 are as follows:\nInformation Resources, Inc. and Subsidiaries\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED\nDecember 31, 1993, 1992, and 1991\nNOTE I - INCOME TAXES - Continued\nIncome tax expense differs from the statutory U.S. Federal income tax rate of 35% for 1993 and 34% for 1992 and 1991 applied to income before income taxes as follows:\nAt December 31, 1993, the Company had general business tax credit carryforwards of approximately $2,500,000 available to reduce future Federal income tax liabilities which will expire between 1995 and 2000 if not utilized. At December 31, 1993, the Company had tax loss carryforwards of $2,200,000 which will expire between 1998 and 2008 if not utilized. The full realization of the tax benefits associated with the carryforwards depends predominantly upon the recognition of ordinary income, and to a lesser extent, capital gain income during the carryforward period. The Company believes it is more likely than not that such benefits will be realized. For financial reporting purposes, the Company has recognized the tax effects of the tax loss and tax credit carryforwards as reductions of deferred Federal income taxes. The Tax Reform Act of 1986 enacted an alternative minimum tax system for corporations, generally effective for taxable years beginning after December 31, 1986. The alternative minimum tax is imposed at a 20% rate on the corporation's alternative minimum taxable income which is determined by making a statutory adjustment to the corporation's regular taxable income. The Company is subject to the alternative minimum tax for financial reporting purposes resulting in an alternative minimum tax carryforward of $1,600,000 as of December 31, 1993. This amount will be allowed as a credit carryover against regular tax in the future in the event the regular tax expense exceeds the alternative minimum tax expense.\nThe Company increased its U.S. deferred tax liability in 1993 as a result of legislation enacted during 1993 increasing the corporate tax rate from 34% to 35% effective January 1, 1993.\nProvision has not been made for U.S. or additional foreign taxes on undistributed earnings of foreign subsidiaries which the Company intends to continue to reinvest. It is not practicable to estimate the amount of additional tax that might be payable on the foreign earnings if they were remitted as dividends, were lent to the Company, or if the Company should sell its stock in the subsidiaries or ventures. However, the Company believes that U.S. foreign tax credits would substantially eliminate any additional tax effects.\nInformation Resources, Inc. and Subsidiaries\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED\nDecember 31, 1993, 1992, and 1991\nNOTE J - STOCK OPTIONS\nThe 1982 Incentive Stock Option Plan, a qualified plan within the meaning of relevant sections of the Internal Revenue Code, authorizing the granting of incentive stock options, expired on November 3, 1992. All remaining outstanding stock options must be exercised within ten years of their respective grant dates.\nIn 1991, the Board of Directors approved an increase in the number of shares authorized under the Company's 1984 Nonqualified Stock Option Plan of 2,000,000 shares, bringing the total maximum shares available for grant to 6,000,000. In 1992, an additional 2,000,000 shares were authorized increasing the total to 8,000,000. In 1993, an additional 2,000,000 shares were authorized increasing the total to 10,000,000. Options are granted pursuant to terms and conditions set forth by the Executive Committee of the Company's Board of Directors. The 1984 Non-Qualified Stock Option Plan expired on January 1, 1994 and was replaced by the 1994 Non-Qualified Stock Option Plan which was adopted and approved by the Executive Committee of the Company's Board of Directors. The Company has reserved for issuance up to 3,000,000 shares of Common Stock to be issued upon the exercise of options to be granted pursuant to the plan. The Company's 1994 Non-Qualified Plan is administered by the Executive Committee of the Company's Board of Directors. All outstanding stock options remaining under the 1984 Non- Qualified Stock Option Plan must be exercised within ten years of their respective grant dates.\nOn May 27, 1992, the stockholders of the Company adopted the Company's 1992 Executive Stock Option Plan and 1992 Incentive Stock Option Plan. Only the Company's executive officers and directors are eligible to participate in the 1992 Executive Stock Option Plan. The 1992 Executive Stock Option Plan is administered by a Stock Option Committee of at least two directors who are \"disinterested persons\" within the meaning of Rule 16b-3 under the Exchange Act. The Company has reserved for issuance up to 2,000,000 shares of Common Stock to be issued upon the exercise of options granted or to be granted pursuant to the 1992 Executive Stock Option Plan. The Company's 1992 Incentive Stock Option Plan is administered by the Executive Committee of the Company's Board of Directors. The Company's executive officers and directors are not eligible to participate in the 1992 Incentive Stock Option Plan. The Company has reserved for issuance up to 2,000,000 shares of its common stock to be issued upon exercise of options to be granted pursuant to the 1992 Incentive Stock Option Plan. It is intended that options issued under these plans and designated by the respective Committees will or may qualify as incentive stock options under relevant sections of the Internal Revenue Code. As of December 31, 1993, no options had been granted pursuant to the Company's 1992 Incentive Stock Option Plan.\nFuture deferred compensation expense with respect to options granted at less than fair market value at grant date was approximately $4,847,000 (net of approximately $420,000 expense in 1993) and will be recognized over the remaining vesting period.\nInformation Resources, Inc. and Subsidiaries\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED\nDecember 31, 1993, 1992, and 1991\nNOTE J - STOCK OPTIONS - Continued\nA summary of transactions in the above described plans during the three years ended December 31 is as follows:\nInformation Resources, Inc. and Subsidiaries\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED\nDecember 31, 1993, 1992, and 1991\nNOTE J - STOCK OPTIONS - CONTINUED\nInformation Resources, Inc. and Subsidiaries\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED\nDecember 31, 1993, 1992, and 1991\nNOTE K - CAPITAL STOCK\nIRI is authorized to issue 60,000,000 shares (increased from 30,000,000 in May 1992) of common stock and 1,000,000 shares of preferred stock.\nPreferred stock may be issued in series with the rights and limitations of each series being determined by the Board of Directors.\nIn September 1992, the Company issued 1,380,000 shares of common stock at a price of $24.00 per share. The proceeds, net of expenses, were $31.2 million. Issuance costs are included as a reduction of capital in excess of par value.\nIn May 1992, the Company acquired, in a pooling-of-interests transaction, all the outstanding capital stock of privately-held Towne-Oller in return for approximately 690,000 shares of Company Common Stock.\nIn November 1991, the Company purchased the outstanding warrants held by Citicorp in exchange for a promissory note in the principal amount of $12.5 million, payable December 31, 1992. The warrants represented Citicorp's right to purchase approximately 2.4 million shares of the Company's Common Stock. The warrants, bearing an exercise price of $16.00 per share, were originally acquired by Citicorp in 1990 as part of a transaction wherein Citicorp also acquired 900,000 shares. These shares are not affected by the warrant purchase transaction.\nIn May 1991, the Company issued 2,270,000 shares of common stock at a price of $21.50 per share. The proceeds, net of expenses, were $45.8 million. Issuance costs are included as a reduction of capital in excess of par value.\nNOTE L - LOSS ON DISPOSITION AND WRITE-OFF OF ASSETS\nThe Company recorded a pre-tax charge of approximately $805,000 in the third quarter of 1993 to expense various intangibles related to its 1991 agreements with VideOcart, Inc. Also in the first quarter of 1993, the Company provided for the expected loss of $2.2 million on the disposition of certain non- strategic assets.\nInformation Resources, Inc. and Subsidiaries\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED\nDecember 31, 1993, 1992, and 1991\nNOTE M - COMMITMENTS AND CONTINGENCIES\n1. Lease Agreements ----------------\nThe Company leases its Chicago, Illinois headquarters facilities. Under the terms of the lease agreement, the Company leased the facility under a long-term operating lease having a minimum term of 15 years and rental rates subject to increases in cost of living expenses. The lease agreement contains financial and other covenants including restrictions on the payment of dividends.\nThe Company and subsidiaries lease certain property and equipment under operating leases expiring at various dates through 2013. At December 31, 1993, obligations to make future minimum payments under these leases for the five years ending in 1998 are $26,232,000, $21,183,000, $16,654,000, $11,633,000 and $8,399,000, respectively.\nMinimum rental commitments for the above leases in the aggregate are $125,169,000.\nRent expense under such operating leases for the three years ended December 31 was as follows:\n2. Licensing Agreements --------------------\nThe Company has entered into licensing agreements with certain cable television companies expiring at various dates through 1998. At December 31, 1993, obligations to make minimum license payments under these agreements for the five years ending in 1998 are $811,000, $408,000, $351,000, $169,000 and $112,000, respectively.\nLicensing expense under these agreements was approximately $892,000, $889,000 and $871,000 in 1993, 1992, and 1991, respectively.\nInformation Resources, Inc. and Subsidiaries\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED\nDecember 31, 1993, 1992, and 1991\nNOTE M - COMMITMENTS AND CONTINGENCIES - Continued\n3. Litigation ----------\nOn May 8, 1989, two shareholders each filed a class action complaint against the Company in the United States District Court for the Northern District of Illinois. Shortly thereafter, a third shareholder filed a similar class action complaint. All three cases have been consolidated.\nIn their consolidated complaint, the plaintiffs purport to represent a class consisting generally of persons who purchased the Company's common stock between February 6, 1989 and May 2, 1989. The plaintiffs allege Section 10(b) and Rule 10b-5 violations of the Securities Exchange Act of 1934, and common law fraud and deceit charges, by reason of alleged omissions of the Company in setting forth material facts in disclosures and public statements about the Company. These alleged omissions include information relating to the Company's finances, results of operations and prospects of achieving growth in earnings and revenues during the referenced period when class members were acquiring shares of the Company's stock.\nThe plaintiffs seek compensatory and punitive damages and attorneys' fees against the Company, five of its former directors and one of its former officers. The Court previously granted defendants' motion to dismiss plaintiffs' claims of negligent misrepresentation from the case, and as a result, the officer and certain of its directors previously named as defendants have been voluntarily dropped from the case by the plaintiffs. The two claims which remain pending against the defendants are for violation of Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934 and for common law fraud and deceit. The plaintiffs retained an individual who testified in his deposition that the total damages suffered by the class as a result of the allegedly wrongful conduct of the defendants were approximately $21.7 million. The Company retained an expert who testified in his deposition that the total damages suffered by the plaintiffs, assuming the defendants are to be found liable, would approximate $850,000. The Company has a directors and officers liability insurance policy having a policy limit of $10 million. Proceeds of the policy have been used for certain defense costs of the directors. The remainder of the proceeds may be available to cover damages assessed against the director defendants. The policy does not cover damages which may be assessed against the Company itself.\nDiscovery with respect to the action is now completed and trial is currently scheduled to commence in early April 1994. The Company's management believes that the Company has valid defenses to these claims and that the ultimate resolution of the case will not have a material impact on the Company's consolidated financial position.\nInformation Resources, Inc. and Subsidiaries\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED\nDecember 31, 1993, 1992, and 1991\nNOTE M - COMMITMENTS AND CONTINGENCIES - Continued\nThe Company had been involved in patent infringement litigation concerning its targetable cable television technology used in its BehaviorScan mini-markets. A judgment was entered against the Company for approximately $4.0 million plus interest and costs. The Company has satisfied the judgment in January 1994 by full payment of the amount due.\nNOTE N - RESEARCH AND DEVELOPMENT\nExpenditures for research and development for the years ended December 31, 1993, 1992, and 1991 approximated $33,717,000, $19,479,000 and $15,255,000, respectively. Included in these expenditures were $10,202,000, $8,808,000 and $6,458,000 of software development cost that were capitalized. Expenditures not capitalized were charged to expense as incurred.\nInformation Resources, Inc. and Subsidiaries\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED\nDecember 31, 1993, 1992, and 1991\nNOTE O - GEOGRAPHIC AREAS INFORMATION\nThe Company develops and maintains computer-based proprietary data bases, decision support software, and mathematical models, primarily for the analysis of detailed information on purchasing of consumer goods, all within one industry segment - business information services. The following table presents information about the Company by geographic areas.\nIncluded in United States revenue for the years ended December 31, 1993, 1992 and 1991, are $2,064,000, $1,187,000 and $811,000 respectively, of export sales to unaffiliated customers. Total international revenues, including export sales, were $52,270,000, $36,344,000 and $24,913,000 for 1993, 1992 and 1991, respectively.\nNOTE P - SUBSEQUENT DEVELOPMENTS\nIn February 1994, the Company signed an agreement in principle with privately held Asia-based SRG Holdings Limited (\"SRG\") to acquire SRG in an exchange of stock valued at approximately $76.0 million.\nInformation Resources, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1993, 1992, and 1991\nNOTE Q - SUMMARY OF QUARTERLY DATA (UNAUDITED)\nSummaries of consolidated 1993 and 1992 results on a quarterly basis are as follows:\nInformation Resources, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1993, 1992, and 1991\nNOTE Q - SUMMARY OF QUARTERLY DATA (UNAUDITED) (Cont'd.)\nITEM 9.","section_9":"ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURES - --------------------------------------------------------------\nNone\nPART III\nITEM 10.","section_9A":"","section_9B":"","section_10":"ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - ------------------------------------------------------------\nThe sections entitled \"Election of Directors\" and \"Ownership of Securities\" are incorporated by reference from the definitive proxy statement to be filed with the Securities and Exchange Commission in connection with the Company's 1994 annual meeting of stockholders scheduled for May 26, 1994. Information about the Company's executive officers is set forth in Item 4(a) in Part I of this Report.\nITEM 11.","section_11":"ITEM 11. EXECUTIVE COMPENSATION - --------------------------------\nThe section entitled \"Executive Compensation\" [excluding the Board Compensation Committee Report and the stock price performance graph] is incorporated by reference from the definitive proxy statement to be filed with the Securities and Exchange Commission in connection with the Company's 1994 annual meeting of stockholders scheduled for May 26, 1994.\nITEM 12.","section_12":"ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT - ------------------------------------------------------------------------\nThe section entitled \"Ownership of Securities\" is incorporated by reference from the definitive proxy statement to be filed with the Securities and Exchange Commission in connection with the Company's 1994 annual meeting of stockholders scheduled for May 26, 1994.\nITEM 13.","section_13":"ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - --------------------------------------------------------\nThe section entitled \"Certain Transactions\" is incorporated by reference from the definitive proxy statement to be filed with the Securities and Exchange Commission in connection with the Company's 1994 annual meeting of stockholders scheduled for May 26, 1994.\nPART IV\nITEM 14.","section_14":"ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K - -------------------------------------------------------------------------\n(a) Documents filed as a part of this Report:\n1. Financial Statements --------------------\nThe consolidated financial statements of the Company are included in Part II, Item 8 of this Report.\n2. Financial Statement Schedules Page No. ----------------------------- --------\nReport of Independent Certified Public Accountants on Schedules 61\nSchedule II - Amounts Receivable from Related Parties and Underwriters, Promoters and Employees Other than Related Parties 62\nSchedule VIII - Valuation and Qualifying Accounts; Allowance for Doubtful Receivables 63\nSchedule X - Supplementary Income Statement Information 64\nAll other schedules are omitted because they are not applicable, or not required, or because the required information is included in the financial statements or notes thereto.\n3. Exhibits --------\n(i) See Exhibit Index (Immediately Following the Financial Statement Schedules attached hereto)\n(ii) Executive Compensation Plans and Arrangements. The following Executive Compensation Plans and Arrangements are listed as exhibits to this Form 10-K:\nEmployment Agreement dated November 27, 1978 between the Company and Gerald Eskin.\nEmployment agreement dated March 15, 1985 between the Company and Jeffrey Stamen.\nEmployment agreements dated March 15, 1985 between the Company and Leonard Lodish.\nNoncompetition Agreement dated March 15, 1985 between the Company and John D.C. Little, Glen Urban, and Leonard Lodish, respectively.\nLetter agreement dated January 17, 1989 between the Company and Glen Urban.\nForm of letter agreement between the Company and John D.C. Little.\nEmployment Agreement effective June 1, 1985 between the Company and Magid Abraham.\nAgreement effective January 1, 1989 between the Company and Edwin Epstein, amending the Consulting and Non- competition Agreement dated January 16, 1987, which Consulting and Noncompetition Agreement is referred to above.\nLetter agreement dated August 7, 1989 between the Company and Leonard Lodish.\nEmployment Agreement dated November 16, 1989 between the Company and James G. Andress.\nNonqualified Stock Option Agreement dated June 29, 1989 between the Company and Magid Abraham.\nAmended and Restated Employment Agreement dated March 16, 1994 between the Company and Thomas M. Walker.\n1992 Executive Stock Option Plan.\n1992 Employee Incentive Stock Option Plan.\nEmployment Agreement dated November 4, 1993 between the Company and George Garrick.\n1994 Employee Nonqualified Stock Option Plan.\nSIGNATURES\nPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.\nDated: March 29, 1994 INFORMATION RESOURCES, INC.\nBy: \/s\/ Gian M. Fulgoni ----------------------------- Gian M. Fulgoni, Chairman and Chief Executive Officer\nPursuant to the requirement of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on March 29, 1994.\nBy: \/s\/ Gian M. Fulgoni ------------------------------------------ Gian M. Fulgoni, Chairman and Chief Executive Officer and Director [Principal executive officer]\n\/s\/ James G. Andress ------------------------------------------ James G. Andress, Chief Executive Officer, President, Chief Operating Officer and Director\n*\/s\/ Gerald J. Eskin ------------------------------------------ Gerald J. Eskin, Vice Chairman and Director\n\/s\/ Thomas W. Walker ------------------------------------------ Thomas M. Walker, Executive Vice President, Chief Financial and Administrative Officer and Director [Principal financial and accounting officer]\n\/s\/ Magid Abraham ------------------------------------------ Magid Abraham, Vice Chairman and Director\n\/s\/ Jeffrey P. Stamen ------------------------------------------ Jeffrey P. Stamen, President, IRI Software and Director\n------------------------------------------- Edwin E. Epstein, Director\n*\/s\/ John D. C. Little ------------------------------------------- John D.C. Little, Director\n*\/s\/ Leonard M. Lodish ------------------------------------------- Leonard M. Lodish, Director\n*\/s\/ Edward E. Lucente ------------------------------------------- Edward E. Lucente, Director\n*\/s\/ Edith W. Martin ------------------------------------------- Edith W. Martin, Director\n*\/s\/ George G. Montgomery, Jr. ------------------------------------------- George G. Montgomery, Jr., Director\n*\/s\/ Glen L. Urban ------------------------------------------- Glen L. Urban, Director\n*\/s\/ Thomas W. Wilson, Jr. ------------------------------------------- Thomas W. Wilson, Jr., Director\n*\/s\/ Gian M. Fulgoni - ------------------------------------ By Gian M. Fulgoni pursuant to a power of attorney\nREPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON SCHEDULES\nBoard of Directors Information Resources, Inc.\nIn connection with our audit of the consolidated financial statements of Information Resources, Inc. and Subsidiaries referred to in our report dated February 10, 1994 which is included in Part II of this form, we have also audited Schedules II, VIII, and X for each of the three years in the period ended December 31, 1993. In our opinion, these schedules present fairly, in all material respects, the information required to be set forth therein.\nGRANT THORNTON\nChicago, Illinois February 10, 1994\nSCHEDULE II\nINFORMATION RESOURCES, INC.\nAMOUNTS RECEIVABLE FROM RELATED PARTIES AND UNDERWRITERS, PROMOTERS AND EMPLOYEES OTHER THAN RELATED PARTIES\n(Dollars in thousands)\nAll receivables outstanding as of December 31, 1993 bear no interest and are due on or before December 31, 1994.\nSCHEDULE VIII\nInformation Resources, Inc. and Subsidiaries\nVALUATION AND QUALIFYING ACCOUNTS ALLOWANCE FOR DOUBTFUL RECEIVABLES\n(Dollars in thousands)\nSCHEDULE X\nInformation Resources, Inc. and Subsidiaries\nSUPPLEMENTARY INCOME STATEMENT INFORMATION\nAmount Charged to Costs and Expenses -------------------------------------- Year Ended December 31 ---------------------- (In thousands)\n\/(1)\/ Includes amounts for investee companies reflected in equity in loss of affiliated companies.\n\/(2)\/ Less than 1% of consolidated revenues.\nEXHIBIT INDEX\nThe following documents are the exhibits to this Report. For convenient reference, each exhibit is listed according to the number assigned to it in the Exhibit Table of Item 601 of Regulation S-K. The page number, if any, listed opposite an exhibit indicates the page number in the sequential numbering system in the manually signed original of this Report where such exhibit can be found.","section_15":""}
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{"filename":"38079_1993.txt","cik":"38079","year":"1993","section_1":"ITEM 1. BUSINESS\nTHE COMPANY\nForest Oil Corporation and its subsidiaries (Forest or the Company) are engaged in the acquisition and exploitation of, exploration for and development and production of oil and natural gas. The Company was incorporated in New York in 1924, the successor to a company formed in 1916, and has been a publicly held company since 1969. The Company is active in several of the major exploration and producing areas in and offshore the United States. Forest's principal reserves and producing properties are located in the Gulf of Mexico and in Texas, Oklahoma and Wyoming.\nThe Company operates from production offices located in Lafayette, Louisiana and Denver, Colorado. Its corporate offices are located in Denver, Colorado. On December 31, 1993, Forest had 187 employees, of whom 129 were salaried and 58 were hourly.\nOPERATING STRATEGY\nIn 1991, Forest adopted a new operating strategy which focuses primarily on acquiring domestic reserves that have significant exploitation potential, increasing production from existing fields through the application of the Company's technical and operating expertise and participating in exploration through farmout arrangements. The Company believes that it has competitive advantages with respect to acquiring and exploiting properties because of its technical and operating expertise, its seismic data base and its ability to operate both onshore and offshore. The Company seeks to acquire interests in properties in which it would have a significant working interest and which it can operate. Since 1991, the Company has implemented its operating strategy by acquiring estimated proved reserves of approximately 181 BCF of natural gas and 8 million barrels of oil and condensate at an average property acquisition cost of $1.08 per MCFE through December 31, 1993. (An MCF is one thousand cubic feet of natural gas. MMCF is used to designate one million cubic feet of natural gas and BCF refers to one billion cubic feet of natural gas. MCFE means thousands of cubic feet of natural gas equivalents, using a conversion ratio of one barrel of oil to 6 MCF of natural gas. With respect to oil, the term BBL means one barrel of oil whereas MBBLS is used to designate one thousand barrels of oil.)\nDuring 1993, the Company completed four major acquisitions. In two separate transactions completed in May 1993 and December 1993, the Company purchased interests in two onshore fields and seven offshore blocks from Atlantic Richfield Company (ARCO) for approximately $60,862,000. Total estimated proved reserves acquired in the ARCO acquisitions were 40.1 BCF of natural gas and 1.3 million barrels of oil. The ARCO acquisitions were financed in part by volumetric production payments. In December 1993, the Company purchased interests in two producing offshore fields in the West Cameron and Eugene Island areas (the West Cameron\/Eugene Island acquisition) and three exploratory blocks from a private company for approximately $24,050,000. Total estimated proved reserves acquired as a result of the West Cameron\/Eugene Island acquisition were 16.3 BCF of natural gas and 269,000 barrels of oil. Also in December 1993, the Company purchased interests in the Loma Vieja Field in south Texas from another private company for approximately $59,458,000. Total estimated proved reserves acquired as a result of the Loma Vieja acquisition were 33.9 BCF of natural gas. In addition, the Loma Vieja acquisition included 8 prospects with exploitation or exploration potential, covering 2,332 net acres. The West Cameron\/Eugene Island and the Loma Vieja acquisitions were financed with proceeds of a nonrecourse secured loan, internally generated funds, and funds obtained under a bank credit facility. In other property acquisitions in 1993 Forest acquired estimated proved reserves totaling 4.4 BCF of natural gas and 102,000 barrels of oil for an aggregate purchase price of $4,700,000.\nThe Company's operating strategy also includes exploitation activities in the areas of reservoir management and development drilling. Reservoir management involves the effort to enhance value by a combination of reduced costs and the use of such techniques as workovers to increase hydrocarbon recovery. The Company engages in development drilling for additional reserves that offset existing production with the objective of either increasing\nthe density in which wells are drilled or extending reservoirs. The Company believes that it can increase production from, and otherwise enhance the value of, existing fields by utilizing its technical expertise to undertake selective workovers, recompletions and development drilling. In total, the Company undertook 39 workover and development projects in 1993 with the following results:\nSuch results are not necessarily indicative of future results of the Company's workover and development projects.\nThe Company participates in exploration activities primarily through farmout arrangements. The Company's farmouts enable Forest to participate in its exploration prospects without incurring additional exploration costs, although with a reduced ownership in each prospect. During 1993, the Company entered into farmout agreements covering 27 prospects, pursuant to which 14 wells were drilled resulting in 9 commercially productive properties. For further information concerning the Company's farmout activity, see Item 2.","section_1A":"","section_1B":"","section_2":"ITEM 2. PROPERTIES\nForest's principal properties are oil and gas properties located in the Gulf of Mexico and in Texas, Oklahoma, and Wyoming.\nRESERVES\nInformation regarding the Company's proved and proved developed oil and gas reserves and the standardized measure of discounted future net cash flows and changes therein is included in Note 19 of Notes to Consolidated Financial Statements.\nSince January 1, 1993, Forest has not filed any oil or natural gas reserve estimates or included any such estimates in reports to any Federal or foreign governmental authority or agency, other than the Securities and Exchange Commission (SEC), the MMS and the Department of Energy (DOE). The reserve estimate report filed with the MMS related to Forest's Gulf of Mexico reserves and there were no differences between the reserve estimates included in the MMS report, the SEC report, the DOE report and those included herein, except for production and additions and deletions due to the difference in the \"as of\" date of such reserve estimates.\nPRODUCTION\nThe following table shows net oil and natural gas production for Forest and its wholly-owned subsidiaries for the three years ended December 31, 1993:\nNet production reported by CanEagle for its fiscal year ended September 30, 1993 was 2.1 BCF of natural gas and 281,000 barrels of oil. The Company's investment in and advances to CanEagle are discussed in Note 3 of Notes to Consolidated Financial Statements.\nAVERAGE SALES PRICES AND PRODUCTION COSTS PER UNIT OF PRODUCTION\nThe following table sets forth the average sales prices per MCF of natural gas and per barrel of oil and condensate and the average production cost per equivalent unit of production for the three years ended December 31, 1993 for Forest and its wholly-owned subsidiaries:\nAverage sales prices received by CanEagle for its fiscal year ended September 30, 1993 were $1.77 CDN per MCF of natural gas and $20.77 CDN per barrel of oil. CanEagle's natural gas production was sold under long-term contracts and its oil production was sold on the spot market. The average production cost per MCFE reported by CanEagle was $.49 CDN per MCFE. The Company's investment in and advances to CanEagle are discussed in Note 3 of Notes to Consolidated Financial Statements.\nPRODUCTIVE WELLS\nThe following summarizes total gross and net productive wells of the Company and its wholly-owned subsidiaries at December 31, 1993, all of which are in the United States:\nAt September 30, 1993, CanEagle had 33 net productive oil wells and 32 net productive gas wells. The Company's investment in and advances to CanEagle are discussed in Note 3 of Notes to Consolidated Financial Statements.\nDEVELOPED AND UNDEVELOPED ACREAGE\nForest and its wholly-owned subsidiaries held acreage as set forth below at December 31, 1993 and 1992. A majority of the developed acreage is subject to a mortgage lien securing either the Company's bank indebtedness or its nonrecourse secured debt. A portion of the developed acreage is also subject to production payments. See Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations and Notes 4, 5 and 7 of Notes to Consolidated Financial Statements.\nDuring 1993, the Company's gross and net developed acreage increased approximately 12% and 92%, respectively, primarily as a result of property acquisitions. The Company's gross and net undeveloped acreage decreased 35% and 27%, respectively, because the acquisitions made during the year were more than offset by reductions in acreage as a result of reclassifications to developed acreage, lease expirations and the Company's decision not to renew certain leases which were located primarily offshore Louisiana and in Texas.\nApproximately 13% of the Company's total net undeveloped acreage is under leases that have terms expiring in 1994, if not held by production, and another approximately 44% of net undeveloped acreage will expire in 1995 if not also held by production.\nAt September 30, 1993, CanEagle held 31,705 gross developed acres, 8,179 net developed acres, 95,847 gross undeveloped acres and 33,478 net undeveloped acres. The Company's investment in and advances to CanEagle are discussed in Note 3 of Notes to Consolidated Financial Statements.\nDRILLING ACTIVITY\nForest and its wholly-owned subsidiaries owned interests in net exploratory and net development wells for the three years ended December 31, 1993 as set forth below. This information does not include wells drilled under farmout agreements as discussed below.\nDuring its fiscal year ended September 30, 1993, CanEagle drilled 2.1 productive net development wells in Canada. The Company's investment in and advances to CanEagle are discussed in Note 3 of Notes to Consolidated Financial Statements.\nFARMOUT AGREEMENTS\nForest entered into farmout agreements with respect to 27 exploration prospects during 1993. Under these agreements, outside parties undertake exploration activities using prospects owned by Forest. This enables the Company to participate in the exploration prospects without incurring additional capital costs, although with a substantially reduced ownership interest in each prospect. Eleven of the farmouts cover onshore prospects and 16 cover prospects located in the Gulf of Mexico.\nFourteen of the 27 farmout prospects were drilled during 1993, resulting in nine productive properties. Forest retained overriding royalty interests ranging from 2.083% to 12.5% before payout, increasing to interests ranging from a 10% overriding royalty interest to a 40% net working interest after payout. One additional well was drilled and commenced production in 1994; the Company anticipates that the 12 remaining undrilled farmouts will be drilled during 1994.\nDuring 1993, the Company entered into an exploration agreement under which a third party agreed to drill a minimum of six additional exploratory wells offshore. The Company retained overriding royalty interests in these prospects of between 8.33% and 12.5% with the option to convert to working interests ranging from 25% to 33 1\/3% after payout of the first well on each prospect. Four of these six wells were drilled by the end of 1993, resulting in one productive well. The remaining two wells are scheduled to be drilled in the first half of 1994.\nThe Company intends to continue to seek farmouts of exploration prospects when they can be arranged on terms that are believed to be favorable.\nDuring its fiscal year ended September 30, 1993, CanEagle concluded two farmout agreements under which two successful gas wells were drilled and completed. The Company's investment in and advances to CanEagle are discussed in Note 3 of Notes to Consolidated Financial Statements.\nPRESENT ACTIVITIES\nAt December 31, 1993, Forest and its wholly owned subsidiaries had three development wells that were in the process of being drilled. All three wells were determined to be productive in January 1994 and are currently being tested. There was one well being drilled under a farmout agreement at year- end, which was subsequently completed as a producing well.\nAt September 30, 1993 CanEagle had one development well that was in the process of being drilled. This well was determined to be a gas well and commenced production in November 1993. The Company's investment in and advances to CanEagle are discussed in Note 3 of Notes to Consolidated Financial Statements.\nDELIVERY COMMITMENTS\nAt December 31, 1993 Forest and its wholly-owned subsidiaries were obligated to deliver approximately 36.3 BCF of natural gas and 479,000 barrels of oil under the terms of volumetric production payments. The delivery commitments cover approximately 35% and 12% of the estimated net proved reserves of natural gas and oil, respectively, attributable to the subject properties. The production payments are nonrecourse to other properties owned by the Company. The Company is further obligated to deliver approximately .8 BCF of natural gas under existing long-term contracts. For further information concerning the Company's production payment agreements, see Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations and Note 7 of Notes to Consolidated Financial Statements.\nITEM 3.","section_3":"ITEM 3. LEGAL PROCEEDINGS\nThe Company has two natural gas sales contracts with Columbia Gas Transmission Corp. (Transmission), a subsidiary of Columbia Gas System (CGS). On July 31, 1991, CGS and Transmission filed Chapter 11 bankruptcy petitions with the United States Bankruptcy Court for the District of Delaware. Both contracts have been rejected pursuant to the bankruptcy proceedings. The Company has filed a proof of claim in the bankruptcy proceeding consisting of a secured claim of $1,600,000 based on Louisiana vendor lien laws and an unsecured claim relating to the rejection of the contracts. The secured claim arises from Transmission's failure to pay the contract price for a period of time prior to rejection of the contracts. The unsecured claim was calculated on an undiscounted basis and without any assumption of mitigation of damages through spot market sales. No prediction can be given as to when or how these matters will ultimately be concluded.\nThe Company, in the ordinary course of business, is a party to various other legal actions. In the opinion of management, none of these actions, including those discussed above, will have a material adverse effect, either individually or in the aggregate, on the financial condition of the Company.\nITEM 4.","section_4":"ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS\nNot Applicable\nITEM 4A. EXECUTIVE OFFICERS OF FOREST\nThe following information with respect to the executive officers of Forest is furnished pursuant to Instruction 3 to Item 401(b) of Regulation S-K.\nYEARS WITH NAME (A) AGE FOREST OFFICE (B) -------- --- ---------- ----------\nWilliam L. Dorn* 45 22 Chairman of the Board and Chairman of the Executive Committee since July 1991. Member of the Executive Committee since August 1988. President from February 1990 until November 1993 and Chief Executive Officer since February 1990. Executive Vice President from August 1989 until February 1990, and prior thereto Vice President. Member of the Royalty Bonus Committee since August 1991.\nRobert S. Boswell* 44 5 President since November 1993. Vice President from May 1991 until November 1993 and Chief Financial Officer since May 1991. Financial Vice President from September 1989 until May 1991. Member of the Executive Committee since July 1991, member of the Royalty Bonus Committee since August 1991. Chief Financial Officer of Bovaird Supply Company, Inc., from January 1988 until September 1989.\nBulent A. Berilgen 45 9 Vice President of Operations since December 1993. Prior thereto Vice President - Engineering and Development since January 1992. Prior thereto Regional Reservoir Engineer.\nKenton M. Scroggs 41 11 Vice President since December 1993 and Treasurer since May 1988. Prior thereto Assistant Treasurer. Member of the Administrative Committee of the Company's Retirement Savings Plan and Chairman of the Board of Trustees of the Company's Pension Trust.\nYEARS WITH NAME (A) AGE FOREST OFFICE (B) -------- --- ---------- ----------\nForest D. Dorn 39 16 Vice President since February 1991 and General Business Manager since December 1993. Prior thereto General Manager - Operations since January 1992. Prior thereto Assistant Division Manager of the Southern Division. Member of the Contributions Committee.\nDavid H. Keyte 37 6 Vice President and Chief Accounting Officer since December 1993. Prior thereto Corporate Controller since January 1989. Prior thereto Manager of Tax. Chairman of the Administrative Committee of the Company's Retirement Savings Plan and member of the Board of Trustees of the Company's Pension Trust.\nDaniel L. McNamara 48 22 Secretary and Corporate Counsel since January 1991. Prior thereto Assistant Secretary and Associate Corporate Counsel.\nJoan C. Sonnen 40 4 Controller since December 1993. Prior thereto Director of Financial Accounting and Reporting since April 1991 and Manager of Financial Systems and Reporting since July 1989. Prior thereto a principal with Arthur Young & Company.\n- ------------- *Also a Director\n(A) William L. Dorn and Forest D. Dorn are brothers, and they are nephews of John C. Dorn, a director of the Company.\n(B) The term of office of each officer is one year from the date of his or her election immediately following the last annual meeting of shareholders and until the officer's respective successor has been elected and qualified or until his or her earlier death, resignation or removal from office whichever occurs first. Each of the named persons has held the office indicated since the last annual meeting of shareholders, except as otherwise indicated.\nPART II\nITEM 5.","section_5":"ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS\nForest Oil Corporation has one class of common equity securities outstanding. The Common Stock, par value $.10 per share, has one vote per share. During 1993, each share of the Class B Stock, par value $.10 per share, which had 10 votes per share, was reclassified into 1.1 shares of Common Stock pursuant to a vote of the shareholders. In the event of dissolution, liquidation or insolvency, holders of Common Stock share ratably in the net assets of Forest, subject to the liquidation rights of the holders of the $.75 Convertible Preferred Stock.\nAs of March 1, 1994, 27,942,755 shares of Common Stock were held by 2,109 recordholders and 1,244,715 Warrants were held by 88 recordholders.\nThe Company also has outstanding Warrants to purchase shares of its Common Stock. Each Warrant entitles the holder to purchase one share of Common Stock at a price of $3.00, is non-callable and expires on October 1, 1996.\nSubject to the prior right of the holders of Forest's $.75 Convertible Preferred Stock, the only restrictions on its present or future ability to pay dividends are (i) the provisions of the New York Business Corporation Law (NYBCL), (ii) certain restrictive provisions in the Indenture executed in connection with Forest's 11 1\/4% Senior Subordinated Notes due September 1, 2003 pursuant to which the Company is currently prohibited from paying any cash dividends other than on its $.75 Convertible Preferred Stock, and (iii) the Company's Credit Agreement dated December 1, 1993 with The Chase Manhattan Bank (National Association), as agent, under which the Company is restricted in amounts it may pay as dividends (other than dividends payable in common stock). Under the dividend restriction in the Credit Agreement, the Company currently has the ability to pay dividends in the approximate amount of $1,920,000, assuming the cash dividend on the $.75 Preferred Stock declared by the Company in February 1994 is paid in May 1994. There is no assurance that Forest will pay any dividends. For further information on Forest's ability to pay cash dividends on its Common Stock and $.75 Convertible Preferred Stock, see Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations and Notes 4, 6, 9 and 10 of Notes to Consolidated Financial Statements.\nThe Company has one class of preferred stock outstanding. Annual dividends on the $.75 Convertible Preferred Stock are cumulative and are payable quarterly each February 1, May 1, August 1 and November 1, when and as declared. Dividends may be paid in cash or, at the Company's election, in shares of Common Stock or in a combination of cash and Common Stock.\nWhenever dividends on the $.75 Convertible Preferred Stock have not been paid, the amount of the deficiency, plus an amount equal to the accumulated dividend for the then current quarterly dividend period, must be fully paid, or declared and set apart for payment, before any dividend may be declared and paid or set apart for payment upon the Common Stock, except for dividends paid in shares of Common Stock.\nWhenever $.75 Convertible Preferred Stock dividends are in arrears in an amount equivalent to six full quarterly dividends, the holders of the $.75 Convertible Preferred Stock, voting separately as a class and with one vote per share, will have the right to elect two directors. If two consecutive dividend payments are in arrears, the holder of each share of $.75 Convertible Preferred Stock will be entitled to a penalty conversion right enabling such holder to convert each such share, plus accumulated dividends, into a share of Common Stock during a two-day period 30 days after the second dividend payment date at a conversion price of 75% of the average of the last reported sales prices of the Common Stock during the period from such second dividend payment date to five trading days prior to the conversion date.\nThe holder of each share of $.75 Convertible Preferred Stock has the right to convert each such share into 3.5 shares of Common Stock at any time. The conversion rate is subject to adjustment in certain events.\nThe $.75 Convertible Preferred Stock may be redeemed at the option of the Company, in whole or in part, upon notice duly given, at any time after the earlier of (i) July 1, 1996, and (ii) the date on which the last reported sales price of the Common Stock will have been $7.50 or higher for at least 20 of the prior 30 trading days, at the redemption prices set forth below, in each case with an amount equal to dividends (whether or not declared) accrued to the date fixed for redemption and remaining unpaid:\nAs of March 1, 1994, 2,880,973 shares of $.75 Convertible Preferred Stock were held by 86 recordholders.\nForest's Common Stock is traded on the National Market System of the National Association of Securities Dealers, Inc., Automated Quotation System (NASDAQ\/NMS). The High and Low sales prices of the Common Stock for each quarterly period of the years presented as reported by the NASDAQ\/NMS are listed in the chart below. The Class B Stock was not traded in any public trading market. There were no dividends on Common Stock or Class B Stock in 1992, 1993 or in the first quarter of 1994.\nOn March 15, 1994, the last reported sales price of the Common Stock as quoted on the NASDAQ\/NMS was $3-11\/16 per share.\nThe Warrants are traded on the NASDAQ\/NMS. The High and Low sales prices of the Warrants for each quarterly period of the years presented as reported by the NASDAQ\/NMS are listed in the chart below.\nOn March 15, 1994, the last reported sales price of the Warrants as quoted on the NASDAQ\/NMS was $1-7\/8 per Warrant.\nThe $.75 Convertible Preferred Stock is traded on the NASDAQ\/NMS. The High and Low sales prices of the $.75 Convertible Preferred Stock for each quarterly period of the years presented as reported by the NASDAQ\/NMS are listed in the chart below.\nOn March 15, 1994, the last reported sales price of the $.75 Convertible Preferred Stock as quoted on the NASDAQ\/NMS was $14-1\/4 per share.\nIn October 1993, the Board of Directors adopted a shareholders' rights plan. The Company issued a dividend of a preferred stock purchase right (the \"Rights\") on each outstanding share of Common Stock of the Company, which, after the Rights become exercisable, entitle the holder to purchase 1\/100th of a share of a newly issued series of the Company's preferred stock at a purchase price of $30 per 1\/100th of a preferred share, subject to adjustment. The Rights expire on October 29, 2003 unless extended or redeemed earlier. The Rights will become exercisable (unless previously redeemed or the expiration date of the Rights has occurred) following a public announcement that a person or group (an \"Acquiring Person\") has acquired 20% or more of the Common Stock or has commenced (or announced an intention to make) a tender offer or exchange offer for 20% or more of the Common Stock. In certain circumstances each holder of Rights (other than an Acquiring Person) will have the right to receive, upon exercise, (i) shares of Common Stock of the Company having a value significantly in excess of the exercise price of the Rights, or (ii) shares of Common Stock of an acquiring company having a value significantly in excess of the exercise price of the Rights.\nITEM 6.","section_6":"ITEM 6. SELECTED FINANCIAL AND OPERATING DATA\nThe following table sets forth selected data regarding the Company as of and for each of the years in the five-year period ended December 31, 1993. This data should be read in conjunction with Item 7.","section_7":"ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS\nThe following discussion and analysis should be read in conjunction with the Company's Consolidated Financial Statements and Notes thereto.\nRESULTS OF OPERATIONS\nNET EARNINGS (LOSS). The Company's net loss was $21,213,000 in 1993 compared to net earnings of $7,298,000 in 1992 and a net loss of $25,348,000 in 1991. There would have been a net loss of $16,745,000 in 1992 excluding the effects of the settlement of gas contract litigation with ONEOK Inc. (the ONEOK settlement). Total revenue less operating expenses (consisting of oil and gas production expense and expensed general and administrative costs) increased in 1993 compared to the 1992 results (excluding the effects of the ONEOK settlement) as a result of the acquisition of properties; however, this increase was more than offset by higher depreciation and depletion expense, an extraordinary loss of $10,735,000 (net of tax benefit of $4,652,000) recorded as a result of the redemption or purchase of all of the Company's 12 3\/4% Senior Secured Notes and long-term subordinated debt and a charge of $1,123,000 to reflect the effects of cumulative changes in accounting principles related to postretirement benefits and income taxes. The 1992 results improved significantly compared to 1991 due to approximately $24,043,000 of net earnings associated with the ONEOK settlement in December 1992 and because there was no writedown of the carrying value of the Company's oil and gas properties required in 1992 by SEC regulations. The 1991 loss included a writedown of the Company's oil and gas properties of $22,400,000 on an after-tax basis, offset by an extraordinary gain of $9,502,000 (net of income taxes of $4,895,000) on extinguishment of debt.\nThe ONEOK settlement in 1992 had a significant impact on the Company's reported revenue, expense and net earnings. A summary of the Company's income and expenses for 1992, before and after the amounts recorded as a result of the ONEOK settlement, is as follows:\nThe inclusion of the effects of the ONEOK settlement in a discussion of the Company's results of operations distorts the trends which would otherwise be reported. In the discussion which follows, results for 1992 exclude the effects of the ONEOK settlement in order to more meaningfully compare and discuss the Company's results of operations for 1993, 1992 and 1991.\nREVENUE. Total revenue increased 39% to $105,148,000 in 1993 from $75,645,000 in 1992, primarily due to increased production from newly-acquired properties. Total revenue increased by 8% to $75,645,000 in 1992 from $69,897,000 in 1991. The increase is due primarily to increased production volumes, despite a decrease in average sales prices for both oil and natural gas.\nOil and gas sales increased to $102,883,000 from $76,847,000, or by approximately 34% in 1993 from 1992, primarily due to increased production from newly-acquired properties and an 11% increase in the average sales price for natural gas. In 1993, oil production volumes were up 3% and natural gas production volumes were up 41% compared to 1992. The increase in revenue attributable to the increased production was partially offset by a 6% decrease in the average sales price for oil.\nOil and gas sales increased to $76,847,000 from $68,876,000 or by approximately 12% in 1992 from 1991. The increase primarily resulted from increased production volumes, despite a decrease in average sales prices for both oil and natural gas. In 1992, oil production volumes were up 71% and natural gas production volumes were up 22% compared to 1991. The increased volumes were primarily the result of property acquisitions in 1992. The increase in revenue attributable to the increased production was partially offset by a 28% decrease in the average sales price for oil and an 8% decrease in the average sales price for natural gas.\nThe production volumes and average sales prices for the three years ended December 31, 1993 for Forest and its wholly-owned subsidiaries were as follows:\nNatural gas sold pursuant to volumetric production payment agreements and other long-term fixed price contracts represented approximately 46% of production in 1993 versus 33% in 1992 and 28% in 1991. In recent years, the industry trend has been for more natural gas to be sold on the spot market as long-term contracts expire. The increase experienced by Forest in natural gas sold under long-term fixed price contracts in 1993, 1992 and 1991 was the result of the Company entering into volumetric production payment agreements.\nMiscellaneous net revenue of $2,265,000 in 1993 included $1,380,000 of interest income on short-term investments and an adjustment to reduce accrued severance taxes based on discussions with the applicable state taxing authorities. The net expense of $1,202,000 in 1992 was primarily attributable to a $926,000 provision for future rent payments on vacated office space. The 1991 amount of $1,021,000 included interest income of $1,314,000 on cash balances invested in short-term investments and $2,032,000 of revenue associated with a favorable ruling by a Texas court with respect to severance tax on take-or-pay settlements, offset by $1,550,000 provided for uncollectible receivables and $850,000 of refund claims which were abandoned.\nOIL AND GAS PRODUCTION EXPENSE. Oil and gas production expense increased 37% to $19,540,000 in 1993 compared to $14,276,000 in 1992 due primarily to increased production from newly acquired properties and increased workover expense. Oil and gas production expense increased 14% to $14,276,000 in 1992 compared to $12,548,000 in 1991 due to increased production. In 1993, production expense was approximately $.39 on an MCFE basis, compared to $.38 in 1992 and $.43 in 1991. The decrease in 1992 compared to 1991 was the result of cost-savings measures coupled with economies of scale achieved when certain fixed operating costs were spread over a larger asset base.\nGENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense for 1993 was $12,003,000 compared to $12,088,000 in 1992. Increases attributable to severance and employee relocation costs and the effects of the postretirement medical benefit accrual in 1993 were more than offset by lower office and storage rentals and lower professional services expense. General and administrative expense for 1992 increased 27% to $12,088,000 from $9,541,000 in 1991, reflecting a decrease in the capitalization rate applied to total overhead costs. The decrease in the capitalization rate was the result of a decrease in the percentage of employees' time spent working directly on exploration and development projects. The capitalization rate remained relatively constant from 1992 to 1993.\nThe Company has devoted significant effort to reducing total overhead costs. Total overhead costs, including amounts related to exploration and development activities, were $19,561,000 in 1993, $19,237,000 in 1992 and $23,292,000 in 1991. The increase in 1993 from 1992 was only 2% despite charges amounting to $2,300,000 for severance and employee relocation costs and $480,000 for postretirement medical benefits; without these charges, total overhead costs would have decreased by approximately 13% in 1993 compared to 1992. Severance and employee relocation costs of approximately $2,300,000 in 1993 resulted from the termination of 10 executives and middle level managers and a loss incurred on an employee's former residence in accordance with the Company's relocation policy. The decrease in total overhead costs in 1992 from 1991 was primarily due to reductions in workforce which occurred during 1991. The following table summarizes the total overhead costs incurred during the periods, including retirement benefits for executives and directors:\nRETIREMENT BENEFITS FOR EXECUTIVES AND DIRECTORS. In December 1990, the Company entered into retirement agreements with seven executives and directors (\"Retirees\") pursuant to which the Retirees will receive supplemental retirement payments totalling approximately $1,127,700 per year through 1996, $1,087,400 in 1997, $938,400 in 1998 and approximately $740,400 per year in 1999 and 2000. The liability to the Retirees was recorded in 1990. Additional expense of $950,000 was recorded in 1991 to reflect the accrual of amounts due to certain Retirees upon resignation as directors of the Company.\nRESTRUCTURING. Restructuring expense in 1991 includes the costs of the Company's implementation of a reorganization and consolidation plan. Costs recorded in 1991 of approximately $3,585,000 related to reductions in workforce and a consolidation of the Company's technical staff, reduced by a credit recognized upon curtailment of the Company's defined benefit pension plan.\nINTEREST EXPENSE. Interest expense of $23,729,000 in 1993 decreased $4,071,000 or 15% compared to 1992, primarily due to redemptions or purchases of certain of the Company's subordinated debentures and 12 3\/4% Senior Secured Notes in 1993, partially offset by the interest expense incurred in connection with the Company's new 11 1\/4% Senior Subordinated Notes. Interest expense of $27,800,000 in 1992 increased $4,494,000 or 19% compared to 1991 due to increased indebtedness in the form of a dollar-denominated production payment related to the acquisition of properties.\nDEPRECIATION AND DEPLETION EXPENSE. Depreciation and depletion expense increased 30% to $60,581,000 in 1993 from $46,624,000 in 1992 due to increased production in the 1993 period as a result of property acquisitions and workovers. Depreciation and depletion expense increased 22% to $46,624,000 in 1992 from $38,229,000 in 1991 due to increased production volumes despite a slightly lower rate per MCFE. The depletion rate was $1.19 per MCFE for U.S. production in 1993 compared to corresponding rates of $1.21 for U.S. production and $1.19 for Canadian production in 1992 and $1.28 for U.S. production and $1.37 for Canadian production in 1991.\nIMPAIRMENT OF OIL AND GAS PROPERTIES. The Company recorded a writedown of its oil and gas properties of $34,000,000 in 1991 due to the poor results of the Company's 1990 exploration program and depressed natural gas prices.\nAdditional writedowns of the full cost pools may be required if prices decrease, estimated proved reserve volumes are revised downward or costs incurred in exploration, development or acquisition activities exceed the discounted future net cash flows from additional reserves, if any.\nThe average spot market price received by the Company for Gulf Coast natural gas production was approximately $2.48 per MCF at December 31, 1993. The West Texas Intermediate price for crude oil received by the Company was $12.00 per barrel at December 31, 1993. The average Gulf Coast spot price received by the Company for natural gas declined from $2.48 per MCF at December 31, 1993 to $2.46 per MCF at March 1, 1994. The West Texas Intermediate price for crude oil increased from $12.00 per barrel at December 31, 1993 to $13.00 per barrel at March 1, 1994.\nINVESTMENT IN AND ADVANCES TO AFFILIATE. In May 1992, the Company transferred substantially all of its Canadian oil and gas properties to a wholly-owned Canadian subsidiary, Forest Canada I Development Ltd. (FCID). On September 30, 1992 FCID sold its Canadian assets and related operations to CanEagle for approximately $51,250,000 in Canadian funds ($41,000,000 U.S.). An independent third party financed the purchase by CanEagle. In the transaction, FCID received cash of approximately $28,000,000 CDN ($22,400,000 U.S.), net of expenses, and provided financing to the third party in the aggregate principal amount of $22,000,000 CDN ($17,600,000 U.S.).\nCanEagle's capital was restructured in 1993. At December 31, 1993, the Company's ownership interest in CanEagle consisted of 15,400,000 shares of Class A Preferred Shares and 1,400,000 shares of Class B Preferred Shares of CanEagle and a $6,000,000 CDN subordinated debenture.\nSubstantial uncertainty exists regarding whether CanEagle is a going concern due to a required principal payment of $16,300,000 on its Senior Debenture due June 30, 1994. CanEagle is in the process of refinancing the Senior Debenture with its lender, but there is no assurance that such refinancing can be completed on mutually acceptable terms prior to the due date.\nNo gain was recognized as a result of the CanEagle transaction because collection of the remaining sales price was not reasonably assured. Due to its continuing financial interest in CanEagle, the Company is accounting for its investment in CanEagle under the equity method. Accordingly, losses will be recognized to the extent that such losses exceed (a) amounts attributable to securities subordinate to the Company's interest, and (b) a basis difference of $780,000 CDN attributable to the 1993 capital restructuring of CanEagle. Under this method, no portion of the CanEagle loss was required to be recorded by the Company in 1993.\nEarnings related to the Company's interest in CanEagle will be recognized only if realization is assured. Accordingly, amounts received as interest on the subordinated note during 1993 (approximately $540,000 CDN) were recorded as a reduction of the Company's investment in and advances to CanEagle. There were no dividends received in 1993.\nThe excess of the carrying value of properties sold over the cash received, or approximately $16,451,000 U.S. at December 31, 1993, represents Forest's investment in CanEagle.\nCHANGES IN ACCOUNTING\nStatement of Financial Accounting Standards No. 106, \"Employers' Accounting for Postretirement Benefits Other Than Pensions,\" (SFAS No. 106) required the Company to accrue expected costs of providing postretirement benefits to employees and the employees' beneficiaries and covered dependents. The Company adopted the provisions of SFAS No. 106 in the first quarter of 1993. The accumulated postretirement benefit obligation as of January 1, 1993 was approximately $4,822,000. This amount, reduced by applicable income tax benefits, was charged to operations in the first quarter of 1993 as the cumulative effect of a change in accounting principle. The annual net postretirement benefit cost (included in total overhead costs) was approximately $480,000 for 1993.\nStatement of Financial Accounting Standards No. 109, \"Accounting for Income Taxes,\" (SFAS No. 109), required the Company to adopt the liability method of accounting for income taxes. The Company adopted such method on a prospective basis as of January 1, 1993 and, as such, prior periods have not been restated. The cumulative effect of adopting SFAS No. 109 as of January 1, 1993 resulted in a reduction of the net amount of deferred income taxes recorded as of December 31, 1992 of approximately $2,060,000. This amount was credited to operations in the first quarter of 1993 as the cumulative effect of a change in accounting principle.\nCAPITAL RESOURCES AND LIQUIDITY\nCASH FLOW. Historically, one of the Company's primary sources of capital has been net cash provided by operating activities, which has varied dramatically in the last three years. The majority of the increases and decreases in net cash provided by operating activities is attributable to increases and decreases in oil and gas revenue. While expenses associated with operations have been relatively stable, revenue from operations has varied dramatically each year depending upon factors such as natural gas contract settlements and price fluctuations, which are difficult to predict.\nThe following summary table reflects comparative cash flows for the Company for the periods ended December 31, 1993, 1992 and 1991:\nSHORT-TERM LIQUIDITY AND WORKING CAPITAL DEFICIT. In December 1993, the Company entered into a secured master credit facility (the Credit Facility) with The Chase Manhattan Bank, NA. (Chase) as agent for a group of banks. Under the Credit Facility, the Company may borrow up to $17,500,000 for acquisition or development of proved oil and gas reserves, which amount is subject to semi- annual redetermination, and up to $17,500,000 for working capital and general corporate purposes. The Credit Facility is secured by a lien on, and a security interest in, a majority of the Company's proved oil and gas properties and related assets (subject to prior security interests granted to holders of volumetric production payment agreements), a pledge of accounts receivable, material contracts and the stock of material subsidiaries, and a negative pledge on remaining assets. Borrowings under the Credit Facility bear interest at the Chase base rate plus 3\/8 of 1% or 1,2,3 or 6 month LIBOR plus 1 and 5\/8%, payable quarterly. A commitment fee of 1\/2 of 1% is charged on unused availability. The maturity date of the Credit Facility is December 31, 1996. Under the terms of the Credit Facility, the Company is subject to certain covenants, including restrictions or requirements with respect to working capital, net cash flow, additional debt, asset sales, mergers, cash dividends on capital stock and reporting responsibilities. At December 31, 1993 the outstanding balance under this facility was $25,000,000.\nDue to the significant capital requirements of acquisition and development activities undertaken in December 1993, the Company reported a working capital deficit of $14,496,000 at December 31, 1993. The Company did not meet the test imposed by the working capital covenant of the Credit Facility; compliance with this covenant was waived by Chase at December 31, 1993. The deficit was funded in the first quarter of 1994 primarily by additional borrowings of $9,000,000 under the Credit Facility, net proceeds of $2,600,000 from the sale of non- strategic oil and gas properties, and a short-term loan from The Chase Manhattan Bank, N.A. of $4,000,000 secured by a pledge of the Company's CanEagle securities. These cash inflows, in addition to cash provided by operating activities, enabled the Company to meet its obligations with respect to principal and interest payments and other short-term obligations. The Company currently has no additional borrowing capacity under the Credit Facility.\nThe Company continues to explore additional sources of short-term liquidity to fund its working capital deficits, including an increase in the Credit Facility, sale of additional non-strategic properties and excess equipment, monetization of its investment in and advances to CanEagle and other measures. Expected increases in operating\ncash flows from recent property acquisitions are also expected to improve the Company's short-term liquidity, although there can be no assurance that this will be the case due to uncertainties in the markets for oil and natural gas and the unpredictability inherent in oil and gas operations.\nLONG-TERM LIQUIDITY. Since 1991, the Company has taken several significant steps to improve its long-term liquidity. In 1991, the Company consummated its recapitalization pursuant to which the Company's outstanding debt and preferred stock were restructured in order to reduce its fixed financial costs. The Company also undertook certain actions in 1991 to implement its operating strategy, to control and reduce its operating costs, and to improve its operating efficiency. The Company continues to devote significant efforts in these areas.\nOn December 24, 1992, the Company received gross proceeds of $51,250,000 as a result of the ONEOK settlement. The net proceeds, after payment of related royalties and production taxes, were approximately $36,429,000. Pursuant to the terms of its 12 3\/4% Senior Secured Notes, the Company was required to make an offer to purchase $16,000,000 principal amount of the 12 3\/4% Senior Secured Notes at a purchase price of 100% of their principal amount plus accrued interest to the date of purchase. Pursuant to such offer, the Company purchased approximately $3,926,000 principal amount of 12 3\/4% Senior Secured Notes in February, 1993. The remainder of the net proceeds were used for general corporate purposes, including working capital, debt reduction and the acquisition of oil and gas properties.\nOn June 15, 1993, the Company issued 11,080,000 shares of Common Stock for $5.00 per share in a public offering. The net proceeds from the issuance of the shares totalled approximately $51,506,000 after issuance costs and underwriting fees, of which the Company used approximately $30,300,000 to purchase or redeem 12 3\/4% Senior Secured Notes. The remainder of the net proceeds was used for general corporate purposes, including working capital, debt reduction and the acquisition of oil and gas properties.\nOn September 8, 1993, the Company completed a public offering of $100,000,000 aggregate principal amount of 11-1\/4% Senior Subordinated Notes due September 1, 2003. The 11 1\/4% Senior Subordinated Notes were issued at a price of 99.259% yielding 11.375% to the holders. On October 13, 1993 the Company used the net proceeds from the sale of the 11 1\/4% Senior Subordinated Notes of approximately $95,827,000, together with approximately $19,400,000 of available cash, to redeem all of its outstanding 12 3\/4% Senior Secured Notes and long-term subordinated debentures.\nOn November 9, 1993, the Company purchased $308,000 principal amount of its 5 1\/2% Convertible Subordinated Debentures. The remaining $7,171,000 principal amount of the 5 1\/2% Debentures was redeemed February 1, 1994.\nOn December 30, 1993, the Company entered into a nonrecourse secured loan agreement (the Enron loan) arranged by Enron Finance Corp., an affiliate of Enron Gas Services. For a further discussion of the Enron loan, see \"Nonrecourse Secured Loan and Dollar-Denominated Production Payment\" below. This financing provided acquisition capital, and capital to execute Forest's exploitation strategy.\nMany of the factors which may affect the Company's future operating performance and long-term liquidity are beyond the Company's control, including, but not limited to, oil and natural gas prices, governmental actions and taxes, the availability and attractiveness of properties for acquisition, the adequacy and attractiveness of financing and operational results.\nVOLUMETRIC PRODUCTION PAYMENTS. Through December 31, 1993, the Company received approximately $134,705,000 (net of fees) from the sale of volumetric production payments and, in return, committed to deliver from the subject properties approximately 77.4 BCF of natural gas and 770,000 barrels of oil to entities associated with Enron Corp. (Enron). As of December 31, 1993, the volumes remaining to be delivered were approximately 36.3 BCF of natural gas and 479,000 barrels of oil. Amounts received for volumetric production payments are recorded as deferred revenue, which is amortized as sales are recorded based upon the scheduled deliveries under the production payment agreements.\nThe purchaser of a volumetric production payment determines the amount paid to the Company for the production payment by calculating the net present value of the scheduled deliveries priced using the purchaser's assumed future prices. However, the sales price per MCFE recorded by the Company upon delivery of production payment volumes is determined by dividing the net proceeds from the sale of the production payment by the total volumes scheduled to be delivered. This price is therefore fixed at the inception of the production payment and does not change. There is no interest expense recorded with respect to a volumetric production payment, the interest factor having been effectively netted against the calculated sales price. In addition, the Company must pay applicable royalties on volumes delivered and is responsible for production- related costs associated with operating the properties subject to the production payment agreements. These accounting treatments should be considered when assessing the Company's financial statements and related information, including information presented with respect to cash flows and average prices for volumes sold under fixed contracts.\nDeferred revenue relating to production payments was $67,228,000 as of December 31, 1993. The annual amortization of deferred revenue and the corresponding delivery and net sales volumes are set forth below:\nNONRECOURSE SECURED LOAN AND DOLLAR-DENOMINATED PRODUCTION PAYMENT. Under the terms of the Enron loan agreement and a dollar-denominated production payment sold in February 1992 in connection with the acquisition of the Harbert Energy Corporation properties, the Company is required to make payments based on the net proceeds, as defined, from certain subject properties.\nAs of December 31, 1993, the Enron loan of $57,400,000, which bears annual interest at the rate of 12.5%, was recorded at $53,101,000 to reflect the conveyance to the lender of a 20% interest in the net profits, as defined, of the Loma Vieja properties. Under the terms of the Enron loan, additional funds may be advanced to fund a portion of the development projects which will be undertaken by the Company on the properties pledged as security for the loan. Payments of principal and interest under the Enron loan are due monthly and are equal to 90% of total net operating income from the secured properties, reduced by 80% of allowable capital expenditures, as defined. The Company's current estimate is that 1994 payments will reduce the recorded liability by approximately $983,000. Payments, if any, under the net profits conveyance will commence upon repayment of the principal amount of the Enron loan and will cease when the lender has received an internal rate of return, as defined, of 18% (15.25% through December 31, 1995). Properties to which approximately 22% of the Company's estimated proved reserves are attributable, on an MCFE equivalent basis, are dedicated to repayment of the Enron loan.\nThe original amount of the dollar-denominated production payment was $37,550,000, which was recorded as a liability of $28,805,000 after a discount to reflect a market rate of interest. At December 31, 1993 the remaining recorded liability was $21,305,000. Under the terms of the dollar-denominated production payment, the Company must make a monthly cash payment which is the greater of a base amount or 85% of the net proceeds from the subject properties, as defined, except that the amount required to be paid in any given month shall not exceed 100% of the net proceeds from the subject properties. The Company's current estimate is that 1994 payments will\nreduce the recorded liability by approximately $3,388,000. Properties to which approximately 7% of the Company's estimated proved reserves are attributable, on an MCFE basis, are dedicated to this production payment financing through July 1999.\nHEDGING PROGRAM. In addition to the volumes of natural gas and oil dedicated to volumetric production payments, the Company has also used energy swaps and other financial agreements to hedge against the effects of fluctuations in the sales prices for oil and natural gas. In a typical swap agreement, the Company receives the difference between a fixed price per unit of production and a price based on an agreed upon third-party index if the index price is lower. If the index price is higher, the Company pays the difference. The Company's current swaps are settled on a monthly basis. At December 31, 1993 the Company had natural gas swaps for an aggregate of approximately 30 MMBTU per day of natural gas during 1994 at fixed prices ranging from $1.90 to $2.30 per MMBTU. At December 31, 1993 the Company had no oil swaps in place.\nOPTION AGREEMENT. Under another agreement (the Option Agreement), the Company paid a premium of $516,000 in conjunction with the closing of the Enron loan agreement. The payment of this premium gives Forest the right to set a floor price of $1.70 per MMBTU on a total of 18.4 BBTU of natural gas over a five year period commencing January 1, 1995. In order to exercise this right to set a floor, the Company must pay an additional premium of 10 CENTS per MMBTU, effectively setting the floor at $1.60 per MMBTU. The premium of $516,000 related to the Option Agreement was recorded as a long-term asset and will be amortized as a reduction to oil and gas income beginning in 1995 based on the volumes involved.\nTRIGGER AGREEMENTS. Two trigger agreements were entered into during 1993. Under a \"trigger\" agreement, the Company agrees to enter into a swap agreement at a later date based upon a specified margin over an agreed-upon third party index. One agreement originally entered into in July 1993 obligated the Company to enter into a gas swap arrangement in 1994. This agreement was terminated in December 1993, in exchange for which the Company will pay $0.2675 per MMBTU on 5,000 MMBTU per day for each contract month, which equates to $488,000. The discounted value of this amount, or $457,000, has been recorded as expense and as a liability at December 31, 1993 and will be paid in monthly installments of approximately $41,000 during 1994. The second trigger agreement was converted into a natural gas swap and is included in the natural gas swaps discussed above. The Company currently has no open trigger agreements.\nSUMMARY OF CASH FLOW CONSIDERATIONS AND EXPOSURE TO PRICE AND RESERVE RISK. Pursuant to certain of the Company's financing arrangements, significant amounts of production are contractually dedicated to production payments and the repayment of nonrecourse debt over the next five years (dedicated volumes). The dedicated volumes decrease over the next five years and also decrease as a percentage of the Company's total production during this period. The production volumes not contractually dedicated to repayment of nonrecourse debt (undedicated volumes) are relatively stable but increase as a percentage of the Company's total production over the next five years. This relative stability of undedicated volumes is due to the fact that the decrease in dedicated volumes corresponds generally to the Company's estimates of the decrease in its total production. In the Company's opinion, the relative stability of undedicated volumes should provide a more constant level of cash flow available for corporate purposes other than debt repayment. The following table presents, on a percentage basis, the Company's estimates of dedicated and undedicated volumes as a percentage of estimated total production:\nAs a result of volumetric production payments, energy swaps, and fixed contracts, the Company currently estimates that approximately 62% of its natural gas production and 15% of its oil production will not be subject to price fluctuations from January 1994 through December 1994. Existing hedge agreements currently cover approximately 42% of the Company's natural gas production and 12% of its oil production for the year ending\nDecember 31, 1995. Currently, it is the Company's intention to commit no more than 75% of its production to such arrangements at any point in time. See \"Hedging Program\" below.\nThe Company's hedging strategy for dedicated volumes differs from that for undedicated volumes. The Company believes that hedging of dedicated volumes provides for greater assurance of debt repayment and decreased financial risk. The Company believes that hedging undedicated volumes is also warranted in order to facilitate its short-term planning and budgeting. The Company has not hedged significant amounts of undedicated volumes beyond 24 months. The Company may consider long-term hedging of undedicated volumes in the future if product prices rise to significantly higher levels. The Company believes that stability of cash flow should be considered by separately reviewing its hedge position relative to dedicated volumes and undedicated volumes. The following table reflects the estimated hedge position as a percentage of the Company's undedicated volumes:\nThe Company believes it is important to hedge volumes dedicated to production payments or required to repay debt. The following table reflects the estimated hedge position as a percentage of the Company's dedicated volumes. (Volumes dedicated to volumetric production payments are treated as hedged for purposes of this presentation):\nEstimates of commercially recoverable oil and gas reserves and of the future net cash flows therefrom are based upon a number of variable factors and assumptions, such as historical production from the subject properties, comparison with other producing properties, the assumed effects of regulation by governmental agencies and assumptions concerning future oil and gas prices and future operating costs, severance and excise taxes, abandonment costs, development costs and workover and remedial costs, all of which may in fact vary considerably from actual results. All such estimates are to some degree speculative. Actual production, revenues, severance and excise taxes, development expenditures, workover and remedial expenditures, abandonment expenditures and operating expenditures with respect to the Company's reserves will likely vary from such estimates, and such variances may be material.\nCAPITAL EXPENDITURES. In 1991, the Company implemented its capital investment strategy of acquiring proved properties. During 1992 and 1993, the Company completed six major acquisitions under this strategy. The Company's expenditures for property acquisition, exploration and development for the past three years, including overhead related to these activities which was capitalized, were as follows:\nIn 1993, the Company's property acquisition expenditures of $144,916,000 resulted in proved reserve additions of an estimated 94.7 BCF of natural gas and 1.7 million barrels of oil, as measured at the closing dates of the acquisitions for financial accounting purposes, as well as eight exploitation prospects and three exploratory offshore blocks. In 1992, the Company's property acquisition expenditures, as measured at the closing dates, of $88,772,000 resulted in proved reserve additions of an estimated 63 BCF of natural gas and 5.8 million barrels of oil, including reserves acquired as a result of gas balancing settlements.\nFor the year ended December 31, 1993, finding costs were $1.26 per MCFE and reserve replacement was 271%. This compares to $1.20 and 235% in 1992 and $1.56 and 79% in 1991. Finding costs are the total costs incurred in oil and gas acquisition, exploration and development activities, including capitalized overhead, for any period, divided by net additions to proved reserves on an MCFE basis (including revisions, extensions and discoveries and purchases of reserves in place) for such period. Reserve replacement represents estimated proved reserve additions as a percentage of production before taking into account sales of oil and gas reserves in place.\nIt is currently anticipated that the Company's 1994 expenditures for exploration and development will be approximately $3,900,000, and $24,300,000, respectively, including capitalized overhead of $900,000 and $5,600,000, respectively. Under the terms of the Enron loan, 80% of direct development expenditures on the properties subject to the loan reduce payments which would otherwise be due; however, planned levels of capital expenditures may still be restricted if the Company experiences lower than anticipated net cash provided by operations or other liquidity problems.\nDuring 1994, the Company intends to aggressively pursue a strategy of acquiring reserves; however, no assurance can be given that the Company can locate or finance any property acquisitions. In order to finance future acquisitions, the Company is exploring many options including, but not limited to: a variety of debt instruments; the issuance of net profits interests; sales of non-strategic properties, prospects and technical information; joint venture financing; the issuance of common or preferred equity of the Company; sale of production payments and other nonrecourse financing; as well as additional bank financing. Availability of these sources of capital will depend upon a number of factors, some of which are beyond the control of the Company.\nDIVIDENDS. To increase liquidity and fund a portion of its capital budget, the Company deferred payment of dividends on its $15.75 Redeemable Preferred Stock and its $2.125 Convertible Preferred Stock throughout 1991. All dividend arrearages were eliminated at the end of 1991 when the $15.75 Redeemable Preferred Stock and $2.125 Convertible Preferred Stock were recapitalized.\nThroughout most of 1991, the Company did not have the legal ability under the NYBCL to pay dividends. Upon completion of the recapitalization, this restriction was removed and the Company once again has the legal ability under the NYBCL to pay dividends, although it is subject to certain restrictive provisions in the Indenture executed in connection with the 11 1\/4% Senior Subordinated Notes due 2003 and in the Credit Facility. The Company was required to pay dividends, when and if declared, on its $.75 Convertible Preferred Stock in shares of Common Stock through 1993. On February 1, 1994, a cash dividend of $.1875 on its $.75 Convertible Preferred Stock was paid to holders of record on January 14, 1994. On February 20, 1994 the Board of Directors declared a cash dividend of $.1875 on the $.75 Convertible Preferred Stock, payable May 1, 1994 to holders of record on April 8, 1994. For further information concerning dividends, see Item 5. Market for Registrant's Common Equity and Related Stockholder Matters and Notes 4, 6, 9 and 10 of Notes to Consolidated Financial Statements.\nOTHER MATTERS\nGAS BALANCING. It is customary in the industry for various working interest partners to produce more or less than their entitlement share of natural gas from time to time. During 1993, the Company's net overproduced position decreased from approximately 13 BCF to approximately 10 BCF. In 1992, the Company's net overproduced position decreased from approximately 16 BCF to approximately 13 BCF. In 1991, the Company's net overproduced position did not change appreciably due to the offseting effects of gas balancing settlements and production in excess of entitlements. The Company has entered into gas balancing agreements for most of its imbalance position and currently estimates that approximately 3 BCF and 2 BCF will be repaid in 1994 and 1995 under such agreements. In the absence of a gas balancing agreement, the Company is unable to determine when its partners may choose to make up their share of production. If and when the Company's partners do make up their share of production, the Company's deliverable natural gas volumes could decrease, adversely affecting revenue and cash flow. For futher information, see Note 1 of Notes to Consolidated Financial Statements.\nUNFUNDED PENSION LIABILITIES. In 1993, in response to market conditions, the Company lowered from 9% to 7.5% the discount rate used in determining the actuarial present value of the projected benefit obligations under its qualified defined benefit trusteed pension plan and its supplemental executive retirement plan. As a result of the change in the discount rate, the Company recorded a liability of $3,038,000 representing the unfunded liabilities of these plans and a corresponding decrease in capital surplus. The Company does not expect the change in discount rate to have a significant impact on future expense due to a pension plan curtailment effected May 31, 1991. The Company currently is not required to make a contribution to the pension plan under the minimum funding requirements of ERISA, but may choose to do so or be required to do so in the future.\nNATURAL GAS SALES CONTRACTS. The Company had two natural gas sales contracts with Columbia Gas Transmission Corp. (Transmission), a subsidiary of Columbia Gas System (CGS). On July 31, 1991, CGS and Transmission filed Chapter 11 bankruptcy petitions with the United States Bankruptcy Court for the District of Delaware. Both contracts have been rejected pursuant to the bankruptcy proceedings. The Company has filed a proof of claim in the bankruptcy proceeding consisting of a secured claim of $1,600,000 based on Louisiana vendor lien laws and an unsecured claim relating to the rejection of the contracts. The secured claim arises from Transmission's failure to pay the contract price for a period of time prior to rejection of the contracts. The unsecured claim was calculated on an undiscounted basis and without any assumption of mitigation of damages through spot market sales. No prediction can be given as to when or how these matters will ultimately be concluded.\nNET OPERATING LOSS AND TAX CREDIT CARRYFORWARDS. At December 31, 1993, the Company estimated that for United States federal income tax purposes, it had consolidated net operating loss carryforwards of $28,439,000, depletion carryforwards of approximately $20,174,000 and investment tax credit carryforwards of approximately $3,885,000. The availability of some of these tax attributes to reduce current and future taxable income of the\nCompany is subject to various limitations under the Internal Revenue Code of 1986, as amended (the Code). In particular, the Company's ability to utilize such tax attributes could be severely restricted due to the occurrence of an \"ownership change\" within the meaning of Section 382 of the Code resulting from the 1991 recapitalization. At December 31, 1993, the Company estimated that net operating loss and investment tax credit carryforwards would be limited to offset current taxable income to the extent described below.\nThe net operating loss carryforwards, which expire in 2008, are not subject to the provisions of Section 382 as they were generated subsequent to the ownership change. Even though the Company is limited in its ability to use the remaining net operating loss carryforwards under the general provisions of Section 382, it may be entitled to use these net operating loss carryovers to offset (a) gains recognized in the five years following the ownership change on the disposition of certain assets, to the extent that the value of the assets disposed of exceeds its tax basis on the date of the ownership change or (b) any item of income which is properly taken into account in the five years following the ownership change but which is attributable to periods before the ownership change (\"built-in gain\"). The ability of the Company to use these net operating loss carryovers to offset built-in gain first requires that the Company have total built-in gains at the time of the ownership change which are greater than a threshold amount. In addition, the use of these net operating loss carryforwards to offset built-in gain cannot exceed the amount of the total built-in gain.\nThe Company believes that due to the amount of built-in gain as of the date of ownership change, and the recognition of such gain through December 31, 1993, that there will be no significant limitation on the Company's ability to use these net operating loss carryforwards or investment tax credit carryforwards.\nCHANGE IN FEDERAL CORPORATE INCOME TAX RATES. The Omnibus Budget Reconciliation Act of 1993 increased the federal corporate tax rate from 34% to 35% retroactively to January 1, 1993. As a result of this tax increase, the tax benefit at December 31, 1993 on the loss from continuing operations was approximately $167,000 less than it would have been without such increase in the tax rate. However, due to limitations on the recognition of deferred tax assets under FAS 109, the total tax benefit at December 31, 1993, including the tax benefit on the extraordinary loss on extinguishment of debt, is unaffected by the tax rate increase. The impact of the tax rate increase on the Company's total tax expense will be recognized when future taxable income absorbs the present unrecognized deferred tax asset.\nACCOUNTING POLICIES. In November 1992, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 112, \"Employers' Accounting for Postemployment Benefits\" (SFAS No. 112). This statement requires the accrual of the estimated cost of certain postemployment benefits provided to former employees. SFAS No. 112 is effective for years beginning after December 15, 1993. The initial effect of applying this statement is to be accounted for as a cumulative effect of a change in accounting principle. The Company has not determined precisely what effect, if any, the adoption of SFAS No. 112 will have on its financial statements, but believes the effect will be immaterial because the Company has already recorded liabilities for any of the affected costs that would be significant.\nITEM 8.","section_7A":"","section_8":"ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA\nInformation concerning this Item begins on the following page.\nITEM 9.","section_9":"ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE\nNone.\nINDEPENDENT AUDITORS' REPORT\nThe Board of Directors and Shareholders Forest Oil Corporation:\nWe have audited the accompanying consolidated balance sheets of Forest Oil Corporation and subsidiaries as of December 31, 1993 and 1992, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1993. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.\nWe conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.\nIn our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Forest Oil Corporation and subsidiaries as of December 31, 1993 and 1992, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1993 in conformity with generally accepted accounting principles.\nAs discussed in Notes 8 and 13 to the consolidated financial statements, the Company adopted the provisions of Financial Accounting Standards Board Statement of Financial Accounting Standards No. 109, \"Accounting for Income Taxes\" and Statement of Financial Accounting Standards No. 106, \"Employers' Accounting for Postretirement Benefits Other Than Pensions\" in 1993.\nKPMG PEAT MARWICK\nDenver, Colorado February 22, 1994\nFOREST OIL CORPORATION CONSOLIDATED BALANCE SHEETS\nSee accompanying notes to consolidated financial statements\nFOREST OIL CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS\nSee accompanying notes to consolidated financial statements\nFOREST OIL CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY\nSee accompanying notes to consolidated financial statements\nFOREST OIL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS\nSee accompanying notes to consolidated financial statements.\n(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: - --------------------------------------------------------------------------------\nBASIS OF CONSOLIDATION - The consolidated financial statements include the accounts of Forest Oil Corporation (the Company) and its wholly-owned subsidiaries. Significant intercompany balances and transactions are eliminated. The Company's investment in CanEagle Resources Corporation (CanEagle) is accounted for using the equity method (See Note 3).\nCASH EQUIVALENTS - For purposes of the statements of cash flows, the Company considers all debt instruments with original maturities of three months or less to be cash equivalents.\nPROPERTY AND EQUIPMENT - The Company uses the full cost method of accounting for oil and gas properties. Separate cost centers are maintained for each country in which the Company has operations. All costs incurred in the acquisition, exploration and development of properties (including costs of surrendered and abandoned leaseholds, delay lease rentals, dry holes and overhead related to exploration and development activities) are capitalized. Costs applicable to each cost center, including capitalized costs as wells as estimated costs of future development, surrender and abandonment, are depleted using the units of production method. Unusually significant investments in seismic data and unproved properties, including related capitalized interest costs, are not depleted pending the determination of the existence of proved reserves and the commencement of sales from the properties. As of December 31, 1993 and 1992, there were undeveloped property costs of $41,216,000 and $18,306,000, respectively, in the United States which were not being depleted, all of which relate to property acquisitions in 1992 and 1993. At December 31, 1991 there were no costs in any cost centers which were not subject to depletion.\nDepletion per unit of production was determined based on conversion to common units of measure using one barrel of oil as an equivalent to six MCF of natural gas. Depletion per unit of production (MCFE) for each of the Company's cost centers was as follows:\nUNITED STATES CANADA ------------- ------\n1993 $ 1.19 - 1992 1.21 1.19 1991 1.28 1.37\nCapitalized costs less related accumulated depletion and deferred income taxes may not exceed the sum of (1) the present value of future net revenue from estimated production of proved oil and gas reserves; plus (2) the cost of properties not being amortized, if any; plus (3) the lower of cost or estimated fair value of unproved properties included in the costs being amortized, if any; less (4) income tax effects related to differences in the book and tax basis of oil and gas properties. As a result of this limitation on capitalized costs of each of the cost centers, the accompanying financial statements include a provision for impairment of oil and gas property costs of $15,000,000 in the United States and $19,000,000 in Canada in 1991. There was no impairment of oil and gas property costs required to be recorded in 1993 or 1992.\nNo gain or loss is recognized on the sale of oil and gas properties except in the case of properties involving significant remaining reserves. Proceeds from sales of insignificant reserves and undeveloped properties are applied to reduce the costs in the cost centers.\nBuildings, transportation and other equipment are depreciated on the straight- line method based upon estimated useful lives of the assets ranging from five to forty-five years.\n(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D): - --------------------------------------------------------------------------------\nINCOME TAXES - The adoption of Statement of Financial Accounting Standards No. 109, \"Accounting for Income Taxes\" (SFAS No. 109), effective January 1, 1993 changed the Company's method of accounting for income taxes from the deferred method to an asset and liability method. Previously, the Company deferred the tax effects of timing differences between financial reporting and taxable income. The asset and liability method requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between tax bases and financial reporting bases of all other assets and liabilities. Temporary differences are principally the result of certain development, exploration and other costs which are deducted for income tax purposes but capitalized for financial accounting purposes.\nFOREIGN CURRENCY TRANSLATION - Balance sheet accounts of Canadian activities are translated into United States dollars using the year-end exchange rates. Income and expense items have been translated at rates applicable during each year. Adjustments resulting from these translations are accumulated in a separate component of shareholders' equity.\nGAS REVENUE - The Company uses the sales method of accounting for amounts received from natural gas sales. Under this method, all proceeds from production credited to the Company are recorded as revenue until such time as the Company has produced its share of related estimated remaining reserves. Thereafter, additional amounts received are recorded as a liability.\nAs of December 31, 1993 the Company had produced approximately 10 BCF more than its entitled share of production. The undiscounted value of this imbalance is approximately $17,000,000 using the lower of the price received for the natural gas, the current market price or the contract price, as applicable. Amounts received for approximately 7 BCF of this production have been recorded as revenue and as reductions of the Company's reserve quantities and reserve values described in Note 19. Amounts received for the remaining 3 BCF of this production have been recorded as a liability as this volume exceeds the Company's share of the related estimated remaining reserves. The liability is recorded in accordance with the settlement provisions of the applicable gas balancing agreements and amounted to approximately $3,887,000 at December 31, 1993.\nENERGY SWAPS AND OTHER FINANCIAL ARRANGEMENTS - In order to hedge against the effects of declines in oil and natural gas prices, the Company enters into energy swap agreements and other financial arrangements with third parties. In a typical swap agreement, the Company receives the difference between a fixed price per unit of production and a price based on an agreed-upon third party index if the index price is lower. If the index price is higher, the Company pays the difference. The Company's current swaps are settled on a monthly basis. For the years ended December 31, 1993, 1992 and 1991, the Company incurred swap gains (losses) of $(2,050,000), $(1,642,000) and $3,564,000, respectively. The Company recognizes gains or losses on such agreements as adjustments to revenue recorded for the related production.\nEARNINGS (LOSS) PER SHARE - Primary earnings (loss) per share is computed by dividing net earnings (loss) attributable to common stock by the weighted average number of common shares and common share equivalents outstanding during each period, excluding treasury shares. Net earnings (loss) attributable to common stock represents net earnings (loss) less preferred stock dividend requirements of $2,250,000 in 1993, $2,348,000 in 1992, and $5,209,000 in 1991. Common share equivalents include, when applicable, dilutive stock options and warrants using the treasury stock method.\nFully diluted earnings per share assumes, in addition to the above, (i) that convertible debentures were converted at the beginning of each period or date of issuance, if later, with earnings being increased for interest expense, net of taxes, that would not have been incurred had conversion taken place, (ii) that convertible preferred stock was converted at the beginning of each period or date of issuance, if later, and (iii) the additional dilutive effect of stock options and warrants. The effects of these assumptions were anti-dilutive in 1993 and 1991. The weighted average number of shares outstanding on a fully- diluted basis was 26,515,000 for the year ended December 31, 1992.\n(2) ACQUISITIONS: - --------------------------------------------------------------------------------\nOn May 18, 1993 and December 10, 1993, the Company purchased interests in properties from Atlantic Richfield Company (ARCO) for approximately $60,862,000.\nIn conjunction with the acquisitions, the Company sold volumetric production payments from certain of the ARCO properties for approximately $40,468,000 (net of fees). On December 14, 1993, the Company purchased interests in offshore properties in the West Cameron\/Eugene Island area from a private company for approximately $24,050,000. On December 30, 1993, the Company purchased interests in properties in the Loma Vieja field in south Texas for approximately $59,458,000. In conjunction with the acquisitions, the Company entered into a nonrecourse secured loan agreement for $51,600,000. The remainder of the purchase price for these two acquisitions, $31,908,000, was financed through internal funds and from funds obtained under the Company's secured master credit facility. The Company's results of operations for the year ended December 31, 1993 include the effects of the first ARCO acquisition since May 1, 1993 and the West Cameron\/Eugene Island properties and the second ARCO acquisition since December 1, 1993.\nOn February 1, 1992, Forest I Development Company, a wholly-owned subsidiary of the Company, purchased substantially all of the assets of Harbert Energy Corporation and its associated entities in an acquisition accounted for as a purchase. The purchase price of $40,400,000 consisted of payment of approximately $7,120,000 in cash (including acquisition costs), assumption by Forest of certain liabilities, and the sale of a dollar-denominated production payment which was recorded at its present value of $28,805,000. On July 31, 1992, the Company purchased Transco Exploration and Production Company (TEPCO) for approximately $45,000,000. In conjunction with the acquisition, the Company sold a volumetric production payment from certain of the TEPCO properties for approximately $38,500,000 (net of fees). In addition, the Company issued a $2,000,000 promissory note to Transco Energy Corporation as part of the purchase price. Approximately $4,062,000 was paid in cash, including acquisition costs. The Company's results of operations for the year ended December 31, 1992 include the effects of the Harbert and TEPCO acquisitions since February 1, 1992 and July 31, 1992, respectively.\n(3) INVESTMENT IN AND ADVANCES TO AFFILIATE: - --------------------------------------------------------------------------------\nIn May 1992, the Company transferred substantially all of its Canadian oil and gas properties to a wholly-owned Canadian subsidiary, Forest Canada I Development Ltd. (FCID). On September 30, 1992, FCID sold its Canadian assets and related operations to CanEagle for approximately $51,250,000 in Canadian funds ($41,000,000 U.S.). CanEagle was formed for the purpose of acquiring the assets and related operations of FCID. An independent third party financed the purchase by CanEagle. In the transaction, FCID received cash of approximately $28,000,000 CDN ($22,400,000 U.S.), net of expenses, and provided financing to the third party in the aggregate principal amount of $22,000,000 CDN ($17,600,000 U.S.).\nIn connection with the transaction, CanEagle issued to the third party (a) a $19,000,000 CDN senior debenture, secured by its oil and gas properties, (b) a $6,000,000 CDN subordinated debenture, secured by its oil and gas properties and subordinated to the senior debenture, (c) a $16,000,000 CDN senior subordinated note, unsecured and subordinated to the debentures, (d) convertible notes for $6,250,000 CDN, unsecured and subordinated to the debentures and the senior subordinated note, and (e) preferred stock for $4,000,000 CDN. A Canadian bank provided financing to the third party secured by a pledge of the senior debenture. Forest's financing to the third party is secured by a pledge of the subordinated debenture and the senior subordinated note. The notes received by Forest from the third party, the subordinated debenture and the senior subordinated note were due March 31, 1998 and bore interest at 9% per annum payable quarterly.\nAs part of the transaction, Forest retained 100% of the common equity of CanEagle and granted an option to a third party to purchase 80% of the common equity of CanEagle for nominal consideration. The original option lapsed unexercised in December 1992. Forest subsequently agreed to sell all of the common equity interest to the third party, subject to certain revisions to aspects of CanEagle's capital structure. This sale was completed on September 29, 1993 for nominal consideration.\n(3) INVESTMENT IN AND ADVANCES TO AFFILIATE (CONT'D): - --------------------------------------------------------------------------------\nOn September 29, 1993, Forest exchanged the $16,000,000 CDN senior subordinated note plus $780,000 CDN accrued interest thereon for 15,400,000 shares of Class A Preferred Shares and 1,400,000 shares of Class B Preferred Shares of CanEagle. The Class A and Class B Preferred Shares have liquidation preference rights of $1.00 CDN per share. The Class A Preferred Shares are entitled to annual fixed cumulative preferential cash dividends of $.03 per share, payable quarterly. Dividends may be paid through issuance of noninterest-bearing promissory notes due not later than September 30, 1998. Class B Preferred Shares are entitled to an annual $.03 fixed cumulative cash dividend payable only after all Class A Preferred Shares have been redeemed.\nCanEagle may redeem first the Class A and then the Class B Preferred Shares at $1.00 CDN per share plus all accumulated but unpaid dividends thereon at any time subsequent to issuance, on a pro rata basis from all holders of each issue, but is required to redeem all of the then outstanding shares of both issues on or before September 30, 1998.\nWhile any of the Class A and Class B Preferred Shares are outstanding, CanEagle is prohibited from making dividends or distributions on, or redeeming or purchasing any of its common shares, issuing any additional preferred shares, incurring any indebtedness other than as permitted under the restated articles of incorporation or undertaking certain other prohibited transactions unless unanimously approved by holders of the Class A shares.\nNo gain was recognized as a result of the CanEagle transaction because collection of the remaining sales price was not reasonably assured. Due to its continuing financial interest in CanEagle, the Company is accounting for its investment in CanEagle under the equity method. Accordingly, losses will be recognized to the extent that such losses exceed (a) amounts attributable to securities subordinate to the Company's interest, and (b) the basis difference of $780,000 CDN attributable to the 1993 capital restructuring of CanEagle. Under this method, no portion of the CanEagle loss was required to be recorded by the Company in 1993.\nEarnings related to the Company's interest in CanEagle will be recognized only if realization is assured. Accordingly, amounts received as interest on the subordinated note during 1993 (approximately $540,000 CDN) were recorded as a reduction of the Company's investment in and advances to CanEagle. No dividends were paid on the Class A Preferred Shares in 1993.\nThe excess of the carrying value of properties sold over the cash received, or approximately $16,451,000 U.S. at December 31, 1993, represents Forest's investment in CanEagle.\nIn March 1994, the Company pledged its CanEagle securities as collateral for a $4,000,000 loan from The Chase Manhattan Bank, NA due June 1, 1994.\n(3) INVESTMENT IN AND ADVANCES TO AFFILIATE (CONT'D): - --------------------------------------------------------------------------------\nCanEagle reports its annual results on a fiscal year ending on September 30. Condensed financial statement information for CanEagle as of September 30, 1993 and 1992 and for the year ended September 30, 1993 is as follows:\n(3) INVESTMENT IN AND ADVANCES TO AFFILIATE (CONT'D): - --------------------------------------------------------------------------------\nSubstantial uncertainty exists regarding whether CanEagle is a going concern due to the required principal payment of $16,300,000 on its Senior Debenture due June 30, 1994. CanEagle is in the process of refinancing the Senior Debenture with its lender, but there is no assurance that such refinancing can be completed on mutually acceptable terms prior to the due date. The above condensed financial statements do not include any adjustments relating to the ultimate outcome of this uncertainty.\nThe following information is presented in accordance with Statement of Financial Accounting Standards No. 69, \"Disclosure about Oil and Gas Producing Activities,\" (SFAS No. 69).\n(A) Unaudited information with respect to costs incurred by CanEagle for oil and gas exploration and development activities is as follows:\n(B) Unaudited information with respect to CanEagle's estimated proved oil and gas reserves at September 30, 1993 and 1992 follows. Such estimates are inherently imprecise and may be subject to substantial revisions.\n(3) INVESTMENT IN AND ADVANCES TO AFFILIATE (CONT'D): - --------------------------------------------------------------------------------\n(C) The standardized measure of discounted future net cash flows of CanEagle, calculated in accordance with the provisions of SFAS 69 is as follows:\n(4) LONG-TERM BANK DEBT: - --------------------------------------------------------------------------------\nIn December 1993, the Company entered into a secured master credit facility (the Credit Facility) with The Chase Manhattan Bank, NA. (Chase) as agent for a group of banks. Under the Credit Facility, the Company may borrow up to $17,500,000 for acquisition or development of proved oil and gas reserves, which amount is subject to semi-annual redetermination, and up to $17,500,000 for working capital and general corporate purposes. The Credit Facility is secured by a lien on, and a security interest in, a majority of the Company's proved oil and gas properties and related assets (subject to prior security interests granted to holders of volumetric production payment agreements), a pledge of accounts receivable, material contracts and the stock of material subsidiaries, and a negative pledge on remaining assets. Borrowings under the Credit Facility bear interest at the Chase base rate plus 3\/8 of 1% or 1,2,3 or 6 month LIBOR plus 1 and 5\/8%, payable quarterly. A commitment fee of 1\/2 of 1% is charged on unused availability. The maturity date of the Credit Facility is December 31, 1996. Under the terms of the Credit Facility, the Company is subject to certain covenants, including restrictions or requirements with respect to working capital, net cash flow, additional debt, asset sales, mergers, cash dividends on capital stock and reporting responsibilities.\nAt December 31, 1993 the outstanding balance under the credit facility was $25,000,000 at an interest rate of 6.375%. The Company did not meet the test imposed by the working capital covenant of the Credit Facility; compliance with this covenant was waived by Chase at December 31, 1993.\n(5) NONRECOURSE SECURED LOAN AND PRODUCTION PAYMENT OBLIGATION: - --------------------------------------------------------------------------------\nNONRECOURSE SECURED LOAN: On December 30, 1993, the Company entered into a nonrecourse secured loan agreement which bears annual interest at the rate of 12.5%, arranged by Enron Finance Corp., an affiliate of Enron Gas Services (the Enron loan). Approximately $51,600,000 was advanced on December 30, 1993 to provide financing for a portion of the West Cameron\/Eugene Island and Loma Vieja acquisitions. Another $5,800,000 of the available balance was advanced on December 30, 1993 to fund a portion of the development projects which will be undertaken by the Company on the properties pledged as security for the loan. Under the terms of the Enron loan, additional funds may be advanced to fund additional development projects which will be undertaken by the Company on the properties pledged as security for the loan. The loan amount of $57,400,000 was recorded as a liability of $53,101,000 to reflect conveyance to the lender of a 20% interest in the net profits, as defined, of the Loma Vieja properties. The loan discount of $4,299,000 will be amortized over the life of the loan using the effective interest method.\nPayments of principal and interest under the Enron loan are due monthly and are equal to 90% of total net operating income from the secured properties, reduced by 80% of allowable capital expenditures, as defined. The Company's current estimate, based on expected production and prices, budgeted capital expenditure levels and expected discount amortization, is that 1994 payments will reduce the recorded liability by approximately $983,000; this amount is included in current liabilities. Estimated liability reductions for 1995 through 1997,\n(5) NONRECOURSE SECURED LOAN AND PRODUCTION PAYMENT OBLIGATION (cont'd): - ------------------------------------------------------------------------------- under the same production, pricing, capital expenditure and amortization scenario, are $12,385,000, $20,485,000, and $19,248,000, respectively. Payments, if any, under the net profits conveyance will commence upon repayment of the principal amount of the Enron loan and will cease when the lender has received an internal rate of return, as defined, of 18% (15.25% through December 31, 1995). Properties to which approximately 22% of the Company's estimated proved reserves are attributable, on an MCF equivalent basis, are dedicated to repayment of the Enron loan.\nPRODUCTION PAYMENT OBLIGATION: The original amount of the dollar-denominated production payment was $37,550,000, which was recorded as a liability of $28,805,000 after a discount to reflect a market rate of interest of 15.5%. At December 31, 1993 the remaining recorded liability was $21,305,000. Under the terms of the dollar- denominated production payment agreement entered into in 1992 in connection with the Harbert acquisition, Forest I Development Company must make a monthly cash payment which is the greater of a base amount or 85% of net proceeds from the subject properties, as defined, except that the amount required to be paid in any given month shall not exceed 100% of the net proceeds from the subject properties. The Company's current estimate, based on expected production and prices, budgeted capital expenditure levels and expected discount amortization, is that 1994 payments will reduce the recorded liability by approximately $3,388,000; this amount is included in current liabilities. Estimated liability reductions for 1995 through 1998, under the same production, pricing, capital expenditure and discount scenario, are $1,949,000, $3,522,000, $4,492,000 and $2,340,000, respectively. Properties to which approximately 7% of the Company's estimated proved reserves are attributable, on an equivalent barrel basis, are pledged under the production payment financing through July 1999.\n(6) SENIOR SECURED NOTES AND SUBORDINATED DEBENTURES:\nSENIOR SECURED NOTES: The Senior Secured Notes were issued in 1991 in connection with the Company's recapitalization and were redeemed in full during 1993. Amounts outstanding at December 31, 1992 were as follows (In Thousands):\nAccretion of the original issue discount relating to the Senior Secured Notes was calculated using the effective interest method over the life of the issue.\nThe Senior Secured Notes bore interest at 12-3\/4%, were due June 1, 1998, and were initially secured by liens on substantially all of the Company's oil and gas properties in the United States, including all reserves attributable thereto. The provisions of the Senior Secured Notes contained restrictions on dividends or cash distributions on or purchases of capital stock, prohibited payment of cash dividends on the Company's Common Stock and Class B Stock prior to January 1, 1994 and were subject to required purchase provisions upon occurrence of certain specified events.\nPursuant to the provisions of the Senior Secured Notes, the Company was required to make an offer to purchase Senior Secured Notes with 50% of the net cash proceeds (as defined) of the ONEOK litigation. (See Note 11). The amount of Senior Secured Notes tendered pursuant to such offer was $3,926,000. The purchase resulted in a loss of $614,000 which was recorded as a reduction of miscellaneous net revenue in 1992.\n(6) SENIOR SECURED NOTES AND SUBORDINATED DEBENTURES (cont'd): - -------------------------------------------------------------------------------\nThe Senior Secured Notes were senior in right of payment to the 13-5\/8% Debentures, 12-1\/2% Debentures, 13-7\/8% Debentures and 5-1\/2% Debentures. The redemption of the Senior Secured Notes was completed using the net proceeds from a Common Stock offering and a portion of the proceeds from the sale of 11- 1\/4% Senior Subordinated Notes described below. The outstanding principal value of the Senior Secured Notes of $61,847,000 at December 31, 1992 was redeemed during 1993, resulting in a loss of $9,419,000.\nSubordinated Debentures: Subordinated debentures outstanding at December 31 were as follows:\nOn September 8, 1993 the Company completed a public offering of $100,000,000 aggregate principal amount of 11-1\/4% Senior Subordinated Notes due September 1, 2003. The Senior Subordinated Notes were issued at a price of 99.259% yielding 11.375% to the holders. The Company used the net proceeds from the sale of the Senior Subordinated Notes of approximately $95,827,000, together with approximately $19,400,000 of available cash, to redeem all of its outstanding Senior Secured Notes and long-term subordinated debentures.\nThe Senior Subordinated Notes will be redeemable at the option of the Company, in whole or in part, at any time on or after September 1, 1998 initially at a redemption price of 105.688%, plus accrued interest to the date of redemption, declining at the rate of 1.896% per year to September 9, 2000 and at 100% thereafter. In addition, the Company may, at its option, redeem prior to September 1, 1996, up to 30% of the initially outstanding principal amount of the Notes at 110% of the principal amount thereof, plus accrued interest to the date of redemption, with the net proceeds of any future public offering of its Common Stock.\nUnder the terms of the Senior Subordinated Notes, the Company must meet certain tests before it is able to pay cash dividends (other than dividends on the Company's $.75 Convertible Preferred Stock) or make other restricted payments, incur additional indebtedness, engage in transactions with its affiliates, incur liens and engage in certain sale and leaseback arrangements. The terms of the Senior Secured Notes also limit the Company's ability to undertake a consolidation, merger or transfer all or substantially all of its assets. In addition, the Company is, subject to certain conditions, obligated to offer to repurchase Senior Subordinated Notes at par value plus accrued and unpaid interest to the date of repurchase, with the net cash proceeds of certain sales or dispositions of assets. Upon a change of control, as defined, the Company will be required to make an offer to purchase the Senior Subordinated Notes at 101% of the principal amount thereof, plus accrued interest to the date of purchase.\nThe 13-5\/8% Debentures were due September 15, 1998. The outstanding balance of the 13-5\/8% Debentures of $72,374,000 at December 31, 1992 was redeemed during 1993, resulting in a loss of $5,839,000.\nThe 12-1\/2% Debentures were due May 1, 1999. The outstanding balance of the 12- 1\/2% Debentures of $4,408,000 at December 31, 1992 was redeemed during 1993, resulting in a loss of $78,450.\n(6) SENIOR SECURED NOTES AND SUBORDINATED DEBENTURES (CONT'D): - -------------------------------------------------------------------------------\nThe 13-7\/8% Debentures were due June 1, 2000. The outstanding balance of the 13-7\/8% Debentures of $4,914,000 at December 31, 1992 was redeemed during 1993, resulting in a loss of $53,000.\nDuring 1993, the Company purchased $308,000 principal amount of its 5-1\/2% Convertible Subordinated Debentures, resulting in a gain of $2,000. The remaining balance of $7,171,000 was paid in full on the February 1, 1994 due date.\nIn 1991, the Company consummated exchange offers pursuant to which the Company's outstanding debt was exchanged for Senior Secured Notes and warrants to purchase Common Stock. Holders of $62,010,000 principal amount of the Company's 12-1\/2% Debentures, 13-7\/8% Debentures and 13-5\/8% Debentures accepted the Company's exchange offers, which were accounted for as extinguishments of debt. Therefore, the Company recognized an extraordinary gain on such transactions equal to the excess of the carrying amount of the debentures exchanged over the estimated market value of the Senior Secured Notes and Warrants issued. The gain on the transactions of $14,397,000, reduced by applicable income taxes of $4,895,000, was recorded as an extraordinary gain on extinguishment of debt in 1991.\n(7) DEFERRED REVENUE: - --------------------------------------------------------------------------------\nIn April 1991, the Company sold a volumetric production payment from the Company's interest in four properties to Enron Reserve Acquisition Corporation (Enron) for net proceeds of $43,680,000. The production payment agreement covered approximately 30 BCF of natural gas to be delivered over six years at an average price of $1.38 per MMBTU. From November 1991 through February 1992, the Company acquired additional interests in one of the subject properties for $15,465,000 and sold a second volumetric production payment to Enron for net proceeds of $12,035,000. This second production payment covered approximately 9 BCF of natural gas to be delivered over four years at an average price of $1.26 per MMBTU. In connection with the purchase of TEPCO in July 1992, a volumetric production payment from certain of the TEPCO properties was sold to Enron for net proceeds of $38,522,000. This production payment covered approximately 18 BCF of natural gas at an average price of $1.39 per MMBTU and 770,000 barrels of oil at an average price of $15.99 per barrel to be delivered over four years. In connection with the purchase of interests in properties from ARCO in May 1993, a volumetric production payment from certain of the ARCO properties was sold to Enron for net proceeds of $27,260,000. This production payment covered approximately 13.1 BCF of natural gas at an average price of $1.92 per MMBTU to be delivered over three years.\nEffective November 1, 1993, the four separate volumetric payment financings described above between the Company and Enron were consolidated into one production payment. The delivery schedules from the previously separate production payments were not adjusted; however, delivery shortfalls on any property can now be made up from excess production from any other property which is dedicated to the production payment obligation. The consolidation also provided that certain acreage previously committed to the production payments was released and can be developed by the Company unburdened by the delivery obligations of the production payment. The Company may grant liens on properties subject to this production payment agreement, but it must notify prospective lienholders that their rights are subject to the prior rights of the production payment owner.\nIn connection with the purchase of interests in properties from ARCO in December 1993, a volumetric production payment from certain of the ARCO proerties was sold to Enron for net proceeds of $13,207,000. This production payment covered approximately 7.3 BCF of natural gas at an average price of $1.68 per MMBTU to be delivered over 8 years.\nThe Company is responsible for royalties and for production costs associated with operating the properties subject to the production payment agreements.\n(7) DEFERRED REVENUE (CONT'D): - --------------------------------------------------------------------------------\nAmounts received were recorded as deferred revenue. Annual amortization of deferred revenue, based on the scheduled deliveries under the production payment agreements, is as follows:\nThe Company includes reserves dedicated to the volumetric production payments in its estimated proved oil and gas reserves. (See Note 19.)\n(8) INCOME TAXES: - --------------------------------------------------------------------------------\nThe Company adopted Statement of Financial Accounting Standards No. 109, \"Accounting for Income Taxes,\" (SFAS No. 109) on a prospective basis effective January 1, 1993. The cumulative effect of this change in accounting for income taxes of $2,060,000 is determined as of January 1, 1993 and is reported separately in the Consolidated Statement of Operations for the year ended December 31, 1993.\nThe income tax expense (benefit) is different from amounts computed by applying the statutory Federal income tax rate for the following reasons:\nThe Omnibus Budget Reconciliation Act of 1993 increased the federal corporate tax rate from 34% to 35% retroactively to January 1, 1993. As a result of this tax increase, the tax benefit at December 31, 1993 on the loss from continuing operations was approximately $167,000 less than it would have been without such increase in the tax rate. However, due to limitations on the recognition of deferred tax assets under SFAS No. 109, the total tax benefit at December 31, 1993, including the tax benefit on the extraordinary loss on extinguishment of debt, is unaffected by the tax rate increase. The impact of the tax rate increase on the Company's total tax expense will be recognized when future taxable income absorbs the present unrecognized deferred tax asset.\n(8) INCOME TAXES (CONT'D): - --------------------------------------------------------------------------------\nIncome taxes that are classified as deferred are generally the result of recognizing income and expenses at different times for financial and tax reporting. These differences result from recording proceeds from the sale of properties in the full cost pool, capitalization of certain development, exploration and other costs under the full cost method of accounting and the provision for impairment of oil and gas properties for financial accounting purposes.\nThe components of the net deferred tax liability, computed in accordance with SFAS No. 109 are as follows:\nThe valuation allowance for deferred tax assets as of January 1, 1993 was $5,234,000. The net change in the total valuation allowance for the year ended December 31, 1993 was an increase of $2,034,000.\nThe Alternative Minimum Tax (AMT) credit carryforward available to reduce future Federal regular taxes aggregated $2,206,000 at December 31, 1993. This amount may be carried forward indefinitely. Regular and AMT net operating loss carryforwards at December 31, 1993 were $28,439,000 and $23,916,000, respectively, and will expire in the years indicated below:\nAMT net operating loss carryforwards can be used to offset 90% of AMT income in future years.\nInvestment tax credit carryforwards available to reduce future Federal income taxes aggregated $3,885,000 at December 31, 1993 and expire at various dates through the year 2001. Percentage depletion carryforwards available to reduce future Federal taxable income aggregated $20,174,000 at December 31, 1993. This amount may be carried forward indefinitely. The net operating loss and investment tax credit carryforwards have been recognized as a reduction of deferred taxes, subject to a valuation allowance.\n(8) INCOME TAXES (cont'd): - --------------------------------------------------------------------------------\nThe availability of some of these tax attributes to reduce current and future taxable income of the Company is subject to various limitations under the Internal Revenue Code. In particular, the Company's ability to utilize such tax attributes could be severely restricted due to the occurrence of an \"ownership change\" within the meaning of Section 382 of the Internal Revenue Code resulting from the Recapitalization. At December 31, 1993, the Company estimated that net operating loss and investment tax credit carryforwards would be limited to offset current taxable income to the extent described below.\nThe net operating loss carryforwards which expire in 2008 are not subject to the provisions of Section 382 as they were generated subsequent to the ownership change. Even though the Company is limited in its ability to use the remaining net operating loss carryovers under the general provisions of Section 382, it may be entitled to use these net operating loss carryovers to offset (a) gains recognized in the five years following the ownership change on the disposition of certain assets, to the extent that the value of the assets disposed of exceeds its tax basis on the date of the ownership change or (b) any item of income which is properly taken into account in the five years following the ownership change but which is attributable to periods before the ownership change (\"built-in gain\"). The ability of the Company to use these net operating loss carryovers to offset built-in gain first requires that the Company have total built-in gains at the time of the ownership change which are greater than a threshold amount. In addition, the use of these net operating loss carryforwards to offset built-in gain cannot exceed the amount of the total built-in gain.\nThe Company believes that due to the amount of built-in gain as of the date of ownership change, and the recognition of such gain through December 31, 1993, there is no significant limitation on the Company's ability to use these net operating loss carryforwards or investment tax credit carryforwards.\n(9) PREFERRED STOCK: - -------------------------------------------------------------------------------\nAt December 31, 1993, there were 2,880,973 outstanding shares of $.75 Convertible Preferred Stock, par value $.01 per share. This stock is convertible at any time, at the option of the holder, at the rate of 3.5 shares of Common Stock for each share of $.75 Convertible Preferred Stock, subject to adjustment upon occurrence of certain events. During 1993, 248,817 shares of $.75 Convertible Preferred Stock were converted into 870,858 shares of Common Stock. The $.75 Convertible Preferred Stock is redeemable, in whole or in part, at the option of the Company, at any time after the earlier of (i) July 1, 1996 or (ii) the date on which the last reported sales price of the Common Stock will have been $7.50 or higher for at least 20 of the prior 30 trading days, at a redemption price of $10.50 per share during the twelve-month period which began July 1, 1993 and declining ratably to $10.00 per share at July 1, 1996 and thereafter, including accumulated and unpaid dividends. Cumulative annual dividends of $.75 per share are payable quarterly, in arrears, on the first day of February, May, August and November, when and as declared. Until December 31, 1993, the Company has paid such dividends in shares of Common Stock. Thereafter, dividends may be paid in cash or, at the Company's election, in shares of Common Stock or in a combination of cash and Common Stock. Common Stock delivered in payment of dividends will be valued for dividend payment purposes at between 75% and 90%, based on trading volume, of the average last reported sales price of the Common Stock during a specified period prior to the record date for the dividend payment. If two consecutive dividend payments are in arrears, the holders of $.75 Convertible Preferred Stock may exercise a penalty conversion right during a specified period and may convert shares of $.75 Convertible Preferred Stock, plus accumulated dividends, to Common Stock at a conversion price of 75% of the average last reported sales price during a specified period prior to the conversion date. If six consecutive dividend payments are in arrears, the holders of the $.75 Convertible Preferred Stock shall have the right to elect two directors.\nDuring any period in which dividends on preferred stock are in arrears, no dividends or distributions, except for dividends paid in shares of Common Stock, may be paid or declared on the Common Stock, nor may any shares of Common Stock be acquired by the Company.\nIn 1985, the Company issued 350,000 shares of $15.75 Cumulative Preferred Stock (Redeemable Preferred Stock), par value $.01 per share. In February 1990, the Company issued 2,300,000 shares of $2.125 Convertible Preferred\n(9) PREFERRED STOCK (cont'd): - --------------------------------------------------------------------------------\nStock with a par value of $.01 per share and liquidation value of $25 per share. In December 1991, in connection with the Company's recapitalization, the Company's shareholders approved an amendment to the Company's Restated Certificate of Incorporation whereby each share of Redeemable Preferred Stock, including accumulated dividends, was acquired by the Company for seven shares of $.75 Convertible Preferred Stock or, at the election of the holder, for $50 principal amount of Senior Secured Notes and 1.2 shares of $.75 Convertible Preferred Stock and whereby each share of the Company's $2.125 Convertible Preferred Stock, including accumulated dividends, was reclassified into one share of $.75 Convertible Preferred Stock. In December 1991, also in connection with the recapitalization, the Company's shareholders approved an amendment to the Company's Restated Certificate of Incorporation whereby each share of the Company's $2.125 Convertible Preferred Stock, including accumulated dividends, was reclassified into one share of $.75 Convertible Preferred Stock.\n(10) COMMON STOCK: - --------------------------------------------------------------------------------\nAt December 31, 1993 the Company has one class of Common Stock, par value $.10 per share, which is entitled to one vote per share. Prior to May 1993 the Company also had Class B stock which had superior voting rights to the Company's Common Stock, had limited transferability and was not traded in any public market but was convertible at any time into shares of Common Stock on a share- for-share basis.\nAt the Company's Annual Meeting of Shareholders on May 12, 1993, the shareholders adopted amendments to the Company's Restated Certificate of Incorporation to increase the number of authorized shares of Common Stock to 112,000,000 and to reclassify each share of Class B Stock into 1.1 shares of Common Stock.\nOn June 15, 1993, the Company issued 11,080,000 shares of Common Stock for $5.00 per share in a public offering. The net proceeds from the issuance of the shares totalled approximately $51,506,000 after deducting issuance costs and underwriting fees.\nOn October 29, 1993 the Company paid a dividend distribution of one Preferred Share Purchase Right on each outstanding share of the Company's Common Stock. The Rights are exercisable only if a person or group acquires 20% or more of the Company's Common Stock or announces a tender offer which would result in ownership by a person or group of 20% or more of the Common Stock. Each Right initially entitles each shareholder to buy 1\/100th of a share of a new series of Preferred Stock at an exercise price of $30.00, subject to adjustment upon certain occurrences. Each 1\/100th of a share of such new Preferred Stock that can be purchased upon exercise of a Right has economic terms designed to approximate the value of one share of Common Stock. The Rights will expire on October 29, 2003, unless extended or terminated earlier.\nThe Company has Warrants outstanding which permit holders thereof to purchase 1,244,715 shares of Common Stock at an exercise price of $3.00 per share. The Warrants are noncallable by the Company and expire on October 1, 1996. The exercise price is payable in cash.\nIn March 1992, the Company adopted the 1992 Stock Option Plan under which non- qualified stock options may be granted to key employees and non-employee directors. The aggregate number of shares of Common Stock which the Company may issue under options granted pursuant to this plan may not exceed 10% of the total number of shares outstanding or issuable at the date of grant pursuant to outstanding rights, warrants, convertible or exchangeable securities or other options. The exercise price of an option may not be less than 85% of the fair market value of one share of the Company's Common Stock on the date of grant. During 1992 the Company granted options to 42 employees to purchase a total of 1,740,000 shares of Common Stock at an exercise price of $3.00 per share. During 1993, the Company granted options to 33 employees to purchase a total of 1,525,000 shares of Common Stock at an exercise price of $5.00 per share. The options vest 20% on the date of grant and an additional 20% on each grant anniversary date thereafter. The Company may, in its discretion, grant each optionee a cash bonus upon the exercise of each granted option. At December 31, 1993, there are 1,529,000 options outstanding at an exercise price of $3.00 per share, of which 776,600 are exercisable, and 1,525,000 options outstanding at $5.00 per share, of which 525,000 are exercisable.\n(11) GAS PURCHASE CONTRACT SETTLEMENT: - --------------------------------------------------------------------------------\nOn December 17, 1992, the Company and ONEOK, Inc. (ONEOK) agreed to settle the case styled Forest Oil Corporation v. ONEOK, Inc. (Number 71,582) and its companion case styled Forest Oil Corporation v. ONEOK, Inc. (Case No. C-89-53). The cases involved take-or-pay damages relating to a natural gas purchase contract between the Company and ONEOK. The settlement encompassed all disputed contracts, claims and future claims. The cash proceeds of $51,250,000 were received by the Company on December 24, 1992. Proceeds after deducting related royalties and production taxes were approximately $36,429,000.\nThe ONEOK settlement increased the Company's net earnings for 1992 by approximately $24,043,000 or $1.75 per share.\n(12) RESTRUCTURING: - --------------------------------------------------------------------------------\nRestructuring expense in 1991 of approximately $3,585,000 related to reductions in workforce and a consolidation of the Company's technical staff, reduced by a credit recognized upon curtailment of the Company's defined benefit pension plan.\n(13) EMPLOYEE BENEFITS: - --------------------------------------------------------------------------------\nPENSION PLANS: The Company has a qualified defined benefit pension plan (Pension Plan). In 1991, in conjunction with its reorganization, the Company effected a curtailment of the Pension Plan pursuant to which all benefit accruals were suspended effective May 31, 1991. As a result of the curtailment, the projected benefit obligation was reduced significantly. Accordingly, the Company recorded a credit to restructuring expense of $806,000 in accordance with Statement of Financial Accounting Standards No. 88.\nThe benefits under the Pension Plan are based on years of service and the employee's average compensation during the highest consecutive sixty-month period in the fifteen years prior to retirement. The Company's funding policy has been to contribute annually an amount in excess of the minimum required by Federal regulations. No contribution was made in 1993, 1992 or 1991. The following table sets forth the Pension Plan's funded status and amounts recognized in the Company's consolidated financial statements at December 31:\nFor 1993 the discount rate used in determining the actuarial present value of the projected benefit obligation was 7.5% and the expected long-term rate of return on assets was 9%. The discount rate used in determining the actuarial present value of the projected benefit obligation was 9% and the expected long- term rate of return on assets was 9% for both 1992 and 1991.\n(13) EMPLOYEE BENEFITS (cont'd): - -------------------------------------------------------------------------------\nIn 1990, the Company adopted a non-qualified unfunded supplementary retirement plan that provides certain officers with defined retirement benefits in excess of qualified plan limits imposed by Federal tax law. Benefit accruals under this plan were suspended effective May 31, 1991 in connection with suspension of benefit accruals under the Company's Pension Plan. At December 31, 1993 the projected benefit obligation under this plan totaled $493,000, which is included in other liabilities in the accompanying balance sheet. The projected benefit obligation is determined using the same discount rate as is used for calculations for the Pension Plan.\nAs a result of the change in the discount rate for the Pension Plan and the supplementary retirement plan, the Company recorded a liability of $3,038,000 representing the unfunded pension liability and a corresponding decrease in capital surplus.\nRETIREMENT SAVINGS PLAN: The Company sponsors a qualified tax deferred savings plan in accordance with the provisions of Section 401(k) of the Internal Revenue Code. Employees may defer up to 10% of their compensation, subject to certain limitations. The Company matches the employee contributions up to 5% of employee compensation. In 1993, 1992 and 1991, Company contributions were made using treasury stock. The expense associated with the Company's contribution was $367,000 in 1993, $454,000 in 1992 and $492,000 in 1991.\nEffective January 1, 1992 the plan was amended to include profit-sharing contributions by the Company. The Company's profit-sharing contributions were made using Company stock valued at $276,000 and $465,000 for 1993 and 1992, respectively.\nANNUAL INCENTIVE PLAN: The Forest Oil Corporation Annual Incentive Plan (the Incentive Plan), which became effective January 1, 1992, permits participating employees to earn annual bonus awards payable in cash or in whole shares of the Company's Common Stock, generally based in part upon the Company attaining certain levels of performance. In 1993 and 1992, the Company accrued bonuses of $426,000 and $930,000, respectively, under the Incentive Plan. Amounts awarded will be disbursed in equal annual installments over the succeeding three-year period.\nEXECUTIVE RETIREMENT AGREEMENTS: The Company entered into Agreements in December 1990 (the Agreements) with certain executives and directors (the Retirees) whereby each executive retired from the employ of the Company as of December 28, 1990. Pursuant to the terms of the Agreements, the Retirees are entitled to receive supplemental retirement payments from the Company in addition to the amounts to which they are entitled under the Company's retirement plan. In addition, the Retirees and their spouses are entitled to lifetime coverage under the Company's group medical and dental plans, tax and other financial services, and payments by the Company in connection with certain club membership dues. The Retirees will also continue to participate in the Company's royalty bonus program until December 31,\n(13) EMPLOYEE BENEFITS (cont'd): - -------------------------------------------------------------------------------\n1995. The Company has also agreed to maintain certain life insurance policies in effect at December 1990, for the benefit of each of the Retirees.\nSix of the Retirees have subsequently resigned as directors. One of the Retirees continues to serve as a director and will be paid the customary non- employee director's fee. Pursuant to the terms of the retirement agreements, the former directors and any other Retiree who ceases to be a director (or his spouse) will be paid $2,500 a month until December 2000.\nThe Company's obligation to one retiree under a revised retirement agreement is payable in Common Stock or cash, at the Company's option, in May of each year from 1993 through 1996 at approximately $190,000 per year with the balance ($149,000) payable in May 1997. The retirement agreements for the other six Retirees, one of whom received in 1991 the payments scheduled to be made in 1999 and 2000, provide for supplemental retirement payments totalling approximately $938,400 per year through 1998 and approximately $740,400 per year in 1999 and 2000.\nThe present value of the amounts due under the agreements discounted at an annual rate of 13% has been recorded as retirement benefits payable to executives and directors.\nLIFE INSURANCE: The Company provides life insurance benefits for certain key employees and retirees under split dollar life insurance plans. The premiums paid for the life insurance policies were $861,000, $995,000, and $1,534,000 in 1993, 1992 and 1991, respectively, including $766,000, $765,000, and $1,335,000 paid for policies for retired executives. Under the split dollar life insurance plans, the Company was assigned a portion of the benefits payable under the policies which were generally designed to recover the premiums paid by the Company as well as any bonuses paid to the employees and retirees in connection with the policies. In December 1991 the Company replaced the existing policies with new, lower cost policies which provide the same death benefits to the employees and retirees. The Company is assigned a portion of the benefits which is designed to recover the premiums paid. As a result of the change in policies, the Company was able to receive 100% of the cash surrender value of the old policies, net of outstanding policy loans. The net cash surrender value of $4,422,000 was received in 1992.\nHEALTH AND DENTAL INSURANCE: The Company provides health and dental insurance to all of its employees, eligible retirees and eligible dependents. The Company provides these benefits at nominal cost to employees and retirees and recognizes the expense in the year incurred. Effective January 1, 1992, the Company replaced its health and dental plans with new plans which require employees and eligible retirees to contribute an estimated 50% of the cost of dependent coverage. In 1993, 1992 and 1991 the costs of providing these benefits for both active and retired employees totalled $1,350,000, $1,359,000, and $2,111,000, respectively. The 1993 cost includes $993,110 related to 184 participating active employees and 4 employees on long- term disability and $356,890 related to 125 eligible retirees. The 1992 cost includes $1,011,000 related to 183 participating active employees and $348,000 related to 119 eligible retirees. The cost of providing these benefits during 1991 for the 164 eligible retirees are not separable from the costs of providing these benefits for the 182 participating active employees.\nPOSTRETIREMENT BENEFITS: In December 1990, the Financial Accounting Standards Board issued the Statement of Financial Accounting Standards No. 106, \"Employers' Accounting for Postretirement Benefits Other Than Pensions,\" (SFAS No. 106). This statement required the Company to accrue expected costs of providing postretirement benefits to employees, their beneficiaries and covered dependents effective for fiscal years beginning after December 15, 1992. The Company adopted the provisions of SFAS No. 106 in the first quarter of 1993. The estimated accumulated postretirement benefit obligation as of January 1, 1993 was approximately $4,822,000. This amount, reduced by applicable income tax benefits, was charged to operations in the first quarter of 1993 as the cumulative effect of a change in accounting principle. The annual net postretirement benefit cost was approximately $483,000 for 1993.\n(13) EMPLOYEE BENEFITS (cont'd): - -------------------------------------------------------------------------------\nAt January 1 and December 31, 1993 the discount rates used in determining the actuarial present value of the accumulated postretirement benefit obligation were 8.5% and 7.5%, respectively.\nPOSTEMPLOYMENT BENEFITS: In November 1992, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 112, \"Employers' Accounting for Postemployment Benefits\" (SFAS No. 112). This statement requires the accrual of the estimated cost of certain postemployment benefits provided to former employees. SFAS No. 112 is effective for years beginning after December 15, 1993. The initial effect of applying this statement is to be accounted for as a cumulative effect of a change in accounting principle. The Company has not determined precisely what effect, if any, the adoption of SFAS No. 112 will have on its financial statements, but believes the effect will be immaterial because the Company has already recorded liabilities for many of the affected costs.\n(14) RELATED PARTY TRANSACTIONS: - -------------------------------------------------------------------------------\nThe Company uses a real estate complex (the Complex) owned directly or indirectly by certain stockholders and members of the Board of Directors for Company-sponsored seminars, the accommodation of business guests, the housing of personnel attending corporate meetings and for other general business purposes. The Company incurred expenses for its use of the Complex of $635,000 in 1993, $611,000 in 1992, and $691,000 in 1991. The Company has notified the owners that it intends to terminate its annual usage after 1994, and it will pay $600,000 for its 1994 usage and $300,000 as a partial reimbursement of deferred maintenance costs.\nJohn F. Dorn resigned as an executive officer and director of the Company in 1993. The Company has agreed to pay John F. Dorn his salary at time of resignation through September 30, 1996. In addition, the Company has provided certain other benefits and services to Mr. Dorn. The present value of the severance package is estimated at $500,000, which amount was recorded as an expense and a liability at December 31, 1993.\nIn March 1994, the Company sold certain non-strategic oil and gas properties for $4,400,000 to an entity controlled by John F. Dorn and another former executive officer of the Company. The Company established the sales price based upon an opinion from an independent third party. The purchasers financed 100% of the purchase price with a loan bearing interest at the rate of prime plus 1%. The loan is secured by a mortgage on the properties and personal guarantees of the purchasers. The Company participated as a lender in the loan in the amount of approximately $800,000. In addition, the Company agreed to subordinate to the other lender its right of payment of principal on default. The purchasers have separately agreed with the Company that certain options to purchase company stock will be cancelled to the extent that the Company's participation in the loan is not repaid in full. Collectively, the purchasers have options to purchase 275,000 shares of the Company's Common Stock at $3.00 per share and 275,000 shares at $5.00 per share.\n(15) COMMITMENTS AND CONTINGENCIES: - -------------------------------------------------------------------------------\nFuture rental payments for office facilities and equipment under the remaining terms of noncancelable leases are $2,210,000, $1,324,000 and $130,000 for the years ending December 31, 1994, 1995 and 1996, respectively.\nNet rental payments applicable to exploration and development activities and capitalized in the oil and gas property accounts aggregated $688,000 in 1993, $874,000 in 1992 and $1,562,000 in 1991. Net rental payments charged to expense amounted to $3,098,000 in 1993, $3,112,000 in 1992 and $2,748,000 in 1991. Rental payments include the short-term lease of vehicles. None of the leases are accounted for as capital leases.\nThe Company, in the ordinary course of business, is a party to various legal actions. In the opinion of management, none of these actions, either individually or in the aggregate, will have a material adverse effect on the financial condition of the Company.\n(16) FINANCIAL INSTRUMENTS: - -------------------------------------------------------------------------------\nStatement of Financial Accounting Standards No. 105 requires certain disclosures about financial instruments with off-balance-sheet risk. The Company is exposed to off-balance-sheet risks associated with energy swap agreements arising from movements in the prices of oil and natural gas and from the unlikely event of non-performance by the counterparty to the swap agreements.\nIn order to hedge against the effects of declines in oil and natural gas prices, the Company enters into energy swap agreements with third parties. In a typical swap agreement, the Company receives the difference between a fixed price per unit of production and a price based on an agreed-upon third party index if the index price is lower. If the index price is higher, the Company pays the difference. The Company's current swaps are settled on a monthly basis. The following table indicates outstanding energy swaps of the Company which were in place at December 31, 1993:\nUnder another agreement (the Option Agreement), the Company paid a premium of $516,000 in conjunction with the closing of the Enron loan agreement. The payment of this premium gives Forest the right to set a floor price of $1.70 per MMBTU on a total of 18.4 BBTU of natural gas over a five year period commencing January 1, 1995. In order to exercise this right to set a floor, the Company must pay an additional premium of 10 cents per MMBTU, effectively setting the floor at $1.60 per MMBTU. The premium of $516,000 related to the Option Agreement was recorded as a long-term asset and will be amortized as a reduction to oil and gas income beginning in 1995 based on the volumes involved.\nIn December 1991, the Financial Accounting Standards Board issued Statement 107, \"Disclosures about Fair Value of Financial Instruments.\" The statement requires disclosure of the estimated fair value of certain on and off-balance sheet financial instruments in the financial statements. The following methods and assumptions were used to estimate the fair value of the Company's financial instruments as of December 31, 1993:\nCASH AND CASH EQUIVALENTS, ACCOUNTS RECEIVABLES AND ACCOUNTS PAYABLE: The carrying amount of these instruments approximates fair value because of their short maturity.\n(16) FINANCIAL INSTRUMENTS (cont'd): - --------------------------------------------------------------------------------\nPRODUCTION PAYMENT OBLIGATION: The fair value of the Company's production payment obligation has been estimated as approximately $20,433,000 by discounting the projected future cash payments required under the agreement by 12.5%. This rate corresponds to the rate on the Company's recent nonrecourse loan agreement.\nSENIOR SUBORDINATED NOTES The fair value of the Company's 11 1\/4% Subordinated Notes was approximately $112,179,000, based upon quoted market prices for the same or similar issues.\nENERGY SWAP AGREEMENTS: The fair value of the Company's energy swap agreements was approximately $508,000, based upon the estimated net amount the Company would receive to terminate the agreements.\n(17) MAJOR CUSTOMERS: - --------------------------------------------------------------------------------\nThe Company's sales of oil and natural gas to individual customers which exceeded 10% of the Company's total sales (exclusive of the effects of energy swaps and hedges) were:\n(19) SUPPLEMENTAL FINANCIAL DATA - OIL AND GAS PRODUCING ACTIVITIES (unaudited): - --------------------------------------------------------------------------------\nThe following information is presented in accordance with Statement of Financial Accounting Standards No. 69, \"Disclosure about Oil and Gas Producing Activities,\" (SFAS No. 69).\n(A) COSTS INCURRED IN OIL AND GAS EXPLORATION AND DEVELOPMENT ACTIVITIES - The following costs were incurred in oil and gas exploration and development activities during the three years ended December 31, 1993:\n(B) AGGREGATE CAPITALIZED COSTS - The aggregate capitalized costs relating to oil and gas activities were incurred as of the date indicated:\n(19) SUPPLEMENTAL FINANCIAL DATA - OIL AND GAS PRODUCING ACTIVITIES (unaudited) (cont'd) - --------------------------------------------------------------------------------\n(C) RESULTS OF OPERATIONS FROM PRODUCING ACTIVITIES - Results of operations from producing activities for 1993, 1992 and 1991 are presented below. Income taxes are different from income taxes shown in the Consolidated Statements of Operations because this table excludes general and administrative and interest expense.\n(19) SUPPLEMENTAL FINANCIAL DATA - OIL AND GAS PRODUCING ACTIVITIES (unaudited) (cont'd): - --------------------------------------------------------------------------------\n(D) ESTIMATED PROVED OIL AND GAS RESERVES - The Company's estimate of its proved and proved developed future net recoverable oil and gas reserves and changes for 1991, 1992 and 1993 follows. Such estimates are inherently imprecise and may be subject to substantial revisions.\nProved oil and gas reserves are the estimated quantities of crude oil, natural gas and natural gas liquids which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions; i.e., prices and costs as of the date the estimate is made. Prices include consideration of changes in existing prices provided only by contractual arrangement, including energy swap agreements (see Note 16), but not on escalations based on future conditions. The Company has decreased these quantities for overproduced volumes recognized as revenue, as discussed in Note 1. The reserve volumes include quantities subject to volumetric production payments discussed in Note 7.\nProved developed oil and gas reserves are reserves that can be expected to be recovered through existing wells with existing equipment and operating methods. Additional oil and gas expected to be obtained through the application of fluid injection or other improved mechanisms of primary recovery are included as \"proved developed reserves\" only after testing by a pilot project or after the operation of an installed program has confirmed through production response that increased recovery will be achieved.\nPurchases of reserves in place represent volumes recorded on the closing dates of the acquisitions for financial accounting purposes.\n(19) SUPPLEMENTAL FINANCIAL DATA - OIL AND GAS PRODUCING ACTIVITIES (unaudited) (cont'd): - --------------------------------------------------------------------------------\n(D) ESTIMATED PROVED OIL AND GAS RESERVES (cont'd)\n(E) STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS - The standardized measure of discounted net cash flows is calculated in accordance with the provisions of SFAS No. 69.\nFuture oil and gas sales and production and development costs have been estimated using prices and costs in effect at the end of the years indicated, except in those instances where the sale of oil and natural gas is covered by contracts, energy swap agreements or volumetric production payments. In the case of contracts, the applicable contract prices, including fixed and determinable escalations, were used for the duration of the contract. Thereafter, the current spot price was used. Prior to December 31, 1993 the contracts included natural gas sales contracts with a Company which is involved in Chapter 11 bankruptcy proceedings. At December 31, 1993 the volumes applicable to this contract were priced at spot prices. Future oil and gas sales include the estimated effects of existing energy swap agreements and the volumetric production payments, as discussed in Notes 7 and 16, and have been reduced for overproduced volumes recognized as revenue, as discussed in Note 1.\nFuture income tax expenses are estimated using the statutory tax rate of 35%. Estimates for future general and administrative and interest expenses have not been considered.\nChanges in the demand for oil and natural gas, inflation and other factors make such estimates inherently imprecise and subject to substantial revision. This table should not be construed to be an estimate of the current market value of the Company's proved reserves. Management does not rely upon the information that follows in making investment decisions.\nUndiscounted future income tax expense in the United States was $35,028,000 at December 31, 1993 and $32,718,000 at December 31, 1992.\n(19) SUPPLEMENTAL FINANCIAL DATA - OIL AND GAS PRODUCING ACTIVITIES (unaudited) (cont'd): - --------------------------------------------------------------------------------\n(E) STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS (cont'd)\nCHANGES IN THE STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED OIL AND GAS RESERVES - An analysis of the decrease during each of the last three years of the total standardized measure of discounted future net cash flows is as follows:\nPART III\nFor information concerning Item 10","section_9A":"","section_9B":"","section_10":"Item 10 - Executive Officers of Registrant, see Part I - Item 4A.\nPART IV\nITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K\n(a).(1) FINANCIAL STATEMENTS\n1. Independent Auditors' Report\n2. Consolidated Balance Sheets - December 31, 1993 and 1992\n3. Consolidated Statements of Operations - Years ended December 31, 1993, 1992 and 1991\n4. Consolidated Statements of Shareholders' Equity - Years ended December 31, 1993, 1992 and 1991\n5. Consolidated Statements of Cash Flows - Years ended December 31, 1993, 1992 and 1991\n6. Notes to Consolidated Financial Statements - Years ended December 31, 1993, 1992 and 1991\n(2) FINANCIAL STATEMENT SCHEDULES\n1. Independent Auditors' Report\n2. Schedule V: Property and Equipment - Years ended December 31, 1993, 1992 and 1991\n3. Schedule VI: Accumulated Depreciation, Depletion and Valuation Allowance of Property and Equipment - Years ended December 31, 1993, 1992 and 1991\n4. Schedule X: Supplementary Operating Statement Information - Years ended December 31, 1993, 1992 and 1991\nFinancial statement schedules omitted: All other schedules have been omitted because the information is either not required or is set forth in the financial statements or the notes thereto.\n(3) Exhibits - Forest shall, upon written request to Daniel L. McNamara, Corporate Secretary of Forest, addressed to Forest Oil Building, Bradford, Pennsylvania 16701, provide copies of each of the following Exhibits:\nExhibit 3(i) Restated Certificate of Incorporation of Forest Oil Corporation dated October 14, 1993, incorporated herein by reference to Exhibit 3(i) to Form 10-Q for Forest Oil Corporation for the quarter ended September 30, 1993 (File No. 0-4597).\nExhibit 3(ii) Restated By-Laws of Forest Oil Corporation as of May 9, 1990, Amendment No. 1 to By-Laws dated as of April 2, 1991, Amendment No. 2 to By-Laws dated as of May 8, 1991, Amendment No. 3 to By-Laws dated as of July 30, 1991, Amendment No. 4 to By-Laws dated as of January 17, 1992, Amendment No. 5 to By-Laws dated as of March 18, 1993 and Amendment No. 6 to By-Laws dated as of September 14, 1993, incorporated herein by reference to Exhibit 3(ii) to Form 10-Q for Forest Oil Corporation for the quarter ended September 30, 1993 (File No. 0-4597).\n*Exhibit 3(ii)(a) Amendment No. 7 to By-Laws dated as of December 3, 1993.\n*Exhibit 3(ii)(b) Amendment No. 8 to By-Laws dated as of February 24, 1994.\nExhibit 4.1 Indenture dated as of September 8, 1993 between Forest Oil Corporation and Shawmut Bank Connecticut, National Association, incorporated herein by reference to Exhibit 4.1 to Form 10-Q for Forest Oil Corporation for the quarter ended September 30, 1993 (File No. 0-4597).\n*Exhibit 4.2 Credit Agreement dated as of December 1, 1993 between Forest Oil Corporation and Subsidiary Borrowers and Subsidiary Guarantors and The Chase Manhattan Bank (National Association), as agent.\n*Exhibit 4.3 Amendment No. 1 dated as of December 28, 1993 relating to Exhibit 4.2 hereof.\n*Exhibit 4.4 Amendment No. 2 dated as of January 27, 1994 relating to Exhibit 4.2 hereof.\n*Exhibit 4.5 Security Agreement dated as of December 1, 1993 between Forest Oil Corporation and The Chase Manhattan Bank (National Association), as agent.\n*Exhibit 4.6 Deed of Trust, Mortgage, Security Agreement, Assignment of Production, Financing Statement (Personal Property including Hydrocarbons), and Fixture Filing dated as of December 1, 1993 between Forest Oil Corporation and The Chase Manhattan Bank (National Association), as agent.\nExhibit 4.7 Loan Agreement between Forest Oil Corporation and Joint Energy Development Investments Limited Partnership dated as of December 28, 1993, incorporated herein by reference to Exhibit 4.1 to Form 8-K for Forest Oil Corporation dated December 30, 1993 (File No. 0-4597).\nExhibit 4.8 Deed of Trust, Assignment of Production, Security Agreement and Financing Statement dated as of December 28, 1993 by and between Forest Oil Corporation and Joint Energy Development Investments Limited Partnership, incorporated herein by reference to Exhibit 4.2 to Form 8-K for Forest Oil Corporation dated December 30, 1993 (File No. 0-4597).\nExhibit 4.9 Act of Mortgage, Assignment of Production, Security Agreement and Financing Statement dated as of December 28, 1993 between Forest Oil Corporation and Joint Energy Development Investments Limited Partnership, incorporated herein by reference to Exhibit 4.3 to Form 8-K for Forest Oil Corporation dated December 30, 1993 (File No. 0-4597).\nExhibit 4.10 Warrant Agreement dated as of December 3, 1991 between Forest Oil Corporation and The Chase Manhattan Bank (National Association), as Warrant Agent (including Form of Warrant), incorporated herein by reference to Exhibit 4.7 to Form 10-K for Forest Oil Corporation for the year ended December 31, 1991 (File No. 0-4597).\nExhibit 4.11 Rights Agreement between Forest Oil Corporation and Mellon Securities Trust Company, as Rights Agent dated as of October 14, 1993, incorporated herein by reference to Exhibit 4.3 to Form 10-Q for Forest Oil Corporation for the quarter ended September 30, 1993 (File No. 0-4597).\nNo other instruments regarding long-term debt are filed because the amount of the securities authorized thereunder do not, in any case, exceed 10% of the total assets of Forest Oil Corporation on a consolidated basis, but a copy of such instruments will be furnished to the Commission upon request.\n+Exhibit 10.1 Description of Employee Overriding Royalty Bonuses, incorporated herein by reference to Exhibit 10.1 to Form 10-K for Forest Oil Corporation for the year ended December 31, 1990 (File No. 0-4597).\n+Exhibit 10.2 Description of Executive Life Insurance Plan, incorporated herein by reference to Exhibit 10.2 to Form 10-K for Forest Oil Corporation for the year ended December 31, 1991 (File No. 0-4597).\n+Exhibit 10.3 Form of non-qualified Deferred Compensation Agreement, incorporated herein by reference to Exhibit 10.3 to Form 10-K for Forest Oil Corporation for the year ended December 31, 1990 (File No. 0-4597).\n+Exhibit 10.4 Form of non-qualified Supplemental Executive Retirement Plan, incorporated herein by reference to Exhibit 10.4 to Form 10-K for Forest Oil Corporation for the year ended December 31, 1990 (File No. 0-4597).\n+Exhibit 10.5 Form of Executive Retirement Agreement, incorporated herein by reference to Exhibit 10.5 to Form 10-K for Forest Oil Corporation for the year ended December 31, 1990 (File No. 0-4597).\n+Exhibit 10.6 Forest Oil Corporation 1992 Stock Option Plan and Option Agreement, incorporated herein by reference to Exhibit 10.7 to Form 10-K for Forest Oil Corporation for the year ended December 31, 1991 (File No. 0-4597).\n+Exhibit 10.7 Letter Agreement with Richard B. Dorn relating to a revision to Exhibit 10.5 hereof, incorporated herein by reference to Exhibit 10.11 to Form 10-K for Forest Oil Corporation for the year ended December 31, 1991 (File No. 0-4597).\n+Exhibit 10.8 Forest Oil Corporation Annual Incentive Plan effective as of January 1, 1992, incorporated herein by reference to Exhibit 10.8 to Form 10-K for Forest Oil Corporation for the year ended December 31, 1992 (File No. 0-4597).\n*+Exhibit 10.9 Form of Executive Severance Agreement.\n*+Exhibit 10.10 Form of Settlement Agreement and General Release between John F. Dorn and Forest Oil Corporation dated March 7, 1994.\n*Exhibit 11 Forest Oil Corporation and Subsidiaries - Calculation of Earnings per Share of Common Stock.\n*Exhibit 24 Independent Auditors' Consent.\n*Exhibit 25 Powers of Attorney of the following Officers and Directors:\nDonald H. Anderson, Austin M. Beutner, Robert S. Boswell, Richard J. Callahan, Dale F. Dorn, John C. Dorn, William L. Dorn, Harold D. Hammar, David H. Keyte, James H. Lee, Daniel L. McNamara, Jeffrey W. Miller, Jack D. Riggs and Michael B. Yanney.\n**Exhibit 28 Form 11-K of the Thrift Plan of Forest Oil Corporation for the year ended December 31, 1993.\n* Filed with this report. **To be filed by amendment. + Management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K pursuant to Item 14(c) of this report.\n(b). REPORTS ON FORM 8-K\nThe following reports on Form 8-K were filed by Forest during the last quarter of 1993:\nSIGNATURES\nPursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.\nFOREST OIL CORPORATION (Registrant)\nDate: March 28, 1994 By: \/s\/ Daniel L. McNamara -------------------------------- Daniel L. McNamara Secretary\nPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated.\nSIGNATURES TITLE DATE ---------- ----- ----\nWilliam L. Dorn* Chairman of the Board and March 28, 1994 (William L. Dorn) Chief Executive Officer (Principal Executive Officer)\nRobert S. Boswell* President and Chief Financial Officer March 28, 1994 (Robert S. Boswell) (Principal Financial Officer)\nDavid H. Keyte* Vice President and Chief Accounting March 28, 1994 (David H. Keyte) Officer (Principal Accounting Officer)\nDonald H. Anderson* (Donald H. Anderson)\nAustin M. Beutner* (Austin M. Beutner)\nRobert S. Boswell* (Robert S. Boswell)\nDirectors of the Registrant March 28, 1994\nRichard J. Callahan* (Richard J. Callahan)\nDale F. Dorn* (Dale F. Dorn)\nJohn C. Dorn* (John C. Dorn)\nSIGNATURES TITLE DATE ---------- ----- ----\nWilliam L. Dorn* (William L. Dorn)\nHarold D. Hammar* (Harold D. Hammar)\nJames H. Lee* (James H. Lee)\nDirectors of the Registrant March 28, 1994\nJeffrey W. Miller* (Jeffrey W. Miller)\nJack D. Riggs* (Jack D. Riggs)\nMichael B. Yanney* (Michael B. Yanney)\n*By \/s\/ Daniel L. McNamara March 28, 1994 ----------------------------- Daniel L. McNamara (as attorney-in-fact for each of the persons indicated)\nINDEPENDENT AUDITORS' REPORT\nThe Board of Directors and Shareholders Forest Oil Corporation:\nUnder date of February 22, 1994, we reported on the consolidated balance sheets of Forest Oil Corporation and subsidaries as of December 31, 1993 and 1992, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1993, as contained in the annual report on Form 10-K for the year 1993. In connection with our audits of the aforementioned consolidated financial statements, we have also audited the related financial statement schedules V, VI, and X. These financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statement schedules based on our audit.\nIn our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.\nAs discussed in Notes 8 and 13 to the financial statements, the Company changed its method of accounting for income taxes and postretirement benefits.\nKPMG PEAT MARWICK\nDenver, Colorado February 22, 1994\nSCHEDULE V\nFOREST OIL CORPORATION AND CONSOLIDATED SUBSIDIARIES Property and Equipment Years ended December 31, 1993, 1992 and 1990 (In Thousands)\nSCHEDULE VI\nFOREST OIL CORPORATION AND CONSOLIDATED SUBSIDIARIES Accumulated Depreciation, Depletion and Valuation Allowance of Property and Equipment Years ended December 31, 1993, 1992 and 1991 (In Thousands)\nSCHEDULE X\nFOREST OIL CORPORATION AND CONSOLIDATED SUBSIDIARIES Supplementary Income Statement Information\nYears ended December 31, 1993, 1992 and 1991\nOther supplementary income statement information required by Rule 12-11 is not presented because the required item does not exceed 1 percent of total sales and revenues reported in the related income statement, except for maintenance and repair costs included in the Company's oil and gas production expense. Such maintenance and repair costs cannot be distinguished from other components of lease operating expense.","section_11":"","section_12":"","section_13":"","section_14":"ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K\n(a).(1) FINANCIAL STATEMENTS\n1. Independent Auditors' Report\n2. Consolidated Balance Sheets - December 31, 1993 and 1992\n3. Consolidated Statements of Operations - Years ended December 31, 1993, 1992 and 1991\n4. Consolidated Statements of Shareholders' Equity - Years ended December 31, 1993, 1992 and 1991\n5. Consolidated Statements of Cash Flows - Years ended December 31, 1993, 1992 and 1991\n6. Notes to Consolidated Financial Statements - Years ended December 31, 1993, 1992 and 1991\n(2) FINANCIAL STATEMENT SCHEDULES\n1. Independent Auditors' Report\n2. Schedule V: Property and Equipment - Years ended December 31, 1993, 1992 and 1991\n3. Schedule VI: Accumulated Depreciation, Depletion and Valuation Allowance of Property and Equipment - Years ended December 31, 1993, 1992 and 1991\n4. Schedule X: Supplementary Operating Statement Information - Years ended December 31, 1993, 1992 and 1991\nFinancial statement schedules omitted: All other schedules have been omitted because the information is either not required or is set forth in the financial statements or the notes thereto.\n(3) Exhibits - Forest shall, upon written request to Daniel L. McNamara, Corporate Secretary of Forest, addressed to Forest Oil Building, Bradford, Pennsylvania 16701, provide copies of each of the following Exhibits:\nExhibit 3(i) Restated Certificate of Incorporation of Forest Oil Corporation dated October 14, 1993, incorporated herein by reference to Exhibit 3(i) to Form 10-Q for Forest Oil Corporation for the quarter ended September 30, 1993 (File No. 0-4597).\nExhibit 3(ii) Restated By-Laws of Forest Oil Corporation as of May 9, 1990, Amendment No. 1 to By-Laws dated as of April 2, 1991, Amendment No. 2 to By-Laws dated as of May 8, 1991, Amendment No. 3 to By-Laws dated as of July 30, 1991, Amendment No. 4 to By-Laws dated as of January 17, 1992, Amendment No. 5 to By-Laws dated as of March 18, 1993 and Amendment No. 6 to By-Laws dated as of September 14, 1993, incorporated herein by reference to Exhibit 3(ii) to Form 10-Q for Forest Oil Corporation for the quarter ended September 30, 1993 (File No. 0-4597).\n*Exhibit 3(ii)(a) Amendment No. 7 to By-Laws dated as of December 3, 1993.\n*Exhibit 3(ii)(b) Amendment No. 8 to By-Laws dated as of February 24, 1994.\nExhibit 4.1 Indenture dated as of September 8, 1993 between Forest Oil Corporation and Shawmut Bank Connecticut, National Association, incorporated herein by reference to Exhibit 4.1 to Form 10-Q for Forest Oil Corporation for the quarter ended September 30, 1993 (File No. 0-4597).\n*Exhibit 4.2 Credit Agreement dated as of December 1, 1993 between Forest Oil Corporation and Subsidiary Borrowers and Subsidiary Guarantors and The Chase Manhattan Bank (National Association), as agent.\n*Exhibit 4.3 Amendment No. 1 dated as of December 28, 1993 relating to Exhibit 4.2 hereof.\n*Exhibit 4.4 Amendment No. 2 dated as of January 27, 1994 relating to Exhibit 4.2 hereof.\n*Exhibit 4.5 Security Agreement dated as of December 1, 1993 between Forest Oil Corporation and The Chase Manhattan Bank (National Association), as agent.\n*Exhibit 4.6 Deed of Trust, Mortgage, Security Agreement, Assignment of Production, Financing Statement (Personal Property including Hydrocarbons), and Fixture Filing dated as of December 1, 1993 between Forest Oil Corporation and The Chase Manhattan Bank (National Association), as agent.\nExhibit 4.7 Loan Agreement between Forest Oil Corporation and Joint Energy Development Investments Limited Partnership dated as of December 28, 1993, incorporated herein by reference to Exhibit 4.1 to Form 8-K for Forest Oil Corporation dated December 30, 1993 (File No. 0-4597).\nExhibit 4.8 Deed of Trust, Assignment of Production, Security Agreement and Financing Statement dated as of December 28, 1993 by and between Forest Oil Corporation and Joint Energy Development Investments Limited Partnership, incorporated herein by reference to Exhibit 4.2 to Form 8-K for Forest Oil Corporation dated December 30, 1993 (File No. 0-4597).\nExhibit 4.9 Act of Mortgage, Assignment of Production, Security Agreement and Financing Statement dated as of December 28, 1993 between Forest Oil Corporation and Joint Energy Development Investments Limited Partnership, incorporated herein by reference to Exhibit 4.3 to Form 8-K for Forest Oil Corporation dated December 30, 1993 (File No. 0-4597).\nExhibit 4.10 Warrant Agreement dated as of December 3, 1991 between Forest Oil Corporation and The Chase Manhattan Bank (National Association), as Warrant Agent (including Form of Warrant), incorporated herein by reference to Exhibit 4.7 to Form 10-K for Forest Oil Corporation for the year ended December 31, 1991 (File No. 0-4597).\nExhibit 4.11 Rights Agreement between Forest Oil Corporation and Mellon Securities Trust Company, as Rights Agent dated as of October 14, 1993, incorporated herein by reference to Exhibit 4.3 to Form 10-Q for Forest Oil Corporation for the quarter ended September 30, 1993 (File No. 0-4597).\nNo other instruments regarding long-term debt are filed because the amount of the securities authorized thereunder do not, in any case, exceed 10% of the total assets of Forest Oil Corporation on a consolidated basis, but a copy of such instruments will be furnished to the Commission upon request.\n+Exhibit 10.1 Description of Employee Overriding Royalty Bonuses, incorporated herein by reference to Exhibit 10.1 to Form 10-K for Forest Oil Corporation for the year ended December 31, 1990 (File No. 0-4597).\n+Exhibit 10.2 Description of Executive Life Insurance Plan, incorporated herein by reference to Exhibit 10.2 to Form 10-K for Forest Oil Corporation for the year ended December 31, 1991 (File No. 0-4597).\n+Exhibit 10.3 Form of non-qualified Deferred Compensation Agreement, incorporated herein by reference to Exhibit 10.3 to Form 10-K for Forest Oil Corporation for the year ended December 31, 1990 (File No. 0-4597).\n+Exhibit 10.4 Form of non-qualified Supplemental Executive Retirement Plan, incorporated herein by reference to Exhibit 10.4 to Form 10-K for Forest Oil Corporation for the year ended December 31, 1990 (File No. 0-4597).\n+Exhibit 10.5 Form of Executive Retirement Agreement, incorporated herein by reference to Exhibit 10.5 to Form 10-K for Forest Oil Corporation for the year ended December 31, 1990 (File No. 0-4597).\n+Exhibit 10.6 Forest Oil Corporation 1992 Stock Option Plan and Option Agreement, incorporated herein by reference to Exhibit 10.7 to Form 10-K for Forest Oil Corporation for the year ended December 31, 1991 (File No. 0-4597).\n+Exhibit 10.7 Letter Agreement with Richard B. Dorn relating to a revision to Exhibit 10.5 hereof, incorporated herein by reference to Exhibit 10.11 to Form 10-K for Forest Oil Corporation for the year ended December 31, 1991 (File No. 0-4597).\n+Exhibit 10.8 Forest Oil Corporation Annual Incentive Plan effective as of January 1, 1992, incorporated herein by reference to Exhibit 10.8 to Form 10-K for Forest Oil Corporation for the year ended December 31, 1992 (File No. 0-4597).\n*+Exhibit 10.9 Form of Executive Severance Agreement.\n*+Exhibit 10.10 Form of Settlement Agreement and General Release between John F. Dorn and Forest Oil Corporation dated March 7, 1994.\n*Exhibit 11 Forest Oil Corporation and Subsidiaries - Calculation of Earnings per Share of Common Stock.\n*Exhibit 24 Independent Auditors' Consent.\n*Exhibit 25 Powers of Attorney of the following Officers and Directors:\nDonald H. Anderson, Austin M. Beutner, Robert S. Boswell, Richard J. Callahan, Dale F. Dorn, John C. Dorn, William L. Dorn, Harold D. Hammar, David H. Keyte, James H. Lee, Daniel L. McNamara, Jeffrey W. Miller, Jack D. Riggs and Michael B. Yanney.\n**Exhibit 28 Form 11-K of the Thrift Plan of Forest Oil Corporation for the year ended December 31, 1993.\n* Filed with this report. **To be filed by amendment. + Management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K pursuant to Item 14(c) of this report.\n(b). REPORTS ON FORM 8-K\nThe following reports on Form 8-K were filed by Forest during the last quarter of 1993:\nSIGNATURES\nPursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.\nFOREST OIL CORPORATION (Registrant)\nDate: March 28, 1994 By: \/s\/ Daniel L. McNamara -------------------------------- Daniel L. McNamara Secretary\nPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated.\nSIGNATURES TITLE DATE ---------- ----- ----\nWilliam L. Dorn* Chairman of the Board and March 28, 1994 (William L. Dorn) Chief Executive Officer (Principal Executive Officer)\nRobert S. Boswell* President and Chief Financial Officer March 28, 1994 (Robert S. Boswell) (Principal Financial Officer)\nDavid H. Keyte* Vice President and Chief Accounting March 28, 1994 (David H. Keyte) Officer (Principal Accounting Officer)\nDonald H. Anderson* (Donald H. Anderson)\nAustin M. Beutner* (Austin M. Beutner)\nRobert S. Boswell* (Robert S. Boswell)\nDirectors of the Registrant March 28, 1994\nRichard J. Callahan* (Richard J. Callahan)\nDale F. Dorn* (Dale F. Dorn)\nJohn C. Dorn* (John C. Dorn)\nSIGNATURES TITLE DATE ---------- ----- ----\nWilliam L. Dorn* (William L. Dorn)\nHarold D. Hammar* (Harold D. Hammar)\nJames H. Lee* (James H. Lee)\nDirectors of the Registrant March 28, 1994\nJeffrey W. Miller* (Jeffrey W. Miller)\nJack D. Riggs* (Jack D. Riggs)\nMichael B. Yanney* (Michael B. Yanney)\n*By \/s\/ Daniel L. McNamara March 28, 1994 ----------------------------- Daniel L. McNamara (as attorney-in-fact for each of the persons indicated)\nINDEPENDENT AUDITORS' REPORT\nThe Board of Directors and Shareholders Forest Oil Corporation:\nUnder date of February 22, 1994, we reported on the consolidated balance sheets of Forest Oil Corporation and subsidaries as of December 31, 1993 and 1992, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1993, as contained in the annual report on Form 10-K for the year 1993. In connection with our audits of the aforementioned consolidated financial statements, we have also audited the related financial statement schedules V, VI, and X. These financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statement schedules based on our audit.\nIn our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.\nAs discussed in Notes 8 and 13 to the financial statements, the Company changed its method of accounting for income taxes and postretirement benefits.\nKPMG PEAT MARWICK\nDenver, Colorado February 22, 1994\nSCHEDULE V\nFOREST OIL CORPORATION AND CONSOLIDATED SUBSIDIARIES Property and Equipment Years ended December 31, 1993, 1992 and 1990 (In Thousands)\nSCHEDULE VI\nFOREST OIL CORPORATION AND CONSOLIDATED SUBSIDIARIES Accumulated Depreciation, Depletion and Valuation Allowance of Property and Equipment Years ended December 31, 1993, 1992 and 1991 (In Thousands)\nSCHEDULE X\nFOREST OIL CORPORATION AND CONSOLIDATED SUBSIDIARIES Supplementary Income Statement Information\nYears ended December 31, 1993, 1992 and 1991\nOther supplementary income statement information required by Rule 12-11 is not presented because the required item does not exceed 1 percent of total sales and revenues reported in the related income statement, except for maintenance and repair costs included in the Company's oil and gas production expense. Such maintenance and repair costs cannot be distinguished from other components of lease operating expense.","section_15":""}
{"filename":"3000_1993.txt","cik":"3000","year":"1993","section_1":"ITEM 1. BUSINESS - ------------------ a) General Development of Business ------------------------------- Airborne Freight Corporation (herein referred to as \"Airborne Express\" or the \"Company\", which reference shall include its subsidiaries and their assets and operations, unless the context clearly indicates otherwise) was incorporated in Delaware on May 10, 1968. The Company is an air express company and air freight forwarder that expedites shipments of all sizes to destinations throughout the United States and most foreign countries.\nThe Company holds a certificate of registration issued by the United States Patent and Trademark Office for the service mark AIRBORNE EXPRESS. Most public presentation of the Company carries this name. The purpose of using this trade name is to more clearly communicate to the market place the primary nature of the business of the Company.\nABX Air, Inc., the Company's principal wholly-owned subsidiary (herein referred to as \"ABX\" or the \"Airline\"), was incorporated in Delaware on January 22, 1980. ABX provides domestic express cargo service and cargo service to Canada. The Company is the principal customer of ABX for this service.\nb) Financial Information about Industry Segments --------------------------------------------- None\nc) Narrative Description of Business --------------------------------- Airborne Express provides door-to-door express delivery of small packages and documents throughout the United States and to and from most foreign countries. The Company also acts as an international and domestic freight forwarder for shipments of any size. The Company's strategy is to be the low cost provider of express services for high volume corporate customers.\nDomestic Operations - ------------------- The Company's domestic operations primarily involve express door-to-door delivery of small packages and documents weighing less than 100 pounds. Shipments consist primarily of business documents and other printed matter, electronic and computer parts, machine parts, health care items, films and videotapes, and other items for which speed and reliability of delivery are important.\nThe Company's primary service is its overnight express product. This product, which comprised approximately 68% of the Company's domestic shipments during 1993, generally provides for before noon delivery on the next business day to most metropolitan cities in the United States. The Company also provides Saturday and holiday pickup and delivery service for most cities.\nThe Company offers a deferred service product, Select Delivery Service (\"SDS\"), which provides for next afternoon or second day delivery. The SDS product expands the Company's product offering and introduces new customers to air express services. SDS service generally provides for shipments weighing five pounds or less to be delivered on a next afternoon basis with shipments weighing more than five pounds being delivered on a second day basis. SDS shipments, which comprised approximately 31% of total domestic shipments during 1993, are generally lower priced than the overnight express product reflecting the less time sensitive nature of the shipments.\nWhile the Company's domestic airline system is designed primarily to handle express shipments, any available capacity is also utilized to carry shipments which the Company would normally move on other carriers in its role as an air freight forwarder.\nPickup and Delivery - ------------------- The Company accomplishes its door-to-door pickup and delivery service using approximately 9,900 radio-dispatched delivery vans and trucks, of which approximately 3,600 are owned by the Company. Independent contractors under contract with the Company provide the balance of the pickup and delivery services.\nThe Company's facilities are linked to FOCUS, a proprietary freight tracking and message computer system which permits monitoring of overall system performance and allows the Company to ascertain the status of a specific shipment. FOCUS receives information in several ways including drivers' use of hand-held scanners which read bar-coded information on shipping documents. FOCUS provides many major customers direct access to the status of their shipments 24 hours a day through the use of their own computer systems.\nBecause convenience is an important factor in attracting business from less frequent shippers, the Company has an ongoing program to place drop boxes in convenient locations. The Company has approximately 7,300 boxes in service.\nSort Facilities - --------------- The Company's main sort center is located in Wilmington, Ohio. As express delivery volume has increased, the main sort center has been expanded. The sort center currently has the capacity to handle 830,000 pieces during the primary 2-1\/2 hour nightly sort operation. On average, approximately 600,000 pieces were sorted each weekday night at the sort center during December 1993. In addition to the sort facilities, the Wilmington location consists of a Company-owned airpark (including airport facilities); maintenance, storage, training and refueling facilities; and operations and administrative offices.\nThe Company also conducts a daylight sort operation at Wilmington. The day sort services SDS shipments weighing in excess of five pounds that are consolidated at certain regional hub facilities and either flown or trucked into or out of Wilmington.\nThe operation of the Wilmington facility is critical to the Company's business. The inability to use the Wilmington airport, because of bad weather or other factors, would have a serious adverse effect on the Company's service. However, contingency plans, including landing at nearby airports and transporting packages to and from the sort center by truck, can be and have been implemented to address temporary inaccessibility of the Wilmington airport.\nIn addition to the main sort facility at Wilmington, ten regional hub facilities have been established primarily to sort shipments originating and having a destination within approximately a 300 mile radius of a regional hub.\nIn December 1993, approximately 65% and 13% of total shipment weight was handled through the night sort and day sort operations at Wilmington, respectively, with the remaining 22% being handled exclusively by the regional hubs.\nShipment Routing - ---------------- The logistical means of moving a shipment from its origin to destination are determined by several factors. Shipments are routed differently depending on shipment product type, weight, geographic distances between origin and destination, and locations of Company stations relative to the locations of sort facilities. Shipments generally are moved between stations and sort facilities on either Company aircraft or contracted trucks. Certain shipments are transported airport-to-airport on commercial air carriers.\nOvernight express shipments and SDS shipments weighing five pounds or less are picked up by local stations and generally consolidated with other stations' shipments at Company airport facilities. Shipments that are not serviced through regional hubs are loaded on Company aircraft departing each weekday evening from various points within the United States and Canada. These aircraft may stop at other airports to permit additional locations and feeder aircraft to consolidate their cargo onto the larger aircraft before completing the flight to the Wilmington hub. The aircraft are scheduled to arrive at Wilmington between approximately 11:30 p.m. and 3:00 a.m. at which time the shipments are sorted and reloaded. The aircraft are scheduled to depart before 6:30 a.m. and return to their applicable destinations in time to complete scheduled next business morning or next afternoon service commitments. The Wilmington hub also receives shipments via truck from selected stations in the vicinity of the Wilmington hub for integration with the nightly sort process.\nFor the daylight sort operation, three aircraft return to Wilmington from overnight service destinations on Tuesday through Friday. These aircraft, and trucks from six regional hubs, arrive at Wilmington between 10:00 a.m. and noon, at which time shipments are sorted and reloaded on the aircraft or trucks by 3:00 p.m. for departure and return to their respective destinations.\nThe Company also performs weekend sort operations at Wilmington to accommodate Saturday pickups and Monday deliveries of both overnight express and SDS shipments. This sort is supported both by Company aircraft and by trucks.\nAircraft - -------- The Company acquires and utilizes used aircraft manufactured in the late 1960s and early 1970s. Upon acquisition, the aircraft are substantially modified by the Company. At the end of 1993, the Company's in-service fleet consisted of a total of 90 aircraft, including 26 DC-8s (consisting of 10 series 61, 6 series 62 and 10 series 63), 53 DC-9s (consisting of 2 series 10, 37 series 30 and 14 series 40), and 11 YS-11 turboprop aircraft. The Company owns the majority of the aircraft it operates, but has completed sale-leaseback transactions with respect to six DC-8 and six DC-9 aircraft. In addition, approximately 50 smaller aircraft are chartered nightly to connect small cities with Company aircraft that then operate to and from Wilmington.\nAt year end 1993, the nightly lift capacity of the system was about 2.8 million pounds versus approximately 2.4 million pounds and 2.1 million pounds at the end of 1992 and 1991, respectively. Over the past several years the Company's utilization of available lift capacity has exceeded 80%.\nIn response to increased public awareness regarding the operation of older aircraft, the Federal Aviation Administration (\"FAA\") has mandated additional maintenance requirements for certain aircraft, including the type operated by the Company. These maintenance requirements were substantially completed by December 1993 for the Company's DC-8 aircraft. As of the end of 1993 the Company had completed this required maintenance on 48 DC-9 series aircraft. This maintenance is required to be completed by September 1994. The Company believes these maintenance requirements for remaining aircraft can be accomplished without materially impacting operations or the financial position of the Company. However, the FAA may, in the future, impose additional requirements with respect to maintenance procedures and practices for aircraft and engines of the type operated by the Company or interpret existing rules in a manner which could have a material adverse effect on the Company's operations and financial position.\nThe Company is periodically required to retrofit certain aircraft equipment and subsystems in accordance with mandated FAA requirements. Presently, the Company is seeking a waiver from the FAA with regard to the date by which installation of certain instrumentation on its YS-11 aircraft must be accomplished. If the FAA denies the Company's request, the Company believes it can comply with the FAA requirement without disrupting the Company's flight schedules.\nIn accordance with federal law and FAA regulations, only subsonic turbojet aircraft classified as Stage 2 or 3 by the FAA may be operated in the United States. Generally, Stage 3 aircraft produce less noise than a comparable Stage 2 aircraft. As of December 31, 1993, 26 of the Company's turbojet aircraft (16 DC-8 and 10 DC-9 aircraft) are Stage 3 aircraft, the balance being Stage 2 aircraft.\nIn 1990, Congress passed the Airport Noise and Capacity Act of 1990 (the \"Noise Act\") which, among other things, requires turbojet aircraft weighing in excess of 75,000 pounds and operating in the United States (the type DC-8 and DC-9 aircraft operated by the Company) to comply with Stage 3 noise emission standards on or before December 31, 1999. The Company's YS-11 turboprop aircraft are not subject to these requirements. The Secretary of Transportation may grant a waiver from this provision to allow up to 15% of an air carrier's Stage 2 fleet to be operated until December 31, 2003. In accordance with the Noise Act, the FAA, acting under delegated authority, has issued regulations establishing interim compliance deadlines. These rules require air carriers to reduce the base level of Stage 2 aircraft they operate 25% by December 31, 1994; 50% by December 31, 1996; and 75% by December 31, 1998. Under limited circumstances, the Secretary of Transportation may grant an operator a waiver from these interim compliance deadlines. As of December 31, 1993 the Company accomplished a reduction of its base level aircraft of approximately 24% and expects to meet or exceed the compliance percentage at the first\ninterim compliance deadline of December 31, 1994.\nIn addition, the Noise Act and the implementing FAA Regulations prohibit a U.S. air carrier from importing into the United States and thereafter operating Stage 2 aircraft unless the aircraft were under contract prior to November 5, 1990. The Company believes that most, if not all of the aircraft which were subject to contracts executed prior to November 5, 1990 and placed into service after the passage of the Noise Act will be permitted to be operated as Stage 2 aircraft subject to the interim and final Stage 2 aircraft phase-out compliance deadlines. In addition to FAA regulation, certain local airports also regulate noise compliance. See \"Business - Regulation\".\nThe Company, in conjunction with several other companies, has developed, tested and received certification of noise suppression technology known as hush kits for its DC-9 series aircraft, which meet FAA Stage 3 requirements. Both of the Company's DC-9-10 series aircraft and eight of the Company's DC-9-30 series aircraft meet Stage 3 requirements. The estimated capital cost for Stage 3 hush kits is approximately $1.1 million for each DC-9 series aircraft. The Company has installed hush kits designed to satisfy Stage 3 compliance requirements on all of its DC-8-62 and DC-8-63 series aircraft. In early 1994, firms under contract to the Company obtained FAA certification for hush kits and other required modifications designed to meet Stage 3 noise standards for the Company's DC-8-61 aircraft. The estimated capital cost for these hush kits and related hardware is approximately $4.0 million per aircraft.\nInternational Operations - ------------------------ The Company provides international express door-to-door delivery and a variety of freight services. These services are provided in most foreign countries on an inbound and outbound basis through a network of Airborne offices and independent agents. Most international deliveries are accomplished within 24 to 96 hours of pickup.\nThe Company's international express service is intended for the movement of non-dutiable and certain dutiable shipments weighing less than 99 pounds. The Company's international freight service handles heavier weight shipments on either an airport-to-airport, door-to-airport or door-to-door basis.\nThe Company's strategy is to use a variable-cost approach in delivering and expanding international services to its customers. This strategy uses existing commercial airline lift capacity in connection with the Company's domestic network to move shipments to overseas destinations. Additionally, exclusive service arrangements with independent freight and express agents have been entered into to accommodate shipments in locations\nnot currently served by Company-owned operations. The Company believes there are no significant service advantages which would justify the operation of its own aircraft on international routes or significant investment in additional offshore facilities or ground operations. In order to expand its business at a reasonable cost, the Company continues to explore possible joint venture agreements, similar to its arrangement with Mitsui & Co., Ltd. in Japan, which combine the Company's management expertise, domestic express system and information systems with local business knowledge and market reputation of suitable partners.\nThe Company's domestic stations are staffed and equipped to handle international shipments to or from almost anywhere in the world. In addition to its extensive domestic network, the Company operates its own offices in the Far East, Australia, New Zealand, and the United Kingdom. The Company's freight and express agents worldwide are connected to FOCUS, Airborne's on-line communication network. The Company is capable of providing its customers with immediate access to the status of shipments via FOCUS almost anywhere in the world.\nCustomers and Marketing - ----------------------- The Company's primary domestic strategy focuses on express services for high volume corporate customers. Most high volume customers have entered into service agreements providing for specified rates or rate schedules for express deliveries. As of December 31, 1993, the Company serviced approximately 356,000 active customer shipping locations.\nThe Company determines prices for any particular domestic express customer based on competitive factors, anticipated costs, shipment volume and weight, and other considerations. The Company believes that it generally offers prices that are competitive with, or lower than, prices quoted by its principal competitors for comparable services.\nThe Company has historically marketed the overnight express service as its primary domestic product. However, the Company believes its SDS product represents an attractive opportunity to expand its customer product offering and generate incremental revenues utilizing its existing network. SDS is a lower yielding product than the Company's overnight product and could result in conversion of certain shipments which may have otherwise been handled on an overnight basis.\nInternationally, the Company's marketing strategy is to target the outbound express and freight shipments of U.S. corporate customers, and to sell the inbound service of the Company's distribution capabilities in the United States.\nBoth in the international and domestic markets, the Company believes that its customers are most effectively reached by a direct sales force,\nand accordingly, does not currently engage in mass media advertising. Domestic sales representatives are responsible for selling both domestic and international express shipments. In addition, the International Division has its own dedicated direct sales organization for selling international freight service.\nThe Company's sales force currently consists of approximately 290 domestic representatives and approximately 80 international specialists. The Company's sales efforts are supported by the Marketing and International Divisions, based at the Company headquarters. Senior management is also active in marketing the Company's services to major accounts.\nValue-added services continue to be important factors in attracting and retaining customers. Accordingly, the Company is automating more of its operations to make the service easier for customers to use and to provide them with valuable management information. The Company believes that it is generally competitive with other express carriers in terms of reliability, value-added services and convenience.\nFor many of its high volume customers, the Company offers a metering device, called LIBRA II, which is installed at the customer's place of business. With minimum data entry, the metering device weighs the package, calculates the shipping charges, generates the shipping labels and provides a daily shipping report. At year end 1993, the system was in use at approximately 5,500 domestic customer locations and a number of selected international customer locations. Use of LIBRA II not only benefits the customer directly, but also lowers the Company's operating costs, since LIBRA II shipment data is transferred into the Airborne FOCUS shipment tracking system automatically, thus avoiding duplicate data entry.\n\"Customer Linkage\", an electronic data interchange (\"EDI\") program developed for Airborne's highest volume shippers, allows customers, with their computers, to create shipping documentation at the same time they are entering orders for their goods. At the end of each day, shipping activities are transmitted electronically to the Airborne FOCUS system where information is captured for shipment tracking and billing purposes. Customer Linkage benefits the customer by eliminating repetitive data entry and paperwork and also lowers the Company's operating costs by eliminating manual data entry. EDI also includes electronic invoicing and payment remittance processing. During 1992, the Company introduced a software program known as Quicklink, which significantly reduces programming time required by customers to take advantage of linkage benefits.\nThe Company offers a number of special logistics programs to customers through its Advanced Logistics Services Corp. (\"ALS\") subsidiary. This\nsubsidiary, established in 1993, operates the Company's Stock Exchange and Hub Warehousing and other logistics programs. These programs provide customers the ability to maintain inventories which can be managed either by Company or customer personnel. Items inventoried at Wilmington can be delivered utilizing either the Company's airline system or, if required, commercial airlines on a next-flight-out basis. ALS' Central Print program allows information to be sent electronically to customer computers located at Wilmington where Company personnel monitor printed output and ship the material according to customer instructions. The Company also offers a Regional Warehousing program where customer inventories are managed by the Company at any of over 40 locations around the United States and Canada.\nIn addition, the Company's Sky Courier business provides next-plane-out service at premium prices.\nThe Company has obtained ISO 9000 certification for its Chicago, Philadelphia and London stations and its Seattle Headquarters. The ISO 9000 is a quality program developed by the International Standards Organization (\"ISO\"), based in Geneva, Switzerland. This organization provides a set of international standards on quality management and quality assurance presently recognized in 91 countries. The certification is an asset in doing business worldwide and provides evidence of the Company's commitment to excellence and quality. The Company expects to certify additional facilities over the next several years.\nCompetition - ----------- The market for the Company's services has been and is expected to remain highly competitive. The principal competitive factors in both domestic and international markets are price, the ability to provide reliable pickup and delivery, and value-added services.\nFederal Express continues to be the dominant competitor in the domestic express business, followed by United Parcel Service. Airborne Express currently ranks third in shipment volume behind these two companies in the domestic express business. Other domestic express competitors include the U.S. Postal Service's Express Mail Service and several other transportation companies offering next morning delivery service. The Company also competes to some extent with companies offering ground transportation services and with facsimile and other forms of electronic transmission.\nThe Company increased rates in March 1993 by approximately 5% on domestic business that was not under a time-definite contract, resulting in an overall yield improvement of approximately 2%. This was the first domestic rate increase in four years. Although still very competitive, the domestic pricing environment improved during 1993 resulting in relatively stable yields.\nThe Company believes it is important to maintain an active capital expansion program to improve service and increase productivity as its volume of shipments increases. However, the Company has significantly less capital resources than its two primary competitors.\nIn the international markets, in addition to Federal Express and United Parcel Service, the Company competes with DHL, TNT and other air freight forwarders or carriers and most commercial airlines.\nEmployees - --------- As of December 31, 1993, the Company and its subsidiaries had approximately 9,500 full-time employees and 6,300 part-time and casual employees. Approximately 4,100 full-time employees (including the Company's pilots) and 2,800 part-time and casual employees are employed under union contracts, primarily with locals of the International Brotherhood of Teamsters and Warehousemen.\nLabor agreements for the Company's ground personnel are for three-year terms with most agreements expiring in 1994. The Company's pilots are covered by a contract which is amendable in 1995.\nSubsidiaries - ------------ The Company has the following wholly-owned subsidiaries:\n1. ABX Air, Inc., a Delaware corporation, owns and operates the Airline. Its wholly-owned subsidiaries are as follows:\na) Wilmington Air Park, Inc., a Ohio corporation, is the owner of the Wilmington airport property (Airborne Air Park).\nb) Airborne FTZ, Inc., a Ohio corporation, is the holder of a foreign trade zone certificate at the Wilmington airport property.\nc) Aviation Fuel, Inc., a Ohio corporation, purchases and sells aviation and other fuels.\nd) Advanced Logistics Services Corp., a Ohio corporation, provides customized warehousing, inventory management and shipping services.\ne) Sound Suppression, Inc., a Ohio corporation with no current operating activities.\n2. Awawego Delivery, Inc., a New York corporation, holds trucking rights in New York and Connecticut.\n3. Airborne Forwarding Corporation, a Delaware corporation doing business as Sky Courier, provides expedited courier service.\n4. Airborne Freight Limited, a New Zealand corporation, provides air express and air freight services.\nRegulation - ---------- The Company's operations are subject to various regulations including regulation by the United States Department of Transportation (\"DOT\"), the FAA, the Interstate Commerce Commission, and various state, local and foreign authorities.\nThe DOT, under the Federal Aviation Act, grants air carriers the right to engage in domestic and international air transportation. The DOT issues certificates to engage in air transportation if the carrier is a U.S. citizen, as defined by the Act, and possesses the financial and managerial fitness necessary to hold such certificates. The DOT has the authority to modify, suspend or revoke such certificates for cause, including failure to comply with the Federal Aviation Act or the DOT regulations. The Company believes it possesses all necessary DOT-issued certificates to conduct its operations.\nThe FAA regulates aircraft safety and flight operations generally, including equipment, ground facilities, maintenance and communications. The FAA issues operating certificates to carriers who possess the technical competence to conduct air carrier operations. In addition, the FAA issues certificates of airworthiness to each aircraft which meets the requirements for aircraft design and maintenance. The Company believes it holds all airworthiness and other FAA certificates required for the conduct of its business, although the FAA has the power to suspend or revoke such certificates for cause, including failure to comply with the Federal Aviation Act.\nThe federal government generally regulates aircraft engine noise at its source. However, local airport operators may, under certain circumstances, regulate airport operations based on aircraft noise considerations. Prior to passage of the Noise Act, certain airports adopted regulations including restrictions on aircraft operations, such as curfews during late night and early morning hours, noise budgets or mandatory use of Stage 3 aircraft, many of which are grandfathered under the Noise Act. Other airports have proposed and may adopt similar noise restrictions. The Noise Act provides that airports proposing restrictions on Stage 2 aircraft operations must provide interested parties a minimum of 180 days advance notice of such regulations and the opportunity to comment\nthereon. Thereafter, the airport may impose such noise regulations subject to the requirements of existing federal law. The Noise Act further provides that airports that fail to provide the required notice and opportunity to comment will be deemed ineligible for federal airport grant funds or the authority to impose passenger facility charges. With respect to Stage 3 aircraft restrictions, the Noise Act provides that no such restrictions may be imposed unless the airport either obtains the consent of all aircraft operators serving the airport or obtains FAA approval to impose such restrictions. Noncompliance with these rules will also result in the loss of federal funding and eligibility to impose passenger facility charges. The Company believes the operation of its aircraft either complies with or is exempt from compliance with currently applicable local airport rules. However, if more stringent aircraft operating regulations were adopted on a widespread basis, the Company might be required to expend substantial sums, make schedule changes or take other actions. See \"Business - Domestic Operations - Aircraft.\"\nThe Company's aircraft currently meet all know requirements for emission levels. However, under the Clear Air Act, individual states or the Federal Environmental Protection Agency (the \"EPA\") may adopt regulations requiring the reduction in emissions for one or more localities based on the measured air quality at such localities. The EPA has proposed regulations for portions of California calling for emission reductions by the year 2005. There can be no assurance that if such regulations are adopted in the future or changes in existing laws or regulations are promulgated that such laws or rules would not have a material adverse effect on the Company.\nUnder currently applicable federal aviation law, the Company's airline subsidiary could cease to be eligible to operate as an all-cargo carrier if more than 25% of the voting stock of the Company were owned or controlled by non-U.S. citizens or the Airline was not effectively controlled by U.S. citizens. Moreover, in order to hold an all-cargo air carrier certificate, the president and at least two-thirds of the directors and officers of an air carrier must be U.S. citizens. The Company has entered into a Rights Agreement designed, in part, to discourage a single foreign person from acquiring 20% or more, and foreign persons in the aggregate from acquiring 25% or more, of the Company's outstanding voting stock without the approval of the Board of Directors. To the best of the Company's knowledge, foreign stockholders do not control more than 25% of the outstanding voting stock. Two of the Company's officers are not U.S. citizens.\nThe Company believes that its current operations are substantially in compliance with the numerous regulations to which its business is subject; however, various regulatory authorities have jurisdiction over significant aspects of the Company's business, and it is possible that new laws or\nregulations or changes in existing laws or regulations or the interpretations thereof could have a material adverse effect on the Company's operations.\nFinancial Information Regarding International and Domestic Operations - --------------------------------------------------------------------- Financial information relating to foreign and domestic operations for each of the three years in the period ended December 31, 1993 is presented in Note L (Segment Information) of the Notes to Consolidated Financial Statements appearing in the 1993 Annual Report to Shareholders and is incorporated herein by reference.\nITEM 2.","section_1A":"","section_1B":"","section_2":"ITEM 2. PROPERTIES - -------------------- The Company leases general and administrative office facilities located in Seattle, Washington.\nAt year end the Company maintained 232 domestic and 22 foreign stations, most of which are leased. The majority of the facilities are located at or near airports.\nThe Company owns the airport at the Airborne Air Park, in Wilmington, Ohio. The airport currently consists of a runway, taxi-ways, aprons, buildings serving as aircraft and equipment maintenance facilities, a sort facility, storage facilities, a training center, and operations and administrative offices. The Company has in progress a significant expansion of the airpark which includes construction of a second runway, taxiways, two roadway tunnels under the taxiways and several other facilities. This expansion should be substantially completed during 1995.\nInformation regarding collateralization of certain property and lease commitments of the Company is set forth in Notes E and F of the Notes to Consolidated Financial Statements appearing in the 1993 Annual Report to Shareholders and is incorporated herein by reference.\nThe Company believes its existing facilities are adequate to meet current needs.\nITEM 3.","section_3":"ITEM 3. LEGAL PROCEEDINGS - --------------------------- None\nITEM 4.","section_4":"ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------------------------------------------------------------- None\nITEM 4a. EXECUTIVE OFFICERS OF THE REGISTRANT\nPART II\nITEM 5.","section_5":"ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED - ---------------------------------------------------------------- STOCKHOLDERS MATTERS - -------------------- The response to this Item is contained in the 1993 Annual Report to Shareholders and the information contained therein is incorporated by reference.\nOn February 28, 1993 there were approximately 1,497 shareholders of record of the Common Stock of the Company based on information provided by the Company's transfer agent.\nITEM 6.","section_6":"ITEM 6. SELECTED FINANCIAL DATA - --------------------------------- The response to this Item is contained in the 1993 Annual Report to Shareholders and the information contained therein is incorporated herein by reference.\nITEM 7.","section_7":"ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND - ------------------------------------------------------------------------- RESULTS OF OPERATIONS - --------------------- The response to this Item is contained in the 1993 Annual Report to Shareholders and the information contained therein is incorporated herein by reference.\nITEM 8.","section_7A":"","section_8":"ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - ----------------------------------------------------- The response to this Item is contained in the 1993 Annual Report to Shareholders and the information contained therein is incorporated herein by reference.\nITEM 9.","section_9":"ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND - ------------------------------------------------------------------------- FINANCIAL DISCLOSURE - -------------------- None\nPART III\nITEM 10.","section_9A":"","section_9B":"","section_10":"ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - ------------------------------------------------------------- The response to this Item is contained in part in the Proxy Statement for the 1994 Annual Meeting of Shareholders under the captions \"Election of Directors\" and \"Exchange Act Compliance\" and the information contained therein is incorporated herein by reference.\nThe executive officers of the Company are elected annually at the Board of Directors meeting held in conjunction with the annual meeting of shareholders. There are no family relationships between any directors or executive officers of the Company. Additional information regarding executive officers is set forth in Part I, Item 4a.\nITEM 11.","section_11":"ITEM 11. EXECUTIVE COMPENSATION - --------------------------------- The response to this Item is contained in the Proxy Statement for the 1994 Annual Meeting of Shareholders under the caption \"Executive Compensation\" and the information contained therein is incorporated herein by reference.\nITEM 12.","section_12":"ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT - ------------------------------------------------------------------------- The response to this Item is contained in the Proxy Statement for the 1994 Annual Meeting of Shareholders under the captions \"Voting at the Meeting\" and \"Stock Ownership of Management\" and the information contained therein is incorporated herein by reference.\nITEM 13.","section_13":"ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - --------------------------------------------------------- The response to this Item is contained in the Proxy Statement for the 1994 Annual Meeting of Shareholders under the caption \"Board of Directors and Committees\" and the information contained therein is incorporated herein by reference.\nPART IV\nITEM 14.","section_14":"ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K - -------------------------------------------------------------------------- (a)1. Financial Statements -------------------- The following consolidated financial statements of Airborne Freight Corporation and its subsidiaries as contained in its 1993 Annual Report to Shareholders are incorporated by reference in Part II, Item 8:\nConsolidated Statements of Net Earnings\nConsolidated Balance Sheets\nConsolidated Statements of Cash Flows\nNotes to Consolidated Financial Statements\nIndependent Auditors' Report\nAll other schedules are omitted because they are not applicable or are not required, or because the required information is included in the consolidated financial statements or notes thereto.\n(a)3. Exhibits - ----------------- A) The following exhibits are filed with this report:\nEXHIBIT NO. 3 Articles of Incorporation and By-laws - ------------------------------------------------------ 3(a) The Restated Certificate of Incorporation of the Company, dated as of August 4, 1987 (incorporated herein by reference from Exhibit 3(a) to the Company's Form 10-K for the year\nended December 31, 1987).\n3(b) The By-laws of the Company as amended to February 1, 1988 (incorporated herein by reference from Exhibit 3(b) to the Company's Form 10-K for the year ended December 31, 1987).\nEXHIBIT NO. 4 Instruments Defining the Rights of Security Holders - --------------------------------------------------------------------\nIncluding Indentures - -------------------- 4(a) Indenture dated as of September 4, 1986, between the Company and Peoples National Bank of Washington (now U.S. Bank of Washington), as trustee, relating to $25 million of the Company's 10% Senior Subordinated Notes due 1996 (incorporated by reference from Exhibit 4(c) to Amendment No. 1 to the Company's Registration Statement on Form S-3, No. 33-6043, filed with the Securities and Exchange Commission on September 3, 1986).\n4(b) Note Purchase Agreement dated September 3, 1986 among the Company and the original purchasers of the Company's 10% Senior Subordinated Notes due 1996 (incorporated by reference from Exhibit 4(d) to Amendment No. 1 to the Company's Registration Statement on Form S-3, No. 33-6043, filed with the Securities and Exchange Commission on September 3, 1986).\n4(c) Indenture dated as of August 15, 1991, between the Company and Bank of America National Trust and Savings Association, as Trustee, with respect to the Company's 6-3\/4% Convertible Subordinated Debentures due August 15, 2001 (incorporated herein by reference from Exhibit 4(i) to Amendment No. 1 to the Company's Registration Statement on Form S-3 No. 33-42044 filed with the Securities and Exchange Commission on August 15, 1991).\n4(d) Indenture dated as of December 3, 1992, between the Company and Bank of New York, as trustee, relating to the Company's 8-7\/8% Notes due 2002 (incorporated herein by reference from Exhibit 4(a) to Amendment No. 1 to the Company's Registration Statement on Form S-3, No. 33-54560 filed with the Securities and Exchange Commission on December 4, 1992).\n4(e) Rights Agreement, dated as of November 20, 1986 between the Company and First Jersey National Bank (predecessor to First Interstate Bank, Ltd.), as Rights Agent (incorporated by reference from Exhibit 1 to the Company's Registration Statement on Form 8-A, dated November 28, 1986).\n4(f) Certificate of Designation of Series A Participating Cumulative Preferred Stock Setting Forth the Powers, Preferences, Rights, Qualification, Limitations and Restrictions of Such Series of Preferred Stock of the Company (incorporated by reference from Exhibit 2 to the Company's Registration Statement on Form 8-A, dated November 28, 1986).\n4(g) Form of Right Certificate relating to the Rights Agreement (see 4(e) above, incorporated by reference from Exhibit 3 to the Company's Registration Statement on Form 8-A, dated November 28, 1986).\n4(h) Letter dated January 5, 1990, from the Company to First Interstate Bank, Ltd. (\"FIB\"), appointing FIB as successor Rights Agent under the Rights Agreement dated as of November 20, 1986, between the Company and The First Jersey National Bank (incorporated by reference from Exhibit 4(c) to the Company's Form 10-K for the year ended December 31, 1989).\n4(i) Amendment to Rights Agreement entered into as of January 24, 1990, between the Company and First Interstate Bank, Ltd. (incorporated herein by reference from Exhibit 4(d) to the Company's Form 10-K for the year ended December 31, 1989).\n4(j) Third Amendment to Rights Agreement entered into as of November 6, 1991 between the Company and First Interstate Bank, Ltd. (incorporated herein by reference from Exhibit 4(a) to the Company's Form 10-K for the year ended December 31, 1991).\n4(k) 6.9% Cumulative Convertible Preferred Stock Purchase Agreement dated as of December 5, 1989, among the Company, Mitsui & Co., Ltd., Mitsui & Co. (U.S.A.), Inc., and Tonami Transportation Co., Ltd. (incorporated herein by reference from Exhibit 4(b) to the Company's Form 10-K for the year ended December 31, 1989).\n4(k)(i) Amendments to the above Stock Purchase Agreement irrevocably waiving all demand registration rights, relinquishing the right of Mitsui & Co., Ltd. to designate a representative to Airborne's Board of Directors, and resignation of T. Kokai from said Board (incorporated herein by reference from Amendment No. 1 to Schedule 13D of Mitsui & Co., Ltd. Intermodal Terminal, Inc. (assignee of Mitsui & Co. (USA) Inc.) and Tonami Transportation Co., Ltd., filed with the Securities & Exchange Commission on December 21, 1993).\n4(l) Certificate of Designation of Preferences of Preferred Shares of Airborne Freight Corporation, as filed on January 26, 1990, in the Office of the Secretary of the State of Delaware (incorporated herein by reference from Exhibit 4(a) to the Company's Form 10-K for the year ended December 31, 1989).\nEXHIBIT NO. 10 Material Contracts - ---------------------------------\nExecutive Compensation Plans and Agreements - ------------------------------------------- 10(a) 1979 Airborne Freight Corporation Key Employee Stock Option and Stock Appreciation Rights Plan, as amended through February 2, 1987 (incorporated by reference from Exhibit 10(d) to the Company's Form 10-K for the year ended December 31, 1986).\n10(b) 1983 Airborne Freight Corporation Key Employee Stock Option and Stock Appreciation Rights Plan, as amended through February 2, 1987 (incorporated by reference from Exhibit 10(c) to the Company's Form 10-K for the year ended December 31, 1986).\n10(c) 1989 Airborne Freight Corporation Key Employee Stock Option and Stock Appreciation Rights Plan (incorporated herein by reference from Exhibit 10(d) to the Company's Form 10-K for the year ended December 31, 1989).\n10(d) 1994 Airborne Freight Corporation Key Employee Stock Option and Stock Appreciation Rights Plan (incorporated herein by reference from the Addendum to the Company's Proxy Statement for the 1994 Annual Meeting of Shareholders).\n10(e) Airborne Freight Corporation Directors Stock Option Plan (incorporated herein by reference from the Addendum to the Company's Proxy Statement for the 1991 Annual Meeting of Shareholders).\n10(f) Airborne Express Executive Deferral Plan dated January 1, 1992 (incorporated by reference from Exhibit 10(b) to the Company's Form 10-K for the year ended December 31, 1991).\n10(g) Airborne Express Supplemental Executive Retirement Plan dated January 1, 1992 (incorporated by reference from Exhibit 10(c) to the Company's Form 10-K for the year ended December 31, 1991).\n10(h) Airborne Express 1993 Executive Management Incentive Compensation Plan.\n10(i) Employment Agreement dated December 15, 1983, as amended November 20, 1986, between the Company and Mr. Robert G. Brazier, President and Chief Operating Officer (incorporated by reference from Exhibit 10(a) to the Company's Form 10-K for the year ended December 31, 1986). Identical agreements exist between the Company and the other six executive officers.\n10(j) Employment Agreement dated November 20, 1986 between the Company and Mr. Lanny H. Michael, then Vice President, Treasurer and Controller (incorporated by reference from Exhibit 10(b) to the Company's Form 10-K for the year ended December 31, 1986). Identical agreements exist between the Company and 25 other officers of the Company. In addition, the Company's principal subsidiary, ABX Air, Inc., has entered into substantially identical agreements with seven of its officers.\nOther Material Contracts ------------------------ 10(k) $240,000,000 Revolving Loan Facility dated as of November 19, 1993 among the Company, as borrower, and Wachovia Bank of Georgia, N.A., ABN AMRO Bank N.V., United States National Bank of Oregon, Seattle-First National Bank, CIBC Inc., Continental Bank N.A., Bank of America National Trust and Savings Association, The Bank of New York, NBD Bank, N.A., as banks and Wachovia Bank of Georgia, N.A., as agent.\n10(l) Letter dated December 5, 1989, to the Company from Mitsui & Co., Ltd. (\"Mitsui\"), relating to Mitsui's commitment to provide the Company and ABX Air, Inc., a $100 million aircraft financing facility, as modified by that certain Supplement thereto entered into as of March 15, 1990 (incorporated herein by reference from Exhibit 10(b) to the Company's Form 10-K for the year ended December 31, 1989).\n10(m) Shareholders Agreement entered into as of February 7, 1990, among the Company, Mitsui & Co., Ltd., and Tonami Transportation Co., Ltd., relating to joint ownership of Airborne Express Japan, Inc. (incorporated herein by reference\nfrom Exhibit 10(c) to the Company's Form 10-K for the year ended December 31, 1989).\nEXHIBIT NO. 11 Statement Re Computation of Per Share Earnings - --------------------------------------------------------------- 11 Statement re computation of earnings per share\nEXHIBIT NO. 12 Statements Re computation of Ratios - ---------------------------------------------------- 12 Statement re computation of ratio of senior long-term debt and total long-term debt to total capitalization\nEXHIBIT NO. 13 Annual Report to Security Holders - -------------------------------------------------- 13 Portions of the 1993 Annual Report to Shareholders of Airborne Freight Corporation\nEXHIBIT NO. 21 Subsidiaries of the Registrant - ----------------------------------------------- 21 The subsidiaries of the Company are listed on page 10 & 11 of this report on Form 10-K for the year ended December 31, 1993.\nEXHIBIT NO. 23 Consents of Experts and Counsel - ------------------------------------------------ 23 Independent Auditors' Consent and Report on Schedules\nAll other exhibits are omitted because they are not applicable, or not required, or because the required information is included in the consolidated financial statements or notes thereto.\n(b) Reports on Form 8-K ------------------- None\nSIGNATURES\nPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.\nAIRBORNE FREIGHT CORPORATION\nBy \/S\/ ROBERT S. CLINE ---------------------------------- Robert S. Cline Chief Executive Officer\nBy \/S\/ ROBERT G. BRAZIER ---------------------------------- Robert G. Brazier Chief Operating Officer\nBy \/S\/ ROY C. LILJEBECK ---------------------------------- Roy C. Liljebeck Chief Financial Officer\nBy \/S\/ LANNY H. MICHAEL --------------------------------- Lanny H. Michael Treasurer and Controller\nDate: March 28, 1994\nPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the date indicated:\n\/S\/ ANCIL H. PAYNE \/S\/ HAROLD M. MESSMER, JR. - ---------------------------------- ---------------------------------- Ancil H. Payne (Director) Harold M. Messmer, Jr. (Director)\n\/S\/ ROBERT G. BRAZIER \/S\/ RICHARD M. ROSENBERG - ---------------------------------- ---------------------------------- Robert G. Brazier (Director) Richard M. Rosenberg (Director)\n\/S\/ ROBERT S. CLINE - ---------------------------------- Robert S. Cline (Director)\nAIRBORNE FREIGHT CORPORATION AND SUBSIDIARIES SCHEDULE V - PROPERTY AND EQUIPMENT (In thousands)\nAIRBORNE FREIGHT CORPORATION AND SUBSIDIARIES SCHEDULE VI - ACCUMULATED DEPRECIATION AND AMORTIZATION OF PROPERTY AND EQUIPMENT (In thousands)\nAIRBORNE FREIGHT CORPORATION AND SUBSIDIARIES SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS (In thousands)\nAIRBORNE FREIGHT CORPORATION AND SUBSIDIARIES SCHEDULE IX - SHORT-TERM BORROWINGS (Dollars in thousands)\nBalances outstanding under the Company's Money Market lines of credit arrangement generally have maturities ranging from one day to one week. Average amount outstanding during the period is computed by dividing the total of daily outstanding principal balances by 365 or 366 days as applicable. Weighted average interest rate during the period is computed by dividing the actual short-term interest expense by the average short-term borrowings outstanding.\nAIRBORNE FREIGHT CORPORATION AND SUBSIDIARIES SCHEDULE X - SUPPLEMENTARY INCOME STATEMENT INFORMATION (In thousands)\nNote: Depreciation and amortization of intangible assets, taxes (other than payroll and income taxes), royalties, and advertising costs are each less than 1% of consolidated revenue in 1993, 1992 and 1991.\nEXHIBIT INDEX\nA) The following exhibits are filed with this report:\nEXHIBIT NO. 3 Articles of Incorporation and By-laws - ----------------------------------------------------\nEXHIBIT NO. 4 Instruments Defining the Rights of Security Holders Including - ---------------------------------------------------------------------------- Indentures - ----------\nEXHIBIT NO. 10 Material Contracts - ----------------------------------\nExecutive Compensation Plans and Agreements - -------------------------------------------\nEXHIBIT NO. 11 Statement Re computation of Per Share Earnings - --------------------------------------------------------------\nEXHIBIT NO. 12 Statements Re computation of Ratios - ---------------------------------------------------\nEXHIBIT NO. 13 Annual Report to Security Holders - -------------------------------------------------\nEXHIBIT NO. 21 Subsidiaries of the Registrant - ----------------------------------------------\nEXHIBIT NO. 23 Consents of Experts and Counsel - -----------------------------------------------\nAll other exhibits are omitted because they are not applicable, or not required, or because the required information is included in the consolidated financial statements or notes thereto.","section_15":""}
{"filename":"22698_1993.txt","cik":"22698","year":"1993","section_1":"Item 1. Business\nGENERAL INFORMATION\nBusiness Segments\nCOMSAT Corporation (COMSAT, the Corporation or Registrant) has four business segments: International Communications, Mobile Communications, Video Enterprises and Technology Services.\nInternational Communications consists of COMSAT World Systems, which provides satellite communications services using the satellite system of the International Telecommunications Satellite Organization (INTELSAT), and COMSAT International Ventures, which invests in telecommunications opportunities internationally. Mobile Communications consists of COMSAT Mobile Communications, which provides satellite communications services using the satellite system of the International Maritime Satellite Organization (Inmarsat). Video Enterprises, which consists of COMSAT Video Enterprises, Inc., and the Corporation's majority ownership interest in On Command Video Corporation, provides entertainment services to the hospitality industry throughout the United States and domestic video distribution services to television networks. Technology Services consists of COMSAT Technology Services, which provides communications networks and products, information services, and applied research and technology throughout the world.\nThe Corporation also owns the Denver Nuggets, a franchise of the National Basketball Association.\nThe revenues, operating income (loss) and assets of the Corporation, by business segment, for each of the last three years are shown in Note 13 to the 1993 Financial Statements.\nThe Corporation had 1,527 employees on December 31, 1993. None of the employees is represented by a labor union.\nCommunications Satellite Act of 1962\nCOMSAT was incorporated in 1963 under District of Columbia law, as authorized by the Communications Satellite Act of 1962 (the Satellite Act). Effective June 1, 1993, COMSAT changed its corporate name from \"Communications Satellite Corporation\" to \"COMSAT Corporation.\" COMSAT is not an agency or establishment of the U.S. Government. The U.S. Government has not invested funds in COMSAT, guaranteed funds invested in COMSAT or guaranteed the payment of dividends by COMSAT.\nAlthough COMSAT is a private corporation, the Satellite Act governs certain aspects of COMSAT's structure, ownership and operations, most significantly the following: three of COMSAT's 15 directors are appointed by the President of the United States with the advice and consent of the United States Senate; COMSAT's issuances of capital stock and borrowings of money must be authorized by the Federal Communications Commission (FCC); there are limitations on the classes of persons that may hold shares of COMSAT's Common Stock and on the number of shares a person or class of persons may hold; and, on matters that may affect the national interest and foreign policy of the United States, COMSAT's representatives to INTELSAT and Inmarsat receive instructions from the U.S. Government. Congress has reserved the right to amend the Satellite Act, and amendments, if any, could materially affect the Corporation.\nGovernment Regulation\nUnder the Satellite Act and the Communications Act of 1934, as amended (the Communications Act), COMSAT is subject to regulation by the FCC with respect to its COMSAT World Systems and COMSAT Mobile Communications communications services and the rates charged for those services. FCC decisions and policies have had and will continue to have a significant impact on the Corporation. For a discussion of these matters, see Note 7 to the 1993 Financial Statements.\nINTERNATIONAL COMMUNICATIONS\nThe International Communications segment consists of the FCC- rate-regulated business of COMSAT World Systems, and COMSAT International Ventures.\nCOMSAT World Systems\nServices. COMSAT World Systems provides telephone, data, video and audio communications services between the United States and the rest of the world using the global network of INTELSAT satellites. COMSAT World Systems customers include U.S. international communications common carriers, private network providers, multinational corporations, U.S. and international broadcasters, newsgathering organizations and digital audio companies.\nThe largest portion of COMSAT World Systems revenues comes from leasing full-time voice grade half-circuits (two-way communications links between an earth station and an INTELSAT satellite) to U.S. international communications common carriers. The three largest carrier customers are American Telephone & Telegraph Company (AT&T), MCI International Inc. (MCI) and Sprint Communications Company (Sprint). COMSAT World Systems offers significant discounts to customers entering into long-term commitments for full-time voice-grade half-circuits. More than 95.5% of all eligible voice-grade half-circuits are now under such commitments.\nCOMSAT World Systems voice and data services are primarily digital, which ensures high-quality transmissions. COMSAT World Systems International Digital Route (IDR) service, for example, makes it possible for communications carriers to provide digital public-switched telephone network circuits. The carriers apply techniques to such circuits that permit a single digital circuit to handle multiple telephone calls simultaneously.\nFor private line customers, COMSAT World Systems offers an all-digital International Business Service (IBS), as well as an international VSAT (Very Small Aperture Terminal) service. IBS offers customers high-speed, digital communications for voice, data, facsimile and video-conferencing using on-premise earth stations that eliminate the need for costly land-line connections. At year-end 1993, approximately 58% of COMSAT World Systems IBS traffic was covered by multi-year agreements.\nIn 1992, COMSAT World Systems established international VSAT networks to both Latin America and Europe. Using on-premise antennas as small as 1.8 meters in combination with the high-power satellites in the INTELSAT network, international corporations can deliver communications to multiple sites. Used primarily for data transmissions, VSATs can also accommodate voice and video communications.\nTo the growing international broadcasting community, COMSAT World Systems provides both digital and analog transmission services on a long-term, short-term or occasional as-needed basis. With the launch in 1992 of the INTELSAT K satellite over the Atlantic Ocean, COMSAT World Systems has expanded the availability of high-power, flexible capacity for broadcasters and satellite newsgatherers. In anticipation of the adoption of digital compression in the broadcast industry, COMSAT World Systems introduced a flexible digital television service and a digital audio service in 1992, attracting new customers to satellite broadcasting.\nTo maintain the quality of the INTELSAT network, COMSAT World Systems provides tracking, telemetry, control and monitoring services to INTELSAT and engages in a program of research and development to ensure that the satellite system accommodates the latest communications technologies, including both broadband and integrated services digital networks (ISDN).\nTariffs and Revenues. Under the Satellite Act and the Communications Act, COMSAT is subject to regulation by the FCC with respect to COMSAT World Systems communications services, the rates charged for those services and earnings levels. COMSAT World Systems provides its services on a non-discriminatory basis to all customers, either under tariffs filed with the FCC or on the basis of inter-carrier contracts.\nEffective January 1, 1992, COMSAT World Systems introduced a regional growth plan through which customers can benefit from rate reductions as certain threshold traffic levels are attained in each of four geographic regions: Europe, Latin America, Pacific and Mid-East\/Other. In addition, COMSAT World Systems reduced its rates by 10% on 10- and 15-year IDR and Time Division Multiple Access (TDMA) digital \"base\" circuits activated prior to January 1, 1992.\nIn May 1992, rates for all multi-year \"base\" circuits with transmissions between large Standard A earth stations were also reduced by 10%. During 1992, COMSAT World Systems also introduced rates for Digital Television Service coupled with transitional rates for customers who commenced service in an analog mode and opted to convert to digital modulation techniques within the same lease period.\nIn January 1992, COMSAT World Systems filed a petition for rulemaking with the FCC seeking incentive-based regulation of its multi-year, switched-voice services for carriers. The petition requests a regulatory framework to replace traditional rate-base regulation and enable COMSAT World Systems to respond more effectively to competitive market forces. This framework would have three parts: (1) COMSAT World Systems would agree to cap its prices for existing multi-year, switched-voice services at the reduced rates that went into effect on January 1, 1992; (2) COMSAT World Systems could lower its rates for these services on 14 days notice, and those rates would be presumed lawful as long as they were above its average variable costs; and (3) multi-year, switched-voice services would no longer be subject to annual rate- of-return reviews, although they would still be subject to review in the event of a customer complaint. The FCC has not yet taken action on this petition.\nIn 1993, COMSAT World Systems entered into new inter-carrier contracts with each of its three largest customers, AT&T, MCI and Sprint. Pursuant to those contracts, COMSAT World Systems further reduced its rates for 10- and 15-year IDR and TDMA digital \"base\" circuits activated prior to January 1, 1992, and also reduced its rates beginning in 1996 for 7-year and longer IDR and TDMA circuits activated after January 1, 1992. In addition, the contracts provided AT&T and Sprint with leases and with options to lease capacity from COMSAT World Systems in 36 MHz increments under specified rates, terms and conditions.\nApproximately 39% of the Corporation's consolidated revenues in 1993 were derived from COMSAT World Systems services (45% in 1992, 47% in 1991). Approximately 13% of the Corporation's consolidated revenues in 1993 were derived from COMSAT World Systems services to AT&T.\nCompetition. COMSAT World Systems competes with operators of high capacity fiber-optic and other submarine cables in service along major traffic routes worldwide. COMSAT World Systems' major carrier customers (including its three largest customers, AT&T, MCI and Sprint) are co-owners of submarine cables.\nUnder the Satellite Act and FCC orders, COMSAT is the only U.S. entity that may provide international space segment services to customers using INTELSAT satellites. In 1985 the FCC authorized the establishment of separate international communications satellite systems that would provide certain services in competition with INTELSAT, subject to certain restrictions that are being phased out. For a discussion of separate satellite systems competition to COMSAT World Systems, see Management's Discussion and Analysis of Financial Condition and Results of Operations and Note 7 to the 1993 Financial Statements.\nINTELSAT. INTELSAT is a 131-nation organization headquartered in Washington, D.C. It operates under two agreements: (1) an intergovernmental agreement; and (2) an operating agreement signed by each nation's government or designated telecommunications entity (Signatory). COMSAT is the U.S. Signatory. It represents the United States in INTELSAT, subject to instructions from the Department of State (in concert with the Department of Commerce and the FCC) on matters that may affect the national interest and foreign policy of the United States.\nEach Signatory has rights and obligations in INTELSAT analogous to those of a partner. Each owns an investment share, makes proportionate contributions to INTELSAT's capital costs, and receives proportionate distributions of INTELSAT's net revenues after deductions for operating expenses. The investment shares are readjusted as of March 1 of each year to approximate the Signatories' respective portions of the total use of the INTELSAT space segment for the previous six months. COMSAT's investment share, the largest in INTELSAT, was 20.2% as of March 1, 1994 (21.8% as of March 1, 1993; 21.9% as of March 1, 1992).\nSignatories also pay INTELSAT for their use of the satellite system. Charges for such use are computed to provide a pretax cumulative rate of return of between 16% to 18% on a Signatory's capital used by another Signatory or from non-owners who use the satellite system. COMSAT World Systems realized revenue from its INTELSAT ownership, net of use charges paid, of $26 million in 1993. This net revenue is reflected in COMSAT World Systems revenue requirements for ratemaking purposes.\nAt December 31, 1993, total INTELSAT Owners' Equity was approximately $1,687 million, and INTELSAT's outstanding contractual commitments totaled approximately $1,725 million.\nIn each of 1989 through 1993, the Corporation entered into agreements with INTELSAT to place COMSAT World Systems FM, digital bearer, IBS and video traffic on the INTELSAT system under long- term commitments.\nDuring 1990, INTELSAT initiated certain reforms to its process for coordinating with separate satellite systems. These reforms were superseded in November 1992. Under the streamlined procedures approved in 1992, carriage by separate systems of any amount of traffic or services not interconnected to the public switched network and of up to 1,250 circuits of public switched traffic per satellite is presumed not to cause significant economic harm to the INTELSAT system. In addition, the recommendations approved called for further liberalization of coordination procedures with a view toward eliminating the economic harm test in the 1996-98 timeframe.\nCOMSAT International Ventures\nCOMSAT International Ventures (CIV) forms venture companies with strategic and operating partners to provide a variety of telecommunications services and equipment, and also operates overseas companies that are wholly or majority owned. These companies provide international and domestic (non-U.S.) private- line voice and data services, including IBS, VSAT and single channel per carrier services, as well as equipment leasing and technical services. Customers for these services include U.S. and foreign multinational corporations, and domestic (non-U.S.) companies operating in their own countries.\nCIV continued to develop new investment opportunities around the world in 1993. CIV ventures are providing services in the Latin American countries of Chile, Argentina, Bolivia, Colombia and Guatemala. A CIV operating unit in Argentina is wholly owned. During 1993, CIV formed a joint venture company in Brazil and its new Venezuelan company continued to explore opportunities to provide communications services in that country. CIV also expanded its European and Middle Eastern presence by investing in a U.S. company providing communications services in Russia and other newly independent states. This venture joins CIV's existing operations in Turkey. CIV continues to expand its investments to other regions of the world besides Latin America, and several new investments are expected to start operations during 1994.\nThe level of competition in each of the joint ventures in which CIV invests varies considerably from country to country. In some countries there is full competition, and in others competition is limited. The competitive conditions faced by each joint venture are the result of differing regulatory policies, as well as economic and market conditions, in the particular country in which that joint venture operates.\nMOBILE COMMUNICATIONS\nThe Mobile Communications segment consists of the FCC- regulated business of COMSAT Mobile Communications.\nCOMSAT Mobile Communications\nCOMSAT Mobile Communications provides satellite telecommunications services for maritime, aeronautical and land mobile applications, using the Inmarsat satellites and COMSAT's land earth stations in Connecticut, California and Turkey, which serve the Atlantic, Pacific and Indian Ocean Regions, respectively. These stations enable COMSAT Mobile Communications to offer global coverage for its services. There are currently more than 34,000 mobile terminals operating in the Inmarsat system. As described below, COMSAT Mobile Communications provides a full range of voice, facsimile, data and telex services, as well as certain value-added services.\nMaritime Services. COMSAT Mobile Communications provides satellite services for communications to and from ships and other vessels. Customers for these services include transport ship operators, cruise ships and their passengers, fishing vessel operators, oil and mining interests, pleasure boat operators, U.S. Navy ships and foreign telecommunications administrations.\nServices include group call messaging to a fleet of ships, an electronic mail service, a direct-dial telephone service for passengers and crew on board ships, a news summary distribution service, access to data bases through personal computers and other office communications services for facsimile transmissions, worldwide teleconferencing and current financial news reports.\nIn 1992, COMSAT Mobile Communications initiated its two new digital services, Inmarsat-B and Inmarsat-M, in the Atlantic and Pacific Ocean Regions. These services provide more efficient use of the Inmarsat satellite capacity, help to significantly lower the cost of using satellite communications, and expand the potential customer base for maritime and land mobile services. COMSAT Mobile Communications also introduced a multi-channel version of Inmarsat- M service that will allow cruise ships and other high-volume users to increase their channel capacity and offer lower rates to their customers. In 1993, COMSAT Mobile Communications announced plans for a new land earth station in Malaysia to provide these new digital services to the Indian Ocean Region. The Malaysian earth station is expected to be operational in 1994.\nAeronautical Services. COMSAT Mobile Communications provides satellite telecommunications services for aeronautical applications, including airline operational and administrative communications, passenger telephone service and, prospectively, air traffic control.\nBy an FCC Report and Order issued in 1989, COMSAT was authorized (1) to be the sole U.S. provider of Inmarsat space segment capacity for aeronautical services; (2) to provide ground segment aeronautical services in connection with the Inmarsat space segment on a nonexclusive basis; and (3) to provide such aeronautical services only to aircraft engaged in international flights, including international flights over U.S. airspace. Another entity, the American Mobile Satellite Corporation (AMSC), was designated as the sole provider of certain domestic aeronautical satellite services. However, COMSAT Mobile Communications has been authorized by the FCC to provide domestic aeronautical satellite services on an interim basis until the deployment of AMSC's satellite, which AMSC expects to occur in late 1994 or early 1995.\nCustomers of COMSAT Mobile Communications for aeronautical services include airline service providers, commercial airlines, government aircraft and owners and operators of corporate aircraft.\nCOMSAT Mobile Communications began providing aeronautical services in 1990 with a data service for cockpit communications on commercial flights under a 10-year agreement with Aeronautical Radio, Inc., an airline-owned service organization. In 1991,\nCOMSAT Mobile Communications began providing aeronautical voice services in the Atlantic and Pacific Ocean Regions through its earth stations at Southbury, Connecticut and Santa Paula, California. There are currently more than 300 aircraft equipped to use the Inmarsat aeronautical system, equally split between voice and data services.\nA service agreement with Kokusai Denshin Denwa Co., Ltd. (KDD), the Japanese Signatory to Inmarsat, provides that COMSAT Mobile Communications may use KDD's ground earth station serving the Indian Ocean Region to serve COMSAT Mobile Communications' aeronautical customers. COMSAT Mobile Communications may serve KDD's customers flying in the Atlantic Ocean Region, and COMSAT Mobile Communications and KDD will provide mutual back-up in the Pacific Ocean Region for aeronautical customers of both companies.\nService agreements with GTE Airfone, Incorporated, Claircom and In-Flight Phone, Inc., all of which are providers of air-to- ground passenger telephone service using terrestrial facilities, enable these providers to extend their current service to transoceanic flights by acquiring satellite and ground earth station services from COMSAT Mobile Communications.\nIn 1993, COMSAT signed a service agreement with United Airlines to provide satellite communications services for passengers, including telephone, fax and data transmission on approximately 74 aircraft, once such aircraft are equipped with satellite terminals.\nLand Mobile Services. COMSAT Mobile Communications provides telecommunications services for international land mobile applications, using mobile and portable terminals located outside of the United States. Customers for these services include broadcasters, foreign telecommunications authorities and U.S. and foreign corporations and government agencies.\nCOMSAT Mobile Communications land mobile services are currently available using transportable versions of Inmarsat's Standard-A mobile earth station (telephone, facsimile, data, and telex), a briefcase-size Inmarsat-M terminal and a smaller data- only Standard-C terminal through COMSAT Mobile Communications' C- Link(sm) service. The briefcase-size Inmarsat-M terminals provide a more portable and less expensive telephone service for international travelers, the news media, government officials and others who travel to remote parts of the world where reliable communications services are often not available. C-Link service is a low-cost text messaging service that permits smaller vessels and land mobile units to use the global satellite network. COMSAT Mobile Communications is continuing to modify its land earth stations to interconnect this service with public and private data networks.\nCOMSAT is not generally authorized to provide domestic land mobile services directly to end users. However, it is providing Inmarsat satellite capacity to AMSC, the authorized U.S. domestic land mobile entity, for an interim service pending the launch of AMSC's own satellite, and it is providing interim domestic service to certain other end users under special temporary authority from the FCC.\nRevenues. Approximately 30% of the Corporation's consolidated revenues in 1993 were derived from COMSAT Mobile Communications (28% in 1992, 24% in 1991). No single customer of COMSAT Mobile Communications provided more than 10% of the Corporation's consolidated revenues in 1993.\nCompetition. Under the Satellite Act and FCC orders, COMSAT is the only U.S. entity that may provide space segment services to customers using the Inmarsat satellites. COMSAT Mobile Communications competes for maritime, land mobile and aeronautical communications business with other Inmarsat Signatories operating land earth stations and with IDB Aero-Nautical Communications, Inc. (IDB), another U.S. carrier which provides maritime, land mobile and aeronautical services through its own U.S. coast earth stations, using Inmarsat satellite capacity obtained from COMSAT Mobile Communications. COMSAT Mobile Communications also competes for maritime communications business with operators of cellular radio services, high frequency radio services and fixed C-band satellites, domestic and international. These competitive forces continue to exert downward pressure on COMSAT Mobile Communication's pricing for services provided through the Inmarsat system.\nIn November 1993, the FCC authorized AT&T to provide shore-to- ship Inmarsat service under an agreement with COMSAT Mobile Communications whereby COMSAT Mobile Communications is indicated in AT&T's tariff as a \"participating carrier\" and pursuant to which COMSAT Mobile Communications reduced its charge for space and ground segment to AT&T by more than 20%. In December 1993, AT&T filed a new application to provide \"branded end-to-end\" Standard A mobile satellite service in the ship-to-shore direction. In February 1994, COMSAT opposed this application, arguing that it is contrary to the Satellite Act. The FCC has not acted on this matter.\nIn March 1993, the FCC granted COMSAT's petition seeking waivers of the structural separation requirements, subject to COMSAT's establishing certain accounting and non-structural safeguards. This relief allows COMSAT to provide equipment, software and value-added services to customers directly through COMSAT Mobile Communications, rather than through a separate subsidiary that would require substantial duplication of personnel and other costs. In satisfaction of conditions placed on COMSAT by the FCC in granting the COMSAT application, in January 1994, COMSAT filed with the FCC its new Cost Allocation Manual, and in February 1994, COMSAT filed its plan for implementing certain non-structural safeguards desired by the FCC. Both filings are subject to FCC approval before the FCC waivers take effect.\nInmarsat. Inmarsat is a 72-nation organization headquartered in London, England. It operates under two agreements: (1) an intergovernmental convention; and (2) an operating agreement signed by each nation's government or designated telecommunications entity (Signatory). COMSAT is the U.S. Signatory. It represents the United States in Inmarsat, subject to instructions from the Department of State (in concert with the Department of Commerce and the FCC) on matters that may affect the national interest and foreign policy of the United States.\nEach Signatory has rights and obligations in Inmarsat analogous to those of a partner. Each owns an investment share, makes proportionate contributions to Inmarsat's capital costs, and receives proportionate distributions of Inmarsat's space segment charges after deductions for operating expenses. The investment shares are readjusted as of February 1 of each year to approximate the Signatories' respective portions of the total use of the Inmarsat space segment for the previous year. COMSAT's investment share, the largest in Inmarsat, was 22.5% as of February 1, 1994 (23.1% as of February 1, 1993; 25.0% as of February 1, 1992).\nAt December 31, 1993, total Inmarsat Owners' Equity was approximately $672 million, including undistributed compensation for use of capital totaling approximately $136 million, and Inmarsat's outstanding contractual commitments totaled approximately $380 million.\nVIDEO ENTERPRISES\nThe Video Enterprises segment consists of COMSAT Video Enterprises, Inc. (CVE), a wholly owned subsidiary of the Corporation, and On Command Video Corporation (OCV), a California- based company that developed and markets a proprietary video entertainment system to hotels. CVE is the majority owner of OCV. This segment provides entertainment services to the hospitality industry throughout the United States, as well as domestic video distribution services to television networks.\nCVE and OCV services to hotels consist of pay-per-view feature films, free-to-guest programming (such as Showtime, HBO, ESPN, The Disney Channel, CNN and TBS, among others), and pay-per-view sports and entertainment special events. OCV's pay-per-view film service is on-demand and its system also provides interactive in-room services such as folio review and guest check out. At December 31, 1993, CVE and OCV had a customer base installed or under contract of approximately 2,200 hotels and approximately 490,000 rooms, including hotels in each major hospitality chain.\nIn 1993, CVE raised its ownership of OCV from 65.7% to 73.5% through purchases of common stock from minority stockholders and of additional common stock from OCV. Beginning with the third quarter of 1992, OCV's financial results have been consolidated with CVE. Previously, this investment was accounted for using the equity method. For a further discussion of this investment, see Note 4 to the 1993 Financial Statements.\nCVE's hotel business was restructured in 1992. For a discussion of the restructuring, see Note 12 to the 1993 Financial Statements.\nAll of the Corporation's domestic video distribution services and products have been consolidated within CVE. This includes the distribution of network television programming of the National Broadcasting Company (NBC) via satellite to NBC affiliate stations nationwide pursuant to a service contract which runs to 1999.\nCVE operates in a highly competitive and rapidly changing environment in which the principal methods of competition are service, product features and price. Several competing companies, principally Spectradyne, Inc., provide hotels with in-room video entertainment.\nTECHNOLOGY SERVICES\nThe Technology Services segment consists of COMSAT Technology Services (CTS), which was created in 1992 by restructuring the former COMSAT Systems Division and combining its activities with those of COMSAT Laboratories, the Corporation's research and development organization. For a discussion of the restructuring, see Note 12 to the 1993 Financial Statements. CTS provides turnkey voice, video and data communications networks and products, information services and applied research and technology worldwide.\nCTS's services include: information systems design, development, engineering, installation, testing and operations and maintenance; program management, applications engineering and software; integrated voice, video and data networks; and systems engineering and technical assistance services. CTS's customers include the U.S. Government, foreign governments and a variety of commercial customers.\nMajor new CTS contracts awarded or begun in 1993 include: a contract with the Cote d'Ivoire (Ivory Coast) government to provide a national television and radio distribution system for Radio Television Ivorian; a contract with the Guatemalan telephone company (Guatel) to provide a VSAT network for rural telephony voice service; and contracts to provide various systems and services for U.S. government classified customers.\nOn-going contracts being implemented in 1993 included: a contract with the Defense Information System Agency for a commercial satellite communications study; a contract to provide earth station management services to the Saudi Arabian government; a contract with a government agency in Korea to install earth stations to connect with the Inmarsat Indian Ocean Region satellites; contracts to provide consulting services for Koreasat and Asiasat satellite construction and launches; a contract with the Voice of America for earth station implementation; and contracts to provide various systems and services for government agencies in Italy, Korea, Japan and Turkey.\nCOMSAT Laboratories, part of CTS, conducts research and development on a broad range of telecommunications devices, subsystems, transmission systems, technologies and techniques in support of CTS and other COMSAT businesses, as well as for outside customers. Customers include U.S. and foreign government agencies, commercial entities, INTELSAT and Inmarsat. COMSAT Laboratories also licenses new technology it develops to other companies for commercialization of such technology.\nDuring 1993, COMSAT Laboratories successfully delivered its portion of NASA's Advanced Communications Technology Satellite (ACTS) and is currently providing operations and maintenance support. The ACTS satellite was launched in 1993 and NASA is currently conducting its experiments program. COMSAT Laboratories also continued work under a subcontract with Magnavox Electronic Systems Company to develop satellite communications control software and a computer interface to a new satellite ground terminal system for the U.S. Army.\nSupport of COMSAT Laboratories from outside sources was 46% of total funding in 1993. The Corporation's total expenditures for research and development were $13 million in 1993, $15 million in 1992, and $18 million in 1991.\nCTS also includes the activities of COMSAT General Corporation (COMSAT General), a wholly owned subsidiary of the Corporation. COMSAT General owns an 86.3% interest in and manages the MARISAT Joint Venture, which owns and operates three satellites and leases capacity in the satellites to Inmarsat and the U.S. Navy. In addition, CTS manages the Corporation's minority investment in Plexsys International Corporation, a manufacturer of cellular telephone equipment.\nEffective December 31, 1993, the Microwave Electronics Division (MED) of CTS, which designs and manufactures certain electronic components primarily for use in satellite communications systems, was sold to AMP Incorporated.\nNo material portion of CTS's business is subject to renegotiation of profits or termination of contracts or subcontracts with the U.S. Government.\nCTS competes with major companies around the world in the broad areas of systems engineering and integration of telecommunications and information systems and services. CTS competes principally on the basis of service, product, price, reputation and capabilities.\nIn January 1994, the Corporation entered into a definitive agreement to acquire Radiation Systems, Inc. (RSi), a company which designs, manufactures and integrates satellite earth stations, advanced antennas and other turnkey systems for telecommunications, radar, air traffic control and military uses, by merging RSi with a wholly owned subsidiary of the Corporation. Following the merger, the Corporation expects to combine CTS with RSi. For a further discussion of the acquisition of RSi, see Note 15 to the 1993 Financial Statements.\nINVESTMENTS\nThe Corporation owns a limited partnership which owns the Denver Nuggets, a franchise of the National Basketball Association. As a result of the Corporation's acquiring all of the remaining interests in the partnership in 1992, the partnership's financial results have been consolidated with the Corporation's financial\nstatements beginning with the third quarter of 1992. Previously, this investment was accounted for using the equity method.\nFor a further discussion of the Corporation's investments, see Note 4 to the 1993 Financial Statements.\nItem 2.","section_1A":"","section_1B":"","section_2":"Item 2. Properties\nCOMSAT Properties\nEffective in 1993, the headquarters of the Corporation and the headquarters of the International Communications and Video Enterprises segments are located in a building in Bethesda, Maryland which the Corporation leases from a limited partnership in which it holds a 50% interest, primarily as a limited partner. The managing general partner also owns a 50% interest in the partnership. An affiliate of the managing general partner owns the building site and has leased this site to the partnership. The Corporation has entered into a 15-year lease with the partnership for the new building. For a further discussion of the Corporation's ownership interest and lease of this property, see Notes 4 and 6 to the 1993 Financial Statements.\nThe Corporation owns buildings and land at Clarksburg, Maryland that serve as the headquarters of the businesses of the Mobile Communications and Technology Services segments.\nThe Corporation owns two satellites that are used by the Video Enterprises segment in its video distribution services and its television distribution network for NBC. The Corporation, through the 86.3%-owned MARISAT Joint Venture, also operates three satellites, capacity of which is leased by the Technology Services segment to Inmarsat and the U.S. Navy.\nThe Corporation leases an earth station in Turkey and owns earth stations at Santa Paula, California and Southbury, Connecticut that are used by COMSAT Mobile Communications to provide mobile communications services. In addition, a land earth station is planned in Malaysia. The California and Connecticut earth stations are also used by the businesses of the Technology Services segment to provide communications services and tracking, telemetry and command (TT&C) services. The Corporation also owns earth stations at Clarksburg, Maryland and Paumalu, Hawaii that are used by COMSAT World Systems to provide TT&C services to INTELSAT.\nThe Corporation's properties are suitable and adequate for the Corporation's business operations.\nINTELSAT Satellites\nCOMSAT World Systems uses the satellites of INTELSAT, an organization in which COMSAT owns a 20.9% interest. The INTELSAT satellites currently used and under construction are described below.\nThe INTELSAT V series consists of eight satellites having an average capacity of at least 15,000 voice-grade bearer circuits or 51 television channels. The INTELSAT V-A series consists of five satellites having an average capacity of at least 16,000 bearer circuits or 57 television channels.\nThe INTELSAT VI series consists of five satellites, constructed by Hughes Aircraft Company, a subsidiary of General Motors Corporation, having an average capacity of at least 24,000 bearer circuits or 87 television channels.\nThe INTELSAT-K satellite, constructed by General Electric Technical Services Company, Inc., a subsidiary of General Electric Company, has an average capacity of 7,000 bearer circuits or 32 television channels.\nThe INTELSAT VII series consists of six satellites that are being constructed by Space Systems\/Loral (formerly Ford Aerospace and Communications Company). These satellites will have an average capacity of at least 17,050 bearer circuits or 62 television channels. The first INTELSAT VII satellite was launched on October 22, 1993. The INTELSAT VII-A series, also being constructed by Space Systems\/Loral, consists of three satellites having an average capacity of at least 19,250 bearer circuits or 70 television channels. The first INTELSAT VII-A satellite is expected to be launched in 1995. The INTELSAT VII satellite launches are expected to be insured. No decision has been made regarding launch insurance for the INTELSAT VII-A series, however.\nThe INTELSAT VIII series consists of four satellites that are being constructed by Martin Marietta Astro Space, a division of the Martin Marietta Corporation. These satellites will have an average capacity of 21,000 bearer circuits or 76 television channels. The first INTELSAT VIII satellite is expected to be launched in 1996. No decision has been made regarding launch insurance for the INTELSAT VIII series.\nCOMSAT has applied to the FCC for authorization to participate in the procurement of one INTELSAT VIII-A spacecraft. This satellite, which is being constructed by Martin Marietta Astro Space, will have an average capacity of at least 11,600 bearer circuits, or 38 television channels, and is expected to be launched in 1997. No decision has been made regarding launch insurance for the INTELSAT VIII-A spacecraft.\nInmarsat Satellites\nCOMSAT Mobile Communications uses the satellites of Inmarsat, an organization in which COMSAT owns a 22.5% interest. The Inmarsat satellites currently used and under construction are described below.\nThe first-generation Inmarsat satellite system consists of satellite capacity leased from INTELSAT, the European Space Agency and the MARISAT Joint Venture for periods expiring at various times through January 1996.\nThe second-generation Inmarsat satellite system, known as the Inmarsat II series, consists of four satellites constructed by an international consortium led by British Aerospace Dynamics Corporation. A financing arrangement with respect to the first three Inmarsat II satellites is discussed in Note 5 to the 1993 Financial Statements.\nThe third-generation Inmarsat satellite system, known as the Inmarsat III series, consists of four satellites which are being constructed by General Electric Technical Services Company, Inc. These satellites will use spot-beam technology, which allows reuse of the scarce frequency resources allocated for mobile satellite communications. Their capacity will be more than 20 times that of the largest satellites in the first-generation Inmarsat system and about eight times more powerful than the Inmarsat II series. In March 1994, Inmarsat decided to procure a fifth Inmarsat III spacecraft as a contingency against possible loss of a satellite. No decision has been made regarding launch insurance for the Inmarsat III series. A financing arrangement with respect to the first three Inmarsat III satellites is discussed in Note 5 to the 1993 Financial Statements.\nItem 3.","section_3":"Item 3. Legal Proceedings\nNeither COMSAT nor any of its subsidiaries is a party to, and none of their property is the subject of, material pending legal proceedings, and no such proceedings are known to be contemplated by governmental authorities, except the matters described in Notes 6, 7 and 15 to the Corporation's 1993 Financial Statements.\nItem 4.","section_4":"Item 4. Submission of Matters to a Vote of Security Holders\nNone.\nExecutive Officers of The Registrant Age as of Name Officer March 31, 1994\nBruce L. Crockett President and Chief Executive Officer 50 Betty C. Alewine President, COMSAT World Systems 45 John V. Evans President, COMSAT Laboratories 60 Charles Lyons President, COMSAT Video Enterprises, Inc. 39 Ronald J. Mario President, COMSAT Mobile Communications 50 Jerome W. Breslow Vice President and Secretary 60 C.Thomas Faulders, III Vice President and Chief Financial Officer 44 Steven F. Bell Vice President, Human Resources and Organization Development 44 Arthur R. Sando Vice President, Corporate Affairs 46 Warren Y. Zeger Vice President and General Counsel 47 Allen E. Flower Controller 50 Wesley D. Minami Treasurer 37\nNormally, the officers are elected annually by the Board of Directors, at its first meeting following the Annual Meeting of Shareholders, to serve until their successors are elected and qualified.\nThere is no family relationship between an officer and any other officer or director and no arrangement or understanding between an officer and any other person pursuant to which he or she was selected as an officer.\nThe following is a brief account of each executive officer's experience for the past five years:\nMr. Crockett has been President and Chief Executive Officer of the Corporation since February 1992. He was President and Chief Operating Officer of the Corporation from April 1991 to February 1992. He was President, World Systems Division from February 1987 to April 1991.\nMs. Alewine has been President, COMSAT World Systems since May 1991. She was Vice President and General Manager, INTELSAT Satellite Services from January 1989 to May 1991. She was Vice President, Sales and Marketing, World Sysite Services from January 1989 to May 1991. She was Vice President, Sales and Marketing, World Systems Division from March 1987 to January 1989.\nDr. Evans has been President, COMSAT Laboratories since September 1991. He was Vice President and Director, COMSAT Laboratories from October 1983 to September 1991, and Vice President and Director of Research from April 1983 to October 1983.\nMr. Lyons has been President, COMSAT Video Enterprises, Inc. (CVE) since February 1992. He was Vice President and General Manager, CVE from October 1990 to January 1992. Prior to joining the Corporation, he was with Marriott Corporation, serving as National Director of Group Marketing from September 1989 to October 1990, Regional Director of Operations and National Director of Group Sales from September 1988 to September 1989, and Director of Marketing from September 1986 to September 1988.\nMr. Mario has been President, COMSAT Mobile Communications (CMC) since May 1991. He was Vice President and General Manager, CMC from April 1988 to May 1991. He was Vice President, Corporate Services from September 1985 to April 1988.\nMr. Breslow has been Vice President and Secretary since June 1987.\nMr. Faulders has been Vice President and Chief Financial Officer since February 1992. Prior to joining the Corporation, he was with MCI Communications Corporation (MCI), serving as Senior Vice President of Business Marketing from August 1991 to February 1992, Senior Vice President of Government Systems and Enterprise Group from August 1990 to August 1991, Vice President of National Accounts for MCI Southeast from August 1988 to August 1990, and Vice President and Treasurer of MCI from December 1985 to August 1988.\nMr. Sando has been Vice President, Corporate Affairs since September 1991. He was Vice President, Marketing and Communications, COMSAT Video Enterprises, Inc. from May 1990 to September 1991. Prior to joining the Corporation, he was with Turner Broadcasting System, Inc., serving as Vice President, Marketing and Communications from February 1989 to April 1990 and Vice President, Corporate Communications from May 1984 to February 1989.\nMr. Zeger has been Vice President and General Counsel since March 1992. He was Acting General Counsel from September 1991 to March 1992. He was Associate General Counsel of the Corporation and Vice President, Law, World Systems Division (WSD) from February 1988 to September 1991. He was Vice President and General Counsel, WSD, from August 1987 to February 1988.\nMr. Flower has been Controller since June 1992. He was Vice President, Finance and Administration, CVE from May 1990 to June 1992. He was Vice President, Finance and Administration, World Systems Division from August 1987 to May 1990.\nMr. Bell has been Vice President of Human Resources and Organization Development since October 1993. Prior to joining the Corporation, he was with American Express Worldwide Technologies, serving as Vice President of Human Resources from September 1992 to September 1993; with US Sprint, serving as Regional Director of Human Resources from October 1987 to August 1992; and with Martin Marietta Data Systems Division, serving as Manager, Employment from July 1985 to October 1987.\nMr. Minami has been Treasurer since May 1993. Prior to joining the Corporation, he was with Oxford Realty Services Corp., a privately held $1.5 billion investment\/property management company, serving as Senior Vice President, Finance and Administration and Chief Financial Officer from December 1989 to April 1993 and Vice President and Treasurer from April 1988 to November 1989.\nPART II\nItem 5.","section_5":"Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters.\nAs of December 31, 1993, there were 40,226,475 shares of Common Stock, without par value, of the Corporation (COMSAT Common Stock) outstanding: 40,205,587 were Series I shares, held by 42,345 holders of record other than communications common carriers; and 20,888 were Series II shares, held by 35 common carriers.\nThe principal market for COMSAT Common Stock is the New York Stock Exchange, where it is traded under the symbol \"CQ.\" COMSAT Common Stock is also traded on the Chicago Stock Exchange and the Pacific Stock Exchange.\nThe Corporation's Transfer Agent, Registrar and Dividend Disbursing Agent is The Bank of New York, 101 Barclay Street, New York, New York.\nThe high and low sales prices of, and the dividends declared on, each share of COMSAT Common Stock for the last two years are as follows: COMSAT Common Stock*\nHigh Low Dividend\nCalendar Year 1992 First Quarter 21 1\/2 17 1\/8 .175 Second Quarter 21 1\/4 18 3\/4 .175 Third Quarter 21 5\/8 19 5\/8 .175 Fourth Quarter 24 1\/2 19 7\/8 .175\nCalendar Year 1993 First Quarter 27 7\/8 23 3\/4 .185 Second Quarter 31 5\/8 27 1\/4 .185 Third Quarter 31 7\/8 26 3\/4 .185 Fourth Quarter 35 1\/4 27 1\/2 .185\n* Prices reflect the two-for-one stock split which occurred in June 1993.\nItem 6.","section_6":"Item 6. Selected Financial Data for the Registrant for Each of the Last Five Fiscal Years.\nFIVE YEAR FINANCIAL SUMMARY\nNotes: 1. Per share amounts have been restated for a 2-for-1 stock split in 1993.\nItem 7.","section_7":"Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.\nANALYSIS OF OPERATIONS\nConsolidated Operations\nConsolidated revenues totaled $640 million, an increase of $77 million above record 1992 revenues and $118 million above 1991. Revenue increases resulted from improved operating performance, particularly in COMSAT Mobile Communications, which had higher traffic volumes, and in COMSAT Video Enterprises, where On Command Video product installations grew rapidly. In addition, revenues rose due to the consolidation of Denver Nuggets results for the full year, versus the six months' revenues included in 1992.\nOperating income was $138 million, an improvement of $50 million over 1992 ($11 million, excluding restructuring charges) and $11 million better than 1991. Results from operations improved over 1992 based on the strong performance from COMSAT Mobile Communications and on cost benefits resulting from the restructuring in 1992 that formed COMSAT Technology Services and consolidated video entertainment and distribution services within COMSAT Video Enterprises. Some of this improvement was offset by the inclusion of a full year of consolidated losses from the Denver Nuggets.\nOther income improved in 1993 due to proceeds from company- owned life insurance policies, inclusion of profits from equity investments, and the inclusion of the Denver Nuggets losses in other income in the first half of 1992.\nInterest costs declined slightly from the levels of the prior two years on lower borrowings and lower interest rates. Capitalized interest increased over 1992, but remained below the 1991 level, as plant under-construction balances have continued to increase following the heavy satellite launch schedule in 1990 and 1991.\nThe corporation adopted Statement of Financial Accounting Standards (SFAS) No. 109 in 1993. The new standard requires that deferred tax assets and liabilities be adjusted to reflect current tax rates. The cumulative effect of adopting this standard was to increase income by $1 million in 1993. In addition, the corporation recorded a charge to income tax expense of $3 million under the new standard to reflect the impact on the prior year's deferred tax accounts of the recent change in Federal income tax rate to 35% from 34%.\nThe corporation adopted SFAS No. 106 in 1991, which required recognition of $27 million in expenses after taxes for the expected cost of postretirement benefits.\nNet income was a record $75 million, a 13% increase over 1992 excluding restructuring charges. Primary earnings per share were $1.85, a 9% increase over 1992, excluding the effects of restructuring.\nOperating Results\nInternational Communications\nIn millions 1993 1992 1991 - - - ------------------------------------------------------------ Revenues $ 250 $ 253 $ 245 Operating Income* $ 89 $ 96* $ 92*\n*Excludes restructuring charges of $7 million in 1992 and SFAS No. 106 costs of $24 million in 1991.\nInternational Communications includes the FCC-regulated and non-regulated businesses of COMSAT World Systems (CWS), as well as COMSAT International Ventures (CIV). CWS provides international voice, data, video and audio communications. Revenues declined slightly, but the business continued its solid performance as demand for services remained strong. CIV invests in telecommunications opportunities internationally.\nCWS revenues declined by 3% from 1992 levels and were flat compared to 1991. Revenues for full-time voice circuits declined 11% due to the anticipated conversion from analog circuits to more efficient digital service. Additionally, CWS entered into new long- term carrier agreements with ATT, MCI and Sprint, its three major international carrier customers, that provide significant rate reductions in exchange for additional service commitments. CWS share of revenues from the INTELSAT system declined as expected with the 1% reduction in the corporation's ownership share in 1993.\nRevenues from full-time leased television services increased over 50% as customers benefitted from implementing highly efficient networks with smaller, less expensive antennas that operate with the high-power INTELSAT-K and INTELSAT VI satellites.\nOperating income for CWS declined 5% from 1992 results, before charges for restructuring, and were about the same as 1991 results. The decrease from 1992 is due to the reduction in revenues. Operating expenses for CWS were below 1992 levels (before restructuring charges) due to cost controls and lower INTELSAT system expenses resulting from the lower ownership share. This was partially offset by higher depreciation expense.\nCIV has business interests in eight countries in Central America, South America, Eastern Europe and the Commonwealth of Independent States. CIV continues to screen new opportunities carefully as it manages its existing portfolio of operating ventures and investments. Revenues from owned or controlled ventures were consolidated for the first time in 1993, adding 2% to segment revenues. As anticipated, CIV incurred operating losses of $6 million in 1993. Results in 1992 were $2 million better, and included a $2 million gain from the sale of a venture in Venezuela.\nMobile Communications\nIn millions 1993 1992 1991 - - - ----------------------------------------------------------------- Revenues $ 190 $ 158 $ 128 Operating Income* $ 48 $ 37* $ 40\n*Excludes restructuring charges of $3 million in 1992.\nCOMSAT Mobile Communications (CMC) provides maritime, aeronautical and land mobile communications services. Revenues and operating income grew in excess of 20% over 1992 levels.\nThe maritime business remains strong while undergoing a transition to less expensive, more efficient digital service. Digital Standard-M terminals currently represent only about 3% of commissioned telephony terminals. However, the lower cost associated with digital service versus comparable analog terminals has produced significant increases in traffic volume on passenger ships. Continued significant traffic growth is expected as the digital Standard-M dominates new terminal commissionings over the next few years.\nOverall, CMC revenues grew by slightly better than 20% in 1993. Demand continued to be strong for telephone service, particularly in the land mobile and government market segments, while the fishing and offshore oil segments declined.\nTelex revenue declined from 1992 levels, but this decline was mostly offset by revenue growth from smaller, less expensive Standard-C digital terminals.\nAeronautical communication services have continued to develop slowly due to airline industry conditions. Revenues remained even with 1992 levels. With several airlines already having committed to install aircraft terminals, it is anticipated that this market will begin to grow in the near future.\nOperating income improved year to year by almost 30%, excluding 1992 restructuring charges. Operating expenses increased 17% as higher satellite use charges associated with higher traffic volumes were only partially offset by a reduced share of Inmarsat system revenues and expenses. Depreciation on new earth station and satellite equipment installed to meet traffic demand increased expenses by $5 million.\nVideo Enterprises\nIn millions 1993 1992 1991 - - - ----------------------------------------------------------------- Revenues $ 96 $ 78 $ 82 Operating Income* $ 10 $ 6* $ 3\n*Excludes restructuring charges of $14 million in 1992.\nCOMSAT Video Enterprises (CVE) provides video distribution and on-demand video entertainment services to the hospitality industry and video distribution services to television networks.\nThe corporation increased its ownership of On Command Video Corporation (OCV) to 74% from 66% during 1993, and has consolidated OCV results since July 1992. Through the investment in OCV, CVE has grown to become the major supplier of on-demand video entertainment to the hospitality industry.\nRevenues from video programming provided to the hospitality industry grew by almost 34% in 1993, as OCV and CVE continued to equip existing and new hotel rooms with on-demand video systems from OCV. A revenue decline of almost 11% in the mid-priced hotel market was more than offset by a six-fold increase in revenues from OCV 's upscale hotels and from CVE hotels converted to the OCV system. OCV tripled the number of rooms equipped during 1993, and increased the backlog of rooms to be installed by 290%. Demand remains high for this state-of-the-art product.\nRevenue from the video distribution services provided to the National Broadcasting Corporation (NBC) remained flat, as did operating income.\nOperating income in 1993 improved by 76% over 1992, excluding charges for restructuring. While the CVE hotel business continued to incur modest losses, these were more than offset by operating income from OCV. CVE improved performance over 1992 due to lower costs achieved through the restructuring and to improved performance from rooms converted to the OCV system.\nTechnology Services\nIn millions 1993 1992 1991 - - - ----------------------------------------------------------------- Revenues $ 88 $ 81 $ 93 Operating Income (Loss)* $ 1 $ (3)* $ -\n*Excludes restructuring charges of $10 million in 1992.\nCOMSAT Technology Services (CTS) provides turnkey voice, video and data communications networks and products, technology consulting services and applied research services.\nRevenues in 1993 increased by 9% over 1992. Improvements came from new infrastructure programs such as a major VSAT rural telephony program in Guatemala and a television and radio distribution network in Cote d'Ivoire (Ivory Coast), as well as from new consulting programs.\nReductions in overhead and refocused marketing efforts which followed the 1992 restructuring have helped make operating income positive. This represents an improvement of $4 million over 1992 operating losses, before restructuring charges.\nCorporate\nIn millions 1993 1992 1991 - - - ----------------------------------------------------------------- Revenues* $ 30 $ 11 $ 3 Operating Loss* $ (10) $ (9)* $ (8)\n*Revenues exclude elimination of intra-company revenues. The 1992 operating loss excludes $4 million of restructuring charges.\nRevenues increased in 1993 due to the Denver Nuggets' improved attendance, ticket sales and sponsor revenues, and a full year of consolidation versus six months in 1992.\nRevenues in 1991 came primarily from office space sub-leased by the corporation at its former headquarters building in Washington. These rents have increased only slightly since 1991.\nOperating losses for all years include costs for proprietary research programs undertaken by COMSAT Laboratories. In 1992, losses for the Denver Nuggets were included for half the year, while in 1993 a full year is reflected. Increases in operating losses of $1 million in 1993 compared to 1992, excluding restructuring charges, were attributable to the full year of consolidated Denver Nugget losses.\nOutlook\nThe corporation has advocated the privatization of both INTELSAT and Inmarsat. Privatization would change these treaty- based international organizations into commercial enterprises that are responsive to marketplace forces and accountable to shareholders. The corporation believes that the existing organizational structures of INTELSAT and Inmarsat are ill-suited to the competitive, fast-paced marketplace of today, and supports the transfer of ownership holdings at market valuations. Privatization would represent a fundamental change in how the corporation operates in a regulated environment. The corporation will continue to pursue its advocacy of privatization for each of these organizations, but does not expect to see major changes implemented in the near term.\nCOMSAT World Systems continues to adjust to an increasingly competitive environment. In late 1993, the Federal Communications Commission (FCC) substantially eliminated prior restrictions on access of separate system satellite operators to the public switched telephone network. This action, along with the FCC's stated goal of eliminating all restrictions on separate satellite systems by 1997, will increase competition for the provision of satellite services and result in some loss of market share.\nDuring 1994, two new satellites scheduled to be launched by PanAmSat will offer additional competition for INTELSAT and CWS. Increased satellite competition and continued competition from fiber optic cables will put increased pressure on service revenues and operating margins.\nCWS is well-positioned with new long-term agreements with the major international carriers to provide new cost-competitive services for bulk usage beyond the year 2000. In addition, several emerging markets are expected to continue growing, including international television distribution, international VSAT and digital audio services.\nINTELSAT currently has 13 satellites on order. The first satellite in the INTELSAT VII series, launched in the fourth quarter of 1993, was placed in service early in 1994. There are three more INTELSAT VII launches planned for 1994. The new INTELSAT VII satellites, along with the INTELSAT VIII series satellites, will offer new higher-power capabilities, enabling CWS to remain competitive in an increasingly crowded international telecommunications market.\nCOMSAT International Ventures anticipates strong traffic growth and expansion of business from its existing ventures and will continue efforts to expand to new markets internationally. Existing ventures as a group are expected to reach profitability by the end of 1994. However, CIV anticipates incurring small additional losses for 1994 due to management and administrative costs and losses from new start-up ventures.\nCOMSAT Mobile Communications will continue to expand its service offerings to meet customer needs. An increasing number of digital terminals with improved operating efficiency and reduced service charges should keep traffic growth strong. Smaller digital\nterminals should facilitate growth in the land mobile, small commercial and pleasure boat, and business traveler markets. Additionally, CMC has signed agreements to provide multi-channel terminals to major airline customers to help expand aeronautical service.\nCMC is facing competitive changes that will increase pressure on service prices and operating margins. AT&T has petitioned the FCC to allow competitive service offerings for ship-to-shore traffic which, if approved, could lead to lower CMC rates for those services. In early 1994, CMC reached agreement with AT&T to lower the rates the corporation charges AT&T for shore-to-ship traffic and the rates AT&T charges the corporation for ship-to-shore traffic termination. It is anticipated that these new CMC rates will be offered to all long distance carriers. These new agreements could lead to slower revenue growth in the future. The impact on future revenues and expenses will depend on the volume of calls generated and the percentage of that traffic committed to the corporation by the carriers. CMC entered into a carrier agreement with Sprint International. The agreement provides for the exchange of traffic and is expected to lead to additional traffic in the future.\nIn 1993, the FCC initiated an audit of the corporation's role as the United States signatory to Inmarsat and of CMC's earnings as a provider of international mobile services. Although the corporation cannot predict the ultimate disposition of this audit, it believes the impact on service rates, if any, would be prospective and should not be materially different from anticipated rate actions required to respond to market pressure and competition.\nCMC is studying alternatives for providing new worldwide, satellite-delivered, hand-held telephony services by the end of the decade. These services would be provided by technically complex global systems that would have to compete with existing cellular services, as well as with planned satellite systems such as the Iridium system to be built by Motorola. The corporation has not yet determined the best technical or business approach to this new expanded opportunity, but anticipates that decisions will be made in 1994 and preliminary expenditures could begin before year end.\nCOMSAT Video Enterprises, Inc. will continue efforts to convert existing qualified customers to the OCV product and to retain hotel customers whose contracts expire in 1994. OCV will continue to install new systems, working to address a rapidly growing backlog that, at year end, exceeded its installed base. Continued revenue and income growth is expected as a result of the increasing market share.\nCVE's video distribution business is expected to remain stable with little change to the NBC services. As in prior years, earnings in 1994 are expected to come primarily from the television network distribution business, with an increasingly larger part from the hospitality industry video distribution business.\nCOMSAT Technology Services emerged from the 1992 restructuring as a more competitive business and entered 1994 with a substantial improvement in its backlog compared to the beginning of 1993. In January 1994, the corporation announced an agreement to acquire, by\nmeans of merger, Radiation Systems, Inc. (RSi). RSi designs, manufactures and integrates satellite earth stations, advanced antennas and other turnkey systems for telecommunications, radar, air traffic control and military uses. If approved by RSi's shareholders, the corporation will exchange newly issued common stock for RSi's outstanding common stock, at an exchange value of about $18.25 per RSi share. Each share of RSi common stock will be exchanged for a portion of COMSAT common stock determined by dividing $18.25 by the average closing price of COMSAT stock for the 20 days ending five trading days prior to the effective date of the merger. The exchange ratio shall not be less than 0.638 or greater than 0.780. The transaction will have a total value of approximately $150 million, and is expected to be completed in the second quarter of 1994. Following the merger, which is expected to be treated as a pooling of interests, CTS will be combined with RSi to form a wholly owned subsidiary of the corporation. The new subsidiary, COMSAT RSI, will pursue opportunities in the high- growth wireless communications market by offering integrated systems and products. COMSAT RSI will target international and domestic markets that include cellular, personal communications systems and VSAT antenna technologies. The corporation expects that COMSAT RSI operations, while profitable, may have a small dilutive effect on earnings in 1994, excluding the non-recurring transaction costs. The newly combined entity plans to leverage the technical expertise of COMSAT Laboratories and to maintain the competitive cost structure that prevails in RSi.\nThe corporation anticipates continued improvement in the financial performance of the Denver Nuggets, and expects that the team will reach break-even in 1994.\nThe corporation will adopt SFAS No. 112, \"Employer's Accounting for Postemployment Benefits,\" in 1994. This statement requires that the estimated cost of benefits provided to former or inactive employees be accrued over their active service lives. The effect of adopting the statement is not expected to have a material effect on the corporation's 1994 financial results.\nThe corporation will also adopt SFAS No. 115, \"Accounting for Certain Investments in Debt and Equity Securities,\" in 1994. This statement requires that certain investments in debt or equity securities be carried on the balance sheet at fair value. The effect of this statement is not expected to be material to the corporation as of December 31, 1993.\nANALYSIS OF BALANCE SHEETS\nAssets\nThe corporation ended 1993 with $1,653 million of assets, an increase of $110 million over 1992.\nInternational Communications\nIn millions 1993 1992 1991 - - - ----------------------------------------------------------------- Assets $ 827 $ 803 $ 765 Property and Equipment Additions $ 117 $ 121 $ 174\nProperty and equipment additions are almost exclusively related to COMSAT World Systems' share of INTELSAT's satellite programs for the VII, VII A and VIII series of satellites. These new satellites will offer higher power and deliver greater performance characteristics to meet increasing demand from customers worldwide.\nCIV invested $7 million for new communications plant and equipment in 1993. The majority of the investments are to meet specific customer requirements for technologically advanced applications in developing countries. The corporation anticipates investing up to an additional $15 million in 1994 to meet demand in existing ventures, and may invest additional amounts if warranted by new opportunities.\nMobile Communications\nIn millions 1993 1992 1991 - - - ----------------------------------------------------------------- Assets $ 404 $ 397 $ 320 Property and Equipment Additions $ 51 $ 83 $ 90\nProperty and equipment were added to provide needed capacity for CMC worldwide services.\nGround station plant and equipment were improved in 1993 to be able to handle traffic volumes in all four service regions. A second CMC ground station in the Indian Ocean region was begun in Malaysia to provide digital Standard-M and -B service. The station is expected to be operational in the second quarter of 1994. Stations in California and Connecticut were also upgraded to handle digital traffic under the new digital standards for Inmarsat M, B and C terminals. Assets of $16 million were transferred to this business from CTS in the first quarter of 1993 as part of the restructuring effort begun in 1992; assets for prior years have been restated. The transferred assets are facilities and equipment at the earth stations in California and Connecticut.\nThe first of the Inmarsat III series satellites, currently under construction, is scheduled for launch in 1996. These satellites will provide increased capacity to meet growing demand for all services in all four service regions.\nVideo Enterprises\nIn millions 1993 1992 1991 - - - ----------------------------------------------------------------- Assets $ 187 $ 122 $ 120 Property and Equipment Additions $ 64 $ 18 $ 9\nThe additions to property and equipment are primarily installations of video entertainment systems for new hotel customers. OCV has a large backlog of hotels waiting to have systems installed. The corporation is expected to make additional investments in these systems during 1994 for new hotel installations. The corporation will also continue to purchase video entertainment systems from OCV for installation in a limited number of hotels in CVE's existing hotel base. The business reduced some asset balances as a result of the 1992 restructuring.\nTechnology Services\nIn millions 1993 1992 1991 - - - ----------------------------------------------------------------- Assets $ 46 $ 49 $ 62 Property and Equipment Additions $ 3 $ 10 $ 7\nProperty and equipment additions for 1992 and 1993 were primarily purchases of test equipment for research and development work by COMSAT Laboratories and equipment to support CTS' work in communication systems design, demonstration and installation. Requirements for new capital in 1994 are expected to be minimal.\nCorporate\nIn millions 1993 1992 1991 - - - ----------------------------------------------------------------- Assets $ 189 $ 172 $ 102 Property and Equipment Additions $ 4 $ 1 $ 2\nAssets increased in 1993 primarily due to the purchase of RSi equity shares and increases in the cash value of company-owned life insurance policies. The purchase of the remaining share and subsequent consolidation of the Denver Nuggets in 1992 was the primary cause of the increase in assets over 1991.\nLiabilities\nDuring 1993, the corporation's share of long-term debt issued by INTELSAT increased by $31 million as INTELSAT issued 6.75% Eurobonds due in January 2000. Proceeds from this issue were used to prepay $30 million of the corporation's 9.55% notes; $70 million remains due in April 1994.\nThe corporation redeemed its 11.625% unsecured debentures in March 1992. In April 1992 the corporation issued $160 million of new debentures at 8.125% due in April 2004. The proceeds were used to redeem its 7.75% convertible subordinated debentures and to repay commercial paper.\nANALYSIS OF CASH FLOWS\nOperating Activities\nCWS generated the majority of the corporation's cash from operations. The corporation made interest payments of $25 million and tax payments of $22 million.\nInvesting Activities\nThe corporation made cash investments of $230 million for property and equipment in 1993. Of this, $117 million was invested by the International Communications businesses, $46 million by CMC and $60 million by CVE and OCV.\nThe corporation received approximately $16 million when its share of INTELSAT declined from 21.8% to 20.9% in 1993. The corporation expects its share of INTELSAT to decrease slightly during 1994. The corporation received approximately $5 million when its share of Inmarsat declined from 24.6% to 23.0% in 1993. The corporation's share of Inmarsat declined to 22.5% in February 1994.\nA total of $14 million was used to purchase equity interests, principally shares of RSi and the CIV ventures. An additional $13 million was used to purchase shares of OCV from minority shareholders. The corporation increased its ownership share of OCV to 73.5% at December 31, 1993.\nThe corporation's investment in property and equipment in 1994 will be somewhat higher than in 1993. Investments in INTELSAT satellites, international ventures, aeronautical service equipment and OCV systems will increase over 1993 levels.\nFinancing Activities\nQuarterly dividends were $.18-1\/2 per share in 1993. The corporation received in early 1993 $33 million in proceeds from long-term debt issued by INTELSAT, all of which was used to redeem or repay other debt obligations. INTELSAT intends to issue bonds in the first quarter of 1994. The corporation will record its share of the borrowings as long-term debt of approximately $42 million. INTELSAT will use the proceeds to redeem or repay their short-term debt obligations.\nLiquidity and Capital Resources\nThe corporation enjoys access to short- and long-term financing at favorable rates. A $125 million commercial paper program has $43 million of borrowings outstanding at an average interest rate of 3.4%. A $200 million revolving credit agreement with a group of banks is currently not being utilized and extends to 1998. This facility is a back-up to the corporation's commercial paper program.\nThe corporation enjoys access to capital markets at favorable costs with an A rating from Standard and Poor's and an A-2 from Moody's.\nThe corporation's funding activities, as regulated by the FCC, allow long-term financing up to 45% of total capital, as well as $200 million of short-term borrowings.\nThe corporation expects operations to fund almost all 1994 cash requirements. Any additional working capital requirements will be funded using commercial paper.\nTaxes\nTaxes were paid on an Alternative Minimum Tax basis due to a net operating loss carryforward from the 1987 discontinued operations.\nItem 8.","section_7A":"","section_8":"Item 8. Financial Statements and Supplementary Data.\nINDEPENDENT AUDITORS' REPORT\nTo the Shareholders of COMSAT Corporation:\nWe have audited the accompanying consolidated balance sheets of COMSAT Corporation and subsidiaries as of December 31, 1993, 1992 and 1991, and the related consolidated statements of income, stockholders' equity, and cash flow for the years then ended. Our audit also included the financial statement schedules listed in the Index at Item 14(a)2. These financial statements and financial statement schedules are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits.\nWe conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.\nIn our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of COMSAT Corporation and subsidiaries at December 31, 1993, 1992 and 1991, and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein.\nAs discussed in Note 10 to the consolidated financial statements, in 1991 the corporation changed its method of accounting for postretirement health and life insurance benefits to conform with Statement of Financial Accounting Standards No. 106. Also, as discussed in Note 11 to the consolidated financial statements, in 1993 the corporation changed its methods of accounting for income taxes to conform with Statement of Financial Accounting Standards No. 109.\nDeloitte & Touche Washington, D.C. February 16, 1994\nCOMSAT CORPORATION AND SUBSIDIARIES CONSOLIDATED INCOME STATEMENTS For the Years Ended December 31, 1993, 1992, and 1991 (In thousands, except per share amounts)\nThe accompanying notes are an integral part of these financial statements.\nCOMSAT CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1993, 1992, and 1991 (In thousands)\nThe accompanying notes are an integral part of these financial\nCOMSAT CORPORATION AND SUBSIDIARIES STATEMENTS OF CHANGES IN CONSOLIDATED STOCKHOLDERS' EQUITY For the Years Ended December 31, 1993, 1992, and 1991 (In thousands)\nThe accompanying notes are an integral part of these financial statements.\nCOMSAT CORPORATION AND SUBSIDIARIES CONSOLIDATED CASH FLOW STATEMENTS For the Years Ended December 31, 1993, 1992, and 1991 (In thousands)\nThe accompanying notes are an integral part of these financial statements.\nCOMSAT CORPORATION AND SUBSIDIARIES\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1993\n1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES\nThe significant accounting policies that have guided the preparation of these financial statements are:\nPrinciples of Consolidation\nAccounts of COMSAT Corporation and its majority-owned subsidiaries (the corporation) have been consolidated. Significant intercompany transactions have been eliminated.\nThe corporation has consolidated its share of the accounts of the International Telecommunications Satellite Organization (INTELSAT), Inmarsat and the MARISAT Joint Venture (MARISAT). The corporation's ownership interests in INTELSAT and Inmarsat are based primarily on the corporation's usage of these systems. As of December 31, 1993, the corporation owned 20.9% of INTELSAT, 23.0% of Inmarsat and 86.3% of MARISAT.\nThe corporation's investments in the Denver Nuggets Limited Partnership (the Nuggets) and On Command Video Corporation (OCV) (see Note 4) were accounted for using the equity method until the third quarter of 1992. Since July 1992, the accounts of these investments have been consolidated in the accompanying financial statements. The interest of other shareholders in the net assets of OCV is shown as Minority Interest in the accompanying balance sheet. The minority interest share of the net income of OCV, which is not significant, is included in Other Income (Expense).\nRevenue Recognition\nRevenue from satellite services is recognized over the period during which the satellite services are provided. Revenue from technical and other service contracts is accounted for using the percentage-of-completion method. Revenue from other services is recorded as services are provided.\nIncome Taxes and Investment Tax Credits\nThe corporation adopted Statement of Financial Accounting Standards (SFAS) No. 109, \"Accounting for Income Taxes,\" effective January 1, 1993. This accounting standard requires the use of the asset and liability approach for financial accounting and reporting for income taxes.\nThe provision for income taxes includes taxes currently payable and those deferred because of differences between the financial statement and tax bases of assets and liabilities. The corporation has earned investment tax credits on certain INTELSAT and Inmarsat satellite costs. These tax credits have been deferred and are being recognized as reductions to the tax provision over the estimated service lives of the related assets.\nEarnings Per Share\nPrimary earnings per share are computed using the average number of shares outstanding during each period, adjusted for outstanding stock options and restricted stock units. Fully diluted earnings per share also assume the conversion of the corporation's convertible debentures, which were redeemed in March 1992 (see Note 5). The calculation of the weighted average number of shares outstanding and all per share amounts have been adjusted for a two-for-one stock split on June 1, 1993 (see Note 8). The weighted average number of shares for each year is:\nGoodwill\nThe balance sheet includes goodwill related primarily to the acquisitions of OCV and the Nuggets. Nuggets goodwill is amortized over 25 years and OCV goodwill is amortized over 15 years. Accumulated goodwill amortization was $2,343,000, $875,000 and $105,000 at December 31, 1993, 1992 and 1991, respectively. Net goodwill of $6,740,000 for the Nuggets and OCV was included in the Investments line on the balance sheet for 1991 because these investments were accounted for using the equity method at that time.\nFranchise Rights and Other Assets\nFranchise rights were recorded in connection with the consolidation of the Nuggets in 1992 and are being amortized over 25 years. The amounts shown on the balance sheets are net of accumulated amortization of $2,955,000 and $990,000 at December 31, 1993 and 1992, respectively.\nThe cash surrender values of life insurance policies (net of loans) totalling $40,849,000, $33,350,000 and $23,419,000 at December 31, 1993, 1992 and 1991, respectively, are included in Other Assets. Other Income (Expense) on the income statement includes the increases in the cash surrender values of these policies. Additionally, the corporation recorded income of $4,131,000 ($3,137,000 net of tax) from the death benefit proceeds of certain policies in 1993.\nCash Flow Information\nThe corporation considers highly liquid investments with a maturity of three months or less at the time of purchase to be cash equivalents.\nStatement Presentation\nCertain prior period amounts have been reclassified to conform with the current year's presentation.\nNew Accounting Pronouncements\nSFAS No. 115, \"Accounting for Certain Investments in Debt and Equity Securities,\" was issued in May 1993 and must be adopted by the corporation in 1994. This statement requires that certain investments in debt or equity securities be carried on the balance sheet at fair value. The effect of this statement is not material to the corporation as of December 31, 1993.\nSFAS No. 112, \"Employers' Accounting for Postemployment Benefits,\" was issued in November 1992 and must be adopted by the corporation in 1994. This statement requires that the estimated cost of benefits provided to former or inactive employees be accrued over the term of their active service as employees. Although the corporation has not completed its analysis, the effect of adopting this statement is not expected to be material.\n2. RECEIVABLES\nReceivables at each year-end are composed of:\nUnbilled receivables consist principally of revenues recorded on long-term contracts, which are billable and collectible within the next year.\nRelated party customer receivables are primarily amounts due from INTELSAT and Inmarsat.\n3. PROPERTY AND EQUIPMENT\nProperty and equipment include the corporation's shares of INTELSAT, Inmarsat and MARISAT property and equipment.\nDepreciation is calculated using the straight-line method over the estimated service life of each asset. The service life for satellites and furniture, fixtures and equipment is 3 to 15 years. The service life for buildings and improvements is 6 to 40 years.\nCosts of satellites which are lost at launch or that fail in orbit are carried, net of any insurance proceeds, in the property accounts. The remaining net amounts are depreciated over the estimated service life of a satellite of the same series.\n4. ACQUISITIONS AND INVESTMENTS\nDenver Nuggets Limited Partnership\nIn November 1989, the corporation acquired a 62.5% interest in a limited partnership which acquired the Denver Nuggets, a franchise of the National Basketball Association. In 1991, the corporation acquired an additional interest, bringing its ownership to 65.3% as of December 31, 1991. In 1992, the corporation acquired the remaining interests in the partnership. The total cost of this investment was $71,500,000 including liabilities assumed of $33,900,000.\nThe partnership's assets, liabilities, revenues and expenses have been consolidated with the corporation's financial statements since July 1, 1992. Prior to this date, the corporation was the majority owner in the partnership, but was not its managing general partner. Accordingly, the financial results of the partnership in prior periods were accounted for using the equity method.\nThe corporation's shares of the partnership's losses accounted for under the equity method were $6,603,000 in 1991 and $2,857,000 for the first six months of 1992. Had the financial results been consolidated throughout 1992 or 1991, the effect on the corporation's financial statements would not have been material.\nOn Command Video\nIn 1991, the corporation acquired a 47% interest in On Command Video Corporation (OCV), a California-based company that developed and markets a proprietary video entertainment system to hotels. The corporation purchased additional shares of OCV stock throughout 1992 and 1993. OCV's financial statements have been consolidated since the third quarter of 1992, when the corporation's ownership increased to 50.4%. The corporation's ownership share was 65.7% at December 31, 1992 and 73.5% at December 31, 1993. Had the financial results been consolidated throughout 1992 or 1991, the effect on the corporation's financial statements would not have been material. The total cost of the corporation's investment in OCV was $77,282,000 as of December 31, 1993.\nRock Spring II Limited Partnership\nThe corporation entered into a limited partnership to build and lease a new headquarters facility. The corporation holds a 50% interest in the partnership, primarily as a limited partner. The managing general partner, a regional real estate investment company, owns the remaining 50% interest in the partnership. An affiliate of the managing general partner owns the building site and has leased this site to the partnership.\nThe corporation relocated its headquarters operations to the new building during the second quarter of 1993. The corporation has entered into a 15-year lease with the partnership for the building starting April 1993 (see Note 6).\nThe partnership borrowed $27,000,000 in the form of a 26-year mortgage at a fixed interest rate of 9.45% to cover construction costs. As of December 31, 1993, the corporation has guaranteed repayment of this loan. The corporation's guarantee will be reduced to $2,700,000 after satisfaction of certain contractual requirements which are expected to be completed in 1994. Subsequently, the corporation's guarantee will be reduced as the principal balance is paid down and completely eliminated once the outstanding loan balance is less than $24,300,000.\n5. DEBT\nThe corporation, as regulated by the Federal Communications Commission (FCC), is allowed to undertake long-term borrowings of up to 45% of its total capital (long-term debt plus equity) and $200,000,000 in short-term borrowings.\nCommercial Paper\nThe corporation has a $125,000,000 commercial paper program. Throughout 1993, 1992 and 1991, the corporation issued short-term commercial paper with repayment terms of 90 days or less. The corporation had $43,233,000 and $47,795,000 in borrowings outstanding at December 31, 1993 and December 31, 1992, respectively. There were no short-term borrowings outstanding at December 31, 1991.\nCredit Facilities\nThe corporation has a $200,000,000 revolving credit agreement which will expire in December 1998. There have been no borrowings under this agreement.\nLong-Term Debt\nLong-term debt at each year-end consists of:\nThe corporation redeemed its 11.625% debentures ($92,935,000) in March 1992, using cash on hand and commercial paper proceeds. In April 1992, the corporation issued $160,000,000 of 8.125% debentures due April 1, 2004. The corporation used $110,000,000 of the proceeds to redeem its 7.75% convertible subordinated debentures in April 1992. The balance of the proceeds was used to repay outstanding commercial paper borrowings.\nIn August 1992, INTELSAT issued $200,000,000 of 7.375% Eurobonds. Interest is payable annually in August, and the bonds are due August 6, 2002. The corporation received its share of the proceeds and recorded long-term debt totalling $43,685,000.\nIn January 1993, INTELSAT issued $150,000,000 of 6.75% Eurobonds. Interest is payable annually in January, and the notes are due January 19, 2000. The corporation received its share of the proceeds and recorded long-term debt. The corporation's share of this debt at December 31, 1993 was $31,344,000. The corporation prepaid $30,000,000 of its 9.55% notes with the proceeds. The remaining $70,000,000 balance of the 9.55% notes is due in April 1994 and has been classified as a current liability on the December 31, 1993 balance sheet.\nThe principal amount of debt (excluding the Inmarsat lease financing obligation) maturing over the next five years is $71,204,000 in 1994, $817,000 in 1995, $208,000 in 1996 and none in 1997 or 1998.\nInmarsat Lease Financing Obligations\nInmarsat borrowed 140,400,000 pounds sterling under a capital lease agreement to finance the construction of second- generation Inmarsat satellites. Inmarsat also entered into another capital lease arrangement to finance the construction costs of its third-generation satellites. As of December 31, 1993, 65,500,000 pounds sterling of the 197,000,000 pounds sterling available for this purpose has been borrowed. The corporation's share of these lease obligations is included in long-term debt. Inmarsat has hedged its obligations through various foreign exchange\ntransactions to minimize the effect of fluctuating interest and exchange rates (see Note 14).\nThe corporation's share of the payments under these lease obligations for each of the next five years from 1994 through 1998 is $9,166,000, $11,486,000, $12,490,000, $13,637,000 and $14,895,000 and $87,451,000 thereafter. These payments include interest totalling $50,466,000 and current maturities of $3,700,000.\n6. COMMITMENTS AND CONTINGENCIES\nProperty and Equipment\nAs of December 31, 1993, the corporation had commitments to acquire property and equipment totalling $379,649,000. Of this total, $353,371,000 is payable over the next three years. These commitments are related principally to the purchase of INTELSAT and Inmarsat satellites.\nEmployment and Consulting Agreements\nThe Nuggets have employment and consulting agreements with certain officers, coaches and players. Virtually all of these agreements provide for guaranteed payments. Other contracts provide for payments contingent upon the fulfillment of certain terms and conditions. Amounts required to be paid under such agreements total $17,682,000 in 1994, $17,906,000 in 1995, $18,243,000 in 1996, $14,158,000 in 1997, $10,484,000 in 1998 and $4,536,000 thereafter.\nLeases\nAs discussed in Note 4, the corporation has a 15-year lease which started April 1993 on its new headquarters building in Bethesda, Maryland, and the corporation has a ten-year lease ending in 1996 on its former headquarters building in Washington, D.C. The corporation also has leases of other property and equipment. Annual rent expense was $6,600,000 in 1993, $3,000,000 in 1992 and $2,900,000 in 1991. These amounts are net of the $3,921,000 annual amortization of the deferred gain from the sale and leaseback of the Washington, D.C. building in 1986. Annual rental income from noncancelable subleases totals approximately $3,800,000.\nThe corporation's payments under all operating leases for 1994 through 1998 are $12,747,000, $12,418,000, $11,877,000, $5,186,000, $5,259,000 and thereafter, $45,697,000.\nEnvironmental Issue\nThe corporation is engaged in a program to monitor a toxic solvent spill of limited scope that occurred in 1986 at the site of its former manufacturing subsidiary in California. The corporation believes that it has complied with remediation requirements. Management believes that the corporation has sufficient accruals to cover the monitoring costs.\n7. REGULATORY ENVIRONMENT AND LITIGATION\nRegulatory Environment\nUnder the Communications Act of 1934 and the Satellite Act, the corporation is subject to regulation by the FCC with respect to communications services provided through the INTELSAT and Inmarsat systems and the rates charged for those services.\nIn 1993, the FCC initiated an audit of the corporation's role as the United States signatory to Inmarsat and as a provider of international mobile satellite services. In the opinion of management, the ultimate outcome of the audit will not have a material effect on the accompanying financial statements.\nUntil 1985, the corporation was, with minor exceptions, the sole United States provider of international satellite communications services using the INTELSAT system. Since then, the FCC has authorized several international satellite systems separate from INTELSAT. These U.S. separate systems currently compete against the corporation for voice, video and data traffic. In 1993, the FCC substantially eliminated prior restrictions on the ability of separate systems to offer public switched telephony services, thereby potentially increasing competition to the corporation in the voice market. The United States government has established a goal to eliminate all restrictions on competitive systems by 1997.\nLitigation\nIn 1989, Pan American Satellite (PanAmSat) filed an antitrust suit against the corporation alleging interference with PanAmSat's efforts to compete in the international satellite communications market and seeking trebled damages of approximately $1.5 billion. In 1991, a United States Court of Appeals ruled that the corporation is immune from antitrust suits in its role as a signatory to INTELSAT. In February 1992, the United States Supreme Court denied PanAmSat's request for a review of the lower court's decision. An amended complaint was filed alleging that the corporation violated antitrust laws in its business activities purportedly outside of its role as a signatory to INTELSAT. In March 1993, a Federal district court denied the corporation's motion to dismiss the amended complaint and allowed PanAmSat to proceed with discovery. A U.S. magistrate has extended the discovery process from November 1993 to June 1994. In February 1994, PanAmSat submitted\na report estimating its alleged damages (before trebling) at a 1994 present value of $227,436,000. Also in February 1994, PanAmSat filed a motion with the district court for acceptance of a third amended and supplemental complaint that would add 15 new defendants to the suit, primarily as alleged co-conspirators with the corporation. Generally, the 15 proposed defendants are international telecommunications companies or telecommunications entities owned by foreign governments. The corporation has opposed the motion which is pending before the court. In the opinion of management, the complaint against the corporation is without merit, and the ultimate disposition of this matter will not have a material effect on the corporation's financial statements.\nThe corporation is defending an intellectual property infringement suit brought by Spectradyne, Inc. against its COMSAT Video Enterprises, Inc. and On Command Video Corporation subsidiaries. The initial patent claims were dismissed. However, Spectradyne amended its complaint to substitute new patent infringement claims along with claims that the corporation's subsidiaries induced unnamed third parties to infringe a copyrighted software interface. Subsequently, Spectradyne further amended its complaint by substituting direct copyright infringement claims for the inducement to infringe claims. Spectradyne is seeking damages in an unspecified amount and injunctive relief. The corporation believes that these claims are without merit and that the ultimate disposition of this matter will not have a material effect on the corporation's financial statements.\n8. STOCKHOLDERS' EQUITY\nEffective June 1, 1993, the corporation's Articles of Incorporation were amended to increase the number of authorized shares of the corporation's common stock from 40,000,000 shares to 100,000,000 shares and to split each share of common stock outstanding on June 1, 1993 into two shares of common stock. Earnings per share and share amounts for all prior periods have been restated to reflect this stock split. The corporation's Articles of Incorporation were also amended to increase the number of authorized shares of the corporation's preferred stock from 1,000 shares to 5,000,000 shares and to permit preferred stock to be convertible into any other class of stock. No preferred stock is currently outstanding.\n9. INCENTIVE STOCK PLANS\nThe corporation has stock plans for officers, directors and employees. These plans provide for the issuance of restricted stock awards, stock appreciation rights, restricted stock units and stock options. Under the current plans, grants for up to 5,550,000 shares may be made. As of December 31, 1993, 5,589,000 shares of the corporation's authorized common stock were reserved for these plans. As of December 31, 1993, no stock appreciation rights were outstanding.\nRestricted Stock Awards\nRestricted stock awards are shares of stock that are subject to restrictions on their sale or transfer. These restrictions are lifted over six years. During 1993, 1992 and 1991, respectively, 348,000, 68,000 and 134,000 restricted stock awards were granted, net of awards forfeited.\nRestricted Stock Units\nRestricted stock units entitle the holder to receive a combination of stock and cash equal to the market price of common stock for each unit, when vested. These units vest over three years. During 1993, 1992 and 1991, respectively, 49,000, 42,000 and 56,000 restricted stock units were granted. At December 31, 1993, 124,000 partially vested restricted stock units were outstanding.\nStock Options\nUnder the current plans, the exercise price for stock options may not be less than 50% of the fair market value of the stock when granted. Options vest over three years and expire after 15 years. Stock option activity was as follows:\nThe corporation is recognizing an expense over three years equal to the exercise price of the 1991 and 1992 options, since they were granted at 50% of the market price. The exercise price for options awarded in 1993 is equal to the fair market value on the grant date.\nEmployee Stock Purchase Plan\nEmployees may purchase stock at a discount through the corporation's Employee Stock Purchase Plan. The purchase price of the shares is the lower of 85% of the fair market value of the stock on the offering date, or 85% of the fair market value of the stock on the last business day of each month throughout the following year. The offering date for 1994 purchases was November 19, 1993, when 85% of the fair market value was $25.87.\nA total of 2,426,000 shares of the corporation's unissued common stock has been reserved for this plan.\n10. PENSION AND OTHER BENEFIT PLANS\nThe corporation has a non-contributory, defined benefit pension plan which covers substantially all of its employees. Pension benefits are based on years of service and compensation prior to retirement. The corporation's funding policy is to make the contributions when required by law.\nThe net pension expense for each year includes the following components:\nIn September 1992, the corporation offered an early retirement program to certain employees in connection with its restructuring of certain operations (see Note 12). This program provided enhanced retirement benefits and an option for a lump sum payment of all benefits. The additional pension expense for this program was $6,582,000 and is included in the provision for restructuring in the accompanying income statement.\nThe following table shows the pension plan's obligations and assets as well as the amount recognized in the corporation's balance sheets at each year end.\nThe corporation made a $4,100,000 cash contribution to the plan in 1993. No contributions were required in 1992 and 1991.\nSupplemental Executive Retirement Plan\nThe corporation has an unfunded supplemental pension plan for executives. The expense for this plan was $2,058,000, $1,917,000 and $4,243,000 for 1993, 1992 and 1991, respectively.\nAs of December 31, 1993, the corporation recorded an additional minimum liability of $5,740,000 for this plan. This amount is the excess of the accumulated benefit obligation over the previously recorded plan liability. The corporation also recorded an intangible asset of $2,128,000 which represents the unrecognized transition obligation and a charge of stockholders equity of $2,301,000, net of tax.\nThe corporation's accrued liabilities for this plan were $15,679,000, $10,661,000 and $9,814,000 at December 31, 1993, 1992 and 1991, respectively. As of December 31, 1993, the accumulated benefit obligation was approximately $15,679,000, and the projected benefit obligation was approximately $16,449,000, assuming a discount rate of 7% and future salary increases of 5%.\n401(k) Plan\nThe corporation has a 401(k) plan for qualifying employees. A portion of employee contributions is matched by the corporation. The corporation's matching contributions for the years ended December 31, 1993, 1992 and 1991 were $3,237,000, $2,860,000 and $2,585,000, respectively.\nPostretirement Benefits\nThe corporation provides health and life insurance benefits to employees and retirees. Effective January 1, 1991, the corporation adopted the provisions of SFAS No. 106, which requires that the expected cost of these benefits be recognized during the years in which employees render service. Prior to 1991, the cost of such benefits was expensed as paid by the corporation. The corporation recognized the full obligation attributable to the cost of prior years' service in 1991. The cumulative effect to January 1, 1991 was $40,314,000, less taxes of $13,707,000, and is shown separately in the 1991 income statement.\nThe net postretirement benefit expense for each year included the following components:\nThe early retirement program discussed earlier in this note resulted in an additional postretirement benefit expense of $2,107,000 in 1992.\nThe following table shows the plan's obligations as well as the liability recognized in the corporation's balance sheet at each year end.\nIn 1993, the corporation made several modifications to its postretirement benefits program including higher participant premium payments, higher deductibles and out-of-pocket maximums and reduced benefits for certain participants. Additionally, the corporation implemented a managed health care program to better control costs. These changes, which are effective January 1, 1994, resulted in a reduction in the accumulated postretirement benefit obligation and an unrecognized gain of $12,873,000 as of December 31, 1993.\nAn 11% increase in health care costs was assumed for 1993 with the rate decreasing 0.5% each year to an ultimate rate of 6%. Increasing the assumed trend rate by 1% each year would have increased the accumulated postretirement benefit obligation as of December 31, 1993 by $6,115,000 and the benefit expense for 1993 by $900,000.\n11. INCOME TAXES\nThe corporation adopted SFAS No. 109, \"Accounting for Income Taxes,\" effective January 1, 1993. This accounting statement changed the method for the recognition and measurement of deferred tax assets and liabilities. The cumulative effect of adopting SFAS No. 109 on the corporation's financial statements was to increase income by $1,238,000 ($.03 per share) and was recorded in the first quarter of 1993. Prior year financial statements have not been restated.\nThe components of income tax expense for each year are:\nThe difference between tax expense computed at the statutory Federal tax rate and the corporation's effective tax rate is:\nSFAS No. 109 requires that deferred tax liabilities and assets be adjusted for the effect of a change in tax laws or rates. Accordingly, the corporation recorded a charge to income tax expense of $2,977,000 in the third quarter of 1993 to adjust prior years' deferred tax assets and liabilities for an increase in the Federal income tax rate from 34% to 35%.\nThe net current and net non-current components of deferred tax accounts as shown on the balance sheet at December 31, 1993 are:\nThe deferred tax assets and liabilities at December 31, 1993 are:\nThe corporation s investment tax credit carryforwards expire in years 2002 through 2007.\nThe Internal Revenue Service (IRS) is currently examining Federal income tax returns for 1990 and 1991 and has completed examinations of the Federal income tax returns of the corporation through 1989. The corporation has also amended its returns and filed claims for refunds for 1979 through 1987. The IRS has denied these claims. The corporation is contesting this denial by the IRS and other adjustments proposed by the IRS on the 1980 through 1987 income tax returns. In the opinion of the corporation, adequate provision has been made for income taxes for all periods through 1993.\n12. PROVISION FOR RESTRUCTURING\nIn September 1992, the corporation recorded a $38,961,000 charge for restructuring costs. At that time, the corporation announced its plans to realign business activities, downsize certain functions, and reposition COMSAT Video Enterprises, Inc. to capitalize on the growing market for on-demand entertainment. The restructuring costs relate to headcount reductions throughout the corporation and the elimination of the former COMSAT Systems Division and the\nconsolidation of its operations with those of COMSAT Laboratories into a new division, COMSAT Technology Services, as well as the transfer of television distribution services from COMSAT Systems Division to CVE. This charge consists of $12,644,000 for early retirement and reduction in force costs related to the reorganization, and $26,317,000 for equipment, property and other items.\n13. BUSINESS SEGMENT INFORMATION\nThe corporation reports operating results and financial data in four business segments: International Communications, Mobile Communications, Video Enterprises and Technology Services. The International Communications segment consists of activities undertaken by the corporation in its COMSAT World Systems business, including INTELSAT services. This segment also includes the activities of the corporation's international ventures, which are accounted for as consolidated subsidiaries. The Mobile Communications segment consists of activities undertaken by the corporation in its COMSAT Mobile Communications (CMC) business, including Inmarsat services. The Video Enterprises segment includes entertainment services provided to the hospitality industry as well as video distribution services to television networks. The Technology Services segment includes voice and data communications networks and products, systems integration services, and applied research and technology services. The financial results of the Denver Nuggets Limited Partnership are included in Other Corporate activities.\nThe corporation has redefined its reporting segments. Prior to 1993, CMC was included in the International Communications segment. In the first quarter of 1993, the operations of the corporation's earth stations in Connecticut and California were transferred from the Technology Services segment to the Mobile Communications segment. As discussed in Note 12, business activities within the Technology Services and Video Enterprises segments were realigned in 1992. The financial results presented below for prior periods have been restated consistent with these changes.\n(1) Technology Services segment revenues include intersegment sales totalling $10,132,000 in 1993, $19,500,000 in 1992 and $29,780,000 in 1991.\n(2) Operating results for 1992 are net of the $38,961,000 provision for restructuring (see Note 12). The amounts recorded in each segment were International Communications - $6,955,000; Mobile Communications - $3,332,000; Video Enterprises - $14,146,000; Technology Services - $10,240,000; and Other Corporate - $4,288,000.\n(3) The identifiable assets of the Video Enterprises segment include the corporation's equity investment in On Command Video Corporation totalling $13,655,000 at December 31, 1991.\nRelated Party Transactions and Significant Customers\nThe corporation provides support services to INTELSAT and support services and satellite capacity to Inmarsat. The revenues from these services were $23,190,000 in 1993, $21,477,000 in 1992 and $24,000,000 in 1991. These revenues were recorded primarily in the International Communications and Technology Services segments.\nA significant amount of the corporation's revenues were received from AT&T. These revenues totalled $117,036,000 in 1993, $134,293,000 in 1992 and $148,525,000 in 1991. Substantially all of these revenues were generated by the International Communications and Mobile Communications segments.\n14. FINANCIAL INSTRUMENTS AND OFF BALANCE SHEET RISKS\nSFAS No. 107, which became effective in 1992, requires disclosures about the fair value of financial instruments. In these disclosures, fair values are estimates and do not necessarily represent the amounts that would be received or paid in an actual sale or settlement of the financial instruments.\nAt December 31, 1993, the corporation was contingently liable to banks for $8,533,000 for outstanding letters of credit securing performance of certain contracts. As discussed in Note 4, the corporation has guaranteed repayment of the construction loan related to its headquarters building. The corporation has other financial guarantees totalling approximately $3,000,000 as of December 31, 1993. The estimated fair value of these instruments is not significant.\nInmarsat has entered into foreign currency contracts designed to minimize exposure to exchange rate fluctuations on foreign currency transactions. At December 31, 1993, Inmarsat had several contracts maturing in 1994 to purchase 12,500,000 pounds sterling for a total of $18,392,000. The corporation's share of the estimated fair value of these contracts, as determined by a bank, is an unrealized gain of approximately $13,000 at December 31, 1993.\nInmarsat has entered into interest rate and foreign currency swap arrangements to minimize the exposure to interest rate and foreign currency exchange fluctuations related to its satellite financing obligations. Inmarsat borrowed and is obligated to repay pounds sterling. The pounds sterling borrowed were swapped for U.S. dollars with an agreement to exchange the dollars for pounds sterling in order to meet the future lease payments. Inmarsat pays interest on the dollars at an average fixed rate of 9.0% and it receives variable interest on the sterling amounts based on short- term rates. The differential to be paid or received is accrued as interest rates change and is recognized over the life of the agreements. The currency swap arrangements have been designated as hedges, and any gains or losses are included in the measurement of the debt. The effect of\nthese swaps is to change the sterling lease obligation into fixed interest rate dollar debt. As of December 31, 1993, Inmarsat had $352,327,000 of swaps to be exchanged for 211,400,000 pounds sterling at various dates through 2005. Inmarsat is exposed to loss if one or more of the counterparties defaults. However, Inmarsat does not anticipate non-performance by the counterparties as they are major financial institutions. The corporation's share of the estimated fair value of these swaps is an unrealized loss of $18,500,000 at December 31, 1993. The fair value was estimated by computing the present value of the dollar obligations using current rates available for issuance of debt with similar terms, and the current value of the sterling at year-end exchange rates.\nThe fair value of long-term debt (excluding capitalized leases) was estimated by computing present values of the related cash flows using risk adjustments to Treasury rates obtained from investment bankers.\nThe fair values of the corporation's other financial instruments are approximately equal to their carrying values.\n15. SUBSEQUENT EVENTS\nMerger Agreement\nIn January 1994, the corporation entered into a definitive merger agreement for the acquisition of Radiation Systems, Inc. (RSi), based in Sterling, Virginia. RSi designs, manufactures and integrates satellite earth stations, advanced antennas and other turnkey systems for telecommunications, radar, air traffic control and military uses. Following the merger, the corporation expects to combine its existing systems integration business, COMSAT Technology Services, with RSi.\nUnder the merger agreement, RSi will be merged into a wholly owned subsidiary of the corporation, and each share of RSi's common stock will be exchanged for $18.25 in the corporation's common stock, based on the average closing price of the corporation's stock during the 20 trading days ending five trading days before the closing of the transaction. However, in no event will a share of RSi common stock be exchanged for less than 0.638 or more than 0.780 shares of the corporation's common stock. RSi has approximately eight million shares outstanding. During 1993, the corporation purchased 404,500 shares of RSi on the open market for $5,098,000. The corporation's ownership represented 4.9% of RSi stock with a market value of $6,042,000 at December 31, 1993.\nThe merger is subject to the approval of RSi's shareholders, receipt of all required government approvals and compliance with other customary conditions. RSi shareholders are expected to vote on the merger during the second quarter of 1994. It is a condition of the merger that it be treated as a pooling of interests for accounting purposes. The merger is expected to be completed in 1994.\nIn February 1994, two shareholder class-action lawsuits were filed in Nevada state court challenging the merger. Plaintiffs in the lawsuits allege, among other things, that the proposed merger consideration is unfair and inadequate. The lawsuits seek, among other things, to enjoin the merger and, in the event the merger is consummated, to recover damages. Management believes that the lawsuits are without merit and that the ultimate disposition of these matters will not have a material effect on the merger or on the corporation's financial statements.\nDebt\nINTELSAT intends to issue $200 million of bonds in the first quarter of 1994. INTELSAT will use the proceeds to repay its short-term borrowings. The corporation will record its share of the borrowings as long-term debt of approximately $42 million when the bonds are issued.\nItem 9.","section_9":"Item 9. Disagreements on Accounting and Financial Disclosure. None.\nPART III\nExcept for the portion of Item 10","section_9A":"","section_9B":"","section_10":"Item 10. Directors and Officers of the Registrant. Item 11.","section_11":"Item 11. Executive Compensation. Item 12.","section_12":"Item 12. Security Ownership of Certain Beneficial Owners and Management. Item 13.","section_13":"Item 13. Certain Relationships and Related Transactions.\nPART IV\nItem 14.","section_14":"Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.\n(a) Documents filed as part of this Report.\n1. Consolidated Financial Statements and Supplementary Data of Registrant.\nPage\na. Independent Auditors' Report . . . . . . . . . . . . . . . . 34\nb. Consolidated Financial Statements of COMSAT Corporation and Subsidiaries\n(i) Consolidated Income Statements for the Years Ended December 31, 1993, 1992 and 1991 . . . . . . . . . 35\n(ii)Consolidated Balance Sheets as of December 31 1993, 1992 and 1991. . . . . . . . . . . . . . . . . . . 36\n(iv)Consolidated Cash Flow Statements for the Years Ended December 31, 1993, 1992 and 1991 . . . . . . . . . 37\n(v) Statements of Changes in Consolidated Stockholders' Equity for the Years Ended December 31, 1993, 1992 and 1991 . . . . . . . . . . . . . . . . . . . . . . . . 38\n(vi)Notes to Consolidated Financial Statements for Each of the Three Years in the Period Ended December 31, 1993. . . . . . . . . . . . . . . . . . .39-60\n2. Financial Statement Schedules Relating to the Consolidated Financial Statements of COMSAT Corporation for Each of the Three Years in the Period Ended December 31, 1993.\nPage\na. Independent Auditors' Report . . . . . . . . . . . . . . . . 34\nb. Schedule II -- Amounts Receivable from Related Parties and Underwriters, Promoters, and Employees Other than Related Parties. . . . . . . . . . . . . . . . . . . . . . . . . . . 73 c. Schedule V -- Property, Plant and Equipment. . . . . . . . . 74 d. Schedule VI -- Accumulated Depreciation of Property, Plant and Equipment. . . . . . . . . . . . . . . . . . . . . . . . 76 e. Schedule VIII -- Valuation and Qualifying Accounts . . . . . 78 f. Schedule IX -- Short-Term Borrowings . . . . . . . . . . . . 79 g. Schedule X -- Supplementary Income Statement Information . . 79\nAll Schedules except those listed above have been omitted because they are not applicable or not required or because the required information is included elsewhere in the financial statements in this filing. Separate financial statements and schedules of COMSAT Corporation are omitted because the Corporation is primarily an operating corporation and all subsidiaries included in the consolidated financial statements, in the aggregate, do not have minority equity interests and indebtedness to any person other than the Corporation and its consolidated subsidiaries in amounts which together exceed 5 percent of the total assets shown by the consolidated statements in this filing.\n(b) Reports on Form 8-K.\nA report on Form 8-K dated January 31, 1994 was filed by the Registrant to file the press release reporting the Registrant's entering into a definitive merger agreement for the acquisition of Radiation Systems, Inc.\nA report on Form 8-K dated March 7, 1994 was filed by the Registrant to file the press release reporting purported class action shareholder lawsuits which were filed in Nevada to challenge the Registrant's acquisition of Radiation Systems, Inc.\nA report on Form 8-K dated March 11, 1994 was filed by the Registrant to file the Registrant's 1993 Financial Statements.\n(c) Exhibits (listed according to the number assigned in the table in Item 601 of Regulation S-K).\nExhibit No. 2 - Plan of Acquisition, Reorganization, Arrangement, Liquidation or Succession.\na. Agreement and Plan of Merger among Registrant, CTS America, Inc. and Radiation Systems, Inc. dated as of January 30, 1994.\nb. Stock Option Agreement between Registrant and Radiation Systems, Inc. dated as of January 30, 1994.\nExhibit No. 3 - Articles of Incorporation and By-laws.\na. Articles of Incorporation of Registrant, composite copy, as amended through June 1, 1993. (Incorporated by reference from Exhibit No. 4(a) to Registrant's Registration Statement on Form S-3 (No. 33-51661) filed on December 22, 1993).\nb. By-laws of Registrant, as amended through March 15, 1991. (Incorporated by reference from Exhibit No. 3(b) to Registrant's Report on Form 10-K for the fiscal year ended December 31, 1991.)\nc. Regulations adopted by Registrant's Board of Directors pursuant to Section 5.02(c) of Registrant's Articles of Incorporation. (Incorporated by reference from Exhibit No. 3(c) to Registrant's Report on Form 10-K for the fiscal year ended 1992.)\nExhibit No. 4 - Instruments defining the rights of security holders, including indentures.\na. Specimen of a certificate representing Series I shares of Registrant's Common Stock, without par value, registered under Section 12 of the Securities Exchange Act of 1934, which are held by citizens of the United States.\nb. Specimen of a certificate representing Series I shares of Registrant's Common Stock, without par value, registered under Section 12 of the Securities Exchange Act of 1934, which are held by aliens. (Incorporated by reference from Exhibit No. 4(b) to Registrant's Report on Form 10-K for the fiscal year ended December 31, 1982.)\nc. Specimen of a certificate representing Series II shares of Registrant's Common Stock, without par value, registered under Section 12 of the Securities Exchange Act of 1934. (Incorporated\nby reference from Exhibit No. 4(c) to Registrant's Report on Form 10-K for the fiscal year ended December 31, 1982.)\nd. Indenture dated as of August 1, 1988 between Registrant and The Chase Manhattan Bank, N.A. (Incorporated by reference from Exhibit No. 4 to Registrant's Report on Form 10-Q for the quarter ended June 30, 1988.)\ne. Standard Multiple-Series Indenture Provisions, dated March 15, 1991. (Incorporated by reference from Exhibit No. 4(a) to Registrant's Registration Statement on Form S-3 (No. 33-39472) filed on March 15, 1991.)\nf. Indenture dated as of March 15, 1991 between Registrant and The Chase Manhattan Bank, N.A. (Incorporated by reference from Exhibit No. 4(b) to Registrant's Registration Statement on Form S-3 (No. 33-39472) filed on March 15, 1991.)\ng. Officers' Certificate pursuant to Section 3.01 of the Indenture, dated as of March 15, 1991, from the Registrant to the Chase Manhattan Bank (National Association), as Trustee, relating to the authorization of $75,000,000 aggregate principal amount of Registrant's 8.95% Notes Due 2001 (with form of Note attached). (Incorporated by reference from Exhibit No. 4 to Registrant's Current Report on Form 8-K filed on May 15, 1991.)\nh. Officers' Certificate pursuant to Section 3.01 of the Indenture, dated as of March 15, 1991, from the Registrant to the Chase Manhattan Bank (National Association), as Trustee, relating to the authorization of $160,000,000 aggregate principal amount of Registrant's 8.125% Debentures Due 2004 (with form of Debenture attached). (Incorporated by reference from Exhibit No. 4 to Registrant's Current Report on Form 8-K filed on April 9, 1992.)\nExhibit No. 10 - Material Contracts\na. Agreement Relating to the International Telecommunications Satellite Organization (INTELSAT) by Governments, which entered into force on February 12, 1973. (Incorporated by reference from Exhibit No. 10(a) to Registrant's Report on Form 10-K for the fiscal year ended December 31, 1980.)\nb. Operating Agreement Relating to the International Telecommunications Satellite Organization (INTELSAT) by Governments which entered into force on February 12, 1973. (Incorporated by reference from Exhibit No. 10(b) to Registrant's Report on Form 10-K for the fiscal year ended December 31, 1980.)\nc. Agreement dated August 15, 1975, among COMSAT General Corporation, RCA Global Communications, Inc., Western Union International, Inc. and ITT World Communications, Inc. relating to the establishment\nof a joint venture for the purpose of participating in the ownership and operation of a maritime communications satellite system and Amendment Nos. 1-4 and Amendment No. 5 dated March 24, 1980. (Incorporated by reference from Exhibit No. 10(p) to Registrant's Report on Form 10-K for the fiscal year ended December 31, 1980.) (i) Amendment No. 6 dated September 1, 1981. (Incorporated by reference from Exhibit No. 10(p)(ii) to Registrant's Report on Form 10-K for the fiscal year ended December 31, 1981.)\nd. Convention on the International Maritime Satellite Organization (INMARSAT) dated September 3, 1976. (Incorporated by reference from Exhibit No. 11 to Registrant's Report on Form 10-K for the fiscal year ended December 31, 1978.)\ne. Operating Agreement on the International Maritime Satellite Organization (INMARSAT) dated September 3, 1976. (Incorporated by reference from Exhibit No. 12 to Registrant's Report on Form 10-K for the fiscal year ended December 31, 1978.)\nf.* Registrant's 1982 Stock Option Plan. (Incorporated by reference from Exhibit No. 10(x) to Registrant's Report on Form 10-K for the fiscal year ended December 31, 1981.)\ng. Agreement dated October 6, 1983, between COMSAT General Corporation and National Broadcasting Company for the provision of satellite distribution network programming. (Incorporated by reference from Exhibit No. 10(r) to Registrant's Report on Form 10-K for the fiscal year ended December 31, 1983.) (i) Amendment dated September 1, 1992. (Incorporated by reference from Exhibit No. 10(j)(i) to Registrant's Report on Form 10-K for the fiscal year ended December 31, 1992.)\nh.* Registrant's Insurance and Retirement Plan for Executives adopted by Registrant's Board of Directors on June 21, 1985, as amended by the Board of Directors on July 15, 1993.\ni.* Registrant's 1986 Key Employee Stock Plan. (Incorporated by reference from Exhibit No. 10(g) to Registrant's Registration Statement on Form S-4 (File No. 33-9966) filed on November 4, 1986.)\nj. Lease dated November 6, 1986, between Registrant and VMS 1985-299 Limited Partnership for the lease of Registrant's former headquarters at 950 L'Enfant Plaza, S.W., Washington, D.C. (Incorporated by reference from Exhibit No. 10(kk) to Registrant's Report on Form 10-K for the fiscal year ended December 31, 1986.)\nk.* Registrant's Non-Employee Directors Stock Option Plan adopted by Registrant's Board of Directors on January 15, 1988 and approved by Registrant's shareholders on May 20, 1988. (Incorporated by\nreference from Exhibit No. 10(h) to Registrant's Report on Form 10-K for the fiscal year ended December 31, 1987.) (i) Amendment No. 1 dated March 16, 1990. (Incorporated by reference from Exhibit No. 10 (g)(i) to Registrant's Report on Form 10-K for the fiscal year ended December 31, 1989.) (ii) Amendment No. 2 dated January 15, 1993.\nl.* Registrant's 1988 Annual Incentive Plan adopted by Registrant's Board of Directors on June 17, 1988, as amended by the Board of Directors on September 16, 1988. (Incorporated by Reference from Exhibit No. 3(a) to Registrant's Report on Form 10-K for the fiscal year ended December 31, 1988.)\nm. Memorandum of Understanding between Registrant and National Aeronautics and Space Administration (NASA), dated July 21, 1988 and amended through February 22, 1990. (Incorporated by reference from Exhibit No. 10(aa) to Registrant's Report on Form 10-K for the fiscal year ended December 31, 1989.)\nn. Agreement to Acquire and Lease (and Supplemental Agreements thereto) dated September 28 and October 10, 1988, respectively, among the International Maritime Satellite Organization (Inmarsat), the North Sea Marine Leasing Company, British Aerospace Public Limited Company, the European Investment Bank, Kreditanstalt Fuer Wiederaufbau, European Investment Bank (as Agent and as Trustee), Instituto Mobiliare Italiano, Credit National, Hellenic Industrial Development Bank, and Society Nationale de Credit a L'Industrie relating to the financing of three Inmarsat spacecraft. (Incorporated by Reference from Exhibit No. 3(a) to Registrant's Report on Form 10-k for the fiscal year ended December 31, 1988.)\no. Service Agreement, dated September 14, 1989, between Registrant and Aeronautical Radio, Inc. relating to satellite-based communications services. (Incorporated by reference from Exhibit No. 10(y) to Registrant's Report on Form 10-K for the fiscal year ended December 31, 1989.)\np. Second Amended and Restated Agreement of Limited Partnership of The Denver Nuggets Limited Partnership, dated November 29, 1989. (Incorporated by reference from Exhibit No. 10(x) to Registrant's Report on Form 10-K for the fiscal year ended December 31, 1989.) (i) Asset Purchase Agreement, dated October 20, 1989, between Denver Nuggets, Incorporated and Denver Nuggets Limited Partnership, and First Amendment to Asset Purchase Agreement, dated November 30, 1989. (Incorporated by reference from Exhibit No. 10(x)(i) to Registrant's Report on Form 10-K for the fiscal year ended December 31, 1989.)\nq. Agreement, dated January 22, 1990, between Registrant and Kokusai Denshin Denwa Co., Ltd. for provision of aeronautical services. (Incorporated by reference from Exhibit No. 10(z) to Registrant's Report on Form 10-K for the fiscal year ended December 31, 1990.) (i) Amendment No. 1 dated May 20, 1993.\nr.* Registrant's 1990 Key Employee Stock Plan adopted by the Board of Directors on March 16, 1990. (Incorporated by reference from Exhibit No. 10 (p) to Registrant's Report on Form 10-K for the fiscal year ended December 31, 1989.) (i) Amendment No. 1 dated January 15, 1993.\ns. Agreement, dated May 25, 1990, between Registrant and IDB Communications Group, Inc. (Incorporated by reference from Exhibit No. 10(bb) to Registrant's Report on Form 10-K for the fiscal year ended December 31, 1990.)\nt. Amended and Restated Agreement, dated November 14, 1990, of Limited Partnership of Rock Spring II Limited Partnership. (Incorporated by reference from Exhibit No. 10(a) to Registrant's Current Report on Form 8-K filed on February 24, 1992.) (i) Amended and Restated Lease Agreement, dated November 14, 1990, by and between Rock Spring II Limited Partnership and Registrant. (Incorporated by reference from Exhibit No. 10(b) to Registrant's Current Report on Form 8-K filed on February 24, 1992.) (ii) Amended and Restated Ground Lease Indenture, dated November 14, 1990, between Anne D. Camalier (Landlord) and Rock Spring II Limited Partnership (Tenant). (Incorporated by reference from Exhibit No. 10(c) to Registrant's Current Report on Form 8-K filed on February 24, 1992.)\nu. Finance Facility Contract (and Supplemental Agreements thereto), dated December 20, 1991, among the International Maritime Satellite Organization (Inmarsat), Abbey National plc, General Electric Technical Services Company, Inc., European Investment Bank, Kreditanstalt Fuer Wiederaufbau, Instituto Mobiliare Italiano S.p.A., Credit National, Societe Nationale de Credit a L'Industrie, Finansieringsinstituttet for Industri OG Haandvaerk A\/S, De Nationale Investeringsbank NV, and Osterreichische Investitionkredit Aktiengesellschaft relating to the financing of three Inmarsat spacecraft. (Incorporated by reference from Exhibit No. 10 (dd) to Registrant's Report on Form 10-K for the fiscal year ended December 31, 1991.)\nv.* Registrant's Directors and Executives Deferred Compensation Plan, as amended by the Board of Directors on July 15, 1993.\nw. Service Agreement, dated April 2, 1992, between Registrant and GTE Airfone, Incorporated, for the provision of aeronautical satellite services. (Incorporated by reference from Exhibit No. 10(r) to Registrant's Report on Form 10-K for the fiscal year ended December 31, 1990.)\nx. Fiscal Agency Agreement, dated as of August 6, 1992, between International Telecommunications Satellite Organization and Morgan Guaranty Trust Company of New York. (Incorporated by reference from Exhibit No. 10 (dd) to Registrant's Report on Form 10-K for the fiscal year ended December 31, 1992.)\ny. Agreement dated as of January 18, 1993 between the government of Cote d'Ivoire and Registrant to provide a national television and radio distribution system. (i) Amendment No. 1 dated January 1994.\nz. Fiscal Agency Agreement, dated as of January 19, 1993, between International Telecommunications Satellite Organization and Morgan Guaranty Trust Company of New York. (Incorporated by reference from Exhibit No. 10 (ee) to Registrant's Report on Form 10-K for the fiscal year ended December 31, 1992.)\naa. Lease Agreement, dated June 8, 1993, between GTE Airfone, Incorporated, United Airlines, Inc. and Registrant for the provision and financing of aeronautical satellite equipment.\nbb. Agreement dated July 1, 1993, between Registrant and AT&T Easylink Services relating to exchange of telex traffic.\ncc. Agreement dated July 27, 1993, between the Registrant and American Telephone & Telegraph Company relating to utilization of space segment.\ndd. Agreement dated September 1, 1993, between Registrant and MCI International, Inc. relating to exchange of traffic.\nee. Agreement dated November 30, 1993, between the Registrant and Sprint Communications Company L.P. relating to utilization of space segment.\nff. Agreement dated December 10, 1993, between Registrant and Sprint International relating to the exchange of traffic.\ngg. Credit Agreement dated as of December 17, 1993 among Registrant, NationsBank of North Carolina, N.A., Bank of America National Trust and Savings Association, The First National Bank of Chicago, The Chase Manhattan Bank, N.A., The Sumitomo Bank, Limited, New York Branch, Swiss Bank Corporation, New York Branch, as lenders, and NationsBank of North Carolina, N.A., as agent.\nhh. Schedule of Commitments between Registrant and INTELSAT, as of December 31, 1993, relating to FM, digital bearer, International Business Service and video traffic.\nii. Agreement dated January 24, 1994, between MCI International, Inc. and Registrant relating to utilization of space segment.\njj. Agreement dated February 18, 1994, between Registrant and AT&T relating to exchange of traffic.\nkk. Fiscal Agency Agreement between International Telecommunications Satellite Organization, Issuer, and Bankers Trust Company, Fiscal Agent and Principal Paying Agent, dated as of 22 March 1994.\n*Compensatory plan or arrangement.\nExhibit No. 11 - Statement re computation of per share earnings.\nExhibit No. 22 - Subsidiaries of the Registrant as of March 31, 1994.\nExhibit No. 24 - Consents of experts and counsel. Consent of Independent Auditors dated March 29, 1994. Exhibit No. 27 - Financial Data Schedule.\nSIGNATURES\nPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.\nCOMSAT CORPORATION (Registrant)\nDate: March 31, 1994 By \/s\/ BRUCE L. CROCKETT -------------------------------------- (Bruce L. Crockett, President and Chief Executive Officer)\nPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by each of the following persons on behalf of the Registrant and in the capacity and on the date indicated.\n(1) Principal executive officer\nDate: March 31, 1994 By \/s\/ BRUCE L. CROCKETT -------------------------------------- (Bruce L. Crockett, President and Chief Executive Officer)\n(2) Principal financial officer\nDate: March 31, 1994 By \/s\/ C. THOMAS FAULDERS, III ------------------------------------- (C. Thomas Faulders, III, Vice President and Chief Financial Officer)\n(3) Principal accounting officer\nDate: March 31, 1994 By \/s\/ ALLEN E. FLOWER ------------------------------------- (Allen E. Flower, Controller)\n(4) Board of Directors\nDate: March 31, 1994 By \/s\/ MELVIN R. LAIRD (Melvin R. Laird, Chairman and Director)\nBy \/s\/ LUCY WILSON BENSON (Lucy Wilson Benson, Director)\nBy \/s\/ RUDY E. BOSCHWITZ (Rudy E. Boschwitz, Director)\nBy \/s\/ EDWIN I. COLODNY (Edwin I. Colodny, Director)\nBy \/s\/ BRUCE L. CROCKETT (Bruce L. Crockett, Director)\nBy \/s\/ FREDERICK B. DENT (Frederick B. Dent, Director)\nBy (James B. Edwards, Director)\nBy \/s\/ NEAL B. FREEMAN (Neal B. Freeman, Director)\nBy \/s\/ BARRY M. GOLDWATER (Barry M. Goldwater, Director)\nBy \/s\/ ARTHUR HAUSPURG (Arthur Hauspurg, Director)\nBy \/s\/ PETER W. LIKINS (Peter W. Likins, Director)\nBy \/s\/ HOWARD M. LOVE (Howard M. Love, Director)\nBy \/s\/ ROBERT G. SCHWARTZ (Robert G. Schwartz, Director)\nBy \/s\/ C. J. SILAS (C. J. Silas, Director)\nBy (Dolores D. Wharton, Director)\n(a) An interest-free note receivable from Robert J. Wussler, a former employee of the corporation, was repaid in 1991.\n(b) An interest-free note receivable from Richard Fenwick, Jr., and employee of On Command Video Corporation, was repaid in 1993.\n(c) A note receivable at a 10% interest rate from Mark Macon, a player of the Denver Nuggets, was repaid in 1992.\nSCHEDULE V (CONTINUED)\n(a) Includes the effect of changes in COMSAT's investment share in INTELSAT which was 23.9%, 22.9%, 21.8% and 20.9% as of December 31, 1990, 1991, 1992 and 1993, respectively. These changes resulted in increases to plant retired and other of $30,096 in 1991, $35,515 in 1992 and $36,343 in 1993. Also includes the effect of changes in COMSAT's investment share in Inmarsat which was 24.9%, 25.0%, 24.6% and 23.0% as of December 31, 1990, 1991, 1992 and 1993, respectively. These changes resulted in decreases to plant retired and other of $290 in 1991, and increases to plant retired and other of $2,681 in 1992 and $15,510 in 1993.\n(b) Net of transfers to property in-service.\n(c) Includes property of $20,046 for the Denver Nuggets Limited Partnership and On Command Video Corporation as of July 1, 1992, when the corporation began consolidating the financial statements of these businesses.\n(a) Includes the effect of changes in COMSAT's investment share in INTELSAT which was 23.9%, 22.9%, 21.8% and 20.9% as of December 31, 1990, 1991, 1992, and 1993, respectively. These changes resulted in decreases of $10,075 in 1991, $11,808 in 1992 and $12,801 in 1993. Also includes the effect of changes in COMSAT's investment share in Inmarsat which was 24.9%, 25.0%, 24.6% and 23.0% as of December 31, 1990, 1991, 1992 and 1993, respectively. These changes resulted in an increase of $10 in 1991 and decreases of $290 in 1992, and $1,986 in 1993.\n(b) Depreciation and amortization as reported in the consolidated income statement for 1992 and 1993 includes amortization of intangibles of $2,399 and $4,254, respectively.\nSCHEDULE VI (CONTINUED)\n(c) Includes accumulated depreciation of $5,004 for the Denver Nuggets Limited Partnership and On Command Video Corporation as of July 1, 1992, when the corporation began consolidating the financial statements of these businesses.\n(d) Includes an addition to accumulated depreciation of $16,755 related to the 1992 restructuring provision discussed in Note 12 to the financial statements.\n(a) Uncollectible amounts written off, recoveries of amounts previously reserved, and other adjustments.\n(a) Calculated using the average daily balance method.\nItems omitted are less than one percent of revenues.\nEXHIBIT INDEX\nExhibit No. Description Page\n2(a) Agreement and Plan of Merger among Registrant, CTS America, 88 Inc. and Radiation Systems, Inc. dated as of January 30, 1994.\n2(b) Stock Option Agreement between Registrant and Radiation 135 Systems, Inc. dated as of January 30, 1994.\n3(a) Articles of Incorporation of Registrant, composite copy, as - amended through June 1, 1993. (Incorporated by reference from Exhibit No. 4(a) to Registrant's Registration Statement on Form S-3 (No. 33-51661) filed on December 22, 1993).\n3(b) By-laws of Registrant, as amended through March 15, 1991. - (Incorporated by reference from Exhibit No. 3(b) to Registrant's Report on Form 10-K for the fiscal year ended December 31, 1991.)\n3(c) Regulations adopted by Registrant's Board of Directors - pursuant to Section 5.02(c) of Registrant's Articles of Incorporation. (Incorporated by reference from Exhibit No. 3(c) to Registrant's Report on Form 10-K for the fiscal year ended 1992.)\n4(a) Specimen of a certificate representing Series I shares of 144 Registrant's Common Stock, without par value, registered under Section 12 of the Securities Exchange Act of 1934, which are held by citizens of the United States.\n4(b) Specimen of a certificate representing Series I shares of - Registrant's Common Stock, without par value, registered under Section 12 of the Securities Exchange Act of 1934, which are held by aliens. (Incorporated by reference from Exhibit No. 4(b) to Registrant's Report on Form 10-K for the fiscal year ended December 31, 1982.)\n4(c) Specimen of a certificate representing Series II shares of - Registrant's Common Stock, without par value, registered under Section 12 of the Securities Exchange Act of 1934. (Incorporated by reference from Exhibit No. 4(c) to Registrant's Report on Form 10-K for the fiscal year ended December 31, 1982.)\n4(d) Indenture dated as of August 1, 1988 between the Registrant - and The Chase Manhattan Bank, N.A. (Incorporated by reference from Exhibit No. 4 to Registrant's Report on Form 10-Q for the quarter ended June 30, 1988.)\n4(e) Standard Multiple-Series Indenture Provisions, dated March - 15, 1991. (Incorporated by reference from Exhibit No. 4(a) to Registrant's Registration Statement on Form S-3 (No. 33- 39472) filed on March 15, 1991.)\n4(f) Indenture dated as of March 15, 1991 between Registrant and - The Chase Manhattan Bank, N.A. (Incorporated by reference from Exhibit No. 4(b) to Registrant's Registration Statement on Form S-3 (No. 33-39472) filed on March 15, 1991.\n4(g) Officers' Certificate pursuant to Section 3.01 of the - Indenture, dated as of March 15, 1991, from the Registrant to the Chase Manhattan Bank (National Association), as Trustee, relating to the authorization of $75,000,000 aggregate principal amount of Registrant's 8.95% Notes Due 2001 (with form of Note attached). (Incorporated by reference from Exhibit No. 4 to Registrant's Current Report on Form 8-K filed on May 15, 1991.)\n4(h) Officers' Certificate pursuant to Section 3.01 of the - Indenture, dated as of March 15, 1991, from the Registrant to the Chase Manhattan Bank (National Association), as Trustee, relating to the authorization of $160,000,000 aggregate principal amount of the Registrant's 8.125% Debentures Due 2004 (with form of Debenture attached). (Incorporated by reference from Exhibit No. 4 to Registrant's Current Report on Form 8-K filed on April 9, 1992.)\n10(a) Agreement Relating to the International - Telecommunications Satellite Organization (INTELSAT) by Governments, which entered into force on February 12, 1973. (Incorporated by reference from Exhibit No. 10(a) to Registrant's Report on Form 10-K for the fiscal year ended December 31, 1980.)\n10(b) Operating Agreement Relating to the International - Telecommunications Satellite Organization (INTELSAT) by Governments which entered into force on February 12, 1973. (Incorporated by reference from Exhibit No. 10(b) to Registrant's Report on Form 10-K for the fiscal year ended December 31, 1980.)\n10(c) Agreement dated August 15, 1975, among COMSAT General - Corporation, RCA Global Communications, Inc., Western Union International, Inc. and ITT World Communications, Inc. relating to the establishment of a joint venture for the purpose of participating in the ownership and operation of a maritime communications satellite system and Amendment Nos. 1-4 and Amendment No. 5 dated March 24, 1980. (Incorporated by reference from Exhibit No. 10(p) to Registrant's Report on Form 10-K for the fiscal year ended December 31, 1980.)\n10(c)(i) Amendment No. 6 dated September 1, 1981. (Incorporated - by reference from Exhibit No. 10(p)(ii) to Registrant's Report on Form 10-K for the fiscal year ended December 31, 1981.)\n10(d) Convention on the International Maritime Satellite - Organization (INMARSAT) dated September 3, 1976. (Incorporated by reference from Exhibit No. 11 to Registrant's Report on Form 10-K for the fiscal year ended December 31, 1978.)\n10(e) Operating Agreement on the International Maritime - Satellite Organization (INMARSAT) dated September 3, 1976. (Incorporated by reference from Exhibit No. 12 to Registrant's Report on Form 10-K for the fiscal year ended December 31, 1978.)\n10(f)* Registrant's 1982 Stock Option Plan. (Incorporated by - reference from Exhibit No. 10(x) to Registrant's Report on Form 10-K for the fiscal year ended December 31, 1981.)\n10(g) Agreement dated October 6, 1983, between COMSAT General - Corporation and National Broadcasting Company for the provision of satellite distribution network programming. (Incorporated by reference from Exhibit No. 10(r) to Registrant's Report on Form 10-K for the fiscal year ended December 31, 1983.)\n10(g)(i) Amendment dated September 1, 1992. (Incorporated by - reference from Exhibit No. 10(j)(i) to Registrant's Report on Form 10-K for the fiscal year ended December 31, 1992.)\n10(h)* Registrant's Insurance and Retirement Plan for 147 Executives adopted by Registrant's Board of Directors on June 21, 1985, as amended by the Board of Directors on July 15, 1993.\n10(i)* Registrant's 1986 Key Employee Stock Plan. - (Incorporated by reference from Exhibit No. 10(g) to Registrant's Registration Statement on Form S-4 (File No. 33-9966) filed on November 4, 1986.)\n10(j) Lease dated November 6, 1986, between Registrant and - VMS 1985-299 Limited Partnership for the lease of Registrant's former headquarters at 950 L'Enfant Plaza, S.W., Washington, D.C. (Incorporated by reference from Exhibit No. 10(kk) to Registrant's Report on Form 10-K for the fiscal year ended December 31, 1986.)\n10(k)* Registrant's Non-Employee Directors Stock Option Plan - adopted by Registrant's Board of Directors on January 15, 1988 and approved by Registrant's shareholders on May 20, 1988. (Incorporated by reference from Exhibit No. 10(h) to Registrant's Report on Form 10-K for the fiscal year ended December 31, 1987.)\n10(k)(i)* Amendment No. 1 dated March 16, 1990. (Incorporated by - reference from Exhibit No. 10 (g)(i) to Registrant's Report on Form 10-K for the fiscal year ended December 31, 1989.)\n10(k)(ii)*Amendment No. 2 dated January 15, 1993. 167\n10(l)* Registrant's 1988 Annual Incentive Plan adopted by - Registrant's Board of Directors on June 17, 1988, as amended by the Board of Directors on September 16, 1988. (Incorporated by Reference from Exhibit No. 3(a) to Registrant's Report on Form 10-K for the fiscal year ended December 31, 1988.)\n10(m) Memorandum of Understanding between Registrant and - National Aeronautics and Space Administration (NASA), dated July 21, 1988 and amended through February 22, 1990. (Incorporated by reference from Exhibit No. 10(aa) to Registrant's Report on Form 10-K for the fiscal year ended December 31, 1989.)\n10(n) Agreement to Acquire and Lease (and Supplemental - Agreements thereto) dated September 28 and October 10, 1988, respectively, among the International Maritime Satellite Organization (Inmarsat), the North Sea Marine Leasing Company, British Aerospace Public Limited Company, the European Investment Bank, Kreditanstalt Fuer Wiederaufbau, European Investment Bank (as Agent and as Trustee), Instituto Mobiliare Italiano, Credit National, Hellenic Industrial Development Bank, and Society Nationale de Credit a L'Industrie relating to the financing of three Inmarsat spacecraft. (Incorporated by Reference from Exhibit No. 3(a) to Registrant's Report on Form 10-k for the fiscal year ended December 31, 1988.)\n10(o) Service Agreement, dated September 14, 1989, between - Registrant and Aeronautical Radio, Inc. relating to satellite-based communications services. (Incorporated by reference from Exhibit No. 10(y) to Registrant's Report on Form 10-K for the fiscal year ended December 31, 1989.)\n10(p) Second Amended and Restated Agreement of Limited - Partnership of The Denver Nuggets Limited Partnership, dated November 29, 1989. (Incorporated by reference from Exhibit No. 10(x) to Registrant's Report on Form 10-K for the fiscal year ended December 31, 1989.)\n10(p)(i) Asset Purchase Agreement, dated October 20, 1989, between Denver Nuggets, Incorporated and Denver Nuggets - Limited Partnership, and First Amendment to Asset Purchase Agreement, dated November 30, 1989. (Incorporated by reference from Exhibit No. 10(x)(i) to Registrant's Report on Form 10-K for the fiscal year ended December 31, 1989.)\n10(q) Agreement, dated January 22, 1990, between Registrant - and Kokusai Denshin Denwa Co., Ltd. for provision of aeronautical services. (Incorporated by reference from Exhibit No. 10(z) to Registrant's Report on Form 10-K for the fiscal year ended December 31, 1990.)\n10(q)(i) Amendment No. 1 dated May 20, 1993. 169\n10(r)* Registrant's 1990 Key Employee Stock Plan adopted by Registrant's Board of Directors on March 16, 1990. (Incorporated by reference from Exhibit No. 10 (p) to Registrant's Report on Form 10-K for the fiscal year ended December 31, 1989.)\n10(r)(i)* Amendment No. 1 dated January 15, 1993. 172\n10(s) Agreement, dated May 25, 1990, between Registrant and - IDB Communications Group, Inc. (Incorporated by reference from Exhibit No. 10(bb) to Registrant's Report on Form 10-K for the fiscal year ended December 31, 1990.)\n10(t) Amended and Restated Agreement, dated November 14, - 1990, of Limited Partnership of Rock Spring II Limited Partnership. (Incorporated by reference from Exhibit No. 10(a) to Registrant's Current Report on Form 8-K filed on February 24, 1992.)\n10(t)(i) Amended and Restated Lease Agreement, dated November - 14, 1990, by and between Rock Spring II Limited Partnership and Registrant. (Incorporated by reference from Exhibit No. 10(b) to Registrant's Current Report on Form 8-K filed on February 24, 1992.)\n10(t)(ii) Amended and Restated Ground Lease Indenture, dated - November 14, 1990, between Anne D. Camalier (Landlord) and Rock Spring II Limited Partnership (Tenant). (Incorporated by reference from Exhibit No. 10(c) to Registrant's Current Report on Form 8-K filed on February 24, 1992.)\n10(u) Finance Facility Contract (and Supplemental Agreements - thereto), dated December 20, 1991, among the International Maritime Satellite Organization (Inmarsat), Abbey National plc, General Electric Technical Services Company, Inc., European Investment Bank, Kreditanstalt Fuer Wiederaufbau, Instituto Mobiliare Italiano S.p.A., Credit National, Societe Nationale de Credit a L'Industrie, Finansieringsinstituttet for Industri OG Haandvaerk A\/S, De Nationale Investeringsbank NV, and Osterreichische Investitionkredit Aktiengesellschaft relating to the financing of three Inmarsat spacecraft. (Incorporated by reference from Exhibit No. 10 (dd) to Registrant's Report on Form 10-K for the fiscal year ended December 31, 1991.)\n10(v)* Registrant's Directors and Executives Deferred 174 Compensation Plan, as amended by the Board of Directors on July 15, 1993.\n10(w) Service Agreement, dated April 2, 1992, between - Registrant and GTE Airfone, Incorporated, for the provision of aeronautical satellite services. (Incorporated by reference from Exhibit No. 10(r) to Registrant's Report on Form 10-K for the fiscal year ended December 31, 1990.)\n10(x) Fiscal Agency Agreement, dated as of August 6, 1992, - between International Telecommunications Satellite Organization and Morgan Guaranty Trust Company of New York. (Incorporated by reference from Exhibit No. 10 (dd) to Registrant's Report on Form 10-K for the fiscal year ended December 31, 1992.)\n10(y) Agreement dated as of January 18, 1993 between the 191 government of Cote d'Ivoire and Registrant to provide a national television and radio distribution system.\n10(y)(i) Amendment No. 1 dated January 1994. 236\n10(z) Fiscal Agency Agreement, dated as of January 19, 1993, - between International Telecommunications Satellite Organization and Morgan Guaranty Trust Company of New York. (Incorporated by reference from Exhibit No. 10 (ee) to Registrant's Report on Form 10-K for the fiscal year ended December 31, 1992.)\n10(aa) Lease Agreement, dated June 8, 1993, between GTE 243 Airfone, Incorporated, United Airlines, Inc. and Registrant for the provision and financing of aeronautical satellite equipment.\n10(bb) Agreement dated July 1, 1993, between Registrant and 254 AT&T Easylink Services relating to exchange of telex traffic.\n10(cc) Agreement dated July 27, 1993, between Registrant and 261 American Telephone & Telegraph Company relating to utilization of space segment.\n10(dd) Agreement dated September 1, 1993, between Registrant 299 and MCI International, Inc. relating to exchange of traffic.\n10(ee) Agreement dated November 30, 1993, between Registrant 316 and Sprint Communications Company L.P. relating to utilization of space segment.\n10(ff) Agreement dated December 10, 1993, between Registrant 347 and Sprint International relating to the exchange of traffic.\n10(gg) Credit Agreement dated as of December 17, 1993 among 364 Registrant, NationsBank of North Carolina, N.A., Bank of America National Trust and Savings Association, The First National Bank of Chicago, The Chase Manhattan Bank, N.A., The Sumitomo Bank, Limited, New York Branch, Swiss Bank Corporation, New York Branch, as lenders, and NationsBank of North Carolina, N.A., as agent.\n10(hh) Schedule of Commitments between Registrant and 434 INTELSAT, as of December 31, 1993, relating to FM, digital bearer, International Business Service and video traffic.\n10(ii) Agreement dated January 24, 1994, between Registrant 436 and MCI International Inc. relating to utilization of space segment.\n10(jj) Agreement dated February 18, 1994, between Registrant 488 and AT&T relating to exchange of traffic.\n10(kk) Fiscal Agency Agreement between International 490 Telecommunications Satellite Organization, Issuer, and Bankers Trust Company, Fiscal Agent and Principal Paying Agent, dated as of 22 March 1994.\n*Compensatory plan or arrangement.\n11 Statement re computation of per share earnings.\n22 Subsidiaries of the Registrant as of March 31, 1994.\n24 Consent of Independent Auditors dated March 29, 1994.\n27 Financial Data Schedule\nEXHIBIT 2(a)\nAGREEMENT AND PLAN OF MERGER\nAGREEMENT AND PLAN OF MERGER (\"Agreement\") made as of January 30, 1994, by and among COMSAT Corporation, a District of Columbia corporation (\"COMSAT\"), CTS America, Inc., a Delaware corporation and a wholly owned subsidiary of COMSAT (\"CTS\"), and Radiation Systems, Inc., a Nevada corporation (\"RSI\").\nWHEREAS, COMSAT desires to acquire RSI by a merger of RSI with and into CTS, and RSI desires the same, pursuant and subject to the terms and conditions of this Agreement;\nWHEREAS, the Boards of Directors of each of COMSAT and RSI have determined that the proposed merger of RSI with and into CTS is in the best interests of their respective corporations and shareholders;\nWHEREAS, COMSAT, CTS and RSI intend that the transactions contemplated by this Agreement qualify as a reorganization within the meaning of Section 368 of the Internal Revenue Code of 1986, as amended (the \"Code\"), and that such transactions will be accounted for by the pooling of interests method of accounting for financial reporting purposes; and\nWHEREAS, pursuant to such merger, CTS shall be the merging or surviving corporation (sometimes hereinafter referred to as the \"Surviving Corporation\") and RSI shall be the merged or disappearing corporation (sometimes hereinafter referred to as the \"Merged Corporation\");\nNOW THEREFORE, in consideration of the premises, the mutual benefits to be derived from this Agreement and the representations, warranties, conditions and promises hereinafter set forth, the parties hereby agree as follows:\nARTICLE I THE MERGER\nSection 1.1 The Merger. Upon the Effective Date (as defined in Section 1.2 herein) and subject to and upon the terms of this Agreement, the General Corporation Law of the State of Delaware (\"Delaware Corporation Law\") and the General Corporation Law of the State of Nevada (\"Nevada Corporation Law\"), RSI shall be merged with and into CTS, the separate corporate existence of RSI shall cease, and CTS shall continue as the Surviving Corporation (the \"Merger\"). CTS and RSI are hereinafter sometimes referred to jointly as the \"Constituent Corporations.\"\n1.1.1 Nevada Articles of Merger. At the Closing (as defined in Article II herein), CTS and RSI shall execute and acknowledge Nevada Articles of Merger in the form of Exhibit A hereto (\"Nevada Articles of Merger\"), providing for the Merger pursuant to Section 78.458 of the Nevada Corporation Law.\n1.1.2 Delaware Certificate of Merger. At the Closing, CTS and RSI shall execute and acknowledge a Delaware Certificate of Merger in the form of Exhibit B hereto (\"Delaware Certificate of Merger\") providing for the Merger pursuant to Section 252 of the Delaware Corporation Law.\n1.1.3 Filings. Immediately upon completion of the Closing, CTS and RSI shall cause the Merger to be consummated by filing or causing to be filed the original Delaware Certificate of Merger with the Secretary of the State of Delaware, by recording or causing to be recorded a second original of the Delaware Certificate of Merger in the Office of the Recorder of the County of New Castle of the State of Delaware (being the county in which the registered office of the Surviving Corporation is located), and by filing or causing to be filed the original Nevada Articles of Merger with the Secretary of the State of Nevada, pursuant to Sections 103 and 252 of the Delaware Corporation Law and Section 78.458 of the Nevada Corporation Law, respectively.\nSection 1.2 Effective Date. The Effective Date of the Merger (\"Effective Date\") shall be the later of the day when the Delaware Certificate of Merger is duly filed with the Secretary of State of the State of Delaware or the day when the Nevada Articles of Merger are duly filed with the Secretary of the State of Nevada as provided in Subsection 1.1.3 herein, the parties intending the Merger to be deemed as having been consummated at the close of business upon the Effective Date, which for purposes of this Agreement, shall be deemed to be 5:00 p.m. local time in Reno, Nevada on the Effective Date. It is the intent of the parties that the Effective Date be the same day as the Closing Date (as defined in Article II herein) or, if not practicable, the earliest practicable day immediately thereafter.\nSection 1.3 Effect of the Merger. At the close of business on the Effective Date, the effect of the Merger shall be as provided under all applicable provisions of the Delaware Corporation Law and the Nevada Corporation Law. Without limiting the generality of the foregoing, and subject thereto, at the close of business on the Effective Date any and all assets, rights, privileges, powers and franchises of the Constituent Corporations, individually and collectively, shall vest in the Surviving Corporation, and any and all debts, liabilities, duties and obligations of the Constituent Corporations, individually and collectively, shall vest in, be deemed to be assumed by and become debts, liabilities, duties and obligations of the Surviving Corporation.\nSection 1.4 The Surviving Corporation.\n1.4.1 Certificate. The Certificate of Incorporation of CTS as in effect upon the Effective Date shall be the Certificate of Incorporation of the Surviving Corporation, until thereafter amended as provided by law and such Certificate. A copy of such Certificate is attached hereto as Exhibit C.\n1.4.2 Bylaws. The Bylaws of CTS as in effect upon the Effective Date shall be the Bylaws of the Surviving Corporation until thereafter amended as provided by law, the Certificate of Incorporation of the Surviving Corporation, and such Bylaws. A copy of such Bylaws is attached hereto as Exhibit D.\n1.4.3 Directors and Officers. The directors and officers of CTS upon the Effective Date will be the initial directors and officers of the Surviving Corporation. In the event a vacancy shall exist on the Board of Directors or in any office of CTS upon the Effective Date, such vacancy may thereafter be filled in the manner provided by law, the Certificate of Incorporation and the Bylaws of the Surviving Corporation.\n1.4.4 Surrender. At the Closing, the Merged Corporation shall surrender its stock registry, minute book and corporate seal to the Surviving Corporation. At the Effective Date the stock transfer books of RSI shall be closed, and there shall be no registration of transfers of shares of capital stock of RSI thereafter.\nSection 1.5 Additional Actions. If, at any time after the Closing, the Surviving Corporation shall consider or be advised that any further assignments or assurances in law or any other acts are necessary or desirable to (a) vest, perfect or confirm, of record or otherwise, in the Surviving Corporation its rights, title or interest in, to or under any of the rights, properties or assets of the Merged Corporation acquired or to be acquired by the Surviving Corporation as a result of, or in connection with, the Merger, or (b) otherwise carry out the purposes of this Agreement and the transactions contemplated hereby, the Merged Corporation shall be deemed to have granted to the Surviving Corporation an irrevocable power of attorney to execute and deliver all such proper deeds, assignments, novations and assurances in law and to do all acts necessary or proper to vest, perfect or confirm title to and possession of such rights, properties or assets in the Surviving Corporation and otherwise to carry out the purposes of this Agreement and the transactions contemplated hereby; and the proper officers and directors of the Surviving Corporation are fully authorized in the name of the Merged Corporation or otherwise to take any and all such actions.\nARTICLE II CLOSING; CONSIDERATION\nSection 2.1 The Closing. The closing of the transactions contemplated by this Agreement (the \"Closing\") shall be held at the offices of Crowell & Moring, 1001 Pennsylvania Avenue, N.W., Washington, D.C. 20004 at 11:00 a.m. immediately following a special meeting of the RSI shareholders to approve the Merger, or otherwise on the first business day after all of the conditions to the Closing set out in Articles VI and VII herein have been met or waived, or at such other place and date and time as the parties may designate in writing (the date and time agreed upon for Closing hereinafter the \"Closing Date\").\nSection 2.2 Consideration and Conversion of Stock. At the close of business on the Effective Date:\n2.2.1 Conversion. Each share of RSI common stock, par value $1.00 per share (the \"RSI Stock\"), other than shares specified in Subsection 2.2.2, that is issued and outstanding on the Effective Date shall be converted without any action on the part of the holder thereof into that fraction of a share, rounded to the nearest thousandth (the \"Conversion Fraction\"), of common stock, without par value, of COMSAT (the \"COMSAT Stock\") determined by dividing Eighteen Dollars and twenty-five cents ($18.25) by the average closing price of a whole share of COMSAT Stock on the New York Stock Exchange Composite Tape for the twenty (20) Trading Days ending with the Trading Day which precedes the Closing Date by five (5) Trading Days (a \"Trading Day\" being any day on which the New York Stock Exchange is open for business and on which shares of COMSAT Stock are traded on that Exchange), provided that the Conversion Fraction shall not be less than .638 and shall not be greater than .780. The issuance and voting of the COMSAT Stock shall be subject to any restrictions set forth in the Communications Satellite Act of 1962, as amended, 47 U.S.C. sections 701 et seq., the COMSAT Articles of Incorporation, and such actions that have been taken by the Board of Directors of COMSAT pursuant to authority granted by section 5.05 of the COMSAT Articles of Incorporation.\n2.2.2 Cancellation of Certain Shares. All shares of RSI Stock which are (i) held in the treasury of RSI or owned by any subsidiary of RSI on the Effective Date, or (ii) owned by COMSAT or any subsidiary of COMSAT, including CTS, on the Effective Date shall be cancelled without payment of any consideration therefor.\nSection 2.3 Exchange of and Payment for RSI Stock.\n2.3.1 Notice. Promptly after the Effective Date COMSAT will cause the exchange agent selected by COMSAT (the \"Exchange Agent\") to send to each holder of record of shares of RSI Stock which shall have been converted into shares of COMSAT Stock in the Merger an appropriate letter of transmittal for\npurposes of surrendering such holder's certificates for such shares for exchange into certificates of shares of COMSAT Stock as provided in this Section 2.3.\n2.3.2 Certificates. As soon as practicable after the Effective Date and after surrender to the Exchange Agent of any certificate which prior to the Effective Date shall have represented any shares of RSI Stock, subject to the provisions of Subsection 2.3.4 herein, COMSAT shall cause to be distributed to the person in whose name such certificate shall have been registered certificates registered in the name of such person representing the shares of COMSAT Stock into which any shares previously represented by the surrendered certificate shall have been converted as of the close of business on the Effective Date and a check payable to such person representing the payment of cash in lieu of fractional shares determined in accordance with Subsection 2.3.5 herein. Until surrendered as contemplated by the preceding sentence, each certificate which immediately prior to the Effective Date shall have represented any shares of RSI Stock shall be deemed at and after the Effective Date to represent only the right to receive upon such surrender a certificate representing the COMSAT Stock and the payment as so contemplated.\n2.3.3 Dividends. No dividends or other distributions declared after the date of this Agreement with respect to shares of COMSAT Stock and payable to the holders of record thereof on or after the Effective Date shall be paid to the holder of any unsurrendered certificates which prior to the Effective Date shall have represented shares of RSI Stock with respect to which the shares of COMSAT Stock shall have been issued in the Merger until such certificates shall be surrendered as provided herein, unless otherwise agreed in writing by COMSAT, but (i) upon such surrender there shall be paid to the person in whose name the certificates representing such shares of COMSAT Stock shall be issued the amount of dividends or other distributions theretofore paid or made with a record date on or after the Effective Date but prior to surrender with respect to such shares of COMSAT Stock and the amount of any cash payable to such person in lieu of fractional shares pursuant to Subsection 2.3.5 herein, and (ii) at the appropriate payment date or as soon as practicable thereafter, there shall be paid or made to such person the amount of dividends or other distributions with a record date on or after the Effective Date but prior to surrender and a payment date subsequent to surrender payable with respect to such shares of COMSAT Stock. No interest shall be payable with respect to the payment of such dividends or other distributions or cash in lieu of fractional shares on surrender of outstanding certificates.\n2.3.4 Prior Transfer. If any cash, dividend, other distribution or certificate representing shares of COMSAT Stock is to be paid or made to or issued in a name other than that in which the certificate surrendered in exchange therefor is registered, it shall be a condition of the payment or issuance thereof that the certificate so surrendered shall be properly endorsed and otherwise in proper form for transfer and that the person requesting such exchange shall pay to the Exchange Agent any transfer or other taxes required by reason of the issuance of\na certificate representing shares of COMSAT Stock in any name other than that of the registered holder of the certificate surrendered, or otherwise required, or shall establish to the satisfaction of the Exchange Agent that such tax has been paid or is not payable.\n2.3.5 Cash in Lieu of Fractional Shares. Notwithstanding any other provision of this Agreement, no certificates or scrip representing fractional shares of COMSAT Stock shall be issued upon the surrender for exchange of certificates which prior to the Merger shall have represented any shares of RSI Stock, no dividend or other distribution of COMSAT shall relate to any fractional share and such fractional share interests will not entitle the owner thereof to vote or to any rights of a shareholder of COMSAT. In lieu of any fractional shares, there shall be paid to each holder of shares of RSI Stock who otherwise would be entitled to receive a fractional share of COMSAT Stock an amount of cash (without interest) determined by multiplying such fraction by the closing price of a whole share of COMSAT Stock on the New York Stock Exchange Composite Tape on the last full trading day prior to the Effective Date.\n2.3.6 Full Satisfaction. Subject to COMSAT's obligation to pay or make previously declared dividends and other distributions which remain unpaid or unmade, all rights to receive cash, if any, other distributions and shares of COMSAT Stock into which shares of RSI Stock shall have been converted in the Merger shall be deemed when paid, made or issued hereunder to have been paid, made or issued, as the case may be, in full satisfaction of all rights pertaining to such shares of RSI Stock.\n2.3.7 Escheat Laws. Notwithstanding any provision of this Section 2.3, neither the Exchange Agent nor any party to this Agreement shall be liable to a holder of a certificate for RSI Stock for any shares of COMSAT Stock, dividends or other distributions thereon, or proceeds in lieu of issuance of any fractional shares thereof, delivered to a public official pursuant to applicable escheat or unclaimed property laws.\nSection 2.4 Adjustments. If, between the date of this Agreement and the Effective Date (inclusive), the outstanding shares of COMSAT Stock or RSI Stock shall have been changed into a different number of shares or a different class by reason of any reclassification, recapitalization, reorganization, split-up, combination, exchange of shares or readjustment, or a stock dividend or other extraordinary distribution (other than a nonliquidating cash dividend) thereon shall be declared with a record date within said period, the number of shares of COMSAT Stock into which shares of RSI Stock are to be converted shall be correspondingly adjusted after negotiations conducted in good faith and promptly concluded between the parties, and the Nevada Articles of Merger and the Delaware Certificate of Merger shall be amended to reflect the same.\nSection 2.5 Other Deliveries. At the Closing, each of COMSAT, CTS and RSI shall use its best efforts to deliver or cause to be delivered the opinions, certificates and other documents respectively required to be delivered pursuant to Articles VI and VII hereunder.\nARTICLE III REPRESENTATIONS AND WARRANTIES OF RSI\nRSI hereby represents and warrants to COMSAT and CTS as of the date hereof and as of the Closing Date as set forth in this Article III. RSI is making all these representations and warranties on behalf of itself and each RSI Subsidiary (as defined in Subsection 3.1.2 herein), unless the context otherwise plainly requires. In determining whether an event, condition or matter would have an effect on or be material to RSI, RSI shall be deemed to include RSI and the RSI Subsidiaries, taken as a whole. The \"Disclosure Letter\" referred to in the representations and warranties of RSI contained in this Article III refers to a letter which has heretofore been delivered by RSI to COMSAT and CTS, and which may be updated periodically and shall be updated immediately prior to the Closing Date pursuant to Section 5.12. The Disclosure Letter (and any update thereof) may include more information than is required to be disclosed therein and such inclusions are not an admission that any matter referred to therein is material. Whenever a representation and warranty contained in this Article III is made to the knowledge of RSI, it shall mean all facts and conditions referred to in or omitted from such representation and warranty, and which are known by, or which should have been known by (in light of circumstantial evidence made available to them on or prior to the date on which such representation and warranty is made), the following individuals: (i) as of the date of this Agreement, Richard E. Thomas, Mark D. Funston, R. Doss McComas, Marvin D. Shoemake, William A. Thomas, Harold A. Siegel, and the directors of RSI; and (ii) as of the Closing Date each of the individuals referred to in clause (i) of this sentence plus those officers and employees of RSI and the RSI division presidents and general managers so listed in the Disclosure Letter.\nSection 3.1 Organization and Standing.\n3.1.1 Organization. RSI is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Nevada.\n3.1.2 Subsidiaries. Except for those entities identified in the Disclosure Letter (hereinafter termed the \"RSI Subsidiaries\"), RSI has no subsidiaries or affiliated companies, is not a partner or co-venturer with any other entity, and does not otherwise directly or indirectly control any other business entity. Except as identified in the Disclosure Letter, each RSI Subsidiary is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction in which it was formed, as indicated in the Disclosure Letter. Except as identified in the Disclosure Letter, RSI is the sole\nrecord and beneficial owner of all of the outstanding capital stock of each RSI Subsidiary, free and clear of any liens, pledges, mortgages or encumbrances.\n3.1.3 Qualification. RSI and each RSI Subsidiary is duly qualified or licensed as a foreign corporation to do business, and is in good standing, in each jurisdiction where the nature of its activities makes such qualification or license necessary, except where the failure to be so qualified or licensed would not have a material adverse effect on the business, assets or results of operations of RSI. The Disclosure Letter identifies: (i) each state in which RSI and each RSI Subsidiary is qualified or licensed to do business as a foreign corporation; and (ii) the name and address of the registered agent for RSI and each RSI Subsidiary in each such state.\n3.1.4 Corporate Power. RSI and each RSI Subsidiary has all requisite corporate power (i) to carry on its business as it is now being conducted and to own and operate the properties and assets it now owns and operates, and (ii) in the case of RSI, to carry out the provisions of this Agreement and the transactions contemplated hereby.\n3.1.5 Corporate Documents. True, correct and complete copies of the Restated Articles of Incorporation of RSI and each RSI Subsidiary and all amendments thereto, and of the By-laws of RSI and each RSI Subsidiary and all amendments thereto, have been delivered to COMSAT.\nSection 3.2 Capitalization.\n3.2.1 Authorized and Outstanding RSI Stock. The total authorized capital stock of RSI is 25,000,000 shares of common stock, par value $1.00 per share, of which, as of the date hereof, (i) 8,285,187 shares are issued and outstanding, (ii) 514,750 shares are subject to issuance upon the exercise of outstanding options, and (iii) 471,432 shares are issued and held in treasury. As of the Closing Date, the total number of issued and outstanding shares of the capital stock of RSI shall not exceed the sum of (i) and (ii). There exist no other shares of capital stock of RSI, securities which are convertible into shares of capital stock of RSI, or any options, warrants, contracts, commitments or other arrangements which subject RSI to the issuance of any shares of capital stock upon the exercise thereof or after the passage of time.\n3.2.2 Due Authorization and Issuance. All issued and outstanding shares of the capital stock of RSI have been duly authorized and validly issued and are fully paid and nonassessable.\nSection 3.3 Authorization.\n3.3.1 RSI. RSI has all requisite corporate power and authority to execute and deliver this Agreement and, subject with respect to consummation of the Merger to approval of this Agreement by a majority of all votes entitled to be cast by\nholders of shares of RSI Stock (the \"RSI Vote\"), to perform the transactions contemplated hereby. The execution and delivery of this Agreement, the performance by RSI of its obligations hereunder and the consummation of the transactions contemplated hereby have been duly authorized by RSI's Board of Directors and, except for the RSI Vote, no other corporate proceedings are necessary to authorize this Agreement and the transactions contemplated hereby. RSI's Board of Directors has unanimously (a) determined that the Merger is in the best interests of RSI and its stockholders, (b) approved all of the transactions contemplated by this Agreement, including without limitation, the Merger, a Stock Option Agreement of even date herewith between RSI and COMSAT (the \"Stock Option Agreement\"), and (c) voted to recommend this Agreement to RSI stockholders. As of the date of this Agreement, RSI has received the written opinion of Alex. Brown & Sons Incorporated (\"Alex. Brown\"), its financial adviser, that in the opinion of Alex. Brown the consideration to be received by RSI stockholders in the Merger is fair, from a financial point of view, to RSI stockholders. Assuming the valid authorization, execution and delivery of this Agreement by COMSAT and CTS, this Agreement is a valid and binding obligation of RSI and is enforceable in accordance with its terms, except as limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws of general application referring to or affecting enforcement of creditors' rights, or by general equitable principles.\n3.3.2 No Breach or Violation by RSI. Execution, delivery and performance of this Agreement by RSI and consummation of the transactions contemplated hereby will not lead to or cause a violation, breach, or default or result in the termination of, or accelerate the performance required by, or result in the creation or imposition of any Encumbrance (as defined in Section 3.7.1 hereof) on any property or assets of RSI, whether by notice or lapse of time or both, or otherwise conflict with any term or provision of the following:\n(a) RSI's Restated Articles of Incorporation and By-laws, as amended;\n(b) Any note, bond, mortgage, contract, indenture, pledge or agreement to lease, license or other instrument or obligation to which RSI or any of the RSI Subsidiaries is a party or is bound: (i) where such violation, breach, default, termination, acceleration or Encumbrance would have a material adverse effect on the business, operations or financial condition of RSI; or (ii) as to which required consents, amendments or waivers shall not have been obtained by RSI prior to the Closing for any such violation, breach, default, termination, acceleration or Encumbrance; or\n(c) Any court or administrative order, writ or injunction or process, or any permit, license, or consent decree to which RSI or any RSI Subsidiary is a party or is bound: (i) where such violation, breach, default, termination, acceleration or Encumbrance would have a material adverse effect on the business, operations or financial condition of RSI; or (ii) as to which required consents, amendments or waivers shall\nnot have been obtained by RSI prior to the Closing for any such violation, breach, default, termination, acceleration or Encumbrance.\nSection 3.4 SEC Filings. RSI has furnished to COMSAT and CTS a true and complete copy of (i) each final prospectus and definitive proxy statement filed by RSI with the Securities and Exchange Commission (the \"SEC\") since June 30, 1989 and (ii) each report on Form 10-K, 8-K or 10-Q (and any amendments thereto) filed by RSI with the SEC since June 30, 1989 (collectively, the \"RSI SEC Documents\"). Each of the RSI SEC Documents complied as to form in all material respects with the published rules and regulations of the SEC with respect thereto and none of the RSI SEC Documents as of the dates they were filed with the SEC contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading in each case as of the date when made.\nSection 3.5 Financial Statements.\n3.5.1 SEC Filings. Each of the consolidated financial statements included in the RSI SEC Documents (including any related notes thereto) complied as to form in all material respects with the published rules and regulations of the SEC with respect thereto and fairly presents the earnings, financial position, cash flows and stockholders' equity, as the case may be, of RSI and its subsidiaries on a consolidated basis as of its date or for the respective periods set forth therein (subject, in the case of unaudited statements, to normal recurring year-end audit adjustments and when read in conjunction with the relevant audited financial statements and the notes thereto), in each case, in accordance with generally accepted accounting principles (\"GAAP\") consistently applied during the periods involved, except as set forth therein or, in the case of the unaudited statements, as permitted by Rule 10-01 of Regulation S-X as in effect at the relevant time.\n3.5.2 Absence of Changes. Since June 30, 1993, there has not been:\n(a) Any material adverse change in the assets, working capital, reserves, financial condition, accounting methods or results of operations of RSI (provided that expenses incurred in connection with the transactions contemplated hereby shall be excluded in making such determination);\n(b) Any material change in the con- tingent obligations or liabilities of RSI by way of guaranty, documentary credit, standby credit, endorsement, indemnity, warranty or otherwise;\n(c) Any waiver or cancellation by RSI of valuable rights or of debts owed to any of them which, taken as a whole, are material to the business or financial condition of RSI;\n(d) Any damage, destruction or loss, whether or not covered by insurance, materially and adversely affecting the properties or business of RSI;\n(e) Any increase in the rate or terms of compensation payable, or potentially payable, by RSI to any director, officer or employee, except increases occurring in the ordinary course of business in accordance with RSI's customary practices (which shall include normal periodic performance reviews and related compensation and benefit increases);\n(f) Any increase in the rate or terms, or establishment, of any bonus, insurance, severance, stock option, pension or other employee benefit plan, payment or arrangement made to, for or with any of the employees of RSI except increases occurring in the ordinary course of business in accordance with RSI's customary practices (which shall include normal periodic performance reviews and related compensation and benefit increases);\n(g) Any loan to, or guarantee or assumption of any loan or obligation on behalf of, any officer or director of RSI except advances occurring in the ordinary course of business in accordance with RSI's customary practices; or\n(h) Any declaration, setting aside or payment of any dividend (other than as permitted by Section 5.7 herein) by RSI (in cash, properties or securities) or other distribution of assets by RSI in respect of the shares of its capital stock, or issuance, sale, transfer by RSI, or commitment to issue, sell or transfer any shares of its capital stock other than pursuant to the Stock Option Agreement, employee stock options, director stock options and other agreements or commitments existing on June 30, 1993, or any redemption, purchase or other acquisition of any of its securities;\nprovided that for purposes of paragraphs (a), (b), (c) and (d) of this Subsection 3.5.2, a material adverse change or effect shall be deemed to occur if as a result of the events described in such paragraphs there is a decrease in the aggregate in the stockholders' equity of RSI as reflected on RSI's consolidated statement of financial position at June 30, 1993, of five percent or greater, to the date of this Agreement or the Closing Date, as applicable.\n3.5.3 No Undisclosed Liabilities. RSI has no liabilities or obligations, secured or unsecured (absolute, accrued, or unaccrued, liquidated or unliquidated, executory, contingent or otherwise and whether due or to become due), of a nature required to be reflected in a balance sheet prepared in accordance with GAAP applied on a basis consistent with prior\nyears, which were not disclosed in the RSI SEC Documents, except for those liabilities and obligations of RSI incurred since June 30, 1993 in the ordinary course of business.\nSection 3.6 Forecasts. Notwithstanding any disclaimers to the contrary (whether oral or in writing) made by or on behalf of RSI, all forward looking statements made in writing (including but not limited to forecasts and projections of revenues, income or losses, capital expenditures, or other financial items, management plans and objectives for future operations, statements of future economic performance and state-\nments of the assumptions underlying or relating to any of the foregoing) by RSI in the \"Bid and Proposal Schedule\" delivered to COMSAT prior to the date hereof or updated prior to the Closing Date, or in any Form 10-K or Form 10-Q (and any amendments thereto) filed with the SEC after June 30, 1992, were made based upon reasonable grounds (in the case of the \"Bid and Proposal Schedule\" delivered to COMSAT prior to the date hereof, taking into account RSI's procedure for assembling the schedule as described in the Disclosure Letter) and disclosed in good faith.\nSection 3.7 Properties; Leases; Tangible Assets.\n3.7.1 Title. The Disclosure Letter contains a list of all real property which RSI purports to own. To RSI's knowledge, RSI has good and valid title to or, in the case of leased properties, a good and valid leasehold interest in, all of the assets which it purports to own or lease, including all assets (real, personal or mixed, tangible or intangible) reflected in the June 30, 1993 consolidated financial statements of RSI, or acquired by RSI thereafter, except those assets disposed of in the ordinary course of business after June 30, 1993 and the title to each such property and asset of RSI is free and clear of any title defects, objections, liens, mortgages, security interests, pledges, charges and encumbrances, adverse claims, equities or other adverse interests of any kind including without limitation, leases, chattel mortgages, conditional sales contracts, collateral security arrangements and other title or interest retention arrangements (collectively the \"Encumbrances\"), except as follows:\n(a) Any lien for taxes or other governmental charges not yet delinquent, or the validity of which is being contested in good faith by appropriate proceedings and as to which adequate reserves have been established by RSI;\n(b) Any Encumbrances reflected on the financial statements contained in the RSI SEC Documents, with such changes in the amount thereof as may have occurred since June 30, 1993 in the ordinary course of business and which changes will not materially reduce the aggregate value of the property and assets held by RSI;\n(c) Such other imperfections of title or Encumbrances which, as of the Closing Date, will not mate- rially reduce the aggregate value of the property and assets of RSI;\n(d) Any progress payment liens arising from progress payments made by the United States Government or any agency thereof on contracts affecting the assets of RSI; and\n(e) Any Encumbrances or other matters identified in the Disclosure Letter.\n3.7.2 Use Restrictions. With respect to any real property owned or leased by RSI, to RSI's knowledge there exists no applicable zoning ordinance, building code, use or occupancy restriction, or any material violation of any such ordinance, code or restriction, or any condemnation action or proceeding with respect thereto, that materially detracts from the aggregate value of the real property as reflected in the June 30, 1993 consolidated statement of financial position of RSI.\n3.7.3 Condition. To RSI's knowledge, all tangible properties and assets of RSI that are necessary or useful to the business of RSI are in good operating condition and repair, ordinary wear and tear excepted, and are adequate for the uses to which they are put.\n3.7.4 Leases. The Disclosure Letter identifies all leases with a remaining term of more than one year and aggregate remaining lease payments due of $100,000 or more to which RSI is a party or is otherwise bound for the lease of real property or personal property or equipment pursuant to which RSI leases real or personal property or equipment either as the lessor or as the lessee. With respect to such leases, to RSI's knowledge there exist no defaults by RSI, or defaults by a lessor or any third party, or misrepresentations with respect to such leases made by RSI, any lessor and\/or any third party, that materially and adversely affect in the aggregate the business, operations or financial condition of RSI.\n3.7.5 Government Furnished Equipment. RSI's materials management systems relating to inventories of equipment and other materials procured or held by RSI for the performance of any contracts (prime or sub) with the U.S. Government are adequate and appropriately maintained for the uses to which they are put or required to be put under the terms of such contracts. All items of inventory, equipment and other materials procured or held by RSI for the performance of any contracts (prime or sub) with the U.S. Government have been maintained in the condition they were when loaned, or bailed to, or procured by RSI, ordinary wear and tear excepted, or used or processed for the purposes for which they were intended and if such items of inventory, equipment and other materials were returned to the U.S. Government or its designee at any time prior to the Closing Date, there is no basis for a claim for loss, damage, negligence or reckless disregard of use or care of such items of inventory, equipment and other materials to be asserted by the U.S.\nGovernment that if successful would have a material adverse effect on the business, results of operations or financial condition of RSI.\nSection 3.8 Backlog.\n3.8.1 Amount. The Disclosure Letter sets forth a schedule of the backlog by contract of RSI (excluding, for purposes of the Disclosure Letter prior to execution of this Agreement, the backlog by contract of the Mark Antennas, PG Technologies, and CSA Antenna Systems Division), as of December 31, 1993, for products and services to be provided by RSI, for those contracts having a value of at least $25,000, including (i) the aggregate dollar amount of firm and funded backlog, (ii) the aggregate dollar amount of unfunded backlog (including without limitation unexercised options), and (iii) the aggregate dollar amount of backlog for which RSI has received notice of program selection but final contract terms have not been negotiated. At the Closing Date, the Disclosure Letter shall set forth on a consistent basis (except that contracts having a value of less than $25,000 may be included) a schedule of the backlog of RSI by contract or, in the case of the Mark Antenna and PG Technology divisions, by division for contracts having a value of less than $100,000, which schedule shall show an aggregate contract backlog for categories (i), (ii), and (iii), above, of at least $118,500,000. For purposes of this Subsection 3.8.1, where the contract or applicable law or regulation would prohibit identification of the customer, the Disclosure Letter will omit such identification.\n3.8.2 Ordinary Course. All of the contracts constituting the backlog of RSI (i) have been entered into in the ordinary course of business, and (ii) are capable of performance by RSI in accordance with the terms and conditions of each such contract, without materially and adversely affecting the financial condition or results of operations of RSI. Since June 30, 1993, RSI has not changed in any material respects its pricing policies, practices or objectives with respect to return on sales in connection with its outstanding bids and proposals, when considered in the aggregate.\nSection 3.9 Accounts Receivable. RSI's accounts receivable, unbilled costs and accrued profits (less customer progress payments), notes receivable, contracts in progress, accounts payable and notes payable (collectively, the \"Receivables and Unbilled Costs\") as of the Closing Date shall be or were recorded on its books and records in the ordinary course of business in accordance with GAAP applied on a basis consistent with prior years. Since June 30, 1993, RSI's consolidated financial statements include reserves with respect to the Receivables and Unbilled Costs reflected therein against doubtful collection or billings which in the opinion of RSI, its officers or directors, are adequate.\nSection 3.10 Inventories. All inventories of RSI (i) reflected in its June 30, 1993 consolidated statement of financial position, or (ii) to be held as of the Closing Date, have been or will have been acquired or manufactured, and are in amounts RSI reasonably believes to be adequate to fill customer\norders, in the ordinary course of business in accordance with RSI's normal inventory practices. For purposes of preparing its June 30, 1993 and any subsequent consolidated statement of financial position, the inventories held by RSI were valued at cost, and as to classes of items inventoried and methods of accounting and pricing determined in a manner consistent with prior years.\nSection 3.11 Intellectual Property.\n3.11.1 Patents and Know-How. The Disclosure Letter sets forth a complete and accurate list of each patent, patent application and docketed invention, by date and germane case or docket number and country of origin, and each license or licensing agreement, by date, term and the parties thereto, for each of the patents, patent applications, inventions, trade-secrets, rights to know-how, processes, computer programs or use of technology, held or employed by RSI (each such patent, patent application, license or licensing agreement listed thereon hereinafter termed the \"Patents and Licenses\"). With respect to the Patents and Licenses, and with respect to all other technology including but not limited to research and development results, computer programs, processes, trade secrets, know-how, formulae, chip designs, mask works, inventions and manufacturing, engineering, quality control, testing, operational, logistical, maintenance and other technical information and technology held or employed by RSI (\"RSI's Technology\") and except as set forth in the Disclosure Letter:\n(a) RSI owns, free and clear of all liens, pledges or other encumbrances, all right, title and interest in the Patents and Licenses and in RSI's Technology, with all rights to make, use, and sell the property embodied in or described in the Patents and Licenses and in RSI's Technology and which are material to the business or operations of RSI. To RSI's knowledge, its use of the Patents and Licenses and RSI's Technology does not conflict with, infringe upon or violate any patent, patent license, patent application, mask work, mask work registration, or any pending application relating thereto, or any trade secret, know-how, programs or processes of any third person, firm or corporation;\n(b) RSI either owns the entire right, title and interest in, to and under, has an express license to use, or has acquired in connection with the acquisition of equipment or inventory an implied license to use, any and all inventions, processes, computer programs, know-how, formulae, trade secrets, patents, chip designs, mask works, trademarks, trade names, brand names and copyrights which are material to the business or operations of RSI.\n(c) The U.S. government has no rights with respect to any \"technical data\" or \"computer software\" that are owned by RSI and are material to the business or operations of RSI.\n3.11.2 Trademarks and Copyrights. The Disclosure Letter sets forth a complete and accurate list of each trademark, trade name, and trademark and trade name registration\nor application, and copyright registration and application for copyright registration, by date and germane case or docket number and country of origin, and each license or licensing agreement, by date and the parties thereto, for each trademark and copyright license or licensing agreement, held or employed by RSI (each such trademark, copyright, application, and license or licensing agreement hereafter termed the \"Trademarks and Licenses\"). Except as set forth in the Disclosure Letter, RSI owns, free and clear of all liens, pledges or other encumbrances, all right, title and interest in the Trademarks and Licenses which are material to the business or operations of RSI. To RSI's knowledge, its use of the Trademarks and Licenses does not conflict with, infringe upon or violate any trademark, trade name, trademark or trade name registration or application, copy- right, copyright registration or application, service mark, brand mark or brand name or any pending application relating thereto, of any third person, firm or corporation.\nSection 3.12 Contracts and Obligations.\n3.12.1 Identification. The Disclosure Letter includes an accurate and complete list as of the date indicated therein of:\n(a) All agreements and contracts between RSI and (i) its vendors or suppliers the termination of which would have a material adverse effect on the business, operations or financial condition of RSI, and (ii) its customers (each U.S. government agency deemed to be a separate customer and where the contract or applicable law or regulation would prohibit identification of the customer, the Disclosure Letter will omit such identification) where the backlog for such contract is $25,000 or more;\n(b) All loan agreements and other evidences of indebtedness, and all letters of credit or other documentary credits, having in each case a total liability of $50,000 or more;\n(c) All distributorship, non-employee commission or marketing agent, representative or franchise agreements providing for the marketing and\/or sale of the products or services of RSI;\n(d) All partnership agreements for the organization of limited or general partnerships in which RSI is a partner, all limited liability company agreements, and all joint ventures to which RSI is a party;\n(e) All agreements or arrangements for the sale of any of the assets of RSI except in the ordinary course of business;\n(f) All employment contracts or consulting contracts reflecting an RSI commitment of $100,000 or more, or agreements with respect to severance or similar arrangements; and\n(g) To RSI's knowledge, all contracts or agreements with any officer, director or employee of RSI or any member of their immediate families, or with any entity under the control of any officer, director or employee of RSI or any member of their immediate families, whether individually or in combination with any other such person or persons.\n3.12.2 Full Force and Effect. Except as may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws of general application referring to or affecting enforcement of creditors' rights, and by general equitable principles, each agreement, contract and obligation having a total value of $100,000 or more identified in the Disclosure Letter pursuant to Subsection 3.12.1 is valid and binding on each other party thereto in accordance with their respective terms.\n3.12.3 No Default. With respect to each con-\ntract, agreement and obligation having a total value of $100,000 or more identified in the Disclosure Letter pursuant to Subsection 3.12.1, neither RSI nor any other party thereto is in material breach thereof or material default thereunder, and to RSI's knowledge, no notice has been received from the other party thereto of any such material breach or material default (whether by lapse of time or notice or both).\n3.12.4 No Commitments. RSI has no commitment or undertaking to retain after Closing any attorneys, accountants, actuaries, appraisers, investment bankers, or management consultants.\nSection 3.13 Employees; Compensation; Labor.\n3.13.1 Employees and Compensation. Prior to the Closing, RSI will provide to COMSAT and CTS a list dated within 15 days prior to the Closing Date of all persons who are employed by RSI, together with their base salary and bonus paid or payable for the most recent fiscal year, and the date upon which such compensation was last varied or increased, title, original date of hire and vacation benefits, and any agreed to current or future benefits or compensation of such employees. The Disclosure Letter contains a true, correct and complete list of all employment policies, procedures, manuals, and other similar rules or regulations of RSI currently in effect regarding the general conduct, compensation, labor relations and employment and severance of RSI's employees, copies or descriptions of which have heretofore been provided to COMSAT and CTS.\n3.13.2 Certain Labor Matters. Except as set forth in the Disclosure Letter:\n(a) To RSI's knowledge, none of its division managers or executive officers has indicated to any director, officer, or manager of RSI his or her intention to cancel or otherwise terminate his relationship with RSI or his relationship with CTS if CTS retains such person after Closing;\n(b) There is no union representing the interests of any of RSI employees and, to the knowledge of RSI, there are no RSI employees seeking or attempting to organize union representation;\n(c) There are neither pending nor, to the knowledge of RSI, threatened any strikes, work stoppages, work disruptions or employment disruptions by any of the RSI employees that would materially impair RSI's business, operations or financial condition;\n(d) To RSI's knowledge, there are neither pending nor threatened any suits, actions, administrative proceedings, hearings, arbitrations or other proceedings between RSI and any of its employees involving a claim of $50,000 or more;\n(e) With respect to its employees, to RSI's knowledge, during the past five (5) years RSI (i) has complied in all material respects with all Federal, state and local laws and regulations relating to the employment of labor, including any provisions thereof relating to wages, hours, collective bargaining and the payment of social security and similar taxes, (ii) is not liable for any material arrears of wages or any taxes or penalties for failure to comply with any of the foregoing, (iii) has not committed any material unfair labor practices, and (iv) has complied in all material respects with all applicable provisions of the Occupational Safety and Health Act of 1970, as amended, and regulations promulgated pursuant thereto;\n(f) To RSI's knowledge, RSI is not required to make any capital or other expenditures of $100,000 or more to comply with the Americans With Disabilities Act of 1990, as amended, and the rules and regulations promulgated thereunder; and\n(g) To RSI's knowledge, since June 30, 1993, none of its employees has filed any complaint relating to RSI's employment of its employees with any governmental or regulatory authority or brought any action in law or in equity with respect thereto.\n3.13.3 Employee Benefit Plans; ERISA.\n(a) Prior to Closing and with adequate time for review, RSI will provide COMSAT an accurate and complete list of each bonus, deferred compensation, incentive compensation, severance or termination pay agreement, hospitalization or other fringe, medical, dental, retiree medical, dental or other welfare benefit plan, stock purchase, stock option, pension, life or other insurance, profit-sharing or retirement plan or arrangement, and each other employee benefit plan or arrangement maintained or contributed to by RSI, whether formal or informal, whether legally binding or not (the \"Plans\"), and which either required or are expected to require expenditures or contributions by RSI\nin the fiscal year ended June 30, 1993 or the fiscal year ended June 30, 1994, as applicable, of $100,000 or more. Such list will set forth the annual amount of employer contributions accrued, paid or payable for Employees of RSI (domestic or foreign) during fiscal 1993 pursuant to each of the Plans. The amount of employer contributions accrued, paid or payable for all Employees of RSI (domestic or foreign) during fiscal 1993 pursuant to the Plans did not exceed $7,000,000. RSI does not have any plan or commitment, whether formal or informal and whether legally binding or not, to create any additional Plan or modify or change any existing Plan. RSI has heretofore delivered or will promptly deliver to COMSAT true and complete copies of (i) the documents governing all such Plans and their related trusts, (ii) the most recent actuarial reports or accountants' reports prepared with respect to each such Plan, (iii) the latest Form 5500 filed with the Internal Revenue Service with respect to each such Plan, and (iv) the most recent determination letter issued by the Internal Revenue Service for each such Plan which has received a determination letter.\n(b) RSI does not have and has not in the past five years had a Plan to which Title IV of the Employee Retirement Income Security Act of 1974, as amended (\"ERISA\"), applies or has applied.\n(c) Prior to Closing and with sufficient time for review the Disclosure Letter will list each Plan in existence since June 30, 1989 that is an \"employee benefit plan,\" as such term is defined in Section 3(3) of ERISA and the rules and regulations promulgated thereunder, which at any time covered any employee of RSI (each such Plan is hereinafter referred to as an \"ERISA Plan\"), and which required contributions or expenditures by RSI in any given fiscal year since June 30, 1989 of $100,000 or more, and copies of such Plans will be made available to COMSAT.\n(d) Except as set forth in the Disclosure Letter: (i) No ERISA Plan is a \"multiemployer plan\" as that term is defined in Section 3(37) of ERISA; (ii) to RSI's knowledge neither RSI, any ERISA Plan, any trust created thereunder, nor any trustee or administrator thereof, has engaged in a transaction in connection with which RSI, any ERISA Plan, any such trust, or any trustee or administrator thereof, or any party dealing with any ERISA Plan or any such trust, could be subject to either a material civil penalty assessed pursuant to Section 502(i) of ERISA, or a material tax imposed by Section 4975 of the Code; (iii) full payment has been made of all amounts which RSI is required to pay under the terms of each ERISA Plan as a contribution to such ERISA Plan as of the last day of the fiscal year of each such ERISA Plan ended prior to the date of this Agreement, and no ERISA Plan nor any trust established thereunder has incurred any \"accumulated funding deficiency\" (as defined in Section 302 of ERISA and Section 412 of the Code), whether or not waived, as of the last day of the most recent fiscal year of each ERISA Plan ended prior to the date of this Agreement; (iv) as to each ERISA Plan which is intended to be qualified under Section 401(a) and 501(a) of the Code, to RSI's knowledge there is no fact, condition or set of circumstances that would adversely affect the qualified status of any such ERISA Plan; (v) to RSI's knowledge each Plan has been operated\nand administered in all material respects in accordance with its terms and all applicable laws, including but not limited to ERISA; (vi) there are no pending or, to RSI's knowledge, threatened or anticipated material claims against any Plan or any fiduciary thereof, by any employee or beneficiary covered under any Plan, or otherwise involving any Plan (other than routine claims for benefits) and there are no pending or, to RSI's knowledge, threatened or anticipated claims by or on behalf of any Plan; and (vii) there is no liability or penalty under ERISA or otherwise relating to the Plans which would have a material adverse effect on RSI's financial condition.\nSection 3.14 Litigation.\n3.14.1 Litigation Pending or Threatened. Except as set forth in the Disclosure Letter: (i) there are no claims, actions, suits, hearings, arbitrations, disputes, proceedings (public or private) or governmental investigations pending or, to the knowledge of RSI, threatened, against RSI, at law or in equity, before or by any Federal, state, municipal or other governmental or nongovernmental department, commission, board, bureau, agency, court or other instrumentality, or by any private person or entity, which seek damages, contributions, expenditures or other penalties of $25,000 or more; (ii) to RSI's knowledge, there is no basis for any action, suit or proceeding which, if successful, would, individually or in the aggregate, have a material adverse effect on the assets, results of operations or financial condition of RSI; and (iii) there are no existing or, to the knowledge of RSI, threatened, orders, judgments or decrees of any court or governmental agency to which RSI is subject or which are materially affecting RSI.\n3.14.2 This Transaction. Except as set forth in the Disclosure Letter there are no legal, administrative, arbitration or other proceedings or governmental investigations pending, or, to the knowledge of RSI threatened, against RSI which seek to enjoin or rescind the transactions contemplated by this Agreement or otherwise prevent RSI from complying with the terms and provisions of this Agreement.\nSection 3.15 Insurance. The Disclosure Letter sets forth (i) a true and correct list of all insurance policies of any kind or nature whatsoever maintained by RSI, indicating the type of coverage, name of insured, the insurer, the premium, the expiration date of each policy and the amount of coverage, and (ii) a general description of RSI's self-insurance practices. The policies of insurance and practices of self-insurance as so described evidence insurance against all risks of a character and in such amounts as RSI has determined is prudent and to RSI's knowledge are usually insured against by similarly situated companies in the same or similar business as RSI, and all of such insurance policies are in full force and effect and will remain so until at least thirty (30) days after the Closing Date. RSI will notify COMSAT in writing within 15 days of the date hereof whether it has any reason to believe that the policies of insurance currently in effect and held by RSI and all pending claims, rights or causes of action made or held by RSI under any\npolicies of insurance will not transfer by operation of law to the Surviving Corporation in the Merger.\nSection 3.16 Permits; Compliance; Reports; Clearances.\n3.16.1 Necessary Permits. RSI holds all material approvals, authorizations, certificates, consents, licenses, orders and permits of all governmental agencies, whether Federal, state or local, necessary to the operation of its business, or for its owned and leased real and personal property in the manner currently operated by RSI, including, without limitation, all necessary permits and approvals for the discharge of by-products and waste material into a public waste discharge system, and all such material approvals, authoriza-\ntions, certificates, consents, licenses, orders and permits are in full force and effect.\n3.16.2 FCC Licenses. The Disclosure Letter identifies all licenses granted by the Federal Communications Commission to RSI. RSI holds all licenses required by the Communications Act of 1934, as amended, and the rules and regulations promulgated thereunder, necessary for the operation of its business as presently conducted.\n3.16.3 Compliance with Law. To RSI's knowledge, the operations of RSI as presently conducted do not violate in any material respect any Federal law (including, without limitation, any that relate to health and safety, individual disabilities, environmental protection and pollution control, sale and distribution of products and services, anti-competitive practices, collective bargaining, equal opportunity and improper or corrupt payments) or any foreign, state, local or other laws, statutes, ordinances, regulations, or any order, writ, injunction or decree of any court, commission, board, bureau, agency or instrumentality.\n3.16.4 FCPA. RSI is in full compliance with the Foreign Corrupt Practices Act, as amended, 15 U.S.C. sections 78m, 78dd-1, 78dd-2 and 78ff (the \"FCPA\"), and no pending contracts, bids or proposals of RSI were obtained or made in violation of the FCPA.\n3.16.5 Reports. All material reports, documents and notices (not relating to Taxes or Tax Returns as defined in Subsection 3.20.2) required to be filed, maintained or furnished with or to all governmental regulatory authorities, including, without limitation, all Federal, state and local governmental authorities have been so filed, maintained or furnished. To RSI's knowledge all such reports, documents and notices are true and correct in all material respects as of the dates when legally required to be true and correct (and all required amendments and updates have been made) and, to the extent required to be kept in the public inspection files of RSI, are kept in such files.\n3.16.6 Clearances. To the extent permitted by law, the Disclosure Letter sets forth all security clearances held by RSI and personal security clearances held by officers, directors or employees of RSI with respect to the operation of RSI's business.\nSection 3.17 Government Contracts.\n3.17.1 Government Contracts Compliance. RSI is not, and consummation of this Agreement and the transactions contemplated hereby will not result, in any material violation, breach or default of any term or provision of (i) any contract, subcontract or agreement between the United States Government and RSI or (ii) any bid, proposal or quote submitted to the United States Government by RSI. RSI is not, and consummation of this Agreement and the transactions contemplated hereby will not result, in any violation, breach or default in any material respect of any provision of any Federal order, statute, rule or regulation governing any contract, subcontract, bid, proposal, quote, arrangement or transaction of any kind between the United States Government and RSI. The representations in the two foregoing sentences of this Subsection 3.17.1 are made after consideration of, but are not limited to, the following laws, regulations, standards, and agreements to the extent, if any, they are applicable to or incorporated into contracts, subcontracts, agreements, bids, proposals or quotes of RSI: (a) The Truth in Negotiations Act of 1962, as amended; (b) The Service Contract Act of 1965, as amended; (c) The Contract Disputes Act of 1978, as amended; (d) The Federal Acquisition Regulations and any applicable agency supplements thereto, as well as applicable predecessor procurement regulations; (e) The Cost Accounting Standards; (f) Agreements with the Defense Contract Audit Agency; (g) Relevant rules and arrangements governing the allowance of costs charged to overhead and general and administrative cost pools allocable to government contracts; (h) The Byrd Amendment, Pub. L. No. 101-121, section 319 (September 23, 1989); and (i) The Defense Industrial Security Manual (DOD 5220.22-M), the Defense Industrial Security Regulation (DOD 5220.22-R) and related security regulations. With respect to bids or proposals by RSI for contracts covered by P.L. 87-653, all required \"cost or pricing data\" provided to the United States Government were current, accurate, and complete when price negotiations were concluded and price agreement reached.\n3.17.2 Investigations and Claims. The Disclosure Letter sets forth descriptions of all audit reports, final decisions, determinations of noncompliance, claims, consent orders in effect, outstanding Forms 1, ongoing Government investigations or prosecutions, or internal investigations con- ducted by or initiated by RSI and identifies any corrective action, restitution or disciplinary action initiated or taken by RSI relating in any sense to the subjects listed below in paragraphs (a) through (g) of this Subsection 3.17.2. Except as set forth in the Disclosure Letter, RSI has not engaged in and has not been charged with, received a claim related to, or been under investigation or conducted or initiated any internal inves- tigation, or had reason to conduct, initiate or report any inter- nal investigation or made a voluntary disclosure, with regard to any of the following, within the past five (5) years: (a)\n\"defective pricing\" within the meaning of P.L. 87-653, as amended; (b) Failure to correct accounting, inventory, material requirements planning, material management and accounting systems, government property records, or purchasing system deficiencies; (c) Mischarging of direct and\/or indirect costs in connection with U.S. Governmental contracts or subcontracts; (d) Delivery to the U.S. Government or to a U.S. Government prime or subcontractor of material, components, items or services that do or did not meet specifications or standards therefor, or delivery to the U.S. Government or to a U.S. Government prime or subcontractor of foreign-made material, components or items where domestic-made material, components or items were required; (e) Improper payments or any payments or activities for obtaining non-public source selection information; (f) Unallowable costs, including unallowable direct or indirect costs; (g) Violations of any of the following statutes, as amended, or the regulations promulgated thereunder: (i) False Statements Act (18 U.S.C. 1001), (ii) False Claims Act (18 U.S.C. 287), (iii) False Claims Act (31 U.S.C. 3729), (iv) Bribery, Gratuities and Conflicts of Interest (18 U.S.C. 201), (v) Anti-Kickback Act (41 U.S.C. 51, 54), (vi) Anti-Kickback Enforcement Act of 1986 (P.L. 99-634), (vii) Arms Export Control Act (22 U.S.C. 277 et seq.), (viii) Foreign Corrupt Practices Act (15 U.S.C. 78 m, 78 dd-1, 78 ff), (ix) Export Administration Act (P.L. 99-64), (x) War and National Defense Act (18 U.S.C. 793), (xi) Racketeer Influenced and Corrupt Organizations Act (18 U.S.C. 1901-68), (xii) Conspiracy to Defraud the Government (18 U.S.C. 371), (xiii) Program Fraud Civil Remedies Act (Pub. L. No. 99-509), (xiv) \"Revolving Door\" Legislation (18 U.S.C. 207, 18 U.S.C. 218, 18 U.S.C. 281 (a)(11), 10 U.S.C. 2397, et seq.) 37 U.S.C. 801, 41 U.S.C. 423, (xv) Defense Production Act (50 U.S.C. App. 2061), (xvi) The Byrd Amendment, Pub. L. No. 101-121, section 319 (September 23, 1989), and (xvii) U.S. antiboycott laws (the Ribicoff Amendment to the 1976 Tax Reform Act, and the 1979 Export Administration Act).\n3.17.3 No Debarment or Suspension. RSI has not been debarred or suspended or, to RSI's knowledge, informed that it will be subject to any proceeding contemplating possible debarment or suspension from contracting with the U.S. Government.\n3.17.4 Test and Inspection Results. All test and inspection results RSI has provided to any government agency pursuant to any government contract or subcontract or as a part of the delivery to the U.S. Government of any article or system designed, engineered or manufactured by RSI were true, complete and correct except where any inaccuracy or omission does not or will not have a material adverse effect on the results of operations, business, assets or financial condition of RSI. RSI has provided all material test and inspection results to government agencies as required by law or pursuant to the terms of the applicable government contracts or subcontracts, or as may have been required by law or government contracts or subcontracts as a part of the delivery to the government of any article or system RSI designed, engineered or manufactured.\nSection 3.18 Product Warranties. RSI has provided COMSAT and CTS true, correct and complete copies of the currently used standard forms and statements of product warranties and guaranties adopted by RSI with respect to any product or service provided prior to Closing. RSI reasonably believes that its reserves for product warranty and other post-sale services reflected on its consolidated financial statements at and subsequent to June 30, 1993 are adequate.\nSection 3.19 Environmental Protection.\n3.19.1 Environmental Permits. Except where the failure to do so would not have a material adverse effect on its business or operations, RSI has obtained all permits, licenses and other authorizations which are required under Federal, state, local and foreign laws relating to pollution or protection of the environment, including laws relating to emissions, discharges, releases or threatened releases of pollutants, contaminants, chemicals, or industrial, toxic or hazardous substances or wastes into the environment (including, without limitation, ambient air, surface water, ground water, land surface or subsurface strata) or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of pollutants, contaminants, chemicals, or industrial, toxic or hazardous substances or wastes or any regulation, code, plan, order, decree, judgment, injunction, notice or demand letter issued, entered, promulgated or approved thereunder including without limitation the following statutes, as amended, (i) Resource Conservation and Recovery Act, 42 U.S.C. section 6901 (\"RCRA\"); (ii) Comprehensive Environmental Response, Compensation and Liability Act of 1980, 26 U.S.C. section 4611; 42 U.S.C. section 9601; (iii) Superfund Amendments and Reauthorization Act of 1984 (\"Superfund\"); (iv) Clean Air Act, 42 U.S.C. section 7401; (v) The Clean Water Act, 33 U.S.C. section 1251; (vi) Safe Drinking Water Act, 42 U.S.C. section 300f; and (vii) Toxic Substances Control Act, 15 U.S.C. section 2601 (collectively, the \"Environmental Laws\"). The Disclosure Letter will set forth prior to Closing (i) all such permits, licenses and other authorizations issued under the Environmental Laws obtained by RSI, and (ii) a description and good faith estimate by RSI of the cost of capital expenditures (if any) that may be necessary to maintain or qualify for each such permit, license or other authorization.\n3.19.2 No Violation. RSI is in compliance in all material respects with all terms and conditions of the required permits, licenses and authorizations, and RSI also is in compliance in all material respects with all other limitations, restrictions, conditions, standards, requirements, schedules and timetables contained or referenced by or in the Environmental Laws. Any single omission or act of non-compliance shall be deemed to be \"material\" under this Subsection 3.19.2 if such omission or act would result in any liabilities for RSI or the Surviving Corporation equal to or greater than One Hundred Thousand Dollars ($100,000), and all omissions or acts of non- compliance shall be deemed to be \"material\" under this Subsection 3.19.2 if the aggregate of all such omissions or acts would result in any liabilities for RSI or the Surviving Corporation equal to or greater than Five Hundred Thousand Dollars ($500,000).\n3.19.3 Certain Matters. Except as set forth in the Disclosure Letter, no properties or facilities owned or leased by RSI contain any (i) underground tanks as defined by any Environmental Law except for fully-inspectable vault tanks, (ii) to RSI's knowledge, any polychlorinated biphenyls (\"PCB\") or PCB contaminated electrical equipment except light ballasts, and (iii) to RSI's knowledge, any friable structural asbestos or asbestos-containing material.\n3.19.4 No Litigation or Proceedings. With respect to or affecting RSI, its business or operations, there is no pending civil or criminal litigation, notice of violation or administrative proceeding relating in any way to the Environmental Laws including, but not limited to, notices, demand letters, claims, litigations or proceedings based upon or relating to any Environmental Law, where such litigation, notice or claim could result in any liability to RSI or the Surviving Corporation in excess of Fifty Thousand Dollars ($50,000).\n3.19.5 No Notice. Except as set forth in the Disclosure Letter, RSI has no knowledge of any threatened or potential civil or criminal litigation, notice of violation or administrative action relating in any way to the Environmental Laws and involving RSI, its business or operations.\n3.19.6 No Basis for Liability. To the knowledge of RSI, except as set forth in the Disclosure Letter, with respect to RSI, its business or operations, there are no past or present events, conditions, circumstances, activities, practices, incidents, actions or plans which may interfere with or prevent continued compliance with the Environmental Laws, or which may give rise to any common law or legal liability, or otherwise form the basis of any claim, action, demand, suit, proceeding, hearing, study, or investigation, based on or related to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling, or the emission, discharge, release or threatened release into the environment, of any pollutant, contaminant, chemical, or industrial, toxic or hazardous substance or waste, including, without limitation, any liability arising, or any claim, action, demand, suit, proceeding, hearing, study or investigation which may be brought under any Environmental Laws.\n3.19.7 No Expenditures. To the knowledge of RSI, except as set forth in the Disclosure Letter, with respect to RSI, its business or operations, there are no past or present conditions, circumstances, activities, practices, incidents, actions or plans which may interfere with or prevent continued compliance with the Environmental Laws, which may require RSI to make any capital or other expenditures to comply with any Environmental Law existing as of Closing, nor is there any reasonable basis on which any governmental or regulatory body or agency could take any action that would require any such capital or other expenditures.\nSection 3.20 Taxes.\n3.20.1 Representation. Except as set forth in the Disclosure Letter, to RSI's knowledge: (i) the reserves reflected on RSI's June 30, 1993 consolidated statement of financial position are sufficient for the payment of all unpaid Taxes of RSI whether or not disputed for all periods through the date thereof or based on any state of facts existing on or prior to June 30, 1993; (ii) there has been no audit by the Internal Revenue Service or any state, local or foreign tax authority of any Tax Return of RSI resulting in a proposed, asserted or assessed deficiency, there is no audit that is not closed, and there are no outstanding agreements or waivers signed or agreed to by RSI extending the statutory period of limitation applicable to any Taxes or Tax Return; (iii) there are no outstanding deficiencies or claims for Taxes asserted or threatened against RSI; (iv) RSI has duly and timely filed all Tax Returns required to be filed by it (all such returns being true, correct and complete in all material respects) with the United States, the United Kingdom, and the states of California, Virginia, Georgia, Texas, Florida, New Jersey, Illinois and West Virginia; (v) with respect to Tax Returns not referenced in (iv) above, RSI has duly and timely filed all Tax Returns required to be filed by it (all such returns being true, correct and complete in all material respects); (vi) none of the Tax Returns referred to in clauses (iv) and (v) above contain, and RSI has never filed with or provided to the Internal Revenue Service, a disclosure statement with respect to any member of the RSI Group under Section 6662 of the Code (or any predecessor statute); (vii) RSI has duly paid or set aside reserves or otherwise made provisions for the payment of all Taxes attributable to the periods covered by the Tax Returns referenced in (iv) and (v) above; (viii) there are no liens with respect to Taxes (except statutory liens for Taxes not yet due or delinquent) upon any of the assets of RSI; (ix) all Taxes required to be collected or withheld by RSI have been duly collected or withheld and timely paid to the appropriate tax authorities; (x) no payments made or that may, as a result of the Merger, be made by RSI (expressly excluding any payments made pursuant to agreements entered into after the Merger or arrangements offered by CTS, COMSAT or any of their affiliates) will be treated as excess parachute payments within the meaning of Section 280G of the Code; and (xi) no member of the RSI Group has applied for a ruling relating to Taxes from any taxing authority or entered into any closing agreement with any taxing authority which could affect any member of the RSI Group; provided, however, that with respect to the representations set forth in (i), (v), (vii) and (ix), above, any failure or failures on the part of RSI with respect to any such representation will constitute a breach of such representation only if such failure or failures would, in the aggregate, have a material adverse effect on the business, results of operations or financial condition of RSI.\n3.20.2 Definitions. As used herein, \"Taxes\" and all derivations thereof means any federal, state, local or foreign income, gross receipts, license, payroll, employment, excise, severance, stamp, occupation, premium, windfall profits,\nenvironmental, customs, duties, capital stock, franchise, profits, withholding, social security (or similar), unemployment, disability, real property, personal property, sales, use, ad valorem, transfer, registration, value added, alternative or add-on minimum, estimated, or other tax of any kind whatsoever, including any interest, penalty, or addition thereto with respect to which any member of the RSI Group could be held liable. The term \"Tax Returns\" shall include all federal, state, local and foreign returns, declarations, statements, reports, schedules, and information returns required to be filed with any taxing authority in connection with any Tax or Taxes. The term \"RSI Group\" means RSI and every member of an affiliated group (as defined in Section 1504 (without regard to Section 1504(b)) of the Code, provided that for purposes of this Section 3.20, references to provisions of the Code also include references to comparable provisions of state, local, or foreign law) which includes RSI or which has included any RSI subsidiary.\nSection 3.21 No Brokers. RSI has not paid or become obligated to pay any fee or commission to any broker, finder, investment banker or other intermediary in connection with the transactions contemplated by this Agreement, other than Alex. Brown.\nSection 3.22 Proxy Statement; Registration Information. The proxy statement (\"Proxy Statement\") including any amendments or supplements thereto with respect to the special meeting of RSI shareholders contemplated by Section 5.1 herein will comply as to form in all material respects with the applicable provisions of the Securities Exchange Act of 1934, as amended, 15 U.S.C. section 78, and the rules and regulations promulgated thereunder (the \"Exchange Act\"), and the information supplied by RSI for inclusion by COMSAT in the Registration Statement (as defined in Section 4.4 herein) including any amendments or supplements thereto with respect to the COMSAT Stock to be issued pursuant to the Merger, will comply as to form in all material respects with the applicable provisions of the Securities Act of 1933, as amended, 15 U.S.C. section 77, and the rules and regulations promulgated thereunder (the \"Securities Act\"), and neither the Proxy Statement nor the information provided by RSI for inclusion in the Registration Statement will, on the date of filing thereof with the SEC, on the date of dissemination thereof to holders of RSI Stock or at any time prior to the special meeting of RSI shareholders contemplated by Section 5.1 herein, as the case may be, contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements made therein, in light of the circumstances under which they are made, not misleading; provided, however, that the foregoing representation and warranty shall not include or relate to any information either furnished by COMSAT for the Proxy Statement or contained in COMSAT's filings with the SEC (other than the information provided by RSI for inclusion in the Registration Statement) and which, in either such case, is included, incorporated by reference or referred to in the Proxy Statement or the Registration Statement. If at any time prior to the Effective Date any event relating to RSI should occur which is required to be described in an amendment of or supplement to the Registration Statement or the Proxy Statement, RSI shall promptly so inform COMSAT and will prepare, or cooperate in the preparation of, such amendment or supplement.\nSection 3.23 Certain Stock Ownership. RSI does not own any COMSAT Stock or any options or other arrangements to acquire COMSAT Stock.\nSection 3.24 Material Disclosures. No statement, representation or warranty made by RSI in this Agreement, in any Exhibit hereto, in the Disclosure Letter, or in any certificate, written statement, list, schedule or other document delivered or to be delivered to COMSAT or CTS hereunder, contains any untrue statement of a material fact, or fails to state a material fact necessary to make the statements contained herein or therein, in light of the circumstances in which they are made, not misleading.\nARTICLE IV REPRESENTATIONS AND WARRANTIES OF COMSAT AND CTS\nCOMSAT and CTS hereby jointly and severally represent and warrant to RSI, as of the date hereof, and as of the Closing Date, as follows:\nSection 4.1 Organization. COMSAT is a corporation duly incorporated, validly existing and in good standing under the laws of the District of Columbia. CTS is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Delaware.\nSection 4.2 Corporate Authorization.\n4.2.1 Authority. Each of COMSAT and CTS have all requisite corporate power and authority to enter into and perform this Agreement and to consummate the transactions contem- plated hereby. The execution and delivery of this Agreement, the performance by COMSAT and CTS of their respective obligations hereunder and the consummation of the transactions contemplated hereby have been duly authorized by COMSAT's and CTS's Boards of Directors and no other corporate proceedings are necessary to authorize this Agreement and the transactions contemplated hereby. Assuming the valid authorization, execution and delivery of this Agreement by RSI, this Agreement is a valid and binding obligation of COMSAT and CTS, enforceable in accordance with its terms, except as limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws of general application referring to or affecting enforcement of creditor's rights, or by general equitable principles.\n4.2.2 No Breach or Violation. Execution, delivery and performance of this Agreement by COMSAT and CTS and consummation of the transactions contemplated hereby will not cause a violation, breach or default or result in the termination of, or accelerate the performance required by, or result in the creation or imposition of any Encumbrance on any property or assets of COMSAT or CTS, whether by notice or lapse of time or both or otherwise conflict with any term or provision of the following:\n(a) Their respective Articles or Certificate of Incorporation and By-laws, as amended;\n(b) Any note, bond, mortgage or indenture to which COMSAT or CTS is a party or is bound (i) where such violation, breach, default, termination, acceleration or Encumbrance would have a material adverse effect on the business, results of operations or financial condition of COMSAT and its subsidiaries, considered as a whole, or (ii) as to which required consents, amendments or waivers shall not have been obtained by COMSAT or CTS prior to the Closing for any such violation, breach, default termination, acceleration or Encumbrance; or\n(c) Any court or administrative order, writ or injunction or process, or any consent decree to which COMSAT or CTS is a party or is bound (i) where such violation, breach, default, termination, acceleration or Encumbrance would have a material adverse effect on the business, results of operations or financial condition of COMSAT, or (ii) as to which required consents, amendments or waivers shall not have been obtained by COMSAT prior to the Closing for any such violation, breach, default, termination, acceleration or Encumbrance.\nSection 4.3 SEC Filings. COMSAT has furnished to RSI a true and complete copy of (i) each final prospectus and definitive proxy statement filed by COMSAT with the SEC since December 31, 1992, and each report on Form 10-K, 8-K or 10-Q (and any amendments thereto) filed by COMSAT with the SEC since December 31, 1992 (collectively, the \"COMSAT SEC Documents\"). All of the COMSAT SEC Documents complied as to form in all material respects with the published rules and regulations of the SEC with respect thereto and none of the COMSAT SEC Documents as of the dates they were filed with the SEC contained any untrue statements of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading in each case as of the date when made.\nSection 4.4 Registration Statement; Proxy Information. The Registration Statement (\"Registration Statement\") including any amendments or supplements thereto with respect to the issuance of the COMSAT Stock pursuant to the Merger contemplated by Section 5.2 herein will comply as to form in all material respects with the applicable provisions of the Securities Act and the information supplied by COMSAT for inclusion by RSI in the Proxy Statement including any amendments or supplements thereto with respect to the special meeting of RSI shareholders contemplated by Section 5.1 herein will comply as to form in all material respects with the applicable provisions of the Exchange Act, and neither the Registration Statement nor the information provided by COMSAT for inclusion in the Proxy Statement will, on the date of filing thereof with the SEC, on the date of dissemination thereof to holders of RSI Stock or at any time prior to the special meeting of RSI shareholders contemplated by Section 5.1 herein, as the case may be, contain\nany untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements made therein, in light of the circumstances under which they are made, not misleading; provided, however, that the foregoing representation and warranty shall not include or relate to any information either furnished by RSI for the Registration Statement or contained in RSI's filings with the SEC (other than information provided by COMSAT for inclusion in the Proxy Statement) and which, in either such case, is included, incorporated by reference or referred to in the Registration Statement or the Proxy Statement. If at any time prior to the Effective Date any event relating to COMSAT should occur which is required to be described in an amendment of or supplement to the Proxy Statement or the Registration Statement, COMSAT shall promptly so inform RSI and will prepare, or cooperate in the preparation of, such amendment or supplement.\nSection 4.5 Capitalization. The total authorized capital stock of COMSAT is 100,000,000 shares of common stock, without par value, and 5,000,000 shares of preferred stock, without par value, of which, as of December 31, 1993, (a) 40,226,475 shares of common stock were validly issued and outstanding and were fully paid and nonassessable and free of preemptive rights, (b) 2,521,780 shares of common stock were subject to issuance upon the exercise of outstanding options or warrants, and (c) 1,348,003 shares of common stock were issued and held in treasury. Other than 1,019,350 options and 222,000 restricted stock awards granted between December 31, 1993 to the date of this Agreement, there are no other issued and outstanding or issued and not outstanding shares of capital stock of COMSAT, or any other securities which are convertible into or exercisable for capital stock of COMSAT.\nSection 4.6 COMSAT Stock. Upon issuance as contemplated by this Agreement or pursuant to the exercise of options into which the RSI Options were converted pursuant to Section 5.10 herein, each share of COMSAT Stock shall be validly issued, fully paid and nonassessable, and free and clear of any liens, pledges, mortgages or encumbrances.\nSection 4.7 No Brokers. Neither COMSAT nor CTS has paid or become obligated to pay any fee or commission to any broker, finder, investment banker or other intermediary in connection with the transactions contemplated by this Agreement, other than Goldman, Sachs & Co.\nSection 4.8 Material Disclosures. No statement, representation or warranty made by COMSAT or CTS in this Agreement, in any Exhibit hereto, or in any certificate, written statement, list, schedule or other document delivered or to be delivered to RSI hereunder, contains any untrue statement of a material fact, or fails to state a material fact necessary to make the statements contained herein or therein, in light of the circumstances in which they are made, not misleading.\nARTICLE V COVENANTS\nSection 5.1 Shareholder Meeting. RSI will call a special meeting of its shareholders to be held as promptly as practicable (but no earlier than 30 business days after the date hereof) for the purpose of obtaining shareholder approval of this Agreement and the Merger. COMSAT will cooperate with RSI in the preparation and filing with the SEC as promptly as practicable of the Proxy Statement for such special meeting, and will cooperate in the prompt filing of such amendments or supplements to the Proxy Statement as may be reasonably requested by the SEC or its staff in order to comply in all material respects with the Exchange Act. The Proxy Statement shall include the recommendation of the Board of Directors of RSI that the RSI shareholders approve this Agreement and authorize the Merger, unless such recommendation shall have been withdrawn in the exercise of the fiduciary duties of the RSI Board of Directors to the RSI shareholders under the Nevada Corporation Law. RSI shall have no obligation to mail the Proxy Statement to its shareholders until the Registration Statement is declared effective by the SEC, as contemplated by Section 5.2 herein.\nSection 5.2 Registration Statement. COMSAT will prepare as promptly as practicable the Registration Statement on Form S-4 for the issuance of the COMSAT Stock as contemplated hereunder, and RSI will cooperate with COMSAT in its preparation. Subject to Section 5.13 herein, COMSAT will file the Registration Statement with the SEC and shall use all reasonable efforts, including the filing of amendments with respect thereto, to have the Registration Statement declared effective by the SEC, and to maintain the effectiveness of the Registration Statement through the Effective Date, including the filing of any post-effective amendments thereto as may reasonably be requested by the SEC staff or as otherwise required by the Securities Act. COMSAT shall also take any action required to be taken under state \"Blue Sky\" or securities laws in connection with the offering of the COMSAT Stock to the RSI shareholders and the issuance of the COMSAT Stock pursuant to the Merger.\nSection 5.3 Affiliates' Letters. As soon as practicable after the date hereof, RSI shall deliver to COMSAT a list of names and addresses of those persons who are, to the knowledge of RSI, reasonably anticipated to be at the time of RSI's special meeting of stockholders convened pursuant to Section 5.1 hereof, \"affiliates\" of RSI within the meaning of Rule 145 (each such person, together with the persons identified below, being hereinafter referred to as an \"Affiliate\") promulgated under the Securities Act (\"Rule 145\"). RSI shall use its best efforts to provide COMSAT such information and documents as COMSAT shall reasonably request for purposes of reviewing such list. There shall be added to such list the names and addresses of any other person (within the meaning of Rule 145) which COMSAT reasonably identifies (by written notice to RSI within three business days after COMSAT's receipt of such list) as being a person who may be deemed to be an Affiliate of RSI within the meaning of Rule 145; provided, however, that no such person\nidentified by COMSAT shall be added to the list of Affiliates of RSI if COMSAT shall receive from RSI, on or before the Effective Date, an opinion of counsel reasonably satisfactory to COMSAT to the effect that such person is not an Affiliate. RSI shall use its best efforts to deliver or cause to be delivered to COMSAT, at least 30 days prior to the anticipated date of RSI's special meeting, from each of the Affiliates of RSI identified in the foregoing list (as the same may be supplemented as aforesaid), a letter dated as of the Effective Date in the form of Exhibit E attached hereto.\nSection 5.4 Acquisition Proposals. RSI shall not (nor will it permit any of its officers, directors, agents or affiliates to) directly or indirectly (i) solicit, encourage, initiate or participate in any negotiations or discussions with respect to any offer or proposal to acquire all or substantially all of its business and properties or capital stock, whether by merger, purchase of assets, tender offer or otherwise, or (ii) except as contemplated by this Agreement disclose any information not customarily disclosed to any person concerning its business and properties, afford to any person or entity access to its properties, books or records or otherwise assist or encourage any person or entity in connection with any of the activities referred to in clause (i) above; unless in the case of either clause (i) or (ii) above, RSI shall have received a firm written offer relating to such transaction, not conditioned upon financing, from a reputable buyer, which offer, in the written opinion of Alex. Brown, RSI's financial advisers, appears to be on terms financially superior to those offered by the transactions contemplated by this Agreement and which, in the written opinion of legal counsel to RSI reasonably acceptable to COMSAT, RSI's Board of Directors is legally obligated to consider by principles of fiduciary duty to shareholders under the Nevada Corporation Law.\nSection 5.5 HSR Act Filings. COMSAT and RSI shall promptly make their respective filings, and shall thereafter promptly make any required submissions or responses to second requests for information, under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, 15 U.S.C. section 18a (the \"HSR Act\"), with respect to the Merger and shall cooperate with each other with respect to the foregoing.\nSection 5.6 Consents. Each of COMSAT and RSI agrees to use all reasonable efforts expeditiously to (i) obtain all actions, non-actions, consents, authorizations, orders and approvals from Federal, state, local and other governmental and regulatory bodies, and from third parties, as may be required in connection with, and waivers of any violations, breaches, defaults, accelerations, terminations or Encumbrances that may be caused by, the consummation of the Merger or the other transactions contemplated by this Agreement and the Merger, including the facilities clearance requirements of the Defense Investigative Service of the United States Department of Defense (\"DIS\"), as set forth in the DIS Industrial Security Regulation (DOD 5220.22-4) and the DIS Industrial Security Manual (DOD 5220.22-M), as may be amended from time to time, and (ii) resolve favorably any action, suit, proceeding or investigation which shall have been instituted or which a governmental agency shall have indicated its intention to institute which could lead to an order making the Merger unlawful.\nSection 5.7 Interim Operations of RSI. During the period from the date of this Agreement through the Effective Date, RSI shall operate its businesses only in the usual and ordinary course and consistent with past practice and shall use all reasonable efforts to (i) preserve intact its business organization and goodwill in all material respects, (ii) keep available the services of its key officers and employees and (iii) maintain its relationships with significant customers, suppliers, distributors and others having significant business relationships with it, and, subject to the provisions of this Agreement, except as mutually agreed to in writing by COMSAT, RSI shall not (A) amend or otherwise change its Restated Articles of Incorporation or Bylaws; (B) other than pursuant to outstanding option or other agreements or commitments existing at June 30, 1993, issue, sell or authorize for issuance or sale, shares of any class of its securities (including, without limitation, by way of stock split or dividend) or any subscriptions, options, warrants, rights, convertible securities or other agreements or commitments of any character obligating it or any of its subsidiaries to issue such securities, or directly or indirectly redeem, purchase or otherwise acquire any of its securities; (C) declare, set aside, make or pay any dividend or other distribution (whether in cash, stock or property) with respect to its capital stock other than its regular semi-annual cash dividends, which in each case shall not be greater than the highest semi-annual cash dividend paid to its shareholders during its fiscal year ended June 30, 1993; (D) make any acquisitions or any dispositions other than in the ordinary course of business; (E) guarantee employment to or commit to retain any Employee after the Closing Date; (F) take any action that would cause the Merger not to qualify as a reorganization within the meaning of Section 368 of the Code; or (G) take any action that could result in the Merger not being accounted for by the pooling of interests method for financial reporting purposes.\nSection 5.8 Interim Operations of COMSAT. Commencing from the date of this Agreement and through the Effective Date and thereafter, COMSAT shall not (i) take any action that would cause the Merger not to qualify as a reorganization within the meaning of Section 368 of the Code, or (ii) take any action that could result in the Merger not being accounted for by the pooling of interests method for financial reporting purposes.\nSection 5.9 Access. Subject to reasonable notice and as permitted by law, RSI shall afford to COMSAT and its accountants, counsel and other agents and representatives full access during normal business hours throughout the period prior to the Effective Date to all of its properties, books, contracts, commitments and records and, during such period, RSI shall furnish promptly to COMSAT and its representatives (i) a copy of each report, schedule and other document filed or received by it pursuant to the requirements of Federal or state securities laws, and (ii) access to all other information concerning its business, properties and personnel as COMSAT may reasonably request, provided that no investigation pursuant to this Section 5.9 shall affect or be deemed to modify any representation or warranty contained herein or the conditions to the obligations of the parties to consummate the Merger. Without limiting the generality of the foregoing, RSI shall permit COMSAT and its representatives to conduct a \"Phase I\" and \"Phase II\" environmental audit on properties owned or leased by RSI or any\nRSI Subsidiary, including the taking of soil samples and the sinking of monitoring wells at COMSAT's expense, and will cooperate with COMSAT and its representatives in any environmental investigation it or they reasonably deem appropriate in the circumstances. RSI shall promptly upon request provide COMSAT and CTS access to a complete and correct copy of each written agreement or other instrument, together with all amendments or clarifications thereto, and a true and complete summary of the terms and conditions of each oral agreement, identified in the Disclosure Letter pursuant to Subsection 3.12.1 or relied upon by RSI in compiling and disclosing its backlog pursuant to Subsection 3.8.1. If access is restricted due to a term in the agreement or by applicable law or regulation, RSI shall use all reasonable efforts to secure consent from the other party(ies) to the Agreement to provide such access prior to Closing with sufficient time for COMSAT and CTS review. COMSAT will treat the documents and other material and information referred to in this Section 5.9 which constitute \"Confidential Information\" as defined in the Confidentiality Agreement between COMSAT and RSI dated January 16, 1994 (the \"Confidentiality Agreement\") as \"Confidential Information\" in accordance with the terms of the Confidentiality Agreement. For purposes of this Agreement, material and information supplied in connection with a \"Phase II\" environmental audit shall be treated as \"Confidential Information.\"\nSection 5.10 RSI Options.\n5.10.1 No Acceleration. RSI shall not, from the date hereof to the close of business on the Effective Date, take any action to accelerate or agree or commit to accelerate the vesting of any options or rights to acquire RSI Stock (the \"RSI Options\"); provided however, that any unvested RSI Options which shall automatically vest on or prior to the Closing Date in accordance with the terms by which options were granted, and without any further action on the part of RSI, shall so vest and become exercisable in accordance with such terms.\n5.10.2 Conversion to COMSAT Options. At the close of business on the Effective Date, each outstanding RSI Option shall be converted into an option to acquire that number of shares of COMSAT Stock in an amount and at an exercise price determined as provided below and otherwise having the same duration and other terms as the original RSI Option:\n(a) The number of shares of COMSAT Stock to be subject to the new option shall be equal to the product of the number of shares of RSI Stock subject to the original RSI Option times the Conversion Fraction; provided that any fractional shares resulting from such multiplication shall be rounded down to the nearest share; and\n(b) The exercise price per share for COMSAT Stock under the new option shall be equal to the product of the per share exercise price for RSI Stock under the original RSI Option times the number, rounded to the nearest thousandth,\nobtained by dividing one (1) by the Conversion Fraction; provided that such exercise price shall be rounded up to the nearest cent.\n5.10.3 Plans and Registration. The Board of Directors of COMSAT, or the appropriate committee thereof, shall, under the terms of the COMSAT 1990 Key Employee Stock Plan, cause the options converted pursuant to Subsection 5.10.2 herein, other than any RSI Option held by directors of RSI, to be assumed under such plan, and COMSAT shall, if such shares are not otherwise registered, file a registration statement on Form S-8 (or any successor form thereto) with respect to the shares of COMSAT Stock underlying such options. COMSAT shall, if reasonably required to permit resale without restrictions other than those contemplated by Section 5.3, file a registration statement on Form S-8 (or any successor form thereto) with respect to shares of COMSAT Stock underlying RSI Options held by directors of RSI.\nSection 5.11 NYSE Listing. COMSAT shall use its best efforts to obtain, prior to the Effective Date, approval for listing on the New York Stock Exchange, upon official notice of issuance, of the COMSAT Stock to be issued pursuant to the Merger.\nSection 5.12 Disclosure Letter. RSI shall deliver to COMSAT an update of the Disclosure Letter prior to Closing with time sufficient for COMSAT's and CTS's review.\nSection 5.13 Interim Review. COMSAT may, in its sole discretion and at its expense, retain Deloitte & Touche to conduct a review of the consolidated financial statements of RSI at December 31, 1993. RSI shall cooperate in any such review and shall use its best efforts to cause such review to be completed prior to the filing by COMSAT of the Registration Statement with the SEC. COMSAT shall be under no obligation to file the Registration Statement with the SEC unless and until such review has been completed.\nSection 5.14 Confidentiality. RSI will treat all documents and other material and information furnished to it by COMSAT which constitute \"Confidential Information\" as defined in the Confidentiality Agreement as \"Confidential Information\" in accordance with the terms of the Confidentiality Agreement.\nSection 5.15 Notice. COMSAT agrees to notify RSI promptly upon COMSAT, CTS or its authorized representatives having received actual knowledge, as part of COMSAT's due diligence review of RSI, of a material breach of an RSI representation or warranty made herein, to the extent RSI has not already disclosed such material breach to COMSAT or the material breach is otherwise open and notorious.\nSection 5.16 ESOP; Certain Benefits. Simultaneously with the execution and delivery of this Agreement, COMSAT is\nexecuting and delivering to the Board of Directors of RSI the letter attached hereto as Exhibit F concerning the RSI Employee Stock Ownership Plan and certain other benefits for the employees and directors of RSI.\nSection 5.17 Further Assurances. Each of the parties hereto agrees to use all reasonable efforts to take, or cause to be taken, all action and to do, or cause to be done, all things necessary, proper or advisable under applicable laws and regulations expeditiously to consummate and make effective the Merger and the other transactions contemplated by this Agreement.\nARTICLE VI CONDITIONS PRECEDENT TO OBLIGATIONS OF COMSAT AND CTS\nSection 6.1 Conditions. The obligations of COMSAT and CTS to consummate the Merger under this Agreement shall be subject to the fulfillment, to their reasonable satisfaction, on or prior to the Closing Date, of all of the following conditions precedent:\n6.1.1 Disclosure Letter. As provided under Section 5.12 herein, the Disclosure Letter shall have been updated to the date closest as practicable to the Closing Date and shall have been delivered with time sufficient for COMSAT's and CTS's review.\n6.1.2 Absence of Changes. The representations and warranties contained in Subsections 3.5.2 and 3.16.4 herein shall be true and correct on the Closing Date. The Disclosure Letter schedule referred to in the penultimate sentence in Subsection 3.8.1 shall show at the Closing Date an aggregate contract backlog for RSI in all categories of at least $118,500,000 as required by Subsection 3.8.1.\n6.1.3 No Adverse Facts Revealed. No audit, investigation or due diligence review by COMSAT or its representatives of RSI with respect to the representations and warranties contained in Article III, shall have revealed in the aggregate liabilities of RSI not previously disclosed as of the date hereof (whether then existing or arising after the date hereof) which exceed the product of five percent (5%) multiplied by (i) $18.25 and (ii) the number of shares of RSI common stock issued and outstanding on the date of this Agreement.\n6.1.4 HSR Act Waiting Period. All waiting periods under the HSR Act with respect to the Merger shall have been terminated or expired.\n6.1.5 Performance by RSI. RSI shall have performed and complied in all material respects with all agreements, covenants, obligations and conditions required by this Agreement to be performed or complied with by RSI on or before the Closing Date.\n6.1.6 Obtaining of DIS Consents and Approvals. RSI shall have obtained and delivered to COMSAT all necessary consents, approvals or waivers on or prior to the Closing Date as required pursuant to the DIS Industrial Security Regulation, DOD 5220.22-R, and the DIS Industrial Security Manual DOD 5220.22-M (as either may be amended from time to time), for the purpose of retaining any necessary facilities clearances and\/or personnel clearances as the case may be after the Closing Date.\n6.1.7 Obtaining of Consents and Approvals. RSI shall have executed and delivered to COMSAT and CTS, or shall have caused to be executed and delivered, any consents, waivers, approvals, permits, licenses or authorizations which, if not obtained on or prior to the Closing Date, would have a material adverse effect on the Surviving Corporation's ability to conduct business as conducted by RSI on the Closing Date.\n6.1.8 Absence of Litigation. There shall not be in effect any order enjoining or restraining the transactions contemplated by this Agreement, and there shall not be instituted or pending any action or proceeding before any Federal, state or foreign court or governmental agency or other regulatory or administrative agency or instrumentality challenging the Merger or the issuance of the COMSAT Stock in connection therewith, or otherwise seeking to restrain or prohibit consummation of the transactions contemplated by this Agreement, or seeking to impose any material limitations on any provision of this Agreement.\n6.1.9 Authorization of Merger. The requisite shareholders of RSI shall have duly voted their shares approving this Agreement and authorizing the Merger.\n6.1.10 Pooling. COMSAT shall have received an opinion from Deloitte & Touche, dated the Closing Date, that the Merger as contemplated by this Agreement will be accounted for as a pooling of interests for financial reporting purposes.\n6.1.11 Employment Agreement. RSI shall have used its best efforts to cause, on or prior to the Closing Date, Richard E. Thomas to execute and deliver an Employment Agreement (the \"Employment Agreement\") in substantially the form of Exhibit G attached hereto.\n6.1.12 RSI Officers' Certificates. COMSAT and CTS shall have received certificates, dated the Closing Date, executed on behalf of RSI by appropriate officers, stating that the representations and warranties set forth in Article III hereof are true and correct on the Closing Date (unless specified to be made as of another date, in which case on such specified date) in all material respects and that the conditions set forth in Sections 6.1.1 through 6.1.9.\n6.1.13 Comfort Letter. COMSAT and CTS shall have received a letter, dated as of a date not more than two days prior to the date that the Registration Statement is declared effective, and shall have received a subsequent letter, dated as of a date not more than two days prior to the Effective Date, from Deloitte & Touche, independent auditors of RSI, addressed to COMSAT and CTS, to the effect that (i) they are independent accountants within the meaning of the Securities Act and the Exchange Act; (ii) in their opinion, the financial statements of RSI included in the Registration Statement comply as to form in all material respects with the applicable accounting requirements of the Securities Act and the Exchange Act, (iii) on the basis of limited procedures specified in their letter, which need not constitute an audit, nothing has come to their attention which would give them reason to believe that (A) since December 31, 1993, to the date of such letter there has been any increase in the outstanding capital stock or rights, securities, options or obligations exercisable for or convertible into shares of capital stock, or in the consolidated indebtedness, of RSI, (B) there has been any change in specified balance sheet items of RSI since the date of the most recent financial statements included in the Registration Statement and the Proxy Statement or (C) since December 31, 1993 to the date of such letter, there has been any decrease in the net income of RSI as compared with the corresponding period for the prior year, except with respect to each of clauses (A), (B) and (C) for any such increase, change or decrease referred to in or contemplated by the Registration Statement and the Proxy Statement or specified in such letter.\n6.1.14 Opinion of RSI's Counsel. RSI shall have furnished COMSAT and CTS with an opinion of Shaw, Pittman, Potts & Trowbridge, special counsel for RSI, dated the Closing Date, substantially in the form of Exhibit H.\n6.1.15 Other Documents. The execution and delivery to COMSAT and CTS by RSI of such other certificates, documents and instruments as COMSAT may reasonably request.\nSection 6.2 Waiver. COMSAT and CTS may, at their sole discretion, waive in writing fulfillment of any or all of the conditions set forth in Section 6.1 of this Agreement, provided that such waiver granted by COMSAT and CTS pursuant to this Section 6.2 shall have no effect upon or as against any of the other conditions not so waived. To the extent that at the Closing RSI delivers to COMSAT a written notice specifying in reasonable detail the failure of any of such conditions or the breach by RSI of any of the representations or warranties of RSI herein, and nevertheless COMSAT proceeds with the Closing, COMSAT shall be deemed to have waived for all purposes any rights or remedies it may have against RSI or, except in the case of fraud or gross negligence, any of its directors, officers or employees by reason of the failure of any such conditions or the breach of any such representations or warranties to the extent described in such notice. Following the Closing, no claims for breach of any representations, warranties or agreements shall be brought against any director or officer, or any employee listed in the Disclosure Letter as providing \"knowledge\" with respect to RSI's\nrepresentations and warranties as of the Closing Date as referenced in clause (ii) of the last sentence in the introductory paragraph in Article III, if and to the extent such person did not have actual knowledge or had no reason to know (in light of circumstantial evidence made available to them on or prior to Closing) of the facts material to such breach of any representation, warranty or agreement.\nARTICLE VII CONDITIONS PRECEDENT TO OBLIGATIONS OF RSI\nSection 7.1 Conditions. The obligations of RSI to consummate the Merger under this Agreement herein shall be subject to the fulfillment, to its reasonable satisfaction, on or prior to the Closing Date, of all of the following conditions precedent:\n7.1.1 HSR Act Waiting Period. All waiting periods under the HSR Act with respect to the Merger shall have been terminated or expired.\n7.1.2 Performance by COMSAT and CTS. Each of COMSAT and CTS shall have performed and complied in all material respects with all agreements, covenants, obligations and condi-\ntions required by this Agreement to be performed or complied with by COMSAT and CTS on or before the Closing Date.\n7.1.3 Obtaining of DIS Consents and Approvals. COMSAT shall have obtained and delivered to RSI all necessary consents, approvals or waivers on or prior to the Closing Date as required pursuant to the DIS Industrial Security Regulation. DOD 5220.22-R, and the DIS Industrial Security Manual DOD 5220.22-M (as either may be amended from time to time), for the purpose of retaining any necessary facilities clearances and\/or personnel clearances as the case may be after the Closing Date.\n7.1.4 Obtaining of Consents and Approvals. COMSAT and CTS shall have executed and delivered to RSI, or shall have caused to be executed and delivered, any consents, waivers, approvals, permits, licenses or authorizations which, if not obtained on or prior to the Closing Date, would have a material adverse effect on the Surviving Corporation's ability to conduct business as conducted by RSI on the Closing Date.\n7.1.5 Pooling. RSI shall have received an opinion from Deloitte & Touche, dated the Closing Date, that the Merger as contemplated by this Agreement will be accounted for as a pooling of interests for financial reporting purposes.\n7.1.6 Absence of Litigation. There shall not be in effect any order enjoining or restraining the transactions contemplated by this Agreement.\n7.1.7 Registration Statement; NYSE Listing. The Registration Statement shall have become effective under the Securities Act prior to the first mailing of the Proxy Statement to shareholders of RSI and the Registration Statement shall, at the date of the meeting of RSI shareholders called pursuant to Section 5.1 of this Agreement and at all times thereafter to and including the Effective Date, have been effective and no stop order suspending the effectiveness thereof shall have been issued during such period and not withdrawn and no stop order shall be pending at the Effective Date. The COMSAT Stock to be issued pursuant to the Merger shall have been approved for listing on the New York Stock Exchange, upon official notice of issuance.\n7.1.8 Authorization of Merger. The requisite shareholders of RSI shall have duly voted their shares approving this Agreement and authorizing the Merger.\n7.1.9 Officers' Certificates. RSI shall have received certificates, dated the Closing Date, executed on behalf of COMSAT by appropriate officers stating that the representations and warranties set forth in Article IV hereof are true and correct on the Closing Date (unless specified to be made as of another date, in which case on such specified date) in all material respects and that the conditions set forth in Sections 7.1.1 through 7.1.8 hereof have been satisfied.\n7.1.10 Other Documents. The execution and delivery to RSI by COMSAT and CTS of such other certificates, documents and instruments as RSI may reasonably request.\n7.1.11 Opinion of COMSAT's Counsel. COMSAT shall have furnished RSI with the opinion of Crowell & Moring, special counsel for COMSAT, dated the Closing Date, substantially in the form of Exhibit I.\nSection 7.2 Waiver. RSI may, in its sole discretion, waive in writing fulfillment of any or all of the conditions set forth in Section 7.1 of this Agreement, provided that such waiver granted pursuant to this Section 7.2 shall not constitute a waiver by RSI of any other conditions not so waived.\nARTICLE VIII TERMINATION\nSection 8.1 Termination Events. Subject to the provisions of Section 8.2, this Agreement may, by written notice given at or prior to the Closing (in the manner provided by Section 9.9 herein) be terminated and abandoned only as follows:\n8.1.1 Breach. By either COMSAT or RSI upon written notice if a material default or breach shall be made by the other, with respect to the due and timely performance of any\nof the other party's respective covenants and agreements contained herein, or with respect to the due compliance with any of the other party's respective representations and warranties contained in Article III or IV herein, as applicable, and such default cannot be cured prior to Closing and has not been waived;\n8.1.2 Mutual Consent. By mutual written consent of the parties hereto; or\n8.1.3 Failure of Conditions to Close. By either COMSAT or RSI, if by reason of failure of their respective conditions to close contained in Article VI or VII herein, as applicable, and such conditions have not been satisfied or waived by December 31, 1994, or such later date as may be agreed upon by the parties hereto, provided that the right to terminate this Agreement under this Subsection 8.1.3 shall not be available to a party whose failure to fulfill any obligation or perform any covenant under this Agreement has been the cause of or resulted in the failure of any of the conditions to close of the other party hereto by such date.\nSection 8.2 Effect of Termination. In the event this Agreement is terminated pursuant to Section 8.1 herein, all further rights and obligations of the parties hereunder shall terminate, provided that if RSI at any time prior to December 31, 1994 is acquired by, merges, effectuates a business combination with, or sells substantially all of its assets to any person or entity not controlled by COMSAT, or agrees to do any of the foregoing, RSI shall immediately upon such action or agreement pay to COMSAT Five Million Dollars ($5,000,000), plus all of COMSAT's costs, fees and expenses incurred in connection with this Agreement and the Merger as contemplated hereby, including fees and expenses of its accountants, investment advisers and counsel, and provided further that the total payment RSI shall pay to COMSAT immediately upon such action or agreement shall not in any event exceed Seven Million, Five Hundred Thousand Dollars ($7,500,000).\nSection 8.3 Fees and Expenses; Damages. Except as otherwise provided in Section 8.2 herein, in the event this Agreement is terminated for any reason and the Merger is not consummated each party shall be responsible for its own costs, fees and expenses, including fees and expenses of its accountants, investment advisers and counsel, provided, however, that if the termination is caused by the breach of COMSAT and CTS on the one hand, or the breach of RSI on the other hand, the breaching party(ies) shall pay to the non-breaching party(ies) as liquidated damages (and as its sole and exclusive remedy) the actual costs and expenses of the non-breaching party(ies), including the fees and expenses of its accountants, investment advisers and counsel, not to exceed Two Million Five Hundred Thousand Dollars ($2,500,000).\nARTICLE IX MISCELLANEOUS\nSection 9.1 Construction.\n9.1.1 Words. All references in this Agreement to the singular shall include the plural where appli-\ncable, and all references to gender shall include both genders and neuter.\n9.1.2 Cross-References. References in this Agreement to any Article shall include all Sections, Subsections and Paragraphs in such Article; references in this Agreement to any Section shall include all Subsections and Paragraphs in such Section; and references in this Agreement to any Subsection shall include all Paragraphs in such Subsection.\n9.1.3 No Presumption. In interpreting any provision of this Agreement no presumption shall be drawn against the party drafting the provision.\n9.1.4 Headings. Article, Section and Subsection headings of this Agreement are for convenience only and are not to be construed as part of this Agreement or as defining or limiting in any way the scope or intent of the provisions hereof.\n9.1.5 Exhibits. Exhibits and the Disclosure Letter referred to herein are hereby incorporated into and made a part of this Agreement. Any material disclosed in any part of the Disclosure Letter shall be deemed disclosed for purposes of all of the representations and warranties of RSI contained in Article III herein.\n9.1.6 Time. Time shall be of the essence in the performance of each party's respective obligations under this Agreement.\nSection 9.2 Severability. If any part of this Agreement for any reason shall be declared invalid, such decision shall not affect the validity of any remaining portion, which shall remain in full force and effect.\nSection 9.3 Further Assurances. Each party shall at its own expense furnish, execute and deliver such documents, instru-\nments, certificates, notices or other further assurances as the other party may reasonably require as necessary or appropriate to effect the purposes of this Agreement or to confirm the rights created or arising hereunder.\nSection 9.4 Benefit. Unless otherwise specified herein, no person who is not a party to this Agreement shall have any rights\nor derive any benefit hereunder. No provision of this Agreement except Exhibit G shall constitute an agreement of employment.\nSection 9.5 Scope and Modification. This Agreement, the Stock Option Agreement, and Sections 1 through 4 and Section 7 of the Confidentiality Agreement, constitute the entire agreement between the parties and supersede all prior oral or written agreements (including the Confidentiality Agreement except as specifically referenced in this Section 9.5) or understandings of the parties with regard to the subject matter hereof. No interpretation, modification, termination or waiver of any provision hereof shall be binding upon a party unless in writing and executed by the other parties. No modification, waiver, termination, rescission, discharge or cancellation of any right or claim under this Agreement shall affect the right of any party hereto to enforce any other claim or right hereunder.\nSection 9.6 Delays or Omissions. Except as expressly pro- vided in this Agreement, no delay or omission to exercise any right, power or remedy accruing to a party hereunder, upon any breach or default of any party under this Agreement, shall impair any such right, power or remedy, nor shall it be construed to be a waiver of any such breach or default, or an acquiescence therein, or a waiver of or acquiescence in any similar breach or default thereafter occurring; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default theretofore or thereafter occurring.\nSection 9.7 Successors and Assigns. This Agreement may not be assigned by any party without the written consent of the other parties. Except as otherwise expressly provided herein, the provisions of this Agreement shall inure to the benefit of, and be binding upon, the successors and permitted assigns of the parties hereto.\nSection 9.8 Governing Law. The terms and provisions of this Agreement shall be interpreted in accordance with and gov-\nerned by the laws of the State of Maryland and the United States of America, without giving effect to the doctrine of conflict of laws.\nSection 9.9 Notices. Any notice under this Agreement shall be in writing and shall be delivered by personal service or by United States certified or registered mail, with postage prepaid, or by facsimile or overnight express courier, addressed to a party at the address set forth beneath its name, below, or at such other address as one party may give written notice of to the other parties.\n(a) If to COMSAT or CTS:\nC. Thomas Faulders, III Vice President and Chief Financial Officer COMSAT Corporation 6560 Rock Spring Drive Bethesda, MD 20817 Fax: (301) 214-7131\nWith a copy to:\nWarren Y. Zeger, Esq. Vice President and General Counsel COMSAT Corporation 6560 Rock Spring Drive Bethesda, MD 20817 Fax: (301) 214-7128\nAnd to:\nWilliam P. O'Neill, Esq. Crowell & Moring 1001 Pennsylvania Avenue, N.W. Washington, D.C. 20004-2505. Fax: (202) 628-5116\n(b) If to RSI:\nRichard E. Thomas Chairman, Chief Executive Officer and President Radiation Systems Inc. 1501 Moran Road Sterling, VA 20166 Fax: (703) 450-2701\nWith a copy to:\nJohn L. Sullivan, III, Esq. Shaw, Pittman, Potts & Trowbridge 1501 Farm Credit Drive Suite 4400 McLean, VA 22102-5000 Fax: (703) 821-2397\nAnd to:\nLynn A. Soukup, Esq. Shaw, Pittman, Potts & Trowbridge 2300 N Street, N.W. Washington, D.C. 20037-1128 Fax: (202) 663-8007\nThe designation of the person(s) to be so notified, or the address or facsimile of such person(s) for the purposes of such notice, may be changed from time to time by means of a similar notice. Copies to counsel shall not constitute notice.\nSection 9.10 Duplicates. This Agreement may be executed in one or more counterparts, each of which shall constitute an original document.\nSection 9.11 Cooperation. The parties shall consult and cooperate with one another regarding, and shall use their respective reasonable efforts to seek and obtain, the approvals, consents and other documents contemplated by this Agreement, and shall use their respective best efforts to cause the statutory and other conditions to their respective obligations hereunder to be satisfied.\nSection 9.12 Public Announcements. RSI and COMSAT agree that they will not issue any press release or otherwise make any public statement or respond to any press inquiry with respect to this Agreement or the transactions contemplated hereby, without the prior approval of the other party, except as may be required by law; if any such disclosure is required by law the disclosing party shall use its best efforts to give notice and an opportunity to consult to the other party prior to such required disclosure.\nEXECUTION AND DELIVERY\nIN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement with the express intent that it be effective, legal and binding as of the date and year first-above written.\nCOMSAT CORPORATION\nBy: \/s\/ Bruce L. Crockett ----------------------- Name: Bruce L. Crockett Title: President\nCTS AMERICA, INC.\nBy: \/s\/ C. Thomas Faulders, III ----------------------------- Name: C. Thomas Faulders, III Title: President\nRADIATION SYSTEMS, INC.\nBy: \/s\/ Richard E. Thomas ------------------------- Name: Richard E. Thomas Title: Chairman\nEXHIBIT 2(b)\nSTOCK OPTION AGREEMENT\nSTOCK OPTION AGREEMENT dated as of January 30, 1994, by and between COMSAT CORPORATION, a District of Columbia corporation (\"COMSAT\"), and RADIATION SYSTEMS, INC., a Nevada corporation (the \"Company\").\nWHEREAS, the Company, COMSAT and CTS America, Inc., a Delaware corporation and a wholly owned subsidiary of COMSAT (\"CTS\"), propose to enter into an Agreement and Plan of Merger, dated as of the date hereof (the \"Merger Agreement\"), which provides, among other things, upon the terms and subject to the conditions thereof, that the Company will be merged with and into CTS, with CTS to be the surviving corporation, and that each outstanding share of common stock, par value $1.00 per share of the Company (the \"Company Common Stock\") will be converted into the right to receive that fraction of a share, rounded to the nearest thousandth (the \"Conversion Fraction\"), of common stock, without par value, of COMSAT (the \"COMSAT Stock\") determined by dividing Eighteen Dollars and twenty- five cents ($18.25) by the average closing price of a whole share of COMSAT Stock on the New York Stock Exchange Composite Tape for the twenty (20) Trading Days ending with the Trading Day which precedes the Closing Date by five (5) Trading Days (a \"Trading Day\" being any day on which the New York Stock Exchange is open for business and on which shares of COMSAT Stock are traded on that Exchange), provided that the Conversion Fraction shall not be less than .638 and shall not be greater than .780; and\nWHEREAS, as a condition to its willingness to enter into the Merger Agreement, COMSAT has required that the Company agree, and in order to induce COMSAT to enter into the Merger Agreement the Company has agreed, to grant the COMSAT Option (as hereinafter defined).\nNOW THEREFORE, in consideration of the foregoing and the mutual covenants and agreements set forth herein and in the Merger Agreement, the parties hereto agree as follows:\n1. Grant of Option. The Company hereby grants to COMSAT an unconditional, irrevocable option (the \"COMSAT Option\") to purchase a number of shares of Company Common Stock equal to Fifteen Percent (15%) of the shares of Company Common Stock outstanding on the date hereof (the \"Option Shares\") at an exercise price of Eighteen Dollars and twenty-five cents ($18.25) per Option Share (the \"COMSAT Option Exercise Price\").\n2. Exercise of Option. Provided that COMSAT or CTS is not then in material breach of its obligations under the Merger Agreement, COMSAT may exercise the COMSAT Option, in whole or in part, at any time, in the event that any corporation, partnership, person, other entity or group (as defined in Section 13(d)(3) of the Securities Exchange Act of 1934, as amended (the \"Exchange Act\")) (collectively, a \"Person\"), other\nthan COMSAT or any of its subsidiaries, (i) acquires beneficial ownership (as such term is defined in Rule 13d-3 under the Exchange Act) of at least Fifteen Percent (15%) of the outstanding shares of Company Common Stock, (ii) enters into an agreement with the Company or any of its material subsidiaries to merge or consolidate with the Company or any of its subsidiaries, or to purchase all or substantially all of the consolidated assets of the Company (or effects any such merger, consolidation or purchase) and the Merger Agreement is terminated, or (iii) has commenced or commences (as such terms are defined in Rule 14d-2 under the Exchange Act) a tender or exchange offer for at least Fifteen Percent (15%) of the outstanding shares of Company Common Stock that is not opposed by the Company and the Company is no longer supporting the Merger Agreement and the transactions contemplated thereby. In the event COMSAT wishes to exercise the COMSAT Option for some or all of the Option Shares, COMSAT shall send a written notice to the Company stating the number of Option Shares that it wishes to purchase and setting forth a place and date not earlier than one nor, subject to Section 8 herein, later than ten business days from the date such notice is given for the closing of such purchase (a \"COMSAT Option Closing\").\n3. Payment and Delivery of Certificates. (a) At a COMSAT Option Closing, COMSAT will make payment to the Company of the aggregate price for the Option Shares being purchased at the COMSAT Option Closing by delivery of immediately available funds to the Company, and the Company will deliver to COMSAT a certificate or certificates representing the Option Shares being so purchased, registered in the name of COMSAT.\n(b) Certificates for the Option Shares delivered at each COMSAT Option Closing shall be endorsed with a restrictive legend which shall read substantially as follows:\nTHE TRANSFER OF THE STOCK REPRESENTED BY THIS CERTIFICATE IS SUBJECT TO RESTRICTIONS ARISING UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND PURSUANT TO THE TERMS OF A STOCK OPTION AGREEMENT DATED AS OF JANUARY __, 1994. A COPY OF SUCH AGREEMENT WILL BE PROVIDED TO THE HOLDER HEREOF WITHOUT CHARGE UPON RECEIPT BY THE ISSUER OF A WRITTEN REQUEST THEREFORE.\nIt is understood and agreed that the above legend shall be removed by delivery of substitute certificate(s) without such legend if COMSAT shall have delivered to the Company a copy of a letter from the staff of the SEC, or an opinion of counsel in form and substance reasonably satisfactory to the Company and its counsel, to the effect that such legend is not required for purposes of the Securities Act.\n4. Option Value. In the event that the COMSAT Option becomes exercisable pursuant to paragraph 2 hereof, and COMSAT so requests in lieu of exercise of the COMSAT Option, then the Company shall promptly,\nand in no event later than five (5) business days after receipt of such request, pay to COMSAT an amount in cash (the \"COMSAT Option Value\") equal to the product of (x) the excess, if any, of (A) the highest price per share paid or proposed to be paid in connection with any transaction specified in Section 2 or Section 10(b)(ii), as applicable, herein for any shares of Company Common Stock, or the greatest aggregate consideration paid or proposed to be paid in connection with any transaction specified in Section 2 or Section 10(b)(ii), as applicable, herein for the purchase of assets of the Company divided by the number of shares of Company Common Stock then outstanding, as the case may be (the value of any such price or consideration other than cash to be determined, in the case of consideration with a readily ascertainable market value, by reference to such market value and, in the case of any other consideration, by agreement in good faith between COMSAT and the Company), over (B) the COMSAT Option Exercise Price, multiplied by (y) the total number of shares still subject to the COMSAT Option. Such payment shall be made by delivery of immediately available funds to COMSAT and shall extinguish all other rights of COMSAT under this Agreement.\n5. Representations and Warranties of the Company. The Company hereby represents and warrants to COMSAT as follows:\n(a) Authority Relative to this Agreement. The Company has full corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly and validly authorized by the Board of Directors of the Company and no other corporate proceedings on the part of the Company are necessary to authorize this Agreement or to consummate the transactions so contemplated. This Agreement has been duly and validly executed and delivered by the Company and, assuming this Agreement and the Merger Agreement constitute valid and binding obligations of COMSAT, this Agreement constitutes a valid and binding agreement of the Company, enforceable against the Company in accordance with its terms.\n(b) Option Shares. The Company has taken all necessary corporate action to authorize and reserve and to permit it to issue, and at all times from the date hereof through the Termination Date (as hereinafter defined) will have reserved for issuance upon exercise of the COMSAT Option, a number of shares of Company Common Stock equal to the number of Option Shares to permit the exercise in full of the COMSAT Option, all of which shares, upon issuance pursuant hereto, shall be duly authorized, validly issued, fully paid and nonassessable, and shall be delivered free and clear of all claims, liens, encumbrances and security interests and not subject to any preemptive rights.\n6. Representations and Warranties of COMSAT. COMSAT hereby represents and warrants to the Company as follows:\n(a) Authority Relative to this Agreement. COMSAT has full corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly and validly authorized by the Board of Directors of COMSAT and no other corporate proceedings on the part of COMSAT are necessary to authorize this Agreement or to consummate the transactions so contemplated. This Agreement has been duly and validly executed and delivered by COMSAT and, assuming this Agreement and the Merger Agreement constitute valid and binding obligations of the Company, this Agreement constitutes a valid and binding agreement of COMSAT, enforceable against COMSAT in accordance with its terms.\n(b) Distribution. COMSAT will acquire the Option Shares for its own account and not with a view to any resale or distribution thereof, and will not sell the Option Shares unless such shares are registered under the Securities Act of 1933 or unless an exemption from registration is available.\n7. Adjustment Upon Changes in Capitalization. In the event of any change in the shares of Company Common Stock by reason of stock dividends, split-ups, mergers, recapitalizations, combinations, conversions, exchanges of shares or the like, the number and kind of shares of Company Common Stock subject to the COMSAT Option and the purchase price per share shall be appropriately adjusted.\n8. Consents. The Company will use its best efforts to obtain any approvals and consents, and otherwise to satisfy any requirements, of all governmental authorities and laws necessary to the consummation of the transactions contemplated by this Agreement. The consummation of such transactions shall be subject to, and, if delayed pursuant to this Section 8, shall occur promptly after (whether before or after the Termination Date) the receipt of such necessary approvals or consents and satisfaction of such requirements.\n9. Registration Rights; Listing. The Company shall, if reasonably requested by COMSAT within three years of the first exercise of the COMSAT Option (or any portion thereof), as expeditiously as possible prepare and file a registration statement under the Securities Act regarding the offer and sale or other disposition of any or all shares of Company Common Stock or other securities that have been acquired by or are issuable to COMSAT upon exercise of the COMSAT Option in accordance with the intended method of sale or other disposition by COMSAT, and the Company shall use its best efforts to qualify such shares or other securities under any applicable state securities laws. COMSAT agrees to use all reasonable efforts to cause, and to cause any\nunderwriters of any sale or disposition to cause, any sale or other disposition pursuant to such registration statement to be effected on a widely distributed basis so that upon consummation thereof no purchaser or transferee shall own beneficially more than 5% of the then outstanding voting power of the Company. The Company shall use its best efforts to cause such registration statement to become effective, to obtain all consents or waivers of other parties that are required therefor and to keep such registration statement effective for a period not in excess of 180 days from the day such registration statement first becomes effective as may be reasonably necessary to effect such sale or other disposition. The obligations of the Company hereunder to file a registration statement and to maintain its effectiveness may be suspended for one or more periods of time not exceeding 45 days in the aggregate if the Board of Directors of the Company shall determined that the filing of such registration statement or the maintenance of its effectiveness would require disclosure of nonpublic information that would materially and adversely affect the Company. Any registration statement prepared and filed under this Section 9, and any sale covered thereby, shall be at the Company's expense except for underwriting discounts or commissions, brokers' fees and the fees and disbursements of COMSAT's counsel related thereto. COMSAT shall provide all information reasonably requested by the Company for inclusion in any registration statement to be filed hereunder. If during the time period referred to in the first sentence of this Section 9 the Company effects a registration under the Securities Act of Company Common Stock for its own account or for any other stockholders of the Company (other than on Form S-4 or Form S-8, or any successor form), it shall allow COMSAT the right to participate in such registration; provided that, if the managing underwriters of such offering advise the Company in writing that in their opinion the number of shares of Company Common Stock requested to be included in such registration exceeds the number which can be sold in such offering, the Company shall include the shares requested to be included therein by COMSAT pro rata with the shares intended to be included therein by the Company (and by no others). In connection with any registration pursuant to this Section 9, the Company and COMSAT shall provide each other and any underwriter of the offering with the customary representations, warranties, covenants, indemnification and contribution in connection with such registration. The Company will use its best efforts promptly to list on the NASDAQ National Market System or a national securities exchange, whichever is the principal trading market for the Company Common Stock on the date of exercise of the COMSAT Option, upon official notice of issuance, the Option Shares issued upon exercise of the COMSAT Option.\n10. Termination; Certain Protection.\n(a) Except as otherwise contemplated hereby, all the provisions of this Agreement shall terminate upon the date (the \"Termination Date\") which is thirty (30) days after the termination of the Merger Agreement.\n(b) In the event that (i) prior to the Termination Date any Person, other than COMSAT or any of its affiliates, shall publicly announce or communicate to the Company a proposal (A) to merge or consolidate with the Company or any of its subsidiaries, or to purchase all or substantially all of the assets of or otherwise to acquire the Company, or (B) to make any tender or exchange offer for shares of Company Common Stock and (ii) within one year after the Termination Date such Person or a related Person (x) acquires at least Fifteen Percent (15%) of the outstanding shares of Company Common Stock, (y) enters into an agreement with the Company or any of its subsidiaries to merge or consolidate with the Company or any of its subsidiaries or to purchase all or substantially all of the assets of the Company (or effects any such merger, consolidation or purchase) or (z) commences a tender offer or exchange offer for at least Fifteen Percent (15%) of the outstanding shares of Company Common Stock that is supported by the Company, then the Company shall promptly pay to COMSAT the COMSAT Option Value.\n11. Assignment. COMSAT shall not sell, assign, convey or transfer the COMSAT Option other than to any wholly owned subsidiary of COMSAT. This Agreement shall be binding upon and inure to the benefit of each party's successors and assigns.\n12. Specific Performance. The parties hereto acknowledge that damages would be an inadequate remedy for a breach of this Agreement and that the obligations of the parties hereto shall be specifically enforceable. Accordingly, it is agreed that COMSAT shall be entitled to injunctive relief to prevent breaches of this Agreement by the Company and specifically to enforce the terms and provisions hereof, in addition to any other remedy to which it may be entitled, at law or in equity.\n13. Entire Agreement. This Agreement and the Merger Agreement constitute the entire agreement among the parties with respect to the subject matter hereof and supersede all other prior agreements and understandings, both written and oral, among the parties or any of them with respect to the subject matter hereof.\n14. Validity. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provisions of this Agreement, which shall remain in full force and effect.\n15. Notices. All notices, requests, claims, demands and other communications hereunder shall be deemed to have been duly given when delivered in person, by registered or certified mail (postage prepaid, return receipt requested) or by facsimile to the respective parties at their respective addresses set forth in the Merger Agreement, or at such other address as the person to whom notice is given may have previously furnished to the others in writing in the manner set forth\nin the Merger Agreement (provided that notice of any change of address shall be effective only upon receipt thereof).\n16. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Maryland.\n17. Descriptive Headings. The descriptive headings herein are inserted for convenience of reference only and are not intended to be part of or to affect the meaning or interpretation of this Agreement.\n18. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original, but all of which shall constitute one and the same agreement.\n19. Expenses. All costs and expenses incurred in connection with the transactions contemplated by this Agreement shall be paid by the party incurring such expenses.\n20. Benefit. No person who is not a party to this Agreement shall have any rights or derive any benefit hereunder.\n21. Transfer. If COMSAT has exercised the COMSAT Option, COMSAT shall not sell, transfer, pledge, or hypothecate the Option Shares except pursuant to a bona fide third party offer (the \"Third Party Offer\"), and without first tendering the Option Shares to the Company at the price or equivalent value as that provided for in the Third Party Offer. Such tender shall be made in writing and be held open for 15 days. Notwithstanding the above, COMSAT shall have no obligation to tender the Option Shares if the Third Party Offer is made by any member or members of a group (as defined in Section 13(d)(3) of the Exchange Act) to which COMSAT is also member.\nIN WITNESS WHEREOF, each of the parties has caused this Agreement to be executed on its behalf by its officers thereunto duly authorized, all as of the day and year first above written.\nCOMSAT CORPORATION\nBy: \/s\/ Bruce L. Crockett ------------------------- Name: Bruce L. Crockett Title: President\nRADIATION SYSTEMS, INC.\nBy: \/s\/ Richard E. Thomas ------------------------- Name: Richard E. Thomas Title: Chairman\nEXHIBIT 4(a)\n__________ __________ NUMBER SHARES CS __________ __________\nTHE TRANSFERABILITY OF THESE THE TRANSFERABILITY OF THESE SHARES IS SUBJECT TO THE SHARES IS SUBJECT TO THE CONDITIONS SET FORTH ON THE CONDITIONS SET FORTH ON THE REVERSE SIDE. REVERSE SIDE.\nDOMESTIC SHARE CERTIFICATE\nSERIES [PICTURE] SERIES I I\nINCORPORATED UNDER THE SEE REVERSE FOR DISTRICT OF COLUMBIA CERTAIN DEFINITIONS BUSINESS CORPORATION ACT CUSIP 20564D 10 7\nCOMSAT CORPORATION ___________________________________________________________________________\nThis is to Certify that\nSPECIMEN\nis the owner of ___________________________________________________________________________ FULLY PAID AND NON-ASSESSABLE SHARES, WITHOUT PAR VALUE, OF SERIES I COMMON STOCK OF\nCOMSAT Corporation, transferable on the books of the Corporation by the holder hereof in person or by duly authorized attorney on surrender of this Certificate properly endorsed. This Certificate and the shares represented hereby are issued and shall be subject to the provisions of the Communications Satellite Act of 1962, the Articles of Incorporation and By- laws of the Corporation, and all amendments thereto (copies of which are on file with the Transfer Agent), to all of which the holder hereof by acceptance of this Certificate assents. This Certificate is not valid until countersigned by the Transfer Agent and registered by the Registrar. In Witness Whereof, the Corporation has caused this Certificate to be signed by its duly authorized officers and its corporate seal to be hereunto affixed.\n[CORPORATE SEAL]\nDated:\nCOUNTERSIGNED AND REGISTERED: THE BANK OF NEW YORK \\S\\ Bruce L. Crockett (NEW YORK) TRANSFER AGENT ______________________ AND REGISTRAR PRESIDENT AND CHIEF EXECUTIVE OFFICER\nBY\n\\S\\ Jerome W. Breslow ______________________ AUTHORIZED SIGNATURE VICE PRESIDENT AND SECRETARY __________________________\nAmerican Bank Note Company __________________________\n[Back of Certificate]\nThe following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations:\nTEN COM -- as tenants in common TEN ENT -- as tenants by the entireties JT TEN -- as joint tenants with right of survivorship and not as tenants in common UNIF GIFT MIN ACT -- .............. Custodian.............. (Cust) (Minor) under Uniform Gifts to Minors Act ................. (State)\nAdditional abbreviations may also be used though not in the above list.\nFor value received, __________ hereby sell, assign and transfer unto\nPLEASE INSERT SOCIAL SECURITY OR OTHER TAXPAYER IDENTIFYING NUMBER OF ASSIGNEE _____________________________\n_____________________________\n___________________________________________________________________________ PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS OF ASSIGNEE ___________________________________________________________________________\n___________________________________________________Shares of the capital stock represented by the within Certificate, and do hereby irrevocably constitute and appoint__________________________________________Attorney, to transfer the said stock on the books of the within-named Corporation with full power of substitution in the premises.\nDated,_________________________\n__________________________________________\nNOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT, OR ANY CHANGE WHATEVER.\nCOMSAT CORPORATION\nThe Corporation will furnish without charge to each shareholder who so requests a statement of the designations, preferences, restrictions, limitations and relative rights of the shares of each class of stock or series thereof which the Corporation is authorized to issue.\nRESTRICTIONS ON OWNERSHIP AND TRANSFER OF SHARES OF COMMON STOCK\nThe ownership and transfer of shares of Common Stock of the Corporation are subject to the provisions of the Communications Satellite Act of 1962 (the Act) and the Articles of Incorporation of the Corporation (the Articles). A summary of such provisions of the Act and the Articles is set forth below and is qualified by reference thereto.\nPersons Ineligible to Own Shares at Any Time. Shares of Common Stock may not at any time be owned by any of the following persons (unless such person is a communications common carrier authorized by the Federal Communications Commission to own shares of stock of the Corporation (an Authorized Carrier)): (1) a communications common carrier; (2) a subsidiary or affiliated company of a communications common carrier; (3) an officer, director or trustee of a communications common carrier or of a subsidiary or affiliated company thereof (except as provided in Sections 5.02(a) and (b) of the Articles); or (4) a person who will hold such shares as nominee of, or subject to the direction and control of, any of the foregoing. In general, the term \"communications common carrier\" includes (a) any person (other than the Corporation) engaged as a common carrier for hire, in interstate or foreign communication by wire or radio or in interstate or foreign radio transmission of energy, and (b) any person that owns or controls, or is under common control with, any such person. Persons engaged in radio broadcasting are not, insofar as so engaged, deemed to be communications common carriers.\nLimitation on Ownership of Shares of Aliens and Certain Other Alien Interests. Not more than an aggregate of 20% of the total number of shares of stock owned or held by persons other than Authorized Carriers may be owned or held by any of the following persons (collectively, Alien Persons): (1) any alien or the representative of any alien; (2) any foreign government or the representative thereof; (3) any corporation organized under the laws of any foreign government; (4) any corporation of which any officer or director is an alien or of which more than one-fifth of the capital stock is owned of record or voted by aliens or their representatives or by a foreign government or representative thereof or by any corporation organized under the laws of a foreign country; or (5) any corporation directly or indirectly controlled by any other corporation of which any officer or more than one-fourth of the directors are aliens, or of which more than one-fourth of the capital stock is owned of record or voted by aliens, their representatives, or by a foreign government or representative thereof, or by any corporation organized under the laws of a foreign country.\nLimitation on Ownership of Shares by Persons Other Than Authorized Carriers. In accordance with procedures set forth in the Articles (including the giving of notice to shareholders of record), the Board of Directors of the Corporation is authorized to establish a percentage limitation on the ownership, and the incidents of ownership such as voting, of shares of stock by any shareholder (other than an Authorized Carrier) or by any syndicate or affiliated group of shareholders, provided that such percentage limitation may not exceed 10% of the shares of stock issued and outstanding. Pursuant to this authority, the Board of Directors has fixed (a) 10% as the maximum percentage of shares of stock issued and outstanding that may be owned by any shareholder (other than an Authorized Carrier) or by any syndicate or affiliated group of shareholders; and (b) 5% as the maximum percentage of shares of stock issued and outstanding that may be voted by any shareholder (other than an Authorized Carrier) or by any syndicate or affiliated group of shareholders. For purposes of these limitations, (a) a person shall be considered a shareholder if he is the record holder of any shares of stock, or is the economic owner of any shares, or has voting power over any shares, but not if he has only investment discretion in respect of shares; and (b) there shall be attributed to such a person shares of which he is the holder of record (unless the attribution of such shares is excepted by Section 5.02(h) of the Articles), shares of which he is the economic owner, and shares over which he has voting power, provided that shares in respect of which he has only investment discretion shall not be attributed to him.\nLimitation on Ownership and Disposition of Shares by Authorized Carriers. The number of shares of Common Stock owned by Authorized Carriers may not at any time exceed 50% of the total number of shares of Common Stock issued and outstanding. No Authorized Carrier (or affiliated group of such carriers) may effect sales or other dispositions of shares of Common Stock owned by them (except dispositions to Authorized Carriers) totaling, in any consecutive 12-month period, more than 2% of the greatest number of shares of Common Stock held by all Authorized Carriers at any time during such period, except pursuant to a general public offering or another method approved by the Board of Directors.\nProcedures Relating to Ownership and Transfer of Shares. The Board of Directors is authorized to establish procedures, consistent with applicable law and the Articles, relating to the ownership and transfer of shares of stock. _________________________________________________________________\nNO TRANSFER OF THE SHARES REPRESENTED BY THIS CERTIFICATE WILL BE REGISTERED ON THE BOOKS OF THE CORPORATION UNLESS AN APPLICATION FOR TRANSFER OF SHARES HAS BEEN EXECUTED BY THE ASSIGNEE. THE APPLICATION FOR TRANSFER OF SHARES SET FORTH BELOW MAY BE EXECUTED BY THE ASSIGNEE IF HE (OR SHE) IS A UNITED STATES CITIZEN AND THE STATEMENTS IN THE APPLICATION ARE CORRECT AS TO SUCH ASSIGNEE. ANY OTHER ASSIGNEE MUST EXECUTE AN APPLICATION IN ANOTHER APPROVED FORM, WHICH THE TRANSFER AGENT WILL FURNISH ON REQUEST AND WITHOUT CHARGE. ________________________________________________________________\nAPPLICATION FOR TRANSFER OF SHARES OF COMMON STOCK\nTHE UNDERSIGNED ASSIGNEE HEREBY MAKES APPLICATION FOR THE TRANSFER TO THE NAME OF THE UNDERSIGNED OF THE SHARES OF COMMON STOCK REPRESENTED BY THE WITHIN CERTIFICATE (THE \"SHARES\") AND HEREBY CERTIFIES TO COMSAT CORPORATION THAT: (1) I AM A UNITED STATES CITIZEN AND AM NOT THE REPRESENTATIVE OF AN ALIEN OR OF A FOREIGN GOVERNMENT. (2) I AM NOT A \"COMMUNICATIONS COMMON CARRIER\" OR A SUBSIDIARY OR AFFILIATED COMPANY OF A \"COMMUNICATIONS COMMON CARRIER\", OR A TRUSTEE, OFFICER OR DIRECTOR OF ANY OF THE FOREGOING.\nTHE OWNERSHIP, ISSUANCE AND TRANSFER OF SHARES OF STOCK OF THE CORPORATION ARE SUBJECT TO THE PROVISIONS OF THE COMMUNICATIONS SATELLITE ACT OF 1962 AND THE ARTICLES OF INCORPORATION OF THE CORPORATION. A SUMMARY OF SUCH PROVISIONS OF THE ACT AND THE ARTICLES IS SET FORTH ABOVE.\nDATED SIGNATURE OF ASSIGNEE\nEXHIBIT 10(h)\nCOMSAT CORPORATION\nINSURANCE AND RETIREMENT PLAN FOR EXECUTIVES\nRestated effective January 1, 1994 (except as otherwise stated)\nSection 1 - Name and Purpose\n1.1 Name. The name of this plan is the COMSAT Corporation Insurance and Retirement Plan for Executives.\n1.2 Purpose. The purpose of this plan is to provide key executives of the Corporation with supplemental retirement income and death benefits in order to assist the Corporation in attracting and retaining executives of outstanding ability.\nSection 2 - Definitions and Construction\n2.1 Definitions. For purposes of the Plan, unless a different meaning is plainly required by the context, the following definitions are applicable:\n(a) \"Accrued Benefit\" means an amount equal to the Normal Retirement Benefit of a Participant, as of any date, as though that date were the date of termination of his employment.\n(b) \"Administrator\" means the person appointed by the Board in accordance with Section 12.1.\n(c) \"Age\" means the number of full years which have elapsed since the Participant's date of birth.\n(d) \"Beneficiary\" means a person designated by a Participant, in a written instrument filed with and in a form satisfactory to the Administrator, to receive the lump sum death benefit payable under Section 10.1 or 10.2 upon the death of a Participant.\n(e) \"Board\" means the Board of Directors of COMSAT Corporation or any successor to such Corporation.\n(f) \"Corporation\" means COMSAT Corporation or any successor thereto, and any subsidiary of such Corporation.\n(g) \"Disability\" means total disability as defined in the Corporation's Long-Term Disability Plan.\n(h) \"Disabled Participant\" means a Participant who incurs a Disability while he is an Employee and who continues to accrue Credited Service under the Retirement Plan.\n(i) \"Early Retirement Date\" means the date on which a Participant retires pursuant to Section 5.1.\n(j) \"Early Retirement Supplement\" means the amount of annual income equal to the Primary Social Security Benefit of the Participant used in determining his Normal Retirement Benefit under the Retirement Plan.\n(k) \"Earnings\" means (i) the regular, basic salary received by a Participant from the Corporation, before any salary reductions, (ii) Incentive Compensation, (iii) dividend equivalents from Restricted Stock Units, and (iv) cash proceeds from vested Restricted Stock Units. Incentive\nCompensation, dividend equivalents from Restricted Stock Units, and cash proceeds from vested Restricted Stock Units shall be included in Earnings at the earliest time they could have been paid to the Participant in cash, whether or not he elects to receive such payment then or defer it to a later date.\n(l) \"Employee\" means any person who is employed by the Corporation.\n(m) \"Highest Average Earnings Period\" means the 48 consecutive months in which a Participant's Earnings were the greatest. If a Participant has completed less than 48 consecutive months of employment with the Corporation as of any date, \"Highest Average Earnings Period\" shall mean all of the consecutive months of employment with the Corporation as of that date.\n(n) \"Highest Average Annual Earnings\" means the amount determined by dividing the total Earnings earned by a Participant during his Highest Average Earnings Period by the number of years (including fractions of years) included in the Highest Average Earnings Period.\n(o) \"Inactive Participant\" means a Participant who is no longer an Employee but who has an interest in the Plan which has not been fully paid.\n(p) \"Incentive Compensation\" means the additional compensation awarded a Participant under the Corporation's Annual Incentive Plan, as amended from time to time.\n(q) \"Late Retirement Date\" means the date on which a Participant retires pursuant to Section 6.1.\n(r) \"Normal Retirement Benefit\" means the amount of annual income payable from and after a Participant's Normal Retirement Date, as calculated as provided in Section 4.2.\n(s) \"Normal Retirement Date\" means the first day of the month coincident with or next following a Participant's 65th birthday. The \"normal retirement age\" under the Plan shall be age 65.\n(t) \"Participant\" means an Employee participating in the Plan in accordance with Section 3, an Inactive Participant, and a Disabled Participant.\n(u) \"Participation Commencement Date\" means the date on which an Employee becomes a Participant in the Plan in accordance with Section 3.\n(v) \"Plan\" means the COMSAT Corporation Insurance and Retirement Plan for Executives, as amended from time to time.\n(w) \"Restricted Stock Units\" (RSUs) means stock units awarded to a Participant under the Corporation's 1986 or 1990 Key Employee Stock Plans or any successors thereto.\n(x) \"Retirement Plan\" means the Corporation's qualified defined benefit pension plan, currently known as the COMSAT Corporation Retirement Plan, as amended from time to time, or any successor thereto.\n(y) \"Spouse\" means the person who is married to a Participant on the date of the Participant's death.\n(z) \"Years of Service\" means the number of full years which a Participant has been employed by the Corporation.\n(aa) Any term used in the Plan in capitalized form which is not defined in one of the preceding paragraphs shall have the same meaning as in the Retirement Plan.\n2.2 Construction. Wherever applicable, the masculine pronoun shall mean or include the feminine pronoun, and words used in the singular shall include the plural, and vice versa.\nSection 3 - Participation\n3.1 Initial Participation. An Employee shall become a Participant in the Plan upon being designated as such by the Board. There is no minimum age or service requirement to become a Participant.\n3.2 Continued Participation. An Employee who becomes a Participant shall remain a Participant as long as he is an Employee. He shall thereafter be an Inactive Participant as long as he has an interest in the Plan which has not been fully paid.\n3.3 Disabled Participant. A Disabled Participant shall remain a Participant for all purposes of the Plan.\nSection 4 - Normal Retirement\n4.1 Normal Retirement Age. A Participant who has not retired earlier pursuant to Section 5.1 shall retire on his 65th birthday, except as provided in Section 6.1.\n4.2 Normal Retirement Benefit. (a) Subject to the provisions of Section 8.1, a Participant retiring at the Normal Retirement Age of 65 shall receive a Normal Retirement Benefit, beginning on his Normal Retirement Date, in an amount equal to 60 percent (65 percent in the case of the President of COMSAT Corporation, and 70 percent in the case of the Chairman and\/or Chief Executive Officer of COMSAT Corporation) of his Highest Average Annual Earnings, reduced by the following:\n(i) the Normal Retirement Income of the Participant under the Retirement Plan, provided that in the case of a Participant who retires under the Retirement Plan on or after March 1, 1993, the amount of the reduction shall be the amount of annual retirement income which the Participant is actually receiving under the Retirement Plan;\n(ii) the Primary Social Security Benefit of the Participant used in determining his Normal Retirement Income under the Retirement Plan;\n(iii) vested age 65 retirement benefits of the Participant from the qualified defined benefit pension plans of prior employers,\nincluding any lump sum retirement benefit previously received, expressed in the form of a single life annuity, whether or not actually paid in that form; and\n(iv) retirement benefits of the Participant from government and military pensions, expressed in the form of a single life annuity, whether or not actually paid in that form.\n(b) Except as provided in Section 11.2, the Normal Retirement Benefit of a Participant who retires at the Normal Retirement Age of 65 shall be nonforfeitable.\nSection 5 - Early Retirement\n5.1 Early Retirement Date. A Participant may elect to retire on the first day of any month between his 55th and 65th birthdays, provided that a Participant may retire before his 62nd birthday only with the Board's consent, and provided further that a Participant eligible for early retirement under the Retirement Plan may retire early under this Plan only if he also elects early retirement under the Retirement Plan on the same date.\n5.2 Retirement Benefit.\n(a) A Participant retiring on an Early Retirement Date shall, unless he makes the election provided for in paragraph (b), receive an annual retirement benefit, beginning on his Normal Retirement Date, in an amount equal to his Accrued Benefit at his Early Retirement Date.\n(b) Such Participant may, by a written statement filed with the Administrator at least 30 days before the date on which he wishes payment to begin, elect that payment of his annual retirement benefit shall begin on the first day of any month between his Early Retirement Date and his Normal Retirement Date. The amount of annual retirement benefit shall be equal to (i) his Accrued Benefit at his Early Retirement Date plus (ii) the Early Retirement Supplement, provided that if payment of such annual retirement benefit commences before the Participant's 62nd birthday, the amount of the Accrued Benefit shall be reduced by 1\/4 of one percent for each complete month between the date the retirement benefit payments commence and his 62nd birthday.\n(c) Participants eligible for the Early Retirement Supplement are those who either retire on or after January 1, 1988, or who are receiving an Early Retirement Benefit as of that date.\nSection 6 - Late Retirement\n6.1 Late Retirement Date. A Participant shall retire not later than the earlier of: (a) his 70th birthday; or (b) the earliest day upon which he meets all of the following tests: (i) he has attained age 65; (ii) his Normal Retirement Benefit under this Plan plus his Normal Retirement Income under the Retirement Plan would be at least $44,000; provided, however,\nthat no Participant shall be required to retire before the earliest date upon which he may be required to retire under the applicable laws of the state or other jurisdiction in which he is employed.\n6.2 Retirement Benefit. A Participant retiring on a Late Retirement Date pursuant to Section 6.1 shall receive an annual retirement benefit, beginning on the first day of the month coincident with or next following his Late Retirement Date, in an amount equal to his Accrued Benefit at his Late Retirement Date.\nSection 7 - Termination of Employment\n7.1 Retirement Benefit. A Participant whose employment with the Corporation terminates for any reason other than death or retirement under this Plan shall be entitled to receive an annual retirement benefit, payable as provided in Section 7.3, in an amount equal to his Accrued Benefit at his date of termination multiplied by a fraction, the numerator of which is the number of complete months of his employment before his termination date, and the denominator of which is the number of complete months of employment he would have had if he had retired at the normal retirement age of 65.\n7.2 Death Before Payment Commencement. If a Participant entitled to an annual retirement benefit pursuant to Section 7.1 dies before payment of such retirement benefit has begun pursuant to Section 7.3, no payment shall be made under any provision of this Plan for the benefit of such Participant.\n7.3 Payment Commencement Date. Payment of the annual retirement benefit to which a Participant is entitled under Section 7.1 shall begin on his Normal Retirement Date, if he shall be living on that date.\nSection 8 - Vesting\n8.1 Vesting - Participation Commencement Date Prior to June 21, 1985. Notwithstanding any other provision of this Plan except Sections 11, 12.3, and 13, a Participant whose Participation Commencement Date is any time before June 21, 1985, shall be fully vested at all times in the annual retirement benefit and the Early Retirement Supplement to which he is entitled under the Plan.\n8.2 Vesting - Participation Commencement Date After June 20, 1985, and Prior to January 1, 1993. Notwithstanding any other provision of this Plan except Sections 11, 12.3, and 13, in the case of a Participant whose Participation Commencement Date is after June 20, 1985, and prior to January 1, 1993, the annual retirement benefit and the Early Retirement Supplement to which such a Participant is otherwise entitled under this Plan shall be multiplied by a fraction (not to exceed 1.0), the numerator of which is the number of complete months of employment with the Corporation before his retirement or termination date, and the denominator of which is 60.\n8.3 Vesting - Participation Commencement Date After December 31, 1992. Notwithstanding any other provision of this Plan except Sections 11, 12.3,\nand 13, a Participant whose Participation Commencement Date is after December 31, 1992, shall be entitled to receive retirement income equal to a percentage of the annual retirement benefit and the Early Retirement Supplement to which the Participant is otherwise entitled under this Plan, computed in accordance with the following schedule once the sum of the Participant's Age and the Participant's Years of Service equals 60:\nYears of Service Vested Percentage\n0-4 0% 5 50 6 60 7 70 8 80 9 90 10 100\n8.4 Death Benefits. Any benefits payable pursuant to Section 10 on account of a Participant's death shall not be reduced because the Participant had completed less than five years of employment with the Corporation at the time of his death.\nSection 9 - Form of Payment of Retirement Benefits\n9.1 Normal Form of Payment. The normal form of payment of retirement benefits shall be in equal monthly installments for the life of the Participant.\n9.2 Optional Forms of Payment.\n(a) At any time prior to the date on which payment of retirement benefits is to begin, a Participant may by an instrument in writing delivered to the Administrator elect to receive, in lieu of the normal form of payment provided in Section 9.1, a retirement benefit which is the actuarial equivalent of the benefit specified in Section 9.1, in one of the forms provided for the payment of retirement benefits under the Retirement Plan.\n(b) Notwithstanding paragraph (a), with respect to a Participant who (i) retires on an Early Retirement Date, (ii) elects to begin payment of his retirement benefits before his Normal Retirement Date, and (iii) elects an optional form of payment pursuant to paragraph (a), the portion of his retirement benefits specified in Section 5.2 (b) (ii) shall be paid in equal monthly installments.\n(c) Notwithstanding paragraph (a), the retirement benefit of a Participant who retires on a Late Retirement Date and who elects an optional form of payment pursuant to paragraph (a) shall not be actuarially increased to take account of the commencement of such benefits after the Participant's Normal Retirement Date.\n9.3 1991 Lump Sum Payment Option\n(a) For purposes of this Section 9.3:\n(i) \"Lump Sum Payment\" means a single payment, payable on January 1, 2000, equal to the actuarial equivalent of the retirement benefits otherwise payable to a Participant under the Plan after December 31, 2000, based on the Participant's Accrued Benefit as of\nMarch 31, 1991. In the case of a Participant who has not begun receiving retirement benefits before January 1, 2000, such actuarial equivalence shall be computed on the basis as if the Participant's retirement benefits were to begin on the later of January 1, 2001, or the first day of the month coincident with or next following his 62nd birthday.\n(ii) \"Electing Participant\" means an Employee who: (1) was a Participant on April 1, 1991 and (2) by an instrument in writing filed with the Administrator no later than August 31, 1991, elects to receive a Lump Sum Payment.\n(b) On January 1, 2000, a Lump Sum Payment shall be made to each Electing Participant who as of that date: (i) has begun receiving retirement benefits pursuant to Section 4.2, 5.2 or 6.2; (ii) has retired on an Early Retirement Date and has not begun to receive his annual retirement benefit pursuant to Section 5.2; or (iii) is an Employee. The annual retirement benefit payable after December 31, 2000, to the Electing Participant pursuant to Section 4.2, 5.2 or 6.2, whichever may be applicable, shall be reduced to reflect his receipt of the Lump Sum Payment.\n9.4 1992 Lump Sum Payment Option.\n(a) For purposes of this Section 9.4:\n(i) \"Lump Sum Payment\" means a single payment, payable on January 1, 2001, equal to the actuarial equivalent of the retirement benefits otherwise payable to a Participant under the Plan after December 31, 2001, based on the amount equal to (1) the Participant's Accrued Benefit as of March 31, 1992, less (2) if the Participant made the election provided in\nSection 9.3, the Participant's Accrued Benefit as of March 31, 1991. In the case of a Participant who has not begun receiving retirement benefits before January 1, 2001, such actuarial equivalence shall be computed on the basis as if the Participant's retirement benefits were to begin on the later of January 1, 2002, or the first day of the month coincident with or next following his 62nd birthday.\n(ii) \"Electing Participant\" means an Employee who: (1) was a Participant on January 1, 1992, and (2) by an instrument in writing filed with the Administrator no later than May 31, 1992, elects to receive a Lump Sum Payment.\n(b) On January 1, 2001, a Lump Sum Payment shall be made to each Electing Participant who as of that date: (i) has begun receiving retirement benefits pursuant to Section 4.2, 5.2 or 6.2; (ii) has retired on an Early Retirement Date and has not begun to receive his annual retirement benefit pursuant to Section 5.2; or\n(iii) is an Employee. The annual retirement benefit payable after December 31, 2001, to the Electing Participant pursuant to Section 4.2, 5.2 or 6.2, whichever may be applicable, shall be reduced to reflect his receipt of the Lump Sum Payment.\n9.5 Actuarial Equivalent. Wherever in the Plan a benefit is required to be the actuarial equivalent of another benefit, such actuarial equivalence shall be computed on the basis of (a) Table V in section 1.72-9 of the Treasury Department Regulations and (b) the Pension Benefit Guaranty Corporation's interest rate for immediate annuities, both as in effect for the month preceding the date of distribution of such benefit.\nSection 10 - Death Benefits\n10.1 Death Benefits While Employed. If a Participant dies while an active Employee:\n(a) His Spouse shall receive an annual death benefit in an amount equal to 50% of his Accrued Benefit at the date of his death. Such benefit shall be payable in equal monthly installments beginning on the first day of the month coincident with or next following the date of the Participant's death, and continuing until the earlier of (i) the completion of 120 months or (ii) the date of the Spouse's death.\n(b) His Beneficiary shall receive a lump sum death benefit in the amount of $200,000 as soon as practicable after the date of his death.\n10.2 Death Benefits After Retirement. If a Participant dies after retirement, his Beneficiary shall receive a lump sum death benefit in the amount of $200,000 as soon as practicable after the date of his death.\n10.3 Death Benefits Offset. If a Participant dies before January 1, 2000, any payments made to the Participant's Spouse or Beneficiary pursuant to life insurance policies on the life of the Participant which are purchased in connection with this Plan shall be offset against, and shall to that extent reduce the payments otherwise required to be made to such Spouse or Beneficiary pursuant to Section 10.1 or 10.2.\nSection 11 - Forfeiture of Benefits\n11.1 Termination for Cause. A Participant whose employment with the Corporation is terminated for cause shall forfeit all right to any benefits under the provisions of this Plan. For this purpose, a Participant's employment with the Corporation shall be considered to be terminated for cause only if: (a) the Participant is convicted of a felony, without regard to his right to appeal, which involves the Corporation's real, tangible or intellectual property, any of its personnel or any person with whom the Corporation has a business relationship, and (b) at least two-thirds of the members of the Board affirmatively vote, in their sole discretion, to terminate the Participant's employment with the Corporation because of such conviction.\n11.2 Employment With a Competitor. A Participant who, without the written consent of the Administrator, becomes employed with a competitor of the Corporation, shall forfeit all rights to any further benefits under the provisions of this Plan; provided, however, that the benefits of a Participant whose Participation Commencement Date is prior to January 1, 1993, and who retires at the normal retirement age of 65, or who retires at a later date upon meeting all of the tests of Section 6.1 (a)(ii), shall be nonforfeitable. For this purpose, a Participant shall be considered to be employed with a competitor of the Corporation only if, within the period ending two years after the date of his termination of employment with the Corporation:\n(a) there is a final judgement by a court of competent jurisdiction, in an action brought by the Corporation, that the Participant is liable for an act of unfair competition or the misappropriation of trade secrets or confidential information; or\n(b) (i) the Participant is employed in a management position with another employer in a line of business that is classified under the same four-digit industry code of the Standard Industrial Classification as is a line of business operated by the Corporation, and (ii) such line of business generated revenues for the Corporation during the previous 12-month period exceeding the greater of (1) $10,000,000 or (2) two percent of the total revenues generated during such period by the Corporation.\nSection 12 - Administration\n12.1 Appointment of Administrator. The Board shall appoint a person to serve as Administrator of the Plan. The initial Administrator shall be the Vice President for Human Resources and Organization Development.\n12.2 Responsibility and Authority of Administrator. The Plan shall be administered by the Administrator, who shall have the responsibility and authority to, among other things, (a) interpret and construe the terms of the Plan and (b) adopt such regulations, rules, procedures and forms consistent with the Plan as he considered necessary or desirable for the administration of the Plan. In all cases the determination of the Administrator shall be final, conclusive and binding on all persons, subject to Section 12.3.\n12.3 Exceptions Under Board Authority. Notwithstanding any other provision of this Plan, the Board in its sole discretion shall have the authority to make exceptions to the normal application and administration of any and all provisions of the Plan in individual cases; provided, however, that no such exception shall, without the written consent of the person involved, deprive any Participant, Beneficiary or Spouse of any part of his benefits under the Plan accrued as of the time such exception is made.\nSection 13 - Amendment or Termination of Plan\n13.1 Right to Amend or Terminate. The Board reserves in its sole discretion the right, at any time and from time to time, to amend or terminate the Plan.\n13.2 Effect on Benefits Accrued. No amendment or termination of the Plan pursuant Section 13.1 shall, without the written consent of the person involved, deprive any Participant, Beneficiary, or Spouse of any part of his benefits under the Plan accrued as of the time of such amendment or termination.\nSection 14 - Miscellaneous Provisions\n14.1 No Implied Rights. Nothing in this Plan shall be deemed to: (a) give to any Employee the right to be retained in the employ of the Corporation or to interfere with the right of the Corporation to dismiss any Employee at any time, or (b) give to any Participant, Beneficiary, or Spouse (i) any right to any payments except as specifically provided for in the Plan or (ii) any interest in any insurance policies acquired by the Corporation in accordance with Section 14.2.\n14.2 Insurance Policies. The Corporation in its discretion may, but shall not be required to, provide for its obligations under the Plan through the purchase of one or more life insurance policies on the life of a Participant. Each Participant agrees, as a condition to receiving any benefits under this Plan, to cooperate in securing life insurance on his life by furnishing such information as the Corporation or any insurer may require, by submitting to such physical examinations as may be necessary, and by taking such other actions as may be requested by the Corporation or any insurer to obtain and maintain such insurance coverage.\n14.3 No Assignment or Alienation. To the extent permitted by law, no benefit provided under the Plan shall be anticipated, assigned (either at law or in equity), alienated or subject to attachment, garnishment, levy, execution or other process. Any attempt to perform any such action shall be void.\n14.4 Expenses. The Corporation shall pay all expenses incident to the operation and administration of the Plan.\n14.5 Applicable Laws. Except as otherwise required by federal law, the provisions of the Plan and the rules, regulations, and decisions of the Board and the Administrator shall be construed and enforced according to the laws of the District of Columbia.\nEXHIBIT 10(k)(ii)\nAMENDMENT\nAMENDMENT to the COMSAT Corporation Non-Employee Directors Stock Option Plan (the \"Plan\"), as approved by the shareholders of COMSAT Corporation (the \"Corporation\") on May 20, 1988.\nWHEREAS, on January 15, 1993, the Corporation's Board of Directors approved this Amendment, subject to approval by the shareholders of the Corporation; and\nWHEREAS, on May 21, 1993, the shareholders of the Corporation approved this Amendment.\nNOW, THEREFORE, the Plan is hereby amended as follows:\n1. Section 4(b) of the Plan is hereby amended to read as follows:\n\"4(b) Automatic Grants. An Option to purchase 2,000 shares of Common Stock, subject to adjustment under Section 6, shall be granted annually at a meeting of the Board held in March (or the next succeeding meeting date if no March meeting is held), beginning in 1993, to each Non-Employee Director who was a director as of the date of the Annual Meeting of Shareholders for the prior year, provided the Non-Employee Director continues in office after the Board meeting date on which the Option is granted.\"\n2. Subsection 4(d) of the Plan is hereby amended to read as follows:\n\"4(d) Option Price. The purchase price for each share of Common Stock subject to an Option shall be the fair market value of the Common Stock on the date the Option is granted. For this purpose, as well as other purposes under the Plan, fair market value shall be deemed to be the average of the highest and lowest selling prices of Common Stock as reported under New York Stock Exchange-Composite Transactions on the date on which the Option was granted or, if there were no sales of Common Stock on that date, then on the next preceding date on which there were sales.\"\nAll other terms and provisions of the Plan are hereby expressly confirmed and restated, and all Options previously issued under the Plan shall remain in full force and effect pursuant to their terms and the terms of the Plan at the time of issuance.\n- - - ---------------------- (1) Pursuant to the operation of Section 6 of the Plan, the number of shares subject to such Options became 4,000 shares effective upon the 2-for-1 stock split effected by the Corporation on June 1, 1993.\nEXHIBIT 10(g)(i)\nThis Amendment No. 1 to the Agreement for Inmarsat Aeronautical Services is entered into this 20th day of May 1993 by and between COMSAT Mobile Communications, a Division of COMSAT Corporation, a corporation organized and existing under the laws of the District of Columbia in the United States of America and having its principal office at 950 L'Enfant Plaza, S.W., Washington, D.C. 20024 (\"COMSAT\") and KOKUSAI DENSHIN DENWA CO., LTD., a company organized and existing under the laws of Japan and having its principal office at No. 3-2, Nishi-Shinjuku 2-Chome, Shinjuku-ku, Tokyo 163, Japan (\"KDD\").\nWHEREAS, COMSAT and KDD have entered into an Agreement dated 22 January 1990 under which COMSAT and KDD agreed to jointly provide aeronautical mobile satellite services to aviation users on a global basis; and\nWHEREAS, COMSAT and KDD have agreed upon a rate schedule for voice calls originated by COMSAT's Customer In-Flight Phone (\"In-Flight\") in the ocean regions served by KDD (IOR, POR).\nNOW, THEREFORE, in accordance with Article 16 and in consideration of the foregoing and the mutual covenants contained herein, the Parties hereto agree to supplement and amend the Agreement by adding Annex 1 \"Rate Schedule for Voice Calls Originated by In-Flight Phone\".\nExcept as expressly provided herein, all other terms and conditions of the Agreement shall remain unchanged and in full force and effect.\nIN WITNESS WHEREOF, the Parties hereto have executed this Amendment.\nCOMSAT Corporation KOKUSAI DENSHIN DENWA CO., LTD.\nBy: \/s\/Elizabeth L. Young By: \/s\/Seiichi Inoue\nName: Elizabeth L. Young Name: Seiichi Inoue Vice Pres. & General Manager Title: COMSAT Aeronautical Services Title: Senior Managing Director\nDate: 22 April 1993 Date: 10 May 1993 \/s\/Kari Schoonhoven Kari Schoonhoven Director, Contracts 5\/20\/93\nANNEX 1\nRate Schedule for Voice Calls Originated by In-Flight Phone\nFor all air-to-ground voice traffic generated by customers of In-Flight through the KDD Ground Earth Stations (\"GESs\") in the IOR and POR which terminates outside of Japan, KDD will charge the rate of 3.95SDR per minute for space segment and use of KDD's GES. For all air-to-ground voice traffic generated by In-Flight customers through the KDD GESs in the IOR and POR which terminates within Japan, KDD will charge the rate of 4.44SDR per minute for space segment and use of KDD's GES. These rates will be exclusive of Land-line charges which shall be charged in addition by KDD. KDD shall provide to COMSAT on a weekly basis call record data for all calls originated from each aircraft. Accounting and settlements shall be made on a monthly basis.\nEXHIBIT 10(r)(i)\nAMENDMENT\nAMENDMENT to the COMSAT Corporation 1990 Key Employee Stock Plan (the \"Plan\"), as approved by the shareholders of COMSAT Corporation (the \"Corporation\") on May 18, 1990.\nWHEREAS, on January 15, 1993, the Corporation's Board of Directors approved this Amendment, subject to approval by the shareholders of the Corporation; and\nWHEREAS, on May 21, 1993, the shareholders of the Corporation approved this Amendment.\nNOW, THEREFORE, Section 3 of the Plan is hereby amended to read as follows:\n\"3. Shares Subject to the Plan. The aggregate number of shares of Common Stock which may be covered by stock options (Options), stock appreciation rights (SARs), restricted stock units (Restricted Stock Units) and restricted stock awards (Restricted Stock Awards) granted pursuant to the Plan is 2,400,000 shares, subject to adjustment under Section 9. Shares which may be delivered on exercise or settlement of Options, SARs, Restricted Stock Units or Restricted Stock Awards may be previously issued shares reacquired by the Corporation or authorized but unissued shares. Shares covered by Restricted Stock Units and Restricted Stock Awards that are forfeited and shares covered by Options that expire unexercised (without having been surrendered upon the exercise of SARs, whether settled in cash or Common Stock) shall again be available for grant under the Plan.\"\nAll other terms and provisions of the Plan are hereby expressly confirmed and restated, and all Options, SARs, Restricted Stock Units and Restricted Stock Awards previously issued under the Plan shall remain in full force and effect pursuant to their terms and the terms of the Plan at the time of issuance.\nEXHIBIT 10(v)\nCOMSAT CORPORATION DIRECTORS AND EXECUTIVES DEFERRED COMPENSATION PLAN\nRestated effective January 1, 1994 (except as otherwise stated)\nSection 1 - Purpose and Effective Date\n1.1 Purpose. The purpose of this Plan is to provide Directors and key executives of the Corporation with supplemental retirement income and death benefits in order to assist the Corporation in attracting and retaining Directors and executives of outstanding ability.\n1.2 Effective Date. The Plan shall become effective upon approval by the Board.\nSection 2 - Definitions and Construction\n2.1 Definitions. For purposes of the Plan, unless a different meaning is plainly required by the context, the following definitions are applicable:\n(a) \"Beneficiary\" means the person designated by a Participant, in accordance with Section 5.4(a), to receive benefits payable under the Plan upon the death of the Participant.\n(b) \"Board\" means the Board of Directors of COMSAT Corporation or any successor to such Corporation.\n(c) \"Change of Control\" means, with respect to COMSAT Corporation:\n(i) A stock purchase by any \"person\" (as such term is used in Sections 13(d) and 14(d) (2) of the Securities and Exchange Act of 1934, as amended) who then owns or by virtue of such purchase becomes the beneficial owner of, directly or indirectly, voting securities of COMSAT Corporation representing 50 percent or more of the combined voting power of such Corporation's then outstanding voting securities, which purchase is not approved by such Corporation pursuant to a resolution of the Board, or\n(ii) Any change of two or more Directors in any one year in the composition of the Board not recommended by the management of COMSAT Corporation or the Board.\n(d) \"Committee\" means the Committee on Compensation and Management Development of the Board.\n(e) \"Compensation\" means:\n(i) In the case of an Employee, the following amounts payable or awarded to the Employee by the Corporation with respect to a Plan Year: (1) base salary, (2) Incentive Compensation, (3) dividend equivalents from Restricted Stock Units, and (4) cash proceeds from vested Restricted Stock Units, or\n(ii) In the case of a Director, the fees and retainer payable to the Director by the Corporation with respect to a Plan Year, before reduction for any amounts deferred pursuant to this Plan or any other plan of the Corporation, and not including any expense reimbursements or any form of non-cash compensation and benefits.\n(f) \"Corporation\" means COMSAT Corporation or any successor thereto, and any subsidiary of such Corporation.\n(g) \"Deferral Election\" means an election made by the Participant, in accordance with Section 3.2 or 3.3, to defer an amount of Compensation payable or awarded to the Participant with respect to a Plan Year.\n(h) \"Deferred Compensation Account\" means the account maintained for a Participant by the Corporation, in accordance with Section 4.1, with respect to the Compensation for which the Participant has made a Deferral Election.\n(i) \"Determination Date\" means the last Friday of each biweekly payroll period of the Corporation.\n(j) \"Director\" means any member of the Board who is not an Employee.\n(k) \"Disability\" means total disability as defined in the Corporation's Long-Term Disability Plan.\n(l) \"Employee\" means any person who is employed by the Corporation.\n(m) \"Hardship\" means the immediate and heavy financial need of a Participant as determined by the Committee in accordance with uniform standards established by the Committee.\n(n) \"Incentive Compensation\" means the additional compensation awarded a Participant with respect to a Plan Year under the Corporation's Annual Incentive Plan and such other incentive plans or arrangements of the Corporation\nas designated by the Committee from time to time as such plans or arrangements may be amended from time to time.\n(o) \"Participant\" means an Employee or Director participating in the Plan in accordance with Section 3.\n(p) \"Plan\" means the COMSAT Corporation Directors and Executives Deferred Compensation Plan, as amended from time to time.\n(q) \"Plan Year\" means the period beginning as soon as practicable after the effective date of the Plan and ending December 31, 1986, and each calendar year thereafter.\n(r) \"Restricted Stock Units\" means restricted stock units awarded to a Participant under the Corporation's 1986 and 1990 Key Employee Stock Plans.\n(s) \"Retirement Plan\" means the Corporation's qualified defined benefit pension plan, currently known as the COMSAT Corporation Retirement Plan, as amended from time to time, or any successor thereto.\n(t) \"Rollover Election\" means an election made by the Participant in accordance with Section 3.5.\n2.2 Construction. Wherever applicable, the masculine pronoun shall mean or include the feminine pronoun, and the words used in the singular shall include the plural, and vice versa.\nSection 3 - Eligibility and Participation\n3.1 Eligibility. Eligibility to participate in the Plan is limited to (a) Directors and (b) Employees who are designated as eligible by the Board.\n3.2 Participation; Deferral Elections. An eligible Employee or Director may elect to participate in the Plan with respect to any Plan Year by filing a Deferral Election, in the form and manner prescribed by the Committee, by December 15 of the immediately preceding Plan Year, except that a Deferral Election with respect to the first Plan Year shall be filed at such time before the commencement of such Plan Year as the Committee shall determine. The Participant may elect in the Deferral Election to defer Compensation with respect to the Plan Year as follows:\n(a) If the Participant is an Employee, he may elect to defer, subject to a minimum deferral of $1,000, (i) base salary payable during the Plan Year in increments of 5 percent up to a maximum of 25 percent, (ii) Incentive Compensation awarded with respect to the Plan Year in increments of 25 percent up to a maximum of 100 percent, (iii) dividend equivalents from Restricted Stock Units payable during the Plan Year in increments of 25 percent up to a maximum of 100 percent, and (iv) cash proceeds from vested Restricted Stock Units payable during the Plan Year in increments of 25 percent up to a maximum of 100 percent.\n(b) If the Participant is a Director, he may elect to defer any amount or percentage of fees and retainer payable with respect to the Plan Year, subject to a minimum deferral of $1,000.\n3.3 Initial Eligibility During the Plan Year. If an Employee or Director first becomes eligible to participate in the Plan during a Plan Year, he may elect to participate with respect to such Plan Year by filing a Deferral Election for such Plan Year not later than 30 days after notification to him by the Committee of his eligibility to participate in the Plan. the Plan. The Participant may elect in such Deferral Election to defer Compensation with respect to the Plan Year which is payable or awarded following the filing of the Deferral Election, in accordance with the limitations of Section 3.2(a) and (b) as if such period were an entire Plan Year.\n3.4 Modification of Deferral Election. A Deferral Election made pursuant to Section 3.2 or 3.3 shall be irrevocable, except that the Committee in its discretion may at any time reduce, or waive the remainder of , the amount to be deferred under the Deferral Election upon determining that the Participant has suffered a Hardship.\n3.5 Rollover Election. When an Employee or Director first becomes eligible to participate in the Plan, but not thereafter, he may elect to rollover to the Plan all, but not less than all, of his then-current account balance of any amounts previously deferred, plus interest credited, under the Corporation's Annual Incentive Plan or its Insurance and Retirement Plan for Directors. Such Rollover Election shall be made at the time, and in the form\nand manner prescribed by the Committee. If the eligible Employee or Director makes a Rollover Election, he shall become a Participant in the Plan, whether or not he also files a Deferral Election pursuant to Section 3.2 or 3.3, and the amount rolled over shall thereafter be subject in full to the provisions of this Plan.\nSection 4 - Deferred Compensation Accounts\n4.1 Maintenance of Accounts. The Corporation shall maintain, for record-keeping purposes only, a Deferred Compensation Account for each Participant who files a Deferral Election or Rollover Election. The Compensation deferred pursuant to a Deferral Election shall be credited to the Participant's Deferred Compensation Account as it otherwise would become payable to the Participant. The amount rolled over pursuant to a Rollover Election shall be credited to the Participant's Deferred Compensation Account upon the filing of the Rollover Election.\n4.2 Interest. Each Participant's Deferred Compensation Account shall be credited with interest as of each Determination Date based upon the balance of the Participant's Deferred Compensation Account as of the immediately preceding Determination Date. The rate of interest to be credited during a Plan Year shall be Moody's plus 6 percent. For this purpose, \"Moody's\" means the effective annual yield on Moody's Seasoned Corporate Bond Yield Index as determined during the first week of the Plan Year from Moody's Bond Record published by Moody's Investors Service, Inc., or any successor thereto. If Moody's annual yield is no longer published, the rate of interest for purposes of the Plan shall be\nbased on a substantially similar annual yield selected by the Committee. Notwithstanding the foregoing, amounts credited to a Participant's Deferred Compensation Account after January 30, 1994 pursuant to a Deferral Election or Rollover Election shall be credited with interest as of each Determination Date at a rate equal to the Corporation's Cost of Capital. For this purpose, \"Cost of Capital\" means the cost of funds employed in the Corporation's business as determined by the Corporation's Chief Financial Officer effective as of the first day of each Plan Year.\nSection 5 - Payment of Benefits\n5.1 Payment Upon Termination of Service.\n(a) A Participant whose service with the Corporation terminates for any of the following reasons shall be entitled to receive an amount equal to the balance of his Deferred Compensation Account, payable as provided in Section 5.4 and 5.5:\n(i) retirement under the Corporation's Retirement Plan or its Insurance and Retirement Plan for Executives, as those plans may be amended from time to time;\n(ii) Disability;\n(iii) the convenience of the Corporation as determined by the Committee;\n(iv) a Change of Control, provided that the Participant's service terminates within 24 months after the occurrence of such Change of Control; or\n(v) if the Participant is a Director, termination of service for any reason other than death.\n(b) A Participant whose service with the Corporation terminates for any reason other than death or the reasons specified in paragraphs (a) or (c) shall be entitled to receive an amount, payable as provided in Sections 5.4 and 5.5, equal to the balance of his Deferred Compensation Account, calculated by recomputing all interest credited to such Deferred Compensation Account at a rate equal to Moody's plus 2 percent, provided that all interest credited to the portion of such Deferred Compensation Account attributable to amounts deferred after January 30, 1994 shall be recomputed at a rate equal to the Cost of Capital minus 4 percent.\n(c) A Participant, other than a Director, whose service with the Corporation is terminated for cause shall be entitled to receive an amount, payable as provided in Sections 5.4 and 5.5, equal to the balance of his Deferred Compensation Account, calculated by recomputing all interest credited to such Deferred Compensation Account at a rate equal to Moody's, provided that all interest credited to the portion of such Deferred Compensation Account attributable to amounts deferred after January 30, 1994 shall be recomputed at a rate equal to the Cost of Capital minus 6 percent. For this purpose, a Participant's service with the Corporation shall be considered to be terminated for cause only if: (i) the Participant is convicted of a felony, without regard to his right to appeal, which involves the Corporation's real, tangible or intellectual property, any of its personnel or any person with whom the Corporation has a business relationship, and (ii) at least two-\nthirds of the members of the Board affirmatively vote, in their sole discretion, to terminate the Participant's employment with the Corporation because of such conviction.\n5.2 Payments Upon Death.\n(a) Each Participant may designate a Beneficiary or Beneficiaries to receive payment of the amounts provided in paragraph (b) in the event of his death. Each Beneficiary designation: (i) shall be made on a form filed in the manner prescribed by the Committee, (ii) shall be effective when, and only if made and filed in such manner during the Participant's lifetime, and (iii) upon such filing, shall automatically revoke all previous Beneficiary designations.\n(b) Upon the death of a Participant, the Participant's Beneficiary shall be entitled to receive an amount equal to the balance of the Participant's Deferred Compensation Account payable as provided in Section 5.4 and 5.5.\n(c) If the payments to be made pursuant to paragraph (b) are not subject to a valid Beneficiary designation at the time of the Participant's death (because the designated Beneficiary predeceased the Participant or for any other reason), the estate of the Participant shall be the Beneficiary. If a Beneficiary designated by the Participant to receive all or any part of the Participant's Deferred Compensation Account dies after the Participant but before complete distribution of that portion of that Deferred Compensation Account, and at the time of the Beneficiary's death there is no valid designation of a contingent Beneficiary, the estate of such Beneficiary shall be the Beneficiary of the portion in question.\n(d) Any payments made to a Participant's Beneficiary pursuant to life insurance policies on the life of the Participant which are purchased in connection with this Plan shall be offset against, and shall to that extent reduce the payments otherwise required to be made to such Beneficiary pursuant to Section 5.2(b).\n5.3 Hardship Distributions. The Committee may, in its sole discretion, make distributions to a Participant from his Deferred Compensation Account prior to his termination of service with the Corporation if the Committee determines that the Participant has suffered a Hardship. The amount of any such distribution shall be limited to the amount reasonable necessary to meet the Participant's needs created by the Hardship.\n5.4 Form of Payment.\n(a) Except as provided in paragraph (c), the amount which a Participant or Beneficiary becomes entitled to receive pursuant to Sections 5.1 or 5.2 shall be paid either (i) as a lump sum or (ii) in equal annual installments annuitized over a period of time not to exceed 15 years, computed by using the rate of interest applicable to the Participant's Deferred Compensation Account at the time the first installment becomes payable.\n(b) Except as provided below in this paragraph (b), the Participant shall elect, at the time and in the manner prescribed by the Committee, the form specified in paragraph (a) in which payment shall be made. If the Participant fails to elect the form of payment, payment shall be made in accordance with paragraph (a) (ii) over a period of 15 years, provided that in the case of such a Participant's death, the Participant's Beneficiary may elect the\nform of payment. In the case of a Participant who becomes entitled to receive payment pursuant to Section 5.1(a)(iii), the Committee shall determine the form specified in paragraph (a) in which payment shall be made.\n(c) Notwithstanding any other provision of this Plan, the amount which a Participant becomes entitled to receive pursuant to paragraph (b) or (c) of Section 5.1 shall be paid in a lump sum.\n5.5 Commencement of Payments.\n(a) Payment which a Participant or Beneficiary becomes entitled to receive in the event of the Participant's death, Disability or termination of service pursuant to paragraph (b) or (c) of Section 5.1 shall commence or be made, as the case may be, as soon as practicable after the occurrence of such event.\n(b) Payment which a Participant becomes entitled to receive upon termination of service pursuant to Section 5.1(a)(iii) shall commence or be made, as determined by the Committee, on the first day of any month between the date the Participant's service terminates and his 66th birthday.\n(c) Payment which a Participant becomes entitled to receive upon termination of service for any other reason shall commence or be made, as elected by the Participant at the time and in the manner prescribed by the Committee, on the first day of any month between the date his service terminates and (i) in the case of an Employee, his 66th birthday, or (ii) in the case of a Director, his 73rd birthday.\n5.6 Payment as of January 1, 2000\n(a) An Employee or Director who is an active Participant on April 1, 1991 may, by an instrument in writing filed with the Vice President of Human Resources and Organization Development no later than August 31, 1991, elect that the amount described in paragraph (b) shall be paid to him or, if applicable, to his Beneficiary on January 1, 2000.\n(b) Notwithstanding any other provision of this Plan:\n(i) a Participant whose service with the Corporation has not terminated before January 1, 2000, or\n(ii) a Participant or Beneficiary who is receiving installment payments pursuant to Section 5.4 as of January 1, 2000, shall, if the Participant has made the election provided for in paragraph (a), be entitled to receive an amount, payable on January 1, 2000 as a lump sum, equal to the portion of the Participant's Deferred Compensation Account, to the extent such portion has not previously been distributed to the Participant, or, if applicable, his Beneficiary pursuant to Sections 5.3 and 5.4, which consists of the balance of the Participant's Deferred Compensation Account as of March 31, 1991 together with interest credited to such balance pursuant to Section 4.2 from April 1, 1991 to December 31, 2000. Solely for purposes of this Section 5.6, interest on such balance from January 1, 2000 to December 31, 2000 shall be credited as of January 1, 2000.\n(c) Any balance remaining in the Participant's Deferred Compensation Account on January 1, 2000 after payment of the amount described in paragraph (b), together with any amounts credited to his Deferred Compensation Account after such date, shall continue to be payable in accordance with the provisions of Sections 5.1 through 5.5.\nSection 6 - Administration\n6.1 Committee; Duties. The Plan shall be administered by the Committee, which shall have the responsibility and authority to, among other things, (a) interpret and construe the terms of the Plan and (b) adopt such regulations, rules, procedures and forms consistent with the Plan as it considers necessary or desirable for the administration of the Plan. In all cases the determination of the Committee shall be final, conclusive and binding on all persons.\n6.2 Appointment of Agents. The Committee shall appoint the Vice President of Human Resources and Organization Development to be the Committee's agent and shall delegate to him its duties with respect to the day-to-day administration of the Plan. The Committee may from time to time appoint other agents and delegate to them such administrative duties as it sees fit. Notwithstanding the above, the Committee may not delegate to any agent its duties under the Plan provided in Sections 2.1(n), 3.4, 4.2, 5.1(a)(iii) and 5.3.\nSection 7 - Amendment or Termination of Plan\n7.1 Right to Amend or Terminate. The Board reserves in its sole discretion the right, at any time and from time to time, to amend or terminate the Plan.\n7.2 Effect of Amendment or Termination. No amendment or termination of the Plan pursuant to Section 7.1 shall deprive any Participant or Beneficiary of any part of his benefits under the Plan accrued as of the time of such amendment or termination. If the Plan is terminated, each Participant shall be paid the full amount of his Deferred Compensation Account in a lump sum within 90 days of the date of termination.\nSection 8 - Miscellaneous Provisions\n8.1 No Implied Rights. Nothing in his Plan shall be deemed to: (a) give to any Employee the right to be retained in the employ of the Corporation or to interfere with the right of the Corporation to dismiss any Employee at any time, or (b) give to any Participant or Beneficiary (i) any right to any payments except as specifically provided for in the Plan or (ii) any interest in any insurance policies acquired by the Corporation in accordance with Section 8.2\n8.2 Insurance Policies. The Corporation in its discretion may, but shall not be required to, provide for its obligations under this Plan through the purchase\nof one or more life insurance policies on the life a Participant. Each Participant agrees, as a condition to receiving any benefits under this Plan, to cooperate in securing life insurance on his life by furnishing such information as the Corporation or any insurer may require, by submitting to such physical examinations as may be necessary, and by taking such other actions as may be required by the Corporation or any insurer to obtain and maintain such insurance coverage.\n8.3 No Assignment or Alienation. To the extent permitted by law, no benefit provided under the Plan shall be anticipated, assigned (either at law or in equity), alienated or subject to attachment, garnishment, levy, execution, or other process. Any attempt to perform any such action shall be void.\n8.4 Expenses. The Corporation shall pay all expenses incident to the operation and administration of the Plan.\n8.5 Applicable Laws. Except as otherwise required by federal law, the provisions of the Plan and the rules, regulations and decisions of the Board and the Committee shall be construed and enforced according to the laws of the District of Columbia.\nEXHIBIT 10(y)\n[TRANSLATED FROM THE ORIGINAL DOCUMENT IN FRENCH]\nAgreement dated as of January 18, 1993\nbetween\nthe State of Cote D'Ivoire\nRepresented by the Minister of Communications herein called: \"Employer\"\nand\n\"The Communications Satellite Corporation (COMSAT)\"\nRegistered Offices: 22300 COMSAT Drive, Clarksburg, Maryland 20871, U.S.A. Legal Status: Corporation existing under American Law hereby represented by Mr. Kenneth Hoch, Vice President, Acting on behalf of the Company under power of attorney annexed to this contract and hereinafter called \"CONTRACTOR\".\nIt has been agreed and decided as follows:\nChapter I - General Conditions\nArticle 1.1 Object of the Contract and Scope of Works\n1.1.1 Object of the Contract\nThe object of the contract for:\nThe renovation of the equipment and installations of existing radio and television broadcast stations and creation of new satellite transmission stations for one television and channel and two radio channels.\nHereinafter called \"Countrywide Sound and Television Broadcast Coverage.\"\n1.1.2 Scope of works\nIn accordance with the terms and conditions of the Technical Specifications (TS) of this contract, works shall comprize:\n1.1.2.1 Firm Phase\n1.1.2.1.1 Lot A\n1. Supply, delivery, installation and commissioning of the entire set of telecommunications equipment needed for the works. 2. Rehabilitation of existing equipment. 3. quipping of new transmission stations.\n4. Supply of a mobile earth station. 5. Supply of a stock of spare parts. 6. Supply of ten (10) maintenance vehicles. 7. Technical assistance and training of personnel necessary for future operation of installations. 8. Obligation to maintain public service during the entire duration of works described in this contract.\n1.1.2.1.2 Lot B\nAll works, infrastructure and utilities:\nfor the construction of new transmission centers, - for the renovation of existing centers.\n1.1.2.2 Optional Phase\n1.1.2.2.1 Lot A\n1. Supply, delivery, installation and start of function of the set of equipment needed for the works. 2. Equipping of new transmission stations. 3. Obligation to maintain public service during the entire duration of works described in this contract.\n1.1.2.2.2 Lot B\nAll works, infrastructure and utilities for the construction of a new transmission station.\nArticle 1.2 - Knowledge of Sites and Working Conditions\nFor works\nFor LOT A works, the CONTRACTOR hereby testifies to his complete knowledge of:\n- the nature and geographic location of works, - the meteorological and climatic conditions, - general conditions for execution of works, especially equipment needed for them, - existence of possible nearby constructions that could affect the mode of execution of the works, - plans, technical specifications, and operation manuals of existing installations, - the exact plan location as well as the nature of all utilities requiring either a diversion or special precautions related to the works, - local conditions, as a rule and more particularly conditions of supply and stocking of equipment and tools,\n- means of communication, transport, possibilities of water, electricity and fuel supplies, - availability of labour, - all constraints and obligations resulting from social, tax and customs laws in COTE D'IVOIRE, - all the conditions and circumstances likely to have an influence on the delivery of supplies, execution of works or prices, - techniques and modes of execution of works in force in COTE D'IVOIRE.\nThe main contractor shall assist the CONTRACTOR in the collection, verification and analysis of these information items. The CONTRACTOR shall, however, be responsible for the adequacy of these information items needed for the execution of services put in his charge.\nThe CONTRACTOR shall be entirely liable for any lack, error or omission by him of the knowledge of the sites and working condition.\nThe parties agree that all the plans, characteristics, operational schedules provided by the ADMINISTRATION concerning the existing installations shall only be given as information and shall not be binding on the ADMINISTRATION.\nArticle 1.3 - Interpretation of Terms Used\nThe following explanations are provided for terms used in this contract:\n1.3.1 The term \"EMPLOYER\" means \"THE MINISTRY OF COMMUNICATIONS\"\n1.3.2 The term \"MAIN CONTRACTOR\" means \"the DIRECTEUR GENERAL DE LA DIRECTION ET CONTROLE DES GRANDS TRAVAUX (DCGTx)\".\n1.3.3 The term \"ENGINEER\" means the duly accredited representative of the \"MAIN CONTRACTOR\" for the monitoring and supervision of the works.\nThe ENGINEER shall carry out, on behalf of the ADMINISTRATION, duties of technical and administrative monitoring of the works.\nIn this regard, he shall, inter alia, be responsible for:\n- approval of specification plans and execution schedules set up by the \"CONTRACTOR\", - regular monitoring of the execution of actual works in accordance with approved plans comprizing, if\nnecessary, possible modifications to the basic project made by the ADMINISTRATION, - checks and other in-situ tests to ensure that the quality of materials and their installation are in conformity with the technical specifications stipulated in the contract, - verification and certification of invoices of the CONTRACTOR, - establishment of counter-measurements, architect's log, provisional monthly breakdown and final detailed account, - writing and notifying directives and any other note sent to the CONTRACTOR, necessary for the appropriate execution of works and their supervision, - factory acceptance, - visits prior to provisional and final acceptance of works.\n1.3.4 The term \"ADMINISTRATION\" broadly means the various STATE agents.\n1.3.5 The term \"CONTRACTOR\" means the holder of this contract or his duly appointed representative.\n1.3.6 The \"PRICE OF THE CONTRACT\" means the amount mentioned under Article 2.1 of this PARTICULAR TERMS AND CONDITIONS (PTC) or THIRTY SIX MILLION UNITED STATES DOLLARS excluding VAT - excluding custom duty.\n1.3.7 The term \"WORKS BY FORCE ACCOUNT\" means works executed by the \"MAIN CONTRACTOR\" using the material and human resources of the \"CONTRACTOR\".\n1.3.8 The term \"CONTROLLED EXPENSE WORKS\" means works executed by the CONTRACTOR and paid for on the basis of actual disbursements.\n1.3.9 The term \"MISCELLANEOUS REIMBURSEMENTS - CONTRACTOR AUTHORIZED\" means expenses directly related to execution of contract which MAIN CONTRACTOR could request CONTRACTOR to pay his appointed suppliers on behalf of the EMPLOYER.\nArticle 1.4 - Listing of Contract Documents\nThe contract comprizes, by order of priority the following documents:\n- Document 1: DEED OF EMPLOYMENT - Document 2: THE PARTICULAR TERMS AND CONDITIONS (PTC) - Document 3: TECHNICAL SPECIFICATIONS (TS) - Document 4: BREAKDOWN OF TOTAL CONTRACT PRICE OF LOT A - Document 5: PROVISIONAL BILL OF QUANTITIES FOR LOT B.\nIn case of any discrepancy among the documents of the contract, such documents shall be considered in the order in which they are listed above.\nIn case of discrepancy between the provisions of the same document, the most restrictive provisions for the CONTRACTOR shall carry. Contractual documents shall be those which are listed above which represent the entire agreement between the parties and stipulate all their respective rights, obligations and responsibilities.\nArticle 1.5 - Document Preparation and Submission-Assistance of Employer\n1.5.1 Documents to be Issued to the Contractor\nFollowing the notification of approval of the contract, the EMPLOYER shall issue, at no cost to the CONTRACTOR and against a receipt, a certified true copy of contractual documents listed under Article 1.4 of the aforementioned PTC.\n1.5.2 Documents to be Prepared and Submitted by Contractor\nWithin a period of ONE HUNDRED AND TWENTY (120) days starting from the day of commencement of works, the CONTRACTOR shall provide:\n- the organizational chart of the local site management and supervisors indicating their names, dates of arrival and qualification of various supervisors, - detailed implementation schedules(s) of all the works, pert type, established on the basis of the contract. It (they) shall be regularly up-dated. To facilitate its (their) use, it (they) shall be in the form of implementation charts.\nThis schedule shall notably comprize all the relevant information on:\n- general programme of supply delivery - planning for end of deliveries as partially or completely set out in general programme, - methods and mode of execution proposed by the CONTRACTOR for the execution of works - execution rate,\n- works (or part of works) for which several work posts shall be necessary and their relevant corresponding periods, - site manpower needs, - provisional payment schedules, - one month preceding each quarter, or at any moment, the ENGINEER shall deem it necessary, especially if schedules are not met, the CONTRACTOR shall submit to the MAIN CONTRACTOR a detailed week to week quarterly programme per work or nature of works comprizing the following four items: - future tasks, - corresponding rates of implementation, - manpower needed, - supplies needed.\nAny modification of installation, construction materials or implementation schedules shall be subject to the prior approval of the ENGINEER. The MAIN CONTRACTOR shall present his comments on the programmes submitted to him.\nStudies carried out by Sub-contractors must bear their stamp and be presented to the ENGINEER by the CONTRACTOR. The latter shall be solely liable for them.\nThe ENGINEER shall sign each plan or make relevant modifications thereof known within THIRTY (30) days. Beyond this period, the plan shall be deemed to have been approved. The approval stamp of the ENGINEER shall not diminish in any way the liabilities of the CONTRACTOR.\nThe CONTRACTOR shall therefore submit to the ENGINEER within FOURTEEN (14) days, FIVE (5) copies of implementation documents and TWO (2) counter-drawings on white tracing cloth. The CONTRACTOR shall strictly adhere to the implementation drawings.\n1.5.2.3 During Project Completion Phase\nThe CONTRACTOR shall constitute a complete file of drawings during the execution of the project. All plans, including those provided by the CONTRACTOR shall be as detailed as necessary to provide complete details on the installation of partially or completely finished infrastructures.\nWithin THREE (3) months of the provisional delivery the CONTRACTOR shall submit to the ENGINEER:\n- TWO (2) complete collections of reversed tracings of all documents prepared by him, updated and in conformity with the execution, - FIVE (5) copies of each tracing,\n- TWO (2) 35 mm microfilms on cards with windows of all the drawings.\n1.5.3 Assistance by Employer\nThe EMPLOYER shall be under the obligation to provide all reasonably possible assistance to the CONTRACTOR in the accomplishment of various administrative procedures: responsibility for their success shall rest entirely on the CONTRACTOR. The EMPLOYER shall notably:\na) provide any assistance which may be required of him in order to facilitate the clearing of equipment through customs; b) assist the CONTRACTOR to obtain at the appropriate time, the authorizations required for the temporary importation into the Republic of Cote d'Ivoire of measuring instruments and other equipment which the CONTRACTOR shall deem useful for the carrying out of services stipulated in the contract; c) assist the CONTRACTOR to obtain authorization to re-export equipment temporarily imported into the country as soon as their use in Cote d'Ivoire shall be over; d) undertake all the necessary steps to ensure that the staff of the CONTRACTOR has access to the various sites; e) enable the CONTRACTOR's staff to have the free use of available measuring instruments; f) facilitate the immediate obtention of any medical assistance and necessary medical evacuation facilities in case of serious accident with the cost being borne by the CONTRACTOR; g) freely making available to the CONTRACTOR and on each site throughout the period of the project an office with a lock and key and equipped with a telephone. The CONTRACTOR shall be responsible for the bills accruing from the use of the latter; h) provide adequate shelter and protection for equipment delivered to various sites and not yet checked and signed for; i) obtain the approval from INTELSAT for access to the system and participation of his staff in antenna testing and putting into operation. The CONTRACTOR shall assist the EMPLOYER to obtain space sector capacity in the operation of the network; j) avail the CONTRACTOR of sites and premises under lock and key, air conditioning and primary power for the installation and operation of equipment as well as the necessary pylons, whenever responsibility for such\nfacilities is not attributed to the CONTRACTOR in the Technical Specifications (TS); k) assist the CONTRACTOR, when the need arises to obtain entry and exit visas, work permits and \/or residence permits and laisser-passers for his expatriate staff; l) assist the CONTRACTOR to obtain accommodation for his staff on the various sites; m) obtain any other license and\/or permit required in Cote d'Ivoire.\nArticle 1.6 - French Language-Metric System Contract Currency\nAny written documents from or to the CONTRACTOR for the purpose of the execution of this contract shall be exclusively:\n- in the French Language, - in the metric system, - with reference to the US Dollar.\nThe CONTRACTOR shall have on the site an adequate number of qualified REPRESENTATIVES and INTERPRETERS speaking the French Language in order to facilitate the work of the ENGINEER and his REPRESENTATIVES; in particular, the approved REPRESENTATIVE of the CONTRACTOR as well as his supervising staff should have a fair knowledge of the French language.\nArticle 1.7 - Laws and Legislation Governing the Contract\n1.7.1 Contract Governed by Ivorian Law\nThe CONTRACT is governed by the laws of the Republic of Cote d'Ivoire.\nThe LEGISLATION in force in Cote d'Ivoire is the only one applicable to this contract except for American Legislation on the export of the technology mentioned in Article 1.7.2 below.\nThe CONTRACTOR must comply with any laws or regulations issued by Ivorian Authorities and applicable to his activities.\nHe shall notably safeguard the EMPLOYER against any penalties or liabilities resulting from the non compliance with these laws and regulations.\nThe CONTRACTOR and his staff shall be subjected to the social and tax laws of the Cote d'Ivoire.\n1.7.2 American Legislation Concerning Technology Export\nThe contract shall be subjected to the regulations applicable in the United States of America on the exportation of equipment and related documentation using certain technologies.\nThe EMPLOYER shall undertake to ensure that goods and documents exported from the United States for the execution of this contract shall only be used for the installation and operation of this broadcast network and shall not directly or indirectly be re-exported to another country without the prior written authorization of the United States Government. The EMPLOYER shall indemnify the CONTRACTOR for the consequences of any violation of this commitment.\nThe provisions of this Article and other restrictions or conditions imposed by the United States Government on this contract shall be binding on the two parties after the termination of the contract.\nArticle 1.8 - Labor\n1.8.1 The CONTRACTOR shall be compelled to observe existing work regulations and social legislation as well as those that shall be published in the OFFICIAL GAZETTE OF THE REPUBLIC OF COTE D'IVOIRE.\n1.8.2 The CONTRACTOR shall comply with the legislation of the Republic of Cote d'Ivoire in matters relating to foreign labour.\nArticle 1.9 - Legislation and Social Regulation - Application to Company Staff and Payment of Salaries\n1.9.1 The CONTRACTOR shall, at his own expense, apply Ivorian social regulations on housing, health and safety to all his employees.\nThe CONTRACTOR shall observe any new legislation or regulation that shall apply in this regard. Notwithstanding the obligations stipulated by the laws and regulations on labour, the CONTRACTOR shall convey to the ENGINEER, at his request, the updated list of names of employees and their qualifications. He shall also convey at the request of the ENGINEER all the payslips of the company employees. The ENGINEER can at any time request the CONTRACTOR for evidence of his application of social legislation to his employees, notably in matters concerning salaries and wages, health and safety.\nThe CONTRACTOR shall be responsible for hiring the staff needed for the execution of the project.\nThe CONTRACTOR shall refrain from enticing workmen away from other companies working for the EMPLOYER.\nThe number of workers of each profession must be proportional to the quantity of structures to be built, taking into consideration time schedules required.\nThe CONTRACTOR can, if he deems it necessary and with the agreement of the MAIN CONTRACTOR or ENGINEER, request derogations of laws, regulations and collective agreements stipulated in texts on the duration of work, weekly breaks, overtime, night shift and public holidays.\nThe prior approval of the MAIN CONTRACTOR or ENGINEER can only be given if the CONTRACTOR shall have presented his request at least five (5) days before the day(s) for which the derogation is sought.\nNo increase in price nor additional payment shall be given the CONTRACTOR because of the above-mentioned derogations.\nThe MAIN CONTRACTOR or ENGINEER can demand the departure from the site of any executive, supervisor or worker deemed to be incompetent or guilty of repeated negligence, carelessness or dishonesty and, generally, of any employee whose behaviour is inimical to the proper execution of the project.\nThe CONTRACTOR shall be solely liable for damages arising from any fraud or poor workmanship committed by his employees in the execution of the project.\n1.9.2 The CONTRACTOR shall be solely liable for the application of all labour legislations and regulation, notably concerning health and social regulations.\n1.9.3 Notwithstanding liabilities stipulated by current labour regulations and laws, the CONTRACTOR shall also provide the ENGINEER with the list of members of his local staff. He shall also be bound to furnish the ENGINEER and any other Administrative Authority upon the request hereof, all payslips of the CONTRACTOR's local staff. One or several agents of the ENGINEER or ADMINISTRATIVE AUTHORITIES may observe the payment of salaries and wages whenever they deem it necessary. The ENGINEER may at any moment request from the CONTRACTOR evidence of the latter's compliance with labour regulations and social regulations, notably in matters relating to salaries and wages, health and safety.\nThe CONTRACTOR may, if he deems it useful, request and utilize derogations from stipulated laws and regulations on working hours and weekly breaks (overtime, night shifts and holidays). No additional payment will be made to the CONTRACTOR as a result of the aforementioned derogations.\nThe CONTRACTOR shall comply with Ivorian laws on foreign labor.\n1.9.4 The CONTRACTOR shall hire the necessary labour for the project under conditions stipulated in current regulations.\nThe number of workers of each profession shall always be proportional to the quantity of structures to be constructed and on the basis of deadlines set.\nThe CONTRACTOR shall refrain from enticing workmen away from other companies working for the EMPLOYER.\nThe CONTRACTOR shall take great care in hiring his employees; the EMPLOYER shall reserve the right to reject entry or residence visa to any person whose presence, in his view, would be inimical to public good. The EMPLOYER may demand the departure from the site of any executive, agent or workers under the CONTRACTOR's orders for repeated insubordination, incompetence, negligence, carelessness or dishonesty. The application of this right shall not in any way serve as an excuse for delays and poor workmanship and claims of any kind by the CONTRACTOR.\nThe CONTRACTOR shall be liable for acts of fraud and poor workmanship committed by his supervisors and workers in the supply and use of materials and other services.\n1.9.5 The CONTRACTOR shall comply with work safety regulations, in this regard, he shall notably:\n- appoint an officer in charge of safety at the start of works and with the approval of the ENGINEER, - undertake all the necessary steps to avoid occupational accidents for which he shall solely be responsible, - insure all his employees against occupational accidents.\nThe attention of the CONTRACTOR is particularly drawing to regulations in force on workers' accommodation and health.\nThe CONTRACTOR shall be responsible for the housing of all his employees in Cote d'Ivoire.\nArticle 1.10 - Health Surveillance of Sites\nThe CONTRACTOR shall provide at no extra cost first-aid and rapid evacuation facilities for any victim of accident either to the nearest health center or home depending on the seriousness of the victim's condition.\nHe must have someone on the spot capable of providing first-aid care and must ensure adequate pharmaceutical products.\nThe CONTRACTOR shall inform the EMPLOYER of any suspicious disease on the sites in accordance with Ivorian health laws.\nArticle 1.11 - Presence of Contractor on Work Sites - Service Orders\n1.11.1 Presence of Contractor on Work Sites\nThe CONTRACTOR shall permanently ensure the on-site supervision of the conduct and execution of works in accordance with the implementation plan. He must appoint a Representative, approved of by the MAIN CONTRACTOR, and who shall have the necessary power to:\n- take necessary immediate decisions on the progress of the work, - receive service orders.\nThe MAIN CONTRACTOR reserves the right to withdraw the approval of the CONTRACTOR's Representative and demand his replacement.\nThe CONTRACTOR shall report to the offices of the MAIN CONTRACTOR or ENGINEER and accompany them on their tour of the site whenever this shall be required. If need be, he shall be accompanied by his SUB-CONTRACTORS.\n1.11.2 Service Orders\nThe service orders shall be written, dated and numbered by the MAIN CONTRACTOR. They shall take immediate effect.\nThey shall be issued in TWO (2) copies to the CONTRACTOR who shall sign, date and return one copy to the MAIN CONTRACTOR.\nWhen the CONTRACTOR shall deem that the service order calls for reservation on his part, he must under penalty of preclusion, make this known in writing to MAIN CONTRACTOR within TEN (10) days.\nThe CONTRACTOR shall strictly comply with service orders which are notified him, regardless of any reservation on his part.\nThe service orders concerning sub-contracted jobs shall be addressed only to the CONTRACTOR who shall be responsible for receiving them.\nArticle 1.12 - Authorization to Sub-Let\nThe CONTRACTOR, holder of the contract, may sub-let some works of the contract. For local jobs, he must obtain the prior authorization from the MAIN CONTRACTOR who, in case of refusal must provide reasons.\nTo support his request, the CONTRACTOR shall specify:\n- the nature of the services to be sub-let, - the name, address, qualification, insurance certificates and references of the proposed SUB-CONTRACTOR.\nThe authorization application for a SUB-CONTRACTOR presented to the MAIN CONTRACTOR, shall imply that the services, for which sub-contract is requested shall be ascribed within the confines of the terms of the contract as set out under Article 1.4 of the PTC.\nAuthorization to sub-let shall not diminish in any way the liabilities of the CONTRACTOR, who shall remain responsible of the entire execution of the contract, to the EMPLOYER.\nThe appointment of a SUB-CONTRACTOR is subjected to conditions stipulated under this Article.\nThe Contractor shall be responsible for the payment of SUB-CONTRACTORS, and shall not in any way default in this. In case of default, the EMPLOYER may substitute for him without any appeal.\nArticle 1.13 - Subjection Arising from Closeness of Sites Unknown to the Company\nThe CONTRACTOR shall not, under any circumstances, claim the right to shirk his contractual obligations, nor lay claims as a result of subjections arising from jobs that the ADMINISTRATION or any other company may have him carry out on the site, except if he shall have given prior notice to the ADMINISTRATION and provided evidence of the inconvenience this may have subjected him to.\nArticle 1.14 - Night Work and Public Holidays\nWork carried out at night or on public holidays shall be subjected to authorization by the ENGINEER.\nThis approval shall only be granted if the CONTRACTOR shall have taken the relevant steps and if the request shall have been made early enough to enable the ENGINEER to ensure the supervision and monitoring of the works.\nNo additional cost shall be granted for work done at night and public holidays.\nChapter II - Financial and Administrative Clauses\nArticle 2.1 - Price of Contract\n2.1.1 Firm Phase\n2.1.1.1 Lot A\nThe value of LOT A amounts to a total and fixed price of: TWENTY SEVEN MILLION US DOLLARS (US $27,000,000) (excluding VAT and duty). The total value of LOT A of the contract, excluding fees, registration charges, VAT, \"TPS\", at prices prevailing in October 1992 and under conditions stipulated in this contract and notably tax and customs levies specified under Articles 2.19 and 2.20 of the particular terms and conditions amounts to the following:\nTotal value excluding taxes and duties: US $27,000,000 Total customs duty: US $ 6,451,772 Registration charges: US $ 1,600 VAT at 25%: US $ 8,362,943 Total value including taxes: US $41,816,315\nFORTY-ONE MILLION EIGHT HUNDRED AND SIXTEEN THOUSAND THREE HUNDRED AND FIFTEEN DOLLARS.\n2.1.1.2 Lot B\nThe estimated total amount of Lot B is a sum of: 9,000,000 USD tax and duty free (Nine million US Dollars).\nThe total amount of the market Lot B without harbor, stamp, and registration fees and without interior V.A.T. [value added tax] and T.P.S., under the conditions defined in all the clauses of the current transaction, particularly the fiscal and customs clauses specified in Articles 2.19 and 2.20 of the Schedule of Clauses and Special Conditions rises then to a sum of:\nTotal amount without duties and taxes: 9,000,000 US dollars Total amount of harbor fees (customs duty): 1,350,000 US dollars Total amount of V.A.T. at a rate of 25%: 2,587,000 US dollars Total amount, all taxes included: 12,937,500 US dollars\nTwelve million nine hundred thirty-seven thousand five hundred US dollars (A.T.I.).\n2.1.2 Optional Section\n2.1.2.1 Lot A\nThe total amount of Lot A is a total, inclusive, firm and fixed sum of:\n1,111,000 USD tax and duty free (One million one hundred and eleven, thousand US Dollars).\nThe total amount of the market Lot A without harbor, stamp, and registration fees, without interior V.A.T. [value added tax] and T.P.S. under conditions defined by all the clauses of the current transaction, particularly the fiscal and customs clauses specified in Articles 2.19 and 2.20 of the Schedule of Clauses and Special Conditions rises then to a sum of:\nTotal amount without duties and taxes: 1,111,000 US dollars Total amount of customs duties: 265,086 US dollars Total amount of V.A.T. at a rate of 25%: 344,022 US dollars Total amount, all taxes included: 1,720,108 US dollars\nOne million seven hundred twenty thousand one hundred eight US dollars (A.T.I.).\n2.1.2.2 Lot B\nThe provisional value of LOT B amounts to SEVEN HUNDRED THOUSAND DOLLARS (US $700,000).\nThe total value of LOT B of the contract, excluding customs and registration charges, excluding VAT and professional taxes and under conditions specified in the terms and conditions of this contract, notably regarding taxes and customs levies specified under Articles 2.19 and 2.20 of the PTC amounts to the following:\nTotal value excluding taxes and duties: US $ 700,000 Customs: US $ 105,000 VAT at 25%: US $ 201,250 Total value: US $1,006,250\nONE MILLION SIX THOUSAND TWO HUNDRED AND FIFTY DOLLARS.\nArticle 2.2 - Price Variations\nWithout object.\nArticle 2.3 - Breakdown of Total Fixed Price\nThe price of this contract for LOT A is total and lumpsum for LOT A.\nThe items which appear in the breakdown of the total and lump price are given for information and do not in any way bind the MAIN CONTRACTOR\/EMPLOYER.\nThe unit value of the breakdown may only be used for provisional detailed account and payment of possible modification works ordered by MAIN CONTRACTOR.\nThe total and contractual price excluding taxes and duties of the project comprizes all the expenses, of the CONTRACTOR in implementing the entire project.\nThe overall and lump price exclusive of taxes and duties shall be deemed to have been established with the understanding that no part shall be carried out by the EMPLOYER except those specified under Article 1.5.3.\nThe price shall comprize notably:\n- design, - technical execution surveys, - technical coordination of the project and supervision - of SUBCONTRACTORS, - salaries and social benefits, - staff accommodation expenses, - amortization and operation of his equipment, - supplies, materials and consumable items of all kinds, - freight, transport and transit charges, - insurance fees as stipulated under Article 2.5 of PTC, - suretyship and guarantees, - patents, fees, taxes, charges and levies of all sorts owed as a result of the execution of this contract, - taxes, and notably: - taxes on incomes, - national contribution (CN), - apprentice's tax (T.A.), - national solidarity tax (SN), - land-tax, - professional and merchant taxes, - scheduled taxes on industrial and commercial profits, - management and site changes, - overheads, - risks and profits.\nThis price shall include all the subjection and constraints arising from the application of administrative, technical and financial provisions stipulated in the contractual documents. It shall take into account risks and subjections of all kinds relating to the works specified in the contract which the CONTRACTOR shall be deemed to have full knowledge. The nature and difficulties.\nThe price shall also include expenses related to special conditions of the project notably:\nnatural phenomena (excluding Acts of God), utilization of public property and functioning of public services, simultaneous construction of other structures.\nFurthermore, it shall be specified that the price of the contract shall also include all expenses outside Cote d'Ivoire which are the necessary and direct consequence of the project (supplies, works, services, etc.), and notably, all fees, taxes, insurance, charges, overheads, false claims underwritten by the CONTRACTOR and for which he shall in any case be liable.\nIn case of sub-contracting, the prices of the contract shall be deemed to have adequately covered the general expenses of the project, especially those relating to the coordination and supervision by the CONTRACTOR and his SUB-CONTRACTOR as well as the consequences of their possible default. The overall lumpsum price stipulated above is labeled as follows:\nexcluding customs fee (special entry fee, fiscal entry fee, custom levy and statistical fee) only for the entry of materials, equipment and components inextricably bound to the project, excluding VAT and professional tax (TPS), excluding registration fees and stamps levies.\nUnder the understanding that the purchase of fuel, lubricants and hydrocarbonate binders shall be purchased locally and shall be affected by the tax laws of Cote d'Ivoire without any restriction or exception.\nThe value of stamp levy and registration fees to be paid by the CONTRACTOR for the purpose of the contract shall be reimbursed under conditions outlined under Article 2.19 of the PTC.\nAll other relevant fees and taxes to be paid by the CONTRACTOR for the purpose of the contract or any other purpose and which shall be in force at the date of the signing of the contract shall be deemed to be included in the total and contractual price of the project.\nFurthermore, the total project shall be financed by a financing agreement between the State of Cote d'Ivoire, an American Bank and EXIMBANK as guarantor.\nArticle 2.4 - Final Nature of Prices\nThe CONTRACTOR shall not revise the overall price of works pertaining to LOT A of the contract signed by him, except in the following cases:\nIf the rehabilitation of transmitters requires replacement of parts other than those specified in overall contractual breakdown, he shall do so at no extra cost provided the required parts are available on the market and can be obtained within the implementation schedules of the project. If the transmitter cannot be repaired under these conditions, any increase in price or deadline shall be subject to a special negotiation.\nArticle 2.5 - Liabilities and Insurance\n2.5.1 General Liability Clause\nNotwithstanding the insurance liabilities imposed hereunder, the CONTRACTOR shall be solely responsible for safeguarding the EMPLOYER, MAIN CONTRACTOR and ENGINEER against any claims by third parties for damages of all kinds or body injuries resulting from the preparation and (or) execution of the contract by the CONTRACTOR, his SUB-CONTRACTORS and their agents. This liability also covers damages resulting from the transportation of his materials.\nCompensations that shall be due shall be paid by the CONTRACTOR without prejudice to possible appeal against the culprits of the accident. Under no circumstances shall the EMPLOYER, MAIN CONTRACTOR and ENGINEER be held liable for damages mentioned in the above paragraph.\nThe CONTRACTOR shall not be liable for any intangible or indirect damages except in case of negligence or unintended error.\n2.5.2 Insurance\n2.5.2.1 Protection of Persons and Liabilities\nThe CONTRACTOR should apply for:\n2.5.2.1.1 Civil liability Insurance\nA third party CIVIL LIABILITY INSURANCE that covers all bodily and material damages that might occur to their parties during execution of all the transactions as well as during the guarantee time limit.\nThis insurance will be applied for in the CONTRACTOR's name of and on his behalf and will cover all the contributors, namely the\nCONTRACTOR, the OWNER, the PROJECT MANAGER, and the ENGINEER as well as the SUBCONTRACTORS for their on site activities: they will thus all be the coinsured.\nThe insurance policy should specify that the OWNER's, ENGINEER's, or PROJECT MANAGER's personnel as well as those of other on site BUSINESSES are considered as third parities with regard to the insurers. The so-called \"OVERLAPPING LIABILITY\" clause is related to both material damages and bodily injuries suffered by the coinsured. This insurance excludes the work accidents suffered by the Contractor's personnel mentioned in section 2.5.2.1.2 below.\nThis insurance must be unlimited for bodily injuries.\nThis insurance must cover especially the liability of the CONTRACTOR acting as the company manger.\n2.5.2.1.2 Work Accidents Insurance\nIn accordance with Cote d'Ivoire law, the Contractor will apply for all insurance necessary to cover this. He will monitor to see that the SUBCONTRACTORS do the same.\nHe protects the OWNER, the PROJECT MANAGER, and the ENGINEER against all claims that its personnel or those of its SUBCONTRACTORS might file against the latter both in the Cote d'Ivoire and abroad.\nFor this permanent expatriated personnel, the CONTRACTOR will also conform to the law and regulations of the original country.\n2.5.2.1.3 Automobile Liability Insurance (C.L.)\nThe CONTRACTOR will apply for insurance that conforms to Cote d'Ivoire law for all vehicles that have access to the public highway and will monitor to see that his SUBCONTRACTORS do the same.\n2.5.2.1.4 Insurance Covering Risks at Work Site\nThe CONTRACTOR must effect and maintain an insurance against work site risks, covering the EMPLOYER as well as the CONTRACTOR extending continuously from the start of the project to the provisional acceptance and covering all the goods of the project.\nThe insurance must carry widest possible guarantees and, consequently, cover all physical damage affecting the goods specified in the contract, including those caused by an error in design, planning, construction or execution material, without excluding the vitiating party.\nFrom the provisional acceptance, the guarantees of this insurance shall run during a \"maintenance\" period and, at least, during the guarantee period. The guarantees shall cover damages attributable to the CONTRACTOR's interventions on the site while carrying out his contractual duties, especially checking, maintenance, adjustment, repairs or damages caused by factors which were anterior to the provisional acceptance.\n2.5.2.2 Subscription and Production of Policies\nThe CONTRACTOR must, before the start of the project, effect insurances stipulated in paragraphs 2.5.2.1.1, 2.5.2.1.2, 2.5.2.1.3 and 2.5.2.1.4 of Article 2.5.2.1 above. The corresponding policies must be presented within FOURTEEN (14) days following the request by the MAIN CONTRACTOR or ENGINEER. All the policies must bear a clause subjecting their annulment to the prior approval of the insurance company, EMPLOYER and MAIN CONTRACTOR. They must be effected with insurance companies recognized in Cote d'Ivoire.\n2.5.2.3 Sanctions\nApart from the copies of policies taken, the CONTRACTOR must provide the MAIN CONTRACTOR's certificates showing that the said insurance policies are indeed in force. Failure to produce these documents shall prohibit any payment relating to the contract to the CONTRACTOR.\nArticle 2.6.1 Execution Period\nThe CONTRACTOR shall take all the necessary steps to complete the entire project within a maximum period of eighteen (18) months beginning from the service note ordering the commencement of work which can only be given after the entry into force of the contract.\n2.6.2 Delay Penalties\n2.6.2.1 Delay in the completion of the project, except for reasons Act of God or delays unattributable to the CONTRACTOR, shall result in the full payment of penalties without prior formal notice.\nThe value of the penalty shall be fixed at ONE THOUSAND (1\/1000th) of the initial value (less taxes) of uncompleted jobs expressed in US Dollars per calendar day of delay.\nThe term \"uncompleted structures\" mentioned above shall apply to each of the 27 centers numbered from 1 to 27 in the BREAKDOWN OF THE TOTAL AND LUMPSUM PRICE OF LOT A and BILL OF QUANTITIES AND PROVISIONAL ESTIMATES OF LOT B undelivered at the expiry of the contract.\nThe value of penalties shall be deducted from amounts owed the CONTRACTOR and shall be deducted from the project.\nAny delay for reasons of Act of God or not attributable to the CONTRACTOR shall be equally compensated for by extension of completion time.\n2.6.2.2 The parties agree that when penalties reach (5%) of the value of the contract, the following consequences shall apply:\nThe CONTRACTOR shall, by notification, inform the EMPLOYER of causes and reasons for this delay as soon as the percentage stated above reaches 4.5%.\nIn case of default by the CONTRACTOR to inform the above-mentioned, the penalties shall continue to apply.\n2.6.2.3 The penalties shall be stopped as soon as the EMPLOYER receives the notification indicated under 2.6.2.2 and for thirty (30) days during which the CONTRACTOR and EMPLOYER shall attempt to negotiate a solution which shall be subjected to a written agreement. Agreement from these negotiations shall put forward solutions for the delay and a new completion time for the project which shall not be more than 90 days after the initial completion date set in 2.6.1. Penalties outlined under Article 2.6.2.1 shall apply to the new completion date and their value shall be linked to the value of the contract.\n2.6.2.4 If by the end of negotiation period stipulated under 2.6.2.3 an agreement has not been reached, the penalties shall begin to apply and linked to the value of the contract.\n2.6.3 Specifications on Time Limit\nAny time limit specified in the contract to the EMPLOYER, MAIN CONTRACTOR or CONTRACTOR shall take effect from the date of notification of commencement of work sent to the CONTRACTOR.\nWhen the time limit is set in days, this shall mean calendar days and it shall expire at the end of the last day of the completion time specified.\nWhen the time limit is in months, it shall be counted from day to day. It there is no corresponding day in the month ending the period, the latter shall expire at the end of the last day of the month hereof.\nWhen the last day falls on a Sunday or public holiday, the time limit shall be extended to the end of the following working day.\nWhen, in executing the terms of the contract, a document must be provided, within a set period, by the CONTRACTOR to the EMPLOYER or vice versa, or when the dispatch of a document must run a certain period, the document shall be delivered to the addressee and a receipt issued. The date of the receipt shall be the official date of delivery of the document.\nArticle 2.7 - Acceptance in Factory - Provisional and Final Acceptance - Guarantee Period - Anticipated Utilization of Some Installations or Parts of Installations\n2.7.1 ACCEPTANCE\n2.7.1.1 BACKGROUND\nFor the execution of pre-delivery testing, the CONTRACTOR shall provide the necessary personnel and instruments, but he may freely use available measuring instruments belonging to the EMPLOYER for tests carried out on the site.\n2.7.1.2 Factory Acceptance\nOne month before the date scheduled for the start of necessary tests, the CONTRACTOR shall provide the MAIN CONTRACTOR with the test plans describing the intended tests and comprizing:\n- a description of the principles to be applied and conditions for the tests, - installation and description of instruments to be used, - expected result of each test.\nThe CONTRACTOR shall inform the MAIN CONTRACTOR by letter, telex or cable the date scheduled for the test. This notification shall reach the MAIN CONTRACTOR at least one month before the set date. The latter shall decide whether or not to appoint his representatives to witness the testing.\nDuring the tests, the CONTRACTOR shall complete the necessary measurement and test sheets. After the representatives of the EMPLOYER shall have attended the testing sessions, the CONTRACTOR shall provide them with sheets for their signature and observations to be completed on the site. The CONTRACTOR shall transmit them to the MAIN CONTRACTOR as soon as possible. Otherwise, the CONTRACTOR shall send them to the MAIN CONTRACTOR as soon as they are filled in.\nIf the results of the factory tests indicate that the equipment can be dispatched, a certificate of factory acceptance shall be issued to the CONTRACTOR within fourteen (14) days beginning from the end of the said tests.\nThese certificates issued on a site per site basis may include a list of reservations concerning elements that do not conform with the contractual specifications which the CONTRACTOR must rectify before presentation for provisional acceptance.\nThe factory tests and measurement sheets shall not in any way absolve the CONTRACTOR of his overall responsibilities for the performance of the equipment.\n2.7.1.3 PROVISIONAL ACCEPTANCE\nTwo months before the start of tests on the site, the CONTRACTOR shall submit to the MAIN CONTRACTOR for approval an acceptance log book describing all the measures to be carried out on each site.\nThe MAIN CONTRACTOR shall approve an acceptance book within thirty (30) days following the acceptance. Beyond this period the MAIN CONTRACTOR shall be deemed to have approved of the delivery.\nAcceptance tests shall be carried out in the presence of representatives of the MAIN CONTRACTOR after installation on each site and the measurement and test sheets shall be submitted to the representatives for signature and comments.\nIn this regard, the CONTRACTOR shall, one month before hand, inform the MAIN CONTRACTOR by registered letter, telex or cable for the scheduled date for the start of the tests and the relevant programme.\nThe tests shall be conducted to the satisfaction of the MAIN CONTRACTOR before the provisional acceptance. If the tests should be postponed or repeated through the exclusive fault of the CONTRACTOR, the latter shall refund to the MAIN CONTRACTOR the entire expenses incurred as a result, such as consultant and expert fees and additional travel expenses. If the results of the tests carried out on a given site indicate that the latter can be commissioned, a provisional acceptance certificate shall be issued to the CONTRACTOR within fourteen (14) days beginning from the end of the said tests. These certificates issued on site by site basis may contain a list of reservations on the components that do not conform with the contractual specifications but shall not prevent the operation of the network and in such a case shall indicate the time limit agreed upon for the withdrawal of these reservations.\nIf the results of the tests do not conform with the specifications, hampering the operation of the site, the provisional acceptance certificate shall not be issued, and if the time set for the installation stipulated under Article 2.6.2 shall continue to apply. A list of materials not conforming to\nspecifications shall be submitted to the CONTRACTOR within the week following the trials.\nThe CONTRACTOR shall then undertake to replace or repair the equipment concerned within the shortest possible time and present them again for testing in accordance with the procedures outlined above.\nIf provisional acceptance is granted. the MAIN CONTRACTOR shall draft and sign the minutes of the provisional acceptance which shall indicate the project completion date on which the various guarantee periods shall then be based.\nThe transfer of full property of the systems, tools and measuring equipment shall take place on the day of handing over of provisional acceptance for each site.\n2.7.1.4 GUARANTEE PERIOD\nThe guarantee period of one (1) year starting from the date of the provisional acceptance of each station.\nThe CONTRACTOR shall be bound, during the guarantee period by a liability called \"PERFECT COMPLETION LIABILITY\" by which he shall, at his own expense:\n- rectify all the defects indicated by the MAIN CONTRACTOR or EMPLOYER such that the installation shall conform with the state in which it was during the provisional acceptance, - undertake, if need be, adjustments or modifications that may appear necessary, - hand over to the MAIN CONTRACTOR plans of installations conforming with the implementation.\nThe obligation of perfect completion covers jobs needed to remedy effects of normal wear and tear with the exception of consumable items, cleaning and regular maintenance which are incumbent upon the EMPLOYER. Any default by the CONTRACTOR to meet his obligations shall, after formal notice, result in the MAIN CONTRACTOR undertaking the adjustments, modifications or repairs at the expense and risks of the CONTRACTOR.\nThe guarantee period shall be extended until the total completion of jobs and services whether the latter are carried out by the CONTRACTOR or officially in conformity with the conditions stated above.\nThe CONTRACTOR shall undertake notably to have all necessary repairs of substandard equipment done at his expense, on the site or in a factory of his choice.\nThis guarantee does not cover consumable items, but it includes the obligation to supply spare parts needed after normal wear and tear during the guarantee period.\nThe CONTRACTOR shall guarantee the repair or replacement of components under conditions stipulated above until the final acceptance; however, when these components shall have been installed six months before this date, the guarantee can be extended six months after their installation and specialty mentioned in the final acceptance certificate.\nThe guarantee does not however apply to damages resulting from violation of rules and directives given by the CONTRACTOR for the maintenance or misuse, negligence or any other omission attributable to the EMPLOYER or a third party.\n2.7.2 FINAL ACCEPTANCE\nAt the expiry of the guarantee, final acceptance operations shall be undertaken in the same manner as the provisional acceptance.\nFinal acceptance shall take place under the same conditions as the provisional acceptance mentioned above after the expiry of the guarantee period of the last site.\nIf during the guarantee period, the MAIN CONTRACTOR detects a defect of non-conformity with the technical specifications of the contract, he shall request the CONTRACTOR to carry out at his own expense, the necessary repairs.\nThe certificate of final acceptance shall only be issued after the CONTRACTOR shall have completed the repair of the established defects. Otherwise, the MAIN CONTRACTOR shall issue the certificate of final acceptance within the thirty days following the end of the guarantee.\n2.7.3 ANTICIPATED USE OF SOME INSTALLATIONS OR PART OF INSTALLATIONS\nThe EMPLOYER may, with the approval of the CONTRACTOR, dispose of some structure or parts of structures as they are completed and before the jobs stipulated in the contract are completed. In this case, the transfer of ownership of the structures involved shall be made.\n2.7.4 REPLACEMENT PARTS\nDuring a period of ten (10) years starting from the final acceptance, the CONTRACTOR shall undertake to supply within reasonable lengths of periods and at reasonable prices any replacement part or material which shall be requested of him for the maintenance of installations described in the contract.\nIn case of stoppage of manufacture of spare parts, the CONTRACTOR shall inform the EMPLOYER early enough to enable him to take the necessary measures.\nThe CONTRACTOR undertakes, however, to refrain from interfering in possible relationship between SUB-CONTRACTORS and the EMPLOYER in the direct procurement of components manufactured by the latter after the expiry of the contract.\nArticle 2.8 - Construction Defects\nIf the MAIN CONTRACTOR is of the opinion that there is a construction defect in a given installation, he shall, during or before the final acceptance direct, through a service order, the measures to be taken to identify this defect. These measures shall comprize, if need be, the demolition and partial or complete reconstruction of the structure presumed defective.\nThe MAIN CONTRACTOR may carry out these measures himself or by a third party, but the operation must be done in the presence of the CONTRACTOR, or after duly summoning him.\nIf a construction defect is observed, the expenses needed for the repairs or total rectification in accordance with the provisions of the contract as well as expenses resulting from possible defection operations, shall be borne by the CONTRACTOR with prejudice to the compensation which the MAIN CONTRACTOR may lay claim to.\nIf no defect is detected, the CONTRACTOR shall be reimbursed the expenses outlined in the preceding paragraph, if he had borne them.\nArticle 2.9 - Logging of Jobs Completed\n2.9.1 For the evaluation of possible modifications ordered by the CONTRACTOR, jobs carried out in this regard shall be logged by the ENGINEER or his approved representative in the presence of the CONTRACTOR, summoned for the purpose or his approved representative. If the CONTRACTOR does not respond to the summons and does not send his representative, the logging shall take place in his absence.\n2.9.2 The CONTRACTOR may not, under any pretext, for measurements invoke habits and traditions in his favor.\n2.9.3 The logs shall be presented for acceptance to the CONTRACTOR who may have it copied in the ENGINEER's offices.\n2.9.4 Acceptance of logs by the CONTRACTOR shall concern quantities and unit prices. The latter should be designated by the numbers of the memorandum of unit prices. When the log is limited to quantities, special mention must be made by the CONTRACTOR who shall express his reservations in writing.\n2.9.5 If the CONTRACTOR refuses to sign the log book or signs them with reservation, minutes shall be written on the presentation and accompanying circumstances; the minutes shall be annexed to the unsigned documents. In this latter case, a time limit of ten (10) days starting from the date of presentation of documents shall be allowed him to put his comments into writing. Beyond this period, the logs shall be deemed to have been accepted by him as if had been signed without reservation.\n2.9.6 The systematic conditional logging shall be considered as constituting a non observance of contractual obligations with all the administrative and legal consequences such an attitude may have.\n2.9.7 Conflicting observations may be agreed to in the course of the project, either at the request of the CONTRACTOR or initiative of the MAIN CONTRACTOR without the observations prejudicing, on principle, neither admission, claim, nor right to payment.\nArticle 2.10 - Basis of Payment\n2.10.1 Provisional Detailed Accounts\nAt the end of each month, the ENGINEER shall establish a provisional detailed account, a copy of which shall be sent to the CONTRACTOR at his request.\nThis provisional monthly detailed account shall take into account sums owed the CONTRACTOR since the beginning of the project.\nIt shall notably comprize:\n- contractual starting advance, - the CIF value of goods stripped and for which partial payment shall have been requested, - value of supplies made on the site, - the value of jobs based on bills of quantity of jobs carried out under contract conditions and unit prices included in the breakdown of the total cost, - value of works by force account, - value of jobs under controlled expenditure, - value of various repayments,\n- value of refund of customs duty, - value of refund of registration and stamp fees, - value of penalties and deductions, - value of VAT.\nThe monthly installments to be paid the CONTRACTOR shall be determined by the difference between the value of the monthly deduction and that of the deduction of the previous month.\n2.10.2 Final Detailed Account\nA final detailed account shall be established at the end of the project.\nThe final account shall include all the items mentioned under Article 2.10.1 above on provisional detailed account.\nThe value of project shall be the same as the total and lumpsum price. However, if necessary, this amount shall be revised:\n- downward to the value of jobs that the MAIN CONTRACTOR shall have expressly called off by service order, - upward to the value of additional jobs expressly ordered during the construction work.\nThe final detailed account shall be binding on the EMPLOYER only after receiving the approval of the MAIN CONTRACTOR.\nWithin three (3) months following the completion of the project and its provisional acceptance, the CONTRACTOR shall be invited by a duly notified service order, to come to the offices of the ENGINEER to inspect the final detailed account and sign it for approval. He may request to see the vouchers and have copies made as well as copies of the account.\nIn case of refusal, minutes of the presentation shall be taken and circumstances of the refusal noted. The acceptance of the final detailed account by the CONTRACTOR shall be binding in respect of unit prices and quantities.\nIf the CONTRACTOR does not reject the service order or refuses to accept the final account, or signs the latter conditionally, he shall explain in writing the reasons for his refusal and inform the ENGINEER the value of his possible claims before the end of a sixty (60) day period starting from the date of notification of the said service order.\nIt shall be expressly stipulated that the CONTRACTOR shall have no recourse to any claims relating to the final account after inspecting it and at the end of the aforementioned sixty (60) days. Beyond this time limit the final account shall be deemed to have been accepted by him even if he shall have signed it with\nreservation the reasons for which shall have no been explained as specified in the foregoing paragraph.\nPayment of the balance, after the necessary deductions from the guarantee deposit, shall be made within ninety (90) days from the date of acceptance of the final account by the CONTRACTOR of the aforementioned expiry date of sixty (60) days.\nArticle 2.11 - Unforseen Jobs and Their Price Elevation\nThe EMPLOYER can order jobs not included in the contractual price under the financing condition of the project in accordance with Article 2.3 above. If the nature of the jobs does not feature in the total price breakdown, the CONTRACTOR shall immediately conform with service orders he shall receive on the subject. New prices shall be prepared without delay following market trends or by assimilation to similar jobs in the contract.\nWhere assimilation cannot be possible, current prices on the international market shall be used as reference. If mutual consent cannot be attained, the CONTRACTOR may refer to the provisions of Article 2.25 of the PTC.\nWhile awaiting the final decision on the litigation, the CONTRACTOR shall be provisionally paid on the basis of prices proposed by the MAIN CONTRACTOR.\nArticle 2.12 - Variations of Volume of Project\nFor the purpose of application of this Article, \"volume\" of the project means the value of actual jobs, evaluated from the breakdown of the total and lumpsum price taking account possible modifications formally ordered by the MAIN CONTRACTOR and new prices fixed in application of Article 2.11 above.\nThe \"initial volume\" of the project shall be the value of jobs resulting from estimates of the contract, i.e., initial contract modified or supplemented with intervening additions.\nThe CONTRACTOR shall complete the construction of jobs indicated in the contract, irrespective of the increase or decrease of the volume of jobs resulting from technical subjections, evaluation of quantities estimated or any cause of increase or decrease thereof.\n2.12.1 Increase in the Volume of Works\nIn the event of an increase in the volume of works, the CONTRACTOR shall not raise any objection.\n2.12.2 Decrease in the Volume of Works\nIn the event of a decrease in the volume of works, the CONTRACTOR shall raise no objection so long as the decrease does not exceed Twenty Five Percent (25%) of the initial volume of works and so long as he shall have not incurred any losses.\nArticle 2.13 - Domiciliation of Payments\nPayments shall be effected in accordance with accounting regulations in force in Cote d'Ivoire. Payments shall be made:\n1. by the Register General of the CAISSE AUTONOME D'AMORTISSEMENT of COTE D'IVOIRE for the sums excluding entry duties (special entry duty, fiscal entry fee, customs fees and statistical charges), registration and stamp duties, VAT \"TPS\", by bank transfers in US Dollars to Account No............. opened on behalf of COMSAT CITIBANK NA NEW YORK, 2. by the AGENT COMPTABLE DU TRESOR PUBLIC for entry, stamps and registration fees, VAT, TPS by special checks payable to the Treasury in accordance with the provisions of Decree No 305 of 2 September 1989.\nArticle 2.14 - Payments\nPayment of installments must be effected within Ninety (90) days following the end of the month of implementation of contract.\nIn case of delay in the payment of monthly installations beyond the 90 day period, the CONTRACTOR shall have the right to claim the payment of interest on the unpaid amounts.\nInterest rates shall be based on the discount rate of the WEST AFRICAN CENTRAL BANK augmented by one point.\nInterest rates shall be calculated on amounts excluding VAT of unpaid amounts with annual capitalization (365 days). Payment of interest rate delays shall not be subjected to VAT nor TPS.\nThe period of application to be used in the calculation of delay interest shall be the number of days between the two dates below less the statutory payment period.\n1. end of month of execution of works, 2. date of payment by BANK.\nArticle 2.15 - Definitive Suretyship\nThe CONTRACTOR shall produce definitive suretyship to guarantee the proper execution of his contractual commitments and recovery\nof amounts for which he shall be deemed debtor in respect of the contract.\nThe value of definitive suretyship shall be fixed at Three Percent (3%) of the initial price less VAT and customs duties of the contract plus, if necessary, the value of amendments.\nThe CONTRACTOR shall effect the definitive suretyship within Twenty (20) days from the date of notification of approval of the contract (or amendments in the case of an increase).\nThe suretyship can be replaced with an individual and joint guarantee underwritten by a bank approved by the Minister in charge of Economy, Finance and Planning under conditions specified by regulations in force on public contracts.\nThe absence of suretyship, or, its increase, shall hamper payment of amounts owed the CONTRACTOR, including the start-up advance. In case of deduction made on the suretyship, for whatever reason, the CONTRACTOR shall have to reconstitute it.\nThe suretyship shall remain assigned to the guarantee of contractual obligations by the CONTRACTOR until the provisional acceptance of the works.\nThe definitive suretyship shall be refunded, or the guarantee in support of it released in so far as the holder shall have met his obligations and following its release by the MAIN CONTRACTOR within Thirty (30)days after the final acceptance of the project.\nArticle 2.16 - Retention Money\nRetention money is a provision meant to guarantee the perfect completion of the structure and rectify, if necessary, the defaults of the CONTRACTOR during the guarantee period.\nThe value of the retention money is fixed at Seven Percent (7%) of the initial value of the works. It shall be made up through successive deductions on the monthly installments. The replacement of this bond with a joint guarantee furnished by a bank approved by the Minister responsible for Economy, Finance and Planning may be effected either with the progress of the works or at the provisional acceptance, in which case the joint guarantee shall be furnished within Ten (10) days following the date of stoppage of the said installment.\nIn so far as the CONTRACTOR shall have met his obligations in this regard the retention money shall be refunded or the guarantee replacing it released within Thirty (30) days following the expiry of the guarantee.\nArticle 2.17 - Contractual Advance\nA contractual advance at the start of the project may be granted the CONTRACTOR provided he formally requests it. It shall be fully backed (100%) with a joint guarantee issued by a bank approved by the Minister responsible for Economy, Finance and Planning.\nThis advance shall be fixed at twenty percent (20%) of the (pre-tax) basic value of the contract.\nPayment of starting advance shall be subjected to the aforementioned request and the furnishing of guarantees (start up advance and final suretyship) must be effected within sixty (60) days starting from the date of the notification ordering the CONTRACTOR to begin works or the acceptance of the latter of the two aforementioned guarantees if the acceptance follows the notification.\nRepayments shall be made by installments and regularly beginning with the first installment on the basis of a 20% deduction of the pre-tax value of the project and shall be completed at the end of the implementation period or at the drafting of the final account. The advance and relevant repayments shall not be revised.\nArticle 2.18 - Embarkation Instalment\nThe CONTRACTOR may request that the provisional monthly breakdown includes an embarkation deposit representing ninety percent (90%) of the CIF value of the goods on board upon the presentation to the ENGINEER of the following documents:\n- bills of lading, - invoices of goods embarked, - packing list.\nThis deposit shall be fully backed (100%) with a joint guarantee from a bank approved by the Minister responsible for Finance.\nThe release of the said guarantee shall be effected by the MAIN CONTRACTOR at the inspection of the delivered goods at the site.\nArticle 2.19 - Tax and Customs System\nThe CONTRACTOR shall be deemed to have full knowledge of tax and customs laws in force in Cote d'Ivoire.\nThe contract shall be eligible for special check procedures in accordance with the provisions of Decree No 305 of 2 September 1989.\nThe breakdown for pre-tax portion authorized by the MAIN CONTRACTOR shall be conveyed to the Caisse Autonome d'Amortissement which shall initiate the procedure required for the settlement of the said portion.\nThe value of customs and entry duties based solely on materials and equipment and components incorporated definitively into the units and the VAT shall be paid by the Public Treasury by special checks.\nSuch checks with special serial numbers that shall be non-endorsable and non-compensable shall be issued in favor of the Controller of Customs and Taxes, according to the procedures described below, and given to the CONTRACTOR. The said non-endorsable checks shall be used exclusively for the intended payments and no other payment except those pertaining to customs and taxes on turnover.\nThe breakdown established for fees and taxes above by the MAIN CONTRACTOR on the basis of vouchers (customs liquidation vouchers or special VAT declarations) shall be presented by the CONTRACTOR to the Office of the Director General of Customs or Taxes for inspection.\nThe inspection of these documents shall be carried out as an emergency. The breakdowns thus signed by these offices shall then be forwarded by the CONTRACTOR to the Directorate of Public Investments for entry into the special account of the Treasury.\nThe Directorate of Public Investments shall transmit payment orders to the Treasury with relevant supporting document for issue by special checks.\nThe claims shall be supported with any details furnished by the CONTRACTOR on the possible withdrawal of credit and the special modalities for payment.\nArticle 2.20 - Registration\nThe CONTRACTOR shall undertake registration procedures to which the contract is subjected.\nStamp levies and registration fees shall be paid as under Article 2.19 above by special checks issued by the Public Treasury in favor of the Registrar and given to the CONTRACTOR for presentation at the Registry.\nArticle 2.21 - Contract Security\nIn order to ensure the security of the contract under conditions stipulated by regulations in force on the financing of State and Public Contracts, it is stated that:\n- the Department responsible for ordering payment of sums owed in the implementation of the contract shall be Direction et Controle des Grands Travaux, - the Accountant responsible for payments shall be Caissier General of the Caisse Autonome d'Amortissement de la Cote d'Ivoire for the pre-tax portion of entry (customs, entry fee and special entry fee) exclusive of stamps, registration, VAT and \"TPS\" and the Agent Comptable du Tresor Public for the portion on entry, stamp, registration, VAT and TPS, - the Officer responsible for providing the contract holder and beneficiaries of security or subrogation information and certificates stipulated under Article 6 of Decree of 6 September 1938 shall be the Director General of Direction et Controle des Grands Travaux, - the MAIN CONTRACTOR shall issue at no cost to the CONTRACTOR and at his request, an original copy of the contract with the words \"single copy issued for security\" on it.\nArticle 2.22 - Complete Termination or Suspension of Works\nWhen the Employer orders the complete stoppage of works, the contract shall be immediately terminated. When he orders their suspension for more than six (6) months, either before or after start of works, the CONTRACTOR shall have a right to the termination of the contract, if he makes the request in writing, without prejudicing the indemnity which in either case he shall be entitled to if need be.\nThe same shall hold for successive suspension, the total duration of which shall exceed a total of six (6) months and suspensions of any duration which would require modifications in the financing mechanisms and which shall not have been obtained within sixty (60) days following the notification of the said suspension.\nIf the works shall have started, the CONTRACTOR may request an immediate provisional acceptance of completed structures, which are liable to be accepted, and their final acceptance after the expiry of the guarantee period. When the CONTRACTOR has no right to a cancellation, he may, if he shall have incurred proven prejudice, lay claims for compensation within the limitations of the prejudice.\nAs soon as the notification of termination or suspension is received, the CONTRACTOR shall:\n- stop or suspend the work on the date indicated on the notice, - terminate or suspend any sub-contract, orders for equipment and materials except those needed for the\ncontinuation of work up to the date of termination or suspension, - undertake all the necessary conservation measures within the limitation and conditions outlined by the MAIN CONTRACTOR.\nArticle 2.23 - Termination by Right\nThe contract shall be terminated by right by the Minister responsible for Public Contracts without any recourse to legal intervention and without compensation in the following cases:\n2.23.1 BANKRUPTCY - LEGAL SETTLEMENT\n1. In case of bankruptcy of the CONTRACTOR, it shall be incumbent upon the Employer to accept, if need be, offers to be made by a group of creditors for the continuation of the project. 2. In case of the legal liquidation, if the CONTRACTOR is not authorized by the Courts to continue operations.\n2.23.2 Unauthorized Sub-Contracting\nIf a sub-contract is effected in breach of Article 1.12, the Employer who approved the contract may request the termination of the project or have sub-contractual jobs carried out at the expense and risks of the CONTRACTOR by State control or through a duly signed contract.\n2.23.3 Long Delays in Works\nIn the event of long delays and irrespective of the application of penalties indicated under Article 2.6, the Employer may impose, at the expense of the CONTRACTOR, additional work teams. If the above measures prove t be unsatisfactory, the Employer may request the termination of the contract after the mandatory thirty (30) day prior notice.\n2.23.4 Default of Firm Suretyship\nIn the case of default by the CONTRACTOR in effecting the firm suretyship within the time limit stipulated under Article 2.15 of the PTC.\nArticle 2.24 Coercive Measures\nThe CONTRACTOR does not comply with either the provisions of the contract or written service orders given him the MAIN CONTRACTOR or his Representatives shall notify him to comply with the said orders within a determined period of time.\nBeyond this period, if the CONTRACTOR has not implemented the prescribed provisions the Employer may, at the risk of the CONTRACTOR.\nrequest the outright termination of the contract. order control by the force account at the expense of the CONTRACTOR. This control many be partial.\nThere shall therefore be, in his presence or to his knowledge an immediate inspection of completed works, materials supplied as the inventory of equipment belonging to the CONTRACTOR and the handing over of the part of the equipment not used by the Administration for the completion of the works.\nIn the case of force account, the CONTRACTOR shall be authorized to monitor the operations with hampering the execution of the orders of the Representatives of the Employer.\nHe may be released from force account if he demonstrates the necessary ability to continue the works to their completion.\nSupplementary expenses resulting from force account or fresh contract shall be at the expense of the CONTRACTOR. They shall be deducted from amounts owed him without prejudice to rights exercised against him in case of inadequacies.\nIf the force account or fresh contract entails a decrease in expenses, the CONTRACTOR shall not claim any part of the profit which shall belong to the Administration.\nWhen fraudulent acts, repeated shortcomings in the working conditions or serious errors in duty shall be noticed and attributed to the CONTRACTOR the relevant authority can, without prejudice to legal proceedings and sanctions to which the CONTRACTOR shall be answerable, ban him for a determined period or definitively from contracts of his Administration.\nArticle 2.25 Avoidance and Settlement of Disputes\n2.25.1 Out of Court Settlement\nThe CONTRACTOR and Employer shall agree to endeavor to settle all the disputes that may arise from the application of this contract out of court by exhausting a mandatory reconciliatory procedure.\n2.25.2 Mandatory conciliatory procedure\n2.25.2.1 As soon as one party shall feel that there is a dispute, he shall notify this to the other party in accordance with Article 2.3.1 by requesting the application of the mandatory conciliatory\nprocedure. The notification shall include a statement indicating the causes of the dispute and, possibly, the value of claims.\n2.25.2.2 The mandatory conciliatory procedure shall be conducted by three (3) arbitrators appointed by the CONTRACTOR and Employer within thirty (30) days after the notification of the dispute. Each part shall appoint one arbitrator and both parties shall jointly appoint the third arbitrator.\n2.25.2.3 If within fourteen (14) days following the expiration of the said thirty (30) day period. following the notification either or both parties shall not have appointed the second and\/or the third arbitrator; the latter shall be appointed by the President of the Abidjan Magistrate Court sitting upon petition of one of the parties.\n2.25.2.4 The mandatory conciliatory procedure shall take place in Abidjan.\n2.25.2.5 The arbitrators shall proceed in the settlement of the dispute solely as arbitrators. They shall not be bound by any rule of procedure. They shall be entitled to undertake any off-site or on-site investigation and summon any person to appear before them.\n2.25.2.6 The deliberations of the arbitrators shall lead to a decision stating the grounds of the said decision. If the latter is not unanimous, it shall reproduce the position of each of the arbitrators.\n2.25.2.7 If within sixty (60) days after the notification of the dispute, no out of court settlement shall have been made, the dispute may be referred for court arbitration in accordance with Clause 2.25.3 hereafter.\n2.25.3 COURT ARBITRATION\nIn default of an out of court settlement, any dispute arising from this contract shall be finally settled under the Rules of Conciliation and Arbitration of the International Chamber of Commerce by one or more arbitrators appointed under such rules.\n2.25.3.1 The place of the said arbitration shall be Abidjan, Cote d'Ivoire.\n2.25.3.2 The French Language shall be used.\n2.25.3.3 Ivorian Law shall be applicable.\nArticle 2.26 - Act of God Special Risks\n2.26.1 ACT OF GOD\nAn event shall only be deemed to be an Act of God if it is unforseen, irresistible, beyond the control of the parties, it can neither be anticipated nor prevented and if it makes it absolutely impossible for the parties to fulfill their commitments.\nNone of the parties shall default in his contractual obligations in so far as the execution of the latter shall have been delayed or prevented by an Act of God.\nIf an event of Act of God is deemed by the Employer to have occurred, the CONTRACTOR shall be authorized to request a fair compensation supported with all the corresponding supporting documents.\nAny dispute over the occurrence of an Act of God shall be settled in accordance with the provisions of Article 2.25 of the PTC.\nIf the CONTRACTOR should invoke the Act of God Clause, he shall notify the Employer in writing within ten (10) days after the event which led to his notification; the Employer shall, at all events, have a period of thirty (30) days to make his view known.\n2.26.2 OTHER PROVISIONS\nThe CONTRACTOR shall not be entitled to any indemnification on losses, damage or injury caused through negligence, improvidence. lack of resources or fraud.\nThe CONTRACTOR must take all the necessary steps, and at his own expense, to ensure that his supplies, equipment and field installations are not carried away or damaged by storms, floods and any atmospheric phenomena.\nThe CONTRACTOR shall not avail himself of the right, either to forego his contractual obligations or lay any claims, any subjections which may result from the simultaneous execution of other works.\n2.26.3 Special Risks\nNotwithstanding all the provisions of the PTC the CONTRACTOR shall not be liable to nor pay compensation for injuries, death, destruction or damages of structures, temporary structures or properties of the Employer or a third party directly or indirectly resulting from acts of war (declared or otherwise), hostility, invasion, enemy operation, revolution, rebellion, insurrection, military or civilian usurpation of power, civil war, uprising or disorders (excluding the CONTRACTOR's employees). These risks are generally defined hereinafter by the term \"Special Risks\".\nThe Employer shall safeguard the CONTRACTOR against the special risks indicated hereof. He shall indemnify the latter for any real losses or damages caused to his property intended for the execution of the works.\nArticle 2.27 - Works and Supplies by Force Account\n2 27.1 BASIS FOR REMUNERATION OF WORKS BY FORCE ACCOUNT\nThe CONTRACTOR shall furnish the MAIN CONTRACTOR, if the need should arise, workers and tools as well as necessary materials and equipment for works by force account. Expenses taken into account shall be the following:\na) Salaries and Wages Salaries and wages shall be refunded to the CONTRACTOR on the basis of actual hours done, including overtime at rates applicable to professional categories specified in the Interprofessional Collective Agreement of Cote d'Ivoire of 20 July 1977, including social benefits and legal entitlements.\nb) Supplies Supplies expenses shall be reimbursed upon the production of vouchers established without VAT in so far as the CONTRACTOR shall be able to get a refund for the tax.\nc) Equipment The equipment shall only be taken into account for hours of actual work. The cost of the equipment shall be repaid in the form of a lease using rates established by the Direction du Materiel des Travaux Publics (DMTP) of Cote d'Ivoire. Bare equipment shall be paid for in accordance with coefficients of posts 1-2-3-4-8 established for a normal 8-hour working day.\nThese coefficients apply to the purchase value of new equipment prevailing at the main place of use, possibly\nincluding the tax and customs provisions in this contract.\nThe leasing rates thus calculated shall be updated on January 1 of each year to take into account variations in the purchase price of the equipment.\nEach effective overtime hour shall be paid as one-eighth (1\/8th) of the cost of a normal day of lease.\nSalaries and wages of the controlling staff shall be refunded according to the provisions of paragraph a) Salaries and Wages.\nd) Fuel and Constituents Expenses shall be reimbursed on the basis of purchase value in so far as the CONTRACTOR can reclaim the VAT.\ne) Lumpsum Increase A lumpsum increase of six point twenty-five percent (6.25%) shall be applied to expenses under paragraphs a), b), c) and d) above to cover all overheads (notably accident insurance on workers and third parties) and entitlements.\nf) VAT All expenses for works by force account shall attract VAT at rates in force on the date of the establishment of the corresponding detailed account.\n2.27.2 Limitation of Works by Force Account\nThe obligation of the CONTRACTOR to carry out works by force account shall only apply within the constraints of total expenditure not exceeding two percent (2%) of the basic price of the contract.\nSums paid to the CONTRACTOR as a result of the application of this Article shall not apply to articles of these particular terms and conditions concerning variations in the volume and nature of works.\nIn case of exceeding the limitation of two percent (2%) fixed above, the contractual increase of six point twenty-five percent (6.25%) shall be carried beyond this limit to ten percent (10%).\nArticle 2.28 - Works Under Controlled Expenses\nThe expenses concerned shall be the following:\na) Salaries Special expenses on senior expatriate staff with a hundred percent (100%) which shall cover all related expenses: travel, housing, miscellaneous allowances, leave, insurance, gratification, social expenses, etc. This increase shall be applied on the basic staff salary. Salaries of the staff not considered under the previous category shall be reimbursed to the CONTRACTOR on the basis of actual hours of work done, including possible overtimes at the rates applicable to professional categories specified in the Interprofessional Collective Agreement of Cote d'Ivoire of 20 July 1977, including social benefits and legal entitlements.\nb) Supplies Expenses for supplies shall be reimbursed upon production of invoices established without VAT in so far as the CONTRACTOR may reclaim the tax.\nc) Equipment Equipment shall only be considered in terms of actual hours done.\nThe cost of equipment shall be repaid in the form of a lease using rates established by the Direction du Materiel des Travaux Publics (DMTP) of Cote d'Ivoire. Bare equipment shall be paid for in accordance with coefficients 1-2-3-4 established for a normal 8-hour working day.\nThese coefficients apply to the purchase value of new equipment at the place of use, possibly including the tax and customs provisions in this contract.\nThe leasing rates thus calculated shall be updated on January 1 of each year to take into account variations in the purchase price of the equipment.\nEach effective overtime hour shall be paid as one-eighth (1\/8th) of the cost of a normal day of lease.\nSalaries and wages of the controlling staff shall be refunded according to the provisions of paragraph a) Salaries and Wages.\nd) Fuel and Constituents Expenses shall be reimbursed on the basis of basic purchase value in so far as the CONTRACTOR can reclaim the VAT.\ne) Lumpsum Increase A lumpsum increase of six point twenty-five percent (6.25%) shall apply to expenses under paragraphs a), b) and c) above to cover all overheads (notably accident insurance on workers and third parties) and entitlements.\nf) VAT All expenses for works by controlled expenses shall attract a VAT at rates in force on the date of establishment of corresponding detailed account.\nArticle 2.29 - Miscellaneous Reimbursements - Authority to Contractor\nThe MAIN CONTRACTOR may request the CONTRACTOR to substitute for the Employer in the payment of suppliers appointed by the MAIN CONTRACTOR for a number of expenses which are directly related to the contract and limited to the following.\n- installation of inspection mission (construction of offices by a company other than the holder of the contract, procurement of office supplies and furniture, procurement of laboratory equipment), - purchase of vehicles, - studies on current site, - works pertaining to LOT B.\nTo this end, the MAIN CONTRACTOR shall give prior authority to the CONTRACTOR to pay the bills concerned, or place orders and follow up on them in his behalf. The bills shall be made in the name of the MAIN CONTRACTOR.\nThe MAIN CONTRACTOR shall fully reimburse on the basis of authority, under a separate heading called Miscellaneous Reimbursements in the provisional breakdowns.\nFor his substitution duties, the CONTRACTOR shall receive a remuneration of six point twenty-five percent (6.25%) of the value of the invoice.\nThe total miscellaneous reimbursements shall be inclusive of VAT at rates applicable at the time of establishment of the corresponding detailed account.\nArticle 2.31 - Domicile - Correspondence\nFor the execution of this contract, the CONTRACTOR and Employer shall elect domicile at their respective head offices. Within fourteen (14) days following the contract, the CONTRACTOR shall convey the MAIN CONTRACTOR the address of a Representative in Cote D'Ivoire who shall receive all correspondence relating to the contract. He shall reserve the right to change this Representative by notifying the MAIN CONTRACTOR but shall undertake to keep the Representative in Cote D'Ivoire until the final acceptance.\nAll correspondence between parties concerned with this contract should be made either by a letter signed by a person duly authorized by the initiating party or by telegram, fax or telex immediately confirmed by letter. Such correspondence must be written in French or accompanied by a translation in French.\nCorrespondence shall be sent to the following addresses or any other that the parties shall notify each other and, notably, for the CONTRACTOR, to the address of the representative in Cote d'Ivoire.\nFor EMPLOYER Ministere de la Communication 01 BP V 138, Abidjan 01 Republic of Cote d'Ivoire Telex: 23501 Fax (225) 22-22-97 ATTN: Honorable Minister of Communications\nFor the CONTRACTOR Communications Satellite Corporation COMSAT Systems Division 22300 Comsat Drive Clarksburg, Maryland 20871 United States of America Telex 44-06-96 Fax: (1) (301) 428-7747 ATTN: Vice President Contracts\nTo establish that a prior notice, notice, notification or other correspondence shall have been duly made, it shall be necessary to prove its reception by the other party which may be presumed on the basis of an acknowledgment of receipt, or delivery certificate for registered mail or a delivery receipt signed and dated by a person who shall be authorized by the addressee, regardless of the form.\nArticle 2.32 - Entry into Force and Validity of Contract\nThis contract for the rehabilitation and extension of the radio and television broadcast network shall only enter into force when\nall the precedent conditions outlined below shall have been fulfilled:\na) signing of a financing agreement between the State of Cote d'Ivoire, an American Bank acting as lender and EXIMBANK as guarantor;\nb) signing of an agreement between the CONTRACTOR and Employer on the modalities of execution of and payment for works of LOT B which shall take account of the provisions of the aforementioned financing agreement;\nc) fulfillment of the set of conditions prior to the use of financing, notably handing over to the lending bank the certificate indicating the EXIMBANK approval of the mode of disbursement chosen.\nParties to the contract shall undertake to ensure severally and collectively to work towards the timely implementation of the conditions listed above. In the event of non-fulfillment of all the conditions by January 31, 1993 and, unless the parties agree to an extension time or forgo the unexecuted conditions, this contract shall be deemed to be null and void.\nIt shall be valid only after notification by the MAIN CONTRACTOR of its approval by the rightful authority.\nDone in Abidjan January 20, 1993 Read and Approved (in writing)\nThe CONTRACTOR The MINISTER OF COMMUNICATION\nBy: \/s\/P. Serrey-Eiffel P. Serrey-Eiffel \/s\/Kenneth Hoch Le Directeur General de la DCGTx for The Minister of Communication\nStamped by Approved under No 93.0001 The DIRECTOR GENERAL OF MINISTER RESPONSIBLE FOR IVORIAN RADIO AND TELEVISION ECONOMY, FINANCE TRADE BROADCAST AND PLANNING\nEXHIBIT 10(y)(i)\n[TRANSLATED FROM THE ORIGINAL DOCUMENT IN FRENCH]\nREPUBLIC OF THE IVORY COAST Union - Discipline - Labor\n- - - - - -\nMINISTRY OF COMMUNICATION\nNATIONWIDE RADIO AND TELEVISION BROADCASTING COVERAGE\nAMENDMENT NO. 1\nIVORY COAST RADIO AND TELEVISION BROADCASTING\nMANAGEMENT AND SUPERVISION OF LARGE-SCALE WORKS\nJANUARY 1994\nREPUBLIC OF THE IVORY COAST Union - Discipline - Labor MINISTRY OF COMMUNICATION\nContract No. : 93.0001 Contracting Company : COMSAT Signed on : Approved on : 01\/18\/93 Notification given on : Starting date of work : 10\/06\/93 Turn-around time : 18 mos. Term of guarantee : 1 yr.\nAmount of initial contract exclusive of tax & customs : $36,000,000 Amount of Amendment No. 1 exclusive of tax & customs : $ 1,768,562 Total amount exclusive of tax & customs : $37,768,562 Amount of customs duties : $ 8,165,492 Amount of VAT (25% rate) : $11,483,514 Amount of stamp duties and registration fees : $ 1,600 Amount of contract all taxes included : $57,419,168 Escrow : 7% Definitive security : 3%\nNATIONWIDE RADIO AND TELEVISION BROADCASTING COVERAGE\nAMENDMENT NO. 1 TO CONTRACT NO. 93.0001 OF JANUARY 18, 1993\nDOCUMENT NO. 1\nIVORY COAST RADIO AND TELEVISION BROADCASTING\nMANAGEMENT AND SUPERVISION OF LARGE-SCALE WORKS\nBETWEEN THE IVORY COAST GOVERNMENT\nRepresented by the MINISTER OF COMMUNICATION hereinafter referred to as: \"SPONSOR\",\nON THE ONE HAND, AND\nThe Company \"Communications Satellite Corporation (COMSAT)\".\nMain office: 22300 COMSAT DRIVE, CLARKSBURG, MARYLAND 20871 USA\nLegal form: Incorporated Company under United States Law\nRepresented for the purposes of these presents by Mr. Kenneth HOCH, Vice-President,\nActing in the name of and on behalf of this COMPANY by virtue of a power of attorney dated .......1992 attached to the present contract, hereinafter referred to as: \"THE CONTRACTOR\",\nON THE OTHER HAND\nTHE FOLLOWING HAS BEEN AGREED AND DECIDED:\nARTICLE 1 - OBJECT OF THE AMENDMENT\nThe object of the present Amendment No. 1 to the Nationwide Radio and Television Broadcasting Coverage Contract is:\n1) The decision to execute the optional section already provided for in Article 1.1.2.2 of the CCCP (Particular Clauses and Conditions, Doc. No. 2) of the initial contract.\nExecution of the optional section comprises installing the Transmitting Station at ZOUKOUGBEU to replace that of ISSIA.\n2) The amount of Lot B, the methods of payment of which were governed in the initial contract by Article 2.29, has been changed to a fixed, non-revisable, total lump-sum of 9,657,562 (nine million six-hundred fifty seven thousand, five hundred sixty two) US Dollars and will be paid in pursuance of Article 2.10 of the initial contract.\nARTICLE 2 - CONTRACT DOCUMENTS\nDocuments No. 4 and 5 of the initial contract are cancelled and replaced with Document No. 5 and 6 of the present Amendment.\nThe list below enumerates in order of importance the contract documents constituting the amendment:\nDocument No. 1: The present amendment. Document No. 2: Documents No. 1 and 2 listed under Article 1.4 of the CCCP (Particular Clauses and Conditions) of the initial contract. Document No. 3: The CPTP (Technical Specifications) of the initial contract to the extent that they do not depart from the data sheets approved by the Architect. Document No. 4: Specifications for all elements of the new transmitting stations and overhauling of existing stations. Document No. 5: Breakdown of the new total lump-sum price of Lot A. Document No. 6: Breakdown of the new total lump-sum price of Lot B. Document No. 7: All plans of project buildings and sites.\nARTICLE 3 - AMOUNT OF AMENDMENT TO CONTRACT\nThe amount of Amendment No. 1 is 1,768,562 (one million, seven hundred sixty-eight thousand, five hundred sixty two) US Dollars, broken down as follows:\n- optional section of Lot A : $1,111,000 - optional section of Lot B : $ 657,562 ---------- TOTAL : $1,768,562\nARTICLE 4 - AMOUNT OF INITIAL CONTRACT AND ITS AMENDMENT NO. 1\nThe amount of the contract and its Amendment No. 1 comes out to 37,768,562 (thirty-seven million, seven hundred sixty-eight thousand, five hundred sixty two) US Dollars, broken down as follows:\n1) Lot A : $28,111,000 2) Lot B : $ 9,657,562 ----------- TOTAL $37,768,562\n1) The breakdown of the total lump-sum price of Lot A is contained in Document No. 5 attached to the present amendment.\n2) The breakdown of the total lump-sum price of Lot B is contained in Document No. 6 attached to the present amendment,\n- New buildings : $5,212,891 - Renovations : $1,162,118 - COCODY electricity : $ 154,755 - Foundations : $1,074,325 - Studies and Management : $2,053,473 ---------- TOTAL : $9,657,562\nARTICLE 5 - TURN-AROUND TIME\nThe turn-around time and penalties for lateness laid down in Article 2.6 of the contract remain unchanged.\nARTICLE 6 - DEFINITIVE SECURITY\nArticle 2.15 of the CCCP (Particular Clauses and Conditions) setting the amount of the definitive security at 3% of the amount of the contract increased by the amount of the amendments remains unchanged.\nThe Contractor is requested to make up the security within twenty (20) days after the date of notification of the present amendment.\nARTICLE 7 - ESCROW\nArticle 2.16 of the CCCP (Particular Clauses and Conditions) setting the amount of escrow at 7% of the amount of the work remains unchanged.\nARTICLE 8 - STAMP DUTIES AND REGISTRATION FEES\nThe present Amendment is subject to stamp and registration formalities.\nThe CONTRACTOR will be responsible for paying the stamp duties and registration fees to which the contract is subject.\nARTICLE 9 - OTHER CLAUSES\nThe clauses of the initial contract remain applicable in all points that do not depart from the prescriptions of the present Amendment.\nARTICLE 10 - (LAST): APPROVAL OF AMENDMENT NO. 1\nThe present Amendment will be definitive only after notification is given of the competent AUTHORITY's approval thereof. Drawn up at Abidjan on January 1994\nRead and approved (handwritten endorsement)\nTHE CONTRACTOR THE MINISTER OF COMMUNICATION\n\/s\/Kenneth Hoch\nApproved under No.\nInitialed by the GENERAL THE DEPUTY MINISTER UNDER THE MANAGER OF IVORY COAST MINISTER OF ECONOMY, FINANCES, RADIO AND TELEVISION TRADE AND PLANNING BROADCASTING\nEXHIBIT 10(aa)\nUAL Contract No. 115990\nLEASE AGREEMENT\nTHIS LEASE made and entered into this 8th day of June, 1993, by and between COMSAT CORPORATION, through its COMSAT Mobile Communications business unit, a District of Columbia corporation, having its principal place of business at 22300 Comsat Drive, Clarksburg, MD 20871, (hereinafter referred to as \"LESSOR\"), GTE AIRFONE INCORPORATED, a Delaware corporation, having its principal place of business at 2809 Butterfield Road, Oak Brook, IL 60522 (hereinafter referred to as \"Lessee's Contract Administrator\") and UNITED AIR LINES INC., a Delaware corporation, having its principal place of business at 1200 East Algonquin Road, Elk Grove Township, IL 60007, (hereinafter referred to as \"LESSEE\").\nWITNESSETH:\nWHEREAS, Lessor shall have available for lease 74 shipsets of satellite communications equipment (hereinafter referred to as \"Equipment\"); and\nWHEREAS, Lessor desires to lease the Equipment to Lessee under the terms and provisions set forth below; and\nWHEREAS, Lessee desires to lease the Equipment from Lessor under the terms and provisions set forth below; and\nWHEREAS, Lessee has appointed GTE Airfone to be Lessee's Contract Administrator of this Agreement; and\nWHEREAS, Lessee's Contract Administrator has been selected by Lessee to provide air-ground telecommunications service to Lessee's passengers aboard certain of Lessee's aircraft; and\nWHEREAS, Lessee's Contract Administrator has agreed to provide certain equipment for telephony services over its system and to assist in the procurement of the Equipment (as defined herein) for telephony services over the INMARSAT System.\nNOW THEREFORE, in consideration of the foregoing and the mutual promises and covenants contained herein, Lessor and Lessee hereby agree as follows:\nSECTION 1. EQUIPMENT PROCUREMENT.\n1.01 The Lessor hereby leases to the Lessee and the Lessee hereby leases from the Lessor, the Equipment, together with all accessories attached thereto or used in connection therewith. (Equipment list is attached hereto as Exhibit A.)\n1.02 The initial term (\"Initial Term\") of this Lease shall commence on the date the Equipment is first installed under the regular installation schedule on Lessee's aircraft (the \"Effective Date\") and shall continue for a period of nine (9) years thereafter, provided that in the event there is a deviation from the installation schedule such that more than 10% of the aircraft hereunder will remain unequipped beyond the first two years of the Initial Term (the \"Later Installed Aircraft\") then the parties shall agree on a mutually acceptable extension of the Initial Term with respect to the Later Installed Aircraft.\n1.03 Lessor shall purchase the equipment listed on Exhibit B, at Lessee's cost set forth therein, from Lessee for inclusion in the shipsets of Equipment provided hereunder.\nSECTION 2. RENTAL.\n2.01 Lessor shall provide up to seventy four (74) complete shipsets (as identified in Exhibit A) of Equipment at a maximum cost to Lessor of two hundred seventy thousand dollars ($270,000.00) per shipset. Procurement beyond 74 shipsets is an option if desired by Lessee. On an aircraft by aircraft basis upon installation of the Equipment, and upon receipt from Lessee of notice of Lessee's installation of the Equipment and identifying the Equipment to be installed on each aircraft, Lessor shall forward payment to the equipment supplier for that shipset of Equipment.\nSECTION 3. PAYMENT OF RENTAL.\n3.01 Upon installation of the Equipment on each aircraft, Lessee's Contract Administrator shall program Lessor as highest priority choice in all ocean regions served by Lessor on the \"Owner's Preference Table\" for the Equipment on that equipped aircraft.\n3.02 Upon installation of the Equipment on each aircraft, Lessee's Contract Administrator shall pay to Lessor, as rental for the Equipment, on behalf of Lessee, an amount equal to the previously agreed rental amount. Such rental shall be the sole liability of Lessee's Contract Administrator and shall at no time become a liability of Lessee.\n3.03 All rental payments shall be due and payable on a quarterly basis in accordance with the terms of the carrier to carrier agreement between Lessee's Contract Administrator and Lessor.\n3.04 It is agreed between the parties that the Lessor shall sell such Equipment to Lessee (at Lessee's option) at any time during the lease period, for a sum equal to the net book value (as defined in Exhibit C attached hereto) of such Equipment at the time of the exercise of this option. In the event Lessee exercises this option prior to the end of the lease term, Lessee shall be responsible for any early pay-back penalty required by Lessor's financing arrangement. It is further stipulated that Lessee must, to exercise this option, inform Lessor, in writing, of its intent to purchase the Equipment ninety (90) days prior to the date Lessee wishes to exercise the option.\n3.05 If Lessee's Contract Administrator does not make the quarterly rental payments when due, Lessor may charge Lessee's Contract Administrator an additional sum of EIGHTEEN (18%) PERCENT per annum or the maximum amount allowed by law, whichever is less, for each and every late rental payment. Such interest shall be the liability of Lessee's Contract Administrator and shall at no time become a liability of Lessee.\nSECTION 4. INSTALLATION, MAINTENANCE & REPAIR.\n4.01 Lessee shall be responsible for performing all installations of the Equipment on Lessee's aircraft and for all expenses associated therewith.\n4.02 As between Lessor and Lessee, Lessee accepts the Equipment in its delivered condition and, during the term of this Lease and until return and delivery of the Equipment to Lessor or until purchase of Equipment by Lessee pursuant to Section 3.04 above, Lessee shall maintain and keep the Equipment on each aircraft in good repair and operating order and shall repair, at its own expense, any damage to the Equipment. Lessee shall maintain a sufficient number of spare parts to properly maintain the Equipment.\nSECTION 5. EXPENSES.\n5.01 Lessee shall bear all operating and maintenance costs including, but not limited to: Equipment maintenance, replacement and repair, and insurance premiums for all insurance coverage required by this Lease. Lessee further agrees to keep the Equipment in (a) fully operational, duly certified and airworthy condition at all times; and (b) mechanical condition adequate to comply with all regulations of the FCC, FAA, INMARSAT, and any other Federal, state or local governing body, domestic or foreign, having jurisdiction over the maintenance, use or operation of the Equipment. All replacement parts supplied by Lessee shall be of the same quality as the replaced part and type approved by the manufacturer. Lessee shall also cause the Equipment to be regularly inspected by qualified experts of its choice and to immediately correct, repair of replace any dangerous condition, malfunction or worn part which may be discovered at any time. Lessor shall bear the costs of modifications or upgrades mandated by airworthiness directives and mandatory operational modifications.\nSECTION 6. LAWFUL USE.\n6.01 Lessee shall during the term of this Lease and until return and delivery of the Equipment to Lessor, abide by and conform to, and cause others to abide by and conform to all laws, governmental orders, and rules and regulations, including future amendments thereto pertaining to or affecting operations or use of said Equipment. Further, the Equipment will not be maintained, used or operated in violation of any law or any rule, regulation or order of any government or governmental authority having jurisdiction (domestic or foreign), or in violation of any airworthiness certificate, license or registration relating to the Equipment or its use, or in violation or breach of any representation or warranty made with respect to obtaining insurance on the Equipment or any term or condition of such insurance policy.\nSECTION 7. MISCELLANEOUS PROVISIONS.\n7.01 Alterations. Excepting modifications required under manufacturer's service bulletins, Lessee shall not in any way alter, modify, remove or make additions or improvements to the Equipment without the prior written consent of Lessor. All alterations, modifications, additions and improvements which are made shall become the sole and exclusive property of Lessor and shall be subject to all terms of this Lease.\n7.02 Liens. The Lessee shall not directly or indirectly create, incur, assume or suffer to exist any liens on or with respect to (a) the Equipment or any part thereof, (b) the Lessor's title thereto or, (c) any interest of the Lessor therein. The Lessee shall promptly, at its own expense, take such action as may be necessary to duly discharge any such lien, except (a) the respective rights of the Lessor and the Lessee as herein provided, and (b) liens created by the Lessor.\n7.03 Inspection. Lessor or its designee shall have the right, but not the duty, to inspect the Equipment at any reasonable time and upon reasonable notice, wherever the aircraft on which the Equipment is installed may then be located. Upon Lessor's request, Lessee shall advise Lessor of the aircraft's location and, within a reasonable time, shall furnish Lessor with all information, documents and Lessee's records regarding or in respect to the Equipment and its use, maintenance or condition.\nSECTION 8. TITLE TO EQUIPMENT.\n8.01 (a) Lessor shall at all times retain the sole and exclusive right, title and possessory interest in and to any and all Equipment installed on any of the aircraft or otherwise in Lessee's possession. Notwithstanding the foregoing, Lessor shall transfer to\nLessee, upon payment therefore in accordance with Section 3.04 above, the sole and exclusive right, title and possessory interest in and to the Equipment and all items that are permanently affixed to any aircraft as a result of any alteration, modification, addition or improvement, as provided for in Section 7.01 above.\n(b) Upon any termination of this Lease or disposition of an aircraft on which any Equipment is installed prior to expiration of the term hereof, Lessee shall provide written notice to Lessor of any disposition of an equipped aircraft, as soon as reasonably possible. Lessor shall, within thirty (30) days thereof, notify Lessee and Lessee's Contract Administrator in writing of its desire to remove such Equipment from the aircraft to which such termination of disposition relates and Lessor and Lessee shall cooperate in good faith in the removal of such Equipment.\n(c) Upon receipt by Lessee or Lessee's Contract Administrator of the notice provided for in Subsection 8.01 (b), Lessee shall, during a period commencing upon the date of receipt of the notice and ending one hundred and twenty (120) days thereafter, provide Lessor with a reasonably sufficient amount of continuous, uninterrupted access to the relevant aircraft on which such Equipment is installed, to permit Lessor to remove any or all of the Equipment aboard such aircraft. Such access will be at such times and locations as Lessor and Lessee shall mutually agree upon in writing. If Lessor and Lessee agree upon a schedule for removal of the Equipment and Lessor fails to remove the Equipment from such aircraft and such failure is not caused, directly or indirectly, by Lessor and Lessor and Lessee cannot in good faith agree upon a new schedule within the one hundred and twenty (120) day period referred to above, Lessor shall forfeit its right to remove any Equipment from the relevant aircraft. Notwithstanding the foregoing, nothing herein shall be construed or interpreted as a waiver or forfeiture by Lessor of any rights to, or interest in, any trade secrets, patents, intellectual property, Confidential Information, or other intangible right or interest represented by or embodied in any Equipment. Lessor and Lessee shall each bear their respective costs and expenses of removal of any Equipment, unless such removal is due to an Event of Default, as specified in Section 13, in which case the Lessee shall be solely responsible for the reasonable costs and expenses of both parties related to such removal.\n8.02 Lessee shall have the obligation to ensure that any leasing agreements between Lessee and any third party, which are applicable to any of the aircraft upon which the shipsets of Equipment will be installed, are modified to reflect that the sole and exclusive right, title and possessory interests in and to such Equipment on any aircraft by aircraft basis remains with Lessor until such time as termination of this Lease or purchase of the Equipment by the Lessee. Lessor shall have the further right to review pertinent parts of amendments to all such leasing agreements between Lessee and any third party prior to installation of Equipment on such aircraft.\n8.03 Neither Lessee nor others shall have the right to incur any mechanic's or other lien in connection with the repair or maintenance of said Equipment and Lessee agrees that neither it nor others will attempt to convey or mortgage or create any lien of any kind or character against the Equipment or do anything to take any action that might mature into such a lien.\nSECTION 9. RISK OF LOSS AND INSURANCE.\n9.01 Lessee shall provide and maintain insurance on the Equipment in such company or companies as Lessor shall approve, with Lessor being named as an additional insured, (a) against loss or damage from any cause or causes to the Equipment in the amount of the replacement cost of the Equipment, and (b) against liability for personal injuries, death or property damages, or any of them, under Lessee's presently existing standard policy.\n9.02 In the event a claim is made with regard to an insured event, Lessee agrees to pay Lessor any deductible amounts as provided in such policies. Such insurance shall not be subject to any offset by any other insurance carried by the Lessor or the Lessee.\n9.03 In the event of loss or of damage to the Equipment, Lessee shall immediately report such loss or damage to Lessor, to the insurance companies underwriting such risk and to all applicable governmental agencies, Federal and state, and Lessee shall furnish such information and execute such documents as may be required to collect the proceeds from the insurance policies. The rights, liabilities and obligations of the parties regarding such proceeds shall be as set forth in Subsection 9.04 below.\n9.04 In the event that, in the opinion of the Lessor, the Equipment is lost, stolen, damaged beyond repair, confiscated, seized or its use appropriated by any government or instrumentality thereof, the proceeds of the insurance policy or policies shall be payable to Lessor. In the event Lessor does not receive insurance proceeds in an amount equal to the replacement cost within one hundred twenty (120) days from the date of the event of loss or damage, Lessee shall promptly pay Lessor the full amount of the replacement cost, and provided that (a) no Event of Default shall have occurred hereunder, and (b) Lessee shall not have breached any of its representations, warranties or agreements under such insurance policy or policies, Lessee shall be subrogated to the rights of Lessor to the extent, but only to the extent, of such payment. For purposes of this Subsection 9.04 only, Lessee's Contract Administrator will not be required to make rental payments for the period the Equipment is not available. Lessor will allow Lessee to cancel the Agreement in this eventuality as to the affected Equipment or, at the option of the Lessor, Lessee will be provided with another shipset of Equipment within a reasonable time thereafter.\n9.05 In the event the Equipment is partially damaged, in the opinion of the Lessor, then this Lease shall remain in full force and effect and Lessor shall use the insurance proceeds to repair the Equipment. Lessor shall direct and must approve all repairs made to the Equipment.\n9.06 Lessee hereby appoints Lessor as Lessee's attorney-in-fact to make proof of loss and claim for and to receive payment of and to execute or endorse all documents, checks or drafts in connection with all policies of insurance in respect of the Equipment.\nSECTION 10. LESSOR'S WARRANTIES.\n10.01 Lessor warrants that it has the right to lease the Equipment to Lessee, and that Lessor will do nothing to disturb Lessee's full right of possession and enjoyment thereof and the exercise of all the Lessee's rights with respect thereto as provided by this Agreement. HOWEVER, LESSOR MAKES NO WARRANTIES OR REPRESENTATIONS, EXPRESS OR IMPLIED, AS TO ANY MATTER WHATSOEVER, INCLUDING, WITHOUT LIMITATION, THE CONDITION OF THE EQUIPMENT, ITS MERCHANTABILITY OR ITS FITNESS FOR ANY PARTICULAR PURPOSE. LESSOR SHALL PASS THROUGH TO LESSEE ANY AND ALL WARRANTIES LESSOR RECEIVES FROM THE EQUIPMENT MANUFACTURER.\nSECTION 11. ASSIGNMENT AND SUBLEASE.\n11.01 The Lessee may not sublet the Equipment nor shall Lessee assign this Agreement without the prior written consent of Lessor. Once installed in an aircraft, the Equipment may only be transferred to other aircraft providing the same service within Lessee's fleet unless\notherwise agreed to in writing by Lessor. Such limitation shall not prevent Lessee from replacing equipment for maintenance.\nSECTION 12. INDEMNITY.\n12.01 Lessee shall be responsible and liable for, indemnify Lessor against, hold Lessor free and harmless from any claim or claims of any kind whatsoever for or from, and promptly pay any judgment for, any and all liability for personal injuries, death or property damages, or any of them, which arise or in any manner are occasioned by the intentional acts or negligence of the Lessee or others in the custody, operation or use of said Equipment during the term of this Lease.\nSECTION 13. LESSEE'S DEFAULT.\n13.01 The following events shall constitute \"Events of Default\" on the part of the Lessee hereunder:\n(a) Any breach or failure of the Lessee to observe or perform any of the obligations specifically required of Lessee hereunder and the failure to correct such default within thirty (30) days after written notice hereof by Lessor to Lessee, or Lessee's Contract Administrator; or\n(b) If any writ or order of attachment or execution or other legal process is levied on or charged against said Equipment and is not vacated or satisfied within thirty (30) days; or\n(c) The making of an assignment by Lessee for the benefit of its creditors or the admission of Lessee, in writing, of its inability to pay its debts as they become due; or\n(d) The insolvency of Lessee or the filing by or against Lessee of a petition in bankruptcy; or\n(e) The adjudication of lessee as bankrupt; or\n(f) The filing by Lessee of any petition seeking for itself a reorganization, arrangement, composition, readjustment of its debts, liquidation, dissolution or similar relief under any law relating to the relief of debtors or insolvents.\nSECTION 14. LESSOR'S REMEDIES.\n14.01 Upon the happening of any Event of Default hereunder, Lessor may, at its sole election, declare a default under the Lease and take possession of said Equipment wherever located, with court order or other process of Law, Lessee hereby consenting to entry upon its premises for such purpose and waiving all damages related to the AES equipment caused by such taking of possession and agreeing that such taking does not constitute termination of this Lease as to any other Equipment unless Lessor expressly notifies Lessee thereof in writing. The above waiver of damages shall not include a waiver of Lessee's rights in the event Lessor damages the aircraft on which the Equipment is located while taking possession of the Equipment.\nSECTION 15. WAIVER.\n15.01 No covenant or condition of this Lease can be waived except by the written consent of Lessor. Forbearance or indulgence by Lessor in any regard whatsoever shall not\nconstitute a waiver of the covenant or condition to be performed by Lessee to which the same may apply, and, until complete performance by Lessee of such covenant or condition, Lessor shall be entitled to invoke any remedy available to Lessor under this Lease despite such forbearance or indulgence. Upon Lessee's failure to perform any of its duties hereunder, Lessor may, but shall not be obligated to, perform any or all such duties, and Lessee shall pay an amount equal to the expense thereof to Lessor forthwith upon demand by Lessor.\nSECTION 16. ADDITIONAL DOCUMENTS.\n16.01 If Lessor shall so request, Lessee shall execute and deliver to Lessor such documents as Lessor shall deem necessary or desirable for purposes of recording or filing to protect the interest of Lessor in the said Equipment.\nSECTION 17. AMENDMENTS.\n17.01 This Lease shall not be amended, altered or changed except by a written agreement signed by both Lessor and Lessee.\nSECTION 18. TIME OF THE ESSENCE.\n18.01 Time is of the essence in this Lease.\nSECTION 19. ENTIRE AGREEMENT.\n19.01 The terms and conditions of this Lease constitute the entire agreement between the parties and supersedes all prior written and oral negotiations, representations and agreements, if any, between the parties and upon execution hereof, this Lease shall be binding upon them, their successors, assigns and legal representatives.\nSECTION 20. NOTICES.\n20.01 Any notices required to be given under this Agreement shall be sufficient if in writing and given personally or mailed, by registered or certified mail, return receipt requested, directed to the attention of the party involved at its respective address set forth below, or at such address as such party may provide in writing from time to time:\nLESSOR: COMSAT Corporation COMSAT Mobile Communications 22300 COMSAT Drive Clarksburg, MD 20871 ATTN: Vice President - Human Resources, Contracts and Administration\nLESSEE'S AGENT: GTE Airfone Incorporated 3809 Butterfield Road Oak Brook, IL 60522 ATTN: Vice President - Marketing\nLESSEE: United Air Lines Inc. Maintenance Operations Center San Francisco International Airport San Francisco, CA 94128 Attn: Designated Contract Representative: Director of Maintenance Purchasing Designated Marketing Representative: Manager-System Aircraft Maintenance & Control OR: United Air Lines Inc. P.O. Box 66100 Chicago, IL 60666 Attn: Designated Marketing Representative: Staff Executive - Aircraft Interiors\nSECTION 21. APPLICABLE LAW.\n21.01 This Lease is made, executed and delivered in the State of Illinois and shall be governed and construed for all purposes under and in accordance with the laws of the State of Illinois, without giving effect to conflict of laws principles which might refer such interpretation to the laws of a different State of jurisdiction.\nSECTION 22. SEVERABILITY.\n22.01 In the event that any one or more of the provisions of this Lease shall for any reason be held invalid, illegal or unenforceable, the remaining provisions of this Lease shall be unimpared.\nSECTION 23. RETURN OF EQUIPMENT.\n23.01 At the termination of this Lease, whether by expiration of time or for any other cause, in the event that the option contained in Section 3.04 is not exercised by the Lessee, the Equipment shall be delivered by Lessee to Lessor at Lessor's address in Section 20.01, or to such other address as Lessee is authorized to deliver the Equipment by an officer of Lessor.\n23.02 Lessee will return the Equipment to Lessor in the same condition as received, normal wear and tear excepted, and upon return any Lessee corporate identification or logo in or on the Equipment shall be removed by Lessee. In the event Lessee does not return the Equipment in such condition, Lessor may make any repairs necessary to restore the Equipment to such condition, and Lessee agrees, upon demand, to reimburse Lessor for any expense related to such restoration.\nSECTION 24. SUCCESSION.\n24.01 This Lease shall be binding upon Lessee, its successors, assigns and\/or any other entity which may succeed to the assets, operations or consolidation by merger of such parties, sale or the transfer of substantially all the assets of Lessee for any reason whatsoever.\nIN WITNESS WHEREOF, the duty authorized representatives of the parties hereto have executed this Agreement effective as of the date first above written.\nGTE AIRFONE INCORPORATED COMSAT CORPORATION\nBY: COMSAT Mobile Communications \/s\/Horace A. Lindsay \/s\/Arthur E. Gelven BY:______________________ BY:______________________\nPresident Vice President, Human Resources, Contracts and Administration TITLE:___________________ TITLE:____________________\nHorace A. Lindsay Arthur E. Gelven PRINTED NAME:____________ PRINTED NAME:_____________\n\/s\/Brenda A. McNabb June 3, 1993 BY:______________________ DATE:_____________________\nAssistant Secretary TITLE:___________________\nBrenda A. McNabb PRINTED NAME:____________\n6\/8\/93 DATE:____________________\nUNITED AIR LINES, INC.\n\/s\/C. E. Doyle BY:______________________\nDirector, Maintenance Purchasing TITLE:___________________\nC. E. Doyle PRINTED NAME:____________\n6\/4\/93 DATE:____________________\nEXHIBIT C\nFor the purposes of Section 3.04 of this Lease Agreement, \"Net Book Value\" is defined as: cost less accumulated depreciation, depreciated over an eight (8) year period.\nEXHIBIT 10(bb)\nTELEX SERVICES AGREEMENT\nThis Agreement No. CMC-SA-93\/167 is hereby entered into this first day of July, 1993, by and between COMSAT Mobile Communications of COMSAT Corporation, a corporation organized and existing under the laws of the District of Columbia and having its principal office located at 22300 COMSAT Drive, Clarksburg, MD 20871 (\"COMSAT\"), and American Telephone and Telegraph company, a corporation of the State of New York, doing business as AT&T Easylink Services, with a place of business at 400 Interpace Parkway, Parsippany, New Jersey 07054 (\"AT&T\").\nWITNESSETH\nWHEREAS, COMSAT offers mobile satellite communications services to and from mobile stations via the Inmarsat satellite system and COMSAT's land earth stations and switching facilities; and\nWHEREAS, AT&T provides, among other thinks, telex communication services worldwide; and\nWHEREAS, COMSAT and AT&T desire jointly to interconnect their facilities to as to permit the exchange of telex traffic between mobile earth stations and land points within the United States and international points served by AT&T;\nNOW, THEREFORE, in consideration of the foregoing and the covenants hereinafter set forth, COMSAT and AT&T agree as follows:\n1. Interconnection of Facilities\nA. COMSAT and AT&T agree to interconnect their telex facilities to permit users of AT&T telex searches to send and receive messages via the Inmarsat system provided by COMSAT, including any traffic from AT&T which originates from any domestic connecting carrier's subscribers in the United States and is routed via AT&T's facilities for delivery to a mobile earth station.\nB. In connection with traffic originating from an international point that transits the U.S. and is destined for a mobile earth station, AT&T and COMSAT shall jointly make appropriate interconnection arrangements with foreign administrations to implement and facilitate the use of COMSAT's services as provided for herein.\nC. For traffic originating at mobile earth stations, COMSAT shall honor routing designated by the originating caller, except that COMSAT shall transmit to any interconnecting carrier all traffic from mobile earth stations destined to subscribers of that carrier's network.\nFor international calls whose routing has not been designated by the originating caller (\"undesignated traffic\"), AT&T shall receive from COMSAT a minimum of twenty (20) percent of such undesignated traffic per month, such percentage reflecting the fact that, as of the date of execution of this Agreement by both Parties, AT&T is one of five carriers interconnecting with COMSAT for such traffic. Should the number of interconnected carriers change, AT&T shall receive from COMSAT a minimum of such undesignated traffic equivalent to AT&T's representative share of the total number of carriers interconnected with COMSAT. Should the Federal Communications Commission (\"FCC\") subsequently approve the implementation of a proportionate return mechanism for the allocation of undesignated traffic, COMSAT shall deliver such traffic to AT&T in accordance with a mutually agreed upon proportionate return formula.\nD. AT&T shall maintain COMSAT as its preferred choice for all fixed-to-mobile traffic.\nE. AT&T shall deliver domestic originating telex traffic destined for termination through the Inmarsat system to United States land earth stations, as required by FCC regulatory policy.\nF. Each Party shall be responsible for providing and maintaining, at its own expense, the equipment and circuits located on its side of the point of interconnection. The Parties shall cooperate in the detection and correction of problems which may not be capable of being immediately isolated to a specified segment of a circuit.\nG. AT&T shall provide prompt assistance, as needed, to customers using or attempting to use the COMSAT mobile satellite communications services on a priority not less than that which they accord their other service activities and their customers for those services.\nH. Each Party shall be responsible for (a) the transmission to the other Party of signals in accordance with CCITT Recommendations, and (b) for the transmission of signals received from the other Party over its facilities and to any interconnecting carrier, foreign administration or subscriber, as appropriate.\n2. Charges\nA. For the services provided by AT&T hereunder, COMSAT agrees to pay those charges set forth in Article 3 B.(i) below.\nB. For those services provided by COMSAT hereunder, AT&T agrees to pay those charges set forth in Article 3 B.(ii) below.\nC. Telex rates to customers of COMSAT or AT&T are the sole responsibility of the billing carrier. Any tariff changes affecting services provided in conjunction with this Agreement shall be provided by the Party making the changes to the other Party prior to the filing of such changes with the FCC.\n3. Accounting and Settlement\nA. The Parties shall exchange accounting statements on a monthly basis within thirty (30) days after the end of the traffic month. Settlement of net balances shall be made on a quarterly basis within thirty (30) days following the end of the traffic quarter. No allowance shall be made in the accounts for uncollectible amounts. Settlement of net balances for overseas originated traffic will be on a quarterly basis within thirty (30) day following the end of the traffic quarter.\nB. The procedures for settlement between AT&T and COMSAT for traffic terminating or originating at mobile earth stations shall be as follows:\ni. For mobile-to-fixed telex traffic billable by COMSAT to mobile subscribers, COMSAT shall credit to AT&T the amounts due at AT&T's normal terminating interconnect rates less twenty percent (20%).\nii. For fixed-to-mobile telex traffic chargeable at U.S. land points, AT&T shall credit to COMSAT the amounts due at COMSAT's terminating interconnect rate of $3.50 per minute.\niii. For telex traffic chargeable at overseas land points, AT&T will arrange for connecting overseas correspondents to collect the applicable charges for the combined services and to credit AT&T with AT&T's share of the applicable international charges plus an amount equal to COMSAT's share of the interconnect rate, which latter amount AT&T shall credit to COMSAT.\nAT&T shall use reasonable efforts to identify such mobile satellite communications traffic by ocean region and traffic month in the accounting statements exchanged.\n5. Term\nThis Agreement shall become effective as of the date set forth above and shall continue in full force and effect until terminated by either Party by not less than six months notice in writing to the other Party, or is replaced by a superseding Agreement between the Parties.\n6. Publicity\nDuring the term of this Agreement, COMSAT and AT&T will entertain proposals by each to the other for joint advertising of the services provided under this Agreement under terms and conditions mutually acceptable to both Parties.\n7. Liability\nNeither Party nor its parent corporation, subsidiaries, affiliates, or suppliers, or any of its parent corporation's subsidiaries or affiliates shall be liable to the other for incidental, special, indirect or consequential damages or loss of revenues or profits resulting from failure to provide telecommunications services or facilities as called for hereunder, or for any loss of damage sustained by reason of any failure in or breakdown of the communications facilities or interruption of the same associated with functioning of the services covered by this Agreement no matter what the cause.\n8. Assignment\nNeither Party may assign this Agreement without the prior written consent of the other Party, except to its parent, an affiliate or subsidiary in connection with the transfer of responsibility for the service provided under this Agreement.\n9. Trademarks\nNothing in this Agreement shall create in either Party any rights in the trademarks, tradenames, insignia, symbols, identification and logotypes used by the other Party. Before either Party uses any such marks of the other Party, it shall obtain the prior, written consent of the other Party.\n10. Confidentiality\nExcept as required by governmental agency, neither Party shall disclose customer and billing information or its participation in this undertaking or any terms and condition of this Agreement or any other agreement between the Parties without the prior written consent of the other Party.\n11. Notices\nAny notices required or permitted to be given pursuant to this Agreement shall be considered properly given when sent via registered courier, telex, or fax to the following addresses, respectively, or to such other addresses as the Party concerned may hereafter designate in writing.\nTo COMSAT: COMSAT Mobile Communications 22300 COMSAT Drive Clarksburg, MD 20024 Attention: Director, Contracts\nTo AT&T: AT&T EasyLink Services 400 Interpace Parkway Parsippany, New Jersey 07054 Attention: Robert Jones Vice President & General manager AT&T Easylink Telex SBU\n12. Governing Law\nThis Agreement shall be governed by and construed according to the law of Maryland, United States of America.\n13. Severability\nIf any term or provision of this Agreement shall be found to be illegal or unenforceable, then such term or provision shall be deemed stricken, and the remainder of this Agreement shall continue in full force and effect.\n14. Waiver\nNo term or provision hereof shall be deemed waived by either Party unless such waiver shall be in writing and signed by that Party.\n15. Amendment\nAny amendment to this Agreement shall be in writing and shall be executed by authorized representatives of the Parties hereto.\n16. Entire Agreement\nThis Agreement and the Attachments hereto constitute the complete and entire understanding of the Parties with respect to the subject matter hereof, superseding all prior oral and written negotiations, representations and agreement.\nIN WITNESS WHEREOF, the Parties hereto have caused this Agreement to be executed as of the day and year first shown above.\nAT&T Easylink Services Communications Satellite Corporation COMSAT Mobile Communications\n\/s\/Robert F. Jones \/s\/Arthur E. Gelven By:____________________ By:____________________\nRobert F. Jones Arthur E. Gelven Name:__________________ Name:__________________\nV.P. & Gen. Mgr. Vice President, Human Resources, Contracts and Administration Title:_________________ Title:_________________\n7-28-93 August 3, 1993 Date:__________________ Date:__________________\nEXHIBIT 10(cc)\nA G R E E M E N T\nThis Agreement is made by and between American Telephone and Telegraph Company (\"AT&T\"), a United States International Service Carrier (\"USISC\"), and COMSAT Corporation (\"COMSAT\"), the U.S. Signatory to the International Telecommunications Satellite Organization (\"INTELSAT\") (hereinafter jointly referred to as the \"Parties\").\nWHEREAS, AT&T is engaged in the provision of international telecommunications services via satellite; and\nWHEREAS, COMSAT offers INTELSAT space segment capacity to USISCs for international telecommunications services; and\nWHEREAS, COMSAT and AT&T entered into an inter-carrier contract on October 8, 1987, specifying the rates, terms and conditions relating to AT&T's long-term commitment for utilization of COMSAT's INTELSAT space segment capacity for IMTS circuits (\"1987 Agreement\"); and\nWHEREAS, the 1987 Agreement was filed with the Federal Communications Commission (\"FCC\") pursuant to Section 211 of the Communications Act and as part of CC Docket 87-67; and\nWHEREAS, the 1987 Agreement was accepted by the FCC in all material respects as consistent with the public interest, and was relied upon by the FCC as a basis for withdrawing all loading guidelines applicable to AT&T's IMTS circuits; and\nWHEREAS, the 1987 Agreement was amended on May 16, 1988, and that amendment was also filed with and accepted by the FCC; and\nWHEREAS, the Parties continue to believe, as stated in the 1987 Agreement, that marketplace forces rather than regulatory determinations can and should govern the relationship between them; and\nWHEREAS, the Parties have decided to replace the 1987 Agreement, as amended, with a new inter-carrier contract based upon AT&T's current and future utilization of COMSAT's INTELSAT space segment capacity for telecommunications services, and have decided to maintain certain prior commitments arising from the 1987 Agreement, as amended, as specified herein;\nNOW, THEREFORE, in consideration of and in reliance upon the mutual promises set forth below, AT&T and COMSAT hereby agree as follows:\nARTICLE I PURPOSE AND INTENT\nThe purpose of this Agreement is to implement the Parties' mutual understanding with respect to AT&T's current and future utilization of COMSAT's INTELSAT space segment capacity for telecommunications services. It is the intent of COMSAT and AT&T that this Agreement comply with all laws and international obligations of the United States. Consistent with that intent, nothing herein shall preclude COMSAT from reaching similar agreements for circuits with other USISCs, and nothing herein shall preclude AT&T from placing traffic not covered by this Agreement on whatever telecommunications facilities it should select.\nARTICLE II DEFINITIONS\nThe terms used in this Agreement are defined as follows:\n1. Additional Circuits. Digital Bearer Circuits activated by AT&T on the INTELSAT system via COMSAT on or after January 1, 1992 for 10-year lease terms, including, but not limited to, circuits other than Base Circuits that AT&T committed to take pursuant to the 1987 Agreement, as amended.\n2. Base Circuits. The 5,716 Digital Bearer Circuits activated by AT&T on the INTELSAT system via COMSAT prior to January 1, 1992, each of which circuits AT&T committed to take for 10-year lease terms pursuant to the 1987 Agreement, as amended.\n3. Bulk Offering. The offering by COMSAT to AT&T of three 36 MHz allotments pursuant to the rates, terms and conditions specified in this Agreement.\n4. Date of Activation. The month, day and year on which a particular FM Circuit or Digital Bearer Circuit is placed in service.\n5. Derived Circuits. Circuits created from Digital Bearer Circuits by means of Digital Circuit Multiplication Equipment (DCME).\n6. Digital Bearer Circuits. 64 Kbps equivalent circuits used to carry public-switched traffic (including IDR and TDMA circuits, but excluding private line circuits); these circuits may or may not be aggregated into larger digital carriers, e.g., 2.048 Mbps.\n7. Efficiency Factor. The maximum number of Derived Circuits that may be provided through a Digital Bearer Circuit.\n8. FM Circuits. 4 Khz analog circuits associated with analog carriers using Frequency Division Multiple Access and Frequency Modulation.\n9. Growth Traffic. Voice-Grade Circuits above and beyond those existing at a given point in time.\n10. IDR Circuits. 64 Kbps equivalent international digital route circuits associated with digital carriers using Quadrature Phase Shift Keying (QPSK) modulation.\n11. IMTS (International Message Telecommunications Service). International switched-voice service, as defined by the FCC to include AT&T's 800 service-overseas, but excluding dedicated private line service.\n12. Large Standard A Earth Station. An earth station having a gain-to-noise temperature ratio (\"G\/T\") at least equal to 40.7 dB\/K (in the U.S.) and at least equal to 39 dB\/K (at the foreign end).\n13. Revised Standard A Earth Station. An earth station having a gain-to-noise temperature ratio (\"G\/T\") at least equal to 35 dB\/K.\n14. Satellite Circuits. Voice-Grade Circuits provided by COMSAT to AT&T and carried on the INTELSAT system.\n15. TDMA\/DNI Circuits. 64 Kbps equivalent digital circuits providing Time Division Multiple Access service using digital non-interpolation equipment providing a clear 64 Kbps channel.\n16. TDMA\/DSI Circuits. 64 Kbps equivalent digital circuits providing Time Division Multiple Access service using digital speech interpolation equipment with encoding at both ends.\n17. Voice-Grade Circuits. IMTS circuits on any long- haul transmission medium consisting of FM Circuits, Digital Bearer Circuits not using DCME, and Derived Circuits.\nARTICLE III PREVIOUSLY-COMMITTED CIRCUITS\nA. The Parties agree that certain obligations under the 1987 Agreement, as amended, shall be incorporated into this Agreement and shall continue to apply. The Parties agree that the provisions of Articles VI-A and VI-B of the 1987 Agreement, as amended (which Articles placed limits on the percentage of digital circuits relative to total IMTS traffic that could be activated by AT&T) shall not be among those that continue to apply, and COMSAT hereby waives any claim it might have based on such limits having been previously exceeded. The obligations under the 1987 Agreement, as amended, that shall continue to apply are set forth in Paragraphs B through J of this Article.\nB. In addition to the Growth Traffic that AT&T has already placed on the INTELSAT system via COMSAT pursuant to the 1987 Agreement, as amended, AT&T shall place on the INTELSAT system via COMSAT at least 30% of its Voice-Grade Circuits from Growth Traffic during each of the following time periods: July 1, 1993 through June 30, 1994, and July 1, 1994 through June 30, 1995. AT&T shall activate Satellite Circuits during each of these time periods in such a way as to achieve an even growth of such circuits throughout the time period, or its mathematical equivalent in terms of satellite circuit months.\nC. Except as provided in Paragraph D of this Article, at no time during the period from the effective date of this Agreement through June 30, 1995 shall AT&T reduce the total number of Voice-Grade Circuits obtained from COMSAT below the levels required by Paragraph B of this Article. However, subject to Paragraph H of this Article, AT&T shall have the flexibility to redistribute its circuits geographically among the regions of the world in order to meet its operational needs without cancellation penalty.\nD. In the event of a net decrease in AT&T's total requirements for Voice-Grade Circuits during either the period from July 1, 1993 through June 30, 1994 or the period from July 1, 1994 through June 30, 1995, and only to the extent of that net decrease, AT&T may remove cable and Satellite Circuits from service in direct proportion to the percentage which cable and Satellite Circuits represent of the total number of AT&T circuits in service at the time, subject to the following conditions: (i) AT&T shall first promptly notify COMSAT of its intent to remove circuits from service and provide COMSAT with appropriate verification of the net decreases in AT&T's total requirements for Voice-Grade Circuits; (ii) AT&T shall remove cable and Satellite Circuits from service in an even manner throughout the year so as to assure that deactivations are equitably distributed between the two media; (iii) AT&T shall only remove Satellite Circuits from service in sequence, beginning with the earliest\nactivated AT&T Satellite Circuits and proceeding on a \"first in, first out basis\"; (iv) Satellite Circuits removed from service shall be subject to the cancellation penalties set forth in Article IV-C of this Agreement; and (v) once AT&T again begins to have Growth Traffic for any July through June period, such growth shall be activated by means of cable and Satellite Circuits in the same manner in which the circuits were removed from service until such time as the number of Satellite Circuits is equal to the levels achieved before AT&T experienced the net decrease referred to above. At such time, the provisions of Paragraph B of this Article shall reapply.\nE. The Efficiency Factors used by AT&T to determine the maximum number of Derived Circuits that can be provided through Digital Bearer Circuits shall not exceed the following: (i) from July 1, 1993 through June 30, 1994, 4.28:1; and (ii) from July 1, 1994 through June 30, 1995, 4.29:1. Examples of the applications of Paragraphs B and E of this Article are provided in Paragraph I below.\nF. Should AT&T elect to activate more Voice-Grade Circuits on the INTELSAT system than are required under Paragraph B of this Article for the time period from July 1, 1993 through June 30, 1994 (by, for example, placing 35% of Growth Traffic on COMSAT's INTELSAT space segment during that time period rather than the 30% required by Paragraph B), such circuits may be in\nany combination of FM and Digital Bearer Circuits necessary to meet AT&T's operational needs and will not be subject to Paragraph E of this Article for that time period. AT&T will identify such circuits in the semi-annual report referred to in Paragraph G of this Article. If such circuits are short-term (e.g., monthly), they may be canceled at any time without penalty, but may not be credited against the number of Voice- Grade Circuits that would be required under Paragraph B of this Article to be placed on the INTELSAT system via COMSAT during the succeeding time period from July 1, 1994 through June 30, 1995. If such circuits are multi-year circuits, they may either (1) be canceled at any time subject to the cancellation penalties set forth in Article IV-C of this Agreement, or (2) be credited against the number of Voice-Grade Circuits that would be required under Paragraph B of this Article to be placed on the INTELSAT system via COMSAT during the succeeding time period from July 1, 1994 through June 30, 1995, provided that such circuits when activated shall be subject to Paragraph E of this Article, and shall otherwise be treated in the same manner as regular Satellite Circuits under Paragraphs B and H of this Article.\nG. AT&T shall provide COMSAT through June 30, 1995 with semi-annual reports, certified by an appropriate representative of AT&T, showing (on a regional basis, and in the same form as it has since implementation of the 1987 Agreement, as amended) the total number of Voice-Grade Circuits on cable, satellite and any\nother media, and their further apportionment into FM, Digital Bearer Circuits not using DCME and Derived Circuits.\nH. All IDR and TDMA\/DNI Bearer Circuits activated by AT&T in fulfillment of the requirements of Paragraph B of this Article shall be subject to a 10-year lease commitment. The 10-year lease term for IDR and TDMA\/DNI Bearer Circuits shall run from the Date of Activation of such circuit, and that term shall apply in full both to new IDR and TDMA\/DNI Bearer Circuits and to IDR and TDMA\/DNI Bearer Circuits converted from FM Circuits. However, the geographical substitution of one circuit for another in order to accommodate AT&T's operational needs shall not trigger the start of a new lease term or cancellation penalty.\nI. Consistent with and subject to the foregoing Paragraphs, following is an explanation summarizing the methodology to be used in determining the number of Satellite Circuits to be maintained by AT&T during each of the time periods July 1, 1993 through June 30, 1994 and July 1, 1994 through June 30, 1995:\n1. The starting point for the calculations will be the total AT&T Voice-Grade Circuits on all facilities as of June 30, 1993 (assuming that, as of that date, AT&T has met its commitment under the 1987 Agreement, as amended, to place at least 30% of its Voice Grade Circuits from Growth Traffic on the INTELSAT system via COMSAT during the period from July 1, 1992 through June 30, 1993; if it has not, AT&T will add enough Satellite Circuits to meet that commitment and such added circuits will be included in the calculation of the\nstarting point, but this will not delay this Agreement from going into effect and will not affect the expiration date specified in Paragraph J below).\n2. The total Growth Traffic in AT&T's IMTS circuits during the period from July 1, 1993 through June 30, 1994 will be multiplied by 30% to determine the portion of such growth that will be placed on the INTELSAT system via COMSAT.\n3. The satellite Growth Traffic obtained in 2 above (i.e., 30% of total Growth Traffic) is then added to the number of Satellite Circuits as of June 30, 1993 to determine the minimum number of Satellite Circuits as of June 30, 1994.\n4. The number of FM Satellite Circuits as of June 30, 1994 is subtracted from the total number of Satellite Circuits as of that date.\n5. The number of Satellite Circuits not including FM Circuits as of June 30, 1994 is then divided by the Efficiency Factor of 4.28:1 to determine the minimum number of Digital Bearer Circuits (to be billed) that must be activated by June 30, 1994.\n6. The above methodology also will be applied for the period from July 1, 1994 through June 30, 1995, using a 30% growth percentage and an Efficiency Factor of 4.29:1.\nJ. The provisions set forth in Paragraphs B through I of this Article shall expire on June 30, 1995, provided, however, that: (1) consistent with Article IX of this Agreement, all applicable rates, terms and conditions for each circuit leased pursuant to the provisions of this Article shall survive until the expiration of that circuit's lease term; and (2) if AT&T removes any Satellite Circuits from the INTELSAT system prior to June 30, 1995 pursuant to Paragraph D of this Article, AT&T's obligation to restore those circuits once it again begins to have growth traffic shall not expire until December 31, 2003.\nARTICLE IV BASE AND ADDITIONAL CIRCUITS\nA. COMSAT's rates for AT&T's Base Circuits shall be reduced as of July 1, 1993 to the levels specified in Attachment A, which is appended hereto and made part of this Agreement. The rates in Attachment A are for Base Circuits provided via INTELSAT Revised Standard A Earth Stations. Base Circuits transmitted through standard earth stations with lower G\/T values shall be subject to the rate adjustment factors specified in Attachment B, which is also appended hereto and made part of this Agreement. In addition, the Parties agree that, from July 1, 1993 through December 31, 1997, a discount of 10% below the rates specified in Attachment A shall be applied to Base Circuits transmitted through Large Standard A Earth Stations at both ends.\nB. COMSAT's rates for AT&T's Additional Circuits shall be reduced to the levels specified in Attachment C, which is appended hereto and made part of this Agreement. The rates in Attachment C are for Additional Circuits provided via all INTELSAT Standard A earth stations. Additional Circuits transmitted through standard earth stations with lower G\/T values shall be subject to the rate adjustment factors specified in Attachment B.\nC. As of July 1, 1993, COMSAT's charge for early termination of Base Circuits and Additional Circuits shall be a flat fee of $6,880 per 64 Kbps equivalent circuit, plus 45% of the balance due at the time of early termination.\nD. Notwithstanding Paragraph C of this Article, AT&T reaffirms that it will not cancel any Digital Bearer Circuits committed pursuant to Article III of this Agreement or already in place under the 1987 Agreement, as amended, until July 1, 1995 at the earliest, except as provided under Article III-D above.\nE. The Parties agree that the rates and early termination charges set forth in this Article and in Attachments A through C supersede any conflicting provisions in COMSAT World Systems Tariff F.C.C. No. 1. All other terms and conditions for AT&T's Base Circuits and Additional Circuits shall be the same as those specified in COMSAT World Systems Tariff F.C.C. No. 1 as of the effective date of this Agreement, and those tariff provisions are hereby incorporated into this Agreement.\nARTICLE V BULK OFFERING\nA. COMSAT hereby agrees to provide, and AT&T commits and agrees to lease from COMSAT for a 10-year term commencing as of July 1, 1993, the following 36 MHz bandwidth allotments to be used for U.S. traffic:\n[blank space intended]\nB. COMSAT's rates for each of the three 36 MHz allotments provided pursuant to the Bulk Offering described in this Article shall be $189,000 per month from January 1, 1994 through December 31, 1996, and $165,000 per month for the remainder of the lease term. As of the effective date of this Agreement, however, there is substantial non-AT&T traffic located in these allotments that will constrain AT&T's ability to utilize them fully. The parties recognize that it will take some time to relocate this non-AT&T\ntraffic consistent with INTELSAT's standard relocation procedures. Therefore, until this relocation is complete, COMSAT will prorate its lease price such that, if there are X non-AT&T circuits being leased from COMSAT in a given allotment, the lease price for that allotment will be ((540-X)\/540) x $189,000 (or $165,000, as applicable) per month.\nC. For the purpose of converting part of the traffic requirements under Article III above to the leasing of the three 36 MHz allotments described in this Article, and for the additional purpose of establishing termination charges for those allotments, each 36 MHz allotment lease will be considered the equivalent of 540 64 Kbps circuits. Consistent therewith, COMSAT and AT&T hereby agree that, by the end of 1993, the three 36 MHz allotment leases may absorb up to 827 of AT&T's existing 10-year Additional Circuits. The conversion of up to 827 Additional Circuits under this Paragraph shall not be considered early termination, and early termination charges shall not apply thereto. Existing circuits outside the allotments that have not been leased for multi-year terms may be moved into the allotments at any time, and new circuits (including Additional Circuits not yet activated as of the effective date of this Agreement) may be activated inside the allotments at any time. Once inside the allotments, circuits may not be counted in determining the appropriate block rates for AT&T under Article IV-B and Attachment C of this Agreement.\nD. The Parties agree that, in consideration of AT&T's total commitment under this Agreement, COMSAT shall provide the three 36 MHz allotments described in this Article free of charge for the period from July 1, 1993 through December 31, 1993. Beginning January 1, 1994, the charges specified in Paragraph B of this Article will apply.\nE. COMSAT's charge for early termination for each of the 36 MHz allotments described in this Article shall be a flat fee of 540 x $6,880 per 64 Kbps equivalent circuit, plus 45% of the balance due at the time of early termination.\nF. Notwithstanding Paragraph E of this Article, AT&T agrees that it will not cancel any of the 36 MHz allotments committed pursuant to this Article until July 1, 1998 at the earliest.\nG. INTELSAT's technical lease definitions, as set forth in the IESS documents that COMSAT routinely provides to AT&T, will apply to the lease of the three 36 MHz allotments described in this Article, and COMSAT and INTELSAT must approve transmission plans for each circuit located in the allotments in advance of service activation.\nH. The Parties recognize that, during the lease term of the three 36 MHz allotments described in this Article, the particular\nsatellites listed in paragraph A of this Article may be replaced by other INTELSAT satellites. In such cases, a transponder of different connectivity may be substituted for the replaced transponder upon mutual agreement of the Parties.\nI. The Parties agree that the rates, early termination charges, and other terms and conditions specified in this Article supersede any conflicting provisions in COMSAT World Systems Tariff F.C.C. No. 1. All other terms and conditions for the circuits provided pursuant to the Bulk Offering described in this Article shall be the same as those specified in COMSAT World Systems Tariff F.C.C. No. 1 as of the effective date of this Agreement, and those tariff provisions are hereby incorporated into this Agreement.\nJ. Any request by AT&T during the term of this Agreement for additional allotments beyond the three 36 MHz allotments specified in this Article shall be the subject of a separate agreement with respect to price and terms when and if such a request is made.\nARTICLE VI MOST FAVORED CARRIER\nA. To the extent permitted by law, COMSAT agrees that, during the term of this Agreement, it will offer AT&T rates, terms and conditions for Base Circuits that are no less favorable than the rates, terms and conditions it makes available, after the effective date of this Agreement, to any other USISC for Digital Bearer Circuits activated prior to January 1, 1992. In the event that, during the term of this Agreement, COMSAT makes available to another USISC rates, terms and conditions for Digital Bearer Circuits activated prior to January 1, 1992 that are more favorable than those applicable under this Agreement, then such more favorable rates, terms and conditions shall be offered by COMSAT to AT&T in writing and, if accepted by AT&T in writing, shall be automatically incorporated into this Agreement as an amendment thereto, and shall be effective as of the date made available to such other USISC.\nB. To the extent permitted by law, COMSAT agrees that, during the term of this Agreement, it will offer AT&T rates, terms and conditions for Additional Circuits that are no less favorable than the rates, terms and conditions it makes available, after the effective date of this Agreement, to any other USISC for Digital Bearer Circuits activated or on after January 1, 1992. In the event that, during the term of this\nAgreement, COMSAT makes available to another USISC rates, terms and conditions for Digital Bearer Circuits activated on or after January 1, 1992 that are more favorable than those applicable under this Agreement, then such more favorable rates, terms and conditions shall be offered by COMSAT to AT&T in writing and, if accepted by AT&T in writing, shall be automatically incorporated into this Agreement as an amendment thereto, and shall be effective as of the date made available to such other USISC.\nARTICLE VII CUSTOMER\/SUPPLIER RELATIONSHIP\nIn recognition of COMSAT's unique expertise and experience in international satellite telecommunications, the high quality of its services, its performance as U.S. Signatory to INTELSAT, and the Parties' good working relationship over the past three decades, AT&T agrees that it shall treat COMSAT as a preferred supplier and shall give it an opportunity to supply additional satellite capacity not covered by this agreement, provided however that, consistent with Article I above, nothing shall preclude AT&T from placing such traffic on other facilities.\nARTICLE VIII REMEDIES\nA. In the event that COMSAT materially breaches Article IV- A or IV-B of this Agreement, AT&T shall be entitled to damages in an amount equal to the difference between the rates AT&T paid and the rates specified in Attachments A and C for the number of Base Circuits or Additional Circuits involved.\nB. In the event that COMSAT materially breaches Article V-B or V-D of this Agreement, AT&T shall be entitled to damages in an amount equal to the difference between the rates AT&T paid and the rates specified in Article V-B and V-D for the number of 36 MHz allotments involved.\nC. In the event that COMSAT materially breaches Article VI of this Agreement, AT&T shall be entitled to damages in an amount equal to the difference between the rates AT&T paid for the circuits covered by this Agreement and the rates AT&T would have paid for those circuits if COMSAT had not breached Article VI.\nD. In the event that AT&T materially breaches Article III or IV-D of this Agreement, COMSAT shall be entitled to damages in an amount equal to the revenues that COMSAT would have realized if AT&T had activated Base and Additional Circuits in accordance\nwith its prior commitments to COMSAT and then canceled those circuits on July 1, 1995.\nE. In the event that AT&T materially breaches Article V-A or V-F of this Agreement, COMSAT shall be entitled to damages in an amount equal to the revenues that COMSAT would have realized if AT&T had activated the three 36 MHz allotments in accordance with the provisions of this Agreement and then canceled those allotments on July 1, 1998.\nF. In the event that AT&T materially breaches Article VII of this Agreement, COMSAT shall be entitled prospectively to charge AT&T for Base Circuits and Additional Circuits at the highest rate specified for such circuits in COMSAT World Systems Tariff F.C.C. No. 1 as of the effective date of this Agreement.\nG. In no event shall either Party be entitled to damages or other remedies under this Article unless it provides the other Party with notice and a reasonable opportunity to cure within sixty (60) days of the date when the Party claiming breach either knew or should have known of the event giving rise to the alleged breach.\nARTICLE IX TERM OF AGREEMENT\nThe term of this Agreement shall commence upon execution of the Agreement by both Parties and shall run through December 31, 2003, provided, however, that all applicable rates, terms and conditions for each circuit leased pursuant to the provisions of this Agreement (or its predecessor, the 1987 Agreement, as amended) shall survive until the expiration of that circuit's lease term. Thus, for example, the rates, terms and conditions for an Additional Circuit activated on January 1, 1995 would remain in effect until December 31, 2004.\nARTICLE X FCC REVIEW\nThe Parties shall jointly submit this Agreement to the FCC within thirty (30) days of execution pursuant to Section 211(a) of the Communications Act, and shall request confidential treatment for any competitively sensitive information contained herein. If any FCC proceeding is initiated with respect to the entry into force of this Agreement, the Parties agree to cooperate fully in seeking a prompt and favorable resolution of such proceeding. Although this Agreement is effective as of its signing date in order to implement rate reductions beneficial to the public as soon as practicable, the Parties recognize that the FCC has reserved the right within ninety (90) days to take actions affecting the provisions herein, and accordingly, the Parties agree that any FCC-mandated changes shall be retroactive to the effective date of this Agreement. However, in the event that such changes materially alter the substance of this Agreement, the Parties shall promptly seek to renegotiate the affected provisions thereof.\nARTICLE XI DISPUTE RESOLUTION\nIf any dispute arises with respect to the interpretation, implementation or termination of this Agreement, the Parties will use their best efforts to resolve the matter amicably, including recourse to the highest levels of management in their respective organizations. If such efforts fail to resolve the dispute within a reasonable time, the Parties agree to present that dispute to the American Arbitration Association in Washington, D.C. for binding resolution in accordance with that Association's Commercial Rules of Arbitration, or in lieu of arbitration, to utilize another mutually agreeable means of alternative dispute resolution (ADR). Each Party shall bear all of its own costs incurred in utilizing arbitration or other ADR mechanism.\nARTICLE XII ENTIRE AGREEMENT\nThis Agreement (including its attachments and those portions of COMSAT's tariffs which are incorporated by reference) replaces the 1987 Agreement, as amended, and constitutes the entire agreement between the Parties as to AT&T's utilization of COMSAT's INTELSAT space segment capacity for telecommunications services; it is intended as the complete and exclusive statement of the terms of the agreement between the Parties, and supersedes all previous understandings, commitments or representations by or between the Parties with respect to its subject matter.\nARTICLE XIII REPRESENTATIONS OF AUTHORITY\nEach Party to this Agreement hereby represents and warrants to the other that it is a corporation duly organized, validly existing, and in good standing under the laws of its jurisdiction of incorporation; that it has appropriate approvals and direction from its Board of Directors to empower it to enter into and perform its obligations under this Agreement; and that it has taken all requisite corporate action to approve the execution, delivery, and performance of this Agreement.\nARTICLE XIV BINDING OBLIGATION\nA. This Agreement, when executed and delivered, shall be a legal, valid and binding obligation of COMSAT and AT&T, and shall bind all successors, permitted assigns and U.S. subsidiaries of the Parties.\nB. The provisions of this Agreement are for the benefit only of the Parties hereto and their subsidiaries, successors and permitted assigns, and no other party may seek to enforce, or benefit from, any provision of this Agreement.\nC. Neither Party shall assign or transfer its rights and obligations under this Agreement without the other Party's express written consent, which consent shall not be unreasonably withheld.\nD. The Parties agree that neither of them shall take any action, either directly or indirectly, that would interfere or be inconsistent with the terms of this Agreement.\nARTICLE XV NOTICES\nAll written notices required under this Agreement shall be considered properly given only when sent by registered or certified mail, return receipt requested, to the following addresses, respectively, or to such other addresses as the receiving party may hereafter designate in writing:\nTo AT&T: Arthur N. Sparks Director, IFM AT&T 412 Mt. Kemble Ave. Morristown, NJ 07960\nTo COMSAT: Patricia S. Benton Vice President and General Manager COMSAT World Systems 6560 Rock Spring Drive Bethesda, MD 20817\nAny period of time referred to herein which is to commence upon notice shall be counted from the date such notice is received as aforesaid.\nARTICLE XVI WAIVERS\nThe waiver by either Party of a breach of, or default under, any of the provisions of this Agreement, or the failure of either Party, on one or more occasions, to enforce any of the provisions of this Agreement or to exercise any right or privilege hereunder, shall not thereafter be construed as a waiver of any subsequent breach or default of a similar nature, or as a waiver of any provision, right or privilege hereunder.\nARTICLE XVII MISCELLANEOUS\nA. The article headings and table of contents in this Agreement are inserted for convenience only and do not constitute a part of this Agreement.\nB. This Agreement may be amended only in writing by an instrument signed by authorized representatives of both Parties.\nC. This Agreement shall be construed according to the laws of the State of New Jersey.\nD. This Agreement may be executed in counterparts, each of which shall be deemed an original, and all such counterparts together shall constitute one and the same instrument.\nE. This Agreement shall become effective immediately upon execution by both Parties.\nIN WITNESS WHEREOF, each of the Parties hereto has executed this Agreement.\nAMERICAN TELEPHONE AND COMSAT CORPORATION TELEGRAPH COMPANY\n\/s\/ Frank P. Fahey \/s\/ Patricia Benton By:___________________________ By:___________________________ V.P. and G.M. COMSAT Deputy Director World Systems Title: _______________________ Title:________________________\nJuly 27, 1993 July 23, 1993 Date:_________________________ Date:_________________________\nATTACHMENT A\nBASE CIRCUIT RATES Per month per activated carrier(1) 10-Year Term\nCarrier Size 1993-94(2) 1995(3) 1996(4) 1997(5) - - - ------------ ------- ------- ------- ------- 64 Kbps $ 600 $ 540 $ 465 $ 365 512 Kbps 4,800 4,320 3,720 2,920 1.544 Mbps 13,920 12,480 10,800 8,400 2.048 Mbps 17,400 15,600 13,500 10,500 6.312 Mbps 49,215 44,125 38,185 29,700 8.448 Mbps 65,625 58,835 50,915 39,600\nPer 64 Kbps equivalent in a fully-activated 2.048 Mbps carrier $ 580 $ 520 $ 450 $ 350\n- - - ------------------------ (1) The rates specified in this Attachment are for services to INTELSAT Revised Standard A Earth Stations.\n(2) The rates in this column shall take effect on July 1, 1993.\n(3) The rates in this column shall take effect on January 1, 1995.\n(4) The rates in this column shall take effect on January 1, 1996.\n(5) The rates in this column shall take effect on January 1, 1997, and shall remain in effect for the duration of each circuit's lease term unless further reduced.\nATTACHMENT B\nRATE ADJUSTMENT FACTORS for Base and Additional Circuits\nEarth Station Frequency Minimum Rate Adjustment Standard Band G\/T Factor(1) - - - ------------- --------- ------- --------------- Std. B C 31.7 dB\/K 1.36 Std. C 29.0 dB\/K 2.05 Std. C 27.0 dB\/K 2.92 Std. E-3 Ku 34.0 dB\/K 1.68 Std. E-2 Ku 29.0 dB\/K 4.94\n- - - ------------------ (1) In the event that COMSAT tariffs rate adjustment factors that are more favorable than those listed in this Attachment, the factors tariffed shall be incorporated automatically into this Agreement.\nATTACHMENT C ADDITIONAL CIRCUIT RATES Per month per 64 Kbps equivalent in a fully-activated 2.048 Mbps carrier(1) 10-Year term\nBlock 1993-94(2) 1995(3) 1996(4) 1997(5) - - - ------ ------- ---- ---- ---- Block 1(6) $495 $495 $450 $350 Block 2(7) 445 445 445 350 Block 3(8) 395 395 395 350 Block 4(9) 350 350 350 350\n- - - --------------- (1) The rates specified in this Attachment are for service to all INTELSAT Standard A earth stations. Rates for fully activated 2.048 Mbps carriers shall be 30 times the numbers shown above. Rates for carrier sizes other than 2.048 Mbps shall bear the same relationships to the 2.048 Mbps rate as those shown in Attachment A.\n(2) The rates in this column are currently in effect.\n(3) The rates in this column are currently in effect.\n(4) The rates in this column shall take effect on January 1, 1996.\n(5) The rates in this column shall take effect on January 1, 1997, and shall remain in effect for the duration of each circuit's lease term unless further reduced.\n(6) The rates in Block 1 apply to Additional Circuits included among the first 270 Digital Bearer Circuits (excluding Base Circuits) leased in a given region for terms of at least five years. The regions are those specified in COMSAT World Systems Tariff F.C.C. No.1 as of the effective date of this Agreement, i.e.: (1) (Western) Europe; (2) Pacific; (3) Latin America; and (4) Near and Middle East, Africa and other Europe.\n(7) The rates in Block 2 apply to Additional Circuits included among the next 360 Digital Bearer Circuits (excluding Base Circuits) leased in a given region for terms of at least five years.\n(8) The rates in Block 3 apply to Additional Circuits included among the next 450 Digital Bearer Circuits (excluding Base Circuits) leased in a given region for terms of at least five years.\n(9) The rates in Block 4 apply to Additional Circuits included among the Digital Bearer Circuits above 1080 (excluding Base Circuits) leased in a given region for terms of at least five years.\nEXHIBIT 10(dd)\nThis Agreement is hereby entered into this 1 day of September 1993 by and between COMSAT Mobile Communications of COMSAT Corporation with offices located at 22300 COMSAT Drive, Clarksburg, MD 20871 (hereinafter referred to as \"COMSAT\"), AND MCI International, Inc. With offices at 2 International Drive, Rye Brook, New York 10573 on behalf of itself and its affiliated entities, (hereinafter referred to as \"MCI\").\nWITNESSETH:\nWHEREAS, COMSAT and MCI are communications common carriers and are each subject to the jurisdiction of the Federal Communications Commission (\"FCC\"); and\nWHEREAS, COMSAT and MCI agree to exchange services between the various regions covered by the International Maritime Satellite Organization (\"Inmarsat\") served by COMSAT and points in the United States and international points served by MCI;\nNOW, THEREFORE, in consideration of the foregoing and the covenants hereinafter set forth, COMSAT and MCI agree as follows:\n1. Interconnection of Facilities\n(a) COMSAT and MCI agree to interconnect their facilities to permit the exchange of traffic for the services covered under this Agreement. Such services to be covered are described in Annex I and II hereto, which is hereby incorporated into and made part of this Agreement. The Annex to this Agreement may be modified from time to time subject to mutual agreement of the Parties, and additional Annexes may be added if the Parties so choose.\n(b) MCI shall provide prompt assistance, as needed, to customers using or attempting to use the COMSAT mobile satellite communications services on a basis not less than that which they accord their other service activities and their customers for those services.\n(c) Each Party shall be responsible for:\no the transmission to the other Party of signals in accordance with CCITT Recommendations, and\no the transmission of signals received from the other Party over its facilities and to any interconnecting carrier, foreign administration or subscriber, as appropriate.\n2. Charges\n(a) Rates for services provided hereunder are set forth in Annex I and II, hereto.\n(b) Rates to customers of COMSAT or MCI are the sole responsibility of the billing carrier. Any tariff changes affecting services provided in conjunction with this Agreement shall be provided by the Party making the changes to the other Party not later than the day of filing of such changes with the FCC.\n3. Payment, Accounting and Settlement\nPayment, accounting and settlement shall be accomplished in accordance with the procedures set forth in Annexes I and II.\n4. Existing Agreements\nThis Agreement shall supersede and replace the existing negotiated Agreement between COMSAT and MCI International for maritime satellite telephone services dated February 8, 1988, the Agreement between COMSAT and Western Union International dated January 19, 1982, the Agreement between COMSAT and RCA Global Communications, Inc. dated October 26, 1981, and all other existing agreements between COMSAT and MCI International pertaining to the services covered by this Agreement.\n5. Term\nThe term of this Agreement shall as set forth in Annexes I and II.\n6. Joint Marketing and Promotion\nDuring the term of this Agreement COMSAT and MCI will entertain proposals by each to the other for joint marketing and promotion of the services provided under this Agreement under terms and conditions mutually acceptable to both Parties.\n7. Liability\nNeither Party nor its parent corporation, subsidiaries, affiliates, or suppliers, or any of its parent corporation's subsidiaries or affiliates shall be liable to the other for incidental, special, indirect or consequential damages or loss of revenues or profits resulting from failure to provide services or facilities as called for hereunder, or for any loss or damage sustained by reason of any failure in or breakdown of the communications facilities or interruption to same associated with functioning of the services covered by this Agreement no matter what the cause, or from any other causes arising out of this Agreement.\n8. Assignment\nNeither Party may assign this Agreement without the prior written consent of the other Party, except to its parent, an affiliate or subsidiary in connection with the transfer of responsibility for the services provided under this Agreement.\n9. Trademarks\nNothing in this Agreement shall create in either Party any rights in the trademarks, tradenames, insignia, symbols, identification and logotypes used by the other Party. Before either Party uses any such marks of the other Party, it shall obtain the prior, written consent of the other Party.\n10. Confidentiality\nExcept as required by law, or where such information becomes Public without the fault of the disclosing party, neither Party shall disclose customer and billing information or its participation in this undertaking or any of the terms and conditions of this Agreement or any other agreement between the Parties without the prior written consent of the other Party. If disclosure is required by law, the Disclosing Party shall provide advance written notice of such disclosure to the other Party.\nIn connection with the provision of services pursuant to this Agreement, COMSAT and MCI may each disclose to the other, certain business, technical, and other information which has been identified to be propriety to the disclosing party of its affiliated companies (hereinafter referred to as \"INFORMATION\"). For purposes of this Agreement, such INFORMATION shall include, but not be limited to, engineering information, hardware, software, drawings, models, samples, tools, technical specifications, or documentation, in whatever form recorded or orally provided. The Receiving Party shall hold the INFORMATION in confidence during the term of this Agreement or until such time as the INFORMATION has been made publicly available without a breach of this Agreement, or any other agreement by either the Disclosing Party or the Receiving Party or the Disclosing Party requested return thereof. The Receiving Party shall use such INFORMATION only for the purpose of performing this Agreement, shall reproduce such INFORMATION only to the extent necessary for such purpose, shall restrict disclosure of such INFORMATION to its employees or contractor itself, or affiliate companies, with a need to know and inform such employees of the obligations assumed herein, and shall not disclose such INFORMATION to any third party without prior written approval of the other party. The Receiving Party shall apply a standard of care to preserve the confidentiality of the INFORMATION which is no less rigorous than that which it applies to protect the confidential nature of its own confidential material. All customer information exchanged by the Parties shall be used only for the purposes agreed upon by the Parties.\n11. Government Approvals and Compliance with Regulations\nAll undertakings and obligations assumed herein by either Party are subject to all necessary governmental licenses and approvals. Moreover, each Party hereby assures the other that it does not intend to, and will not knowingly, violate the laws and regulations applicable to the services provided under this Agreement, including, but not limited to, those pertaining to the provision of telecommunications services and to export control.\n12. Additional Services\nShould COMSAT elect to subscribe to new MCI Services that are not covered by this Agreement, MCI and COMSAT agree to incorporate into this Agreement such new MCI Services at mutually agreeable discount structures based on aggregate usage of MCI Services.\n13. Technical Descriptions and Performance Definitions\nFor each and any particular service contemplated and\/or implemented hereunder, MCI and COMSAT agree that prior to installation or commencement of said service, technical discussions will be held by appropriate representatives of MCI and COMSAT. These discussions will entail, at a minimum, definition of specifications of the interconnections, transmission performance and standards, signalling standards, billing arrangements, traffic routing, and any other operational characteristics and technical items requiring clarification. Technical performance standards criteria which must be met will be cited for each service. Results of these discussions shall be confirmed in writing and summarized as technical attachments hereto in a Technical Annex for each service described herein, or any future services which may be added to this Agreement. Should COMSAT and MCI fail to reach timely agreement on the technical issues as described above pertaining to any service contemplated under this Agreement, COMSAT may decline to take part in such service, and COMSAT may seek such services form other suppliers without penalty or claim of violation of any provision of this Agreement. Agreement to the contents of each Technical Annex for each service described must be reached in accordance with the above in order for COMSAT to be eligible for the discounts for that respective service.\n(a) Order for Services Furthermore, notwithstanding anything to the contrary contained in the Agreement, nothing in this Agreement is to be construed as an order for any particular service, nor shall be so construed, without formal notification to MCI by COMSAT of an order for each specific service described herein and Agreement reached in accordance with this Paragraph 16.\n14. Notices\nAny notices required or permitted to be given pursuant to this Agreement shall be considered properly given when sent via registered courier, telex, or fax to the following addresses, respectively, or to such other addresses as the Party concerned may hereafter designate in writing.\nTO COMSAT: COMSAT Mobile Communications 22300 COMSAT Drive Clarksburg, MD 20871 Attention: Director, Contracts\nTO MCI: MCI International, Inc. 2 International Drive Rye Brook, New York 10573 Attention: Vice President, Finance\n15. Publicity\nNeither Party may issue any press release or other public statement concerning this Agreement or the relationship of the Parties in connection herewith without obtaining the prior written consent of the other Party.\n16. Governing Law\nThis Agreement shall be governed by and construed according to the laws of New York, United States of America.\n17. Equal Treatment\nCOMSAT agrees to exchange services covered by this Agreement with MCI on terms and conditions substantially similar to those given other carriers providing substantially equivalent service. MCI agrees to exchange services covered by this Agreement with COMSAT on terms and conditions substantially similar to those given other carriers providing substantially similar mobile services.\n18. Severability\nIf any term or provision of this Agreement shall be found to be illegal or unenforceable, then such term or provision shall be deemed stricken and replaced by a mutually agreeable substitute provision which is legal and enforceable and the remainder of this Agreement shall continue in full force and effect.\n19. Waiver\nNo term or provision hereof shall be deemed waived by either Party unless such waiver shall be in writing and signed by that Party.\n20. Amendment\nAny amendment to this Agreement shall be in writing and shall be executed by authorized representatives of the Parties hereto.\n21. Entire Agreement\nThis Agreement and the attachments hereto constitute the complete and entire understanding of the Parties with respect to the subject matter hereof, superseding all prior oral and written negotiations, representations and agreement.\nIn WITNESS WHEREOF, the Parties hereto have caused this Agreement to execute as of the day and year first shown above.\nCOMSAT Corporation MCI International, Inc COMSAT Mobile Communication\nBy: \/s\/William A. Paquin By: \/s\/Arthur E. Gelven -------------------- ------------------- Name: William A. Paquin Name: Arthur E. Gelven\nVice President, Human Resources, Vice President Contracts and Administration Title: ___________________ Title:____________________\nDate: 9 September 1993 Date: September 10, 1993\nANNEX I\nMOBILE SATELLITE TELEPHONE SERVICE\n1. PROVISION OF SERVICE\nCOMSAT and MCI agree to interconnect COMSAT's facilities and MCI's network, and agree to provide telecommunications services between the various Inmarsat-system regions and points throughout the world served by MCI. COMSAT and MCI shall cooperate to make arrangements with foreign telecommunications administrations to originate and terminate such services at international points. Mobile satellite telephony service shall be accorded equal priority with MCI's other telephony services for purposes of maintenance and access to MCI's network.\n2. Term\nThe term of this Annex shall be for a period of one year, commencing October 1, 1993, and shall be automatically renewable for additional periods of one (1) year. Either Party may terminate this Annex upon furnishing six (6) months written notice at any time after the initial one (1) year term.\n3. Value Added Services to be Provided\nIt is understood that from time to time COMSAT and\/or MCI may wish to introduce new or enhanced value-added services (including, for example, directory assistance and credit card\/calling card service) to supplement the mobile satellite telephony service covered by this Agreement. Such introduction of new services shall be accommodated by each party by mutual agreement. Other services may also include such services as the provision of private leased lines to and\/or from COMSAT's land earth stations, such lines provided by MCI to MCI customers, or to COMSAT subject to mutual agreement between the parties.\n4. Service Structure\n(a) MCI will tariff fixed-to-mobile service for Inmarsat traffic originating in its network, and COMSAT will concur in MCI's tariff.\n(b) COMSAT will continue to tariff its mobile-to-fixed service for Inmarsat traffic originating in its network, and MCI will concur in COMSAT Corporation - COMSAT Mobile Communications Tariff F.C.C. No. 1 and future COMSAT tariffs for mobile-to-fixed service for Inmarsat traffic originating in COMSAT's network.\n(c) MCI and COMSAT shall cooperate diligently and in good faith to develop and implement procedures and mechanisms to ensure, to the greatest extent feasible, that all end users have an opportunity to express a preference for a specific ground station service provider and that all customers who express a preference for COMSAT's services are given access to those services.\n(d) The interconnecting circuits to be used in providing the services covered by this Annex shall be direct circuits between COMSAT's Mobile Satellite Switching Centers (MSSC) and MCI's International Switching Centers (ISC). Each party shall provide and maintain, at its own expense, the circuits located on its side of the point of interconnection at COMSAT's MSSC. Each party shall inform the other party, as soon as possible of any facility failure in its network that is expected to cause protracted interruption of service and the party experiencing the failure shall take reasonable actions to implement restoration procedures.\n5. Exchange of Traffic\n(a) COMSAT and MCI agree to route designated traffic in accordance with the customer's instructions, including the following:\n(i) fixed-to-mobile routed to COMSAT: all foreign originating (transit) traffic for which a Foreign Administration has requested to have its traffic routed to COMSAT, and all other traffic for which a customer has indicated a preference for COMSAT.\n(ii) mobile-to-fixed routed to MCI: all traffic for which the customer has designated MCI as the carrier through COMSAT's carrier selection program, whether by presubscription or direct-dialed selection, MCI specific services (MCI calling card, country direct, or calls requested to be routed through MCI), or other means.\n(b) COMSAT and MCI agree to route undesignated traffic as follows:\n(i) fixed-to-mobile routed to COMSAT: MCI agrees to meet with COMSAT each year to establish a mutually agreed upon traffic forecast for the following calendar year. MCI shall use its reasonable best efforts to deliver to COMSAT fixed-to-mobile traffic consistent with the mutually agreed upon traffic forecasts.\n(ii) mobile-to-fixed routed to MCI: COMSAT shall transmit to MCI traffic originating at mobile earth stations and designated for delivery by MCI.\no Mobile originated traffic destined for domestic or international points, for which no routing has been designated by the originating caller, shall be allocated to MCI on a proportionate return basis.\no COMSAT shall compute the proportion based upon traffic recorded through COMSAT's switch.\n(iii) Proportionate Return Procedures\no To implement the proportionate return agreement, the parties agree that a \"data capture period\" shall be established, for the calculation of proportionate return percentages to be applied to total ship-shore minutes. The proportionate return percentages will be calculated based on the total shore-ship minutes as recorded through COMSAT's switch and as reported in the monthly statements of account for that period. The first \"data capture period\" hereunder will be the first quarter subsequent to the signing of this agreement. Each subsequent quarter will represent a new \"data capture period\".\no The proportionate return percentages developed during the \"data capture period\" shall be used to return traffic for the \"designated return period\". The first \"designated return period\" hereunder will commence three months after the data capture period.\no The \"designated return period\" will be separated from the \"data capture period\" by three calendar months to allow for \"collection and confirmation\" of the traffic data and the calculation of market shares and return traffic requirements using the proportionate return principle as defined in this agreement. The time periods are:\nData Capture Period Collection Designated Return (Settlement Months) & Confirmation Period ___________________ ________________ _________________ Three (3) Months Three (3) Months Three (3) Months\no Prior to each \"designated return period\", COMSAT will inform the U.S. Carriers of the proportionate return percentage it has calculated for each new \"data capture period\" to be sent during the \"designated return period\".\no At the end of each \"designated return period\" COMSAT shall inform the carriers of any deviations in the actual minutes returned as compared to the proportionate return owed and the reasons therefore.\n(c) QUARTERLY reviews will be conducted to discuss the items in (b) (iii) above as well as the following items to compare actual traffic data against the forecast:\no Adjustments will be made in the proportion to be returned for the following year if necessary.\no Traffic levels quarterly for the previous period for all traffic will be reviewed to determine if revised volume discounts are applicable.\no Updated forecasts for the new year will exchanged at the October 1 review.\n6. Rates\nRates for services provided hereunder are set forth in Attachments 1,2. Such rates shall be effective on September 1, 1993.\n7. Payment Accounting and Settlement\n(a) Monthly Accounts\n(i) For sent paid calls, each party shall be responsible for the billing and collection of charges to its respective subscribers.\n(ii) Each party shall render to the other a monthly statement of the minutes carried, at rates in U.S. currency, for services rendered during the month to which the account relates showing the portion of revenues due to the other party. Such accounts shall be forwarded to the other party promptly after the calendar month to which the account relates but in no event later than the end of the second calendar month following the month to which the account relates. The monthly statements shall include accounting information received through international accounts.\n(iii) No allowances shall be made in the accounts for uncollectible amounts. However, each party will have the right to make adjustments as may be proper with respect to periods when transmission is defective. A party may deduct such credits from the monthly accounts submitted to the other party, provided that such deductions are made before the monthly account involved is forwarded to the other party.\n(iv) An account shall be deemed to have been accepted by the party to whom it is rendered if that party does not object in writing thereto before the end of the calendar month following the month in which the account is transmitted by the party rendering it. Objections shall be transmitted in writing to the party which rendered the account promptly after receipt of the account. Agreed adjustment shall be included in the next monthly account.\n(b) Establishment of Balance - Payment of Account\nThe sum due each month from one party to the other as covered by the rendered accounts shall be reduced to a net balance by each party. Net balances due from one party to the other shall be paid monthly by the debtor party to the creditor party in United States currency. Payment will be made promptly, but in no event later than six (6) weeks after each monthly account is received from the creditor party. The payment of a balance due on an account shall not be delayed pending agreement to the adjustment of disputed items of that account.\n(c) Transit Traffic\nIf the call is chargeable at the international point where COMSAT has an agreed transit rate with the originating Administration, then MCI shall be entitled to its transit fee, and COMSAT shall be entitled to an amount determined in accordance with its agreed transit rate to the originating Administration. If COMSAT does not have an agreed transit rate with the originating Administration, then MCI shall pay to COMSAT an amount equal to the shore-to-ship per minute rate established in Annex I, Attachment 1 of this Agreement.\nAttachment 1 to Annex I 7.21.93\nCOMSAT Mobile Communications\nPRICE SCHEDULE FOR FIXED-MOBILE INMARSAT SERVICES\nPrices Effective January 1, 1994(3)\nSTANDARD-A TELEPHONE\nTRAFFIC VOLUME STANDARD-A PRESENTED TO TRAFFIC COMSAT ANNUALLY PRICE PER (A,M,B, AERO) MINUTE (minutes) - - - ------------------------------------ 0 to 500,000 $8.00 500,000 to 3,500,000 $7.25 Over 3,500,000 $7.20\nGROWTH INCENTIVE SCHEDULE\nCUMULATIVE INCREMENTAL STANDARD-A TRAFFIC GROWTH OVER TRAFFIC INITIAL BASE FORECAST(1) PRICE PER (percent) MINUTE(2) - - - ------------------------------------ 20% to 30% $7.15 30% to 50% $7.10 50% to 70% $6.95 Greater than 70% $6.95\nDIGITAL SERVICES\nSERVICE PRICE PER MINUTE - - - ----------------------------------- STANDARD-M $4.95 STANDARD-B $6.45 AERONAUTICAL $7.40\n(1) INITIAL BASE FORECASE = First Two Year's Traffic Forecast. (2) Price applies to incremental minutes over BASE FORCAST. (3) Interim Price for Standard-A fixed-mobile Telephone service until January 1, 1994 will be at the rate of $7.25 per minute.\nANNEX II\nINMARSAT TELEX SERVICES\n1. Service To Be Provided\n(a) COMSAT and MCI agree to interconnect their telex facilities to permit user of MCI telex services to send and receive messages via the Inmarsat system provided by COMSAT, including any traffic from MCI which originates from any domestic connecting carrier's subscribers in the United States and is routed via MCI's facilities for delivery to a mobile earth station.\n(b) For traffic originating from an international point that transits the U.S. and is destined for a mobile earth station, MCI and COMSAT shall jointly make appropriate interconnection arrangements with foreign administrations to implement and facilitate the use of COMSAT's services as provided for herein.\n(c) For traffic originating at mobile earth stations, COMSAT shall honor routing designated by the originating caller, except that COMSAT shall transmit to any interconnecting carrier all traffic from mobile earth stations destined to subscribers of that carrier's network. For international calls whose routing has not been designated by the originating caller (\"undesignated traffic\"), MCI shall receive from COMSAT a minimum of twenty (20) percent of such undesignated traffic per month, such percentage reflecting the fact that, as of the date of execution of this Agreement by both Parties, MCI is one of five carriers interconnecting with COMSAT for such traffic. Should the number of interconnected carriers change, MCI shall receive from COMSAT a minimum of such undesignated traffic equivalent to MCI's representative share of the total number of carriers interconnected with COMSAT. Should the Federal Communications Commission (\"FCC\") subsequently approve the implementation of a proportionate return mechanism for the allocation of undesignated traffic, COMSAT shall deliver such traffic to MCI in accordance with a mutually agreed upon proportionate return formula.\n(d) MCI shall deliver domestic originating telex traffic destined for termination through the Inmarsat system to United States land earth stations, as required by FCC regulatory policy.\n2. Term\nThe term of the Annex shall be for one (1) year, commencing September 1, 1993, and shall automatically renewable for additional periods of one (1) year. Either Party may terminate this Annex upon furnishing six (6) months written notice at any time after the initial one year term.\n3. Charges\n(a) For the services provided by COMSAT hereunder, MCI agrees to pay those charges set forth in Attachment 1 hereto.\n(b) For those services provided by MCI hereunder, COMSAT agrees to pay those charges set forth in Attachment 2 hereto.\n(c) Telex rates to customers of COMSAT or MCI are the sole responsibility of the billing carrier.\n4. Accounting and Settlement\n(a) The Parties shall exchange accounting statements on a monthly basis within thirty (30) days after the end of the traffic month. Settlement of net balances shall be made on a quarterly basis within thirty (30) days following the end of the traffic quarter. No allowance shall be made in the accounts for uncollectible amounts. Settlement of net balances for overseas originated traffic will be on a quarterly basis within thirty (30) days following the end of the traffic quarter.\n(b) The procedures for settlement between MCI and COMSAT for traffic terminating or originating at mobile earth stations shall be as follows:\n(i) For traffic billable by COMSAT to mobile subscribers, COMSAT shall credit to MCI the amounts due at MCI's terminating interconnect rates specified in Attachment 2 to this Annex.\n(ii) For traffic chargeable at U.S. land points, MCI shall credit to COMSAT the amounts due at COMSAT's terminating interconnect rate specified in Attachment 1 to this Annex.\n(iii) For traffic chargeable at overseas land points, MCI will arrange for connecting overseas correspondents to collect the applicable charges for the combined services and to credit MCI with MCI's share of the applicable international charges plus an amount equal to COMSAT's share of the interconnect rate, which latter amount MCI shall credit to COMSAT. MCI shall use reasonable efforts to identify such mobile satellite communications traffic by ocean region and traffic month in the accounting statements exchanged.\n5. Promotion of Traffic\nCOMSAT will implement a carrier selection code for MCI and promote the availabilty of MCI telex carrier selection.\nAttachment 1 to Annex II\nCOMSAT Mobile Communications Price Schedule for INMARSAT Telex Services\nStandard A Telex(1)\nAnnual Commitment Price per Minute (000's of Minutes)\n0 - 200 $3.80\n201 - 500 $3.75\n501 - 750 $3.70\n751 - 1,000 $3.60\nOver 1,000 Annually $3.50\nStandard B Telex(2)\nNotes\n1. Minutes are bi-directionally accumulative; i.e. total of minutes in Fixed-to-Mobile, Mobile-to-Fixed, domestic and foreign originating, apply.\n2. Minutes of Digital Services Telex (Standard B) traffic apply toward Standard A Telex traffic commitment levels, but are volume insensitive until such time that traffic levels warrant volume-commitment discounts.\nMCII PRICING SCHEDULE\nTELEX TRAFFIC (UNDESIGNATED)\nDOMESTIC DOMESTIC RATE PER WUI TARIFF #22 INTL INTL COMPONENT RATE PER WUI TARIFF #5\nTELEX CARRIER SELECT TRAFFIC (DESIGNATED)\nGROSS MONTHLY INTERNATIONAL REVENUE*\n$0 - $10,000 5.0% $10,001 - $30,000 10.0% >$30,000 15.0%\n*DOMESTIC DESIGNATED SETTLED AT SAME RATE AS UNDESIGNATED ========================================================\nMCII TERMINATION CHARGES **\nINMARSAT VOICE SERVICES\nU.S. TERMINATION $0.35\/MINUTE\nINTERNATIONAL TERMINATION 75,000 MINUTES\/MONTH PRISM 1 RATES >75,000 MINUTES\/MONTH 10% OFF PRISM 1 RATES\n**UNDESIGNATED TRAFFIC\nEXHIBIT 10(ee)\nA G R E E M E N T\nThis Agreement is made by and between Sprint Communications Company L.P., a Delaware limited partnership (\"SPRINT\"), a United States International Service Carrier (\"USISC\"), and COMSAT Corporation (\"COMSAT\"), the U.S. Signatory to the International Telecommunications Satellite Organization (\"INTELSAT\") (hereinafter jointly referred to as the \"Parties\").\nWHEREAS, SPRINT is engaged in the provision of telecommunications services via satellite; and\nWHEREAS, COMSAT offers INTELSAT space segment capacity to USISCs for telecommunications services; and\nWHEREAS, the Parties have decided to enter into an inter- carrier contract based on SPRINT's utilization of COMSAT's INTELSAT space segment capacity for telecommunications services;\nNOW, THEREFORE, in consideration of and in reliance upon the mutual promises set forth below, SPRINT and COMSAT hereby agree as follows:\nARTICLE I PURPOSE AND INTENT\nThe purpose of this Agreement is to implement the Parties' mutual understanding with respect to SPRINT's utilization of COMSAT's INTELSAT space segment capacity for telecommunications services. It is the intent of COMSAT and SPRINT that this Agreement comply with all laws and international obligations of the United States. Consistent with that intent, nothing herein shall preclude COMSAT from reaching similar agreements for circuits with other USISCs, and nothing herein shall preclude SPRINT from placing traffic not covered by this Agreement on whatever telecommunications facilities it should select.\nARTICLE II DEFINITIONS\nThe terms used in this Agreement are defined as follows:\n1. Additional Circuits. Digital Bearer Circuits activated by SPRINT on the INTELSAT system via COMSAT on or after January 1, 1992 for lease terms of at least seven (7) years.\n2. Base Circuits. Digital Bearer Circuits activated by SPRINT on the INTELSAT system via COMSAT prior to January 1, 1992 for lease terms of at least ten (10) years, or otherwise treated as Base Circuits pursuant to this Agreement.\n3. Bulk Offering. The offering by COMSAT to SPRINT of one 36 MHz bandwidth allotment pursuant to the rates, terms and conditions specified in this Agreement.\n4. Digital Bearer Circuits. 64 Kbps equivalent circuits used to carry public-switched traffic (including IDR and TDMA circuits, but excluding private line circuits); these circuits may or may not be aggregated into larger digital carriers.\n5. Revised Standard A Earth Station. An earth station having a gain-to-temperature ratio (\"G\/T\") at least equal to 35 dB\/K.\nARTICLE III BASE AND ADDITIONAL CIRCUITS\nA. As of the date of this Agreement, SPRINT had activated _____ Base Circuits on the INTELSAT system via COMSAT for 10-year lease terms. SPRINT hereby agrees by this inter-carrier agreement to replace each individual lease term for these _____ Base Circuits with a new 10-year lease term that will begin on December 1, 1993 and end on November 30, 2003.\nB. As of the date of this Agreement, SPRINT had also activated _____ Base Circuits on the INTELSAT system via COMSAT for 15-year lease terms. COMSAT hereby agrees that these __ circuits may be converted to 10-year Base Circuits, each with a new lease term that will begin on December 1, 1993 and end on November 30, 2003. In consideration for this adjustment, SPRINT agrees to convert [an equivalent number] of its existing 7-year Additional Circuits to 10-year Base Circuits, also with a new lease term that will begin on December 1, 1993 and end on November 30, 2003. Thus, for purposes of this Agreement, SPRINT's total number of Base Circuits is _____.\nC. As of December 1, 1993, COMSAT's rates for SPRINT's _____ Base Circuits shall be as specified in Attachment A, which is appended hereto and made part of this Agreement. The rates in\nAttachment A are for Base Circuits provided via INTELSAT Revised Standard A Earth Stations. Base Circuits transmitted through standard earth stations with lower G\/T values shall be subject to the rate adjustments specified in Attachment B, which is also appended hereto and made part of this Agreement.\nD. As of December 1, 1993, COMSAT's rates for SPRINT's Additional Circuits shall be as specified in Attachment C, which is appended hereto and made part of this Agreement. The rates in Attachment C are for Additional Circuits provided via INTELSAT Revised Standard A earth stations. Additional Circuits transmitted through standard earth stations with lower G\/T values shall be subject to the rate adjustment factors specified in Attachment B.\nE. As of December 1, 1993, COMSAT's charge for early termination of SPRINT's Base Circuits and Additional Circuits shall be a flat fee of $6,880 per 64 Kbps equivalent circuit, plus 45% of the balance due at the time of early termination.\nF. The Parties agree that the rates and early termination charges set forth in this Article and in Attachments A through C supersede any conflicting provisions in COMSAT World Systems Tariff F.C.C. No. 1. All other terms and conditions for SPRINT's Base Circuits and Additional Circuits shall be the same as those specified in COMSAT World Systems Tariff F.C.C. No. 1 as of the\neffective date of this Agreement, and those tariff provisions are hereby incorporated into this Agreement.\nG. Notwithstanding Paragraph F above, COMSAT agrees that, during the term of this Agreement, it will offer SPRINT rates, terms and conditions for Base Circuits that are no less favorable than the rates, terms and conditions it makes available pursuant to tariff for Digital Bearer Circuits activated prior to January 1, 1992. Upon written acceptance by SPRINT, such rates, terms and conditions shall be automatically incorporated into this Agreement.\nH. Notwithstanding Paragraph F above, COMSAT agrees that, during the term of this Agreement, it will offer SPRINT rates, terms and conditions for Additional Circuits that are no less favorable than the rates, terms and conditions it makes available pursuant to tariff for Digital Bearer Circuits activated or on after January 1, 1992. Upon written acceptance by SPRINT, such rates, terms and conditions shall be automatically incorporated into this Agreement.\nARTICLE IV BULK OFFERING\nA. COMSAT hereby agrees to provide, and SPRINT commits and agrees to lease from COMSAT for a 10-year term commencing on December 1, 1993 and ending on November 30, 2003, one (1) 36 MHz bandwidth allotment providing __________________________________ connectivity in the __________ Ocean Region. As of the date of this Agreement, this allotment will be in ______________________ ________________________________________________________________ __________________________________________.\nB. COMSAT's rate for the 36 MHz allotment provided pursuant to the Bulk Offering described in this Article shall be $189,000 per month from January 1, 1994 through the remainder of the lease term. The Parties anticipate, however, that for some period of time after January 1, 1994 there will be substantial non-SPRINT traffic located in this allotment that will constrain SPRINT's ability to utilize it fully. The Parties recognize that it will take some time to relocate this non-SPRINT traffic consistent with INTELSAT's standard relocation procedures. Therefore, until this relocation is complete, COMSAT will prorate its lease price such that, if there are X non-SPRINT circuits being leased from COMSAT in this allotment, the lease price for the allotment will be ((540-X)\/540) x $189,000 per month.\nC. The 36 MHz allotment provided pursuant to the Bulk Offering described in this Article shall be considered the equivalent of 540 64 Kbps circuits. Consistent therewith, COMSAT and SPRINT hereby agree that, during the six-month period commencing with the effective date of this Agreement, the 36 MHz allotment may absorb up to 270 of SPRINT's existing 7-year or 10- year Additional Circuits. (Base Circuits already located within the allotment may be substituted for Additional Circuits, but only if equivalent numbers of Additional Circuits outside the allotment are redesignated as Base Circuits, so that SPRINT's total number of Base Circuits remains constant at _____.) The conversion of up to 270 Additional Circuits under this Paragraph shall not be considered early termination, and early termination charges shall not apply thereto. Existing circuits outside the allotment that have not been leased for multi-year terms may be moved into the allotments at any time, and new circuits may be activated inside the allotment at any time. Once an existing circuit is designated as part of the allotment, all other charges for that circuit shall cease, and that circuit may not be counted in determining the appropriate block rates for SPRINT under Article IV-B and Attachment C of this Agreement.\nD. SPRINT hereby agrees that it will not cancel the 36 MHz allotment committed pursuant to this Article until November 30, 1998 at the earliest.\nE. After November 30, 1998, COMSAT's charge for early termination for the 36 MHz allotment described in this Article shall be a flat fee of $6,880 x 540 64 Kbps equivalent circuits, plus 45% of the balance due at the time of early termination.\nF. The 36 MHz allotment provided pursuant to this Article shall be non-preemptible. In case of space segment failure, this allotment shall be restored in accordance with the procedures set forth in INTELSAT SSOG 103, Section 6, as may be amended from time to time. This allotment may be used for any type of U.S. traffic, including both public-switched and private line traffic and both analog and digital traffic, provided, however, that: (1) INTELSAT's technical lease definitions, as set forth in the IESS documents that COMSAT routinely provides to SPRINT, shall apply to the use of this allotment, and (2) COMSAT and INTELSAT must approve transmission plans for each circuit in the allotment in advance of service activation.\nG. The Parties recognize that, during the lease term of the 36 MHz allotment described in this Article, the particular satellite listed in paragraph A of this Article may be replaced by another INTELSAT satellite. In such cases, a transponder of different connectivity may be substituted for the replaced transponder under the same terms and conditions upon mutual agreement of the Parties.\nH. The Parties agree that the rates, early termination charges, and other terms and conditions specified in this Article supersede any conflicting provisions in COMSAT World Systems Tariff F.C.C. No. 1. All other terms and conditions for the circuits contained in the 36 MHz allotment provided pursuant to this Article shall be the same as those specified in COMSAT World Systems Tariff F.C.C. No. 1 as of the effective date of this Agreement, and those tariff provisions are hereby incorporated into this Agreement.\nI. During the twelve months immediately following the effective date of this Agreement, SPRINT shall have the option of leasing up to two (2) additional 36 MHz bandwidth allotments from COMSAT, subject to the availability of mutually agreeable capacity. The rates, terms and conditions for the lease of such additional 36 MHz allotments shall be the same as those set forth in Paragraphs A through H of this Article, except that if SPRINT leases a total of three (3) 36 MHz allotments by the end of this twelve-month period, the rate for each such allotment shall be $165,000 per month beginning on January 1, 1997. After twelve months from the date of this Agreement, any request by SPRINT during the term of this Agreement for additional allotments beyond the one 36 MHz allotment specified in this Article shall be the subject of a separate agreement with respect to price and terms when and if such a request is made.\nK. COMSAT shall be responsible for coordinating the movement of circuits in and out of the 36 MHz allotment described in this Article. It is the intent of both Parties that at least nine (9) of SPRINT's 2.048 Mbps carriers be located in this allotment within ninety (90) days after the effective date of this Agreement, and COMSAT agrees to use its best efforts to ensure that this schedule is met.\nL. The Parties agree that, in consideration of SPRINT's total commitment under this Agreement, COMSAT shall provide the 36 MHz allotment described in this Article free of charge for the period from December 1, 1993 through December 31, 1993. Beginning January 1, 1994, the charges specified in Paragraph B of this Article will apply to the 36 MHz allotment described in this Article.\nARTICLE V REMEDIES\nA. In the event that COMSAT materially breaches Article III-C or III-D of this Agreement, SPRINT shall be entitled to damages in an amount equal to the difference between the rates SPRINT actually paid and the rates specified in Attachments A and C for the number of Base Circuits or Additional Circuits involved.\nB. In the event that COMSAT materially breaches Article IV-B or IV-E of this Agreement, SPRINT shall be entitled to damages in an amount equal to the difference between the rates SPRINT actually paid and the rates specified in Articles IV-B and IV-D for the 36 MHz allotment involved.\nC. In the event that SPRINT materially breaches Article III-A or III-B of this Agreement, COMSAT shall be entitled to damages in an amount equal to the difference between the charges SPRINT actually paid and the revenues that COMSAT would have realized if SPRINT had begun a new lease term for each of its 1,434 Base Circuits as of December 1, 1993.\nD. In the event that SPRINT materially breaches Article IV-A or IV-D of this Agreement, COMSAT shall be entitled to\ndamages in an amount equal to the difference between the charges SPRINT actually paid and the revenues that COMSAT would have realized if SPRINT had activated the 36 MHz allotment in accordance with the provisions of this Agreement and then prematurely canceled that allotment on November 30, 1998.\nE. In no event shall either Party be entitled to damages or other remedies under this Article unless it provides the other Party with notice and a reasonable opportunity to cure within sixty (60) days of the date when the Party claiming breach either knew or should have known of the event giving rise to the alleged breach.\nARTICLE VI CUSTOMER\/SUPPLIER RELATIONSHIP\nIn recognition of COMSAT's unique expertise and experience in international satellite telecommunications, the high quality of its services, its performance as U.S. Signatory to INTELSAT, and the Parties' good working relationship over many years, SPRINT agrees that it shall give COMSAT an opportunity to supply additional satellite capacity not covered by this agreement, provided however that, consistent with Article I above, nothing shall preclude SPRINT from placing such traffic on other facilities.\nARTICLE VII TERM OF AGREEMENT\nThe term of this Agreement shall commence on December 1, 1993 and shall run through November 30, 2003, provided, however, that all applicable rates, terms and conditions for each circuit leased pursuant to the provisions of this Agreement shall survive until the expiration of that circuit's lease term. Thus, for example, the rates, terms and conditions for a 10-year Additional Circuit activated on January 1, 1995 would remain in effect until December 31, 2004.\nARTICLE VIII FCC REVIEW\nThe Parties shall jointly submit this Agreement to the FCC within thirty (30) days of execution pursuant to Section 211(a) of the Communications Act, and shall request confidential treatment for any competitively sensitive information contained herein. If any FCC proceeding is initiated with respect to the entry into force of this Agreement, the Parties agree to cooperate fully in seeking a prompt and favorable resolution of such proceeding.\nARTICLE IX DISPUTE RESOLUTION\nIf any dispute arises with respect to the interpretation, implementation or termination of this Agreement, the Parties will use their best efforts to resolve the matter amicably, including recourse to the highest levels of management in their respective organizations. If such efforts fail to resolve the dispute within a reasonable time, the Parties agree to present that dispute to the American Arbitration Association in Washington, D.C. for binding resolution in accordance with that Association's Commercial Rules of Arbitration, or in lieu of arbitration, to utilize another mutually agreeable means of alternative dispute resolution (ADR). Each Party shall bear all of its own costs incurred in utilizing arbitration or other ADR mechanism.\nARTICLE X ENTIRE AGREEMENT\nThis Agreement (including its attachments and those portions of COMSAT's tariffs which are incorporated by reference) constitutes the entire agreement between the Parties as to SPRINT's utilization of COMSAT's INTELSAT space segment capacity for the telecommunications services specified herein; it is intended as the complete and exclusive statement of the terms of this agreement between the Parties, and supersedes all previous understandings, commitments or representations by or between the Parties with respect to its subject matter.\nARTICLE XI REPRESENTATIONS OF AUTHORITY\nA. COMSAT hereby represents and warrants to SPRINT that it is a corporation duly organized, validly existing, and in good standing under the laws of its jurisdiction of incorporation; that it has appropriate approvals and direction from its Board of Directors to empower it to enter into and perform its obligations under this Agreement; and that it has taken all requisite corporate action to approve the execution, delivery, and performance of this Agreement.\nB. SPRINT hereby represents and warrants to COMSAT that it is duly organized, validly existing, and in good standing under the laws of the State of Kansas; that it has appropriate approvals and direction to empower it to enter into and perform its obligations under this Agreement; and that it has taken all requisite action to approve the execution, delivery and performance of this Agreement.\nARTICLE XII BINDING OBLIGATION\nA. This Agreement, when executed and delivered, shall be a legal, valid and binding obligation of COMSAT and SPRINT, and shall bind all successors and assigns of the Parties.\nB. The provisions of this Agreement are for the benefit only of the Parties hereto and their successors and assigns, and no other party may seek to enforce, or benefit from, any provision of this Agreement.\nC. Neither Party may assign this Agreement without the other Party's express written consent, except that each Party may assign its rights and obligations hereunder to a legal entity which is successor, assign, subsidiary or affiliate of that Party or its parent without notice or consent.\nARTICLE XIII NOTICES\nAll written notices required under this Agreement shall be considered properly given only when sent by registered or certified mail, return receipt requested, or by an overnight courier such as Federal Express, to the following addresses, respectively, or to such other addresses as the receiving party may hereafter designate in writing:\nTo SPRINT: Ericka Officer Contract Negotiator Sprint Communications Company L.P. 9350 Metcalf KSOPKC0802 Overland Park, KS 66212\nTo COMSAT: M. Brent Bohne Director, Contracts and Procurement COMSAT World Systems 6560 Rock Spring Drive Bethesda, MD 20817\nAny period of time referred to herein which is to commence upon notice shall be counted from the date such notice is received as aforesaid.\nARTICLE XIV WAIVERS\nThe waiver by either Party of a breach of, or default under, any of the provisions of this Agreement, or the failure of either Party, on one or more occasions, to enforce any of the provisions of this Agreement or to exercise any right or privilege hereunder, shall not thereafter be construed as a waiver of any subsequent breach or default of a similar nature, or as a waiver of any provision, right or privilege hereunder.\nARTICLE XV MISCELLANEOUS\nA. The article headings and table of contents in this Agreement are inserted for convenience only and do not constitute a part of this Agreement.\nB. This Agreement may be amended only in writing by an instrument signed by authorized representatives of both Parties.\nC. This Agreement shall be construed according to the laws of the State of Maryland.\nD. This Agreement may be executed in counterparts, each of which shall be deemed an original, and all such counterparts together shall constitute one and the same instrument.\nE. This Agreement shall become effective on December 1, 1993 following execution by both Parties.\nIN WITNESS WHEREOF, each of the Parties hereto has executed this Agreement.\nSPRINT COMMUNICATIONS COMSAT CORPORATION COMPANY L.P.\n\/s\/Michael Robinson \/s\/Patricia Benton By:___________________________ By:___________________________ V.P. and G.M. COMSAT AVP Network World Systems Title: _______________________ Title:________________________\n11\/30\/93 November 16, 1993 Date:_________________________ Date:_________________________\nATTACHMENT A\nBASE CIRCUIT RATES Per month per activated carrier(1) 10-Year Term\nCarrier Size 1993(2) 1994(3) 1995(4) 1996(5) 1997(6) - - - ------------ ------- ------ ------ ------ ------ 1.544 Mbps $ 8,496 13,920 12,480 10,800 8,400 2.048 Mbps $10,620 17,400 15,600 13,500 10,500\nPer 64 Kbps equivalent in a fully-activated 2.048 Mbps carrier $354 580 520 450 350\n- - - ------------------- (1) The rates specified in this Attachment are for service to INTELSAT Revised Standard A Earth Stations.\n(2) The rates in this column shall take effect on December 1, 1993 and are provided in consideration for SPRINT's agreement to start a new 10-year lease term for each of its _____ Base Circuits.\n(3) The rates in this column shall take effect on January 1, 1994.\n(4) The rates in this column shall take effect on January 1, 1995.\n(5) The rates in this column shall take effect on January 1, 1996.\n(6) The rates in this column shall take effect on January 1, 1997, and shall remain in effect for the duration of each circuit's lease term unless further reduced.\nATTACHMENT B\nRATE ADJUSTMENT FACTORS for Base and Additional Circuits\nEarth Station Frequency Minimum Rate Adjustment Standard Band G\/T Factor(1) - - - ------------- --------- ------- ------------- Std. B C 31.7 dB\/K 1.36 Std. C 29.0 dB\/K 2.05 Std. C 27.0 dB\/K 2.92 Std. E-3 Ku 34.0 dB\/K 1.68 Std. E-2 Ku 29.0 dB\/K 4.94\n- - - --------------- (1) In the event that COMSAT tariffs rate adjustment factors that are more favorable than those listed in this Attachment, the factors tariffed shall be incorporated automatically into this Agreement.\nATTACHMENT C ADDITIONAL CIRCUIT RATES Per month per 64 Kbps equivalent in a fully-activated 2.048 Mbps carrier(1) 10-Year term\nBlock 1993-94(2) 1995(3) 1996(4) 1997(5) - - - ----- ------- ---- ---- ---- Block 1(6) $495 $495 $450 $350 Block 2(7) 445 445 445 350 Block 3(8) 395 395 395 350 Block 4(9) 350 350 350 350\n- - - -------------- (1) The rates specified in this Attachment are for service to INTELSAT Revised Standard A earth stations. Rates for fully activiated 2.048 Mbps carriers shall be 30 times the numbers shown INTELSAT Standard A earth stations. Rates for fully activated 2.048 Mbps carriers shall be 30 times the numbers shown above. Rates for carrier sizes other than 2.048 Mbps shall bear the same relationships to the 2.048 Mbps rate as those shown in Attachment A.\n(2) The rates in this column are currently in effect.\n(3) The rates in this column are currently in effect.\n(4) The rates in this column shall take effect on January 1, 1996.\n(5) The rates in this column shall take effect on January 1, 1997, and shall remain in effect for the duration of each circuit's lease term unless further reduced.\n(6) The rates in Block 1 apply to Additional Circuits included among the first 270 Digital Bearer Circuits (excluding Base Circuits) leased in a given region for terms of at least five years. The regions are those specified in COMSAT World Systems Tariff F.C.C. No.1 as of the effective date of this Agreement, i.e.: (1) (Western) Europe; (2) Pacific; (3) Latin America; and (4) Near and Middle East, Africa and other Europe.\n(7) The rates in Block 2 apply to Additional Circuits included among the next 360 Digital Bearer Circuits (excluding Base Circuits) leased in a given region for terms of at least five years.\n(8) The rates in Block 3 apply to Additional Circuits included among the next 450 Digital Bearer Circuits (excluding Base Circuits) leased in a given region for terms of at least five years.\n(9) The rates in Block 4 apply to Additional Circuits included among the Digital Bearer Circuits above 1080 (excluding Base Circuits) leased in a given region for terms of at least five years.\nADDITIONAL CIRCUIT RATES Per month per 64 Kbps equivalent in a fully-activated 2.048 Mbps carrier(1) 7-Year term\nBlock 1993-94(2) 1995(3) 1996(4) 1997(5) - - - ------ ------- ---- ---- ---- Block 1 $615 $615 $559 $455 Block 2 555 555 555 455 Block 3 505 505 505 455 Block 4 455 455 455 455\n__________________ (1) The rates specified in this Attachment are for service to INTELSAT Revised Standard A earth stations. Rates for fully activiated 2.048 Mbps carriers shall be 30 times the numbers shown INTELSAT Standard A earth stations. Rates for fully activated 2.048 Mbps carriers shall be 30 times the numbers shown above. Rates for carrier sizes other than 2.048 Mbps shall bear the same relationships to the 2.048 Mbps rate as those shown in Attachment A.\n(2) The rates in this column are currently in effect.\n(3) The rates in this column are currently in effect.\n(4) The rates in this column shall take effect on January 1, 1996.\n(5) The rates in this column shall take effect on January 1, 1997, and shall remain in effect for the duration of each circuit's lease term unless further reduced.\n(6) The rates in Block 1 apply to Additional Circuits included among the first 270 Digital Bearer Circuits (excluding Base Circuits) leased in a given region for terms of at least five years. The regions are those specified in COMSAT World Systems Tariff F.C.C. No.1 as of the effective date of this Agreement, i.e.: (1) (Western) Europe; (2) Pacific; (3) Latin America; and (4) Near and Middle East, Africa and other Europe.\n(7) The rates in Block 2 apply to Additional Circuits included among the next 360 Digital Bearer Circuits (excluding Base Circuits) leased in a given region for terms of at least five years.\n(8) The rates in Block 3 apply to Additional Circuits included among the next 450 Digital Bearer Circuits (excluding Base Circuits) leased in a given region for terms of at least five years.\n(9) The rates in Block 4 apply to Additional Circuits included among the Digital Bearer Circuits above 1080 (excluding Base Circuits) leased in a given region for terms of at least five years.\nEXHIBIT 10(ff)\nThis agreement is hereby entered into this 10th day of December 1993 by and between COMSAT Mobile Communications of COMSAT Corporation with offices located at 22300 COMSAT Drive, Clarksburg, MD 20871 (hereinafter referred to as \"COMSAT\"), and Sprint International with offices at 12490 Sunrise Valley Drive, Reston, Virginia 22096 on behalf of itself, Sprint Communications Company, L.P. and its, affiliated entities, (hereinafter referred to as \"SPRINT\").\nWITNESSETH:\nWHEREAS, COMSAT and SPRINT are communications common carriers and are each subject to the jurisdiction of the Federal Communications Commission (\"FCC\"); and\nWHEREAS, COMSAT and SPRINT agree to exchange services between the various regions covered by the International Maritime Satellite Organization (\"Inmarsat\") served by COMSAT and points in the United States and international points served by SPRINT:\nNOW, THEREFORE, in consideration of the foregoing and the covenants hereinafter set forth, COMSAT and SPRINT agree as follows:\n1. Interconnection of Facilities\n(a) COMSAT and SPRINT agree to interconnect their facilities to permit the exchange of traffic for the services covered under this Agreement. Such services to be covered are described in Annex I hereto entitled \"Mobile Satellite Telephone Service\", which is hereby incorporated into and made a part of this Agreement. The Annexes to this Agreement may be modified from time to time subject to mutual written agreement of the Parties, and additional Annexes may be added if the Parties so choose.\n(b) SPRINT shall provide prompt assistance, as needed, to customers using or attempting to use the COMSAT mobile satellite communications services on a priority basis not less than that which they accord their other service activities and their customers for those services.\n(c) Each Party shall be responsible for:\no the transmission to the other Party of signals in accordance with TSS Recommendations, and\no the transmission of signals received from the other Party over its facilities and to any interconnecting carrier, foreign administration or subscriber, as appropriate.\n(d) Consistent with the terms and conditions of this Agreement, each Party shall have the right to interconnect with the other telecommunications service providers to exchange services, including, but not limited to, those covered by this Agreement.\n2. Charges\n(a) Settlement Rates for services provided hereunder are set forth in Annex I hereto.\n(b) Rates to customers of COMSAT or SPRINT are the sole responsibility of the billing carrier. Any tariff changes affecting services provided in conjunction with this Agreement shall be provided by the Party making the changes to the other Party three (3) days prior to the filing of such changes with the FCC.\n3. Payment, Accounting and Settlement\nPayment, accounting and settlement shall be accomplished in accordance with the procedures set forth in Annex I.\n4. Term\nThe term of this Agreement shall be for a period of five (5) years commending on Dec. 10, 1993, with subsequent renewal periods of one year. This Agreement may be terminated by either Party after five (5) years with not less than six (6) months notice in writing to the other Party.\n5. Joint Marketing and Promotion\nDuring the term of this Agreement COMSAT and SPRINT will entertain proposals by each to the other for joint marketing and promotion of the services provided under this Agreement under terms and conditions mutually acceptable to both Parties.\n6. Liability\nNeither Party nor its parent corporation, subsidiaries, affiliates, or suppliers, or any of its parent corporation's subsidiaries or affiliates shall be liable to the other for incidental, special, indirect or consequential damages or loss of revenues or profits resulting from failure to provide services or facilities as called for hereunder, or for any loss or damage sustained by reason of any failure in or breakdown of the communications facilities or interruption to same associated with functioning of the services covered by this Agreement no matter what the cause.\n7. Assignment\nNeither Party may assign this Agreement without the prior written consent of the other Party, except to its parent, an affiliate or subsidiary in connection with the transfer of responsibility for the services provided under this Agreement.\n8. Trademarks\nNothing in this Agreement shall create in either Party any rights in the trademarks, tradenames, insignia, identification and logotypes used by the other Party. Before either Party uses any such marks of the other Party, it shall obtain the prior, written consent of the other Party.\n9. Confidentiality\nExcept as required by law, neither Party shall disclose customer and billing information or its participation in this undertaking or any of the terms and conditions of this Agreement or any other agreement between the Parties without the prior written consent of the other Party. If disclosure is required by law, the Disclosing Party shall provide advance written notice of such disclosure to the other Party.\nIn connection with the provision of services pursuant to this Agreement COMSAT and SPRINT may each disclose to the other, certain business, technical, and other information which has been identified in writing to be proprietary to the disclosing party or its affiliated companies (hereinafter referred to as \"INFORMATION\"). For purposes of this Agreement, such INFORMATION shall include, but not be limited to, engineering information, hardware, software, drawings, models, samples, tools, technical specifications, or documentation, in whatever form recorded or orally provided. The Receiving Party shall hold the INFORMATION in confidence during the term of this Agreement or until such time as the INFORMATION has been made publicly available without a breach of this Agreement, or any other agreement or the Disclosing Party requests return thereof. The Receiving Party shall use such INFORMATION only for the purpose of performing this Agreement, and in support of the services provided hereunder, shall reproduce such INFORMATION only to the extent necessary for such purpose, shall restrict disclosure of such INFORMATION to its employees with a need to know (and inform such employees of the obligations assumed herein), and shall not disclose such INFORMATION to any third party without prior written approval of the other party. The Receiving Party shall apply a standard of care to preserve the confidentiality of the INFORMATION which is no less rigorous than that which it applies to protect the confidential nature of its own confidential material.\n10. Export Control\nEach party hereby assures the other that it does not intend to and will not knowingly, without the prior written consent, if required, of the Office of Export Administration of the U.S. Department of Commerce, Washington, DC 20230, transmit directly or indirectly: (a) any INFORMATION received hereunder; or (b) any immediate product (including processes and services) produced directly by the use of such INFORMATION; or (c) any commodity produced by such immediate product if the immediate product of such INFORMATION is a plant capable of producing a commodity or is a major component of such plant; to Afghanistan, the People's Republic of China or any Group Q, S, W, Y or Z country specified in Supplement No. 1 to Section 770 of the Export Administration\nRegulations issued by the U.S. Department of Commerce. Each Party agrees that all of its obligations undertaken in Articles 10 and 11 herein as a Party receiving INFORMATION shall survive and continue after termination of this Agreement.\n11. Government Approvals\nAll undertakings and obligations assumed herein by either party are subject to all necessary governmental licenses and approvals.\n12. Letter of Agency\nWhen circumstances so require, COMSAT agrees to appoint SPRINT as its agent with provisions typically authorized as shown in the example letter of Agency attached hereto and incorporated herein as Exhibit A.\n13. Special Access Surcharge\nWhere applicable, COMSAT will certify that any special access lines terminate in a device not capable of interconnecting SPRINT's service with the local exchange network and thus are surcharge exempt from the special access surcharge. The form shown in Exhibit B is an example of the means to be used for such certification.\n14. Additional Services\nShould COMSAT elect to subscribe to other SPRINT Services that are not covered by this Agreement, SPRINT and COMSAT agree to incorporate into this Agreement such other SPRINT Services at similar discount structures based on aggregate usage of SPRINT Services.\n15. Technical Descriptions and Performance Definitions\nFor each and any particular service contemplated and\/or implemented hereunder, SPRINT and COMSAT agree that prior to installation or commencement of said service, technical discussions will be held by appropriate representatives of SPRINT and COMSAT. These discussions will entail, at a minimum, definition of specifications of the interconnections, transmission performance and standards, signaling standards, billing arrangements, traffic routing, and any other operational characteristics and technical items requiring clarification. Technical performance standards criteria which must be met will be cited for each service. Results of these discussions shall be confirmed in writing and summarized as technical attachments hereto in a Technical Annex for each service described herein, or any future services which may be added to this Agreement. Should COMSAT and SPRINT fail to reach timely agreement on the technical issues as described above pertaining to any service contemplated under this Agreement, COMSAT may decline\nto take up such service, and COMSAT may seek such service form other suppliers without penalty or claim of violation of any provision of this Agreement. Agreement to the contents of each Technical Annex for each service described must be reached in accordance with the above in order for COMSAT to be eligible for the discounts for that respective service.\n16. Notices\nAny notices required or permitted to be given pursuant to this Agreement shall be considered properly given when sent via registered courier, telex, or fax to the following addresses, respectively, or to such other addresses as the Party concerned may hereafter designate in writing.\nTo COMSAT: COMSAT Mobile Communications 22300 Comsat Drive Clarksburg, Maryland 20871 Attention: Director, Contracts\nTo SPRINT: SPRINT 12490 Sunrise Valley Drive Reston, Virginia 22096 Attention: General Counsel\n17. Governing Law\nThis Agreement shall be governed by and construed according to the laws of Maryland, United States of America.\n18. Equal Treatment\nCOMSAT agrees to exchange services with SPRINT on terms and conditions substantially similar to those given other carriers providing substantially equivalent service. SPRINT agrees to exchange services with COMSAT on terms and conditions substantially similar to those given other carriers providing substantially similar mobile services.\n19. Severability\nIf any term or provision of this Agreement shall be found to be illegal or unenforceable, then such term or provision shall be deemed stricken, and the remainder of this Agreement shall continue in full force and effect.\n20. Waiver\nNo term or provision hereof shall be deemed waived by either Party unless such waiver shall be in writing and signed by that Party.\n21. Amendment\nAny amendments, attachments, or orders to or stemming from this Agreement shall be in writing and shall be executed by authorized representatives of the Parties hereto.\n22. Entire Agreement\nThis Agreement and the attachments hereto constitute the complete and entire understanding of the Parties with respect to the subject matter hereof, superseding all prior oral and written negotiations, representations and agreement.\nIN WITNESS WHEREOF, the Parties hereto have caused this Agreement to be executed as of the day and year first shown above.\nCOMSAT Corporation SPRINT International COMSAT Mobile Communication\n\/s\/J. Allen \/s\/Chris J. Leber By:_____________________________ By:__________________________ J. Allen Chris J. Leber Name:___________________________ Name:________________________ Assistant Vice President V.P. & G.M. Operations Title:__________________________ Title:_______________________ Dec. 10, 1993 12-10-93 Date:___________________________ Date:________________________\nExhibit A\nCOMSAT Mobile Communications 22300 COMSAT Drive Clarksburg, MD 20871 Telephone 301 428 4000 Fax 301 428 7747 Telex 197800\nLETTER OF AGENCY\nDear Sir:\nCOMSAT Mobile Communications of Communications Satellite Corporation (COMSAT), hereby appoints Sprint International on behalf of Sprint Communications Company, L.P. or any of its affiliated companies; as agent (Agent) to order changes in, or maintenance on, specific telecommunications service you provide to the undersigned, including, without limitation, removing, adding to, or rearranging such telecommunications service.\nThis specific service is to provide interconnection between Agent's facilities and COMSAT facilities.\nYou are hereby released from any and all liability for making pertinent information available to the Agent and for following the Agent's instructions with reference to any additions changes to, or maintenance on, the undersign's telecommunications service.\nYou may deal directly with the Agent on all matters pertaining to said telecommunications service and should follow its instructions with reference thereto. This authorization will remain in effect until otherwise notified.\nSincerely,\nEXHIBIT B\nSURCHAGE EXEMPTION FORM\nI certify that my special access lines, circuit numbers\n______________________________________\n______________________________________\nprovided by SPRINT,\na) terminate in a device not capable of interconnecting* SPRINT service with the local exchange network, or\nb) are associated with Switched Access Service that is subject to Carrier Common Line Charges (applies to Foreign Exchange (FX) open ends), or\nc) the private line facility is used for Telex service or radio or television program transmissions.\n* \"Not capable of interconnecting\" or \"leaking\" has been interpreted by the FCC to mean \"prevented from interconnecting special access lines with the local exchange lines due to either hardware or software restrictions.\"\nSincerely,\n______________________________________ COMPANY NAME\n______________________________________ CUSTOMER ACCOUNT ID\n______________________________________ SIGNATURE\n______________________________________ TITLE\n______________________________________ DATE\nANNEX I\nMOBILE SATELLITE TELEPHONE SERVICE\n1. Provision of Service\nCOMSAT and SPRINT agree to interconnect OMSAT's facilities and SPRINT's terrestrial network, and agree to provide telecommunications services between the various Inmarsat-system regions and points throughout the world served by SPRINT. COMSAT an SPRINT shall cooperate to make arrangements with foreign telecommunications administrations to originate such services at international points. Mobile satellite telephony service shall be accorded equal priority with SPRINT's other telephony services for purposes of maintenance and access to SPRINT's network.\n2. Services to be Provided\nDIRECTORY ASSISTANCE. All mobile directory assistance such as mobile station listing, locations, etc., will be provided by COMSAT's mobile operators. SPRINT will direct its customers requiring mobile station listings to call the COMSAT Directory Assistance number: 1 (800) 826-8680.\nCONFERENCE CALLS. Conference calls will be permitted in both the shore-to-ship and ship-to-shore directions.\nPERSON\/STATION. Person and station calls will be permitted in both directions for maritime and international and mobile satellite service. Only station calls will be permitted for aeronautical satellite telephone service.\nCREDIT CARD AND CALLING CARD. SPRINT calling cards will be accepted on calls from the United States to mobile earth stations. Recognized SPRINT and foreign telecommunications authorities' credit cards will be accepted by COMSAT for mobile originated calls to U.S. or overseas termination points, providing that systems needed to perform such acceptance are in place. If, in the ship-to-shore usage, there is evidence of fraud, alleged misuse, or substantial uncollectibles, COMSAT and SPRINT shall cooperate to investigate the nature and extent of the incident, and if no reconciliation of the problem can be found, COMSAT and SPRINT will share in an equitable and fair manner the losses incurred. In the event fraud levels prevent either party from providing a profitable calling card or credit card service, either Party may, pursuant to Article 16 of this Agreement \"Notices\", discontinue said service. Any call carried by COMSAT which is billed to a SPRINT Foncard shall be routed to SPRINT's network.\nTHIRD NUMBER. Third number calls will be permitted in the shore-to-ship direction only, at SPRINT's discretion with the understanding that SPRINT will accept liability for the charge. Third number calls will not be permitted in the ship-to-shore direction.\nPUBLIC AND SEMI-PUBLIC COIN TELEPHONES. Collect calls and credit card calls will be permitted from a coin telephone. Collect calls will not be permitted to a coin telephone. If a collect call is inadvertently placed to a coin telephone, resulting in an uncollectible charge for the call, COMSAT and SPRINT shall cooperate to investigate the nature an extent of the incident, and if no reconciliation of the problem can be found, COMSAT and SPRINT will agree to negotiate proportional share in an equitable and fair restitution process for losses which might be incurred.\nCOLLECT CALLS. Collect calls will be permitted in both directions between mobile stations and the 50 states and U.S. possessions and territories, where applicable, except to coin telephones. Collect calls will also be permitted to U.S. offshore and overseas points, providing an agreement has been reached with the respective overseas administration.\nOTHER SERVICES. It is understood that from time to time COMSAT and\/or SPRINT may wish to introduce new or enhanced services. Such introduction of new services shall be accommodated by each party by mutual agreement. Other services can include such services as the provision of private leased lines to and\/or from COMSAT's land earth stations, such lines provided by SPRINT to SPRINT customers, or to COMSAT subject to mutual agreement between the parties.\n3. Service Structure\n(a) SPRINT will tariff fixed-to-mobile service for Inmarsat traffic originating in its network, and COMSAT will concur in SPRINT's tariff.\n(b) COMSAT will continue to tariff its mobile-to-fixed service for Inmarsat traffic originating in its network, and SPRINT will concur in COMSAT's tariff.\n(c) SPRINT shall deliver originated traffic destined for termination through the Inmarsat system to United States land earth stations, as required by FCC regulatory policy.\n(d) SPRINT will recognize and accept COMSAT's requirement to maintain its identity with customers which express a preference for COMSAT's high quality ground station services.\n(e) The interconnecting circuits to be used in providing the services covered by this Annex shall be direct circuits between COMSAT's Mobile Satellite Switching Centers (MSSC) and SPRINT's International Switching Centers (ISC). Each party shall provide and maintain, at its own expense, the circuits located on its side of the point of interconnection at COMSAT's MSSC. Each party shall inform the other party, as soon as possible of any facility failure in its network that is expected to cause protracted interruption of service and the party experiencing the failures shall take reasonable actions to implement restoration procedures.\n4. Exchange of Traffic\n(a) COMSAT and SPRINT agree to route designated traffic in accordance with the customer's instructions, including the following:\n(i) fixed-to-mobile routed to COMSAT: all foreign originating (transit) traffic for which a Foreign Administration has requested to have its traffic routed to COMSAT, and all other traffic for which a customer has indicated a preference for COMSAT.\n(ii) mobile-to-fixed routed to SPRINT: all traffic for which the customer has designated SPRINT as the terminating carrier through COMSAT's carrier selection program, whether by presubscription or direct-dialed selection, SPRINT specific services (SPRINT calling card, country direct, or calls requested to be routed through SPRINT), or other means.\n(b) COMSAT and SPRINT agree to route undesignated traffic as follows:\n(i) fixed-to-mobile routed to COMSAT: SPRINT agrees to meet with COMSAT each year to establish a mutually agreed upon traffic forecast for the following calendar year. SPRINT shall use its reasonable best efforts to deliver to COMSAT fixed-to-mobile traffic consistent with the mutually agreed upon traffic forecasts.\n(ii) mobile-to-fixed routed to SPRINT: COMSAT shall transmit to SPRINT traffic originating at mobile earth stations and designated for delivery by SPRINT.\no Mobile originated traffic destined for domestic or international points, for which no routing has been dsignated by the originating caller, shall be allocated to SPRINT on a proportionate return basis.\no COMSAT shall compute the proportion based upon traffic recorded through COMSAT's switch.\no For the initial twelve (12) month period of service, SPRINT's proportion of undesignated traffic will be ten (10) percent. COMSAT will recompute SPRINT's proportion of undesignated traffic transmitted beginning day one of month thirteen (13) based upon traffic data captured during the initial period. Such recomputation shall not adjust for any shortfall between the percentage of traffic delivered by SPRINT during the initial twelve (12) month period and the percentage to which the ten percent minimum guaranteed return would ordinarily correspond if the return traffic was based upon proportionate return during the initial twelve (12) month period. Thereafter, COMSAT will calculate SPRINT's proportion in accordance with Paragraph 4(b)(iii).\n(iii) Proportionate Return Procedures\no To implement the proportionate return agreement, the parties agree that a \"data capture period\" shall be established, for the calculation of proportionate return percentages to be applied to total ship-shore minutes. The proportionate return percentages will be calculated based on the total shore-ship minutes as recorded through COMSAT's switch and as reported in the monthly statements of account for that period. The first \"data capture period\" hereunder will be the first quarter subsequent to the signing of this agreement. Each subsequent quarter will represent a new \"data capture period\".\no The proportionate return percentages developed during the \"data capture period\" shall be used to return traffic for the \"designated return period\". The first \"designated return period\" hereunder will commence three (3) months after the data capture period.\no The \"designated return period\" will be separate from the \"data capture period\" by three (3) calendar months to allow for \"collection and confirmation\" of the traffic data and the calculation of market shares and return traffic requirements using the proportionate return principle as defined in this agreement. The time periods are\nData Capture Period Collection Designated (Settlement Months) & Confirmation Return Period ___________________ ______________ _____________ Three (3) months Three (3) Months Three (3) Months\no Prior to each \"designated return period\", COMSAT will inform the U.S. Carriers of the return percentage it has calculated for each new \"data capture period\" to be sent during the designated return period\".\no At the end of each \"designated return period\" COMSAT shall inform the carriers of any deviations in the actual minutes returned as compared to the proportionate return owed and the reasons therefore.\n(c) QUARTERLY reviews will be conducted to discuss the items in (b)(iii) above as well as the following items to compare actual traffic data against the forecast:\no Adjustments will be made in the proportion to be returned for the following quarter if necessary, except during the initial twelve (12) month service period as specified in Paragraph 4(b)(ii) above.\no Traffic levels quarterly for the previous period for all traffic will be reviewed to determine if revised volume discounts are applicable.\no Updated forecasts for the new year will be exchanged during the last month of each year to compare actual traffic data against the forecast, except after year one owing to the two year nature of the initial base forecast\n5. Rates\nRates for services provided hereunder are set forth in Attachments 1 and 2 hereto.\n6. Payment Accounting and Settlement\n(a) Monthly Accounts\n(i) For sent paid calls, each party shall be responsible for the billing and collection of charges to its respective subscribers.\n(ii) Each party shall render to the other a monthly statement of the minutes carried, at accounting rates in U.S. currency, for services rendered during the month to which the account relates showing the portion of revenues due to the other party. Such accounts shall be forwarded to the other party promptly after the calendar month to which the account relates but in no event later than the end of the second calendar month following the month to which the account relates. The monthly statements shall include accounting information received through international accounts.\n(iii) No allowances shall be made in the accounts for uncollectible amounts. However, each party will have the right to make adjustments as may be proper with respect to periods when transmission is defective or when fraud has been established in accordance with Paragraph 2 above. A party may deduct such credits from the monthly accounts submitted to the other party, provided that such deductions are made before the monthly account involved is forwarded to the other party.\n(iv) An account shall be deemed to have been accepted by the party to whom it is rendered if that party does not object in writing thereto before the end of the calendar month in which the account is transmitted by the party rendering it. Objections shall be transmitted in writing to the party which rendered the account promptly after receipt of the account. Agreed adjustments shall be included in the next monthly account.\n(b) Establishment of Balance - Payment of Account\nThe sum due each month form one party to the other as covered by the rendered accounts shall be reduced to a net balance by each party. Net balances due from one party to the other shall be paid monthly by the debtor party to the creditor party in United States currency. Payment will be made promptly, but in no event later than six (6) weeks after each monthly account is received from the creditor party. The payment of a balance due on an account shall not be delayed pending agreement to the adjustment of disputed items of that account.\n(c) Transit Traffic\nIf the call is chargeable at the international point, SPRINT shall be entitled to its rate agree with the originating Administration for service via the U.S. to CVOMSAT's facilities, plus its terrestrial interconnection fees, and COMSAT shall be entitled to an amount determined in accordance with the agreed rate to the originating Administration.\nAttachment 1 to Annex 1\nCOMSAT Mobile Communications\nPRICE SCHEDULE FOR FIXED-MOBILE INMARSAT SERVICES\nSTANDARD-A TELEPHONE\nTRAFFIC VOLUME STANDARD-A PRESENTED TO TRAFFIC COMSAT ANNUALLY PRICE PER MINUTE (A,M,B, AERO) (minutes)\n0 to 500,000 $8.00 500,000 to 3,500,000 $7.25 Over 3,500,000 $7.20\nGROWTH INCENTIVE SCHEDULE\nCUMULATIVE INCREMENTAL TRAFFIC GROWTH OVER INITIAL BASE FORECAST STANDARD-A TRAFFIC (percent) PRICE PER MINUTE\n20% to 30% $7.15 30% to 50% $7.10 50% to 70% $7.05 Greater than 70% $6.95\nDIGITAL SERVICES\nSERVICE PRICE PER MINUTE\nSTANDARD-M $4.95 STANDARD-B $6.45 AERONAUTICAL $7.40\nTERMS AND CONDITIONS FOR GROWTH INCENTIVE SCHEDULE\n1. Eligibility for discounts under the Growth Incentive Schedule will be based upon Sprint's performance in a particular quarter as compared to the annualized base forecast. COMSAT will utilize Sprint's initial base forecast over a two year period in its evaluations.\n2. Incentive discounts will be available in accordance with the schedule for readjusting proportional return percentages as explained in Paragraph 4(b)(iii) of Annex 1. COMSAT will endeavor to adjust any applicable discount level in a more expeditious manner should such action prove feasible.\nAttachment 2 to Annex 1\nSprint International's PRICE SCHEDULE FOR MOBILE-FIXED TERMINATION RATES for COMSAT Mobile Communications' INMARSAT SERVICES STANDARD-A TELEPHONE\nREGION Price Per Minute(1)\nNorth America North American Dialing Plan $0.35 (Plus 809 Countries)\nRegion 1 Western Europe, Japan $1.13 Central and South America\nRegion 2 Pacific Rim and Asia $1.67 (Excluding Japan)\nRegion 3 Remainder of Countries $1.62 World-wide\n1 Volume discounts are applicable to per-minute rates per TABLE below.\nVOLUME DISCOUNT TABLE\nMonthly Volume North American International of Service ($) Region Regions (1,2, & 3)\n0 to 9,999 0 0 10,000 to 17,999 8% 2% 18,000 to 24,999 9% 3% 25,000 to 39,999 10% 4% 40,000 to 49,999 11% 5% 50,000 to 74,999 12% 6% Over 75,000 13% 7%\nEXHIBIT 10(gg)\nCREDIT AGREEMENT\nDated as of December 17, 1993\nAmong\nCOMSAT CORPORATION\nas Borrower\nand\nTHE BANKS NAMED HEREIN\nas Banks\nand\nNATIONSBANK OF NORTH CAROLINA, N.A.\nas Agent\nCREDIT AGREEMENT\nDated as of December 17, 1993\nCOMSAT Corporation, a District of Columbia corporation (the \"Borrower\"), the banks (the \"Banks\") listed on the signature pages hereof, and NationsBank of North Carolina, N.A. (\"NationsBank\"), as agent (the \"Agent\") for the Lenders (as hereinafter defined) hereunder, agree as follows:\nARTICLE I\nDEFINITIONS AND ACCOUNTING TERMS\nSECTION 1.01. Certain Defined Terms. As used in this Agreement, the following terms shall have the following meanings (such meanings to be equally applicable to both the singular and plural forms of the terms defined):\n\"A Advance\" means an advance by a Lender to the Borrower as part of an A Borrowing and refers to a Base Rate Advance or a Eurodollar Rate Advance, each of which shall be a \"Type\" of A Advance.\n\"A Borrowing\" means a borrowing consisting of simultaneous A Advances of the same Type made by each of the Lenders pursuant to Section 2.01.\n\"A Note\" means a promissory note of the Borrower payable to the order of any Lender, in substantially the form of Exhibit A-1 hereto, evidencing the aggregate indebtedness of the Borrower to such Lender resulting from the A Advances made by such Lender.\n\"Advance\" means an A Advance, a B Advance or a Swingline Advance.\n\"Affiliate\" means, as to any Person, any other Person that, directly or indirectly, controls, is controlled by or is under common control with such Person or is a director or executive officer of such Person.\n\"Applicable Fee Percentage\" shall mean on any date, with respect to the Facility Fees, the applicable percentage set forth below based upon the ratings applicable on such date to any senior unsecured debt of the Borrower then outstanding:\nFacility Fee Percentage ------------ Category 1 ---------- AA- or higher by S&P .125% and Aa3 or higher by Moody's\nCategory 2 ---------- A+ by S&P and .125% A1 by Moody's\nCategory 3 ---------- A by S&P and A2 .125% by Moody's\nCategory 4 ---------- A- by S&P and .125% A3 by Moody's\nCategory 5 ---------- BBB+ by S&P and .15% Baa1 by Moody's\nCategory 6 ---------- BBB by S&P and .1875% Baa2 by Moody's\nCategory 7 ---------- BBB- by S&P and .25% Baa3 by Moody's\nCategory 8 ---------- BB+ or lower by .375% S&P and Ba1 or lower by Moody's\nFor purposes of the foregoing, (i) if no rating for any senior unsecured debt of the Borrower shall be available from either Moody's or S&P, such rating agency shall be deemed to have established a rating for the senior unsecured debt of the Borrower in Category 8, (ii) if the ratings established or deemed to have been established by Moody's and S&P shall fall within different Categories, the Applicable Fee Percentage shall be based upon the inferior (or numerically highest) Category and (iii) if any rating\nestablished or deemed to have been established by Moody's or S&P shall be changed (other than as a result of a change in the rating system of either Moody's or S&P), such change shall be effective as of the date on which such change is first announced by the rating agency making such change. Each such change shall apply to all Facility Fees thataccrue at any time during the period commencing on the effective date of such change and ending on the date immediately preceding the effective date of the next such change. If the rating system of either Moody's or S&P shall change prior to the Termination Date, the Borrower and the Lenders shall negotiate in good faith to amend the references to specific ratings in this definition to reflect such changed rating system.\n\"Applicable Lending Office\" means, with respect to each Lender, such Lender's Domestic Lending Office in the case of a Base Rate Advance and such Lender's Eurodollar Lending Office in the case of a Eurodollar Rate Advance and, in the case of a B Advance, the office of such Lender notified by such Lender to the Agent as its Applicable Lending Office with respect to such B Advance.\n\"Applicable Margin\" shall mean on any date, with respect to A Advances which are Eurodollar Rate Advances, the applicable spread set forth below based upon the ratings applicable on such date to any senior unsecured debt of the Borrower then outstanding:\nEurodollar Rate Advance Spread --------------- Category 1 ---------- AA- or higher by S&P .25% and Aa3 or higher by Moody's\nCategory 2 ---------- A+ by S&P and .275% A1 by Moody's\nCategory 3 ---------- A by S&P and A2 .275% by Moody's\nCategory 4 ---------- A- by S&P and .275% A3 by Moody's\nCategory 5 ---------- BBB+ by S&P and .30% Baa1 by Moody's\nCategory 6 ---------- BBB by S&P and .3125% Baa2 by Moody's\nCategory 7 ---------- BBB- by S&P and .375% Baa3 by Moody's\nCategory 8 ---------- BB+ or lower by .50% S&P and Ba1 or lower by Moody's\nFor purposes of the foregoing, (i) if no rating for any senior unsecured debt of the Borrower shall be available from either Moody's or S&P, such rating agency shall be deemed to have established a rating for the senior unsecured debt of the Borrower in Category 8, (ii) if the ratings established or deemed to have been established by Moody's and S&P shall fall within different Categories, the Applicable Margin applicable to any A Advance which is a Eurodollar Rate Advance shall be based upon the inferior (or numerically highest) Category and (iii) if any rating established or deemed to have been established by Moody's or S&P shall be changed (other than as a result of a change in the rating system of either Moody's or S&P), such change shall be effective as of the date on which such change is first announced by the rating agency making such change. Each such change shall apply to all A Advances which are Eurodollar Rate Advances that are outstanding at any time during the period commencing on the effective date of such change and ending on the date immediately preceding the effective date of the next such change. If the rating system of either Moody's or S&P shall change prior to the Termination Date, the Borrower and the Lenders shall negotiate in good faith to amend the references to specific ratings in this definition to reflect such changed rating system.\n\"Assignment and Acceptance\" means an assignment and acceptance agreement entered into by a Lender and an Eligible Assignee, and accepted by the Agent, in substantially the form of Exhibit C hereto.\n\"B Advance\" means an advance by a Lender to the Borrower as part of a B Borrowing resulting from the auction bidding procedure described in Section 2.03.\n\"B Borrowing\" means a borrowing consisting of simultaneous B Advances from each of the Lenders whose offer to make one or more B Advances as part of such borrowing has been accepted by the Borrower under the auction bidding procedure described in Section 2.03.\n\"B Note\" means a promissory note of the Borrower payable to the order of any Lender, in substantially the form of Exhibit A-2 hereto, evidencing the indebtedness of the Borrower to such Lender resulting from a B Advance made by such Lender.\n\"B Reduction\" has the meaning specified in Section 2.01.\n\"Base Rate\" means a fluctuating interest rate per annum equal at all times to the higher of:\n(a) the rate of interest announced publicly by NationsBank of North Carolina, N.A. in Charlotte, North Carolina, from time to time, as NationsBank of North Carolina, N.A.'s prime rate; or\n(b) for any day 1\/2 of one percent per annum above the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for such day on such transactions received by NationsBank of North Carolina, N.A. from three Federal funds brokers of recognized standing selected by it.\n\"Base Rate Advance\" means an A Advance which bears interest as provided in Section 2.07(a).\n\"Borrowing\" means an A Borrowing or a B Borrowing.\n\"Business Day\" means a day of the year on which banks are not required or authorized to close in New York City and, if the applicable Business Day relates to any Eurodollar Rate Advances, on which dealings are carried on in the London interbank market.\n\"Closing Date\" means the date on which the conditions set forth in Section 3.01 applicable to the making of the initial Advances under this Agreement have been fulfilled.\n\"Commitment\" has the meaning specified in Section 2.01.\n\"Commitment Percentage\" means, with respect to each Lender, the percentage that such Lender's Commitment constitutes of the aggregate amount of the Commitments.\n\"Convert\", \"Conversion\" and \"Converted\" each refers to a conversion of Advances of one Type into Advances of another Type pursuant to Section 2.09 or 2.10.\n\"Debt\" means (i) indebtedness for borrowed money, however evidenced, including obligations under letters of credit, (ii) obligations to pay the deferred purchase price of property or services (other than trade indebtedness incurred in the ordinary course of business), (iii) obligations as lessee under leases recorded as capital leases in accordance with generally accepted accounting principles, and (iv) obligations under direct or indirect guaranties in respect of, and obligations (contingent or otherwise) to assure a creditor against loss in respect of, indebtedness or obligations of others of the kinds referred to in clauses (i) through (iii) above.\n\"Domestic Lending Office\" means, with respect to any Lender, the office of such Lender specified as its \"Domestic Lending Office\" opposite its name on Schedule I hereto or in the Assignment and Acceptance pursuant to which it became a Lender, or such other office of such Lender as such Lender may from time to time specify to the Borrower and the Agent.\n\"Eligible Assignee\" means (i) a commercial bank organized or licensed to operate under the laws of the United States, or any State thereof, and having a combined capital and surplus of at least $50,000,000, or (ii) a commercial bank organized under the laws of any other country which is a member of the Organization for Economic Cooperation and Development or has concluded special lending arrangements with the International Monetary Fund associated with its General Arrangements to Borrow and having a combined capital and surplus of at least $50,000,000, provided that such bank is acting through a branch or agency located in the United States.\n\"ERISA\" means the Employee Retirement Income Security Act of 1974, as amended from time to time, and the regulations promulgated and rulings issued thereunder.\n\"ERISA Affiliate\" of any Person means any other Person that for purposes of Title IV of ERISA is a member of such Person's controlled group, or under common control with such Person, within the meaning of Section 414 of the Internal Revenue Code of 1986, as amended, and the regulations promulgated and rulings issued thereunder.\n\"ERISA Event\" means (a) a reportable event, within the meaning of Section 4043 of ERISA, unless the 30-day notice requirement with respect thereto has been waived by the Pension Benefit Guaranty Corporation; (b) the provision by the administrator of any Plan of a notice of intent to terminate such Plan, pursuant to Section 4041(a)(2) of ERISA (including any such notice with respect to a plan amendment referred to in Section 4041(e) of ERISA; (c) the cessation of operations at a facility in the circumstances described in Section 4068(f) of ERISA; (d) the withdrawal by the Borrower or any of its ERISA Affiliates from a Multiple Employer Plan during a plan year for which is was a substantial employer, as defined in Section 4001(a)(2) of ERISA; (e) the failure by the Borrower or any of its ERISA Affiliates to make a payment to a plan required under Section 302(f)(1) of ERISA; (f) the adoption of an amendment to a Plan requiring the provision of security to such Plan, pursuant to Section 307 of ERISA; or (g) the institution by the PBGC of proceedings to terminate a Plan, pursuant to Section 4042 of ERISA, or the occurrence of any event or condition that might constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, a Plan.\n\"Eurocurrency Liabilities\" has the meaning assigned to that term in Regulation D of the Board of Governors of the Federal Reserve System, as in effect from time to time.\n\"Eurodollar Lending Office\" means, with respect to any Lender, the office of such Lender specified as its \"Eurodollar Lending Office\" opposite its name on Schedule I hereto or in the Assignment and Acceptance pursuant to which it became a Lender (or, if no such office is specified, its Domestic Lending Office), or such other office of such Lender as such Lender may from time to time specify to the Borrower and the Agent.\n\"Eurodollar Rate\" means, for the Interest Period for each Eurodollar Rate Advance comprising part of the same A Borrowing, an interest rate per annum equal to the average (rounded upward to the nearest whole multiple of 1\/16 of 1% per annum, if such average is not such a multiple) of the rate per annum at which deposits in U.S. dollars are offered by the principal office of each of the Reference Banks in London, England to prime banks in the London interbank market at 11:00 A.M. (London time) two Business Days before the first day of such Interest Period in an amount substantially equal to such Reference Bank's Eurodollar Rate Advance comprising part of such A Borrowing and for a period equal to such Interest Period. The Eurodollar Rate for the Interest Period for each Eurodollar Rate Advance comprising part of the same A Borrowing shall be determined by the Agent on the basis of applicable rates furnished to and received by the Agent from the Reference Banks two Business\nDays before the first day of such Interest Period, subject, however, to the provisions of Section 2.09.\n\"Eurodollar Rate Advance\" means an A Advance which bears interest as provided in Section 2.07(b).\n\"Eurodollar Rate Reserve Percentage\" of any Lender for the Interest Period for any Eurodollar Rate Advance means the reserve percentage applicable during such Interest Period (or if more than one such percentage shall be so applicable, the daily average of such percentages for those days in such Interest Period during which any such percentage shall be so applicable) under regulations issued from time to time by the Board of Governors of the Federal Reserve System (or any successor) for determining the maximum reserve requirement (including, without limitation, any emergency, supplemental or other marginal reserve requirement) for such Lender with respect to liabilities or assets consisting of or including Eurocurrency Liabilities having a term equal to such Interest Period.\n\"Events of Default\" has the meaning specified in Section 6.01.\n\"Extension Date\" has the meaning specified in Section 2.17.\n\"Facility Fee\" shall have the meaning assigned to such term in Section 2.04(a).\n\"Federal Funds Rate\" means, for any period, a fluctuating interest rate per annum equal for each day during such period to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for such day on such transactions received by the Agent from three Federal funds brokers of recognized standing selected by it.\n\"Insufficiency\" means, with respect to any Plan, the amount, if any, of its unfunded benefit liabilities within the meaning of Section 4001(a)(18) of ERISA.\n\"Interest Period\" means, for each A Advance comprising part of the same A Borrowing, the period commencing on the date of such A Advance or the date of the Conversion of any A Advance into such an A Advance and ending on the last day of the period selected by the Borrower pursuant to the provisions below and, thereafter, each subsequent period commencing on the last day of the immediately preceding Interest Period and ending on the last day of the period\nselected by the Borrower pursuant to the provisions below. The duration of each such Interest Period shall be 1, 3 or 6 months in the case of a Eurodollar Rate Advance, in each case as the Borrower may, upon notice received by the Agent not later than 11:00 A.M. (New York City time) on the third Business Day prior to the first day of such Interest Period, select; provided, however, that:\n(i) the duration of any Interest Period which commences before the Termination Date and otherwise ends after such date shall end on such date;\n(ii) the duration of any Interest Period which commences before an assignment pursuant to Section 8.07 and otherwise ends after the date of such assignment shall end on such date and all accrued and unpaid interest shall be due and payable on such date;\n(iii) Interest Periods commencing on the same date for A Advances comprising part of the same A Borrowing shall be of the same duration; and\n(iv) whenever the last day of any Interest Period would otherwise occur on a day other than a Business Day, the last day of such Interest Period shall be extended to occur on the next succeeding Business Day, provided, in the case of any Interest Period for a Eurodollar Rate Advance, that if such extension would cause the last day of such Interest Period to occur in the next following calendar month, the last day of such Interest Period shall occur on the next preceding Business Day.\n\"Lenders\" means the Banks listed on the signature pages hereof and each Eligible Assignee that shall become a party hereto pursuant to Section 8.07.\n\"Majority Lenders\" means at any time Lenders holding at least 51% of the then aggregate unpaid principal amount of the A Notes held by Lenders, or, if no such principal amount is then outstanding, Lenders having at least 51% of the Commitments (provided that, for purposes hereof, neither the Borrower, nor any of its Affiliates, if a Lender, shall be included in (i) the Lenders holding such amount of the A Advances or having such amount of the Commitments or (ii) determining the aggregate unpaid principal amount of the A Advances or the total Commitments).\n\"Margin Regulations\" means the margin stock regulations issued by the Board of Governors of the Federal Reserve System applicable to the Lenders and\/or to the Borrower.\n\"Moody's\" shall mean Moody's Investors Service, Inc.\n\"Moody's Rating\" means the rating assigned to the Borrower's senior unsecured debt by Moody's Investors Service, Inc.\n\"Multiemployer Plan\" means a multiemployer plan, as defined in Section 4001(a)(3) of ERISA, to which the Borrower or any of its ERISA Affiliates is making or accruing an obligation to make contributions, or has within any of the preceding five plan years made or accrued an obligation to make contributions, such plan being maintained pursuant to one or more collective bargaining agreements.\n\"Multiple Employer Plan\" means a single employer plan, as defined in Section 4001(a)(15) of ERISA, that (a) is maintained for employees of the Borrower or any of its ERISA Affiliates and at least one Person other than the Borrower and its ERISA Affiliates or (b) was so maintained and in respect of which the Borrower or any of its ERISA Affiliates could have liability under Section 4064 or 4069 of ERISA in the event such plan has been or were to be terminated.\n\"Note\" means an A Note, a B Note or the promissory note executed by the Borrower in favor of the Swingline Lender to evidence the Swingline Advances.\n\"Notice of an A Borrowing\" has the meaning specified in Section 2.02(a).\n\"Notice of a B Borrowing\" has the meaning specified in Section 2.03(a).\n\"Person\" means an individual, partnership, corporation (including a business trust), joint stock company, trust, unincorporated association, joint venture or other entity, or a government or any political subdivision or agency thereof.\n\"Plan\" means a Single Employer Plan or a Multiple Employer Plan.\n\"Rating Event\" means any of the following: (i) the Borrower's senior unsecured debt is rated by both S&P and Moody's and the Standard & Poor's Rating is lower than or equal to BBB+ or the Moody's Rating is lower than or equal to Baa1 or (ii) the Borrower's senior unsecured debt is rated by only one of S&P or Moody's and the Standard & Poor's Rating is lower than or equal to BBB+ or the Moody's Rating is lower than or equal to Baa1, as the case may be, or (iii) the Borrower's senior unsecured debt is not rated by either S&P or Moody's.\n\"Reference Banks\" means NationsBank of North Carolina, N.A., Bank of America National Trust and Savings Association, The First National Bank of Chicago and The Chase Manhattan Bank, N.A.\n\"Register\" has the meaning specified in Section 8.07(c).\n\"S&P\" shall mean Standard and Poor's Corporation.\n\"Single Employer Plan\" means a single employer plan, as defined in Section 4001(a)(15) of ERISA, that (a) is maintained for employees of the Borrower or any of its ERISA Affiliates and no Person other than the Borrower and its ERISA Affiliates or (b) was so maintained and in respect of which the Borrower or any of its ERISA Affiliates could have liability under Section 4069 of ERISA in the event such plan has been or were to be terminated.\n\"Standard & Poor's Rating\" means the rating assigned to the Borrower's senior unsecured debt by Standard & Poor's Corporation.\n\"Swingline Advances\" shall have the meaning given to such term in Section 2.18 hereof.\n\"Swingline Lender\" shall mean NationsBank.\n\"Swingline Reduction\" has the meaning specified in Section 2.01.\n\"Termination Date\" means (i) December 17, 1998 or such later date determined in accordance with the provisions of Section 2.17, provided, however, that the Termination Date shall not be in any event later than December 17, 2000 or (ii) the earlier date of termination in whole of the Commitments pursuant to Section 2.05 or 6.01.\n\"Type\" means, with respect to any Advance, a Base Rate Advance or a Eurodollar Rate Advance.\n\"Withdrawal Liability\" has the meaning assigned to such term under Part 1 of Subtitle E or Part IV of ERISA.\nSECTION 1.02. Computation of Time Periods. In this Agreement in the computation of periods of time from a specified date to a later specified date, the word \"from\" means \"from and including\" and the words \"to\" and \"until\" each means \"to but excluding\".\nSECTION 1.03. Accounting Terms. All accounting terms not specifically defined herein shall be construed in accordance with generally accepted accounting principles consistent with\nthose applied in the preparation of the financial statements referred to in Section 4.01(e).\nARTICLE II\nAMOUNTS AND TERMS OF THE ADVANCES\nSECTION 2.01. The A Advances. Each Lender severally agrees, on the terms and conditions hereinafter set forth, to make A Advances to the Borrower from time to time on any Business Day during the period from the date hereof until the Termination Date in an aggregate amount not to exceed at any time outstanding the amount set forth opposite such Lender's name on the signature pages hereof or, if such Lender has entered into any Assignment and Acceptance, set forth for such Lender in the Register maintained by the Agent pursuant to Section 8.07(c), as such amount may be reduced or increased pursuant to Section 2.05 (such Lender's \"Commitment\"), provided that the aggregate amount of the Commitments of the Lenders shall be deemed used from time to time to the extent of the aggregate amount of the B Advances then outstanding and such deemed use of the aggregate amount of the Commitments shall be applied to the Lenders ratably according to their respective Commitments (such deemed use of the aggregate amount of the Commitments being a \"B Reduction\"), provided further, that the aggregate amount of the Commitments of the Lenders shall be deemed used from time to time to the extent of the aggregate amount of the Swingline Advances then outstanding and such deemed use of the aggregate amount of the Commitments shall be applied to the Lenders ratably according to their respective Commitments (such deemed use of the aggregate amount of the Commitments being a \"Swingline Reduction\"). Each A Borrowing shall be in an aggregate amount not less than $10,000,000 or an integral multiple of $1,000,000 in excess thereof and shall consist of A Advances of the same Type made on the same day by the Lenders ratably according to their respective Commitments. Within the limits of each Lender's Commitment, the Borrower may from time to time borrow, prepay pursuant to Section 2.11(b) and reborrow from time to time under this Section 2.01.\nSECTION 2.02. Making the A Advances. (a) Each A Borrowing shall be made on notice, given not later than 11:00 A.M. (New York City time) on the third Business Day prior to the date of the proposed A Borrowing, by the Borrower to the Agent, which shall give to each Lender prompt notice thereof by telecopier, telex or cable; provided, however, that in the event such notice is with respect to a proposed Base Rate Advance, such notice shall be given not later than 10:00 A.M. (New York City time) on the Business Day of the proposed Base Rate Advance. Each such notice of an A Borrowing (a \"Notice of A Borrowing\") shall be by telecopier, telex or cable, confirmed immediately in writing, in substantially the form of Exhibit B-1 hereto, specifying therein the requested (i) date of such A Borrowing, (ii) Type of A Advances comprising such A Borrowing, (iii) aggregate amount of such A Borrowing, and (iv) in the case of an\nA Borrowing comprised of Eurodollar Rate Advances, initial Interest Period for each such A Advance. Each Lender shall, before 11:00 A.M. (New York City time) on the date of such A Borrowing, make available for the account of its Applicable Lending Office to the Agent at its address referred to in Section 8.02, in same day funds, such Lender's ratable portion of such A Borrowing, provided, however, that upon any assignment pursuant to Section 8.07, the assignee shall therewith make available to the Agent, and the Borrower shall immediately reborrow upon the same terms and conditions, the Advances of the assignor repaid in connection with such assignment. After the Agent's receipt of such funds and upon fulfillment of the applicable conditions set forth in Article III, the Agent will make such same day funds available to the Borrower at the Borrower's account maintained with the Agent.\n(b) Each Notice of A Borrowing shall be irrevocable and binding on the Borrower. In the case of any A Borrowing which the related Notice of A Borrowing specifies is to be comprised of Eurodollar Rate Advances, the Borrower shall indemnify each Lender against any loss, cost or reasonable expense incurred by such Lender as a result of any failure to fulfill on or before the date specified in such Notice of A Borrowing for such A Borrowing the applicable conditions set forth in Article III, including, without limitation, any loss (other than the loss of anticipated profits), cost or reasonable expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by such Lender to fund the A Advance to be made by such Lender as part of such A Borrowing when such A Advance, as a result of such failure, is not made on such date. The amount of such loss, cost or expense shall be determined by such Lender and notified to the Borrower through the Agent in the form of a certificate of such Lender stating that the calculations set forth therein are in accordance with the terms of this Agreement and setting forth in reasonable detail the basis of such calculations, such certificate being conclusive and binding for all purposes absent manifest error and unless contested by the Borrower within 10 Business Days of its receipt of such certificate, and the amount set forth therein being payable in any event by the Borrower to such Lender on or before the 10th Business Day following delivery of such certificate to the Borrower.\n(c) Unless the Agent shall have received notice from a Lender prior to the date of any A Borrowing that such Lender will not make available to the Agent such Lender's ratable portion of such A Borrowing, the Agent may assume that such Lender has made such portion available to the Agent on the date of such A Borrowing in accordance with subsection (a) of this Section 2.02 and the Agent may, in reliance upon such assumption, make available to the Borrower on such date a corresponding amount. If and to the extent that such Lender shall not have so made such ratable portion available to the Agent, such Lender and the Borrower severally agree to repay to the Agent forthwith on demand such corresponding amount together with interest thereon,\nfor each day from the date such amount is made available to the Borrower until the date such amount is repaid to the Agent, at (i) in the case of the Borrower, the interest rate applicable at the time to A Advances comprising such A Borrowing and (ii) in the case of such Lender, the Federal Funds Rate. If such Lender shall repay to the Agent such corresponding amount, such amount so repaid shall constitute such Lender's A Advance as part of such A Borrowing for purposes of this Agreement.\n(d) The failure of any Lender to make the A Advance to be made by it as part of any A Borrowing shall not relieve any other Lender of its obligation, if any, hereunder to make its A Advance on the date of such A Borrowing, but no Lender shall be responsible for the failure of any other Lender to make the A Advance to be made by such other Lender on the date of any A Borrowing.\nSECTION 2.03. The B Advances. (a) Each Lender severally agrees that the Borrower may make B Borrowings under this Section 2.03 from time to time on any Business Day during the period from the date hereof until the date occurring 30 days prior to the Termination Date in the manner set forth below; provided that, following the making of each B Borrowing, the aggregate amount of the Advances then outstanding shall not exceed the aggregate amount of the Commitments of the Lenders (computed without regard to any B Reduction).\n(i) The Borrower may request a B Borrowing under this Section 2.03 by delivering to the Agent, by telecopier, telex or cable, confirmed immediately in writing, a notice of a B Borrowing (a \"Notice of B Borrowing\"), in substantially the form of Exhibit B-2 hereto, specifying the date and aggregate amount of the proposed B Borrowing, the maturity date for repayment of each B Advance to be made as part of such B Borrowing (which maturity date may not be earlier than the date occurring 10 days after the date of such B Borrowing or later than the Termination Date), the interest payment date or dates relating thereto, and any other terms to be applicable to such B Borrowing, not later than 10:00 A.M. (New York City time) (A) at least one Business Day prior to the date of the proposed B Borrowing, if the Borrower shall specify in the Notice of B Borrowing that the rates of interest to be offered by the Lenders shall be fixed rates per annum and (B) at least four Business Days prior to the date of the proposed B Borrowing, if the Borrower shall instead specify in the Notice of B Borrowing the basis to be used by the Lenders in determining the rates of interest to be offered by them. The Agent shall in turn promptly notify each Lender of each request for a B Borrowing received by it from the Borrower by sending such Lender a copy of the related Notice of B Borrowing.\n(ii) Each Lender may, if, in its sole discretion, it elects to do so, irrevocably offer to make one or more B\nAdvances to the Borrower as part of such proposed B Borrowing at a rate or rates of interest specified by such Lender in its sole discretion, by notifying the Agent (which shall give prompt notice thereof to the Borrower), before 10:00 A.M. (New York City time) (A) on the date of such proposed B Borrowing, in the case of a Notice of B Borrowing delivered pursuant to clause (A) of paragraph (i) above and (B) three Business Days before the date of such proposed B Borrowing, in the case of a Notice of B Borrowing delivered pursuant to clause (B) of paragraph (i) above, of the minimum amount and maximum amount of each B Advance which such Lender would be willing to make as part of such proposed B Borrowing (which amounts may, subject to the proviso to the first sentence of this Section 2.03(a), exceed such Lender's Commitment), the rate or rates of interest therefor and such Lender's Applicable Lending Office with respect to such B Advance; provided that if the Agent in its capacity as a Lender shall, in its sole discretion, elect to make any such offer, it shall notify the Borrower of such offer before 9:00 A.M. (New York City time) on the date on which notice of such election is to be given to the Agent by the other Lenders. If any Lender shall elect not to make such an offer, such Lender shall so notify the Agent, before 10:00 A.M. (New York City time) on the date on which notice of such election is to be given to the Agent by the other Lenders, and such Lender shall not be obligated to, and shall not, make any B Advance as part of such B Borrowing; provided that the failure by any Lender to give such notice shall not cause such Lender to be obligated to make any B Advance as part of such proposed B Borrowing.\n(iii) The Borrower shall, in turn, (A) before 11:00 A.M. (New York City time) on the date of such proposed B Borrowing, in the case of a Notice of B Borrowing delivered pursuant to clause (A) of paragraph (i) above and (B) before 1:00 P.M. (New York City time) three Business Days before the date of such proposed B Borrowing, in the case of a Notice of B Borrowing delivered pursuant to clause (B) of paragraph (i) above, either\n(x) cancel such B Borrowing by giving the Agent notice to that effect, or\n(y) accept one or more of the offers made by any Lender or Lenders pursuant to paragraph (ii) above, in its sole discretion, by giving notice to the Agent of the amount of each B Advance (which amount shall be equal to or greater than the minimum amount, and equal to or less than the maximum amount, notified to the Borrower by the Agent on behalf of such Lender for such B Advance pursuant to paragraph (ii) above) to be made by each Lender as part of such B Borrowing, and reject any remaining offers made by Lenders pursuant to paragraph (ii) above by giving the Agent notice to that effect.\n(iv) If the Borrower notifies the Agent that such B Borrowing is cancelled pursuant to paragraph (iii)(x) above, the Agent shall give prompt notice thereof to the Lenders and such B Borrowing shall not be made.\n(v) If the Borrower accepts one or more of the offers made by any Lender or Lenders pursuant to paragraph (iii)(y) above, the Agent shall in turn promptly notify (A) each Lender that has made an offer as described in paragraph (ii) above, of the date and aggregate amount of such B Borrowing and whether or not any offer or offers made by such Lender pursuant to paragraph (ii) above have been accepted by the Borrower, (B) each Lender that is to make a B Advance as part of such B Borrowing, of the amount of each B Advance to be made by such Lender as part of such B Borrowing, and (C) each Lender that is to make a B Advance as part of such B Borrowing, upon receipt, that the Agent has received forms of documents appearing to fulfill the applicable conditions set forth in Article III. Each Lender that is to make a B Advance as part of such B Borrowing shall, before 12:00 noon (New York City time) on the date of such B Borrowing specified in the notice received from the Agent pursuant to clause (A) of the preceding sentence or any later time when such Lender shall have received notice from the Agent pursuant to clause (C) of the preceding sentence, make available for the account of its Applicable Lending Office to the Agent at its address referred to in Section 8.02 such Lender's portion of such B Borrowing, in same day funds. Upon fulfillment of the applicable conditions set forth in Article III and after receipt by the Agent of such funds, the Agent will make such funds available to the Borrower at the Agent's aforesaid address. Promptly after each B Borrowing the Agent will notify each Lender of the amount of the B Borrowing, the consequent B Reduction and the dates upon which such B Reduction commenced and will terminate.\n(b) Each B Borrowing shall be in an aggregate amount not less than $10,000,000 or an integral multiple of $1,000,000 in excess thereof and, following the making of each B Borrowing, the Borrower shall be in compliance with the limitation set forth in the proviso to the first sentence of subsection (a) above.\n(c) Within the limits and on the conditions set forth in this Section 2.03, the Borrower may from time to time borrow under this Section 2.03, repay or prepay pursuant to subsection (d) below, and reborrow under this Section 2.03, provided that a B Borrowing shall not be made within five Business Days of the date of any other B Borrowing.\n(d) The Borrower shall repay to the Agent for the account of each Lender which has made a B Advance, or each other holder of a B Note, on the maturity date of each B Advance (such maturity date being that specified by the Borrower for repayment of such B Advance in the related Notice of B Borrowing\ndelivered pursuant to subsection (a)(i) above and provided in the B Note evidencing such B Advance), the then unpaid principal amount of such B Advance. The Borrower shall have no right to prepay any principal amount of any B Advance unless, and then only on the terms, specified by the Borrower for such B Advance in the related Notice of B Borrowing delivered pursuant to subsection (a)(i) above and set forth in the B Note evidencing such B Advance.\n(e) The Borrower shall pay interest on the unpaid principal amount of each B Advance from the date of such B Advance to the date the principal amount of such B Advance is repaid in full, at the rate of interest for such B Advance specified by the Lender making such B Advance in its notice with respect thereto delivered pursuant to subsection (a)(ii) above, payable on the interest payment date or dates specified by the Borrower for such B Advance in the related Notice of B Borrowing delivered pursuant to subsection (a)(i) above, as provided in the B Note evidencing such B Advance.\n(f) The indebtedness of the Borrower resulting from each B Advance made to the Borrower as part of a B Borrowing shall be evidenced by a separate B Note of the Borrower payable to the order of the Lender making such B Advance.\nSECTION 2.04. Fees. (a) Facility Fee. The Borrower agrees to pay to the Agent, for the account of each Lender, a facility fee (the \"Facility Fee\") from the date hereof in the case of each Bank and from the effective date specified in the Assignment and Acceptance pursuant to which it became a Lender in the case of each other Lender until the Termination Date, payable on the first day of each March, June, September and December during the term of such Lender's Commitment, commencing March 1, 1994, and on the Termination Date, in an amount equal to the Applicable Fee Percentage multiplied by the daily average Commitment (whether used or unused) of such Lender.\n(b) Agent's Fees. The Borrower shall pay to the Agent for its own account such fees as may from time to time be agreed between the Borrower and the Agent.\nSECTION 2.05. Reduction of the Commitments. (a) Reduction. The Borrower shall have the right, upon at least 10 Business Days' notice to the Agent, to terminate in whole or reduce ratably in part the unused portions of the respective Commitments of the Lenders, provided that the aggregate amount of the Commitments of the Lenders shall not be reduced to an amount which is less than the aggregate principal amount of the B Advances and Swingline Advances then outstanding, provided, further, that each partial reduction shall be in the aggregate amount of $10,000,000 or an integral multiple of $5,000,000 in excess thereof and provided, further, that the aggregate amount of the Commitments of the Lenders, after giving effect to the B Reductions and the Swingline Reductions, shall not be reduced below $100,000,000.\n(b) [intentionally left blank].\nSECTION 2.06. Repayment of A Advances. The Borrower shall repay the principal amount of each A Advance made by each Lender in accordance with the A Note to the order of such Lender.\nSECTION 2.07. Interest on A Advances. The Borrower shall pay interest on the unpaid principal amount of each A Advance made by each Lender from the date of such A Advance until such principal amount shall be paid in full, at the following rates per annum:\n(a) Base Rate Advances. If such A Advance is a Base Rate Advance, a rate per annum equal at all times to the Base Rate in effect from time to time, payable monthly in arrears on the first Business Day of each month during such periods and on the date such Base Rate Advance shall be Converted or paid in full; provided that any amount of principal which is not paid when due (whether at stated maturity, by acceleration or otherwise) shall bear interest, from the date on which such amount is due until such amount is paid in full, payable on demand, at a rate per annum equal at all times to 2% per annum above the Base Rate in effect from time to time.\n(b) Eurodollar Rate Advances. If such A Advance is a Eurodollar Rate Advance, a rate per annum equal at all times during the Interest Period for such A Advance to the Eurodollar Rate for such Interest Period plus the Applicable Margin, payable on the last day of such Interest Period and, if such Interest Period has a duration of more than three months, on each day which occurs during such Interest Period every three months from the first day of such Interest Period; provided that any amount of principal which is not paid when due (whether at stated maturity, by acceleration or otherwise) shall bear interest, from the date on which such amount is due until such amount is paid in full, payable on demand, at a rate per annum equal at all times to the greater of (x) 2% per annum above the Base Rate in effect from time to time and (y) 2% per annum above the rate per annum required to be paid on such A Advance immediately prior to the date on which such amount became due.\nSECTION 2.08. Additional Interest on Eurodollar Rate Advances. The Borrower shall pay to each Lender, so long as such Lender shall be required under regulations of the Board of Governors of the Federal Reserve System to maintain reserves with respect to liabilities or assets consisting of or including Eurocurrency Liabilities, additional interest on the unpaid principal amount of each Eurodollar Rate Advance of such Lender, from the date of such A Advance until such principal amount is paid in full, at an interest rate per annum equal at all times to the remainder obtained by subtracting (i) the Eurodollar Rate for the Interest Period for such A Advance from (ii) the rate obtained by dividing such Eurodollar Rate by a percentage equal to 100% minus the Eurodollar Rate Reserve Percentage of such Lender for such Interest Period, payable on each date on which\ninterest is payable on such A Advance. Such additional interest shall be determined by such Lender and notified to the Borrower through the Agent in the form of a certificate of such Lender stating that the calculations set forth therein are in accordance with the terms of this Agreement and setting forth in reasonable detail the basis of such calculation, such certificate being conclusive and binding for all purposes absent manifest error and unless contested by the Borrower within 10 Business Days of its receipt of such certificate, and such amounts being payable by the Borrower in any event on or before the 10th Business Day following delivery of such certificates to the Borrower.\nSECTION 2.09. Interest Rate Determination. (a) Each Reference Bank agrees to furnish to the Agent timely information for the purpose of determining each Eurodollar Rate. If any one or more of the Reference Banks shall not furnish such timely information to the Agent for the purpose of determining any such interest rate, the Agent shall determine such interest rate on the basis of timely information furnished by the remaining Reference Banks.\n(b) The Agent shall give prompt notice to the Borrower and the Lenders of the applicable interest rate determined by the Agent for purposes of Section 2.07(a) or (b), and the applicable rate, if any, furnished by each Reference Bank for the purpose of determining the applicable interest rate under Section 2.07(b).\n(c) If fewer than two Reference Banks furnish timely information to the Agent for determining the Eurodollar Rate for any Eurodollar Rate Advance, the Eurodollar Rate for such Eurodollar Rate Advance shall be a rate of interest determined on the basis of at least two offered rates for deposits in United States dollars for a period equal to the Interest Period applicable to such Eurodollar Rate Advance commencing on the first day of such Interest Period appearing on the Reuters Screen LIBO Page as of 11:00 a.m. (London time) on the day that is two Business Days prior to the first day of such Interest Period. If at least two such offered rates appear on the Reuters Screen LIBO Page, the rate with respect to each Interest Period will be the arithmetic average (rounded upwards to the next 1\/16th of 1%) of such offered rates. If fewer than two offered rates appear:\n(i) the Agent shall forthwith notify the Borrower and the Lenders that the interest rate cannot be determined for such Eurodollar Rate Advances, as the case may be,\n(ii) each such Advance will automatically, on the last day of the then existing Interest Period therefor, Convert into a Base Rate Advance, and\n(iii) the obligation of the Lenders to make, or to Convert Base Rate Advances into, Eurodollar Rate Advances shall be suspended until the Agent shall notify the Borrower and the Lenders that the circumstances causing such suspension no longer exist.\nEach Reference Bank shall use its best efforts to provide timely information to the Agent for the purpose of determining the Eurodollar Rate.\n(d) If, with respect to any Eurodollar Rate Advances, the Majority Lenders notify the Agent that the Eurodollar Rate for any Interest Period for such Advances will not adequately reflect the cost to such Majority Lenders of making, funding or maintaining their respective Eurodollar Rate Advances for such Interest Period, the Agent shall forthwith so notify the Borrower and the Lenders, whereupon\n(i) each Eurodollar Rate Advance will automatically, on the last day of the then existing Interest Period therefor, Convert into a Base Rate Advance, and\n(ii) the obligation of the Lenders to make, or to Convert A Advances into, Eurodollar Rate Advances shall be suspended until the Agent shall notify the Borrower and the Lenders that the circumstances causing such suspension no longer exist.\n(e) If the Borrower shall fail to select the duration of any Interest Period for any Eurodollar Rate Advances in accordance with the provisions contained in the definition of \"Interest Period\" in Section 1.01, the Agent will forthwith so notify the Borrower and the Lenders and such advances will automatically, on the last day of the then existing Interest Period therefor, Convert into Base Rate Advances.\n(f) On the date on which the aggregate unpaid principal amount of A Advances comprising any A Borrowing shall be reduced, by payment or prepayment or otherwise, to less than $10,000,000, such A Advances shall, if they are Advances of a Type other than Base Rate Advances, automatically Convert into Base Rate Advances, and on and after such date the right of the Borrower to Convert such A Advances into Advances of a Type other than Base Rate Advances shall terminate; provided, however, that if and so long as each such A Advance shall be of the same Type and have the same Interest Period as A Advances comprising another A Borrowing or other A Borrowings, and the aggregate unpaid principal amount of all such A Advances shall equal or exceed $10,000,000, the Borrower shall have the right to continue all such A Advances as, or to Convert all such A Advances into, Advances of such Type having such Interest Period.\nSECTION 2.10. Voluntary Conversion of A Advances. The Borrower may on any Business Day, upon notice given to the Agent not later than 11:00 A.M. (New York City time) on the third Business Day prior to the date of the proposed Conversion and subject to the provisions of Sections 2.09 and 2.13, Convert all A Advances of one Type comprising the same A Borrowing into Advances of another Type; provided, however, that any Conversion of any Eurodollar Rate Advances into Base Rate Advances shall be made on, and only on, the last day of an Interest Period for such\nEurodollar Rate Advances. Each such notice of a Conversion shall, within the restrictions specified above, specify (i) the date of such Conversion, (ii) the A Advances to be Converted, and (iii) if such Conversion is into Eurodollar Rate Advances, the duration of the Interest Period for each such A Advance.\nSECTION 2.11. Prepayment of A Advances. (a) The Borrower shall have no right to prepay any principal amount of any A Advances other than as provided in subsection (b) below.\n(b) The Borrower may, upon at least 1 Business Day's notice to the Agent stating the proposed date and aggregate principal amount of the prepayment, and if such notice is given the Borrower shall, prepay the outstanding principal amounts of the Advances comprising part of the same A Borrowing in whole or ratably in part, together with accrued interest to the date of such prepayment on the principal amount prepaid; provided, however, that (x) each partial prepayment shall be in an aggregate principal amount not less than $1,000,000 and (y) in the case of any such prepayment of a Eurodollar Rate Advance, the Borrower shall be obligated to reimburse the Lenders in respect thereof pursuant to Section 8.04(b).\nSECTION 2.12. Increased Costs. (a) If, due to either (i) the introduction after the date of this Agreement of or any change (other than any change by way of imposition or increase of reserve requirements, in the case of Eurodollar Rate Advances, included in the Eurodollar Rate Reserve Percentage) in or in the interpretation of any law or regulation or (ii) the compliance with any guideline or request from any central bank or other governmental authority after the date of this Agreement (whether or not having the force of law), there shall be any increase in the cost to any Lender of agreeing to make or making, funding or maintaining Eurodollar Rate Advances under this Agreement, then the Borrower shall from time to time pay to the Agent for the account of such Lender, to the extent that such Lender reasonably determines such increase to be allocable to the existence of such Lender's commitment to lend hereunder, additional amounts sufficient to compensate such Lender for such increased cost. The amount of such increased cost shall be determined by such Lender and notified to the Borrower through the Agent in the form of a certificate of such Lender stating that the calculations set forth therein are in accordance with the terms of this Agreement and setting forth in reasonable detail the basis of such calculations, such certificate being conclusive and binding for all purposes absent manifest error and unless contested by the Borrower within 10 Business Days of its receipt of such certificate, and the amount set forth therein being payable in any event by the Borrower to such Lender on or before the 10th Business Day following delivery of such certificate to the Borrower.\n(b) If any Lender determines that compliance with any law or regulation or any guideline or request from any central bank or other governmental authority (whether or not having the\nforce of law) affects or would affect the amount of capital required or expected to be maintained by such Lender or any corporation controlling such Lender and that the amount of such capital is increased by or based upon the existence of such Lender's commitment to lend hereunder and other commitments of this type or such Lender's Advances, then, on or before 10 Business Days after a demand by such Lender (with a copy of such demand to the Agent), the Borrower shall immediately pay to the Agent for the account of such Lender, from time to time as specified by such Lender, additional amounts sufficient to compensate such Lender or such corporation in the light of such circumstances, to the extent that such Lender reasonably determines such increase in capital to be allocable to the existence of such Lender's commitment to lend hereunder or such Lender's Advances. Such additional amounts shall be determined by such Lender and notified to the Borrower through the Agent in the form of a certificate of such Lender stating that the calculations set forth therein are in accordance with the terms of this Agreement and setting forth in reasonable detail the basis of such calculations, such certificate being conclusive and binding for all purposes absent manifest error and unless contested by the Borrower within 10 Business Days of its receipt of such certificate, and the amount set forth therein being payable in any event by the Borrower to such Lender on or before the 10th Business Day following delivery of such certificate to the Borrower.\n(c) Notwithstanding the foregoing, any Lender making written demand on Borrower for indemnification or compensation pursuant to paragraphs (a) or (b) of this Section 2.12 shall make such demand as soon as practicable after the Lender receives actual notice or obtains actual knowledge of the promulgation of a law, rule, order or interpretation or occurrence of another event giving rise to a claim pursuant to such paragraphs. In the event that such Lender fails to give Borrower the notice within the time limitation set forth in the preceding sentence, the Borrower shall have no obligation to pay such claim for indemnification or compensation accruing prior to the ninetieth day preceding such written demand.\n(d) Each Lender agrees that it will use reasonable efforts to designate an alternate lending office with respect to any of its Advances affected by the matters or circumstances described in paragraphs (a) or (b) of this Section 2.12, Section 2.13 or Section 2.14 to reduce the liability of Borrower or avoid the results provided thereunder, so long as such designation is not disadvantageous to such Lender as reasonably determined by such Lender.\n(e) If a Lender has notified the Borrower of any material increased costs pursuant to paragraph (a) or (b) of this Section 2.12, Borrower may, within 10 Business Days after such notice and upon at least 5 Business Days notice to such Lender, terminate the Commitment of such Lender; provided, that (i) any such termination shall be accompanied by prepayment in full of\nthe aggregate principal amount of the Advances made by such Lender then outstanding, together with accrued interest thereon to the date of such prepayment, any other amounts owing to the Lender pursuant to this Agreement and reasonable costs and expenses incurred by such Lender in effecting such Commitment termination and (ii) no Event of Default, or an event which would constitute an Event of Default but for the requirement that notice be given or time elapse or both, shall exist as of the date of any such termination; provided, further, that the Borrower may terminate the Commitment of a Lender pursuant to this paragraph even if an Event of Default, or an event which would constitute an Event of Default but for the requirement that notice be given or time elapse or both, exists at the time of such termination, if the Lender's Commitment is assigned in accordance with Section 8.07.\nSECTION 2.13. Illegality. Notwithstanding any other provision of this Agreement, if any Lender or Lenders shall notify the Agent that after the date of this Agreement the introduction of or any change in or in the interpretation of any law or regulation makes it unlawful, or any central bank or other governmental authority asserts that it is unlawful, for any Lender or its Eurodollar Lending office to perform its obligations hereunder to make Eurodollar Rate Advances or to fund or maintain Eurodollar Rate Advances hereunder, (i) the obligation of the Lenders to make, or to Convert A Advances into, Eurodollar Rate Advances shall be suspended until the Agent shall notify the Borrower and the Lenders that the circumstances causing such suspension no longer exist and (ii) the Borrower shall either (A) forthwith prepay in full all Eurodollar Rate Advances of all Lenders then outstanding, together with interest accrued thereon, unless the Borrower, within five Business Days of notice from the Agent, Converts all Eurodollar Rate Advances of all Lenders then outstanding into Advances of another Type in accordance with Section 2.10 or (B) forthwith prepay in full all Eurodollar Rate Advances of such Lender or Lenders so notifying the Agent and reduce the Commitments of such Lenders by such amount.\nSECTION 2.14. Payments and Computations. (a) The Borrower shall make each payment hereunder and under the Notes not later than 11:00 A.M. (New York City time) on the day when due in U.S. dollars to the Agent at its address referred to in Section 8.02 in same day funds. The Agent will promptly thereafter cause to be distributed like funds relating to the payment of principal or interest or commitment fees ratably (other than amounts payable pursuant to Section 2.03, 2.08, 2.12, 2.13(ii)(B) or 2.15) to the Lenders for the account of their respective Applicable Lending Offices, and like funds relating to the payment of any other amount payable to any Lender to such Lender for the account of its Applicable Lending Office, in each case to be applied in accordance with the terms of this Agreement. Upon its acceptance of an Assignment and Acceptance and recording of the information contained therein in the Register pursuant to Section 8.07(d), from and after the\neffective date specified in such Assignment and Acceptance, the Agent shall make all payments hereunder and under the Notes in respect of the interest assigned thereby to the Lender assignee thereunder, and the parties to such Assignment and Acceptance shall make all appropriate adjustments in such payments for periods prior to such effective date directly between themselves.\n(b) All computations of interest based on the Base Rate and of fees set forth in Sections 2.04(a) shall be made by the Agent on the basis of a year of 365 or 366 days, as the case may be, and all computations of interest based on the Eurodollar Rate or the Federal Funds Rate shall be made by the Agent, and all computations of interest pursuant to Section 2.08 shall be made by a Lender, on the basis of a year of 360 days, in each case for the actual number of days including the first day but excluding the last day) occurring in the period for which such interest or commitment fees are payable. Each determination by the Agent (or, in the case of Section 2.08, by a Lender) of an interest rate hereunder shall be conclusive and binding for all purposes, absent manifest error.\n(c) Whenever any payment hereunder or under the Notes shall be stated to be due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day, and such extension of time shall in such case be included in the computation of payment of interest or commitment fee, as the case may be; provided, however, if such extension would cause payment of interest on or principal of Eurodollar Rate Advances to be made in the next following calendar month, such payment shall be made on the next preceding Business Day.\n(d) Unless the Agent shall have received notice from the Borrower prior to the date on which any payment is due to the Lenders hereunder that the Borrower will not make such payment in full, the Agent may assume that the Borrower has made such payment in full to the Agent on such date and the Agent may, in reliance upon such assumption, cause to be distributed to each Lender on such due date an amount equal to the amount then due such Lender. If and to the extent that the Borrower shall not have so made such payment in full to the Agent, each Lender shall repay to the Agent forthwith on demand such amount distributed to such Lender together with interest thereon, for each day from the date such amount is distributed to such Lender until the date such Lender repays such amount to the Agent, at the Federal Funds Rate.\nSECTION 2.15. Taxes. (a) Any and all payments by the Borrower hereunder or under the A Notes shall be made, in accordance with Section 2.14, free and clear of and without deduction for any and all present or future taxes, levies, imposts, deductions, charges or withholdings, and all liabilities with respect thereto, excluding, in the case of each Lender and the Agent, taxes imposed on its income, and franchise taxes imposed on it, by the jurisdiction under the laws of which such Lender or the Agent (as the case may be) is organized or any\npolitical subdivision thereof and, in the case of each Lender, taxes imposed on its income, and franchise taxes imposed on it, by the jurisdiction of such Lender's Applicable Lending Office or any political subdivision thereof (all such non-excluded taxes, levies, imposts, deductions charges, withholdings and liabilities being hereinafter referred to as \"Taxes\"). If the Borrower shall be required by law to deduct any Taxes from or in respect of any sum payable hereunder or under any A Note to any Lender or the Agent, (i) the sum payable shall be increased as may be necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section 2.15) such Lender or the Agent (as the case may be) receives an amount equal to the sum it would have received had not such deductions been made, (ii) the Borrower shall make such deductions and (iii) the Borrower shall pay the full amount deducted to the relevant taxation authority or other authority in accordance with applicable law.\n(b) In addition, the Borrower agrees to pay any present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies which arise from any payment made hereunder or under the A Notes or from the execution, delivery or registration of, or otherwise with respect to, this Agreement or the A Notes (hereinafter referred to as \"Other Taxes\").\n(c) The Borrower will indemnify each Lender and the Agent for the full amount of Taxes or Other Taxes (including, without limitation, any Taxes or Other Taxes imposed by any jurisdiction on amounts payable under this Section 2.15) paid by such Lender or the Agent (as the case may be) and any liability (including penalties, interest and expenses) arising therefrom or with respect thereto, whether or not such Taxes or Other Taxes were correctly or legally asserted. Such indemnification shall be made within 30 days from the date the Lender or the Agent (as the case may be) makes written demand therefor. The Borrower may contest whether such Taxes or Other Taxes were correctly or legally asserted within 30 days from the date of such demand. In the event that subsequent to the Borrower's indemnification of a Lender or the Agent it is determined that such Taxes or Other Taxes were incorrectly asserted and such Lender or the Agent receives a refund of such Taxes or Other Taxes, such Lender or the Agent shall, within 10 days of receiving such refund, pay to the Borrower the amount of such refund allocable to this Agreement together with any interest received by such Lender or the Agent on account thereof.\n(d) Prior to the date of the initial Borrowing in the case of each Bank, and on the date of the Assignment and Acceptance pursuant to which it became a Lender in the case of each other Lender, and from time to time thereafter if requested by the Borrower or the Agent, each Lender organized under the laws of a jurisdiction outside the United States shall provide the Agent and the Borrower with the forms prescribed by the Internal Revenue Service of the United States certifying as to\nsuch Lender's status for purposes of determining exemption from United States withholding taxes with respect to all payments to be made to such Lender hereunder and under the Notes or other documents satisfactory to the Borrower and the Agent indicating that all payments to be made to such Lender hereunder and under the Notes are subject to such taxes at a rate reduced by an applicable tax treaty. Unless the Borrower and the Agent have received forms or other documents satisfactory to them indicating that payments hereunder or under any Note are not subject to United States withholding tax or are subject to such tax at a rate reduced by an applicable tax treaty, the Borrower or the Agent shall withhold taxes from such payments at the applicable statutory rate in the case of payments to or for any Lender organized under the laws of a jurisdiction outside the United States.\n(e) Any Lender claiming any additional amounts payable pursuant to this Section 2.15 shall use its best efforts (consistent with its internal policy and legal and regulatory restrictions) to change the jurisdiction of its Applicable Lending Office if the making of such a change would avoid the need for, or reduce the amount of, any such additional amounts which may thereafter accrue and would not, in the reasonable judgment of such Lender, be otherwise disadvantageous to such Lender.\n(f) Without prejudice to the survival of any other agreement hereunder, the agreements and obligations contained in this Section 2.15 shall survive the payment in full of principal and interest hereunder and under the A Notes.\nSECTION 2.16. Sharing of Payments, Etc. If any Lender shall obtain any payment (whether voluntary, involuntary, through the exercise of any right of set-off, or otherwise) on account of the A Advances made by it (other than pursuant to Section 2.08, 2.12, 2.13(ii)(B), 2.15 or 8.07) in excess of its ratable share of payments on account of the A Advances obtained by all the Lenders, such Lender shall forthwith purchase from the other Lenders such participations in the A Advances made by them as shall be necessary to cause such purchasing Lender to share the excess payment ratably with each of them, provided, however, that if all or any portion of such excess payment is thereafter recovered from such purchasing Lender, such purchase from each Lender shall be rescinded and such Lender shall repay to the purchasing Lender the purchase price to the extent of such recovery together with an amount equal to such Lender's ratable share (according to the proportion of (i) the amount of such Lender's required repayment to (ii) the total amount so recovered from the purchasing Lender) of any interest or other amount paid or payable by the purchasing Lender in respect of the total amount so recovered. The Borrower agrees that any Lender so purchasing a participation from another Lender pursuant to this Section 2.16 may, to the fullest extent permitted by law, exercise all its rights of payment (including the right of set- off) with respect to such participation as fully as if such\nLender were the direct creditor of the Borrower in the amount of such participation.\nSECTION 2.17. Extension of Maturity. So long as no Event of Default shall have occurred and be continuing or if any Event of Default shall have occurred and shall have been waived, the Borrower may, prior to each of December 17, 1998 and December 17, 1999 (each, an \"Extension Date\"), request an extension of the Termination Date for a one-year period by giving notice of such request not less than 90 days nor more than 120 days prior to such Extension Date to the Agent and executing and delivering to each Lender a completed Extension Letter in the form of Exhibit \"F\" hereto, requesting the extension of the Termination Date. Each Lender may, in its sole discretion, execute such letter and return copies thereof to the Agent and the Borrower. Any Lender which fails to execute and return its copies of the Extension Letter on or before the date 60 days prior to the applicable Extension Date shall be deemed to have denied the Borrower's request. If, on the date 60 days before the applicable Extension Date, the Agent has received Extension Letters from Lenders holding at least 60% but less than 100% in aggregate principal amount of the Commitments, the Borrower may (i) require each Lender who has denied the Borrower's request to transfer all such Lender's rights and obligations under this Agreement to another financial institution or institutions, which shall be in each case (A) an Eligible Assignee selected by the Borrower willing to assume such rights and obligations and to consent to the extension of the Termination Date, in accordance with the provisions of Section 8.07 and (B) assuming a Commitment in an amount not less than $10,000,000 or an integral multiple of $1,000,000 in excess thereof or (ii) repay in whole or in part accrued and unpaid principal, interest and fees with respect to the Commitments and Advances of each Lender who has denied the Borrower's request and terminate in whole or in part the Commitments of such Lenders, provided (i) that the termination of such Commitments would not result in the aggregate remaining Commitments being reduced below the limit set forth in Section 2.05 and (ii) that the Borrower shall have obtained the consent of such Lender with respect to the remaining portion of such Lender's Commitment. If on the date 30 days prior to the applicable Extension Date the Agent has received Extension Letters from each Lender (after giving effect to the assignments pursuant to Section 8.07, if any) the Termination Date shall be extended by one year.\nSECTION 2.18 Swingline Advances.\n(a) Subject to the terms and conditions hereof, and in reliance on the representations and warranties set forth herein, the Swingline Lender agrees to make swingline loans (the \"Swingline Advances\") to the Borrower from time to time during the period from the Closing Date to but not including the Termination Date, in an amount not to exceed Twenty Million Dollars ($20,000,000) at any time outstanding; provided, the obligation of the Lenders to make A Advances under Section 2.01\nshall be reduced from time to time by the outstanding principal balance of the Swingline Advances. Notwithstanding the foregoing, the Swingline Lender shall not make any Swingline Advances after the date on which the Agent or the Majority Lenders notify the Swingline Lender and the Borrower that an Event of Default, or an event which would constitute an Event of Default but for the requirement that notice be given or time elapse or both, has occurred. The Swingline Lender may resume the making of Swingline Advances after the Swingline Lender shall have received, and acknowledged in writing, notice from the Majority Lenders or the Agent that an Event of Default, or an event which would constitute an Event of Default but for the requirement that notice be given or time elapse or both, is no longer continuing or has been waived in accordance with the terms of this Agreement.\n(b) (i) Each Swingline Advance shall have a maturity of no greater than 7 days and shall bear interest at the rate offered by the Swingline Lender and accepted by the Borrower for the applicable period prior to maturity. Interest on all Swingline Advances shall be due and payable in arrears on March 31, June 30, September 30 and December 31 of each year and on the Termination Date.\n(ii) All Swingline Advances shall be denominated in Dollars. Swingline Advances and all payments thereof shall be in the aggregate minimum amount of $1,000,000 and integral multiples of $500,000 in excess of that amount.\n(c) Whenever the Borrower desires to borrow or repay under this Section 2.18, it shall deliver to the Agent a notice of such borrowing or repayment not later than 11:00 a.m. (Charlotte, North Carolina time) on the date of each Swingline Advance.\n(d) (i) Promptly after receipt of such notice under Section 2.18(c), the Agent shall notify the Swingline Lender by facsimile or other similar form of transmission, of the date, type, amount and interest period of the proposed borrowing. The Swingline Lender shall make the amount of its Swingline Advances available to the Agent in immediately available, freely transferable funds, to such account of the Agent as the Agent may designate, by the date and time specified in the notice of borrowing delivered pursuant to Section 2.18(c) provided that the Swingline Lender and the Borrower have agreed as to the interest rate for such Swingline Advance. After the Agent's receipt of the proceeds of such Swingline Advances and upon satisfaction of the applicable conditions set forth in Section 3.02, the Agent shall make the proceeds of such Swingline Advance on such date by transferring immediately available, freely transferable funds equal to the proceeds of all such Swingline Advances received by the Agent to an account of the Borrower with the Agent.\n(ii) All Swingline Advances shall be subject to all the terms and conditions applicable to Advances generally,\nprovided that all interest thereon shall be payable to the Agent solely for the account of the Swingline Lender except as provided herein and in subsection (e) below.\n(iii) Notwithstanding the foregoing, not more than (A) two (2) Business Days after demand is made by the Swingline Lender (if such demand is made by 10:00 a.m. (Charlotte, North Carolina time) on any Business Day) or (B) three (3) Business Days after demand is made by the Swingline Lender (if such demand is made after 10:00 a.m. (Charlotte, North Carolina time) on any Business Day) (in each case whether before or after the occurrence of an Event of Default or an event which would constitute an Event of Default but for the requirement that notice be given or time elapse or both), each Lender shall irrevocably and unconditionally purchase and receive from the Swingline Lender, without recourse or warranty, an undivided interest and participation in each Swingline Advance to the extent of such Lender's Commitment Percentage thereof by paying to the Agent for the account of the Swingline Lender, in same day funds, an amount equal to the product of such Swingline Advance multiplied by such Lender's Commitment Percentage. If such amount is not in fact made available by any Lender, the Agent shall be entitled to recover such amount on demand from such Lender together with interest thereon, for each day from the date of such demand, if made prior to 10:00 a.m. (Charlotte, North Carolina time) on any Business Day, or, if made at any other time, from the next Business Day following the date of such demand, until the date such amount is paid to the Agent by such Lender, at the Federal Funds Rate.\n(e) From and after the date, if any, on which any Lender purchases an undivided interest and participation in any Swingline Advance pursuant to Section 2.18(d)(iii) above, the Agent shall promptly distribute to such Lender at its address set forth on the signature pages hereof, or at such other address as such Lender may request in writing, such Lender's pro rata share of all payments of principal and interest received by the Agent in respect of such Swingline Advance.\nARTICLE III\nCONDITIONS OF LENDING\nSECTION 3.01. Condition Precedent to Initial Advances. The obligation of each Lender to make its initial Advance is subject to the condition precedent that the Agent shall have received on or before the day of the initial Borrowing the following, each dated such day, in form and substance satisfactory to the Agent and (except for the Notes) in sufficient copies for each Lender:\n(a) The A Notes payable to the order of the Lenders, respectively.\n(b) Certified copies of the resolutions of the Board of Directors of the Borrower approving this Agreement and the Notes, and of all documents evidencing other necessary corporate action and governmental approvals, if any, with respect to this Agreement and the Notes.\n(c) A certificate of the Secretary or an Assistant Secretary of the Borrower certifying the names and true signatures of the officers of the Borrower authorized to sign this Agreement and the Notes and the other documents to be delivered hereunder.\n(d) A favorable opinion of Warren Y. Zeger, Esq., Vice President and General Counsel for the Borrower, substantially in the form of Exhibit D hereto and as to such other matters as any Lender through the Agent may reasonably request.\n(e) The Borrower shall have paid all accrued fees and expenses of the Agent (including the accrued fees and disbursements of counsel to the Agent).\nSECTION 3.02. Conditions Precedent to Each A Borrowing. The obligation of each Lender to make an A Advance on the occasion of each A Borrowing (including the initial Borrowing if an A Borrowing) shall be subject to the further conditions precedent that on the date of such A Borrowing the following statements shall be true (and each of the giving of the applicable Notice of A Borrowing and the acceptance by the Borrower of the proceeds of such A Borrowing shall constitute a representation and warranty by the Borrower that on the date of such A Borrowing such statements are true):\n(i) The representations and warranties contained in paragraphs (a) and (d) of Section 4.01 are correct on and as of the date of such A Borrowing, before and after giving effect to such A Borrowing and to the application of the proceeds therefrom, as though made on and as of such date, and\n(ii) No event has occurred and is continuing, or would result from such A Borrowing or from the application of the proceeds therefrom, which constitutes an Event of Default or would constitute an Event of Default but for the requirement that notice be given or time elapse or both.\nSECTION 3.03. Conditions Precedent to Each B Borrowing. The obligation of each Lender which is to make a B Advance on the occasion of a B Borrowing (including the initial Borrowing if a B Borrowing) to make such B Advance as part of such B Borrowing is subject to the conditions precedent that (i) the Agent shall have received the written confirmatory Notice of B Borrowing with respect thereto, (ii) on or before the date of such B Borrowing, but prior to such B Borrowing, the Agent shall have received a B Note payable to the order of such Lender for each of the one or more B Advances to be made by such Lender as\npart of such B Borrowing, in a principal amount equal to the principal amount of the B Advance to be evidenced thereby and otherwise on such terms as were agreed to for such B Advance in accordance with Section 2.03, and (iii) on the date of such B Borrowing the following statements shall be true (and each of the giving of the applicable Notice of B Borrowing and the acceptance by the Borrower of the proceeds of such B Borrowing shall constitute a representation and warranty by the Borrower that on the date of such B Borrowing such statements are true):\n(a) The representations and warranties contained in paragraphs (a) and (d) of Section 4.01 are correct on and as of the date of such B Borrowing, before and after giving effect to such B Borrowing and the application of the proceeds therefrom, as though made on and as of such date, and\n(b) No event has occurred and is continuing, or would result from such B Borrowing or from the application of the proceeds therefrom, which constitutes an Event of Default or which would constitute an Event of Default but for the requirement that notice be given or time elapse or both.\nARTICLE IV\nREPRESENTATIONS AND WARRANTIES\nSECTION 4.01. Representations and Warranties of the Borrower. The Borrower represents and warrants as follows ((i) as of the date hereof and as of the date of the making of each Advance in the case of the representations and warranties contained in Sections 4.01(a) and (d) and (ii) as of the date hereof in the case of each other representation and warranty contained in this Section 4.01):\n(a) The Borrower is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction indicated at the beginning of this Agreement.\n(b) The execution, delivery and performance by the Borrower of this Agreement and the Notes are within the Borrower's corporate powers, have been duly authorized by all necessary corporate action, and do not contravene (i) the Borrower's charter or by-laws or (ii) law or any contractual restriction binding on or affecting the Borrower except, in the case of (ii), for any contravention which would not have a materially adverse effect on Borrower's business, assets or financial condition.\n(c) Section 4.01(c) of the Disclosure Schedule lists each material authorization or approval or other action by, and notice to or filing with, any governmental authority or regulatory body (including, without limitation, the Federal Communications Commission) required for the due execution, delivery and performance by the Borrower of this Agreement or the\nNotes, and Borrower has obtained each such authorization or approval and has given each such notice and made each such filing.\n(d) This Agreement is, and the Notes when delivered hereunder will be, legal, valid and binding obligations of the Borrower enforceable against the Borrower in accordance with their respective terms, subject to the effect of any applicable bankruptcy, insolvency, reorganization, moratorium or similar law affecting creditors' rights generally and subject to general rules of equity.\n(e) The balance sheets of the Borrower and its consolidated subsidiaries as at December 31, 1992, and the related statements of income and retained earnings of the Borrower and its consolidated subsidiaries for the fiscal year then ended, copies of which have been furnished to each Bank, fairly present the financial condition of the Borrower and its consolidated subsidiaries as at such date and the results of the operations of the Borrower and its consolidated subsidiaries for the period ended on such date, all in accordance with generally accepted accounting principles consistently applied, and since December 31, 1992, there has been no material adverse change in the business, financial condition or performance, operations, or properties of the Borrower and any of its consolidated subsidiaries, taken as a whole.\n(f) Section 4.01(f) of the Disclosure Schedule contains a brief description of each material action, suit, investigation, litigation or proceeding pending or, to the knowledge of Borrower, threatened in any court or before any arbitrator or governmental instrumentality to which the Borrower is a party, none of which (i) would have a material adverse effect on the business, financial condition, operations or properties of the Borrower and any of its consolidated subsidiaries, taken as a whole or (ii) would be likely to have a material adverse effect on the ability of Borrower to fulfill its obligations under this Agreement or any Note.\n(g) All transactions contemplated hereby are permissible in accordance with Regulation U and the Margin Regulations issued by the Board of Governors of the Federal Reserve System, after giving effect to each of the Advances made hereunder.\n(h) To the knowledge of the Borrower, no representation or warranty by the Borrower in this Agreement or in any certificate or other document that has been delivered pursuant to the terms of this Agreement contained any untrue statement of a material fact or omitted to state a material fact or any fact necessary to make the statements contained herein or therein not misleading at such time and in light of the circumstances under which such information was furnished.\n(i) Neither the Borrower nor any of its consolidated subsidiaries is an \"investment company,\" or an \"affiliated person\" of, or \"promoter\" or \"principal underwriter\" for, an \"investment company,\" as such terms are defined in the Investment Company Act of 1940, as amended. Neither the making of any Advances, nor the application of the proceeds or repayment thereof by the Borrower, nor the consummation of the other transactions contemplated hereby will violate any provision of such Act or rule, regulation or order of the Securities Exchange Commission thereunder.\nARTICLE V\nCOVENANTS OF THE BORROWER\nSECTION 5.01. Affirmative Covenants. So long as any Note shall remain unpaid or any Lender shall have any Commitment hereunder, the Borrower will, unless the Majority Lenders shall otherwise consent in writing:\n(a) Compliance with Laws, Etc. Comply, and cause each of its consolidated subsidiaries to comply, with (i) the requirements of all applicable laws, rules, regulations and orders of any governmental authority (including, without limitation, the regulations of the Federal Communications Commission), non-compliance with which would materially adversely affect the business or credit of the Borrower and its consolidated subsidiaries, taken as a whole, and (ii) the Margin Regulations (which compliance shall include the furnishing to any Lender of a Federal Reserve Form U-1 provided for in Regulation U issued by the Board of Governors of the Federal Reserve System upon the reasonable request of any Lender).\n(b) Reporting Requirements. Furnish to the Lenders:\n(i) as soon as available and in any event within 60 days after the end of each fiscal quarter, quarterly consolidated balance sheets, income statements and statements of changes in financial position of the Borrower and its consolidated subsidiaries, certified by the Borrower's Chief Financial Officer or Treasurer (which certification shall indicate that the reported results present fairly the combined financial positions of the Borrower and its consolidated subsidiaries at the end of such quarter in conformity with generally accepted accounting principles applied on a consistent basis and which may be subject to year-end audit adjustments) and stating that, to such officer's knowledge, the Borrower is in compliance with the covenants contained in Sections 5.01, and 5.02 and, if applicable, 5.03 of this Agreement;\n(ii) as soon as available and in any event within 90 days after the end of each fiscal year, furnish audited annual consolidated financial statements of the Borrower and\nits consolidated subsidiaries prepared in accordance with generally accepted accounting principles consistently applied and certified in a manner acceptable to the Majority Lenders by Deloitte & Touche or other independent certified public accountants reasonably acceptable to the Majority Lenders;\n(iii) as soon as possible and in any event within five Business Days after the Borrower becomes aware of the occurrence of each Event of Default and each event which, with the giving of notice or lapse of time, or both, would constitute an Event of Default, continuing on the date of such statement, a statement of the Chief Financial Officer of the Borrower setting forth details of such Event of Default or event and the action which the Borrower has taken and proposes to take with respect thereto;\n(iv) promptly after the sending or filing thereof, copies of all reports which the Borrower sends to any of its security holders, and copies of all reports and registration statements, other than Form S-8 and other similar reports, which the Borrower or any subsidiary files with the Securities and Exchange Commission or any national securities exchange; and\n(v) such other information respecting the financial condition or operations of the Borrower or any of its consolidated subsidiaries as any Lender through the Agent may from time to time reasonably request.\n(c) Insurance. Maintain, and cause each of its consolidated subsidiaries to maintain, insurance with responsible and reputable insurance companies or associations in such amounts and covering such risks as is usually carried by companies engaged in similar businesses and owning similar properties in the same general areas in which the Borrower or such subsidiary operates.\n(d) Preservation of Corporate Existence, Etc. Preserve and maintain, and cause each of its consolidated subsidiaries to preserve and maintain, its corporate existence, rights (charter and statutory), and franchises; provided, however, that the Borrower or any of its consolidated subsidiaries shall not be required to preserve any right or franchise and any such consolidated subsidiary shall not be required to preserve its corporate existence, if the Board of Directors or an appropriate executive officer of the Borrower or the Board of Directors or an appropriate executive officer of such consolidated subsidiary shall determine that the preservation thereof is no longer desirable in the conduct of the business of the Borrower or such consolidated subsidiary, as the case may be, and that the loss thereof is not disadvantageous in any material respect to the Lenders.\n(e) Visitation Rights. At any reasonable time and from time to time, permit the Agent or any of the Lenders or any agents or representatives thereof, upon written notice given to the Borrower, to examine and make copies of and abstracts from the records and books of account of, and visit the properties of, the Borrower and any of its consolidated subsidiaries, and to discuss the affairs, finances and accounts of the Borrower and any of its consolidated subsidiaries with any of their respective officers or directors.\n(f) Keeping of Books. Keep, and cause each of its consolidated subsidiaries to keep, proper books of record and account, in which full and correct entries shall be made of all financial transactions and the assets and business of the Borrower and each of its consolidated subsidiaries in accordance with generally accepted accounting principles consistently applied.\n(g) Maintenance of Properties, Etc. Maintain and preserve, and cause each of its consolidated subsidiaries to maintain and preserve, in the ordinary course of business consistent with past practice, all of its properties which are used in the conduct of its business in good working order and condition, ordinary wear and tear excepted.\nSECTION 5.02. Negative Covenants. So long as any Note shall remain unpaid or any Lender shall have any Commitment hereunder, the Borrower will not, without the written consent of the Majority Lenders:\n(a) Liens, Etc. Create or suffer to exist, or permit any of its consolidated subsidiaries to create or suffer to exist, any lien, security interest or other charge or encumbrance, or any other type of preferential arrangement, upon or with respect to any of its properties, whether now owned or hereafter acquired, or assign, or permit any of its consolidated subsidiaries to assign, any right to receive income, in each case to secure or provide for the payment of any Debt of any Person, other than (i) purchase money liens or purchase money security interests upon or in any property acquired or held by the Borrower or any consolidated subsidiary in the ordinary course of business to secure the purchase price of such property or to secure indebtedness incurred solely for the purpose of financing the acquisition of such property, (ii) liens or security interests existing on such property at the time of its acquisition (other than any such lien or security interest created in contemplation of such acquisition), (iii) liens or security interests existing on the date of this Credit Agreement, (iv) liens for taxes not yet due, or liens for taxes being contested in good faith and by appropriate proceedings for which adequate reserves have been established in accordance with generally accepted accounting principles, (v) liens in respect of property or assets of the Borrower or any consolidated subsidiary imposed by law, which were incurred in the ordinary course of business, such as carriers', warehousemen's and mechanics' liens\nand other similar liens arising in the ordinary course of business and (x) which do not in the aggregate materially detract from the value of such property or assets or materially impair the use thereof in the operation of the business of the Borrower or any consolidated subsidiary or (y) which are being contested in good faith by appropriate proceedings for which adequate reserves have been established in accordance with generally accepted accounting principles and which proceedings have the effect of preventing the forfeiture or sale of the property or assets subject to any such lien, (vi) any lien arising by reason of deposits with, or the giving of any form of security to, any governmental agency or any body created or approved by law or governmental regulation, which is required by law or governmental regulation as a condition to the transaction of any business, or the exercise of any privilege or license, or to enable the Borrower or a consolidated subsidiary to maintain self-insurance or to participate in any arrangements established by law to cover any insurance risks or in connection with workmen's compensation, unemployment insurance, old age pensions, social security or similar matters, (vii) judgment liens, so long as the finality of such judgment is being contested in good faith and execution thereon is stayed and adequate reserves have been established in accordance with generally accepted accounting principles, (viii) easements or similar encumbrances, the existence of which does not impair the use or value of the property subject thereto for the purposes for which it is held or was acquired or (ix) leases and landlords' liens on fixtures and movable property located on premises leased in the ordinary course of business, so long as the rent secured by said fixtures and movable property is not in default; provided that the aggregate principal amount of the indebtedness secured by the liens or security interests referred to in clauses (i) and (ii) above shall not exceed the lesser of (A) $400 million or (B) 40% of the Borrower's consolidated tangible net worth as of the date of the Borrower's last financial statement submitted to the Agent pursuant to Section 5.01(b). In the event that such indebtedness secured by liens or security interests would be permitted but for the limitation in clause (B) above, the Borrower may nevertheless incur such indebtedness and grant such liens or security interests, provided that the amount of such indebtedness shall not exceed 40% of the Borrower's consolidated tangible net worth as reflected in a pro forma balance sheet giving effect to such transaction delivered to the Agent and certified by the Treasurer or Assistant Treasurer of the Borrower as to the basis of such determinations and, upon the reasonable request of the Majority Lenders, upon the Borrower's delivery to the Agent of a letter from a firm reasonably satisfactory to the Majority Lenders as to the fairness of the consideration paid and the indebtedness and liens incurred by the Borrower in connection with such acquisition.\n(b) Mergers, Etc. Merge or consolidate with any Person or acquire all or substantially all of the assets of any Person provided that the Borrower may engage in any such proposed transaction so long as the Borrower is the surviving corporation and immediately after giving effect to such proposed transaction,\nno Event of Default or event which, with the giving of notice or lapse of time, or both, would constitute an Event of Default would exist.\n(c) Sales, Etc. of Assets. Sell, lease, transfer or otherwise dispose of, or permit any consolidated subsidiary to sell, lease, transfer or otherwise dispose of, fixed assets of the Borrower or its consolidated subsidiaries in an aggregate amount in excess of 15% of the Borrower's consolidated tangible net worth as of the date of the Borrower's last financial statement submitted to the Agent pursuant to Section 5.01(b) during any calendar year, other than (i) in the ordinary course of business or (ii) pursuant to an order of the Federal Communications Commission.\n(d) Change in Nature of Business. Make, or permit any consolidated subsidiary to make, any material change in the nature of its business, taken as a whole, as carried on at the date hereof; provided, however, that the Borrower may make, or permit any consolidated subsidiary to make, any such change so long as it does not constitute a material change of the nature of the Borrower's operations conducted with not less than 40% of its total consolidated assets.\n(e) Accounting Changes. Make, or permit any consolidated subsidiary to make, any material change in accounting policies or reporting practices, except as required by generally accepted accounting principles or by any law, rule or regulation applicable to the Borrower or any of its consolidated subsidiaries.\nSECTION 5.03. Special Financial Covenant. So long as any Note shall remain unpaid or any Lender shall have any Commitment hereunder and in the event that a Rating Event shall have occurred and be continuing, the Borrower will, unless the Majority Lenders shall otherwise consent in writing,maintain at all times a ratio of (A) the sum of the Borrower's total consolidated Debt to (B) the sum of the Borrower's total consolidated Debt plus the Borrower's total stockholders' equity not in excess of .60 to 1.0.\nARTICLE VI\nEVENTS OF DEFAULT\nSECTION 6.01. Events of Default. If any of the following events (\"Events of Default\") shall occur and be continuing:\n(a) The Borrower shall fail to pay (i) any principal of any Note when the same becomes due and payable or (ii) interest on any Note when the same becomes due and payable and such failure to pay interest continues for five (5) Business Days; or\n(b) Any representation or warranty made or deemed made by the Borrower herein or by the Borrower (or any of its officers) to the Agent or any Lender in connection with the negotiation of this Agreement or any representation or warranty deemed to have been made pursuant to Section 3.02(i) or 3.03(a) in connection with any Borrowing shall prove to have been incorrect in any material respect when made; or\n(c) The Borrower shall fail to perform or observe (i) any term, covenant or agreement contained in Section 5.01(b)(iii), (ii) any term, covenant or agreement contained in Section 5.02 if the failure to perform or observe any such term, covenant or agreement shall remain unremedied for 5 Business Days after written notice thereof shall have been given to the Borrower by the Agent or any Lender; or (iii) any other term, covenant or agreement contained in this Agreement on its part to be performed or observed if the failure to perform or observe such other term, covenant or agreement shall remain unremedied for 30 days after written notice thereof shall have been given to the Borrower by the Agent or any Lender; or\n(d) The Borrower or any of its consolidated subsidiaries shall fail to pay any principal of or premium or interest on any Debt which is outstanding in a principal amount of at least $25,000,000 in the aggregate (but excluding Debt evidenced by the Notes) of the Borrower or such subsidiary (as the case may be), when the same becomes due and payable (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise), and such failure shall continue after the applicable grace period, if any, specified in the agreement or instrument relating to such Debt; or any other event shall occur or condition shall exist under any agreement or instrument relating to any such Debt and shall continue after the applicable grace period, if any, specified in such agreement or instrument, if the effect of such event or condition is to accelerate, or to permit the acceleration of, the maturity of such Debt; or any such Debt shall be declared to be due and payable, or required to be prepaid (other than by a regularly scheduled required prepayment), prior to the stated maturity thereof; or\n(e) The Borrower or any of its consolidated subsidiaries shall generally not pay its debts as such debts become due, or shall admit in writing its inability to pay its debts generally, or shall make a general assignment for the benefit of creditors; or any proceeding shall be instituted by or against the Borrower or any of its consolidated subsidiaries seeking to adjudicate it a bankrupt or insolvent, or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief, or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors, or seeking the entry of an order for relief or the appointment of a receiver, trustee, custodian or other similar official for it or for any substantial part of its property and, in the case of any such proceeding instituted against it (but not instituted by it), either such proceeding\nshall remain undismissed or unstayed for a period of 60 days, or any of the actions sought in such proceeding (including, without limitation, the entry of an order for relief against, or the appointment of a receiver, trustee, custodian or other similar official for, it or for any substantial part of its property) shall occur; or the Borrower or any of its consolidated subsidiaries shall take any corporate action to authorize any of the actions set forth above in this subsection (e); or\n(f) Any judgment or order for the payment of money in excess of $10,000,000 in the aggregate or individually (except for any judgment or order which is not final and is appealable by the Borrower and the enforcement of which is stayed by reason of pending appeal or otherwise and for which the Borrower has provided adequate reserves) shall be rendered against the Borrower or any of its consolidated subsidiaries and there shall be any period of 30 consecutive days during which a stay of enforcement of such judgment or order, by reason of a pending appeal or otherwise, shall not be in effect; or\n(g) (i) any Person or two or more Persons acting in concert shall have acquired beneficial ownership (within the meaning of Rule 13d-3 of the Securities and Exchange Commission under the Securities Exchange Act of 1934), directly or indirectly, of securities of the Borrower (or other securities convertible into such securities) representing 20% or more of the combined voting power of all securities of the Borrower entitled to vote in the election of directors, other than securities having such power only by reason of the happening of a contingency; or (ii) any Person or two or more Persons acting in concert shall have acquired by contract or otherwise, or shall have entered into a contract or arrangement that, upon consummation, will result in its or their acquisition of, the power to exercise, directly or indirectly, control over securities of the Borrower (or other securities convertible into such securities) representing 20% or more of the combined voting power of all securities of the Borrower entitled to vote in the election of directors, other than securities having such power only by reason of the happening of a contingency; or\n(h) Any ERISA Event shall have occurred with respect to a Plan and, 30 days after notice thereof shall have been given to the Borrower by the Agent, (i) such ERISA Event shall still exist and (ii) the sum (determined as of the date of occurrence of such ERISA Event) of the Insufficiency of such Plan and the Insufficiency of any and all other Plans with respect to which a ERISA Event shall have occurred and then exist (or in the case of a Plan with respect to which a Termination Event described in clause (iii) through (vi) of the definition of ERISA Event shall have occurred and then exist, the liability related thereto) is equal to or greater than $25,000,000; or\n(i) The Borrower or any of its ERISA Affiliates shall have been notified by the sponsor of a Multiemployer Plan that it has incurred Withdrawal Liability to such Multiemployer Plan in\nan amount that, when aggregated with all other amounts required to be paid to Multiemployer Plans by the Borrower and its ERISA Affiliates in connection with Withdrawal Liabilities (determined as of the date of such notification), exceeds $25,000,000; or\n(j) The Borrower or any of its ERISA Affiliates shall have been notified by the sponsor of a Multiemployer Plan that such Multiemployer Plan is in reorganization or is being terminated, within the meaning of Title IV of ERISA, if as a result of such reorganization or termination the aggregate annual contributions of the Borrower and its ERISA Affiliates to all Multiemployer Plans that are then in reorganization or being terminated have been or will be increased over the amounts contributed to such Multiemployer Plans for the plan year of each such Multiemployer Plan immediately preceding the plan year in which such reorganization or termination occurs by an amount exceeding $25,000,000; or\n(k) The Borrower or any of its ERISA Affiliates shall have committed a failure described in Section 302(f)(1) of ERISA and the amount determined under Section 302(f)(3) of ERISA is equal to or greater than $25,000,000;\nthen, and in any such event, the Agent (i) shall at the request, or may with the consent, of the Majority Lenders, by notice to the Borrower, declare the obligation of each Lender to make Advances to be terminated, whereupon the same shall forthwith terminate, and (ii) shall at the request, or may with the consent, of the Majority Lenders, by notice to the Borrower, declare the Notes, all interest thereon and all other amounts payable under this Agreement to be forthwith due and payable, whereupon the Notes, all such interest and all such amounts shall become and be forthwith due and payable, without presentment, demand, protest or further notice of any kind, all of which are hereby expressly waived by the Borrower; provided, however, that in the event of an actual or deemed entry of an order for relief with respect to the Borrower or any of its consolidated subsidiaries under the Federal Bankruptcy Code, (A) the obligation of each Lender to make Advances shall automatically be terminated and (B) the Notes, all such interest and all such amounts shall automatically become and be due and payable, without presentment, demand, protest or any notice of any kind, all of which are hereby expressly waived by the Borrower.\nARTICLE VII\nTHE AGENT\nSECTION 7.01. Authorization and Action. Each Lender hereby appoints and authorizes the Agent to take such action as agent on its behalf and to exercise such powers under this Agreement as are delegated to the Agent by the terms hereof, together with such powers as are reasonably incidental thereto. As to any matters not expressly provided for by this Agreement\n(including, without limitation, enforcement or collection of the Notes), the Agent shall not be required to exercise any discretion or take any action, but shall be required to act or to refrain from acting (and shall be fully protected in so action or refraining from acting) upon the instructions of the Majority Lenders, and such instructions shall be binding upon all Lenders and all holders of Notes; provided, however, that the Agent shall not be required to take any action which exposes the Agent to personal liability or which is contrary to this Agreement or applicable law. The Agent agrees to give to each Lender prompt notice of each notice given to it by the Borrower pursuant to the terms of this Agreement.\nSECTION 7.02. Agent's Reliance, Etc. Neither the Agent nor any of its directors, officers, agents or employees shall be liable for any action taken or omitted to be taken by it or them under or in connection with this Agreement, except for its or their own gross negligence or willful misconduct. Without limitation of the generality of the foregoing, the Agent: (i) may treat the payee of any Note as the holder thereof until the Agent receives and accepts an Assignment and Acceptance entered into by the Lender which is the payee of such Note, as assignor, and an Eligible Assignee, as assignee, as provided in Section 8.07; (ii) may consult with legal counsel (including counsel for the Borrower), independent public accountants and other experts selected by it and shall not be liable for any action taken or omitted to be taken in good faith by it in accordance with the advice of such counsel, accountants or experts; (iii) makes no warranty or representation to any Lender and shall not be responsible to any Lender for any statements, warranties or representations (whether written or oral) made in or in connection with this Agreement; (iv) shall not have any duty to ascertain or to inquire as to the performance or observance of any of the terms, covenants or conditions of this Agreement on the part of the Borrower or to inspect the property (including the books and records) of the Borrower; (v) shall not be responsible to any Lender for the due execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement or any other instrument or document furnished pursuant hereto; and (vi) shall incur no liability under or in respect of this Agreement by acting upon any notice, consent, certificate or other instrument or writing (which may be by telecopier, telegram, cable or telex) believed by it to be genuine and signed or sent by the proper party or parties.\nSECTION 7.03. NationsBank and Affiliates. With respect to its Commitment, the Advances made by it and the Notes issued to it, NationsBank shall have the same rights and powers under this Agreement as any other Lender and may exercise the same as though it were not the Agent; and the term \"Lender\" or \"Lenders\" shall, unless otherwise expressly indicated, include NationsBank in its individual capacity. NationsBank and its affiliates may accept deposits from, lend money to, act as trustee under indentures of, and generally engage in any kind of business with, the Borrower, any of its subsidiaries and any\nPerson who may do business with or own securities of the Borrower or any such subsidiary, all as if NationsBank were not the Agent and without any duty to account therefor to the Lenders.\nSECTION 7.04. Lender Credit Decision. Each Lender acknowledges that it has, independently and without reliance upon the Agent or any other Lender and based on the financial statements referred to in Section 4.01 and such other documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Lender also acknowledges that it will, independently and without reliance upon the Agent or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement.\nSECTION 7.05. Indemnification. The Lenders agree to indemnify the Agent (to the extent not reimbursed by the Borrower), ratably according to the respective principal amounts of the A Notes then held by each of them (or if no A Notes are at the time outstanding or if any A Notes are held by Persons which are not Lenders, ratably according to the respective amounts of their Commitments), from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever which may be imposed on, incurred by, or asserted against the Agent in any way relating to or arising out of this Agreement or any action taken or omitted by the Agent under this Agreement, provided that no Lender shall be liable for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting from the Agent's gross negligence or willful misconduct. Without limitation of the foregoing, each Lender agrees to reimburse the Agent promptly upon demand for its ratable share of any out-of-pocket expenses (including counsel fees) incurred by the Agent and reimbursable by the Borrower in accordance with Section 8.04 to the extent that the Agent is not reimbursed for such expenses by the Borrower.\nSECTION 7.06. Successor Agent. The Agent may resign at any time by giving 30 days' written notice thereof to the Lenders and the Borrower and may be removed at any time with or without cause by the Majority Lenders. Upon any such resignation or removal, the Majority Lenders shall have the right to appoint a successor Agent with the consent of the Borrower, such consent not to be unreasonably withheld, provided, however, that the consent of the Borrower shall not be required for the appointment of any Lender as Agent. If no successor Agent shall have been so appointed by the Majority Lenders, and shall have accepted such appointment, within 30 days after the retiring Agent's giving of notice of resignation or the Majority Lenders' removal of the retiring Agent, then the retiring Agent may, on behalf of the Lenders, appoint a successor Agent, which shall be a commercial bank organized under the laws of the United States of America or of any State thereof and having a combined capital and surplus of\nat least $50,000,000. Upon the acceptance of any appointment as Agent hereunder by a successor Agent, such successor Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Agent, and the retiring Agent shall be discharged from its duties and obligations under this Agreement. After any retiring Agent's resignation or removal hereunder as Agent, the provisions of this Article VII shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent under this Agreement.\nARTICLE VIII\nMISCELLANEOUS\nSECTION 8.01. Amendments, Etc. No amendment or waiver of any provision of this Agreement or the A Notes, nor consent to any departure by the Borrower therefrom, shall in any event be effective unless the same shall be in writing and signed by the Majority Lenders, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given; provided, however, that no amendment, waiver or consent shall, unless in writing and signed by all the Lenders, do any of the following: (a) waive any of the conditions specified in Section 3.01, 3.02 or 3.03, (b) except pursuant to Section 2.05, increase the Commitments of the Lenders or subject the Lenders to any additional obligations, (c) reduce the principal of, or interest on, the A Notes or any fees or other amounts payable hereunder, (d) postpone any date fixed for any payment of principal of, or interest on, the A Notes or any fees or other amounts payable hereunder, (e) change the percentage of the Commitments or of the aggregate unpaid principal amount of the A Notes, or the number of Lenders, which shall be required for the Lenders or any of them to take any action hereunder, (f) change the percentage of the Commitments which shall be required to extend the Termination Date pursuant to Section 2.17 or (g) amend this Section 8.01; and provided, further, that no amendment, waiver or consent shall, unless in writing and signed by the Agent in addition to the Lenders required above to take such action, affect the rights or duties of the Agent under this Agreement or any Note.\nSECTION 8.02. Notices, Etc. All notices and other communications provided for hereunder shall be in writing (including telecopier, telegraphic, telex or cable communication) and mailed, telecopied, telegraphed, telexed, cabled or delivered, if to the Borrower, at its address at 6560 Rock Spring Drive, Bethesda, Maryland, 20817, Attention: Treasurer; if to any Bank, at its Domestic Lending Office specified opposite its name on Schedule I hereto; if to any other Lender, at its Domestic Lending Office specified in the Assignment and Acceptance pursuant to which it became a Lender; and if to the Agent, at its address at NationsBank Plaza, NC1002-06-19, Charlotte, North Carolina 28255 Attention: Kevin Stephens; or,\nas to the Borrower or the Agent, at such other address as shall be designated by such party in a written notice to the other parties and, as to each other party, at such other address as shall be designated by such party in a written notice to the Borrower and the Agent. All such notices and communications shall, when mailed, telecopied, telegraphed, telexed or cabled, be effective when deposited in the mails, telecopied, delivered to the telegraph company, confirmed by telex answerback or delivered to the cable company, respectively, except that notices and communications to the Agent pursuant to Article II or VII shall not be effective until received by the Agent.\nSECTION 8.03. No Waiver; Remedies. No failure on the part of any Lender or the Agent to exercise, and no delay in exercising, any right hereunder or under any Note shall operate as a waiver thereof; nor shall any single or partial exercise of any such right preclude any other or further exercise thereof or the exercise of any other right. The remedies herein provided are cumulative and not exclusive of any remedies provided by law.\nSECTION 8.04. Costs, Expenses and Taxes. (a) The Borrower agrees to pay on demand all reasonable out-of-pocket costs and expenses of the Agent in connection with the preparation, execution, delivery, waiver, modification and amendment of this Agreement, the Notes and the other documents to be delivered hereunder, including, without limitation, the reasonable out-of-pocket fees and expenses of counsel for the Agent with respect thereto; provided, however, such costs and expenses of the Agent in connection with the preparation, execution and delivery of this Agreement, the Notes and the other documents to be delivered hereunder shall not exceed $10,000.00. The Borrower further agrees to pay on demand all reasonable out- of-pocket costs and expenses, if any (including without limitation, reasonable counsel fees and expenses), in connection with the enforcement (whether through negotiations, legal proceedings or otherwise) of this Agreement, the Notes and the other documents to be delivered hereunder, including, without limitation, reasonable out-of-pocket counsel fees and expenses in connection with the enforcement of rights under this Section 8.04(a).\n(b) If any payment of principal of, or Conversion of, any Eurodollar Rate Advance is made other than on the last day of the Interest Period for such A Advance, as a result of a payment or Conversion pursuant to Section 2.13 or 2.09(f) or acceleration of the maturity of the Notes pursuant to Section 6.01 or for any other reason, the Borrower shall, upon demand by any Lender (with a copy of such demand to the Agent), pay to the Agent for the account of such Lender any amounts required to compensate such Lender for any additional losses, costs or expenses which it may reasonably incur as a result of such payment or Conversion, including, without limitation, any loss (other than loss of anticipated profits), cost or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by any Lender to fund or maintain such A Advance. The amount of\nsuch loss, cost or expense shall be determined by such Lender and notified to the Borrower through the Agent in the form a certificate of such Lender stating that the calculations set forth therein are in accordance with the terms of this Agreement and setting forth in reasonable detail the basis of such calculations, such certificate being conclusive and binding for all purposes absent manifest error and unless contested by the Borrower within 10 Business Days of its receipt of such certificate, and the amount set forth therein being payable in any event by the Borrower to such Lender on or before the 10th Business Day following delivery of such certificate to the Borrower.\nSECTION 8.05. Right of Set-off. Upon (i) the occurrence and during the continuance of any Event of Default and (ii) the making of the request or the granting of the consent specified by Section 6.01 to authorize the Agent to declare the Notes due and payable pursuant to the provisions of Section 6.01, each Lender is hereby authorized at any time and from time to time, to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by such Lender to or for the credit or the account of the Borrower against any and all of the obligations of the Borrower now or hereafter existing under this Agreement and any Note held by such Lender, whether or not such Lender shall have made any demand under this Agreement or such Note and although such obligations may be unmatured. Each Lender agrees promptly to notify the Borrower after any such set-off and application made by such Lender, provided that the failure to give such notice shall not affect the validity of such set-off and application. The rights of each Lender under this Section are in addition to other rights and remedies (including, without limitation, other rights of set-off) which such Lender may have.\nSECTION 8.06. Binding Effect. This Agreement shall become effective when it shall have been executed by the Borrower and the Agent and when the Agent shall have been notified by each Bank that such Bank has executed it and thereafter shall be binding upon and inure to the benefit of the Borrower, the Agent and each Lender and their respective successors and assigns, except that the Borrower shall not have the right to assign its rights hereunder or any interest herein without the prior written consent of the Lenders.\nSECTION 8.07. Assignments and Participations. (a) No Lender may assign any portion of its rights and obligations under this Agreement (including, without limitation, all or a portion of its Commitment, the A Advances owing to it and the A Note or Notes held by it, the B Advances owing to it and the B Note or Notes held by it), except with the approval of the Borrower and the Agent, which approval may not be unreasonably withheld, or otherwise pursuant to the terms of this Section 8.07; provided, however, any Lender may pledge or assign any of its rights (including, without limitation, rights to payment of principal\nand\/or interest under the Notes) under this Credit Agreement to any Federal Reserve Bank in accordance with applicable law without the consent of or prior notice to the Borrower or the Agent. If, pursuant to the terms of Section 2.17, the Borrower shall have given notice of its request to extend the Termination Date and on the date 60 days prior to the applicable anniversary date Lenders holding at least 60% but less than 100% in aggregate principal amount of the Commitments have consented to such extension, each Lender who has denied the Borrower's request for an extension of the Termination Date shall, upon the written demand of the Borrower, execute an Assignment and Acceptance for all or a portion of such Lender's rights and obligations under this Agreement (including, without limitation, all or a portion of its Commitment, the A Advances owing to it and the A Note held by it, the B Advances owing to it and the B Note or Notes held by it); provided, however, that the Borrower shall have delivered to such Lender not less than 5 Business Days prior to such demand, an Assignment and Acceptance executed by an Eligible Assignee for the portion of such Lender's Commitment not terminated by the Borrower or retained and consented to by such Lender. All accrued and unpaid principal, interest and fees with respect to any assigning Lender's Commitment and Advances that have not been terminated by the Borrower or retained by such Lender shall be due and payable by the Borrower to such Lender upon the assignment. Notwithstanding such assignment, the obligations of the Borrower under Sections 2.02, 2.12, 8.04 and 8.08 shall survive such assignment and be enforceable by such Lender. The parties to each Assignment and Acceptance shall deliver to the Agent, for its acceptance and recording in the Register, the Assignment and Acceptance, together with any A Note and\/or B Note or Notes subject to such assignment and a processing and recordation fee of $2,500, payable by the assigning Lender. Upon such execution, delivery, acceptance and recording, from and after the effective date specified in each Assignment and Acceptance, (x) the assignee thereunder shall be a party hereto and, to the extent that rights and obligations hereunder have been assigned to it pursuant to such Assignment and Acceptance, have the rights and obligations of a Lender hereunder and (y) the Lender assignor thereunder shall, to the extent that rights and obligations hereunder have been assigned by it pursuant to such Assignment and Acceptance, relinquish its rights and be released from its obligations under this Agreement (and, in the case of an Assignment and Acceptance covering all or the remaining portion of an assigning Lender's rights and obligations under this Agreement, such Lender shall cease to be a party hereto).\n(b) By executing and delivering an Assignment and Acceptance, the Lender assignor thereunder and the assignee thereunder confirm to and agree with each other and the other parties hereto as follows: (i) other than as provided in such Assignment and Acceptance, such assigning Lender makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with this Agreement or the execution, legality, validity, enforceability, genuineness, sufficiency or value of\nthis Agreement or any other instrument or document furnished pursuant hereto; (ii) such assigning Lender makes no representation or warranty and assumes no responsibility with respect to the financial condition of the Borrower or the performance or observance by the Borrower of any of its obligations under this Agreement or any other instrument or document furnished pursuant hereto; (iii) such assignee confirms that it has received a copy of this Agreement, together with copies of the financial statements referred to in Section 4.01 and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into such Assignment and Acceptance; (iv) such assignee will, independently and without reliance upon the Agent, such assigning Lender or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement; (v) such assignee confirms that it is an Eligible Assignee; (vi) such assignee appoints and authorizes the Agent to take such action as agent on its behalf and to exercise such powers under this Agreement as are delegated to the Agent by the terms hereof, together with such powers as are reasonably incidental thereto; and (vii) such assignee agrees that it will perform in accordance with their terms all of the obligations which by the terms of this Agreement are required to be performed by it as a Lender.\n(c) The Agent shall maintain at its address referred to in Section 8.02 a copy of each Assignment and Acceptance delivered to and accepted by it and a register for the recordation of the names and addresses of the Lenders and the Commitment of, and principal amount of the A Advances owing to, each Lender from time to time (the \"Register\"). The entries in the Register shall be conclusive and binding for all purposes, absent manifest error, and the Borrower, the Agent and the Lenders may treat each Person whose name is recorded in the Register as a Lender hereunder for all purposes of this Agreement. The Register shall be available for inspection by the Borrower or any Lender at any reasonable time and from time to time upon reasonable prior notice.\n(d) Upon its receipt of an Assignment and Acceptance executed by an assigning Lender and an assignee representing that it is an Eligible Assignee, together with any A Note and\/or B Notes subject to such assignment, the Agent shall, if such Assignment and Acceptance has been completed and is in substantially the form of Exhibit C hereto, (i) accept such Assignment and Acceptance, (ii) record the information contained therein in the Register and (iii) give prompt notice thereof to the Borrower. Within five Business Days after its receipt of such notice, the Borrower, at its own expense, shall execute and deliver to the Agent in exchange for the surrendered A Note and\/or B Note or Notes, a new A Note and\/or B Note or Notes to the order of such Eligible Assignee in an amount equal to the Commitment assumed by it pursuant to such Assignment and Acceptance and, if the assigning Lender has retained a Commitment\nhereunder, a new A Note to the order of the assigning Lender in an amount equal to the Commitment retained by it hereunder. Such new A Note and\/or B Note or Notes shall be in an aggregate principal amount equal to the aggregate principal amount of such surrendered A Note and\/or B Note or Notes, shall be dated the effective date of such Assignment and Acceptance and shall otherwise be in substantially the form of Exhibit A-1 hereto.\n(e) Each Lender may sell participations to one or more banks or other entities in or to all or a portion of its rights and obligations under this Agreement (including, without limitation, all or a portion of its Commitment, the Advances owing to it and the Note or Notes held by it); provided, however, that (i) such Lender's obligations under this Agreement (including, without limitation, its Commitment to the Borrower hereunder) shall remain unchanged, (ii) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations, (iii) such Lender shall remain the holder of any such Note for all purposes of this Agreement, and (iv) the Borrower, the Agent and the other Lenders shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement.\n(f) Any Lender may, in connection with any assignment or participation or proposed assignment or participation pursuant to this Section 8.07, disclose to the assignee or participant or proposed assignee or participant, any information relating to the Borrower furnished to such Lender by or on behalf of the Borrower; provided that, prior to any such disclosure, the assignee or participant or proposed assignee or participant shall agree to preserve the confidentiality of any confidential information relating to the Borrower received by it from such Lender.\nSECTION 8.08. Indemnification by Borrower. The Borrower shall indemnify and hold harmless the Agent, each Lender and their respective affiliates, officers, directors, employees, agents and advisors (each, an \"Indemnified Party\") from and against any and all claims, damages, losses, liabilities and expenses (including, without limitation, reasonable out-of-pocket fees and disbursements of counsel) which may be incurred by or asserted or awarded against any Indemnified Party, in each case arising out of or in connection with or by reason of, or in connection with the preparation for a defense of, any investigation, litigation or proceeding arising out of, related to or in connection with this Agreement or the Notes, whether or not an Indemnified Party is a party thereto and whether or not any Advance has been made under this Agreement, except to the extent such claim, damage, loss, liability or expensehas been caused by such Indemnified Party's gross negligence or willful misconduct.\nSECTION 8.09. Governing Law. This Agreement and the Notes shall be governed by, and construed in accordance with, the laws of the State of New York.\nSECTION 8.10. Confidentiality of Financial Information. The Agent and the Lenders agree that they will not disclose Financial Information (as defined below) without the prior consent of the Borrower (other than to their directors, employees, auditors or counsel); provided that the Agent and any Lender is authorized to make such disclosure of Financial Information without any consent of the Borrower (a) as may be required by law (such as pursuant to any subpoena or civil investigative demand) and as may be requested or required by any state or federal authority, examiner, or regulatory body or agency having jurisdiction over the Agent or any Lender, (b) during the course of any action, suit, investigation, litigation or proceeding in any court or before any arbitrator or governmental instrumentality to which the Borrower and any Lender is a party, provided such Financial Information is submitted under seal and (c) as permitted by Section 8.07(f). The term \"Financial Information\" means any information delivered by the Borrower under Section 5.01(b)(v), that is marked \"Confidential\" that relates to the business, operations or financial condition of the Borrower or its consolidated subsidiaries other than information (a) that is, or generally becomes, available to the public, (b) was available to the Agent or any Lender on a nonconfidential basis prior to its disclosure to the Agent or such Lender (as the case may be) by the Borrower or any Affiliate or (c) becomes available to the Agent or any Lender from a Person or other sources that is not, to the best knowledge of the Agent or such Lender (as the case may be) otherwise bound by a confidentiality agreement with the Borrower.\nSECTION 8.11. WAIVER OF JURY TRIAL. THE BORROWER AND EACH LENDER EACH HEREBY IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OR RELATING TO THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS.\nSECTION 8.12. Effect of Headings and Table of Contents. The Article and Section headings herein and the Table of Contents are for convenience only and shall not affect the construction hereof.\nSECTION 8.13. Execution in Counterparts. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement.\nIN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized, as of the date first above written.\nCOMSAT CORPORATION\nBy: \/s\/Wesley D. Minami ------------------------ Title: Treasurer\nNATIONSBANK OF NORTH CAROLINA, N.A., as Agent\nBy: \/s\/Michael R. Williams --------------------------- Title: Senior Vice President\nBanks -----\nCommitment - - - ----------\n$45,000,000 NATIONSBANK OF NORTH CAROLINA, N.A.\nBy: \/s\/Michael R. Williams -------------------------- Title: Senior Vice President\n$35,000,000 BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION\nBy: \/s\/Doug Bontemps ------------------------ Title: Vice President\n$25,000,000 THE FIRST NATIONAL BANK CHICAGO\nBy: \/s\/Ted Wozniak ------------------------ Title: Vice President\n$35,000,000 THE CHASE MANHATTAN BANK, N.A.\nBy: \/s\/Robert T. Smith ------------------------ Title: Vice President\n$35,000,000 THE SUMITOMO BANK, LIMITED, NEW YORK BRANCH By: \/s\/Yoshinori Kawamura ------------------------- Title: Joint General Manager\n$25,000,000 SWISS BANK CORPORATION, NEW YORK BRANCH\nBy: \/s\/Jane A. Majeski ---------------------- Title: Director Merchant Banking\nBy: \/s\/Alois Mueller ---------------------- Title: Associate Director Merchant Banking _____________ $200,000,000 Total of the Commitments\nEXHIBIT A-1\nFORM OF A NOTE\nU.S. $______________ Dated: December 17, 1993\nFOR VALUE RECEIVED, the undersigned, Comsat Corporation, a District of Columbia corporation (the \"Borrower\"), HEREBY PROMISES TO PAY to the order of ____________________________ (the \"Lender\") for the account of its Applicable Lending Office (as defined in the Credit Agreement referred to below) the principal sum of U.S. $[amount of the Lender's Commitment in figures] or, if less, the aggregate principal amount of the A Advances (as defined below) made by the Lender to the Borrower pursuant to the Credit Agreement outstanding on the Termination Date (as defined in the Credit Agreement) or upon earlier maturity, as provided in the Credit Agreement.\nThe Borrower promises to pay interest on the unpaid principal amount of each A Advance from the date of such A Advance until such principal amount is paid in full, at such interest rates, and payable at such times, as are specified in the Credit Agreement.\nBoth principal and interest are payable in lawful money of the United States of America to NationsBank of North Carolina, N.A., as Agent, at _________________________________, in same day funds. Each A Advance made by the Lender to the Borrower pursuant to the Credit Agreement, and all payments made on account of principal thereof, shall be recorded by the Lender and, prior to any transfer hereof, endorsed on the grid attached hereto which is part of this Promissory Note.\nThis Promissory Note is one of the A Notes referred to in, and is entitled to the benefits of, the Credit Agreement dated as of December 17, 1993 (the \"Credit Agreement\") among the Borrower, the Lender and certain other banks parties thereto, and NationsBank of North Carolina, N.A., as Agent for the Lender and such other banks. The Credit Agreement, among other things, (i) provides for the making of advances (the \"A Advances\") by the Lender to the Borrower from time to time in an aggregate amount not to exceed at any time outstanding the U.S. dollar amount first above mentioned, the indebtedness of the Borrower resulting from each such A Advance being evidenced by this Promissory Note, and (ii) contains provisions for acceleration of the maturity hereof upon the happening of certain stated events and also for prepayments on account of principal hereof prior to the maturity hereof upon the terms and conditions therein specified.\nCOMSAT CORPORATION\nBy______________________ Title:\nEXHIBIT A-2\nFORM OF B NOTE\nU.S. $______________ Dated: ________, 19__\nFOR VALUE RECEIVED, the undersigned, Comsat Corporation, a District of Columbia corporation (the \"Borrower\"), HEREBY PROMISES TO PAY to the order of _______________________ (the \"Lender\") for the account of its Applicable Lending Office (as defined in the Credit Agreement referred to below), on __________, 19__, the principal amount of _____________ Dollars ($___________).\nThe Borrower promises to pay interest on the unpaid principal amount hereof from the date hereof until such principal amount is paid in full, at the interest rate and payable on the interest payment date or dates provided below:\nInterest Rate: ___% per annum (calculated on the basis of a year of ____ days for the actual number of day s elapsed).\nInterest Payment Date or Dates: ____________________\nBoth principal and interest are payable in lawful money of the United States of America to __________________ or the account of the Lender at the office of _____________________, at ____________________________________, in same day funds, free and clear of and without any deduction, with respect to the payee named above, for any and all present and future taxes, deductions, charges or withholdings, and all liabilities with respect thereto.\nThis Promissory Note is one of the B Notes referred to in, and is entitled to the benefits of, the Credit Agreement dated as of December 17, 1993 (the \"Credit Agreement\") among the Borrower, the Lender and certain other banks parties thereto, and NationsBank of North Carolina, N.A., as Agent for the Lender and such other banks. The Credit Agreement, among other things, contains provisions for acceleration of the maturity hereof upon the happening of certain stated events.\nCOMSAT CORPORATION\nBy__________________________ Title:\nEXHIBIT B-1\nNOTICE OF A BORROWING\nNationsBank of North Carolina, N.A., as Agent for the Lenders parties to the Credit Agreement referred to below _______________________ _______________________ [Date]\nAttention: __________________\nGentlemen:\nThe undersigned, Comsat Corporation, refers to the Credit Agreement, dated as of December 17, 1993 (the \"Credit Agreement\", the terms defined therein being used herein as therein defined), among the undersigned, certain Lenders parties thereto and NationsBank of North Carolina, N.A., as Agent for said Lenders, and hereby gives you notice, irrevocably, pursuant to Section 2.02 of the Credit Agreement that the undersigned hereby requests an A Borrowing under the Credit Agreement, and in that connection sets forth below the information relating to such A Borrowing (the \"Proposed A Borrowing\") as required by Section 2.02(a) of the Credit Agreement:\n(i) The Business Day of the Proposed A Borrowing is _____________, 19___.\n(ii) The Type of A Advances comprising the Proposed A Borrowing is [Base Rate Advances] [Eurodollar Rate Advances].\n(iii) The aggregate amount of the Proposed A Borrowing is $____________ [an amount not less than $10,000,000].\n(iv) The Interest Period for each A Advance made as part of the Proposed A Borrowing is [____ days] [____ month[s]].\nThe undersigned hereby certifies that the following statements are true on the date hereof, and will be true on the date of the Proposed A Borrowing:\n(A) the representations and warranties contained in paragraphs (a) and (d) of Section 4.01 are correct, before and after giving effect to the Proposed A Borrowing and to the application of the proceeds therefrom, as though made on and as of such date; and\n(B) no event has occurred and is continuing, or would result from such Proposed A Borrowing or from the application of the proceeds therefrom, which constitutes an Event of Default or would constitute an Event of Default but for the requirement that notice be given or time elapse or both.\nVery truly yours,\nCOMSAT CORPORATION\nBy_________________________ Title:\nEXHIBIT B-2\nNOTICE OF B BORROWING\nNationsBank of North Carolina, N.A., as Agent for the Lenders parties to the Credit Agreement referred to below _________________________ _________________________ [Date]\nAttention: ___________________\nGentlemen:\nThe undersigned, Comsat Corporation, refers to the Credit Agreement, dated as of December 17, 1993 (the \"Credit Agreement\", the terms defined therein being used herein as therein defined), among the undersigned, certain Lenders parties thereto and NationsBank of North Carolina, N.A., as Agent for said Lenders, and hereby gives you notice pursuant to Section 2.03 of the Credit Agreement that the undersigned hereby requests a B Borrowing under the Credit Agreement, and in that connection sets forth the terms on which such B Borrowing (the \"Proposed B Borrowing\") is requested to be made:\n(A) Date of B Borrowing _________________________ (B) Amount of B Borrowing _________________________ (C) Maturity Date _________________________ (D) Interest Rate Basis _________________________ (E) Interest Payment Date(s) _________________________ (F) _____________________ _________________________ (G) _____________________ _________________________ (H) _____________________ _________________________\nThe undersigned hereby certifies that the following statements are true on the date hereof, and will be true on the date of the Proposed B Borrowing:\n(a) the representations and warranties contained in paragraphs (a) and (d) of Section 4.01 are correct, before and after giving effect to the Proposed B Borrowing and to the application of the proceeds therefrom, as though made on and as of such date; and\n(b) no event has occurred and is continuing, or would result from the Proposed B Borrowing or from the application of the proceeds therefrom, which constitutes an Event of Default or would constitute an Event of Default but for the requirement that notice be given or time elapse or both.\nThe undersigned hereby confirms that the Proposed B Borrowing is to be made available to it in accordance with Section 2.03(a)(v) of the Credit Agreement.\nVery truly yours,\nCOMSAT CORPORATION\nBy_________________________ Title:\nEXHIBIT C\nASSIGNMENT AND ACCEPTANCE\nDated______, 19___\nReference is made to the Credit Agreement dated as of December 17, 1993 (the \"Credit Agreement\") among Comsat Corporation, a District of Columbia corporation (the \"Borrower\"), the Lenders (as defined in the Credit Agreement) and NationsBank of North Carolina, N.A., as Agent for the Lenders (the \"Agent\"). Terms defined in the Credit Agreement are used herein with the same meaning.\n_______________ (the \"Assignor\") and _______________ (the \"Assignee\") agree as follows:\n1. The Assignor hereby sells and assigns to the Assignee, and the Assignee hereby purchases and assumes from the Assignor, that interest in and to all of the Assignor's rights and obligations under the Credit Agreement as of the date hereof which represents the percentage interest specified on Schedule 1 of all outstanding rights and obligations under the Credit Agreement, including, without limitation, such interest in the Assignor's Commitment. After giving effect to such sale and assignment, the Assignee's Commitment will be set forth in Section 2 of Schedule 1.\n2. The Assignor (i) represents and warrants that it is the legal and beneficial owner of the interest being assigned by it hereunder and that such interest is free and clear of any adverse claim; (ii) makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with the Credit Agreement or the execution, legality, validity, enforceability, genuineness, sufficiency or value of the Credit Agreement or any other instrument or document furnished pursuant thereto; and (iii) makes no representation or warranty and assumes no responsibility with respect to the financial condition of the Borrower or the performance or observance by the Borrower of any of its obligations under the Credit Agreement or any other instrument or document furnished pursuant thereto.\n3. The Assignee (i) confirms that it has received a copy of the Credit Agreement, together with copies of the financial statements referred to in Section 4.01 thereof and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Assignment and Acceptance; (ii) agrees that it will, independently and without reliance upon the Agent, the Assignor or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the\nCredit Agreement; (iii) confirms that it is an Eligible Assignee; (iv) appoints and authorizes the Agent to take such action as Agent on its behalf and to exercise such powers under the Credit Agreement as are delegated to the Agent by the terms thereof, together with such powers as are reasonably incidental thereto; (v) agrees that it will perform in accordance with their terms all of the obligations which by the terms of the Credit Agreement are required to be performed by it as a Lender; (vi) specifies as its Domestic Lending Office (and address for notices) and Eurodollar Lending Office the offices set forth beneath its name on the signature pages hereof; and [(vii) attaches its executed Extension Letter consenting to the extension of the Termination Date] [and (viii) attaches the forms prescribed by the Internal Revenue Service of the United States certifying as to the Assignee's status for purposes of determining exemption from United States withholding taxes with respect to all payments to be made to the Assignee under the Credit Agreement and the Notes or such other documents as are necessary to indicate that all such payments are subject to such rates at a rate reduced by an applicable tax treaty](1).\n4. Following the execution of this Assignment and Acceptance by the Assignor and the Assignee, it will be delivered to the Agent for acceptance and recording by the Agent. The effective date of this Assignment and Acceptance shall be the date of acceptance thereof by the Agent[, which shall be an anniversary date of the Credit Agreement] (the \"Effective Date\").\n5. Upon such acceptance and recording by the Agent, as of the Effective Date, (i) the Assignee shall be a party to the Credit Agreement and, to the extent provided in this Assignment and Acceptance, have the rights and obligations of a Lender thereunder and (ii) the Assignor shall, to the extent provided in this Assignment and Acceptance, relinquish its rights and be released from its obligations under the Credit Agreement.\n6. Upon such acceptance and recording by the Agent, from and after the Effective Date the Agent shall make all payments under the Credit Agreement assigned hereby (including, without limitation, all payments of principal, interest and commitment fees with respect thereto) to the Assignee. The Assignor and Assignee shall make all appropriate adjustments in payments under the Credit Agreement for periods prior to the Effective Date directly between themselves.\n7. This Assignment and Acceptance shall be governed by, and construed in accordance with, the laws of the State of New York.\n- - - ----------- (1) If the Assignee is organized under the laws of a jurisdiction outside the Unites States.\nIN WITNESS WHEREOF, the parties hereto have caused this Assignment and Acceptance to be executed by their respective officers thereunto duly authorized, as of the date first above written, such execution being made on Schedule 1 hereto.\nSchedule 1 to Assignment and Acceptance Dated _______, 19___\nSection 1.\nPercentage Interest: ____%\nSection 2.\nAssignee's Commitment: Aggregate Outstanding Principal $________ Amount of A Advances owing to the Assignee: $________\nAn A Note payable to the order of the Assignee Dated: _______, 19__ Principal amount: _______\nSection 3.\nEffective Date*: __________, 19__\n[NAME OF ASSIGNOR]\nBy:_________________________ Title:\n[NAME OF ASSIGNEE]\nBy:_________________________ Title:\nDomestic Lending Office (and address for notices): [Address]\nEurodollar Lending Office: [Address] ___________________\n* This date should be no earlier than the date of acceptance by the Agent, and in the case of an assignment pursuant to Section 2.07, shall be an anniversary date of the Credit Agreement.\nAccepted this ____ day of ____________, 19___\nNATIONSBANK OF NORTH CAROLINA, N.A.\nBy:__________________________ Title:\nEXHIBIT D\nFORM OF OPINION OF COUNSEL FOR THE BORROWER\n[Date of initial Borrowing]\nTo each of the Banks parties to the Revolving Credit and Term Loan Agreement dated as of December 17, 1993 among Comsat Corporation, said Banks and NationsBank of North Carolina, N.A., as Agent for said Banks, and to NationsBank of North Carolina, N.A., as Agent\nCOMSAT CORPORATION\n$200,000,000 Credit Agreement\nGentlemen:\nThis opinion is furnished to you pursuant to Section 3.01(d) of the Credit Agreement, dated as of December 17, 1993 (the \"Credit Agreement\"), among Comsat Corporation (the \"Borrower\"), the Banks parties thereto and NationsBank of North Carolina, N.A., as Agent for said Banks. Terms defined in the Credit Agreement are used herein as therein defined.\nWe have acted as counsel for the Borrower in connection with the preparation, execution and delivery of, and the initial Borrowing made under, the Credit Agreement.\nIn that connection, we have examined:\n(1) The Credit Agreement.\n(2) The documents furnished by the Borrower pursuant to Article II of the Credit Agreement.\n(3) The Certificate of Incorporation of the Borrower and all amendments thereto (the \"Charter\").\n(4) The by-laws of the Borrower and all amendments thereto (the \"By-laws\").\n(5) A certificate of the Department of Consumer and Regulatory Affairs of the District of Columbia, dated __________, 19___, attesting to the continued corporate existence and good standing of the Borrower in the District of Columbia.\nWe have also examined the originals, or copies certified to our satisfaction, of the documents listed in a certificate of the chief financial officer of the Borrower, dated the date hereof (the \"Certificate\"), certifying that the documents listed in such certificate are all of the indentures, loan or credit agreements, leases, guarantees, mortgages, security agreements, bonds, notes and other agreements or instruments, and all of the orders, writs, judgments, awards, injunctions and decrees, which affect or purport to affect the Borrower's right to borrow money or the Borrower's obligations under the Credit Agreement or the Notes. In addition, we have examined the originals, or copies certified to our satisfaction, of such other corporate records of the Borrower, certificates of public officials and of officers of the Borrower, and agreements, instruments and other documents, as we have deemed necessary as a basis for the opinions expressed below. As to questions of fact material to such opinions, we have, when relevant facts were not independently established by us, relied upon certificates of the Borrower or its officers or of public officials. We have assumed the due execution and delivery, pursuant to due authorization, of the Credit Agreement by the Banks and the Agent.\nWe are qualified to practice law in the District of Columbia and we do not purport to be experts on any laws other than the laws of the District of Columbia and the Federal laws of the United States.\nBased upon the foregoing and upon such investigation as we have deemed necessary, we are of the following opinion:\n1. The Borrower is a corporation duly organized, validly existing and in good standing under the laws of the District of Columbia.\n2. The execution, delivery and performance by the Borrower of the Credit Agreement and the Notes are within the Borrower's corporate powers, have been duly authorized by all necessary corporate action, and do not contravene (i) the Charter or the By-laws or (ii) any law, rule or regulation applicable to the Borrower (including, without limitation, the margin stock regulations issued by the Board of Governors of the Federal Reserve System applicable to the Borrower and the regulations of the Federal Communications Commission) or (iii) any contractual or legal restriction contained in any document listed in the Certificate or, to the best of our knowledge, contained in any other similar document. The Credit Agreement and the Notes have been duly executed and delivered on behalf of the Borrower.\n3. No authorization, approval or other action by, and no notice to or filing with, any governmental authority or regulatory body is required for the due execution, delivery and performance by the Borrower of the Credit Agreement and the Notes.\n4. To the best of our knowledge, there are no pending or overtly threatened actions or proceedings against the Borrower or any of its subsidiaries before any court, governmental agency or arbitrator which purport to affect the legality, validity, binding effect or enforceability of the Credit Agreement or any of the Notes or which are likely to have a materially adverse effect upon the financial condition or operations of the Borrower and its consolidated subsidiaries, taken as a whole.\n5. In any action or proceeding arising out of or relating to the Credit Agreement or the Notes in any court of the District of Columbia or in any federal court sitting in the District of Columbia, such court would recognize and give effect to the provisions of Section 8.09 of the Credit Agreement wherein the parties thereto agree that the Credit Agreement and the Notes shall be governed by, and construed in accordance with, the laws of the State of New York. Without limiting the generality of the foregoing, a court of the District of Columbia or a federal court sitting in the District of Columbia would apply the usury law of the State of New York, and would not apply the usury law of the District of Columbia, to the Credit Agreement and the Notes. However, if a court were to hold that the Credit Agreement and the Notes are governed by, and to be construed in accordance with, the laws of the District of Columbia, the Credit Agreement and the Notes would be, under the laws of the District of Columbia, legal, valid and binding obligations of the Borrower enforceable against the Borrower in accordance with the respective terms.\nThe opinions set forth above are subject to the following qualifications:\n(a) Our opinion in paragraph 5 above is subject to the effect of any applicable bankruptcy, insolvency, reorganization, moratorium or similar law affecting creditors' rights generally.\n(b) Our opinion in paragraph 5 above is subject to the effect of general principles of equity, including (without limitation) concepts of materiality, reasonableness, good faith and fair dealing (regardless of whether considered in a proceeding in equity or at law).\nVery truly yours,\nEXHIBIT E\nForm of Extension Letter\n_______________, 199_\n[Name and address of Lender]\nRe: Proposed Extension of the Termination Date\nLadies and Gentlemen:\nWe make reference to the Credit Agreement dated as of December 17, 1993 among the undersigned, the Lenders parties thereto and NationsBank of North Carolina, N.A., as Agent for said Lenders (the \"Credit Agreement,\" the terms defined therein being used herein as therein defined).\nThe current Termination Date is ______________, 199_.\nThe Borrower desires to extend the Termination Date by one year and accordingly requests hereby that the Bank agree to extend the Termination Date to ______________, 199_.\nIf the foregoing proposed extension of the Termination Date meets with your approval, please so indicate by executing and returning to the Agent and the Borrower the accompanying copies of this letter. Upon the approval of at least 60% of the Lenders in accordance with Section 2.17 of the Credit Agreement, the Termination Date under the Credit Agreement shall hereafter be _______________, 199_.\nVery truly yours,\nCOMSAT CORPORATION\nBy: Title:\nACCEPTED AND AGREED TO:\n[NAME OF BANK]\nBy:____________________________ Title:_________________________ Date:__________________________\nEXHIBIT 10hh\nEXHIBIT 10(ii)\nA G R E E M E N T\nThis Agreement is made by and between MCI International, Inc. (\"MCI\"), a United States International Service Carrier (\"USISC\"), and COMSAT Corporation (\"COMSAT\"), the U.S. Signatory to the International Telecommunications Satellite Organization (\"INTELSAT\") (hereinafter jointly referred to as the \"Parties\").\nWHEREAS, MCI is engaged in the provision of telecommunications services via satellite; and\nWHEREAS, COMSAT offers INTELSAT space segment capacity to USISCs for telecommunications services; and\nWHEREAS, COMSAT and MCI entered into an inter-carrier contract on October 27, 1988, specifying the rates, terms and conditions relating to MCI's long-term commitment for utilization of COMSAT's INTELSAT space segment capacity for international voice-grade switched circuits (\"1988 Agreement\"); and\nWHEREAS, the 1988 Agreement was filed with the Federal Communications Commission (\"FCC\") pursuant to Section 211 of the Communications Act, and was allowed to become effective by the FCC; and\nWHEREAS, COMSAT and MCI entered into a new inter-carrier contract on April 8, 1993, specifying rates, terms and conditions relating to MCI's utilization of COMSAT's INTELSAT space segment\ncapacity for international switched telecommunications services (\"1993 Agreement\"); and\nWHEREAS, the 1993 Agreement was also filed with the FCC pursuant to Section 211 of the Communications Act, and was also allowed to become effective by the FCC; and\nWHEREAS, the Parties have decided to replace the 1993 Agreement with a new inter-carrier contract based upon MCI's current and future utilization of COMSAT's INTELSAT space segment capacity for telecommunications services, and have decided to maintain certain prior commitments arising from the 1988 Agreement and the 1993 Agreement, as specified herein;\nNOW, THEREFORE, in consideration of and in reliance upon the mutual promises set forth below, MCI and COMSAT hereby agree as follows:\nARTICLE I PURPOSE AND INTENT\nThe purpose of this Agreement is to implement the Parties' mutual understanding with respect to MCI's current and future utilization of COMSAT's INTELSAT space segment capacity for telecommunications services. It is the intent of COMSAT and MCI that this Agreement comply with all laws and international obligations of the United States. Consistent with that intent, nothing herein shall preclude COMSAT from reaching similar agreements for circuits with other USISCs, and nothing herein shall preclude MCI from placing traffic not covered by this Agreement on whatever telecommunications facilities it should select.\nARTICLE II DEFINITIONS\nThe terms used in this Agreement are defined as follows:\n1. Additional Circuits. Digital Bearer Circuits activated by MCI on the INTELSAT system via COMSAT on or after January 1, 1992 for 7-year, 10-year or 15-year lease terms, including but not limited to the 7-year circuits that MCI committed to take pursuant to the 1993 Agreement and the 10-year circuits that MCI has committed to take pursuant to this Agreement.\n2. Analog-to-Digital Conversions. Digital Bearer Circuits converted from FM Circuits.\n3. Base Circuits. The Digital Bearer Circuits activated by MCI on the INTELSAT system via COMSAT prior to January 1, 1992, each of which circuits MCI committed to take for 15-year lease terms pursuant to the 1988 Agreement.\n4. Circuit Month. The utilization by MCI of one 64 Kbps equivalent Digital Bearer Circuit for thirty (30) consecutive days as part of the First Bulk Offering provided under this Agreement.\n5. Date of Activation. The month, day and year on which a particular FM Circuit or Digital Bearer Circuit is placed in service.\n6. Derived Circuits. Circuits created from Digital Bearer Circuits by means of Digital Circuit Multiplication Equipment (DCME).\n7. Digital Bearer Circuits. 64 Kbps equivalent circuits used to carry public-switched traffic (including IDR and TDMA circuits, but excluding private line circuits such as IBS); these circuits may or may not be aggregated into larger digital carriers, e.g., 2.048 Mbps.\n8. Efficiency Factor. The maximum number of Derived Circuits that may be provided through a Digital Bearer Circuit.\n9. First Bulk Offering. The offering by COMSAT to MCI of a total of Circuit Months of service on a take-or-pay basis pursuant to the rates, terms and conditions initially specified in the\n1993 Agreement and subsequently revised in this Agreement.\n10. FM Circuits. 4 Khz analog circuits associated with analog carriers using Frequency Division Multiple Access and Frequency Modulation.\n11. Global Traffic Meeting. INTELSAT's annual Global Traffic Meeting, at which USISCs and their foreign correspondents forecast their requirements for INTELSAT satellite circuits.\n12. Growth Circuits. Digital Bearer Circuits (excluding Analog-to-Digital Conversions) activated after the effective date of this Agreement.\n13. IDR Circuits. 64 Kbps equivalent international digital route circuits associated with digital carriers using Quadrature Phase Shift Keying (QPSK) modulation.\n14. Large Standard A Earth Station. An earth station having a gain-to-noise temperature ratio (\"G\/T\") at least equal to 40.7 dB\/K in the U.S. and at least equal to 39 dB\/K at the foreign end.\n15. Revised Standard A Earth Station. An earth station having a gain-to-noise temperature ratio (\"G\/T\") at least equal to 35 dB\/K.\n16. Second Bulk Offering. The offering by COMSAT to MCI of options to lease up to three (3) 36 MHz allotments pursuant to the rates, terms and conditions specified in this Agreement.\n17. Tariff No. 1. COMSAT World Systems Tariff F.C.C. No. 1.\n18. TDMA Circuits. 64 Kbps equivalent digital circuits providing Time Division Multiple Access service.\n19. Voice-Grade Circuits. Circuits on any long-haul transmission medium consisting of FM Circuits, Digital Bearer Circuits not using DCME, and Derived Circuits.\nARTICLE III BASE AND ADDITIONAL CIRCUITS\nA. MCI hereby reaffirms the prior commitment it made to COMSAT under the 1988 Agreement (and affirmed in the 1993 Agreement) to place at least Voice-Grade Circuits on the INTELSAT system via COMSAT by December 31, 1998. In fulfillment of that commitment, as of the date of this Agreement MCI had taken Digital Bearer Circuits from COMSAT for 15-year lease terms. Those circuits were all activated before January 1, 1992, and are referred to herein as Base Circuits. MCI also reaffirms its prior commitment to COMSAT under the 1988 Agreement and 1993 Agreement not to cancel any of its existing 15- year Digital Bearer Circuits until January 1, 1999, at the earliest.\nB. MCI also committed under the 1993 Agreement to place on the INTELSAT system via COMSAT at least 7-year Digital Bearer Circuits between January 1, 1992 and December 31, 1993. In exchange for this commitment, which has also been fulfilled, COMSAT affirms that it will allow MCI to deactivate any or all of its FM Circuits in existence as of the effective date of the 1993 Agreement (up to a maximum of FM Circuits) at any time during the term of the present Agreement without incurring early termination charges.\nC. COMSAT hereby agrees to provide, and MCI commits and agrees to lease from COMSAT, an additional 64 Kbps equivalent IDR Growth Circuits. At least of these circuits must be leased within one (1) year after the effective date of this Agreement and the remainder within two (2) years after the effective date of this Agreement. The lease term for each of these circuits shall be ten (10) years.\nD. In addition to the 15-year Digital Bearer Circuits described in Paragraph A of this Article, the 7-year Digital Bearer Circuits described in Paragraph B of this Article, and the 10-year IDR Growth Circuits described in Paragraph C of this Article, MCI may order other long-term Digital Bearer Circuits from COMSAT. For purposes of this Agreement, all 7- year, 10-year and 15-Year Digital Bearer Circuits activated by MCI after January 1, 1992 (including the 7-year circuits described in Paragraph B and the 10-year circuits described in Paragraph C) are referred to as Additional Circuits.\nE. MCI affirms its prior commitment to maintain for the duration of their respective lease terms at least Voice- Grade Circuits in the combined Europe\/Latin America Region and at least Voice-Grade Circuits in the Pacific Region pursuant to its written notification availing itself of COMSAT's 1989 promotional regional tariff. Above those specified circuit\nlevels, MCI shall have the flexibility to redistribute its Base and Additional Circuits geographically consistent with the procedures specified in Tariff No. 1 (which provisions are hereby incorporated into this Agreement), without incurring early termination charges for such redistribution or triggering the start of a new lease term.\nF. COMSAT will permit MCI to redesignate Base Circuits as Additional Circuits and vice versa, and will also permit MCI to redesignate the Circuit Months provided under the First Bulk Offering described in Article V below as Base or Additional Circuits and vice versa. Such redesignation is subject to the following conditions, however: (1) a circuit may not be redesignated more than once every thirty (30) days; (2) MCI's total number of 15-year Base Circuits may not be reduced below before January 1, 1999 at the earliest and thereafter may be reduced only upon payment of early termination charges; (3) MCI's commitment of Circuit Months pursuant to Article V below may not be reduced; and (4) except as provided in Article VI below, MCI's total number of Additional Circuits may not be reduced without payment of early termination charges.\nARTICLE IV RATES FOR BASE AND ADDITIONAL CIRCUITS\nA. COMSAT's rates for MCI's Base Circuits shall be reduced as of December 1, 1993 to the levels specified in Attachment A, which is appended hereto and made part of this Agreement. The rates in Attachment A are for Base Circuits provided via INTELSAT Revised Standard A Earth Stations at the U.S. end. Base Circuits transmitted through standard earth stations with lower G\/T values at the U.S. end shall be subject to the rate adjustment factors specified in Attachment B, which is also appended hereto and made part of this Agreement. In addition, the Parties agree that, from December 1, 1993 through December 31, 1997, a discount of 10% below the rates specified in Attachment A shall be applied to Base Circuits transmitted through Large Standard A Earth Stations at both ends.\nB. COMSAT's rates for MCI's Additional Circuits are specified in Attachments C and D, which are appended hereto and made part of this Agreement. The rates in Attachments C and D are for Additional Circuits provided via INTELSAT Large Standard A and Revised Standard A earth stations at the U.S. end. Additional Circuits transmitted through standard earth stations with lower G\/T values at the U.S. end shall be subject to the rate adjustment factors specified in Attachment B.\nhowever, that MCI must accept or reject the amended terms and conditions in their entirety.\nARTICLE V FIRST BULK OFFERING\nA. The Parties hereby affirm that COMSAT shall provide, and that MCI shall place on the INTELSAT system via COMSAT, Digital Bearer Growth Circuits equivalent to Circuit Months during the period from April 8, 1993 through December 31, 1999. The Parties also affirm that COMSAT shall provide these Circuit Months to MCI on a take-or-pay basis as a Bulk Offering at special rates within the framework of this Agreement.\nB. The Bulk Offering described in this Article (hereafter \"First Bulk Offering\") is designed to accommodate MCI's varying growth traffic requirements during the period from April 8, 1993 through December 31, 1999, in a flexible manner consistent with reasonable operational constraints. Accordingly, MCI previously agreed to pay for at least the following numbers of 64 Kbps equivalent Digital Bearer Circuit Months within the following calendar years:\nCalendar Year Circuit Month Commitment\n1996\nC. MCI recognizes that COMSAT and INTELSAT may be unable to accommodate spikes in MCI's traffic. For this reason, COMSAT's commitment under Articles III-C, III-D, V-A and V-B of this Agreement is limited to meeting circuit orders: (1) that have been included in MCI's then-current Global Traffic Meeting forecast for the relevant calendar year; (2) that have been matched by a foreign correspondent; (3) in amounts up to 270 64 Kbps equivalent Digital Bearer Circuits in a given calendar month and up to 1,710 64 Kbps equivalent Digital Bearer Circuits in a given calendar year. However, COMSAT will attempt to fill any MCI order, and circuits in excess of the limits specified herein will be provided if available. If MCI orders circuits within the limits specified herein under Articles V-A and V-B of this Agreement, and such circuits cannot be accommodated by the sixtieth (60th) day from the date a matched order is placed with COMSAT, such circuits will be subtracted from MCI's commitment under Articles V-A and V-B for the calendar year after the sixtieth (60th) day during which they were unavailable. Circuits ordered in excess of the limits specified herein that cannot be accommodated will not be subtracted from MCI's commitments under Articles V-A and V-B for the applicable calendar year. If MCI orders circuits within the limits specified herein under Article III-C of this Agreement, and such circuits cannot be accommodated by the sixtieth (60th) day from the date a matched order is placed with COMSAT, such circuits will not be subtracted from\nMCI's total commitment of circuits under Article III-C, but their activation may be postponed until the following calendar year.\nD. Except as provided in Paragraph J below, COMSAT's rates for Circuit Months provided pursuant to the First Bulk Offering described in this Article shall be set at $10 per month per 64 Kbps equivalent Digital Bearer Circuit above the Block 1 step rate specified in Attachment D (or the Block 1 step rate specified in Tariff No. 1, if that rate is lower) that would have been applicable if the same circuit had been taken for a seven (7) year lease term.\nE. Billing for each circuit activated pursuant to this First Bulk Offering shall commence as of the Date of Activation, and shall continue until the circuit is deactivated. Charges will be billed on a calendar month basis. There shall be no early termination charges associated with this First Bulk Offering. However, each circuit provided pursuant to this First Bulk Offering must be activated for at least thirty (30) consecutive days and may be deactivated only on ten (10) days' prior written notice. During both the first and last calendar months of service for each circuit, MCI shall be charged for one- half month of service if the circuit is utilized for fifteen (15) days or less, and for a full month of service if the circuit is utilized for more than fifteen (15) days.\nF. Except as provided in Paragraph J below, if, at the end of a given calendar year, the Circuit Month volume committed to by MCI exceeds its actual use, MCI shall pay for the difference within sixty (60) days at the rate of $10 per month per 64 Kbps equivalent Digital Bearer Circuit above the Block 1 step rate specified in Attachment D (or the Block 1 step rate specified in Tariff No. 1, if that rate is lower) that would have been applicable if the same circuit had been taken for a seven (7) year lease term. If MCI's actual use of Circuit Months exceeds its commitment during a given calendar year, the overage may be applied against MCI's commitment for the subsequent calendar year or, alternatively, MCI may receive a credit for the overage up to the amount of any shortfall it has paid for that occurred during the previous calendar year.\nG. Except as otherwise specified in this Agreement, all Digital Bearer Circuits provided pursuant to the First Bulk Offering described in this Article shall be subject to the same terms and conditions as those specified in Tariff No. 1 as of the effective date of this Agreement, and those tariff provisions are hereby incorporated into this Agreement. If such tariff terms and conditions are amended during the term of this Agreement, the amended terms and conditions shall also be automatically incorporated into this Agreement and shall be effective as of the effective date of the tariff amendment, unless MCI notifies COMSAT in writing within thirty (30) days of such effective date\nthat it does not accept the amended terms and conditions, in which case the prior terms and conditions will continue to apply to MCI; provided, however, that MCI must accept or reject the amended terms and conditions in their entirety.\nH. Any request by MCI during the period through December 31, 1999, for additional Circuit Months beyond the Circuit Months specified in this Article shall be the subject of a separate agreement with respect to price and terms when and if such requests are made.\nI. To the extent MCI orders Digital Bearer Circuits from COMSAT over and above the 7-year circuits described in Article III-B and the 10-year circuits described in Article III-C for terms of seven (7) years or more, the Circuit Months (out to December 31, 1999) represented by such circuits, up to a maximum of Circuit Months, may be counted prospectively toward the fulfillment of MCI's commitment under Articles V-A and V-B of this Agreement.\nJ. As of the effective date of this Agreement, it appears that MCI placed Digital Bearer Growth Circuits equivalent to only Circuit Months with COMSAT during 1993. In consideration of MCI's other traffic commitments reflected in this Agreement, the Parties agree that Paragraph F of this Article shall not be invoked, and that MCI shall make up the 1993 shortfall of\nCircuit Months completely in 1994. The price for these Circuit Months, and only these Circuit Months, shall be $465 per month per 64 Kbps equivalent circuit. The price for the Circuit Months originally committed to for 1994 under Paragraph B of this Article shall be $625 per month per 64 Kbps equivalent circuit. If MCI fails by year-end 1994 to place with COMSAT the total of Circuit Months ( ) committed to for 1994, then the provisions of Paragraph F of this Article will apply. MCI hereby reaffirms its commitment either to place the remainder of its Circuit Months with COMSAT according to the schedule set forth in Paragraph B of this Article or to follow the procedures set forth in Paragraph F of this Article. MCI also reaffirms its agreement that the price for all Circuit Months other than the Circuit Months referenced in this Paragraph shall be as specified in Paragraph D of this Article.\nARTICLE VI SECOND BULK OFFERING\nA. The Parties agree that MCI shall have options to lease up to three (3) 36 MHz bandwidth allotments from COMSAT for U.S. traffic. Two (2) of these options shall expire one (1) year after the effective date of this Agreement, and the third option shall expire two (2) years after the effective date of this Agreement. The designation of the specific capacity to be leased shall be subject to mutual agreement. All three (3) 36 MHz allotments offered pursuant to the Second Bulk Offering described in this Article shall be subject to the availability of capacity for the entire lease term as of the start date requested by MCI, and shall be leased pursuant to the rates, terms and conditions described in Paragraphs B-L below.\nB. MCI must lease each 36 MHz bandwidth allotment for a 10- year term, which term must commence before the expiration of the option date specified in Paragraph A above.\nC. COMSAT's rates for each 36 MHz allotment provided pursuant to the Second Bulk Offering described in this Article shall initially be $189,000 per month. If MCI leases three (3) 36 Mhz allotments within one (1) year after the effective date of this Agreement, the rate for each of the three allotments shall be $165,000 per month from January 1, 1997 through the remainder\nof the lease term for each allotment. If MCI leases two (2) 36 MHZ allotments within one (1) year after the effective date of this Agreement and a third 36 MHz allotment within two (2) years after the effective date of this Agreement, the rate for each of the three allotments shall be $165,000 per month from January 1, 1998 through the remainder of the lease term for each allotment.\nD. The Parties recognize that, even after COMSAT and MCI agree on specific capacity to be leased as part of the Second Bulk Offering described in this Article, there is still likely to be substantial non-MCI traffic located in these allotments that will constrain MCI's ability to utilize them fully. The parties also recognize that it will take some time to relocate this non- MCI traffic consistent with INTELSAT's standard relocation procedures. Therefore, until this relocation is complete, COMSAT will prorate its lease price such that, if there are X non-MCI circuits being leased from COMSAT in a given allotment, the lease price for that allotment will be ((540-X)\/540) x $189,000 (or $165,000, as applicable) per month.\nE. Each of the 36 MHz allotments described in this Article may accommodate up to 540 64 Kbps equivalent circuits. Consistent therewith, COMSAT and MCI hereby agree that, during the two-year period following the effective date of this Agreement, MCI's 36 MHz allotment(s) may absorb any or all of the 10-year Additional Circuits committed by MCI pursuant to\nArticle III-C of this Agreement. In addition, the Parties agree that, during the six-month period following the commencement of each lease for a 36 MHz allotment, that allotment may absorb up to 270 of MCI's other existing Additional Circuits (except circuits ordered under Article V-I of this Agreement), provided, however, that the total number of 64 Kbps equivalent circuits in any one 36 MHz allotment shall not exceed 540. (Base Circuits within the allotment may be substituted for Additional Circuits, but only if equivalent numbers of Additional Circuits outside the allotment are redesignated as Base Circuits, so that MCI's total number of Base Circuits remains constant at .) The movement of the 10-year Additional Circuits into the 36 MHz allotments, and of up to 270 other Additional Circuits (excluding Article V-I circuits) into a given 36 MHz allotment, subject to the limits set forth in this Paragraph, shall not be considered early termination, and early termination charges shall not apply thereto. However, if MCI moves more than the permitted number of existing Additional Circuits into 36 MHz allotments, MCI must replace those circuits with Growth Circuits of equal lease term; otherwise, early termination charges will be applied.\nF. Existing circuits outside the allotment(s) that have not been leased for multi-year terms (including circuits leased pursuant to the First Bulk Offering described in Article V of this Agreement) may be moved into the allotments at any time, and new circuits (including Additional Circuits not yet activated as\nof the effective date of this Agreement) may be activated inside the allotments at any time. Once a circuit is designated as part of an allotment, all other charges for that circuit shall cease, and that circuit may not be counted either in determining the appropriate block rates for MCI under Article IV-B and Attachments C and D of this Agreement, or in determining the number of Circuit Months placed with COMSAT under Article V of this Agreement.\nG. MCI agrees that it will not cancel any 36 MHz allotment taken pursuant to this Article until at least five (5) years after the commencement of the lease term for such allotment.\nH. Beginning five (5) years after the commencement of the lease term for any 36 MHz allotment taken pursuant to this Article, COMSAT's charge for early termination for that allotment shall be a flat fee of $6,880 x 540 64 Kbps equivalent circuits, plus 45% of the balance due at the time of early termination.\nI. Any 36 MHz allotment provided pursuant to this Article shall be non-preemptible. In case of space segment failure, such allotment(s) shall be restored in accordance with the procedures set forth in INTELSAT SSOG 103, Section 6, as may be amended from time to time. The allotment(s) may be used for any type of U.S. traffic, provided, however, that: (1) INTELSAT's technical lease definitions, as set forth in the IESS documents that COMSAT\nroutinely provides to MCI, shall apply to the use of the allotment(s), and that (2) COMSAT and INTELSAT must approve transmission plans for each circuit located in the allotment(s) in advance of service activation.\nJ. The Parties recognize that, during the lease term of the 36 MHz allotment(s) described in this Article, the particular satellites on which the allotments are initially located may be replaced by other INTELSAT satellites. In such cases, a transponder of different connectivity may be substituted for the replaced transponder upon mutual agreement of the Parties.\nK. The Parties agree that the rates, early termination charges, and other terms and conditions specified in this Article supersede any conflicting provisions in Tariff No. 1. In addition, the circuits provided pursuant to the Second Bulk Offering described in this Article shall be subject to the terms and conditions specified in Sections 2.1, 2.2, 2.3, 2.4.3, 2.5.1, 2.6, 2.7, 2.10, 2.11 and 9 of Tariff No. 1 as of the date of this Agreement, and those tariff provisions are hereby incorporated into this Agreement. If such tariff terms and conditions are amended during the term of this Agreement, the amended terms and conditions shall also be automatically incorporated into this Agreement and shall be effective as of the effective date of the tariff amendment, unless MCI notifies COMSAT in writing within thirty (30) days of such effective date that it does not accept\nthe amended terms and conditions, in which case the prior terms and conditions will continue to apply to MCI; provided, however, that MCI must accept or reject the amended terms and conditions in their entirety.\nL. Any request by MCI during the term of this Agreement for additional allotments (or options for allotments) beyond the number of exercisable options specified in this Article shall be the subject of a separate agreement with respect to price and terms when and if such a request is made.\nARTICLE VII SEMI-ANNUAL REPORTS\nA. To ensure compliance with the terms of this Agreement, MCI agrees to provide COMSAT with semi-annual reports, certified by a responsible officer of MCI or that officer's authorized designate. These reports will be provided at mid-year and year- end and will be subject to appropriate non-disclosure agreements.\nB. With respect to the First Bulk Offering described in Article V above, MCI shall specify in its semi-annual reports: (1) the number of 64 Kbps Digital Bearer Circuits activated and deactivated during the preceding six-month period; (2) the total number of Circuit Months utilized during the preceding six-month period; and (3) the total number of Circuit Months utilized up to the date of the report.\nC. With respect to the 10-year Digital Bearer Circuits described in Article III-C above, MCI shall specify the number of 64 Kbps equivalent Digital Bearer Circuits activated during the preceding six-month period on a regional basis. If MCI activates Additional Circuits over and above the 10-year circuits described in Article III-C above (and the 7-year circuits described in Article III-B above), it shall specify the number of 64 Kbps equivalent Digital Bearer Circuits activated during the preceding six-month period on a regional basis, and shall also\nindicate (in the case of circuits leased for seven (7) years or longer) whether it wishes those circuits to be counted prospectively toward the fulfillment of MCI's commitment under Articles V-A and V-B of this Agreement.\nD. To the extent that MCI exercises any of its options under the Second Bulk Offering described in Article VI above, MCI shall specify in its semi-annual reports: (1) the number of 64 Kbps Digital Bearer Circuits moved into and out of the allotment(s) within the previous six-month period, and (2) whether those circuits are (or were) existing long-term circuits, existing short-term circuits, or new circuits.\nE. The Parties will meet as needed to review and verify the semi-annual reports provided pursuant to this Article. In addition, and if undertaken at COMSAT's own expense, MCI agrees that COMSAT shall have the annual right to retain an independent firm to audit MCI's compliance with the circuit commitments made under this Agreement, and MCI agrees to cooperate fully with the independent auditors.\nF. The semi-annual reports provided for in this Article are not a substitute for COMSAT's standard ordering and billing procedures. Thus, nothing in this Article shall relieve MCI of its obligation to inform COMSAT of what service it wishes to take prior to activation, movement or designation of any circuit.\nARTICLE VIII MOST FAVORED CARRIER\nA. To the extent permitted by law, COMSAT agrees that, during the term of this Agreement, it will offer MCI rates, terms and conditions for Base Circuits that are no less favorable than the rates, terms and conditions it makes available, after the effective date of this Agreement, to any other USISC for Digital Bearer Circuits activated prior to January 1, 1992. In the event that, during the term of this Agreement, COMSAT makes available to another USISC rates, terms and conditions for Digital Bearer Circuits activated prior to January 1, 1992 that are more favorable than those applicable under this Agreement, then such more favorable rates, terms and conditions shall be offered by COMSAT to MCI in writing and, if accepted by MCI in writing, shall be automatically incorporated into this Agreement as an amendment thereto, and shall be effective as of the date made available to such other USISC.\nB. To the extent permitted by law, COMSAT agrees that, during the term of this Agreement, it will offer MCI rates, terms and conditions for Additional Circuits that are no less favorable than the rates, terms and conditions it makes available, after the effective date of this Agreement, to any other USISC (including potentially any carrier subsidiary or affiliate of COMSAT) for Digital Bearer Circuits activated on or after January\n1, 1992. In the event that, during the term of this Agreement, COMSAT makes available to another USISC rates, terms and conditions for Digital Bearer Circuits activated on or after January 1, 1992 that are more favorable than those applicable under this Agreement, then such more favorable rates, terms and conditions shall be offered by COMSAT to MCI in writing and, if accepted by MCI in writing, shall be automatically incorporated into this Agreement as an amendment thereto, and shall be effective as of the date made available to such other USISC.\nC. To the extent permitted by law, COMSAT agrees that, during the term of this Agreement, it will offer MCI rates, terms and conditions for Circuit Month bulk offerings that are no less favorable than the rates, terms and conditions it makes available to any other USISC for any such offerings leased after the effective date of this Agreement. In the event that, during the term of this Agreement, COMSAT makes available to another USISC rates, terms and conditions for Circuit Month bulk offerings leased after the effective date of this Agreement that are more favorable than those applicable under this Agreement, then such more favorable rates, terms and conditions shall be offered by COMSAT to MCI in writing and, if accepted by MCI in writing, shall be automatically incorporated into this Agreement as an amendment thereto, and shall be effective as of the date made available to such other USISC.\nD. To the extent permitted by law, COMSAT agrees that, during the term of this Agreement, it will offer MCI rates, terms and conditions for 36 MHz frequency allotments that are no less favorable than the rates, terms and conditions it makes available to any other USISC for any such allotments leased after the effective date of this Agreement. In the event that, during the term of this Agreement, COMSAT makes available to another USISC rates, terms and conditions for 36 MHz frequency allotments leased after the effective date of this Agreement that are more favorable than those applicable under this Agreement, then such more favorable rates, terms and conditions shall be offered by COMSAT to MCI in writing and, if accepted by MCI in writing, shall be automatically incorporated into this Agreement as an amendment thereto, and shall be effective as of the date made available to such other USISC.\nARTICLE IX CUSTOMER\/SUPPLIER RELATIONSHIP\nIn recognition of COMSAT's unique expertise and experience in international satellite telecommunications, the high quality of its services, its performance as U.S. Signatory to INTELSAT, and the Parties' good working relationship over the past decade, MCI agrees that it shall give COMSAT an opportunity to supply additional satellite capacity not covered by this agreement, provided however that, consistent with Article I above, nothing shall preclude MCI from placing such traffic on other facilities.\nARTICLE X NEW ENTRANTS\nA. It is the intent of the Parties under this Article that MCI shall not be placed at a market disadvantage by virtue of paying Base Circuit rates in comparison to other USISCs that did not take Digital Bearer Circuits from COMSAT in substantial numbers prior to January 1, 1992. Accordingly, if any USISC increases the number of 64 Kbps equivalent Digital Bearer Circuits it takes from COMSAT from fewer than in a particular region as of January 1, 1992, to more than in that region during the term of this Agreement (other than by merger with, or acquisition of, another USISC), and thereby achieves a lower average cost per circuit to that region than MCI, COMSAT shall, at its discretion, either: (1) adjust its rates for MCI's Base Circuits so that MCI's average cost per circuit, as billed by COMSAT, for Digital Bearer Circuits to the same region for the same term is no greater than the average cost per circuit available to such other USISC; or (2) adjust its rates for MCI's Base Circuits to the region in question so that those rates are no higher than the highest applicable step rate specified in Tariff No. 1 for 15-year circuits activated after January 1, 1992; or (3) subject to Article III-E above, permit MCI to cancel without penalty enough Base Circuits to the region in question to ensure that its average cost per circuit to that region for the\nsame term is no greater than the average cost per circuit available to such other USISC.\nB. For purposes of this Article, the regions referred to are those specified in Tariff No. 1, as may be amended from time to time. As of the date of this Agreement, those regions are: (1) (Western) Europe; (2) Pacific; (3) Latin America; and (4) Near and Middle East, Africa and other Europe.\nC. For purposes of calculating average cost per circuit in connection with this Article, any 36 MHz frequency allotment leased by MCI pursuant to Article VI of this Agreement (or by another USISC pursuant to a similar bulk offering) shall be deemed the equivalent of 540 Digital Bearer Circuits.\nD. As part of the review process described in Article VII of this Agreement, a responsible officer of COMSAT, or that officer's designee, shall certify to MCI whether any USISC has met the criteria set forth in Paragraph A of this Article. Such certification shall not require COMSAT to disclose to MCI the identity of such USISC, or any other confidential or competitively sensitive information with respect to such USISC.\nARTICLE XI INCENTIVE REGULATION\nNotwithstanding any other provision of this Agreement, Article X of this Agreement (entitled \"New Entrants\") shall not take effect unless and until the Federal Communications Commission issues a final Memorandum Opinion and Order, which is no longer subject to Commission or court review, granting COMSAT's specific request, as described in its Petition for Rulemaking, RM-7913, filed January 30, 1992, for incentive-based regulation of its multi-year fixed-price carrier-to-carrier contract-based switched-voice INTELSAT services.\nARTICLE XII REMEDIES\nA. In the event that COMSAT materially breaches Article IV- A, IV-B, or V-D of this Agreement, MCI shall be entitled to damages in an amount equal to the difference between the rates MCI actually paid and the rates specified in Attachments A, C and D and in Article V-D for the number of Base Circuits, Additional Circuits or Circuit Months involved.\nB. In the event that MCI exercises its option to lease one or more 36 MHz transponders pursuant to Article VI of this Agreement, and COMSAT then materially breaches Article VI-C of this Agreement, MCI shall be entitled to damages in an amount equal to the difference between the rates MCI paid and the rates specified in Article VI-C for the number of 36 MHz allotments involved.\nC. In the event that COMSAT materially breaches Article VIII of this Agreement, MCI shall be entitled to damages in an amount equal to the difference between the rates MCI paid for the circuits covered by this Agreement and the rates MCI would have paid for those circuits if COMSAT had not breached Article VIII.\nD. In the event that MCI materially breaches Article III-A of this Agreement, COMSAT shall be entitled to damages in an\namount equal to the revenues that COMSAT would have realized if MCI had left Base Circuits in place in accordance with its commitments to COMSAT and then canceled those circuits on January 1, 1999.\nE. In the event that MCI materially breaches Article III-C of this Agreement, COMSAT shall be entitled to damages in an amount equal to the termination charges that COMSAT would have realized if MCI had activated circuits on the last possible day consistent with its commitments and then canceled those circuits immediately. Alternatively, MCI may notify COMSAT that it wishes to commence payment for those circuits and activate them up to six (6) months later. If those circuits then are not activated within six (6) months, termination charges will apply to the remaining balance.\nF. In the event that MCI exercises its option to lease one or more 36 MHz frequency allotments pursuant to Article VI of this Agreement, and MCI then materially breaches Article VI-G of this Agreement with respect to such allotment(s), COMSAT shall be entitled to damages in an amount equal to the difference between the rates MCI paid and the revenues that COMSAT would have realized if MCI had not canceled such allotment(s) until five (5) years after commencement of the lease term for each allotment and had then canceled those leases.\nG. In no event shall either Party be entitled to damages or other remedies under this Article unless it provides the other Party with notice and a reasonable opportunity to cure within sixty (60) days of the date when the Party claiming breach either knew or should have known of the event giving rise to the alleged breach.\nARTICLE XIII TERM OF AGREEMENT\nThe term of this Agreement shall commence upon execution of the Agreement by both Parties and shall run through December 31, 2003, provided, however, that all applicable rates, terms and conditions for each circuit leased pursuant to the provisions of this Agreement (or its predecessors, the 1988 Agreement and the 1993 Agreement) shall survive until the expiration of that circuit's lease term. Thus, for example, the rates, terms and conditions for a 10-year Additional Circuit activated on January 1, 1995 would remain in effect until December 31, 2004.\nARTICLE XIV FCC REVIEW\nThe Parties shall jointly submit this Agreement to the FCC within thirty (30) days of execution pursuant to Section 211(a) of the Communications Act, and shall request confidential treatment for any competitively sensitive information contained herein. If any FCC proceeding is initiated with respect to the entry into force of this Agreement, the Parties agree to cooperate fully in seeking a prompt and favorable resolution of such proceeding.\nARTICLE XV DISPUTE RESOLUTION\nIf any dispute arises with respect to the interpretation, implementation or termination of this Agreement, the Parties will use their best efforts to resolve the matter amicably, including recourse to the highest levels of management in their respective organizations. If such efforts fail to resolve the dispute within a reasonable time, the Parties agree to present that dispute to the American Arbitration Association in Washington, D.C. for binding resolution in accordance with that Association's Commercial Rules of Arbitration, or in lieu of arbitration, to utilize another mutually agreeable means of alternative dispute resolution (ADR). Each Party shall bear all of its own costs incurred in utilizing arbitration or other ADR mechanism.\nARTICLE XVI ENTIRE AGREEMENT\nThis Agreement (including its attachments and those portions of COMSAT's tariffs which are incorporated by reference) replaces the 1993 Agreement between the Parties, and constitutes the entire agreement between the Parties as to MCI's utilization of COMSAT's INTELSAT space segment capacity for the telecommunications services specified herein; it is intended as the complete and exclusive statement of the terms of the agreement between the Parties, and supersedes all previous understandings, commitments or representations by or between the Parties with respect to its subject matter.\nARTICLE XVII REPRESENTATIONS OF AUTHORITY\nEach Party to this Agreement hereby represents and warrants to the other that it is a corporation duly organized, validly existing, and in good standing under the laws of its jurisdiction of incorporation; that it has appropriate approvals and direction from its Board of Directors to empower it to enter into and perform its obligations under this Agreement; and that it has taken all requisite corporate action to approve the execution, delivery, and performance of this Agreement.\nARTICLE XVIII BINDING OBLIGATION\nA. This Agreement, when executed and delivered, shall be a legal, valid and binding obligation of COMSAT and MCI, and shall bind all successors, permitted assigns and U.S. subsidiaries of the Parties.\nB. The provisions of this Agreement are for the benefit only of the Parties hereto and their subsidiaries, successors and permitted assigns, and no other party may seek to enforce, or benefit from, any provision of this Agreement.\nC. Neither Party shall assign or transfer its rights and obligations under this Agreement without the other Party's express written consent, which consent shall not be unreasonably withheld.\nARTICLE XIX NOTICES\nAll written notices required under this Agreement shall be considered properly given only when sent by registered or certified mail, return receipt requested, to the following addresses, respectively, or to such other addresses as the receiving party may hereafter designate in writing:\nTo MCI: William A. Paquin Vice President - Finance\/Information Services MCI International, Inc. 2 International Drive Rye Brook, New York 10573\nTo COMSAT: Patricia S. Benton Vice President and General Manager COMSAT World Systems 6560 Rock Spring Drive Bethesda, MD 20817\nAny period of time referred to herein which is to commence upon notice shall be counted from the date such notice is received as aforesaid.\nARTICLE XX WAIVERS\nThe waiver by either Party of a breach of, or default under, any of the provisions of this Agreement, or the failure of either Party, on one or more occasions, to enforce any of the provisions of this Agreement or to exercise any right or privilege hereunder, shall not thereafter be construed as a waiver of any subsequent breach or default of a similar nature, or as a waiver of any provision, right or privilege hereunder.\nARTICLE XXI MISCELLANEOUS\nA. The article headings and table of contents in this Agreement are inserted for convenience only and do not constitute a part of this Agreement.\nB. This Agreement may be amended only in writing by an instrument signed by authorized representatives of both Parties.\nC. This Agreement shall be construed according to the laws of the State of Maryland.\nD. This Agreement may be executed in counterparts, each of which shall be deemed an original, and all such counterparts together shall constitute one and the same instrument.\nE. This Agreement shall become effective as of the last date written below.\nIN WITNESS WHEREOF, each of the Parties hereto has executed this Agreement.\nMCI INTERNATIONAL, INC. COMSAT CORPORATION\n\/s\/William A. Paquin \/s\/Patricia Benton\nBy:___________________________ By:___________________________ Vice President and General Manager Vice President COMSAT World Systems Title: _______________________ Title:________________________\n24 January 1994 January 21, 1994 Date:_________________________ Date:_________________________\nATTACHMENT A\nBASE CIRCUIT RATES Per month per activated carrier(1) 15-Year Term\nCarrier Size 1993(2) 1994(3) 1995(4) 1996(5) 1997(6)\n64 Kbps $470 $595 $535 $465 $360 512 Kbps 3,760 4,760 4,280 3,720 2,880 1.024 Mbps 7,520 9,520 8,560 7,440 5,760 1.544 Mbps 10,370 13,130 11,760 10,175 7,920 2.048 Mbps 12,960 16,410 14,700 12,720 9,900 6.312 Mbps 36,530 46,250 41,430 35,850 27,900 8.448 Mbps 48,710 61,670 55,240 47,800 37,200\nPer 64 Kbps equivalent in a fully-activated 2.048 Mbps carrier $432 $547 $490 $424 $330\n- - - --------------------- (1) The rates specified in this Attachment are for services to INTELSAT Revised Standard A Earth Stations at the U.S. end.\n(2) The rates in this column shall be in effect only for the month of December 1993.\n(3) The rates in this column shall take effect on January 1, 1994.\n(4) The rates in this column shall take effect on January 1, 1995.\n(5) The rates in this column shall take effect on January 1, 1996.\n(6) The rates in this column shall take effect on January 1, 1997, and shall remain in effect for the duration of each circuit's lease term unless further reduced.\nATTACHMENT B\nRATE ADJUSTMENT FACTORS for Base and Additional Circuits\nEarth Station Frequency Minimum Rate Adjustment Standard Band G\/T Factor(1)\nStd. B C 31.7 dB\/K 1.36 Std. C 29.0 dB\/K 2.05 Std. C 27.0 dB\/K 2.92 Std. E-3 Ku 34.0 dB\/K 1.68 Std. E-2 Ku 29.0 dB\/K 4.94\n- - - ----------------------- (1) In the event that COMSAT tariffs rate adjustment factors that are more favorable than those listed in this Attachment, the factors tariffed shall be incorporated automatically into this Agreement.\nATTACHMENT C ADDITIONAL CIRCUIT RATES Per month per 64 Kbps equivalent in a fully-activated 2.048 Mbps carrier(1) 10-Year term\nBlock 1993-94(2) 1995(3) 1996(4) 1997(5)\nBlock 1(6) $495 $495 $450 $350 Block 2(7) 445 445 445 350 Block 3(8) 395 395 395 350 Block 4(9) 350 350 350 350\n- - - ----------------- (1) The rates specified in this Attachment are for service to all INTELSAT Standard A earth stations. Rates for fully activated 2.048 Mbps carriers shall be 30 times the numbers shown above. Rates for carrier sizes other than 2.048 Mbps shall bear the same relationships to the 2.048 Mbps rate as those shown in Attachment A.\n(2) The rates in this column are currently in effect.\n(3) The rates in this column are currently in effect.\n(4) The rates in this column shall take effect on January 1, 1996.\n(5) The rates in this column shall take effect on January 1, 1997, and shall remain in effect for the duration of each circuit's lease term unless further reduced.\n(6) The rates in Block 1 apply to Additional Circuits included among the first 270 Digital Bearer Circuits (excluding Base Circuits) leased in a given region for terms of at least five years. The regions are those specified in COMSAT World Systems Tariff F.C.C. No.1 as of the effective date of this Agreement, i.e.: (1) (Western) Europe; (2) Pacific; (3) Latin America; and (4) Near and Middle East, Africa and other Europe.\n(7) The rates in Block 2 apply to Additional Circuits included among the next 360 Digital Bearer Circuits (excluding Base Circuits) leased in a given region for terms of at least five years.\n(8) The rates in Block 3 apply to Additional Circuits included among the next 450 Digital Bearer Circuits (excluding Base Circuits) leased in a given region for terms of at least five years.\n(9) The rates in Block 4 apply to Additional Circuits included among the Digital Bearer Circuits above 1080 (excluding Base Circuits) leased in a given region for terms of at least five years.\nATTACHMENT D ADDITIONAL CIRCUIT RATES Per month per 64 Kbps equivalent in a fully-activated 2.048 Mbps carrier(1) 7-Year term\nBlock 1993-94(2) 1995(3) 1996(4) 1997(5)\nBlock 1(6) $615 $615 $559 $455 Block 2(7) 555 555 555 455 Block 3(8) 505 505 505 455 Block 4(9) 455 455 455 455\n- - - ------------------------\n(1) The rates specified in this Attachment are for service to all INTELSAT Standard A earth stations. Rates for fully activated 2.048 Mbps carriers shall be 30 times the numbers shown above. Rates for carrier sizes other than 2.048 Mbps shall bear the same relationships to the 2.048 Mbps rate as those shown in Attachment A.\n(2) The rates in this column are currently in effect.\n(3) The rates in this column are currently in effect.\n(4) The rates in this column shall take effect on January 1, 1996.\n(5) The rates in this column shall take effect on January 1, 1997, and shall remain in effect for the duration of each circuit's lease term unless further reduced.\n(6) The rates in Block 1 apply to Additional Circuits included among the first 270 Digital Bearer Circuits (excluding Base Circuits) leased in a given region for terms of at least five years. The regions are those specified in COMSAT World Systems Tariff F.C.C. No.1 as of the effective date of this Agreement, i.e.: (1) (Western) Europe; (2) Pacific; (3) Latin America; and (4) Near and Middle East, Africa and other Europe.\n(7) The rates in Block 2 apply to Additional Circuits included among the next 360 Digital Bearer Circuits (excluding Base Circuits) leased in a given region for terms of at least five years.\n(8) The rates in Block 3 apply to Additional Circuits included among the next 450 Digital Bearer Circuits (excluding Base Circuits) leased in a given region for terms of at least five years.\n(9) The rates in Block 4 apply to Additional Circuits included among the Digital Bearer Circuits above 1080 (excluding Base Circuits) leased in a given region for terms of at least five years.\nEXHIBIT 10(jj)\nAT&T Maritime Services 650 Liberty Avenue Union, NJ 07083 FAX 908 851-4002\nFebruary 18, 1994\nChristopher J. Leber Vice President & General Manager CMC Operations COMSAT Mobile Communications 22300 COMSAT Drive Clarksburg, Maryland 20871\nChris,\nThe following outlines the agreement in principle we have reached regarding pricing and volumes for AT&T's branded shore-to-ship mobile satellite service and COMSAT's branded ship-to-shore service to be effective February 1, 1994.\nAT&T plans to route 1.8 million minutes annually of domestic U.S. originating shore-to-ship Standard A traffic to COMSAT, prorated during the period beginning February 1, 1994 and ending December 31, 1994. AT&T will settle with COMSAT at the rate of $6.70 per minute. Furthermore, for all Standard M and Standard B traffic that AT&T routes to COMSAT during the above period, COMSAT will settle with AT&T at the rate of $4.95 per minute for Standard M traffic and $6.45 per minute for Standard B traffic.\nCOMSAT plans to route 3.6 million minutes annually of ship-to- shore traffic to AT&T, prorated during the period beginning February 1, 1994 and ending December 31, 1994. COMSAT will also return to AT&T all calls designated by the customer for termination over the AT&T network. COMSAT will settle with AT&T at the rate of $.25 per minute for calls terminating in the United States and, for call terminating to all other points, at an amount equal to a 10 percent discount off of AT&T's prevailing published ILD rates.\nNeither AT&T nor COMSAT commits to traffic volumes, but will make a good faith effort to send the above-described traffic to the other. Each party will review volumes quarterly to verify that these proposed volumes are being satisfied. There will be no shortfall obligation, charge, or penalty for the failure to deliver the planned volumes.\nThe parties agree also to exchange written proposals on or before November 30, 1994 with respect to prices for calendar year 1995. Subject to any appropriate regulatory approvals, this informal letter of understanding will form the basis for a formal contract based upon these principles. The parties will use reasonable best efforts to incorporate the above understanding into a formal contract by the earliest possible date.\nPlease indicate your acceptance in the appropriate space below.\nSincerely,\n\/s\/Paula Goldstein - - - ------------------ Paula Goldstein Product Manager Maritime Services\n\/s\/Cheryl Lynn Schneider Agreed to and accepted by: ________________________________\nEXHIBIT 10(kk)\n______________________________________________________________________________\nFISCAL AGENCY AGREEMENT\nBetween\nINTERNATIONAL TELECOMMUNICATIONS SATELLITE ORGANIZATION,\nIssuer\nand\nBANKERS TRUST COMPANY\nFiscal Agent and Principal Paying Agent\n_________________________\nDated as of 22 March 1994 _________________________\nU.S. $200,000,000\n6 5\/8% Notes Due 2004\n______________________________________________________________________________\nFISCAL AGENCY AGREEMENT, dated as of 22 March 1994 (the \"Agreement\"), between International Telecommunications Satellite Organization (\"INTELSAT\"), an international organization established by the Agreement Relating to the International Telecommunications Satellite Organization and the Operating Agreement relating thereto, entered into force on 12 February 1973, and Bankers Trust Company, a bank organized under the laws of New York, United States, as Fiscal Agent and Principal Paying Agent.\n1. INTELSAT has, by a Subscription Agreement, dated 7 March 1994, between INTELSAT and Goldman Sachs (Asia) Limited (\"GSAL\"), and the other Managers named therein (the \"Managers\"), agreed to issue U.S. $200,000,000 aggregate principal amount of its 6 5\/8% Notes Due 2004 (the \"Notes\"). The Notes shall be issued initially in the form of a temporary global note in bearer form, without interest coupons, substantially in the form of Exhibit A hereto (the \"Global Note\"). The Global Note will be exchangeable, as provided below, for definitive Notes issuable in bearer form, in denominations of U.S. $10,000 and U.S. $100,000 (the \"Bearer Notes\") with interest coupons attached (the \"coupons\"), substan- tially in the forms set forth in Exhibit B hereto. The term \"Notes\" as used herein includes the Global Note. The term \"Holder\", when used with respect to a Bearer Note or any coupon, means the bearer thereof.\n2. INTELSAT hereby appoints Bankers Trust Company acting through its office at London, United Kingdom, as its fiscal agent and principal paying agent in respect of the Notes upon the terms and subject to the conditions herein set forth (Bankers Trust Company and its successor or successors as such fiscal agent or principal paying agent qualified or appointed in accordance with Section 8 hereof are herein collectively called the \"Fiscal Agent\"), and Bankers Trust Company hereby accepts such appointment. The Fiscal Agent shall have the powers and authority granted to and conferred upon it herein and in the Notes and such further powers and authority to act on behalf of INTELSAT as may be mutually agreed upon by INTELSAT and the Fiscal Agent. As used herein, \"paying agents\" shall mean paying agents (including the Fiscal Agent) maintained by INTELSAT as provided in Section 8(b) hereof.\n3. (a) The Notes shall be executed on behalf of INTELSAT by the Director General and Chief Executive Officer or by any other officer of INTELSAT specifically identified in a certificate of incumbency and specimen signatures as having the requisite authority to execute the Notes (the \"Executive Officers\"), any of whose signatures may be manual or facsimile, under a facsimile of its seal reproduced thereon and attested by its General Counsel or an Assistant General Counsel, any of whose signatures may be manual or facsimile. Notes bearing the manual or facsimile signatures of persons who were at any time the proper officers of INTELSAT shall bind INTELSAT, notwithstanding that such persons or any of them ceased to hold such office or offices prior to the authentication and delivery of such Notes or did not hold such office or offices at the date of issue of such Notes.\n(b) The Fiscal Agent is hereby authorized, in accordance with the provisions of Paragraph 9 of the definitive Notes and this Section, from time to time to authenticate (or to arrange for the authentication on its behalf) and deliver a new Note in exchange for or in lieu of any Note which has become, or the coupons appertaining thereto which have become, mutilated, lost, stolen or destroyed. Each Note authenticated and delivered in exchange for or in lieu of any such Note shall carry all the rights to interest accrued and unpaid and to accrue which were carried by such Note.\n4. (a) INTELSAT initially shall execute and deliver, on 22 March 1994 (the \"Closing Date\"), a Global Note for an aggregate principal amount of U.S. $200,000,000 to the Fiscal Agent, and the Fiscal Agent by a duly authorized officer or an attorney-in-fact duly appointed pursuant to a valid power of attorney shall, upon the order of INTELSAT signed by an Executive Officer of INTELSAT, authenticate the Global Note and deliver the Global Note to The Chase Manhattan Bank, N.A., as common depositary (the \"Common Depositary\") for the benefit of the operator of the Euroclear System (\"Euroclear\") and Cedel S.A. (\"Cedel\"), for credit to the respective account of the purchasers (or to such other accounts as it may direct).\n(b) For the purposes of this Agreement, \"Exchange Date\" shall mean a date which is not earlier than the day immediately following the expiration of the 40-day period beginning on the later of the commencement of the offering and the Closing Date. Without unnecessary delay, but in any event not less than 14 days prior to the Exchange Date, in such denominations as are specified by the Fiscal Agent, except in the event of earlier redemption or acceleration, INTELSAT shall execute and deliver to the Fiscal Agent U.S. $200,000,000 principal amount of definitive Bearer Notes.\n(c) Not earlier than the Exchange Date, the interest of a beneficial owner of the Notes in the Global Note shall only be exchanged for Bearer Notes after the account holder instructs Euroclear or Cedel, as the case may be, to request such exchange on his behalf and presents to Euroclear or Cedel, as the case may be, a certificate substantially in the form set forth in Exhibit C hereto, copies of which certificate shall be available from the offices of Euroclear and Cedel, the Fiscal Agent and each other paying agent of INTELSAT. Any exchange pursuant to this paragraph shall be made free of charge to beneficial owners of the Global Note, except that a person receiving definitive Notes must bear the cost of insurance, postage, transportation and the like in the event that such person does not take delivery of such definitive Notes in person at the offices of Euroclear or Cedel. In no event shall any such exchange occur prior to the Exchange Date.\n(d) Upon request for issuance of Bearer Notes, on or after the Exchange Date, the Global Note shall be surrendered by the Common Depositary to the Fiscal Agent, as INTELSAT's agent, for purposes of the exchange of Notes described below. Following such surrender and upon presentation by Euroclear or Cedel, acting on behalf of the beneficial owners of Bearer Notes, to the Fiscal Agent at its principal office in London, United Kingdom (the \"Principal Office\") of a certificate or certificates substantially in the form set forth in Exhibit D\nhereto, the Fiscal Agent shall authenticate (or arrange for the authentication on its behalf) and deliver to Euroclear or Cedel, as the case may be, for the account of such owners, the Bearer Notes in exchange for an aggregate principal amount equal to the principal amount of the Global Note beneficially owned by such owners. The presentation to the Fiscal Agent by Euroclear or Cedel of such a certificate may be relied upon by INTELSAT and the Fiscal Agent as conclusive evidence that a related certificate or certificates has or have been presented to Euroclear or Cedel, as the case may be, as contemplated by the terms of Section 4(c) hereof.\nUpon any exchange of a portion of the Global Note for Bearer Notes, the Global Note shall be endorsed by the Fiscal Agent to reflect the reduction of the principal amount evidenced thereby, whereupon its remaining principal amount shall be reduced for all purposes by the amount so exchanged; provided, that when the Global Note is exchanged in full, the Fiscal Agent shall cancel it. Until so exchanged in full, the Global Note shall in all respects be entitled to the same benefits under this Agreement as the definitive Notes authenticated and delivered hereunder, except that none of Euroclear, Cedel or the beneficial owners of the Global Note shall be entitled to receive payment of interest thereon.\nNotwithstanding the foregoing, in the event of redemption or acceleration of the Global Note prior to the issue of the Bearer Notes, Bearer Notes will be issuable in respect of such Global Note on or after the later of (i) the date fixed for such redemption or on which such acceleration occurs and (ii) the Exchange Date, and all of the foregoing in this subsection (d) shall be applicable to the issuance of such Bearer Notes.\n(e) No Note or coupon shall be entitled to any benefit under this Agreement or be valid or obligatory for any purpose unless there appears on such Note or coupon a certificate of authentication substantially in the forms provided for herein and executed by the Fiscal Agent by manual signature, and such certificate upon any Note or coupon shall be conclusive evidence, and the only evidence, that such Note or coupon has been duly authenticated and delivered hereunder.\n5. (a) INTELSAT will pay or cause to be paid to the Fiscal Agent the amounts required to be paid by it herein and in the Notes, at the times and for the purposes set forth herein and in the Notes and in the manner set forth below, and INTELSAT hereby authorizes and directs the Fiscal Agent to make payment of the principal of and interest and additional amounts pursuant to Paragraph 5 of the definitive Notes (\"Additional Amounts\"), if any, on the Notes in accordance with the terms of the Notes.\n(i) INTELSAT shall initiate a wire transfer for payment to the Fiscal Agent at its Principal Office in London, United Kingdom, by no later than 10:00 a.m. (New York time) on the applicable Interest Payment Date, any redemption date and the maturity date of the Notes, in such coin or currency of the United States of America as at the time of payment is legal tender for the payment of public and private debts, of amounts sufficient (with any amounts then held by the Fiscal Agent and available for the purpose) to pay\nthe interest on, the redemption price of an accrued interest (if the redemption date is not an Interest Payment Date) on, and the principal of, the Notes due and payable on such an Interest Payment Date, redemption date or maturity date, as the case may be.\n(ii) INTELSAT will supply to the Fiscal Agent by 10:00 a.m. (New York time) on the second business day prior to the due date for any such payment a confirmation (by tested telex or authenticated SWIFT message or by facsimile transmission with an original to follow by mail) that such payment will be made, which confirmation shall identify the bank from which the wire transfer constituting payment will be made.\n(iii) The Fiscal Agent will forthwith notify by telex each of the other paying agents and INTELSAT if it has not (A) by the time specified for its receipt, received the confirmation referred to above or (B) by the due date for any payment due, received the full amount so payable on such date.\n(iv) In the absence of the notification from the Fiscal Agent referred to in sub-clause (iii) of this Clause, each such paying agent shall be entitled to assume that the Fiscal Agent has received the full amount due in respect of the Notes or the Coupons on that date and shall be entitled:\n(A) to pay maturing Notes and Coupons in accordance with their terms; and\n(B) to claim any amounts so paid by it from the Fiscal Agent (notwithstanding anything herein to the contrary).\n(v) Without prejudice to the obligations of INTELSAT to make payments in accordance with the provisions of this Clause, if payment of the appropriate amount shall be made by or on behalf of INTELSAT later than the time specified, but otherwise in accordance with the provisions hereof, the Fiscal Agent shall forthwith notify the paying agents and give notice to holders of the Notes, that the Fiscal Agent has received such amount and the paying agents will act as such for the Notes and Coupons and make or cause to be made payments as provided herein.\n(vi) The Fiscal Agent shall apply the amounts so paid to it to the payment of such interest, redemption price and principal in accordance with the terms of the Notes. Any monies paid by INTELSAT to the Fiscal Agent for the payment of the principal of and interest on any Notes and remaining unclaimed at the end of two years after such principal or interest shall have become due and payable (whether at maturity, upon call for redemption or otherwise) shall then be repaid to INTELSAT upon its written request, and upon such repayment all\nliability of the Fiscal Agent with respect thereto shall thereupon cease, without, however, limiting in any way any obligation INTELSAT may have to pay the principal of and interest on this Note as the same shall become due.\n(b) Notwithstanding any other provision hereof (other than the last sentence of this Section 5(b)) or of the Notes, no payment with respect to principal of or interest or Additional Amounts, if any, on any Bearer Note may be made at any office of the Fiscal Agent or any other paying agent maintained by INTELSAT in the United States of America (including the States and the District of Columbia), its territories or possessions and other areas subject to its jurisdiction (the \"United States\"). No payment with respect to a Bearer Note shall be made by transfer to an account in, or by mail to an address in, the United States. Notwithstanding the foregoing, payment of principal of and interest and Additional Amounts, if any, on Bearer Notes shall be made at the paying agent in the Borough of Manhattan, The City of New York, if (but only if) payments in United States dollars of the full amount of such principal, interest or Additional Amounts at all offices or agencies outside the United States through which payment is to be made in accordance with the terms of the Notes is illegal or effectively precluded by exchange controls or other similar restrictions.\n(c) If INTELSAT becomes liable to pay additional amounts pursuant to Section 5 of the Notes, then, at least ten business days prior to the date of any such payment of principal or interest to which such payment of additional amounts relates, INTELSAT shall furnish the Fiscal Agent, the Paying Agent and each other paying agent of INTELSAT with a certificate which specifies, by country, the rates of withholding, if any, applicable to such payment to Holders of the Notes, and shall pay to the Paying Agent such amounts as shall be required to be paid to Holders of the Notes. INTELSAT hereby agrees to indemnify the Fiscal Agent, the Paying Agent and each other paying agent of INTELSAT for, and to hold them harmless against, any loss, liability or expense incurred without negligence or bad faith on their part arising out of or in connection with actions taken or omitted by any of them in reliance on any certificate furnished pursuant to this Section 5(c).\n(d) In the case of any redemption of Notes, INTELSAT shall give notice, not less than 45 or more than 75 days prior to any date set for redemption (as provided for in Paragraph 6 of the definitive Notes), to the Fiscal Agent of its election to redeem the Notes on such redemption date specified in such notice. The Fiscal Agent shall cause notice of redemption to be given in the name and at the expense of INTELSAT in the manner provided in Paragraph 6(e) of the definitive Notes.\n6. All Notes and coupons surrendered for payment, redemption or exchange shall, if surrendered to anyone other than the Fiscal Agent, be cancelled and delivered to the Fiscal Agent. All cancelled Notes and coupons held by the Fiscal Agent shall be destroyed, and the Fiscal Agent shall furnish to INTELSAT a certificate with respect to such destruction, except that the cancelled Global Note and the certificates as to beneficial ownership required by Section 4 hereof shall not be destroyed but shall be delivered to INTELSAT.\n7. The Fiscal Agent accepts its obligations set forth herein and in the Notes upon the terms and conditions hereof and thereof, including the following, to all of which INTELSAT agrees and to all of which the rights hereunder of the Holders from time to time of the Notes and coupons shall be subject:\n(a) The Fiscal Agent and each other paying agent of INTELSAT shall be entitled to the compensation to be agreed upon with INTELSAT for all services rendered by it, and INTELSAT agrees promptly to pay such compensation and to reimburse the Fiscal Agent and each other paying agent of INTELSAT for its reasonable out-of- pocket expenses (including reasonable advertising expenses and counsel fees) incurred by it in connection with the services rendered by it hereunder. INTELSAT also agrees to indemnify each of the Fiscal Agent and each other paying agent of INTELSAT hereunder for, and to hold it harmless against, any loss, liability or expense incurred without negligence or bad faith on the part of the Fiscal Agent or such other paying agent, arising out of or in connection with its acting as such Fiscal Agent or other paying agent of INTELSAT hereunder, including the costs and expenses of defending against any claim of liability. For purposes of this Section, the obligations of INTELSAT shall survive the payment of the Notes and the resignation or removal of the Fiscal Agent or any other paying agent of INTELSAT hereunder.\n(b) In acting under this Agreement and in connection with the Notes, the Fiscal Agent and each other paying agent of INTELSAT are acting solely as agents of INTELSAT and do not assume any obligation or relationship of agency or trust for or with any of the Holders of the Notes or coupons, except that all funds held by the Fiscal Agent or any other paying agent of INTELSAT for payment of principal of or interest or Additional Amounts, if any, on the Notes shall be held in trust, but need not be segregated from other funds except as required by law, and shall be applied as set forth herein and in the Notes; provided, however, that monies paid by INTELSAT to the Fiscal Agent or any other paying agent of INTELSAT for the payment of principal of or interest or Additional Amounts, if any, on Notes remaining unclaimed at the end of two years after such principal or interest or Additional Amounts, if any, shall have become due and payable shall be repaid to INTELSAT, promptly upon its request, as provided and in the manner set forth in the Notes, whereupon the aforesaid trust shall terminate and all liability of the Fiscal Agent or such other paying agent of INTELSAT with respect thereto shall cease and the Holder of such Note or unpaid coupon must thereafter look solely to INTELSAT for payment thereof.\n(c) The Fiscal Agent and each other paying agent of INTELSAT hereunder may consult with counsel (who may also be counsel to INTELSAT) satisfactory to such Fiscal Agent or paying agent in its reasonable judgment, and the written opinion of such counsel shall be full and complete authorization and protection in respect of any action taken, omitted or suffered by it hereunder in good faith and in reliance thereon.\n(d) The Fiscal Agent and each other paying agent of INTELSAT hereunder shall be protected and shall incur no liability to any person for or in respect of any action in good\nfaith taken, omitted or suffered by it in reliance upon any Note, coupon, notice, direction, consent, certificate, affidavit, statement or other paper or document reasonably believed by the Fiscal Agent or such other paying agent in good faith to be genuine and to have been signed by the proper parties.\n(e) The Fiscal Agent and each other paying agent of INTELSAT hereunder and its directors, officers and employees may become the owner of, or acquire an interest in, any Notes or coupons, with the same rights that it or they would have if it were not the Fiscal Agent or such other paying agent of INTELSAT hereunder, may engage or be interested in any financial or other transaction with INTELSAT and may act on, or as depositary, trustee or agent for, any committee or body of Holders of Notes or coupons or holders of other obligations of INTELSAT as freely as if it were not the Fiscal Agent or a paying agent of INTELSAT hereunder.\n(f) Neither the Fiscal Agent nor any other paying agent of INTELSAT hereunder shall be under any liability to any person for interest on any monies at any time received by it pursuant to any of the provisions of this Agreement or of the Notes except as may be otherwise agreed with INTELSAT.\n(g) The recitals contained herein and in the Notes (except the Fiscal Agent's certificates of authentication) and in the coupons shall be taken as the statements of INTELSAT, and the Fiscal Agent assumes no responsibility for their correctness. The Fiscal Agent makes no representation as to the validity or sufficiency of this Agreement or the Notes or coupons, except for the Fiscal Agent's due authorization to execute and deliver this Agreement; provided, however, that the Fiscal Agent shall not be relieved of its duty to authenticate Notes (or to arrange for authentication on its behalf) as authorized by this Agreement. The Fiscal Agent shall not be accountable for the use or application by INTELSAT of the proceeds of Notes.\n(h) The Fiscal Agent and each other paying agent of INTELSAT hereunder shall be obligated to perform such duties and only such duties as are herein and in the Notes specifically set forth and no implied duties or obligations shall be read into this Agreement or the Notes against the Fiscal Agent or any other paying agent of INTELSAT. The Fiscal Agent shall not be under any obligation to take any action hereunder which may tend to involve it in any undue expense or liability, the payment of which within a reasonable time is not, in its reasonable opinion, assured to it.\n(i) Unless herein or in the Notes otherwise specifically provided, any order, certificate, notice, request, direction or other communication from INTELSAT under any provision of this Agreement shall be sufficient if signed by an Executive Officer of INTELSAT.\n(j) No provision of this Agreement shall be construed to relieve the Fiscal Agent from liability for its own negligent action, its own negligent failure to act, or its own willful misconduct or that of its directors, officers or employees.\n8. (a) INTELSAT agrees that, until all Notes or coupons (other than coupons the surrender of which has been waived under Paragraphs 3 and 6 of the definitive Notes and coupons which have been replaced or paid as provided in Paragraph 9 of the definitive Notes) authenticated and delivered hereunder (i) shall have been delivered to the Fiscal Agent for cancellation or (ii) become due and payable, whether at maturity or upon redemption, and monies sufficient to pay the principal thereof and interest, and Additional Amounts, if any, thereon shall have been made available to the Fiscal Agent and either paid to the persons entitled thereto or returned to INTELSAT as provided herein and in the Notes, there shall at all times be a Fiscal Agent hereunder which shall be appointed by INTELSAT, shall be authorized under the laws of its place of organization to exercise corporate trust powers and shall have a combined capital and surplus of at least U.S. $50,000,000.\n(b) INTELSAT hereby appoints the Principal Office of the Fiscal Agent as its agent where, subject to any applicable laws or regulations, Notes and coupons may be presented or surrendered for payment, where the Global and Bearer Notes may be surrendered for exchange and where notices and demands to or upon INTELSAT in respect of the Notes and coupons and this Agreement may be served. In addition, INTELSAT hereby appoints the main office of Bankers Trust Luxembourg S.A. in Luxembourg, Bankers Trust Company in Hong Kong, Credit Suisse in Zurich, Switzerland and DBS Bank in Singapore as additional paying agencies for the payment of principal of, and interest and Additional Amounts, if any, on, the Notes.\nINTELSAT may at any time and from time to time vary or terminate the appointment, upon thirty days prior written notice, of any such agent or appoint any additional agents for any or all of such purposes; provided, however, that, (i) so long as INTELSAT is required to maintain a Fiscal Agent hereunder, INTELSAT will maintain in London, United Kingdom an office or agency where Notes and coupons may be presented or surrendered for payment, where the Global and Bearer Notes may be presented for exchange and where notices and demands to or upon INTELSAT in respect of the Notes and coupons and this Agreement may be served and (ii) in the event the circumstances described in Section 5(b) hereof require, it will designate a paying agent in the Borough of Manhattan, The City of New York, the State of New York, U.S.A., where Bearer Notes and coupons may be presented or surrendered for payment in such circumstances (and not otherwise); and provided, further, that so long as the Notes are listed on the respective stock exchanges, INTELSAT will maintain a paying agent in Hong Kong and Singapore. INTELSAT will give prompt written notice to the Fiscal Agent, of the appointment or termination of any such agency and of the location and any change in the location of any such office or agency and shall give notice thereof to Holders in the manner described in the first sentence of Paragraph 6(d) of the definitive Notes.\n(c) The Fiscal Agent may at any time resign as such Fiscal Agent by giving written notice to INTELSAT of such intention on its part, specifying the date on which its desired resignation shall become effective; provided, however, that such date shall never be less than three months after the receipt of such notice by INTELSAT unless INTELSAT agrees to\naccept less notice. The Fiscal Agent may be removed at any time by the filing with it of an instrument in writing signed on behalf of INTELSAT and specifying such removal and the date when it is intended to become effective. Any resignation or removal of the Fiscal Agent or other paying agent of INTELSAT, if such other paying agent is the only paying agent of INTELSAT then maintained outside the United States, shall take effect upon the date of the appointment by INTELSAT as hereinafter provided of a successor and the acceptance of such appointment by such successor. Upon its resignation or removal, such agent shall be entitled to the payment by INTELSAT of its compensation for the services rendered hereunder and to the reimbursement of all reasonable out-of-pocket expenses incurred in connection with the services rendered hereunder by such agent.\n(d) In case at any time the Fiscal Agent or other paying agent of INTELSAT, if such other paying agent is the only paying agent of INTELSAT then maintained outside the United States, shall resign, or shall be removed, or shall become incapable of acting or shall be adjudged a bankrupt or insolvent, or if a receiver of it or of its property shall be appointed, or if any public officer shall take charge or control of it or of its property or affairs for the purpose of rehabilitation, conservation or liquidation, a successor agent, eligible as aforesaid, shall be appointed by INTELSAT by an instrument in writing. Upon the appointment as aforesaid of a successor agent and the acceptance by it of such appointment, the agent so superseded shall cease to be such agent hereunder. If no successor Fiscal Agent or other paying agent of INTELSAT shall have been so appointed by INTELSAT and shall have accepted appointment as hereinafter provided, and if such other paying agent is the only paying agent of INTELSAT then maintained outside the United States, and if INTELSAT shall have otherwise failed to make arrangements for the performance of the duties of the Fiscal Agent or other paying agent, then any Holder of a Note who has been a bona fide Holder of a Note for at least six months, on behalf of himself and all others similarly situated, or the Fiscal Agent, may petition any New York State or United States Federal court sitting in the Borough of Manhattan, The City of New York, the State of New York, U.S.A., for the appointment of a successor agent.\n(e) Any successor Fiscal Agent appointed hereunder shall execute, acknowledge and deliver to its predecessor and to INTELSAT an instrument accepting such appointment hereunder, and thereupon such successor Fiscal Agent, without any further act, deed or conveyance, shall become vested with all the authority, rights, powers, trusts, immunities, duties and obligations of such predecessor with like effect as if originally named as such Fiscal Agent hereunder, and such predecessor, upon payment of its charges and disbursements then unpaid, shall simultaneously therewith become obligated to transfer, deliver and pay over, and such successor Fiscal Agent shall be entitled to receive, all monies, securities or other property on deposit with or held by such predecessor, as such Fiscal Agent hereunder. INTELSAT will give prompt written notice to each other paying agent of INTELSAT of the appointment of a successor Fiscal Agent and shall give notice thereof to Holders at least once, in the manner described in Paragraph 6(e) of the definitive Notes.\n(f) Any corporation, bank or trust company into which the Fiscal Agent may be merged or converted, or with which it may be consolidated, or any corporation, bank or trust company resulting from any merger, conversion or consolidation to which the Fiscal Agent shall be a party, or any corporation, bank or trust company succeeding to all or substantially all the assets and business of the Fiscal Agent, shall be the successor to the Fiscal Agent under this Agreement; provided, however, that such corporation shall be otherwise eligible under this Section, without the execution or filing of any document or any further act on the part of any of the parties hereto.\n9. INTELSAT will pay all stamp taxes and other duties, if any, which may be imposed by the United States, the United Kingdom or any political subdivision or taxing authority of or in the foregoing with respect to (i) the execution or delivery of this Agreement, (ii) the issuance of the Global Note, or (iii) the exchange from time to time of the Global Note for Bearer Notes (other than any such tax or duty which would not have been imposed on such exchange had such exchange occurred on or before the first anniversary of the initial issuance of the Notes which shall be payable by the Holders).\n10. (a) A meeting of Holders of Notes may be called at any time and from time to time to make, give or take any request, demand, authorization, direction, notice, consent, waiver or other action provided by this Agreement or the Notes to be made, given or taken by Holders of Notes. The Fiscal Agent may, upon request from, and at the expense of, INTELSAT, direct to convene a single meeting of the Holders of Notes and the holders of debt securities of other series.\n(b) INTELSAT may at any time call a meeting of Holders of Notes for any purpose specified in Section 10(a) hereof to be held at such time and at such place in London, United Kingdom or in the Borough of Manhattan, The City of New York, the State of New York, U.S.A., as INTELSAT shall determine. Notice of every meeting of Holders of Notes, setting forth the time and the place of such meeting and in general terms the action proposed to be taken at such meeting, shall be given, in the same manner as provided in Paragraph 6(e) of the definitive Notes, not more than 180 days nor less than 21 days prior to the date fixed for the meeting. In case at any time the Holders of at least 10% in principal amount of the Outstanding (as defined in Paragraph 3 of the definitive Notes) Notes shall have requested INTELSAT to call a meeting of the Holders of Notes for any purpose specified in Section 10(a) hereof, by written request setting forth in reasonable detail the action proposed to be taken at the meeting, and INTELSAT shall not have caused to be published the notice of such meeting within 21 days after receipt of such request or shall not thereafter proceed to cause the meeting to be held as provided herein, then the Holders of Notes in the amount above-specified, as the case may be, may determine the time and the place in London, United Kingdom or in the Borough of Manhattan, The City of New York, the State of New York, U.S.A., for such meeting and may call such meeting for such purposes by giving notice thereof as provided in this subsection (b).\n(c) To be entitled to vote at any meeting of Holders of Notes, a person shall be a Holder of an Outstanding Note or a person appointed by an instrument in writing as proxy for such a Holder.\n(d) The persons entitled to vote a majority in aggregate principal amount of the Outstanding Notes shall constitute a quorum. In the absence of a quorum within 30 minutes of the time appointed for any such meeting, the meeting shall, if convened at the request of the Holders of Notes, be dissolved. In any other case the meeting may be adjourned for a period of not less than 10 days as determined by the chairman of the meeting prior to the adjournment of such meeting. In the absence of a quorum at any such adjourned meeting, such adjourned meeting may be further adjourned for a period of not less than 10 days as determined by the chairman of the meeting prior to the adjournment of such adjourned meeting. Notice of the reconvening of any adjourned meeting shall be given as provided in Section 10(b) hereof, except that such notice need be given only once not less than five days prior to the date on which the meeting is scheduled to be reconvened. Notice of the reconvening of an adjourned meeting shall state expressly the percentage of the principal amount of the Outstanding Notes which shall constitute a quorum.\nSubject to the foregoing, at the reconvening of any meeting adjourned for a lack of a quorum, the persons entitled to vote 25% in principal amount of the Outstanding Notes shall constitute a quorum for the taking of any action set forth in the notice of the original meeting. Any meeting of Holders of Notes at which a quorum is present may be adjourned from time to time by vote of a majority in principal amount of the Outstanding Notes represented at the meeting, and the meeting may be held as so adjourned without further notice. At a meeting or an adjourned meeting duly reconvened and at which a quorum is present as aforesaid, any resolution and all matters shall be effectively passed or decided if passed or decided by the persons entitled to vote a majority in principal amount of the Outstanding Notes represented and voting.\n(e) INTELSAT may make such reasonable regulations as it may deem advisable for any meeting of Holders of Notes in regard to proof of the holding of Notes and of the appointment of proxies and in regard to the appointment and duties of inspectors of votes, the submission and examination of proxies, certificates and other evidence of the right to vote, and such other matters concerning the conduct of the meeting as it shall deem appropriate. INTELSAT or the Holders calling the meeting, as the case may be, shall, by an instrument in writing, appoint a temporary chairman. A permanent chairman and a permanent secretary of the meeting shall be elected by vote of the persons entitled to vote a majority in principal amount of the Outstanding Notes represented and voting at the meeting. The chairman of the meeting shall have no right to vote, except as a Holder of Notes or a proxy. A record, at least in duplicate, of the proceedings of each meeting of Holders of Notes shall be prepared, and one such copy shall be delivered to INTELSAT and another to the Fiscal Agent to be preserved by the Fiscal Agent.\n11. All notices hereunder shall be deemed to have been given when deposited in the mails as first-class mail, registered or certified mail, return receipt requested, postage prepaid, or, if electronically communicated, then when delivered, or when hand delivered, addressed to either party hereto as follows:\nINTELSAT . . . . . . . . . . . International Telecommunications Satellite Organization 3400 International Drive, N.W. Washington, D.C. 20008-3098, U.S.A. Attention: Vice President & Chief Financial Officer Facsimile No.: (202) 944-7860\nFiscal Agent . . . . . . . . . . Bankers Trust Company 1 Appold Street, Broadgate London EC2A 2HE, England Attention: Corporate Trust and Agency Group Facsimile No.: 011-4471-982-2271\nor at any other address of which either of the foregoing shall have notified the other in writing. All notices to Holders of Notes shall be given in the manner provided in Paragraph 6(e) of the definitive Notes.\n12. This Agreement and the terms and conditions of the Notes and coupons may be modified or amended by INTELSAT and the Fiscal Agent, without the consent of the Holder of any Note or coupon, for the purpose of (a) adding to the covenants of INTELSAT for the benefit of the Holders of Notes or coupons, or (b) surrendering any right or power conferred upon INTELSAT, or (c) securing the Notes pursuant to the requirements of the Notes or otherwise, or (d) permitting the payment of principal, interest and Additional Amounts, if any, in respect of Notes in the United States, or (e) curing any ambiguity or correcting or supplementing any defective provision contained herein or in the Notes or coupons, or (f) evidencing the succession of another organization or entity to INTELSAT and the assumption by any such successor of the covenants and obligations of INTELSAT herein and in the Notes and coupons as permitted by the Notes, or (g) providing for issuances of further debt securities as contemplated by Section 13, or (h) in any manner which the parties may mutually deem necessary or desirable and which in any such case shall not adversely affect the interests of the Holders of the Notes or the coupons.\n13. INTELSAT may from time to time without the consent of the Holder of any Note or coupon issue further debt securities having the same terms and conditions as the Notes in all respects (or in all respects except for the first payment of interest thereon) or having such terms as INTELSAT may determine at the time of their issuance, in either case so that any such further debt securities shall be consolidated and form a single series with the outstanding securities of any series (including the Notes). Unless the context requires otherwise, references herein and in the Notes and coupons to the Notes or coupons shall include any other debt\nsecurities issued in accordance with this Section that are intended by INTELSAT to form a single series with the Notes. Any further debt securities forming a single series with the outstanding securities of any series (including the Notes) shall be issued pursuant to this Agreement as amended pursuant to Section 12 for the purpose of providing for the issuance of such debt securities.\n14. This Agreement and each of the Notes and coupons shall be governed by and construed in accordance with the laws of the State of New York, U.S.A.\n15. INTELSAT hereby appoints CT Corporation System, 1633 Broadway, New York, New York 10019, as its authorized agent (the \"Authorized Agent\") upon which process may be served in any action arising out of or based on this Agreement, the Notes or any coupons which action may be instituted in any New York State or United States Federal court sitting in the Borough of Manhattan, The City of New York, the State of New York, U.S.A., by the Fiscal Agent or the Holder of any Note or coupon and INTELSAT and each such Holder by acceptance of a Note or coupon expressly accepts the exclusive jurisdiction of any such court in respect of any such action. Such appointment shall be irrevocable until two years after the Notes shall have matured and been paid or moneys for the payment thereof shall have been made available unless and until a successor Authorized Agent shall have been appointed and shall have accepted such appointment. INTELSAT hereby irrevocably waives any immunity to service of process in respect of any such action to which it might otherwise be entitled in any action arising out of or based on this Agreement or the Notes or coupons which may be instituted by the Fiscal Agent or any Holder of a Note or coupon in any State or Federal court in the Borough of Manhattan, The City of New York, the State of New York, U.S.A. Service of process upon the Authorized Agent at the address indicated above, as such address may be changed within the Borough of Manhattan, The City of New York, the State of New York, U.S.A., by notice given by the Authorized Agent to each party hereto, shall be deemed, in every respect, effective service of process upon INTELSAT. INTELSAT irrevocably waives, to the fullest extent permitted by applicable law, any sovereign or other immunity from jurisdiction or from execution (except that INTELSAT does not waive immunity from execution prior to judgment and any similar defense) to which it might otherwise be entitled in any such action which may be instituted by the Fiscal Agent or any Holder of a Note or coupon in any New York State or United States Federal court sitting in the Borough of Manhattan, The City of New York, the State of New York, U.S.A.\n16. This Agreement, the Notes and the coupons appertaining thereto will constitute obligations of INTELSAT and not of any Signatory or Party (each as defined in the Agreement Relating to the International Telecommunications Satellite Organization, entered into force on 12 February 1973). No Signatory or Party will waive any immunity to which it may be entitled in any suit on this Agreement or the Notes or coupons, and neither the Fiscal Agent nor Holders of Notes or coupons will have any recourse against any Signatory or Party with respect to any obligations of INTELSAT under this Agreement or the Notes and the coupons appertaining thereto.\n17. This Agreement may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original but all such counterparts shall together constitute but one and the same instrument.\nIN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written.\nINTERNATIONAL TELECOMMUNICATIONS SATELLITE ORGANIZATION\n\/s\/Margarita K. Dilley By _____________________________ Name: Margarita K. Dilley Title: Treasurer\nBANKERS TRUST COMPANY as Fiscal Agent and Principal Paying Agent\n\/s\/Shiela Ajimal By _____________________________ Name: Shiela Ajimal Title: Authorized Signatory\nINTERNATIONAL TELECOMMUNICATIONS SATELLITE ORGANIZATION\nU.S. $200,000,000\n6 5\/8% Notes Due 2004\nTEMPORARY GLOBAL NOTE\nINTERNATIONAL TELECOMMUNICATIONS SATELLITE ORGANIZATION, an international organization established by the Agreement Relating to the International Telecommunications Satellite Organization and the Operating Agreement relating thereto, entered into force on 12 February 1973, for value received, hereby promises to pay to bearer upon presentation and surrender of this Temporary Global Note the principal sum of Two Hundred Million United States Dollars (U.S. $200,000,000) on 22 March 2004 and to pay interest thereon, from the date hereof, annually in arrears on 22 March in each year, commencing 22 March 1995, at the rate of 6 5\/8% per annum, until the principal hereof is paid or made available for payment; provided, however, that interest on this Temporary Global Note shall be payable only after the issuance of Bearer Notes for which this Temporary Global Note is exchangeable, and only upon presentation and surrender of the interest coupons thereto attached as they severally mature.\nThis Temporary Global Note is one of a duly authorized issue of Notes of INTELSAT designated as specified in the title hereof, entitled to the benefits of the Fiscal Agency Agreement, dated as of 22 March 1994, between INTELSAT and Bankers Trust Company as Fiscal Agent. This Note is a temporary note and is exchangeable in whole or from time to time in part without charge upon request of the Holder hereof for Bearer Notes with coupons attached in denominations of U.S. $10,000 and $100,000 as promptly as practicable following presentation of certification, in the form required by the Fiscal Agency Agreement for such purpose, that the beneficial owner or owners of this Temporary Global Note (or, if such exchange is only for a part of this Temporary Global Note, of such part) are not citizens or residents of the United States, a corporation, partnership or other entity created or organized in or under the laws of the United States or any political subdivision thereof, or an estate or trust the income of which is subject to United States Federal income taxation regardless of its source (\"United States Person\"). The Bearer Notes are expected to be available 40 days after the Closing Date. Bearer Notes to be delivered in exchange for any part of this Temporary Global Note shall be delivered only outside the United States. Upon any exchange of a part of this Temporary Global Note for Bearer Notes, the portion of the principal amount hereof so exchanged shall be endorsed by the Fiscal Agent on the Schedule hereto, and the principal amount hereof shall be reduced for all purposes by the amount so exchanged.\nUntil exchanged in full for Bearer Notes, this Temporary Global Note shall in all respects be entitled to the same benefits and subject to the same terms and conditions as those of the definitive Notes and those contained in the Fiscal Agency Agreement (including the forms of Notes attached thereto), except that neither the Holder hereof nor the beneficial owners of this Temporary Global Note shall be entitled to receive payment of interest hereon.\nThis Temporary Global Note shall be governed by and construed in accordance with the laws of the State of New York, U.S.A.\nAll terms used in this Temporary Global Note which are defined in the Fiscal Agency Agreement or the definitive Notes shall have the meanings assigned to them therein.\nUnless the certificate of authentication hereon has been executed by the Fiscal Agent by the manual signature of one of its duly authorized officers, this Temporary Global Note shall not be valid or obligatory for any purpose.\nThis Temporary Global Note constitutes an obligation of INTELSAT and not of any Signatory or Party (each as defined in the INTELSAT Agreement). No Signatory or Party will waive any immunity to which it may be entitled in any suit on this Temporary Global Note, and Holders of this Temporary Global Note will have no recourse against any Signatory or Party with respect to any obligations of INTELSAT under this Temporary Global Note.\nIN WITNESS WHEREOF, INTELSAT has caused this Temporary Global Note to be duly executed and its seal to be hereunto affixed and attested.\nDated as of 22 March 1994\nINTERNATIONAL TELECOMMUNICATIONS SATELLITE ORGANIZATION\nBy______________________________\nAttest:\n_____________________\nThis is the Temporary Global Note referred to in the within-mentioned Fiscal Agency Agreement.\nBANKERS TRUST COMPANY as Fiscal Agent\nBy_________________________ Authorized Signatory\nSCHEDULE OF EXCHANGES\nRemaining principal Principal amount amount Notation Date exchanged for following made on behalf Made definitive Bearer Notes such exchange of the Fiscal Agent ____ _______________________ _____________ ___________________ ____ _______________________ _____________ ___________________ ____ _______________________ _____________ ___________________ ____ _______________________ _____________ ___________________ ____ _______________________ _____________ ___________________ ____ _______________________ _____________ ___________________ ____ _______________________ _____________ ___________________ ____ _______________________ _____________ ___________________ ____ _______________________ _____________ ___________________ ____ _______________________ _____________ ___________________ ____ _______________________ _____________ ___________________ ____ _______________________ _____________ ___________________ ____ _______________________ _____________ ___________________ ____ _______________________ _____________ ___________________ ____ _______________________ _____________ ___________________ ____ _______________________ _____________ ___________________ ____ _______________________ _____________ ___________________ ____ _______________________ _____________ ___________________ ____ _______________________ _____________ ___________________ ____ _______________________ _____________ ___________________ ____ _______________________ _____________ ___________________\nEXHIBIT B\n[FORM OF BEARER NOTES]\n[Form of Face]\nANY UNITED STATES PERSON WHO HOLDS THIS OBLIGATION WILL BE SUBJECT TO LIMITATIONS UNDER THE UNITED STATES INCOME TAX LAWS, INCLUDING THE LIMITATIONS PROVIDED IN SECTIONS 165(j) AND 1287(a) OF THE INTERNAL REVENUE CODE.\nINTERNATIONAL TELECOMMUNICATIONS SATELLITE ORGANIZATION\n6 5\/8% Notes Due 2004\nNo. B-_________ U.S.$[10,000] [100,000]\nINTERNATIONAL TELECOMMUNICATIONS SATELLITE ORGANIZATION (\"INTELSAT\"), an international organization established by the Agreement Relating to the International Telecommunications Satellite Organization and the Operating Agreement relating thereto, entered into force on 12 February 1973, for value received, hereby promises to pay to bearer upon presentation and surrender of this Note the principal sum of [10,000][100,000] United States dollars on 22 March 2004 and to pay interest thereon, from the date hereof, annually in arrears on 22 March in each year (\"Interest Payment Date\"), commencing 22 March 1995 at the rate of 6 5\/8% per annum (calculated on the basis of a year of twelve 30- day months), until the principal hereof is paid or made available for payment. Such payments shall be made subject to any laws or regulations applicable thereto and to the right of INTELSAT (limited as provided below) to terminate the appointment of any such paying agency, at the principal office of Bankers Trust Company in London, United Kingdom or at such other offices or agencies outside the United States (as defined in Paragraph 5 on the reverse hereof) as INTELSAT may designate and notify the Holder (as defined in Paragraph 2 on the reverse hereof) as provided in Paragraph 6(e) hereof, at the option of the Holder, by United States dollar check, or (ii) by wire transfer to a United States dollar account maintained by the Holder with a bank located outside the United States. Payments with respect to this Note shall be payable only at an office or agency located outside the United States and only upon presentation and surrender at such office of this Note in the case of principal or the coupons attached hereto (the\n\"coupons\") as they severally mature in the case of interest (but not in the case of Additional Amounts payable as defined and provided for in Paragraph 5 on the reverse hereof). No payment with respect to this Note shall be made by transfer to an account in, or by mail to an address in, the United States. Notwithstanding the foregoing, payment of principal of and interest on Bearer Notes and Additional Amounts, if any, may, at INTELSAT's option, be made at an office designated by INTELSAT in the Borough of Manhattan, The City of New York, the State of New York, U.S.A. if (but only if) the full amount of such payments at all offices and agencies located outside the United States through which payment is to be made in accordance with the terms of the Notes is illegal or effectively precluded by exchange controls or other similar restrictions as determined by INTELSAT. INTELSAT covenants that until this Note has been delivered to the Fiscal Agent for cancellation or monies sufficient to pay the principal of and interest on this Note have been made available for payment and either paid or returned to INTELSAT as provided herein, it will at all times maintain offices or paying agents in London, United Kingdom and, so long as the Notes are listed on the respective stock exchanges, in Hong Kong and Singapore for the payment of the principal of and interest on the Notes as herein provided.\nReference is hereby made to the further provisions of this Note set forth on the reverse hereof, including but not limited to the provisions for redemption of the Notes, which further provisions shall for all purposes have the same effect as though fully set forth at this place.\nUnless the certificate of authentication hereon has been executed by the Fiscal Agent by the manual signature of one of its authorized officers, neither this Note nor any coupon appertaining hereto shall be valid or obligatory for any purpose.\nIN WITNESS WHEREOF, INTELSAT has caused this Note to be duly executed and its seal to be hereunto affixed and attested and duly executed coupons to be annexed hereto.\nDated as of 22 March 1994 INTERNATIONAL TELECOMMUNICATIONS SATELLITE ORGANIZATION\nBy______________________________ [Seal]\nAttest:\n[FORM OF FISCAL AGENT'S CERTIFICATE OF AUTHENTICATION]\nThis is one of the Notes referred to in the within- mentioned Fiscal Agency Agreement.\nFor and on behalf of BANKERS TRUST COMPANY as Fiscal Agent\nBy _____________________________________________ Authorized Signatory\n[Form of Reverse]\n1. This Note is one of a duly authorized issue of Notes of INTELSAT in the aggregate principal amount of Two Hundred Million United States Dollars (U.S.$200,000,000), designated as its 6 5\/8% Notes Due 2004 (the \"Notes\"). INTELSAT, for the benefit of the Holders from time to time of the Notes, has entered into a Fiscal Agency Agreement, dated as of 22 March 1994 (the \"Fiscal Agency Agreement\"), between INTELSAT and Bankers Trust Company, as Fiscal Agent, copies of which Fiscal Agency Agreement are on file and available for inspection at the Principal Office of the Fiscal Agent in London, United Kingdom and the main offices of the paying agencies named on the face of this Note. (Bankers Trust Company and its respective successors as Fiscal Agent are herein collectively called the \"Fiscal Agent\".)\nAs long as any of the Notes shall be outstanding and unpaid, but only up to the time all amounts of principal and interest have been placed at the disposal of the Fiscal Agent, INTELSAT will not cause or permit to be created on any of its property or assets any mortgage, pledge or other lien or charge as security for any bonds, notes or other evidences of indebtedness heretofore or hereafter issued, assumed or guaranteed by INTELSAT for money borrowed (other than purchase money mortgages, sale and leaseback transactions in connection with spacecraft, or other pledges or liens on property purchased by INTELSAT as security for all or part of the purchase price thereof; liens incidental to an investment transaction, but not a borrowing, of INTELSAT; or mechanics', landlords', tax or other statutory liens), unless the Notes shall be secured by such mortgage, pledge or other lien or charge equally and ratably with such other bonds, notes or evidences of indebtedness.\n2. The Notes are issuable in bearer form, with interest coupons attached (the \"coupons\"), in denominations of U.S. $10,000 and $100,000. As used herein, the term \"Holder\" when used with respect to any Bearer Note or coupon, means the bearer thereof.\n3. INTELSAT has appointed the main offices of Bankers Trust Luxembourg S.A. in Luxembourg, Bankers Trust Company in Hong Kong, Credit Suisse in Zurich, Switzerland and DBS Bank in Singapore as additional agencies where Notes may be surrendered for exchange. INTELSAT reserves the right to vary or terminate the appointment of any agent or to appoint additional or other transfer agents or to approve any change in the office through which any transfer agent acts, provided that there will at all times be a transfer agent in London, United Kingdom.\nAll Notes issued upon any exchange of Notes shall be the valid obligations of INTELSAT evidencing the same debt, and entitled to the same benefits, as the Notes surrendered upon such exchange. No service charge shall be made for any exchange, but INTELSAT may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith.\nTitle to Bearer Notes and coupons shall pass by delivery. INTELSAT, the Fiscal Agent, and any paying agent of INTELSAT may deem and treat the bearer of any Bearer Note or coupon as the owner thereof for all purposes, whether or not such Note or coupon shall be overdue.\nFor purposes of the provisions of this Note and the Fiscal Agency Agreement, any Note authenticated and delivered pursuant to the Fiscal Agency Agreement shall, as of any date of determination, be deemed to be \"Outstanding\", except:\n(i) Notes theretofore cancelled by the Fiscal Agent or delivered to the Fiscal Agent for cancellation and not reissued by the Fiscal Agent;\n(ii) Notes which have been surrendered for redemption in accordance with Paragraph 6 hereof or which have become due and payable at maturity or otherwise and with respect to which monies sufficient to pay the principal thereof and interest thereon shall have been made available to the Fiscal Agent; or\n(iii) Notes in lieu of or in substitution for which other Notes shall have been authenticated and delivered pursuant to the Fiscal Agency Agreement;\nprovided, however, that in determining whether the Holders of the requisite principal amount of Outstanding Notes are present at a meeting of Holders of Notes for quorum purposes or have given any request, demand, authorization, direction, notice, consent or waiver hereunder, Notes owned by INTELSAT shall be disregarded and deemed not to be Outstanding.\n4. (a) INTELSAT shall pay to the Fiscal Agent at its Principal Office in London, United Kingdom, in accordance with the terms of the Fiscal Agency Agreement on each Interest Payment Date, any redemption date and the maturity date of the Notes, in such coin or currency of the United States of America as at the time of payment is legal tender for the payment of public and private debts, amounts sufficient (with any amounts then held by the Fiscal Agent and available for the purpose) to pay the interest on, the redemption price of and accrued interest (if the redemption date is not an Interest Payment Date) on, and the principal of, the Notes due and payable on such an Interest Payment Date, redemption date or maturity date, as the case may be.\nThe Fiscal Agent shall apply the amounts so paid to it to the payment of such interest, redemption price and principal in accordance with the terms of the Notes. Any monies paid by INTELSAT to the Fiscal Agent for the payment of the principal of and interest on any Notes and remaining unclaimed at the end of two years after such principal or interest shall have become due and payable (whether at maturity, upon call for redemption or otherwise) shall then be repaid to INTELSAT upon its written request, and upon such repayment all liability of the Fiscal Agent with respect thereto shall thereupon cease, without,\nhowever, limiting in any way any obligation INTELSAT may have to pay the principal of and interest on this Note as the same shall become due.\n(b) In any case where the date for the payment of the principal of or interest on any Note or the date fixed for redemption of any Note shall be at any place of payment a day on which banking institutions are authorized or obligated by law or executive order to close, or are not carrying out transactions in United States dollars in The City of New York, the State of New York, U.S.A., or the city of the paying agent to which the Note or coupon is surrendered for payment, then payment of principal or interest need not be made on such date at such place but may be made on the next succeeding day at such place of payment which is not a day on which banking institutions are authorized or obligated by law or executive order to close, or which is a day on which banking institutions are carrying out transactions in United States dollars in The City of New York, the State of New York, U.S.A., or the city of the paying agent to which the Note or coupon is surrendered for payment, with the same force and effect as if made on the date for the payment of the principal or interest or the date fixed for redemption, and no interest shall accrue for the period after such date.\n5. (a) INTELSAT will pay to the Holder of this Note or any coupon appertaining hereto who is a United States Alien (as defined below) such Additional Amounts as may be necessary in order that every net payment of the principal of, and interest on, this Note, after withholding for or on account of any present or future tax, assessment or governmental charge imposed upon, or as a result of, such payment by the United States (or any political subdivision or taxing authority thereof or therein), will not be less than the amount provided for in this Note or in such coupon to be then due and payable; provided, however, that the foregoing obligation to pay Additional Amounts shall not apply to any one or more of the following:\n(i) any tax, assessment or other governmental charge which would not have been so imposed but for (A) the existence of any present or former connection between such Holder (or between a fiduciary, settlor, or beneficiary of, or a possessor of a power over, such Holder, if such Holder is an estate or trust, or a member or shareholder of such holder, if such Holder is a partnership or corporation) and the United States, including, without limitation, such Holder (or such fiduciary, settlor, beneficiary, possessor, member or shareholder) being or having been a citizen, resident or treated as a resident thereof or being or having been engaged in a trade or business or present therein or having or having had a permanent establishment therein or (B) such Holder's present or former status as a personal holding company, controlled foreign corporation, foreign personal holding company or passive foreign investment company with respect to the United States or as a corporation which accumulates earnings to avoid United States federal income tax, all under existing United States Federal income tax law or successor provisions;\n(ii) any tax, assessment or other governmental charge which would not have been so imposed but for the presentation by the Holder of this Note or any coupon appertaining hereto for payment on a date more than 10 calendar days after the date on which such payment became due and payable or the date on which payment thereof is duly provided for and notice thereof is given to Holders, whichever occurs later;\n(iii) any estate, inheritance, gift, sales, transfer, personal property tax or any similar tax, assessment or other governmental charge;\n(iv) any tax, assessment or other governmental charge which is payable otherwise than by withholding from payments on or in respect of this Note or any coupon appertaining hereto;\n(v) any tax, assessment or other governmental charge imposed by reason of such Holder's past or present status as the actual or constructive owner of 10 per cent. or more of the capital or profits interest of INTELSAT within the meaning of Section 871(h)(3) of the United States Internal Revenue Code of 1986, as amended, and any regulations thereunder;\n(vi) any tax, assessment or other governmental charge imposed because a Holder of a Note is a bank that receives interest on such Note pursuant to a loan agreement entered into in the ordinary course of its trade or business;\n(vii) any tax, assessment or other governmental charge imposed as a result of the failure to comply with applicable certification, information, documentation or other reporting requirements concerning the nationality, residence, identity or connection with the United States of the Holder or beneficial owner of this Note, or any coupon appertaining hereto if such compliance is required by statute or by regulation of the United States as a precondition to relief or exemption from such tax, assessment or other government charge;\n(viii) any tax, assessment or other governmental charge required to be withheld by any paying agent from any payment on this Note or any coupon appertaining hereto if such payment can be made without such withholding by at least one other paying agent; or\n(ix) any combination of items (i) through (viii) above;\nnor will Additional Amounts be paid with respect to any payment of principal or interest on this Note or any coupon appertaining hereto to a Holder who is a fiduciary or partnership or other than the sole beneficial owner of this Note or any coupon appertaining hereto to the extent a beneficiary or settlor with respect to the fiduciary or a member of the partnership or\nthe beneficial owner would not have been entitled to payment of the Additional Amounts had such beneficiary, settlor, member or beneficial owner been the Holder of this Note or any coupon appertaining hereto.\nThe term \"United States Alien\" means any person who, for United States federal income tax purposes, is a foreign corporation, a nonresident alien individual, a nonresident fiduciary of a foreign estate or trust, or a foreign partnership, one or more of the members of which is, for United States federal income tax purposes, a foreign corporation, a nonresident alien individual or a nonresident fiduciary of a foreign estate or trust. The term \"United States\" means the United States of America (including the States and the District of Columbia), its territories, its possessions and other areas subject to its jurisdiction.\n(b) Except as specifically provided in this Note and in the Fiscal Agency Agreement, INTELSAT shall not be required to make any payment with respect to any tax, assessment or other governmental charge imposed by any government or any political subdivision or taxing authority thereof or therein. Whenever in this Note there is a reference, in any context, to the payment of the principal of or interest on, or in respect of, any Note or any coupon, such mention shall be deemed to include mention of the payment of Additional Amounts provided for in this Paragraph to the extent that, in such context, Additional Amounts are, were or would be payable in respect thereof pursuant to the provisions of this Paragraph and express mention of the payment of Additional Amounts (if applicable) in any provisions hereof shall not be construed as excluding Additional Amounts in those provisions hereof where such express mention is not made.\n6. (a) The Notes are subject to redemption at the option of INTELSAT, as a whole but not in part, at any time at a redemption price equal to the principal amount thereof, together with accrued and unpaid interest to the date fixed for redemption (except if the redemption date is an Interest Payment Date) under the circumstances described in the next three Paragraphs.\n(b) The Notes may be redeemed, as a whole but not in part, at the option of INTELSAT, upon not more than 60 days' nor less than 30 days' prior notice in the manner provided in clause (e) of this Paragraph 6 at a redemption price equal to the principal amount thereof together with accrued and unpaid interest to the date fixed for redemption, if (x) INTELSAT determines that, without regard to any immunities that may be available to it, (1) as a result of any change in or amendment to the laws (or any regulations or rulings promulgated thereunder) of the United States or of any political subdivision or taxing authority thereof or therein affecting taxation, or any change in official position regarding application or interpretation of such laws, regulations or rulings (including a holding by a court of competent jurisdiction in the United States), which change or amendment is announced or becomes effective on or after 22 March 1994, INTELSAT has or will become obligated to pay Additional Amounts (as provided in Paragraph 5(a) hereof) or (2) on or after 22 March 1994, any action has been taken by any taxing authority of, or any decision has\nbeen rendered by a court of competent jurisdiction in, the United States or any political subdivision or taxing authority thereof or therein, including any of those actions specified in (1) above, whether or not such action was taken or decision was rendered with respect to INTELSAT, or any change, amendment, application or interpretation shall be officially proposed, which, in any such case, in the written opinion to INTELSAT of independent legal counsel of recognized standing, will result in a material probability that INTELSAT will become obligated to pay Additional Amounts with respect to the Notes, and (y) in any such case INTELSAT, in its business judgment, determines that such obligation cannot be avoided by the use of reasonable measures available to INTELSAT (provided that INTELSAT shall not be required to assert any immunities that may be available to it); provided, however, that (i) no such notice of redemption shall be given earlier than 90 days prior to the earliest date on which INTELSAT would but for such redemption be obligated to pay Additional Amounts and (ii) at the time such notice of redemption is given, such obligation to pay Additional Amounts remains in effect. Prior to the publication of notice of redemption pursuant to this Paragraph 6(b), INTELSAT shall deliver to the Fiscal Agent a certificate of INTELSAT stating the date of redemption and that INTELSAT is entitled to effect such redemption and setting forth in reasonable detail a statement of facts showing that the conditions precedent to the right of INTELSAT to so redeem the Notes have occurred.\n(c) In addition, if INTELSAT shall determine that any payment made outside the United States by INTELSAT or any paying agent of principal or interest due in respect of any Bearer Note or coupon would, under any present or future laws or regulations of the United States and without regard to any immunities that may be available to INTELSAT, be subject to any certification, information or other reporting requirement of any kind, the effect of which requirement is the disclosure to INTELSAT, any paying agent or any governmental authority of the nationality, residence or identity (as distinguished from, for example, status as a United States Alien) of a beneficial owner of such Note or coupon who is a United States Alien (other than such a requirement (i) which would not be applicable to a payment made by INTELSAT or any paying agent (A) directly to the beneficial owner, or (B) to a custodian, nominee or other agent of the beneficial owner, or (ii) which can be satisfied by such custodian, nominee or other agent certifying to the effect that such beneficial owner is a United States Alien, provided that in each case referred to in clauses (i)(B) and (ii), payment by such custodian, nominee or agent to such beneficial owner is not otherwise subject to any such requirement or (iii) would not be applicable to a payment made by at least one other paying agent of INTELSAT), INTELSAT, at its election, shall either (x) redeem the Bearer Notes, as a whole but not in part, at a redemption price equal to the principal amount thereof, together with accrued and unpaid interest to the date fixed for redemption or (y) if the conditions set forth in Paragraph 6(d) hereof are satisfied, pay the additional amounts specified in such Paragraph. INTELSAT shall make such determination and election as soon as practicable and give prompt notice thereof (the \"Determination Notice\") in the manner provided in clause (e) of this Paragraph 6, stating the effective date of such certification, information or other reporting requirement, whether INTELSAT has elected to redeem the Bearer Notes or to pay the additional amounts specified in Paragraph\n6(d) hereof, and (if applicable) the last date by which the redemption of the Bearer Notes must take place, as provided in the next succeeding sentence. If INTELSAT elects to redeem the Bearer Notes, such redemption shall take place on such date, not later than one year after the publication of the Determination Notice, as INTELSAT shall elect by notice to the Fiscal Agent given not less than 45 nor more than 75 days before the date fixed for redemption. Notice of such redemption of the Bearer Notes will be given to the Holders of the Bearer Notes not less than 30 nor more than 60 days prior to the date fixed for redemption. Notwithstanding the foregoing, INTELSAT shall not so redeem the Bearer Notes if INTELSAT shall subsequently determine, not less than 30 days prior to the date fixed for redemption, that subsequent payments would not be subject to any such requirement, in which case INTELSAT shall give prompt notice of such determination in the manner provided in clause (e) of this Paragraph 6 and any earlier redemption notice shall be revoked and of no further effect.\n(d) If and so long as the certification, information or other reporting requirements referred to in Paragraph 6(c) would be fully satisfied by payment of a withholding tax, backup withholding tax or similar charge, INTELSAT may elect to pay, without regard to any immunities that may be available to it, such additional amounts (regardless of clause (vii) in Paragraph 5(a)) as may be necessary so that every net payment made outside the United States following the effective date of such requirements by INTELSAT or any paying agent of principal or interest due in respect of any Bearer Note or any coupon the beneficial owner of which is a United States Alien (but without any requirement that the nationality, residence or identity of such beneficial owner be disclosed to INTELSAT, any paying agent or any governmental authority), after deduction or withholding for or on account of such withholding tax, backup withholding tax or similar charge (other than a withholding tax, backup withholding tax or similar charge that (i) is the result of a certification, information or other reporting requirement described in the second parenthetical clause of the first sentence of Paragraph 6(c), (ii) is imposed as a result of the fact that INTELSAT or any of its paying agents have actual knowledge that the beneficial owner of such Bearer Note or coupon is within the category of persons described in Clauses (i) or (v) of Paragraph 5(a), or (iii) is imposed as a result of presentation of such Bearer Note or coupon for payment more than 10 calendar days after the date on which such payment becomes due and payable or on which payment thereof is duly provided for and notice thereof is given to Holders, whichever occurs later), will not be less than the amount provided for in such Bearer Note or coupon to be then due and payable. In the event INTELSAT elects to pay such additional amounts, INTELSAT will have the right, at its sole option, at any time, to redeem the Bearer Notes as a whole, but not in part, at a redemption price equal to the principal amount thereof, together with accrued and unpaid interest to the date fixed for redemption. If INTELSAT has made the determination described in Paragraph 6(c) with respect to certification, information or other reporting requirements applicable only to interest and subsequently makes a determination in the manner and of the nature referred to in such Paragraph 6(c) with respect to such requirements applicable to principal, INTELSAT will redeem the Bearer Notes in the manner and on the terms described in Paragraph 6(c) unless INTELSAT elects to have the provisions of this Paragraph apply rather than the provisions of\nParagraph 6(c). If in such circumstances the Bearer Notes are to be redeemed, INTELSAT shall have no obligation to pay additional amounts pursuant to this Paragraph with respect to principal or interest accrued and unpaid after the date of the notice of such determination indicating such redemption, but will be obligated to pay such additional amounts with respect to interest accrued and unpaid to the date of such determination. If INTELSAT elects to pay additional amounts pursuant to this Paragraph and the condition specified in the first sentence of this Paragraph should no longer be satisfied, then INTELSAT shall promptly redeem such Bearer Notes.\n(e) The Fiscal Agent shall cause, on behalf of INTELSAT, notices to be given to redeem Bearer Notes to Holders by publication at least once in a leading daily newspaper in the English language of general circulation in South East Asia and, so long as the Notes are listed on the respective stock exchanges and such exchanges shall so require, in a daily newspaper of general circulation in Hong Kong and Singapore or, if publication in either Hong Kong or Singapore is not reasonably practicable, elsewhere in South East Asia. The term \"daily newspaper\" as used herein shall be deemed to mean a newspaper customarily published on each business day, whether or not it shall be published in Saturday, Sunday or holiday editions. If by reason of the suspension of publication of any newspaper, or by reason of any other cause, it shall be impracticable to give notice to the Holders of Notes in the manner prescribed herein, then such notification in lieu thereof as shall be made by INTELSAT or by the Fiscal Agent on behalf of and at the instruction and expense of INTELSAT shall constitute sufficient provision of such notice, if such notification shall, so far as may be practicable, approximate the terms and conditions of the publication in lieu of which it is given. Neither the failure to give notice nor any defect in any notice given to any particular Holder of a Note shall affect the sufficiency of any notice with respect to other Notes. Such notices will be deemed to have been given on the date of such publication or mailing or, if published in such newspapers on different dates, on the date of the first such publication in South East Asia. Notices to redeem Notes shall be given at least once not more than 60 days nor less than 30 days prior to the date fixed for redemption and shall specify the date fixed for redemption, the redemption price, the place or places of payment, that payment will be made upon presentation and surrender of the Notes to be redeemed, together with all appurtenant coupons, if any, maturing subsequent to the date fixed for redemption, that interest accrued and unpaid to the date fixed for redemption (unless the redemption date is an Interest Payment Date) will be paid as specified in said notice, and that on and after said date interest thereon will cease to accrue. If the redemption is pursuant to Paragraph 6(b) or 6(c) hereof, such notice shall also state that the conditions precedent to such redemption have occurred and state that INTELSAT has elected to redeem all the Notes.\n(f) If notice of redemption has been given in the manner set forth in Paragraph 6(e) hereof, the Notes so to be redeemed shall become due and payable on such redemption date specified in such notice and upon presentation and surrender of the Notes at\nthe place or places specified in such notice, together with all appurtenant coupons, if any, maturing subsequent to the redemption date, the Notes shall be paid and redeemed by INTELSAT at the places and in the manner and currency herein specified and at the redemption price together with accrued and unpaid interest (unless the redemption date is an Interest Payment Date) to the redemption date; provided, however, that interest due on or prior to the redemption date on Bearer Notes shall be payable only upon the presentation and surrender of coupons for such interest (at an office or agency outside the United States except as otherwise provided on the face of the Bearer Note). If any Bearer Note surrendered for redemption shall not be accompanied by all appurtenant coupons maturing after the redemption date, such Note may be paid after deducting from the amount otherwise payable an amount equal to the face amount of all such missing coupons, or the surrender of such missing coupon or coupons may be waived by INTELSAT and the Fiscal Agent if they are furnished with such security or indemnity as they may require to save each of them and each other paying agency of INTELSAT harmless. From and after the redemption date, if monies for the redemption of Notes surrendered for redemption shall have been made available at the Principal Office of the Fiscal Agent for redemption on the redemption date, the Notes surrendered for redemption shall cease to bear interest, the coupons for interest appertaining to Bearer Notes maturing subsequent to the redemption date shall be void (unless the amount of such coupons shall have been deducted from the redemption price at the time of surrender of the Bearer Note to which such coupons appertained, as aforesaid), and the only right of the Holders of such Notes shall be to receive payment of the redemption price together with accrued and unpaid interest (unless the redemption date is an Interest Payment Date) to the redemption date as aforesaid. If monies for the redemption of the Notes are not made available for payment until after the redemption date, the Notes surrendered for redemption shall not cease to bear interest until such monies have been so made available.\n(g) Notes redeemed or otherwise acquired by INTELSAT will forthwith be delivered to the Fiscal Agent for cancellation and may not be reissued or resold, except that Bearer Notes delivered to the Fiscal Agent may, at the written request of INTELSAT, be reissued by the Fiscal Agent in replacement of mutilated, lost, stolen or destroyed Notes pursuant to Paragraph 9 hereof.\n7. In the event of:\n(a) default in the payment of any installment of interest upon any Note for a period of 30 days after the date when due; or\n(b) default in the payment of the principal of any Note when due (whether at maturity or redemption or otherwise); or\n(c) default in the performance or breach of any covenant or warranty contained in the Notes or the Fiscal Agency Agreement (other than as specified in\nclauses (a) and (b) of this Paragraph 7) for a period of 90 days after the date on which written notice of such failure, requiring INTELSAT to remedy the same and stating that such notice is a \"Notice of Default\", shall first have been given to INTELSAT and the Fiscal Agent by any Holder of a Note; or\n(d) involuntary acceleration of the maturity of other indebtedness of INTELSAT for money borrowed with a maturity of one year or more in excess of U.S. $50,000,000 which acceleration shall not be rescinded or annulled, or which indebtedness shall not be discharged, within 45 days after notice; or\n(e) INTELSAT is dissolved or the INTELSAT Agreement or the Operating Agreement ceases to be in full force and effect; provided, however, that no default shall occur if INTELSAT's obligations under the Fiscal Agency Agreement and the Notes are assumed by a successor who maintains a business which is substantially similar to that of INTELSAT;\nthe Holder of this Note may, at such Holder's option, unless such Event of Default has been waived as described in Paragraph 10(b) hereof, declare the principal of this Note and accrued and unpaid interest hereon to be due and payable immediately by written notice to INTELSAT, with a copy to the Fiscal Agent at its Principal Office, and unless all such defaults shall have been cured by INTELSAT prior to receipt of such written notice, the principal of this Note and accrued and unpaid interest hereon shall become and be immediately due and payable.\n8. (a) INTELSAT will conduct and operate its business diligently and in the ordinary manner in compliance with the INTELSAT Agreement and the Operating Agreement, and will use all reasonable efforts to maintain in full force and effect its existing international registration of orbital locations and frequency spectrum for the operation of its global commercial telecommunications satellite system; provided, however, that INTELSAT shall not be prevented from making any change with respect to its manner of conducting or operating its business or with respect to such registration if such change, in the judgment of INTELSAT, is desirable and does not materially impair INTELSAT's ability to perform its obligations under the Notes.\n(b) INTELSAT will cause all properties used or useful in the conduct of its business to be maintained and kept in good condition, repair and working order and supplied with all necessary equipment and will cause to be made all necessary repairs, renewals, replacements, betterments and improvements thereof, all as in the judgment of INTELSAT may be necessary so that the business carried on in connection therewith may be properly and advantageously conducted at all times (except for ordinary wear and tear and deterioration); provided, however, that INTELSAT shall not be prevented from discontinuing the operation or maintenance of any of such properties if such discontinuance, in the judgment of INTELSAT, is desirable in the conduct of its business and does not materially impair INTELSAT's ability to perform its obligations under the Notes.\n9. If any mutilated Note or a Note with a mutilated coupon appertaining to it is surrendered to the Fiscal Agent, INTELSAT shall execute, and the Fiscal Agent shall authenticate (or arrange for authentication on its behalf) and deliver in exchange therefor, a new Note of like tenor and principal amount, bearing a number not contemporaneously outstanding, with coupons corresponding to the coupons, if any, appertaining to the surrendered Note.\nIf there be delivered to INTELSAT and the Fiscal Agent (i) evidence to their satisfaction of the destruction, loss or theft of any Note or coupon, and (ii) such security or indemnity as may be required by them to save each of them and any agent of each of them harmless, then, in the absence of notice to INTELSAT or the Fiscal Agent that such Note or coupon has been acquired by a bona fide purchaser, INTELSAT shall execute, and upon its request the Fiscal Agent shall authenticate (or arrange for authentication on its behalf) and deliver in lieu of any such destroyed, lost or stolen Note or in exchange for the Note to which such coupon appertains (with all appurtenant coupons not destroyed, lost or stolen), a new Note of like tenor and principal amount and bearing a number not contemporaneously outstanding, with coupons corresponding to the coupons, if any, appertaining to such destroyed, lost or stolen Note or to the Note to which such destroyed, lost or stolen coupon appertains.\nUpon the issuance of any new Note under this Paragraph, INTELSAT may require the payment by the Holder of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses (including the fees and the expenses of the Fiscal Agent and INTELSAT) connected therewith.\nEvery new Note with its coupons, if any, issued pursuant to this Paragraph in lieu of any destroyed, lost or stolen Note, or in exchange for a Note to which a destroyed, lost or stolen coupon appertains, shall constitute an original additional contractual obligation of INTELSAT, whether or not the destroyed, lost or stolen Note and its coupons, if any, or the destroyed, lost or stolen coupon shall be at any time enforceable by anyone.\nAny new Note delivered pursuant to this Paragraph shall be so dated, or have attached thereto such coupons, that neither gain nor loss in interest shall result from such exchange.\nThe provisions of this Paragraph 9 are exclusive and shall preclude (to the extent lawful) all other rights and remedies with respect to the replacement or payment of mutilated, destroyed, lost or stolen Notes or coupons.\n10. (a) The Fiscal Agency Agreement and the terms and conditions of the Notes may be modified or amended by INTELSAT and the Fiscal Agent, without the consent of the Holder of any Note or coupon, in any manner which does not adversely affect the interests of the Holders, to provide for issuances of further debt securities as contemplated by Paragraph 11 hereof and by the Fiscal Agency Agreement, and to cure any ambiguity or to cure, correct or supplement any defective provision contained herein or in any coupon appertaining hereto or in the Fiscal Agency Agreement, or in certain other circumstances as described in the Fiscal Agency Agreement, to all of which each Holder of any Note or coupon shall, by acceptance thereof, consent.\n(b) The Fiscal Agency Agreement and the terms and conditions of the Notes may also be modified or amended by INTELSAT and the Fiscal Agent, and future compliance therewith or past default by INTELSAT may be waived, either with the consent of the Holders of not less than a majority in aggregate principal amount of the Notes at the time Outstanding or by the adoption of a resolution at a meeting of Holders duly convened and held in accordance with the provisions of the Fiscal Agency Agreement at which a quorum (as defined below) is present by at least a majority in aggregate principle amount of Notes represented at such meeting; provided, however, that no such modification, amendment or waiver may, without the written consent or affirmative vote of the Holder of each Note affected thereby:\n(i) change the stated maturity of the principal of or any installment of interest on any such Note, or\n(ii) reduce the principal amount thereof or the rate of interest on any such Note, or\n(iii) change the obligation of INTELSAT to pay Additional Amounts, or\n(iv) change the coin or currency in which any such Note or the interest thereon is payable, or\n(v) modify the obligation of INTELSAT to maintain offices or agencies outside the United States, or\n(vi) reduce the percentage in principal amount of the Outstanding Notes necessary to modify or amend the Fiscal Agency Agreement or the terms and conditions of the Notes or the coupons, or to waive any future compliance or past default, or\n(vii) reduce the requirements for voting for the adoption of a resolution or the quorum required at any meeting of Holders of Notes at which a resolution is adopted.\nThe quorum at any meeting called to adopt a resolution will be a majority in aggregate principal amount of Notes Outstanding, except that at any meeting which is reconvened for lack of a quorum, the Holders entitled to vote 25 per cent. in aggregate principle amount of Notes Outstanding shall constitute a quorum for the taking of any action set forth in the notice of the original meeting.\nIt shall not be necessary for the Holders of Notes to approve the particular form of any proposed amendment, but it shall be sufficient if they approve the substance thereof.\n(c) Any modifications, amendments or waivers to the Fiscal Agency Agreement or to the terms and conditions of the Notes in accordance with the foregoing provisions will be conclusive and binding on all Holders of Notes, whether or not they have given such consent, and on all Holders of coupons, whether or not notation of such modifications, amendments or waivers is made upon the Notes or coupons, and on all future Holders of Notes and coupons.\n(d) Promptly after the execution of any amendment to the Fiscal Agency Agreement or the effectiveness of any modification or amendment of the terms and conditions of the Notes, notice of such modification or amendment shall be given by INTELSAT or by the Fiscal Agent on behalf of and at the expense of INTELSAT, to Holders of the Notes in the manner provided in Paragraph 6(e) hereof. The failure to give such notice on a timely basis shall not invalidate such modification or amendment, but INTELSAT shall cause the Fiscal Agent to give such notice as soon as practicable upon discovering such failure or upon any impediment to the giving of such notice being overcome.\n11. INTELSAT may from time to time, without the consent of the Holder of any Note or coupon, issue further debt securities having the same terms and conditions as the Notes in all respects (or in all respects except for the first payment of interest thereon) or having such terms as INTELSAT may determine at the time of their issuance, in either case so that any such further debt securities shall be consolidated and form a single series with outstanding securities of any series (including the Notes). Unless the context requires otherwise, references in the Notes and coupons and in the Fiscal Agency Agreement to the Notes or coupons shall include any other debt securities issued in accordance with the Fiscal Agency Agreement that are intended by INTELSAT to form a single series with the Notes. Any further debt securities forming a single series with the outstanding securities of any series (including the Notes) shall be issued pursuant to the Fiscal Agency Agreement as amended for the purpose of providing for the issuance of such debt securities.\n12. Subject to the authentication of this Note by the Fiscal Agent, INTELSAT hereby certifies and declares that all acts, conditions and things required to be done and performed and to have happened precedent to the creation and issuance of the Notes and any coupons, and to constitute the same the valid obligations of INTELSAT, have been done and performed and have happened in due compliance with all applicable laws.\n13. INTELSAT hereby appoints CT Corporation System, 1633 Broadway, New York, New York 10019, as its authorized agent (\"Authorized Agent\") upon which process may be served in any action arising out of or based on the Notes or any coupons which action may be instituted in any New York State or United States Federal court sitting in the Borough of Manhattan, The City of New York, the State of New York, U.S.A., by the Holder of any Note or coupon, and INTELSAT and each Holder by acceptance hereof expressly accepts the exclusive jurisdiction of any such court in respect of any such action. Such appointment shall be irrevocable until two years after the Notes shall have matured and been paid or moneys for the payment thereof shall have been made available unless and until a successor Authorized Agent shall have been appointed and shall have accepted such appointment. INTELSAT hereby irrevocably waives any immunity to service of process in respect of any such action to which it might otherwise be entitled in any action arising out of or based upon the Notes or coupons which may be instituted by any Holder of a Note or coupon in any State or Federal court in the Borough of Manhattan, The City of New York, the State of New York, U.S.A. Service of process upon the Authorized Agent at the address indicated above, as such address may be changed within the Borough of Manhattan, The City of New York, the State of New York, U.S.A., by notice given by the Authorized Agent to each party hereto, shall be deemed, in every respect, effective service of process upon INTELSAT. INTELSAT irrevocably waives, to the fullest extent permitted by applicable law, any sovereign or other immunity from jurisdiction or from execution (except that INTELSAT does not waive immunity from execution prior to judgment and any similar defense) to which it might otherwise be entitled in any such action which may be instituted by any Holder of a Note or coupon in any New York State or United States Federal court sitting in the Borough of Manhattan, The City of New York, the State of New York, U.S.A.\n14. The Notes and coupons will constitute an obligation of INTELSAT and not of any Signatory or Party (each as defined in the INTELSAT Agreement). No Signatory or Party will waive any immunity to which it may be entitled in any suit on the Notes or coupons, and Holders of Notes or coupons will have no recourse against any Signatory or Party with respect to any obligations of INTELSAT under the Notes or coupons.\n[Form of coupon]\n[Face of coupon]\nANY UNITED STATES PERSON WHO HOLDS THIS OBLIGATION WILL BE SUBJECT TO LIMITATIONS UNDER THE UNITED STATES INCOME TAX LAWS, INCLUDING THE LIMITATIONS PROVIDED IN SECTIONS 165(j) AND 1287(a) OF THE INTERNAL REVENUE CODE.\n[B-][1] ... [10] U.S.$[662.50] [6625.00] Due March 22 [1995]....[2004]\nINTERNATIONAL TELECOMMUNICATIONS SATELLITE ORGANIZATION\n6 5\/8 Notes Due 2004\nOn the date set forth hereon, INTERNATIONAL TELECOMMUNICATIONS SATELLITE ORGANIZATION (\"INTELSAT\") will pay to bearer upon surrender hereof, the amount shown hereon (together with any additional amounts in respect thereof which INTELSAT may be required to pay according to the terms of said Note) at the paying agencies set out on the reverse hereof or at such other places outside the United States of America (including the States and the District of Columbia), its territories and possessions and other areas subject to its jurisdiction as INTELSAT may determine from time to time, at the option of the Holder, by United States dollar check drawn on a bank in The City of New York, the State of New York, U.S.A. or by transfer to a United States dollar account maintained by the payee with a bank located in a city in Western Europe, being the interest then payable on said Note.\nINTERNATIONAL TELECOMMUNICATIONS SATELLITE ORGANIZATION\nBy_______________________________________\n[Reverse of coupon]\nBankers Trust Company 1 Appold Street Broadgate London EC2A 2HE England\nBankers Trust Luxembourg S.A. 14 Boulevard F.D. Roosevelt L-2450 Luxembourg\nBankers Trust Company 38\/F Two Pacific Place 88 Queensway Hong Kong\nCredit Suisse Paradeplatz 8 8001 Zurich Switzerland\nDBS Bank 24 Raffles Place #81-00 Clifford Centre Singapore 0104\nEXHIBIT C\n[FORM OF CERTIFICATION TO BE GIVEN TO EUROCLEAR OR CEDEL S.A. BY ACCOUNT HOLDER]\nCERTIFICATE\nINTERNATIONAL TELECOMMUNICATIONS SATELLITE ORGANIZATION\n6 5\/8% Notes Due 2004\n(the \"Notes\")\nThis is to certify that as of the date hereof, and except as set forth below, interests in the temporary Global Note representing the above-captioned Notes held by you for our account (i) are owned by person(s) that are not citizens or residents of the United States, domestic partnerships, domestic corporations or any estate or trust the income of which is subject to United States Federal income taxation regardless of its source (\"United States person(s)\"), (ii) are owned by United States person(s) that (a) are foreign branches of United States financial institutions (as defined in U.S. Treasury Regulations Section 1.165-12(c)(1)(v) (\"financial institutions\")) purchasing for their own account or for resale or (b) acquired the Notes through foreign branches of United States financial institutions and who hold the Notes through such United States financial institutions on the date hereof (and in either case (a) or (b), each such United States financial institution hereby agrees, on its own behalf or through its agent, that you may advise INTELSAT or INTELSAT's agent that it will comply with the requirements of Section 165(j)(3)(A), (B) or (C) of the U.S. Internal Revenue Code of 1986, as amended, and the regulations thereunder), or (iii) are owned by a United States or foreign financial institution for purposes of resale during the restricted period (as defined in U.S. Treasury Regulations Section 1.163-5(c)(2)(i)(D)(7)), and in addition if the owner of the Notes is a United States or foreign financial institution described in clause (iii) above (whether or not also described in clause (i) or (ii)) this is to further certify that such financial institution has not acquired the Notes for purposes of resale directly or indirectly to a United States person or to a person within the United States or its possessions.\nAs used herein, \"United States\" means the United States of America (including the States thereof and the District of Columbia); and its \"possessions\" include Puerto Rico, the U.S. Virgin Islands, Guam, American Samoa, Wake Island and the Northern Mariana Islands.\nWe undertake to advise you promptly by tested telex on or prior to the date on which you intend to submit your certification relating to the Notes held by you for our account in accordance with your Operating Procedures if any applicable statement herein is not correct\non such date, and in the absence of any such notification it may be assumed that this certification applies as of such date.\nThis certification excepts and does not relate to U.S. $______ of such interest in the above Notes in respect of which we are not able to certify and as to which we understand exchange and delivery of definitive Notes (or, if relevant, exercise of any rights or collection of any interest) cannot be made until we do so certify.\nWe understand that this certification is required in connection with certain tax laws or, if applicable, certain securities laws of the United States. In connection therewith, if administrative or legal proceedings are commenced or threatened in connection with which this certification is or would be relevant, we irrevocably authorize you to produce this certification to any interested party in such proceedings.\nDated: _____________, 199_\nBy:_______________________________________ As, or as agent for, the beneficial owner(s) of the Notes to which this certificate relates.\nEXHIBIT D\n[FORM OF CERTIFICATION TO BE GIVEN BY THE EUROCLEAR OPERATOR OR CEDEL S.A.]\nCERTIFICATION\nINTERNATIONAL TELECOMMUNICATIONS SATELLITE ORGANIZATION\n6 5\/8% Notes Due 2004 (the \"Notes\")\nThis is to certify that, based solely on certifications we have received in writing, by tested telex or by electronic transmission from member organizations appearing in our records as persons being entitled to a portion of the principal amount set forth below (our \"Member Organizations\") substantially to the effect set forth in the Fiscal Agency Agreement, as of the date hereof, U.S. $_______ principal amount of the above-captioned Notes (i) is owned by persons that are not citizens or residents of the United States, domestic partnerships, domestic corporations or any estate or trust the income of which is subject to United States Federal income taxation regardless of its source (\"United States persons\"), (ii) is owned by United States persons that are (a) foreign branches of United States financial institutions (as defined in U.S. Treasury Regulations Section 1.165-12(c)(1)(v) (\"financial institutions\")) purchasing for their own account or for resale or (b) United States persons who acquired the Notes through foreign branches of United States financial institutions and who hold the Notes through such United States financial institutions on the date hereof (and in either case (a) or (b), each such United States financial institution has agreed, on its own behalf or through its agent, that we may advise INTELSAT or INTELSAT's agent that it will comply with the requirements of Section 165(j)(3)(A), (B) or (C) of the U.S. Internal Revenue Code of 1986, as amended, and the regulations thereunder), or (iii) is owned by a United States or foreign financial institution for purposes of resale during the restricted period (as defined in U.S. Treasury Regulations Section 1.163-5(c)(2)(i)(D)(7)), and to the further effect that United States or foreign financial institutions described in clause (iii) above (whether or not also described in clause (i) or (ii)) have certified that they have not acquired the Notes for purposes of resale directly or indirectly to a United States person or to a person within the United States or its possessions.\nWe further certify (i) that we are not making available herewith for exchange (or, if relevant, exercise of any rights or collection of any interest) any portion of the Temporary Global Note excepted in such certifications and (ii) that as of the date hereof we have not received any notification from any of our Member Organizations to the effect that the statements made by such Member Organizations with respect to any portion of the part submitted herewith\nfor exchange (or, if relevant, exercise of any rights or collection of any interest) are no longer true and cannot be relied upon as of the date hereof.\nWe understand that this certification is required in connection with certain tax laws and, if applicable, certain securities laws of the United States. In connection therewith, if administrative or legal proceedings are commenced or threatened in connection with which this certification is or would be relevant, we irrevocably authorize you to produce this certification to any interested party in such proceedings.\nDated: __________, 1994\nYours faithfully, [Morgan Guaranty Trust Company of New York, Brussels Office as operator of the Euroclear System]\nor\n[Cedel S.A.]\nBy_______________________\nEXHIBIT 10(jj)\nAT&T Maritime Services 650 Liberty Avenue Union, NJ 07083 FAX 908 851-4002\nFebruary 18, 1994\nChristopher J. Leber Vice President & General Manager CMC Operations COMSAT Mobile Communications 22300 COMSAT Drive Clarksburg, Maryland 20871\nChris,\nThe following outlines the agreement in principle we have reached regarding pricing and volumes for AT&T's branded shore-to-ship mobile satellite service and COMSAT's branded ship-to-shore service to be effective February 1, 1994.\nAT&T plans to route 1.8 million minutes annually of domestic U.S. originating shore-to-ship Standard A traffic to COMSAT, prorated during the period beginning February 1, 1994 and ending December 31, 1994. AT&T will settle with COMSAT at the rate of $6.70 per minute. Furthermore, for all Standard M and Standard B traffic that AT&T routes to COMSAT during the above period, COMSAT will settle with AT&T at the rate of $4.95 per minute for Standard M traffic and $6.45 per minute for Standard B traffic.\nCOMSAT plans to route 3.6 million minutes annually of ship-to- shore traffic to AT&T, prorated during the period beginning February 1, 1994 and ending December 31, 1994. COMSAT will also return to AT&T all calls designated by the customer for termination over the AT&T network. COMSAT will settle with AT&T at the rate of $.25 per minute for calls terminating in the United States and, for call terminating to all other points, at an amount equal to a 10 percent discount off of AT&T's prevailing published ILD rates.\nNeither AT&T nor COMSAT commits to traffic volumes, but will make a good faith effort to send the above-described traffic to the other. Each party will review volumes quarterly to verify that these proposed volumes are being satisfied. There will be no shortfall obligation, charge, or penalty for the failure to deliver the planned volumes.\nThe parties agree also to exchange written proposals on or before November 30, 1994 with respect to prices for calendar year 1995. Subject to any appropriate regulatory approvals, this informal letter of understanding will form the basis for a formal contract based upon these principles. The parties will use reasonable best efforts to incorporate the above understanding into a formal contract by the earliest possible date.\nPlease indicate your acceptance in the appropriate space below.\nSincerely,\n\/s\/Paula Goldstein - - - ------------------ Paula Goldstein Product Manager Maritime Services\n\/s\/Cheryl Lynn Schneider Agreed to and accepted by: ________________________________\nEXHIBIT 10(kk)\n______________________________________________________________________________\nFISCAL AGENCY AGREEMENT\nBetween\nINTERNATIONAL TELECOMMUNICATIONS SATELLITE ORGANIZATION,\nIssuer\nand\nBANKERS TRUST COMPANY\nFiscal Agent and Principal Paying Agent\n_________________________\nDated as of 22 March 1994 _________________________\nU.S. $200,000,000\n6 5\/8% Notes Due 2004\n______________________________________________________________________________\nFISCAL AGENCY AGREEMENT, dated as of 22 March 1994 (the \"Agreement\"), between International Telecommunications Satellite Organization (\"INTELSAT\"), an international organization established by the Agreement Relating to the International Telecommunications Satellite Organization and the Operating Agreement relating thereto, entered into force on 12 February 1973, and Bankers Trust Company, a bank organized under the laws of New York, United States, as Fiscal Agent and Principal Paying Agent.\n1. INTELSAT has, by a Subscription Agreement, dated 7 March 1994, between INTELSAT and Goldman Sachs (Asia) Limited (\"GSAL\"), and the other Managers named therein (the \"Managers\"), agreed to issue U.S. $200,000,000 aggregate principal amount of its 6 5\/8% Notes Due 2004 (the \"Notes\"). The Notes shall be issued initially in the form of a temporary global note in bearer form, without interest coupons, substantially in the form of Exhibit A hereto (the \"Global Note\"). The Global Note will be exchangeable, as provided below, for definitive Notes issuable in bearer form, in denominations of U.S. $10,000 and U.S. $100,000 (the \"Bearer Notes\") with interest coupons attached (the \"coupons\"), substan- tially in the forms set forth in Exhibit B hereto. The term \"Notes\" as used herein includes the Global Note. The term \"Holder\", when used with respect to a Bearer Note or any coupon, means the bearer thereof.\n2. INTELSAT hereby appoints Bankers Trust Company acting through its office at London, United Kingdom, as its fiscal agent and principal paying agent in respect of the Notes upon the terms and subject to the conditions herein set forth (Bankers Trust Company and its successor or successors as such fiscal agent or principal paying agent qualified or appointed in accordance with Section 8 hereof are herein collectively called the \"Fiscal Agent\"), and Bankers Trust Company hereby accepts such appointment. The Fiscal Agent shall have the powers and authority granted to and conferred upon it herein and in the Notes and such further powers and authority to act on behalf of INTELSAT as may be mutually agreed upon by INTELSAT and the Fiscal Agent. As used herein, \"paying agents\" shall mean paying agents (including the Fiscal Agent) maintained by INTELSAT as provided in Section 8(b) hereof.\n3. (a) The Notes shall be executed on behalf of INTELSAT by the Director General and Chief Executive Officer or by any other officer of INTELSAT specifically identified in a certificate of incumbency and specimen signatures as having the requisite authority to execute the Notes (the \"Executive Officers\"), any of whose signatures may be manual or facsimile, under a facsimile of its seal reproduced thereon and attested by its General Counsel or an Assistant General Counsel, any of whose signatures may be manual or facsimile. Notes bearing the manual or facsimile signatures of persons who were at any time the proper officers of INTELSAT shall bind INTELSAT, notwithstanding that such persons or any of them ceased to hold such office or offices prior to the authentication and delivery of such Notes or did not hold such office or offices at the date of issue of such Notes.\n(b) The Fiscal Agent is hereby authorized, in accordance with the provisions of Paragraph 9 of the definitive Notes and this Section, from time to time to authenticate (or to arrange for the authentication on its behalf) and deliver a new Note in exchange for or in lieu of any Note which has become, or the coupons appertaining thereto which have become, mutilated, lost, stolen or destroyed. Each Note authenticated and delivered in exchange for or in lieu of any such Note shall carry all the rights to interest accrued and unpaid and to accrue which were carried by such Note.\n4. (a) INTELSAT initially shall execute and deliver, on 22 March 1994 (the \"Closing Date\"), a Global Note for an aggregate principal amount of U.S. $200,000,000 to the Fiscal Agent, and the Fiscal Agent by a duly authorized officer or an attorney-in-fact duly appointed pursuant to a valid power of attorney shall, upon the order of INTELSAT signed by an Executive Officer of INTELSAT, authenticate the Global Note and deliver the Global Note to The Chase Manhattan Bank, N.A., as common depositary (the \"Common Depositary\") for the benefit of the operator of the Euroclear System (\"Euroclear\") and Cedel S.A. (\"Cedel\"), for credit to the respective account of the purchasers (or to such other accounts as it may direct).\n(b) For the purposes of this Agreement, \"Exchange Date\" shall mean a date which is not earlier than the day immediately following the expiration of the 40-day period beginning on the later of the commencement of the offering and the Closing Date. Without unnecessary delay, but in any event not less than 14 days prior to the Exchange Date, in such denominations as are specified by the Fiscal Agent, except in the event of earlier redemption or acceleration, INTELSAT shall execute and deliver to the Fiscal Agent U.S. $200,000,000 principal amount of definitive Bearer Notes.\n(c) Not earlier than the Exchange Date, the interest of a beneficial owner of the Notes in the Global Note shall only be exchanged for Bearer Notes after the account holder instructs Euroclear or Cedel, as the case may be, to request such exchange on his behalf and presents to Euroclear or Cedel, as the case may be, a certificate substantially in the form set forth in Exhibit C hereto, copies of which certificate shall be available from the offices of Euroclear and Cedel, the Fiscal Agent and each other paying agent of INTELSAT. Any exchange pursuant to this paragraph shall be made free of charge to beneficial owners of the Global Note, except that a person receiving definitive Notes must bear the cost of insurance, postage, transportation and the like in the event that such person does not take delivery of such definitive Notes in person at the offices of Euroclear or Cedel. In no event shall any such exchange occur prior to the Exchange Date.\n(d) Upon request for issuance of Bearer Notes, on or after the Exchange Date, the Global Note shall be surrendered by the Common Depositary to the Fiscal Agent, as INTELSAT's agent, for purposes of the exchange of Notes described below. Following such surrender and upon presentation by Euroclear or Cedel, acting on behalf of the beneficial owners of Bearer Notes, to the Fiscal Agent at its principal office in London, United Kingdom (the \"Principal Office\") of a certificate or certificates substantially in the form set forth in Exhibit D\nhereto, the Fiscal Agent shall authenticate (or arrange for the authentication on its behalf) and deliver to Euroclear or Cedel, as the case may be, for the account of such owners, the Bearer Notes in exchange for an aggregate principal amount equal to the principal amount of the Global Note beneficially owned by such owners. The presentation to the Fiscal Agent by Euroclear or Cedel of such a certificate may be relied upon by INTELSAT and the Fiscal Agent as conclusive evidence that a related certificate or certificates has or have been presented to Euroclear or Cedel, as the case may be, as contemplated by the terms of Section 4(c) hereof.\nUpon any exchange of a portion of the Global Note for Bearer Notes, the Global Note shall be endorsed by the Fiscal Agent to reflect the reduction of the principal amount evidenced thereby, whereupon its remaining principal amount shall be reduced for all purposes by the amount so exchanged; provided, that when the Global Note is exchanged in full, the Fiscal Agent shall cancel it. Until so exchanged in full, the Global Note shall in all respects be entitled to the same benefits under this Agreement as the definitive Notes authenticated and delivered hereunder, except that none of Euroclear, Cedel or the beneficial owners of the Global Note shall be entitled to receive payment of interest thereon.\nNotwithstanding the foregoing, in the event of redemption or acceleration of the Global Note prior to the issue of the Bearer Notes, Bearer Notes will be issuable in respect of such Global Note on or after the later of (i) the date fixed for such redemption or on which such acceleration occurs and (ii) the Exchange Date, and all of the foregoing in this subsection (d) shall be applicable to the issuance of such Bearer Notes.\n(e) No Note or coupon shall be entitled to any benefit under this Agreement or be valid or obligatory for any purpose unless there appears on such Note or coupon a certificate of authentication substantially in the forms provided for herein and executed by the Fiscal Agent by manual signature, and such certificate upon any Note or coupon shall be conclusive evidence, and the only evidence, that such Note or coupon has been duly authenticated and delivered hereunder.\n5. (a) INTELSAT will pay or cause to be paid to the Fiscal Agent the amounts required to be paid by it herein and in the Notes, at the times and for the purposes set forth herein and in the Notes and in the manner set forth below, and INTELSAT hereby authorizes and directs the Fiscal Agent to make payment of the principal of and interest and additional amounts pursuant to Paragraph 5 of the definitive Notes (\"Additional Amounts\"), if any, on the Notes in accordance with the terms of the Notes.\n(i) INTELSAT shall initiate a wire transfer for payment to the Fiscal Agent at its Principal Office in London, United Kingdom, by no later than 10:00 a.m. (New York time) on the applicable Interest Payment Date, any redemption date and the maturity date of the Notes, in such coin or currency of the United States of America as at the time of payment is legal tender for the payment of public and private debts, of amounts sufficient (with any amounts then held by the Fiscal Agent and available for the purpose) to pay\nthe interest on, the redemption price of an accrued interest (if the redemption date is not an Interest Payment Date) on, and the principal of, the Notes due and payable on such an Interest Payment Date, redemption date or maturity date, as the case may be.\n(ii) INTELSAT will supply to the Fiscal Agent by 10:00 a.m. (New York time) on the second business day prior to the due date for any such payment a confirmation (by tested telex or authenticated SWIFT message or by facsimile transmission with an original to follow by mail) that such payment will be made, which confirmation shall identify the bank from which the wire transfer constituting payment will be made.\n(iii) The Fiscal Agent will forthwith notify by telex each of the other paying agents and INTELSAT if it has not (A) by the time specified for its receipt, received the confirmation referred to above or (B) by the due date for any payment due, received the full amount so payable on such date.\n(iv) In the absence of the notification from the Fiscal Agent referred to in sub-clause (iii) of this Clause, each such paying agent shall be entitled to assume that the Fiscal Agent has received the full amount due in respect of the Notes or the Coupons on that date and shall be entitled:\n(A) to pay maturing Notes and Coupons in accordance with their terms; and\n(B) to claim any amounts so paid by it from the Fiscal Agent (notwithstanding anything herein to the contrary).\n(v) Without prejudice to the obligations of INTELSAT to make payments in accordance with the provisions of this Clause, if payment of the appropriate amount shall be made by or on behalf of INTELSAT later than the time specified, but otherwise in accordance with the provisions hereof, the Fiscal Agent shall forthwith notify the paying agents and give notice to holders of the Notes, that the Fiscal Agent has received such amount and the paying agents will act as such for the Notes and Coupons and make or cause to be made payments as provided herein.\n(vi) The Fiscal Agent shall apply the amounts so paid to it to the payment of such interest, redemption price and principal in accordance with the terms of the Notes. Any monies paid by INTELSAT to the Fiscal Agent for the payment of the principal of and interest on any Notes and remaining unclaimed at the end of two years after such principal or interest shall have become due and payable (whether at maturity, upon call for redemption or otherwise) shall then be repaid to INTELSAT upon its written request, and upon such repayment all\nliability of the Fiscal Agent with respect thereto shall thereupon cease, without, however, limiting in any way any obligation INTELSAT may have to pay the principal of and interest on this Note as the same shall become due.\n(b) Notwithstanding any other provision hereof (other than the last sentence of this Section 5(b)) or of the Notes, no payment with respect to principal of or interest or Additional Amounts, if any, on any Bearer Note may be made at any office of the Fiscal Agent or any other paying agent maintained by INTELSAT in the United States of America (including the States and the District of Columbia), its territories or possessions and other areas subject to its jurisdiction (the \"United States\"). No payment with respect to a Bearer Note shall be made by transfer to an account in, or by mail to an address in, the United States. Notwithstanding the foregoing, payment of principal of and interest and Additional Amounts, if any, on Bearer Notes shall be made at the paying agent in the Borough of Manhattan, The City of New York, if (but only if) payments in United States dollars of the full amount of such principal, interest or Additional Amounts at all offices or agencies outside the United States through which payment is to be made in accordance with the terms of the Notes is illegal or effectively precluded by exchange controls or other similar restrictions.\n(c) If INTELSAT becomes liable to pay additional amounts pursuant to Section 5 of the Notes, then, at least ten business days prior to the date of any such payment of principal or interest to which such payment of additional amounts relates, INTELSAT shall furnish the Fiscal Agent, the Paying Agent and each other paying agent of INTELSAT with a certificate which specifies, by country, the rates of withholding, if any, applicable to such payment to Holders of the Notes, and shall pay to the Paying Agent such amounts as shall be required to be paid to Holders of the Notes. INTELSAT hereby agrees to indemnify the Fiscal Agent, the Paying Agent and each other paying agent of INTELSAT for, and to hold them harmless against, any loss, liability or expense incurred without negligence or bad faith on their part arising out of or in connection with actions taken or omitted by any of them in reliance on any certificate furnished pursuant to this Section 5(c).\n(d) In the case of any redemption of Notes, INTELSAT shall give notice, not less than 45 or more than 75 days prior to any date set for redemption (as provided for in Paragraph 6 of the definitive Notes), to the Fiscal Agent of its election to redeem the Notes on such redemption date specified in such notice. The Fiscal Agent shall cause notice of redemption to be given in the name and at the expense of INTELSAT in the manner provided in Paragraph 6(e) of the definitive Notes.\n6. All Notes and coupons surrendered for payment, redemption or exchange shall, if surrendered to anyone other than the Fiscal Agent, be cancelled and delivered to the Fiscal Agent. All cancelled Notes and coupons held by the Fiscal Agent shall be destroyed, and the Fiscal Agent shall furnish to INTELSAT a certificate with respect to such destruction, except that the cancelled Global Note and the certificates as to beneficial ownership required by Section 4 hereof shall not be destroyed but shall be delivered to INTELSAT.\n7. The Fiscal Agent accepts its obligations set forth herein and in the Notes upon the terms and conditions hereof and thereof, including the following, to all of which INTELSAT agrees and to all of which the rights hereunder of the Holders from time to time of the Notes and coupons shall be subject:\n(a) The Fiscal Agent and each other paying agent of INTELSAT shall be entitled to the compensation to be agreed upon with INTELSAT for all services rendered by it, and INTELSAT agrees promptly to pay such compensation and to reimburse the Fiscal Agent and each other paying agent of INTELSAT for its reasonable out-of- pocket expenses (including reasonable advertising expenses and counsel fees) incurred by it in connection with the services rendered by it hereunder. INTELSAT also agrees to indemnify each of the Fiscal Agent and each other paying agent of INTELSAT hereunder for, and to hold it harmless against, any loss, liability or expense incurred without negligence or bad faith on the part of the Fiscal Agent or such other paying agent, arising out of or in connection with its acting as such Fiscal Agent or other paying agent of INTELSAT hereunder, including the costs and expenses of defending against any claim of liability. For purposes of this Section, the obligations of INTELSAT shall survive the payment of the Notes and the resignation or removal of the Fiscal Agent or any other paying agent of INTELSAT hereunder.\n(b) In acting under this Agreement and in connection with the Notes, the Fiscal Agent and each other paying agent of INTELSAT are acting solely as agents of INTELSAT and do not assume any obligation or relationship of agency or trust for or with any of the Holders of the Notes or coupons, except that all funds held by the Fiscal Agent or any other paying agent of INTELSAT for payment of principal of or interest or Additional Amounts, if any, on the Notes shall be held in trust, but need not be segregated from other funds except as required by law, and shall be applied as set forth herein and in the Notes; provided, however, that monies paid by INTELSAT to the Fiscal Agent or any other paying agent of INTELSAT for the payment of principal of or interest or Additional Amounts, if any, on Notes remaining unclaimed at the end of two years after such principal or interest or Additional Amounts, if any, shall have become due and payable shall be repaid to INTELSAT, promptly upon its request, as provided and in the manner set forth in the Notes, whereupon the aforesaid trust shall terminate and all liability of the Fiscal Agent or such other paying agent of INTELSAT with respect thereto shall cease and the Holder of such Note or unpaid coupon must thereafter look solely to INTELSAT for payment thereof.\n(c) The Fiscal Agent and each other paying agent of INTELSAT hereunder may consult with counsel (who may also be counsel to INTELSAT) satisfactory to such Fiscal Agent or paying agent in its reasonable judgment, and the written opinion of such counsel shall be full and complete authorization and protection in respect of any action taken, omitted or suffered by it hereunder in good faith and in reliance thereon.\n(d) The Fiscal Agent and each other paying agent of INTELSAT hereunder shall be protected and shall incur no liability to any person for or in respect of any action in good\nfaith taken, omitted or suffered by it in reliance upon any Note, coupon, notice, direction, consent, certificate, affidavit, statement or other paper or document reasonably believed by the Fiscal Agent or such other paying agent in good faith to be genuine and to have been signed by the proper parties.\n(e) The Fiscal Agent and each other paying agent of INTELSAT hereunder and its directors, officers and employees may become the owner of, or acquire an interest in, any Notes or coupons, with the same rights that it or they would have if it were not the Fiscal Agent or such other paying agent of INTELSAT hereunder, may engage or be interested in any financial or other transaction with INTELSAT and may act on, or as depositary, trustee or agent for, any committee or body of Holders of Notes or coupons or holders of other obligations of INTELSAT as freely as if it were not the Fiscal Agent or a paying agent of INTELSAT hereunder.\n(f) Neither the Fiscal Agent nor any other paying agent of INTELSAT hereunder shall be under any liability to any person for interest on any monies at any time received by it pursuant to any of the provisions of this Agreement or of the Notes except as may be otherwise agreed with INTELSAT.\n(g) The recitals contained herein and in the Notes (except the Fiscal Agent's certificates of authentication) and in the coupons shall be taken as the statements of INTELSAT, and the Fiscal Agent assumes no responsibility for their correctness. The Fiscal Agent makes no representation as to the validity or sufficiency of this Agreement or the Notes or coupons, except for the Fiscal Agent's due authorization to execute and deliver this Agreement; provided, however, that the Fiscal Agent shall not be relieved of its duty to authenticate Notes (or to arrange for authentication on its behalf) as authorized by this Agreement. The Fiscal Agent shall not be accountable for the use or application by INTELSAT of the proceeds of Notes.\n(h) The Fiscal Agent and each other paying agent of INTELSAT hereunder shall be obligated to perform such duties and only such duties as are herein and in the Notes specifically set forth and no implied duties or obligations shall be read into this Agreement or the Notes against the Fiscal Agent or any other paying agent of INTELSAT. The Fiscal Agent shall not be under any obligation to take any action hereunder which may tend to involve it in any undue expense or liability, the payment of which within a reasonable time is not, in its reasonable opinion, assured to it.\n(i) Unless herein or in the Notes otherwise specifically provided, any order, certificate, notice, request, direction or other communication from INTELSAT under any provision of this Agreement shall be sufficient if signed by an Executive Officer of INTELSAT.\n(j) No provision of this Agreement shall be construed to relieve the Fiscal Agent from liability for its own negligent action, its own negligent failure to act, or its own willful misconduct or that of its directors, officers or employees.\n8. (a) INTELSAT agrees that, until all Notes or coupons (other than coupons the surrender of which has been waived under Paragraphs 3 and 6 of the definitive Notes and coupons which have been replaced or paid as provided in Paragraph 9 of the definitive Notes) authenticated and delivered hereunder (i) shall have been delivered to the Fiscal Agent for cancellation or (ii) become due and payable, whether at maturity or upon redemption, and monies sufficient to pay the principal thereof and interest, and Additional Amounts, if any, thereon shall have been made available to the Fiscal Agent and either paid to the persons entitled thereto or returned to INTELSAT as provided herein and in the Notes, there shall at all times be a Fiscal Agent hereunder which shall be appointed by INTELSAT, shall be authorized under the laws of its place of organization to exercise corporate trust powers and shall have a combined capital and surplus of at least U.S. $50,000,000.\n(b) INTELSAT hereby appoints the Principal Office of the Fiscal Agent as its agent where, subject to any applicable laws or regulations, Notes and coupons may be presented or surrendered for payment, where the Global and Bearer Notes may be surrendered for exchange and where notices and demands to or upon INTELSAT in respect of the Notes and coupons and this Agreement may be served. In addition, INTELSAT hereby appoints the main office of Bankers Trust Luxembourg S.A. in Luxembourg, Bankers Trust Company in Hong Kong, Credit Suisse in Zurich, Switzerland and DBS Bank in Singapore as additional paying agencies for the payment of principal of, and interest and Additional Amounts, if any, on, the Notes.\nINTELSAT may at any time and from time to time vary or terminate the appointment, upon thirty days prior written notice, of any such agent or appoint any additional agents for any or all of such purposes; provided, however, that, (i) so long as INTELSAT is required to maintain a Fiscal Agent hereunder, INTELSAT will maintain in London, United Kingdom an office or agency where Notes and coupons may be presented or surrendered for payment, where the Global and Bearer Notes may be presented for exchange and where notices and demands to or upon INTELSAT in respect of the Notes and coupons and this Agreement may be served and (ii) in the event the circumstances described in Section 5(b) hereof require, it will designate a paying agent in the Borough of Manhattan, The City of New York, the State of New York, U.S.A., where Bearer Notes and coupons may be presented or surrendered for payment in such circumstances (and not otherwise); and provided, further, that so long as the Notes are listed on the respective stock exchanges, INTELSAT will maintain a paying agent in Hong Kong and Singapore. INTELSAT will give prompt written notice to the Fiscal Agent, of the appointment or termination of any such agency and of the location and any change in the location of any such office or agency and shall give notice thereof to Holders in the manner described in the first sentence of Paragraph 6(d) of the definitive Notes.\n(c) The Fiscal Agent may at any time resign as such Fiscal Agent by giving written notice to INTELSAT of such intention on its part, specifying the date on which its desired resignation shall become effective; provided, however, that such date shall never be less than three months after the receipt of such notice by INTELSAT unless INTELSAT agrees to\naccept less notice. The Fiscal Agent may be removed at any time by the filing with it of an instrument in writing signed on behalf of INTELSAT and specifying such removal and the date when it is intended to become effective. Any resignation or removal of the Fiscal Agent or other paying agent of INTELSAT, if such other paying agent is the only paying agent of INTELSAT then maintained outside the United States, shall take effect upon the date of the appointment by INTELSAT as hereinafter provided of a successor and the acceptance of such appointment by such successor. Upon its resignation or removal, such agent shall be entitled to the payment by INTELSAT of its compensation for the services rendered hereunder and to the reimbursement of all reasonable out-of-pocket expenses incurred in connection with the services rendered hereunder by such agent.\n(d) In case at any time the Fiscal Agent or other paying agent of INTELSAT, if such other paying agent is the only paying agent of INTELSAT then maintained outside the United States, shall resign, or shall be removed, or shall become incapable of acting or shall be adjudged a bankrupt or insolvent, or if a receiver of it or of its property shall be appointed, or if any public officer shall take charge or control of it or of its property or affairs for the purpose of rehabilitation, conservation or liquidation, a successor agent, eligible as aforesaid, shall be appointed by INTELSAT by an instrument in writing. Upon the appointment as aforesaid of a successor agent and the acceptance by it of such appointment, the agent so superseded shall cease to be such agent hereunder. If no successor Fiscal Agent or other paying agent of INTELSAT shall have been so appointed by INTELSAT and shall have accepted appointment as hereinafter provided, and if such other paying agent is the only paying agent of INTELSAT then maintained outside the United States, and if INTELSAT shall have otherwise failed to make arrangements for the performance of the duties of the Fiscal Agent or other paying agent, then any Holder of a Note who has been a bona fide Holder of a Note for at least six months, on behalf of himself and all others similarly situated, or the Fiscal Agent, may petition any New York State or United States Federal court sitting in the Borough of Manhattan, The City of New York, the State of New York, U.S.A., for the appointment of a successor agent.\n(e) Any successor Fiscal Agent appointed hereunder shall execute, acknowledge and deliver to its predecessor and to INTELSAT an instrument accepting such appointment hereunder, and thereupon such successor Fiscal Agent, without any further act, deed or conveyance, shall become vested with all the authority, rights, powers, trusts, immunities, duties and obligations of such predecessor with like effect as if originally named as such Fiscal Agent hereunder, and such predecessor, upon payment of its charges and disbursements then unpaid, shall simultaneously therewith become obligated to transfer, deliver and pay over, and such successor Fiscal Agent shall be entitled to receive, all monies, securities or other property on deposit with or held by such predecessor, as such Fiscal Agent hereunder. INTELSAT will give prompt written notice to each other paying agent of INTELSAT of the appointment of a successor Fiscal Agent and shall give notice thereof to Holders at least once, in the manner described in Paragraph 6(e) of the definitive Notes.\n(f) Any corporation, bank or trust company into which the Fiscal Agent may be merged or converted, or with which it may be consolidated, or any corporation, bank or trust company resulting from any merger, conversion or consolidation to which the Fiscal Agent shall be a party, or any corporation, bank or trust company succeeding to all or substantially all the assets and business of the Fiscal Agent, shall be the successor to the Fiscal Agent under this Agreement; provided, however, that such corporation shall be otherwise eligible under this Section, without the execution or filing of any document or any further act on the part of any of the parties hereto.\n9. INTELSAT will pay all stamp taxes and other duties, if any, which may be imposed by the United States, the United Kingdom or any political subdivision or taxing authority of or in the foregoing with respect to (i) the execution or delivery of this Agreement, (ii) the issuance of the Global Note, or (iii) the exchange from time to time of the Global Note for Bearer Notes (other than any such tax or duty which would not have been imposed on such exchange had such exchange occurred on or before the first anniversary of the initial issuance of the Notes which shall be payable by the Holders).\n10. (a) A meeting of Holders of Notes may be called at any time and from time to time to make, give or take any request, demand, authorization, direction, notice, consent, waiver or other action provided by this Agreement or the Notes to be made, given or taken by Holders of Notes. The Fiscal Agent may, upon request from, and at the expense of, INTELSAT, direct to convene a single meeting of the Holders of Notes and the holders of debt securities of other series.\n(b) INTELSAT may at any time call a meeting of Holders of Notes for any purpose specified in Section 10(a) hereof to be held at such time and at such place in London, United Kingdom or in the Borough of Manhattan, The City of New York, the State of New York, U.S.A., as INTELSAT shall determine. Notice of every meeting of Holders of Notes, setting forth the time and the place of such meeting and in general terms the action proposed to be taken at such meeting, shall be given, in the same manner as provided in Paragraph 6(e) of the definitive Notes, not more than 180 days nor less than 21 days prior to the date fixed for the meeting. In case at any time the Holders of at least 10% in principal amount of the Outstanding (as defined in Paragraph 3 of the definitive Notes) Notes shall have requested INTELSAT to call a meeting of the Holders of Notes for any purpose specified in Section 10(a) hereof, by written request setting forth in reasonable detail the action proposed to be taken at the meeting, and INTELSAT shall not have caused to be published the notice of such meeting within 21 days after receipt of such request or shall not thereafter proceed to cause the meeting to be held as provided herein, then the Holders of Notes in the amount above-specified, as the case may be, may determine the time and the place in London, United Kingdom or in the Borough of Manhattan, The City of New York, the State of New York, U.S.A., for such meeting and may call such meeting for such purposes by giving notice thereof as provided in this subsection (b).\n(c) To be entitled to vote at any meeting of Holders of Notes, a person shall be a Holder of an Outstanding Note or a person appointed by an instrument in writing as proxy for such a Holder.\n(d) The persons entitled to vote a majority in aggregate principal amount of the Outstanding Notes shall constitute a quorum. In the absence of a quorum within 30 minutes of the time appointed for any such meeting, the meeting shall, if convened at the request of the Holders of Notes, be dissolved. In any other case the meeting may be adjourned for a period of not less than 10 days as determined by the chairman of the meeting prior to the adjournment of such meeting. In the absence of a quorum at any such adjourned meeting, such adjourned meeting may be further adjourned for a period of not less than 10 days as determined by the chairman of the meeting prior to the adjournment of such adjourned meeting. Notice of the reconvening of any adjourned meeting shall be given as provided in Section 10(b) hereof, except that such notice need be given only once not less than five days prior to the date on which the meeting is scheduled to be reconvened. Notice of the reconvening of an adjourned meeting shall state expressly the percentage of the principal amount of the Outstanding Notes which shall constitute a quorum.\nSubject to the foregoing, at the reconvening of any meeting adjourned for a lack of a quorum, the persons entitled to vote 25% in principal amount of the Outstanding Notes shall constitute a quorum for the taking of any action set forth in the notice of the original meeting. Any meeting of Holders of Notes at which a quorum is present may be adjourned from time to time by vote of a majority in principal amount of the Outstanding Notes represented at the meeting, and the meeting may be held as so adjourned without further notice. At a meeting or an adjourned meeting duly reconvened and at which a quorum is present as aforesaid, any resolution and all matters shall be effectively passed or decided if passed or decided by the persons entitled to vote a majority in principal amount of the Outstanding Notes represented and voting.\n(e) INTELSAT may make such reasonable regulations as it may deem advisable for any meeting of Holders of Notes in regard to proof of the holding of Notes and of the appointment of proxies and in regard to the appointment and duties of inspectors of votes, the submission and examination of proxies, certificates and other evidence of the right to vote, and such other matters concerning the conduct of the meeting as it shall deem appropriate. INTELSAT or the Holders calling the meeting, as the case may be, shall, by an instrument in writing, appoint a temporary chairman. A permanent chairman and a permanent secretary of the meeting shall be elected by vote of the persons entitled to vote a majority in principal amount of the Outstanding Notes represented and voting at the meeting. The chairman of the meeting shall have no right to vote, except as a Holder of Notes or a proxy. A record, at least in duplicate, of the proceedings of each meeting of Holders of Notes shall be prepared, and one such copy shall be delivered to INTELSAT and another to the Fiscal Agent to be preserved by the Fiscal Agent.\n11. All notices hereunder shall be deemed to have been given when deposited in the mails as first-class mail, registered or certified mail, return receipt requested, postage prepaid, or, if electronically communicated, then when delivered, or when hand delivered, addressed to either party hereto as follows:\nINTELSAT . . . . . . . . . . . International Telecommunications Satellite Organization 3400 International Drive, N.W. Washington, D.C. 20008-3098, U.S.A. Attention: Vice President & Chief Financial Officer Facsimile No.: (202) 944-7860\nFiscal Agent . . . . . . . . . . Bankers Trust Company 1 Appold Street, Broadgate London EC2A 2HE, England Attention: Corporate Trust and Agency Group Facsimile No.: 011-4471-982-2271\nor at any other address of which either of the foregoing shall have notified the other in writing. All notices to Holders of Notes shall be given in the manner provided in Paragraph 6(e) of the definitive Notes.\n12. This Agreement and the terms and conditions of the Notes and coupons may be modified or amended by INTELSAT and the Fiscal Agent, without the consent of the Holder of any Note or coupon, for the purpose of (a) adding to the covenants of INTELSAT for the benefit of the Holders of Notes or coupons, or (b) surrendering any right or power conferred upon INTELSAT, or (c) securing the Notes pursuant to the requirements of the Notes or otherwise, or (d) permitting the payment of principal, interest and Additional Amounts, if any, in respect of Notes in the United States, or (e) curing any ambiguity or correcting or supplementing any defective provision contained herein or in the Notes or coupons, or (f) evidencing the succession of another organization or entity to INTELSAT and the assumption by any such successor of the covenants and obligations of INTELSAT herein and in the Notes and coupons as permitted by the Notes, or (g) providing for issuances of further debt securities as contemplated by Section 13, or (h) in any manner which the parties may mutually deem necessary or desirable and which in any such case shall not adversely affect the interests of the Holders of the Notes or the coupons.\n13. INTELSAT may from time to time without the consent of the Holder of any Note or coupon issue further debt securities having the same terms and conditions as the Notes in all respects (or in all respects except for the first payment of interest thereon) or having such terms as INTELSAT may determine at the time of their issuance, in either case so that any such further debt securities shall be consolidated and form a single series with the outstanding securities of any series (including the Notes). Unless the context requires otherwise, references herein and in the Notes and coupons to the Notes or coupons shall include any other debt\nsecurities issued in accordance with this Section that are intended by INTELSAT to form a single series with the Notes. Any further debt securities forming a single series with the outstanding securities of any series (including the Notes) shall be issued pursuant to this Agreement as amended pursuant to Section 12 for the purpose of providing for the issuance of such debt securities.\n14. This Agreement and each of the Notes and coupons shall be governed by and construed in accordance with the laws of the State of New York, U.S.A.\n15. INTELSAT hereby appoints CT Corporation System, 1633 Broadway, New York, New York 10019, as its authorized agent (the \"Authorized Agent\") upon which process may be served in any action arising out of or based on this Agreement, the Notes or any coupons which action may be instituted in any New York State or United States Federal court sitting in the Borough of Manhattan, The City of New York, the State of New York, U.S.A., by the Fiscal Agent or the Holder of any Note or coupon and INTELSAT and each such Holder by acceptance of a Note or coupon expressly accepts the exclusive jurisdiction of any such court in respect of any such action. Such appointment shall be irrevocable until two years after the Notes shall have matured and been paid or moneys for the payment thereof shall have been made available unless and until a successor Authorized Agent shall have been appointed and shall have accepted such appointment. INTELSAT hereby irrevocably waives any immunity to service of process in respect of any such action to which it might otherwise be entitled in any action arising out of or based on this Agreement or the Notes or coupons which may be instituted by the Fiscal Agent or any Holder of a Note or coupon in any State or Federal court in the Borough of Manhattan, The City of New York, the State of New York, U.S.A. Service of process upon the Authorized Agent at the address indicated above, as such address may be changed within the Borough of Manhattan, The City of New York, the State of New York, U.S.A., by notice given by the Authorized Agent to each party hereto, shall be deemed, in every respect, effective service of process upon INTELSAT. INTELSAT irrevocably waives, to the fullest extent permitted by applicable law, any sovereign or other immunity from jurisdiction or from execution (except that INTELSAT does not waive immunity from execution prior to judgment and any similar defense) to which it might otherwise be entitled in any such action which may be instituted by the Fiscal Agent or any Holder of a Note or coupon in any New York State or United States Federal court sitting in the Borough of Manhattan, The City of New York, the State of New York, U.S.A.\n16. This Agreement, the Notes and the coupons appertaining thereto will constitute obligations of INTELSAT and not of any Signatory or Party (each as defined in the Agreement Relating to the International Telecommunications Satellite Organization, entered into force on 12 February 1973). No Signatory or Party will waive any immunity to which it may be entitled in any suit on this Agreement or the Notes or coupons, and neither the Fiscal Agent nor Holders of Notes or coupons will have any recourse against any Signatory or Party with respect to any obligations of INTELSAT under this Agreement or the Notes and the coupons appertaining thereto.\n17. This Agreement may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original but all such counterparts shall together constitute but one and the same instrument.\nIN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written.\nINTERNATIONAL TELECOMMUNICATIONS SATELLITE ORGANIZATION\n\/s\/Margarita K. Dilley By _____________________________ Name: Margarita K. Dilley Title: Treasurer\nBANKERS TRUST COMPANY as Fiscal Agent and Principal Paying Agent\n\/s\/Shiela Ajimal By _____________________________ Name: Shiela Ajimal Title: Authorized Signatory\nINTERNATIONAL TELECOMMUNICATIONS SATELLITE ORGANIZATION\nU.S. $200,000,000\n6 5\/8% Notes Due 2004\nTEMPORARY GLOBAL NOTE\nINTERNATIONAL TELECOMMUNICATIONS SATELLITE ORGANIZATION, an international organization established by the Agreement Relating to the International Telecommunications Satellite Organization and the Operating Agreement relating thereto, entered into force on 12 February 1973, for value received, hereby promises to pay to bearer upon presentation and surrender of this Temporary Global Note the principal sum of Two Hundred Million United States Dollars (U.S. $200,000,000) on 22 March 2004 and to pay interest thereon, from the date hereof, annually in arrears on 22 March in each year, commencing 22 March 1995, at the rate of 6 5\/8% per annum, until the principal hereof is paid or made available for payment; provided, however, that interest on this Temporary Global Note shall be payable only after the issuance of Bearer Notes for which this Temporary Global Note is exchangeable, and only upon presentation and surrender of the interest coupons thereto attached as they severally mature.\nThis Temporary Global Note is one of a duly authorized issue of Notes of INTELSAT designated as specified in the title hereof, entitled to the benefits of the Fiscal Agency Agreement, dated as of 22 March 1994, between INTELSAT and Bankers Trust Company as Fiscal Agent. This Note is a temporary note and is exchangeable in whole or from time to time in part without charge upon request of the Holder hereof for Bearer Notes with coupons attached in denominations of U.S. $10,000 and $100,000 as promptly as practicable following presentation of certification, in the form required by the Fiscal Agency Agreement for such purpose, that the beneficial owner or owners of this Temporary Global Note (or, if such exchange is only for a part of this Temporary Global Note, of such part) are not citizens or residents of the United States, a corporation, partnership or other entity created or organized in or under the laws of the United States or any political subdivision thereof, or an estate or trust the income of which is subject to United States Federal income taxation regardless of its source (\"United States Person\"). The Bearer Notes are expected to be available 40 days after the Closing Date. Bearer Notes to be delivered in exchange for any part of this Temporary Global Note shall be delivered only outside the United States. Upon any exchange of a part of this Temporary Global Note for Bearer Notes, the portion of the principal amount hereof so exchanged shall be endorsed by the Fiscal Agent on the Schedule hereto, and the principal amount hereof shall be reduced for all purposes by the amount so exchanged.\nUntil exchanged in full for Bearer Notes, this Temporary Global Note shall in all respects be entitled to the same benefits and subject to the same terms and conditions as those of the definitive Notes and those contained in the Fiscal Agency Agreement (including the forms of Notes attached thereto), except that neither the Holder hereof nor the beneficial owners of this Temporary Global Note shall be entitled to receive payment of interest hereon.\nThis Temporary Global Note shall be governed by and construed in accordance with the laws of the State of New York, U.S.A.\nAll terms used in this Temporary Global Note which are defined in the Fiscal Agency Agreement or the definitive Notes shall have the meanings assigned to them therein.\nUnless the certificate of authentication hereon has been executed by the Fiscal Agent by the manual signature of one of its duly authorized officers, this Temporary Global Note shall not be valid or obligatory for any purpose.\nThis Temporary Global Note constitutes an obligation of INTELSAT and not of any Signatory or Party (each as defined in the INTELSAT Agreement). No Signatory or Party will waive any immunity to which it may be entitled in any suit on this Temporary Global Note, and Holders of this Temporary Global Note will have no recourse against any Signatory or Party with respect to any obligations of INTELSAT under this Temporary Global Note.\nIN WITNESS WHEREOF, INTELSAT has caused this Temporary Global Note to be duly executed and its seal to be hereunto affixed and attested.\nDated as of 22 March 1994\nINTERNATIONAL TELECOMMUNICATIONS SATELLITE ORGANIZATION\nBy______________________________\nAttest:\n_____________________\nThis is the Temporary Global Note referred to in the within-mentioned Fiscal Agency Agreement.\nBANKERS TRUST COMPANY as Fiscal Agent\nBy_________________________ Authorized Signatory\nSCHEDULE OF EXCHANGES\nRemaining principal Principal amount amount Notation Date exchanged for following made on behalf Made definitive Bearer Notes such exchange of the Fiscal Agent ____ _______________________ _____________ ___________________ ____ _______________________ _____________ ___________________ ____ _______________________ _____________ ___________________ ____ _______________________ _____________ ___________________ ____ _______________________ _____________ ___________________ ____ _______________________ _____________ ___________________ ____ _______________________ _____________ ___________________ ____ _______________________ _____________ ___________________ ____ _______________________ _____________ ___________________ ____ _______________________ _____________ ___________________ ____ _______________________ _____________ ___________________ ____ _______________________ _____________ ___________________ ____ _______________________ _____________ ___________________ ____ _______________________ _____________ ___________________ ____ _______________________ _____________ ___________________ ____ _______________________ _____________ ___________________ ____ _______________________ _____________ ___________________ ____ _______________________ _____________ ___________________ ____ _______________________ _____________ ___________________ ____ _______________________ _____________ ___________________ ____ _______________________ _____________ ___________________\nEXHIBIT B\n[FORM OF BEARER NOTES]\n[Form of Face]\nANY UNITED STATES PERSON WHO HOLDS THIS OBLIGATION WILL BE SUBJECT TO LIMITATIONS UNDER THE UNITED STATES INCOME TAX LAWS, INCLUDING THE LIMITATIONS PROVIDED IN SECTIONS 165(j) AND 1287(a) OF THE INTERNAL REVENUE CODE.\nINTERNATIONAL TELECOMMUNICATIONS SATELLITE ORGANIZATION\n6 5\/8% Notes Due 2004\nNo. B-_________ U.S.$[10,000] [100,000]\nINTERNATIONAL TELECOMMUNICATIONS SATELLITE ORGANIZATION (\"INTELSAT\"), an international organization established by the Agreement Relating to the International Telecommunications Satellite Organization and the Operating Agreement relating thereto, entered into force on 12 February 1973, for value received, hereby promises to pay to bearer upon presentation and surrender of this Note the principal sum of [10,000][100,000] United States dollars on 22 March 2004 and to pay interest thereon, from the date hereof, annually in arrears on 22 March in each year (\"Interest Payment Date\"), commencing 22 March 1995 at the rate of 6 5\/8% per annum (calculated on the basis of a year of twelve 30- day months), until the principal hereof is paid or made available for payment. Such payments shall be made subject to any laws or regulations applicable thereto and to the right of INTELSAT (limited as provided below) to terminate the appointment of any such paying agency, at the principal office of Bankers Trust Company in London, United Kingdom or at such other offices or agencies outside the United States (as defined in Paragraph 5 on the reverse hereof) as INTELSAT may designate and notify the Holder (as defined in Paragraph 2 on the reverse hereof) as provided in Paragraph 6(e) hereof, at the option of the Holder, by United States dollar check, or (ii) by wire transfer to a United States dollar account maintained by the Holder with a bank located outside the United States. Payments with respect to this Note shall be payable only at an office or agency located outside the United States and only upon presentation and surrender at such office of this Note in the case of principal or the coupons attached hereto (the\n\"coupons\") as they severally mature in the case of interest (but not in the case of Additional Amounts payable as defined and provided for in Paragraph 5 on the reverse hereof). No payment with respect to this Note shall be made by transfer to an account in, or by mail to an address in, the United States. Notwithstanding the foregoing, payment of principal of and interest on Bearer Notes and Additional Amounts, if any, may, at INTELSAT's option, be made at an office designated by INTELSAT in the Borough of Manhattan, The City of New York, the State of New York, U.S.A. if (but only if) the full amount of such payments at all offices and agencies located outside the United States through which payment is to be made in accordance with the terms of the Notes is illegal or effectively precluded by exchange controls or other similar restrictions as determined by INTELSAT. INTELSAT covenants that until this Note has been delivered to the Fiscal Agent for cancellation or monies sufficient to pay the principal of and interest on this Note have been made available for payment and either paid or returned to INTELSAT as provided herein, it will at all times maintain offices or paying agents in London, United Kingdom and, so long as the Notes are listed on the respective stock exchanges, in Hong Kong and Singapore for the payment of the principal of and interest on the Notes as herein provided.\nReference is hereby made to the further provisions of this Note set forth on the reverse hereof, including but not limited to the provisions for redemption of the Notes, which further provisions shall for all purposes have the same effect as though fully set forth at this place.\nUnless the certificate of authentication hereon has been executed by the Fiscal Agent by the manual signature of one of its authorized officers, neither this Note nor any coupon appertaining hereto shall be valid or obligatory for any purpose.\nIN WITNESS WHEREOF, INTELSAT has caused this Note to be duly executed and its seal to be hereunto affixed and attested and duly executed coupons to be annexed hereto.\nDated as of 22 March 1994 INTERNATIONAL TELECOMMUNICATIONS SATELLITE ORGANIZATION\nBy______________________________ [Seal]\nAttest:\n[FORM OF FISCAL AGENT'S CERTIFICATE OF AUTHENTICATION]\nThis is one of the Notes referred to in the within- mentioned Fiscal Agency Agreement.\nFor and on behalf of BANKERS TRUST COMPANY as Fiscal Agent\nBy _____________________________________________ Authorized Signatory\n[Form of Reverse]\n1. This Note is one of a duly authorized issue of Notes of INTELSAT in the aggregate principal amount of Two Hundred Million United States Dollars (U.S.$200,000,000), designated as its 6 5\/8% Notes Due 2004 (the \"Notes\"). INTELSAT, for the benefit of the Holders from time to time of the Notes, has entered into a Fiscal Agency Agreement, dated as of 22 March 1994 (the \"Fiscal Agency Agreement\"), between INTELSAT and Bankers Trust Company, as Fiscal Agent, copies of which Fiscal Agency Agreement are on file and available for inspection at the Principal Office of the Fiscal Agent in London, United Kingdom and the main offices of the paying agencies named on the face of this Note. (Bankers Trust Company and its respective successors as Fiscal Agent are herein collectively called the \"Fiscal Agent\".)\nAs long as any of the Notes shall be outstanding and unpaid, but only up to the time all amounts of principal and interest have been placed at the disposal of the Fiscal Agent, INTELSAT will not cause or permit to be created on any of its property or assets any mortgage, pledge or other lien or charge as security for any bonds, notes or other evidences of indebtedness heretofore or hereafter issued, assumed or guaranteed by INTELSAT for money borrowed (other than purchase money mortgages, sale and leaseback transactions in connection with spacecraft, or other pledges or liens on property purchased by INTELSAT as security for all or part of the purchase price thereof; liens incidental to an investment transaction, but not a borrowing, of INTELSAT; or mechanics', landlords', tax or other statutory liens), unless the Notes shall be secured by such mortgage, pledge or other lien or charge equally and ratably with such other bonds, notes or evidences of indebtedness.\n2. The Notes are issuable in bearer form, with interest coupons attached (the \"coupons\"), in denominations of U.S. $10,000 and $100,000. As used herein, the term \"Holder\" when used with respect to any Bearer Note or coupon, means the bearer thereof.\n3. INTELSAT has appointed the main offices of Bankers Trust Luxembourg S.A. in Luxembourg, Bankers Trust Company in Hong Kong, Credit Suisse in Zurich, Switzerland and DBS Bank in Singapore as additional agencies where Notes may be surrendered for exchange. INTELSAT reserves the right to vary or terminate the appointment of any agent or to appoint additional or other transfer agents or to approve any change in the office through which any transfer agent acts, provided that there will at all times be a transfer agent in London, United Kingdom.\nAll Notes issued upon any exchange of Notes shall be the valid obligations of INTELSAT evidencing the same debt, and entitled to the same benefits, as the Notes surrendered upon such exchange. No service charge shall be made for any exchange, but INTELSAT may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith.\nTitle to Bearer Notes and coupons shall pass by delivery. INTELSAT, the Fiscal Agent, and any paying agent of INTELSAT may deem and treat the bearer of any Bearer Note or coupon as the owner thereof for all purposes, whether or not such Note or coupon shall be overdue.\nFor purposes of the provisions of this Note and the Fiscal Agency Agreement, any Note authenticated and delivered pursuant to the Fiscal Agency Agreement shall, as of any date of determination, be deemed to be \"Outstanding\", except:\n(i) Notes theretofore cancelled by the Fiscal Agent or delivered to the Fiscal Agent for cancellation and not reissued by the Fiscal Agent;\n(ii) Notes which have been surrendered for redemption in accordance with Paragraph 6 hereof or which have become due and payable at maturity or otherwise and with respect to which monies sufficient to pay the principal thereof and interest thereon shall have been made available to the Fiscal Agent; or\n(iii) Notes in lieu of or in substitution for which other Notes shall have been authenticated and delivered pursuant to the Fiscal Agency Agreement;\nprovided, however, that in determining whether the Holders of the requisite principal amount of Outstanding Notes are present at a meeting of Holders of Notes for quorum purposes or have given any request, demand, authorization, direction, notice, consent or waiver hereunder, Notes owned by INTELSAT shall be disregarded and deemed not to be Outstanding.\n4. (a) INTELSAT shall pay to the Fiscal Agent at its Principal Office in London, United Kingdom, in accordance with the terms of the Fiscal Agency Agreement on each Interest Payment Date, any redemption date and the maturity date of the Notes, in such coin or currency of the United States of America as at the time of payment is legal tender for the payment of public and private debts, amounts sufficient (with any amounts then held by the Fiscal Agent and available for the purpose) to pay the interest on, the redemption price of and accrued interest (if the redemption date is not an Interest Payment Date) on, and the principal of, the Notes due and payable on such an Interest Payment Date, redemption date or maturity date, as the case may be.\nThe Fiscal Agent shall apply the amounts so paid to it to the payment of such interest, redemption price and principal in accordance with the terms of the Notes. Any monies paid by INTELSAT to the Fiscal Agent for the payment of the principal of and interest on any Notes and remaining unclaimed at the end of two years after such principal or interest shall have become due and payable (whether at maturity, upon call for redemption or otherwise) shall then be repaid to INTELSAT upon its written request, and upon such repayment all liability of the Fiscal Agent with respect thereto shall thereupon cease, without,\nhowever, limiting in any way any obligation INTELSAT may have to pay the principal of and interest on this Note as the same shall become due.\n(b) In any case where the date for the payment of the principal of or interest on any Note or the date fixed for redemption of any Note shall be at any place of payment a day on which banking institutions are authorized or obligated by law or executive order to close, or are not carrying out transactions in United States dollars in The City of New York, the State of New York, U.S.A., or the city of the paying agent to which the Note or coupon is surrendered for payment, then payment of principal or interest need not be made on such date at such place but may be made on the next succeeding day at such place of payment which is not a day on which banking institutions are authorized or obligated by law or executive order to close, or which is a day on which banking institutions are carrying out transactions in United States dollars in The City of New York, the State of New York, U.S.A., or the city of the paying agent to which the Note or coupon is surrendered for payment, with the same force and effect as if made on the date for the payment of the principal or interest or the date fixed for redemption, and no interest shall accrue for the period after such date.\n5. (a) INTELSAT will pay to the Holder of this Note or any coupon appertaining hereto who is a United States Alien (as defined below) such Additional Amounts as may be necessary in order that every net payment of the principal of, and interest on, this Note, after withholding for or on account of any present or future tax, assessment or governmental charge imposed upon, or as a result of, such payment by the United States (or any political subdivision or taxing authority thereof or therein), will not be less than the amount provided for in this Note or in such coupon to be then due and payable; provided, however, that the foregoing obligation to pay Additional Amounts shall not apply to any one or more of the following:\n(i) any tax, assessment or other governmental charge which would not have been so imposed but for (A) the existence of any present or former connection between such Holder (or between a fiduciary, settlor, or beneficiary of, or a possessor of a power over, such Holder, if such Holder is an estate or trust, or a member or shareholder of such holder, if such Holder is a partnership or corporation) and the United States, including, without limitation, such Holder (or such fiduciary, settlor, beneficiary, possessor, member or shareholder) being or having been a citizen, resident or treated as a resident thereof or being or having been engaged in a trade or business or present therein or having or having had a permanent establishment therein or (B) such Holder's present or former status as a personal holding company, controlled foreign corporation, foreign personal holding company or passive foreign investment company with respect to the United States or as a corporation which accumulates earnings to avoid United States federal income tax, all under existing United States Federal income tax law or successor provisions;\n(ii) any tax, assessment or other governmental charge which would not have been so imposed but for the presentation by the Holder of this Note or any coupon appertaining hereto for payment on a date more than 10 calendar days after the date on which such payment became due and payable or the date on which payment thereof is duly provided for and notice thereof is given to Holders, whichever occurs later;\n(iii) any estate, inheritance, gift, sales, transfer, personal property tax or any similar tax, assessment or other governmental charge;\n(iv) any tax, assessment or other governmental charge which is payable otherwise than by withholding from payments on or in respect of this Note or any coupon appertaining hereto;\n(v) any tax, assessment or other governmental charge imposed by reason of such Holder's past or present status as the actual or constructive owner of 10 per cent. or more of the capital or profits interest of INTELSAT within the meaning of Section 871(h)(3) of the United States Internal Revenue Code of 1986, as amended, and any regulations thereunder;\n(vi) any tax, assessment or other governmental charge imposed because a Holder of a Note is a bank that receives interest on such Note pursuant to a loan agreement entered into in the ordinary course of its trade or business;\n(vii) any tax, assessment or other governmental charge imposed as a result of the failure to comply with applicable certification, information, documentation or other reporting requirements concerning the nationality, residence, identity or connection with the United States of the Holder or beneficial owner of this Note, or any coupon appertaining hereto if such compliance is required by statute or by regulation of the United States as a precondition to relief or exemption from such tax, assessment or other government charge;\n(viii) any tax, assessment or other governmental charge required to be withheld by any paying agent from any payment on this Note or any coupon appertaining hereto if such payment can be made without such withholding by at least one other paying agent; or\n(ix) any combination of items (i) through (viii) above;\nnor will Additional Amounts be paid with respect to any payment of principal or interest on this Note or any coupon appertaining hereto to a Holder who is a fiduciary or partnership or other than the sole beneficial owner of this Note or any coupon appertaining hereto to the extent a beneficiary or settlor with respect to the fiduciary or a member of the partnership or\nthe beneficial owner would not have been entitled to payment of the Additional Amounts had such beneficiary, settlor, member or beneficial owner been the Holder of this Note or any coupon appertaining hereto.\nThe term \"United States Alien\" means any person who, for United States federal income tax purposes, is a foreign corporation, a nonresident alien individual, a nonresident fiduciary of a foreign estate or trust, or a foreign partnership, one or more of the members of which is, for United States federal income tax purposes, a foreign corporation, a nonresident alien individual or a nonresident fiduciary of a foreign estate or trust. The term \"United States\" means the United States of America (including the States and the District of Columbia), its territories, its possessions and other areas subject to its jurisdiction.\n(b) Except as specifically provided in this Note and in the Fiscal Agency Agreement, INTELSAT shall not be required to make any payment with respect to any tax, assessment or other governmental charge imposed by any government or any political subdivision or taxing authority thereof or therein. Whenever in this Note there is a reference, in any context, to the payment of the principal of or interest on, or in respect of, any Note or any coupon, such mention shall be deemed to include mention of the payment of Additional Amounts provided for in this Paragraph to the extent that, in such context, Additional Amounts are, were or would be payable in respect thereof pursuant to the provisions of this Paragraph and express mention of the payment of Additional Amounts (if applicable) in any provisions hereof shall not be construed as excluding Additional Amounts in those provisions hereof where such express mention is not made.\n6. (a) The Notes are subject to redemption at the option of INTELSAT, as a whole but not in part, at any time at a redemption price equal to the principal amount thereof, together with accrued and unpaid interest to the date fixed for redemption (except if the redemption date is an Interest Payment Date) under the circumstances described in the next three Paragraphs.\n(b) The Notes may be redeemed, as a whole but not in part, at the option of INTELSAT, upon not more than 60 days' nor less than 30 days' prior notice in the manner provided in clause (e) of this Paragraph 6 at a redemption price equal to the principal amount thereof together with accrued and unpaid interest to the date fixed for redemption, if (x) INTELSAT determines that, without regard to any immunities that may be available to it, (1) as a result of any change in or amendment to the laws (or any regulations or rulings promulgated thereunder) of the United States or of any political subdivision or taxing authority thereof or therein affecting taxation, or any change in official position regarding application or interpretation of such laws, regulations or rulings (including a holding by a court of competent jurisdiction in the United States), which change or amendment is announced or becomes effective on or after 22 March 1994, INTELSAT has or will become obligated to pay Additional Amounts (as provided in Paragraph 5(a) hereof) or (2) on or after 22 March 1994, any action has been taken by any taxing authority of, or any decision has\nbeen rendered by a court of competent jurisdiction in, the United States or any political subdivision or taxing authority thereof or therein, including any of those actions specified in (1) above, whether or not such action was taken or decision was rendered with respect to INTELSAT, or any change, amendment, application or interpretation shall be officially proposed, which, in any such case, in the written opinion to INTELSAT of independent legal counsel of recognized standing, will result in a material probability that INTELSAT will become obligated to pay Additional Amounts with respect to the Notes, and (y) in any such case INTELSAT, in its business judgment, determines that such obligation cannot be avoided by the use of reasonable measures available to INTELSAT (provided that INTELSAT shall not be required to assert any immunities that may be available to it); provided, however, that (i) no such notice of redemption shall be given earlier than 90 days prior to the earliest date on which INTELSAT would but for such redemption be obligated to pay Additional Amounts and (ii) at the time such notice of redemption is given, such obligation to pay Additional Amounts remains in effect. Prior to the publication of notice of redemption pursuant to this Paragraph 6(b), INTELSAT shall deliver to the Fiscal Agent a certificate of INTELSAT stating the date of redemption and that INTELSAT is entitled to effect such redemption and setting forth in reasonable detail a statement of facts showing that the conditions precedent to the right of INTELSAT to so redeem the Notes have occurred.\n(c) In addition, if INTELSAT shall determine that any payment made outside the United States by INTELSAT or any paying agent of principal or interest due in respect of any Bearer Note or coupon would, under any present or future laws or regulations of the United States and without regard to any immunities that may be available to INTELSAT, be subject to any certification, information or other reporting requirement of any kind, the effect of which requirement is the disclosure to INTELSAT, any paying agent or any governmental authority of the nationality, residence or identity (as distinguished from, for example, status as a United States Alien) of a beneficial owner of such Note or coupon who is a United States Alien (other than such a requirement (i) which would not be applicable to a payment made by INTELSAT or any paying agent (A) directly to the beneficial owner, or (B) to a custodian, nominee or other agent of the beneficial owner, or (ii) which can be satisfied by such custodian, nominee or other agent certifying to the effect that such beneficial owner is a United States Alien, provided that in each case referred to in clauses (i)(B) and (ii), payment by such custodian, nominee or agent to such beneficial owner is not otherwise subject to any such requirement or (iii) would not be applicable to a payment made by at least one other paying agent of INTELSAT), INTELSAT, at its election, shall either (x) redeem the Bearer Notes, as a whole but not in part, at a redemption price equal to the principal amount thereof, together with accrued and unpaid interest to the date fixed for redemption or (y) if the conditions set forth in Paragraph 6(d) hereof are satisfied, pay the additional amounts specified in such Paragraph. INTELSAT shall make such determination and election as soon as practicable and give prompt notice thereof (the \"Determination Notice\") in the manner provided in clause (e) of this Paragraph 6, stating the effective date of such certification, information or other reporting requirement, whether INTELSAT has elected to redeem the Bearer Notes or to pay the additional amounts specified in Paragraph\n6(d) hereof, and (if applicable) the last date by which the redemption of the Bearer Notes must take place, as provided in the next succeeding sentence. If INTELSAT elects to redeem the Bearer Notes, such redemption shall take place on such date, not later than one year after the publication of the Determination Notice, as INTELSAT shall elect by notice to the Fiscal Agent given not less than 45 nor more than 75 days before the date fixed for redemption. Notice of such redemption of the Bearer Notes will be given to the Holders of the Bearer Notes not less than 30 nor more than 60 days prior to the date fixed for redemption. Notwithstanding the foregoing, INTELSAT shall not so redeem the Bearer Notes if INTELSAT shall subsequently determine, not less than 30 days prior to the date fixed for redemption, that subsequent payments would not be subject to any such requirement, in which case INTELSAT shall give prompt notice of such determination in the manner provided in clause (e) of this Paragraph 6 and any earlier redemption notice shall be revoked and of no further effect.\n(d) If and so long as the certification, information or other reporting requirements referred to in Paragraph 6(c) would be fully satisfied by payment of a withholding tax, backup withholding tax or similar charge, INTELSAT may elect to pay, without regard to any immunities that may be available to it, such additional amounts (regardless of clause (vii) in Paragraph 5(a)) as may be necessary so that every net payment made outside the United States following the effective date of such requirements by INTELSAT or any paying agent of principal or interest due in respect of any Bearer Note or any coupon the beneficial owner of which is a United States Alien (but without any requirement that the nationality, residence or identity of such beneficial owner be disclosed to INTELSAT, any paying agent or any governmental authority), after deduction or withholding for or on account of such withholding tax, backup withholding tax or similar charge (other than a withholding tax, backup withholding tax or similar charge that (i) is the result of a certification, information or other reporting requirement described in the second parenthetical clause of the first sentence of Paragraph 6(c), (ii) is imposed as a result of the fact that INTELSAT or any of its paying agents have actual knowledge that the beneficial owner of such Bearer Note or coupon is within the category of persons described in Clauses (i) or (v) of Paragraph 5(a), or (iii) is imposed as a result of presentation of such Bearer Note or coupon for payment more than 10 calendar days after the date on which such payment becomes due and payable or on which payment thereof is duly provided for and notice thereof is given to Holders, whichever occurs later), will not be less than the amount provided for in such Bearer Note or coupon to be then due and payable. In the event INTELSAT elects to pay such additional amounts, INTELSAT will have the right, at its sole option, at any time, to redeem the Bearer Notes as a whole, but not in part, at a redemption price equal to the principal amount thereof, together with accrued and unpaid interest to the date fixed for redemption. If INTELSAT has made the determination described in Paragraph 6(c) with respect to certification, information or other reporting requirements applicable only to interest and subsequently makes a determination in the manner and of the nature referred to in such Paragraph 6(c) with respect to such requirements applicable to principal, INTELSAT will redeem the Bearer Notes in the manner and on the terms described in Paragraph 6(c) unless INTELSAT elects to have the provisions of this Paragraph apply rather than the provisions of\nParagraph 6(c). If in such circumstances the Bearer Notes are to be redeemed, INTELSAT shall have no obligation to pay additional amounts pursuant to this Paragraph with respect to principal or interest accrued and unpaid after the date of the notice of such determination indicating such redemption, but will be obligated to pay such additional amounts with respect to interest accrued and unpaid to the date of such determination. If INTELSAT elects to pay additional amounts pursuant to this Paragraph and the condition specified in the first sentence of this Paragraph should no longer be satisfied, then INTELSAT shall promptly redeem such Bearer Notes.\n(e) The Fiscal Agent shall cause, on behalf of INTELSAT, notices to be given to redeem Bearer Notes to Holders by publication at least once in a leading daily newspaper in the English language of general circulation in South East Asia and, so long as the Notes are listed on the respective stock exchanges and such exchanges shall so require, in a daily newspaper of general circulation in Hong Kong and Singapore or, if publication in either Hong Kong or Singapore is not reasonably practicable, elsewhere in South East Asia. The term \"daily newspaper\" as used herein shall be deemed to mean a newspaper customarily published on each business day, whether or not it shall be published in Saturday, Sunday or holiday editions. If by reason of the suspension of publication of any newspaper, or by reason of any other cause, it shall be impracticable to give notice to the Holders of Notes in the manner prescribed herein, then such notification in lieu thereof as shall be made by INTELSAT or by the Fiscal Agent on behalf of and at the instruction and expense of INTELSAT shall constitute sufficient provision of such notice, if such notification shall, so far as may be practicable, approximate the terms and conditions of the publication in lieu of which it is given. Neither the failure to give notice nor any defect in any notice given to any particular Holder of a Note shall affect the sufficiency of any notice with respect to other Notes. Such notices will be deemed to have been given on the date of such publication or mailing or, if published in such newspapers on different dates, on the date of the first such publication in South East Asia. Notices to redeem Notes shall be given at least once not more than 60 days nor less than 30 days prior to the date fixed for redemption and shall specify the date fixed for redemption, the redemption price, the place or places of payment, that payment will be made upon presentation and surrender of the Notes to be redeemed, together with all appurtenant coupons, if any, maturing subsequent to the date fixed for redemption, that interest accrued and unpaid to the date fixed for redemption (unless the redemption date is an Interest Payment Date) will be paid as specified in said notice, and that on and after said date interest thereon will cease to accrue. If the redemption is pursuant to Paragraph 6(b) or 6(c) hereof, such notice shall also state that the conditions precedent to such redemption have occurred and state that INTELSAT has elected to redeem all the Notes.\n(f) If notice of redemption has been given in the manner set forth in Paragraph 6(e) hereof, the Notes so to be redeemed shall become due and payable on such redemption date specified in such notice and upon presentation and surrender of the Notes at\nthe place or places specified in such notice, together with all appurtenant coupons, if any, maturing subsequent to the redemption date, the Notes shall be paid and redeemed by INTELSAT at the places and in the manner and currency herein specified and at the redemption price together with accrued and unpaid interest (unless the redemption date is an Interest Payment Date) to the redemption date; provided, however, that interest due on or prior to the redemption date on Bearer Notes shall be payable only upon the presentation and surrender of coupons for such interest (at an office or agency outside the United States except as otherwise provided on the face of the Bearer Note). If any Bearer Note surrendered for redemption shall not be accompanied by all appurtenant coupons maturing after the redemption date, such Note may be paid after deducting from the amount otherwise payable an amount equal to the face amount of all such missing coupons, or the surrender of such missing coupon or coupons may be waived by INTELSAT and the Fiscal Agent if they are furnished with such security or indemnity as they may require to save each of them and each other paying agency of INTELSAT harmless. From and after the redemption date, if monies for the redemption of Notes surrendered for redemption shall have been made available at the Principal Office of the Fiscal Agent for redemption on the redemption date, the Notes surrendered for redemption shall cease to bear interest, the coupons for interest appertaining to Bearer Notes maturing subsequent to the redemption date shall be void (unless the amount of such coupons shall have been deducted from the redemption price at the time of surrender of the Bearer Note to which such coupons appertained, as aforesaid), and the only right of the Holders of such Notes shall be to receive payment of the redemption price together with accrued and unpaid interest (unless the redemption date is an Interest Payment Date) to the redemption date as aforesaid. If monies for the redemption of the Notes are not made available for payment until after the redemption date, the Notes surrendered for redemption shall not cease to bear interest until such monies have been so made available.\n(g) Notes redeemed or otherwise acquired by INTELSAT will forthwith be delivered to the Fiscal Agent for cancellation and may not be reissued or resold, except that Bearer Notes delivered to the Fiscal Agent may, at the written request of INTELSAT, be reissued by the Fiscal Agent in replacement of mutilated, lost, stolen or destroyed Notes pursuant to Paragraph 9 hereof.\n7. In the event of:\n(a) default in the payment of any installment of interest upon any Note for a period of 30 days after the date when due; or\n(b) default in the payment of the principal of any Note when due (whether at maturity or redemption or otherwise); or\n(c) default in the performance or breach of any covenant or warranty contained in the Notes or the Fiscal Agency Agreement (other than as specified in\nclauses (a) and (b) of this Paragraph 7) for a period of 90 days after the date on which written notice of such failure, requiring INTELSAT to remedy the same and stating that such notice is a \"Notice of Default\", shall first have been given to INTELSAT and the Fiscal Agent by any Holder of a Note; or\n(d) involuntary acceleration of the maturity of other indebtedness of INTELSAT for money borrowed with a maturity of one year or more in excess of U.S. $50,000,000 which acceleration shall not be rescinded or annulled, or which indebtedness shall not be discharged, within 45 days after notice; or\n(e) INTELSAT is dissolved or the INTELSAT Agreement or the Operating Agreement ceases to be in full force and effect; provided, however, that no default shall occur if INTELSAT's obligations under the Fiscal Agency Agreement and the Notes are assumed by a successor who maintains a business which is substantially similar to that of INTELSAT;\nthe Holder of this Note may, at such Holder's option, unless such Event of Default has been waived as described in Paragraph 10(b) hereof, declare the principal of this Note and accrued and unpaid interest hereon to be due and payable immediately by written notice to INTELSAT, with a copy to the Fiscal Agent at its Principal Office, and unless all such defaults shall have been cured by INTELSAT prior to receipt of such written notice, the principal of this Note and accrued and unpaid interest hereon shall become and be immediately due and payable.\n8. (a) INTELSAT will conduct and operate its business diligently and in the ordinary manner in compliance with the INTELSAT Agreement and the Operating Agreement, and will use all reasonable efforts to maintain in full force and effect its existing international registration of orbital locations and frequency spectrum for the operation of its global commercial telecommunications satellite system; provided, however, that INTELSAT shall not be prevented from making any change with respect to its manner of conducting or operating its business or with respect to such registration if such change, in the judgment of INTELSAT, is desirable and does not materially impair INTELSAT's ability to perform its obligations under the Notes.\n(b) INTELSAT will cause all properties used or useful in the conduct of its business to be maintained and kept in good condition, repair and working order and supplied with all necessary equipment and will cause to be made all necessary repairs, renewals, replacements, betterments and improvements thereof, all as in the judgment of INTELSAT may be necessary so that the business carried on in connection therewith may be properly and advantageously conducted at all times (except for ordinary wear and tear and deterioration); provided, however, that INTELSAT shall not be prevented from discontinuing the operation or maintenance of any of such properties if such discontinuance, in the judgment of INTELSAT, is desirable in the conduct of its business and does not materially impair INTELSAT's ability to perform its obligations under the Notes.\n9. If any mutilated Note or a Note with a mutilated coupon appertaining to it is surrendered to the Fiscal Agent, INTELSAT shall execute, and the Fiscal Agent shall authenticate (or arrange for authentication on its behalf) and deliver in exchange therefor, a new Note of like tenor and principal amount, bearing a number not contemporaneously outstanding, with coupons corresponding to the coupons, if any, appertaining to the surrendered Note.\nIf there be delivered to INTELSAT and the Fiscal Agent (i) evidence to their satisfaction of the destruction, loss or theft of any Note or coupon, and (ii) such security or indemnity as may be required by them to save each of them and any agent of each of them harmless, then, in the absence of notice to INTELSAT or the Fiscal Agent that such Note or coupon has been acquired by a bona fide purchaser, INTELSAT shall execute, and upon its request the Fiscal Agent shall authenticate (or arrange for authentication on its behalf) and deliver in lieu of any such destroyed, lost or stolen Note or in exchange for the Note to which such coupon appertains (with all appurtenant coupons not destroyed, lost or stolen), a new Note of like tenor and principal amount and bearing a number not contemporaneously outstanding, with coupons corresponding to the coupons, if any, appertaining to such destroyed, lost or stolen Note or to the Note to which such destroyed, lost or stolen coupon appertains.\nUpon the issuance of any new Note under this Paragraph, INTELSAT may require the payment by the Holder of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses (including the fees and the expenses of the Fiscal Agent and INTELSAT) connected therewith.\nEvery new Note with its coupons, if any, issued pursuant to this Paragraph in lieu of any destroyed, lost or stolen Note, or in exchange for a Note to which a destroyed, lost or stolen coupon appertains, shall constitute an original additional contractual obligation of INTELSAT, whether or not the destroyed, lost or stolen Note and its coupons, if any, or the destroyed, lost or stolen coupon shall be at any time enforceable by anyone.\nAny new Note delivered pursuant to this Paragraph shall be so dated, or have attached thereto such coupons, that neither gain nor loss in interest shall result from such exchange.\nThe provisions of this Paragraph 9 are exclusive and shall preclude (to the extent lawful) all other rights and remedies with respect to the replacement or payment of mutilated, destroyed, lost or stolen Notes or coupons.\n10. (a) The Fiscal Agency Agreement and the terms and conditions of the Notes may be modified or amended by INTELSAT and the Fiscal Agent, without the consent of the Holder of any Note or coupon, in any manner which does not adversely affect the interests of the Holders, to provide for issuances of further debt securities as contemplated by Paragraph 11 hereof and by the Fiscal Agency Agreement, and to cure any ambiguity or to cure, correct or supplement any defective provision contained herein or in any coupon appertaining hereto or in the Fiscal Agency Agreement, or in certain other circumstances as described in the Fiscal Agency Agreement, to all of which each Holder of any Note or coupon shall, by acceptance thereof, consent.\n(b) The Fiscal Agency Agreement and the terms and conditions of the Notes may also be modified or amended by INTELSAT and the Fiscal Agent, and future compliance therewith or past default by INTELSAT may be waived, either with the consent of the Holders of not less than a majority in aggregate principal amount of the Notes at the time Outstanding or by the adoption of a resolution at a meeting of Holders duly convened and held in accordance with the provisions of the Fiscal Agency Agreement at which a quorum (as defined below) is present by at least a majority in aggregate principle amount of Notes represented at such meeting; provided, however, that no such modification, amendment or waiver may, without the written consent or affirmative vote of the Holder of each Note affected thereby:\n(i) change the stated maturity of the principal of or any installment of interest on any such Note, or\n(ii) reduce the principal amount thereof or the rate of interest on any such Note, or\n(iii) change the obligation of INTELSAT to pay Additional Amounts, or\n(iv) change the coin or currency in which any such Note or the interest thereon is payable, or\n(v) modify the obligation of INTELSAT to maintain offices or agencies outside the United States, or\n(vi) reduce the percentage in principal amount of the Outstanding Notes necessary to modify or amend the Fiscal Agency Agreement or the terms and conditions of the Notes or the coupons, or to waive any future compliance or past default, or\n(vii) reduce the requirements for voting for the adoption of a resolution or the quorum required at any meeting of Holders of Notes at which a resolution is adopted.\nThe quorum at any meeting called to adopt a resolution will be a majority in aggregate principal amount of Notes Outstanding, except that at any meeting which is reconvened for lack of a quorum, the Holders entitled to vote 25 per cent. in aggregate principle amount of Notes Outstanding shall constitute a quorum for the taking of any action set forth in the notice of the original meeting.\nIt shall not be necessary for the Holders of Notes to approve the particular form of any proposed amendment, but it shall be sufficient if they approve the substance thereof.\n(c) Any modifications, amendments or waivers to the Fiscal Agency Agreement or to the terms and conditions of the Notes in accordance with the foregoing provisions will be conclusive and binding on all Holders of Notes, whether or not they have given such consent, and on all Holders of coupons, whether or not notation of such modifications, amendments or waivers is made upon the Notes or coupons, and on all future Holders of Notes and coupons.\n(d) Promptly after the execution of any amendment to the Fiscal Agency Agreement or the effectiveness of any modification or amendment of the terms and conditions of the Notes, notice of such modification or amendment shall be given by INTELSAT or by the Fiscal Agent on behalf of and at the expense of INTELSAT, to Holders of the Notes in the manner provided in Paragraph 6(e) hereof. The failure to give such notice on a timely basis shall not invalidate such modification or amendment, but INTELSAT shall cause the Fiscal Agent to give such notice as soon as practicable upon discovering such failure or upon any impediment to the giving of such notice being overcome.\n11. INTELSAT may from time to time, without the consent of the Holder of any Note or coupon, issue further debt securities having the same terms and conditions as the Notes in all respects (or in all respects except for the first payment of interest thereon) or having such terms as INTELSAT may determine at the time of their issuance, in either case so that any such further debt securities shall be consolidated and form a single series with outstanding securities of any series (including the Notes). Unless the context requires otherwise, references in the Notes and coupons and in the Fiscal Agency Agreement to the Notes or coupons shall include any other debt securities issued in accordance with the Fiscal Agency Agreement that are intended by INTELSAT to form a single series with the Notes. Any further debt securities forming a single series with the outstanding securities of any series (including the Notes) shall be issued pursuant to the Fiscal Agency Agreement as amended for the purpose of providing for the issuance of such debt securities.\n12. Subject to the authentication of this Note by the Fiscal Agent, INTELSAT hereby certifies and declares that all acts, conditions and things required to be done and performed and to have happened precedent to the creation and issuance of the Notes and any coupons, and to constitute the same the valid obligations of INTELSAT, have been done and performed and have happened in due compliance with all applicable laws.\n13. INTELSAT hereby appoints CT Corporation System, 1633 Broadway, New York, New York 10019, as its authorized agent (\"Authorized Agent\") upon which process may be served in any action arising out of or based on the Notes or any coupons which action may be instituted in any New York State or United States Federal court sitting in the Borough of Manhattan, The City of New York, the State of New York, U.S.A., by the Holder of any Note or coupon, and INTELSAT and each Holder by acceptance hereof expressly accepts the exclusive jurisdiction of any such court in respect of any such action. Such appointment shall be irrevocable until two years after the Notes shall have matured and been paid or moneys for the payment thereof shall have been made available unless and until a successor Authorized Agent shall have been appointed and shall have accepted such appointment. INTELSAT hereby irrevocably waives any immunity to service of process in respect of any such action to which it might otherwise be entitled in any action arising out of or based upon the Notes or coupons which may be instituted by any Holder of a Note or coupon in any State or Federal court in the Borough of Manhattan, The City of New York, the State of New York, U.S.A. Service of process upon the Authorized Agent at the address indicated above, as such address may be changed within the Borough of Manhattan, The City of New York, the State of New York, U.S.A., by notice given by the Authorized Agent to each party hereto, shall be deemed, in every respect, effective service of process upon INTELSAT. INTELSAT irrevocably waives, to the fullest extent permitted by applicable law, any sovereign or other immunity from jurisdiction or from execution (except that INTELSAT does not waive immunity from execution prior to judgment and any similar defense) to which it might otherwise be entitled in any such action which may be instituted by any Holder of a Note or coupon in any New York State or United States Federal court sitting in the Borough of Manhattan, The City of New York, the State of New York, U.S.A.\n14. The Notes and coupons will constitute an obligation of INTELSAT and not of any Signatory or Party (each as defined in the INTELSAT Agreement). No Signatory or Party will waive any immunity to which it may be entitled in any suit on the Notes or coupons, and Holders of Notes or coupons will have no recourse against any Signatory or Party with respect to any obligations of INTELSAT under the Notes or coupons.\n[Form of coupon]\n[Face of coupon]\nANY UNITED STATES PERSON WHO HOLDS THIS OBLIGATION WILL BE SUBJECT TO LIMITATIONS UNDER THE UNITED STATES INCOME TAX LAWS, INCLUDING THE LIMITATIONS PROVIDED IN SECTIONS 165(j) AND 1287(a) OF THE INTERNAL REVENUE CODE.\n[B-][1] ... [10] U.S.$[662.50] [6625.00] Due March 22 [1995]....[2004]\nINTERNATIONAL TELECOMMUNICATIONS SATELLITE ORGANIZATION\n6 5\/8 Notes Due 2004\nOn the date set forth hereon, INTERNATIONAL TELECOMMUNICATIONS SATELLITE ORGANIZATION (\"INTELSAT\") will pay to bearer upon surrender hereof, the amount shown hereon (together with any additional amounts in respect thereof which INTELSAT may be required to pay according to the terms of said Note) at the paying agencies set out on the reverse hereof or at such other places outside the United States of America (including the States and the District of Columbia), its territories and possessions and other areas subject to its jurisdiction as INTELSAT may determine from time to time, at the option of the Holder, by United States dollar check drawn on a bank in The City of New York, the State of New York, U.S.A. or by transfer to a United States dollar account maintained by the payee with a bank located in a city in Western Europe, being the interest then payable on said Note.\nINTERNATIONAL TELECOMMUNICATIONS SATELLITE ORGANIZATION\nBy_______________________________________\n[Reverse of coupon]\nBankers Trust Company 1 Appold Street Broadgate London EC2A 2HE England\nBankers Trust Luxembourg S.A. 14 Boulevard F.D. Roosevelt L-2450 Luxembourg\nBankers Trust Company 38\/F Two Pacific Place 88 Queensway Hong Kong\nCredit Suisse Paradeplatz 8 8001 Zurich Switzerland\nDBS Bank 24 Raffles Place #81-00 Clifford Centre Singapore 0104\nEXHIBIT C\n[FORM OF CERTIFICATION TO BE GIVEN TO EUROCLEAR OR CEDEL S.A. BY ACCOUNT HOLDER]\nCERTIFICATE\nINTERNATIONAL TELECOMMUNICATIONS SATELLITE ORGANIZATION\n6 5\/8% Notes Due 2004\n(the \"Notes\")\nThis is to certify that as of the date hereof, and except as set forth below, interests in the temporary Global Note representing the above-captioned Notes held by you for our account (i) are owned by person(s) that are not citizens or residents of the United States, domestic partnerships, domestic corporations or any estate or trust the income of which is subject to United States Federal income taxation regardless of its source (\"United States person(s)\"), (ii) are owned by United States person(s) that (a) are foreign branches of United States financial institutions (as defined in U.S. Treasury Regulations Section 1.165-12(c)(1)(v) (\"financial institutions\")) purchasing for their own account or for resale or (b) acquired the Notes through foreign branches of United States financial institutions and who hold the Notes through such United States financial institutions on the date hereof (and in either case (a) or (b), each such United States financial institution hereby agrees, on its own behalf or through its agent, that you may advise INTELSAT or INTELSAT's agent that it will comply with the requirements of Section 165(j)(3)(A), (B) or (C) of the U.S. Internal Revenue Code of 1986, as amended, and the regulations thereunder), or (iii) are owned by a United States or foreign financial institution for purposes of resale during the restricted period (as defined in U.S. Treasury Regulations Section 1.163-5(c)(2)(i)(D)(7)), and in addition if the owner of the Notes is a United States or foreign financial institution described in clause (iii) above (whether or not also described in clause (i) or (ii)) this is to further certify that such financial institution has not acquired the Notes for purposes of resale directly or indirectly to a United States person or to a person within the United States or its possessions.\nAs used herein, \"United States\" means the United States of America (including the States thereof and the District of Columbia); and its \"possessions\" include Puerto Rico, the U.S. Virgin Islands, Guam, American Samoa, Wake Island and the Northern Mariana Islands.\nWe undertake to advise you promptly by tested telex on or prior to the date on which you intend to submit your certification relating to the Notes held by you for our account in accordance with your Operating Procedures if any applicable statement herein is not correct\non such date, and in the absence of any such notification it may be assumed that this certification applies as of such date.\nThis certification excepts and does not relate to U.S. $______ of such interest in the above Notes in respect of which we are not able to certify and as to which we understand exchange and delivery of definitive Notes (or, if relevant, exercise of any rights or collection of any interest) cannot be made until we do so certify.\nWe understand that this certification is required in connection with certain tax laws or, if applicable, certain securities laws of the United States. In connection therewith, if administrative or legal proceedings are commenced or threatened in connection with which this certification is or would be relevant, we irrevocably authorize you to produce this certification to any interested party in such proceedings.\nDated: _____________, 199_\nBy:_______________________________________ As, or as agent for, the beneficial owner(s) of the Notes to which this certificate relates.\nEXHIBIT D\n[FORM OF CERTIFICATION TO BE GIVEN BY THE EUROCLEAR OPERATOR OR CEDEL S.A.]\nCERTIFICATION\nINTERNATIONAL TELECOMMUNICATIONS SATELLITE ORGANIZATION\n6 5\/8% Notes Due 2004 (the \"Notes\")\nThis is to certify that, based solely on certifications we have received in writing, by tested telex or by electronic transmission from member organizations appearing in our records as persons being entitled to a portion of the principal amount set forth below (our \"Member Organizations\") substantially to the effect set forth in the Fiscal Agency Agreement, as of the date hereof, U.S. $_______ principal amount of the above-captioned Notes (i) is owned by persons that are not citizens or residents of the United States, domestic partnerships, domestic corporations or any estate or trust the income of which is subject to United States Federal income taxation regardless of its source (\"United States persons\"), (ii) is owned by United States persons that are (a) foreign branches of United States financial institutions (as defined in U.S. Treasury Regulations Section 1.165-12(c)(1)(v) (\"financial institutions\")) purchasing for their own account or for resale or (b) United States persons who acquired the Notes through foreign branches of United States financial institutions and who hold the Notes through such United States financial institutions on the date hereof (and in either case (a) or (b), each such United States financial institution has agreed, on its own behalf or through its agent, that we may advise INTELSAT or INTELSAT's agent that it will comply with the requirements of Section 165(j)(3)(A), (B) or (C) of the U.S. Internal Revenue Code of 1986, as amended, and the regulations thereunder), or (iii) is owned by a United States or foreign financial institution for purposes of resale during the restricted period (as defined in U.S. Treasury Regulations Section 1.163-5(c)(2)(i)(D)(7)), and to the further effect that United States or foreign financial institutions described in clause (iii) above (whether or not also described in clause (i) or (ii)) have certified that they have not acquired the Notes for purposes of resale directly or indirectly to a United States person or to a person within the United States or its possessions.\nWe further certify (i) that we are not making available herewith for exchange (or, if relevant, exercise of any rights or collection of any interest) any portion of the Temporary Global Note excepted in such certifications and (ii) that as of the date hereof we have not received any notification from any of our Member Organizations to the effect that the statements made by such Member Organizations with respect to any portion of the part submitted herewith\nfor exchange (or, if relevant, exercise of any rights or collection of any interest) are no longer true and cannot be relied upon as of the date hereof.\nWe understand that this certification is required in connection with certain tax laws and, if applicable, certain securities laws of the United States. In connection therewith, if administrative or legal proceedings are commenced or threatened in connection with which this certification is or would be relevant, we irrevocably authorize you to produce this certification to any interested party in such proceedings.\nDated: __________, 1994\nYours faithfully, [Morgan Guaranty Trust Company of New York, Brussels Office as operator of the Euroclear System]\nor\n[Cedel S.A.]\nBy_______________________\nEXHIBIT 11\nEXHIBIT 22\nSUBSIDIARIES OF THE REGISTRANT\nAS OF MARCH 31, 1994\nSubsidiary State of Incorporation - - - -------------------------------------------------------------- Bethesda Real Property, Inc. Delaware\nCOMSAT Earth Stations, Inc. Delaware\nCOMSAT General Corporation Delaware\nCOMSAT Technology, Inc. Delaware\nCOMSAT General Telematics, Inc. Delaware\nCOMSAT International N.V. Delaware\nCOMSAT Investments, Inc. Delaware\nCOMSAT Mobile Investments, Inc. Delaware\nCOMSAT Overseas, Inc. Delaware\nCOMSAT Video Enterprises, Inc. Delaware\nCOMSAT Denver, Inc. Delaware\nOn Command Video Corporation Delaware\nCTS America, Inc. Delaware\nCTS Transnational, Inc. Delaware\nEXHIBIT 24\nEXHIBIT 24\nINDEPENDENT AUDITORS' CONSENT\nWe consent to the incorporation by reference in COMSAT Corporation's Registration Statement No. 2-83319 on Form S-8, Registration Statement No. 2-87942 on Form S-8, Registration Statement No. 33-5259 on Form S-8, Registration Statement No. 33-25124 on Form S-8, Registration Statement No. 33-35364 on Form S-8, Registration Statement No. 33-53610 on Form S-8, and Registration Statement No. 33-51661 on Form S-3 of our report dated February 16, 1994, appearing in this Annual Report on Form 10-K of COMSAT Corporation for the year ended December 31, 1993.\nDeloitte & Touche Washington D.C. March 29, 1994\nEXHIBIT 27\nEXHIBIT 27 COMSAT CORPORATION CONSOLIDATED FINANCIAL DATA SCHEDULE (in thousands, except per share amounts)\nItems omitted are not material.\nThis schedule contains summary financial information extracted from the statements and notes for the years ended December 31, 1993, 1992 and 19 in its entirety by reference to such financial statements.","section_15":""}
{"filename":"77320_1993.txt","cik":"77320","year":"1993","section_1":"ITEM 1. BUSINESS AND ITEM 2.","section_1A":"","section_1B":"","section_2":"","section_3":"ITEM 3. LEGAL PROCEEDINGS.\n(a) TAX DISPUTE. Reference is made to \"Management's Discussion and Analysis of Financial Condition and Results of Operations -- Capital Resources and Liquidity -- Tax Dispute\" and Note 8 of Notes to Consolidated Financial Statements for information regarding a letter and examination report received from the District Director of the Internal Revenue Service in January 1994 that proposes a tax deficiency based on an audit of Pennzoil's 1988 federal income tax return.\n(b) CURTAILMENT DAMAGE ACTIONS. Reference is made to Note 8 of Notes to Consolidated Financial Statements for information regarding a lawsuit in which Pennzoil has been joined as a defendant for damages allegedly caused by curtailment of deliveries of gas by United Gas Pipe Line Company, a former Pennzoil subsidiary, to its customers.\n(c) EATON V. PENNZOIL COMPANY. In December 1992, two former employees of Pennzoil filed a purported class action suit in the United States District Court for the Southern District of Texas, Galveston Division. The suit alleges that one of Pennzoil's deferred compensation plans had been improperly administered because of the absence of an adjustment under the plan for a significant event occurring in 1988 in determining the value of awards under the plan maturing in 1988 and 1990. The plaintiffs allege breach of contract, common law fraud and breach of fiduciary duty and seek compensatory and consequential damages of $40.0 million and punitive damages of $400.0 million. Pennzoil believes that the plan was administered properly and that the lawsuit is without merit. In October 1993, the court granted Pennzoil's motion for summary judgment. The plaintiffs have appealed.\nITEM 4.","section_4":"ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.\nNo matter was submitted during the fourth quarter of 1993 to a vote of security holders.\nITEM S-K 401(B). EXECUTIVE OFFICERS OF THE REGISTRANT.\n(a) Set forth below are the names and ages of the executive officers of Pennzoil (at March 4, 1994). Positions, unless otherwise specified, are with Pennzoil.\nDAVID P. ALDERSON, II (44) Group Vice President -- Finance and Treasurer\nCLYDE W. BEAHM (56) Group Vice President -- Franchise Operations\nLINDA F. CONDIT (46) Corporate Secretary\nJOHN L. DAVIS (46) Group Vice President -- Sulphur\nTHOMAS M. HAMILTON (50) Group Vice President -- Oil and Gas\nTERRY HEMEYER (55) Group Vice President -- Administration J. HUGH LIEDTKE (72)(1) Chairman of the Board\nMARK A. MALINSKI (38) Group Vice President -- Accounting and Controller\nJAMES L. PATE (58)(1) President and Chief Executive Officer\nWILLIAM M. ROBB (49) Group Vice President -- Products Manufacturing\nJAMES W. SHADDIX (47) General Counsel\nWILLIAM E. WELCHER (61) Group Vice President -- Products Marketing\n- ---------------\n(1) Director of Pennzoil and member of Executive Committee.\n(b) Officers are appointed annually to serve for the ensuing year or until their successors have been appointed. Officers listed above have held their present offices for at least the past five years except for those named below, who have had the business experience indicated during that period. Positions, unless specified otherwise, are with Pennzoil.\nDAVID P. ALDERSON, II -- Group Vice President -- Finance since February 1992 and Treasurer since August 1989. Senior Vice President -- Finance from March 1990 to February 1992. Assistant Treasurer prior thereto.\nCLYDE W. BEAHM -- Group Vice President -- Franchise Operations since July 1992. Executive Vice President -- Franchise Operations from February 1992 to July 1992. Senior Vice President -- Franchise Operations from May 1991 to February 1992. Vice President -- Quick Lube Operations from November 1989 to May 1991. Assistant Vice President -- Wholesale Market Development of Western Auto Supply Company's wholesale supply division prior thereto.\nLINDA F. CONDIT -- Corporate Secretary since March 1990. Director -- Treasury Operations prior thereto.\nJOHN L. DAVIS -- Group Vice President -- Sulphur since June 1991. Senior Vice President -- Pennzoil Sulphur Company from June 1990 to June 1991. Vice President -- Legal of Pennzoil Sulphur Company prior thereto.\nTHOMAS M. HAMILTON -- Group Vice President -- Oil and Gas since December 1991. Chief Executive -- Frontier and International Operating Company of BP Exploration from September 1989 to June 1991. General Manager -- East Asia, Australia and Latin America of BP Exploration prior thereto.\nTERRY HEMEYER -- Group Vice President -- Administration since February 1992. Senior Vice President -- Administration from March 1990 to February 1992. Vice President -- Public Affairs prior thereto.\nMARK A. MALINSKI -- Group Vice President -- Accounting since February 1992 and Controller since March 1990. Senior Vice President -- Accounting from March 1990 to February 1992. Corporate Secretary prior thereto.\nJAMES L. PATE -- President and Chief Executive Officer since March 1990. Chief Operating Officer from February to March 1990 and Executive Vice President from July 1989 to March 1990. Senior Vice President -- Finance and Treasurer prior thereto.\nWILLIAM M. ROBB -- Group Vice President -- Products Manufacturing since October 1992. Executive Vice President -- Manufacturing of Pennzoil Products Company prior thereto.\nJAMES W. SHADDIX -- General Counsel since March 1990. Assistant General Counsel prior thereto.\nWILLIAM E. WELCHER -- Group Vice President -- Products Marketing since October 1992. Executive Vice President -- Marketing of Pennzoil Products Company prior thereto.\nPART II\nITEM 5.","section_5":"ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.\nThe following table shows high and low sales prices for the common stock of Pennzoil as reported on the New York Stock Exchange (consolidated transactions reporting system), the principal market in which the common stock is traded and dividends paid per share for the calendar quarters indicated. The common stock is also listed for trading on the Pacific Stock Exchange, as well as the Toronto, London and Swiss stock exchanges.\nPennzoil has paid quarterly dividends for 70 consecutive years.\nAs of December 31, 1993, Pennzoil had 20,590 record holders of its common stock.\nITEM 6.","section_6":"ITEM 6. SELECTED FINANCIAL DATA.\nThe following table contains selected financial data for the five years indicated.\n- ---------------\n(1) Reference is made to Note 11 of Notes to Consolidated Financial Statements.\n(2) Reference is made to Note 3 of Notes to Consolidated Financial Statements.\n(3) Reference is made to Notes 2 and 6 of Notes to Consolidated Financial Statements.\nITEM 7.","section_7":"ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.\nReference is made to Industry Segment Financial Information included in Item 1, Business and Item 2, Properties and the Consolidated Financial Statements beginning on page for additional information.\nRESULTS OF OPERATIONS\nNet income for 1993 was $141.9 million, or $3.36 per share, compared with net income of $128.2 million, or $3.16 per share, for 1992 and $21.0 million, or $.52 per share, for 1991. In November 1993, Pennzoil sold 8,158,582 shares of Chevron Corporation (\"Chevron\") common stock in a block trade on the New York Stock Exchange (\"NYSE\") for a net price of $88.38 per share. The sale resulted in a net realized gain of $137.0 million ($171.6 million before tax), or $3.25 per share. Reference is made to \"-- Capital Resources and Liquidity\" for additional information.\nIn September 1993, Pennzoil called for redemption an aggregate of $292.5 million principal amount of indebtedness. The premiums and related unamortized discount and debt issue costs relating to these redemptions resulted in an extraordinary charge of $13.7 million ($21.1 million before tax), or $.33 per share, in the third quarter of 1993. Reference is made to \"-- Capital Resources and Liquidity\" for additional information.\nIn August 1993, the Omnibus Budget Reconciliation Act of 1993 was enacted, establishing a new 35% corporate income tax rate effective January 1, 1993. As a result of the increase in the marginal income tax rate and other tax law changes, Pennzoil recorded a one-time, non-cash charge of approximately $16 million, or $.38 per share, in the third quarter of 1993 to adjust its deferred income tax liabilities and assets for the effect of the change in income tax rates.\nIn June 1993, Pennzoil called for redemption $96.1 million principal amount of indebtedness (which redemption occurred in July 1993). The premiums and related unamortized discount and debt issue costs relating to these redemptions resulted in an extraordinary charge of $4.7 million ($7.2 million before tax), or $.12 per share, in the second quarter of 1993. Reference is made to \"-- Capital Resources and Liquidity\" for additional information.\nIn December 1992, Pennzoil announced its decision to change its method of accounting for income taxes by adopting the new requirements of Statement of Financial Accounting Standards (\"SFAS\") No. 109, \"Accounting for Income Taxes,\" effective as of January 1, 1992. As a result, Pennzoil recognized an increase to net income of $119.1 million in 1992. Of this amount, $115.7 million, or $2.85 per share, is reported as the one-time cumulative effect on prior year results. The remaining $3.4 million, or $.08 per share, reflects the impact of adoption of this standard on 1992 income from continuing operations.\nIn December 1992, Pennzoil sold in initial public offerings all its shares of capital stock of Purolator Products Company (\"Purolator\"). Pennzoil recorded a net gain on the disposition of Purolator of $1.5 million, or $.04 per share, in the fourth quarter of 1992. Reference is made to \"-- Discontinued Operations\" and Note 11 of Notes to Consolidated Financial Statements for additional information.\nIn December 1992, Pennzoil called for redemption $272.9 million principal amount of indebtedness (which redemption occurred in February 1993). As of December 31, 1992, this indebtedness was defeased by placing funds required for the redemption with the trustee for the indebtedness. As a result, the funds deposited with the trustee for the redemption of the debentures and the principal amount of the indebtedness are not reflected in Pennzoil's consolidated balance sheet at December 31, 1992. The premiums and related unamortized discount and debt issue costs relating to this redemption resulted in an extraordinary charge of $16.6 million ($25.2 million before tax), or $.41 per share, in the fourth quarter of 1992. Reference is made to \"-- Capital Resources and Liquidity\" for additional information.\nIn December 1991, Pennzoil announced its decision to change its method of accounting for postretirement benefit costs other than pensions by adopting the new requirements of SFAS No. 106, \"Employers' Accounting for Postretirement Benefits Other Than Pensions,\" effective as of January 1, 1991. As a result, Pennzoil recorded a charge of $49.0 million (including $11.4 million related to Purolator), or $1.21 per share, in the first quarter of 1991 to reflect the cumulative effect of the change in accounting principle for periods prior to 1991. In addition to the cumulative effect, Pennzoil's 1991 postretirement health care and life insurance costs increased $1.7 million, or $.04 per share, as a result of adopting the new standard.\nNet income for 1991 was increased by adjustments of approximately $27.6 million, or $.68 per share, required to reclassify Purolator from a discontinued operation to a continuing operation as a result of Pennzoil's 1991 decision to retain Purolator. Reference is made to Note 11 of Notes to Consolidated Financial Statements for additional information.\nInvestment and other income for 1993 primarily represents a gain on the sale of 8,158,582 shares of Chevron common stock and dividend income from Pennzoil's investment in Chevron common stock. Investment and other income for 1992 and 1991 primarily represents dividend income from Pennzoil's investment in Chevron common stock. From 1989 through 1991, Pennzoil acquired 32,944,100 shares of common stock of Chevron. As of December 31, 1993, Pennzoil beneficially owned 9,035,518 shares of Chevron common stock, which is classified as non-current marketable securities and other investments in the accompanying consolidated balance sheet. Reference is made to \"-- Capital Resources and Liquidity\" for additional information.\nOIL AND GAS\nOperating income for the oil and gas segment was $159.2 million, compared with operating income of $134.7 million in 1992 and $48.6 million in 1991, reflecting the inclusion of a full year of results of Pennzoil Petroleum Company (\"Pennzoil Petroleum\"). Gas and liquids volume increases along with higher gas prices and gains on asset sales were primarily responsible for the increase in operating income. These increases were partially offset by lower crude oil prices, generally higher expenses associated with the higher level of activity within the oil and gas segment and higher exploration expenses described below.\nIn October 1992, Pennzoil completed a transaction with Chevron, pursuant to which Pennzoil exchanged 15,750,000 shares of Chevron common stock held by Pennzoil for all the capital stock of Pennzoil Petroleum, which owns Gulf of Mexico, Gulf Coast, Permian Basin and other domestic oil and gas producing properties. The exchange of stock has been accounted for using the purchase method of accounting, and Pennzoil Petroleum's results of operations subsequent to October 30, 1992 have been included in Pennzoil's oil and gas segment results. Reference is made to Note 10 of Notes to Consolidated Financial Statements for additional information.\nDuring the four-month period between the \"effective date\" and the closing date of the transaction, Chevron continued operation of the Pennzoil Petroleum oil and gas properties and, immediately prior to closing, contributed $57.4 million in cash to Pennzoil Petroleum (for the benefit of Pennzoil), representing the cash flow from Pennzoil Petroleum's operations during this four-month period, less production costs, provisions for taxes and approximately $11 million of nonrecurring closing adjustments. As a result of an audit completed during 1993, Chevron contributed an additional $9.9 million in cash to Pennzoil Petroleum, representing an adjustment to the initial $57.4 million cash contribution made by Chevron to Pennzoil Petroleum prior to closing. This additional contribution from Chevron was accounted for as an adjustment to the original purchase price of Pennzoil Petroleum.\nNatural gas produced for sale in 1993 was 649,399 Mcf per day, compared with 447,561 Mcf per day and 400,960 Mcf per day in 1992 and 1991, respectively. Natural gas prices averaged $2.04 per Mcf in 1993 compared to $1.81 per Mcf in 1992 and $1.54 per Mcf in 1991. Liquids volumes in 1993 were 64,273 barrels per day, compared to 39,462 and 30,897 barrels per day in 1992 and 1991, respectively. The average liquids price received in 1993 dropped to $14.90 per barrel compared with $16.95 per barrel in 1992 and $18.30 per barrel in 1991.\nThe results of operations from Pennzoil's oil and gas segment are subject to volatility resulting from changes in crude oil and natural gas prices. Pennzoil has used in the past, and may use in the future, a limited price risk management strategy to provide protection against temporary declines in domestic natural gas prices. To date, these price risk management activities have encompassed no more than 3% of Pennzoil's total annual natural gas production.\nDuring 1993, Pennzoil recorded $34.9 million in gains on sales of assets, primarily oil and gas producing properties. Proceeds from these asset sales were $87.5 million. These properties were categorized as noncore properties as a part of Pennzoil's continuing assessment of its domestic oil and gas properties, which commenced early in 1992. These properties, while constituting a significant number of fields, were, as a whole, immaterial to Pennzoil. Management estimates that Pennzoil's proved reserves at December 31, 1993 were reduced by approximately 13.7 million barrels of proved oil equivalents, or less than 3% of Pennzoil's proved reserves, as a result of these sales. Pennzoil intends to continue disposal of noncore properties during 1994, with the proceeds from these sales intended for reinvestment in or reallocation to Pennzoil's core properties.\nExpenses associated with exploration activities in 1993 increased to $70.7 million compared with $11.7 million in 1992 and $47.3 million in 1991. This increase was due to a $46.9 million charge for impairments of unproved offshore property costs, primarily in the Mobile Bay area, and an increase in geological and geophysical expenses of $12.9 million over 1992 associated with an increase in Pennzoil's domestic exploration and development activity and the continuing assessment of its domestic oil and gas properties. In the early stages of this assessment, Pennzoil curtailed domestic exploration activity and, as a result, reduced its 1992 capital budget related to both exploration and development activity and geological and\ngeophysical expenses. As this assessment has progressed, more exploration and development activity has occurred in and around core areas. As a result, both domestic capital expenditures and geological and geophysical expenses for 1993 have more than doubled from the previous year as new opportunities were evaluated and exploration and development programs were implemented.\nDepreciation, depletion and amortization expense in 1993 included a charge of $17.7 million to increase an impairment reserve originally established in 1988 related to Pennzoil's net investment in offshore California producing properties. Generally lower offshore California oil price forecasts in the fourth quarter, led management to determine that an additional impairment was necessary.\nInternationally, Pennzoil in 1992 announced agreements for the exclusive right to negotiate with the Azerbaijan Republic and the State Oil Company of the Azerbaijan Republic (\"SOCAR\") to develop the Guneshli Field offshore Azerbaijan in the southern portion of the Caspian Sea. In May 1993, the Azeri government announced its intention to jointly develop, under a unified development plan, three fields (the Guneshli, Chirag and Azeri Fields) then under negotiation with western oil companies. In October 1993, the group of eight western oil companies, including Pennzoil, entered into an Area of Mutual Interest (\"AMI\") agreement that reaffirmed the equity distribution among the companies set out in a Declaration of Unitization previously signed by the western oil companies and SOCAR and established the basis for the companies' development of the three-field unit. Subsequently, during October 1993, the Azeri government elected to withdraw the Guneshli Field from the unit to be developed by the western oil companies and develop the Guneshli Field on its own. Under the terms of the AMI agreement, Pennzoil and Ramco Energy Ltd. of Scotland will have a 17% working interest in any development of the three fields by the western oil companies party to the AMI agreement, including the current two-field unit composed of the Chirag and Azeri Fields.\nAlso in Azerbaijan, Pennzoil continued work on a comprehensive gas gathering and compression system during 1993. This project is designed to capture, compress and transport to shore approximately 150 million cubic feet per day of gas presently being vented from the Guneshli Field. The gas utilization project accounted for approximately $98 million of the $361 million in capital expenditures for the oil and gas segment in 1993. Pennzoil has signed a gas utilization agreement with SOCAR that provides for recovery of Pennzoil's costs incurred in connection with the gas utilization project by payment in hard currency or oil or petroleum products or by a credit against a signature bonus for the first exploration, exploitation and\/or development contract entered into between Pennzoil and SOCAR in Azerbaijan. The gas utilization project should be completed during the first quarter of 1994. Pennzoil's total investment related to its Azerbaijan activities, including the gas utilization project, was $116 million as of December 31, 1993.\nCapital expenditures for the oil and gas segment in 1993 were $360.5 million compared to $93.8 million in 1992, excluding expenditures related to Pennzoil's acquisition of Pennzoil Petroleum, and $177.9 million in 1991. Total capital expenditures for this segment in 1994 are estimated to be $223.9 million, net of expected recoveries from the gas utilization project in Azerbaijan. Reference is made to \"-- Capital Resources and Liquidity\" for additional information.\nMOTOR OIL & AUTOMOTIVE PRODUCTS\nOperating income in 1993 for this segment was $90.0 million, compared with $77.9 million in 1992 and $108.3 million in 1991. Higher income in the marketing division in 1993 resulted primarily from higher domestic motor oil margins, which increased by approximately 6% due to lower crude oil prices in 1993. Domestic motor oil volumes were about even with 1992 but 4% higher than 1991 (lower 1991 volumes were the result of a recessionary decrease in total market demand). Domestic motor oil margin gains in 1993 were partially offset by higher advertising and selling expenditures. International motor oil and other lubricating product volumes increased 25% when compared to 1992 and 51% when compared to 1991. The revenue increases resulting from the higher international motor oil volumes were partially offset by higher selling and depreciation expenses. Higher income in the manufacturing division in 1993 was the result of higher refining and specialty product margins. Higher refining margins were due to higher fuels and other light product margins and higher base oil margins, all resulting from lower crude prices. Total processed volume at the refineries of 59,222 barrels per day was 767 barrels per day higher than 1992 but 2,683 barrels per day lower\nthan 1991. The lower volumes in 1993 and 1992 were primarily due to major maintenance turnarounds. Higher refinery operating and maintenance expenses slightly offset the increased margin. Income from the specialty products Penreco division was up 47% in 1993 due to higher volumes and margins coupled with a division-wide focus on reducing operating expenses.\nThe profitability of Pennzoil's refineries is directly affected by the supply and price of the grade and quality of crude oil purchased or otherwise obtained for refinery throughput. Because of shortages in the supply of crude oil meeting the unique grade and quality requirements for each of Pennzoil's refineries, and possible declining refinery margins resulting from such shortages, Pennzoil continually considers and evaluates crude oil supply arrangements for each of its refineries and the corresponding impact on the operating profitability of the affected refineries. In response to these crude oil supply shortages, Pennzoil is evaluating, among other things, the feasibility of increasing production from nearby fields and the possible reduction or consolidation of refinery operations. The magnitude and timing of crude oil supply shortages, and the resultant impact on Pennzoil's operating results and business operations, cannot be predicted with accuracy.\nCapital expenditures for the motor oil and automotive products segment were $71.5 million in 1993, $35.8 million in 1992 and $32.3 million in 1991. The 1993 expenditures included $26.6 million for a diesel desulphurization and dewaxing project at the Atlas Processing Company (\"Atlas\") refinery in Shreveport, Louisiana, required to meet the new standards of the Clean Air Act. Also included were expenditures of $6.3 million for a feasibility study for a state-of-the-art base oil plant to be built as a joint venture and $4.8 million for the acquisition of property, plant and equipment of a blending plant in Spain (acquired in the first quarter of 1993). Total capital expenditures for this segment in 1994 are estimated to be $59.1 million.\nFRANCHISE OPERATIONS\nThe operating loss from franchise operations during 1993 was $17.6 million, compared with an operating loss of $13.4 million in 1992 and an operating loss of $7.8 million in 1991. Operating results for 1993 include a charge of $10.0 million for estimated costs associated with centers that Jiffy Lube International, Inc. (\"Jiffy Lube\") has decided to eliminate. Jiffy Lube has determined that these centers are not viable as company-operated centers and has been unsuccessful in subleasing many of these centers for alternative uses. This provision for estimated costs takes into consideration the present value of future lease obligations related to operating leases (less estimated sublease rental revenue of existing subleases) and the estimated fair value of land, buildings, leaseholds and leasehold improvements. Additionally, 1993 results include approximately $12.7 million for the settlement of certain litigation, estimated environmental costs and write-downs of other individually insignificant investments to reflect Jiffy Lube's estimate of the net realizability of those investments. The decline in operating results in 1992 as compared to 1991 was due in part to increased selling, general and administrative expenses incurred in connection with the settlement of certain litigation ($6.8 million in 1992 compared to $1.1 million in 1991) and increased start-up expenses incurred in association with the development and installation of a new point-of-sale system ($2.6 million in 1992 compared to $1.1 million in 1991). As of December 31, 1993, Jiffy Lube operated 410 service centers, of which 19 are currently held for resale.\nSystemwide service center sales reported to Jiffy Lube for the year ended December 31, 1993 increased $39 million, or approximately 8%, to $539 million, compared with the prior year and increased $64 million, or approximately 13%, compared with 1991. Average ticket prices increased to $33.60 for the year ended December 31, 1993, compared with $33.23 and $32.15 for the years ended December 31, 1992 and 1991, respectively.\nDuring the year ended December 31, 1993, Jiffy Lube acquired 70 centers with estimated values of $15.8 million and real estate with estimated values of $.9 million in exchange for cash of $12.2 million, forgiveness of amounts due Jiffy Lube of $.9 million, liabilities assumed of $.5 million, debt assumed of $.4 million and real estate valued at $1.6 million. During the year ended December 31, 1992, Jiffy Lube acquired 104 service centers with estimated values of $29.7 million in exchange for cash of $16.7 million, forgiveness of amounts due Jiffy Lube of $2.8 million, liabilities assumed of $8.7 million and debt issued of $1.5 million. During the year ended December 31, 1991, Jiffy Lube acquired 106 service centers with estimated values of $31.9 million\nin exchange for cash of $13.3 million, forgiveness of amounts due Jiffy Lube of $6.3 million, liabilities assumed of $11.5 million and debt issued of $6.5 million.\nCapital expenditures for the franchise operations segment were $21.7 million in 1993, compared to $25.8 million and $4.9 million in 1992 and 1991, respectively. Capital expenditures for 1994 are estimated to be approximately $14.5 million.\nSULPHUR\nThe operating loss from this segment was $20.8 million in 1993, down from $1.0 million of operating income earned in 1992 and from $42.7 million of operating income reported in 1991. The decrease in operating income in the sulphur segment during 1993 was primarily attributable to reduced sales volumes and sharply lower prices received for sulphur during 1993. The average Green Markets Tampa Recovered Contract Price range for sulphur in 1993 had a mid-point of $64.00 per long ton, which was approximately 26% below the 1992 mid-point and 44% below the mid-point in 1991. A downturn related to aggressive pricing by Canadian and U.S. recovered sulphur producers began in mid-1991, with average mid-point prices falling by $77.00 per ton from a weekly high of $131.00 in June 1991 to a weekly low of $54.00 in December 1993.\nDuring 1993, sulphur sales volumes were 1.1 million long tons, a decrease of approximately 37% and 46% from 1992 and 1991 levels, respectively, due to reduced market share resulting from lower priced imports from Canada and increased recovered production domestically. Consumption of sulphur in North America was also estimated to be down one million tons due to lower phosphate exports. Sales volume commitments from certain Pennzoil customers have also been reduced or eliminated, including the elimination of commitments in the second half of 1992 from a customer accounting for approximately 10% of annual sulphur sales.\nIn October 1993, Pennzoil announced intended capital expenditures of approximately $7.4 million to modify the process of heating recycled mine water for reinjection into the production zone at the Culberson mine and the replacement of inefficient steam turbines with a gas-fired turbine. The modification resulted in a one-time charge of approximately $3.6 million for the write-off of obsolete property, plant and equipment. In addition, Pennzoil Sulphur Company began a work force reduction program in 1993, which resulted in a fourth quarter charge of $3.2 million. Annual expense savings at current production rates as a result of these actions are estimated at $12 million.\nPennzoil announced a voluntary workforce reduction for the sulphur segment effective in September 1992 and an involuntary workforce reduction program at two locations in October 1992. These measures resulted in one-time charges of $1.3 million and $1.1 million, respectively, and estimated cost reductions of $2.2 million and $3.2 million annually.\nSo long as sulphur prices and volumes remain at current levels, operating results in the sulphur segment will continue to be adversely affected, and the sulphur segment will likely generate an operating loss. The magnitude and timing of the actual effect on operating results of any future sulphur price fluctuation cannot be accurately predicted.\nA significant portion of Pennzoil's sulphur sales is made to United States phosphate fertilizer producers who sell in both domestic and foreign agricultural markets. Domestic agricultural markets typically peak during spring and fall planting seasons, which are in the first and third quarters of the year. Foreign markets are also cyclical, but seasonal variations among individual foreign countries tend to offset each other.\nCapital expenditures for the sulphur segment were $2.3 million in 1993, compared with $2.9 million and $7.0 million in 1992 and 1991, respectively. Total capital expenditures for this segment in 1994 have been budgeted at $6.2 million.\nOTHER\nOther operating income for 1993 was $253.7 million, compared to $88.2 million in 1992 and $127.8 million in 1991. The higher level of other income in 1993 was primarily due to the gains on the sales of shares of Chevron common stock of $171.6 million and Pogo Producing Company common stock of $10.5 million. Dividend income on the Chevron common stock was $60.2 million for 1993, $95.7 million for 1992 and $107.0 million for 1991.\nOther revenues, net of related expenses, are included in the consolidated statement of income under \"Investment and Other Income, Net\" which consists of the following:\nSubstantially all interest and dividend income is from marketable securities and other cash investments.\nINTEREST CHARGES, NET\nDuring 1993, Pennzoil's interest charges, net of interest capitalized, decreased $45.1 million over 1992 levels. This decrease is primarily due to a decrease in the average amount of debt outstanding and lower average interest rates during 1993 compared to 1992. In addition, interest expense for 1991 includes $3.7 million in interest payments related to federal income tax paid on a portion of the $3.0 billion settlement received by Pennzoil from Texaco, Inc. (\"Texaco\") in 1988 in settlement of certain litigation. Reference is made to \"-- Capital Resources and Liquidity -- Investment in Chevron Corporation\" for additional information.\nDISCONTINUED OPERATIONS\nIn early 1990, Pennzoil decided to sell or otherwise dispose of Purolator. In connection with this decision, Pennzoil recorded a 1989 fourth quarter write-down of $125.0 million to reflect the estimated loss to be incurred from the then anticipated sale or other disposition of Purolator's filtration products operations, including estimated future costs and operating results from the segment until the date of disposition.\nIn August 1991, Pennzoil concluded that, because of Purolator's improved performance, the intrinsic value of Purolator could be more effectively realized by retaining Purolator. Accordingly, Pennzoil reclassified Purolator's net assets and results of operations for all periods as part of continuing operations. As a result of Pennzoil's decision to retain Purolator, the remaining reserve of $115.7 million for the estimated loss on the disposition of Purolator originally established in the fourth quarter of 1989 was reversed. Concurrent with the reversal of the reserve, Pennzoil recorded, during the third quarter of 1991, a provision of $108.0 million ($88.0 million after tax) to reflect losses due to asset impairment and other identified liabilities related to Purolator.\nIn October 1992, as a result of Pennzoil's conclusion that disposal of Purolator's filtration products operations would enhance Pennzoil's efforts to focus on its strategic businesses and to reduce indebtedness, Purolator filed a registration statement pursuant to which Pennzoil offered to the public all shares of Purolator stock held by Pennzoil. Accordingly, Purolator's net assets and results of operations for all periods have been reclassified as discontinued operations for financial reporting purposes. In December 1992, Pennzoil sold in initial public offerings all its shares of capital stock of Purolator. The total amount received by Pennzoil, prior\nto the payment of expenses, from the net proceeds of the offerings and the repayment of indebtedness by Purolator was $206.0 million. Pennzoil also expects to receive a tax refund of approximately $23 million as a result of the transaction. Pennzoil recorded a net gain on the disposition of Purolator stock of $1.5 million, or $.04 per share, in the fourth quarter of 1992.\nReference is made to \"-- Capital Resources and Liquidity -- Environmental Matters\" and Note 8 of Notes to Consolidated Financial Statements for information concerning an environmental indemnification agreement between Pennzoil and Purolator entered into in connection with Pennzoil's disposition of Purolator.\nCAPITAL RESOURCES AND LIQUIDITY\nCASH FLOW. Pennzoil had cash and cash equivalents and current marketable securities and other investments of $946.6 million and $20.7 million at December 31, 1993 and 1992, respectively. Cash flow generated from operations, net proceeds from the sale of 8.2 million shares of Chevron common stock and proceeds from the sale of assets totaled approximately $1.1 billion. These funds were primarily used for the payment of cash dividends ($126.2 million) and for capital expenditures ($475.0 million).\nINVESTMENT IN CHEVRON CORPORATION. As of December 31, 1993, Pennzoil beneficially owned 9,035,518 shares of Chevron common stock. From 1989 through 1991, Pennzoil acquired 32,944,100 shares of Chevron common stock at an average cost of $67.36 per share with approximately $2.2 billion of the net proceeds from the Texaco settlement. In anticipation of not reinvesting in excess of $2.2 billion of the original $3.0 billion of proceeds from the Texaco settlement in property that is similar or related in service or use to the property involuntarily converted by Texaco, Pennzoil paid $13.2 million in federal income tax and $3.7 million in related interest in 1991 in addition to payments of $120.4 million in federal income tax and $17.6 million in related interest made during 1990. The interest payments are included in interest expense for 1991 and 1990, respectively. Provision for the income tax was previously made when the proceeds from the Texaco settlement were received in 1988. Reference is made to Note 8 of Notes to Consolidated Financial Statements for additional information.\nIn April 1991, Chevron increased the amount of quarterly dividends paid to holders of its common stock from $.775 per share to $.825 per share, and, in January 1993, Chevron announced an increase in the amount of quarterly dividends paid to holders of its common stock from $.825 per share to $.875 per share. In January 1994, Chevron announced an increase in the amount of quarterly dividends paid to holders of its common stock from $.875 per share to $.925 per share. At March 4, 1994, the closing price for Chevron common stock on the NYSE was $88.25 per share.\nIn October 1992, Pennzoil completed a transaction with Chevron, pursuant to which Pennzoil exchanged 15,750,000 shares of Chevron common stock held by Pennzoil for all capital stock of Pennzoil Petroleum, which owns Gulf of Mexico, Gulf Coast, Permian Basin and other domestic oil and gas producing properties. The exchange of stock has been accounted for using the purchase method of accounting, and Pennzoil Petroleum's results subsequent to October 30, 1992 are included in Pennzoil's oil and gas segment results.\nIn November 1993, Pennzoil sold 8,158,582 shares of Chevron common stock in a block trade on the NYSE for a price of $89.00 per share before commissions ($88.38 per share net of commissions). The sale resulted in a net gain of $137.0 million ($171.6 million before tax), or $3.25 per share. The tax liability resulting from the sale of shares of Chevron common stock has been reduced by $25.5 million as a result of the utilization of a net operating loss carryforward. Realization of the net operating loss carryforward resulted in the reversal of a valuation allowance related to the deferred tax asset. Reference is made to Note 2 of Notes to Consolidated Financial Statements for additional information.\nEXCHANGEABLE DEBENTURES. In 1993, Pennzoil completed public offerings of $402.5 million principal amount of its 6 1\/2% Exchangeable Senior Debentures due January 15, 2003 (the \"6 1\/2% Debentures\") and $500.0 million principal amount of its 4 3\/4% Exchangeable Senior Debentures due October 1, 2003 (the \"4 3\/4% Debentures\"). The 6 1\/2% Debentures and the 4 3\/4% Debentures are exchangeable at the option of the holders thereof at any time prior to maturity, unless previously redeemed, for shares of Chevron common stock owned by Pennzoil at exchange rates of 11.887 shares and 8.502 shares, respectively, per $1,000 principal amount of\nthe 6 1\/2% Debentures and the 4 3\/4% Debentures (the equivalent of $84 1\/8 per share and $117 5\/8 per share, respectively), subject to adjustment in certain events. In lieu of delivering certificates representing shares of Chevron common stock in exchange for the 6 1\/2% Debentures and the 4 3\/4% Debentures, Pennzoil may, at its option, pay to any holder surrendering the 6 1\/2% Debentures and the 4 3\/4% Debentures an amount in cash equal to the market price of the shares for which the 6 1\/2% Debentures and the 4 3\/4% Debentures are exchangeable. Pennzoil has deposited 9,035,518 shares of Chevron common stock deliverable in exchange for the 6 1\/2% Debentures and the 4 3\/4% Debentures with exchange agents.\nUnder the instruments governing the 6 1\/2% Debentures and the 4 3\/4% Debentures, Pennzoil may not pledge, mortgage, hypothecate or grant a security interest in, or permit any mortgage, pledge, security interest or other lien upon, the shares of Chevron common stock deposited with exchange agents and deliverable in exchange for the 6 1\/2% Debentures and the 4 3\/4% Debentures. Pennzoil may at any time obtain from the exchange agents or otherwise authorize or direct the exchange agents to release all or part of the 9,035,518 shares of Chevron common stock deposited with the exchange agents. However, in the event Pennzoil obtains or otherwise releases any shares of Chevron common stock subject to exchange, each holder of a 6 1\/2% Debenture or a 4 3\/4% Debenture will generally have the right, at such holder's option, to require Pennzoil to repurchase all or a portion of such holder's debentures at a premium.\nFrom the proceeds from the sale in January 1993 of the 6 1\/2% Debentures, Pennzoil in March 1993 redeemed $223.4 million principal amount of indebtedness (including $80.1 million of Pennzoil's 12 1\/8% and 12 1\/4% debentures due 2007, $100.0 million of Pennzoil's 9 1\/8% notes due 1996 and $43.3 million of Pennzoil's 9% debentures due 2001). The call premiums and related unamortized net premiums and debt issue costs relating to the redemption of these series of indebtedness resulted in a charge of $1.4 million, net of tax, or $.02 per share, for the first quarter of 1993. Also with such proceeds, approximately $23.3 million of additional indebtedness has been retired, repaid or repurchased in 1993 and $100.0 million principal amount of Pennzoil's 9% notes was retired upon maturity in May 1993. From the proceeds from the sale of the 4 3\/4% Debentures, Pennzoil in October 1993 reduced its borrowings outstanding under its unsecured revolving credit facility.\nASSESSMENT OF OIL AND GAS PROPERTIES. Pennzoil is continuing its assessment of its domestic oil and gas properties commenced in early 1992. This assessment has resulted in, and is expected to continue to result in, the categorization of Pennzoil's oil and gas properties into core and noncore producing areas and core and noncore producing fields within core areas. In the early stages of this assessment, Pennzoil curtailed domestic exploration and development activity and, as a result, reduced its 1992 capital expenditures for domestic exploration and development by approximately one-half, excluding expenditures related to Pennzoil's acquisition of Pennzoil Petroleum. This ongoing assessment now includes the properties added in October 1992 as a result of the acquisition of Pennzoil Petroleum, which has created additional core areas and enhanced other core areas. With respect to properties to date categorized as noncore, Pennzoil sought to dispose of certain of these properties during 1992, and Pennzoil responded to inquiries from third parties with respect to other of these properties. As a result, Pennzoil disposed of approximately $35 million of these noncore properties and fields during 1992. No significant gain or loss was realized as a result of these dispositions. Pennzoil began 1993 with interests in approximately 800 producing fields owning small working interests and\/or insignificant reserves in the majority of these fields. The successful first step in an asset highgrading program resulted in the disposal of approximately 300 of these fields representing less than 3% of the total value of Pennzoil's proved oil and gas reserves. Pennzoil realized gains of $34.9 million from these asset sales on total proceeds of $87.5 million. In addition, four asset swaps were finalized during 1993 to increase working interests in core Gulf of Mexico fields. Pennzoil intends to continue disposal of noncore properties during 1994 with the proceeds from these sales intended for reinvestment in or reallocation to Pennzoil's core properties.\nCREDIT FACILITIES. In August 1993, Pennzoil entered into an amended and restated credit facility with a group of banks that provides for up to $600.0 million of unsecured revolving credit borrowings through August 19, 1994, with any outstanding borrowings on such date being converted into a term credit facility terminating on September 1, 1995. A facility fee of .15% per annum is payable on the aggregate amount of the banks' commitments. This amended and restated credit facility replaces and supersedes the previous revolving\ncredit facilities of Pennzoil and Pennzoil Exploration and Production Company. Borrowings under the facility totaled $195.0 million and $200.0 million at December 31, 1993 and March 1, 1994, respectively.\nDuring 1993, Pennzoil's Board of Directors increased the limit on the aggregate amount of commercial paper that Pennzoil may issue under its domestic commercial paper program and\/or its Euro-commercial paper program from $150.0 million to $250.0 million. Borrowings under Pennzoil's commercial paper facilities totaled $249.4 million and $247.1 million at December 31, 1993 and March 1, 1994, respectively.\nPennzoil has several short-term variable-rate credit arrangements with certain banks. Pennzoil's Board of Directors has limited borrowings under these credit arrangements to $200.0 million. Outstanding borrowings totaled $183.6 million at December 31, 1993 and $193.9 million at March 1, 1994. None of the banks has any obligation to continue to extend credit after the maturities of outstanding borrowings or to extend the maturities of any borrowings under these credit arrangements.\nOTHER REDEMPTIONS OF INDEBTEDNESS. In December 1992, Pennzoil called for redemption $272.9 million principal amount of indebtedness (including $250.0 million of Pennzoil's 10 5\/8% debentures due 2018 and $22.9 million of Pennzoil's 10% debentures due 2011), using proceeds from the disposition of Purolator, from the disposition of certain oil and gas properties and from cash contributed by Chevron to Pennzoil Petroleum for the benefit of Pennzoil. The redemptions were completed in February 1993. As of December 31, 1992, this indebtedness was defeased by placing funds required for the redemption with the trustee for the indebtedness. As a result, the funds deposited with the trustee for the redemption of the debentures and the principal amount of the indebtedness are not reflected in Pennzoil's consolidated balance sheet at December 31, 1992. The premiums and related unamortized discount and debt issue costs relating to these redemptions resulted in an extraordinary charge of $16.6 million ($25.2 million before tax), or $.41 per share, in the fourth quarter of 1992.\nIn June 1993, Pennzoil called for redemption $96.1 million principal amount of indebtedness (including $66.1 million of Pennzoil's 10% debentures due 2011 and $30.0 million of Pennzoil's 10 1\/8% debentures due 2011). The redemptions were completed in July 1993. The funds used for these redemptions were obtained from (i) the cash proceeds from the completed sale of a subsidiary holding Pennzoil's Indonesian gold properties in January 1993, (ii) the cash proceeds from the sale in March 1993 of common stock of Pogo Producing Company held by Pennzoil and (iii) the cash payments received from Chevron from and as a result of the net cash flows from operations of the oil and gas properties of Pennzoil Petroleum through March 31, 1993. The premiums and related unamortized discount and debt issue costs relating to these redemptions resulted in an extraordinary charge of $4.7 million, net of tax, or $.12 per share, in the second quarter of 1993.\nIn September 1993, Pennzoil called for redemption $292.5 million principal amount of indebtedness (including $120.0 million of Pennzoil's 10 1\/8% debentures due 2011, $111.0 million of Pennzoil's 10% debentures due 2011 and $61.5 million of Pennzoil's 9% debentures due 2017). The redemptions were completed in November 1993. The funds used for these redemptions were primarily obtained from the net proceeds from the sale in September 1993 of 5,000,000 shares of Pennzoil common stock. The premiums and related unamortized discount and debt issue costs relating to these redemptions resulted in an extraordinary charge of $13.7 million, net of tax, or $.33 per share, in the third quarter of 1993.\nIn November 1993, Pennzoil redeemed $24.0 million principal amount of indebtedness (including $21.3 million of Pennzoil's 8 3\/8% and 8 5\/8% debentures due 1996 and $2.7 million of Pennzoil's 8 3\/4% debentures due 2001). No significant gain or loss resulted from these early retirements.\nTAX DISPUTE. In January 1994, Pennzoil received a letter and examination report from the District Director of the Internal Revenue Service (\"IRS\") that proposes a tax deficiency based on an audit of Pennzoil's 1988 federal income tax return. The examination report proposes two principal adjustments with which Pennzoil disagrees.\nThe first adjustment challenges Pennzoil's position under Section 1033 of the Internal Revenue Code that (i) at least $2.2 billion of the $3.0 billion cash payment received from Texaco in 1988 in settlement of certain litigation was realized as a result of the involuntary conversion of property and (ii) the shares of Chevron common stock purchased with $2.2 billion of the net Texaco settlement proceeds were similar or related in\nservice or use to the property converted by Texaco. Although these issues have not been resolved, Pennzoil believes that its position is sound, and it intends to contest the proposed adjustment in court unless an acceptable settlement is reached. The proposed tax deficiency relating to this proposed adjustment is $550.9 million, net of available offsets. Pennzoil estimates that the additional after-tax interest on this proposed deficiency would be approximately $234.3 million as of December 31, 1993. If Pennzoil's position is not sustained by the courts, Pennzoil would be required to pay the assessed taxes, plus the accrued interest. Pennzoil's consolidated financial statements do not include an accrual for the interest that would be due in such event.\nThe second adjustment proposed by the IRS would permanently capitalize, rather than allow Pennzoil to deduct, approximately $366 million incurred by Pennzoil in 1988 and earlier years for litigation and related expenses in connection with the Texaco settlement, even if it were determined that the entire $3.0 billion is includable in Pennzoil's 1988 taxable income. Pennzoil believes that this proposed adjustment is irrational and capricious and will not be sustained in court. The proposed tax deficiency relating to the disallowance of deductions is $124.6 million, and the estimated additional after-tax interest on this proposed deficiency would be approximately $46.7 million as of December 31, 1993. If the deductions for legal and related expenses were ultimately disallowed, Pennzoil would be required to pay the assessed taxes, plus the accrued interest. Pennzoil's consolidated financial statements do not include an accrual for the taxes that would be assessed as a result of the proposed disallowance of deductions or the related interest that would be due in such event.\nPennzoil has formally protested the IRS' proposed tax deficiency in writing within the required 30-day time period. The issue has been forwarded to the IRS Appeals Office, which is empowered to settle disputes with taxpayers, taking into account the hazards of litigation. If Pennzoil and the IRS Appeals Office are unable to reach a negotiated resolution of these tax issues, the IRS would forward a letter requiring Pennzoil to pay the assessed taxes, plus the accrued interest, within 90 days, unless Pennzoil files a petition with the United States Tax Court. If Pennzoil were to choose to file suit in the Tax Court, Pennzoil would not pay any taxes unless and until the Tax Court rendered a judgment against Pennzoil, but interest would continue to accrue on any taxes ultimately determined to be due. Alternatively, Pennzoil would be entitled to choose to pay the assessed taxes, plus the accrued interest, and file a claim for a refund in either the United States Court of Claims or the United States District Court for the Southern District of Texas. Paying the assessed taxes would halt the accrual of interest on any taxes finally determined to be owing by Pennzoil. In such event, any refund to Pennzoil would include a refund by the IRS of the prior interest paid by Pennzoil, as well as a payment by the IRS of additional interest accrued on the assessed taxes previously paid by Pennzoil. If litigation is necessary, a case of this kind would normally take several years in the absence of a settlement, which could occur at any stage in the process.\nPennzoil had cash and cash equivalents and current marketable securities and other investments of $946.6 million at December 31, 1993 and approximately $850 million at March 1, 1994. As a result of these available liquid assets and Pennzoil's available credit facilities, Pennzoil believes that it has the financial flexibility to deal with any eventuality that may occur in connection with the dispute with the IRS, including the possibility of paying the taxes assessed, plus the accrued interest, and suing for a refund if Pennzoil is not able to resolve the disputed matters through discussions with the IRS.\nDeferred income taxes originally resulted from the timing difference in the recognition of the settlement income for tax and financial reporting purposes under the deferred method of accounting for income taxes and not from the accrual of a contingency reserve for taxes due in the event Pennzoil's tax reporting position ultimately were determined to be incorrect. Under the liability method of accounting for income taxes adopted by Pennzoil in December 1992, since the excess of the financial reporting basis over the tax basis of Pennzoil's investment in Pennzoil Petroleum is not expected to result in a future income tax liability, deferred income taxes attributable to the 15,750,000 shares of Chevron common stock exchanged for the stock of Pennzoil Petroleum have been reflected as a reduction of the cost of Pennzoil's investment in Pennzoil Petroleum. Deferred income taxes remain related to the 9,035,518 shares of Chevron common stock currently owned by Pennzoil. Resolution of the tax dispute could result in an increase in the carrying cost of Pennzoil's investment in Pennzoil Petroleum and, therefore, an increase in future depreciation, depletion and amortization expense.\nCAPITAL EXPENDITURES. Total capital expenditures for 1993 were $485.1 million, including $11.4 million of interest capitalized, representing an increase of $322.5 million from comparable 1992 capital expenditure levels.\nThe table below summarizes the current 1994 capital budget by segment compared with 1993 and 1992 capital expenditures, excluding expenditures related to Pennzoil's acquisition of Pennzoil Petroleum in 1992. The capital budget is reassessed from time to time, and could, for example, be adjusted to reflect changes in oil and gas prices and other economic factors.\n- ---------------\n(1) The 1994 capital expenditures for this segment are net of expected recoveries from the gas utilization project in Azerbaijan.\nPennzoil currently expects to generate funds for its budgeted 1994 capital expenditures from cash flows from operations, borrowings under its revolving credit facility, available cash, proceeds from future debt issuances or a combination of some or all of the foregoing.\nENVIRONMENTAL MATTERS. Pennzoil continues to make capital and operating expenditures relating to the environment, including expenditures associated with the compliance with increasing federal, state and local environmental regulations. As they continue to evolve, environmental protection laws are expected to have an increasing impact on Pennzoil's operations. In connection with pollution abatement efforts related to current operations, Pennzoil made capital expenditures of approximately $35 million in 1993. The 1993 expenditures included $26.6 million for a diesel desulphurization and dewaxing project at the Atlas refinery in Shreveport, Louisiana, which was required to meet the new regulations promulgated under the federal Clean Air Act. Capital expenditures in connection with pollution abatement are expected to be approximately $18 million in 1994. Pennzoil's recurring operating expenditures relating to environmental compliance activities are not material.\nPennzoil is subject to certain laws and regulations relating to environmental remediation activities associated with past operations, such as the Comprehensive Environmental Response, Compensation, and Liability Act (\"CERCLA\"), the Resource Conservation and Recovery Act and similar state statutes. In response to liabilities associated with these activities, accruals have been established when reasonable estimates are possible. Such accruals primarily include estimated costs associated with remediation. Pennzoil has not used discounting in determining its accrued liabilities for environmental remediation, and no claims for possible recovery from third party insurers or other parties related to environmental costs have been recognized in Pennzoil's consolidated financial statements. Pennzoil adjusts the accruals when new remediation responsibilities are discovered and probable costs become estimable, or when current remediation estimates must be adjusted to reflect new information.\nPennzoil's assessment of the potential impact of these environmental laws is subject to uncertainty due to the difficult process of estimating and refining remediation costs that are subject to ongoing and evolving change. Initial estimates of remediation costs reflect a broad-based analysis of site conditions and potential environmental and human health impacts derived from preliminary site investigations (including soil and water analysis, migration pathways, and potential risk). Later changes to initial estimates may be based on additional site investigations, completion of feasibility studies (comparing and selecting from among various remediation methods and technologies) and risk assessments (determining the degree of current and future risk to the environment and human health, based on current scientific and regulatory criteria) and finally the\nactual implementation of the remediation plan. This process occurs over relatively long periods of time and is sequential, highly influenced by regulatory and community approval processes and subject to ongoing development of remediation technologies. Pennzoil's assessment analysis takes into account the state of the process each site is in at the time of estimation, the degree of uncertainty surrounding the estimates for each phase of remediation and other site specific factors.\nIn connection with Pennzoil's disposition of Purolator, Pennzoil and Purolator entered into an indemnification agreement pursuant to which Pennzoil has agreed to reimburse Purolator for costs and expenses of certain environmental remediation relating to a plant operated by Purolator in Elmira Heights, New York, and certain environmental remediation, if any, relating to one other site located near the Elmira facility and a landfill site located in Metamora, Michigan. The indemnification provided by Pennzoil applies to all remediation required by Purolator under CERCLA that has been identified at the Elmira facility in the Environmental Protection Agency's September 1992 Record of Decision with respect to the Elmira facility, but does not extend to certain additional environmental expenditures relating to the Elmira facility or other sites for which Purolator is or may be held responsible. Pennzoil had a reserve of $16.3 million and $17.7 million recorded with respect to its obligations under its indemnification agreement with Purolator as of December 31, 1993 and 1992, respectively.\nCertain of Pennzoil's subsidiaries are involved in matters in which it has been alleged that such subsidiaries are potentially responsible parties (\"PRPs\") under CERCLA or similar state legislation with respect to various waste disposal areas owned or operated by third parties. In addition, certain of Pennzoil's subsidiaries are involved in other environmental remediation activities, including the removal, inspection and replacement, as necessary, of underground storage tanks. As of December 31, 1993 and 1992, Pennzoil's consolidated balance sheet included accrued liabilities for environmental remediation of $33.1 million and $34.2 million, respectively, which amounts include reserves with respect to Pennzoil's obligations under its indemnification agreement with Purolator referred to in the previous paragraph. Of these reserves, $4.8 million and $4.9 million is reflected on the consolidated balance sheet as other current liabilities as of December 31, 1993 and 1992, respectively, and $28.3 million and $29.3 million is reflected as other liabilities as of December 31, 1993 and 1992, respectively. Pennzoil does not currently believe there is a reasonable possibility of incurring additional material amounts in excess of the current accruals recognized for such environmental remediation activities. With respect to the sites in which Pennzoil subsidiaries are PRPs, Pennzoil's conclusion is based in large part on (i) the availability of defenses to liability, including the availability of the \"petroleum exclusion\" under CERCLA and similar state laws, and\/or (ii) Pennzoil's current belief that its share of wastes at a particular site is or will be less than the threshold deemed by the Environmental Protection Agency or recognized by the relevant group of PRPs as being de minimis (and as a result Pennzoil's monetary exposure is not expected to be material).\nOTHER MATTERS. Pennzoil does not currently consider the impact of inflation to be significant in the businesses in which Pennzoil operates.\nReference is made to Notes 1 and 6 of Notes to Consolidated Financial Statements for a discussion of the impact that recently issued accounting standards are expected to have on Pennzoil's consolidated financial statements, when adopted.\nITEM 8.","section_7A":"","section_8":"ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.\nThe consolidated financial statements of Pennzoil, together with the report thereon of Arthur Andersen & Co. dated March 4, 1994 and the supplementary financial data specified by Item 302 of Regulation S-K, are set forth on pages through hereof. (See Item 14 for Index.)\nITEM 9.","section_9":"ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.\nNot Applicable.\nPART III\nITEM 10.","section_9A":"","section_9B":"","section_10":"ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.\nThe information appearing under the captions \"Nominees,\" \"Directors with Terms Expiring in 1995 and 1996\" and \"Compliance with Section 16(a) of the Exchange Act\" set forth within the section entitled \"Election of Directors\" in Pennzoil's definitive Proxy Statement to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934 is incorporated herein by reference. See also Item S-K 401(b) appearing in Part I of this Annual Report on Form 10-K.\nITEM 11.","section_11":"ITEM 11. EXECUTIVE COMPENSATION.\nThe information appearing under the captions \"Director Remuneration,\" \"Executive Compensation\" and \"Compensation Committee Interlocks and Insider Participation\" set forth within the section entitled \"Election of Directors\" in Pennzoil's definitive Proxy Statement to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934 is incorporated herein by reference.\nITEM 12.","section_12":"ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.\nThe information appearing under the caption \"Security Ownership of Directors and Officers\" set forth within the section entitled \"Election of Directors\" and under the caption \"Security Ownership of Certain Shareholders\" set forth within the section entitled \"Additional Information\" in Pennzoil's definitive Proxy Statement to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934 is incorporated herein by reference.\nITEM 13.","section_13":"ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.\nThe information appearing under the captions \"Compensation Committee Interlocks and Insider Participation\" and \"Certain Transactions Concerning Continuing Directors\" and \"Certain Transactions Concerning Retiring Directors\" set forth within the section entitled \"Election of Directors\" and under the caption \"Security Ownership of Certain Shareholders\" set forth within the section entitled \"Additional Information\" in Pennzoil's definitive Proxy Statement to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934 is incorporated herein by reference.\nPART IV\nITEM 14.","section_14":"ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.\n(A)(1) FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.\nThe supplementary financial data specified by Item 302 of Regulation S-K are included in the Supplemental Financial and Statistical Information -- Unaudited beginning on page.\n(A)(2) FINANCIAL STATEMENT SCHEDULES.\nOther schedules of Pennzoil and its subsidiaries are omitted because of the absence of the conditions under which they are required or because the required information is included in the financial statements or notes thereto.\n(A)(3) EXHIBITS.\n- ---------------\n* Incorporated by reference.\n+ Management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to the requirements of Item 14(c) of Form 10-K.\n(B) REPORTS ON FORM 8-K.\nDuring the fourth quarter of 1993, Pennzoil filed a Current Report on Form 8-K with the SEC dated as of November 26, 1993 to report the completion of the sale of 8,158,582 shares of the common stock of Chevron.\nSIGNATURES\nPURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.\nPENNZOIL COMPANY\nBy: JAMES L. PATE ---------------------------------- (JAMES L. PATE, PRESIDENT AND CHIEF EXECUTIVE OFFICER)\nDate: March 11, 1994\nPURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.\nREPORT OF INDEPENDENT PUBLIC ACCOUNTANTS\nTo Pennzoil Company:\nWe have audited the accompanying consolidated balance sheet of Pennzoil Company (a Delaware corporation) and subsidiaries as of December 31, 1993 and 1992, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1993. These financial statements and the schedules referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.\nWe conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.\nIn our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Pennzoil Company and subsidiaries as of December 31, 1993 and 1992, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1993, in conformity with generally accepted accounting principles.\nAs discussed in Note 8 to the Consolidated Financial Statements, in January 1994, the Company received a letter and examination report from the District Director of the Internal Revenue Service (\"IRS\") that proposes a tax deficiency based on an audit of the Company's 1988 federal income tax return. The proposed tax deficiency relates primarily to the Company's tax reporting position with regard to the receipt of $3.0 billion in 1988 in settlement of certain litigation. Deferred income taxes were provided in the Consolidated Financial Statements in 1988 in connection with the Company's receipt of the $3.0 billion settlement; however, no accrual has been made for interest on the proposed tax deficiency. The Company has filed a protest with the IRS asserting the Company's disagreement with the examination report; however, the ultimate outcome of this matter is not presently determinable.\nAs discussed in Note 2 to the Consolidated Financial Statements, as of January 1, 1992, the Company changed its method of accounting for income taxes. Also, as discussed in Note 6 to the Consolidated Financial Statements, as of January 1, 1991, the Company changed its method of accounting for postretirement benefit costs other than pensions.\nOur audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The financial statement schedules listed in Item 14(a)(2) are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic financial statements. The financial statement schedules have been subjected to the auditing procedures applied in our audits of the basic financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.\nARTHUR ANDERSEN & CO.\nHouston, Texas March 4, 1994\n[THIS PAGE INTENTIONALLY LEFT BLANK]\nPENNZOIL COMPANY AND SUBSIDIARIES\nCONSOLIDATED STATEMENT OF INCOME\nSee Notes to Consolidated Financial Statements.\nPENNZOIL COMPANY AND SUBSIDIARIES\nCONSOLIDATED BALANCE SHEET\nASSETS\nSee Notes to Consolidated Financial Statements.\nPENNZOIL COMPANY AND SUBSIDIARIES\nCONSOLIDATED BALANCE SHEET\nLIABILITIES AND SHAREHOLDERS' EQUITY\nSee Notes to Consolidated Financial Statements.\nPENNZOIL COMPANY AND SUBSIDIARIES\nCONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY\nSee Notes to Consolidated Financial Statements.\nPENNZOIL COMPANY AND SUBSIDIARIES\nCONSOLIDATED STATEMENT OF CASH FLOWS\nSee Notes to Consolidated Financial Statements.\nPENNZOIL COMPANY AND SUBSIDIARIES\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES --\nPrinciples of Consolidation --\nThe accompanying consolidated financial statements include all majority-owned subsidiaries of Pennzoil Company (\"Pennzoil\"). All significant intercompany accounts and transactions have been eliminated. Certain prior period items have been reclassified in the Consolidated Financial Statements in order to conform with the current year presentation. The results of operations of Pennzoil Petroleum Company (\"Pennzoil Petroleum\") have been included in Pennzoil's consolidated financial statements subsequent to October 30, 1992 (see Note 10).\nMarketable Securities and Other Investments --\nAt December 31, 1993, marketable securities and other investments included in current assets were comprised of domestic commercial paper, Federal National Mortgage Association notes, a certificate of deposit and treasury bills.\nMarketable securities and other investments are carried at the lower of aggregate cost or market value, as shown below.\nAs of December 31, 1993 and 1992, Pennzoil beneficially owned 9,035,518 shares and 17,194,100 shares, respectively, of the common stock of Chevron Corporation (\"Chevron\"). At March 4, 1994, the closing price for Chevron common stock on the New York Stock Exchange was $88.25 per share. Realized gains on Pennzoil's remaining investment in Chevron common stock could be limited as a result of the issuance of Pennzoil's 6 1\/2% Exchangeable Senior Debentures due January 15, 2003 (the \"6 1\/2% Debentures\") and 4 3\/4% Exchangeable Senior Debentures due October 1, 2003 (the \"4 3\/4% Debentures\"), all of which are exchangeable at the option of the holders thereof for shares of Chevron common stock owned by Pennzoil. Reference is made to Note 3 for additional information.\nIn November 1993, Pennzoil sold 8,158,582 shares of Chevron common stock in a block trade on the New York Stock Exchange for a price of $89.00 per share before commissions ($88.38 per share net of commissions). The sale resulted in a net realized gain of $137.0 million ($171.6 million before tax), or $3.25 per share.\nPENNZOIL COMPANY AND SUBSIDIARIES\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)\nThe cost of the securities sold is based on the average cost of each security held at the time of sale.\nOther income effects from marketable securities and other investments are discussed under the caption \"Investment and Other Income, Net\" below.\nIn May 1993, the Financial Accounting Standards Board (\"FASB\") issued a new standard on accounting for certain investments in debt and equity securities. This standard requires that, except for debt securities classified as \"held-to-maturity securities,\" investments in debt and equity securities must be reported at fair value. As a result of the standard, Pennzoil's remaining investment in Chevron common stock will be reported at fair value, with unrealized gains or losses excluded from earnings and reported as a separate component of shareholders' equity. Adoption of the standard by Pennzoil is required effective January 1, 1994. Based on December 31, 1993 fair values, adoption of the standard would increase shareholders' equity by approximately $107 million.\nInvestment and Other Income, Net --\nOther revenues, net of related expenses, are included in investment and other income, net, and consist of the following:\nSubstantially all interest and dividend income is from marketable securities and other cash investments.\nReceivables --\nCurrent receivables include trade accounts and notes receivable and are net of allowances for doubtful accounts of $10.0 million in 1993 and $10.1 million in 1992. Long-term receivables consist of notes receivable and are net of allowances for doubtful accounts of $4.2 million in 1993 and $8.2 million in 1992.\nAt December 31, 1993 and 1992, current receivables included notes receivable of $12.6 million and $13.0 million, respectively. Other assets included long-term notes receivable of $44.7 million and $31.8 million at December 31, 1993 and 1992, respectively.\nIn May 1993, the FASB issued a new standard on accounting by creditors for impairment of loans. This standard requires certain impaired loans to be measured based on the present value of expected future cash flows discounted at the loan's effective interest rate or, as a practical expedient, at the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. Adoption of the standard by Pennzoil is required no later than the first quarter of 1995, although earlier implementation is permitted. Pennzoil currently expects to adopt the standard effective January 1, 1995. Based on a preliminary review, Pennzoil does not expect that adoption of the standard will have a material effect on its financial condition or results of operations.\nPENNZOIL COMPANY AND SUBSIDIARIES\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)\nInventories --\nA majority of inventories are reported at cost using the last-in, first-out (\"LIFO\") method, which is lower than market. Substantially all other inventories are reported at cost using the first-in, first-out method. Inventories valued on the LIFO method totaled $131.2 million at December 31, 1993 and $134.3 million at December 31, 1992. The current cost of LIFO inventories was approximately $178.8 million and $207.9 million at December 31, 1993 and 1992, respectively.\nOil and Gas Producing Activities and Depreciation, Depletion and Amortization --\nPennzoil follows the successful efforts method of accounting for oil and gas operations. Under the successful efforts method, lease acquisition costs are capitalized. Significant unproved properties are reviewed periodically on a property-by-property basis to determine if there has been impairment of the carrying value, with any such impairment charged currently to exploration expense. All other unproved properties are generally aggregated and a portion of such costs estimated to be nonproductive, based on historical experience, is amortized on an average holding period basis.\nExploratory drilling costs are capitalized pending determination of proved reserves. If proved reserves are not discovered, the exploratory drilling costs are expensed. Other exploration costs are also expensed. All development costs are capitalized. Provision for depreciation, depletion and amortization is determined on a field-by-field basis using the unit-of-production method. Estimated costs of future dismantlement and abandonment of wells and production platforms, net of salvage values, are accrued as part of depreciation, depletion and amortization expense using the unit-of-production method; actual costs are charged to accumulated depreciation, depletion and amortization. The carrying amounts of proven properties are reviewed periodically and an impairment reserve is provided as conditions warrant.\nPennzoil follows the sales method of accounting for natural gas imbalances. Under the sales method, revenue is recognized on all production delivered by Pennzoil to its purchasers, regardless of Pennzoil's ownership interest in the respective property. At December 31, 1993, Pennzoil's gas imbalance reflects a net underproduced position of 17 billion cubic feet of gas. The company expects to recover this imbalance from its co-owners through future production or alternative arrangements.\nSulphur properties are generally depreciated and depleted on the unit-of-production method, except assets having an estimated life less than the estimated life of the mineral deposits, which are depreciated on the straight-line method.\nAll other properties are depreciated on straight-line or accelerated methods in amounts calculated to allocate the cost of properties over their estimated useful lives.\nEnvironmental Expenditures --\nEnvironmental expenditures are expensed or capitalized in accordance with generally accepted accounting principles. Liabilities for these expenditures are recorded when it is probable that obligations have been incurred and the amounts can be reasonably estimated.\nIntangible Assets --\nSubstantially all intangible assets, included in other assets in the accompanying consolidated balance sheet, relate to goodwill recognized in business combinations accounted for as purchases. Goodwill included in other assets in the accompanying consolidated balance sheet was $86.2 million at December 31, 1993 and $82.3 million at December 31, 1992, net of accumulated amortization of $17.2 million and $11.2 million, respectively. Goodwill is being amortized on a straight-line basis over periods ranging from 20 to 40 years. Amortization expense recorded during 1993 and 1992 was $8.1 million and $5.2 million, respectively.\nPENNZOIL COMPANY AND SUBSIDIARIES\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)\nCash Flow Information --\nFor purposes of the consolidated statement of cash flows, all highly liquid investments purchased with a maturity of three months or less are considered to be cash equivalents. The effect of changes in foreign exchange rates on cash balances has been immaterial. Cash used in operating activities includes cash payments for interest (net of amounts capitalized) of $183.6 million, $228.9 million and $246.8 million in 1993, 1992 and 1991, respectively. Interest capitalized for 1993, 1992 and 1991 was $11.4 million, $8.7 million and $10.4 million, respectively. Income taxes paid, net of refunds, during 1993, 1992 and 1991 were $5.5 million, $2.2 million and $13.7 million, respectively.\nChanges in operating assets and liabilities, net of effects from the purchases of equity interests in certain businesses acquired, consist of the following:\nEarnings Per Share --\nEarnings per share are computed based on the weighted average shares of common stock outstanding. The average shares used in earnings per share computations for the years 1993, 1992 and 1991 were 42,187,739, 40,582,451 and 40,346,652, respectively.\nForeign Operations --\nConsolidated income (loss) from continuing operations before income tax includes losses from foreign operations of $17.3 million, $21.7 million and $10.0 million in 1993, 1992 and 1991, respectively.\n(2) INCOME TAXES --\nAccounting for Income Taxes --\nIn December 1992, Pennzoil announced its decision to change its method of accounting for income taxes by adopting the new requirements of Statement of Financial Accounting Standards (\"SFAS\") No. 109, \"Accounting for Income Taxes,\" effective as of January 1, 1992. Previous 1992 interim period results were restated as a result of the adoption. Prior year financial statements have not been restated to reflect the new accounting method. As a result of adopting SFAS No. 109, Pennzoil recognized a cumulative, one-time benefit from the change in accounting principle for periods prior to 1992 of $115.7 million, or $2.85 per share, as of the first quarter of 1992. In addition to the cumulative effect, income from continuing operations for the year ended December 31, 1992, increased $3.4 million ($4.5 million before tax), or $.08 per share, associated with adopting the new standard.\nSFAS No. 109 requires recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Prior to adoption of SFAS No. 109, deferred income taxes resulted from timing differences in the recognition of revenue and expense for tax and financial purposes.\nPENNZOIL COMPANY AND SUBSIDIARIES\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)\nFederal, State and Foreign --\nFederal, state and foreign income tax expense (benefit) for continuing operations consists of the following:\nReference is made to Note 3 for information regarding the tax benefit applicable to the extraordinary loss on the early retirement of debt. In addition, reference is made to Note 6 for information regarding the deferred tax benefit applicable to the cumulative effect of the change in accounting for postretirement benefit costs other than pensions.\nPennzoil's net deferred tax liability is as follows:\nTemporary differences and carryforwards which gave rise to significant portions of deferred tax assets and liabilities are as follows:\nPENNZOIL COMPANY AND SUBSIDIARIES\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)\nPrior to adopting SFAS No. 109, the sources of timing differences resulting from the recognition of revenue and expense for tax and financial reporting purposes and the tax effect of each were as follows:\nThe principal items accounting for the difference in income taxes on income from continuing operations computed at the federal statutory rate and as recorded are as follows:\nIn August 1993, the Omnibus Budget Reconciliation Act of 1993 was enacted, establishing a new 35% corporate income tax rate effective January 1, 1993. As a result of the increase in the marginal income tax rate and other tax law changes, Pennzoil recorded a one-time, non-cash charge of approximately $16 million, or $.38 per share, in the third quarter of 1993 to adjust its deferred income tax liabilities and assets for the effect of the change in income tax rates.\nThe tax liability resulting from the November 1993 sale of 8,158,582 shares of Chevron common stock was reduced by $25.5 million as a result of the utilization of a net operating loss carryforward (see Note 1). Realization of the net operating loss carryforward resulted in the reversal of a valuation allowance related to the deferred tax asset.\nAs of December 31, 1993, Pennzoil had a United States net operating loss carryforward of approximately $133 million, which is available to reduce future regular income taxes payable. Additionally, for purposes of determining alternative minimum tax, an approximately $7 million net operating loss is available to offset future alternative minimum taxable income. Utilization of these regular and alternative minimum tax net operating losses, to the extent generated in separate return years, is limited based on the separate taxable\nPENNZOIL COMPANY AND SUBSIDIARIES\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)\nincome of the subsidiary, or its successor, generating the loss. If not used, these carryovers will expire in the years 1998 to 2004. In addition, Pennzoil has approximately $195 million of alternative minimum tax credits indefinitely available to reduce future regular tax liability to the extent it exceeds the related alternative minimum tax otherwise due. All net operating loss and credit carryover amounts are subject to examination by the tax authorities.\nReference is made to Note 8 for information regarding a letter and examination report received from the District Director of the Internal Revenue Service (\"IRS\") in January 1994 that proposes a tax deficiency based on an audit of Pennzoil's 1988 federal income tax return.\n(3) DEBT --\nLong-term debt outstanding was as follows:\nIn August 1993, Pennzoil entered into an amended and restated credit facility with a group of banks that provides for up to $600.0 million of unsecured revolving credit borrowings through August 19, 1994, with any outstanding borrowings on such date being converted into a term credit facility terminating on September 1, 1995. A facility fee of .15% per annum is payable on the aggregate amount of the banks' commitments. This amended and restated credit facility replaces and supersedes the previous revolving credit facilities of Pennzoil and Pennzoil Exploration and Production Company (\"PEPCO\"), a wholly owned subsidiary of Pennzoil.\nPENNZOIL COMPANY AND SUBSIDIARIES\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)\nBorrowings under the facility totaled $195.0 million at December 31, 1993. The average interest rate applicable to amounts outstanding under this facility and the previous revolving credit facilities of Pennzoil and PEPCO was 3.59% during 1993.\nPrior to August 1993, PEPCO had a revolving credit facility with a group of banks to provide for unsecured borrowings. A commitment fee of .20% per annum was payable on the average daily unborrowed amount under the facility. Outstanding borrowings under this facility totaled $72.1 million at December 31, 1992. The average interest rate applicable to amounts outstanding under this facility was 4.10% during 1992.\nAlso prior to August 1993, Pennzoil had a $500.0 million revolving credit facility with a group of banks to provide for unsecured revolving credit borrowings. A commitment fee of .15% per annum was payable on the average daily unborrowed amount under the facility. Outstanding borrowings under this facility totaled $207.7 million at December 31, 1992. The average interest rate applicable to amounts outstanding under this facility was 4.15% during 1992.\nPennzoil's Board of Directors has increased the limit on the aggregate amount of commercial paper that Pennzoil may issue under its domestic commercial paper program and\/or its Euro-commercial paper program from $150.0 million to $250.0 million. Borrowings under Pennzoil's commercial paper facilities totaled $249.4 million and $147.3 million at December 31, 1993 and 1992, respectively, and are included in notes payable in the accompanying consolidated balance sheet. The average interest rates applicable to outstanding commercial paper were 3.26% and 3.81% during 1993 and 1992, respectively.\nPennzoil has several short-term variable-rate credit arrangements with certain banks. Pennzoil's Board of Directors has limited borrowings under these credit arrangements to $200.0 million. Outstanding borrowings totaled $183.6 million and $192.1 million at December 31, 1993 and 1992, respectively, and are included in notes payable in the accompanying consolidated balance sheet. The average interest rates applicable to amounts outstanding under these arrangements were 3.35% and 3.87% during 1993 and 1992, respectively. None of the banks has any obligation to continue to extend credit after the maturities of outstanding borrowings or to extend the maturities of any borrowings under these credit arrangements.\nIn December 1992, Pennzoil called for redemption $272.9 million principal amount of indebtedness (including $250.0 million of Pennzoil's 10 5\/8% debentures due 2018 and $22.9 million of Pennzoil's 10% debentures due 2011), using proceeds from the disposition of Purolator Products Company (\"Purolator\"), from the disposition of certain oil and gas properties and from cash contributed by Chevron to Pennzoil Petroleum for the benefit of Pennzoil. The redemptions were completed in February 1993. As of December 31, 1992, this indebtedness was defeased by placing funds required for the redemption with the trustee for the indebtedness. As a result, the funds deposited with the trustee for the redemption of the debentures and the principal amount of the indebtedness are not reflected in Pennzoil's consolidated balance sheet at December 31, 1992. The premiums and related unamortized discount and debt issue costs relating to these redemptions resulted in an extraordinary charge of $16.6 million ($25.2 million before tax), or $.41 per share, in the fourth quarter of 1992.\nIn 1993, Pennzoil completed public offerings of $402.5 million of the 6 1\/2% Debentures and $500.0 million of the 4 3\/4% Debentures. The 6 1\/2% Debentures and the 4 3\/4% Debentures are exchangeable at the option of the holders thereof at any time prior to maturity, unless previously redeemed, for shares of Chevron common stock owned by Pennzoil at exchange rates of 11.887 shares and 8.502 shares, respectively, per $1,000 principal amount of the 6 1\/2% Debentures and the 4 3\/4% Debentures (the equivalent of $84 1\/8 per share and $117 5\/8 per share, respectively), subject to adjustment in certain events. In lieu of delivering certificates representing shares of Chevron common stock in exchange for the 6 1\/2% Debentures and the 4 3\/4% Debentures, Pennzoil may, at its option, pay to any holder surrendering the 6 1\/2% Debentures and the 4 3\/4% Debentures an amount in cash equal to the market price of the shares for which the 6 1\/2% Debentures and the 4 3\/4% Debentures are\nPENNZOIL COMPANY AND SUBSIDIARIES\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)\nexchangeable. Pennzoil has deposited 9,035,518 shares of Chevron common stock deliverable in exchange for the 6 1\/2% Debentures and the 4 3\/4% Debentures with exchange agents.\nUnder the instruments governing the 6 1\/2% Debentures and the 4 3\/4% Debentures, Pennzoil may not pledge, mortgage, hypothecate or grant a security interest in, or permit any mortgage, pledge, security interest or other lien upon, the shares of Chevron common stock deposited with exchange agents and deliverable in exchange for the 6 1\/2% Debentures and the 4 3\/4% Debentures. Pennzoil may at any time obtain from the exchange agents or otherwise authorize or direct the exchange agents to release all or part of the 9,035,518 shares of Chevron common stock deposited with the exchange agents. However, in the event Pennzoil obtains or otherwise releases any shares of Chevron common stock subject to exchange, each holder of a 6 1\/2% Debenture or a 4 3\/4% Debenture will generally have the right, at such holder's option, to require Pennzoil to repurchase all or a portion of such holder's debentures at a premium.\nIn March 1993, using proceeds from the sale of the 6 1\/2% Debentures, Pennzoil redeemed $223.4 million principal amount of indebtedness (including $80.1 million of Pennzoil's 12 1\/8% and 12 1\/4% debentures due 2007, $100.0 million of Pennzoil's 9 1\/8% notes due 1996 and $43.3 million of Pennzoil's 9% debentures due 2001). The call premiums and related unamortized net premiums and debt issue costs relating to the redemption of these series of indebtedness resulted in a charge of $1.4 million, net of tax, or $.02 per share, for the first quarter of 1993. Also with such proceeds, approximately $23.3 million of additional indebtedness has been retired, repaid or repurchased in 1993 and $100.0 million principal amount of Pennzoil's 9% notes was retired upon maturity in May 1993.\nIn June 1993, Pennzoil called for redemption $96.1 million principal amount of indebtedness (including $66.1 million of Pennzoil's 10% debentures due 2011 and $30.0 million of Pennzoil's 10 1\/8% debentures due 2011). The redemptions were completed in July 1993. The funds used for these redemptions were obtained from (i) the cash proceeds from the completed sale of a subsidiary holding Pennzoil's Indonesian gold properties in January 1993, (ii) the cash proceeds from the sale in March 1993 of common stock of Pogo Producing Company held by Pennzoil and (iii) the cash payments received from Chevron from and as a result of the net cash flows from operations of the oil and gas properties of Pennzoil Petroleum through March 31, 1993. The premiums and related unamortized discount and debt issue costs relating to these redemptions resulted in an extraordinary charge of $4.7 million ($7.2 million before tax), or $.12 per share, in the second quarter of 1993.\nIn September 1993, Pennzoil called for redemption $292.5 million principal amount of indebtedness (including $120.0 million of Pennzoil's 10 1\/8% debentures due 2011, $111.0 million of Pennzoil's 10% debentures due 2011 and $61.5 million of Pennzoil's 9% debentures due 2017). The redemptions were completed in November 1993. The funds used for these redemptions were obtained primarily from the net proceeds from the sale in September 1993 of 5,000,000 shares of Pennzoil common stock (see Note 7). The premiums and related unamortized discount and debt issue costs relating to these redemptions resulted in an extraordinary charge of $13.7 million ($21.1 million before tax), or $.33 per share, in the third quarter of 1993.\nIn October 1993, using $350.0 million of the proceeds from the sale of the 4 3\/4% Debentures, Pennzoil reduced its borrowings outstanding under its unsecured revolving credit facility. Also from such proceeds, Pennzoil redeemed $24.0 million principal amount of indebtedness in November 1993 (including $21.3 million of Pennzoil's 8 3\/8% and 8 5\/8% debentures due 1996 and $2.7 million of Pennzoil's 8 3\/4% debentures due 2001). No significant gain or loss resulted from these early retirements.\nIn May 1993, Jiffy Lube International, Inc. (\"Jiffy Lube\"), a wholly owned subsidiary of Pennzoil, repurchased at face value $20.0 million of its unsecured promissory notes which were originally issued in connection with Jiffy Lube's debt restructuring in January 1990 (see Note 10). Also issued in connection with Jiffy Lube's debt restructuring was a series of unsecured non-interest bearing promissory notes maturing over\nPENNZOIL COMPANY AND SUBSIDIARIES\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)\nseven years in the aggregate principal amount of approximately $15.1 million at December 31, 1993 (with a present value of approximately $11.5 million at December 31, 1993), the payment of which is contingent upon the future profitability of Jiffy Lube. Jiffy Lube also has $18.8 million in outstanding mortgages on certain real estate and buildings with interest rates ranging from 6.3% to 11.0% and maturing through 2012. The book value of the collateral securing these mortgages was $19.7 million at December 31, 1993.\nAt December 31, 1993, amounts due within one year for Jiffy Lube include $17.4 million of the long-term mortgage debt described above that is in default as a result of the violation of certain covenants and cross-default provisions applicable to such debt. As a result, the applicable lenders could declare these obligations to be in default and exercise certain rights and remedies, including accelerating the maturity of the obligations so that they become immediately due and payable subject, in some cases, to certain notice periods and provisions allowing the curing of the defaults. Although these obligations are in technical default, Jiffy Lube has paid all principal and interest on such obligations when due.\nAt December 31, 1993, sinking fund obligations and maturities of long-term debt for the years ending December 31, 1994 to 1998 were $19.6 million, $200.6 million, $5.4 million, $6.0 million and $1.7 million, respectively. Such maturities include $3.5 million, $3.5 million and $4.6 million for the years ending December 31, 1995 to 1997, respectively, related to Jiffy Lube's non-interest bearing promissory notes, the payment of which is contingent upon the future profitability of Jiffy Lube. These maturities of long-term debt include $17.4 million of Jiffy Lube's long-term debt in technical default classified as due within one year as discussed above.\n(4) FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF CREDIT RISK --\nFinancial Instruments with Off-Balance-Sheet Risk --\nPennzoil is a party to various financial instruments with off-balance-sheet risk as part of its normal course of business, including financial guarantees and contractual commitments to extend financial guarantees, credit and other assistance to customers, franchisees and other third parties. These financial instruments involve, to varying degrees, elements of credit risk which are not recognized in Pennzoil's consolidated balance sheet. In addition, in connection with Pennzoil's disposition of Purolator, Pennzoil entered into an agreement with certain banks to provide contingent credit support for a Purolator credit facility and an agreement with a government agency with respect to guarantees of benefits under certain of Purolator's employee benefit plans.\nThe financial guarantees primarily relate to debt and lease obligation guarantees with expiration dates of up to twenty years issued to third parties to guarantee the performance of customers and franchisees in the fast lube industry. Commitments to extend credit are also provided to fast lube industry participants to finance equipment purchases, working capital needs and, in some cases, the acquisition of land and construction of improvements. Contractual commitments to extend credit and other assistance are in effect as long as certain conditions established in the respective contracts are met. Contractual commitments to extend financial guarantees are conditioned on the occurrence of specified events. The largest of these commitments is to provide a guarantee for letters of credit issued by third parties to meet the reinsurance requirements of Pennzoil's captive insurance subsidiary. This commitment has no stated maturity and is expected to vary in amount from year to year to meet the reinsurance requirements. Reserves established for reported and incurred but not reported insurance losses in the amount of $32.3 million and $30.7 million have been recognized in Pennzoil's consolidated balance sheet as of December 31, 1993 and 1992, respectively. The credit risk to Pennzoil is mitigated by the insurance subsidiary's portfolio of high-quality short-term investments used to collateralize the letter of credit. At December 31, 1993, the collateral was valued at approximately 137% of the credit risk.\nThe credit support for the Purolator credit facility is contingent upon the occurrence of an acceleration of the debt under the facility after an event of default, but only if and to the extent Purolator has incurred certain\nPENNZOIL COMPANY AND SUBSIDIARIES\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)\nenvironmental expenses not covered by an indemnification agreement pursuant to which Pennzoil agreed to indemnify Purolator against necessary costs and expenses of certain environmental remediation activities currently required by the Environmental Protection Agency (\"EPA\") at specified Purolator sites (the indemnification is limited to remediation required solely as a result of contamination prior to the agreement) (see Note 8). In such event, Pennzoil would be required to pay to the banks an amount equal to the amount expended by Purolator for such unindemnified environmental expenses (in which case Purolator would become liable to Pennzoil for any such amount). The maximum amount of any such contingent payment is permanently reduced over time as the maximum amount available under the Purolator credit facility declines. As of December 31, 1993, the maximum amount of the contingent credit support was $23.1 million.\nIn connection with Pennzoil's disposition of Purolator in December 1992, Pennzoil entered into an agreement with the Pension Benefit Guaranty Corporation (\"PBGC\"), pursuant to which Pennzoil agreed that, for up to five years, in the event of the termination of any or all the employee benefit plans of Purolator that are subject to Title IV of the Employee Retirement Income Security Act of 1974, as amended (\"ERISA\"), and the inability of the PBGC in good faith to collect the amounts of any unfunded benefit liabilities under Purolator's plans from Purolator or any person controlling Purolator, Pennzoil would guarantee up to $7.0 million of such unfunded benefit liabilities.\nFollowing are the amounts related to Pennzoil's financial guarantees and contractual commitments to extend financial guarantees, credit and other assistance as of December 31, 1993 and 1992.\nPennzoil's exposure to credit loss in the event of nonperformance by the other parties to these financial instruments is represented by the contractual or notional amounts. Decisions to extend financial guarantees and commitments and the amount of remuneration and collateral required are based on management's credit evaluation of the counterparties on a case-by-case basis. The collateral held varies but may include accounts receivable, inventory, equipment, real property, securities and personal assets. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.\nConcentrations of Credit Risk --\nPennzoil extends credit to various companies in the oil and gas, motor oil and automotive products, fast lube and sulphur industries in the normal course of business. Within these industries, certain concentrations of credit risk exist. These concentrations of credit risk may be similarly affected by changes in economic or other conditions and may, accordingly, impact Pennzoil's overall credit risk. However, management believes that consolidated receivables are well diversified, thereby reducing potential credit risk to Pennzoil, and that allowances for doubtful accounts are adequate to absorb estimated losses as of December 31, 1993. Pennzoil's policies concerning collateral requirements and the types of collateral obtained for on-balance-sheet financial\nPENNZOIL COMPANY AND SUBSIDIARIES\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)\ninstruments are the same as those described above under \"Financial Instruments with Off-Balance-Sheet Risk.\"\nAt December 31, 1993, receivables related to these group concentrations in the oil and gas, motor oil and automotive products, fast lube and sulphur industries were $182.8 million, $181.4 million, $36.9 million and $8.9 million, respectively, compared with $140.5 million, $184.5 million, $32.3 million and $20.3 million, respectively, at December 31, 1992.\n(5) FAIR VALUE OF FINANCIAL INSTRUMENTS --\nThe carrying amounts of Pennzoil's short-term financial instruments, including cash equivalents, current marketable securities and other investments, trade accounts receivable, trade accounts payable and notes payable, approximate their fair values based on the short maturities of those instruments and on quoted market prices, where such prices are available.\nThe following table summarizes the carrying amounts and estimated fair values of Pennzoil's other financial instruments.\nThe following methods and assumptions were used to estimate the fair value of each class of financial instrument included above:\nNotes Receivable --\nThe estimated fair value of notes receivable is based on discounting future cash flows using estimated year-end interest rates at which similar loans have been made to borrowers with similar credit ratings for the same remaining maturities.\nLong-Term Investments --\nThe estimated fair value of long-term investments is based on quoted market prices at year end for those investments.\nLong-Term Debt --\nThe estimated fair value of Pennzoil's long-term debt is based on quoted market prices or, where such prices are not available, on estimated year-end interest rates of debt with the same remaining maturities and credit quality.\nOff-Balance-Sheet Financial Instruments --\nThe estimated fair value of certain financial guarantees written and commitments to extend financial guarantees is based on the estimated cost to Pennzoil to obtain third party letters of credit to relieve Pennzoil\nPENNZOIL COMPANY AND SUBSIDIARIES\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)\nof its obligations under such guarantees or, in the case of certain lease guarantees related to Jiffy Lube franchisees, the present value of expected future cash flows using a discount rate commensurate with the risks involved. Reference is made to Note 4 for further information regarding off-balance-sheet financial instruments.\n(6) BENEFIT PLANS --\nRetirement Plans --\nSubstantially all employees are covered by non-contributory retirement plans which provide benefits based on the participants' years of service and compensation or stated amounts for each year of service. Annual contributions to the plans are made in accordance with the minimum funding provisions of ERISA where applicable, but not in excess of the maximum amount that can be deducted for federal income tax purposes.\nNet periodic pension cost for 1993, 1992 and 1991 included the following components:\nActual return on plans' assets was $2.6 million, $6.2 million and $30.4 million in 1993, 1992 and 1991, respectively.\nAssumptions used were:\nPENNZOIL COMPANY AND SUBSIDIARIES\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)\nThe following table sets forth the plans' funded status and amounts recognized in the consolidated balance sheet:\nThe plans' assets include equity securities, common trust funds and various debt securities.\nUnrecognized prior service cost is amortized on a straight-line basis over a period equal to the average of the expected future service of active employees expected to receive benefits under the respective plans.\nPostretirement Health Care and Life Insurance Benefits --\nPennzoil sponsors several unfunded defined benefit postretirement plans covering most salaried and hourly employees. The plans provide medical and life insurance benefits and are, depending on the type of plan, either contributory or non-contributory. The accounting for the health care plans anticipates future cost-sharing changes that are consistent with Pennzoil's expressed intent to increase, where possible, contributions from future retirees to a minimum of 30% of the total annual cost. Furthermore, Pennzoil's future contributions for both current and future retirees have been limited, where possible, to 200% of the average 1992 benefit cost.\nIn December 1991, Pennzoil announced its decision to change its method of accounting for postretirement benefit costs other than pensions by adopting the new requirements of SFAS No. 106, \"Employers' Accounting for Postretirement Benefits Other Than Pensions,\" effective as of January 1, 1991. Previous 1991\nPENNZOIL COMPANY AND SUBSIDIARIES\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)\ninterim period results were restated as a result of adopting the new standard. Pennzoil recorded a charge of $49.0 million ($74.2 million before tax), or $1.21 per share, as of the first quarter of 1991 to reflect the cumulative effect of the change in accounting principle for periods prior to 1991. The first quarter charge included $11.4 million ($17.3 million before tax) related to the cumulative effect of the change in accounting principle associated with Purolator. In addition to the cumulative effect, Pennzoil's 1991 postretirement health care and life insurance costs increased $1.7 million ($2.6 million before tax), or $.04 per share, as a result of adopting the new standard.\nNet periodic postretirement benefit cost for 1993, 1992 and 1991 included the following components:\nThe following table sets forth the plans' combined status reconciled with the amount included in the consolidated balance sheet at December 31, 1993 and 1992:\nFor measurement purposes, an 11% annual rate of increase in the per capita cost of covered health care benefits was assumed for 1994; the rate was assumed to decrease gradually to 7% through the year 2001 and remain at that level thereafter. The health care cost trend rate assumption has a significant effect on the amount of the obligation and periodic cost reported. An increase in the assumed health care cost trend rates by 1% in each year would increase the accumulated postretirement benefit obligation as of December 31, 1993 by $3.4 million and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for the year then ended by $.3 million.\nThe weighted-average discount rates used in determining the accumulated postretirement benefit obligation as of December 31, 1993 and 1992 were 7.5% and 8.25%, respectively.\nContribution Plans --\nPennzoil has defined contribution plans covering substantially all employees who have completed one year of service. Employee contributions of not less than 1% to not more than 6% of each covered employee's compensation are matched between 50% and 100% by Pennzoil. The cost of such company contributions totaled $9.4 million in 1993, $9.1 million in 1992 and $8.1 million in 1991.\nPENNZOIL COMPANY AND SUBSIDIARIES\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)\nPostemployment Benefits --\nIn November 1992, the FASB issued a new standard on accounting for postemployment benefits. This standard requires employers to recognize the obligation to provide postemployment benefits if the obligation is attributable to employees' services already rendered, employees' rights to those benefits accumulate or vest, payment of the benefits is probable and the amounts can be reasonably estimated. If those four conditions are not met, the employer should recognize the obligation to provide postemployment benefits when it is probable that a liability has been incurred and the amount can be reasonably estimated. Adoption of the standard by Pennzoil is required effective January 1, 1994. The standard does not represent a significant change from Pennzoil's current policy of recognizing postemployment benefit costs. As such, adoption of the standard will not have a material effect on Pennzoil's financial condition or results of operations.\n(7) CAPITAL STOCK AND STOCK OPTIONS --\nPennzoil's Restated Certificate of Incorporation authorizes the issuance of up to 9,747,720 shares of preferred stock. None of these shares were issued or outstanding at December 31, 1993.\nPennzoil's Restated Certificate of Incorporation authorizes the issuance of up to 27,862,924 shares of preference common stock. None of these shares were issued or outstanding at December 31, 1993. Dividend rights on any preference common stock are junior to the rights of any preferred stock and senior to the rights of Pennzoil's common stock.\nIn September 1993, Pennzoil completed the sale, pursuant to underwritten public offerings, of 5,000,000 shares of its common stock at a price of $62.50 per share. As of December 31, 1993, 45,910,307 shares of Pennzoil common stock were issued and outstanding.\nThe net proceeds from the sale of the shares of Pennzoil common stock offered, prior to the payment of expenses, totaled approximately $303.3 million. Primarily utilizing funds from such offerings, Pennzoil redeemed an aggregate of $292.5 million principal amount of Pennzoil's debentures (see Note 3). Pro forma earnings per share for the year ended December 31, 1993, assuming the stock offering and redemption of debentures had occurred at the beginning of 1993, was $3.43 per share.\nAt December 31, 1993, Pennzoil had 2,694,418 shares of common stock reserved for issuance upon the exercise of stock options and the maturity of conditional stock awards.\nAt December 31, 1993, Pennzoil had nonqualified and incentive stock option plans covering a total of 2,620,565 shares of common stock (compared to 2,673,848 shares at December 31, 1992), of which 605,140 shares were available for granting of options. Options granted under the plans have a maximum term of ten years and are exercisable under the terms of the respective option agreements at the market price of the common stock at the date of grant, subject to antidilution adjustments in certain circumstances. At December 31, 1993, expiration dates for the outstanding options ranged from March 1994 to December 2003 and the average exercise price per share was $63.55. Payment of the exercise price may be made in cash or in shares of common stock previously owned by the optionee, valued at the then-current market value.\nPENNZOIL COMPANY AND SUBSIDIARIES\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)\nAdditional information with respect to the stock option plans is as follows:\nIn 1993, 24,150 units of common stock were granted to selected employees under Pennzoil's conditional stock award programs. Awards under the programs are made in the form of units which entitle the recipient to receive, at the end of a specified period, subject to certain conditions of continued employment, a number of shares equal to the number of units granted. At December 31, 1993, units covering 73,853 shares were outstanding (compared to 50,033 shares at December 31, 1992). In 1992, 24,200 shares of common stock were distributed to selected employees upon maturity of awards granted under Pennzoil's conditional stock award programs.\n(8) COMMITMENTS AND CONTINGENCIES --\nTax Dispute --\nIn 1988, Pennzoil received $3.0 billion from Texaco Inc. (\"Texaco\") in settlement of all litigation between Pennzoil and Texaco arising out of Texaco's tortious interference with Pennzoil's contractual rights to purchase a minority interest in Getty Oil Company. From 1989 through 1991, Pennzoil acquired 32,944,100 shares of Chevron common stock with approximately $2.2 billion of the net Texaco settlement proceeds.\nFor financial reporting purposes, Pennzoil reported an extraordinary gain of $1.656 billion (after expenses and estimated current and deferred taxes), or $42.62 per share, associated with the $3.0 billion in cash received from Texaco in April 1988.\nFor federal income tax purposes, Pennzoil originally reported that it recognized no gain upon receipt of the $3.0 billion and obtained no tax basis in the Chevron shares. Pennzoil's reporting position was based on its belief that, under Section 1033 of the Internal Revenue Code, the $3.0 billion received from Texaco was an amount realized as a result of the involuntary conversion of property and that the Chevron shares were similar or related in service or use to the property converted by Texaco. During 1990 and 1991, Pennzoil recalculated its 1988 federal income tax liability to recognize approximately $800 million of income, being the excess of the $3.0 billion received over the amount expended to acquire Chevron shares. As a result of these adjustments, current taxes were increased, and deferred taxes were decreased, by $120.4 million in 1990 and $13.2 million in 1991. In addition, Pennzoil paid interest on such taxes of $17.6 million during 1990 and $3.7 million in 1991.\nIn January 1994, Pennzoil received a letter and examination report from the District Director of the IRS that proposes a tax deficiency based on an audit of Pennzoil's 1988 federal income tax return. The examination report proposes two principal adjustments with which Pennzoil disagrees.\nThe first adjustment challenges Pennzoil's position under Section 1033 of the Internal Revenue Code that (i) at least $2.2 billion of the $3.0 billion cash payment received from Texaco in 1988 in settlement of certain litigation was realized as a result of the involuntary conversion of property and (ii) the shares of Chevron common stock purchased with $2.2 billion of the net Texaco settlement proceeds were similar or related in service or use to the property converted by Texaco. Although these issues have not been resolved, Pennzoil\nPENNZOIL COMPANY AND SUBSIDIARIES\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)\nbelieves that its position is sound, and it intends to contest the proposed adjustment in court unless an acceptable settlement is reached. The proposed tax deficiency relating to this proposed adjustment is $550.9 million, net of available offsets. Pennzoil estimates that the additional after-tax interest on this proposed deficiency would be approximately $234.3 million as of December 31, 1993. If Pennzoil's position is not sustained by the courts, Pennzoil would be required to pay the assessed taxes, plus the accrued interest, and Pennzoil's tax basis in the shares of common stock of Chevron and Pennzoil Petroleum (see Note 10) would be Pennzoil's cost. Pennzoil's consolidated financial statements do not include an accrual for the interest that would be due in such event.\nThe second adjustment proposed by the IRS would permanently capitalize, rather than allow Pennzoil to deduct, approximately $366 million incurred by Pennzoil in 1988 and earlier years for litigation and related expenses in connection with the Texaco settlement, even if it were determined that the entire $3.0 billion is includable in Pennzoil's 1988 taxable income. Pennzoil believes that this proposed adjustment is irrational and capricious and will not be sustained in court. The proposed tax deficiency relating to the disallowance of deductions is $124.6 million, and the estimated additional after-tax interest on this proposed deficiency would be approximately $46.7 million as of December 31, 1993. If the deductions for legal and related expenses were ultimately disallowed, Pennzoil would be required to pay the assessed taxes, plus the accrued interest. Pennzoil's consolidated financial statements do not include an accrual for the taxes that would be assessed as a result of the proposed disallowance of deductions or the related interest that would be due in such event.\nPennzoil has formally protested the IRS' proposed tax deficiency in writing within the required 30-day time period. The issue has been forwarded to the IRS Appeals Office, which is empowered to settle disputes with taxpayers, taking into account the hazards of litigation. If Pennzoil and the IRS Appeals Office are unable to reach a negotiated resolution of these tax issues, the IRS would forward a letter requiring Pennzoil to pay the assessed taxes, plus the accrued interest, within 90 days, unless Pennzoil files a petition with the United States Tax Court. If Pennzoil were to choose to file suit in the Tax Court, Pennzoil would not pay any taxes unless and until the Tax Court rendered a judgment against Pennzoil, but interest would continue to accrue on any taxes ultimately determined to be due. Alternatively, Pennzoil would be entitled to choose to pay the assessed taxes, plus the accrued interest, and file a claim for a refund in either the United States Court of Claims or the United States District Court for the Southern District of Texas. Paying the assessed taxes would halt the accrual of interest on any taxes finally determined to be owing by Pennzoil. In such event, any refund to Pennzoil would include a refund by the IRS of the prior interest paid by Pennzoil, as well as a payment by the IRS of additional interest accrued on the assessed taxes previously paid by Pennzoil. If litigation is necessary, a case of this kind would normally take several years in the absence of a settlement, which could occur at any stage in the process.\nPennzoil had cash and cash equivalents and current marketable securities and other investments of $946.6 million at December 31, 1993 and approximately $850 million at March 1, 1994. As a result of these available liquid assets and Pennzoil's available credit facilities, Pennzoil believes that it has the financial flexibility to deal with any eventuality that may occur in connection with the dispute with the IRS, including the possibility of paying the taxes assessed, plus the accrued interest, and suing for a refund if Pennzoil is not able to resolve the disputed matters through discussions with the IRS.\nDeferred income taxes originally resulted from the timing difference in the recognition of the settlement income for tax and financial reporting purposes under the deferred method of accounting for income taxes and not from the accrual of a contingency reserve for taxes due in the event Pennzoil's tax reporting position ultimately were determined to be incorrect. Under the liability method of accounting for income taxes adopted by Pennzoil in December 1992, since the excess of the financial reporting basis over the tax basis of Pennzoil's investment in Pennzoil Petroleum is not expected to result in a future income tax liability, deferred income taxes attributable to the 15,750,000 shares of Chevron common stock exchanged for the stock of Pennzoil\nPENNZOIL COMPANY AND SUBSIDIARIES\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)\nPetroleum have been reflected as a reduction of the cost of Pennzoil's investment in Pennzoil Petroleum. Deferred income taxes remain related to the 9,035,518 shares of Chevron common stock currently owned by Pennzoil (see Note 10).\nCurtailment Litigation --\nUnited Gas Pipe Line Company (\"United\"), a former subsidiary of Pennzoil, curtailed deliveries of natural gas to its customers in accordance with priorities contained in its tariffs during the 1970s and early 1980s. Several lawsuits filed by industrial and power plant \"direct sale\" customers for damages allegedly caused by curtailments were brought against United, and Pennzoil was joined as a defendant in five of these suits. The only remaining suit against United involving Pennzoil is an action filed in the United States District Court for the Southern District of Mississippi on November 14, 1974 by Mississippi Power Co. (\"MPCo\"), which alleges damages of approximately $44.7 million and seeks to have such damages trebled pursuant to federal antitrust laws. In related proceedings before the Federal Energy Regulatory Commission (\"FERC\"), MPCo has introduced evidence indicating that its claimed damages (before trebling) have increased to approximately $88.2 million. The judge in the MPCo case has referred certain issues to the FERC and stayed all proceedings pending action by the FERC. No action has been taken to remove the stay. Pennzoil believes that it has no liability for any action it has taken or omitted to take, that it can successfully defend itself in the action and that the final outcome of the case will not have a material adverse effect on its financial condition or results of operations.\nEaton v. Pennzoil Company --\nIn December 1992, two former employees of Pennzoil filed a purported class action lawsuit in the United States District Court for the Southern District of Texas, Galveston Division. The suit alleges that one of Pennzoil's deferred compensation plans had been improperly administered because of the absence of an adjustment under the plan for a significant event occurring in 1988 in determining the value of awards under the plan maturing in 1988 and 1990. The plaintiffs allege breach of contract, common law fraud and breach of fiduciary duty and seek compensatory and consequential damages of $40.0 million and punitive damages of $400.0 million. Pennzoil believes that the plan was administered properly and the lawsuit is without merit. In October 1993, the court granted Pennzoil's motion for summary judgment. The plaintiffs have appealed. Pennzoil believes that the outcome of this suit will not have a material adverse effect on its financial condition or results of operations.\nEnvironmental Matters --\nPennzoil is subject to certain laws and regulations relating to environmental remediation activities associated with past operations, such as the Comprehensive Environmental Response, Compensation, and Liability Act (\"CERCLA\"), the Resource Conservation and Recovery Act and similar state statutes. In response to liabilities associated with these activities, accruals have been established when reasonable estimates are possible. Such accruals primarily include estimated costs associated with remediation. Pennzoil has not used discounting in determining its accrued liabilities for environmental remediation, and no claims for possible recovery from third party insurers or other parties related to environmental costs have been recognized in Pennzoil's consolidated financial statements. Pennzoil adjusts the accruals when new remediation responsibilities are discovered and probable costs become estimable, or when current remediation estimates must be adjusted to reflect new information.\nIn connection with Pennzoil's disposition of Purolator, Pennzoil and Purolator entered into an indemnification agreement pursuant to which Pennzoil has agreed to reimburse Purolator for costs and expenses of certain environmental remediation relating to a plant operated by Purolator in Elmira Heights, New York, and certain environmental remediation, if any, relating to one other site located near the Elmira facility and a\nPENNZOIL COMPANY AND SUBSIDIARIES\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)\nlandfill site located in Metamora, Michigan. The indemnification provided by Pennzoil applies to all remediation required by Purolator under CERCLA that has been identified at the Elmira facility in the EPA's September 1992 Record of Decision with respect to the Elmira facility, but does not extend to certain additional environmental expenditures relating to the Elmira facility or other sites for which Purolator is or may be held responsible. Pennzoil had a reserve of $16.3 million and a $17.7 million recorded with respect to its obligations under its indemnification agreement with Purolator as of December 31, 1993 and 1992, respectively. Reference is made to Note 11 for additional information.\nCertain of Pennzoil's subsidiaries are involved in matters in which it has been alleged that such subsidiaries are potentially responsible parties (\"PRPs\") under CERCLA or similar state legislation with respect to various waste disposal areas owned or operated by third parties. In addition, certain of Pennzoil's subsidiaries are involved in other environmental remediation activities, including the removal, inspection and replacement, as necessary, of underground storage tanks. As of December 31, 1993 and 1992, Pennzoil's consolidated balance sheet included accrued liabilities for environmental remediation of $33.1 and $34.2 million, respectively, which amounts include reserves with respect to Pennzoil's obligations under its indemnification agreement with Purolator referred to in the previous paragraph. Of these reserves, $4.8 million and $4.9 million is reflected on the consolidated balance sheet as other current liabilities as of December 31, 1993 and 1992, respectively, and $28.3 million and $29.3 million is reflected as other liabilities as of December 31, 1993 and 1992, respectively. Pennzoil does not currently believe there is a reasonable possibility of incurring additional material amounts in excess of the current accruals recognized for such environmental remediation activities. With respect to the sites in which Pennzoil subsidiaries are PRPs, Pennzoil's conclusion is based in large part on (i) the availability of defenses to liability, including the availability of the \"petroleum exclusion\" under CERCLA and similar state laws, and\/or (ii) Pennzoil's current belief that its share of wastes at a particular site is or will be less than the threshold deemed by the EPA or recognized by the relevant group of PRPs as being de minimis (and as a result Pennzoil's monetary exposure is not expected to be material).\nFTC Matters --\nThe Federal Trade Commission (\"FTC\") has inquired as to Pennzoil's reliance on the investment exemption of Section 7A(c)(9) and Rule 802.9 under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, in connection with Pennzoil's investment in common stock of other entities. Pennzoil has provided the requested information to the FTC and has cooperated with the FTC in response to the inquiry.\nFranchisee Litigation --\nCertain current and former Jiffy Lube franchisees have brought suit against Jiffy Lube to challenge various matters relating to the franchisor-franchisee relationship. Certain of the suits have included allegations against Pennzoil and\/or Pennzoil Products Company (\"PPC\"), a wholly owned subsidiary of Pennzoil, as well. These franchisee lawsuits generally contain allegations of, among other things, certain misrepresentations by Jiffy Lube in connection with the execution of franchise and licensing agreements, certain breaches of these agreements by Jiffy Lube and\/or certain breaches of fiduciary duty by Jiffy Lube. In some cases, conflicts of interest or conspiracy between Jiffy Lube and Pennzoil are also alleged. Pennzoil believes that the allegations in these lawsuits stem primarily from previous uncertainties surrounding Jiffy Lube's financial condition, financial difficulties experienced by certain franchisees and franchisees' concerns relating to the adequacy of services provided by Jiffy Lube prior to Pennzoil's initial acquisition of Jiffy Lube stock in January 1990 (see Note 10). Jiffy Lube, Pennzoil and\/or PPC, as the case may be, have each denied the material allegations against them and intend to defend these actions vigorously. Pennzoil does not believe that the final outcome of these cases will have a material adverse effect on its financial condition or results of operations.\nPENNZOIL COMPANY AND SUBSIDIARIES\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)\n(9) LEASES --\nAs Lessee -- Pennzoil leases various assets and office space with lease periods of 1 to 20 years. Additionally, Pennzoil's wholly owned subsidiary Jiffy Lube leases sites and equipment which are subleased to franchisees or used in the operation of automotive fast lubrication and fluid maintenance service centers operated by Jiffy Lube. The typical lease period for the service centers is 20 years with escalation clauses generally increasing the lease payments by 9% every third year, with some leases containing renewal options generally for periods of five years. These leases, excluding leases for land that are classified as operating leases, are accounted for as capital leases and are capitalized using interest rates appropriate at the inception of each lease.\nCertain operating and capital lease payments are contingent upon such factors as the consumer price index or the prime interest rate with any future changes reflected in income as accruable. The effects of these changes are not considered material.\nTotal operating lease rental expenses for Pennzoil (exclusive of oil and gas lease rentals) were $59.6 million, $56.2 million and $49.7 million for 1993, 1992 and 1991, respectively. Non-current capital lease obligations are classified as other liabilities in the accompanying consolidated balance sheet.\nFuture minimum commitments under noncancellable leasing arrangements as of December 31, 1993 are as follows:\nAssets recorded under capital lease obligations of $65.3 million and $20.2 million at December 31, 1993 are classified as property, plant and equipment and other assets, respectively, in the accompanying consolidated balance sheet.\nAs Lessor -- Pennzoil, through its wholly owned subsidiary Jiffy Lube, owns or leases numerous service center sites which are leased or subleased to franchisees. Buildings owned or leased that meet the criteria for direct financing leases are carried at the gross investment in the lease less unearned income. Unearned income is recognized in such a manner as to produce a constant periodic rate of return on the net investment in the direct financing lease. Any buildings leased or subleased that do not meet the criteria for a direct financing lease and any land leased or subleased are accounted for as operating leases. The typical lease period is 20 years and some leases contain renewal options. The franchisee is responsible for the payment of property taxes, insurance and maintenance costs related to the leased property. The net investment in direct financing leases is classified as other assets in the accompanying consolidated balance sheet.\nPENNZOIL COMPANY AND SUBSIDIARIES\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)\nFuture minimum lease payment receivables under noncancellable leasing arrangements as of December 31, 1993 are as follows:\n(10) ACQUISITIONS --\nAcquisition of Pennzoil Petroleum --\nIn October 1992, Pennzoil completed a transaction with Chevron, pursuant to which Pennzoil exchanged 15,750,000 shares of Chevron common stock held by Pennzoil for all the capital stock of Pennzoil Petroleum, which owns Gulf of Mexico, Gulf Coast, Permian Basin and other domestic oil and gas producing properties. The exchange of stock has been accounted for using the purchase method of accounting, and Pennzoil Petroleum's results of operations subsequent to October 30, 1992 have been included in Pennzoil's consolidated financial statements. The fair market value of the 15,750,000 shares of Chevron common stock exchanged for the capital stock of Pennzoil Petroleum approximated Pennzoil's historical book value for such shares of $1.06 billion. Accordingly, Pennzoil used the net book value of the Chevron shares exchanged for purposes of purchase accounting.\nIncluded in the assets of Pennzoil Petroleum at the time of the transfer to Pennzoil was $57.4 million in cash contributed by Chevron to Pennzoil Petroleum immediately prior to closing, representing the net cash flow from Pennzoil Petroleum's operations during the four-month period between the \"effective date\" and the closing date of the transaction, after reduction as a result of nonrecurring closing adjustments of approximately $11 million. As a result of an audit completed during 1993, Chevron contributed an additional $9.9 million in cash to Pennzoil Petroleum, representing an adjustment to the initial $57.4 million cash contribution made by Chevron to Pennzoil Petroleum prior to closing. This additional contribution from Chevron was accounted for as an adjustment to the original purchase price of Pennzoil Petroleum.\nThe following unaudited pro forma information has been prepared assuming that the acquisition of Pennzoil Petroleum had occurred at the beginning of the periods presented. Permitted pro forma adjustments include only the effects of events directly attributable to a transaction that are factually supportable and expected to have a continuing impact. Pro forma adjustments reflecting anticipated \"efficiencies\" in operations resulting from a transaction are, under most circumstances, not permitted. As a result of the limitations imposed with regard to the types of permitted pro forma adjustments, Pennzoil believes that this\nPENNZOIL COMPANY AND SUBSIDIARIES\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)\nunaudited pro forma information is not indicative of future results of operations, nor the results of historical operations had the acquisition of Pennzoil Petroleum been consummated as of the assumed dates.\nAcquisition of Jiffy Lube --\nOn January 8, 1990, Jiffy Lube, Pennzoil and Jiffy Lube's senior unsecured creditors consummated a plan of debt restructuring for Jiffy Lube, which resulted in the restructuring and reduction of Jiffy Lube's senior unsecured debt and the acquisition by Pennzoil of 80% of the common stock of Jiffy Lube. In connection with the Jiffy Lube debt restructuring plan, Pennzoil paid $28.5 million in cash to or on behalf of Jiffy Lube and exchanged Pennzoil's $15.0 million principal amount of Jiffy Lube's 12% Convertible Subordinated Debenture (including accrued and unpaid interest) as consideration for the shares of Jiffy Lube common stock acquired.\nThe acquisition was accounted for using the purchase method of accounting, and the results of operations of Jiffy Lube have been included in Pennzoil's consolidated statement of income subsequent to January 8, 1990.\nOn August 5, 1991, a newly formed Pennzoil subsidiary commenced a tender offer to acquire all Jiffy Lube shares not already owned by Pennzoil at a price of $6.00 per share, or approximately $9.3 million in the aggregate. Pursuant to the tender offer, Pennzoil acquired additional Jiffy Lube common stock, as a result of which Pennzoil held directly or indirectly in excess of 93% of the outstanding Jiffy Lube common stock. A merger between Jiffy Lube and the newly formed Pennzoil subsidiary became effective as of October 17, 1991, pursuant to which each remaining Jiffy Lube share not owned by Pennzoil was converted into the right to receive $6.00 in cash. As a result of the merger, Jiffy Lube is now a wholly owned subsidiary of Pennzoil.\n(11) DISCONTINUED OPERATIONS --\nFiltration Products Segment --\nIn early 1990, Pennzoil decided to sell or otherwise dispose of Purolator. In connection with this decision, Pennzoil recorded a 1989 fourth quarter write-down of $125.0 million to reflect the estimated loss to be incurred from the then anticipated sale or other disposition of Purolator's filtration products operations, including estimated future costs and operating results from the segment until the date of disposition.\nIn August 1991, Pennzoil concluded that, because of Purolator's improved performance, the intrinsic value of Purolator could be more effectively realized by retaining Purolator. Accordingly, in the third quarter of 1991, Pennzoil reclassified Purolator's net assets and results of operations for all periods as part of continuing operations. As a result of Pennzoil's decision to retain Purolator, the remaining reserve of $115.7 million for the estimated loss on the disposition of Purolator originally established in the fourth quarter of 1989 was reversed. Concurrent with the reversal of the reserve, Pennzoil recorded a provision of $108.0 million ($88.0 million after tax) to reflect losses due to asset impairment and other identified liabilities\nPENNZOIL COMPANY AND SUBSIDIARIES\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)\nrelated to Purolator. The following is a summary of the write-downs and other charges provided during the three months ended September 30, 1991 (in millions):\n(a) Write-Down of Goodwill --\nIn connection with the August 1991 decision not to dispose of Purolator, Pennzoil assessed the potential for loss recognition resulting from asset impairment and concluded that a portion of Purolator's goodwill was permanently impaired. Accordingly, a write-down of approximately $48.0 million was recorded.\n(b) Reserve for Environmental Costs --\nPurolator is involved in certain waste disposal areas in which it has been alleged that it is a potentially responsible party under CERCLA or similar state legislation. In connection therewith, charges totaling $30.0 million were recorded to reflect a reserve for estimated cleanup and compliance costs.\n(c) Adjustment to Postretirement Benefit Liability Established at Acquisition - --\nIn connection with Pennzoil's 1988 acquisition of Purolator, a liability was established in the purchase price allocation for vested postretirement benefit obligations attributable to a specific group of Purolator retirees. Based on revised actuarial estimates, Pennzoil concluded that the remaining liability established for these retirees was understated and recorded a charge against earnings of $16.5 million. As of December 31, 1991, the net assets of discontinued operations have been reduced by a liability of $43.9 million attributable to these vested postretirement benefit obligations.\n(d) Other Write-Downs and Charges --\nWrite-downs of other individually non-significant assets of approximately $10.0 million were recorded representing Pennzoil's estimate of the net realizability of those investments. In addition, other charges of approximately $3.5 million were recorded to reflect other identified liabilities.\nPublic Offerings --\nIn October 1992, as a result of Pennzoil's conclusion that disposal of Purolator's filtration products operations would enhance Pennzoil's efforts to focus on its strategic businesses and to reduce indebtedness, Purolator filed a registration statement pursuant to which Pennzoil offered to the public all shares of Purolator stock held by Pennzoil. Accordingly, Purolator's net assets and results of operations for all periods have been reclassified as discontinued operations for financial reporting purposes. In December 1992, Pennzoil sold in initial public offerings all its shares of capital stock of Purolator. The total amount received by Pennzoil, prior to the payment of expenses, from the net proceeds of the offerings and the repayment of indebtedness by Purolator was $206.0 million. Pennzoil also expects to receive a tax refund of approximately $23 million as a result of the transaction. Pennzoil recorded a net gain on the disposition of Purolator stock of $1.5 million ($20.0 million before tax loss), or $.04 per share, in the fourth quarter of 1992.\nIn connection with Pennzoil's disposition of Purolator, Pennzoil and Purolator entered into an indemnification agreement with respect to certain environmental matters (see Note 8). In addition, Pennzoil entered into an agreement with certain banks to provide contingent credit support for a Purolator credit facility and an\nPENNZOIL COMPANY AND SUBSIDIARIES\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)\nagreement with a government agency with respect to guarantees of benefits under certain of Purolator's employee benefit plans (see Note 4).\nIncome from discontinued operations is as follows:\n(12) SEGMENT FINANCIAL INFORMATION --\nInformation with respect to revenues, operating income and other data by industry segment is presented in Item 1, Business and Item 2, Properties of this Annual Report on Form 10-K.\nPENNZOIL COMPANY AND SUBSIDIARIES\nSUPPLEMENTAL FINANCIAL AND STATISTICAL INFORMATION -- UNAUDITED\nQUARTERLY RESULTS(1) --\n- ---------------\n(1) Reference is made to Notes 1, 2, 3 and 10 of Notes to Consolidated Financial Statements for information on items affecting quarterly results.\n(2) Operating income is defined as net revenues less costs and operating expenses.\n(3) The total of the 1993 quarterly earnings (loss) per share amounts presented does not equal the annual 1993 earnings per share amount primarily due to the issuance of 5 million shares of Pennzoil's common stock during September 1993. Reference is made to Note 7 of Notes to Consolidated Financial Statements for additional information.\nOIL AND GAS INFORMATION\nEstimated Quantities of Proved Oil and Gas Reserves\nPresented on the following page are Pennzoil's estimated net proved oil and gas reserves as of December 31, 1993, 1992 and 1991. Reserves in the United States are located onshore in all the main producing states (except Alaska) and offshore Alabama, California, Louisiana, Mississippi and Texas. Foreign reserves are located in Canada.\nPENNZOIL COMPANY AND SUBSIDIARIES\nSUPPLEMENTAL FINANCIAL AND STATISTICAL INFORMATION -- UNAUDITED (CONTINUED)\nOIL AND GAS INFORMATION (CONTINUED)\nThe estimates of proved oil and gas reserves have been prepared by Ryder Scott Company Petroleum Engineers (\"Ryder Scott\") and are based on data supplied by Pennzoil. The reports of Ryder Scott, which include a description of the basis used in preparing the estimated reserves, are included as exhibits to Pennzoil's Annual Reports on Form 10-K for the respective years. Oil includes crude oil, condensate and natural gas liquids.\nPROVED OIL RESERVES (MILLIONS OF BARRELS)\nPROVED NATURAL GAS RESERVES (BILLIONS OF CUBIC FEET)\n- ---------------\n(1) Purchases of minerals in place for 1992 include proved developed and undeveloped reserves attributable to Pennzoil Petroleum as of the date of acquisition (October 30, 1992).\n(2) Purchases and sales of minerals in place for 1993 include 5 million barrels of oil and 91 billion cubic feet (\"Bcf \") of natural gas and 4 million barrels of oil and 93 Bcf of natural gas, respectively, associated with asset swaps.\n(3) United States natural gas reserves for 1993, 1992 and 1991 exclude 162 Bcf, 124 Bcf and 129 Bcf, respectively, of carbon dioxide gas for sale or use in company operations.\nPENNZOIL COMPANY AND SUBSIDIARIES\nSUPPLEMENTAL FINANCIAL AND STATISTICAL INFORMATION -- UNAUDITED (CONTINUED)\nOIL AND GAS INFORMATION (CONTINUED)\nCapitalized Costs and Costs Incurred Relating to Oil and Gas Producing Activities\nThe following table shows the aggregate capitalized costs related to oil and gas producing activities and related accumulated depreciation, depletion and amortization and valuation allowances.\nThe following table shows costs incurred in oil and gas producing activities (whether charged to expense or capitalized).\n- ---------------\n(1) Costs incurred for unproved property acquisition include approximately $98 million related to the gas utilization project in Azerbaijan. Pennzoil has signed a gas utilization agreement with the State Oil Company of the Azerbaijan Republic (\"SOCAR\") that provides for recovery of Pennzoil's costs incurred in connection with the gas utilization project by payment in hard currency or oil or petroleum products or as a credit against a signature bonus for the first exploration, exploitation and\/or development contract entered into between Pennzoil and SOCAR in Azerbaijan. Total costs incurred during 1993 include $114 million related to Pennzoil's Azerbaijan activities.\n(2) Costs incurred for property acquisitions in 1992 include $1,009 million attributable to the acquisition of Pennzoil Petroleum. See Note 10 of Notes to Consolidated Financial Statements for additional information.\nPENNZOIL COMPANY AND SUBSIDIARIES\nSUPPLEMENTAL FINANCIAL AND STATISTICAL INFORMATION -- UNAUDITED (CONTINUED)\nOIL AND GAS INFORMATION (CONTINUED)\nResults of Operations From Oil and Gas Producing Activities\nThis information is similar to the disclosures set forth in the \"Industry Segment Financial Information\" set forth on pages 1 and 2 herein but differs in several respects as to the level of detail, geographic presentation and income taxes. Income taxes were determined by applying the applicable statutory rates to pretax income with adjustment for tax credits and other allowances. Income tax provisions involved certain allocations among geographic areas based on management's assessment of the principal factors giving rise to the tax obligation.\n- ---------------\n(1) Foreign technical support and other during 1993 includes approximately $7 million related to Pennzoil's Azerbaijan activities.\nPENNZOIL COMPANY AND SUBSIDIARIES\nSUPPLEMENTAL FINANCIAL AND STATISTICAL INFORMATION -- UNAUDITED (CONTINUED)\nOIL AND GAS INFORMATION (CONTINUED)\nStandardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Gas Reserves (Standardized Measure)\nThe Standardized Measure is determined on a basis which presumes that year-end economic and operating conditions will continue over the periods during which year-end proved reserves would be produced. Neither the effects of future inflation nor expected future changes in technology and operating practices have been considered.\nThe Standardized Measure is determined as the excess of future cash inflows from proved reserves less future costs of producing and developing the reserves, future income taxes and a discount factor. Future cash inflows represent the revenues that would be received from production of year-end proved reserve quantities assuming the future production would be sold at year-end prices plus any fixed and determinable future escalations (but not escalations based on inflation) of natural gas prices provided by existing contracts. As a result of the continued volatility in oil and natural gas markets, future prices received from oil, condensate and natural gas sales may be higher or lower than current levels.\nFuture production costs include the estimated expenditures related to production of the proved reserves plus any production taxes without consideration of inflation. Future development costs include the estimated costs of drilling development wells and installation of production facilities, plus the net costs associated with dismantlement and abandonment of wells and production platforms, assuming year-end costs continue without inflation. Future income taxes were determined by applying current legislated statutory rates to the excess of (a) future cash inflows, less future production and development costs, over (b) the tax basis in the properties involved plus existing net operating loss carryforwards. Tax credits are considered in the computation of future income tax expenses. The discount was determined by applying a discount rate of 10% per year to the annual future net cash flows.\nPENNZOIL COMPANY AND SUBSIDIARIES\nSUPPLEMENTAL FINANCIAL AND STATISTICAL INFORMATION -- UNAUDITED (CONTINUED)\nOIL AND GAS INFORMATION (CONTINUED)\nThe Standardized Measure does not purport to be an estimate of the fair market value of Pennzoil's proved reserves. An estimate of fair market value would also take into account, among other things, the expected recovery of reserves in excess of proved reserves, anticipated changes in future prices and costs and a discount factor more representative of the time value of money and the risks inherent in producing oil and gas. In the opinion of Pennzoil's management, the estimated fair value of Pennzoil's oil and gas properties is in excess of the amounts set forth below.\n- ---------------\n(1) Includes future dismantlement and abandonment costs, net of salvage values.\n(2) Future income taxes before discount were $896 million (U.S.) and $35 million (foreign) and $1,004 million (U.S.) and $20 million (foreign) for 1993 and 1992, respectively.\nPENNZOIL COMPANY AND SUBSIDIARIES\nSUPPLEMENTAL FINANCIAL AND STATISTICAL INFORMATION -- UNAUDITED (CONTINUED)\nOIL AND GAS INFORMATION (CONTINUED)\nChanges in the Standardized Measure\nThe following table sets forth the principal elements of the changes in the Standardized Measure for the years presented. All amounts are reflected on a discounted basis.\nSULPHUR INFORMATION\nReference is made to Item 1, Business and Item 2, Properties under the caption \"Sulphur -- Reserves, Production and Sales Information\" for disclosures relative to sulphur reserves, production and sales information.\nPENNZOIL COMPANY AND SUBSIDIARIES\nSCHEDULE I -- MARKETABLE SECURITIES AND OTHER INVESTMENTS\nAT DECEMBER 31, 1993\n- -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------\n- ---------------\n(1) Maturities for the various securities and investments were as of the dates of the original investments.\nS-1\nPENNZOIL COMPANY AND SUBSIDIARIES\nSCHEDULE V -- CONSOLIDATED PROPERTY, PLANT AND EQUIPMENT\n- -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------\n- ---------------\n(1) Retirements or Sales includes dry hole costs charged to exploration expense of $4,256,000, $2,404,000 and $30,849,000 for 1993, 1992 and 1991, respectively.\n(2) During 1993, oil and gas property, plant and equipment has been reduced by $278,044,000 attributable to certain asset swap transactions. See Schedule VI for a corresponding reduction of oil and gas accumulated depreciation, depletion and amortization.\n(3) Additions to the oil and gas segment include $1,009,410,000 allocated to the oil and gas properties attributable to the acquisition of Pennzoil Petroleum in October 1992.\nS-2\nPENNZOIL COMPANY AND SUBSIDIARIES\nSCHEDULE VI -- CONSOLIDATED ACCUMULATED DEPRECIATION, DEPLETION, AMORTIZATION AND VALUATION ALLOWANCES OF PROPERTY, PLANT AND EQUIPMENT\n===============================================================================\n- ---------------\n(1) Additions charged to costs and expenses include impairments and abandonments charged to exploration expense. Impairments and abandonments for 1993, 1992 and 1991 were $46,884,000, $3,759,000 and $5,039,000, respectively.\n(2) During 1993, oil and gas accumulated depreciation, depletion and amortization has been reduced by $278,044,000 attributable to certain asset swap transactions. See Schedule V for a corresponding reduction of oil and gas property, plant and equipment.\nS-3\nPENNZOIL COMPANY AND SUBSIDIARIES\nSCHEDULE IX -- SHORT-TERM BORROWINGS\n- -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------\n- ---------------\n(1) Represents the weighted average interest rate in effect while the short-term borrowings were outstanding.\n(2) None of the banks has any obligation to continue to extend credit after the maturities of outstanding borrowings or to extend the maturities of any borrowings under these credit arrangements.\nS-4\nPENNZOIL COMPANY AND SUBSIDIARIES\nSCHEDULE X -- SUPPLEMENTARY CONSOLIDATED INCOME STATEMENT INFORMATION\n- -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------\nS-5\nEXHIBIT INDEX\n- ---------------\n* Incorporated by reference.\n+ Management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to the requirements of Item 14(c) of Form 10-K.","section_15":""}
{"filename":"732780_1993.txt","cik":"732780","year":"1993","section_1":"","section_1A":"","section_1B":"","section_2":"","section_3":"ITEM 3. LEGAL PROCEEDINGS\nOMI and its subsidiaries are not parties to any material pending legal proceedings for damages, or a related group of such proceedings, other than ordinary routine litigation incidental to the business.\nOMI is a party, as plaintiff or defendant, in a variety of lawsuits for damages arising principally from personal injuries or other casualties in the ordinary course of the maritime business. All such personal injury and casualty claims against OMI are fully covered by insurance (subject to deductibles which are not material).\nITEM 4.","section_4":"ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS\nNo matters were submitted to a vote of the security holders of the Company during the fourth quarter of 1993.\nEXECUTIVE OFFICERS OF OMI\nSet forth below are the names, ages, position and office, term and year appointed of all of the Company's executive officers (including OMI Bulk Management Co., a division of the Company) as of March 22, 1994.\nThere is no family relationship by blood, marriage or adoption (not more remote than first cousins) between any of the above individuals and any other executive officer or any OMI director.\nThe term of office of each officer is until the first meeting of directors after the annual stockholders' meeting next succeeding his election and until his respective successor is chosen and qualified.\nThere are no arrangements or understandings between any of the above officers and any other person pursuant to which any of the above was selected as an officer.\nMr. Klebanoff has served as Chairman of the Board of the Company since 1983.\nThe following are descriptions of other occupations or positions that the other executive officers of the Company have held during the last five years:\nJack Goldstein was appointed President and Chief Executive Officer of the Company in April 1986.\nChaim Barash was elected Senior Vice President\/Operations of the Company in November 1986 and President of OMI Bulk Management Co. in October 1992.\nVincent de Sostoa was elected Senior Vice President\/Finance of the Company in January 1989.\nFredric S. London was elected Senior Vice President of the Company in December 1991. He was elected Vice President of the Company in December 1988.\nCraig H. Stevenson was elected Senior Vice President\/Chartering of the Company in August 1993. For five years prior thereto he was President of Ocean Specialty Tankers Corp., a marketing manager for several of the Company's chemical tankers.\nEnrico Fenzi was elected Vice President of the Company in September 1990. He was elected Assistant Vice President of the Company in January 1988.\nKathleen C. Haines was elected Vice President of the Company in January 1994. She was elected Assistant Vice President and Controller in December 1992. Prior thereto, Ms. Haines was Assistant Controller.\nRichard Halluska was elected Vice President of the Company in July 1993. He was elected Assistant Vice President of the Company in December 1989.\nWilliam A.G. Hogg was elected Vice President of the Company in January 1994. He was elected Assistant Vice President of the Company in June 1987.\nWilliam Osmer was elected Vice President of the Company in January 1994. He was elected Assistant Vice President of the Company in December 1986.\nAnthony Naccarato was elected Vice President\/Labor Relations of the Company in June 1987.\nKenneth Rogers was elected Vice President of the Company in January 1994. He was elected Assistant Vice President of the Company in December 1990. Prior thereto, Mr. Rogers was Ship Manager.\nPART II\nITEM 5.","section_5":"ITEM 5. MARKET FOR OMI CORP.'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS\nCOMMON STOCK\nThe Company listed for trading on the New York Stock Exchange all of its common stock on March 13, 1992 (NYSE-OMM). Previously, the Company's common stock initially traded on the over-the-counter market on January 4, 1984, began trading on the NASDAQ National Market System on February 18, 1986, and on January 27, 1989 was listed for trading on the American Stock Exchange. As of March 22, 1994, the number of holders of OMI common stock was approximately 5,533.\nPAYMENT OF DIVIDENDS TO SHAREHOLDERS\nOn May 2, 1990, the Board of Directors of OMI voted to initiate a semi-annual dividend of $.05 per share of common stock. At the Company's annual meeting of shareholders on June 19, 1991, the Board approved an increase in its semi-annual dividend from $.05 to $.07 per share of common stock. The dividends were paid in 1990 at $.05 and 1991 and 1992 at $.07. On July 23, 1992, dividends were paid to shareholders of record on June 26, 1992, and subsequently, on January 21, 1993, to shareholders of record on December 28, 1992. On June 15, 1993, the Board voted to declare special dividends rather than adhere to a regular dividend policy. For the year ended December 31, 1993, there were no dividends declared.\n1993 QUARTER 1st 2nd 3rd 4th\nHigh 5 5\/8 6 1\/4 7 7 Low 3 7\/8 4 3\/4 5 5\/8 6 1\/8\n1992 QUARTER 1st 2nd 3rd 4th\nHigh 8 5\/8 6 1\/4 5 7\/8 5 1\/4 Low 5 3\/4 4 1\/4 3 5\/8 3 3\/8 Semi-annual dividends declared $0.07 $0.07\nITEM 6.","section_6":"ITEM 6. SELECTED FINANCIAL DATA OMI CORP. AND SUBSIDIARIES\nITEM 7.","section_7":"ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS\nOMI Corp. (\"OMI\" or the \"Company\"), is a highly diversified bulk shipping company active in both the U.S. flag and international markets. OMI also has interests in lightering services in the Gulf of Mexico through OMI Petrolink Corp. (\"Petrolink\"), in offshore drilling through an 8.8 percent interest in Chiles Offshore Corporation (\"COC\"), and in the workboat market, via a two percent interest in Seacor Holdings, Inc.\nResults of operations of OMI include operating activities of the Company's domestic and foreign flag wholly-owned vessels, leased vessels and vessels chartered-in. Revenues are derived from five principal markets: crude oil, refined petroleum, dry bulk, LPG and combination carrier.\nFISCAL YEARS 1993, 1992 AND 1991\nNET VOYAGE REVENUES\nThe Company's vessels are operating under a variety of charters and contracts. The nature of these arrangements is such that, without a material variation in net voyage revenues (voyage revenues less vessel and voyage expenses), the revenues and expenses attributable to a vessel deployed under one type of charter or contract can differ substantially from those attributable to the same vessel if deployed under a different type of charter or contract. Accordingly, depending on the mix of charters or contracts in place during a particular accounting period, the Company's voyage revenues and vessel and voyage expenses can fluctuate substantially from one period to another even if the number of vessels deployed, the number of voyages completed, the amount of cargo carried and the net voyage revenues derived from the vessels were to remain relatively constant. As a result, fluctuations in voyage revenues and expenses are not necessarily indicative of trends in profitability. The discussion below addresses variations in net voyage revenues.\nIn the period between mid-1988 and the beginning of 1991, the majority of OMI's vessels operated under time charter agreements. Since 1991, however, rates for time charters have declined, and vessels completing long-term time charters in 1992 were shifted to the spot market rather than being committed to long-term charters at unfavorable rates. Under a time charter, the charterer assumes certain operating expenses, such as bunkers and port charges. The length of time charters usually ranges for a period of one to five years, which, if rates are satisfactory, gives the company a predictable revenue stream and reduces its exposure to the volatility of the rates in the spot market. Under a voyage (\"spot\") charter, most expenses are for the owner's account and the charters are generally short-term. Revenues may be higher in the spot market as the owner has to cover more costs. If rates in the spot market are not adequate, the Company may elect to lay the vessel up until rates improve.\nAs a result of weak worldwide economic conditions and a lower demand for petroleum products beginning after the Persian Gulf war of 1991, spot rates have fluctuated. While market pressures have reduced revenues, operating costs have increased, partially due to regulatory changes and new environmental laws. A direct impact on OMI, as a result of the Oil Pollution Act of 1990, was a substantial increase in insurance costs in 1992, which have leveled off in 1993.\nThe Company currently participates with seven of its American flag tanker and dry bulk vessels in a number of federal programs for the distribution of agricultural products. These programs were enacted and are controlled by Congress as an extension of U.S. foreign policy. If these programs were discontinued or modified, six American flag vessels, eligible for Operating-Differential Subsidy from the U.S. Government, would operate in international trades.\nThe Company's voyage revenues include charter hire from the Military Sealift Command (\"MSC\") in the amounts of $192,000, $23,942,000 and $42,061,000 for the years ended December 31, 1993, 1992 and 1991, respectively. The Company currently has only one vessel on a voyage charter to MSC due to cutbacks in military spending. Vessels, previously chartered by MSC, are operating in the commercial market with subsidy or in federal programs.\nNet voyage revenues decreased $10,299,000 or 16 percent for the year ended December 31, 1993 from the prior year. The net decrease resulted primarily from increased idle time between voyages for five domestic vessels (aggregating approximately 541 more offhire days in 1993 than in 1992) while continuing to incur port expenses and other daily expenses. The net decrease is also attributable to three domestic vessels operating in a profit sharing pool, four vessels operating on time charters were offhire a total of 144 days for drydocking, loss of revenue for two vessels disposed of, and reduced revenue from Petrolink resulting from reduced volume of its lightering operations in 1993 and the sale of seven workboats.\nAlthough the federal programs that the American flag tankers and dry bulk vessels participated in were successful during 1993, in 1994 these programs have been cut back by the U.S. Government. These vessels will operate in the spot market and will likely experience sporadic offhire days during 1994. The OMI Columbia began the first quarter with spot charters in the Alaskan North Slope trade and the Company anticipates further employment in late 1994. Two other vessels operating in the spot market in 1993 will continue operating in the spot market in 1994 at approximately the same rates.\nThe majority of the foreign flag vessels are currently operating on time charters, five of which expire in 1994. Management expects that three of these vessels will be able to operate in the spot market at competitive rates for the balance of 1994. Two vessels were added to the foreign fleet in December 1993, which are operating under bareboat charters.\nDuring March 1994, OMI contracted to purchase a vessel for approx- imately $12,050,000, which will operate in the spot market.\nNet voyage revenues decreased $41,569,000 or 39 percent for the year ended December 31, 1992 from the prior year. The following factors were the primary cause of this decrease: thirteen vessels, for which time charters expired during the year, were placed in the spot market because replacement time charters were not available at acceptable rates; two vessels, which operated in the spot market in both 1992 and 1991, earned lower rates in 1992 than in the previous year; two domestic vessels were laid up during a portion of the year; market conditions affecting the workboat operations of Petrolink weakened; and insurance costs increased, in part, from regulatory and environmental law changes.\nNet voyage revenues increased $23,827,000 or 28 percent for the year ended December 31, 1991 over 1990. Net increases during 1991 resulted primarily because of the acquisition of the remaining 50.1 percent interest in a joint venture, on March 13, 1990, whose operations were consolidated with those of OMI for a full year during 1991 compared with nine months in 1990. Additionally, increased rates on time charters continuing from 1990 and revenues from a domestic vessel acquired in 1991 contributed to 1991 revenue increases.\nYEAR ENDED DECEMBER 31, 1993 VERSUS DECEMBER 31, 1992\nVOYAGE REVENUES AND VESSEL AND VOYAGE EXPENSES\nVoyage revenues increased $5,936,000 or two percent, with net increases in domestic revenues of $2,223,000 and foreign revenues of $3,713,000 for the year ended December 31, 1993 compared to the year ended December 31, 1992. Domestic revenues increased primarily from improvement in spot rates earned for two vessels in 1993 over 1992, three vessels which incurred less offhire days in 1993 than in 1992 and the purchase of a new vessel in June 1993 which operates in the spot market, primarily in grain trades. Domestic revenue increases were offset by decreased volume and reduced rates in Petrolink's lightering operations due to increased competition in 1993, an accident which caused the loss of a vessel which had been operating on a time charter since December 1992, the scrapping of a vessel in October 1993, and decreases in revenues of two vessels, including the Company's largest domestic vessel, the OMI Columbia, which were idle during 1993 for an aggregate of approximately 330 days. The OMI Columbia's operating results had\na significantly adverse effect on the Company's earnings for 1993. However, while there can be no assurance, the Company believes that conditions have stabilized and, early in 1994, several spot charters were obtained for this vessel at satisfactory charter rates. During 1991, the last year in which the vessel was fully employed, it generated approximately $14.7 million of revenue and $3.1 million of pre-tax income. In the two years prior thereto, revenues were approximately $15.2 million and $14.5 million, respectively, and pre-tax income was approximately $4.8 million in each period. In 1992 and 1993, the vessel generated approximately $9.3 million and $4.0 million of revenue and a pre-tax loss of $1.1 million and $1.3 million, respectively. The pre-tax income effect of the vessel's sporadic trading as against full employment has historically been about $5.0-$7.0 million per year.\nForeign revenues increased primarily because three vessels, which operated on time charters for a portion of 1992 began operating in the spot market and received higher revenues in 1993. Revenues also increased because two vessels were chartered-in during the last quarter of 1993. Foreign increases were partially offset by decreases from three vessels which incurred 110 idle days due to drydocking. The three vessels were on time charters in 1993 and 1992.\nVessel and voyage expenses increased by $16,235,000 or eight percent consisting of net increases in domestic expenses of $13,832,000 and foreign expenses of $2,403,000 for the year ended December 31, 1993 over the comparable year in 1992. Vessel and voyage expenses increased largely due to the change in charter status for four domestic vessels and four foreign vessels from time charters in 1992 to spot charters in 1993. Other increases in expenses relate to expenses for the domestic vessel acquired May 1993, 78 more operating days in 1993 for a vessel which was operating in the spot market in both 1993 and 1992, and lease payments on a vessel which was sold and leased back in November 1992. Increases in expenses were partially offset by decreases in expenses for three vessels which were operating in the spot market in 1992 and began time charters in 1993, decreased expenses from workboat operations of Petrolink due to the workboat sales, and decline in volume of approximately 11 percent in Petrolink's lightering operations.\nOTHER INCOME\nOther income consists primarily of management fees received from affiliates and\/or other parties. During the year ended December 31, 1993, other income decreased $986,000, or 17 percent, for the year as compared to 1992. The decrease in 1993 resulted primarily from a payment of $1,000,000 from Wilomi, Inc. (\"Wilomi\") during the first quarter of 1992, which was paid in accordance with a contractual agreement relating to the construction contract of a vessel delivered, offset by increases from the U.S. Government for the management of vessels in the Ready Reserve Fleet under a contract renewed for 10 vessels in 1993.\nOTHER OPERATING EXPENSES\nThe Company's operating expenses, other than vessel and voyage expenses, consist of depreciation and amortization, operating lease expense and general and administrative expenses. For the year ended December 31, 1993 these expenses had a net decrease of $992,000 or two percent, as compared to the year ended December 31, 1992. The primary causes of the decrease in 1993 in general and administrative expenses were a change in health insurance coverage for employees, a decrease in other employee benefits and a reduction in legal fees for transactions during 1993 in comparison to 1992.\nOTHER INCOME (EXPENSE)\nOther income (expense) consists of gain\/loss on disposal of assets - - net, provision for writedown of investments, interest expense, interest income, and minority interest. For the year ended December 31, 1993, net other expense decreased $21,633,000, or 55 percent, over 1992. The net decrease resulted primarily from the writedown of $13,094,000 on COC stock during 1992. In addition, decreases during 1993 also resulted from the $2,190,000 gain from the sale of seven workboats of Petrolink, gain on sale of COC stock of $4,086,000 previously written down in 1992 and the decrease in interest expense resulting from both lower interest rates and a decrease in the outstanding principal balance of debt during the year prior to issuing $170,000,000 in Senior Notes in November 1993, offset in part by losses on the sale of a 50 percent owned joint venture and 25 percent equity investment aggregating approximately $1,554,000.\n(BENEFIT) PROVISION FOR INCOME TAXES\nThe benefit for income taxes of $1,730,000 for the year ended December 31, 1993 varied from statutory rates in 1993 by excluding the tax effect on the equity in operations of joint ventures other than Amazon Transport, Inc. (\"Amazon\"), as management considers it to be permanently invested, and included the effect of the change in the Federal tax rate.\nOn August 2, 1993, Congress passed the Omnibus Budget Reconciliation Act of 1993 (the \"Act\"). The major component of the Act affecting OMI is the retroactive increase in the marginal corporate tax rate from 34 percent to 35 percent, increasing the provision for deferred taxes payable by $3,044,000 to comply with the provisions of the Act.\nEQUITY IN OPERATIONS OF JOINT VENTURES\nEquity in operations of joint ventures of $5,544,000 was $3,515,000 or 39 percent lower in 1993 than in 1992. Joint venture equity was less in 1993 primarily due to a gain on sale of a vessel owned by\nWilomi in April 1992, which increased OMI's equity by approximately $4,826,000. This decline, along with a decline in profits for the vessel owned by Amazon, resulting from the termination of its time charter in 1993 and lower profits being earned in the spot market, were offset by decreases in operating losses in 1993 compared to 1992 incurred by a partnership, Ecomarine USA, which was wrapping up during 1993, and increased equity in the operating results of White Sea Holdings Ltd., a joint venture formed during December 1992.\nYEAR ENDED DECEMBER 31, 1992 VERSUS DECEMBER 31, 1991\nVOYAGE REVENUES AND VESSEL AND VOYAGE EXPENSE\nVoyage revenues decreased $20,958,000 or seven percent, with net decreases of $7,924,000 and $13,034,000 in the domestic and foreign fleets, respectively, for the year ended December 31, 1992 compared to the year ended December 31, 1991. The net decrease in domestic revenues consisted of an aggregate decrease of $16,404,000 offset by increases of $8,480,000. The decreases resulted from reduced revenues from Petrolink's workboat operations, the lay-up of two vessels and the sale of a vessel in May 1992. Increases in revenues resulted primarily from two vessels which were on time charters in both 1992 and 1991, one of which continued the charter through 1992 at an increased rate and one of which operated for 52 more days in 1992 as a result of offhire incurred for repairs in 1991. Increases in domestic revenues also resulted from three vessels that began operating in the spot market in 1992 which were on time charters in 1991. Also, three vessels managed by a joint venture received additional revenues in 1992 as a result of increased profit sharing.\nIn the foreign fleet, the net decrease in voyage revenues resulted primarily from the expiration of three time charters which were replaced with both voyage and short-term time charters with less favorable rates throughout the year, reduction in rates for a vessel which was operating in the spot market since 1991, and two vessels chartered-in during 1991 which were not part of OMI's fleet during 1992.\nVessel and voyage expenses increased $20,611,000 or 12 percent consisting of a $16,473,000 increase in expenses of domestic operations and a $4,138,000 net increase in foreign operations for the year ended December 31, 1992 over the comparable 1991 period. The increase in domestic vessel and voyage expenses resulted primarily from increased voyage expenses of four vessels, two of which were operating in the spot market in both 1992 and 1991, and two vessels which began operating in the spot market in 1992 that were previously on time charters. Other increases in expenses were incurred on four vessels continuing time charters from 1991 with overall increases in stores, crew and insurance costs.\nThe net increase in foreign vessel and voyage expenses consisted of an aggregate increase of $9,825,000 offset by decreases of $5,687,000. The increases resulted primarily from five vessels previously on time charters in 1991, which began operating in the spot market in 1992, and similar to the domestic operations, increased vessel expenses on two vessels continuing time charters from 1991. Decreases in vessel and voyage expenses were attributable to the return of the chartered-in vessels.\nOTHER INCOME\nDuring the year ended December 31, 1992, other income increased $1,729,000, or 44 percent, over 1991. The increase in 1992 resulted primarily from a contractual payment of $1,000,000 from Wilomi relating to a vessel delivered in the first quarter of 1992. The remaining increase in 1992 relates to increases in management fees from the U.S. Government for management of the Ready Reserve Fleet.\nOTHER OPERATING EXPENSES\nOther operating expenses increased $2,678,000, or five percent, over 1991. The primary increases in 1992 resulted in increased general and administrative expense of $1,859,000 from the change in the ESOP calculation in the third quarter of 1991 and the addition of a London marketing office in January 1992. Additionally, depreciation and amortization increased $795,000 during 1992 resulting primarily from the acquisition during the fourth quarter of a previously leased vessel and capital improvements on existing vessels.\nOTHER INCOME (EXPENSE)\nFor the year ended December 31, 1992, net other expense increased $12,067,000, or 44 percent, over 1991.\nDuring 1992 OMI deemed its investment in COC shares to have an other than temporary decline in its market value and provided for a writedown of $13,094,000, in addition to a $1,982,000 writedown of a partnership investment to the realizable value of the company's assets. Net loss of $1,146,000 resulted primarily from the loss on the sale of a domestic vessel and disposal of other property of $1,394,000 offset by net gains from the sale of investments and amortization of gain on sale from the sale\/leaseback of a vessel. Additionally, during 1992, interest expense decreased $5,544,000 resulting from the decline in interest rates and refinancing of debt.\nEQUITY IN OPERATIONS OF JOINT VENTURES\nEquity in operations of joint ventures was $3,200,000, or 26 percent, lower during 1992 than in 1991. The net decrease for the\nyear, excluding the gain on sale of vessels of $4,826,000 in 1992 and $5,940,000 in 1991, primarily resulted from lower rates and higher expenses on vessels which operated under voyage charters in 1992. Additionally, two vessels, which were under construction in 1991, were delivered to a 49 percent joint venture during March and August of 1992. These vessels operated on voyage charters while incurring some offhire days between charters. Additionally, income for the second half of 1992 declined by approximately $2,500,000 due to the drop in the spot market rates for five vessels operating in the spot market or on backhaul voyages to reposition the vessels. The average decline in rates for each of the vessels was approximately $2,800 per day, reflecting a cyclical decline in spot market rates. Moreover, OMI owned a 25 percent interest in an offshore drilling rig whose charter expired in 1991 and for which no revenues were derived in 1992. This accounted for 38 percent of the total decrease in equity for 1992.\nLIQUIDITY AND CAPITAL RESOURCES\nThe Company's working capital at December 31, 1993 was $32,957,000 versus a working capital deficit of $21,133,000 at December 31, 1992. Cash and cash equivalents of $45,321,000 at December 31, 1993 increased $28,471,000 or 169 percent over the balance of $16,850,000 at December 31, 1992. In 1993, the source of the Company's liquidity was issuance of debt, including use of lines of credit, and cash generated by operations. For the year ended December 31, 1993, net cash provided by operating activities was $18,300,000, which was an increase of $6,314,000 or 53 percent from $11,986,000 provided in 1992.\nNet cash used by investing activities was $8,778,000 in 1993 versus $13,624,000 in 1992. The Company received dividends aggregating $11,823,000 in 1993 from certain joint ventures. Most joint venture earnings are considered to be permanently invested and are not available for distribution, and there is no certainty that the joint venture, the earnings of which are not considered to be permanently invested, will have sufficient earnings to pay dividends in the future. Therefore, the Company cannot rely on dividends or loans from its joint ventures to improve its liquidity.\nThe Company operates in a capital intensive industry and augments cash generated by operating activities with debt in order to purchase ships. On November 3, 1993, the Company completed a public sale of $170,000,000, 10.25 percent Senior Notes due November 1, 2003 (\"the Notes\"). The Notes are unsecured obligations of the Company. The net proceeds of approximately $163,781,000, after deducting fees and expenses, were used to prepay outstanding indebtedness of approximately $98,000,000 and the balance is being used for general corporate purposes, including the acquisition of vessels. The consummation of the offering of the Notes gives the Company greater financial flexibility. The\nCompany has improved its liquidity and financial position by (1) extending the average life of its indebtedness so that the average life more closely approximates the useful life of its vessels, (2) prepaying a portion of its long-term debt scheduled to come due between 1994 and 1998, (3) enhancing the Company's ability to benefit from improvements in industry conditions, and (4) positioning the Company to finance the acquisition of replacement and additional vessels. The Company believes that, based upon current levels of operations and anticipated improvements in charter market conditions, cash flow from operations together with other available sources of funds, including lines of credit aggregating $45,500,000, should be adequate to make required payments of principal and interest on the Company's debt, including the Notes, to permit anticipated capital expenditures and to fund working capital requirements.\nIn addition to cash provided by operating activities and issuance of the Notes, OMI received cash from the following significant activities:\n*During 1993, Petrolink sold seven workboats and other property and received $3,750,000 in cash proceeds from the sale; the remaining proceeds were received in the form of stock and a note payable through March 1996. *OMI received cash proceeds of $68,153,000 from drawdowns on its lines of credit and $7,000,000 in mortgage notes during the year ended December 31, 1993. *OMI was reimbursed $5,734,000 by a joint venture, White Sea Holdings Ltd., formed during December 1992 for a vessel OMI had purchased on behalf of the venture. *The Company received $5,552,000 from the sale of 1,173,000 shares of COC stock, and $1,363,000 on the sale of its investment in Mundogas Orinoco Ltd. *The Company received insurance proceeds of approximately $7,000,000 for the loss of the OMI Charger. *OMI received $1,480,000 in proceeds from the scrapping of a vessel.\nDuring the year ended December 31, 1993, OMI made the following disbursements other than from operating activities:\n*Cash payments of $81,653,000 on short-term lines of credit, $6,910,000 on notes with joint ventures and approximately $135,718,000 payments on mortgage notes on vessels as of December 31, 1993. *Capital expenditures of $36,548,000 for the purchase of one domestic vessel in May 1993, the purchase of two foreign flag vessels in December 1993, improvements to vessels and other property, and the purchase of a workboat. *Cash dividends of $2,140,000 paid on OMI common stock. *Cash payments of $3,724,000 in the form of contributions to existing joint venture\/partnership investments.\nCOMMITMENTS\nOn January 28, 1994, a vessel built in Japan for a joint venture was delivered for an aggregate purchase price of $38,479,000. OMI has committed, with a joint venture partner, to construct another vessel to be built in the Peoples Republic of China for a cost of approximately $54,400,000. The vessel is scheduled to be delivered in the second quarter of 1996.\nOMI acts as a guarantor for a portion of the debt incurred by joint ventures with affiliates of two of its joint venture partners. Such debt was approximately $102,869,000 at December 31, 1993 with OMI's share of such guarantees being approximately $49,594,000. OMI also is a guarantor for one of its joint venture's revolving line of credit of $4,000,000, with a guarantee to OMI from its joint venture partner of $2,000,000.\nThe Company and its joint venture partners have committed to fund any working capital deficiencies which may be incurred by their joint venture investments. At December 31, 1993, no such deficiencies have been funded.\nEFFECTS OF INFLATION\nThe Company does not consider inflation to be a significant risk to the cost of doing business in the current and foreseeable future. The Company has experienced some additions to the costs of operating the vessels due to price level increases, however, in some cases, the effect has been offset by charter escalation clauses.\nITEM 8.","section_7A":"","section_8":"ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA\nOMI CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Three Years Ended December 31, 1993 (All tabular amounts are in thousands of dollars)\nNote 1 - Summary of Significant Accounting Policies\nPRINCIPLES OF CONSOLIDATION - The consolidated financial statements include all domestic and foreign subsidiaries which are more than 50 percent owned by OMI Corp. (\"OMI\" or the \"Company\"). All significant intercompany accounts and transactions have been eliminated in consolidation.\nInvestments in joint ventures, in which the Company's interest is 50 percent or less and where it is deemed that the Company's ownership gives it significant influence over operating and financial policies, are accounted for by the equity method. Accordingly, net income includes OMI's share of the earnings of these companies.\nOPERATING REVENUES AND EXPENSES - Voyage revenues and expenses are recognized on the percentage of completion method of accounting based on voyage costs incurred to date to estimated total voyage costs. Estimated losses on voyages are provided for in full at the time such losses become evident.\nSpecial survey and drydock expenses are accrued and charged to operating expenses over the survey cycle, which is generally a two to three year period.\nFOREIGN CURRENCY TRANSLATION - Foreign currency translation adjustments were related to assets and liabilities of two wholly-owned subsidiaries, whose functional currency was Yen. In August 1990, the functional currency of these subsidiaries was changed to U.S. dollars. The cumulative translation adjustment at that time was $(4,912,000), net of deferred income taxes of $(2,530,000) and will remain at this amount until such assets are sold or disposed of.\nACCOUNTING FOR INVESTMENTS IN EQUITY SECURITIES - The Company has elected early adoption of Financial Accounting Standards No. 115, \"Accounting for Certain Investments in Debt and Equity Securities\" (\"SFAS 115\") as of December 31, 1993. As a result of the adoption of SFAS 115, the Company recorded an unrealized gain of $9,709,000, net of deferred taxes of $5,228,000, which is presented as a separate component of stockholders' equity. Adjustments are made to net income for any impairment in value that is deemed to be other than temporary.\nPrior to adoption of SFAS 115, equity securities were carried at the lower of cost or market.\nMARKETABLE SECURITIES - Marketable securities comprise the current portion of available-for-sale securities. Available-for-sale securities, both current and long-term, are carried at market value. Net unrealized gains or losses are reported as a separate component of stockholders' equity until realized. Realized gains and losses on the sales of securities are recognized in net income on the specific identification basis.\nCAPITAL CONSTRUCTION AND OTHER RESTRICTED FUNDS - The Capital construction fund is restricted to provide for replacement vessels, additional vessels or reconstruction of vessels built in the United States. The other restricted funds are to be used to pay certain of the Company's debt. These funds can be used at the discretion of the Company upon receipt of written approval from the Maritime Administration.\nVESSELS AND OTHER PROPERTY - Vessels and other property are recorded at cost. Depreciation for financial reporting purposes is provided principally on the straight-line method based on the estimated useful lives of the assets up to the assets' estimated salvage value. Salvage value is based upon a vessel's light weight tonnage multiplied by a scrap rate.\nLeasehold improvements are amortized on the straight-line method over the terms of the leases or the estimated useful lives of the improvements as appropriate.\nThe Company periodically reviews the book value of its vessels and its ability to recover the remaining book value of the vessels using undiscounted cash flows over the remaining life of each vessel.\nGOODWILL - Goodwill, recognized in business combinations accounted for as purchases, of $17,868,000 before accumulated amortization of $2,559,000 and $1,858,000 at December 31, 1993 and 1992, respectively, is being amortized over 25 years.\nNET (LOSS) INCOME PER COMMON SHARE - Net (loss) income per common share is determined by dividing net (loss) income by the weighted average number of common shares outstanding during the period. Shares issuable upon the exercise of stock options (see Note 8) have not been included in the computation because they would not have a material effect on net (loss) income per common share.\nINCOME TAXES - OMI files a consolidated Federal income tax return which includes all its domestic subsidiary companies. Deferred income taxes are consistent with the provisions of\nthe Financial Accounting Standards Board (\"FASB\") Statement No. 109, \"Accounting for Income Taxes\", which was adopted by the Company in 1992 (see Note 5).\nPOSTRETIREMENT AND POSTEMPLOYMENT BENEFITS - In December 1990, the FASB issued Statement No. 106, \"Employers' Accounting for Postretirement Benefits Other than Pensions\", effective for fiscal years beginning after December 15, 1992. Adoption of this statement has not affected the Company's financial position or results of operations as the Company provides no postretirement benefits.\nDuring November 1992, the FASB issued Statement No. 112, \"Employers' Accounting for Postemployment Benefits\", effective for fiscal years beginning after December 15, 1993. Adoption of this statement is not expected to have any material effect on the Company's financial position or results of operations.\nCASH FLOWS - During the years ended December 31, 1993, 1992 and 1991, interest paid totalled approximately $20,647,000, $25,429,000 and $28,679,000, respectively. For the years ended December 31, 1993, 1992 and 1991, income taxes paid were approximately $6,413,000, $7,628,000 and $10,964,000, respectively.\nCash equivalents represent liquid investments which mature within 90 days. The carrying amount approximates fair market value.\nFor the years ended December 31, 1993, 1992 and 1991, noncash transactions, which have been excluded from the Consolidated Statements of Cash Flows, include the amortization of the receivable from ESOP of $361,000, $1,141,000 and $2,105,000, respectively (see Note 7), and accruals for capital expenditures of $115,000, $2,525,000 and $2,676,000, respectively.\nRECLASSIFICATION - Certain reclassifications have been made to the 1992 and 1991 financial statements to conform to the 1993 presentations.\nNOTE 2--INVESTMENTS IN JOINT VENTURES\nOMI's investments in joint ventures are accounted for using the equity method, under which the Company's share of earnings of these affiliates is reflected in income as earned and dividends are credited against the investment in joint ventures when received.\nThe operating results of the joint ventures have been included in the accompanying consolidated financial statements on the following basis:\nOMI has entered into management service agreements with certain of its joint ventures, wherein the Company acts as technical and\/or commercial manager for certain of the ventures' vessels. Management fees relating to services rendered to joint ventures aggregated $699,000, $567,000 and $589,000 for the years ended December 31, 1993, 1992 and 1991, respectively. During 1992, OMI received a $1,000,000 payment from Wilomi, which is included in other income.\nAt December 31, 1993, Mosaic owned 893,800 shares of OMI common stock at an aggregate cost of $4,595,000, acquired on the open market between 1990 and 1992 at prices ranging from $3.56 to $7.34. During February 1994, Mosaic sold 300,000 shares of OMI stock at $7.19 per share.\nDuring 1993, 1992 and 1991, OMI chartered three vessels for $24,269,000, three vessels for $27,260,000 and four vessels for $29,964,000, respectively, to OSTC. These amounts are included in the revenue of OMI as the operations of OSTC are not consolidated with OMI.\nSummarized combined financial information pertaining to all affiliated companies accounted for by the equity method is as follows:\nDuring the fourth quarter of 1993, OMI recognized a $1,625,000 writedown of its investment in Ecomarine USA, which represents OMI's remaining interest in the partnership. In 1992, OMI wrote this investment down by $1,982,000.\nAt December 31, 1992, OMI had receivables from affiliates of $13,775,000 consisting of $4,655,000 in dividends receivable from Amazon, $2,500,000 in dividends receivable from Wilomi, and $6,620,000 receivable for the purchase of a vessel on behalf of White Sea. These receivables were collected in 1993, with the exception of $886,000 from White Sea, which was contributed to the venture.\nThe Company received dividends from Amazon of $4,410,000 and $258,000 from Aurora in 1993.\nCertain of the loan agreements to which the Company's joint ventures are party contain restrictive covenants requiring minimum levels of cash or cash equivalents, working capital and net worth, maintenance of specified financial ratios and collateral values, and restrict the ability of the joint ventures to pay dividends to the Company.\nThe loan agreements described above also contain various provisions restricting the right of the joint ventures to make certain investments, to place additional liens on their property, to incur additional long-term debt, to make certain payments (including in certain instances, dividends), to merge or to undergo a similar corporate reorganization, and to enter into transactions with affiliated companies.\nNOTE 3--LONG-TERM DEBT AND CREDIT ARRANGEMENTS\nLong-term debt consisted of the following:\nIn November 1993, the Company issued $170,000,000 in unsecured Senior Notes due November 1, 2003. The notes are not redeemable prior to November 1, 1998; thereafter, the notes are redeemable at the option of the Company at a premium until November 1, 2000 when the notes will be redeemable at face value, plus accrued interest.\nBonds of domestic subsidiaries of OMI aggregating $36,390,000 and $48,176,000 at December 31, 1993 and 1992, including the amounts due within one year, are collateralized by mortgages on specific vessels and are guaranteed as to the principal and\ninterest by the U.S. Government under the Title XI program. These security arrangements restrict these subsidiaries from, among other things, the withdrawal of capital, the payment of common stock dividends and the extending of loans to affiliated parties.\nAt December 31, 1993, vessels with a net book value of $269,349,000, investments of $13,786,000 (included in Capital construction and other restricted funds in the accompanying balance sheets) and shares of a subsidiary and a joint venture with an aggregate carrying value of $22,420,000 have been pledged as collateral on available lines of credit with banks and long-term debt issues.\nCertain of the loan agreements of the Company's subsidiaries contain restrictive covenants requiring minimum levels of cash or cash equivalents, working capital and net worth, maintenance of specified financial ratios and collateral values, and restrict the ability of the Company's subsidiaries to pay dividends to the Company.\nThe loan agreements described above also contain various provisions restricting the right of OMI and\/or its subsidiaries to make certain investments, to place additional liens on the property of certain of OMI's subsidiaries, to incur additional long-term debt, to make certain payments, to merge or to undergo a similar corporate reorganization, and to enter into transactions with affiliated companies. As dividend payments are limited to 50 percent of net income earned subsequent to issuance of the Notes, none of the retained earnings at December 31, 1993 were available for payment of dividends.\nThe maturities of the long-term debt for the five years following December 31, 1993 are as follows:\n1994 $ 15,302 1995 19,131 1996 16,838 1997 14,608 1998 16,901 Thereafter 214,847\nTotal $297,627\nAt December 31, 1993, OMI had available and unused a total of $45,500,000 in five short-term lines of credit with banks at variable rates, based on LIBOR.\nOMI has entered into interest rate SWAP agreements to manage interest costs and the risk associated with changing interest\nrates. At December 31, 1993 and 1992, the Company had outstanding four and seven, respectively, interest rate SWAP agreements with commercial banks. These agreements effectively change the Company's interest rate exposure on floating rate loans to fixed rates ranging from 5.29 percent to 9.02 percent. The interest rate SWAP agreements have various maturity dates from December 1994 to February 1999. The changes in the notional principal amounts are as follows:\nInterest expense on interest rate SWAPS for the three years ended December 31, 1993, 1992 and 1991 was $2,914,000, $4,332,000 and $2,412,000, respectively. Gains on termination of SWAP agreements totalled $217,000 for the year ended December 31, 1993. There were no gains on terminations in 1992 or 1991.\nThe Company is exposed to credit loss in the event of non-performance by other parties to the interest rate SWAP agreements. However, OMI does not anticipate non-performance by the counter-parties.\nNOTE 4--FAIR VALUE OF FINANCIAL INSTRUMENTS\nThe estimated fair values of the Company's financial instruments at December 31, are as follows:\nThe fair value of long-term debt is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to the Company for debt of the same remaining maturities. The fair value of interest rate SWAPS (used for hedging purposes) is the estimated amount the Company would receive or pay to terminate SWAP agreements at the reporting date, taking into account current interest rates and the current credit-worthiness of the SWAP counter-parties.\nSecurities available-for-sale included in Marketable securities, Capital construction and other restricted funds, and Long-term investments consisted of the following components:\nExcluded from the above schedule are 125,000 shares of Seacor Holdings, Inc., with a carrying value of $1,875,000, which are restricted from sale until February 1995, and in accordance with SFAS 115, are not included in securities available-for- sale.\nIn 1992, OMI recognized a $13,094,000 loss provision as a charge against operations pertaining to the COC investment. The unrealized loss of $5,948,000, net of deferred taxes of $3,295,000, reflected in stockholders' equity in 1991, pertained to this investment.\nNOTE 5--INCOME TAXES\nA summary of the components of the (benefit) provision for income taxes is as follows:\nThe (benefit) provision for income taxes varied from the statutory rates due to the following:\nThe components of deferred income taxes payable - net relate to the tax effects of temporary differences as follows:\nIn 1992, the Company adopted FASB Statement No. 109, \"Accounting for Income Taxes\". There was no cumulative effect on the Company's financial position or results of operations from this change. Prior year's financial statements had not been restated for deferred income taxes and benefits which had been provided in accordance with the provisions of FASB Statement No. 96.\nThe Company has not provided deferred taxes on its equity in the undistributed earnings of foreign corporate joint ventures accounted for under the equity method other than Amazon. These earnings are considered by management to be permanently invested in the business. If the earnings were not considered permanently invested, approximately $10,347,000 of additional deferred tax liabilities would have been provided at December 31, 1993.\nOn August 2, 1993, Congress passed the Omnibus Budget Reconciliation Act of 1993, (the \"Act\"). The major component of the Act affecting OMI was the retroactive increase in the marginal corporate tax rate from 34 percent to 35 percent, increasing deferred taxes payable by $3,044,000 to comply with the provisions of the Act.\nNOTE 6--TREASURY STOCK\nDuring 1992, OMI purchased 639,000 shares of the Company's common stock at an aggregate price of $2,658,000. In addition, 666,000 shares were added to treasury from the ESOP (see Note 7) and 1,291,000 shares were retired.\nNOTE 7--EMPLOYEE STOCK OWNERSHIP PLAN\nIn November 1987, OMI established an Employee Stock Ownership Plan (\"ESOP\"), effective January 1, 1987, for all eligible employees and approved a contribution of $400,000 toward the funding of the ESOP trust.\nIn November 1987, the ESOP trust borrowed $9,600,000 from a bank, pursuant to a loan agreement guaranteed by OMI, which provided for 28 quarterly payments. OMI agreed to make annual contributions to the ESOP as necessary to repay the principal and interest on the ESOP's debt. The ESOP purchased 2,666,666 shares of common stock, at the same date, from OMI for $10,000,000.\nIn February 1990, OMI expanded its 1987 ESOP Plan by purchasing 737,366 shares of OMI common stock for an aggregate purchase price of $7,558,000. OMI funded this purchase by amending the November 1987 loan agreement, providing for 24 quarterly installments at a rate of Prime plus .53 percent, with a final payment due November 1995.\nOMI's contribution to the ESOP had been used to make loan principal and interest payments. With each loan payment, a portion of the common stock had been released from the pledge to the bank and allocated annually to participating employees to the extent allowable by the Internal Revenue Code.\nOn December 23, 1992, OMI repurchased 666,000 shares of OMI common stock from the ESOP trust at an aggregate cost of $6,825,000 and, correspondingly, reduced the receivable from ESOP by the same amount. During 1992, OMI reduced ESOP debt by scheduled payments of $1,141,000, and in July 1992 paid the remaining ESOP loan balance of $9,345,000.\nNOTE 8--STOCK OPTION AND RESTRICTED STOCK PLANS\nThe Incentive Stock Option Plan (\"ISO\") of 1984 provides for the granting of options to acquire up to 600,000 shares of the Company's common stock. Options under this Plan are exercisable at the rate of 33 1\/3 percent a year, commencing one year from the date of grant and expiring ten years after the date of grant.\nThe Non-Qualified Stock Option Plan of 1986 provides for the granting of up to 500,000 shares at a price not less than fair market value at the date of grant. Options are exercisable at the rate of 20 percent per year, commencing one year from the date of grant, and expiring ten years after the date of grant. Stock Appreciation Rights (\"SARs\") have been granted in tandem with all options under this plan. Such rights offer recipients the alternative of electing to cancel the related stock option, and to receive instead an amount in cash, stock or a combination of cash and stock equal to the difference between the option price and the market price of the Company's stock on the date at which the SAR is exercised.\nProceeds received from the exercise of the options are credited to the capital accounts. Compensation expense is recorded for options based on the difference between market price on the day exercised and option prices. Compensation expense relating to SARs is recorded with respect to the rights based upon the quoted market value of the shares and exercise provisions. Charges (benefits) to net income relating to SARs and\/or options in 1993, 1992 and 1991 were $96,000, $(126,000) and $426,000, respectively.\nOn June 12, 1990, the Board of Directors of OMI adopted, with shareholders' approval, the 1990 Equity Incentive Plan (the \"1990 Plan\"). The total number of shares of OMI common stock that may be optioned or issued as stock under this plan is 1,000,000 shares. The maximum number of issuable common stock is 300,000 shares, of which OMI awarded 15,000 shares and\n254,000 shares in 1991 and 1990, respectively, to eligible key employees under this Plan. On January 27, 1993 and December 18, 1990, OMI granted 131,000 and 606,000 options, respectively, that are not intended to qualify as incentive stock options which are exercisable at a rate of 33 1\/3 percent per year commencing one year from the date of grant, and expiring ten years after the date of grant. Upon issuance of restricted common stock under the 1990 Plan, unearned compensation, equivalent to the market value at the date of grant, is charged to stockholders' equity and subsequently amortized over the life of the award.\nA summary of the changes in shares under option for all plans is as follows:\nNumber of Options Option Price Outstanding at January 1, 1991 1,162,833 $2.8125 to 9.875 Exercised (137,154) 2.8125 to 4.6875 Cancelled (108,000) 4.6875 to 5.125 Outstanding at December 31, 1991 917,679 2.8125 to 9.875 Exercised (6,000) 5.125 Forfeited (4,267) 4.6875 Outstanding at December 31, 1992 907,412 2.8125 to 9.875 Granted 131,000 4.50 Exercised (47,623) 2.8125 to 5.125 Forfeited (14,300) 5.125 to 9.875 Outstanding at December 31, 1993 976,489 $4.25 to 9.875\nNOTE 9--RETIREMENT BENEFITS AND DEFERRED COMPENSATION\nIn June 1993, the Company terminated its non-contributory defined benefit Pension Plan (the \"Plan\"). This termination resulted in a loss of $1,017,000, which the Company recognized in 1993. All participants of the Plan were fully vested as of the termination date. The settlement of the accumulated benefit obligation, through the purchase of annuity contracts for or lump-sum payments to participants by the Company, will be completed in 1994.\nIn determining the actuarial present value of the projected benefit obligation as of December 31, 1993 and 1992, the weighted average discount used was 4.2 percent in 1993 (which approximates the rate expected to be used in settlement of these obligations in 1994) and 8.5 percent in 1992, and the rate of increase in future compensation expense was 5 percent in 1992.\nThe expected long-term rate of return on Pension Plan assets was 8 percent in 1993 and 1992. Assets of the Plan primarily consist of Chase Domestic Liquidity Funds.\nThe following table sets forth the Plan's funded status and amounts recognized by OMI at December 31:\nNOTE 11--ASSETS HELD FOR SALE\nIn December 1992, OMI Petrolink Corp. (\"Petrolink\"), a subsidiary of the Company, entered into a contract to sell seven workboats for $7,500,000 for delivery in 1993.\nPetrolink received $3,750,000 in cash, notes receivable of $1,875,000 payable through March 31, 1996 and $1,875,000 in restricted stock of the purchaser. Gain on the sale was approximately $2,190,000.\nNOTE 12--DISPOSAL OF ASSETS\nIn 1992, the Company entered into a sale\/leaseback transaction on a vessel. The Company received $11,500,000 in cash, of which $3,500,000 was used to pay the mortgage on the vessel, a $2,000,000 secured note receivable due December 31, 1995, and a six-year lease at the current market rate. The gain of approximately $2,001,000 is being amortized over the term of the lease.\nThe net gain (loss) for the year ended December 31, on disposal of assets consists of the following:\nDuring 1991, OMI sold marketable securities and other assets with a cost of $7,319,000, resulting in a net gain of $105,000.\nIn October 1993, the Company's vessel, OMI Charger, which was at anchor without cargo outside Galveston, Texas, suffered explosions which caused the deaths of three persons and resulted in the total loss of the vessel. No environmental damage occurred. The Company's insurance covered the loss of the vessel and its protection and indemnity coverage is expected to cover property and personal injury claims.\nNOTE 13--FINANCIAL INFORMATION RELATING TO DOMESTIC AND FOREIGN OPERATIONS\nPresented below is certain information relating to OMI's operations:\nInvestments in and net receivables from foreign subsidiaries amounting to $395,988,000, $274,109,000 and $287,343,000 at December 31, 1993, 1992 and 1991, respectively, have been excluded from domestic assets as they have been eliminated in consolidation.\nVoyage revenues included income from major customers as follows:\nNOTE 14--COMMITMENTS AND CONTINGENCIES\nOMI and certain subsidiaries are defendants in various actions arising from shipping operations. Such actions are covered by insurance or, in the opinion of management, after review with counsel, are of such nature that the ultimate liability, if any, would not have a material adverse effect on the consolidated financial statements.\nIn September 1988, the Board of Directors adopted a Separation Allowance Program providing for severance benefits to all non-union employees other than non-resident aliens, leased employees, directors who are not employees of the Company or employees with individual severance plans in the event there is a change of control in OMI and such employees are thereafter terminated without cause or transferred or their position is significantly changed. Severance benefits include a lump-sum payment equal to the employee's average monthly wages immediately prior to the date of termination times the lesser of 24 or one for each year of full-time employment by the Company (but not less than six).\nThe Company has employment agreements with five key officers. Each of the employment agreements provide that if the employee is terminated without cause, voluntarily terminates his employment within 90 days of a relocation or reduction in compensation or responsibilities, dies or is disabled, such employee will continue to receive base salary (plus a portion of his incentive bonus for the year in which termination occurs) and other benefits until December 31, 1994 or twelve months from the date of termination, whichever is later. In addition, if any such employee is terminated without cause (other than for reasons of disability) within three years of a Change of Control (as defined in the Company's Separation Allowance Program), the Company will pay such employee an amount equal to three times the sum of his then current base salary and his maximum incentive bonus. The aggregate commitment for future salaries, excluding bonuses, under these employment agreements is approximately $1,328,000 at December 31, 1993. The maximum contingent liability for salary and incentive compensation in the event of a change in control is approximately $3,574,000 at December 31, 1993. The Company is in the process of revising its employment agreements and contracts with additional key employees.\nOMI has committed, with a joint venture partner, to construct a vessel to be built in the Peoples Republic of China for a cost of approximately $54,400,000. The vessel is scheduled to be delivered in the second quarter of 1996.\nOMI acts as a guarantor for a portion of the debt incurred by joint ventures with affiliates of two of its joint venture\npartners. Such debt was approximately $102,869,000 at December 31, 1993 with OMI's share of such guarantees being approximately $49,594,000. OMI also is a guarantor for one of its joint venture's revolving line of credit of $4,000,000, with a guarantee to OMI from its joint venture partner of $2,000,000.\nThe Company and its joint venture partners have committed to fund any working capital deficiencies which may be incurred by their joint venture investments. At December 31, 1993, no such deficiencies have been funded.\nNOTE 15--SUBSEQUENT EVENT\nOn January 28, 1994, a vessel built in Japan for a joint venture was delivered for an aggregate purchase price of $38,479,000.\nINDEPENDENT AUDITORS' REPORT\nTo the Board of Directors and Shareholders of OMI Corp.:\nWe have audited the accompanying consolidated balance sheets of OMI Corp. and its subsidiaries as of December 31, 1993 and 1992 and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1993. Our audits also included the financial statement schedules listed in Item 14. These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits.\nWe conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.\nIn our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the companies at December 31, 1993 and 1992 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1993, in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.\nDeloitte & Touche New York, New York\nFebruary 18, 1994\nITEM 8. SUPPLEMENTARY DATA QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)\nITEM 8. FINANCIAL SCHEDULES\nOMI CORP. AND SUBSIDIARIES SCHEDULE II AMOUNTS RECEIVABLE FROM RELATED PARTIES AND UNDERWRITERS, PROMOTERS AND EMPLOYEES (OTHER THAN RELATED PARTIES) DECEMBER 31, 1993 (IN THOUSANDS)\nBalance at Balance at Beginning End Affiliate of Year Additions Deletions of Year\nAmazon Transport, Inc. $ 4,655 $ -0- $ 4,655 $ -0-\nWilomi, Inc. 2,500 -0- 2,500 -0-\nWhite Sea Holdings Ltd. 6,620 -0- 6,620 -0-\nTotal $ 13,775 $ -0- $ 13,775 $ -0-\n[FN] The Company received $5,734 from White Sea Holdings, Inc. during 1993 and the remaining balance was recorded as a capital contribution.\nSCHEDULE III\nSCHEDULE III\nSCHEDULE III OMI CORP. NOTES TO CONDENSED FINANCIAL STATEMENTS\n1. The condensed financial statements, hereto reflect OMI Corp. (\"OMI\") parent only, balance sheets, statements of operations and statements of cash flows. All domestic and foreign subsidiaries which are more than 20% owned and investments in joint ventures are accounted for by the equity method.\nSee Notes to Consolidated Financial Statements on pages 35 through 53 of OMI's 1993 Form 10K.\nCertain reclassifications have been made to the 1992 financial statements to conform to the 1993 presentations.\n2. Long-Term Debt\nLong-term debt as of December 31, 1993 and 1992 consisted of the following:\nIn November 1993, the Company issued $170,000,000 in unsecured Senior Notes due November 1, 2003. The notes are not redeemable prior to November 1, 1998; thereafter, the notes are redeemable at the option of the Company at a premium until November 1, 2000 when the notes will be redeemable at face value, plus accrued interest.\n3. Lines of Credit\nAt December 31, 1992, the Company had $7,000,000 in short-term notes payable to banks representing borrowings against lines of credit established with a bank.\nAt December 31, 1993, the Company had available and unused $35,500,000 in four lines of credit at variable rates, based on LIBOR.\nSCHEDULE X\nOMI CORP. AND SUBSIDIARIES SUPPLEMENTAL INCOME STATEMENT INFORMATION FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991 (IN THOUSANDS)\nCHARGED TO EXPENSE:\nItem 1993 1992 1991\nMaintenance & Repair $21,410 $14,010 $16,962\nWILOMI, INC. AND SUBSIDIARIES\nCONSOLIDATED BALANCE SHEETS DECEMBER 31, 1993 AND 1992\nNOTES 1993 1992\nASSETS\nCURRENT ASSETS: Cash (including cash equivalents of $2,400,000 in 1993 and $1,500,000 in 1992) 2 $ 7,013,960 $ 3,342,896 Advances to masters 89,026 63,823 Accounts receivable 925,328 1,032,323 Other receivables 352,930 704,988 Notes due from affiliate 4 2,755,102 2,500,000 Prepaid expenses 922,827 972,533\nTotal current assets 12,059,173 8,616,563\nRECEIVABLES FROM AFFILIATES 4 225,192\nVESSELS (net of accumulated depreciation of $10,069,152 in 1993 and $5,259,704 in 1992) 2,3 120,682,447 125,438,232\nNOTES DUE FROM AFFILIATES 4 16,409,898 19,165,000\nOTHER ASSETS 1,098,586 763,753\nTOTAL ASSETS $150,475,296 $153,983,548\nSee notes to consolidated financial statements.\nNOTES 1993 1992\nLIABILITIES AND STOCKHOLDERS' EQUITY\nCURRENT LIABILITIES: Accounts payable $ 408,002 $ 339,083 Accrued expenses 2,261,056 1,225,868 Accrued interest payable 1,562,057 1,339,786 Due to affiliate 4 2,500,000 Current portion of long-term debt 6,064,000 5,887,000\nTotal current liabilities 10,295,115 11,291,737\nPAYABLES TO AFFILIATES 4 2,168,126\nADVANCE TIME CHARTER REVENUES AND OTHER LIABILITIES 500,656 458,029\nLONG-TERM DEBT 5 90,283,000 96,347,000\nSTOCKHOLDERS' EQUITY: Common stock - $1.00 par value; 10,000 shares authorized and outstanding 10,000 10,000 Capital surplus 1,080,577 1,080,577 Retained earnings 48,305,948 42,628,079\nTotal stockholders' equity 49,396,525 43,718,656\nTOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $150,475,296 $153,983,548\nWILOMI, INC. AND SUBSIDIARIES\nWILOMI, INC. AND SUBSIDIARIES\nWILOMI, INC. AND SUBSIDIARIES\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991\n1. COMPANY\nWilomi, Inc. and subsidiaries (the \"Company\" or \"Wilomi\") are jointly-owned by Universal Bulk Carriers, Inc. (\"UBC\"), a wholly- owned subsidiary of OMI Corp. (\"OMI\"), and K\/S Wilhelmsen Transport and Trading A\/S (\"Wilhelmsen\") with interests of 49 and 51 percent respectively. On August 9, 1992, OMI transferred its 49 percent investment in Wilomi to its wholly-owned subsidiary, UBC. The joint venture, incorporated on May 15, 1987, owns and operates commercial vessels.\n2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES\nBASIS OF PRESENTATION - The consolidated financial statements include all subsidiaries of the Company. All significant intercompany accounts and transactions have been eliminated in consolidation.\nOPERATING REVENUES AND EXPENSES - Voyage revenues and expenses are recognized on the percentage-of-completion method of accounting based on voyage costs incurred to date to estimated total voyage costs. Estimated losses on voyages are provided in full at the time such losses become evident.\nSpecial survey and drydock expenses are accrued and charged to operating expenses over the survey cycle, which is generally a three year period.\nVESSELS AND VESSELS UNDER CONSTRUCTION - Vessels are recorded at cost; including interest on funds borrowed to finance the construction of new vessels. Interest of $594,893 and $2,088,081 was capitalized during the years ended December 31, 1992 and 1991, respectively.\nDepreciation is provided on the straight-line method based on the estimated useful lives of the vessels, up to the vessel's estimated salvage value. Salvage value is based upon the vessel's light weight tonnage, multiplied by a scrap rate.\nThe Company periodically reviews the book value of its vessels and its ability to recover the remaining book value of the vessels using undiscounted cash flow over the remaining life of each vessel.\nFEDERAL INCOME TAXES - No provision has been made for Federal income taxes. The income of the Company is not generally subject to tax as a result of various provisions of the Internal Revenue Code. Additionally, the country in which the Company is incorporated exempts shipping and maritime operations from taxation.\nCASH FLOWS - Cash equivalents represent liquid investments that equal fair market value and mature within 90 days. During the years ended December 31, 1993, 1992 and 1991, the Company paid interest of $4,605,435, $4,097,261 and $5,178,645, respectively. The Company paid no taxes in 1993, 1992 or 1991.\n3. VESSELS AND VESSELS UNDER CONSTRUCTION\nIn November 1993, the Company entered into an agreement to construct a new vessel at an approximate cost of $54,000,000. The vessel is expected to be delivered in 1996.\nDuring 1992, the Company took delivery of three vessels which had been under construction in 1991. One vessel, with total costs of $37,681,683, was sold in April, 1992 at a gain of $9,848,317.\nIn July 1991, a vessel with total construction costs of $36,858,043 was delivered to the Company. This vessel was sold in September 1991 for a gain of $12,050,416.\n4. RELATED PARTY TRANSACTIONS\nOMI acted as technical and commercial manager for two vessels owned during 1993 and three vessels owned during 1992 and 1991.\nManagement fees to OMI relating to years ended December 31, 1993, 1992 and 1991 were $288,000, $255,827 and $277,034, respectively.\nWilhelmsen acted as manager for one vessel owned during 1993. Management fees to Wilhelmsen for the year ended December 31, 1993 were $144,000.\nThe Company declared dividends of $5,102,041 and $1,000,000 in 1992.\nNotes due from affiliates in 1993 of $19,165,000 bear interest at 6.5 percent. During 1992, notes due from affiliates of $19,165,000 and $2,500,000 accrued interest at 6.5 percent and 6.3 percent, respectively. In 1992, the Company forgave $2,602,041 of the note due from Wilhelmsen in lieu of payment of the dividend. Notes due from affiliates of $5,500,000 in 1991 bear interest at 6.3 percent. Interest income on these notes amounted to $1,263,000, $836,000 and $25,000 for the years ended December 31, 1993, 1992 and 1991, respectively.\nIn accordance with an agreement between UBC and Wilhelmsen, UBC is entitled to receive $1,000,000 upon delivery of each vessel that was contracted for or under construction at the time the joint venture was formed. In 1992, Wilomi took delivery on a new building subject to this agreement. Accordingly, Wilomi paid a dividend of $1,000,000 to UBC in 1992.\n5. LONG-TERM DEBT\nLong term debt at December 31, 1993 and 1992 consisted of the following:\nThe maturities of the mortgage notes payable, for each of the five years following December 31, 1993, are as follows:\n1994 $ 6,064,000 1995 6,446,000 1996 6,654,000 1997 6,879,000 1998 7,122,000 Thereafter 63,182,000\nTotal $ 96,347,000\nAt December 31, 1993, the Company had available $10,000,000 in a short-term line of credit with a bank at a variable rate based on LIBOR.\nThe fair market value of long-term debt at December 31, 1993 is equal to its carrying value.\nDuring 1992, credit line draw-downs on two vessels which were under construction during 1991 were refinanced with bank loans totaling $83,960,000. Additionally, a mortgage note on a vessel was refinanced in the amount of $19,300,000.\n6. COMMITMENTS AND CONTINGENCIES\nThe Company acts as a guarantor on debt incurred by an affiliated company. Such debt was $4,000,000 at December 31, 1993.\nINDEPENDENT AUDITORS' REPORT\nTo the Shareholders of Wilomi, Inc. and Subsidiaries:\nWe have audited the accompanying consolidated balance sheets of Wilomi, Inc. and subsidiaries as of December 31, 1993 and 1992 and the related statements of consolidated income and retained earnings and of cash flows for each of the three years in the period ended December 31, 1993. These financial statements are the responsibility of the Companies' management. Our responsibility is to express an opinion on these financial statements based on our audits.\nWe conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.\nIn our opinion, such financial statements present fairly, in all material respects, the financial position of the Companies at December 31, 1993 and 1992, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1993 in conformity with generally accepted accounting principles.\nDeloitte & Touche New York, New York\nFebruary 18, 1994\nAMAZON TRANSPORT, INC.\nBALANCE SHEETS DECEMBER 31, 1993 and 1992\nNOTES 1993 1992 ASSETS\nCURRENT ASSETS: 2 Cash and cash equivalents $ 7,873,324 $11,155,370 Advances to masters 31,971 137,417 Receivables: Traffic 530,721 Other 107,258 331,606 Prepaid expenses and other current assets 497,579 279,184\nTotal current assets 9,040,853 11,903,577\nVESSEL AT COST: 2 Vessel 21,394,270 21,272,767 Less accumulated depreciation 4,906,994 4,293,358 Vessel - net 16,487,276 16,979,409\nRECEIVABLE FROM AFFILIATE 3 4,410,000\nOTHER ASSETS 5,866 73,712\nTOTAL ASSETS $25,533,995 $33,366,698\nLIABILITIES AND STOCKHOLDERS' EQUITY\nCURRENT LIABILITIES - Accounts payable and accrued liabilities $ 2,113,435 $ 833,033\nPAYABLE TO AFFILIATES 3 14,707 4,695,025\nADVANCED TIME CHARTER REVENUE 511,897\nSTOCKHOLDERS' EQUITY: Common stock - $5.00 par value; authorized 5,000 shares, outstanding 180 shares 900 900 Capital surplus 21,194,085 21,194,085 Retained earnings 2,210,868 6,131,758\nTotal stockholders' equity 23,405,853 27,326,743\nTOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $25,533,995 $33,366,698\nSee notes to financial statements.\nAMAZON TRANSPORT, INC.\nAMAZON TRANSPORT, INC.\nAMAZON TRANSPORT, INC.\nNOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991\n1. ORGANIZATION\nAmazon Transport, Inc. (the \"Company\" or \"Amazon\") is jointly owned by Universal Bulk Carriers, Inc. (\"UBC\"), a wholly-owned subsidiary of OMI Corp. (\"OMI\"), and Bergesen d.y. A\/S (\"Bergesen\") with interests of 49 and 51 percent, respectively. The Company began operating as a joint venture on December 3, 1988 for the purpose of owning and chartering commercial vessels. The Company owned and operated one vessel, the Settebello, for all periods presented.\n2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES\nOperating Revenues and Expenses - Voyage revenues and expenses are recognized on the percentage-of-completion method of accounting. Estimated losses are provided in full at the time such losses become evident.\nVessel - The vessel is recorded at cost. Depreciation is provided on the straight-line method based on the estimated useful life of the vessel up to the estimated salvage value. Salvage value is based upon the scrap value of the vessel's light weight tonnage.\nThe Company periodically reviews the book value of its vessel and its ability to recover the remaining book value of the vessel using undiscounted cash flows over the remaining life of the vessel.\nFederal Income Taxes - No provision has been made for Federal income taxes. The income of the Company is not generally subject to tax as a result of various provisions of the Internal Revenue Code. Additionally, the country in which the Company is incorporated exempts shipping and maritime operations from taxation.\nCash Flows - Cash equivalents represent liquid investments which mature within 90 days. The Company paid no interest or taxes in 1993, 1992 and 1991.\n3. RELATED PARTY TRANSACTIONS\nThe Company has entered into management service agreements with OMI and Bergesen, who act as technical and commercial managers of the Settebello. The Company paid OMI and Bergesen management fees of $200,000 for each of the years ended December 31, 1993, 1992, and 1991.\nThe following table summarizes balances receivable from or due to affiliated companies at December 31:\n1993 1992 Receivable from affiliate: OMI $4,410,000\nPayable to affiliates: OMI $ 14,646 $ 29,281 UBC 61 4,657,572 Bergesen 8,172\n$ 14,707 $4,695,025\nDuring 1992, the Company issued 6.5 percent notes in the amounts of $4,410,000 and $4,590,000 to OMI and Bergesen, respectively. Interest earned on these notes aggregated $391,068. On December 31, 1992, the Company forgave the $4,590,000 note due from Bergesen and $199,443 of related interest in lieu of payment of a portion of the dividend. (See Note 4).\n4. DIVIDENDS\nDuring 1993, the Company declared and paid a $9,000,000 dividend. The Company also paid $4,655,000 of 1992 dividends during the year.\nDuring 1992, the Company declared dividends of $9,500,000 of which $55,557 was paid.\nDuring 1991, the Company paid dividends of $12,000,000 to UBC and Bergesen.\nINDEPENDENT AUDITORS' REPORT\nTo the Shareholders of Amazon Transport, Inc.:\nWe have audited the accompanying balance sheets of Amazon Transport, Inc. as of December 31, 1993 and 1992 and the related statements of operations and retained earnings and of cash flows 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.\nWe conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.\nIn our opinion, the accompanying financial statements present fairly, in all material respects, the financial position of the Company at December 31, 1993 and 1992 and the 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.\nDeloitte & Touche New York, New York\nFebruary 18, 1994\nITEM 9.","section_9":"ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE\nNone. PART III\nITEM 10.","section_9A":"","section_9B":"","section_10":"ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF OMI\nPursuant to General Instruction G(3) the information regarding directors called for by this item is hereby incorporated by reference from OMI's 1994 Proxy Statement to be filed with the Securities and Exchange Commission. Certain information relating to Executive Officers of the Company appears at the end of Part I of this Form 10-K Annual Report.\nITEM 11.","section_11":"ITEM 11. EXECUTIVE COMPENSATION\nPursuant to General Instruction G(3) the information called for by this item is hereby incorporated by reference from OMI's 1994 Proxy Statement to be filed with the Securities and Exchange Commission.\nITEM 12.","section_12":"ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT\nPursuant to General Instruction G(3) the information called for by this item is hereby incorporated by reference from OMI's 1994 Proxy Statement to be filed with the Securities and Exchange Commission.\nITEM 13.","section_13":"ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS\nPursuant to General Instruction G(3) the information called for by this item is hereby incorporated by reference from OMI's 1994 Proxy Statement to be filed with the Securities and Exchange Commission.\nPART IV\nITEM 14.","section_14":"ITEM 14. FINANCIAL STATEMENT SCHEDULES, EXHIBITS, REPORTS ON FORM 8-K AND FINANCIAL STATEMENTS OF AFFILIATES\n(a) Financial Statements and Financial Statement Schedules\n1. Financial Statements:\nOMI Corp. and Subsidiaries Consolidated Statements of Operations for the three years ended December 31, 1993.\nOMI Corp and Subsidiaries Consolidated Balance Sheets at December 31, 1993 and 1992.\nOMI Corp. and Subsidiaries Consolidated Statements of Cash Flows for the three years ended December 31, 1993.\nOMI Corp. and Subsidiaries Consolidated Statements of Changes in Stockholders' Equity for the three years ended December 31, 1993.\nOMI Corp. and Subsidiaries Notes to Consolidated Financial Statements for the three years ended December 31, 1993.\nOMI Corp. and Subsidiaries Quarterly Results of Operations for 1993 and 1992.\n2. Financial Statement Schedules:\nII -- OMI Corp. and Subsidiaries Amounts Receivable from Related Parties and Underwriters, Promotors and Employees (Other than Related Parties) at December 31, 1993.\nIII -- OMI Corp. (Parent only) Condensed financial information as to financial position as of December 31, 1993 and 1992, and statements of cash flows and results of operations for the years ended December 31, 1993, 1992 and 1991.\nV -- OMI Corp. and Subsidiaries Property, Plant and Equipment for the years ended December 31, 1993, 1992 and 1991.\nVI -- OMI Corp. and Subsidiaries Accumulated Depreciation and Amortization of Property, Plant and Equipment for the years ended December 31, 1993, 1992 and 1991.\nX -- OMI Corp. and Subsidiaries Supplementary Income Statement Information for the years ended December 31, 1993, 1992 and 1991.\n3. Exhibits\n(b) Reports on Form 8-K.\nNone.\n(d) Financial Statements of Affiliates:\nWilomi Inc. and Subsidiaries\nConsolidated Balance Sheets at December 31, 1993 and 1992, and Related Statements of Consolidated Income and Retained Earnings, and Cash Flows for each of the three years in the period ended December 31, 1993 and Independent Auditors' Report.\nAmazon Transport, Inc.\nBalance Sheets at December 31, 1993 and 1992 and Related Statements of Operations and Retained Earnings, and Cash Flows for each of the three years in the period ended December 31, 1993 and Independent Auditors' Report.\nSIGNATURES\nPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.\nOMI CORP.\nBy \/s\/ Jack Goldstein JACK GOLDSTEIN President, Chief Executive Officer and Director\nPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.\nSIGNATURE TITLE\n\/s\/ Michael Klebanoff Chairman of the Board March 22, 1994 MICHAEL KLEBANOFF and Director\nPresident, Chief March 22, 1994 \/s\/ Jack Goldstein Executive Officer, JACK GOLDSTEIN and Director\n\/s\/ Chaim Barash Senior Vice President March 22, 1994 CHAIM BARASH and Director\n\/s\/ Livio Borghese Director March 22, 1994 LIVIO BORGHESE\n\/s\/ C.G. Caras Director March 22, 1994 C.G. CARAS\n\/s\/ Steven D. Jellinek Director March 22, 1994 STEVEN D. JELLINEK\n\/s\/ Emanuel L. Rouvelas Director March 22, 1994 EMANUEL L. ROUVELAS\n\/s\/ Franklin W.L. Tsao Director March 22, 1994 FRANKLIN W.L. TSAO\n\/s\/ George W. Vlandis Director March 22, 1994 GEORGE W. VLANDIS\nSenior Vice President, March 22, 1994 \/s\/ Vincent J. de Sostoa Treasurer and Chief VINCENT J. DE SOSTOA Financial Officer","section_15":""}
{"filename":"850429_1993.txt","cik":"850429","year":"1993","section_1":"Item 1. BUSINESS\nDescription of Business\nTredegar Industries, Inc. (\"Tredegar\") was formed under the laws of the Commonwealth of Virginia as a subsidiary of Ethyl Corporation (\"Ethyl\") on June 1, 1988. On July 10, 1989, Ethyl distributed all of the outstanding Tredegar common stock, no par value (the \"Common Stock\"), to the holders of Ethyl common stock at the close of business on that day. Since July 10, 1989, Tredegar has been a publicly held operating company. Tredegar is engaged directly or through subsidiaries in plastics, metal products, energy and other businesses (primarily software and rational drug design research). Tredegar's Energy segment is composed of its coal subsidiary, The Elk Horn Coal Corporation (\"Elk Horn\"), and oil and gas properties located in Western Canada. On February 4, 1994, Tredegar sold its remaining oil and gas properties. In addition, in November 1993, Tredegar announced that it is pursuing the sale of Elk Horn. Assuming Elk Horn can be sold on terms agreeable to Tredegar, the sale is expected to be completed by mid-1994. Tredegar's Energy segment has been reported as discontinued operations.\nThe following discussion of Tredegar's businesses should be read in conjunction with the information contained in the \"Financial Review\" section of the Annual Report referred to in Item 7 below.\nPlastics\nThe Plastics segment is composed of the Film Products division (\"Film Products\"), Tredegar Molded Products Company (\"Molded Products\") and Fiberlux, Inc. (\"Fiberlux\"). Film Products and Molded Products manufacture a wide range of products including specialty films, injection-molded products and custom injection molds. Broad application for these products is found in films for packaging, industrial, agricultural and disposable personal products, including diapers, and in molded products for industrial, household, personal-care, medical and electronics products. Fiberlux produces vinyl extrusions, windows and patio doors. These products are produced at various locations throughout the United States and are sold both directly and through distributors. Tredegar also has films plants located in the Netherlands and Brazil, where it produces films primarily for the European and Latin American markets, respectively. The Plastics segment competes in all of its markets on the basis of the quality and prices of its products and its service.\nFilm Products\nFilm Products produces films for two major market categories: disposables and industrial.\nDisposables. Film Products is the largest U.S. supplier of embossed and permeable films for disposable personal products. In each of the last three years, this class of products accounted for more than 20% of the consolidated revenues of Tredegar.\nFilm Products supplies embossed films to domestic and international manufacturers for use as backsheet in such disposable products as baby diapers, adult incontinent products, feminine hygiene pads and hospital underpads. Film Products' primary customer for embossed films for backsheet is The Procter & Gamble Company (\"P&G\"), the leading disposable diaper manufacturer. Film Products also sells embossed films to several producers of private label products. Film Products competes with several foreign and domestic film products manufacturers in the backsheet market.\nIn response to environmental concerns, Film Products has been involved in the development of new materials to replace the existing backsheet for disposable diapers with a more environmentally friendly material.\nIn 1991, Film Products' U.S. disposable diaper backsheet volume declines due to downgauging (i.e., making thinner films) were offset by higher volume from increased P&G market share. In 1992, Film Products' U.S. disposable diaper backsheet volume declined significantly due to lower P&G market share. The economic recession caused many consumers to seek lower priced private label diapers. In 1993, P&G's U.S. diaper market share stabilized resulting in backsheet volumes roughly equal to 1992. On an international basis, 1993 backsheet sales were slightly higher than 1992. Overall, 1993 backsheet volumes were higher than 1992 but below 1990 and 1991 levels.\nFilm Products supplies permeable films to P&G for use as topsheet in adult incontinent products, feminine hygiene products and hospital underpads. The processes used in manufacturing these films were developed jointly by Film Products and P&G and are covered by applicable patents held by P&G and Tredegar. Film Products also sells significant amounts of permeable films to international affiliates of P&G.\nIn 1991, permeable film volumes improved over 1990 due to higher international sales, primarily in the Far East. In 1992, volumes improved over 1991 due to higher sales in all geographic areas. In 1993, permeable film volumes declined in the U.S. and Far East, partially offset by increases in Europe and Latin America. Overall, 1993 permeable film volumes were below 1992 and level with 1991.\nP&G also purchases molded plastic products from Molded Products. P&G and Tredegar have had a successful long-term relationship based on cooperation, product innovation and continuous process improvement. The loss or significant reduction of business associated with P&G would have a material adverse effect on Tredegar's business.\nIndustrial. Film Products produces a line of oriented films under the name MONAX(R). These are high strength, high moisture barrier films that allow both cost and source reduction opportunities over current packaging mediums. During 1994, Film Products will concentrate on increasing awareness of MONAX(R) film and the development of heat sealable versions that can be used by end- users in food, industrial, and medical packaging markets.\nFilm Products also produces coextruded and monolayer permeable formed films under the name of VisPore(R). These films are used to regulate fluid transmission in many industrial, medical, agricultural and packaging markets. Specific examples include rubber bale wrap, filter plies for surgical masks and other medical applications, permeable ground cover and cook-in-bag for rice and pasta.\nDifferentially embossed monolayer and coextruded films are also produced by Film Products. Some of these films are extruded in a Class 10,000 clean room and act as a disposable, protective coversheet for photopolymers used in the manufacture of circuit boards. Other films, sold under the name of ULTRAMASK(R), are used as masking films that protect polycarbonate, acrylics and glass from damage during fabrication, shipping and handling.\nIn January 1994, Film Products announced its intention to sell or close its Flemington, New Jersey, plant in order to exit the non-strategic conventional films business (single layer, blown polyethylene film used primarily for general purpose industrial packaging).\nRaw Materials. The primary raw materials for films produced by Film Products are low-density and linear low-density polyethylene resins, which Film Products obtains from domestic and foreign suppliers at competitive prices.\nTredegar's management believes that there will be an adequate supply of polyethylene resins in the immediate future. Changes in resin prices, and the timing thereof, could have a significant impact on the profitability of this division.\nResearch and Development. Film Products has a technical center in Terre Haute, Indiana. Film Products holds 35 U.S. patents and nine U.S. trademarks. Expenditures for research and development have averaged approximately $3.3 million per year during the past three years.\nMolded Products\nMolded Products manufactures five major categories of products: packaging products, industrial products, parts for medical products, parts for electronics products and injection-mold tools. Packaging products represent more than half of Molded Products' business.\nPackaging Products. The packaging group produces deodorant canisters, lip balm sticks, custom jars, plugs, fitments and closures, primarily for toiletries, cosmetics, pharmaceuticals and personal hygiene markets. Molded Products is the leading U.S. producer of lip balm sticks. Molded Products competes with various large producers in the packaging market.\nIndustrial Products. Molded Products produces molded plastic parts for business machines, media storage products, cameras, appliances and various custom products. In the business machine area, closer tolerances, made possible by computer-aided design and manufacturing (CAD\/CAM) and modern resins, have led to expanded high-performance applications. Molded Products works closely with customers in the design of new industrial products and systems. The market for such products is very competitive.\nParts for Medical and Electronics Products. Effective July 31, 1993, Molded Product's subsidiary, Polestar Plastics Manufacturing Company, acquired the assets of a custom molder of precision parts for the medical and electronics markets. Products supplied to the medical market include, among others, disposable plastic parts for laparoscopic surgery instruments, staple guns, needle protector devices and syringe housings. Products supplied to the electronics market include, among others, connectors for computer cables and circuit boards.\nInjection-Mold Tools. Molded Products' tooling group produces injection molds for internal use and for sale to other custom and captive molders. Molded Products operates one of the largest independent tool shops in the United States in St. Petersburg, Florida.\nRaw Materials. Polypropylene and polyethylene resin are the primary raw materials used by Molded Products. Molded Products also uses polystyrene resins. Molded Products purchases these raw materials from domestic suppliers at competitive prices. Changes in resin prices, and the timing thereof, could have a significant impact on the profitability of this division. Molded Products' management believes that there will be an adequate supply of these resins in the immediate future.\nResearch and Development. Molded Products owns eight U.S. patents and has spent an average of $.3 million each year for the last three years for research and development. Molded Products maintains a technical center as part of its St. Petersburg, Florida, complex.\nFiberlux\nFiberlux is a leading U.S. producer of rigid vinyl extrusions, windows and patio doors. Fiberlux products are sold to fabricators and directly to end users. The subsidiary's primary raw material, polyvinyl chloride resin, is purchased from producers in open market purchases and under contract. No critical shortages of polyvinyl chloride resins are expected.\nMetal Products\nThe Metal Products segment is composed of The William L. Bonnell Company, Inc. (\"Bonnell\"), Capitol Products Corporation (\"Capitol\") and Brudi, Inc. (\"Brudi\"). Bonnell and Capitol (\"Aluminum Extrusions\") produce soft alloy aluminum extrusions primarily for the building and construction industry, and for transportation and consumer durables markets. Brudi, acquired by Tredegar in April 1991, primarily produces steel attachments and uprights for the forklift truck market.\nAluminum Extrusions\nAluminum Extrusions manufactures plain, anodized and painted aluminum extrusions for sale directly to fabricators and distributors that use aluminum extrusions in the production of curtain walls, moldings, architectural shapes, running boards, tub and shower doors, boat windshields, window components and furniture, among other products. Sales are made primarily in the United States, principally east of the Rocky Mountains. Sales are substantially affected by the strength of the building and construction industry, which accounts for a majority of product sales.\nRaw materials for Aluminum Extrusions, consisting of aluminum ingot, aluminum scrap and various alloys, are purchased from domestic and foreign producers in open market purchases and under short-term contracts. Profit margins for products in Aluminum Extrusions are sensitive to significant fluctuations in aluminum ingot and scrap prices, which account for more than 40 percent of product cost. Tredegar does not expect critical shortages of aluminum or other required raw materials and supplies.\nAluminum Extrusions competes primarily based on the quality and prices of its products and its service with a number of national and regional manufacturers in the industry.\nBrudi\nHeadquartered in Ridgefield, Washington, Brudi is the second largest supplier of uprights and attachments for the forklift truck segment of the domestic materials handling industry. Brudi markets its products and services, which include in-house engineering and design capabilities, primarily to dealers and original equipment manufacturers of forklift trucks. Markets served include warehousing and distribution, food, fiber, primary metals, pharmaceuticals, beverage and paper. Brudi products are made primarily from steel, which is purchased on the open market and under contract from domestic producers. Tredegar does not foresee critical shortages of steel or other required raw materials and supplies.\nDuring 1992, Brudi acquired the assets of a materials handling company in Halifax, United Kingdom to serve the European market.\nEnergy\nThe Energy segment is composed of Elk Horn and oil and gas properties located in Western Canada. On February 4, 1994, Tredegar sold its remaining oil and gas properties. In addition, in November 1993, Tredegar announced that it is pursuing the sale of Elk Horn. Assuming Elk Horn can be sold on terms agreeable to Tredegar, the sale is expected to be completed by mid- 1994. Tredegar's Energy segment has been reported as discontinued operations.\nCoal\nElk Horn, an approximately 97 percent owned subsidiary, obtains income from royalties by leasing part of its Eastern Kentucky mineral rights (approximately 142,000 acres) for mining coal. The coal is generally characterized as high-volatility, bituminous A-rank with low sulphur content. Based on recent changes to the methodology used in classifying coal reserves, Elk Horn estimates that, as of January 1, 1993, its proven and probable raw recoverable reserves (reserves before any losses due to beneficiation) approximate 124 million tons and 86 million tons, respectively. During the last five years, Elk Horn's reserves have been mined at volumes ranging from 4 million to 6.2 million tons per year. Elk Horn leases its mineral rights to coal operators, who mine the coal and pay royalties based on their sales revenues. Elk Horn also uses independent contractors to mine coal. Elk Horn sells coal on the open market on the basis of price and quality.\nIn January 1991, Elk Horn entered the coal trading business through a new subsidiary. The Elk Horn Coal Sales Corporation facilitates the sale of coal to customers from Elk Horn's production and from independent operators mining non-Elk Horn reserves throughout Central Appalachia. Tredegar is negotiating the sale of Elk Horn's coal trading business independently from its other coal operations.\nOil and Gas\nTredegar sold its remaining oil and gas properties on February 4, 1994 for approximately $8 million. This transaction resulted in a gain of approximately $6.1 million ($3.9 million after income taxes), which will be recognized in 1994.\nOther Businesses\nThe Other segment is composed primarily of investments in high- technology businesses and related research.\nIn December 1992, Tredegar acquired APPX Software, Inc. (formerly Kennedy & Company, Inc.) (\"APPX Software\"), a supplier of flexible software development environments and business applications software. Headquartered in Richmond, Virginia, APPX Software's leading product is a proprietary application software development tool called APPX(R). APPX enables software designers and programmers to develop and modify business applications software much faster than customary programming techniques. APPX can run on a variety of computers and is designed to adapt to changing hardware environments. The market for software products is very competitive and characterized by short product life cycles.\nDuring 1992, Molecumetics, Ltd., a subsidiary of Tredegar (\"Molecumetics\"), commenced operation of its rational drug design research laboratory in Seattle, Washington. Molecumetics provides proprietary chemistry for the synthesis of small molecule therapeutics and vaccines. Using synthetic chemistry techniques, researchers can fashion small molecules that imitate the bioactive portion of larger and more complex molecules. For customers in the pharmaceutical and biotechnology industries, these synthetically-produced compounds offer significant advantages over naturally occurring proteins in fighting diseases because they are smaller and more easily absorbed in the human body, less subject to attack by enzymes, more specific in their therapeutic activity, and faster and less expensive to produce.\nAPPX Software owns four U.S. copyrights. Molecumetics has filed a number of patent applications with respect to its technology. Businesses included in the Other segment spent $5.6 million in 1993 and $1.9 million in 1992 for research and development.\nMiscellaneous\nPatents, Licenses and Trademarks. Tredegar considers patents, licenses and trademarks to be of significance to its Plastics segment and its APPX Software and Molecumetics subsidiaries. Tredegar routinely applies for patents on significant patentable developments with respect to all of its businesses. Tredegar and its subsidiaries now own numerous patents with remaining terms ranging from 1 to 16 years. In addition, the Plastics segment and certain of Tredegar's other subsidiaries have licenses under patents owned by third parties.\nResearch and Development. During 1993, 1992 and 1991, approximately $9.1 million, $5.0 million and $4.5 million, respectively, was spent on company- sponsored research and development activities in connection with the businesses of Tredegar and its subsidiaries. See \"Business of Tredegar - Plastics and Other Businesses.\"\nBacklog. Backlogs are not material to Tredegar.\nGovernment Regulation. Laws concerning the environment that affect or could affect Tredegar's domestic operations include, among others, the Clean Water Act, the Clean Air Act, the Resource Conservation Recovery Act, the Occupational Safety and Health Act, the National Environmental Policy Act, the Toxic Substances Control Act, the Comprehensive Environmental Response, Compensation and Liability Act (\"CERCLA\"), regulations promulgated under these acts, and any other federal, state or local laws or regulations governing environmental matters. The operations of Tredegar and its subsidiaries are in substantial compliance with all applicable laws, regulations and permits. In order to maintain substantial compliance with such standards, Tredegar may be required to incur expenditures, the amounts and timing of which are not presently determinable but which could be significant, in constructing new facilities or in modifying existing facilities.\nMunicipal, state and federal governments continue to consider restrictions on the disposal of plastic products. Several states have enacted such restrictions. The Plastics segment is conducting research into source reduction through improved product quality and reduced plastic product content and into the development of degradable films at its Terre Haute, Indiana, research and development facility. At present, Tredegar cannot determine the likely impact of proposed restrictions on the Plastics segment.\nFrom time to time the Environmental Protection Agency (the \"EPA\") may identify Tredegar or one of its subsidiaries as a potentially responsible party with respect to a Superfund site under CERCLA. To date, Tredegar, indirectly, is potentially responsible with respect to four Superfund sites. As a result, Tredegar may be required to expend amounts on remedial investigations and actions at such Superfund sites. Responsible parties under CERCLA may be jointly and severally liable for costs at a site, although typically costs are allocated among the responsible parties.\nIn addition, Tredegar, indirectly, is potentially responsible for one New Jersey Spill Site Act location. Another New Jersey site is being investigated pursuant to the New Jersey Environmental Cleanup Responsibility Act.\nCapital expenditures for pollution abatement and OSHA projects were about $.4 million, $.8 million and $3.6 million in 1993, 1992 and 1991, respectively. In 1991, approximately $2.3 million in capital expenditures was related to the finishing operations in Aluminum Extrusions. Future capital expenditures for pollution abatement and OSHA projects are expected to approximate 1993 and 1992 levels.\nEmployees. Tredegar and its subsidiaries employ approximately 3,500 people. Tredegar considers its relations with its employees to be good.\nItem 2.","section_1A":"","section_1B":"","section_2":"Item 2. PROPERTIES\nGeneral\nMost of the improved real property and the other assets of Tredegar and its subsidiaries are owned, and none of the owned property is subject to an encumbrance material to the consolidated operations of Tredegar and its subsidiaries. Tredegar considers the condition of the plants, warehouses and other properties and assets owned or leased by Tredegar and its subsidiaries to be generally good. Additionally, Tredegar considers the geographical distribution of its plants to be well-suited to satisfying the needs of its customers.\nTredegar believes that the capacity of its plants to be adequate for immediate needs of its businesses. Tredegar's plants generally have operated at 70-85 percent of capacity. Tredegar's corporate headquarters offices are located at 1100 Boulders Parkway, Richmond, Virginia 23225.\nPlastics\nThe Plastics segment has the following principal plants and facilities:\nLocation Principal Operations Carbondale, Pennsylvania Production of plastic films Flemington, New Jersey* Fremont, California* LaGrange, Georgia Manchester, Iowa New Bern, North Carolina Tacoma, Washington Terre Haute, Indiana (2) (technical center and production facility) Kerkrade, the Netherlands Sao Paulo, Brazil\nAlsip, Illinois Production of molds and molded Excelsior Springs, Missouri plastic products South Grafton, Massachusetts St. Petersburg, Florida (3) (technical center and two production facilities) Phillipsburg, Pennsylvania State College, Pennsylvania\nPawling, New York Production of vinyl extrusions, Purchase, New York (headquarters) windows and patio doors South Bend, Indiana\n*Tredegar has announced the closing or other disposition of these plants during 1994.\nMetal Products\nThe Metal Products segment has the following principal plants and facilities:\nLocation Principal Operations Carthage, Tennessee Production of aluminum Kentland, Indiana extrusions, finishing Newnan, Georgia\nRidgefield, Washington Production of uprights Kelso, Washington and attachments Adelaide, Australia Halifax, United Kingdom\nEnergy\nSee page 5\nOther Businesses\nAPPX Software leases office space in Richmond, Virginia. Molecumetics leases its laboratory space in Bellevue, Washington.\nItem 3.","section_3":"Item 3. LEGAL PROCEEDINGS\nNone\nItem 4.","section_4":"Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS\nNone\nExecutive Officers of Tredegar\nSet forth below are the names, ages and titles of the executive officers of Tredegar:\nName Age Title\nJohn D. Gottwald 39 President and Chief Executive Officer\nRichard W. Goodrum 65 Executive Vice President and Chief Operating Officer\nNorman A. Scher 56 Executive Vice President, Chief Financial Officer and Treasurer\nMichael W. Giancaspro 39 Vice President, Corporate Planning\nSteven M. Johnson 43 Vice President, Corporate Development\nAnthony J. Rinaldi 56 Vice President and General Manager, Film Products\nFrederick P. Woods 49 Vice President, Personnel\nExcept as described below, each of these officers has served in such capacity since July 10, 1989. Each will hold office until his successor is elected or until his earlier removal or resignation. The business experience during the past five years of the executive officers is set forth below.\nJohn D. Gottwald. Mr. Gottwald was Corporate Vice President-Aluminum, Plastics and Energy of Ethyl from January 1, 1989, until July 10, 1989.\nRichard W. Goodrum. Mr. Goodrum was the Divisional Vice President-Aluminum, Plastics, and Energy of Ethyl from January 1, 1989, until July 10, 1989.\nNorman A. Scher. Until July 10, 1989, Mr. Scher was a partner in the law firm of Hunton & Williams, where he was a member of the firm's corporate and securities team. He was an assistant managing partner in the firm for many years, and since 1982 had primary responsibility for financial and planning activities.\nMichael W. Giancaspro. Mr. Giancaspro served as Director of Corporate Planning from March 31, 1989, until February 27, 1992, when he was elected Vice President, Corporate Planning. Mr. Giancaspro was Plant Manager of Ethyl Film Products' Carbondale plant from April 1988 until March 1989.\nSteven M. Johnson. Mr. Johnson served as Secretary of the Corporation until February, 1994. Mr. Johnson served as Vice President, General Counsel and Secretary from July 10, 1989, until July, 1992, when his position was changed to Vice President, Corporate Development and Secretary. Mr. Johnson served as counsel to the law firm of Hunton & Williams in Richmond, Virginia, from March, 1989, until July 10, 1989.\nAnthony J. Rinaldi. Mr. Rinaldi was elected Vice President on February 27, 1992. Mr. Rinaldi has served as General Manager of Tredegar Film Products since July 1, 1991. During 1991, he also served as Managing Director of European operations. Mr. Rinaldi served as Director of Sales and Marketing for Tredegar Film Products from July 10, 1989 to June, 1991. In 1985, Mr. Rinaldi became Director of Sales & Marketing for Ethyl Film Products.\nFrederick P. Woods. Mr. Woods served as Vice President, Employee Relations until December, 1993, when his position was changed to Vice President, Personnel. Mr. Woods served as Director of Employee Relations for Ethyl from February 1, 1988, until July 10, 1989.\nPART II\nItem 5.","section_5":"Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS\nThe information contained on page 40 of the Annual Report under the captions \"Dividend Information,\" \"Stock Listing\" and \"Market Prices of Common Stock and Shareholder Data\" is incorporated herein by reference.\nItem 6.","section_6":"Item 6. SELECTED FINANCIAL DATA\nThe information for the five years ended December 31, 1993, contained in the \"Five-Year Summary\" on page 14 of the Annual Report is incorporated herein by reference.\nItem 7.","section_7":"Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS\nThe textual and tabular information concerning the years 1993, 1992 and 1991 contained on pages 16 through 24 and page 26 of the Annual Report is incorporated herein by reference.\nItem 8.","section_7A":"","section_8":"Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA\nThe consolidated financial statements contained on pages 28 through 31, the notes to financial statements contained on pages 32 through 39, the report of independent accountants on page 27, and the information under the caption \"Selected Quarterly Financial Data (Unaudited)\" on pages 25 and 26 of the Annual Report are incorporated herein by reference.\nItem 9.","section_9":"Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE\nNone.\nPART III\nItem 10.","section_9A":"","section_9B":"","section_10":"Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT\nThe information contained on pages 2 through 4 of the Proxy Statement under the caption \"Election of Directors\" concerning directors and persons nominated to become directors of Tredegar is incorporated herein by reference. See \"Executive Officers of Tredegar\" at the end of Part I above for information about the executive officers of Tredegar.\nThe information contained on page 6 of the Proxy Statement under the caption \"Stock Ownership\" is incorporated herein by reference.\nItem 11.","section_11":"Item 11. EXECUTIVE COMPENSATION\nThe information contained on pages 9 through 15 of the Proxy Statement under the caption \"Compensation of Executive Officers and Directors\" concerning executive compensation is incorporated herein by reference.\nItem 12.","section_12":"Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT\nThe information contained on pages 5 through 8 of the Proxy Statement under the caption \"Stock Ownership\" is incorporated herein by reference.\nItem 13.","section_13":"Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS\nNone.\nPART IV\nItem 14.","section_14":"Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K\n(a) Documents:\n(1) Financial statements - the following consolidated financial statements of the registrant are included on pages 27 to 39 in the Annual Report and are incorporated herein by reference in Item 8.\nReport of independent accountants.\nConsolidated balance sheets as of December 31, 1993 and 1992.\nConsolidated statements of income, shareholders' equity and cash flows for the years ended December 31, 1993, 1992 and 1991.\nNotes to financial statements.\n(2) See Index to Financial Statement Schedules on page S-1.\n(3) Exhibits\n3.1 Amended and Restated Articles of Incorporation of Tredegar (filed as Exhibit 3.1 to Tredegar's Annual Report on Form 10-K for the year ended December 31, 1989, and incorporated herein by reference)\n3.2 Amended By-laws of Tredegar\n4.1 Form of Common Stock Certificate (filed as Exhibit 4.3 to Tredegar's Annual Report on Form 10-K for the year ended December 31, 1989, and incorporated herein by reference)\n4.2 Rights Agreement dated as of June 15, 1989, between Tredegar and NationsBank of Virginia, N.A. (formerly Sovran Bank, N.A.), as Rights Agent (filed as Exhibit 4.4 to Tredegar's Annual Report on Form 10-K for the year ended December 31, 1989, and incorporated herein by reference)\n4.2.1 Amendment and Substitution Agreement (Rights Agreement) dated as of July 1, 1992, by and among Tredegar, NationsBank of Virginia, N.A. (formerly Sovran Bank, N.A.) and American Stock Transfer & Trust Company\n4.3 Competitive Advance and Revolving Credit Agreement dated as of June 16, 1989, among Tredegar, the Banks named therein and Chemical Bank, as Agent (filed as Exhibit 4.2 to Tredegar's Annual Report on Form 10-K for the year ended December 31, 1989, and incorporated herein by reference)\n4.3.1 First Amendment to the Competitive Advance and Revolving Credit Agreement dated as of September 15, 1990, among Tredegar, the Banks named therein and Chemical Bank, as Agent (filed as Exhibit 4.2.1 to Tredegar's Annual Report on Form 10-K for the year ended December 31, 1990, and incorporated herein by reference)\n4.3.2 Second Amendment to the Competitive Advance and Revolving Credit Agreement, dated as of December 6, 1991, among Tredegar, the Banks named therein and Chemical Bank, as Agent (filed as Exhibit 4.4.2 to Tredegar's Annual Report on Form 10-K for the year ended December 31, 1991, and incorporated herein by reference)\n4.3.3 Third Amendment to the Competitive Advance and Revolving Credit Agreement, dated as of June 8, 1992, among Tredegar, the Banks named therein and Chemical Bank, as Agent (filed as Exhibit 4.4.3 to Tredegar's Annual Report on Form 10-K for the year ended December 31, 1992, and incorporated herein by reference)\n4.3.4 Fourth Amendment, dated as of August 20, 1993, to the Competitive Advance and Revolving Credit Agreement among Tredegar, the Banks named therein and Chemical Bank, as Agent (filed as Exhibit 4 to Tredegar's Quarterly Report on Form 10-Q for the quarter ended September 30, 1993, and incorporated herein by reference)\n4.4 Loan Agreement dated as of June 8, 1992, among Tredegar, the Banks named therein and LTCB Trust Company, as Agent (filed as Exhibit 4 to Tredegar's Quarterly Report on Form 10-Q for the quarter ended June 30, 1992, and incorporated herein by reference)\n4.4.1 Accession Agreement dated August 3, 1992, among Tredegar, the Banks named in the Loan Agreement dated as of June 8, 1992 and LTCB Trust Company, as Agent (filed as Exhibit 4.5.1 to Tredegar's Annual Report on Form 10-K for the year ended December 31, 1992, and incorporated herein by reference)\n4.5 Loan Agreement dated June 16, 1993 between Tredegar and Metropolitan Life Insurance Company (filed as Exhibit 4 to Tredegar's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993, and incorporated herein by reference)\n10.1 Reorganization and Distribution Agreement dated as of June 1, 1989, between Tredegar and Ethyl (filed as Exhibit 10.1 to Tredegar's Annual Report on Form 10-K for the year ended December 31, 1989, and incorporated herein by reference)\n*10.2 Employee Benefits Agreement dated as of June 1, 1989, between Tredegar and Ethyl (filed as Exhibit 10.2 to Tredegar's Annual Report on Form 10-K for the year ended December 31, 1989, and incorporated herein by reference)\n10.3 Tax Sharing Agreement dated as of June 1, 1989, between Tredegar and Ethyl (filed as Exhibit 10.3 to Tredegar's Annual Report on Form 10-K for the year ended December 31, 1989, and incorporated herein by reference)\n10.4 Master Services Agreement dated as of June 1, 1989, between Tredegar and Ethyl (filed as Exhibit 10.4 to Tredegar's Annual Report on Form 10-K for the year ended December 31, 1989, and incorporated herein by reference)\n10.4.1 Amendment to Master Services Agreement dated as of November 1, 1990, between Tredegar and Ethyl (filed as Exhibit 10.4.1 to Tredegar's Annual Report on Form 10-K for the year ended December 31, 1990, and incorporated herein by reference)\n10.5 Indemnification Agreement dated as of June 1, 1989, between Tredegar and Ethyl (filed as Exhibit 10.5 to Tredegar's Annual Report on Form 10-K for the year ended December 31, 1989, and incorporated herein by reference)\n*10.6 Tredegar 1989 Incentive Stock Option Plan (included as Exhibit A to the Prospectus contained in the Form S-8 Registration Statement No. 33-31047, and incorporated herein by reference)\n*10.7 Tredegar Bonus Plan (filed as Exhibit 10.7 to Tredegar's Annual Report on Form 10-K for the year ended December 31, 1989, and incorporated herein by reference)\n*10.8 Savings Plan for the Employees of Tredegar (filed as Exhibit 4 to the Form S-8 Registration Statement No. 33-29582, and incorporated herein by reference)\n*10.9 Tredegar Retirement Income Plan (filed as Exhibit 10.9 to Tredegar's Annual Report on Form 10-K for the year ended December 31, 1990, and incorporated herein by reference)\n*10.10 Agreement dated as of June 1, 1989, between Tredegar and Norman A. Scher (filed as Exhibit 10.10 to Tredegar's Annual Report on Form 10-K for the year ended December 31, 1989, and incorporated herein by reference)\n10.11 Stock and Warrant Purchase Agreement dated as of February 15, 1991, by and between Tredegar Investments, Inc. and Clinical Technologies Associates, Inc. (now Emisphere Technologies, Inc.) (filed as Exhibit 10.11 to Tredegar's Annual Report on Form 10-K for the year ended December 31, 1991, and incorporated herein by reference)\n10.11.1 Agreement dated as of October 23, 1992, by and among Tredegar Investments, Inc., Emisphere Technologies, Inc., Michael M. Goldberg, M.D. and Sam J. Milstein, Ph.D. (filed as Exhibit 10.11.1 to Tredegar's Annual Report on Form 10-K for the year ended December 31, 1991, and incorporated herein by reference)\n10.11.2 Letter Agreement dated December 30, 1992, by and between Tredegar Investments, Inc. and Emisphere Technologies, Inc. (filed as Exhibit 10.11.2 to Tredegar's Annual Report on Form 10-K for the year ended December 31, 1991, and incorporated herein by reference)\n*10.12 Tredegar 1992 Omnibus Stock Incentive Plan (filed as Exhibit 10.12 to Tredegar's Annual Report on Form 10-K for the year ended December 31, 1991, and incorporated herein by reference)\n*10.13 Tredegar Industries, Inc. Retirement Benefit Restoration Plan\n*10.14 Tredegar Industries, Inc. Savings Plan Benefit Restoration Plan\n11 Computations of earnings per share\n13 Tredegar Annual Report to Shareholders for the year ended December 31, 1993 (See Note 1)\n21 Subsidiaries of Tredegar\n23.1 Consent of Independent Accountants\n*The marked items are management contracts or compensatory plans, contracts or arrangements required to be filed as exhibits to this Form 10-K.\n(b) Reports on Form 8-K None\n(c) Exhibits\nThe response to this portion of Item 14 is submitted as a separate section of this report.\n(d) Financial Statement Schedules\nThe response to this portion of Item 14 is submitted as a separate section of this report.\nNote 1. With the exception of the information incorporated in this Form 10-K by reference thereto, the Annual Report shall not be deemed \"filed\" as a part of Form 10-K.\nSIGNATURES\nPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. TREDEGAR INDUSTRIES, INC. (Registrant)\nDated: February 25, 1994 By \/s\/ John D. Gottwald John D. Gottwald President\nPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on February 25, 1994.\nSignature Title\n\/s\/ John D. Gottwald President (John D. Gottwald) (Principal Executive Officer and Director)\n\/s\/ N. A. Scher Executive Vice President, (Norman A. Scher) Treasurer and Director (Principal Financial Officer)\n\/s\/ D. Andrew Edwards Corporate Controller (D. Andrew Edwards) (Principal Accounting Officer)\n\/s\/ R. W. Goodrum Executive Vice President and (Richard W. Goodrum) Director\n\/s\/ Phyllis Cothran Director (Phyllis Cothran)\n\/s\/ Bruce C. Gottwald Director (Bruce C. Gottwald)\n\/s\/ Floyd D. Gottwald, Jr. Director (Floyd D. Gottwald)\n\/s\/ Andre B. Lacy Director (Andre B. Lacy)\n\/s\/ James F. Miller Director (James F. Miller)\n\/s\/ Emmett J. Rice Director (Emmett J. Rice)\n\/s\/ W. Thomas Rice Director (W. Thomas Rice)\nTREDEGAR INDUSTRIES, INC.\nINDEX TO FINANCIAL STATEMENT SCHEDULES\nPage\nReport of Independent Accountants on Financial Statement Schedules S-2\nSchedule V - Property, Plant and Equipment for the years ended December 31, 1993, 1992 and 1991 S-3\nSchedule VI - Accumulated Depreciation and Amortization of Property, Plant and Equipment for the years ended December 31, 1993, 1992 and 1991 S-4\nReport of Independent Accountants on Financial Statement Schedules\nTo the Board of Directors and Shareholders of Tredegar Industries, Inc.:\nOur report on the consolidated financial statements of Tredegar Industries, Inc. and Subsidiaries has been incorporated by reference in this Form 10-K from page 27 of the 1993 Annual Report to Shareholders of Tredegar Industries, Inc. In connection with our audits of such financial statements, we have also audited the related financial statement schedules listed in the index on page S-1 of this Form 10-K.\nIn 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 required to be included therein.\nCoopers & Lybrand\nRichmond, Virginia January 17, 1994\nDepreciation is computed on the straight-line basis over the estimated useful lives of the related assets, resulting in annual depreciation rates of: Land improvements: 5% - 10% Buildings: 2.5% - 5% Machinery and equipment: 5% - 33.3%\n(1) Continuing operations. (2) Reclassifications. (3) Acquisitions of businesses. (4) Write-up of assets to their pre-tax amounts in accordance with Statement of Financial Accounting Standards No. 109, \"Accounting for Income Taxes.\" (5) Sales of businesses and assets. (6) Adjustment for fully-depreciated divested assets.\n(1) Continuing operations. (2) Reclassifications. (3) Sales of businesses and assets. (4) Acquisitions of businesses. (5) Adjustment for fully-depreciated divested assets.\nEXHIBIT INDEX\nPage\n3.1 Amended and Restated Articles of Incorporation of Tredegar (filed as Exhibit 3.1 to Tredegar's Annual Report on Form 10-K for the year ended December 31, 1989, and incorporated herein by reference)\n3.2 Amended By-laws of Tredegar\n4.1 Form of Common Stock Certificate (filed as Exhibit 4.3 to Tredegar's Annual Report on Form 10-K for the year ended December 31, 1989, and incorporated herein by reference)\n4.2 Rights Agreement dated as of June 15, 1989, between Tredegar and NationsBank of Virginia, N.A. (formerly Sovran Bank, N.A.), as Rights Agent (filed as Exhibit 4.4 to Tredegar's Annual Report on Form 10-K for the year ended December 31, 1989, and incorporated herein by reference)\n4.2.1 Amendment and Substitution Agreement (Rights Agreement) dated as of July 1, 1992, by and among Tredegar, NationsBank of Virginia, N.A. (formerly Sovran Bank, N.A.) and American Stock Transfer & Trust Company (filed as Exhibit 4.2.1 to Tredegar's Annual Report on Form 10- K for the year ended December 31, 1992, and incorporated herein by reference)\n4.3 Competitive Advance and Revolving Credit Agreement dated as of June 16, 1989, among Tredegar, the Banks named therein and Chemical Bank, as Agent (filed as Exhibit 4.2 to Tredegar's Annual Report on Form 10-K for the year ended December 31, 1989, and incorporated herein by reference)\n4.3.1 First Amendment to the Competitive Advance and Revolving Credit Agreement dated as of September 15, 1990, among Tredegar, the Banks named therein and Chemical Bank, as Agent (filed as Exhibit 4.2.1 to Tredegar's Annual Report on Form 10-K for the year ended December 31, 1990, and incorporated herein by reference)\n4.3.2 Second Amendment to the Competitive Advance and Revolving Credit Agreement, dated as of December 6, 1991, among Tredegar, the Banks named therein and Chemical Bank, as Agent (filed as Exhibit 4.4.2 to Tredegar's Annual Report on Form 10-K for the year ended December 31, 1991, and incorporated herein by reference)\n4.3.3 Third Amendment to the Competitive Advance and Revolving Credit Agreement, dated as of June 8, 1992, among Tredegar, the Banks named therein and Chemical Bank, as Agent (filed as Exhibit 4.4.3 to Tredegar's Annual Report on Form 10-K for the year ended December 31, 1991, and incorporated herein by reference)\n4.3.4 Fourth Amendment to the Competitive Advance and Revolving Credit Agreement, dated as of August 20, 1993, among Tredegar, the Banks named therein and Chemical Bank, as Agent (filed as Exhibit 4 to Tredegar's Quarterly Report on Form 10-Q for the quarter ended September 30, 1993, and incorporated herein by reference)\n4.4 Loan Agreement dated as of June 8, 1992, among Tredegar, the Banks named therein and LTCB Trust Company, as Agent (filed as Exhibit 4 to Tredegar's Quarterly Report on Form 10-Q for the quarter ended June 30, 1992, and incorporated herein by reference)\n4.4.1 Accession Agreement dated August 3, 1992, among Tredegar, the Banks named in the Loan Agreement dated as of June 8, 1992 and LTCB Trust Company, as Agent (filed as Exhibit 4.5.1 to Tredegar's Annual Report on Form 10-K for the year ended December 31, 1992, and incorporated herein by reference)\n4.5 Loan Agreement dated June 16, 1993 between Tredegar and Metropolitan Life Insurance Company (filed as Exhibit 4 to Tredegar's Quarterly Report on Form 10-Q for the quarter ended September 30, 1993, and incorporated herein by reference)\n10.1 Reorganization and Distribution Agreement dated as of June 1, 1989, between Tredegar and Ethyl (filed as Exhibit 10.1 to Tredegar's Annual Report on Form 10-K for the year ended December 31, 1989, and incorporated herein by reference)\n*10.2 Employee Benefits Agreement dated as of June 1, 1989, between Tredegar and Ethyl (filed as Exhibit 10.2 to Tredegar's Annual Report on Form 10-K for the year ended December 31, 1989, and incorporated herein by reference)\n10.3 Tax Sharing Agreement dated as of June 1, 1989, between Tredegar and Ethyl (filed as Exhibit 10.3 to Tredegar's Annual Report on Form 10-K for the year ended December 31, 1989, and incorporated herein by reference)\n10.4 Master Services Agreement dated as of June 1, 1989, between Tredegar and Ethyl (filed as Exhibit 10.4 to Tredegar's Annual Report on Form 10-K for the year ended December 31, 1989, and incorporated herein by reference)\n10.4.1 Amendment to Master Services Agreement dated as of November 1, 1990, between Tredegar and Ethyl (filed as Exhibit 10.4.1 to Tredegar's Annual Report on Form 10-K for the year ended December 31, 1990, and incorporated herein by reference)\n10.5 Indemnification Agreement dated as of June 1, 1989, between Tredegar and Ethyl (filed as Exhibit 10.5 to Tredegar's Annual Report on Form 10-K for the year ended December 31, 1989, and incorporated herein by reference)\n*10.6 Tredegar 1989 Incentive Stock Option Plan (included as Exhibit A to the Prospectus contained in the Form S-8 Registration Statement No. 33-31047, and incorporated herein by reference)\n*10.7 Tredegar Bonus Plan (filed as Exhibit 10.7 to Tredegar's Annual Report on Form 10-K for the year ended December 31, 1989, and incorporated herein by reference)\n*10.8 Savings Plan for the Employees of Tredegar (filed as Exhibit 4 to the Form S-8 Registration Statement No. 33-29582, and incorporated herein by reference)\n*10.9 Tredegar Retirement Income Plan (filed as Exhibit 10.9 to Tredegar's Annual Report on Form 10-K for the year ended December 31, 1990, and incorporated herein by reference)\n*10.10 Agreement dated as of June 1, 1989, between Tredegar and Norman A. Scher (filed as Exhibit 10.10 to Tredegar's Annual Report on Form 10-K for the year ended December 31, 1989, and incorporated herein by reference)\n10.11 Stock and Warrant Purchase Agreement dated as of February 15, 1991, by and between Tredegar Investments, Inc. and Clinical Technologies Associates, Inc. (now Emisphere Technologies, Inc.) (filed as Exhibit 10.11 to Tredegar's Annual Report on Form 10-K for the year ended December 31, 1991, and incorporated herein by reference)\n10.11.1 Agreement dated as of October 23, 1992, by and among Tredegar Investments, Inc., Emisphere Technologies, Inc., Michael M. Goldberg, M.D. and Sam J. Milstein, Ph.D. (filed as Exhibit 10.11.1 to Tredegar's Annual Report on Form 10-K for the year ended December 31, 1991, and incorporated herein by reference)\n10.11.2 Letter Agreement dated December 30, 1992, by and between Tredegar Investments, Inc. and Emisphere Technologies, Inc. (filed as Exhibit 10.11.2 to Tredegar's Annual Report on Form 10-K for the year ended December 31, 1991, and incorporated herein by reference)\n*10.12 Tredegar 1992 Omnibus Stock Incentive Plan (filed as Exhibit 10.12 to Tredegar's Annual Report on Form 10-K for the year ended December 31, 1991, and incorporated herein by reference)\n*10.13 Tredegar Industries, Inc. Retirement Benefit Restoration Plan\n*10.14 Tredegar Industries, Inc. Savings Plan Benefit Restoration Plan\n11 Computations of earnings per share\n13 Tredegar Annual Report to Shareholders for the year ended December 31, 1993 (See Note 1)\n21 Subsidiaries of Tredegar\n23.1 Consent of Independent Accountants\n*The marked items are management contracts or compensatory plans, contracts or arrangements required to be filed as exhibits to this Form 10-K.","section_15":""}
{"filename":"9626_1993.txt","cik":"9626","year":"1993","section_1":"ITEM 1. BUSINESS - -----------------\nThe business of The Bank of New York Company, Inc. (the \"Company\") and its subsidiaries is described in the \"Business Review\" section of the Company's 1993 Annual Report to Shareholders which description is included in Exhibit 13 to this report and incorporated herein by reference. Also, the \"Management's Discussion and Analysis\" section included in Exhibit 13 contains financial and statistical information on the operations of the Company. Such information is herein incorporated by reference.\nCOMPETITION\nThe retail and commercial businesses in which the Company operates are strongly competitive. Competition is provided by both unregulated and regulated financial services organizations, whose products and services span the local, national, and global markets in which the Company conducts operations.\nSavings banks, savings and loan associations, and credit unions actively compete for deposits, and money market funds and brokerage houses offer deposit-like services. These institutions, as well as consumer and commercial finance companies, national retail chains, factors, insurance companies and pension trusts, are important competitors for various types of loans. Issuers of commercial paper compete actively for funds and reduce demand for bank loans. For personal and corporate trust services and investment counseling services, insurance companies, investment counseling firms, and other business firms and individuals offer active competition.\nCERTAIN REGULATORY CONSIDERATIONS\nGeneral\nAs a bank holding company, the Company is subject to the regulation and supervision of the Federal Reserve Board under the Bank Holding Company Act (\"BHC Act\"). The Company is also subject to regulation by the New York State Department of Banking. Under the BHC Act, bank holding companies may not directly or indirectly acquire the ownership or control of more than 5% of the voting shares or substantially all of the assets of any company, including a bank, without the prior approval of the Federal Reserve Board. In addition, bank holding companies are generally prohibited under the BHC Act from engaging in nonbanking activities, subject to certain exceptions.\nThe Company's subsidiary banks are subject to supervision and examination by applicable federal and state banking agencies. The Bank of New York (\"BNY\") is a state-chartered New York banking corporation and a member of the Federal Reserve System and is subject to regulation and supervision principally by the Federal Reserve Board. The Bank of New York (Delaware) (\"BNY Del.\") is a Delaware chartered FDIC insured non-member bank and therefore is subject to regulation and supervision principally by the FDIC. The Bank of New York National Association (\"BNYNA\") is organized as a national association under the laws of the United States and therefore is subject to regulation and supervision principally by the Comptroller of the Currency (\"Comptroller\").\n3.\nCapital Adequacy\nBank regulators have adopted risk-based capital guidelines for bank holding companies and banks. The minimum ratio of qualifying total capital to risk-weighted assets (including certain off-balance sheet items) is 8%. At least half of the total capital is to be comprised of common stock, retained earnings, noncumulative perpetual preferred stocks, minority interests and for bank holding companies, a limited amount of qualifying cumulative perpetual preferred stock, less certain intangibles including goodwill (\"Tier I capital\"). The remainder (\"Tier II capital\") may consist of other preferred stock, certain other instruments, and limited amounts of subordinated debt and the loan and lease loss allowance.\nIn addition, the Federal Reserve Board has established minimum Leverage Ratio (Tier I capital to average total assets) guidelines for bank holding companies and banks. These guidelines provide for a minimum leverage ratio of 3% for bank holding companies and banks that meet certain specified criteria, including that they have the highest regulatory rating. All other banking organizations will be required to maintain a leverage ratio of 3% plus an additional cushion of at least 100 to 200 basis points. The guidelines also provide that banking organizations experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels, without significant reliance on intangible assets. Furthermore, the guidelines indicate that the Federal Reserve Board will continue to consider a \"Tangible Tier I Leverage Ratio\" in evaluating proposals for expansion or new activities. The Tangible Tier I Leverage Ratio is the ratio of Tier I capital, less intangibles not deducted from Tier I capital, to average total assets. The Federal Reserve Board has not advised the Company of any specific minimum leverage ratio applicable to it.\nFederal banking agencies have proposed regulations that would modify existing rules related to risk-based and leverage capital ratios. The Company does not believe that the aggregate impact of these modifications would have a significant impact on its capital position.\nBank regulators continue to indicate their desire to raise capital requirements applicable to banking organizations beyond their current levels. However, management is unable to predict whether and when higher capital requirements would be imposed and, if so, at what level and on what schedule.\nFDICIA\nThe Federal Deposit Insurance Corporation Improvement Act of 1991 (\"FDICIA\"), which was enacted in December 1991, substantially revised the depository institution regulatory and funding provisions of the Federal Deposit Insurance Act (\"FDIA\") and made revisions to several other federal banking statutes. Among other things, FDICIA requires the federal banking regulators to take prompt corrective action in respect of FDIC-insured depository institutions that do not meet minimum capital requirements. FDICIA establishes five capital tiers: \"well capitalized,\" \"adequately capitalized,\" \"undercapitalized,\" \"significantly undercapitalized\" and \"critically undercapitalized.\" Under applicable regulations, an FDIC-insured bank is defined to be well capitalized if it maintains a Leverage Ratio of at least 5%, a risk-adjusted Tier I Capital Ratio of at least 6% and a Total Capital Ratio of at least 10% and is not otherwise in a \"troubled condition\" as specified by its appropriate federal regulatory agency. A bank is generally considered to be adequately capitalized if it is not defined to be well capitalized but meets all of its minimum capital requirements, i.e., if it has a total risk-based Capital Ratio of 8% or greater, a Tier I risk-based Capital Ratio of 4% or greater and a Leverage Ratio of 4% or greater. A bank will be considered undercapitalized if it fails to meet any minimum required measure, significantly undercapitalized if it is significantly below such measure and critically undercapitalized if it maintains a level of tangible equity capital equal to or less than 2% of total assets. A bank may be deemed to be in a capitalization category that is lower than is indicated by its actual capital position if it receives an unsatisfactory examination rating.\n4.\nFDICIA generally prohibits an FDIC-insured depository institution from making any capital distribution (including payment of dividends) or paying any management fee to its holding company if the depository institution would thereafter be undercapitalized. Undercapitalized depository institutions are subject to restrictions on borrowing from the Federal Reserve System. In addition, undercapitalized depository institutions are subject to growth limitations and are required to submit capital restoration plans. For an undercapitalized depository institution's capital restoration plan to be acceptable, its holding company must guarantee the capital plan up to an amount equal to the lesser of 5% of the depository institution's assets at the time it becomes undercapitalized or the amount of the capital deficiency when the institution fails to comply with the plan. In the event of the parent holding company's bankruptcy, such guarantee would take priority over the parent's general unsecured creditors. The federal banking agencies may not accept a capital plan without determining, among other things, that the plan is based on realistic assumptions and is likely to succeed in restoring the depository institution's capital. If a depository institution fails to submit an acceptable plan, it is treated as if it is significantly undercapitalized.\nSignificantly undercapitalized depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become adequately capitalized, requirements to reduce total assets and cessation of receipt of deposits from correspondent banks. Critically undercapitalized depository institutions are subject to appointment of a receiver or conservator.\nThe Company's significant banking subsidiaries are well capitalized.\nThe table below indicates capital ratios of the Company and its significant banking subsidiaries at December 31, 1993 and 1992 and the respective guidelines for well capitalized institutions under FDICIA.\nAt December 31, 1993, the amounts of capital by which the Company and its significant banking subsidiaries exceed the guidelines are as follows:\nWell Capitalized\nBNY Company BNY Del. BNYNA (in millions) ------- --- ---- -----\nTier I $1,215 $753 $ 79 $167 Total Capital 1,545 960 52 110 Leverage 1,404 861 149 66\n5.\nThe following table presents the components of the Company's risk-based capital at December 31, 1993 and 1992:\n(in millions) 1993 1992 ---- ---- Common Stock $3,778 $3,302 Preferred Stock 294 369 Less: Intangibles 317 345 ----- ------ Tier 1 Capital 3,755 3,326\nConvertible Preferred Stock - 59 Qualifying Long-term Debt 1,489 1,452 Qualifying Allowance for Loan Losses 534 554 ------ ------ Tier 2 Capital 2,023 2,065 ------ ------ Total Risk-based Capital $5,778 $5,391 ====== ======\nThe following table presents the components of the Company's risk adjusted assets at December 31, 1993 and 1992:\n6.\nSubsequent to December 31, 1993, the Company redeemed $173 million of preferred stock and BNY acquired the domestic factoring business of the Bank of Boston. After giving pro forma effect to these actions, the Company's and BNY's captial ratios at December 31, 1993 were as follows: Company BNY ------- ---- Tier 1 8.33% 7.82% Total Capital 13.08 12.41 Leverage 7.51 6.89 Tangible Common Equity 6.88 7.58\nA discussion of the Company's capital position is incorporated by reference from the caption \"Capital Resources\" in the \"Management's Discussion and Analysis\" section of Exhibit 13.\nBrokered Deposits\nThe FDIC has adopted regulations under FDICIA governing the receipt of brokered deposits. Under the regulations, a bank cannot accept, rollover or renew brokered deposits unless (i) it is well capitalized or (ii) it is adequately capitalized and receives a waiver from the FDIC. A bank that cannot receive brokered deposits also cannot offer \"pass-through\" insurance on certain employee benefit accounts. Whether or not it has obtained such a waiver, an adequately capitalized bank may not pay an interest rate on any deposits in excess of 75 basis points over certain prevailing market rates specified by regulation. There are no such restrictions on a bank that is well capitalized. Because BNY and BNY Del. are well capitalized, the Company believes the brokered deposits regulation will have no material effect on the funding or liquidity of BNY and BNY Del. BNYNA is well capitalized, but has no brokered deposits.\nFDIC Insurance Assessments\nBNY, BNY Del., and BNYNA are subject to FDIC deposit insurance assessments. As required by FDICIA, the FDIC has adopted a risk-based premium schedule which has increased the assessment rates for most FDIC- insured depository institutions. Under the schedule, the premiums initially range from $.23 to $.31 for every $100 of deposits. Each financial institution is assigned to one of three capital groups --- well capitalized, adequately capitalized, or undercapitalized --- and further assigned to one of three subgroups within a capital group, on the basis of supervisory evaluations by the institution's primary federal and, if applicable, state supervisors and other information relevant to the institution's financial condition and the risk posed to the applicable insurance fund. The actual assessment rate applicable to a particular institution will, therefore, depend in part upon the risk assessment classification so assigned to the institution by the FDIC.\nThe FDIC is authorized to raise insurance premiums in certain circumstances. Any increase in premiums would have an adverse effect on the Company's earnings.\nUnder the FDIA, insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by a bank's federal regulatory agency.\nDepositor Preference\nThe Omnibus Budget Reconciliation Act of 1993 provides for a national depositor preference on amounts realized from the liquidation or other resolution of any depository institution insured by the FDIC. That act requires claims to be paid in the following order of priority: the receiver's administrative expenses; deposits; other general or senior liabilities of the institution; obligations subordinated to depositors or general creditors; and obligations to shareholders. Under an FDIC interim rule, which became effective August 13, 1993, \"administrative expenses of the receiver\" are defined as those incurred by the receiver in liquidating or resolving the affairs of a failed insured depository institution.\n7.\nAcquisitions\nThe BHC Act generally limits acquisitions by the Company to commercial banks and companies engaged in activities that the Federal Reserve Board has determined to be so closely related to banking as to be a proper incident thereto. The Company's direct activities are generally limited to furnishing to its subsidiaries services that qualify under the \"closely related\" and \"proper incident\" tests. Prior Federal Reserve Board approval is required under the BHC Act for new activities and acquisitions of most nonbanking companies.\nThe BHC Act, the Federal Bank Merger Act, and the New York Banking Law regulate the acquisition of commercial banks. The BHC Act requires the prior approval of the Federal Reserve Board for the direct or indirect acquisition of more than 5% of the voting shares of a commercial bank. The BHC Act generally prohibits the acquisition of a domestic bank located outside the Company's state of principal operations, New York State, unless authorized by the law of the state of the target bank. Most states have enacted interstate banking laws that permit the Company to acquire banks located in their states, but some states (particularly in the Southeast) presently do not permit entry by New York bank holding companies. The New York Banking Law requires state regulatory approval before the Company can acquire more than 5% of the voting shares of a commercial bank in New York.\nThe merger of BNY with another bank would require the approval of the Federal Reserve Board or other federal bank regulatory authority and, if the surviving bank is a state bank, the New York Superintendent of Banks. With respect to BNYNA, the approval of the Comptroller is required for branching of national banks, purchasing the assets of other banks and for bank mergers in which the continuing bank is a national bank.\nIn reviewing bank acquisition and merger applications, the bank regulatory authorities will consider, among other things, the competitive effect and public benefits of the transactions, the capital position of the combined organization, and the applicant's record under the Community Reinvestment Act.\nUnder Federal Reserve Board policy, the Company is expected to act as a source of financial strength to its banks and to commit resources to support such banks in circumstances where it might not do so absent such policy. In addition, any loans by the Company to its banks would be subordinate in right of payment to deposits and to certain other indebtedness of its banks.\nRegulated Banking Subsidiaries\nAs a New York State chartered bank and a member of the Federal Reserve System, BNY is subject to the supervision of, and is regularly examined by, the New York State Banking Department and the Federal Reserve Board. As a bank insured by the FDIC, BNY is also subject to examination by that agency. BNY Del. is subject to the supervision of, and is regularly examined by, the FDIC and the Office of State Bank Commissioner of the State of Delaware. BNYNA is a national bank subject to the regulation and supervision of, and regular examination by, the Comptroller and subject to regulations of the FDIC and Federal Reserve Board.\nBoth federal and state laws extensively regulate various aspects of the banking business, such as permissible types and amounts of loans and investments, permissible activities, and reserve requirements. These regulations are intended primarily for the protection of depositors rather than the Company's stockholders.\nRestrictions on Transfer of Funds\nRestrictions on the transfer of funds to the Company are discussed in Note 12 to the Consolidated Financial Statements included in Exhibit 13. Such discussion is incorporated herein by reference.\n8.\nFIRREA\nA depository institution insured by the FDIC can be held liable for any loss incurred by, or reasonably expected to be incurred by, the FDIC in connection with (i) the default of a commonly controlled institution or (ii) any assistance provided by the FDIC to a commonly controlled, FDIC-insured depository institution in danger of default. \"Default\" is defined generally as the appointment of a conservator or receiver, and \"in danger of default\" is defined generally as the existence of certain conditions indicating that a \"default\" is likely to occur in the absence of regulatory assistance.\nGOVERNMENT MONETARY POLICIES\nThe Federal Reserve Board has the primary responsibility for monetary policy; accordingly, its actions have an important influence on the demand for credit and investments and the level of interest rates.\n9.\nContinued on page 10\n10.\n11.\n12.\nInterest-Rate Sensitivity - -------------------------\nThe Company actively manages interest-rate sensitivity (the exposure of net interest income to interest rate movements). The relationship of interest-earning assets and interest-bearing liabilities between repricing dates is monitored, and is flexible enough to capitalize on profit opportunities, while minimizing adverse effects on earnings when changes in short-term and long-term interest rates occur. The Company uses complex simulation models to adjust the structure of its assets and liabilities in response to interest rate changes. The following table reflects the year-end position of the Company's interest-earning assets and interest-bearing liabilities that either reprice or mature within the designated time periods. A positive interest sensitivity gap, for a particular time period, is one in which more interest- earning assets reprice or mature than interest-bearing liabilities. A negative interest sensitivity gap results from a greater amount of liabilities repricing or maturing. Further, within the time periods shown below, assets and liabilities reprice on different dates and at different levels. Interest sensitivity gaps change daily. A negative gap will result in an increase in net interest income in periods of declining rates and a decrease in net interest income in periods of rising rates. The opposite is true for positive gaps.\n13.\nPROVISION AND ALLOWANCE FOR LOAN LOSSES - ---------------------------------------\nRisk factors other than less developed country (LDC) loans and highly leveraged transaction (HLT) loans are discussed below. LDC and HLT loans are discussed under the captions \"Provision and Allowance for Loan Losses\" and \"Highly Leveraged Transactions\" in the \"Management's Discussion and Analysis\" section included in Exhibit 13, which discussion is incorporated herein by reference.\nAt December 31, 1993, the domestic commercial real estate portfolio had approximately 74% of its loans in New York and New Jersey, 6% in California, 5% in Pennsylvania, 3% in New England, and 2% in Florida; no other state accounts for more than 2% of the portfolio. This portfolio consists of the following types of properties:\nBusiness loans secured by real estate 47% Offices 24 Retail 7 Hotels 5 Mixed-Used 4 Condominiums and cooperatives 3 Land 2 Industrial\/Warehouse 1 Other 7 ---- 100% ====\nAt December 31, 1993 and 1992, the Company's nonperforming real estate loans and real estate acquired in satisfaction of loans aggregated $171 million and $411 million, respectively. Net charge-offs of real estate loans were $69 million in 1993 and $90 million in 1992. In addition, other real estate charges were $53 million and $106 million in 1993 and 1992. A discussion of other real estate charges under \"Noninterest Expense and Income Taxes\" in the \"Management's Discussion and Analysis\" section included in Exhibit 13 is incorporated herein by reference.\nThe Company's consumer loan portfolio is comprised principally of credit card, other installment, and residential loans. Residential and auto loans are collateralized, thereby reducing the risk. Credit card net charge-offs were $121 million in 1993 compared to $118 million in 1992. The 1993 and 1992 amounts exclude $56 million and $57 million in net charge-offs related to the portion of the portfolio that is securitized. As a percentage of average credit card outstandings, net charge-offs decreased to 2.88% in 1993 from 3.74% in 1992. On a managed receivables basis, net charge-offs as a percentage of average outstandings were 3.19% in 1993 compared to 3.89% in 1992. Other consumer net charge-offs were $23 million in 1993 and $37 million in 1992.\nLending to the utility industry is concentrated in investor-owned electric utilities. The Company also makes loans to gas and telephone utilities. Nonperforming loans in this industry amounted to $2 million at year-end 1993 compared to $3 million in 1992. Charge-offs of loans to the utility industry were $14 million in 1992. There were no charge-offs in 1993.\n14.\nThe Company's loans to the communications, entertainment, and publishing industries primarily consist of credits with cable television operators, broadcasters, magazine and newspaper publishers and motion picture theaters. There were no nonperforming communications loans at December 31, 1993. Nonperforming communication loans amounted to $8 million at December 31, 1992. Charge-offs of communications loans were $1 million and $23 million in 1993 and 1992. None of these amounts represent HLTs.\nThe Company's portfolio of loans for purchasing or carrying securities is comprised largely of overnight loans which are fully collateralized, with appropriate margins, by marketable securities. Throughout its many years of experience in this area, the Company has rarely experienced a loss.\nThe Company makes short-term, collateralized loans to mortgage bankers to fund mortgages sold to investors. Nonperforming loans and charge-offs have not been significant.\nBased on an evaluation of individual credits, historical loan losses, and global economic factors, the Company has allocated its allowance for loan losses as follows:\nSuch an allocation is inherently judgmental, and the entire allowance for loan losses is available to absorb loan losses regardless of the nature of the loan.\n15.\nThe following table details changes in the Company's allowance for loan losses for the last five years.\n16.\nNonperforming Assets - -------------------- A summary of nonperforming assets is presented in the following table.\n17.\nSecurities - ---------- The following table shows the maturity distribution by carrying amount and yield (not on a taxable equivalent basis) of the Company's securities portfolio at December 31, 1993.\nLoans - -----\nThe following table shows the maturity structure of the Company's commercial loan portfolio at December 31, 1993.\n18.\nDeposits - --------\nThe aggregate amount of deposits by foreign customers in domestic offices was $739 million, $789 million, and $664 million at December 31, 1993, 1992, and 1991, respectively.\nThe following table shows the maturity breakdown of domestic time deposits of $100,000 or more at December 31, 1993.\nThe majority of deposits in foreign offices are time deposits in denominations of $100,000 or more.\nOther Borrowed Funds - --------------------- Information related to other borrowed funds in 1993, 1992, and 1991 is presented in the table below.\nForeign Assets - -------------- The only foreign country in which the Company's assets exceed .75% of year end total assets was the United Kingdom ($351 million in 1993 and $393 million in 1991).\n19.\nITEM 2.","section_1A":"","section_1B":"","section_2":"ITEM 2. PROPERTIES - ------------------- In New York City, the Company owns the thirty story building housing its executive headquarters at 48 Wall Street, a forty-nine story office building at One Wall Street, and an operations center at 101 Barclay Street. In addition, the Company owns and\/or leases administrative and operations facilities in New York City; various locations in New Jersey; Harrison, New York; Newark, Delaware; London, England; and Utica, New York. Other real properties owned or leased by the Company, when considered in the aggregate, are not material to its operations.\nITEM 3.","section_3":"ITEM 3. LEGAL PROCEEDINGS - -------------------------- Litigation regarding Northeast Bancorp., Inc. is described in Note 14 to the Consolidated Financial Statements included in Exhibit 13, and such description is incorporated herein by reference.\nITEM 4.","section_4":"ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------------------------------------------------------------ There were no matters submitted to a vote of security holders of the registrant during the fourth quarter of 1993.\nPART II - ------- ITEM 5.","section_5":"ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND - -------------------------------------------------- RELATED STOCKHOLDER MATTERS --------------------------- Information with respect to the market for the Company's common equity and related stockholder matters is incorporated herein by reference from the \"Quarterly Data\" section included in Exhibit 13. The Company's securities that are listed on the New York Stock Exchange (NYSE), are indicated as such on the front cover of this report. The NYSE symbol for the Company's Common Stock is BK. The Warrants (to purchase the Company's Common Stock) are traded over the counter. All of the Company's other securities are not currently listed. The Company had 26,900 common shareholders of record at February 28, 1994.\nITEM 6.","section_6":"ITEM 6. SELECTED FINANCIAL DATA - -------------------------------- Selected financial data are incorporated herein by reference from the \"Financial Highlights\" section included in Exhibit 13.\nITEM 7.","section_7":"ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL - ---------------------------------------------------------- CONDITION AND RESULTS OF OPERATIONS ----------------------------------- Management's discussion and analysis of financial condition and results of operations is incorporated herein by reference from the corresponding section of the Company's 1993 Annual Report to Shareholders the relevant portions of which are filed as Exhibit 13 of this report.\nITEM 8.","section_7A":"","section_8":"ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - ---------------------------------------------------- Consolidated financial statements and notes and the independent auditors' report are incorporated herein by reference from the Company's 1993 Annual Report to Shareholders the relevant portions of which are filed as Exhibit 13 to this report.\nSupplementary financial information is incorporated herein by reference from the \"Quarterly Data\" section included in Exhibit 13.\nITEM 9.","section_9":"ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE - ----------------------------------------------------------------------------- There have been no events which require disclosure under Item 304 of Regulation S-K.\n20.\nPART III - --------\nITEM 10.","section_9A":"","section_9B":"","section_10":"ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - ------------------------------------------------------------\nThe directors of the registrant are identified on pages 25 and 26 of this report. Additional material responsive to this item is contained in the Company's definitive Proxy Statement for its 1994 Annual Meeting of Shareholders, which information is incorporated herein by reference.\nEXECUTIVE OFFICERS OF THE REGISTRANT AND BUSINESS EXPERIENCE DURING THE PAST FIVE YEARS - -----------------------------------------------------------------------------\nCompany Officer Name Office and Experience Age Since ---- --------------------- --- -----\nJ. Carter Bacot 1989-1994 Chairman and Chief 61 1975 Executive Officer of the Company and the Bank\nThomas A. Renyi 1992-1994 President of the Company and 48 1992 Vice Chairman of the Bank 1989-1993 Senior Executive Vice President and Chief Credit Officer of the Bank\nAlan R. Griffith 1990-1994 Senior Executive Vice 52 1990 President of the Company, and President and Chief Operating Officer of the Bank 1989-1990 Senior Executive Vice President of the Bank\nSamuel F. Chevalier 1989-1994 Vice Chairman of the Company 60 1989 and the Bank 1989-1990 Chief Operating Officer and President of Irving Bank Corporation 1989 Vice Chairman and Chief Operating Officer of Irving Trust Company\nDeno D. Papageorge 1989-1994 Senior Executive Vice 55 1980 President of the Company 1989-1994 Senior Executive Vice President and Chief Financial Officer of the Bank\nRichard D. Field 1989-1994 Executive Vice President 53 1987 of the Company 1989-1992 Senior Executive Vice President of the Bank\nRobert E. Keilman 1989-1994 Comptroller of the 48 1984 Company and the Bank, Senior Vice President of the Bank\nCharles E. Rappold 1989-1994 Secretary and Chief Legal 41 1986 Officer of the Company, Senior Vice President and Chief Legal Officer of the Bank\nRobert J. Goebert 1989-1994 Auditor of the Company, 52 1982 Senior Vice President of the Bank\n21.\nOfficers of BNY who perform major policy making functions:\nBank Executive Officer Name Office and Experience Age Since ---- --------------------- --- ------\nRichard A. Pace 1990-1994 Executive Vice President and Chief 48 1989 Technologist 1989-1990 Senior Vice President 1989 Senior Vice President of Irving Trust Company\nRobert J. Mueller 1992-1994 Senior Executive Vice President - 52 1989 Chief Credit Policy Officer 1989-1994 Executive Vice President - Mortgage & Construction Lending\nThere are no family relationships between the executive officers of the Company. The terms of office of the executive officers of the Company extend until the annual organizational meeting of the Board of Directors.\nITEM 11.","section_11":"ITEM 11. EXECUTIVE COMPENSATION - --------------------------------\nThe material responsive to such item in the Company's definitive Proxy Statement for its 1994 Annual Meeting of Shareholders is incorporated by reference.\nITEM 12.","section_12":"ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT - ------------------------------------------------------------------------\nThe material responsive to such item in the Company's definitive Proxy Statement for its 1994 Annual Meeting of Shareholders is incorporated by reference.\nITEM 13.","section_13":"ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - --------------------------------------------------------\nThe material responsive to such item in the Company's definitive Proxy Statement for its 1994 Annual Meeting of Shareholders is incorporated by reference.\nPART IV - -------\nITEM 14.","section_14":"ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K - -------------------------------------------------------------------------- (a) 1 Financial Statements:\nSee Item 8.\n(a) 2 Financial Statement Schedules:\nFinancial statement schedules are omitted since the required information is either not applicable, not deemed material, or is shown in the respective financial statements or in the notes thereto.\n22.\n(a) 3 Listing of Exhibits:\nExhibit No. Per Regulation S-K Description - -------------- -----------\n3 (a) The By-Laws of The Bank of New York Company, Inc. as amended through October 13, 1987. (Filed as Exhibit 3(a) to the Company's 1987 Annual Report on Form 10- K and incorporated herein by reference.)\n(b) Certificate of Incorporation of The Bank of New York Company, Inc. as amended through July 14, 1993. (Filed as Exhibit 3 to Current Report on Form 8-K filed by the Company on July 14, 1993.)\n4 (a) None of the outstanding instruments defining the rights of holders of long-term debt of the Company represent long-term debt in excess of 10% of the total assets of the Company. The Company hereby agrees to furnish to the Commission, upon request, a copy of any of such instruments.\n(b) Amended and Restated Rights Agreement dated March 8, 1994. (Filed as Exhibit 4(a) to Current Report on Form 8-K filed by the Company on March 23, 1994.)\n10 (a) 1984 Stock Option Plan of The Bank of New York Company, Inc. as amended through February 23, 1988. (Filed as Exhibit 10(a) to the Company's 1988 Annual Report on Form 10-K and incorporated herein by reference.)\n(b) The Bank of New York Company, Inc. Excess Contribution Plan as amended through July 10, 1990. (Filed as Exhibit 10(b) to the Company's 1990 Annual Report on Form 10-K and incorporated herein by reference.)\n(c) Amendments to The Bank of New York Company, Inc. Excess Contribution Plan dated February 23, 1994 and November 9, 1993.\n(d) The Bank of New York Company, Inc. Excess Benefit Plan as amended through December 8, 1992. (Filed as Exhibit 10(d) to the Company's 1992 Annual Report on Form 10-K and incorporated herein by reference.)\n(e) Amendments to The Bank of New York Company, Inc. Excess Benefit Plan dated February 23, 1994 and November 9, 1993.\n(f) Management Incentive Compensation Plan of The Bank of New York Company, Inc. (Filed as Exhibit 10(d) to the Company's 1986 Annual Report on Form 10-K and incorporated herein by reference.)\n(g) 1994 Management Incentive Compensation Plan of The Bank of New York Company, Inc.\n(h) 1988 Long-Term Incentive Plan as amended through December 8, 1992. (Filed as Exhibit 10(f) to the Company's 1992 Annual Report on Form 10-K and incorporated herein by reference.)\n(i) The Bank of New York Company, Inc. 1993 Long Term Incentive Plan. (Filed as Exhibit 10(m) to the Company's 1992 Annual Report on Form 10-K and incorporated herein by reference.)\n23.\nExhibit No. Per Regulation S-K Description - --------------- -----------\n10 (j) The Bank of New York Company, Inc. Supplemental Executive Retirement Plan. (Filed as Exhibit 10(n) to the Company's 1992 Annual Report on Form 10-K and incorporated herein by reference.)\n(k) Amendment to The Bank of New York Company, Inc. Supplemental Executive Retirement Plan dated March 9, 1993.\n(l) Trust Agreement dated April 19, 1988 related to deferred compensation plans. (Filed as Exhibit 10(h) to the Company's 1988 Annual Report on Form 10-K and incorporated herein by reference.)\n(m) Trust Agreement dated November 16, 1993 related to deferred compensation plans.\n(n) Form of Remuneration Agreement between the Company and two of the five most highly compensated executive officers of the Company. (Filed as Exhibit 10 to the Company's 1982 Annual Report on Form 10-K and incorporated herein by reference.)\n(o) Remuneration Agreement between the Company and an executive officer of the Company. (Filed as Exhibit 10(h) to the Company's 1991 Annual Report on Form 10-K and incorporated herein by reference.)\n(p) Remuneration Agreement between the Company and an executive officer of the Company. (Filed as Exhibit 10(i) to the Company's 1991 Annual Report on Form 10-K and incorporated herein by reference.)\n(q) Remuneration Agreement between the Company and an executive officer of the Company. (Filed as Exhibit 10(j) to the Company's 1992 Annual Report on Form 10-K and incorporated herein by reference.)\n(r) The Bank of New York Company, Inc. Retirement Plan for Non- Employee Directors.\n(s) Deferred Compensation Plan for Non-Employee Directors of The Bank of New York Company, Inc.\n11 Statement - Re: Computation of Per Common Share Earnings\n12 Statement - Re: Computation of Earnings to Fixed Charges Ratios\n13 Portions of the 1993 Annual Report to Shareholders\n21 Subsidiaries of the Registrant\n23.1 Consent of Deloitte & Touche\n23.2 Consent of Arthur Andersen & Co.\n24.\n(b) Reports on Form 8-K:\nOctober 18, 1993: Unaudited interim financial information and accompanying discussion for the third quarter of 1993.\nDecember 7, 1993: An Underwriting Agreement, a Form of Note, an Officers' Certificate, and a Legal Opinion filed in connection with the Company's Registration Statement on Form S-3 (File No. 33-51984 and No. 33-50333) with the Securities and Exchange Commission covering the Company's 6.50% Subordinated Notes due 2003.\nJanuary 13, 1994: Unaudited interim financial information and accompanying discussion for the fourth quarter of 1993.\nMarch 23, 1994: Amended and Restated Rights Agreement dated March 8, 1994\n(c) Exhibits:\nSubmitted as a separate section of this report.\n(d) Financial Statements Schedules:\nNone\n25.\nSIGNATURES - ----------\nPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized in New York, New York, on the 8th day of March, 1994.\nTHE BANK OF NEW YORK COMPANY, INC.\nBy: \\s\\ J. Carter Bacot ------------------------------------- (J. Carter Bacot, Chairman)\nPursuant to the requirements of the Securities Exchange Act of 1934, this report has been duly signed below by the following persons on behalf of the registrant and in the capacities indicated on the 8th day of March, 1994.\nSignature Title --------- -----\n\\s\\J. Carter Bacot Chairman and - ----------------------------------- Chief Executive Officer (J. Carter Bacot) (principal executive officer)\n\\s\\ Deno D. Papageorge Senior Executive Vice President - ----------------------------------- (principal financial officer) (Deno D. Papageorge)\n\\s\\ Robert E. Keilman Comptroller (principal - ------------------------------------ accounting officer) (Robert E. Keilman)\n\\s\\ Richard Barth Director - ------------------------------------ (Richard Barth)\n\\s\\ William R. Chaney Director - ------------------------------------ (William R. Chaney)\n\\s\\ Samuel F. Chevalier Vice Chairman and Director - ------------------------------------ (Samuel F. Chevalier)\n\\s\\ Anthony S. D'Amato Director - ------------------------------------ (Anthony S. D'Amato)\n\\s\\ Anthony P. Gammie Director - ------------------------------------ (Anthony P. Gammie)\n26.\n\\s\\ Ralph E. Gomory Director - ------------------------------------ (Ralph E. Gomory)\n\\s\\ Alan R. Griffith Senior Executive Vice President - ----------------------------------- and Director (Alan R. Griffith)\n\\s\\ Edward L. Hennessy, Jr. Director\n- ------------------------------------ (Edward L. Hennessy, Jr.)\n\\s\\ John C. Malone Director - ------------------------------------ (John C. Malone)\n\\s\\ Donald L. Miller Director - ------------------------------------ (Donald L. Miller)\n\\s\\ H. Barclay Morley Director - ------------------------------------ (H. Barclay Morley)\n\\s\\ Martha T. Muse Director - ------------------------------------ (Martha T. Muse)\n\\s\\ Catherine A. Rein Director - ------------------------------------ (Catherine A. Rein)\n\\s\\ Thomas A. Renyi President and Director - ------------------------------------ (Thomas A. Renyi)\n\\s\\ Harold E. Sells Director - ------------------------------------ (Harold E. Sells)\n\\s\\ Delbert C. Staley Director - ------------------------------------ (Delbert C. Staley)\n\\s\\ W. S. White, Jr. Director - ------------------------------------ (W. S. White, Jr.)\n\\s\\ Samuel H. Woolley Director - ------------------------------------ (Samuel H. Woolley)\n27.\nINDEX TO EXHIBITS Exhibit No. - ------------ 3 (a) The By-Laws of The Bank of New York Company, Inc. as amended through October 13, 1987. (Filed as Exhibit 3(a) to the Company's 1987 Annual Report on Form 10-K and incorporated herein by reference.\n(b) Certificate of Incorporation of The Bank of New York Company, Inc. as amended through July 14, 1993. (Filed as Exhibit 3 to Current Report on Form 8-K filed by the Company on July 14, 1993.)\n4 (a) None of the outstanding instruments defining the rights of holders of long-term debt of the Company represent long-term debt in excess of 10% of the total assets of the Company. The Company hereby agrees to furnish to the Commission, upon request, a copy of any of such instruments.\n(b) Amended and Restated Rights Agreement dated March 8, 1994. (Filed as Exhibit 4 (a) to Current Report on Form 8-K filed by the Company on March 23, 1994.)\n10 (a) 1984 Stock Option Plan of The Bank of New York Company, Inc. as amended through February 23, 1988. (Filed as Exhibit 10(a) to the Company's 1988 Annual Report on Form 10-K and incorporated herein by reference.)\n(b) The Bank of New York Company, Inc. Excess Contribution Plan as amended through July 10, 1990. (Filed as Exhibit 10(b) to the Company's 1990 Annual Report on Form 10-K and incorporated herein by reference.)\n(c) Amendments to The Bank of New York Company, Inc. Excess Contribution Plan dated February 23, 1994 and November 9, 1993.\n(d) The Bank of New York Company, Inc. Excess Benefit Plan as amended through December 8, 1992. (Filed as Exhibit 10(d) to the Company's 1992 Annual Report on Form 10-K and incorporated herein by reference.)\n(e) Amendments to The Bank of New York Company, Inc. Excess Benefit Plan dated February 23, 1994 and November 9, 1993.\n(f) Management Incentive Compensation Plan of The Bank of New York Company, Inc. (Filed as Exhibit 10(d) to the Company's 1986 Annual Report on Form 10-K and incorporated herein by reference.)\n(g) 1994 Management Incentive Compensation Plan of The Bank of New York Company, Inc.\n(h) 1988 Long-Term Incentive Plan as amended through December 8, 1992. (Filed as Exhibit 10(f) to the Company's 1992 Annual Report on Form 10-K and incorporated herein by reference.)\n(i) The Bank of New York Company, Inc. 1993 Long Term Incentive Plan. (Filed as Exhibit 10(m) to the Company's 1992 Annual Report on Form 10-K and incorporated herein by reference.)\n28.\nINDEX TO EXHIBITS Exhibit No. - ------------ 10 (j) The Bank of New York Company, Inc. Supplemental Executive Retirement Plan. (Filed as Exhibit 10(n) to the Company's 1992 Annual Report on Form 10-K and incorporated herein by reference.)\n(k) Amendment to The Bank of New York Company, Inc. Supplemental Executive Retirement Plan dated March 9, 1993.\n(l) Trust Agreement dated April 19, 1988 related to deferred compensation plans. (Filed as Exhibit 10(h) to the Company's 1988 Annual Report on Form 10-K and incorporated herein by reference.)\n(m) Trust Agreement dated November 16, 1993 related to deferred compensation plans.\n(n) Form of Remuneration Agreement between the Company and two of the five most highly compensated executive officers of the Company. (Filed as Exhibit 10 to the Company's 1982 Annual Report on Form 10-K and incorporated herein by reference.)\n(o) Remuneration Agreement between the Company and an executive officer of the Company. (Filed as Exhibit 10(h) to the Company's 1991 Annual Report on Form 10-K and incorporated herein by reference.)\n(p) Remuneration Agreement between the Company and an executive officer of the Company. (Filed as Exhibit 10(i) to the Company's 1991 Annual Report on Form 10-K and incorporated herein by reference.)\n(q) Remuneration Agreement between the Company and an executive officer of the Company. (Filed as Exhibit 10(j) to the Company's 1992 Annual Report on Form 10-K and incorporated herein by reference.)\n(r) The Bank of New York Company, Inc. Retirement Plan for Non-Employee Directors.\n(s) Deferred Compensation Plan for Non-Employee Directors of The Bank of New York Company, Inc.\n11 Statement - Re: Computation of Per Common Share Earnings\n12 Statement - Re: Computation of Earnings to Fixed Charges Ratios\n13 Portions of the 1993 Annual Report to Shareholders\n21 Subsidiaries of the Registrant\n23.1 Consent of Deloitte & Touche\n23.2 Consent of Arthur Andersen & Co.","section_15":""}
{"filename":"18172_1993.txt","cik":"18172","year":"1993","section_1":"ITEM 1. BUSINESS.\nA. M. Castle & Co. is one of North America's largest, independent metals service center companies. The registrant (Company) provides a complete range of inventories as well as preprocessing services to a wide variety of customers.\nIn the last three years, sales mix was approximately as follows:\nThese metals are inventoried in many forms including round, hexagon, square and flat bars; plates; tubing; shapes; and sheet and coil.\nDepending on the size of the facility and the nature of the markets it serves, each of the Company's service centers is equipped as needed with Bar Saws, Tubing Cut-off Lathes, Close Tolerance Plate Saws, Oxygen and Plasma Arc Flame Cutting Machinery, Stress Relieving and Annealing Furnaces, Surface Grinding Equipment, Edge Conditioning Equipment, Sheet Shears and Coil Processing Equipment. The Company also does specialized fabrications for customers through pre-qualified subcontractors.\nEmphasis on the more highly engineered grades and alloys of metals, supported by strong service commitments, has earned the Company a leadership role in filling the needs of users of those metals.\nThe Company has its main office, and largest distribution center, in Franklin Park, Illinois. This center serves metropolitan Chicago and, approximately, a nine state area. In addition, there are distribution centers in various other cities (see Item 2). The Chicago, Los Angeles and Cleveland distribution centers together account for approximately one-half of all sales.\nThe customer base in the Eastern part of the county includes heavy and light machine tool industries, construction equipment, mining, textile manufacturing machinery and plastic extrusion machinery. The aerospace market is also served both directly and through subcontractors.\nThe Midwest Region serves manufacturers of hydrocarbon processing equipment, farm implement and construction equipment, food processing equipment and machine tools. The automotive, marine and aerospace markets are also included in the Midwest Region customer base.\nIn the Western area of the country, the Company serves the metal needs of a wide variety of industries as well as the subcontractors and manufacturers who serve those industries. The major markets include aircraft and aerospace, both military and commercial, oil and gas, chemical, petrochemical, farm equipment, electronics, lumber, and mining.\nIn Canada, the Company serves a wide range of businesses including aerospace, pulp and paper, and machinery equipment manufacturing. These markets are serviced by the Company's Canadian subsidiary A. M. Castle & Co. (Canada) Inc.\nThe Company's specialized operating unit is the Hy-Alloy Steels Co., located in Bedford Park, Illinois, a Chicago suburb. Hy-Alloy is a distributor of alloy bars stocked as rounds, squares, hexes, and flats; and of alloy tubing. It serves a nationwide market, which includes aircraft and aerospace, oil field equipment, gears and power train components, machine tools, screw machine products, bearings, construction equipment and agricultural equipment. In 1993 a value-added bar processing center, H-A Industries, was added. From this facility, the Company ships quench and tempered alloy bar products to its customers throughout the United States and Canada.\nIn general, the Company purchases metals from many producers. In the case of nickel alloys and titanium, each is single sourced. Satisfactory alternative sources, however, are available for all metals that the\nCompany buys and its business would not be materially adversely affected by the loss of any one supplier. Purchases are made in large lots and held in the distribution centers until sold, usually in smaller quantities. The Company's ability to provide quick delivery, frequently overnight, of a wide variety of metal products allows customers to reduce inventory investment because they do not need to order the large quantities required by producing mills.\nThe major portion of 1993 net sales were from materials owned by the Company. The materials required to fill the balance of such sales were obtained from other sources, such as direct mill shipments to customers or purchases from other metals distributors. Sales are primarily through the Company's own sales organization and are made to many thousands of customers in a wide variety of industries. No single customer is significant to the Company's sales volume. Deliveries are made principally by leased trucks. Common carrier delivery is used in areas not serviced directly by the Company's fleet.\nThe Company encounters strong competition both from other independent metals distributors and from large distribution organizations, some of which have substantially greater resources.\nThe Company has approximately 1200 full-time employees in its operations throughout the United States and Canada. Approximately 300 of these are represented by collective bargaining units, principally the United Steelworkers of America.\nITEM 2.","section_1A":"","section_1B":"","section_2":"ITEM 2. PROPERTIES.\nThe Company's principal executive offices are at its Franklin Park plant near Chicago, Illinois. All properties and equipment are well maintained and in good operating condition and sufficient for the current level of activities. Metals distribution centers and sales offices are maintained at each of the following locations, all of which are owned in fee, except as indicated:\n- ---------------\n(1) Leased: See Note 5 in the 1993 Annual Report to Stockholders, incorporated herein by this specific reference, for information regarding lease agreements.\nITEM 3.","section_3":"ITEM 3. LEGAL PROCEEDINGS.\nThere are no material legal proceedings other than the ordinary routine litigation incidental to the business of the Company.\nITEM 4.","section_4":"ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.\nNone.\nPART II\nITEM 5.","section_5":"ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.\nITEM 6.","section_6":"ITEM 6. SELECTED FINANCIAL DATA.\nITEM 7.","section_7":"ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.\nThe information required to be filed in Part II (Items 5, 6, and 7) in Form 10-K has been included in the 1993 Annual Report to Stockholders, as required by the Securities and Exchange Commission, and is included elsewhere in the filing. Accordingly, the following items required under Items 5, 6, and 7 are incorporated herein by this specific reference to the 1993 Annual Report to Stockholders: \"Common Stock Information\", page 20, \"Eleven-Year Financial and Operating Summary\", pages 18 and 19, and \"Financial Review\", pages 7 and 8.\nITEM 8.","section_7A":"","section_8":"ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.\nSee Part IV, Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.\nITEM 9.","section_9":"ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.\nNone.\nPART III\nITEM 10.","section_9A":"","section_9B":"","section_10":"ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.\nEXECUTIVE OFFICERS OF THE REGISTRANT\nAll additional information required to be filed in Part III, Item 10, Form 10-K, has been included in the Definitive Proxy Statement dated March 11, 1994 filed with the Securities and Exchange Commission, pursuant to Regulation 14A entitled \"Information Concerning Nominees for Directors\" and is hereby incorporated by this specific reference.\nITEM 11.","section_11":"ITEM 11. EXECUTIVE COMPENSATION.\nAll information required to be filed in Part III, Item 11, Form 10-K, has been included in the Definitive Proxy Statement dated March 11, 1994, filed with the Securities and Exchange Commission, pursuant to Regulation 14A entitled \"Management Remuneration\" and is hereby incorporated by this specific reference.\nITEM 12.","section_12":"ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.\nThe information required to be filed in Part I, Item 4, Form 10-K, has been included in the Definitive Proxy Statement dated March 11, 1994, filed with the Securities and Exchange Commission pursuant to Regulation 14A, entitled \"Information Concerning Nominees for Directors\" and \"Stock Ownership of Certain Beneficial Owners and Management\" is hereby incorporated by this specific reference.\nOther than the information provided above, Part III has been omitted pursuant to General Instruction G for Form 10-K and Rule 12b-23 since the Company will file a Definitive Proxy Statement not later than 120 days after the end of the fiscal year covered by this Form 10-K pursuant to Regulation 14A, which involves the election of Directors.\nITEM 13.","section_13":"ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.\nNone.\nPART IV\nITEM 14.","section_14":"ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.\nFinancial statements (incorporated by reference to the 1993 Annual Report to Stockholders) and exhibits are set forth in the accompanying index to Financial Statements and Schedules. No reports on Form 8-K were filed in the fourth quarter of 1993.\nA. M. CASTLE & CO.\nINDEX TO FINANCIAL STATEMENTS AND SCHEDULES\nAll schedules and exhibits, other than those listed above are omitted as the information is not required or is furnished elsewhere in the financial statements or the notes thereto.\nREPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULES\nTo A. M. Castle & Co.:\nWe have audited in accordance with generally accepted auditing standards, the financial statements included in the A. M. Castle & Co. 1993 Annual Report to Stockholders incorporated by reference in this Form 10-K, and have issued our report thereon dated February 4, 1994. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. The schedules listed in the accompanying index are the responsibility of the company's management and are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic financial statements. These schedules have been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.\nChicago, Illinois, February 4, 1994.\nCONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS WITH RESPECT TO FORM S-8\nAs independent public accountants, we hereby consent to the incorporation of our report, incorporated by reference in this Form 10-K, into the Company's previously filed Registration Statement File No. 2-83884 on Form S-8.\nChicago, Illinois, March 4, 1994\nSCHEDULE V\nA. M. CASTLE & CO.\nPROPERTY, PLANT AND EQUIPMENT FOR THE YEARS ENDED DECEMBER 31, 1993, 1992, AND 1991 (DOLLARS IN THOUSANDS)\nSCHEDULE VI\nA. M. CASTLE & CO.\nACCUMULATED DEPRECIATION FOR THE YEARS ENDED DECEMBER 31, 1993, 1992, AND 1991 (DOLLARS IN THOUSANDS)\nSCHEDULE VIII\nA. M. CASTLE & CO.\nACCOUNTS RECEIVABLE -- ALLOWANCE FOR DOUBTFUL ACCOUNTS VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1993, 1992, AND 1991 (DOLLARS IN THOUSANDS)\nSIGNATURES\nPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.\nA. M. Castle & Co. (Registrant)\nBy: \/s\/ James A. Podojil ------------------------------- James A. Podojil, Treasurer and Controller\n(Mr. Podojil is the Chief Accounting Officer and has been authorized to sign on behalf of the registrant.)\nDate: March 4, 1994\nPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.\n\/s\/ Michael Simpson - ------------------------------------- Michael Simpson, Chairman of the Board March 4, 1994\n\/s\/ Richard G. Mork - ------------------------------------- Richard G. Mork, President-- Chief Executive Officer, and Director March 4, 1994\n\/s\/ Edward F. Culliton - ------------------------------------- Edward F. Culliton, Vice President-- Chief Financial Officer, and Director March 4, 1994\n\/s\/ William K. Hall - ------------------------------------- William K. Hall, Director March 4, 1993\n\/s\/ Robert S. Hamada - ------------------------------------- Robert S. Hamada, Director Chairman, Audit Committee March 4, 1994\n\/s\/ John W. McCarter, Jr. - ------------------------------------- John W. McCarter, Jr., Director March 4, 1994\n\/s\/ William J. McDermott - ------------------------------------- William J. McDermott, Director March 4, 1994","section_15":""}
{"filename":"102237_1993.txt","cik":"102237","year":"1993","section_1":"Item 1. Business\nThe Upjohn Company (the \"Company\") operates in the human health care and agricultural business segments.\nHUMAN HEALTH CARE SEGMENT\nThe Company historically has engaged primarily in the research, development, production and sale of prescription pharmaceuticals, and it continues to be one of the largest drug manufacturers in the United States. The Company manufactures a broad line of prescription drugs, primarily central nervous system agents, nonsteroidal anti-inflammatory and analgesic agents, antibiotics, steroids, oral antidiabetes agents and a hair growth product. These are principally products which were developed or invented in its laboratories or for which licenses to make, use and sell have been obtained from others. They are sold to pharmacies and other retail stores, wholesalers, distributors, physicians, hospitals and governmental agencies.\nThe Company also manufactures for distribution to the general public certain nonprescription drugs and manufactures pharmaceutical chemicals for use in its own products and for bulk sales.\nThe Company's most important pharmaceutical products, many of which it sells under other trademarks in foreign markets, are discussed below, together with a summary indication of their principal uses and applications.\nDuring 1993 U.S. patent protection expired on ANSAID, CLEOCIN-T, XANAX and HALCION. Additionally, no significant patent protection remains on PROVERA. The U.S. patent on MICRONASE expired in 1992; however, a moratorium on the approval of Abbreviated New Drug Applications (ANDAs) for products containing glyburide, the generic name for MICRONASE, continues until May 1994. A moratorium on the approval of ANDAs also protects exclusivity for GLYNASE, a new formulation of glyburide, until March 1995. For further information on the impact of this loss of patent protection, see Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, incorporated by reference to the 1993 Annual Report to Shareholders (Exhibit 13).\nThe Company produces two major drugs for central nervous system (\"CNS\") disorders. XANAX Tablets, containing alprazolam, are used for symptomatic relief of anxiety with and without depressive symptoms and for the treatment of panic disorder. HALCION Tablets, containing triazolam, are a hypnotic agent for the treatment of insomnia. The use patent for the panic disorder indication for XANAX expires in 2002. HALCION, which has been subject to controversy for a number of years, has received increased adverse publicity, particularly in the United States and the United Kingdom, and worldwide regulatory action since mid-1991. For a more detailed description of recent United States and foreign regulatory action taken with respect to HALCION, see Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, incorporated by reference to the 1993 Annual Report to Shareholders (Exhibit 13).\nThe Company's major oral antidiabetes agent is MICRONASE Tablets, containing glyburide. The Company also markets GLYNASE PresTab Tablets, a new formulation of glyburide for the treatment of non-insulin-dependent diabetes.\nThe Company markets ANSAID Tablets, a nonsteroidal anti-inflammatory product containing flurbiprofen, for treatment of osteoarthritis and rheumatoid arthritis. The Company also markets MOTRIN Tablets, a nonsteroidal anti-inflammatory product containing ibuprofen, used in the treatment of rheumatoid arthritis and osteoarthritis and as a general analgesic for mild to moderate pain, including dysmenorrhea. MOTRIN is not subject to significant patent protection.\nThe Company and its subsidiaries provide a broad line of antibiotic products including CLEOCIN and LINCOCIN products, neither of which is subject to significant United States patent protection. CLEOCIN PHOSPHATE is an injectable form of clindamycin that is used in the treatment of certain life-threatening anaerobic infections. CLEOCIN T is a topical formulation for treatment of acne. CLEOCIN VAGINAL CREAM is used to treat bacterial vaginosis. LINCOCIN is used in the treatment of serious infections caused by many strains of gram-positive bacteria. Upjohn has exclusive U.S. marketing rights to VANTIN Tablets and Oral Suspension, an advanced cephalosporin antibiotic, under patents licensed from Sankyo Company, Ltd., which rights will become semi-exclusive in 1997. The Company also markets ZEFAZONE Sterile Powder, another cephalosporin antibiotic, under license from Sankyo.\nThe Company markets several steroid hormones having a variety of uses, including the treatment of allergic reactions, inflammation, asthma and certain hormone deficiencies, none of which are subject to significant patent protection. The most important synthetic hormone is PROVERA Tablets, which is a female sex hormone replacement agent. The Company produces various forms of chemical modifications of hormones, under the trademark MEDROL, which is used to treat a number of inflammatory and allergic conditions. SOLU-CORTEF Sterile Powder and SOLU-MEDROL Sterile Powder are injectable corticosteroid products. The Company recently introduced DEPO-PROVERA Contraceptive Injection in the U.S. In 1993, the government of India granted the Company permission to market DEPO-PROVERA Contraceptive Injection in that country.\nThe Company also markets certain prostaglandin products, including PROSTIN E2 Vaginal Suppository, which is generally used for pregnancy disorders, and PROSTIN VR PEDIATRIC Sterile Solution, for cardiovascular use, neither of which is subject to significant patent protection. The Company has recently introduced in the U.S. PREPIDIL Gel, used for cervical ripening, which is protected by U.S. patents until 2003.\nIn 1993, the Company obtained worldwide marketing rights to OGEN Tablets and Vaginal Cream, an estrogen replacement product, from Abbott Laboratories.\nThe Company produces and sells ROGAINE Topical Solution, a 2% solution of minoxidil applied topically to restore hair growth in men with male pattern baldness and in women with androgenetic alopecia, or hereditary hair loss. The product is also sold in numerous foreign countries. The United States patents covering ROGAINE expire in 1996.\nOther prescription drugs include ATGAM Sterile Solution, an immunosuppressant product, COLESTID Granules and Flavored Granules, a cholesterol-lowering agent, and CYTOSAR-U Sterile Powder, used for the treatment of leukemia. These products are no longer subject to significant patent protection.\nGeneva Pharmaceuticals, Inc., a subsidiary of CIBA-GEIGY Corporation, has certain rights to market generic versions of the Company's XANAX, HALCION, ANSAID, MICRONASE and CLEOCIN T products under an agreement with the Company. The Company also markets certain generic products through its subsidiary, Greenstone, Ltd.\nThe Company manufactures and distributes other products which do not require a prescription, including MOTRIN IB Tablets and Caplets, an analgesic; MOTRIN IB Sinus Tablets and Caplets, a sinus pain formula; KAOPECTATE products, for diarrhea; CORTAID products, anti-inflammatory topical products; the family of UNICAP vitamin products; DRAMAMINE, anti-motion sickness medicines, and MYCITRACIN, an antibiotic ointment for treatment of minor skin infections and burns. The Company also holds a license from Hoechst-Roussel Pharmaceuticals Inc. for exclusive United States rights to the nonprescription laxative products DOXIDAN and SURFAK. The Company also has a U.S. marketing arrangement with McNeil Consumer Products Company whereby the Company will receive access to several ibuprofen-based and other products being developed by McNeil.\nThe Company has an agreement with Biopure Corporation under which the Company will acquire sales and marketing rights to any bovine hemoglobin-derived blood substitute products developed for human or animal use by Biopure.\nThe Company has joint marketing agreements with Hoechst-Roussel Pharmaceuticals Inc. to jointly market ALTACE Capsules, a product for the treatment of hypertension, and with Solvay S.A. to jointly market Solvay's fluvoxamine, for the treatment of depression (which is approved in Europe and Canada but not yet approved in the United States), and Upjohn's XANAX. In 1992, the Company entered into a collaboration with Boehringer Ingelheim International GmbH to develop and market worldwide four CNS compounds.\nInternational Pharmaceutical Operations\nThe Company manufactures and sells throughout the world many of the prescription pharmaceuticals described above. The principal markets are Europe, Japan, the Pacific Region, Latin America, the Middle East and Canada. The Company competes with a large number of other companies primarily on the basis of product differentiation and price. The most significant product areas for the Company's international sales are antibiotics, central nervous system agents and corticosteroids.\nDelta West Pty. Limited, an Australian subsidiary of the Company, manufactures and distributes a broad line of generic products for hospital applications, with particular emphasis on injectable oncolytic products in plastic containers, primarily in Australia, New Zealand and Southeast Asia. Delta West is in the process of expanding its export efforts through the Asia- Pacific region and other markets. In 1993, Delta West and the Company entered into a collaboration with Gensia Laboratories Inc. to develop and market Delta West and Gensia generic oncology and pain products in the United States. Sale of the first product approved by the Food and Drug Administration from the collaboration with Gensia, injectable etoposide, commenced in February 1994.\nThe Company, through its subsidiary, Sanorania GmbH, markets a broad line of branded generic pharmaceutical products throughout Germany.\nCompetition\nIt is estimated there are at least 50 companies that are significant competitors in the United States in the sale of prescription and nonprescription pharmaceutical products. A major feature of this competition is the effort to discover, develop and introduce new or improved products for the treatment and prevention of disease. Other competitive features include quality, price, dissemination of technical information, competent product recall capability and medical support advice.\nSignificant changes in marketing conditions are occurring in both the U.S. and foreign pharmaceutical markets, including decreased pricing flexibility, restrictions on promotional and marketing practices and the impact of managed care, particularly with respect to product selections and pricing concessions.\nSee \"Governmental Regulation\" under \"General\" below for a description of the competitive effects of FDA regulation.\nDistribution\nThe Company has a domestic pharmaceutical sales force of technically trained representatives who call on physicians, pharmacists, hospital personnel, HMOs and other managed health care organizations and wholesale drug outlets. Most sales of pharmaceutical products are made directly to pharmacies, hospitals, chain warehouses, wholesalers and other distributors, although some are made to physicians and governments. Nonprescription drugs are also sold to other retail stores. Domestic customers are served from several distribution centers located throughout the United States. Separate sales forces handle nonprescription drug sales and foreign pharmaceutical sales.\nPuerto Rico Operations\nThe Company conducts substantial pharmaceutical manufacturing operations in Puerto Rico through a wholly owned subsidiary. Under current law, the earnings from this subsidiary will be partially exempt from both United States and Puerto Rico income taxes. The Omnibus Budget Reconciliation Act of 1993 will reduce, in years subsequent to 1994, the amount of Puerto Rico tax benefits available under Section 936 of the Internal Revenue Code (ultimately reducing the benefit under the current law by 60 percent). If earnings from the Company's Puerto Rican subsidiary are repatriated in the form of a dividend to the Company, such earnings would be subject to a Puerto Rican withholding tax of up to 10% of the amount repatriated. Under the Puerto Rico tax exemption grant, certain credits are available to reduce Puerto Rican withholding taxes. See Notes E and H of \"Notes to Consolidated Financial Statements\" in the 1993 Annual Report to Shareholders (Exhibit 13), which is hereby incorporated by reference, and Schedule I on page 36 herein, for further information, including the effect on the Company's net earnings of the Puerto Rican tax exemption grant and the investment of earnings from Puerto Rican operations.\nAGRICULTURAL SEGMENT\nAsgrow Seed Company, a wholly owned subsidiary, is, directly and through its affiliated companies, one of the leading worldwide breeders, developers, producers and marketers of vegetable and agronomic seed. Among Asgrow's major vegetable seed products are peas, beans, sweet corn, cucumbers, tomatoes, carrots, lettuce, onions and cantaloupe; and its major agronomic seed products are hybrid corn, hybrid sorghum and soybeans. Asgrow competes with a large number of other seed producers primarily on the basis of price, quality and yields. The sale of seeds is seasonal. The Company also participates in a 50-percent-owned joint venture with Tyson Foods, Inc., called Cobb-Vantress, Inc., for developing, producing and marketing broiler chicken breeders.\nIn late 1993, the Company sold the assets of Asgrow Florida Company, a distributor of agricultural chemicals and supplies in Florida, to Terra Industries, Inc. The vegetable and agronomic seed varieties previously sold by Asgrow Florida Company will continue to be sold by Asgrow Seed Company.\nThe Company develops, manufactures and sells animal pharmaceutical products and animal feed additives, the sales of which fluctuate with changes in the agricultural economy. These products are sold to veterinarians, feed manufacturers, distributors and growers who choose the Company's products primarily because of their efficacy and suitability for particular uses. Major products include NAXCEL Sterile Powder, an antibiotic for bovine and swine respiratory disease and early chick mortality; LINCO-SPECTIN Soluble Powder and Premix, a combination lincomycin\/spectinomycin antibiotic; LINCOMIX 20 and LINCOMIX 50 Feed Medication, which are feed-additive antibiotics; MGA Premix, which is a growth-promoting feed additive for feedlot heifers; various products for the treatment of mastitis; DELTA ALBAPLEX Tablets and LINCOCIN, which are small-animal antibiotics; and LUTALYSE Sterile Solution, which is used to synchronize breeding performance in mares and cattle. In addition, the Company sells a line of animal health vaccines through Oxford Veterinary Laboratories, Inc. (Bio-Vac Labs, Inc.).\nSeparate sales units handle the sales of animal health products and seeds.\nGENERAL\nResearch and Patents\nTotal research and development expenditures have increased each year for more than a decade, amounting to $522.9 million in 1991, $581.5 million in 1992, and $642.0 million in 1993. There are continuing research programs principally in the areas of cardiovascular diseases, central nervous system diseases, infectious diseases, atherosclerosis and thrombosis, hypersensitivity diseases, cancer, diabetes, hair growth, virology, gastrointestinal diseases, AIDS, trauma, biotechnology, agricultural microbiology and nutrition, agricultural growth physiology, agricultural parasitology, agronomic and vegetable seed germ plasm development and seed technology.\nThe Company and its subsidiaries have a large number of United States and foreign patents expiring at various times. The Company considers that the overall protection from its patents and trademarks and from licenses under patents belonging to others is of material value. However, it is believed that no single patent or license is of material importance in relation to the business as a whole. Rights under patents and know-how are both given and taken. In 1993, the Company recorded income for use of know-how and patents totaling approximately $10 million and expenses totaling approximately $54 million.\nRaw Materials and Energy\nFrom time to time, for a number of reasons, there has been difficulty in obtaining certain raw materials for the manufacture of some pharmaceutical products. However, the principal raw materials used by the Company are at this time readily available. Possible effect on the Company of increased costs and possible shortages of material or energy in the future cannot be predicted.\nEnvironment\nSignificant capital and operating expenses will be incurred to address environmental remediation and control in connection with the phasing out of its industrial chemical operations at the North Haven, Connecticut plant, improving controls on air emissions at the Kalamazoo manufacturing facilities, addressing other environmental issues at all company facilities and the Company's involvement in certain Superfund sites. The information under the caption \"Financial Review\" and Notes J and K of \"Notes to Consolidated Financial Statements\" in the 1993 Annual Report to Shareholders (Exhibit 13) is hereby incorporated by reference. Since several capital projects are undertaken for both environmental control and other business purposes, such as production process improvements, it is difficult to estimate the specific capital expenditures for environmental control. However, including all such multi-purpose capital projects as environmental expenditures, it is estimated that capital expenditures for environmental protection for 1994 and 1995 may exceed $60 million and $45 million each year, respectively. Operating expenses in 1993 for compliance with environmental protection laws and regulations are estimated to have been approximately $40 million. Such operating expenses in 1994 are estimated to be approximately $50 million. Cash payments charged to environmental reserves in 1993 totaled $6 million and are expected to be approximately $20 million in 1994.\nAmong the sites on the United States Environmental Protection Agency's (\"EPA\") National Priorities List, in connection with which the Company has been identified as a potentially responsible party (\"PRP\"), is the West KL Avenue Landfill located in Kalamazoo County, Michigan. In September 1991, the Company and three local governmental units agreed to a consent decree with the EPA, which has been approved by the United States Department of Justice and entered by a Federal Court, to undertake necessary remedial action. The costs of remediation may exceed $40 million, of which other viable parties are expected to contribute more than half.\nNegotiations continue in connection with remediation of the site of the Company's discontinued industrial chemical operations in North Haven, Connecticut. The Town is seeking to force the Company to remove a sludge pile located on the plant site because it violates local zoning ordinances. As a result of the detection of PCBs in the pile in concentrations that may require compliance with additional laws and regulations relative to disposal of PCBs, coupled with significant changes in applicable regulations relating to disposal of hazardous waste, the cost of off-site disposal (if, in fact, such disposal is possible, legal and ultimately required) could be approximately $200 million. The Company cannot at the present time predict the final resolution of the sludge pile issue. Because the Company believes in-place closure of the sludge pile is the most responsible course of action and the Connecticut Department of Environmental Protection and the U.S. Environmental Protection Agency had earlier approved the Company's plan for in-place closure of the sludge pile, which is substantially less expensive than removal, the Company has not established any reserves for the cost of off-site disposal.\nThe Company is also in the process of evaluating other existing environmental conditions at the North Haven, Connecticut facility with the intention of addressing concerns that may be determined appropriate. The Company believes that it has established sufficient reserves to cover the cost of any actions required to be taken after the evaluation process is completed.\nGovernmental Regulation and Legal Compliance\nThe Company's products have for many years been subject to regulation by federal, state and foreign governments. Such regulation has generally been aimed at product safety and labeling. In the United States, most human and animal pharmaceutical products manufactured or sold by the Company are subject to regulation by the U.S. Food and Drug Administration (\"FDA\") as well as by other federal and state agencies. The FDA regulates the introduction of new drugs, advertising of prescription drug products, good manufacturing and good laboratory practices, labeling, packaging and record keeping with respect to drug products. In addition, the FDA reviews the safety and effectiveness of marketed drugs and may require withdrawal of products from the market and modification of labeling claims where necessary. The FDA regulations require promotional use of generic names with trademarks for prescription drugs.\nGovernment approval of new drugs under the federal Food, Drug and Cosmetic Act requires substantial evidence of safety and efficacy. As a result of this requirement, as interpreted by the FDA, the length of time and the laboratory and clinical information required for approval of a New Drug Application (\"NDA\") is considerable.\nThe FDA has adopted streamlined procedures for the approval of duplicate drugs (drugs containing the same active ingredient as the originator's product), including Abbreviated New Drug Applications (\"ANDAs\"). Approval of ANDAs may not be made effective prior to expiration of valid patents. The FDA has established a similar expedited approval process for antibiotics. The availability of the ANDA and expedited antibiotic approval processes has reduced the time period and expense required to obtain FDA approval of some competing products and facilitated generic competition.\nAt the state level, so-called \"generic substitution\" legislation permits the dispensing pharmacist to substitute a different manufacturer's version of a drug for the one prescribed. In a number of states, such substitution is mandatory unless precluded by the prescribing physician.\nInterest in the FDA approval mechanism for duplicate or generic drugs and \"generic substitution\" by pharmacists has been increased by limits on government reimbursement of drug costs in health and welfare programs (Medicare and Medicaid).\nBeginning in 1991, all pharmaceutical manufacturers were required to provide rebates to the state governments for prescriptions covered by Medicaid. Rebates for single-source and innovator multiple-source drugs are 15 percent of the average manufacturer price (\"AMP\") for each drug or the AMP minus the best price a company offered to any given purchaser (excluding certain federal customers), whichever was greater. At any time, additional rebates are required if the cumulative price increases exceed the change in the Consumer Price Index, for the time period beginning October 1990. Approximately 10% of the Company's pharmaceutical business involves Medicaid. In November 1992, ceiling prices were placed on products sold to the Department of Defense, the Veterans Administration and the Public Health Service. In addition, manufacturers are required to sell products to PHS grantees at the net Medicaid price (AMP minus the Medicaid rebate). The issue of further price controls on sales of prescription drugs continues to be considered in Congress, and additional federal legislation to limit prices of prescription drugs is possible.\nIt is difficult to predict the ultimate effect of streamlined approval of duplicate or generic drugs, \"generic substitution,\" the Medicaid reimbursement and rebate programs and possible price limitations. However, the Company believes that its development of patented and exclusively licensed products may moderate the impact of programs and legislation focusing mainly on products available from multiple suppliers.\nSimilar product regulatory laws are found in most other countries in which the Company manufactures or sells its products. There, too, the thrust of governmental inquiry and action has been primarily toward reducing the prices of prescription drugs.\nThe Company is subject to administrative action by the various regulatory agencies. Such actions may include product recalls, seizures of products and other civil and criminal actions.\nIn 1993, the Company conducted an internal review of the Company's compliance with United States export control, trade embargo and antiboycott laws. This review determined that although the Company was generally in compliance with these laws, there may have been transactions effected by certain foreign subsidiaries which may not have been in compliance with these laws, including failure to report a small percentage of boycott-related customer requests to the U.S. Department of Commerce, issuance of four negative certificates of origin in response to customer requests and shipments of a small amount of United States-origin products by two foreign subsidiaries to embargoed countries. These matters have been reported voluntarily by the Company to the U.S. Department of Treasury and the U.S. Department of Commerce, and the Company has taken other corrective action. Although the Company cannot predict the outcome, the Company does not believe that any actions that may be taken by federal agencies against the Company as a result of these matters will have a material adverse effect on the Company's business, financial condition or results of operations.\nInternational Operations\nThe Company's international operations are subject to certain risks which are inherent in conducting business outside the United States, particularly fluctuations in currency exchange rates, price controls, differing rates of economic growth, inflation, political instability and varying controls on the repatriation of earnings.\nEmployees\nThe Company had 18,600 regular employees on December 31, 1993. The Company believes that it has good relations with its employees. Except for certain employees at the Company's plant in North Haven, Connecticut, none of the Company's United States employees are represented by unions or covered by collective bargaining agreements. Employees at several non-U.S. locations are represented either by freely elected unions or by legally mandated workers' councils or similar organizations.\nFinancial Information\nFinancial information about industry segments and foreign and domestic operations appearing under the caption \"Consolidated Statements of Segment Operations\" in the 1993 Annual Report to Shareholders (Exhibit 13) is hereby incorporated by reference. For additional information, see Notes S and T of \"Notes to Consolidated Financial Statements\" and the segment discussions included in the \"Human Health Care and Agricultural\" sections of the \"Financial Review\" in the 1993 Annual Report to Shareholders (Exhibit 13), which are hereby incorporated by reference.\nEmployee Stock Ownership Plan\nThe Company maintains an Employee Stock Ownership Plan (\"ESOP\") as part of The Upjohn Employee Savings Plan. Assets of the ESOP are held through a trust (the \"ESOP Trust\"). The ESOP Trust has issued debt securities to the public, and the Company has unconditionally guaranteed payment of the principal and interest on the debt securities. Holders of the debt securities have no recourse against the assets of the ESOP Trust except cash contributions made by the Company to pay such debt securities, and earnings attributable to such contributions. A summary description of the liabilities of the ESOP Trust under such debt securities and of the cash contributions made by the Company to the ESOP Trust during 1993 is set forth in Note N of \"Notes to Consolidated Financial Statements\" in the 1993 Annual Report to Shareholders (Exhibit 13), which is hereby incorporated by reference.\nItem 2.","section_1A":"","section_1B":"","section_2":"Item 2. Properties\nHuman Health Care Segment\nThe Company owns its main pharmaceutical plants and general offices, which consist of a group of buildings containing approximately 5,000,000 square feet of floor space, all of which were constructed since 1948 and are considered adequate for the Company's present needs, on about 500 acres of a 2,200 acre tract located six miles southeast of Kalamazoo, Michigan. The Company's main manufacturing building, which is located at the Kalamazoo site, contains about 1,630,000 square feet. Other major buildings at the Kalamazoo site include a large fermentation plant where antibiotics and steroids are produced, a new complex used for production of fine chemicals, and buildings devoted to chemical and fermentation process development. The Henrietta Street complex, owned by the Company and consisting of approximately 33 acres, includes a group of buildings aggregating about 2,500,000 square feet that houses the Company's research laboratories and offices. Pharmaceutical fermentation, production, warehouse and office facilities, containing approximately 510,000 square feet, are located on a 259 acre site owned by the Company near Arecibo, Puerto Rico. The Company also owns or leases distribution warehouses in several major cities in the United States.\nAgricultural Segment\nThe Company owns a 2,140 acre farm complex northeast of Kalamazoo, which includes the principal offices of the Company's agricultural business, including Asgrow Seed Company, and agricultural and veterinary research facilities, with offices, laboratory and farm buildings aggregating about 410,000 square feet. The agricultural segment also has animal health products production, grain storage, seed conditioning, breeding and research facilities in several locations in the United States and in foreign countries.\nItem 3.","section_3":"Item 3. Legal Proceedings\nVarious suits and claims arising in the ordinary course of business, primarily for personal injury and property damage alleged to have been caused by the use of the Company's products, are pending against the Company and its subsidiaries; and the ultimate liability with respect thereto is not presently determinable.\nThe Company is a defendant in approximately 100 product liability lawsuits involving its benzodiazepine product, HALCION, some of which seek punitive damages based on alleged deficiencies in the product approval process.\nThe Company has entered into a consent judgment with the Michigan Department of Natural Resources, and approved by the Michigan Circuit Court, regarding compliance with air control regulations. Pursuant to this consent judgment, the Company has paid the State of Michigan $1.5 million to cover the costs of surveillance, enforcement of applicable laws and natural resource damages; and the Company is installing significant air pollution control equipment at its Kalamazoo facility. The installation of these controls is expected to be nearly completed during 1994 and will require additional capital spending of approximately $40 to $50 million.\nTwo shareholder class action complaints are pending in the United States District Court for the Western District of Michigan against the Company and certain directors and officers of the Company seeking damages resulting from the alleged failure of the Company to disclose material adverse information about HALCION. The plaintiffs claim that the failure to disclose information on HALCION caused the price of the Company's stock to be artificially inflated, which caused them to purchase Upjohn stock at an excessive price. One of the actions contains a derivative complaint alleging a pattern of misconduct by the Company and named defendants purposely concealing or minimizing reports of side effects related to HALCION, which allegedly caused damage and loss to Upjohn as a company, improper election of directors and payment of excessive incentive compensation and stock option bonuses to the named defendants. The Company does not believe that there is merit to the claims and will defend the cases.\nIn October 1991, a Cook County, Illinois jury returned a verdict against the Company in the amount of approximately $127.5 million, of which approximately $124.5 million constituted punitive damages which was subsequently reduced to $35 million. The Plaintiff lost his left eye after his physician inadvertently injected the drug DEPO-MEDROL, a corticosteroid manufactured and marketed by the Company, directly into the eye instead of near the eye, as he had intended. The Company believes the decision was erroneous and will vigorously appeal this judgment, but, as with any litigation, the outcome is uncertain. The Company's insurance carriers have denied liability for punitive damages, and the Company is in litigation with its insurance carriers to determine the extent to which the Company's insurance policies cover punitive damages.\nIn addition to actions involving the West KL Avenue Landfill discussed above under Item 1, General, Environment, the Company is involved in several administrative and judicial proceedings relating to environmental matters, including actions brought by the EPA and state environmental agencies for cleanup at approximately 40 \"Superfund\" or comparable sites. The Company is not able to determine its ultimate exposure in connection with most of these environmental situations due to uncertainties related to cleanup procedures to be employed, if any, the cost of cleanup and the Company's share of a site's cost.\nThe Company is a party along with approximately thirty other defendants in several civil antitrust lawsuits alleging price discrimination and price- fixing with respect to the level of discounts and rebates provided to certain customers.\nThe Company is of the opinion that, although the outcome of the litigation and proceedings referred to above cannot be predicted with any certainty, appropriate accruals have been made in the Company's financial statements and the ultimate liability should not have a material adverse effect on the Company's consolidated financial position.\nSee the information under the caption \"Other Items\" in the \"Financial Review\" section and Notes J and K of the \"Notes to Consolidated Financial Statements\" in the 1993 Annual Report to Shareholders (Exhibit 13) for other information concerning environmental matters, which information is hereby incorporated by reference.\nItem 4.","section_4":"Item 4. Submission of Matters to a Vote of Security Holders\nNo matters were submitted to a vote of security holders during the quarter ended December 31, 1993.\nPART II\nItem 5.","section_5":"Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters\nThe Company's Common Stock is traded on the New York Stock Exchange under the symbol UPJ. As of February 28, 1994, there were 35,489 holders of record of the Company's Common Stock, $1 par value. In addition, there were 11,459 accounts under the Company's Dividend Reinvestment Plan which are not included in the number above.\nInformation regarding the market prices and dividends for the Company's Common Stock and related stockholder matters appearing under the caption \"Selected Financial and Quarterly Data\" in the 1993 Annual Report to Shareholders (Exhibit 13) is hereby incorporated by reference.\nItem 6.","section_6":"Item 6. Selected Financial Data\nThe information under the captions \"Financial Review,\" \"Notes to Consolidated Financial Statements,\" \"Summary of Continuing Operations\" and \"Selected and Quarterly Data\" in the 1993 Annual Report to Shareholders (Exhibit 13) is hereby incorporated by reference.\nItem 7.","section_7":"Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations\nThe information under the caption \"Financial Review\" in the 1993 Annual Report to Shareholders (Exhibit 13) is hereby incorporated by reference.\nItem 8.","section_7A":"","section_8":"Item 8. Financial Statements and Supplementary Data\nThe information under the caption \"Report of Independent Accountants,\" the consolidated financial statements, and the information under the caption \"Selected Financial and Quarterly Data\" in the 1993 Annual Report to Shareholders (Exhibit 13) is hereby incorporated by reference.\nItem 9.","section_9":"Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure\nNone.\nPART III\nItem 10.","section_9A":"","section_9B":"","section_10":"Item 10. Directors and Executive Officers of the Registrant\nThe Directors of the Company, who are elected annually for a three-year term, are as follows:\nRICHARD H. BROWN, age 46, Vice Chairman of Ameritech Corp., a telecommunications company. Mr. Brown was elected Ameritech Vice Chairman in January 1993. He joined Illinois Bell as President and Chief Executive Officer in 1990 and, prior to that, he was Executive Vice President of United Telecom and U.S. Sprint. He is secretary of the Illinois Business Roundtable, a member of the Economic Club of Chicago and serves actively in many non- profit organizations in Illinois. Mr. Brown is a director of Ameritech Corp. and serves on a number of other boards. He has served as a Director of The Upjohn Company since September 1993 and is a member of the Compensation and Incentive; the Nominating; and the Social Responsibility Committees of the Board of Directors.\nFRANK C. CARLUCCI, age 63, Chairman, The Carlyle Group, a merchant bank in Washington, D.C. Mr. Carlucci was vice chairman of The Carlyle Group from 1989 to 1993. He served as U.S. Secretary of Defense from 1987 to 1989. Mr. Carlucci is currently on the board of directors of Ashland Oil, Inc.; Bell Atlantic Corporation; Connecticut Mutual Life Insurance Company; East New York Savings Bank; Ecotech, Inc.; General Dynamics Corporation; International Planning and Analysis Center; Kaman Corporation; Neurogen Corporation; Northern Telecom Limited; The Quaker Oats Company; SunResorts, Ltd., N.V.; Texas Biotechnological Corporation; Westinghouse Electric Corporation; and serves on the board of trustees for the nonprofit Rand Corporation. Mr. Carlucci has served as a Director of The Upjohn Company since 1990 and is a member of the Audit; the Compensation and Incentive; the Finance; and the Nominating Committees of the Board of Directors.\nM. KATHRYN EICKHOFF, age 54, President, Eickhoff Economics Incorporated, economic consultants. Ms. Eickhoff is the former associate director for Economic Policy, United States Office of Management and Budget. She serves as a director of AT&T, National Westminster Bancorp. Inc. and Tenneco Inc. Ms. Eickhoff is a member of several business organizations including The Conference of Business Economists, The Economic Club of New York and the National Association of Business Economists. She served as a Director of The Upjohn Company from 1982 to 1985 and returned as a Director in 1987. She is a member of the Audit; the Executive; the Finance; and the Nominating Committees of the Board of Directors.\nDARYL F. GRISHAM, age 67, President and Chief Executive Officer, Parker House Sausage Company. Mr. Grisham joined Parker House Sausage Company in 1954. He has been a director of that company since 1961 and was promoted to his current position in 1969. Mr. Grisham is a former director for G. D. Searle and Company and Illinois Bell Telephone Co. He serves as a director of Harris Bankcorp, Inc.; Lincoln Park Zoological Society and the Rehabilitation Institute of Chicago. He also serves as a trustee for the Chicago Museum of Science & Industry and Northwestern University. He was named to the Chicago Business Hall of Fame in 1984. He has served as a Director of The Upjohn Company since 1989 and is a member of the Compensation and Incentive; the Executive; the Nominating; and the Social Responsibility Committees of the Board of Directors.\nLAWRENCE C. HOFF, age 65, former President and Chief Operating Officer of the Company. Mr. Hoff has long been active in major industry and educational associations including: director, American Diabetes Association, Inc.; trustee, Borgess Medical Center; director, Council on Family Health; chairman, Pharmaceutical Manufacturers Association; member, U.S. Chamber of Commerce, International Policy Committee. He holds an honorary Doctor of Science in Pharmacy degree from Massachusetts College of Pharmacy and Allied Health Sciences, and is currently a director of Alpha Beta Technology, Inc.; Curative Technologies, Inc.; and MedImmune, Inc. He has served as a Director of The Upjohn Company since 1973 and is a member of the Audit and the Social Responsibility Committees of the Board of Directors.\nGERALDINE A. KENNEY-WALLACE, age 51, President and Vice-Chancellor of McMaster University, Hamilton, Ontario, Canada. Dr. Kenney-Wallace is a member of the board of directors of the Bank of Montreal, Dofasco Inc., DMR Inc., General Motors (Canada), and Northern Telecom Ltd. She serves on the advisory board of the Canadian Foundation for AIDS Research, the Manning Foundation, and is currently the Honorary Chairman of the Canadian Donner Foundation. During her scientific career in lasers, ultra-fast phenomena and opto-electronics, Dr. Kenney-Wallace has received numerous honors and scientific awards. She has served as a Director of The Upjohn Company since September 1993 and is a member of the Audit; the Finance; and the Social Responsibility Committees of the Board of Directors.\nWILLIAM E. LAMOTHE, age 67, former Chairman of the Board and Chief Executive Officer of Kellogg Company, a food company. Mr. LaMothe is a former director of the Food and Drug Law Institute, Kimberly Clark Corporation, Unisys Corporation and the Western Michigan University Foundation. He is currently a director of Allstate Insurance Companies, Kellogg Company, and Sears Roebuck and Company; and he is a member of the board and a trustee for the W. K. Kellogg Foundation Trust. Mr. LaMothe serves on the board of governors of the Battle Creek Community United Arts Council and The Battle Creek Community Foundation. He has served as a Director of The Upjohn Company since 1986 and is a member of the Audit; the Compensation and Incentive; the Executive; and the Nominating Committees of the Board of Directors.\nJERRY R. MITCHELL, M.D., Ph.D., age 52, Vice Chairman of the Board and President, Upjohn Laboratories. Previously, Dr. Mitchell had been Executive Vice President and President, Upjohn Laboratories (1991-92); Senior Vice President and President, Upjohn Laboratories (1990); and Vice President for Pharmaceutical Research (1989-90). Prior to joining The Upjohn Company, Dr. Mitchell was a professor of internal medicine and the director of the Center for Experimental Therapeutics, Baylor College of Medicine and Affiliated Hospitals. During his distinguished career, Dr. Mitchell has served on many national advisory boards and committees and has received numerous honors and scientific awards. He has published two books and has written hundreds of manuscripts and abstracts. Dr. Mitchell has been a Director of The Upjohn Company since 1991.\nWILLIAM D. MULHOLLAND, age 67, former Chairman of the Board and Chief Executive Officer of the Bank of Montreal. Mr. Mulholland is currently a director of the Bank of Montreal; Brooks Fashion Stores, Inc. and Canadian Pacific Ltd. He is a trustee of Queen's University and a member of the Advisory Committee on Canadian Studies at the School of Advanced International Studies, Johns Hopkins University. Mr. Mulholland has received honorary Doctor of Laws degrees from Memorial University and Queen's University. He has served as a Director of The Upjohn Company since 1977 and is a member of the Compensation and Incentive; the Executive; the Finance; and the Nominating Committees of the Board of Directors.\nRAY T. PARFET, JR., age 71, former Chairman of the Board and Chief Executive Officer of the Company. Mr. Parfet is also a former chairman of the Pharmaceutical Manufacturers Association. He has served as a director for The ARO Corporation, Michigan Bell Telephone Company and Union Pump Company and as a trustee of the National 4-H Council in Washington, D.C. and Bronson Healthcare Group, Inc. He is currently a director of The W. E. Upjohn Unemployment Trustee Corporation. He has served as a Director of The Upjohn Company since 1958 and is a member of the Executive Committee of the Board of Directors.\nWILLIAM U. PARFET, age 47, President and Chief Executive Officer of Richard-Allan Medical Industries, Inc., a manufacturer of surgical equipment and medical supplies. Prior to joining Richard-Allan in October 1993, Mr. Parfet had been Vice Chairman of the Board of the Company, and was President (1991-93) and Executive Vice President (1989-91) before that. Mr. Parfet serves on various boards of directors, including CMS Energy Corporation, the Financial Accounting Foundation, Flint Ink Corporation, Old Kent Financial Corporation, Stryker Corporation and Universal Foods, Inc. He has served as a Director of The Upjohn Company since 1985 and is a member of the Finance and the Social Responsibility Committees of the Board of Directors.\nLEY S. SMITH, age 59, President and Chief Operating Officer of the Company. Mr. Smith was elected President, Chief Operating Officer and Acting Chief Executive Officer in 1993; he became Vice Chairman of the Board in 1991; and was elected Executive Vice President in January 1989. Mr. Smith is active in a wide variety of business, community, and medical- and pharmaceutical-related activities, including the Pharmaceutical Manufacturers Association; the Virginia Neurological Institute; the Health, Welfare and Retirement Income Task Force of the Business Roundtable; and the Greater Kalamazoo United Way. He has served as a Director of The Upjohn Company since 1989.\nJOHN L. ZABRISKIE, Ph.D., age 54, Chairman of the Board and Chief Executive Officer of the Company. Prior to joining the Company earlier this year, Dr. Zabriskie had spent his entire career with Merck & Co., Inc. During the last five years, he has held several officer positions with Merck in sales, marketing, public affairs and manufacturing, serving most recently as executive vice president of Merck & Co., Inc., and president, Merck Manufacturing Division. He is active in the debate over U.S. health care reform as a member of the Jackson Hole Group for Healthcare Reform and the Healthcare Leadership Council. He is also active in the Pharmaceutical Manufacturers Association. Dr. Zabriskie has served on the boards of Penjerdel Corporation; Pennsylvania Biotechnology Association; the National Pharmaceutical Council, Inc.; Morristown Memorial Hospital and Wells College; he is currently a director of First of America Bank Corporation. He began serving as a Director of The Upjohn Company in January 1994 and is a member of the Executive and the Finance Committees of the Board of Directors.\nIn addition to J. L. Zabriskie, Ph.D., L. S. Smith and J. R. Mitchell, M.D., Ph.D., the executive officers of the Company, who are elected annually for a one-year term, are as follows:\nItem 11.","section_11":"Item 11. Executive Compensation\nBoard of Directors Compensation\nCompensation for non-employee members of the Board of Directors consists of an annual retainer fee of $24,000 plus a $1,000 fee for each Board meeting attended; a $1,000 fee for attending the first committee meeting held on any day and a $750 fee for attending subsequent committee meetings held on the same day. In addition, the chairperson for each committee receives a quarterly retainer fee of $1,000. Employee directors do not receive compensation for serving on the Board or on the Board's committees. The Company maintains a retirement plan for outside directors which provides that a director will receive retirement benefits for a period of time equal to the length of his non-employee Board service in an amount equal to 50% of his last annual retainer after 5 years of non-employee service plus 5% for each additional year of non-employee Board service up to a total of 100% of his last annual retainer. The Company also maintains a deferred compensation plan for outside directors, which enables a director to defer payment of his fees until he leaves the Board.\nReport of the Compensation and Incentive Committee\nThe Compensation and Incentive Committee, consisting of five independent directors, none of whom has ever served as an officer or employee of the Company or has any known conflicts, recommends to the Board the salaries of all corporate officers and administers the Company's incentive compensation plans. The Committee also reviews with the Board its recommendations relating to the future direction of corporate compensation and benefit policies and practices.\nAnnually, the Compensation and Incentive Committee reviews:\n(a) the financial and operational performance of the Company and its major business segments;\n(b) the performance of each corporate officer;\n(c) the compensation paid key executives in similar positions within the pharmaceutical industry and industry generally; and\n(d) the design and appropriate use of specific short-term and long- term reward vehicles that will support the achievement of business goals and commitment to the Company's shareholders.\nIn general, the Company seeks to encourage and reward executive efforts which create shareholder value through achievement of corporate objectives, business strategies and performance goals, by blending annual and long-term cash and equity compensation and, in so doing, to align the interests of executives with those of shareholders.\nThe Committee's policies through 1993 can be summarized as follows:\n(a) to increase the proportion of total compensation comprised of variable, or incentive-based, compensation, while reducing the proportion of fixed compensation;\n(b) to place increasing reliance upon individual and business unit performance when awarding individual incentive compensation, while reducing the proportion based upon total corporate performance;\n(c) to place increasing reliance upon external standards of competitive performance rather than internally defined standards when fixing the total amount of incentive compensation that may be awarded; and\n(d) to maintain a competitive level of total executive compensation for competitive performance; and, similarly, to recognize superior performance.\nFor 1993, the proportion of senior executive compensation that was fixed, base salary ranged from 50% to 60%. Base salary is set at competitive levels and based on job level, experience and performance. The remaining 40% to 50% was variable, incentive compensation, 75% of which was dependent upon the extent to which actual corporate earnings before tax (\"EBT\") met budgeted EBT levels and 25% of which was based upon the Company's earnings growth as compared with the median earnings growth of our peer companies. The comparator group used to assess competitive practices is the group of companies included in the peer group index identified on page 23.\nIn addition to the stock options granted in February 1993, the Committee granted special stock options in December 1993 to selected employees whose individual performance and leadership were deemed critical to the Company's future success. These stock options will become exercisable if the Company's stock price appreciates by certain thresholds over the market price on the date of grant.\nIn reviewing the compensation policies at the end of 1993, the Committee determined that it had approached an appropriate level of variable compensation based upon our existing business objectives. In addition, the Committee decided that a greater proportion of the variable compensation should be based on the Company's performance relative to that of peer pharmaceutical companies. Accordingly, the Committee's policies were revised for 1994 and can be summarized as:\n(a) total executive compensation should be maintained at a competitive level for competitive performance; and, similarly, superior performance should be recognized;\n(b) variable, or incentive-based compensation should range from 30% to 50% of total compensation with the higher-ranking executives having a greater proportion of variable or incentive-based compensation;\n(c) with respect to variable, or incentive-based compensation, at least 50% should be based upon external standards of competitive performance rather than internally established financial goals; and\n(d) equity-based compensation (stock options, restricted stock, performance shares and deferred incentive compensation) should be increasingly used to link employee performance to shareholder interests; promote and encourage stock ownership in the Company and provide an incentive to create long-term shareholder value.\nListed below are several actions that illustrate the Committee's commitment to these revised policies.\nIn 1994, 50% of incentive compensation will be dependent upon the extent to which actual corporate EBT meets budgeted corporate EBT levels, and the remaining 50% will be determined by Upjohn's Total Market Return performance relative to the average Total Market Return of peer pharmaceutical companies.\nConsistent with our focus on performance-driven compensation, the Company eliminated the Christmas Bonus for 1994 and subsequent years (which had been equal to 5% of base salary after eight years of service), and increased incentive compensation target ranges by 5% of base salary.\nAs in prior years, 20% of incentive compensation earned each year will be deferred in shares of Company stock which will not vest until retirement.\nThe Committee grants annual ten-year stock options, having a value based on the level of stock price appreciation over the market price on the date of grant. The Committee considers the level of stock options granted by competitive companies and the number of Upjohn stock options previously granted, currently outstanding and proposed to be granted in reaching its decision to make additional grants of stock options to executive officers. Restricted stock, which cannot be sold or transferred until earned in future years, is issued on an infrequent and selective basis based on the Committee's assessment of appropriate recognition and retention factors.\nTo further increase executive stock ownership and enhance the focus on the long-term competitive financial performance of the Company, the Committee made two initial grants of performance shares in 1994, one measured over a two-year period and one measured over a three-year period. The utilization of performance shares was approved by shareholders as part of The Upjohn Management Incentive Program of 1992. The stock reserved for payment of performance share awards was reallocated from the stock that would normally have been reserved for issuance as stock options. The Performance Shares will be payable in shares of the Company's Common Stock and will be earned based upon the Company's relative Total Market Return, Return on Net Assets and Net Earnings Growth, as compared to the group of peer pharmaceutical companies.\nBecause of the extensive time required to discover, develop, test and obtain approval to sell new drugs, a process which often takes ten or more years, performance of executives in the pharmaceutical industry cannot be adequately measured by short-term changes in stock price. Efforts expended today will not reap benefits until several years in the future. Management has taken many difficult but significant steps to position the Company for the future, including realigning its core businesses, sharpening the focus of its research, streamlining product development and regulatory activities, implementing cost containment measures, reducing the number of employees, globalizing operations, forming new strategic partnerships and establishing a corporate commitment to total quality.\nThe Internal Revenue Code was recently amended to limit the Company's ability to deduct more than $1 million of an executive's nonperformance-based compensation. The Committee will endeavor in the future to design and administer the Company's performance-based compensation plans (incentive compensation, stock options and performance shares) in a manner that will comply with the IRS exclusion for performance-based compensation, including shareholder approval, administration by disinterested directors and use of nondiscretionary, preestablished performance goals. Base salary will be determined on the basis of job performance and competitive requirements and may, therefore, exceed the $1 million deduction limit, although currently no base compensation exceeds $800,000. In recruiting Dr. Zabriskie to serve as the Company's Chairman and Chief Executive Officer, the Company committed to pay a minimum performance bonus for 1995 that will not be fully deductible under the new limitation.\nCompensation and Incentive Committee\nR. H. Brown F. C. Carlucci D. F. Grisham W. E. LaMothe W. D. Mulholland\nEXECUTIVE COMPENSATION\nThe following table shows the total compensation received for the last three calendar years by the Company's Acting Chief Executive Officer at year-end; by the next four most highly compensated executive officers who were in office at year-end; and by T. Cooper, M. Novitch and W. U. Parfet who were executive officers for part of 1993. Footnotes to the table are included on the next page.\nThe following table shows the number and percentage of stock options granted to the named executive officers during 1993, the exercise price and expiration date of the options and the potential realizable value of each grant assuming that the market price of the stock appreciates in value from the date of grant to the expiration date at assumed annualized 5% and 10% rates. Options can be exercised in full after one year of employment from the date of grant with payment in either cash or shares of the Company's Common Stock. Upon a stock-for-stock exercise, the optionee will receive a new, non- qualified reloaded stock option at the then current market price for the number of shares tendered to exercise the option. No reloaded stock options were issued to executive officers in 1994. The reloaded stock option will have an exercise term equal to the remaining term of the exercised option. Options may only be exercised during employment or within three months after employment ceases, except that following retirement at or after age 65 or other approved termination of employment (as was the case with M. Novitch and W. U. Parfet), stock options may be exercised for periods up to five years (but not beyond the original expiration date of the option). The Company is unable to predict or estimate the Company's actual future stock price or place a reasonably accurate present value on the options granted.\nThe following table shows the number of stock options exercised and the value realized by the named executive officers during 1993 and the number of unexercised stock options remaining at year end and the potential value thereof based on the year-end market price of the Company's Common Stock of $29.25:\nCOMPARISON OF CUMULATIVE TOTAL SHAREHOLDER RETURN\nThe following graphs compare the yearly change over the last five years and, for a longer-term perspective, over the last ten years, in the Company's cumulative total shareholder return (stock price appreciation plus the cumulative value of reinvested dividends) compared to the Standard & Poor's 500 Stock Index and a Combined Standard & Poor's Drug Group Index consisting of Abbott Laboratories, American Cyanamid Co., American Home Products Corporation, Bristol-Myers Squibb Company, Johnson & Johnson, Eli Lilly and Company, Merck & Co., Inc., Pfizer Inc., Schering-Plough Corporation, Syntex Corporation, The Upjohn Company and Warner Lambert Company. Under this peer group index, the returns of each component company are weighted according to their respective stock market capitalization as of the beginning of each period for which a return is indicated. The graphs assume $100 was invested on December 31, 1988 (for five-year graph) and December 31, 1983 (for ten-year graph) and that all dividends were reinvested. The stock performance as shown on the Performance Graph should not be interpreted as a prediction of future stock performance.\nRetirement Benefits\nThe following table illustrates the estimated annual benefits payable under the Company's pension plan upon retirement to persons in the specified remuneration and years-of-service classifications, assuming retirement at the normal Social Security retirement age and assuming the participant's remuneration is equivalent to his Final Average Salary under the plan and is equal to or greater than 150% of his Social Security Covered Compensation. The amounts shown include additional non-qualified pension benefits, represent straight-life annuity amounts notwithstanding the availability of joint survivorship provisions and are not subject to any offset or reduction for Social Security benefits.\nThe compensation included as remuneration is the amounts listed under \"Annual Compensation\" in the Summary Compensation Table on page 20. The current number of years of service credited for the following individuals at December 31, 1993, were: L. S. Smith, 35 years; J. R. Mitchell, 8 years; G. A. Welch, 34 years; D. R. Parfet, 16 years; and R. C. Salisbury, 19 years.\nEmployment Agreements and Termination of Employment Arrangements\nUnder an agreement made with J. L. Zabriskie when he joined the Company, he will receive a base salary of $800,000 and a bonus of at least $600,000 payable in March 1995 for services rendered in 1994. In addition, he received 15,000 shares of restricted stock to be earned in equal amounts in January 1995 and January 1996, which amount will be reduced by the value of any future performance share awards received from his prior employer. He was also granted a stock option for 250,000 shares that will become exercisable on January 3, 1995; a stock option for 50,000 shares that will become exercisable after January 3, 1996 when the stock price exceeds $34.06; and a stock option for 50,000 shares that will become exercisable after January 3, 1997 when the stock price exceeds $39.06. All of the stock options have a ten-year term and an exercise price of $29.06 per share. When Dr. Zabriskie retires, he will receive a retirement benefit under the Company's plans as if he had been employed by Upjohn for 28 years plus his actual years of service with the Company less the value of his pension from former employment. If Dr. Zabriskie's employment is terminated within the next four years, he will receive a severance payment of at least two years' base salary.\nUnder an agreement made with J. R. Mitchell when he joined the Company, he will receive a retirement benefit equal to that which he would receive if he were granted 1.67 years of service for each actual year of service under the Company's pension plans, reduced by the value of the pension to be received by him from his former employment.\nThe Company has a separation payment plan for eligible individual employee terminations, including executive officers, ranging from one week's base pay for employees with three months' service to 31 weeks' base pay for 30 or more years of service. The Company also has a plan for employees, including executive officers, who are terminated as a result of having their position eliminated, which provides for separation payments ranging from two weeks' base pay for employees with one year of service to 62 weeks' base pay for employees with 30 or more years of service. In addition, the Company has a change-in-control severance plan for eligible employees, excluding executive officers, which may be terminated by the Board of Directors at any time prior to a change in control of the Company, which will provide severance benefits ranging from 4 weeks' base pay for employees with one year of service to 104 weeks' base pay for employees with 30 or more years of service payable in the event their employment is terminated within two years following a change in control of the Company. The Company has entered into a severance agreement with each executive officer providing for the payment of severance pay equal to 2.5 times the officer's annualized salary in the event his employment is terminated other than for cause, disability or retirement within 24 months following a change in control of the Company.\nItem 12.","section_12":"Item 12. Security Ownership of Certain Beneficial Owners and Management\nUnder regulations of the Securities and Exchange Commission, persons who have power to vote or dispose of shares of the Company, either alone or jointly with others, are deemed to be beneficial owners of such shares. Because the voting or dispositive power of certain shares listed in the following table is shared, the same securities in such cases are listed opposite more than one name in the table. The total number of shares of Common Stock of the Company listed below for directors and executive officers as a group eliminates such duplication.\nPursuant to a Schedule 13G filed with the Securities and Exchange Commission by State Street Bank and Trust Company, 225 Franklin Street, Boston, Massachusetts 02110, as Trustee of The Upjohn Employee Savings Plan, the Bank indicated beneficial ownership equivalent to 7.4% of the Company's outstanding Common Stock as of December 31, 1993.\nPursuant to a Schedule 13G filed with the Securities and Exchange Commission by The Capital Group, Inc., 333 South Hope Street, Los Angeles, California 90071, Capital Research and Management Company, a registered investment adviser and an operating subsidiary of The Capital Group, Inc., exercised, as of December 31, 1993, investment discretion, but not voting power, with respect to 11,001,900 shares, or 6.3% of outstanding shares of the Company's Common Stock, which were owned by various institutional investors.\nSet forth in the following table are the beneficial holdings as of the close of business on March 31, 1994 of individual directors and nominees, the five most highly compensated executive officers for 1993 and all directors and executive officers as a group.\nItem 13.","section_13":"Item 13. Certain Relationships and Related Transactions\nD. R. Parfet, Executive Vice President for Administration, is the brother of W. U. Parfet and both are sons of R. T. Parfet, Jr.; W. U. Parfet and R. T. Parfet, Jr., are directors of the Company.\nPART IV\nItem 14.","section_14":"Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K\n(a)1. Financial Statements\nThe following are included in the 1993 Annual Report to Shareholders (Exhibit 13) and are incorporated by reference into this Form 10-K pursuant to Item 8:\nReport of Independent Accountants.\nConsolidated Statements of Earnings--Years ended December 31, 1993, 1992 and 1991.\nConsolidated Balance Sheets--December 31, 1993 and 1992.\nConsolidated Statements of Shareholders' Equity--Years ended December 31, 1993, 1992 and 1991.\nConsolidated Statements of Cash Flows--Years ended December 31, 1993, 1992 and 1991.\nConsolidated Statements of Segment Operations--Years ended December 31, 1993, 1992 and 1991.\nNotes to Consolidated Financial Statements.\n(a)2. Financial Statement Schedules\nReport of Independent Accountants. . . . . . . . . . . . . .35\nSchedules: I Marketable Securities--Other Investments, December 31, 1993 . . . . . . . . . . . . . . . 36\nFor the years ended December 31, 1993, 1992 and 1991: V Property, Plant and Equipment . . . . . . . . . 37 VI Accumulated Depreciation, Depletion and Amortization of Property, Plant and Equipment . 38 IX Short-term Borrowings . . . . . . . . . . . . . 39\nNotes:\n(1) Schedules other than those listed above are omitted because they are either not required, are not applicable or because equivalent information has been included in the financial statements, the notes thereto or elsewhere herein.\n(2) Financial statements of 50 percent-or-less-owned affiliated persons are omitted because such persons, in the aggregate, do not constitute a significant subsidiary.\n(a)3. Exhibits - Management and compensation-related agreements and plans are included as Exhibits (10)(a) through (10)(q).\n(3)(i) Restated Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit (3)(a) to the Registrant's Form 10-K for the year ending December 31, 1987).\n(3)(ii) By-laws of the Registrant, as amended, June 21, 1988 (incorporated by reference to Exhibit (3)(b) to the Registrant's Form 10-K for the year ending December 31, 1988).\n(4)(a) Loan Agreement between Puerto Rico Industrial, Medical and Environmental Pollution Control Facilities Financing Authority and The Upjohn Company, dated as of December 1, 1983, and Trust Agreement between Puerto Rico Industrial, Medical and Environmental Pollution Control Facilities Financing Authority and The Chase Manhattan Bank (National Association), Trustee, dated as of December 1, 1983 (not filed pursuant to Regulation S-K, Item 601 (b)(4)(iii)(A); the Registrant agrees to furnish a copy of these documents to the Securities and Exchange Commission upon request).\n(4)(b) Indenture dated as of February 1, 1990, with respect to debt securities issued by The Upjohn Company Employee Stock Ownership Trust and 9.79% Amortizing Notes, Series A, Due February 1, 2004, issued by The Upjohn Company Employee Stock Ownership Trust and guaranteed by the Registrant (not filed pursuant to Regulation S-K, Item 601 (b)(4)(iii)(A); the Registrant agrees to furnish a copy of these documents to the Securities and Exchange Commission upon request).\n(4)(c) Rights Agreement dated as of June 17, 1986 (incorporated by reference to Exhibit 4(d) to the Registrant's Form 8-K dated June 17, 1986), as amended by First Amendment dated as of March 22, 1989 (incorporated by reference to Exhibit 4 to the Registrant's Form 8-K dated March 27, 1989).\n(4)(d) Certificate of Designation, Preferences and Rights of Series A Participating Cumulative Preferred Stock (incorporated by reference to Exhibit 4(a) to the Registrant's Form 8-K dated June 17, 1986).\n(4)(e) Certificate of Designations, Preferences and Rights of Series B Convertible Perpetual Preferred Stock (incorporated by reference to Exhibit (4)(f) to the Registrant's Form 10-K for the year ending December 31, 1989).\n(4)(f) Indenture dated as of August 1, 1991 between the Company and The Bank of New York, as trustee, with respect to Debt Securities to be issued thereunder from time to time (not filed pursuant to Regulation S-K, Item 601(b)(4)(iii)(A); the Registrant agrees to furnish a copy of these documents to the Securities and Exchange Commission upon request).\n(10)(a) Agreements with J. R. Mitchell relating to additional pension benefits (incorporated by reference to Exhibit (10)(e) to the Registrant's Form 10-K for the year ending December 31, 1988 and Exhibit (10)(f) to the Registrant's Form 10-K for the year ending December 31, 1989).\n(10)(b) Restricted Stock Agreement with L. S. Smith (incorporated by reference to Exhibit (10)(q) to the Registrant's Form 10-K for the year ending December 31, 1990).\n(10)(c) Restricted Stock Agreement with J. R. Mitchell (incorporated by reference to Exhibit (10)(i) to the Registrant's Form 10-K for the year ending December 31, 1991).\n(10)(d) The Upjohn Management Incentive Program of 1992, consisting of Incentive Compensation Plan, Stock Option Plan and Performance Share Plan (incorporated by reference to Exhibit (10)(j) to the Registrant's Form 10-K for the year ending December 31, 1991).\n(10)(e) Form of Indemnification Agreement entered into with Each Officer and Director (incorporated by reference to Exhibit (10)(h) to the Registrant's Form 10-K for the year ending December 31, 1986).\n(10)(f) Grantor Trust Agreement with The Chase Manhattan Bank, N.A. (incorporated by reference to Exhibit (10)(l) to the Registrant's Form 10-K for the year ending December 31, 1988).\n(10)(g) Form of Severance Agreement Entered into with Each Officer of The Upjohn Company (incorporated by reference to Exhibit (10)(m) to the Registrant's Form 10-K for the year ending December 31, 1988).\n(10)(h) The Upjohn Replacement and Deferred Benefit Plan (incorporated by reference to Exhibit (10)(p) to the Registrant's Form 10-K for the year ending December 31, 1988).\n(10)(i) The Upjohn Directors' Retirement Benefit Plan (incorporated by reference to Exhibit (10)(o) to the Registrant's Form 10-K for the year ending December 31, 1989).\n(10)(j) Deferred Compensation Plan for Directors (incorporated by reference to Exhibit (10)(p) to the Registrant's Form 10-K for the year ending December 31, 1989).\n(10)(k) Special Retirement Agreement dated as of September 14, 1992 between the Company and R.G. Tomlinson (incorporated by reference to Exhibit (10)(q) to the Registrant's Form 10-K for the year ending December 31, 1992).\n(10)(l) Form of Restricted Stock Agreement with L.S. Smith (incorporated by reference to Exhibit (10)(t) to the Registrant's Form 10-K for the year ending December 31, 1992).\n(10)(m) Restricted Stock Agreement with R.G. Tomlinson (incorporated by reference to Exhibit (10)(v) to the Registrant's Form 10-K for the year ending December 31, 1992).\n(10)(n) Form of Restricted Stock Agreement with K.M. Cyrus and R.C. Salisbury (incorporated by reference to Exhibit (10)(w) to the Registrant's Form 10-K for the year ending December 31, 1992).\n(10)(o) Agreement with W. U. Parfet dated September 17, 1993.\n(10)(p) Agreement with M. Novitch dated October 17, 1993.\n(10)(q) Employment Agreement with J. L. Zabriskie dated March 14, 1994.\n(11)(a) Computation of Earnings Per Share - Primary\n(11)(b) Computation of Earnings Per Share - Fully Diluted\n(12) Computation of Ratio of Earnings to Fixed Charges\n(13) Portions of The Upjohn Company's 1993 Annual Report to Shareholders\n(21) Subsidiaries of the Registrant.\n(23) Consent of Independent Accountants.\n(b) Reports on Form 8-K\nNo reports on Form 8-K were filed during the fourth quarter of the year ended December 31, 1993.\nSIGNATURES\nPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.\nDated: March 15, 1994 THE UPJOHN COMPANY (Registrant)\nBy: J. L. ZABRISKIE J. L. Zabriskie Chairman of the Board and Chief Executive Officer\nPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.\nSignature Title Date\nJ. L. ZABRISKIE Chairman of the Board and J. L. Zabriskie Chief Executive Officer\nL. S. SMITH President and Director L. S. Smith\nR. C. SALISBURY Executive Vice President for March 15, 1994 R. C. Salisbury Finance and Chief Financial Officer; also Principal Accounting Officer\nDirector R. H. Brown\nF. C. CARLUCCI Director F. C. Carlucci\nDirector M. K. Eickhoff\nD. F. GRISHAM Director D. F. Grisham\nL. C. HOFF Director L. C. Hoff\nG. A. KENNEY-WALLACE Director G. A. Kenney-Wallace\nMarch 15, 1994 W. E. LaMOTHE Director W. E. LaMothe\nJ. R. MITCHELL Director J. R. Mitchell\nW. D. MULHOLLAND Director W. D. Mulholland\nR. T. PARFET, JR. Director R. T. Parfet, Jr.\nW. U. PARFET Director W. U. Parfet\nREPORT OF INDEPENDENT ACCOUNTANTS\nTo the Shareholders and Board of Directors The Upjohn Company\nOur report on the consolidated financial statements of The Upjohn Company and Subsidiaries has been incorporated by reference in this Form 10-K from page 25 of the 1993 Annual Report to Shareholders of The Upjohn Company. In connection with our audits of such financial statements, we have also audited the related financial statement schedules listed under Item 14.(a)2 of this Form 10-K.\nIn 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 required to be included therein.\nCoopers & Lybrand Chicago, Illinois January 31, 1994","section_15":""}
{"filename":"29669_1993.txt","cik":"29669","year":"1993","section_1":"ITEM 1. BUSINESS\nR. R. Donnelley & Sons Company (the company), incorporated in the state of Delaware in 1956 as the successor to a business founded in 1864, is a major participant in the information industry, providing a broad range of services in print and digital media. The company believes it is the largest supplier of commercial print and print-related services in the United States. It is a major supplier in the United Kingdom and also provides services in Mexico, other locations in Europe and in Asia. Services provided to customers include presswork and binding, including on-demand customized publications; conventional and digital pre-press operations, including desktop publishing and filmless color imaging, necessary to create a printed image; software replication, translation and localization; list, list enhancement, database management and mail production services (provided primarily through Metromail); design and related creative services (provided through Mobium); cartographic services; electronic communication networks for simultaneous worldwide product releases; digital services to publishers; and, through R. R. Donnelley Logistic Services, the planning for and fulfillment of truck, rail, mail and air distribution for products of the company and its customers, as well as third parties. The company's pre-press, presswork and binding operations have accounted for over 90% of the company's revenues for each of the last five years. In 1990, the company acquired the Meredith\/Burda companies, thereby enhancing the company's service capabilities by adding four printing plants.\nThe company provides these services to more than 4,000 customers, including publishers of consumer and trade magazines, books and telephone and other directories; direct mail (catalog) and in-store merchandisers; software publishers and computer hardware manufacturers; and financial institutions and other firms requiring substantial amounts of printing and other related information services. Due to the range of services it provides, the company believes it is uniquely positioned to meet the information and communication needs of its customers.\nThe relative contribution of each of the company's major product areas to its total sales for the five-year period ended December 31, 1993, is presented in the table below. In 1993, international printing operations represented less than 9% of consolidated results and assets.\nMost of the company's sales are made pursuant to term contracts with customers, with the remainder being made on a single-order basis. For some customers, the company prints and provides related services for several different publications under different contracts. The company's contracts with its larger customers normally run for a period of years (usually three to five years but longer in the case of contracts requiring significant capital investment) or for an indefinite period subject to termination on specified notice by either party. Such sales contracts generally provide for timely price adjustments to reflect price changes for materials, wages and utilities. No single customer has a relationship with the company that accounted for 3% or more of the company's sales in 1993. The company's dependence for sales from its ten largest customers has declined in the past eleven years to approximately 22% of sales in 1993, down from 35% of sales in 1983.\nThe various phases of the information industry in which the company is involved are highly competitive. While the company has contracts with its customers as indicated above, there are numerous competing companies and renewal of such contracts is dependent, in part, on the ability of the company to continue to differentiate itself from the competition. Differentiation results, in part, from the company's broad range of value-added services, which include Selectronic(R) imaging and gathering; list maintenance, database management and targeted mail programs; expansive mailing and distribution services; in-plant reception from customer desktop publishing systems; fulfillment and returned books inventory management; replication of magnetic media products; electronic data management and distribution; and design. Although the company believes it is the largest commercial printer in the United States, it estimates that its revenues represent approximately 7% of the total sales in the industry. Although the company's plants are well located for the national or regional distribution of its products, competitors in some areas of the United States have a competitive advantage in some instances due to such factors as freight rates, wage scales and customer preference for local services. In addition to location, other important competitive factors are price and quality as well as the range of available services.\nAn excess of supply versus demand exists for most grades of paper. The list price of paper remains stable, although discounting is prevalent for certain grades of paper. Existing paper supply contracts (at prevailing market prices) will cover the company's requirements through 1994, and management believes that extensions and renewals of these purchase contracts will provide adequate paper supplies in the future. Ink and ink materials are currently available in sufficient amounts, and the company believes that it will have adequate supplies in the future.\nThe company estimates that its capital expenditures in 1994 and 1995 to comply with federal, state and local provisions for environmental controls, as well as expenditures, if any, for the company's share of costs to clean hazardous waste sites that have received waste from the company, will not be material and will not have a material effect upon its earnings or its competitive position.\nThe company employed an average of approximately 32,100 persons in 1993 (34,000 persons at December 31, 1993), of whom more than 11,000 had been with the company for more than 10 years and over 2,700 for 25 years or longer.\nITEM 2.","section_1A":"","section_1B":"","section_2":"ITEM 2. PROPERTIES\nR. R. Donnelley & Sons Company's corporate office is located in leased facilities in Chicago, Illinois. Production facilities leased by the company are listed in the chart beginning on page 6. Printing and other plants that are owned and operated by the company (or through wholly owned subsidiaries) are listed below and continuing on the next page.\nThe company has historically followed the practice of adding capacity to meet customer requirements, and has retained a substantial portion of its earnings for reinvestment in plant and equipment for this purpose. Management believes that growth in 1994 will be financed in large part by internally-generated funds. The amount of capital expenditures in future years will depend upon the requirements of the company's existing and future customers.\nITEM 3.","section_3":"ITEM 3. LEGAL PROCEEDINGS\nOn July 13, 1990, the Federal Trade Commission (\"FTC\") filed a complaint in the U.S. District Court for the District of Columbia (\"District Court\") seeking a preliminary injunction enjoining the company from consummating its acquisition of the Meredith\/Burda companies. The complaint alleged that consummation of the acquisition might substantially lessen competition in certain alleged rotogravure printing markets. The District Court denied the motion of the FTC for an injunction as well as a further motion for injunction pending appeal. The acquisition was closed on September 4, 1990.\nOn October 11, 1990, the FTC Staff initiated its administrative action challenging the acquisition of the Meredith\/Burda companies. The complaint alleged the same issues as did the complaint before the District Court. Trial before an administrative law judge (\"ALJ\") of the FTC concluded in June, 1993. On December 30, 1993, the FTC's ALJ issued his initial decision upholding the position of the FTC Staff. The ALJ found that the acquisition by the company of the Meredith\/Burda companies created a \"dominant firm\" and significantly increased concentration in a \"high-volume publication rotogravure market,\" thus increasing the likelihood of anti-competitive conduct and actual or tacit collusion among the firms participating in that market. The ALJ ordered the divestiture of the Meredith\/Burda companies and prohibited the acquisition by the company of any other firms participating in the U.S. \"rotogravure market\" without FTC approval for a period of ten years.\nThe company has filed its appeal of the ALJ's decision, asking the FTC Commissioners to dismiss the FTC complaint. The appeal has the effect of staying the ALJ's order. If the appeal by the company is not granted, the company intends to file a further appeal to a U.S. Court of Appeals.\nThe company continues to believe that the acquisition of the Meredith\/Burda companies was legally proper and will ultimately be upheld.\nITEM 4.","section_4":"ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS\nNo matters were submitted to a vote of security holders during the quarter ended December 31, 1993.\nEXECUTIVE OFFICERS OF R. R. DONNELLEY & SONS COMPANY\n(1) Each officer named has carried on his principal occupation and employment in R. R. Donnelley & Sons Company for more than five years with the exception of S. J. Baumgartner and E. P. Duffy as noted in the above table.\n(2) Member of the company's management committee.\nPART II\nITEM 5.","section_5":"ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS\nThe common stock is listed and traded on the New York Stock Exchange, Chicago Stock Exchange and Pacific Stock Exchange and is accorded unlisted trading privileges on the Boston and Cincinnati Stock Exchanges.\nAs of March 1, 1994 there were approximately 10,400 stockholders of record. Information about the quarterly prices of the common stock, as reported on the New York Stock Exchange-Composite Transactions, and dividends paid during the two years ended December 31, 1993, is contained in the chart below:\n1992 reflects the 2 for 1 stock split effective September 1, 1992.\nITEM 6.","section_6":"ITEM 6. SELECTED FINANCIAL DATA\nSELECTED FINANCIAL DATA (NOT COVERED BY AUDITORS' REPORT) (THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)\n- -------- * 1993 earnings from operations includes the one-time adjustment for a restructuring charge ($90 million). ** 1993 net income and net income per share include one-time adjustments for the restructuring charge ($60.8 million or $0.39 per share); the net cumulative effect of accounting changes ($69.5 million or $0.45 per share); and the deferred income tax charge related to the federal income tax rate increase ($6.2 million or $0.04 per share). *** Reflects the 2 for 1 stock split effective September 1, 1992.\nITEM 7.","section_7":"ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS\nMANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS\nCOMPARISON OF 1993 WITH 1992\nNet sales grew at a rate of 4.6% (first half growth was 0.5%; second half growth was 8.2%). The year-to-year growth was due to an increased volume of services provided to customers, including volume added through the company's global expansion into new areas. Strong demand for global software services, financial printing services and services for book publishers and volume increases associated with recent acquisitions in new product areas, including specialty products and special interest magazines, were partially offset by the negative effects of a stronger dollar (lower translation of foreign revenues, particularly those of the company's U.K. operations) and lower catalog volume primarily associated with the decision by Sears, Roebuck & Co., a customer, to discontinue its catalog operations.\nGross profit grew at a greater rate than net sales, 6.3%, reflecting better coverage of fixed costs through higher volume, a more favorable mix of sales and a favorable LIFO inventory credit. Earnings from operations included a $90 million restructuring charge recorded during the first quarter (an after-tax charge of $0.39 per share) related primarily to the closing of the company's Chicago manufacturing facility following the decision by Sears to discontinue its catalog operations. Excluding this charge, earnings from operations would have been $415.6 million, a 2.5% increase over the prior year, reflecting the gross profit improvement\npartially offset by higher selling and administrative expenses (10.1% increase) resulting primarily from the additional costs associated with newly acquired and start-up operations and the expansion of the company's global sales presence.\nThe $4.6 million increase in total other expense-net resulted from higher interest expense (higher outstanding debt balances due to recent acquisitions, investments in joint ventures and additional VEBA funding for employee benefits) and increased expenses associated with life insurance programs, which were partially offset by improved earnings on investments.\nThe 1993 provision for income taxes included the one-time effect of the new, higher federal statutory income tax rate on deferred taxes, which reduced net income $6.2 million (equivalent to $0.04 per share); excluding this one-time charge, the 1993 effective tax rate of 33.1% would have been lower than the 1992 rate of 35.0%, reflecting the benefits associated with life insurance programs and credits associated with affordable housing investments, partially offset by the impact of the higher federal statutory income tax rate on current year earnings ($2.8 million). Net income from operations before cumulative effects of accounting changes reflected the restructuring charge and increased selling and administrative expenses partially offset by the favorable factors discussed above with respect to gross profit. Excluding the restructuring charge and deferred income tax charge, net income from operations before cumulative effects of accounting changes would have been $245.9 million (equivalent to $1.59 per common share).\nDuring the first quarter of 1993, the company adopted two new accounting standards for postretirement benefits and income taxes. The one-time charge for postretirement benefits, net of associated tax benefits of $80.1 million, was $127.7 million (equivalent to $0.82 per share). Ongoing annual expense increases resulting from this new accounting requirement have been mitigated through an investment program to partially prefund the related postretirement liabilities. Nevertheless, in 1993, the new accounting standard for postretirement benefits resulted in additional expenses which reduced operating income by $0.05 per share. The new accounting standard for income taxes resulted in a one-time credit of $58.2 million (equivalent to $0.37 per share). As discussed above, the new income tax standard also required the company to increase its 1993 income tax provision by $6.2 million. This new standard will not have an ongoing material effect as long as statutory income tax rates remain at current levels.\nCOMPARISON OF 1992 WITH 1991\nThe growth in net sales (7.1% higher than 1991) is represented by an increased volume of services provided to customers, including volume added through the company's global expansion into new markets. A large portion of this increase was due to the introduction of new products by documentation services customers and the strong demand for financial printing services resulting from favorable capital market conditions in 1992.\nGross profit grew at a greater rate than net sales, 12.5%, reflecting several factors: higher volume, a more favorable mix of sales, improved productivity and cost control, lower start-up costs and a LIFO inventory credit. Higher depreciation expense, increased reserve provisions and expenses related to the companywide stock purchase plan and incentive compensation plans partially offset the favorable factors. Selling and administrative expenses increased 13.4% over 1991 as a result of higher volume-related commission expenses, a higher provision for doubtful accounts receivable, the increased costs of expanding the company's global sales presence and expenses related to the companywide stock purchase plan and incentive compensation plans. Earnings from operations also grew at a rate greater than net sales, 11.7%, reflecting the gross profit improvement partially offset by the higher selling and administrative expenses.\nThe $1.5 million increase in total other expense-net resulted from lower interest expense (lower interest rates and outstanding debt balances) which was more than offset by start-up expenses associated with recent international and domestic joint venture investments. The effective tax rate of 35.0% in 1992 was lower than the 36.0% in 1991 reflecting the benefits associated with a life insurance program. Net income for the full year increased 14.5%, as a consequence of the net favorable factors discussed above.\nMANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION\nThe Consolidated Balance Sheet presents the company's financial position at the end of each of the last two years. The statement lists the company's assets and liabilities, and the equity of its shareholders. Major changes in the company's financial position are summarized in the Consolidated Statement of Cash Flows which appears on page. The Cash Flows Statement summarizes the changes in the Company's cash and equivalents balance for each of the last three years and helps to show the relationship between operations (presented in the Consolidated Statement of Income) and liquidity and financial resources (presented in the Consolidated Balance Sheet).\nWith the growth in cash flow and the credit facilities and shelf registration discussed below, management believes the company has the financial flexibility to fund current operations and growth. In 1993, net income from operations before cumulative effect of accounting changes plus depreciation and amortization represented $453.7 million of the net cash provided by operating activities. Excluding the restructuring charge and the charge related to the impact of higher income tax rates on deferred income tax balances, net income from operations before cumulative effect of accounting changes plus depreciation and amortization would have been $520.7 million, compared to $492.8 million in 1992. Cash flow from operations was used primarily to fund capital investments and pay dividends.\nThe company's working capital continued to be adequate for the operation and expansion of the business. Working capital--particularly cash, accounts receivable and inventories--is closely controlled and continually monitored. Emphasis continues on overall balance sheet management. Working capital increased by $14.6 million from December 31, 1992, due to working capital balances of newly acquired businesses, the additional funding of the Voluntary Employee's Beneficiary Associations, increase in inventory resulting from the reduced LIFO reserve, as well as increased inventory quantities to support revenue growth and the reclassification of short-term debt (which reflects management's estimate of near-term repayments). Other noncurrent liabilities and deferred income tax balances at December 31, 1993 reflect the impacts of the adoption of new accounting standards for postretirement benefits and income taxes. A valuation allowance has not been provided on deferred tax asset balances due to the company's projection of future taxable income (supported by existing long-term customer contracts that are expected to provide future revenues and earnings) in excess of such tax assets.\nIn 1993, capital expenditures totaled $307 million ($228 million in 1992) and an additional $178 million ($84 million in 1992) was invested in various acquisitions and joint ventures. This capital investment reflects the company's continued program to expand and upgrade operations, including new equipment and operations to meet the growing needs of present and new customers. The expenditures were financed by internally generated funds and the issuance of debt. Management currently estimates capital investment in 1994 will be approximately $375 million, and, once again, capital investment will be substantially financed through operating cash flows. Other expenditures in 1994 are expected to be in line with the growth in sales, earnings and cash flows.\nAt December 31, 1993, the company had revolving credit facilities totaling $550 million with a number of banks (see the Notes to Consolidated Financial Statements). These credit facilities provide support for the issuance of commercial paper and other credit needs. Under an effective shelf registration, in January, 1993, the company issued $110 million of 7.0% (7.2% effective rate after consideration of placement costs and discounts) notes due January, 2003. As of December 31, 1993, the company had effective shelf registration statements permitting it to issue, from time to time, up to $500 million in additional debt securities.\nITEM 8.","section_7A":"","section_8":"ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA\nThe financial information required by Item 8 is contained in Item 14 of Part IV and listed on page.\nITEM 9.","section_9":"ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE\nNone\nPART III\nITEM 10.","section_9A":"","section_9B":"","section_10":"ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT\nInformation concerning the directors and officers of the company is contained on pages 2-5 and 8 of the company's definitive Proxy Statement dated February 17, 1994 and is incorporated herein by reference. See also the list of the company's executive officers and related information under \"Executive Officers of R. R. Donnelley & Sons Company\" at the end of Part I of this Report.\nITEM 11.","section_11":"ITEM 11. EXECUTIVE COMPENSATION\nInformation concerning executive compensation for the year ended December 31, 1993, and, with respect to certain of such information, prior years, is contained on pages 8-14 of the company's definitive Proxy Statement dated February 17, 1994 and is incorporated herein by reference (excluding the information on page 14 under the caption, \"Compensation Committee Report on Executive Compensation\").\nITEM 12.","section_12":"ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT\nInformation concerning the beneficial ownership of the company's common stock is contained on pages 5-8 of the company's definitive Proxy Statement dated February 17, 1994 and is incorporated herein by reference.\nITEM 13.","section_13":"ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS\nInformation concerning certain relationships and related transactions for the year ended December 31, 1993, is contained on pages 5 and 14 of the company's definitive Proxy Statement dated February 17, 1994 and is incorporated herein by reference (excluding the information on page 14 under the caption, \"Compensation Committee Report on Executive Compensation\").\nPART IV\nITEM 14.","section_14":"ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K\n(a)1. Financial Statements The financial statements listed in the accompanying index (page) to the financial statements are filed as part of this annual report. 2. Financial Statement Schedules The financial statement schedules listed in the accompanying index (page) to the financial statements are filed as part of this annual report. 3. Exhibits The exhibits listed on the accompanying index to exhibits (pages E-1 through E-2) are filed as part of this annual report. (b)Reports on Form 8-K None (c)Exhibits The exhibits listed on the accompanying index (Pages E-1 through E-2) are filed as part of this annual report. (d)Financial Statements omitted-- Separate financial statements of the parent company have been omitted since it is primarily an operating company and the minority interest and indebtedness to persons other than the parent of the subsidiaries included in the consolidated financial statements are less than 5% of total consolidated assets. Certain schedules have been omitted because the required information is included in the consolidated financial statements or notes thereto or because they are not applicable or not required.\nSIGNATURES\nPURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, ON THE 28TH DAY OF MARCH, 1994.\nR. R. DONNELLEY & SONS COMPANY\nWilliam L. White By __________________________________ William L. White, Vice President, Controller\nPURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES INDICATED, ON THE 28TH DAY OF MARCH, 1994.\nSIGNATURE AND TITLE SIGNATURE AND TITLE\nJohn R. Walter Robert A. Hanson - ------------------------------------- ------------------------------------- John R. Walter Robert A. Hanson Chairman of the Board, Director Chief Executive Officer and Director\n(Principal Executive Officer) Thomas S. Johnson -------------------------------------\nFrank R. Jarc Thomas S. Johnson - ------------------------------------- Director Frank R. Jarc\nExecutive Vice President and Richard M. Morrow Chief Financial Officer ------------------------------------- (Principal Financial Officer) Richard M. Morrow Director\nWilliam L. White - ------------------------------------- John M. Richman William L. White ------------------------------------- Vice President, Controller John M. Richman (Principal Accounting Officer) Director\nMartha Layne Collins William D. Sanders - ------------------------------------- ------------------------------------- Martha Layne Collins William D. Sanders Director Director\nJames R. Donnelley Jerre L. Stead - ------------------------------------- ------------------------------------- James R. Donnelley Jerre L. Stead Director Director\nCharles C. Haffner III Bide L. Thomas - ------------------------------------- ------------------------------------- Charles C. Haffner III Bide L. Thomas Director Director\nH. Blair White ------------------------------------- H. Blair White Director\nITEM 14(A). INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES\nR.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES\nCONSOLIDATED STATEMENT OF INCOME\nSee accompanying Notes to Consolidated Financial Statements.\nR.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES\nCONSOLIDATED BALANCE SHEET\nAssets\nSee accompanying Notes to Consolidated Financial Statements.\nR.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES\nCONSOLIDATED STATEMENT OF CASH FLOWS\nSee accompanying Notes to Consolidated Financial Statements.\nR.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES\nCONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (THOUSANDS OF DOLLARS)\nSee accompanying Notes to Consolidated Financial Statements.\nR.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS\nSUMMARY OF SIGNIFICANT ACCOUNTING POLICIES\nBasis of Consolidation--\nThe consolidated financial statements include the accounts of the company and its subsidiaries. Intercompany items and transactions are eliminated in consolidation.\nNature of Operations--\nThe operations of the company are in the information industry. The company produces a wide variety of print and print-related services for specific customers, virtually always under contract. Some contracts provide for progress payments from customers as certain phases of the work are completed; however, revenue is not recognized until the production process has been completed in accordance with the terms of the contracts. Some customers furnish paper for their work, while in other cases the company purchases and sells the paper. International operations represent less than 9% of consolidated results and of consolidated assets.\nCash and Equivalents--\nThe company considers all highly liquid debt instruments purchased with original maturities of three months or less to be cash equivalents.\nInventories--\nInventories include material, labor and factory overhead and are substantially carried at Last-In, First-Out (LIFO) cost. This method reflects the effect of inventory replacement costs in earnings; accordingly, charges to cost of sales reflect recent costs of material, labor and factory overhead.\nForeign Currency Translation--\nGains and losses arising from the translation of the company's international subsidiaries' financial statements are reflected in Retained Earnings.\nNet Income Per Share of Common Stock--\nNet income per share is computed on the basis of average shares outstanding during each year. No material dilution would result if effect were given to the exercise of outstanding stock options and the vesting of stock units.\nBenefit Plans--\nThe company's Retirement Benefit Plan (the Plan) is a non-contributory defined benefit plan covering substantially all employees. Normal retirement age is 65 but provision is made for earlier retirement. As required, the company uses the projected unit credit actuarial cost method to determine pension cost for financial reporting purposes. In conjunction with this method, the company amortizes deferred gains and losses (using the corridor method), prior service costs and the transition credit (the excess of Plan assets plus balance sheet accruals over the projected obligation, as of January 1, 1987) over 19 years, representing the average remaining service life of its active employee population. For tax and funding purposes, the attained age normal actuarial cost method is used. Compared to the projected unit credit method, the attained age normal method attributes a greater proportion of the total retirement obligation to an employee's early years of service.\nR.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)\nCapitalization, Depreciation and Amortization--\nProperty, plant and equipment are stated at cost. Depreciation is computed principally on the straight-line method. Maintenance and repair costs are charged to expense as incurred. Major overhauls are capitalized as reductions to accumulated depreciation. When properties are retired or disposed, the costs and related depreciation reserves are eliminated and the resulting profit or loss is recognized in income. Goodwill and other intangible assets are amortized principally over periods ranging from 10 to 40 years.\nIncome Taxes--\nDeferred income taxes relate principally to the use of accelerated depreciation methods for tax reporting purposes, the investment in safe harbor leases, pension costs, net postretirement medical and death benefit costs and contributions to fund the Voluntary Employees' Beneficiary Associations (VEBAs).\nRESTRUCTURING CHARGE\nOn January 25, 1993, Sears Roebuck and Co., a customer, announced its decision to discontinue catalog operations during 1993. In response to Sears' announcement, the company incurred a one-time charge of $60.8 million (net of the associated tax benefit) in the first quarter of 1993. The charge primarily covered the costs associated with closing the company's manufacturing facility in Chicago, Illinois, where the company printed the Sears catalogs. The loss of this work will have no ongoing material effect on operating results.\nINVENTORIES\nThe components of the company's inventories as of December 31, 1993 and 1992, were as follows:\nVOLUNTARY EMPLOYEES' BENEFICIARY ASSOCIATIONS\nThe company maintains two Voluntary Employees' Beneficiary Associations to fund employee welfare benefits and postretirement medical and death benefits. The balances of the VEBAs (net of associated liabilities) in the accompanying Consolidated Balance Sheet are classified as either current or noncurrent depending on the ultimate expected payment date of the underlying liabilities. As of December 31, 1993, a net current asset of $9.8 million was included in Prepaid Assets representing the current position of the company's employee welfare benefit plans funded by one of the VEBAs ($33.2 million included in Other Accrued Liabilities at December 31, 1992). The VEBA established to partially fund the company's liability for postretirement medical and death benefits ($135 million at December 31, 1993) is included in other noncurrent liabilities as an offset to the related liability. (The initial VEBA fund of $104 million was recorded as a Noncurrent Asset at December 31, 1992). For additional information, refer to the notes on \"Other Retirement Benefits.\"\nR.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) PROPERTY, PLANT AND EQUIPMENT\nThe following table summarizes the components of Property, Plant and Equipment (at cost):\nCOMMITMENTS AND CONTINGENCIES\nAuthorized expenditures on incomplete projects for the purchase of property, plant and equipment, as of December 31, 1993, totaled $418.8 million. Of this total, $143.9 million has been paid and an additional $120.7 million has been committed for payment upon completion of the contracts. The company has a variety of commitments with suppliers for the purchase of paper, ink and other materials for delivery in future years at prevailing market prices.\nThe company has operating lease commitments approximating $390.2 million extending through various periods to 2066. The lease commitment is $60.8 million for 1994, and ranges from $26.8 million to $47.4 million in each of the years 1995-1998 and totals $186.1 million for future periods.\nThe company does not believe an accounts receivable credit risk exists due to the diversity of industry classification, distribution channels and geographic location of its customers. In addition, the company is a party to certain litigation (other than the FTC matter described below) arising in the ordinary course of business which, in the opinion of management, will not have a material adverse effect on the operations of the company. The company also has future annual commitments to invest in various affordable housing limited partnerships which provide annual tax benefits and credits in amounts greater than the annual investments.\nThe company has appealed a recent decision in the Federal Trade Commission (FTC) challenge to the company's 1990 acquisition of the Meredith\/Burda companies. An FTC administrative law judge found the acquisition has or may substantially lessen competition in an alleged \"high-volume publication gravure printing\" market and ordered the divestiture of the Meredith\/Burda companies. The company's appeal has the effect of staying the divestiture order. The ruling is contrary to an earlier ruling by a Federal District Court which allowed the acquisition to be consummated. Company management continues to believe this acquisition was legally proper.\nRETIREMENT BENEFIT PLAN\nNet pension credits included in operating results for the Retirement Benefit Plan (the Plan) were:\nR.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) For financial reporting purposes the actuarial computations that derived the above amounts assumed a discount rate on projected benefit obligations of 7.5% (7.8% at December 31, 1992 and December 31, 1991), an expected long-term rate of return on Plan assets of 9.5% and annual salary increases of 5%.\nPlan assets include primarily government and corporate debt securities and marketable equity securities, and, to a lesser extent, commingled funds, real estate and a group annuity contract purchased from a life insurance company. The funded status and prepaid pension cost (included in Other Assets on the accompanying Consolidated Balance Sheet) are as follows:\nIn the event of Plan termination, the Plan provides that no funds can revert to the company and any excess assets over Plan liabilities must be used to fund retirement benefits.\nOTHER RETIREMENT BENEFITS\nIn addition to pension benefits, the company provides certain health care and life insurance benefits for retired employees. Substantially all of the company's domestic, full-time employees become eligible for those benefits upon reaching age 55 while working for the company and having ten years continuous service at retirement. Beginning in 1992, the company began a program to partially fund the liabilities associated with these plans through a tax-exempt trust. The trust is invested in various assets, primarily life insurance covering some of the company's employees.\nEffective January 1, 1993, the company adopted Statement of Financial Accounting Standards No. 106 (SFAS 106), \"Employers' Accounting for Postretirement Benefits Other Than Pensions.\" SFAS 106 requires companies to charge to expense the expected costs of postretirement health care and life insurance (and similar benefits) during the years that the employees render service. Previously, such costs were expensed as actual claims were paid (cash basis). The company elected to immediately recognize the transition obligation for future benefits to be paid related to past employee services, resulting in a noncash charge of $207.8 million before deferred income tax benefits ($127.7 million after-tax or $0.82 per share) that represents the cumulative effect of the change in accounting for the years prior to 1993.\nR.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)\nThe net accrual-basis expense for postretirement benefits during 1993 included the following components:\nThe above table does not include a $23 million charge for postretirement medical benefits associated with the closing of the company's Chicago manufacturing facility; such amount was included in the restructuring charge (see separate note above). The expense for postretirement medical and death benefits for 1992 and 1991 (recognized on a cash basis) was $12.4 million and $9.8 million, respectively.\nThe liability (included in Other Noncurrent Liabilities on the accompanying Consolidated Balance Sheet at December 31, 1993) for postretirement benefits, net of the partial funding, is as follows:\nFor financial reporting purposes the 1993 actuarial computations assumed a discount rate of 7.5% to determine the accumulated postretirement benefit obligation, an expected long-term rate of return on plan assets of 9.0% and a health care cost trend rate of 8.4% initially, declining gradually to 5.4% in 2053, to measure the accumulated postretirement benefit obligation.\nEffective January 1, 1993, certain features of the plan were amended. For future retirees, the company introduced retiree cost-sharing and implemented programs intended to stem rising costs. Also, the company has adopted a provision which limits its future obligation to absorb health care cost inflation. The features of the new plan provisions have been reflected in the assumed health care cost trend rate disclosed above. However, a one-percentage- point increase in the assumed health care cost trend rate would increase the 1993 postretirement benefit expense (service cost and interest cost) by $1.6 million and the accumulated postretirement benefit obligations as of December 31, 1993 by $10.4 million.\nINCOME TAXES\nEffective January 1, 1993, the company adopted Statement of Financial Accounting Standards No. 109 (SFAS 109), \"Accounting for Income Taxes.\" SFAS 109 requires, among other things, the application of current statutory income tax rates to deferred income tax balances. In the first quarter of 1993, the company recognized the cumulative effect, through January 1, 1993, of the accounting change, reflecting the difference between current statutory tax rates and the generally higher rates that were used to establish the deferred income tax balances, resulting in noncash income of $58.2 million (equivalent to $0.37 per share).\nR.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)\nCash payments for income taxes were $75.2 million, $105.9 million and $106.2 million in 1993, 1992 and 1991, respectively. The components of income tax expense for the years ending December 31, 1993, 1992 and 1991, were as follows:\n- -------- *The 1993 deferred income tax expense includes $6.2 million for the one-time adjustment of previously recorded deferred taxes due to the increase in the U.S. statutory rate.\nThe significant deferred tax assets and liabilities at December 31, 1993 and January 1, 1993, were as follows:\nThe following table reconciles the difference between the U.S. statutory tax rates and the rates used by the company in the determination of net income:\nR.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DEBT FINANCING AND INTEREST EXPENSE\nThe company's debt at December 31, consisted of the following:\nBased upon the interest rates currently available to the company for borrowings with similar terms and maturities, the fair value of the company's debt is approximately $788 million. The company's debentures are not actively traded and contain no call provisions. The company's other financial instruments are either carried at fair value or do not materially differ from fair value.\nAt December 31, 1993, the company had available credit facilities of $550 with a group of domestic and foreign banks. The credit arrangements provide support for the issuance of commercial paper and other credit needs. Borrowings under the facilities (none during the past three years) bear interest at various rates not exceeding the banks' prime rates. The company pays annual fees ranging from 0.1% to 0.15% on the total unused credit facilities.\nAt December 31, 1993, the company had $233.0 million of commercial paper and short-term debt outstanding, of which $37.4 million represents management's current estimate of 1994 net repayment. The remaining $195.6 million is classified as long term since the company has the ability and intent to maintain such debt on a long term basis. The weighted average interest rate on all commercial paper debt outstanding during 1993 was 3.2% (3.3% at December 31, 1993).\nThe following table summarizes interest expenses included in the Consolidated Statement of Income:\nInterest paid, net of capitalized interest, was $42.9 million, $38.4 million, $51.8 million in 1993, 1992 and 1991, respectively. As of December 31, 1993, the company had effective shelf registrations permitting it to issue, from time to time, up to $500 million of debt securities. The proceeds of any debt securities issued would be used for general corporate purposes.\nR.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)\nSTOCK AND INCENTIVE PROGRAMS FOR MANAGEMENT EMPLOYEES\nStock Unit Awards and Restricted Stock Awards--At December 31, 1993 and 1992, the company had outstanding 80,000 and 171,000 stock units, respectively, which had been granted to officers and selected managers prior to 1990. Certain of these units are payable upon or subsequent to termination of employment and others are payable upon vesting, normally five years after the date of grant. Payment of these awards will be made in shares of common stock equal to the number of units awarded, in cash equal to the market value at the date of distribution, or a combination thereof, at the company's option. The expense for these grants was recognized in the year granted. When an award of stock units is paid, the recipient will receive an additional amount in cash equal to dividends paid on an equivalent number of shares of common stock during the vesting period, plus interest. The values of the dividends and interest accounts, were $232 thousand and $409 thousand at December 31, 1993 and 1992, respectively.\nAt December 31, 1993 and 1992, the company had outstanding 275,000 and 223,000, respectively, restricted shares granted to certain officers. These shares are registered in the names of the recipients, but are subject to conditions of forfeiture and restrictions on sale or transfer for five years from the grant date. Dividends on the restricted shares are paid currently to the recipients and, accordingly, the restricted shares are treated as outstanding shares. The expense of the grant is recognized evenly over the vesting period.\nThe value of the stock units and restricted stock awards was $11.0 million and $12.9 million based upon the closing price of the company's stock price at each year end ($31.13 and $32.75 at December 31, 1993 and 1992, respectively). Charges to expense for both stock plans were $1.1 million, $1.2 million, and $0.9 million in 1993, 1992 and 1991, respectively.\nStock Purchase Plan--\nThe company has a stock purchase plan for selected managers and key staff employees. Under the plan, the company is required to contribute an amount equal to 70% of participants' contributions, of which 50% is applied to the purchase of stock and 20% is paid in cash. The number of shares required for the plan for the year 1993 will depend upon the extent to which eligible participants subscribe during the subscription period in the first quarter of 1994 and the price of the stock on March 16, 1994. Amounts charged to expense for this plan were $6.2 million in 1993 and $5.8 million in 1992. No amounts were charged to expense for the 1991 plan year since participation was not allowed according to the plan terms because the company's earnings did not meet the required performance goal under the plan.\nIncentive Compensation Plans--\nThe company has incentive compensation plans covering selected officers. Amounts charged to expense for supplementary compensation, which is determined from participants' base salaries and factors relating to various performance measures, were $2.6 million in 1993, $2.7 million in 1992 and $0.7 million in 1991.\nStock Options--\nThe company has granted stock options annually from 1983 to 1993. Exercise prices are 100% of the market price of common stock on the date of grant. The options vest over four or five years and may be exercised, once vested, up to ten years from the date of grant. Under the 1991 Stock Incentive Plan, a maximum of 2.9 million shares were available for future grants of stock options and restricted stock awards as of December 31, 1993. Information relating to stock options for the years ended December 31 is shown on the following table.\nR.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)\nOther Information--\nUnder the stock programs, authorized unissued shares or treasury shares may be used. If authorized unissued shares are used, not more than 11.3 million shares may be issued in the aggregate. The company intends to reacquire shares of its common stock to meet the stock requirements of these programs in the future.\nEMPLOYEE STOCK OWNERSHIP PLAN\nContributions to the company's Employee Stock Ownership Plan were discontinued in response to the change in tax law that eliminated the previously available tax credit. Under this plan, 1.2 million shares are held in trust as of December 31, 1993, for formerly eligible employees. There are no charges to operations for this plan, except for certain administrative expenses.\nSTOCK SPLIT\nOn July 23, 1992, the Board of Directors declared a 2-for-1 common stock split. The split was completed on September 1, 1992, by the distribution of one share of common stock, par value $1.25 per share, for each share held by stockholders of record on August 7, 1992. Information relating to stock options, stock units rights, reacquired common stock, the Shareholders Rights Plan, and the net income and dividends per share included in the Consolidated Financial Statements and related footnotes reflect the stock split.\nPREFERRED STOCK\nThe company has two million shares of $1.00 par value preferred stock authorized for issuance. The Board of Directors may divide the preferred stock into one or more series and fix the redemption, dividend, voting, conversion, sinking fund, liquidation and other rights. The company has no present plans to issue any preferred stock. One million of the shares are reserved for issuance under the Shareholder Rights Plan discussed below.\nSHAREHOLDER RIGHTS PLAN\nThe company maintains a Shareholder Rights Plan (the Plan) designed to deter coercive or unfair takeover tactics, to prevent a person or group from gaining control of the company without offering fair value to all shareholders and to deter other abusive takeover tactics which are not in the best interest of shareholders.\nUnder the terms of the Plan, each share of common stock is accompanied by one-quarter of a right; each full right entitles the shareholder to purchase from the company, one one-hundredth of a newly issued share of Series A Junior Preferred Stock at an exercise price of $225.\nR.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)\nThe rights become exercisable ten days after a public announcement that an acquiring person (as defined in the Plan) has acquired 20% or more of the outstanding common stock of the company (the Stock Acquisition Date) or ten days after the commencement of a tender offer of which would result in a person owning 30% or more of such shares. The company can redeem the rights for $.05 per right at any time until twenty days following the Stock Acquisition Date (the 20-day period can be shortened or lengthened by the company). The rights will expire on August 8, 1996 unless redeemed earlier by the company.\nIf, subsequent to the rights becoming exercisable, the company is acquired in a merger or other business combination at any time when there is a 20% or more holder, the rights will then entitle a holder to buy shares of the acquiring company with a market value equal to twice the exercise price of each right. Alternatively, if a 20% holder acquires the company by means of a merger in which the company and its stock survives, or if any person acquires 30% or more of the company's common stock, each right not owned by a 20% or more shareholder, would become exercisable for common stock of the company (or, in certain circumstances, other consideration) having a market value equal to twice the exercise price of the right.\nACQUISITIONS\nThe company made several acquisitions, joint venture and equity investments in 1993, 1992 and 1991, none of which, either individually or in the aggregate, were material to the company's financial statements. The acquisitions were accounted for using the purchase method; accordingly, the assets and liabilities of the acquired entities have been recorded at their estimated fair values at their respective dates of acquisition.\nREPORT OF INDEPENDENT PUBLIC ACCOUNTANTS\nTo the Stockholders of R.R. Donnelley & Sons Company:\nWe have audited the accompanying consolidated balance sheets of R. R. Donnelley & Sons Company (a Delaware corporation) and Subsidiaries as of December 31, 1993 and 1992, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years 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.\nWe conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.\nIn our opinion the financial statements referred to above present fairly, in all material respects, the financial position of R. R. Donnelley & Sons Company and Subsidiaries as of December 31, 1993 and 1992, and the results of its operations and its cash flows for each of the three years ended December 31, 1993, in conformity with generally accepted accounting principles.\nAs explained in the Notes to Consolidated Financial Statements, effective January 1, 1993, the company changed its method of accounting for postretirement benefits other than pensions and its method of accounting for income taxes.\nArthur Andersen & Co. Chicago, Illinois January 27, 1994\nUNAUDITED INTERIM FINANCIAL INFORMATION\nTHOUSANDS OF DOLLARS EXCEPT PER SHARE DATA\nREPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON\nFINANCIAL STATEMENT SCHEDULES\nTo the Stockholders of R.R. Donnelley & Sons Company:\nWe have audited, in accordance with generally accepted auditing standards, the financial statements included in the Company's Annual Report to Shareholders included in this Form 10-K, and have issued our report thereon dated January 27, 1994. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. The schedules listed in the index to the financial statements and financial statement schedules are the responsibility of the Company's management and are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic financial statements. These schedules have been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.\nArthur Andersen & Co.\nChicago, Illinois, January 27, 1994\nSCHEDULE V\nPROPERTY, PLANT AND EQUIPMENT\nDepreciation of plant and equipment is computed principally on the straight- line basis primarily at the following rates: buildings, 3%-5% and machinery and equipment, 6 2\/3%-33 1\/3%.\nSCHEDULE VI\nACCUMULATED DEPRECIATION AND AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT\nSCHEDULE VIII\nVALUATION AND QUALIFYING ACCOUNTS\nTransactions affecting the allowances for doubtful accounts during the years ended December 31, 1993, 1992 and 1991 were as follows:\nSCHEDULE IX\nSHORT-TERM BORROWINGS\n- -------- *At December 31, 1993 the Company had $218.7 million of commercial paper ($176.0 million and $215.7 million at December 31, 1992 and December 31, 1991, respectively) of which the $23.1 million represents management's current estimate of 1994 repayments. The remaining $195.6 million, at December 31, 1993, is classified as long term since the Company has the ability and intent to maintain such debt on a long term basis.\nSCHEDULE X\nSUPPLEMENTARY INCOME STATEMENT INFORMATION\nAmounts charged to expense for the years ended December 31, 1993, 1992 and 1991 were as follows:\nINDEX TO EXHIBITS*\n- -------- *Filed with the Securities and Exchange Commission. Each such exhibit may be obtained by a shareholder of the Company upon payment of $5.00 per exhibit. **Management contract or compensatory plan or arrangement.\n(1) Instruments, other than that described in 4(d), defining the rights of holders of long-term debt not registered under the Securities Exchange Act of 1934 of the registrant and of all subsidiaries for which consolidated or unconsolidated financial statements are required to be filed are being omitted pursuant to paragraph (4)(iii)(A) of Item 601 of Regulation S-K. Registrant agrees to furnish a copy of any such instrument to the Commission upon request.\nE-1\n(2) Filed as Exhibit with Form SE filed on July 31, 1986, and incorporated herein by reference.\n(3) Filed as Exhibit with Form SE filed on March 24, 1988, and incorporated herein by reference.\n(4) Filed as Exhibit with Form SE filed on May 10, 1988, and incorporated herein by reference.\n(5) Filed as Exhibit with Form SE filed on March 23, 1990, and incorporated herein by reference.\n(6) Filed as Exhibit with Form SE filed on March 25, 1991, and incorporated herein by reference.\n(7) Filed as Exhibit with Form SE filed on May 9, 1991 and incorporated herein by reference.\n(8) Filed as Exhibit with Form SE filed on March 26, 1992 and incorporated herein by reference. (9) Filed as Exhibit with Form SE filed on March 30, 1993 and incorporated herein by reference. (10) Filed on May 14, 1993 as Exhibit to Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1993. (11) Filed on November 12, 1993 as Exhibit to Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1993.\nE-2","section_15":""}
{"filename":"102420_1993.txt","cik":"102420","year":"1993","section_1":"Item 1.\nItem 3.","section_1A":"","section_1B":"","section_2":"","section_3":"Item 3. Legal Proceedings.\nIn November 1981 the Company and certain of its subsidiaries filed a third amended complaint against a former registered representative and certain of his affiliated companies and individuals and against certain former officers of USLIFE Savings and Loan Association (\"USLIFE Savings\", a former subsidiary of the Company) for indemnification, injunctive relief and accounting (USLIFE Savings and Loan Association v. Louis Wilcox, et al., Superior Court of the State of California for the County of Riverside). In the complaint, the Company, its subsidiaries and USLIFE Savings sought to recover all damages and losses incurred by them as defendants in actions related to the activities of the aforementioned former registered representative as well as attorneys' fees and costs incurred in defending against such actions. In April 1984, defendant Louis M. Wilcox, a former officer of USLIFE Savings, filed a cross complaint in this action. Wilcox seeks special damages in the amount of not less than $15 thousand, general damages of $1 million, and punitive damages of $10 million. In 1986 Wilcox's causes of action for malicious prosecution and abuse of process were dismissed. In 1989 Wilcox voluntarily dismissed the remainder of his case and appealed the 1986 decision dismissing his causes of action for malicious prosecution and abuse of process. On appeal, the dismissal of the cause of action for abuse of process was reversed. The dismissal of the cause of action for malicious prosecution was upheld. Trial was scheduled to begin in June 1993. Pursuant to the Company's request, the case was bifurcated for trial. In July 1993 the trial court, after hearing evidence on the issue, without a jury, decided that the Company originally had probable cause to sue Wilcox. As this was dispositive of Wilcox's claim for malicious prosecution, the Court dismissed Wilcox's claims against the Company. A judgment in the Company's favor was entered in late 1993. Wilcox has appealed.\nIn March 1992, All American Life Insurance Company (\"All American\") terminated the right of Doug Ruedlinger, Inc. (the \"Managing General Agent\" or \"DRI\") to sell college medical insurance on behalf of All American. All American had entered into an arrangement with the Managing General Agent for sales and the administration of student accident and health policies, embodied in an Exclusive Agency Agreement. In April 1992, All American terminated the Managing General Agent's Exclusive Agency Agreement. The Exclusive Agency Agreement was terminated as a result of the failure of the Managing General Agent to secure adequate reinsurance as required under that contract, and to meet other contractual obligations. Subsequent to the termination of the Exclusive Agency Agreement, the Managing General Agent ceased processing and paying claims under All American policies, and All American assumed these functions. The Managing General Agent then commenced arbitration proceedings against All American before the American Arbitration Association based upon the termination of the Exclusive Agency Agreement (the \"Arbitration Proceeding\").\nAll American then commenced an action against the Managing General Agent in the United States District Court for the District of Kansas (All American Life Insurance Co. v. Doug Ruedlinger, Inc. and First Benefits, Inc. (\"FBI\") (the \"Kansas litigation\") seeking a Temporary Restraining Order (which was granted), and damages for breach of contract and breach of fiduciary duty; All American also secured a preliminary injunction prohibiting the Managing General Agent from, among other things, collecting premiums, placing any insurance on behalf of All American, or in any way holding itself out as representing All American. All American subsequently filed an amended complaint adding corporations and individuals affiliated with the Managing General Agent as party defendants (the \"Ruedlinger Defendants\") and alleging claims ranging from civil RICO violations to a claim for common law fraud. The Managing General Agent's Errors and Omissions carrier, Transamerica Insurance Company (\"Transamerica\"), intervened in the Kansas litigation to deny coverage for the claims asserted against the Managing General Agent in the Arbitration Proceeding and the Kansas litigation, which allegedly fell under the coverage of Transamerica's Errors and Omissions Policy (the \"Policy\"). In March 1993, All American entered into an Assignment Agreement with Merchants National Bank (\"Merchants\" or, the \"Bank\") (the Managing General Agent's former bank). The Bank had asserted a security interest in premiums and reinsurance recoveries on the policies at issue, and had intervened in the Kansas litigation seeking to enforce these alleged security interests. Through the Assignment Agreement, All American purchased all of the Bank's right, title and interest in and to the Managing General Agent's assets, as well as the assets of its parent and affiliates, pursuant to certain loan documents executed by the Managing General Agent and its parent and affiliates. Pursuant to the terms of the Assignment Agreement, all claims asserted by All American and the Bank, against each other, were dismissed. By consent order dated May 25, 1993, the Kansas litigation was stayed by the Court. The Court in the Kansas litigation lifted the stay in that case solely to permit All American to file a second amended complaint in that action, which was identical to the prior pleading except that it set forth an additional claim against an affiliate of the Managing General Agent, Fund Insurance Company, Ltd. (\"FICL\"), based on a promissory note that was assigned to All American by the Bank under the Assignment Agreement. FICL is a Bermuda insurance company that was already a defendant in the Kansas litigation, and is owned by a Kansas corporation known as The Ruedlinger Company, Inc. Among the loan documents assigned to All American by the Bank pursuant to the Assignment Agreement was a written guaranty by Douglas O. Ruedlinger (\"Ruedlinger\"), guarantying the full indebtedness represented by the loan documents. Prior to the execution and delivery of the Assignment Agreement, the Bank had commenced an action against Ruedlinger in the Kansas State Court of Shawnee County, Merchants National Bank v. Douglas O. Ruedlinger, 92CV1432 based on that guaranty (the \"Guaranty Action\"). In April 1993, after the Assignment Agreement, All American was substituted as plaintiff in that action. All American then moved for summary judgment, and by Order and Judgment dated September 15, 1993, the Court awarded All American final judgment against Ruedlinger personally for an amount in excess of $2.4 million. Ruedlinger has filed an appeal of that judgment.\nThe arbitration hearings between All American and the Managing General Agent, which began in October 1992, and which by January 1993 were substantially completed (the \"Arbitration Proceeding\"), were effectively stayed on January 19, 1993, when the Managing General Agent, and its captive third-party administration affiliate FBI, filed Chapter 11 reorganization bankruptcy petitions (the \"DRI Bankruptcy Cases\"). In April 1993, the Bankruptcy Court converted those bankruptcy reorganization proceedings to Chapter 7 liquidations and appointed a trustee to administer the debtors' estates (the \"DRI Trustee\"). All American moved in those bankruptcy proceedings to lift the stay imposed by the bankruptcy filings to permit the Arbitration Proceeding to be concluded, which motion was granted by the Court in August 1993.\nIn December 1993, All American negotiated a settlement with the DRI Trustee and Transamerica in the DRI Bankruptcy Cases (the \"DRI Bankruptcy Settlement\"). Under the terms of that settlement, which was approved by the bankruptcy court at a hearing on December 16, 1993, and later by written order dated January 25, 1994, all claims asserted, or which could have been asserted against All American by DRI, FBI, the DRI Trustee and Transamerica were dismissed, with prejudice. In addition, the DRI Trustee consented to the entry of an award in the Arbitration Proceeding whereby: (i) the arbitrators would find in favor of All American on all of its claims, including a finding that the termination of DRI's Exclusive Agency Agreement was proper and for cause; (ii) finding against DRI on all of its claims; and (iii) further entering a monetary award in All American's favor against DRI and FBI in the sum of $17 million (the \"General Claim\"). Also in connection with the DRI Bankruptcy Settlement, Transamerica agreed to pay to All American the sum of $200 thousand to settle All American's\nclaim under Transamerica's Policy. As consideration for this payment, All American agreed to subordinate its claims to all other allowed claims in the DRI Bankruptcy Cases, and to dismiss and release certain claims against DRI, FBI, and certain of the Ruedlinger Defendants. Expressly exempted from the release were claims against FICL, Ruedlinger in the Guaranty Action, Wheatland and various other entities under the Merchants loan documents, and various other entities controlled by Ruedlinger.\nOn or about April 21, 1993, All American filed involuntary bankruptcy petitions under Chapter 7 against the Managing General Agent's parent corporation, Wheatland Group Holdings, Inc. (\"Wheatland\"), and five of its other wholly owned subsidiaries, which were also affiliates of the Managing General Agent. Each of the six alleged debtors moved to dismiss the involuntary bankruptcy petition filed against it, and All American opposed those motions. After a hearing before the Court on October 12, 1993, by Judgment dated October 25, 1993, the Bankruptcy Court denied the debtors' motions to dismiss, ruling that All American had properly filed the involuntary bankruptcy petitions against each of the six debtors. In November 1993, the Court entered orders for relief under Chapter 7 of the Bankruptcy Code against each of the involuntary debtors, and appointed a Trustee to administer their estates.\nIn July 1993, the Judge in an action entitled Sheldon Whitehouse, as Receiver for United International Insurance Company (\"UIIC\") v. Douglas O. Ruedlinger, et al., pending in the United States District Court for the District of Kansas, 92-4255 (RDR), permitted the plaintiff-Receiver to amend his complaint to add All American as a defendant in that case, and to assert claims against All American for an accounting and for money damages, which complaint was served on All American. In that action it is alleged that over $300 thousand in UIIC premiums were used by FBI to pay All American insured's claims, and that UIIC's Receiver is entitled to a refund of those funds. All American intends to vigorously oppose that action. That action has also been stayed pursuant to a separate consent order issued by the Court. In August 1993, All American filed a claim in the UIIC receivership action in Rhode Island, in which All American claimed that $87 thousand of its premiums were used by FBI to pay claims of UIIC's insureds. The Receiver has taken no position with respect to this claim.\nIn December 1993, All American settled all potential claims by or against the National Federation of State High School Associations (the \"Federation\"). The Federation was an insured under a student accident medical payment insurance policy placed by DRI. The policy provided excess insurance to the Federation over a 55% self-insured program for the Federation members. All American and the Federation were involved in a dispute as to when All American's coverage applied. All American contended that its coverage was excess to the self- insured program, and the Federation contended that All American's insurance obligation was primary coverage. The Federation also threatened to bring an action against All American claiming that, since June 1992, All American had collected certain premiums directly from Federation insureds and further alleging that part of those premiums were Federation member dues for the self- insured program. The Federation threatened to seek an accounting from All American, and to the extent that DRI was All American's Managing General Agent, the Federation stated that it would allege that All American was liable to it for over $1.5 million in Federation dues that were misappropriated by DRI. In July 1992, All American entered into a standstill agreement with the Federation, which provided that All American would advance claim payments to Federation insureds for all claims under both the self-insured program and All American's insurance policy, subject to the resolution of the coverage dispute. All American advanced over $750 thousand for such claim payments. In December 1993, All American settled all claims by and against the Federation whereby the Federation has agreed to pay $100 thousand to All American in installments. The Federation and All American have agreed to exchange general releases as part of this settlement.\nStarting in June 1991, and through April 1992, DRI filed several claims with reinsurers of All American's insurance under reinsurance treaties issued for the school years 1988-1989, 1989-1990, and 1990-1991. As of June 1992, the outstanding reinsurance claims filed by DRI totalled to approximately $3.5 million. After a preliminary audit of DRI conducted by the reinsurers in February 1992, the reinsurers informed DRI that they would not pay any further claims until a full audit was completed. Among the questions raised by the reinsurers at that audit were (i) whether DRI improperly included a 5% TPA fee as part of loss adjustment expense when filing the aggregate stop loss claims; (ii) whether the reinsurance treaties covered illness claims; and (iii) whether DRI's tack-on premiums should have been included in calculating the premium\ncomponent of the stop loss policies' attachment point, and the reinsurance premiums. The reinsurers claim that all three procedures were improper. All American had demanded payment of these outstanding claims, which is currently the subject of negotiations between All American and the reinsurers. Certain of the reinsurers have settled with All American, which when completed, will represent payments to All American of over $230 thousand. Other reinsurers have indicated that they will demand the refund of sums previously paid by them to DRI on certain aggregate claims that the reinsurers contend were improper. All American submitted claims to the reinsurers for the 1991-1992 year of account totalling over $3 million on an excess of loss treaty in effect for this period. These reinsurers, which for the most part were different from the prior years' reinsurers, denied coverage for the vast majority of the claims submitted and refused to pay any claims without a thorough audit. All American has reached settlements with reinsurers possessing over 85% of the participation interests in this period's treaties by agreeing to rescind these treaties, which have resulted in premium refund payments to All American totalling over $900 thousand. All American is continuing to negotiate with the remaining few reinsurers. All American's likelihood of recovering significantly more of these reinsurance billings is currently uncertain.\nAll American has taken a one-time, after-tax charge of $10.6 million to establish a reserve for amounts receivable from the Managing General Agent. Management is of the opinion that any additional losses that might be suffered will not have a material adverse impact on the consolidated Equity Capital of the Company.\nIn April 1991, All American commenced a lawsuit against 11 subscribers to a reinsurance pool when the reinsurers failed to honor their obligations under the reinsurance agreement. Approximately $15.8 million of reinsured claims were in dispute. All American's complaint sought declaratory relief, and damages for breach of contract and the reinsurers' duty of good faith and fair dealing (All American Life Insurance Company, et al. v. Beneficial Life Insurance Company, et al., U.S. District Court for the District of New Jersey). All of the defendants in the All American action asserted counterclaims against All American based upon its alleged failure to properly administer the reinsured policies. Certain other common law claims were also asserted. A total of eight of the reinsurers commenced their own lawsuits against All American, among others, arising out of the same transactions. Seven of those brought an action entitled Mutual Benefit Life Insurance Company, et al. v. George G. Zimmerman, et al., in the U.S. District Court for the District of New Jersey. The Mutual Benefit complaint sought rescission of the reinsurance agreement, as well as compensatory and punitive damages, based upon asserted federal and New Jersey state RICO claims and other common law claims for relief. All of the defendants in the Mutual Benefit action also cross-claimed against each other for contribution or indemnification. An eighth reinsurer commenced a further lawsuit arising out of the same transactions, naming All American, among others, as a defendant (Security Benefit Life Insurance Company v. All American Life Insurance Company, et al, U.S. District Court for the District of New Jersey). The Security Benefit complaint sought only rescission of the reinsurance agreement and declaratory relief as against All American. Certain of the other defendants in the Security Benefit action asserted cross- claims against All American for contribution or indemnification. All of the lawsuits were consolidated in the United States District Court for the District of New Jersey, Newark Division. All American has now reached settlements with all of the reinsurers. All direct claims concerning All American in the Mutual Benefit and Security Benefit actions have been dismissed. The consolidated actions are currently in the discovery phase and no date for trial has been set. All American has moved to dismiss the remaining cross-claims for contribution or indemnity asserted against it, but that motion has not yet been decided by the Court.\nIn June 1993 a purported class action (Hoban v. USLIFE Credit Life Insurance Company, All American Life Insurance Company and Security of America Life Insurance Company) was filed in the United States District Court for the Northern District of Illinois. An Amended Complaint was filed in October 1993. The Amended Complaint alleges that the defendant companies, all of which are subsidiaries of USLIFE Corporation, sold single premium credit life and credit disability insurance policies to second mortgage borrowers in several states. The Amended Complaint further alleges that some second mortgage loans were paid off early so that the insureds were legally entitled to refunds for unearned premiums. The suit seeks damages on behalf of those insureds who did not claim and therefore did not receive partial refunds of their premiums from the named defendants. The Amended Complaint also contains claims under the Federal RICO statute and the Illinois Consumer Fraud Act. Defendants filed a Motion to Dismiss the Amended Complaint for lack of federal jurisdiction, for failure to\nallege facts amounting to fraud, and for failure to allege facts amounting to a RICO violation. Plaintiff has filed a Motion to Certify the Class, which defendants opposed. Both motions are awaiting decision by the Court.\nAt this point in time the outcome of these suits is not predictable. However, in the opinion of management, the ultimate resolution of these suits is not likely to have a material adverse affect on the consolidated Equity Capital of the Company.\nItem 4.","section_4":"Item 4. Submission of Matters to a Vote of Security Holders.\nNone.\nItem 5.","section_5":"Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.\nUSLIFE's Common Stock is traded on the New York, Chicago (formerly Midwest), Pacific and London Stock Exchanges. Dividends for the years ended December 31, 1993 and 1992 have been declared and paid to Common Stockholders at the annual rates of $1.21 and $1.14 respectively (paid quarterly in 1993 and 1992). As of February 24, 1994 there were approximately 8,100 record holders of the Common Stock. The following table sets forth the high and low sales prices for the Common Stock as reported in the consolidated transaction system for each quarterly period during the years indicated.\nMARKET PRICE RANGES (low to high)\n1993 1992 ____ ____\nFirst quarter...... 36 1\/8 - 42 5\/8 28 1\/8 - 31 7\/8 Second quarter..... 35 3\/4 - 41 1\/2 28 3\/8 - 34 3\/8 Third quarter...... 39 3\/4 - 43 7\/8 31 1\/8 - 35 Fourth quarter..... 36 1\/2 - 45 3\/4 29 3\/8 - 38 1\/4\nMarket prices have been adjusted as appropriate to reflect the three-for-two split of the Company's common stock in December 1992.\nSee \"Insurance Accounting\" in Note 1 of Notes to Financial Statements and Management's Discussion and Analysis of \"Liquidity\" herein, for information concerning regulatory restrictions upon payment of dividends by the Life Insurance Subsidiaries to the Company.\nItem 8.","section_6":"","section_7":"","section_7A":"","section_8":"Item 8. Financial Statements and Supplementary Data.\nSee separate Index to Financial Statements and Financial Statement Schedules on page 44. See Note 15 of Notes to Financial Statements as to condensed quarterly results of operations.\nItem 9.","section_9":"Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.\nNone.\nItem 10.","section_9A":"","section_9B":"","section_10":"Item 10. Directors and Executive Officers of the Registrant.\nExecutive Officers of the Registrant\nThe executive officers of USLIFE are listed below. The executive officers, after their initial election, are elected at USLIFE's annual Board of Directors meeting to serve, unless removed, until the next such annual meeting, scheduled for May 1994.\n(1) Served as Chairman since March 21, 1967. Had been President from November 11, 1966 to June 14, 1971 and resumed that position from October 15, 1974 to March 1, 1976, from January 24, 1984 to November 17, 1987, and from December 1, 1988 to May 18, 1993.\nAll of USLIFE's executive officers devote their full time to the business of USLIFE or its subsidiaries. With the exception of Messrs. Dicke, Hohn, Schlomann, and Simpson, all of the executive officers of USLIFE have been employed by USLIFE or one of its subsidiaries or one of their predecessors for at least five years. Mr. Casper has served as President and Chief Operating Officer of USLIFE Corporation since May 1993. He also serves as President and Chief Executive Officer of USLIFE Equity Sales Corporation, and has been a Director since March 1990. Prior to assumption of his current position, Mr. Casper served as President and Chief Operating Officer of the life insurance division of USLIFE Corporation since October 1991 and as President of United States Life since at least January 1989. Mr. Henderson has served as Vice Chairman and Chief Financial Officer and a Director since at least January 1989. Mr. Ruisi has served as Vice Chairman and Chief Administrative Officer since May 1993 and has been a Director since November 1992. Previously, Mr. Ruisi served as Senior Executive Vice President-Administration since March 1990 and as Executive Vice President-Administration since at least January 1989. Mr. Bushey has served as Executive Vice President-Corporate Planning since at least January 1989. Mr. Dicke has served as Executive Vice President - Product Actuary since April 1992. Previously, he served as Vice President and Actuary for The Equitable Life Assurance Society since April 1991, and as Consultant and Actuary with Tillinghast, a Towers Perrin Company, from at least January 1989. Mr. Forte has served as Executive Vice President-General Counsel since at least January 1989. Mr. Gavrity has served as Executive Vice President- Financial Actuary since October 1991 and previously served as Executive Vice President - Chief Actuary since at least January 1989. Mr. Schlomann has served as Executive Vice President - Financial Operations since October 1993. He previously served as Senior Vice President and Controller with Frank B. Hall & Company, Inc., since at least January 1989. Mr. Hohn has served as Senior Vice President - Corporate Secretary and Counsel since May 1993. He previously served as Vice President - Corporate Secretary since April 1991. Prior to that date, he served as consultant to the Life Insurance Council of New York, a trade association of New York life insurance companies, since April 1990; and as an attorney in private practice since at least January 1989. Mr. Lynch has served as Senior Vice President-Controller since at least January 1989. Mr. McQueen has served as Senior Vice President-Financial Operations since at least January 1989. Mr. Chouinard, who has served as Senior Investment Officer of USLIFE since at least January 1989, also serves as President and Chief Executive Officer of Advisers and President and a Director of Income Fund. Mr. Auriemmo has served as Vice President and Treasurer since at least January 1989. Mr. Cargiulo has served as President and Chief Executive Officer of United States Life since May 1993. Previously, he served as President- Chief Operating Officer of United States Life since October 1991. Prior to that date, he served as Executive Vice President for individual underwriting and insurance services of that subsidiary since November 1990 and as Senior Vice President - Individual Insurance Services of United States Life since at least January 1989. Mr. Faulkner has served as President and Chief Executive Officer of USLIFE Real Estate Services Corporation since at least January 1989. Mr. Griffin has served as President and Chief Executive Officer of Old Line Life since at least January 1989. Mr. Hendricks has served as President and Chief Executive Officer of USLIFE Systems Corporation since at least January 1989 and as President and Chief Executive Officer of USLIFE Insurance Services Corporation since April 1991. Mr. Lee has served as President and Chief Executive Officer of USLIFE Credit Life since at least January 1989. Mr. Simpson has served as President of All American Life since April 1990 and as a Director since March 1990. He served as President of USLIFE from March 1990 to October 1991. Previously, Mr. Simpson served as President and Chief Operating Officer and a member of the board of directors of Transamerica Occidental Life Insurance Company since at least January 1989.\nInformation regarding directors of the Registrant is incorporated by reference to USLIFE Corporation's definitive proxy statement to be filed within 120 days after the end of USLIFE's fiscal year ended December 31, 1993 for use in connection with the Annual Meeting of Shareholders to be held on May 17, 1994.\nItem ll. Executive Compensation.\nInformation regarding executive compensation is incorporated by reference to USLIFE Corporation's definitive proxy statement to be filed within 120 days after the end of USLIFE's fiscal year ended December 31, 1993 for use in connection with the Annual Meeting of Shareholders to be held on May 17, 1994.\nItem 12.","section_11":"","section_12":"Item 12. Security Ownership of Certain Beneficial Owners and Management.\nInformation regarding beneficial ownership of USLIFE's voting securities by directors, officers, and persons who, to the best knowledge of USLIFE, are known to be the beneficial owners of more than 5% of any class of USLIFE's voting securities as of March 31, 1994, is incorporated by reference to USLIFE Corporation's definitive proxy statement to be filed within 120 days after the end of USLIFE's fiscal year ended December 31, 1993 for use in connection with the Annual Meeting of Shareholders to be held on May 17, 1994.\nItem 13.","section_13":"Item 13. Certain Relationships and Related Transactions.\nInformation regarding certain relationships and related transactions is incorporated by reference to USLIFE Corporation's definitive proxy statement to be filed within 120 days after the end of USLIFE's fiscal year ended December 31, 1993 for use in connection with the Annual Meeting of Shareholders to be held on May 17, 1994.\nItem 14.","section_14":"Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.\n(a) 1 and 2. Financial Statements and Financial Statement Schedules of USLIFE and Subsidiaries.\nSee separate Index to Financial Statements and Financial Statement Schedules on page 44.\nFor the purposes of complying with the amendments to the rules governing Form S-8 (effective July 13, 1990) under the Securities Act of 1933, the undersigned registrant hereby undertakes as follows, which undertaking shall be incorporated by reference into registrant's Registration Statements on Form S-8 Nos. 33-40793 (filed June 23, 1991), 33-13999 (filed May 11, 1987) and 2-77278 (filed April 30, 1982):\nInsofar as indemnification for liabilities under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.\n(a) 3. Exhibits.\n3 (i) - Restated Certificate of Incorporation, as amended, incorporated herein by reference to USLIFE's Quarterly Report on Form 10-Q for the quarter ended September 30, 1993.\n3 (ii) - By-laws, as amended, incorporated herein by reference to USLIFE's Annual Report on Form 10-K for the year ended December 31, 1992.\n4 (i) - See Exhibit 3(i).\n(ii) - Indenture dated as of October 1, 1982 (9.15% Notes due June 15, 1999, 6.75% Notes due January 15, 1998, and 6.375% Notes due June 15, 2000) incorporated herein by reference to USLIFE's Registration Statement No. 2-79559 on Form S-3.\nAgreements or instruments with respect to long-term debt which are not filed as exhibits hereto do not in total exceed 10% of USLIFE's consolidated total assets and USLIFE agrees to furnish a copy thereof to the Commission upon request.\n(iii) - Amended and Restated Rights Agreement, dated as of June 24, 1986 and amended and restated as of January 24, 1989, between USLIFE Corporation and Manufacturers Hanover Trust Company (predecessor to Chemical Bank), as Rights Agent, relating to Common Stock Purchase Rights issued by USLIFE on July 10, 1986, incorporated herein by reference to USLIFE's Current Report on Form 8-K dated January 24, 1989.\n10 * (i) - 1981 Stock Option Plan, incorporated herein by reference to USLIFE's Annual Report on Form 10-K for the year ended December 31, 1981.\n* (ii) - Employment contract dated as of April 1, 1989 between USLIFE Corporation and Gordon E. Crosby, Jr., incorporated herein by reference to USLIFE's Quarterly Report on Form 10-Q for the quarter ended March 31, 1989.\n* (iii) - First Amendment dated as of May 1, 1989 to employment contract dated as of April 1, 1989 between USLIFE Corporation and Gordon E. Crosby, Jr., incorporated herein by reference to USLIFE's Quarterly Report on Form 10-Q for the quarter ended June 30, 1989.\n* (iv) - Second Amendment dated as of May 1, 1990 to employment contract dated as of April 1, 1989, as amended, between USLIFE Corporation and Gordon E. Crosby, Jr., incorporated herein by reference to USLIFE's Quarterly Report on Form 10-Q for the quarter ended March 31, 1990.\n* (v) - Third Amendment dated as of May 1, 1991 to employment contract dated as of April 1, 1989, as amended, between USLIFE Corporation and Gordon E. Crosby, Jr., incorporated herein by reference to USLIFE's Quarterly Report on Form 10-Q for the quarter ended June 30, 1991.\n* (vi) - Fourth Amendment dated as of May 1, 1992 to employment contract dated as of April 1, 1989, as amended, between USLIFE Corporation and Gordon E. Crosby, Jr., incorporated herein by reference to USLIFE's Quarterly Report on Form 10-Q for the quarter ended June 30, 1992.\n* (vii) - Fifth Amendment dated as of February 1, 1993 to employment contract dated as of April 1, 1989, as amended, between USLIFE Corporation and Gordon E. Crosby, Jr., incorporated herein by reference to USLIFE's Annual Report on Form 10-K for the year ended December 31, 1992.\n* (viii) - Sixth Amendment dated as of May 1, 1993 to employment contract dated as of April 1, 1989, as amended, between USLIFE Corporation and Gordon E. Crosby, Jr., incorporated herein by reference to USLIFE's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993.\n* (ix) - Employment contract dated as of April 1, 1989 between USLIFE Corporation and Greer F. Henderson, incorporated herein by reference to USLIFE's Quarterly Report on Form 10-Q for the quarter ended March 31, 1989.\n* (x) - First Amendment dated as of May 1, 1989 to employment contract dated as of April 1, 1989, between USLIFE Corporation and Greer F. Henderson, incorporated herein by reference to USLIFE's Quarterly Report on Form 10-Q for the quarter ended June 30, 1989.\n* (xi) - Second Amendment dated as of May 1, 1990 to employment contract dated as of April 1, 1989, as amended, between USLIFE Corporation and Greer F. Henderson, incorporated herein by reference to USLIFE's Quarterly Report on Form 10-Q for the quarter ended March 31, 1990.\n* (xii) - Third Amendment dated as of May 1, 1991 to employment contract dated as of April 1, 1989, as amended, between USLIFE Corporation and Greer F. Henderson, incorporated herein by reference to USLIFE's Quarterly Report on Form 10-Q for the quarter ended June 30, 1991.\n* (xiii) - Fourth Amendment dated as of May 1, 1992 to employment contract dated as of April 1, 1989, as amended, between USLIFE Corporation and Greer F. Henderson, incorporated herein by reference to USLIFE's Quarterly Report on Form 10-Q for the quarter ended June 30, 1992.\n* (xiv) - Fifth Amendment dated as of May 1, 1993 to employment contract dated as of April 1, 1989, as amended, between USLIFE Corporation and Greer F. Henderson, incorporated herein by reference to USLIFE's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993.\n* (xv) - Employment contract dated as of April 1, 1989 between USLIFE Corporation and Wesley E. Forte, incorporated herein by reference to USLIFE's Quarterly Report on Form 10-Q for the quarter ended March 31, 1989.\n* (xvi) - First Amendment dated as of May 1, 1989 to employment contract dated as of April 1, 1989 between USLIFE Corporation and Wesley E. Forte, incorporated herein by reference to USLIFE's Quarterly Report on Form 10-Q for the quarter ended June 30, 1989.\n* (xvii) - Second Amendment dated as of May 1, 1990 to employment contract dated as of April 1, 1989, as amended, between USLIFE Corporation and Wesley E. Forte, incorporated herein by reference to USLIFE's Quarterly Report on Form 10-Q for the quarter ended March 31, 1990.\n* (xviii)- Third Amendment dated as of May 1, 1991 to employment contract dated as of April 1, 1989, as amended, between USLIFE Corporation and Wesley E. Forte.\n* (xix) - Fourth Amendment dated as of May 1, 1993 to employment contract dated as of April 1, 1989, as amended, between USLIFE Corporation and Wesley E. Forte, incorporated herein by reference to USLIFE's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993.\n* (xx) - Employment contract dated as of April 1, 1989 between USLIFE Corporation and John D. Gavrity, incorporated herein by reference to USLIFE's Quarterly Report on Form 10-Q for the quarter ended March 31, 1989.\n* (xxi) - First Amendment dated as of May 1, 1989 to employment contract dated as of April 1, 1989 between USLIFE Corporation and John D. Gavrity, incorporated herein by reference to USLIFE's Quarterly Report on Form 10-Q for the quarter ended June 30, 1989.\n* (xxii) - Second Amendment dated as of May 1, 1990 to employment contract dated as of April 1, 1989, as amended, between USLIFE Corporation and John D. Gavrity, incorporated herein by reference to USLIFE's Quarterly Report on Form 10-Q for the quarter ended March 31, 1990.\n* (xxiii)- Third Amendment dated as of May 1, 1991 to employment contract dated as of April 1, 1989, as amended, between USLIFE Corporation and John D. Gavrity, incorporated herein by reference to USLIFE's Quarterly Report on Form 10-Q for the quarter ended June 30, 1991.\n* (xxiv) - Fourth Amendment dated as of May 1, 1992 to employment contract dated as of April 1, 1989, as amended, between USLIFE Corporation and John D. Gavrity, incorporated herein by reference to USLIFE's Quarterly Report on Form 10-Q for the quarter ended June 30, 1992.\n* (xxv) - Fifth Amendment dated as of May 1, 1993 to employment contract dated as of April 1, 1989, as amended, between USLIFE Corporation and John D. Gavrity, incorporated herein by reference to USLIFE's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993.\n* (xxvi) - Employment contract dated as of April 1, 1989 between USLIFE Corporation and Christopher S. Ruisi, incorporated herein by reference to USLIFE's Quarterly Report on Form 10-Q for the quarter ended March 31, 1989.\n* (xxvii)- First Amendment dated as of May 1, 1989 to employment contract dated as of April 1, 1989 between USLIFE Corporation and Christopher S. Ruisi, incorporated herein by reference to USLIFE's Quarterly Report on Form 10-Q for the quarter ended June 30, 1989.\n* (xxviii)- Second Amendment dated as of May 1, 1990 to employment contract dated as of April 1, 1989, as amended, between USLIFE Corporation and Christopher S. Ruisi, incorporated herein by reference to USLIFE's Quarterly Report on Form 10-Q for the quarter ended March 31, 1990.\n* (xxix) - Third Amendment dated as of May 1, 1991 to employment contract dated as of April 1, 1989, as amended, between USLIFE Corporation and Christopher S. Ruisi, incorporated herein by reference to USLIFE's Quarterly Report on Form 10-Q for the quarter ended June 30, 1991.\n* (xxx) - Fourth Amendment dated as of May 1, 1992 to employment contract dated as of April 1, 1989, as amended, between USLIFE Corporation and Christopher S. Ruisi, incorporated herein by reference to USLIFE's Quarterly Report on Form 10-Q for the quarter ended June 30, 1992.\n* (xxxi) - Fifth Amendment dated as of May 1, 1993 to employment contract dated as of April 1, 1989, as amended, between USLIFE Corporation and Christopher S. Ruisi, incorporated herein by reference to USLIFE's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993.\n* (xxxii)- Employment contract dated as of April 1, 1989 between USLIFE Corporation and A. Scott Bushey, incorporated herein by reference to USLIFE's Quarterly Report on Form 10-Q for the quarter ended March 31, 1989.\n* (xxxiii)- First Amendment dated as of May 1, 1989 to employment contract dated as of April 1, 1989 between USLIFE Corporation and A. Scott Bushey, incorporated herein by reference to USLIFE's Quarterly Report on Form 10-Q for the quarter ended June 30, 1989.\n* (xxxiv)- Second Amendment dated as of May 1, 1990 to employment contract dated as of April 1, 1989, as amended, between USLIFE Corporation and A. Scott Bushey, incorporated herein by reference to USLIFE's Quarterly Report on Form 10-Q for the quarter ended March 31, 1990.\n* (xxxv) - Third Amendment dated as of May 1, 1991 to employment contract dated as of April 1, 1989, as amended, between USLIFE Corporation and A. Scott Bushey, incorporated herein by reference to USLIFE's Quarterly Report on Form 10-Q for the quarter ended June 30, 1991.\n* (xxxvi)- Fourth Amendment dated as of May 1, 1992 to employment contract dated as of April 1, 1989, as amended, between USLIFE Corporation and A. Scott Bushey, incorporated herein by reference to USLIFE's Quarterly Report on Form 10-Q for the quarter ended June 30, 1992.\n* (xxxvii)- Fifth Amendment dated as of May 1, 1993 to employment contract dated as of April 1, 1989, as amended, between USLIFE Corporation and A. Scott Bushey, incorporated herein by reference to USLIFE's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993.\n*(xxxviii)- Employment contract dated as of April 16, 1990 between USLIFE Corporation and William A. Simpson, incorporated herein by reference to USLIFE's Quarterly Report on Form 10-Q for the quarter ended March 31, 1990.\n* (xxxix)- First Amendment dated as of May 1, 1991 to employment contract dated as of April 16, 1990 between USLIFE Corporation and William A. Simpson, incorporated herein by reference to USLIFE's Quarterly Report on Form 10-Q for the quarter ended June 30, 1991.\n* (xl) - Second Amendment dated as of May 1, 1992 to employment contract dated as of April 16, 1990, as amended, between USLIFE Corporation and William A. Simpson, incorporated herein by reference to USLIFE's Quarterly Report on Form 10-Q for the quarter ended June 30, 1992.\n* (xli) - Third Amendment dated as of October 1, 1992 to employment contract dated as of April 16, 1990, as amended, between USLIFE Corporation and William A. Simpson, incorporated herein by reference to USLIFE's Quarterly Report on Form 10-Q for the quarter ended September 30, 1992.\n* (xlii) - Third Amendment dated as of May 1, 1993 to employment contract dated as of April 16, 1990, as amended, between USLIFE Corporation and William A. Simpson, incorporated herein by reference to USLIFE's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993.\n* (xliii)- Employment contract dated as of April 1, 1991 between USLIFE Corporation and Robert J. Casper, incorporated herein by reference to USLIFE's Quarterly Report on Form 10-Q for the quarter ended March 31, 1992.\n* (xliv) - First amendment dated as of May 1, 1992 to employment contract dated as of April 1, 1991 between USLIFE Corporation and Robert J. Casper, incorporated herein by reference to USLIFE's Quarterly Report on Form 10-Q for the quarter ended June 30, 1992.\n* (xlv) - Second Amendment dated as of October 1, 1992 to employment contract dated as of April 1, 1991, as amended, between USLIFE Corporation and Robert J. Casper, incorporated herein by reference to USLIFE's Quarterly Report on Form 10-Q for the quarter ended September 30, 1992.\n* (xlvi) - Second Amendment dated as of May 1, 1993 to employment contract dated as of April 1, 1991, as amended, between USLIFE Corporation and Robert J. Casper, incorporated herein by reference to USLIFE's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993.\n* (xlvii)- 1978 Stock Option Plan, incorporated herein by reference to USLIFE's Annual Report on Form 10-K for the year ended December 31, 1980.\n* (xlviii)- Deferred Compensation Plan, incorporated herein by reference to USLIFE's Annual Report on Form 10-K for the year ended December 31, 1980.\n* (il) - Book Unit Plan, incorporated herein by reference to USLIFE's Annual Report on Form 10-K for the year ended December 31, 1980.\n(l) - Lease dated as of December 30, 1986 between The United States Life Insurance Company In the City of New York and RREEF USA Fund-III for the lease of a portion of 125 Maiden Lane, New York, New York, incorporated herein by reference to USLIFE's Annual Report on Form 10-K for the year ended December 31, 1986.\n(li) - Amendment to Lease dated August 31, 1988 to Lease dated as of December 30, 1986 between The United States Life Insurance Company In the City of New York and RREEF USA Fund-III for the lease of a portion of 125 Maiden Lane, New York, New York, incorporated herein by reference to USLIFE's Annual Report on Form 10-K for the year ended December 31, 1988.\n(lii) - Second Amendment to Lease dated November 16, 1988 to Lease dated as of December 30, 1986 between The United States Life Insurance Company In the City of New York and RREEF USA Fund-III for the lease of a portion of 125 Maiden Lane, New York, New York, incorporated herein by reference to USLIFE's Annual Report on Form 10-K for the year ended December 31, 1988.\n(liii) - Lease dated May 21, 1987 between The United States Life Insurance Company In the City of New York and Commercial Realty & Resources Corp. for the lease of premises at the Jumping Brook Corporate Office Park in Neptune, New Jersey, incorporated herein by reference to USLIFE's Annual Report on Form 10-K for the year ended December 31, 1988.\n(liv) - February 9, 1989 Amendment to Lease dated May 21, 1987 between The United States Life Insurance Company In the City of New York and Commercial Realty & Resources Corp. for the lease of premises at the Jumping Brook Corporate Office Park in Neptune, New Jersey, incorporated herein by reference to USLIFE's Annual Report on Form 10-K for the year ended December 31, 1988.\n* (lv) - Retirement Plan for Outside Directors effective February 28, 1989, incorporated herein by reference to USLIFE's Annual Report on Form 10-K for the year ended December 31, 1988.\n* (lvi) - USLIFE Corporation Restricted Stock Plan effective January 1, 1989, incorporated herein by reference to USLIFE's Quarterly Report on Form 10-Q for the quarter ended June 30, 1989.\n* (lvii) - Trust Agreement made as of September 25, 1990 among USLIFE Corporation, Manufacturers Hanover Trust Company (predecessor to Chemical Bank) and KPMG Peat Marwick (as independent contractor) establishing a trust to fund certain employment contracts, incorporated herein by reference to USLIFE's Annual Report on Form 10-K for the year ended December 31, 1990.\n* (lviii)- Trust Agreement made as of September 25, 1990 among USLIFE Corporation, Manufacturers Hanover Trust Company (predecessor to Chemical Bank) and KPMG Peat Marwick (as independent contractor) establishing a trust to fund the USLIFE Corporation Supplemental Retirement Plan, incorporated herein by reference to USLIFE's Annual Report on Form 10-K for the year ended December 31, 1990.\n* (lix) - Trust Agreement made as of September 25, 1990 among USLIFE Corporation, Manufacturers Hanover Trust Company (predecessor to Chemical Bank) and KPMG Peat Marwick (as independent contractor) establishing a trust to fund the USLIFE Corporation Retirement Plan for Outside Directors, incorporated herein by reference to USLIFE's Annual Report on Form 10-K for the year ended December 31, 1990.\n* (lx) - 1991 Stock Option Plan, incorporated herein by reference to USLIFE's Annual Report on Form 10-K for the year ended December 31, 1991.\n12 - Computations of ratios of earnings to fixed charges.\n21 - List of Subsidiaries.\n23 - Consent of Independent Certified Public Accountants (see page 41).\n99 (i) - Annual Report on Form 11-K of USLIFE Corporation Employee Savings and Investment Plan for the plan year ended December 31, 1993 (to be filed within 120 days of fiscal year end of Plan).\n99 (ii) - Trust Agreement made as of December 6, 1990 among USLIFE Corporation, Manufacturers Hanover Trust Company (predecessor to Chemical Bank), and KPMG Peat Marwick (as independent contractor) establishing a trust to fund the USLIFE Corporation Retirement Plan, incorporated herein by reference to USLIFE's Annual Report on Form 10-K for the year ended December 31, 1990.\n* Indicates a management contract or compensatory plan or arrangement.\n(b) Reports on Form 8-K.\nNo Current Report on Form 8-K has been filed for the last quarter of the fiscal year ended December 31, 1993.\nCONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS\nThe Board of Directors and Shareholders USLIFE Corporation:\nWe consent to the incorporation by reference in Registration Statements Nos. 33-18287, 33-8489, 33-58944, 33-29934, 33-17126, 33-67344 and 33-9159 on Form S-3 relative to Debt Securities, and common stock, respectively; the post effective amendment to Registration Statement No. 33-29934 on Form S-3 relative to Debt Securities; the post effective amendment to Registration Statement No. 33-9159 on Form S-3 relative to common stock; the post effective amendments to Registration Statement Nos. 2-93655 and 33-11019 on Form S-3 relative to the General Agents Incentive Compensation Plan; Registration Statement No. 33-45377 on Form S-3 relative to the United States Life Insurance Company Retirement Plan for General Agents and Producers; the post effective amendments to Registration Statement No. 33-17126 relative to Debt Securities; Registration Statement No. 33-40793 on Form S-3 relative to the 1991 Stock Option Plan; and the post effective amendment to Registration Statement Nos. 2-63159, 2-32606 and 2-77278 on Form S-8 relative to the Stock Option Plans and Registration Statement Nos. 2-75011 and 33-13999 on Form S-8 relative to the Employee Savings and Investment Plan of USLIFE Corporation of our report dated February 22, 1994, relating to the consolidated balance sheets of USLIFE Corporation and subsidiaries as of December 31, 1993 and 1992 and the related statements of consolidated income, equity capital, and cash flows for each of the years in the three-year period ended December 31, 1993 which report appears in this December 31, 1993 Annual Report on Form 10-K of USLIFE Corporation. Our report refers to a change in accounting to adopt the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 106, \"Employers' Accounting for Postretirement Benefits Other Than Pensions.\"\n\/s\/ KPMG Peat Marwick KPMG Peat Marwick\nMarch 22, 1994 345 Park Avenue New York, New York\nSIGNATURES\nPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.\nUSLIFE Corporation (Registrant)\nDated: March 22, 1994\nBy: \/s\/ Gordon E. Crosby, Jr. _____________________________ (Gordon E. Crosby, Jr., Chairman of the Board and Chief Executive Officer)\nPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.\nUSLIFE CORPORATION AND SUBSIDIARIES\nINDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES\nPage ____\nSelected Financial Data for the five years ended December 31, 1993............................................... 2 Independent Auditors' Report...................................... 45 Consolidated balance sheets as of December 31, 1993 and 1992...... 46 Statements of consolidated income for the three years ended December 31, 1993............................................... 48 Statements of consolidated cash flows for the three years ended December 31, 1993............................................... 49 Statements of consolidated Equity Capital for the three years ended December 31, 1993................................... 50 Notes to financial statements..................................... 51\nSchedule of the Registrant:\n(A) Schedule III - Condensed Financial Information of Registrant (incorporated in Note 14 of Notes to Financial Statements)...................................\nSchedules of the Registrant and Consolidated Subsidiaries:\n(A) Schedule I - Summary of investments-other than investments in related parties (incorporated in Note 11 of Notes to Financial Statements)...............\n(B) Schedule V - Supplementary insurance information (incorporated in Note 13 of Notes to Financial Statements).............................................\n(C) Schedule VI - Reinsurance (incorporated in Note 10 of Notes to Financial Statements)..........................\n(D) Schedule IX - Short-term borrowings (incorporated in Note 2 of Notes to Financial Statements)................\nINDEPENDENT AUDITORS' REPORT\nThe Board of Directors and Shareholders USLIFE Corporation:\nWe have audited the accompanying consolidated balance sheets of USLIFE Corporation and subsidiaries as of December 31, 1993 and 1992, and the related statements of consolidated income, equity capital, and cash flows for each of the years in the three-year period ended December 31, 1993. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.\nWe conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.\nIn our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of USLIFE Corporation and subsidiaries at December 31, 1993 and 1992, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1993, in conformity with generally accepted accounting principles.\nAs discussed in Notes 1 and 5 to the consolidated financial statements, the Company changed its method of accounting for postretirement benefits other than pensions in 1992 to adopt the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 106, \"Employers' Accounting for Postretirement Benefits Other Than Pensions.\"\n\/s\/ KPMG Peat Marwick KPMG Peat Marwick\nFebruary 22, 1994 345 Park Avenue New York, New York\nUSLIFE CORPORATION AND SUBSIDIARIES\nNOTES TO FINANCIAL STATEMENTS\nNote 1. Significant Accounting Policies\nChanges in Accounting Principles\nEffective as of the first quarter of 1993, the Company adopted Statement of Financial Accounting Standards No. 113 (\"SFAS 113\"), entitled \"Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts.\" SFAS 113 requires that assets and liabilities relating to reinsured contracts be reported on a gross basis rather than net of the impact of reinsurance as permitted under previous accounting standards. The Statement also establishes guidelines for determining whether risk is transferred under a reinsurance contract and requires reinsurance contracts which do not qualify under these guidelines to be accounted for as deposits. As a result of the adoption of SFAS 113, reinsurance receivables amounting to approximately $135 million are included in consolidated total assets at December 31, 1993, including approximately $118 million which would have been offset to various liability accounts under previous accounting standards. Other than the required gross presentation of reinsurance assets and liabilities, SFAS 113 did not have a material impact on the Company's reported financial position or results of operations. Financial statements of previous years were not restated as a result of the adoption of SFAS 113. See Note 10 of Notes to Financial Statements for further information regarding the Company's reinsurance contracts.\nEffective as of January 1, 1992, the Company implemented new accounting standards for non-pension postretirement benefits required by Statement of Financial Accounting Standards No. 106 (\"SFAS 106\"), entitled \"Employers' Accounting for Postretirement Benefits Other Than Pensions\" and recognized the initial liability required by SFAS 106 by means of a one-time charge to net income for \"cumulative effect of accounting change.\" As required by SFAS 106, this charge, which amounted to $38.0 million or $1.67 per share, was retroactively recorded in the first quarter of 1992. See Note 5 of Notes to Financial Statements for further information regarding non-pension postretirement benefits.\nAlso in 1992, the Company adopted Statement of Financial Accounting Standards No. 109 (\"SFAS 109\"), entitled \"Accounting for Income Taxes,\" and restated, as appropriate, the financial statements of previous years presented to retroactively give effect to the accounting standards required by SFAS 109. See Note 4 of Notes to Financial Statements for further information regarding Federal income taxes.\nFuture Accounting Changes\nIn November 1992, the Financial Accounting Standards Board (\"FASB\") issued Statement of Financial Accounting Standards No. 112, \"Employers' Accounting for Postemployment Benefits.\" Statement No. 112, which must be implemented in 1994, will require advance recognition of non-retirement benefits such as severance pay and health insurance continuation when certain conditions are met. The adoption of Statement No. 112 will not have a material impact on the Company's reported financial position or results of operations.\nIn May 1993, FASB issued two additional Statements which will require the Company to adopt new accounting and reporting standards in preparation of future period financial statements.\nStatement No. 114, \"Accounting by Creditors for Impairment of a Loan,\" must be adopted by calendar year enterprises no later than 1995 and will require a writedown to fair value, as defined by the Statement, for certain mortgage loans and similar investments where impairment results in a change in repayment terms. Based on current evaluation of the Company's investments that are covered by this Statement, it is not anticipated to have a material impact on the Company's reported financial position or results of operations. The Company has not yet determined the timing of its implementation of Statement No. 114.\nStatement No. 115, \"Accounting for Certain Investments in Debt and Equity Securities,\" will require most fixed maturity investments to be carried at market value commencing in 1994. It is currently anticipated that substantially all of the Company's fixed maturity investments will be included in a category established by the Statement that will require the securities to be valued at market, with changes in market value recognized through equity. In addition to application of appropriate tax effect, the impact on Equity Capital from this unrealized appreciation may also be subject to certain additional adjustments which have not yet been quantified by the Company. Market value of these securities exceeds adjusted cost by approximately $380 million at December 31, 1993. The Company will adopt Statement No. 115 in the first quarter of 1994. Adjustments to market value will be required each quarter following the implementation of Statement No. 115, resulting in both increases and decreases to Equity Capital.\nBasis of Consolidation\nThe consolidated financial statements include the accounts of USLIFE and all of its subsidiaries (the \"Company\"). All subsidiaries are 100 percent owned. All material intercompany accounts and transactions have been eliminated.\nSegment Information\nThe only reportable industry segment of the Company is \"Life Insurance\" and the related information is presented below:\nThe caption \"Other\" above consists principally of investment income and capital gains attributable to Equity Capital.\nInvestments in Securities\nThe Company's investments in preferred stocks (other than redeemable preferred stocks) and common stocks (\"Equity Securities\") are carried at market value in the Consolidated Balance Sheets at December 31, 1993, 1992, and 1991 and related valuation allowances, \"Net unrealized losses on marketable equity securities,\" in the amounts of $29 thousand, $165 thousand, and $13 thousand, respectively, are included in Equity Capital at those dates. Effective December 31, 1992, Fixed Maturity investments (including bonds and redeemable preferred stocks) which may be sold prior to maturity as a result of the Company's investment strategies are considered available for sale and carried at the lower of aggregate amortized cost or market value as of the balance sheet date. The Company's investment management policies include continual monitoring and evaluation of securities market conditions and circumstances relating to its investment holdings which may result in the selection of investments for sale prior to maturity. Securities may also be sold as part of the Company's asset\/liability management strategy in response to changes in interest rates, resultant prepayment risk, and similar factors. The reclassification, as of December 31, 1992, of the Company's entire Fixed Maturity portfolio to the \"available for sale\" category did not affect reported net income, and this classification had no impact on Equity Capital at December 31, 1993 or 1992 as the aggregate market value of these securities exceeded\ntheir amortized cost at those dates. Valuation reserves are maintained for investments with a reduction in value determined to be other than temporary. The cost and market values of the Company's consolidated investments in Fixed Maturities and Equity Securities at December 31, 1993, 1992 and 1991 are presented below:\nAt December 31, 1993, consolidated invested assets included approximately $221 million book value of less than investment grade corporate securities, based on ratings assigned by recognized rating agencies and insurance regulatory authorities. Such investments had an aggregate market value of approximately $232 million at December 31, 1993 and, based on book value, represent approximately 3.3% of consolidated total assets at that date. Approximately $28 million book value of these investments are classified as problem securities at that date and, of that amount, approximately $16 million represented securities in default at December 31, 1993. Also at December 31, 1993, the book value of mortgage loans included in consolidated total assets which were 60 days or more delinquent or in foreclosure was approximately $26 million, and the book value of property acquired through foreclosure of mortgage loans was approximately $25 million.\nRealized gains on the Company's consolidated investments in Fixed Maturities and Equity Securities for the three years ended December 31, 1993 are summarized as follows:\nPre-tax realized gains shown above reflect provisions for valuation of certain investments with decline in value determined to be other than temporary. The cost of securities sold for purposes of determination of realized gains or losses included in net income is based on the specific identification method.\nPre-tax realized gains on Fixed Maturities and Equity Securities are reconciled to consolidated realized gains (losses) on investments as follows:\n1993 1992 1991 __________ __________ __________\n(Amounts in Thousands) Realized gains (losses):\nFixed Maturities.............. $ 46,891 $ 23,094 $ 10,950 Equity Securities............. 897 1,584 1,244 __________ __________ __________\n47,788 24,678 12,194\nReal estate, mortgage loans, and other investments (a)... (39,272) (27,258) (14,115) __________ __________ __________\nTotal......................... $ 8,516 $ (2,580) $ (1,921) ========== ========== ==========\n(a) Reflects provisions for valuation to estimated net realizable value for certain investments.\nThe amortized cost and estimated market values of the Company's consolidated investments in debt securities at December 31, 1993 and 1992 are as follows:\nThe amortized cost and estimated market value of debt securities at December 31, 1993 and 1992, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without prepayment penalties.\nProceeds from disposals of investments in debt securities (excluding short term commercial paper) during 1993, 1992 and 1991 were $1.209 billion, $824.1 million, and $756.1 million, respectively. During 1993, gross gains of $57.9 million and gross losses of $11.0 million were realized on such disposals. During 1992, gross gains of $41.0 million and gross losses of $17.9 million were realized on such disposals. During 1991, gross gains of $26.3 million and gross losses of $15.4 million were realized on such disposals.\nShort term investments are carried at cost, which approximates market value.\nOther Investments\nReal estate is carried at the lower of depreciated cost or net realizable value. Depreciation is calculated on a straight line basis with useful lives varying based on the type of building. Policy loans and mortgages, other than those with a decline in value determined to be other than temporary, are stated at the aggregate of unpaid principal balances. Other long term investments are stated at the lower of cost or their estimated net realizable value.\nInsurance Accounting\nAmounts for the life insurance subsidiaries are reported to regulatory authorities on the basis of statutory accounting practices and have been presented herein in conformity with generally accepted accounting principles (\"GAAP\").\nRegulatory after-tax income and after-tax income in accordance with GAAP of the life insurance subsidiaries for the three years ended December 31, 1993, and regulatory Equity Capital and Equity Capital in accordance with GAAP of such subsidiaries at December 31, 1993, 1992 and 1991 are as follows:\n______\n(a) Amounts shown exclude after-tax capital gains (losses) of $(1.3) million, $(15.5) million and $5.0 million on a regulatory basis and $7.1 million, $(1.4) million, and $(1.4) million on a GAAP basis in 1993, 1992 and 1991, respectively. GAAP income above also excludes an after-tax charge in 1992 of $21.5 million for \"cumulative effect of accounting change\" relating to the adoption of FASB Statement No. 106 which had no impact on 1992 regulatory net income. Both regulatory and GAAP after-tax income shown above for 1992 reflect a charge equivalent to $10.6 million on an after-tax basis relating to receivables from an Association Group Health marketing organization which declared bankruptcy.\nAs a result of the appropriate adjustments, Equity Capital of the life insurance subsidiaries prepared in accordance with GAAP exceeds that which was prepared on a regulatory basis by $826.5 million, $779.0 million and $736.7 million, respectively, at December 31, 1993, 1992 and 1991. It should be noted that the dividend paying capability of the life insurance subsidiaries is generally limited by income before capital gains and losses and Equity Capital as reported on a regulatory basis. Notice to or approval by regulatory authorities is frequently required for dividends paid by insurance companies. Loans to or advances from the life insurance subsidiaries to the parent company may also be subject to regulatory approval requirements or limitations. At December 31, 1993, the portion of the aggregate $1.376 billion Equity Capital of the life insurance subsidiaries which was not available for transfer to the parent company by dividend, loan, or advance or available for such transfer only with approval of a third party (\"Restricted Net Assets\"), as a result of the aforementioned regulatory requirements, amounted to $1.308 billion. Cash dividends paid by all consolidated subsidiaries to the parent company totalled $61.2 million, $47.7 million and $58.2 million for the years ended December 31, 1993, 1992 and 1991, respectively. Additionally, during 1993, securities with market value of $21.6 million were transferred from a life insurance subsidiary to the parent company and subsequently contributed to another life insurance subsidiary in connection with the combination of the two subsidiaries' operations. In addition to the 1992 cash dividends, investment securities with market value of $26.3 million were transferred by dividend from a life insurance subsidiary to the parent company.\nLife Insurance\nDeferred Policy Acquisition Costs\nThe costs of acquiring new business (principally commissions) and certain costs of issuing policies (such as medical examinations and inspection reports) and certain agency and marketing expenses, all of which vary with and are primarily related to the production of new business, have been deferred. For traditional life insurance policies, these costs are being amortized over the premium-paying periods of the related policies in proportion to the ratio of the annual premium revenue to the total anticipated premium revenue. Anticipated premium revenue was estimated using the same assumptions which were used for computing liabilities for future policy benefits. For universal life- type policies, these costs are being amortized over the lives of the policies in relation to the incidence of gross profits arising principally from investment, mortality and expense margins. Deferred policy acquisition costs are reviewed to determine that the unamortized portion of such costs does not exceed recoverable amounts, after considering anticipated investment income.\nDetails with respect to consolidated deferred policy acquisition costs and premium income for life insurance and annuities and accident and health insurance for the three years ended December 31, 1993 are as follows:\nFuture Policy Benefits\nLiabilities for future policy benefits relating to traditional life insurance policies have been computed by the net level premium method based on estimated future investment yield, mortality and termination experience. Interest rate assumptions for most non-interest sensitive life insurance have ranged from 2-1\/2 to 3-1\/2 percent on issues of 1959 and prior, to 5-1\/2 to 5- 7\/8 percent on issues of 1967 and subsequent years. (On certain products, the rate ranges as high as 8-3\/4 percent.) Mortality has been calculated principally on an experience multiple applied to select and ultimate tables in common usage in the industry. Estimated terminations have been determined principally based on industry tables.\nUniversal Life-Type and Investment Contracts\nRevenues for universal life insurance, other interest-sensitive life insurance, and investment contracts include policy charges for administration and cost of insurance, and surrender charges assessed against policyholder account balances during the period. Premiums received on these products are treated as policyholder deposits rather than revenues. The liability for policyholder account balances represents the accumulated amounts which accrue to the benefit of policyholders, and reflects interest credited at rates which are subject to periodic adjustment. Charges to expense relating to these policies and contracts include such interest credited as well as benefits during the period in excess of related policy account balances.\nParticipating Policies\nParticipating policies subject to profit limitations approximate 2.4 percent of the individual life insurance in force at December 31, 1993 and 6.5 percent of individual life insurance premium income in 1993. The major portion of earnings therefrom inures to the benefit of the participating policyholders and is not available to shareholders. Undistributed earnings payable to participating policyholders are included as a liability in the Consolidated Balance Sheets.\nAll participating policies approximate 2.5 percent of the total individual life insurance in force at December 31, 1993 and 6.8 percent of individual life insurance premium income in 1993. The provisions for dividends to policyholders in the statements of consolidated income include dividends paid or payable on participating policies.\nLiability for Unpaid Claims\nThe liability for unpaid claims and claim adjustment expenses is based on the estimated amount payable on claims reported prior to the balance sheet date which have not yet been settled, claims reported subsequent to the balance sheet date which have been incurred during the period then ended, and an estimate (based on prior experience) of incurred but unreported claims relating to such period.\nLiability for Guaranty Fund Assessments\nThe Company's life insurance subsidiaries may be required, under the solvency or guaranty laws of the various states in which they are licensed, to pay assessments up to prescribed limits to fund policyholder losses or liabilities of insolvent insurance companies. Certain states permit these assessments, or a portion thereof, to be recovered as an offset to future premium taxes. Assessments are recognized based on notification of liability by regulatory authorities, including provision for certain future amounts payable, and, when subject to credit against future premium taxes and judged to be recoverable, may be capitalized and amortized on a basis consistent with the credits to be realized under applicable state law.\nOther Assets\nIncluded in other assets is the unamortized portion of goodwill, representing the excess of cost over the value of net assets acquired in subsidiary acquisitions accounted for by the purchase method. Such amounts are being amortized by straight-line basis charges to income over forty year periods which began at the respective dates of acquisition of the acquired subsidiaries. Amortization of goodwill amounted to approximately $2 million for each of the three years ended December 31, 1993.\nIncome Taxes\nDeferred income taxes arise as a result of applying enacted statutory tax rates to the temporary differences between the financial statement carrying value and the tax basis of assets and liabilities. Such differences result primarily from amounts capitalized for policy acquisition costs and calculated for future policy benefit liabilities.\nThe Company and its subsidiaries file a consolidated Federal income tax return and have elected to include the life insurance and non-life insurance subsidiaries in the consolidated tax return. Taxes on income for life insurance and non-life insurance subsidiaries are recorded in the individual income accounts of the subsidiaries and are remitted to the Company on a separate return basis. The provision for taxes in the Statements of Consolidated Income for the three years ended December 31, 1993 represents the tax for all companies on a consolidated return basis.\nIncome Per Share\nIncome per share was computed by dividing the income applicable to common and common equivalent shares by the weighted average number of common and common equivalent shares outstanding during each year. The weighted average number of common and common equivalent shares was determined by using the average number of common shares outstanding during each year, net of reacquired (treasury) shares from the date of acquisition; by converting the shares of the Series A and Series B Preferred Stock to their equivalent common shares, and by calculating the number of shares issuable on exercise of those common stock options with exercise prices lower than the market price of the common stock, reduced by the number of shares assumed to have been purchased with the proceeds from the exercise of the options. Income before cumulative effect of accounting change and net income were adjusted to deduct the dividend requirements on Series C Preferred Stock for periods when that issue was outstanding. Fully diluted income per share is the same as income per share data indicated. The following table sets forth the computations of income per share for the three years ended December 31, 1993:\nStatement of Cash Flows\nFor the years ended December 31, 1993, 1992 and 1991, respectively, interest paid (net of amounts capitalized) amounted to $32.6 million, $34.7 million, and $39.4 million, and Federal income taxes paid amounted to $60.7 million, $75.7 million and $71.4 million. The major portion of the disposals of fixed maturity investments relate to securities sold or redeemed prior to their maturity dates. The $1.154 billion disposals of Fixed Maturity investments by the Company for the year ended December 31, 1993 included approximately $928 million book value of securities which were called for redemption by the respective issuers prior to maturity. The $799 million disposals of Fixed Maturity investments in 1992 included approximately $497 million of such redemptions.\nFinancial Instruments and Concentrations of Credit Risk\nThe Company's investments in Fixed Maturities and Equity Securities are comprised of a diverse portfolio represented by approximately 600 issuers, with no issuer accounting for more than 1% of the Company's total investment in these securities, based on book value, at December 31, 1993.\nThe Company's investment in mortgage loans at December 31, 1993 is characterized by a broad geographical distribution, with approximately 6% of total book value relating to the New England region of the United States, 16% from the middle-Atlantic states, 23% from the north-central states, 16% from the south-Atlantic states, 10% from the south-central states, 14% from the mountain states, and 15% from the Pacific states. Based on book value, approximately 40% of the Company's mortgage loans at that date are secured by office buildings, 24% by industrial \/ warehouse properties, 25% retail, 1% apartments, 3% one to four family residential, and the remainder secured by hotel \/ motel, medically oriented, or other specialty properties.\nThe Company's reinsurance receivables and other recoverable amounts at December 31, 1993 relate to approximately 160 reinsurers. Two major United States insurance companies, rated \"A\" (excellent) and \"A+\" (superior) respectively by A. M. Best Company, a recognized insurance rating agency, each account for approximately 10% of the reinsurance receivable and recoverable amounts at that date. Other than these companies, no single reinsurer accounts for more than 6% of total reinsurance receivable and recoverable amounts at December 31, 1993. The Company monitors the financial condition of its reinsurers in order to minimize its exposure to loss from reinsurer insolvencies.\nAs described in Note 9 of Notes to Financial Statements, a life insurance subsidiary has an outstanding standby commitment amounting to $6.8 million at December 31, 1993. The Life Insurance Subsidiaries historically have not provided permanent financing on the major portion of such commitments. In the ordinary course of investment operations, the Life Insurance Subsidiaries also may extend permanent financing commitments for investments in mortgage loans, with specified closing dates typically within 90 to 120 days after approval and interest rates and other terms (based on the credit policies utilized for investments in mortgage loans) determined at the commitment date. There were no material permanent financing commitments outstanding at December 31, 1993.\nDisclosures about Fair Value of Financial Instruments\nThe following methods and assumptions were used to estimate the fair value of the indicated classes of financial instruments:\nCash and Short-term Investments\nThe carrying amounts of these assets approximate their fair value.\nFixed Maturities and Equity Securities\nFair values are based on quoted market prices or dealer quotes.\nMortgage Loans\nThe fair value of mortgage loans, other than those which are more than 60 days delinquent or in foreclosure, is estimated by discounting the expected future cash flows. The rates used for this purpose are the estimated current rates that would be applied to the loans in a purchase or sale transaction, on an aggregate or bulk basis grouped by maturity range, considering the creditworthiness of the borrowers and the general characteristics of the collateral. For purposes of this calculation, the fair value of loans with stated interest rates greater than the estimated applicable market rate was adjusted to reflect the impact of prepayment options or other contractual terms upon market value. For mortgage loans which are classified as delinquent or are in foreclosure, fair value is based on estimated net realizable value of the underlying collateral.\nLong-term Debt\nThe fair value of the Company's long-term debt is estimated based on rates believed to be currently available to the Company for borrowings with terms similar to the remaining maturities of the outstanding debt. For outstanding debt securities with fixed interest rates in excess of current market rates, repayment on call dates prior to stated maturity was assumed for purposes of fair value estimation.\nThe estimated fair values of the Company's financial instruments are as follows:\nIn accordance with the requirements of Statement No. 107 of the Financial Accounting Standards Board, the financial instruments presented above exclude accounts relating to the Company's insurance contracts and certain other classes of assets and liabilities. The estimated fair values of the Company's policy loan assets and its policyholder account balance liabilities relating to investment contracts at December 31, 1993 and 1992 are not materially different from the respective carrying values at those dates. No material carrying value or fair value amounts are ascribed to the Company's outstanding standby commitments at December 31, 1993 and 1992.\nNote 2. Notes Payable\nIncluded in this item are short term borrowings against bank lines of credit or pursuant to certain bank revolving credit agreements, and other short term bank borrowings. The Company has lines of credit of $60.0 million with 7 banks and revolving short term credit agreements with two banks which provide term loan borrowing facilities up to a maximum of $100 million. The lines of credit provide for annual review and renewal at the option of each bank. The interest rates and terms of loans under the lines of credit and the revolving credit agreements are determined bilaterally on the date of borrowing. Although there are no formal requirements to maintain compensating balances, the Company has carried balances which generally approximate 5 to 10 percent of the lines.\nThe following table sets forth summary information with respect to short term borrowings of the Company for the three years ended December 31, 1993.\n(a) The average amounts of short term borrowings were computed by determining the arithmetic average of months' end short term borrowings.\n(b) The weighted average interest rates were determined by dividing interest expense related to short term borrowings by the average amounts of such borrowings.\nNote 3. Long Term Debt\nAt December 31, 1993 and 1992, consolidated long term debt consists of the following:\nThe contractual maturities of the Company's long term debt are as follows:\nParent Company and Consolidated _______________________________\nDecember 31, December 31, 1993 1992 ____________ ____________\n(Amounts in Thousands)\n1994....................... $100,000 $150,000 1995....................... -- 49,917 1996....................... -- 99,522 1998....................... 149,739 -- 1999....................... 50,000 50,000 2000....................... 149,496 -- ________ ________\nTotal............... $449,235 $349,439 ======== ========\nCurrent maturities of long term debt at December 31, 1993 is comprised of $100 million borrowings under a two-year credit agreement between the Company and the Bank of New York which commenced on May 15, 1992 and provides for term borrowings in segments of up to six months with interest indexed to the LIBOR borrowing rate or based on certain alternative interest rates at the option of the Company. USLIFE Corporation has the option to prepay amounts borrowed under the credit agreement, in whole or in part, and to reborrow loans thereunder provided the total amount of outstanding borrowings does not exceed $150 million. All borrowings under the credit agreement must mature no later than May 13, 1994. Long term debt at December 31, 1992 includes $150 million borrowings under this agreement.\nNone of the debt issues of the Company or its subsidiaries are or have been in default.\nNote 4. Federal Income Taxes\nFederal income tax expense relating to operations of the Company for 1993, 1992 and 1991 is comprised of the following components:\nThe Omnibus Budget Reconciliation Act of 1993, enacted in August 1993, increased the Federal corporate income tax rate from 34% to 35% retroactively to January 1, 1993. This rate increase resulted in additional tax expense for the first half of 1993 amounting to $666 thousand, and the effect of the tax rate change upon net deferred tax liabilities as required by Statement of Financial Accounting Standards No. 109 (\"SFAS 109\") was $1.322 million. In accordance with SFAS 109, the $1.988 million aggregate catch-up impact of the rate change was included in Federal income tax expense for the third quarter of 1993.\nThe significant components of deferred income tax expense for the years ended December 31, 1993, 1992 and 1991 are as follows:\nTotal tax expense differs from the amount computed by applying the Federal income tax rate of 35 percent in 1993 and 34 percent in 1992 and 1991 to income before tax for the following reasons:\nThe tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1993 and 1992 are presented below:\nDecember 31 ______________________\n1993 1992 ____ ____\n(Amounts in Thousands)\nDeferred Tax Assets:\nFuture policy benefits.......................... $ 129,078 $ 116,176 Tax net operating loss carryforward............. 23,990 26,005 Capital gains and losses........................ 42,678 27,913 Capitalization of policy acquisition costs, net of amortization, for tax return purposes.. 45,089 32,661 Sale and leaseback transactions................. 2,617 3,390 Allowance for uncollectible receivables......... 2,489 2,833 Resisted claim liability........................ 1,691 1,944 Employee retirement benefits.................... 26,534 27,818 Unearned interest............................... 1,787 1,814 Accrual of interest payable..................... 2,138 513 Other........................................... 5,397 5,393 _________ _________\nTotal gross deferred tax assets................. 283,488 246,460\nTotal valuation allowance....................... (16,368) (15,900) _________ _________\nNet deferred tax assets......................... 267,120 230,560 _________ _________\nDeferred Tax Liabilities:\nDeferral of policy acquisition costs, net of amortization, for accounting purposes......... (259,674) (239,991) Basis differences between tax and accounting for joint ventures............................ (4,266) (4,906) Basis differences between tax and accounting for securities................................ (4,672) (4,301) Depreciation.................................... (5,759) (6,079) Prepaid expenses................................ (2,403) (2,052) Differences between tax and accounting for reinsurance............................... (6,596) (10,366) Other........................................... (9,055) (7,808) _________ _________\nTotal gross deferred tax liabilities............ (292,425) (275,503)\n_________ _________\nNet deferred tax liability...................... $ (25,305) $ (44,943) ========= =========\nThe 1993 change in the above valuation allowance is due only to the change in the Federal income tax rate from 34% to 35%.\nFederal income tax returns have been examined and settled for all life insurance subsidiaries and their predecessors through 1980. The consolidated Federal income tax returns of the Company and non-life insurance subsidiaries have been examined and settled through 1980. The life-nonlife consolidated Federal income tax returns of the Company and all subsidiaries have been examined and settled for 1981 through 1985. The Company believes that its recorded income tax liabilities are adequate for all open years.\nUnder the provisions of prior tax law applicable to life insurance companies, one half of the excess of the gain from operations of a life insurance company over its taxable investment income was not taxed but was set aside in a special \"Policyholders' Surplus Account\". Under provisions of the Tax Reform Act of 1984, this account is \"frozen\" as of December 31, 1983 and is subject to tax under conditions set forth pursuant to prior tax law. Policyholder Surplus may be taxable at the time of its distribution to the company's shareholders or under certain other specified conditions. The Company does not believe that any significant portion of the amount in this account will be taxed in the foreseeable future. However, should the balance at December 31, 1993 become taxable, the tax computed at present rates would be approximately $54.3 million.\nAt December 31, 1993, the Company has nonlife net operating loss carryforwards for Federal income tax purposes of approximately $68.5 million which are available to offset future Federal taxable income, if any, through 2008.\nNote 5. Retirement Plans\nThe Company and its subsidiaries have a qualified noncontributory defined benefit pension plan covering substantially all employees. Benefits are generally based on years of service, the employee's compensation during the last three years of employment, and an average of Social Security covered wage bases. It is the Company's policy to fund pension costs in accordance with the requirements of the Employee Retirement Income Security Act of 1974. Based on such standards, contributions amounting to $4.5 million, $4.2 million and $3.9 million were made for the years ended December 31, 1993, 1992 and 1991, respectively. Substantially all of the Plan assets are invested in the general investment account of a life insurance subsidiary of the Company through a deposit administration insurance contract. As a result of compensation and benefit limitations under Federal tax law applicable to the Company's qualified defined benefit pension plan, the \"excess\" portion of the pension benefits for certain employees is provided under an unfunded Supplemental Retirement Plan for which eligibility requirements and certain other provisions were modified during 1993. Additionally, the Company has an unfunded Retirement Plan for Outside Directors which provides pension benefits to non-employee Directors of USLIFE Corporation subject to specified eligibility requirements. Benefits are based on years of service and the annual retainer at time of retirement.\nPension expense for all of the above pension plans amounted to $5.212 million, $4.774 million and $3.748 million in 1993, 1992 and 1991, respectively. The net periodic pension cost for these plans in 1993, 1992 and 1991 included the following components:\nThe funded status is reconciled to accrued pension cost included in the Company's consolidated balance sheets as of December 31, 1993 and 1992 as follows:\nThe unrecognized net asset relating to the qualified pension plan is being recognized over a 14 year period which began January 1, 1987. The unrecognized net loss and unrecognized prior service cost relating to the Company's pension plans are subject to amortization on a straight-line basis over the estimated average future service period of active employees expected to receive benefits under the plan. Assumptions used in the actuarial computations for the Company's pension plans were as follows:\nIn addition to providing pension benefits, the Company and its subsidiaries provide certain health care and life insurance benefits to retired employees under a defined benefit plan. Employees may become eligible for these benefits if they have accumulated ten years of service and reach normal or early retirement age while working for the Company. The postretirement benefit plan contains cost-sharing features such as deductibles and coinsurance, and contributions of certain retirees are subject to annual adjustment. It is the Company's current policy to fund these benefits, which are provided through an insurance contract with a life insurance subsidiary of the Company, on a \"pay as you go\" basis.\nEffective as of January 1, 1992, the Company adopted Statement of Financial Accounting Standards No. 106, \"Employers' Accounting for Postretirement Benefits Other Than Pensions.\" Statement No. 106 requires that an employer's obligation for non-pension plan benefits provided after retirement be recognized by income statement charges during the service periods of eligible employees rather than on a cash basis as permitted by previously established accounting standards. The Company elected to recognize the initial obligation under the Statement, representing the present value of future benefits attributed to service already rendered by eligible employees as of January 1, 1992, by means of a one-time charge to net income for cumulative effect of the accounting change. This initial obligation, and the consequent charge, amounted to $57.6 million before applicable taxes. Excluding this one-time charge, the cost of non-pension postretirement benefits for 1992 was approximately $2 million. Postretirement benefit costs of approximately $2 million in 1991, which were recorded on a cash basis, have not been restated.\nDuring 1993, the Company's non-pension postretirement benefit program was modified in several respects, including the establishment of a maximum dollar cap on amounts to be paid by the Company for future increases in the cost of retiree health benefits. These plan amendments resulted in an unrecognized reduction in prior service cost, which is being amortized over the remaining average service period to full eligibility for benefits of the active participants. Excess gains or losses are being amortized over the average remaining service period to full eligibility for benefits of the active participants.\nThe funded status of the non-pension postretirement benefit program as of December 31, 1993 and 1992 is reconciled to accrued postretirement benefit cost as follows:\nNet periodic postretirement benefit cost for 1993 included the following components:\n(Amounts in Thousands)\nService cost - benefits earned during the year........ $1,068 Interest cost on accumulated postretirement benefit obligation.................................. 2,198 Net amortization and deferral......................... (1,162) ______ Net periodic postretirement benefit cost.............. $2,104 ======\nThe non-pension postretirement benefit cost for the year 1992 was comprised primarily of \"interest cost.\" For measurement purposes, a 14 percent annual rate of increase in the per-capita cost of covered health benefits (ie., health care cost trend rate) was assumed for 1993; the rate was assumed to decrease gradually to 6 percent by the year 1997 and remain at that level thereafter. The assumed health care cost trend rate does not have a significant effect on the amounts reported in accordance with Statement No. 106 due to the maximum dollar cap adopted. For example, increasing the assumed health care cost trend rates by one percentage point in each year would increase the accumulated postretirement benefit obligation as of December 31, 1993 by approximately $94 thousand and the aggregate of the service and interest cost components of 1993 net periodic postretirement benefit cost by $7 thousand. The discount rate used in determining the accumulated postretirement benefit obligation was 7.5% at both December 31, 1993 and 1992.\nNote 6. Capital Stock\nNon-Redeemable Preferred Stocks\nThe $4.50 Series A Convertible Preferred Stock ($1.00 par value; authorized and issued as of December 31, 1993, 4,815 shares; December 31, 1992, 5,627 shares; December 31, 1991, 6,420 shares) is carried at involuntary liquidating value of $100 per share in the financial statements; is entitled to cumulative annual dividends of $4.50 per share; may be redeemed in whole or in part at the option of the Company at $100 per share; and is convertible at any time into Common Stock at a conversion price which at December 31, 1993 was $12.49 per share (each share of Series A Stock valued at $100), subject to adjustment under a formula intended to protect against dilution in certain events. Holders are entitled to vote together with the Common Stock and Series B Convertible Preferred Stock as one class on the basis of one vote per share and to vote as a class upon the election of two directors during any period in which four quarterly dividends (whether or not consecutive) are in default.\nThe $5.00 Series B Convertible Preferred Stock ($1.00 par value; authorized and issued as of December 31, 1993, 2,050 shares; December 31, 1992, 2,251 shares; December 31, 1991, 2,405 shares) is carried at involuntary liquidating value of $50 per share in the financial statements; is entitled to cumulative annual dividends of $5.00 per share; may be redeemed in whole or in part at the option of the Company at $100 per share; and is convertible at any time into Common Stock at a conversion price which at December 31, 1993 was $12.51 per share (each share of Series B Stock valued at $100), subject to adjustment under a formula intended to protect against dilution in certain events. Voting rights are the same as those of holders of Series A Stock.\nThe Preferred Stock, undesignated ($1.00 par value; authorized as of December 31, 1993, 10,793,135 shares, issued none), may be issued by authorization of the Board of Directors without further approval of shareholders. The Board has broad powers to fix the terms of such issues subject to the limit that the aggregate of all amounts which may be paid to holders of all of the series of Preferred Stock upon the involuntary liquidation, dissolution or winding up of the Company cannot exceed $100 times the number of such shares plus accrued unpaid dividends.\nCommon Stock\nThe outstanding shares of Common Stock (par value $1.00 per share; authorized, as of December 31, 1993: 60,000,000 shares; December 31, 1992 and 1991: 40,000,000 shares; issued, including treasury shares, as of December 31, 1993, 38,308,823 shares; December 31, 1992, 38,255,975 shares; December 31, 1991, 38,117,150 shares) entitle each holder to one vote per share in the election of directors and on all other matters submitted to a vote of shareholders and to such dividends and distributions as may be declared by the Board of Directors out of funds legally available. At December 31, 1993, 54,948 shares of Common Stock were reserved for issuance upon conversion of Preferred Stock. The Company sponsors, through certain of its life insurance subsidiaries, savings plans for selected general agents and producers (the \"Agents Plans\") providing for distribution of Common shares to participants if specified qualification and vesting requirements are satisfied. As of December 31, 1993, participant interests relating to 5,797 Common shares had vested under the Agents Plans. On July 10, 1986 the Company issued, to shareholders of record on that date, one Common Stock Purchase Right (a \"Right\") for each share of Common Stock owned on that date. Until the Rights become exercisable they will be represented by the stock certificates for all outstanding Common Stock including newly issued shares. Upon the occurrence of certain events specified in a Rights Agreement dated as of June 24, 1986 and amended and restated as of January 24, 1989 between the Company and Manufacturers Hanover Trust Company (predecessor to Chemical Bank) as Rights Agent, the Rights will become exercisable, separate certificates representing the Rights will be issued, and each Right will entitle the holder to purchase one half of a share of the Common Stock for $50.00. Under certain circumstances specified in the Rights Agreement each Right will entitle the holder to purchase, for one half of its then market value, publicly traded common stock of any corporation which acquires the Company; each Right will also entitle the holder, with certain exceptions specified in the Rights Agreement, to purchase $150.00 worth of the Common Stock for $75.00. As of December 31, 1993 the Rights had not become exercisable.\nThe Company also sponsors a Dividend Reinvestment and Stock Purchase Plan which enables holders of the Company's Common Stock to invest cash dividends and optional cash payments in additional shares of the Common Stock. In 1993, 1992 and 1991, respectively, 25,689, 29,523 and 34,430 shares of the Common Stock had been sold pursuant to the Dividend Reinvestment and Stock Purchase Plan.\nTreasury Stock\nAt December 31, 1993, there were 15,650,354 shares of Common Stock held in treasury. During 1993, 65,666 Common shares were acquired, at an aggregate cost of $2.6 million, and 168,811 Common shares, with an aggregate cost of $3.2 million, were utilized for certain employee, director, and agent benefit plans and for the Dividend Reinvestment and Stock Purchase Plan of USLIFE Corporation. At December 31, 1992, treasury stock consisted of 15,753,499 Common shares.\nNote 7. Stock Options, Book Units and Restricted Stock Plan\nIn May, 1991, the Company adopted a stock option plan (the \"1991 Stock Option Plan\") for key employees to replace the previous stock option plan under which options could no longer be granted. Under the 1991 Stock Option Plan, a maximum of 1,050,000 shares of the Company's common stock may be issued upon the exercise of stock options which may be granted pursuant to the Plan. The 1991 Stock Option Plan also provides for \"Reload\" options, which are automatically granted to a participant upon the exercise of an option if the participant uses previously owned shares to pay for the option shares. Reload options will be for the number of previously-owned shares delivered upon the employee's exercise of an option. Under the 1991 Stock Option Plan, the purchase price of shares subject to each option will be not less than 100% of their fair market value at the time of the grant of the option. No options may be granted under the 1991 Stock Option Plan after May 20, 2001.\nNo option granted under the Company's stock option plans is exercisable in whole or in part in less than six months from the date of grant. Each option may be exercisable in one or more installments as provided therein. To the extent such options are not exercised, installments accumulate to the total granted and are exercisable in whole or in part at any time during the term of the option. This term shall be set forth in the option but in no event is an option exercisable, in whole or in part, after the expiration of ten years from the date of grant. The 1991 Stock Option Plan provides that in the event of a Change in Control (as defined in the Plan), all outstanding options granted under that Plan which have been held for at least six months from the date of grant shall become immediately exercisable.\nAs of December 31, 1993, the Company had outstanding options to its employees (including officers) for purchase of shares of its Common Stock as follows:\nA summary of activity under all stock option plans for the three years ended December 31, 1993 is presented below:\nAs of December 31, 1993, options for 530,483 common shares were exercisable under all stock option plans at $18.42 to $29.50 per share. At December 31, 1993, up to 1,585,445 common shares could be issued under the Company's stock option plans. Common shares may be issued under the Company's stock option plans from shares in treasury or authorized but unissued shares.\nIn May, 1976 the Company adopted a Book Unit Plan for certain key employees. Under the terms of the plan, the Board of Directors may award, at its sole discretion, one or more units to employees it has selected to become participants in the plan. No more than 600,000 units shall be outstanding under the plan at any time. The value of a unit shall be the amount by which the book value per share, as of its award date, has been increased or decreased by (a) the sum of the increases or decreases in the book value per share of the Company's common stock plus (b) dividend equivalents for subsequent years up to and including its valuation date. Accordingly, approximately $2.1 million, $1.4 million, and $1.1 million were charged to expense in 1993, 1992, and 1991, respectively.\nA summary of units outstanding under the Book Unit Plan follows:\nIn May, 1989, the Company adopted a Restricted Stock Plan for certain key employees. Under the terms of the Plan, a committee of the Board of Directors may award restricted shares of common stock of the Company, up to an aggregate maximum of 1,050,000 shares, to designated Participants. The shares, when awarded, are initially non-transferable and subject to forfeiture in the event that the Participant ceases to be an employee of USLIFE or any of its subsidiaries other than by reason of death, permanent disability, retirement, or certain other specified circumstances. These restrictions generally terminate with respect to 20% of the number of shares awarded on January 1 of each of the five calendar years following the year of award, at which time the appropriate number of unrestricted shares are distributed to the Participant. For certain awards, restrictions terminate with respect to one-third of the number of shares awarded on the first, second, and third anniversaries of the award date, with similar distribution. Upon award of shares under the Plan, deferred compensation equivalent to the market value of the shares on the award date is charged to Equity Capital. Such deferred compensation is subsequently amortized by means of charges to expense over the period during which the restrictions lapse. During 1993, a total of 18,356 shares were awarded under the Plan. During 1991, a total of 16,200 previously awarded shares were forfeited pursuant to the terms of the plan. As of December 31, 1993, there were 30,356 previously awarded shares outstanding under the Plan as to which\nthe restrictions had not yet lapsed. Expense charges recognized in 1993, 1992 and 1991 relating to these awards amounted to approximately $2.1 million, $2.0 million, and $2.0 million, respectively.\nNote 8. Leases\nIn December, 1986 a subsidiary of the Company sold its home office building located at 125 Maiden Lane, New York, New York, and leased back portions of the premises which are utilized as the subsidiary's principal executive offices as well as the headquarters of the Company and several other subsidiaries. A $16.9 million portion of the gain arising from the sale and leaseback transaction (net of related taxes) was deferred and is being amortized by credits to income in proportion to rental payments made in accordance with the lease commitments over a ten year period. Additionally, several subsidiaries lease office space at other locations generally for periods ranging from five to fifteen years, and certain subsidiaries utilize leased furniture and office equipment. Certain of the operating leases for office premises provide for renewal options for periods ranging from five to twenty years based on fair rental value at time of renewal, and further options relating to rental of additional office space. The minimum rental commitments for all such non-cancelable operating leases as of December 31, 1993 approximate $12.6 million in 1994, $12.4 million in 1995, $11.4 million in 1996, $6.6 million in 1997, $5.5 million in 1998, and a total of $18.4 million from 1999 to 2003. Total rental expense amounted to approximately $13.5 million, $12.4 million, and $12.0 million for the years ended December 31, 1993, 1992 and 1991, respectively.\nNote 9. Contingent Liabilities and Commitments\nA life insurance subsidiary has an outstanding standby commitment, representing a contingent obligation to replace certain borrowings in the event of default by unaffiliated borrowers, amounting to $6.8 million at December 31, 1993. The life insurance subsidiaries historically have not provided permanent financing on the major portion of such commitments. This commitment, which is not guaranteed by the parent company, will expire in 1994.\nThe Company has outstanding Standby Letters of Credit with two banks representing contingent obligations to fund various trusts established in connection with certain employment contracts of management employees, the Company's Supplemental Retirement Plan, Retirement Plan for Outside Directors, and Retirement Plan, in the event of a Change in Control (as defined in the trust agreements), totalling $31 million. Additionally, in connection with the application by a life insurance subsidiary for an additional state license to transact business, USLIFE Corporation has agreed to guarantee that subsidiary's maintenance of the state's minimum capital and surplus requirements (amounting to $4.4 million at December 31, 1993) for a ten year period commencing at the effective date of such license.\nThe Company and certain of its subsidiaries are involved in litigation, which originated in 1981, with a former officer of a former subsidiary of the Company. Allegations in the former officer's lawsuit include breach of the covenant of good faith and fair dealing, breach of fiduciary duty, infliction of emotional distress and malicious prosecution. Judgment was rendered in favor of the Company. That judgment is being appealed. No contingent loss has been accrued for this litigation because the amount of loss, if any, cannot be reasonably estimated, nor is it probable in the opinion of management that the ultimate outcome of this litigation will result in a liability to the Company or any of its subsidiaries.\nIn April 1991, All American Life Insurance Company (\"All American\"), a life insurance subsidiary of the Company, commenced a lawsuit against 11 subscribers to a reinsurance pool when the reinsurers failed to honor their obligations under the reinsurance agreement. Certain of the reinsurers also filed their own lawsuits against All American. Approximately $15.8 million of reinsured claims were in dispute. All American reached settlements with the 11 reinsurers. There remain pending against All American certain cross claims for indemnification and contribution by a third party administrator and a reinsurance intermediary. In the opinion of management the ultimate resolution of this matter will not result in a material adverse financial impact upon the Company.\nIn March 1992, All American terminated the right of a Managing General Agent to sell college medical insurance on behalf of All American as a result of the failure of the Managing General Agent to secure adequate reinsurance under the contract and meet other contractual obligations. All American is currently involved in litigation with this former Managing General Agent, who has declared bankruptcy, and All American has taken a charge of $10.6 million (after applicable taxes) to establish a reserve for amounts receivable from the Managing General Agent. No contingent loss has been accrued for this litigation because the amount of additional loss, if any, cannot be reasonably estimated, nor is it probable in the opinion of management that the ultimate outcome of this litigation will result in a liability to the Company or any of its subsidiaries.\nIn June 1993, a purported class action was filed against three of the Company's subsidiaries alleging that the class members were entitled to premium refunds on policies of credit life and disability insurance purchased from the three subsidiaries. No contingent loss has been accrued for this litigation because the amount of loss, if any, cannot be reasonably estimated.\nIn addition to the aforementioned legal proceedings, the Company and its subsidiaries are parties to various routine legal proceedings incidental to the conduct of their business. Based on currently available information, in the opinion of management it is not probable that the ultimate resolution of these suits will result in a material liability on the part of the Company.\nNote 10. Reinsurance\nThe life insurance subsidiaries reinsure with other companies portions of the risks they underwrite and assume portions of risks on policies underwritten by other companies. The life insurance subsidiaries generally reinsure risks over $1.5 million as well as selected risks of lesser amounts. In this connection, $7.5 billion, representing 6 percent of total life insurance in force as of December 31, 1993, was ceded to other carriers. Reinsurance contracts do not relieve the Company from its obligations to policyholders, and the Company is contingently liable with respect to insurance ceded in the event any reinsurer is unable to meet the obligations which have been assumed.\nThe Company's consolidated financial statements for 1993 reflect the adoption of Statement of Financial Accounting Standards No. 113 (\"SFAS 113\"), \"Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts.\" Pursuant to the standards of SFAS 113, amounts paid for or recoverable under reinsurance contracts, including amounts previously reported as a reduction of various liability accounts as permitted under previous accounting standards, are included in total assets as reinsurance receivable or recoverable amounts. The cost of reinsurance related to long-duration contracts is accounted for over the life of the underlying reinsured policies using assumptions consistent with those used to account for the underlying policies. Financial statements of previous years were not restated as a result of the adoption of SFAS 113.\nThe effect of reinsurance on premiums, other considerations, and benefits to policyholders and beneficiaries, is as follows:\nYear Ended December 31, 1993 _______________________\n(Amounts in Thousands)\nPremiums, before reinsurance ceded......... $1,021,694 Premiums ceded............................. 77,388 __________ Net premiums............................... $ 944,306 ==========\nOther considerations, before reinsurance ceded................................... $166,477 Other considerations ceded................. 12,938 ________ Net other considerations................... $153,539 ========\nBenefits to policyholders and beneficiaries, before reinsurance recoveries............ $794,640 Reinsurance recoveries..................... 57,309 ________ Benefits to policyholders and beneficiaries, net of reinsurance recoveries............ $737,331 ========\nA summary of reinsurance activity for the three years ended December 31, 1993 is presented below:\nThe estimated amounts of reinsurance recoverable on paid and unpaid claims included in the Consolidated Balance Sheets as of December 31, 1993 and 1992 are as follows:\nThe amount included in the consolidated balance sheet at December 31, 1993 for \"Other reinsurance recoverable\" includes the estimated amounts recoverable on unpaid claims as indicated above as well as prepaid reinsurance premiums. For periods prior to 1993, these amounts were netted against the related insurance liabilities in accordance with previous accounting standards.\nNote 11. Investment Securities\nThe investments of the Company at December 31, 1993 are summarized as follows:\nBased on book value, assets categorized as \"non-income producing\" for the 12 months ended December 31, 1993 included in fixed maturities, mortgage loans, real estate investment properties, and real estate acquired in satisfaction of debt amounted to $16.3 million, $13.5 million, $4.9 million and $8.9 million, respectively.\nNote 12. Net Investment Income\nThe details of consolidated net investment income for the three years ended December 31, 1993 follow:\nNote 13. Supplementary Insurance Information\nSupplementary data relating to the life insurance industry segment of the Company for the three years ended December 31, 1993 is presented below.\nYear Ended December 31, 1991 ___________________________________\nNon- Life Reportable Insurance Segments and Industry Consolidating Segment Adjustments Consolidated __________ _________ __________\nDeferred policy acquisition costs........ $ 648,835 $ - $ 648,835 ========== ========= ==========\nFuture policy benefits:\nLife........... $1,091,759 $ - $1,091,759 Accident and health........ 189,585 - 189,585 __________ _________ __________\nTotal......... $1,281,344 $ - $1,281,344 ========== ========= ==========\nPolicyholder account balances for universal life-type and investment contracts....... $2,147,849 $ - $2,147,849 ========== ========= ==========\nOther policy claims and benefits payable......... $ 223,755 $ (6,675) $ 217,080 ========== ========= ==========\nPremium income: Life........... $ 409,096 $ (566) $ 408,530 Accident and health....... 436,978 (5,250) 431,728 __________ _________ __________\nTotal........ $ 846,074 $ (5,816) $ 840,258 ========== ========= ==========\nOther consider- ation.......... $ 129,109 $ - $ 129,109 ========== ========= ==========\nNet investment income......... $ 351,671 $ 9,905 $ 361,576 ========== ========= ==========\nRealized gains (losses)....... $ (2,235) $ 314 $ (1,921) ========== ========= ==========\nBenefits, claims, losses and settlement expenses........ $ 835,084 $ 190 $ 835,274 ========== ========= ==========\nAmortization of deferred policy acquisition costs........... $ 130,659 $ - $ 130,659 ========== ========= ==========\nOther operating expenses ...... $ 231,362 $ 74,592 $ 305,954 ========== ========= ==========\nNote 14. Condensed Financial Information of Parent Company\nNote 15. Condensed Quarterly Results of Operations (Unaudited)\nThe quarterly results of consolidated operations for the two years ended December 31, 1993 are presented below (in thousands of dollars except per share amounts):","section_15":""}
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{"filename":"24491_1993.txt","cik":"24491","year":"1993","section_1":"Item 1. BUSINESS.\nProducts and Sales\nThe primary business of Cooper Tire & Rubber Company (\"Cooper\" or \"Company\") is the conversion of natural and synthetic rubbers into a variety of carbon black reinforced rubber products. The Company manufactures and markets the following products for the transportation industry: automobile and truck tires, inner tubes, vibration control products, hose and hose assemblies, automotive sealing systems and specialty seating components. Its non-transportation products accounted for less than one percent of sales in 1993, 1992 and 1991. Additional information on the Company's products appears on pages 49, 50 and 54 through 56 of this Annual Report on Form 10-K.\nThe Company's tire products are sold nationally and internationally in the replacement tire market, primarily through independent dealers and distributors. In the United States, this channel of marketing has accounted for 66 percent of all replacement passenger tires sold in 1993 and 1992 and 67 percent during the year 1991. Cooper has an efficient distribution system to serve its markets for replacement passenger and truck tires.\nCooper engineers and manufactures rubber parts for automotive vehicle manufacturers. The Company's engineering and marketing personnel work closely with these customers to assist in the design and development of rubber products to meet their changing requirements.\nAdditional information on the Company's marketing and distribution appears on pages 52, 53, 55 and 56 of this Annual Report on Form 10-K.\nNorth American vehicle manufacturers experienced an 11.6% increase in total production of light vehicles in 1993. The Company's sales of engineered rubber products are generally linked to light vehicle production. Cooper's improved sales in this market reflected the increased vehicle production as well as the Company's success in the procurement of larger contracts and development of new products. The Company is an authorized supplier to all domestically owned automotive vehicle manufacturers and the foreign-owned and joint-venture vehicle manufacturers in the United States.\nCurrent market data indicates an increasing demand for replacement tires and engineered rubber products. Essentially, there are no economical or practical substitutes for tires or certain rubber automotive parts. Based on current data, the Company expects moderate growth in the market for replacement tires and in the use of rubber components by automobile manufacturers. Additional information on the Company's outlook for the industry appears on pages 49 and 53 of this Annual Report on Form 10-K.\nDuring recent years Cooper has exported to Canada and countries in Latin America, Western Europe, the Middle East, Asia, Africa and Oceania. The international market for rubber products is expanding as the standard of living in other countries increases and motor vehicle usage grows. Net sales from international operations accounted for approximately five percent of Cooper's sales in 1993, 1992 and 1991.\n(continued)\nDuring 1993 Cooper's ten largest customers accounted for approximately 55 percent of total sales. Sales to one major customer approximated 14, 15 and 14 percent of net sales in 1993, 1992 and 1991. The amount of backlog of orders for the Company's products at any given time is usually small in relation to annual sales and is, therefore, of little value in forecasting sales or earnings for the current or succeeding years.\nThe Company successfully operates in a competitive industry. A number of its competitors are larger than the Company. The four largest tire-producing companies are believed to account for approximately 67 percent of all domestic original equipment and replacement tire sales. The Company's shipments of automobile and truck tires in 1993 represented approximately 10 percent of all such industry shipments. On the basis of domestic tire manufacturing capacity the Company believes it ranks fourth among twelve generally recognized producers of new tires. According to a recognized trade source the Company ranked ninth in worldwide tire sales based on 1992 estimated sales volumes. Sales of the Company's tire products are affected by factors which include price, quality, availability, technology, warranty, credit terms and overall customer service.\nRaw Materials\nThe primary raw materials used by the Company include synthetic and natural rubbers, polyester and nylon fabrics, steel tire cord and carbon black, which the Company acquires from multiple sources to provide greater assurance of continuing supplies for its manufacturing operations. The Company did not experience any significant raw material shortages in 1993, nor have any shortages been experienced in the opening months of 1994.\nDuring 1993 the Company opened a purchasing office in Singapore to acquire various grades of natural rubber direct from producers in Indonesia, Malaysia and Thailand. This purchasing operation enables the Company to work directly with processors to improve the consistency of quality and to reduce the costs of materials, delivery and transactions. In addition, control over packaging methods will enhance the Company's goal to use recyclable materials in the packaging of these raw materials.\nThe Company's contractual relationships with its raw material suppliers are generally based on purchase order arrangements. Certain materials are purchased pursuant to supply contracts which incorporate normal purchase order terms and establish minimum purchase amounts.\nCooper has not experienced serious fuel shortages and none are foreseen in the near future. The Findlay, Ohio plant uses coal and natural gas with fuel oil as a standby energy source. All other Company plants use natural gas with fuel oil as a standby energy source.\nResearch, Development and Product Improvement\nCooper generally directs its research activities toward product development, improvements in quality, and operating efficiency. A significant portion of basic research for the rubber industry is performed by raw material suppliers. The Company participates in such research with its suppliers. Cooper has approximately 187 full-time employees engaged in research and development programs. Research and development expenditures amounted to approximately $15,100,000 in 1993, $13,700,000 in 1992, and $14,000,000 in 1991.\n(continued) 3\nThe Company is a leader in the application of computer technology to the development of new tire products and engineered automotive products. The use of computer-aided design (CAD) and sophisticated modeling programs reduce Cooper's product development costs and the time necessary to bring new products to market. The Company also forms strategic alliances with universities, research firms and high-tech manufacturers to collaborate on new product development, particularly in engineered automotive products. The ability to offer complete component design services and full vehicle analysis to automotive customers increases the Company's value as a partner in product design and development.\nThe Company continues to actively develop new passenger and truck tires. Cooper conducts extensive testing of current tire lines, as well as new concepts in tire design and construction. During 1993 approximately 117 million miles of tests were performed on indoor test wheels and in monitored road tests. Uniformity equipment is used to physically check every radial passenger tire produced for high standards of quality. The Company continues to design and develop specialized equipment to fit the precise needs of its manufacturing and quality control requirements.\nAdditional information on the Company's research, development and product improvement programs appears on pages 51, 52 and 55 of this Annual Report on Form 10-K.\nEnvironmental Matters\nCooper recognizes the importance of compliance in environmental matters and has an organization structure to supervise environmental activities, planning and programs. The Company also participates in activities concerning general industry environmental matters.\nCooper's manufacturing facilities, in common with those of industry generally, are subject to numerous laws and regulations designed to protect the environment. In general, the Company has not experienced difficulty in complying with these requirements and believes they have not had a material adverse effect on its financial condition or the results of its operations. The Company expects that additional requirements with respect to environmental control facilities and waste disposal will be imposed in the future.\nThe Company has been named in environmental matters asserting potential joint and several liability for past and future cleanup, state and Federal claims, site remediation, and attorney fees. The Company has determined that it has no material liability for these matters. The Company's 1993 expense and capital expenditures for environmental control at its facilities were not material, nor is it estimated that expenditures in 1994 for such uses will be material.\nSeasonal Trends\nThere is a year-round demand for passenger and truck replacement tires, but passenger replacement tire sales are generally strongest during the second and third quarters of the year. Winter tires are sold principally during the months of August through October. Engineered rubber product sales to automotive customers are lowest during the months prior to model changeover.\n(continued)\nEmployee Relations\nAs of December 31, 1993, the Company employed 7,607 persons, of whom 3,622 were salaried employees. Union contracts covering 3,985 employees include, among other things: wages, hours, grievance procedures, checkoff, seniority and working conditions. Union contracts with the United Rubber, Cork, Linoleum and Plastic Workers of America (AFL-CIO-CLC) for all production and maintenance employees at each of the following Company plants continue in effect until the indicated contract expiration date:\nAuburn, Indiana - December 5, 1994 Bowling Green, Ohio (Sealing products) - October 31, 1994 Bowling Green, Ohio (Hose products) - April 30, 1995 Clarksdale, Mississippi - July 31, 1996 El Dorado, Arkansas - April 27, 1997 Findlay, Ohio - October 31, 1994 Texarkana, Arkansas, - March 5, 1996\nOver-the-road truck drivers are affiliated with the International Brotherhood of Teamsters with their contract in effect until February 13, 1994. This contract has been mutually extended to allow additional time to schedule and hold negotiation meetings. No difficulties are anticipated in the pending negotiations. Employees at the Piedras Negras, Mexico plant are affiliated with Sindicato Autonomo de Trabajadores Rio Grande SerVaas with their contract in effect until January 31, 1996. All labor agreements will be extended for yearly periods unless notice of termination or change is given by either party at least 60 days prior to the expiration of any yearly period. During the last three years there has been only one plant work stoppage, which lasted for 23 days. Cooper considers its labor relations to be favorable.\nSubstantially all employees are covered by hospital and surgical, group life, and accident and sickness benefit plans. The Company has various trusteed non-contributory retirement income plans which cover most employees and retirees. Substantially all retirees are covered by hospital and surgical and group life benefit plans. See \"Notes to Consolidated Financial Statements\" on pages 28 through 32 of this Annual Report on Form 10-K for additional information as to pension costs and funding and postretirement benefits.\nItem 2.","section_1A":"","section_1B":"","section_2":"Item 2. PROPERTIES. The Company owns its headquarters facility which is adjacent to its Findlay, Ohio tire manufacturing plant. Properties are located in various sections of the United States for use in the ordinary course of business. Such properties consist of the following:\n(continued) 6\nThe Company also owns a manufacturing facility located in Mexico which produces inner tubes and engineered rubber parts.\nCooper's tire plants are operating at rated capacity levels with the exception of the plant in Albany, Georgia. This plant was acquired in 1990, began limited production during 1991, and continues to be equipped to manufacture a full range of radial passenger, light truck and medium truck tires using the most advanced technology. The former regional distribution center in Atlanta, Georgia was sold during 1993. It was closed during 1991 with its operations relocated to Albany, Georgia. The Tupelo, Mississippi and Albany, Georgia plants operate on a 24-hour day, seven-day production schedule. The other plants are operating 24 hours per day, five days per week. The Company believes its properties have been adequately maintained and generally are in good condition.\nAdditional information concerning the Company's facilities appears on pages 51, 53, and 54 of this Annual Report on Form 10-K. Information related to leased properties appears on pages 33 and 34.\nItem 3.","section_3":"Item 3. LEGAL PROCEEDINGS.\nCooper is a defendant in many unrelated actions in Federal and state courts throughout the United States. In a number of such cases the plaintiffs allege violations of state and Federal laws, breach of contract and product liability and assert damages of many thousands of dollars. The Company self-insures product liability losses up to $2,250,000 per occurrence with an annual aggregate of $6,000,000. In addition, Cooper carries Excess Liability Insurance which provides protection with respect to product liability costs in excess of the self-insured amounts. While the outcome of litigation cannot be predicted with any certainty, in the opinion of counsel for the Company, the pending claims and lawsuits against the Company should not have a material adverse effect on the financial condition of the Company or the results of its operations.\nItem 4.","section_4":"Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.\nNo matter was submitted to a vote of security holders during the last quarter of the fiscal year ended December 31, 1993.\nPart II.\nItem 5.","section_5":"Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.\nCooper Tire & Rubber Company common stock is traded on the New York Stock Exchange under the symbol CTB. Information concerning the Company's common stock and related security holder matters (including dividends) is presented on pages 9, 21, 25 through 28 and 36 of this Annual Report on Form 10-K.\nItem 7.","section_6":"","section_7":"Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.\nFinancial Condition The financial position of the Company continues to be excellent. Strong operating cash flows provided funds for modernization and expansion and contributed to continued financial strength. Working capital amounted to $205 million at year-end 1993 compared to $175 million one year earlier. A current ratio of 2.6 indicates an excellent liquidity position and is improved from the year-end 1992 current ratio of 2.3. Accounts receivable increased slightly to $182 million versus $181 million at year-end 1992, reflecting fourth quarter sales levels. Adequate allowances have been made for possible collection losses. Generally, collection experience has been excellent and customer payment terms are comparable to the prior year. Total inventories at $111 million were up significantly from $75 million at year-end 1992. Finished goods inventories were $29 million, or 55 percent, higher than one year ago. This increase is a result of rebuilding inventories to provide desirable customer service levels. Raw material and supplies inventories were $5 million higher than one year ago due to increased levels of raw material purchases. Work-in-process inventories were $2 million higher compared to the prior year reflecting current production levels. Prepaid expenses and deferred taxes include $10 million in deferred tax assets at December 31, 1993 which are considered fully realizable within one year. In 1993 additions to property, plant and equipment were $117 million. This was an increase of $7 million from the previous record of $110 million in 1992. The Company's capital expenditure commitments at December 31, 1993 were not material. The Company has invested significant amounts for property, plant and equipment in recent years primarily for continuing expansions and plant modernization. A continuation of high levels of capital expenditures is anticipated. Funding for these projects will be available from operating cash flows with additional funding available, if needed, under a credit agreement and a shelf registration. Depreciation and amortization was $46 million in 1993, a 22 percent increase from $38 million in 1992, and results from the significant capital expenditures in recent years. Other assets of $30 million are up $8 million from year-end 1992 and primarily reflect the increase in the amount of cumulative pension funding in excess of amounts expensed under Statement of Financial Accounting Standards (SFAS) #87, \"Employers' Accounting for Pensions\". Current liabilities of $127 million were $13 million lower than the $140 million at year-end 1992 reflecting decreases in trade payables. Long-term debt decreased $9 million from year-end 1992 to $39 million due to the payment of the $4 million Industrial Development Revenue Bonds and scheduled debt payments. Long-term debt, as a percent of total capitalization, decreased to 6.6 percent at December 31, 1993 from 9.3 percent one year earlier. The Company has a shelf registration statement with the Securities and Exchange Commission covering the proposed sale of its debt securities in an aggregate amount of up to $200 million. The net proceeds received by the Company from any sale of the debt securities would be available for general corporate purposes. In December 1992, the Company adopted changes in accounting for postretirement benefits other than pensions and income taxes retroactive to January 1, 1992. The net impact of these accounting changes had no effect on cash flows of the Company. The discount rate used to derive the liability for postretirement benefits other than pensions was reduced from 8.5 percent at December 31, 1992 to 7.5 percent at December 31, 1993.\n(continued) 10\nOther long-term liabilities increased $16 million reaching $36 million at December 31, 1993 from $20 million one year earlier. This increase reflects a $14 million increase in the additional minimum pension liability and results primarily from the change in the assumptions used to value pension liabilities. The discount rate for pensions was reduced from 8 percent to 7 percent and the assumed rate of increase in compensation was reduced from 6 percent to 5 percent. Noncurrent deferred income taxes increased to $12 million at December 31, 1993, from $7 million one year earlier, primarily reflecting the excess of tax over book depreciation. The Company has been named in environmental matters asserting potential joint and several liability for past and future cleanup, state and Federal claims, site remediation, and attorney fees. The Company has determined that it has no material liability for these matters. In addition, the Company is a defendant in unrelated product liability actions in Federal and state courts throughout the United States in which plaintiffs assert damages of many thousands of dollars. While the outcome of litigation cannot be predicted with any certainty, in the opinion of counsel for the Company, the pending claims and lawsuits against the Company have not had and should not have a material adverse effect on its financial condition or results of operations. Stockholders' equity increased $79 million during the year reaching $550 million at year end. Earnings retentions for 1993 (net income less dividends paid) added $85 million to stockholders' equity but was offset by a $7 million reduction for minimum pension liability, net of taxes. Stockholders' equity per share was $6.58 at year-end 1993, an increase of 16 percent over $5.65 per share at year-end 1992.\nResults of Operations High levels of capacity utilization and good customer demand continued for the Company's tires and engineered rubber products. Sales increased 2 percent in 1993 to a record of nearly $1.2 billion. This followed a 17 percent increase in sales in 1992 which resulted primarily from growth in customer demand. Sales margins were lower in 1993 than in 1992 and were higher in 1992 than in 1991. In 1993 intense pricing pressure in the replacement tire industry contributed to the reduction. Changes in product mix and production efficiencies were the primary contributing factors to the 1992 improvement. The effects of inflation on sales and operations were not material during 1993, 1992 and 1991. Other income was lower in 1993 compared with 1992 and higher in 1992 compared to 1991. These changes were related to the investments of cash reserves and rates earned thereon. Increases in 1993 and 1992 selling, general and administrative expenses were normal considering sales activity levels and general inflation. Effective income tax rates were higher in 1993 reflecting the Omnibus Budget Reconciliation Act of 1993 which, among other things, increased the effective federal tax rate and reinstated the research and development credit. The increased rate in 1992 over 1991 was due primarily to differences in tax credits.\n(continued)\nThe Company currently provides certain health care and life insurance benefits for its active and retired employees. If the Company does not terminate such benefits, or modify coverage or eligibility requirements, substantially all of the Company's United States employees may become eligible for these benefits at their retirement. During 1992 the Company began using the accrual method of accounting for the cost of providing such benefits. The Company continues to fund these benefit costs as claims are incurred. The cumulative effect of adopting this accounting standard was a one-time charge to net income of $67 million, net of a deferred income tax benefit of $41 million, or 81 cents per share. The Company also adopted the liability method of accounting for income taxes in 1992. The cumulative effect of this change in accounting was a credit to net income of $2 million, or 3 cents per share.\nItem 8.","section_7A":"","section_8":"Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.\nStatements of financial position at December 31, 1993 and 1992 and statements of income, cash flows, and stockholders' equity for each of the three years in the period ended December 31, 1993, the independent auditor's report thereon, and the Company's unaudited quarterly financial data for the two-year period ended December 31, 1993 are presented on pages 19 through 36 of this Annual Report on Form 10-K.\nItem 9.","section_9":"Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.\nNone.\nPart III. Item 10.","section_9A":"","section_9B":"","section_10":"Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. Information concerning the Company's directors appears on pages 2 through 6 and 17 of the Company's Proxy Statement dated March 22, 1994 and is incorporated herein by reference. The names, ages, and all positions and offices held by all executive officers of the Company, as of the same date are as follows:\nEach such officer shall hold such office until his successor is elected and qualified in his stead.\nItem 11.","section_11":"Item 11. EXECUTIVE COMPENSATION.\nInformation regarding executive compensation appears on pages 6 through 14 of the Company's Proxy Statement dated March 22, 1994 and is incorporated herein by reference.\nItem 12.","section_12":"Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.\nInformation concerning the security ownership of certain beneficial owners and management of the Company's voting securities and equity securities appears on pages 15 through 17 of the Company's Proxy Statement dated March 22, 1994 and is incorporated herein by reference.\nItem 13.","section_13":"Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.\nNone.\nPart IV.\nItem 14.","section_14":"Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.\n(a) 1. Financial Statements\nThe financial statements listed in the accompanying index to financial statements and financial statement schedules are filed as part of this Annual Report on Form 10-K.\n2. Financial Statement Schedules\nThe financial statement schedules listed in the accompanying index to financial statements and financial statement schedules are filed as part of this Annual Report on Form 10-K.\n3. Exhibits\nThe exhibits listed on the accompanying index to exhibits are filed as part of this Annual Report on Form 10-K.\n(b) Reports on Form 8-K\nNo reports on Form 8-K were filed during the last quarter of the fiscal year ended December 31, 1993.\nINDEX TO FINANCIAL STATEMENTS, SCHEDULES AND EXHIBITS Page(s) FINANCIAL STATEMENTS: Reference --------- Consolidated Statements of Income for the years ended December 31, 1993, 1992 and 1991 19 Consolidated Balance Sheets at December 31, 1993 and 1992 20-21 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1993, 1992 and 1991 22 Consolidated Statements of Cash Flows for the years ended December 31, 1993, 1992 and 1991 23 Notes to Consolidated Financial Statements 24-34 Report of Independent Auditors 35\nSUPPLEMENTARY INFORMATION:\nQuarterly Financial Data (Unaudited) 36\nFINANCIAL STATEMENTS SCHEDULES:\nI Marketable Securities 37 V Property, plant and equipment 38 VI Accumulated depreciation and amortization of property, plant and equipment 39 VIII Valuation and qualifying accounts 40 IX Short-term borrowings 40 X Supplementary Income Statement Information 41\nEXHIBITS:\n(3) Certificate of Incorporation and Bylaws (i) Certificate of Incorporation, as restated and filed with the Secretary of State of Delaware on May 17, 1993, is incorporated herein by reference from Exhibit 3(i) of the Company's Form 10-Q for the quarter ended June 30, 1993\n(ii) Bylaws, as amended May 5, 1987, are incorporated herein by reference from Exhibit 19 of the Company's Form 10-Q for the quarter ended June 30, 1987\n(4) Description of the Common Stock of the Company 42\n(10) Description of management contracts, compensatory plans, contracts, or arrangements is incorporated herein by reference from pages 6 through 14 of the Company's Proxy Statement dated March 22, 1994.\nThe following related documents are also incorporated by reference: a) 1981 Incentive Stock Option Plan - Form S-8 Registration Statement No. 2-77400, Exhibit 15(a) b) 1986 Incentive Stock Option Plan - Form S-8 Registration Statement No. 33-5483, Exhibit 4(a) c) Thrift and Profit Sharing Plan - Form S-8 Registration Statement No. 2-58577, Post-Effective Amendment No. 6, Exhibit 4 d) Employment Agreements - Form 10-K for fiscal year ended December 31, 1987, Exhibit 10 e) 1991 Stock Option Plan for Non-Employee Directors - Form S-8 Registration Statement No. 33-47980 and Appendix to the Company's Proxy Statement dated March 26, 1991\n(continued) 16\n(11) Statement regarding computation of earnings per share is presented on page 28 of this Annual Report on Form 10-K\n(23) Consent of Ernst & Young 43\n(24) Powers of Attorney 44-48\n(99) Operations Review and Product Overview as published in the Company's Annual Report to Stockholders for its fiscal year ended December 31, 1993 49-56\nUndertakings of the Company 57-59\nAll other schedules have been omitted since the required information is not present or not present in amounts sufficient to require submission of the schedules, or because the information required is included in the financial statements or the notes thereto.\nSIGNATURES\nPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.\nCOOPER TIRE & RUBBER COMPANY\n\/s\/ Stan C. Kaiman -------------------------------- STAN C. KAIMAN, Attorney-in-fact\nDate: March 22, 1994 --------------\nPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.\nSignature Title Date --------- ----- ----\nIVAN W. GORR* Chairman of the Board, Chief March 22, 1994 Executive Officer and Director (Principal Executive Officer)\nPATRICK W. ROONEY* President, Chief Operating March 22, 1994 Officer and Director (Principal Operating Officer)\nJ. ALEC REINHARDT* Executive Vice President and March 22, 1994 Director (Principal Financial Officer)\nJOHN FAHL* Vice President and Director March 22, 1994\nJULIEN A. FAISANT* Vice President and Corporate March 22, 1994 Controller (Principal Accounting Officer)\nDELMONT A. DAVIS* Director March 22, 1994\nDENNIS J. GORMLEY* Director March 22, 1994\nJOSEPH M. MAGLIOCHETTI* Director March 22, 1994\nWILLIAM D. MAROHN* Director March 22, 1994\nALLAN H. MELTZER* Director March 22, 1994\nLEON F. WINBIGLER* Director March 22, 1994\n*By\/s\/ Stan C. Kaiman -------------------------------- STAN C. KAIMAN, Attorney-in-fact\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS\nSIGNIFICANT ACCOUNTING POLICIES\nAccounting policies employed by the Company are based on generally accepted accounting principles. The following summary of significant accounting policies is presented for assistance in the evaluation and interpretation of the financial statements and supplementary data.\nConsolidation - The consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly-owned. All material intercompany accounts and transactions have been eliminated.\nCash and short-term investments - The Company considers all highly liquid investments with an original maturity of three months or less to be short-term investments (cash equivalents). The carrying amount reported in the balance sheets for cash and short-term investments approximates its fair value. The effect of changes in foreign exchange rates on cash balances was not significant.\nInventories - Substantially all inventories are valued at cost, using the last-in, first-out (LIFO) cost method, which is not in excess of market.\nProperty, plant and equipment - Assets are recorded at cost and depreciated or amortized using the straight-line method over their expected useful lives. For income tax purposes accelerated depreciation methods and shorter lives are used.\nRevenue recognition - Revenues are recognized after goods are shipped to customers in accordance with their purchase orders.\nWarranties - Estimated costs for product warranties are charged to income at the time of sale.\nResearch and development - These costs are charged to expense as incurred and amounted to approximately $15,100,000, $13,700,000 and $14,000,000 in 1993, 1992 and 1991, respectively.\nBUSINESS\nThe Company, a specialist in the rubber industry, manufactures and markets automobile and truck tires, inner tubes, vibration control products, hose and hose assemblies, automotive sealing systems, and specialty seating components.\nThe Company manufactures products primarily for the transportation industry. Its non-transportation products accounted for less than one percent of sales in 1993, 1992 and 1991. Sales to one major customer approximated 14, 15 and 14 percent of net sales in 1993, 1992 and 1991, respectively.\nINVENTORIES\nUnder the LIFO method, inventories have been reduced by approximately $52,850,000 and $52,746,000 at December 31, 1993 and 1992, respectively, from current cost which would be reported under the first-in, first-out method.\n(continued)\nLONG-TERM DEBT\nThe Company has a credit agreement with four banks authorizing borrowings up to $120,000,000 with interest at varying rates. The proceeds may be used for general corporate purposes. The agreement provides that on June 30, 1996 the Company may convert any outstanding borrowings into a four-year term loan. A commitment fee of 3\/16 percent per year on the daily unused portion of the $120,000,000 is payable quarterly. The credit facility supports the issuance of commercial paper. There were no borrowings under the agreement at December 31, 1993 and 1992.\nThe 9% Senior Notes, due October 1, 2001, provide for semiannual interest payments on April 1 and October 1 and annual principal prepayments of $4,545,000 on October 1 through the year 2000.\nThe Company paid the $4,000,000 Industrial Development Revenue Bonds during 1993 as a result of the sale of a regional distribution facility. The mortgage note is secured by real and personal property with a carrying value of $7,637,000 at December 31, 1993.\nThe most restrictive covenants under the loan agreements require the maintenance of $65,000,000 in working capital and restrict the payment of dividends; the amount of retained earnings not restricted was $342,886,000 at December 31, 1993.\nInterest paid on debt during 1993, 1992 and 1991 was $4,723,000, $5,111,000 and $8,321,000, respectively. The amount of interest capitalized was $2,297,000, $2,907,000 and $3,733,000 during 1993, 1992 and 1991, respectively.\nThe required principal payments for long-term debt during the next five years are as follows: 1994-$5,345,000; 1995-$5,112,000; 1996-$5,036,000; 1997 - $5,081,000; 1998 - $4,723,000. See the note on lease commitments for information on capitalized lease obligations.\nThe Company has a Registration Statement with the Securities and Exchange Commission covering the proposed sale of its debt securities in an aggregate amount of up to $200,000,000. The Company may sell the securities to or through underwriters, and may also sell the securities directly to other purchasers or through agents or dealers. The net proceeds received by the Company from any sale of the debt securities would be available for general corporate purposes.\n(continued)\nACCRUED LIABILITIES\nPREFERRED STOCK\nAt December 31, 1993, 5,000,000 shares of preferred stock were authorized but unissued. The rights of the preferred stock will be determined upon issuance by the board of directors.\nPREFERRED STOCK PURCHASE RIGHT\nEach stockholder is entitled to the right to purchase 1\/100th of a newly-issued share of Series A preferred stock of the Company at an exercise price of $16.88. The rights will be exercisable only if a person or group acquires beneficial ownership of 20 percent or more of the Company's outstanding common stock, or commences a tender or exchange offer which upon consummation would result in such person or group beneficially owning 30 percent or more of the Company's outstanding common stock.\nIf any person becomes the beneficial owner of 25 percent or more of the Company's outstanding common stock, or if a holder of 20 percent or more of the Company's common stock engages in certain self-dealing transactions or a merger transaction in which the Company is the surviving corporation and its common stock remains outstanding, then each right not owned by such person or certain related parties will entitle its holder to purchase a number of shares of the Company's Series A preferred stock having a market value equal to twice the then current exercise price of the right. In addition, if the Company is involved in a merger or other business combination transaction with another person after which the Company's common stock does not remain outstanding, or if the Company sells 50 percent or more of its assets or earning power to another person, each right will entitle its holder to purchase a number of shares of common stock of such other person having a market value equal to twice the then current exercise price of the right.\nThe Company will generally be entitled to redeem the rights at one cent per right, or as adjusted to reflect stock splits or similar transactions, at any time until the tenth day following public announcement that a person or group has acquired 20 percent or more of the Company's common stock.\nCOMMON STOCK\nThere were 7,617,672 common shares reserved for the exercise of stock options and contributions to the Company's Thrift and Profit Sharing Plan at December 31, 1993.\n(continued)\nSTOCK OPTIONS\nThe Company's 1981 and 1986 incentive stock option plans provide for granting options to key employees to purchase common shares at prices not less than market at the date of grant. These plans were amended in 1988 to allow the granting of nonqualified stock options. Nonqualified stock options are not intended to qualify for the tax treatment applicable to incentive stock options under provisions of the Internal Revenue Code.\nOptions under these plans may have terms of up to ten years becoming exercisable in whole or in consecutive installments, cumulative or otherwise. The plans also permit the granting of stock appreciation rights with the options. Stock appreciation rights enable an optionee to surrender exercisable options and receive common stock and\/or cash measured by the difference between the option price and the market value of the common stock on the date of surrender.\nThe options granted under these plans which were outstanding at December 31, 1993 have a term of 10 years and become exercisable 50 percent after the first year and 100 percent after the second year.\nThe Company's 1991 nonqualified stock option plan provides for granting options to directors, who are not employees of the Company, to purchase common shares at prices not less than market at the date of grant. Options granted under this plan have a term of ten years and are exercisable in full beginning one year after the date of grant.\nAt December 31, 1993, under the 1981 plan, options were exercisable on 37,200 shares and no shares were available for future grants. At December 31, 1992, options were exercisable on 53,400 shares and no shares were available for future grants.\n(continued)\nUnder the 1986 plan, at December 31, 1993, options were exercisable on 285,850 shares and 1,308,640 shares were available for future grants. At December 31, 1992, options were exercisable on 234,700 shares and 1,388,640 shares were available for future grants.\nAt December 31, 1993, under the 1991 plan, 5,074 options were exercisable and 92,495 shares were available for future grants. At December 31, 1992, 3,106 options were exercisable and 94,690 shares were available for future grants.\nEARNINGS PER SHARE\nNet income per share is based upon the weighted average number of shares outstanding which were 83,549,566 in 1993, 83,357,141 in 1992 and 82,737,762 in 1991. The effect of common stock equivalents is not significant for any period presented.\nPENSIONS\nThe Company has defined benefit plans covering substantially all employees. The salary plan provides pension benefits based on an employee's years of service and average earnings for the five highest calendar years during the ten years immediately preceding retirement. The hourly plans provide benefits of stated amounts for each year of service. The Company's general funding policy is to contribute amounts deductible for Federal income tax purposes.\n(continued)\nThe increase in the actuarial present value of benefit obligations in 1993 is due primarily to the reduction of the assumptions for the discount rate and the rate of increase in future compensation levels. The expected long-term rate of return on the plans' assets was 10 percent in 1993, 1992 and 1991. The assumptions used to determine the status of the Company's plans were as follows:\nThe information presented above includes an unfunded, nonqualified supplemental executive retirement plan covering certain employees whose participation in the qualified plan is limited by provisions of the Internal Revenue Code. The Company sponsors several defined contribution plans for its employees who are eligible to participate. Participation is voluntary and participants' contributions are based on their compensation. A thrift and profit sharing plan is available for any salaried employee\n(continued) 30\nafter completion of one year of continuous service. Company contributions are based on the lesser of (a) participants' contributions up to six percent of each participant's compensation, less any forfeitures, or (b) an amount equal to fifteen percent of the Company's pre-tax earnings in excess of ten percent of stockholders' equity at the beginning of the year. Thrift and profit sharing expense for 1993, 1992 and 1991 was $6,027,000, $5,503,000 and $4,759,000, respectively. Pre-tax savings plans are available for certain hourly employees after completion of 30 days of continuous credited service. The Company has not contributed to these plans.\nPOSTRETIREMENT BENEFITS OTHER THAN PENSIONS The Company currently provides certain health care and life insurance benefits for its active and retired employees. If the Company does not terminate such benefits, or modify coverage or eligibility requirements, substantially all of the Company's United States employees may become eligible for these benefits during their retirement if they meet certain age and service requirements. The Company has reserved the right to modify or terminate such benefits at any time. In recent years benefit changes have been implemented throughout the Company. During the fourth quarter of 1992 the Company adopted Statement of Financial Accounting Standards No. 106, \"Employers' Accounting for Postretirement Benefits Other Than Pensions,\" retroactive to January 1, 1992. The Standard requires, among other things, that employers use the accrual method of accounting for the cost of providing such benefits in the future. The Company continues to fund these benefit costs as claims are incurred. The cumulative effect of adopting this Standard at January 1, 1992 was a one-time charge to net income of $67,393,000, net of a deferred income tax benefit of $40,797,000, or 81 cents per share. Postretirement benefit costs for years prior to 1992 were recorded on a cash basis and have not been restated.\n(continued) 31\nThe discount rate used in determining the APBO was 7.5 percent and 8.5 percent for 1993 and 1992, respectively. The increase in the actuarial present value of the accumulated benefit obligation is due primarily to the reduction of the assumption for the discount rate. At December 31, 1993, the assumed average annual rate of increase in the cost of health care benefits (health care cost trend rate) was 11.75 percent for 1994 declining by .75 percent per year through 1997, by .5 percent per year through 2003, and by .25 percent per year through 2007 when the ultimate rate of 5.5 percent is attained. This trend rate assumption has a significant effect on the amounts reported above. A 1 percent increase in the health care cost trend rate would increase the APBO by $7,900,000 and the net periodic expense by $600,000 for the year. The Company has a Voluntary Employees' Beneficiary Trust and Welfare Benefits Plan (VEBA) to pre-fund future health benefits for eligible active and retired employees. The pre-funded amount was $9,200,000 in 1993 and $8,600,000 in 1992.\nINCOME TAXES\nPayments for income taxes in 1993, 1992 and 1991 were $54,712,000, $53,123,000 and $35,782,000, respectively. (continued)\nDuring the fourth quarter of 1992, the Company adopted Statement of Financial Accounting Standards No. 109, \"Accounting for Income Taxes\", retroactive to January 1, 1992. The Company's financial statements for years prior to adoption have not been restated. The cumulative effect of adopting this Standard at January 1, 1992 was a one-time credit to income of $2,433,000, or 3 cents per share.\nLEASE COMMITMENTS\nThe Company leases certain facilities and equipment under long-term leases expiring at various dates. The leases generally contain renewal or purchase options and provide that the Company shall pay for insurance, property taxes and maintenance.\n(continued) 33\nRental expense for operating leases was $5,362,000 for 1993, $5,756,000 for 1992 and $6,152,000 for 1991.\nREPORT OF INDEPENDENT AUDITORS\nThe Board of Directors\nCooper Tire & Rubber Company\nWe have audited the accompanying consolidated balance sheets of Cooper Tire & Rubber Company as of December 31, 1993 and 1992, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1993. Our audits also included the financial statement schedules listed in the Index at Item 14(a). These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.\nWe conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.\nIn our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Cooper Tire & Rubber Company 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. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.\nAs discussed in the notes to the financial statements, in 1992 the Company changed its methods of accounting for postretirement benefits other than pensions and income taxes.\n\/s\/ Ernst & Young ----------------- ERNST & YOUNG\nToledo, Ohio February 14, 1994\nExhibit (4)\nDESCRIPTION OF COMMON STOCK\nThe Company is authorized to issue 300,000,000 shares of Common Stock, par value $1.00 per share. As of March 7, 1994, 83,616,872 shares were issued and outstanding. Each share of Common Stock has equal dividend, liquidation and voting rights. The shares of Common Stock are not redeemable and have no conversion rights. The only rights to subscribe for additional shares of the Company's capital stock are those involved in a Stockholder Rights Plan adopted May 27, 1988 and described in a Rights Agreement between the Company and Society National Bank as Rights Agent. All shares of Common Stock presently outstanding are fully paid and nonassessable.\nThe most restrictive covenants under the Company's loan agreements require the maintenance of $65,000,000 in working capital and limit the payment of cash dividends, purchase or redemption of capital stock and any other cash distributions to stockholders. The amount of retained earnings not restricted under the agreements was $342,886,000 at December 31, 1993.\nSubject to the foregoing, holders of the Common Stock are entitled to receive such dividends as the Board of Directors may from time to time declare out of funds lawfully available therefor. The Company has paid cash dividends on its Common Stock in each year since 1950. See \"Quarterly Financial Data (Unaudited)\" presented on page 36 of this Annual Report on Form 10-K for a description of the Company's recent dividend practices. The payment of future dividends will depend on the earnings and financial position of the Company, its capital requirements and other relevant factors.\nThe Company's Board of Directors consists of three classes of directors as nearly equal in number as the total number of directors constituting the entire board permits. By a vote of a majority, the Board of Directors has the authority to fix the number of directors constituting the entire board at not less than six (6) nor more than twelve (12) individuals, and the number is currently set at eleven (11). The term of each class of directors is three years and each class of directors is elected in successive years. The shares of Common Stock have non-cumulative voting rights.\nThe Transfer Agent and Registrar for the shares of Common Stock of the Company is Society National Bank, Cleveland, Ohio.\nExhibit (23)\nCONSENT OF INDEPENDENT AUDITORS\nWe consent to the incorporation by reference in the Registration Statements of Cooper Tire & Rubber Company listed below, and in the Prospectus related to the Form S-3, of our report dated February 14, 1994, with respect to the consolidated financial statements and schedules of Cooper Tire & Rubber Company included in the Annual Report (Form 10-K) for the year ended December 31, 1993:\nForm S-3 No. 33-44159 $200,000,000 aggregate principal amount of the Company's Debt Securities\nForm S-8 No. 2-58577 Thrift and Profit Sharing Plan\nNo. 2-77400 1981 Incentive Stock Option Plan\nNo. 33-5483 1986 Incentive Stock Option Plan\nNo. 33-35071 Texarkana Pre-Tax Savings Plan\nNo. 33-47979 Pre-Tax Savings Plan at the Auburn Plant\nNo. 33-47980 1991 Stock Option Plan for Non-Employee Directors\nNo. 33-47981 Pre-Tax Savings Plan at the Findlay Plant\nNo. 33-47982 Pre-Tax Savings Plan at the El Dorado Plant\nNo. 33-52499 Pre-Tax Savings Plan (Bowling Green - Hose)\nNo. 33-52505 Pre-Tax Savings Plan (Bowling Green - Sealing)\n\/s\/ Ernst & Young ----------------- ERNST & YOUNG\nToledo, Ohio March 22, 1994\nExhibit (24)\nPOWER OF ATTORNEY\nKNOW ALL MEN BY THESE PRESENTS, that the undersigned, in the capacities indicated, do hereby constitute and appoint Ivan W. Gorr, or Stan C. Kaiman, or J. Alec Reinhardt, or Patrick W. Rooney as their attorney with full power of substitution and resubstitution for and in their name, place and stead, to sign and file with the Securities and Exchange Commission an Annual Report on Form 10-K, as amended, together with any and all amendments and exhibits thereto and any and all applications, instruments or documents to be filed with the Securities and Exchange Commission pertaining to such report, with full power and authority to do and perform any and all acts and things whatsoever requisite and necessary to be done in the premises, hereby ratifying and approving the acts of said attorney or any such substitute.\nExecuted at Findlay, Ohio this 14th day of February, 1994.\n\/s\/ Delmont A. Davis \/s\/ John Fahl --------------------------- ----------------------------- Delmont A. Davis, Director John Fahl, Director\n\/s\/ Julien A. Faisant \/s\/ Dennis J. Gormley --------------------------- ----------------------------- Julien A. Faisant, Vice Dennis J. Gormley, Director President and Controller, Principal Accounting Officer\n\/s\/ Ivan W. Gorr \/s\/ Stan C. Kaiman --------------------------- ----------------------------- Ivan W. Gorr, Chairman of the Stan C. Kaiman, Secretary Board, Principal Executive Officer, and Director\n\/s\/ William D. Marohn --------------------------- ----------------------------- Joseph M. Magliochetti, William D. Marohn, Director Director\n\/s\/ J. Alec Reinhardt --------------------------- ----------------------------- Allan H. Meltzer, Director J. Alec Reinhardt, Executive Vice President, Principal Financial Officer, and Director\n\/s\/ Patrick W. Rooney \/s\/ Leon F. Winbigler --------------------------- ------------------------------ Patrick W. Rooney, President, Leon F. Winbigler, Director Principal Operating Officer, and Director\n(continued)\nSTATE OF OHIO ) ) ss. COUNTY OF HANCOCK)\nOn this 14th day of February, 1994, before me a Notary Public in and for the State and County aforesaid, personally appeared Delmont A. Davis, John Fahl, Julien A. Faisant, Dennis J. Gormley, Ivan W. Gorr, Stan C. Kaiman, William D. Marohn, J. Alec Reinhardt, Patrick W. Rooney, and Leon F. Winbigler, known to me to be the persons whose names are subscribed in the within instrument and acknowledged to me that they executed the same.\nIN WITNESS WHEREOF, I have hereunto set my hand and affixed my official seal the day and year in this certificate first above written.\n\/s\/ Julie A. Grismore -------------------------------------- Julie A. Grismore Notary Public, State of Ohio My commission expires January 15, 1996\n(SEAL)\nExhibit (24)\nPOWER OF ATTORNEY\nKNOW ALL MEN BY THESE PRESENTS, that the undersigned, in the capacity indicated, does hereby constitute and appoint Ivan W. Gorr, or Stan C. Kaiman, or J. Alec Reinhardt, or Patrick W. Rooney as his attorney with full power of substitution and resubstitution for and in his name, place and stead, to sign and file with the Securities and Exchange Commission an Annual Report on Form 10-K, as amended, together with any and all amendments and exhibits thereto and any and all applications, instruments or documents to be filed with the Securities and Exchange Commission pertaining to the filing of such report, with full power and authority to do and perform any and all acts and things whatsoever requisite and necessary to be done in the premises, hereby ratifying and approving the acts of said attorney or any such substitute.\nExecuted at Toledo, Ohio this 21st day of February, 1994.\n\/s\/ Joseph M. Magliochetti -------------------------------- Joseph M. Magliochetti, Director\nSTATE OF OHIO ) ) ss. COUNTY OF LUCAS)\nOn this 21st day of February, 1994, before me a Notary Public, in and for the State and County aforesaid, personally appeared Joseph M. Magliochetti, known to me to be the person whose name is subscribed in the within instrument and acknowledged to me that he executed the same.\nIN WITNESS WHEREOF, I have hereunto set my hand and affixed my official seal the day and year in this certificate first above written.\n\/s\/ Marcia L. Coy-Bauman --------------------------------- Marcia L. Coy-Bauman Notary Public, State of Ohio My commission expires March 27, 1997\n(SEAL)\nExhibit (24)\nPOWER OF ATTORNEY\nKNOW ALL MEN BY THESE PRESENTS, that the undersigned, in the capacity indicated, does hereby constitute and appoint Ivan W. Gorr, or Stan C. Kaiman, or J. Alec Reinhardt, or Patrick W. Rooney as his attorney with full power of substitution and resubstitution for and in his name, place and stead, to sign and file with the Securities and Exchange Commission an Annual Report on Form 10-K, as amended, together with any and all amendments and exhibits thereto and any and all applications, instruments or documents to be filed with the Securities and Exchange Commission pertaining to the filing of such report, with full power and authority to do and perform any and all acts and things whatsoever requisite and necessary to be done in the premises, hereby ratifying and approving the acts of said attorney or any such substitute.\nExecuted at Pittsburgh, Pennsylvania this 24th day of February, 1994.\n\/s\/ Allan H. Meltzer -------------------------------- Allan H. Meltzer, Director\nSTATE OF PENNSYLVANIA) ) ss. COUNTY OF ALLEGHENY )\nOn this 24th day of February, 1994, before me a Notary Public, in and for the State and County aforesaid, personally appeared Allan H. Meltzer, known to me to be the person whose name is subscribed in the within instrument and acknowledged to me that he executed the same.\nIN WITNESS WHEREOF, I have hereunto set my hand and affixed my official seal the day and year in this certificate first above written.\n\/s\/ Richard C. Schaeffer --------------------------------- Richard C. Schaeffer Pittsburgh, Allegheny County My commission expires February 29, 1996\n(SEAL)\nExhibit (24)\nPOWER OF ATTORNEY\nKNOW ALL MEN BY THESE PRESENTS, that the undersigned does hereby, for and on behalf of Cooper Tire & Rubber Company in accordance with the certain resolution of the Board of Directors adopted February 14, 1994, constitute and appoint Ivan W. Gorr, or Stan C. Kaiman, or J. Alec Reinhardt, or Patrick W. Rooney as its attorney with full power of substitution and resubstitution for and in its name, place and stead, to sign and file with the Securities and Exchange Commission an Annual Report on Form 10-K pursuant to the Securities Act of 1934, as amended, together with any and all amendments and exhibits thereto, and all applications, instruments or documents to be filed with the Securities and Exchange Commission pertaining to the filing of such report, with full power and authority to do and perform any and all acts and things whatsoever requisite and necessary to be done in the premises, hereby ratifying and approving the acts of said attorney or any such substitute.\nExecuted at Findlay, Ohio this 23rd day of February, 1994.\nATTEST: COOPER TIRE & RUBBER COMPANY\n\/s\/ Stan C. Kaiman \/s\/ Ivan W. Gorr ------------------------- ----------------------------- Stan C. Kaiman Ivan W. Gorr Secretary Chairman of the Board and Chief Executive Officer\nSTATE OF OHIO ) ) ss. COUNTY OF HANCOCK)\nOn this 23rd day of February, 1994, before me a Notary Public, in and for the State and County aforesaid, personally appeared Ivan W. Gorr and Stan C. Kaiman, known to me to be the persons whose names are subscribed in the within instrument and acknowledged to me that they executed the same.\nIN WITNESS WHEREOF, I have hereunto set my hand and affixed my official seal the day and year in this certificate first above written.\n\/s\/ Julie A. Grismore ---------------------------------- Julie A. Grismore Notary Public, State of Ohio My commission expires January 15, 1996\n(SEAL)\nExhibit (99) OPERATIONS REVIEW AND PRODUCT OVERVIEW\nOPERATIONS REVIEW\nTire Products\nINDUSTRY OVERVIEW\nFollowing an exceptional year in 1992, industry demand returned to rather normal levels in 1993. Total replacement tire shipments for the year were approximately 199.2 million units, virtually equal to the 1992 total of 199 million units. Industry sales of replacement passenger tires were slightly lower than the prior year, while the light truck and medium truck tire segments showed slight gains.\nThe most popular replacement passenger tires continue to be performance-type, all-season radials. Of the total industry replacement passenger tires shipped during the year, eight out of ten were all-season designs, while half carried speed ratings of S or higher and had aspect ratios in the performance range below 75 series.\nLight truck tires in the replacement market are following a comparable direction. Four out of five replacement light truck tires shipped are radial construction and three out of five have all-season treads. Speed ratings are also finding application in this market, however, the trend is not significant at this time.\nFive out of six medium truck tires in the replacement market are of radial construction. Industry shipments of radial medium truck tires to the replacement market increased during the year, while bias tire sales declined.\nThe total inner tube market is declining gradually each year. Within the total units shipped, smaller sized tubes, such as for passenger and light truck tires, are decreasing, while larger tubes for trucks, farm implements and construction vehicles are experiencing increased demand.\nFactors which indicate consumer buying potential in the replacement industry continue to show favorable trends. The number of passenger car registrations in the U.S. increased by more than a half million vehicles during the year over the 1992 figure. Passenger cars in the U.S. traveled almost 2.3 trillion miles during the year, about 50 billion miles more than in 1992. For the second consecutive year, the average age of a passenger car in the U.S. exceeded 8 years. Combined, these factors show that more vehicles are being driven more miles over a longer period of time which will, consequently, require the purchase of additional replacement tires.\nThe Company distributes its Cooper, Falls Mastercraft and Starfire house brand tires primarily through independent tire dealers, who make up the largest distribution channel in the replacement industry. According to consumer surveys, independent dealers are the most preferred source for retail tire purchases. The expertise and customer service provided by independent dealers prevails as a major consumer benefit.\nPRODUCTS\nCooper manufactures and markets full lines of passenger, light truck and medium truck tires in sizes, tread designs and sidewall styles to meet the application and price demands of the replacement market.\n(continued) 49\nFive new lines of tire products were introduced during the year and received excellent dealer and consumer acceptance. The Cooper Lifeliner Grand Classic STE is a premium radial passenger tire with a treadwear protection warranty of 80,000 miles.\nThe Cooper Cobra GTV replaced the Company's initial V speed-rated high performance passenger tire. Market advantages of this new tire include an all-season tread design for excellent overall traction, increased treadwear, and a non-directional tread pattern, which eliminates special inventory handling. Another passenger tire updated during the year was the Cooper Monogram 2000, an original equipment-style all-season radial. The new Monogram 2000 offers longer treadwear and improved wet traction over the previous design.\nIn the light truck category, the Company introduced the Cooper Discoverer STE, a touring design for all-season use on sport utility vehicles, vans, and small and large pickup trucks. For the first time on a light truck tire line, the Company is offering a free, limited replacement warranty on workmanship and materials for the useful life of the tread.\nAlso introduced in the light truck category, the Cooper Discoverer CTD is a radial traction tire designed for heavy-duty commercial applications, such as in farm and construction work.\nThe Company began previewing its lines of radial medium truck tires to customers during the year, while production continues to increase at the Albany plant. The Cooper CXMT 340 all-wheel position tire and the Cooper CT 240 free-rolling position tire feature all-steel, tubeless radial construction. To the end user, these tires will contribute to lower vehicle operating costs through excellent original treadwear and subsequent recapping for extended life. The Company will add a drive wheel version of the tire to the line in 1994.\nOther tire products are in development for introduction in 1994. The Company will introduce the Cooper Rainmaster, a non-directional passenger tire which channels water and reduces the potential for hydroplaning in wet weather conditions. Also to be introduced is a new premium touring radial, the Cooper Lifeliner Classic II, with a 60,000-mile treadwear warranty, all-season performance and excellent wet traction.\nOver forty percent of all new vehicles sold in 1993 were sport utility vehicles, vans and pick-up trucks. Cooper has a strong presence in this market with its large Discoverer line of recreational and commercial LT tires. Additional sizes across the line will be provided in 1994 to meet new vehicle specifications.\nTo verify the quality of new products and existing lines, the Company ran more than 117 million tire miles of tests in controlled laboratory conditions and actual on-the-road trials. Through testing, tire characteristics such as carcass durability, treadwear, handling, traction and noise are evaluated to ensure ultimate quality and consumer satisfaction.\nThe Company's products are of the highest quality and value to compete with leading brands on the market today.\n(continued)\nFACILITIES\nA new tire warehouse was constructed at the Findlay plant to add capacity and improve distribution services to customers. The new 163,000-sq. ft. warehouse enhanced the plant's shipping and receiving operations and allowed the previous warehouse to be converted to manufacturing use. The largest of the Findlay plant's rubber compound mixers was replaced with a new state-of-the-art model, which operates at greater efficiency and provides for needed additional mixing capacity.\nThe Albany plant reached planned production goals for radial passenger, light truck and medium truck tires. More tire building and support equipment was installed during the second half of the year to increase production capacity. The Albany plant provides incremental production expansion opportunity at minimum cost to meet growing demand for Cooper tire products.\nIn January 1993 the Tupelo plant reached a milestone with the production of its 50 millionth radial passenger tire. Equipment upgrades and manufacturing process improvements were installed and implemented during the year, including the application of robotics in the tread extrusion operation to enhance quality and efficiency.\nMajor modernization and improvement projects were completed at the Texarkana facility during the year. All curing presses are now fitted with computer controls and a pre-cure process is being applied to all calendered ply material, reducing production cost and yielding high quality products. During 1994 Texarkana employees will observe the plant's 30th anniversary.\nAdditional capacity for producing large size inner tubes for farm and construction vehicles was installed at the Clarksdale plant. The plant reorganized its technical support group and began a program to reduce production costs by increasing process controls and other manufacturing efficiencies.\nThe Piedras Negras plant began production of engineered rubber products in response to market opportunities in Mexico. Inner tube production continues and is dedicated to high-volume lines of passenger, light truck and medium truck sizes, maximizing the plant's efficiency. Expanded production of engineered rubber parts is planned for the future.\nThe Company follows a strategic and systematic schedule of building and equipment maintenance to protect and preserve its capital investments. Programmed systems provide effective scheduling and controls over vital routine maintenance.\nTECHNOLOGY\nVirtually all areas of Cooper tire and tube production have been affected by the application of advanced technologies. The Company and its customers have benefited with improved productivity, lower costs and higher quality. Computers, lasers and robotics are used in many production operations. New materials and rubber compounding chemistry improve product performance and overall quality.\nCooper has a competitive advantage in being able to design and build much of its proprietary production equipment. Cost savings and increased quality are usually derived from custom-designed equipment.\n(continued)\nThe Company uses unique, sophisticated tire assembly equipment for passenger, light truck and medium truck tires and is currently implementing new and efficient methods of supplying components in the tire assembly operation. Projects include equipment development to measure aspects of finished products with greater precision for more advanced data collection and analysis.\nA new system for computer-aided analysis and computer-aided design was installed for mold design operations. The system is expected to reduce mold design time by half, contributing significantly to the Company's ability to respond to customer needs and reduce product launch time.\nOver the years, Cooper has been an industry leader in obtaining higher tire production rates from its equipment. For example, employee teams have fitted curing presses with specialized computer controls and optical scanners to monitor and adjust curing cycles. Shaving even seconds off a curing cycle can result in significant production increases. Improved production efficiencies have been achieved in many operations resulting in increased competitiveness.\nMARKETING AND DISTRIBUTION\nThe Company markets its Cooper, Falls Mastercraft and Starfire house brand products primarily through independent dealers and distributors. A 1993 study of the replacement tire industry by J. D. Power and Associates confirmed that independent tire dealers and service stations are viewed by consumers as providing the most expertise for tire purchases, installation and service. Company marketing programs are designed to help position Cooper dealers prominently in their local markets.\nTwo other industry surveys conducted during the year by Tire Review magazine confirmed the Company's excellent service to customers. In the annual Tire Brands Survey, independent dealers rated their suppliers on a number of criteria. Another survey, the annual Tire Dealer Profile, asked independent dealers to rank their most critical needs and concerns. A cross comparison of the two studies shows Cooper scores very high in meeting critical dealer needs, particularly dealer profitability, product availability, total service and ease of doing business.\nThe Company introduced an advertising theme during the year which continued to differentiate Cooper's independence and 100 percent American-made tires from competitors. The theme, \"Put Your Trust in American Hands,\" was used throughout Cooper's national consumer advertising in USA TODAY and on Paul Harvey's syndicated radio broadcasts. Trade advertising also carried the theme, as well as retail materials for dealer use in the Company's cooperative advertising program. Cooper will continue an American-made, American-owned message in its 1994 campaign and expand its media coverage to include national television and consumer automotive magazines.\nCooper's network of distribution centers, located strategically around the country, efficiently serve its customers. A computerized information system has streamlined inventory, shipping and receiving operations to fill orders and provide timely shipments to customers.\n(continued)\nLimited treadwear protection warranties, ranging from 40,000 miles to 80,000 miles, are offered on five tire lines. Consumers consider mileage warranties an important factor in the tire purchase decision. Highly promoted by dealers, the Cooper warranty program is very competitive with other industry brands.\nNew packaging and labeling processes instituted for inner tube operations are designed to improve product handling. Pallet quantities have been optimized for ease of shipping and storage for customers.\nIn its national advertising and on product information materials, the Company provides a toll-free number for consumers to call to locate their nearest Cooper dealer. The number, 1-800-854-6288, is staffed weekdays during normal business hours. Telephone calls are answered by members of the Cooper team who provide assistance to customers and consumers.\nEngineered Products\nINDUSTRY OVERVIEW\nThe Company expects continuing strong demand for its engineered rubber products. The number of new passenger and light truck vehicles produced in the U.S. and Canada during the year was approximately 13 million vehicles, up about 12 percent over the 11.7 million vehicles produced in 1992. About a 10 percent growth rate for North American vehicle production is anticipated by industry economists in 1994.\nAccording to industry experts, automobile manufacturers use approximately 134 pounds of rubber components per vehicle, excluding tires. This would indicate the automotive market for engineered rubber products for safety, sealing, convenience and comfort was in excess of 1.7 billion pounds in 1993. There is excellent opportunity for Cooper to expand in this area as a result of its expertise in design, technical and production capabilities.\nAutomotive manufacturers continue to reduce their supplier base in order to simplify administration of the supply process and to realize cost savings from higher volume orders. They require suppliers to provide consistent product quality, on-time deliveries, advanced technical support, and competitive costs and value in order to remain a preferred supplier.\nAs a result of this trend, Cooper is in an excellent position to strengthen its partnerships with automakers. The Company has established a reputation for excellent quality levels, and demonstrated its technical expertise in specific product development.\nAbout 99 percent of the Company's vibration control, hose, body sealing and seating products are sold directly to vehicle manufacturers or their primary (tier 1) suppliers. Almost 200 customers are served by the engineered products operation.\nFACILITIES\nA second manufacturing plant in Bowling Green, Ohio, was built to accommodate increased demand for both hose and body sealing products. All hose production was moved to the new facility, allowing body seal production to expand at the original plant. Completed on time and under budget, the new hose plant is in full production.\n(continued)\nNo major plant construction projects are currently planned for engineered products in 1994. New production lines and equipment will be installed at all facilities to increase production capacity and meet customer commitments.\nThe third phase of the Auburn expansion -- the rubber mixing facility -- was completed during 1993. Currently supplying rubber compounds to the Company's engineered products plants in Ohio and Indiana, the new mixer offers greater automation for improved quality controls and operating cost efficiencies. Further expansion phases are scheduled for 1995.\nMany manufacturing operations have been converted to a cellular configuration. Improved production scheduling and significant inventory and work-in-process reductions have been realized. The reorganization has also resulted in improved product quality and customer service.\nA reconfiguration of the El Dorado plant in 1994 will optimize process flow, modernize mixing operations, and result in improved manufacturing capabilities and overall efficiency.\nProduction of molded products at the Piedras Negras plant was begun during 1993 and certified for quality on an interim basis. Direct shipments to automotive customers in Mexico will continue to be made from the plant and full certification will be granted in 1994. Tooling is under way for new business which will start production at the plant in mid-1994 and represent a significant volume increase in engineered products sales to Mexican manufacturers.\nIn 1994 additional equipment will be installed in all plants to begin fulfilling orders for 1995 model year products, as well as initial 1996 requirements.\nPRODUCTS\nCooper is one of the most complete engineered rubber component suppliers in the industry. Its extensive manufacturing capabilities include the basic processes of molding and extrusion, including high-technology dual-durometer extrusion, flocking and rubber-to-metal bonding. Cooper has the engineering, technology and research facilities to serve as a development partner with its automotive customers for vehicle design and performance applications.\nVibration control products, such as body, cradle and engine mounts, vary in complexity and are used to absorb vibrations throughout the vehicle. Products currently in production for 1994 vehicle models are the result of development projects ranging over several years.\nSlight alterations in vehicle engine configurations from model year to model year significantly modify hoses and hose assembly requirements. Cooper has proven its ability to respond quickly to design changes. The Company supplies hoses for virtually all categories of passenger vehicles and light trucks made in North America, and branched hose components using the Diradia (Reg. USPTO by Caoutchouc Manufacture et Plastiques) process for the three largest automakers.\nBody seals around vehicle doors, trunks, hoods and windows prevent water, wind and dust from entering the inside of the vehicle. Done properly, seals also serve as noise barriers. The products often contain both hard and soft rubber compounds, plus metal carriers for attachment and decoration.\n(continued)\nThe Company's line of seating components is produced for a specialized market. Inflatable comfort bladders are specified primarily for upscale vehicles or as optional equipment on other models. Made from urethane, the inflatable bladders can be positioned anywhere in the seat.\nVehicle design and development is a complex process requiring the cooperation of many different suppliers. Due to the long lead time from concept to production, original equipment manufacturers and their suppliers are working with vehicle designs intended for 1998 introductions. Through its design and manufacturing capability, the Company is well-represented in these on-going projects.\nTECHNOLOGY\nThe auto industry has been challenged to develop a high-mileage \"supercar\" within the next decade. Along with an 80-miles-per-gallon capability, automotive designers are specifying active control systems and lightweight, high-temperature resistant materials among other innovative ideas. Cooper has product development and service capabilities which are very compatible with these automotive design requirements of the future.\nActive noise and vibration control systems with electronic sensors have a high priority in future vehicle designs. In 1992 Cooper launched an intensive program to produce a working prototype of an actively controlled engine mount. The prototype will be demonstrated to customers on a test vehicle in 1994. Cooper is also developing 'active' vibration control systems technology for applications on other vehicle components.\nEngine materials that withstand very high temperatures are targeted components for future development projects. For several years, Cooper has been testing and developing formulas using various polymers with high temperature resistance for use in its lines of engine hose products.\nCooper has long established its ability to support customers with product design capability. Using the latest computer-aided design equipment and advanced computer modeling programs, Company engineers provide component design service throughout the vehicle design process, including \"black box\" (total design) and \"gray box\" (partial design) assignments.\nCooper's partnerships with customers employ direct electronic communication for complete documentation of work, support services, and efficient, just-in-time deliveries.\nMARKETING AND DISTRIBUTION\nCooper has been providing product design and development services to automotive manufacturers for many years. The development and introduction of new products into the manufacturing process is accomplished by close teamwork and cooperation from many individuals representing many disciplines.\nAt the onset of a design project, members of the Company's engineering, manufacturing and quality control staffs join with customer representatives to form a product development team. This early involvement permits the Company's project team members to help optimize the component design for efficient, high quality and cost effective manufacturing.\n(continued) 55\nThe Company uses advanced inventory handling and storage methods in its distribution operations to provide excellent service to customers around the world. Warehoused products are inventoried using an on-line, real-time electronic information system. Optical scanning devices aid in ensuring correct shipments and in generating electronic documentation. Approximately 20 percent of the Company's engineered products sales are exported to customers primarily in Canada, Mexico, Europe, Australia and South America.\nCooper is a proven and established member of the world automotive supplier base. The Company continues to improve its operations, expand its capabilities and strengthen its service levels for greater business opportunities in the future.\nPRODUCT OVERVIEW\nTire Products\nPASSENGER TIRES: The 15 lines of passenger tires include touring, high performance and conventional designs. Speed ratings of S, T, H and V are also offered as well as standard and low profiles, all-season, rib and high traction treads, and white, white lettered and black sidewalls.\nLIGHT TRUCK: Light truck tires in 13 lines fit pickup trucks, vans and sport utility vehicles for either recreational or commercial use. Lines include all-steel radial, steel-belted radial and conventional bias constructions, all-season, rib and high traction treads, and white and black lettered sidewalls.\nMEDIUM TRUCK: Ten lines of medium truck tires include all-steel radial and conventional bias ply constructions, all-wheel, drive wheel and trailer applications, and rib and traction treads for on-road and off-road service. Medium truck tires fit vehicles such as tractor-semitrailer rigs.\nINNER TUBES: Inner tubes are offered in radial and bias constructions for passenger, light truck and medium truck applications. The size range covers specialty tires such as farm tractors and implements, road graders and industrial vehicles.\nEngineered Products\nVIBRATION CONTROL: These products are used throughout vehicle engines, bodies and powertrains to minimize the amount of vibrations reaching the passenger compartment. Product lines include mounts, bushings, isolators and torsional springs.\nBODY & WINDOW SEALING SYSTEMS: Rubber seals around doors, trunks and hoods protect vehicle interiors from outside elements. Flocked window channels allow glass panels to slide open and closed easily while still providing a tight weather seal.\nHOSES: Hoses are used primarily in the engine to transport fluids and gases. Different shapes, sizes, diameters, lengths, rubber compounds and constructions are produced to meet vehicle engine configurations.\nSPECIALTY SEATING COMPONENTS: Inflatable bladders are placed in various sections of a passenger seat for adjustable comfort. Production includes single- and multi-cell bladders from rubber or polyurethane and provides both manual and electronic inflation systems. A thin-line seat suspension system is also offered under a licensing agreement.\nExhibit (99) COOPER TIRE & RUBBER COMPANY UNDERTAKINGS OF THE COMPANY FOR FISCAL YEAR ENDED DECEMBER 31, 1993\n1. Undertakings. ------------ a. The undersigned registrant hereby undertakes: 1. To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: i. To include any prospectus required by section 10(a)(3) of the Securities Act of 1933; ii. To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represents a fundamental change in the information set forth in the registration statement; iii. To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement; Provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if the registration statement is on Form S-3 or Form S-8 and the information required to be included in a post-effective amendment by those paragraphs is contained in periodic reports filed by the registrant pursuant to section 13 or section 15(d) of the Securities Exchange Act of 1934 that are incorporated by reference in the registration statement. 2. That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. 3. To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.\nb. The undersigned registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the registrant's annual report pursuant to section 13(a) or section 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan's annual report pursuant to section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.\nf. Employee plans on Form S-8. 1. The undersigned registrant hereby undertakes to deliver or cause to be delivered with the prospectus to each employee to whom the prospectus is sent or given a copy of the registrant's annual report to stockholders for its last fiscal year, unless such employee otherwise has received a copy of such report, in which case the registrant shall state in the prospectus that it will promptly furnish, without charge, a copy of such report on written request of the employee. If the last fiscal year of the registrant has (continued) 57\nended within 120 days prior to the use of the prospectus, the annual report of the registrant for the preceding fiscal year may be so delivered, but within such 120 day period the annual report for the last fiscal year will be furnished to each such employee. 2. The undersigned registrant hereby undertakes to transmit or cause to be transmitted to all employees participating in the plan who do not otherwise receive such material as stockholders of the registrant, at the time and in the manner such material is sent to its stockholders, copies of all reports, proxy statements and other communications distributed to its stockholders generally. 3. Where interests in a plan are registered herewith, the undersigned registrant and plan hereby undertake to transmit or cause to be transmitted promptly, without charge, to any participant in the plan who makes a written request, a copy of the then latest annual report of the plan filed pursuant to section 15(d) of the Securities Exchange Act of 1934 (Form 11-K). If such report is filed separately on Form 11- K, such form shall be delivered upon written request. If such report is filed as a part of the registrant's annual report on Form 10-K, that entire report (excluding exhibits) shall be delivered upon written request. If such report is filed as a part of the registrant's annual report to stockholders delivered pursuant to paragraph (1) or (2) of this undertaking, additional delivery shall not be required. i. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.\n2. Indemnification of Directors and Officers. ----------------------------------------- Article VII of the Bylaws of the registrant and Section 145 of the Delaware Code provide for indemnification. Article VII, in which registrant is referred to as \"Corporation\", provides as follows: Section 1. Right to Indemnification. --------- ------------------------ Each person who was or is made 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 (a \"proceeding\"), by reason of the fact that he, or a person of whom he 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 a partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans maintained or sponsored by the (continued) 58\nCorporation, whether the basis of such proceeding is alleged action in an official capacity as a director, officer, employee or agent 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 authorized by the Delaware General Corporation Law, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than said Law permitted the Corporation to provide prior to such amendment), against all expense, liability and loss (including attorneys' fees, judgments, fines, excise taxes pursuant to the Employee Retirement Income Security Act of 1974 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 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. 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 disposition; 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 or officer 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 or 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 Article 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.\nSection 2. 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, the Restated Certificate of Incorporation, these Bylaws, agreement, vote of stockholders or disinterested directors or otherwise.\nSection 3. 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 or loss, whether or not the Corporation would have the power to indemnify such person against such expense, liability or loss under the Delaware General Corporation Law.\nThe registrant also maintains policies insuring the liability of the registrant to its directors and officers under the terms and provisions of the Bylaws of the registrant and insuring its directors and officers against liability incurred in their capacities as such directors and officers.","section_15":""}
{"filename":"790730_1993.txt","cik":"790730","year":"1993","section_1":"ITEM 1 - BUSINESS\n(A) GENERAL DEVELOPMENT OF BUSINESS.\nAlthough the Company's antecedents date back to 1907, it evolved directly from the merger of two separate firms in 1929, resulting in the incorporation of American Concrete Pipe Co. on April 22, 1929. Various name changes occurred between that time and 1942, at which time the Company's name became American Pipe and Construction Co. By the late 1960s the Company was almost exclusively engaged in manufacturing and had expanded its product lines to include not only concrete and steel pipe but also high-performance protective coatings, ready-mix concrete, aggregates and reinforced thermosetting resin pipe and fittings.\nAt the beginning of 1970, the Company's name was changed to Ameron, Inc. In the meantime, other manufactured products had been added to its product lines. These included concrete and steel poles for street and area lighting, and tapered steel vertical and cantilevered poles for traffic signals. In 1984, the Company acquired a major domestic fiberglass pipe business, including a manufacturing plant in Burkburnett, Texas, and certain trade names and patent rights. In 1988, the Company expanded its ability to serve the water transmission and distribution market through the acquisition of a major steel pipe fabricating facility in Fontana, California.\nFurther details or commentary on the year's operations can be found in the Annual Report, which is Exhibit 13 to this report on Form 10-K, and which should be read in conjunction with this report.\n(B) FINANCIAL INFORMATION AS TO INDUSTRY SEGMENTS.\nThe information contained in Notes (1), (4) and (14) of Notes to Consolidated Financial Statements on pages 38, 39, 43, 46 and 47 of the Annual Report is incorporated herein by reference.\n(C) NARRATIVE DESCRIPTION OF BUSINESS.\n(1) For geographical and operational convenience, the Company is organized into divisions. These divisions are combined into the following groups serving the following-described industry segments.\na) The Protective Coatings Systems group develops, manufactures and markets high-performance coatings and surfacer systems on a world-wide basis. These products are utilized for the preservation of major structures, such as metallic and concrete facilities and equipment, to prevent their degradation by corrosion, abrasion, marine fouling and other forms of chemical and physical attack. The primary markets served include marine, offshore, petrochemical, power generation, petroleum, chemical, steel, pulp and paper, railroad, bridges, mining, metal processing and original equipment manufacturing. These products are marketed by direct\nsales, as well as through manufacturers' representatives, distributors and licensees. Competition is based upon quality, price and service. Manufacture of these products is carried out in the Company's plants in California and Arkansas, by a wholly-owned subsidiary in The Netherlands, by jointly-owned operations in Mexico and Saudi Arabia and by various third party licensees. The Company licenses its patents, trademarks, know-how and technical assistance to various of its subsidiary and affiliated companies and to various third party licensees.\nb) The Fiberglass Pipe Systems group develops, manufactures and markets filament-wound and molded fiberglass pipe and fittings. These products are used by a wide range of process industries, including industrial, petroleum, chemical processing and petrochemical industries, for service station replacement piping systems, aboard marine vessels and on offshore oil platforms, and are marketed as an alternative to metallic piping systems which ultimately fail under corrosive operating conditions. These products are marketed by direct sales, as well as through manufacturers' representatives, distributors and licensees. Competition is based upon quality, price and service. Manufacture of these products is carried out in the Company's plants in Texas and South Carolina, by wholly-owned subsidiaries in The Netherlands and Singapore, and by a jointly-owned affiliate in Saudi Arabia.\nc) The Concrete and Steel Pipe Systems group supplies products and services used in the construction of pipeline facilities for various utilities. Eight plants are located in three of the continental western states. These plants manufacture concrete cylinder pipe, prestressed concrete cylinder pipe, steel pipe and reinforced concrete pipe for water transmission, storm and industrial waste water and sewage collection. These products are marketed by direct selling using the Company's own personnel and by competitive bidding. Customers include local, state and federal agencies, developers and general contractors. Normally no one customer or group of customers will account for sales equal to or greater than 10 percent of the Company's consolidated revenue. However, occasionally, when more than one unusually large project is in progress, combined sales to all U.S. government agencies and\/or general contractors for those agencies can reach those proportions. Besides competing with several other concrete pipe manufacturers located in the market area, alternative products such as ductile iron, asbestos cement, and clay pipe compete with the Company's concrete and steel pipe products, but ordinarily these other materials do not offer the full diameter range produced by the Company. Principal methods of competition are price, delivery schedule and service. The Company's technology is used in the Middle East through affiliated companies whose activities are not reflected in the amounts reported for this industry segment. This segment also includes the manufacturing and marketing on a world-wide basis through direct sales of polyvinyl chloride sheet lining for the protection of concrete pipe and cast-in- place concrete structures from the corrosive effects of sewer gases, acids and industrial chemicals. Competition is based on quality, price and service. Manufacture of this product is carried out in the Company's plant in California. This segment also includes engineered design, fabrication and direct sale of specialized proprietary equipment which is outside the regular business of the other segments of the Company's businesses. Competition for such work is based upon quality, price and service. Manufacture of such equipment is carried out in the Company's plant in California.\nd) The Construction & Allied Products group includes the HC&D division, which suppllies ready-mix concrete, crushed and sized basaltic aggregates, dune sand, concrete pipe and box culverts, primarily to the construction industry in Hawaii. These products are marketed through direct sales. Ample raw materials are available locally in Hawaii and, as to rock products, the\nCompany has exclusive rights to a quarry containing many years' reserves. Within the market area there are competitors for each of the segment's products. No single competitor offers the full range of products sold by the Company in Hawaii. The principal methods of competition are in price and service, since an appreciable portion of the segment's business is obtained through competitive bidding.\nThis segment also includes the operations of the Pole Products & Systems division, which manufactures and markets concrete and steel poles for highway, street and outdoor area lighting and for traffic signals. Sales are nationwide, but with a stronger concentration in the western states. Marketing is handled by the Company's own sales force and by outside sales agents. Competition for such products is mainly based on price, but with some consideration for service and delivery. Manufacture of these products is carried out in in two plants in California, as well as plants in Washington and Oklahoma.\ne) Except as individually shown in the above descriptions of industry segments, the following comments or situations apply to all segments:\n(i) Because of the number of manufacturing locations and the variety of raw materials essential to the business, no critical situations exist with respect to supply of materials. The Company has multiple sources for raw materials. A program continues in operation to minimize any potential effect which may be anticipated to result from any foreseeable inadequacy of energy supplies. The effects of increases in costs of energy are being mitigated to the extent practical through conservation and through addition or substitution of equipment to manage the use and reduce consumption of energy.\n(ii) The Company owns certain patents and trademarks, both U.S. and foreign, related to its products. It licenses these proprietary items to some extent in the U.S., and to a greater degree abroad. These patents, trademarks, and licenses do not constitute a material portion of the Company's business. No franchises or concessions exist.\n(iii) Many of the Company's products are used in connection with capital goods, water and sewage transmission and construction of capital facilities. Favorable or adverse effects on general sales volume and earnings can result from weather conditions. Normally, sales volume and earnings will be lowest in the first fiscal quarter, seasonal effects typically accelerate or slow the business volume and normally do not bring about severe changes in full-year activity.\n(iv) With respect to working capital items, the Company does not encounter any requirements which are not common to other companies engaged in the same industries. No unusual amounts of inventory are required to meet seasonal delivery requirements. All of the Company's industry segments turn their inventory between four and eleven times annually. Average days' sales in accounts receivable range between 39 and 81 for all segments.\n(v) The value of backlog orders at November 30, 1993 and 1992 by industry segment is shown below. Substantially all of the November 30, 1993 backlog is expected to be billed and recorded as sales during the year 1994.\nBacklog at November 30, 1993 declined 37.8% from the prior year's level. The $25.7 million decrease in the Fiberglass Pipe Systems segment reflects the completion of several large crude oil projects overseas. The lower backlog of the Concrete and Steel Pipe Systems segment resulted from a decline in public spending for large water transmission systems and reduced construction activity in the Company's geographic markets. Backlog declined in the Construction and Allied Products segment because of reduced construction activity in Hawaii. The increase in backlog for the Protective Coatings Systems segment reflects an increase in overseas project orders.\n(vi) There was no significant change in competitive conditions or the competitive position of the Company in the industries and localities in which it operates. There is no knowledge of any single competitive situation which would be material to an understanding of the business.\n(vii) Sales contracts in all of the Company's business segments normally consists of purchase orders, which in some cases are issued pursuant to master purchase agreements. Longer term contracts seldom involve commitments of more than one year by the Company, and exceptions are not deemed material by management. Payment is normally due from 30 to 60 days after shipment, with progress payments prior to shipment in some circumstances. It is the Company's practice to require letters of credit prior to shipment of foreign orders, subject to limited exceptions. The Company does not voluntarily extend long-term credit to purchasers of its products.\n(2) a) Approximate expense during each of the last three fiscal years for Research and Development costs is shown under the caption in Note (1) of Notes to Consolidated Financial Statements on page 38 of the Annual Report, which information is incoporated herein by reference.\nb) The Corporation's business is not dependent on any single customer or few customers, the loss of any one or more of whom would have a material adverse effect on its business.\nc) For many years the Corporation has been consistently installing or improving devices to control or eliminate the discharge of pollutants into the environment. Accordingly, compliance with federal, state, and locally enacted provisions relating to protection of the environment is not having, and is not expected to have, a material effect upon the Corporation's capital expenditures, earnings, or competitive position.\nd) At year-end the Corporation and its consolidated subsidiaries employed approximately 2,868 persons. Of those, approximately 1,340 were covered by labor union contracts, and there are six separate bargaining agreements subject to renegotiation in 1994. Management does not presently anticipate a strike or other labor disturbance in connection with renegotiation of these agreements; however, the possibility of such an occurrence exists.\n(D) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES.\nThe information contained in Notes (4) and (14) of Notes to Consolidated Financial Statements on pages 39, 43, 46 and 47 of the Annual Report is incorporated herein by reference.\nExport sales in the aggregate from domestic operations during the last three fiscal years were:\nITEM 2","section_1A":"","section_1B":"","section_2":"ITEM 2 - DESCRIPTION OF PROPERTY\n(A) The location and general character of principal plants and other materially important physical properties used in the Company's operations is tabulated below. Property is owned in fee except where otherwise indicated by footnote. In addition to the property shown, the Company owns vacant land adjacent to or in the proximity of some of its operating locations and holds this property available for use when it may be needed to accommodate expanded or new operations. Property listed does not include any temporary project sites which are generally leased for the duration of the respective projects. With the exception of the Kailua, Oahu property, shown under the Construction & Allied Products industry segment, there are no material leases with respect to which expiration or inability to renew would have any material adverse effect on the Company's operations. The lease term on the Kailua property extends to the year 2012. This is the principal source of quarried rock and aggregates for the Company's operations on Oahu, Hawaii and, in management's opinion, reserves are adequate for its requirements during the term of the lease.\n(B) The Company believes that its existing facilities are adequate for current and presently foreseeable operations. Because of the cyclical nature of certain of the Company's operations, and the substantial amounts involved in some individual orders, the level of utilization of particular facilities may vary significantly from time to time in the normal course of operations.\nINDUSTRY SEGMENT - GROUP\nDivision - Location Description ------------------- ----------- PROTECTIVE COATINGS SYSTEMS\nProtective Coatings Systems division - USA Brea, CA Office, Plant, Laboratory Little Rock, AR Office, Plant\nAmeron B.V. Geldermalsen, The Netherlands Office, Plant\nFIBERGLASS PIPE SYSTEMS\nFiberglass Pipe Systems division - USA Burkburnett, TX Office, Plant Spartanburg, SC Plant\nAmeron B.V. Geldermalsen, The Netherlands Office, Plant\nAmeron (Pte) Ltd. Singapore *Office, Plant\nCONCRETE AND STEEL PIPE SYSTEMS\nSouthern Division Rancho Cucamonga, CA *Office Etiwanda, CA Plant Lakeside, CA Plant South Gate, CA Plant Palmdale, CA Plant Phoenix, AZ Office, Plant\nNorthern Division Tracy, CA Office, Plant Portland, OR Office, Plant\nSteel Fabrication division Fontana, CA *Office, Plant\nProtective Linings division Brea, CA Office, Plant\nFabrication Plant South Gate, CA Office, Plant\nCONSTRUCTION & ALLIED PRODUCTS\nHC&D division Honolulu, Oahu, HI *Office, Plant Kailua, Oahu, HI *Plant, Quarry Barbers Point, Oahu, HI *Plant Puunene, Maui, HI *Office, Plant, Quarry\nPole Products & Systems division Fillmore, CA Office, Plant Oakland, CA *Plant Everett, WA *Office, Plant Tulsa, OK *Office, Plant\nCORPORATE Corporate Headquarters Pasadena, CA *Office\nCorporate Research & Engineering South Gate, CA Office, Laboratory\n*Leased\nITEM 3","section_3":"ITEM 3 - LEGAL PROCEEDINGS\nOn August 22, 1988, Fontana Pipe and Fabrication, Inc. filed a civil lawsuit against the Company in the United States District Court, District of Oregon. The action stemmed from the purchase by the Company in 1988 of the assets of a steel fabrication plant located in Fontana, California which had been owned by Kaiser Steel Corporation. The amounts claimed by the plaintiff were substantial. The case went to trial in October, 1989 and resulted in a judgment in favor of the Company. Following two appeals to the Ninth Circuit Court of Appeals by plaintiff, this lawsuit was settled in September 1993 on terms deemed to be favorable to the Company.\nOn January 24, 1992, the Central Arizona Water Conservation District (\"CAWCD\") filed an action for damages against several parties, including the Company, in United States District Court, District of Arizona, in connection with six prestressed concrete pipe siphons furnished and installed in the 1970's as part of the Central Arizona Project (\"CAP\"), a federal project to bring water from the Colorado River to Arizona. The CAWCD also filed separate actions against the U.S. Bureau of Reclamation (\"USBR\") in the United States Claims Court and with the Arizona Projects Office of the USBR in connection with the CAP siphons. The CAWCD alleges that the six CAP siphons are defective and that the USBR and the defendants in the U.S. District Court action are liable for the repair or replacement of those siphons at a claimed estimated cost of $146.7 million. The Company has internally, as well as through independent third party consultants, conducted engineering analyses regarding this issue and believes that the siphons were manufactured in accordance with the project specifications and other contract requirements, and therefore it is not liable for any claims relating to the siphons. The Company has recorded reserves that it believes are adequate to cover costs associated with the Company's vigorous defense of its position in this matter. The Company and its legal counsel believe that it has meritorious defenses to this action and that resultant liability, if any, should not have a material adverse effect on the financial position of the Company and its results of operations.\nOn July 22, 1992, the Company was served with a complaint in an action brought by the City and County of San Francisco (\"CCSF\") in Superior Court, County of San Francisco, State of California against the Company and two co-defendants, in connection with a pipeline referred to as San Andreas Pipeline No. 3, a water transmission pipeline that was installed between 1980 and 1982. The Company furnished the pipe used in that pipeline. In its complaint, plaintiff alleges that the pipeline is defective and seeks damages of approximately $44 million to replace the entire pipeline. The Company has recorded reserves that it believes are adequate to cover costs associated with the Company's vigorous defense of its position in this matter. The Company believes that it has meritorious defenses to this action and that resultant liability, if any, should not have a material adverse effect on the financial position of the Company and its results of operations.\nIn addition, certain other claims, suits and complaints, which arise in the ordinary course of business, have been filed or are pending against the Company. Management believes that these matters, and the matters discussed above, are either adequately reserved, covered by insurance, or would not have an adverse\nmaterial effect on the financial position of the Company and its results of operations if disposed of unfavorably.\nThe Company is also subject to federal, state and local laws and regulations concerning the environment and is currently participating in administrative proceedings at several sites under these laws. It is difficult to estimate with any certainty the total cost of remediation, the timing and extent of remedial actions required by governmental authorities, and the amount of the Company's liability, if any, in proportion to that of other potentially responsible parties. While the Company finds it difficult to estimate with any certainty the total cost of remediation at the several sites which are subject to environmental regulatory proceedings, on the basis of currently available information, the Company does not believe it likely that the outcome of such environmental regulatory proceedings will have a material adverse effect on the Company's financial position or its results of operations. This conclusion is based on the location and type of contamination of each site, potential recovery from insurance carriers and existing reserves. When it has been possible to reasonably estimate the Company's liability with respect to these matters, provisions have been made as appropriate.\nITEM 4","section_4":"ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS\n(Not Applicable)\nITEM 4A - EXECUTIVE OFFICERS OF THE REGISTRANT\nThe following sets forth information with respect to individuals who served as executive officers as of November 30, 1993 and who are not directors of the Company. All executive officers are appointed by the Board of Directors to serve at the discretion of the Board of Directors.\nAll of the executive officers named above have held high level managerial or executive positions with the Company for more than the past five years except Mr. Steinkamp, who joined the Company in 1990 as Corporate Director of Manufacturing and in 1992 was named Vice President, Manufacturing. He was previously with Dayton Superior Corporation since 1982 where he was Vice President, Northern Division and in 1987 Vice President, Operations.\nPART II\nITEM 5","section_5":"ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS\nThe Common Stock, $2.50 Par Value, of the Corporation, its only outstanding class of common equity, is traded on the New York Stock Exchange, the only exchange on which it is presently listed. On February 9, 1994, there were 1,925 stockholders of record of such stock.\nDividends have been paid each quarter during the prior two years and for many years in the past. Information as to the amount of dividends paid during the reporting period and the high and low sales prices of the Corporation's Common Stock during that period are set out under the caption Per Share Data shown on page 44 of the Annual Report, which information is incorporated herein by reference.\nTerms of lending agreements which place restrictions on cash dividends are discussed in Note (9) of Notes to Consolidated Financial Statements on page 42 of the Annual Report, which is incorporated herein by reference.\nITEM 6","section_6":"ITEM 6 - SELECTED FINANCIAL DATA\nThe information required by this item is contained in the Selected Consolidated Financial Information shown on page 29 of the Annual Report, which information is incorporated herein by reference.\nITEM 7","section_7":"ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS\nThe information required by this item with respect to fiscal years 1993 and 1992 is shown under Ameron 1993 Financial Review on pages 30-32 of the Annual Report, which information is incorporated herein by reference. The information required for 1991 is as follows:\nRESULTS OF OPERATIONS-1991 COMPARED WITH 1990\nSALES. During 1991, sales rose 4.3 percent to $465 million. The higher revenues were attributable primarily to sales of steel pipe, protective coatings and linings, and fiberglass pipe products.\nProtective coatings and linings sales were higher than in 1990, due principally to the addition of operations in the United Kingdom and Spain, and increased marine coatings sales to a United States government agency. However, domestic and Canadian sales of industrial protective coatings were flat, reflecting continued recessionary conditions in several markets. The European protective coatings operation was impacted by the delay in the start-up of the next phase of a large North African project, which resumed in 1992.\nSales of fiberglass pipe products increased because of continued strong domestic demand for service station rehabilitation piping systems, and increased deliveries to North Africa and the Middle East resulting from petroleum-related and infrastructure development in those regions.\nConcrete and steel pipe sales were higher than last year, due mainly to welded steel pipe sold to two major water projects in Southern California, and sales of prestressed concrete pipe for a large tunnel liner project. However, the Company's concrete pipe operations were impacted by the economic downturn and competitive pricing pressures, as well as limitations imposed by certain water agencies on the utilization of prestressed concrete cylinder pipe as a result of problems encountered with several pipelines in the United States. In addition, at the beginning of 1992, the Central Arizona Water Conservation District filed an action for damages in connection with six prestressed concrete pipe siphons furnished and installed in the 1970s as part of the Central Arizona Project. The Company's technical staff is working with water agencies and other concrete pipe manufacturers to determine solutions to the pipeline problems. Although near term revenues from this product are expected to be reduced, demand increased in 1991 for welded steel pipe throughout California, thus offsetting much of the effect of the drop-off in sales of prestressed concrete cylinder pipe.\nConstruction product sales declined from 1990, due primarily to a decrease in activity for both concrete and steel pole products as a result of delays in public spending and the sharp drop-off in housing starts and construction. Partially offsetting the reduced pole products sales were moderate gains by the construction products operations in Hawaii, which continued to experience high demand for ready-mix concrete and aggregates in both commercial and public sector markets.\nGROSS PROFIT. The gross profit margin decreased by .7 percent to 25.5 percent in 1991. Profit margins on sales of protective coatings and linings increased because of improved product pricing achieved by the domestic industrial and marine coatings operations. Higher margins on fiberglass pipe product sales were attributable to manufacturing efficiencies stemming from higher production volumes and better pricing on fiberglass pipe products sold abroad. The decline in construction activity during 1991 furthered price competition and lowered production volumes at several of the concrete pipe operations, causing overall margins on concrete pipe products to decrease. Construction products profit margins declined as a result of significant price competition in steel traffic and lighting pole markets and increased manufacturing costs resulting from lower production volumes, as well as price competition for ready-mix concrete in Hawaii.\nSELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses were higher than in 1990, due mainly to the addition of the British and Spanish protective coatings operations, which were not included in the 1990 consolidated results. Other factors affecting selling, general and administrative expenses include increased costs associated with the expansion of marine and protective coatings marketing activities, legal expenses, and additional provisions for insurance, doubtful accounts, and other contingencies.\nINTEREST EXPENSE. Interest expense increased marginally in 1991, due principally to slightly higher borrowing levels maintained throughout the year.\nWRITE DOWN OF ASSETS AND RESTRUCTURING COSTS. The Company recorded repositioning costs of approximately $5.6 million and wrote down related fixed assets of approximately $8.9 million after an in-depth evaluation by management of the long-term profitability and rate of return on investment potential for each of the Company's major product lines. Based on this evaluation, management determined that the Company's overall long-term rate of return could be increased if certain facilities were consolidated and if capital and management were redeployed among certain product lines to those with the greatest long-term potential. As a result, management decided to de-emphasize certain product lines and promote and emphasize alternative products that it considered to be more viable and technologically appropriate on a long-term basis. The Company's restructuring activities were also a further response to the lingering effects of the domestic recession and shifting of the Company's productive capabilities to lower cost, more competitive products.\nGAIN FROM SALE OF ASSETS. During the fourth quarter of 1991, the Company sold, under the threat of condemnation, its headquarters facility for $21 million, resulting in a pre-tax gain of $15 million.\nOTHER INCOME. Royalties and fees from affiliated companies were higher than last year because of the increased level of sales activity at licensees and foreign affiliated companies. Gains from foreign currency transactions compared favorably to the prior year's losses, reflecting the strength of the U.S. dollar against the Dutch guilder and the Canadian dollar. Other income includes a legal settlement of $770,000 received from resolution of a prior class action lawsuit.\nEQUITY IN LOSSES OF AFFILIATED COMPANIES. Equity in losses of jointly-owned affiliated companies was primarily the result of economic downturns experienced by several of the affiliates. The losses of Gifford-Hill-American, Inc., a 50- percent-owned concrete pressure pipe manufacturer, reflect ongoing weak demand in the Texas concrete pipe market, coupled with the bankruptcy loss of Gifford- Hill-American's wholly-owned \"Lock-Joint\" subsidiary. Tamco, a 50-percent- owned steel mini-mill, also reported lower operating results due to the downturn in construction activity in California, while Ameron Saudi Arabia, Ltd., endured the effects of the Gulf War. Partially offsetting these declines were the improved performance of both Oasis-Ameron, Ltd. and Bondstrand, Ltd., which benefitted from increased demand for protective coatings and fiberglass pipe, respectively, in Saudi Arabia.\nITEM 8","section_7A":"","section_8":"ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA\nThe Consolidated Financial Statements, the report thereon of Arthur Andersen & Co. dated January 13, 1994, Notes to Consolidated Financial Statements and Quarterly Financial Data, comprising pages 33 through 47 of the Annual Report, are incorporated herein by reference.\nITEM 9","section_9":"ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE\n(Not applicable) PART III\nITEM 10","section_9A":"","section_9B":"","section_10":"ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS\nInformation with respect to the directors is contained under the section entitled, \"Election of Directors\" in the Corporation's Proxy Statement which was filed on February 25, 1994 in connection with the Annual Meeting of Stockholders to be held on March 28, 1994. Such information is incorporated herein by reference.\nInformation with respect to the executive officers of the Corporation is located in Part I, Item 4A of this report.\nITEM 11","section_11":"ITEM 11 - EXECUTIVE COMPENSATION*\nITEM 12","section_12":"ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT*\nITEM 13","section_13":"ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS*\n*The information required by Items 11, 12 and 13 is contained in the Corporation's Proxy Statement which was filed on February 25, 1994 in connection with the 1994 Annual Meeting of Stockholders to be held on March 28, 1994. Such information is incorporated herein by reference.\nPART IV\nITEM 14","section_14":"ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K\n(A) (1) FINANCIAL STATEMENTS:\nThe financial statements to be filed hereunder are cross-referenced, in the index immediately following, to the Annual Report, as to sections incorporated herein by reference.\n(i) Summarized information as to the financial condition and results of operations for Gifford-Hill-American, Inc., Ameron Saudi Arabia, Ltd., Bondstrand, Ltd, Oasis-Ameron, Ltd. and Tamco are presented in Note (4) of Notes to Consolidated Financial Statements on page 39 of the Annual Report, which information is incorporated herein by reference.\n(A) (2) FINANCIAL STATEMENT SCHEDULES:\nThe following additional financial data should be read in conjunction with the consolidated financial statements in the 1993 Annual Report. Schedules not included with this additional financial data have been omitted because they are either not applicable, not required, not significant, or the required information is provided in the consolidated financial statements or notes thereto.\n(B) REPORTS ON FORM 8-K\nNo report on Form 8-K was filed by the Corporation during the last quarter of the fiscal year ended November 30, 1993.\nREPORT OF INDEPENDENT PUBLIC ACCOUNTANTS\nTo the Stockholders and the Board of Directors, Ameron, Inc.:\nWe have audited in accordance with generally accepted auditing standards, the consolidated financial statements included in Ameron, Inc.'s Annual Report to Stockholders incorporated by reference in this Form 10-K, and have issued our report thereon dated January 13, 1994. Our audits were made for the purpose of forming an opinion on those statements taken as a whole. The schedules listed in the index above are the responsibility of the Company's management and are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic financial statements. These schedules have been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.\nARTHUR ANDERSEN & CO.\nLos Angeles, California January 13, 1994\nAMERON, INC. AND SUBSIDIARIES SCHEDULE V - PROPERTY, PLANT AND EQUIPMENT (In thousands)\nAMERON, INC. AND SUBSIDIARIES SCHEDULE VI - ACCUMULATED DEPRECIATION OF PROPERTY, PLANT AND EQUIPMENT (In thousands)\nAMERON, INC. AND SUBSIDIARIES SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES FOR THE YEAR ENDED NOVEMBER 30, 1993 (In thousands)\nAMERON, INC. AND SUBSIDIARIES SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES FOR THE YEAR ENDED NOVEMBER 30, 1992 (In thousands)\nAMERON, INC. AND SUBSIDIARIES SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES FOR THE YEAR ENDED NOVEMBER 30, 1991 (In thousands)\nAMERON, INC. AND SUBSIDIARIES SCHEDULE IX - SHORT TERM BORROWINGS (In thousands)\nThe increased interest rates in 1993 reflect a higher percentage of short-term borrowings owed by the Company's Colombian subsidiary.\nAMERON, INC. AND SUBSIDIARIES SCHEDULE X SUPPLEMENTARY INCOME STATEMENT INFORMATION (In thousands)\nPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.\nAMERON, INC.\nBy: \/s\/Javier Solis _______________________________________________ Javier Solis, Senior Vice President & Secretary\nDate: February 25, 1994\nPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.\nDate: \/s\/James S. Marlen Chief Executive Officer, President --------------------- and Director (Principal Executive James S. Marlen Officer)\nDate: \/s\/Gary Wagner Senior Vice President and Chief --------------------- Financial Officer, Treasurer Gary Wagner (Principal Financial and Accounting Officer)\nDate: \/s\/Donald H. Albrecht Director --------------------- Donald H. Albrecht\nDate: \/s\/Victor K. Atkins Director --------------------- Victor K. Atkins\nDate: \/s\/John F. King Director --------------------- John F. King\nDate: \/s\/William I. McKay Director --------------------- William I. McKay\nDate: \/s\/Richard J. Pearson Director --------------------- Richard J. Pearson\nDate: \/s\/Lawrence R. Tollenaere Director, Chairman of the Board ------------------------- Lawrence R. Tollenaere\nDate: ________________________________ Director Robert Toxe\nDate: ________________________________ Director F. H. Fentener van Vlissingen","section_15":""}
{"filename":"106535_1993.txt","cik":"106535","year":"1993","section_1":"Item 1. Business\n- -----------------------------------------------------------------------------\nDESCRIPTION OF THE BUSINESS OF THE COMPANY\nWeyerhaeuser Company (the company) was incorporated in the state of Washington in January 1900, as Weyerhaeuser Timber Company. It is principally engaged in growing and harvesting of timber and the manufacture, distribution and sale of forest products, real estate development and construction, and financial services. Its principal business segments include timberlands and wood products, pulp and paper products, real estate, and financial services. A description of each of these business segments follows.\nTimberlands and Wood Products\nThe company owns approximately 5.5 million acres of commercial forestland in the United States (50% in the South and 50% in the Pacific Northwest), most of it highly productive and located extremely well to serve both domestic and international markets. The company has, additionally, long-term license arrangements in Canada covering approximately 17.8 million acres (of which 14 million acres are considered to be productive forestland). The combined total timber inventory on these U.S. and Canadian lands is approximately 245 million cunits (a cunit is 100 cubic feet of solid wood), of which approximately 75% is softwood species. The relationship between cubic measurement and the quantity of end products that may be produced from timber varies according to the species, size and quality of timber, and will change through time as the mix of these variables changes. To sustain the timber supply from its fee timberland, the company is engaged in extensive planting, suppression of nonmerchantable species, precommercial and commercial thinning and fertilization and operational pruning, all of which increase the yield from its fee timberland acreage.\nWeyerhaeuser Company and Subsidiaries\nPart I Item 1. Business - Continued\n- -----------------------------------------------------------------------------\nThe company's wood products businesses produce and sell softwood lumber, plywood and veneer; composite panels; oriented strand board; hardboard; hardwood lumber and plywood; doors; treated products; logs; chips and timber. These products are sold primarily through the company's own sales organizations. Building materials are sold to wholesalers, retailers and industrial users.\nSales by volumes by major product class are as follows (millions):\nSelected product prices:\nWeyerhaeuser Company and Subsidiaries\nPart I Item 1. Business - Continued\n- -----------------------------------------------------------------------------\nPulp and Paper Products\nThe company's pulp and paper products businesses include: Pulp, which manufactures chemical wood pulp for world markets; Newsprint, which manufactures newsprint at the company's North Pacific Paper Corporation mill and markets it to West Coast and Japanese newspaper publishers; Paper, which manufactures and markets a range of both coated and uncoated fine papers through paper merchants and printers; Containerboard Packaging, which manufactures linerboard and corrugating medium, which is primarily used in the production of corrugated shipping containers and manufactures and markets corrugated shipping containers for industrial and agricultural packaging; Paperboard, which manufactures bleached paperboard that is used for production of liquid containers and is marketed to West Coast and Pacific Rim customers; Recycling, which operates an extensive wastepaper collection system and markets it to company mills and worldwide customers; Chemicals, which produces chlorine, caustic and tall oil, which are used principally by the company's pulp and paper operations; and Personal Care Products, which manufactures disposable diapers sold under the private-label brands of many of North America's largest retailers (this business was sold in February 1993 through an initial public offering of stock).\nSales volumes by major product class are as follows (thousands):\nSelected product prices (per ton):\nWeyerhaeuser Company and Subsidiaries\nPart I Item 1. Business - Continued\n- -----------------------------------------------------------------------------\nReal Estate\nThe company, through its real estate subsidiary, Weyerhaeuser Real Estate Company, is a builder\/developer of for-sale housing and apartments, develops commercial and residential lots for sale to users and other builders, builds commercial buildings for sale to institutional investors, and is an investor in joint ventures and limited partnerships.\nVolumes sold:\nFinancial Services\nThe company, through its financial services subsidiary, Weyerhaeuser Financial Services, Inc., is involved in a range of financial services. The principal operating unit is Weyerhaeuser Mortgage Company, which has origination offices in 12 states, with a servicing portfolio of $8.4 billion covering approximately 112,000 loans throughout the country. Mortgages are resold in the secondary market through mortgage-backed securities to financial institutions and investors. Through its insurance services organization, it also offers a broad line of property, life and disability insurance. GNA Corporation, a subsidiary that specialized in the sale of life insurance annuities and mutual funds to the customers of financial institutions, was sold in April 1993. Republic Federal Savings & Loan Association, a subsidiary that operated in Southern California through 1991, was dissolved in 1992.\nVolume information (millions):\nWeyerhaeuser Company and Subsidiaries\nPart I Item 2.","section_1A":"","section_1B":"","section_2":"Item 2. Properties\n- -----------------------------------------------------------------------------\nTimberlands and Wood Products\nFacilities and annual production are summarized by major product class as follows (millions):\nPrincipal manufacturing facilities are located as follows:\nSoftwood lumber and plywood Hardwood doors Alabama, Arkansas, Georgia, Idaho, Wisconsin Mississippi, North Carolina, Oklahoma, Oregon, Composite panels Washington, and Georgia, North Carolina, Alberta, British Columbia, and Oregon and Wisconsin Saskatchewan, Canada Oriented strand board Hardwood lumber Michigan, North Carolina, Arkansas, Oklahoma, Pennsylvania, and Alberta, Canada Washington, and Wisconsin Hardboard Oregon\nWeyerhaeuser Company and Subsidiaries\nPart I Item 2. Properties - Continued\n- ------------------------------------------------------------------------------\nPulp and Paper Products\nFacilities and annual production are summarized by major product class as follows (thousands):\nPrincipal manufacturing facilities are located as follows:\nPulp Containerboard Georgia, Mississippi, North North Carolina, Oklahoma, Carolina, Washington, and Oregon, and Washington Alberta, British Columbia, and Saskatchewan, Canada Packaging Arizona, California, Florida, Newsprint Georgia, Hawaii, Illinois, Washington Indiana, Iowa, Kentucky, Maine, Michigan, Minnesota, Paper Mississippi, Missouri, Nebraska, Mississippi, North Carolina, New Jersey, New York, North Washington, Wisconsin, and Carolina, Ohio, Oregon, Saskatchewan, Canada Tennessee, Texas, Virginia, Washington, and Wisconsin Paperboard Washington Recycling California, Colorado, Iowa, Kansas, Maryland, North Carolina, Oklahoma, Oregon, Texas, Virginia, Washington, and British Columbia, Canada\nChemicals Georgia, Mississippi, North Carolina, Oklahoma, Washington, and Saskatchewan, Canada\nWeyerhaeuser Company and Subsidiaries\nPart I Item 2. Properties - Continued\n- -----------------------------------------------------------------------------\nReal Estate\nPrincipal operations are located as follows:\nWeyerhaeuser Company and Subsidiaries\nPart I Item 2. Properties - Continued\n- -----------------------------------------------------------------------------\nFinancial Services\nPrincipal operations are located as follows:\nWeyerhaeuser Company and Subsidiaries\nPart I Item 3.","section_3":"Item 3. Legal Proceedings\n- ------------------------------------------------------------------------------\nTrial began in May 1992 in a federal income tax refund case that the company filed in July 1989 in the United States Claims Court. The complaint seeks a refund of federal income taxes that the company contends it overpaid in 1977 through 1983. The alleged overpayments are the result of the disallowance of certain timber casualty losses and certain deductions claimed by the company arising from export transactions. The refund sought was approximately $29 million, plus statutory interest from the dates of the alleged overpayments. The company has reached an agreement with the United States Department of Justice to settle the portion of the case relating to export transactions. That settlement has been approved by the Joint Committee on Taxation of the U.S. Congress. The tax refund remaining in dispute is approximately $9 million plus statutory interest from the dates of the alleged overpayments. The court has not entered a decision on the remaining issue.\nOn March 6, 1992, the company filed a complaint in the Superior Court for King County, Washington against a number of insurance companies. The complaint seeks a declaratory judgment that the insurance companies named as defendants are obligated under the terms and conditions of the policies sold by them to the company to defend the company and to pay, on the company's behalf, certain claims asserted against the company. The claims relate to alleged environmental damage to third-party sites and to some of the company's own property to which allegedly toxic material was delivered or on which allegedly toxic material was placed in the past. Since December 1992, the company has agreed to settlements with six of the defendants. In July 1993, the trial court dismissed fourteen of the thirty-five sites named in the complaint. Appeal of those dismissals was heard by the Washington State Supreme Court on February 22, 1994. Trial on two sites is scheduled for October 1994.\nIn April 1991, the United States Environmental Protection Agency (EPA) issued an amended complaint adding the company as an additional defendant in an administrative proceeding under the Toxic Substances Control Act (TSCA). The proceeding seeks penalties of $171,000 from all defendants with respect to alleged improper storage and record keeping between 1980 and 1989 for certain transformers which contained polychlorinated biphenyls. The transformers, which the company sold in 1980, were located at the company's former hardboard siding mill in Doswell, Virginia. The company is currently negotiating with the EPA to settle the matter with no admission of liability or penalties.\nIn April 1992, the Georgia Department of Natural Resources, Environmental Protection Division issued a Notice of Violation to the company's Adel, Georgia particleboard plant citing violations of particulate emission standards. A consent order was entered into on September 18, 1992 assessing a $35,000 penalty and a stipulated penalty of $100 per day until the facility is in full compliance with particulate emission requirements. The Consent Order sets a compliance deadline of January 31, 1994. The Consent Order also requires that the company demonstrate that the facility is in compliance with regulations under the Prevention of Significant Deterioration (PSD) regulations under the Clean Air Act. The company has submitted compliance data and is awaiting the State's concurrence that it satisfies the consent order requirements.\nThe company has undertaken a review of all its wood products facilities for compliance with the PSD regulations and has disclosed PSD compliance issues to certain state agencies and the EPA. The company and the State of Mississippi Department of Environmental Quality (DEQ) have entered into a consent agreement concerning PSD regulations at two company facilities in Mississippi involving penalties of $170,000. The State of Alabama has issued a compliance order with penalties totaling $100,000 for noncompliance with PSD regulations at the company's Millport facility. The company and North Carolina's Division of Environmental Management have entered into a consent agreement for its Elkin, North Carolina facility involving penalties of $140,000 and are currently negotiating a separate consent agreement for its Moncure, North Carolina facility involving penalties of $140,000. The company has signed a consent agreement including penalties of $140,000 relating to PSD issues at the company's Wright City, Oklahoma facility with the State of Oklahoma Department of Environmental Quality. The company is negotiating a consent agreement with the State of Arkansas concerning PSD related issues for two facilities in that state involving $375,000 in total penalties for both facilities. Region V of the EPA has issued a Notice of Violation for permit violations at the company's Grayling, Michigan facility. The company is negotiating settlement of those alleged permit violations and other PSD related issues with the Michigan Department of Natural Resources and the EPA that may involve penalties of up to $416,000. In September 1992, the EPA issued a Section 114 Request for Information concerning PSD compliance at the company's oriented strand board and medium density fiberboard mills. In June 1993, the EPA issued a similar Section 114 request for the company's plywood and particleboard mills. The company is also undertaking a review of its pulp and paper facilities for PSD compliance.\nWeyerhaeuser Company and Subsidiaries\nPart I Item 3. Legal Proceedings - Continued\n- ------------------------------------------------------------------------------\nOn April 9, 1993, the company entered into a Stipulated Final Order (SFO) with the Oregon Department of Environmental Quality for alleged air emissions in excess of permit levels and PSD noncompliance at the company's North Bend, Oregon containerboard facility. The SFO establishes a compliance schedule for installing control technology. A supplemental SFO assessed upfront penalties of $247,000 and penalties of $500 per day until compliance is demonstrated. The SFO requires demonstrated compliance by December 1993 and a historical evaluation of the facility's PSD status. The company has submitted a plant site PSD review to the state and is awaiting its review.\nIn August 1992, the EPA issued an administrative complaint for the assessment of $215,000 in civil penalties against the company's Longview, Washington facility. The penalties are based upon alleged violations of the record keeping and storage provisions of the polychlorinated biphenyls rules contained in the TSCA. The company and the EPA settled the complaint for a maximum penalty of $118,150, 50% of which was paid when the settlement was signed. Payment of the remaining 50% was deferred and will be eliminated based on the expenditure of more than $118,150 by the company to dispose of PCB contaminated transformers at Longview during 1993.\nOn November 2, 1992, an action was filed against the company in the Circuit Court for the First Judicial District of Hinds County, Mississippi on behalf of a purported class of riparian property owners in Mississippi and Alabama whose properties are located on the Tennessee Tombigbee Waterway, Aliceville Lake, Cedar Creek and the Magoway Creek. The complaint seeks $1 billion in compensatory and punitive damages for diminution in property value, personal injuries and mental anguish allegedly resulting from the discharge of purported hazardous substances, including dioxins and furans, by the company's pulp and paper mill in Columbus, Mississippi and the alleged fraudulent concealments of such discharge. The complaint also seeks an injunction prohibiting future releases and the removal of hazardous substances allegedly released in the past. On August 20, 1993, a companion action was filed in Green County, Alabama on behalf of a similar purported class of riparian owners with essentially the same claims as the Mississippi case. The action was removed to the Federal District Court for the Northern District of Alabama, which subsequently remanded the case to state court.\nTrial began in January 1994 in the United States District Court for the District of Alaska of claims filed against Weyerhaeuser by two corporations with which Weyerhaeuser had entered into financing arrangements, a marketing agreement, and a technical assistance agreement. The plaintiffs claim that Weyerhaeuser breached contractual and common law duties by allegedly failing to adequately market and ship the plaintiffs' products, misrepresenting its marketing and shipping capabilities, and acting to further its interests at the plaintiffs' expense. The plaintiffs in the First Amended Complaint, filed in May 1992, seek an unstated amount of damages described as more than $50 million in compensatory damages plus not less than $75 million in punitive damages. The claim for punitive damages has been dismissed by the trial court.\nThe company is also a party to various proceedings relating to the clean up of hazardous waste sites under the Comprehensive Environmental Response Compensation and Liability Act, commonly known as \"Superfund,\" and similar state laws. The Environmental Protection Agency and\/or various state agencies have notified the company that it may be a potentially responsible party with respect to other hazardous waste sites as to which no proceedings have been instituted against the company. The company is also a party to other legal proceedings generally incidental to its business. Although the final outcome of any legal proceeding is subject to a great many variables and cannot be predicted with any degree of certainty, the company presently believes that any ultimate liability resulting from the legal proceedings discussed herein, or all of them combined, would not have a material effect on the company's financial position.\nWeyerhaeuser Company and Subsidiaries\nPart III Item 10. Directors and Executive Officers of the Registrant\n- ----------------------------------------------------------------------------\nPart IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K\n- -----------------------------------------------------------------------------\nFinancial Statements Weyerhaeuser Company and Subsidiaries 1\nFinancial Statement Schedules Schedule V - Property and Equipment Schedule VI - Allowance for Depreciation and Amortization of Property and Equipment Schedule VIII - Valuation and Qualifying Accounts Schedule IX - Short-term Borrowings Schedule X - Supplementary Income Statement Information\nExhibits Exhibit 3 - Articles of Incorporation and Bylaws Exhibit 10 - Material Contracts (a) Agreement with N. E. Johnson (b) Agreement with W. R. Corbin Exhibit 11 - Statement Re: Computation of Per Share Earnings (incorporated by reference to page 52 of the 1993 Weyerhaeuser Company Annual Report) Exhibit 13 - Portions of the 1993 Weyerhaeuser Company Annual Report specifically incorporated by reference herein Exhibit 22 - Subsidiaries of the Registrant Exhibit 24 - Consents of Experts and Counsel\nReports on Form 8-K The registrant has not filed a report on Form 8-K during the last fiscal quarter of the period for which this Form 10-K is filed.\n1 Incorporated in Part II, Item 8","section_4":"","section_5":"","section_6":"","section_7":"","section_7A":"","section_8":"","section_9":"","section_9A":"","section_9B":"","section_10":"","section_11":"","section_12":"","section_13":"","section_14":"","section_15":""}
{"filename":"27879_1993.txt","cik":"27879","year":"1993","section_1":"ITEM 1. BUSINESS\nTHE COMPANY\nDelmarva Power & Light Company (the Company) was incorporated in Delaware in 1909 and in Virginia in 1979. The Company's wholly-owned subsidiaries, also incorporated in Delaware, include Delmarva Energy Company, Delmarva Industries, Inc., Delmarva Services Company, and Delmarva Capital Investments, Inc. For a discussion of the Company's subsidiaries, see \"Subsidiaries\" on page I-11.\nThe Company is a public utility which provides electric service on the Delmarva Peninsula in an area consisting of about 5,700 square miles with a population of approximately one million. The Company also provides gas service in an area consisting of about 275 square miles with a population of approximately 457,000 in northern Delaware, including the City of Wilmington.\nSEGMENT INFORMATION\nSee Note 17 of the Notes to Consolidated Financial Statements contained in the Company's 1993 Annual Report to Stockholders filed as Exhibit 13.\nCOMPETITION\nCompetition is increasing for certain electric and gas energy markets historically served by regulated utilities. In recent years, changing laws and governmental regulations, interest in self-generation, and competition from nonregulated energy suppliers are providing some utility customers with alternative sources to satisfy their electric and gas needs.\nElectric Business\nThe Public Utility Regulatory Policies Act of 1978 (PURPA) facilitated the entry of potential competitors into the electric generation business. Under PURPA, a utility may be required to purchase the electricity generated by qualifying facilities at prices reflecting the utility's avoided cost as determined by utility procedures or state regulatory bodies.\nThe Energy Policy Act of 1992 (the Energy Act) enabled the Federal Energy Regulatory Commission (FERC) to order the provision of transmission service (wheeling of electricity) for wholesale (resale) electricity producers and also provided for the creation of a new category of electric power producers called exempt wholesale generators (EWGs). These provisions of the Energy Act have enhanced the ability of utilities and non-utility generators to compete to serve resale customers currently served by a particular utility. Partly as a result of the Energy Act, industry-wide resale markets are experiencing increased competition. In 1993, gross electric revenues from the Company's resale business were $105.0 million or 13.0% of billed electric sales revenues.\nIn response to the changing environment in the electric utility industry, the Company has modified existing strategies and also developed new strategies. From a customer or market perspective, the Company has concluded that focusing on growing the retail portion of the business provides the best opportunity to meet the twin objectives of satisfying customers' needs while providing a fair return to shareholders. During 1993, the Company began to develop new products and services for its retail markets and to hold preliminary discussions with certain municipalities in Delaware to either purchase their electric systems or enter into long-term supply contracts. In December 1993, the Company offered $103.5 million to purchase the electric system of the City of Dover, Delaware (Dover). Dover has approximately 18,500 electric customers and annual revenues from electricity sales of about $37 million. Although the Company expects that the impact on earnings from the potential purchase would be minimal over the first year or two, incremental earnings are\nI-1\nexpected once economies of scale are achieved. It is the Company's understanding that other parties have shown interest in the generation segment of Dover's business, but none have shown interest in purchasing Dover's entire electric system. In February 1994, PECO Energy Company (PECO), formerly known as Philadelphia Electric Company, announced that it is evaluating its strategic alternatives with respect to Conowingo Power Company (COPCO), its Maryland subsidiary, including determining the level of interest that other companies may have in acquiring COPCO. The Company has expressed an interest to PECO in acquiring COPCO and will seek to participate in an acquisition process if such a process is commenced. See \"Other Regulatory Matters--Conowingo Power Company\" on page I-15 for a further discussion of certain regulatory proceedings related to COPCO in which the Company has intervened.\nAlthough the Energy Act permits competition for wholesale customers only, competitive forces exist within the retail market and are expected to increase. Large retail customers (i.e. commercial and industrial customers) have choices to reduce their energy costs, including self-generation and relocation to the service territories of other utilities with lower rates. In addition, regulatory authorities may permit the retail wheeling of electricity, thereby permitting utilities and non-utility generators to compete to serve large retail customers currently served by a particular utility. The Company is positioned well for these competitive forces. The Company's prices for large retail customers are among the lowest in the region and are competitive with alternative sources of energy such as self-generation. The Company's average price for commercial customers in 1992 was 7.04 cents per kilowatt hour (kwh) compared to a regional average of 8.64 cents per kwh. The Company's average price for industrial customers in 1992 was 4.63 cents per kwh compared to a regional average of 6.59 cents per kwh. These regional averages are based on 1992 data for 27 utilities within a 300 mile radius of the Company. In order to keep customer prices competitive, the Company is stepping up its efforts to reduce costs.\nThe Company believes it should have the ability to offer flexible pricing in order to compete to serve large retail customers. Such changes in pricing methods could require modification to the existing regulatory process. In Delaware, the Governor has convened a task force \"to recommend reforms to the existing regulatory process, structure and organization that will improve utility efficiency and encourage utility innovation, while assuring continued availability of utility services at affordable and competitive prices.\" The task force includes representatives from the Delaware Public Service Commission (DPSC), utilities (including the Company), industrial customers, government, and the public. The task force plans to issue recommendations that can be introduced as legislation in June 1994 in the General Assembly.\nIn the resale market, the Company is seeking to reduce the risk associated with a customer switching energy suppliers on short notice because providing electricity service requires investments in capital-intensive facilities which have long lives and require long lead-times for construction. In the Company's most recent resale base rate case, its resale customers agreed to provide a two-year notice for load reductions up to 30% and a five-year notice for load reductions greater than 30%.\nPrior to this agreement, Old Dominion Electric Cooperative (ODEC), a resale customer, advised the Company that it would purchase up to 150 megawatts (MW) from another utility, beginning January 1, 1995. The Company is continuing to negotiate a partial-requirements service agreement (to serve the balance of ODEC's load) and a transmission service agreement (to transport the electricity ODEC plans to purchase from another utility) to become effective January 1, 1995. The maximum reduction in annual non-fuel revenues that could result from ODEC's purchase of 150 MW from another utility is estimated to be about $24 million or $0.24 per share based on projected shares outstanding in 1995. To mitigate the potential impact of this loss of business and expected increases in operating costs, the Company is pursuing off-system sales of capacity and energy (targeted increase in revenues: $10-$20 million), intensifying cost control efforts (targeted decrease in costs: $15-$20 million), and if necessary, may apply for increases in customer rates (targeted increase in revenues: $10-$15 million). The Company expects that some combination of these strategies will reduce, or possibly eliminate, the adverse earnings per share effect; however, the ultimate effect on future earnings depends on the degree of success experienced by the Company in implementing its strategies.\nI-2\nGas Business\nAs a result of FERC initiatives, the interstate gas pipeline system has been opened further to permit the transportation of natural gas by end users, including the Company's gas customers. The Company has in place local transportation tariffs to complement this interstate pipeline service. As a result, some Company gas customers now buy gas directly from producers and transport the gas to their facilities in Delaware, paying a transportation fee to the Company for the use of the Company's gas transmission and distribution facilities.\nAn issue contested in the Company's most recent gas base rate case involved the conditions under which firm customers would be able to switch to non-firm service such as Interruptible Gas Transportation (IGT) service. The Company's tariff in effect prior to this case did not allow firm customers to switch to non-firm service. The Company had proposed in this case to allow firm customers to switch to non-firm service with three years' advance notice. Intervenors in the case, comprised of a group of large firm and non-firm industrial gas customers, sought DPSC approval to allow switching to non-firm service with little or no prior notice. In July 1993, the DPSC approved a three-year notice requirement for firm customers switching to non-firm service. This notice period will mitigate the effect on the Company's results of operations of customers switching from firm to non-firm service.\nIn a related matter, during the proceedings in the Company's most recent gas base rate case, the Company's largest firm gas customer filed a complaint in the Delaware Chancery Court seeking rescission of its current firm service agreement with the Company and other relief, including non-firm service as an IGT customer. This case was settled in October 1993, with the customer agreeing for a three-year period to transport or pay for a minimum amount of gas equal to 75% of the average amount of gas it has taken over the past three years. This settlement will not have a material impact on the Company's results of operations.\nELECTRIC OPERATIONS\nInstalled Capacity\nThe net installed summer electric generating capacity available to the Company to serve its peak load as of December 31, 1993 is presented below. The Company plans to maintain a balanced approach to energy supply, including conservation and load management, purchases of capacity and energy from other utilities and nonutility generators, and construction of new generating capacity. For a discussion of the energy supply plan, see \"Challenge 2000 Plan\" which begins on page I-4.\nThe net generating capacity available for operations at any time may be less than the total net installed generating capacity due to generating units being temporarily out of service for inspection, maintenance, repairs, or unforeseen circumstances. See \"Item 2","section_1A":"","section_1B":"","section_2":"ITEM 2. PROPERTIES\nSubstantially all utility plants and properties of the Company are subject to the lien of the Mortgage under which the Company's First Mortgage Bonds are issued.\nThe Company's electric properties are located in Delaware, Maryland, Virginia, Pennsylvania, and New Jersey. The following table sets forth the net installed generating capacity available to the Company to serve its peak load as of December 31, 1993.\n- -------- (A) Company portion of jointly owned plants. (B) Represents capacity owned by a refinery customer which is available to the Company to serve its peak load.\nI-22\nMajor transmission and distribution lines owned and in service are as follows:\nThe Company's electric transmission and distribution system includes 1,338 transmission poleline miles of overhead lines, 5 transmission cable miles of underground cables, 6,634 distribution poleline miles of overhead lines, and 4,294 cable miles of distribution underground cables.\nThe Company has a liquefied natural gas plant located in Wilmington, Delaware with a storage capacity of 3.045 million gallons and a planned sendout capacity of 25,000 Mcf per day.\nThe Company also owns four natural gas city gate stations at various locations in its gas service territory. These stations have a total sendout capacity of 125,000 Mcf per day.\nThe following table sets forth the Company's gas pipeline miles:\n-------- * Includes 11 miles of joint-use gas pipeline that is used 10% for gas and 90% for electric.\nThe Company owns and occupies office buildings in Wilmington and Christiana, Delaware and Salisbury, Maryland, and also owns elsewhere in its service area a number of properties that are used for office, service, and other purposes.\nITEM 3.","section_3":"ITEM 3. LEGAL PROCEEDINGS\nIn October 1992, the Company's largest firm gas customer filed a complaint in the Delaware Chancery Court seeking rescission of its current firm service agreement with the Company and other relief, including non-firm service as an interruptible Gas Transportation customer. For a discussion of the outcome of this case, see \"Competition--Gas Business\" on page I-3.\nIn November 1992, DCTC-Glendon, Inc., a subsidiary of the Company, filed a lawsuit in the U.S. District Court for the Eastern District of Pennsylvania against Energenics\/Glendon, Inc. (EGI) and Joseph M. Reibman (Reibman), the sole shareholder of EGI. In July 1993, the court entered an order granting EGI's and Reibman's motion to file omitted counterclaims and add counterclaim defendants, including the Company, various subsidiaries of the Company, and certain individual officers and employees of the Company and its subsidiaries. In February 1994, DCTC-Glendon, Inc., Delcap, Reibman and the counterclaim defendants settled the litigation and all claims made by the parties were dismissed with prejudice.\nIn June 1993, the Delaware Coastal Zone Industrial Control Board (the \"Board\") adopted regulations (the \"Regulations\") under Delaware's Coastal Zone Act which would, among other things, prohibit the Company from constructing new power-generating facilities or expanding any of its existing power-generating facilities outside a designated boundary. In July 1993, the Company filed a complaint in the Delaware Superior Court seeking to have the Regulations declared null and void. In addition, the Company joined with\nI-23\nother affected parties in filing a complaint in July 1993 in the Delaware Chancery Court. The Chancery Court complaint alleges procedural violations of the Freedom of Information Act by the Board in the passage of the Regulations and requests that the Regulations be declared null and void. The Company cannot predict the outcome of either of these lawsuits.\nOn December 14, 1993, Star filed a complaint against the Company in Delaware Chancery Court alleging that the Company overcharged it for pension and tax- related costs under a contract entered into by the parties' predecessors in 1955. The complaint asks for a refund and damages totalling $9.3 million. While the Company believes that it did not overcharge Star and is defending its position, it cannot predict the outcome of the lawsuit.\nITEM 4.","section_4":"ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS\nNo matter was submitted during the fourth quarter of the fiscal year covered by this report to a vote of security holders, through the solicitation of proxies or otherwise.\nI-24\nPART II\nITEM 5.","section_5":"ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS\nThe Company's common stock is listed on the New York and Philadelphia Stock Exchanges and has unlisted trading privileges on the Cincinnati, Midwest, and Pacific Stock Exchanges and had the following dividends declared and high\/low prices by quarter for the years 1993 and 1992.\nThe Company had 58,225 registered holders of common stock as of December 31, 1993.\nThe Charter and the Mortgage securing the Company's outstanding bonds contain restrictions on the payment of dividends on common stock which would become applicable if its capital and retained earnings fall below certain specific levels or if preferred stock dividends are in arrears.\nThe retained earnings available for dividends on common stock as of December 31, 1993 were approximately $223,814,000 under the most restrictive of these provisions.\nWhile the Board of Directors intends to continue the practice of paying dividends quarterly, amounts and dates of such dividends as may be declared will necessarily be dependent upon the Company's future earnings, financial requirements, and other factors. For a further discussion of dividends, refer to the \"Dividends\" section of Management's Discussion and Analysis of Financial Condition and Results of Operations included in the 1993 Annual Report to Stockholders, incorporated by reference herein.\nITEM 6.","section_6":"ITEM 6. SELECTED FINANCIAL DATA\nThis information is contained on page 18 of the 1993 Annual Report to Stockholders filed herein as Exhibit 13, which portion of such Annual Report is hereby incorporated by reference herein.\nITEM 7.","section_7":"ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS\nThis information is contained on pages 19 through 26 of the 1993 Annual Report to Stockholders filed herein as Exhibit 13, which portion of such Annual Report is hereby incorporated by reference herein. Refer to the \"Competition\" section of Part I herein for an update to the disclosure included in the \"Competition\" section of Management's Discussion and Analysis of Financial Condition and Results of Operations concerning strategies to mitigate the expected loss of revenues in 1995 due to the decision of a resale customer (ODEC) to purchase up to 150 MW from another utility.\nITEM 8.","section_7A":"","section_8":"ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA\nThe consolidated financial statements, notes 1 through 18 to consolidated financial statements, and related report thereon of Coopers & Lybrand, independent accountants, appear on pages 27 through 46 of the 1993 Annual Report to Stockholders filed herein as Exhibit 13, which portion of such Annual Report is hereby incorporated by reference herein.\nITEM 9.","section_9":"ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE\nNone.\nII-1\nREPORT OF INDEPENDENT ACCOUNTANTS\nTo the Board of Directors and Stockholders Delmarva Power & Light Company Wilmington, Delaware\nOur report, which includes an explanatory paragraph regarding the Company's changes in its methods of accounting for unbilled revenues, income taxes, and postretirement benefits other than pensions, on the consolidated financial statements of Delmarva Power & Light Company has been incorporated by reference in this Form 10-K from page 27 of the 1993 Annual Report to Stockholders of Delmarva Power & Light Company. In connection with our audits of such financial statements, we have also audited the related financial statement schedules listed in the index in Item 14 of this Form 10-K.\nIn 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 required to be included therein.\nCoopers & Lybrand\n2400 Eleven Penn Center Philadelphia, Pennsylvania February 4, 1994\nII-2\nPART III\nITEM 10.","section_9A":"","section_9B":"","section_10":"ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT\n\"Proposal No. 1 -- Election of Directors\" is incorporated by reference herein from the Definitive Proxy Statement which is expected to be filed on or about April 21, 1994, and information about the executive officers of the registrant is included under Item 1.\nITEM 11.","section_11":"ITEM 11. EXECUTIVE COMPENSATION\n\"Executive Compensation\" is incorporated by reference herein from the Definitive Proxy Statement which is expected to be filed on or about April 21, 1994.\nITEM 12.","section_12":"ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT\n\"Proposal No. 1 -- Election of Directors\" is incorporated by reference herein from the Definitive Proxy Statement which is expected to be filed on or about April 21, 1994.\nITEM 13.","section_13":"ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS\nNone.\nIII-1\nPART IV\nITEM 14.","section_14":"ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K\n(a) The following documents are filed as part of this report:\n1. Financial Statements--The following financial statements are contained in the Company's 1993 Annual Report to Stockholders filed as Exhibit 13 hereto and incorporated herein by reference.\n2. Financial Statement Schedules--The following financial statement schedules are contained in Part IV of this report.\nAll other schedules have been omitted since the required information is not present or not present in amounts sufficient to require submission of the schedule or because the information required is included in the respective financial statements or the notes thereto.\n3. Schedule of Operating Statistics for the three years ended December 31, 1993 can be found on page IV-14 of this report.\n4. Exhibits\nIV-1\nb) Reports on Form 8-K (filed during the reporting period):\nA Report on Form 8-K dated October 28, 1993, containing a press release of the Company concerning third quarter earnings, was filed with the Commission.\nIV-2\nDELMARVA POWER & LIGHT COMPANY\nSCHEDULE V--UTILITY PLANT PROPERTY FOR THE YEAR ENDED DECEMBER 31, 1993 (THOUSANDS OF DOLLARS)\nIV-3\nDELMARVA POWER & LIGHT COMPANY\nSCHEDULE V -- UTILITY PLANT PROPERTY -- (CONTINUED) FOR THE YEAR ENDED DECEMBER 31, 1993 (THOUSANDS OF DOLLARS)\n- -------- (a) Construction and nuclear fuel expenditures, including AFUDC. (b) Includes transfers from construction work in progress and transfers of land and facilities to\/from non-utility property, plant held for future use or other functions. (c) Transfers to plant in service. (d) Amortization of acquisition adjustment which is charged against utility operating income. (e) Includes transfers between functions and adjustments to prior closings.\nIV-4\nDELMARVA POWER & LIGHT COMPANY\nSCHEDULE V -- UTILITY PLANT PROPERTY FOR THE YEAR ENDED DECEMBER 31, 1992 (THOUSANDS OF DOLLARS) - --------------------------------------------------------------------------------\nIV-5\nDELMARVA POWER & LIGHT COMPANY\nSCHEDULE V -- UTILITY PLANT PROPERTY -- (CONTINUED) FOR THE YEAR ENDED DECEMBER 31, 1992 (THOUSANDS OF DOLLARS)\n- -------- (a) Construction and nuclear fuel expenditures, including AFUDC. (b) Includes transfers from construction work in progress and transfers of land and facilities to\/from non-utility property, plant held for future use or other functions. (c) Transfers to plant in service. (d) Amortization of acquisition adjustment which is charged against utility operating income. (e) Includes transfers between functions and adjustments to prior closings. (f) Reclassified to other property for financial reporting purposes.\nIV-6\nDELMARVA POWER & LIGHT COMPANY\nSCHEDULE V -- UTILITY PLANT PROPERTY FOR THE YEAR ENDED DECEMBER 31, 1991 (THOUSANDS OF DOLLARS)\nIV-7\nDELMARVA POWER & LIGHT COMPANY\nSCHEDULE V -- UTILITY PLANT PROPERTY -- (CONTINUED) FOR THE YEAR ENDED DECEMBER 31, 1991 (THOUSANDS OF DOLLARS)\n- -------- (a) Construction and nuclear fuel expenditures, including AFUDC. (b) Includes transfers from construction work in progress and transfers of land and facilities to\/from non-utility property, plant held for future use or other functions. (c) Transfers to plant in service. (d) Amortization of acquisition adjustment which is charged against utility operating income. (e) Includes transfers between functions and adjustments to prior closings. (f) Includes sale of Delaware City Plant.\nIV-8\nDELMARVA POWER & LIGHT COMPANY\nSCHEDULE VI -- CONSOLIDATED ACCUMULATED DEPRECIATION AND AMORTIZATION (UTILITY PLANT) FOR THE YEAR ENDED DECEMBER 31, 1993 (THOUSANDS OF DOLLARS)\n- -------- (a) Charged to clearing accounts for which subsequent distribution was made to operating and other accounts. (b) Includes removal cost net of salvage.\nIV-9\nDELMARVA POWER & LIGHT COMPANY\nSCHEDULE VI -- CONSOLIDATED ACCUMULATED DEPRECIATION AND AMORTIZATION (UTILITY PLANT) FOR THE YEAR ENDED DECEMBER 31, 1992 (THOUSANDS OF DOLLARS)\n- -------- (a) Charged to clearing accounts for which subsequent distribution was made to operating and other accounts. (b) Includes removal cost net of salvage.\nIV-10\nDELMARVA POWER & LIGHT COMPANY\nSCHEDULE VI -- CONSOLIDATED ACCUMULATED DEPRECIATION AND AMORTIZATION (UTILITY PLANT) FOR THE YEAR ENDED DECEMBER 31, 1991 (THOUSANDS OF DOLLARS)\n- -------- (a) Charged to clearing accounts for which subsequent distribution was made to operating and other accounts. (b) Includes removal cost net of salvage. (c) Includes sale of Delaware City Plant.\nIV-11\nDELMARVA POWER & LIGHT COMPANY\nSCHEDULE IX -- SHORT-TERM BORROWINGS FOR THE THREE YEARS ENDED DECEMBER 31, 1993\n- -------- (a) Average daily balance based on 365 days. (b) Weighted average monthly rates for debt outstanding. (c) Loan Participation Agreements--Short-term bank loans which are remarketed to investors. (d) Subsidiary debt.\nIV-12\nDELMARVA POWER & LIGHT COMPANY\nSCHEDULE X -- SUPPLEMENTAL INCOME STATEMENT INFORMATION FOR THE THREE YEARS ENDED DECEMBER 31, 1993 (THOUSANDS OF DOLLARS)\n- -------- Note: Other information has been omitted since the required information either is not present in amounts sufficient to require submission or is included in the respective financial statements or the notes thereto.\nIV-13\nDELMARVA POWER & LIGHT COMPANY\nOPERATING STATISTICS FOR THE THREE YEARS ENDED DECEMBER 31, 1993\nThe table below sets forth selected financial and operating statistics for the electric and gas divisions for the three years ended December 31, 1993.\n- -------- (1) Based on average number of customers during period.\nIV-14\nSIGNATURES\nPURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.\nDelmarva Power & Light Company (Registrant)\nDated: March 22, 1994 \/s\/ Barbara S. Graham By__________________________________ (Barbara S. Graham, Vice President and Chief Financial Officer)\nPURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATE INDICATED.\nSIGNATURE TITLE DATE\n\/s\/ (Howard E. Cosgrove) Chairman of the Board, March 22, 1994 ..................................... President, Chief (Howard E. Cosgrove) Executive Officer, and Director\n\/s\/ (H. Ray Landon) Executive Vice March 22, 1994 ..................................... President and (H. Ray Landon) Director\n\/s\/ (Barbara S. Graham) Vice President and March 22, 1994 ..................................... Chief Financial (Barbara S. Graham) Officer\n\/s\/ (James P. Lavin) Comptroller and Chief March 22, 1994 ..................................... Accounting Officer (James P. Lavin)\n\/s\/ (Michael G. Abercrombie) Director March 22, 1994 ..................................... (Michael G. Abercrombie)\n\/s\/ (Elwood P. Blanchard, Jr.) Director March 22, 1994 ..................................... (Elwood P. Blanchard, Jr.)\n\/s\/ (Robert D. Burris) Director March 22, 1994 ..................................... (Robert D. Burris)\n\/s\/ (Audrey K. Doberstein) Director March 22, 1994 ..................................... (Audrey K. Doberstein)\n\/s\/ (James H. Gilliam, Jr.) Director March 22, 1994 ..................................... (James H. Gilliam, Jr.)\n\/s\/ (Sarah I. Gore) Director March 22, 1994 ..................................... (Sarah I. Gore)\n\/s\/ (James C. Johnson, III) Director March 22, 1994 ..................................... (James C. Johnson, III)\n\/s\/ (James T. McKinstry) Director March 22, 1994 ..................................... (James T. McKinstry)\nIV-15\nDELMARVA POWER & LIGHT COMPANY 1993 ANNUAL REPORT ON FORM 10-K EXHIBIT INDEX\nExhibit Page Number Description Number - ------ ----------- ------\n3-C Copy of the Company's Certificate of Designation and Articles of Amendment establishing the 6 3\/4% Preferred Stock.\n3-D Copy of the Company's By-laws as amended September 30, 1993.\n4-J Copy of the Eighty-Fourth Supplemental Indenture.\n4-K Copy of the Eighty-Fifth Supplemental Indenture.\n10-F Copy of the severance agreement with members of management.\n10-G Copy of the current listing of members of management who have signed the severance agreement.\n12-A Computation of ratio of earnings to fixed charges.\n12-B Computation of ratio of earnings to fixed charges and preferred dividends.\n13 Certain portions of the 1993 Annual Report to Stockholders which are incorporated by reference in this Form 10-K.\n23 Consent of Independent Accountants.","section_15":""}
{"filename":"1077144_1993.txt","cik":"1077144","year":"1993","section_1":"ITEM 1. Business.\nThe trust fund relating to Pooling and Servicing Agreement dated as of December 1, 1992 (the \"Pooling and Servicing Agreement\") among First Boston Mortgage Securities Corp., as depositor (the \"Depositor\"), and Bankers Trust Company of California, N.A. as trustee (the \"Trustee\").\nThe Conduit Mortgage Pass-Through Certificates, Series 1992-5 will be comprised of two Classes of Certificates, designated as the Class 1-A Certificates and the Class 2-A Certificates (collectively, the \"Certificates\"). The Class 1-A Certificates and Class 2-A Certificates each evidence beneficial ownership interests in a separate trust fund (each, a \"Trust Fund\") to be created by First Boston Mortgage Securities Corp. (the \"Depositor\"), which will contain a pool of adjustable rate, conventional mortgage loans (together the \"Mortgage Loans\") secured by deeds of trust on residential properties held in trust for the benefit of the Certificateholders. The Mortgage Loans were originated by or acquired by, and will be serviced by, Countrywide Funding Corporation (\"Countywide\") and will be purchased by the Depositor from First Boston Mortgage Capital Corp., an affiliate of the Depositor, and transferred by the Depositor to the Trust Funds pursuant to a Pooling and Servicing Agreement, dated as of December 1, 1992, in exchange for the Certificates. Each Trust Fund will include a separate group of Mortgage Loans: Loan Group 1 and Loan Group 2 (each, a \"Loan Group\"). Distributions of principal and interest on the Class 1-A Certificates will be based on payments received on the Mortgage Loans in Loan Group 1. Distributions of principal and interest on the Class 2-A Certificates will be based on payments received on the Mortgage Loans in Loan Group 2. The Mortgage Loans are more fully described in the Prospectus Supplement dated July 17, 1992.\nInformation with respect to the business of the Trust would not be meaningful because the only \"business\" of the Trust is the collection on the Mortgage Loans and distribution of payments on the Certificates to Certificateholders. This information is accurately summarized in the Monthly Reports to Certificateholders, which are filed on Form 8-K. There is no additional relevant information to report in response to Item 101 of Regulation S-K.\nITEM 2.","section_1A":"","section_1B":"","section_2":"ITEM 2. Properties.\nThe Depositor owns no property. The First Boston Mortgage Securities Corp., Conduit Mortgage Pass-Through Certificates, Series 1992-5, in the aggregate, represent the beneficial ownership in a Trust consisting primarily of the Mortgage Loans. The Trust will acquire title to real estate only upon default of the mortgagors under the Mortgage Loan. Therefore, this item is inapplicable.\nITEM 3.","section_3":"ITEM 3. Legal Proceedings.\nNone.\nITEM 4.","section_4":"ITEM 4. Submission of Matters to a Vote of Security Holders.\nNo matters were submitted to a vote of Certificateholders during the fiscal year covered by this report.\nPART II\nITEM 5.","section_5":"ITEM 5. Market for Depositor's Common Equity and Related Stockholder Matters.\nThe First Boston Mortgage Securities Corp., Conduit Mortgage Pass-Through Certificates, Series 1992-5 represent, in the aggregate, the beneficial ownership in a trust fund consisting primarily of the Mortgage Loans. The Certificates are owned by Certificateholders as trust beneficiaries. Strictly speaking, Depositor has no \"common equity,\" but for purposes of this Item only, Depositor's Conduit Mortgage Pass-Through Certificates are treated as \"common equity.\"\n(a) Market Information. There is no established public trading market for Depositor's Notes. Depositor believes the Notes are traded primarily in intra-dealer markets and non-centralized inter-dealer markets.\n(b) Holders. The number of registered holders of all classes of Certificates on (for dates see ITEM 12(a)) was 5.\n(c) Dividends. Not applicable. The information regarding dividend required by sub-paragraph (c) of Item 201 of Regulation S-K is inapplicable because the Trust does not pay dividends. However, information as to distribution to Certificateholders is provided in the Monthly Reports to Certificateholders for each month of the fiscal year in which a distribution to Certificateholders was made.\nITEM 6.","section_6":"ITEM 6. Selected Financial Data.\nNot Applicable. Because of the limited activities of the Trust, the Selected Financial Data required by Item 301 of Regulation S-K does not add relevant information to that provided by the Monthly Reports to Certificateholders, which are filed on a monthly basis on Form 8-K.\nITEM 7.","section_7":"ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.\nNot Applicable. The information required by Item 303 of Regulation S-K is inapplicable because the Trust does not have management per se, but rather the Trust has a Trustee who causes the preparation of the Monthly Reports to Certificateholders. The information provided by the Monthly Reports to Certificateholders, which are filed on a monthly basis on Form 8-K, does provide the relevant financial information regarding the financial status of the Trust.\nITEM 8.","section_7A":"","section_8":"ITEM 8. Financial Statements and Supplementary Data.\nMonthly Remittance Statement to the Certificateholders as to distributions made on January 25, 1993, and filed with the Securities and Exchange Commission on Form 8-K on February 10, 1999.\nMonthly Remittance Statement to the Certificateholders as to distributions made on February 25, 1993, and filed with the Securities and Exchange Commission on Form 8-K on February 10, 1999.\nMonthly Remittance Statement to the Certificateholders as to distributions made on March 25, 1993, and filed with the Securities and Exchange Commission on Form 8-K on February 10, 1999.\nMonthly Remittance Statement to the Certificateholders as to distributions made on April 26, 1993, and filed with the Securities and Exchange Commission on Form 8-K on February 10, 1999.\nMonthly Remittance Statement to the Certificateholders as to distributions made on May 25, 1993, and filed with the Securities and Exchange Commission on Form 8-K on February 10, 1999.\nMonthly Remittance Statement to the Certificateholders as to distributions made on June 25, 1993, and filed with the Securities and Exchange Commission on Form 8-K on February 10, 1999.\nMonthly Remittance Statement to the Certificateholders as to distributions made on July 26, 1993, and filed with the Securities and Exchange Commission on Form 8-K on February 10, 1999.\nMonthly Remittance Statement to the Certificateholders as to distributions made on August 25, 1993, and filed with the Securities and Exchange Commission on Form 8-K on February 10, 1999.\nMonthly Remittance Statement to the Certificateholders as to distributions made on August 25, 1993, and filed with the Securities and Exchange Commission on Form 8-K on February 10, 1999.\nMonthly Remittance Statement to the Certificateholders as to distributions made on September 27, 1993, and filed with the Securities and Exchange Commission on Form 8-K on February 10, 1999.\nMonthly Remittance Statement to the Certificateholders as to distributions made on October 25, 1993, and filed with the Securities and Exchange Commission on Form 8-K on February 10, 1999.\nMonthly Remittance Statement to the Certificateholders as to distributions made on November 26, 1993, and filed with the Securities and Exchange Commission on Form 8-K on February 10, 1999.\nMonthly Remittance Statement to the Certificateholders as to distributions made on December 27, 1993, and filed with the Securities and Exchange Commission on Form 8-K on February 10, 1999.\nAnnual Statement of Compliance by the Master Servicer is not currently available and will be subsequently filed on Form 8.\nIndependent Accountant's Report on Servicer's will be subsequently filed on Form 8.\nITEM 9.","section_9":"ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.\nNone.\nPART III\nITEM 10.","section_9A":"","section_9B":"","section_10":"ITEM 10. Directors and Executive Officers of Depositor.\nNot Applicable. The Trust does not have officers or directors. Therefore, the information required by items 401 and 405 of Regulation S-K are inapplicable.\nITEM 11.","section_11":"ITEM 11. Executive Compensation.\nNot Applicable. The Trust does not have officers or directors to whom compensation needs to be paid. Therefore, the information required by item 402 of regulation S-K is inapplicable.\nITEM 12.","section_12":"ITEM 12. Security Ownership of Certain Beneficial Owners and Management.\n(a) Security ownership of certain beneficial owners. Under the Pooling and Servicing Agreement governing the Trust, the holders of the Certificates generally do not have the right to vote and are prohibited from taking part in management of the Trust. For purposes of this Item and Item 13","section_13":"ITEM 13. Certain Relationships and Related Transactions.\n(a) Transactions with management and others. Depositor knows of no transaction or series of transactions during the fiscal year ended December 31, 1993, or any currently proposed transaction or series of transactions, in an amount exceeding $60,000 involving the Depositor in which the Certificateholders identified in Item 12(a) had or will have a direct or indirect material interest. There are no persons of the types described in Item 404(a)(1),(2) and (4) of Regulation S-K, however, the information required by Item 404(a)(3) of Regulation S-K is hereby incorporated by reference in Item 12 herein.\n(b) Certain business relationships. None.\n(c) Indebtedness of management. Not Applicable. The Trust does not have management consisting of any officers or directors. Therefore, the information required by item 404 of Regulation S-K is inapplicable.\n(d) Transactions with promoters. Not Applicable. The Trust does not use promoters. Therefore, the information required by item 404 of Regulation S-K is inapplicable.\nPART IV\nITEM 14.","section_14":"ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.\n(a) The following is a list of documents filed as part of this report:\nEXHIBITS\nMonthly Remittance Statement to the Certificateholders as to distributions made on January 25, 1993, and filed with the Securities and Exchange Commission on Form 8-K on February 10, 1999.\nMonthly Remittance Statement to the Certificateholders as to distributions made on February 25, 1993, and filed with the Securities and Exchange Commission on Form 8-K on February 10, 1999.\nMonthly Remittance Statement to the Certificateholders as to distributions made on March 25, 1993, and filed with the Securities and Exchange Commission on Form 8-K on February 10, 1999.\nMonthly Remittance Statement to the Certificateholders as to distributions made on April 26, 1993, and filed with the Securities and Exchange Commission on Form 8-K on February 10, 1999.\nMonthly Remittance Statement to the Certificateholders as to distributions made on May 25, 1993, and filed with the Securities and Exchange Commission on Form 8-K on February 10, 1999.\nMonthly Remittance Statement to the Certificateholders as to distributions made on June 25, 1993, and filed with the Securities and Exchange Commission on Form 8-K on February 10, 1999.\nMonthly Remittance Statement to the Certificateholders as to distributions made on July 26, 1993, and filed with the Securities and Exchange Commission on Form 8-K on February 10, 1999.\nMonthly Remittance Statement to the Certificateholders as to distributions made on August 25, 1993, and filed with the Securities and Exchange Commission on Form 8-K on February 10, 1999.\nMonthly Remittance Statement to the Certificateholders as to distributions made on August 25, 1993, and filed with the Securities and Exchange Commission on Form 8-K on February 10, 1999.\nMonthly Remittance Statement to the Certificateholders as to distributions made on September 27, 1993, and filed with the Securities and Exchange Commission on Form 8-K on February 10, 1999.\nMonthly Remittance Statement to the Certificateholders as to distributions made on October 25, 1993, and filed with the Securities and Exchange Commission on Form 8-K on February 10, 1999.\nMonthly Remittance Statement to the Certificateholders as to distributions made on November 26, 1993, and filed with the Securities and Exchange Commission on Form 8-K on February 10, 1999.\nMonthly Remittance Statement to the Certificateholders as to distributions made on December 27, 1993, and filed with the Securities and Exchange Commission on Form 8-K on February 10, 1999.\n(c) The exhibits required to be filed by Depositor pursuant to Item 601 of Regulation S-K are listed above and in the Exhibit Index that immediately follows the signature page hereof.\n(d) Not Applicable. The Trust does not have any subsidiaries or affiliates. Therefore, no financial statements are filed with respect to subsidiaries or affiliates.\nSupplemental information to be furnished with reports filed pursuant to Section 15(d) by Depositors which have not registered securities pursuant to Section 12 of the Act.\nNo annual report, proxy statement, form of proxy or other soliciting material has been sent to Certificateholders, and the Depositor does not contemplate sending any such materials subsequent to the filing of this report.\nSIGNATURE\nPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Depositor has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.\nBy: Bankers Trust Company of California, N.A. not in its individual capacity but solely as a duly authorized agent of the Registrant pursuant to the Pooling and Servicing Agreement, dated as of December 1, 1992.\nBy: \/s\/Judy L. Gomez Judy L. Gomez Assistant Vice President\nDate: March 3, 1999\nEXHIBIT INDEX\nExhibit Document\n1.1 Monthly Remittance Statement to the Certificateholders as to distributions made on January 25, 1993, and filed with the Securities and Exchange Commission on Form 8-K on February 10, 1999.\n1.2 Monthly Remittance Statement to the Certificateholders as to distributions made on February 25, 1993, and filed with the Securities and Exchange Commission on Form 8-K on February 10, 1999.\n1.3 Monthly Remittance Statement to the Certificateholders as to distributions made on March 25, 1993, and filed with the Securities and Exchange Commission on Form 8-K on February 10, 1999.\n1.4 Monthly Remittance Statement to the Certificateholders as to distributions made on April 26, 1993, and filed with the Securities and Exchange Commission on Form 8-K on February 10, 1999.\n1.5 Monthly Remittance Statement to the Certificateholders as to distributions made on May 25, 1993, and filed with the Securities and Exchange Commission on Form 8-K on February 10, 1999.\n1.6 Monthly Remittance Statement to the Certificateholders as to distributions made on June 25, 1993, and filed with the Securities and Exchange Commission on Form 8-K on February 10, 1999.\n1.7 Monthly Remittance Statement to the Certificateholders as to distributions made on July 26, 1993, and filed with the Securities and Exchange Commission on Form 8-K on February 10, 1999.\n1.8 Monthly Remittance Statement to the Certificateholders as to distributions made on August 25, 1993, and filed with the Securities and Exchange Commission on Form 8-K on February 10, 1999.\n1.9 Monthly Remittance Statement to the Certificateholders as to distributions made on September 27, 1993, and filed with the Securities and Exchange Commission on Form 8-K on February 10, 1999.\n1.10 Monthly Remittance Statement to the Certificateholders as to distributions made on October 25, 1993, and filed with the Securities and Exchange Commission on Form 8-K on February 10, 1999.\n1.11 Monthly Remittance Statement to the Certificateholders as to distributions made on November 26, 1993, and filed with the Securities and Exchange Commission on Form 8-K on February 10, 1999.\n1.12 Monthly Remittance Statement to the Certificateholders as to distributions made on December 27, 1993, and filed with the Securities and Exchange Commission on Form 8-K on February 10, 1999.\n1.13 The Pooling and Servicing Agreement of the Registrant dated as of December 1, 1992 (hereby incorporated herein by reference and filed as part of the Registrant's Current Report on Form 8-K filed with Securities and Exchange Commission on February 10, 1999.","section_15":""}
{"filename":"798166_1993.txt","cik":"798166","year":"1993","section_1":"ITEM 1. BUSINESS\nICN Biomedicals, Inc. and its subsidiaries (the \"Company\") develop, manufacture and sell research chemical products, biomedical instrumentation, diagnostic reagents, and radiation monitoring services. Major product lines of the research chemical products group include biochemicals, radiochemicals and cell biology products, and chromatography materials. Major product lines of the biomedical instrumentation group include microplate instrumentation, environmental technology products and precision liquid delivery instrumenta- tion. The diagnostic reagents group provides reagents and instrumentation, including enzyme-and radio-immunoassay kits and immunoassay systems. The Company also purchases research chemicals from other manufacturers, in bulk, for repackaging and distributes biomedical instrumentation manufactured by others. The Company's principal customers are life science researchers, including those engaged in molecular biology, genetic engineering and other areas of biotechnology, biochemical research laboratories, and clinical laboratories. Major markets are located in the United States, Canada, Mexico, South America, Eastern and Western Europe, Australia and Japan. The Company's products are sold through Company-produced catalogs, direct mail advertising, direct sales force, and selected independent distributors and agents.\nThe Company was incorporated in September 1983 as a Delaware corporation by its parent, ICN Pharmaceuticals, Inc. (\"ICN\"), and has since operated as an ICN subsidiary. Effective January 1, 1984, ICN transferred to the Company, in exchange for all of the then outstanding shares of common stock of the Company, certain assets and liabilities comprising the Life Sciences Group of ICN. Some of the operations of that group had been conducted by ICN since ICN's inception in 1960. Since 1984, several businesses and product lines have been acquired by ICN on behalf of the Company and subsequently transferred to the Company.\nThe Company changed its fiscal year end from November 30 to December 31, effective for the twelve months ended December 31, 1991.\nIn November 1989, the Company acquired, for $37,700,000, all of the issued and outstanding common shares of Flow Laboratories, Inc., and Flow Laboratories B.V., from GRC International, Inc. (formerly Flow General, Inc.). These companies, together with their respective subsidiaries (\"Flow\") constituted the Biomedical Division of Flow General. Funds for the purchase consisted of cash and bonds with a value of $35,700,000 (of which $27,000,000 was financed by bank borrowings, and 100,000 shares of the common stock of the Company, with a guaranteed value of $20 per share on November 8, 1994. Flow was a manufacturer and distributor of several thousand biomedical products worldwide, including cell biology products, laboratory plastics, enzyme linking immunosorbent assay (ELISA), diagnostic instrumentation and environmental technology products.\nAt the time of the acquisition of Flow, the Company believed that the distribution outlets acquired would substantially increase the Company's ability to compete in international markets where it had no significant direct representation. Following the acquisition, the Company attempted to centralize the European marketing and distribution, discontinue certain low margin product lines and shut down excess manufacturing and distribution facilities. These efforts continued into 1992, at which time the Company\ncompleted a major restructuring plan. (See Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations, Restructuring Costs and Special charges).\nOn August 30, 1993, the Company issued 300,000 shares of a new series \"A\" of the Company's non-convertible, non-voting, preferred stock valued pursuant to a fairness opinion, at $30,000,000 to ICN. In exchange, ICN delivered 4,983,606 shares of the Company's common stock that ICN owned and exchanged intercompany debt owed to ICN by the Company in the amount of $11,000,000.\nIn addition, on August 30, 1993, the Company issued 390,000 shares of a new series \"B\" of the Company's non-convertible, non-voting, preferred stock valued pursuant to a fairness opinion, at $32,000,000 to ICN. In exchange, ICN delivered to the Company 8,384,843 shares of the Company's common stock that ICN owned.\nAs a result of the series \"A\" and \"B\" exchanges, ICN's ownership was reduced from 88% to 69% of the outstanding common stock of the Company.\nIn addition to the business of the Company, ICN develops, manufactures, distributes and sells pharmaceutical and related products and services. ICN's pharmaceuticals group is composed of Viratek, Inc. (\"Viratek\", a 63%-owned subsidiary at March 26, 1994) and SPI Pharmaceuticals, Inc. (\"SPI\", a 39%-owned investment at March 26, 1994, which, effective from January 1, 1993, is accounted for on the equity method of accounting by ICN.)\nViratek conducts research and develops compounds derived from nucleic acids, the basic genetic material. Viratek's principal product is the compound Virazole (registered trademark) (ribavirin), a broad spectrum anti-viral agent. The Company has no financial interest in Virazole. In addition, Viratek has initiated a new research program focused on the detection and measurement of a group of human peptide hormones or regulators and in vitro commercial diagnostics. Viratek also conducts certain biomedical research and development for the Company (see Research and Development).\nSPI and its subsidiaries manufacture, distribute and sell pharmaceutical and nutritional products, primarily in the United States, Yugoslavia, Mexico, Western and Eastern Europe and Canada.\nThe Company's principal executive offices are located at 3300 Hyland Avenue, Costa Mesa, California 92626, telephone (714) 545-0113.\nProducts\nResearch Chemical Products Group\nBiomedical's research products group markets more than 55,000 chemical, radiochemical, biochemical and immunochemical compounds. These compounds result from chemical synthesis, biochemical (enzymatic) synthesis, and\/or are isolated from natural sources such as micro-organisms, plant, and animal tissues. In addition, the biomedical group offers laboratory plasticware, media for cell culture, and materials for chromatography.\nBIOCHEMICALS. Biochemicals are chemicals that occur in or result from any life process. The major biochemicals in the research laboratory market\ninclude proteins, peptides, amino acids, carbohydrates, enzymes, nucleic acids and their derivatives. The Company repackages and sells, primarily through a catalog, spot mailings and telephone solicitation, approximately 35,000 chemical items (including rare and fine chemicals) to customers in approximately 1,500 laboratories worldwide who are largely engaged in organic, inorganic and biochemical experimentation and synthesis. Major products include ammonium sulfate, cesium chloride, guanidine hydrochloride, L-glutamine and ultra-pure tris.\nIn recent years, there has been an increasing demand for ultra-pure biochemicals, particularly for use in molecular biology and medically- oriented research work. The Company has expanded its molecular biology line through the addition of modifying and restriction enzymes, reagents for gel electrophoresis and other chemicals used in various phases of genetic engineering. This includes materials used in recombinant technology such as growth factors, restriction endonucleases (enzymes which \"cut\" DNA material at a specific point) and polynucleotide \"linkers\" which are used to rejoin divided segments of DNA molecules.\nUnder the K&K Laboratories trade name the Company offers 23,000 rare and fine chemicals consisting principally of organic chemicals, inorganic chemicals, organometallics, rare earth metals and specialty intermediates. These products are used in the chemical, pharmaceutical, aerospace, electronic, and educational fields.\nRADIOCHEMICALS. Radiochemicals are produced through the combination of radioactive raw materials with non-radioactive chemical intermediates, the resulting products, referred to as \"labeled\" or \"tagged\", possess one or more radioactive atoms. These isotopes are used by researchers in conjunction with sophisticated measuring instruments to follow or trace the chemical through a biochemical system. Such work helps to determine the mechanisms by which molecules are transformed within living systems, furthering knowledge of genetic, biological and physiological disorders, including hormonal deficiencies, physical abnormalities and a range of organ and endocrinological disorders.\nUsing a variety of multi-step chemical and biochemical procedures, the Company produces in excess of 800 different \"radioactive\" or \"labeled\" compounds. The Irvine, California facility uses Phosphorus-32, Sulfur-35, Tritium and Carbon-14 to produce organic molecules for use in a large number of biomedical research applications. The Company offers reactor-produced radionuclides but does not, at this time, refine such products for human use as radiopharmaceuticals.\nCELL BIOLOGY. The Company sells a wide range of components for the culturing of cells in an artificial environment under specially controlled conditions. Prior to the sale of the Irvine, Scotland manufacturing facility in April 1993, the Company manufactured most cell biology products in-house. The Company now procures these products at a lower cost from third party suppliers. Cell culture has become an increasingly important technique for the study of cell behavior, the study of viruses and viral infections, the development and production of vaccines and the testing of new drugs, chemicals, food and toxic substances.\nThe Company is a supplier of materials for cell culture and offers a comprehensive range of media, growth factors and sera as well as a variety of disposable plastic labware and ancillary equipment. The Company's chemically\ndefined growth media, which nourish living cells, are used by customers in maintaining or growing cells in the laboratory. The Company also markets processed animal sera (used to enrich media) and uses both raw and processed sera to formulate other products. The availability and costs of raw animal sera varies and is largely beyond the Company's control.\nOther cell biology products include the Titertek-Plus (registered trademark) family of pipettes and disposable plastic labware.\nCHROMATOGRAPHY PRODUCTS. Chromatography products include chemicals known as adsorbents as well as other consumable products, such as nylon membranes, which are used for chromatography (a scientific method employing sophisticated instrumentation to separate chemical mixtures in order to analyze their components). The Company distributes adsorbents worldwide which are produced by its German subsidiary.\nBiomedical Instrumentation Group\nThe Company's biomedical instrumentation group markets microplate instruments, a wide range of precision liquid delivery systems and gamma counters.\nMICROPLATE INSTRUMENTATION. These products are laboratory instruments serving the needs of all applications utilizing the microtitration plate (microplate) format. Microplates are 96-well trays, about the size of a postcard, that offer a convenient, economical space-saving alternative to test tubes and have become the vessel of choice for biomedical tests. The preeminent microplate application is immunoassays used in diagnostics, public health screening, quality control and research. The Company's Titertek (registered trademark) product lines offer instruments that address all steps in using microplates including dispensing samples and reagents, reagent displacement (known as microplate \"washing\"), and measurement of calori- metric, fluorescent and luminescent test results. The products range from hand operated pipettes to integrated analytical systems.\nPRECISION LIQUID DELIVERY SYSTEMS. The Company's instrument manufacturing facility in Huntsville, Alabama, produces high precision liquid delivery systems starting with general purpose bench-top stations and extending to customized automated systems incorporating process control, test measurement and data reduction. The liquid delivery products are all complimentary to, and compatible with, the microplate instruments, (both those manufactured in Huntsville and own-label products obtained from third- parties). This integration of the product lines enhances the Company's ability to offer users a flexible system approach to meeting their evolving laboratory equipment needs.\nGAMMA COUNTERS. The Huntsville facility also produces gamma counters (instruments that quantify the amount of radioactive \"labels\" incorporated into a sample). Gamma counters are mainly used in diagnostics and research. The Company offers a choice of automatic sample-feed and manually loaded batch processing machines, all with a common data analysis and reduction software package.\nAll instrumentation sold by the Company is supported by field and factory service capability. Service contracts are actively sold to a large customer base of long-term users of the Company's instruments.\nDiagnostic Reagents Group\nThe Company provides diagnostic reagents and instrumentation to hospitals, clinics and biomedical research laboratories. Immunoassay is a diagnostic technique used to determine the quantity of biological substances present in very low concentrations in body fluids. In the United States alone, more than 5,000 laboratories use the technique in routine clinical diagnostic applications. The Company manufactures both Enzyme-Immunoassay and Radio-Immunoassay kits at its Costa Mesa, California facility and markets these kits under the IMMUCHEM product line. In 1993, the Company developed a line of non-isotopic enzyme-immunoassay used for screening newborns for inherited genetic diseases (\"Neonatal line\"). The Company's strategy is to develop a complete line of reagents to address its strength in the endocrinology and newborn screening product segments. The Company has developed instruments which allow assays to be automated for moderate to high volume applications in which ease of use and labor productivity are competitive advantages. The Company will continue to add more internally developed products to its Neonatal line in 1994 including a new fully- automated analyzer.\nRadiation Monitoring Services Group\nThe Company provides an analytical monitoring service to determine personal occupational exposure to ionizing radiation.\nSince 1973, ICN has provided dosimetry services to dentists, veterin- arians, chiropractors, podiatrists, hospitals, universities, governmental institutions and power plants. ICN's service include both film and Thermo Luminescent (\"TL\") badges in several configurations to accommodate a broad scope of users. This service includes the manufacture of badges, distribution to and from clients, analysis of badges and a radiation report indicating the exposure. The marketing strategy in 1993 was geared towards the small office practitioner both domestically and in an initial entry into the international market. Fiscal 1994 will be a year of intense effort to upgrade and streamline internal operations and computer software related to Dosimetry services. Two new badge configurations are planned to enhance Dosimetry's product offering: A CR39 neutron monitor and a Thermo Luminescent Dosimeter (\"TLD\") wallet card monitor. These new products, coupled with the software enhancements will allow the Company to continue its aggressive marketing campaign both in the domestic and international areas.\nMarketing\nThe Company's marketing operations are headquartered at the corporate offices in Costa Mesa, California. Sales and marketing methods vary according to product group and include direct sales through a field sales force, catalog sales, direct mail campaigns and independent agents\/ distributors. The Company has a field sales and marketing organization of 141 persons in the United States and Canada, 73 in Europe, 9 in Australia and 6 in Japan.\nCustomers\nThe Company's customer group for research products is principally composed of biomedical research institutions such as universities, the National Institutes of Health, pharmaceutical companies, and, to a lesser extent, hospitals. Customers for diagnostic reagents and instruments are\ngenerally clinics, medical offices and hospitals. Customers for the Company's other biomedical instruments include both biomedical research institutions and clinics, medical offices and hospitals. The Company is not materially dependent upon any one customer or a small group of customers and does not believe the loss of any one customer would have a material adverse effect on the Company. However, since a large portion of medical research in both the United States and other countries is funded by governmental agencies, the Company's results of operations could be adversely affected by cancellation or curtailment of governmental expenditures for medical research.\nForeign Operations\nThe Company operates in the United States, Canada, Europe and Asia\/- Pacific. For financial information about domestic and foreign operations and export sales, see Note 10 of Notes to Consolidated Financial Statements.\nForeign operations are subject to certain risks inherent to conducting business abroad, including price and currency exchange control, fluctuations in the relative value of currencies, political instability and restrictive governmental actions. Changes in the relative value of currencies occur from time to time and may, in certain instances, materially affect the Company's results of operations. The Company does not hedge foreign currency risks. The effects of these risks are difficult to predict.\nLicenses, Patents, Trademarks and Proprietary Rights\nThe Company has 7 United States patents and 5 foreign patents expiring from 1994 to 2008. Although no assurance can be given as to the breadth or degree of protection which these patents will afford the Company, the Company's business is not materially dependent on the protection afforded by its patents.\nMany of the Company's product names are registered trademarks in the United States, Canada and other countries. Other organizations may in the future apply for and be issued patents or may obtain proprietary rights covering technology which may become useful to the Company's business. The extent to which the Company may need, at some future date, to obtain licenses from others is not known. In addition, the Company intends to rely on unpatented proprietary know-how. However, there can be no assurance that others will not independently develop such know-how or otherwise obtain access to the Company's know-how. Each employee of the Company is required to enter into an agreement holding proprietary information confidential and agreeing that such obligation will survive the termination of his or her employment with the Company.\nBacklog\nBacklog is not a significant factor since most orders received are filled and shipped promptly after receipt. No single customer accounted for more than 10% of the Company's net sales during the year ended December 31, 1993.\nRaw Materials and Manufacturing\nIn general, raw materials used by the Company in the manufacture of its products are obtainable from multiple sources in the quantities desired.\nHowever, the availability and costs of raw animal sera for distribution as part of the Company's cell biology products may vary from time to time and is largely beyond the Company's control. Additionally, in the last decade, the number of reactor sites producing radioactive raw materials has diminished.\nProduct manufacturing is chiefly carried out by the Company in three domestic facilities and one foreign facility: Costa Mesa, California (radioimmunoassay kits and immunobiologic products); Huntsville, Alabama (diagnostic and microplate instrumentation); Irvine, California (radiochemicals) and Eschwege, Germany (chromatography products). Some manufacturing and repackaging is also carried out at the Company's facility in Aurora, Ohio.\nResearch and Development\nThe research and development group conducts its new product development activities in its production departments, an approach that has proven most effective in this specialized high technology segment of molecular biology. The Company conducts research and development activities for diagnostic reagents in Costa Mesa, California, and for the instrument product line in Huntsville, Alabama.\nEffective January 1, 1992, the Company entered into an agreement with Viratek, whereby the Company transferred right, title and interest in research and development projects related to the development of new assay methods utilizing various non-isotopic and other immunoassay techniques as well as universal immunohistology kits for specific immunogen localization in cellular structures to Viratek. The Company retains the right of first refusal to the marketing and distribution rights of any products developed under this agreement.\nGovernment Regulation\nThe Company is subject to licensing and other regulatory control by the United States Food and Drug Administration, the Nuclear Regulatory Commission, other Federal and state agencies and comparable foreign governmental agencies. The Company has not in the past experienced any significant difficulty in complying with the regulations of those agencies.\nProvisions enacted or adopted by United States federal, state and local agencies regulating the discharge of waste into the environment do not currently have a material effect upon the Company's capital expenditures, earnings or competitive position.\nCompetition\nThe industry in which the Company operates is highly competitive. The Company's competitors, many of which have substantially greater capital resources, marketing capabilities and larger staffs and facilities than the Company, are actively engaged in marketing products similar to those of the Company and developing new products similar to those being developed and sold by the Company. Competitive factors vary by product line and customer and include service, product availability and performance, price and technical capabilities. Competitors of the Company's diagnostic reagent and instrumentation group include LKB Instruments, Abbott Laboratories, Diagnostic Products Corp. and Smith Kline\/Beckman. Sigma Aldrich, Amersham and New England Nuclear, a subsidiary of Dupont, are the market leaders in\ntheir segments of the research products business. Competitors of the Company's cell biology products group include Life Technologies (Gibco\/BRL) and Whittaker\/MBA. The Company's competitors in the biological instrumentation group for its microplate instrumentation business include Labsystems, Dynatech and Bio-tek Instruments. The possibility of product obsolescence and product substitution is highest in the Company's immunodiagnostic business where radioimmunoassay methods are being replaced by assay techniques utilizing non-radioactive components such as enzymes or fluorescent chemicals. Although the Company believes that the radio- immunoassay technique is not under immediate threat, due to its superior sensitivity and low cost, the Company has a research program in non- isotopic based systems which could replace some of its radioimmunoassay kits at some time in the future.\nEmployees\nThe Company employs approximately 505 persons, of whom 77 are engaged in general and administrative matters, 229 in marketing and sales, 195 in production and 4 in research and development. There are no collective bargaining agreements between the Company and any of its employees, except for approximately 39 employees of the Company's German subsidiary. The Company considers its relations with its employees to be satisfactory.\nITEM 2.","section_1A":"","section_1B":"","section_2":"ITEM 2. PROPERTIES\nAll of the Company's facilities are leased except those in Eschwege, Germany, Huntsville, Alabama and Opera, Italy. The Company believes its existing facilities are adequate to support expected future growth. The following are the principal facilities of the Company and its subsidiaries:\nIt is management's belief that the methods used and amounts allocated for related party leases are reasonable based upon the current usage by the Company. For information regarding the Company's lease commitments to non-affiliates, see Note 7 of Notes to Consolidated Financial Statements.\nITEM 3.","section_3":"ITEM 3. LEGAL PROCEEDINGS\nThe Company and its subsidiaries could be exposed to possible claims for personal injury resulting from allegedly defective products. The Company and its subsidiaries self-insure against potential product liability exposure with respect to their marketed products. Until July 1985, the Company maintained product liability insurance on an occurrence basis with respect to its then marketed products, at which time certain policies were allowed to lapse. After a review of the situation, based on cost and availability and related factors, management decided not to continue to maintain any further product liability insurance. Management reviews the Company's product liability insurance requirements on a continuing basis. While the Company has never experienced a material adverse claim for personal injury resulting from allegedly defective products, a substantial claim, if successful, could have a material adverse effect on the Company.\nOn September 27, 1993, ICN and the Company filed a complaint in the California State Superior Court for Orange County, California, against GRC International Inc., alleging fraud, negligent misrepresentation in the sale of securities in California and violations of state and federal securities laws. The precise amount of damages is unknown at this time. The lawsuit arises out of the acquisition of all of the issued and outstanding shares of Flow Laboratories, Inc. (\"Flow\") and Flow Laboratories B.V. by Biomedicals in November 1989 from GRC International Inc., (formerly known as Flow General Inc.). Defendant GRC's motion to compel arbitration was granted as to the Company's claims. The action is stayed until April 7, 1994, as to ICN's causes of action.\nThe Company is a party to a number of pending or threatened lawsuits arising out of, or incident to, the ordinary course of business. In the opinion of management, the resolutions of these matters will not have a material adverse effect upon the consolidated financial position or operations of the Company.\nITEM 4.","section_4":"ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS\nNone.\nEXECUTIVE OFFICERS OF THE REGISTRANT\nThe executive officers of the Company at December 31, 1993, were as follows:\nExecutive officers are elected annually and serve at the pleasure of the Board of Directors. The Company has adopted a charter provision which limits the monetary liability of its directors under certain circumstances. The Company enters into indemnification agreements with certain of its officers and directors to the full extent permitted under Delaware law.\nICN has entered into employment agreements with certain senior executives of ICN and its subsidiaries, including certain employees of the Company. Mr. Milan Panic has an Employment Agreement with ICN which expires in November 1994. Messrs. Bill A. MacDonald and John E. Giordani have Employment Agreements which are intended to retain the services of these executives for continuity of management in the event of any actual or threatened change in control. Each agreement has an initial term of three years and is automatically extended for one year terms unless either the employee or the Company elects not to extend it.\nMr. Panic is Chairman of the Board of the Company. He is also Chairman of the Board of ICN, Viratek and SPI. Mr. Panic is the founder of ICN and has served as its Chairman of the Board since its inception in 1960. Prior to July 1992, Mr. Panic also served as Chief Executive Officer of the Company, and President and Chief Executive Officer of ICN, Viratek and SPI. On July 14, 1992, Mr. Panic became Prime Minister of Yugoslavia and, with the approval of the Company's Board of Directors, took a leave of absence from all duties at the Company while retaining his title as Chairman of the Board. Mr. Panic, with the approval of the respective Boards of Directors of those companies, took similar leaves of absence from ICN, Viratek and SPI. Mr. Panic and each of the companies, ICN, SPI, Viratek and Biomedicals entered into an agreement providing for Mr. Panic's reemployment as Chief Executive Officer upon termination of the leave of absence. Under a license from the United States government, Mr. Panic, an American citizen, was permitted to serve as Prime Minister of Yugoslavia without violating applicable United States laws and regulations concerning sanctions imposed against the Federal Republic of Yugoslavia (Serbia and Montenegro). The license restricted Mr. Panic from engaging in any business with the Company and its affiliates. On March 4, 1993, Mr. Panic completed his service as Prime Minister and returned to the Company as Chief Executive Officer.\nMr. Bill A. MacDonald became President of the Company on March 18, 1993. He joined ICN in March 1982 as Director of Taxes and Vice President of ICN. In January 1992, Mr. MacDonald was promoted to Executive Vice President of Corporate Development of ICN.\nMr. Giordani has been Chief Financial Officer of the Company since March 1992. He is ICN's Executive Vice President-Finance and Chief Financial Officer. He joined ICN in June 1986 after serving as Vice President and Corporate Controller of Revlon, Inc. in New York since February, 1982. From 1978 until February 1982 he held Deputy and Assistant Corporate Controller positions with Revlon, Inc. He was with Peat, Marwick, Mitchell & Co. from 1969 to 1978.\nDr. Coggins has been Vice President-Marketing since December 1990 and has been employed by the Company since April 1990. He held various sales positions with Labsystems OY from 1985 through 1990 culminating in the position of Vice President International Marketing and Diagnostics Division. Prior to this experience, he was in various sales and international marketing positions with Amersham where he was employed from 1973 through 1985.\nMs. Kane, Vice President-Legal and Secretary, rejoined the Company in March 1990. She was Senior Counsel and Secretary of Countrywide Credit Industries, Inc. and Countrywide Funding Corporation from 1988 until March 1990. Prior to that time she was Assistant General Counsel and Secretary of ICN, holding various legal titles, from January of 1984 through January of 1988.\nPART II\nITEM 5.","section_5":"ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS\nThe common stock is traded on the American Stock Exchange (Symbol: BIM).\nThe following table sets forth, for the periods shown, the high and low closing sales prices on the American Stock Exchange.\nAs of March 29, 1994, there were approximately 386 holders of record of the Company's common stock.\nFor the years ended December 31, 1993, 1992, and 1991, the Company declared per share dividends of $.17, $.17 and $.15, respectively. Dividends are generally declared and paid each quarter. The Company's Board of Directors will continue to review the Company's dividend policy, and the amount and timing of any future dividends will depend upon the profitability of the Company, the need to retain earnings for use in the development of the Company's business and other factors.\nITEM 6.","section_6":"ITEM 6. SELECTED FINANCIAL DATA\nThe following table sets forth certain selected consolidated financial data for the years ended December 31, 1993, 1992 and 1991, the one-month ended December 31, 1990, and for each of the years in the two-year period ended November 30, 1990. This information should be read in conjunction with the consolidated financial statements included elsewhere in this Form 10-K (in thousands, except per share information).\nITEM 7.","section_7":"ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS\nResults of Operations\nIntroduction. At the time of the 1989 acquisition of Flow Laboratories, Inc. and Flow Laboratories B.V., together with their respective subsidiaries (\"Flow\"), the Company believed that the distribution outlets acquired would substantially increase the Company's ability to compete in international markets where it had no significant direct representation. Following the acquisition, the Company attempted to centralize the European marketing and distribution, discontinue certain low margin product lines and shut down excess manufacturing and distribution facilities. These efforts continued into 1992, at which time the Company completed a major restructuring plan. (See Restructuring Costs and Special Charges, below).\nDuring the latter part of 1992 and throughout 1993, the Company realigned its European operations including the distribution network and manufacturing, resulting in reductions in selling, general and administrative costs. Integration of the Company's higher margin \"core\" product lines and elimination of lower gross margin products have contributed to the increase in the overall gross profit margins; however, such actions have not fully\nmitigated the continuing decline in European sales. The Company's North American sales have remained stable.\nThe Company is actively working on the introduction of new products, primarily related to its diagnostic and instrumentation product lines and will be introducing its Dosimetry product line in Europe and Canada. The Company expects these strategies to contribute to increased sales in 1994 and beyond. Absent improvements in the 1994 European operating results, the Company will need to reassess its business strategy and prospects for its European business.\nNet Sales. Net sales were $59,076,000, $75,648,000 and $96,507,000 in 1993, 1992, and 1991, respectively. Net sales were 22% lower in 1993 than in 1992 and 22% lower in 1992 than in 1991. The continuing decline in sales can be attributed primarily to the Company's European operations. This declining trend is due to a variety of factors including the transition from a marketing effort focused on an agency\/distributor network to one based upon catalog distribution, discontinuance of low gross profit margin product lines, competitive pressures, delays in getting new products to markets, and a continuing weakness in government funding for capital equipment purchases.\nCost of Sales. Product cost as a percentage of sales decreased to 47% in 1993 from 59% in 1992 and 54% in 1991. The decrease in product costs in 1993 reflects actions taken by the Company to reduce costs beginning in the latter part of 1992, as discussed further in Restructuring Costs and Special Charges, below. Additionally during 1993, high cost products with lower margins were eliminated, certain production facilities were consolidated or sold, other excess manufacturing facilities were closed down and the Company continued to focus on improving purchasing and manufacturing processes. The increase in product costs in 1992 as compared to 1991 is the result of a writedown of slow moving inventory due to lower than anticipated sales volume. In addition, during 1992, the Company's production facilities and warehousing costs were spread over a reduced sales volume thereby increasing cost of sales as a percentage of sales.\nGross Profit. Gross profit as a percentage of sales was 53%, 41% and 46% in 1993, 1992 and 1991, respectively. Actions taken by the Company in 1992, as described above, resulted in an increase in gross profit as a percentage of sales during 1993. The impact of declining sales, increasing product costs, and a writedown of slow moving inventory, as described above, reduced gross profit in 1992 as compared to 1991.\nSelling, General and Administrative Expenses. Selling, general and administrative expenses as a percentage of sales was 48%, 58% and 41% in 1993, 1992 and 1991, respectively. The decrease in 1993 reflects manage- ment's continuing efforts to reduce expenses through consolidation of operations and distribution centers and other cost controls. Additionally, during 1993, the Company renegotiated certain common services allocations from ICN, which reduced selling, general and administrative expense by $969,000 compared to 1992. The increase in expenses in 1992 over 1991 was due, in part, to increased allowances for estimated uncollectible accounts plus other costs related to increased level of catalog amortization and accruals for legal expenses. The increase in these costs as a percentage of sales was due primarily to a significantly greater decline in sales in the markets related to the Flow acquisition than in the markets in which the Company has traditionally done business. Although costs in 1994 will reflect\nincreased catalog expenses of at least $2,295,000, the Company expects selling, general and administrative expenses to remain stable.\nResearch and Development Costs. Research and development expenses were $378,000, $583,000, and $1,687,000 during 1993, 1992 and 1991, respectively. Effective January 1, 1992, the Company entered into an agreement with Viratek whereby the Company transferred right, title and interest in certain of its research and development projects. The Company retains a right of first refusal to the marketing and distribution rights for any product developed in accordance with the agreement. Viratek conducts biomedical research related to the development of non-isotopic diagnostic test kits and associated hard- ware. The Company continues to perform research and development activities for diagnostic reagents and the instrument product line manufactured in Huntsville, Alabama. The Company currently has four employees devoted to research and development activities.\nAmortization of Goodwill and Other Intangibles. Amortization expense was $502,000, $1,486,000, and $1,829,000, in 1993, 1992, and 1991, respectively. The reduction in goodwill amortization in 1993, reflects the write-off of a major portion of the Company's goodwill during the fourth quarter of 1992, as described below under Restructuring Costs and Special Charges. The Company continually evaluates the continued carrying value and amortization periods for goodwill and other intangibles.\nInterest (income) expense, net. Interest (income) expense, net is comprised of the following:\nThe net interest expense decline in 1993 compared to 1992 and 1992 compared to 1991 results from a reduced level of outstanding debt both to third parties and ICN.\nLease Vacancy Costs. During 1993, the Company vacated its High Wycombe facility in England and moved to a facility more suitable to the Company's operating needs in Thame, England. The Company pursued various subleasing agreements for which none were consummated as of December 31, 1993. Consequently, the Company accrued approximately $1,200,000 which represents management's best estimate of the net present value of future leasing costs to be incurred for High Wycombe. During 1993, the Company expensed an additional $236,000 of leasing costs related to High Wycombe.\nOther (Income) Expense, Net. Other (income) expense, net was $(2,399,000), $4,731,000 and $1,268,000 in 1993, 1992 and 1991, respectively. In 1993, Other (income) expense, net, includes a gain of $430,000 representing a favorable settlement of a foreign non-income tax related tax dispute, a gain of $278,000 on the sale of the Company's Irvine, Scotland\nfacility, a gain of $938,000 realized by the Company's Italian operation on the favorable termination of certain leasing contracts, and a gain of $1,250,000 relating to certain liabilities accrued during 1992 which were settled for less than the original estimates. In 1992, the Company expensed $2,187,000 for a non-exclusive license fee for the purpose of marketing certain laboratory equipment in the U.S., Canada and South America. Other charges in 1992 include certain foreign non-income related taxes and an equity investment write-off totaling $2,202,000. Other (income) expense, net in 1991 included $1,286,000 of costs relating to the introduction of the Company's catalog.\nProvision for Income Taxes. The Company's effective income tax rate was (38)%, 1% and (3)% for 1993, 1992, and 1991, respectively. The Company's effective rate of (38)% in 1993 was due primarily to a reduction in the estimate of required U.S. and foreign tax contingency allowances. Such contingency allowances were established in prior years to cover certain tax exposures in the U.S. and certain foreign jurisdictions. The Company's effective tax rate for 1992 and 1991 was significantly less than the U.S. statutory rate due to limitations on the utilization of net operating losses.\nRestructuring Costs and Special Charges. During 1991, the Company initiated a restructuring program designed to reduce costs and improve operating efficiencies. Accordingly, restructuring program costs of $6,087,000 were recorded in 1991. The program included, among other items, the consolidation, relocation and closure of certain manufacturing and distribution facilities, primarily in Milan, Italy and Costa Mesa, California. Those measures, including a 15% reduction in work force, were initiated in 1991 and continued through 1992.\nSales continued to decline during the first three quarters of 1992 over the same periods in 1991 despite the restructuring program initiated in 1991. The significant decreases were primarily due to operations in Italy and other European subsidiaries acquired as part of the Flow acquisition. A further decline in sales of 19.3% or $4,009,000, occurred in the fourth quarter of 1992 compared to the fourth quarter of 1991.\nIn prior years and the first three quarters of 1992, recoverability of goodwill associated with the Flow acquisition was focused on the European operations, as the Company had only a limited presence in Europe prior to the Flow acquisition. Accordingly, the Company used the expected operating income of the European operations in evaluating the recoverability of the Flow goodwill.\nDuring the fourth quarter of 1992, as a result of the continued decline in sales and other factors, the Company reassessed their business plan and prospects for 1993 and beyond which included, among other things, the decision to sell the last remaining major European manufacturing facility and to restructure the previously acquired distribution network and European operations in line with the revised sales estimates. Consequently, based upon the continuing decline in European revenue and profitability relating to Flow, Flow facility closures and an ineffective distribution network, management concluded that there was no current or expected future benefit associated from the Flow acquisition. Accordingly, the Company wrote off\ngoodwill and other intangibles, primarily from the Flow acquisition of $37,714,000.\nIn addition, the Company determined that future benefit could be realized if the distribution activities in Irvine, Scotland, Brussels, Belgium, Cleveland, Ohio, and Horsham, Pennsylvania, were consolidated with other distribution centers in Europe and the U.S., as these operations did not support the costs of maintaining separate facilities. Estimated costs included in the 1992 results associated with this consolidation effort were included in lease termination costs of $1,434,000, employee termination costs of $1,961,000, facility shut down costs of $357,000 and writedowns to net realizable value totaling $1,106,000 of facilities held for disposition.\nThe Irvine, Scotland facility was vacated in March 1993 and subsequently sold for a gain of $278,000. During the first quarter of 1993, the Horsham, Pennsylvania, and Cleveland, Ohio facilities moved to Aurora, Ohio.\nAdditionally, the Company reviewed the ability of the Flow product lines to be effectively integrated into the Company's \"core\" product lines and vice versa. As a result, it was concluded that Flow's distribution network, product lines and business operations were not effectively integrated into the Company's global strategy. Low margin product lines such as cell biology and instruments had become technologically obsolete given the other competitive products on the market. As sales continued to decline, the amount of slow moving and potentially obsolete inventory increased. Accordingly, during the fourth quarter of 1992, the Company recorded a provision for abnormal writedowns of inventory to estimated realizable value of $9,924,000 and discontinued products of $3,377,000.\nIn addition, the Company determined that the unamortized costs of the catalog marketing program would not be recovered within a reasonable period of time, therefore, catalog costs totaling $6,659,000 were written off in the fourth quarter of 1992. Despite the general shortfall in catalog related sales, the catalog marketing approach has firmly established the Company's \"core\" products in the European and Asian-Pacific markets. During 1993, the Company's strategy to redefine the form and use of the catalog to specifically customer focused or \"product-line\" catalogs is believed to be more effective in light of current market conditions. Additionally, radiochemical and cell biology \"mini\" catalogs have been developed. During 1993 and into 1994, the Company will continue to use general catalogs and associated direct mail programs for sales activities in biochemical, enzyme immunobiological products and reagents for electrophoresis, but with more focus on product movement and customer needs. The diagnostic instrument and reagent lines are promoted by media advertising and direct sales activities.\nDiagnostic product development activities are organized to provide an enhanced range of non-isotopic tests, complementing the existing radio-immuno assays and microplate instrumentation. The Company intends to remain a leader in neonatal screening, and as a significant supplier of endocrinology assay kits, test reagents and infectious disease diagnostics.\nExtraordinary Income\nDuring the second quarter of 1993, the Company's Italian operation negotiated settlements with certain of its suppliers and banks resulting in extraordinary income of $627,000 or $.03 per share.\nLiquidity and Capital Resources\nCash and cash equivalents decreased to $509,000 at December 31, 1993 from $2,204,000 at December 31, 1992.\nNet cash used in operations increased to $6,676,000 in 1993 from $6,207,000 in 1992. The slight increase in net cash used in operations can be attributed primarily to the Company's payments of trade payables and accrued liabilities in the normal course of business and an increase in inventory available for sale, partially offset by a decrease in trade receivables.\nNet cash (used in) provided by investing activities was $2,308,000 in 1993 compared to $(821,000) in 1992. The increase in cash provided by investing activities is a result of the sale of the Company's Irvine, Scotland facility, which occurred in April 1993.\nNet cash provided by financing activities was $2,627,000 in 1993 compared to $7,445,000 in 1992. The decrease is primarily attributed to less cash received from ICN and less cash proceeds from issuance of long-term debt and notes payable.\nCash and cash equivalents increased to $2,204,000 at December 31, 1992 from $2,005,000 at December 31, 1991.\nNet cash (used in) provided by operations was $(6,207,000) in 1992 as compared to $8,357,000 in 1991. The increase in cash used in operations in 1992 compared to 1991 can be attributed to a decrease in sales and higher operating expenses. Additionally, lower collection on trade receivables in 1992 as compared to 1991 were partially offset by decreases in inventory over the same periods.\nNet cash (used in) provided by investing activities was $(821,000) in 1992 compared to $1,275,000 in 1991. During 1991, the Company sold ICN debentures for approximately $3,503,000 which were acquired for investment purposes.\nNet cash (used in) provided by financing activities was $7,445,000 in 1992 compared to $(8,004,000) in 1991. During 1992, the Company made principal payments on long-term debt and notes payable of $11,736,000 which were offset by borrowings from ICN and issuance of other long-term debt and note payable. During 1991, the Company made principal payments on long-term debt and notes payable of $38,765,000 which were partially offset by borrowings from ICN and issuance of other long-term debt and notes payable, however, such borrowings did not fully fund total principal payments on long- term debt and notes payable.\nManagement believes that cash generated from operations, reductions in working capital, and, if needed, additional borrowings from ICN will provide sufficient cash to meet its normal operating requirements.\nThe Company has obtained a written agreement from ICN that ICN is prepared, if needed, to provide financial support to the Company in order to meet its financial obligations through April 15, 1995.\nOther\nIncluded in total debt is $8,441,000 of debt related to the issuance of 5 1\/2% Swiss Franc Exchangeable Certificates (the \"Certificates\"). Each Certificate is exchangeable into 334 shares of the Company's Common Stock at an exchange price of $10.02 per share, based on a fixed exchange rate of SFr. 1.49 per $1.00. (These terms are as adjusted in April 1990. See Note 6 of Notes to Consolidated Financial Statements.) The Certificates, if converted, would result in the issuance of 2,608,241 shares of the Company's common stock, and an increase in marketable securities of approximately $13,605,000, resulting in an increase in stockholders' equity of approximately $21,582,000.\nEffective December 1, 1986, ICN and its affiliates adopted an investment policy covering intercompany advances and interest rates, and the type of investments (acquisitions, marketable equity securities, high yield bonds, etc.) to be made by ICN and its affiliates. As a result of this policy, excess cash held by the Company is transferred to ICN and, in turn, cash advances have been made by ICN to the Company to fund acquisitions and other transactions. ICN charges interest at the prime rate plus 1\/2% and credits interest at the prime rate less 1\/2% on the amounts invested or advanced. ICN provided $6,783,000 of cash to the Company during 1993. Total loans and advances from ICN were $5,932,000 as of December 31, 1993. Such advances have been classified as a long-term payable.\nOn August 30, 1993, the Company issued 300,000 shares of a new series \"A\" of the Company's non-convertible, non-voting, preferred stock valued pursuant to a fairness opinion, at $30,000,000 to ICN. In exchange, ICN delivered 4,983,606 shares of the Company's common stock that ICN owned and exchanged intercompany debt owed to ICN by the Company in the amount of $11,000,000.\nIn addition, on August 30, 1993, the Company issued 390,000 shares of a new series \"B\" of the Company's non-convertible, non-voting, preferred stock valued pursuant to a fairness opinion, at $32,000,000 to ICN. In exchange, ICN delivered to the Company 8,384,843 shares of the Company's common stock that ICN owned.\nSubsequent to the exchange, the Company had 9,033,623 common shares issued and outstanding.\nSubject to declaration by the Company's Board of Directors, the new series \"A\" preferred stock pays an annual dividend of $8, noncumulative, payable quarterly and the new series \"B\" preferred stock pays an annual dividend of $10, noncumulative, payable quarterly. Both series \"A\" and \"B\" preferred stock become cumulative in respect to dividends upon certain events deemed to be a change in control, as defined by the certificates of designation. The series \"B\" preferred dividends are subject to the prior rights of the holders of the series \"A\" preferred stock and any other preferred stock ranking prior to the series \"B\" preferred.\nThe series \"A\" preferred stock is senior in ranking to the series \"B\" preferred stock and the series \"B\" preferred stock is senior to the Company's common stock as to voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company, after payment or provision for payment of the debts and other liabilities of the Company. The holders of the series \"A\" preferred shares are entitled to receive an amount in cash or\nin property, including securities of another corporation, equal to $100 per share in involuntary liquidation or $106 per share in voluntary liquidation prior to August 31, 1994 and declining ratably per year to $100 per share after 1998, plus dividends, in the event dividends have become cumulative. The holders of the series \"B\" preferred shares are entitled to receive an amount in cash or in property, including securities of another corporation equal to $100 per share in voluntary or involuntary liquidation, plus dividends, in the event dividends have become cumulative.\nThe series \"A\" and \"B\" preferred shares are redeemable, for cash or property, including securities of another corporation, in whole or in part, at the option of the Company only, subject to approval by a vote of a majority of the independent directors of the Company. The series \"A\" preferred shares are redeemable at $106 per share prior to August 31, 1994 and declining ratably per year to $100 in 1998, plus dividends, in the event dividends have become cumulative. The series \"B\" shares are redeemable at $100 per share, plus dividends, in the event dividends have become cumulative.\nThere were no dividends declared on the Series \"A\" or Series \"B\" preferred stock during 1993.\nUnder the terms of the Flow purchase agreement, the Company issued 100,000 shares of common stock to the seller, which shares have a guaranteed value of $20 per share on November 8, 1994. If the fair value, as defined, of the Company's common stock is less than $20 per share on that date, the Company must pay the difference in cash. The Company may redeem such shares for the $20 guaranteed value prior to November 8, 1994. At December 31, 1993, the Company would have paid $1,575,000 to honor the guarantee.\nThe Company has a purchase commitment with a major supplier for which the remaining purchase of inventory under agreement will be due June 1994 in the amount of approximately $1,727,000 (Finnish Markka 10,000,000).\nThe Company is also a guarantor on a note payable to the same supplier for which ICN is primarily liable. On June 30, 1993, ICN filed a claim in arbitration alleging breach of agreement entered with such supplier and withheld final payment due on that date of approximately $1,295,000 (Finnish Markka 7,500,000). In addition, ICN is seeking declaration and award that the Company is not obligated to honor the aforementioned purchase commitment or installments on the note. Arbitration is set for October 4, 1994.\nNet property, plant and equipment increased from $13,155,000 at December 31, 1992 to $15,728,000 at December 31, 1993. The transfer of the Italian Opera facility from assets held for disposition to property, plant and equipment for $3,816,000 accounted for the increase which was partially offset by depreciation of approximately $2,790,000. Capital expenditures for property, plant and equipment totaled $2,235,000 in 1993, $911,000 in 1992, and $1,978,000 in 1991. The Company does not anticipate any significant capital expenditures through the end of 1994.\nInflation and Changing Prices\nForeign operations are subject to certain risks inherent to conducting business abroad, including price and currency exchange control, fluctuations in the relative value of currencies, political instability and restrictive governmental actions. Changes in the relative value of currencies occur from\ntime to time and may, in certain instances, materially affect the Company's results of operations. The Company does not hedge foreign currency risks. The effects of these risks are difficult to predict.\nThe effects of inflation are experienced by the Company through increases in the cost of labor, services and raw materials. In general, these costs have been offset and\/or anticipated, by periodic increases in the prices of its products sold.\nSelected Quarterly Financial Data (Unaudited)\nFollowing is a summary of quarterly financial data for the years ended December 31, 1993 and 1992 (in thousands, except per share amounts): ====== ====== ====== ========\nAll other schedules are not submitted because they are not applicable, not required or the information required is included in the Consolidated Financial Statements, including the notes thereto.\nREPORT OF INDEPENDENT AUDITORS\nTo ICN Biomedicals, Inc.:\nWe have audited the consolidated financial statements and financial statement schedules of ICN Biomedicals, Inc. (a Delaware corporation) and subsidiaries as listed in the index on page 26 of this Form 10-K. These consolidated financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on our audits.\nWe conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated 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.\nThe Company has had certain transactions with its parent and affiliated companies as more fully described in Notes 3, 4, 6, 7 and 11 to the consolidated financial statements. Whether the terms of these transactions would have been the same had they been between wholly unrelated parties cannot be determined.\nIn our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of ICN Biomedicals, Inc. and subsidiaries as of December 31, 1993 and 1992 and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1993 in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statements 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 required to be included therein.\nCOOPERS & LYBRAND\nLos Angeles, California March 30, 1994\nThe accompanying notes are an integral part of these consolidated financial statements.\nThe accompanying notes are an integral part of these consolidated financial statements.\nThe accompanying notes are an integral part of these consolidated financial statements.\n33 ICN BIOMEDICALS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS\nDecember 31, 1993\n1. Formation and History\nICN Biomedicals, Inc. (the \"Company\") was incorporated in September 1983 as a Delaware corporation by ICN Pharmaceuticals, Inc. (\"ICN\") and operated as a wholly-owned subsidiary of ICN until the Company completed its initial public offering during 1986. The Company is a 69%-owned subsidiary of ICN at December 31, 1993. The Company conducts its business in research chemical products, diagnostics products, biomedical instrumentation, and radiation monitoring services.\n2. Summary of Significant Accounting Policies\nReclassifications\nCertain prior year items have been reclassified to conform with the current year presentation.\nPrinciples of Consolidation\nThe accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany account balances and transactions have been eliminated.\nCash Equivalents\nThe Company considers all highly liquid instruments purchased with a maturity of less than three months to be cash equivalents.\nExcess of Cost Over Net Assets of Purchased Subsidiaries\nThe difference between the purchase price and the fair value of net assets at the date of acquisition is included in the consolidated balance sheets as \"Excess of cost over net assets of purchased subsidiaries, net\" (\"Goodwill\"). Goodwill has been amortized primarily over forty years through 1992. The Company evaluates the carrying value of goodwill including the amortization periods on a quarterly basis to determine whether events and circumstances warrant revised estimates of useful lives. The recoverability of goodwill is assessed based on the expected undiscounted future operating income of the acquired entity. During the fourth quarter of 1992, the Company wrote-off a substantial portion of its goodwill, primarily related to its Flow acquisition, as more fully described in Note 12. Additionally, of the remaining goodwill, the Company revised the remaining amortization period to primarily five years, which reflects the estimated recovery period of the remaining goodwill. Accumulated amortization totaled $2,901,000 and $2,548,000 at December 31, 1993 and 1992, respectively.\nForeign Currency Translation\nThe assets and liabilities of the Company's foreign operations are translated at the end of period exchange rates. Revenues and expenses are translated at the average exchange rates prevailing during the period. The effects of unrealized exchange rate fluctuations on translating foreign currency assets and liabilities into U.S. dollars are accumulated in stockholders' equity. The Company has included in operating income all foreign exchange gains and losses arising from foreign currency transactions. Gains included in other expenses, net from foreign exchange transactions for 1993, 1992 and 1991 were $178,000, $730,000 and $744,000, respectively.\nInventories\nInventories, which include material, direct labor and overhead, are stated at the lower of cost or market. Cost is determined on a first-in, first-out (FIFO) basis.\nCatalog Costs\nThe initial costs of design, production and distribution of the Company's product catalog are deferred and amortized over its estimated service life, approximately one year. However, for the year ended December 31, 1992, due to lower than expected sales results, the Company wrote-off these costs in the fourth quarter of 1992 (See Note 12).\nProperty, Plant and Equipment\nThe Company primarily uses the straight-line method for depreciating property, plant and equipment over their estimated useful lives. Buildings and related improvements are depreciated over 20-40 years, machinery and equipment over 2-10 years, furniture and fixtures over 3-10 years, and leasehold improvements are amortized over their useful lives, limited to the life of the lease.\nThe Company follows the policy of capitalizing expenditures that materially extend the life or increase the value of the related assets. Repair and maintenance costs are charged to expense. Upon sale or retirement, the costs and related accumulated depreciation or amortization are eliminated from the respective accounts, and the resulting gain or loss is included in income.\nPatents and Other Intangible Assets\nThe costs of patents, license rights and other intangible assets acquired primarily through acquisitions are included in other assets and deferred charges, net and are being amortized over approximately 5 to 10 years. Such costs totaled $871,000 and $1,024,000, net of accumulated amortization of $803,000 and $654,000 as of December 31, 1993 and 1992, respectively. In addition, certain patents and intangible assets which were acquired in connection with the Flow and other acquisitions were re-evaluated during the fourth quarter 1992. The Company wrote-off a portion of its patents and intangible assets, as more fully described in Note 12. Additionally, of the remaining patents and other intangible assets, the Company revised the remaining amortization period to primarily five years which reflects the estimated recovery period of the remaining patents and other intangible assets.\nIncome Taxes\nIn January 1993, the Company adopted Statement of Financial Accounting Standards No. 109, (SFAS 109) \"Accounting for Income Taxes\". SFAS 109 is an asset and liability approach that requires the recognition of deferred tax\nassets and liabilities for the expected future tax consequence of events that have been recognized in the Company's financial statements or tax returns. In estimating future tax consequences, SFAS 109 generally considers all expected future events other than enactment of changes in the tax law or rates. Previously, the Company used the SFAS 96 asset and liability approach that gave no recognition to future events other than the recovery of assets and settlement of liabilities at their carrying amounts. The adoption of SFAS 109 did not result in a cumulative effect adjustment in the statement of operations.\nNotes Payable\nThe Company classifies bank borrowings with initial terms of one year or less as Notes Payable. These notes, originating in the Italian subsidiary, bear interest at average rates of 16%. The carrying amount of Notes Payable approximates fair value due to the short-term maturity of these instruments.\nPer Share Information\nPer share information is based on the weighted average number of shares outstanding and dilutive common share equivalents. Common share equivalents represent shares issuable for outstanding options and warrants on the assumption that the proceeds would be used to repurchase shares on the open market. The Swiss Franc Exchangeable Certificates debt issue (see Note 6) is not a common share equivalent. Fully dilutive earnings per share is not shown because the computation was antidilutive or the difference from primary earnings per share was not material. The number of shares used in the per share computation was 17,964,000, 18,224,000 and 11,790,000 in 1993, 1992 and 1991, respectively.\nConcentrations of Credit Risk\nThe Company has approximately $3,506,000 of accounts receivables related to its Italian subsidiary for which a significant portion of the balance relates to local government entities. The ability and timing to collect these receivables is influenced by the general economics in that country.\n3. Assets Held for Disposition\nDuring January 1993, the Company transferred its Dublin, Virginia, facility to ICN in exchange for a reduction in the intercompany amounts due ICN of $586,000 representing the net book value at the date of transfer.\nDuring April 1993, the Company sold certain assets of its manufacturing business, producing liquid and powder media, located in Irvine, Scotland. The resulting gain of approximately $278,000 is included in other (income) expense, net. Additionally, the Company has deferred approximately $256,000 of the sales proceeds for certain environmental contingencies related to the Irvine, Scotland property. This obligation is funded and included in restricted cash and held in an escrow trust account. In the event such contingencies do not utilize the escrow balance, remaining funds, if any, will be remitted to the Company.\nDuring the fourth quarter of 1993, the Company moved its Italian opera- tion from Cassina de Pecchi, a leased facility, back to Opera, an owned\nfacility. The Opera facility was transferred from assets held for disposition to property, plant and equipment during December 1993.\n4. Related Party Transactions\nGeneral\nAs of December 31, 1993, ICN owned 69% of the outstanding common stock of the Company. ICN controls the Company through stock ownership, voting control and board representation. The Company, ICN, SPI Pharmaceuticals, Inc. (a 39%-owned equity investment of ICN at December 31, 1993- \"SPI\") and Viratek, Inc. (a 69%-owned subsidiary of ICN at December 31, 1993-\"Viratek\") have engaged in, and will continue to engage in, certain transactions with each other.\nThe Company has obtained a written agreement from ICN that ICN is prepared, if needed, to provide financial support to the Company in order to meet its financial obligations through April 15, 1995.\nAn Oversight Committee of the Boards of Directors of ICN, SPI, Viratek and the Company reviews transactions between or among the Company, ICN, SPI and Viratek (collectively, the \"Affiliated Corporations\") to determine whether a conflict of interest exists with respect to a particular transaction and the manner in which such conflict can be resolved. The Oversight Committee has advisory authority only and makes recommendations to the Board of Directors of each of the Affiliated Corporations. The Oversight Committee consists of one non-management director of each Affiliated Corporation and a non-voting chairman. The significant related party transactions have been reviewed and recommended for approval by the Oversight Committee, and approved by the respective Boards of Directors.\nCost Allocations\nThe Company subleases space on a year-to-year basis in Costa Mesa, California from ICN. The costs of common services used by the Company, SPI, Viratek and ICN are allocated by SPI based upon various formulas. Effective January 1, 1993, ICN reimburses the Company for those allocations which are in excess of the amounts determined by management using competitive data, as reviewed and recommended by the Oversight Committee, that would have been incurred by the Company if it operated in a facility suited solely to its requirements. It is management's belief that the methods used and amounts allocated for facility costs and common services are reasonable based upon the usage by the respective Companies.\nRent and common services charged to the Company were as follows:\nInvestment Policy\nEffective December 1, 1986, ICN and its affiliates have adopted an investment policy covering intercompany advances and interest rates, and the types of investment acquisitions (marketable equity securities, high-yield bonds, etc.) to be made by ICN and its affiliates. As a result of this policy, excess cash held by the Company is transferred to ICN and in turn, invested by ICN and cash advances have been made by ICN to the Company to fund acquisitions and certain other transactions. ICN charges interest at the prime rate plus 1\/2% and credits interest at the prime rate less 1\/2% on the amounts invested or advanced. Interest (income) expense, related to this balance was $420,000, $314,000, and ($218,000) for 1993, 1992 and 1991, respectively, at average interest rates of approximately 6.5%, 6.75%, and 7.9%, respectively.\nDuring the year ended December 31, 1993 and 1992, the Company reclassified its SPI intercompany payable of $2,333,000 and $3,631,000, and its Viratek intercompany receivable of $272,000 and $536,000 to the Company's ICN intercompany account resulting in a net increase in the Company's liability to ICN of $2,061,000 and $3,095,000, respectively. Total loans and advances from ICN were $5,932,000 and $8,414,000 as of December 31, 1993 and 1992, respectively. Such advances have been classified as a long-term payable.\nIn accordance with this investment policy, the Company advanced the net proceeds of the Company's Bio Capital Holding Swiss Franc public offering, completed in February 1987, to ICN. These advances were payable to the Company by ICN in Swiss Francs. At March 1, 1991 the Company converted an advance due from ICN of SFr. 14,386,000 into $10,849,000. As a result of this change, the Company removed the hedge from its Swiss franc liability and recorded exchange gains of $159,000, $758,000 and $170,000 in 1993, 1992 and 1991, respectively.\nDebt and Equity Transactions\nOn August 30, 1993, the Company issued 300,000 shares of a new series \"A\" of the Company's non-convertible, non-voting, preferred stock valued pursuant to a fairness opinion, at $30,000,000 to ICN. In exchange, ICN delivered 4,983,606 shares of the Company's common stock that ICN owned and exchanged intercompany debt owed to ICN by the Company in the amount of $11,000,000.\nIn addition, on August 30, 1993, the Company issued 390,000 shares of a new series \"B\" of the Company's non-convertible, non-voting, preferred stock valued pursuant to a fairness opinion, at $32,000,000 to ICN. In exchange, ICN delivered to the Company 8,384,843 shares of the Company's common stock that ICN owned.\nAs a result of the exchange, the Company had 9,033,623 common shares issued and outstanding.\nSubject to declaration by the Company's Board of Directors, the new series \"A\" preferred stock pays an annual dividend of $8, noncumulative, payable quarterly and the new series \"B\" preferred stock pays an annual dividend of $10, noncumulative, payable quarterly. Both series \"A\" and \"B\" preferred stock become cumulative in respect to dividends upon certain events deemed to be a change in control, as defined by the certificates of designation. The series \"B\" preferred dividends are subject to the prior rights of the holders of the series \"A\" preferred stock and any other preferred stock ranking prior to the series \"B\" preferred.\nThe series \"A\" preferred stock is senior in ranking to the series \"B\" preferred stock and the series \"B\" preferred stock is senior to the Company's common stock as to voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company, after payment or provision for payment of the debts and other liabilities of the Company. The holders of the series \"A\" preferred shares are entitled to receive an amount in cash or in property, including securities of another corporation, equal to $100 per share in involuntary liquidation or $106 per share in voluntary liquidation prior to August 31, 1994 and declining ratably per year to $100 per share after 1998, plus dividends, in the event dividends have become cumulative. The holders of the series \"B\" preferred shares are entitled to receive an amount in cash or in property, including securities of another corporation equal to $100 per share in voluntary or involuntary liquidation, plus dividends, in the event dividends have become cumulative.\nThe series \"A\" and \"B\" preferred shares are redeemable, for cash or property, including securities of another corporation, in whole or in part, at the option of the Company only, subject to approval by a vote of a majority of the independent directors of the Company. The series \"A\" preferred shares are redeemable at $106 per share prior to August 31, 1994 and declining ratably per year to $100 in 1998, plus dividends, in the event dividends have become cumulative. The series \"B\" shares are redeemable at $100 per share, plus dividends, in the event dividends have become cumulative.\nNo dividends were declared on the Series \"A\" or Series \"B\" preferred stock during 1993.\nOn December 31, 1992, the Company exchanged $11,250,000 of debt owed to ICN for 3,214,286 shares of the Company's common stock issued to ICN at a price of $3.50 per share which represents the closing market price of the stock on that date.\nOn April 1, 1992, the Company transferred $13,072,000 of debt with First City Bank of Texas-Houston N.A., to ICN. The Company, in exchange, issued 2,412,449 shares of the Company's common stock at a price of $5.42 per share which represents the closing market price of the stock at that date less a discount of 15%. ICN became primarily liable for the debt. The Company's domestic inventories and receivables remained as collateral. The outstanding debt was repaid in full by ICN on December 3, 1992 and all pledges were extinguished.\nOn March 31, 1992, the Company transferred $2,711,000 of debt owed to Skopbank of Finland to ICN. The Company, in exchange, issued 500,334 shares of the Company's common stock at a price of $5.42 per share which represents the closing market price of the Company's stock on that date less a discount of 15%. ICN became primarily liable for the debt and the Company became guarantor.\nOn March 31, 1992, the Company exchanged $4,837,000 of debt owed to ICN for 892,703 shares of the Company's common stock issued to ICN at a price of $5.42 per share which represents the closing market price of the stock on that date less a discount of 15%.\nOn December 31, 1991, the Company issued 3,363,298 shares of the Company's common stock to ICN at a price of $6.25 which represents the fair market value of the Company's stock on that date in exchange for debt owed ICN in the amount of $18,167,523.\nOn March 1, 1991, the Company exchanged $3,833,000 of advances due to ICN into 538,000 shares of the Company's Common Stock, issued at a price of $7.125 which represented the fair market value of the Company's stock on that date less a discount of 22%.\nIn March 1987 and October 1988, the Company purchased ICN 12 7\/8% debentures due 1998 and ICN 12 1\/2% debentures due 1999 on the open market. The debentures had a book value of $3,567,250. On December 30, 1991 the Company sold all the debentures to ICN for a loss of $64,250.\nResearch and Development\nEffective January 1, 1992, the Company entered into an agreement with Viratek, whereby the Company transferred right, title, and interest in certain of its research and development projects to Viratek. The Company retains a right of first refusal to the marketing and distribution rights for any products developed. Viratek conducts biomedical research related to the development of non-isotopic diagnostic test kits and associated hardware. The Company continues to perform research and development in reagents and instrumentation.\nOther\nDuring January 1993, the Company transferred its Dublin, Virginia, facility to ICN in exchange for a reduction in the intercompany amounts due ICN of $586,000 representing the net book value at the date of the transfer.\nOn December 31, 1992, the Company transferred $5,747,000 of debt owed to a major supplier, to ICN. ICN became primarily liable for the debt and the Company became guarantor. On June 30, 1993, ICN filed a claim in arbitration alleging breach of agreement entered with such supplier and withheld final payment due on that date of approximately, $1,295,000 (Finnish Markka 7,500,000). Arbitration is set for October 11, 1994.\n5. Income Taxes\nIn January 1993, the Company adopted Statement of Financial Accounting Standards No. 109, (SFAS 109) \"Accounting for Income Taxes\". SFAS 109 is an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequence of events that have been recognized in the Company's financial statements or tax returns. In estimating future tax consequences, SFAS 109 generally considers all expected future events other than enactment of changes in the tax law or rates. Previously, the Company used the SFAS 96 asset and liability approach that gave no recognition to future events other than the recovery of assets and settlement of liabilities at their carrying amounts. The adoption of SFAS 109 did not result in a cumulative effect adjustment in the statement of operations. Prior years' amounts are presented as previously reported.\nIncome (loss) before provision for income taxes and extraordinary income (1993) for the years ended December 31 consists of the following:\nThe income tax provision (benefit) consists of the following:\nThe components of the deferred income tax provision relate primarily to the net tax effects of the differences arising as the result of utilizing different depreciation and amortization methods for income tax purposes than for financial reporting purposes and establishing inventory allowances for financial reporting purposes which are not currently deductible for income tax purposes.\nA reconciliation of the Federal statutory income tax rates to the effective income tax rates is as follows:\nThe Company conducts business in a number of different tax juris- dictions. Accordingly, losses sustained in one jurisdiction generally cannot be applied to reduce taxable income in another jurisdiction. The income of certain foreign subsidiaries is not subject to U.S. income taxes, except when such income is paid to the U.S. parent company or one of its domestic subsidiaries. No U.S. taxes have been provided on the Company's foreign subsidiaries since management intends to reinvest those amounts in foreign operations. Included in consolidated retained earnings (deficit) at December 31, 1993 is approximately $1,820,000 of accumulated earnings of foreign operations that would be subject to U.S. income taxes if and when repatriated.\nThe Company has domestic and foreign operating loss carryforwards (NOL) of approximately $39,000,000 and $38,000,000, respectively, at December 31, 1993. Such NOL's expire in varying amounts from 1994 until 2008. Of the $77,000,000 NOL, $458,000 will be credited to additional paid in capital when utilized. In connection with the acquisition of Flow, the Company acquired Flow's net operating loss carryforwards of $9,771,000. The Company has agreed to pay Flow the first $500,000 of any benefits realized. In the event this amount is not realized by November 1994, it will become due and payable to Flow including interest at 10%. Tax benefits related to the NOL existing at the date of acquisition realized in excess of $500,000 will be shared equally with Flow.\nThe primary temporary differences which give rise to the Company's net deferred tax liability, at December 31, 1993 and January 1, 1993, are as follows: (in thousands)\n6. Debt\nLong-term debt and obligations under capital leases due non-affiliates consists of the following:\nAll of the long-term debt noted above (other than $1,555,000 and $1,670,000 of notes payable to banks, collateralized by land and buildings in 1993 and 1992, respectively), is denominated in currencies other than the U.S. Dollar.\nIn 1987, Bio Capital Holding (\"Bio Capital\"), a trust established by ICN and the Company, completed a public offering in Switzerland of Swiss Francs (SFr.) 70,000,000 principal amount of 5 1\/2% Swiss Franc Exchangeable Certificates (\"Old Certificates\"). At the option of the certificate holders, the Old Certificates are exchangeable into shares of common stock of the Company. Net proceeds were used by Bio Capital to purchase SFr. 70,000,000 face amount of zero coupon Swiss Franc Debt Notes due 2002 of the Kingdom of Denmark (the \"Danish Bonds\") for SFr. 33,772,000 and 15 series of zero coupon Swiss Franc Guaranteed Bonds of the Company (the \"Zero Coupon Guaranteed Bonds\") for SFr. 32,440,000, which are guaranteed by ICN. Each series of the Zero Coupon Guaranteed Bonds are in an aggregate principal amount of SFr. 3,850,000 maturing in February of each year through 2002. The Company has no obligation with respect to the payment of the principal amount of the Old Certificates since they will be paid upon maturity by the Danish bonds.\nDuring 1990, the Company offered, to all certificate holders, to exchange the Old Certificates for newly issued certificates (\"New Certificates\"), the terms of which remain the same except that 334 shares per SFr. 5,000 principal certificate can be exchanged at $10.02 using a fixed exchange rate of SFr. 1.49 to U.S. $1.00. Substantially all of the\noutstanding Old Certificates were exchanged for New Certificates (together referred to as \"Certificates\"). The deferred loan costs associated with the exchange are included in other assets and deferred charges, net in the accompanying consolidated balance sheets. This exchange was accounted for as an extinguishment of debt and the effect on net income was not material.\nDuring 1992, the Company repurchased SFr. 5,640,000 of Certificates, representing long-term debt of $1,859,000.\nDuring 1991, SFr. 1,245,000 ($918,000) principal amount of New Certificates were exchanged into 83,166 shares of common stock. These transactions resulted in a reduction of debt of SFr. 434,000 ($312,000) during 1991. There were no Certificates exchanged during 1992 or 1993.\nAs of December 31, 1993, the accompanying consolidated financial statements include total outstanding debt of SFr. 12,534,000 ($8,441,000) which represents the present value of the Company's obligation to pay the Zero Coupon Guaranteed Bonds. When Certificates are exchanged into common stock, the Company's obligation to pay the Zero Coupon Guaranteed Bonds is reduced and the Danish Bonds are released by Bio Capital to the Company, both on a pro rata basis. As of December 31, 1993, SFr. 39,615,000 ($26,677,000) principal of Certificates were outstanding which, if exchanged for common stock, would result in the issuance of 2,608,241 shares of common stock, a reduction of long-term debt of SFr. 11,330,000 ($7,630,000), a reduction of SFr. 1,204,000 ($811,000) of current maturities of long-term debt, and an increase in marketable securities of SFr. 20,204,000 ($13,605,000) from the release by Bio Capital of the Danish Bonds to the Company.\nAnnual aggregate maturities of long-term debt including obligations under capital leases are as follows:\nThe average month-end balances of aggregate short-term borrowings due to non-affiliates were $2,933,000, and $6,059,000, at weighted average interest rates of 16.2% and 20.9%, for 1993 and 1992, respectively. Maximum total month-end borrowings during 1993 and 1992 were $4,204,000, and $7,712,000, respectively. The weighted average interest rates of total short-term debt due to non-affiliates at the end of 1993 and 1992, approximated the weighted average rate on average month-end balances.\n7. Commitments and Contingencies\nCommitments\nAt December 31, 1993, the Company was committed under noncancellable leases with non-affiliates for minimum aggregate lease payments as follows:\nRental expense on operating leases was $870,000, $1,066,000 and $1,426,000 in 1993, 1992 and 1991, respectively.\nPurchase Commitment\nThe Company has a purchase commitment with a major supplier for which the remaining purchase of inventory under agreement will be due June 1994 in the amount of approximately $1,727,000 (Finnish Markka 10,000,000).\nThe Company is also a guarantor on a note payable to the same supplier for which ICN is primarily liable. On June 30, 1993, ICN filed a claim in arbitration alleging breach of agreement entered with such supplier and withheld final payment due on that date of approximately $1,295,000 (Finnish Markka 7,500,000). In addition, ICN is seeking declaration and award that the Company is not obligated to honor the aforementioned purchase commitment or installments on the note. Arbitration is set for October 4, 1994.\nAcquisition Commitments\nUnder the terms of the Flow purchase agreement, the Company issued 100,000 shares of common stock to the seller, which shares have a guaranteed value of $20 per share on November 8, 1994. If the fair value, as defined, of the Company's common stock is less than $20 per share on that date, the Company must pay the difference in cash. The Company may redeem such shares\nfor the $20 guaranteed value prior to November 8, 1994. At December 31, 1993, the Company would have paid $1,575,000 to honor the guarantee.\nLitigation\nThe Company is party to a number of pending or threatened lawsuits arising out of, or incidental to, its ordinary course of business. In the opinion of management, the resolution of these matters will not have a material adverse effect upon the consolidated financial position of the Company.\nProduct Liability Insurance\nThe Company is self-insured for potential product liability with respect to currently marketed products. The Company could be exposed to possible claims for personal injury resulting from allegedly defective products. While to date no material adverse claim for personal injury resulting from allegedly defective products has been successfully maintained against the Company, a substantial claim, if successful, could have a material adverse effect upon the consolidated financial position of the Company.\nBenefit Plans\nThe Company has several benefit plans covering substantially all of their employees.\nAll eligible U.S. employees may elect to participate in an ICN sponsored 401(k) plan. The Company partially matches employee contributions.\nThe Company's United Kingdom subsidiary has a defined benefit retirement plan which covers all eligible U.K. employees. The plan is actuarially reviewed approximately every three years. Annual contributions are based on total pensionable salaries. It is estimated that the plan's assets exceeded the actuarial computed value of vested benefits as of December 31, 1993 and 1992, respectively.\nThe total expense under the U.S. and U.K. plans was approximately $452,000 in 1993, $260,000 in 1992, and $440,000 in 1991.\nThe Company also had deferred compensation agreements for certain of its officers and certain key employees, with benefits commencing at death or retirement. The present value of the benefits expected to be paid was accrued from 1985 through 1989 at which time the agreements were terminated. Interest continues to accrue on the amounts due until all payments are made.\n8. Common Stock\nThe Company has reserved a total of 2,140,000 shares for issuance under its 1983 Employee Incentive Stock Option Plan and its 1983 Non-Qualified Stock Option Plan and 1,000,000 shares for issuance under its 1992 Employee Incentive Stock Option Plan and 1992 Non-Qualified Stock Option Plan (the \"Plans\"). Under the terms of the plans, participants may receive options to purchase common stock in such amounts as may be established by the Compensation Committee of the Board of Directors. Options are granted at a price not less than 100 percent of the fair market value on the date of grant and may be granted for a term of up to ten years. Options have been granted\nat prices ranging from $.83 to $10.50 per share. Options for 1,819,830, 1,192,130 and 1,137,258 shares were outstanding at December 31, 1993, 1992 and 1991, respectively. Shares available for grant under the Plans were 169,750, 789,120 and 343,860 at December 31, 1993, 1992 and 1991, respectively. Shares remaining under grant were 1,819,830 and 1,192,130 at December 31, 1993 and 1992, respectively. Shares of 843,135 and 592,310, were exercisable as of December 31, 1993 and 1992, respectively. Options totaling 4,800, 54,040, and 89,083 shares were exercised during 1993, 1992 and 1991, at average prices of $.83, $4.55 and $3.86, respectively. The Company's 1983 Plans expired on September 1, 1993 and the Company's 1992 Plans expire in 2002.\nAt December 31, 1993, options for 600,000 shares at prices ranging from $6.125 to $7.00 per share of the Company's common stock were outstanding, which had been granted during 1988 and 1992 to Milan Panic, Chairman of the Board of Directors and Chief Executive Officer of the Company.\nThe Company issued 83,166 shares of common stock upon the exchange of Certificates in 1991. There were no certificates exchanged during 1992 or 1993.\n9. Detail of Certain Accounts\n10. Geographical Data\nThe following tables set forth the amounts of net sales, income (loss) before provision for income taxes and extraordinary income and identifiable assets by geographical area for 1993, 1992 and 1991.\n11. Supplemental Cash Flow Disclosures\nThe Company paid interest charges of $1,478,000, $3,168,000 and $5,483,000 in 1993, 1992 and 1991, respectively. The Company also paid income taxes of $164,000, $706,000 and $469,000 in 1993, 1992 and 1991, respectively.\nOn August 30, 1993, the Company issued 300,000 and 390,000 shares of preferred stock series \"A\" and \"B\", respectively, to ICN. In exchange, ICN retired $11,000,000 of debt owed to ICN by the Company and delivered 13,368,449 shares of the Company's common stock that ICN owned (see Note 3, - \"Preferred Stock\").\nDuring January 1993, the Company transferred its Dublin, Virginia, facility to ICN in exchange for a reduction in the intercompany amounts due ICN of $586,000 representing the net book value at the date of transfer.\nSee Note 4 regarding debt converted into the Company's common stock during 1992 and 1991.\n12. Restructuring Costs and Special Charges\nThe following is a summary regarding the Company's 1992 and 1991 Restructuring Costs and Special Charges.\nIn November 1989, the Company acquired for $37,700,000 all of the issued and outstanding common shares of Flow Laboratories, Inc. and Flow Laboratories B.V. from GRC International, Inc. (formerly Flow General Inc.). These companies together with their respective subsidiaries (\"Flow\"), constituted the Biomedical division of Flow General. The excess of the total purchase price (including acquisition costs) over the fair value of net assets acquired was $35,245,000, which was allocated to the excess of cost over net assets of purchased subsidiaries and was being amortized over 40 years. Flow was a manufacturer and distributor of several thousand biochemical products worldwide. At the time of the acquisition, the Company had concluded that Flow was a significant complement to the Company, since Flow had a major presence in the European markets, which the Company lacked at the time. Therefore, more than products, the Company acquired an international distribution network. Since 1990, the Company utilized this distribution network to introduce ICN products. At the same time, it decided to phase out or to eliminate Flow low margin products, certain other product lines which did not fit the Company's long-term strategies and to close down inefficient operations.\nIn prior years and the first three quarters of 1992, recoverability of goodwill associated with the Flow acquisition was focused on the European operations as Biomedicals had only a limited presence in Europe prior to the Flow acquisition. Accordingly, Biomedicals used the expected future operating income of the European operations in evaluating the recoverability of the Flow goodwill.\nDuring 1991, the Company initiated a restructuring program designed to reduce costs, and improve operating efficiencies. The program included, among other items, the consolidation, relocation and closure of certain manufacturing and distribution facilities within the U.S. and Europe, which were acquired in the Flow acquisition. Those measures, including a 15% reduction in the work force, were largely enacted during 1991 and continued in 1992. Costs incurred relating to this restructuring plan during 1991 were $6,087,000.\nDuring the fourth quarter 1992, as a result of a continued decline in sales and other factors, the Company reassessed their business plan and\nprospects for 1993 and beyond which included, among other things, the decision to sell the last remaining major European manufacturing facility and to restructure the previously acquired distribution network and European operations in line with the revised sales estimates. Consequently, based upon the continuing decline in European revenue and profitability relating to Flow, Flow facility closures and an ineffective distribution network, management concluded that there was no current or expected future benefit associated from the Flow acquisition. Accordingly, the Company wrote off goodwill and other intangibles, primarily from the Flow acquisition of $37,714,000.\nThe relocation of various U.S. and European operations was also re-evaluated. It was determined that many of the operations did not support the costs of maintaining separate facilities. Therefore, estimated costs associated with lease termination, employee termination, facility shut-down (of facilities held for disposition) were expensed primarily in the fourth quarter of 1992 and amounted to $4,858,000.\nDuring the fourth quarter of 1992, the Company reassessed the valuation of inventory, given the decline in sales and lack of effective integration of the Company's and Flow's product lines. Accordingly, the Company recorded a provision for abnormal writedowns of inventory to estimated realizable value of $9,924,000 and discontinued products of $3,377,000.\nIn addition, during the fourth quarter of 1992, the Company determined that the unamortized costs of the catalog marketing program would not be recovered within a reasonable period; therefore, costs totaling $6,659,000 were written off. In the future, specifically focused customer or \"product line\" catalogs will be used for customer product lines and a more focused general catalog for others.\nRestructuring costs and special charges of $63,032,000 and $6,087,000 for the years ended December 31, 1992 and 1991, respectively, are shown as a separate item in the Consolidated Statements of Operations and include the following:\n13. Lease Vacancy Costs\nDuring 1993, the Company vacated its High Wycombe facility in England and moved to a facility more suitable to the Company's operating needs in Thames, England. The Company pursued various subleasing agreements for which none were consummated as of December 31, 1993. Consequently, the Company accrued approximately $1,200,000 which represents management's best estimate of the net present value of future leasing costs to be incurred for High Wycombe. During 1993, the Company expensed an additional $236,000 of leasing costs related to High Wycombe.\n14. Other (Income) Expense, Net.\nOther (income) expense, net was $(2,399,000), $4,731,000 and $1,268,000 in 1993, 1992 and 1991, respectively. In 1993, Other (income) expense, net, includes a gain of $430,000 representing a favorable settlement of a foreign non-income related tax dispute, a gain of $278,000 on the sale of the Company's Irvine, Scotland facility, a gain of $938,000 realized by the Company's Italian operation on the favorable termination of certain leasing contracts, and a gain of $1,250,000 relating to certain liabilities accrued during 1992 which were settled for less than the original estimates. In 1992, the Company expensed $2,187,000 for a non-exclusive license fee for the purpose of marketing certain laboratory equipment in the U.S., Canada and South America. Other charges in 1992 include certain non-income related taxes and an equity investment write-off totaling $2,202,000. Other (income) expense, net in 1991 included $1,286,000 of one-time costs relating to the introduction of the Company's catalog.\n15. Extraordinary Income\nDuring the second quarter of 1993, the Company's Italian operation negotiated settlements with certain of its suppliers and banks resulting in an extraordinary income of $627,000 or $.03 per share.\n52 ICN BIOMEDICALS, INC.\nSchedule V -- Property, Plant and Equipment (In thousands)\n53 ICN BIOMEDICALS, INC.\n54 ICN BIOMEDICALS, INC. Schedule VIII--Valuation and Qualifying Accounts (In thousands)\nITEM 9.","section_7A":"","section_8":"","section_9":"ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE\nNone.\nPART III\nITEM 10.","section_9A":"","section_9B":"","section_10":"ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT\nThe information required under this item is incorporated by reference to the Company's definitive Proxy Statement to be filed in connection with the Company's 1994 annual meeting of stockholders. Reference is made to that portion of the Proxy Statement entitled \"Information Concerning Nominees and Directors.\" Information regarding the Company's executive officers is included in Part I of this Form 10-K under the caption \"Executive Officers of the Registrant.\"\nITEM 11.","section_11":"ITEM 11. EXECUTIVE COMPENSATION\nThe information required under this item is incorporated by reference to the Company's definitive Proxy Statement to be filed in connection with the Company's 1994 Annual Meeting of Stockholders. Reference is made to that portion of the Proxy Statement entitled \"Executive Compensation.\"\nITEM 12.","section_12":"ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT\nThe information required under this item is incorporated by reference to the Company's definitive Proxy Statement to be filed in connection with the Company's 1994 Annual Meeting of Stockholders. Reference is made to that portion of the Proxy Statement entitled \"Ownership of the Company's Securities.\"\nITEM 13.","section_13":"ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS\nThe information required under this item is incorporated by reference to the Company's definitive Proxy Statement to be filed in connection with the Company's 1994 Annual Meeting of Stockholders. Reference is made to those portions of the Proxy Statement entitled \"Executive Compensation\" and \"Certain Transactions.\"\nPART IV\nITEM 14.","section_14":"ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K\n(a) 1. Financial Statements\nFinancial Statements of the Registrant are listed in the index to Consolidated Financial Statements and filed under Item 8, \"Financial Statements and Supplementary Data\", included elsewhere in this Form 10-K.\n2. Financial Statement Schedules\nFinancial Statement Schedules of the Registrant are listed in the index to Consolidated Financial Statements and filed under Item 8, \"Financial Statements and Supplementary Data,\" included elsewhere in this Form 10-K.\n3. Exhibits.\n3.1 Certificate of Incorporation of Registrant, including all Amendments through March 13, 1987.*\n3.2 Bylaws of Registrant, including all Amendments through September 23, 1986.*\n10.1 Exchange Agreement dated as of January 1, 1984 between Registrant and ICN (Exhibit 10.1 to Registration Statement No. 33-7613).*\n10.2 Tax Sharing Agreement dated as of November 30, 1983 between Registrant and ICN (Exhibit 10.2 to Registration Statement No. 33-7613).*\n10.3 1983 Employee Incentive Stock Option Plan (Exhibit 10.3 to Registration Statement No. 33-7613).*\n10.4 1983 Non-Qualified Stock Option Plan (Exhibit 10.4 to Registration Statement No. 33-7613).*\n10.5 Asset Purchase Agreement dated as of October 1, 1985 between Micromedic Systems, Inc. and ICN Pharmaceuticals, Inc (Exhibit 10.5 to Registration Statement No. 33-7613).*\n10.6 Lease Agreement between Pennsylvania Business Campus Delaware, Inc. (Landlord) and ICN Micromedic Systems, Inc. (Tenant) dated April 9, 1986 (Exhibit 10.8 to Registration Statement No. 33-7613).*\n10.7 Loan Agreement, dated as of July 1, 1986, between ICN Pharmaceuticals, Inc. and ICN Biomedicals, Inc. (Exhibit 10.9 to Registration Statement No. 33-7613).*\n10.8 Amendment No. 1 to Loan Agreement, dated as of September 11, 1986, between ICN Pharmaceuticals, Inc. and ICN Biomedicals, Inc (Exhibit 10.10 to Registration Statement No. 33-7613).*\n10.9 Bio Capital Holding Trust Instrument between ICN Biomedicals, Inc., Ansbacher (C.I.) Limited and ICN Pharmaceuticals, Inc. dated as of January 26, 1987; Subscription Agreement between ICN Biomedicals, Inc., Ansbacher (C.I.) Limited, ICN Pharmaceuticals, Inc., Banque\nGutzwiller, Kurz, Bungener S.A. and the other financial institutions named therein dated as of January 26, 1987; Exchange Agency Agreement between ICN Biomedicals, Inc., Banque Gutzwiller, Kurz, Bungener S.A. and the other financial institutions named therein dated as of January 26, 1987; and Guaranty between ICN Pharmaceuticals, Inc., and ICN Biomedicals, Inc. dated as of February 17, 1987 (Exhibit 10.1 to the Company's Form 10-Q for the quarter ended February 28, 1987).*\n10.10 Exchange Agreement effective as of December 1, 1986 between ICN Biomedicals, Inc. and ICN Pharmaceuticals, Inc. (Exhibit 10.2 to the Company's Form 10-Q for the quarter ended February 28, 1987).*\n10.11 1983 Employee Incentive Stock Option Plan, as amended (Exhibit 19.1 to the Company's Form 10-Q for the quarter ended May 31, 1989)*.\n10.12 1983 Non-Qualified Stock Option Plan, as amended.*\n10.13 Purchase and Sale Agreement between ICN Biomedicals, Inc. and Flow General, Inc. dated as of September 28, 1989 (Exhibit 2.1 to the Company's Form 10-Q for the quarter ended August 31, 1989)*.\n10.14 Credit Agreement between ICN Biomedicals, Inc., Flow Laboratories, Inc., Flow Laboratories B.V. and First City, Texas-Houston, N.A. dated as of November 8, 1989.*\n10.15 Amended and Restated Credit Agreement between ICN Biomedicals, Inc. and First City, Texas-Houston, N.A. dated as of November 30, 1990.*\n10.16 Commitment Letter between ICN Biomedicals, Inc., ICN Pharmaceuticals, and First City, Texas-Houston, N.A. dated March 30, 1992.\n10.17 Research and Development Agreement between ICN Biomedicals, Inc. and Viratek, Inc. dated January 1, 1992.*\n10.18 1992 Employee Incentive Stock Option Plan.*\n10.19 1992 Employee Non-Qualified Stock Option Plan.*\n11 Statement re computation of per share earnings.\n21 Subsidiaries of Registrant.\n23 Consent of Coopers & Lybrand, Independent Auditor.\n* Incorporated by reference.\n59 SIGNATURES\nPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.\nMarch 30, 1994\nICN BIOMEDICALS, INC.\nBy \/s\/ MILAN PANIC ------------------------------ Milan Panic, Chairman of the Board and Chief Executive Officer\nPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated.\nEXHIBIT INDEX\nEXHIBIT 11 STATEMENT RE COMPUTATION OF PER SHARE EARNINGS\nThe computations of net income (loss) per share for the years ended December 31, 1993, 1992 and 1991, respectively, are as follows:\nEXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT\nICN Biomedicals, Inc. is incorporated in the State of Delaware. The following table shows the Company's significant subsidiaries as of March 30, 1994, the percentages of their voting securities (including directors' qualifying shares) owned by the Company, and the jurisdiction under which each subsidiary is incorporated.\nEXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS\nWe consent to the incorporation by reference of our report dated March 30, 1994 into the Company's previously filed Registration Statements on Form S-8 (File No.33-26170, 33-34943, and 33-60862), Form S-1 (File No. 33-14479), and Form S-3 (File No. 33-63162) on our audits of the consolidated financial statements and financial statement schedules of ICN Biomedicals, Inc. as of December 31, 1993 and 1992 and for the years ended December 31, 1993, 1992 and 1991, which report is included in this Annual Report on Form 10-K.\nCOOPERS & LYBRAND\nLos Angeles, California March 30, 1994","section_15":""}
{"filename":"12978_1993.txt","cik":"12978","year":"1993","section_1":"Item 1. Business\nAs used in this annual report, the term \"Company\" includes Boise Cascade Corporation and its consolidated subsidiaries and predecessors. The terms \"Boise Cascade\" and \"Company\" refer, unless the context otherwise requires, to Boise Cascade Corporation and its consolidated subsidiaries.\nBoise Cascade Corporation is an integrated paper and forest products company headquartered in Boise, Idaho, with operations located in the United States and Canada. The Company manufactures and distributes paper and paper products, office products, and building products and owns and manages timberland to support these operations. The Company was incorporated under the laws of Delaware in 1931 under the name Boise Payette Lumber Company of Delaware, as a successor to an Idaho corporation formed in 1913; in 1957, its name was changed to its present form.\nFinancial information pertaining to each of the Company's industry segments and to each of its geographic areas for the years 1993, 1992, and 1991 is presented in Note 8, \"Segment Information,\" of the Notes to Financial Statements of the Company's 1993 Annual Report and is incorporated herein by this reference.\nThe Company's sales and income are affected by the industry supply of product and changing economic conditions in the markets it serves. Demand for paper and paper products and for office products correlates closely with real growth in the gross domestic product. Paper and paper products operations are also affected by demand in international markets and by inventory levels of users of these products. The Company's building products businesses are dependent on repair-and-remodel activity, housing starts, and commercial and industrial building, which in turn are influenced by the availability and cost of mortgage funds. Declines in building activity that may occur during winter affect the Company's building products businesses, and demand for office products generally is somewhat lower during the second quarter. In addition, energy and some operating costs may increase at facilities affected by cold weather. However, seasonal influences are generally not significant.\nThe management practices followed by the Company with respect to working capital conform to those of the paper and forest products industry and common business practice in the United States.\nThe Company occasionally engages in acquisition discussions with other companies and makes acquisitions from time to time. It is also the Company's policy to review its operations periodically and to dispose of assets which fail to meet its criteria for return on investment or which cease to warrant retention for other reasons. (See Note 1 of the Notes to Financial Statements of the Company's 1993 Annual Report. This information is incorporated herein by this reference.)\nPaper and Paper Products\nThe products manufactured by the Company, made both from virgin and recycled fibers, include uncoated business, printing, forms, and converting papers; coated white papers for magazines, catalogs, and direct- mail advertising; newsprint; containerboard; uncoated groundwood papers for newspaper inserts and books; and market pulp. These products are available for sale to the related paper markets, and certain of these products are sold through the Company's office products distribution operations. In addition, containerboard is used by the Company in the manufacture of corrugated containers.\nThe Company is a major North American pulp and paper producer with 8 U.S. and 2 Canadian paper mills. The total annual practical capacity of the mills was approximately 4.1 million tons at December 31, 1993. The Company's products are sold to distributors and industrial customers primarily by the Company's own sales personnel.\nThe Company's paper mills are supplied with pulp principally from the Company's own integrated pulp mills. Pulp mills in the Northwest manu- facture chemical and thermomechanical pulp primarily from wood waste pro- duced as a byproduct of wood products manufacturing. In 1993, the Company started up a recycled pulp mill at its existing paper mill in Steilacoom (West Tacoma), Washington. Pulp mills in the Midwest, Northeast, South, and Canada manufacture chemical, thermomechanical, and groundwood pulp mainly from pulpwood logs and, to some extent, from purchased wood waste. Wood waste is provided by Company sawmills and plywood mills in the Northwest and, to a lesser extent, in the South, and the remainder is purchased from outside sources.\nThe Company currently manufactures corrugated containers at 7 plants, which have annual practical capacity of approximately 3.3 billion square feet. The containers produced at the Company's plants are used to package fresh fruit and vegetables, processed food, beverages, and many other industrial and consumer products. The Company primarily sells its corrugated containers through its own sales personnel.\nThe following table sets forth sales volumes of paper and paper products for the years indicated:\n1993 1992 1991 1990 1989 Paper (thousands of short tons)\nUncoated free sheet papers 1,215 1,110 1,050 891 835 Newsprint 860 831 838 873 859 Containerboard 559 560 540 529 536 Coated papers 418 397 371 365 389 Uncoated groundwood papers 299 319 319 314 305 Market pulp 205 260 284 307 286 Other(1) - - - 43 91 ______ ______ ______ ______ ______ 3,556 3,477 3,402 3,322 3,301\n(millions of square feet)\nCorrugated containers(2) 2,961 4,715 6,478 7,087 7,091\n(1) Includes specialty paperboard and carbonless paper. The Company sold its specialty paperboard mills on June 30, 1989. In 1990, the Company discontinued production of carbonless paper.\n(2) On June 30, 1992, the Company sold 11 corrugated container plants.\nIn keeping with the Company's periodic reviews of the opportunities and challenges for each of its businesses, in February 1994, the Company announced its intention to combine the majority of its newsprint, uncoated groundwood, and related assets into an independently managed Canadian company which would have access to financial markets. Locations involved include Kenora and Fort Frances, Ontario, Canada, and Steilacoom (West Tacoma), Washington. The new entity also would have responsibility for the sale of newsprint produced at the Company's DeRidder, Louisiana, mill.\nOffice Products\nThe Company distributes a broad line of items for the office, including office supplies, paper, and office furniture. All of the products sold by this segment are purchased from other manufacturers or from industry wholesalers, except for copier and similar papers, which are primarily sourced from the Company's paper operations. The Company sells these office products directly to corporate, government, and other offices, primarily for next-day delivery.\nCustomers with multi-site locations across the country are often serviced via national contracts that provide for consistent pricing and product offerings and, if desired, summary billings, usage reporting, and other special services. The Company's 24 distribution centers are located across the United States to provide next-day delivery to all domestic locations. The Company also operates 4 retail office supply stores in Hawaii. The Company plans to open a distribution center in Colorado late in the first quarter of 1994.\nThe following table sets forth sales dollars for the office products distribution business for the years indicated:\n1993 1992 1991 1990 1989\nSales (millions) $ 683 $ 672(1) $1,039 $1,079 $1,014\n(1)Early in 1992, the Company sold essentially all of its wholesale office products distribution operations, enabling the Company to focus on the commercial channel on a national basis. In 1991, sales of the 13 distribution centers and 1 minidistribution center that comprised the wholesale operations were approximately $400 million.\nBuilding Products\nThe Company is a major producer of plywood, lumber, and particle- board, together with a variety of specialty wood products. The Company also manufactures engineered wood products consisting of laminated veneer lumber (LVL), which is a high-strength engineered structural lumber product, and I-beam floor and ceiling joists that incorporate the LVL technology. Most of its production is sold to independent wholesalers and dealers and through the Company's own wholesale building materials distribution outlets. The Company's wood products are used primarily in housing, industrial construction, and a variety of manufactured products. Wood products manufac- turing trade sales for 1993, 1992, and 1991 were $879 million, $761 million, and $615 million.\nThe following table sets forth annual practical capacities of the Company's wood products facilities as of December 31, 1993:\nNumber of Mills Practical Capacity (millions)\nPlywood 12 1,895 square feet (3\/8\" basis) Lumber 13 756 board feet Particleboard 1 185 square feet (3\/4\" basis)\nThe Company operates 9 wholesale building materials distribution facilities and 2 satellite locations. These operations market a wide range of building materials, including lumber, plywood, particleboard, engineered wood products, fiberboard siding, roofing, gypsum board, insulation, ceiling tile, paneling, molding, windows, doors, builders' hardware, and related products. These products are distributed to retail lumber dealers, home centers specializing in the do-it-yourself market, and industrial customers. A portion (approximately 33% in 1993) of the wood products required by the Company's Building Materials Distribution Division are provided by the Company's manufacturing facilities, and the balance is purchased from out- side sources.\nThe following table sets forth sales volumes of wood products and sales dollars for engineered wood products and the building materials distribution business for the years indicated:\n1993 1992 1991 1990 1989 (millions)\nPlywood (square feet - 3\/8\" basis) 1,760 1,788 1,621 1,682 1,679 Lumber (board feet) 760 805 815 782 815 Particleboard (square feet - 3\/4\" basis) 182 186 182 179 188 Engineered wood products (sales dollars) $71 $38 $13 $ 1 $ - Building materials distribution (sales dollars) $590 $447 $328 $289 $279\nTimber Resources\nIn recent years, heightened attention has been paid to developing and implementing recovery plans throughout the U.S. for species listed as threatened or endangered under the Endangered Species Act of 1973. Some of these plans have caused or could cause sharp curtailment in the use of public and private timberlands in the Pacific Northwest. The case of the spotted owl is a highly visible example of the negative impact of these plans on the paper and forest products industry.\nIn July 1993, the Clinton Administration announced a forest management plan that would reduce harvests in the so-called spotted owl forests of western Washington, western Oregon, and northern California to an average of 1.2 billion board feet annually for ten years - about a 75 percent reduction in harvest levels from those of the mid-'80s.\nIf the plan is implemented as announced, as much as 50 percent of the wood products manufacturing capacity in the owl forests could be shut down over time, as compared with 1988 levels. In this environment, Boise Cascade has a number of relative advantages. An important share of the Company's raw material needs is met by its own timberland - some 1.3 million acres in Washington, Oregon, and Idaho. The Company's wood products facilities are among the most efficient in the region, allowing it to bid competitively for any timber that is available.\nThe Company's Northwest pulp and paper mills already receive approximately 73 percent of their wood chip supply either directly from or through trades with the Company's wood products and whole-log chipping operations. The Company is taking additional steps to reduce its need for outside chip purchases. The Company's cottonwood tree plantation near its Wallula, Washington, mill should be ready for harvest in 1997, supplying a portion of its Northwest wood chip needs. In addition, two of the Company's Northwest paper mills are now using recycled fiber - and will use more - to produce recycled-content paper products.\nThus, the Company is better positioned than most Northwest producers to compete in an era of reduced log supply. However, because of further potential litigation, legislation, and regulation related to this issue, the Company cannot predict how the next several years will unfold. At year-end, the Company's lumber capacity had been reduced 8.5 percent from the year-end 1992 level to 756 million board feet, primarily reflecting shift reductions due to limited log supply.\nAlso difficult to predict is the impact of these timber constraints on the cost structure of the Northwest paper and forest products industry. Log costs for wood products facilities have already climbed dramatically over the last several years, while wood chip costs for the Company's Northwest pulp mills rose 75 percent from 1987 to 1991, before leveling off. Lumber and plywood prices, however, have outpaced log cost increases, resulting in strong profit margins in the wood products business. Because of excess industry supply, paper prices have not climbed to meet higher wood chip costs in the Northwest.\nIt is unclear what impact the developing recovery plans for various threatened or endangered species will have on pricing and cost trends in future years in the Northwest or across the nation.\nBesides the 1.3 million acres of timberland in the Northwest, Boise Cascade also owns or controls another 4.8 million acres of timberland in North America. The amount of timber harvested each year by the Company from its timber resources, compared with the amount it purchases from outside sources, varies according to the price and supply of timber for sale on the open market and according to what the Company deems to be in the interest of sound management of its timberlands. During 1993, the Company's mills processed approximately 1.2 billion board feet of sawtimber and 2.4 million cords of pulpwood; 40% of the sawtimber and 58% of the pulpwood were har- vested from the Company's timber resources, and the balance was acquired from various private and government sources. Approximately 73% of the 1.1 million bone-dry tons of wood chips consumed by the Company's Northwest pulp and paper mills in 1993 were provided from the Company's Northwest wood products manufacturing facilities as residuals in the processing of solid wood products and from a whole-log chipping facility. Of the 660,000 bone-dry tons of residual chips used in the South, 46% were provided by the Company's Southern wood products manufacturing facilities.\nAt December 31, 1993, the acreages of owned or controlled timber resources by geographic area and the approximate percentages of total fiber requirements available from the Company's respective timber resources in these areas and from the residuals from processed purchased logs were as follows:\nLong-term leases generally provide the Company with timber harvest- ing rights and carry with them the responsibility for management of the timberlands. The average remaining life of all leases and contracts is in excess of 50 years. In addition, the Company has an option to purchase approximately 203,000 acres of the timberland it currently has under leases and contracts in the South.\nA substantial portion of the wood requirements of the Company's pulp and paper mills in Kenora and Fort Frances, Ontario, Canada, are provided through four separate Forest Management Agreements with the Province of Ontario covering approximately 3 million acres of timberland. Stumpage charges are those in effect at the time the timber is harvested, as prescribed by the province's regulations. The agreements require the Company to assume responsibility for management of the timberlands; however, the Company is reimbursed for certain silvicultural expenses that are incurred. The agreements were signed in 1983 and 1984 and have initial terms of 20 years. At the end of each successive five-year period covered by the agreements, the remaining term will be extended by an additional five years, provided that the Company has fulfilled the timberland management responsibilities set forth in the agreements. In accordance with these provisions, those agreements have been extended.\nThe Company seeks to maximize the utilization of its timberlands through efficient management so that the timberlands will provide a continu- ous supply of wood for future needs. Site preparation, planting, fertil- izing, thinning, and logging techniques are continually improved through a variety of methods, including genetic research and computerization.\nThe Company assumes substantially all risks of loss from fire and other casualties on all the standing timber it owns, as do most owners of timber tracts in the U.S.\nCompetition\nThe markets served by the Company are highly competitive, with various substantial companies operating in each. The Company competes in its markets principally through price, service, quality, and value-added products and services.\nEnvironmental Quality\nThe Company invests substantial capital in order to comply with federal, state, and local environmental laws and regulations. During 1993, capital expenditures attributable to an ongoing pollution abatement program amounted to $46 million. It is anticipated that approximately $70 million will be spent in 1994 for this purpose. Failure to comply with applicable pollution control standards could result in interruption or suspension of operations at the affected facilities or could require additional expenditures at these facilities. Anticipated expenditures pursuant to the ongoing pollution abatement program should enable the Company to continue to meet the environmental standards now applicable to its various facilities.\nThe Environmental Protection Agency (EPA) has proposed new rules to regulate air and water emissions from pulp and paper mills. These proposed rules would, among other things, set extremely stringent standards for color, chemical oxygen demand, and the discharge of all chlorinated organics. \"Chlorinated organics\" refers to a family of thousands of organic compounds that occur naturally and are also produced as byproducts of pulp-bleaching processes that use chlorine compounds.\nAlthough the majority of these chemical compounds discharged are environmentally benign, a small percentage, including the chemical dioxin, are known to be toxic at sufficiently high concentrations. With this knowledge, Boise Cascade has invested in new pulping and bleaching equipment and has changed bleaching processes so that, today, the level of dioxin in mill effluent at most of the Company's pulp mills is so small that it cannot be measured using acceptable methodology.\nUnfortunately, the proposed EPA rules do not discriminate between known toxins and other chlorinated organics, but rather seek to regulate the levels of all such compounds, regardless of their actual impact on human health or the environment. This approach is likely to require the elimination of elemental chlorine and may require the elimination of all chlorine compounds from the pulp-bleaching process, despite a lack of evidence that totally chlorine-free bleaching would result in significant or cost-effective improvement in the environment or public health. Moreover, the estimated cost of changing bleaching processes and capturing air emissions to accommodate the proposed regulations is staggering - as much as $12 billion for the U.S. pulp and paper industry as a whole. For Boise Cascade, the cost of complying with the proposed rules utilizing current technology could be several hundred million dollars over the next four or five years. Boise Cascade is working with industry associations and the EPA to achieve revisions to the proposed regulations that would better reflect scientific understanding of the effects, the risks of alternative pulp-bleaching processes, and the costs.\nAs of December 31, 1993, the Company was notified that it is a \"potentially responsible party\" under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) or similar federal and state laws with respect to 53 sites where hazardous substances or other contaminants are located. The Company has resolved issues relating to several of these sites at minimal cost and believes that it may have minimal or no responsibility with regard to several other of these sites. In most cases, the Company is one of many potentially responsible parties, and its alleged contribution to these sites has been minor. For those sites where a range of potential liability has been determined, the Company has established appropriate reserves.\nWith respect to all of the currently outstanding sites, the Company cannot predict with certainty the total response and remedial costs, the Company's share of the total costs, the extent to which contributions will be available from other parties, the amount of time necessary to complete the cleanups, or the availability of insurance coverage. However, based on the Company's investigations, the Company's experience with respect to cleanup of hazardous substances, the fact that expenditures will in many cases be incurred over extended periods of time, and the number of solvent potentially responsible parties, the Company does not presently believe that the known actual and potential response costs will, in the aggregate, have a material adverse effect on its financial condition or the results of operations.\nEmployees\nAs of December 31, 1993, the Company had 17,362 employees, 9,071 of whom were covered under collective bargaining agreements. During 1993, the Company reached new labor agreements effective until mid-1998 at its pulp and paper mill in Kenora, Ontario, Canada. In February 1994, the Company and production and most of the maintenance workers at its International Falls, Minnesota, pulp and paper mill agreed to contract extensions. The agreements are effective until April 1999.\nCollective bargaining agreements at the Company's four Pacific Northwest pulp and paper facilities and one converting operation expired in the spring of 1993. The Company is operating these mills without signed collective bargaining agreements. On February 1, 1994, the Company implemented its final contract offer at its Wallula, Washington, paper mill. The Company is in negotiations with unions representing employees at the other four mills. The Company is seeking changes in the amount of pay for time not worked, changes in work rules in order to increase operating flexibility, and other changes, all of which would improve productivity and efficiency.\nThe collective bargaining contracts at the Company's pulp and paper mill in Fort Frances, Ontario, Canada, expired in April 1993. The Company is operating this mill without signed collective bargaining agreements. Although negotiations are continuing, the terms of new agreements proposed by the Company have not been accepted by unions representing employees at this facility. The Company is seeking changes in work rules that would increase operating flexibility, which the Company believes is necessary for increased productivity and efficiency. In addition, there is some dispute over pension plan improvements. A number of the Company's Canadian competitors have already achieved some of the same work rule changes in their contract settlements. Prior to satisfactory resolution of the issues, another firm's mill was on strike for over 90 days. On March 2, 1994, the unions announced that they had selected March 16 as a date for strike. There are meetings scheduled for the Company and unions to meet prior to that date.\nWhile the Company believes that the Pacific Northwest and Fort Frances, Ontario, negotiations can be resolved without work stoppages or strikes, it is not possible at this time to predict how the negotiations may conclude.\nAmong the negotiations scheduled for 1994 are labor contracts covering the Company's Northwest wood products facilities.\nIdentification of Executive Officers\nThe information with respect to the executive officers of the registrant, which is set forth in Item 10 of this annual report on Form 10-K, is incorporated into this Part I by this reference.\nCapital Investment\nThe Company's capital expenditures in 1993 were $221 million, compared with $283 million in 1992 and $299 million in 1991. Details of 1993 spending by segment and by type are as follows:\nThe level of capital investment in 1994 is expected to be about $300 million. The 1994 capital budget will be allocated to cost-saving, modernization, replacement, maintenance, environmental, and safety projects.\nEnergy\nThe paper and paper products segment is the primary energy user of the Company. Self-generated energy sources in this segment, such as wood wastes, pulping liquors, and hydroelectric power, provided 55% of total 1993 energy requirements, compared with 54% in 1992 and 52% in 1991. The energy requirements fulfilled by purchased sources in 1993 were as follows: natural gas, 45%; electricity, 28%; residual fuel oil, 8%; and other sources, 19%.\nItem 2.","section_1A":"","section_1B":"","section_2":"Item 2. Properties\nThe Company owns substantially all of its operating facilities. Regular maintenance, renewal, and new construction programs have preserved the operating suitability and adequacy of those properties.\nFollowing is a list of the Company's facilities by segment as of December 31, 1993. Information concerning timber resources is presented in Item 1 of this Form 10-K.\nPaper and Paper Products\n10 pulp and paper mills located in Alabama, Louisiana, Maine, Minnesota, Oregon, Washington (3), and Ontario, Canada (2).\n1 recycled pulp mill located in Washington.\n6 regional service centers located in California, Georgia, Illinois, New Jersey, Oregon, and Texas.\n1 converting facility located in Oregon.\n7 corrugated container plants located in Idaho (2), Nevada, Oregon, Utah, and Washington (2).\nOffice Products\n24 office supply, paper, and office furniture distribution centers located in Arizona, California (2), Connecticut, Florida, Hawaii (4), Illinois, Maryland, Massachusetts, Michigan, Minnesota, Missouri, New Jersey, Ohio, Oregon, Pennsylvania, South Carolina, Texas (2), Utah, and Washington. The Company plans to open a distribution center in Denver, Colorado, late in the first quarter of 1994.\n4 retail outlets located in Hawaii.\nBuilding Products\n13 sawmills located in Alabama, Idaho (3), Louisiana, Oregon (5), and Washington (3).\n12 plywood and veneer plants located in Idaho, Louisiana (2), Oregon (7), and Washington (2).\n1 particleboard plant located in Oregon.\n1 engineered wood products plant located in Oregon.\n1 wood beam plant located in Idaho.\n9 wholesale building materials units located in Arizona, Colorado, Idaho (2), Montana, Utah, and Washington (3).\n2 satellite building materials facilities located in Colorado and Washington.\nItem 3.","section_3":"Item 3. Legal Proceedings\nAs of December 31, 1993, the Company was notified that it is a \"potentially responsible party\" under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) or similar federal and state laws with respect to 53 sites where hazardous substances or other contaminants are located. On April 19, 1993, the Company filed a lawsuit in State District Court in Boise, Idaho, against 31 of its current and previous insurance carriers seeking insurance coverage for response costs the Company has incurred or may incur at these sites. The Company cannot predict with certainty the total response and remedial costs, the Company's share of the total costs, the extent to which contributions will be available from other parties, the amount of time necessary to complete the cleanups, or the availability of insurance coverage. However, based on the Company's investigations, the Company's experience with respect to cleanup of hazardous substances, the fact that expenditures will in many cases be incurred over extended periods of time, and the number of solvent potentially responsible parties, the Company does not presently believe that the known actual and potential response costs will, in the aggregate, have a material adverse effect on its financial condition or the results of operations.\nIn January 1994, the state of Maine Department of Environmental Protection requested that the Company enter into an administrative settlement to resolve alleged violations of the state's environmental laws during April 1991 through March 1993 at the Company's facility in Rumford, Maine. The alleged violations concern water discharges, air emissions, and hazardous waste. The Department has requested that the Company pay a fine of $359,000 and agree to an injunctive order. Negotiations with the Department are ongoing; it is expected that this matter will be resolved consensually, but at this time, the ultimate resolution of this matter and the dollar amount of any settlement cannot be determined.\nThe Company is involved in other litigation and administrative proceedings primarily arising in the normal course of its business. In the opinion of management, the Company's recovery, if any, or the Company's liability, if any, under any pending litigation or administrative proceeding, including that described in the preceding paragraphs would not materially affect its financial condition or operations.\nItem 4.","section_4":"Item 4. Submission of Matters to a Vote of Security Holders\nNot applicable.\nPART II\nItem 5.","section_5":"Item 5. Market for Registrant's Common Equity and Related Stockholder Matters\nThe Company's common stock is listed on the New York, the Chicago, and the Pacific Stock Exchanges. The high and low sales prices for the Company's common stock, as well as the frequency and amount of dividends paid on such stock, are presented in the tables captioned \"Common Stock Prices\" and \"Common Stock Dividends -- Paid Per Share\" in the Company's 1993 Annual Report. Additional information concerning dividends on common stock is presented under the caption \"Dividends\" of the Financial Review, and information concerning restrictions on the payments of dividends is included in Note 4, \"Debt,\" of the Notes to Financial Statements in the Company's 1993 Annual Report. The approximate number of common shareholders, based upon actual record holders at year-end, is presented under the caption \"Financial Highlights\" of the Company's 1993 Annual Report. The information under these captions is incorporated herein by this reference.\nItem 6.","section_6":"Item 6. Selected Financial Data\nThe following table sets forth selected financial data of the Company for the years indicated and should be read in conjunction with the disclosures in Item 7","section_7":"Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations\nManagement's discussion and analysis of financial condition and results of operations are presented under the captions \"Financial Review\" and \"Discussion and Analysis\" of the Company's 1993 Annual Report. The information under these captions is incorporated herein by this reference.\nItem 8.","section_7A":"","section_8":"Item 8. Financial Statements and Supplementary Data\nThe Company's consolidated financial statements and related notes, together with the report of the independent public accountants, are presented in the Company's 1993 Annual Report and are incorporated herein by this reference. Selected quarterly financial data is presented under the caption \"Quarterly Results of Operations\" in the Company's 1993 Annual Report and is incorporated herein by this reference.\nThe consolidated income (loss) statement for the three months ended December 31, 1993, is presented in the Company's Fact Book for the fourth quarter of 1993 and is incorporated herein by this reference.\nThe 10.125% Notes issued in December 1990, the 9.85% Notes issued in June 1990, the 9.9% Notes issued in March 1990, and the 9.45% Debentures issued in October 1989 each contain a provision under which in the event of the occurrence of both a designated event, as defined, and a rating decline, as defined, the holders of these securities may require the Company to redeem the securities.\nItem 9.","section_9":"Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure\nNot applicable.\nPART III\nItem 10.","section_9A":"","section_9B":"","section_10":"Item 10. Directors and Executive Officers of the Registrant\nDirectors\nThe directors and nominees for directors of the Company are pre- sented under the caption \"Election of Directors\" in the Company's definitive proxy statement dated March 7, 1994. All of the nominees are presently directors. This information is incorporated herein by this reference.\nExecutive Officers as of February 28, 1994 Date First Elected as Name Age Position or Office an Officer\nJohn B. Fery 64 Chairman of the Board and 11\/29\/60 Chief Executive Officer, Director\nGeorge J. Harad 49 President and Chief Operating Officer, Director 5\/11\/82\nPeter G. Danis Jr. 62 Executive Vice President 7\/26\/77\nTheodore Crumley 48 Senior Vice President and Chief Financial Officer 5\/10\/90\nRex L. Dorman 60 Senior Vice President 2\/21\/75\nAlice E. Hennessey 57 Senior Vice President 10\/28\/71\nTerry R. Lock 52 Senior Vice President 2\/17\/77\nRichard B. Parrish 55 Senior Vice President 2\/27\/80\nN. David Spence 58 Senior Vice President 12\/8\/87\nJohn H. Wasserlein 52 Senior Vice President 2\/10\/82\nJ. Ray Barbee 46 Vice President 9\/26\/89\nStanley R. Bell 47 Vice President 9\/25\/90\nJohn C. Bender 53 Vice President 2\/13\/90\nCharles D. Blencke 50 Vice President 12\/11\/92\nTom E. Carlile 42 Vice President and Controller 2\/4\/94\nA. Ben Groce 52 Vice President 2\/8\/91\nJ. Michael Gwartney 53 Vice President 4\/25\/89\nJohn W. Holleran 39 Vice President and General Counsel 7\/30\/91\nH. John Leusner 58 Vice President 12\/11\/92\nIrving Littman 53 Vice President and Treasurer 11\/1\/84\nJeffrey G. Lowe 52 Vice President 12\/11\/92\nRobert L. Merrill 51 Vice President 12\/11\/92\nCarol B. Moerdyk 43 Vice President 5\/10\/90\nD. Ray Ryden 60 Vice President 4\/26\/88\nDonald F. Smith 52 Vice President 12\/8\/87\nJ. Kirk Sullivan 58 Vice President 9\/30\/81\nGary M. Watson 46 Vice President 2\/5\/93\nA. James Balkins III 41 Corporate Secretary 9\/5\/91\nAll of the officers named above except A. Ben Groce and Gary M. Watson (see below) have been employees of the registrant or one of its subsidiaries for at least five years. Mr. Groce rejoined the Company in 1991 after resigning in June 1989. Prior to his resignation, he had served as an officer of the Company since December 1987.\nRex L. Dorman, senior vice president and former chief financial officer, will retire from his position with the Company effective June 1, 1994. Theodore Crumley, formerly vice president and controller, was elected senior vice president and chief financial officer as of February 4, 1994, to replace him. Mr. Dorman will assist Mr. Crumley with the transition in the Company's financial management until June 1.\nTom E. Carlile was elected vice president and controller in February 1994. Mr. Carlile received a B.A. degree in accounting in 1973 from Boise State University in Boise, Idaho, and is a certified public accountant. He joined the Company in 1973 and held a variety of financial and planning positions before becoming director of finance and planning for the White Paper Division in 1989.\nE. Thomas Edquist, senior vice president, retired from his position as an officer of the Company effective July 31, 1993. He continued to work for the Company until his retirement on December 31, 1993.\nGary M. Watson was elected vice president in February 1993. Dr. Watson received a B.S. degree in chemistry from Western Washington University in 1969. He also received an M.S. degree in 1972 and a Ph.D. degree in chemical physics in 1974, both from Lawrence University in connection with the Institute of Paper Science and Technology. He joined Boise Cascade in 1992 as director of the Company's Paper Research and Development Center in Portland, Oregon.\nItem 11.","section_11":"Item 11. Executive Compensation\nInformation concerning compensation of the Company's executive officers for the year ended December 31, 1993, is presented under the caption \"Compensation Tables\" in the Company's definitive proxy statement dated March 7, 1994. This information is incorporated herein by this reference.\nItem 12.","section_12":"Item 12. Security Ownership of Certain Beneficial Owners and Management\n(a) Information concerning the security ownership of certain benefi- cial owners as of December 31, 1993, is set forth under the caption \"Beneficial Ownership\" in the Company's definitive proxy statement dated March 7, 1994, and is incorporated herein by this reference.\n(b) Information concerning security ownership of management as of December 31, 1993, is set forth under the caption \"Security Ownership of Directors and Executive Officers\" in the Company's definitive proxy statement dated March 7, 1994, and is incorporated herein by this reference.\nItem 13.","section_13":"Item 13. Certain Relationships and Related Transactions\nInformation concerning certain relationships and related transactions during 1993 is set forth under the caption \"Consulting Agreement\" in the Company's definitive proxy statement dated March 7, 1994, and is incorporated herein by this reference.\nPART IV\nItem 14.","section_14":"Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K\n(a) The following documents are filed as a part of this annual report on Form 10-K for Boise Cascade Corporation and subsidiaries:\n(1) (i) The Income (Loss) Statement for the three months ended December 31, 1993, is incorporated herein by this reference from the Company's Fact Book for the fourth quarter of 1993.\n(ii) The Financial Statements, the Notes to Financial Statements, and the Report of Independent Public Accountants listed below are incorporated herein by this reference from the Company's 1993 Annual Report.\n- Balance Sheets as of December 31, 1993, 1992, and 1991. - Statements of Income (Loss) for the years ended December 31, 1993, 1992, and 1991. - Statements of Cash Flows for the years ended December 31, 1993, 1992, and 1991. - Statements of Shareholders' Equity for the years ended December 31, 1993, 1992, and 1991. - Notes to Financial Statements. - Report of Independent Public Accountants.\n(2) Financial Statement Schedules.\n- Report of Independent Public Accountants. V Property and Equipment for the years ended December 31, 1993, 1992, and 1991. VI Accumulated Depreciation, Depletion, and Amortization of Property and Equipment for the years ended December 31, 1993, 1992, and 1991. VII Guarantees of Securities of Other Issuers as of December 31, 1993. IX Short-Term Borrowings for the years ended December 31, 1993, 1992, and 1991. X Supplementary Income Statement Information for the years ended December 31, 1993, 1992, and 1991. - Consent of Independent Public Accountants.\nSchedules other than those listed are omitted because they are not applicable or because the required information is shown in the financial statements or notes.\n(3) Exhibits.\nA list of the exhibits required to be filed as part of this report is set forth in the Index to Exhibits, which immedi- ately precedes such exhibits, and is incorporated herein by this reference.\n(b) Reports on Form 8-K.\nNo reports on Form 8-K were filed during the quarter ended December 31, 1993.\nFor the purpose of complying with the rules governing Form S-8 under the Securities Act of 1933, the undersigned registrant hereby undertakes as follows, which undertaking shall be incorporated by reference into registrant's Registration Statements on Form S-8 Nos. 33-47892 (filed May 14, 1992), 33-28595 (filed May 8, 1989), 33-21964 (filed June 6, 1988), 33-31642 (filed November 7, 1989), 2-96196 (filed March 25, 1985), 33-45675 (filed February 12, 1992), and 33-16672 (filed September 10, 1987):\nInsofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers, and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer, or controlling person of the registrant in the successful defense of any action, suit, or proceeding) is asserted by such director, officer, or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.\nREPORT OF INDEPENDENT PUBLIC ACCOUNTANTS\nTo Boise Cascade Corporation:\nWe have audited, in accordance with generally accepted auditing standards, the financial statements included in Boise Cascade Corporation's annual report to shareholders incorporated by reference in this Form 10-K, and have issued our report thereon dated January 26, 1994. Our report on the financial statements includes an explanatory paragraph with respect to the change in the method of accounting for postretirement benefits other than pensions in accordance with Standard No. 106 of the Financial Accounting Standards Board as discussed in Note 5 of the financial state- ments. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. The schedules listed in Part IV, Item 14(a)(2) are the responsibility of the Company's management and are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic financial statements. These schedules have been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.\nARTHUR ANDERSEN & CO.\nBoise, Idaho January 26, 1994\nSIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.\nBoise Cascade Corporation\nBy John B. Fery John B. Fery Chairman of the Board and Chief Executive Officer\nDated: March 11, 1994\nPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 11, 1994.\nSignature Capacity\n(i) Principal Executive Officer:\nJohn B. Fery Chairman of the Board and John B. Fery Chief Executive Officer\n(ii) Principal Financial Officer:\nTheodore Crumley Senior Vice President and Theodore Crumley Chief Financial Officer\n(iii) Principal Accounting Officer:\nTom E. Carlile Vice President Tom E. Carlile and Controller\n(iv) Directors:\nJohn B. Fery Paul J. Phoenix John B. Fery Paul J. Phoenix\nAnne L. Armstrong A. William Reynolds Anne L. Armstrong A. William Reynolds\nRobert E. Coleman Frank A. Shrontz Robert E. Coleman Frank A. Shrontz\nGeorge J. Harad Edson W. Spencer George J. Harad Edson W. Spencer\nRobert K. Jaedicke Robert H. Waterman, Jr. Robert K. Jaedicke Robert H. Waterman, Jr.\nJames A. McClure Ward W. Woods James A. McClure Ward W. Woods\nBOISE CASCADE CORPORATION AND SUBSIDIARIES\nSCHEDULE X -- SUPPLEMENTARY INCOME STATEMENT INFORMATION\nFOR THE YEARS ENDED DECEMBER 31, 1993, 1992, AND 1991\nCOLUMN A COLUMN B ITEM CHARGED TO COSTS AND EXPENSES YEAR ENDED DECEMBER 31 1993 1992 1991 (expressed in thousands)\nMaintenance and repairs $339,027 $345,257 $369,079\nTaxes, other than payroll and income taxes 52,848 54,984 57,633\nCONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS\nAs independent public accountants, we hereby consent to the incorporation of our reports dated January 26, 1994, included or incor- porated by reference in this Form 10-K for the year ended December 31, 1993, into Boise Cascade Corporation's previously filed post-effective amendment No. 1 to Form S-8 registration statement (File No. 33-28595); the registration statement on Form S-8 (File No. 33-47892); post-effective amendment No. 1 to Form S-8 registration statement (File No. 2-96196); post- effective amendment No. 1 to Form S-8 registration statement (File No. 33-21964); the registration statement on Form S-8 (File No. 33-31642); the registration statement on Form S-8 (File No. 33-45675); the registration statement on Form S-3 (File No. 33-38216); and the registration statement on Form S-3 (File No. 33-55396).\nARTHUR ANDERSEN & CO.\nBoise, Idaho March 11, 1994\nBOISE CASCADE CORPORATION\nINDEX TO EXHIBITS Filed with the Annual Report on Form 10-K for the Year Ended December 31, 1993\nPage Number Description Number (1)\n3.1 (2) Restated Certificate of Incorporation, as amended - 3.2 (3) Certificate of Designation of Convertible Preferred Stock, Series D, dated July 10, 1989 - 3.3 (4) Certificate of Designation of Conversion Preferred Stock, Series E, dated January 21, 1992 - 3.4 Certificate of Designation of Cumulative Preferred Stock, Series F, dated January 29, 1993 31 3.5 Bylaws, as amended, July 30, 1993 35 3.6 Certificate of Designation of Conversion Preferred Stock, Series G, dated September 17, 1993 51 4.1 (5) Trust Indenture between Boise Cascade Corporation and Morgan Guaranty Trust Company of New York, Trustee, dated October 1, 1985, as amended - 4.2 (6) 1990 Revolving Loan Agreement -- $750,000,000, dated January 1, 1990, as amended - 4.3 (7) Shareholder Rights Plan, as amended September 25, 1990 - 9 Inapplicable - 10.1 Key Executive Performance Plan for Executive Officers, as amended February 3, 1994 65 10.2 1986 Executive Officer Deferred Compensation Plan, as amended July 29, 1993 81 10.3 1983 Board of Directors Deferred Compensation Plan, as amended July 29, 1993 93 10.4 1982 Executive Officer Deferred Compensation Plan, as amended July 29, 1993 103 10.5 Executive Officer Severance Pay Policy 115 10.6 Supplemental Early Retirement Plan for Executive Officers 119 10.7 Boise Cascade Corporation Supplemental Retirement Policy 131 10.8 1987 Board of Directors Deferred Compensation Plan, as amended July 29, 1993 135 10.9 1984 Key Executive Stock Option Plan and Form of Agreement, as amended through February 7, 1992 145 10.10 Executive Officer Group Life Insurance Plan description 157 10.11 Executive Officer Split-Dollar Life Insurance Plan 161 10.12 Form of Agreement with Executive Officers, as amended 175 10.13 Supplemental Health Care Plan for Executive Officers 189 10.14 Nonbusiness Use of Corporate Aircraft Policy, as amended 197 10.15 Executive Officer Financial Counseling Program description 201 10.16 Family Travel Program description 205 10.17 Form of Directors' Indemnification Agreement 209 10.18 Deferred Compensation and Benefits Trust, as amended through June 30, 1989 219 10.19 1991 Director Stock Option Plan 249 11 Inapplicable - 12 Ratio of Earnings (Losses) to Fixed Charges 259 13.1 Incorporated sections of the Boise Cascade Corporation 1993 Annual Report 263 13.2 Incorporated sections of the Boise Cascade Corporation 1993 Fact Book for the fourth quarter of 1993 301 18 Inapplicable - 19 Inapplicable - 22 Significant subsidiaries of the registrant 309 23 Inapplicable - 24 Consent of Arthur Andersen & Co. (See page 26) - 25 Inapplicable - 28 Inapplicable - 29 Inapplicable -\n(1) This information appears only in the manually signed original of the Annual Report on Form 10-K.\n(2) Exhibit 3.1 was filed under the same exhibit number in the Company's 1987 Annual Report on Form 10-K and is incorporated herein by this reference.\n(3) The Certificate of Designation of Convertible Preferred Stock, Series D, dated July 10, 1989, was filed as Exhibit 4.4 in the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1989, and is incorporated herein by this reference.\n(4) Exhibit 3.3 was filed under the same exhibit number in the Company's 1991 Annual Report on Form 10-K and is incorporated herein by this reference.\n(5) The Trust Indenture between Boise Cascade Corporation and Morgan Guaranty Trust Company of New York, Trustee, dated October 1, 1985, as amended, was filed as Exhibit 4 in the Registration Statement on Form S-3 No. 33-5673, filed May 13, 1986. The First Supplemental Indenture, dated December 20, 1989, to the Trust Indenture between Boise Cascade Corporation and Morgan Guaranty Trust Company of New York, Trustee, dated October 1, 1985, was filed as Exhibit 4.2 in the Pre-Effective Amendment No. 1 to the Registration Statement on Form S-3 No. 33-32584, filed December 20, 1989. The Second Supplemental Indenture, dated August 1, 1990, to the Trust Indenture was filed as Exhibit 4.1 in the Company's Current Report on Form 8-K filed on August 10, 1990. Each of the documents referenced in this footnote is incorporated herein by this reference.\n(6) The 1990 Revolving Loan Agreement, as amended, was filed as Exhibit 4.1 in the Company's Form 10-K for the year ended December 31, 1989, filed with the Securities and Exchange Commission on March 8, 1990, and is incorporated herein by this reference. The Form of Second Amendment to the 1990 Revolving Loan Agreement was filed as Exhibit 4.2 in the Company's Form 10-Q for the quarter ended March 31, 1992, filed with the Securities and Exchange Commission on May 8, 1992, and the Form of Third Amendment to the 1990 Revolving Loan Agreement was filed as Exhibit 4 in the Company's Form 8-K, dated December 4, 1992, filed with the Securities and Exchange Commission on December 4, 1992, both of which are incorporated herein by this reference.\nIn reliance upon item 601(b)(4)(iii) of Regulation S-K, the registrant is not filing herewith various instruments (other than those mentioned in footnotes 5 and 6) defining the rights of holders of long-term debt of the registrant and its subsidiaries because the total amount of securities authorized under each such instrument does not exceed 10% of the total assets of the registrant and its subsidiaries on a consolidated basis. The registrant hereby agrees to furnish a copy of any such instrument to the Commission upon request.\n(7) The Rights Agreement, dated as of December 13, 1988, as amended September 25, 1990, was filed as Exhibit 1 in the Company's Form 8-K filed with the Securities and Exchange Commission on September 25, 1990, and is incorporated herein by this reference.","section_15":""}
{"filename":"59558_1993.txt","cik":"59558","year":"1993","section_1":"Item 1. Business\nLincoln National Corporation (\"LNC\") is a holding company. Through subsidiary companies, LNC operates multiple insurance businesses. Operations are divided into four major business segments, 1) Property-Casualty, 2) Life Insurance and Annuities, 3) Life-Health Reinsurance and 4) Employee Life-Health Benefits. Although one of the subsidiaries held by LNC was formed as early as 1905, LNC itself was formed in 1968. LNC is an Indiana corporation with its principal office at 200 East Berry Street, Fort Wayne, Indiana 46802-2706. As of December 31, 1993, there were 215 persons on the staff of LNC. Total employment of Lincoln National Corporation at December 31, 1993 on a consolidated basis was 11,890.\nAlthough acquisition and disposition activity has occurred, there has been no activity of this nature during the past five years involving all or predominately all of a business segment.\nNumeric presentations showing revenues, pre-tax income, and assets for LNC's four major business segments and other operations in which LNC engages through its subsidiaries are included in this report as part of the consolidated financial statements (see note 8 to the consolidated financial statements on page 54). The LNC \"Other Operations\" category includes LNC's investment management companies and unallocated corporate items, including corporate investment income, interest expense on short-term and long-term borrowings, and unallocated corporate overhead expenses.\nFollowing is a brief description of the four major business segments:\n1. Property-Casualty Property-Casualty insurance includes automobile, boiler and machinery, workers' compensation, fire and allied lines, inland marine, home-owners, general casualty, special risks and multiple peril insurance. Fidelity and surety bonds are also included within property-casualty insurance.\nMost of LNC's property-casualty business is conducted through American States Insurance Company (\"American States\"), headquartered in Indianapolis, Indiana, and its property-casualty subsidiaries. These companies operate a multi-line property-casualty insurance business in most states of the United States through 22 semi-autonomous division offices with broad authority for underwriting, agency contracting, marketing and claims settlement for most lines of business. The distribution network involves approximately 5,000 independent local agencies.\nOther companies within this business segment include Lincoln National Specialty Insurance Company (\"LNSIC\") which underwrites select coverages in the sports and entertainment market and Lincoln National Reinsurance Company which is a property-casualty company that is involved in servicing a closed block of reinsurance business.\nApproximately 3,900 employees are involved in this business segment.\n2. Life Insurance and Annuities The primary company within this business segment is The Lincoln National Life Insurance Company (\"LNL\"). Other companies within this business segment include, Security-Connecticut Life Insurance Company (\"Security- Connecticut\"), First Penn-Pacific Life Insurance Company (\"First Penn\"), American States Life Insurance Company (\"American States Life\"), and Lincoln National (UK) PLC.\nLNL, the 6th largest U.S. stockholder-owned life insurance Company (1992 Fortune Rankings of 50 Largest Life Insurance Companies by Assets) is an Indiana corporation headquartered in Fort Wayne, Indiana. A network of 36 life insurance agencies, independent life insurance brokers, insurance agencies located within financial institutions and specifically trained employees sells fixed annuities, variable annuities, pension products, universal life, variable universal life and other individual insurance coverages in most states of the United States and various foreign countries including Canada. The distribution network includes approximately 1,900 career agents, 13,000 brokers and access to 42,000 stockbrokers and financial planners.\nSecurity-Connecticut is a Connecticut corporation headquartered in Avon, Connecticut. It specializes in writing universal life and term insurance through independent general agencies in most states of the United States. A wholly owned subsidiary of Security-Connecticut, Lincoln Security Life Insurance Company, operates in the state of New York. In January 1993, LNC announced it would seek a buyer for Security-Connecticut. The sale of the common stock of Security-Connecticut Corporation (a recently formed holding company to which ownership of the operating companies was transferred prior to the sale) was completed on February 2, 1994 through an Initial Public Offering (IPO).\nFirst Penn, headquartered in Oakbrook Terrace, Illinois, specializes in the writing and administration of universal life products through independent marketing companies and the sale of LNL's annuities through insurance agencies located within financial institutions in most states of the United States.\nAmerican States Life is an Indiana corporation headquartered in Indianapolis, Indiana. Its products, principally universal life and term insurance, are marketed through independent local agencies (who also offer property-casualty insurance) in most states of the United States.\nLincoln National (UK) PLC is a United Kingdom company headquartered in Wembley, England that is licensed to do business throughout the United Kingdom. The principal products produced by this operation known as unit- linked assets are similar to U.S. produced universal life products. This company was previously named Cannon Assurance Limited, but was renamed following the acquisition and merger of another UK company that previously operated as Citibank Life (UK). Lincoln National (UK) is the 16th largest writer of unit-linked new business premiums in the UK as measured in 1992 (Money Management Survey-New Business Trends, published in June 1993.)\nApproximately 4,325 employees are involved in this business segment.\n3. Life-Health Reinsurance The primary companies within this business segment are Lincoln National Life Reinsurance Company (\"LNLR\"), Lincoln National Reassurance Company, (\"LNRAC\"), Lincoln National Health & Casualty Insurance Company (\"LNH&C\") and LNL. These companies are headquartered in Fort Wayne, Indiana. A broad range of risk management products and services are offered to insurance companies, HMOs, self-funded employers and other primary market risk accepting organizations throughout the United States and economically attractive international markets. Marketing efforts are conducted primarily through the efforts of a reinsurance sales staff. Some business is presented by reinsurance intermediaries and brokers. The reinsurance organization is one of the largest life-health reinsurers worldwide (Swiss Re survey, May 1993).\nLNH&C offers accident and health products and services on both a direct and reinsurance basis.\nOther companies in this business segment include various general business corporations and foreign reinsurance companies. The general business corporations are used to support the segment's sales, service and administration efforts. One of the general business corporations, Lincoln National Risk Management Inc. has developed and patented a knowledge based underwriting system (\"Life Underwriting System\") which it is marketing to other insurance companies. The foreign reinsurance corporations are used to support LNC's U.S. companies through reinsuring select business.\nApproximately 575 employees are involved in this business segment.\n4. Employee Life-Health Benefits This segment's business is conducted through Employers Health Insurance Company (\"Employers Health\"), a Wisconsin Corporation, headquartered in Green Bay, Wisconsin. Employers Health manufactures and distributes group life and health insurance, managed health care, dental, disability products and flexible benefit administrative services with a primary focus on the small business market (companies with 2-150 employees). It also provides administrative services to medium and large self-funded accounts in Wisconsin and is extending such services to other core market areas for self-funded groups of 100 - 1,000 lives. Employers Health has a strong market position in the Midwest, California, Texas, Colorado, Georgia, Tennessee, Maryland and Virginia, representing approximately 80 percent of its in-force business. In December 1993, LNC announced it would attempt to sell a portion of its\nownership in Employers Health through an initial public offering (IPO) of Common Stock in a newly formed holding company known as EMPHESYS Financial Group, Inc. In March 1994, this IPO was completed and resulted in the sale of 64% of the company.\nApproximately 2,590 employees are involved in this segment.\nLiabilities for losses and loss adjustment expenses (\"LAE\") for the property- casualty business segment are estimated at the end of each accounting period using case-basis evaluations and statistical projections. These liabilities include estimates for the ultimate cost of claims 1) which have been reported but not settled and 2) which have been incurred but not yet reported. A provision for inflation is implicitly considered in the estimated liability as the development of the estimated liability is based on historical data which reflects past inflation and on other factors which are judged to be appropriate modifiers of past experience. Adjustments to previously established estimates are reflected in current operating results along with initial estimates for claims arising within the current accounting period. Further, beginning in 1993 such estimates no longer recognize the effects of reinsurance recoverable because such amounts are now recorded as an asset with the adoption of FAS 113 (see note 2 to the consolidated financial statements on page 38).\nThe reconciliation shows an increase (decrease) of ($26.5) million, $47.0 million, and $12.3 million to the December 31, 1992, 1991 and 1990 liability for losses and LAE, respectively, for claims arising in prior years. Such reserve adjustments, which affected current operations during 1993, 1992 and 1991, respectively, resulted from developed losses for prior years being different than were anticipated when the liabilities for losses and LAE were originally estimated.\nThe following table shows the development of the estimated liability for loss and LAE for the ten year period prior to 1993. Each column shows the liability as originally estimated and cumulative data on payments and re- estimated liabilities for that accident year and all prior accident years, making up that calendar year-end liability; and all amounts are reflected net of reinsurance recoverable for all years. As a result of adopting FAS 113 in 1993, the 1993 liability is $225 million less than reported in the financial statements. The resulting redundancy (deficiency) is also a cumulative amount for that year and all prior years. The reserves include an estimated liability for unreported environmental losses. Prior to 1993, this liability was generally recognized in the more recent accident years and allocated to the appropriate accident year when reported. In 1993, this estimated liability for unreported environmental losses was reallocated to more appropriate accident years and as a result increased the deficiency for the period 1983 and prior. Beginning in 1986, the overall reserves were strengthened and this action has been maintained as evidenced by the cumulative development reported for 1987 through 1993. Conditions and trends that have affected the development of these liabilities in the past may not necessarily recur in the future; therefore, it would not be appropriate to use this cumulative history in the projection of future performance.\nIn order to protect itself against losses greater than the amount it is willing to retain on any one risk or event, LNC's insurance subsidiaries purchase reinsurance from unaffiliated insurance companies (see note 7 to the consolidated financial statements on page 50).\nIn order to maximize returns on its investment portfolio, LNC's investment personnel continually monitor both current investment income produced by the portfolio and current market values of the portfolio. The type, maturity, quality and liquidity of investments selected to place in the segmented portfolios vary depending on the nature of the underlying liabilities that are being supported.\nAll the areas of business activity in which LNC is involved are highly competitive because of the marketing structure and the large number of competing companies.\nAt the end of 1992, the latest year for which data is available, there were approximately 1,200 groups and unaffiliated individual companies selling property and casualty insurance. LNC's group of companies writing property-casualty insurance ranked 25th in net written premiums for 1992 (A.M. Best Aggregates and Averages) among all such groups and companies.\nAt the end of 1992 there were more than 2,100 life insurance companies in the United States and LNL was the 13th largest stock and mutual life insurance company in the United States based on assets and 15th based on insurance in-force (1992 Fortune Ranking of 50 Largest Life Insurance Companies by Assets).\nThe business of LNC's property-casualty, life insurance and annuities, life-health reinsurance and employee life-health benefits business segments, in common with those of other insurance companies, is subject to regulation and supervision by the states, territories and foreign countries in which they are admitted to do business. The laws of these jurisdictions generally establish supervisory agencies with broad administrative powers relative to granting and revoking licenses to transact business, regulating trade practices, licensing agents, prescribing and approving policy forms, regulating premium rates for some lines of business, establishing reserve requirements, regulating competitive matters, prescribing the form and content of financial statements and reports, and regulating the type and amount of investments permitted. The ability to continue an insurance business is dependent upon the maintenance of the licenses in the various jurisdictions.\nBecause of the nature of the insurance business, there is no single customer or group of customers upon whom the business is dependent. Factors such as backlog, raw materials, patents (including trademarks, licenses, franchises, and any other concessions held), seasonality, or environmental impact do not have a material effect upon such business. However, within LNC's Life-Health Reinsurance segment, Lincoln National Risk Management, Inc. does own the patent for a knowledge based underwriting system known as \"Life Underwriting System.\" LNC does not have a separate unit that conducts market research. Research activities related to new products or services or the improvement of existing products or services is completed by persons within the business segments. Expenses related to such activities are not material. Also, sales are not dependent upon select geographic areas and foreign sales are not material in relationship to either LNC's total sales or sales of individual business segments.\nItem 2.","section_1A":"","section_1B":"","section_2":"Item 2. Properties\nLNC and the various operating businesses headquartered in Fort Wayne lease approximately 1.3 million square feet of office space in the Fort Wayne area. Approximately 1.0 million square feet of space is leased by operating businesses headquartered in Indianapolis, Indiana; Oakbrook Terrace, Illinois; Green Bay, Wisconsin; and Wembley, London England. In addition, branch offices owned or leased for all of the operating businesses referenced above as well as the space for some smaller operations total approximately 1.2 million square feet. As shown in the notes to consolidated financial statements, (see note 7 to the consolidated financial statements on page 49) the rental expense on operating leases for office space and equipment for continuing operations totaled $55.9 million for 1993 of which $49.6 million was for office space. This discussion regarding properties does not include information on investment properties.\nItem 3.","section_3":"Item 3. Legal Proceedings\nLNC and its subsidiaries are involved in various pending or threatened legal proceedings arising from the conduct of their business. In some instances, these proceedings include claims for punitive damages and similar types of relief in unspecified or substantial amounts, in addition to amounts for alleged contractual liability or requests for equitable relief. After consultation with counsel and a review of available facts, it is management's opinion that these proceedings ultimately will be resolved without materially affecting the consolidated financial statements of LNC.\nItem 4.","section_4":"Item 4. Submission of Matters to a Vote of Security Holders\nDuring the fourth quarter of 1993, no matters were submitted to security holders for a vote.\nPART II\nItem 5.","section_5":"Item 5. Market for Registrant's Common Equity and Related Stockholder Matters\nExchanges: New York, Chicago, Pacific, London and Tokyo.\nStock Exchange Symbol: LNC\nDividend Guideline: The dividend on LNC's Common Stock is determined each quarter by the Corporation's Board of Directors. The Board takes into consideration the financial condition of the Corporation, including current and expected earnings, projected cash flows and anticipated financing needs. The Board also considers the ability to maintain the dividend through bad times as well as good so that the dividend rate would need to be reduced only under unusual circumstances. One guideline that the Board has found useful in recent years is to consider a dividend approximately equal to five percent of the book value per share with such book value computed excluding the impact of marking its securities available-for-sale to fair value.\nNotes: 1. The data for 1992 and the first quarter of 1993 has been adjusted to reflect the effects of a June 1993 two-for-one split of LNC's Common Stock.\n2. At December 31, 1993, the number of shareholders of record of LNC's Common Stock was 13,600.\n3. The payment of dividends to shareholders is subject to the restrictions described in notes 5, Supplemental Financial Data, and 7, Restrictions, Commitments and Contingencies to the consolidated financial statements (see pages 45 and 48) and is discussed in the Management's Discussion and Analysis of Financial Information (see page 28).\nItem 7. Management's Discussion and Analysis of Financial Condition and Results of Operations\nThe pages to follow review LNC's results of operations and financial condi- tion. Historical financial information is presented and analyzed. Where appropriate, factors that may affect future financial performance are identified and discussed.\nOn pages 9 through 22, the financial results of our business segments, investments and other operations are presented and discussed. Within these business segment discussions reference is made to \"Income from Operations\" (see definition in item 6","section_6":"","section_7":"","section_7A":"","section_8":"","section_9":"Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure\nThere have been no disagreements with LNC's independent auditors which are reportable pursuant to Item 304 of Regulation S-K.\nPART III\nItem 10.","section_9A":"","section_9B":"","section_10":"Item 10. Directors and Executive Officers of the Registrant\nInformation for this item relating to directors of LNC is incorporated by reference to the sections captioned \"NOMINEES FOR DIRECTOR\" and \"DIRECTORS CONTINUING IN OFFICE\" of LNC's Proxy Statement for the Annual Meeting scheduled for May 12, 1994.\nExecutive Officers of the Registrant as of December 31, 1993 were as follows:\nName Position with LNC and Business Experience (Age) During the Past Five Years\nRobert A. Anker President, Chief Operating Officer and Director, (52) LNC since 1992. President and Chief Executive Officer, American States* (1990-1991). President and Chief Operating Officer, American States* (1985-1990).\nJon A. Boscia Executive Vice President, LNC since 1991. (42) President, Lincoln National Investment Management Company* since 1991. Senior Vice President, LNL* (1985-1991).\nGeorge E. Davis Senior Vice President, LNC since March 1993. (51) Vice President, Eastman Kodak Co. (1985-March 1993).\nP. Kenneth Dunsire Executive Vice President, LNC since 1986. (62)\nJack D. Hunter Executive Vice President, LNC since 1986. General (57) Counsel since 1971.\nWilliam J. Lawson President and Chief Executive, Officer, Employers (54) Health* since 1988. Senior Vice President, LNL* (1984-1988).\nF. Cedric McCurley President and Chief Executive Officer, American (59) States* since 1992. Executive Vice President, American States* (1986-1991).\nH. Thomas McMeekin, III Senior Vice President, LNC since 1992. (40) Executive Vice President, Lincoln National Investment Management Company* (1987-1992).\nRichard S. Robertson Executive Vice President, LNC since 1986. (51)\nIan M. Rolland Chairman and Director, LNC since 1992. (60) President and Director, LNC (1975-1991). Chief Executive Officer, LNC since 1977.\nRichard C. Vaughan Senior Vice President and Chief Financial Officer, (44) LNC since 1992. Senior Vice President, LNL* since 1990. Vice President, EQUICOR, Inc. (1988-1990).\nDonald L. Van Wyngarden Second Vice President and Controller, LNC since (54) 1975.\nThomas M. West Executive Vice President, LNL* since 1981. (53)\n*Denotes a subsidiary of LNC\nThere is no family relationship between any of the foregoing executive officers, all of whom are elected annually.\nItem 11.","section_11":"Item 11. Executive Compensation\nInformation for this item is incorporated by reference to the section cap- tioned \"EXECUTIVE COMPENSATION\" of LNC's Proxy Statement for the Annual Meeting scheduled for May 12, 1994.\nItem 12.","section_12":"Item 12. Security Ownership of Certain Beneficial Owners and Management\nInformation for this item is incorporated by reference to the sections captioned \"SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS\" and \"SECURITY OWNERSHIP OF DIRECTORS, NOMINEES AND EXECUTIVE OFFICERS\" of LNC's Proxy Statement for the Annual Meeting scheduled for May 12, 1994.\nItem 13.","section_13":"Item 13. Certain Relationships and Related Transactions Information for this item is incorporated by reference to the section cap- tioned \"TERMINATION OF EMPLOYMENT ARRANGEMENTS\" of LNC's Proxy Statement for the Annual Meeting scheduled for May 12, 1994.\nPART IV\nItem 14.","section_14":"Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K Item 14(a)(1) Financial Statements\nThe following consolidated financial statements of Lincoln National Corpora- tion and subsidiaries are included in Item 8:\nConsolidated Balance Sheets - December 31, 1993 and 1992\nConsolidated Statements of Income - Years ended December 31, 1993, 1992 and 1991\nConsolidated Statements of Shareholders' Equity - Years ended December 31, 1993, 1992 and 1991\nConsolidated Statements of Cash Flows - Years ended December 31, 1993, 1992 and 1991\nNotes to Consolidated Financial Statements\nReport of Independent Auditors\nItem 14(a)(2) Financial Statement Schedules\nThe following consolidated financial statement schedules of Lincoln National Corporation and subsidiaries are included in Item 14(d):\nI - Summary of Investments - Other than Investments in Related Parties III - Condensed Financial Information of Registrant V - Supplementary Insurance Information VI - Reinsurance VII - Guarantees of Securities of Other Issuers VIII - Valuation and Qualifying Accounts IX - Short-term Borrowings X - Supplementary Information Concerning Property-Casualty Insurance Operations\nAll other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions, are inapplicable, or the required information is included in the consolidated financial statements, and therefore have been omitted.\nItem 14(a)(3) Listing of Exhibits\nThe following exhibits of Lincoln National Corporation and subsidiaries are included in Item 14(c) - (Note: The numbers preceding the exhibits correspond to the specific numbers within Item 601 of Regulation S-K.):\n3(a) The Articles of Incorporation of LNC as last amended May 24, 1991 are incorporated by reference to Exhibit 3(a) of LNC's Form 10-K for the year ended December 31, 1991 filed with the Commission on March 27, 1992.\n3(b) The Bylaws of LNC as last amended January 1, 1992 are incorporated by reference to Exhibit 3(b) of LNC's Form 10-K for the year ended December 31, 1991 filed with the Commission on March 27, 1992.\n4(a) Indenture for 8% Notes of LNC due March 15, 1997 and the specimen Notes is incorporated by reference to Exhibit 4(b) of LNC's Form 10-K for the year ended December 31, 1991, filed with the Commission on March 27, 1992.\n4(b) First Supplemental Indenture and Specimen Notes for LNC's 7 1\/8% Notes due July 15, 1999 are incorporated by reference to Annex B and Annex C of LNC's Form 8-K filed with the Commission on July 7, 1992.\n4(c) First Supplemental Indenture and Specimen Notes for LNC's 7 5\/8% Notes due July 15, 2002 are incorporated by reference to Annex B and Annex D of LNC's Form 8-K filed with the Commission on July 7, 1992.\n4(d) Fiscal Agency Agreement related to sale of $100,000,000 aggregate principal amount of 9 3\/4% Notes of LNC due October 20, 1995 and the specimen of 9 3\/4% Notes.\n10(a)* The Lincoln National Corporation 1986 Stock Option Incentive Plan as last amended May 13, 1993.\n10(b)* The Lincoln National Corporation 1982 Stock Option Incentive Plan as last amended May 7, 1987.\n10(c)* The Lincoln National Corporation Executives' Salary Continuation Plan as last amended January 1, 1992 is incorporated by reference to Exhibit 10(c) of LNC's Form 10-K for the year ended December 31, 1992, filed with the Commission on March 30, 1993.\n10(d)* The Lincoln National Corporation Executive Value Sharing Plan is incorporated by reference to Exhibit 10(d) of LNC's Form 10-K for the year ended December 31, 1992, filed with the Commission on March 30, 1993.\n10(e)* The Lincoln National Corporation Management Incentive Plan II as last amended August 1, 1989, is incorporated by reference to Exhibit 10(e) of LNC's Form 10-K for the year ended December 31, 1989, filed with the Commission on March 29, 1990.\n10(f)* Lincoln National Corporation Executives' Severance Benefit Plan as last amended January 10, 1990, is incorporated by reference to Exhibit 10(f) of LNC's Form 10-K for the year ended December 31, 1990, filed with the Commission on March 28, 1991.\n10(g)* The Lincoln National Corporation Outside Directors Retirement Plan as last amended March 15, 1990, is incorporated by reference to Exhibit 10(g) of LNC's Form 10-K for the year ended December 31, 1990, filed with the Commission on March 28, 1991.\n10(h)* The Lincoln National Corporation Outside Directors Benefits Plan is incorporated by reference to Exhibit 10(h) of LNC's Form 10-K for the year ended December 31, 1992, filed with the Commission on March 30, 1993.\n10(i) Lease and Agreement dated August 1, 1984, with respect to the American States' home office property, is incorporated by reference to Exhibit 10(i) of LNC's Form 10-K for the year ended December 31, 1990, filed with the Commission on March 28, 1991.\n10(j) Lease and Agreement dated August 1, 1984, with respect to LNL's home office property, is incorporated by reference to Exhibit 10(j) of LNC's Form 10-K for the year ended December 31, 1990, filed with the Commission on March 28, 1991.\n10(k) Lease and Agreement dated August 1, 1984, with respect to Lincoln National Pension Insurance Company's (\"LNP\") home office property, is incorporated by reference to Exhibit 10(k) of LNC's Form 10-K for the year ended December 31, 1990, filed with the Commission on March 28, 1991. [LNP was merged into its parent, LNL, effective January 1, 1989.]\n10(l) Lease dated March 1, 1984, with respect to Security- Connecticut's home office property, is incorporated by reference to Exhibit 10(l) of LNC's Form 10-K for the year ended December 31, 1990, filed with the Commission on March 28, 1991.\n10(m)* Descriptions of compensation arrangements with Executive Officers.\n10(n)* The Lincoln National Corporation Executives' Supplemental Pension Benefit Plan is incorporated by reference to Exhibit 10(n) of LNC's Form 10-K for the year ended December 31, 1992, filed with the Commission on March 30, 1993.\n10(o)* Lincoln National Corporation Executive Savings and Profit Sharing Plan as amended as of January 1, 1992 is incorporated by reference to Exhibit 10(o) of LNC's Form 10-K for the year ended December 31, 1992, filed with the Commission on March 30, 1993.\n10(p) Lease dated February 14, 1991, with respect to property occupied by select Fort Wayne operations of the Registrant is incorporated by reference to Exhibit 10(q) of LNC's Form 10-K for the year ended December 31, 1991 filed with the Commission on March 27, 1992.\n10(q)* Lincoln National Corporation 1993 Stock Plan for Non-Employee Directors.\n10(r)* Lincoln National Corporation Executives' Excess Compensation Benefit Plan.\n*This exhibit is a management contract or compensatory plan or arrangement required to be filed as an exhibit to this form pursuant to Item 14(c) of this report.\n11 Computation of Per Share Earnings\n21 The List of Subsidiaries of LNC.\n23 Consent of Independent Auditors.\n28 Information from Reports Furnished to State Insurance Regulatory Authorities.\nItem 14(b) - During the fourth quarter of the year ended December 31, 1993, no reports on Form 8-K were filed with the Commission.\nItem 14(c) - The exhibits of Lincoln National Corporation and subsidiaries are listed in Item 14(a)(3) above.\nItem 14(d) - The financial schedules for Lincoln National Corporation and subsidiaries follow on pages 59 through 68.\n(A) Investments which are deemed to have declines in value that are other than temporary are written down or reserved for to reduce their carrying value to their estimated realizable value.\nThese condensed financial statements should be read in conjunction with the consolidated financial statements and accompanying footnotes of Lincoln National Corporation and subsidiaries (see pages 30 through 54).\nThese condensed financial statements should be read in conjunction with the consolidated financial statements and accompanying footnotes of Lincoln National Corporation and subsidiaries (see pages 30 through 54).\nThese condensed financial statements should be read in conjunction with the consolidated financial statements and accompanying footnotes of Lincoln National Corporation and subsidiaries (see pages 30 through 54).\nLINCOLN NATIONAL CORPORATION AND SUBSIDIARIES EXHIBIT INDEX FOR THE ANNUAL REPORT ON FORM 10-K For the Year Ended December 31, 1993\nExhibit Number Page 3(a) Articles of Incorporation of LNC as last amended May 24, 1991. 3(b) Bylaws of LNC as last amended January 1, 1992.\n4(a) Indenture for 8% Notes due March 15, 1997 and Specimen Notes. 4(b) Indenture for 7 1\/8% due July 15, 1999 and Specimen Notes.* 4(c) Indenture for 7 5\/8% Notes due July 15, 2002 and Specimen Notes.* 4(d) Fiscal Agency Agreement for 9 3\/4% Notes due October 30, 1995, and Specimen Notes. 71\n10(a) Lincoln National Corporation 1986 Stock Option Incentive Plan. 101 10(b) Lincoln National Corporation 1982 Stock Option Incentive Plan. 110 10(c) The Lincoln National Corporation Executives' Salary Continuation Plan.*\n10(d) The Lincoln National Corporation Executive Value Sharing Plan.* 10(e) The Lincoln National Corporation Management Incentive Plan II.* 10(f) Lincoln National Corporation Executives' Severance Benefit Plan as last amended January 10, 1990.* 10(g) The Lincoln National Corporation Outside Directors Retirement Plan.* 10(h) The Lincoln National Corporation Outside Directors Benefits Plan.* 10(i) Lease and Agreement dated August 1, 1984, with respect to the American States' home office property.* 10(j) Lease and Agreement dated August 1, 1984, with respect to LNL's home office property.* 10(k) Lease and Agreement dated August 1, 1984, with respect to LNP's home office property.* 10(l) Lease dated March 1, 1984, with respect to the Security-Connecticut's home office property.* 10(m) Descriptions of Compensation Arrangements with Executive Officers. 118 10(n) The Lincoln National Corporation Executives' Supplemental Pension Benefit Plan.* 10(o) The Lincoln National Corporation Executive Savings and Profit Sharing Plan as last amended January 1, 1992.* 10(p) Lease dated February 14, 1991, with respect to select Fort Wayne business operation's office space.* 10(q) Lincoln National Corporation 1993 Stock Plan for Non- Employee Directors. 120 10(r) Lincoln National Corporation Executives' Excess Compensation Benefit Plan. 125\n11 Computation of Per Share Earnings. 128\n21 List of Subsidiaries of LNC. 129\n23 Consent of Independent Auditors. 135\n28 Information from Reports Furnished to State Insurance Regulatory Authorities. P 136\n*Incorporated by Reference\nSignature Page\nLINCOLN NATIONAL CORPORATION\nPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act By \/s\/ Ian M. Rolland March 10, 1994 of 1934, LNC has duly caused Ian M. Rolland, this report to be signed on (Chairman, Chief Executive Officer and behalf by the under- Director) signed, thereunto duly authorized. By \/s\/ Robert A. Anker March 10, 1994 Robert A. Anker, (President, Chief Operating Officer and Director)\nBy \/s\/ Richard C. Vaughan March 10, 1994 Richard C. Vaughan, (Senior Vice President and Chief Financial Officer)\nBy \/s\/ Donald L. Van Wyngarden March 10, 1994 Donald L. Van Wyngarden (Second Vice President and Controller)\nPursuant to the requirements By \/s\/ J. Patrick Barrett March 10, 1994 of the Securities Exchange J. Patrick Barrett Act of 1934, this report has been signed below by By \/s\/ Thomas D. Bell, Jr. March 10, 1994 the following Directors Thomas D. Bell, Jr of LNC on the date indicated. By \/s\/ Daniel R. Efroymson March 10, 1994 Daniel R. Efroymson\nBy \/s\/ Harry L. Kavetas March 10, 1994 Harry L. Kavetas\nBy \/s\/ M. Leanne Lachman March 10, 1994 M. Leanne Lachman\nBy \/s\/ Leo J. McKernan March 10, 1994 Leo J. McKernan\nBy \/s\/ Earl L. Neal March 10, 1994 Earl L. Neal\nBy \/s\/ John M. Pietruski March 10, 1994 John M. Pietruski\nBy \/s\/ Jill S. Ruckelshaus March 10, 1994 Jill S. Ruckelshaus\nBy \/s\/ Gordon A. Walker March 10, 1994 Gordon A. Walker\nBy \/s\/ Gilbert R. Whitaker,Jr. March 10, 1994 Gilbert R. Whitaker,Jr.","section_15":""}
{"filename":"20520_1993.txt","cik":"20520","year":"1993","section_1":"Item 1. Description of Business ----------------------- (a) General Development of Business -------------------------------\nThe \"company\" includes Citizens Utilities Company and its subsidiaries except where the context or statement indicates otherwise. The company was incorporated in Delaware in 1935 to acquire the assets and business of a predecessor public utility corporation. Since then, the company has grown as a result of investment in owned utility operations and numerous acquisitions of additional utility operations. It continues to consider and carry out business expansion through significant acquisitions and joint ventures in traditional public utility and related fields and the rapidly evolving telecommunications and cable television industries.\nThe company directly, or through subsidiaries, provides telecommunications, electric, gas and water\/wastewater services to more than 1,000,000 customer connections in areas of sixteen states: Arizona, California, Colorado, Hawaii, Idaho, Illinois, Indiana, Louisiana, Ohio, Oregon, Pennsylvania, Tennessee, Utah, Vermont, Washington and West Virginia. Other than the acquisition of the GTE Telephone Properties discussed below, there have not been any material changes in the business of the company during the past fiscal year. The company's strong financial resources and consistent operating performance enable it to make the investments and conduct the operations necessary to serve growing areas and to expand through acquisitions. The company is aggressively and enthusiastically integrating continuous improvement into every aspect of its business with the goal of exceeding customer expectations, ensuring employee satisfaction and increasing shareholder value. In keeping with its commitment to continuous improvement the company has centralized the administration of its Mohave County, Arizona operations, which provide five different utility services, resulting in the ability to enhance customer service and to realize operating cost efficiencies.\nOn May 19, 1993, the company and GTE Corporation announced the signing of ten definitive agreements under which the company would purchase from GTE Corporation, for approximately $1,100,000,000 in cash, 500,000 local telephone access lines in nine states (\"the GTE Telephone Properties\"). These transactions are consistent with the company's growth strategy, will enable the company to achieve operating economies of scale and increase the company's annual revenues to more than $1,000,000,000 once the operations are fully integrated. These transactions require the approval of the Federal Communications Commission and the regulatory commissions of the nine states in which the properties are located. On December 31, 1993, 189,000 access lines in Idaho, Tennessee, Utah and West Virginia were transferred to the company. The remaining access lines are expected to be transferred during 1994.\n(b) Financial Information about Industry Segments ---------------------------------------------\nThe Consolidated Statements of Income and Note 10 of the Notes to Consolidated Financial Statements included herein sets forth financial information about industry segments of the company for the last three fiscal years.\n(c) Narrative Description of Business ---------------------------------\nTelecommunications ------------------\nThe company provides telecommunications services in Arizona, California, Idaho, Oregon, Pennsylvania, Tennessee, Utah, Washington and West Virginia to customers served by approximately 340,000 access lines as of December 31, 1993. The company will provide telecommunications services to customers served by approximately 311,000 additional access lines in Arizona, California, Montana, New York and Oregon upon completion of the transfer of the remaining GTE Telephone Properties in 1994. Telecommunications services consist of local service, centrex service, network access service, long distance service, competitive access service, cellular service and other related services. The company's telecommunications services and\/or rates are subject to the jurisdiction of the Federal Communications Commission and state regulatory agencies.\nThe Public Utility Commission of the State of California (\"CPUC\") continues with its efforts to open the California telecommunications markets to competition. The proceedings call for, among other things, authorized competition for intrastate intraLATA switched toll services; alternative regulatory frameworks for local exchange carriers; less regulation of radio telephone utilities and the elimination of the toll settlement pools for mid- sized local exchange carriers. In support of these CPUC efforts, the company's California telephone subsidiary exited the intrastate toll settlement pools in 1991 and entered into a transition contract with Pacific Bell. Pursuant to the contract, Pacific Bell has agreed to continue to make payments to the company through December 31, 1994, by which time the company expected to have concluded a general rate case permitting the implementation of new higher rates. In the event a general rate case is concluded prior to December 31, 1994, the Pacific Bell payments would be reduced. Such a reduction, if any, would not materially affect 1994 consolidated revenues or earnings. The Pacific Bell contract was designed to partially offset the declines in revenues and earnings which resulted from exiting the intrastate toll settlement pools. The Pacific Bell contract payments, which are received in lieu of revenues from the intrastate toll settlement pools, are included in their entirety in the company's telecommunications revenues and income from operations. The introduction of competition for intrastate intraLATA switched toll services once the CPUC's decision to authorize intrastate intraLATA switched toll competition is implemented could have a negative impact on the California subsidiary's revenues and earnings; however, the subsidiary's properties should be least effected by such competition since they are located in small- and medium-size towns and communities and the CPUC's decision will allow the company to compete for switched toll revenues and earnings in markets that it is not currently allowed to serve. The CPUC's decision, originally\nexpected in 1993, is now expected in 1994. Thus, the time available to the company to complete its general rate case and implement new higher rates and an Incentive Regulatory Framework (\"IRF\") after the CPUC decision and prior to the expiration of the Pacific Bell contract has been shortened. In order to have a new rate design in effect prior to the expiration of the Pacific Bell contract, the company proceeded with its general rate case filing on December 15, 1993. The delay in the CPUC's decision is likely to have a negative impact on the California subsidiary's revenues and earnings, since this delay could result in a period in which intrastate intraLATA competition for switched toll services is implemented, Pacific Bell contract payments would no longer be received and the IRF and increased rates from the general rate case would not yet be implemented, or, alternatively, interim rate relief would not be approved. The Pacific Bell contract payments represent 6% of the company's 1993 consolidated revenues and 4% of the company's 1993 consolidated revenues pro forma for the acquisition of all the GTE Telephone Properties (see Note 3 of Notes to Consolidated Financial Statements). The company has taken the following measures to offset this negative impact on revenues and earnings and simultaneously position itself for a more competitive telecommunications environment: the company has pending proposals before the CPUC to enter new and existing markets (including the intrastate intraLATA toll market as a toll provider and the market for broadband services, including two way interactive video applications such as distance learning), to enter into an IRF under which the company would be allowed to earn rates of return in excess of those allowed under traditional rate base rate of return regulation and to rebalance its rate structure to be more competitive; the company has implemented state-of-the-art operational cost control systems and force management systems which provide for the ongoing monitoring and improvement of business processes and will continue to generate cost reductions which, under an IRF, will benefit shareholders and customers; the company's acquisition of the GTE Telephone Properties positions the company for the new competitive environment since these properties are located in small-and medium- size towns and communities which should be least affected by competition and will provide growth opportunities; and the company is also investing in competitive telecommunications services such as competitive access, cellular and cable operations.\nThe company continues to invest in its subsidiary,Electric Lightwave, Inc., a competitive access provider in Oregon and Washington, with planned expansion to California, Utah and Arizona. The Federal Communications Commission has granted the company a permit to construct a fiber-optic route from Nevada to Arizona which will provide centralized equal access service for the company's telecommunications customers in Arizona. This project will allow the company to interface with any carrier desiring equal access in the service area and make it possible for the company to enter the long distance market as a competitor. The company has contributed $29,120,000 through the year ended December 31, 1993 towards the expansion of Electric Lightwave, Inc.'s operations.\nIn January 1993, the company, through its Mohave Cellular subsidiary as general managing partner, began the operation of a cellular partnership in Arizona. The partnership currently owns five cell sites in Arizona. In 1993, a subsidiary of the company conducted tests to determine the viability of Personal Communications Networks (\"PCN\") and is exploring means to participate by either acquiring a spectrum on its own or as part of a partnership or consortium.\nIn March 1993, the company signed an agreement to purchase, through a joint venture with Century Communications Corp. (\"Century\"), the assets of two cable television systems serving approximately 45,000 subscribers in California. The joint venture will pay a purchase price of up to approximately $89,000,000 for the systems and intends to enter into an agreement with Century pursuant to which Century will manage the systems. The purchase is subject to regulatory approval for the transfer of licenses and is expected to be consummated in 1994.\nThe GTE Telephone Properties acquired and to be acquired increases the company's number of access lines serving customers by approximately 500,000. To best manage these new businesses, as well as the growth in its existing properties, the company is in the process of consolidating support service functions and establishing a centralized telecommunications infrastructure to carry out these functions.\nNatural Gas - -----------\nOperating divisions of the company provide gas transmission and distribution services to residential, commercial and industrial customers in Arizona, Colorado and Louisiana. Total number of gas customers served as of December 31, 1993 was approximately 350,000. The provision of services and\/or rates charged are subject to the jurisdiction of federal and state regulatory agencies. The company purchases all needed gas supplies, the supply of which is believed to be adequate to meet current demands and to provide for additional sales to new customers. The gas industry is subject to seasonal demand, with the peak demand occurring during the heating season of November 1 through March 31. The gas division experiences third party competition from fuel oil, propane, and other natural gas suppliers for most of its large consumption customers and from electricity for all of its customer base. The competitive position of natural gas at any given time depends primarily on the relative prices of natural gas and these other energy sources. Various federal and state tax incentive programs call for replacing other fuels with compressed natural gas. However, these regulations may, in certain circumstances, promote the use of other fuels to replace natural gas.\nNumerous opportunities for expansion are available to the company in connection with its northern Arizona gas transmission and distribution system build out program. In addition, gas powered cogeneration opportunities with industrial customers have emerged as a result of the relatively high price of electricity. Natural gas heat pumps that also cool would generate large demand during the Summer months when natural gas consumption is historically low.\nOn December 22, 1993, the company acquired Natural Gas Company of Louisiana (\"NGL\") by merger. In the merger, NGL's 59,980 outstanding shares were converted into 568,748 shares of the company's Series B common stock, for an aggregate value of $10,522,000. NGL is a local gas distribution company serving 15,500 customers in Louisiana. NGL will operate as part of the company's Louisiana gas division.\nElectric - --------\nOperating divisions of the company provide electric services to approximately 98,000 residential, commercial and industrial customers in Arizona, Hawaii and Vermont as of December 31, 1993. The provision of services and\/or rates charged are subject to the jurisdiction of federal and state regulatory agencies. The company purchases over 80% of needed electric supplies, the supply of which is believed to be adequate to meet current demands and to provide for additional sales to new customers. As a whole, the company's electric segment does not experience material seasonal fluctuations. In response to regulatory initiatives, the company's electric divisions are all proceeding with demand-side management programs and integrated resource planning techniques designed to promote the most efficient use of electricity and to reduce the environmental impacts associated with new generation facilities.\nThe company's Kauai Electric Division (\"KED\") has restored all transmission and distribution lines, poles and equipment that were damaged as a result of Hurricane Iniki in September 1992. As of December 31, 1993, all customers whose facilities were capable of receiving service (approximately 24,300 of the KED's 24,500 pre-hurricane customers) had been reconnected. Sales volume has been slowly recovering as construction throughout the island continues on residential homes, commercial establishments and hotels. The Hawaii Public Utilities Commission (\"HPUC\") approved a stipulation on December 9, 1992 specifying regulatory treatment of certain\ncosts associated with the restoration of KED facilities. As part of this stipulation, KED agreed to defer its next general rate increase application until 1994 with rates becoming effective no earlier than January 1, 1995 (the \"deferred rate case\"). Under the terms of this stipulation, KED is authorized to earn an allowance for funds used during construction (\"AFUDC\") on the restoration costs. The allowed restoration costs, plus associated AFUDC earnings, will be included in rate base to be recovered in the deferred rate case. Restoration costs plus associated AFUDC earnings not ultimately allowed in rate base should be recovered by the company in the deferred rate case over an amortization period to be determined in that case. Depreciation expense on the restoration plant is being deferred and will be amortized over the remaining useful life of the restored plant when rates are approved in the deferred rate case. Lost gross margin (unrecovered costs and the allowed return on investment based on the rate award received by the KED in November, 1992) and interest, compounded monthly, on the lost gross margin is authorized to be accrued and is subject to recovery in the deferred rate case.\nThe company is participating in research and development of electric powered vehicles which could provide new opportunities to expand its electric business. At the same time, the company is taking a leadership role toward enhancing and protecting the environment by sponsoring a study to protect endangered species of birds, employment of new technology to reduce emissions from generating facilities at the company's Kauai electric division and conducting extensive studies at the company's Vermont electric division to protect and preserve waterways, while balancing the need for hydrogeneration.\nThe United States Environmental Protection Agency (\"EPA\") named the company a potentially responsible party (\"PRP\") with respect to three sites which have been designated for federally supervised clean-up under the Comprehensive Environmental Response, Compensation and Liability Act. These three sites are Missouri Electric Works in Cape Girardeau, Missouri; Northwest Transformer in Everson, Washington; and Rose Chemicals in Holden, Missouri. The EPA has determined that the electric divisions' participation in each site is less than 0.5%. The number of named PRP's ranges from 40 to 700 at each site. Significant parties have accepted responsibility and are currently funding the clean-up activity as required. The company's remaining financial liability is estimated to be less than $141,000.\nDuring 1993, the company acquired Franklin Electric Light Company, Incorporated whose operations are contiguous with its Vermont electric division. The company issued 51,500 shares of Series B common stock to complete the acquisition. This acquisition will allow for greater economies of scale and will result in more efficient customer service.\nWater\/Wastewater - ----------------\nThe company provided water and\/or wastewater services to approximately 254,000 customer connections in Arizona, California, Illinois, Indiana, Ohio and Pennsylvania as of December 31, 1993. The provision of these services and\/or rates charged are subject to the jurisdiction of federal, state and local regulatory agencies. A significant portion of the company's water\/wastewater construction expenditures necessary to serve new customers are made under agreements with land developers who generally advance construction monies to the company that are later refunded in part as new customers and revenues are added in their developments.\nWater\/wastewater public utility property of the company, from time to time, has been subjected to condemnation proceedings initiated by municipalities or utility districts seeking to acquire and take control of the operation of such property. During 1992, one operation in Illinois became subject to such proceeding; this condemnation is being contested by the company.\nIn September 1992, the United States Environmental Protection Agency (\"EPA\") filed a complaint with the United States District Court for the Northern District of Illinois relating to alleged violations by the company's Illinois subsidiary with respect to\nNational Pollutant Discharge Elimination System permit requirements. The company is unable to estimate exposure at this time, but believes the Illinois subsidiary has meritorious defenses. The company believes the risk of material loss from this action is remote.\nGeneral - ------- The company's public utility operations are conducted primarily in small- and medium-size towns and communities. No material part of the company's business is dependent upon a single customer or upon a small group of customers. The loss of one or more of such customers would not have a material adverse effect on operating income. As a result of its diversification, the company is not dependent upon any single geographic area or upon any one type of utility service for its revenues. Due to this diversity, no single regulatory body regulates a utility service of the company accounting for more than 18% of its 1993 revenues.\nThe company is subject to regulation by the respective state Public Utility Commissions and federal regulatory agencies. The company is not subject to the Public Utility Holding Company Act. Order backlog is not a significant consideration in the company's business, and the company has no contracts or subcontracts which may be subject to renegotiation of profits or termination at the election of the federal government. The company holds franchises with local governmental bodies, which vary in duration. The company also holds certificates of convenience and necessity granted by various state commissions which are generally of indefinite duration. The company has no special working capital practices. The company's research and development activities are not material. There are no patents, trademarks, licenses or concessions held by the company that are material.\nThe company employed 2,917 full time and 50 part time employees at December 31, 1993 (includes employees of the GTE Telephone Properties acquired December 31, 1993).\n(d) Financial Information about Foreign and Domestic Operations and --------------------------------------------------------------- Export Sales ------------\nThe company does not have any material foreign operations or export sales.\nItem 2.","section_1A":"","section_1B":"","section_2":"Item 2. Description of Property ------------------------\nThe administrative offices of the company are located at High Ridge Park, Stamford, Connecticut, 06905 and are leased. The company owns property including: telecommunications outside plant, central office, microwave radio and fiber-optic facilities; electric generation, transmission and distribution facilities; gas transmission and distribution facilities; water production, treatment, storage, transmission and distribution facilities; and wastewater treatment, transmission, collection and discharge facilities; all as necessary to provide services at the locations listed below.\n* Certain telecommunications properties are subject to a mortgage deed.\nItem 3.","section_3":"Item 3. Legal Proceedings -----------------\nIn September 1992, the United States Environmental Protection Agency filed a complaint with the United States District Court for the Northern District of Illinois relating to alleged violations by the company's Illinois subsidiary with respect to National Pollutant Discharge Elimination System permit requirements. The company is unable to estimate exposure at this time, but believes the Illinois subsidiary has meritorious defenses.\nOn February 19, 1993, the company was served with a summons and complaint in an action brought by the Sun City Taxpayers' Association in the United States District Court for the District of Connecticut. The plaintiff alleged that the company, through its Sun City Water Company and Sun City Sewer Company subsidiaries, misrepresented rate-base investment in rate applications submitted to the Arizona Corporation Commission (\"ACC\") between 1968 and 1978 and claimed damages of $65,000,000 before trebling. The plaintiff made substantially the same allegations in a regulatory proceeding before the ACC in 1986 and the ACC rejected those allegations. On February 1, 1994, the company's motion to dismiss this action was granted and the complaint was dismissed by an opinion and order of the court. On February 9, 1994, plaintiff filed a notice of appeal and is seeking review of the court's ruling by the United States Court of Appeals for the Second Circuit.\nIn June 1993, several stockholders commenced purported derivative actions in the Delaware Court of Chancery against the company's Board of Directors. These stockholders allege that the compensation approved by the Board of Directors for the company's Chairman is excessive and seek, among other things, an accounting for alleged corporate waste and a declaration that the Chairman's employment agreement and existing stock options are invalid. These stockholders further allege that certain corporate transactions involving the company and Century Communications Corp. (\"Century\") benefitted Century to the detriment of the company. Certain of these stockholders have also asserted individual and purported class claims based upon the company's alleged failure to disclose facts relating to the Chairman's compensation and certain stock options granted to members of the company's Board of Directors and the allegedly improper accounting treatment with respect to Citizens' investment in Centennial Cellular Corp. (\"Centennial\"). The company's Board of Directors has moved to dismiss the complaints for failure to state a claim and for failure to comply with the demand requirements applicable to a derivative suit. The motions are currently pending. In November 1993, another purported derivative action was filed in the Court of Chancery against the company's Board of Directors and Century. Plaintiffs challenge both the Chairman's compensation and the merger which resulted in the creation of Centennial.\nCertain of the above actions, commenced in June 1993, were consolidated (the \"Consolidated Action\"). In February 1994, a Memorandum of Understanding was executed among counsel for several of the stockholders in the Consolidated Action and counsel for the company's Board of Directors. The parties to the Memorandum of Understanding will attempt to agree upon, execute and present to the Delaware Court of Chancery a stipulation of settlement resolving all of the claims in the Consolidated Action. The Memorandum of Understanding sets forth the contemplated terms of the stipulation of settlement. Consummation of the proposed settlement will be subject to: (a) the drafting and execution of a stipulation of settlement; (b) the completion by plaintiffs of appropriate confirmatory discovery in the Consolidated Action; and (c) final approval of the settlement by the Delaware Court of\nChancery and dismissal of the Consolidated Action with prejudice. It is contemplated that the stipulation of settlement will provide for the complete release and settlement of all claims against the company's Board of Directors arising out of the allegations in the Consolidated Action. It is also contemplated that plaintiffs' counsel will seek an award of attorneys' fees and expenses in connection with the settlement. No understanding has been reached with respect to the amount of fees and expenses to be sought, but it is contemplated that the company will pay, on behalf of the defendant directors, the amount of fees and expenses, if any, to be awarded by the Delaware Court of Chancery to plaintiffs' counsel.\nIn June 1993, a stockholder of the company commenced a purported class action in the United States District Court for the District of Delaware against the company and the company's Board of Directors. The stockholder's complaint, amended in July 1993, alleges that the proxy statements disseminated by the company from 1990 to 1993 failed to disclose material information regarding, among other things, the Chairman's compensation and certain purported related- party transactions and thereby violated federal and state disclosure requirements. The relief sought includes a declaration that the results of the 1993 Annual Meeting of the stockholders are null and void, a declaration that the Chairman's employment agreement is invalid and unspecified damages. Defendants have filed a motion to dismiss this action. The motion is currently pending.\nThe company believes the risk of material loss from the above actions is remote.\nItem 4.","section_4":"Item 4. Submission of Matters to Vote of Security Holders ------------------------------------------------- None in fourth quarter 1993.\nExecutive Officers ------------------\nInformation as to Executive Officers of the company as of January 31, 1994, follows:\nThere is no family relationship between any of the officers of the Registrant. The term of office of each of the foregoing officers of the Registrant will continue until the next annual meeting of the Board of Directors and until a successor has been elected and qualified.\nLEONARD TOW has been associated with the Registrant since April 1989 as a Director. In June 1990, he was elected Chairman of the Board and Chief Executive Officer. In October 1991, he was appointed to the additional position of Chief Financial Officer of the Registrant. He has also been a Director, Chief Executive Officer and Chief Financial Officer of Century Communications Corporation since its incorporation in 1973, and Chairman of its Board of Directors since October 1989.\nDARYL A. FERGUSON has been associated with the Registrant since July 1989. He was Vice President, Administration from July 1989 through March 1990 and Senior Vice President, Operations and Engineering from March 1990 through June 1990. He has been President and Chief Operating Officer since June 1990. During the period April 1987 through July 1989, he was President and Chief Executive Officer of Microtecture Corporation.\nROBERT J. DeSANTIS has been associated with the Registrant since January 1986. He was Assistant to the Treasurer through May 1986 and Assistant Treasurer from June 1986 through September 1991. He has been Vice President and Treasurer since October 1991.\nCHARLES R. ALDRICH has been associated with the Registrant since December 1990 as Vice President of the Registrant's Gas Operations. He was associated with Louisiana General Services, Inc. from 1971 until that company was merged with the Registrant in December 1990. He served as President of LGS Pipeline, Inc. from January 1983 through June 1988 and President of Louisiana Gas Service Company from July 1988 through December 1990.\nJAMES P. AVERY has been associated with the Registrant since August 1981. He was Project Manager, Electric through June 1988, Assistant Vice President, Electric Operations from June 1988 through December 1990 and Acting Vice President from December 1990 through April 1991. He has been Vice President, Electric Operations since May 1991.\nRICHARD A. FAUST, JR. has been associated with the Registrant since December 1990. He was associated with Louisiana General Services, Inc. from 1972 until that company was merged with the Registrant in December 1990. He served as Vice President, General Counsel and Secretary of Louisiana General Services, Inc. from March 1984 through May 1993. He was elected Assistant Secretary for the Registrant in June 1991 and Vice President, Mohave County, Arizona Operations in June 1993.\nJ. MICHAEL LOVE has been associated with the Registrant since May 1990 and from November 1984 through January 1988. He was Assistant Vice President, Regulatory Affairs and Community Relations from June 1986 through January 1988. He left the Registrant in January 1988 to become President and General Counsel of Southern New Hampshire Water Company. He rejoined the Registrant in April 1990 and was Assistant Vice President, Corporate Planning from June 1990 through March 1991. He has been Vice President, Corporate Planning since March 1991.\nROBERT L. O'BRIEN has been associated with the Registrant since March 1975. He has been Vice President, Regulatory Affairs since June 1981.\nDONALD K. ROBERTON has been associated with the Registrant since January 1991 and has been Vice President, Telecommunications since that date. Prior to joining the Registrant, he was Vice President, Western Operations at Henkels & McCoy from December 1989 through December 1990. From January 1984 through November 1989, he was a Vice President with Centel Communications Systems.\nLIVINGSTON E. ROSS has been associated with the Registrant since August 1977. He was Manager of Reporting from September 1984 through March 1988, Manager of General Accounting from April 1988 through September 1990 and Assistant Controller from October 1990 through November 1991. He has been Vice President and Controller since December 1991.\nRONALD E. WALSH has been associated with the Registrant since January 1986. He was Attorney and Assistant Secretary from November 1987 through August 1992. He has been Vice President, Water and Wastewater Operations since August 1992.\nPART II -------\nItem 5.","section_5":"Item 5. Market for the Registrant's Common Stock and Related Stockholder ---------------------------------------------------------------- Matters -------\nPRICE RANGE OF COMMON STOCK\nThe company's Common Stock is traded on the New York Stock Exchange under the symbols CZNA and CZNB for Series A and Series B, respectively. The following table indicates the high and low prices per share as taken from the daily quotations published in the \"Wall Street Journal\" during the periods indicated. Prices are adjusted for intervening stock dividends, the July 24, 1992 3-for-2 stock split and the August 31, 1993 2-for-1 stock split, rounded to the nearest 1\/8th. (See Note 7 of Notes to Consolidated Financial Statements.)\nThe December 31, 1993 prices were: Series A $18.125 high, $17.875 low; Series B $18.125 high, $17.875 low.\nAs of January 31, 1994, the approximate number of record security holders of the company's Series A and Series B Common Stock was 37,715. This information was obtained from the company's transfer agent.\nDIVIDENDS\nQuarterly stock dividends declared and issued on both Series A and Series B Common Stock were 1.2% for the first quarter of 1993, 1.0% for the second quarter of 1993, 1.1% for the third quarter of 1993 and 1.0% for the fourth quarter of 1993. Quarterly stock dividends declared and issued on both Series A and Series B Common Stock were 1.6% for the first quarter of 1992, 1.5% for the second quarter of 1992 and 1.2% for each of the third and fourth quarters of 1992. An annual cash dividend equivalent rate of $0.745 and $0.675 per share (adjusted for subsequent stock dividends and stock splits) was considered by the company's Board of Directors in establishing the Series A and Series B stock dividends during 1993 and 1992, respectively. (See Note 7 of Notes to Consolidated Financial Statements.)\nItem 6.","section_6":"Item 6. Selected Financial Data (In thousands, except for per-share ----------------------------------------------------------- amounts) -------\n\/(1)\/ Adjusted for intervening stock dividends and splits; no adjustment has been made for the company's 1.1% first quarter 1994 stock dividend because the effect is immaterial. \/(2)\/ Annual rate of quarterly stock dividends compounded. \/(3)\/ The 1990 amount represents cash dividend payments by Louisiana General Services, Inc. prior to its merger into the company on December 4, 1990. The 1989 amount represents cash dividend payments by Louisiana General Services, Inc. prior to its merger into the company in 1990 and payments by the company.\nItem 7.","section_7":"Item 7. Management's Discussion and Analysis of Financial Condition and --------------------------------------------------------------- Results of Operations ---------------------\n(a) Liquidity and Capital Resources -------------------------------\nThe company's primary source of funds was from operations. Funds requisitioned from the 1993, 1992 and 1991 Series Industrial Development Revenue Bond construction fund trust accounts and funds from advances for specific capital expenditures from parties desiring utility service were used to pay for the construction of utility plant. Funds from the issuance of commercial paper were used to repay $11,489,000 of higher-coupon first mortgage bonds on October 15, 1993. Commercial paper notes payable in the amount of $438,953,000 were outstanding as of December 31, 1993, of which $380,000,000 was issued to temporarily and partially fund the GTE Telephone Properties acquired on December 31, 1993. The $380,000,000 of commercial paper is expected to be repaid from maturing temporary investments and proceeds from the planned issuance of equity securities in 1994. On March 10, 1993, the company arranged for the issuance of\n$42,560,000 of 1993 Series Industrial Development Revenue Bonds. The bonds were issued as money market bonds with an initial interest rate of 2.25% and an ultimate maturity date of December 1, 2027. On November 16, 1993, the company arranged for the issuance of $25,600,000 of 1993 Series Industrial Development Revenue Bonds; the bonds were issued as Demand Purchase Bonds bearing interest at a composite rate of approximately 5.8% and mature on November 15, 2028. On December 15, 1993, the company arranged for the issuance of $35,700,000 of 1993 Series Special Purpose Revenue Bonds; these bonds were issued as Residual Interest Bonds\/Select Auction Variable Rate Securities and bear interest at a fixed annual interest rate of 5.6% and mature on December 15, 2023. The company has received approval from the Federal Energy Regulatory Commission to issue up to $1,250,000,000 in various forms of additional securities over the next two years to fund the acquisition of the GTE Telephone Properties and for other corporate purposes. The company has filed a shelf-registration statement with the Securities and Exchange Commission to offer, from time to time, up to $1,000,000,000 in securities to fund the acquisition of the GTE Telephone Properties and for other corporate purposes.\nThe company considers its operating cash flows and its ability to raise debt and equity capital as the principal indicators of its liquidity. Although working capital is not considered to be an indicator of the company's liquidity, the company experienced a decrease in its working capital at December 31, 1993. The decrease is primarily due to the issuance of short-term debt to temporarily and partially fund the acquisition of the GTE Telephone Properties acquired on December 31, 1993.\nCapital expenditures for the years 1993, 1992 and 1991, respectively, were $182,480,000, $148,027,000 and $115,884,000, and for 1994 are expected to be approximately $280,000,000. These expenditures were, and in 1994 will be, for utility and related facilities and properties, including the GTE Telephone Properties.\nThe company anticipates that the funds necessary for its 1994 capital expenditures will be provided from operations; from 1991, 1992 and 1993 Series Industrial Development Revenue Bond construction fund trust account requisitions; from Rural Telephone Bank loan contract advances; from commercial paper notes payable; from parties desiring utility service; from debt, equity and other financing at appropriate times; and, if deemed advantageous, from short-term borrowings under bank credit lines. The company has committed lines of credit with banks under which it may borrow up to $1,200,000,000.\nIn March 1993, the company signed an agreement to purchase, through a joint venture with Century Communications Corp. (\"Century\"), the assets of two cable television systems serving approximately 45,000 subscribers in California. The joint venture will pay a purchase price of up to approximately $89,000,000 for the systems and intends to enter into an agreement with Century pursuant to which Century will manage the systems. The purchase is subject to regulatory approval for the transfer of licenses and is expected to be consummated in 1994.\nOn May 19, 1993, the company and GTE Corporation announced the signing of ten definitive agreements under which the company would purchase from GTE Corporation, for approximately $1,100,000,000 in cash, 500,000 local telephone access lines in nine states (\"the GTE\nTelephone Properties\"). These transactions are consistent with the company's growth strategy, will enable the company to achieve operating economies of scale, and will increase the company's annual revenues to more than $1,000,000,000 once the operations are fully integrated. These transactions require the approval of the Federal Communications Commission and the regulatory commissions of the nine states in which the properties are located. On December 31, 1993, 189,000 access lines in Idaho, Tennessee, Utah and West Virginia were transferred to the company. The remaining access lines are expected to be transferred during 1994.\nDuring 1993, the company acquired Franklin Electric Light Company, Incorporated which operations are contiguous with its Vermont electric division. The company issued 51,500 shares of Series B common stock to complete the acquisition. This acquisition will allow for greater economies of scale and will result in more efficient customer service.\nOn December 22, 1993, the company acquired Natural Gas Company of Louisiana (\"NGL\") by merger. In the merger, NGL's 59,980 outstanding shares were converted into 568,748 shares of the company's Series B common stock, for an aggregate value of $10,522,000. NGL is a local gas distribution company serving 15,500 customers in Louisiana, and will operate as part of the company's Louisiana gas division.\nRegulatory Matters - ------------------\nPursuant to the 1972 Clean Water Act, as amended, National Pollutant Discharge Elimination System (\"NPDES\") permits are required for wastewater treatment facilities which discharge to surface waters. In September 1992, the United States Environmental Protection Agency (\"EPA\") filed a complaint with the United States District Court for the Northern District of Illinois relating to alleged violations by the company's Illinois subsidiary with respect to NPDES permit requirements. The company is unable to estimate exposure at this time, but believes the Illinois subsidiary has meritorious defenses. The company believes the risk of material loss from this action is remote.\nOn February 19, 1993, the company was served with a summons and complaint in an action brought by the Sun City Taxpayers' Association in the United States District Court for the District of Connecticut. The plaintiff alleged that the company, through its Sun City Water Company and Sun City Sewer Company subsidiaries, misrepresented rate-base investment in rate applications submitted to the Arizona Corporation Commission (\"ACC\") between 1968 and 1978 and claimed damages of $65,000,000 before trebling. The plaintiff made substantially the same allegations in a regulatory proceeding before the ACC in 1986 and the ACC rejected those allegations. On February 1, 1994, the company's motion to dismiss this action was granted and the complaint was dismissed by an opinion and order of the court. On February 9, 1994, plaintiff filed a notice of appeal and is seeking review of the court's ruling by the United States Court of Appeals for the Second Circuit.\nThe EPA named the company a potentially responsible party (\"PRP\") with respect to three sites which have been designated for federally supervised clean-up under the Comprehensive Environmental Response, Compensation and Liability Act. These three sites are Missouri Electric Works in Cape Girardeau, Missouri; Northwest Transformer in Everson, Washington; and Rose Chemicals in Holden, Missouri. The EPA has determined that the company's participation in each site is less than 0.5%. The number of named PRP's ranges from 40 to 700 at each site. Significant parties have accepted responsibility and are currently funding the clean-up activity as required. The company's remaining financial liability is estimated to be less than $141,000.\nThe Public Utility Commission of the State of California (\"CPUC\") continues with its efforts to open the California telecommunications markets to competition. The proceedings call for, among other things, authorized competition for intrastate intraLATA switched toll services; alternative regulatory frameworks for local exchange carriers; less regulation of radio telephone utilities; and the elimination of the toll settlement pools for mid- sized local exchange carriers. In support of these CPUC efforts, the company's California telephone subsidiary exited the intrastate toll settlement pools in 1991 and entered into a transition contract with Pacific Bell. Pursuant to the contract, Pacific Bell has agreed to continue to make payments to the company through December 31, 1994, by which time the company expected to have concluded a general rate case permitting the implementation of new higher rates. In the event a general rate case is concluded prior to December 31, 1994, the Pacific Bell payments would be reduced. Such a reduction, if any, would not materially affect 1994 consolidated revenues or earnings. The Pacific Bell contract was designed to partially offset the declines in revenues and earnings which resulted from exiting the intrastate toll settlement pools. The Pacific Bell contract payments, which are received in lieu of revenues from the intrastate toll settlement pools, are included in their entirety in the company's telecommunications revenues and income from operations. The introduction of competition for intrastate intraLATA switched toll services, once the CPUC's decision to authorize intrastate intraLATA switched toll competition is implemented, could have a negative impact on the California subsidiary's revenues and earnings; however, the subsidiary's properties should be least affected by such competition since they are located in small-and medium-size towns and communities and the CPUC's decision will allow the company to compete for switched toll revenues and earnings in markets that it is not currently allowed to serve. The CPUC's decision, originally expected in 1993, is now expected in 1994. Thus, the time available to the company to complete its general rate case and implement new higher rates and an Incentive Regulatory Framework (\"IRF\") after the CPUC decision and prior to the expiration of the Pacific Bell contract has been shortened. In order to have a new rate design in effect prior to the expiration of the Pacific Bell contract, the company proceeded with its general rate case filing on December 15, 1993. The delay in the CPUC's decision is likely to have a negative impact on the California subsidiary's revenues and earnings, since this delay could result in a period in which intrastate intraLATA competition for switched toll services is implemented, Pacific Bell contract payments would no longer be received and the IRF and increased rates from the general rate case would not yet be implemented, or, alternatively, interim rate relief would not be approved. The Pacific Bell contract payments represent 6% of the company's 1993 consolidated revenues and 4% of the company's 1993 consolidated revenues pro forma for the acquisition of the GTE Telephone Properties (see Note 3 of Notes to Consolidated Financial Statements). The company has taken the following measures to offset this negative impact on revenues and earnings and simultaneously position itself for a more competitive telecommunications environment: the company has pending\nproposals before the CPUC to enter new and existing markets (including the intrastate intraLATA toll market as a toll provider and the market for broadband services, including two-way interactive video applications such as distance learning), to enter into an IRF under which the company would be allowed to earn rates of return in excess of those allowed under traditional rate base rate of return regulation and to rebalance its rate structure to be more competitive; the company has implemented state-of-the-art operational cost control systems and force management systems which provide for the ongoing monitoring and improvement of business processes and will continue to generate cost reductions which, under an IRF, will benefit shareholders and customers; the company's acquisition of the GTE Telephone Properties positions the company for the new competitive environment since these properties are located in small- and medium-size towns and communities which should be least affected by competition and will provide growth opportunities; and the company is also investing in competitive telecommunications services such as competitive access, cellular and cable operations.\nNew Accounting Pronouncements - -----------------------------\nThe Financial Accounting Standards Board (\"FASB\") has issued Statement of Financial Accounting Standards (\"SFAS\") No. 112, \"Employers' Accounting for Postemployment Benefits,\" effective for fiscal years beginning after December 15, 1993. Adoption of SFAS No. 112 will require accrual of the expected cost of providing benefits, if any, to former or inactive employees after termination of employment for reasons other than retirement. Adoption of SFAS No. 112 will not have a material effect on the Consolidated Financial Statements.\nThe FASB has issued SFAS No. 115, \"Accounting for Certain Investments in Debt and Equity Securities,\" effective for fiscal years beginning after December 15, 1993. Adoption of SFAS No. 115 will require Fair Value reporting for certain investments in debt and equity securities. The company does not expect the adoption of SFAS No. 115 to have a material impact on the Consolidated Statements of Income, but does expect there to be an increase to investments on the Consolidated Balance Sheets with an accompanying increase in shareholders' equity.\n(b) Results of Operations ---------------------\nOperating revenues for the years ended December 31, 1993 and 1992 increased compared to the like prior year periods primarily due to increased natural gas, electric, water\/wastewater revenues. Telecommunications revenues decreased 5% in 1993 and 6% in 1992, primarily due to regulatory changes in the state of California, as discussed in the \"Regulatory Matters\" section. The decrease in 1993 was partially offset by $2,626,000 of increased local revenues as a result of customer growth and $2,548,000 of increased toll revenues as a result of increased toll volume. The acquisition of the GTE Telephone Properties is expected to increase annual consolidated revenues to more than $1,000,000,000 once the\noperations are fully integrated. Natural gas revenues increased 12% in 1993 primarily due to $7,089,000 of revenues from Natural Gas Company of Louisiana (\"NGL\"), which was acquired by the company in 1993; $3,624,000 from increased average revenue per MCF of gas sold to industrial customers; $5,229,000 from increased average revenue per MCF of gas sold to residential and commercial customers and $9,322,000 from pass-ons to residential and commercial customers of increases in the wholesale costs of commodities purchased. These increases were partially offset by decreased consumption due to warmer weather conditions. Pass-ons are required under tariff provisions and do not affect net income. Natural gas revenues increased 25% in 1992 primarily due to $29,333,000 of revenues from northern Arizona gas properties acquired by the company on December 3, 1991, $5,430,000 from increased rates and $11,463,000 from pass-ons to residential and commercial customers of increases in the wholesale costs of commodities purchased. These increases were partially offset by decreased consumption due to warmer weather conditions. Electric revenues increased 13% in 1993 primarily due to $10,245,000 of increased unit revenues and $4,737,000 from customer consumption. Electric revenues increased 5% in 1992 primarily because of increased consumption resulting from increased customer usage due to warmer weather conditions. Water\/wastewater revenues increased 10% in 1993 primarily due to $2,826,000 of rate increases; $2,018,000 from customer growth and increased customer usage; as well as $1,256,000 of revenues received from a water\/wastewater property acquired in December 1992. Water\/wastewater revenues increased 3% in 1992 primarily due to rate increases.\nElectric energy and fuel oil purchased costs increased 9% in 1993 and 7% in 1992. Electric energy purchased costs for 1993 totaled $68,224,000 a 6% increase over the 1992 amount of $64,077,000, which was a 15% increase over the 1991 cost of $55,480,000. The increased cost of electricity purchased in 1993 and 1992 was primarily due to increased customer demand and increased supplier prices. The increase in 1992 was partially offset by a decline in customer consumption at the company's Kauai electric division due to Hurricane Iniki. Fuel oil purchased in 1993 of $14,895,000 increased 22% from the 1992 amount of $12,209,000 primarily due to higher supplier prices and increased volume to satisfy increased customer consumption. Fuel oil purchased costs in 1992 of $12,209,000 decreased 23% from the 1991 amount of $15,843,000, primarily due to decreasing supplier prices. Natural gas purchased costs increased 15% in 1993, primarily due to higher supplier prices. Natural gas purchased costs increased 26% in 1992, primarily due to the acquisition of northern Arizona gas properties. Under tariff provisions, changes in the company's wholesale costs of electric energy, fuel oil and natural gas purchased are largely passed on to customers.\nOperating and maintenance expenses increased .4% in 1993 primarily due to the acquisition of Natural Gas Company of Louisiana. Operating and maintenance expenses increased 2% in 1992 primarily due to the acquisition of northern Arizona gas properties in December 1991. In addition, in 1992 the company's operations were impacted by several natural disasters; forest fires in northern California, Hurricane Andrew in Louisiana and Hurricane Iniki on\nKauai. Depreciation expense increased 9% in 1993 and 6% in 1992, primarily due to increased investment in plant in service and increases in the authorized depreciation rates for the company's Arizona electric operations in 1993 and California telephone operations in 1992.\nTaxes other than income increased 3% in 1993 and 7% in 1992, primarily due to increased real estate taxes resulting from higher tax rates and assessment values and the acquisition of northern Arizona gas properties in 1992.\nInterest expense decreased 4% in 1993, primarily due to the refinancing of higher-coupon First Mortgage Bonds with lower cost debentures and increased allowance for funds used during construction related to borrowings, which is a reduction to interest expense. The decrease in interest expense was partially offset by an increase in industrial development revenue bond borrowings. Interest expense increased 17% in 1992, primarily due to additional industrial development revenue bond construction fund requisitions and interest on debentures issued in January 1992, the proceeds of which were used to redeem higher-coupon debt in February and March 1992. Investment income increased 5% in 1993, primarily due to realization of gains on sales of securities and an increase in income from the company's Centennial investment; partially offset by lower investment balances and market yields. Investment income increased 24% in 1992, primarily due to the temporary investment of debenture proceeds, increased industrial development revenue bond proceeds held-in-trust, and income from the company's Centennial investment. Other income-net increased 66% in 1993 primarily due to an increase in the allowance for funds used during construction related to equity, as a result of increased property, plant and equipment.\nIncome taxes increased 19% in 1993 and 1% in 1992, primarily due to increased taxable income and an increase in the effective tax rate resulting from an increase in the federal corporate income tax rate.\nCost increases, including those due to inflation, are offset in due course by increases in revenues obtained under established regulatory procedures.\nItem 8.","section_7A":"","section_8":"Item 8. Financial Statements and Supplementary Data -------------------------------------------\nThe following documents are filed as part of this Report:\n1. Financial Statements: See Index on page.\n2. Supplementary Data: Quarterly Financial Data is included in the Financial Statements (see 1. above).\nItem 9.","section_9":"Item 9. Disagreements with Auditors on Accounting and Financial Disclosure ------------------------------------------------------------------\nNone\nPART III --------\nThe company intends to file with the Commission a definitive proxy statement for the 1994 Annual Meeting of Stockholders pursuant to Regulation 14A not later than 120 days after December 31, 1993. The information called for by this Part III is incorporated by reference to that proxy statement.\nPART IV -------\nItem 14.","section_9A":"","section_9B":"","section_10":"","section_11":"","section_12":"","section_13":"","section_14":"Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K ---------------------------------------------------------------\n(a) The following documents are filed as part of this Report:\n1. The financial statements indexed on page of this Report.\n2. The financial statement schedules required to be filed by Item 8 will be filed as an amendment to this Report on or before April 29, 1994.\n3. The Exhibits listed below:\nThe company agrees to furnish to the Commission upon request copies of the Realty and Chattel Mortgage, dated as of March 1, 1965, made by Citizens Utilities Rural Company, Inc., to the United States of America (the Rural Electrification Administration and Rural Telephone Bank) and the Mortgage Notes which that mortgage secures; and the several subsequent supplemental Mortgages and Mortgage\nNotes; copies of the instruments governing the long-term debt of Louisiana General Services, Inc.; and copies of separate loan agreements and indentures governing various Industrial development revenue bonds.\nA Report on Form 8-K was filed as of December 20, 1993, transmitting Condensed Financial Statements as of September 30, 1993 and for the twelve month period then ended for certain of the individual GTE Telephone Properties listed below proposed to be acquired by Citizens Utilities Company.\n- Contel of New York, Inc. - Contel of West Virginia, Inc. - West Virginia Division GTE South, Inc. - Arizona Division Contel of the West, Inc. - Idaho Division Contel of the West, Inc. - Tennessee Division GTE South, Inc.\nA Report on Form 8-K was filed as of December 23, 1993 updating the initiatives of the Public Utility Commission of the State of California to open the California Telecommunications market to competition and pending stockholders' litigation.\nA Report on Form 8-K\/A was filed as of December 23, 1993, amending the Form 8-K filed December 15, 1993, to include the Reports of Independent Public Accountants.\nA Report on Form 8-K was filed as of December 31, 1993, transmitting a press release dated January 3, 1994, announcing the transfer of GTE's 189,000 access lines in southern Idaho, Tennessee, Utah and West Virginia to Citizens Utilities Company effective December 31, 1993, pursuant to agreements dated May 19, 1993.\nSIGNATURES ----------\nPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.\nCITIZENS UTILITIES COMPANY -------------------------- (Registrant)\nBy: \/s\/ Leonard Tow ------------------------ Leonard Tow Chairman of the Board; Chief Executive Officer; Chief Financial Officer; Member, Executive Committee and Director March 15, 1994\nPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on the 15th day of March 1994.\nSignature Title --------- -----\n\/s\/ Robert J. DeSantis Vice President and Treasurer - ------------------------------------------ (Robert J. DeSantis)\n\/s\/ Livingston E. Ross Vice President and Controller - ------------------------------------------ (Livingston E. Ross)\nNorman I. Botwinik* Member, Executive Committee and - ------------------------------------------ Director (Norman I. Botwinik)\nAaron I. Fleischman* Member, Executive Committee and - ------------------------------------------ Director (Aaron I. Fleischman)\nStanley Harfenist* Member, Executive Committee and - ------------------------------------------ Director (Stanley Harfenist)\nAndrew N. Heine* Director - ------------------------------------------ (Andrew N. Heine)\nElwood A. Rickless* Director - ------------------------------------------ (Elwood A. Rickless)\nJohn L. Schroeder* Director - ------------------------------------------ (John L. Schroeder)\nRobert D. Siff* Director - ------------------------------------------ (Robert D. Siff)\nRobert A. Stanger* Director - ------------------------------------------ (Robert A. Stanger)\nEdwin Tornberg* Director - ------------------------------------------ (Edwin Tornberg)\nClaire L. Tow* Director - ------------------------------------------ (Claire L. Tow)\n*By: \/s\/ Robert J. DeSantis -------------------------------------- (Robert J. DeSantis) Attorney-in-Fact\nCITIZENS UTILITIES COMPANY AND SUBSIDIARIES\nIndependent Auditors' Report\nThe Board of Directors and Shareholders Citizens Utilities Company:\nWe have audited the accompanying consolidated balance sheets of Citizens Utilities Company and subsidiaries as of December 31, 1993, 1992 and 1991, and the related consolidated statements of income, shareholders' equity, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.\nWe conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.\nIn our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Citizens Utilities Company and subsidiaries at December 31, 1993, 1992 and 1991, and the results of their operations and their cash flows for the years then ended, in conformity with generally accepted accounting principles.\nAs discussed in Notes 9 and 13 to the consolidated financial statements, the company has adopted Statements of Financial Accounting Standards No. 109, \"Accounting for Income Taxes\" and No. 106, \"Employers' Accounting for Postretirement Benefits Other Than Pensions\" effective January 1, 1993.\nKPMG Peat Marwick\nNew York, New York March 9, 1994\nCITIZENS UTILITIES COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1993, 1992 and 1991 (In thousands)\nThe accompanying Notes are an integral part of these Consolidated Financial Statements.\nCITIZENS UTILITIES COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE YEARS ENDED DECEMBER 31, 1993 (In thousands, except for per-share amounts)\nThe accompanying Notes are an integral part of these Consolidated Financial Statements.\nCITIZENS UTILITIES COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE THREE YEARS ENDED DECEMBER 31, 1993 (In thousands, except for per-share amounts)\nThe accompanying Notes are an integral part of these Consolidated Financial Statements.\nCITIZENS UTILITIES COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE YEARS ENDED DECEMBER 31, 1993 (In thousands)\nThe accompanying Notes are an integral part of these Consolidated Financial Statements.\nCITIZENS UTILITIES COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements\n(1) Summary of Significant Accounting Policies: ------------------------------------------ (a) Principles of Consolidation:\nThe Consolidated Financial Statements include the accounts of Citizens Utilities Company and all subsidiaries after elimination of intercompany balances and transactions. The Consolidated Balance Sheet at December 31, 1993, includes $469,487,000 of property, plant and equipment representing the GTE Telephone Properties acquired on December 31, 1993, in a purchase transaction (See Note 3 of Notes to Consolidated Financial Statements). Certain reclassifications of balances previously reported have been made to conform to current presentation.\n(b) Revenues:\nElectric, natural gas and water\/wastewater - The company records revenues from electric, natural gas and water\/wastewater customers when billed. These customers are billed on a cycle basis based on monthly meter readings. The company accrues unbilled revenues earned from the dates customers were last billed to the end of the accounting period.\nTelecommunications - The company records revenues from telecommunications services when earned. Revenues from local service are primarily derived from providing local telephone services. Revenues from long- distance service are derived from charges for access to the company's local exchange network, subscriber line charges and contractual arrangements. Certain toll and access services revenues are estimated under cost separation procedures that base revenues on current operating costs and investments in facilities to provide such services.\n(c) Construction Costs and Maintenance Expense:\nProperty, plant and equipment are stated at original cost, including general overhead and an allowance for funds used during construction (\"AFUDC\"). AFUDC represents the borrowing costs and a return on common equity of funds used to finance construction. AFUDC is capitalized as a component of additions to property, plant and equipment and is credited to income. AFUDC does not represent current cash earnings; however, under established regulatory rate- making practices, after the related plant is placed in service, the company is permitted to include in the rates charged for utility services a fair return on and depreciation of such AFUDC included in plant in service. The amount relating to equity is included in other income ($10,123,000, $6,398,000 and $7,250,000 for 1993, 1992 and 1991, respectively) and the amount relating to borrowings is a reduction of interest expense ($2,678,000, $1,805,000 and $2,045,000 for 1993, 1992 and 1991, respectively). The weighted average rates used to calculate AFUDC were 12%, 14% and 13% in 1993, 1992 and 1991, respectively. Maintenance and repairs are charged to operating expenses as incurred. The cost, net of salvage, of routine property dispositions is charged against accumulated depreciation.\nCITIZENS UTILITIES COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements\n(d) Depreciation Expense:\nDepreciation expense, calculated using the straight-line method, is based upon the estimated service lives of various classifications of property, plant and equipment and represented approximately 4% of the gross depreciable property, plant and equipment for 1993, 1992 and 1991.\n(e) Temporary Investments and Short-Term Debt:\nTemporary investments include investments in state and municipal securities held by the company which mature in 1994 and are to be used to partially finance the acquisition of the GTE Telephone Properties (see Note 3 of Notes to Consolidated Financial Statements). The fair value of temporary investments at December 31, 1993, was $93,438,000.\nShort-term debt outstanding, was issued in the form of commercial paper notes payable to temporarily and partially fund the GTE Telephone Properties acquired on December 31, 1993. This short-term debt had a weighted average interest rate of 3.26% at December 31, 1993 and is expected to be repaid from maturing temporary investments and proceeds from the planned issuance of equity securities in 1994. The fair value of short-term debt at December 31, 1993, was $380,000,000.\n(f) Investment in Centennial Cellular Corp.:\nThe company recorded its investment in Centennial Cellular Corp. Convertible Redeemable Preferred Stock (the \"Preferred Security\") and Class B Common Stock at the historical cost of the company's investment in Citizens Cellular Company. The terms of the Preferred Security provide that the Preferred Security accretes a liquidation value preference at a fixed dividend rate of 7.5%, compounded quarterly, on an initial liquidation value preference of $125,700,000 until the Preferred Security reaches a liquidation value preference of$186,000,000 on August 31, 1996. The company recognizes the non-cash accretion as it is earned in each period as investment income and increases the book value of its investment in Centennial by the same amount. On a quarterly basis, the company assesses whether the book value of the Preferred Security can be realized by comparing such book value to the market value of Centennial's common equity and by evaluating other relevant indicators of realizability, including Centennial's ability to redeem the Preferred Security. The book value of the Preferred Security would be deemed impaired to the extent that such book value exceeds the estimated realizability of the Preferred Security based on all existing facts and circumstances, including the company's assessment of its ability to realize the book value of the Preferred Security through mandatory redemption. (See Notes 3 and 5 of Notes to Consolidated Financial Statements)\n(g) Deferred Income Taxes and Investment Tax Credits:\nThe Financial Accounting Standards Board (\"FASB\") issued Statement of Financial Accounting Standards (\"SFAS\") No. 109, \"Accounting for Income Taxes,\" effective for fiscal years beginning after December 15, 1992. SFAS No. 109 required a change from the deferred to the liability method of computing deferred income taxes. The company adopted the provisions of SFAS No. 109 in 1993 without restating the prior years financial statements; there was no material effect of the adoption of SFAS No. 109 on net income in 1993. Adoption of SFAS No. 109 resulted in recording a net increase in the liability for deferred income taxes of $115,437,000. Such increase resulted principally from income tax benefits previously flowed through to customers and the allowance for funds used during construction; partially offsetting these items were the effects of tax law changes and the tax benefit associated with the unamortized deferred\nCITIZENS UTILITIES COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements\ninvestment tax credits. Due to the effects of utility regulation, the company recorded regulatory assets and liabilities of $143,813,000 and $28,376,000, respectively, as offsets to the increase in the deferred income taxes.\nPrior to the adoption of SFAS No. 109, deferred income taxes resulted from the tax effect of using accelerated depreciation methods and certain other timing differences between income reported on the Consolidated Financial Statements and taxable income reported on the company's income tax returns.\nThe investment tax credits relating to utility properties, as defined by applicable regulatory authorities, have been deferred and are being amortized to income over the life of the related properties.\n(h) Earnings Per Share:\nEarnings per share is based on the average number of outstanding shares. Earnings per share is presented for each series separately, with historical adjustment for stock dividends and stock splits for each series. The calculation has not been adjusted for the 1.1% stock dividend declared on February 8, 1994, because its effect is immaterial. The effect on earnings per share of the exercise of dilutive options is immaterial.\nCITIZENS UTILITIES COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements\n(2) Property, Plant and Equipment: ------------------------------\nThe components of property, plant and equipment at December 31, 1993, 1992 and 1991 are as follows:\n(3) Mergers and Acquisitions: -------------------------\nOn May 19, 1993, the company and GTE Corporation announced the signing of ten definitive agreements under which the company would purchase from GTE Corporation, for approximately $1,100,000,000 in cash, 500,000 local telephone access lines in nine states (\"the GTE Telephone Properties\"). These transactions require the approval of the Federal Communications Commission and the regulatory commissions of the nine states in which the properties are located. On December 31, 1993, 189,000 access lines in Idaho, Tennessee, Utah and West Virginia were transferred to the company. The remaining access lines are expected to be transferred during 1994. No revenues were recorded during 1993 since this acquisition was accounted for by the purchase method.\nThe following unaudited pro forma financial information presents the combined results of operations of the company and the GTE Telephone Properties acquired and to be acquired as if the acquisition had occurred at the beginning of the respective periods. The pro forma financial information does not necessarily reflect the results of operations that would have occurred had the company and the GTE Telephone Properties constituted a single entity during such periods.\nCITIZENS UTILITIES COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements\nIn 1993, the company separately acquired Natural Gas Company of Louisiana (\"NGL\") and Franklin Electric Light Company, Incorporated (\"Franklin\") by merger. In the mergers, the company issued 568,748 shares of Series B common stock for all of the common stock of NGL and Franklin, respectively. The acquisitions were accounted for as poolings of interests. Prior years' financial statements were not restated for the effects of these transactions because the amounts were not significant.\nOn December 3, 1991, the company acquired Southern Union Company's northern Arizona gas utility operations, which serve more than 65,000 customers, for a purchase price of $46,000,000. The purchase price was comprised of approximately $39,000,000 in cash, allocated to utility plant, and $7,000,000 in net liabilities assumed.\nOn August 30, 1991, the company and Century Communications Corp. (\"Century\") completed the merger of their respective interests in the cellular telephone field. The combination was effected through a merger of Citizens Cellular Company, a subsidiary of the company having an adjusted book value of $69,668,000, with and into Century Cellular Corp., a wholly owned subsidiary of Century Communications Corp. In connection with the merger, the company received Centennial Cellular Corp. (formerly Century Cellular Corp.) Convertible Redeemable Preferred Stock with an initial liquidation value preference of $125,700,000 and Class B Common Stock representing 12% of the currently outstanding common equity of Centennial Cellular Corp. These securities are included in the investments caption of the Consolidated Balance Sheets.\nIn March 1993, the company signed an agreement to purchase, through a joint venture with Century the assets of two cable television systems serving approximately 45,000 subscribers in California. The joint venture will pay a purchase price of up to approximately $89,000,000 for the systems and intends to enter into an agreement with Century pursuant to which Century will manage the systems. The purchase is subject to regulatory approval for the transfer of licenses and is expected to be consummated in 1994.\nThe chairman and chief executive officer of the company is also chairman and chief executive officer of Century Communications Corp.\n(4) Dispositions: -------------\nDuring 1993, the company disposed of its Santa Cruz County, Arizona water and wastewater properties, Idaho water property and Aalert Paging Company. The sale of the Santa Cruz properties yielded net proceeds of $1,694,000 and had a net investment of $94,000. The company received net proceeds of $1,221,000 from the sale of the Idaho water property and had a net investment of $1,249,000. The sale of Aalert Paging Company yielded net proceeds of $5,498,000 and had a net investment of $5,287,000. The resulting gains and losses are included in other income - net.\nDuring 1992, the company disposed of two water properties in California. One property was transferred to a municipality through condemnation proceedings. The company received net proceeds of $3,400,000 and had a net investment of $1,877,000. The other property was sold for net proceeds of $6,618,000; the company's net investment was $4,160,000. In December 1992, the company disposed of its Idaho electric operations. The company received $1,177,500 and had a net investment of $706,000. The resulting gains on dispositions are included in other income-net.\nCITIZENS UTILITIES COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements\n(5) Investments: -----------\nInvestments include high-grade, short- and intermediate-term fixed- income securities (primarily state and municipal debt obligations) and equity securities. Fixed-income securities are stated at cost. Marketable equity securities are stated at the lower of cost or market.\nThe company's investment in Centennial Cellular Corp. (See Note 3 of Notes to Consolidated Financial Statements) includes 102,187 Convertible Redeemable Preferred Shares and 1,367,099 Class B Common Shares. The liquidation value preference earned on the Convertible Redeemable Preferred Stock for 1993, 1992 and 1991 was $9,594,000, $8,803,000 and $2,563,000, respectively, and was recorded as investment income. The book value of the investment in Centennial at December 31, 1993, as presented in the table below, represents the historical book value of the investment of $69,668,000 ($19,826,000 of which relates to the Class B common shares) plus $20,960,000 of liquidation value preference earned on the Preferred Security by the company to date. The Preferred Security is mandatorily redeemable in the year 2007. The company believes it can realize its investment in Centennial either by cash redemption by the issuer funded through refinancing by the issuer, by temporary conversion to common equity securities followed by the sale of the common equity securities, or by sale of its current investment holdings.\nThe aggregate market value of marketable equity securities at December 31, 1993, was $27,492,000. Total unrealized gains on marketable equity securities at December 31, 1993 were $14,210,000. Net realized gains on marketable equity securities included in the determination of net income for the years 1993, 1992 and 1991, respectively, were $0, $259,000 and $670,000. The cost of securities sold was based on the actual cost of the shares of each security held at the time of sale. Marketable equity securities at December 31, 1993, includes 1,758,428 shares (adjusted for stock dividends) of Class A Common Stock of Century Communications Corp. These shares represent less than 2% of the total outstanding common stock of Century Communications Corp. The chairman and chief executive officer of the company is also chairman and chief executive officer of Century Communications Corp.\nThe components of investments at December 31, 1993, 1992 and 1991 are as follows:\nThe fair value of investments, presented as required by SFAS No. 107, was $501,273,000 and $649,366,000 at December 31, 1993 and 1992 respectively, based on relative market information about each financial instrument.\nCITIZENS UTILITIES COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements\n(6) Long-term Debt: ---------------\nCertain commercial paper notes payable have been classified as long-term debt because these obligations are expected to be refinanced ultimately through the issuance of long-term debt securities. The company has available lines of credit with commercial banks in the amounts of $1,000,000,000 and $200,000,000, which expire on December 14, 1994 and December 16, 1996, respectively, and have associated facility fees of one-twentieth of one percent per annum and one- twelfth of one percent per annum, respectively. The terms of the lines of credit provide the company with certain extension options.\nThe total principal amounts of industrial development revenue bonds at December 31, 1993, 1992 and 1991, respectively, were $377,890,000, $274,030,000 and $264,030,000. Amounts presented in the preceding table have been reduced by funds held by trustees to be used for payment of qualifying construction expenditures. Holders of certain industrial development revenue bonds may tender at par prior to maturity. The next tender date is August 1, 1997, for $30,350,000 of principal amount of bonds.\nIn the years 1993, 1992 and 1991, respectively, interest payments were $40,217,000, $37,913,000 and $34,645,000.\nThe fair value of long-term debt, presented as required by SFAS No. 107 at December 31, 1993 and 1992, respectively, was $602,710,000 and $550,724,000, based on relative market information and information about each financial instrument.\nCITIZENS UTILITIES COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements\nThe installment principal payments and maturities of long-term debt for the next five years are as follows:\n(7) Capital Stock: --------------\nThe common stock of the company is in two series, Series A and Series B. The company is authorized to issue up to 200,000,000 shares of Series A common stock and 300,000,000 shares of Series B common stock. Quarterly stock dividends are declared and issued at the same rate on both Series A and Series B. The series differ in that, since 1992, Series B shareholders have the option of enrolling in the \"Series B Common Stock Dividend Sale Plan.\" The Plan offers Series B shareholders the opportunity to have their stock dividends sold quarterly by the Plan Broker and the net cash proceeds of the sale distributed to them quarterly. Series A shares are convertible share-for-share into Series B shares. Series B shares, however, are not convertible into Series A. In all other respects, the shares of both series have the same voting rights and participate ratably in liquidation.\nOn April 14, 1992, the company declared a 3-for-2 stock split of its Series A and Series B common stock. The stock split was distributed on July 24, 1992, to shareholders of record on July 1, 1992. On May 21, 1993, the company declared a 2-for-1 stock split of its Series A and Series B common stock. The stock split was distributed on August 31, 1993, to shareholders of record on August 16, 1993. Quarterly stock dividend rates declared on Series A and Series B common stock are based upon cash equivalent rates and share market prices, and have been as follows:\nAnnualized stock dividend cash equivalent rates considered by the company's Board of Directors in establishing the stock dividends during 1993, 1992 and 1991, respectively, were $0.745, $0.675 and $0.585 per share (adjusted for subsequent stock dividends and stock splits).\nCITIZENS UTILITIES COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements\nThe activity in shares of outstanding common stock for Series A and Series B during 1993, 1992 and 1991 is summarized as follows:\nThe company used 7,000 Series B shares (not adjusted for subsequent stock dividends and stock split) acquired from employees pursuant to the Management Equity Incentive Plan (\"MEIP\") in partial payment of the 1993 stock dividend. These shares had a cost of $215,000. The company purchased 93,000 Series B shares (not adjusted for subsequent stock dividends and stock splits) at a cost of $2,558,000 for use in partial payment of the 1991 stock dividend.\nThe company has 50,000,000 authorized shares of preferred stock ($.01 par), none of which has been issued. The preferred stock may be issued by the Board of Directors (without further approval by shareholders) in one or more series, having such attributes as may be designated by the Board of Directors at the time of issuance.\n(8) Employee Stock Plans: --------------------\nOn June 22, 1990, shareholders approved the Citizens Utilities Company Management Equity Incentive Plan (\"MEIP\"). Under the MEIP, awards of the company's Series A or Series B common stock may be granted to eligible officers and other management employees of the company and its subsidiaries in the form of incentive stock options, non-qualified stock\nCITIZENS UTILITIES COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements\noptions, stock appreciation rights, restricted stock or other stock-based awards. The MEIP is administered by the Compensation Committee of the Board of Directors.\nThe maximum number of shares of common stock which may be issued pursuant to awards at any time is 5% of the company's common stock outstanding from time to time; provided that no more than 8,147,000 shares (adjusted for stock dividends and stock splits) will be issued pursuant to incentive stock options under the MEIP. No awards will be granted more than ten years after the effective date of the MEIP. The exercise price of stock options and stock appreciation rights (\"SARs\") shall be equal to or greater than the fair market value of the underlying common stock on the date of grant. Stock options are generally not exercisable on the date of grant but vest over a period of time.\nSome options were awarded in tandem with related SARs. SARs provide the MEIP participant with the alternative of electing not to exercise the related stock option, but to receive instead an amount in cash or in common stock equal to the difference between the option price and the fair market value of the common stock on the date the SAR is exercised. Either the SAR or the related option may be exercised, but not both. During 1993, there were no SARs granted. During 1992, 613,000 SARs were exercised at an average exercise price of $12.21 per share (not adjusted for subsequent stock dividends and stock splits). This resulted in the cancellation of the 613,000 tandem stock options. At December 31, 1993 and 1992, no SARs were outstanding.\nUnder the terms of the MEIP, subsequent stock dividends and stock splits have the effect of increasing the option shares outstanding, which correspondingly decreases the average exercise price of outstanding options. The following summary of shares subject to option under the MEIP reflects the original options granted at original option prices adjusted for subsequent stock splits.\nCITIZENS UTILITIES COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements\n* Represents adjustment to outstanding option shares to reflect stock dividends.\nDuring 1993 and 1992, the company granted restricted stock awards to key employees in the form of the company's Series B common stock. The number of Series B shares issued as restricted stock awards during 1993 and 1992 was 142,000 and 754,000, respectively (adjusted for stock dividends and stock splits). None of the restricted stock awards may be sold, assigned, pledged or otherwise transferred, voluntarily or involuntarily, by the employee. The restrictions lapse on 20% of the restricted stock awards each year over a five- year period. At December 31, 1993, 701,000 shares (adjusted for stock dividends and stock splits) of restricted stock were outstanding.\nThe company's Employee Stock Purchase Plan (\"ESP Plan\") was approved by shareholders on June 12, 1992 and amended on May 21, 1993. Under the ESP Plan, eligible employees of the company and its subsidiaries may subscribe to purchase shares of Series B common stock at the lower of 85% of the average market price on the first day of the purchase period or on the last day of the purchase period. An employee may elect to have up to 20% of annual base pay withheld in equal installments throughout the designated payroll-deduction period for the purchase of shares. The value of an employee's subscription may not exceed $25,000 in any one calendar year. As of December 31, 1993, there are 1,217,000 shares (adjusted for stock dividends and stock splits) of Series B common stock reserved for issuance under the ESP Plan. These shares will be adjusted for any future stock dividends or stock splits. The ESP Plan will terminate when all 1,217,000 shares reserved have been subscribed for, unless terminated earlier by the Board of Directors. The ESP Plan is administered by a committee of the Board of Directors. As of January 1, 1993, the number of employees participating in the ESP Plan was 1,058 and the number of shares subscribed for was 182,000 at a price of $11.63 per share (which reflects the 15% discount and is adjusted for stock dividends and stock splits).\nCITIZENS UTILITIES COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements\n(9) Income Taxes: ------------ The following is a reconciliation of the provision for income taxes at federal statutory rates to the reported provision for income taxes:\nFor 1993, 1992 and 1991, accumulated deferred income taxes amounted to $194,165,000, $72,969,000 and $83,157,000, respectively, and the unamortized deferred investment tax credits amounted to $19,306,000, $22,253,000 and $24,610,000, respectively. Income taxes paid during the year were $24,139,000, $22,798,000 and $29,309,000 for 1993, 1992 and 1991, respectively.\nCITIZENS UTILITIES COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements\nThe components of the net deferred tax liability at December 31, 1993 are as follows:\n* There was no change in the valuation allowance during 1993.\nThe provision for federal and state income taxes includes amounts both payable currently and deferred for payment in future periods. The company and its subsidiaries are included in a consolidated federal income tax return using a calendar year reporting period.\nCITIZENS UTILITIES COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements\n(10) Segment Information: --------------------\n*$469,487,000 of which constitutes a portion of the GTE Telephone Properties. These properties were acquired on December 31, 1993, in a transaction accounted for under the purchase method.\nCITIZENS UTILITIES COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements\n(11) Quarterly Financial Data (unaudited): ------------------------------------\n(12) Supplemental Cash Flow Information: ----------------------------------\nSchedule of net cash provided by operating activities for the years ended December 31,\nCITIZENS UTILITIES COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements\n(13) Pension and Retirement Plans: ----------------------------\nThe company and its subsidiaries have noncontributory pension plans covering all employees who have met certain service and age requirements. The benefits are based on years of service and final average pay or pay rate. Contributions are made in amounts sufficient to fund the plans' current service costs and to provide for benefits expected to be earned in the future. Plan assets are invested in a diversified portfolio of equity and fixed-income securities.\nPension costs for 1993, 1992 and 1991 include the following components:\nAssumptions used in the computation of pension costs and the actuarial present value of projected benefit obligations included the following:\nAs of December 31, 1993, 1992 and 1991, respectively, the fair values of plan assets were $73,233,000, $68,506,000 and $63,654,000. The actuarial present values of the accumulated benefit obligations were $57,216,000, $48,661,000 and $44,513,000 for 1993, 1992 and 1991, respectively. The actuarial present values of the vested accumulated benefit obligation for 1993, 1992 and 1991, respectively, were $54,591,000, $46,819,000 and $43,484,000. The total projected benefit obligations for 1993, 1992 and 1991, respectively, were $75,531,000, $63,199,000 and $62,915,000. The company has agreed to assume the pension liabilities associated with employees of the GTE Telephone Properties acquired on December 31, 1993. GTE Corporation has agreed to transfer to the company plan assets in an amount equal to the assumed liabilities. Such amounts will be determined in 1994.\nThe company provides certain medical, dental and life insurance benefits for retired employees and their beneficiaries and covered dependents. In January 1993, the company implemented SFAS No. 106, \"Employers' Accounting for Postretirement Benefits Other than Pensions\". SFAS No. 106 requires the company to accrue the expected costs of\nCITIZENS UTILITIES COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements\nproviding postretirement benefits to employees and to employees' beneficiaries and covered dependents, during the years the employee renders the necessary service. The company's 1993 annualized costs were approximately $3,671,000, of which approximately $1,601,000 were recorded as regulatory assets for states whose regulatory commissions to date have not but will likely allow recovery of accrued costs in future rate proceedings. The company's accumulated postretirement benefit obligation at December 31, 1993, was approximately $24,000,000. The company's annual cost includes 20-year prospective recognition of the transition obligation. The company is currently assessing the costs and benefits of alternative funding methods. For measurement purposes, the company used a 7.5% discount rate and a 9% annual rate of increase in the per capita cost of covered health care benefits, gradually decreasing to 6% in the year 2030 and remaining at that level thereafter. The effect of a 1% increase in the assumed health care cost trend rates for each future year on the aggregate of the service and interest cost components of the total postretirement benefit cost would be $314,000 and the effect on the accumulated postretirement benefit obligation for health benefits would be $2,609,000.\nThe components of the net periodic postretirement benefit cost for the year ended December 31, 1993, is as follows:\nThe following table sets forth the accrued postretirement benefit cost recognized in the company's balance sheet at December 31, 1993:\nCITIZENS UTILITIES COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements\n(14) Commitments and Contingencies: ------------------------------\nThe company has budgeted expenditures for facilities in 1994 of approximately $280,000,000 and certain commitments have been entered into in connection therewith. On May 19, 1993, the company and GTE Corporation announced the signing of ten definitive agreements under which the company would purchase from GTE Corporation, for approximately $1,100,000,000 in cash ($469,487,000 of the total purchase price has been paid to date), 500,000 access lines in nine states. These transactions are consistent with the company's growth strategy, will enable the company to achieve operating economies of scale and will increase the company's annual revenues to more than $1,000,000,000 once the operations are fully integrated. These transactions require the approval of the Federal Communications Commission and the regulatory commissions of the nine states in which the properties are located. On December 31, 1993, 189,000 access lines in Idaho, Tennessee, Utah and West Virginia were transferred to the company. The remaining access lines are expected to be transferred during 1994.\nCITIZENS UTILITIES COMPANY EXHIBITS TO FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1993","section_15":""}
{"filename":"71691_1993.txt","cik":"71691","year":"1993","section_1":"ITEM 1. BUSINESS.\nINTRODUCTION\nThe New York Times Company (the \"Company\") was incorporated on August 26, 1896, under the laws of the State of New York. The Company is engaged in diversified activities in the communications field. The Company also has substantial equity interests in two Canadian newsprint companies and a Maine supercalendered paper manufacturing partnership.\nOn October 1, 1993, a wholly owned subsidiary of the Company was merged with Affiliated Publications, Inc. (\"API\"), the parent company of The Boston Globe, which became a wholly owned subsidiary of the Company. (See Note 2 of Notes to Consolidated Financial Statements and \"Newspapers--The Boston Globe\".)\nThe Company currently classifies its businesses into the following segments:\nNewspapers: The New York Times (\"The Times\"); The Boston Globe, a daily newspaper, and the Boston Sunday Globe (both editions, \"The Globe\"); 23 other daily and five non-daily newspapers in Alabama, California, Florida, Kentucky, Louisiana, Maine, Mississippi, North Carolina, South Carolina and Tennessee (\"Regional Newspapers\"); a newspaper wholesaler in the New York City metropolitan area; and a one-half interest in the International Herald Tribune.\nMagazines: Family Circle, McCall's, American HomeStyle, Child, Fitness, Custom Builder, Golf Digest, Golf World (U.S.), Golf World (U.K.), Golf Shop Operations, Golf World Industry News (U.K.), Golf Weekly (U.K.), Tennis, Tennis Buyer's Guide, Cruising World, Sailing World, Sailing Business, Snow Country and Ski Business.\nBroadcasting\/Information Services: television stations WREG-TV in Memphis, Tennessee, WNEP-TV in Wilkes-Barre\/Scranton, Pennsylvania, WHNT-TV in Huntsville, Alabama, WQAD-TV in Moline, Illinois, and KFSM-TV in Fort Smith, Arkansas; radio stations WQXR (FM) and WQEW (AM) in New York City; news, photo and graphics services and news and features syndication; TimesFax; The New York Times Index; and licensing of electronic data bases and microform, CD-ROM products and the trademarks and copyrights of The Times.\nSUMMARY OF SEGMENT INFORMATION\nIn 1993 the Company's consolidated revenues increased to $2,019,654,000 from $1,773,535,000 in 1992, due principally to the October 1, 1993 acquisition of The Globe, the June 1992 acquisition of two wholesale newspaper distribution businesses and higher advertising and circulation revenues. The Company's net income in 1993 was $6,123,000, or $.07 per share, compared with a net loss of $44,709,000, or $.57 per share, in 1992. The 1993 net income includes pre-tax charges aggregating $35,400,000, or $.23 per share, to cover severance and related costs resulting from anticipated white-collar and composing room staff reductions at The Times and an after-tax noncash charge of $47,000,000, or $.56 per share, to write down the Company's investment in its Forest Products Group to reflect current operating conditions and economic factors in the industry. The 1992 loss includes an after-tax charge of $33,437,000, or $.43 per share, related to the net cumulative effect of adopting three accounting changes in 1992 and a pre-tax loss of $53,768,000, or $.47 per share, due to the closing of The Gwinnett (Georgia) Daily News, the sale of its residual assets and its 1992 operations. A summary of segment information for the three years ended December 31, 1993, is set forth on pages and of this Form 10-K. Also see \"Management's Discussion and Analysis\" on pages through of this Form 10-K.\nAs part of the API merger, the Company acquired a one-third interest in BPI Communications, L.P. (\"BPI\"), a publisher of speciality magazines including Billboard and Hollywood Reporter. In February 1994 BPI was sold and the Company received approximately $53,000,000 for its interest. The Company expects to receive additional payments of approximately $2,000,000 later in the year. (See Note 2 of Notes to Consolidated Financial Statements.)\nThe Company's largest source of revenues is advertising, which influences the pattern of the Company's quarterly consolidated revenues and is seasonal in nature. Traditionally second-quarter and fourth-quarter advertising volume is higher than that which occurs in the first quarter. Advertising volume tends to be lower in the third quarter primarily because of the summer slow-down in many areas of economic activity. In addition, quarterly trends are affected by the overall economy and economic conditions that may exist in specific markets served by the Company's business segments.\nNEWSPAPERS\nThe Newspaper Group had revenues of $1,537,934,000 in 1993, compared with $1,306,952,000 in 1992, and an operating profit of $114,332,000 in 1993, compared with $81,173,000 in 1992. Exclusive of the special items discussed in more detail in \"Management's Discussion and Analysis\" on pages and of this Form 10-K, operating profit of the Newspaper Group increased to $150,832,000 in 1993 from $129,073,000 in 1992. Improvements in operating profit were mainly due to inclusion of the results of The Globe since the October 1, 1993 acquisition date, higher advertising and circulation revenues, cost controls throughout the Group and cost savings related to The Times's Edison facility. Advertising weakness at the Company's two California regional newspapers and higher depreciation and newsprint prices partially offset the higher results.\nTHE NEW YORK TIMES CIRCULATION\nThe Times, a standard-size weekday and Sunday newspaper which commenced publication in 1851, is circulated in each of the 50 states and the District of Columbia and worldwide. Approximately 64% of the weekday (Monday through Friday) circulation is sold in the 31 counties that make up the greater New York City area which includes New York City, Westchester and parts of upstate New York, Connecticut and New Jersey; 36% is sold elsewhere. On Sundays approximately 63% of the circulation is sold in the greater New York City area and 37% elsewhere. According to reports of the Audit Bureau of Circulations (\"ABC\"), an independent agency that audits the circulation of most U.S. newspapers and magazines on an annual basis, for the semi-annual period ended September 30, 1993, of all seven-day United States newspapers, The Times's daily and Sunday circulations were the largest.\nThe Times's average weekday and Sunday circulations for the five 12-month periods ended September 30, 1993, as audited by ABC (except as indicated), are shown in the table below.\nDuring the year ended December 31, 1993, the average weekday circulation of The Times increased by approximately 1,700 copies to 1,179,000 copies and the average Sunday circulation of The Times increased by approximately 17,100 copies to 1,781,200 copies. Approximately 52% of the weekday circulation and 42% of the larger Sunday circulation were sold through home and office delivery; the remainder were sold primarily on newsstands.\nThe suggested newsstand price of The Times within the New York City metropolitan area is $.50 on weekdays and $2.00 on Sunday. The suggested newsstand price in the New England-Middle Atlantic states outside the New York City metropolitan area is $.75 on weekdays and $2.00 on Sundays. The suggested newsstand price of the National Edition, distributed throughout the rest of the country, is $.75 on weekdays and $3.50 on Sundays, except that, effective January 10, 1994, the suggested\nnewsstand price of the National Edition in 11 southwest and southeast states and the Caribbean is $1.00 on weekdays.\nADVERTISING\nThe Times published 77,787,000 lines of advertising in 1993, compared with 77,012,000 lines in 1992. Both figures include part-run linage, which totaled 21,728,000 lines in 1993, compared with 20,574,000 lines in 1992.\nTotal linage in The Times for the five years ended December 31, 1993, as measured by Leading National Advertisers Incorporated (\"LNA\"), an independent agency that measures advertising volume, is shown in the table below. The \"National\" heading in the table below includes such categories as automotive, financial and general advertising.\nThe table includes linage for The New York Times Magazine, which published 2,857 pages of advertising in 1993, compared with 2,742 pages in 1992.\nAdvertising rates for The Times increased an average of 5% in January 1993 and in January 1994.\nPRODUCTION\nExcept for The New York Times Magazine, the Television section, the National Edition and certain supplements, The Times is currently produced at its New York City production facility and a newly-operational production and distribution facility in Edison, New Jersey.\nThe Times is fully photocomposed, and all news is processed through electronic editing terminals and photocomposition equipment that produce text at a rate of up to 3,000 lines per minute. Page images are reproduced on lightweight printing plates through the use of negatives that are produced by laser beams scanning paste-ups. The page images are transmitted by direct wire to the platemaking room in the Manhattan facility and by a combination of microwave and satellite transmission from the composing room in the Manhattan facility to the platemaking room in Edison and each of the eight National Edition printing sites around the country.\nThe new Edison facility, which recently replaced an older production facility in Carlstadt, New Jersey, prints all the advance sections of the Sunday newspaper (except The New York Times Magazine and the Television section) and approximately one-third of the weekday New York edition. The Edison facility houses six 10-unit Goss Colorliner presses as well as modern, automated packaging and distribution equipment. No decision has been made as to the disposition of the Carlstadt plant, which was closed in February 1993. During 1993 The Times began printing some of its advance Sunday sections at Edison in color; it expects to add at least two color sections in 1994.\nThe National Edition of The Times is distributed from eight printing sites: in the Midwest from printing sites in Chicago, Illinois, and Warren, Ohio; in the West from printing sites in Torrance and Walnut Creek, California, and Tacoma, Washington; in the Southwest from a printing site in Austin, Texas; and in the Southeast from printing sites in Atlanta, Georgia, and Ft. Lauderdale, Florida. Satellite transmission of page images to the National Edition printing sites permits early-morning delivery to homes and newsstands in many major markets.\nIn June 1992 the Company acquired two wholesale newspaper distribution businesses that distribute The Times and other newspapers and periodicals in New York City and central and northern New Jersey. (See Note 2 of Notes to Consolidated Financial Statements.) These wholesalers operate under the name of City & Suburban Delivery Systems. Approximately 46% of The Times's daily circulation and 40% of its Sunday circulation in the New York City metropolitan area are delivered to retail outlets and home delivery depots through these wholesale operations.\nThe Times has an agreement with R.R. Donnelley & Sons Company to print The New York Times Magazine through December 1999 and an agreement with KTB Associates, Inc. to print the Television section through February 1998.\nIn 1993 The Times used approximately 301,000 metric tons of newsprint, which was purchased primarily under long-term contracts from both related and unrelated suppliers (see \"Forest Products Companies\"). The New York Times Magazine used approximately 21,000 metric tons of supercalendered paper, an intermediate grade of magazine quality paper, in 1993. This supercalendered paper was purchased under long-term contracts from both related (see \"Forest Products Companies\") and unrelated suppliers. The Times and The New York Times Magazine are not dependent on any one supplier.\nTHE BOSTON GLOBE\nThe Company acquired The Globe on October 1, 1993, pursuant to a merger of a wholly owned subsidiary of the Company into API. The Globe is owned and published by an API subsidiary, Globe Newspaper Company (as used herein, \"The Globe\" may also be used to refer to Globe Newspaper Company).\nCIRCULATION\nThe Globe is distributed throughout New England, though its circulation is concentrated in the Boston metropolitan area. According to ABC reports, as of September 30, 1993, the daily circulation of The Globe was the 12th largest of any daily newspaper, and circulation of the Sunday edition was the 9th largest of any Sunday newspaper published in the United States; and its daily and Sunday circulation was the largest of all newspapers published in either Boston or New England.\nDuring the year ended December 26, 1993, the average weekday circulation of The Globe decreased by approximately 3,300 copies to 504,600 copies and the average Sunday circulation increased by approximately 2,700 copies to 814,500 copies. Approximately 68% of The Globe's total daily circulation and 54% of The Globe's total Sunday circulation were sold through home or office delivery; the remainder were sold primarily on newsstands.\nWithin the 30-mile-radius of Boston, the newsstand price of the daily edition of The Globe during 1993 was $.35. The newsstand price for copies sold more than 30 miles from Boston was $.50. The newsstand price of the Sunday edition of The Globe was $1.50. The seven-day home delivery price for the newspaper was $4.00.\nThe following table shows the average weekday and Sunday paid circulation of The Globe for the editions and the periods indicated.\n- ---------------\n* Per audit report of ABC.\n** As submitted by The Globe to ABC.\nADVERTISING\nThe Globe's total advertising volume by category of advertising for the year ended December 31, 1993 for all editions, as measured by The Globe, is set forth below:\nAdvertising rates in each category of advertising were adjusted in 1993. The latest increase in retail advertising rates occurred on January 1, 1994. Increases in national and classified advertising rates occurred effective July 1, 1993 and August 1, 1993, respectively. These increases ranged from 2.1% to 4.5%.\nPRODUCTION\nAll editions of The Globe are printed and prepared for delivery at its main Boston plant or its Billerica, Massachusetts, satellite plant. Both of the plants use Goss Metroliner offset presses. The Boston plant has a comprehensive computerized information system utilizing terminals for entering news and advertising copy into its phototext setting equipment. The data for printing The Globe at the Billerica plant are delivered by dedicated telephone lines.\nIn June 1992, The Globe purchased a 126,000 square foot building in Westwood, Massachusetts, which became operational as a Sunday pre-print storage, inserting and packaging plant in the fall of 1993.\nVirtually all of The Globe's home-delivered circulation is delivered through The Globe's distribution subsidiary, Community Newsdealers Inc.\nIn 1993, The Globe used approximately 128,000 metric tons of newsprint. The major portion was purchased under long-term contracts with unrelated suppliers; The Globe is not dependent on any one supplier.\nREGIONAL NEWSPAPERS\nThe Company currently owns 23 daily and five non-daily smaller-city newspapers.\nThe regional daily newspapers achieved circulation gains for the year ended December 31, 1993, as weekday circulation increased 4,500 copies to 851,000 copies and Sunday circulation increased 9,200 copies to 853,700 copies; the circulation of the non-dailies decreased 500 copies to 72,700 copies. Advertising volume, stated on the basis of six columns per page, was 35,163,700 inches in 1993, compared with 33,854,000 inches in 1992. The circulation gains and the advertising volume exclude the 1992 circulation and advertising volume of The Gwinnett (Georgia) Daily News, which the Company closed in September 1992. The circulation and advertising volume include the two weekly Georgia newspapers sold at year-end, The Forsyth County News (Cumming) and The Winder News (Winder). (See Note 2 of Notes to Consolidated Financial Statements.)\nAll of the Regional Newspapers are produced by photocomposition and offset printing. In 1993 the Regional Newspapers used approximately 99,000 metric tons of newsprint, which was purchased under long-term contracts from both related (see \"Forest Products Companies\") and unrelated suppliers. The Regional Newspapers are not dependent on any one supplier.\nINTERNATIONAL HERALD TRIBUNE S.A.\nThe Company owns a one-half interest in the International Herald Tribune S.A., which publishes the International Herald Tribune. The newspaper is edited in Paris and printed simultaneously in Paris, London, Zurich, Hong Kong, Singapore, The Hague, Marseille, Tokyo, Rome, Frankfurt and New York. The other one-half interest is owned by The Washington Post Company.\nMAGAZINES\nThe Company's Magazine Group had revenues of $394,463,000 in 1993, compared with $386,120,000 in 1992, and operating profit of $12,330,000 in 1993, compared with $9,929,000 in 1992. Exclusive of the amortization costs associated with the acquisitions of McCall's and Golf World (U.S.), which were structured to maximize cash flow, the Group's operating profit was $25,400,000 in 1993, which is equal to 1992. Continuing softness in advertising in the consumer packaged goods category in the women's magazines field continues to affect the Group adversely.\nAll of the Company's magazines are printed under long-term contracts with unrelated printers. In 1993 the magazines used approximately 78,000 metric tons of coated paper, all of which was purchased from unrelated suppliers under long-term contracts.\nWOMEN'S MAGAZINES\nAs of December 31, 1993, NYT Women's Magazines published the magazines listed in the chart below:\n- ---------------\n(1) As reported by the publisher to ABC or the Business Publications Association (\"BPA\").\n(2) Formerly called Decorating Remodeling. Six ancillary publications were published in 1993: Home Plans (four times a year), Kitchen Plans (two times a year), Build It, Build It Ultra, Weekend Decorator, Weekend Remodeler. The Ratebase for American HomeStyle increased from 675,000 to 700,000 in January 1994.\n(3) Four ancillary publications were published in 1993: Organized Parent, Organized Pregnancy, Having a Baby, Child's Guide to Baby Products. The Ratebase for Child increased from 600,000 to 650,000 in January 1994.\n(4) As reported by the publisher to Publisher's Information Bureau (\"PIB\"); or, in the case of Custom Builder, as calculated by the publisher using the same methodology as for PIB.\n(5) The Ratebase increased from 400,000 to 500,000 in January 1994.\nIn 1993, NYT Women's Magazines also published 14 Special Interest Publications on such topics as Christmas, food and shelter.\nSPORTS\/LEISURE MAGAZINES\nAs of December 31, 1993, NYT Sports\/Leisure Magazines published the magazines listed in the chart below:\n- --------------- (1) As reported by the publisher to ABC or BPA.\n(2) As reported by the publisher to PIB; or, in the case of trade publications, as calculated by the publisher using the same methodology as for PIB.\n(3) As provided by publisher.\nBROADCASTING\/INFORMATION SERVICES\nBroadcasting\/Information Services had revenues of $87,257,000 in 1993, up from $80,463,000 in 1992, and an operating profit of $19,403,000 in 1993, compared with $14,766,000 in 1992. Higher local advertising revenues at the Company's television stations accounted for the improved results.\nBROADCASTING\nThe Company's television and radio stations are operated under licenses from the Federal Communications Commission (\"FCC\") and are subject to FCC regulations. Each television station's license is for a five-year term. The licenses for WREG-TV (Memphis, Tenn.), WHNT-TV (Huntsville, Ala.), WQAD-TV (Moline, Ill.) and KFSM-TV (Fort Smith, Ark.) will expire in 1997. The license of WNEP-TV (Wilkes-Barre\/Scranton, Pa.) will expire on August 1, 1994. The Company expects this license to be renewed.\nAll of the television stations have three principal sources of revenue: local advertising sold to advertisers in the immediate geographic areas of the stations, national spot advertising and compensation paid by the networks for carrying commercial network programs. WREG-TV, WHNT-TV and KFSM-TV are affiliated with the CBS Television Network and WNEP-TV and WQAD-TV are affiliated with the ABC Television Network.\nWREG-TV, WQAD-TV and KFSM-TV are in the VHF band; WNEP-TV and WHNT-TV are in the UHF band, as are all other stations in their markets. According to A. C. Nielsen Company, Memphis is the 42nd largest television market in the United States, Wilkes-Barre\/Scranton is the 47th largest market, Huntsville is the 87th largest market, Moline is part of the Quad Cities market, the 88th largest, and Fort Smith is the 118th largest market.\nThe Company's two radio stations serve the New York metropolitan area. WQXR (FM) is currently the only commercial classical music station serving this market. WQEW (AM) is the only station that offers a format of American popular standards for the market. Applications for renewal of the FCC licenses for both stations for the seven-year terms starting June 1, 1991, are pending. Although the National Hispanic Media Coalition has filed an opposition to the radio stations' license renewals, the Company expects its licenses to be renewed.\nINFORMATION SERVICES\nThe New York Times Syndication Sales Corporation (\"Syndication Sales\") operates The New York Times News Service, Special Features and the licensing and reprint permission operations of The Times. The News Service transmits articles, graphics and photographs from The Times to approximately 650 newspapers and magazines in the United States and in 53 countries worldwide. Special Features markets other supplemental news services and feature material, graphics and photographs from The Times and other leading news sources to newspapers and magazines around the world.\nIn 1993 the Company continued to expand its distribution of TimesFax, a six- to eight-page synopsis of The Times delivered to customers' facsimile machines or personal computers in markets where The Times is not easily available. In addition to distribution by satellite to cruise ships and U.S. Navy vessels, TimesFax is distributed to hotels, governments and corporations in over 50 countries and territories. In 1993 the Company launched its first industry specific fax product: The Monday Media edition, a six-page synopsis of media-related news, is produced weekly and distributed to media and advertising executives.\nThrough its Index department and Times On-Line Services, Inc., the Company creates The New York Times Index and computer-retrievable data bases. The Company licenses Mead Data Central, Inc. to store, market and distribute its on-line computer data bases and University Microfilms, Inc. to produce and sell The New York Times Index and The Times on microform and CD-ROM. The Company has entered into license agreements which will make material from The Times available online on the day of publication through Dow Jones Business Information Services and America Online beginning in the first half of 1994.\nFOREST PRODUCTS COMPANIES\nThe Company has equity interests in two Canadian newsprint companies, Donohue Malbaie Inc. (\"Malbaie\"), and Gaspesia Pulp and Paper Company Ltd. (\"Gaspesia\"), and in a partnership operating a supercalendered paper mill in Maine, Madison Paper Industries (\"Madison\") (collectively, the \"Forest Products Companies\"). None of these companies' debt is guaranteed by the Company. Exclusive of the $47,000,000 noncash charge to write down the Company's investment in the Forest Products Group (see \"Summary of Segment Information\"), the Company's equity in operations (an after-tax amount) of these businesses in 1993 was a loss of $4,852,000 compared with a loss of $8,718,000 in 1992. Softness due to oversupply is continuing. The improved year over year results are due principally to lower newsprint discounts and a favorable Canadian exchange rate.\nThe Company has a 49% equity interest in Malbaie. The other 51% is owned by Donohue, Inc. (\"Donohue\"), a publicly traded Canadian company whose voting shares are controlled by Quebecor, a Canadian publishing company. Malbaie purchases pulp from Donohue and manufactures newsprint from this raw material on the paper machine it owns within the Donohue paper mill at Clermont, Quebec. Malbaie is wholly dependent upon Donohue for its pulp. The production capacity for 1993 of Malbaie was 196,000 metric tons. In 1993 Malbaie produced 192,000 metric tons of newsprint, 82,000 tons of which were sold to the Company with the balance sold to Donohue for resale.\nThe Company has a 49% equity interest in Gaspesia. The other 51% is owned by Abitibi-Price Inc. (\"Abitibi\"), a publicly traded Canadian company. Gaspesia produces newsprint at Chandler, Quebec, on the southern coast of the Gaspe Peninsula. Gaspesia has cutting rights on approximately 2,500 square miles of forest under a license from the Province of Quebec. It also purchases wood from local jobbers and farmers. The production capacity for 1993 of Gaspesia was 256,000 metric tons. Under the terms of the Company's agreement with Abitibi, all of Gaspesia's production is purchased by Abitibi for resale to the Company and other customers. The Company has a long-term newsprint purchase agreement with Abitibi, pursuant to which it purchased 133,000 tons of newsprint from Abitibi in 1993. The Company includes all of this newsprint as affiliated tonnage when calculating how much newsprint the Company purchases from affiliated companies.\nMadison is a partnership between Northern SC Paper Corporation (\"Northern\") and a subsidiary of Myllykoski Oy, a Finnish papermaking company. The Company owns 80% of Northern, and Myllykoski Oy, through a subsidiary, owns the remaining 20%. Madison produces supercalendered paper at its facility in Madison, Maine. Madison purchases all its wood from local suppliers, mostly under long-term contracts. Madison's production capacity for 1993 was 170,000 metric tons, 10,050 tons of which were sold to the Company. In 1994 Madison's five largest customers, one of which is the Company, are expected to purchase approximately 68% of Madison's budgeted production.\nThe Forest Products Companies are subject to comprehensive environmental protection laws, regulations and orders of provincial, federal, state and local authorities of Canada or the United States (the \"Environmental Laws\"). The Environmental Laws impose effluent and emission limitations and require the Forest Products Companies to obtain, and operate in compliance with the conditions of, permits and other governmental authorizations (\"Governmental Authorizations\"). The Forest Products Companies follow policies and operate monitoring programs to ensure compliance with applicable Environmental Laws and Governmental Authorizations and to minimize exposure to environmental liabilities. Various regulatory authorities periodically review the status of the operations of the Forest Products Companies. Based on the foregoing, the Company believes that the Forest Products Companies are in substantial compliance with such Environmental Laws and Governmental Authorizations.\nCOMPETITION\nThe Times competes with newspapers of general circulation in New York City and its suburbs. The Times also competes in varying degrees with national publications such as The Wall Street Journal and USA Today and with television, radio and other media. Based on a specially prepared LNA report and The Times's own internal analysis, The Times believes that it ranks first in advertising revenue in the general weekday and Sunday newspaper field in the New York City metropolitan area. The Regional Newspapers and the International Herald Tribune compete with a variety of other advertising media in their respective markets.\nThe Globe competes with other newspapers distributed in Boston and its neighboring suburbs. However, the only major daily metropolitan newspaper in direct competition with The Globe is The Boston Herald (daily and Sunday), whose publisher and sole stockholder (through Herald Media, Inc.) is Patrick J. Purcell. The Globe also competes with other communications media, such as direct mail, magazines, radio, television (including cable television), and nationally-distributed newspapers. Based on information supplied by major daily newspapers published in New England and assembled by the New England Newspaper Association, Inc., for the 12-month period ending December 31, 1993, The Globe ranked first in advertising inches among all newspapers published in Boston and New England.\nAll the magazines published by the Company compete directly with comparable publications as well as with general interest magazines and other media, such as newspapers and broadcasting.\nAll of the Company's television stations compete directly with other television stations in their respective markets and with other video services such as cable network programming carried on local cable systems. WQXR (FM) competes in New York City with WNYC (a non-commercial station) for the classical music audience, and it and WQEW (AM) compete with many adult-audience commercial radio stations and other media in New York City and surrounding suburbs.\nSyndication Sales's operations compete with several other syndicated features and supplemental news services.\nThe Forest Products Companies are in a highly-competitive industry.\nEMPLOYEES\nAs of December 31, 1993, the Company had approximately 13,000 full-time employees.\nApproximately 4,290 full-time employees of The Times and City & Suburban Delivery Systems, which operates its newspaper wholesaler business, are represented by 14 unions. The Times has collective bargaining agreements effective through March 30, 2000, with all of its six production unions and with seven of its eight non-production unions. The production agreements enabled The Times to begin full operation of its Edison production and distribution facility in February 1993. The Times is in the process of negotiating the remaining agreement with the Newspaper Guild of New York; this agreement expired on March 30, 1993; The Times cannot predict the timing or the outcome of the negotiations. Three other entities owned by the Company (The Press Democrat, WQXR and WQEW) also have collective bargaining agreements covering certain of their employees.\nApproximately 2,103 full-time employees of The Globe and Wilson Tisdale Company, its subsidiary which owns the truck fleet used in delivery of The Globe, are represented by 12 unions. As of December 31, 1993, labor agreements with four of its 11 mechanical unions were in effect with expiration dates ranging from December 31, 1995, to December 31, 1998. Labor agreements with six of the other mechanical unions expired on December 31, 1992, and one expired on December 31, 1993; negotiations are proceeding with respect to these new agreements, all of which The Globe expects to be completed during 1994. A new agreement with The Boston Globe Employees' Association covering the period from January 1, 1991, through December 31, 1994, was recently approved by the union membership. On March 10, 1994, the membership of that union voted to affiliate with The Newspaper Guild.\nITEM 2.","section_1A":"","section_1B":"","section_2":"ITEM 2. PROPERTIES.\nThe Times: The Company owns its headquarters at 229 West 43d Street, New York, New York. The building has 15 stories and approximately 714,000 square feet of floor space and serves as a publishing facility for The Times.\nThe other publishing facility is located in Edison, New Jersey. This 1,300,000 square foot facility is occupied pursuant to a long-term lease with renewal and purchase options. The Edison production and distribution facility began producing newspapers in September 1992, and produces all of the advance Sunday sections of The Times (except The New York Times Magazine and the Television section) and approximately one-third of the weekday and Sunday New York edition. (See Notes 3 and 13 of Notes to Consolidated Financial Statements.)\nThe Edison facility is the first step in a plan to modernize the production facilities of The Times, giving the Company the ability to add color, increase paging and sections and improve quality. To complete this upgrade in capability and capacity, the Company plans to replace the production facility housed in the basement at its 43d Street facility.\nOn December 17, 1993, the Company executed a lease agreement and related agreements with the City of New York under which the Company will lease a 31-acre site for this replacement facility in Queens, New York. The agreements include a package of tax benefits and energy cost reductions valued at approximately $29 million. The Company has ten years in which to begin construction, and the lease will run for 25 years from the start of construction. The Company has the option to purchase the property at any time prior to the end of the lease. Construction of the facility is subject to approval of the Company's Board of Directors. (See Note 3 of Notes to Consolidated Financial Statements.)\nThe Globe owns its printing plants in Boston and Billerica, Massachusetts, as well as its new Sunday pre-print storage, inserting and packaging plant in Westwood, Massachusetts. The Globe and its subsidiaries own or lease office and other facilities that are suitable and adequate for their current activities.\nThe Regional Newspapers own their printing facilities. The Company's regional newspapers, magazines, broadcast stations and information businesses own or lease office facilities that are suitable and adequate for their current activities.\nITEM 3.","section_3":"ITEM 3. LEGAL PROCEEDINGS.\nThere are various legal actions that have arisen in the ordinary course of business and are now pending against the Company. Such actions are usually for amounts greatly in excess of the payments, if any, that may be required to be made. It is the opinion of management after reviewing such actions with legal counsel to the Company that the ultimate liability which might result from such actions will not have a material adverse effect on the consolidated financial position or results of operations of the Company.\nITEM 4.","section_4":"ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.\nNot applicable.\nEXECUTIVE OFFICERS OF THE REGISTRANT\n- ---------------\n(1) During the past five years, all of the executive officers listed above have held positions which were the same or substantially similar to those they currently hold except as indicated above.\nPART II\nITEM 5.","section_5":"ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.\nThe information required by this item appears at page of this Form 10-K.\nITEM 6.","section_6":"ITEM 6. SELECTED FINANCIAL DATA.\nThe information required by this item appears at page of this Form 10-K.\nITEM 7.","section_7":"ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.\nThe information required by this item appears at pages to of this Form 10-K.\nITEM 8.","section_7A":"","section_8":"ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.\nThe information required by this item appears at pages, and to of this Form 10-K.\nITEM 9.","section_9":"ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.\nNot applicable.\nPART III\nITEM 10.","section_9A":"","section_9B":"","section_10":"ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.\nIn addition to the information set forth under the caption \"Executive Officers of the Registrant\" in Part I of this Form 10-K, the information required by this item is incorporated by reference to pages 6 to 14 of the Company's Proxy Statement for the 1994 Annual Meeting of Stockholders.\nITEM 11.","section_11":"ITEM 11. EXECUTIVE COMPENSATION.\nThe information required by this item is incorporated by reference to pages 14 to 20 (but only up to and not including the paragraph entitled \"Performance Presentation\") of the Company's Proxy Statement for the 1994 Annual Meeting of Stockholders.\nITEM 12.","section_12":"ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.\nThe information required by this item is incorporated by reference to pages 1 to 8 of the Company's Proxy Statement for the 1994 Annual Meeting of Stockholders.\nITEM 13.","section_13":"ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.\nThe information required by this item is incorporated by reference to pages 14 to 15 and pages 17 to 20 (but only up to and not including the paragraph entitled \"Performance Presentation\") of the Company's Proxy Statement for the 1994 Annual Meeting of Stockholders.\nPART IV\nITEM 14.","section_14":"ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (A) DOCUMENTS FILED AS PART OF THIS REPORT\n(1) FINANCIAL STATEMENTS AND SUPPLEMENTAL SCHEDULES\n(a) The consolidated financial statements of the Company are filed as part of this Form 10-K and are set forth on pages, and to . The report of Deloitte & Touche, Independent Public Accountants, dated February 10, 1994, is set forth on page of this Form 10-K.\n(b) The following additional consolidated financial information is filed as part of this Form 10-K and should be read in conjunction with the consolidated financial statements set forth on pages, and to. Schedules not included with this additional consolidated financial information have been omitted either because they are not applicable or because the required information is shown in the consolidated financial statements at the aforementioned pages.\nSeparate financial statements and supplemental schedules of associated companies accounted for by the equity method are omitted in accordance with the provisions of Rule 3-09 of Regulation S-X.\n(2) EXHIBITS\n(2.1) Agreement and Plan of Merger dated as of June 11, 1993, as amended by the First Amendment dated as of August 12, 1993, by and among the Company, Sphere, Inc. and Affiliated Publications, Inc. (filed as Exhibit 2 to the Form S-4 Registration Statement, Registration No. 33-50043, on August 23, 1993, and included as Annex I to the Joint Proxy Statement\/Prospectus included in such Registration Statement (schedules omitted--the Company agrees to furnish a copy of any schedule to the Commission upon request), and incorporated by reference herein).\n(2.2) Stockholders Agreement dated as of June 11, 1993 by and between the Company and the other parties signatory thereto (filed as Exhibit 2.1 to the Form S-4 Registration Statement, Registration No. 33-50043, on August 23, 1993, and included as Annex II to the Joint Proxy Statement\/Prospectus included in such Registration Statement, and incorporated by reference herein).\n(3.1) Certificate of Incorporation as amended by the Class A and Class B stockholders and as restated on September 29, 1993.\n(3.2) By-laws as amended through February 17, 1994.\n(4) The Company agrees to furnish to the Commission upon request a copy of any instrument with respect to long-term debt of the Company and any subsidiary for which consolidated or unconsolidated financial statements are required to be filed, and for which the\namount of securities authorized thereunder does not exceed 10% of the total assets of the Company and its subsidiaries on a consolidated basis.\n(9.1) Globe Voting Trust Agreement, dated as of October 1, 1993.\n(9.2) Jordan Voting Trust Agreement, dated as of January 29, 1987, as amended through May 15, 1987 (filed as Exhibit 9.2 to API's Form 10-K for fiscal year ended December 31, 1989, and incorporated by reference herein).\n(10.1) The Company's Executive Incentive Compensation Plan as amended through December 20, 1990 (filed as an Exhibit to the Company's Form 10-K dated March 1, 1991, and incorporated by reference herein).\n(10.2) The Company's 1991 Executive Stock Incentive Plan, as amended through April 13, 1993.\n(10.3) The Company's 1991 Executive Cash Bonus Plan, adopted on April 16, 1991 (filed as an Exhibit to the Company's Proxy Statement dated March 1, 1991, and incorporated by reference herein).\n(10.4) The Company's Non-Employee Directors' Stock Option Plan, adopted on April 16, 1991 (filed as an Exhibit to the Company's Proxy Statement dated March 1, 1991, and incorporated by reference herein).\n(10.5) The Company's Supplemental Executive Retirement Plan as amended through May 5, 1989 (filed as an Exhibit to the Company's Form 10-K dated March 29, 1990, and incorporated by reference herein).\n(10.6) Lease (short form) between the Company and Z Edison Limited Partnership dated April 8, 1987 (filed as an Exhibit to the Company's Form 10-K dated March 27, 1988, and incorporated by reference herein).\n(10.8) Agreement of Lease, dated as of December 15, 1993, between The City of New York, Landlord, and the Company, Tenant (as successor to New York City Economic Development Corporation (the \"EDC\"), pursuant to an Assignment and Assumption of Lease With Consent, made as of December 15, 1993, between the EDC, as Assignor, to the Company, as Assignee).\n(10.9) Funding Agreement #1, dated as of December 15, 1993, between the EDC and the Company.\n(10.10) Funding Agreement #2, dated as of December 15, 1993, between the EDC and the Company.\n(10.11) Funding Agreement #3, dated as of December 15, 1993, between the EDC and the Company.\n(10.12) Funding Agreement #4, dated as of December 15, 1993, between the EDC and the Company.\n(10.13) New York City Public Utility Service Power Service Agreement, made as of May 3, 1993, between The City of New York, acting by and through its Public Utility Service, and The New York Times Newspaper Division of the Company.\n(10.14) Employment Agreement, dated May 19, 1993, between API, Globe Newspaper Company and William O. Taylor.\n(10.15) API's 1989 Stock Option Plan (filed as Annex to API's Proxy Statement-Joint Prospectus, dated as of April 28, 1989, contained in API's Registration Statement on\nForm S-4 (Registration Statement No. 33-28373) declared effective April 28, 1989, and incorporated by reference herein).\n(10.16) API's Supplemental Executive Retirement Plan, as amended effective September 15, 1993.\n(10.17) API's 1990 Stock Option Plan (Restated 1991) (filed as Exhibit 1 to API's Quarterly Report on Form 10-Q for the Quarter ended June 30, 1991 (Commission File No. 1-10251), and incorporated by reference herein).\n(10.18) Form of Substituted Stock Option Option Agreement\/Incentive 86 among API, its predecessor company and certain employees (filed as Exhibit 10.27 to Post-Effective Amendment No. 1 filed August 11, 1989, to API's Registration Statement on Form S-4 (Registration Statement No. 33-28373) declared effective April 28, 1989, and incorporated by reference herein).\n(10.19) Form of Substituted Stock Option Option Agreement\/Incentive 87 among API, its predecessor company and certain employees (filed as Exhibit 10.29 to Post-Effective Amendment No. 1 filed August 11, 1989, to API's Registration Statement on Form S-4 (Registration Statement No. 33-28373) declared effective April 28, 1989, and incorporated by reference herein).\n(10.20) Form of Substituted Stock Option Option Agreement\/Incentive 88 among API, its predecessor company and certain employees (filed as Exhibit 10.31 to Post-Effective Amendment No. 1 filed August 11, 1989, to API's Registration Statement on Form S-4 (Registration Statement No. 33-28373) declared effective April 28, 1989, and incorporated by reference herein).\n(21) Subsidiaries of the Company.\n(B) REPORTS ON FORM 8-K\nDuring the quarter ended December 31, 1993, no reports on Form 8-K were filed.\nSIGNATURES\nPURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED. Date: March 21, 1994 (Registrant) THE NEW YORK TIMES COMPANY By: LAURA J. CORWIN ................................. Laura J. Corwin, Secretary\nPURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.\nCONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS\nTHE NEW YORK TIMES COMPANY:\nWe consent to the incorporation by reference in Registration Statements No. 2-91826, 33-31538, 33-43210, 33-43211, 33-50461, 33-50465, 33-50457, 33-50467 and 33-50459 on Forms S-8 of our report dated February 10, 1994, appearing in this Annual Report on Form 10-K of The New York Times Company (the \"Company\") for the year ended December 31, 1993.\nWe also consent to the Company extending the reference to us under the heading \"Experts\" in Registration Statement No. 33-31538 to comprehend our report, dated February 10, 1994, on the consolidated balance sheets of the Company as of December 31, 1993 and 1992, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1993 included in the aforementioned Form 10-K.\nDELOITTE & TOUCHE\nNew York, New York March 21, 1994\nTHE NEW YORK TIMES COMPANY 1993 Consolidated Financial Statements\n- ---------------------------------------------------------------------- Contents Page - ---------------------------------------------------------------------- Financial Highlights\nSegment Information\nManagement's Discussion and Analysis\nConsolidated Statements of Operations\nConsolidated Balance Sheets\nConsolidated Statements of Cash Flows\nConsolidated Statements of Stockholders' Equity\nNotes to Consolidated Financial Statements\nIndependent Auditors' Report\nManagement's Responsibilities Report\nMarket Information\nQuarterly Information\nTen-Year Supplemental Financial Data\nFINANCIAL HIGHLIGHTS\nIn September 1992 the Company closed The Gwinnett (Ga.) Daily News and sold the residual assets. The closing and related sale resulted in a pre-tax loss of $53.8 million ($37.1 million after taxes or $.47 per share). This transaction is not reflected in the 1992 income amounts used in the applicable key ratio calculations presented above.\nNet cumulative effect of accounting changes reflects the 1992 adoption of the change in methods of accounting for income taxes, postretirement benefits other than pensions and postemployment benefits. The net cumulative effect is not reflected in the 1992 income amounts used in the applicable key ratio calculations presented above.\nFor 1993, return on average stockholders' equity and return on average total assets are less than 1 percent due to several factors which lowered net income for the year. See Management's Discussion and Analysis on page.\nSEGMENT INFORMATION - ------------------------------------------------------------------------------ The Company has classified its business into the following segments and equity interests:\nNEWSPAPERS: The New York Times, The Boston Globe, 28 regional newspapers, a wholesale newspaper distribution business in the New York City metropolitan area and a one-half interest in the International Herald Tribune S.A.\nMAGAZINES: Numerous publications and related activities in the women's publishing and sports\/leisure fields.\nBROADCASTING\/INFORMATION SERVICES: Five network-affiliated television stations, two radio stations, a news service, a features syndicate, TimesFax and licensing operations of The New York Times databases and microfilm.\nFOREST PRODUCTS: Equity interests in two newsprint companies and a partnership in a supercalendered paper mill that together supply the major portion of the Newspaper Group's annual paper requirements.\n- ------------------------------------------------------------------------------- Dollars in thousands Year Ended December 31 1993 1992 1991 - ------------------------------------------------------------------------------- REVENUES Newspapers $1,537,934 $1,306,952 $1,274,435 Magazines 394,463 386,120 352,686 Broadcasting\/Information services 87,257 80,463 75,980 - ------------------------------------------------------------------------------- Total $2,019,654 $1,773,535 $1,703,101 - ------------------------------------------------------------------------------- OPERATING PROFIT (LOSS) Newspapers $ 114,332 $ 81,173 $ 93,578 Magazines 12,330 9,929 (492) Broadcasting\/Information services 19,403 14,766 13,957 Unallocated corporate expenses (19,484) (17,460) (13,404) - ------------------------------------------------------------------------------- Total 126,581 88,408 93,639 Interest expense, net of interest income 25,375 26,115 30,586 Loss on disposition of Gwinnett Daily News - 53,768 - - ------------------------------------------------------------------------------- Income before income taxes and equity in operations of forest products group 101,206 8,525 63,053 Income taxes 43,231 11,079 21,760 - ------------------------------------------------------------------------------- Income (Loss) before equity in operations of forest products group 57,975 (2,554) 41,293 Equity in operations of forest products group (51,852) (8,718) 5,700 - ------------------------------------------------------------------------------- INCOME (LOSS) BEFORE NET CUMULATIVE EFFECT OF ACCOUNTING CHANGES $ 6,123 $ (11,272) $ 46,993 - ------------------------------------------------------------------------------- See notes to consolidated financial statements.\nSEGMENT INFORMATION - ------------------------------------------------------------------------------- Dollars in thousands Year Ended December 31 1993 1992 1991 - ------------------------------------------------------------------------------- DEPRECIATION AND AMORTIZATION Newspapers $ 98,957 $ 74,495 $ 77,090 Magazines 18,616 20,628 26,683 Broadcasting\/Information services 10,731 12,424 12,621 Corporate 528 385 446 - ------------------------------------------------------------------------------- Total $ 128,832 $ 107,932 $ 116,840 - ------------------------------------------------------------------------------- CAPITAL EXPENDITURES Newspapers $ 71,746 $ 42,675 $ 21,867 Magazines 3,059 1,888 1,467 Broadcasting\/Information services 3,323 1,863 2,697 Corporate 1,491 903 169 - ------------------------------------------------------------------------------- Total $ 79,619 $ 47,329 $ 26,200 - ------------------------------------------------------------------------------- IDENTIFIABLE ASSETS AT DECEMBER 31 Newspapers $2,676,779 $1,321,667 $1,444,462 Magazines 247,723 255,777 272,323 Broadcasting\/Information services 113,675 117,679 122,436 Corporate 101,007 160,459 125,760 Investment in forest products group 76,020 139,392 163,000 - ------------------------------------------------------------------------------- Total $3,215,204 $1,994,974 $2,127,981 - ------------------------------------------------------------------------------- See notes to consolidated financial statements.\nNewspaper Group amounts for 1993 have been affected by the October 1, 1993 acquisition of The Boston Globe (see Note 2).\nNewspaper Group operating profit for 1993, 1992 and 1991 includes charges of $35.4 million, $28.0 million and $20.0 million, respectively, for costs related to staff reductions at The New York Times newspaper.\nEquity in operations of Forest Products Group and investment in Forest Products Group for 1993 reflect an after-tax noncash charge of $47.0 million to write down the Company's investment in this Group to reflect current operating conditions and economic factors in the industry.\nNewspaper Group operating results for 1992 were negatively affected by $21.4 million for labor disruptions and training and start-up costs related to the new production and distribution facility located in Edison, New Jersey (\"Edison\") for The New York Times newspaper.\nMANAGEMENT'S DISCUSSION AND ANALYSIS - ------------------------------------------------------------------------------- Per share amounts in the following Management's Discussion and Analysis are computed on an after-tax basis.\nResults of Operations: 1993 Compared with 1992\nIn 1993, the Company reported net income of $6.1 million, or $.07 per share compared with a net loss of $44.7 million, or $.57 per share, in 1992.\nEarnings for 1993 were affected by the following factors:\n- $47.0 million after-tax charge ($.56 per share) against equity in operations of the Forest Products Group to write down the Company's investment in the Group to reflect current operating conditions and economic factors in the industry.\n- $30.0 million pre-tax charge ($.20 per share) to cover severance and related costs resulting from anticipated white-collar staff reductions at The New York Times newspaper (\"The Times\").\n- $5.4 million pre-tax charge ($.03 per share) to cover severance and related costs resulting from voluntary early retirements from the composing room of The Times.\n- $2.6 million pre-tax gain ($.02 per share) on the sale of assets.\n- $5.6 million tax expense ($.07 per share) due to the enactment of the Omnibus Budget Reconciliation Act of 1993 (\"Tax Act\") which increased the Federal corporate income tax rate from 34 percent to 35 percent retroactively to January 1, 1993, affected the deductibility of certain costs and caused the Company to remeasure its year-end 1992 deferred tax balances to reflect the higher tax rate.\n- $3.7 million pre-tax ($.02 per share) in unfavorable advertising and circulation rate adjustments due to a snowstorm in March that disrupted delivery of The Times.\nEarnings for 1992 were affected by the following factors:\n- $33.4 million after-tax charge ($.43 per share) for the adoption as of January 1, 1992, of three mandated non-cash accounting changes related to income taxes, postretirement benefits and postemployment benefits.\n- $3.1 million pre-tax gain ($.02 per share) on the sales of assets.\n- $28.0 million pre-tax charge ($.20 per share) to cover severance and related costs for production unions at The Times.\n- $53.8 million pre-tax loss ($.47 per share) due to the closing of The Gwinnett (Ga.) Daily News, the sale of its residual assets and its 1992 operations.\n- $10.4 million pre-tax ($.07 per share) for training and start-up costs related to The Times's new production and distribution facility located in Edison, N.J. (\"Edison\").\n- $11.0 million pre-tax ($.08 per share) due to labor disruptions arising from a dispute between independent distributors of The Times and its Drivers' Union.\nExclusive of the factors described above for the 1993 and 1992 periods, earnings would have been $.93 per share in 1993 compared with $.66 per share in 1992.\nConsolidated revenues for 1993 increased to $2.02 billion from $1.77 billion in 1992, due principally to the October 1, 1993 acquisition of The Boston Globe (\"The Globe\"), the June 1992 acquisition of two wholesale newspaper distribution businesses and higher advertising and circulation revenues. Costs and expenses after excluding special items increased to $1.86 billion from $1.64 billion in 1992. The increase was due principally to the October 1993 Globe acquisition, the June 1992 wholesale distribution business acquisition and higher newsprint, depreciation, and payroll and benefit costs.\nOperating profit after excluding the special factors rose to $163.1 million from $134.7 million in 1992 due principally to higher advertising and circulation revenues in the Newspaper Group, which included the operations of The Globe subsequent to October 1, 1993 and a strong performance by the Company's television stations which was partially offset by higher newsprint prices and increased depreciation.\nInterest expense, net of interest income, declined to $25.4 million in 1993 from $26.1 million in 1992. Lower levels of borrowings through the first half of 1993 were partially offset by increased borrowings in connection with the Company's stock repurchase program (see Note 13) and the utilization of cash balances in connection with the October 1, 1993 acquisition of The Globe.\nThe Company's effective income tax rate for 1993 was 42.7 percent compared with 44.5 percent in 1992, exclusive of the effect of the Gwinnett transaction. The lower rate is due principally to the recognition of capital loss carryforwards and state operating loss carryforwards, which were partially offset by the negative impact of the Tax Act.\nA discussion of the operating results of the Company's segments and equity interests follows:\nExclusive of the special pre-tax items ($36.5 million in 1993 and $47.9 million in 1992), operating profit of the Newspaper Group was $150.8 million compared with $129.1 million in 1992 on revenues of $1.54 billion and $1.31 billion respectively. Improvements in revenues were due to higher advertising and circulation rates, principally at The Times, the June 1992 acquisition of two wholesale newspaper distribution businesses and the October 1, 1993 acquisition of The Globe. The higher operating profit results principally from the inclusion of the results of The Globe since the October 1, 1993 acquisition date, higher advertising and circulation revenues, cost controls throughout the Group and cost savings related to Edison, which were partially offset by advertising weakness at the Company's two California regional newspapers, increased depreciation and start-up and redesign costs related to certain sections of The Times.\nMANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED) - ------------------------------------------------------------------------------- Advertising linage at The Times increased 1.0 percent over 1992 to 77.8 million lines. Retail advertising rose 4.9 percent over 1992 while national and classified advertising declined 2.4 percent and 4.1 percent respectively. Circulation of The Times for the year ended December 31, 1993 was 1,179,000 copies weekdays, approximately equal to the 1992 period. Sunday circulation of 1,781,200 copies reached a record high, up 17,100 copies over the prior year.\nAt The Globe, full-run advertising volume for the year 1993 increased 4.0 percent over 1992 to 2.5 million inches. Retail and classified advertising increased 9.9 percent and 2.6 percent, respectively, over 1992, but national advertising declined 1.6 percent. Circulation of The Globe for the year ended December 31, 1993 was 504,600 copies weekdays, down 3,300 copies, and 814,500 copies Sundays, up 2,700 copies.\nAt the 30 regional newspapers that were in the Group for the entire 1993 and 1992 periods (two weekly newspapers were sold at the end of 1993), advertising volume increased 3.9 percent to 35.2 million inches. The 1993 amount includes a significantly higher volume of advertising inserts. Circulation for the daily regional newspapers for the year ended December 31, 1993 was 851,000 copies weekdays, up 4,500 copies, and 853,700 copies Sundays, up 9,200 copies. Circulation for the non-dailies was 72,700 copies, down 500 copies.\nThe Magazine Group's operating profit was $12.3 million in 1993 compared with $9.9 million in 1992 on revenues of $394.5 million and $386.1 million respectively. Exclusive of the amortization costs associated with the acquisitions of McCall's and Golf World (U.S.), the Group's operating profit was $25.4 million in both years. Results for 1993 were adversely affected by an August 1993 lawsuit settlement of $1.5 million. In addition, continuing softness in the consumer packaged goods category in the women's magazines field continues to affect the Group adversely.\nAdvertising pages as reported to Publications Information Bureau (\"PIB\") for Golf Digest increased 1 percent from 1992 to 1,344 pages; for Tennis increased 4 percent from 1992 to 795 pages; for Family Circle decreased 9 percent from 1992 to 1,570 pages, and for McCall's decreased 5 percent from 1992 to 1,138 pages.\nThe Broadcasting\/Information Services Group operating profit was $19.4 million compared with $14.8 million in 1992 on revenues of $87.3 million and $80.5 million respectively. Higher local advertising revenues at the Company's television stations accounted for the improved results.\nExclusive of the $47.0 million noncash charge to write down the Company's investment in its Forest Products Group, equity in operations (an after-tax amount) of the Group was a loss of $4.9 million compared with a loss of $8.7 million in 1992. The 1993 results have been adversely affected by $0.6 million resulting from the impact of the Tax Act. Lower newsprint discounts and a favorable Canadian exchange rate accounted for the improved results. Higher newsprint discounts which were effective October 1, 1993 negatively affected the Group during the fourth quarter and into 1994.\nThe Forest Products Group write-down resulted principally from the softening of paper prices due to continuing oversupply, as well as high costs and projected environmental expenditures at one mill.\nAll of the Company's paper mills were affected by pricing difficulties in 1993. Newsprint prices showed some strengthening during the second and third quarters but they resumed their decline in October and were at their lowest point at year-end. This trend continued into the first quarter of 1994 as prices fell further in January. A modest March 1, 1994, newsprint price increase has been announced throughout the industry. However, other recently announced increases have not become effective because of oversupply, and it is uncertain whether this increase will be realized. In addition to pricing difficulties, one of the Company's two newsprint mills has been unable to fully overcome high cost disadvantages. This mill also requires a capital expenditure (estimated to be $25.0 million) to comply with environmental regulations which become effective in 1995. This expenditure, if it is made, will not lower the mill's costs.\nIn measuring the write-down, the Company projected the future cash flows of the mills, including the required capital expenditure, and determined that the value of those cash flows was less than the carrying value of its investment in the Forest Products Group. Due in part to this write-down, the Company currently expects to report an improvement in 1994 equity operations since it will not be recording operating losses for one of its mills.\n- ------------------------------------------------------------------------------- Results of Operations: 1992 Compared with 1991\nIn 1992, the Company reported a net loss of $44.7 million, or $.57 per share, compared with net income of $47.0 million, or $.61 per share, in 1991. The 1992 year was adversely affected by $33.4 million, or $.43 per share, resulting from the net cumulative effect of adopting three mandated noncash accounting changes related to postretirement and postemployment benefits (see Note 11) and income taxes (see Note 7) as of January 1, 1992.\nExclusive of the net cumulative effect of the accounting changes, the net loss for 1992 was $11.3 million or $.14 per share. Earnings for 1992 and 1991 have also been affected by the following factors:\n- $3.1 million pre-tax gains ($.02 per share) in 1992 on the sale of assets.\n- $28.0 million pre-tax charge ($.20 per share) in 1992 to cover severance and related costs resulting from labor agreements for various production unions at The Times.\n- $53.8 million pre-tax loss ($.47 per share) in 1992 due to the closing of The Gwinnett (Ga.) Daily News, the sale of its residual assets and its 1992 operations.\nMANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED) - ------------------------------------------------------------------------------ - $10.4 million pre-tax ($.07 per share) in 1992 for training and start-up costs related to commencement of operations at Edison.\n- $11.0 million pre-tax ($.08 per share) in 1992 due to labor disruptions arising from a dispute between inde-pendent distributors of The Times and its Drivers' Union.\n- $7.8 million pre-tax ($.05 per share) in 1992 for the annual charge related to postretirement benefits.\n- $20.0 million pre-tax charge ($.15 per share) in 1991 to cover severance and related costs resulting from a voluntary early retirement program for 160 employees, mainly Newspaper Guild at The Times.\n- $10.0 million ($.13 per share) in 1991 for the reversal of a provision for income taxes which related to a settlement with the Internal Revenue Service for tax years 1980 through 1984.\nExclusive of these factors, 1992 earnings would have been $.71 per share compared with $.63 per share for 1991.\nExcluding the factors mentioned above, the principal reason for the increase in net income is higher advertising and circulation revenues in the Newspaper and Magazine Groups and lower newsprint costs due to increased price discounting offset, in part, by the adverse effect such discounting had on equity in earnings of the Forest Products Group.\nConsolidated revenues increased to $1.77 billion from $1.70 billion in 1991. The increase was due principally to higher advertising rates, higher circulation revenues in the Newspaper and Magazine Groups and the June 1992 acquisition of two wholesale newspaper distribution businesses, which distribute The Times and other publications in New York City and parts of New Jersey.\nExcluding the special factors, costs and expenses increased to $1.63 billion in 1992 from $1.59 billion in 1991 due principally to higher payroll and benefit costs and operating expenses of two wholesale distribution businesses acquired in June 1992 offset, in part, by lower newsprint prices.\nInterest expense, net of interest income, declined to $26.1 million compared with $30.6 million in 1991 due to lower levels of borrowings.\nThe nondeductibility of a portion of the loss on the closedown and sale of The Gwinnett (Ga.) Daily News significantly increased the Company's tax rate. Exclusive of the Gwinnett transaction and the 1991 favorable IRS settlement, the effective income tax rate in 1992 declined to 44.5 percent compared with 50.4 percent in 1991. The lower rate is due principally to a decrease in the relationship of amortization expense for intangible assets to 1992's pre-tax income, which was significantly higher than that of 1991.\nA discussion of the operating results of the Company's segments and equity interests follows:\nExclusive of the special pre-tax items ($47.9 million in 1992 and $20.0 million in 1991), operating profit of the Newspaper Group increased to $129.1 million in 1992 from $113.6 million in 1991 on revenues of $1.31 billion and $1.27 billion respectively.\nImprovements in revenues and operating profit were due to higher advertising and circulation rates and increased circulation. Lower newsprint costs also favorably affected the Group. The June 1992 acquisition of wholesale newspaper distribution businesses also increased the Group's revenues.\nAdvertising linage at The Times declined 2.0 percent to 77.0 million lines compared with 1991. Retail advertising was flat compared with 1991 and national advertising rose 0.9 percent. However, classified advertising declined 10.5 percent from last year. Circulation of The Times for the year ended December 31, 1992, reached record highs. Circulation was 1,181,500 copies weekdays and 1,763,800 copies Sundays, up 21,600 copies and 29,800 copies, respectively, over the prior year.\nDepreciation of the building portion of Edison amounted to $14.0 million per year beginning in 1990. Depreciation of the facility's equipment has begun and will increase as each element is placed in service. Production commenced in September 1992 and depreciation of related equipment began in the fourth quarter.\nFull operation of the facility began during the first quarter of 1993. The Company estimates that depreciation of the building and equipment will total $33.0 million in 1993 increasing to $35.0 million in 1994 when the facility is operational for a full year.\nAt the 30 regional newspapers that were in the Group for the entire 1992 and 1991 periods, advertising volume increased 2.5 percent to 33.8 million inches. The 1992 amount includes a significantly higher volume of advertising inserts. Circulation for the daily regional newspapers for the year ended December 31, 1992, was 844,500 copies Sundays, up 13,800 copies, and 846,500 copies weekdays, up 10,400 copies. Circulation for the non-dailies was 73,200 copies, up 3,100 copies.\nThe Magazine Group's operating profit was $9.9 million in 1992 compared with a loss of $0.5 million in 1991 on revenues of $386.1 million and $352.7 million respectively. Exclusive of the amortization costs associated with the acquisitions of McCall's and Golf World (U.S.), which were structured to maximize cash flow, the Group's operating profit was $25.4 million in 1992 compared with $21.2 million in 1991. The better 1992 results were primarily due to increased advertising pages at most of the Group's magazines and lower magazine paper prices. Most of the Group's magazines increased their market share compared with 1991.\nAdvertising pages as reported to PIB for Golf Digest increased 10 percent from 1991 to 1,332 pages; for Tennis increased 4 percent from 1991 to 768 pages; for Family Circle increased 12 percent from 1991 to 1,723 pages, and for McCall's increased 11 percent from 1991 to 1,201 pages.\nBroadcasting\/Information Services Group operating profit was $14.8 million in 1992 compared with $14.0 million in 1991 on revenues of $80.5 million and $76.0 million respectively. The higher operating profit was due to higher local advertising revenues at the Company's television stations offset, in part, by costs related to a format change for the AM radio station WQEW, formerly WQXR- AM.\nEquity in operations of the Forest Products Group (an after-tax amount) was a loss of $8.7 million compared with income of $5.7 million in 1991. Higher paper discounts due to oversupply continue to have a negative impact.\nMANAGEMENT'S DISCUSSION AND ANALYSIS (CONCLUDED) - ------------------------------------------------------------------------------- Liquidity and Capital Resources\nNet cash provided by operating activities of $175.3 million was used primarily to modernize facilities and equipment, to pay dividends to stockholders, to repurchase shares of the Company's Class A Common Stock and, in part, to purchase The Globe. The ratio of current assets to current liabilities was 0.89 at December 31, 1993 compared with 1.08 at December 31, 1992, and long-term debt and capital lease obligations as a percentage of total capitalization was 22 percent at December 31, 1993 compared with 17 percent at December 31,1992. The increase was due principally to the impact of the Company's stock repurchase program discussed below, which was partially offset by the acquisition of The Globe on October 1, 1993.\nIn October 1993, the Company announced authorized expenditures of up to $150.0 million for repurchases of its Class A Common Stock. Under the program, purchases may be made from time to time either in the open market or through private transactions. The number of shares that may be purchased in market transactions may be limited as a result of The Globe transaction. Purchases may be suspended from time to time or discontinued. To date the Company has repurchased approximately 30,000 shares of its Class A Common Stock at an average price of $24.78 per share under this program.\nUnder a previously announced program that expired at the close of The Globe transaction, the Company expended approximately $254.0 million. Under this program, the Company repurchased approximately 10,231,000 shares of its Class A Common Stock at an average price of $24.87 per share.\nIn December 1993 the Company and the City of New York executed a lease agreement and related agreements, under which the Company will lease 31 acres of City-owned land in Queens, New York, on which The Times plans to build a state- of-the-art printing and distribution facility. The Company estimates that the cost of the new facility will be approximately $280.0 million with construction to begin in the summer of 1994 and completion expected in 1997. Construction of the facility is subject to approval of the Company's Board of Directors.\nThe Company currently estimates that, exclusive of the Queens facility, capital expenditures for 1994 will range from $90.0 million to $110.0 million.\nIn connection with the 1991 divestiture of a jointly-owned affiliate, Spruce Falls Power and Paper Company Limited, the Company committed to lend up to $26.5 million (C$30.0 million) to the new owners of the mill. Such loans will take place over a five-year period ending December 1996. To date the Company has loaned approximately U.S. $20.5 million under the commitment.\nIn October 1993 the Company issued notes totaling $200.0 million to an insurance company with interest payable semi-annually. $100.0 million of five- year notes were issued at a rate of 5.50 percent, and the remaining $100.0 million were issued as six and one-half year notes at a rate of 5.77 percent.\nIn connection with the previously announced charges totaling $35.4 million for white-collar and production union staff reductions (see Note 4), the Company currently anticipates that the staff reductions and related expenditures will occur during 1994 and that the cost of this program will be recovered through reduced costs over a two-year period. The charges cover approximately 300 employees with an average annual wage and benefit cost of $110,000 per employee. The Company does not anticipate that its ongoing business operations will be affected by this reduction of staff and expects to fund this charge through internally generated funds.\nIn January 1994 a definitive agreement was reached regarding the sale of a partnership (BPI Communications, L.P.) in which the Company has a one-third interest. In February 1994, the Company received approximately $53.0 million, which will primarily be utilized to repay notes payable, which totaled $62.3 million at December 31, 1993.\nIn addition to cash provided from operating activities, the Company has several established sources for future liquidity purposes, including several revolving credit and term loan agreements. At December 31, 1993, $150.0 million was available for borrowing by the Company under these agreements. The Company anticipates that during 1994 cash for operating, investing and financing activities will continue to come from a combination of internally generated funds and external financing.\nCONSOLIDATED STATEMENTS OF OPERATIONS - ------------------------------------------------------------------------------- Dollars and shares in thousands except Year Ended December 31 per share data 1993 1992 1991 - ------------------------------------------------------------------------------- REVENUES Advertising $1,399,042 $1,254,764 $1,254,365 Circulation 473,971 419,454 390,600 Other 146,641 99,317 58,136 - ------------------------------------------------------------------------------- Total 2,019,654 1,773,535 1,703,101 - ------------------------------------------------------------------------------- COSTS AND EXPENSES Production costs: Raw materials 280,531 250,575 288,618 Wages and benefits 437,528 388,403 361,660 Other 418,554 365,651 341,105 - ------------------------------------------------------------------------------- Total 1,136,613 1,004,629 991,383 Selling, general and administrative expenses 756,460 680,498 618,079 - ------------------------------------------------------------------------------- Total 1,893,073 1,685,127 1,609,462 - ------------------------------------------------------------------------------- OPERATING PROFIT 126,581 88,408 93,639 Interest expense, net of interest income 25,375 26,115 30,586 Loss on disposition of Gwinnett Daily News - 53,768 - - ------------------------------------------------------------------------------- Income before income taxes and equity in operations of forest products group 101,206 8,525 63,053 Income taxes 43,231 11,079 21,760 - ------------------------------------------------------------------------------- Income (Loss) before equity in operations of forest products group 57,975 (2,554) 41,293 Equity in operations of forest products group (51,852) (8,718) 5,700 - ------------------------------------------------------------------------------- Income (Loss) before net cumulative effect of accounting changes 6,123 (11,272) 46,993 Net cumulative effect of accounting changes - (33,437) - - ------------------------------------------------------------------------------- NET INCOME (LOSS) $ 6,123 $ (44,709) $ 46,993 - ------------------------------------------------------------------------------- Average number of common shares outstanding 84,459 78,534 77,299 Per share of common stock Before net cumulative effect of accounting changes $ .07 $ (.14) $ .61 Net cumulative effect of accounting changes - (.43) - Net income (loss) .07 (.57) .61 Dividends .56 .56 .56 - ------------------------------------------------------------------------------- See notes to consolidated financial statements.\nCONSOLIDATED BALANCE SHEETS - ------------------------------------------------------------------------------- December 31 1993 1992 - ------------------------------------------------------------------------------- ASSETS Dollars in thousands - ------------------------------------------------------------------------------- CURRENT ASSETS Cash and short-term investments (at cost which approximates market: 1993, $27,744,000; 1992, $91,685,000) $ 42,058 $ 118,503\nAccounts receivable (net of allowances: 1993, $43,507,000; 1992, $33,300,000) 264,218 192,233\nInventories 47,271 51,551\nDeferred subscription costs 32,597 32,830\nOther current assets 107,009 37,661 - ------------------------------------------------------------------------------- Total current assets 493,153 432,778 - ------------------------------------------------------------------------------- INVESTMENT IN FOREST PRODUCTS GROUP 76,020 139,392 - ------------------------------------------------------------------------------- PROPERTY, PLANT AND EQUIPMENT (at cost)\nLand 65,839 61,961\nBuildings, building equipment and improvements 650,186 597,597\nEquipment 874,479 751,186\nConstruction and equipment installations in progress 93,007 47,842 - ------------------------------------------------------------------------------- Total 1,683,511 1,458,586\nLess accumulated depreciation 571,487 555,831 - ------------------------------------------------------------------------------- Total property, plant and equipment - net 1,112,024 902,755 - ------------------------------------------------------------------------------- INTANGIBLE ASSETS ACQUIRED\nCosts in excess of net assets acquired 1,383,582 554,014\nOther intangible assets acquired 227,377 63,200 - ------------------------------------------------------------------------------- Total 1,610,959 617,214\nLess accumulated amortization 190,006 160,991 - ------------------------------------------------------------------------------- Total intangible assets acquired - net 1,420,953 456,223 - ------------------------------------------------------------------------------- MISCELLANEOUS ASSETS 113,054 63,826 - ------------------------------------------------------------------------------- Total $3,215,204 $1,994,974 - ------------------------------------------------------------------------------- See notes to consolidated financial statements.\n- ------------------------------------------------------------------------------- December 31 1993 1992 - ------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Dollars in thousands - ------------------------------------------------------------------------------- CURRENT LIABILITIES\nAccounts payable $ 115,402 $ 139,115\nNotes payable 62,340 -\nPayrolls 71,256 47,820\nAccrued expenses 171,515 90,063\nUnexpired subscriptions 130,627 119,508\nShort-term debt 2,590 2,643 - ------------------------------------------------------------------------------- Total current liabilities 553,730 399,149 - ------------------------------------------------------------------------------- OTHER LIABILITIES\nLong-term debt 413,581 158,131\nCapital lease obligations 46,482 48,780\nDeferred income taxes 196,875 187,701\nOther 403,869 199,799 - ------------------------------------------------------------------------------- Total other liabilities 1,060,807 594,411 - ------------------------------------------------------------------------------- STOCKHOLDERS' EQUITY\n5 1\/2% Cumulative prior preference stock of $100 par value - authorized 110,000 shares; outstanding: 1993 and 1992, 17,837 shares 1,784 1,784\nSerial preferred stock of $1 par value - authorized 200,000 shares - none issued - -\nCommon stock of $.10 par value\nClass A - authorized 200,000,000 shares; issued: 1993, 107,678,024 shares; 1992, 88,047,623 shares (including treasury shares: 1993, 1,251,573; 1992, 8,773,419) 10,768 8,805\nClass B, convertible - authorized 600,000 shares; issued: 1993, 571,624 shares; 1992, 571,804 (including treasury shares: 1993 and 1992, 139,943) 57 57\nAdditional capital 599,758 164,928\nEarnings reinvested in the business 1,022,958 1,065,347\nCommon stock held in treasury, at cost (34,658) (239,507)\n- ------------------------------------------------------------------------------- Total stockholders' equity 1,600,667 1,001,414 - ------------------------------------------------------------------------------- Total $3,215,204 $1,994,974 - ------------------------------------------------------------------------------- See notes to consolidated financial statements.\nSUPPLEMENTAL DISCLOSURES TO CONSOLIDATED STATEMENTS OF CASH FLOWS - ------------------------------------------------------------------------------- Dollars in thousands Year Ended December 31 1993 1992 1991 - ------------------------------------------------------------------------------- NONCASH INVESTING AND FINANCING TRANSACTIONS\nCapital lease assets and obligations incurred $ 338 $ 668 $ 311 ========== ========== ========== Businesses acquired Fair value of assets acquired $1,237,029 $ 34,462 Liabilities assumed (209,000) (11,371) Liabilities incurred, net of payments (18,744) - Common stock issued (874,901) - --------- ---------- Net cash paid $ 134,384 $ 23,091 ========= ==========\nValuation reserve (investment in forest products group) $ (26,927) ========== CASH FLOW INFORMATION\nCash payments during the year for\nInterest (net of amount capitalized) $ 26,861 $ 28,486 $ 31,367 ========= ======== =========\nIncome taxes $ 55,327 $ 36,776 $ 25,620 ========= ======== =========\n- -------------------------------------------------------------------------------\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES\nPrinciples of Consolidation. The consolidated financial statements include the accounts of The New York Times Company and all subsidiaries (the \"Company\") after elimination of intercompany items.\nInventories. Inventories are stated at the lower of cost or current market value. Inventory cost generally is based on the last-in, first-out (\"LIFO\") method for newsprint and magazine paper and the first-in, first-out (\"FIFO\") method for other inventories.\nInvestments. Investments in which the Company has at least a 20 percent but not more than 50 percent interest are accounted for under the equity method.\nProperty, Plant and Equipment. Property, plant and equipment is stated at cost, and depreciation is computed by the straight-line method over estimated service lives. The Company capitalizes interest costs as part of the cost of constructing major facilities and equipment.\nIntangible Assets Acquired. Costs in excess of net assets acquired consist of excess costs of businesses acquired over values assigned to their net tangible assets and other intangible assets. The excess costs which arose from acquisitions after October 31, 1970 are being amortized by the straight-line method principally over 40 years. The remaining portion of such excess, which arose from acquisitions before November 1, 1970 (approximately $13,000,000), is not being amortized since in the opinion of management there has been no diminution in value. Other intangible assets acquired consist principally of advertiser and subscriber relationships which are being amortized over the remaining lives, ranging from 5 to 40 years.\nSubscription Revenues and Costs. Proceeds from subscriptions and related costs, principally agency commissions, are deferred at the time of sale and are included in the Consolidated Statements of Operations on a pro rata basis over the terms of the subscriptions.\nForeign Currency Translation. The assets and liabilities of foreign companies are translated at the year-end exchange rates. Results of operations are translated at the average rates of exchange in effect during the year. The resultant translation adjustment is included as a component of stockholders' equity.\nEarnings Per Share. Earnings per share is computed after preference dividends and is based on the weighted average number of shares of Class A and Class B Common Stock outstanding during each year. The effect of shares issuable under the Company's Incentive Plans (see Note 12), including stock options, is not material and therefore excluded from the computation.\nCash and Short-Term Investments. For purposes of the Consolidated Statements of Cash Flows, the Company considers all highly liquid debt instruments purchased with maturities of three months or less to be cash equivalents. The Company has overdraft positions at certain banks caused by outstanding checks. These overdrafts have been reclassified to accounts payable. - ------------------------------------------------------------------------------- 2. ACQUISITIONS\/DIVESTITURES\nOn October 1, 1993, pursuant to an Agreement and Plan of Merger dated June 11, 1993, as amended as of August 12, 1993 (the \"Merger Agreement\"), a wholly-owned subsidiary of the Company was merged with Affiliated Publications, Inc., the parent company of The Boston Globe (\"The Globe\"), which became a wholly-owned subsidiary of the Company.\nThe transaction was accounted for as a purchase and, accordingly, the results of The Globe's operations have been included in the Company's consolidated financial statements beginning October 1, 1993, the date the transaction closed. The acquisition had a net cost of approximately $1,028,000,000. Under the Merger Agreement the Company exchanged cash of approximately $160,000,000 for 15 percent of The Globe's common stock with the remainder of the consideration paid by the exchange of approximately 36,400,000 shares of the Company's Class A Common Stock valued at $24.03 per share. The purchase resulted in increases in costs in excess of net assets acquired of approximately $830,000,000 (which will be amortized by the straight-line method over 40 years); other intangible assets acquired of $161,000,000 (which consist principally of advertiser and subscriber relationships which are being amortized by the straight-line method over an average period of 33 years); and property, plant and equipment of $246,000,000. Net liabilities assumed as a result of the transaction totaled approximately $209,000,000.\nThe following pro forma supplemental financial information is presented as if the enterprises had combined at the beginning of the respective periods. It is not necessarily indicative of the combined results that would have occurred had the merger taken place as of the beginning of the periods provided, nor necessarily indicative of results that may be achieved in the future:\n(Dollars in thousands Year Ended December 31, except per share data) 1993 1992 - ---------------------------------------------------------------------------- Revenues $ 2,335,985 $2,187,490 Income (loss) before net cumulative effect of accounting changes 1,380 (14,237) Net income (loss) 1,380 (61,783) Income (loss) per share before net cumulative effect of accounting changes .01 (.13) Net income (loss) per share .01 (.54)\nPro forma depreciation and amortization expense for the year ended December 31, 1993 and 1992 was approximately $166,816,000 and $158,363,000 respectively.\nOn December 31, 1993 the Company sold two weekly newspapers and recognized a pre-tax gain of $2,600,000, or $.02 per share, on the transaction.\nIn January 1994, a definitive agreement was announced regarding the sale of BPI Communications, L.P. (\"BPI\"), a partnership in which the Company acquired a one-third interest through its October 1993 merger with The Globe. The Company received approximately $53,000,000 when the transaction was completed in February 1994 with additional payments of approximately $2,000,000 expected later in the year. For financial reporting purposes, no gain or loss will be recognized on the transaction. The Company's investment in BPI of $55,000,000 has been included in other current assets on the accompanying Consolidated Balance Sheet at December 31, 1993.\nIn September 1992 the Company closed The Gwinnett (Ga.) Daily News and sold the residual assets. The closing, related sale and its 1992 operations resulted in a pre-tax loss of approximately $53,768,000 ($37,113,000 after taxes or $.47 per share). The newspaper had not earned a profit since its acquisition in 1987, but its annual operating losses were not material.\nIn June 1992 the Company acquired two wholesale newspaper distribution businesses that distribute The Times and other newspapers and periodicals in New York City and central and northern New Jersey. The acquisition was accounted for as a purchase; accordingly, the operating results have been included in the consolidated financial statements from the date of the acquisition. The cost of the acquisition was approximately $34,500,000, of which $23,091,000 was paid in cash with the remainder representing net liabilities assumed. The purchase resulted in an increase in intangible assets acquired of $34,462,000.\nIn April 1991 the Company increased its interest in the International Herald Tribune S.A. to 50 percent. - ------------------------------------------------------------------------------- 3. CAPITAL INVESTMENT PROJECTS\nDepreciation of the building portion of the Company's Edison facility, amounting to approximately $14,000,000 per year, began in 1990 when the facility was substantially completed. Due to the resolution of various labor issues, commencement of production at the facility was delayed until late in 1992. Depreciation of the equipment began during the fourth quarter and was phased in as each element was placed in service with full operation of the facility beginning in the first quarter of 1993. Depreciation of the building and equipment totaled $33,000,000 in 1993 and will increase to $35,000,000 in 1994 when the facility is operational for a full year.\nIn February 1993 the Company announced that The Times closed its printing plant in Carlstadt, New Jersey, and transferred production and distribution to the new Edison facility. The carrying value of the facility (approximately $24,000,000) has been included in miscellaneous assets at December 31, 1993 pending the Company's determination of the future of the facility. The closing of the plant and decision related to its future is not expected to result in a writedown.\nIn December 1993 the Company and the City of New York executed a lease agreement and related agreements, under which the Company will lease 31 acres of City-owned land in Queens, New York, on which The Times plans to build a state- of-the-art printing and distribution facility. Such agreement will not commence until certain provisions relating to site preparation have been met and, accordingly, the transaction has not yet been recorded on the Company's financial statements. The Company estimates that the cost of the new facility will be approximately $280,000,000 with construction to begin in the summer of 1994 and completion expected in 1997. The new facility will replace presses and distribution facilities now located at The Times's facility in Manhattan. The lease will continue for 25 years after the start of construction with an option ultimately to purchase the property. Under the terms of the agreement, The Times would receive various tax and energy cost reductions. Construction of the facility is subject to approval of the Company's Board of Directors. - ------------------------------------------------------------------------------- 4. VOLUNTARY STAFF REDUCTIONS AND PRODUCTION UNION NEGOTIATIONS\nThe Company announced two fourth quarter 1993 pre-tax charges totaling $35,400,000 or $.23 per share for severance and related costs resulting from anticipated white-collar staff reductions (approximately $30,000,000) and voluntary early retirements from the composing room (approximately $5,400,000) at The Times.\nIn 1993 the Company completed the negotiations of long-term labor agreements with all of its production unions, which extend to the year 2000. These agreements include wages, payments to the unions' benefit and pension funds, job security and financial incentives. The agreements extend to all of The Times's production and distribution facilities and to any new facilities which the Company might utilize (see Note 3).\nIn connection with these agreements, the Company recorded two pre-tax charges, $28,000,000, or $.20 per share, in 1992 and $30,000,000, or $.22 per share, in 1989) for voluntary production union staff reductions at The Times related to the opening of Edison (see Note 3), the further automation of newspaper production in the composing room and the announced closing of Carlstadt.\nIn 1991 the Company recorded a $20,000,000 before-tax charge ($.15 per share) for severance and related costs resulting from a voluntary termination benefits program for approximately 160 employees at The Times, most of whom were members of The Newspaper Guild of New York.\nAt December 31, 1993 and 1992, approximately $40,000,000 and $29,000,000, respectively, are included in accrued expenses in the accompanying Consolidated Balance Sheets, which represents the unpaid balance of the pre-tax charges.\n- ------------------------------------------------------------------------------- 5. INVESTMENT IN FOREST PRODUCTS GROUP\nThe Company has equity interests in two Canadian newsprint companies and a paper manufacturing company operating as a partnership. The equity interests in the newsprint companies are: Donohue Malbaie Inc. - 49 percent; and Gaspesia Pulp and Paper Company Ltd. - 49 percent.\nIn 1993 the Company recorded an after-tax noncash charge of $47.0 million ($.56 per share) against equity in operations to write down the Company's investment in the Forest Products Group to reflect current operating conditions and economic factors in the industry.\nIn December 1991 the Company and Kimberly-Clark Corporation announced the completion of the divestiture of their jointly-owned affiliate, Spruce Falls Power and Paper Company, Limited (\"Spruce Falls\"). Spruce Falls is a producer of newsprint in which the Company held a 49.5 percent equity interest.\nIn connection with the divestiture, the Company committed to lend up to $26,500,000 (C$30,000,000) to the new owners of the mill. Such loans will take place over a five-year period ending December 1996. At December 31, 1993 and 1992 the Company had loaned Spruce Falls approximately $20,515,000 and $5,515,000, respectively, under the loan commitment. Interest on the outstanding balance is payable quarterly at annual rates ranging from 4 to 10 percent. Commencing in December 1997, the borrowings outstanding at the end of the commitment (December 1996) are payable annually over a 5 year period in 20 percent increments.\nThe Company and Myllykoski Oy, a Finnish paper manufacturing company, are partners through subsidiary companies in Madison Paper Industries (\"Madison\").\nLoans and contributions to Madison by an 80 percent-owned subsidiary of the Company totaled $1,279,000, $1,337,000 and $1,806,000, respectively, in 1993, 1992 and 1991. The partners' interests in the net assets of Madison at any time will depend on their capital accounts, as defined, at such time. Through the 80 percent-owned subsidiary, the Company's share of Madison's profits and losses is 40 percent.\nAt December 31, 1993, the Company recorded a distribution receivable from Donohue Malbaie Inc. of $8,224,000. Such amount is included in other current assets in the Company's consolidated balance sheet at such date. No other distributions were received from the Canadian newsprint companies in 1993, 1992 or 1991. The Company's share of undistributed earnings of these companies aggregated approximately $3,975,000 and $24,551,000 at December 31, 1993 and 1992, respectively.\nLoans and contributions to the Canadian newsprint companies by the Company totaled $171,000 in 1991. No loans and contributions were made in 1993 or 1992.\n- ------------------------------------------------------------------------------- Condensed Combined Balance Sheets of Forest Products Group\nDollars in thousands - ------------------------------------------------------------------------------- December 31 1993 1992 - -------------------------------------------------------------------------------\nCurrent assets $ 87,984 $ 76,317 Less current liabilities 75,073 65,026 - ------------------------------------------------------------------------------- Working capital 12,911 11,291 Fixed assets, net, etc. 345,413 372,554 Long-term debt (71,528) (77,025) Deferred income taxes, etc. (102,752) (86,755) - ------------------------------------------------------------------------------- Net assets $184,044 $220,065 - -------------------------------------------------------------------------------\nAt December 31, 1993 long-term debt of the Forest Products Group (exclusive of $10,275,000 due within one year) matures as follows: 1995, $10,335,000; 1996, $46,085,000; and 1997, $15,108,000. The maturities of a substantial portion of the debt may be accelerated if cash flow, as defined, exceed certain levels. None of the Forest Products Group's debt is guaranteed by the Company.\n- ------------------------------------------------------------------------------- Condensed Combined Statements of Operations of Forest Products Group\nDollars in thousands - ------------------------------------------------------------------------------- Year Ended December 31 1993 1992 1991 - ------------------------------------------------------------------------------- Net sales and other income $254,324 $266,451 $287,924 Costs and expenses 269,845 297,117 276,062 - ------------------------------------------------------------------------------- Income (Loss) before taxes (15,521) (30,666) 11,862 Income tax benefit (2,700) (11,680) (544) - ------------------------------------------------------------------------------- Net income (loss) $(12,821) $(18,986) $ 12,406 - -------------------------------------------------------------------------------\nThe condensed combined financial information of the Forest Products Group excludes the income tax effects related to Madison. Such tax effects (see Note 7) have been included in the Company's consolidated financial statements.\nThe accumulated translation adjustment (included in earnings reinvested in the business) decreased stockholders' equity by $2,628,000 and $1,217,000 at December 31, 1993 and 1992 respectively. Upon the disposition of Spruce Falls in 1991, stockholders' equity was reduced by $3,506,000 to reflect the accumulated translation adjustment for such company.\nAdjustments from translating certain balance sheet accounts, principally of the Canadian newsprint companies, for each of the three years in the period ended December 31, 1993, are set forth in the Consolidated Statements of Stockholders' Equity.\nDuring 1993, 1992 and 1991, the Company's Newspaper Group purchased newsprint and supercalendered paper from the Forest Products Group at competitive prices. Such purchases aggregated approximately $102,000,000, $112,000,000, and $127,000,000 respectively.\n- -------------------------------------------------------------------------------- 6. INVENTORIES\nInventories as shown in the accompanying Consolidated Balance Sheets are composed of the following:\n- --------------------------------------- Dollars in thousands - --------------------------------------- December 31 1993 1992 - --------------------------------------- Newsprint and magazine paper $38,691 $44,570 Work-in-process, etc. 8,580 6,981 - --------------------------------------- Total $47,271 $51,551 - ---------------------------------------\nUtilization of the LIFO method reduced inventories as calculated on the FIFO method by approximately $2,263,000 and $1,765,000 at December 31, 1993 and 1992 respectively. - -------------------------------------------------------------------------------- 7. INCOME TAXES\nThe Company adopted Statement of Financial Accounting Standards No. 109 - Accounting for Income Taxes (\"SFAS 109\") as of January 1, 1992 which changed its method of accounting for income taxes from the deferred method (Accounting Principles Board Opinion No. 11 - \"APB 11\") to an asset and liability approach. The cumulative effect of this change in accounting method on net income was a credit of $13,414,000 ($.17 per share) and was reflected as of January 1, 1992. Income taxes for 1991 are measured under APB 11.\nSFAS 109 requires recognition of deferred tax liabilities and assets for the estimated future tax consequences attributable to temporary differences. Such temporary differences exist when the tax basis differs from the financial reporting amount of assets or liabilities. All tax liabilities and tax assets are measured using current tax law and applicable rates. A valuation allowance is recorded to reduce deferred tax assets to amounts which, in management's judgment, are most likely to be realized.\nSFAS 109 further requires adjustment of tax balances to reflect enacted changes in tax law or rates in the period of enactment. Accordingly, 1993 results include increased tax expense resulting from the enactment of the Tax Act in August. The Tax Act increased the statutory corporate income tax rate one percent (to 35 percent) retroactive to January 1, 1993, and made other changes concerning the deductibility of certain costs in determining taxable income.\nIncome tax expense as shown in the Consolidated Statements of Operations is composed of the following:\n- ----------------------------------------------------- Dollars in thousands 1993 1992 1991 - ----------------------------------------------------- Current tax expense Federal $60,178 $8,970 $21,666 State, local, foreign 17,612 1,413 695 - ----------------------------------------------------- 77,790 10,383 22,361 - ----------------------------------------------------- Deferred tax expense Federal (26,982) (1,157) (2,335) State, local, foreign (8,919) 1,302 4,941 - ----------------------------------------------------- (35,901) 145 2,606 - ----------------------------------------------------- Income tax expense including the tax effects of equity in operations 41,889 10,528 24,967 Less income tax (benefit) expense related to equity in operations (1,342) (551) 3,207 - ----------------------------------------------------- Income tax expense $43,231 $11,079 $21,760 - -----------------------------------------------------\nTax expense in 1993 was reduced by approximately $7,000,000 and $2,485,000, respectively, relating to a decrease in valuation allowance and recognition of federal tax benefits of capital loss carryforwards. Of the decrease in valuation allowance, $4,390,000 was associated with federal tax benefits of capital loss carryforwards; with the remainder attributable to state and local tax benefits of net operating loss carryforwards. Adjustment of the Company's deferred tax balances for the one percent rate increase provided in the Tax Act added $4,359,000 to deferred tax expense, inclusive of $600,000 of expense reported in equity in operations of the forest products group. In accordance with the provisions of SFAS 109, approximately $1,600,000 of additional reduction in valuation allowance, which was established against acquired deferred tax assets, was recorded as a reduction of goodwill. No such amounts affected 1992 tax expense.\nIn connection with the Gwinnett transaction in 1992 (see Note 2), the Company had a net tax benefit of $16,655,000 on a pre-tax loss of $53,768,000. The difference of $1,626,000 between the tax benefit and such benefit calculated at the federal statutory rate is mainly attributable to an unrecognized capital loss (which increased tax expense by $3,405,000), net of the impact of previously amortized intangibles (which decreased tax expense by $1,779,000).\nIn 1991 the Company reversed a provision for income tax contingencies of $10,000,000 related to a settlement with the Internal Revenue Service for tax years 1980 through 1984.\nThe components of deferred income tax expense for 1991, which totaled $2,606,000, are as follows: depreciation $13,288,000; tax certificate $(10,409,000); tax settlement $(10,000,000); subscription expenses $7,969,000; and other net deferred tax expense of $1,758,000.\nIncome tax benefits credited directly to stockholders' equity totaled $3,595,000, $3,735,000 and $707,000 during 1993, 1992 and 1991 respectively.\nForeign taxes included in income tax expense in each of the years presented were not significant.\nF - 17\nThe reasons for the variance between the effective tax rate on income before income taxes and equity in operations of the Forest Products Group and the federal statutory rate (exclusive in 1992 of the loss on the disposition of Gwinnett) are as follows:\nYear Ended December 31 1993 1992 1991 - ------------------------------------------------------------------------------ % of % of % of Dollars in thousands Amount Pretax Amount Pretax Amount Pretax - ------------------------------------------------------------------------------ Tax at federal statutory rate $35,422 35.0% $21,180 34.0% $21,438 34.0% Increase (decrease) resulting from State and local taxes - - net 6,883 6.8 2,294 3.7 3,507 5.6 Capital loss carryforwards (6,875) (6.8) - - - - Amortization of intangible assets acquired 5,602 5.5 4,033 6.5 6,970 11.1 Change in enacted tax rate 3,759 3.7 - - - - Tax settlement - - - - (10,000) (15.9) Other - net (1,560) (1.5) 227 0.3 (155) (0.3) - ------------------------------------------------------------------------------ Subtotal 43,231 42.7% 27,734 44.5% 21,760 34.5% - ------------------------------------------------------------------------------ Gwinnett disposition - (16,655) - - ------------------------------------------------------------------------------ Income tax expense $43,231 $11,079 $21,760 - ------------------------------------------------------------------------------\nFederal income taxes currently refundable totaled $2,992,000 and $4,842,000 at December 31, 1993 and 1992, respectively, and are included in other current assets on the Consolidated Balance Sheets. The components of the net deferred tax liabilities recognized on the respective Consolidated Balance Sheets, are as follows:\n- ----------------------------------------- Dollars in thousands December 31 1993 1992 - ----------------------------------------- Deferred Tax Assets\nIntangible assets acquired $23,568 $ 23,504\nAccrued state and local taxes 19,890 18,522\nPostretirement and postemployment 78,655 40,177 benefits\nOther accrued employee benefits 110,218 25,370 and compensation\nAllowance for doubtful 23,557 24,077 accounts\nAMT credit - 4,033 carryforward\nTax loss 23,595 26,741 carryforwards\nOther 20,151 6,521 - ----------------------------------------- Total deferred tax 299,634 168,945 assets Valuation allowance (25,064) (19,851) - ----------------------------------------- Net deferred tax $274,570 $149,094 assets - -----------------------------------------\n- ----------------------------------------- Dollars in thousands December 31 1993 1992 - ----------------------------------------- Deferred Tax Liabilities Property, plant and equipment $131,189 $ 127,691\nTax certificate 137,343 145,631\nNontaxable 145,298 - acquisition\nDeferred subscription 21,743 21,361 expenses\nSafe harbor tax 20,376 24,433 lease\nOther 18,446 20,703 - ----------------------------------------- Total deferred tax 474,395 339,819 liabilities - ----------------------------------------- Net deferred tax (274,570) (149,094) assets - ----------------------------------------- Net deferred tax 199,825 190,725 liability - ----------------------------------------- Less amounts included in: Other current (4,812) - assets\nAccrued expenses 7,762 3,024 - ----------------------------------------- Deferred income $196,875 $187,701 taxes - -----------------------------------------\nAt December 31, 1993, there were no federal net operating loss carryforwards. Benefits from state and local loss carryforwards are attributable mainly to tax operating losses. Such loss carryforwards expire in accordance with provisions of applicable tax law and have remaining lives ranging from 1 to 15 years. At December 31, 1993 the tax benefits relating to these carryforwards expire as follows: 1996, $4,829,000; 1997, $7,984,000; 1998, $3,017,000; 1999 through 2003, $6,540,000 and 2004 through 2008, $1,225,000. In connection with the sale in 1989 of its cable television system, the Federal Communications Commission granted the Company a tax certificate. This certificate enabled the Company to defer income taxes on the gain on the transaction and pay such taxes over a number of years. Under the provisions of the Internal Revenue Code, this is accomplished through a reduction in the tax bases of various assets. As a result, $10,820,000, $10,388,000 and $10,409,000 of income taxes that were so deferred became currently payable in 1993, 1992 and 1991 respectively. Additional income taxes that were deferred will become currently payable over the remaining lives of those assets with reduced tax bases. Federal income tax returns for all years through 1989 have been examined by the Internal Revenue Service. Tentative agreements have been reached for all years through 1989.\nF - 18\nExaminations of the tax returns for the years 1990 through 1992 have not commenced. Management is of the opinion that any assessments resulting from these examinations will not have a material effect on the consolidated financial statements.\nEquity in operations of the Forest Products Group (see Note 5) includes the income tax effects of the Company's interest in Madison and its equity in the operations of the Canadian newsprint companies. Of such amounts, tax benefits of $585,000 in 1993, $1,219,000 in 1992 and $120,000 in 1991 are applicable to the Canadian newsprint companies. Deferred taxes attributable to the Company's interest in Madison were $1,562,000, $265,000, and $(561,000), respectively, for 1993, 1992 and 1991. These deferred taxes relate principally to differences between financial reporting and tax depreciation. The Company's consolidated federal income tax returns include the income tax effects of its interest in Madison. - -------------------------------------------------------------------------------- 8. DEBT\nLong-term debt consisted of the following:\n- ----------------------------------------- Dollars in thousands December 31 1993 1992 - ----------------------------------------- Notes due 1998-2000 (a) $200,000 $ - Notes due 1995 net of unamortized discount: 1993, $2,444; 1992, $4,169 (b) 159,856 158,131 Notes due 1995 net of unamortized premium of $3,725 in 1993(c) 53,725 -\nOther notes, due in 1993 at a weighted average interest rate of 7.80% in 1992 - 22 - ----------------------------------------- Total 413,581 158,153 Less current portion - 22 - ----------------------------------------- Total long-term portion $413,581 $158,131 - -----------------------------------------\n(a) In October 1993 the Company issued senior notes totaling $200,000,000 to an insurance company with interest payable semi-annually. Five-year notes totaling $100,000,000 were issued at a rate of 5.50 percent, and the remaining $100,000,000 were issued as six and one-half year notes at a rate of 5.77 percent. (b) In connection with the 1985 acquisition of certain newspapers, the Company issued 10-year notes with an aggregate stated value of $162,300,000 which have been discounted at an interest rate of 11.85 percent for financial reporting purposes. Interest on certain of the notes is payable semi-annually. The original difference of $12,600,000 between the stated value of the notes and the amount that results from discounting the notes at 11.85 percent is being amortized as interest expense over the term of the notes. Based on the borrowing rates currently available to the Company for bank loans with similar terms and average maturities, the fair value of these notes is $179,000,000. (c) In connection with the 1993 acquisition of The Globe (see Note 2), the Company assumed $50,000,000 of 9.34 percent fixed-rate notes maturing July 1995 which have been valued for financial reporting purposes using a discount rate of 4.25 percent. Interest on the notes is payable semi-annually. The excess of the fair value of the notes at the acquisition date over the stated value of such notes was $4,303,000, which is being amortized as a reduction of interest expense over the remaining term of the notes. The Company has an interest rate swap agreement (the \"Agreement\") with a major financial institution to manage interest costs. The Agreement matures in 1995 and effectively converts the 9.34 percent interest rate to a variable rate which is semi-annually indexed to the six-month LIBOR rate. Based on quoted market prices, the Agreement was valued at $1,800,000 at the acquisition date and is being amortized as interest expense over its term. Such amount has been included in miscellaneous assets in the accompanying balance sheet at December 31, 1993. During the 1993 fourth quarter and on December 31, 1993, the Company's effective interest rate on these unsecured notes was 6.42 percent. As of December 31, 1993, the recorded amounts for these unsecured notes and the Agreement approximate fair value. - ------------------------------------------------------------------------------ In May 1992 the Company entered into an $80,000,000 revolving credit and term loan agreement with a group of banks, which replaced the previous $100,000,000 revolving credit and term loan agreement which would have terminated in July 1992. The new agreement, as amended, terminates in May 1995. At such time, then outstanding borrowings would be payable semi-annually aggregating 5 percent, 20 percent, 45 percent and 30 percent annually from 1995 to 1998. At the Company's discretion, this facility may be converted into term loans at any time. The Company also has a $40,000,000 revolving credit agreement with the same group of banks that expires May 1994, at which time, any outstanding borrowings would be payable. The agreements permit borrowings which bear interest, at the Company's option, (i) for domestic borrowings: based on the certificates of deposit rate, the Federal Funds rate, a prime rate or a quoted rate; or (ii) for Eurodollar borrowings: based on the London interbank rate. Borrowings under these agreements may be prepaid without penalty. In October 1992 the Company entered into a new $20,000,000 revolving credit and term loan agreement with a bank and its affiliate, which replaced a previous $30,000,000 revolving credit agreement with the same bank. The new agreement, as amended, terminates in May 1995. At such time, then outstanding borrowings would be payable semi-annually aggregating 5 percent, 20 percent, 45 percent and 30 percent annually from 1995 to 1998. At the Company's discretion, this facility may be converted into term loans at any time. The Company also has entered into a $10,000,000 revolving credit agreement with the same bank and its affiliate that expires May 1994, at which time, any outstanding borrowings would be payable. The agreements permit borrowings which bear interest, at the Company's option, (i) for domestic borrowings: based on the certificates of deposit rate, a prime rate or a quoted rate; or (ii) for\nF - 19\nEurodollar borrowings based on the London interbank rate. Borrowings under these agreements may be prepaid without penalty. No borrowings under any of the above agreements were outstanding during 1993.\nBoth agreements provide for an annual commitment fee of 1\/8th of 1 percent on the unused commitment. Certain of the agreements also include provisions which require, among other matters, specified levels of stockholders' equity. At December 31, 1993 approximately $1,148,000,000 of stockholders' equity was unrestricted. Short-term debt is comprised of current maturities of long-term debt and capital lease obligations. Outstanding notes payable at December 31, 1993 consists of $62,340,000 of short-term bank borrowings at an average interest rate of 3.71 percent. There were no outstanding notes payable at December 31, 1992.\nInterest expense, net of interest income, as shown in the accompanying Consolidated Statements of Operations consisted of the following:\n- ------------------------------------------------------- Dollars in thousands Year Ended December 31 1993 1992 1991 - ------------------------------------------------------- Interest expense $29,549 $30,075 $32,401 Interest income (4,174) (3,960) (1,815) - ------------------------------------------------------- Net $25,375 $26,115 $30,586 - ------------------------------------------------------- In connection with various construction projects, interest of approximately $1,351,000 and $705,000 was capitalized as property, plant and equipment for 1993 and 1992 respectively. There was no interest capitalized in 1991. - -------------------------------------------------------------------------------- 9. LEASE COMMITMENTS\nIn December 1993, the Company and The City of New York executed a long-term lease agreement and related agreements, under which the Company will lease land to build a state-of-the-art printing and distribution facility for The Times (see Note 3).\nOperating Leases: Such lease commitments are primarily for office space and equipment. Certain office space leases provide for adjustments relating to changes in real estate taxes and other operating expenses. Rental expense amounted to $24,744,000 in 1993, $23,689,000 in 1992 and $24,159,000 in 1991. The approximate minimum rental commitments under noncancelable leases (exclusive of minimum sublease rentals of $301,000) at December 31, 1993 were as follows: 1994, $16,917,000; 1995, $11,977,000; 1996, $9,647,000; 1997, $8,566,000; 1998, $7,416,000 and $36,427,000 thereafter.\nCapital Leases: In connection with its Capital Investment Projects (see Note 3), the Company entered into a long-term lease for a building and site in Edison, New Jersey. The lease provides the Company with certain early cancellation rights, as well as renewal and purchase options. For financial reporting purposes, the lease has been classified as a capital lease; accordingly, an asset of approximately $57,000,000 (included in buildings, building equipment and improvements at December 31, 1993 and 1992) has been recorded. The following is a schedule of future minimum lease payments under all capitalized leases together with the present value of the net minimum lease payments as of December 31, 1993:\nDollars in thousands - -------------------------------------- Year Ended December 31 Amount - -------------------------------------- 1994 $ 7,221 1995 6,871 1996 6,623 1997 6,411 1998 6,400 Later years 52,800 - -------------------------------------- Total minimum lease payments 86,326 Less: amount representing interest 37,254 - -------------------------------------- Present value of net minimum lease payments including current maturities of $2,590 $49,072 - --------------------------------------\nF - 20\n- -------------------------------------------------------------------------------- 10. PENSION PLANS The Company sponsors several pension plans and makes contributions to several others in connection with collective bargaining agreements, including a joint Company-union plan and a number of joint industry-union plans. These plans cover substantially all employees. The Company-sponsored pension plans provide participating employees with retirement benefits in accordance with benefit provision formulas which are based on years of service and final average or career pay, and where applicable, employee contributions. Funding is based on an evaluation and review of the assets, liabilities and requirements of each plan. Retirement benefits are also provided under supplemental unfunded pension plans. Amounts for 1993 have increased due to the October 1, 1993 acquisition of The Globe. Net periodic pension cost was $16,461,000 in 1993, $15,082,000 in 1992, and $14,467,000 in 1991. The components of net periodic pension cost are:\n- ---------------------------------------------------------------- Dollars in thousands Year Ended December 31 1993 1992 1991 - ---------------------------------------------------------------- Service cost $14,075 $11,879 $11,210 Interest cost 26,675 24,167 22,451 Actual return on plan assets (38,907) (25,365) (37,430) Curtailment gain - (885) - Net amortization and deferral 14,618 5,286 18,236 - ---------------------------------------------------------------- Net periodic pension cost $16,461 $15,082 $14,467 - ----------------------------------------------------------------\nAssumptions used in the actuarial computations were:\n- ---------------------------------------------------------------- Year Ended December 31 1993 1992 1991 - ---------------------------------------------------------------- Discount rate 7.0% 8.0% 8.25% Rate of increase in compensation levels 5.5% 5.5% 5.5% Expected long-term rate of return on assets 8.75% 8.75% 8.75% - ----------------------------------------------------------------\nIn connection with collective bargaining agreements, the Company contributes to several other pension plans including a joint Company-union plan and a number of joint industry-union plans. Contributions are determined as a function of hours worked or period earnings. Pension cost for these plans was $17,970,000 in 1993, $15,700,000 in 1992, and $15,052,000 in 1991.\nThe funded status of the Company's plans which were valued at September 30, 1993 and 1992 is as follows:\nPlans Plans Whose Whose Assets Accumulated Exceed Benefits December 31, 1993 Accumulated Exceed Dollars in thousands Benefits Assets - ---------------------------------------------------- Actuarial present value of benefit obligation: Vested benefit obligation $187,972 $219,554 - ---------------------------------------------------- Accumulated benefit obligation $193,951 $227,102 - ---------------------------------------------------- Projected benefit obligation $251,679 $282,179 Plan assets at fair value 234,366 142,015 - ---------------------------------------------------- Projected benefit obligation in excess of plan assets 17,313 140,164 Unrecognized net losses (24,972) (20,043) Unrecognized prior service cost 7,746 (9,633)\nUnrecognized transition obligation (2,690) (2,724) Fourth-quarter contribution, net (2,675) (3,220) Adjustment required to recognize additional minimum liability - 10,087 - ---------------------------------------------------- Recorded pension (asset) liability $ (5,278) $114,631 - ----------------------------------------------------\nPlans Plans Whose Whose Assets Accumulated Exceed Benefits December 31, 1992 Accumulated Exceed Dollars in thousands Benefits Assets - ---------------------------------------------------- Actuarial present value of benefit obligation: Vested benefit obligation $230,705 $21,039 - ---------------------------------------------------- Accumulated benefit obligation $235,994 $21,153 - ---------------------------------------------------- Projected benefit obligation $296,312 $30,722 Plan assets at fair value 284,469 - - ---------------------------------------------------- Projected benefit obligation in excess of plan assets 11,843 30,722 Unrecognized net gains (losses) 6,181 (6,393) Unrecognized prior service cost (1,202) (1,005) Unrecognized net asset (transition obligation) 1,873 (6,339) Fourth-quarter contribution, net (3,172) (265) Adjustment required to recognize additional minimum liability - 4,167 - ---------------------------------------------------- Recorded pension liability $ 15,523 $20,887 - ----------------------------------------------------\nPlan assets, which were valued as of September 30, 1993 and 1992, consist of money market investments, investments in marketable fixed income and equity securities, an investment in a diversified real estate equity fund and investments in group annuity insurance contracts. The additional liability relating to the unfunded status of these plans is included in other liabilities on the Consolidated Balance Sheets as of December 31, 1993 and 1992 and miscellaneous assets includes a related intangible asset of equal amount.\nF - 21\n- -------------------------------------------------------------------------------- 11. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS AND POSTEMPLOYMENT BENEFITS The Company provides health and life insurance benefits to retired employees (and their eligible dependents) who are not covered by any collective bargaining agreements if the employee meets specified age and service requirements. The Company adopted the provisions of SFAS No. 106 - Employers' Accounting for Postretirement Benefits Other Than Pensions (\"SFAS 106\"), changing to the accrual method of accounting for these benefits effective January 1, 1992. Prior to 1992, postretirement benefit expenses were recognized on a pay-as-you- go basis and were not material. As permitted by SFAS 106, the Company elected to recognize in 1992 the accumulated postretirement benefit obligation related to prior service costs. The Company recorded this obligation of $64,856,000 ($37,411,000 after taxes or $.48 per share) as the cumulative effect of an accounting change at January 1, 1992. Net periodic postretirement cost was $10,809,000 and $7,776,000 in 1993 and 1992 respectively. The components of this cost are as follows:\n- -------------------------------------------- Dollars in thousands 1993 1992 - -------------------------------------------- Service cost for benefits earned during the period $3,955 $3,299 Interest cost on accumulated postretirement benefit obligation 6,854 5,239 Curtailment gain - (762) - -------------------------------------------- Net periodic postretirement benefit cost $10,809 $7,776 - ------------------------------------------- The Company's policy is to fund the above-mentioned payments as claims and premiums are paid. The following table sets forth the amounts included in \"Accrued Expenses\" and \"Other Liabilities\" in the Consolidated Balance Sheets at December 31, 1993 and 1992 based on valuation dates of September 30 in each year. The 1993 amounts have increased principally due to the October 1, 1993 acquisition of The Globe.\n- -------------------------------------------- Dollars in thousands - -------------------------------------------- December 31 1993 1992 - -------------------------------------------- Accumulated postretirement benefit obligation Retirees $53,677 $28,054 Fully eligible active 28,450 18,943 plan participants Other active plan participants 51,522 25,645 - -------------------------------------------- Total 133,649 72,642 Unrecognized net gains (losses) 3,093 (2,198) Fourth-quarter expense net of benefit payment 621 - - -------------------------------------------- Total accrued postretirement benefit liability 137,363 70,444 Current portion included in accrued expenses 4,040 2,591 - -------------------------------------------- Long-term accrued postretirement benefit liability $133,323 $67,853 - --------------------------------------------\nFor 1993 the accumulated postretirement benefit obligation was determined using a discount rate of 7.0 percent, an estimated increase in compensation levels of 5.5 percent and a health care cost trend rate of between 13 percent and 11 percent in the first year grading down to 5 percent in the year 2008. Increasing the assumed health care cost trend rates by one percentage point in each year and holding all other assumptions constant would increase the accumulated postretirement benefit obligation as of December 31, 1993 by $18,857,000 and increase the net periodic postretirement benefit cost for 1993 by $2,300,000. For 1992 the accumulated postretirement benefit obligation was determined using a discount rate of 8.0 percent, an estimated increase in compensation levels of 5.5 percent and a health care cost trend rate of approximately 15.0 percent for pre-age-65 benefits, decreasing to 6.25 percent in the year 2014 and thereafter and a rate of 14.75 percent for post-age-65 benefits decreasing to 6.0 percent in the year 2014 and thereafter. In connection with collective bargaining agreements, the Company contributes to several welfare plans including a joint Company-union plan and a number of joint industry-union plans. Contributions are determined as a function of hours worked or period earnings. Portions of these contributions, which cannot be disaggregated, related to postretirement benefits for plan participants. Total contributions to these welfare funds were approximately $18,000,000 and $16,800,000 in 1993 and 1992 respectively. The Company also adopted SFAS No. 112 - Employers' Accounting for Postemployment Benefits (\"SFAS 112\") as of the beginning of 1992. SFAS 112 requires that certain benefits provided to former or inactive employees, after employment but before retirement, such as workers' compensation, disability benefits and health care continuation coverage be accrued if attributable to employees' service already rendered. The cumulative effect on net income of this change in accounting method resulted in a one-time charge of $16,365,000 ($9,440,000 after taxes or $.12 per share) and has been reflected as of January 1, 1992.\nF - 22\n- -------------------------------------------------------------------------------- 12. EXECUTIVE AND NON-EMPLOYEE DIRECTORS' INCENTIVE PLAN\nUnder the Company's 1991 Executive Stock Incentive Plan and 1991 Executive Cash Bonus Plan (together the \"1991 Executive Plans\"), the Board of Directors may authorize incentive compensation awards and grant stock options to key employees of the Company. Awards may be granted in cash, restricted and unrestricted shares of the Company's Class A Common Stock, Retirement Units or such other forms as the Board of Directors deems appropriate. Under the 1991 Executive Plans, stock options of up to 10,000,000 shares of Class A Common Stock may be granted and stock awards of up to 1,000,000 shares of Class A Common Stock may be made. In adopting the 1991 Executive Plans, shares previously available for issuance of retirement units and stock options under prior plans are no longer available for future awards. Retirement Units are payable in Class A Common Stock over a period of 10 years following retirement. Stock options currently outstanding were granted under the Company's 1974 and 1984 Stock Option Plans and the 1991 Executive Plans. The Plans provide for granting of both incentive and non-qualified stock options principally at an option price per share of 100 percent of the fair market value of the Class A Common Stock on the date of grant. These options have terms of five or ten years, and become exercisable in annual periods ranging from one year to four years from the date of grant. Payment upon exercise of an option may be made in cash, with previously-acquired shares, with shares (valued at fair market value) which would be otherwise issued on the exercise of the option or any combination thereof. Under the Company's Non-Employee Directors' Stock Option Plan (the \"Directors' Plan\"), non-qualified options with ten-year terms are granted annually to each non-employee director of the Company. Each annual grant allows the director to purchase from the Company up to 1,000 shares of Class A Common Stock at the fair market value of such shares at the date of grant. Options for an aggregate of 250,000 shares of Class A Common Stock may be granted under the Directors' Plan. Outstanding stocks options granted to key employees of The Globe to purchase its Series A and\/or Series B Common Stock prior to the merger have been converted to stock options to purchase the Company's Class A Common Stock. The former Globe stock options were converted at a ratio of 0.6 shares of Class A Common for each share of Globe stock as determined by the merger agreement. All of these stock options became exercisable effective with the merger on October 1, 1993. Changes in stock options for each of the three years in the period ended December 31, 1993 were as follows:\n- -------------------------------------------------------------- Dollars in thousands Option Price except per share data Shares Per Share($) Total - -------------------------------------------------------------- Options outstanding January 1, 1991 3,296,385 4.77 to 38.87 76,344 Granted 1,269,064 20.00 to 20.81 25,391 Exercised (134,984) 4.77 to 18.40 (1,121) Terminations (94,957) 20.56 to 38.87 (2,515) - -------------------------------------------------------------- Options outstanding December 31, 1991 4,335,508 5.76 to 38.87 98,099 Granted 1,103,410 25.93 to 28.88 28,473 Exercised (466,320) 5.76 to 26.75 (7,900) Terminations (91,982) 20.56 to 36.43 (2,737) - -------------------------------------------------------------- Options outstanding December 31, 1992 4,880,616 13.96 to 38.87 115,935 Granted 1,909,080 26.50 to 30.68 50,641 Globe stock option conversion 958,654 6.89 to 22.50 14,381 Exercised (346,334) 6.89 to 26.75 (6,333) Terminations (41,175) 20.00 to 36.43 (1,116) - -------------------------------------------------------------- Options outstanding December 31, 1993 7,360,841 6.89 to 38.87 $173,508 - -------------------------------------------------------------- Options which became exercisable during 1991 1,086,077 20.56 $22,332 1992 728,859 20.00 to 20.81 14,588 1993 1,803,174 6.89 to 28.88 35,098 - -------------------------------------------------------------- Options exercisable at December 31, 1991 3,066,444 5.76 to 38.87 $72,708 1992 3,237,964 13.96 to 38.87 76,678 1993 4,673,663 6.89 to 38.87 104,789 - --------------------------------------------------------------\n- -------------------------------------------------------------------------------- 13. CAPITAL STOCK\nThe 5 1\/2 percent cumulative prior preference stock, which is redeemable at the option of the Company on 30-day's notice at par plus accrued dividends, is entitled to an annual dividend of $5.50 payable quarterly. The serial preferred stock is subordinate to the 5 1\/2 percent cumulative prior preference stock. The Board of Directors is authorized to set the distinguishing characteristics of each series prior to issuance, including the granting of limited or full voting rights; however, the consideration received must be at least $100 per share. No shares of serial preferred stock have been issued. The Class A and Class B Common Stock are entitled to equal participation in the event of liquidation and in dividend declarations. The Class B Common Stock is convertible at the holders' option on a share-for-share basis into Class A shares. As provided for in the certificate of incorporation, the Class A Common Stock has limited voting rights, including the right to elect 30 percent of the Board of Directors, and the Class A and Class B Common Stock have the right to vote together on reservations of Company stock for stock options, on the ratification of the selection of independent certified public accountants and, in certain circumstances, on acquisitions of the stock or assets of other companies. Otherwise, except as provided by the laws of the State of New York, all voting power is vested solely and exclusively in the holders of the Class B Common Stock. At a special meeting of shareholders in September 1993, an amendment of the Company's Restated Certificate of Incorporation was approved to increase the total number of authorized shares of Class A Common Stock to 200,000,000 shares, thereby increasing the Company's overall total number of authorized shares of capital stock of The New York Times Company to 200,910,000 shares. Under a stock repurchase program which commenced in June 1993 and expired at the close of The Globe transaction on October 1, 1993, the Company repurchased approximately 10,231,000 shares of its Class A Common Stock at an average price of $24.87 per share. In a new program announced in October 1993, the Company's Board of Directors authorized additional expenditures of up to $150,000,000 for repurchases of its Class A Common Stock. Under the new Board authorization, purchases may be made from time to time either in the open market or through private transactions. The number of shares that may be purchased in market transactions may be limited as a result of The Globe transaction. Purchases may be suspended from time to time or discontinued. Under this program, to date, the Company has repurchased approximately 30,000 shares of its Class A Common Stock at an average price of $24.78 per share. Had stock repurchases, under both programs, occurred as of January 1, 1993, earnings per share for the year 1993 would have been $.08. Under the 1994 Offering of the Employee Stock Purchase Plan, eligible employees may purchase Class A Common Stock through payroll deductions during 1994 at the lower of $20.03 per share (85 percent of the average market price on November 1, 1993) or 85 percent of the average market price on December 29, 1994. Shares of Class A Common Stock reserved for issuance at December 31, 1993 and 1992 were as follows:\n- -------------------------------------------------- December 31 1993 1992 - -------------------------------------------------- Retirement Units Outstanding 216,806 229,574 Stock Awards Available 993,359 - Stock Options Outstanding 7,360,841 4,880,616 Available 5,988,480 7,651,526 Employee Stock Purchase Plan Available 993,919 1,813,085 Voluntary Conversion of Class B Common Stock Available 571,624 571,804 - -------------------------------------------------- Total 16,125,029 15,146,605 - --------------------------------------------------\nF - 24\n- -------------------------------------------------------------------------------- 14. ACCOUNTING CHANGES\nDuring 1992, the Company adopted three noncash accounting changes mandated by the Financial Accounting Standards Board: SFAS No. 106-Employers' Accounting for Postretirement Benefits Other Than Pensions (see Note 11), SFAS 109- Accounting for Income Taxes (see Note 7) and SFAS 112-Employers' Accounting for Postemployment Benefits (see Note 11). All accounting changes have been adopted prospectively and, accordingly, earnings for 1991 have not been restated. The cumulative effect of adopting these accounting changes is as follows:\n- ---------------------------------------------- After-tax effects Earnings (Dollars in thousands) per share - ---------------------------------------------- Postretirement Benefits $(37,411) $(.48) Income Taxes 13,414 .17 Postemployment Benefits (9,440) (.12) -------- ----- Net charge $(33,437) $(.43) ======== ===== - ----------------------------------------------\n- -------------------------------------------------------------------------------- 15. SEGMENTS The Company's segment and related information is included on pages 2 and 3 of this Appendix. The information for the years 1993, 1992 and 1991 appearing therein is presented on a basis consistent with, and is an integral part of, the consolidated financial statements. Revenues from individual customers, revenues between business segments and revenues, operating profit and identifiable assets of foreign operations are not significant.\n- -------------------------------------------------------------------------------- 16. CONTINGENT LIABILITIES\nThere are various libel and other legal actions that have arisen in the ordinary course of business and are now pending against the Company. Such actions are usually for amounts greatly in excess of the payments, if any, that may be required to be made. It is the opinion of management after reviewing such actions with legal counsel to the Company that the ultimate liability which might result from such actions would not have a material adverse effect on the consolidated financial statements.\n- -------------------------------------------------------------------------------- 17. RECLASSIFICATIONS\nFor comparability, certain 1991 and 1992 amounts have been reclassified to conform with the 1993 presentation.\nF - 25\nINDEPENDENT AUDITORS' REPORT BOARD OF DIRECTORS AND STOCKHOLDERS OF THE NEW YORK TIMES COMPANY:\nWe have audited the accompanying consolidated balance sheets of The New York Times Company as of December 31, 1993 and 1992 and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1993. Our audits also include the financial schedules listed in the Index at Item 14(a). These consolidated financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated 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 consolidated financial statements present fairly, in all material respects, the financial position of The New York Times Company as of December 31, 1993 and 1992 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1993 in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein. As discussed in notes 7, 11 and 14, the Company changed its methods of accounting for income taxes, postretirement benefits other than pensions and postemployment benefits effective January 1, 1992 to conform with Statements of Financial Accounting Standards 109, 106 and 112.\n-Deloitte & Touche-\nNew York, New York February 10, 1994\nMANAGEMENT'S RESPONSIBILITIES REPORT\nThe Company's consolidated financial statements were prepared by management who is responsible for their integrity and objectivity. The consolidated financial statements have been prepared in accordance with generally accepted accounting principles and, as such, include amounts based on management's best estimates and judgments. Management is further responsible for maintaining a system of internal accounting control, designed to provide reasonable assurance that the Company's assets are adequately safeguarded and that the accounting records reflect transactions executed in accordance with management's authorization. The system of internal control is continually reviewed for its effectiveness and is augmented by written policies and procedures, the careful selection and training of qualified personnel and a program of internal audit. The consolidated financial statements were audited by Deloitte & Touche, independent auditors. Their audit was conducted in accordance with generally accepted auditing standards and their report is shown on this page. The Audit Committee of the Board of Directors, which is composed solely of independent directors, meets regularly with the independent auditors, internal auditors and management to discuss specific accounting, financial reporting and internal control matters. Both the independent auditors and the internal auditors have full and free access to the Audit Committee. Each year the Audit Committee selects, subject to ratification by stockholders, the firm which is to perform audit and other related work for the Company.\nMARKET INFORMATION\nThe Class A Common Stock is listed on the American Stock Exchange. The Class B convertible Common Stock and the 5 1\/2 percent cumulative prior preference stock are unlisted and are not actively traded. Dividends on the preference stock were paid at the quarterly rate of $1.375 per share during each of the two years. The approximate number of security holders of record as of January 31, 1994 was as follows: Class A Common Stock: 17,245; Class B Common Stock: 43; 5 1\/2 percent cumulative prior preference stock: 65.\nThe market price range of Class A Common Stock in 1993 and 1992 is as follows:\n- ------------------------------------------ Quarter Ended 1993 1992 - ------------------------------------------ High Low High Low March 31 $31.25 $26.37 $32.12 $22.62 June 30 31.25 23.00 32.00 26.00 September 30 26.12 22.62 29.75 25.00 December 31 28.75 22.37 28.37 23.62 Year 31.25 22.37 32.12 22.62 - ------------------------------------------\nF - 26\nThe 1993 quarters do not equal the 1993 year-end amount for earnings per share due to the weighted average number of shares outstanding used in the computations for the respective periods. Per share amounts for the respective quarters and years have been computed using the average number of common shares outstanding as presented in the table above. The significant differences in the number of shares in the 1993 periods are due principally to the issuance of approximately 36.4 million shares due to the October 1993 Globe acquisition offset, in part, by stock repurchases of approximately 10.3 million shares during the third and fourth quarter. The Company's largest source of revenues is advertising, which influences the pattern of the Company's quarterly consolidated revenues and is seasonal in nature. Traditionally, second-quarter and fourth-quarter advertising volume is higher than that in the first quarter. Advertising volume tends to be lower in the third quarter primarily because of the summer slow-down in many areas of economic activity. Quarterly trends are also affected by the overall economy and economic conditions that may exist in specific markets served by each of the Company's business segments. First-quarter 1993 was negatively affected by $3.7 million pre-tax ($.02 per share) due to a March snowstorm. Third-quarter 1993 includes $5.6 million ($.07 per share) of additional income tax expense due to the enactment of the Tax Act. Fourth-quarter 1993 includes a $2.6 million pre-tax gain ($.02 per share) on the sale of assets. Fourth-quarter 1993 includes $35.4 million of pre-tax charges ($.19 per share) for white-collar and production union staff reductions at The Times. Fourth-quarter 1993 includes an after-tax noncash charge to equity in operations of $47.0 million ($.44 per share) to write-down the Company's investment in its Forest Products Group to reflect current operating conditions and economic factors in the industry. First-quarter 1992 includes $3.1 million pre-tax gain ($.02 per share) on the sales of assets. Second-quarter 1992 was negatively affected by $11.0 million pre-tax ($.08 per share) due to labor disruptions at The Times. Third and fourth-quarter 1992 include pre-tax $2.8 million ($.02 per share) and $7.6 million ($.05 per share), respectively, for training and start-up costs for commencement of operations at Edison. Fourth-quarter 1992 includes a $28.0 million pre-tax charge ($.20 per share) for voluntary union staff reductions at The Times.\nF - 27\n1993 - Results include pre-tax $3.7 million ($.02 per share) due to a March snowstorm.\nResults include $5.6 million ($.07 per share) of additional tax expense due to the enactment of the Tax Act.\nResults include a $2.6 million pre-tax gain ($.02 per share) on the sale of assets.\nResults include $35.4 million of pre-tax charges ($.23 per share) for staff reductions at The Times.\nResults include an after-tax noncash charge of $47.0 million ($.56 per share) against equity in operations to write down the Company's investment in its Forest Products Group to reflect current operating conditions and economic factors in the industry.\n1992 - Results included a $53.8 million pre-tax loss ($.47 per share) on the closing of The Gwinnett (Ga.) Daily News.\nResults included a $3.1 million pre-tax gain ($.02 per share) from the sales of assets.\nResults included a $28.0 million pre-tax charge ($.20 per share) for voluntary union staff reductions at The Times.\nResults included $21.4 million pre-tax ($.15 per share) for labor disruptions and training and start-up costs at Edison.\n1991 - Results included a $20.0 million pre-tax charge ($.15 per share) for voluntary union staff reductions at The Times.\nResults include the reversal of a provision for income taxes of $10.0 million ($.13 per share) for a favorable tax settlement.\n1989 - Results included an after-tax gain of $193.3 million ($2.46 per share) from the sale of the Company's cable television operations. The gain and results of operations through the 1989 sale date are included as discontinued operations.\nResults included a $30.0 million pre-tax charge ($.22 per share) for voluntary union staff reductions at The Times.\nResults included an after-tax charge of $27.2 million ($.35 per share) for a valuation reserve against the Company's investment in the Forest Products Group.\n1986 - Results included an interest charge of $8.5 million ($.05 per share) which relates to a court decision arising from the Company's 1981 acquisition of two cable television systems.\n1985 - Results included a $2.8 million gain ($.03 per share) from the sale of property. The Company acquired five newspapers and two television stations for $389.6 million.\nSCHEDULE V\nTHE NEW YORK TIMES COMPANY PROPERTY, PLANT AND EQUIPMENT FOR THE THREE YEARS ENDED DECEMBER 31, 1993\n- ---------------\n(1) Net change for the period.\n(2) Includes property, plant and equipment acquired through the October 1, 1993 acquisition of The Boston Globe.\n(3) Includes reclassification of closed production facility (totaling $89 million) to miscellaneous assets pending decision related to future use of such facility.\n(4) Sale of residual assets of The Gwinnett (Ga.) Daily News.\n(5) Includes $57 million capitalized lease of building and site for a production and distribution facility in Edison, New Jersey for The New York Times.\nS-1\nSCHEDULE VI\nTHE NEW YORK TIMES COMPANY ACCUMULATED DEPRECIATION OF PROPERTY, PLANT AND EQUIPMENT FOR THE THREE YEARS ENDED DECEMBER 31, 1993\n- ---------------\n(1) Depreciation of property, plant and equipment is provided at annual rates based on estimated service lives. The rates are applied by the straight-line method using ranges of estimated service lives as follows: 15 to 50 years for buildings; 5 to 30 years for building equipment and improvements and 2 to 20 years for equipment.\n(2) Reclassification of closed production facility to miscellaneous assets pending decision related to future use of such facility.\n(3) Sale of residual assets of The Gwinnett (Ga.) Daily News.\nS-2\nSCHEDULE VIII\nTHE NEW YORK TIMES COMPANY VALUATION AND QUALIFYING ACCOUNTS FOR THE THREE YEARS ENDED DECEMBER 31, 1993\nS-3\nSCHEDULE IX\nTHE NEW YORK TIMES COMPANY SHORT-TERM BORROWINGS FOR THE THREE YEARS ENDED DECEMBER 31, 1993\n- ---------------\n(1) Calculated by dividing the aggregate amount borrowed during the year by the number of days in a year.\n(2) Calculated by dividing the total short-term interest expense by the average short-term borrowings outstanding during the period.\nS-4\nSCHEDULE X\nTHE NEW YORK TIMES COMPANY SUPPLEMENTARY INCOME STATEMENT INFORMATION FOR THE THREE YEARS ENDED DECEMBER 31, 1993\n-----------------------\n(1) Amounts for other items required by this schedule are omitted as they are presented in the consolidated financial statements or are less than 1% of consolidated revenues.\nS-5\nEXHIBIT INDEX\nExhibit No. Description - ------ ---------------------------------------------------------------\n3.1 -Certificate of Incorporation as amended by the Class A and Class B stockholders and as restated on September 29, 1993.\n3.2 -By-laws as amended through February 17, 1994.\n9.1 -Globe Voting Trust Agreement, dated as of October 1, 1993.\n10.2 -The Company's 1991 Executive Stock Incentive Plan, as amended through April 13, 1993.\n10.8 -Agreement of Lease, dated as of December 15, 1993, between The City of New York, Landlord, and the Company, Tenant (as successor to New York City Economic Development Corporation (the \"EDC\"), pursuant to an Assignment and Assumption of Lease With Consent, made as of December 15, 1993, between the EDC, as Assignor, to the Company, as Assignee).\n10.9 -Funding Agreement #1, dated as of December 15, 1993, between the EDC and the Company.\n10.10 -Funding Agreement #2, dated as of December 15, 1993, between the EDC and the Company.\n10.11 -Funding Agreement #3, dated as of December 15, 1993, between the EDC and the Company.\n10.12 -Funding Agreement #4, dated as of December 15, 1993, between the EDC and the Company.\n10.13 -New York City Public Utility Service Power Service Agreement, made as of May 3, 1993, between The City of New York, acting by and through its Public Utility Service, and The New York Times Newspaper Division of the Company.\n10.14 -Employment Agreement, dated May 19, 1993, between API, Globe Newspaper Company and William O. Taylor.\n10.16 -API's Supplemental Executive Retirement Plan, as amended effective September 15, 1993.\n21 -Subsidiaries of the Company.","section_15":""}
{"filename":"36146_1993.txt","cik":"36146","year":"1993","section_1":"ITEM 1. BUSINESS\nGENERAL\nTrustmark Corporation (Corporation) is a one-bank holding company which was incorporated under the Mississippi Business Corporation Act on August 5, 1968 and commenced doing business in November 1968. At December 31, 1993, the Corporation had total consolidated assets of $4.4 billion and total consolidated equity of $358.6 million. The Corporation's primary business activities are generated through its majority-owned subsidiary, Trustmark National Bank (Trustmark), which accounts for approximately 99.9% of total assets and total revenues of the Corporation. Trustmark, which was chartered by the State of Mississippi in 1889, is headquartered in Jackson and is the largest bank in the state having total assets at December 31, 1993, of approximately $4.4 billion and deposits of $3.2 billion.\nTrustmark's primary means of asset growth has been through mergers and acquisitions of financial institutions. The most recent acquisition involved the merger of Trustmark National Bank and the UniSouth Banking Corporation (UniSouth) of Columbus, Mississippi. This merger was consummated after the close of business on July 31, 1993, and has been accounted for by the purchase method of accounting. The stockholders of UniSouth received 1,696,524 shares of Trustmark Corporation stock and approximately $677,000 in cash in connection with this merger.\nTrustmark's retail banking system offers a variety of deposit, investment and credit products to its customers through a branch network with facilities in 142 locations. Trustmark is well established as a provider of depository, credit and cash management services to middle-market and larger businesses. These services range from payroll checking, business checking accounts, corporate savings, secured and unsecured lines of credit and loans to direct deposit payroll, sweep accounts and letters of credit. Trustmark also offers MasterCard, VISA and VISA Gold credit card services to consumers and merchants throughout Mississippi. In addition, customers continue to have access to over 95,000 ATM's worldwide through the Gulfnet and CIRRUS systems. Trustmark's Trust Services business unit provides services in three areas: custody, investment management and ancillary services such as a third party fiscal agent. Trustmark's Investment Services unit provides both institutional and retail customers with quality investment opportunities through its Dealer Bank Department and Trustmark Financial Services, Inc. (TFSI), its wholly-owned subsidiary. During 1993, TFSI opened new offices in Columbus, Meridian and Hernando with more openings planned for 1994.\nIn addition, the Corporation directly owns all of the stock of F. S. Corporation and First Building Corporation, both non-bank Mississippi corporations. F. S. Corporation previously developed automobile financing, including all incidental and related matters. First Building Corporation previously managed and operated its real estate investments. Today, F. S. Corporation and First Building Corporation are not considered significant subsidiaries.\nAs of January 31, 1994, the Corporation and its subsidiaries employed approximately 2,058 employees.\nCOMPETITION\nTrustmark competes with national and state banks in its service areas for all types of depository, credit, investment and trust services. In addition, Trustmark competes in its respective service areas with other financial institutions including savings and loan associations, personal loan companies, consumer finance companies, mortgage companies, insurance companies, brokerage firms, investment companies, credit unions and financial service operations of major retailers. Trustmark competes with these financial institutions in the areas of interest rates, the availability and quality of services and products, and the pricing of these services and products.\nSUPERVISION AND REGULATION\nThe Corporation is a registered bank holding company under the Bank Holding Company Act of 1956, as amended. As such, the Corporation is required to file an annual report and such additional information as the Board of Governors of the Federal Reserve System may require. The Act requires every bank holding company to obtain the prior approval of the Board of Governors before it may acquire substantially all the assets of any bank, or ownership or control of any voting shares of any bank, if, after the acquisition, it would own or control, directly or indirectly, more than five percent of the voting shares of the bank. In addition, a bank holding company is generally prohibited from engaging in or acquiring direct or indirect control of voting shares of any company engaged in nonbanking activities. One of the principal exceptions to this prohibition is for activities found by the Board of Governors, by order or regulation, to be closely related to banking or managing or controlling banks \"as to be a proper incident thereto.\" The Board has by regulation determined that a number of activities are closely related to banking within the meaning of the Act. In addition, the Corporation is subject to regulation by the State of Mississippi under its laws of incorporation.\nTrustmark is subject to various requirements and restrictions by federal and state banking authorities including the Office of the Comptroller of the Currency (OCC) and the Mississippi Department of Banking. Areas subject to regulation include loans, reserves, investments, issuance of securities, establishment of branches, loans to directors, executive officers and their related interests, relationships with correspondent banks, consumer protection and other aspects of operations. In addition, national banks are subject to legal limitations on the amount of earnings they may pay as dividends. Trustmark also is insured by, and therefore subject to the regulations of the Federal Deposit Insurance Corporation.\nIn December 1991, the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) was enacted. FDICIA substantially revised the depository institution regulatory and funding provisions of the Federal Deposit Insurance Act and makes revisions to several other federal banking statutes. Among other things, FDICIA requires banking regulators to take prompt corrective action whenever financial institutions do not meet minimum capital requirements. In addition, FDICIA has created restrictions on capital distributions that would leave a depository institution undercapitalized.\nIn May of 1993, the FDIC adopted the final rule implementing Section 112 of FDICIA. This regulation includes requirements, procedures and interpretive guidelines that mandate new audit and reporting requirements for financial institutions. As a result of these new requirements, certain formal attestations, assertions and documentation must be imposed on existing control structures. This regulation became effective for fiscal years ending after December 31, 1992.\nEXECUTIVE OFFICERS OF THE REGISTRANT\nThe executive officers of the Registrant including their positions with the Registrant, their ages and their principal occupations for the last five years are as follows:\nFrank R. Day, 62, Director, Chairman of the Board, President and Chief Executive Officer, Trustmark Corporation; Chairman of the Board and Chief Executive Officer, Trustmark National Bank since January, 1988. Assumed additional office of President of Trustmark Corporation at that time.\nDavid R. Carter, 42, Secretary-Treasurer of Trustmark Corporation since March 1986; Chief Financial Officer of Trustmark National Bank since May 1987.\nSTATISTICAL DISCLOSURES\nThe statistical disclosures for Trustmark Corporation are contained in Tables 1 through 12.\nTRUSTMARK CORPORATION STATISTICAL DISCLOSURES\nTABLE 1 - COMPARATIVE AVERAGE BALANCES - YIELDS AND RATES\nThe Average Assets and Liabilities table below shows the average balances for all assets and liabilities of the Corporation, the interest income or expense associated with those assets and liabilities, and the computed yield or rate based upon the interest income or expense for each of the last three years (Tax Equivalent Basis - $ in thousands):\nNonaccruing loans have been included in the average loan balances and interest collected prior to these loans having been placed on nonaccrual has been included in interest income. Interest income and average yield on tax- exempt assets have been calculated on a fully tax equivalent basis using a tax rate of 35% for 1993 and 34% for 1992 and 1991. Certain reclassifications have been made to the 1992 and 1991 statements to conform to the 1993 method of presentation.\nTRUSTMARK CORPORATION STATISTICAL DISCLOSURES (CONTINUED)\nTABLE 2 - VOLUME AND YIELD\/RATE VARIANCE ANALYSIS\nThe Volume and Yield\/Rate variance table below shows the change from year to year for each component of the tax equivalent net interest margin separated into the amount generated by volume changes and the amount generated by changes in the yield or rate (Tax Equivalent Basis - $ in thousands):\nThe change in interest due to both volume and yield\/rate has been allocated to change due to volume and change due to yield\/rate in proportion to the absolute value of the change in each. Tax-exempt income has been adjusted to a tax equivalent basis using a tax rate of 35% for 1993 and 34% for 1992 and 1991. The balances of nonaccrual loans and related income recognized have been included for purposes of these computations. TRUSTMARK CORPORATION STATISTICAL DISCLOSURES (CONTINUED)\nTABLE 3 - INVESTMENT PORTFOLIO\nThe table below indicates book values of investment securities by type at year-end for each of the last three years ($ in thousands):\nTABLE 4 - MATURITY DISTRIBUTION AND YIELDS OF INVESTMENT PORTFOLIO\nThe following table details the maturities of investment securities at December 31, 1993 and the weighted average yield for each range of maturities (Tax Equivalent Basis - $ in thousands):\nIncluded in the above maturity schedule are mortgage related securities totaling $914,918,000 which have contractual maturities as follow: Within One Year - $6,402,000; After One, But Within Five Years - $17,492,000; After Five, But Within Ten Years - $137,181,000; After Ten Years - $753,843,000. Due to the nature of mortgage related securities, the actual maturities of these investments can be substantially shorter than their contractual maturity. Management believes the actual weighted average maturity of the entire mortgage related portfolio to be approximately 2.98 years.\nAs of December 31, 1993 the Corporation held securities of one issuer with a carrying value exceeding ten percent of total stockholders' equity. General obligations of the State of Mississippi with a carrying value of $77,348,000 and an approximate fair value of $81,739,000 were held on December 31, 1993. Included in the aforementioned State of Mississippi holdings are bonds with an aggregate carrying value of $27,112,000 and an approximate fair value of $29,459,000 which are known to be prerefunded or escrowed to maturity by U. S. Government securities.\nTRUSTMARK CORPORATION STATISTICAL DISCLOSURES (CONTINUED)\nTABLE 5 - COMPOSITION OF THE LOAN PORTFOLIO\nThe table below shows the carrying value of the loan portfolio at the end of each of the last five years ($ in thousands):\nTABLE 6 - LOAN MATURITIES AND SENSITIVITY TO CHANGES IN INTEREST RATES\nThe table below shows the amounts of loans in certain categories outstanding as of December 31, 1993, which, based on the remaining scheduled repayments of principal, are due in the periods indicated ($ in thousands):\nThe following table shows all loans due after one year classified according to their sensitivity to changes in interest rates ($ in thousands):\nTRUSTMARK CORPORATION STATISTICAL DISCLOSURES (CONTINUED)\nTABLE 7 - NONPERFORMING ASSETS AND PAST DUE LOANS\nThe table below shows the Corporation's nonperforming assets and past due loans at the end of each of the last five years ($ in thousands):\nInterest which would have been accrued on nonaccrual and restructured loans if they had been in compliance with their original terms is immaterial.\nAt December 31, 1993 the Corporation had no loan concentrations greater than ten percent of total loans except as shown in Table 5.\nAt December 31, 1993 there were no interest-earning assets that would be required to be disclosed if such assets were loans.\nIt is the Corporation's policy that interest will not be accrued on any loan for which payment in full of interest or principal is not expected, on any loan which is seriously delinquent unless the obligation is both well secured and in the process of collection, or on any loan that is maintained on a cash basis due to deterioration in the financial condition of the borrower. Management considers a debt to be \"well secured\" if it is secured by collateral in the form of liens on or pledges of real or personal property that have a realizable value sufficient to discharge the debt in full or by the guaranty of a financially responsible party. A debt is considered to be \"in process of collection\" if, based on a probable specific event, it is expected that the loan will be repaid or brought current. At December 31, 1993, the Corporation has no loans about which Management has serious doubts as to their collectibility other than those disclosed above. TRUSTMARK CORPORATION STATISTICAL DISCLOSURES (CONTINUED)\nTABLE 8 - ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES\nThe table below summarizes the Corporation's loan loss experience for each of the last five years ($ in thousands):\nThe allowance for loan losses is established through a provision for loan losses charged to expenses. Loans are charged against the allowance for loan losses when Management believes that the collectibility of the principal is unlikely.\nThe allowance for loan losses is maintained at a level which Management and the Board of Directors believe is adequate to absorb estimated losses inherent in the loan portfolio. The adequacy of the allowance is reviewed on a quarterly basis by using the criteria specified in revised Comptroller of the Currency Banking Circular 201. Each review includes analyses of historical loss experience, trends in portfolio volume and composition, consideration of current economic conditions, estimated future losses in significant criticized loans and other pertinent information. Once this information is analyzed, it is used as the basis for allocation for pools of criticized loans, loans by industry or concentration, letters of credit and off-balance sheet commitments to lend. During 1993, the Corporation felt it was prudent to continue to increase the allowance given the uncertainty surrounding the national and state economies and its commitment to sound, conservative banking practices. Because the current economic recovery is predicted to produce only modest economic growth during 1994, Management will continue to take a prudent approach to the evaluation of the allowance for loan losses. TRUSTMARK CORPORATION STATISTICAL DISCLOSURES (CONTINUED)\nTABLE 9 - ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES\nThe following table is a summary by allocation category of the Corporation's allowance for loan losses at December 31, 1993. These allocations were determined by internal formulas based upon Management's analyses of the various types of risk associated with the Corporation's loan portfolio. A discussion of Management's methodology for performing these analyses follows the table ($ in thousands):\nThe Corporation maintains an allowance for loan losses which is considered sufficient to absorb potential losses. The methodology employed in order to determine an amount which is considered adequate utilizes the criteria specified in the Office of the Comptroller of the Currency's revised Banking Circular 201 and guidance provided in the recently issued Interagency Policy Statement. Loss percentages were uniformly applied to pools of risk-rated loans within the total portfolio. The percentages utilized were determined based on migration analysis, previously established floors for each category and economic factors. In addition, relationships of $500,000 or more which were risk-rated Other Loans Especially Mentioned (OLEM) or Substandard and all which were risk-related Doubtful were reviewed by the Corporation's Internal Asset Review staff to determine if the standard percentages appeared to be sufficient to cover potential loss on each line. In the event that the percentages on any particular lines were determined to be insufficient, additional allocations were made based upon recommendations of lending and asset review personnel.\nIndustry allocations were made based on concentrations of credit within the portfolio as well as arbitrary designation of certain other industries by Management.\nThe general allocation is included in the allowance to cover potential loan losses within portions of the loan portfolio not addressed in the preceeding allocations. The types of loans included in the general allocation were mortgage loans, direct and indirect installment loans, credit card loans and overdrafts. The actual allocation amount was based upon the more conservative estimate of loss experience within these categories during 1993 or the historical 5-year moving average for each category or previously established floors.\nThe amount included in the allocation for lines of credit and letters of credit consists of a percentage of the unused portion of those lines and the amount outstanding in letters of credit. Since the Corporation has had negligible loss experience in these categories, arbitrary percentages, which represented the same percentages applied to the funded portions of the commercial and retail loan portfolios, were applied to cover any potential losses.\nThe remaining $28,022,000 is discretionary and serves as added protection in the event that any of the above specific components are determined to be inadequate or for issues that cannot or have not been measured on a quantitative basis over a prolonged period of time. During 1993, the Corporation felt it was prudent to continue to increase the allowance given the uncertainty surrounding the economy and its commitment to sound, conservative banking practices. Because of the imprecision inherent in most estimates of expected credit losses, Management will continue to take a prudent approach in the evaluation of the allowance for loan losses.\nAs is shown in Table 8, net charge-offs decreased during 1993 compared to 1992. With a similar decline in nonperforming assets during 1993, it is anticipated that the level of net charge-offs for 1994 will compare favorably to those experienced in recent years.\nTRUSTMARK CORPORATION STATISTICAL DISCLOSURES (CONTINUED)\nTABLE 10 - TIME DEPOSITS OF $100,000 OR MORE\nThe table below shows maturities on outstanding time deposits of $100,000 or more at December 31, 1993 ($ in thousands):\nTABLE 11 - SELECTED RATIOS\nThe following ratios are presented for each of the last three years:\nTABLE 12 - SHORT-TERM BORROWINGS\nThe table below presents certain information concerning the Corporation's short-term borrowings for each of the last three years ($ in thousands):\nITEM 2.","section_1A":"","section_1B":"","section_2":"ITEM 2. PROPERTIES\nThe Corporation does not directly own or lease any physical properties. All properties are owned or leased by Trustmark whose main office is located in Jackson, Mississippi and is housed in a 14-floor combination office and bank building owned in fee. Approximately 132,000 square feet (50%) of the rentable space in the building is allocated to bank use with the remainder occupied by tenants on a lease basis. In total, Trustmark operates 89 full-service branches, 27 limited-service branches and 26 off-premise automated teller machines. Trustmark leases 34 of the 142 total locations with the remainder being owned.\nITEM 3.","section_3":"ITEM 3. LEGAL PROCEEDINGS\nThe Corporation is defendant in various legal actions arising in the normal course of business. Management and legal counsel are of the opinion that the outcome of these matters will not have a material adverse effect on the Corporation's financial condition.\nITEM 4.","section_4":"ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS\nThere were no matters submitted to the Corporation's shareholders during the fourth quarter of 1993.\nPART II\nITEM 5.","section_5":"ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS\nThe Corporation's common stock is listed for trading on the Nasdaq Stock Market. At February 28, 1994 there were approximately 4,200 shareholders of record of the Corporation's common stock. Other information required by this item can be found in Note 14-Stockholders' Equity and the table captioned \"Principal Markets and Prices of the Corporation's Stock\" included in the Registrant's 1993 Annual Report to Shareholders and is incorporated herein by reference.\nITEM 6.","section_6":"ITEM 6. SELECTED FINANCIAL DATA\nThe information required by this item can be found in the table captioned \"Selected Financial Data\" included in the Registrant's 1993 Annual Report to Shareholders and is incorporated herein by reference.\nITEM 7.","section_7":"ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS\nThe information required by this item can be found in \"Management's Discussion and Analysis of Financial Condition and Results of Operations\" included in the Registrant's 1993 Annual Report to Shareholders and is incorporated herein by reference.\nITEM 8.","section_7A":"","section_8":"ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA\nThe Consolidated Financial Statements of Trustmark Corporation and Subsidiaries, the accompanying Notes to Consolidated Financial Statements and the Report of Independent Public Accountants are contained in the Registrant's 1993 Annual Report to Shareholders and are incorporated herein by reference. The table captioned \"Summary of Quarterly Results of Operations\" is also included in the Registrant's 1993 Annual Report to Shareholders and is incorporated herein by reference.\nITEM 9.","section_9":"ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE\nThere has been no change of accountants within the two-year period prior to December 31, 1993.\nPART III\nITEM 10.","section_9A":"","section_9B":"","section_10":"ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT\nInformation on the directors of the Registrant can be found in Section II, \"Election of Directors\" and Section IX, \"Other Information Concerning Directors\" contained in Trustmark Corporation's Proxy Statement dated February 11, 1994 and is incorporated herein by reference. Information on the Registrant's executive officers is included in Part I of this report.\nITEM 11.","section_11":"ITEM 11. EXECUTIVE COMPENSATION\nInformation required by this item can be found in Section V, \"Executive Compensation\", Section VI, \"Compensation Committee Report on Executive Compensation\", Section VII, \"Compensation Committee Interlocks and Insider Participation in Compensation Decisions\" and Section IX, \"Other Information Concerning Directors\" contained in Trustmark Corporation's Proxy Statement dated February 11, 1994 and is incorporated herein by reference.\nITEM 12.","section_12":"ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT\nInformation regarding security ownership of certain beneficial owners and Management can be found in Section III, \"Voting Securities and Principal Holders Thereof\" and Section IV, \"Ownership of Equity Securities by Management\" contained in Trustmark Corporation's Proxy Statement dated February 11, 1994 and is incorporated herein by reference.\nThe Registrant knows of no arrangements which may at a subsequent date result in a change in control of the Registrant.\nITEM 13.","section_13":"ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS\nInformation regarding certain relationships and related transactions can be found in Section VIII, \"Transactions with Management\" contained in Trustmark Corporation's Proxy Statement dated February 11, 1994 and is incorporated herein by reference.\nPART IV\nITEM 14.","section_14":"ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K\nA-1. Financial Statements\nThe report of Arthur Andersen & Co., independent auditors, and the following consolidated financial statements of Trustmark Corporation and Subsidiaries are included in the Registrant's 1993 Annual Report to Shareholders and are incorporated into Part II, Item 8 herein by reference:\nReport of Independent Public Accountants Consolidated Balance Sheets as of December 31, 1993 and 1992 Consolidated Statements of Income for the Years Ended December 31, 1993, 1992 and 1991 Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December 31, 1993, 1992 and 1991 Consolidated Statements of Cash Flows for the Years Ended December 31, 1993, 1992 and 1991 Notes to Consolidated Financial Statements (Notes 1 through 15) Selected Financial Data, Summary of Quarterly Results of Operations, and Principal Markets and Prices of the Corporation's Stock\nA-2. Financial Statement Schedules\nThe schedules to the consolidated financial statements set forth by Article 9 of Regulation S-X are not required under the related instructions or are inapplicable and therefore have been omitted.\nA-3. Exhibits\nThe exhibits listed in the Exhibit Index are filed herewith or are incorporated herein by reference.\nB. Reports on Form 8-K\nThere have been no reports on Form 8-K filed by the Registrant for the quarter ended December 31, 1993. SIGNATURES\nPursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.\nTRUSTMARK CORPORATION\nBY: \/s\/ FRANK R. DAY BY: \/s\/ DAVID R. CARTER Frank R. Day David R. Carter Chairman of the Board, Secretary-Treasurer President and Chief Executive Officer\nDATE: March 8, 1994 DATE: March 8, 1994 SIGNATURES\nPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:\nDATE: March 8, 1994 BY: \/s\/ J. KELLY ALLGOOD J. Kelly Allgood, Director\nDATE: March 8, 1994 BY: \/s\/ REUBEN V. ANDERSON Reuben V. Anderson, Director\nDATE: March 8, 1994 BY: \/s\/ JOHN L. BLACK, JR. John L. Black, Jr., Director\nDATE: March 8, 1994 BY: \/s\/ HARRY H. BUSH Harry H. Bush, Director\nDATE: March 8, 1994 BY: \/s\/ ROBERT P. COOKE III Robert P. Cooke III, Director\nDATE: March 8, 1994 BY: \/s\/ D. G. FOUNTAIN, JR. D. G. Fountain, Jr., Director\nDATE: March 8, 1994 BY: \/s\/ C. GERALD GARNETT C. Gerald Garnett, Director\nDATE: March 8, 1994 BY: \/s\/ WILLIAM F. GOODMAN, JR. William F. Goodman, Jr., Director\nDATE: March 8, 1994 BY: \/s\/ MATTHEW L. HOLLEMAN III Matthew L. Holleman III, Director\nDATE: March 8, 1994 BY: \/s\/ AARON J. JOHNSTON Aaron J. Johnston, Director\nDATE: March 8, 1994 BY: \/s\/ FRED A. JONES Fred A. Jones, Director\nDATE: March 8, 1994 BY: \/s\/ T. H. KENDALL III T. H. Kendall III, Director DATE: March 8, 1994 BY: \/s\/ ROBERT V. MASSENGILL Robert V. Massengill, Director\nDATE: March 8, 1994 BY: \/s\/ DONALD E. MEINERS Donald E. Meiners, Director\nDATE: March 8, 1994 BY: \/s\/ WILLIAM NEVILLE III William Neville III, Director\nDATE: March 8, 1994 BY: \/s\/ GUS A. PRIMOS Gus A. Primos, Director\nDATE: March 8, 1994 BY: \/s\/ BEN PUCKETT Ben Puckett, Director\nDATE: March 8, 1994 BY: Clyda S. Rent, Director\nDATE: March 8, 1994 BY: \/s\/ WILLIAM THOMAS SHOWS William Thomas Shows, Director\nDATE: March 8, 1994 BY: \/s\/ HARRY M. WALKER Harry M. Walker, Director\nDATE: March 8, 1994 BY: \/s\/ PAUL H. WATSON, JR. Paul H. Watson, Jr., Director\nDATE: March 8, 1994 BY: \/s\/ ALLEN WOOD, JR. Allen Wood, Jr., Director EXHIBIT INDEX\n3-a Articles of Incorporation, as amended. Filed as Exhibit 3 to the Corporation's Form 10-K Annual Report for the year ended December 31, 1990, incorporated herein by reference\n3-b Bylaws, as amended. Filed as Exhibit 3-b to the Corporation's Form 10-K Annual Report for the year ended December 31, 1991, incorporated herein by reference.\n10-a Deferred Compensation Plan for Directors of Trustmark Corporation. Filed as Exhibit 10 to the Corporation's Form 10-K Annual Report for the year ended December 31, 1991, incorporated herein by reference.\n10-b Deferred Compensation Plan for Executive Officers of Trustmark National Bank.\n13 Only those portions of the Registrant's 1993 Annual Report to Shareholders expressly incorporated by reference herein are included in this exhibit and, therefore, are filed as a part of this report on Form 10-K.\nAll other exhibits are omitted as they are inapplicable or not required by the related instructions.","section_15":""}
{"filename":"48898_1993.txt","cik":"48898","year":"1993","section_1":"Item 1. Business\nHubbell Incorporated (herein referred to as \"Hubbell\", the \"Company\" or the \"registrant\", which references shall include its divisions and subsidiaries as the context may require) was founded as a proprietorship in 1888, and was incorporated in Connecticut in 1905. For over a century, Hubbell has manufactured and sold high quality electrical and electronic products for a broad range of commercial, industrial, telecommunications, and utility applications. Since 1961, Hubbell has expanded its operations into other areas of the electrical industry and related fields. Hubbell products are now manufactured or assembled by seventeen divisions and subsidiaries at twenty-six locations in the United States, Canada, Puerto Rico, Mexico, United Kingdom and Singapore. Hubbell also participates in joint ventures with partners in Germany and Taiwan, and maintains sales offices in Malaysia, Indonesia, Germany, Hong Kong, South Korea, and the Middle East.\nHubbell is primarily engaged in the engineering, manufacture and sale of electrical and electronic products. These products can be divided into three general segments: products primarily used in low-voltage applications, products primarily used in high-voltage applications and products that either are not directly related to the electrical business, or, if related, cannot be clearly classified on a voltage application basis. Hubbell defines \"low-voltage\" as being 600 volts and less and \"high-voltage\" as greater than 600 volts. Reference is made to page 35 for information relative to Industry Segment and Geographic Area Information for 1993, 1992 and 1991.\nIn March, 1993, Hubbell acquired the stock of E. M. Wiegmann & Co., Inc. (\"Wiegmann\"). Wiegmann, located in Freeburg, Illinois, manufactures and sells a wide range of cabinets, panels, consoles and other enclosures used to mount and protect transformers, industrial controls, wireway ducts and fittings. Additional information relating to the Wiegmann acquisition can be found on page 6 of this document under \"Outlet Boxes, Enclosures and Fittings.\"\nOn January 19, 1994, in reporting its fourth quarter - 1993, and full year - 1993, results, Hubbell announced implementation of a restructuring program which will include the consolidation of all or a portion of ten manufacturing facilities, a reduction in labor force of approximately 6%, the reorganization of certain operation's management structure, and a realignment of warehousing and product distribution capabilities.\nAs noted on page 37, the Company announced on March 16, 1994, that it had entered into an agreement to purchase A. B. Chance Industries, Inc. (\"Chance\"). Chance, with facilities in Centralia and Mexico, Missouri; Ontario, Canada; and Bristol, England, manufactures products used in the electrical transmission, distribution and telecommunications industries, including electrical apparatus (overhead and underground distribution switches, fuses, contacts, enclosures and sectionalizers); anchors; hardware; insulators (porcelain and polymer); and hot-line tools and other safety equipment. The transaction is subject to completion of certain conditions under the agreement and obtaining of regulatory approvals.\nPRODUCTS USED IN LOW-VOLTAGE APPLICATIONS\nElectrical Wiring Devices\nThe Wiring Device Division of Hubbell specializes in the manufacture and sale of highly durable and reliable wiring devices which are supplied principally to industrial and commercial customers. These products, comprising several thousand catalog items, include plugs, receptacles, (including surge suppressor units), wall outlets, connectors, adapters, floor boxes and switches (including automatic motion sensing switches).\nThe Wiring Device Division's pin-and-sleeve devices have incorporated improved water and dust-tight construction and impact resistance. In addition, Hubbell's flexible wiring systems offer standardized connectors and cable lengths for integration with electrical, lighting and power fixtures in both the domestic and international markets. Switch and receptacle wall plates produced by Hubbell Plastics, Inc., are distributed through the Wiring Device Division, feature proprietary thermoplastic materials offering high impact resistance and durability, and are available in a variety of colors. Architectural wiring systems, including the system PDC (under carpet cable systems for power, data and communications transmission) provide efficiency and flexibility in both initial installation and remodeling application.\nHubbell also manufactures wiring devices for use in certain environments requiring specialized products. The Wiring Device Division also sells ground fault circuit interrupter units for residential and industrial applications. Some of these units contain a number of outlets to which electrically-powered equipment may be simultaneously connected for ground fault protection. Ground fault units interrupt the circuit to which they are connected when a fault to ground is detected to protect the user from potentially lethal shock.\nBryant Electric, Inc. manufactures and sells electrical wiring devices, including plugs, connectors, receptacles, switches, lampholders, motor control pendants, weatherproof enclosures, and wall plates, to a separate market segment of industrial and commercial customers, utilizing its own sales and marketing organization.\nHubbell maintains operations in the United Kingdom, Singapore, Canada and Mexico which sell a variety of wiring device products similar to those produced in the United States. Most of the wiring device products sold by these operations are manufactured from parts shipped from the United States.\nLighting Fixtures\nHubbell Lighting, Inc. sells lighting fixtures and accessories for both indoor and outdoor applications in the United States, Canada, Mexico, United Kingdom, Singapore and elsewhere internationally. Hubbell Lighting has three basic classifications of products; specifically, Outdoor, Industrial and Commercial. The Outdoor products include floodlights, landscape lights, roadway lights and poles, which are used to illuminate athletic and recreational fields, service stations, outdoor display signs, parking lots, roadways and streets, security areas, shopping centers and similar areas. In addition, a line of decorative outdoor fixtures is sold for use in residences, parking lots, gardens and walkways. The Industrial products include fixtures used to illuminate factories, work spaces, and similar areas, including specialty requirements such as paint rooms, clean rooms and warehouses. The Commercial products include fluorescent, emergency and exit, and recessed and track fixtures which are used for offices, schools, hospitals, retail stores, and similar applications. The fixtures use high-intensity discharge lamps, such as mercury-vapor, high-pressure sodium-vapor, and metal-halide lamps, as well as quartz, fluorescent and incandescent lamps, all of which are purchased from other sources. Hubbell Lighting also manufactures a broad range of track and down lighting fixtures and accessories sold under the Marco name. These products supplemented existing track and down lighting product lines developed internally by Hubbell Lighting. Hubbell Lighting also has a line of Life Safety products, fixtures and related components which are used in specialized safety applications. Industrial Controls\nHubbell Industrial Controls, Inc. manufactures and sells a variety of heavy-duty electrical control products which have broad application in the control of industrial equipment and processes. These products range from standard and specialized industrial control components to combinations of components that control entire industrial manufacturing processes. Standard products include motor speed controls, pendant-type push-button stations, power and grounding resistors and overhead crane controls. Hubbell Industrial Controls, Inc. also manufactures and sells a line of transfer switches used to direct electrical supply from alternate sources and a line of fire pump control products used in fire control systems.\nIndustrial controls are also manufactured and sold in the United Kingdom by Hubbell, Ltd. Products sold by this subsidiary are used in motor control applications and include fuse switches, contactors and solid state timers.\nSpecial Application Products\nIn addition to its other products, Killark Electric Manufacturing Company manufactures and sells weather proof and hazardous location products suitable for explosion proof applications. These products consist of plugs and receptacles, enclosed and gasketed HID and incandescent lighting fixtures, and standard and custom configuration control stations.\nHazardous locations are those areas where a potential for explosion and fire exists due to the presence of flammable gasses, vapors, dust or easily ignitable fibers and include such places as refineries, petro-chemical plants, grain processing areas and elevators.\nSales and Distribution of Low-Voltage Products\nA majority of Hubbell's low-voltage products are stock items and are sold through distributors, home centers and lighting showrooms. A portion of these products, primarily industrial controls, are sold directly to the customer. Special application products are sold primarily through electrical distributors to contractors, industrial customers and original equipment manufacturers.\nHubbell maintains a sales organization to assist potential users with the application of certain products to their specific requirements. Hubbell also maintains regional offices in the United States which work with architects, engineers, industrial designers, original equipment manufacturers and electrical contractors for the design of electrical systems to meet the specific requirements of industrial and commercial users.\nHubbell is also represented by sales representatives for its lighting fixtures, and industrial controls product lines, as well as products of the Wiring Device Division.\nThe sales of low-voltage products accounted for approximately 52% of Hubbell's total revenue in 1993, 54% in 1992 and 55% in 1991. PRODUCTS USED IN HIGH-VOLTAGE APPLICATIONS\nInsulated Wire and Cable\nThe Kerite Company manufactures and sells premium quality, high performance, insulated electric power cable for application in critical circuits of electric utilities and major industrials. This product line utilizes proprietary insulation systems and unique designs to meet the increasingly demanding specifications of its customers. Applications include nuclear and fossil fuel generating plants, underground and submarine transmission and distribution systems, petrochemical plants and mines. Kerite produces specially-designed cable for supplying power to submersible pumps in oil wells. This cable is designed to offer increased service life in the extreme compressive, temperature and corrosive conditions encountered in these adverse environments. The Kerite Company also manufactures accessories for splicing and terminating cable ends.\nElectrical Transmission and Distribution Products\nThe Ohio Brass Company manufactures a complete line of polymer insulators, and high-voltage surge arresters used in the construction of electrical transmission and distribution lines and substations. The Ohio Brass Company's primary focus in this product area is its Hi*LiteXL and Veri*Lite polymer insulator line and its DynaVar and Protecta*Lite surge arrester lines. Electrical transmission products, primarily suspension insulators, are used in the expansion and upgrading of electrical transmission capability.\nHigh Voltage Test and Measurement Equipment\nAcquired in November, 1992, Hipotronics, Inc. manufactures and sells a broad line of high voltage test and measurement systems to test materials and equipment used in the generation, transmission and distribution of electricity. In addition, Hipotronics manufactures test equipment and high voltage power supplies for use in electrical and electronic industries. Principal products include AC\/DC hipot testers and megohmmeters, cable fault location systems, oil testers and DC hipots, impulse generators and digital measurement systems, AC series resonant and corona detection systems, DC test sets and power supplies, the Peschel variable transformer, voltage regulators, and motor and transformer test sets.\nSales and Distribution of High-Voltage Products\nSales of high-voltage products are made through distributors and directly to users such as electric utilities, mining operations, industrial firms, and engineering and construction firms engaged in electric transmission projects. Hipotronics' products are sold primarily by direct sales to its customers in the United States and in foreign countries through its sales engineers, independent sales representatives and its sales and service office in Germany.\nWhile Hubbell believes its sales in this area are not materially dependent upon any customer or group of customers, a decrease in purchases by public utilities does affect this category.\nThe sale of high-voltage products accounted for approximately 16% of Hubbell's total revenue in 1993 and 14% and 15% in 1992 and 1991, respectively. PRODUCTS NOT CLASSIFIED ON A VOLTAGE BASIS\nOutlet Boxes, Enclosures and Fittings\nRaco Inc. is a leading manufacturer of steel and plastic boxes used at outlets, switch locations and junction points as well as a broad line of fittings for the electrical industry, including rigid conduit fittings, EMT (thinwall) fittings and other metal conduit fittings. Raco also has a complete electrical nonmetallic family of products (ENT) including PVC conduit tubing, fittings and enclosures.\nThe major markets for Raco Inc.'s products include industrial, commercial and residential construction, the do-it-yourself market, the export market, and the original equipment manufacturer market. Raco Inc.'s products are sold primarily through distributors and in some retail and hardware outlets.\nHubbell-Bell, Inc. manufactures a variety of electrical box products, with an emphasis on weather-resistant types suitable for outdoor application. The weatherproof lines include a full assortment of boxes, covers, combination devices, lampholders, and lever switches. Bell's products are sold primarily through electrical and hardware distributors.\nWiegmann manufactures a full-line of fabricated steel enclosures such as rainproof and dust-tight consoles and cabinets, telephone and transformer cabinets and electronic rack enclosures. Wiegmann's products are primarily sold through distributors to industrial customers and original equipment manufacturers.\nIn addition to its other products, Hubbell Canada Inc. manufactures a line of quality nonmetallic plastic switch and outlet boxes configured for the Canadian residential construction market.\nKillark Electric is a leading manufacturer of quality standard and special application enclosures and fittings including hazardous location products for use in installations such as chemical plants, pipelines, grain towers, coal handling facilities and refineries. These products include switch boxes, cord connectors, service entrance fittings, conduit bodies, fittings and cast aluminum enclosures. Killark also is a major participant in the maintenance and repair, commercial and industrial construction segments of the domestic conduit and raceway fittings market. Killark products are sold primarily through electrical distributors to contractors, industrial customers and original equipment manufacturers.\nVoice and Data Signal Processing Equipment\nPulse Communications, Inc. designs and manufactures a line of voice and data signal processing equipment primarily for use by the telephone and telecommunications industry. Customers of this product line include various telecommunications companies, the Regional Bell Operating Companies, independent telephone companies and specialized common carriers and companies with private networks. Pulse Communications, Inc. also manufactures electronic systems which monitor various conditions, such as telephone traffic levels or the occurrence of certain events at one or more remote locations. The information obtained is processed and appropriate corrective or alarm signals are generated and transmitted back to a central station.\nThese products are sold primarily by direct sales to its customers in the United States and in foreign countries through Pulse Communications, Inc.'s sales personnel and sales representatives. Hubbell Premise Wiring, Inc. manufactures components used in telecommunications applications for voice and data signals. Products include adapters and outlets, quick connect jacks, connectorized cables, patch panels, baluns, undercarpet cable and other components used in the processing, distribution, and termination functions for local area networks (LANS) in commercial and industrial buildings. These products are sold through direct sales and by selected, independent telecommunications representatives.\nHolding Devices\nThe Kellems Division manufactures a line of Kellems grips used to pull, support and relieve stress in elongated items such as cables, electrical cords, hoses and conduits. The grips are made of wire mesh in a range of sizes and strengths to accommodate differing needs. The mesh part of the grip is designed to tighten around the surface of the items under tension.\nKellems also makes a line of cord connectors designed to prevent electrical conductors from pulling away from electrical terminals to which the conductors are attached, and wire management products including flexible, non-metallic conduit and fittings and non-metallic surface raceway products used in wiring and cable harness installations. Products are manufactured at Hubbell's facilities in Stonington, Connecticut; Pickering, Ontario, Canada; Kempston, Bedfordshire, England; and Vega Baja, Puerto Rico. These products are sold primarily through distributors.\nThe sale of products not classified on a voltage basis accounted for approximately 32% of Hubbell's total revenue in 1993 and 32% in 1992 and 30% in 1991.\nINFORMATION APPLICABLE TO ALL GENERAL CATEGORIES\nInternational Operations\nHubbell Ltd. in the United Kingdom manufactures and sells fuse switches, contactors, solid state timers, lighting fixtures, and selected wiring device products.\nHubbell Canada Inc. and Hubbell de Mexico, S.A. de C.V. currently manufacture and\/or market wiring devices, lighting fixtures, grips, fittings, plastic outlet boxes, hazardous location products and electrical transmission and distribution products. Industrial Controls products are sold in Canada through an independent sales agent.\nHarvey Hubbell S.E. Asia Pte. Ltd. assembles and\/or markets wiring devices, lighting fixtures, hazardous location products, electrical transmission and distribution products and cable.\nHubbell also manufactures electrical wiring devices and selected holding devices in Aibonito, Puerto Rico, and Vega Baja, Puerto Rico. Hubbell also has interests in various other international operations such as joint ventures in Germany and Taiwan, and others which are not material to its business. Hubbell also has sales offices in Malaysia, Indonesia, Germany, Hong Kong, Mexico, South Korea and the Middle East.\nRaw Materials\nPrincipal raw materials used in the manufacture of Hubbell products include steel, brass, copper, aluminum, bronze, plastics, phenolics, elastomers and petrochemicals. Hubbell also purchases certain electrical and electronic components, including solenoids, lighting ballasts, printed circuit boards, integrated circuit chips and cord sets, from a number of suppliers.\nHubbell is not materially dependent upon any one supplier for raw materials used in the manufacture of its products and equipment and, at the present time, raw materials and components essential to its operation are in adequate supply.\nPatents\nHubbell has approximately 450 active United States and foreign patents covering many of its products, which expire at various times. While Hubbell deems these patents to be of value, it does not consider its business to be dependent upon patent protection. Hubbell is licensed under patents owned by others and grants licenses under certain of its patents.\nWorking Capital\nHubbell maintains sufficient inventory to enable it to provide a high level of service to its customers. The inventory levels, payment terms and return policies are in accord with the general practices of the electrical products industry and standard business procedures.\nBacklog\nBacklog of orders believed to be firm at December 31, 1993 and 1992 were approximately $60,400,000 and $54,700,000, respectively. Most of the backlog is expected to be shipped in the current year.\nAlthough this backlog is important, the majority of Hubbell's revenues result from sales of inventoried products or products that have short periods of manufacture.\nCompetition\nHubbell experiences substantial competition in all categories of its business, but does not compete with the same companies in all its product categories. The number and size of competitors vary considerably depending on the product line. Hubbell cannot specify with exactitude the number of competitors in each product category or their relative market position. However, some of its competitors are larger companies with substantial financial and other resources.\nHubbell considers product performance, reliability, quality and technological innovation as important factors relevant to all areas of its business and considers its reputation as a manufacturer of quality products to be an important factor in its business. In addition, product price and other factors can affect Hubbell's ability to compete.\nEnvironment\nCompliance with Federal, State and local provisions regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, is not believed to have any material effect upon the financial position or the competitive position of Hubbell. Employees\nAs of December 31, 1993, Hubbell had approximately 5,885 full-time employees, including salaried and hourly personnel. Approximately 1,750 of Hubbell's United States employees are represented by seven labor unions. Hubbell considers its labor relations to be satisfactory.\nItem 2.","section_1A":"","section_1B":"","section_2":"Item 2. Properties\nThe following is a list of Hubbell's material manufacturing facilities, classified by segment:\nHubbell owns and occupies its corporate headquarters and executive office, containing a total of approximately 85,000 square feet, on property located in Orange, Connecticut. Bryant Electric leases its administrative headquarters and engineering facility, containing a total of approximately 39,771 square feet, in Milford Connecticut.\nHubbell and its subsidiaries own or lease warehouses and distribution centers containing an aggregate of approximately 733,400 square feet. Hubbell believes its manufacturing and warehousing facilities are adequate to carry on its business activities.\nItem 3.","section_3":"Item 3. Legal Proceedings\nThere are no material pending legal proceedings to which Hubbell or any of its subsidiaries is a party or of which any of their property is the subject, other than ordinary and routine litigation incident to their business.\n- ---------------------\n(1) 69,100 square feet leased (2) Leased * Some products also are classified in the low voltage segment. Item 4.","section_4":"Item 4. Submission of Matters to a Vote of Security Holders\nNo matters were submitted to a vote of security holders during the fourth quarter of 1993.\nPART II\nItem 5.","section_5":"Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters\nThe Company's Class A and Class B common stocks are principally traded on the New York Stock Exchange under the symbols \"HUBA\" and \"HUBB\". The following tables provide information on market prices, dividends declared and number of common shareholders:\nTHIS PAGE INTENTIONALLY LEFT BLANK Item 6.","section_6":"Item 6. Selected Financial Data\nThe following summary should be read in conjunction with the consolidated financial statements and notes and Exhibit 11 contained herein (Dollars in thousands, except per share amounts).\n* In the fourth quarter of 1993, the Company recorded a restructuring charge for consolidation of manufacturing and distribution operations and other productivity programs which reduced net income by $31,000,000, $0.98 per share. Excluding the restructuring charge, net earnings from operations would have been $97,306,000, $3.08 per share.\nItem 7.","section_7":"Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations\nLIQUIDITY AND CAPITAL RESOURCES\nManagement views liquidity on the basis of the Company's ability to meet operational needs, fund additional investments, including acquisitions, and make dividend payments to shareholders.\nAt December 31, 1993, the Company's financial condition remained strong with working capital of $131.9 million and a current ratio of 1.6 to 1. Cash and temporary cash investments increased by $16.0 million primarily as a result of increased cash generated by operations.\nNet cash provided by operations increased due to higher sales and profitability after adjusting for the impact of the non-cash restructuring charge recorded in 1993 and a reduction in the level of inventories and receivables. This decline reflects the Company's aggressive management of inventory and receivables while maintaining emphasis on continued improvement in order fill rates and cycle times and overall customer service.\nThe level of net cash used in investing and financing activities in 1993 is more in line with the Company's historic patterns. In 1992 as part of managing its financial investment structure, the Company re-allocated funds from temporary cash investments into longer-term securities with higher investment yields and entered into unsecured short-term borrowings primarily to fund the purchase of Hipotronics, Inc. At December 31, 1993 total borrowings, consisting of notes payable of $91.1 million and long-term debt of $2.7 million, were 16.8% of shareholder equity.\nCapital expenditures in 1993 increased slightly over 1992 as the Company continued to invest in new machinery and equipment as part of the on-going product development programs, as well as the continued emphasis on improvements in operating efficiencies. Although no significant commitments had been made at December 31, 1993, the Company anticipates that capital expenditures will be between $40.0 million and $50.0 million annually during the next three years reflecting the historic capital investment pattern and the capital investment portion of the planned restructuring program. The Company believes that currently available borrowing facilities, and its ability to increase its credit lines if needed, combined with internally generated funds should be more than sufficient to fund capital expenditures as well as the increased working capital that would be required to accommodate a higher level of business activity.\nThe Company actively seeks to expand by acquisition as well as through the growth of its present businesses. While a significant acquisition may require additional borrowings, the Company believes it would be able to obtain financing based on its favorable historical earnings performance and strong financial position.\nAs noted on page 37, the Company has entered into an agreement to purchase A. B. Chance Industries, Inc. The transaction is subject to completion of certain conditions under the agreement and regulatory approvals. The Company will pay for the acquisition out of internally available funds and additional short term borrowing of up to $40,000,000. RESULTS OF OPERATIONS\n1993 Compared With 1992\nConsolidated net sales increased 6% on improved sales through distributors and home centers; continued growth at the Ohio Brass subsidiary; inclusion of Hipotronics Inc. acquired in November 1992 and the E. M. Wiegmann & Co., Inc. acquired in March 1993. These improvements were offset by lower activity at the Pulse Communications subsidiary and foreign operations. In the fourth quarter of 1993, the Company recorded a $50,000,000 pretax charge ($31,000,000 net of tax, or $.98 per share) for the estimated costs of a restructuring program. The program includes the consolidation of all or a portion of several manufacturing plants, a reduction in labor force of approximately 6%, the reorganization of certain operations management and structure, and a realignment of warehousing and product distribution capabilities. The restructuring charge is approximately equally divided between personnel costs (severance and postemployment benefits), plant and equipment relocation and costs associated with disposal of plant and equipment. At the end of 1993, $7,250,000 has been expended with an additional $14,000,000 anticipated in 1994 with the balance to be expended approximately equally in 1995 and 1996. After an approximate three year implementation the annual savings and cost avoidance could be as much as $25,000,000. Excluding the impact of the restructuring charge, segment total operating income increased 2% as a large portion of the sales growth was in lower margin products combined with strong price competition during this period of slow economic growth. Additionally, the Company has continued to increase expenditures for product and market development, as well as, customer service enhancements.\nThe Low Voltage Segment sales for the year increased 2% on higher shipments of fluorescent lighting products and improved demand for products in the commercial and industrial markets off-setting weakness in overseas markets. Segment operating income before restructuring charges increased 2% in line with the growth in sales.\nSales of the High Voltage Segment increased by more than 23% from the inclusion of Hipotronics, Inc. and higher shipments of insulators and surge arrestors. Sales of power cable were essentially even with last year due to the depressed worldwide market conditions for cable. Segment operating income before the restructuring charge increased 35% on higher sales volume and improved operating rates.\nOther Industry Segment net sales increased by more than 4% due to the acquisition of E. M. Wiegmann & Co., Inc. in March, 1993, and increased sales of components for wire management, voice and data signals, which off-set the reduced shipments of telecommunication products and equipment. Segment operating income prior to the restructuring charge decreased 10% reflecting the reduced shipment of higher marginal products and increased expenditures for development of the next generation of telecommunication products.\nGeneral corporate expenses were slightly lower than last year due to continued productivity improvements. Investment income increased 10% on a higher level of funds invested in long-term securities. The higher level of interest expense is due to the utilization of short-term borrowings by the Company. The increase in other expenses reflects the charges for the establishment of a corporate owned life insurance program. The effective tax rate was 19% in 1993, 28% in 1992, and 30% in 1991. The decline in the effective tax rate reflects an increased portion of earnings from Puerto Rico operations and continued emphasis on generating tax-exempt income combined with the tax effect of the restructuring charge recorded in 1993. The recent tax law changes may in future years reduce the tax benefit arising from the Company's Puerto Rico operations. 1992 Compared With 1991\nConsolidated net sales increased by 4% due to the strong sales growth at the Pulsecom and Ohio Brass subsidiaries; moderate increases in other operating units due to the gradual but mixed economic recovery; and inclusion of Bryant Electric, Inc., which was acquired in March 1991 and Hipotronics, Inc., which was acquired in November 1992. These improvements were offset by the continuing soft demand for power cable and the disposal of the Hermetic Refrigeration operation in November 1991. Segment total operating income was essentially even with last year as the modest sales growth was offset by increased expenditures to enhance sales and marketing programs, continued product development programs and strong price competition during this period of slow economic growth. Income before the cumulative effect of the change in accounting principles and the related earnings per share increased 4% due to the higher level of investment income and a lower effective tax rate. The Company recorded a one-time, non-cash charge of $16,506,000 net of tax or $0.52 per share for the cumulative effect on prior years of the change in accounting principles due to the adoption of the Statements of Financial Standards (SFAS) No. 106 - Employers' Accounting for Postretirement Benefits Other than Pensions, No. 109 - Accounting for Income Taxes and No. 112 - Employers' Accounting for Postemployment Benefits. Net income, as adjusted for these changes was $77,584,000 or $2.45 per share. Based on the restructuring of benefit programs which began in 1989, the impact on the Company's financial position was not significant (3% of shareholder's equity) and the required on-going annual expense will not have a material effect on operating results.\nLow Voltage Segment sales for the year increased by 2% on a higher level of shipments of industrial wiring devices and fluorescent lighting products combined with the inclusion of Bryant Electric for the full year. This improvement was offset by highly competitive market conditions and the disposal of the Hermetic Refrigeration operations in November 1991. Operating income increased by 1% reflecting the increased sales, especially of lower margin lighting products, and market introduction costs for new products which were approximately offset by the effect of the acquisition of Bryant Electric and disposal of Hermetic Refrigeration.\nSales of High Voltage products were 3% lower than last year due to the depressed worldwide market for power cable products which negated the higher sales of insulators and surge arresters and inclusion of Hipotronics, Inc. Operating income was more than 20% below 1991 due to the impact from the cable operation of maintaining marketing programs and reduced manufacturing volumes.\nInflation\nIn times of inflationary cost increases, the Company has historically been able to maintain its profitability by improvements in operating methods and cost recovery through price increases. In large measure the reported operating results have absorbed the effects of inflation since the Company's predominant use of the LIFO method of inventory accounting generally has the effect of charging operating results with costs (except for depreciation) that contain current price levels. Item 8.","section_7A":"","section_8":"Item 8. Financial Statements and Supplementary Data\nREPORT OF INDEPENDENT ACCOUNTANTS\nTo the Board of Directors and Shareholders of Hubbell Incorporated\nIn our opinion, the consolidated financial statements listed in the index on page 44 present fairly, in all material respects, the financial position of Hubbell Incorporated and its subsidiaries at December 31, 1993 and 1992, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1993, in conformity with generally accepted accounting principles. 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 of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.\nAs discussed in the Statement of Accounting Policies accompanying the consolidated financial statements, the Company changed its method of accounting for postretirement benefits other than pensions, for postemployment benefits, and for income taxes in 1992.\nPrice Waterhouse Stamford, Connecticut January 19, 1994, except as to the subsequent event note on page 37 which is as of March 16, 1994. Hubbell Incorporated and Subsidiaries CONSOLIDATED BALANCE SHEET At December 31, (Dollars in thousands)\nSee notes to consolidated financial statements. Hubbell Incorporated and Subsidiaries CONSOLIDATED BALANCE SHEET At December 31, (Dollars in thousands)\nSee notes to consolidated financial statements. Hubbell Incorporated and Subsidiaries CONSOLIDATED STATEMENT OF INCOME (Dollars in thousands, except per share amounts)\nSee notes to consolidated financial statements. Hubbell Incorporated and Subsidiaries CONSOLIDATED STATEMENT OF CASH FLOWS (Dollars in thousands)\nSee notes to consolidated financial statements. Hubbell Incorporated and Subsidiaries CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (Dollars in thousands, except per share amounts)\nSee notes to consolidated financial statements Hubbell Incorporated and Subsidiaries STATEMENT OF ACCOUNTING POLICIES\nPrinciples of Consolidation\nThe consolidated financial statements include all subsidiaries; all significant inter-company balances and transactions have been eliminated. Certain reclassifications, which were not significant, have been made in prior period financial statements to conform to the 1993 presentation.\nForeign Currency Translation\nThe assets and liabilities of international subsidiaries are translated to U.S. dollars at exchange rates in effect at the end of the year, and income and expense items are translated at average rates of exchange in effect during the year. The effects of exchange rate fluctuations on the translated amounts of foreign currency assets and liabilities are included as translation adjustments in shareholders' equity. Gains and losses from foreign currency transactions are included in income of the period.\nCash and Temporary Cash Investments\nTemporary cash investments consist of liquid investments with maturities of three months or less when purchased. The carrying value of cash and temporary cash investments approximates fair value because of their short maturities.\nInventories\nInventories are stated at the lower of cost or market. The cost of substantially all domestic inventories, 82% of total inventory value, is determined on the basis of the last-in, first-out (LIFO) method of inventory accounting. The cost of foreign inventories and certain domestic inventories is determined on the basis of the first-in, first-out (FIFO) method of inventory accounting.\nProperty, Plant, and Equipment\nProperty, plant, and equipment are depreciated over their estimated useful lives, principally using accelerated methods.\nPurchase Price in Excess of Net Assets of Companies Acquired\nThe cost of companies acquired in excess of the amount assigned to net assets is being amortized on a straight-line basis over a 40 year period.\nDeferred Income Taxes\nDeferred income taxes are recognized for the tax consequence of differences between the financial statement carrying amounts and tax bases of assets and liabilities by applying the currently enacted statutory tax rates. The effect of a change in statutory tax rates is recognized in income in the period that includes the enactment date. Federal income taxes have not been provided on the undistributed earnings of the Company's international subsidiaries as the Company has reinvested all of these earnings indefinitely. Retirement Benefits\nThe Company's policy is to fund pension costs within the ranges prescribed by applicable regulations. In addition to providing pension benefits, in some circumstances the Company provides health care and life insurance benefits for retired employees. The Company's policy is to fund these benefits through insurance premiums or as actual expenditures are made.\nEarnings Per Share\nEarnings per share is based on reported income and the weighted average number of shares of common stock and equivalents outstanding.\nChange in Accounting Principles\nIn 1992, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 106 - Employers' Accounting for Postretirement Benefits Other Than Pensions, No. 109 - Accounting for Income Taxes and No. 112 - Employers' Accounting for Postemployment Benefits. As part of adopting the new accounting standards as of January 1, 1992, a one-time non-cash charge of $16,506,000 net of tax or $0.52 per share was recorded. Also deferred taxes were recorded for business acquisitions completed before January 1, 1992 which increased the previously allocated purchased adjustments to inventories, property, plant and equipment. The impact of these accounting changes on 1992 financial results were not significant. Hubbell Incorporated and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS\nRestructuring Charge\nIn the fourth quarter of 1993, the Company recorded a $50,000,000 pretax charge ($31,000,000 net of tax benefits, or $.98 per share) for the estimated costs of a restructuring program. The program entails the consolidation of manufacturing facilities, reduction in labor force and a realignment of warehousing and distribution activities. The restructuring charge is approximately equally divided between personnel costs (severance and postemployment benefits), plant and equipment relocation, and costs associated with disposal of plant and equipment. At December 31, 1993, the restructuring accrual was $42,750,000 of which $14,000,000 is classified as a current liability.\nAcquisitions\nIn March 1993, the E. M. Wiegmann & Co., Inc. was acquired. Wiegmann fabricates a wide range of cabinets, panels, consoles and other enclosures used to mount and protect transformers, industrial controls, and wireway duct and fittings. The total cost of the acquired business has been allocated on a preliminary basis to current assets, property, plant and equipment, goodwill, and other liabilities pending final appraisal.\nIn November 1992, Hipotronics, Inc., was acquired. Hipotronics, Inc. manufactures high voltage test equipment which is sold to electric utility and industrial companies in the United States and abroad.\nIn March 1991, the net assets and business of the Bryant Electric Division (Bryant Electric) of the Westinghouse Electric Corporation were acquired. Bryant Electric manufactures a line of high quality wiring devices including plugs, connectors, receptacles, switches, lamp holders and wall plates. In October 1991, the net assets and business of the Lexington Switch and Controls Division, a manufacturer of transfer switches and fire pump controls, were acquired from the Paulworth Corporation.\nThe acquisitions in 1993, 1992 and 1991 were for cash and were recorded under the purchase method of accounting. Accordingly, the results of operations for the acquired businesses have been included in the consolidated statement of income only from their respective acquisition dates. If the businesses had been acquired on the first day of 1991, unaudited consolidated net sales would have been $836,902,000 in 1993, $822,832,000 in 1992, $808,159,000 in 1991, and there would have been no material effect on reported earnings for the respective years.\nInvestments\nInvestments consist primarily of mortgage-backed securities and marketable securities. Marketable equity securities are carried at the lower of aggregate cost or market. Other investments are carried at cost with the purchase premium or discount amortized over the estimated life of the security. Certain portfolio securities that may be affected by changes in interest rates are hedged with futures contracts for U.S. Treasury notes and bonds (at December 31, 1993, future contracts totaled $7,500,000). Market value gains and losses on the futures contracts are recognized in income when the effects of the related price changes in the value of the hedged securities are recognized.\nThe following table sets forth selected data with respect to the Company's long term investments at December 31, 1993 (in thousands):\nSecurities of any one individual issuer do not exceed 2% of total assets of the Company.\nNon-current marketable equity securities are carried at cost which approximates market in 1993 and at cost $35,283,000 (market - $35,727,000) in 1992. Inventories\nInventories are classified as follows at December 31, (in thousands):\nThe financial accounting basis for the LIFO inventories of acquired companies exceeds the tax basis by approximately $28,500,000 at December 31, 1993.\nIncome Taxes\nThe following table sets forth selected data with respect to the Company's income tax provisions for the years ended December 31, (in thousands):\nIncome Taxes (continued)\nThe principal items making up the deferred tax provisions are set forth in the following table for the years ended December 31, (in thousands):\nAs discussed in the Change in Accounting Principles note, the Company adopted SFAS No. 109 as of the beginning of the year 1992. The deferred tax provision for 1991 was determined under prior accounting principles in effect at that time and has not been restated for adoption of SFAS No. 109.\nThe components of the net deferred tax (asset) liability at December 31, (in thousands) were as follows:\nDeferred taxes are classified in the financial statements as a net short-term deferred tax asset of $15,875,000 and a net long-term deferred tax liability of $4,572,000.\nAt December 31, 1993, United States income taxes had not been provided on approximately $15,600,000 of undistributed international earnings. Payments of income taxes were $33,106,000 in 1993, $32,819,000 in 1992 and $34,200,000 in 1991. Income Taxes (continued)\nThe consolidated effective income tax rates varied from the United States federal statutory income tax rate for the years ended December 31, as follows:\nThe decline in the consolidated effective income tax rate to 18.6% in 1993 is a result of the decline in pre-tax income following the charge for restructuring. The dollar amount of all items in the table above which reconcile the statutory rate to the effective rate remained at relatively consistent levels for all three years. Other Non-Current Liabilities\nOther Non-Current Liabilities consists of the following at December 31, (in thousands):\nPension Benefits\nThe Company and its subsidiaries have a number of non-contributory defined benefit pension plans and defined contribution plans covering substantially all employees. The pension plans provide pension benefits that are based on a combination of years of service and either compensation levels or specified dollar amounts.\nThe following table sets forth the components of pension cost for the years ended December 31, (in thousands):\nPension expense as a percent of payroll was 3.3% in 1993, 3.4% in 1992 and 2.4% in 1991. Pension Benefits (continued)\nThe following table sets forth the retirement plans' status and the pension liability recognized in the Company's balance sheet at December 31, (in thousands):\nThe projected benefit obligations were determined using discount rates of 7.5% in 1993 and 8.0% in 1992 and assumed average long-term rate of compensation increase of 5% in 1993 and 6.5% in 1992.\nAt December 31, 1993, approximately $70,800,000 of plan assets were invested in common stocks, including Hubbell Incorporated common stock with a market value of $8,600,000. The balance of plan assets are invested in short term money market accounts, government and corporate bonds.\nPostretirement Benefits Other Than Pensions\nThe Company and its subsidiaries have a number of health care and life insurance benefit plans covering eligible employees who reached retirement age while working for the Company, providing they retired prior to 1992. These benefits were discontinued in 1991 for substantially all future retirees.\nFor retirees prior to 1992, some of the plans provide for retiree contributions, which are periodically increased. The plans anticipate future cost-sharing changes that are consistent with the Company's past practices. The plans are funded either on a monthly premium basis or as benefits become due.\nAt December 31, 1993, the recorded liability for providing these postretirement benefits was based on a 7% discount rate and assumed health care cost trend rate of 20.0% declining to 5.5% over fifteen years. The costs recognized for providing these benefits in 1993, 1992, and 1991 were $1,300,000, $1,400,000, and $1,800,000 respectively. The costs for 1993 and 1992 were primarily interest while 1991 was determined under prior accounting pronouncements in effect at that time and have not been restated for the adoption of SFAS No. 106. Debt\nThe following table sets forth the components of the Company's debt structure at December 31, (in thousands):\nThe term loan is due on November 25, 1994 and has a variable rate based on LIBOR plus 0.25% which equalled 3.50% at December 31, 1993. The revolving credit loan agreement matures on November 19, 1994 and may be extended based on approval of the bank. The maximum amount available under the agreement is $25,000,000 and carries a daily interest rate based on the bank's overnight rate which was 3.46% at December 31, 1993. A fee of 0.1% is due on the average daily unused portion of the credit agreement. Payments of interest and fees were $3,280,000 in 1993.\nAs part of the borrowing agreements, the Company is required to maintain a minimum shareholder equity of $400,000,000 and can not have total debt of more than $250,000,000. The Company is in compliance with the terms and conditions under the borrowing agreements.\nLeases\nTotal rental expense under operating leases was $5,600,000 in 1993, $6,600,000 in 1992 and $6,800,000 in 1991.\nThe minimum annual rentals on non-cancelable, long-term, operating leases in effect at December 31, 1993 will approximate $1,500,000 in 1994, $1,200,000 in 1995, and will decline thereafter.\nResearch, Development and Engineering\nExpenses for new product development and ongoing improvement of existing products were $15,400,000 in 1993, $13,800,000 in 1992, and $8,500,000 in 1991. Expenses in 1993 included an increase in expenditures for the development of the next generation of telecommunication products.\nConcentration of Credit Risks\nFinancial instruments which potentially subject the Company to concentration of credit risks consist of trade receivables and temporary cash investments. The Company grants credit terms in the normal course of business to its customers. Due to the diversity of its product segments, the Company has a diverse customer base including electrical distributors and wholesalers, electric utilities, equipment manufacturers, electrical contractors, retail and hardware outlets. As part of its ongoing procedures, the Company monitors the credit worthiness of its customers. Bad debt write-offs have historically been minimal. The Company places its temporary cash investments with financial institutions and limits the amount of exposure to any one institution. Capital Stock\nShare activity in the Company's preferred and common stocks is set forth below for the three years ended December 31, 1993:\nShares held in Treasury at December 31, 1993: Class A Common - 1,672,968; Class B Common - 1,920,620. Voting rights per share: Class A Common - twenty; Class B Common - one. In addition, the Company has 5,891,097 authorized shares of preferred stock; none are outstanding.\nThe Company has a Shareholder Rights Plan under which holders of Class A Common Stock have Class A Rights and holders of Class B Common Stock have Class B Rights. These Rights become exercisable after a specified period of time only if a person or group of affiliated persons acquires beneficial ownership of 20 percent or more of the outstanding Class A Common Stock of the Company or announces or commences a tender or exchange offer that would result in the offeror acquiring beneficial ownership of 30 percent or more of the outstanding Class A Common Stock of the Company. Once exercisable, the Rights would entitle their registered holders to purchase, for each common share held, one share of the Company's Class A Common Stock or Class B Common Stock, as the case may be, at a price of $103.66 per share, subject to adjustment to prevent dilution. Upon the occurrence of certain events or transactions specified in the Rights Agreement, a holder of Rights applicable to one share is entitled to receive for an exercise price of $103.66 per share owned a number of shares of the Company's Class A Common Stock or Class B Common Stock, as the case may be, or an acquiring corporation's common stock, having a market value equal to twice the exercise price. The Rights may be redeemed by the Company for one cent per Right prior to the tenth day after a person or group of affiliated persons has acquired 20 percent or more of the outstanding Class A Common Stock of the Company. The Rights expire on December 31, 1998, unless earlier redeemed by the Company.\nStock Options\nThe Company has granted to officers and key employees options to purchase the Company's Class A and Class B Common Stock and the Company may grant to officers and key employees options to purchase the Company's Class B Common Stock at not less than 85% of market prices on the date of grant. Stock option activity for the three years ended December 31, 1993 is set forth below:\nOptions for the purchase of 1,217,687 shares were exercisable at December 31, 1993, at prices ranging from $13.99 to $56.69 per share. Industry Segment and Geographic Information\nThe Company's business is the manufacture and sale of electrical and electronic products. For better assessment, operations are reported in three segments as follows:\nLow Voltage products are in the range of less than 600 volts, are sold principally to distributors and represent stock items. At December 31, 1993, this segment consisted of standard and special application wiring device products, lighting fixtures and low voltage industrial controls.\nHigh Voltage products are in the more than 600 volt range, are generally sold directly to the user and represent products made to customer's order. At December 31, 1993, this segment comprised test and measurement equipment, wire and cable, insulators and surge arresters.\nThe Other segment consists of products not classified on a voltage basis. At December 31, 1993, this segment included standard and special application cabinets and enclosures, fittings, switch and outlet boxes, wire management components and systems, data transmission and telecommunications equipment, and components for voice and data signals.\nNet sales comprise sales to unaffiliated customers - intersegment and inter-area sales are immaterial.\nSegment operating income consists of net sales less operating expenses. General corporate expenses, interest expense, and other income, net have not been allocated to segments.\nGeneral corporate assets not allocated to segments are principally cash and investments.\nFinancial information by industry segment and geographic area for the three years ended December 31, 1993 is summarized below (in thousands):\nFinancial Information (continued)\nExport sales to unaffiliated customers were $37,500,000 in 1993, $26,500,000 in 1992, and $21,900,000 in 1991.\nNet assets of international subsidiaries were 4% of the consolidated total in 1993, 4% in 1992, and 6% in 1991.\nSubsequent Event\nOn March 16, 1994, the Company announced that it had entered into an agreement to purchase A. B. Chance Industries, Inc. Chance manufactures electrical apparatus (overhead and underground distribution switches, fuses, contacts, enclosures and sectionalizers); anchors; hardware, insulators (porcelain and polymer); and hot-line tools and other safety equipment. Under terms of the agreement the Company will purchase all the outstanding capital stock of Chance for $41,135,000 and retire Chance's existing debt of $66,865,000. The transaction is subject to completion of certain conditions under the agreement and obtaining of regulatory approvals.\nQuarterly Financial Data (Unaudited)\nThe table below sets forth summarized quarterly financial data for the years ended December 31, 1993 and 1992 (in thousands, except per share amounts):\nItem 9.","section_9":"Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure\nNot applicable.\nPART III\nItem 10.","section_9A":"","section_9B":"","section_10":"Item 10. Directors and Executive Officers of the Registrant (1)\nInformation relative to Executive Officers appears on Page 41 of this report.\nItem 11.","section_11":"Item 11. Executive Compensation (1)\nItem 12.","section_12":"Item 12. Security Ownership of Certain Beneficial Owners and Management (1)\nItem 13.","section_13":"Item 13. Certain Relationships and Related Transactions (1)\nPART IV\nItem 14.","section_14":"Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K\n1. Financial Statement and Schedules\nFinancial statement and schedules listed in the Index to Financial Statements and Schedules appearing on Page 44 are filed as part of this Annual Report on Form 10-K.\n2. Exhibits\nNumber Description\n3a Articles of Incorporation, as amended on May 10, 1991. Exhibit 3a of the registrant's report on (i) Form 10-K for the year 1980, filed on March 16, 1981 (containing the Articles of Incorporation), (ii) Form 10-K for the year 1986 filed on March 26, 1987, (iii) Form 10-K for the year 1987 filed on March 25, 1988, (iv) Form 10-Q for the quarter ended June 30, 1990 filed on August 6, 1990, and (v) Form 10-K for the year 1991 filed on March 24, 1992 are herein incorporated by reference.\n3b By-Laws, Hubbell Incorporated, as amended on December 12, 1989. Exhibit 3b of the registrant's report on Form 10-K for the year 1989, filed on March 26, 1990, is incorporated by reference.\n3c Rights Agreement, dated as of December 13, 1988, between Hubbell Incorporated and Manufacturers Hanover Trust Company (now known as Chemical Bank) as Rights Agent. Registrant's Form 8-A, dated December 27, 1988, and filed on December 29, 1988, is incorporated by reference.\n- ----------------\n(1) The definitive proxy statement for the annual meeting of shareholders to be held on May 2, 1994, filed with the Commission on March 25, 1994, pursuant to Regulation 14A, is incorporated herein by reference. Exhibits - Continued\nNumber Description\n4 Loan Agreement dated as of June 1, 1981, between the Connecticut Development Authority and Harvey Hubbell, Incorporated. Exhibit 4c of the registrant's report on Form 10-K for the year 1981, filed on March 29, 1982, is incorporated herein by reference.\n10a+ Hubbell Incorporated Supplemental Executive Retirement Plan, as amended and restated effective May 1, 1993. Exhibit 10a of the registrant's report on Form 10-Q for the second quarter, 1993, filed on August 12, 1993, is incorporated by reference.\n10b(1)+ Hubbell Incorporated 1973 Stock Option Plan for Key Employees, as amended and restated effective September 12, 1991. Exhibit 10b(1) of the registrant's report on Form 10-Q for the third quarter, 1991, filed on November 8, 1991, is incorporated by reference.\n10c+ Description of the Hubbell Incorporated, Post Retirement Death Benefit Plan for Participants in the Supplemental Executive Retirement Plan, as emended effective May 1, 1993. Exhibit 10c of the registrant's report on Form 10-Q for the second quarter, 1993, filed on August 12, 1993, is incorporated herein by reference.\n10f Hubbell Incorporated Deferred Compensation Plan for Directors, as amended and restated effective June 20, 1991. Exhibit 10f of the registrant's report on Form 10-Q for the second quarter, 1991, filed on August 7, 1991, is incorporated by reference.\n10g*+ Hubbell Incorporated Incentive Compensation Plan, as amended and restated effective December 15, 1993.\n10h Hubbell Incorporated Key Man Supplemental Medical Insurance, as amended and restated effective December 9, 1986. Exhibit 10h of the registrant's report on Form 10-K for the year 1987, filed on March 25, 1988, is incorporated by reference.\n10i Hubbell Incorporated Retirement Plan for Directors, as amended and restated effective March 13, 1990. Exhibit 10i of the registrant's report on Form 10-K for the year 1989, filed on March 26, 1990, is incorporated by reference.\n10l+ Employment Agreement, dated March 28, 1989 (effective January 1, 1989), between Hubbell Incorporated and G. Jackson Ratcliffe, Chairman of the Board, President and Chief Executive Officer. Exhibit 10l of the registrant's report on Form 10-K for the year 1988, filed on March 29, 1989, is incorporated by reference.\n- -------------------\n*Filed hereunder +This exhibit constitutes a management contract, compensatory plan, or arrangement Exhibits - Continued\nNumber Description\n10m+ Employment Agreement, dated March 28, 1989 (effective January 1, 1989), between Hubbell Incorporated and Vincent R. Petrecca, Executive Vice President. Exhibit 10m of the registrant's report on Form 10-K for the year 1988, filed on March 29, 1989, is incorporated by reference.\n10n+ Employment Agreement, dated March 28, 1989 (effective January 1, 1989), between Hubbell Incorporated and Harry B. Rowell, Jr., Executive Vice President. Exhibit 10n of the registrant's report on Form 10-K for the year 1988, filed on March 29, 1989, is incorporated by reference.\n10o+ Hubbell Incorporated Policy for Providing Severance Payments to Key Managers, as amended and restated effective September 9, 1993. Exhibit 10o of the registrant's report on Form 10-Q for the third quarter, 1993, filed on November 10, 1993, is incorporated by reference.\n11 Computation of earnings per share.\n21 Listing of significant subsidiaries.\n3. Reports on Form 8-K\nThere were no reports on Form 8-K filed for the three months ended December 31, 1993.\n- -----------------\n+This exhibit constitutes a management contract, compensatory plan, or arrangement\n- ------------------\n(1) As of March 18, 1994 Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.\nHUBBELL INCORPORATED\nBy \/s\/G. J. Ratcliffe 3\/14\/94 -------------------------------------------------- --------- G. J. Ratcliffe Date Chairman of the Board, President, Chief Executive Officer and Director\nPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.\nBy \/s\/G. J. Ratcliffe 3\/14\/94 --------------------------------------------------- --------- G. J. Ratcliffe Date Chairman of the Board, President, Chief Executive Officer and Director\nBy \/s\/H. B. Rowell, Jr. 3\/14\/94 -------------------------------------------------- --------- H. B. Rowell, Jr. Date Executive Vice President (Chief Financial and Accounting Officer)\nBy \/s\/E. R. Brooks 3\/14\/94 -------------------------------------------------- --------- E. R. Brooks Date Director\nBy \/s\/G. W. Edwards, Jr. 3\/14\/94 -------------------------------------------------- --------- G. W. Edwards, Jr. Date Director\nBy \/s\/R. N. Flint 3\/14\/94 -------------------------------------------------- --------- R. N. Flint Date Director\nBy \/s\/J. S. Hoffman 3\/14\/94 -------------------------------------------------- --------- J. S. Hoffman Date Director\nBy \/s\/H. G. McDonell 3\/14\/94 -------------------------------------------------- --------- H. G. McDonell Date Director\nBy \/s\/A. McNally IV 3\/14\/94 -------------------------------------------------- --------- A. McNally IV Date Director\nBy \/s\/D. J. Meyer 3\/14\/94 -------------------------------------------------- --------- D. J. Meyer Date Director\nBy \/s\/J. A. Urquhart 3\/14\/94 -------------------------------------------------- --------- J. A. Urquhart Date Director INDEX TO FINANCIAL STATEMENTS AND SCHEDULES\nAll other schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto. REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULES\nTo the Board of Directors of Hubbell Incorporated\nOur audits of the consolidated financial statements referred to in our report dated January 19, 1994, except for the subsequent event note which is as of March 16, 1994, appearing on page 17 of this Form 10-K also included an audit of the Financial Statement Schedules listed in the index on page 44. In our opinion, these Financial Statement Schedules present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.\nPrice Waterhouse Stamford, Connecticut January 19, 1994 HUBBELL INCORPORATED Schedule V AND SUBSIDIARIES\nPROPERTY, PLANT AND EQUIPMENT FOR THE YEARS ENDED DECEMBER 31, 1991, 1992 AND 1993 (In thousands)\nNotes\n1. Property, plant, and equipment are depreciated using principally accelerated methods over the following estimated useful lives:\nWhen properties are retired or otherwise disposed of, accumulated depreciation together with any amount realized on disposal, are offset against the cost of the assets retired and the resulting gain or loss is reflected in income of the period. Expenditures for repairs and maintenance are charged against income; major renewals and betterments are capitalized.\n2. Includes the assets of the Hubbell Hermetic Refrigeration, Inc. subsidiary which were sold as part of the discontinuation of the business.\n3. Certain surplus and idle assets which are being offered for sale and have been reclassified to \"Property held as investment\" are included in this caption.\n4. Includes the assets of Hipotronics, Inc., which was acquired during 1992, as well as the impact of the adoption of Statement of Financial Accounting Standard 109 - Accounting for Income Taxes on previously recorded business acquisitions.\n5. Includes the assets of E. M. Wiegmann & Co., Inc. which was acquired during 1993. HUBBELL INCORPORATED Schedule VI AND SUBSIDIARIES\nACCUMULATED DEPRECIATION AND AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT FOR THE YEARS ENDED DECEMBER 31, 1991, 1992 AND 1993 (In thousands)\nNotes\n1. The following table reconciles depreciation per this schedule to total depreciation and amortization as reported in the 1993 Annual Report to shareholders:\n2. Includes the assets of Hubbell Hermetic Refrigeration, Inc. subsidiary which were sold as part of the discontinuation of the business.\n3. Certain surplus and idle assets which are being offered for sale and have been reclassified to \"Property held as investment\" are included in this caption. HUBBELL INCORPORATED Schedule VIII AND SUBSIDIARIES\nVALUATION AND QUALIFYING ACCOUNTS AND RESERVES FOR THE YEARS ENDED DECEMBER 31, 1991, 1992 AND 1993 (In thousands)\nReserves deducted in the balance sheet from the assets to which they apply:\nSchedule IX\nHUBBELL INCORPORATED AND SUBSIDIARIES\nSHORT TERM BORROWINGS FOR THE YEARS ENDED DECEMBER 31, 1991, 1992 AND 1993 (In thousands)\n- -----------------------\n(1) Maximum daily balance outstanding during the year\n(2) Calculated using the average daily balance outstanding and related daily interest rate Schedule X\nHUBBELL INCORPORATED AND SUBSIDIARIES\nSUPPLEMENTARY INCOME STATEMENT INFORMATION FOR THE YEARS ENDED DECEMBER 31, 1991, 1992 AND 1993 (In thousands)\nExhibit Index\nNumber Description\n3a Articles of Incorporation, as amended on May 10, 1991. Exhibit 3a of the registrant's report on (i) Form 10-K for the year 1980, filed on March 16, 1981 (containing the Articles of Incorporation), (ii) Form 10-K for the year 1986 filed on March 26, 1987, (iii) Form 10-K for the year 1987 filed on March 25, 1988, (iv) Form 10-Q for the quarter ended June 30, 1990 filed on August 6, 1990, and (v) Form 10-K for the year 1991 filed on March 24, 1992 are herein incorporated by reference.\n3b By-Laws, Hubbell Incorporated, as amended on December 12, 1989. Exhibit 3b of the registrant's report on Form 10-K for the year 1989, filed on March 26, 1990, is incorporated by reference.\n3c Rights Agreement, dated as of December 13, 1988, between Hubbell Incorporated and Manufacturers Hanover Trust Company (now known as Chemical Bank) as Rights Agent. Registrant's Form 8-A, dated December 27, 1988, and filed on December 29, 1988, is incorporated by reference.\nExhibit Index - Continued\nNumber Description\n4 Loan Agreement dated as of June 1, 1981, between the Connecticut Development Authority and Harvey Hubbell, Incorporated. Exhibit 4c of the registrant's report on Form 10-K for the year 1981, filed on March 29, 1982, is incorporated herein by reference.\n10a+ Hubbell Incorporated Supplemental Executive Retirement Plan, as amended and restated effective May 1, 1993. Exhibit 10a of the registrant's report on Form 10-Q for the second quarter, 1993, filed on August 12, 1993, is incorporated by reference.\n10b(1)+ Hubbell Incorporated 1973 Stock Option Plan for Key Employees, as amended and restated effective September 12, 1991. Exhibit 10b(1) of the registrant's report on Form 10-Q for the third quarter, 1991, filed on November 8, 1991, is incorporated by reference.\n10c+ Description of the Hubbell Incorporated, Post Retirement Death Benefit Plan for Participants in the Supplemental Executive Retirement Plan, as emended effective May 1, 1993. Exhibit 10c of the registrant's report on Form 10-Q for the second quarter, 1993, filed on August 12, 1993, is incorporated herein by reference.\n10f Hubbell Incorporated Deferred Compensation Plan for Directors, as amended and restated effective June 20, 1991. Exhibit 10f of the registrant's report on Form 10-Q for the second quarter, 1991, filed on August 7, 1991, is incorporated by reference.\n10g*+ Hubbell Incorporated Incentive Compensation Plan, as amended and restated effective December 15, 1993.\n10h Hubbell Incorporated Key Man Supplemental Medical Insurance, as amended and restated effective December 9, 1986. Exhibit 10h of the registrant's report on Form 10-K for the year 1987, filed on March 25, 1988, is incorporated by reference.\n10i Hubbell Incorporated Retirement Plan for Directors, as amended and restated effective March 13, 1990. Exhibit 10i of the registrant's report on Form 10-K for the year 1989, filed on March 26, 1990, is incorporated by reference.\n10l+ Employment Agreement, dated March 28, 1989 (effective January 1, 1989), between Hubbell Incorporated and G. Jackson Ratcliffe, Chairman of the Board, President and Chief Executive Officer. Exhibit 10l of the registrant's report on Form 10-K for the year 1988, filed on March 29, 1989, is incorporated by reference.\n- -------------------\n*Filed hereunder +This exhibit constitutes a management contract, compensatory plan, or arrangement\nExhibit Index - Continued\nNumber Description\n10m+ Employment Agreement, dated March 28, 1989 (effective January 1, 1989), between Hubbell Incorporated and Vincent R. Petrecca, Executive Vice President. Exhibit 10m of the registrant's report on Form 10-K for the year 1988, filed on March 29, 1989, is incorporated by reference.\n10n+ Employment Agreement, dated March 28, 1989 (effective January 1, 1989), between Hubbell Incorporated and Harry B. Rowell, Jr., Executive Vice President. Exhibit 10n of the registrant's report on Form 10-K for the year 1988, filed on March 29, 1989, is incorporated by reference.\n10o+ Hubbell Incorporated Policy for Providing Severance Payments to Key Managers, as amended and restated effective September 9, 1993. Exhibit 10o of the registrant's report on Form 10-Q for the third quarter, 1993, filed on November 10, 1993, is incorporated by reference.\n11 Computation of earnings per share.\n21 Listing of significant subsidiaries.\n- -----------------\n+This exhibit constitutes a management contract, compensatory plan, or arrangement","section_15":""}
{"filename":"761023_1993.txt","cik":"761023","year":"1993","section_1":"ITEM 1. BUSINESS\nUnless otherwise indicated, all references to \"Notes\" are to Notes to Consolidated Financial Statements contained in this report.\nThe registrant, Carlyle Real Estate Limited Partnership-XV (the \"Partnership\"), is a limited partnership formed in August of 1984 and currently governed by the Revised Uniform Limited Partnership Act of the State of Illinois to invest in income-producing commercial and residential real property. On July 5, 1985, the Partnership commenced an offering to the public of $250,000,000 (subject to increase by up to $250,000,000) in Limited Partnership Interests and assigned interests therein (\"Interests\") pursuant to a Registration Statement on Form S-11 under the Securities Act of 1933 (No. 2-95382). A total of 443,711.76 Interests were sold to the public at $1,000 per Interest. The holders of 224,569.10 Interests were admitted to the Partnership in 1985; the holders of 219,142.66 Interests were admitted to the Partnership in 1986. The offering closed on July 31, 1986. Subsequent to admittance to the Partnership, no holder of Interests (hereinafter, a \"Limited Partner\") has made any additional capital contribution. The Limited Partners of the Partnership share in their portion of the benefits of ownership of the Partnership's real property investments according to the number of Interests held.\nThe Partnership is engaged solely in the business of the acquisition, operation and sale and disposition of equity real estate investments. Such equity investments are held by fee title, leasehold estates and\/or through joint venture partnership interests. The Partnership's real property investments are located throughout the nation and it has no real estate investments located outside of the United States. A presentation of information about industry segments, geographic regions, raw materials or seasonality is not applicable and would not be material to an understanding of the Partnership's business taken as a whole. Pursuant to the Partnership Agreement, the Partnership is required to terminate on or before December 31, 2035. Accordingly, the Partnership intends to hold the real properties it acquires for investment purposes until such time as sale or other disposition appears to be advantageous. Unless otherwise described, the Partnership expects to hold its properties for long-term investment. Due to current market conditions, the Partnership is not able to determine the holding period for its remaining properties. At sale of a particular property, the proceeds, if any, are generally distributed or reinvested in existing properties rather than invested in acquiring additional properties.\nThe Partnership has made the real property investments set forth in the following table:\nThe Partnership's real property investments are subject to competition from similar types of properties (including in certain areas properties owned or advised by affiliates of the General Partners or properties owned by venture partners or their affiliates) in the respective vicinities in which they are located. Such competition is generally for the retention of existing tenants. Additionally, the Partnership is in competition for new tenants in markets where significant vacancies are present. Reference is made to Item 7 below for a discussion of competitive conditions and future renovation and capital improvement plans of the Partnership and certain of its significant investment properties. Approximate occupancy levels for the properties are in the table in Item 2","section_1A":"","section_1B":"","section_2":"ITEM 2. PROPERTIES\nThe Partnership owned or owns directly or through joint venture partnerships the properties or interests in the properties referred to under Item 1 above to which reference is hereby made for a description of said properties.\nThe following is a listing of principal businesses or occupations carried on in and approximate occupancy levels by quarter during fiscal years 1993 and 1992 for the Partnership's investment properties owned during 1993:\nITEM 3.","section_3":"ITEM 3. LEGAL PROCEEDINGS\nThe Partnership is not subject to any material pending legal proceedings.\nReference is made to Note 3(c)(ii) for a discussion of certain litigation involving the Partnership.\nITEM 4.","section_4":"ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS\nThere were no matters submitted to a vote of security holders during 1993 and 1992.\nPART II\nITEM 5.","section_5":"ITEM 5. MARKET FOR THE PARTNERSHIP'S LIMITED PARTNERSHIP INTERESTS AND RELATED SECURITY HOLDER MATTERS\nAs of December 31, 1993, there were 40,382 record holders of Interests in the Partnership. There is no public market for Interests, and it is not anticipated that a public market for Interests will develop. Upon request, the Corporate General Partner may provide information relating to a prospective transfer of Interests to an investor desiring to transfer his Interests. The price to be paid for the Interests, as well as any other economic aspect of the transaction, will be subject to negotiation by the investor. Reference is made to Article XVI of the Partnership Agreement and Sections 3 and 4 of the Assignment Agreement, (included as Exhibits 3 and 4-A, respectively, filed with the Partnership's report on Form 10-K for December 31, 1992 (File No. 0-16111) dated March 19, 1993) for provisions governing the transferability of Interests, which provisions are hereby incorporated herein by reference.\nReference is made to Note 5 for a discussion of the provisions of the Partnership Agreement relating to cash distributions. Reference is made to Item 6","section_6":"Item 6 below for a discussion of cash distributions made to the Limited Partners.\nITEM 7.","section_7":"ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS\nLIQUIDITY AND CAPITAL RESOURCES\nOn July 5, 1985, the Partnership commenced an offering of $250,000,000 (subject to increase by up to $250,000,000) of Limited partnership interests and assignee interests therein pursuant to a Registration Statement on Form S-11 (File No. 2-95382) under the Securities Act of 1933. A total of 443,711.76 Interests were sold to the public at $1,000 per Interest (fractional interests are due to a Distribution Reinvestment Program). The holders of such Interests were admitted to the Partnership in 1985 and 1986.\nAfter deducting selling expenses and other offering costs, the Partner- ship had approximately $385,000,000 with which to make investments in income-producing commercial and residential real property, to pay legal fees and other costs (including acquisition fees) related to such investments and to satisfy working capital requirements. A portion of the proceeds has been utilized to acquire the properties described in Item 1 above.\nAt December 31, 1993, the Partnership and its consolidated ventures had cash and cash equivalents of approximately $5,020,000. Such funds and short- term investments of approximately $10,167,000 are available for the Partnership's share of leasing costs and capital improvements at 9701 Wilshire Building, 160 Spear Street Building, Springbrook Shopping Center, Eastridge Mall and 260 Franklin Street Building, and the Partnership's share of operating deficits currently being incurred at 260 Franklin Street Building (to the extent not funded from escrowed reserves for 260 Franklin as discussed below) and 9701 Wilshire Building as well as distributions to partners as discussed below and working capital requirements, including the Partnership's share of potential future deficits and financing costs at these and certain other of the Partnership's investment properties. The Partnership currently has adequate cash and cash equivalents to maintain the operations of the Partnership. However, the Partnership has taken steps to preserve its working capital by deciding to suspend distributions (except for certain withholding requirements) to the Limited and General Partners effective as of the first quarter of 1992. In addition, the General Partners and their affiliates have deferred cash distributions, management and leasing fees and reimbursements payable to them in an aggregate amount of approximately $6,811,566 (approximately $15 per interest) through December 31, 1993. These amounts, which do not bear interest, are expected to be paid in future periods. Effective October 1, 1993, the Partnership began paying property management and leasing fees on a current basis. Reference is made to Note 11 relating to this deferral of distributions, fees and reimbursements.\nThe Partnership and its consolidated ventures have currently budgeted in 1994 approximately $4,328,000 for leasing costs and other capital expenditures. The Partnership's share of such items and its share of such similar items for its unconsolidated ventures in 1994 is currently budgeted to be $6,419,000. Actual amounts expended in 1994 may vary depending on a number of factors including actual leasing activity, results of property operations, liquidity considerations and other market conditions over the course of the year. The source of capital for such items and for both short-term and long- term future liquidity requirements and distributions is expected to be primarily through net cash generated by the Partnership's investment properties, through an existing obligation of a seller (or its affiliate) to fund deficits at one property and through the sale or refinancing of such investments.\nA number of mortgage loans secured by the Partnership's investment properties will mature in 1994 and will need to be extended or refinanced, including the mortgage loans related to the Wells Fargo Center, 900 Third Avenue, 9701 Wilshire Building and the Dunwoody Apartments (Phase I and III). In addition, certain other mortgage loans secured by the Partnership's investment properties are the subject of discussions with lenders for debt modifications or restructurings, including the mortgage loans related to 125 Broad and RiverEdge Plaza. The current status of the a refinance, modify or restructure these loans, as well as other possible mortgage loan modifications, are discussed below.\nThe mortgage note secured by the Villa Solana Apartments matured on November 1, 1993. The venture had obtained extensions of this note from the existing lender until August 1, 1994. The venture paid the lender $125,000 in extension fees in connection with these extensions. The monthly principal and interest payment, and the interest rate remain the same on the loan as prior to the original maturity date. The unpaid principal and accrued interest were to mature on August 1, 1994, however, the venture sold the investment property on March 23, 1994 as described in Note 13. The loan has been classified at December 31, 1993 and December 31, 1992 as a current liability in the accompanying consolidated financial statements. As a matter of prudent accounting practice, the Partnership made a provision for value impairment of $916,309 at September 30, 1993 for Villa Solana Apartments. Such provision reduced the net carrying value of the investment property to an amount not in excess of the proposed selling price of the investment property. Reference is made to Note 1.\nThe mortgage notes secured by the Woodland Hills Apartments are scheduled to mature on June 1, 1994. The Partnership plans to refinance these notes when they mature, although there is no assurance the Partnership will be able to obtain such financing. The loans have been classified at December 31, 1993 as current liabilities in the accompanying consolidated financial statements. Reference is made to Notes 2(f) and 4(c).\nIn October 1993, the joint venture ceased making the required debt service payments on the mortgage note secured by Park at Countryside Apartments, and commenced discussions with the lender regarding an additional modification of the loan. However, the venture was unable to secure an additional modification of the loan. Therefore, as of the date of this report, the loan is in default and the lender has initiated procedures to obtain title to the property. The loan has been classified at December 31, 1993 as a current liability in the accompanying consolidated financial statements. Based on current and anticipated market conditions, the Partnership and the joint venture partners are unwilling to commit any additional amounts to the property since the likelihood of recovering any such amounts is remote. This will result in the Partnership no longer having an ownership interest in the property and would result in a gain to the Partnership for financial reporting and Federal income tax purposes with no corresponding distributable proceeds.\nThe first mortgage loan secured by the Dunwoody Crossing Phase I and III Apartments is scheduled to mature in October 1994. The Partnership plans to refinance this note when it matures, although there can be no assurance the Partnership will be able to obtain such financing.\nIn June 1993, JMB\/Owings sold its interest in the Owings Mills Shopping Center for $9,416,000 represented by a purchase price note. Reference is made to Note 7.\nThe borrowings of the Partnership and its ventures consist of separate non-recourse mortgage loans secured by the investment properties and individually are not obligations of the entire investment portfolio. However, for any particular investment property incurring deficits, the Partnership or its ventures, if deemed appropriate, may seek a modification or refinancing of existing indebtedness and, in the absence of a satisfactory debt modification or refinancing, may decide, in light of then existing and expected future market conditions for such investment property, not to commit additional funds to such investment property. This would result in the Partnership no longer having an ownership interest in such property and would result in a gain to the Partnership for financial reporting and Federal income tax purposes with no corresponding distributable proceeds.\nCertain of the Partnership's investments have been made through joint ventures. There are certain risks associated with the Partnership's investments including the possibility that the Partnership's joint venture partner(s) in an investment might become unable or unwilling to fulfill its (their) financial or other obligations, or that such joint venture partner(s) may have economic or business interests or goals that are inconsistent with those of the Partnership.\nIn response to the weakness of the economy and the limited amount of available real estate financing in particular, the Partnership is taking steps to preserve its working capital during the current economic slowdown. Therefore, the Partnership is carefully scrutinizing the appropriateness of any possibly discretionary expenditures, particularly in relation to the amount of working capital it has available to it and its ventures. By conserving working capital, the Partnership will be in a better position to meet future needs of its properties without having to rely on external financing sources.\nPiper Jaffray Tower\nThe Minneapolis office market remains competitive due to the significant amount of new office building developments, which has caused effective rental rates achieved at Piper Jaffray Tower to be below expectations. During the fourth quarter 1991, Larkins, Hoffman, Daly & Lindgren, Ltd. (23,344 square feet) approached the joint venture indicating that it was experiencing financial difficulties and desired to give back a portion or all of its leased space. Larkin's lease was scheduled to expire in January 2005 and provided for annual rental payments which were significantly higher than current market rental rates. Larkin was also an owner with partial interests in the building and the land under the building. After substantive review of Larkin's financial condition, on January 15, 1992, the joint venture signed an agreement with Larkin to terminate its lease in return for its partial interest (4%) in the land under the building and a $1,011,798 note payable to the joint venture. The note payable provides for monthly payments of principal and interest at 8% per annum with full repayment over ten years. Larkin may prepay all or a portion of the note payable at any time.\nDuring the fourth quarter of 1993, the joint venture finalized a lease amendment with Popham Haik, Schnobrich & Kaufman, Ltd. (104,843 square feet). The amendment provides for the extension of the lease term from February 1, 1997 to January 31, 2003 in exchange for a rent reduction effective February 1, 1994. In addition, the tenant will lease an additional 10,670 square feet effective August 1, 1995. The rental rate on the expansion space approximates market which is significantly lower than the reduced rental rate on the tenant's current occupied space.\nIn August 1992, the venture signed an agreement with the lender, effective April 1, 1991, to modify the terms of the mortgage notes which are secured by the investment property. The principal balance of the mortgage notes has been consolidated into one note in the amount of $100,000,000. Under the terms of the modification, commencing on April 1, 1991 and continuing through and including January 30, 2020, fixed interest will accrue and is payable on a monthly basis at a $10,250,000 per annum level. Contingent interest is payable in annual installments on April 1 and is computed at 50% of gross receipts, as defined, for each fiscal year in excess of $15,200,000; none was due for 1992 or 1993. In addition, to the extent the investment property generates cash flow after leasing and capital costs, and 29% of the ground rent (25% after January 15, 1992 as a result of the Larkin, Hoffman, Daly & Lindgren, Ltd. settlement discussed above), such amount will be paid to the lender as a reduction of the principal balance of the mortgage loan. The excess cash flow generated by the property in 1992 totalled $923,362 and was remitted to the lender during the third quarter of 1993. During 1993, the excess cash flow generated under this agreement was $1,390,910 and will be remitted to the lender during the second quarter in 1994. The mortgage note provides for the lender to earn a minimum internal rate of return which increases over the term of the note. Accordingly, for financial reporting purposes, interest expense has been accrued at a rate of 13.59% per annum which is the estimated minimum interna annum assuming the note is held to maturity. On a monthly basis, the venture deposits the property management fee into an escrow account to be used for future leasing costs to the extent cash flow is not sufficient to cover such items. The manager of the property (which is an affiliate of the Corporate General Partner) has agreed to defer receipt of its management fee until a later date. As of December 31, 1993, the manager has deferred approximately $1,792,000 of management fees. If upon sale of the property or refinancing as discussed below, there are funds remaining in this escrow after repayments of amounts owed the lender, such funds will be paid to the manager to the extent of its deferred and unpaid management fees. Any remaining unpaid management fees would be payable out of the venture's share of sale or refinancing proceeds. Additionally, pursuant to the terms of the loan modification, effective January 1992, an affiliate of the joint venture, as majority owner of the underlying land, began deferring receipt of its share of land rent. These deferrals will be repaid from potential net sale or refinancing proceeds. In order for the Partnership to share in future net sale or refinancing proceeds, there must be a significant improvement in current market and property operating conditions resulting in a significant increase in value of the property. Reference is made to Note 3(c)(i).\n160 Spear Street Building\nDue to the rental concessions granted to facilitate leasing, the property operated at an approximate break-even level in 1993. As more fully discussed in Note 4(b)(iii), effective February 1992, the Partnership reached an agreement with the lender to reduce the current debt service payments and to extend the loan, which was scheduled to mature on December 10, 1992, to February 10, 1999. Additionally, tenant leases comprising approximately 69% of the building are scheduled to expire in 1995. It is anticipated that there will be significant costs related to releasing this space. The venture expects to approach the lender regarding an additional modification to the loan due to the increased deficits anticipated in connection with the re- leasing costs. Should the venture not be successful in obtaining an additional loan modification or alternative financing, or, should the Partnership decide not to commit any significant additional funds for the anticipated re-leasing costs, this may result in the Partnership no longer having an ownership interest in the property. This would likely result in the Partnership recognizing a gain for financial reporting and Federal income tax purposes with no corresponding distributable proceeds.\n125 Broad Street Building\nVacancy rates in the downtown Manhattan office market have increased significantly over the last few years. As vacancy rates rise, competition for tenants increases, which results in lower effective rental rates. The increased vacancy rate in the downtown Manhattan office market has resulted primarily from layoffs, cutbacks and consolidations by many of the financial service companies which, along with related businesses, dominate this submarket. The Partnership believes that these adverse market conditions and the negative impact on effective rental rates will continue over the next few years. The depressed market in downtown Manhattan has significantly affected the 125 Broad Street Building as the occupancy has decreased to 54% at December 31, 1993 partially as a result of a major tenant vacating 395,000 square feet (30% of the building) at the expiration of its lease during 1991. Additionally, in October 1993, the joint venture owning the building, 125 Broad Street Company (\"125 Broad\") entered into an agreement with Salomon Brothers, Inc. to terminate its lease covering approximately 231,000 square feet (17% of the building) at the property on December 31, 1993 rather than its scheduled termination in January 1997. In consideration for the early termination of the lease, Salomon Brothers, Inc. paid 125 Broad approximately $26,500,000 plus interest thereon of approximately $200,000, which 125 Broad in turn paid its lender to reduce amounts outstanding under the mortgage loan.\nIn addition, Salomon Brothers, Inc. paid JMB\/125 $1,000,000 in consideration of JMB\/125's consent to the lease termination. The property will be adversely affected by lower than originally expected effective rental rates to be achieved upon releasing of the space. The low effective rental rates coupled with the lower occupancy during the releasing period are expected to result in the property operating at a significant deficit in 1994 and for several years. The unaffiliated venture partners (the \"O&Y partners\"), who are affiliates of Olympia & York Developments, Ltd. (\"O&Y\"), are obligated to fund (in the form of interest-bearing loans) operating deficits and costs of lease-up and capital improvements through the end of 1995. However, as discussed below, the O&Y partners are in default in respect to certain of their funding obligations, and it appears unlikely that the O&Y partners will fulfill their obligation to 125 Broad and JMB\/125. Releasing of the vacant space will depend upon, among other things, the O&Y partners advancing the costs associated with such releasing since JMB\/125 does not intend to contribute funds to the joint venture to pay such costs. The O&Y partners have made outstanding loans to the joint venture of approximately $14,650,000 as of December 31, 1993. Such loans, which are non-recourse to JMB\/125, are payable out of cash flow from property operations or sale or refinancing proceeds. Based on the facts discussed above and as described more fully in Note 3(c)(iv), the joint venture recorded a provision for value impairment as of December 31, 1991 to reduce the net book value of the 125 Broad Street Building to the then outstanding balance of the related non-recourse financing and O&Y partner loans due to the uncertainty of the joint venture's ability to recover the net carrying value of the investment property through future operations or sale.\nO & Y and certain of its affiliates have been involved in bankruptcy proceedings in the United States and Canada and similar proceedings in England. Subsequent to December 31, 1992, O & Y emerged from bankruptcy protection in Canada. In addition, a reorganization of the management of the company's United States operations has been completed, and certain O&Y affiliates are in the process of renegotiating or restructuring various loans affecting properties in the United States in which they have an interest. In view of the present financial condition of O&Y and its affiliates and the anticipated deficits for the property as well as the existing defaults of the O&Y partners, it appears unlikely that the O&Y partners will meet their financial and other obligations to JMB\/125 and 125 Broad.\nThe O&Y partners have failed to advance necessary funds to 125 Broad as required under the joint venture agreement, and as a result, the joint venture defaulted on its mortgage loan which has an outstanding principal balance of approximately $277,000,000 in June 1992 by failing to pay approximately $4,722,000 of the semi-annual interest payment due on the loan. In addition, during 1992 affiliates of O&Y defaulted on a \"takeover space\" agreement with Johnson & Higgins, Inc. (\"J&H\"), one of the major tenants at the 125 Broad Street Building, whereby such affiliates of O&Y agreed to assume certain lease obligations of J&H at another office building in consideration of J&H's leasing space in the 125 Broad Street Building. As a result of this default, J&H has offset rent payable to 125 Broad for its lease at the 125 Broad Street Building in the amount of approximately $28,600,000 through December 31, 1993, and it is expected that J&H will continue to offset amounts due under its lease corresponding to amounts by which the affiliates of O&Y are in default under the \"takeover space\" agreement. As a result of the O&Y affiliates' default under the \"takeover space\" agreement and the continuing defaults of the O&Y partners to advance funds to cover operating deficits, as of the end of 1993, the arrearage under the mortgage loan had increased to approximately $48,180,000. However, as discussed above, approximately $26,700,000 was remitted to the lender in October 1993 in connection with the early termination of the Salomon Brothers lease, and was applied towards the mortgage principal for financial reporting purposes. Due to their obligations relating to the \"takeover space\" agreement, the affiliates of O&Y are obligated for the payment of the rent receivable associated with the J&H lease at the 125 Broad Street Building. Based on the continuing defaults of the O&Y partners, the joint venture has reserved the entire rent offset by J&H, $19,300,000 and $9,300,000 in 1993 and 1992, respectively, and has also reserved approximately $32,600,000 of accrued rents receivable relating to such J&H lease, since the ultimate collectability of such amounts depends upon the O&Y partners' and the O&Y affiliates' performance of their obligations. The Partnership's share of such losses was approximately $5,587,000 and $12,159,000 for 1993 and 1992, respectively, and is included in the Partnership's share of loss from operations of unconsolidated ventures. The O&Y partners have attempted to negotiate a restructuring of the mortgage loan with the lender in order to reduce operating deficits view of, among other things, the significant operating deficits which the property is expected to incur during 1994 and for the next several years, it is unlikely that a restructuring of the mortgage loan will be obtained. The loan restructuring is part of a larger restructuring with the lender involving a number of loans secured by various properties in which O&Y affiliates have an interest. JMB\/125 has notified the O&Y partners that their failure to advance funds to cover the operating deficits constitutes a default under the joint venture agreement.\nAccordingly, it appears unlikely the O&Y partners will fulfill their obligations to 125 Broad and JMB\/125. Therefore, it appears unlikely that 125 Broad will be able to restructure the mortgage loan, and JMB\/125 is not likely to commit any significant additional amounts to the property. This would result in the Partnership no longer having an ownership interest in the property. If this event were to occur, the Partnership would recognize a net gain for financial reporting and Federal income tax purposes without any corresponding distributable proceeds. In addition, under certain circumstances JMB\/125 may be required to make an additional capital contribution to 125 Broad in order to make up a deficit balance in its capital account. Reference is made to Note 3(c)(iv).\n260 Franklin Street Building\nThe office market in the Financial District of Boston remains competitive due to new office building developments and layoffs, cutbacks and consolidations by financial service companies. The effective rental rates achieved upon releasing have been substantially below the rates which were received under the previous leases for the same space. In December 1991, 260 Franklin, the affiliated joint venture, reached an agreement with the lender to modify the long-term mortgage note secured by the 260 Franklin Street Building. The property is currently expected to operate at a deficit for 1994 and for several years thereafter. The loan modification required that the affiliated joint venture establish an escrow account for excess cash flow from the property's operations (computed without a deduction for property management fees and leasing commissions to an affiliate) to be used to cover the cost of capital and tenant improvements and lease inducements, which are the primary components of the anticipated operating deficits noted above, as defined, with the balance, if any, of such escrowed funds available at the scheduled or accelerated maturity to be used for the payment of principal and interest due to the lender. Beginning January 1, 1992, 260 Franklin began escrowing the payment of property management fees and lease commissions owed to an affiliate of the Corporate General Partner pursuant to the terms of the debt modification, which is more fully described in Note 4(b), and accordingly, such fees and commissions remained unpaid. The Partnership's share of such fees and lease commissions is approximately $523,615 at December 31, 1993. In 1995, the leases of tenants occupying approximately 107,000 square feet (approximately 31% of the property) at the 260 Franklin Street Building expire. It is anticipated that there will be significant cost related to releasing this space. In addition, the long-term mortgage loan matures January 1, 1996. If the Partnership is unable to refinance or extend the mortgage loan, the Partnership may decide not to commit any significant additional funds. This may result in the Partnership no longer having an ownership interest in the property. This would result in the Partnership recognizing a gain for financial reporting purposes.\n900 Third Avenue Building\nDuring the year, occupancy of this building increased to 95%, up from 92% in the previous year primarily due to Investment Technology Group, Inc. occupying 15,636 square feet (approximately 3% of the building's leasable space) in the second quarter of 1993. The midtown Manhattan market remains very competitive. Although, the joint venture is in discussions with the existing lender for a possible refinancing and extension of its mortgage loan which matures in December 1994, there can be no assurance that the Partnership will be successful in such discussions.\nThe Partnership and affiliated partner have filed a lawsuit against the former manager and one of the unaffiliated venture partners to recover the amounts advanced and certain other joint venture obligations on which the unaffiliated partner has defaulted. This lawsuit has been dismissed on jurisdictional grounds. Subsequently, however, the Federal Deposit Insurance Corp. (\"FDIC\") filed a complaint, since amended, in a lawsuit against the joint venture partner, the Partnership and affiliated partner and the joint venture, which has enabled the Partnership and affiliated partner to refile its previously asserted claims against the joint venture partner as part of that lawsuit in Federal court. There is no assurance that the Partnership and affiliated partner will recover the amounts of its claims as a result of the litigation. Due to the uncertainty, no amounts in addition to the amounts advanced to date, noted above, have been recorded in the accompanying consolidated financial statements. Settlement discussions with one of the venture partners and the FDIC continue. The FDIC has, in the past, been unwilling to consider a settlement until certain other issues it has with one of the unaffiliated venture partners are resolved. It appears that a resolution of those other issues may be near. There are no assurances that a settlement will be finalized and that the Partnership and affiliated partner will be able to recover any amounts from the unaffiliated venture partners.\n300 East Lombard Building\nEffective September 30, 1991, the Partnership sold, to an affiliate of the joint venture partners, 62% of its interest in a joint venture that owns a 55% interest in the 300 East Lombard investment property. In conjunction with the sale, the Partnership and buyer established a put-call option on the Partnership's remaining interest in the joint venture. In January 1993, the Partnership sold its remaining interest in accordance with the terms of the option. Reference is made to Note 7.\nWells Fargo Center\nThe Wells Fargo Center operates in the Downtown Los Angeles office market, which has become extremely competitive over the last several years with the addition of several new buildings that has resulted in a high vacancy rate of approximately 25% in the marketplace. In 1992, two major law firm tenants occupying approximately 11% of the building's space approached the joint venture indicating that they were experiencing financial difficulties and desired to give back a portion of their leased space in lieu of ceasing business altogether. The joint venture reached agreements which resulted in a reduction of the space leased by each of these tenants. The Partnership is also aware that a major tenant, IBM, leasing approximately 58% of the tenant space in the Wells Fargo Building is sub-leasing or attempting to sub-lease approximately one-fourth of its space, which is scheduled to expire in December 1998. The Partnership expects that the competitive market conditions will have an adverse affect on the building through lower effective rental rates achieved on releasing of existing tenant space which expires or is given back over the next several years. The property operated at deficits in 1992 and 1993 due to rental concessions granted to facilitate leasing of space taken back from the two tenants noted above and the expansion of one of the other major tenants in the building. The property is expected to produce cash flow in 1994. The mortgage note secured by the property, as well as the promissory note secured by the Partnership's interest in the joint venture are scheduled to mature in December 1994. The promissory note secured by the Partnership's interest in the joint venture is classified at December 31, 1993 as a current liability in the accompanying consolidated financial statements. In view of, among other things, current and anticipated market and leasing conditions affecting the property, including uncertainty regarding the amount of space, if any, which IBM will renew when its lease expires in December 1998, the South Tower Venture, as a matter of prudent accounting practice, recorded a provision for value impairment of $67,479,871 (of which $20,035,181 has been allocated to the Partnership and is reflected in the Partnership's share of operations of unconsolidated ventures in the accompanying consolidated financial statements). Such provision, made as of August 31, 1993, is recorded to reduce the net carrying value of the Wells Fargo Center to the then outstanding balance of the related non-recourse debt. Further, there is no assurance that the joint venture or the Partnership will be able to refinance these notes when they mature in December o Partnership may then decide not to commit any significant additional amounts to the property. This may result in the Partnership no longer having an ownership interest in the property, and would result in a gain for financial reporting and for Federal income tax purposes with no corresponding distributable proceeds. The property did not sustain any significant damage as a result of the January 1994 earthquake in southern California. Reference is made to Notes 1 and 3(c)(iii).\nRiverEdge Place Building\nThe RiverEdge Place Building was 100% leased to an affiliate of the major tenant, First American Bank, under a long-term over-lease executed in connection with the purchase of the property. The Bank and its affiliate approached the Partnership indicating that they were experiencing significant financial difficulties. On June 23, 1992, the Partnership reached an agreement with the Bank and received cash and U.S. Government Securities valued at $9,325,000 for the buy-out of the Bank's over-lease obligations. The termination of the Bank's over-lease obligation yielded an approximately $1,591,000 reduction in accrued rents receivable. The Partnership took these courses of action due to the First American Bank's deteriorating financial condition and the Federal Deposit Insurance Corporation's ability to assume control of the Bank and to terminate the over-lease obligation. The $9,325,000 buy-out was concurrently remitted to the lender to reduce the mortgage secured by the RiverEdge Place Building and the Partnership continues to negotiate with the lender to restructure the mortgage note in order to reduce operating deficits anticipated as a result of the over-lease buy-out. In connection with the Partnership's negotiations with the lender, the Partnership ceased making debt service payments effective July 1, 1992. If the Partnership's negotiations for mortgage note restructuring are not successful, the Partnership would likely decide, based upon current market conditions and other considerations relating to the property and the Partnership's portfolio, not to commit significant additional amounts to the property. This would result in the Partnership no longer having an ownership interest in the property and would result in a gain for financial reporting and Federal income tax purposes without any corresponding distributable proceeds. Accordingly, the mortgage note has been classified as a current liability in the accompanying consolidated financial statements. Additionally, the tenant lease with First American Bank for approximately 120,000 square feet has been assigned to and assumed by SouthTrust Bank of Georgia in connection with that bank's acquisition of most of the remaining assets of First American Bank. Effective August 1, 1992, the Partnership restructured the lease with SouthTrust Bank of Georgia reducing the tenant's space to approximately 92,000 square feet, as well as reducing the effective rent on the retained space in exchange for an extension of the lease term from April, 1994 to July, 2002. The restructuring of SouthTrust Bank's lease reduced the occupied space of the RiverEdge Place Building from 96% to 85% at that time. The Partnership is actively pursuing replacement tenants for the building's vacant space including the space taken back from the SouthTrust lease restructuring. Due to the uncertainty as to the Partnership's ability to recover the net carrying value of the investment property through future operations and sale, as a matter of prudent accounting practice, the Partnership made a provision for value impairment of $6,149,632 recorded as of September 30, 1992. Such provision was recorded to reduce the net carrying value of the investment property to the September 30, 1992 outstanding balance of the related non-recourse financing. Reference is made to Notes 1, 2(b) and\n4(b)(iv).\n21900 Burbank Building\nThe 21900 Burbank Building sustained some damage as a result of the earthquakes that occurred in January 1994 in southern California. Preliminary estimates of the damage range from $200,000 to $500,000. Much of this damage occurred within tenant premises in the building. The Partnership does not believe it has any significant obligations to reimburse tenants for such repairs. While the Partnership carried earthquake insurance on this property, it is anticipated that the total damages will not exceed the deductible amount. Although the property produced cash flow to the Partnership in 1993, there is uncertainty as to the Partnership's ability to recover the net carrying value of the investment property through future operations and sale as a result of the substantial amount of tenant space (approximately 83% of the building) under leases that are scheduled to expire during 1995 and 1996. As a matter of prudent accounting practice, the Partnership made a provision for value impairment of such investment property of $1,740,533 recorded as of June 30, 1992. Such provision was recorded to reduce the net carrying value of the investment property to the June 30, 1992 outstanding balance of the related non-recourse financing. Reference is made to Notes 1 and 2(c).\nNewPark Associates\nIn December 1992, NewPark Associates refinanced the existing indebtedness related to its shopping center with a new mortgage loan as described in Note 3(c)(v). In addition to retiring the prior mortgage loan and the notes payable to the unaffiliated joint venture partner, the new mortgage loan, which is in the principal amount of approximately $51,000,000 and bears interest at 8.75% per annum, has provided approximately $14,000,000 of additional proceeds, a major portion of which were used to pay the costs of the renovation work described below and to provide a reserve for future tenant improvement costs at the property. The new mortgage loan matures in November 1995, subject to the right of the joint venture to extend the maturity date to November 2000 upon payment of a $250,000 fee and satisfaction of certain conditions.\nNewPark Associates commenced a renovation of NewPark Mall in early 1993 and such renovation was substantially complete as of September 30, 1993. NewPark Mall may be subject to increased competition from a new mall that is expected to open in the vicinity in late 1994.\nCalifornia Plaza\nThe property operated at a deficit in 1993 due to the costs incurred in connection with the leasing of space which was vacant or under leases that expired in 1993. Effective March 1, 1993, the joint venture ceased making the scheduled debt service payments on the mortgage loan secured by the property which was scheduled to mature on January 1, 1997. Subsequently, the Partnership made partial debt service payments based on net cash flow of the property through December, 1993 when an agreement was reached with the lender to modify the loan on December 22, 1993. As more fully discussed in Note 4(b)(vi), the loan modification reduced the pay rate of monthly interest only payments to 8% per annum, effective February 1993, extended the loan maturity date to January 1, 2000, and requires the net cash flow of the property to be escrowed (as defined). The venture also funded $500,000 into a reserve account as required by the modification agreement. This reserve account is to be used to fund future costs, including tenant improvements, leasing commissions and capital improvements, approved by the lender. Additionally, due to the uncertainty of the Partnership's ability to recover the net carrying value of the California investment property, the Partnership made, as a matter of prudent accounting practice, a provision for value impairment of California Plaza at June 30, 1993 of $2,166,799 (which included $1,558,492 relating to the venture partner's deficit investment balance at that date). Such provision reduced the net carrying value of the investment property to the June 30, 1993 outstanding balance of the related non-recourse mortgage note. Reference is made to Notes 1 and 4(b)(vi).\nErie-McClurg Parking Facility\nOn September 25, 1992, the Partnership, through Erie-McClurg Associates, sold the Erie-McClurg Parking Facility located in Chicago, Illinois. A portion of the cash proceeds was used to retire the first mortgage note secured by the property. Additionally, a portion of the proceeds was used to retire the Partnership's unsecured, non-revolving line of credit. Reference is made to Notes 2(e) and 7.\nConcurrently, with the sale of the Erie-McClurg Parking Facility, the Partnership entered into an agreement with the unaffiliated manager of the parking facility to induce the manager to re-write the existing long-term management agreement at less favorable terms to the manager. This agreement guarantees the manager 100% of the compensation which would have been earned under the agreement prior to the sale in years one through five and 50% of any potential difference between the management fee under the agreement prior to the sale and the renegotiated agreement with the purchaser (as defined) in years six through eighteen. Reference is made to Note 7.\nIn connection with this agreement, at closing the Partnership paid the unaffiliated manager a partial settlement of $400,000 and has estimated the present value of the remaining contingent liability to be $360,000. This contingent liability is recorded as a long-term liability in the accompanying consolidated financial statements. Reference is made to Note 7.\nSpringbrook Shopping Center\nIn October 1993, a tenant occupying 20% of the space at the Springbrook Shopping Center vacated upon expiration of its lease. The Partnership is actively pursuing replacement tenants for the vacant space, but there is no assurance that any leases will be consummated. Due to the uncertainty of re- leasing this space, and due to the property being expected to operate at a deficit in 1994, there is uncertainty as to the Partnership's ability to recover the net carrying value of the investment property through future operations or sale. Thus, as a matter of prudent accounting practice, the Partnership made a provision for value impairment of such investment property of $7,534,763 at December 31, 1993. Such provision is recorded to reduce the net carrying value of the investment property to the December 31, 1993 outstanding balance of the related non-recourse financing. Reference is made to Note 1.\nOther\nThe mortgage note secured by Eastridge Mall is scheduled to mature on October 1, 1995. There is no assurance that the venture will be able to refinance or obtain alternative financing when the note matures. Due to the uncertainty of the Partnership's ability to recover the net carrying value of the Eastridge Mall investment property, the Partnership has made, as a matter of prudent accounting practice, a provision at June 30, 1992 for value impairment of Eastridge Mall of $5,752,710. Such provision reduced the net carrying value of the investment property to the then outstanding balance of the related non-recourse mortgage note.\nDue to the uncertainty of the Partnership's ability to recover the net carrying value of the 9701 Wilshire Building investment property, the Partnership has made, as a matter of prudent accounting practice, a provision at September 30, 1992 for value impairment of 9701 Wilshire Building of $12,504,079. Such provision reduced the net carrying value of the investment property to the then outstanding balance of the related non-recourse mortgage note. The property operated at a slight deficit in 1993 due to the costs incurred in connection with the re-leasing of the vacant space in the building. The mortgage note secured by the property matured on January 1, 1994. The Partnership obtained extensions of this note from the existing lender until August 1, 1994. The Partnership paid the lender $110,000 in extension fees in connection with these extensions. The monthly principal and interest payment, and the interest rate remain the same on the loan as prior to the original maturity date. The unpaid principal and interest matures on August 1, 1994, and thus, the loan has been classified at December 31, 1993 as a current liability in the accompanying consolidated financial statements. The Partnership is pursuing a sale or alternative financing of the property, however, there is no assurance that the Partnership will be successful in either refinancing or selling the property. The property did not sustain any significant damage as a result of the January 1994 earthquake in southern California.\nDue to the factors discussed above and the general lack of buyers of real estate today, it is likely that the Partnership may hold some of its investment properties longer than originally anticipated in order to maximize Partnership's recovery of its investments and any potential return thereon. In light of the current severely depressed real estate markets, it currently appears that the Partnership's goal of capital appreciation will not be achieved. Although some portion of the Limited Partners' original capital is expected to be distributed from sales proceeds, without a dramatic improvement in market conditions the Limited Partners will not receive a full return of their original investment. In addition, in connection with sales or other dispositions (including transfers to lenders) of properties (or interests therein) owned by the Partnership or its joint ventures, the Limited Partners may be allocated substantial gain for Federal income tax purposes.\nRESULTS OF OPERATIONS\nThe decrease in current portion of notes receivable at December 31, 1993 as compared to December 31, 1992 is primarily due to the receipt by the Partnership in June 1993 of $165,625 of the Boatman's settlement. Reference is made to Note 3(b)(i).\nThe increase in escrow deposits and restricted securities at December 31, 1993 as compared to December 31, 1992 is primarily due to an increase in the escrow balance at the 260 Franklin Street Building and an increase in the escrow balance at Cal Plaza due to the loan modification in December 1993, offset by the return of reserves to the venture partner related to Cal Plaza as required by the 1991 settlement. Reference is made to Notes 3(b)(iii) and 4(b).\nThe decrease in land and buildings and improvements at December 31, 1993 as compared to December 31, 1992 is primarily due to the Partnership's decision to establish provisions for value impairment in connection with the Cal Plaza, Villa Solana Apartments and Springbrook Shopping Center investment properties. The decrease in buildings and improvements is partially offset by additions of buildings and improvements at certain of the Partnership's investment properties. Reference is made to Note 1.\nThe decrease in investment in unconsolidated ventures, at equity at December 31, 1993 as compared to December 31, 1992 is primarily due to the provision for value impairment recorded at Wells Fargo Center at August 31, 1993, of which the Partnership's share was $20,035,181, as more fully discussed in Note 1, and in the Liquidity and Capital Resources section above.\nThe increase in the balance of the current portion of long-term debt and corresponding decrease in the balance of long-term debt at December 31, 1993 as compared to December 31, 1992 is primarily due to 9701 Wilshire's debt, which matured January 1, 1994 and for which the Partnership obtained extensions until August 1, 1994, Woodland Hills debt, which is scheduled to mature June 1, 1994, Dunwoody Crossings (Phase I and III) Apartment's debt, which is scheduled to mature on October 1, 1994, Park at Countryside Apartment's debt which has been in default since October 1993, and for which the lender has initiated foreclosure proceedings, and the Wells Fargo promissory note which is secured by the Partnership's interest in the South Tower joint venture, which is scheduled to mature on December 31, 1994, being classified as current liabilities at December 31, 1993. Reference is made to Note 4.\nThe increase in amounts due affiliates at December 31, 1993 as compared to December 31, 1992 is primarily due to the additional deferrals by the Partnership's General Partners and their affiliates of certain property management and leasing fees and reimbursements. Reference is made to Note 11.\nThe increase in the balance of accrued interest payable at December 31, 1993 as compared to December 31, 1992 is primarily due to the accrual of approximately $2,611,000 in 1993 of unpaid interest on the mortgage loan secured by the RiverEdge Place investment property. Reference is made to Note 4(b)(iv).\nThe decrease in deposits and advances at December 31, 1993 as compared to December 31, 1992 is due to the return of reserves to the venture partner related to the California Plaza investment property as required by the 1991 settlement agreement. Reference is made to Note 3(b)(iii).\nDecreases in rental income for the year ended December 31, 1993 as compared to the same period in 1992 is primarily due to the June 30, 1992 buy- out of the First American Bank's over-lease obligations at RiverEdge Place, and the sale of the Erie-McClurg Parking Facility in September 1992. Reference is made to Notes 2(b) and 7. Increases in rental income for the year ended December 31, 1992 as compared to the same period in 1991 are primarily due to the June 1992 buy-out of the First American Bank's over-lease obligations (as discussed above) offset, in part, by lower effective rental rates on tenant space that expired in 1991 and was re-leased in 1992 at the 260 Franklin Street investment property and the September 1992 sale of the Erie-McClurg Parking Facility.\nThe decrease in interest income for the year ended December 31, 1993 as compared to the same period in 1992 is primarily due to lower interest rates earned on the Partnership's short-term investments. The increase in interest income for the year ended December 31, 1992 as compared to same period in 1991 is primarily due to an increase in the average balance of short-term investments in 1992 as compared to 1991.\nThe decrease in mortgage and other interest for the year ended December 31, 1993 as compared to the same period in 1992 is primarily due to the sale of the Erie-McClurg Parking Facility in September, 1992, a reduction of the debt balance of RiverEdge Place investment property by $9,325,000 in June 1992 and the modification of the loan at Cal Plaza which decreased the effective interest rate. Reference is made to Notes 2(b), 4(b)(vi) and 7. The decrease in mortgage and other interest for the year ended December 31, 1992 as compared to the same period in 1991 is primarily due to the February 1992 modification (effecting a lower average interest rate) of the debt secured by the 160 Spear Street investment property, the June 1992 $9,325,000 principal reduction of the debt secured by the RiverEdge Place investment property and the September 1992 sale and simultaneous retirement of debt of the Erie- McClurg Parking Facility.\nThe decrease in depreciation expense for the year ended December 31, 1993 as compared to the same period in 1992, and the decrease for the year and December 31, 1992 as compared to the same period in 1991 is primarily due to the provisions for value impairment recorded at several of the Partnership's investment properties in 1993 and 1992, which resulted in a lower basis of assets to be depreciated in 1993 and 1992, and due to the sale in September 1992 of the Erie-McClurg Parking Facility. Reference is made to Notes 1 and 7.\nThe decrease in professional services for the years ended December 31, 1993 as compared to the same period in 1992 and the decrease for the year ended December 31, 1992 as compared to the same period in 1991 is primarily due to Partnership's 1991 and 1992 legal fees relating to the lawsuit against the joint venture partner of the C-C California Plaza venture. Reference is made to Note 3(b)(iii).\nThe decrease in management fees to corporate general partner for the year ended December 31, 1993 as compared to the same period in 1992 and, the decrease for the year ended December 31, 1992 as compared to the same period in 1991 is due to the decreases in the Partnership's distributions in 1992, and suspension of distributions in 1992, a portion of which is earned by the Corporate General Partner as a partnership management fee. Reference is made to Note 11 relating to the deferral of these fees.\nThe provisions for value impairment for the year ended December 31, 1993 relate to provisions recorded for Cal Plaza, Villa Solana Apartments, and Springbrook Shopping Center of $2,166,799, $916,309 and $7,534,763, respectively. The provisions for value impairment for the year ended December 31, 1992 relate to provisions recorded for Eastridge Mall, 21900 Burbank Boulevard Building, 9701 Wilshire Building and RiverEdge Plaza properties of $5,752,710, $1,740,533, $12,504,079 and $6,149,632, respectively. Reference is made to Note 1.\nThe increase in Partnership's share of loss from operations of unconsolidated ventures for the year ended December 31, 1993 as compared to the same period in 1992 is primarily due to the provision for value impairment recorded at August 31, 1993 at Wells Fargo Center (of which the Partnership's share is $20,035,181), offset by a decrease in the Partnership's share of losses of JMB\/125 due to the receipt of the Salomon Brothers lease termination fee payment in 1993. The increase in the Partnership's share of losses from operations of unconsolidated ventures for the year ended December 31, 1992 as compared to the same period in 1991 is primarily due to activity at the 125 Broad Street office building, including (i) the recognition of losses relating to Johnson and Higgins receivables in 1992 and (ii) a decrease in rental income as a result of a major tenant vacating a large portion of its space during 1991. The Partnership's share of loss from operations of unconsolidated ventures for 1991 includes a provision for value impairment recorded on the books of the 125 Broad Street Building as of December 31, 1991 to reduce the net book value of the 125 Broad Street Building to the then outstanding balance of related non-recourse financing. Reference is made to Notes 3(c)(iii) and 3(c)(iv).\nThe gain on sale of investment property in 1992 relates to the sale of the Erie-McClurg Parking Facility in September 1992. Reference is made to Note 7.\nThe gain on sale of interests in unconsolidated ventures for the year ended December 31, 1993 relates to JMB\/Owning's sale of its interest in Owings Mills Limited Partnership (\"OMLP\") in June 1993, and the Partnership's sale of the remaining interest in Harbor Overlook Limited Partnership in January 1993.\nThe gain on sale of interest in unconsolidated ventures for the year ended December 31, 1991 relates to the Partnership's sale of 62% of its general partnership interest in Harbor Overlook Limited Partnership in 1991. Reference is made to Note 7.\nThe $1,014,538 extraordinary item for the year ended December 31, 1991 relates to the cancellation in February 1991, of the wrap-around mortgage note secured by the Woodland Hills apartment complex. Reference is made to Note 4(c).\nINFLATION\nDue to the decrease in the level of inflation in recent years, inflation generally has not had a material effect on rental income or property operating expenses.\nTo the extent that inflation in future periods does have an adverse impact on property operating expenses, the effect will generally be offset by amounts recovered from tenants as many of the long-term leases at the Partnership's commercial and retail properties have escalation clauses covering increases in the cost of operating and maintaining the properties as well as real estate taxes. Therefore, there should be little effect on net operating earnings if the properties remain substantially occupied. In addition, substantially all of the leases at the Partnership's shopping center investments contain provisions which entitle the property owner to participate in gross receipts of tenants above fixed minimum amounts.\nFuture inflation may also cause capital appreciation of the Partnership's investment properties over a period of time to the extent that rental rates and replacement costs of properties increase. ITEM 8.","section_7A":"","section_8":"ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA\nCARLYLE REAL ESTATE LIMITED PARTNERSHIP - XV (A LIMITED PARTNERSHIP) AND CONSOLIDATED VENTURES\nINDEX\nIndependent Auditors' Report Consolidated Balance Sheets, December 31, 1993 and 1992 Consolidated Statements of Operations, years ended December 31, 1993, 1992 and 1991 Consolidated Statements of Partners' Capital Accounts (Deficits), years ended December 31, 1993, 1992 and 1991 Consolidated Statements of Cash Flows, years ended December 31, 1993, 1992 and 1991 Notes to Consolidated Financial Statements\nSCHEDULE --------\nSupplementary Income Statement Information X Consolidated Real Estate and Accumulated Depreciation XI\nSchedules not filed:\nAll schedules other than those indicated in the indices have been omitted as the required information is inapplicable or the information is presented in the consolidated or combined financial statements or related notes.\nCARLYLE REAL ESTATE LIMITED PARTNERSHIP - XV\nCERTAIN UNCONSOLIDATED VENTURES\nINDEX\nIndependent Auditors' Report Combined Balance Sheets, December 31, 1993 and 1992 Combined Statements of Operations, years ended December 31, 1993, 1992 and 1991 Combined Statements of Partners' Capital Accounts (Deficits), years ended December 31, 1993, 1992 and 1991 Combined Statements of Cash Flows, years ended December 31, 1993, 1992 and 1991\nNotes to Combined Financial Statements\nSCHEDULE --------\nSupplementary Income Statement Information X Combined Real Estate and Accumulated Depreciation XI\nSchedules not filed:\nAll schedules other than those indicated in the indices have been omitted as the required information is inapplicable or the information is presented in the consolidated or combined financial statements or related notes.\nINDEPENDENT AUDITORS' REPORT\nThe Partners CARLYLE REAL ESTATE LIMITED PARTNERSHIP - XV:\nWe have audited the consolidated financial statements of Carlyle Real Estate Limited Partnership - XV (a limited partnership) and Consolidated Ventures as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedules as listed in the accompanying index. These consolidated financial statements and financial statement schedules are the responsibility of the General Partners of the Partnership. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on our audits.\nWe conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the General Partners of the Partnership, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.\nIn our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Carlyle Real Estate Limited Partnership - XV and Consolidated Ventures at December 31, 1993 and 1992, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1993, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.\nAs described in Note 3 (c)(iv) of notes to consolidated financial statements, the property owned by 125 Broad Street Company (125 Broad), in which the Partnership has an interest through 125 Broad Building Associates (JMB\/125), has suffered losses and cash flow deficits from operations and expects to incur significant cash flow deficits in the future that are required to be funded by the unaffiliated venture partners through 1995 pursuant to the 125 Broad joint venture agreement. In 1992, the unaffiliated venture partners failed to advance necessary funds to 125 Broad and, as a result, 125 Broad defaulted on its mortgage loan. JMB\/125 has notified the unaffiliated joint venture partners that their failure to advance funds to cover operating deficits constitutes a default under the 125 Broad joint venture agreement. The 125 Broad joint venture partners have been negotiating with the property's lender to restructure the mortgage loan; however, there can be no assurances that negotiations to restructure the loan will be successful. The Partnership believes it is unlikely that the unaffiliated joint venture partners will fulfill their funding obligations to 125 Broad and JMB\/125. As a result, it appears unlikely that 125 Broad will be able to restructure the mortgage loan. In the event that 125 Broad is unable to restructure the mortgage loan, JMB\/125 would likely decide not to commit additional funds to 125 Broad. These circumstances could result in the Partnership no longer having an ownership interest in the investment property.\nThe ultimate outcome of these circumstances cannot presently be determined. The consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.\nAdditionally, as discussed in Notes 3 and 4 of notes to consolidated financial statements, a number of mortgage loans secured by the Partnership's investment properties or investment properties owned by ventures in which the Partnership has an interest, mature in 1994. The Partnership has commenced or intends to commence discussions with the mortgage lenders in order to extend and\/or modify such mortgage loans. In the event that discussions with lenders are unsuccessful, the Partnership and its venture partners may be unable or unwilling to commit additional amounts to the investment properties. These circumstances could result in the Partnership no longer having an ownership interest in certain investment properties. The ultimate outcome of these circumstances cannot presently be determined. The Partnership and ventures have recorded provisions for value impairment, where applicable, to reduce the net book value of such properties to the outstanding balance of the related non-recourse financing (Notes 1 and 3 of notes to consolidated financial statements).\nKPMG PEAT MARWICK\nChicago, Illinois March 28, 1994\nCARLYLE REAL ESTATE LIMITED PARTNERSHIP - XV (A LIMITED PARTNERSHIP) AND CONSOLIDATED VENTURES\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS\nDECEMBER 31, 1993, 1992 AND 1991\n(1) BASIS OF ACCOUNTING\nThe accompanying consolidated financial statements include the accounts of the Partnership and its consolidated ventures, Eastridge Development Company (\"Eastridge\"); Daytona Park Associates (\"Park\"); JMB\/160 Spear Street Associates (\"160 Spear\"); Villa Solana Associates (\"Villa Solana\"); 260 Franklin Street Associates (\"260 Franklin\"); C-C California Plaza Partnership (\"Cal Plaza\"); Villages Northeast Associates (\"Villages Northeast\") and VNE Partners, Ltd. (\"VNE Partners\"). The effect of all transactions between the Partnership and the consolidated ventures has been eliminated.\nThe equity method of accounting has been applied in the accompanying consolidated financial statements with respect to the Partnership's interests in JMB\/Piper Jaffray Tower Associates (\"JMB\/Piper\") and JMB\/Piper Jaffray Tower Associates II (\"JMB\/Piper II\"); 900 Third Avenue Associates (\"JMB\/900\"); Maguire\/Thomas Partners-South Tower (\"South Tower\"); Harbor Overlook Limited Partnership (\"Harbor\"); JMB\/Owings Mills Associates (\"JMB\/Owings\"); Carlyle-XV Associates, L.P., which owns an interest in JMB\/125 Broad Building Associates, L.P. (\"JMB\/125\") and JMB\/NewPark Associates, L.P. (\"JMB\/NewPark\").\nThe Partnership's records are maintained on the accrual basis of accounting as adjusted for Federal income tax reporting purposes. The accompanying consolidated financial statements have been prepared from such records after making appropriate adjustments to present the Partnership's accounts in accordance with generally accepted accounting principles (\"GAAP\") and to consolidate the accounts of certain ventures as described above. Such adjustments are not recorded on the records of the Partnership. The effect of these items is summarized as follows for the years ended December 31, 1993 and 1992:\nCARLYLE REAL ESTATE LIMITED PARTNERSHIP - XV\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED\nThe net loss per limited partnership interest is based upon the limited partnership interests outstanding at the end of the period (443,717). Deficit capital accounts will result, through the duration of the Partnership, in the recognition of net gain for financial reporting and income tax purposes.\nStatement of Financial Accounting Standards No. 95 requires the Partnership to present a statement which classifies receipts and payments according to whether they stem from operating, investing or financing activities. The required information has been segregated and accumulated according to the classifications specified in the pronouncement. Partnership distributions from unconsolidated ventures are considered cash flow from operating activities only to the extent of the Partnership's cumulative share of net earnings. In addition, the Partnership records amounts held in U.S. Government obligations and other securities at cost which approximates market.\nFor the purposes of these statements, the Partnership's policy is to consider all such amounts held with original maturities of three months or less (none at December 31, 1993 and 1992) as cash equivalents with any remaining amounts reflected as short-term investments.\nEscrow deposits and restricted securities primarily represent cash and investments restricted as to their use by the Partnership.\nDue to the uncertainty of the Partnership's ability to recover the net carrying value of the 125 Broad Street Building (note 3(c)(iv), 260 Franklin Street Building, Eastridge Mall, 21900 Burbank Boulevard Building, 9701 Wilshire Building, RiverEdge Place, California Plaza, Wells Fargo Center - IBM Tower, Villa Solana Apartments and Springbrook Shopping Center investment properties, the Partnership, or ventures, as the case may be, made, as a matter of prudent accounting practice, provisions for value impairment. A provision for value impairment was recorded at June 30, 1992 of $5,752,710 and $1,740,533 for Eastridge Mall and 21900 Burbank Boulevard Building, respectively, at September 30, 1992 of $12,504,079 and $6,149,632 for 9701 Wilshire Building and RiverEdge Place, respectively, at June 30, 1993, of $2,166,799 for California Plaza, which included $1,558,492 relating to the venture partner's deficit investment balance at that date, at August 31, 1993, of $67,479,871 (of which, the Partnership's share is $20,035,181) at Wells Fargo Center - IBM Tower, at September 30, 1993, of $916,309 at Villa Solana Apartments, and at December 31, 1993 of $7,534,763 at Springbrook Shopping Center. Such provisions generally reduce the net carrying values of the investment properties to the then outstanding balance of the related non- recourse mortgage notes.\nDeferred expenses are comprised principally of deferred financing fees which are amortized over the related debt term and deferred leasing fees which are amortized over the related lease term.\nAlthough certain leases of the Partnership provide for tenant occupancy during periods for which no rent is due and\/or increases in minimum lease payments over the term of the lease, the Partnership accrues prorated rental income for the full period of occupancy on a straight-line basis.\nStatement of Financial Accounting Standards No. 107 (\"SFAS 107\"), \"Disclosures about Fair Value of Financial Instruments\", requires entities with total assets exceeding $150 million at December 31, 1993 to disclose the SFAS 107 value of all financial assets and liabilities for which it is practicable to estimate. Value is defined in the Statement as the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. The Partnership believes the carrying amount of its current assets and liabilities (excluding current portion of long-term debt) approximates SFAS 107 value due to the relatively short maturity of these instruments. There is no quoted market value available for any of the Partnership's other instruments. As the debt secured by the RiverEdge Place Building and Park at Countryside Apartments investment properties has been classified by the Partnership as a current\nCARLYLE REAL ESTATE LIMITED PARTNERSHIP -\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED\nliability at December 31, 1993 as a result of defaults (see notes 4(b)(i) and 4(b)(iv)), and because the resolution of such defaults is uncertain, the Partnership considers the disclosure of the SFAS 107 value of such long-term debt to be impracticable. The remaining debt, with a carrying balance of $319,790,235, has been calculated to have a SFAS 107 value of $311,472,146 by discounting the scheduled loan payments to maturity. Due to restrictions on transferability and prepayment, and the inability to obtain comparable financing due to previously modified debt terms or other property specific competitive conditions, the Partnership would be unable to refinance these properties to obtain such calculated debt amounts reported (see note 4). The Partnership has no other significant financial instruments.\nCertain reclassifications have been made to the 1992 and 1991 consolidated financial statements to conform with the 1993 presentation.\nNo provision for State or Federal income taxes has been made as the liability for such taxes is that of the partners rather than the Partnership. However, in certain instances, the Partnership has been required under applicable law to remit directly to the tax authorities amounts representing withholding from distributions paid to partners.\n(2) INVESTMENT PROPERTIES\n(a) General\nThe Partnership has acquired, either directly or through joint ventures, interests in four apartment complexes, twelve office buildings, four shopping centers and one parking facility. The Partnership's aggregate cash investment, excluding certain related acquisition costs, was $299,637,926. During 1989, the Partnership disposed of its interest in the investment property owned by CBC Investment Company (\"Boatmen's\") (note 3(b)(i)). During 1991, the Partnership sold 62% of its interest in Harbor and in 1993 sold its remaining 38% interest in Harbor (note 7). In September 1992, the Partnership sold the Erie-McClurg Parking Facility (note 7). In June 1993, the Partnership sold its interest in Owings Mills Shopping Center (note 7). All of the properties owned at December 31, 1993 were completed and operating.\nThe cost of the investment properties represents the total cost to the Partnership or its ventures plus miscellaneous acquisition costs. Deprecia- tion on the operating properties has been provided over the estimated useful lives of 5-30 years using the straight-line method.\nAll investment properties are pledged as security for the long-term debt, for which generally there is no recourse to the Partnership.\nMaintenance and repair expenses are charged to operations as incurred. Significant betterments and improvements are capitalized and depreciated over their estimated useful lives.\n(b) RiverEdge Place Building\nThe RiverEdge Place Building (formerly the First American Bank Building) was 100% leased to an affiliate of the major tenant, First American Bank, under a long-term over-lease executed in connection with the purchase of the property. The Bank and its affiliate approached the Partnership and indicated that they were experiencing significant financial difficulties. On June 23, 1992, the Partnership reached an agreement with the Bank and received cash and U.S. Government securities valued at $9,325,000 for the buy-out of the Bank's over-lease obligations. The termination of the Bank's over-lease obligations yielded an approximately $1,591,000 reduction in accrued rents receivable. The Partnership took these courses of action due to the First American Bank's\nCARLYLE REAL ESTATE LIMITED PARTNERSHIP\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED\ndeteriorating financial condition and the Federal Deposit Insurance Corporation's ability to assume control of the Bank and to terminate the over- lease obligation. The $9,325,000 buy-out was concurrently remitted to the lender to reduce the mortgage note secured by the RiverEdge Place Building and the Partnership continues to negotiate with the lender to restructure the mortgage note in order to reduce operating deficits anticipated as a result of the over-lease buy-out (see note 4(b)(iv)). Additionally, the tenant lease with First American Bank for approximately 120,000 square feet of space was assigned to and assumed by SouthTrust Bank of Georgia in connection with that bank's acquisition of most of the remaining assets of First American Bank. Effective August 1, 1992, the Partnership restructured the lease with SouthTrust Bank of Georgia reducing the tenant's space to approximately 92,000 square feet, as well as, reducing the effective rent on the retained space in exchange for an extension of the lease term from April 1994 to July 2002. The restructuring of SouthTrust Bank's lease reduced the occupied space of the RiverEdge Place Building from 96% to 85% at that time. The Partnership is actively pursuing replacement tenants for the building's vacant space including the space taken back from the SouthTrust lease restructuring.\n(c) 21900 Burbank Boulevard Building\nThe 21900 Burbank Building sustained some damage as a result of the earthquakes that occurred in January 1994 in southern California. Preliminary estimates of the damage range from $200,000 to $500,000. Much of this damage occurred within tenant premises in the building. The Partnership does not believe it has any significant obligations to reimburse tenants for such repairs. While the Partnership carried earthquake insurance on this property, it is anticipated that the total damages will not exceed the policy's deductible amount.\n(d) Springbrook Shopping Center\nIn October 1993, a tenant occupying 20% of the space at the Springbrook Shopping Center vacated upon expiration of its lease. The Partnership is actively pursuing replacement tenants for the vacant space.\n(e) Erie-McClurg Parking Facility\nThe mortgage note secured by the Erie-McClurg Parking Facility was scheduled to mature May 1, 1992. The Partnership negotiated with the underlying lender and received an extension of the note's maturity to September 30, 1992. On September 25, 1992, the Partnership sold the Erie- McClurg Parking Facility to an unaffiliated third party for a price of $18,700,000 (before selling costs and prorations) (note 7).\n(f) Woodland Hills Apartments\nEffective February 1, 1991, the seller\/manager has agreed to guarantee a level of cash flow from the property equal to the underlying debt service in return for a subordinated level of cash flow (payable as an incentive management fee) from operations and sale or refinancing of the property. The underlying debt which consists of first and second mortgage notes secured by the property is scheduled to mature in June 1994. The Partnership plans to refinance the notes when they mature, although there is no assurance the Partnership will be able to obtain such financing (see note 4(c)).\nCARLYLE REAL ESTATE LIMITED PARTNERSHIP - XV\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED\n(3) VENTURE AGREEMENTS\n(a) Introduction\nThe Partnership (or Carlyle-XV Associates, L.P., in which the Partnership holds a limited partnership interest) has entered into eight joint venture agreements (JMB\/Piper, JMB\/Piper II, JMB\/900, JMB\/Owings, JMB\/125, 260 Franklin, Villages Northeast and JMB\/NewPark) with Carlyle Real Estate Limited Partnership-XIV (\"Carlyle-XIV\") or Carlyle Real Estate Limited Partnership-XVI (or Carlyle-XVI Associates, L.P., in which Carlyle Real Estate Limited Partnership-XVI holds a limited partnership interest) (\"Carlyle-XVI\"), partnerships sponsored by the Corporate General Partner, and eight joint venture agreements with unaffiliated venture partners. Pursuant to such agreements, the Partnership made initial capital contributions of approximately $247,300,000 (before legal and other acquisition costs and its share of operating deficits as discussed below). The terms of these affiliated partnerships provide, in general, that the benefits of ownership, including tax effects, net cash receipts and sale and refinancing proceeds, are allocated between or distributed to, as the case may be, the Partnership and the affiliated partner in proportion to their respective capital contributions to the affiliated venture.\nThere are certain risks associated with the Partnership's investments made through joint ventures including the possibility that the Partnership's joint venture partner(s) in an investment might become unable or unwilling to fulfill its (their) financial or other obligations, or that such joint venture partner(s) may have economic or business interests or goals that are inconsistent with those of the Partnership. Under certain circumstances, either pursuant to the venture agreements or due to the Partnership's obligations as a general partner, the Partnership may be required to contribute additional amounts to the venture.\nDuring 1989, the Partnership disposed of its interest in the Boatmen's venture (note 3(b)(i)). During 1991, the Partnership sold a portion of its interest in the Harbor venture (note 7). In January 1993, the Partnership sold the remaining portion of its interest in the Harbor venture and in June 1993, the Partnership sold its interest in the JMB\/Owings Mills joint venture (note 7).\n(b) Consolidated Ventures\nThe terms of the 260 Franklin venture have been described, in general, above (note 3(a)). The terms of the Eastridge, Park, 160 Spear, Villa Solana, Cal Plaza and VNE Partners ventures can be described in general, as follows:\nIn most instances, these properties were acquired (as completed) for a fixed purchase price; however, certain properties were developed by the ventures and in those instances, the contributions of the Partnership are generally fixed. The joint venture partner was required to contribute any excess of cost over the aggregate amount available from Partnership contributions and financing. To the extent such funds exceed the aggregate costs, the venture partner was entitled to retain such excesses. The venture properties have been financed under various long-term debt arrangements as described in note 4.\nThe Partnership generally has a cumulative preferred interest in net cash receipts (as defined) from the properties. Such preferential interest relates to a negotiated rate of return on contributions made by the Partnership. After the Partnership receives its preferential return, the venture partner is generally entitled to a non-cumulative return on its interest in the venture; additional net cash receipts are generally shared in a ratio relating to the\nCARLYLE REAL ESTATE LIMITED PARTNERSHI\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED\nvarious ownership interests of the Partnership and its venture partners. During 1993, 1992 and 1991, three, four and four, respectively, of the ventures' properties produced net cash receipts. The Partnership also has preferred positions (related to the Partnership's cash investment in the ventures) with respect to distribution of net sale or refinancing proceeds from the ventures.\nIn general, operating profits and losses are shared in the same ratio as net cash receipts; however, if there are no net cash receipts, substantially all profits or losses are allocated to the Partnership. In addition, generally amounts equal to certain expenses paid from capital contributions by the Partnership or venture partners are allocated to the contributing partner or partners.\n(i) Boatmen's\nDuring 1989 the joint venture defaulted on the mortgage loan secured by the property, and the lender obtained title to the property. As a result, the Partnership has no further ownership interest in the property.\nOn May 31, 1990, the Partnership entered into an agreement with the joint venture partners to settle certain claims against the joint venture partners. The settlement provided that the Partnership would receive payments totalling $2,325,000. As of December 31, 1993 the Partnership has received cash payments totalling $1,910,937. Two of the venture partners were delinquent under the scheduled payments in the amount of $414,063 as of December 31, 1993. These joint venture partners had requested extensions of the promissory notes and the Partnership is currently considering their requests. To preserve its legal rights, the Partnership served the delinquent partners with notices of default. The Partnership has recognized revenue on the settlement to the extent of the cash collected. There is no assurance that the remaining delinquent payments will be collected.\n(ii) Park\nIn November 1991, Park modified the mortgage note secured by Park at Countryside Apartments effective January 1, 1990 (note 4(b)). In October 1993, the joint venture ceased making the required debt service payments, and commenced discussions with the lender regarding an additional modification of the loan. However, the venture was unable to secure an additional modification of the loan. Therefore, as of the date of this report, the loan is in default and the lender has initiated procedures to obtain title to the property. As a result of an amendment to the joint venture agreement, an affiliate of the joint venture partners agreed to manage the property without compensation from January 1, 1990 through December 31, 1995.\n(iii) Cal Plaza\nIn August 1990, the joint venture partner filed a lawsuit against the Partnership, the General Partners of the Partnership and certain of their affiliates, alleging, among other things, breaches of the joint venture agreement and fraud. The Partnership filed a counter claim against the joint venture partner for breaches of the joint venture agreement and property management agreement. In November 1991, the Partnership and the joint venture partner reached a settlement resolving certain claims between the two parties.\nUnder the terms of the settlement agreement, the obligation of the venture partner to indemnify Cal Plaza for payment on promissory notes issued to a tenant was revised (see note 10) and previously escrowed amounts were made available for 1991 cash flow requirements.\nIn December 1993, the venture reached an agreement with the lender to modify the mortgage note, effective February 1993. The accrual rate of the note remains at 10.375%, but the interest only monthly payments are based on\nCARLYLE REAL ESTATE LIMITED PARTNERSHIP\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED\nan interest rate of 8% per annum. The maturity date of the note has been extended from January 1, 1997 to January 1, 2000, and property cash flows are required to be escrowed as more fully described in note 4(b)(vi).\n(c) Significant Unconsolidated Ventures\n(i) JMB\/Piper\nIn 1984, the Partnership acquired, through a joint venture partnership (\"JMB\/Piper\") with Carlyle-XIV, an interest in three existing joint ventures (OB Joint Venture, OB Joint Venture II and 222 South Ninth Street Limited Partnership, together \"Piper\") with the developer and certain limited partners which own a 42-story office building known as the Piper Jaffray Tower in Minneapolis, Minnesota. As of December 31, 1993, two of the limited partners are primary tenants in the office building and hold a 25% interest in the land and building ventures. The third limited partner holds a 4% interest in the building venture; however, on January 15, 1992, it returned its 4% interest in the land venture to 222 South Ninth Street Limited Partnership (as discussed below). In April 1986, JMB\/Piper II, a joint venture partnership between the Partnership and Carlyle-XIV, acquired the developer's interest in the OB Joint Venture as discussed below.\nThe terms of the JMB\/Piper and JMB\/Piper II venture agreements generally provide that JMB\/Piper's and JMB Piper II's respective shares of Piper's annual cash flow, sale or refinancing proceeds and profits and losses will be distributed or allocated to the Partnership in proportion to its 50% share of capital contributions.\nJMB\/Piper invested approximately $19,915,000 for its 71% interest in Piper. JMB\/Piper is obligated to loan amounts to Piper to fund operating deficits (as defined). The loans bear interest at a rate of not more than 14.36% per annum, provide for payments of interest only from net cash flow, if any, and are repayable from net sale or refinancing proceeds. Such loans and accrued interest was approximately $63,214,000 and $53,729,000 at December 31, 1993 and 1992, respectively. The Partnership and the affiliated partner, Carlyle-XIV, have contributed to JMB\/Piper the funds required for such loans.\nIn August 1992, the venture signed an agreement with the lender, effective April 1, 1991, to modify the terms of the mortgage notes which are secured by the investment property. The principal balance of the mortgage notes has been consolidated into one note in the amount of $100,000,000. Under the terms of the modification, commencing on April 1, 1991 and continuing through and including January 30, 2020, fixed interest will accrue and is payable on a monthly basis at a $10,250,000 per annum level. Contingent interest is payable in annual installments on April 1 and is computed at 50% of gross receipts, as defined, for each fiscal year in excess of $15,200,000; none was due for 1991, 1992 or 1993. In addition, to the extent the investment property generates cash flow after payment of the fixed interest on the mortgage, contingent interest, leasing and capital costs, and 29% of the ground rent (25% after January 15, 1992 as a result of the Larkin, Hoffman, Daly & Lindgren, Ltd. settlement discussed below), such amount will be paid to the lender as a reduction of the principal balance of the mortgage loan. The excess cash flow generated by the property in 1992 totalled $923,362 and was remitted to the lender during the third quarter of 1993. During 1993, the excess cash flow generated under this agreement was $1,390,910 and will be remitted to the lender during the second quarter of 1994. On a monthly basis, the venture deposits the property management fee into an escrow account to be used for future leasing costs to the extent cash flow is not sufficient to cover such items. The manager of the property (which is an affiliate of the Corporate General Partner) has agreed to defer receipt of its management fee until a later date. As of December 31, 1993, the manager has deferred approximately $1,792,000 of management fees. If upon sale or refinancing as discussed below, there are funds remaining in this escrow after payment of amounts owed to the lender, such funds will be paid to the manager to the extent of its deferred and unpaid management fees. Any\nCARLYLE REAL ESTATE LIMITED PARTNERSHIP\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED\nremaining unpaid management fees would be payable out of the venture's share of sale of refinancing proceeds. Additionally, pursuant to the terms of the loan modification, effective January 1992, OB Joint Venture, as majority owner of the underlying land, began deferring receipt of it share of land rent. These deferrals will be payable from potential net sale or refinancing proceeds, if any.\nFurthermore, pursuant to the loan modification, the venture can prepay the mortgage note beginning February 1, 1996. The prepayment fee is equal to the sum of (i) 6% of the amount prepaid declining 1\/2 of 1% per annum to a minimum of 1%; (ii) from the greatest of: (1) net sale proceeds or (2) net refinance proceeds or (3) the net appraised value (all as defined), an amount until the lender has received an internal rate of return of 12% per annum if prepayment occurs between February 1, 1996 and February 1, 1997; 12 3\/4% if prepayment occurs between February 1, 1997 and February 1, 1998; and 13.59% per annum thereafter; and (iii) after the lender has received the internal rate of return as noted above, the next $10,000,000 of net proceeds (as determined in (ii) above) will be distributed 50% to the lender and 50% to the venture, the next $10,000,000 - 40% to the lender and 60% to the venture, the next $10,000,000 - 30% to the lender and 70% to the venture, the next $10,000,000 - 20% to the lender and 80% to the venture, and the remaining proceeds - 10% to the lender and 90% to the venture. For financial reporting purposes, interest expense has been accrued at a rate of 13.59% per annum which is the estimated minimum internal rate of return assuming the note is held to maturity. In order for the venture to share in future net sale or refinancing proceeds, there must be a significant improvement in current market and property operating conditions resulting in a significant increase in value of the property.\nThe Piper venture agreements provide that any net cash flow, as defined, will be used to pay interest on any operating deficit loans (as described above) with any excess generally distributable 71% to JMB\/Piper and 29% to the venture partners, subject to certain adjustments (as defined). In general, operating profits or losses are allocated in relation to the economic interests of the venture partners. Accordingly, operating profits and losses (excluding depreciation and amortization) were allocated 71% to the General Partner and 29% to limited partners during 1993 and 100% to the General Partner during 1992.\nThe Piper venture agreements further provide that, in general, upon any sale or refinancing of the property, the principal and any accrued interest outstanding on any operating deficit loans will be repaid. Any remaining proceeds will be distributable 71% to JMB\/Piper and 29% to the joint venture partners, subject to certain adjustments, as defined.\nDuring the fourth quarter 1991, Larkin, Hoffman, Daly & Lindgren, Ltd. (23,344 square feet) approached the joint venture indicating that it was experiencing financial difficulties and desired to give back a portion or all of its leased space. Larkin's lease was scheduled to expire in January 2005 and provided for annual rental payments which were significantly higher than current market rental rates. Larkin was also an owner with partial interests in the building and the land under the building. After substantive review of Larkin's financial condition, on January 15, 1992, the joint venture signed an agreement with Larkin to terminate its lease in return for its partial interest (4%) in the land under the building and a $1,011,798 note payable to the joint venture. The note payable provides for monthly payments of principal and interest at 8% per annum with full repayment over ten years. Larkin may prepay all or a portion of the note payable at any time.\nDuring the third quarter of 1992, the joint venture executed a lease amendment with a major tenant and joint venture partner, Piper Jaffray Inc., which provides for (i) deletion of the tenant's option to terminate in March 1994 its leases on 21,508 square feet of space and 18,288 square feet of space which leases were to expire on March 2000 and March 1995, respectively, (ii)\nCARLYLE REAL ESTATE LIMITED PARTNERSH\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED\nextension of the lease term on its 18,288 square foot space to March 2000, (iii) rent reductions on the aggregate 39,796 square feet of space, (iv) lease expansions through March 2000 of 23,344 square feet (the former Larkin, Hoffman space) and 19,350 square feet on November 1992 and February 1993, respectively, at rental rates significantly below market, and (v) additional expansion options to lease up to an additional 94,210 square feet of space throughout the term of the lease.\nDuring the fourth quarter of 1993, the joint venture finalized a lease amendment with Popham, Haik, Schnobrich & Kaufman, Ltd. (104,843 square feet).\nThe amendment provides for the extension of the lease term from February 1, 1997 to January 31, 2003 in exchange for a rent reduction effective February 1, 1994. In addition, the tenant will lease an additional 10,670 square feet effective August 1, 1995. The rental rate on the expansion space approximates market which is significantly lower than the reduced rental rate on the tenant's current occupied space.\n(ii) JMB\/900\nIn 1984, the Partnership acquired, through JMB\/900, an interest in an existing joint venture (\"Progress Partners\") which owns a 36-story office building known as the 900 Third Avenue Building in New York, New York. The partners of Progress Partners are the developer of the property and an affiliate of the developer (the \"Venture Partners\") and JMB\/900.\nThe terms of the JMB\/900 venture agreement generally provide that JMB\/900's share of Progress Partners' cash flow, sale or refinancing proceeds and profits and losses will be distributed or allocated to the Partnership in proportion to its 66-2\/3% share of capital contributions.\nJMB\/900 has made capital contributions to Progress Partners and certain payments to an affiliate of the developer, in the aggregate amount of $17,200,000, subject to the obligation to make additional capital contributions as described below.\nJMB\/900 has also made a loan to the developer in the amount of $20,000,000 which is secured by the Venture Partners' interest in Progress Partners. The loan bears interest at the rate of 16.4% per annum and is payable in monthly installments of interest only until maturity on the earlier of the sale or refinancing of the property or August 2004. For financial reporting purposes, the loan is classified as an additional investment in Progress Partners and any related interest received would be accounted for as distributions (none in 1991, 1992 and 1993). To the extent that JMB\/900 has not received annual distributions equal to the interest payable on such loan, the deficiency becomes a cumulative preferred return payable out of future net cash flow or net sale or refinancing proceeds.\nThe Progress Partners venture agreement provides that the venture is required to pay the Venture Partners a stated return of $3,285,000 per annum. Generally, JMB\/900 is required to contribute funds to the venture, to the extent net cash flow is not sufficient, to enable the venture to make this payment. Such amounts have not been paid as interest has not been received on the $20,000,000 loan discussed above. Under the terms of the Progress Partners' venture agreement, the Venture Partners are generally entitled to receive a non-cumulative preferred return of net cash flow of approximately $3,414,000 per annum, with any remaining net cash flow distributable 49% to JMB\/900 and 51% to the Venture Partners.\nThe Progress Partners venture agreement further provides that net sale or refinancing proceeds are distributable to JMB\/900 and the Venture Partners, on a pro rata basis, in an amount equal to the sum of any deficiencies in the receipt of their respective cumulative preferred returns of net cash flow plus certain contributions to the venture made by JMB\/900. Next, proceeds will be distributable to the Venture Partners in an amount equal to $20,000,000.\nCARLYLE REAL ESTATE LIMITED PARTNERSHIP -\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED\nJMB\/900 is entitled to receive the next $21,000,000 and the Venture Partners will receive the next $42,700,000. Any remaining net proceeds are to be distributed 49% to JMB\/900 and 51% to the Venture Partners.\nOperating profits, in general, are allocated 49% to JMB\/900 and 51% to the Venture Partners. Operating losses, in general, are allocated 90% to JMB\/900 and 10% to the venture partners.\nAs a result of certain defaults by one of the unaffiliated joint venture partners, an affiliate of the General Partners assumed management responsibility for the property as of August 1987 for a fee computed as a percentage of certain revenues.\nThrough December 31, 1991, it was necessary for JMB\/900 to contribute approximately $4,364,000 ($2,909,000 of which was contributed by the Partnership) to pay past due property real estate taxes and to pay certain costs, including litigation settlement costs, which were the responsibility of one of the unaffiliated joint venture partners under the terms of the joint venture agreement to the extent such funds were not available from the investment property.\nIn July 1989, JMB\/900 filed a lawsuit in federal court against the former manager and one of the unaffiliated venture partners to recover the amounts contributed and to recover for certain other joint venture obligations on which the unaffiliated partner has defaulted. This lawsuit was dismissed on jurisdictional grounds. Subsequently, however, the Federal Deposit Insurance Corporation (\"FDIC\") filed a complaint, since amended, in a lawsuit against the joint venture partner, the Partnership and affiliated partner and the joint venture, which has enabled the Partnership and affiliated partner to refile its previously asserted claims against the joint venture partner as part of that lawsuit in Federal Court. There is no assurance that JMB\/900 will recover the amounts of its claims as a result of the litigation. Due to the uncertainty, no amounts in addition to the amounts advanced to date, noted above, have been recorded in the financial statements. Settlement discussions with one of the venture partners and the FDIC continue. The FDIC has, in the past, been unwilling to consider a settlement until certain other issues it has with one of the unaffiliated venture partners are resolved. It appears that a resolution of those other issues may be near. There are no assurances that a settlement will be finalized and that the Partnership and affiliated partner will be able to recover any amounts from the unaffiliated venture partners.\nThe joint venture negotiated an early lease termination agreement with a major tenant that vacated its space in June 1992. The joint venture terminated the lease (which was to expire in November 2000) for a fee of approximately $1.2 million (including arrearages). The Partnership is currently seeking a replacement tenant for the vacated space (14,700 square feet). The Midtown Manhattan office rental market remains very competitive.\n(iii) South Tower\nIn June 1985, the Partnership acquired an interest in a joint venture partnership (\"South Tower\") which owns a 44-story office building in Los Angeles, California. The joint venture partners of the Partnership include Carlyle Real Estate Limited Partnership-XIV (\"Affiliated Partner\"), one of the sellers of the interests in South Tower, and another unaffiliated venture partner.\nThe Partnership and the Affiliated Partner purchased their interests for $61,592,000. In addition, the Partnership and the Affiliated Partner made capital contributions to South Tower totaling $48,400,000 for general working capital requirements and certain other obligations of South Tower. The Partnership's share of the purchase price, capital contributions (net of additional financing) and interest thereon totaled $53,179,000.\nCARLYLE REAL ESTATE LIMITED PARTNERSHIP - XV\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED\nThe terms of the South Tower agreement generally provide that the Partnership and Affiliated Partner's aggregate share of the South Tower's annual cash flow, net sale or refinancing proceeds, and profits and losses are to be distributed or allocated to the Partnership and the Affiliated Partner in proportion to their aggregate capital contributions.\nAnnual cash flow will be distributed 80% to the Partnership and Affiliated Partner and 20% to another partner until the Partnership and the Affiliated Partner have received, in the aggregate, a cumulative preferred return of $8,050,000 per annum. The remaining cash flow is to be distributable 49.99% to the Partnership and the Affiliated Partner, and the balance to the other joint venture partners. Additional contributions to South Tower were contributed 49.99% by the Partnership and the Affiliated Partner until all partners had contributed $10,000,000 in aggregate.\nOperating profits and losses, in general, are to be allocated 49.99% to the Partnership and the Affiliated Partner and the balance to the other joint venture partners. Substantially all depreciation and certain expenses paid from the Partnership's and Affiliated Partner's capital contributions are to be allocated to the Partnership and Affiliated Partner. In addition, operating profits, up to the amount of any annual cash flow distribution, are allocated to all partners in proportion to such distributions of annual cash flow.\nIn general, upon sale or refinancing of the property, net sale or refinancing proceeds will be distributed 80% to the Partnership and the Affiliated Partner and 20% to another partner until the Partnership and the Affiliated Partner have received the amount of any deficiency in their preferred cash flow distributions described above plus an amount equal to their \"Disposition Preference\" (which, in general, begins at $120,000,000 and increases annually by $8,000,000 to a maximum of $200,000,000). Any remaining net sale or refinancing proceeds will be distributed 49.99% to the Partnership and the Affiliated Partner and the remainder to the other partners.\nThe office building is being managed by an affiliate of one of the venture partners under a long-term agreement pursuant to which the affiliate is entitled to receive a monthly management fee of 2-1\/2% of gross project income, a tenant improvement fee of 10% of the cost of tenant improvements, and commissions on new leases.\nThe mortgage note secured by the property, as well as the promissory note secured by the Partnership's interest in the joint venture are scheduled to mature in December 1994. The promissory note secured by the Partnership's interest in the joint venture is classified at December 31, 1993 as a current liability in the accompanying consolidated financial statements. In view of, among other things, current and anticipated market and leasing conditions affecting the property including uncertainty regarding the amount of space, if any, which IBM will renew when its lease expires in December 1998, there is no assurance that the joint venture or the Partnership will be able to refinance these notes when they mature, the Partnership may then decide not to commit any significant amounts to the property. This may result in the Partnership no longer having an ownership interest in the property, and would result in a gain for financial reporting and for Federal income tax purposes with no corresponding distributable proceeds.\n(iv) JMB\/125\nIn December 1985, the Partnership, through the JMB\/125 joint venture partnership, acquired an interest in an existing joint venture partnership (\"125 Broad\") which owns a 40-story office building, together with a leasehold interest in the underlying land, located at 125 Broad Street in New York, New York. In addition to JMB\/125, the other partners (the \"O&Y partners\") of 125 Broad include O&Y 25 Realty Company L.P., Olympia & York Broad Street Holding Company L.P. (USA) and certain other affiliates of Olympia & York Development, Ltd. (\"O&Y\"). CARLYLE REAL ESTATE LIMITED PARTNERSHIP - XV\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED\nJMB\/125 is a joint venture between Carlyle-XV Associates, L.P. (in which the Partnership holds a 99% limited partnership interest), Carlyle-XVI Associates, L.P. and Carlyle Advisors, Inc. The terms of the JMB\/125 venture agreement generally provide that JMB\/125's share of 125 Broad's annual cash flow and sale or refinancing proceeds will be distributed or allocated to the Partnership in proportion to its (indirect) approximate 60% share of capital contributions to JMB\/125. In April 1993 JMB\/125, originally a general partnership, was converted to a limited partnership, and the Partnership's interest in JMB\/125, which previously has been held directly, was converted to a limited partnership interest and was contributed to Carlyle-XV Associates, L.P. in exchange for a limited partnership interest in Carlyle-XV Associates, L.P. As a result of these transactions, the Partnership currently holds, indirectly through Carlyle-XV Associates, L.P., an approximate 60% limited partnership interest in JMB\/125. The general partner in each of JMB\/125 and Carlyle-XV Associates, L.P. is an affiliate of the Partnership. For financial reporting purposes, profits and losses of JMB\/125 are generally allocated 60% to the Partnership.\nJMB\/125 acquired an approximately 48.25% interest in 125 Broad for a purchase price of $16,000,000, subject to a first mortgage loan of $260,000,000 and a note payable to an affiliate of the joint venture partners in the amount of $17,410,516 originally due September 30, 1989. In June 1987, the note payable was consolidated with the first mortgage loan forming a single consolidated note in the principal amount of $277,410,516. The consolidated note bears interest at a rate of 10-1\/8% per annum payable in semi-annual interest only payments and matures on December 27, 1995. JMB\/125 has also contributed $14,055,500 to 125 Broad to be used for working capital purposes and to pay an affiliate of O&Y for its assumption of JMB\/125's share of the obligations incurred by 125 Broad under the \"takeover space\" agreement described below. In addition, JMB\/125 contributed $24,222,042, plus interest thereon of approximately $1,089,992 on June 30, 1986 for working capital purposes. Thus, JMB\/125's original cash investment, exclusive of acquisition costs, was $55,367,534, of which the Partnership's share was approximately $33,220,000.\nThe land underlying the office building is subject to a ground lease which has a term through June 2067 and provides for annual rental payments of $1,075,000. The terms of the ground lease grant 125 Broad a right of first refusal to acquire the fee interest in the land in the event of any proposed sale of the land during the term of the lease and an option to purchase the fee interest in the land for $15,000,000 at 10-year intervals (the next option date occurring in 1994).\nThe partnership agreement of 125 Broad, as amended, provides that the O&Y partners are obligated to make advances to pay operating deficits incurred by 125 Broad from the earlier of 1991 or the achievement of a 95% occupancy rate of the office building through 1995. In addition, from closing through 1995, the O&Y partners are required to make capital contributions to 125 Broad for the cost of tenant improvements and leasing expenses up to certain specified amounts and to make advances to 125 Broad to the extent such costs exceed such specified amounts and such costs are not paid for by the working capital provided by JMB\/125 or the cash flow of 125 Broad. The amount of all costs for such tenant improvements and leasing expenses over the specified amounts and the advances for operating deficits from the earlier of the achievement of a 95% occupancy rate of the office building or 1991 will be treated by 125 Broad as non-recourse loans bearing interest, payable monthly, at the floating prime rate of an institutional lender. The interest rate in effect at December 31, 1993 was 6%. The amount of such outstanding O&Y partner non- recourse loans was approximately $14,650,000 at December 31, 1993. Due to a major tenant vacating in 1991 and the O&Y affiliates' default under the \"takeover space\" agreement, the property operated at a deficit in 1993 and is expected to operate at a deficit for the next several years. Such deficits are required to be funded by additional loans from the O&Y partners, although as discussed below the O&Y partners have been in default of such funding obligation since June 1992. The outstanding principal balance and any accrued\nCARLYLE REAL ESTATE LIMITED PARTNERS\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED\nand unpaid interest of such loans will be payable from 125 Broad's annual cash flow or net sale or refinancing proceeds, as described below. Any unpaid principal of such loans and any accrued and unpaid interest thereon will be due and payable on December 31, 2000. JMB\/125 and the O&Y partners are obligated to make capital contributions, in proportion to their respective interests in 125 Broad, in amounts sufficient to enable 125 Broad to pay any excess expenditures not covered by the capital contributions or advances of the O&Y partners described above.\nThe 125 Broad partnership agreement also provides that beginning in 1991 annual cash flow, if any, is distributable first to JMB\/125 and to the O&Y partners in certain proportions up to certain specified amounts. Next, the O&Y partners are entitled to repayment of principal and any accrued but unpaid interest on the loans for certain tenant improvements, leasing expenses and operating deficits described above, and remaining annual cash flow, if any, is distributable approximately 48.25% to JMB\/125 and approximately 51.75% to the O&Y partners. In general, operating profits or losses are allocable approximately 48.25% to JMB\/125 and approximately 51.75% to the O&Y partners, except for certain specified items of profits or losses which are allocable to JMB\/125 or the O&Y partners.\nThe 125 Broad partnership agreement further provides that, in general, upon sale or refinancing of the property, net sale or refinancing proceeds (after repayment of the outstanding principal balance and any accrued and unpaid interest on any loans from the O&Y partners described above) are distributable approximately 48.25% to JMB\/125 and approximately 51.75% to the O&Y partners.\nIn the event of a dissolution and liquidation of the joint venture, the terms of the joint venture agreement between the O&Y partners and JMB\/125 provide that if there is a deficit balance in the tax basis capital account of JMB\/125, after the allocation of profits or losses and the distribution of all liquidation proceeds, then JMB\/125 generally would be required to contribute cash to the joint venture in the amount of its deficit capital account balance. Taxable gain arising from the sale or other disposition of the joint venture's property would be allocated to the joint venture partner or partners then having a deficit balance in its or their respective capital accounts in accordance with the terms of the joint venture agreement. However, if such taxable gain is insufficient to eliminate the deficit balance in its account in connection with a liquidation of the joint venture, JMB\/125 would be required to contribute funds to the joint venture (regardless of whether any proceeds were received by JMB\/125 from the disposition of the joint venture's property) to eliminate any remaining deficit account balance.\nThe Partnership's liability for such contribution, if any, would be its share, if any, of the liability of JMB\/125 and would depend upon, among other things, the amounts of JMB\/125's and the O&Y partners' respective capital accounts at the time of a sale or other disposition of 125 Broad's property, the amount of JMB\/125's share of the taxable gain attributable to such sale or other disposition of 125 Broad's property and the timing of the dissolution and liquidation of 125 Broad. In such event, the Partnership could be required to sell or dispose of other assets in order to satisfy any obligation attributable to it as a partner of JMB\/125 to make such contribution. Although the amount of such liability may be material, the Limited Partners of the Partnership would not be required to make additional contributions of capital to satisfy the obligation, if any, of the Partnership.\nAs described above, the terms of the joint venture agreement provide that the O&Y partners are obligated to advance to the joint venture, in the form of interest-bearing loans, amounts required to pay operating deficits and capital improvement costs incurred during 1991 through 1995. O&Y and certain of its affiliates have been involved in bankruptcy proceedings in the United States and Canada and similar proceedings in England. During 1993, O & Y emerged from bankruptcy protection in Canada. In addition, a reorganization of the CARLYLE REAL ESTATE LIMITED PARTNERSHIP\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED\nmanagement of the company's United States operations has been completed, and certain O&Y affiliates are in the process of renegotiating or restructuring various loans affecting properties in the United States in which they have an interest. In view of the present financial conditions of O&Y and its affiliates and the anticipated deficits for the property, as well as the existing defaults of the O&Y partners, it appears unlikely that the O&Y partners will meet their financial and other obligations to JMB\/125 and 125 Broad.\nIn October 1993, 125 Broad entered into an agreement with Salomon Brothers, Inc. to terminate its lease covering approximately 231,000 square feet (17% of the building) at the property on December 31, 1993 rather than its scheduled termination in January 1997. In consideration for the early termination of the lease, Salomon Brothers, Inc. paid 125 Broad approximately $26,500,000, plus interest thereon of approximately $200,000, which 125 Broad in turn paid its lender to reduce amounts outstanding under the mortgage loan. In addition, Salomon Brothers, Inc. paid JMB\/125 $1,000,000 in consideration of JMB\/125's consent to the lease termination.\nDue to the O&Y partners' failure to advance necessary funds to 125 Broad as required under the joint venture agreement, 125 Broad defaulted on its mortgage loan in June 1992 by failing to pay approximately $4,722,000 of the semi-annual interest payment due on the loan. As a result of this default, the loan agreement provides for a default interest rate of 13-1\/8% per annum on the unpaid principal amount. In addition, during 1992 affiliates of O&Y defaulted on a \"takeover space\" agreement with Johnson & Higgins, Inc. (\"J&H\"), one of the major tenants at the 125 Broad Street Building, whereby such affiliates of O&Y agreed to assume certain lease obligations of J&H at another office building in consideration of J&H's leasing space in the 125 Broad Street Building. As a result of this default, J&H has offset rent payable to 125 Broad for its lease at the 125 Broad Street Building in the amount of approximately $28,600,000 through December 31, 1993, and it is expected that J&H will continue to offset amounts due under its lease corresponding to amounts by which the affiliates of O&Y are in default under the \"takeover space\" agreement. As a result of the O&Y affiliates' default under the \"takeover space\" agreement and the continuing defaults of the O&Y partners to advance funds to cover operating deficits, as of the end of 1993, the arrearage under the mortgage loan had increased to approximately $48,180,000. As discussed above, approximately $26,700,000 was remitted to the lender in October 1993 in connection with the early termination of the Salomon Brothers lease, and was applied towards mortgage principal for financial reporting purposes. Due to their obligations relating to the \"takeover space\" agreement, the affiliates of O&Y are obligated for the payment of the rent receivable associated with the J&H lease at the 125 Broad Street Building. Based on the continuing defaults of the O&Y partners, 125 Broad has provided loss reserves for the entire rent offset by J&H, $19,300,000 and $9,300,000 in 1993 and 1992, respectively, and has also reserved approximately $32,600,000 of accrued rents receivable relating to such J&H lease, since the ultimate collectability of such amounts depends upon the O&Y partners' and the O&Y affiliates' performance of their obligations. The Partnership's share of such losses was approximately $5,587,000 and $12,159,000 for the years ended December 31, 1993 and 1992, respectively, and is included in the Partnership's share of loss from operations of unconsolidated venture. The O&Y partners have attempted to negotiate a restructuring of the mortgage loan with the lender in order to reduce operating deficits of the property. In view of, among other things, the significant operating deficits which the property is expected to incur during 1994 and for the next several years, it is unlikely that a restructuring of the mortgage will be obtained. The loan restructuring is part of a larger restructuring with the lender involving a number of loans secured by various properties in which O&Y affiliates have an interest. JMB\/125 has notified the O&Y partners that their failure to advance funds to cover the operating deficits constitutes a default under the joint venture agreement. CARLYLE REAL ESTATE LIMITED PARTNERSHIP - XV\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED\nAccordingly, it appears unlikely the O&Y partners will fulfill their obligations to 125 Broad and JMB\/125. As a result, as discussed above, it appears unlikely that 125 Broad will be able to restructure the mortgage loan and JMB\/125 is not likely to commit any significant additional amounts to the property. This would result in the Partnership no longer having an ownership interest in the property. If this event were to occur, the Partnership would recognize a net gain for financial reporting and Federal income tax purposes without any corresponding distributable proceeds. In addition, under certain circumstances, as discussed above, JMB\/125 may be required to make an additional capital contribution to 125 Broad in order to make up a deficit balance in its capital account.\nThe O&Y partners and certain other O&Y affiliates reached an agreement with the City of New York to defer the payment of real estate taxes owed in July 1992 on properties in which O&Y affiliates have an ownership interest, including the 125 Broad Street Building. Payment of the real estate taxes was made in six equal monthly installments from July through December, 1992. Interest on the deferred amounts was paid in July 1992. A similar agreement to defer payment of real estate taxes owed in January, 1993 was entered into for the first six months of 1993. Interest on the deferred amounts was paid in January, 1993.\nVacancy rates in the downtown Manhattan office market have increased substantially over the last several years. As a result, competition for tenants has increased, which has resulted in lower effective rents. The increased vacancy in the downtown Manhattan office market has resulted primarily from layoffs, cutbacks and consolidations by many financial service companies which, along with related businesses, dominate the submarket. This has resulted in uncertainty as to the joint venture partnership's ability to recover the net carrying value of the investment property through future operations and sales. As a matter of prudent accounting practice, a provision for value impairment of such investment property of $14,844,420 was recorded as of December 31, 1991. The Partnership's share of such provision was $4,841,800 and was included in the Partnership's share of operations of unconsolidated ventures. Such provision was recorded to reduce the net book value of the investment property to the then outstanding balance of the related non-recourse financing and O&Y partner loans.\nThe office building is being managed pursuant to a long-term agreement with an affiliate of the O&Y partners. Under the terms of the management agreement, the manager is obligated to manage the office building, collect all receipts from operations and to the extent available from such receipts pay all expenses of the office building. The manager is entitled to receive a management fee equal to 1% of gross receipts of the property.\n(v) JMB\/NewPark\nIn December 1986, the Partnership, through a joint venture partnership (\"JMB\/NewPark\"), acquired an interest in an existing joint venture partnership (\"NewPark Associates\") with the developer which owns an interest in an existing enclosed regional shopping center in Newark, California known as NewPark Mall.\nJMB\/NewPark acquired its 50% interest in NewPark Associates for a purchase price of $32,500,000 paid in cash at closing, subject to an existing first mortgage loan of approximately $23,556,000 and certain loans from the joint venture partner of approximately $6,300,000.\nIn 1990, NewPark Associates reached an agreement with J.C. Penney to open an anchor store at NewPark Mall which opened in November 1991. Under the terms of the agreement, J.C. Penney built its own store and NewPark Associates constructed a parking deck to accommodate the addition of J.C. Penney to the center. NewPark Associates incurred costs of approximately $10,400,000 related to this addition, of which $2,000,000 was reimbursed by J.C. Penney.\nCARLYLE REAL ESTATE LIMITED PARTNERSHIP - XV\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED\nThe unaffiliated joint venture partner loaned NewPark Associates all of the funds to cover the costs incurred related to the addition. In December 1992, proceeds from the refinancing described below were used to repay all amounts due to the unaffiliated joint venture partner.\nOn December 31, 1992, NewPark Associates refinanced the shopping center with an institutional lender. The new mortgage note payable in the principal amount of $50,620,219 is due on November 1, 1995. Monthly payments of interest only of $369,106 are due through November 30, 1993. Commencing on December 1, 1993 through October 30, 1995, principal and interest are due in monthly payments of $416,351 with a final balloon payment due November 1, 1995. Interest on the note payable accrues at 8.75% per annum. The joint venture has an option to extend the term of the mortgage note payable to November 1, 2000 upon payment of a $250,000 option fee and satisfaction of certain conditions as specified in the mortgage note. A portion of the proceeds from the note payable were used to pay the outstanding balance including accrued interest, under the previous mortgage note payable and the notes payable to the unaffiliated joint venture partner. NewPark Associates commenced a renovation that was substantially complete as of September 30, 1993.\nThe NewPark Associates partnership agreement provides that JMB\/NewPark and the joint venture partner are each entitled to receive 50% of profits and losses, net cash flow and net sale or refinancing proceeds of NewPark Associates and are each obligated to advance 50% of any additional funds equired under the terms of the NewPark Associates partnership agreement.\nThe portion of the shopping center owned by NewPark Associates is managed by the unaffiliated joint venture partner under a long-term agreement pursuant to which it is obligated to manage the property and collect all receipts from operations of the property. The joint venture partner is paid a management fee equal to 4% of the fixed and percentage rent.\nCARLYLE REAL ESTATE LIMITED PARTNERSHIP - XV\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED\nIncluded in the above total long-term debt is $10,411,883 and $6,868,462 for 1993 and 1992, respectively, which represents mortgage interest accrued but not currently payable pursuant to the terms of the notes.\nFive year maturities of long-term debt are as follows:\n1994. . . . . . . . $103,244,992 1995. . . . . . . . 23,874,541 1996. . . . . . . . 87,025,453 1997. . . . . . . . 11,352,285 1998. . . . . . . . 504,393 ============\n(b) Debt Modifications\n(i) Park\nIn March 1988, the mortgage note secured by Park at Countryside Apartments located in Daytona Beach, Florida was modified to reduce the monthly installments payable and in November 1991, the mortgage note was further modified effective January 1, 1990 through December 31, 1995. The new agreement provides for minimum monthly interest payments of $18,033 (7.0% per annum) through 1991, $19,375 (7.5% per annum) for 1992, $20,667 (8.0% per annum) for 1993, $21,958 (8.5% per annum) for 1994 and $23,250 (9.0% per annum) for 1995. The contract rate on the loan will remain at 11.25% per annum. The deferrals, along with interest thereon, and the outstanding principal balance were to become due and payable at maturity on January 1, 1996.\nIn October 1993, the joint venture ceased making the required debt service payments, and commenced discussions with the lender regarding an additional modification of the loan. However, the venture was unable to secure an additional modification of the loan. Therefore, as of the date of this report, the loan is in default and the lender has initiated procedures to obtain title to the property.\n(ii) 260 Franklin\nIn December 1991, the affiliated joint venture reached an agreement with the lender to modify the terms of the long-term mortgage note secured by the 260 Franklin Street Building. During 1991, the affiliated joint venture made monthly payments of principal and interest, in the amount of $714,375, which reduced the outstanding balance to $74,891,013 as of April 30, 1991. The modified terms of the mortgage note provide for payments made relating to 1991, which were paid through April 1991, to be amortized based upon an accrued interest rate of 6%. Beginning May 1991, the modified mortgage note provides for monthly payments of interest only based upon the then outstanding balance at a rate of 6% per annum through January 1992 and 8% per annum thereafter. Upon the scheduled or accelerated maturity, or prepayment of the mortgage loan, the affiliated joint venture shall be obligated to pay an amount sufficient to provide the lender with an 11% per annum yield on the mortgage note from January 1, 1991 through the date of maturity or prepayment. In addition, upon maturity or prepayment, the affiliated joint venture is obligated to pay to the lender a residual interest amount equal to 60% of the\nCARLYLE REAL ESTATE LIMITED PARTNERSHIP - XV\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED\nhighest amount, if any, of (i) net sales proceeds, (ii) net refinancing proceeds, or (iii) net appraisal value, as defined. The affiliated joint venture is required to (i) escrow excess cash flow from operations, beginning in 1991, to cover future cash flow deficits (ii) make an initial contribution to the escrow account of $250,000, of which the Partnership's share was $175,000, and (iii) make annual escrow contributions through January 1995, of $150,000, of which the Partnership's share is $105,000. The escrow account is to be used to cover the costs of capital and tenant improvement and lease inducements which are the primary components of the anticipated operating deficits noted above ($726,983 as of December 31, 1993), as defined, with the balance, if any, of such escrowed funds available at the scheduled or accelerated maturity to be used for the payment of principal and interest due to the lender as described above.\n(iii) 160 Spear Street Building\nThe Partnership reached an agreement, effective February 10, 1992, with the first mortgage lender to modify the mortgage note secured by the 160 Spear Street investment property, which was scheduled to mature on December 10, 1992. Under the terms of the agreement, the modified first mortgage note of approximately $33,750,000 and the second mortgage note of $5,435,000 require monthly debt service (reduced to interest only payments) of approximately $279,000 (9.3% per annum) and $58,000 (12.55% per annum), respectively, through February 10, 1995. Beginning March 10, 1995, monthly payments of principal and interest of approximately $337,000 are required through maturity of the loan, which is extended to February 10, 1999. Additionally, the Partnership is required to escrow net cash flow (as defined) thirty days following each quarter end which can be withdrawn for expenditures approved by the lender, by the lender upon default of the note or by the Partnership on February 10, 1997 when the escrow agreement terminates. As of December 31, 1993, $62,000 has been placed in, and withdrawn for expenditures approved by the lender, from the escrow account.\n(iv) RiverEdge Place Building\nOn June 23, 1992, in connection with the buy-out of the over-lease (see note 2(b)), the Partnership remitted cash and U.S. Government securities valued at $9,325,000 to the lender reducing the balance of the mortgage note secured by the RiverEdge Place Building (formerly the First American Bank Building) to approximately $18,166,000. The Partnership ceased making its monthly debt service payments effective July 1, 1992. The Partnership is currently negotiating with the lender to restructure the mortgage note in order to reduce operating deficits anticipated as a result of the over-lease buy-out. If the Partnership's negotiations for mortgage note restructuring are not successful, the Partnership would likely decide, based upon current market conditions and other considerations relating to the property and the Partnership's portfolio, not to commit significant additional amounts to the property. This would result in the Partnership no longer having an ownership interest in the property and would result in the recognition of a gain for financial statement and Federal income tax purposes without any corresponding distributable proceeds. As of December 31, 1993, the amount of such principal and interest payments in arrears is approximately $5,451,000.\nTherefore, the loan has been classified at December 31, 1993 as a current liability in the accompanying consolidated financial statements.\n(v) Villages Northeast\nEffective October 6, 1992, the Villages Northeast joint venture, through a joint venture (\"Post Associates\") refinanced the first mortgage loan secured by the Dunwoody (Phase II) Apartments which had a principal balance at the date of refinancing of approximately $9,467,000.\nCARLYLE REAL ESTATE LIMITED PARTNERSHIP - XV\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED\nThe new first mortgage loan of $9,800,000 (from an institutional lender) bears interest of 7.64% per annum, is collateralized by the property and requires monthly payments of principal and interest of $73,316 beginning November 1, 1992 and continuing through November 1, 1997, when the remaining balance is payable.\n(vi) Cal Plaza\nEffective March 1, 1993, the joint venture ceased making the scheduled debt service payments on the mortgage loan secured by the property which was scheduled to mature on January 1, 1997. Subsequently, the Partnership made partial debt service payments based on net cash flow of the property through December 1993 when an agreement was reached with the lender to modify the loan. The accrual rate of the modified loan remains at 10.375% per annum while the pay rate is reduced to 8% per annum. The loan modification reduced the monthly payments to $384,505, effective with the March 1, 1993 payment. The maturity date is extended, as a result of this modification, to January 1, 2000 when the unpaid balance of principal and interest is due. Additionally, the joint venture entered into a cash management agreement which requires monthly net cash flow to be escrowed (as defined). The excess of the monthly cash flow paid from March 1993 to December 1993 above the 8% interest pay rate was put into escrow for the future payment of insurance premiums, real estate taxes, and to fund a reserve account to be used to cover future costs, including tenant improvements, lease commissions, and capital improvements, approved by the lender. The joint venture also was required to fund $500,000 into the reserve account.\n(c) Cancellation of Wrap Note\nIn February 1991, the Partnership entered into an agreement with the seller of Woodland Hills Apartments. Under the terms of this agreement, the seller canceled its wrap-around mortgage note receivable from the Partnership and assumed management of the property (see notes 2(f) and 6). The obligations to make payments on the two underlying mortgage loans have been assumed by the Partnership. The mortgage note receivable wrapped around and was subordinate to a first and a second mortgage loan in the principal amounts of $6,800,000 and $1,256,667, respectively. The first mortgage loan bears interest at the rate of 12.8% per annum and requires monthly payments of interest only in arrears through June 1, 1994 when the entire principal balance and any accrued interest will be due and payable. The second mortgage loan bears interest at 11.7% per annum and requires monthly payments of interest only in arrears until June 1, 1994 when the entire principal balance and any accrued interest will be due and payable. The Partnership plans to refinance these notes when they mature, although there is no assurance the Partnership will be able to obtain such financing. The loans have been classified as current liabilities at December 31, 1993 in the accompanying consolidated financial statements. As a result of the seller's cancellation of the wrap-around mortgage note, an extraordinary gain totalling $1,014,538 was recognized in the 1991 consolidated financial statements.\n(5) PARTNERSHIP AGREEMENT\nPursuant to the terms of the Partnership Agreement, net profits and losses of the Partnership from operations are allocated 96% to the Limited Partners and 4% to the General Partners. Profits from the sale or other dispositions of investment properties will be allocated first to the General Partners in an amount equal to the greater of the General Partners' share of cash distributions from the proceeds of any such sale or other dispositions (as described below) or 1% of the total profits from any such sales or other CARLYLE REAL ESTATE LIMITED PARTNERSHIP - XV\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED\ndispositions, plus an amount which will reduce deficits (if any) in the General Partners' capital accounts to a level consistent with the gain anticipated to be realized from the sale of investment properties. Losses from the sale or other disposition of investment properties will be allocated 1% to the General Partners. The remaining sale or other disposition profit and losses will be allocated to the Limited Partners.\nThe General Partners are not required to make any additional capital contributions except under certain limited circumstances upon dissolution and termination of the Partnership. \"Net cash receipts\" from operations of the Partnership will be allocated 90% to the Limited Partners and 10% to the General Partners (of which 6.25% constitutes a management fee to the Corporate General Partner for services in managing the Partnership).\nThe Partnership Agreement provides that subject to certain conditions, the General Partners shall receive as a distribution from the sale of a real property by the Partnership up to 3% of the selling price, and that the remaining proceeds (net after expenses and retained working capital) be distributed 85% to the Limited Partners and 15% to the General Partners. However, prior to such distribution being made, the Limited Partners are entitled to receive 99% and the General Partners l% of net sale or refinancing proceeds until the Limited Partners (i) have received cash distributions of \"sale proceeds\" or \"refinancing proceeds\" in an amount equal to the Limited Partners' aggregate initial capital investment in the Partnership and (ii) have received cumulative cash distributions from the Partnership's operations which, when combined with \"sale proceeds\" or \"refinancing proceeds\" previously distributed, equal a 6% annual return on the Limited Partners' average capital investment for each year (their initial capital investment as reduced by \"sale proceeds\" or \"refinancing proceeds\" previously distributed) commencing with the first fiscal quarter of 1990. Accordingly, up to $561,000 of sale proceeds from Erie-McClurg Parking Facility for the General Partners has been deferred (see note 7).\n(6) MANAGEMENT AGREEMENTS\nThe Partnership has entered into agreements for the operation and management of the properties. Such agreements are summarized as follows:\nAt acquisition, management of the 9701 Wilshire Building and the Springbrook Shopping Center was assumed by affiliates of the Corporate General Partner.\nFor a fee computed as a percentage of rental income, an affiliate of the Corporate General Partner assumed management of the 21900 Burbank Boulevard Building, the 260 Franklin Street Building, the Woodland Hills Apartments, the Villa Solana Apartments, the RiverEdge Place Building and Village Northeast Apartments in January 1988, May 1988, September 1989, December 1989, September 1992 and August 1993, respectively.\nThe Partnership has also entered into agreements with certain joint venture partners or affiliates of the joint venture partners for the operation and management of properties owned by Eastridge, 160 Spear, Park, Boatmen's, Cal Plaza and VNE Partners. Certain of these agreements have been terminated. Reference is made to note 3(b). Such agreements generally provided for initial terms during which the managers or their affiliates pay all expenses of the properties and retain the excess, if any, of the cash revenues from operations over costs and expenses, as defined (including debt service requirements), as a management fee. Upon termination of the agreements, the properties are expected to be managed by an affiliate of the Corporate General Partner.\nIn February 1991, management of the Woodland Hills Apartments was reassumed by the seller of this property (see notes 2(f) and 4(c)). CARLYLE REAL ESTATE LIMITED PARTNERSHIP - XV\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED\n(7) SALE OF INVESTMENT PROPERTIES\n(a) Erie-McClurg Parking Facility\nOn September 25, 1992, the Partnership, through Erie-McClurg Associates, sold the Erie-McClurg Parking Facility located in Chicago, Illinois. The sale price was $18,700,000 (before selling costs and prorations), all of which was paid in cash at closing. A portion of the cash proceeds (approximately $7,612,000) was used to retire the first mortgage note secured by the property. An additional $6,335,000 of the proceeds was used to retire the Partnership's unsecured, non-revolving line of credit.\nConcurrently, with the sale of the Erie-McClurg Parking Facility, the Partnership entered into an agreement with the unaffiliated manager of the parking facility to induce the manager to re-write the existing long-term management agreement at less favorable terms to the manager (see note 2(e)). This agreement guarantees the manager 100% of the compensation which would have been earned under the agreement prior to the sale in years one through five and 50% of any potential difference between the management fee under the agreement prior to the sale and the re- negotiated agreement with the purchaser (as defined) in years six through eighteen.\nIn connection with this agreement, at closing the Partnership paid the unaffiliated manager a partial settlement of $400,000 and has estimated the remaining contingent liability to be $360,000. This contingent liability is recorded as a long-term liability in the accompanying consolidated financial statements.\nThe sale of the property has resulted in the Partnership's recognition of a gain of $506,446 for financial reporting purposes and $1,296,367 for Federal income tax purposes in 1992.\n(b) Owings Mills\nOn June 30, 1993, JMB\/Owings sold its partnership interest in Owings Mills Limited Partnership (\"OMLP\"), which owns an allocated portion of the land, building and related improvements of the Owings Mills Mall located in Owings Mills, Maryland. The purchaser, O.M. Investment II Limited Partnership, is an affiliate of the Partnership's joint venture partner in OMLP.\nThe sale price of the interest in OMLP was $9,416,000, all of which was received in the form of a promissory note. In addition, the Partnership and Carlyle-XVI were relieved of their allocated portion of the debt secured by the property. The promissory note (which is secured by a guaranty from an affiliate of the purchaser and of the Partnership's joint venture partner in OMLP) bears interest at a rate of 7% per annum unless a certain specified event occurs, in which event the rate would increase to 8% per annum for the remainder of the term of the note. The promissory note requires principal and interest payments of approximately $109,000 per month with the remaining principal balance of approximately $5,500,000 due and payable on June 30, 1998. The monthly installment of principal and interest would be adjusted for the increase in the interest rate if applicable. Early prepayment of the promissory note may be required under certain circumstances, including the sale or further encumbrance of Owings Mills Mall.\nThe net cash proceeds and gain from sale of the interest in OMLP was allocated 50% to the Partnership and 50% to Carlyle-XVI in accordance to the JMB\/Owings Mills Associates partnership agreement.\nCARLYLE REAL ESTATE LIMITED PARTNERSHIP - XV\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED\nFor financial reporting purposes, JMB\/Owings recognized, on the date of sale, gain of $5,254,855, of which the Partnership's share is $2,627,427, attributable to JMB\/Owings being relieved of its obligations under the OMLP partnership agreement pursuant to the terms of the sale agreement. The Partnership has adopted the cost recovery method until such time as the purchaser's initial investment is sufficient in order to recognize gain under Statement of Financial Accounting Standards No. #66. At December 31, 1993, the total deferred gain of JMB\/Owings including principal and interest payments of $546,639 received through December 31, 1993 is $9,687,441 of which the Partnership's share is $4,843,720.\n(c) Harbor\nDuring 1991, the Partnership sold, 62% of its general partnership interest in Harbor, to an affiliate of the Harbor unaffiliated joint venture partners. The Partnership owned an 80% interest in Harbor prior to sale. Harbor owned a 55% general partnership interest in a joint venture which owned the leasehold interest on the land and owned the building and related improvements of the 300 East Lombard office building located in Baltimore, Maryland. The sale price for 62% of the Partnership's general partnership interest was $383,244, all of which was received in cash at closing. As of the date of the initial sale, the Partnership had a deficit capital account balance in the Harbor venture resulting from losses and distributions from the joint venture in an amount in excess of its original cash investment in the joint venture. As a result of the Partnership's initial sale of 62% of its interest and its simultaneous conversion to a limited partner, the Partnership eliminated its remaining deficit capital balance and recognized a total gain of $9,041,533 in 1991 for financial reporting purposes. In conjunction with the sale, the Partnership established a put-call option with the buyer on the Partnership's remaining interest in Harbor. On January 19, 1993, the Partnership sold the remaining 38% of its limited partnership interest in Harbor based on the buyer's exercise of the put-call option. The sale price for the Partnership's remaining interest was $229,140, plus $24,294 of interest accrued at 10% per annum from September 30, 1991 through the closing date, all of which was received in cash at closing. For financial reporting purposes in 1993, the Partnership recognized a gain on sale of the remaining interest of $229,140, which is included in gain on sale of interests in unconsolidated ventures in the accompanying financial statements.\n(8) NOTES RECEIVABLE\nIn 1987 and 1988, the Partnership advanced funds to pay for certain deficits at the 21900 Burbank Boulevard Building which were the obligation of an affiliate of the seller. Such advances, including unpaid interest, were approximately $2,004,000 as of the date of this report. The Partnership received demand notes from the seller which are personally guaranteed by certain of its principals. The seller had been paying interest on the note at a rate equal to 3% over the prime rate. In February 1991, the seller ceased paying monthly interest required under terms of the note. The Partnership has put the seller in default and effective October 31, 1991, the note began accruing interest at the default rate. The Partnership is pursuing its legal remedies against the seller and certain of its principals. The collectibility of the amounts discussed above is uncertain. For financial reporting purposes, the Partnership ceased accruing interest on the note receivable as of February 1991. As a matter of prudent accounting policy, a reserve for uncollectibility for the entire amount recorded for financial reporting purposes ($1,466,051) has been reflected in the accompanying consolidated financial statements. CARLYLE REAL ESTATE LIMITED PARTNERSHIP - XV\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED\n(9) LEASES\n(a) As Property Lessor\nAt December 31, 1993, the Partnership and its consolidated ventures' principal assets are six office buildings, four apartment complexes and two shopping centers. The Partnership has determined that all leases relating to these properties are properly classified as operating leases; therefore, rental income is reported when earned and the cost of each of the properties, excluding cost of land, is depreciated over the estimated useful lives. Leases with commercial tenants range in term from one to 30 years and provide for fixed minimum rent and partial to full reimbursement of operating costs. In addition, substantially all leases with shopping center tenants provide for additional rent based upon percentages of tenant sales volume. With respect to the Partnership's shopping center investments, a substantial portion of the ability of retail tenants to honor their leases is dependent upon the retail economic sector.\nApartment complex leases in effect at December 31, 1993 are generally for a term of one year or less and provide for annual rents of approximately $11,925,695.\nCost and accumulated depreciation of the leased assets are summarized as follows at December 31, 1993:\nOffice buildings: Cost. . . . . . . . . . . . . . . . . $278,922,521 Accumulated depreciation. . . . . . . 72,739,876 ------------ 206,182,645 ------------ Shopping centers: Cost. . . . . . . . . . . . . . . . . 46,856,107 Accumulated depreciation. . . . . . . 13,230,510 ------------ 33,625,597 ------------ Apartment complexes: Cost. . . . . . . . . . . . . . . . . 87,360,949 Accumulated depreciation. . . . . . . 22,026,935 ------------ 65,334,014 ------------ Total . . . . . . . . . . . . $305,142,256 ============\nMinimum lease payments including amounts representing executory costs (e.g., taxes, maintenance, insurance), and any related profit in excess of specific reimbursements, to be received in the future under the above operating commercial lease agreements, are as follows:\n1994. . . . . . . . . . . $ 35,330,429 1995. . . . . . . . . . . 28,530,858 1996. . . . . . . . . . . 18,689,562 1997. . . . . . . . . . . 13,786,253 1998. . . . . . . . . . . 11,363,918 Thereafter. . . . . . . . 31,075,046 ------------ Total . . . . . . . . $138,776,066 ============ CARLYLE REAL ESTATE LIMITED PARTNERSHIP - XV\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED\n(b) As Property Lessee\nThe following lease agreement has been determined to be an operating lease:\nThe Partnership owns through 160 Spear, a leasehold interest which expires in 2033 in the land underlying the 160 Spear Street Building. The ground lease provides that through the end of the lease term and each of the two ten-year renewal option periods, the rental payments will increase annually to equal the lesser of (i) 105-1\/2% of $252,000, compounded annually, or (ii) $252,000 increased by the increase in a price index from August 1, 1987 through the commencement date of each subsequent lease year.\nFuture minimum rental commitments under the lease are as follows:\n1994. . . . . . . . . . . $ 374,724 1995. . . . . . . . . . . 374,724 1996. . . . . . . . . . . 374,724 1997. . . . . . . . . . . 374,724 1998. . . . . . . . . . . 374,724 Thereafter. . . . . . . . 13,115,340 -----------\nTotal. . . . . . . . $14,988,960 ===========\n(10) NOTES PAYABLE\nPursuant to the terms of a tenant lease at Cal Plaza, promissory notes (for certain sub-leasing costs) aggregating $707,009 have been issued by the Cal Plaza joint venture to a tenant of the investment property. Commencing on July 1, 1990 and on each July 1st thereafter until the notes are paid in full, one tenth of the original principal balance together with 12% annual interest on the outstanding balance of the notes shall be payable. As the result of a settlement agreement between the Partnership and its joint venture partner, the joint venture partner is obligated to pay 40% of the amounts owed under the promissory notes and the Partnership is obligated to pay 60% of such amounts (see note 3(b)(iii)). During July 1991, principal of $70,701 and interest of $71,724 was paid to the tenant from cash flow generated from operations of the property. During July 1992, principal of $70,701 and interest of $68,788 was paid to the tenant from cash flow generated from operations of the property. During July 1993, principal of $70,701 and interest of $60,304 was paid to the tenant from cash flow generated from operations of the property. As of December 31, 1993, the outstanding balance of the notes was $431,836.\n(11) TRANSACTIONS WITH AFFILIATES\nThe Corporate General Partner and its affiliates are entitled to reimbursement for salaries and direct expenses of officers and employees of the Corporate General Partner and its affiliates relating to the administration of the Partnership and the operation of the Partnership's properties.\nFees, commissions and other expenses required to be paid by the Partnership (or in the case of property management and leasing fees, by the Partnership's consolidated ventures) to the General Partners and their affiliates as of December 31, 1993 and for the years ended December 31, 1993, 1992 and 1991 are as follows:\nCARLYLE REAL ESTATE LIMITED PARTNERSHIP - XV\nKPMG PEAT MARWICK\nChicago, Illinois March 28, 1994\nSee accompanying notes to combined financial statements.\nCARLYLE REAL ESTATE LIMITED PARTNERSHIP - XV CERTAIN UNCONSOLIDATED VENTURES\nNOTES TO COMBINED FINANCIAL STATEMENTS\nDECEMBER 31, 1993, 1992 AND 1991\n(1) ORGANIZATION AND BASIS OF ACCOUNTING\nThe accompanying combined financial statements have been prepared for the purpose of complying with Rule 3.09 of Regulation S-X of the Securities and Exchange Commission. They include the accounts of certain of the unconsolidated joint ventures in which Carlyle Real Estate Limited Partnership-XV (\"Carlyle-XV\") owns a direct interest. Also included are the accounts of one of the joint venture partnerships (underlying ventures) in which Carlyle-XV owns an indirect interest through one of the unconsolidated joint ventures. The entities included in the combined financial statements are as follows: DATE VENTURE ACQUIRED ------- --------\n1. Maguire\/Thomas Partners - South Tower (\"South Tower\") (a) 06\/28\/85\n2. Carlyle - XV Associates, L.P. (a) - JMB\/125 Broad Building Associates, L.P. 12\/31\/85 (\"JMB\/125\") (a) - 125 Broad Street Company (b)\nFive year maturities of long-term debt are as follows:\n1994 . . . . . . . . . $447,216,935 1995 . . . . . . . . . -- 1996 . . . . . . . . . -- 1997 . . . . . . . . . -- 1998 . . . . . . . . . -- ============\n1994 . . . . . . . . . . . $ 56,853,468 1995 . . . . . . . . . . . 57,634,891 1996 . . . . . . . . . . . 60,566,341 1997 . . . . . . . . . . . 57,362,986 1998 . . . . . . . . . . . 51,203,800 Thereafter . . . . . . . . 354,036,341 ------------ Total. . . . . . $637,657,827 ============\nCARLYLE REAL ESTATE LIMITED PARTNERSHIP - XV CERTAIN UNCONSOLIDATED VENTURES\nNOTES TO COMBINED FINANCIAL STATEMENTS - CONCLUDED\n(b) As Property Lessee\nThe 125 Broad Street Building is currently subject to a ground lease which has a term through June 2067. The future minimum rental commitments under these leases are as follows:\n1994 . . . . . . . . . $ 1,075,000 1995 . . . . . . . . . 1,075,000 1996 . . . . . . . . . 1,075,000 1997 . . . . . . . . . 1,075,000 1998 . . . . . . . . . 1,075,000 Thereafter . . . . . . 74,175,000 ----------- Total. . . . $79,550,000 ===========\nThe terms of the ground lease grant 125 Broad Street Company a right of first refusal to acquire the fee interest in the land in the event of any proposed sale of the land during the term of the lease and an option to purchase the fee interest in the land for $15,000,000 at ten-year intervals (the next option date occurring in 1994). SCHEDULE X\nCARLYLE REAL ESTATE LIMITED PARTNERSHIP CERTAIN UNCONSOLIDATED VENTURES\nSUPPLEMENTARY INCOME STATEMENT INFORMATION\nYEARS ENDED DECEMBER 31, 1993, 1992 AND 1991\nCHARGED TO COSTS AND EXPENSES ---------------------------------------------- 1993 1992 1991 ----------- ---------- ---------- Depreciation . . . . . . . . $21,023,113 22,625,958 22,233,706\nRepairs and maintenance. . . 5,968,953 6,291,955 6,490,736\nReal estate taxes. . . . . . 14,578,166 15,863,796 14,635,888\nAmortization of deferred expenses. . . . . 4,007,632 3,367,762 3,829,014 =========== ========== ==========\nITEM 9.","section_9":"ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE\nThere were no changes of or disagreements with accountants during fiscal year 1993 and 1992.\nPART III\nSIGNATURES\nPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Partnership has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.\nCARLYLE REAL ESTATE LIMITED PARTNERSHIP - XV\nBy: JMB Realty Corporation Corporate General Partner\nGAILEN J. HULL By: Gailen J. Hull Senior Vice President Date: March 28, 1994\nPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.\nBy: JMB Realty Corporation Corporate General Partner\nJUDD D. MALKIN* By: Judd D. Malkin, Chairman and Director Date: March 28, 1994\nNEIL G. BLUHM* By: Neil G. Bluhm, President and Director Date: March 28, 1994\nH. RIGEL BARBER* By: H. Rigel Barber, Chief Executive Officer Date: March 28, 1994\nJEFFREY R. ROSENTHAL* By: Jeffrey R. Rosenthal, Chief Financial Officer Principal Financial Officer Date: March 28, 1994\nGAILEN J. HULL By: Gailen J. Hull, Senior Vice President Principal Accounting Officer Date: March 28, 1994\nA. LEE SACKS* By: A. Lee Sacks, Director Date: March 28, 1994\nSTUART C. NATHAN* By: Stuart C. Nathan, Executive Vice President and Director Date: March 28, 1994\n*By: GAILEN J. HULL, Pursuant to a Power of Attorney\nGAILEN J. HULL By: Gailen J. Hull, Attorney-in-Fact Date: March 28, 1994\nCARLYLE REAL ESTATE LIMITED PARTNERSHIP - XV EXHIBIT INDEX\nDocument Incorporated By Reference Page ------------ ----\n3. Amended and Restated Agreement Yes of Limited Partnership of the Partnership, included as Exhibit A to the Partnership's Prospectus dated July 5, 1985.\n4-A. Assignment Agreement, included as Yes Exhibit B to the Partnership's Prospectus dated July 5, 1985.\n4-B. Documents relating to the modification of the mortgage loan secured by the 260 Franklin Street Building Yes\n4-C. Documents relating to the modification of the mortgage loans secured by the 160 Spear Street Building Yes\n4-D. Documents relating to the refinancing of the mortgage loan secured by the Post Crest Apartments Yes\n10-A. through 10-R. * Exhibits 10.A through 10.R Yes are hereby incorporated herein by reference.\n10-S. through 10-W. Exhibits 10-S. through 10-W. are hereby incorporated herein by reference. Yes\n10-X. Agreement of Limited Partnership of Carlyle-XV Associates, L.P., dated April 19, 1993 between the Partnership and Carlyle Partners, Inc. relating to the 125 Broad Street Building is filed herewith. No\n10-Y. Documents relating to the modification of the mortgage loan secured by California Plaza are filed herewith. No\n21. List of Subsidiaries No\n24. Powers of Attorney No\n- - --------------------\n* Previously filed as Exhibits to the Partnership's Registration Statement (as amended) on Form S-11 (Filed No. 2-95382) of the Securities Act of 1933.\nAMENDED AND RESTATED ARTICLES OF PARTNERSHIP OF JMB\/125 BROAD BUILDING ASSOCIATES\nThese Amended and Restated Articles of Partnership made and entered into as of April 21, 1993, by and between Carlyle Advisors, Inc., a Delaware corporation (hereinafter referred to as \"General Partner\"), and Carlyle-XV Associates, L.P., an Delaware limited partnership, and Carlyle-XVI Associates, L.P., a Delaware limited partnership, as the limited partners (hereinafter collectively referred to as the \"Limited Partners\").\nW I T N E S S E T H\nTHAT WHEREAS, this partnership (hereinafter referred to as the \"Partnership\") was heretofore formed pursuant to the Uniform Partnership Act of the State of Illinois by Carlyle Real Estate Limited Partnership-XV, an Illinois limited partnership, and Carlyle Real Estate Limited Partnership-XVI, an Illinois limited partnership (hereinafter collectively referred to as the \"Original Partners\"); and\nTHAT WHEREAS, the Original Partners have each individually assigned their respective partnership interests to the Limited Partners pursuant to that certain Amendment No. 1 to the Articles of Partnership of the Partnership (the \"Agreement\"); and\nTHAT WHEREAS, the parties hereto desire to continue the partnership as a limited partnership pursuant to the Revised Uniform Limited Partnership Act as in effect in the State of Illinois, as amended (the \"Act\"), for the purposes and on the terms and conditions hereinafter set forth; and\nTHAT WHEREAS, the General Partner desires to: (i) be admitted into the Partnership as a general partner, (ii) perform all of the duties and responsibilities of a general partner under the Act, and (iii) acquire a general partnership interest in the Partnership, and the Limited Partners, by their execution hereof, desire to evidence their consent to said admission and to the continuance of the Partnership as a limited partnership; and\nTHAT WHEREAS, the parties hereto desire to amend and restate the partnership so that it appears in its entirety as follows.\nNOW THEREFORE, the undersigned hereby continue the partnership as a limited partnership under the provisions of the Act, except as hereinafter provided, for the purposes and on the terms and conditions as hereinafter set forth, and do hereby agree:\n1. Name of Partnership. The name of the Partnership shall be \"JMB\/125 Broad Building Associates, L.P.\"\n2. Character of the Partnership's Business. The character of the business of the Partnership will be to acquire, hold, and otherwise use for profit , either directly or indirectly, an interest in 125 Broad Street Company, a limited partnership formed pursuant to the Uniform Limited Partnership Act as in effect in the State of New York, which partnership owns the improvements on, together with a leasehold interest in, the land more particularly described on Exhibit A attached hereto, and to engage in any and all activities related or incidental thereto. Whenever the term \"Property\" appears in these Articles such term shall mean any property, real or personal, tangible or intangible, at any time owned by the Partnership, including the Partnership's interest in 125 Broad Street Company, and any property at any time owned by 125 Broad Street Company.\n3. Location of the Principal Place of Business. The location of the principal place of business of the Partnership shall be 900 North Michigan Avenue, Chicago, Illinois 60611 or such other location as shall be designated by the Partners.\n4. Names and Places of Residence of Partners. The names of the Partners of the Partnership and their respective addresse after each respective name as follows:\nGeneral Partner Residence\nCarlyle Advisors, Inc. 900 North Michigan Chicago, IL 60611\nLimited Partners Residence\nCarlyle-XV Associates, L.P. 900 North Michigan Chicago, IL 60611\nCarlyle-XVI Associates, L.P. 900 North Michigan \t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\tChicago,IL 60611\nAs used herein, the term \"Partner\" shall refer to any of the General Partner or Limited Partners and the term \"Partners\" shall refer to the General Partner and the Limited Partners collectively and shall include their respective successors and assigns, as the case may be.\n5. Term of Partnership. The term for which the Partnership shall exist shall be until December 31, 2035 unless sooner terminated as hereinafter provided.\n6. Contributions of the Members of the Partnership.\nA. Contributions. The Original Partners have contributed the sums set forth opposite each Partner's name on the attached Exhibit B. Each of the Limited Partners have contributed hereto the partnership interests in the Partnership assigned to them by each of the Original Partners, respectively. In the event that any Partner makes an additional contributions to the Partnership or receives a return of all or part of its contributions to the Partnership, Exhibit B shall be promptly and appropriately amended to reflect such additional or returned contribution.\nB. Withdrawals of Capital. Except as otherwise herein provided, no Partner shall be entitled to withdraw capital or to receive distributions of or against capital without the prior written consent of, and upon the terms and conditions specified by, the General Partner.\nC. Capital Accounts. The Partnership shall maintain for each of the Partners a Capital Account, which shall be the aggregate amount of the contributions to the Partnership made by such Partner, as set forth in Exhibit B, reduced by the aggregate amount of any losses allocated, and any distributions of cash or the fair market value of other assets of the Partnership made, to such Partner and increased by the aggregate amount of any profits allocated to such Partner.\nD. Loans. Except as provided in Section 8D hereof, all advances or payments to the Partnership by any Partner shall be deemed to be loans by such Partner to the Partnership, and the Partner shall be entitled to interest thereon at such rates per annum as the General Partner may determine, and the same, together with interest as aforesaid, shall be repaid before any distribution shall be made hereunder to the other Partners. No such loan to the Partnership shall be made without the prior written consent of the General Partner and, unless all of the Partners otherwise agree, shall be required to be made by all of the Partners in proportion to their respective Partnership Shares (as hereinafter defined).\n7. Partnership Shares.\nA. As used herein, \"profits and losses\" include, without limitation, each item of Partnership income, gain, loss and deduction as determined for Federal income tax purposes, and \"Partnership Share\" means the proportion which the aggregate capital contributions to the Partnership of a Partner bear to the aggregate capital contributions to the Partnership of all of the Partners as set forth in Exhibit B. All net profits or losses from the operations of the Partnership for a fiscal year or part thereof shall be allocated to the Partners based upon their respective Partnership Shares.\nAny credits of the Partnership for a fiscal year shall be allocated in the same manner as are profits of the Partnership pursuant to this Section 7A (without regard to Section 7B), except that any investment tax credit shall be allocated only among those Partners who were partners (for Federal income tax purposes) on the date the property with respect to which such credit is earned was placed in service.\nB. There shall be allocated to each Partner (i) the amount of any profits attributable to interest, \"points\", financing fees and other amounts paid by such Partner to the Partnership with respect to loans made by the Partnership to such Partner and (ii) the amount of any losses attributable to interest, \"points\", financing fees and other amounts paid by the Partnership to a third party lender with respect to borrowings incurred by the Partnership to make loans by the Partnership to such Partner.\nC. (i) All net profits or losses from the sale or other disposition of all or any substantial portion of the Property shall be allocated to the Partners in accordance with their respective Partnership Shares on the date on which the Partnership recognized such profits or losses for Federal income tax purposes. Notwithstanding allocations in the first sentence of this Section 7C(i) if, at any time profit or loss, as the case may be, is realized by the Partnership on the sale or other disposition of all or any substantial portion of the Property, the Capital Account balances of the Partners are not in the ratio of their respective Partnership Shares (the \"Equalization Ratio\"), then gain shall be allocated to those Partners whose Capital Account balances are less than they would be if they were in the Equalization Ratio (or loss shall be allocated to those Partners whose Capital Account balances are greater than they would be if they were in the Equalization Ratio), in either case up to and in proportion to the amount necessary to cause the Capital Account balances of the Partners to be in the Equalization Ratio and then in accordance with the first sentence in this Section 7C(i). Notwithstanding any adjustment of the allocation of profits or losses provided in this Agreement by any judicial body or governmental agency, the allocations of profits of losses provided in this Agreement shall control for purposes of this Agreement (or any amendment hereto pursuant to Section 12B), including without limitation, the determination of the Partners' Capital Accounts.\n(ii) The portion of any gain allocated under Section 7C(i) above that represents ordinary income attributable to \"Unrealized Receivables\" and \"Substantially Appreciated Inventory Items\", as such terms are defined in Section 751(c) and (d), respectively, of the Internal Revenue Code of 1954, as amended (the \"Code\"), shall be allocated among the Partners in the proportions in which depreciation deductions on the Partnership Property sold, or tax benefits attributable to or giving rise to such Unrealized Receivables or Substantially Appreciated Inventory Items, were originally allocated to their Partnership interests. No Partner shall relinquish such Partner's share of \"Unrealized Receivables\" (as such term is defined in Section 751(c) of the Code) attributable to depreciation recapture in the case of a distribution or constructive distribution of property arising in connection with admission to the Partnership of another person as Person.\nD. Each distribution to the Partners of cash or other assets of the Partnership made prior to the dissolution of the Partnership, including, but not limited to, each distribution of net proceeds received by the Partnership from the sale or refinancing of all or any substantial portion of the Property, shall be made to the Partners in accordance with their respective Partnership Shares owned on the date of such distribution; provided, however, that if, at the time of any such distribution, the Capital Account balances of the Partners are not in the Equalization Ratio, then the proceeds of any such distribution shall be distributed first to the Partners having Capital Account balances greater than they would be if the Capital Account balances of all Partners were in the Equalization Ratio, up to and in proportion to the amount necessary to cause the Capital Account balances of all Partners to be in the Equalization Ratio, and then in accordance with the respective Partnership Shares of the Partners on the date of such distribution. Each distribution of cash or other assets of the Partnership made after dissolution of the Partnership shall be made in accordance with Section 11C. Distributions to the Partners will be made in such amounts and at such times as shall be determined by the General Partner.\nE. The Partnership Shares of each of the Partners are as follows: 1% to the General Partner, 58.712% to Carlyle-XV Associates, L.P., and 40.288% to Carlyle-XVI Associates, L.P.\n8. Powers, Rights and Duties of the Partners.\nA. Except as otherwise provided herein, the General Partner alone shall have the full, exclusive and complete power, authority and responsibility to manage and control the affairs and funds of the Partnership in the ordinary course of its activities for the purposes herein stated, including the power to take (or omit) all or any such action as he may from time to time deem appropriate or desirable in connection therewith. In furtherance of the powers granted to the General Partner herein, and in no way in limitation thereof, the General Partner, for and on behalf of the Partnership, shall have full, exclusive and complete power and responsibility to enter into agreements of whatever nature necessary to effect the acquisition of the Partnership's assets, and such amendments and restatements thereof and supplements and modifications thereto as it amy consider to be in the best interests of the Partnership to perform all duties and obligations, and exercise all rights, as provided under such agreements in such manner as it may determine; to act on behalf of the Partnership in dealing with third parties and to manage, operate and undertake the funds and affairs of the Partnership for the purposes of conducting its business and of making, holding, conducting and disposing of assets and investments. The president or any vice president of the General Partner may act for and in the name of the Partnership in the exercise by the Partnership of any of its rights and powers hereunder. In dealing with the president or any vice president of the General Partner, no person shall be required to inquire into the authority of such individual acting on behalf of the Partnership to bind the Partnership. Persons dealing with the Partnership are entitled to rely conclusively on the power and authority of the president or any vice president of the General Partner as set forth in this Agreement.\nB. Notwithstanding any provision of this Agreement to the contrary, in the event that the Partners cannot reach unanimous agreement concerning a decision regarding the sale of all or any substantial portion of the Property (other than any property owned by a partnership or joint venture, directly or indirectly through another partnership or joint venture, in which the Partnership is a partner), the Partner or Partners desiring a sale thereof (the \"Notifying Party\") shall give notice to the other Partner or Partners (the \"Notified Party\") of the proposed transaction and shall deliver to the Notified Party with such notice a copy of the bona fide written offer from the prospective purchaser setting forth the name of the prospective purchaser and all of the material terms and conditions on which it is intended that the Property, or specified portion thereof, be sold. The Notified Party shall then have 30 days after receiving such notice to elect (by giving notice of the same to the Notifying Party) either (a) to purchase the specified Property (other than any property owned by a partnership or joint venture, in which the Partnership is a partner) for the purchase price and on the terms and conditions as set forth in such offer or (b) to acquire a proportionate share of the Notifying Party's interest in the Partnership for an amount equal to the amount which the Notifying Party would have received as its share of the net proceeds from the sale of the specified Property. In the event that the Notified Party makes either such election, the Partners shall close on the transaction as elected by the Notified Party within a period equal to the later of 90 days after the making of such election or the closing date specified in such written offer, with the time, place and date (within such period) as specified by the Notified Party by notice to the Notifying Party within 30 days after the making of such election. If the Notified Party does not make either election, then the Notifying Party may conclude a sale of such specified Property, without the agreement of the Notified Party, at any time or times within 180 days after the giving of notice of the proposed sale thereof, for a purchase price and on terms which are at least as favorable to the Partnership as those contained in the written offer and only to the purchaser identified in such written offer or to an \"Affiliate\" (as hereinafter defined) of such purchaser, if the Affiliate is specified in such written offer or such notice, but if a sale is not consummated within such period, then the right of the Notified Party to receive notice and to purchase or to acquire as aforesaid will continue as to any future proposed sale. In the event that the Notified Party includes more than one Partner, the election made by the Notified Party must be consented to by each such Partner and the purchase from the Notifying Party shall be made by the Partners comprising the Notified Partner based upon their respective Partnership Shares at the time of such election; provided, however, that if one such Partner fails or refuses to consent to either election, the other such Partner may, at its option, make the election of its choice and undertake the entire purchase or acquisition from the Notifying Party.\nC. Neither the General Partner nor any of its Affiliates shall be required to manage the Partnership as its sole and exclusive function and it may have other business interests and may engage in other activities in addition to those relating to the Partnership, including the making or management of other investments. Without limitation on the generality of the foregoing, each Partner recognizes that each Partner was formed for the purpose of investing in, operating, transferring, leasing and otherwise using real property and interests therein for profit and engaging in any and all activities related or incidental thereto and that each Partner will or may make other investments consistent with such purpose. Neither the Partnership nor any Partner shall have any right by virtue of this Agreement or the Partnership relationship created hereby in or to such other ventures or activities or to the income or proceeds derived therefrom, and the pursuit of such other ventures or activities by each Partner or any of their Affiliates, even if competitive with the business of the Partnership, is hereby consented to by all Partners and shall not be deemed wrongful or improper. Except as otherwise permitted in this Agreement or in any agreement among the Partners, no Partner or any Affiliate of a Partner shall be obligated to present any particular investment opportunity to the Partnership even if such opportunity is of a character which, if presented to the Partnership, could be taken by the Partnership, and each Partner or any Affiliate of a Partner shall have the right to take for its own account, or to recommend to others, any such particular investment opportunity.\nD. \"Affiliate(s)\" of a person means (i) any officer, director, employee, shareholder, partner or relative within the third degree of kindred of such person: (ii) any corporation, partnership, trust or other entity controlling, controlled by or under common control with such person or any such relative of such person; and (iii) any officer, director, trustee, general partner or employee of any entity described in (ii) above. Affiliates of a Partner may receive commissions when the Partnership buys or sells the Property or any portion thereof and may be employed to provide property management for the Partnership or any of the Property, but no commissions or compensation payable to such Affiliate for the same may exceed the normal and competitive rates for similar services in the locality where provided. The Partnership may borrow funds for the purpose of lending such funds to all or any of its Partners; provided, however, that the cost of such funds charged to the Partnership (including financing fees, \"points\" and interest charged with respect to such funds) by a third party shall not exceed the amount charged by the Partnership to such Partner or Partners for the use of such funds. The Partnership may enter into agreements with Affiliates of a Partner to provide insurance brokerage or similar services to the Partnership or any of the Property; provided that any such services by Affiliates shall be at rates at least as favorable to the Partnership as those available from unaffiliated parties. The validity of any transaction, agreement or payment involving the Partnership and any Affiliate of a Partner shall not be affected by reason of the relationship between the Partner and such Affiliate or the approval of said transaction, agreement or payment by officers, directors or partners of such Affiliate all or some of whom are also Affiliates of a Partner or are officers, directors or partners or are otherwise interested in or related to such Partner or its Affiliates.\nE. No Partner nor any Affiliate of any Partner nor any officer, director, shareholder, employee or partner of any such Affiliate shall be liable, responsible or accountable in damages or otherwise to the Partnership or to any other Partner for any action taken or failure to act on behalf of the Partnership within the scope of the authority conferred on such Partner or such Affiliate or such other person by this Agreement or by law unless such action or omission was performed or omitted fraudulently or in bad faith or constituted wanton and willful misconduct.\nF. The Partnership shall indemnify and hold harmless each Partner, any Affiliate of any Partner and any officer, director, shareholder, employee or partner of any such Affiliate (the \"Indemnified Parties\") from and against any loss, expense, damage or injury suffered or sustained by any Indemnified Party by reason of any acts, omissions or alleged acts or omissions arising out of its activities on behalf of the Partnership or in furtherance of the interest of the Partnership, including, but not limited to, any judgment, award, settlement, reasonable attorneys' fees and other costs and expenses incurred in connection with the defense of any actual or threatened action, proceeding or claim; provided that the acts or omissions or alleged acts or omissions upon which such actual or threatened action, proceeding or claim are based were performed or omitted in good faith and were not performed or omitted fraudulently or in bad faith or as a result of wanton and willful misconduct.\nG. The Limited Partners shall not participate in the management or control of the Partnership's business, nor shall they transact any business for the Partnership, nor shall they have the power to act for or bind the Partnership, said powers being vested solely and exclusively in the General Partner as provided herein (and except as provided herein). The Limited Partners shall not have any personal liability whatever, whether to the Partnership, to any Partner or to the creditors of the Partnership, for the debts of the Partnership or any of its losses once it has paid to the Partnership the amount of its capital contribution set forth in Exhibit B. The partnership interest of the Limited Partners in the Partnership shall be fully paid and non-assessable.\nH. The General Partner may in its sole discretion, make or seek to revoke the election referred to in Section 745 of the Internal Revenue Code of 1986, as amended, (herein the \"Code\") or any similar provision exacted in lieu thereof. Each of the Partners will upon request supply the information necessary to properly give effect to any such election.\nI. The General Partner shall, at the Partnership's expense and within a reasonable time after the close of each fiscal year, cause each Partner to be furnished with such statements of the Partnership's assets and liabilities as of the close of such year (if any), such profit and loss statement for such year (if any), such statement of the capital and profit account of each Partner (if any), and such other reports (if any), all as the General Partner may deem appropriate.\nJ. The General Partner shall, at the Partnership's expense, cause the Partnership's Federal and state income and other tax returns to be prepared and filed and shall furnish copies to each Partner of any information on such returns needed for the preparation of each Partner's own tax returns.\n9. Books and Records of the Partnership; Fiscal Year. The General Partner shall keep and maintain the books and records of the Partnership at the principal place of business of the Partnership. The fiscal year of the Partnership shall end on the 31st day of December in each year. The books of the Partnership shall be kept on the cash or accrual basis, and the Partnership shall be on the cash or accrual basis for tax purposes, as determined by the General Partner. The books and records of the Partnership shall be audited at such times and by such accountants as shall be determined from time to time by the General Partner. The funds of the Partnership shall be deposited in such bank accounts or invested in such interest-bearing or non-interest-bearing investments as shall be determined by Partner.\n10. Transfer of Partnership Interest.\nA. No Partner may sell, assign, transfer, encumber or hypothecate the whole or any part of its Partnership interest (including, but not limited to, its interest in the capital or profits of the Partnership) without prior written consent of the General Partner.\nB. Any party or person admitted to the Partnership as a substituted Partner shall be subject to and bound by all of the provisions of this Agreement as if originally a party to this Agreement and as a condition to such admission shall be required to execute a copy of this Agreement as amended to the date of such admission.\nC. A Partner shall have no liability hereunder (including, but not limited to, any liability as a surety but excluding the repayment of any outstanding principal and interest on loans made by the Partnership to such Partner) for any obligations accruing under or in connection with the Partnership and relating to events occurring after such Partner shall have sold, assigned or transferred its entire Partnership interest.\n11. Dissolution of the Partnership.\nA. No act, thing, occurrence, event or circumstances shall cause or result in the dissolution of the Partnership except the matters specified in subsection B below.\nB. The happening of any one of the following events shall work a dissolution of the Partnership:\n(1) The bankruptcy, resignation, legal incapacity, dissolution, termination, or expulsion of the General Partner; provided, however, that in such event the remaining Partners shall have the right to elect to continue the Partnership's business by depositing at the office of the Partnership a writing evidencing such an election. No other act shall be required to effect such continuation;\n(2) The sale of all or substantially all of the assets of the Partnership;\n(3) The unanimous agreement in writing by all of the Partners to dissolve the Partnership; or\n(4) The termination of the term of the Partnership pursuant to Section 5 hereof. Without limitation on the other provisions hereof, the admission of a new Partner shall not work a dissolution of the Partnership. Except as otherwise provided in this Agreement, each Partner agrees that, without the consent of the General Partner, a Partner may not withdraw from or cause a voluntary dissolution of the Partnership.\nC. Upon the occurrence of any of the events specified in subsection B above causing a dissolution of the Partnership and except as otherwise provided in subsection B above, the remaining Partner or Partners shall commence to wind up the affairs of the Partnership and to liquidate its investments (and in this connection shall have full right and unlimited discretion to determine in good faith the time, manner and terms of any sale or sales of Partnership Property). The Partner or Partners obligated to wind up the affairs of the Partnership as aforesaid shall herein be called the \"Winding-Up Party\". The Partners and their legal representatives, successors and assignees shall continue to share in profits and losses during the period of liquidation in the same manner and proportion as immediately before the dissolution. Following the payment of all debts and liabilities of the Partnership and all expenses of liquidation and subject to the right of the Winding-Up Party to set up such cash reserves as, and for so long as, it may deem reasonably necessary, the proceeds of the liquidation and any other funds of the Partnership shall be distributed to the Partners (after deducting from the distributive share of a Partner any sum such Partner owes the Partnership) in accordance with Section 7 hereof. No Partner shall have any right to demand or receive property other than cash upon dissolution or termination of the Partnership. Upon the completion of the liquidation of the Partnership and of the distribution of all Partnership funds, the Partnership shall terminate and the Winding-Up Party shall have the authority to execute any and all documents required in its judgment to effectuate the dissolution and termination of the Partnership. Each Partners shall look solely to the assets of the Partnership for all distributions with respect to the Partnership and its capital contributions thereto and share of profits or losses therefrom, and shall have no recourse therefor against any Partner; provided that nothing herein contained shall relieve any Partner of such Partner's obligation to pay any liability or indebtedness owing to the Partnership by such Partner.\n12. Notices; Amendment.\nA. Any notice which a Partner is required or may desire to give any other Partner shall be in writing, and may be given by personal delivery or by mailing the same by United States registered or certified mail, return receipt required, to the Partner to whom such notice is directed at the address of such Partner as hereinabove set forth, subject to the right of a Partner to designate a different address for itself by notice similarly given. Any notice so given by United States mail shall be deemed to have been given on the second day after the same is deposited in the United States mail as registered or certified mail, addressed as above provided, with postage thereon fully prepaid. Any such notice not given by registered or certified mail as aforesaid shall be deemed to be given upon receipt of the same by the party to whom the same is to be given.\nB. This Agreement may be amended by written agreement of amendment executed by all the Partners, but not otherwise.\n13. New General Partner. All of the Partners may agree in writing from time to time to admit to the Partnership one or more new General Partners. The General Partner may, on behalf of all Partners, cause Exhibit B hereto and the Partnership's Certificate of Limited Partnership to be appropriately amended and cause the same to be recorded in the event of each such appointment. No such addition or substitution of a new General Partner shall work a dissolution of the Partnership or otherwise affect the continuity of the Partnership.\n14. Miscellaneous. Each Partner hereby irrevocably waives any and all rights that it may have to maintain any action for partition of any of the Partnership Property. This Agreement constitutes the entire agreement between the parties. This Agreement supersedes any prior agreement or understanding between the parties. This Agreement and the rights of the parties hereunder shall be governed by and interpreted in accordance with the laws of the State of Illinois. Except as herein otherwise specifically provided, this Agreement shall be binding upon and inure to the benefit of the parties and their legal representatives, successors and assignees. Captions contained in the Agreement in no way define, limit or extend the scope or intent of this Agreement. If any provision of this Agreement, or the application of such provision to any person or circumstance shall be held invalid, the remainder of this Agreement, or the application of such provision to other persons or circumstances, shall not be affected thereby. This Agreement may be executed in several counterparts, each of which shall be deemed an original but all of which shall constitute one and the same instrument. The opinion of the independent certified public accountants retained by the Partnership from time to time shall be final and binding with respect to all computations and determinations required to be made under Section 7 hereof (including computations and determinations in connection with any distribution following or in connection with dissolution of the Partnership). If the Partnership or any Partner obtains a judgment against any other party by reason of breach of this Agreement or failure to comply with the provisions hereof, a reasonable attorneys' fee as fixed by the court shall be included in such judgment. Any Partner shall be entitled to maintain, on its own behalf or on behalf of the Partnership, any action or proceeding against any other Partner or the Partnership (including, without limitation, any action for damages, specific performance or declaratory relief) for or by reason of breach by such party of this Agreement, notwithstanding the fact that any or all of the parties to such proceeding may then be a partner in the Partnership, and without dissolving the Partnership as a partnership. No remedy conferred upon the Partnership or any partner in this Agreement is intended to be exclusive of any other remedy herein or by law provided or permitted, but each shall be cumulative and shall be in addition to every other remedy given hereunder or now or hereafter existing at law or in equity or by stature (subject, however, to the limitations expressly herein set forth). No waiver by a Partner or the Partnership of any breach of this Agreement shall be deemed to be a waiver of any other breach of any kind or nature and no acceptance of payment or performance by a Partner of the Partnership after any such breach shall be deemed to be a waiver of any breach of this Agreement whether or not such Partner or the Partnership knows of such breach at the time it accepts such payment or performance. No failure or delay on the part of a Partner or the Partnership to exercise any right it may have shall prevent the exercise thereof by such Partner or the Partnership at any time such other Partner may continue to be so in default, and no such failure or delay shall operate as a waiver of any default.\nPower of Attorney\nThe undersigned Partners of JMB\/125 Broad Building Associates, L.P., a limited partnership pursuant to the laws of the State of Illinois, hereby jointly and severally irrevocably constitute and appoint the General Partner with full power of substitution, their true and lawful attorney-in-fact, in their name, place and stead to make, execute, sign, acknowledge, record and file, on behalf of them and on behalf of the Partnership the following:\n(i) A Certificate of Limited Partnership and any other certificates or instruments which may be required to be filed by the Partnership or the Partners under the laws of the State of Illinois and any other jurisdiction whose laws may be applicable;\n(ii) Such instruments or documents as may be deemed necessary or desirable by the General Partner in connection with the termination of the Partnership's business;\n(iii) Any and all amendments of the instruments described in clauses (i) and (ii) above, provided such amendments either are required by law to be filed or are consistent with the Agreement of Limited Partnership of the Partnership as it may exist from time to time, or have been authorized by the particular Partner or Partners; and\n(iv) Any amendment of this Agreement authorized to be made by the General Partner under this Agreement.\nThe foregoing grant of authority:\n(i) Is a Special Power of Attorney coupled with an interest, is irrevocable and shall survive the death or incapacity of the Partner granting the power;\n(ii) May be exercised by the General Partner on behalf of each Partner by a facsimile signature or by listing all of the Partners executing any instrument with a single signature as attorney-in-fact for all of them; and\n(iii) Shall survive the withdrawal, dissolution, legal incapacity, bankruptcy or resignation of a Partner from the Partnership or the delivery of an assignment by a Partner of the whole or any portion of his interest in the Partnership.\nIN WITNESS WHEREOF, the undersigned have executed these Amended and Restated Articles of Limited Partnership of JMB\/125 Broad Building Associates, L.P. as of the day and year first above written.\nGeneral Partner Limited Partners\nCARLYLE ADVISORS, INC., CARLYLE-XV ASSOCIATES, L.P., a Delaware corporation a Delaware limited partnership\nBy: CARLYLE PARTNERS, INC., By: a Delaware corporation, Brian Ellison General Partner Vice President\nBy: Brian Ellison Vice President\nCARLYLE-XVI ASSOCIATES, L.P., a Delaware limited partnership\nBy: CARLYLE PARTNERS, INC., a Delaware corporation, General Partner\nBy: Brian Ellison Vice President\nEXHIBIT A\nA 40-story office building containing approximately 1,336,000 rentable square feet of space and located at 125 Broad Street in New York, New York, together with a leasehold interest in the underlying land.\nEXHIBIT B\nCAPITAL CONTRIBUTIONS DECEMBER, 1985\nPARTNER\nCarlyle Real Estate Limited Partnership-XV $27,138,800\nCarlyle Real Estate Limited Partnership-XVI $ 274,129 ----------- $27,412,929 =========== EXHIBIT B (con't)\nADDITIONAL CAPITAL CONTRIBUTIONS AS OF SEPTEMBER 29, 1986\nEXHIBIT B\nTOTAL CAPITAL CONTRIBUTIONS\nGENERAL PARTNER CONTRIBUTION TOTAL\nCarlyle Advisors, Inc. $ 00000000100 000001%\nLIMITED PARTNERS\nCarlyle-XV Associates, L.P. $ 33,792.885.73 58.712%\nCarlyle-XVI Associates, L.P. $ 23,188,462.03 40.288%\nAGREEMENT OF LIMITED PARTNERSHIP\nOF\nCARLYLE-XV ASSOCIATES, L.P.\nThis Agreement of Limited Partnership (the \"Agreement\") made and entered into as Apr.il_19 993 by and between Carlyle Partners, Inc., a Delaware corporation, as general partner (hereinafter the \"General Partners) and Carlyle Real Estate Limited Partnership-XV, an Illinois limited partnership, as limited partner (hereinafter the \"Limited Partner\" and, together with the General Partner, sometimes hereinafter collectively referred to as the \"Partners\").\nWITNESSETH\nTHAT WHEREAS, the parties hereto desire to form a limited partnership, (hereinafter the \"Partnerships) pursuant to the Revised Uniform Limited Partnership Act as in effect in the State of Delaware (hereinafter the \"Act\"), except as hereinafter provided, for the purposes and term as hereinafter provided;\nNOW, THEREFORE, in consideration of the mutual promises and agreements herein made and intending to be legally bound thereby, the parties hereto hereby agree as follows:\n1. Name of Partnership. The name of the Partnership shall be \"Carlyle-XV Associates, L.P.\"\n2. Character of the Partnership's Business. The character of the business of the Partnership will be to acquire, hold and otherwise use for profit, either directly or indirectly, a limited partnership interest in IMB\/125 Broad Building Associates, L.P., an Illinois limited partnership, and to engage in any and all activities related or incidental thereto. Whenever the term \"Property\" appears in this Agreement, such term shall mean any property, real or personal, tangible or intangible, at any time owned by the Partnership, including the Partnership's respective interests in the aforementioned limited partnership and any property at any time owned by a partnership or other enterprise in which the Partnership is a partner.\n3. Location of the Principal Place of Business. The location of the principal place of business of the Partnership is 900 North Michigan Avenue, Chicago, Illinois 60611-1575 or such other location as shall be designated by the General Partner.\n4. Names and Addresses of Partners. The names of the Partners of the Partnership and their respective addresses are as set forth on exhibit A attached hereto.\n5. Term of Partnership. The term for which the Partnership shall exist shall be until December 31, 2043, unless earlier dissolved as provided in Section 11 hereof.\n6. Partner's Capital.\nA. Capital Contributions.\n(i) The capital contribution of each Partner to the Partnership is set forth opposite such Partner's name on Exhibit A hereto. The Partners shall bc obligated to make their capital contributions as reflected in Exhibit A hereto at such times as the General Partner may determine.\n(ii) Except as provided in Section 6A(i) above, no Partner shall have any obligation to make any additional capital contribution to the Partnership. In the event that, as provided in this Agreement, all or any part of the capital contribution of any Partner is withdrawn, any Partner makes an additional capital contribution, additional Partners are admitted to the Partnership, the Partnership purchases the interest of a Partner, or some similar change occurs, the General Partner shall promptly, when required, amend Exhibit A and prepare an amendment to this Agreement and the Certificate of Limited Partnership to reflect such change. The term \"capital contribution\" when used herein, shall mean the capital contribution of each Partner as set forth on Exhibit A hereto, plus any additional capital contributions which arc made to the Partnership as permitted under Section 6C hereof.\nB. No Right to Return of Contributions. No interest shall be paid or shall accrue on the capital contribution of any Partner. No Partner shall be personally liable for the return of the capital contributions of the other Partners, nor for the return of any Partnership assets. Notwithstanding the Act or any other provision of law, no Partner shall bc entitled to withdraw or obtain a return of all or any part of his capital contribution other than as expressly provided in this Agreement. It is the intent of the Partners that, unless expressly stated otherwise in a writing furnished to all the Partners by the Partnership, no distribution (or any part of any distribution) made to any Partner pursuant to this Agreement shall bc deemed a return or withdrawal of capital, even if such distribution represents (in full or in part) an allocation of depreciation or of any other non-cash item accounted for as a loss or deduction from or offset to income.\nC. Additional Contributions of Partners: Admission of Additional Partners. Any Partner or Partners may make additional contributions to the capital of the Partnership only with the consent of the General Partner. The General Partner may admit persons as additional Partners only (i) upon cecution by such persons of a copy of this Agreement, as it may have been amended or supplemented and be in effect immediately prior to the time of such admission and (ii) upon payment by such person(s) of a capital contribution, whether in cash or Property, which, along with the agreed value thereof, has been determined by agreement of all of the Partners.\nD. Capital Accounts. The Partnership shall maintain a capital account for each of the Partners which shall be the aggregate amount of the contributions to the Partnership made by such Partner, as set forth in Exhibit A hereto, reduced by the aggregate amount of any losses allocated, and any distributions of cash or the fair market value of other assets of the Partnership made to such Partner, and increased by the aggregate amount of any profits allocated to such Partner.\nE. Loans. Except as provided in Section 8C hereof, all advances or payments to the Partnership by any Partner other than the contributions required or made under Sections 6 or 7 hereof, shall be deemed to be loans by such Partner to the Partnership, and the Partner making the same shall be entitled to interest thereon at such rates per annum as the Partners may agree, and the same, together with interest as aforesaid, shall be repaid before any distribution shall be made hereunder to the Partners.\nNo such loan to the Partnership shall be made without the prior written consent of the Partners and, unless all Partners otherwise agree, shall be required to be made by all Partners in proportion to their respective Partnership Shares (as hereinafter defined). With respect to any borrowings by the Partnership for which there is recourse to the Partners or any of their respective assets, the Partners shall be liable for such borrowings in proportion to their respective Partnership Shares (as hereinafter defined) as determined from time to time.\n7. Partnership Shares.\nA. As used herein, \"profits\" or \"losses\" include, without limitation, each item of Partnership income, gain, loss and deduction as determined for Federal income tax purposes, and \"Partnership Share\" means 99% to the Limited Partner and 1% to the General Partner. Except as otherwise provided in this Section 7, all profits or losses from the operations of the Partnership for a fiscal year or part thereof shall be allocated to the Partners based upon their respective Partnership Shares. Notwithstanding the foregoing, to the extent required by Section 704(c) of the Code (as hereinafter defined) and the regulations promulgated thereunder, income, gain, loss and deduction with respect to the Property then owned by the Partnership shall be shared among the Partners so as to take account of the variation between the basis of the Property to the Partnership and its fair market value at the time of contribution.\nB. Each distribution to the Partners of cash or other assets of the Partnership (exclusive of cash or other assets relating to a sale or other disposition of the assets of the Partnership) made prior to the dissolution of the Partnership, including, but not limited to, each distribution of net cash flow from the operations of the Partnership shall be made to the Partners in accordance with their respective Partnership Shares owned on the date of such distribution. Each distribution of cash or other assets of the Partnership made after dissolution of the Partnership shall be made in accordance with Section II.E. hereof. Distributions to the Partners will be made in such amounts and at such times as shall be determined by the General Partner, or in the event of the dissolution and liquidation of the Partnership, by the Winding-Up Party (as hereinafter defined).\n8. Powers. Rights and Duties of the Partners.\nA. The General Partner alone shall have the full, exclusive and complete power, authority and responsibility to manage and control the affairs and funds of the Partnership in the ordinary course of its activities for the purposes herein stated, including the power to take (or omit) all or any such action as he may from time to time deem appropriate or desirable in connection therewith. In furtherance of the powers granted to the General Partner herein, and in no way in limitation thereof, the General Partner, for and on behalf of the Partnership, shall have full, exclusive and complete power and responsibility to enter into agreements of whatever nature necessary to effect the acquisition of the Partnership's assets, and such amendments and restatements thereof and supplements and modifications thereto as it may consider to be in the best interests of the Partnership to perform all duties and obligations, and exercise all rights, as provided under such agreements in such manner as it may determine; to act of behalf of the Partnership in dealing with third parties and to manage, operate and undertake the funds and affairs of the Partnership for the purposes of conducting its business and of making, holding, conducting and disposing of assets and investments. The president or any vice president of the General Partner may act for and in the name of the Partnership in the exercise by the Partnership of any of its rights and powers hereunder. In dealing with the president or any vice president of the General Partner, no person shall be required to inquire into the authority of such individual acting on behalf of the partnership to bind the Partnership. Persons dealing with the Partnership are entitled to rely conclusively on the power and authority of the president or any vice president of the General Partner as set forth in this Agreement.\nB. Neither the General Partner nor any of its Affiliates (as hereinafter defined) shall be required to manage the Partnership as its sole and exclusive function and it may have other business interests and may engage in other activities in addition to those relating to the Partnership, including the making or management of other investments or businesses. Without limitation on the generality of the foregoing, each Partner recognizes that each other Partner was formed for the purpose of investing in, operating, transferring, leasing and otherwise using real property and interests therein for profit and engaging in any and all activities related or incidental thereto and that each Partner will make other investments consistent with such purpose. Neither the Partnership nor any Partner shall have any right by virtue of this Agreement or the Partnership relationship created hereby in or to such other ventures or activities conducted by each Partner or its Affiliates or to the income or proceeds derived therefrom, and the pursuit of such other ventures or activities by each Partner or any of its Affiliates, even if competitive with the business of the Partnership, is hereby consented to by all Partners and shall not be deemed wrongful or improper. Except as otherwise provided in this Agreement or in any agreement between the Partners, no Partner nor any Affiliate of a Partner shall be obligated to present any particular business or investment opportunity to the Partnership even if such opportunity is of a character which, if presented to the Partnership, could be taken by the Partnership, and each Partner and any Affiliate of a Partner shall have the right to take for its own account, or to recommend to others, any such particular investment opportunity.\nC. \"Affiliate(s)\" of a Partner means (i) any officer, director, employee, shareholder, trustee, partner or relative within the third degree of kindred of such Partner or any other interest in or relation to such Partner; (ii) any corporation, partnership, trust or other entity controlling, controlled by or under common control with such Partner or any such relative of such Partner; and (iii) any officer, director, trustee, shareholder, partner or employee of any entity described in (ii) above. Affiliates of a Partner may receive commissions when the Partnership buys and sells the Partnership's Property or any portion thereof or any real property acquired or owned by a partnership in which the Partnership is a partner and may be employed to provide property management for the Partnership or any of the Property, but no commissions or compensation payable to such Affiliate for the same may exceed the normal and competitive rates for similar services in the locality where provided. The Partnership may borrow funds for the purpose of lending such funds to all or any of its Partners; provided, however, that the cost of such funds charged to the Partnership (including financing fees, \"points\" and interest and other amounts charged with respect to such funds) by a third party shall not exceed the amount charged by the Partnership to such Partner or Partners for the use of such funds. The Partnership may enter into agreements with Affiliates of a Partner to provide insurance brokerage or similar services to the Partnership or with respect to any of the Partnership's property; provided that any such services by Affiliates shall be at rates at least as favorable to the Partnership as those available from unaffiliated parties. The validity of any transaction, agreement or payment involving the Partnership and any Affiliate of a Partner shall not be affected by reason of the relationship between the Partner and such Affiliate or the approval of said transaction, agreement or payment by officers, directors or partners of such Affiliate all or some of whom are also Affiliates of a Partner or are officers, directors or partners or are otherwise interested in or related to such Partner or its Affiliates.\nD. No Partner, employee nor any Affiliate of any Partner shall bc liable, responsible or accountable in damages or otherwise to the Partnership or the other Partner for any action taken or failure to act on behalf of the Partnership within the scope of the authority conferred on such Partner or such Affiliate or such other person by this Agreement or by law unless such action or omission was performed or omitted fraudulently or in bad faith or constituted misconduct or negligence (gross or ordinary).\nE. The Partnership shall indemnify and hold harmless each of its Partners, employees, and any Affiliate of any Partner (the \"Indemnified Parties\") from and against any loss, expense, damage or injury suffered or sustained by any Indemnified Partyby reason of any acts, omissions or alleged acts or omissions arising out of is activities on behalf of the Partnership or in furtherance of the interest of the Partnership, including, but not limited to, any judgment, award, settlement, reasonable attorneys' fees and other costs and expenses incurred in connection with the defense of any actual or threatened action, proceeding or claim and including any payments made by the General Partner to any of its officers or directors pursuant to an indemnification agreement no broader than this Section 8E; provided that the acts or omissions or alleged acts or omissions upon which such actual or threatened action, proceeding or claim is based were taken or omitted in good faith and were not performed or omitted fraudulently or in bad faith or as a result of misconduct or negligence (gross or ordinary) by such Indemnified Party.\nF. The Limited Partner shall not participate in the management or control of the Partnership's business, nor shall it transact any business for the Partnership, nor shall it have the power to act for or bind the Partnership, said powers being vested solely and exclusively in the General Partner as provided herein (and except as provided herein). The Limited Partner shall not have any personal liability whatever, whether to the Partnership, to any Partner or to the creditors of the Partnership, for the debts of the Partnership or any of its losses once it has paid to the Partnership the amount of its capital contribution set forth in Exhibit A. The partnership interest of the Limited Partner in the Partnership shall be fully paid and non-assessable.\nG. The General Partner may in its sole discretion, make or seek to revoke the election referred to in Section 754 of the Internal Revenue Code of 1986, as amended, (herein the \"Code\") or any similar provision enacted in lieu thereof. Each of the Partners will upon request supply the information necessary to properly give effect to any such election.\nH. The General Partner shall, at the Partnership's expense and within a reasonable time after the close of each fiscal year, cause each Partner to be furnished with such statements of the Partnership's assets and liabilities as of the close of such year (if any), such profit and loss statement for such year (if any), such statement of the capital and profit account of each Partner (if any), and such other reports (if any), all as the General Partner may deem appropriate.\n1. The General Partner shall, at the Partnership's expense, cause the Partnership's Federal and state income and other tax returns to be prepared and filed and shall furnish copies to each Partner of any information on such returns needed for the preparation of each Partner's own tax returns.\n9. Books and Records of the Partnership: Fiscal Year. The General Partner shall keep and maintain the books and records of the Partnership at the principal place of business of the Partnership. The books of the Partnership shall be kept on the cash or accrual basis, and the Partnership shall be on the cash or accrual basis for tax purposes and the Partnership shall have a fiscal or calendar year, all as determined by the General Partner. The books and records of the Partnership shall be audited at such times and by such accountants as shall be determined from time to time by the General Partner. The funds of the Partnership shall be deposited in such bank accounts or invested in such interest-bearing or non-interest-bearing investments, as shall be determined by the General Partner.\n10. Transfer of Partnership Interest.\nA. No Partner may sell, assign, transfer, encumber or hypothecate the whole or any part of its Partnership interest (including, but not limited to, its interest in the capital or profits of the Partnership) without prior written consent of all of the other Partners. The assignee of all or any portion of a Partner's interest so assigned shall be admitted to the Partnership as a substituted Partner only upon the consent of all of the Partners.\nB. Any party or person admitted to the Partnership as a substituted Partner shall be subject to and bound by all of the provisions of this Agreement as if originally a party to this Agreement and, as a condition to such admission, shall be required to execute a copy of this Agreement as amended or supplemented to the date of such admission.\nC. A Partner shall have no liability hereunder (including, but not limited to, any liability as a surety but excluding liability for the repayment of any outstanding principal and interest on loans made by the Partnership to such Partner) for any obligations accruing under or in connection with the Partnership and relating to events occurring after such Partner shall have sold, assigned or transferred its entire Partnership interest.\n11. Dissolution of the Partnership.\nA. No act, thing, occurrence, event or circumstance shall cause or result in the dissolution of the Partnership, except the matters specified in subsection B below. Without limitation on the other provisions hereof, the admission of a new Partner shall not work a dissolution of the Partnership. Except as otherwise provided in this Agreement, each Partner agrees that, without the consent of the other Partner, a Partner may not withdraw from or cause a voluntary dissolution of the Partnership.\nB. The happening of any one of the following events shall work a dissolution of the Partnership:\n(I) The death, bankruptcy, resignation, retirement, legal incapacity, dissolution, termination or withdrawal of the last remaining General Partner;\n(2) The sale or other disposition of all of the Partnership's assets (including purchase money security interest), all liabilities and obligations of the Partnership have been paid and satisfied and the purposes of the Partnership have been completed; reduction to cash or cash equivalents of all of the assets of the Partnership;\n(3) The unanimous agreement, in writing, of all of the Partners to dissolve the Partnership;\n(4) The termination of the term of the Partnership pursuant to Section 5 of this Agreement; or\n(5) The happening of any other event causing a dissolution of the Partnership under the Act (other than an event of withdrawal of the General Partner as set forth in Section 17-402(5) of the Act or any similar or successor provision enacted in lieu thereof ).\nC. In the event of the dissolution of the Partnership for any reason, the Partners shall have the option, upon the consent of all of them (other than any Partner which may have become bankrupt or incompetent, dissolved, terminated or withdrawn from the Partnership), to form a new (or reform the existing) partnership, on such terms and conditions as may be agreed upon, for the purpose of continuing the Partnership business. Unless the Partners so agree, the Partnership shall be liquidated and shall immediately commence to wind up its affairs as provided in subsection E below.\nD. Each Partner shall look solely to the assets of the Partnership for all distributions with respect to the Partnership and for the return, if any, of his capital contribution and his share of profits or losses thereof, and shall have no recourse therefore (upon dissolution or otherwise) against the General Partner or any other Partner. No Partner shall have any right to demand or receive Property other than cash at any time, including dissolution and termination of the Partnership; provided that nothing herein contained shall relieve any Partner of such Partner's obligation to pay any liability or indebtedness owing the Partnership by such Partner.\nE. Upon the occurrence of any of the events specified in subsection B above causing a dissolution of the Partnership and except as otherwise provided in this Section 11, the remaining Partner or Partners shall commence to wind up the affairs of the Partnership and to liquidate its assets (and in this connection shall have full right and unlimited discretion to determine in good faith the time, manner and terms of any sale or sales of the Partnership's Property). The Partner or Partners obligated to wind up the affairs of the Partnership as aforesaid are herein called the \"Winding-Up Party. The Partners and their legal representatives, successors and assignees shall continue to share profits and losses during the period of liquidation in the same manner and proportion as immediately before the dissolution. Following the payment of all debts and liabilities of the Partnership and all expenses of liquidation and subject to the right of the Winding-Up Party to set up such cash reserves as, and for so long as, it may deem reasonably necessary, the proceeds of the liquidation and any other funds and assets of the Partnership shall be distributed to the Partners (after deducting from the distributive share of a Partner any sum such Partner owes the Partnership) in accordance with Capital Account balances and Partnership Shares as provided in Section 7A hereof. Upon the completion of the liquidation of the Partnership and of the distribution of all Partnership assets, the Partnership shall terminate and the Winding-Up Party shall have the authority to execute any and all documents required in its judgment to effectuate the dissolution and termination of the Partnership.\n12. Personal Property.\nA. A Partner's interest in the Partnership shall be personal property for all purposes. All real and other Property owned by the Partnership shall be deemed to be owned by the Partnership as an entity (and may be held in the name of a nominee for the Partnership), and no Partner, individually, shall have any ownership of such Property. The Partners agree that the Property of the Partnership is not and will not be suitable for partition. Accordingly, each of the Partners hereby irrevocably waives any and all rights he may have to maintain any action for partition of any Property of the Partnership.\nB. Whenever, either under this Agreement or under applicable law, it is provided that there shall be voting or approval by all Partners, each Partner shall vote in Partnership matters, insofar as is necessary, according to the ratio which his capital contribution to the Partnership as set forth on Exhibit A hereto bears to the combined capital contributions of all Partners to the Partnership as set forth on Exhibit A hereto.\n13. New General Partner.\nA. All the Partners may agree in writing from time to time to admit to the Partnership one or more new General Partners. The General Partner may, on behalf of all Partners, cause Exhibit A hereto and the Partnership's Certificate of Limited Partnership to be appropriately amended and cause the same to be recorded in the event of each such appointment. No such addition or substitution of a new General Partner shall work a dissolution of the Partnership or otherwise affect the continuity of the Partnership.\nB. The death, resignation, withdrawal, bankruptcy, incompetence or legal incapacity of a General Partner shall not cause a dissolution of the Partnership (unless such General Partner is the last remaining General Partner) but the rights of such former General Partner or his personal representative, or other successor, to share in the profits or losses in the Partnership, to receive distributions from the Partnership and otherwise to receive the benefit of his interest in the Partnership shall be treated as if such former General Partner or his personal representative or other successor had received his interest in the Partnership from a Limited Partner, and, with the consent of the General Partner, such former General Partner or his personal representative or other successor shall become a Limited Partner in the Partnership being deemed to have made the same capital contribution to the Partnership as such former General Partner, and this Agreement and the Certificate of Limited Partnership shall be amended to reflect the capital contribution deemed made by such person or successor as a Limited Partner, subject to the terms and conditions of this Agreement. Any such General Partner, or the estate of a deceased General Partner, shall remain liable for all debts and obligations of such General Partner prior to the date of death, withdrawal or removal.\n14. Notices: Amendment.\nA. Any notice which a Partner is required or may desire to give any other Partner shall be in writing, and may be given by personal delivery or by mailing the same by United States registered or certified mail, return receipt requested, to the Partner to whom such notice is directed at the address of such Partner as set forth on Exhibit A hereto, subject to the right of a Partner to designate a different address for itself by notice similarly given. Any notice so given by United States mail shall be deemed to have been given on the second day after the same is deposited in the United States mail as registered or certified mail, addressed as above provided, with postage thereon fully prepaid. Any such notice not given by registered or certified mail as aforesaid shall be deemed to be given upon receipt of the same by the party to whom the same is to be given.\nB. This Agreement may be amended by written agreement of amendment executed by all of the Partners, but not otherwise.\n15. Miscellaneous. This Agreement constitutes the entire agreement between the Partners concerning the subject matter hereof. This Agreement supersedes any prior agreement or understanding between the Partners regarding the subject matter hereof. This Agreement and the rights of the Partners hereunder shall be governed by and\ninterpreted in accordance with the laws of the State of Delaware. Except as herein otherwise specifically provided, this Agreement shall be binding upon and inure to the benefit of the Partners and their legal representatives, successors and assignees. Captions contained in this Agreement in no way define, limit or extend the scope or intent of this Agreement. If any provision of this Agreement, or the application of such provision to any person or circumstance, shall be held invalid, the remainder of this Agreement, or application of such provision to other persons or circumstances, shall not be affected thereby. This Agreement may be executed in several counterparts, each of which shall be deemed an original but all of which shall constitute one and the same instrument. The opinion of the independent certified public accountants retained by the Partnership from time to time shall be final and binding with respect to all computations and determinations required to be made under Section 7 hereof (including computations and determinations in connection with any distribution following or in connection with the dissolution of the Partnership). If the Partnership or any Partner obtains a judgment against any other party by reason of breach of this Agreement or failure to comply with the provisions hereof, a reasonable attorneys' fee as fixed by the court shall be included in such judgment. Any Partner shall be entitled to maintain, on its own behalf or on behalf of the Partnership, any action or proceeding against any other Partner or the Partnership (including, without limitation, any action for damages, specific performance or declaratory relief) for or by reason of breach by such party of this Agreement, notwithstanding the fact that any or all of the parties to such proceeding may then be a Partner in the Partnership, and without dissolving the Partnership as a partnership. No remedy conferred upon the Partnership or either Partner in this Agreement is intended to be exclusive of any other remedy herein or by law provided or permitted, but each shall be cumulative and shall be in addition to every other remedy given hereunder or now or hereafter existing at law or in equity or by statute (subject, however, to the limitations expressly herein set forth). No waiver by a Partner or the Partnership of any breach of this Agreement shall be deemed to be a waiver of any other breach of any kind or nature and no acceptance of payment or performance by a Partner of the Partnership after any such breach shall be deemed to be a waiver of any breach of this Agreement whether or not such Partner or the Partnership knows of such breach at the time it accepts such payment or performance. No failure or delay on the part of a Partner or the Partnership to exercise any right it may have shall prevent the exercise thereof by such Partner or the Partnership at any time such other Partner may continue to be in default hereunder, and no such failure or delay shall operate as a waiver of any breach or default.\nmjs.agreemts.carlyle. 1 4\nPower of Attorney.\nThe undersigned Partners of Carlyle-XV Associates, L.P., a limited partnership formed under the laws of the State of Delaware, hereby jointly and severally irrevocably constitute and appoint the General Partner with full power of substitution, their true and lawful attorney-in-fact, in their name, place and stead to make, execute, sign, acknowledge, record and file, on behalf of them and on behalf of the Partnership the following:\n(i) A Certificate of Limited Partnership and any other certificates or instruments which may be required to be filed by the Partnership or the Partners under the laws of the State of Delaware and any other jurisdiction whose laws may be applicable;\n(ii) Such instruments or documents as may be deemed necessary or desirable by the General Partner in connection with the termination of the Partnership business;\n(iii) Any and all amendments of the instruments described in clauses (i) and (ii) above, provided such amendments either are required by law to be filed or are consistent with the Agreement of Limited Partnership of the Partnership as it may exist from time to time, or have been authorized by the particular Partner or Partners; and\n(iv) Any amendment of this Agreement authorized to be made by the General Partner under this Agreement.\nThe foregoing grant of authority:\n(i) Is a Special Power of Attorney coupled with an interest, is irrevocable and shall survive the death or incapacity of the Partner granting the power;\n(ii) May be exercised by the General Partner or any of them on behalf of each Partner by a facsimile signature or by listing all of the Partners executing any instrument with a single signature as attorney-in-fact for all of them; and\n(iii) Shall survive the withdrawal, dissolution, legal incapacity, bankruptcy or resignation of a Partner from the Partnership or the delivery of an assignment by a Partner of the whole or any portion of his interest in the Partnership.\nIN WITNESS WHEREOF, the undersigned have executed this Agreement of Limited Partnership of Carlyle-XV Associates, L.P. as of this l9th day of April, 1993.\nGeneral Partner Limited Partner\nCarlyle Partners, Inc. Carlyle Real Estate Limited Partnership-XV a Delaware corporation an Illinois limited partnership\nBy: JMB Realty Corporation a Delaware corporation NEIL G. BLUHM Corporate General Partner ------------- Neil G. Bluhm President NEIL G. BLUHM ------------- Neil G. Bluhm President\nEXHIBIT A\nPartner Name and Address Capital Contribution\nCarlyle Partners, Inc. $ 10.00 900 North Michigan Avenue Chicago, Illinois 60611-1575\nCarlyle Real Estate Limited Partnership-XV $ 990.00 900 North Michigan Avenue Chicago, Illinois 60611-1575\n$ 1 ,000.00\nTravelers Loan No. 204366\nCASH MANAGEMENT AGREEMENT\nTHIS CASH MANAGEMENT AGREEMENT (this \"AGREEMENT\") is made as of the 22nd day of December, 1993, by and among C-C CALIFORNIA PLAZA PARTNERSHIP, a California general partnership having an office at 2121 North California Boulevard, Suite 230, Walnut Creek, California 94596 (\"BORROWER\"), THE TRAVELERS LIFE AND ANNUITY COMPANY, having an office at 2215 York Road, Suite 504, Oak Brook, Illinois 60521, Attention: Managing Director (\"LENDER\") and CYGNA DEVELOPMENT SERVICES, INC., a California corporation, having an office at 2121 North California Boulevard, Suite 230, Walnut Creek, California 94596 (\"MANAGER\").\nRECITALS:\nThis Agreement is based upon the following recitals:\n(a) Borrower is indebted to Lender for certain deed of trust obligations in the aggregate outstanding principal amount of $57,675,704.31 (the \"LOAN\"), which Loan is evidenced by the Note and secured by the Deed of Trust, which documents are described on EXHIBIT A attached hereto. The Deed of Trust grants to Lender a first priority security interest in the property commonly known as California Plaza, 2121 North California Boulevard, Walnut Creek, California (the \"PROPERTY\"). Pursuant to the Deed of Trust, among other things, Borrower assigned to Lender Borrower's interest in all leases and occupancy agreements of whatever form then or thereafter affecting all or any part of the Property and any and all guarantees, extensions and modifications thereof (the \"LEASES\") and all deposits, rents, issues, profits, revenues, royalties, benefits and income of every nature of and from the Property (the \"RENTS\"). The Note and the Deed of Trust, together with all other documents and instruments originally executed and delivered in connection with the Loan, as described more fully in EXHIBIT A attached hereto, are hereinafter called the \"ORIGINAL LOAN DOCUMENTS\".\n(b) Borrower failed to pay when due (after expiration of applicable grace periods, if any) the full installment in the amount of $525,136.08 representing principal and interest due under the Note on March 1, 1993.\n(c) Borrower has proposed that such default and certain other subsequent defaults be resolved through a modification of the Loan pursuant to which payment of a portion of the interest due would be deferred and the maturity date extended.\n(d) Lender is willing to enter into such a modification only if, among other things, Borrower executes and delivers to Lender (i) this Cash Management Agreement and (ii) the Modification Agreement and certain other documents amending and restating the Original Loan Documents (the \"MODIFICATION DOCUMENTS\"), which documents are described more fully in EXHIBIT B attached hereto (the Original Loan Documents, as so amended and restated by the Modification Documents, are hereinafter collectively referred to as the \"LOAN DOCUMENTS\").\n(e) Borrower and Manager have entered into a certain Management and Leasing Agreement dated as of June 30, 1986, as amended by agreements dated as of July 30, 1986, November 26, 1991 and December 21, 1993 (as so amended, the \"MANAGEMENT AGREEMENT\") pursuant to which Manager is managing the operation and leasing of the Property.\nNOW, THEREFORE, in consideration of the above recitals and for other good and valuable consideration, the receipt and adequacy of which are hereby mutually acknowledged, the parties hereto do hereby agree as follows:\n1. Affirmation of Recitals. The recitals set forth above are true and correct and are incorporated herein by this reference.\n2. Cash Collateral. (a) Borrower hereby affirms that all Rents and the other payments, if any, assigned to Lender under the Loan Documents (collectively, the \"ASSIGNED PAYMENTS\"), all deposits to the Cash Collateral Disbursement Account, the Reserve Account, the Security Deposits Account (as such terms are hereinafter defined) and all proceeds of such accounts and interest on the proceeds of such accounts (hereinafter collectively referred to as the \"CASH COLLATERAL\") are subject to the existing first priority lien and security interest of Lender as created by the Original Loan Documents and continued by the Loan Documents. In addition to, and without limitation of, any such continuing security interest, Borrower hereby affirms Lender's security interest in and to all Cash Collateral as security for the obligations to Lender under the Loan Documents and Borrower acknowledges and agrees that Lender has an absolute, present, possessory and \"choate\" perfected security interest in and to the Rents and the other Assigned Payments. On demand, from time to time, Borrower agrees to execute and deliver to Lender and hereby authorizes Lender to execute in the name of Borrower to the extent Lender may lawfully do so, financing statements, chattel mortgages or comparable security instruments as may reasonably be requested or required by Lender to perfect or continue the satisfaction of its security interest in the Cash Collateral Disbursement Account, the Reserve Account, the Security Deposits Account and all other accounts provided for herein.\n(b) The $4,271,000.00 of cash flow from the Property for the calendar years 1992 and 1993 currently held by Travelers shall be applied as follows: (i) $30,000 shall be transferred to the Cash Collateral Disbursement Account in order to establish a minimum account balance to be used by Borrower and Manager from time to time as necessary to fund short-term shortfalls of Assigned Payments to pay Operating Expenses without resorting to the formal procedure set forth in subparagraph 3(c) hereof for larger and longer-term shortfalls, and to be replenished by deposit of the Assigned Payments collected during the next subsequent calendar month in accordance with subparagraph 3(d) hereof (such minimum account balance, the \"WORKING CAPITAL BALANCE\"), (ii) $3,845,046.95 shall be paid to Lender as interest payable under the Note (as modified and amended by the Modification Agreement) on the first day of each month commencing March 1, 1993 through December 1, 1993, (iii) $149,753.79 shall be transferred to the real estate tax escrow described in subparagraph 3(d)(i) of this Agreement (iv) $78,665.00 shall be transferred to the insurance escrow described in subparagraph 3(d)(ii) of this Agreement and (v) the remaining $167,534.26 shall be placed into the Reserve Account.\n3. Application of Assigned Payments. (a) From and after the date hereof, Manager shall collect all Rents and the other Assigned Payments as agent of and in trust for Lender, and upon collection, will deposit all Rents and other Assigned Payments into Account No. 0585-107212 with Wells Fargo Bank (the \"CASH COLLATERAL DISBURSEMENT ACCOUNT\"), which Cash Collateral Disbursement Account has been established in a depositary institution to be approved by, and in the name of Manager as trustee for the benefit of Lender and will be held by Manager in such institution as agent of and in trust for Lender. Borrower and Manager shall take all reasonably necessary actions and shall otherwise reasonably cooperate to ensure that all the Assigned Payments are promptly deposited in the Cash Collateral Disbursement Account, including without limitation immediately depositing any such amounts inadvertently held by Borrower or Manager and not deposited in the Cash Collateral Disbursement Account as provided in this paragraph. Lender shall have the absolute and unconditional right, at any time (and regardless of whether a default has occurred under this Agreement or the Loan Documents), to modify the arrangements for the collection and application of Cash Collateral under this Agreement by giving written notice to the tenants at the Property (the \"TENANTS\") in the form of EXHIBIT C attached hereto (which notices will, at Lender's request, be joined by Borrower and Manager), whereby the Tenants will be required to pay all Rents directly to an account maintained by and in the name of Lender. Upon such modification, and provided that no default beyond applicable notice and cure periods then exists by Manager under this Agreement or by Borrower under this Agreement or any of the Loan Documents, this Agreement will be modified as necessary to reflect that (i) all Rents and other Assigned Payments are to be sent directly by Tenants to such account and (ii) Lender will make available to Manager that portion of the Rents and the other Assigned Payments as provided in this Agreement, but subject to all of the limitations and restrictions set forth in this Agreement as well as all of the rights of Lender under this Agreement.\n(b) During each calendar month during the term hereof, Manager shall pay from the Cash Collateral Disbursement Account those expenses relating to the operation and maintenance of the Property (the \"OPERATING EXPENSES\") as more particularly set forth in the annual operating budget for the Property prepared by Borrower for such calendar year and approved by Lender (the \"OPERATING BUDGET\") or as otherwise approved by Lender in writing.\nThe approved form of Operating Budget for each calendar year during the term of the Loan is attached hereto as EXHIBIT D. In addition, Manager may disburse monies in the Cash Collateral Disbursement Account for emergency expenses relating to the Property required to prevent or limit damage or injury to persons or property, provided that Manager notifies both Borrower and Lender of such disbursements no later than the first business day thereafter and provides to Lender a complete accounting of such expenses within five (5) business days of such disbursements. Notwithstanding any contrary provision hereof, in no event or under any circumstance (other than as set forth in the preceding sentence) shall Manager, without having received the prior written approval of Lender, which approval will be granted or withheld promptly (but may be withheld in Lender's sole and absolute discretion), disburse monies from the Cash Collateral Disbursement Account for payment of: (i) an Operating Expense in a particular category (as such categories are set forth in the form of Attachment 1 to the Operating Budget attached hereto as Exhibit D) (A) for a given calendar month in an amount in excess of one hundred ten percent (110%) of the amount allocated for such category of Operating Expense in the Operating Budget for such calendar month plus the amount by which the aggregate amount allocated for such category of Operating Expense for all prior months of said calendar year exceeds the amount actually disbursed by Manager for each category of Operating Expense for such prior calendar months, or (B) in any particular calendar year in an amount in excess of one hundred five percent (105%) of the amount allocated for such category of Operating Expense in the Operating Budget for such calendar year (provided, however, that with respect to current utilities, real estate taxes, expenses for insurance provided on a competitively bid basis, the full amount of such Operating Expenses may be disbursed from the Cash Collateral Disbursement Account regardless of the amount allocated for such categories of Operating Expenses in the Operating Budget); and provided further, with respect to any repairs and maintenance categories that appear on the Operating Budget or any approved leasing costs, an amount up to the full amount allocated to such category on the Operating Budget (or such approved leasing costs) for the calendar year may be disbursed from the Cash Collateral Disbursement Account in any calendar month provided the aggregate amount disbursed from the Cash Collateral Disbursement Account for such category over the calendar year does not exceed one hundred five percent (105%) of the amount allocated for such category of Operating Expense in the Operating Budget for such calendar year; (ii) expenses, including those for capital expenditures, not identified in the Operating Budget; or (iii) any category of Operating Expense unless such expense is actually incurred prior to the Termination Date (as hereinafter defined). Furthermore, Manager shall in no event or under any circumstance make any further disbursements from the Cash Collateral Disbursement Account after the tenth (10th) day of any calendar month unless, on or before such date (i) Borrower has delivered to Lender the accountings and statements with respect to the Property that are required to be delivered in such month to Lender pursuant to the provisions of subparagraphs 4(a) and 4(c) of this Agreement; (ii) Manager has furnished Lender with (A) an aging report for accounts receivable and payable for the Property and (B) a certified statement in the form of EXHIBIT E attached hereto from Manager, certifying that all payroll and other taxes required by applicable law to be withheld for the preceding month with respect to the Property have been so withheld, and will be delivered in good and sufficient funds to the appropriate taxing authorities on or prior to the date established by law for such delivery; and (iii) Manager has remitted to Lender all Excess Cash Collateral for the prior month, as required by subpara- graph 3(d) of this Agreement. In addition, Lender shall have the right to request that Manager furnish Lender with evidence of payment of all or certain of the Operating Expenses for a prior calendar month or months for the Property, which evidence shall be in the form of invoices marked \"paid-in- full\" or such other evidence of payment reasonably satisfactory to Lender including, without limitation, copies of checks accompanied by the invoices paid by said checks.\n(c) In the event that the available balance in the Cash Collateral Disbursement Account (inclusive of the Working Capital Balance) is insufficient to pay a particular Operating Expense set forth in the Operating Budget (such an event, a \"SHORTFALL\"), then, in such case, Borrower may issue to Lender a written request to disburse Cash Collateral for payment of such Operating Expense from the Reserve Account (as hereinafter defined) (each such request, a \"REQUEST\"). Provided that no default shall exist and be continuing under this Agreement and provided that Borrower complies with all of the provisions of this subparagraph 3(c), within ten (10) business days from the receipt of such Request, Lender shall disburse payment of any Shortfall from the Reserve Account. The following additional conditions shall apply to any Requests made by Borrower seeking Lender's approval for the use of Cash Collateral in the Reserve Account for payment of Operating Expenses:\n(i) Each Request shall be in the form of EXHIBIT F attached hereto, shall specify the amount and payee of each item of Operating Expense and shall be accompanied by evidence reasonably satisfactory to Lender of the incurrence of such expense by Borrower;\n(ii) If the Request is to pay for Capital Expenditures, it shall be accompanied by (w) invoices or other evidence substantiating the actual incurrence of items of Capital Expenditures which are covered in the Request, (x) if required by Lender and if the Capital Expenditure involves a physical improvement to the Property, a certificate of a consultant to Lender (based upon an on-site inspection) in which such consultant shall verify that any work for which payment is sought under the Request has actually been performed, (y) evidence that all work for which payment is sought under the Request shall comply with all applicable laws, rules, restrictions, orders and regulations of governmental authorities, and that all necessary permits, certificates, licenses and other approvals relating to such work have been obtained and are in full force and effect, and (z) lien waivers (which may be conditional with respect to payments not yet received) and other documents required under applicable law or reasonably required by Lender;\n(iii) No more than one (1) Request may be made in any calendar month;\n(iv) Notwithstanding any contrary provision hereof, in no event or under any circumstance shall Lender be required to pay from the Reserve Account, (A) any item of any Request unless such expense is actually incurred by Borrower prior to the Termination Date (as hereinafter defined) and the Request for such item is received by Lender not later than thirty (30) days subsequent to the Termination Date, (B) unless otherwise included within clause (A), any item of any Request which is properly payable after the date of such Request, (C) any Request which is not accompanied by evidence satisfactory to Lender of the incurrence of such expense by Borrower and the insufficiency of funds in the Cash Collateral Disbursement Account, (D) any Request for funds in excess of available Cash Collateral in the Reserve Account or (E) any item of any Request that is over thirty (30) days past due (other than with respect to items subject to a bona fide dispute which are less than sixty (60) days past due);\n(v) Borrower and Manager shall not have defaulted (beyond the expiration of applicable grace and cure periods, if any) in any of their respective obligations under this Agreement; and\n(vi) Borrower shall not have defaulted (beyond the expiration of applicable grace and cure periods, if any) in any of its obligations under any of the Loan Documents.\nSimultaneously with the execution of this Agreement and as described in subparagraph 2(b) of this Agreement, Lender is depositing $167,534.26 of cash flow from the Property into the Reserve Account and Borrower is depositing an additional $500,000.00 into the Reserve Account, all of which monies are to be held and disbursed pursuant to the provisions of this Agreement.\n(d) On the last business day of December, 1993, and on the last business day of each calendar month thereafter, Manager shall remit to Lender from the Cash Collateral Disbursement Account an amount equal to the amount by which the Rents and other Assigned Payments deposited in the Cash Collateral Disbursement Account during the calendar month exceeds the aggregate of (x) the Operating Expenses paid from the Cash Collateral Disbursement Account in such calendar month, including any amounts represented by any checks written for Operating Expenses for such calendar month which have not yet cleared through the Cash Collateral Disbursement Account and (y) an amount, if any, necessary to restore the Working Capital Balance in the Cash Collateral Disbursement Account back to $30,000 (such excess amounts are herein referred to as \"EXCESS CASH COLLATERAL\"), which remittance will be done by wire transfer made in accordance with the instructions set forth on EXHIBIT G attached hereto or as otherwise directed by Lender. Simultaneously with the delivery of any Excess Cash Collateral to Lender as aforesaid, Manager shall furnish Lender and Borrower with a complete accounting of all Cash Collateral received by Manager and all expenditures of Cash Collateral made during such month. Excess Cash Collateral payable to Lender on the last business day of each calendar month shall be applied by Lender on or about the first business day of the following calendar month in the following order and priority:\n(i) An amount equal to one-twelfth of the amount sufficient to pay real property taxes payable for the Property, or estimated by Lender to be payable, by Borrower for the ensuing twelve (12) months shall be deposited by Lender into a real property tax escrow account maintained by Lender. The monies in the real property tax escrow account shall be held and disbursed by Lender as provided in paragraph 3 of the Deed of Trust (as modified and amended by the Modification Agreement);\n(ii) An amount equal to one-twelfth of the amount sufficient to pay all premiums and other charges for the insurance required to be maintained under the Deed of Trust (as modified and amended by the Modification Agreement), or estimated by Lender to be payable, for the ensuing twelve (12) months shall be deposited by Lender into an insurance escrow account maintained by Lender. The monies in the insurance escrow account shall be held and disbursed by Lender toward the payment of insurance premiums and charges;\n(iii) Towards the payment of interest that is due and payable under the Note (as modified and amended by the Modification Agreement);\n(iv) Lender shall deposit into an interest bearing account established by and in the name of First National Bank of Chicago (the \"ACCOUNT AGENT\"), as trustee for the benefit of Lender (the \"RESERVE ACCOUNT\") an amount that is necessary to bring (or replenish, as the case may be) the balance of the Reserve Account to $2,120,000.00;\n(v) Toward all \"Deferred Interest\" accrued under the Note (as modified and amended by the Modification Agreement); and\n(vi) Toward the repayment of the outstanding principal balance of the Note (as modified and amended by this Agreement).\n(e) Account Agent shall have sole control and responsibility for management of the Reserve Account and all monies deposited into such account. At any time and from time to time Lender may redesignate the name or title of or the manner in which the Reserve Account is held, but in each instance otherwise subject to the terms and provisions of this Agreement. The Reserve Account shall be at all times maintained with financial institutions chosen by Lender and shall bear interest initially at a rate equal to the then current yield on three-month U.S. Treasury bills less seventy (70) basis points. The monies contained in the Reserve Account may be transferred by Account Agent from time to time to any other account chosen by Lender, provided that the monies shall remain subject to the terms and provisions of this Agreement. The Reserve Account shall without further act or instrument be deemed to be assigned to Lender and shall constitute additional security for the payment of the Debt. The Reserve Account shall be administered by Account Agent, with any disbursements to Manager to be made in accordance with subparagraph 3(c) of this Agreement. Lender shall have the sole, absolute and unconditional right, at any time after the date hereof, without notice, to designate a third party attorney, accountant or property manager acceptable to Lender to administer the Reserve Account on its behalf in accordance with the provisions of this Agreement, which shall by instrument in form and substance satisfactory to Lender in all respects, be assumed by any such third party attorney, accountant or property manager. Borrower agrees that the reasonable fees of Lender (including the fee of Account Agent), and the reasonable fees of such other attorney, accountant or property manager incurred in establishing and administering the Reserve Account, which fees shall be equal to $10,000 per year in the aggregate, shall be payable on January 1 of each calendar year out of the Cash Collateral. Borrower acknowledges that any third party attorney, accountant or property manager designated subsequent to the execution hereof to administer the Reserve Account shall hold the proceeds thereof as agent of and in trust for the use and benefit of Lender and for application in accordance with the terms of this Agreement.\n(f) Lender may from time to time, at its sole option and in its sole and absolute discretion, upon the written petition of Borrower, authorize in writing the expenditure of Cash Collateral from the Cash Collateral Disbursement Account or the Reserve Account for expenses not identified in the Operating Budget or for purposes not otherwise authorized herein and Lender agrees to respond to any such request for an expenditure in a prompt fashion. Lender and Borrower acknowledge that in lieu of Borrower paying the following costs incurred in connection with the modification of the Loan out of pocket (i.e., not from the cash flow generated by the Property), Lender shall pay out of the proceeds of the Reserve Account: the reasonable attorneys' fees and disbursements of Borrower and Lender's counsel for legal services rendered in connection with the modification of the Loan, any title premium or charges incurred in connection with the issuance of endorsements to the title policies issued in connection with the Loan, any recording charges with respect to the recording of any of the Modification Documents and the reasonable fees charged by the escrow agent pursuant to the Escrow Agreement described on Exhibit B attached hereto.\n(g) Except as otherwise expressly set forth herein, Borrower and Manager acknowledge and agree that no disbursements shall be made from the Cash Collateral Disbursement Account unless such disbursements are consistent with the Operating Budget then in effect (subject to the permitted variances as set forth in subparagraph 3(b) of this Agreement) or are otherwise approved in writing by Lender. Borrower and Manager further acknowledge and covenant that all Rents and other Assigned Payments and all funds deposited in the Cash Collateral Disbursement Account shall be used solely for the payment of approved Operating Expenses and the use of such funds for any other purpose shall constitute a default under this Agreement and an event of default under the Loan Documents.\n(h) Borrower and Manager agree that should any account payable relating to the Property remain unpaid for a period in excess of sixty (60) days, such occurrence shall constitute a default under this Agreement and an event of default under the Loan Documents (other than with respect to any bona fide dispute, provided Manager has escrowed from the Cash Collateral pursuant to an arrangement satisfactory to Lender an amount sufficient to include any attorneys' fees incurred with respect to such dispute and otherwise satisfactory to Lender, in its reasonable discretion, to pay such bona fide dispute; it being agreed, however, that (i) the rights of the party seeking payment from the escrowed funds will not be affected by the occurrence of the Termination Date and (ii) upon the occurrence of the Termination Date all rights of Borrower under such escrow arrangement shall automatically and without further act or notice required, be assigned over to Lender). In no event or under any circumstances whatsoever (and notwithstanding anything to the contrary which may be contained in or implied in this Agreement to the contrary) shall Lender be required to make any advances for any expenses relating to the operation, maintenance, management or marketing of the Property. The foregoing sentence shall not constitute a waiver by Borrower or Manager of their right to use amounts deposited in the Cash Collateral Disbursement Account or to make a Request for the disbursal of monies by Lender from the Reserve Account in accordance with the terms of this Agreement.\n(i) Lender reserves the right to approve and to change the depository banks holding the Cash Collateral Disbursement Account, the Reserve Account, the Security Deposits Account or any other account maintained under this Agreement, and Borrower and Manager agree to cooperate with Lender to promptly effect any such transfer.\n(j) Manager shall submit to Borrower and Lender (i) on or before November 15, 1994 and on or before November 15 of each subsequent year, a comprehensive preliminary proposed Operating Budget (containing full and complete breakdowns of all categories of expense, as such categories are set forth in the form of Attachment 1 to the Operating Budget attached hereto as Exhibit D, including, without limitation, Capital Expenditures, as defined below and rebates to then-existing tenants) for the ensuing calendar year for Borrower's and Lender's review; and (ii) on or before December 15, 1993 and on or before December 15 of each subsequent year, Borrower shall submit the final comprehensive proposed Operating Budget (containing full and complete breakdowns of all categories of expenses, including, without limitation, Capital Expenditures, as defined below, and rebates to then-existing tenants) for the ensuing calendar year for review by Borrower and Lender. Provided Manager has delivered the preliminary and final proposed Operating Budgets on or before the dates set forth above, Lender shall notify Borrower as to whether Lender approves such final comprehensive proposed Operating Budget within thirty (30) days of receipt by Lender. Such proposed annual Operating Budget shall be in the form attached hereto as EXHIBIT D and shall include comparative figures for amounts actually spent for each expense listed therein for the calendar year in which the Operating Budget is delivered for review. In addition to the foregoing, each proposed annual Operating Budget shall specify parameters for the leasing of any space at the Property, which parameters shall include, among other things, the following information, broken down by size and\/or location of the space to be leased at the Property: lease term, gross fixed and additional rent, effective rent (net of any tenant concessions), rental or other concessions to be granted prospective tenants (including rental abatements) and a description and the cost of any improvements to be performed on behalf of prospective tenants. If a proposed Operating Budget has not been approved prior to January 1 of the calendar year covered by such Operating Budget, the most recently approved Operating Budget will remain in effect and be utilized until agreement is reached on a new budget, provided that current utilities, real estate taxes and insurance expenses (if the insurance is provided on a competitively bid basis) may be paid as Operating Expenses regardless of the budget allocations set forth on the most recently approved Operating Budget. Furthermore, no monies will be applied towards capital improvement items regardless of whether the most recently approved Operating Budget contains line items for Capital Expenditures (other than for ongoing multi-year capital repair projects or leasing costs which have received the prior approval of Lender). The term \"CAPITAL EXPENDITURES\" as used in this Agreement shall mean any and all expenditures (i) with respect to the Property which would be capitalized instead of expensed in accordance with generally accepted accounting principles consistently applied, (ii) for an addition or replacement to the Property with a useful life of more than one (1) year, (iii) for an improvement that prolongs the useful life of the Property, and (iv) for reimbursement of the costs of tenant improvements and leasing commissions pursuant to Leases which meet the leasing parameters set forth in an approved Operating Budget or otherwise have been approved in writing by Lender, and such other capital and tenant expenditures as may be approved by Lender in writing, in Lender's sole and absolute discretion.\n(k) Nothing contained in this Agreement (including, without limitation, the provisions of paragraph 3 of this Agreement regarding the application of Excess Cash Collateral) shall limit or qualify in any manner (i) the obligations of Borrower under the Loan Documents, including without limitation, the obligation of Borrower to make all principal, interest and other payments at the time and manner required under the Note (as modified and amended by the Modification Agreement), or (ii) the right of Lender to pursue all rights and remedies available under the Loan Documents, at law, equity or otherwise in the event of the occurrence of any default under the Loan Documents.\n(l) Notwithstanding anything to the contrary contained in this Agreement, in the event an insured loss occurs with respect to the Property, Lender confirms that the insurance proceeds shall be applied in the manner provided in paragraph 6 of the Deed of Trust.\n4. Reporting. (a) Borrower shall deliver to Lender or cause Manager to deliver to Lender, not later than the tenth (10th) day of each month following any month (or portion thereof) during the term hereof, (x) a detailed accounting of the cash income from the Property for the preceding calendar month and a detailed accounting of the cash expenses for the Property for the preceding calendar month, which accountings shall include, without limitation, a monthly balance sheet, a profit and loss statement (cash basis), a schedule of all accounts receivable and accounts payable (to the extent ascertainable by the date such report is required and including whether any rents or other charges are delinquent), a bank statement and bank reconciliation for the Cash Collateral Disbursement Account and such other statements and information as Lender shall reasonably request, (y) a certified current rent roll of the Property identifying therein all current Tenants (with appropriate contact persons), the spaces they use or occupy, their monthly rental and other obligations, the commencement and termination dates of all Leases in effect at the Property, and (z) a schedule of the security deposits held pursuant to such Leases and such other information as Lender shall reasonably request.\n(b) If the reports delivered under clause (x) of subparagraph 4(a) above reveal an underpayment of Excess Cash Collateral with respect to the period covered by such reports, simultaneously with the sending of such reports, the underpayment will be sent to Lender from the Cash Collateral Disbursement Account by wire transfer in accordance with the instructions set forth on EXHIBIT G attached hereto or as otherwise directed by Lender, which amount will be applied by Lender in the manner that such underpayment would have been applied had such underpayment been received with the prior monthly payment to Lender of Excess Cash Collateral. If the reports delivered under clause (x) of subparagraph 4(a) above reveal an overpayment of Excess Cash Collateral with respect to the period covered by such reports, and Lender confirms in writing such overpayment to Borrower and Manager, Manager shall be entitled to reduce the next payment of Excess Cash Collateral by an amount equal to such overpayment.\n(c) Whenever any action, suit or proceeding is commenced against the Borrower or the Property or is threatened in writing to be commenced against the Borrower or the Property, the Borrower shall (or shall cause Manager to), within five (5) business days of such commencement or receipt of such threat, as the case may be, notify Lender of such action, suit or proceeding or of such threatened action, suit or proceeding, as the case may be (which notice will include, without limitation, a description of the amount and nature of the claim), and as long as such action, suit or proceeding or such threatened action, suit or proceeding, as the case may be, is continuing, Borrower will update Lender on a monthly basis on the status of such action, suit or proceeding or of such threatened action, suit or proceeding, as the case may be.\n(d) All accounts, reports and statements delivered to Lender pursuant to subparagraphs 4(a) and (c) above shall be certified by Manager or by the Chief Financial Officer of Borrower or, if none, its managing general partner as being true, complete and correct in all material respects as of the date of such certification, and shall be accompanied by all invoices and such other documentation as Lender may reasonably request to substantiate and verify the actual incurrence of such expenses by Borrower identified therein.\n(e) Borrower and Manager agree that Lender and its agents and employees shall at all times have the right upon reasonable notice and during normal business hours to inspect, audit and make copies of the books, records, reports and financial and accounting information relating to the Property maintained by Borrower or Manager. In addition, in the event that Lender determines from any such inspection or audit that Borrower or Manager failed to pay over to Lender any net cash flow from the Property, for the period of February 1, 1993 through November 30, 1993, Borrower or Manager, as the case may be, shall reimburse Lender for such net cash flow immediately upon written notice of such failure, it being understood that Manager shall only be liable for the obligation set forth in the sentence up to the amount of such net cash flow which Manager did not pay over to Borrower or Lender. Such net cash flow shall be deposited in the Reserve Account.\n5. Waiver of Management Fees. Neither Borrower nor Manager will pay Borrower or any entity or person affiliated with Borrower (including Borrower's partners) any management fees, commissions or other compensation of any kind or nature with respect to the management, leasing, development or administration of the Property during the term of this Agreement, other than fees due to Manager under the Management Agreement; it being agreed, however, that the foregoing shall not preclude Cash Collateral being applied by Borrower or Manager toward payment of the usual and customary insurance commissions obtained by Borrower, provided that the insurance is provided on a competitively-bid basis and provided that such payments are otherwise made in accordance with the terms of this Agreement. Furthermore, neither Borrower nor Manager shall enter into any agreement amending, modifying, restating, replacing, extending, renewing or terminating the Management Agreement without the prior written consent of Lender.\n6. Termination and Default. (a) At any time upon the occurrence of any default beyond applicable grace and cure periods by Borrower or Manager under this Agreement or by Borrower under the Loan Documents, Lender may, in addition to electing to exercise any and all of its rights and remedies under the Loan Documents or at law or in equity, by written notice to Borrower and Manager, elect to terminate this Agreement, in which event (and notwith- standing anything to the contrary which may be contained or implied in this Agreement) the terms of the Deed of Trust shall govern the application of Rents and other Assigned Payments, it being expressly acknowledged that upon any such termination Lender shall have the absolute and unconditional right either to: (i) direct Manager, with respect to the Cash Collateral Disbursement Account, and\/or Account Agent, with respect to the Reserve Account, to maintain the account balances then existing in said accounts plus any new monies subsequently deposited therein and to enjoin said parties from disbursing any amounts from said accounts for any purpose whatsoever or (ii) to apply all Rents and other Assigned Payments (then held or thereafter received, but subject, with respect to security deposits, to the rights of Tenants) to the payment of principal, interest and other sums due under the Loan in such order and priority as Lender, in its sole and absolute discretion, shall elect. Termination of this Agreement shall not affect the right of Lender to collect the Rents should Lender elect to exercise its rights under the Deed of Trust. The date that Lender gives a notice to terminate this Agreement as described above is herein referred to as the \"TERMINATION DATE\". Upon the occurrence of the Termination Date, Lender expressly reserves the right (i) to enjoin the disbursement of any amounts held in the Cash Collateral Disbursement Account, Reserve Account or any other account maintained in connection with the Loan for whatever purpose, by notice to Manager, Account Agent or the holder of any other such accounts as set forth above; (ii) to notify the bank holding the Cash Collateral Disbursement Account and\/or the Reserve Account that Lender shall have the sole, exclusive and absolute authority to make disbursements or transfers from such accounts or (iii) to withdraw all monies contained in the Cash Collateral Disbursement Account, the Reserve Account and any other accounts maintained in connection with the Loan (irrespective of whether such monies constitute Excess Cash Collateral), or alternatively, with respect to the Cash Collateral Disbursement Account, to require Manager and\/or Account Agent to immediately remit to Lender on demand all sums in the Cash Collateral Disbursement Account and\/or the Reserve Account. Lender shall apply all such monies received from Manager and Account Agent under clause (iii) above against the Borrower's obligations under the Loan Documents (but subject, with respect to security deposits, to the rights of Tenants), including without limitation, the payment of principal, interest and other sums evidenced and secured by the Loan Documents (all said principal, interest and other sums being herein referred to as the \"DEBT\"), whether or not then due and payable and in such order, priority and proportions as Lender shall determine in its sole and absolute discretion; provided, however, that Lender will leave in the Cash Collateral Disbursement Account an amount sufficient to pay Operating Expenses (including any leasing commissions owing to the Manager under the terms of the Management Agreement) which have been incurred prior to the Termination Date (but not with respect to any accounts payable which are more than thirty (30) days past due, except for (i) items subject to a bona fide dispute which are less than sixty (60) days past due and (ii) items for which monies have been reserved in accordance with the provisions of subparagraph 3(h) of this Agreement), or which otherwise relate to Operating Expenses incurred no more than thirty (30) days prior to the Termination Date (but only if Lender has not made other arrangements for the payment of such Operating Expenses). In no event shall such Operating Expenses to be so paid from the Cash Collateral Disbursement Account following the Termination Date be in excess of amounts permitted to be paid by Manager under this Agreement for such Operating Expenses and in no event shall such Operating Expenses be incurred subsequent to Lender (other than as approved by Lender) having commenced a foreclosure action against the Property or having obtained the appointment of a receiver for the Property and Borrower having received notice of such commencement or such appointment or Lender (or its assignee, designee or nominee) having taken title to the Property pursuant to the terms of the Modification Agreement and Borrower having received notice of such transfer of title. In addition to the foregoing, at any time on or after the Termination Date, Lender shall have the right to terminate the Management Agreement with or without cause on fifteen (15) days' notice to Manager and Borrower.\n(b) No failure to exercise or delay by Lender in exercising any right, power or privilege under the Loan Documents, at law or in equity shall preclude any other or further exercise thereof, or the exercise of any other right, power or privilege. The rights and remedies provided in this Agreement and the Loan Documents are cumulative and not exclusive of each other or of any right or remedy provided by law or in equity. Lender expressly reserves any and all rights and remedies available to it under the Loan Documents, at law or in equity, including, without limitation, the right to accelerate the Loan and to commence an action to foreclose the Deed of Trust (judicially or by power of sale) or petition for the appointment of a receiver, irrespective of whether this Agreement is in effect or has been terminated in accordance with the provisions contained in this paragraph 6, it being expressly agreed that the termination of this Agreement shall in no event or under any circumstances be a condition precedent to the exercise by Lender of any of such rights and remedies.\n(c) Simultaneously with the execution of this Agreement, Borrower and Manager have executed and delivered to Lender undated written notices (collectively, the \"NOTICES\") instructing each Tenant and future tenant to pay Rents to Lender in the manner more particularly set forth in such Notices. Borrower acknowledges and agrees that Lender shall have the absolute and unconditional right to send the Notices to the Tenants and future tenants upon the occurrence of any event which would permit Lender to terminate this Agreement in accordance with the terms of this paragraph 6. Borrower hereby grants to Lender (and all persons designated by Lender including, without limitation, First National Bank of Chicago or any other financial institution designated by Lender) the full right, power and authority, which shall be deemed to be coupled with an interest, to endorse and deposit all checks pertaining to the Property delivered for deposit into the account described in the Notices, whether or not made payable to Borrower, Lender, Manager or otherwise, and Borrower agrees to execute all necessary or appropriate documentation confirming the authority granted hereby. Neither Borrower nor Manager shall hereafter deliver any notice or other written communication containing contrary payment instructions for the Rents or any other Assigned Payments to any Tenant or future tenant of the Property unless such notice or communication shall have been approved by Lender in writing, which approval may be withheld by Lender in its sole and absolute discretion.\n7. Security Deposits Account. As of the date hereof, Borrower has deposited $192,237.26 representing all amounts being held as security deposits under the Leases into a separate interest-bearing escrow account (which interest shall periodically be paid into the Reserve Account, unless the terms of a Lease or applicable state law require otherwise, in which event such escrow account shall retain such interest or such interest shall be paid as required by applicable law or such Lease) in Lender's exclusive possession and control (the \"SECURITY DEPOSITS ACCOUNT\") which monies represent all security deposits under existing Leases. Lender shall furnish Borrower account statements with respect to the Security Deposits Account not more than quarterly during any calendar year. In addition, Borrower has furnished Lender with a complete accounting of all security deposits required to be held by Borrower under the Leases presently in effect. Borrower or Manager, as the case may be, shall remit to Lender all future security deposits from Tenants of the Property for deposit into the Security Deposits Account. Neither Borrower nor Manager shall have any right to withdraw or otherwise use, apply or credit such funds (except as provided in the next sentence or to return same to a Tenant in accordance with the provisions of a Lease) without the prior written consent of Lender. Borrower or Manager shall notify Lender in writing in advance of the need to return a particular security deposit to a Tenant or of the right of Borrower to retain the security deposit under the terms of the applicable Lease, and if Borrower is entitled to retain a security deposit, then all such amounts shall be transferred by Lender promptly into the Cash Collateral Disbursement Account to be treated as Cash Collateral and applied in accordance with the provisions of paragraph 3 of this Agreement. Borrower hereby grants to Lender a security interest in Borrower's interest, if any, in the Security Deposits Account and this Agreement shall constitute a security agreement upon said account. On demand, Borrower agrees to execute and deliver to Lender and hereby authorizes Lender to execute in the name of Borrower to the extent Lender may lawfully do so, financing statements, chattel mortgages or comparable security instruments as may be requested or required by Lender to perfect its security interest in the Security Deposits Account and Borrower's interest in the monies held in the Security Deposits Account. The foregoing provisions shall not constitute a waiver of any claim Lender may have against Borrower or Manager, if any, by reason of any misapplication and\/or misrepresentation by Borrower, Manager or their respective agents or employees of security deposits and Borrower and Manager hereby indemnify and hold Lender harmless from and against any loss, liability, damage or expense in connection with any such misapplication and\/or misrepresentation by Borrower, Manager or their respective agents or employees.\n8. Leases. Borrower has delivered to Lender original or certified copies (as amended and modified) of (i) all Leases and (ii) all other contracts and agreements which currently affect the use, operation, maintenance or occupancy of the Property. Manager, for itself and its agents and employees, shall agree at all times to maintain, operate and endeavor to lease-up the Property in a professional and diligent manner.\n9. No Waiver. Upon the occurrence of the Termination Date and subject to the provisions of the last sentence of subparagraph 6(a) of this Agreement, Lender expressly reserves the right to withdraw and apply all monies contained in the Cash Collateral Disbursement Account, the Reserve Account and any other escrow accounts maintained by Lender in connection with the Loans (irrespective of whether such monies constitute Excess Cash Collateral) against the Debt whether or not then due and payable and in such order, priority and proportions as Lender shall determine in its sole and absolute discretion. No failure to exercise or delay by Lender in exercising any right, power or privilege under the Loan Documents, at law or in equity shall preclude any other or further exercise thereof, or the exercise of any other right, power or privilege. The rights and remedies provided in this Agreement and the Loan Documents are cumulative and not exclusive of each other or of any right or remedy provided by law or in equity. Except as otherwise expressly provided in the Loan Documents, no notice to or demand upon Borrower in any instance shall, in itself, entitle Borrower to any other or further notice or demand in similar or other circumstances or constitute a waiver of the right of Lender to any other or further action in any circumstances without notice or demand.\n10. Expenses, Attorneys' Fees. Lender is hereby authorized to reimburse itself from the Reserve Account or to direct Manager to reimburse Lender from the Cash Collateral Disbursement Account for all amounts reasonably incurred by or on behalf of Lender from and after the date hereof for attorneys' fees and all other expenses reasonably incurred by or on behalf of Lender in connection with the enforcement of this Agreement following the occurrence of a default hereunder. In the event any dispute shall arise concerning the subject matter of this Agreement and the Lender prevails in such dispute, Lender shall be entitled to recover its reasonable attorneys' fees and costs incurred in connection therewith, including without limitation, all costs of trial, appellate and bankruptcy proceedings. The rights and remedies of Lender contained in this paragraph shall be in addition to, and not in lieu of, the rights and remedies contained in the Loan Documents and as otherwise provided by law or in equity.\n11. Borrower to Encourage Payment, Collections. Borrower and Manager will use their usual and customary procedures to collect Rents up to the institution of suit, including sending delinquency notices and phone calls. At such time as Borrower or Manager would ordinarily take action to collect past-due accounts, Borrower or Manager, as the case may be, shall notify Lender that it recommends that a collection action be instituted. Lender shall then have the option, with respect to any leases covering more than 10,000 square feet of the Property, of authorizing Borrower or Manager, or both, to take such action, either on Borrower's name or its own name, as Lender deems appropriate to collect the delinquent Rents or Lender shall undertake on behalf of Borrower to take such action as Lender deems appropriate to collect the delinquent Rents; provided, however, that with respect to leases covering less than 10,000 square feet of the Property, Borrower or Manager shall take such actions to collect past due accounts as Borrower deems appropriate in its sole discretion. All reasonable attorneys' fees and costs incurred by Borrower in the collection of delinquent Rents shall be approved by Lender for payment from the Cash Collateral Disbursement Account or the Reserve Account in accordance with subparagraphs 3(a) or 3(c) hereof, respectively.\n12. Carryover of this Agreement in the Event of Bankruptcy. In the event either Borrower or any general partner of Borrower (\"GENERAL PARTNERS\") files for relief under Title 11 of the United States Code, as amended (the \"BANKRUPTCY CODE\"), or an order of relief is granted as to any of them under the Bankruptcy Code, the following provisions shall be applicable. Notwithstanding anything in this paragraph 12 to the contrary, however, neither Borrower nor any of the General Partners shall have Lender's consent to use the Cash Collateral until a Cash Collateral Order or Stipulation incorporating the following provisions has been signed by Lender and entered and approved by a bankruptcy court under Section 363 of the Bankruptcy Code. Borrower and General Partners (on behalf of themselves and each of their prospective bankruptcy estates) enter into the following provisions in consideration of the procedures provided in this Agreement and other good and valuable consideration, the receipt and sufficiency of which Borrower and General Partners acknowledge:\nThis Agreement to be a Cash Collateral Order. Borrower and General Partners agree that, in the event Borrower or any of the General Partners files a petition for relief under the Bankruptcy Code with any bankruptcy court, or is subjected to any petition under the Bankruptcy Code which results in any order of relief under the Bankruptcy Code, and the debtor in that proceeding wishes to use Cash Collateral as defined in the Bankruptcy Code and\/or this Agreement, then this Agreement shall without modification be deemed to be a stipulation between Lender and Borrower and\/or any of the General Partners, as applicable, for a Cash Collateral Order pursuant to Section 363 of the Bankruptcy Code. Borrower, General Partners (on behalf of themselves and each of their prospective bankruptcy estates) and Lender hereby agree that they shall cooperate in and shall not in any way resist having this Agreement become and be fully incorporated in, without change or modification, a Cash Collateral Order or Stipulation immediately entered, subject to court approval, by a bankruptcy court under Section 363 of the Bankruptcy Code and before any use of Cash Collateral as defined in Section 363 of the Bankruptcy Code and\/or this Agreement and that Cash Collateral shall only be used as provided in this Agreement. Such order shall permit the use of Cash Collateral only until the end of the exclusive period under Section 1121(b) of the Bankruptcy Code, and no longer, and shall incorporate all of the other terms provided by this Agreement, and specifically Sections 12(ii) through 12(vi) below; provided, however, that nothing herein shall be deemed to restrict Lender's absolute right, at any time, to seek to limit or terminate the exclusive period under Section 1121(b) of the Bankruptcy Code or any of Lender's other rights or remedies under the Loan Documents, the Bankruptcy Code or otherwise; and provided, further, that Borrower does not represent, warrant or guarantee that any creditor, committee or trustee acting in the bankruptcy case, or the bankruptcy court, sua sponte, will not object to one or more of the terms or conditions in Section 12(ii) through 12 (vi) below provided that this provision shall not be deemed an admission by Lender that any such party has any right or cause to make any such objection. Borrower and General Partners also agree and acknowledge that the Rents and the other Assigned Payments are and shall be deemed to be in any such proceeding \"Cash Collateral\" as that term is defined in Section 363 of the Bankruptcy Code.\n(i) Adequate Protection. As adequate protection for the use of Cash Collateral, Borrower and General Partners agree that Lender shall be deemed in the proceeding, to the extent it is determined that Section 552(a) of the Bankruptcy Code applies to limit Lender's interest under the Loan Documents and this Agreement, to have a continuing perfected post- bankruptcy interest and pledge in all Leases and all Rents and other Assigned Payments whether entered into or derived from the Property prior or subsequent to the later to occur of the filing of the petition or the order for relief. As further adequate protection for Borrower's use of the Rents and the other Assigned Payments, Borrower agrees to maintain at all times an adequate and appropriate amount and coverage of insurance covering its assets in amounts not less than that required under the Loan Documents, naming Lender as a loss payee as its interest may appear, provided a sufficient portion of the Rents is made available for such purpose.\n(ii) Priority Claim To The Extent Lender's Security Decreased. All Rents and the other Assigned Payments are Cash Collateral, and to the extent they are used and consumed after filing or entry of any Cash Collateral Order, Borrower and General Partners specifically agree that they are collateral for a secured claim under Section 506 of the Bankruptcy Code in the amount so used. To the extent the collateral securing Lender's claim in the bankruptcy proceeding is thereafter deemed or proves to be insufficient to pay Lender's claim in full, Lender's secured claim shall be deemed to have been inadequately protected by the provisions of the Cash Collateral Order, and it shall therefore have an administrative expense claim in the proceeding with super priority over any and all administrative expenses of the kind specified in Section 503(b) and 507(b) of the Bankruptcy Code, which super priority shall be equal to the priority provided under the provisions of Section 364(c)(1) of the Bankruptcy Code over all other costs and administrative expenses incurred in the case of the kind specified in, or ordered pursuant to, Section 105, 326, 330, 331, 503(b), 506(c), 507(a), 507(b) or 726 of the Bankruptcy Code and shall at all times be senior to the rights of Borrower, General Partners or any successor trustee in the resulting bankruptcy proceeding or any subsequent proceeding under the Bankruptcy Code.\n(iii) No Renewal of Exclusive Period, Relief from Automatic Stay. Borrower and General Partners agree that if it or any of them is a debtor in a proceeding under the Bankruptcy Code, and the bankruptcy court enters a Cash Collateral Order, then, subject to the approval of the bankruptcy court, such Cash Collateral Order shall provide that if Borrower or any of the General Partners, as the case may be, does not file a Plan within the exclusive period provided by Section 1121(b) of the Bankruptcy Code, Lender shall, without the necessity of any additional notice to the debtor or to other creditors, or any hearing or any further order of the bankruptcy court, have immediate relief from stay under Bankruptcy Code Section 362 to commence and complete foreclosure on the Property, conduct and complete sale thereunder, and either purchase itself or sell to a third party under the provisions of the Loan Documents and according to applicable non-bankruptcy laws, and to take any other action permitted under the Loan Documents and applicable non-bankruptcy law. Nothing in this subsection 12(iii) shall be deemed to in any way limit Lender's right, at any time, to limit or terminate the exclusive period under Section 1121 of the Bankruptcy Code.\n(iv) Further Relief From Automatic Stay. Borrower and General Partners specifically agree that, for valuable consideration as stated herein, subject to bankruptcy court approval, Lender shall be deemed to have the relief from the automatic stay under Section 362 of the Bankruptcy Code in order to effectuate the provisions of this Section 12. As an alternative, if Lender requests such relief, Borrower or General Partners, as the case may be, shall not object to or oppose Lender from having immediate relief, subject to bankruptcy court approval, from the automatic stay under Section 362 of the Bankruptcy Code, such relief being limited to modification of the stay (i) to implement the provisions of this Agreement permitting the use of Cash Collateral, (ii) to permit the filing of financing statements or other instruments and documents evidencing Lender's interests in the Rents, the other Assigned Payments and the Leases after the filing of the petition or order for relief, whichever is later, (iii) to permit Lender's application of the Rents and the other Assigned Payments as provided herein, and (iv) to permit the relief provided for in subsection 12(iii).\n(v) Perfection. During the pendency of the case, any of the rights granted hereunder or by the Deed of Trust shall be confirmed as security interests or liens, and shall be deemed present, \"choate\", fully perfected and presently fully enforceable without the necessity of the filing of any additional documents or commencement of proceedings otherwise required under non-bankruptcy law for the perfection or enforcement of security interests, with such perfection and enforcement being binding upon Borrower, General Partners and any subsequently appointed trustee, either in Chapter 11 or under any other Chapter of the Bankruptcy Code, and upon other creditors of Borrower or General Partners, as the case may be, who have or who may hereafter extend secured or unsecured credit to Borrower or General Partners.\n(vi) Nothing in this Section 12 shall be deemed in any way to limit or restrict any of Lender's rights to seek in the bankruptcy court any relief that Lender, in its sole discretion, may deem appropriate, in the event that a case under the Bankruptcy Code is commenced by or against Borrower or any of the General Partners, and in particular, Lender shall be free to move for an immediate vacation of the automatic stay under Section 362 of the Bankruptcy Code, to terminate the exclusive period under Section 1121 of the Bankruptcy Code, and\/or to dismiss the filed bankruptcy case.\n13. Lender Not Liable for Expenses. Nothing in this Agreement shall be intended or construed to hold Lender liable or responsible for any expense, disbursement, liability or obligation of any kind or nature whatsoever, including, but not limited to, wages, salaries, payroll taxes, withholding, benefits or other amounts payable to or on behalf of Borrower or General Partners, whether or not there is sufficient money in the Cash Collateral Disbursement Account and\/or the Reserve Account to pay such expenses or costs and whether any present or future creditor attempts to assert a claim against Lender or the Property, including, but not limited to, any attempt in any bankruptcy proceeding to assert a claim under Section 506(c) of the Bankruptcy Code, or any other provision of the Bankruptcy Code. Nothing contained in the preceding sentence shall be construed as relieving Lender of its obligations to comply with the express provisions of this Agreement. In any case commenced under any provision of the Bankruptcy Code by or against Borrower, Lender does not consent to any \"carve-out\", nor shall the Borrower nor any of the General Partners seek the imposition of any \"carve-out\" for any costs, fees or expenses of any kind or nature of the Borrower's bankruptcy estate, as against either (x) any of Borrower's past, present or future property together with any proceeds or products of the same (and whether or not any of such property together with the proceeds or products thereof is Lender's collateral) or (y) as against Lender, its collateral or its indebtedness.\n14. Management Agreement. In the event and to the extent that the terms and provisions of the Management Agreement conflict with those of this Agreement, the terms and provisions of this Agreement shall override those of the Management Agreement. Manager acknowledges and agrees that amendments and modifications of the Management Agreement will be binding on Lender only to the extent such amendments and modifications have been approved in writing by Lender. Lender may terminate the Management Agreement upon termination of this Agreement as set forth in subparagraph 6(a) hereof.\n15. No Joint Venture. This Agreement shall not constitute a joint venture or partnership agreement of any kind between the parties hereto or otherwise create the relationship of joint venturers or partners among the parties hereto. Nothing contained herein shall characterize or be deemed to characterize Lender as a \"mortgagee-in-possession\".\n16. Modifications. If any or all of the provisions of this Agreement are hereafter modified, vacated or stayed by subsequent order of any court, such stay, modification or vacation shall not affect the validity and enforceability of any contractual right, property right, lien, security interest or priority authorized hereby with respect to any of the Rents or the other Assigned Payments which are deemed by this Agreement to be Cash Collateral and which have been used pursuant to this Agreement and the Loan Documents. Notwithstanding such stay, modification or vacation, any uses of Rents or the other Assigned Payments after the effective date of such modification, stay or vacation, shall be governed in all respects by the original provisions of this Agreement, and Lender shall be entitled to all of the rights, privileges and benefits, including any interest, liens, security interests, priorities and collection rights granted herein, with respect to all Rents and other Assigned Payments which are used thereafter. Unless it explicitly consents in writing at the time of such modification, stay or vacation, Lender does not by the terms hereof consent to any modifications of this Agreement.\n17. Governing Law. This Agreement shall be construed in accordance with the laws of the State of California without regard to its conflict of laws principles.\n18. Benefit. This Agreement shall to the extent legally permissible be binding upon and shall inure to the benefit of Lender, Borrower, Manager and their respective successors and assigns, including, but not limited to, any trustee that may be appointed under the Bankruptcy Code or any state court receiver. The provisions of paragraph 12 of this Agreement shall be binding upon General Partners and their respective successors, assigns, heirs, estates and representatives. In no event or under any circumstances shall any third party be deemed a third party beneficiary of this Agreement.\n19. Consent to Agreement. Borrower and each General Partner acknowledges for itself that it has thoroughly read and reviewed the terms and provisions of this Agreement and is familiar with same, that the terms and provisions contained herein are clearly understood by it and have been fully and unconditionally consented to by it and that Borrower and each General Partner has had full benefit and advice of counsel of its own selection, or the opportunity to obtain the benefit and advice of counsel of its own selection, in regard to understanding the terms, meaning and effect of this Agreement, and that this Agreement has been entered into by Borrower and each General Partner freely, voluntarily, with full knowledge and without duress, and that in executing this Agreement, Borrower and each General Partner are relying on no other representations, either written or oral, express or implied, made by Lender, or by any other party hereto, and that the consideration received by Borrower and each General Partner hereunder has been actual and adequate.\n20. Miscellaneous. This Agreement is made for the sole protection of Lender, Borrower, Manager and their respective successors and assigns. No other person shall have any right whatsoever hereunder. Any notice, demand or other communication which any party hereto may desire or may be required to give to any other party hereto shall be in writing, and shall be deemed given (a) if and when personally delivered, (b) upon receipt if sent by a nationally recognized overnight courier addressed to a party at its address set forth below, or (c) on the third (3rd) business day after being deposited in United States registered or certified mail, postage prepaid, addressed to a party at its address set forth below, or to such other address as the party to receive such notice may have designated to all other parties by notice in writing in accordance herewith:\nIf to Lender: The Travelers Life and Annuity Company 2215 York Road Suite 504 Oak Brook, Illinois 60521 Attention: Managing Director General Counsel\nWith copies to:\nThe Travelers Insurance Company One Tower Square Hartford, Connecticut 06183 Attention: Travelers Realty Investment Company\nand\nBattle Fowler 280 Park Avenue New York, New York 10017 Attention: Lawrence Mittman, Esq. Dean A. Stiffle, Esq.\nIf to Borrower:\nC-C California Plaza Partnership c\/o Carlyle Real Estate Limited Partnership-XV c\/o JMB Realty Corporation 900 North Michigan Avenue Chicago, Illinois 60611-1575 Attention: Robert J. Chapman\nWith copies to:\nPircher, Nichols & Meeks 1999 Avenue of the Stars Los Angeles, California 90067-6077 Attention: Real Estate Notices (P.G.N.)\nCygna Limited One c\/o Cygna Development Corporation 2121 North California Boulevard - Suite 230 Walnut Creek, California 94596 Attention: Ben Kacyra\nand\nGreene, Radovsky, Maloney & Share Spear Street Tower - Suite 4200 1 Market Plaza San Francisco, California 94105 Attention: Russell Pollock, Esq.\nIf to Manager:\nCygna Development Services, Inc. 2121 North California Boulevard Suite 230 Walnut Creek, California 94596\nWith copies to:\nGreene, Radovsky, Maloney & Share Spear Street Tower - Suite 4200 1 Market Plaza San Francisco, California 94105 Attention: Russell Pollock, Esq.\nEach party entitled to receive notice under this Agreement may designate a change of address by notice given to the other parties at least ten (10) days prior to the date such change of address is to become effective. Time shall be of the strictest essence in the performance of each and every one of the provisions hereof. If any of the provisions of this Agreement is held to be invalid or unenforceable, the remaining provisions shall remain in effect without impairment. This Agreement may not be modified, amended or terminated except by an agreement in writing executed by all of the parties hereto.\n21. Counterparts. It is understood and agreed that this Agreement may be executed in telecopied or original counterparts, each of which shall, for all purposes, be deemed an original and all of such counterparts, taken together, shall constitute one and the same Agreement, even though all of the parties hereto may not have executed the same counterpart of this Agreement.\n22. Recourse Obligations. Borrower and its general partner, Carlyle Real Estate Limited Partnership-XV, an Illinois limited partnership (\"CARLYLE\") (but none of the partners of Carlyle, including, without limitation, JMB Realty Corporation (\"JMB\"), a Delaware corporation, nor any of Carlyle's partners' respective successors and assigns), respectively, shall be liable personally and on a full recourse basis to Lender for any and all losses, costs, expenses and liabilities of any kind or nature whatsoever incurred by Lender as a result of any act of Borrower or Carlyle which knowingly or intentionally prevents or materially impedes or hinders the collection or application of the Rents and the other Assigned Payments as provided in this Agreement; provided, however, that Carlyle shall only be liable with respect to acts of Borrower directly caused by Carlyle (and not by any other person or entity, including any other partner in Borrower). Borrower and Borrower's general partner, Cygna Limited One, a California limited partnership (\"CL1\"), respectively, shall also be liable personally and on a full recourse basis to Lender for any and all such losses, costs, expenses, and liabilities incurred by Lender as a result of any act of Borrower or CL1 which knowingly or intentionally prevents or materially impedes or hinders the collection or application of the Rents and the other Assigned Payments as provided in this Agreement; provided however, that CL1 shall only be liable with respect to acts of Borrower directly caused by CL1 (and not by any other person or entity, including any other partner or Borrower). In addition, CL1 shall be liable as set forth above with respect to any acts of Manager, for which acts Manager also shall be personally liable to Lender on a full recourse basis. The provisions of the foregoing sentence shall be limited to the circumstances described in such sentence and shall not otherwise affect the exculpatory provisions of the Loan Documents as they relate to the payment of the Debt.\n23. Signatories. Each undersigned general partner signatory of Borrower represents that it is a general partner of Borrower and that it is executing this Agreement on behalf of Borrower and, with respect to paragraphs 12, 13, 18, 19 and 22 of this Agreement, also in its separate capacity as a general partner of Borrower, and that such execution has been duly authorized by all necessary partnership action.\n24. Exculpation. Notwithstanding anything in this Agreement to the contrary, but subject to the provisions of this paragraph 24, without in any manner releasing, impairing or otherwise affecting the Note, the Deed of Trust or any other instrument securing the Note or the validity thereof or hereof or the lien of the Deed of Trust, there is no personal liability of Borrower or any partner in Borrower hereunder or under any of the Loan Documents, and no monetary or deficiency judgment shall be sought or enforced against Borrower; provided, however, that a judgment may be sought against Borrower to the extent necessary to enforce the right of Lender in, to or against the Property securing the indebtedness evidenced by the Note and covered by the Deed of Trust and the other Loan Documents. Notwithstanding any of the foregoing, nothing contained in this paragraph shall be deemed to prejudice the rights of Lender: (i) to recover any fraudulently misapplied Restoration Funds, Insurance Proceeds or Condemnation Proceeds (all as defined in the Deed of Trust) as well as any expenditures, damages or costs (including without limitation reasonable attorneys' fees) incurred by Lender as a result of such fraudulent misapplication, (ii) to recover any expenditures, damages or costs (including without limitation reasonable attorneys' fees) incurred by Lender as a result of Borrower's fraud, material and intentional misrepresentation or intentional destruction of the Property or (iii) to enforce the personal recourse obligations set forth in paragraph 22 of this Agreement. All references in this paragraph to the Note, Deed of Trust and Loan Documents shall be deemed to mean the Note, Deed of Trust and Loan Documents as modified and amended by the Modification Agreement.\n25. Waiver of California Statutes. Borrower acknowledges that it is in default under the terms and conditions of the Loan Documents as of the execution hereof, that Lender presently has the right to enforce the terms of the Loan Documents, and that this Agreement is being entered into pursuant to the request of Borrower. Borrower further acknowledges that all of the terms and conditions of this Agreement have been carefully negotiated between Borrower and Lender and that Borrower has been fully represented during those negotiations by competent legal counsel of Borrower's choosing, including counsel licensed to practice in the state of California. Borrower understands that Lender is entering into this Agreement in reliance upon, and in consideration of, among other things, the following waiver by Borrower of various provisions of California law. Accordingly, Borrower hereby waives, to the fullest extent permitted by law, the protections of (i) Section 726 of the California Code of Civil Procedure (providing that a creditor has only one form of action to enforce a debt secured by real property) and (ii) Sections 580a and 580d of the California Code of Civil Procedure (providing for the limitation of deficiency judgments), but only for the purpose of allowing Lender to foreclose on any collateral expressly pledged to Lender under the Loan Documents (and, without limitation to the foregoing, no deficiency judgment following a foreclosure sale may be enforced personally against Borrower or its partners, but rather may be enforced solely against such other collateral as may be expressed pledged to Lender under the Loan Documents).\nBorrower represents and warrants to Lender that Borrower has discussed the meaning and effect of the foregoing waivers with Borrower's legal counsel and that Borrower understands fully the legal consequence of Borrower's providing such waivers to Lender. Borrower covenants to Lender not to assert any rights under any of the foregoing statutes in opposition to any action taken by Lender to enforce Lender's rights under this Agreement or any other Loan Document.\n[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK.]\nIN WITNESS WHEREOF, this Agreement has been executed by the parties hereto in manner and form sufficient to bind them, as of the day and year first set forth above.\nTHE TRAVELERS LIFE AND ANNUITY COMPANY, a Connecticut corporation\nBy: _________________________________ Name: Title:\nC-C CALIFORNIA PLAZA PARTNERSHIP a California general partnership\nBy: Carlyle Real Estate Limited Partnership-XV, an Illinois limited partnership, General Partner\nBy: JMB Realty Corporation, a Delaware corporation, General Partner\nBy: _______________________ Name: Title:\nBy: Cygna Limited One, a California limited partnership, General Partner\nBy: Cygna Development Corporation, a California corporation, General Partner\nBy: _______________________ Name: Title:\nCYGNA DEVELOPMENT SERVICES, INC., a California corporation\nBy: _________________________________ Name: Title:\nEXHIBIT A\n[ORIGINAL LOAN DOCUMENTS]\nNOTE: The term \"Note\" as used herein shall mean that certain Note Secured by Deed of Trust dated December 18, 1986 in the principal amount of $58,000,000 given by Borrower to Lender.\nDEED OF TRUST: The term \"Deed of Trust\" as used herein shall mean that certain First Deed of Trust and Security Agreement With Assignment of Rents and Leases and Fixture Filing dated as of December 18, 1986 in the principal amount of $58,000,000 given by Borrower to First American Title Insurance Company and Lender and recorded on December 18, 1986 as Document Number 86-229768 in Book 13327, Page 243, Contra Costa County Records, California.\nThe Original Loan Documents also include all filings made in accordance with the Uniform Commercial Code with respect to the documents listed on this Exhibit A as well as all other documents or instruments evidencing, securing or relating to the indebtedness of the Note.\nEXHIBIT B\n[MODIFICATION DOCUMENTS]\nMODIFICATION AGREEMENT: The term \"Modification Agreement\" as used herein shall mean that certain Agreement of Modification of Note, Deed of Trust, and other Loan Documents dated as of the date hereof between Borrower and Lender.\nThe Modification Documents also include the following additional documents:\n(i) This Agreement;\n(ii) that certain Escrow Agreement among Borrower, Lender and Chicago Title and Trust Company, as escrow agent; and\n(iii)all filings made in accordance with the Uniform Commercial Code with respect to the documents listed on this Exhibit B.\nEXHIBIT C\n[NOTICE TO TENANTS]\nTenant's Name: Tenant's Address:\nAttention: General Manager\nRe: [Lease or License] dated _______________ between (C-C California Plaza Partnership), as landlord, and __________________, as tenant, [as amended] [such lease or license, as amended,] the [\"Lease\" or \"License\"]\nGentlemen:\nThis Letter shall confirm to you that notwithstanding any previous communications received by you from either or both of the undersigned and notwithstanding anything to the contrary contained in the Lease [or License], you are hereby directed by the undersigned to make your check payable to ___________________ _____ and to send all payments of rents, additional rents and all other payments due or to become due under the Lease [or License] as follows:\n__________________________ __________________________ __________________________\nEach check should include the notation: Account No. _______________.\nYou are also hereby notified that the terms of this letter are irrevocable and cannot be terminated, modified, abrogated or vitiated in any respect whatsoever except by a writing signed by _________________ ____________________________________________________.\nSincerely yours,\n_____________________________________ ________________________\nBy:________________________________ Name: Title:\nC-C CALIFORNIA PLAZA PARTNERSHIP, a California general partnership\nBy: Carlyle Real Estate Limited Partnership-XV, an Illinois limited partnership, General Partner\nBy: JMB Realty Corporation, a Delaware corporation, General Partner\nBy:___________________________ Name: Title:\nBy: Cygna Limited One, a California limited partnership, General Partner\nBy: Cygna Development Corporation, a California corporation, General Partner\nBy:___________________________ Name: Title:\nCYGNA DEVELOPMENT SERVICES, INC. a California corporation\nBy:_____________________________________ Name: Title:\nEXHIBIT D\n[OPERATING BUDGET]\nTo Be Attached EXHIBIT E\n[CERTIFICATION OF MANAGER]\nThe undersigned, _________________________, hereby certifies to you that on behalf of C-C California Plaza Partnership, a California general partnership (\"BORROWER\") he has paid all federal, state and local income taxes, FICA taxes, FUTA taxes, federal and state unemployment taxes and any and all other taxes required to be withheld by Borrower from its employee payroll to date as referenced in that certain Budget dated ______________ delivered to you for Borrower's operating period from ________________________ to ___________________________. The undersigned further certifies that he has withheld and paid over to the appropriate taxing authorities, any and all state and local sales and use taxes due on goods sold or services rendered during such operating period.\nIN WITNESS WHEREOF, the undersigned has executed and delivered this certification as of this ___ day of __________, 199_.\nBy: ___________________________\nTitle: ________________________\nWitness:\n_____________________________________\nEXHIBIT F\n[FORM OF REQUEST]\n___________________, 199_\nThe Travelers Life and Annuity Company 2215 York Road Suite 504 Oak Brook, Illinois 60521\nRe: Request No._______ for Cash Collateral in the Amount of $________________ Travelers Loan No. 204366-0\nGentlemen:\nThis request refers to that certain Cash Management Agreement (\"AGREEMENT\") dated ________________________, 1993, among The Travelers Life and Annuity Company (\"LENDER\"), C-C California Plaza Partnership (\"BORROWER\") and Cygna Development Services, Inc. (\"MANAGER\"). All capitalized terms which are not otherwise defined herein shall have the meaning given to such term in the Agreement.\nThis certifies that pursuant to paragraph 3(c) of the Agreement, Borrower is entitled to request, and hereby does request, disbursement from available funds in the Reserve Account, of the amounts listed on Schedule I hereto, each of which is required to pay ordinary, necessary and reasonable operating expenses of the Property.\nAttached are invoices and other substantiation for the amounts requested.\nThe exculpation provisions set forth in paragraph 24 of the Agreement are incorporated herein by reference as if set forth in their entirety.\nVery truly yours,\nC-C CALIFORNIA PLAZA PARTNERSHIP, a California general partnership\nBy: Carlyle Real Estate Limited Partnership-XV, an Illinois limited partnership, General Partner\nBy: JMB Realty Corporation, a Delaware corporation, General Partner\nBy: ___________________________ Name: Title:\nBy: Cygna Limited One, a California limited partnership, General Partner\nBy: Cygna Development Corporation, a California corporation, General Partner\nBy: __________________________ Name: Title: EXHIBIT G\n(Wiring Instructions)\nThe Travelers Life and Annuity Company Chase Manhattan Bank New York, New York 10005\nABA No.: 021-000-021\nAcct. No.: 910-2-524155\nAttn.: Investment Administration\nRef.: TIC Loan No. 204366-0 Travelers Loan No. 204366\nESCROW AGREEMENT\nAGREEMENT dated as of December 22, 1993 entered into among C-C CALIFORNIA PLAZA PARTNERSHIP, a California general partnership having an office at 2121 North California Boulevard, Suite 230, Walnut Creek, California 94596 (hereinafter referred to as Borrower); THE TRAVELERS LIFE AND ANNUITY COMPANY, a Connecticut corporation, having an address at 2215 York Road, Suite 504, Oak Brook, Illinois 60521 (hereinafter referred to as Lender); and CHICAGO TITLE AND TRUST COMPANY, having an office at 171 North Clark Street, Chicago, Illinois 60601 (hereinafter referred to as Escrow Agent);\nW I T N E S S E T H:\nWHEREAS, Borrower has borrowed from Lender the original principal sum of $58,000,000.00 (the \"LOAN\"), the indebtedness of which Loan is evidenced by the Note and secured by the Deed of Trust (as such terms are defined in Exhibit A attached hereto) encumbering Borrower's fee estate in the real property and improvements more particularly described in the Deed of Trust (the \"PROPERTY\");\nWHEREAS, Borrower has permitted certain defaults to occur under the Loan and as of the date hereof Lender is entitled to foreclose its interest in the Property;\nWHEREAS, Borrower has requested that for the time being Lender refrain from foreclosing its interest in the Property and has requested that Lender enter into among other agreements, that certain Agreement of Modification of Note, Deed and Trust and Other Loan Documents (the \"MODIFICATION AGREEMENT\") amending the Note and the Deed of Trust and extending the maturity date of the Loan;\nWHEREAS, Lender has refused to refrain from foreclosing its interest in the Property for the time being or to execute and deliver the Modification Agreement unless Borrower executes this Agreement and delivers a deed to the Property and various other documents in escrow pursuant hereto; and\nWHEREAS, in consideration of Lender's agreement to refrain from foreclosing its interest in the Property for the time being, to extend the maturity of the Loan and to execute and deliver the Modification Agreement, Borrower and Lender have executed various documents which are to be deposited into escrow and held in escrow pursuant to the provisions of this Agreement.\nNOW, THEREFORE, in consideration of ten dollars ($10) and other good and valuable consideration, the receipt of which is hereby acknowledged, Borrower, Lender and Escrow Agent hereby covenant and agree as follows:\n1. Transfer Documents. Borrower acknowledges and agrees that in order to enable Lender to avoid the time and expense of pursuing a foreclosure upon the occurrence of a default beyond applicable grace and cure periods, if any, under the Loan Documents (as defined in Exhibit A), on the date hereof, original copies of the documents and instruments described in Exhibit B attached hereto (hereinafter referred to as the Transfer Documents) executed by Borrower have been delivered to Escrow Agent.\n2. Receipt by Escrow Agent. Escrow Agent acknowledges receipt of the Transfer Documents and agrees to establish an escrow (hereinafter referred to as the Escrow) and hold the Transfer Documents in escrow pursuant to the provisions of this Agreement.\n3. Breaking of Escrow. Upon the receipt by Escrow Agent of a certification in the form of Exhibit C attached hereto (the \"TRANSFER DIRECTION NOTICE\"), Escrow Agent shall immediately complete, by dating and filling in all blanks as appropriate, and deliver to Lender or Lender's nominee, designee or assignee the Transfer Documents, it being understood that the Property may be transferred to Lender, its nominee, designee or assignee, as directed by Lender. Borrower hereby authorizes and empowers Lender as attorney-in-fact of Borrower, to complete the Transfer Documents as described above and to execute any such further documentation as is reasonably necessary to effectuate any such transfer; provided, however, that Lender shall not execute pursuant to said power of attorney any further documentation that would create any recourse liability on behalf of Borrower or any of its partners. The power of attorney granted to Lender pursuant to this paragraph shall be deemed coupled with an interest and shall be irrevocable. Notwithstanding anything to the contrary contained in this Agreement, it is expressly understood that (i) Borrower shall not be responsible for the payment of any deed tax, sales tax or similar tax imposed as a result of the execution, delivery and recordation of the Transfer Documents, (ii) Borrower shall not be responsible for the payment of any title premiums or other title charges with respect to the issuance of the owner's title policy insuring the Transfer Documents and (iii) all documents and instruments required to be delivered by Borrower or actions required to be taken by Borrower pursuant to this Agreement shall be without recourse, cost or liability of any sort whatsoever to Borrower or any of its direct or indirect present or future partners.\n4. Transfer Absolute. Borrower acknowledges and agrees that at the time the Transfer Documents and all additional documents and actions contemplated by this Agreement are properly delivered to Lender pursuant to the provisions hereof (a) they are intended to effect a present and absolute conveyance and unconditional transfer of the Property, the Account Proceeds, the leases affecting the Property and all income and revenue therefrom, furniture, fixtures and equipment and all licenses, rights and privileges associated therewith, to the extent assignable, and are not given as security, (b) Borrower will deliver to Lender, its nominee, designee or assignee possession (subject to the rights of tenants, occupants and licensees) and enjoyment of the Property and the other property transferred pursuant to the Transfer Documents concurrently with the delivery to Lender of the Transfer Documents and Lender, its nominee, designee or assignee shall thereafter have the immediate right to occupy, operate, use, sell and transfer the same or any part thereof for its own account, at its sole and absolute discretion and (c) title to the Property shall remain subject to the Deed of Trust to the full extent of the indebtedness secured thereby, and recording of the Deed (described in Exhibit B attached hereto) shall not result in a merger of Lender's interest as beneficiary under the Deed of Trust with Lender's interest as fee title holder pursuant to the Deed.\n5. Cumulative Remedies. Nothing contained in this Agreement shall preclude Lender from pursuing foreclosure of the Deed of Trust upon an Event of Default or failure to pay the Debt upon maturity, or any other rights and remedies under the Deed of Trust or the other Loan Documents (as defined in the Deed of Trust), instead of or in addition to directing the Escrow Agent to deliver the Transfer Documents to Lender in accordance with the provisions of this Agreement and effectuating a transfer to Lender, its nominee, designee or assignee, pursuant to the Transfer Documents. Upon a default under the Loan Documents beyond applicable notice and cure periods, if any, or failure to pay the Debt in full on the maturity, Borrower shall within five (5) days of demand by Lender (unless the Debt shall have been paid in full within such five (5) day period) deliver to Lender, in a form and content acceptable to Lender, a stipulation of the facts, necessary to obtain a judgment of foreclosure uncontested by Borrower and a quitclaim deed of Borrower's redemption rights and Lender shall have the absolute right to file the same and complete a foreclosure of the Deed of Trust and a transfer of the Property pursuant to the terms thereof. Any documents or instrument required to be delivered under this paragraph shall be without recourse, cost or liability of any sort whatsoever to Borrower.\n6. Specific Performance. The provisions of this Agreement shall be enforceable by an action for specific performance.\n7. Termination of Escrow. Upon payment in full to Lender of the Debt, Lender shall by written notice to Escrow Agent terminate the Escrow and deliver the Transfer Documents to Borrower whereupon the Transfer Documents shall be deemed cancelled and null and void. Except as to deposits of funds for which Escrow Agent has received express written direction concerning investment or other handling, the parties hereto agree that the Escrow Agent shall be under no duty to invest or reinvest any deposits at any time held by it hereunder; and, further, that Escrow Agent may commingle such deposits with other deposits or with its own funds in the manner provided for the administration of funds under Section 2-8 of the Corporate Fiduciary Act (Ill. Rev. Stat. 1989, Ch 17, Par. 1552-8) and may use any part or all such funds for its own benefit without obligation of any party for interest or earnings derived thereby, if any. Provided, however, nothing herein shall diminish Escrow Agent's obligation to apply the full amount of the deposits in accordance with the terms of these escrow trust instructions. In the event the Escrow Agent is requested to invest deposits hereunder, Escrow Agent is not to be held responsible for any loss of principal or interest which may be incurred as a result of making the investments or redeeming said investment for the purposes of these escrow trust instructions.\n8. Provisions Regarding Escrow Agent. (a) Escrow Agent shall have no duties or responsibilities other than those expressly set forth herein. Escrow Agent shall have no duty to enforce any obligation of any person to make any delivery or to enforce any obligation of any person to perform any other act. Escrow Agent shall be under no liability to the other parties hereto or to anyone else by reason of any failure on the part of any party hereto or any maker, guarantor, endorser or other signatory of any document or any other person to perform such person's obligations under any such document. Except for amendments to this Agreement hereinafter referred to and except for joint instructions given to Escrow Agent by Borrower and Lender relating to the Transfer Documents, Escrow Agent shall not be obligated to recognize any agreement between any or all of the persons referred to herein.\n(b) In its capacity as Escrow Agent, Escrow Agent shall not be responsible for the genuineness or validity of any security, instrument, document or item deposited with it and shall have no responsibility other than to faithfully follow the instructions contained herein, and shall not be responsible for the validity or enforceability of any security interest of any party and it is fully protected in acting in accordance with any written instrument given to it hereunder by any of the parties hereto and reasonably believed by Escrow Agent to have been signed by the proper person. Escrow Agent may assume that any person purporting to give any notice hereunder has been duly authorized to do so.\n(c) It is understood and agreed that the duties of Escrow Agent are purely ministerial in nature. Escrow Agent shall not be liable to the other parties hereto or to anyone else for any action taken or omitted by it, or any action suffered by it to be taken or omitted, in good faith and in the exercise of reasonable judgment, except for acts of willful misconduct or gross negligence. Escrow Agent may rely conclusively and shall be protected in acting upon any order, notice, demand, certificate, opinion or advice of counsel (including counsel chosen by Escrow Agent), statement, instrument, report or other paper or document (not only as to its due execution and the validity and effectiveness of its provisions, but also as to the truth and acceptability of any information therein contained) which is reasonably believed by Escrow Agent to be genuine and to be signed or presented by the proper person or persons. Except as set forth in paragraphs 3 and 7 of this Agreement, Escrow Agent shall not be bound by any notice or demand, or any waiver, modification, termination or rescission of this Agreement or any of the terms hereof, unless evidenced by a final judgment or decree of a court of competent jurisdiction in the State of California or a Federal court in such State, or a writing delivered to Escrow Agent signed by the proper party or parties and, if the duties or rights of Escrow Agent are affected, unless it shall give its prior written consent thereto.\n(d) Escrow Agent shall have the right to assume in the absence of written notice to the contrary from the proper person or persons that a fact or an event by reason of which an action would or might be taken by Escrow Agent does not exist or has not occurred, without incurring liability to the other parties hereto or to anyone else for any action taken or omitted, or any action suffered by it to be taken or omitted, in good faith and in the exercise of reasonable judgment, in reliance upon such assumption.\n(e) Escrow Agent may resign as Escrow Agent hereunder upon giving five (5) days' prior written notice to that effect to each of the parties to this Agreement. In such event, the successor Escrow Agent shall be a reputable law firm or a nationally recognized title insurance company, selected by Lender and approved by Borrower, which approval will not be unreasonably withheld or unduly delayed. Such party that will no longer be serving as Escrow Agent shall deliver, against receipt, to such successor Escrow Agent, the Transfer Documents, if any, held by such party, to be held by such successor Escrow Agent pursuant to the terms and provisions of this Agreement. If no such successor has been designated on or before the effective date of such party's resignation, its obligations as Escrow Agent shall continue until such successor is appointed; provided, however, its sole obligation thereafter shall be to safely keep all documents and instruments then held by it and to deliver the same to the person, firm or corporation designated as its successor or until directed by a final order or judgment of a court of competent jurisdiction in the State of California or a Federal Court in such State, whereupon Escrow Agent shall make disposition thereof in accordance with such order or judgment. If no successor Escrow Agent is designated and qualified within five (5) days after Escrow Agent's resignation is effective, such party that will no longer be serving as Escrow Agent may apply to any court of competent jurisdiction for the appointment of a successor Escrow Agent.\n(f) In the event Escrow Agent is the attorney for any party hereto, Escrow Agent shall be entitled to represent such party in any matter, including any litigation in connection herewith.\n9. Miscellaneous Provisions. (a) No failure or delay on the part of a party to this Agreement in exercising any power or right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or power preclude any other or further exercise thereof or the exercise of any other right or power hereunder. No modification or waiver of any provision of this Agreement and no consent to any departure by any party to this Agreement therefrom shall be effective unless the same shall be in writing and signed by the party against whom such modification, waiver or consent is being sought to be enforced against, and then such waiver, modification or consent shall be effective only in the specific instance and for the purpose for which given. No notice to or demand on any party to this Agreement in any case shall, of itself, entitle such party to any other or further notice or demand in similar or other circumstances.\n(b) This Agreement may only be modified, amended, changed, discharged or terminated by an agreement in writing signed by all of the parties hereto.\n(c) Each of the parties to this Agreement (and the undersigned representatives of such parties, if any) has the full power, authority and legal right to execute this Agreement and to keep and observe all of the terms, covenants and provisions of this Agreement on such parties' respective parts to be performed or observed.\n(d) Any notice, request, direction or demand given or made under this Agreement shall be in writing and shall be hand delivered or sent by Federal Express or other reputable overnight national courier service, and shall be deemed given when received at the following addresses whether hand delivered or sent by Federal Express or other reputable overnight national courier service:\nIf to Borrower:\nC-C California Plaza Partnership c\/o Carlyle Real Estate Limited Partnership-XV c\/o JMB Realty Corporation 900 North Michigan Avenue Chicago, Illinois 60611-1575 Attention: Robert J. Chapman\nWith copies to:\nPircher, Nichols & Meeks 1999 Avenue of the Stars Los Angeles, California 90067-6077 Attention: Real Estate Notices (P.G.N.)\nCygna Limited One c\/o Cygna Development Corporation 2121 North California Boulevard - Suite 230 Walnut Creek, California 94596 Attention: Ben Kacyra\nand\nGreene, Radovsky, Maloney & Share Spear Street Tower Suite 4200 1 Market Plaza San Francisco, California 94105 Attention: Russell Pollock, Esq.\nIf to Lender:\nThe Travelers Life and Annuity Company 2215 York Road, Suite 504 Oak Brook, Illinois 60521 Attention: Managing Director General Counsel\nand\nThe Travelers Insurance Company One Tower Square, 13 SHS Hartford, Connecticut 06183-2020 Attention: Travelers Realty Investment Company\nWith a copy to:\nBattle Fowler 280 Park Avenue New York, New York 10017 Attention: Lawrence Mittman, Esq. Dean A. Stiffle, Esq.\nIf to Escrow Agent:\nChicago Title and Trust Company 171 North Clark Street Chicago, Illinois 60601 Attention: Ms. Nancy Castro\nEach party to this Agreement may designate a change of address by notice given to the other party fifteen (15) days prior to the date such change of address is to become effective.\n(e) If any term, covenant or provision of this Agreement shall be held to be invalid, illegal or unenforceable in any respect, this Agreement shall be construed without such term, covenant or provision.\n(f) This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns.\n(g) This Agreement sets forth the entire agreement and understanding of the parties hereto with respect to the specific matters agreed to herein and the parties hereto acknowledge that no oral or other agreements, understandings, representations or warranties exist with respect to this Agreement or with respect to the obligations of the parties hereto under this Agreement, except those specifically set forth in this Agreement.\n(h) This Agreement is, and shall be deemed to be, a contract entered into under and pursuant to the laws of the State of Illinois and shall be in all respects governed, construed, applied and enforced in accordance with the laws of the State of Illinois. No defense given or allowed by the laws of any other state or country shall be interposed in any action or proceeding hereon unless such defense is also given or allowed by the laws of the State of Illinois. (i) The parties hereto agree to submit to personal jurisdiction in the State of Illinois in any action or proceeding arising out of this Agreement.\n(j) Paragraph 21 of the Modification Agreement (\"Exculpation\") is hereby incorporated by reference with the same force and effect as if such paragraph appeared in this Agreement.\n(k) This Agreement may be executed in one or more counterparts by some or all of the parties hereto, each of which counterparts shall be an original and all of which together shall constitute a single agreement.\n10. Waiver of California Statutes. Borrower acknowledges that it is in default under the terms and conditions of the documents evidencing and securing the Loan (the \"Loan Documents\") as of the execution hereof, that Lender presently has the right to enforce the terms of the Loan Documents, and that this Agreement is being done pursuant to the request of Borrower. Borrower further acknowledges that all of the terms and conditions of this Agreement have been carefully negotiated between Borrower and Lender and that Borrower has been fully represented during those negotiations by competent legal counsel of Borrower's choosing, including counsel licensed to practice in the state of California. Borrower understands that Lender is entering into this Agreement in reliance upon, and in consideration of, among other things, the following waiver by Borrower of various provisions of California law. Accordingly, Borrower hereby waives, to the fullest extent permitted by law, the protections of (i) Section 726 of the California Code of Civil Procedure (providing that a creditor has only one form of action to enforce a debt secured by real property) and (ii) Sections 580a and 580d of the California Code of Civil Procedure (providing for the limitation of deficiency judgments), but only for the purpose of allowing Lender to foreclose on any collateral expressly pledged to Lender under the Loan Documents (and, without limitation to the foregoing, no deficiency judgment following a foreclosure sale may be enforced personally against Borrower or its partners, but rather may be enforced solely against such other collateral as may be expressed pledged to Lender under the Loan Documents).\nBorrower represents and warrants to Lender that Borrower has discussed the meaning and effect of the foregoing waivers with Borrower's legal counsel and that Borrower understands fully the legal consequence of Borrower's providing such waivers to Lender. Borrower covenants to Lender not to assert any rights under any of the foregoing statutes in opposition to any action taken by Lender to enforce Lender's rights under this Agreement or any other Loan Document.\n[THE REMAINDER OF THIS PAGE IS INTENTIONALLY BLANK.]\nIN WITNESS WHEREOF, Borrower, Lender and Escrow Agent have duly executed this Agreement the day and year first above written.\nC-C CALIFORNIA PLAZA PARTNERSHIP, a California general partnership\nBy: Carlyle Real Estate Limited Partnership-XV, an Illinois limited partnership, General Partner\nBy: JMB Realty Corporation, a Delaware corporation, General Partner\nBy: ________________________ Name: Title:\nBy: Cygna Limited One, a California limited partnership, General Partner\nBy: Cygna Development Corporation, a California corporation, General Partner\nBy: ________________________ Name: Title:\nTHE TRAVELERS LIFE AND ANNUITY COMPANY, a Connecticut corporation\nBy: ___________________________________ Name: Title:\nCHICAGO TITLE AND TRUST COMPANY, as Escrow Agent\nBy: ____________________________________ Name: Title:\nExhibit A\n(DEFINITIONS)\nDeed of Trust: Deed of Trust and Security Agreement with Assignment of Rents and Leases and Fixture Filing dated as of December 18, 1986 in the principal amount of $58,000,000 given by Borrower to First American Title Insurance Company and Lender and recorded as Document No. 86- 229768 in Book 13327, Page 243, Contra Costa County Records, California.\nNote: Note Secured by Deed of Trust dated December 18, 1986 in the principal amount of $58,000,000 given by Borrower to Lender.\nProperty: The real property and all improvements located thereon encumbered by the Deed of Trust.\nDebt: All principal, interest, contingent interest and other sums of any nature whatsoever which may or shall become due and owing under the Note or Deed of Trust, as each may have been modified by the Modification Agreement, or the other documents evidencing or securing the Loan.\nLoan Documents: The term \"Loan Documents\" shall mean all documents and instruments executed and delivered by Borrower, Carlyle Real Estate Limited Partnership-XV or Cygna Limited One in connection with the Loan, as modified and amended from time to time.\nExhibit B\n(Transfer Documents)\nTransfer Documents:\n1. Deed executed by Borrower\n2. Bill of Sale executed by Borrower\n3. Omnibus Assignment executed by Borrower\n4. FIRPTA Certificate executed by Borrower\nExhibit C\n(Letterhead of Travelers)\nTransfer Direction Notice\n__________ __, 199_\nChicago Title and Trust Company 111 West Washington Avenue Chicago, Illinois 60602 Attn: Ms. Nancy Castro\nDear Sirs:\nReference is made to that certain Escrow Agreement dated as of __________ __, 1993 entered into among C-C California Plaza Partnership, The Travelers Life and Annuity Company (\"Lender\") and First American Title Insurance Company (the \"Escrow Agreement\").\nLender hereby directs you to release from the Escrow and deliver to Lender the Transfer Documents.\nAll terms not otherwise specifically defined in this Transfer Direction Notice shall have the meaning given to such terms in the Escrow Agreement.\nThe undersigned hereby certifies to you that (i) he\/she is a representative of Lender, (ii) he\/she has the full power and authority to sign and deliver this Transfer Direction Notice, (iii) a default occurred under the Deed of Trust, the Modification Agreement or one of the other Loan Documents and continued beyond the expiration of applicable notice and cure periods, if any and (iv) Lender has the right to receive the Transfer Documents under the terms of the Escrow Agreement and the Modification Agreement.\nTHE TRAVELERS LIFE AND ANNUITY COMPANY\nBy: __________________________________ Name: Title:\nAGREEMENT OF MODIFICATION OF NOTE, DEED OF TRUST AND OTHER LOAN DOCUMENTS\nTHIS AGREEMENT made as of the 22nd day of December, 1993, between C-C CALIFORNIA PLAZA PARTNERSHIP, a California general partnership having an office at 2121 North California Boulevard, Suite 230, Walnut Creek, California 94596 (hereinafter referred to as \"BORROWER\"); and THE TRAVELERS LIFE AND ANNUITY COMPANY, a Connecticut corporation having an office at 2215 York Road, Suite 504, Oak Brook, Illinois 60521 (hereinafter referred to as \"LENDER\");\nW I T N E S S E T H :\nWHEREAS, Lender has previously made a loan of up to $58,000,000 (hereinafter referred to as the \"LOAN\") to Borrower, which Loan is (i) evidenced by the NOTE (as defined in Exhibit A attached hereto) and (ii) secured by, inter alia, the DEED OF TRUST (as defined in Exhibit A attached hereto) covering the fee interest of Borrower in the PROPERTY (as defined in Exhibit A attached hereto);\nWHEREAS, Borrower committed the Prior Defaults (as defined in Exhibit A attached hereto), and as a result thereof, Lender declared Borrower in default under the Loan;\nWHEREAS, Borrower has proposed that such Prior Defaults be addressed through a modification of the Loan pursuant to which payment of a portion of the interest due would be deferred and the maturity date extended;\nWHEREAS, Lender is willing to enter into such modification of the Loan so as to defer a portion of the interest due and to extend the maturity date only if, among other things, Borrower agrees to modify and amend the terms of the Loan Documents (as defined in Exhibit A attached hereto) executed and delivered prior to the date hereof on the terms and conditions set forth herein;\nNOW, THEREFORE, in consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Borrower hereby represents and warrants to and covenants and agrees with Lender as follows:\n1. Modification and Amendment of the Note. As of the date hereof, the Note, without further act or instrument, shall be deemed modified and amended in the following respects:\n(i) The address of Lender, as it appears in the first paragraph of the Note, is hereby deleted and the following address inserted in its place: \"2215 York Road, Suite 504, Oak Brook, Illinois 60521.\"\n(ii) From and after February 1, 1993 interest shall accrue on the outstanding principal balance of the Note at a per annum rate equal to 10.375% (hereinafter referred to as the \"CONTRACT RATE\"), which interest will be payable on March 1, 1993 and on the first day of each calendar month thereafter through and including January 1, 2000. All accrued and unpaid interest (including, without limitation, any Deferred Interest, as hereinafter defined), principal and any other amounts evidenced by the Note shall be due and payable on January 1, 2000 (subject to Lender's right to accelerate the indebtedness evidenced by the Note, as expressly set forth therein). Notwithstanding anything to the contrary contained in this subparagraph (ii), for the period commencing on February 1, 1993 and ending on the date that all Deferred Interest has been repaid in full in accordance with the provisions of subparagraph 3(d)(v) of the Cash Management Agreement (such period herein referred to as the \"DEFERRAL PERIOD\"), interest will accrue at the Contract Rate on the outstanding principal balance of the Note, and interest will be payable under the Note at a per annum rate of 8% (hereinafter referred to as the \"DEFERRAL PERIOD PAYMENT RATE\"). The difference between (i) the amount of interest accruing at the Contract Rate on the outstanding principal balance of the Note during each one month period of time during the Deferral Period and (ii) the amount of interest payable at the Deferral Period Payment Rate on the outstanding principal balance of the Note during each one month period of time during the Deferral Period (herein referred to as \"DEFERRED INTEREST\") shall accrue and be payable on January 1, 2000 (as such date of payment may be accelerated as described above) subject to the prior application of any amounts under subparagraph 3(d)(v) of the Cash Management Agreement, it being understood and agreed that no interest shall accrue on the Deferred Interest (other than interest at the Default Rate, as defined in the Note, following an acceleration of the indebtedness following a default). The outstanding principal balance of the Note as of February 1, 1993 is $57,675,704.31.\n(iii) The term \"Deed of Trust\" as used in the Note shall be deemed to refer to the Deed of Trust, as modified and amended by this Agreement.\n(iv) The term \"Loan Documents\" as used in the Note shall be deemed to refer to the Loan Documents, as modified and amended by this Agreement.\n(v) The following subparagraph 3(a)(i) is hereby added to the Note between subparagraphs 3(a) and 3(b) of the Note:\n\"(a)(i) if the Termination Date shall occur under that certain Cash Management Agreement dated as of December 22, 1993 entered into among Maker, Holder and Cygna Development Services (the \"Cash Management Agreement\").\"\n(vi) The third and fourth paragraphs (not counting the preamble paragraphs) of paragraph 4 of the Note are hereby deleted and shall be deemed of no further force and effect.\n(vii) Nothing contained in paragraph 5 of the Note shall be deemed to prejudice the rights of Lender to enforce the personal recourse obligations created under paragraph 22 of the Cash Management Agreement.\n(viii) Paragraph 6 of the Note is hereby deleted and shall be deemed of no further force and effect.\n(ix) Paragraph 12 of the Note is deleted in its entirety and the following is inserted in its place: \"12. Notices. Any notice, demand or other communication which any party hereto may desire or may be required to give to any other party hereto shall be in writing, and shall be deemed given (a) if and when personally delivered, (b) upon receipt if sent by a nationally recognized overnight courier addressed to a party at its address set forth below, or (c) on the third (3rd) business day after being deposited in United States registered or certified mail, postage prepaid, addressed to a party at its address set forth below, or to such other address as the party to receive such notice may have designated to all other parties by notice in writing in accordance herewith:\nIf to Holder: The Travelers Life and Annuity Company 2215 York Road Suite 504 Oak Brook, Illinois 60521 Attention: Managing Director General Counsel\nWith copies to:\nThe Travelers Insurance Company One Tower Square Hartford, Connecticut 06183 Attention: Travelers Realty Investment Company\nand\nBattle Fowler 280 Park Avenue New York, New York 10017 Attention: Lawrence Mittman, Esq. Dean A. Stiffle, Esq.\nIf to Maker:\nC-C California Plaza Partnership c\/o Carlyle Real Estate Limited Partnership-XV c\/o JMB Realty Corporation 900 North Michigan Avenue Chicago, Illinois 60611-1575 Attention: Robert J. Chapman\nWith copies to:\nPircher, Nichols & Meeks 1999 Avenue of the Stars Los Angeles, California 90067-6077 Attention: Real Estate Notices (P.G.N.)\nCygna Limited One c\/o Cygna Development Corporation 2121 North California Boulevard - Suite 230 Walnut Creek, California 94596 Attention: Ben Kacyra\nand\nGreene, Radovsky, Maloney & Share Spear Street Tower Suite 4200 1 Market Plaza San Francisco, California 94105 Attention: Russell Pollock, Esq.\nEach party entitled to receive notice under this Note may designate a change of address by notice given to the other parties at least ten (10) days prior to the date such change of address is to become effective.\"\n2. Modification and Amendment of the Deed of Trust. As of the date hereof, the Deed of Trust, without further act or instrument, shall be deemed modified and amended in the following respects:\n(i) The address of Lender, as it appears in the first paragraph of page one of the Deed of Trust, is hereby deleted and the following address inserted in its place: \"2215 York Road, Suite 504, Oak Brook, Illinois 60521.\"\n(ii) The term \"Note\" as used in the Deed of Trust shall be deemed to refer to the Note, as modified and amended by this Agreement.\n(iii) The following subparagraph 12(a)(i) is hereby added to paragraph 12 of the Deed of Trust between subparagraphs 12(a) and 12(b): \"(a)(i) if the Termination Date shall occur under that certain Cash Management Agreement dated as of December 22, 1993 entered into among Trustor, Beneficiary and Cygna Development Services (the \"Cash Management Agreement\").\"\n(iv) Paragraph 31 of the Deed of Trust is deleted in its entirety and the following is inserted in its place: \"31. Addresses for Notices. Any notice, demand or other communication which any party hereto may desire or may be required to give to any other party hereto shall be in writing, and shall be deemed given (a) if and when personally delivered, (b) upon receipt if sent by a nationally recognized overnight courier addressed to a party at its address set forth below, or (c) on the third (3rd) business day after being deposited in United States registered or certified mail, postage prepaid, addressed to a party at its address set forth below, or to such other address as the party to receive such notice may have designated to all other parties by notice in writing in accordance herewith: If to Beneficiary: The Travelers Life and Annuity Company 2215 York Road Suite 504 Oak Brook, Illinois 60521\nAttention: Managing Director General Counsel\nWith copies to:\nThe Travelers Insurance Company One Tower Square Hartford, Connecticut 06183\nAttention: Travelers Realty Investment Company\nand\nBattle Fowler 280 Park Avenue New York, New York 10017\nAttention: Lawrence Mittman, Esq. Dean A. Stiffle, Esq.\nIf to Trustor:\nC-C California Plaza Partnership c\/o Carlyle Real Estate Limited Partnership-XV c\/o JMB Realty Corporation 900 North Michigan Avenue Chicago, Illinois 60611-1575 Attention: Robert J. Chapman\nWith copies to:\nPircher, Nichols & Meeks 1999 Avenue of the Stars Los Angeles, California 90067-6077 Attention: Real Estate Notices (P.G.N.)\nCygna Limited One c\/o Cygna Development Corporation 2121 North California Boulevard - Suite 230 Walnut Creek, California 94596 Attention: Ben Kacyra\nand\nGreene, Radovsky, Maloney & Share Spear Street Tower Suite 4200 1 Market Plaza San Francisco, California 94105 Attention: Russell Pollock, Esq.\nEach party entitled to receive notice under this Deed of Trust may designate a change of address by notice given to the other parties at least ten (10) days prior to the date such change of address is to become effective.\"\n(v) The third and fourth paragraphs of paragraph 34 of the Deed of Trust are hereby deleted and shall be deemed of no further force and effect.\n(vi) Paragraph 35 of the Deed of Trust is hereby deleted and shall be deemed of no further force and effect.\n(vii) Nothing contained in paragraph 37 of the Deed of Trust shall be deemed to prejudice the rights of Lender to enforce the personal recourse obligations created under paragraph 22 of the Cash Management Agreement.\n3. Deed In Escrow. (a) Borrower acknowledges and agrees that in order to avoid the time and expense of pursuing a foreclosure of the Deed of Trust, in consideration of Lender's agreement to enter into this Agreement and to modify the Loan, Borrower has delivered the TRANSFER DOCUMENTS (as defined in Exhibit A attached hereto) to the ESCROW AGENT (as defined in Exhibit A attached hereto). Upon the occurrence of a default under and as defined in the Note or the Deed of Trust (both as modified and amended by this Agreement), this Agreement or any other document or instrument executed or delivered in connection with the Loan or its modification (such other documents are hereinafter collectively referred to as, the \"OTHER LOAN DOCUMENTS\") which continues beyond the expiration of applicable notice and cure periods, if any, or upon failure to pay all principal, interest and other sums due under the Note (as modified and amended by this Agreement) upon maturity, Lender or Lender's nominee, designee or assignee shall have the absolute and unconditional right, at its option, without further notice required to be given to Borrower or any other persons, parties or entities, to remove the Transfer Documents from escrow and record the deed which constitutes one of the Transfer Documents (hereinafter referred to as the \"DEED\"). Borrower shall, within three (3) business days of request by Lender or Lender's nominee, designee or assignee, sign and deliver to Lender upon demand an updated affidavit required for purposes of Section 1445 of the Internal Revenue Code, and, to the extent required by Lender's counsel to consummate the transactions described in this sentence, such other documents necessary or required to effect a full and complete transfer of Borrower's title to the Property and all income and revenue therefrom and all licenses, rights and privileges associated therewith pursuant to the provisions of this paragraph, and to enable Lender or Lender's nominee, designee or assignee to obtain an owner's policy of title insurance (or \"open\" commitment for an owner's policy of title insurance) containing an anti-merger endorsement, if available, and any such other endorsements as may be reasonably requested by Lender or Lender's nominee, designee or assignee (provided that such policy, commitment or endorsements are available in the marketplace). In no event shall any such additional or updated documents impose any personal liability upon Borrower or its direct and indirect or future constituent partners. In the event the Transfer Documents are removed from escrow in accordance with the provisions of this Agreement and the Escrow Agreement, at Lender's election, title to the Property shall remain subject to the lien of the Deed of Trust (as modified and amended by this Agreement) to the full extent of the indebtedness secured thereby, and recording of the Deed or any of the other Transfer Documents shall not result in a merger of the Lender's interest as beneficiary under the Deed of Trust (as modified and amended by this Agreement) with that of it as fee title holder.\n(b) A transfer pursuant to the terms of the preceding subparagraph (a) is referred to herein as a \"DEED IN LIEU TRANSFER\". At the option of Lender, any such Deed in Lieu Transfer may be made to Lender or its nominee, designee or assignee. Borrower further acknowledges and agrees: (i) that at the time the Transfer Documents and all additional documents and actions contemplated by this paragraph (the \"ADDITIONAL REQUIREMENTS\") are properly delivered to Lender out of escrow pursuant to the terms of this paragraph 3, they are intended to effect a present and absolute conveyance and unconditional transfer of Borrower's interest in the Property, and all Borrower's right, title, interest, income, revenues, receipts, rents, royalties and profits in connection therewith, and are not given as security; and (ii) Lender has advised Borrower and Borrower confirms that, upon proper delivery of and compliance with the Transfer Documents and the Additional Requirements in accordance with this paragraph 3, Lender does not intend to purchase or continue the business of Borrower at the Property, to be a successor to any such business or to have any liability for the debts, acts or omissions of Borrower, its employees or agents, and Lender intends only to be liable for its own debts, acts or omissions which take place from and after the date of recording of the Deed or any of the other Transfer Documents; and (iii) Borrower will deliver Borrower's right to possession and enjoyment of the Property concurrently with the recording of the Deed and Lender shall thereafter have the immediate right to operate, use, sell and\/or transfer the Property or any part thereof for its own account, at its sole and absolute discretion.\n(c) Nothing contained in this paragraph 3 shall preclude Lender from pursuing foreclosure of the Deed of Trust (as modified and amended by this Agreement) or any other rights and remedies under any of the Loan Documents (as modified and amended by this Agreement), instead of or in addition to removing the Transfer Documents from escrow and recording the Deed, and in such event, Borrower agrees to sign and deliver to Lender (at Lender's cost and expense), in a form and content reasonably acceptable to Lender, a stipulation of the facts necessary to obtain a judgment of foreclosure uncontested by Borrower and a quitclaim deed of Borrower's redemption rights and Borrower agrees not to impede, hinder or delay any foreclosure by power of sale; provided, however, that such stipulation does not impose any personal liability upon Borrower or its direct and indirect present or future constituent partners. If and when Lender completes a foreclosure (through recording of a deed) of the Deed of Trust (as modified and amended by this Agreement) or when all principal, interest and other sums due under the Note and the other Loan Documents (all as modified and amended by this Agreement) are paid in full or otherwise satisfied, Lender shall cause the Transfer Documents to be cancelled and returned to Borrower for destruction, and they shall be of no force and effect. The provisions of this paragraph 3 shall be enforceable by an action for specific performance.\n4. Cash Management Agreement. Simultaneously with the execution of this Agreement, and in consideration of Lender entering into this Agreement, Borrower, Cygna Development Services and Lender are executing and delivering a Cash Management Agreement dated as of the date hereof (the \"CASH MANAGEMENT AGREEMENT\") governing the collection and application of rents, revenues, income, profits and proceeds of the Property. In the event of any conflict or ambiguity between the terms, covenants and conditions of the Note, the Deed of Trust or any of the Other Loan Documents, all as modified and amended by this Agreement, and the terms, covenants and conditions of the Cash Management Agreement, the terms, covenants and conditions which shall enlarge the rights and remedies of Lender and the interest of Lender in the Property and the rents, revenues, income, profits and proceeds of the Property, afford Lender greater financial security in the Property and the rents, revenues, income, profits and proceeds of the Property and better assure payment of the Loan in full, shall govern and control.\n5. Representations and Warranties. Borrower represents and warrants to Lender as follows:\n(a) Borrower has all requisite partnership power and authority to execute and deliver this Agreement and the documents contemplated hereby and to carry out its obligations hereunder and the transactions contemplated hereby. This Agreement has been, and the documents contemplated hereby or otherwise executed and delivered in connection herewith, have been duly executed and delivered by Borrower and constitute the legal, valid and binding obligations enforceable against Borrower in accordance with their respective terms subject to the application of bankruptcy, insolvency, moratorium and similar laws affecting rights of creditors and principles of equity, and are not in violation of or in conflict with, nor do they constitute a default under, any term or provision of the organizational documents of Borrower or any of its general partners, or any of the terms of any agreement or instrument to which Borrower or any of its general partners is or may be bound, or any agreement or instrument affecting the Property, or to the best of Borrower's knowledge, any provision of any applicable law, ordinance, rule or regulation of any governmental authority or of any provision of any applicable order, judgment or decree of any court, arbitrator or governmental authority.\n(b) Except as set forth in Exhibit B attached hereto and made a part hereof, Borrower has no knowledge, nor has Borrower received any written notice of any action, proceeding or litigation, or proceeding by any organization, person, individual or governmental agency (including, without limitation, any employee or former employee, tenant, lessee, contractor, subcontractor, mechanic, materialmen or laborer, architect, engineer, managing agent, leasing agent, real estate broker or similar party) against or specifically relating to the Property or any portion of the Property.\n(c) To the best of Borrower's knowledge, there is no pending or threatened condemnation of the Property or of any building or other improvement located on any portion of the Property.\n(d) Lender may be required, under Section 6050J of the Internal Revenue Code, to submit to the Internal Revenue Service Borrower's taxpayer identification number in connection with the transactions contemplated hereby. Borrower hereby warrants and represents that its taxpayer identification number is 36-3450380.\n(e) To Borrower's actual knowledge, (i) no Hazardous Materials (as hereinafter defined) are currently present at the Property (or have been present at the Property at anytime in the past) other than those used, stored and contained in quantities, and in such manner, that do not violate any law or regulation relating thereto (including, without limitation, heating oil, cleaning fluids and supplies, refrigerants and paint), and (ii) the Property is in compliance with all applicable local, state or federal environmental laws, rules, ordinances and regulations (\"ENVIRONMENTAL REGULATIONS\"). As used in this Agreement, \"HAZARDOUS MATERIALS\" means any dangerous, toxic or hazardous pollutants, contaminants, chemicals, wastes, materials or substances, as defined in or governed by the provisions of any Environmental Regulations, including, without limitation, urea-formaldehyde, polychlorinated biphenyls, asbestos, asbestos-containing materials, nuclear fuel or waste and petroleum products, or any other waste, material, substance, pollutant or contaminant which would subject the owner of the Property to any damages, penalties or liabilities under any applicable Environmental Regulation. Lender acknowledges that Borrower has informed Lender that Borrower has not ordered or received any report as to the presence of Hazardous Materials at the Property or compliance with Environmental Regulations in connection with this Agreement or the modification of the Loan or the Loan Documents.\n(f) Borrower (i) has sufficient knowledge and experience in financial and business matters so as to enable it to evaluate the merits and risks of transactions like the transactions contemplated hereby, and (ii) by virtue of its sufficient knowledge and experience in financial and business matters in transactions such as the transactions contemplated hereby, Borrower is not in a significantly disparate bargaining position with respect to such transactions.\n6. Release of Lender. (a) Borrower hereby releases and forever discharges Lender, its agents, servants, employees, directors, officers, attorneys, branches, affiliates, subsidiaries, successors and assigns and all persons, firms, corporations and organizations in its behalf of and from all damage, loss, claims, demands, liabilities, obligations, actions and causes of action whatsoever which Borrower may now have or claim to have against Lender, as of the date hereof, whether presently known or unknown, and of every nature and extent whatsoever on account of or in any way touching, concerning, arising out of or founded upon the Loan Documents, as herein or concurrently herewith modified, including but not limited to, all such loss or damage of any kind heretofore sustained, or that may arise as a consequence of the dealings between the parties up to and including the date hereof with respect to the Note, the Deed of Trust, this Agreement, the Other Loan Documents or the Property. Borrower expressly waives any rights or benefits available under Section 1542 of the Civil Code of the State of California which provides as follows:\n\"A general release does not extend to claims which a creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor.\"\n(b) By entering into this Agreement, the Cash Management Agreement and by otherwise effecting the modification of the Loan described in this Agreement, Lender is not, and shall not be deemed to be, participating in, directing, or influencing in any manner whatsoever the management of Borrower's business, including, without limitation, the operation of the Property or improvements located thereon. Borrower hereby acknowledges and agrees that Lender is not participating in the management of Borrower's business.\n7. References. All references in the Loan Documents to (i) the Loan shall be deemed to refer to the Loan as amended and modified pursuant to the terms of this Agreement, and (ii) the Loan Documents shall be deemed to refer to the Loan Documents as modified and amended pursuant to the terms of this Agreement. All references in the Other Loan Documents to (i) the Note shall be deemed to refer to the Note, as amended and modified by this Agreement, (ii) the Deed of Trust shall be deemed to refer to the Deed of Trust, as amended and modified pursuant to the provisions of this Agreement, and (iii) the Other Loan Documents shall be deemed to refer to the Other Loan Documents as amended and modified pursuant to the provisions of this Agreement.\n8. Ratification. Borrower hereby acknowledges and agrees that the Loan, as amended pursuant to the terms of this Agreement, shall be secured by, among other things, the Deed of Trust, as modified and amended pursuant to the provisions of this Agreement, and shall be evidenced by the Note, as modified and amended pursuant to the provisions of this Agreement. Borrower hereby assumes and agrees to perform all of the terms, covenants and provisions contained in the Note, the Deed of Trust and the Other Loan Documents, all as modified and amended pursuant to the provisions of this Agreement. Borrower and Lender agree that all of the terms, covenants and conditions of the Note, the Deed of Trust and the Other Loan Documents, except as expressly amended and modified pursuant to the provisions of this Agreement, remain in full force and effect.\n9. No Defenses. Borrower acknowledges and agrees that there are no offsets, defenses or counterclaims of any nature whatsoever with respect to (i) the Note, the Deed of Trust or any of the Other Loan Documents or (ii) the payment of the indebtedness evidenced by the Note and secured by, among other things, the Deed of Trust (hereinafter referred to as the \"DEBT\"). Borrower acknowledges that Borrower's obligation to pay the Debt in accordance with the provisions of the Note, the Deed of Trust and the Other Loan Documents is and shall at all times continue to be absolute and unconditional in all respects, and shall at all times be valid and enforceable irrespective of any other agreements or circumstances of any nature whatsoever which might otherwise constitute a defense to (i) the Note, the Deed of Trust or the Other Loan Documents or the respective obligations of Borrower under such documents and instruments (including, without limitation, the obligation to pay the Debt) or (ii) the obligations of any other person relating to the Note, the Deed of Trust and the Other Loan Documents or the obligations of Borrower under such documents and instruments or otherwise with respect to the Loan, and Borrower absolutely, unconditionally and irrevocably waives any and all right to assert any defense, setoff, counterclaim (other than compulsory counterclaims) or crossclaim of any nature whatsoever with respect to the obligation to pay the Debt in accordance with the provisions of the Note, the Deed of Trust and the Other Loan Documents or the obligations of any other person relating to the Note, the Deed of Trust and the Other Loan Documents or the obligations of Borrower under such documents and instruments or otherwise with respect to the Loan in any action or proceeding brought by Lender to collect the Debt, or any portion thereof, or to enforce, foreclose and realize upon the liens and security interests created by the Deed of Trust or any other document or instrument securing repayment of the Debt, in whole or in part. Notwithstanding the foregoing to the contrary, nothing herein shall limit Borrower's right to bring a separate cause of action against Lender, provided that such action would not (i) seek to preclude Lender from exercising its remedies under the Note, the Deed of Trust or the Other Loan Documents or (ii) if raised, upon motion of Borrower be consolidated with any prior action brought by Lender under the Note, the Deed of Trust or the Other Loan Documents unless a failure to so consolidate said action would result in the inability to prosecute the claim upon which such action is based because such claim would be deemed to be a compulsory counterclaim. All references in this paragraph to the Note, the Deed of Trust, and the Other Loan Documents shall mean the Note, the Deed of Trust and the Other Loan Documents as amended and modified by this Agreement.\n10. Waiver by Borrower. Borrower hereby waives for itself and its partners (i) to the extent permitted by applicable law, all rights to exercise or to attempt to exercise any right of redemption with respect to the Property, or if such waivers are not permitted by applicable law, Borrower hereby agrees to reduce the time period for redemption to the shortest period of time permitted by applicable law and Borrower hereby agrees that it shall not, nor shall any person or entity acting on its behalf or upon its (or any of its partners') instigation, exercise or attempt to exercise any right of redemption with respect to the Property or bid or cause any other person or entity to bid at a foreclosure sale of the Property; and (ii) all rights to contest the validity, binding effect or enforceability of this Agreement or of the provisions hereof and Borrower hereby agrees that it shall not, nor shall any person or entity acting on its behalf or upon its (or any of its partners') instigation, directly or indirectly, contest the validity, binding effect or enforceability of this Agreement or any of the provisions hereof. The foregoing shall not be deemed a waiver by Borrower of any claim or right to take action or bring a compulsory counterclaim against Lender for any default or breach of its obligations under this Agreement or the other Loan Documents (as modified and amended by this Agreement).\n11. Lift Stay Agreement. Borrower hereby agrees that, in consideration of the recitals and mutual covenants contained herein, and for other good and valuable consideration (including the agreement of Lender to modify the Loan pursuant to this Agreement), the receipt and sufficiency of which are hereby acknowledged, in the event (a) Borrower or any of its general partners shall (i) file with any bankruptcy court of competent jurisdiction or be the subject of any petition under Title 11 of the United States Code, as amended, (ii) be the subject of any order for relief issued under such Title 11 of the United States Code, as amended, (iii) file or be the subject of any petition seeking any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under any present or future federal or state act or law relating to bankruptcy, insolvency or other relief for debtors, (iv) have sought or consented to or acquiesced in the appointment of any trustee, receiver or liquidator for itself or for any substantial portion of its assets, (v) be the subject of any order, judgment or decree entered by any court of competent jurisdiction approving a petition filed against such party for any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under any present or future federal or state act or law relating to bankruptcy, insolvency or relief for debtors, and as a result of any of the matters set forth in (a) above, (b) Lender's ability to complete a sale at foreclosure or other conveyance of the Property or to exercise or enforce any of Lender's other rights or remedies under the Note, the Deed of Trust or the Other Loan Documents (all as modified and amended pursuant to the provisions of this Agreement) at law or in equity is interfered with, impeded or otherwise impaired because of a stay of such sale or conveyance in such proceeding, then in any such event Borrower agrees that any such action described in clause (i) through (v) above shall have been filed to frustrate or delay a foreclosure proceeding, in bad faith, and in abrogation of this Agreement and should be deemed to have been so filed by the Bankruptcy Court, and Lender shall thereupon be automatically entitled to relief from any automatic stay imposed by Section 362 of Title 11 of the United States Code, as amended, or otherwise (provided that Borrower's agreement that any such action shall have been taken in bad faith shall be solely for the purpose of determining whether Lender is entitled to relief from the automatic stay and shall not be used against Borrower for any other purpose), on or against the exercise of the rights and remedies otherwise available to Lender as provided in the Loan Documents (as modified and amended pursuant to the provisions of this Agreement) or as otherwise provided by law and, in the event of the occurrence of any of the events described in clauses (i) through (v) above, neither Borrower nor any of its general partners will take any action to impede, restrain or restrict Lender's rights and remedies under this Agreement or otherwise, whether under Sections 105 or 362 of Title 11 of the United States Code or otherwise. In addition, Borrower waives the right to extend the one hundred twenty (120) day period under which the debtor has the exclusive right to file a plan of reorganization in any case involving Borrower as debtor under Title 11 of the United States Code.\n12. WAIVER OF TRIAL BY JURY. TO THE EXTENT PERMITTED BY LAW, THE PARTIES HERETO EACH IRREVOCABLY AND UNCONDITIONALLY WAIVE THE RIGHT TO TRIAL BY JURY IN ANY ACTION, SUIT OR COUNTERCLAIM ARISING IN CONNECTION WITH, OUT OF OR OTHERWISE RELATING TO THE NOTE, THE DEED OF TRUST OR ANY OF THE OTHER LOAN DOCUMENTS (ALL AS AMENDED AND MODIFIED BY THIS AGREEMENT).\n13. Further Modifications. This Agreement may not be modified, amended or terminated, except by an agreement in writing signed by the parties hereto.\n14. Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns.\n15. Counterparts. This Agreement may be executed in one or more counterparts by some or all of the parties hereto, each of which counterparts shall be an original and all of which together shall constitute a single agreement.\n16. Not a Novation. This Agreement constitutes a modification of the Loan Documents, and is not intended to and shall not terminate or extinguish any of the indebtedness or obligations under the Note, the Deed of Trust or any of the Other Loan Documents in such a manner as would constitute a novation of the original indebtedness or obligations under the Note, the Deed of Trust, or any of the Other Loan Documents, nor shall this Agreement affect or impair the priority of any liens created thereby, it being the intention of the parties hereto to carry forward all liens and security interests securing payment of the Note, which liens and interests are acknowledged by Borrower to be valid and subsisting against the Property, and any other collateral for the Loan.\n17. Severability. If any term, covenant or provision of this Agreement shall be held to be invalid, illegal or unenforceable in any respect, this Agreement shall, at Lender's option, be construed without such term, covenant or provision.\n18. Construction. This Agreement has been negotiated at arms' length between persons knowledgeable in the matters dealt with herein. Each party has been represented by experienced and knowledgeable counsel. Accordingly, any rule of law or any other statutes, legal decisions or common law principles of similar effect that would require interpretation of any ambiguities in this Agreement against the party that has drafted it are of no application and are hereby expressly waived.\n19. Further Assurances. Borrower shall execute and deliver or cause to be executed and delivered such assignments, agreements, partnership authorization and other documentation as Lender shall reasonably require to create, evidence and assure the modifications and agreements herein contained and the rights conferred upon the parties hereby.\n\\EL Waiver of Prior Defaults. In consideration of this Agreement and the modification of the Loan, Lender hereby waives its rights with respect to enforcement against Borrower of the Prior Defaults and all other defaults, known or unknown, which occurred prior to the date hereof but which are not continuing or in existence today. This waiver shall not be a waiver of any default under the Loan Documents prior to the date hereof which continues or is in existence as of the date hereof nor a waiver of any default, monetary or non-monetary, subsequent to the date hereof, to which Lender expressly reserves all rights to which it is entitled under law and under the Loan Documents, as amended and restated by this Agreement. Lender hereby waives as a default Borrower's failure to make the debt service payments under the Note that were due and payable on the first day of March, 1993 and the first day of each month thereafter through December 1, 1993 which payments are being replaced by the interest payments due under the Note as amended and modified by this Agreement.\n21. Exculpation. Without in any manner releasing, impairing or otherwise affecting the Note, the Deed of Trust or any other instrument securing the Note or the validity thereof or hereof or the lien of the Deed of Trust, there is no personal liability of Borrower or any partner in Borrower hereunder or under any of the Loan Documents, and no monetary or deficiency judgment shall be sought or enforced against Borrower; provided, however, that a judgment may be sought against Borrower to the extent necessary to enforce the right of Lender in, to or against the Property securing the indebtedness evidenced by the Note and covered by the Deed of Trust and the other Loan Documents. Notwithstanding any of the foregoing, nothing contained in this paragraph shall be deemed to prejudice the rights of Lender: (i) to recover any fraudulently misapplied Restoration Funds, Insurance Proceeds or Condemnation Proceeds (all as defined in the Deed of Trust) as well as any expenditures, damages or costs (including without limitation reasonable attorneys' fees) incurred by Lender as a result of such fraudulent misapplication, (ii) to recover any expenditures, damages or costs (including without limitation reasonable attorneys' fees) incurred by Lender as a result of Borrower's fraud, material and intentional misrepresentation or intentional destruction of the Property or (iii) to enforce the personal recourse obligations set forth in paragraph 22 of the Cash Management Agreement. All references in this paragraph to the Note, Deed of Trust and Loan Documents shall be deemed to mean the Note, Deed of Trust and Loan Documents as modified and amended by this Agreement. Notwithstanding anything in this paragraph 21 to the contrary, neither general partner of Borrower shall have any personal liability hereunder or under any of the Loan Documents with respect to a material and intentional misrepresentation by Borrower concerning the matters set forth in paragraph 5(e) hereof unless such general partner had actual knowledge of the matters constituting such misrepresentation.\n22. Leasing. Notwithstanding anything to the contrary which may be contained in the Note, the Deed of Trust or any of the Other Loan Documents (as each of the foregoing is amended and modified by this Agreement), Borrower shall not enter into any lease, or permit any party to enter into any lease on its behalf, with respect to the Property or any portion thereof without having received the prior written consent of Lender (which consent may be withheld by Lender in the exercise of its sole and absolute discretion) in the event that such lease does not comply with the leasing parameters set forth in the annual Operating Budget for the Property submitted in accordance with, and more particularly described in, subparagraph 3(j) of the Cash Management Agreement as defined in Exhibit A attached hereto. Lender shall have no obligation to consider a request to approve a lease for space at the Property unless Lender has been provided with a complete copy of the Lease, comprehensive financial information on the prospective tenant and a comprehensive summary of the costs and expenses that will be incurred by Borrower in connection with the lease.\n23. Waiver of California Statutes. Borrower acknowledges that it is in default under the terms and conditions of the Loan Documents as of the execution hereof, that Lender presently has the right to enforce the terms of the Loan Documents, and that this Agreement is being entered into pursuant to the request of Borrower. Borrower further acknowledges that all of the terms and conditions of this Agreement have been carefully negotiated between Borrower and Lender and that Borrower has been fully represented during those negotiations by competent legal counsel of Borrower's choosing, including counsel licensed to practice in the state of California. Borrower understands that Lender is entering into this Agreement in reliance upon, and in consideration of, among other things, the following waiver by Borrower of various provisions of California law. Accordingly, Borrower hereby waives, to the fullest extent permitted by law, the protections of (i) Section 726 of the California Code of Civil Procedure (providing that a creditor has only one form of action to enforce a debt secured by real property) and (ii) Sections 580a and 580d of the California Code of Civil Procedure (providing for the limitation of deficiency judgments), but only for the purpose of allowing Lender to foreclose on any collateral expressly pledged to Lender under the Loan Documents (and, without limitation to the foregoing, no deficiency judgment following a foreclosure sale may be enforced personally against Borrower or its partners, but rather may be enforced solely against such other collateral as may be expressed pledged to Lender under the Loan Documents).\nBorrower represents and warrants to Lender that Borrower has discussed the meaning and effect of the foregoing waivers with Borrower's legal counsel and that Borrower understands fully the legal consequence of Borrower's providing such waivers to Lender. Borrower covenants to Lender not to assert any rights under any of the foregoing statutes in opposition to any action taken by Lender to enforce Lender's rights under this Agreement or any other Loan Document.\n24. Assignment of Loan. Notwithstanding anything in the Loan Documents (as amended and modified by this Agreement) to the contrary, Lender shall have the absolute and unconditional right to assign, sell or otherwise transfer all or any portion of its interest in the Loan, any security given therefor, or its interest under the Loan Documents (as amended and modified by this Agreement).\n[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK.]\nIN WITNESS WHEREOF, Borrower and Lender have duly executed this Agreement as of the day and year first above written.\nC-C CALIFORNIA PLAZA PARTNERSHIP, a California general partnership\nBy: Carlyle Real Estate Limited Partnership-XV, an Illinois limited partnership, General Partner\nBy: JMB Realty Corporation, a Delaware corporation, General Partner\nBy: ____________________________ Name: Title:\nBy: Cygna Limited One, a California limited partnership, General Partner\nBy: Cygna Development Corporation, a California corporation, General Partner\nBy: ____________________________ Name: Title:\nTHE TRAVELERS LIFE AND ANNUITY COMPANY\nBy: _______________________________________ Name: Title:\nThe undersigned parties are joining this Agreement to acknowledge and confirm their agreement to paragraphs 11 and 21 of this Agreement.\nCARLYLE REAL ESTATE LIMITED PARTNERSHIP- XV, an Illinois limited partnership\nBy: JMB Realty Corporation, a Delaware corporation, General Partner\nBy: __________________________________ Name: Title:\nCYGNA LIMITED ONE, a California limited partnership\nBy: Cygna Development Corporation, a California corporation\nBy:__________________________________ Name: Title:\nState of _______________) County of ______________) ss.\nOn ________________ before me, _____________________ personally appeared ____________________ personally known to me (or proved to me on the basis of satisfactory evidence) to be the person(s) whose name(s) is\/are subscribed to the within instrument and acknowledged to me that he\/she\/they executed the same in his\/her\/their authorized capacity(ies), and that by his\/her\/their signature(s) on the instrument the person(s) or the entity upon behalf of which the person(s) acted, executed the instrument.\nWITNESS my hand and official seal.\nSignature__________________________________\n(This area for official seal.)\nState of _______________) County of ______________) ss.\nOn ________________ before me, _____________________ personally appeared ____________________ personally known to me (or proved to me on the basis of satisfactory evidence) to be the person(s) whose name(s) is\/are subscribed to the within instrument and acknowledged to me that he\/she\/they executed the same in his\/her\/their authorized capacity(ies), and that by his\/her\/their signature(s) on the instrument the person(s) or the entity upon behalf of which the person(s) acted, executed the instrument.\nWITNESS my hand and official seal.\nSignature__________________________________\n(This area for official seal.)\nState of _______________) County of ______________) ss.\nOn ________________ before me, _____________________ personally appeared ____________________ personally known to me (or proved to me on the basis of satisfactory evidence) to be the person(s) whose name(s) is\/are subscribed to the within instrument and acknowledged to me that he\/she\/they executed the same in his\/her\/their authorized capacity(ies), and that by his\/her\/their signature(s) on the instrument the person(s) or the entity upon behalf of which the person(s) acted, executed the instrument.\nWITNESS my hand and official seal.\nSignature__________________________________\n(This area for official seal.)\nState of _______________) County of ______________) ss.\nOn ________________ before me, _____________________ personally appeared ____________________ personally known to me (or proved to me on the basis of satisfactory evidence) to be the person(s) whose name(s) is\/are subscribed to the within instrument and acknowledged to me that he\/she\/they executed the same in his\/her\/their authorized capacity(ies), and that by his\/her\/their signature(s) on the instrument the person(s) or the entity upon behalf of which the person(s) acted, executed the instrument.\nWITNESS my hand and official seal.\nSignature__________________________________\n(This area for official seal.)\nState of _______________) County of ______________) ss.\nOn ________________ before me, _____________________ personally appeared ____________________ personally known to me (or proved to me on the basis of satisfactory evidence) to be the person(s) whose name(s) is\/are subscribed to the within instrument and acknowledged to me that he\/she\/they executed the same in his\/her\/their authorized capacity(ies), and that by his\/her\/their signature(s) on the instrument the person(s) or the entity upon behalf of which the person(s) acted, executed the instrument.\nWITNESS my hand and official seal.\nSignature__________________________________\n(This area for official seal.)\nEXHIBIT A\n(Certain Definitions)\nCash Management Agreement: The term \"Cash Management Agreement\" as used in this Agreement shall mean the Cash Management Agreement dated the date hereof by and among Borrower, Lender and Cygna Development Services, as manager of the Property.\nDeed of Trust: The term \"Deed of Trust\" as used in this Agreement shall mean that certain Deed of Trust and Security Agreement with Assignment of Rents and Leases and Fixture Filing dated as of December 18, 1986 in the principal amount of $58,000,000 given by Borrower to First American Title Insurance Company and Lender and recorded on December 18, 1986 as Document No. 86-229768 in Book 13327, Page 243, Contra Costa County Records, California.\nEscrow Agent: The term \"Escrow Agent\" as used in this Agreement shall mean Chicago Title and Trust Company.\nLoan Documents: The term \"Loan Documents\" as used in this Agreement shall mean the Note, the Deed of Trust and any other document or instrument executed and delivered in connection with the Loan.\nNote: The term \"Note\" as used in this Agreement shall mean that certain Note Secured by Deed of Trust dated December 18, 1986 in the principal amount of $58,000,000 given by Borrower to Lender.\nPrior Defaults: The term \"Prior Defaults\" as used in this Agreement shall mean those certain defaults committed by Borrower prior to the date hereof and declared by Lender under the Loan Documents, including, without limitation, Borrower's failure to pay when due (after expiration of applicable grace periods, if any) the full installment in the amount of $525,136.08 representing principal and interest due under the Note on March 1, 1993).\nProperty: The term \"Property\" as used in this Agreement shall mean the land and improvements known as California Plaza and located at 2121 North California Boulevard, Walnut Creek, California as more particularly described on Schedule A attached hereto.\nTransfer Documents: The term \"Transfer Documents\" as used in this Agreement shall mean that certain Escrow Agreement dated as of the date hereof by and among Borrower, Lender and Escrow Agent and the Deed, Bill of Sale, Assignment, Section 1445 (FIRPTA) Affidavit and any other document and instrument delivered into escrow pursuant thereto.\nSCHEDULE A\n(Description of Premises)\nEXHIBIT B\n(Description of Litigation)\nC-C California Plaza Associates v. Dillingham Construction N.A., Inc., Case No. C91-03449 filed in Superior Court, Contra Costa County, California.\nTravelers Loan No. 204366\nC-C CALIFORNIA PLAZA PARTNERSHIP\nand\nTHE TRAVELERS LIFE AND ANNUITY COMPANY\n_________________________________________\nAGREEMENT OF MODIFICATION OF NOTE, DEED OF TRUST AND OTHER LOAN DOCUMENTS _________________________________________\nDated: As of December 22, 1993\nLocation: 2121 North California Boulevard Walnut Creek, California\nRECORD AND RETURN TO:\nBattle Fowler 280 Park Avenue New York, New York 10017\nAttention: Steven Koch, Esq.\nPOWER OF ATTORNEY\nKNOW ALL MEN BY THESE PRESENTS, that the undersigned officers and directors of JMB Realty Corporation, the managing general partner of JMB Income Properties, Ltd. - XV, do hereby nominate, constitute and appoint GARY NICKELE, GAILEN J. HULL, DENNIS M. QUINN or any of them, attorneys and agents of the undersigned with full power of authority to sign in the name and on behalf of the undersigned officer or directors a Report on Form 10-K of said partnership for the fiscal year ended December 31, 1993, and any and all amendments thereto, hereby ratifying and confirming all that said attorneys and agents and any of them may do by virtue hereof.\nIN WITNESS WHEREOF, the undersigned have executed this Power of Attorney the 23rd day of March, 1994.\nJUDD D. MALKIN - - ------------------- Chairman and Director Judd D. Malkin\nNEIL G. BLUHM - - ------------------- President and Director Neil G. Bluhm\nH. RIGEL BARBER - - ------------------- Chief Executive Officer H. Rigel Barber\nJEFFREY R. ROSENTHAL - - ----------------------- Chief Financial Officer Jeffrey R. Rosenthal\nThe undersigned hereby acknowledge and accept such power of authority to sign, in the name and on behalf of the above named officer and directors, a Report on Form 10-K of said partnership for the fiscal year ended December 31, 1993, and any and all amendments thereto, the 23rd day of March, 1994.\nGARY NICKELE ------------ Gary Nickele\nGAILEN J. HULL --------------- Gailen J. Hull\nDENNIS M. QUINN --------------- Dennis M. Quinn\nPOWER OF ATTORNEY -----------------\nKNOW ALL MEN BY THESE PRESENTS, that the undersigned officer and directors of JMB Realty Corporation, the managing general partner of JMB Income Properties, Ltd. - XV, do hereby nominate, constitute and appoint GARY NICKELE, GAILEN J. HULL, DENNIS M. QUINN or any of them, attorneys and agents of the undersigned with full power of authority to sign in the name and on behalf of the undersigned officer or directors a Report on Form 10-K of said partnership for the fiscal year ended December 31, 1993, and any and all amendments thereto, hereby ratifying and confirming all that said attorneys and agents and any of them may do by virtue hereof.\nIN WITNESS WHEREOF, the undersigned have executed this Power of Attorney the 26th day of January, 1994.\nSTUART C. NATHAN _________________________ Executive Vice President and Director of Stuart C. Nathan General Partner\nA. LEE SACKS _________________________ Director of General Partner A. Lee Sacks\nThe undersigned hereby acknowledge and accept such power of authority to sign, in the name on behalf of the above named officer and directors, a Report on Form 10-K of said partnership for the fiscal year ended December 31, 1993, and any and all amendments thereto, the 26th day of January, 1994.\nGARY NICKELE ______________________ Gary Nickele\nGAILEN J. HULL ______________________ Gailen J. Hull\nDENNIS M. QUINN ___________________________ Dennis M. Quinn","section_9A":"","section_9B":"","section_10":"","section_11":"","section_12":"","section_13":"","section_14":"","section_15":""}
{"filename":"758004_1993.txt","cik":"758004","year":"1993","section_1":"ITEM 1. BUSINESS\nTHE COMPANY\nNovell, Inc. (\"Novell\" or the \"Company\") is an information system software company, which develops, markets and services specialized and general purpose operating system products and application programming tools. Novell's NetWare(R), UnixWare(TM) and AppWare(TM) families of products provide matched software components for distributing information resources within local, wide area and internetworked information systems.\nThe Company was incorporated in Delaware on January 25, 1983. Novell's executive offices are located at 122 East 1700 South, Provo, Utah 84606. Its telephone number at that address is (801) 429-7000.\nThe Company sells its products domestically and internationally through 33 U.S. sales offices and 31 foreign offices. The Company sells its products primarily through distributors and national retail chains, who in turn sell the Company's products to retail dealers. The Company also sells its products through OEMs, system integrators, and VARs.\nThe Company conducts product development activities in Cupertino, Monterey, San Jose, Sunnyvale, and Walnut Creek, California; Boulder, Colorado; Natick, Massachusetts; Summit, New Jersey; Austin, Texas; Provo, Salt Lake City, and Sandy, Utah; Toronto, Canada; and Hungerford, U.K. It also contracts out some product development activities to other third-party developers.\nIn December 1990, the Company announced that Canon, Fujitsu, NEC, Sony, and Toshiba, five major Japanese computer companies, joined SOFTBANK Corporation and Novell as investment partners in Novell Japan, Ltd., a Tokyo-based joint venture inaugurated in April 1990. Novell has a 54% ownership interest, and accordingly, the financial statements of Novell Japan, Ltd. are consolidated in the financial statements of the Company, with the minority interest in profit or loss offset within other income and expense.\nIn April 1991, the Company invested $15.0 million in UNIX System Laboratories, Inc. (USL), a subsidiary of AT&T that develops and licenses the UNIX operating system and other standards-based software to customers worldwide. In December 1991, the Company announced the formation of Univel, a joint venture with USL, formed to accelerate the expanded use of the UNIX operating system in the personal computer and network computing marketplace. Novell and USL contributed cash and technology rights to Univel. Then in June 1993, the Company acquired the remaining portion of USL by issuing approximately 11.1 million shares of Novell common stock valued at $321.8 million in exchange for all of the outstanding stock of USL not previously owned by Novell and assumed additional liabilities of $9.4 million. The transaction was accounted for as a purchase and, on this basis, resulted in a one-time write-off of $268.7 million for purchased research and development in the third quarter of fiscal 1993.\nOn October 28, 1991, the Company completed a merger with Digital Research Inc. (DRI), a producer of personal computer operating software, whereby DRI became a wholly owned subsidiary of Novell. There were 6.0 million shares of Novell common stock exchanged for all of the outstanding stock of DRI. This transaction was accounted for as a pooling of interests; however, prior year financial statements have not been restated due to immateriality.\nIn April 1992, the Company purchased all of the outstanding stock of International Business Software, Ltd. (IBS), a developer of distributed computing technology for Apple Macintosh computers, for $5.2 million cash, whereby IBS became a wholly owned subsidiary of Novell.\nIn June 1992, the Company purchased all of the outstanding stock of Annatek Systems, Inc. (Annatek), a developer of software distribution products, for $10.0 million cash, whereby Annatek became a wholly owned subsidiary of Novell.\nIn June 1993, the company purchased all of the outstanding stock not previously owned by Novell of Serius Corporation (Serius), a developer of object-based application tools, for $17.0 million cash and assumed\nliabilities of $5.0 million, whereby Serius became a wholly owned subsidiary of Novell. Novell previously had invested cash of $1.1 million in Serius. This transaction was accounted for as a purchase and, on this basis, resulted in a one-time write-off of $22.1 million for purchased research and development in the third quarter of fiscal 1993.\nIn June 1993, the Company acquired all of the outstanding stock of Software Transformation, Inc. (STI), a developer of software development tools, by issuing approximately 800,000 shares of Novell common stock in exchange for all of the outstanding stock of STI. The transaction was accounted for as a pooling of interests; however, prior periods were not restated due to immateriality.\nIn July 1993, the Company acquired all of the outstanding stock of Fluent, Inc. (Fluent), a developer of multimedia software for personal computers, for $18.5 million cash and assumed liabilities of $3.0 million, whereby Fluent became a wholly owned subsidiary of Novell. The transaction was accounted for as a purchase and, on this basis, resulted in a one-time write-off of $20.7 million for purchased research and development in the third quarter of fiscal 1993.\nThe Company will continue to look for similar acquisitions, investments, or strategic alliances which it believes complement its overall business strategy.\nBUSINESS STRATEGY\nNovell's business strategy is to be a leading supplier of software products for the network computing industry. Over the past several years the Company has issued common stock or paid cash to acquire technology companies, invested cash in other technology companies, and formed strategic alliances with still other technology companies. Novell undertook all of these transactions to promote the growth of the network computing industry, and in many cases to also broaden the Company's business as a system software supplier.\nNovell believes that companies implement technologies to meet business needs. People use technology to help them to be more productive in their jobs. As a result of these motivations, customers have made the NetWare operating system the most popular network solution in the industry. This is a direct result of Novell's delivery of a networking environment that contributes to the success of individuals and companies. Novell is focused on meeting customer needs.\nTo meet the needs of its customers, over the past year Novell has embarked on a strategy to combine the industry's most proven network operating system with the industry's most proven application platform -- UNIX. This \"matched pair\" combines the best network services with the best application services to deliver to customers the best computing platform on which to run their businesses. These strong operating systems combine with Novell's innovative client\/server application platform to deliver a total system software solution.\nNovell's mission is to accelerate the growth of the network computing industry through responsible leadership. The Company accomplishes this by delivering an overall networking environment which includes industry leading product technology, programs, and partnerships. The key elements of the Company's overall business strategy are:\nTechnological Leadership.\nIntegration Platform. Novell's NetWare network operating system provides a platform for the integration of multiple technologies. This includes the seamless integration of multiple desktop systems and host environments. Novell believes that the customer environments are inherently heterogeneous and therefore require an information system that integrates dissimilar technologies. The goal of Novell's strategy of integrating various desktop systems is to allow IBM and IBM-compatible, Apple Macintosh, and UNIX-based PCs and workstations to access and share simultaneously a common set of network resources and information. This gives customers the freedom to choose the desktop and application server systems that best fit their application requirements. In addition to the integration of desktops, host environments from vendors such as IBM, DEC, HP and Olivetti are integrated into the NetWare network so that users can access host-based resources and information from their desktops across the network. Novell continues to extend this hardware and infrastructure integration to other communication\ndevices such as PBXs and imbedded systems such as cash registers and process control devices. The overall objective is to seamlessly connect users by shielding them from the underlying network technology used to share resources and information across heterogenous systems.\nNetwork Services. Novell delivers advanced network services on top of the integration platform. These services enhance the functionality available to users on the network. In the first release of NetWare eleven years ago, those services were file and print only. While Novell has continued to enhance NetWare file and print services, the services provided by Novell and third parties have expanded significantly to include communications, network and systems management, messaging, directory, software licensing and distribution, imaging and document management, and telephony services. Novell continues to add network services through internal development efforts, partnerships, and acquisitions.\nApplication Framework: AppWare. In addition to the programming interfaces that Novell provides for application developers, Novell has begun delivering AppWare -- a set of development tools that significantly eases the development of true client\/server applications. AppWare allows application developers and internal IS development teams to deliver distributed applications that integrate and take advantage of all of the network services available in NetWare and UnixWare.\nDirectory Services. With the introduction of NetWare 4 in March 1993, Novell began to deliver an industry leading distributed naming service -- NetWare Directory Services (NDS). NDS allows administrators and users to view the information and resources on the network in a simple and integrated way. It provides for one common view of the network rather than having to track resources by knowing on which server the resource resides. NDS allows the user to login once into the network and access information and resources independent of physical location. While this simplifies both the administration and use of the network, NDS also improves the security of network information with the use of encryption technology. The NetWare Directory Service will continue to become the centerpiece of network services and client\/server applications for the next several years.\nPrograms\nTechnical Support Alliance. In May 1991 Novell announced the formation of the Technical Support Alliance (TSA), with 37 current members including Apple, Compaq, Hewlett-Packard, Intel, IBM, Lotus, Microsoft, Oracle and WordPerfect. The TSA was organized to provide one-stop multivendor support.\nCertified NetWare Engineer Program. Through the Certified NetWare Engineer (CNE) program, Novell is strengthening the networking industry's Level I support self-sufficiency. CNEs are individuals who receive high-level training, information, and advanced technical telephone support (Level II) from Novell. CNEs may be employed by resellers, independent support organizations, or Novell Support Organizations (NSOs). The NSO program pools the capabilities of the industry's best support providers. NSOs have contractual agreements with Novell that are designed to ensure quality service on a national or global level.\nNational Authorized Education Centers. Novell offers education to end users through more than 1,200 established Novell Authorized Education Centers (NAECs) worldwide, which use Novell-developed courses to instruct more than 30,000 students per month in the use and maintenance of Novell products. Novell also offers self-paced training products.\nNovell Labs. Through its Independent Manufacturer Support Program (IMSP), Novell works with third-party manufacturers to test and certify hardware components designed to interoperate with the NetWare operating system. Novell distributes these tests results to inform NetWare customers about products that have formally demonstrated NetWare compatibility. In effect, IMSP certification programs help vendors to market their products through Novell's distribution channels. The primary goal of IMSP is to foster working relationships between Novell and strategic third-party hardware manufacturers. Secondary goals include promoting certified hardware to industry resellers, anticipating industry hardware\ndirections through comarketing efforts, and working with vendors to codevelop critical network hardware components.\nClient-Server NetWare Loadable Module (NLM) Testing Program. Novell is committed to ensuring the highest quality customer solutions by raising the level of importance that quality assurance and testing hold in the software development cycle. The NLM testing program is a result of that commitment; it allows developers to submit client-server NLM applications for testing.\nPartnerships\nDevelopment Partners. When customers request a new network service be added to the NetWare operating system, Novell investigates the most effective way to deliver that functionality to the user. Very often the best way is for Novell to partner with a company who has expertise in that specific area. By partnering, the combination of Novell's expertise in networks and the partner's expertise in the given product area combine to deliver a better solution faster than if Novell would have attempted to develop it alone.\nSystems Partners. Novell partners with companies who have complimentary software and hardware. The resulting solution is a powerful combination of products that deliver enterprise-wide connectivity solutions. These partners include system suppliers like IBM, DEC and HP, as well as system integration experts like Memorex Telex, Arthur Andersen, EDS, etc.\nApplication Partners. Novell works very closely with application developers to provide integrated software support for end users. Because Novell does not market applications, relationships with software developers can be very synergistic.\nMultiple Channel Distribution Network. The Company markets a broad line of the NetWare operating system and the UnixWare operating system through distributors, dealers, value added resellers, systems integrators, and OEMs as well as to major end users.\nWorldwide Service and Support. The Company is committed to providing service and support on a worldwide basis to its resellers and to their end-user customers. The Company has established agreements with third party service vendors to expand and complement the service provided directly by the Company's service personnel and the Company's resellers.\nPRODUCTS\nThe Company's products fall within three operating groups: NetWare Systems Group (NSG), UNIX Systems Group (USG), and AppWare Systems Group (ASG).\nNETWARE SYSTEMS GROUP. NSG develops operating systems products to meet customer demands and include the following features.\nOpen Architecture. Novell maintains an open architecture in all of its networking products. Application interfaces to all of the NetWare services have been developed and published, allowing developers to take advantage of NetWare functionality. NetWare applications interfaces provide access to all NetWare services, including file and print, database, communications, and messaging services.\nThe NetWare Directory Service will be the foundation for network services and client\/server applications for the next several years. Besides enhanced NetWare file and print services, the services provided by Novell and third parties will also include communications, network and systems management, messaging, directory, software licensing and distribution, imaging and document management, and telephony services.\nEase of Use. NetWare 4 reduces administrative costs by allowing network supervisors to manage and administer their networks easily. A new graphical utility called the NetWare Administrator consolidates all network administration tools into a single console, giving intuitive control of the entire network.\nReliability. NetWare contains a wide variety of features that ensure system reliability and data integrity. These features protect everything from the storage medium to critical application files, allowing Novell to provide the highest levels of network reliability in the industry.\nNovell pioneered system fault tolerance in PC-based networks and continues to lead the industry in this area. Novell's introduction of mirrored server technology in 1992 provides the highest level of fault tolerance for PC based networks.\nManageability. Through NetWare Distributed Management Services (NDMS), Novell delivers industry leading products that provide network and systems management capabilities. NetWare manages all of a customers critical assets -- information, infrastructure, hardware, and software -- through delivery of storage management, device, and software licensing and distribution services.\nSecurity. Throughout its history, the NetWare product line has provided the tightest security features in the industry. Novell introduced the concept of usernames, passwords, and user profiles to the network market in NetWare as early as 1983. These user profiles list the resources to which a user has access, and the rights he or she has while using that resource. With version 2.15 of the NetWare operating system, network managers have been able to specify the date, time, and location from which a user can login to the network. Intruder detection and lockout features notify supervisors of any unauthorized access attempt. NetWare 3 incorporates additional security features including encrypted passwords over the wire. NetWare 4 network operating system adds new security auditing capabilities required in many security conscious network environments.\nWorkstation Independence. NetWare currently supports DOS, MS Windows, OS\/2, Macintosh, and UNIX workstations. By providing a network operating system that can integrate all the standard workstation operating systems, Novell gives users the freedom to choose their workstation environment while ensuring them full network participation.\nHardware Independence. NetWare is hardware-independent and the Company has close working relationships with more than 350 strategic third-party hardware manufacturers. This independence and these relationships provide the Company with a broad market for its networking software and the ability to support new hardware as it is developed.\nHigh Performance. When Novell introduced the Advanced NetWare network operating system to the market in 1985, it represented a major improvement in network operating system performance, and NetWare network operating systems still lead the market in performance today. The NetWare 3 network operating system extends Novell's performance leadership by providing end users the potential of up to three times the performance of the NetWare 2 network computing products. The NetWare 4 network operating system allows users and applications to gain access to network-wide information and services transparently through technologies such as NetWare Directory Services, new security capabilities, wide-area networking improvements, and enhanced administration and management tools.\nNETWARE OPERATING SYSTEMS PRODUCT LINE. The NetWare family of network operating systems provides solutions to a wide variety of needs ranging from small, simple networks to enterprise-wide networks and include the following products.\nNetWare 4. In March 1993, Novell introduced the NetWare 4 operating system. An elaborate demonstration showed the ability of how one network server can support 1,000 clients or how one client can access 1,000 servers.\nNovell sees itself and NetWare at the center of the converging market forces reshaping business computing on to downsized, or rightsized information systems. Cohesively managed computer networks are taking on computing responsibilities held by mainframe computers over the last three decades.\nNetWare has increasingly defined a system services environment that supports this world-wide shift away from mainframe and mid-range computing solutions to computer networks.\nNovell's NetWare 4 operating system is designed to deliver the power and technology to meet downsizing requirements.\nAll Encompassing Environment. Delivering a manageable, global, directory framework that provides connectivity to other computing platforms enables users to access applications and system services regardless of their physical location on the network.\nSystem Fault Tolerance. Providing robust business-critical reliability to a network using the concept of server mirroring allows the workflow of the business to be uninterrupted even in the event of a hardware failure.\nLarge Scale Configurations. NetWare 4 supports single server configurations up to 1,000 concurrent users, or clients, on each server.\nNetWare 3. NetWare 3 is a proven, sophisticated connectivity tool for businesses, departments, and workgroups of various sizes. NetWare 3 is a full-featured, 32-bit network operating system that supports all key desktop operating systems -- DOS, MS Windows, OS\/2, UNIX, and Macintosh -- as well as the IBM SAA environment. NetWare 3 provides a high-performance integration platform for businesses requiring a sophisticated network computing solution in a multivendor environment. NetWare 3 offers centralized network management and is available in 5-,10-, 20-, 50-, 100-and 250-user versions, allowing organizations to standardize on a high-performance networking solution regardless of their size.\nNetWare Clients. As new desktop operating systems become available Novell has continued its Open Desktop Strategy by offering NetWare clients and redirectors for connection into NetWare through fulfillment and 1-800 numbers. This allows existing users of NetWare to update client network components while maintaining their investment in NetWare servers. In 1992 Novell released Workstation kits for MS DOS, DR DOS, MS Windows 3.1 and OS\/2 2.0. These kits provide users and administrators with the ability to get the latest desktop client support available and allows Novell the flexibility to enhance the desktop support independently of NetWare Operating System releases.\nMessaging Services. Messaging technology provides communications capabilities that allow messages to be sent between people, between processes, or between a person and a process without using real-time links. Novell also provides products with these capabilities.\nNetWare MHS is a \"store-and-forward\" message handling service for the Novell distributed computing platform. NetWare MHS platform supports a wide range of services including Electronic mail (E-mail), workflow automation, calendar and scheduling, and fax services.\nApplications from more than 900 developers (including more than 150 commercial applications) operate on this foundation and support the NetWare MHS platform.\nFor example, Indisy provides connectivity between mainframe, minicomputer, and PC-based network users. Indisy's software provides for the exchange of mail transparently across IBM SNA networks. In addition to electronic mail, Indisy also provides software for the exchange of single mail parcels containing spreadsheets, graphics and text, batch report distribution, remote job submission, document translation, and other functions.\nNetWare for Macintosh. When used in conjunction with a NetWare environment, NetWare for Macintosh brings the comprehensive networking features of NetWare, such as enhanced security, resource accounting, and fault tolerance, to the Apple Macintosh environment. NetWare for Macintosh allows Macintosh, DOS, and OS\/2 workstations to share data and resources in a high-performance, secure network environment. This product is of special interest to large-and medium-sized companies that have heterogeneous computing environments.\nNetWare for Macintosh comes in two versions: NetWare for Macintosh 4.01 and NetWare for Macintosh 3.12.\nNetWare for Macintosh 4.01 is the premier solution for integrating Macintosh computers into the NetWare environment. It provides file services, print services, administrative utilities, and AppleTalk routing for Macintosh users on a NetWare 4 network. NetWare for Macintosh 4.01 also allows fast and secure CD-ROM access and DOS-to-Macintosh application mapping.\nNetWare for Macintosh 3.12 provides NetWare file, print, routing, and administrative utilities to Macintosh users and integrates them into the NetWare 3 environment.\nPersonal NetWare. As the networking industry continues to grow, new users are interested in simple and inexpensive entry level networking solutions to connect small groups of users together in workgroups. In September 1991 Novell introduced a new peer-to-peer desktop networking product aimed at this market called NetWare Lite 1.0. In July 1992 Novell released an updated NetWare Lite 1.1 that improved the performance of NetWare Lite 1.0 by adding a full network caching and also improved the reliability and Windows support.\nNovell continued to enhance its desktop networking solutions with the release of Personal NetWare in 1993. Personal NetWare is the ideal solution for small businesses and for workgroups in larger businesses and enterprise-wide NetWare networks. Personal NetWare allows users to connect as many as 50 PCs running DOS or MS Windows so they can share hard disks, printers, CD-ROM drives and other resources. In addition to tighter integration with NetWare, Personal NetWare will include support for mobile users and network management at the desktop.\nOther features of Personal NetWare include a single-network view, single login, full compatibility with other versions of the NetWare network operating system, easy management and administration, security, autoreconnect, and a flexible configuration to maximize memory use.\nNovell DOS. In September 1991, the Company introduced DR DOS 6.0, a major upgrade of its advanced DR DOS operating system. DR DOS 6.0 represents a significant advance over DR DOS 5.0 and other competing products with respect to features such as memory management, disk caching and task-switching. The latest addition to Novell's desktop operating system products is Novell DOS 7.\nNovell DOS 7 is the first DOS that fully integrates advanced DOS technology with networking. Novell DOS 7 advances the DOS standard by providing state-of-the-art network and client management utilities, workstation security, disk compression, and NetWare, with all inherent peer-to-peer networking capabilities. Fully integrated networking makes Novell DOS 7 the best DOS client operating system for the Novell NetWare network operating system. It is also fully compatible with the installed base of DOS and MS Windows applications.\nCOMMUNICATIONS AND CONNECTIVITY PRODUCTS. As the leader in local area network technology, the Company has made a significant commitment to implementing communications and connectivity services within the NetWare environment.\nRemote PC Access to Networks. The company provides two types of dial-in services for remote PCs:\nNetWare for SAA. NetWare for SAA 1.3B, which runs on both NetWare 3 and NetWare 4 platforms, integrates the NetWare network operating system with traditional IBM SNA mainframe and AS\/400 environments. With NetWare for SAA, NetWare clients can access host data and applications while simultaneously accessing files and data on NetWare servers. Built as a set of NetWare Loadable Modules (NLMs), NetWare for SAA capitalizes on the high performance, security, name services, and administration features on the NetWare operating system.\nNetWare SNA Links. NetWare SNA Links 2.0 is an NLM that works with NetWare for SAA to provide LAN-to-LAN communications over existing SNA networks. With NetWare SNA Links, users in geographically dispersed branch offices can access remote LAN and host resources over SDLC and Token-Ring backbones without requiring specialized software on the host. Network supervisors can administer branch office servers from a central location using standard NetWare utilities and management products.\nWhen installed on a NetWare 3 server or a NetWare MultiProtocol Router 2.0, NetWare SNA Links can route IPX, IP, AppleTalk, and OSI over leased lines using the Point-to-Point Protocol or using X.25 private or public data networks.\nINTERNETWORKING PRODUCTS. Novell's internetworking products connect NetWare services at headquarters with services at branch offices, providing access to information and NetWare resources.\nNetWare MultiProtocol Router. The NetWare MultiProtocol Router v2.11 and NetWare MultiProtocol Router Plus v2.11 are software-based bridge\/routers that run on 80386, 80486, and Pentium PCs. These bridge\/routers enable users to connect to remote offices using familiar NetWare and PC technology. NetWare MultiProtocol Router is ideal for connecting local area networks by routing the IPX, IP, AppleTalk, and OSI protocols over a wide range of LAN types, and source-route bridging over Token-Ring. NetWare MultiProtocol Router Plus provides remote routing and source-bridge routing over leased lines, Frame Relay, and x.25.\nUNIX SYSTEMS GROUP. USG provides a full suite of UNIX operating system and UNIX connectivity products. Key products include:\nOperating System Products. Novell's UnixWare operating system provides a powerful application server and client for today's distributed computing environments. The current product offerings are the UnixWare Application Server 1.1 and the UnixWare Personal Edition 1.1. UnixWare uses the network services available from NetWare and the cross-platform development tools available from AppWare to make applications available throughout the entire enterprise. UnixWare is easy to use, enabling users to be productive right away. Its fully graphical user interface gives users access to all the enterprise-wide information and services available in the corporate computing environment with simple point-and-click mouse functions. UnixWare also supports a variety of international languages.\nOptional products for the Application Server systems include: UnixWare Server Merge for Windows, which provides UnixWare users with multiuser DOS access and limited multiuser MS Windows access; UnixWare Online Data Manager 1.1, a UNIX System V, industry-standard, robust file system designed to maximize system and data availability and improve I\/O performance; and OracleWare System-UnixWare Edition, a powerful applications data server platform which integrates the UnixWare Application Server 1.1 operating system with Oracle 7 cooperative database server on a single CD-ROM disk.\nOptional add-on products for UnixWare Personal Edition include UnixWare NFS, which enables resource-sharing with other UNIX systems; UnixWare C2 Auditing, which records security-related events to help detect attempts to breach security; and UnixWare Encryption Utilities, which provide support for DES encryption and decryption.\nNovell also supplies the UNIX operating system source code to other UNIX system vendors. The latest version, UNIX System V Release 4.2 (SVR4.2), unifies several earlier versions and offers greatly enhanced ease of use and ease of administration features.\nUNIX Connectivity Products. Novell provides several product families designed to integrate NetWare into the UNIX and TCP\/IP environments.\nNetWare NFS provides UNIX workstations with transparent access to the NetWare 3 and NetWare 4 file systems. Once NetWare NFS is installed, workstations with NFS client services can share files with other NetWare clients-such as DOS, Macintosh and OS\/2 workstations. NetWare NFS enables UNIX and NetWare clients to share all network printing devices. It also provides an X Window System application that enables UNIX network supervisors to remotely manage NetWare servers. NetWare FLeX\/IP provides all the services delivered in the NetWare NFS product except the transparent access to the NFS distributed file system.\nThe NetWare NFS Gateway enables DOS and MS Windows users on NetWare to transparently access files on NFS servers. It extends the users' reach into the UNIX world yet preserves the familiar NetWare look and feel. The NetWare NFS Gateway provides easy-to-use, server-based installation, administration and management.\nNovell's popular LAN WorkPlace family of products provides users with fast, direct access to enterprise-wide TCP\/IP resources, including the Internet, from a variety of desktop workstations. LAN WorkPlace for DOS offers unsurpassed flexibility by including both DOS and MS Windows TCP\/IP applications, as well as new native language versions in French, German, Spanish, Portuguese and Japanese. LAN WorkGroup provides the same versatile connectivity to DOS and MS Windows users of large NetWare networks; its server-based installation, maintenance and management greatly reduce administration time and costs. LAN WorkPlace products are also available for such users of Macintosh and OS\/2 systems. Mobile WorkPlace is the newest member of the family, enabling users to access TCP\/IP resources when they're on the road just as if they were in the office.\nNetWare\/IP is another way for customers to tightly integrate NetWare services into their TCP\/IP environments. By installing NetWare\/IP on existing NetWare 3 and NetWare 4 servers, customers can create an environment that supports both the TCP\/IP and IPX transport protocols, or one that uses TCP\/IP only.\nNovell also offers a solution for integrating Open Systems Interconnection (OSI) with NetWare. NetWare FTAM from Firefox is a fully FOSIP-compliant FTAM server that enables a variety of FTAM clients to access the NetWare 3 file system. This standard protocol-based product provides a key to enabling multivendor interoperability with NetWare systems.\nAPPWARE SYSTEMS GROUP. ASG provides tools and technologies for the development of network-aware applications. Four key requirements are the focus of ASG's product line: (1) object based tools and systems for use by corporate and consulting developers for rapid network application development, (2) libraries for use by commercial software vendors for writing portable source code, covering dominant desktop and network system services, (3) transaction processing monitor technology for the creation and management of mission- critical corporate transaction applications, and (4) operating systems and network access technologies for office, commercial, and industrial devices to connect into local area networks.\nAppWare Bus and AppWare Loadable Modules. The AppWare Bus and ALMs provide a model for software components from separate vendors to work together in custom applications. The AppWare Bus is a sophisticated engine for managing the interactions between the ALM components. Novell and many third parties provide high-level, easy to use ALMs covering network, DBMS, communications, multimedia, and other application fields. When accessed by a development tool such as Novell's Visual AppBuilder, the AppWare Bus allows all ALMs to be used rapidly in any combination to create powerful applications. The AppWare Bus and ALMs are usually bundled with other Novell products, and several OEM agreements are in place for building within other vendors' development tools.\nVisual AppBuilder. Visual AppBuilder is Novell's rapid development tool for corporate and consulting developers. It provides an intuitive, visual interface to application construction, empowering developers who need not necessarily be fluent with traditional languages such as C and C++. Visual AppBuilder accesses the AppWare Bus and ALMs to provide the component engine and component set for developers to visually assemble into custom applications. Visual AppBuilder, when combined with network ALMs, is one of the most effective tools for building network-aware applications. Visual AppBuilder is targeted for sale through a variety of distribution channels, and will be bundled with several other Novell products.\nALM SDK. The ALM SDK is a tool for C and C++ programmers to use to create new ALMs. The interface to the AppWare Bus is provided, allowing any third party programmer or vendor to create ALMs that interoperate with Novell's ALMs. The ALM SDK is bundled with Visual AppBuilder.\nAppWare Foundation. AppWare Foundation is a set of libraries which provide an application programming interface (API) for C and C++ developers to write portable source code. The problem of portability which is addressed by the AppWare Foundation is perhaps one of the most important issues facing software vendors today. Using the AppWare Foundation, a programmer may write code once for a new application or software component, and simply recompile the code to run on any of the dominant desktop computing systems, including MS Windows, MacIntosh, UnixWare and other versions of UNIX, and soon OS\/2 and Windows NT. The Foundation offers such portable APIs covering graphical interfaces, operating systems, network systems, and network services. AppWare Foundation is targeted for sale through a variety of\ndistribution channels, and several OEM relationships have been formed to distribute the Foundation libraries as a part of third party development tools.\nTuxedo. Derived from Novell's 1993 acquisition of USL, Tuxedo is a sophisticated transaction processing manager for mission critical transaction-oriented applications. Tuxedo provides both client and server software for connecting client applications and server services together with a highly reliable, high-performance, secure, managed transaction connection. In use today in mission critical applications within Fortune 500 companies, Tuxedo is well recognized as a leading offering in its field. Its integration with NetWare, via NLMs, and AppWare, via ALMs, provides those key Novell products with effective transaction processing facilities. Tuxedo is sold largely through OEM agreements with major system software vendors, and directly to large corporate customers.\nExtended Networks Group products. The Extended Networks Group is developing and providing system software and application technologies for integrating office, commercial, and industrial devices into NetWare networks. While its products are not yet announced, they will include technology components such as:\nFlexOS. Novell's FlexOS is a 32-bit real time operating system which is most often embedded in business, commercial, and industrial devices to make such devices \"intelligent\". Widely used today in point-of-sale and industrial hardware systems, Flex OS will play an important role in the extension of NetWare LANs into emerging device markets.\nDevice-centric ALMs. AppWare Loadable Modules which control devices through NetWare networks will offer complete system control to application developers. Given the other ALMs described above, applications will be able to be created quickly integrating control over desktop computer functions, network functions, and device functions.\nPRODUCT DEVELOPMENT\nDue to the rapid pace of technological change in its industry, the Company believes that its future success will depend, in part, on its ability to enhance and develop its network and communications software products to satisfactorily meet specific market needs.\nThe Company's current product development activities include the enhancement of existing products and the development of products that will support (1) further integration of NetWare and UNIX environments and the establishment of UnixWare as an industry-leading UNIX platform; (2) network management services; (3) global naming services; (4) international networking standards; (5) integrated peer services in NetWare clients; (6) integration of current and future desktop operating systems into the overall networking environment; (7) host-based versions of NetWare, such as NetWare for UNIX and NetWare for OS\/2; (8) processor independent versions of NetWare; (9) additional network services; (10) technologies for distributed applications development and operation; (11) AppWare ALMs for a broad range of Novell and UNIX services; and (12) multiplatform and multivendor APIs for major network services.\nDuring fiscal 1993, 1992, and 1991, product development expenses were approximately $164.9 million, $120.8 million, and $77.9 million, respectively. The Company's product development effort consists primarily of work performed by employees; however, the Company also utilizes third-party technology partners to assist with product development.\nSALES AND MARKETING\nNovell markets its NetWare family of network products and the UnixWare operating system through distributors, dealers, vertical market resellers, systems integrators, and OEMs who meet the Company's criteria, as well as to major end users. In addition, the Company provides technical support, training, and field service to its customers from its field offices and corporate headquarters. The Company also conducts sales and marketing activities from its offices in Cupertino, Monterey, San Jose, and Sunnyvale, California; Summit, New Jersey; Austin, Texas; Provo and Sandy, Utah; and from its 33 U.S. domestic and 31 foreign field offices.\nDistributors. Novell has established a network of independent distributors, which resell the Company's products to dealers, smaller VARs, and computer retail outlets. As of December 31, 1993, there were approximately 21 domestic distributors and approximately 113 foreign distributors.\nDealers. The Company also markets its products to large-volume dealers and regional and national computer retail chains.\nVARs and Systems Integrators. Novell also sells directly to value added resellers and systems integrators who market data processing systems to vertical markets, and whose volume of purchases warrants buying directly from the Company.\nOEMs. The Company licenses its network software to domestic and international OEMs for integration with their products. With the acquisitions of USL and DRI, the number of OEM agreements the Company has increased significantly as USL and DRI have marketed their products quite extensively through OEMs, both domestically and internationally.\nEnd Users. Generally, the Company refers prospective end-user customers to its resellers. However, the Company has the internal resources to work directly with major end users and has developed master license agreements with approximately 150 of them to date. Additionally, some upgrade products are sold directly to end users.\nExport Sales. In fiscal 1993, 1992, and 1991, approximately 48%, 47%, and 44%, respectively, of the Company's net sales were to customers outside the U.S.--primarily distributors. (See Note L of Notes to Consolidated Financial Statements.) To date, substantially all international sales except Japanese sales have been invoiced by the Company in U.S. dollars, and in fiscal 1994 the Company anticipates that substantially all foreign revenues except Japanese sales, will continue to be invoiced in U.S. dollars. Except for Germany, which accounted for 11% of revenue in fiscal 1993, 13% of revenue in fiscal 1992 and 10% of revenue in fiscal 1991, no one foreign country accounted for more than 10% of net sales in any period. Except for one multi-national distributor which accounted for 12% of revenue in fiscal 1993, no customer accounted for more than 10% of revenue in any period.\nMarketing. The Company's marketing activities include distribution of sales literature and press releases, advertising, periodic product announcements, support of NetWare user groups, publication of technical and other articles in the trade press, and participation in industry seminars, conferences, and trade shows. The marketing departments of the Company employ many technical laboratories of networked computer equipment and individual device testing and evaluation. The knowledge derived from these laboratories is the basis for the technical publications published by the Company. These activities are designed to educate the market about local area networks in general, as well as to promote the Company's products. Through the Professional Developers Program, the Company strongly supports independent software and hardware vendors in developing products that work on NetWare networks. Thousands of multiuser application software packages are now compatible with the NetWare operating system. In March 1993, the ninth annual BrainShare Conference (formerly Developers' Conference) was held to inform and educate developers about NetWare product strategy, NetWare open architecture programming interfaces, and NetWare third-party product certification programs.\nSERVICE, SUPPORT, AND EDUCATION\nThe purpose of any service program is to help users get the most out of the products they buy. Novell offers a variety of support alternatives and encourages users to select the services that meet their own needs. These include the worldwide service and support organization, the Technical Support Alliance, the CNE program, NAECs, IMSP and the ClientServer NLM Testing Program.\nMANUFACTURING SUPPLIERS\nThe Company's products, which consist primarily of software diskettes and manuals, are duplicated by outside vendors. This allows the Company to minimize the need for expensive capital equipment in an industry in which multiple high-volume manufacturers are available.\nBACKLOG\nLead times for the Company's products are typically short. Consequently, the Company does not believe that backlog is a reliable indicator of future sales or earnings. The absence of significant backlog may contribute to unpredictability in the Company's net income and to fluctuations in the Company's stock price. See \"Factors Affecting Earnings and Stock Price.\" The Company's backlog of orders at January 21, 1994, was approximately $35.3 million, compared with $35.7 million at January 22, 1993.\nCOMPETITION\nNovell competes in the highly competitive market for computer software, including in particular, network operating systems, desktop operating systems and related systems software. In the market for network operating systems, Novell believes that the principal competitive factors are hardware independence and compatibility, availability of application software, marketing strength in desktop operating systems, system\/performance, customer service and support, reliability, ease of use, price\/performance, and connectivity with minicomputer and mainframe hosts.\nThe market for operating systems software, including network operating systems and client operating systems, has become increasingly problematic due to Microsoft's growing dominance in all sectors of the software business. The Company does not have the product breadth and market power of Microsoft. Microsoft's dominant position provides it with enormous competitive advantages, including the ability to unilaterally determine the direction of future operating systems and to leverage its strength in one or more product areas to achieve a dominant position in new markets. This position may enable Microsoft to increase its dominance even if the Company succeeds in continuing to introduce products with superior performance and features to those offered by Microsoft.\nMicrosoft's ability to offer networking functionality in future versions of MS Windows and Windows NT, or to provide incentives to customers to purchase certain products in order to obtain favorable sales terms or necessary compatibility or information with respect to other products, may significantly inhibit the Company's ability to maintain its business. Moreover, Microsoft's ability to offer products on a bundled basis can be expected to impair the Company's competitive position with respect to particular products. Novell may be unable to maintain compatibility with Microsoft's key products, although Novell will continue to seek to do so.\nThe Company has not succeeded in establishing significant sales from DR DOS following its acquisition of Digital Research Inc. in October 1991. The Company believes that it will continue to be at a substantial competitive disadvantage in selling its client operating systems due in part to Microsoft's dominance and certain of Microsoft's pricing and licensing practices. Such competitive position and practices may prevent the Company from successfully offering products to a broad variety of customers or from maintaining demand for these products. There can be no assurance that the Company will be successful in competing against Microsoft in any market or market segment in the future.\nThe application software development tools market in which Novell now operates is also highly competitive. There can be no assurance that Novell will be successful in competing in this market or any other market in the future.\nLICENSES, PATENTS AND TRADEMARKS\nThe Company currently relies on copyright, patent, trade secret and trademark law, as well as provisions in its license, distribution and other agreements in order to protect its intellectual property rights. The Company currently holds six United States patents and has numerous United States patents pending. Additionally, the Company has a number of patents pending in foreign jurisdictions. No assurance can be given that such patents pending will be issued or, if issued, will provide protection for the Company's competitive position. Although the company intends to protect its patent rights vigorously, there can be no assurance that these measures will be successful. Additionally, no assurance can be given that the claims on any patents held by the Company will be sufficiently broad to protect the Company's technology. In addition, no assurance can be given that any patents issued to the Company will not be challenged, invalidated or\ncircumvented or that the rights granted thereunder will provide competitive advantages to the Company. The loss of patent protection on the Company's technology or the circumvention of its patent protection by competitors could have a material adverse effect on the Company's ability to compete successfully in its products business.\nThe software industry is characterized by frequent litigation regarding copyright, patent and other intellectual property rights. There can be no assurance that third parties will not assert claims against the Company with respect to existing or future products or that licenses will be available on reasonable terms, or at all, with respect to any third party technology. In the event of litigation to determine the validity of any third party claims, such litigation could result in significant expense to the Company and divert the efforts of the Company's technical and management personnel, whether or not such litigation is determined in favor of the Company.\nIn the event of an adverse result in any such litigation, the Company could be required to expend significant resources to develop non-infringing technology or to obtain licenses to the technology which is the subject of the litigation. There can be no assurance that the Company would be successful in such development or that any such licenses would be available. In addition, the laws of certain countries in which the Company's products are or may be developed, manufactured or sold may not protect the Company's products and intellectual property rights to the same extent as the laws of the United States.\nEMPLOYEES\nAs of December 31, 1993, the Company had 4,335 employees. The functional distribution of its employees was: sales and marketing -- 939; product development and marketing-1,817; general and administrative -- 487; service, support and education -- 807; operations -- 146; and joint ventures -- 139. Of these, 349 employees are located in U.S. field offices, and 755 employees are in offices outside the U.S. All other Company personnel are based at the Company's facilities in Utah, California, Colorado, Massachusetts, New Jersey, or Texas. None of the employees is represented by a labor union, and the Company considers its employee relations to be excellent.\nCompetition for qualified personnel in the computer industry is intense. To make a long-term relationship with the Company rewarding, Novell endeavors to give its employees and consultants challenging work, educational opportunities, competitive wages, and, through sales commission plans, bonuses, and stock option and purchase plans, opportunities to participate financially in the Company.\nFACTORS AFFECTING EARNINGS AND STOCK PRICE\nIn addition to factors described above under \"Competition\" which may adversely affect the Company's earnings and stock price, other factors may also adversely affect the Company's earnings and stock price. The successful combination of companies in the high technology industry may be more difficult to accomplish than in other industries. There can be no assurance that Novell will be successful in integrating acquired businesses into its own, that it will retain their key technical and management personnel or that Novell will realize any of the other anticipated benefits of the acquisitions.\nThe computer software industry has experienced delays in its product development and \"debugging\" efforts, and the Company could experience such delays in the future. Significant delays in developing, completing or shipping new or enhanced products would adversely affect the Company. Furthermore, it can be expected that as products become more complex, development cycles will become longer and more expensive. There can be no assurance that Novell will be able to respond effectively to technological changes or new product announcements by others, or the Novell's research and development efforts will be successful.\nThe Company's industry is characterized by rapid technological change, resulting in continuing pressure for price\/performance improvements in response to advances in computer software and hardware technology. The Company believes that its future success will depend on its ability to continue to enhance its current products and to develop and introduce new products that maintain its technological leadership and achieve market acceptance.\nIn particular, the Company has recently introduced the NetWare 4 operating system, a new version of the NetWare operating system which provides increased functionality as compared to prior releases of the NetWare product, including the ability to support a substantial increase in the number of clients connected on a single network. As with the introduction of any major new product or upgrade, the introduction of the product may cause a deferral in orders or reduction in demand for prior versions of the NetWare operating system, as customers and value-added resellers evaluate the functionality of the new product. Moreover, because the new product addresses new market segments and is offered at a higher price than prior NetWare product releases, the Company is unable to predict the level of demand for the NetWare 4 operating system which will actually occur. Should orders and sales for either the NetWare 4 operating system or prior versions of the NetWare product fall short of the Company's objectives, the Company could experience excess inventories and unexpected costs. As a result, the Company's future sales and earnings may be subject to substantial fluctuations, particularly in the near term.\nThe introduction of new products also involves material marketing risks due to the possibility of errors or shortfalls in product performance. Should any new product experience a high rate of bugs or performance difficulties, the Company could experience product returns, unexpected warranty expenses and lower than expected sales. No assurance can be given as to the Company's financial results during such periods.\nThe Company's future earnings and stock price could be subject to significant volatility, particularly on a quarterly basis. The Company's revenues and earnings may be unpredictable due to the Company's shipment patterns. As is typical in the software industry, a high percentage of Novell's revenues are earned in the third month of each fiscal quarter and tend to be concentrated in the latter half of that month. Accordingly, quarterly financial results are difficult to predict and quarterly financial results may fall short of anticipated levels. Because the Company's backlog early in a quarter is not generally large enough to assure that it will meet its revenue targets for any particular quarter, quarterly results may be difficult to predict until the end of the quarter. A shortfall in shipments at the end of any particular quarter may cause the results of that quarter to fall significantly short of anticipated levels. Due to analysts' expectations of continued growth and the high price\/earnings ratio at which the Company's common stock trades, any such shortfall in earnings could have an immediate and very significant adverse effect on the trading price of the Company's common stock in any given period.\nAs a result of the foregoing factors and other factors that may arise in the future, the market price of the Company's common stock may be subject to significant fluctuations over a short period of time. These fluctuations may be due to factors specific to the Company, to changes in analysts' earnings estimates, or to factors affecting the computer industry or the securities markets in general.\nITEM 1A.","section_1A":"ITEM 1A. EXECUTIVE OFFICERS OF THE REGISTRANT\nSet forth below are the names, ages, titles with Novell, and present and past positions of the persons currently serving as executive officers of Novell.\nRaymond J. Noorda, a founder of the Company, has been President, Chief Executive Officer, and a director of the Company since March 1983, and Chairman of the Board since January 1986.\nMary M. Burnside joined the Company in January 1988 as Materials Manager. In November 1988, she was promoted to Vice President, Operations. In January 1989 she became Senior Vice President, Operations and was elected a corporate officer. In November 1991 she became Executive Vice President, Corporate Services Group. In August 1993 she joined the Office of the President as Chief Operating Officer.\nJames R. Tolonen became a Senior Vice President and Chief Financial Officer of Novell in August 1989 and was elected a corporate officer. In August 1993 he joined the Office of the President as Chief Financial Officer. He served as Vice President, Finance, Chief Financial Officer, and Treasurer of Excelan since 1983. A Certified Public Accountant, he also served as Excelan's acting President from April through August 1985.\nJohn W. Edwards joined the Company in August 1988 as a Senior Marketing Manager. In November 1989 he became a Product Line Manager and in April 1991 he became a Director of Product Marketing. In November 1991 he was promoted to Director of Marketing and in February 1992 he became Vice President, Marketing. In April 1992 he became Executive Vice President, Desktop Systems Group and was elected a corporate officer. In August 1993 he became Executive Vice President, AppWare Systems Group.\nMichael J. DeFazio joined the Company as Vice President, UNIX Systems Group, when it acquired USL in June 1993. In January 1994 he became Executive Vice President, UNIX Systems Group and was elected a corporate officer. Previous to the acquisition, he was USL's Executive Vice President, UNIX System V Software. Prior to the formation of USL in 1989 he was with AT&T, responsible for business planning, product management, marketing and licensing for UNIX System V and associated system software.\nRichard W. King joined the Company in 1985 as Manager of Software Development and was promoted to Vice President, Software Development in April 1986. In September 1987 he became Vice President, NetWare Products Division and in September 1991 he became Vice President, Service and Support. Then in August 1993 he was promoted to Executive Vice President, NetWare Systems Group and was elected a corporate officer.\nDarrell L. Miller joined the Company in November 1987 as Vice President of Corporate Marketing. In June 1988 he became Vice President and General Manager of the Communications Products Division. In March 1989, he was promoted to Executive Vice President, Software Group and was elected a corporate officer. In March 1990, he became Executive Vice President, Strategic Relations. In November 1993, he resigned from the Company.\nKanwal S. Rekhi has been an Executive Vice President from June 1989 to the present, and is currently Executive Vice President, Corporate Technology and a director of the Company. Mr. Rekhi, a founder and executive officer of Excelan, Inc., a company acquired by Novell in June 1989, served as Excelan's President and Chief Executive Officer from 1988 to June 1989 and as Executive Vice President of Business Development from 1986 to 1988. Mr. Rekhi was also Secretary of Excelan from 1982 to 1988 and a member of its Board of Directors from 1986 to June 1989.\nDavid R. Bradford joined the Company in October 1985 as Corporate Counsel. He became Corporate Secretary in January 1986, Senior Corporate Counsel in April 1986, and Senior Vice President, General Counsel, and Corporate Secretary in April 1989.\nRobert W. Davis joined the Company when it acquired Excelan in June 1989 where he had held various marketing positions since 1986. In November 1992 he became Vice President, Connectivity Products and then in August 1993 he became Vice President Marketing, UNIX Systems Group. In January 1994 he became Senior Vice President, Corporate Marketing and was elected a corporate officer.\nErnest J. Harris joined the Company when it acquired Excelan in June 1989 as Vice President, Human Resources. He had served in the same capacity at Excelan since 1984. In May 1990 he became Senior Vice President, Human Resources and in January 1994 was elected a corporate officer.\nJoseph A. Marengi joined the Company when it acquired Excelan in June 1989 where he had been National Sales Manager since January 1989. He served in various sales positions with the Company until October 1992 when he became Senior Vice President, Worldwide Sales. In August 1993 he was elected a corporate officer.\nJan E. Newman joined the Company in June 1986 as a Programmer. In July 1988 he became Manager of Documentation and Testing, followed by a promotion to Director of Software Services in November 1988. In March 1991 he became Vice President, Support and Services and was made Vice President, NetWare Products in November 1991. In April 1992 he became Executive Vice President, NetWare Systems Group and was elected as a corporate officer. In August 1993 he became Senior Vice President, Service and Support and Novell Labs.\nStephen C. Wise became Vice President, Accounting and Planning in January 1990 and was elected a corporate officer. In January 1991, he became Vice President and Corporate Controller. In December 1993 he became Senior Vice President, Finance. He had served previously as Corporate Controller and Assistant Treasurer of Excelan since July 1984.\nDarcy G. Mott, a Certified Public Accountant, joined the Company in September 1986 as Manager, Financial Reporting and Taxes. He became Corporate Controller in February 1989, was elected an officer in November 1989, and became Treasurer in January 1991.\nITEM 2.","section_1B":"","section_2":"ITEM 2. PROPERTIES\nThe Company owns and occupies a 542,000 square-foot office complex in Provo, Utah, which is used as corporate headquarters and a product development center. In March 1993, the Company purchased a 52,000 square foot building in San Jose, California, which it had previously leased. It is used primarily for product\ndevelopment. The Company also owns a 175,000 square-foot office complex in Austin, Texas. Approximately 80,000 square-feet of this complex is used as a product development center and the remainder is leased to tenants. Additionally, the Company owns a 100,000 square-foot office building in Herndon, Virginia. The Company occupies approximately 1\/2 of the space in this building and leases the remainder to tenants. Additionally, the Company owns approximately 48 acres of undeveloped land in San Jose, California and an additional 17 acres of undeveloped land in Provo, Utah, for future expansion.\nThe Company has subsidiaries in Australia, Belgium, Brazil, Canada, France, Germany, India, Italy, Japan, Korea, Mexico, South Africa, Spain, Sweden, Switzerland, and the United Kingdom--each of which leases its facilities.\nThe Company leases offices for product development in Cupertino, Monterey, San Jose, Sunnyvale, and Walnut Creek, California; Boulder, Colorado; Natick, Massachusetts; Summit, New Jersey; Salt Lake City and Sandy, Utah; Toronto, Canada; and Hungerford, U.K.; and a distribution facility in San Jose, California. The Company also leases sales and support offices in Arizona, California (6), Colorado, Connecticut, Florida (2), Georgia, Illinois, Massachusetts (2), Michigan, Minnesota, Missouri, New Jersey, New York (2), North Carolina, Ohio (2), Oregon, Pennsylvania (2), Tennessee, Texas (3), Utah, Washington, Hong Kong, Singapore and Taiwan.\nThe terms of such leases vary from month to month to up to ten years.\nITEM 3.","section_3":"ITEM 3. LEGAL PROCEEDINGS\nOn November 10, 1993, a suit was filed against Novell and certain of its officers and directors alleging violation of federal securities laws. The lawsuit was brought as a purported class action on behalf of purchasers of Novell common stock from June 23, 1993 through July 26, 1993. Although the case is in its earliest stages, Novell does not believe that the resolution of this legal matter will have a material adverse effect on its financial position or results of operations.\nIn December of 1991, Roger Billings and his International Academy of Science, (the \"Academy\") filed suit against Novell alleging that the Company infringes on a patent allegedly owned by the Academy. The case is still in its pretrial phase. The Company believes that the ultimate resolution of this legal proceeding will not have a material adverse effect on its financial position or results of operations.\nThe Company is a party to a number of additional legal proceedings arising in the ordinary course of its business. The Company believes the ultimate resolution of these claims will not have a material adverse effect on its financial position or results of operations.\nITEM 4.","section_4":"ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS\nNo matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report.\nPART II\nITEM 5.","section_5":"ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS\nThe information required by Item 5 of Form 10-K is incorporated herein by reference to the information contained in the section captioned \"Novell, Inc. Common Stock\" on page 38 of the Company's Annual Report to Shareholders for the fiscal year ended October 30, 1993.\nITEM 6.","section_6":"ITEM 6. SELECTED FINANCIAL DATA\nThe information required by Item 6 of Form 10-K is incorporated herein by reference to the information contained in the section captioned \"Selected Consolidated Financial Data\" on page 20 of the Company's Annual Report to Shareholders for the fiscal year ended October 30, 1993.\nITEM 7.","section_7":"ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS\nThe information required by Item 7 of Form 10-K is incorporated herein by reference to the information contained in the section captioned \"Management's Discussion and Analysis of Financial Condition and Results of Operations\" on pages 21 through 24 of the Company's Annual Report to Shareholders for the fiscal year ended October 30, 1993.\nITEM 8.","section_7A":"","section_8":"ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA\nThe information required by Item 8 of Form 10-K is incorporated herein by reference to the Company's consolidated financial statements and related notes thereto, together with the report of the independent auditors presented on pages 25 through 36 of the Company's Annual Report to Shareholders for the fiscal year ended October 30, 1993, and to the information contained in the section captioned \"Selected Consolidated Quarterly Financial Data\" on page 37 of the Company's Annual Report to Shareholders for the fiscal year ended October 30, 1993.\nITEM 9.","section_9":"ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE\nNot applicable.\nPART III\nITEM 10.","section_9A":"","section_9B":"","section_10":"ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT\nThe information required with respect to identification of directors is incorporated herein by reference to the information contained in the section captioned \"Election of Directors\" of the Registrant's definitive Proxy Statement for the Annual Meeting of Shareholders to be held March 9, 1994, filed with the Securities and Exchange Commission pursuant to Regulation 14A under the Securities and Exchange Act of 1934, as amended. Information regarding executive officers of Novell is set forth under the caption \"Executive Officers\" in Item 1a hereof.\nEach director and each officer of the Company who is subject to Section 16 of the Securities Exchange Act of 1934 (the \"Act\") is required by Section 16(a) of the Act to report to the Securities and Exchange Commission by a specified date his or her transactions in the Company's securities. During the period from November 1, 1992 to fiscal 1993 year end, Director Elaine R. Bond filed her Form 3 upon joining the Board of Directors in a timely manner but inadvertently omitted a derivative security that she beneficially owned. She subsequently amended such Form 3 to reflect such ownership, which amendment was filed late.\nITEM 11.","section_11":"ITEM 11. EXECUTIVE COMPENSATION\nThe information required by Item 11 of Form 10-K is incorporated by reference to the information contained in the sections captioned \"Executive Compensation\" of the Registrant's definitive Proxy Statement for the Annual Meeting of Shareholders to be held March 9, 1994, filed with the Securities and Exchange Commission pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended.\nITEM 12.","section_12":"ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT\nThe information required by Item 12 of Form 10-K is incorporated by reference to the information contained in the section captioned \"Securities Ownership of Certain Beneficial Owners and Management\" of the Registrant's definitive Proxy Statement for the Annual Meeting of Shareholders to be held March 9, 1994, filed with the Securities and Exchange Commission pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended.\nITEM 13.","section_13":"ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS\nThe information required by Item 13 of Form 10-K is incorporated by reference to the information contained in the section captioned \"Compensation Committee Interlocks and Insider Participation\" of the Registrant's definitive Proxy Statement for the Annual Meeting of Shareholders to be held on March 9, 1994, filed with the Securities and Exchange Commission pursuant to Regulation 14A under the Securities Act of 1934, as amended.\nPART IV\nITEM 14.","section_14":"ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K\n(a) The following documents are filed as a part of this annual report on Form 10-K for Novell, Inc.:\n1. The Consolidated Financial Statements, the Notes to Consolidated Financial Statements and the Report of Ernst & Young, Independent Auditors, listed below are incorporated herein by reference to pages 25 through 36 of the Company's Annual Report to Shareholders for the fiscal year ended October 30, 1993.\nConsolidated Statements of Operations for the fiscal years ended October 30, 1993, October 31, 1992, and October 26, 1991.\nConsolidated Balance Sheets at October 30, 1993 and October 31, 1992.\nConsolidated Statements of Shareholders' Equity for the fiscal years ended October 30, 1993, October 31, 1992, and October 26, 1991.\nConsolidated Statements of Cash Flows for the fiscal years ended October 30, 1993, October 31, 1992, and October 26, 1991.\nNotes to Consolidated Financial Statements.\nReport of Ernst & Young, Independent Auditors.\n(b) Reports on Form 8-K\nNo reports on Form 8-K were filed by the Registrant during the quarter ended October 30, 1993.\nSIGNATURES\nPURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.\nNOVELL, INC. (Registrant)\nDate: January 24, 1994 By \/s\/ RAYMOND J. NOORDA (Raymond J. Noorda, Chairman of the Board, President and Chief Executive Officer)\nPURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.\nNOVELL, INC.\nSCHEDULE I -- MARKETABLE SECURITIES\n- ------------\n(1) The portfolio includes tax exempt municipal bonds with put features and interest rates that are reset periodically as specified with no fluctuation. It also includes tax exempt commercial paper, and tax exempt auction rate instruments.\nNOVELL, INC.\nSCHEDULE VIII--VALUATION AND QUALIFYING ACCOUNTS\n- ------------\n(1) Write-off of uncollectible accounts\nNOVELL, INC.\nSCHEDULE X--SUPPLEMENTARY INCOME STATEMENT INFORMATION\nEXHIBIT INDEX\n- ----------\n(1) Incorporated by reference to the Exhibit identified in parentheses, filed as an exhibit in the Registrant's Registration Statement on Form S-1, filed November 30, 1984, and amendments thereto (File No. 2-94613).\n(2) Incorporated by reference to the Exhibit identified in parentheses, filed as an exhibit in the Registrant's Annual Report on Form 10-K, filed for the fiscal year ended October 25, 1986 (File No. 0-13351).\n(3) Incorporated by reference to the Exhibit identified in parentheses, filed as an exhibit in the Registrant's Current Report on Form 8-K, dated December 7, 1988 (File No. 0-13351).\n(4) Incorporated by reference to the Exhibit identified in parentheses, filed as an exhibit in the Registrant's Annual Report on Form 10-K, filed for the fiscal year ended October 29, 1988 (File No. 0-13351).\n(5) Incorporated by reference to the Appendix identified in parentheses, filed as an appendix in the Registrant's Registration Statement on Form S-4, filed May 9, 1989 (File No. 33-28470).\n(6) Incorporated by reference to the Exhibit identified in parentheses, filed as an exhibit in the Registrant's Registration Statement on Form S-8, filed on July 27, 1989 (File No. 33-29798).\n(7) Incorporated by reference to the Exhibit identified in parentheses, filed as an exhibit in the Registrant's Registration Statement on Form S-8, filed September 28, 1989 (File No. 33-31299).\n(8) Incorporated by reference to the Exhibit identified in parentheses, filed as an exhibit in the Registrant's Registration Statement on Form S-8, filed on September 4, 1990 (File No. 33-36673).\n(9) Incorporated by reference to the Appendix identified in parentheses, filed as an appendix in the Registrant's Registration Statement on Form S-4, filed September 24, 1991 (File No. 33-42254).\n(10) Incorporated by reference to the Exhibit identified in parentheses, filed as an exhibit in the Registrant's Registration Statement on Form S-8, filed June 5, 1992 (File No. 33-48395).\n(11) Incorporated by reference to the Exhibit identified in parentheses, filed as an exhibit in the Registrant's Registration Statement of Form S-4, filed May 13, 1993 (File No. 33-60120).\n(12) Incorporated by reference to the Exhibit identified in parentheses, filed as an exhibit in the Registrant's Registration Statement on Form S-8, filed July 2, 1993 (File No. 33-65440).\n(13) Filed herewith.","section_15":""}
{"filename":"24186_1993.txt","cik":"24186","year":"1993","section_1":"Item 1. Business\nContel of California, Inc. (the Company) is a wholly-owned subsidiary of Contel Corporation (the Parent Company), a wholly-owned subsidiary of GTE Corporation (GTE), and provides communications services in California, Nevada and Arizona.\nThe Company was incorporated in California in 1954. Since its incorporation, twenty-three independent telephone companies have been merged into the Company to form the present entity.\nThe Company provides local telephone service within its franchise areas and intraLATA (Local Access Transport Area) long distance service between the Company's facilities and the facilities of other telephone companies within the Company's LATAs. InterLATA service to other points in and out of the states in which the Company operates is provided through connection with interexchange (long distance) common carriers. These common carriers are charged fees (access charges) for interconnection to the Company's local facilities. End user business and residential customers are also charged access charges for access to the facilities of the long distance carriers. The Company also earns other revenues by leasing interexchange plant facilities and providing such services as billing and collection and operator services to interexchange carriers, primarily the American Telephone and Telegraph Company (AT&T). The number of access lines has grown steadily from 292,103 on January 1, 1989 to 362,905 on December 31, 1993.\nThe Company's principal line of business is providing telecommunication services. These services fall into five major classes: local network, network access, long distance, equipment sales and services and other. Revenues from each of these classes over the last three years are as follows:\nYears Ended December 31 -------------------------------------- 1993 1992 1991 ---- ---- ---- (Thousands of Dollars)\nLocal Network Services $ 94,586 $ 93,752 $ 88,631 % of Total Revenues 25% 23% 23%\nNetwork Access Services $ 139,822 $ 139,171 $ 146,577 % of Total Revenues 36% 34% 38%\nLong Distance Services $ 124,780 $ 133,926 $ 126,746 % of Total Revenues 33% 32% 32%\nEquipment Sales and Services $ 13,134 $ 37,220 $ 12,468 % of Total Revenues 3% 9% 3%\nOther $ 12,315 $ 9,893 $ 16,282 % of Total Revenues 3% 2% 4%\nAt December 31, 1993, the Company had 1,592 employees. The Company has written agreements with the Communications Workers of America (CWA) and International Brotherhood of Electrical Workers (IBEW) covering approximately 794 of the Company's employees. The current agreements with CWA and IBEW units expire on September 6, 1995.\nTelephone Competition\nThe Company holds franchises, licenses and permits adequate for the conduct of its business in the territory which it serves.\nThe Company is subject to regulation by the California Public Utilities Commission (CPUC), the Public Service Commission of Nevada, and the Arizona Corporation Commission as to its intrastate business operations and by the Federal Communications Commission (FCC) as to its interstate business operations. Information regarding the Company's activities with the various regulatory agencies and revenue arrangements with other telephone companies can be found in Note 10 of the Company's Annual Report to Shareholders for the year ended December 31, 1993, incorporated herein and filed as Exhibit 13.\nThe year was marked by important changes in the U.S. telecommunications industry. Rapid advances in technology, together with government and industry initiatives to eliminate certain legal and regulatory barriers are accelerating and expanding the level of competition and opportunities available to the Company. As a result, the Company faces increasing competition in virtually all aspects of its business. Specialized communications companies have constructed new systems in certain markets to bypass the local-exchange network. Additional competition from interexchange carriers as well as wireless companies continues to evolve for both intrastate and interstate communications.\nDuring 1994, the Company will begin implementation of a re-engineering plan that will redesign and streamline processes. Implementation of its re- engineering plan will allow the Company to continue to respond aggressively to these competitive and regulatory developments through reduced costs, improved service quality, competitive prices and new product offerings. Moreover, implementation of this program will position the Company to accelerate delivery of a full array of voice, video and data services. The re-engineering program will be implemented over three years. During the year, the Company continued to introduce new business and consumer services utilizing advanced technology, offering new features and pricing options while at the same time reducing costs and prices.\nDuring 1993, the FCC announced its decision to auction licenses during 1994 in 51 major markets and 492 basic trading areas across the United States to encourage the development of a new generation of wireless personal communications services (PCS). These services will both complement and compete with the Company's traditional wireline services. The Company will be permitted to fully participate in the license auctions in areas outside of GTE's existing cellular service areas. Limited participation will be permitted in areas in which GTE has an existing cellular presence.\nIn Cerritos, California, GTE is testing and comparing the capabilities of copper wire, coaxial cable and fiber optics. The Cerritos test has enhanced GTE's expertise in the areas of pay-per-view video service, video-on demand and local video conferencing, and led to a new interactive video service, GTE Main Street, which allows customers to shop, bank and access various other information services from their homes. In 1992, the FCC issued a \"video dialtone\" ruling that allows telephone companies to transmit video signals over their networks. The FCC also recommended that Congress amend the Cable Act of 1984 to permit telephone companies to supply video programming in their service areas.\nDuring 1993, the CPUC approved a New Regulatory Framework (NRF) settlement agreement allowing GTE California to retain 100% of any earnings above 15.5% beginning in 1994. Under its prior agreement, GTE California was required to share 50% of any earnings over a 13% rate of return and refund 100% of any earnings over 16.5%. The Company has requested that it be allowed to adopt GTE California's NRF concurrent with the approval of the legal entity merger of the Company and GTE California Incorporated. Additionally, the CPUC is expected to issue a final decision in early 1994 generally authorizing intralata toll competition and ordering significant rate restructuring in California. Although intended to be revenue neutral, the ultimate effect on revenue will depend, in part, on the extent to which toll and access rate reductions result in increased calling volumes.\nThe GTE Consent Decree, which was issued in connection with the 1983 acquisition of GTE Sprint (since divested) and GTE Spacenet, prohibits GTE's domestic telephone operating subsidiaries from providing long distance service beyond the boundaries of the LATA. This prohibition restricts their direct provision of long distance service to relatively short distances. The degree of competition allowed in the intraLATA market is subject to state regulation. However, regulatory constraints on intraLATA competition are gradually being relaxed. In fact, some form of intraLATA competition is authorized in many of the states in which the Company provides service.\nIn September 1993, the FCC released an order allowing competing carriers to interconnect to the local-exchange network for the purpose of providing switched access transport services. This ruling complements similar interconnect arrangements for private line services ordered during 1992. The order encourages competition for the transport of telecommunications traffic between local exchange carriers' (LECs) switching offices and interexchange carrier locations. In addition, the order allows LECs flexibility in pricing competitive services.\nThese and other actions to eliminate the existing legal and regulatory barriers, together with rapid advances in technology, are facilitating a convergence of the computer, media and telecommunications industries. In addition to allowing new forms of competition, these developments are also creating new opportunities to develop interactive communications networks. The Company supports these initiatives to assure greater competition in telecommunications, provided that overall the changes allow an opportunity for all service providers to participate equally in a competitive marketplace under comparable conditions.\nItem 2.","section_1A":"","section_1B":"","section_2":"Item 2. Properties\nThe Company's property consists of network facilities (85%), company facilities (12%), customer premises equipment (1%) and other (2%). From January 1, 1989 to December 31, 1993, the Company made gross property additions of $334.9 million and property retirements of $155.6 million. Substantially all of the Company's property is subject to liens securing long-term debt. In the opinion of management, the Company's telephone plant is substantially in good repair.\nItem 3.","section_3":"Item 3. Legal Proceedings\nThere are no pending legal proceedings, either for or against the Company, which would have a material impact on the Company's financial statements.\nItem 4.","section_4":"Item 4. Submission of Matters to a Vote of Security Holders\nNone.\nPART II\nItem 5.","section_5":"Item 5. Market for the Registrant's Common Equity and Related Shareholder Matters\nMarket information is omitted since the Company's common stock is wholly-owned by Contel Corporation.\nItem 6.","section_6":"Item 6. Selected Financial Data\nReference is made to the Registrant's Annual Report to Shareholders, page 30, for the year ended December 31, 1993, incorporated herein and filed as Exhibit 13.\nItem 7.","section_7":"Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations\nReference is made to the Registrant's Annual Report to Shareholders, pages 25 to 29 for the year ended December 31, 1993, incorporated herein and filed as Exhibit 13.\nItem 8.","section_7A":"","section_8":"Item 8. Financial Statements and Supplementary Data\nReference is made to the Registrant's Annual Report to Shareholders, pages 2 to 23, for the year ended December 31, 1993, incorporated herein and filed as Exhibit 13.\nItem 9.","section_9":"Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure\nNone.\nPART III\nItem 10.","section_9A":"","section_9B":"","section_10":"Item 10. Directors and Executive Officers of the Registrant\nThe names, ages and positions of all the directors and executive officers of the Company as of March 1, 1994 are listed below along with their business experience during the past five years.\na. Identification of Directors\nDirector Name Age Since Business Experience - -------------------- --- -------- ----------------------------------------\nJames F. Miles 51 1984 President of Contel of California, Inc. since 1984; Board of Directors, Desert Community Bank, Victorville, California; Former President, Contel of Texas, Inc.; Former Assistant Vice President - Finance, Contel Western Region.\nGeoffrey C. Gould 41 1990 Vice President - Regulatory and Governmental Affairs, GTE Telephone Operations; Former Vice President - Merger Integration, GTE Telephone Operations; Former President, Contel Western Region; Former Vice President - Quality, Contel Headquarters; Former Vice President - Customer Services, Contel Eastern Division Headquarters; Former Director of Public Affairs, Contel of Illinois.\nThomas W. White 47 1991 Executive Vice President, GTE Telephone Operations; Director, Contel of California, Inc.; Board Member, GTE Data Services; Former Senior Executive Vice President - Headquarters Staff, GTE Telephone Operations; Former Vice President - Products Management, GTE Telephone Operations; and Former Vice President - Business Development, GTE Telephone Operations.\nDirectors are elected annually. The term of each director expires on the date of the next annual meeting of shareholders, which may be held on any day during May, as specified in the notice of the meeting.\nThere are no family relationships between any of the directors or executive officers of the Company.\nb. Identification of Executive Officers\nYear Assumed Current Name Age Position Position with Company - ------------------------ --- -------- -----------------------------------\nJames F. Miles 51 1984 President Michael W. Bollinger 43 1991 Assistant Vice President - Controller Michael E. Burke 49 1991 Vice President - Network Design Jeffrey B. Cutherell 44 1991 Vice President - Regulatory and Governmental Affairs and Treasurer John A. Ferrell 43 1991 Vice President - Customer Services\nEach of these executive officers has been an employee of the Company or an affiliated company for the last five years.\nExcept for duly elected officers and directors, no other employees had a significant role in decision making.\nAll officers are appointed for a term of one year.\nItem 11.","section_11":"Item 11. Executive Compensation\nExecutive Compensation Tables\nThe following tables provide information about executive compensation.\nExecutive Agreement\nMr. Miles is covered by a Contel Executive Severance Agreement until December 31, 1994. In order to receive a benefit, this agreement requires the termination of the executive following a change in control of Contel Corporation. Termination is defined as an actual or constructive termination within twelve months following a change in control. Constructive termination includes a reduction in pay or benefits, a demotion or a reduction in responsibilities. The amount of severance to which he is entitled in the event of termination following a change in control is generally equal to three times his final average earnings as defined in Contel's Senior Executive Supplemental Income Plan, plus all fringe benefits that were available to him immediately prior to the change in control. There will be no deduction from the severance payments as a result of any subsequent employment activity.\nRetirement Programs\nPension Plans\nThe Company maintains for its full-time employees, without cost to its employees, a trusteed defined benefit pension plan that complies with the Employee Retirement Income Security Act of 1974, as amended (\"ERISA\"). An employee's normal retirement date is the first day of the month coinciding with or next following his or her sixty-fifth birthday. Pension payments under this defined benefit plan are based on attained age, years of credited service and average annual earnings (regular rates of pay excluding bonuses and fringe benefits) for the five highest consecutive years out of the last ten consecutive years preceding retirement; however, such pension payments may not exceed the \"maximum benefit\" on an annual basis under the provisions of ERISA. The plan provides that up to $235,840 of an employee's earnings in 1993 and up to $245,274 of an employee's earnings in 1994 may be taken into account for purposes of determining an employee's retirement benefits under the plan. Compensation received by current executive officers for services rendered during 1992 that would be used in calculating future pension payments appears in the Summary Compensation Table under the caption \"Annual Compensation - Salary\". As of December 31, 1993, Messrs. Miles, Cutherell, Burke, Ferrell and Bollinger were credited with 28, 22, 27, 21 and 20 years of service, respectively. The following table illustrates the approximate amount of annual pension payments that would accrue to an employee retiring in 1993 at age 65 under the provisions of the plans (such amounts are not subject to any offsets, such as social security benefits):\nAverage Annual 15 Yrs. 20 Yrs. 25 Yrs. 30 Yrs. 35 Yrs. Earnings of Svc. of Svc. of Svc. of Svc. of Svc. - -------------- ---------- --------- ----------- ------------ ----------\n$ 50,000 $ 10,125 $ 13,500 $ 16,875 $ 20,250 $ 23,625 100,000 20,729 27,638 34,548 41,457 48,367 150,000 31,604 42,138 52,672 63,207 73,742 200,000 42,479 56,638 70,797 84,957 99,117 300,000 64,229 85,638 107,048 128,457 149,867\nExecutive Retired Life Insurance Plan\nThe Executive Retired Life Insurance Plan (ERLIP) provides Messrs. Miles, Cutherell, Burke, Ferrell and Bollinger a maximum postretirement life insurance benefit of three times final base salary. Upon retirement, ERLIP benefits may be paid as life insurance or optionally, an equivalent amount may be paid as a lump sum payment equal to the present value of the life insurance amount (based on actuarial factors and the interest rate then in effect), as an annuity or as installment payments. If an optional payment method is selected, the ERLIP benefit will be based on the actuarial equivalent of the present value of the insurance amount.\nThere are no other compensation arrangements for directors of the Company.\nItem 12.","section_12":"Item 12. Security Ownership of Certain Beneficial Owners and Management\n(a) Security Ownership of Certain Beneficial Owners as of February 28, 1994:\nName and Shares of Title Address of Beneficial Percent of Class Beneficial Owner Ownership of Class -------- -------------------- ----------- --------\nCommon Stock Contel Corporation 2,503,667 100% $5 Par value One Stamford Forum shares of Stamford, Connecticut record\nCumulative Alsta & Co. 13,000 100% Preferred c\/o Continental Bank shares of $20 par value 231 S. La Salle Street record (1) Chicago, IL 60693\n- ---------- (1) The 5.25% Series of cumulative preferred stock has full voting rights. The number of shares of cumulative preferred stock shown or owned includes only shares of series having full voting rights. According to the Company's records at the time of issuance of the fully voting preferred shares, sole voting and investment power with respect to such shares is held by the beneficial owner listed in the table.\n(b) Security Ownership of Management as of December 31, 1993:\nCommon Stock of Name of Director or Nominee GTE Corporation --------------------------- All less James F. Miles (1) 15,178 than 1% Geoffrey C. Gould 24,250 Thomas W. White 83,071 ------- 122,499 =======\nExecutive Officers(1)(2) James F. Miles 15,178 Jeffrey B. Cutherell 5,234 John A. Ferrell 2,573 Michael E. Burke 2,776 Michael W. Bollinger 586 ------- 26,347 =======\nAll directors and executive officers as a group(1)(2) 133,668 =======\n(1) Includes shares acquired through participation in GTE's Consolidated Employee Stock Ownership Plan and\/or the GTE Savings Plan.\n(2) Included in the number of shares beneficially owned by Messrs. Miles, Cutherell, Ferrell, Burke and Bollinger and all directors and executive officers as a group are 5,925; 532; 466; 1,270; 297 and 9,287 shares, respectively, which such persons have the right to acquire within 60 days pursuant to stock options.\n(c) There were no changes in control of the Company during 1993.\nItem 13.","section_13":"Item 13. Certain Relationships and Related Transactions\nThe Company`s executive officers or directors were not materially indebted to the Company or involved in any material transaction in which they had a direct or indirect material interest.\nPART IV\nItem 14.","section_14":"Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K\n(a)(1) Financial Statements - Reference is made to the Registrant's Annual Report to Shareholders, pages 2 - 23, for the year ended December 31, 1993, incorporated herein and filed as Exhibit 13.\nReport of Independent Public Accountants.\nConsolidated Balance Sheets - December 31, 1993 and 1992.\nConsolidated Statements of Income for the years ended December 31, 1993-1991.\nConsolidated Statements of Reinvested Earnings for the years ended December 31, 1993-1991.\nConsolidated Statements of Cash Flows for the years ended December 31, 1993-1991.\nNotes to Consolidated Financial Statements.\n(2) Financial Statement Schedules - Included in Part IV of this report for the years ended December 31, 1993-1991:\nPage(s) -------\nReport of Independent Public Accountants 14\nSchedules:\nV - Property, Plant and Equipment 15-17\nVI - Accumulated Depreciation and Amortization of Property, Plant and Equipment 18\nVIII - Valuation and Qualifying Accounts 19\nX - Supplementary Income Statement Information 20\n- ---------- Note: Schedules other than those listed above are omitted as not applicable, not required, or the information is included in the financial statements or notes thereto.\n(3) Exhibits - Included in this report or incorporated by reference.\n2.1 Agreement of Merger, dated September 10, 1992 between GTE California Incorporated and Contel of California, Inc.\n3* Articles of Incorporation and Bylaws (incorporated by reference from the Registration Statement of the Company, File No. 2-52487, effective January 14, 1975).\n4* Instruments defining the rights of security holders, including indentures (incorporated by reference from the Registration Statement of the Company, File No. 2-52487, effective January 14, 1975).\n13 Annual Report to Shareholders for the year ended December 31, 1993, filed herein as Exhibit 13.\n(b) Reports on Form 8-K - No reports on Form 8-K were filed during the fourth quarter of 1993.\n- ---------- * Denotes exhibits incorporated herein by reference to previous filings with the Securities and Exchange Commission as designated.\nREPORT OF INDEPENDENT PUBLIC ACCOUNTANTS\nTo Contel of California, Inc.:\nWe have audited in accordance with generally accepted auditing standards, the consolidated financial statements included in Contel of California, Inc. and subsidiary's annual report to shareholders incorporated by reference in this Form 10-K, and have issued our report thereon dated January 28, 1994. Our report on the consolidated financial statements includes an explanatory paragraph with respect to the change in the method of accounting for income taxes in 1992 as discussed in Note 1 to the consolidated financial statements. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. The schedules listed under Item 14 are the responsibility of the Company's management and are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic financial statements. These schedules have been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.\nARTHUR ANDERSEN & CO.\nDallas, Texas January 28, 1994.","section_15":""}
{"filename":"897599_1993.txt","cik":"897599","year":"1993","section_1":"ITEM 1. BUSINESS\nGeneral\nMartin Marietta Corporation is a diversified enterprise principally engaged in the conception, design, manufacture and integration of advanced technology products and services for the United States Government and private industry. Martin Marietta Corporation manages significant facilities for the Department of Energy and also produces construction aggregates and specialty chemical products. In April 1993, Martin Marietta Corporation consummated a transaction in which its businesses and the Aerospace businesses of the General Electric Company (GE) were combined (Combination). As a result of the Combination, which was approved by Martin Marietta Corporation's stockholders on March 25, 1993, the then existing Martin Marietta Corporation, which was formed in 1961 by the consolidation of the Glenn L. Martin Company (founded in 1909) and the American-Marietta Company (founded in 1913), was renamed Martin Marietta Technologies, Inc. (Technologies). In the Combination, Technologies became a wholly-owned subsidiary of a new corporation which assumed the Martin Marietta Corporation name. Martin Marietta Corporation and Technologies, although separate Maryland corporations, are operated functionally as an integrated organization and this Annual Report on Form 10-K treats them in this fashion. Unless the context otherwise requires,\nreferences to \"Martin Marietta\" or the \"Corporation\" refer to Martin Marietta Corporation, its consolidated subsidiaries (including Technologies) and certain nonconsolidated associated companies or joint ventures. See \"Martin Marietta Technologies, Inc. - Reporting Status\" on page 23.\nBusiness Segment Information In 1993, Martin Marietta conducted business in six reportable industry segments. These segments are: the Electronics Group, the Space Group, the Information Group, the Services Group, the Materials Group, and Energy and Other Operations. Information concerning Martin Marietta's net sales, operating profit, assets employed, and certain additional information attributable to each reportable business segment for each year in the three-year period ended December 31, 1993, is included in the \"Analysis of Financial Condition and Operating Results\" on page 56 through page 61 of the Corporation's 1993 Annual Report to Shareowners (1993 Annual Report) and in \"Note R: Industry Segments\" of the \"Notes to Financial Statements\" on page 54 of the 1993 Annual Report.\nElectronics Group The Electronics Group carries out its operations through the following organizations: Aero & Naval Systems, Armament Systems, Defense Systems, Communications Systems, Control Systems, Electronics & Missiles, Government Electronic Systems, and Ocean, Radar & Sensor Systems. The Group's activities are diverse, but\n- 2 -\nprimarily relate to the design, development, engineering and production of electronic systems for precision guidance, navigation, detection and tracking of threats; missiles and missile launching systems; armaments; aircraft controls and subsystems (thrust reversers); and secure communications systems. The Group is the prime contractor for the United States Navy's AEGIS fleet air-defense system and produces the AEGIS Weapon System including the AN\/SPY-1 radar. AEGIS was the Group's largest program in 1993 and is expected to be the largest in 1994. The Group serves as prime contractor for the development of the AN\/BSY-2 Submarine Combat System for the Navy's new Seawolf attack submarine. The Group produces the LANTIRN system, an advanced night vision, navigation and targeting fire control system for fixed-wing aircraft and the Target Acquisition Designation Sight\/Pilot Night Vision Sensor (TADS\/PNVS) for the Army's AH-64 Apache Attack helicopter. The Group also produces the MK 41 Vertical Launching System (VLS) for the Navy's AEGIS-equipped Ticonderoga-class cruisers and Spruance- and Arleigh Burke-class destroyers. The VLS is a shipboard multi-missile launching system for various types of naval missiles. Sales by the Group represented approximately 41% of the Corporation's total sales in 1993. Sales to the United States Government represented approximately 89% of the Group's sales in 1993.\n- 3 -\nSpace Group The Space Group's operations are carried out through three organizations: Astronautics, Astro Space and Manned Space Systems. The Group's activities include the design, development, engineering and production of spacecraft, space launch vehicles and supporting ground systems, electronics and instrumentation. The Group serves as the prime integration, systems production and launch contractor to the U.S. Air Force for the Titan series of expendable space launch vehicles. These include the Titan II, Titan III and Titan IV. The design, development and fabrication of the Titan IV, together with the provision of related payload integration and launch services, was the Group's (and the Corporation's) largest program in 1993, constituting approximately 45% of the Group's 1993 sales. The first Titan IV equipped with a newly developed Centaur upper stage was successfully launched in February, 1994. The new configuration allows the launching of significantly heavier payloads to geosynchronous orbit. Titan IV is expected to continue to be the Group's largest program over the next several years. Affirming its commitment to remain a leading contractor in the nation's civil and military space launch programs, on December 22, 1993, the Corporation signed an agreement with General Dynamics to purchase its Space Systems Division. The primary asset of the Space Systems Division is business relating to the Atlas series of space launch vehicles and the Centaur upper stages used with Atlas and Titan IV launch vehicles. Acquisition of the Atlas series of launch vehicles will allow the Corporation to enter the\n- 4 -\nintermediate lift launch market. Consummation of the transaction is subject to certain regulatory approvals and the satisfaction of certain other conditions. Assuming satisfaction of these conditions, the transaction is expected to close during the first half of 1994. See \"Note D: Proposed Transactions\" of the \"Notes to Financial Statements\" on page 46 of the 1993 Annual Report. A second focus of the Group is the design, development, assembly and testing of expendable external fuel tanks for the National Aeronautics and Space Administration's (NASA) Space Shuttle program. The external tank program is expected to remain a significant program in future years. A third area of operations is the design, development, production and integration of military, civil and commercial spacecraft and related subsystems. Spacecraft missions include communications (e.g., INTELSAT VIII, AsiaSat, Echostar, Inmarsat and the Defense Satellite Communications System), global positioning (e.g., GPS Block II), weather monitoring (e.g., the Television Infrared Observation Satellite program and the Defense Meteorological Satellite program), environmental\/earth observing (e.g., Global Geospace Science Satellite, EOS AM, and Landsat satellites), and planetary exploring (e.g., Magellan and Cassini). Sales by the Group represented approximately 36% of the Corporation's total sales in 1993. Sales to the United States Government represented approximately 93% of the Group's sales in 1993.\n- 5 -\nInformation Group The Information Group consists of four organizations: Automation Systems, Information Systems, Internal Information Systems and Management & Data Systems. The Group provides command and control systems, information processing services, systems engineering, integration, program management, software development, computer-based simulations and training products, computer-based test control, machinery control, and automated logistics systems to civil, military and commercial customers. The Group is the prime contractor for the Consolidated Automated Support System (CASS). CASS is an automated, self contained diagnostic unit for testing Navy electronic and avionic systems. The Group is the integration contractor for the Ballistic Missile Defense organization National Test Facility (NTF) at Falcon Air Force Base, Colorado. As part of the ballistic missile defense initiative, the NTF tests and evaluates simulated strategic defense concepts, architectures, battle-management plans and technologies that would not otherwise be feasible to test. In addition, the Group is providing systems engineering and integration services to the U.S. Federal Aviation Administration (FAA). These services assist the FAA in the implementation of the FAA's Capital Investment Plan, a plan for modernizing the nation's air traffic control system. Implementation of the FAA's plan requires upgrading the FAA's computer, weather, navigation and communication systems.\n- 6 -\nThe Group is in the third year of a 12-year contract with the U.S. Department of Housing & Urban Development (HUD) to modernize HUD's data processing systems. In 1993, development of a communication system linking HUD's new computer center with its disaster-recovery facility, headquarters and 81 regional and field offices was completed. Sales by the Group represented approximately 13% of the Corporation's total sales in 1993. Sales to the United States Government represented approximately 90% of the Group's sales in 1993.\nServices Group The Services Group consists of three organizations: Martin Marietta Services, Inc., Martin Marietta Technical Services, Inc. and KAPL, Inc. The Group provides management, engineering, logistics, systems software and processing support, and other technical services to military, civil government and international customers as well as to other organizations within the Corporation. The Department of Defense is the Group's largest customer. The Group is responsible for the operation of the EPA's National Computer Center in Raleigh, North Carolina, the Washington Information Center in Washington, D.C., and the National Environmental Supercomputer Center in Bay City, Michigan. In addition, the Group provides information center support and various consulting and design services to the EPA. Work for the EPA is expected to remain one of the Group's major sources of revenue in 1994.\n- 7 -\nThe Group provides scientific, engineering, operations and management services support to NASA's Johnson Space Flight Center with respect to that organization's efforts in life sciences experimentation. In this regard, the Group was recently selected to provide such support on the ten upcoming Russian\/American Life Sciences Missions. The Group provides similar services supporting NASA missions at Goddard Space Flight Center, AMES Research Center, and the Dryden Flight Center. The Group also provides quality control and engineering services, training, installation and maintenance support of the U.S. Navy's AEGIS fleet air-defense system for which the Corporation's Electronics Group is prime contractor. In addition, the Group presently provides operation and maintenance support of 17 remote long-range radar sites throughout the State of Alaska for the U.S. Air Force. The contract's period of performance expires in September 1994 and currently the Group is competing for a new five-year contract. KAPL Inc., a component of the Group, provides high-level engineering and management support to the Department of Energy's Knolls Atomic Power Laboratory. Sales by the Group represented approximately 4% of the Corporation's total sales in 1993. Sales to the United States Government represented essentially all of the Group's sales in 1993.\n- 8 -\nMaterials Group Historically, the Corporation's construction aggregates and specialty chemical products businesses had been conducted through Martin Marietta Aggregates and Martin Marietta Magnesia Specialties Inc. In November 1993, the aggregates business and the Common Stock of Martin Marietta Magnesia Specialties Inc. were transferred to a new company, Martin Marietta Materials, Inc. (Materials). On February 24, 1994, an initial public offering of Material's common stock was consummated and 8,797,500 shares of common stock (representing approximately 19% of the shares outstanding) were sold at an initial offering price of $23.00 per share. The Corporation continues to own all of the remaining shares and presently intends to maintain such ownership. Maintenance by the Corporation of at least an 80% ownership position will enable the Corporation to continue to include Materials in the Corporation's consolidated group for federal income tax purposes. See \"Note D: Proposed Transactions\" of the \"Notes to Financial Statements\" on page 46 of the 1993 Annual Report. Materials carries on its operations through two divisions, Aggregates and Magnesia Specialties. The Aggregates division is the United States' third largest producer of aggregates for the construction of highways and other infrastructure projects and for the commercial and residential construction industries. In 1993, Materials shipped approximately 65 million tons of aggregates to customers in 24 states, generating sales of $337.5 million. In 1993, approximately 94% of the aggregates shipped by Materials were crushed stone, primarily granite and limestone, and approximately\n- 9 -\n6% were sand and gravel. Materials has focussed on the production of construction aggregates and has not integrated vertically into other construction materials businesses. As a result of dependence upon the construction industry, the profitability of construction aggregates producers is sensitive to regional economic conditions, particularly to cyclical swings in construction spending and changes in the level of infrastructure spending funded by the public sector. The aggregates business is also highly seasonal, due primarily to the effect of weather conditions on construction activity in the markets served. Materials' aggregates business is concentrated principally in the Southeast and the Midwest and is, therefore, primarily affected by the weather and economies in these regions. Management believes that raw material reserves are sufficient to permit production at present operational levels for the foreseeable future. Through its Magnesia Specialties Division, Materials manufactures and markets magnesia-based products, including refractory products for the steel industry and chemical products for industrial and agricultural uses. In 1993, the Magnesia Specialties Division generated net sales of $115.4 million. Magnesia Specialties' refractory and dolomitic lime products are sold primarily to the steel industry, and such sales may be affected by developments in that industry. Sales by the Group represented approximately 5% of the Corporation's total sales in 1993.\n- 10 -\nEnergy and Other Operations Energy Group - The Energy Group's operations are performed through three organizations: Martin Marietta Energy Systems, Inc., Martin Marietta Utility Services, Inc. and Martin Marietta Specialty Components, Inc. A primary function performed by Martin Marietta Energy Systems, Inc. is managing the Department of Energy's (DOE) facilities at Oak Ridge, Tennessee. The Oak Ridge facilities include: (i) the K-25 site, which is host to a number of environmental and other technical programs performed for the DOE and other federal agencies, (ii) the Oak Ridge Y-12 Plant, a manufacturing and developmental engineering facility engaged primarily in programs vital to the national defense, and (iii) the Oak Ridge National Laboratory, one of the nation's largest multipurpose research centers. The Oak Ridge National Laboratory's primary mission is the development of safe, economic and environmentally acceptable technologies for the efficient production and use of energy. An additional critical mission is the transfer of technology to the private sector to enhance national competitiveness. In July 1993, the DOE's uranium enrichment operations were transferred to the United States Enrichment Corporation, a government corporation. These operations included the DOE's Paducah and Portsmouth Gaseous Diffusion Plants which produce enriched uranium for use as a fuel in nuclear power plants. The Energy Group, which had managed these facilities for the DOE, continues to perform this management role for the United States\n- 11 -\nEnrichment Corporation through Martin Marietta Utility Services, Inc. Martin Marietta Specialty Components, Inc. manages the Pinellas electronic components plant in Largo, Florida for the DOE. The plant manufactures electronic and electromechanical components, primarily for nuclear weapons. Recent defense-related budget reductions have decreased production at some of the Energy Group's facilities and the Secretary of the DOE recently announced that nuclear weapons components stockpile production will cease at both the Y-12 and the Specialty Components plants. Sandia Corporation - In 1993, the Corporation was selected to succeed AT&T as the operating contractor for the DOE's Sandia National Laboratories (Sandia). The Corporation, through Sandia Corporation (a wholly-owned subsidiary, the common stock of which was acquired from AT&T), assumed full management and operational responsibility for Sandia in October 1993. Sandia is a federal government research and development laboratory with significant responsibilities for national security programs in defense and energy. An additional critical mission is the transfer of technology to the private sector to enhance national competitiveness. Martin Marietta Overseas Corporation - Martin Marietta Overseas Corporation (MMOC), a wholly-owned subsidiary of Martin Marietta, is generally responsible for contracts, joint ventures, teaming and other agreements with international customers and parties. In recent years, the amount of business conducted by the\n- 12 -\nCorporation internationally (directly and through MMOC) has increased and international business now constitutes approximately 13% of the Corporation's business. Included in this percentage are Foreign Military Sales which, because such sales are made through the U.S. Government, are also taken into account in calculating the percentage of the Corporation's sales to the U.S. Government. International business includes the production of commercial communications satellites for customers such as AsiaSat, Japan Broadcasting Corporation, Korea Telecom, the 52-nation Inmarsat Consortium and the 124-nation INTELSAT consortium, and the sale of airborne, ground and naval surveillance radars, the Patriot Missile System, the LANTIRN system, and the TADS\/PNVS system to various allied nations. Additional Activities - For information relating to activities undertaken by the Corporation included within this reportable business segment, including information pertaining to activities not discussed above, see \"Note R: Industry Segments\" of the \"Notes to Financial Statements\" on page 54 of the 1993 Annual Report.\nCompetition, Contracts and Risk Martin Marietta competes with numerous other contractors on the basis of price and technical capability. Its business involves rapidly advancing technologies and is subject to many uncertainties including, but not limited to, those resulting from changes in federal budget priorities, particularly the size and scope of the defense budget, and dependence on Congressional appropriations. Within the context of the general market decline and resulting over\n- 13 -\ncapacity and increased competition within the defense and aerospace industries, management views the operations of the Electronics and Space Groups as stable areas and is taking steps to maintain sales levels by these Groups. Management views the operations of the Information Group, Services Group, Materials Group and Energy Group as growth areas and is seeking to increase the business of these Groups particularly to civil, commercial and international customers. Due to the intense competition for available government business, the maintenance and\/or expansion of government business increasingly requires the Corporation to invest in its working capital and fixed asset base. In addition, management continues to review opportunities to expand the Corporation's existing businesses and to diversify into closely related businesses through acquisitions. Approximately 87% of the 1993 sales of the Corporation were made to the United States Government, either as a prime contractor or as a subcontractor, principally to the Department of Defense (including Foreign Military Sales) and NASA and additionally to the U.S. Department of Energy, the U.S. Department of Housing & Urban Development, the U.S. Environmental Protection Agency, and the U.S. Postal Service. Accordingly, sales and earnings are subject to the size, schedule and funding of government programs and are subject to periodic review in light of changes in government policies and requirements, availability of funds and technical or schedule progress. Earnings may vary materially depending upon the types of long- term government contracts undertaken, the costs incurred in their\n- 14 -\nperformance, the achievement of other performance objectives and the stage of performance at which the right to receive fees, particularly under incentive and award fee contracts, is finally determined. See \"Note A: Accounting Policies\" of the \"Notes to Financial Statements\" on page 44 and page 45 of the 1993 Annual Report for information concerning Martin Marietta's accounting policies governing recognition of revenues and earnings. All government contracts and, in general, subcontracts thereunder are subject to termination in whole or in part at the convenience of the United States Government as well as for default. Long-term government contracts and related orders are subject to cancellation if appropriations for subsequent performance periods become unavailable. Martin Marietta generally would be entitled to receive payment for work completed and allowable termination or cancellation costs if any of its government contracts were to be terminated for convenience. Upon termination for convenience of cost-reimbursement-type contracts, the contractor is normally entitled, to the extent of available funding, to reimbursement of allowable costs plus a portion of the fee related to work accomplished. Upon termination for convenience of fixed-price-type contracts, the contractor is normally entitled, to the extent of available funding, to receive the purchase price for delivered items, reimbursement for allowable costs for work in process, and an allowance for profit thereon or adjustment for loss if completion of performance would have resulted in a loss.\n- 15 -\nA portion of Martin Marietta's business includes classified programs. Although these programs are not discussed herein, the operating results relating to those programs are included in the Corporation's consolidated financial results. The nature of and business risks associated with classified programs do not differ materially from those of the Corporation's other government programs and products. An increasing percentage of Martin Marietta's business is conducted internationally. While this is one of the Corporation's objectives, international business may involve additional risks, such as exposure to currency fluctuations, offset obligations and changes in foreign economic and political environments. In addition, international transactions frequently involve increased financial and legal risks arising from stringent contractual terms and conditions and widely differing legal systems, customs and mores in various foreign countries. The Corporation owns numerous patents and patent applications some of which, together with licenses under patents owned by others, are utilized in its operations. While such patents and licenses are, in the aggregate, important to the operation of the Corporation's business, no existing patent, license or other similar intellectual property right is of such importance that its loss or termination would, in the opinion of management, materially affect the Corporation's business. Certain risks inherent in the current defense and aerospace business environment are discussed in \"Analysis of Financial\n- 16 -\nCondition and Operating Results\" on page 56 through page 61 of the 1993 Annual Report.\nBacklog Martin Marietta's backlog of orders at December 31, 1993, was $16.7 billion compared with $8.9 billion at the end of 1992. The 1993 amount includes funded backlog of $9.3 billion compared with $3.7 billion at the end of 1992. Martin Marietta's backlog and funded backlog did not include $10.4 billion and $6.3 billion, respectively, at December 31, 1992, attributable to the former GE Aerospace businesses that was added on April 2, 1993, as a result of the Combination. See Parent Corporation's Registration Statement on Form S-4 (Registration No. 33-58494). Typically, the United States Government funds its major programs only to the dollar level appropriated annually by the Congress despite total estimated program values being significantly higher. Accordingly, the government funded backlog reflected in the above amounts represents only the government's present obligation and represents the amount from which Martin Marietta can be reimbursed for work performed. Backlog information and comparisons thereof as of different dates may not be accurate indicators of future sales or the ratio of Martin Marietta's future sales to the United States Government versus its sales to other customers. Of the Corporation's total 1993 year-end backlog, approximately $10.4 billion, or 62%, is not expected to be filled within one year.\n- 17 -\nEnvironmental Regulation Martin Marietta's operations are subject to and affected by a variety of federal, state, and local environmental protection laws and regulations, including those regulating air and water quality, hazardous materials and solid wastes. Management believes that, on an overall basis, all of the facilities, owned or leased by the Corporation, are currently operated in substantial compliance with applicable statutes and regulations. Some of these facilities are currently subject to remedial actions for removing hazardous contamination that exists from prior operations. The Corporation is actively involved in environmental responses at certain of its facilities and at certain waste disposal sites not currently owned by the Corporation (third-party sites) where the Corporation, or its former aluminum subsidiary, or one of the GE Aerospace businesses acquired in the Combination has been designated a \"Potentially Responsible Party\" (PRP) by the U.S. Environmental Protection Agency (EPA). At such third-party sites, the EPA or a state agency has identified the site as requiring removal or remedial action under the federal \"Superfund\" and other related federal or state laws governing the remediation of hazardous materials. Generally, PRPs that are ultimately determined to be \"responsible parties\" are strictly liable for site clean-ups and usually agree among themselves to share, on an allocated basis, in the costs and expenses for investigation and remediation of the hazardous materials. Under existing environmental laws, however, responsible parties are jointly and severally liable and, therefore, the Corporation is potentially liable for the full cost\n- 18 -\nof funding such remediation. In the unlikely event that the Corporation were required to fund the entire cost of such remediation, the statutory framework provides that the Corporation may pursue rights of contribution from the other PRPs. At third-party sites, the Corporation continues to pursue a course of action designed to minimize and mitigate its potential liability through assessing the legal basis for its involvement, including an analysis of such factors as (i) the amount and nature of materials disposed of by the Corporation, (ii) the allocation process, if any, used to assign all costs to all involved parties, and (iii) the scope of the response action that is or may reasonably be required. The Corporation also continues to pursue active participation in steering committees, consent orders and other appropriate and available avenues. Management believes that this approach should allow the Corporation to establish its minimum percentage liability on an allocated or shared basis with other PRPs. Although the Corporation's involvement and extent of responsibility varies at each site, management, after an assessment of each site and consultation with environmental experts and counsel, has concluded that the probability is remote that the Corporation's actual or potential liability as a PRP in each or all of these sites will have a material adverse effect on the Corporation's financial position or results of operations. While the possibility of insurance coverage is considered in the Corporation's efforts to minimize and mitigate its potential liability, this possibility is not taken into account in\n- 19 -\nmanagement's assessment of whether it is likely that its actual or potential liability will have a material adverse effect on the Corporation's financial position or results of operations. As part of its established environmental management program, the Corporation is currently engaged in waste-minimization projects designed to reduce generation of hazardous waste and to reduce future costs associated with waste disposal. Capital investments for environmental control purposes generally afford minimal financial return and result in increased operating costs. New and revised requirements are being continually imposed which may require further investment. Such requirements add to the costs of operations in the industries in which Martin Marietta does business, but the amount of such costs cannot reasonably be estimated. In addition, Martin Marietta manages various government-owned facilities on behalf of the government. At such facilities, environmental compliance and remediation costs have historically been the responsibility of the government and the Corporation relied (and continues to rely with respect to past practices) upon government funding to pay such costs. While the government remains responsible for capital costs associated with environmental compliance, responsibility for fines and penalties associated with environmental noncompliance is being shifted from the government to the contractor in certain instances with such fines and penalties no longer constituting allowable costs under the contracts pursuant to which such facilities are managed.\n- 20 -\nManagement does not believe that adherence to presently applicable environmental regulations at its own facilities or in its contract management capacity at government-owned facilities will have a material adverse effect on Martin Marietta's financial position or results of operations. For additional details, see \"Legal Proceedings\" on page 26 through page 30. See also \"Note I: Contingencies\" of the \"Notes to Financial Statements\" on page 48 and \"Analysis of Financial Condition and Operating Results\" on page 56 through page 61 of the 1993 Annual Report.\nResearch and Development Martin Marietta conducts significant research and development activities, both under contract funding and with Independent Research and Development (IR&D) funds. A large portion of these activities are carried out at the Corporation's Electronics Group, Space Group and Information Group facilities. Research and development projects at these facilities relate to such diverse areas as sensor technologies, state-of-the-art software, expert systems and computing technologies, space launch and space platform technologies, and electronics. In addition, the Corporation's Advanced Development & Technology Operations (ADTO), headquartered in San Diego, California, is chartered to identify, develop and demonstrate advanced technological concepts having broad applications in space, defense, information and communications systems, and commercial fields. An element of ADTO is Martin Marietta Laboratories, a research and development facility near Baltimore, Maryland. Martin Marietta Laboratories conduct basic\n- 21 -\nscientific and engineering research projects in fields such as advanced materials, photonics, micro-electronics and information processing. In addition, as a result of the Combination, the Corporation now has an Electronics Laboratory in Syracuse, New York, which conducts advanced research in solid-state microwave and millimeter- wave technology, infrared sensor focal plane electronics and specialized integrated microelectronic modules for radar, space, communications and infrared sensor systems. The Combination also brought to the Corporation the Advanced Technology Laboratory in Moorestown, New Jersey, which conducts research and development in advanced computing technologies. Finally, as a result of the Combination, the Corporation is afforded access to the General Electric Company's Corporate Research and Development Laboratories. See \"Note P: Research and Development Expenses\" of the \"Notes to Financial Statements\" on page 51 of the 1993 Annual Report.\nEmployees As of January 31, 1994, Martin Marietta had approximately 92,000 employees, including approximately 22,000 persons employed by the Energy Group, 9,000 persons employed by Sandia Corporation and 3,000 employed by KAPL, Inc. Approximately 17,000 of Martin Marietta's employees are covered by 68 separate collective bargaining agreements with various international and local unions. Of these agreements, 40, covering approximately 6,000 employees, will expire during 1994. Management considers employee relations generally to be good and believes that the probability is remote\n- 22 -\nthat renegotiating these contracts will have a material adverse effect on its business.\nMartin Marietta Technologies, Inc. - Reporting Status Martin Marietta Corporation and Martin Marietta Technologies, Inc. each have securities registered pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (1934 Act). The staff of the Securities and Exchange Commission (SEC) has taken the position that the companies need not file separate 1934 Act reports if those reports filed by Martin Marietta Corporation are expanded so as to include additional information concerning Martin Marietta Technologies, Inc. Such additional information is included in this Annual Report on Form 10-K and in \"Note J: Martin Marietta Technologies, Inc.\" of the \"Notes to Financial Statements\" on page 48 of the 1993 Annual Report. In addition, certain documents required to be filed as Exhibits to this Form 10-K or incorporated by reference to previous filings with the SEC are incorporated herein by reference to previous SEC filings by Technologies. At the time of such filings, Technologies was known as Martin Marietta Corporation and filed under Commission File Number 1-4552. See \"Note B: Business Combination with GE Aerospace\" of the \"Notes to Financial Statements\" on page 45 and page 46 of the 1993 Annual Report.\nITEM 2.","section_1A":"","section_1B":"","section_2":"ITEM 2. PROPERTIES At December 31, 1993, excluding Martin Marietta Materials, Inc., the Corporation operated in approximately 186 offices,\n- 23 -\nfacilities, plants and laboratories located throughout the United States and internationally. Of these, Martin Marietta owned approximately 18 locations, aggregating approximately 19 million square feet, in fee simple and leased approximately 168 locations aggregating just over 9 million square feet. In addition, Martin Marietta manages various government-owned facilities, including the NASA Michoud Assembly Facility at New Orleans, Louisiana, the Department of Energy facilities at Oak Ridge, Tennessee, and Largo, Florida, the United States Enrichment Corporation's facilities at Paducah, Kentucky, and Piketon, Ohio, the Sandia National Laboratories at Albuquerque, New Mexico and Livermore, California, the Knolls Atomic Power Laboratory at Niskayuna, New York, and an Army ordnance plant at Milan, Tennessee. Martin Marietta personnel also occupy government-owned facilities at Cape Canaveral Air Force Station and Kennedy Space Center in Florida, at Marshall Space Flight Center in Alabama, at Vandenberg Air Force Base in California and at Jericho, Vermont; Johnson City, New York; and Pittsfield, Massachusetts. The United States Government also furnishes certain equipment and property used by Martin Marietta. Martin Marietta owns its headquarters office building located in Bethesda, Maryland in fee simple. In addition, the Corporation owns 200 acres of land and approximately 2.1 million square feet of buildings at Middle River, Maryland, near Baltimore; a 1.8 million square foot office building and manufacturing park located in Syracuse, New York; approximately 3,200,000; 3,200,000; 675,000; 500,000 and 1,200,000 square feet of office and manufacturing facilities located in Orlando, Florida; Waterton, Colorado; East\n- 24 -\nWindsor, New Jersey; Utica, New York; and King of Prussia, Pennsylvania, respectively; approximately 1,500,000 square feet of office space in Littleton, Colorado; and approximately 700 acres of land which could be developed in Orlando, Florida. The Syracuse and Utica, New York facilities are occupied by the Electronics Group while the Waterton, Colorado; East Windsor, New Jersey; and King of Prussia, Pennsylvania facilities are occupied by the Space Group. In 1993, the Corporation announced a facilities consolidation plan which is expected to reduce operating costs by $1.5 billion over the next five years. Under this plan, approximately five million square feet of capacity will be eliminated from the Corporation's facilities in various locations. For additional details, see \"Analysis of Financial Condition and Operating Results\" on page 56 through page 61 of the 1993 Annual Report. In 1993, Martin Marietta Materials, Inc. (Materials) shipped aggregates from 140 quarries in 11 Southeastern and Midwestern states; mining operations were conducted at 133 of these quarries, of which 29 are located on land owned by Materials, 45 are on land owned in part and leased in part, 54 are on leased land, and 5 are on facilities leased on a temporary basis. Materials owns real property with a total area of approximately 38,000 acres and leases real property with a total area of approximately 46,000 acres. Materials conducts its specialty chemical products operations at facilities in Woodville, Ohio and Manistee, Michigan and at smaller plants in Bridgeport, Connecticut and River Rouge, Michigan.\n- 25 -\nManagement believes that all of Martin Marietta's major physical facilities are in good condition and are adequate for their intended use.\nITEM 3.","section_3":"ITEM 3. LEGAL PROCEEDINGS Martin Marietta is primarily engaged in providing products and services under contracts with the United States Government and, to a lesser degree, under foreign government contracts, some of which are funded by the United States Government. All such contracts are subject to extensive legal and regulatory requirements and, from time to time, agencies of the United States Government investigate whether Martin Marietta's operations are being conducted in accordance with these requirements. Such investigations could result in administrative, civil or criminal liabilities including reimbursements, fines or penalties being imposed upon Martin Marietta or could lead to suspension or debarment from future government contracting by Martin Marietta. Neither management nor counsel is aware of any such investigation presently ongoing which is likely to result in the suspension or debarment of the Corporation or which is likely to result in the imposition of reimbursements, fines or penalties which would have a material adverse effect on the Corporation's financial position. Martin Marietta is also involved in various other legal and environmental proceedings. Martin Marietta Energy Systems, Inc. (MMES), a wholly-owned subsidiary of Technologies, manages certain facilities on behalf of the Department of Energy (DOE) under contracts with the DOE. MMES\n- 26 -\nis involved in proceedings arising out of work performed under these contracts including the following: - - On June 7, 1990, Boggs, et al. v. Divested Atomic Corporation, et al., was filed against various defendants including MMES. Plaintiffs' request for class certification was granted and the case is pending in the United States District Court for the Eastern District of Ohio. Plaintiffs seek monetary damages of $600 million based upon allegations that the defendants discharged hazardous substances into the environment. In the event that any damages are awarded in these proceedings, such damages will be allowable costs under the contracts between MMES and the DOE. - - On May 28, 1992, the Arkansas State Attorney General filed a civil suit against MMES and the DOE relating to the shipment of hazardous waste (which may have contained trace amounts of radioactivity) from facilities managed for the DOE by MMES into the State of Arkansas. The suit, which is in the United States District Court for the Eastern District of Arkansas, Western Division, seeks civil penalties to be set by the Court plus an award to the State of Arkansas for the costs of its investigation plus reasonable attorney's fees and costs. In the event that any damages are awarded in these proceedings, such damages will be allowable costs under the contracts between MMES and the DOE. - - On December 28, 1993, MMES received a subpoena issued by a Federal Grand Jury in the Eastern District of Virginia requiring the production of documents relating to subcontracts\n- 27 -\nwith two of MMES' suppliers. MMES has produced the documents required. The prosecutor has informed MMES that MMES is not, at this time, the target of the investigation. On August 5, 1991, Technologies (then known as Martin Marietta Corporation) was served with two subpoenas by the Department of Defense Inspector General relating to documents pertaining to a contract with the Navy for the full-scale development of the Supersonic Low Altitude Target (SLAT) and documents associated with six Independent Research and Development (IR&D) tasks, collectively known as Navy Missile Systems. Technologies has complied with these subpoenas. In addition, the Civil Division of the Justice Department is conducting a civil fraud investigation dealing with the same or similar allegations and has issued Civil Investigative Demands for the testimony of several current and former employees. The Inspector General of the Department of Defense has been investigating alleged defective pricing and labor mischarging in the Pershing II program since at least January 1987, when Technologies (then known as Martin Marietta Corporation) was served with an Inspector General's subpoena. Subsequently, Technologies was served with additional Inspector General's subpoenas seeking records relating to the Pershing II program. In addition, current and former employees were subpoenaed to appear and have testified before a Federal Grand Jury in Orlando, Florida. In January 1994, the Corporation was informed that criminal prosecution had been declined but that the Civil Division of the Justice Department intends to pursue the matter.\n- 28 -\nOn January 6, 1994, the Corporation's Ordnance Systems facility at Milan, Tennessee, received a Federal Grand Jury subpoena issued in the Western District of Tennessee. The subpoena requested the production of certain purchase order files. On January 20, 1994, the Corporation received a second subpoena in this matter. The Corporation has complied with the initial subpoena and is in the process of responding to the second. The Corporation has not been identified as a target of the investigation and has not been informed of its purpose. On January 20, 1994, the Corporation received two subpoenas issued by the Defense Investigative Service relating to the LANTIRN program. One of the subpoenas requests documents relating to repairs to the navigation and targeting pods and relates to the charging of repair work under the warranty provisions of the LANTIRN contract. The other pertains to purchases from a subcontractor and relates to the disclosure of pricing data concerning these purchases. The Corporation is in the process of responding. The Corporation has been identified as a potential target in each of the investigations. As a result of the Combination, subject to certain limitations and subject to certain limited rights to indemnification all as discussed in Parent Corporation's Registration Statement on Form S-4 (Registration No. 33-58494), Martin Marietta assumed liabilities relating to or arising out of legal and environmental proceedings pertaining to the GE Aerospace businesses transferred to Martin Marietta.\n- 29 -\nIn April 1992, GE voluntarily disclosed to the U.S. Department of Defense a matter involving allegations concerning payments, certifications, and acquisition of competitive information and related claims in connection with contracts with the Arab Republic of Egypt for the sale of radar units by one of the GE Aerospace businesses which is now part of Martin Marietta. Martin Marietta is cooperating, as did GE, with an ongoing Department of Defense investigation of this matter. Martin Marietta is involved in various other legal and environmental litigation and proceedings arising in the ordinary course of its business. In the opinion of management (which opinion is based in part upon consideration of the opinion of counsel) and in the opinion of counsel, the probability is remote that the outcome of any litigation or proceedings, whether or not specifically described above or otherwise referred to herein, will have a material adverse effect on the results of Martin Marietta's operations or its financial position. See also \"Note I: Contingencies\" of the \"Notes to Financial Statements\" on page 48 of the 1993 Annual Report and \"Analysis of Financial Condition and Operating Results\" on page 56 through page 61 of the 1993 Annual Report.\nITEM 4.","section_4":"ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of 1993.\n- 30 -\nITEM 4(a). EXECUTIVE OFFICERS OF THE REGISTRANT The corporate officers of Martin Marietta Corporation are listed below. The Corporation's Board of Directors has determined that, as of February 24, 1994, the individuals whose names are followed by an * are executive officers of Martin Marietta for the purposes of Item 401(b) of Regulation S-K and officers for the purposes of Rule 16a-1(f) under Section 16 of the Securities Exchange Act of 1934. There are no family relationships among any of the executive officers and directors of the Corporation. All officers serve at the pleasure of the Board of Directors.\nPrincipal Positions and Occupation and Offices Held Business Name with Corporation** Experience** (Age at 3\/30\/94) (Year Elected) (Past Five Years)\nNorman R. Augustine*(58) Chairman of the Board (1988), Chief Executive Officer (1987) and Director (1986)\nA. Thomas Young*(55) President and Chief Executive Vice Operating Officer President, 1989 (1990) and Director (1989)\nRichard G. Adamson*(61) Corporate Vice Corporate Vice President, Strategic President, Business Development (1993) Development, 1988-1993\nJoseph D. Antinucci*(53) Corporate Vice President, Martin President (1993) and Marietta Aero & Naval President, Electronics Systems, 1984-1993 and Missiles (1993)\nMarcus C. Bennett*(58) Corporate Vice President (1984), Chief Financial Officer (1988), and Director (1993)\n- 31 -\nPeter A. Bracken*(52) Corporate Vice President, Martin President (1992) and Marietta Electronics, President, Information Information & Missiles, Group (1993) 1992-1993; Vice President, Technical Operations for Information Systems, 1986-1992\nMichael F. Camardo*(52) Corporate Vice President, GE President (1993) and Government Services, President, Services Inc., 1990-1993; Group (1993) President, GE Government Services, 1988-1990\nThomas A. Corcoran*(49) Corporate Vice Vice President and President (1993) and General Manager, President, Electronics General Electric Group (1993) Company, 1990-1993; General Manager, GE Government Communications, 1988-\nJames B. Feller (56) Vice President, GE Aerospace, Research and Engineering and Development (1993) Research, 1989-1993\nClyde C. Hopkins*(64) Corporate Vice President, Martin President (1991) and Marietta Energy President, Energy Systems, Inc. since Group (1993) 1988\nAlexander L. Horvath*(52) Corporate Vice President, Martin President (1993) Marietta Ocean, Radar & Sensor Systems since April 1993; Vice President and General Manager, GE Ocean, Radar & Sensor Systems, 1992-1993; General Manager, GE, 1989-1992\nBobby F. Leonard*(61) Corporate Vice President, Human Resources (1981)\nWilliam B. Lytton (45) Corporate Vice General Counsel, GE President (1993) and Aerospace, 1989; Associate General Partner, Kohn, Savett, Counsel, Operations Klein & Graf, 1983-1989 and International (1993) - 32 -\nJames W. McAnally*(57) President, Martin President, Martin Marietta Astronautics Marietta Defense (1993) Systems & Communications, 1987-\nJanet L. McGregor*(40) Treasurer (1992) Deputy Treasurer, 1991- 1992; Assistant Treasurer, 1984-1991\nFrank H. Menaker, Jr.* Corporate Vice (53) President (1982) and General Counsel (1981)\nDan A. Peterson*(63) Corporate Vice President, Information President (1986), and Systems, 1986-1989 Vice President, Washington Operations (1989)\nRobert J. Polutchko*(56) Corporate Vice Vice President, President (1991) and Technical Operations, Vice President, Space 1991-1993; President, Group Technical Information Systems Operations (1993) Group, 1989-1991; President, Martin Marietta Communications Systems, 1988-1989\nMichael A. Smith*(50) Corporate Vice President, Martin President (1993) Marietta Astro Space since April 1993; Vice President and General Manager of General Electric Company, 1989-\nPeter B. Teets*(52) Corporate Vice President (1985) and President, Space Group (1993)\nRobert H. Tieken (54) Corporate Vice Vice President, Finance President (1993), and of GE Aerospace, 1988- Vice President, 1993 Finance (1993)\nLillian M. Trippett (40) Corporate Secretary Counsel to the 1993 and Assistant Subcommittee on Space, General Counsel (1993) Committee on Science, Space and Technology, U.S. House of Representatives, 1986- 1989; Director Washington, Operations, 1989-1993 - 33 -\nStephen P. Zelnak, Jr.* Corporate Vice (49) President (1989) and President, Materials Group (1993)***\n** In April 1993, as a result of the Combination, all of the Executive Officers of Technologies (then known as Martin Marietta Corporation) assumed the same offices with the new Martin Marietta Corporation. The above listing does not distinguish between their service with the two corporations.\n*** In November 1993, the Corporation's aggregates business and the Common Stock of Martin Marietta Magnesia Specialties Inc. were transferred to a subsidiary, Martin Marietta Materials, Inc. On February 24, 1994, approximately 19% of the common stock of Martin Marietta Materials, Inc. was sold to the public. See \"Materials Group\" on page 9. Mr. Zelnak is the President, Chief Executive Officer and a Director of Martin Marietta Materials, Inc. Effective upon the completion of the offering, Mr. Zelnak resigned his position as a corporate officer of Martin Marietta Corporation.\n- 34 -\nPART II\nITEM 5.","section_5":"ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS\nThere were approximately 32,644 holders of record of Martin Marietta Corporation Common Stock, $1 par value, as of January 31, 1994. The exchanges on which the Corporation's Common Stock is traded are listed on the cover of this Form 10-K. Information concerning stock prices and dividends paid during the past two years is included with \"Quarterly Performance, (Unaudited)\" under the caption \"Common Dividends Paid and Stock Prices\" on page 62 of the 1993 Annual Report, and that information is hereby incorporated by reference in this Form 10-K.\nITEM 6.","section_6":"ITEM 6. SELECTED FINANCIAL DATA The information required by this Item 6 is included under the caption \"Five Year Summary\" on page 63 of the 1993 Annual Report, and that information is hereby incorporated by reference in this Form 10-K.\nITEM 7.","section_7":"ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS\nThe information required by this Item 7 is included under the caption \"Analysis of Financial Condition and Operating Results\" on page 56 through page 61 of the 1993 Annual Report, and that information is hereby incorporated by reference in this Form 10-K.\n- 35 -\nITEM 8.","section_7A":"","section_8":"ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this Item 8 is included under the captions \"Statement of Earnings,\" \"Balance Sheet,\" \"Statement of Cash Flows,\" \"Statement of Shareowners' Equity,\" \"Notes to Financial Statements,\" \"Analysis of Financial Condition and Operating Results,\" and \"Quarterly Performance (Unaudited)\" on pages 40, 41, 42, 43, 44-54, 56-61 and 62, respectively, of the 1993 Annual Report. This information is hereby incorporated by reference in this Form 10-K.\nITEM 9.","section_9":"ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE\nNot applicable.\n- 36 -\nPART III\nITEM 10.","section_9A":"","section_9B":"","section_10":"ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT\nThe information concerning directors required by this Item 10, is included under the caption \"Election of Directors\" in the Corporation's definitive Proxy Statement to be filed pursuant to Regulation 14A no later than March 28, 1994 (1994 Proxy Statement), and that information is hereby incorporated by reference in this Form 10-K. Information concerning executive officers required by this Item 10 is located under Part I, Item 4(a) of this Form 10-K on page 31 through page 34.\nITEM 11.","section_11":"ITEM 11. EXECUTIVE COMPENSATION The information required by this Item 11 is included in the text and tables under the caption \"Compensation of Executive Officers\" in the 1994 Proxy Statement and that information, except for the information required by Item 402(k) and Item 402(l) of Regulation S-K, is hereby incorporated by reference in this Form 10-K.\nITEM 12.","section_12":"ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT\nThe information required by this Item 12 is included under the captions \"Securities Owned by Management\" and \"Voting Securities and Record Date\" in the 1994 Proxy Statement and that information is hereby incorporated by reference in this Form 10-K.\n- 37 -\nITEM 13.","section_13":"ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Pursuant to the terms of the Standstill Agreement entered into by the Corporation and GE as part of the Combination, GE is entitled to representation upon Martin Marietta's Board of Directors. See \"General\" page 1 through page 2. Messrs. Edward E. Hood, Jr., retired Vice Chairman and a former director of GE, and Eugene F. Murphy, President and Chief Executive Officer of GE Aircraft Engines, currently serve as GE's representatives on Martin Marietta's Board of Directors. The Standstill Agreement resulted from arm's-length negotiations between the Corporation and GE. A portion of the consideration received by GE in the Combination consisted of 20 million shares of Martin Marietta's Series A Preferred Stock, par value $1.00 per share, which is convertible into Martin Marietta Common Stock and which, if converted, would represent approximately 23% of the shares of Common Stock outstanding after giving effect to such conversion. Further, there are existing business relationships between the Corporation and GE. These relationships are the product of arm's- length negotiations between the corporations. During part of 1993, John J. Byrne, a director of Martin Marietta since 1978, also served on the Board of Directors of Lehman Brothers Inc. The Corporation retained Lehman Brothers Inc. to render financial services to the Corporation in connection with the Combination for which Lehman Brothers Inc. was paid an advisory fee. Lehman Brothers Inc. rendered a fairness opinion to the Corporation in connection with the Corporation's proposed acquisition of General Dynamics Corporation's Space Systems\n- 38 -\nDivision for which Lehman Brothers Inc. received a fee. Finally, Lehman Brothers Inc. served as one of the underwriters of an initial public offering of approximately 19% of the common stock of Martin Marietta Materials, Inc. for which Lehman Brothers Inc. received underwriting fees. In addition, Mr. Byrne is the Chief Executive Officer of Fund American Enterprises, Inc. (Fund American). Hanover Advisors, Inc., formerly a wholly-owned subsidiary of Fund American, serves as an investment manager for the Corporation's Master Retirement Trust. Pursuant to the arrangement, Hanover Advisors receives management fees from the Corporation which aggregated approximately $342,000 in 1993. These engagements resulted from arm's-length negotiations in which Mr. Byrne played no part. Messrs. Richard G. Adamson, Marcus C. Bennett, Bobby F. Leonard and Frank H. Menaker, Jr., each of whom is an Executive Officer of Martin Marietta, serve as Directors (Mr. Bennett as Chairman) of Martin Marietta Materials, Inc. See \"Materials Group\" on Page 9. A summary description of the relationship between Martin Marietta and Martin Marietta Materials, Inc. is included under the caption \"Relationship with Martin Marietta\" in the Martin Marietta Materials, Inc. Registration Statement on Form S-1 (Registration Statement No. 33-72648) and such information is incorporated herein by reference. Messrs. Norman R. Augustine, Marcus C. Bennett, Peter B. Teets and A. Thomas Young, each of whom is an Executive Officer of Martin Marietta, borrowed $232,363, $68,447, $86,535 and $104,563, respectively, from the Corporation in 1993. The loans were used to\n- 39 -\nsatisfy personal income tax obligations associated with the vesting of restricted stock previously granted to these individuals by the Corporation. The plan under which such restricted stock was granted envisions that recipients may satisfy such tax obligations by instructing the Corporation to withhold the appropriate number of shares from the certificate delivered to the recipient when the restricted stock vests. In this instance, as a result of possible restrictions on sales by the Corporation's Executive Officers imposed by Section 16 of the Securities Exchange Act of 1934 and resulting from the Combination, counsel for the Corporation recommended that its Executive Officers not utilize this tax withholding feature. As the restrictions on sale resulted from the Corporation's actions in effecting the Combination which was in the best interest of the Corporation, the Corporation offered short- term loans to such persons to enable them to satisfy their income tax obligations. The loans and their terms were approved by disinterested members of the Corporation's Board of Directors. No interest was paid on the loans. All of the loans had been repaid in full by January 31, 1994. See the caption \"Compensation of Executive Officers\" in the 1994 Proxy Statement. Mr. Alexander, a director of the Corporation, is counsel to Baker, Worthington, Crossley, Stansbury & Woolf, a law firm that provides legal services to the Corporation from time to time. Mr. Colodny, a director of the Corporation, is Of Counsel to Paul, Hastings, Janofsky & Walker, a law firm that provides legal services to the Corporation from time to time.\n- 40 -\nAllen E. Murray, a director of Martin Marietta since 1991, also served on the Board of Directors of Morgan Stanley Group Inc. Morgan Stanley International served as one of the underwriters of an initial public offering of approximately 19% of the common stock of Martin Marietta Materials, Inc. for which Morgan Stanley Group Inc. received underwriting fees. This engagement resulted from arm's-length negotiations in which Mr. Murray played no part.\n- 41 -\nPART IV\nITEM 14.","section_14":"ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K\n(a)(1) List of Financial Statements filed as part of the Form 10-K. The following financial statements of Martin Marietta Corporation and consolidated subsidiaries, included in the 1993 Annual Report, are incorporated by reference into Item 8 on page 36 of this Annual Report on Form 10-K. Page numbers refer to the 1993 Annual Report: Page Balance Sheet-- December 31, 1993 and 1992 41\nStatement of Earnings-- Years ended December 31, 1993, 1992 and 1991 40\nStatement of Shareowners' Equity-- Years ended December 31, 1993, 1992 and 1991 43\nStatement of Cash Flows-- Years ended December 31, 1993, 1992 and 1991 42\nNotes to Financial Statements-- Years ended December 31, 1993, 1992 and 1991 44-54\n(2) List of Financial Statement Schedules filed as part of this Form 10-K. The following financial statement schedules of Martin Marietta Corporation and consolidated subsidiaries are included in Item 14(d). Page numbers refer to this Form 10-K:\nSchedule II - Amounts receivable from related parties and underwriters, promoters and employees other than related parties 53\nSchedule V - Property, plant and equipment 54-55\n- 42 -\nPage\nSchedule VI - Accumulated depreciation, depletion and amortization of property, plant and equipment 56\nSchedule IX - Short-term borrowings 57\nSchedule X - Supplementary income statement information 58\nAll other schedules have been omitted because they are not applicable, not required, or the information has been otherwise supplied in the financial statements or notes to the financial statements.\nThe report of Martin Marietta's independent auditors with respect to the above-referenced financial statements appears on page 55 of the 1993 Annual Report and that report is hereby incorporated by reference in this Form 10-K. The report on the financial statement schedules and the consent of Martin Marietta's independent auditors appear on page 51.\nThe report of the former GE Aerospace businesses' independent auditors with respect to the GE Aerospace businesses' financial statements as of December 31, 1992 and 1991, and for each of the years in the two year period ended December 31, 1992, included in Parent Corporation's Registration Statement on Form S-4 (Registration No. 33-58494), which report is hereby incorporated by reference in this Form 10-K. The consent of the former GE Aerospace businesses' independent auditors appears on page 52.\n(b) No reports on Form 8-K have been filed during the last quarter of the period covered by this report.\n(c) Exhibits\n(3)(i) Articles of Incorporation.\n(a) Articles of Restatement of Martin Marietta Corporation (formerly Parent Corporation) filed with the State Department of Assessments and Taxation of the State of Maryland on June 30, 1993.\n- 43 -\n(ii) Bylaws\n(a) Copy of the Bylaws of Parent Corporation (now Martin Marietta Corporation) as amended on January 13, 1993, effective April 2, 1993.\n(4) (a) Indenture dated April 22, 1993, between the Corporation, Technologies, and Continental Bank, National Association as Trustee (incorporated by reference to Exhibit 4 of the Corporation's filing on Form 8-K on April 15, 1993).\nNo other instruments defining the rights of holders of long-term debt are filed since the total amount of securities authorized under any such instrument does not exceed 10% of the total assets of the Corporation on a consolidated basis. The Corporation agrees to furnish a copy of such instruments to the Securities and Exchange Commission upon request.\n(10)(iii) (a) Directors Deferred Compensation Plan, as amended (incorporated by reference to Exhibit 10(iii)(a) to Technologies' Form 10-K for the fiscal year ended December 31, 1988).\n(b) Post-Retirement Income Maintenance Plan for Directors, as amended.\n(c) Financial Counseling Program for directors, officers, company presidents, and other key employees as amended (incorporated by reference to Exhibit 10(iii)(c) to Technologies' Form 10-K for the fiscal year ended December 31, 1989).\n(d) Executive Incentive Plan, as amended.\n(e) Deferred Compensation and Estate Supplement Plan, as amended.\n(f) Post-Retirement Death Benefit Plan for Senior Executives, as amended (incorporated by reference to Exhibit (10)(iii)(f) to Technologies' Form 10-K for the fiscal year ended December 31, 1987).\n(g) 1979 Stock Option Plan for Key Employees, as amended.\n- 44 -\n(h) 1984 Stock Option Plan for Key Employees, as amended.\n(i) Martin Marietta Amended Omnibus Securities Award Plan, as amended March 25, 1993.\n(j) Format of the agreements between Technologies and its officers to provide for continuity of management in the event of a change in control of Technologies (incorporated by reference to Exhibit (10)(iii) to Technologies' Form 10-K for the fiscal year ended December 31, 1987).\n(k) Supplemental Excess Retirement Plan, as amended (incorporated by reference to Exhibit (10)(iii)(k) to Technologies' Form 10-K for the fiscal year ended December 31, 1990).\n(l) Restricted Stock Award Plan (incorporated by reference to Exhibit 10 to Technologies' Form 10-Q for the quarter ended June 30, 1989).\n(m) Long Term Performance Incentive Compensation Plan (incorporated by reference to Exhibit (10)(iii)(m) to Technologies' Form 10-K for the fiscal year ended December 31, 1990).\n(n) Amended and Restated Martin Marietta Corporation Long Term Performance Incentive Compensation Plan (incorporated by reference to Exhibit 10(iii)(o) of Technologies' Form 10-K for the fiscal year ended December 31, 1992).\n(o) Directors' Life Insurance Program.\n(p) (1) Transaction Agreement dated November 22, 1992, among General Electric Company, Technologies and the Corporation (incorporated by reference from Parent Corporation's Registration Statement on Form S-4 (Registration No. 33-58494) filed with the SEC on February 18, 1993).\n(2) Form of Amendment Agreement, dated as of February 17, 1993, among General Electric Company, Technologies and the Corporation\n- 45 -\n(incorporated by reference from Parent Corporation's Registration Statement on Form S-4 (Registration No. 33-58494) filed with the SEC on February 18, 1993).\n(3) Form of Amendment Agreement, dated as of March 28, 1993, among General Electric Company, Technologies and the Corporation (incorporated by reference from Parent Corporation's Registration Statement on Form S-4 (Registration No. 33-58494) filed with the SEC on February 18, 1993). .\n(q) Martin Marietta Executive Special Early Retirement Option and Plant Closing Retirement Option Plan.\n(r) Martin Marietta Supplementary Pension Plan for Employees of Transferred GE Operations.\n(11) Computation of net earnings per common share for the years ended December 31, 1993, 1992 and 1991.\n(12) Computation of ratio of earnings to fixed charges for the year ended December 31, 1993.\n(13) Martin Marietta Corporation 1993 Annual Report to Shareowners, portions of which are incorporated by reference in this Form 10-K. Those portions of the 1993 Annual Report to Shareowners which are not incorporated by reference shall not be deemed to be \"filed\" as part of this report.\n(21) List of Subsidiaries of Martin Marietta Corporation.\n(23) (a) Consent of Ernst & Young, Independent Auditors for Martin Marietta Corporation (included in this Form 10-K at page 51).\n(b) Consent of KPMG Peat Marwick, Independent Auditors for the former GE Aerospace businesses (included in this Form 10-K at page 52).\n(24) Powers of Attorney.\n- 46 -\n(27) The Financial Statement Schedules appear on page 53 through page 58 of this Form 10-K.\n(99) Other Exhibits\n(a) Assumption Agreement among Martin Marietta Materials, Inc. and Technologies dated as of November 12, 1993 (incorporated by reference to Exhibit 10.01 to Martin Marietta Materials, Inc.'s Registration Statement on Form S-1 (Reg. No. 33-72648). Exhibit filed with the SEC on December 8, 1993).\n(b) Transfer and Capitalization Agreement dated as of November 12, 1993, among Technologies, Martin Marietta Investments, Inc., and Martin Marietta Materials, Inc. (incorporated by reference to Exhibit 10.02 to Martin Marietta Materials, Inc.'s Registration Statement on Form S-1 (Reg. No. 33-72648). Exhibit filed with the SEC on December 8, 1993).\n(c) Form of Intercompany Services Agreement between Martin Marietta Materials, Inc. and the Corporation (incorporated by reference to Exhibit 10.03 to Martin Marietta Materials, Inc.'s Registration Statement on Form S-1 (Reg. No. 33- 72648). Exhibit filed with the SEC on February 2, 1994).\n(d) Form of Tax-Sharing Agreement between Martin Marietta Materials, Inc. and the Corporation (incorporated by reference to Exhibit 10.04 to Martin Marietta Materials, Inc.'s Registration Statement on Form S-1 (Reg. No. 33- 72648). Exhibit filed with the SEC on February 2, 1994).\n- 47 -\n(e) Form of Corporate Agreement between Martin Marietta Materials, Inc. and the Corporation (incorporated by reference to Exhibit 10.05 to Martin Marietta Materials, Inc.'s Registration Statement on Form S-1 (Reg. No. 33-72648). Exhibit filed with the SEC on February 2, 1994).\n(f) Form of Cash Management Agreement between Martin Marietta Materials, Inc. and Technologies (incorporated by reference to Exhibit 10.08 to Martin Marietta Materials, Inc.'s Registration Statement on Form S-1 (Reg. No. 33-72648). Exhibit filed with the SEC on February 2, 1994).\nOther material incorporated by reference:\nMartin Marietta Corporation's definitive Proxy Statement to be filed pursuant to Regulation 14A no later than March 28, 1994, portions of which are incorporated by reference in this Form 10-K. Those portions of the definitive Proxy Statement which are not incorporated by reference shall not be deemed to be \"filed\" as part of this report.\n- 48 -\nSIGNATURES\nPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.\nMARTIN MARIETTA CORPORATION\nDate: February 25, 1994 By: \/s\/ FRANK H. MENAKER, JR. Frank H. Menaker, Jr. Vice President and General Counsel\nPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.\nSignature Title Date\n\/s\/ Norman R. Augustine Chairman of the February 25, 1994 Norman R. Augustine* Board, Chief Executive Officer\n\/s\/ Marcus C. Bennett Director, Vice February 25, 1994 Marcus C. Bennett* President, Chief Financial and Chief Accounting Officer\n\/s\/ A. James Clark Director February 25, 1994 A. James Clark*\n\/s\/ James L. Everett, III Director February 25, 1994 James L. Everett, III*\n\/s\/ Edward L. Hennessy, Jr. Director February 25, 1994 Edward L. Hennessy, Jr.*\n- 49 -\nSignature Title Date\n\/s\/ Edward E. Hood, Jr. Director February 25, 1994 Edward E. Hood, Jr.*\n\/s\/ Caleb B. Hurtt Director February 25, 1994 Caleb B. Hurtt*\n\/s\/ Gwendolyn S. King Director February 25, 1994 Gwendolyn S. King*\n\/s\/ Melvin R. Laird Director February 25, 1994 Melvin R. Laird*\n\/s\/ Gordon S. Macklin Director February 25, 1994 Gordon S. Macklin*\n\/s\/ Eugene F. Murphy Director February 25, 1994 Eugene F. Murphy*\n\/s\/ Allen E. Murray Director February 25, 1994 Allen E. Murray*\n\/s\/ John W. Vessey, Jr. Director February 25, 1994 John W. Vessey, Jr.*\n\/s\/ A. Thomas Young Director February 25, 1994 A. Thomas Young*\n*By: \/s\/ STEPHEN M. PIPER February 25, 1994 (Stephen M. Piper, Attorney-in-fact**)\n_____________________\n**By authority of Powers of Attorney filed with this Annual Report on Form 10-K.\n- 50 -\nCONSENT OF ERNST & YOUNG, INDEPENDENT AUDITORS\nWe consent to the incorporation by reference in this Annual Report on Form 10-K of Martin Marietta Corporation of our report dated January 21, 1994, included on page 55 of the Martin Marietta Corporation 1993 Annual Report to Shareowners.\nOur audits also included the financial statement schedules of Martin Marietta Corporation listed in Item 14(a). These schedules are the responsibility of the Corporation'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.\nWe also consent to the incorporation by reference of our report dated January 21, 1994, with respect to the consolidated financial statements incorporated herein by reference, and our report included in the preceding paragraph with respect to the financial statement schedules included in the Annual Report on Form 10-K of Martin Marietta Corporation, in the following Registration Statements:\n(1) Pre-Effective Amendment No. 1, dated April 18, 1988, to Registration Statement Number 33-20931 of Martin Marietta Technologies, Inc. on Form S-3;\n(2) Registration Statement Number 33-59466-01 of Martin Marietta Corporation and Martin Marietta Technologies, Inc. on Form S-3, dated March 12, 1993;\n(3) Registration Statement Number 33-61210 of Martin Marietta Corporation on Form S-3, dated April 16, 1993;\n(4) Registration Statement Number 33-58494 of Parent Corporation (now known as Martin Marietta Corporation) on Form S-4, dated February 19, 1993;\n(5) Registration Statement Number 33-60476 of Martin Marietta Corporation on Form S-8, dated April 2, 1993;\n(6) Registration Statement Number 33-60478 of Martin Marietta Corporation on Form S-8, dated April 2, 1993;\n(7) Registration Statement Number 33-60480 of Martin Marietta Corporation on Form S-8, dated April 2, 1993;\n(8) Registration Statement Number 33-60484 of Martin Marietta Corporation on Form S-8, dated April 2, 1993;\n(9) Registration Statement Number 33-60486 of Martin Marietta Corporation on Form S-8, dated April 2, 1993; and\n(10) Registration Statement Number 33-60782 of Martin Marietta Corporation on Form S-8, dated April 2, 1993.\n\/s\/ Ernst & Young ERNST & YOUNG\nWashington, D.C. February 23, 1994 - 51 -\nCONSENT OF KPMG PEAT MARWICK, INDEPENDENT AUDITORS\nThe Board of Directors General Electric Company:\nThe Board of Directors Martin Marietta Corporation:\nWe consent to the incorporation by reference of our report dated February 3, 1993 relating to the consolidated financial statements of GE Aerospace Businesses as of December 31, 1992 and 1991 and for each of the years in the two-year period ended December 31, 1992, which report is incorporated by reference in the December 31, 1993 annual report on Form 10-K of Martin Marietta Corporation, in the following Registration Statements:\n(1) Pre-Effective Amendment No.1, dated April 18, 1988, to Registration Statement Number 33-20931 of Martin Marietta Technologies, Inc. on Form S-3;\n(2) Registration Statement Number 33-59466-01 of Martin Marietta Corporation and Martin Marietta Technologies, Inc. on Form S- 3, dated March 12, 1993;\n(3) Registration Statement Number 33-61210 of Martin Marietta Corporation on Form S-3, dated April 16, 1993;\n(4) Registration Statement Number 33-58494 of Parent Corporation (now known as Martin Marietta Corporation) on Form S-4, dated February 19, 1993;\n(5) Registration Statement Number 33-60476 of Martin Marietta Corporation on Form S-8, dated April 2, 1993;\n(6) Registration Statement Number 33-60478 of Martin Marietta Corporation on Form S-8, dated April 2, 1993;\n(7) Registration Statement Number 33-60480 of Martin Marietta Corporation on Form S-8, dated April 2, 1993;\n(8) Registration Statement Number 33-60484 of Martin Marietta Corporation on Form S-8, dated April 2, 1993;\n(9) Registration Statement Number 33-60486 of Martin Marietta Corporation on Form S-8, dated April 2, 1993; and\n(10) Registration Statement Number 33-60782 of Martin Marietta Corporation on Form S-8, dated April 2, 1993.\n\/s\/ KPMG PEAT MARWICK\nPhiladelphia, PA February 23, 1994\n- 52 -\nINDEX TO THE EXHIBITS\nTO\nTHE ANNUAL REPORT ON FORM 10-K\nFOR FISCAL YEAR ENDED DECEMBER 31, 1993\n(3)(i) Articles of Incorporation.\n(a) Articles of Restatement of Martin Marietta Corporation (formerly Parent Corporation) filed with the State Department of Assessments and Taxation of the State of Maryland on June 30, 1993.\n(ii) Bylaws\n(a) Copy of the Bylaws of Parent Corporation (now Martin Marietta Corporation) as amended on January 13, 1993, effective April 2, 1993.\n(4) (a) Indenture dated April 22, 1993, between the Corporation, Technologies, and Continental Bank, National Association as Trustee (incorporated by reference to Exhibit 4 of the Corporation's filing on Form 8-K on April 15, 1993).\nNo other instruments defining the rights of holders of long-term debt are filed since the total amount of securities authorized under any such instrument does not exceed 10% of the total assets of the Corporation on a consolidated basis. The Corporation agrees to furnish a copy of such instruments to the Securities and Exchange Commission upon request.\n(10)(iii) (a) Directors Deferred Compensation Plan, as amended (incorporated by reference to Exhibit 10(iii)(a) to Technologies' Form 10-K for the fiscal year ended December 31, 1988).\n(b) Post-Retirement Income Maintenance Plan for Directors, as amended.\n(c) Financial Counseling Program for directors, officers, company presidents, and other key employees as amended (incorporated by reference to Exhibit 10(iii)(c) to Technologies' Form 10-K for the fiscal year ended December 31, 1989).\n(d) Executive Incentive Plan, as amended.\n(e) Deferred Compensation and Estate Supplement Plan, as amended.\n(f) Post-Retirement Death Benefit Plan for Senior Executives, as amended (incorporated by reference to Exhibit (10)(iii)(f) to Technologies' Form 10-K for the fiscal year ended December 31, 1987).\n(g) 1979 Stock Option Plan for Key Employees, as amended.\n(h) 1984 Stock Option Plan for Key Employees, as amended.\n(i) Martin Marietta Amended Omnibus Securities Award Plan, as amended March 25, 1993.\n(j) Format of the agreements between Technologies and its officers to provide for continuity of management in the event of a change in control of Technologies (incorporated by reference to Exhibit (10)(iii) to Technologies' Form 10-K for the fiscal year ended December 31, 1987).\n(k) Supplemental Excess Retirement Plan, as amended (incorporated by reference to Exhibit (10)(iii) to Technologies' Form 10-K for the fiscal year ended December 31, 1991).\n(l) Restricted Stock Award Plan (incorporated by reference to Exhibit 10 to Technologies' Form 10-Q for the quarter ended June 30, 1989).\n(m) Long Term Performance Incentive Compensation Plan (incorporated by reference to Exhibit (10)(iii) to Technologies' Form 10-K for the fiscal year ended December 31, 1991).\n(n) Amended and Restated Martin Marietta Corporation Long Term Performance Incentive Compensation Plan (incorporated by reference to Exhibit 10(iii)(o) of Technologies' Form 10-K for the fiscal year ended December 31, 1992).\n(o) Directors' Life Insurance Program.\n(p) (1) Transaction Agreement dated November 22, 1992, among General Electric Company, Technologies and the Corporation (incorporated by reference from Parent Corporation's Registration Statement on Form S-4 (Registration No. 33-58494) filed with the SEC on February 18, 1993).\n- ii -\n(2) Form of Amendment Agreement, dated as of February 17, 1993, among General Electric Company, Technologies and the Corporation (incorporated by reference from Parent Corporation's Registration Statement on Form S-4 (Registration No. 33-58494) filed with the SEC on February 18, 1993).\n(3) Form of Amendment Agreement, dated as of March 28, 1993, among General Electric Company, Technologies and the Corporation (incorporated by reference from Parent Corporation's Registration Statement on Form S-4 (Registration No. 33-58494) filed with the SEC on February 18, 1993).\n(q) Martin Marietta Executive Special Early Retirement Option and Plant Closing Retirement Option Plan.\n(r) Martin Marietta Supplementary Pension Plan for Employees of Transferred GE Operations.\n(11) Computation of net earnings per common share for the years ended December 31, 1993, 1992 and 1991.\n(12) Computation of ratio of earnings to fixed charges for the year ended December 31, 1993.\n(13) Martin Marietta Corporation 1993 Annual Report to Shareowners, portions of which are incorporated by reference in this Form 10-K. Those portions of the 1993 Annual Report to Shareowners which are not incorporated by reference shall not be deemed to be \"filed\" as part of this report.\n(21) List of Subsidiaries of Martin Marietta Corporation.\n(23) (a) Consent of Ernst & Young, Independent Auditors for Martin Marietta Corporation (included in this Form 10-K at page 47).\n(b) Consent of KPMG Peat Marwick, Independent Auditors for the former GE Aerospace businesses (included in this Form 10-K at page 48).\n(24) Powers of Attorney.\n(27) The Financial Statement Schedules appear on page 53 through page 58 of this Form 10-K.\n(99) Other Exhibits\n(a) Assumption Agreement among Martin Marietta Materials, Inc. and Technologies dated as of November 12, 1993 (incorporated by reference to\n- iii -\nExhibit 10.01 to Martin Marietta Materials, Inc.'s Registration Statement on Form S-1 (Reg. No. 33-72648) filed with the SEC on December 8, 1993).\n(b) Transfer and Capitalization Agreement dated as of November 12, 1993, among Technologies, Martin Marietta Investments, Inc. and Martin Marietta Materials, Inc. (incorporated by reference from Martin Marietta Materials, Inc.'s Registration Statement on Form S-1 (Reg. No. 33-72648) filed with the SEC on December 8, 1993).\n(c) Form of Intercompany Services Agreement between Martin Marietta Materials, Inc. and the Corporation (incorporated by reference from Martin Marietta Materials, Inc.'s Registration Statement on Form S-1 (Reg. No. 33-72648) filed with the SEC on December 8, 1993).\n(d) Form of Tax-Sharing Agreement between Martin Marietta Materials, Inc. and the Corporation (incorporated by reference from Martin Marietta Materials, Inc.'s Registration Statement on Form S-1 (Reg. No. 33-72648) filed with the SEC on December 8, 1993).\n(e) Form of Corporate Agreement between Martin Marietta Materials, Inc. and the Corporation (incorporated by reference from Martin Marietta Materials, Inc.'s Registration Statement on Form S-1 (Reg. No. 33-72648) filed with the SEC on December 8, 1993).\n(f) Form of Cash Management Agreement between Martin Marietta Materials, Inc. and Technologies (incorporated by reference from Martin Marietta Materials, Inc.'s Registration Statement on Form S-1 (Reg. No. 33-72648) filed with the SEC on December 8, 1993).\nOther material incorporated by reference:\nMartin Marietta Corporation's definitive Proxy Statement to be filed pursuant to Regulation 14A no later than March 28, 1994, portions of which are incorporated by reference in this Form 10-K. Those portions of the definitive Proxy Statement which are not incorporated by reference shall not be deemed to be \"filed\" as part of this report.\n- iv -","section_15":""}
{"filename":"70578_1993.txt","cik":"70578","year":"1993","section_1":"ITEM 1. BUSINESS\nNational Steel Corporation, a Delaware corporation, and its consolidated subsidiaries (the \"Company\") is the fourth largest integrated steel producer in the United States as measured by production and shipments and is engaged in the production and sale of a wide variety of flat rolled carbon steel products, including hot rolled, cold rolled, galvanized, tin and chrome plated steels. Flat rolled carbon steel products account for approximately 50% of domestic steel industry shipments.\nThe Company was formed through the merger of Weirton Steel, Great Lakes Steel and Hanna Iron Ore Company and was incorporated in Delaware on November 7, 1929. The Company built a finishing facility, now the Midwest Division, in 1961 and in 1971 purchased Granite City Steel Corporation, now the Granite City Division. On September 13, 1983, the Company became a wholly-owned subsidiary of National Intergroup, Inc. (collectively, with its subsidiaries, \"NII\") through a restructuring. On January 11, 1984, the Company sold the principal assets of its Weirton Steel Division and retained certain liabilities related thereto. On August 31, 1984, NKK Corporation (collectively, with its subsidiaries, \"NKK\") purchased a 50% equity interest in the Company from NII. On June 26, 1990, NKK purchased an additional 20% equity interest in the Company from NII. In April 1993, the Company completed an initial public offering of its Class B Common Stock. In October 1993, NII converted all of its shares of Class A Common Stock to an equal number of shares of Class B Common Stock, resulting in NKK having a 75.6% voting interest in the Company. NII sold substantially all of its shares of Class B Common Stock in the market in January 1994.\nSTRATEGY\nThe Company's mission is to be the most competitive steel company in the United States. The Company's strategy to achieve this goal is based on cooperative partnerships with its customers and employees and a strong alliance with its principal stockholder, NKK. Such cooperative efforts are intended to reduce costs and improve productivity and product quality.\nCustomer Partnership\nA cooperative partnership with customers requires the Company to differentiate its products through superior quality and service. Management believes it is able to differentiate the Company's products and promote customer loyalty by establishing close relationships through early customer involvement, providing technical services and support and utilizing its Product Application Center and Technical Research Center facilities. To fulfill its customers' needs, the Company has developed and implemented a series of coordinated strategies in marketing, capital investment and research and development.\nMarketing Strategy. The Company's marketing strategy has concentrated on increasing the level of sales of higher value added products to the automotive, metal buildings and container markets. These segments demand high quality products, on-time delivery and effective and efficient customer service. This strategy is designed to increase margins, reduce competitive threats and maintain high capacity utilization rates by shifting the Company's product mix to higher quality products and providing superior customer service.\nCapital Investment Program. Since 1984, the Company has invested approximately $2 billion in capital improvements aimed at upgrading the Company's steelmaking and finishing operations to meet its customers' demanding requirements for higher quality products and to reduce production costs. Major projects include an electrolytic galvanizing line, a continuous caster, a ladle metallurgy station, a vacuum degasser, a complete coke oven battery rebuild and a high speed pickle line, each of which services the Great Lakes Division (located near Detroit, Michigan) and a continuous caster and a ladle metallurgy station each of which services the Granite City Division (located near St. Louis, Missouri). Major improvements at the Midwest Division (located near Chicago, Illinois) include the installation of process control equipment to upgrade its finishing capabilities. Capital investments for each of 1993, 1992 and 1991 were $160.7 million, $283.9 million and $178.2 million, respectively. In early 1991, the Company became the first major integrated U.S. steel producer to continuously cast 100% of its raw steel production.\nTo enable the Company to more efficiently meet the needs of its target markets and focus on higher value added products, the Company has entered into two separate joint ventures to build hot dip galvanizing facilities. One joint venture is with NKK and an unrelated third party and has been built to service the automotive industry. The second joint venture is being built to service the construction industry.\nResearch and Development. The Company's research and development efforts focus on creating new steel products, developing new production processes to improve the quality and reduce the cost of the Company's existing product lines and providing product and technical support to customers.\nThe Company operates a research and development facility near its Great Lakes Division to develop new products, improve existing products and develop more efficient operating procedures to meet the constantly increasing demands of the automotive, container and metal buildings markets. The research center employs approximately 55 chemists, physicists, metallurgists and engineers. In addition, the Company operates a Product Application Center near Detroit dedicated to providing product and technical support to customers. The Product Application Center assists customers with application engineering (selecting optimum metal and manufacturing methods), application technology (evaluating product performance) and technical developments (performing problem solving at plants). The Company spent $9.4 million, $9.5 million and $8.8 million for research and development in 1993, 1992 and 1991, respectively. In addition, the Company participates in various research efforts through the American Iron and Steel Institute (\"AISI\").\nSince 1984, NKK has provided engineering and technical support to the Company principally by providing the full-time services of approximately 40 engineers, at the Company's expense, to the Company's Divisions. These engineers, as well as engineers and technical support personnel at NKK's facilities in Japan, assist in improving operating practices and developing new manufacturing processes. This support also includes providing input on ways to improve raw steel to finished product yields and preventative maintenance practices on equipment.\nEmployee Partnership\nSince 1986, the Company has provided substantially all of its employees with employment security and economic incentives, such as profit sharing and productivity gainsharing (an incentive system that provides employees with bonuses tied to improvements in labor productivity), in exchange for more flexible work rules that, among other things, have permitted the Company to significantly reduce the number of job classifications for its represented employees and consequently increased the variety of tasks each employee may be requested to accomplish. These more flexible work rules have contributed to the Company's improved productivity as evidenced by its reduced manhours per net ton shipped, while permitting the Company to reduce employment levels through retirement and attrition.\nDespite the late settlement with the United Steelworkers of America (the \"USWA\") in the summer of 1993 and the strike by the USWA local which represents former employees of National Steel Pellet Company, a wholly-owned subsidiary of the Company (\"NSPC\"), management believes that the cooperative labor arrangements described above will continue to contribute to improved productivity at its principal facilities. (See \"Employees\" below).\nAlliance with NKK\nThe Company has a strong alliance with its principal stockholder, NKK, the second largest steel company in Japan and the fifth largest in the world as measured by production. Since 1984, the Company has had access to a wide range of NKK's steelmaking, processing and applications technology. In addition, NKK has provided financial assistance to the Company in the form of investments, loans and introductions to Japanese financial institutions and trading companies. While no assurances can be given with respect to the extent of NKK's future financial support beyond existing contractual commitments, NKK has indicated that it presently plans to continue to provide technical support and research and development services of the nature and to the extent currently provided to the Company.\nProduct Quality\nThe Company has focused its efforts on improving product quality through capital investments, research and development, NKK's technical support and employee training. Despite delivery and customer service problems in 1993, the Company has continued to receive numerous quality awards. In 1993, the Company received the prestigious General Motors Mark of Excellence award. Additionally, the Company received a 1993 Best-of-the-Best award from Midway Products, representing an eighteen month period of no rejections for hot rolled, cold rolled and coated products shipped from all three of the Company's principal facilities. The Company also achieved its quality objectives at Toyota and was recognized by Toyota as the only supplier to attain its demanding target levels four times in the last five years. During 1993, the Company's Great Lakes Division developed a bumper coil pickling process which improved surface quality on bumper products. The Granite City Division received supplier excellence awards from Trane Corporation and Accuride Corporation, the largest manufacturer of medium to heavy duty truck wheels in North America. At the Midwest Division, quality recognition included certified supplier awards from Steelcase Corporation, a major manufacturer of office furniture, and John Deere Corporation.\nCost Reduction Programs\nThe Company aggressively seeks to continually reduce costs in all facets of its business. Performance based compensation provides an incentive to all employees to focus on key cost and quality measures, such as manhours per ton and prime tons shipped. Facility engineers, who have access to a wide range of NKK process technologies, analyze and implement innovative steelmaking, processing and preventative maintenance methods on an ongoing basis. In addition, the Company works closely with its customers to develop products specifically suited to the needs of such customers through the use of its Product Application Center, thereby reducing engineering costs and minimizing start-up costs for each of the Company and its customers. The Company's customer service system integrates orders, inventory and delivery deadlines at all of the Company's divisions. Finally, the Company aggressively seeks and utilizes employee input with respect to cost cutting measures at all employee levels.\nResults of Strategic Initiative\nThe Company's strategies of developing customer and employee partnerships, its alliance with NKK, and emphasis on quality improvement and implementing continuous cost reduction programs have resulted in increased productivity and yields, decreased employment levels and higher percentages of steel formed through continuous casting. The table set forth below illustrates these trends for the years 1989 to 1993.\n- -------- (1) Manhours per net ton shipped is calculated as hours worked by all steel employees, which includes employees at the steel divisions, corporate headquarters, the research and development centers and the Product Application Center, divided by net tons shipped, and excludes iron ore and certain other non-steel employee hours worked. (2) The number of employees was reduced by 579 in 1993 as a result of the temporary idling of NSPC. (See \"Employees\" below).\nCUSTOMERS\nThe Company's marketing strategy concentrates on increasing the Company's sales of higher value added products targeted to customers in the automotive, metal buildings and container markets. The Company also markets its products to the pipe and tube and service center industries.\nThe Company is a major supplier of hot and cold rolled steel and galvanized coils to the automotive industry, one of the most demanding steel consumers. Car and truck manufacturers require wide sheets of\nsteel, rolled to exact dimensions. In addition, formability and defect-free surfaces are critical. The Company has been able to successfully meet these demands. Its steels have been used in a variety of automotive applications including exposed and unexposed panels, wheels and bumpers.\nThe Company believes it is a leading supplier of steel to the domestic metal buildings market. Roof and building panels are the principal applications for galvanized and Galvalume(R) steel in this market. Management believes that demand for Galvalume(R) steel will exhibit strong growth for the next several years partially as a result of a trend away from traditional building products and that the Company is well positioned to profit from this growth as a result of both its position in this market and additional capacity currently under construction.\nThe Company produces chrome and tin plated steels to exact tolerances of gauge, shape, surface flatness and cleanliness for the container industry. Tin and chrome plated steels are used to produce a wide variety of food and non- food containers. In recent years, the market for tin and chrome plated steels has been both stable and profitable for the Company.\nThe Company also supplies the pipe and tube and service center markets with hot rolled, cold rolled and coated sheet. The Company is a key supplier to transmission pipeline, downhole casing and structural pipe producers. Service centers generally purchase steel coils from the Company and may process them further or sell them directly to third parties without further processing.\nThe following table sets forth the percentage of the Company's revenues from various markets for the past five years.\nShipments to General Motors, the Company's largest customer, accounted for approximately 11%, 12% and 12% of net sales in each of 1993, 1992 and 1991, respectively. There can be no assurance that future net sales to General Motors will equal historical levels. Export sales accounted for approximately .1% of revenue in 1993, .5% in 1992 and 4.5% in 1991. The Company's products are sold through the Company's six sales offices located in Chicago, Detroit, Houston, Kansas City, Pittsburgh and St. Louis. Substantially all of the Company's net revenues are based on orders for short-term delivery. Accordingly, backlog is not meaningful when assessing future results of operations.\nOPERATIONS\nThe Company operates three principal facilities: two integrated steel plants, the Great Lakes Division in Ecorse and River Rouge, Michigan, near Detroit and the Granite City Division in Granite City, Illinois, near St. Louis and a finishing facility, the Midwest Division in Portage, Indiana, near Chicago. The Company's centralized corporate structure, the close proximity of the Company's principal facilities and the complementary balance of processing equipment shared by them, enable the Company to closely coordinate the operations of these facilities in order to maintain high operating rates throughout its processing facilities and to maximize the return on its capital investments. Generally, the Company's facilities are well maintained, considered adequate and being utilized for their intended purposes.\nThe following table details effective steelmaking capacity, actual production, effective capacity utilization and percentage of steel continuously cast for the Company and the domestic steel industry for the years indicated.\nRAW STEEL PRODUCTION DATA\n- -------- *Information as reported by the AISI. The 1993 industry information is estimated by the AISI.\nThe Company's effective capacity varies annually due to planned blast furnace outages for maintenance purposes. Effective capacity utilization fell to 92.5% in 1991 due, in part, to an unusually high level of inventory carried forward from 1990, along with scheduled maintenance outages at major finishing units and a low demand for steel products during the first half of the year.\nRAW MATERIALS\nIron ore. The metallic iron requirements of the Company are supplied primarily from iron ore pellets that are produced from a concentration of low- grade ores. The Company formerly purchased a significant portion of its iron ore pellet requirements from NSPC. However, as a result of the temporary idling of NSPC, the Company has secured its pellet requirements from outside sources. The Company currently has entered into agreements that will satisfy its iron ore pellet requirements through 1994. It is management's intention to secure long-term contracts for the purchase of iron ore pellets for a period of one to three years. (See \"Employees\" below).\nCoal. In 1992, the Company decided to exit the coal business. At that time, the Company owned underground coal properties in Pennsylvania, Kentucky and West Virginia as well as undeveloped coal reserves in Pennsylvania and West Virginia. During 1993, the Pennsylvania and Kentucky properties were sold except for the coal reserves which were leased on a long term basis. Negotiations are in process for the sale of the West Virginia properties. While the undeveloped coal reserves are for sale there are no interested parties at the present time. The remaining coal assets totaling $42.7 million are included in the assets of the Company and constitute less than 2% of the Company's total assets. Adequate supplies of coal are readily available at competitive market prices.\nCoke. The Company operates two efficient coke oven batteries servicing the Granite City Division and the newly rebuilt No. 5 coke oven battery at the Great Lakes Division. The No. 5 coke battery enhances the quality and stability of the Company's coke supply, and incorporates state-of-the-art technology while meeting the requirements of the Clean Air Act. With the No. 5 coke battery rebuild, the Company has significantly improved its self-sufficiency and can supply approximately 60% of its annual coke requirements. The remaining coke requirements are met through competitive market purchases.\nLimestone. The Company, through an affiliated company, has limestone reserves of approximately 80 million gross tons located in Michigan. During the last five years, approximately 59% of the Company's average annual consumption of limestone was derived from these reserves. The Company's remaining limestone requirements were purchased.\nScrap and Other Materials. Supplies of steel scrap, tin, zinc, and other alloying and coating materials are readily available at competitive market prices.\nCOMPETITION\nThe Company is in direct competition with domestic and foreign flat rolled carbon steel producers and producers of plastics, aluminum and other materials which can be used in place of flat rolled carbon steel in manufactured products. Price, service and quality are the primary types of competition experienced by the Company. The Company believes it is able to differentiate its products from those of its competitors by, among other things, providing technical services and support and utilizing its Product Application Center and Technical Research Center facilities and by its focus on improving product quality through, among other things, capital investment and research and development, as described above.\nImports. Domestic steel producers face significant competition from foreign producers and have been adversely affected by unfairly traded imports. Imports of finished steel products accounted for approximately 14% of the domestic market in 1993 and approximately 16% of the domestic market in 1992 and 1991. Many foreign steel producers are owned, controlled or subsidized by their governments. Decisions by these foreign producers with respect to production and sales may be influenced to a greater degree by political and economic policy considerations than by prevailing market conditions.\nIn 1992, the Company and eleven other domestic steel producers filed unfair trade cases with the Commerce Department and the International Trade Commission (the \"ITC\") against foreign steel producers covering imports of flat rolled carbon steel products. In June 1993, the Commerce Department imposed final antidumping and subsidy margins averaging 37% for all products under review. In July 1993, the ITC made final determinations that material injury had occurred in cases representing an estimated 51% of the dollar value and 42% of the volume of all flat rolled carbon steel imports under investigation. In the four product categories, injury was found in cases relating to 97% of the volume of plate steel, 92% of the volume of higher value-added corrosion resistant steel and 36% of the volume of cold rolled steel. No injury was found with respect to hot rolled steel products. Approximately 30% of the Company's 1993 shipments consisted of corrosion resistant steel, 14% consisted of cold rolled steel and less than 1% consisted of plate steel. Approximately 45% of the Company's 1993 shipments consisted of hot rolled steel. Imports of products not covered by affirmative ITC injury determinations may increase as a result of the ITC determinations, which may have an adverse effect on the Company's shipments of these products and the prices it realizes for such products. The Company and the other domestic producers who filed these cases have appealed the negative decisions of the ITC and are defending appeals brought by foreign producers involving decisions favorable to domestic producers. These appeals are proceeding before the Court of International Trade in New York and, in the case of Canada, before Binational Dispute Panels under the U.S.-Canada Free Trade Agreement and decisions are not expected before the second half of 1994. Future increases in other steel imports are also possible, particularly if the value of the dollar should rise in relation to foreign currencies or if legislation implementing the recently concluded GATT Uruguay Round agreements is enacted in a form which substantially weakens United States trade laws.\nReorganized\/Reconstituted Mills. The intensely competitive conditions within the domestic steel industry have been exacerbated by the continued operation, modernization and upgrading of marginal steel production facilities through bankruptcy reorganization procedures, thereby perpetuating overcapacity in certain industry product lines. Overcapacity is also caused by the continued operation of marginal steel production facilities that have been sold by integrated steel producers to new owners, who operate such facilities with a lower cost structure.\nMini-mills. Domestic integrated producers, such as the Company, have lost market share in recent years to domestic mini-mills. Mini-mills provide significant competition in certain product lines, including hot rolled and cold rolled sheets, which represented, in the aggregate, approximately 60% of the Company's shipments in 1993. Mini-mills are relatively efficient, low-cost producers which produce steel from scrap in electric furnaces, have lower employment and environmental costs and target regional markets. Thin slab casting technologies have allowed mini-mills to enter certain sheet markets which have traditionally been supplied by integrated producers. One mini-mill has constructed two such plants and announced its intention to start a third in a joint venture with another steel producer. Certain companies have announced plans for, or have indicated that they are currently considering, additional mini-mill plants for sheet products in the United States.\nSteel Substitutes. In the case of many steel products, there is substantial competition from manufacturers of other products, including plastics, aluminum, ceramics, glass, wood and concrete. Conversely, the Company and certain other manufacturers of steel products have begun to compete in recent years in markets not traditionally served by steel producers.\nPATENTS AND TRADEMARKS\nThe Company has the patents and licenses necessary for the operation of its business as now conducted. The Company does not consider its patents and trademarks to be material to the business of the Company.\nEMPLOYEES\nAs of December 31, 1993, the Company employed 9,490 people. Approximately 7,300 (77%) of the Company's employees are represented by the USWA. Except as described below, the Company believes that its relationships with its collective bargaining units are good.\nOn August 27, 1993, a new six year cooperative labor agreement (the \"1993 Settlement Agreement\") between the Company and the USWA was ratified by USWA members at the Company's three steel divisions and corporate headquarters. The new agreement, effective August 1, 1993 through July 31, 1999, protects the Company and the USWA from a strike or lockout for the duration of the agreement. Either the Company or the USWA may reopen negotiations after three years, except with respect to pensions and certain other matters, with any unresolved issues subject to binding arbitration. Under the 1993 Settlement Agreement, represented employees will receive improved pension benefits, bonuses to be paid over the term of the agreement, a $.50 per hour wage increase effective in August 1995, and an additional paid holiday for the years 1994, 1995 and 1996. The 1993 Settlement Agreement provides for the establishment of a Voluntary Employee Benefits Association trust (the \"VEBA Trust\") to which the Company has agreed to contribute a minimum of $10 million annually and, under certain circumstances, additional amounts calculated as set forth in the 1993 Settlement Agreement. The Company has granted to the VEBA a second mortgage on the No. 5 coke oven battery at the Great Lakes Division. The 1993 Settlement Agreement also provides for opportunities to reduce health care costs and for flexible work practices and opportunities to reduce manning levels through attrition. In addition, the 1993 Settlement Agreement grants the USWA the right to nominate a candidate, subject to the approval of the Company's Board of Directors and stockholders, for a seat on the Company's Board of Directors.\nNSPC has been idled since August 1, 1993, initially as a result of a labor dispute with the USWA upon expiration of the former labor contract on July 31, 1993. However, NSPC remains temporarily idled because the Company has obtained contracts to purchase pellets at a lower cost than NSPC's production costs. The USWA has filed 19 unfair labor practice charges with the National Labor Relations Board (the \"NLRB\") regarding the NSPC dispute. The USWA's charges include allegations that NSPC failed to bargain in good faith. NSPC has responded to these charges and has denied any unfair labor practices. If the NLRB finds against NSPC, it could issue an order requiring NSPC to pay back pay and front pay until the labor practices are corrected or to cease and desist unfair labor practices and bargain in good faith.\nENVIRONMENTAL MATTERS\nThe Company's operations are subject to numerous laws and regulations relating to the protection of human health and the environment. The Company believes that it is in substantial compliance with such laws and regulations. The Company currently estimates that it will incur capital expenditures in connection with matters relating to environmental control of approximately $9.1 million and $8.0 million for 1994 and 1995, respectively. In addition, the Company expects to record expenses for environmental compliance, including depreciation, of approximately $70 million and $73 million for 1994 and 1995, respectively. Since environmental laws and regulations are becoming increasingly stringent, the Company's environmental capital expenditures and costs for environmental compliance may increase in the future. In addition, due to the possibility of unanticipated factual or regulatory developments, the amount and timing of future environmental expenditures could vary substantially from those currently anticipated. The costs for environmental compliance may also place the Company at a competitive disadvantage with respect to foreign steel producers, as well as manufacturers of steel substitutes, that are subject to less stringent environmental requirements.\nIn 1990, Congress passed amendments to the Clean Air Act which impose more stringent standards on air emissions. The Clean Air Act amendments will directly affect the operations of many of the Company's facilities, including its coke ovens. Under such amendments, coke ovens generally will be required to comply with progressively more stringent standards over the next thirty years. The Company believes that the costs for complying with the Clean Air Act amendments will not have a material adverse effect on the Company's financial condition.\nIn 1990, the United States Environmental Protection Agency (the \"EPA\") released a proposed rule which establishes standards for the implementation of a corrective action program under the Resource Conservation and Recovery Act of 1976, as amended (\"RCRA\"). The corrective action program requires facilities that are operating under a permit, or are seeking a permit, to treat, store or dispose of hazardous wastes to investigate and remediate environmental contamination. Currently, the Company is conducting an investigation at its Midwest Division facility. The Company estimates that the potential capital costs for implementing corrective actions at such facility will be approximately $8 million payable over the next several years. At the present time, the Company's other facilities are not subject to corrective action.\nSince 1989, the EPA and the eight Great Lakes states have been developing the Great Lakes Initiative, which will impose standards that are even more stringent than the best available technology standards currently being enforced. As required under section 118 of the Clean Water Act, as amended, which is intended to codify the efforts of the EPA and such states under the Great Lakes Initiative, on April 16, 1993, the EPA published the proposed \"Water Quality Guidance for the Great Lakes System\" (the \"Guidance Document\"). Once finalized, the Guidance Document will establish minimum water quality standards and other pollution control policies and procedures for waters within the Great Lakes System. The EPA intends to publish the final Guidance Document by October 1995. Preliminary studies conducted by the AISI prior to publication of the proposed Guidance Document estimate that the potential capital cost for a fully integrated steel mill to comply with draft standards under the Great Lakes Initiative can range from approximately $50 million to $175 million and the potential annual operating and maintenance cost will be approximately 15% of the estimated capital cost. Until the Guidance Document is finalized, the Company is unable to determine whether such estimates are accurate and whether the Company's actual costs for compliance will be comparable. Although the Company believes only the Great Lakes Division would be required to incur significant costs for compliance, there can be no assurances that such compliance will not have a material adverse effect on the Company's financial condition.\nThe Company has recorded the reclamation and other costs to restore its coal and iron ore mines at its shutdown locations to their original and natural state, as required by various federal and state mining statutes. Additionally, in October 1993, NSPC announced its intention to temporarily idle the iron ore mining and pelletizing operations conducted at the facility. A final decision to permanently shut down these operations would result in additional charges.\nITEM 2.","section_1A":"","section_1B":"","section_2":"ITEM 2. PROPERTIES\nThe Granite City Division\nThe Granite City Division, located in Granite City, Illinois, has an annual effective steelmaking capacity of 2.3 million tons. With the start-up of a second continuous caster in early 1991, all steel at this Division is now produced by continuous casting. The Granite City Division also uses ladle metallurgy to refine the steel chemistry to enable it to meet the exacting specifications of its customers. The Division's ironmaking facilities consist of two coke batteries and two blast furnaces. Finishing facilities include an 80 inch hot strip mill, a continuous pickler and two hot dip galvanizing lines. The Granite City Division ships approximately 20% of its total production to the Midwest Division for finishing. Principal products of the Granite City Division include hot rolled, cold rolled, hot dipped galvanized, grain bin and high strength, low alloy steels.\nThe Granite City Division is located on 1,540 acres and employs approximately 3,150 people. The Division's proximity to the Mississippi River and other interstate transit systems, both rail and highway, provides easy accessibility for receiving raw materials and supplying finished steel products to customers.\nThe Great Lakes Division\nThe Great Lakes Division, located in Ecorse and River Rouge, Michigan, is an integrated facility engaged in steelmaking primarily for use in the automotive market with an annual effective steelmaking capacity of 3.2 million tons. With the start-up of a second continuous caster in late 1987, all steel at this Division is now produced by continuous casting. The Division's ironmaking facilities consist of a recent 85-oven coke battery rebuild and three blast furnaces. The Division also operates steelmaking facilities consisting of a vacuum degasser and a ladle metallurgy station. Finishing facilities include a hot strip mill, a skinpass mill, a shear line, two existing pickling lines, a new high speed pickle line, a tandem mill, a batch annealing station, two temper mills and two customer service lines, and an electrolytic galvanizing line. The Great Lakes Division ships approximately 40% of its production to the Midwest Division for finishing. Principal products of the Great Lakes Division include hot rolled, cold rolled, electrolytic galvanized, and high strength, low alloy steels.\nThe Great Lakes Division is located on 1,100 acres and employs approximately 4,150 people. The Division is strategically located with easy access to lake, rail and highway transit systems for receiving raw materials and supplying finished steel products to customers.\nThe Midwest Division\nThe Midwest Division, located in Portage, Indiana, finishes hot rolled bands produced at the Granite City and Great Lakes Divisions primarily for use in the automotive, metal buildings and container markets. The Division's facilities include a continuous pickling line, two cold reduction mills and two continuous galvanizing lines, a 48 inch wide line which can produce galvanized or Galvalume(R) steel products and which services the metal buildings markets, and a 72 inch wide line which services the automotive market; finishing facilities for cold rolled products consisting of a batch annealing station, a sheet temper mill and a continuous stretcher leveling line; and an electrolytic cleaning line, a continuous annealing line, two tin temper mills, two tin recoil lines, an electrolytic tinning line and a chrome line which services the container markets. Principal products of the Midwest Division include tin mill products, hot dipped galvanized and Galvalume(R) steel, cold rolled, and electrical lamination steels.\nThe Midwest Division is located on 1,100 acres in Portage, Indiana and employs approximately 1,400 people. Its location provides excellent access to rail, water and highway transit systems for receiving raw materials and supplying finished steel products to customers.\nDNN Galvanizing Limited Partnership\nAs part of its strategy to focus its marketing efforts on high quality steels for the automotive industry, the Company has entered into an agreement with NKK and an unrelated third party to build and operate the DNN Galvanizing Limited Partnership (\"DNN\"), a 400,000 ton per year, hot dip galvanizing facility in Windsor, Ontario, Canada. This facility incorporates state-of-the-art technology to galvanize steel for critically exposed automotive applications. The facility is modeled after NKK's Fukuyama Works Galvanizing Line that has provided high quality galvanized steel to the Japanese automotive industry for several years. The Company is committed to utilize 50% of the available line time of the facility and pay a tolling fee designed to cover fixed and variable costs with respect to 50% of the available line time, whether or not such line time is utilized. The plant began production in January 1993 and is currently operating at full capacity. The Company's steel substrate requirements are provided to DNN by the Great Lakes Division.\nIn 1993, the ITC issued a final affirmative injury determination that certain galvanized steel products from Canada are being sold in the United States at less than fair value. Accordingly, certain types of galvanized steel, approximating 15% of the steel galvanized for the Company by DNN and shipped to the United States, are subject to an anti-dumping duty order and to cash deposits of 10.89%. The anti-dumping duty currently applies to the entire entered value of the affected types of products. The Company is currently appealing the ITC determination. If successful, such appeal would result in the duty deposit requirement applying only to the added value of the Canadian processing with respect to such product types, which the Company estimates to account for approximately 30% of the total value of such product types of the finished product. The other 70% of the value with respect to such product types results from U.S. production. The Company also intends to seek a refund of the entire anti-dumping duty upon administrative review, which will occur more than one year in the future. The Company does not believe that the costs that may be imposed on the Company as a result of this ITC determination will have a material adverse effect on the Company's financial condition.\nDouble G Coatings, L.P.\nTo continue to meet the needs of the growing metal buildings market, the Company and an unrelated third party formed a joint venture to build and operate Double G Coatings, L.P. (\"Double G\"), a 270,000 ton per year hot dip galvanizing and Galvalume(R) steel plant near Jackson, Mississippi. The plant will be capable of coating 48 inch wide steel coils with zinc to produce a product known as galvanized steel and a zinc\/aluminum coating to produce a product known as Galvalume(R) steel. Double G will primarily serve the metal buildings segment of the construction market in the south central United States. The Company is committed to utilize and pay a tolling fee in connection with 50% of the available line time at the facility. The joint venture plant is scheduled to begin production in the second quarter of 1994 and is expected to operate at full capacity in 1995. The Company's steel substrate requirements will be provided to Double G by the Great Lakes and Midwest Divisions.\nProCoil Corporation\nProCoil Corporation (\"ProCoil\"), a joint venture among the Company, Marubeni Corporation, Mitsubishi Corporation and NKK, located in Canton, Michigan, operates a steel processing facility which began operations in 1988 and a warehousing facility which began operations in 1992. Each of the Company and Marubeni Corporation owns a 44% equity interest in ProCoil. ProCoil blanks, slits and cuts steel coils to desired lengths to service automotive market customers. In addition, ProCoil warehouses material to assist the Company in providing just-in-time delivery to customers.\nOTHER PROPERTIES\nGenerally, the Company's properties are well maintained, considered adequate and being utilized for their intended purposes. The Company's corporate headquarters is located in Mishawaka, Indiana.\nExcept as stated below, the steel production facilities are owned in fee by the Company. A continuous caster and related ladle metallurgy facility and an electrolytic galvanizing line, which each service the Great Lakes Division, and a coke battery, which services the Granite City Division, are operated pursuant to the terms of operating leases with third parties and are not subject to a lien under the Company's First Mortgage Bonds. The electrolytic galvanizing lease, the coke battery lease and the continuous caster and related metallurgy facility lease are scheduled to expire in 2001, 2004 and 2008, respectively. Upon expiration, the Company has the option to extend the respective lease or purchase the facility at fair market value.\nAll land (excluding certain unimproved land), buildings and equipment (excluding, generally, mobile equipment) that are owned in fee by the Company at the Great Lakes Division, Granite City Division and Midwest Division are subject to a lien under the First Mortgage Bonds, with certain exceptions, including a vacuum degasser and a pickle line which service the Great Lakes Division, a continuous caster which services the Granite City Division and the corporate headquarters in Mishawaka, Indiana. Additionally, the Company has granted to the VEBA a second mortgage on the No. 5 coke oven battery at the Great Lakes Division.\nITEM 3.","section_3":"ITEM 3. LEGAL PROCEEDINGS\nIn addition to the matters specifically discussed below, the Company is involved in various legal proceedings occurring in the normal course of its business. In the opinion of the Company's management, adequate provision has been made for losses which are likely to result from these actions. To the extent that such reserves prove to be inadequate, the Company would incur a charge to earnings, which could have a material adverse effect on the Company's results of operations for the applicable period. The outcome of these proceedings, however, is not expected to have a material adverse effect on the financial condition of the Company. For a description of certain environmental matters involving the Company, see \"Environmental Matters\" below.\nBaker's Port, Inc. v. National Steel Corporation\nOn July 1, 1988, Baker's Port, Inc. (\"BPI\") and Baker Marine Corporation (\"BMC\") filed a lawsuit in the District Court for San Patricio County, Texas against the Company, two of its subsidiaries, NS Land Company (\"NS Land\") and Natland Corporation (\"Natland\"), and several other defendants, alleging breach of their general warranty of title, violation of the Texas Deceptive Trade Practice Act (the \"DTPA\") and fraud, in connection with the sale by Natland to BPI in 1981 of approximately 3,000 acres of land near Corpus Christi, Texas. Approximately $24.7 million of the purchase price was in the form of a note (the \"Note\") secured by a Deed of Trust (mortgage) and BMC's guarantee. BPI and BMC sought actual damages in excess of $55 million, or, alternatively, rescission of the sale, and exemplary damages in excess of $155 million, as well as treble damages under the DTPA. Natland counterclaimed for the amount defaulted on by BPI under the Note, approximately $13.3 million in principal and $10.8 million in interest at December 31, 1993, all of which has been reserved by the Company. The State of Texas also claimed the rights to certain riparian lands. On September 7, 1990, after trial, a judgment was entered, holding, among other things, (i) that the affirmative claims of BPI and BMC were barred, except as set forth in (iii) below, (ii) that recovery by Natland on the Note was barred, (iii) that BPI was entitled to approximately $.4 million plus pre-judgment interest thereon in the sum of approximately $.5 million, plus post-judgment interest thereon and (iv) that Natland's Deed of Trust lien on the property was fully released and discharged. On June 30, 1993, the Court of Appeals issued an opinion generally in favor of the Company and its subsidiaries. The Court of Appeals affirmed in part and reversed and remanded in part the judgment of the trial court. Specifically, the Court of Appeals (i) affirmed the dismissal by the trial court of the title claims brought by the State of Texas, (ii) reversed the finding by the trial court of $22 million of damages for fraud, which was applied to offset the amount then owing of approximately $19 million on the Note from BPI to Natland, (iii) reversed the trial court's award of approximately $.4 million plus pre-judgment interest thereon in the amount of approximately $.5 million plus post-judgment interest and (iv) remanded the case for a new trial on one remaining title claim. All parties have filed appeals and are awaiting a decision by the Texas Supreme Court as to whether or not it will hear the appeals. Until all appellate rights available to the parties have been exhausted, counsel is unable to predict the likelihood of a successful outcome. However, should the Court of Appeals' ruling be upheld, the case will be remanded for a new trial on limited issues which may favor the possibility of a successful outcome by Natland, NS Land and the Company. The Company has reserved $.9 million in its financial statements in connection with the matter and as a result of the trial court's decision, and the Note has been fully reserved on the Company's books.\nDetroit Coke Corporation v. NKK Chemical USA, Inc.\nOn October 4, 1991, Detroit Coke Corporation (\"Detroit Coke\") filed a lawsuit against NKK Chemical USA, Inc. (\"NKK Chemical\") and the Company in the United States District Court for the Eastern District of Michigan, Southern Division, alleging damages in excess of $160 million arising under coal and coke purchase and sale agreements among the parties and a subsidiary of the Company. Detroit Coke alleges that the defendants supplied it with defective coal and coal blends, which caused damage to its coke making facility and environmental problems, thereby forcing the shutdown of its facility. On July 2, 1992, the action was transferred to the United States District Court for the Western District of Pennsylvania. In October 1992,\nDetroit Coke added a new defendant, Trans-Tech Corporation, and claimed an additional $1.4 million allegedly due for coke and coke oven gas sales. While the Company has denied all the allegations of Detroit Coke and is defending this action, because the allegations have not yet been fully investigated, it is not possible at this stage of the litigation to make an assessment of the outcome of this case.\nDonner-Hanna Coke Joint Venture\nHanna Furnace Corporation (\"Hanna\"), a wholly-owned subsidiary of the Company, was a 50% participant, along with LTV Steel Company, Inc. (\"LTV\"), in the Donner-Hanna Coke Joint Venture (\"Donner-Hanna\") which ceased its coke making operations in 1982. LTV filed a petition in July 1986 with the United States Bankruptcy Court for the Southern District of New York for relief under Chapter 11 of the Bankruptcy Code, and, with the approval of the Bankruptcy Court, rejected the Donner-Hanna-Coke Joint Venture Agreement. As a result of LTV's actions, Donner-Hanna has failed to make its annual minimum pension contributions to the trustee of its salaried and hourly pension plans (the \"Plans\") for each of the plan years 1985 through 1992 in the aggregate amount of approximately $7.2 million. The Company estimates the 1993 minimum contribution to be $.7 million, which also has not been made. The Company has fully reserved for these amounts at December 31, 1993. The total unfunded liability of the Plans was determined to be $15.5 million on May 20, 1993, for purposes of settling Hanna's bankruptcy claim against LTV. Since July 1991, the Pension Benefit Guaranty Corporation (the \"PBGC\") has funded the monthly pension benefits under the hourly pension plan. On August 13, 1993, the Internal Revenue Service assessed Hanna, as a general partner of Donner-Hanna, approximately $2.7 million for excise taxes (including interest through August 31, 1993) and penalties for plan years 1985 through 1991 arising from the failure to meet minimum funding standards for the Plans. In November 1993, Hanna contributed approximately $1.2 million to the salaried plan, representing proceeds from the sale of LTV stock received for Hanna's claim in the LTV bankruptcy proceeding. On December 30, 1993, the Pension Benefit Guarantee Corporation (\"PBGC\") notified Hanna and the Pension Committee for the Plans that the PBGC was terminating the hourly plan retroactive to July 1, 1991, and was terminating the salaried plan as of December 31, 1993. The PBGC has submitted a proposed Termination Agreement which is currently under review. The PBGC has indicated that it may seek to hold the Company liable for the unfunded liability of the Plans. Although the Company believes that under applicable law Hanna is solely liable and the Company has valid defenses to any such action by the PBGC, the Company is unable to predict with certainty the final outcome of any such action by the PBGC.\nManagement believes that the final disposition of the Baker's Port, Detroit Coke and Donner-Hanna Coke matters will not have a material adverse effect on the Company's financial condition.\nENVIRONMENTAL MATTERS\nThe Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended (\"CERCLA\"), and similar state superfund statutes generally impose joint and several liability on present and former owners and operators, transporters and generators for remediation of contaminated properties regardless of fault. Currently, an inactive site located at the Great Lakes Division facility is listed on the Michigan Environmental Response Act Site List, but remediation activity has not been required by the Michigan Department of Natural Resources (\"MDNR\"). In addition, the Company and certain of its subsidiaries are involved as a potentially responsible party (\"PRP\") at a number of off-site CERCLA or state superfund site proceedings. At several of these sites, any remediation costs incurred by the Company would constitute Weirton liabilities for which NII is required to indemnify the Company or other environmental liabilities for which NII has agreed to indemnify the Company. The more significant of these matters are described below.\nIlada Energy Company Site. The Company and certain other PRPs have performed a removal action pursuant to an order issued by the EPA under Section 106 of CERCLA at this waste oil\/solvent reclamation site located in East Cape Girardeau, Illinois. The Company received a special notice of liability with respect\nto this site on December 21, 1988. The Company believes that there are approximately sixty-three PRPs identified at such site. Pursuant to an Administrative Order of Consent (\"AOC\"), the Company and other PRPs are currently performing a remedial investigation and feasibility study at such site to determine whether the residual levels of contamination of soil and groundwater remaining after the removal action pose any threat to either human health or the environment and therefore whether or not the site will require further remediation. During the remedial investigation and feasibility study, a floating layer of material, which the Company believes to be aviation fuel, was discovered above the groundwater. The Company does not know the extent of this contamination. Furthermore, the Company believes that this material is not considered to be a hazardous substance as defined under CERCLA. As a result, the Company is unable to estimate its potential liability. To date, the Company has paid approximately $2 million for work and oversight costs.\nBuck Mine Complex. This is a proceeding involving a large site, called the Buck Mine Complex, two discrete portions of which were formerly owned or operated by a subsidiary of the Company. This subsidiary was subsequently merged into the Company. The Company received a notice of potential liability from the MDNR with respect to this site on June 24, 1992. The Company's subsidiary had conducted mining operations at only one of these two parcels and had leased the other parcel to a mining company for numerous years. The MDNR alleges that this site discharged and continues to discharge heavy metals into the environment, including the Iron River. Because the Company and approximately eight other PRPs have declined to undertake a remedial investigation and feasibility study, the MDNR has advised the Company that it will undertake the investigation at this site and charge the costs thereof to those parties ultimately held responsible for the cleanup. The MDNR has orally advised the Company that the cost of the remedial investigation and feasibility study and the remediation at this site will be approximately $250,000, which cost will be allocated among the parties ultimately held responsible. The Company does not have complete information regarding the relationship of the other PRPs to the site and consequently, the Company is unable to estimate its potential liability, if any, in connection with this site.\nPort of Monroe Site. In February 1992, the Company received a notice of potential liability from the MDNR as a generator of waste materials at this landfill. The Company believes that there are approximately eighty other PRPs identified at this site. The Company's records indicate that it sent some material to the landfill. It is the Company's understanding that the remedial investigation and feasibility study for this site is presently being conducted. The Company does not yet have sufficient information regarding the nature and extent of contamination at such site and the nature and extent of the wastes that the other PRPs have sent to the site to estimate its potential liability, if any, in connection with the site.\nHamtramck Site. In January 1993, the City of Hamtramck filed a complaint against the Sherwin-Williams Company and six other defendants seeking contribution of costs incurred in connection with the remediation of certain property located in Hamtramck, Michigan. In February 1993, the Sherwin-Williams Company filed a third party complaint against the Company and seven other third party defendants seeking contribution in connection with the site. The complaint alleges that the Company's Great Lakes Division engaged a third party waste oil hauler and processor that operated a tank farm at the site, to haul and\/or treat some of the Division's waste oil. The Company entered into an agreement with the City of Hamtramck in 1983 pursuant to which the Company, without admitting liability, contributed to the funding of the cleanup of the tank farm, in return for which the City agreed to indemnify the Company for any releases. The Company has notified the City of this proceeding, and the City has agreed to defend and indemnify the Company in this matter. The Company is not aware of how many other parties are involved in this proceeding, and what, if any, potential liability the Company may have. However, the Company believes that whatever liability it may ultimately be assessed will be paid for by the City of Hamtramck.\nMartha C. Rose Chemicals Superfund Site. This proceeding involves a former PCB storage, processing and treatment facility located in Holden, Missouri. The Company received an initial request for information with respect to this site on December 2, 1986. The Company believes that there are over 700 PRPs identified at this site. The Company believes that it sent only one empty PCB transformer there. In July 1988, the Company entered into a Consent Party Agreement with the other PRPs and paid $48,134 in connection with\nthe remediation of such site. A record of decision selecting the final remedial action and an order pursuant to Section 106 of CERCLA requiring certain PRPs, not including the Company, to implement the final remedy have been issued by the EPA. To date, the PRP steering committee has raised approximately $35 million to pay for past removal actions, the remedial investigation and feasibility study and the final remedial action. While there can be no assurances, the Company believes that this amount is sufficient to cover such costs. However, if such costs were to exceed $35 million, the Company does not expect that additional payments required by it would be significant.\nSpringfield Township Site. This is a proceeding involving a disposal site located in Springfield Township, Davisburg, Michigan in which approximately twenty-two PRPs have been identified. The Company received a general notice of liability with respect to this site on January 23, 1990. The Company and eleven other PRPs have entered into AOCs with the EPA for the performance of partial removal actions at such site and reimbursement of past response costs to the EPA. The Company's share of costs under the AOCs was $48,000. The PRPs are currently negotiating with the EPA regarding the final remedial action at such site. The EPA and the PRP steering committee have estimated that the cost to implement the final remedy is approximately $33 million and $20 million, respectively, depending upon the final remedy. The Company is currently negotiating with the other PRPs with respect to its share of such cost and has offered to pay $175,000 in connection with the final remedy. On November 10, 1993, the EPA issued a unilateral order pursuant to Section 106 of CERCLA requiring the PRP steering committee to implement the groundwater portion of the final remedy. The members of the PRP steering committee have entered into an agreement among themselves for the implementation of the groundwater portion of the final remedy. Subject to a final determination by the EPA as to what must be included in the groundwater portion of the final remedy, a preliminary estimate by the PRP steering committee of the cost of such work is approximately $300,000. Additionally, in response to a demand letter from the MDNR, the PRP steering committee and the MDNR have negotiated a preliminary agreement pursuant to which MDNR will be reimbursed approximately $700,000 for its past response costs. The Company has recorded its estimated liability for this matter.\nRasmussen Site. The Company and nine other PRPs have entered into a Consent Decree with the EPA in connection with this disposal site located in Livingston, Michigan. The Company received a general notice of liability with respect to this site on September 27, 1988. The Company believes that there are approximately twenty-three PRPs at this site. A record of decision selecting the final remedial action for this site was issued by the EPA in March 1991. The PRP steering committee has estimated that remediation costs are approximately $18.5 million. Pursuant to a participation agreement among the PRPs, the Company's share of such costs is approximately $420,000, of which approximately $327,000 has been accrued by the Company and remains to be paid.\nBerlin and Farro Liquid Incineration Site. The Company has been identified as a generator of small amounts of hazardous materials allegedly deposited at this industrial waste facility located in Swartz Creek, Michigan. The Company received an initial request for information with respect to this site on September 19, 1983. The Company believes that there are approximately 125 PRPs at this site. A record of decision selecting the final remedial action for this site was issued by the EPA in September 1991. The EPA and the PRP steering committee have estimated that the cost of the selected remedy is approximately $8 million and $10.5 million, respectively. A third-party complaint has been filed against the Company by three PRPs for recovery of the EPA's past and future response costs. The Company has entered into a consent decree with the EPA which was lodged with the court on February 25, 1994. Pursuant to such consent decree the Company's share of liability will be approximately $105,000. In addition, the terms of the proposed consent decree provide that settling defendants who are plaintiffs in the above-referenced cost recovery action will execute and file a dismissal with prejudice as to their claims against the de minimis settling defendants, including the Company. In addition, the MDNR has demanded that the Company reimburse the state for its past response costs incurred at this site. In July 1993, the MDNR offered and the Company accepted a \"de minimis\" buyout settlement of the state's claims for approximately $1,500. The Company has recorded its estimated liability for this matter.\nNII Sites.\nRemediation costs incurred by the Company at the following sites constitute Weirton Liabilities or other environmental liabilities for which NII has agreed to indemnify the Company: the Swissvale Site, Swissvale, Pennsylvania; Buckeye Site, Bridgeport, Ohio; Lowry Landfill, Aurora, Colorado; and Weirton Steel Corporation Site, Weirton, West Virginia. The Company was notified of potential liability with respect to each of these sites as follows: the Swissvale Site-- February 1985; Buckeye Site--September 1991; Lowry Landfill--December 1990; and Weirton Steel Corporation Site--January 1993. In accordance with the terms of an agreement between the Company and NII, in January 1994, NII paid the Company $10 million as an unrestricted prepayment for environmental obligations which may arise after such prepayment and for which NII has previously agreed to indemnify the Company. Since NII retains responsibility to indemnify the Company for any remaining environmental liabilities arising before such prepayment or arising after such prepayment and in excess of $10 million, these environmental liabilities are not expected to have a material adverse effect on the Company's liquidity. However, the failure of NII to satisfy any such indemnity obligations could have a material adverse effect on the Company's liquidity.\nThe Company, Earth Sciences, Inc. and Southwire Company are general partners in the Alumet Partnership (\"Alumet\"), which has been identified by the EPA as one of approximately 260 PRPs at the Lowry Landfill Superfund Site. In the August 1993 proposed plan, the EPA has estimated the overall discounted costs for implementing the selected remedial action to be approximately $98 million. Based on information received by the Company, it appears that Alumet may have contributed approximately 3.8% of the overall volume of industrial materials sent to this site. Alumet has presented information to the EPA in support of its position that the material it sent to this site is not a hazardous substance. To date, however, the EPA has rejected this position, and on November 15, 1993, Alumet received a demand letter from the EPA requesting approximately $15.3 million for its past response costs incurred as of the date of the letter. The Company believes that the same demand letter was sent to all PRPs that sent over 300,000 gallons of waste to the site. The Company does not have sufficient information to estimate its portion of any liability resulting from the $15.3 million demand. The owners and operators of the Lowry Landfill-- the City and County of Denver, Waste Management of Colorado, Inc. and Chemical Waste Management, Inc.--are performing the remediation activities at the site. The City and County of Denver (the \"Plaintiffs\") in December 1991 filed a complaint against 40 of the PRPs seeking reimbursement for past and future response costs incurred by the Plaintiffs at the Lowry Landfill site. Subsequently, the Plaintiffs reached a confidential settlement agreement with Earth Sciences, Inc. and unsuccessfully attempted to add Alumet as a third- party defendant. In June 1993, Alumet received a settlement demand from the owners and operators of the Lowry Landfill for response costs associated with Alumet's wastes that were not covered by the earlier confidential settlement agreement. The Company believes that whatever liability it may be ultimately assessed will be covered by NII's indemnity obligations. Because this is a complex site with numerous operable units, PRPs and different types of wastes, and because remediation activities at this site are occurring in various stages, the Company is unable to estimate its potential liability at this site.\nIn connection with the Buckeye Site, the Company and thirteen other PRPs have entered into an AOC with the EPA to perform a remedial design. The Company's allocated share for the remedial design, as established by a participation agreement for the remedial design executed by the PRPs, is 4.63%. The EPA and the PRP steering committee have estimated the cost for the remedial design to be approximately $3 million. The EPA has estimated that the total cost for remediation activities at this site is approximately $50 million. The PRPs are currently negotiating with the EPA to reduce the scope of the remediation activities at the site. Additionally, the Company and the other thirteen PRPs are discussing an additional participation agreement and allocation governing the costs of the final remedial action and are continuing to identify other PRPs. The Company believes that its share of the final remedial action costs will not exceed 4.63 percent.\nIn January 1993, the Company was notified that the West Virginia Division of Environmental Protection (the \"WVDEP\") had conducted an investigation at a site in Weirton, West Virginia which was formerly owned by the Company's Weirton Steel Division and is currently owned by Weirton Steel Corporation. The\nWVDEP alleged that samples taken from four groundwater monitoring wells located at this site contained elevated levels of contamination. Weirton Steel Corporation has agreed to cooperate with the WVDEP with respect to conducting a ground water monitoring program at the site. The Company does not have sufficient information to estimate its potential liability, if any, at this site.\nThe Company has been named as a third-party defendant in a governmental action for reimbursement of EPA's response costs in connection with the Swissvale Site. The Company understands that on December 2, 1993, the EPA and the original defendants reached a tentative settlement agreement regarding EPA's cost recovery claim for $4.5 million. Pursuant to that tentative settlement agreement, the original defendants will pay a total of $1.5 million. The original defendants have requested that the eighteen third-party defendants, including the Company, pay a total of $375,000. The Company believes that its share should be less than $25,000.\nOther.\nThe Company and its subsidiaries have been conducting steel manufacturing and related operations at numerous locations, including their present facilities, for over sixty years. Although the Company believes that it has utilized operating practices that were standard in the industry at the time, hazardous materials may have been released on or under these currently- or previously- owned sites. Consequently, the Company potentially may also be required to remediate contamination at some of these sites. The Company does not have sufficient information to estimate its potential liability in connection with any potential future remediation. However, the Company believes that if any such remediation is required, it will occur over an extended period of time. In addition, the Company believes that many of these sites may also be subject to indemnities by NII to the Company.\nIn addition to the aforementioned proceedings, the Company is or may be involved in proceedings with various regulatory authorities which may require the Company to pay various fines and penalties relating to violations of environmental laws and regulations, comply with applicable standards or other requirements or incur capital expenditures to add or change certain pollution control equipment or processes.\nDuring 1992, the Wayne County Air Pollution Control Department (the \"WCAPCD\") issued 37 notices of violation to the Company in connection with particulate emissions at the basic oxygen furnace shop and the ladle metallurgy facility servicing the Great Lakes Division. In 1993, approximately 42 additional notices of violations have been issued to the Company in connection with alleged exceedances of particulate emissions standards covering various process and fugitive emissions sources. The Company is currently negotiating with the WCAPCD with respect to any potential liability that may result from the notices of violations. The Company is not yet able to estimate its liability with respect to these alleged violations.\nNational Mines Corporation (\"NMC\"), a wholly-owned subsidiary of the Company, owns certain properties in West Virginia and Kentucky where mining operations were conducted by third-party contract miners. In connection with such operations, such contract miners were required to comply with applicable Federal and state mining laws (including conducting reclamation activities at such properties). However, since many of these contract miners allegedly failed to comply with such laws or to reclaim these properties, NMC has been faced with various claims as owner of such properties. NMC has entered into a settlement agreement with the State of Kentucky which will require NMC to pay $525,000 of the $1.6 million in civil penalties assessed against NMC's contract miners and require NMC to perform reclamation of various mining sites operated by its contract miners. The agreed upon reclamation was completed at a cost of approximately $100,000. The payment of $525,000, which has been accrued by the Company, will be made over 24 months, consisting of an initial payment of $125,000 and two annual payments of $200,000 each.\nIn September 1993, the Indiana Department of Environmental Management (\"IDEM\") issued a Notice of Violation to the Company's Midwest Division alleging, among other things, that (1) the Division had failed to comply with enumerated provisions of its Hazardous Waste Management Permit (the \"Permit\") for its\nGreenbelt Landfill; (2) the Division was conducting operations at its plant in violation of specified IDEM regulations; and (3) certain areas of the plant had experienced releases of solid or hazardous waste that should be prevented as part of a plan for preventative maintenance. IDEM demanded $351,875 in civil penalties. After extensive negotiations, without admission of any liability, the Company entered into an Agreed Order with IDEM in October 1993 which requires the Division to put certain compliance procedures in place and perform certain activities pursuant to the Permit, submit and implement a preventative maintenance program at certain areas of the plant and pay a civil penalty of $150,000. All such actions have been completed and a civil penalty of $150,000 has been paid.\nIn connection with certain outfalls located at the Great Lakes Division facility, including the outfall at the 80-inch hot strip mill, the U.S. Coast Guard issued certain penalty assessments in 1992, three of which totalling $8,000 have been accrued by the Company and are under appeal. Depending upon the results of the pending challenges, there may be further assessments. The MDNR, in April 1992, also notified the Company of a potential enforcement action alleging approximately 63 exceedances of limitations at the outfall at the 80-inch hot strip mill. The Company requested the MDNR to provide more information concerning these exceedances. In April 1993, the MDNR identified the dates of the alleged exceedances, but no further action has taken place.\nIn connection with certain of these proceedings, the Company has only commenced investigation or otherwise does not have sufficient information to estimate its potential liability, if any. Although the outcomes of the proceedings described above or any fines or penalties that may be assessed in any such proceedings, to the extent that they exceed any applicable reserves, could have a material adverse effect on the Company's results of operations for the applicable period, the Company has no reason to believe that any such outcomes, fines or penalties, whether considered individually or in the aggregate, will have a material adverse effect on the Company's financial condition.\nITEM 4.","section_4":"ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS\nThere were no matters submitted to a vote of security holders during the fourth quarter of 1993.\nPART II\nITEM 5.","section_5":"ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS\nThe Class B Common Stock is listed on the New York Stock Exchange (the \"NYSE\") and traded under the symbol \"NS.\" The following table sets forth for the periods indicated the high and low sales prices of the Class B Common Stock on a quarterly basis as reported on the NYSE Composite Tape. Prior to March 30, 1993, the Company did not have any publicly traded shares.\nAs of December 31, 1993, there were approximately 45 registered holders of the Company's Class B Common Stock.\nThe Company has not paid dividends on its Common Stock since 1984, with the exception of an aggregate dividend payment of $6.7 million in 1989. The Company is currently prohibited from paying cash dividends on its Common Stock, including the Class B Common Stock, by covenants contained in certain of the Company's financing arrangements. In the event the payment of dividends is not prohibited in the future by such covenants, the decision whether to pay dividends on the Common Stock will be determined by the Board of Directors in light of the Company's earnings, cash flows, financial condition, business prospects and other relevant factors. Holders of Class A Common Stock and Class B Common Stock will be entitled to share ratably, as a single class, in any dividends paid on the Common Stock. In addition, dividends with respect to the Common Stock are subject to the prior payment of cumulative dividends on any outstanding series of Preferred Stock, including the Series A Preferred Stock and Series B Preferred Stock.\nITEM 6.","section_6":"ITEM 6. SELECTED FINANCIAL DATA\nSELECTED FINANCIAL INFORMATION (DOLLARS IN MILLIONS, EXCEPT PER SHARE AND PER TON DATA)\n- -------- *The number of employees was reduced by 579 in 1993 as a result of the temporary idling of NSPC.\nITEM 7.","section_7":"ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS\nDuring 1993, the Company experienced operating problems which were the result of a combination of unusual factors. Early in the year, the Company suffered an explosion and fire at its electrolytic galvanizing line. At the same time, demand from the automotive market for ultra-low carbon steel used in the production of coated products was rapidly rising. As a result, the Company began to experience difficulties in attaining on time deliveries for such steel. In an attempt to meet its commitment to customer service, the Company rapidly expanded production of ultra-low carbon steels, causing operating inefficiencies and leading to the generation of non-prime products. Additionally, the Company purchased steel and services from outside providers to meet this increased demand, resulting in higher production costs. Concurrently, the Company completed the construction and start-up of several new facilities such as the DNN joint venture, the rebuild of the No. 5 coke oven battery and the No. 5 pickle line, which caused some disruption of existing operations. These operational problems, along with measures taken in preparation for a potential work stoppage at the Company's steel divisions and corporate headquarters, were among the more significant events contributing to higher costs in 1993.\nIn the fourth quarter of 1993, management initiated a number of steps to improve quality and delivery performance. As a first step, the Company made key management changes at two of its three Divisions along with a number of other personnel changes. Secondly, management intentionally reduced its 1993 fourth quarter order book to improve delivery performance. The Company activated a number of multi-disciplined teams to focus on solving production problems. Also, at the Company's request, NKK dispatched several technical improvement teams to aid in the investigation and to propose corrective action for the operating problems.\nManagement anticipates that its results for 1994 will be favorably impacted by the $15 per ton price increase effective January 3, 1994 on all new spot market orders for hot rolled, cold rolled and coated products. The Company's ability to successfully implement such price increase is subject to, among other things, the strength of the Company's principal customer markets and general economic conditions. In 1993, approximately 40% of the Company's shipments, and a slightly higher percentage of net sales, were covered by sales contracts with a duration of 12 months or longer. To the extent that the Company is successful in implementing the announced price increase, such increase will not be reflected in sales made pursuant to such contracts prior to their expiration.\nOn January 24, 1994, the United States Supreme Court denied the Bessemer & Lake Erie Railroad's (\"B&LE\") petition for certiorari in the Iron Ore Antitrust Litigation, thus sustaining the Company's judgment against the B&LE. On February 11, 1994, the Company received approximately $111 million, including interest, in satisfaction of this judgment. Pursuant to the terms of the 1993 Settlement Agreement, approximately $11 million of the proceeds will be deposited into the VEBA Trust established to prefund the Company's OPEB (defined below) obligation with respect to USWA represented employees. Of the remaining proceeds, the Company plans to use approximately $40 million to repay outstanding indebtedness and the remaining proceeds will be used for working capital and general corporate purposes. The Company will recognize this gain in the first quarter of 1994.\nAnticipated First Quarter 1994 Results\nExcluding the effect of the gain from the B&LE judgment, the Company currently expects to report a net loss for the first quarter of 1994 due to a slight seasonal shift in the Company's product mix and the negative impact of particularly severe winter weather on the Company's operations. The ability of the Company to return to profitability is dependent upon several managerial and operational changes implemented to reduce costs, improve productivity and achieve an improved product mix. Performance will also be affected by factors outside the Company's control, including the level of steel prices, domestic steel demand and the level of the U.S. dollar.\nRESULTS OF OPERATIONS--COMPARISON OF THE YEARS ENDED DECEMBER 31, 1993 AND 1992\nNet Sales\nNet sales for 1993 increased by 1.9% to $2,418.8 million, due primarily to increases in volume and realized selling prices, coupled with a favorable shift in product mix. Steel shipments in 1993 were 5,005,000 tons, up 0.6% from 4,974,000 tons in 1992. Raw steel production increased to 5,551,000 tons, a 3.2% increase from the 5,380,000 tons produced in 1992.\nCost of Products Sold\nCost of products sold of $2,254.0 million reflects an increase of $147.2 million compared to the same period in 1992. This increase was largely the result of the Company's implementation of Statement of Financial Accounting Standards No. 106, \"Accounting for Postretirement Benefits Other Than Pensions\" (\"SFAS 106\" or \"OPEB\"), effective January 1, 1993. The excess of the postretirement benefit expense under SFAS 106 over the former pay-as-you-go basis was approximately $59.5 million in 1993. Additionally, $25.3 million of present value interest relating to postretirement benefit liabilities and certain Weirton benefit liabilities, previously recorded for facility sales and restructurings and charged to interest expense, was charged to cost of products sold. The remaining portion of the increase can be attributed primarily to operational and economic factors, as discussed above.\nSelling, General and Administrative Expenses\nSelling, general and administrative expenses increased by 2.9% from $132.8 million in 1992, to $136.7 million in 1993, primarily due to legal costs incurred in pursuing unfair trade litigation.\nDepreciation, Depletion and Amortization\nDepreciation expense for 1993 increased by $22.6 million, or 19.7% as compared to 1992, primarily as a result of the completion of the rebuild of the No. 5 coke oven battery at the Great Lakes Division in November 1992.\nUnusual Items Related to the Temporary Idling of NSPC\nThe Company formerly purchased a significant portion of its iron ore pellet requirements from NSPC. On August 1, 1993, the USWA went on strike against NSPC over demands for a new labor contract at NSPC. In October 1993, NSPC announced its intention to temporarily idle the facility. During the period from August 1, 1993 to date, the Company has secured its pellet requirements from outside sources. The Company has entered into agreements that will satisfy its iron ore pellet requirements through 1994 at a lower cost than could be obtained by operating NSPC. It is management's intention to secure long term contracts for the purchase of iron ore pellets for a period of one to three years.\nThe Company recorded an unusual charge of $108.6 million during the fourth quarter of 1993 which is comprised of employee benefits related charges of $90.9 million (principally pensions and OPEB), taxes of $7.9 million and miscellaneous other costs of $9.8 million relating to the three year idle period. Management has not made a final decision regarding the permanent shutdown of NSPC; however, such a decision would result in additional charges which management currently estimates to be approximately $160 million.\nFinancing Costs\nNet financing costs decreased by $0.3 million from 1992 to 1993. Interest expense associated with the financing of the No. 5 coke oven battery rebuild was $25.1 million in 1993. However, this was largely offset by a $20.5 million reduction in financing costs for present value interest expense attributable to postretirement benefits which are now being charged to cost of products sold.\nIncome Taxes\nThe Company adopted Statement of Financial Accounting Standards No. 109, \"Accounting for Income Taxes\" (\"SFAS 109\"), at December 31, 1992. At that time, available tax planning strategies served as the only basis for determining the amount of the net deferred tax asset to be recognized. As a result, a full valuation allowance was recorded, except for the $43 million recognized pursuant to those tax planning strategies. In 1993, the Company determined it was more likely than not that sufficient future taxable income would be generated to justify increasing the net deferred tax asset after valuation allowance to $80.6 million. Accordingly, the Company recognized an additional deferred tax asset of $37.6 million in 1993, which had the effect of decreasing the Company's net loss by a like amount.\nCumulative Effect of Accounting Change\nDuring the fourth quarter of 1993, the Company adopted Statement of Financial Accounting Standards No. 112, \"Employer's Accounting for Postemployment Benefits\" (\"SFAS 112\"), which requires accrual accounting for benefits payable to inactive employees who are not retired. The cumulative effect as of January 1, 1993 of this change was to decrease net income by $16.5 million or $.49 per share. The results of operations for the first quarter of 1993 have been restated to reflect the effect of adopting SFAS 112 at January 1, 1993. The effect of the change on 1993 income before the cumulative effect of the change was not material; therefore, the remaining quarters of 1993 have not been restated.\nAdoption of SFAS 106\nDuring the first quarter of 1993, the Company adopted SFAS 106, which requires the accrual of retiree medical and life insurance costs as these benefits are earned, rather than recognition of these costs as claims are paid. At January 1, 1993, the Company calculated its transition obligation to be $622.1 million with $66.1 million recorded prior to implementation of SFAS 106 in connection with facility sales and restructurings. The Company has elected to amortize its transition obligation over a period of 20 years. Total postretirement benefit cost in 1993 was $123.7 million, or $85.6 million excluding the $38.1 million of curtailment charges related primarily to the idling of NSPC. Excluding these curtailment charges, the excess of postretirement benefit expense recorded under SFAS 106 over the Company's former method of accounting for these benefits was $59.5 million, or $1.08 per share net of tax.\nDiscount Rate Assumptions\nAs a result of a decline in long term interest rates in the United States, at December 31, 1993, the Company reduced the discount rate used to calculate the actuarial present value of its accumulated benefit obligation for OPEB by 100 basis points to 7.75% and for pensions by 125 basis points to 7.50%, from the rate used at January 1, 1993. The effect of these changes did not impact 1993 expense. However, this decline in the discount rate used to calculate the pension obligation increased the minimum pension liability recorded on the Company's balance sheet to $134.7 million and increased the related intangible asset to $128.8 million, with the remaining $5.9 million charged to stockholders' equity. While the same reduction in the discount rate as of December 31, 1993 also applies to the actuarial present value of the Company's OPEB obligation, such reductions do not result in any increase in the recorded liability or potential charge to equity because of different required accounting principles.\nThe Company expects its 1994 pension and OPEB expense to increase by approximately $27 million and $6 million, respectively, as a result of this decrease in the discount rate, among other things. Additionally, the Company anticipates that its pension contributions for the 1994 plan year will increase by approximately $30 million, primarily attributable to increases in benefits resulting from the 1993 Settlement Agreement, together with the decrease in the discount rate.\nComparability of Earnings Per Share\nWhile the Company has chosen to amortize its SFAS 106 transition obligation over twenty years, certain of the Company's competitors have chosen to immediately recognize their respective SFAS 106 transition obligations. As a result, any earnings per share (\"EPS\") comparison between the Company and these competitors must be adjusted for the per share adverse impact of this amortization. Based upon weighted average shares outstanding for the year ended December 31, 1993, the Company's after tax EPS was negatively impacted by $0.51.\nUSWA Agreement\nOn August 27, 1993, the 1993 Settlement Agreement between the Company and the USWA was ratified by union members of the Company's three steel divisions and corporate headquarters. The 1993 Settlement Agreement, effective August 1, 1993 through July 31, 1999, protects the Company and the USWA from a strike or lockout for the duration of the agreement. Either the Company or the USWA may reopen negotiations, except with respect to pensions and certain other matters, after three years, with any unresolved issues subject to binding arbitration. The Company estimates the additional annual cost resulting from the 1993 Settlement Agreement to be approximately $25 million per year through 1996. However, there is the potential that these higher costs may be reduced by productivity gains which are difficult to quantify. The Company is unable to estimate the impact of the 1993 Settlement Agreement beyond 1996 since it then may be reopened as discussed above.\nRESULTS OF OPERATIONS--COMPARISON OF THE YEARS ENDED DECEMBER 31, 1992 AND 1991\nNet Sales\nNet sales for 1992 increased by 1.9% to $2,373.3 million, due primarily to a shift in product mix from lower priced export, secondary and slab sales to higher priced coated products, coupled with an increase in steel shipments. A general decline in selling prices was partially offset by an improvement in product mix. Steel shipments in 1992 were 4,974,000 tons, up 1.4% from 4,906,000 tons in 1991. The increase in shipments reflected modest improvements in the domestic steel market in 1992. Raw steel production increased to 5,380,000 tons, a 2.5% increase from the 5,247,000 tons produced in 1991.\nCost of Products Sold\nThe Company's cost of products sold as a percentage of net sales decreased from 90.2% in 1991 to 88.8% in 1992. This decrease was primarily the result of a Company-wide emphasis on cost-reduction programs which began in the second quarter of 1991 and continued throughout 1992 and was achieved despite an average $.50 per hour wage increase which became effective January 1, 1992 under the Company's prior labor agreement with the USWA and the continuing escalation in health care costs.\nSelling, General and Administrative Expenses\nSelling, general and administrative expenses decreased by 4.7% from $139.3 million in 1991 to $132.8 million in 1992 primarily as a result of the Company's cost reduction programs.\nUnusual Items\nIn 1992, the Company recorded unusual charges aggregating $37.0 million relating principally to a pension window and the Company's decision to exit the coal mining business. A charge of $13.3 million was recognized relating to a 1992 pension window as part of the consolidation of certain staff functions and the relocation of the Company's corporate offices to Mishawaka, Indiana from Pittsburgh, Pennsylvania. The decision to relocate was made in order to be closer to the Company's customer base, to consolidate certain staff functions and to be closer to the Company's steel plants. As a result of management's decision to exit the coal mining business, an unusual charge of $24.9 million was recognized in the fourth quarter to reduce certain coal properties to net realizable value and record postretirement, environmental and other liabilities.\nDuring 1991, the Company recorded unusual charges which totalled $110.7 million. A charge of $41.5 million was recognized for the estimated costs to be incurred in conjunction with the consolidation of certain staff functions and relocation in 1992 of the Company headquarters as described above. A charge of $25.5 million was recognized relating to the Company's decision to permanently idle its Mathies coal mine after efforts to obtain third party financing to reopen the mine after a fire were unsuccessful. Concurrently, the Company undertook an evaluation of its other coal properties and operations. While no decision was made during 1991 as to the disposition of these properties, the net book value of certain of the assets exceeded their net realizable value. Therefore, a charge of $43.7 million was recognized to reduce certain coal properties to net realizable value and to recognize postemployment, environmental and other liabilities.\nFinancing Costs\nInterest and other financial income decreased to $2.0 million, a decrease of $4.1 million. This decrease was attributable to lower interest rates coupled with lower average balances of cash and cash equivalents. Interest and other financial expense was $64.0 million in 1992 compared to $64.8 million in 1991.\nExtraordinary Item\nDuring 1992, the Company recorded a charge of $50 million, representing management's best estimate of the Company's liability for United Mine Workers of America (\"UMWA\") beneficiaries under the Rockefeller Amendment. Since the Company notified the UMWA that it did not intend to renew its labor contract which expired February 1, 1993, thereby ending the Company's active involvement in the coal industry, the $50 million charge was recorded as an extraordinary item in accordance with accounting guidance provided by the Emerging Issues Task Force. No deferred tax benefits were recognized relating to the $50 million charge generated by the Rockefeller Amendment. Based upon preliminary assignments from the Secretary of Health and Human Services received during 1993, the Company believes this reserve is adequate.\nCumulative Effect of Accounting Change\nDuring the fourth quarter of 1992, the Company adopted SFAS 109. The Company formerly accounted for income taxes under the provisions of Accounting Principles Board Opinion No. 11, \"Accounting for Income Taxes.\" As permitted under SFAS 109, the Company elected not to restate the financial statements of prior years. The effect of adopting SFAS 109 as of January 1, 1992 was recorded as a cumulative effect of a change in accounting method and reduced the Company's net loss by $76.3 million, or $2.99 per share. The previously reported net loss for the first quarter of 1992 has been restated and reduced by $76.3 million. The change did not have an impact on the remaining quarters of 1992.\nLIQUIDITY AND SOURCES OF CAPITAL\nThe Company's liquidity needs arise primarily from capital investments, principal and interest payments on its indebtedness and working capital requirements. The Company has satisfied these liquidity needs over the last three years primarily with funds provided by long-term borrowings, cash provided by operations and proceeds of the Company's initial public offering (the \"IPO\") of Class B Common Stock in 1993. The Company's available sources of liquidity include a $100 million revolving secured credit arrangement (the \"Revolver\"), a $150 million subordinated loan agreement (the \"Subordinated Loan Agreement\") and $25 million in uncommitted, unsecured lines of credit (the \"Uncommitted Lines of Credit\"). The Company is currently in compliance with all material covenants of, and obligations under, its Revolver, Subordinated Loan Agreement, Uncommitted Lines of Credit and other debt instruments. The Company has satisfied its liquidity needs without extensive use of its credit facilities.\nCash and cash equivalents totaled $5.3 million and $55.2 million as of December 31, 1993 and 1992, respectively. Excluding the effect of the IPO, this represents a decrease of $191.3 million, primarily due to costs incurred in expanding the Company's properties and equipment. Also, on May 4, 1993 the Company used $67.8 million of the IPO proceeds to fund the early redemption of 10,000 shares of the Series B Preferred Stock held by NII.\nCash Flows from Operating Activities\nFor the year ended December 31, 1993, cash provided from operating activities decreased by $73.2 million compared to 1992, due to the effect of working capital items, along with a reduction in net income after adjusting for the effect of non cash items on operations. Changes in working capital items reduced cash flows by $27.2 million during 1993, as a substantial decrease in accounts payable was combined with the smaller negative effects of accounts receivable and accrued liabilities changes. In 1992, working capital items had a $36.0 million favorable impact on cash flows from operations, due primarily to the timing of cash disbursement clearings.\nCash Flows from Investing Activities\nCapital investments for the years ended December 31, 1993 and 1992 amounted to $160.7 million and $283.9 million, respectively, which included $31.9 million and $198.4 million related to the complete rebuild of the No. 5 coke oven battery at the Great Lakes Division. Additionally, in 1993, the Company spent $58.9 million on the relining of a blast furnace servicing the same division.\nBudgeted capital investments approximating $346.1 million, of which $92.5 million are committed at December 31, 1993, are expected to be made during 1994 and 1995, including the completion of a pickle line servicing the Great Lakes Division and the relining of a blast furnace servicing the Granite City Division.\nCash Flows from Financing Activities\nIn April 1993, the Company completed its IPO of 10,861,100 shares of its Class B Common Stock, at an offering price of $14 per share, which generated net proceeds to the Company of approximately $141.4 million. On May 4, 1993, the Company utilized $67.8 million of the IPO proceeds to fund the early redemption of 10,000 shares of the Series B Redeemable Preferred Stock (the \"Series B Preferred Stock\") held by NII.\nTotal borrowings for the years ended December 31, 1993 and 1992 amounted to $40.6 million and $209.7 million, respectively, primarily representing the remaining financing from a subsidiary of NKK related to the rebuild of the No. 5 coke oven battery at the Great Lakes Division. Correspondingly, cash basis interest expense increased by $19.7 million from 1992 to 1993 as a result of the completion of, and commencement of permanent financing for, the No. 5 coke oven battery.\nSources of Financing\nDuring 1993, the Company utilized $20 million of the proceeds from the IPO to reduce the amount of construction financing outstanding and the total financing commitment for a pickle line servicing the Great Lakes Division to $90 million. As of December 31, 1993, the construction financing was being provided by the contractor and was not a liability of the Company. In January 1994, upon completion and acceptance of the pickle line pursuant to the construction contract, the permanent financing commenced with repayment scheduled to occur over a fourteen-year period. The pickle line is not subject to the lien under the Company's First Mortgage Bonds, but is subject to a first mortgage in favor of the lender.\nThe Revolver was amended and restated on December 31, 1992 to extend the expiration date to December 31, 1994. The Revolver permits the Company to borrow up to $100 million on a short-term basis and provides the Company with the ability to issue up to $150 million in letters of credit. The Revolver is secured by the accounts receivable and inventories of the Company. No borrowings have been outstanding on the Revolver since 1987. At December 31, 1993 and 1992, letters of credit outstanding totaled $113.7 million and $113.6 million, respectively.\nThe Subordinated Loan Agreement, which was entered into in May 1991 with a United States subsidiary of NKK, was also extended in December 1992 to an expiration date of April 1, 1995. The Subordinated Loan Agreement permits the Company to borrow up to $150 million on an unsecured, short-term basis. The\nRevolver requires that the first $50 million in borrowings by the Company in excess of thirty days must come from the Subordinated Loan Agreement. Additional amounts borrowed would alternate between the Revolver and the Subordinated Loan Agreement up to $25 million in each increment. On February 7, 1994, the Company borrowed $20 million under the Subordinated Loan Agreement, all of which was repaid on February 17, 1994. Prior to this, the last borrowing on the Subordinated Loan Agreement occurred in 1991, when the Company borrowed $50 million, all of which was repaid later in that year.\nThe Uncommitted Lines of Credit permit the Company to borrow up to $25 million on an unsecured, short-term basis for periods of up to thirty days. One of these arrangements expires on March 31, 1994, while the other has no fixed expiration date but may be withdrawn at any time without notice. During 1993, the Company borrowed a maximum of $7.7 million under its Uncommitted Lines of Credit, which was repaid the following day. No borrowings were outstanding at December 31, 1993 and 1992. However, in February 1994, the Company borrowed a maximum of $5.0 million under the Uncommitted Lines of Credit which was repaid later in the month.\nWeirton Liabilities and Preferred Stock\nIn connection with the Company's June 1990 recapitalization, the Company received $146.6 million from NII in cash and recorded a net present value equivalent liability with respect to certain released Weirton benefit liabilities, primarily healthcare and life insurance. As a result of this transaction, the Company's future cash flow will decrease as the released Weirton benefit liabilities are paid. During 1993, such cash payments were $20.0 million compared to $15.3 million during 1992.\nOn October 28, 1993, NII converted all of its 3,400,000 shares of Class A Common Stock to an equal number of shares of Class B Common Stock. During January 1994, NII sold substantially all of such shares of Class B Common Stock. As previously agreed, the Company received $10 million of proceeds from the sale of such shares from NII as an unrestricted prepayment for environmental obligations which may arise after such prepayment and for which NII has previously agreed to indemnify the Company. The Company is required to repay to NII portions of the $10 million to the extent the Company's expenditures for such environmental liabilities do not reach specified levels by certain dates over a twenty year period. Since NII retains responsibility to indemnify the Company for remaining environmental liabilities (i) arising before such prepayment or (ii) arising after such prepayment and in excess of $10 million, these environmental liabilities are not expected to have a material adverse effect on the Company's liquidity. However, the failure of NII to satisfy any such indemnity obligations could have a material adverse effect on the Company's liquidity.\nIn connection with the June 1990 recapitalization, the Series B Preferred Stock was issued to NII. On May 4, 1993, the Company redeemed 10,000 shares of Series B Preferred Stock held by NII. These shares were subject to mandatory redemption on August 5, 1995. Pursuant to the terms of the Series B Preferred Stock and certain other agreements between the Company and NII, the Company paid the redemption amount directly to a pension trustee and released NII from a corresponding amount of NII's indemnification obligations with respect to certain employee benefit liabilities of the Company retained in connection with the sale of its Weirton Steel Division.\nAt December 31, 1993, there were 10,000 remaining shares of Series B Preferred Stock issued and outstanding, all of which were held by NII. The Series B Preferred Stock carries annual cumulative dividend rights of $806.30 per share, which equates to approximately an 11% yield. At December 31, 1993 and 1992, $68.0 million and $137.8 million, respectively, of the Series B Preferred Stock was outstanding.\nDividends on the Series B Preferred Stock are cumulative and payable quarterly in the form of a release of NII from its obligation to indemnify the Company for a corresponding amount of the remaining unreleased portion of the Weirton benefit liabilities to the extent such liabilities are due and owing, with the balance, if any, payable in cash. The Series B Preferred Stock dividend permitted release and payment of $10.6 million and $15.4 million of previously unreleased Weirton benefit liabilities during 1993 and 1992, respectively, and cash dividends of $1.4 million and $.8 million during 1993 and 1992, respectively, to reimburse NII for an obligation previously incurred in connection with the Weirton benefit liabilities.\nThe remaining Series B Preferred Stock is presently subject to mandatory redemption by the Company on August 5, 2000 at a redemption price of $58.3 million and may be redeemed beginning January 1, 1998 without the consent of NII at a redemption price of $62.2 million. Based upon the Company's actuarial analysis, the unreleased Weirton benefit liabilities approximate the aggregate remaining dividend and redemption payments with respect to the Series B Preferred Stock and accordingly, such payments are expected to be made in the form of releases of NII from its obligations to indemnify the Company for corresponding amounts of the remaining unreleased Weirton benefit liabilities. Dividend and redemption payments with respect to the Series B Preferred Stock reduce the Company's cash flow, even though they are paid in the form of a release of NII from such obligations, because the Company is obligated, subject to certain limited exceptions, to pay such amounts to the trustee of the pension plan included in the Weirton benefit liabilities.\nIf any dividend or redemption payment otherwise required pursuant to the terms of the Series B Preferred Stock is less than the amount required to satisfy NII's then current indemnification obligation, NII would be required to pay such shortfall in cash to the Company. The Company's ability to fully realize the benefits of NII's indemnification obligations is necessarily dependent upon NII's financial condition at the time of any claim with respect to such obligations.\nThe June 1990 recapitalization agreement also created the Series A Preferred Stock which carries annual cumulative dividend rights of $806.30 per share, which equates to an 11% yield. The Series A Preferred Stock is held by NKK and $36.7 million was outstanding at December 31, 1993 and 1992. Dividends on the Series A Preferred Stock are paid quarterly in cash and totalled $4 million in each of the years ended December 31, 1993, 1992 and 1991.\nMiscellaneous\nAt December 31, 1993, obligations guaranteed by the Company approximated $41.0 million, compared to $16.7 million at December 31, 1992. This increase in 1993 is primarily due to additional borrowings of the Double G Coatings, L.P. joint venture, 50% of which are separately guaranteed by the Company.\nTotal debt and redeemable preferred stock as a percentage of total capitalization increased to 80.2% at December 31, 1993 as compared to 71.8% at December 31, 1992 as the Company's net loss of $258.9 million more than offset the effect of the Company's IPO, which increased stockholders' equity by $141.4 million, as well as the early redemption of 10,000 shares of Series B Preferred Stock.\nOn January 24, 1994, the United States Supreme Court denied the B&LE's petition for certiorari, thus sustaining the Company's judgment against the B&LE. On February 11, 1994, the Company received approximately $111 million, including interest, in satisfaction of this judgment. Pursuant to the terms of the 1993 Settlement Agreement, approximately $11 million of the proceeds will be deposited into the VEBA Trust. Of the remaining proceeds, the Company plans to use approximately $40 million to repay outstanding indebtedness and the remaining proceeds will be used for working capital and general corporate purposes.\nENVIRONMENTAL\nThe Company's operations are subject to numerous laws and regulations relating to the protection of human health and the environment. The Company will incur significant capital expenditures in connection with matters relating to environmental control and will also be required to expend additional amounts in connection with ongoing compliance with such laws and regulations, including, without limitation, the Clean Air Act amendments of 1990. Proposed regulations establishing standards for corrective action under RCRA and the Guidance Document may also require further significant expenditures by the Company in the future. Additionally, the Company is currently one of many potentially responsible parties at a number of sites requiring remediation. The Company has estimated that it will incur capital expenditures for matters relating to environmental control of approximately $9.1 million and $8.0 million for 1994 and 1995, respectively. In addition, the Company expects to record expenses for environmental compliance, including depreciation, in the amount of approximately $70 million and $73 million for 1994 and 1995, respectively. Since environmental laws are becoming increasingly stringent, the Company's environmental capital expenditures and costs for environmental compliance may increase in the future.\nITEM 8.","section_7A":"","section_8":"ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA\nThe following consolidated financial statements and financial statement schedules of the Company are submitted pursuant to the requirements of Item 8:\nNATIONAL STEEL CORPORATION AND SUBSIDIARIES\nINDEX TO FINANCIAL STATEMENTS, SUPPLEMENTARY DATA AND FINANCIAL STATEMENT SCHEDULES\nREPORT OF ERNST & YOUNG INDEPENDENT AUDITORS\nBoard of Directors National Steel Corporation\nWe have audited the accompanying consolidated balance sheets of National Steel Corporation and subsidiaries (the \"Company\") as of December 31, 1993 and 1992, and the related statements of consolidated income, cash flows, and changes in stockholders' equity and redeemable preferred stock--Series B for each of the three years in the period ended December 31, 1993. Our audits also included the financial statement schedules listed in the Index at Item 8. These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.\nWe conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.\nIn our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of National Steel Corporation and subsidiaries 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. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.\nAs discussed in Note A to the Consolidated Financial Statements, in 1993 the Company changed its method of accounting for postretirement and postemployment benefits, and in 1992 the Company changed its method of accounting for income taxes.\nErnst & Young\nFort Wayne, Indiana January 26, 1994, except for the last paragraph of Note S as to which the date is February 11, 1994\nNATIONAL STEEL CORPORATION AND SUBSIDIARIES\nSTATEMENTS OF CONSOLIDATED INCOME\n(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)\nSee notes to consolidated financial statements.\nNATIONAL STEEL CORPORATION AND SUBSIDIARIES\nCONSOLIDATED BALANCE SHEETS\n(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)\nSee notes to consolidated financial statements.\nNATIONAL STEEL CORPORATION AND SUBSIDIARIES\nSTATEMENTS OF CONSOLIDATED CASH FLOWS\n(IN THOUSANDS OF DOLLARS)\nSee notes to consolidated financial statements.\nNATIONAL STEEL CORPORATION AND SUBSIDIARIES\nSTATEMENTS OF CHANGES IN CONSOLIDATED STOCKHOLDERS' EQUITY AND REDEEMABLE PREFERRED STOCK--SERIES B\n(IN THOUSANDS OF DOLLARS)\nSee notes to consolidated financial statements.\nNATIONAL STEEL CORPORATION AND SUBSIDIARIES\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS\nDECEMBER 31, 1993\nNOTE A--SIGNIFICANT ACCOUNTING POLICIES\nPrinciples of Consolidation: The consolidated financial statements include the accounts of National Steel Corporation and its majority owned subsidiaries (the \"Company\").\nCash Equivalents: Cash equivalents are short-term investments which consist principally of time deposits at cost which approximates market. These investments have maturities of three months or less at the time of purchase.\nInventories: Inventories are stated at the lower of last-in, first-out (\"LIFO\") cost or market. If the first-in, first-out (\"FIFO\") cost method of inventory accounting had been used, inventories would have been approximately $169.5 million and $141.3 million higher than reported at December 31, 1993 and 1992, respectively. During each of the last three years certain inventory quantity reductions caused liquidations of LIFO inventory values. These liquidations decreased net income for the quarters and years ended December 31, 1993 and 1992, by $3.0 million and $3.4 million, respectively, and increased net income for the quarter and year ended December 31, 1991 by approximately $10.9 million.\nInvestments: Investments in affiliated companies (corporate joint ventures and 20% to 50% owned companies) are stated at cost plus equity in undistributed earnings since acquisition. Undistributed earnings of affiliated companies included in retained earnings at December 31, 1993 and 1992 amounted to $7.2 million and $11.3 million, respectively.\nProperty, Plant and Equipment: Property, plant and equipment are stated at cost and include certain expenditures for leased facilities. Interest costs applicable to facilities under construction are capitalized. Capitalized interest amounted to $5.8 million in 1993, $14.4 million in 1992 and $4.5 million in 1991. Amortization of capitalized interest amounted to $5.7 million in 1993, $4.6 million in 1992 and $4.5 million in 1991.\nDepreciation, Depletion and Amortization: Depreciation of production facilities and amortization related to capitalized lease obligations are generally provided by charges to income computed by the straight-line method. Provisions for depreciation and depletion of certain raw material facilities and furnace relinings are computed on the basis of tonnage produced in relation to estimated total production to be obtained from such facilities.\nEnvironmental: Estimated losses from environmental contingencies are accrued and charged to income when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. (See Note M--Environmental Liabilities.)\nResearch and Development: Research and development costs are expensed when incurred and are charged to cost of products sold. Expenses for 1993, 1992 and 1991 amounted to approximately $9.4 million, $9.5 million and $8.8 million, respectively.\nIncome Taxes: Effective January 1, 1992, the Company adopted Statement of Financial Accounting Standards No. 109 \"Accounting for Income Taxes\" (\"SFAS 109\"), whereby deferred items are determined based on 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 1992, the Company accounted for income taxes under Accounting Principles Board Opinion No. 11 (\"APB 11\").\nFinancial Instruments: The Company's financial instruments, as defined by Statement of Financial Accounting Standards No. 107, consist of cash and cash equivalents, long-term obligations (excluding capitalized lease obligations), and the Series B Preferred Stock (defined below). The Company's estimate of the fair value of these financial instruments approximates their carrying amounts at December 31, 1993.\nAccounting Changes: During 1993, the Company adopted two new Financial Accounting Standards Board Statements, \"Accounting for Postretirement Benefits Other Than Pensions\" (\"SFAS 106\" or \"OPEB\") and \"Employer's Accounting for Postemployment Benefits\" (\"SFAS 112\"). (See Note F--Postretirement Benefits Other Than Pensions and Note G--Postemployment Benefits.)\nEarnings per Share: Earnings (loss) per share of Common Stock (\"EPS\") is computed by dividing net income or loss applicable to common stockholders by the sum of the weighted average of the shares of common stock outstanding during the period plus common stock equivalents, if dilutive.\nBusiness Segment: The Company is engaged in a single line of business, the production and processing of steel. The Company targets high value added applications of flat rolled carbon steel for sale to the automotive, metal buildings and container markets. The Company also sells hot and cold rolled steel to a wide variety of other users including the pipe and tube industry and independent steel service centers. In 1993, a single customer accounted for approximately 11% of net sales and approximately 12% of net sales in 1992 and 1991. Sales of the Company's products to the automotive market accounted for approximately 29%, 27% and 26% of the Company's total net sales in 1993, 1992 and 1991, respectively. Concentration of credit risk related to the Company's trade receivables is limited due to the large numbers of customers in differing industries and geographic areas.\nReclassifications: Certain items in prior years have been reclassified to conform with the current year presentation.\nNOTE B--CAPITAL STRUCTURE AND INITIAL PUBLIC OFFERING OF COMMON STOCK\nOwnership. At December 31, 1993, 75.6% of the voting control of the Company was owned by NKK Corporation (collectively with its subsidiaries \"NKK\"). The majority of this control has been acquired since 1984 from National Intergroup, Inc. (collectively with its subsidiaries \"NII\") which owned 5.8% of the voting control of the Company at December 31, 1993. (See Note S--Subsequent Events.)\nIn April 1993, the Company completed an initial public offering (the \"IPO\") of 10,861,100 shares of its Class B Common Stock, par value $.01 per share (the \"Class B Common Stock\"), at an offering price of $14 per share, which generated net proceeds to the Company of approximately $141.4 million.\nIn connection with the IPO, 30,000,000 shares of Class A Common Stock, par value $.01 per share (the \"Class A Common Stock\"), were authorized and the then outstanding 75,000 shares of existing Common Stock received a 340 for 1 stock split effectuated in the form of a stock dividend and the common stock was automatically converted to Class A Common Stock. Stockholders' equity at December 31, 1991 has been retroactively adjusted to reflect this stock dividend. As a result of the IPO, all preferred stock outstanding became non- voting.\nOn October 28, 1993, NII converted each of its 3,400,000 shares of Class A Common Stock to 3,400,000 shares of Class B Common Stock, bringing the total number of outstanding shares of Class A and Class B Common Stock to 22,100,000 and 14,261,100, respectively, at December 31, 1993. (See Note S--Subsequent Events.)\nAt December 31, 1993 the Company's capital structure was as follows:\nSeries A Preferred Stock\nAt December 31, 1993, there were 5,000 shares of Series A Preferred Stock, par value $1.00 per share (the \"Series A Preferred Stock\"), issued and outstanding. Annual dividends of $806.30 per share on the Series A Preferred Stock are cumulative and payable quarterly. The Series A Preferred Stock is not subject to mandatory redemption by the Company and is non-voting.\nSeries B Redeemable Preferred Stock\nOn May 4, 1993, the Company redeemed 10,000 shares of the Series B Redeemable Preferred Stock, par value $1.00 per share (the \"Series B Preferred Stock\"), held by NII. These shares were subject to mandatory redemption on August 5, 1995. The cost of the redemption totaled $67.8 million and was funded from proceeds received in connection with the IPO. If the redemption of these shares had occurred at the beginning of the year, EPS for 1993 would have increased by $.06. Pursuant to the terms of the Series B Preferred Stock and certain other agreements between the Company and NII, the Company paid the redemption amount directly to a pension trustee and released NII from a corresponding amount of NII's indemnification obligations with respect to certain employee benefit liabilities of the Company retained in connection with the sale of its Weirton Steel Division. (See Note J--Weirton Liabilities.)\nAt December 31, 1993 there were 10,000 remaining shares of Series B Preferred Stock issued and outstanding and held by NII. Annual dividends of $806.30 per share on the Series B Preferred Stock are cumulative and payable quarterly. Dividends and redemption proceeds, to the extent required by the Stock Purchase and Recapitalization Agreement (the \"Recapitalization Agreement\"), are used to release NII from its indemnification obligations with respect to the remaining unreleased liabilities for certain employee benefits for the employees of its former Weirton Steel Division (\"Weirton\") employees (the \"Weirton Benefit Liabilities\"). (See Note J--Weirton Liabilities.) The Series B Preferred Stock dividend permitted release and payment of $10.6 million and $15.3 million of previously unreleased Weirton Benefit Liabilities during 1993 and 1992, respectively, and a cash dividend of $1.4 million and $.8 million during 1993 and 1992, respectively, to reimburse NII for an obligation previously incurred in connection with the Weirton Benefit Liabilities. Upon the occurrence of certain events detailed in the Recapitalization Agreement, prior to or coincident with the Series B Preferred Stock final redemption, the released Weirton Benefit Liabilities will be recalculated by an independent actuary. Any adjustment to bring the balances of the released Weirton Benefit Liabilities to such recalculated amount will be dealt with in the Series B Preferred Stock redemption proceeds or otherwise settled. If the Company does not meet its preferred stock dividend and redemption obligations when due, NII has the right to cause NKK to purchase the Company's preferred stock dividend and redemption obligations. The Series B Preferred Stock is nontransferable and nonvoting.\nThe remaining Series B Preferred Stock is subject to mandatory redemption on August 5, 2000 at a redemption price of $58.3 million and may not be redeemed prior to January 1, 1998 without the consent of NII.\nPeriodic adjustments are made to consolidated retained earnings for the excess of the book value of the Series B Preferred Stock at the date of issuance over the redemption value. Based upon the Company's actuarial analysis, the unreleased Weirton Benefit Liabilities approximate the aggregate remaining dividend and redemption payments with respect to the Series B Preferred Stock and accordingly, such payments are expected to be made in the form of releases of NII from its obligations to indemnify the Company for corresponding amounts of the remaining unreleased Weirton Benefit Liabilities. At that time, the Company will be required to deposit cash equal to the redemption amount in the Weirton Retirement Trust, thus leaving the Company's net liability position unchanged. The Series B Preferred Stock, with respect to dividend rights and rights on liquidation, ranks senior to the Company's common stock and equal to the Series A Preferred Stock.\nClass A Common Stock\nAt December 31, 1993, the Company had 30,000,000 shares of $.01 par value Class A Common Stock authorized, of which 22,100,000 shares were issued and outstanding and owned by NKK. Each share of Class A Common Stock is entitled to two votes. No cash dividends were paid in 1993, 1992 or 1991.\nClass B Common Stock\nAt December 31, 1993, the Company had 65,000,000 shares of $.01 par value Class B Common Stock authorized. Of the 14,261,100 shares issued and outstanding, 3,400,000 were owned by NII and the remaining 10,861,100 shares were publicly traded. (See Note S--Subsequent Events.) No cash dividends were paid in 1993.\nThe Company is restricted from paying cash dividends on Common Stock by various debt covenants. (See Note D--Long-Term Obligations and Related Party Indebtedness.)\nAs of December 31, 1993, NKK held 75.6% of the combined voting power of the Company's 36,361,100 outstanding shares of Common Stock, while NII held 5.8% of the combined voting power of the Company. (See Note S--Subsequent Events.) The remaining 10,861,100 shares of Class B Common Stock held by the public represented 18.6% of the combined voting power of the outstanding Common Stock.\nNOTE C--INVESTMENT IN IRON ORE COMPANY OF CANADA\nSummarized financial information for Iron Ore Company of Canada, a 19.96% owned affiliated company accounted for by the equity method is presented below:\nNOTE D--LONG-TERM OBLIGATIONS AND RELATED PARTY INDEBTEDNESS\nLong-term obligations and related party indebtedness at December 31, 1993 and 1992 were as follows:\nFuture minimum payments for all long-term obligations and leases as of December 31, 1993 are as follows:\nOperating leases include a coke battery facility which services the Granite City Division and expires in 2004, a continuous caster and the related ladle metallurgy facility which services the Great Lakes Division and expires in 2008, and an electrolytic galvanizing facility which services the Great Lakes Division (the \"EGL\") and expires in 2001. Upon expiration, the Company has the option to extend the leases or purchase the equipment at fair market value.\nThe Company's remaining operating leases cover various types of properties, primarily machinery and equipment, which have lease terms generally for periods of 2 to 20 years, and which are expected to be renewed or replaced by other leases in the normal course of business. Rental expense under operating leases totaled $70.7 million, in 1993, $79.8 million in 1992 and $81.2 million in 1991.\nDuring 1993, the Company borrowed $40.5 million from a United States subsidiary of NKK, thereby completing the $350.0 million construction period financing for the No. 5 coke oven battery rebuild at the Great Lakes Division. Later in 1993, the Company paid $6.7 million in principal, and recorded $25.1 million in interest expense on the coke battery loan. Accrued interest on the loan as of December 31, 1993 was $10.5 million. Additionally, deferred financing costs related to the loan were $4.5 million and $4.2 million, respectively, as of December 31, 1993 and 1992.\nCredit Arrangements\nThe Company's credit arrangements include a $100 million revolving secured credit arrangement (the \"Revolver\"), a $150 million subordinated loan agreement (the \"Subordinated Loan Agreement\") and $25 million in uncommitted, unsecured lines of credit (the \"Uncommitted Lines of Credit\").\nThe Revolver was amended and restated in December 1992 to extend the expiration date to December 31, 1994. The Revolver permits the Company to borrow up to $100 million on a short term basis, and provides the Company with the ability to issue up to $150 million in letters of credit. The Revolver is secured by the accounts receivable and inventories of the Company. This arrangement has interest rates which approximate current market rates for periods of one, two, three or six months. At December 31, 1993 and 1992, no borrowings were outstanding and letters of credit outstanding amounted to $113.7 million and $113.6 million, respectively, under the Revolver.\nThe Subordinated Loan Agreement, which was entered into in May 1991 with a United States subsidiary of NKK, was also extended in December 1992 to an expiration date of April 1, 1995. This arrangement has\ninterest rates which approximate current market rates for periods from one month to six months and permits the Company to borrow up to $150 million on an unsecured, short-term basis. The Revolver requires that the first $50 million in borrowings by the Company in excess of thirty days must come from the Subordinated Loan Agreement. Additional amounts borrowed would alternate between the Revolver and the Subordinated Loan Agreement up to $25 million in each increment. There were no borrowings under the Subordinated Loan Agreement during 1993 or 1992.\nThe Uncommitted Lines of Credit permit the Company to borrow up to $25 million on an unsecured, short-term basis for periods of up to thirty days. One of these arrangements expires on March 31, 1994, while the other has no fixed expiration date and may be withdrawn at any time without notice. During 1993, the Company borrowed a maximum of $7.7 million under its Uncommitted Lines of Credit, which was repaid the next day. No borrowings were outstanding at December 31, 1993 and 1992.\nAt December 31, 1993 the Company was prohibited from paying cash dividends on Common Stock by various common stock dividend covenants. The most restrictive dividend covenant is contained in the EGL lease agreement. The Company is not restricted from paying its annual Series A and B Preferred Stock dividend obligations.\nNOTE E--PENSIONS\nThe Company has various non-contributory defined benefit pension plans covering substantially all employees. Benefit payments for salaried employees are based upon a formula which utilizes employee age, years of credited service and the highest five consecutive years of pensionable earnings during the last ten years preceding normal retirement. Benefit payments to most hourly employees are the greater of a benefit calculation utilizing fixed rates per year of service or the highest five consecutive years of pensionable earnings during the last ten years preceding retirement, with a premium paid for years of service in excess of thirty years. The Company's funding policy is to contribute, at a minimum, the amount necessary to meet minimum funding standards as prescribed by applicable law. The Company utilizes a long-term rate of return of 9.0% for funding purposes. The Company's pension contributions for the 1993 and 1992 plan years were $30.8 million and $28.0 million, respectively. The Company anticipates that its 1994 pension contributions will increase by approximately $30 million attributable to both increases in benefits resulting from the July 31, 1993 settlement agreement (the \"1993 Settlement Agreement\") between the Company and the United Steelworkers of America (\"USWA\") and the decrease in the discount rate used to measure the pension obligation.\nPension cost and related actuarial assumptions utilized are summarized below:\nIn connection with the temporary idling of National Steel Pellet Company (\"NSPC\"), a wholly-owned subsidiary of the Company, special termination benefits of $31.9 million related to hourly NSPC plan participants were recorded at December 31, 1993 and included in total pension cost above. (See Note P--Temporary Idling of National Steel Pellet Company.)\nThe funded status of the Company's plans at year end along with the actuarial assumptions utilized are as follows:\nThe adjustment required to recognize the minimum pension liability of $134.7 million in 1993 represents the excess of the ABO over the fair value of plan assets in underfunded plans, and is primarily the result of the 1.25% decrease in the discount rate, as well as increased pension benefits resulting from the 1993 Settlement Agreement. The unfunded liability in excess of the unrecognized prior service cost of $5.9 million was recorded as a reduction in stockholders' equity at December 31, 1993. The remaining portion of the unfunded liability of $128.8 million was offset by an intangible pension asset.\nAt December 31, 1993, the Company's pension plans' assets were comprised of approximately 50.0% equity investments, 39.9% fixed income investments, 4.1% cash and 6.0% in other investments including real estate and venture capital.\nNOTE F--POSTRETIREMENT BENEFITS OTHER THAN PENSIONS\nEffective January 1, 1993, the Company implemented SFAS 106 which requires accrual of retiree medical and life insurance benefits as these benefits are earned rather than recognition of these costs as claims are paid. In 1993, the excess of total postretirement benefit expense recorded under SFAS 106 over the Company's former method of accounting for these benefits was $97.6 million, or $59.5 million excluding curtailment charges, or $1.77 and $1.08 per share net of tax, respectively. In 1993 the Company's cash OPEB payments were approximately $32 million.\nThe Company provides health care and life insurance benefits for certain retirees and their dependents. Generally, employees are eligible to participate in the medical benefit plans if they retired under one of the\nCompany's pension plans on other than a deferred vested basis, and at the time of retirement had at least 15 years of continuous service. However, salaried employees hired after January 1, 1993 are not eligible to participate in the plans. The Company's medical benefit plans are contributory. Health care benefits are funded as claims are paid; thus adoption of SFAS 106 has no impact on the cash flows of the Company. However, as discussed below, the Company will begin prefunding the OPEB obligation for USWA represented employees in 1994. The Company elected to amortize the unrecognized transition obligation, which was calculated to be $556.0 million at January 1, 1993, over a period of 20 years, in part, to continually focus the attention of its employees on the magnitude of its rising health care costs. Amortization of the transition obligation will adversely impact EPS on an after tax basis by approximately $.45 per year for the next 19 years based upon shares of common stock outstanding at December 31, 1993.\nThe components of postretirement benefit cost and related actuarial assumptions are as follows:\nIn connection with the temporary idling of NSPC, curtailment charges of $36.7 million related to hourly NSPC plan participants were recorded at December 31, 1993 and included in total postretirement benefit cost at December 31, 1993. (See Note P--Temporary Idling of National Steel Pellet Company.)\nThe following represents the plans' funded status reconciled with amounts recognized in the Company's balance sheet and related actuarial assumptions:\nThe assumed health care cost trend rate of 10.3% in 1994 decreases gradually to the ultimate trend rate of 5.0% in 2002 and thereafter. A 1.0% increase in the assumed health care cost trend rate would have increased the APBO at December 31, 1993 and postretirement benefit cost for 1993 by $26.7 million and $3.3 million, respectively.\nDifferences between January 1, 1993 SFAS 106 disclosures at December 31, 1993 and in the Company's March 31, 1993 Form 10-Q reflect the fact that the adoption amounts disclosed in interim reports were based upon preliminary claims data through December 31, 1992, whereas the year end disclosure was based upon final data. In addition, the Company utilized a flat 8.75% discount rate at January 1, 1993 versus an initial rate of 6.0% which was to gradually increase to a 9.0% rate in 1996, as discussed in the March 31, 1993 Form 10-Q.\nIn connection with the 1993 Settlement Agreement between the Company and the USWA, the Company will begin prefunding the OPEB obligation with respect to USWA represented employees in 1994. Under the terms of the 1993 Settlement Agreement, a Voluntary Employee Benefit Association trust (the \"VEBA Trust\") will be established to which the Company has agreed to contribute a minimum of $10 million annually and, under certain circumstances, additional amounts calculated as set forth in the 1993 Settlement Agreement. The Company has granted to the VEBA a second mortgage on the No. 5 coke oven battery at the Great Lakes Division.\nNOTE G--POSTEMPLOYMENT BENEFITS\nDuring the fourth quarter of 1993, the Company adopted SFAS 112 which requires accrual accounting for benefits payable to inactive employees who are not retired. Among the more significant benefits included are worker's compensation, long-term disability and continued medical coverage for disabled employees and surviving spouses. The Company previously followed the practice of accruing for many of these benefits, but did not base these accruals on actuarial analyses.\nPrior year financial statements have not been restated to reflect the change in accounting method. The cumulative effect as of January 1, 1993 of this change was to increase the net loss by $16.5 million or $.49 per share. The results of operations for the first quarter have been restated to reflect the effect of adopting SFAS 112 at January 1, 1993. The effect of the change on 1993 income before the cumulative effect of the change was not material, therefore the remaining quarters of 1993 have not been restated.\nNOTE H--OTHER LONG-TERM LIABILITIES\nOther long-term liabilities at December 31, 1993 and 1992 consisted of the following:\nNOTE I--INCOME TAXES\nEffective January 1, 1992, the Company changed its method of accounting for income taxes from the deferred method to the liability method as required by SFAS 109. As permitted under the new\npronouncement, prior years' financial statements were not restated. The cumulative effect of adopting SFAS 109, as of January 1, 1992, was to decrease the net loss for 1992 by $76.3 million.\nDeferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities at December 31, 1993 and 1992 are as follows:\nIn 1992, available tax planning strategies served as the only basis for determining the amount of the net deferred tax asset to be recognized. As a result, a full valuation allowance was recorded, except for the $43.0 million recognized pursuant to those tax planning strategies. In 1993, the Company determined that it was more likely than not that sufficient future taxable income would be generated to justify increasing the net deferred tax asset after valuation allowance as presented above. Accordingly, the Company recognized an additional deferred tax asset of $37.6 million in 1993, which had the effect of decreasing the Company's net loss by a like amount, bringing the net deferred tax asset to $80.6 million at December 31, 1993.\nSignificant components of the provision for income taxes are as follows:\nThe reconciliation of the income tax computed at the U.S. federal statutory tax rates to income tax expense is:\nAt December 31, 1993, the Company has unused net operating loss carryforwards of approximately $525.3 million which expire as follows: $30.7 million in 1998, $78.1 million in 2000, $71.3 million in 2001, $108.0 million in 2006, $99.4 million in 2007 and $137.8 million in 2008. Tax benefits relating to operating loss carryforwards were not recorded in 1991 in accordance with APB 11. To date, the Company believes that it has not undergone an ownership change for federal income tax purposes, however there can be no assurance that the Company will not undergo such a change in the future. Future events, some of which may be beyond the Company's control, could cause an ownership change. An ownership change may substantially limit the Company's ability to offset future taxable income with its net operating loss carryforwards.\nAt December 31, 1993, the Company has unused alternative minimum tax credit carryforwards of approximately $3.2 million which may be applied to offset its future regular federal income tax liabilities. These tax credits may be carried forward indefinitely.\nNOTE J--WEIRTON LIABILITIES\nOn January 11, 1984, the Company completed the sale of substantially all of the assets of its Weirton Steel Division to Weirton Steel Corporation, a corporation owned by its employees, through an employee stock ownership trust. In connection with the sale of Weirton, the Company retained certain existing and contingent liabilities (the \"Weirton Liabilities\") including the Weirton Benefit Liabilities, which consist of, among other things, pension benefits for the then active employees based on service prior to the sale, and pension, life and health insurance benefits for the then retired employees and certain environmental liabilities.\nAs part of the 1984 sale of a 50% interest in the Company to NKK, NII agreed, as between NII and the Company, to provide in advance sufficient funds for payment and discharge of, and to indemnify the Company against, all obligations and liabilities of the Company, whether direct, indirect, absolute or contingent, incurred or retained by the Company in connection with the sale of Weirton. As part of the 1990 ownership transaction whereby NKK purchased an additional 20% ownership in the Company, the Company released NII from indemnification of $146.6 million of certain defined Weirton Benefit Liabilities. NII also reaffirmed its agreement to indemnify the Company for Weirton environmental liabilities as to which the Company is obligated to Weirton Steel Corporation. (See Note S--Subsequent Events.) On May 4, 1993, the Company released NII from an additional $67.8 million of previously unreleased Weirton Benefit Liabilities in connection with the early redemption of 10,000 shares of Series B Preferred Stock.\nAt December 31, 1993, the net present value of the released Weirton Benefit Liabilities, based upon a discount factor of 12.0% per annum, is $140.1 million. NII continues to indemnify the Company for the\nremaining unreleased Weirton Benefit Liabilities and other liabilities. Since the Company is indemnified by NII for such remaining liabilities, they are not recorded in the Company's consolidated balance sheet. Such Weirton Liabilities are comprised of (i) the unreleased Weirton Benefit Liabilities, the amount of which, based on the Company's actuarial analysis, approximates the aggregate remaining dividend and redemption payments of $112.7 million with respect to the Series B Preferred Stock and (ii) other contingent liabilities, such as environmental liabilities, that are not currently estimable.\nNOTE K--UNUSUAL ITEMS\nDuring 1993, the Company recorded unusual charges which totaled $111.0 million, primarily relating to the temporary idling of NSPC. (See Note P-- Temporary Idling of National Steel Pellet Company.) A fourth quarter charge of $108.6 million was recorded to recognize various liabilities incurred in connection with the idling, most notably pensions and postemployment benefits. Additionally, the Company recorded a charge of $4.5 million relating to the acceptance by represented office and technical employees of a voluntary pension window offered by the Company as a part of its functional consolidation and reorganization plan.\nIn 1992, the Company recorded unusual charges aggregating $37.0 million relating principally to a pension window and the Company's decision to exit the coal mining business. A charge of $13.3 million was recognized relating to a 1992 pension window as part of the consolidation of certain staff functions and the relocation of its corporate office to Mishawaka, Indiana from Pittsburgh, Pennsylvania. As a result of management's decision to exit the coal mining business, an unusual charge of $24.9 million was recognized during the fourth quarter to reduce certain coal properties to net realizable value and record postemployment, environmental and other liabilities.\nDuring 1991, the Company recorded unusual charges which totaled $110.7 million. A charge of $41.5 million was recorded for the estimated costs anticipated to be incurred in conjunction with the consolidation of certain staff functions and relocation in 1992 of the corporate headquarters to Mishawaka, Indiana from Pittsburgh, Pennsylvania. An unusual charge of $25.5 million related to the Company's decision to permanently idle its Mathies coal mine after efforts to obtain third party financing to reopen the mine after a fire were unsuccessful. Concurrently, the Company undertook an evaluation of its other coal properties and operations and recorded an unusual charge of $43.7 million to reduce certain coal properties to net realizable value and to recognize postemployment, environmental and other liabilities.\nNOTE L--RELATED PARTY TRANSACTIONS\nSummarized below are transactions between the Company and NKK, NII and the Company's affiliated companies accounted for under the equity method.\nThe Company had borrowings outstanding with an NKK affiliate totaling $343.3 million and $309.5 million as of December 31, 1993 and 1992, respectively. (See Note D--Long-Term Obligations and Related Party Indebtedness.) Subsidiaries of the Company sold coal to and purchased coke from a subsidiary of NKK in 1991 totaling $7.5 million and $22.5 million, respectively. There were no such coal sales or coke purchases of this type in 1993 or 1992. Accounts receivable and accounts payable relating to these transactions totalled $3.2 million and $2.5 million, respectively, at each of the two years ended December 31, 1993.\nThe Company's selling, general and administrative expenses for 1992 and 1991 included charges of $2.2 million and $3.9 million, respectively, for facilities provided and direct services performed by NII for the benefit of the Company, all of which arrangements have expired or have been terminated. During January 1994, NII completed the sale of substantially all of its 3,400,000 shares of Class B Common Stock.\nIn both 1993 and 1992, cash dividends of $4.0 million were paid on the Series A Preferred Stock. Accrued dividends of $0.6 million were recorded as of December 31, 1993 and 1992 related to the Series A Preferred Stock. For 1993 and 1992, Series B Preferred Stock dividend payments totaling $12.0 million and $16.1 million were made through the release and payment of $10.6 million and $15.3 million of previously unreleased Weirton Benefit Liabilities and $1.4 million and $.8 million of cash to reimburse NII for an\nobligation previously incurred in connection with certain Weirton Liabilities, respectively. At December 31, 1993 and 1992, accrued dividends related to the Series B Preferred Stock totalled $1.2 million and $2.4 million, respectively.\nThe Company is contractually required to purchase its proportionate share of raw material production from certain affiliated companies. Such purchases of raw materials and services aggregated $65.9 million in 1993, $63.3 million in 1992 and $65.3 million in 1991. Additional expenses were incurred in connection with the operation of a joint venture agreement. (See Note N--Other Commitments and Contingencies.) Accounts payable at December 31, 1993 and 1992 included amounts with affiliated companies accounted for by the equity method of $29.1 million and $24.3 million, respectively.\nNOTE M--ENVIRONMENTAL LIABILITIES\nThe Company's operations are subject to numerous laws and regulations relating to the protection of human health and the environment. Because these environmental laws and regulations are quite stringent and are generally becoming more stringent, the Company has expended, and can be expected to expend in the future, substantial amounts for compliance with these laws and regulations.\nIt is the Company's policy to expense or capitalize, as appropriate, environmental expenditures that relate to current operating sites. Environmental expenditures that relate to past operations and which do not contribute to future or current revenue generation are expensed. With respect to costs for environmental assessments or remediation activities, or penalties or fines that may be imposed for noncompliance with such laws and regulations, such costs are accrued when it is probable that liability for such costs will be incurred and the amount of such costs can be reasonably estimated.\nThe Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended (\"CERCLA\"), and similar state superfund statutes generally impose joint and several liability on present and former owners and operators, transporters and generators for remediation of contaminated properties regardless of fault. The Company and certain of its subsidiaries are involved as a potentially responsible party (\"PRP\") at a number of off-site CERCLA or state superfund site proceedings. At some of these sites, any remediation costs incurred by the Company would constitute liabilities for which NII is required to indemnify the Company (\"NII Environmental Liabilities\"). In addition, at some of these sites, the Company does not have sufficient information regarding the nature and extent of the contamination, the wastes contributed by other PRPs, or the required remediation activity to estimate its potential liability. With respect to those sites which the Company has sufficient information to estimate its potential liability, excluding any site involving NII Environmental Liabilities, the Company has recorded an aggregate liability of approximately $2 million, which it anticipates paying over the next several years.\nIn connection with those sites involving NII Environmental Liabilities, in January, 1994, the Company received $10 million from NII as an unrestricted prepayment for such liabilities for which the Company recorded $10 million as a liability in its consolidated balance sheet. The Company is required to repay NII portions of the $10 million to the extent the Company's expenditures for such NII Environmental Liabilities do not meet specified levels by certain dates over a twenty year period. NII will continue to be obligated to indemnify the Company for all other NII Environmental Liabilities (i) arising before such prepayment or (ii) arising after such prepayment and exceeding the $10 million prepayment. (See Note J--Weirton Liabilities and Note S--Subsequent Events.)\nThe Company has also recorded the reclamation and other costs to restore its coal and iron ore mines at its shutdown locations to their original and natural state, as required by various federal and state mining statutes. (See Note K-- Unusual Items). Additionally, in October 1993, NSPC announced its intention to temporarily idle the iron ore mining and pelletizing operations conducted at the facility. A final decision to permanently shut down these operations would result in additional charges. (See Note P--Temporary Idling of National Steel Pellet Company.)\nSince the Company has been conducting steel manufacturing and related operations at numerous locations for over sixty years, the Company potentially may be required to remediate or reclaim any contamination that may be present at these sites. The Company does not have sufficient information to estimate its potential liability in connection with any potential future remediation at such sites. Accordingly, the Company has not accrued for such potential liabilities.\nAs these matters progress or the Company becomes aware of additional matters, the Company may be required to accrue charges in excess of those previously accrued. However, although the outcome of any of the matters described, to the extent they exceed any applicable reserves, could have a material adverse effect on the Company's results of operations for the applicable period, the Company has no reason to believe that such outcome will have a material adverse effect on the Company's financial condition.\nIn April 1993, the United States Environmental Protection Agency published a proposed guidance document establishing minimum water quality standards and other pollution control policies and procedures for the Great Lakes System. Until such guidance document is finalized, the Company cannot estimate its potential costs for compliance, and there can be no assurances that such compliance will not have a material adverse effect on the Company's financial condition.\nNOTE N--OTHER COMMITMENTS AND CONTINGENCIES\nThe Company has an agreement providing for the availability of raw material loading and docking facilities through 2002. Under this agreement, the Company must make advance freight payments if shipments fall below specified minimum tonnages. At December 31, 1993, the maximum amount of such payments, before giving effect to certain credits provided in the agreement, totals approximately $18 million or $2 million per year. During the three years ended December 31, 1993, no advance freight payments were made as the Company's shipments exceeded the minimum tonnage requirements. The Company anticipates its shipments will exceed the minimum tonnage requirements in 1994.\nIn September 1990, the Company entered into a joint venture agreement to build a $240 million continuous galvanizing line to serve North American automakers. This joint venture coats steel products for the Company and an unrelated third party. The Company is a 10% equity owner of the facility, an unrelated third party is a 50% owner, and a subsidiary of NKK owns the remaining 40%. The Company has contributed $5.6 million in equity capital, which represents its total equity requirement. In addition, the Company is committed to utilize and pay a tolling fee in connection with 50% of the available line-time of the facility. The agreement extends for 20 years after the start of production, which commenced in January 1993.\nIn March 1992, a wholly-owned subsidiary of the Company finalized a turnkey contract for the construction and permanent financing of a pickle line (the \"Pickle Line\") servicing the Great Lakes Division. The total financing commitment amounts to $110 million. During 1993 the Company utilized $20 million of the proceeds from the IPO to reduce the amount of construction borrowings outstanding and the total commitment to $90 million. As of December 31, 1993 the construction period financing was being provided by the contractor and was not a liability of the Company. In January 1994, upon completion and acceptance of the Pickle Line, the permanent financing commenced with repayment occurring over a fourteen-year period. The Pickle Line will not be subject to the lien under the Company's First Mortgage Bonds, but will be subject to a first mortgage in favor of the lender.\nIn May 1992, the Company signed an agreement to enter into a joint venture with an unrelated third party. The joint venture, Double G Coating Company, L.P. (\"Double G\"), of which the Company owns 50%, is constructing a $90 million steel coating facility near Jackson, Mississippi to produce galvanized and Galvalume(R) steel sheet for the metal buildings market. Approximately 20% of the total cost will be financed equally through partners' capital contributions with the remaining 80% financed by a group of third party lenders. The Company has committed to invest capital contributions of approximately $9 million of which $7.6 million has been contributed to date. The balance of approximately $1.4 million will be paid during the\nfirst half of 1994. In addition, the Company is committed to utilize and pay a tolling fee in connection with 50% of the available line time at the facility. Management anticipates that production will begin in mid-1994.\nIn August 1992, Double G entered into a loan agreement with a consortium of lenders that provides up to $75 million in construction-period financing which converts to a 10 year loan upon completion and acceptance of the facility by Double G. Repayment of the permanent loan is scheduled to commence 18 months after completion and acceptance of the facility and will be amortized over 10 years. Double G will provide a first mortgage on its property, plant and equipment and the Company has separately guaranteed 50% of the debt. At December 31, 1993, outstanding borrowings on the construction loan were $60.4 million, of which $30.2 million is separately guaranteed by the Company.\nThe Company has agreements to purchase approximately 1.4 million gross tons of iron ore pellets per year through 1999 from an affiliated company, and 5.4 million gross tons in 1994 from various non-affiliated companies. In 1994, purchases under such agreements will approximate $50 million and $145 million, respectively. Additionally, the Company has agreed to purchase its proportionate share of the limestone production of an affiliated company, which will approximate $2 million per year.\nThe Company is guarantor of specific obligations of ProCoil Corporation, an affiliated company, approximating $10.8 million and $9.5 million at December 31, 1993 and 1992, respectively.\nNOTE O--EXTRAORDINARY ITEM\nThe Rockefeller Amendment, which became effective February 1, 1993, is designed to provide funding for the United Mine Workers of America (\"UMWA\") retiree medical and life insurance benefits programs by transferring funds from other sources and imposing a liability on all signatories to certain UMWA collective bargaining agreements for current fund deficits and present and future benefit costs for qualifying UMWA retirees. The Company has subsidiaries that are signatories of the 1988 UMWA Wage Agreement and thus falls within the Rockefeller Amendment's provisions. The Rockefeller Amendment also extends, jointly and severally, the liability for the cost of retiree medical and life insurance benefits to any members of the signatory operator's control group, which would include the Company.\nDuring 1992, the Company recorded a charge of $50 million, representing management's best estimate of its liability for UMWA beneficiaries. Based upon preliminary assignments from the Secretary of Health and Human Services received during 1993, the Company believes this reserve is adequate. However, the amount is subject to future adjustment when additional information relating to beneficiaries becomes available.\nNOTE P--TEMPORARY IDLING OF NATIONAL STEEL PELLET COMPANY\nOn August 1, 1993, the USWA went on strike against NSPC over demands for a new labor contract at NSPC. In October 1993, NSPC announced its intention to temporarily idle the facility. During the period from August 1, 1993 to date, the Company has secured its pellet requirements from other sources. The Company currently has entered into agreements that will satisfy its iron ore pellet requirements through 1994 at a lower cost than could be obtained by operating NSPC. It is management's intention to secure long term contracts for the purchase of iron ore pellets for a period of one to three years.\nThe Company recorded an unusual charge of $108.6 million during the fourth quarter of 1993 which is comprised of employee benefit related charges of $90.9 million (principally pensions and OPEB), taxes of $7.9 million and miscellaneous other costs of $9.8 million relating to the three year idle period. Management has not made a final decision regarding the permanent shutdown of NSPC; however, a decision to permanently shut down the facility would result in additional charges which management currently estimates to be approximately $160 million.\nThe USWA has filed 19 unfair labor practice charges with the National Labor Relations Board (the \"NLRB\") regarding the NSPC dispute. The USWA's charges include allegations that NSPC failed to bargain in good faith. NSPC has responded to the charges and has denied any unfair labor practices. If the NLRB finds against NSPC, it could issue an order requiring NSPC to pay back pay and front pay until the labor practices are corrected or to cease and desist unfair labor practices and bargain in good faith.\nNOTE Q--LONG TERM INCENTIVE PLAN\nThe Long Term Incentive Plan was established in 1993 in connection with the IPO and has authorized the grant of options for up to 750,000 shares of Class B Common Stock to certain executive officers, non-employee directors and other employees of the Company. The exercise price of the options equals the fair market value of the Common Stock on the date of grant. All options granted have 10 year terms and generally vest and become fully exercisable at the end of the three years of continued employment. However, in the event that termination is by reason of retirement, permanent disability or death, the option must be exercised in whole or in part within 24 months of such occurrences.\nThe Company currently follows the provisions of Accounting Principles Board Opinion No. 25, \"Accounting for Stock Issued to Employees\", which requires compensation expense for the Company's options to be recognized only if the market price of the underlying stock exceeds the exercise price on the date of grant. Accordingly, the Company has not recognized compensation expense for its options granted in 1993.\nA reconciliation of the Company's stock option activity, and related information, for 1993 follows:\nOn January 1, 1994, an additional 43,750 options became exercisable.\nOutstanding stock options did not enter into the determination of EPS in 1993 as their effect was antidilutive.\nNOTE R--QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)\nFollowing are the unaudited quarterly results of operations for the years 1993 and 1992. The quarters ended March 31, 1993 and 1992 have each been restated to reflect adoption of SFAS 112 and SFAS 109, respectively, retroactive to the beginning of each of those years. The remaining quarters of 1993 and 1992 were not impacted by the changes. Reference should be made to Note K--Unusual Items concerning adjustments affecting the fourth quarters of 1993 and 1992.\nNOTE S--SUBSEQUENT EVENTS\nDuring January 1994, NII sold substantially all of its 3,400,000 shares of Class B Common Stock. In connection with the IPO, the Company entered into a definitive agreement (the \"Agreement\") with NII and NKK which amends certain terms and conditions of the Recapitalization Agreement. Pursuant to the Agreement, NII paid the Company $10 million as an unrestricted prepayment for environmental obligations which may arise after such prepayment and for which NII has previously agreed to indemnify the Company. The Company is required to repay to NII portions of the $10 million to the extent the Company's expenditures for such environmental liabilities do not reach specified levels by certain dates over a twenty year period. NII retains responsibility to indemnify the Company for remaining environmental liabilities arising before such prepayment or arising after such prepayment and in excess of $10 million.\nOn January 24, 1994, the United States Supreme Court denied Bessemer & Lake Erie's (\"B&LE\") petition for certiorari in the Iron Ore Antitrust Litigation, thus sustaining the Company's judgement against the B&LE. On February 11, 1994, the Company received approximately $111 million, including interest, in satisfaction of this judgment. Pursuant to the terms of the 1993 Settlement Agreement, approximately $11 million of the proceeds will be deposited into a VEBA Trust established to prefund the Company's OPEB obligation with respect to USWA represented employees. (See Note F--Postretirement Benefits Other Than Pensions.) Of the remaining proceeds, the Company plans to use approximately $60 million for working capital and general corporate purposes and nearly $40 million to repay outstanding indebtedness. The Company had not recorded a gain for this contingency as of December 31, 1993, pending the outcome of the B&LE petition. However, the Company will recognize this gain in the first quarter of 1994.\nNATIONAL STEEL CORPORATION AND SUBSIDIARIES\nSCHEDULE V--PROPERTY, PLANT AND EQUIPMENT\n(IN THOUSANDS OF DOLLARS)\nNOTE 1--Includes approximately $31.9 million, $198.4 million and $101.6 million at December 31, 1993, 1992 and 1991, respectively, related to the No. 5 coke battery rebuild. NOTE 2--Includes $31.3 million related to the sale of coal properties. NOTE 3--Includes $47.6 million related to the sale of coal properties.\nNATIONAL STEEL CORPORATION AND SUBSIDIARIES\nSCHEDULE VI--ACCUMULATED DEPRECIATION, DEPLETION AND AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT\n(IN THOUSANDS OF DOLLARS)\nNOTE 1--The annual provision for depreciation has been computed principally in accordance with the following ranges of lives:\nNOTE 2--Includes $25.0 million related to the sale of coal properties. NOTE 3--Includes $44.4 million related to the sale of coal properties. NOTE 4--Includes $18.2 million related to writedowns of certain coal mining assets. NOTE 5--Includes $30.9 million related to asset writedowns of Mathies coal mine as well as certain coal mining assets.\nNATIONAL STEEL CORPORATION AND SUBSIDIARIES\nSCHEDULE VII--GUARANTEES OF SECURITIES OF OTHER ISSUERS YEAR ENDED DECEMBER 31, 1993\n(IN THOUSANDS OF DOLLARS)\nNOTE 1--The Company has separately guaranteed 50% of the debt relating to financing the construction of the Double G facility. The Loan Agreement provides for borrowing up to $75.0 million.\nNATIONAL STEEL CORPORATION AND SUBSIDIARIES\nSCHEDULE VIII--VALUATION AND QUALIFYING ACCOUNTS\n(IN THOUSANDS OF DOLLARS)\nNOTE 1--Doubtful accounts charged off, net of recoveries, claims and discounts allowed and reclassifications to other assets. NOTE 2--Represents the amount of the valuation allowance at January 1, 1992, the adoption date of SFAS 109. NOTE 3--Represents the increase in the net deferred tax asset for which no benefit was recognized. NOTE 4--Included in these amounts are reserves for doubtful accounts of $(2,693), $2,434 and $2,716 for 1993, 1992 and 1991, respectively. Other charges consist primarily of claims for pricing adjustments and discounts allowed.\nNATIONAL STEEL CORPORATION AND SUBSIDIARIES\nSCHEDULE IX--SHORT-TERM BORROWINGS\n(IN THOUSANDS OF DOLLARS)\nNOTE 1--The average amount outstanding during the period was computed by dividing the total of daily balances outstanding by total days in the year. NOTE 2--The weighted average interest rate during the period was computed by dividing the actual interest expense by the average short-term debt outstanding.\nNATIONAL STEEL CORPORATION AND SUBSIDIARIES\nSCHEDULE X--SUPPLEMENTARY INCOME STATEMENT INFORMATION\n(IN THOUSANDS OF DOLLARS)\nITEM 9.","section_9":"ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE\nNone.\nPART III\nITEM 10.","section_9A":"","section_9B":"","section_10":"ITEM 10. EXECUTIVE OFFICERS\nThe following table sets forth, as of December 31, 1993, certain information with respect to the executive officers of the Company. Executive officers are chosen by the Board of Directors of the Company at the first meeting of the Board after each annual meeting of stockholders. Officers of the Company serve at the discretion of the Board of Directors and are subject to removal at any time.\n- -------- (1) Retired as CEO effective October 14, 1993 and as Chairman of the Board effective December 31, 1993. (2) Elected Chairman of the Board effective January 1, 1994. (3) Resigned effective February 3, 1994.\nAll of the above-named executive officers, with the exception of Mr. Thompson, who previously served with NII, have served in various management capacities with the Company, NKK or one of its subsidiaries for more than the last five years.\nCertain information with respect to Directors as required by this Item is incorporated by reference from the Company's Proxy Statement for the 1994 Annual Meeting of Stockholders. With the exception of the information specifically incorporated by reference, the Company's Proxy Statement is not to be deemed filed as part of this report for purposes of this Item.\nITEM 11.","section_11":"ITEM 11. EXECUTIVE COMPENSATION\nThe information required by this Item is incorporated by reference from the Company's Proxy Statement for the 1994 Annual Meeting of Stockholders. With the exception of the information specifically incorporated by reference, the Company's Proxy Statement is not to be deemed filed as part of this report for purposes of this Item.\nITEM 12.","section_12":"ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT\nThe information required by this Item is incorporated by reference from the Company's Proxy Statement for the 1994 Annual Meeting of Stockholders. With the exception of the information specifically incorporated by reference, the Company's Proxy Statement is not to be deemed filed as part of this report for purposes of this Item.\nITEM 13.","section_13":"ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS\nThe information required by this Item is incorporated by reference from the Company's Proxy Statement for the 1994 Annual Meeting of Stockholders. With the exception of the information specifically incorporated by reference, the Company's Proxy Statement is not to be deemed filed as part of this report for purposes of this Item.\nTHIS PAGE INTENTIONALLY LEFT BLANK\nPART IV\nITEM 14.","section_14":"ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K\n(a)(1) The list of financial statements filed as part of this report is submitted as a separate section, the index to which is located on page 30.\n(2)The list of financial statement schedules required to be filed by Item 8 is located on page 30.\nAll other schedules of National Steel Corporation and subsidiaries for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted.\n(3) EXHIBITS:\n(b) No reports on Form 8-K were filed during the last quarter of 1993.\n(c) Exhibits 3-B, 10-EE, 10-FF, 10-GG, 21 and 23, which are required by Item 601 of Regulation S-K, are filed as part of this report.\nSIGNATURES\nPURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934, THE COMPANY HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED IN THE CITY OF MISHAWAKA, STATE OF INDIANA, ON THIS 4TH DAY OF MARCH, 1994.\nNational Steel Corporation\n\/s\/ Richard E. Newsted By: _________________________________ Richard E. Newsted Vice President, Chief Financial Officer and Secretary\nPURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE COMPANY IN THE CAPACITIES AND ON THE DATE INDICATED ON MARCH 4, 1994.\n\/s\/ Osamu Sawaragi ---------------------------------------- Osamu Sawaragi Director and Chairman \/s\/ Ronald H. Doerr ---------------------------------------- Ronald H. Doerr Director, President and Chief Executive Officer \/s\/ Yoshito Tokumitsu ---------------------------------------- Yoshito Tokumitsu Director, Senior Vice President and Assistant to the Chief Executive Officer \/s\/ Keisuke Murakami ---------------------------------------- Keisuke Murakami Director and Vice President--Administration \/s\/ Edwin V. Clarke, Jr. ---------------------------------------- Edwin V. Clarke, Jr. Director \/s\/ Masayuki Hanmyo - ----------------------------------------- Masayuki Hanmyo Director \/s\/ Kenichiro Sekino - ----------------------------------------- Kenichiro Sekino Director \/s\/ Robert J. Slater - ----------------------------------------- Robert J. Slater Director \/s\/ Richard E. Newsted - ----------------------------------------- Richard E. Newsted Vice President, Chief Financial Officer and Secretary \/s\/ Carl M. Apel - ----------------------------------------- Carl M. Apel Corporate Controller, Accounting and Assistant Secretary\nNATIONAL STEEL CORPORATION\nANNUAL REPORT ON FORM 10-K\nEXHIBIT INDEX\nYEAR ENDED DECEMBER 31, 1993","section_15":""}
{"filename":"827052_1993.txt","cik":"827052","year":"1993","section_1":"ITEM 1. BUSINESS\nBUSINESS OF SCECORP\nSCEcorp was incorporated on April 20, 1987, under the laws of the State of California for the purpose of becoming the parent holding company of Southern California Edison Company (\"Edison\"), a California public utility corporation. SCEcorp owns all of the issued and outstanding common stock of Edison and, in addition, owns all of the issued and outstanding capital stock of The Mission Group (\"Mission Group\"), which in turn owns the stock of subsidiaries engaged in nonutility businesses. These subsidiaries are currently engaged in developing cogeneration and other energy projects (\"Mission Energy\"), making financial investments in electric generating facilities and other assets (\"Mission First Financial\") and developing, managing, and selling existing real estate projects (\"Mission Land\").\nSCEcorp is engaged solely in the business of holding for investment the stock of its subsidiaries and is not presently conducting any independent business activities. For the year ended December 31, 1993, Edison and Mission Group accounted for 99.3% and 0.7%, respectively, of the net income of SCEcorp. At December 31, 1993, Edison had 16,487 full-time employees and Mission Group and its subsidiaries had 706 full-time employees. Currently, SCEcorp has no employees of its own.\nThe principal executive offices of SCEcorp are located at 2244 Walnut Grove Avenue, Rosemead, California 91770, and its telephone number is (818) 302-2222.\nREGULATION OF SCECORP\nSCEcorp and its subsidiaries are exempt from all provisions, except Section 9(a)(2), of the Public Utility Holding Company Act of 1935 (\"Holding Company Act\") on the basis that SCEcorp and Edison are incorporated in the same state and their business is predominately intrastate in character and carried on substantially in the state of incorporation. It is necessary for SCEcorp to file an annual exemption statement with the Securities and Exchange Commission (\"SEC\"), and the exemption may be revoked by the SEC upon a finding that the exemption may be detrimental to the public interest or the interest of investors or consumers. SCEcorp has no intention of becoming a registered holding company under the Holding Company Act.\nSCEcorp is not a public utility under the laws of the State of California and is not subject to regulation as such by the California Public Utilities Commission (\"CPUC\"). See \"Business of Southern California Edison Company--Regulation of Edison\" below for a description of the regulation of Edison by the CPUC. However, the CPUC decision authorizing Edison to reorganize into a holding company structure contains certain conditions, which, among other things, ensure the CPUC access to books and records of SCEcorp and its affiliates which relate to transactions with Edison; require SCEcorp and its subsidiaries to employ accounting and other procedures and controls to ensure full review by the CPUC and to protect against subsidization of nonutility activities by Edison's customers; require that all transfers of market, technological or similar data from Edison to SCEcorp or its affiliates be made at market value; preclude Edison from guaranteeing any obligations of SCEcorp without prior written consent from the CPUC; provide for royalty payments to be paid by SCEcorp or its subsidiaries in connection with the transfer of product rights, patents, copyrights or similar legal rights from\nEdison; and prevent SCEcorp and its subsidiaries from providing certain facilities and equipment to Edison except through competitive bidding. In addition, the decision provides that Edison shall maintain a balanced capital structure in accordance with prior CPUC decisions, that Edison's dividend policy shall continue to be established by Edison's Board of Directors as though Edison were a comparable stand-alone utility company, and that the capital requirements of Edison, as determined to be necessary to meet Edison's service obligations, shall be given first priority by the Boards of Directors of SCEcorp and Edison.\nENVIRONMENTAL MATTERS\nLegislative and regulatory activities in the areas of air and water pollution, waste management, hazardous chemical use, noise abatement, land use, aesthetics and nuclear control continue to result in the imposition of numerous restrictions on SCEcorp's subsidiaries with respect to the operation of existing facilities, on the timing, cost, location, design, construction and operation of new facilities required to meet future load requirements, and on the cost of mitigating the effect of past operations on the environment. These activities substantially affect future planning and will continue to require modifications of existing facilities and operating procedures. SCEcorp is unable to predict the extent to which additional regulations may affect the operations and capital expenditure requirements of its subsidiaries.\nThe Clean Air Act provides the statutory framework to implement a program for achieving national ambient air quality standards and provides for maintenance of air quality in areas exceeding such standards. The Clean Air Act was amended in 1990, giving the South Coast Air Quality Management District (\"SCAQMD\") 20 years to achieve all the federal air quality standards. The SCAQMD's Air Quality Management Plan (\"AQMP\"), adopted in 1991, demonstrates a commitment to attain federal air quality standards within 20 years. Consistent with the requirements of the AQMP and the Clean Air Act Amendments of 1990 (\"CAAA\"), the SCAQMD adopted rules to reduce emissions of oxides of nitrogen (\"NOx\") from combustion turbines, internal combustion engines, industrial coolers and utility boilers. On October 15, 1993, the SCAQMD adopted the Regional Clean Air Incentives Market (\"RECLAIM\") which replaces most of the previous rule requirements with a market mechanism for NOx emission trading (trading credits). RECLAIM will, however, still require Edison to reduce NOx emissions through retrofit or purchase of trading credits on all basin generation by over 86% by 2003. In Ventura County, a NOx rule was adopted requiring more than an 88% NOx reduction by June 1996 at all utility boilers. Edison's expected total cost to meet these requirements is approximately $330,000,000 of capital expenditures.\nThe CAAA do not require any significant additional emissions control expenditures that are identifiable at this time. The amendments call for a five-year study of the sources and causes of regional haze in the southwestern U.S. The extent to which this study may require sulfur dioxide emissions reductions at Edison's Mohave Generating Station (\"Mohave\") is not known. The acid rain provisions of the amended Clean Air Act also put an annual limit on sulfur dioxide emissions allowed from power plants. Edison will receive more sulfur dioxide allowances than it requires for its projected operations. The CAAA also require the Environmental Protection Agency (\"EPA\") to carry out a three-year study of risk to public health from emissions of toxic air contaminants from power plants, and to regulate such emissions only if required. As a result of a petition by Mohave County in the State of Arizona, the Nevada Department of Environmental Protection (\"NDEP\") studied the impact of the plume from Edison's Mohave plant on the Mohave area air quality. The\nregulatory outcome requires Edison to meet a new lower opacity limit in early 1994. The NDEP will review the opacity limit again in 1995 in conjunction with an ongoing tracer study being conducted by the EPA and evaluate potential impacts on visibility in the Grand Canyon from sulfur dioxide emissions. Until more definitive information on tracer study results are available, Edison expects to meet all the present regulations through improved operations at the plant.\nRegulations under the Clean Water Act require permits for the discharge of certain pollutants into waters of the United States. Under this act, the EPA issues effluent limitation guidelines, pretreatment standards and new source performance standards for the control of certain pollutants. Individual states may impose even more stringent limitations. In order to comply with guidelines and standards applicable to steam electric power plants, Edison incurs additional expenses and capital expenditures. Edison presently has discharge permits for all applicable facilities.\nThe Safe Drinking Water and Toxic Enforcement Act prohibits the exposure to individuals of chemicals known to the State of California to cause cancer or reproductive harm and the discharge of such listed chemicals into potential sources of drinking water. Additional chemicals are continuously being put on the state's list, requiring constant monitoring by Edison.\nThe State of California has adopted a policy discouraging the use of fresh water for plant cooling purposes at inland locations. Such a policy, when taken in conjunction with existing federal and state water quality regulations and coastal zone land use restrictions, could substantially increase the difficulty of siting new generating plants anywhere in California.\nSCEcorp has identified 46 sites for which any of its subsidiaries, are or may be, responsible for remediation under environmental laws. SCEcorp's subsidiaries are participating in investigations and cleanups at a number of these sites and SCEcorp has recorded a $60,000,000 liability for the estimated minimum costs to clean up several sites. Additional costs may be incurred as progress is made in determining the magnitude of required remedial actions, as the share of these costs attributable to SCEcorp's subsidiaries in proportion to other responsible parties is determined and as additional investigations and cleanups are performed.\nThe CPUC currently allows Edison rate recovery of environmental- cleanup costs, subject to reasonableness reviews. Edison filed for a reasonableness review of costs incurred through 1991 at two hazardous substance sites. Hearings have been delayed due to a 1992 CPUC decision involving another California utility, which concluded that the current procedure may not be appropriate for these costs and requested interested parties to recommend alternatives. In November 1993, the major California utilities, the DRA and others filed a collaborative report recommending an incentive mechanism, which would require shareholders to fund 10% of cleanup costs. Shareholders would have the opportunity to recover these costs through insurance. Accordingly, Edison has recorded a regulatory asset which represents 90% of the estimated cleanup costs for sites covered by this proposed mechanism. The remaining sites' cleanup costs are expected to be immaterial and would be recovered through base rates. If approved by the CPUC, Edison would be allowed to recover 90% of cleanup costs incurred to date under the reasonableness review procedure ($11,000,000). A March 10, 1994 proposed decision issued by a CPUC ALJ accepted the collaborative report's recommendation. A final CPUC decision is expected in early 1994.\nTwenty of the 46 sites identified are Edison's former manufactured gas plant sites. Edison's cleanup responsibility for these sites is based on Edison's, or a predecessor company's, ownership or operation of the plants. These gas plants were operated for the production of gas prior to the widespread availability of natural gas. The EPA and the California Department of Toxic Substances Control have determined that specified constituents of the gas plant by-products are hazardous substances or hazardous wastes, and may require removal or other remedial action.\nThe Resource Conservation and Recovery Act (\"RCRA\") provides the statutory authority for the EPA to implement a regulatory program for the safe treatment, recycling, storage and disposal of solid and hazardous wastes. There is an unresolved issue regarding the degree to which coal wastes should be regulated under RCRA. Increased regulation may result in an increase in expenses related to the operation of Mohave.\nThe Toxic Substance Control Act and accompanying regulations govern the manufacturing, processing, distribution in commerce, use and disposal of polychlorinated biphenyls, a toxic substance used in certain electrical equipment (\"PCB waste\"). Current costs for deposal of PCB waste are immaterial.\nEdison's capitalized expenditures for environmental protection for the years 1969 through 1993 and its currently estimated capital expenditures for such purpose for the years 1994 through 1998 are as follows:\nThese estimates include budgeted and forecasted plant expenditures responsive to currently effective legislation. Projected capital expenditures for environmental protection are subject to continuous review and periodic revisions because of escalation in engineering and construction costs, additions and deletions of planned facilities, changes in technology, evolving environmental regulatory requirements and other factors beyond Edison's control. Edison believes that costs incurred for these environmental purposes will be recognized by the CPUC and the FERC as reasonable and necessary costs of service for rate recovery purposes.\nBUSINESS OF SOUTHERN CALIFORNIA EDISON COMPANY\nEdison was incorporated under California law in 1909. Edison is a public utility primarily engaged in the business of supplying electric energy to a 50,000 square-mile area of central and southern California, excluding the City of Los Angeles and certain other cities. This area includes some 800 cities and communities and a population of nearly 11 million people. As of December 31, 1993, Edison had 16,487 full-time employees. During 1993, 37% of Edison's total operating revenue was derived from commercial customers, 36% from residential customers, 13% from industrial customers, 8% from public authorities, 4% from agricultural and other customers and 2% from resale customers. Edison comprises the major portion of the assets and revenues of SCEcorp, its parent holding company.\nREGULATION OF EDISON\nEdison's retail operations are subject to regulation by the CPUC. The CPUC has the authority to regulate, among other things, retail rates, issuances of securities and accounting and depreciation practices. Edison's resale operations are subject to regulation by the Federal Energy Regulatory Commission (\"FERC\"). The FERC has the authority to regulate resale rates as well as other matters, including transmission service pricing, accounting and depreciation practices and licensing of hydroelectric projects.\nEdison is subject to the jurisdiction of the Nuclear Regulatory Commission (\"NRC\") with respect to its nuclear power plants. NRC regulations govern the granting of licenses for the construction and operation of nuclear power plants and subject those power plants to continuing review and regulation.\nThe construction, planning and siting of Edison's power plants within California are subject to the jurisdiction of the California Energy Commission and the CPUC. Edison is subject to rules and regulations promulgated by the California Air Resources Board and local air pollution control districts with respect to the emission of pollutants into the atmosphere, the regulatory requirements of the California State Water Resources Control Board and regional boards with respect to the discharge of pollutants into waters of the state and the requirements of the California Department of Toxic Substances Control with respect to handling and disposal of hazardous materials and wastes. Edison is also subject to regulation by the EPA, which administers certain federal statutes relating to environmental matters. Other federal, state and local laws and regulations relating to environmental protection, land use and water rights also impact Edison. (See previous discussion of Environmental Matters under the Business of SCEcorp, above.)\nThe California Coastal Commission has continuing jurisdiction over the coastal permit for San Onofre Nuclear Generating Station (\"San Onofre\") Units 2 and 3. Although the units are operating, the permit remains open. This jurisdiction may continue for several years because it involves oversight on mitigation measures arising from the permit.\nThe Department of Energy (\"DOE\") has regulatory authority over certain aspects of Edison's operations and business relating to energy conservation, solar energy development, power plant fuel use and disposal, coal conversion, public utility regulatory policy and natural gas pricing.\nRATE MATTERS\nCPUC Retail Ratemaking\nThe rates for electricity provided by Edison to its retail customers comprise several major components established by the CPUC to compensate Edison for basic business and operational costs, fuel and purchased power costs, and the costs of adding major new facilities.\nBasic business and operational costs are recovered through base rates, which are determined in general rate case proceedings held before the CPUC every three years. During a general rate case, the CPUC critically reviews Edison's operations and general costs to provide service (excluding energy costs and, in certain instances, major plant additions). The CPUC then determines the revenue requirement to cover those costs, including items such as depreciation, taxes, cost of capital, operation, maintenance, and administrative and general expenses. The revenue\nrequirement is forecasted on the basis of a specified test year. Following the revenue requirement phase of a general rate case, Edison and the CPUC proceed to a rate design phase which allocates revenue requirements and establishes rate levels for customers.\nBase rates may be adjusted in the years between general rate case years through an attrition year allowance. The attrition year allowance is intended to allow Edison to recover, without lengthy hearings, specific uncontrollable cost changes in its base rate revenue requirement and thereby preserve Edison's opportunity to earn its authorized rate of return in the years that are not general rate case test years.\nIn December 1993, Edison filed an application with the CPUC in which it proposed a performance-based ratemaking procedure for recovery of operation and maintenance (\"O&M\") expenses and capital-related costs. Such costs have traditionally been recovered through general rate cases, attrition proceedings, and cost of capital proceedings.\nEdison proposed that the CPUC authorize a base rate revenue indexing formula which would combine O&M and capital-related cost recovery. In addition, Edison proposed that the period between general rate cases be lengthened from three to six years. Cost of capital proceedings would occur only after significant changes in utility capital markets.\nEdison's fuel, purchased power and energy-related costs of providing electrical service are recovered through a balancing account mechanism called the Energy Cost Adjustment Clause (\"ECAC\"). Under the ECAC balancing account procedure, fuel, purchased power and energy-related revenues and costs are compared and the difference is recorded as either an undercollection or overcollection. The amount recorded in the balancing account is periodically amortized through rate changes which return overcollections to customers by reducing rates or collect undercollections from customers by increasing rates. The costs recorded in the ECAC balancing account are subject to review by the CPUC and allowed for rate recovery only to the extent they are found to be reasonable. Certain incentive provisions are included in the ECAC that can affect the amount of fuel and energy-related costs actually recovered. Edison is required to make an ECAC filing for each calendar year, and must also make a second filing for a mid-year adjustment if such filing would result in an ECAC rate change exceeding 5% of total annual revenue.\nFor Edison's interest in the three units of the Palo Verde Nuclear Generating Station (\"Palo Verde\"), the CPUC authorized a 10-year rate phase-in plan which deferred $200,000,000 of investment-related revenue during the first four years of operations for each of the three units, commencing on their respective commercial operation dates. Revenue deferred for each unit under the plan for years one through four was $80,000,000, $60,000,000, $40,000,000 and $20,000,000, respectively. The deferrals and related interest are being recovered over the final six years of each unit's phase-in plan.\nThe CPUC has also adopted a nuclear unit incentive procedure which provides for a sharing of additional energy costs or savings between Edison and its ratepayers when operation of any of the units of San Onofre or Palo Verde is outside a specified target capacity factor (\"TCF\") range. For San Onofre Units 2 and 3, and Palo Verde Units 1, 2 and 3 the TCF range is 55% to 80% of their rated capacity.\nThe Electric Revenue Adjustment Mechanism (\"ERAM\") reflects the difference between the recorded level of base rate revenue and the authorized level of base rate revenue. This mechanism has been adopted by the CPUC primarily to minimize the effect on earnings of fluctuations in retail kilowatt-hour sales.\nGeneral Rate Case (\"GRC\")\nIn December 1991, the CPUC issued a decision on the revenue requirement phase of Edison's 1992 test year GRC application. The CPUC authorized a $72,000,000 or 1% increase in Edison's base rate revenues, effective January 20, 1992. The decision did not adopt Edison's request to capitalize, rather than expense, computer software development and research, development and demonstration (\"RD&D\") expenditures, but did allow Edison to file additional information regarding such capitalization.\nIn April 1992, Edison filed supplemental testimony supporting its request to capitalize application software development costs, and proposed to decrease its authorized level of base rate revenues (\"ALBRR\") by $53,000,000 in 1993 and 1994. Edison and the CPUC's Division of Ratepayer Advocates (\"DRA\") entered into a settlement agreement to allow rate recovery of capitalized software expenditures in which Edison agreed to an additional $32,000,000 base rate revenue decrease. The CPUC approved the settlement agreement in November 1992, and authorized a $48,900,000 decrease to Edison's ALBRR effective January 1, 1993. The related base rate revenue decrease was included in Edison's January 15, 1993, consolidated revenue change. The CPUC also authorized a $12,900,000 increase to Edison's ALBRR effective January 1, 1994. The related base rate revenue increase was included in Edison's January 24, 1994, consolidated revenue change.\nIn September 1992, Edison filed supplemental testimony supporting its request to capitalize RD&D expenditures. In the additional filing, Edison proposed to capitalize approximately $9,000,000 in RD&D project expenditures. The DRA's supplemental testimony alleged that Edison did not comply with a CPUC order regarding joint remote meter reading and recommended a $10,000,000 penalty for non-compliance. Additionally, the DRA proposed to disallow approximately $4,500,000 of capital costs associated with Edison's research on off-grid generation technology. The CPUC's decision is expected by the end of 1994.\nIn December 1992, the CPUC approved an ALBRR increase of $110,000,000, effective January 1, 1993, for the 1993 attrition year allowance. The related base rate revenue increase was included in Edison's January 15, 1993 consolidated revenue change. In April 1993, the CPUC modified its decision (pursuant to a petition by Edison), and approved an ALBRR increase of $10,400,000 effective April 28, 1993. The related base rate revenue increase was included in Edison's January 24, 1994, consolidated revenue change.\nIn December 1993, the CPUC approved an ALBRR increase of $97,200,000 effective January 1, 1994, for: (1) the 1994 attrition year allowance; (2) increased federal income taxes pursuant to the Revenue Reconciliation Act of 1993; and, (3) reduction in Edison's California property tax liability resulting from a settlement agreement with the California State Board of Equalization.\nEach year, the CPUC reviews the components of the cost of capital for all the California energy utilities in a generic cost of capital proceeding. On December 3, 1993, the CPUC issued a final decision resulting in a $108,000,000 reduction to Edison's ALBRR effective January 1, 1994. The decision also resulted in a reduction of Edison's overall rate of return from 9.94% to 9.17%, a reduction in return on common equity from 11.80% to 11.00%, and an increase to Edison's common equity capital ratio from 46.00% to 47.25% effective January 1, 1994. The related base rate revenue decrease was included in Edison's January 24, 1994, consolidated revenue change.\nIn December 1993, Edison filed with the CPUC its 1995 GRC application. In its application, Edison requested an increase to the ALBRR of $117,000,000 above the expected year-end 1994 ALBRR level to become effective January 1, 1995. On March 14, 1994, the DRA issued a report which, based on Edison's preliminary review, recommended a $269,000,000 reduction to Edison's expected year-end 1994 authorized level of base rate revenue. Evidentiary hearings are expected to commence in April 1994, with a final CPUC decision anticipated in December 1994.\nIn January 1994, the CPUC approved an ALBRR increase of $8,800,000 effective January 24, 1994, for base rate recovery of the permanent component of Edison's fuel oil inventory. The related base rate revenue increase was included in Edison's January 24, 1994, consolidated revenue change.\nIn November 1993, the CPUC approved an ALBRR increase of: (1) $64,400,000 effective December 31, 1993; and (2) $63,100,000 effective January 1, 1994, to reflect cost recovery of employee post-retirement benefits other than pensions (\"PBOP\"). In addition, the CPUC approved an ALBRR reduction of $39,500,000 effective December 30, 1993, to reflect the removal of costs associated with Edison's 1992 PBOP contributions. The related base rate revenue reduction associated with the PBOP ALBRR changes was included in Edison's January 24, 1994, consolidated revenue change, less $16,000,000 of rate recovery deferred until 1995.\nEnergy Cost Adjustment Clause\nIn January 1992, the DRA issued a report on the reasonableness of Edison's non-standard, non-affiliate qualifying facilities (\"QF\") power purchase contracts included in Edison's 1989 and 1990 annual ECAC applications. With respect to both ECAC periods, the DRA asserted that Edison had incorrectly calculated firm capacity payments and bonus capacity payments to QFs by including certain energy deliveries which the DRA contended should be excluded or \"truncated\" from the calculation. The DRA recommended disallowances of $2,500,000 for the 1989 record period and $4,800,000 for the 1990 record period. On April 26, 1993, the DRA withdrew its January 1992 testimony pursuant to an Edison-DRA agreement to jointly petition the CPUC for clarification of the CPUC's intent regarding truncation and two other QF contract administration issues. Edison and the DRA filed their joint petition on April 23, 1993. On November 2, 1993, the CPUC voted to dismiss the joint petition on the basis that the issues presented were complex and could be developed more appropriately in an ECAC proceeding or through direct negotiations among the affected parties. Pursuant to the Edison-DRA agreement, a dismissal on this basis permits the DRA to renew its challenge to Edison's truncation practice beginning with the 1991 ECAC record period and thereafter in each subsequent ECAC record period. To date, the DRA has not recommended further disallowances attributable to the truncation issue.\nIn March 1992, Edison and the DRA settled disputes relating to Edison's power purchases from the 13 non-utility generation facilities partially owned by Mission Energy. Pursuant to the settlements, Edison agreed not to enter into new power purchase-contracts with Mission Energy and to a one-time disallowance. On March 10, 1993, the CPUC issued a decision approving the settlement and authorizing a ratepayer refund of $250,000,000 over a two-year period beginning January 1, 1994. The decision also ordered an immediate adjustment to Edison's ECAC balancing account with interest accruing until the rate reduction takes effect. The\n$250,000,000 disallowance is fully reflected in Edison's financial statements.\nIn October 1993, the DRA issued its report on QF reasonableness issues for the ECAC record period April 1990 through March 1991. In its report, the DRA recommended that the CPUC disallow $1,574,000 in power purchase expenses incurred as a result of purchases during the record period under a QF contract with Mojave Cogeneration Company, a nonutility generator. In its report, the DRA also alleged that in 1990 and 1991 Edison imprudently renegotiated Mojave Cogeneration Company's contract with Edison, resulting in higher ratepayer costs. The DRA further alleged that ratepayers may be harmed in the amount of $31,600,000 (present value) over the contract's twenty-year life. The DRA found the execution of five other QF contracts to be reasonable. Hearings will likely be held no earlier than the second half of 1994.\nThe DRA issued four reports addressing Edison's non-QF reasonableness showing for the April 1, 1991 through March 31, 1992 period. The DRA recommended: 1) a disallowance of $2,205,000 of replacement power costs associated with extended outage duration or reduced power production at Edison's nuclear units, which was allegedly caused by human error; and 2) a reduction of $1,203,000 to Edison's proposed TCF reward for San Onofre Unit 3, based on excluding generation above the unit capacity rating. A January 25, 1994 ALJ proposed decision found three nuclear plant outages unreasonable, resulting in a potential $1,600,000 disallowance, but rejected the DRA's recommendations for reducing Edison's TCF reward. Edison filed comments on the proposed decision on February 14, 1994. The final CPUC decision is expected in March 1994.\nOn May 28, 1993, Edison requested a $152,000,000 annual rate increase for service beginning January 1, 1994, for changes to the Energy Cost Adjustment Billing Factor, Electric Revenue Adjustment Balancing Accounts (\"ERABF\"), Low Income Surcharge and base rate levels. Edison also made a rate stabilization proposal which defers recovery of approximately $200,000,000 of 1994 fuel and purchased-power expenses until 1995. In July 1993, Edison updated its ECAC request to a $181,000,000 increase. The DRA proposed a $105,000,000 increase. In October 1993, Edison and the DRA stipulated to a proposed $164,688,000 ECAC revenue increase subject to adjustment for incorporating Edison's forecast December 31, 1993 balance in the ECAC, Low Income Ratepayer Assistance, and ERABF to reflect more recent recorded data. On January 19, 1994, the CPUC issued its decision which adopted a revenue increase of $274,600,000. When this revenue change is combined with other revenue changes which occurred on or before January 1, 1994, the total combined revenue change is $232,101,000.\nOn May 28, 1993, Edison filed the non-QF portion of its Reasonableness of Operations Report, which included power purchases and exchanges and the operation of its hydro, coal, gas and nuclear resources for the period April 1, 1992 through March 31, 1993. In February 1994, the DRA recommended: (1) a $7,200,000 disallowance relating to fuel oil inventory management; and (2) a $5,000,000 disallowance for transmission loss revenues. Hearings on this matter are scheduled for October 1994.\nEdison filed its QF Reasonableness of Operations Report on September 1, 1993. It is presently unknown when the DRA will file testimony in the QF reasonableness phase.\nPalo Verde Outage Review\nIn March 1989, Palo Verde Units 1 and 3 experienced automatic shutdowns. Since the resultant outages overlapped previously scheduled refueling outages, normal refueling, maintenance, inspection, surveillance, modification and testing activities were conducted at the units, as well as modifications to the plants required by the NRC. Unit 3 was restored to service on December 30, 1989, and Unit 1 was restored to service on July 5, 1990.\nIn December 1989, the CPUC instituted an investigation into the outages pursuant to the California Public Utilities Code (\"Code\"). The Code requires the CPUC to institute an investigation when any portion of a utility's generating facilities has been out of service for nine consecutive months. The CPUC order required that the subsequent collection of rates associated with Palo Verde Units 1 and 3 be subject to refund pending review of the outages. In November 1991, the DRA issued a report recommending disallowances totaling more than $160,000,000 including a $63,000,000 disallowance for revenue collected during the outages (including interest).\nIn September 1993, Edison and the DRA agreed to settle these disputes for $38,000,000 (including $29,000,000 for replacement power costs, $2,000,000 for capital projects and approximately $7,000,000 for interest), subject to CPUC approval. The settlement resolves all issues related to the 1989-1990 outages at Palo Verde. The effect of the settlement has been fully reflected in the financial statements. Edison expects a CPUC decision regarding the settlement in mid 1994.\nMohave Order Instituting Investigation (\"OII\")\nIn April 1986, the CPUC began investigating the 1985 rupture of a high pressure steam pipe at Mohave. Edison is the plant operator and 56% owner. The CPUC's OII reviewed Edison's share of repair costs and replacement fuel and energy related costs associated with the outage. Edison incurred costs of approximately $90,000,000 (including interest) to repair damage from the accident and provide replacement power during the six-month outage. This total is net of Edison's recovery of expenses from the settlement of lawsuits with contractors and insurance.\nIn May 1991, the DRA and its consultant issued reports alleging that Edison imprudently operated the Mohave plant and therefore contributed to the accident. As a result, the DRA recommended that all expenses incurred because of the accident be disallowed in rates. The DRA did not quantify its proposed disallowance. Edison believes that metallurgical and physical characteristics of a weld reduced the otherwise expected pipe life to the point of failure after 15 years of service. Edison filed testimony contesting the allegations in May 1992, in December 1992, and on March 1, 1993. In March 1994, the CPUC issued a decision finding that Edison acted unreasonably in failing to implement an inspection program. The CPUC decision ordered a second phase of this proceeding to quantify the disallowance.\nHigh Voltage Direct Current Expansion Project (\"HVDCEP\")\nThe HVDCEP began operation in 1989. In October 1989, Edison filed a report with the CPUC requesting recovery of $72,600,000 in project costs. Subsequently, Edison and the DRA agreed on an accounting adjustment of $150,000, and a settlement agreement was filed. A February 3, 1993 CPUC decision upheld the settlement agreement allowing Edison recovery in rates of approximately $72,450,000. In its 1995 GRC, Edison is requesting rate recovery of an additional $7,000,000 associated with completion items and\nother HVDCEP-related expenditures. The total amount of rate recovery for the HVDCEP that Edison will be allowed remains subject to further adjustment pending a final determination of the cost-effectiveness of the project in comparison with the power exchange agreement between Edison and the Los Angeles Department of Water and Power.\nFERC Resale Ratemaking\nEdison sells electricity to public power utilities (the cities of Anaheim, Azusa, Banning, Colton, Riverside and Vernon), Southern California Water Company and Arizona Public Service Company (\"APS\") under rates subject to FERC jurisdiction. In accordance with FERC procedures resale rates are subject to refund with interest if subsequently disallowed. Edison believes any refunds from pending rate proceedings, would not materially affect its results of operations or financial position.\nFUEL SUPPLY\nFuel and purchased-power costs amounted to approximately $3.29 billion in 1993, a 7% increase over 1992. Sources of energy and unit costs of fuel for 1989 through 1993 were as follows:\n_______________ (1) British Thermal Unit (\"BTU\") is the standard unit of measure for the heat content of fuels. One BTU is the amount of heat required to raise the temperature of one pound of water, at 39.1 degrees Fahrenheit, by one degree Fahrenheit. (2) There are no fuel costs associated with these categories.\n* Indicates a source of less than 1%.\nAverage fuel costs, expressed in cents per kilowatt-hour, for the year ended December 31, 1993, were: oil, 7.996c.; natural gas, 2.930c.; nuclear, 0.537c.; and coal, 1.226c..\nNatural Gas Supply\nTwelve of Edison's major steam electric generating units are designed to burn oil or natural gas as a primary boiler fuel. In 1990, Edison adopted an all-gas strategy to comply with air quality goals by eliminating burning oil in all but very extreme conditions. In August 1991, the CPUC adopted regulations which made Edison fully responsible for all gas procurement activities previously performed by local distribution companies for natural gas.\nTo implement its all-gas strategy, Edison acquired a balanced portfolio of gas supply and transportation arrangements. Traditionally, natural gas needs in southern California were met from gas production in the southwest region of the country. To diversify its gas supply, Edison entered into four 15-year natural gas supply agreements with major producers in western Canada. These contracts, totaling 200,000,000 cubic feet per day, have market-sensitive pricing arrangements. This represents about 40% of Edison's current average annual supply needs. The rest of Edison's gas supply is acquired under short-term contracts from West Texas, New Mexico, and the Rocky Mountain region.\nFirm transportation arrangements provide the necessary long-term reliability for supply deliverability. To transport Canadian supplies, Edison contracted for 200,000,000 cubic feet per day of firm transportation arrangements on the Pacific Gas Transmission and Pacific Gas & Electric Expansion Project connecting southern California to the low-cost gas producing regions of western Canada. Edison has a 30-year commitment to this project, construction of which was completed in late 1993. In addition, Edison has a 15-year commitment to 200,000,000 cubic feet per day of firm transportation rights on El Paso Natural Gas' pipeline to transport Southwest U.S. gas supplies.\nNuclear Fuel Supply\nEdison has contractual arrangements covering 100% of the projected nuclear fuel cycle requirements for San Onofre through the years indicated below:\n_______________ (1) Assumes the San Onofre participants meet their supply obligations in a timely manner.\n(2) Assumes full utilization of expanded on-site storage capacity and normal operation of the units, including interpool transfers and maintaining full-core reserve. To supplement existing spent fuel storage, a contingency plan is being developed to construct additional on-site storage capacity with initial operation scheduled for no later than 2002. The Nuclear Waste Policy Act of 1982 requires that the DOE provide for the disposal of utility spent nuclear fuel beginning in 1998. The DOE has stated that it is unlikely that it will be able to start accepting spent nuclear fuel at its permanent repository before 2010.\nParticipants in Palo Verde have purchased uranium concentrates sufficient to meet projected requirements through 1997. Independent of arrangements made by other participants, Edison will furnish its share of uranium concentrates requirements through at least 1995 from existing contracts. Contracts to provide conversion services cover requirements through 1994. Enrichment and fabrication contracts will meet Palo Verde requirements through 1995 and 1997, respectively.\nPalo Verde on-site expanded spent fuel storage capacity will accommodate needs through 2005 for Units 1 and 2 and 2006 for Unit 3, while maintaining full-core reserve.\nBUSINESS OF THE MISSION GROUP AND ITS SUBSIDIARIES\nMission Group was incorporated in 1987 to own the stock and coordinate the activities of several companies engaged in nonutility businesses. The principal subsidiaries of Mission Group are Mission Energy, Mission First Financial and Mission Land. A fourth subsidiary, Mission Power Engineering Company, discontinued operations in 1990. The businesses of these companies are described below. For SCEcorp's business segment information for each of the three years ended December 31, 1993, 1992 and 1991, see Note 12 of \"Notes to Consolidated Financial Statements\" contained in the 1993 Annual Report to Shareholders incorporated by reference in this report.\nOn December 31, 1993, Mission Group had consolidated assets of $3.3 billion and, for the year then ended, had consolidated operating revenue of $424,500,000 and consolidated net income of $3,000,000.\nMission Group's principal executive offices are located at 18101 Von Karman Avenue, #1700, Irvine, California 92715.\nMission Energy. Mission Energy, primarily through its subsidiary corporations, is engaged in the business of developing, owning, and operating cogeneration, small power, geothermal, and other principally energy-related projects. At December 31, 1993, Mission Energy subsidiaries held interests in 33 operating power production facilities with an aggregate power production capability of 4,105 MW, of which 1,862 MW are attributable to Mission Energy's interests. These operating facilities are located in California, Nevada, New Jersey, Pennsylvania, Virginia, Washington, Australia, Spain, and the United Kingdom. In addition, facilities aggregating more than 1,746 MW, of which one 500 MW facility is located in Australia, are in construction or advanced permitting stages. Mission Energy owns interests in oil and gas producing operations and related facilities in Canada and U.S. locations in Texas, Alabama, New Mexico, California and offshore Louisiana. In February 1994, Mission Energy -- as lead developer -- and its partners, General Electric Capital Corporation, Mitsui & Co., Ltd. and P.T. Batu Hitam Perkasa, signed a 30-year power-purchase agreement with the Indonesian government for the 1,230-MW Paiton project.\nAt December 31, 1993, Mission Energy had total consolidated assets of $1.8 billion and for the year then ended, had consolidated operating revenue of $272,800,000 and consolidated net income of $2,300,000.\nCurrently, most of Mission Energy's operating power production facilities have QF status under the Public Utility Regulatory Policies Act of 1978 (\"PURPA\") and the regulations promulgated thereunder. QF status exempts the projects from the application of the Holding Company Act, many provisions of the Federal Power Act, and state laws and regulations respecting rates and financial or organizational regulation of electric\nutilities. Mission Energy, through wholly-owned subsidiaries, also has ownership interests in two operating power projects that have received exempt wholesale generator status as defined in the Holding Company Act. In addition, some Mission Energy subsidiaries have made fuel-related investments and a limited number of non-energy related investments.\nWhile QF status entitles projects to the benefits of PURPA, each project must still comply with other federal, state and local laws, including those regarding siting, construction, operation, licensing and pollution abatement.\nMission First Financial. Mission First Financial participates in investment opportunities involving leveraged leasing, project financing, affordable housing and cash management. Its investments include interests in nuclear power, cogeneration, waste-to-energy, hydroelectric, electric transportation and affordable housing facilities. Since its inception in 1987, Mission First Financial has invested in 71 projects. In 1993, Mission First Financial invested $20,000,000 in a sale\/leaseback of electric locomotive equipment with the Dutch rail authority. In addition, Mission First Financial invested $62,000,000 in 23 completed affordable housing projects and signed commitments to invest in 19 additional projects.\nAt December 31, 1993, Mission First Financial had total consolidated assets of $972,000,000 and, for the year then ended, had consolidated operating revenue of $31,500,000 (including interest income) and consolidated net income of $29,200,000.\nMission Land. Mission Land is engaged, directly and through its subsidiaries, in the business of developing, owning and managing industrial parks and other real property investments. Mission Land owns and manages commercial and industrial buildings in industrial parks located in Brea, Chino, Garden Grove, Ontario, Oceanside and Rancho Cucamonga, California. Mission Land and its subsidiaries also have interests in industrial, residential and commercial real estate in California; Tolleson, Arizona; Munster, Indiana; Chicago, Illinois and in other locations. SCEcorp has decided no longer to pursue real estate development as one of its core businesses and plans to exit this business in an orderly fashion over time.\nAt December 31, 1993, Mission Land had total consolidated assets of $516,300,000 and for the year then ended, had consolidated operating revenue of $112,500,000 and a consolidated net loss of $15,300,000. Mission Land has reduced assets by one-third since 1991 primarily through asset sales, reduced debt significantly, improved operating income through higher occupancy rates, and has increased reserves. As a result, Mission Land believes it has improved its ability to systematically exit the real estate business in a self-sustaining way. However, Mission Land may experience additional losses if the real estate market remains weak.\nITEM 2.","section_1A":"","section_1B":"","section_2":"ITEM 2. PROPERTIES\nEXISTING UTILITY GENERATING FACILITIES\nEdison owns and operates 12 oil- and gas-fueled electric generating plants, one diesel-fueled generating plant, 38 hydroelectric plants and an undivided 75.05% interest (1,614 MW net) in Units 2 and 3 at San Onofre. These plants are located in central and southern California. Palo Verde (15.8% Edison-owned, 579 MW net) is located near Phoenix, Arizona. Palo Verde Units 1, 2 and 3 started commercial operation on February 1, 1986, September 19, 1986, and January 20, 1988, respectively. Edison owns a 48% undivided interest (754 MW) in Units 4 and 5 at the Four\nCorners Generating Station (\"Four Corners Project\"), a coal-fueled steam electric generating plant in New Mexico. Palo Verde and the Four Corners Project are operated by other utilities. Edison operates and owns a 56% undivided interest (885 MW) in Mohave, which consists of two coal-fueled steam electric generating units in Clark County, Nevada. Edison receives an entitlement of 277 MW from the DOE's Hoover Dam Hydroelectric Project. At year-end 1993, the existing Edison-owned generating capacity (summer effective rating) was comprised of approximately 67% gas, 14% nuclear, 11% coal and 8% hydroelectric.\nSan Onofre, the Four Corners Project, certain of Edison's substations and portions of its transmission, distribution and communication systems are located on lands of the United States or others under (with minor exceptions) licenses, permits, easements or leases or on public streets or highways pursuant to franchises. Certain of such documents obligate Edison, under specified circumstances and at its expense, to relocate transmission, distribution and communication facilities located on lands owned or controlled by federal, state or local governments.\nWith certain exceptions, major and certain minor hydroelectric projects with related reservoirs, currently having an effective operating capacity of 1,154 MW and located in whole or in part on lands of the United States, are owned and operated by Edison under governmental licenses which expire at various times between 1994 and 2022. Such licenses impose numerous restrictions and obligations on Edison, including the right of the United States to acquire the project upon payment of specified compensation. When existing licenses expire, FERC has the authority to issue new licenses to third parties, but only if their license application is superior to Edison's and then only upon payment of specified compensation to Edison. Any new licenses issued to Edison are expected to be issued under terms and conditions less favorable than those of the expired licenses. Edison's applications for the relicensing of certain hydroelectric projects referred to above with an aggregate effective operating capacity of 89.0 MW are pending. Annual licenses issued for all Edison projects, whose licenses have expired and are undergoing relicensing, will be renewed until the new licenses are issued.\nIn 1993, Edison's peak demand was 16,475 MW, set on September 9, 1993. The 1993 peak was 1,938 MW less than Edison's record peak demand of 18,413 MW that occurred on August 17, 1992. Total area system operating capacity of 20,606 MW was available to Edison at the time of the 1993 record peak.\nSubstantially all of Edison's properties are subject to the lien of a trust indenture securing First and Refunding Mortgage Bonds (\"Trust Indenture\"), of which approximately $3.5 billion principal amount was outstanding at December 31, 1993. Such lien and Edison's title to its properties are subject to the terms of franchises, licenses, easements, leases, permits, contracts and other instruments under which properties are held or operated, certain statutes and governmental regulations, liens for taxes and assessments, and liens of the trustees under the Trust Indenture. In addition, such lien and Edison's title to its properties are subject to certain other liens, prior rights and other encumbrances, none of which, with minor or unsubstantial exceptions, affects Edison's right to use such properties in its business, unless the matters with respect to Edison's interest in the Four Corners Project and the related easement and lease referred to below may be so considered.\nEdison's rights in the Four Corners Project, which is located on land of The Navajo Tribe of Indians under an easement from the United States and a lease from The Navajo Tribe, may be subject to possible defects. These defects include possible conflicting grants or encumbrances not\nascertainable because of the absence of, or inadequacies in, the applicable recording law and the record systems of the Bureau of Indian Affairs and The Navajo Tribe, the possible inability of Edison to resort to legal process to enforce its rights against The Navajo Tribe without Congressional consent, possible impairment or termination under certain circumstances of the easement and lease by The Navajo Tribe, Congress or the Secretary of the Interior and the possible invalidity of the Trust Indenture lien against Edison's interest in the easement, lease and improvements on the Four Corners Project.\nEL PASO ELECTRIC COMPANY (\"EL PASO\") BANKRUPTCY\nEl Paso owns and leases a combined 15.8% interest in Palo Verde and owns a 7% interest in Units 4 and 5 of the Four Corners Project. In January 1992, El Paso filed a voluntary petition to reorganize under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the Western District of Texas. Pursuant to an agreement among the Palo Verde participants and an agreement among the participants in Four Corners Units 4 and 5, each participant is required to fund its proportionate share of operation and maintenance, capital and fuel costs of Palo Verde and Four Corners Units 4 and 5, respectively. The participation agreements provide that if a participant fails to meet its payment obligation, each non-defaulting participant must pay its proportionate share of the payments owed by the defaulting participant. In February 1992, the bankruptcy court approved a stipulation between El Paso and APS, as the operating agent of Palo Verde, pursuant to which El Paso agreed to pay its proportionate share of all Palo Verde invoices delivered to El Paso after February 6, 1992. El Paso agreed to make these payments until such time, if ever, the bankruptcy court orders El Paso's rejection of the participation agreement governing the relations among the Palo Verde participants. The stipulation also specifies that approximately $9,200,000 of El Paso's Palo Verde payment obligations invoiced prior to February 7, 1992, are to be considered \"pre-petition\" general unsecured claims of the other Palo Verde participants.\nOn August 27, 1993, El Paso filed with the bankruptcy court an Amended Plan of Reorganization and Disclosure Statement (\"Amended Plan\"). The Amended Plan, which is subject to numerous conditions, proposes a reorganization pursuant to which El Paso will become a wholly- owned subsidiary of Central and South West Corporation. The Amended Plan also proposes, among other things, (i) rejection of the El Paso leases and reacquisition by El Paso of the Palo Verde interests represented by the leases, and (ii) El Paso's assumption of the Four Corners Operating Agreement and the Arizona Nuclear Power Project Participation Agreement. On November 19, 1993, the bankruptcy court approved a Cure and Assumption Agreement among El Paso and the Palo Verde Participants, in which El Paso shall (i) assume the Participation Agreement on the date the Amended Plan becomes effective, and (ii) cure its pre-petition default on the date the court approves the Order Confirming El Paso's Amended Plan. On December 8, 1993, the bankruptcy court confirmed El Paso's Amended Plan. Effectiveness of the Amended Plan is still subject to approval by numerous state and federal agencies. El Paso estimates that it will take about 18 months to obtain all necessary regulatory approvals.\nCONSTRUCTION PROGRAM AND CAPITAL EXPENDITURES\nIn April 1992, the CPUC decided how Edison and other California utilities will meet their resource needs through 2002. The CPUC ruled that Edison must obtain 624 MW of new generation through competitive bidding. The decision required that 175 MW be reserved for renewables, such as wind, hydro and geothermal. The competitive bid solicitation was issued in August 1993 and suspended in December 1993 due to the discovery\nof a bidding anomaly that raised prices above those allowed by the rules of the solicitation. After the suspension, Edison requested the solicitation be cancelled because current forecasts show that Edison has no need for additional generating capacity until at least 2005.\nFrom the solicitation results, Edison has estimated that the cost of these resources would be approximately $530,000,000 (present value in 1997 dollars). However, two events have occurred that should reduce Edison's cost exposure resulting from power purchases under this CPUC mandated process. First, on March 15, 1994, Edison and Kenetech Corporation, a potential winning bidder in Edison's solicitation, signed a memorandum of understanding for a wind resource power purchase. Contingent upon CPUC approval, Kenetech, under this proposed agreement, will provide lower cost resources than those potentially awarded through Edison's solicitation. Second, on March 16, 1994, the CPUC issued an interim decision that reduces Edison's solicitation by 25% and gives Edison authority to eliminate the added costs from the bidding anomaly. Although Edison will likely continue to request cancellation of the competitive solicitation, these two events reduce Edison's exposure. The exact amount of this reduction cannot be estimated until the methodology the CPUC intends for implementation of these changes is known.\nCash required by SCEcorp for its capital expenditures totaled $1.26 billion in 1993, $1.24 billion in 1992, and $1.03 billion in 1991. Construction expenditures for the 1994-1998 period are estimated as follows:\nEdison's construction program and related expenditures are continuously reviewed and periodically revised because of changes in estimated system load growth, rates of inflation, receipt of adequate and timely rate relief, the availability and timing of environmental, siting and other regulatory approvals, the scope of modifications required by regulatory agencies, the availability and costs of external sources of capital, the development of new technology and other factors beyond Edison's control.\nSince the completion of San Onofre Units 2 and 3 and Palo Verde Units 1, 2 and 3, construction work in progress has been significantly reduced. The reduction in construction work in progress caused allowance for funds used during construction (\"AFUDC\"), which does not represent current cash income, to decline accordingly. Pre-tax AFUDC represented 5.7% of earnings for 1993.\nIn addition to cash required for construction expenditures for the next five years as discussed above, $1.3 billion is needed to meet requirements for long-term debt maturities, and sinking fund redemption\nrequirements. The majority of these capital requirements are expected to be met by internally generated sources.\nEdison's estimates of cash available for operations for the five years through 1998 assume, among other things, the receipt of adequate and timely rate relief and the realization of its assumptions regarding cost increases, including the cost of capital. Edison's estimates and underlying assumptions are subject to continuous review and periodic revision.\nThe timing, type and amount of all additional long-term financing are also influenced by market conditions, rate relief and other factors, including limitations imposed by Edison's Articles of Incorporation and Trust Indenture.\nNUCLEAR POWER MATTERS\nAlthough higher energy costs will be incurred for replacement generation during any periods the San Onofre and Palo Verde Units are not in operation, substantially all such costs will be included in future ECAC filings. Edison cannot predict what other effects, if any, legislative or regulatory actions may have upon it or upon the future operation of the San Onofre or Palo Verde Units or the extent of any additional costs it may incur as a result thereof, except for those that follow.\nSan Onofre Unit 1\nOn November 30, 1992, Edison discontinued operation of San Onofre Unit 1. The CPUC approved an agreement between Edison and the DRA which allows Edison recovery of its investment of approximately $350,000,000 (after deferred taxes), including an 8.98% rate of return, by August 1996.\nThe agreement does not affect Unit 1's decommissioning, scheduled to start in 2013. The estimated current-dollar decommissioning costs for Unit 1 have been recorded as a liability.\nSan Onofre Units 2 and 3\nIn 1974, the California Coastal Commission, as a condition of the San Onofre Units 2 and 3 coastal permit, established a three-member Marine Review Committee (\"MRC\") to assess the marine environmental effects caused by the Units. In August 1989, the MRC issued its final report which alleged, in part, that San Onofre Units 2 and 3 caused adverse effects to several species of marine life and to the environment.\nBased on the MRC findings, the Coastal Commission in 1991 revised the coastal permit for Units 2 and 3 and required Edison to restore 150 acres of degraded wetlands, construct a 300-acre artificial kelp reef, and install fish behavioral barriers inside the Units' cooling water intake structure. Edison is currently in the process of planning and designing these projects, all of which must receive the approval of the Coastal Commission and state and federal resource and regulatory agencies. Current estimates place Edison's share of these capital costs at about $83,000,000 which is expected to be spent over the next 10 to 12 years.\nPalo Verde Nuclear Generating Station\nOn March 14, 1993, APS, as operating agent, manually shut down Palo Verde Unit 2 as a result of a steam generator tube leak. Unit 2 remained shut down and began its scheduled refueling outage on March 19, 1993.\nAn extensive inspection of the Palo Verde Unit 2 steam generators was performed prior to the unit's return to service on September 1, 1993. APS\ndetermined that intergranular attack\/intergranular stress corrosion cracking was a major contributor to the tube leak. APS is continuing its evaluation of the effects of possible steam generator tube degradation in all three units (six steam generators) and has instituted several avenues of study and corrective action.\nPalo Verde Units 1, 2, and 3 will be operated at reduced power (85%) until the investigation and other associated activities are completed. APS expects to be able to return the units to full power after implementing corrective action.\nNuclear Facility Decommissioning\nEdison's share of costs to decommission nuclear generation facilities is estimated to be $225,500,000 for San Onofre Unit 1; $280,900,000 for San Onofre Unit 2; $365,400,000 for San Onofre Unit 3; $50,200,000 for Palo Verde Unit 1; $49,800,000 for Palo Verde Unit 2; and $55,400,000 for Palo Verde Unit 3. These costs are all in 1993 dollars.\nEdison is currently collecting $104,255,000 annually in rates for its share of decommissioning costs for San Onofre Units 1, 2 and 3 and Palo Verde Units 1, 2 and 3. As of December 31, 1993, Edison's decommissioning trust funds totaled approximately $853,000,000 (market value).\nIn accordance with the Energy Policy Act of 1992, Edison's recorded liability at December 31, 1993, of $72,300,000 represents its share of the estimated costs to decommission three federal nuclear enrichment facilities. This cost is based on San Onofre's and Palo Verde's past purchases of enrichment services and will be paid over 15 years. These costs are expected to be recovered through the ECAC procedure and from participants.\nNuclear Facility Depreciation\nTo reduce Edison nuclear facilities' capital cost effect on future customer rates, Edison has filed for a $75,000,000 per year accelerated recovery of its nuclear investments. To offset the increased cost recovery, Edison proposes to lengthen its recovery period for transmission and distribution assets. This proposal would have no significant effect on customer rates. The CPUC held hearings in October 1993 and Edison expects a decision in mid-1994.\nNuclear Insurance\nEdison carries the maximum insurance coverage reasonably available to protect against losses from damage to its nuclear units and to provide some of its replacement energy costs in the unlikely event of an accident at any of its nuclear units. A description of this insurance is included in Note 10 of \"Notes to Consolidated Financial Statements\" incorporated herein. Although Edison believes an accident at its nuclear units is extremely unlikely, in the event of an accident, regardless of fault, Edison's insurance coverage might be inadequate to cover the losses to Edison. In addition, such an accident could result in NRC action to suspend operation of the damaged unit. Further, the NRC could suspend operation at Edison's undamaged nuclear units and the CPUC and FERC could deny rate recovery of related costs. Such an accident, therefore, could materially and adversely affect the operations and earnings of Edison.\nNUCLEAR WASTE POLICY ACT\nUnder the Nuclear Waste Policy Act of 1982, Edison, acting as agent for the San Onofre participants, has entered into a contract with the DOE for disposal of spent nuclear fuel for San Onofre Units 1, 2 and 3. Under\nthe terms of the contract, Edison is required to pay a quarterly fee of one mill per kilowatt hour to the DOE for net nuclear power generated and sold on and after April 7, 1983. During 1992, DOE implemented a refund process for overpayments to the Nuclear Waste Fund through credits against future quarterly payments.\nFor generation prior to April 7, 1983, the contract required payment of a one-time fee equivalent to one mill per kilowatt hour, plus accrued interest. The obligation for this one-time fee was being discharged by equal quarterly payments. In October 1992 and 1993, DOE credits arising from overpayments to the Nuclear Waste Fund were also applied to this obligation. In October 1993, this obligation was paid in full. Expenses associated with the disposal of spent nuclear fuel are recovered through the ECAC procedure and from participants.\nCOMPETITIVE ENVIRONMENT\nUnder various acts of Congress, federal power projects have been constructed in California and neighboring states. Municipally owned utilities, cooperative utilities and other public bodies have certain preferences over investor-owned utilities in the purchase of electric power provided by federally funded power projects and, in addition, have certain preferences over investor-owned utilities in connection with the acquisition of licenses to build and\/or operate hydroelectric power plants. Any energy which is or may be generated at these projects and transmitted for the account of such other utilities and public bodies over present or future government or utility-owned lines into the territory or markets served by Edison would result in a loss of sales by Edison.\nUnder the laws of California, utility districts may include incorporated as well as unincorporated territory. Such districts, as well as municipalities, have the right to construct, purchase or condemn and operate electric facilities. In addition, when a city owning an electric system annexes adjacent unincorporated territory which Edison has previously served, Edison may experience a loss of customers.\nEdison's construction permits for San Onofre Units 2 and 3 contain certain conditions which require Edison (i) on timely notice, to permit privately or publicly owned utilities, including Edison's resale customers within or adjacent to Edison's service area, to participate on mutually agreeable terms in future nuclear units initiated by Edison, and (ii) to interconnect and coordinate reserves with, furnish emergency service to, sell bulk power to and purchase bulk power from, and provide certain transmission services for such utilities. Edison has also entered into agreements with certain of its resale customers which contemplate their possible participation in jointly owned generating projects initiated by Edison, and the integration of power sources acquired by each such customer, including the dispatching, reserve sharing, partial power-supply requirements and transmission service required in connection with such integrated operations. Pursuant to these agreements, two resale customers exercised an option to participate in Edison's ownership entitlement in San Onofre Units 2 and 3. Effective November 1977, Edison sold an undivided 3.45% interest in San Onofre Units 2 and 3 to these two resale customers for approximately $90,000,000. Effective September 1981, a further 1.5% interest in Units 2 and 3 was sold to one of these resale customers for approximately $50,000,000. In addition, since 1986, six of Edison's resale customers have acquired ownership interests in other generating sources and made purchases from other utilities in such amounts as to decrease Edison's revenues from resale cities from 4.4% to 1.6% of sales. This revenue loss has not had a substantial effect on Edison's business and opportunities.\nPURPA has fostered the entry of nonutility companies into the electric generation business. Under PURPA, nonutility power producers are allowed to construct QFs for the production of electricity from certain alternative or renewable energy resources, and utilities are required to purchase the electrical output of these QFs at prices set pursuant to state regulations and, in the future, pursuant to a CPUC- approved competitive bidding process.\nEdison is required by contracts and state regulation to continue to buy power generated by QFs, under long-term contracts negotiated earlier at prices that are most often higher than the power Edison can produce or purchase from other sources. Edison is presently managing contracts with QF developers to reduce ratepayer impacts and to more closely match Edison's needs with proposed development. Further, certain operators of QFs sell power they produce to large industrial and commercial customers of Edison from projects located on-site. Further loss of sales from such customers may be aggravated in the future as a result of attempts by these producers to gain access to a utility's transmission lines to sell power directly to retail customers now being served by that utility--an activity called \"retail wheeling.\" Edison opposes any attempt to impose mandatory wheeling to Edison's retail customers.\nIn late 1992, Congress passed the Energy Policy Act of 1992. This Act creates a new class of Exempt Wholesale Generators (\"EWGs\") who are exempt from the restrictions otherwise imposed on utilities under the Public Utility Holding Company Act. The effect of this exemption is to facilitate the development of more independent third-party generators potentially available to satisfy utilities' needs for increased power supplies. However, unlike purchases from QFs, utilities have no statutory obligation to purchase power from EWGs. Furthermore, EWGs are precluded from making direct sales to retail electricity customers.\nThe Energy Policy Act also broadens the authority of the FERC to require a utility to transmit power produced by a wholesale producer to another utility. Municipal utilities are eligible applicants for such transmission service. However, the FERC is precluded from ordering a utility to transmit power from another entity directly to a retail customer. The authority of states to order such retail wheeling is unclear; but, to the extent such authority exists, it is explicitly preserved by the Energy Policy Act.\nITEM 3.","section_3":"ITEM 3. LEGAL PROCEEDINGS\nANTITRUST MATTERS\nIn 1983, a public power utility, the City of Vernon, filed a complaint against Edison in the United States District Court for the Central District of California, alleging violation of certain antitrust laws. The complaint alleged that Edison engaged in anticompetitive behavior by restricting access to Edison transmission facilities and foreclosing Vernon from purchasing bulk power supplies from other sources. Vernon also alleged that Edison unlawfully designed its resale rates and claimed damages of approximately $60,000,000 before trebling. Edison filed three motions for Summary Judgment and the District Court entered final judgment in favor of Edison in August 1990. In October 1990, Vernon appealed the District Court decision to the Ninth Circuit Court of Appeals. In February 1992, the Court of Appeals affirmed the District Court's rulings on all issues but one, involving injunctive relief only, and remanded that issue back to the District Court for consideration. In July 1992, Vernon filed a writ of certiorari to the U.S. Supreme Court which was denied. On July 13, 1993, Edison and Vernon settled the remaining issue regarding injunctive relief. The settlement is part of a broader settlement of regulatory issues that was approved by the FERC on October 27, 1993.\nOn January 31, 1991, California Energy Company (\"CEC\") filed a lawsuit in United States District Court for the Northern District of California against SCEcorp, Edison, several nonutility subsidiaries, selected individuals, and Kidder, Peabody & Co. CEC alleged antitrust violations of the Sherman Act, conspiracy to interfere with contractual relations and common law unfair competition. CEC asked for treble damages (as proved at trial) for antitrust violations and compensatory and punitive damages for the pendent claims. Furthermore, CEC requested that SCEcorp divest itself of Mission Energy. On April 30, 1993, Edison and CEC reached a settlement. In June 1993, a nonutility affiliate and CEC settled a related lawsuit concerning construction of CEC's power plants. Pursuant to the settlements, the case was dismissed.\nFurther terms of the CEC settlement relate to litigation involving Mission Power Engineering Company in connection with a construction contract. In June 1990, Mission Power filed suit to foreclose on mechanics liens against CEC, Coso Finance Partners, Coso Energy Developers, Coso Power Developers (\"Coso Entities\") and Credit Suisse in California Superior Court in Inyo County. Mission Power claimed damages in excess of $79,000,000 and alleged breach of contract, fraud and negligent misrepresentation. In December 1990, the Coso Entities filed a cross- complaint against Mission Power and The Mission Group alleging $97,000,000 plus punitive damages for breach of contract, negligence, and misrepresentations. On June 10, 1993, the parties announced they had reached a settlement of all outstanding disputes regarding construction of the Coso Geothermal Project. Under the settlement, Coso Partnerships made a net payment of $20,000,000 to Mission Power. This was less than the amount of revenue Mission Power had previously recorded, resulting in a one-time charge of $11,000,000 after tax for the second quarter.\nTransphase Systems, Inc. filed a lawsuit on May 3, 1993, in the United States District Court for the Central District of California against Edison and San Diego Gas & Electric Company (\"SDG&E\"). The complaint alleged that Transphase was competitively disadvantaged because it could not directly access the demand side management funds Edison collects from its ratepayers to fund conservation and demand side management activities and that the utilities willfully acquired and maintain monopoly power in the energy conservation industry. The complaint sought $50,000,000 in damages before trebling. Edison filed a motion to dismiss the complaint on the grounds that it was without merit. The court granted Edison's motion on October 7, 1993, and denied plaintiffs the opportunity to replead the case. Plaintiffs have appealed to the Ninth Circuit Court of Appeals.\nENVIRONMENTAL LITIGATION\nOn November 8, 1990, an environmental organization and two individuals filed a lawsuit against Edison in United States Federal District Court for the Southern District of California. The lawsuit alleges Edison's operation of San Onofre Units 2 and 3 is in violation of its National Pollutant Discharge Elimination System permits. The basis for the allegations was a report prepared for the California Coastal Commission on the marine environmental effects of the generating station. The plaintiffs requested that the Court enjoin operation of Units 2 and 3, impose civil penalties, and order Edison to repair the alleged damage to the marine environment. After mediation by the court, the parties agreed on a settlement that includes: (i) $2,000,000 in wetlands research which will be undertaken by the Pacific Estuarine Research Laboratory at San Diego State University; (ii) $7,500,000 in additional wetland restoration within the San Dieguito River Valley; (iii) a $5,500,000, 10 year, Marine Education Program which will be based at Edison's Redondo Generating Station; and (iv) $1,400,000 in attorney's fees. The court approved the settlement on June 15, 1993.\nOn September 23, 1993, the California Department of Toxic Substances Control (\"DTSC\") issued a Report of Violation to Edison, alleging various hazardous waste violations of the California Health & Safety Code at several Edison facilities. Edison is currently in settlement negotiations with DTSC regarding these alleged violations and tentatively has reached an agreement in principle for settlement in the amount of $1,900,000.\nSAN ONOFRE PERSONAL INJURY LITIGATION\nIn 1993, a former NRC inspector who was assigned to San Onofre in 1985 and 1986 filed a lawsuit against Edison, SDG&E and a fuel rod manufacturer in Los Angeles County Superior Court, Central District. The case was subsequently transferred to the Federal District Court for the Southern District of California. The inspector claimed that exposure to radioactive materials at the plant caused her leukemia. Plant records showed that the inspector's exposure to radiation was well below NRC regulatory levels. Plaintiff nevertheless alleged that she was exposed to radioactive fuel particles, that this caused a radiation exposure above the NRC levels and that this exposure was a legal cause for her illness. Plaintiff sought compensatory and punitive damages. The defendants denied having liability for plaintiff's illness.\nA jury trial began on January 4, 1994. In closing arguments at the end of the trial, plaintiff's counsel requested damages between $4,000,000 and $4,500,000 for medical costs and economic losses and asked for three to five times that amount for pain and suffering compensatory damages. After deliberations, the jury reported that it was \"hung\" and could not reach a unanimous verdict on the threshold question of whether plaintiff was exposed to radiation levels above the NRC-defined levels. (A 7-2 majority of the jury had concluded that plaintiffs exposure did exceed these levels). Finding itself hung on the exposure question, the jury did not decide the other questions regarding causation, the amount of compensatory damages and whether Edison's conduct warranted punitive damages. If the jury had found that punitive damages should be assessed, the trial would have resumed to decide the amount of such damages.\nOn February 8, 1994, the trial judge declared a mistrial because of the hung jury. The second trial was scheduled to begin on March 15, 1994. On March 14, 1994, the case was settled. The amount of the settlement payment will not have a material adverse effect on Edison's net income.\nITEM 4.","section_4":"ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS\nInapplicable.\nPursuant to Form 10-K's General Instruction (\"General Instruction\") G(3), the following information is included as an additional item in Part I:\nEXECUTIVE OFFICERS OF THE REGISTRANT (1)(2)\nSCECORP\n- --------------------- (1) The Executive Officers of SCEcorp include the Chairman of the Board and Chief Executive Officer, the elected Vice Presidents and the Secretary of SCEcorp and Edison as well as the Chief Executive Officers and Presidents, Executive Vice Presidents and Senior Vice Presidents of Mission Energy, Mission Financial, and Mission Land (collectively \"The Mission Companies\") all of whom may be deemed policy makers of SCEcorp. (2) Effective March 1, 1993, Michael R. Peevey retired from his position as President of SCEcorp.\nNone of SCEcorp's elected executive officers are related to each other by blood or marriage. As set forth in Article IV of SCEcorp's Bylaws, the elected officers of SCEcorp are chosen annually by and serve at the pleasure of SCEcorp's Board of Directors and hold their respective offices until their resignation, removal, other disqualification from service, or until their respective successors are elected. Each of the elected executive officers of SCEcorp holds an identical position with Edison except for Alan J. Fohrer, who does not hold the Treasurer position at Edison and has been actively engaged in the business of Edison for more than five years except for Bryant C. Danner. Those officers who have not held their present position with SCEcorp and\/or Edison for the past five years had the following business experience during that period:\n(1) Prior to leaving the law firm of Latham & Watkins, Bryant C. Danner was in the firm's environmental department. (2) This entity is not a parent, subsidiary or other affiliate of Edison.\nEDISON\n- --------------- (1) Effective March 1, 1993, Michael R. Peevey retired from his position as President of Edison, and Harry E. Morgan, Jr. retired from his position as Vice President of Edison and Site Manager of San Onofre. At December 31, 1993, Charles B. McCarthy, Jr. was Senior Vice President of Edison; however, effective January 1, 1994, Mr. McCarthy retired from this position. (2) John E. Bryson, Bryant C. Danner, Richard K. Bushey and Kenneth S. Stewart also hold the same positions with SCEcorp. Alan J. Fohrer holds the office of Senior Vice President, Treasurer and Chief Financial Officer of SCEcorp. SCEcorp is the parent holding company of Edison.\nNone of Edison's executive officers are related to each other by blood or marriage. As set forth in Article IV of Edison's Bylaws, the officers of Edison are chosen annually by and serve at the pleasure of Edison's Board of Directors and hold their respective offices until their resignation, removal, other disqualification from service, or until their respective successors are elected. All of the executive officers have been actively engaged in the business of Edison for more than five years except for Bryant C. Danner and Margaret H. Jordan. Those officers who have not held their present position for the past five years had the following business experience during that period:\n- ---------------- (1) Prior to leaving the law firm of Latham & Watkins, Bryant C. Danner was in the firm's environmental department. (2) As Vice President of the Kaiser Foundation Health Plan of Texas, Margaret H. Jordan was responsible for serving over 124,000 members in 10 multispecialty medical offices in the Dallas\/Fort Worth area. (3) This entity is not a parent, subsidiary or other affiliate of Edison.\nTHE MISSION COMPANIES\n____________\n(1) Effective August 1, 1993, James S. Pignatelli resigned from his position as President and Chief Executive Officer of Mission Energy. Alan J. Fohrer served as interim Vice Chairman and interim Chief Executive Officer of Mission Energy prior to Edward R. Muller's appointment as President and Chief Executive Officer. John A. Moriarty served as Senior Vice President of Mission Land until April 15, 1993; Mr. Moriarty currently serves as Vice President of Mission Land.\nNone of The Mission Companies' executive officers are related to each other by blood or marriage. As set forth in Article IV of their respective Bylaws, the officers of The Mission Companies are chosen annually by and serve at the pleasure of the respective Boards of Directors and hold their respective offices until their resignation, removal, other disqualification from service, or until their respective successors are elected. All of the executive officers have been actively engaged in the business of the respective Mission Companies and\/or SCEcorp and Edison for more than five years except for Edward R. Muller, James V. Iaco, Jr., S. Daniel Melita and Charles W. Johnson. Those officers who have not held their present position for the past five years had the following business experience during that period:\n____________\n(1) Edward R. Muller served as Chief Financial Officer and General Counsel (the second most senior officer) of Whittaker Corporation, a company during the period from 1992 to 1993 engaged in various aerospace businesses. (2) Edward R. Muller served as Chief Administrative Officer and General Counsel (the third most senior officer) of Whittaker Corporation, a company during the period from 1988 to 1992 engaged in various aerospace, chemical and biotechnology businesses and which underwent significant restructurings, including a leveraged recapitalization and a tax-free spin off. (3) James V. Iaco, Jr. was elected Senior Vice President and Chief Financial Officer of Mission Energy Company effective January 24, 1994. (4) As President of James V. Iaco & Associates, James V. Iaco, Jr. provided consultant services specializing in mergers and acquisitions, restructurings, financing crisis management and other management services. (5) As an independent business consultant, James V. Iaco, Jr. completed the disposition of subsidiaries of Phoenix Distributors, Inc. (\"Phoenix\"). Phoenix was one of the largest independent industrial gas and welding supply distributor in the United States. Mr. Iaco acted as the Company's chief financial officer, completing the refinancing and restructuring of the remaining operation of the Company. (6) James V. Iaco, Jr. served as an independent business consultant primarily engaged as the chief operating officer of a major developer of time-share resort properties at the request of the shareholders. (7) As Senior Vice President, Chief Financial Officer, James V. Iaco, Jr. developed debt reduction and restructuring plans.\n(8) James V. Iaco, Jr. served as Senior Vice President, Chief Financial Officer and Treasurer at MAXXAM, Inc., a Fortune 200 company engaged in aluminum production, forest products operations and real estate development. (9) As Director International Business Development, S. Daniel Melita planned and implemented international marketing and sales strategies for all business units and was responsible for selecting team partners and establishing joint venture companies. (10) As Vice President, International Operations of EBASCO Constructors, Inc.\/EBASCO Overseas Corporation, S. Daniel Melita was responsible for all overseas activities including operations and business development, consulting construction management and lump sum turn key construction. (11) As President, Charles W. Johnson directed all real estate operations and business combinations which included direct development, joint ventures and syndications. (12) As Executive Vice President, Charles W. Johnson directed all real estate operations where Glenfed had made a direct equity investment. This included August Financial Corporation, Glenfed Development Corporation and Glenfed Properties. (13) This entity is not a parent, subsidiary or other affiliate of SCEcorp.\nPART II\nITEM 5.","section_5":"ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS\nInformation responding to Item 5 is included in SCEcorp's Annual Report to Shareholders for the year ended December 31, 1993, (\"Annual Report\") under \"Quarterly Financial Data\" on page 38 and under \"Shareholder Information\" on page 41, and is incorporated by reference pursuant to General Instruction G(2). The number of Common Stock shareholders of record was 140,600 on March 4, 1994. Additional information concerning the market for SCEcorp's Common Stock is set forth on the cover page hereof.\nITEM 6.","section_6":"ITEM 6. SELECTED FINANCIAL DATA\nInformation responding to Item 6 is included in the Annual Report under \"Selected Financial and Operating Data: 1989-1993\" on page 40, and is incorporated herein by reference pursuant to General Instruction G(2).\nITEM 7.","section_7":"ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION\nInformation responding to Item 7 is included in the Annual Report under \"Management's Discussion and Analysis\" on pages 21 through 29 and is incorporated herein by reference pursuant to General Instruction G(2).\nITEM 8.","section_7A":"","section_8":"ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA\nCertain information responding to Item 8 is set forth after Item 14 in Part IV. Other information responding to Item 8 is included in the Annual Report on pages 23 through 40 and is incorporated herein by reference pursuant to General Instruction G(2).\nITEM 9.","section_9":"ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE\nNone.\nPART III\nITEM 10.","section_9A":"","section_9B":"","section_10":"ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT\nInformation concerning executive officers of SCEcorp is set forth in Part I in accordance with General Instruction G(3), pursuant to Instruction 3 to Item 401(b) of Regulation S-K. Other information responding to Item 10 is included in the Joint Proxy Statement (\"Proxy Statement\") filed with the Commission in connection with SCEcorp's Annual Meeting to be held on April 21, 1994, under the heading, \"Election of Directors of SCEcorp and Edison,\" and is incorporated herein by reference pursuant to General Instruction G(3).\nITEM 11.","section_11":"ITEM 11. EXECUTIVE COMPENSATION\nInformation responding to Item 11 is included in the Proxy Statement under the heading \"Election of Directors of SCEcorp and Edison,\" and is incorporated herein by reference pursuant to General Instruction G(3).\nITEM 12.","section_12":"ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT\nInformation responding to Item 12 is included in the Proxy Statement under the headings \"Election of Directors of SCEcorp and Edison,\" and \"Stock Ownership of Certain Shareholders\" and is incorporated herein by reference pursuant to General Instruction G(3).\nITEM 13.","section_13":"ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS\nInformation responding to Item 13 is included in the Proxy Statement under the heading \"Election of Directors of SCEcorp and Edison,\" and is incorporated herein by reference pursuant to General Instruction G(3).\nPART IV\nITEM 14.","section_14":"ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K\n(A)(1) FINANCIAL STATEMENTS\nThe following items contained in the 1993 Annual Report to Shareholders are incorporated by reference in this report.\nManagement's Discussion and Analysis of Results of Operations and Financial Condition Responsibility for Financial Reporting Report of Independent Public Accountants Consolidated Statements of Income -- Years Ended December 31, 1993, 1992 and 1991 Consolidated Balance Sheets -- December 31, 1993, and 1992 Consolidated Statements of Cash Flows -- Years Ended December 31, 1993, 1992 and 1991 Consolidated Statements of Retained Earnings -- Years Ended December 31, 1993, 1992 and 1991 Notes to Consolidated Financial Statements\n(2) REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS AND SCHEDULES SUPPLEMENTING FINANCIAL STATEMENTS\nThe following documents may be found in this report at the indicated page numbers.\nSchedules I through XIII, inclusive, except those referred to above, are omitted as not required or not applicable.\n(3) EXHIBITS\nSee Exhibit Index on page 50 of this report.\n(B) REPORTS ON FORM 8-K\nOctober 12, 1993 Item 5: Other Events: Termination of Mission Energy Company Project in Mexico\nOctober 27, 1993\nItem 5: Other Events: Earnings Report\nItem 7: Financial Statements: Pro Forma Financial Information and Exhibits\nREPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SUPPLEMENTAL SCHEDULES\nTo SCEcorp:\nWe have audited, in accordance with generally accepted auditing standards, the consolidated financial statements included in the 1993 Annual Report to Shareholders of SCEcorp, incorporated by reference in this Form 10-K, and have issued our report thereon dated February 4, 1994. Our audits of the consolidated financial statements were made for the purpose of forming an opinion on those basic consolidated financial statements taken as a whole. The supplemental schedules listed in Part IV of this Form 10-K which are the responsibility of SCEcorp's management are presented for purposes of complying with the Securities and Exchange Commission's rules and regulations, and are not part of the basic consolidated financial statements. These supplemental schedules have been subjected to the auditing procedures applied in the audits of the basic consolidated financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole.\nARTHUR ANDERSEN & CO. ARTHUR ANDERSEN & CO.\nLos Angeles, California February 4, 1994\nSCECORP\nSCHEDULE III -- CONDENSED FINANCIAL INFORMATION OF PARENT\nCONDENSED BALANCE SHEETS\nCONDENSED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1993, 1992, AND 1991\nSCECORP\nSCHEDULE III--CONDENSED FINANCIAL INFORMATION OF PARENT (CONTINUED)\nCONDENSED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1993, 1992, AND 1991\nSCECORP\nSCHEDULE V -- PROPERTY, PLANT AND EQUIPMENT\nFOR THE YEAR ENDED DECEMBER 31, 1993\n_______________ (a) Reflects transfers to plant in service, which are net of additions to construction work in progress.\n(b) Reflects prior-year adjustments.\nSCECORP\nSCHEDULE V -- PROPERTY, PLANT AND EQUIPMENT\nFOR THE YEAR ENDED DECEMBER 31, 1992\n_______________ (a) Reflects transfers to plant in service, which are net of additions to construction work in progress.\n(b) Reflects removal from service of nuclear generating plant under an agreement reached with the California Public Utilities Commission.\nSCECORP\nSCHEDULE V -- PROPERTY, PLANT AND EQUIPMENT\nFOR THE YEAR ENDED DECEMBER 31, 1991\n____________ (a) Reflects transfers to plant in service, which are net of additions to construction work in progress.\n(b) Restated to include consolidated statements from affiliates.\nSCECORP\nSCHEDULE VI -- ACCUMULATED DEPRECIATION AND AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT\nFOR THE YEAR ENDED DECEMBER 31, 1993\n____________ (a) Includes removal costs related to facilities retired, damage claims and relocation costs collected from others, and various other adjustments of depreciation and amortization.\nSCECORP\nSCHEDULE VI -- ACCUMULATED DEPRECIATION AND AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT\nFOR THE YEAR ENDED DECEMBER 31, 1992\n____________ (a) Includes removal costs related to facilities retired, damage claims and relocation costs collected from others, and various other adjustments of depreciation and amortization.\n(b) Reflects removal from service of nuclear generating plant under an agreement reached with the California Public Utilities Commission.\nSCECORP\nSCHEDULE VI -- ACCUMULATED DEPRECIATION AND AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT\nFOR THE YEAR ENDED DECEMBER 31, 1991\n____________ (a) Includes removal costs related to facilities retired, damage claims and relocation costs collected from others, and various other adjustments of depreciation and amortization.\n(b) Restated to include consolidated statements from affiliates.\nSCECORP\nSCHEDULE VII -- GUARANTEES OF SECURITIES OF OTHER ISSUERS\nFOR THE YEAR ENDED DECEMBER 31, 1993 (IN THOUSANDS)\nSCECORP\nSCHEDULE VIII -- VALUATION AND QUALIFYING ACCOUNTS\nFOR THE YEAR ENDED DECEMBER 31, 1993\n________________ (a) Accounts written off, net. (b) Represents final settlement with the California Public Utilities Commission's Division of Ratepayer Advocates regarding affiliated company power purchases. (c) Represents new estimate based on actual billings. (d) Represents amounts paid. (e) Primarily represents transfers from the accrued paid absence allowance account for required additions to the comprehensive disability plan accounts. (f) Includes pension payments to retired employees, amounts paid to active employees during periods of illness and the funding of certain pension benefits. (g) Amounts charged to operations that were not covered by insurance.\nSCECORP\nSCHEDULE VIII -- VALUATION AND QUALIFYING ACCOUNTS\nFOR THE YEAR ENDED DECEMBER 31, 1992\n____________ (a) Includes reserve for net realizable value write-down. (b) Accounts written off, net. (c) Represents reserve addition for the settlement with the California Public Utilities Commission's Division of Ratepayer Advocates regarding affiliated company power purchases. (d) Represents the amortization of the difference between the nominal value and the present value. (e) Represents the estimated long-term costs to be incurred and recovered through rates over 15 years; reclassified from account 253. (f) Represents an additional estimated liability established for environmental cleanup costs expected to be incurred and recovered through rates in future years. (g) Amount reclassified to Account 253, other deferred credits. (h) Primarily represents transfers from the accrued paid absence allowance account for required additions to the comprehensive disability plan accounts. (i) Includes pension payments to retired employees, amounts paid to active employees during periods of illness and the funding of certain pension benefits. (j) Amounts charged to operations that were not covered by insurance.\nSCECORP\nSCHEDULE VIII -- VALUATION AND QUALIFYING ACCOUNTS\nFOR THE YEAR ENDED DECEMBER 31, 1991\n____________ (a) Includes reserve for net realizable value write-down. (b) Accounts written off, net. (c) Represents reserve addition for a proposed settlement with the California Public Utilities Commission's Division of Ratepayer Advocates regarding affiliated company power purchases. (d) Represents an estimated minimum liability established for environmental cleanup costs expected to be incurred and recovered through rates in future years. (e) Primarily represents transfers from the accrued paid absence allowance account for required additions to the comprehensive disability plan accounts. (f) Includes pension payments to retired employees, amounts paid to active employees during periods of illness and the funding of certain pension benefits. (g) Amounts charged to operations that were not covered by insurance.\nSCECORP\nSCHEDULE IX -- SHORT-TERM BORROWINGS\nFOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1993\n_____________ (a) Average amount outstanding during the period is computed by dividing the total of daily outstanding principal balances by 365. (b) Weighted-average interest rate during the period is computed by dividing the total interest expense by the average amount outstanding. (c) Under credit agreements with commercial banks which allow SCEcorp to refinance short-term borrowings on a long-term basis, borrowings of $252,000,000 as of December 31, 1993, $245,000,000 as of December 31, 1992, and $333,000,000 as of December 31, 1991, have been reclassified as long-term debt on the Consolidated Balance Sheet in the 1993 Annual Report.\nSCECORP\nSCHEDULE X -- SUPPLEMENTARY INCOME STATEMENT INFORMATION\nFOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1993\n____________ Note: Depreciation and maintenance expenses appear on the Consolidated Statements of Income. Royalties paid and advertising costs included in Other Operating Expenses are less than 1% of total operating revenue.\nSCECORP\nSCHEDULE XIII -- OTHER INVESTMENTS\nDECEMBER 31, 1993 (IN THOUSANDS)\n____________ (a) Market value is assumed to equal current unrecovered investment less deferred taxes.\nSIGNATURES\nPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.\nSCEcorp\nBy W. J. Scilacci -------------------------------- (W. J. Scilacci, Assistant Treasurer)\nDate: March 17, 1994\nPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.\nBy W. J. Scilacci --------------------------------------- (W. J. Scilacci, Attorney-in-Fact)\nEXHIBIT INDEX\nEXHIBIT INDEX\nEXHIBIT INDEX\nEXHIBIT INDEX\nEXHIBIT INDEX\n* Incorporated by reference pursuant to Rule 12b-32.","section_15":""}
{"filename":"818145_1993.txt","cik":"818145","year":"1993","section_1":"Item 1. Business\nThe principal objectives of Polaris Aircraft Income Fund IV (PAIF-IV or the Partnership) are to purchase and lease used commercial jet aircraft in order to provide quarterly distributions of cash from operations, to maximize the residual values of aircraft upon sale and to protect Partnership capital through experienced management and diversification. PAIF-IV was organized as a California limited partnership on June 27, 1984 and will terminate no later than December 2020.\nPAIF-IV has many competitors in the aircraft leasing market, including airlines, aircraft leasing companies, other limited partnerships, banks and several other types of financial institutions. This market is highly competitive and there is no single competitor who has a significant influence on the industry. In addition to other competitors, the general partner, Polaris Investment Management Corporation (PIMC), and its affiliates, including Polaris Aircraft Leasing Corporation (PALC), Polaris Holding Company (PHC) and GE Capital Corporation (GE Capital), acquire, lease, finance and sell aircraft for their own accounts and for existing aircraft leasing programs sponsored by them. Accordingly, in seeking to re-lease and sell its aircraft, the Partnership may be in competition with the general partner and its affiliates.\nA brief description of the aircraft owned by the Partnership is set forth in Item 2, on page 4. The following table describes the material terms of the Partnership's leases to American Trans Air, Inc. (ATA) and Continental Airlines, Inc. (Continental) as of December 31, 1993:\n(1) These aircraft were formerly leased to USAir, Inc. (USAir) through December 1992. The lease rate is approximately 45% of the prior lease rate. The lease includes an eleven month rent abatement period, beginning on the delivery dates in February and March 1993. The ATA lease also specifies that the Partnership incur certain maintenance costs not to exceed approximately $817,000 and, in addition, the Partnership may finance certain aircraft hushkits at an estimated cost of approximately $5.0 million, which will be partially recovered with interest through payments from ATA over the lease terms. The Partnership loaned $1,164,800 to ATA in 1993 to finance the purchase by ATA of two spare engines. As part of the lease transaction, ATA transferred unencumbered title to two of its Boeing\n727-100 aircraft to the Partnership in April and May 1993. One of the aircraft was sold as discussed in Item 7 and the Partnership is remarketing the second aircraft for sale or lease.\n(2) The Continental leases were modified in 1991; the leases for the Boeing 727-200 aircraft were extended for ten months beyond the initial lease expiration date in June 1993 at approximately 55% of the original lease rates. Continental may terminate the leases for these aircraft at the earlier of April 1994 or 60,000 cycles. The leases for the DC-9-30 aircraft were extended for 36 months beyond the initial lease expiration date in June 1993 at approximately 79% of the original lease rates. The Partnership also agreed to pay for certain aircraft maintenance, modification and refurbishment costs, expected not to exceed approximately $4.9 million, a portion of which will be recovered with interest through payments from Continental over the extended lease terms.\n(3) The rental rate during the renewal term remains the same as the current rate.\nThe Partnership also owns one Boeing 737-200 and one Boeing 737-200 Advanced aircraft formerly leased to Britannia Airways Limited (Britannia), one Boeing 737-200 and three Boeing 737-200 Advanced aircraft formerly leased to Thomson Overseas Finance N.V. (T.O.F.) and subleased to Britannia, and two Boeing 727- 100 aircraft transferred from ATA as part of the ATA lease transaction (Item 7). The four Boeing 737-200 Advanced aircraft were re-leased to various lessees in February 1994 and one of the Boeing 727-100 aircraft was sold in February 1994 as discussed in Item 7. In addition, fourteen Boeing 727-100F aircraft were sold to Emery Aircraft Leasing Corporation (Emery) in 1993 (Item 7).\nApproximately 700 commercial aircraft are currently available for sale or lease. The current surplus has negatively affected market lease rates and fair market values of both new and used aircraft. Current depressed demand for air travel has limited airline expansion plans, with new aircraft orders and scheduled delivery being cancelled or substantially deferred. As profitability has declined, many airlines have opted to downsize, liquidate assets or file for bankruptcy protection. The Partnership has been forced to adjust its estimates of the residual values realizable from its aircraft and aircraft inventory, which resulted in an increase in depreciation expense in 1993, 1992 and 1991, as discussed in Note 3 to the financial statements of the Form 10-K (Item 8). A discussion of the current market condition for the type of aircraft owned by the Partnership follows:\nBoeing 727-100 The Boeing 727 was the first tri-jet introduced into commercial service. The Boeing 727-100 is a short to medium range jet carrying approximately 125 passengers on trips of up to 1,500 miles. The operating characteristics of the aircraft, as well as the cost of aging aircraft and corrosion control Airworthiness Directives (ADs), have significantly reduced the possibility of re-leasing this type of aircraft.\nBoeing 727-100 Freighter The Boeing 727 was the first tri-jet introduced into commercial service. The Boeing 727-100F is a short to medium range jet which has been converted to carry freight on trips of up to 1,500 miles. The high\ncost of complying with Aging Aircraft and Corrosion ADs have contributed to a general decline in the market demand for this aircraft. Additionally, the demand for Boeing 727-100 Freighter aircraft is diminishing as major freight operators look to larger, more efficient aircraft to meet future requirements.\nBoeing 727-200 and Boeing 727-200 Advanced The Boeing 727 was the first tri-jet introduced into commercial service. The Boeing 727 is a short to medium range jet used for trips of up to 1,500 miles. The Boeing 727-200 aircraft was introduced in 1967 and 299 were built between 1967 and 1972. In 1972, Boeing introduced the Boeing 727-200 Advanced model, a higher gross weight version with increased fuel capacity. Noise suppression hardware, commonly known as a \"hushkit,\" has been developed which, when installed on the aircraft, bring the Boeing 727-200 and the Boeing 727-200 Advanced into compliance with Federal Aviation Administration (FAA) Stage 3 noise limits as discussed in the Industry Update section of Item 7. The cost of the hushkit is approximately $1.75 million for the Boeing 727-200 aircraft and approximately $2.5 million for the Boeing 727-200 Advanced aircraft. However, while technically feasible, hushkits may not be cost effective on all aircraft due to the age of some of the aircraft and the time required to fully amortize the additional investment. Certain ADs applicable to all models of the Boeing 727 have been issued to prevent fatigue cracks and control corrosion. Demand for Boeing 727-200 aircraft is currently very soft due to the general oversupply of narrowbody aircraft.\nBoeing 737-200 and Boeing 737-200 Advanced The Boeing 737-200 aircraft was introduced in 1967 and 950 were delivered from 1967 through 1971. In 1971, Boeing introduced the Boeing 737-200 Advanced model, a higher gross weight aircraft with increased fuel capacity as compared to its predecessor, the non-advanced model. This two engine, two pilot aircraft provides operators with 107 to 120 seats, meeting their requirements for economical lift in the 1,100 nautical mile range. A domestic company is selling hushkits which bring Boeing 737s into compliance with Stage 3 noise restrictions at a cost of approximately $3.0 million per aircraft. The market for this type of aircraft, as for all Stage 2 narrowbody aircraft, is currently soft.\nMcDonnell Douglas DC-9-30 The McDonnell Douglas DC-9-10, a short to medium range twin-engine jet, was introduced in 1965. The DC-9-30, which is a stretched version of the DC-9-10, was introduced in 1967. This model offered improved performance when carrying heavier loads. Over 970 DC-9 aircraft were produced and there are approximately 56 operators worldwide. Providing reliable, inexpensive lift, these aircraft fill thin niche markets, mostly in the United States. Hushkits at a cost of approximately $1.6 million are available to bring these aircraft into compliance with Stage 3 requirements. The market for this type of aircraft is currently soft.\nIt is expected that the FAA will continue to propose and adopt ADs similar to those discussed above for the Boeing 737s and Boeing 727s, which will require modifications at some point in the future to prevent fatigue cracks and control corrosion. Likewise demand, and hence value, of the aircraft may be diminished to the extent that the costs of bringing DC-9 aircraft into compliance with any ADs reduces the economic efficiency of operating these aircraft.\nThe general partner believes that the current soft market reflects, in addition to the factors cited above, the airline industry's reaction to the significant expenditures potentially necessary to bring these aircraft into compliance with certain ADs issued by the FAA relating to aging aircraft, corrosion prevention and control and structural inspection and modification.\nItem 2.","section_1A":"","section_1B":"","section_2":"Item 2. Properties\nPAIF-IV owns five McDonnell Douglas DC-9-30 and five Boeing 727-200 aircraft leased to Continental, two Boeing 727-200 Advanced aircraft leased to ATA, one Boeing 737-200 and one Boeing 737-200 Advanced aircraft formerly leased to Britannia, one Boeing 737-200 and three Boeing 737-200 Advanced aircraft formerly leased to T.O.F. (and subleased to Britannia), and two Boeing 727-100 aircraft transferred from ATA as part of the ATA lease transaction (Item 7), one of which was sold in February 1994. Fourteen Boeing 727-100 Freighter aircraft were sold to Emery in 1993 (Item 7). The four Boeing 737-200 Advanced aircraft, formerly leased or sub-leased to Britannia, were re-leased to various lessees in February 1994 (Item 7). The table below describes the Partnership's aircraft portfolio in greater detail:\nCycles Year of As of 10\/31\/93 Aircraft Type Serial Number Manufacture (1)\nBoeing 727-100 18805 1967 44,985 (2) Boeing 727-100 19153 1967 32,254 Boeing 727-200 19513 1968 56,765 Boeing 727-200 19797 1968 56,739 Boeing 727-200 19801 1968 56,748 Boeing 727-200 20387 1970 52,976 Boeing 727-200 20464 1972 47,224 Boeing 727-200A 22001 1980 22,876 Boeing 727-200A 22983 1982 19,450 Boeing 737-200 19711 1969 38,840 Boeing 737-200 20236 1969 39,673 Boeing 737-200A 20807 1974 29,183 Boeing 737-200A 21335 1977 24,088 Boeing 737-200A 21336 1977 24,256 Boeing 737-200A 21694 1978 22,930 McDonnell Douglas DC-9-30 45791 1968 59,016 McDonnell Douglas DC-9-30 47111 1967 61,922 McDonnell Douglas DC-9-30 47112 1967 61,983 McDonnell Douglas DC-9-30 47521 1971 48,321 McDonnell Douglas DC-9-30 47524 1971 48,304\n(1) Cycle information as of 12\/31\/93 is not yet available. (2) Aircraft sold in February 1994.\nItem 3.","section_3":"Item 3. Legal Proceedings\nContinental - On August 23, 1991, the court overseeing Continental's bankruptcy case approved the negotiated agreement reached by Continental and the Partnership as discussed in Note 6 to the financial statements of the 1993 Annual Report to the Securities and Exchange Commission on Form 10-K (Form 10-K) (Item 8). The Bankruptcy Court retains jurisdiction over Continental for the purpose of approving the terms of a stipulated settlement in which Continental would continue to operate certain of the Partnership's aircraft under lease.\nPrudential Securities Incorporated (Prudential) Settlement - On October 21, 1993, the U.S. Securities and Exchange Commission announced a settlement with Prudential of an administrative proceeding alleging violations of the anti-fraud provisions of the federal securities laws. It is our understanding that, in connection with this settlement, Prudential has agreed to establish certain claim resolution procedures and expedited arbitration procedures for persons with claims against Prudential arising from their purchase of various limited partnership interests through Prudential. Information regarding the Prudential settlement and claims procedures may be obtained by calling toll-free 1-800-774- 0700.\nOther Proceedings Item 10 discusses certain actions which have been filed against the general partner in connection with certain public offerings, including that of the Partnership.\nItem 4.","section_4":"Item 4. Submission of Matters to a Vote of Security Holders\nNone.\nPART II\nItem 5.","section_5":"Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters\na) PAIF-IV's units representing assignments of limited partnership interest (Units) are not publicly traded. The Units are held by Polaris Depositary IV on behalf of the Partnership's investors (Unit Holders). Currently there is no market for PAIF-IV's Units and it is unlikely that any market will develop.\nb) Number of Security Holders:\nNumber of Record Holders Title of Class as of December 31, 1993\nLimited Partnership Interest: 16,881\nGeneral Partnership Interest: 1\nc) Dividends:\nThe Partnership distributed cash to partners on a quarterly basis beginning December 1987. Cash distributions to Unit Holders during 1993 and 1992 totalled $41,247,030 and $22,498,380, respectively. Cash distributions per limited partnership unit were $82.50 and $45.00 in 1993 and 1992, respectively.\nItem 6.","section_6":"Item 6. Selected Financial Data\nItem 7.","section_7":"Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations\nPolaris Aircraft Income Fund IV (the Partnership) owns 19 commercial jet aircraft. The portfolio includes five DC-9-30 and five Boeing 727-200 aircraft leased to Continental Airlines, Inc. (Continental), two Boeing 727-200 Advanced aircraft leased to American Trans Air, Inc. (ATA), two Boeing 737-200 Advanced aircraft formerly leased or subleased to Britannia Airways Limited (Britannia) which were leased to GB Airways Limited (GB Airways) in February 1994, and two Boeing 737-200 Advanced aircraft formerly leased or subleased to Britannia, which were leased to TBG Airways Limited (TBG Airways) in February 1994. ATA transferred to the Partnership two Boeing 727-100 aircraft in 1993 as part of the ATA lease transaction. One of these Boeing 727-100 aircraft was sold to Total Aerospace Services, Inc. (Total Aerospace) in February 1994 and one is being remarketed for sale or lease. Also being remarketed for sale or lease are two Boeing 737-200 aircraft formerly leased or subleased to Britannia. Out of an original portfolio of 33 aircraft, one Boeing 727-100 Freighter formerly leased to Emery Aircraft Leasing Corporation (Emery) was declared a casualty loss due to an accident in 1991 and fourteen Boeing 727-100 Freighters were sold to Emery in 1993 as described below.\nPartnership Operations\nThe Partnership recorded net income of $4,226,843, $13,817,873 and $6,168,184, for the years ended December 31, 1993, 1992 and 1991, respectively. Net income per limited partnership unit was $4.62, $22.86 and $6.66, in 1993, 1992 and 1991, respectively. The sharp decrease in net income for 1993 from 1992 is primarily attributable to declines in rental revenue. The Emery aircraft were sold at the termination of the extended leases in January and April 1993, and no further rentals were received, compared to a full year of rental payments in 1992. The Britannia lease extension in June 1993 through October, November and December 1993 were at rates ranging from 53% to 85% of the original rates. In addition, the ATA lease rates are 45% of the previous USAir, Inc. (USAir) rates earned in 1992. Partially offsetting these declines are a full year of interest and rental income recognized on the first Continental rent deferral and three months recognized on the additional deferral. Revenues during 1993 included an aggregate net loss of $492,319 recognized on the sale of aircraft to Emery.\nFurther impacting the lower net income for 1993 were aircraft operating expenses, including maintenance and remarketing costs, necessary to re-lease the 727-200 Advanced aircraft from USAir to ATA.\nDepreciation expense was increased to reflect industry-wide declines in demand, as discussed in the industry update section. Depreciation adjustments for 1993 were approximately $0.6 million in 1993 compared to adjustments of $0.1 million and $3.6 million for 1992 and 1991, respectively.\nCash Distributions and Liquidity\nCash Distributions Distributions of cash available from operations commenced in the fourth quarter of 1987. Cash distributions from operations to limited partners totalled $18,748,650, $22,498,380 and $27,778,000, or $37.50, $45.00 and $55.56 per limited partnership unit in 1993, 1992 and 1991, respectively. In July 1993, a cash distribution of the sale proceeds from the Emery sale was made totalling $22,498,380, or $45.00 per limited partnership unit. The amount of future cash distributions will depend on the Partnership's future cash requirements, the successful re-lease of the off-lease aircraft and receipt of rental payments from Continental, ATA, GB Airways and TBG Airways. A portion of the Partnership's cash reserves will be applied toward costs specified below.\nLiquidity The Partnership has received all rental payments due from its lessees. The agreement with Continental stipulates that the Partnership pay for the costs of certain maintenance work, Airworthiness Directives compliance, aircraft modification and refurbishment costs, which are not to exceed approximately $4.9 million, and which will partially be recovered with interest through payments from Continental over the extended lease terms. In 1993, no rental payments were received during the ATA rent suspension period. The ATA lease also specifies that the Partnership incur certain maintenance costs not to exceed approximately $817,000 and, in addition, the Partnership may finance certain aircraft hushkits at an aggregate cost of approximately $5.0 million, a portion of which will be partially recovered with interest through payments from ATA over the lease terms. The Partnership will use a portion of its cash reserves of approximately $16.4 million as of December 31, 1993 to finance these costs. The remainder of the reserves will be retained to cover potential costs of remarketing the Partnership's aircraft, including remarketing or sale of the five Boeing 727-200 aircraft coming off-lease from Continental in April 1994.\nRemarketing Update\nSale of aircraft to Emery One of the aircraft leased to Emery was sold to Emery at the end of its lease term in January 1993 for $1.5 million, in accordance with the purchase option in the lease. The Partnership recorded a loss on sale of $555,676. Subsequently, Emery exercised its option to purchase the remaining 13 Boeing 727-100 Freighter aircraft for $2.0 million each at the end of April 1993. The Partnership reported an aggregate gain of $63,357 on these sales. Proceeds from the sale were distributed to the partners in July 1993 as previously discussed.\nLease to ATA - In December 1992, the Partnership negotiated a seven-year lease with ATA for the ex-USAir aircraft at current fair market lease rates, which are approximately 45% of the prior rates. The leases are renewable for up to three one-year periods. The Partnership has permitted a rent suspension period of approximately eleven months, beginning on the delivery dates in February and March 1993. The Partnership also agreed to incur certain maintenance costs and may provide financing for hushkits and spare engines for use on the aircraft.\nATA transferred unencumbered title to two of its Boeing 727-100 aircraft to the Partnership as part of the lease transaction in 1993. One of the aircraft was sold as discussed below and the Partnership is remarketing the second aircraft for sale or lease.\nThe Partnership loaned $1,164,800 to ATA in 1993 to finance the purchase by ATA of two spare engines. This loan is reflected in notes receivable in the accompanying balance sheet of the Partnership's 1993 Form 10-K (Item 8). During 1993, the Partnership received all scheduled principal and interest payments due under the notes totalling $87,139. The balance of the note at December 31, 1993 was $1,103,089.\nSale to Total Aerospace - In February 1994, the Partnership sold one of the Boeing 727-100 aircraft that was transferred to the Partnership by ATA, as discussed above, to Total Aerospace for $425,000. The Partnership will record a gain on sale of $425,000 in 1994.\nLease to GB Airways - In February 1994, the Partnership leased two Boeing 737- 200 Advanced aircraft that were formerly on lease to Britannia to GB Airways. Lease payments for an interim lease term through March 1994 are at a variable rate based on usage. Thereafter and through March 1996, the lease rate is 58% of the original rate received from Britannia. The rate is then adjusted through the end of the lease in October 1996 to 67% of the original rate received from Britannia. GB Airways has the option to extend the lease for one year at the initial rate. The lease stipulates that the Partnership share in the cost of certain modification and refurbishment costs which are inestimable at this time.\nLease to TBG Airways - In February 1994, the Partnership leased the remaining two Boeing 737-200 Advanced aircraft that were formerly on lease to Britannia to TBG Airways. Lease payments for an interim lease term through April 1994 are at a variable rate based on usage. Thereafter and through the end of the lease in October 1998, the rate is increased annually from 55% to as much as 80% of the original rate received from Britannia. The lease stipulates that the Partnership share in the cost of certain modification and refurbishment costs which are inestimable at this time. TBG Airways has the option to early terminate the lease in April 1997 after paying a termination fee of $250,000. TBG Airways also has the option to purchase the aircraft at the end of the lease term for $8.0 million each.\nAircraft Casualty Incident\nIn May 1991, one of the Partnership's Boeing 727-100 Freighter aircraft leased to Emery was damaged as a result of fire while it was on the ground. Emery paid to the Partnership the casualty value specified in the lease of $4,310,000, which was equal to the Partnership's cost for the aircraft, resulting in a gain of $1,391,503. A portion of the proceeds from the casualty occurrence were distributed to unit holders in July 1991. The distribution of $3,874,721, or $7.75 per limited partnership unit, represented a distribution from casualty proceeds, as opposed to a distribution of cash from operations.\nContinental Lease Modification\nAs discussed in the Partnership's Form 10-K for the year ended December 31, 1990, Continental filed for Chapter 11 bankruptcy protection in December 1990. Continental emerged from bankruptcy protection under a reorganization plan approved by the Bankruptcy Court effective April 28, 1993. The modified agreement approved by the Bankruptcy Court in 1991 specifies (i) extension of the leases for the five Boeing 727-200s to the earlier of April 1994 or 60,000 cycles, and for the five DC-9-30 aircraft to June 1996; (ii) renegotiated rental rates averaging approximately 67% of the original lease rates; (iii) payment of ongoing rentals at the reduced rates beginning in October 1991; (iv) payment of deferred rentals with interest beginning in July 1992; and (v) payment by the\nPartnership of certain aircraft modification and refurbishment costs, not to exceed approximately $4.9 million, a portion of which will be recovered with interest through payments from Continental over the extended lease term. The Partnership's balance sheets reflect the net reimbursable costs incurred of $419,212 and $206,777 as of December 31, 1993 and 1992, respectively, as notes receivable in the balance sheet of the Partnership's 1993 Form 10-K (Item 8). A portion of these will be capitalized and depreciated over the remaining lease term. Under certain circumstances related to a possible future substantial downsizing, Continental will be entitled to reject the existing leases. These circumstances are not currently expected to materialize.\nThe Partnership recognized rent receivable from Continental of $960,152 in its financial statements for the year ended December 31, 1990. As a result of the terms of the agreement, which included an extended deferral of the dates when Continental will remit its rental payments for the period from December 3, 1990 through September 30, 1991 (the Deferred Amount), the Partnership has not recognized the Deferred Amount as rental revenue until it is received, or until the contingencies regarding collectability are removed. Accordingly, the rent receivable recognized at December 31, 1990 was reversed in the first quarter of 1991. The unrecognized Deferred Amounts as of December 31, 1993 and 1992 were $3,281,033 and $5,476,604, respectively. In accordance with the aforementioned agreement, Continental began making supplemental payments for accrued unpaid rent plus interest on July 1, 1992. During 1993 and 1992, the Partnership received supplemental payments of $3,186,649 and $1,593,324, respectively, of which $2,195,572 and $973,395 was recognized as rental income in 1993 and 1992, respectively.\nAdditional Continental Deferral Agreement As part of its reorganization plan, Continental requested additional concessions from its aircraft lessors. As a result, the Partnership and Continental reached an agreement to defer rental payments for a period of three months, beginning in November 1992, for a total of $1,935,000 (Additional Deferred Amount), with repayment over the shorter of three and one-half years or the remaining lease term. Repayment began October 1, 1993. The unrecognized Additional Deferred Amount as of December 31, 1993 was $1,810,282. Continental continues to pay all other amounts due under the prior agreement. During 1993, the Partnership received supplemental payments of $170,070, of which $124,718 was recognized as rental income in 1993.\nThe Partnership's right to receive payments under the agreements fall into various categories of priority under the Bankruptcy Code. In general, the Partnership's claims are administrative claims, with the exception of certain deferred amounts. If Continental's reorganization is not successful, it is likely that a portion of the Partnership's claims will not be paid in full.\nRefund of Hushkit Deposits\nIn 1990, the Partnership agreed to acquire up to 12 hushkits for Boeing 727 aircraft from Federal Express Corporation (Federal Express). Because certain conditions to the purchase of the hushkits were not satisfied, the Partnership requested return of its deposit of $330,000 plus interest as provided in the purchase documents. Federal Express refused the Partnership's request, pending\nresolution with the Partnership of certain allegedly disputed contractual issues. In April 1992, the general partner, on behalf of the Partnership, commenced legal action to require Federal Express to refund the remaining balance of the deposit, with interest, plus legal fees and other damages, and Federal Express filed a cross-complaint against the Partnership alleging breach of contract. A settlement was reached and payment of the deposit, with interest, was received by the Partnership in November 1992.\nReconciliation of Book Income to Taxable Income\nThe following is a reconciliation between net income per limited partnership unit reflected in the financial statements of Form 10-K (Item 8) and information provided to unit holders for federal income tax purposes:\nThe differences between net income for book purposes and net income for tax purposes result from the timing differences of certain income and deductions. The Partnership computes depreciation using the straight line method for financial reporting and tax purposes; however, the aircraft are depreciated using a shorter life for tax purposes. Thus, the current year tax depreciation expense is greater than book depreciation expense and provides unit holders with the benefit of deferring taxation on a portion of their cash distributions. The Partnership also periodically evaluates the ultimate recoverability of the carrying values and the economic lives of its aircraft for book purposes and, accordingly, recognized adjustments which increased depreciation expense by approximately $0.6 million, or $1.19 per limited partnership unit, during 1993. The depreciation differences resulted in a larger tax gain on sale of aircraft then the book gain. Finally, certain costs were capitalized for tax purposes and expensed for book purposes.\nIn addition, there are differences between the recognition of certain deferred rental income for book and tax purposes. As previously discussed, one of the Partnership's lessees, Continental, filed for Chapter 11 bankruptcy protection. The Partnership and Continental subsequently reached agreement as to the payment of deferred and future rentals. The original deferred rentals were converted into promissory notes bearing interest at a 12% rate, to be repaid by Continental over periods of up to 48 months beginning in July 1992. The subsequent deferred rentals will likely be converted to notes under a similar\nagreement. For book purposes, the Partnership will not recognize any of these deferred rentals, or the related interest, as income, nor will it accrue management fee expense on such rentals, until the amounts due are received from Continental. However, for tax purposes, these amounts have been accrued over the period in which they were earned. In addition, the Partnership received title to two aircraft from its' lessee ATA. For tax purposes, the fair market value of these aircraft was recorded as rental income. For book purposes, rental income was accrued for the ATA rent suspension period. These recognition differences resulted in a book net rental income in excess of tax.\nIndustry Update\nMaintenance of Aging Aircraft The process of aircraft maintenance begins at the aircraft design stage. For aircraft operating under Federal Aviation Administration (FAA) regulations, a review board consisting of representatives of the manufacturer, FAA representatives and operating airline representatives is responsible for specifying the aircraft's initial maintenance program. This program is constantly reviewed and modified throughout the aircraft's operational life.\nSince 1988, the FAA, working with the aircraft manufacturers and operators, has issued a series of Airworthiness Directives (ADs) which mandate that operators conduct more intensive inspections, primarily of the aircraft fuselages. The results of these mandatory inspections may uncover the need for repairs or structural modifications that may not have been required under existing maintenance programs.\nIn addition, an AD adopted in 1990 requires replacement or modification of certain structural items on a specific timetable. These structural items were formerly subject to periodic inspection, with replacement when necessary. The FAA estimates the cost of compliance with this AD to be approximately $1.0 million and $0.9 million per Boeing 727 and Boeing 737 aircraft, respectively, if none of the required work had been done previously. The FAA also issued several ADs in 1993 updating inspection and modification requirements for Boeing 737 aircraft. The FAA estimates the cost of these requirements to be approximately $90,000 per aircraft. In general, the new maintenance requirements must be completed by the later of March 1994, or 75,000 and 60,000 cycles for each Boeing 737 and 727 respectively. A similar AD was adopted on September 24, 1990, applicable to McDonnell Douglas aircraft. The AD requires specific work to be performed at various cycle thresholds between 50,000 and 100,000 cycles, and on specific date or age thresholds. The estimated cost of compliance with all of the components of this AD is $1.0 million per aircraft.\nIn December 1990, the FAA adopted another AD intended to mitigate corrosion of structural components, which would require repeated inspections from 5 years of age throughout the life of an aircraft, with replacement of corroded components as needed. Integration of the new inspections into each aircraft operator's maintenance program was required by December 31, 1991 on Boeing aircraft. A similar directive was issued in late 1992 for McDonnell Douglas aircraft.\nThe Partnership's existing leases require the lessees to maintain the Partnership's aircraft in accordance with an FAA-approved maintenance program during the lease term. At the end of the leases, each lessee is generally required to return the aircraft in airworthy condition including compliance with all ADs for which action is mandated by the FAA during the lease term, except for certain instances. In negotiating subsequent leases, market conditions generally require that the Partnership bear some or all of the costs of compliance with future ADs or ADs that have been issued, but which did not require action during the previous lease term. The ultimate effect on the Partnership of compliance with the FAA maintenance standards is not determinable at this time and will depend on a variety of factors, including the state of the\ncommercial aircraft market, the timing of the issuance of ADs, and the status of compliance therewith at the expiration of the current leases.\nAircraft Noise Another issue which has affected the airline industry is that of aircraft noise levels. The FAA has categorized aircraft according to their noise levels. Stage 1 aircraft, which have the highest noise level, are, with few exceptions, no longer allowed to operate from civil airports in the United States. Stage 2 aircraft meet current FAA requirements. Stage 3 aircraft are the most quiet and Stage 3 is the standard for all new aircraft.\nOn September 24, 1991, the FAA issued final rules on the phase-out of Stage 2 aircraft by the end of this decade. The current U.S. fleet is comprised of approximately 51% Stage 3 aircraft and 49% Stage 2 aircraft. The key features of the rule include:\nCompliance can be accomplished through a gradual process of phase-in or phase-out (see below) on each of three interim compliance dates: December 31, 1994, 1996 and 1998 (with waivers available in certain specific cases to December 31, 2003).\nAll operators have the option of achieving compliance through a gradual phase-out of Stage 2 aircraft (i.e., eliminate 25% of its Stage 2 fleet on each of the compliance dates noted above), or a gradual phase-in of Stage 3 aircraft (i.e., 55%, 65% and 75% of an operator's fleet must consist of Stage 3 aircraft by the respective compliance dates noted above).\nCarryforward credits will be awarded to operators for early additions of Stage 3 aircraft to their fleets. These credits may be used to reduce either the number of Stage 2 aircraft it must phase-out or the number of Stage 3 aircraft it must phase-in by the next interim compliance date. The credits must be used by that operator, however, and cannot be transferred or sold to another operator.\nThe federal rule does not prohibit local airports from issuing more stringent phase-out rules. In fact, several local airports have adopted more stringent noise requirements which restrict the operation of Stage 2 and certain Stage 3 aircraft.\nOther countries have also adopted noise policies. The European Economic Community (EEC) adopted a non-addition rule in 1989, which directed each member country to pass the necessary legislation to prohibit airlines from adding Stage 2 aircraft to their fleets after November 1, 1990. The rule has specific exceptions for leased aircraft and does allow the continued use of Stage 2 aircraft which were in operation before November 1, 1990, although adoption of rules requiring the eventual phase-out of Stage 2 aircraft is anticipated.\nThe Partnership's entire fleet consists of Stage 2 aircraft. Hushkit modifications, which allow Stage 2 aircraft to meet Stage 3 requirements, are currently available for the Partnership's aircraft. However, while technically feasible, hushkits may not be cost effective on all models due to the age of some of the aircraft and the time required to fully amortize the additional investment. The general partner will evaluate, as appropriate, the potential\nbenefits of hushkitting some or all of the Partnership's aircraft. It is unlikely, however, that the Partnership will incur such costs unless they can be recovered through a lease.\nImplementation of the Stage 3 standards have adversely affected the value of Stage 2 aircraft, as these aircraft will require eventual modification to be operated in the U.S. or other countries with Stage 3 standards.\nDemand for Aircraft Approximately 700 commercial aircraft are currently available for sale or lease. The current surplus has negatively affected market lease rates and fair market values of both new and used aircraft. Current depressed demand for air travel has limited airline expansion plans, with new aircraft orders and scheduled delivery being cancelled or substantially deferred. As profitability has declined, many airlines have opted to downsize, liquidate assets, or file for bankruptcy protection.\nEffects on the Partnership's Aircraft The Partnership has made downward adjustments to its estimates of aircraft value for certain of its on-lease aircraft. To ensure that the carrying value of each asset equals its estimated residual value at the end of its expected holding period, where appropriate the Partnership has increased depreciation expense. The Partnership also made downward adjustments to the carrying values of certain of its off-lease aircraft where depreciated cost exceeded the estimated net realizable value. During 1993, 1992 and 1991, the Partnership recognized downward adjustments totalling $0.6 million, $0.1 million and $3.6 million, respectively, for certain of its aircraft. These adjustments are included in depreciation expense in the statements of income.\nThe Partnership's leases expire between April 1994 and March 2000. Current market studies indicate that the Partnership's non-advanced Boeing and McDonnell Douglas aircraft continue to be adversely affected by industry events. Therefore, the Partnership will evaluate each aircraft as it comes off lease to determine whether a re-lease or a sale at the then current market rates would be most beneficial for unit holders.\nOther Event\nEffective October 18, 1993, James F. Walsh resigned as Senior Vice President and Chief Financial Officer of Polaris Investment Management Corporation to assume new responsibilities at GE Capital Corporation. Bobbe V. Sabella has assumed the position of Vice President and Chief Financial Officer. Ms. Sabella has served the general partner in various capacities since September 1986, most recently as Vice President-Finance of Polaris Investment Management Corporation.\nItem 8.","section_7A":"","section_8":"Item 8. Financial Statements and Supplementary Data\nPOLARIS AIRCRAFT INCOME FUND IV\n(A California Limited Partnership)\nFINANCIAL STATEMENTS AS OF DECEMBER 31, 1993 AND 1992\nTOGETHER WITH\nAUDITORS' REPORT\nREPORT OF INDEPENDENT PUBLIC ACCOUNTANTS\nTo the Partners of Polaris Aircraft Income Fund IV:\nWe have audited the accompanying balance sheets of Polaris Aircraft Income Fund IV (a California Limited Partnership) as of December 31, 1993 and 1992, and the related statements of income, changes in partners' capital (deficit) and cash flows for each of the three years ended December 31, 1993. These financial statements and the schedules referred to below are the responsibility of the general partner. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.\nWe conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the general partner, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.\nIn our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Polaris Aircraft Income Fund IV as of December 31, 1993 and 1992, and the results of its operations and its cash flows for each of the three years ended December 31, 1993, in conformity with generally accepted accounting principles.\nOur audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedules listed in the index to the financial statements are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic financial statements. These schedules have been subjected to the auditing procedures applied in audits of the basic financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.\nARTHUR ANDERSEN & CO.\nSan Francisco, California, January 21, 1994 (except with respect to the matters discussed in Note 10, as to which the date is February 24, 1994)\n[FN] The accompanying notes are an integral part of these statements.\n[FN] The accompanying notes are an integral part of these statements.\n[FN] The accompanying notes are an integral part of these statements.\n[FN] The accompanying notes are an integral part of these statements.\nPOLARIS AIRCRAFT INCOME FUND IV (A California Limited Partnership)\nNOTES TO FINANCIAL STATEMENTS\nDECEMBER 31, 1993\n1. Accounting Principles and Policies\nAccounting Method Polaris Aircraft Income Fund IV (PAIF-IV or the Partnership), a California Limited Partnership, maintains its accounting records, prepares financial statements and files its tax returns on the accrual basis of accounting.\nAircraft and Depreciation The aircraft are recorded at cost, which includes acquisition costs. Depreciation to an estimated residual value is computed using the straight-line method over the estimated economic life of the aircraft which was originally estimated to be 30 years from the date of manufacture. Depreciation in the year of acquisition is calculated based upon the number of days that the aircraft are in service.\nThe Partnership periodically reviews the estimated realizability of the residual values at the end of each aircraft's economic life. For any downward adjustment in estimated residual, or change in the estimated remaining economic life, the depreciation expense over the remaining life of the aircraft is increased. If the expected net income generated from the lease (rental revenue, net of management fees, less adjusted depreciation and an allocation of estimated administrative expense) results in a net loss, that loss will be recognized currently. Off-lease aircraft are carried at the lower of depreciated cost or estimated net realizable value. A further adjustment is made for those aircraft, if any, that require substantial maintenance work.\nCapitalized Costs Aircraft modification and maintenance costs which are determined to increase the value or extend the useful life of the aircraft are capitalized and amortized using the straight-line method over the appropriate period. These costs are also subject to the periodic evaluation discussed above.\nOperating Leases The aircraft leases are accounted for as operating leases. Lease revenues are recognized in equal installments over the terms of the leases.\nOther Assets Lease acquisition costs are capitalized as other assets and amortized using the straight-line method over the term of the lease.\nIncome Taxes The Partnership files federal and state information income tax returns only. Taxable income or loss is reportable by the individual partners.\nNet Income Per Limited Partnership Unit Net income per limited partnership unit is based on the limited partners' share of net income and the number of units outstanding for the years ended December 31, 1993, 1992, and 1991.\nShort-Term Investments The Partnership classifies all liquid investments with original maturities of three months or less as short-term investments.\n2. Organization\nThe Partnership was formed on June 27, 1984 for the purpose of acquiring and leasing aircraft. The Partnership will terminate no later than December 2020. Upon organization, both the general partner and the depositary contributed $500. The Partnership recognized no profits or losses during the periods ended December 31, 1984, 1985 and 1986. The offering of depositary units (Units), representing assignments of limited partnership interest, terminated on September 15, 1988, at which time the Partnership had sold 500,000 units of $500, representing $250,000,000. All unit holders were admitted to the Partnership on or before September 15, 1988. During November 1988, 36 units were returned to the Partnership by an investor who did not meet the Investor Suitability Standards described in the Prospectus. Allocations to affiliates are described in Note 8.\nPolaris Investment Management Corporation (PIMC), the sole general partner of the Partnership, supervises the day-to-day operations of the Partnership. PIMC is a wholly-owned subsidiary of Polaris Aircraft Leasing Corporation (PALC). Polaris Holding Company (PHC) is the parent company of PALC. GE Capital Corporation (GE Capital), an affiliate of General Electric Company, owns 100% of PHC's outstanding common stock.\n3. Aircraft\nThe Partnership owns 20 aircraft from its original portfolio of 33 used commercial jet aircraft which were acquire, leased or sold as discussed below.\nAll aircraft acquired from an affiliate were purchased within one year of the affiliate's acquisition at the affiliate's original price paid. Two aircraft were transferred from a lessee as discussed below. The aircraft leases are generally net leases, requiring the lessees to pay all operating expenses associated with the aircraft during the lease term including Airworthiness Directives (ADs) which have been or may be issued by the Federal Aviation Administration (FAA) and require compliance during the lease term. The leases generally state a minimum acceptable return condition for which the lessee is liable under the terms of the lease agreement.\nTwo Boeing 727-100 These aircraft were transferred from ATA to the Partnership in April and May 1993 as part of the ATA lease transaction. One of these aircraft was sold in February 1994 as discussed in Note 10. The Partnership is remarketing the second Boeing 727-100 aircraft for sale or lease.\nFifteen Boeing 727-100 Freighter These aircraft were acquired for $64,610,000 in 1988 and leased to Emery Aircraft Leasing Corporation (Emery) until August 1993, except for one aircraft which was retired in May 1991 due to a casualty incident as discussed in Note 4. In January 1993, Emery purchased one of the aircraft for $1.5 million, in accordance with the purchase option in the lease (Note 5). In April 1993, Emery exercised its option to purchase the remaining 13 Boeing 727-100 Freighter aircraft for $2.0 million each (Note 5).\nTwo Boeing 737-200 and Four 737-200 Advanced These aircraft were acquired for $55,000,000 in 1988 and leased or subleased to Britannia Airways Limited (Britannia) until June 1993. The leases were extended beyond their initial termination dates for approximately four months through the end of September 1993 at lease rates ranging from 53% to 85% of the original rates. The leases were then again extended through various dates in October, November and December 1993, at the modified rates, which coincide with the commencement of maintenance work required of the lessee to meet return conditions specified in the lease. The four Boeing 737-200 Advanced aircraft were re-leased in February 1994 as discussed in Note 10. The remaining two aircraft are being remarketed for sale or lease.\nFive Boeing 727-200 and Five McDonnell Douglas DC-9-30 These aircraft were acquired for $64,875,000 in 1988 and leased to Continental Airlines, Inc. (Continental) for terms of 60 months. Continental filed for Chapter 11 bankruptcy protection in December 1990. In 1991, the Partnership and Continental entered into an agreement for Continental's continued lease of the Partnership's aircraft. Note 6 contains a detailed discussion of the Continental lease modifications.\nTwo Boeing 727-200 Advanced These aircraft were acquired for $27,000,000 in 1988 and leased to USAir, Inc. (USAir) until late 1992. USAir paid rent through December 1992 although the aircraft were returned prior to that time.\nIn December 1992, the Partnership negotiated a seven year lease with ATA for the aircraft at approximately 45% of the prior rate. The leases began in February and March 1993. ATA is not required to begin making cash rental payments until January 1994, although recognition of rental income will be spread over the entire base lease term. The leases are renewable for up to three one-year periods. ATA transferred to the Partnership two unencumbered Boeing 727-100 aircraft as part of the lease transaction as previously discussed.\nThe Partnership agreed to incur certain maintenance costs estimated at approximately $817,000. In addition, the Partnership may finance aircraft hushkits for use on the aircraft at an estimated cost of approximately $5.0 million, which will be partially recovered with interest through payment from ATA over the lease terms. The Partnership loaned $1,164,800 to ATA in 1993 to finance the purchase by ATA of two spare engines. This loan is reflected in notes receivable in the accompanying balance sheet. During 1993, the Partnership received all scheduled principal and interest payments due under the notes. The balance of the notes at December 31, 1993 was $1,103,089.\nThe following is a schedule by year of future minimum rental payments under all of the existing leases, including the deferred rental payments specified in the Continental lease modification (Note 6):\nContinental Deferred Rental Year Amount (1) Payments Total 1994 $1,981,818 $ 6,970,062 $ 8,951,880 1995 1,675,095 6,147,144 7,822,239 1996 1,267,713 3,852,144 5,119,857 1997 166,689 1,557,144 1,723,833 1998 and thereafter - 3,341,372 3,341,372\n$5,091,315 $ 21,867,866 $ 26,959,181\n(1) Rental payments for the period from December 1990 through September 1991 are payable with interest commencing in July 1992 according to the Continental lease modification agreement. Rental payments for the period from November 1992 through January 1993 are payable with interest commencing in October 1993 according to the agreement with Continental. These payments are shown separately because of contingencies regarding collectability as discussed in Note 6.\nFuture minimum rental payments may be offset or reduced by future costs as discussed in Note 6.\nDuring 1993, 1992 and 1991 the Partnership made downward adjustments to its estimates of aircraft value for certain of its on-lease aircraft. To ensure that the carrying value of each asset equals its estimated residual value at the end of its expected holding period, where appropriate the Partnership has increased depreciation expense as described in Note 1. The Partnership also made downward adjustments to the carrying values of certain of its off-lease aircraft where depreciated cost exceeded the estimated net realizable value. During 1993, 1992 and 1991, the Partnership recognized downward adjustments totalling $0.6 million, $0.1 million and $3.6 million, respectively, for certain of its off-lease and on-lease aircraft. These adjustments are included in depreciation expense in the statements of income.\n4. Aircraft Casualty Incident\nIn May 1991, one of the Partnership's Boeing 727-100 Freighter aircraft leased to Emery was damaged as a result of fire while it was on the ground. Emery paid to the Partnership the casualty value specified in the lease of $4,310,000, which was equal to the Partnership's cost for the aircraft, resulting in a gain of $1,391,503. A portion of the proceeds from the casualty occurrence were distributed to unit holders in July 1991.\n5. Sale of Aircraft to Emery One of the aircraft leased to Emery was sold to Emery at the end of its lease term in January 1993 for $1.5 million, in accordance with the purchase option in the lease. The Partnership recorded a loss on sale of $555,676. Subsequently, Emery exercised its option to purchase the remaining 13 Boeing 727-100 Freighter aircraft for $2.0 million each at the end of April 1993. The Partnership reported an aggregate gain of $63,357 on these sales.\n6. Continental Lease Modification\nAs discussed in the Partnership's Form 10-K for the year ended December 31, 1990, Continental filed for Chapter 11 bankruptcy protection in December 1990. Continental emerged from bankruptcy protection under a reorganization plan approved by the Bankruptcy Court effective April 28, 1993. The modified agreement approved by the Bankruptcy Court in 1991 specifies (i) extension of the leases for the five Boeing 727-200s to the earlier of April 1994 or 60,000 cycles, and for the five DC-9-30 aircraft to June 1996; (ii) renegotiated rental rates averaging approximately 67% of the original lease rates; (iii) payment of ongoing rentals at the reduced rates beginning in October 1991; (iv) payment of deferred rentals with interest beginning in July 1992; and (v) payment by the Partnership of certain aircraft modification and refurbishment costs, not to exceed approximately $4.9 million, a portion of which will be recovered with interest through payments from Continental over the extended lease term. The Partnership's balance sheets reflect the net reimbursable costs incurred of $419,212 and $206,777 as of December 31, 1993 and 1992, respectively, as notes receivable. A portion of such costs which the Partnership will bear will be capitalized and depreciated over the remaining lease term. Continental will be entitled, under certain circumstances related to a possible future substantial downsizing by Continental, which is not currently anticipated, to reject the existing leases.\nThe Partnership recognized rent receivable from Continental of $960,152 in its financial statements for the year ended December 31, 1990. As a result of the terms of the agreement, which included an extended deferral of the dates when Continental will remit its rental payments for the period from December 3, 1990 through September 30, 1991 (the Deferred Amount), the Partnership has not recognized the Deferred Amount as rental revenue until it is received, or until the contingencies regarding collectability are removed. Accordingly, the rent receivable recognized at December 31, 1990 was reversed in the first quarter of 1991. The unrecognized Deferred Amounts as of December 31, 1993 and 1992 were $3,281,033 and $5,476,604, respectively. In accordance with the aforementioned agreement, Continental began making supplemental payments for accrued unpaid rent plus interest on July 1, 1992. During 1993 and 1992, the Partnership received supplemental payments of $3,186,649 and $1,593,324, respectively, of which $2,195,572 and $973,395 was recognized as rental income in 1993 and 1992, respectively.\nAdditional Continental Deferral Agreement As part of its reorganization plan, Continental requested additional concessions from its aircraft lessors. As a\nresult, the Partnership and Continental reached an agreement to defer rental payments for a period of three months beginning in November 1992, for a total of $1,935,000 (Additional Deferred Amount), with repayment over the shorter of three and one-half years or the remaining lease term. Repayment began October 1, 1993. The unrecognized Additional Deferred Amount as of December 31, 1993 was $1,810,282. Continental continues to pay all other amounts due under the prior agreement. During 1993, the Partnership received supplemental payments of $170,070, of which $124,717 was recognized as rental income in 1993.\nThe Partnership's right to receive payments under the agreements fall into various categories of priority under the Bankruptcy Code. In general, the Partnership's claims are administrative claims, with the exception of certain deferred amounts. If Continental's reorganization is not successful, it is likely that a portion of the Partnership's claims will not be paid in full.\n7. Refund of Hushkit Deposits\nIn 1990, the Partnership agreed to acquire up to 12 hushkits for Boeing 727 aircraft from Federal Express Corporation (Federal Express). Because certain conditions to the purchase of the hushkits were not satisfied, the Partnership requested return of its deposit of $330,000 plus interest as provided in the purchase documents. Federal Express refused the Partnership's request, pending resolution with the Partnership of certain allegedly disputed contractual issues. In April 1992, the general partner, on behalf of the Partnership, commenced legal action to require Federal Express to refund the remaining balance of the deposit, with interest, plus legal fees and other damages, and Federal Express filed a cross-complaint against the Partnership alleging breach of contract. A settlement was reached and payment of the deposit, with interest, was received by the Partnership in November 1992.\n8. Related Parties\nUnder the Partnership Agreement, the Partnership paid or agreed to pay the following amounts to PIMC and\/or its affiliates in connection with services rendered:\na. An aircraft management fee equal to 5% of gross rental revenues with respect to operating leases or 2% of gross rental revenues with respect to full payout leases of the Partnership, payable upon receipt of the rent, subordinated to receipt by unit holders of distributions equalling an 8% cumulative, non-compounded return on capital contributions, as defined in the Partnership Agreement.\nb. Reimbursement of certain out-of-pocket expenses incurred in connection with the management of the Partnership and supervision of its assets. In 1993, 1992, and 1991, the Partnership reimbursed PIMC for serviced rendered or payments made on behalf of the Partnership of $2,147,152, $584,749, and $433,111, respectively. Reimbursements totalling $477,617 and $38,448 were payable to PIMC at December 31, 1993 and 1992, respectively.\nc. A 10% interest in all cash distributions from operations and sales proceeds, gross income in an amount equal to 9.09% of distributed cash available from operations and 1% of net income or loss and taxable income or loss, as such terms are defined in the Partnership Agreement.\nd. A subordinated sales commission of 3% of the gross sales price of each aircraft for services performed upon disposition and reimbursement of out-of-pocket and other disposition expenses. Subordinated sales commissions shall be paid only after unit holders have received distributions in an aggregate amount equal to their capital contributions plus a cumulative non-compounded 8% per annum return on their adjusted capital contributions, as defined in the Partnership Agreement. The Partnership did not pay or accrue a sales commission on any aircraft sales to date as the above subordination threshold has not been met.\n9. Income Taxes\nFederal and state income tax regulations provide that taxes on the income or loss of the Partnership are reportable by the partners in their individual income tax returns. Accordingly, no provision for such taxes has been made in the accompanying financial statements.\nIn 1993, the Partnership adopted Statement of Financial Accounting Standards No. 109, \"Accounting for Income Taxes\" (SFAS 109). One of the requirements of SFAS 109 is for a public enterprise that is not subject to income taxes, because its income is taxed directly to its owners, to disclose the net difference between\nthe tax basis and the reported amounts of the enterprise's assets and liabilities.\nThe net differences between the tax basis and the reported amounts of the Partnership's assets and liabilities at December 31, 1993 are as follows:\nReported Amounts Tax Basis Net Difference\nAssets $115,637,336 $87,614,677 $28,022,659\nLiabilities 1,047,580 1,302,146 (254,566)\n10. Subsequent Events\nSale to Total Aerospace Services, Inc. (Total Aerospace) - In February 1994, the Partnership sold one of the Boeing 727-100 aircraft that was transferred to the Partnership by ATA, as discussed in Note 3, to Total Aerospace for $425,000. The Partnership will record a gain on sale of $425,000 in 1994.\nLease to GB Airways Limited (GB Airways) - In February 1994, the Partnership leased two Boeing 737-200 Advanced aircraft that were formerly on lease to Britannia to GB Airways. Lease payments for an interim lease term through March 1994 are at a variable rate based on usage. Thereafter and through March 1996, the lease rate is 58% of the original rate received from Britannia. The rate is then adjusted through the end of the lease in October 1996 to 67% of the original rate received from Britannia. GB Airways has the option to extend the lease for one year at the initial rate. The lease stipulates that the Partnership share in the cost of certain modification and refurbishment costs which are inestimable at this time.\nLease to TBG Airways Limited (TBG Airways) - In February 1994, the Partnership leased the remaining two Boeing 737-200 Advanced aircraft that were formerly on lease to Britannia to TBG Airways. Lease payments for an interim lease term through April 1994 are at a variable rate based on usage. Thereafter and through the end of the lease in October 1998, the rate is increased annually from 55% to as much as 80% of the original rate received from Britannia. The lease stipulates that the Partnership share in the cost of certain modification and refurbishment costs which are inestimable at this time. TBG Airways has the option to early terminate the lease in April 1997 after paying a termination fee of $250,000. TBG Airways also has the option to purchase the aircraft at the end of the lease term for $8.0 million each.\nPART III\nItem 9.","section_9":"Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure\nNone.\nItem 10.","section_9A":"","section_9B":"","section_10":"Item 10. Directors and Executive Officers of the Registrant\nPAIF-IV has no directors or officers. PIMC is the General Partner of the Partnership and as such manages and controls the business of the Partnership. The directors and officers of PIMC are:\nName Position\nHerbert D. Depp Chairman of the Board; President; Director\nHoward L. Feinsand Senior Vice President; Director\nJohn E. Flynn Senior Vice President Aircraft Marketing\nRichard J. Adams Senior Vice President Aircraft Sales and Leasing\nJames T. Caleshu Senior Vice President and General Counsel; Secretary\nBobbe V. Sabella Vice President and Chief Financial Officer\nRobert M.J. Ward Vice President International\nJames R. Weiland Vice President Technical\nJames W. Linnan Vice President Financial Management\nRobert W. Dillon Vice President Aviation Legal and Insurance Affairs; Assistant Secretary\nMr. Depp, 49, assumed the position of the President effective April 1991, previously having served as Executive Vice President of PIMC and PALC since July 1989, Vice President Aircraft Marketing since June 1986, Vice President Commercial Aircraft since August 1984, and Director of Marketing Aircraft since November 1980. Mr. Depp assumed the position of Chairman effective April\n1991. He has been a director of PIMC and of PHC since May 1990 and a director of PALC since April 1991.\nMr. Feinsand, 46, joined PIMC and PALC as Vice President and General Counsel; Assistant Secretary in April 1989. Effective July 1989, Mr. Feinsand assumed the positions of Senior Vice President which he continues to hold, and previously served as General Counsel and Secretary from July 1989 to August 1992. Mr. Feinsand also serves as a director of PIMC. Mr. Feinsand, an attorney, was a partner in the New York law firm of Golenbock and Barell from 1987 through 1989. In his previous capacities, Mr. Feinsand served as counsel to PIMC and PALC. Mr. Feinsand also serves as a director on the board of Duke Realty Investments, Inc.\nMr. Flynn, 53, was elected Senior Vice President Aircraft Marketing effective April 1991, having previously served as Vice President North America of PIMC and PALC since July 1989. Mr. Flynn joined PALC in March 1989 as Vice President Cargo. For the two years prior to the time he joined PALC, Mr. Flynn was a Transportation Consultant.\nMr. Adams, 60, serves as Senior Vice President Aircraft Sales and Leasing of PIMC and PALC effective August 1992; having previously served as Vice President Aircraft Sales & Leasing, Vice President North America, and Vice President Corporate Aircraft since he joined PALC in August 1986.\nMr. Weiland, 50, joined PIMC and PALC in September 1990 as Vice President Technical. Prior to joining PIMC and PALC, Mr. Weiland had been President and Chief Executive Officer of RAMCO, a company organized to build and operate an aircraft maintenance facility, since 1986.\nMr. Caleshu, 54, joined PIMC and PALC in August 1992 as Senior Vice President and General Counsel. Prior to joining PIMC and PALC, Mr. Caleshu, an attorney, was a partner in the San Francisco firm of Pettit and Martin from 1966 to 1992.\nMs. Sabella, 37, was elected Vice President and Chief Financial Officer effective October 1993, having previously served as Vice President - Finance since April 1992, Vice President and Controller since January 1990 and Corporate Controller of PIMC and PALC since September 1986.\nMr. Ward, 50, has served as Vice President International of PIMC and PALC since October 1987, with responsibility for Asia, Central America, Pacific and Latin America.\nMr. Linnan, 52, was elected Vice President Financial Management effective April 1991, having previously served as Vice President Investor Marketing of PIMC and PALC since July 1986.\nMr. Dillon, 52, was elected Vice President Aviation Legal and Insurance Affairs effective April 1989. Previously, he has served as General Counsel of PIMC and PALC since January 1986.\nDisclosure pursuant to Section 16, Item 405 of Regulation S-K:\nBased solely on its review of the copies of such forms received or written representations from certain reporting persons that no Forms 3, 4, or 5 were required for those persons, the Partnership believes that, during 1993 all filing requirements applicable to its officers, directors and greater than ten percent beneficial owners were met.\nAs reported in the Partnership's 1990 Form 10-K, on June 8, 1990, a purported class action entitled Harner, et al, v Prudential Bache Securities, (to which the Partnership was not a party) was filed by certain purchasers of units in a 1983 and 1984 public offering in several corporate aircraft public partnerships. PALC and PIMC were named as two of the defendants in this action. On September 24, 1991, the court entered an order in favor of PALC and PIMC granting their motion for summary judgement and dismissing the plaintiffs' complaint with prejudice. On March 13, 1992, Plaintiff filed a notice of appeal to the United States Court of Appeals for the Sixth Circuit. On August 21, 1992, the court of Appeals ordered consolidation of the Appellants' causes for the purposes of briefing and submission. This appeal was fully briefed and oral argument was held. Parties are waiting for the Court to issue a decision.\nOn October 27, 1992, a Class Action Complaint entitled Edwin Weisl, Jr. et al, Plaintiffs, v the General Partner of the Partnership, its affiliates and others, Defendants, Index No. 29239\/92 was filed in the Supreme Court of the State of New York for the County of New York. The Complaint sets forth various causes of action which include allegations against certain or all of the defendants (i) for alleged fraud in connection with certain public offerings, including that of the Partnership, on the basis of alleged misrepresentation and alleged omissions contained in the written offering materials and all presentations allegedly made to investors; (ii) for alleged negligent misrepresentation in connection with such offerings; (iii) for alleged breach of fiduciary duties; (iv) for alleged breach of third party beneficiary contracts; (v) for alleged violations of the NASD Rules of Fair Practice by certain registered broker dealers; and (vi) for alleged breach of implied covenants in the customer agreements by certain registered brokers. The Complaint seeks an award of compensatory and other damages and remedies. On January 19, 1993, Plaintiff's filed a motion for class certification. On March 1, 1993, Defendants filed motions to dismiss Complaint on numerous grounds, including failure to state a cause of action and statute of limitations. The court has not ruled on the motion for class certification or the motions to dismiss the complaint. The Partnership is not named as a defendant in this action.\nOn or around February 17, 1993, a civil action entitled Einhorn, et al v Polaris Public Income Funds, et al, was filed in the Circuit Court of the 11th Judicial Circuit in and for Dade County, Florida against, among others, PIMC and Polaris Depositary Company. Plaintiffs seek class action certification on behalf of a class of investors in the Polaris Aircraft Income Funds IV, V and VI who purchased their interests while residing in Florida. Plaintiffs allege the violation of Section 517.301, Florida Statutes, in connection with the offering and sale of the Partnerships. Among other things, Plaintiffs assert that the Defendants sold interests in the Partnerships while \"omitting and failing to disclose the material facts questioning the economic efficacy of\" the Partnerships. Plaintiffs seek rescission or damages, in addition to interest,\ncosts, and attorneys' fees. On April 5, 1993, defendants filed a motion to stay this action pending the final determination of a prior filed action in the Supreme Court for the State of New York entitled Weisl v Polaris Holding Company. On that date, defendants also filed a motion to dismiss the Complaint on the grounds of failure to attach necessary documents, failure to plead fraud with particularity and failure to plead reasonable reliance. On April 13, 1993, the court denied the defendants' motion to stay. On May 7, 1993, the Court stayed the action pending an appeal of the denial of the motion to stay. Defendants subsequently filed with the Third District Court of Appeal a petition for writ of certiorari to review the Circuit Court order denying the motion to stay. On October 19, 1993, the Court of Appeal granted the writ of certiorari, quashed the order, and remanded the action with instruction to grant the stay.\nOn or around May 14, 1993, a purported class action entitled Michael Moross, et al, v Polaris Holding Company, et al, was filed in the United States District Court for the District of Arizona. This purported class action was filed on behalf of investors in the Polaris Aircraft Income Funds I - VI by nine investors in the Polaris Aircraft Income Funds. The Compliant alleges that defendants violated Arizona state securities statues and committed negligent misrepresentation and breach of fiduciary duty by misrepresenting and failing to disclose material facts in connection with the sale of limited partnership units in the above-named funds. An Amended Compliant was filed on September 17, 1993, but has not been served upon defendants. On or around October 4, 1993, defendants filed a notice of removal to the United States District Court for the district of Arizona. Defendants also filed a motion to stay the action pending the final determination of a prior filed action in the Supreme Court for the State of New York entitled Weisl v. Polaris Holding Company (\"Weisl\") and to defendants' time to respond to the Complaint until 20 days after disposition of the motion to action pending resolution of the motions for class certification and motions to dismiss pending in Weisl. On January 20, 1994, the court stayed the action and required defendants to file status reports every sixty days setting forth the status of the motions in Weisl.\nOn September 21, 1993, a purported derivative action entitled Novak, et al, v. Polaris Holding Company, et al, was filed in the Supreme Court of the State of New York, County of New York. This action was brought on behalf of Polaris Aircraft Income Funds I - III (the \"Partnerships\"). The Complaint names as defendants Polaris Holding Company, its affiliates and others. Polaris Aircraft Income Funds I - III are named as nominal defendants. The Complaint alleges, among other things, that defendants mismanaged the Partnerships, engaged in self-dealing transactions that were detrimental to the Partnerships and failed to make required disclosure in connection with the sale of the Partnership units. The Complaint alleges claims of breach of fiduciary duty and constructive fraud and seeks, among other things an award of compensatory and punitive damages in an unspecified amount, re-judgment interest, and attorneys' fees and costs. On January 13, 1994, certain of the defendants, including Polaris Holding Company, filed motions to dismiss the Complaint on the grounds of, among others, failure to state a cause of action and failure to plead the alleged wrong in detail.\nOn or around March 13, 1991, a purported class action entitled Kahn v Polaris Holding Company, et al, was filed in the Supreme Court of the State of New York, County of New York. This purported class action on behalf of investors in Polaris Aircraft Income Fund V (\"PAIF V\") was filed by one investor in the above named fund. The Complaint names as defendants the Company, Polaris Holding Company, its affiliates and others. The Complaint charges defendants with common law fraud, negligent misrepresentation and breach of fiduciary duty in connection with certain misrepresentations and omissions allegedly made in connection with the sale of interest in PAIF V. Plaintiffs seek compensatory and consequential damages in an unspecified amount, plus interest, disgorgement and restitution of all earnings, profits and other benefits received by defendants as a result of their alleged practices, and attorneys' fees and costs.\nDefendants' time to move, answer or otherwise plead with respect to the Complaint has been extended by stipulation up to and including 30 days after the Court rules on the pending motions to dismiss, or the motions are otherwise resolved, in Weisl v Polaris Holding Company, et al. The Partnership is not named as a defendant in this action.\nItem 11.","section_11":"Item 11. Management Remuneration and Transactions\nPAIF-IV has no directors or officers. PAIF-IV is managed by PIMC, the General Partner. In connection with management services provided, management and advisory fees of $950,604 were paid to PIMC in 1993.\nItem 12.","section_12":"Item 12. Security Ownership of Certain Beneficial Owners and Management\na) No person owns of record, or is known by PAIF-IV to own beneficially more than five percent of any class of voting securities of PAIF-IV.\nb) The General Partner of PAIF-IV owns the equity securities of PAIF-IV as set forth in the following table:\n(4) (1) (2) (3) Percent Title Name of Amount and Nature of of of Class Beneficial Owner Beneficial Ownership Class\nGeneral Polaris Represents a 10.0% interest of all 100% Partner Investment cash distributions, gross income Interest Management in an amount equal to 9.09% of Corporation distributed cash available from operations, and a 1% interest in net income or loss\nc) There are no arrangements known to PAIF-IV, including any pledge by any person of securities of PAIF-IV, the operation of which may at a subsequent date result in a change in control of PAIF-IV.\nItem 13.","section_13":"Item 13. Certain Relationships and Related Transactions\nNone.\nPART IV\nItem 14.","section_14":"Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K\n1. Financial Statements.\nThe following are included in Part II of this report: Page No.\nReport of Independent Public Accountants 19 Balance Sheets 20 Statements of Income 21 Statements of Changes in Partners' Capital (Deficit) 22 Statements of Cash Flows 23 Notes to Financial Statements 24\n2. Financial Statement Schedules.\na) The following are included in Part II of this report: Page No.\nSchedule V Property, Plant and Equipment 33 Schedule VI Accumulated Depreciation, Depletion; and Amortization of Property, Plant, and Equipment 33\nAll other schedules are omitted because they are not applicable, not required or because the required information is included in the financial statements or notes thereto.\n3. Exhibits required to be filed by Item 601 of Regulation S-K and Reports on Form 8-K.\na) Reports on Form 8-K:\nNone.\nb) Exhibits required to be filed by Item 601 of Regulation S-K:\nNone.","section_15":""}
{"filename":"101679_1993.txt","cik":"101679","year":"1993","section_1":"","section_1A":"","section_1B":"","section_2":"ITEM 2. PROPERTIES\nThe Company owns no significant real property and leases all of its offices. See Note 10 of Notes to Consolidated Financial Statements on page 32 for information as to rental obligations.\nITEM 3.","section_3":"ITEM 3. LEGAL PROCEEDINGS\nThere are no pending legal proceedings, other than ordinary routine litigation incidental to the business, to which the Company is a party or to which its property is subject, nor are any such proceedings known to be contemplated by governmental authorities.\nITEM 4.","section_4":"ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS\nThe information called for by this item has been omitted pursuant to General Instruction J(2)(c).\nPART II\nITEM 5.","section_5":"ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS\nAll outstanding shares of the Company's Common Stock are owned by Ford Holdings, and therefore there is no market for such shares. In the fourth quarter of 1989, the Company dividended to Ford the Company's ownership interests in its Australian, United Kingdom, Canadian and German operations in the aggregate amount of $19.9 million. Since such dividend, the Company has paid no dividend nor made any other distribution to Ford, Ford Holdings or any other Ford affiliate. Ford Holdings made a $30 million, a $5 million and a $40 million capital contribution to the Company in 1991, 1992 and 1993, respectively. The Company and Ford Holdings will, from time to time, determine the appropriate capitalization for the Company, which will, in part, affect any future payment of dividends to Ford Holdings or capital contributions to the Company.\nITEM 6.","section_6":"ITEM 6. SELECTED FINANCIAL DATA\nThe information called for by this item has been omitted pursuant to General Instruction J(2)(a).\nITEM 7.","section_7":"ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS\nPursuant to General Instruction J(2)(a), the following narrative analysis of the results of operations is presented in lieu of Management's Discussion and Analysis of Financial Condition and Results of Operations.\nRESULTS OF OPERATIONS\nREVENUES, EXPENSES AND OPERATING PROFIT\nRevenues\nRevenues increased $63.1 million, or 13% in 1993 compared with 1992 primarily as a result of a 30% increase in average earning assets partially offset by a decrease in revenue yields relating to the general decline in interest rates and a change in the mix of assets in the operating lease portfolio. In addition, there was an increase of $10.1 million in the gain on sale of residuals and equipment in the Transportation and Industrial Financing business.\nExpenses\nSales, administrative and general expenses increased $7.1 million, or 11% in 1993, primarily reflecting the effects of the substantial increase in earning assets.\nInterest expense increased $35.8 million, or 23% in 1993, reflecting an increase in average borrowings from $2.31 billion in 1992 to $3.15 billion in 1993 to finance earning assets. This increase was offset in part by a decline in borrowing rates, which averaged 6.0% in 1993 compared with 6.6% in 1992.\nDepreciation expense on operating lease equipment decreased $28.2 million, or 18% in 1993, although the average investment in operating lease equipment increased 30% or $151 million. This increase in equipment primarily reflects the addition of approximately $200 million in the Rail Services business, with an average life of 16 years. The reduction in depreciation expense is the result of the shift to the longer depreciable life rail car assets.\nOther expenses increased $15.3 million, or 43%, due primarily to an $8.8 million increase in maintenance expense incurred by the Rail Services business as a result of routine maintenance on a significantly larger fleet. There was also an increase of $5.3 million in the provision for losses (see page 11 for discussion of credit loss experience).\nOperating Profit\nOperating profit improved $33.1 million or 37% compared with 1992. The improvement in operating results reflects the impact of higher earning assets.\nTaxes on Income\nIncome taxes were 36.9% on income before taxes in 1993 compared with 32.8% in 1992. See Note 9 of Notes to Consolidated Financial Statements on page 31 for the principal reasons for differences from the normal statutory rates.\nNew Acccounting Standards\nIn November 1992, the Financial Accounting Standards Board (\"FASB\") issued Statement of Financial Accounting Standards (\"SFAS\") No. 112, \"Employers' Accounting for Postemployment Benefits\", which requires companies to account for employee benefits on an accrual basis for periods when employees are no longer actively employed but have not yet reached retirement. The effect on the Company's financial statements was not material.\nIn May 1993, the FASB issued SFAS 114, \"Accounting by Creditors for Impairment of a Loan\". The Standards requires that impaired loans be measured based on the present value of expected future cash flows discounted at the loan's effective interest rate. The Company does not plan to adopt this standard until January 1, 1995 and the effect is not expected to be material.\nIn May 1993, the FASB issued SFAS 115, \"Accounting for Certain Investments in Debt and Equity Securities\". The Standard establishes standards of financial accounting and reporting for investments in equity securities (excluding those accounted for under the equity method and investments in consolidated subsidiaries) that have readily determinable fair values and for all investments in debt securities. The Company has adopted this standard effective January 1, 1994, and the effect is not expected to be material.\nITEM 8.","section_7A":"","section_8":"ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA\nThe financial statements and supplementary data required by this Item are listed in Item 14 of Part IV on page 16, are set forth in detail at the end of this report, and are filed as part hereof.\nITEM 9.","section_9":"ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE\nNone.\nPART III\nThe information called for by Items 10, 11, 12 and 13 has been omitted pursuant to General Instruction J(2)(c).\nPART IV\nITEM 14.","section_9A":"","section_9B":"","section_10":"","section_11":"","section_12":"","section_13":"","section_14":"ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K\n(a) 1. Financial Statements\nThe consolidated financial statements of the Company are included in this report at the pages indicated.\n(a) 2. Financial Statement Schedules\nFinancial statements and schedules other than those listed above are omitted because the required information is included in the financial statements or the notes thereto or because of the absence of conditions under which they are required.\n(a) 3. Exhibits required by Item 601 of Regulation S-K:\nThe Company agrees to furnish to the Commission upon request a copy of each instrument with respect to issues of long-term debt of the Company, the authorized principal amount of which does not exceed 10% of the total assets of the Company.\n(b) Report on Form 8-K.\nNone.\nSIGNATURES\nPURSUANT TO THE REQUIREMENTS OF SECTION 13 OF THE SECURITIES EXCHANGE ACT OF 1934, THE COMPANY HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED ON MARCH 28, 1994.\nUSL CAPITAL CORPORATION (Registrant)\nBy: \/s\/ JAMES G. DUFF James G. Duff, Chairman and Chief Executive Officer\nPURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE COMPANY AND IN THE CAPACITIES AND ON THE DATES INDICATED.\nLetterhead of USL Capital Corporation\nMANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS\nManagement is responsible for the preparation of the Company's financial statements and the other financial information in this report. This responsibility includes maintaining the integrity and objectivity of the financial records and the presentation of the Company's financial statements in accordance with generally accepted accounting principles.\nThe Company maintains an internal control structure designed to provide, among other things, reasonable assurance that its records include the transactions of its operations in all material respects and to provide protection against significant misuse or loss of Company assets. The internal control structure is supported by careful selection and training of financial management personnel, by written procedures that communicate the details of the control structure to the Company's activities, by a staff of internal auditors of Ford Motor Company who employ thorough auditing programs, and by the Company's staff of operating control specialists who conduct reviews of adherence to the Company's procedures and policies.\nThe Company's financial statements have been audited by Coopers & Lybrand, independent certified public accountants. Their audit was conducted in accordance with generally accepted auditing standards which include a review of the Company's internal control structure to the extent deemed necessary for the purposes of their audit. The Report of Independent Accountants appears on the following page.\nThe Board of Directors is responsible for overseeing management's fulfillment of its responsibilities in the preparation of financial statements and the financial control of operations. The Board of Directors of Ford Motor Company, through its Audit Committee, selects the independent accountants. The independent accountants have full and free access to the Board to discuss their audit work, the Company's internal controls, and financial reporting matters.\n\/s\/ J.G. Duff James G. Duff Chairman & Chief Executive Officer\n\/s\/ George F. Stallos George F. Stallos Executive Vice President and Chief Financial Officer\nLETTERHEAD OF COOPERS & LYBRAND\nREPORT OF INDEPENDENT ACCOUNTANTS\nTo the Board of Directors, USL Capital Corporation:\nWe have audited the consolidated financial statements and the financial statement schedules of USL Capital Corporation and subsidiaries listed in Part IV Item 14(a)1. and 2. of this Form 10-K. These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits.\nWe conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.\nIn our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of USL Capital Corporation and subsidiaries as of December 31, 1993 and 1992, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1993, in conformity with generally accepted accounting principles. In addition, 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 required to be included therein.\n\/s\/ Coopers & Lybrand\nSan Francisco, California January 28, 1994\nUSL CAPITAL CORPORATION AND SUBSIDIARIES\nCONSOLIDATED STATEMENTS OF INCOME\nSee notes to consolidated financial statements.\nUSL CAPITAL CORPORATION AND SUBSIDIARIES\nCONSOLIDATED BALANCE SHEETS\n- ---------------\n* Less than $1,000\nSee notes to consolidated financial statements.\nUSL CAPITAL CORPORATION AND SUBSIDIARIES\nCONSOLIDATED STATEMENTS OF CASH FLOWS\nSee notes to consolidated financial statements.\nUSL CAPITAL CORPORATION AND SUBSIDIARIES\nCONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY\n- ---------------\n* Less than $1,000\nSee notes to consolidated financial statements.\nUSL CAPITAL CORPORATION AND SUBSIDIARIES\nNOTES TO CONSOLIDATED FINANCIAL STATEMENTS\nNOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES\nConsolidation -- The consolidated financial statements include USL Capital Corporation (\"Company\") and all of its majority-owned subsidiaries. Investments in partnerships and 50%-or-less owned associated companies are accounted for on the equity method. Refer to Item 1. Business \"Consolidation and Sale of Subsidiaries.\" All material intercompany balances and transactions are eliminated. Certain amounts have been reclassified to conform to the 1993 presentation.\nIn October 1989, all of the Company's outstanding capital stock was acquired by Ford Holdings, Inc. (\"Ford Holdings\") from Ford Motor Company (\"Ford\"). The acquisition by Ford in 1987 was accounted for as a purchase. The unamortized balance of the excess of the purchase price paid by Ford over the fair value of identifiable net assets acquired is shown as goodwill on the Company's books.\nCash and Cash Equivalents -- Cash and cash equivalents consist of highly liquid investments with a maturity of three months or less at the time of purchase. Outstanding checks ($21,582,000 at December 31, 1993 and $22,660,000 at December 31, 1992) are reclassified to Accounts Payable. For Cash and Cash Equivalents, the carrying amount is stated at fair value.\nFinance Leases -- At lease commencement, the Company records the lease receivable, estimated residual value of the leased equipment, and unearned lease income. Initial direct costs are deferred as part of the investment and amortized over the lease term. Unearned lease income is recognized as revenue over the lease term so as to approximate a level rate of return on the net investment. Residual values, which are reviewed periodically, represent the estimated amount to be received at lease termination from the disposition of leased equipment.\nOperating Leases -- Lease contracts that do not meet the criteria of finance leases are accounted for as operating leases. Rental equipment is recorded at cost and depreciated over its useful life or lease term to an estimated salvage or residual value (10 to 30 years for railroad cars and 3 to 7 years for other equipment), primarily on a straight-line basis.\nLeveraged Leases -- Leveraged lease assets acquired by the Company are financed primarily through nonrecourse loans from third-party debt participants. These loans are secured by the lessee's rental obligations and the leased property. Unearned income is recognized over the lease term at a constant after-tax rate of return on the net investment in the lease in those periods in which the net investment is positive. Unguaranteed estimated residual values are principally based on independent appraisals of the estimated values of the assets remaining at the expiration of the lease.\nInvestment in Securities -- Investments in securities consist principally of debt securities (preferred stock, corporate and Municipal bonds) which are recorded at amortized cost because the Company has the ability to hold such securities until maturity and presently has this intention. See Note 6 for additional information on the fair value of securities.\nGoodwill -- Goodwill, arising principally from the acquisition by Ford, is being amortized on the straight-line method over 40 years (1993, $5,643,000; 1992, $5,643,000; 1991, $5,643,000).\nTaxes on Income and Tax Credits -- Since the transfer of ownership of the Company by Ford to Ford Holdings in 1989, the Company has been included in the consolidated federal income tax return of Ford Holdings and continues to be included in the combined state income tax returns of Ford, except in those states where the Company is required to file separate returns. Income taxes, including the federal alternative minimum tax, if any, are allocated by Ford Holdings based on the Company's effect on taxes paid by the group. Deferred income tax liabilities give effect to temporary differences between financial statement and tax return amounts based upon enacted tax rates in effect for the future periods when such differences are expected to reverse.\nNOTE 2 -- INVESTMENT IN FINANCE LEASES\nFinance lease receivables at December 31, 1993 are due in installments as follows (in thousands): 1994, $751,956; 1995, $547,200; 1996, $327,429; 1997, $228,880; 1998, $161,459 and thereafter, $1,247,246. Receivables of $6.9 million serve as collateral to long-term debt.\nIn December 1991, U.S. Fleet Financing (\"USFF\") , a wholly owned subsidiary of the Company, sold a portfolio of finance leases for proceeds of $211.5 million. During 1992 and 1993, additional leases were sold for proceeds of $79.9 million and $103.0 million, respectively, to replace the run-off of principal in the leases initially securitized. The sale agreement provides recourse to the assets of USFF, $35.7 million at December 31, 1993, for any uncollectible receivables in the portfolio. USFF is a separate entity from its parent company, USL Capital Corporation, and its assets will be available first and foremost to satisfy the claims of its creditors. An allowance of $772,000 has been provided on the books of USFF for estimated losses on the sold receivables. The agreement provides that the Company will service the lease receivables for the purchaser. At December 31, 1993, $171.6 million of net investment in the leases serviced by the Company was outstanding.\nIn April 1992, the Company sold a portfolio of municipal finance leases for proceeds of $95.1 million. The sale agreement provides the buyers with limited recourse against the Company, $3.0 million at December 31, 1993, for any uncollectible receivables in the portfolio. An allowance of $26,000 has been provided for estimated losses on the sold receivables. The agreement provides that the Company will service the lease receivables for the purchaser. At December 31, 1993, $19.3 million of net investment in the leases serviced by the Company was outstanding.\nNOTE 3 -- INVESTMENT IN OPERATING LEASES\nNOTE 3 -- INVESTMENT IN OPERATING LEASES (CONTINUED)\nInitial lease terms of rental equipment range from one month to 8.5 years. Future minimum rentals on operating leases at December 31, 1993 are due in installments as follows (in thousands): 1994, $182,026; 1995, $95,430; 1996, $66,666; 1997, $27,137; 1998, $15,337 and thereafter, $25,358.\nMinimum future rentals do not include contingent rentals that may be received under certain rail car leases, because of use in excess of specified amounts. Contingent rentals (in thousands) received were $8,170 in 1993, $2,454 in 1992 and $2,033 in 1991. The increase in 1993 is the result of the large expansion of the Rail Services fleet (see Item 1. Business \"Business Units\").\nNOTE 4 -- INVESTMENT IN LEVERAGED LEASES\nA summary of the components of income from leveraged leases were as follows:\nNOTE 5 -- NOTES RECEIVABLE\nAt December 31, 1993, $609.6 million of principal was collateralized by equipment, real estate, and other assets. The weighted average interest rate at December 31, 1993 was 8.1%. Notes receivable are due in subsequent years as follows (in thousands): 1994, $96,792; 1995, $101,230; 1996, $114,867; 1997, $98,383; 1998, $142,069; and thereafter, $178,300.\nThe fair value of loans is estimated by either discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities, or dealer quotes. At December 31, 1993, the estimated fair values of the Company's Notes Receivable were $727.4 million.\nNOTE 6 -- INVESTMENT IN SECURITIES\nAt December 31, 1993 and 1992 the amortized cost and estimated fair value of investment in securities were as follows:\nThe amortized cost and estimated fair value of debt securities at December 31, 1993 and 1992 by contractual maturity are shown below.\nExpected maturities will differ from contractual maturities because borrowers may have the right to call or pre-pay obligations with or without call or pre-payment penalties, and the Company may have the option to redeem or convert securities prior to redemption.\nIn 1993 proceeds from the sale of investments in debt securities (in thousands) were $58,251, resulting in a gross gain of $4,888. In 1992, proceeds (in thousands) were $44,253, resulting in a gross gain of $2,195.\nThe fair value of the investment in debt and equity securities is estimated primarily by market and dealer quotes. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. Debt securities are also valued using the discounted future cash flows based upon current rates of similar debt instruments traded, when a market quote or market quote of a similar investment is not available.\nNOTE 7 -- SHORT-TERM NOTES PAYABLE\nShort-term notes payable consist entirely of commercial paper. The balance outstanding at December 31, 1993 had an average maturity of 10 days. The Company has committed credit lines, wherein it may borrow up to $1.19 billion at floating rates which approximate prime. A commitment fee of 1\/8% to 1\/4% is paid on the unused portion of these credit lines. These lines contain certain provisions related to (a) continuing Ford ownership; (b) limitations on liens; and (c) limitations on activities and indebtedness of subsidiaries. There were no borrowings outstanding on these lines at December 31, 1993.\nFor short-term notes payable, the carrying amount approximates fair value because of the short maturity of these instruments.\nNOTE 8 -- LONG-TERM DEBT\nPayments required on long-term debt are (in thousands): 1994, $386,422; 1995, $323,165; 1996, $357,310; 1997, $197,351; 1998, $192,393; and thereafter, $1,091,609. Average interest rates on collateralized and senior debt outstanding at December 31, 1993 were 6.3% and 6.7%, respectively.\nRates currently available to the Company for debt with similar terms and remaining maturities are used to estimate fair value of existing debt. At December 31, 1993, the estimated fair value of the Company's long-term debt, collateralized and senior, was $2.451 billion.\nIt is the Company's policy to follow a strategy of match funding all financing, and as such, the Company believes that the change in the fair market value of its debt would be off-set by a corresponding increase in the estimated fair value of its investment in leases. See Note 13 for information concerning interest rate swap agreements.\nNOTE 9 -- TAXES ON INCOME\nThe Company uses the liability method of accounting for income taxes pursuant to SFAS No. 109. The Company adopted the liability method in 1987 in accordance with SFAS No. 96, which was subsequently superseded by SFAS No. 109. The adoption of SFAS No. 109 at the beginning of 1992 had no effect on net income in that year.\nThe provision for taxes on income includes:\nDeferred income taxes, on a SFAS No. 109 basis, reflect the estimated future tax effect of temporary differences between the amount of assets and liabilities for financial reporting purposes and such amounts as measured by tax laws and regulations. The components of deferred income tax assets and liabilities as of December 31, 1993 and 1992 were as follows:\nState Net Operating Loss carry forwards will be recovered in future periods as an offset to future state tax liabilities in accordance with the Company's tax sharing agreement with Ford Holdings.\nNOTE 9 -- TAXES ON INCOME (CONTINUED)\nDeferred income taxes for 1991 were derived using the guidelines in SFAS No. 96. Under SFAS No. 96, deferred income taxes are the result of temporary differences in the financial reporting and tax bases of assets and liabilities. The source of the changes in deferred taxes were as follows:\nThe provision for taxes on income differs from the normal statutory rate for the following reasons:\nThe deferred tax assets and liabilities were restated effective January 1, 1993 to reflect the increase of the U.S. Corporate Tax Rate to 35% from 34%, resulting in additional tax provision of $5.6 million.\nAt December 31, 1993, investment tax credit carry forwards of approximately $600,000 are available to reduce future federal income tax liabilities and expire between 1997 and 1999 if not utilized.\nFederal income taxes payable to Ford Holdings (in thousands) were: $15,466 at December 31, 1993 and $2,700 at December 31, 1992.\nNOTE 10 -- COMMITMENTS\nThe Company leases office facilities and equipment under operating leases. The equipment leased by the Company is for sublease to end-user lessees under operating leases of various terms. New leases are arranged when the equipment is returned to the Company. Rental expense (in thousands) for all operating leases was $11,574 in 1993, $12,626 in 1992, and $14,353 in 1991; and sublease income was $6,129, $6,169 and $8,859, respectively. Future minimum rentals (excluding executory costs) and related sublease income under operating leases that have non-cancelable lease terms in excess of one year as of December 31, 1993 are:\nNOTE 11 -- PENSIONS\nThe Company sponsors a defined contribution retirement plan comprising a profit sharing part and a deferred compensation part which covers substantially all of its employees. Under the profit sharing part, contributions are determined as a percent (12.6%) of each covered participant's qualified earnings, minus the Old Age, Survivors, and Disability Insurance portion of social security taxes paid for the participant by the Company. Profit sharing cost represents contributions minus the unvested amounts of terminated participants. Under the deferred compensation part, contributions (cost) are determined as 75 cents per dollar of deferred compensation for the first 3 percent of a participant's compensation and 25 cents per dollar for the next 3 percent, up to 6 percent of a participant's compensation. The total cost of the retirement plan (in thousands) amounted to $3,500 in 1993, $3,700 in 1992, and $4,400 in 1991.\nNOTE 12 -- TRANSACTIONS WITH AFFILIATED COMPANIES\nThe Company provides administrative services for Ford Credit and other Ford affiliates, for which the Company is reimbursed. Ford also provides administrative services to the Company, for which Ford is reimbursed. The Company believes that these arrangements, which are not covered by any formal agreement between the Company, Ford Credit and Ford or its affiliates, are mutually beneficial. Assessments for services by the Company to Ford Credit and other affiliates were (in thousands): 1993, $12,423; 1992, $11,781; 1991, $13,553; and assessments by Ford to the Company were $2,280, $2,776, and $2,566, respectively.\nIn 1989, the Company leased office space from Ford Motor Land Development Corporation, a subsidiary of Ford. The lease, with a term of five years plus an extension of an additional five years, is classified as an operating lease. The base rent (in thousands) for the initial five year lease term amounts to $2,204, plus 22% of the operating expenses and property taxes related to the building. Rent expense (in thousands) amounted to $701 in 1993, $731 in 1992, and $823 in 1991. Beginning in 1991, a portion of the leased office space was subleased to several divisions of Ford Motor Company. Sublease income, which includes amounts for leasehold improvements and furniture and fixtures, (in thousands) amounted to $1,013 in 1993, $716 in 1992 and $438 in 1991.\nIn 1992, the Company purchased equipment and the remaining payments under an existing operating lease agreement due from Ford. The revenue earned during the remaining operating lease term in 1992 amounted to $8.1 million. The corresponding depreciation of the asset during the period was $7.5 million. In December 1992 the lease with Ford was renewed with upgraded equipment, purchased for $28.2 million, and classified as a finance lease with an initial lease term of 42 months. The revenue earned under the finance lease was $2.2 million in 1993 and $198,000 in 1992.\nA 1991 agreement with Ford provides for payments by Ford to the Company of broker fees for the negotiation and arrangement of leases for Ford. Such fees (in thousands) were $2,546 in 1993, $1,514 in 1992 and $1,794 in 1991.\nThe Company receives fees for the management of rail cars for Ford Credit. Such fees (in thousands) were $294 in 1993, $145 in 1992, and $130 in 1991.\nIn 1993 and 1992, Ford Holdings made capital contributions to the Company of $40 million and $5 million, respectively.\nThe Company acts as general partner to a limited partnership, in which it has a 23% equity interest. In addition, the Company had a nominal investment interest and acted as general partner to three limited partnerships which were liquidated in 1991. In accordance with the limited partnership agreements, the Company receives fees and other compensation for services provided. Such amounts earned were as follows (in thousands): 1993, $774; 1992, $770; and 1991, $1,042.\nNOTE 12 -- TRANSACTIONS WITH AFFILIATED COMPANIES (CONTINUED)\nThe Company, in partnership with AT&T Capital Corporation, leased vehicles to subsidiaries and affiliates of American Telephone and Telegraph Company. In such arrangements, the Company provided the services of accounting, purchasing, collections and fleet management, as well as providing loans to an affiliate. Fees received (in thousands) were $326 in 1993, $276 in 1992, and $326 in 1991. Notes receivable and interest income, respectively, (in thousands) were: 1993, $0 and $407; 1992, $11,060 and $409; and 1991, $11,281 and $728. The Company sold its equity interest in the partnership in December, 1993, but continues to provide operational services.\nNOTE 13 -- FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK\nThe Company enters into certain transactions that can give rise to financial instruments with off-balance-sheet risk. The following information pertains to those financial instruments held at December 31, 1993.\nThe Company has entered into arrangements to manage exposure to fluctuations in interest rates. These arrangements primarily include interest rate swap agreements. Interest rate swap agreements involve the exchange of interest obligations on fixed and floating interest rate debt without the exchange of the underlying principal amounts. The agreements generally mature at the time the related debt matures. The differential paid or received on interest rate swap agreements is recognized as an adjustment to interest expense over the life of the agreements. Notional amounts are used to express the volume of interest rate swap agreements. The notional amounts do not represent cash flows and are not subject to risk of loss. In the unlikely event that a counterparty fails to meet the terms of an interest rate swap agreement, the Company's exposure is limited to the interest rate differential. The fair value of interest rate swaps (used for hedging purposes) is the estimated amount that the Company would receive or pay to terminate the swap agreements at the reporting date, taking into account current interest rates and current credit-worthiness of the swap counterparties. At December 31, 1993, the Company had 95 interest rates swaps, of which 22 swaps were in a net receivable position with a notional principal amount of $629.9 million and 73 swaps in a net payable position with a notional principal amount of $1.3 billion. It would cost the Company $43.6 million to terminate the swaps in a net payable position and the Company would receive $45.3 million to terminate the swaps in a net receivable position.\nThe Company has issued financial guarantees in support of lines of credit and lease\/sublease transactions entered into by two affiliates of Ford. These affiliates, located in the United Kingdom and Australia, were previously subsidiaries of the Company, which retains management responsibility for their operations. The lines of credit have various expiration dates through 1994, and the sublease transactions extend through 1994. At December 31, 1993, the financial guarantees issued totaled $197 million for the United Kingdom, and $61 million for Australia. At December 31, 1993, the outstanding balances subject to such guarantees were $39 million for the United Kingdom, and $38 million for Australia. The disclosed amount of the guarantees is a reasonable estimate of the market value as it represents the cost to satisfy the guarantees. (See Item 1. Business \"Management of Foreign Affiliates\".)\nAdditionally, under several of the Company's domestic lease transactions, it guaranteed under certain conditions that the lessor or lender will receive additional rents of specified amounts after the original lease terms expire. The expiration dates are between 1996 and 2001. At December 31, 1993, such guarantees totaled $17 million. The Company has not provided collateral or other security to support financial instruments with credit risk.\nThe Company has also entered into several commitment agreements with third parties contemplating possible first mortgage loans and equipment leases. The interest rates on the first mortgage loan commitments average prime or Libor plus 3.98% and they have various expiration dates through 1998. At December 31, 1993, such commitments totaled approximately $95 million. The disclosed amount of the commitments is a reasonable estimate of the market value, as all financing rates are floating until funding.\nThe Company has entered into a variety of other financial agreements which contain potential risk of loss. These agreements include interest rate swap spread contracts and revolving loan commitments. Neither the amounts of these agreements, fair value, nor the potential risk of loss was considered to be significant at December 31, 1993.\nNOTE 14 -- CONCENTRATIONS OF CREDIT RISK\nThe Company controls its credit risk through credit standards, limits on exposure, and monitoring the financial condition of other parties. The lease, note and investment portfolios are well diversified, consisting of more than 75 industries.\nA significant portion of the Company's business activity is with customers and businesses located in California. As of December 31, 1993, the Company's net finance and operating leases, notes receivable and investments in California totaled approximately $700 million. There were no other significant regional, industrial or group concentrations at December 31, 1993.\nThe Company generally requires the leased asset to serve as collateral for the lease. The collateral consists principally of autos, computers and peripherals, office furnishings, copiers, rail cars and aircraft. Notes receivable are collateralized by first mortgages on real estate or equipment. Investments are not collateralized.\nNOTE 15 -- POSTRETIREMENT BENEFITS\nThe Company sponsors defined benefit postretirement health care plans that provide medical and life insurance coverage to retirees and their dependents. The cost of retiree and dependent medical coverage is shared between the Company and the retiree. The life insurance plan is noncontributory. The accounting for the health care plan anticipates future cost-sharing changes to the written plan that are consistent with the Company's past practice. The Company defines a maximum amount (or \"cap\") that it will contribute toward the health benefits of each retiree. This cap is redetermined annually, and is based on the individual retiree's number of dependents. The Company has a history of increasing this cap. Over the last seven years the aggregate increase in the cap approximates the average increase in the underlying premium costs of the program. This valuation assumed that in future years the Company will continue to increase the cap at the average rate of increase of the underlying cost of the retiree benefit program. However, benefits and eligibility rules may be modified by the Company from time to time.\nThe following table sets forth the plans' combined funded status reconciled with the amount shown in the Company's statement of financial position at December 31:\nACCUMULATED POSTRETIREMENT BENEFIT OBLIGATION\nThe Company's postretirement plans are underfunded; the accumulated postretirement benefit obligation and plan assets for the plan at December 31, 1993 (in thousands) are $5,858 and $0, respectively.\nNOTE 15 -- POSTRETIREMENT BENEFITS (CONTINUED)\nNET PERIODIC POSTRETIREMENT BENEFIT COST INCLUDED THE FOLLOWING COMPONENTS:\nFor measurement purposes, 12 percent and 8 percent annual rates of increase in the per capita cost of postretirement medical benefits were assumed for 1993 for the under age 65 indemnity and HMO and over age 65 indemnity plans, respectively; the rates were assumed to decrease gradually to 5.5 percent for 2006 and remain at that level thereafter. The comparable rates assumed for 1992 were 14 percent and 9 percent for the under age 65 indemnity and HMO and over age 65 indemnity plans, respectively. The health care cost trend rate assumption has a significant effect on the amounts reported. To illustrate, increasing the assumed health care cost trend rates by one percentage point in each year would increase the accumulated postretirement benefit obligation as of December 31, 1993 by $477,000 and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for the year then ended by $159,000.\nSCHEDULE II\nUSL CAPITAL CORPORATION AND SUBSIDIARY COMPANIES\nAMOUNTS RECEIVABLE FROM RELATED PARTIES AND UNDERWRITERS, PROMOTERS, AND EMPLOYEES OTHER THAN RELATED PARTIES\n- ---------------\n* Real estate loans for relocated employees, collateralized by first mortgages. Amounts are due 1996-1998 and carry interest at 5.41% to 9.65%.\nColumn D(2) has been omitted as the answer is \"none.\"\nSCHEDULE V\nUSL CAPITAL CORPORATION AND SUBSIDIARY COMPANIES\nPROPERTY, PLANT, AND EQUIPMENT\n- ---------------\n(1) Increase (decrease) in initial direct costs. (2) Transfer or reclassifications.\nSCHEDULE VI\nUSL CAPITAL CORPORATION AND SUBSIDIARY COMPANIES\nACCUMULATED DEPRECIATION, DEPLETION AND AMORTIZATION OF PROPERTY, PLANT, AND EQUIPMENT\n- ---------------\n(1) Transfer or reclassifications.\nSCHEDULE VIII\nUSL CAPITAL CORPORATION AND SUBSIDIARY COMPANIES\nVALUATIONS AND QUALIFYING ACCOUNTS\n- ---------------\n(1) Reclassification\n(2) Write-offs, net of recoveries.\n(3) Principally included in \"Other receivables\" caption on the balance sheet.\n(4) Included in \"Residual value\" caption on the balance sheet, the purpose for which relates to equipment casualties and lessee defaults.\n(5) Represents balance of purchased portfolio.\nSCHEDULE IX\nUSL CAPITAL CORPORATION AND SUBSIDIARY COMPANIES\nSHORT-TERM NOTES PAYABLE\n- ---------------\n(1) The weighted average interest rate was based on rates and borrowings at the end of the period after giving effect to interest rate exchange agreements. These agreements, which expire through 2005, had the effect of fixing interest rates on $292.1 million of debt at rates ranging from 5.66% to 9.46%.\n(2) The average amount outstanding was based on the balances at the beginning of the period and each month-end divided by 13.\n(3) The weighted average interest rate during the period was computed by dividing actual interest expense by the average short-term debt outstanding during the period and after giving effect to interest rate exchange agreements.\nSCHEDULE X\nUSL CAPITAL CORPORATION AND SUBSIDIARY COMPANIES\nSUPPLEMENTARY INCOME STATEMENT INFORMATION\n- ---------------\n* Less than 1% of total revenues.\n- -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------\nSECURITIES AND EXCHANGE COMMISSION\nWASHINGTON, D.C. 20549\nEXHIBITS TO\nFORM 10-K\nANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934\nFOR THE FISCAL YEAR ENDED DECEMBER 31, 1993\nCOMMISSION FILE NUMBER 1-4976\nUSL CAPITAL CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)\nDelaware\n(STATE OF INCORPORATION)\n733 Front Street San Francisco, California\n(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) 94-1360891\n(I.R.S. EMPLOYER IDENTIFICATION NO.)\n(ZIP CODE)\nREGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (415) 627-9000\n- -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------\nEXHIBITS INDEX\n- ------------\n* Incorporated by Reference.","section_15":""}
{"filename":"93451_1993.txt","cik":"93451","year":"1993","section_1":"ITEM 1. BUSINESS\nGENERAL\nSterling Bancorp (the Registrant), organized in 1966, is a bank holding company, as defined by the Bank Holding Company Act of 1956 (the BHCA), as amended, with subsidiaries engaged principally in commercial banking as well as accounts receivable financing, factoring and other financial services. The Registrant owns virtually 100% of Sterling National Bank & Trust Company of New York (the bank), its principal subsidiary, and all of the outstanding shares of Standard Factors Corporation, Universal Finance Corporation, Sterling Banking Corporation and virtually 100% of Security Industrial Loan Association (finance subsidiaries). Zenith Financial Services Company operates as a division of the Registrant. As used throughout this report, \"the Company\" refers to Sterling Bancorp and its subsidiaries.\nThere is intense competition in all areas in which the Company conducts its business, including deposits, loans, domestic and international financing and trust services. In addition to competing with other banks, the Company also competes in certain areas of its business with other financial institutions. The following table presents the components of the loan portfolio for both the Company and the bank as of December 31, 1993 and December 31, 1992. Reference is made to the information beginning on page 33 of the Company's 1993 Annual Report (pages 9 to 39 of which are incorporated herein by reference) under the caption \"CREDIT RISK\".\nThe BHCA requires the prior approval of the Federal Reserve Board for the acquisition by a bank holding company of more than 5% of the voting stock or substantially all of the assets of any bank or bank holding company. Also, under the BHCA, bank holding companies are prohibited, with certain exceptions, from engaging in, or from acquiring more than 5% of the voting stock of any company engaging in, activities other than banking or managing or controlling banks or furnishing services to or performing services for their subsidiaries. The BHCA also authorized the Federal Reserve Board to permit bank holding companies to\nI-1\nengage in, and to acquire or retain shares of companies that engage in, activities which the Federal Reserve Board determines to be so closely related to banking or managing or controlling banks as to be a proper incident thereto.\nThe Federal Reserve Board has ruled on a number of activities and found some of them to come within such standard while finding that other activities do not fall within the permissible scope of such standard; other activities have been proposed by the Federal Reserve Board for consideration. The effect of the Federal Reserve Board's findings under the standard has been to expand the financially related activities in which bank holding companies may engage. Revisions of the Federal Reserve Board's principal regulation (Regulation Y) affecting bank holding companies have expanded the scope of permissible bank-related activities and liberalized procedures to allow the entry into such activities. In addition, the BHCA prohibits bank holding companies from acquiring direct or indirect control of more than a 5% interest in a bank or bank holding company located in a state other than New York unless the laws of such state expressly authorize such acquisition.\nThere are also various requirements and restrictions imposed by the laws of the United States and the State of New York and by regulations of the Federal Reserve System, of which the bank is a member, affecting the operations of the Company including the requirement to maintain reserves against deposits, restrictions relating to: (a) the nature and amount of loans that may be made by the bank and the interest that may be charged thereon; (b) extensions of credit by subsidiary banks of a bank holding company to the bank holding company or certain of its subsidiaries; (c) on investments in the stock or other securities thereof, and on the taking of such stock or securities as collateral for loans to any borrower; and (d) other investments, branching and other activities of the Company and the bank. Regulatory limitations on the payment of dividends to the Registrant by the bank are discussed in the \"FINANCIAL CONDITION\" section beginning on page 32 of the Company's 1993 Annual Report. The Registrant and its finance subsidiaries are subject to supervision and regulation by the Federal Reserve Board (FRB); Security Industrial Loan Association is subject to supervision and regulation by the Bureau of Financial Institutions of the State Corporation Commission of the Commonwealth of Virginia; Sterling Banking Corporation is subject to supervision and regulation by the Banking Department of the State of New York; the bank is subject to supervision and regulation by the Office of the Comptroller of the Currency (the Comptroller) and, by reason of the insurance of its deposits to the extent permitted by law, to the regulations of the Federal Deposit Insurance Corporation (FDIC).\nThe Company and the bank are subject to risk-based capital and leverage guidelines which are discussed in the \"FINANCIAL CONDITION\" section beginning on\nI-2 page 32 of the Company's 1993 Annual Report. Failure to meet applicable capital guidelines could subject a national bank to a variety of enforcement remedies available to the federal regulatory authorities. Depending upon circumstance, the regulatory agencies may require an institution to surpass minimum capital ratios established by the Comptroller and the FRB.\nThe enactment of the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) was intended, among other things, to protect the federal deposit insurance fund by requiring regulators to take specific prompt actions with respect to institutions that do not meet minimum capital standards. FDICIA established five capital tiers to be defined in implementing regulations to be adopted: \"well capitalized,\" \"adequately capitalized,\" \"undercapitalized,\" \"significantly undercapitalized,\" and \"critically undercapitalized.\" Significant restrictions are imposed on the operations of a bank that is below the \"adequately capitalized\" category. The federal regulatory agencies adopted regulations defining the five capital tiers. Under these regulations, a \"well capitalized\" institution must have a Tier 1 capital ratio of at least 6%, a Total (combined Tier 1 and Tier 2) capital ratio of at least 10%, and a Leverage ratio of at least 5% and not be subject to a directive, order or written agreement to meet and maintain specific capital levels; the regulatory agencies may also impose more stringent requirements on an institution designed to achieve a given capital status. At December 31, 1993, the bank's Tier 1 capital ratio, Total capital ratio and Leverage ratio were 14.95%, 15.94% and 7.57%, respectively, exceeding the capital and leverage ratio requirements for \"well capitalized\" institutions.\nFDICIA new regulations became effective June 16, 1992 governing the receipt of brokered deposits. Under these regulations, an insured depository institution cannot accept brokered deposits (which term is defined to include payment of an interest rate more than 75 basis points above prevailing rates) unless (i) it is \"well capitalized,\" or (ii) it is \"adequately capitalized\" and receives a waiver from the FDIC. A bank that cannot receive brokered deposits and that is not \"adequately capitalized\" cannot offer \"pass-through\" insurance on certain employee benefit accounts. In addition, a bank that is \"adequately capitalized\" may not pay an interest rate on any deposits in excess of 75 basis points over certain prevailing market rates. There are no such restrictions on a bank that is \"well capitalized.\" Since the bank meets the requirements for classification as \"well capitalized\", the Company does not anticipate that these regulations will have a material effect on its operations.\nI-3 Other FDICIA revisions included the imposition of specific accounting and reporting requirements and risk-based assessments for FDIC insurance. Effective January 1, 1993, the FDIC adopted a risk-based assessment system under which the assessment rate for an insured depository institution varies according to the level of risk incurred in its activities. Other rules adopted pursuant to FDICIA include: (1) real estate lending standards for depository institutions, which provide guidelines concerning loan-to-value ratios for various types of real estate loans; (2) rules requiring depository institutions to develop and implement internal procedures to evaluate and control credit and settlement exposure to their correspondent banks; (3) rules implementing the FDICIA provisions prohibiting, with certain exceptions, insured state banks from making equity investments or engaging in activities of the types and amounts not permissible for national banks; and (4) rules and guidelines for enhanced financial reporting and audit requirements.\nFurther rules proposed or to be proposed under FDICIA, governing such matters as operational and managerial standards and capital requirements, are expected to be finalized and become effective in 1994. Until the various regulations are adopted in final form, however, it is difficult to assess how they will impact the Company's financial condition or operations.\nThe Federal Reserve Board has issued regulations under the BHCA that require a bank holding company to serve as a source of financial and managerial strength to its subsidiary banks. As a result, the Federal Reserve Board, pursuant to such regulations, may require the Registrant to stand ready to use its resources to provide adequate capital funds to its banking subsidiaries during periods of financial stress or adversity. This support may be required at times when, absent such regulations, the bank holding company might not otherwise provide such support.\nThe earnings of the Registrant and its finance subsidiaries and the bank are affected by legislative changes and by regulations and policies of various governmental authorities, including the Federal Reserve System, the Comptroller, and the states in which the Registrant's subsidiaries operate. Such changes and policies significantly affect the growth of deposits as well as the cost of purchased funds and the return on earning assets.\nChanging conditions in the national economy and in the money markets make it impossible to predict future changes in interest rates, deposit levels, loan demand or their effects on the business and earnings of the Registrant and its subsidiaries. Foreign activities of the Company are not considered to be material.\nI-4 THE BANK\nSterling National Bank & Trust Company of New York was organized in 1929 under the National Bank Act and commenced operations in New York City. The bank maintains five branch offices in New York City (three branches in Manhattan and two branches in Queens) and an International Banking Facility in New York City. The main office is located at 540 Madison Avenue, New York, New York. There are regional representatives located in Los Angeles, California and Richmond, Virginia.\nThe bank provides a range of banking services to businesses and individuals including checking, savings and money market accounts, certificates of deposit, business loans, personal and installment loans, VISA\/MASTERCARD, safe deposit and night depository facilities. Lending, depository and related financial services are furnished to a wide range of customers in diverse industries, including commercial, industrial and financial companies of all sizes as well as government and non-profit agencies. Loan facilities available to these customers include short-term revolving credit arrangements, term loans, letters of credit, factoring, accounts receivable financing, equipment financing, real estate and mortgage loans, leasing and lock box services. Through its international division and International Banking Facility, the bank offers financial services to its customers and correspondents in the world's major financial centers. These services consist of financing import and export transactions, issuance of letters of credit and creation of bankers acceptances. In addition to its direct worldwide correspondent banking relationships, active bank account relationships are maintained with leading foreign banking institutions in major financial centers. The bank's trust division provides a variety of fiduciary, investment management, advisory and corporate agency services to individuals, corporations and foundations. The bank acts as trustee for pension, profit-sharing and other employee benefit plans and personal trusts and estates. For corporations, the bank acts as trustee, transfer agent, registrar and in other corporate agency capacities.\nMost of the bank's business loans are short-term; approximately 83% of the loans are to customers located in the New York metropolitan area. No single borrower or group of related borrowers have loans which represent more than 15% of the bank's shareholders' equity. The bank's legal lending limit to a single borrower was approximately $7.5 million at December 31, 1993.\nThe composition of income of the bank for the years ended: (1) December 31, 1993 included interest on term Federal funds sold (2%), interest and fees on commercial and other loans (44%), interest and dividends on investments securities (43%) and other (11%); (2) December 31, 1992 included interest on term Federal funds sold (6%), interest and fees on commercial and other loans (37%), interest and dividends on investment securities (42%), and other (15%); (3) December 31, 1991 included interest on term Federal funds sold (16%), interest and fees on commercial and other loans (40%), interest and dividends on investment securities (35%), and other (9%).\nAt December 31, 1993, the bank had 191 employees, consisting of 68 officers and 123 supervisory and clerical employees. The bank considers its relations with its employees to be satisfactory.\nI-5\nREGISTRANT AND FINANCE SUBSIDIARIES\nThe Registrant and its finance subsidiaries engage in various types of secured and unsecured financing activities such as accounts receivable financing, factoring and commercial, consumer and installment mortgage loans and service such accounts for the bank. The Registrant also engages in consumer receivables financing.\nAccounts receivable financing services rendered by the Registrant and its finance subsidiaries include new business referral, collection, supervisory, examination and bookkeeping to the bank for a fee; and the bank assumes all credit risks.\nStandard Factors Corporation provides factoring services. Standard Factors Corporation purchases client's accounts receivable, assumes credit risk on approved orders and handles credit and collection details and bookkeeping requirements. Income for these services is derived from commissions charged for receivables serviced and interest charged on advances to the client. In addition, Standard Factors Corporation services the bank's portfolio without assuming the credit risk for those factored receivables managed for the bank. For these services, Standard Factors Corporation receives a portion of factoring commissions paid by the clients plus a portion of interest charged on advances. The accounts receivable factored are for clients primarily engaged in the apparel and textile industries.\nThe Registrant and its finance subsidiaries make business and consumer loans. The loans are usually secured by real estate, personal property, accounts receivable or other collateral; occasionally unsecured working capital advances are provided to its customers.\nSecurity Industrial Loan Association (S.I.L.A.), located in Richmond, Virginia, jointly originates and services mortgage loans to homeowners funded by the bank. S.I.L.A. receives a service fee. The loans are repayable in equal monthly installments over periods ranging from 36 to 180 months. Loans are usually made to allow the borrower to make home repairs, consolidate debt or to meet educational, medical or other expenses. The loans are secured by first or second mortgages. The amounts loaned are less than the borrower's equity in the home, as determined by appraisals.\nOn June 1, 1993, the Registrant acquired the assets of Zenith Financial Corporation, a nationwide provider of consumer receivables financing. As a division of the Registrant Zenith engages in asset based lending with independent dealers who market products (i.e., housewares, appliances, automobiles, educational material, et al) to consumers on an installment basis with repayment terms between 12 and 36 months. Zenith administers these installment contracts for the dealer, providing billing, payment processing and other bookkeeping services. Zenith makes advances to each dealer of between 30% and 80% of the discounted aggregate value of the dealer's installment contracts.\nI-6 The composition of income (excluding equity in undistributed net income of the banking subsidiary) of the Registrant and its finance subsidiaries for the years ended: (1) December 31, 1993 included interest and fees on loans (32%), interest and fees on accounts receivable factored (14%), dividends, interest and service fees (50%) and other (4%); (2) December 31, 1992 included interest and fees on loans (11%) interest and fees on accounts receivable factored (26%), dividends, interest and service fees (49%), and other (14%); (3) December 31, 1991 included interest and fees on accounts receivable factored (32%), dividends, interest and service fees (61%), and other (7%).\nAt December 31, 1993, the Registrant and its finance subsidiaries employed 28 persons consisting of 9 officers with the balance of the employees performing supervisory and clerical functions. Of these persons, 6 are represented by District 65 Wholesale, Retail, Office and Processing Union. The Registrant and its finance subsidiaries consider employee relations to be satisfactory.\nSELECTED CONSOLIDATED STATISTICAL INFORMATION\nI. Distribution of Assets, Liabilities and Shareholders' Equity; Interest Rates and Interest Differential.\nThe information appearing on pages 36, 37 and 39 of the Company's 1993 Annual Report is incorporated herein by reference.\nII. Investment Portfolio\nShown below is a summary of the Company's investment securities by type with related book values:\nInformation regarding book values and range of maturities by type of security and weighted average yields for totals of each category is presented in the Company's 1993 Annual Report on pages 15, 16 and 17 and is incorporated herein by reference. The average yield by maturity range is not available.\nI-7 III. Loan Portfolio\nThe following table sets forth the composition of the Company's loan portfolio net of unearned discounts at the end of each of the most recent five fiscal years:\nThe following table sets forth the maturities and sensitivity to changes in interest rates of selected loans of the Company's loan portfolio at December 31, 1993:\nI-8 It is the policy of the Company to consider all customer requests for extensions of original maturity dates (rollovers), whether in whole or in part, as though each was an application for a new loan subject to standard approval criteria, including credit evaluation. The information appearing in the Company's 1993 Annual Report beginning on page 33 under the caption \"CREDIT RISK\", on page 18 in footnote 5 and on page 14 in footnote 1 under the caption \"Loans\" is incorporated herein by reference.\nThe following table sets forth the aggregate amount of domestic non-accrual, past due and restructured loans of the Company at the end of each of the most recent five fiscal years; as of December 31, 1993, there were no foreign loans accounted for on a nonaccrual basis or which were troubled debt restructurings:\n(1) Includes $1.4, $1.9 and $2.5 million at December 31, 1993, 1992 and 1991, respectively, representing the balance of a loan to a single borrower who filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code during the third quarter of 1991.\n(2) Loans which are contractually past due 90 days or more and accruing are loans which are both well secured or guaranteed by financially responsible third parties and are in the process of collection.\nI-9 IV. Summary of Loan Loss Experience\nThe information appearing in the Company's 1993 Annual Report on page 18 in footnote 5 is incorporated herein by reference. The following table sets forth certain information with respect to the Company's loan loss experience for each of the most recent five fiscal years:\nOn June 1, 1993, the parent company purchased for cash the assets (principally loans) of Zenith Financial Corporation, a nationwide provider of consumer receivables financing. The purchase price included the allowance for loan losses of $209,627.\nThe Company's allowance for possible loan losses is a general reserve, maintained without any specific dedication to the components of the loan portfolio, available to meet the credit exposure implicit in any lending activity. The information beginning on page 33 of the Company's 1993 Annual Report under the caption \"CREDIT RISK\" is incorporated herein by reference.\nThe Company considers its allowance for possible loan losses to be adequate based upon the size and risk characteristics of the outstanding loan portfolio at December 31, 1993. While net losses within the loan portfolio are not statistically predictable, it is possible that a deterioration in economic conditions in the next twelve months could require future provisions for loan losses above the level taken in 1993. The Company does not anticipate any recurrence of net credit losses of the magnitude experienced in 1991.\nI-10 V. Deposits\nAverage deposits for each of the most recent three years is presented in the Company's 1993 Annual Report on page 36 and is incorporated herein by reference.\nOutstanding time certificates of deposit issued from domestic offices in amounts of $100,000 or more and interest expense on domestic and foreign deposits are presented in the Company's 1993 Annual Report on page 18 in Footnote 6 and is incorporated herein by reference.\nVI. Return on Equity and Assets\nThe Company's returns on average total assets and average shareholders' equity, dividend payout ratio and average shareholders' equity to average total assets for each of the most recent three years follow:\nNote: Dividend payout ratio is not shown for 1991 because the Company's results of operations were a net loss for that year.\nI-11 VII. Short-Term Borrowings\nBalance and rate data for significant categories of the Company's Short-Term Borrowings, for each of the most recent three years is presented in the Company's 1993 Annual Report on page 19 in Footnote 7 and is incorporated by reference.\nITEM 2.","section_1A":"","section_1B":"","section_2":"ITEM 2. PROPERTIES\nThe principal offices of the Registrant and the bank occupy four contiguous floors at 540 Madison Avenue at 55th Street, New York, N.Y. consisting of approximately 29,000 square feet. These are held under two leases, of which the one covering the upper floor expires December 31, 1996. The other, covering the lower three floors, expires December 31, 1996 with a renewal option to December 31, 2001. Annual rental commitments approximates $860,000. Certain finance subsidiaries maintain offices in Beverly Hills, California and Richmond, Virginia.\nIn addition to the principal offices, the bank maintains operating leases for three additional branch offices and an Operations Center with an aggregate of approximately 43,100 square feet. The annual office rental commitments for these premises approximates $448,000. The leases have expiration dates ranging from 1996 through 2008 with varying additional renewal options. The bank also maintains a branch located in Forest Hills owned by the bank (and not subject to a mortgage).\nITEM 3.","section_3":"ITEM 3. LEGAL PROCEEDINGS\nNeither Registrant nor any of its subsidiaries is party to any material legal proceedings.\nITEM 4.","section_4":"ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS\nNone.\nI-12 PART II\nITEM 5.","section_5":"ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS\nThe information appearing on page 35 of the Sterling Bancorp 1993 Annual Report under the caption \"MARKET PRICE FOR THE COMPANY'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS\" is incorporated herein by reference.\nITEM 6.","section_6":"ITEM 6. SELECTED FINANCIAL DATA\nThe information appearing on page 31 of the 1993 Annual Report under the caption \"Selected Financial Data\" is incorporated herein by reference.\nITEM 7.","section_7":"ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS\nThe information appearing on pages 32 - 35 of the 1993 Annual Report under the caption \"Management's Discussion and Analysis of Financial Condition and Results of Operations\" is incorporated herein by reference. Supplementary Data appearing on page 29 of the 1993 Annual Report under the caption \"Quarterly Data (Unaudited)\" is incorporated herein by reference.\nITEM 8.","section_7A":"","section_8":"ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA\nThe Company's consolidated financial statements as of December 31, 1993 and 1992 and for each of the years in the three-year period ended December 31, 1993 and the statements of condition of Sterling National Bank & Trust Company of New York as of December 31, 1993 and 1992, notes thereto and Independent Auditors' Report thereon appearing on pages 9 - 30 of the 1993 Annual Report, are incorporated herein by reference.\nITEM 9.","section_9":"ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE\nNone.\nII-1 PART III\nITEM 10.","section_9A":"","section_9B":"","section_10":"ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT\nThe information beginning on page 1 of the Sterling Bancorp Proxy Statement dated March 18, 1994 under the caption \"Election of Directors\" and on page 10 of the same proxy statement under the caption \"Security Ownership of Directors and Executive Officers and Certain Beneficial Owners\" are incorporated herein by reference.\nExecutive Officers - This information is included pursuant to Instruction 3 to Item 401 (b) and (c) of Regulation S-K:\nAll executive officers are elected annually by the Board of Directors and serve at the pleasure of the Board. There are no arrangements or understandings between any of the foregoing officers and any other person or persons pursuant to which he was selected as an executive officer.\nITEM 11.","section_11":"ITEM 11. EXECUTIVE COMPENSATION\nThe information beginning on page 3 of the Sterling Bancorp Proxy Statement dated March 18, 1994 under the caption \" Executive Compensation and Related Matters\" and on page 9 of the same Proxy Statement under the caption \"Transactions with the Company and Other Matters\" are incorporated herein by reference.\nITEM 12.","section_12":"ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT\nThe information beginning on page 10 of the Sterling Bancorp Proxy Statement dated March 18, 1994 under the caption \"Security Ownership of Directors and Executive Officers and Certain Beneficial Owners\" and is incorporated herein by reference.\nITEM 13.","section_13":"ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS\nThe information appearing on page 9 of the Sterling Bancorp Proxy Statement dated March 18, 1994 under the caption \"Transactions with the Company and Other Matters\" is incorporated herein by reference.\nIII-1 PART IV\nITEM 14.","section_14":"ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K\n(a) The documents filed as a part of this report are listed below:\n1. Financial Statements\nAnnual Report to security holders, Sterling Bancorp 1993 Annual Report (This document is filed only to the extent of pages 9 through 39 which are incorporated by reference herein).\n2. Financial Statement Schedules\nNone\n3. Exhibits\n3 (i)(A) Amended and restated Certificate of Incorporation filed with the State of New York, Department of State, August 14, 1986 (Filed as Exhibit 3.3 to Registrant's Form 10-K for the fiscal year ended December 31, 1986 and incorporated by reference herein). (i)(B) Certificate of Amendment of The Certificate of Incorporation filed with the State of New York Department of State, June 13, 1988 (Filed as Exhibit 3.5 to Registrant's Form 10-K for the fiscal year ended December 31, 1988 and incorporated by reference herein). (i)(C) Certificate of Amendment of the Certificate of Incorporation filed with the State of New York Department of State, March 5, 1993 (Filed as Exhibit 4.1 to Registrant's Form 8-K dated March 5, 1993 and incorporated by reference herein).\n3 (ii) By-Laws as in effect on March 15, 1993 (Filed as Exhibit 3.3 to the Registrant's Form 10-K for the fiscal year ended December 31, 1992 and incorporated herein by reference).\n4 (a) Indenture relating to floating interest rate convertible subordinated debentures, third series, due July 1, 1998 (Filed as Exhibit 4(a) to Registrant's Registration Statement 2-97263 and incorporated by reference herein). (b) Indenture relating to floating interest rate convertible subordinated debentures, 4th series, due November 1, 1998 (Filed as Exhibit 4(a) to Registrant's Registration Statement 33-23877 and incorporated by reference herein).\n10 Employment Agreements, dated as of February 19, 1993 (Filed as Exhibits 3.4(a) and 3.4(b), respectively, to the Registrant's Form 10-K for the fiscal year ended December 31, 1992 and incorporated herein by reference). (a) For Louis J. Cappelli (b) For John C. Millman\n11 Statement re Computation of Per Share Earnings.\n13 Annual Report to security holders, Sterling Bancorp 1993 Annual Report (This document is filed only to the extent of pages 9 through 39 which are incorporated by reference herein).\n21 Subsidiaries of the Registrant.\n(b) Reports on Form 8-K:\nThere were no reports on Form 8-K filed during the last quarter of the period covered by this report.\nIV-1\nSIGNATURES\nPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, The Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.\nSTERLING BANCORP\n\/s\/ Louis J. Cappelli Louis J. Cappelli, Chairman (Principal Executive Officer)\nMarch 29, 1994 Date\n\/s\/ John W. Tietjen John W. Tietjen, Treasurer (Principal Financial and Accounting Officer)\nMarch 29, 1994 Date\nPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:\n================================================================================\nSECURITIES AND EXCHANGE COMMISSION WASHINGTON D.C. 20549\nDOCUMENTS FILED\nAS A PART\nOF THIS REPORT\nON\nFORM 10-K\nANNUAL REPORT - 1993\n____________\nSTERLING BANCORP\n================================================================================\nDOCUMENT INDEX\n1. Financial Statements\nAnnual Report to security holders, Sterling Bancorp 1993 Annual Report (This document is filed only to the extent of pages 9 through 39 which are incorporated by reference herein).\n2. Financial Statement Schedules\nNone\n3. Exhibits\n3 (i)(A) Amended and restated Certificate of Incorporation filed with the State of New York, Department of State, August 14, 1986 (Filed as Exhibit 3.3 to Registrant's Form 10-K for the fiscal year ended December 31, 1986 and incorporated by reference herein). (i)(B) Certificate of Amendment of The Certificate of Incorporation filed with the State of New York Department of State, June 13, 1988 (Filed as Exhibit 3.5 to Registrant's Form 10-K for the fiscal year ended December 31, 1988 and incorporated by reference herein). (i)(C) Certificate of Amendment of the Certificate of Incorporation filed with the State of New York Department of State, March 5, 1993 (Filed as Exhibit 4.1 to Registrant's Form 8-K dated March 5, 1993 and incorporated by reference herein).\n3 (ii) By-Laws as in effect on March 15, 1993 (Filed as Exhibit 3.3 to the Registrant's Form 10-K for the fiscal year ended December 31, 1992 and incorporated herein by reference).\n4 (a) Indenture relating to floating interest rate convertible subordinated debentures, third series, due July 1, 1998 (Filed as Exhibit 4(a) to Registrant's Registration Statement 2-97263 and incorporated by reference herein). (b) Indenture relating to floating interest rate convertible subordinated debentures, 4th series, due November 1, 1998 (Filed as Exhibit 4(a) to Registrant's Registration Statement 33-23877 and incorporated by reference herein).\n10 Employment Agreements, dated as of February 19, 1993 (Filed as Exhibits 3.4(a) and 3.4(b), respectively, to the Registrant's Form 10-K for the fiscal year ended December 31, 1992 and incorporated herein by reference). (a) For Louis J. Cappelli (b) For John C. Millman\n11 Statement re Computation of Per Share Earnings.\n13 Annual Report to security holders, Sterling Bancorp 1993 Annual Report (This document is filed only to the extent of pages 9 through 39 which are incorporated by reference herein).\n21 Subsidiaries of the Registrant.\n4. Reports on Form 8-K:\nThere were no reports on Form 8-K filed during the last quarter of the period covered by this report.\nEXHIBIT INDEX\nExhibit Number Description ------- -----------\n3 (i)(A) Amended and restated Certificate of Incorporation filed with the State of New York, Department of State, August 14, 1986 (Filed as Exhibit 3.3 to Registrant's Form 10-K for the fiscal year ended December 31, 1986 and incorporated by reference herein). (i)(B) Certificate of Amendment of The Certificate of Incorporation filed with the State of New York Department of State, June 13, 1988 (Filed as Exhibit 3.5 to Registrant's Form 10-K for the fiscal year ended December 31, 1988 and incorporated by reference herein). (i)(C) Certificate of Amendment of the Certificate of Incorporation filed with the State of New York Department of State, March 5, 1993 (Filed as Exhibit 4.1 to Registrant's Form 8-K dated March 5, 1993 and incorporated by reference herein).\n3 (ii) By-Laws as in effect on March 15, 1993 (Filed as Exhibit 3.3 to the Registrant's Form 10-K for the fiscal year ended December 31, 1992 and incorporated herein by reference).\n4 (a) Indenture relating to floating interest rate convertible subordinated debentures, third series, due July 1, 1998 (Filed as Exhibit 4(a) to Registrant's Registration Statement 2-97263 and incorporated by reference herein). (b) Indenture relating to floating interest rate convertible subordinated debentures, 4th series, due November 1, 1998 (Filed as Exhibit 4(a) to Registrant's Registration Statement 33-23877 and incorporated by reference herein).\n10 Employment Agreements, dated as of February 19, 1993 (Filed as Exhibits 3.4(a) and 3.4(b), respectively, to the Registrant's Form 10-K for the fiscal year ended December 31, 1992 and incorporated herein by reference). (a) For Louis J. Cappelli (b) For John C. Millman\n11 Statement re Computation of Per Share Earnings.\n13 Annual Report to security holders, Sterling Bancorp 1993 Annual Report (This document is filed only to the extent of pages 9 through 39 which are incorporated by reference herein).\n21 Subsidiaries of the Registrant.","section_15":""}